Tobacco is Malawi’s main foreign exchange earner but every year almost 10% of the crop is smuggled out of the country instead of being sold on the auction floors as required by law. Why do farmers prefer to sell abroad, even at lower prices, than at home? Lameck Masina has been finding out.
Malawi’s overwhelming expectations of boosting its foreign exchange coffers with this year’s earnings from the country’s main forex earner, tobacco, are being dashed by the continuing incidents of tobacco smuggling to neighbouring countries despite the government’s introduction of the anti-smuggling campaign which seeks to put the practice to a halt.
Tobacco contributes about 70% to the country’s exchange earnings. The crop which is referred to as ‘green gold’ in Malawi, also contributes about 13% to the country’s GDP. It earns 23% of total national revenue with about 80% of the population directly or indirectly employed in the tobacco-related activities. With the current acute shortage of forex, there were high expectations that revenues from tobacco sales would help boost the country’s foreign exchange reserves. But since the opening of the marketing season in March by President Joyce Banda, numerous reports have been circulating that farmers are yet again smuggling the crop out to neighbouring countries such as Zambia and Mozambique where it is fetching better prices.
Farmers who are involved in illegally bypassing the auction floors contend that they get double the profits from crossborder trading compared to selling in Malawi. This year tobacco prices at the country’s auction floors averaged $2.20/kg for the highest-quality leaf while the cheapest was $0.90/kg. Alex Mbewe (not real name), a farmer in the central district of Mchinji, which borders Zambia, told African Business that in Zambia tobacco is selling at an average of $4.5/kg compared to Malawi, where the same quality of crops averaged $1.90. “We earn more in Zambia than what Malawi markets offer and there is no convincing reason from government which can stop us from selling our crops across the border,” he said.
Deputy Agriculture Minister Ulemu Chilapondwa said that government has engaged in an anti-smuggling campaign in which it has tightened security in border districts. The campaign has resulted in the police seizure of over 32,000 kilograms of tobacco and the arrests of five traders in the central district of Kasungu early March. Despite the campaign, recent statistics show that about 5% of Malawi’s tobacco has so far been smuggled abroad, slashing official receipts from the country’s main foreign exchange earner by $10m.
$30m lost annually
Tobacco Farm Quarterly magazine says 15% of the tobacco on the Zambian market is smuggled from Malawi. The publication quotes Zambia’s Eastern Province Tobacco Sponsors Association contending that “the tobacco is being smuggled into Zambia because it can fetch more money on auction floors in Zambia than in Malawi”. Malawi’s tobacco regulatory body, the Tobacco Control Commission (TCC) has estimated
that every year the country loses almost 10% of its tobacco crop to smugglers who sell the leaf across the borders. The TCC Chief Executive Officer Bruce Munthali said this meant that, on average, the country loses almost $30m every year through such illegal cross-border trading.
“Government has noted with great disappointment that the problem of illegal cross-border trade is being promoted by some stakeholders within the tobacco industry and Malawians who do not wish the country well,” he said. However, a research study, Global leaf companies control the tobacco market in Malawi, reveals that farmers are forced to smuggle Malawi tobacco because of problems associated with selling tobacco on the country’s auction floors.
“[For example] a farmer selling his tobacco at auction for $1.18/kg only earns a net return of $0.34 after subtracting deductions at auction and costs for fertilisers, seeds, hired labour and other marketing transaction expenses”, reads the research in part. The research says in some cases, the farmers would accept a lower price per kilogram of tobacco from intermediary buyers than the price at auction to avoid the inefficiencies and overhead costs of the auction system. “Even when smugglers accept a lower price at illegal markets than the price at auction, they still profit more because they avoid deductions at auction that represent 20% of the selling price”.
The deductions at auction include withholding tax, charges for hessian sacks for wrapping bales, transportation costs to satellite depots and the auction floors and bank charges. Market commentators are warning that unless the government addresses the root causes of tobacco smuggling, the anti-smuggling campaigns won’t change anything because “what farmers want is nothing but better income from their sweat”.