Western financial Analysts say Brent crude oil prices hit a four-year low in November of $77.83, and Credit Suisse believes sub-$100 prices are here to stay for at least the next three years. What does the sudden and sharp decline portend for the world economy and Malawi? Generally speaking, falling crude oil prices are an importing economy’s paradise.
Oil price shocks tend to have significant effects on the macroeconomic variables of net oil-importing developing countries, including economic growth, employment, balance of payments and government accounts.
The first winner is the world economy itself. A 10% change in the oil price is associated with around a 0.2% change in global GDP, says Tom Helbling of the IMF. A price fall normally boosts GDP by shifting resources from producers to consumers, who are more likely to spend their gains than wealthy sheikhdoms.
International Monetary Fund chief Christine Lagarde on Monday said falling oil prices will help boost economies in the U.S. and across much of the globe, a net positive for a world struggling with slowing growth.
The question to the Malawi government is are we taking advantage of these falling oil prices? Are Malawians seeing results of the falling Crude prices at the pump? If not why not?
Transportation Costs:
Malawi being a landlocked country whose main developmental challenge in trade depends on transit solutions in neighboring countries to access gateways to international markets. Compared to other landlocked countries in Sub Saharan Africa, Malawi enjoys a rather favorable logistical position because is main economic and population center, Blantyre, is only about 300 km from the sea.
Historically this relative proximity spurred early development: Southern Malawi and Blantyre used to enjoy a direct railroad link of 530 km to the port of Beira, a distance comparable to that of Nairobi or Johannesburg to their ports.
This advantage proved fragile and were essentially wiped away by regional and global developments. The upheaval in Mozambique in the 1980s essentially cut off Malawi from this traditional trade route. The country started to rely on very long land routes through Tanzania or South Africa for its imports as well as its exports.
In addition, during this period, trade patterns changed radically. First the development of tobacco crops, the geographical center of Malawian production moved north. Second, after the end of apartheid in South Africa, Malawi became more economically integrated and dependent on South Africa for imports and exports.
Long overland trucking routes became a natural and sustainable option.
Today, Malawi essentially relies on three relatively long land routes to access international gateways: the road to Durban, 2300 km, the road to Beira, 800km and the Railroad to the port of Nacala in Mozambique, also 800 km. Still, the port of Durban in South Africa, remains the regional gateway even when going through Mozambican ports served by feeder ships.
Most of the freight, which is containerized, goes through Durban either as the gateway or the port of transshipment for the Mozambican ports. Except for Oil product and certain bulk commodities Malawian traders pay high transportation costs for imports and exports.
In 2004, minimal transport charges to Blantyre are 90 USD/ton from Johannesburg, 45 USD/tons from Beira or 60-70 USD/tons from Nacala. These charges are substantial especially when it comes to the transportation of commodities such as oil or fertilizer.
They are caused by the length of the routes and the high unit costs of transportation, which are due to the difficulty in organizing back-loads from Malawi (volume imbalance between imports and exports).
It is obvious that the lowest hanging fruit is reducing the costs of transporting goods into Malawi. If the Rail to Beira can be fixed and upgraded it needs to be done.
This is the reason President Bingu WA Mutharika was so much invested in the Nsanje port to reduce transportation costs.
Sources: World Bank, United Nations
