Malawi Malawi at a Glance: 2004-05

Country Report October 2003

Malawi Malawi at a glance: 2004-05

OVERVIEW The Economist Intelligence Unit has now extended its forecast period into 2005. The ruling United Democratic Front (UDF) is best placed to win both the presidential and legislative elections, scheduled for May 2004, owing to its strong nationwide organisation and its alliance with the Alliance for Democracy. Divisions within the party over Bingu wa Mutharika’s nomination as presidential candidate are unlikely to weaken its electoral chances. Assuming a good harvest of maize and other crops, real GDP growth should increase to 2.6% in 2004; falling tobacco receipts will bring this down to 2.3% in 2005.

Key changes from last month Political outlook • Mr Mutharika will be unlikely to risk deviating from Mr Muluzi’s wishes too much in 2004-05. After the elections, the essentially self-serving nature of Malawian politics is unlikely to change. Economic policy outlook • Our economic policy forecast remains largely unchanged. After the elections in 2004, we expect the government’s commitment to improving fiscal discipline to increase slightly; therefore, we are forecasting that the fiscal deficit will narrow to 5.5% of GDP in fiscal year 2004/05 (July-June) and 5% of GDP in 2005/06. Economic forecast • We have extended our forecast period to 2004-05 this month. The depreciation of the kwacha and higher government spending ahead of the presidential and legislative elections will push average inflation up to 13% in 2004. The lack of election-related spending should bring average inflation down to 12.2% in 2005. We expect the kwacha to depreciate from an average of MK98.3:US$1 in 2003 to MK120.2:US$1 in 2004 and MK132.3:US$1 in 2005, as the lack of steady foreign-exchange flows exerts downward pressure on the currency. • Slower import growth and higher tobacco exports will cause the current- account deficit to narrow to 9.2% of GDP in 2004; higher donor inflows will result in a further narrowing of the deficit to 8.3% of GDP in 2005. October 2003

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2004-05 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

20 The domestic economy 20 Economic trends 21 Agriculture 25 Mining 25 Industry 26 Financial services

26 Foreign trade and payments

List of tables 9 International assumptions summary 11 Forecast summary 18 Government finances 26 US imports, total and under AGOA

List of figures

12 Gross domestic product 12 Consumer price inflation 21 Price and wage inflation 23 Maize production 26 Foreign-exchange reserves

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Malawi 3

Summary October 2003

Outlook for 2004-05 The ruling United Democratic Front (UDF) is best placed to win both the presidential and legislative elections, scheduled for May 2004, owing to its strong nationwide organisation and its alliance with the Alliance for Democracy (Aford). Bingu Wa Mutharika, the UDF’s presidential candidate, will be unlikely to risk deviating too much from Mr Muluzi’s wishes in 2004-05. After the election, the essentially self-serving nature of Malawian politics is unlikely to change. Assuming a good harvest of maize and other crops, real GDP growth should increase to 2.6% in 2004; falling tobacco receipts will bring this down to 2.3% in 2005. The depreciating kwacha and higher government spending ahead of the 2004 elections will push average inflation up to 13% in 2004 from 11.6% in 2003. Once the elections have passed, inflation should fall back to average 12.2% in 2005. Slower import growth and higher exports will cause the current-account deficit narrow to around 9.2% of GDP in 2004; higher donor inflows will bring the deficit down to 8.3% of GP in 2005.

The political scene Bingu Wa Mutharika has been chosen as the UDF’s presidential candidate for the 2004 election. At one point the finance minister, Friday Jumbe, appeared to have put his name forward for the nomination. Arrangements have been made for Mr Muluzi to remain party chairman after he steps down as national president. The issue of a third presidential term is still alive. The UDF has begun election campaigning. John Tembo has been disqualified from running in the 2004 election. Dissident Aford members have formed a new party. The government has suffered embarrassment over the arrest of al-Qaida suspects.

Economic policy The budget for fiscal year 2003/04 (July-June) has been announced and relies on renewed donor support. Implementation will be key to the success of the budget. The government has resolved the disputes delaying the David Whitehead privatisation and this is now expected to go ahead.

The domestic economy Low tobacco revenue has caused the kwacha to slump. The downward trend in inflation has been reversed. Diversification efforts have made little progress. Smallholders have been encouraged to grow macadamia trees. Maize production was up by 26% on 2001/02 in 2002/03; prospects for the 2003/04 harvest appear less promising. Tea production was up by 8.2% and a record sugar crop has been reported for 2002/03. The government is still pushing the development of the mining sector. The Portland cement quarry has closed.

Foreign trade and payments Foreign-exchange reserves have declined owing to poor performance at the tobacco auctions. Textile exports to the US under the Africa Growth and Opportunity Act have increased in the first half of 2003 compared with the first half of 2002. Editors: Christopher Eads (editor); Angus Downie (consulting editor) Editorial closing date: September 24th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report October 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Malawi

Political structure

Official name Republic of Malawi

Form of state Unitary republic

Legal system Based on English common law and the constitution, promulgated in May 1995

National legislature National Assembly of 193 seats, elected by direct universal suffrage for a five-year term

National elections June 15th 1999 (presidential and legislative); next elections due by June 2004 (presidential and legislative)

Head of state President, elected by direct universal suffrage for a term of five years; Bakili Muluzi was re- elected for a second and constitutionally final term in June 1999

National government Cabinet, chaired by the president; a new cabinet was named on November 5th 2000 and was last reshuffled in April 2003

Political parties United Democratic Front (UDF), the largest single party in the National Assembly; Malawi Congress Party (MCP), the main opposition party; Alliance for Democracy (Aford), Malawi’s third party. Smaller parties not represented in the National Assembly include: the Malawi Democratic Party (MDP); Malawi National Democratic Party (MNDP); Mass Movement for the Young Generation (MM); National Unity Party (NUP); National Patriotic Front (NPF); United Front for Multiparty Democracy (UFMD)

President & commander-in-chief of the armed forces Bakili Muluzi Vice-president & minister of privatisation Justin Malewezi Vice-president & minister of agriculture, irrigation & food security Chakufwa Chihana

Key ministers Commerce & industry Sam Mpasu Defence Rodwell Munyenyembe Education, science & technology George Ntafu Finance Friday Jumbe Economic planning & development Bingu wa Mutharika Foreign affairs & international co-operation Lilian Patel Gender, youth & community services Alice Sumani Health & population Yusuf Mwawa Home affairs & internal security Mangeza Maluza Information Bernard Chisale Justice & attorney-general Paul Maulidi Labour & vocational training Lee Mlanga Land, physical planning & housing Thengo Maloya Local government Salim Bagus Natural resources & environment Uladi Mussa Presidential affairs Ken Lipenga Wa t e r d eve l o p m e n t Dumbo Lemani Tourism, national parks & wildlife Wallace Chiume Transport & public works Clement Stambuli Poverty alleviation Ludoviko Shati

Central bank governor Elias Ngalande

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Economic structure

Annual indicators 1999a 2000a 2001a 2002a 2003b GDP at market prices (MK bn) 78.6 97.2 121.6 139.4b 157.7 GDP (US$ bn) 1.8 1.6 1.7 1.8b 1.6 Real GDP growth (%) 4.0 1.7 -1.5 1.7b 1.7 Consumer price inflation (av; %) 44.8 29.6 27.2 14.7 11.6a Population (m)c 11.1 11.4b 11.6b 11.9b 12.1 Exports of goods fob (US$ m) 447.0 405.5 406.8 396.7 399.8 Imports of goods fob (US$ m) 673.0 563.2 582.2 634.6 623.2 Current-account balance (US$ m) -150.3 -89.0 -127.7 -185.9 -151.0 Foreign-exchange reserves excl gold (US$ m) 247.2 243.5 203.1 162.0 160.0a Total external debt (US$ bn) 2.8 2.7 2.6 2.8 3.0 Debt-service ratio, paid (%) 13.8 12.7 8.4 9.7 9.9 Exchange rate (av) MK:US$ 44.09 59.54 72.20 76.69 98.34a a Actual. b Economist Intelligence Unit estimates. c 1989-98 based on preliminary results from 1998 census; subject to revisions.

Origins of gross domestic product 2001a % of total Components of gross domestic product 2001a % of total Agriculture 34.0 Private consumption 85.1 Small-scale 19.4 Government consumption 20.0 Industry 17.9 Gross fixed capital formation 11.4 Manufacturing 12.9 Change in stocks n/a Services 48.1 Net exports of goods & services -16.5

Principal exports fob 2001 US$ m Imports fob 2000 US$ m Tobaccob 255 Intermediate goods 419 Sugar 35 Fuel oils 79 Tea 36 Capital goods 79 Pulses 7 Consumer goods 65 Coffee 6

Main destinations of exports 2002c % of total Main origins of imports 2002c % of total US 17.4 South Africa 43.9 Germany 13.5 Zambia 12.6 South Africa 10.2 US 5.5 Egypt 6.3 India 4.2 a Official estimates. b Production marketed at the auction floors. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2001 2002 2003 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (MK m) Revenue and grants 8,506.7 5,774.0 7,082.9 9,680.5 9,809.5 8,566.9 10,388.6 12,553.0 Revenue 6,438.0 5,036.5 7,079.7 8,659.6 9,809.1 8,566.9 9,141.9 12,048.5 Grants 2,068.7 737.6 3.2 1,020.9 0.4 0.0 1,246.9 504.3 Expenditure 7,822.8 9,486.6 12,504.3 14,685.4 21,782.9 26,488.1 26,976.0 33,223.9 Balance before grants -1,384.8 -4,450.1 -5,424.6 -6,025.8 -11,973.8 -17,921.2 -17,834.1 -21,175.4 Balance after grants 684.0 -3,712.6 -5,421.4 -5,004.9 -11,973.4 -17,921.2 -16,587.4 -20,670.9 Output trends Industrial production index (1984=100) 96.2 96.5 101.0 101.7 103.1 102.7 n/a n/a Industrial production index (% change, year on year) -10.6 -11.1 -10.2 -0.6 7.2 6.4 n/a n/a Financial indicators Exchange rate: MK:US$ (av) 67.435 64.769 70.999 75.948 76.957 82.842 89.597 91.329 Exchange rate: MK:US$ (end-period) 61.735 67.294 74.804 76.611 80.319 87.139 91.572 89.915 Exchange rate: nominal effective rate (1995=100) 32.5 33.8 31.4 28.4 27.0 25.2 23.6 n/a Exchange rate: real effective rate (1995=100) 126.8 138.1 127.7 114.6 114.8 103.0 92.0 n/a Deposit rate (av; %) 30.50 30.50 30.50 30.50 27.33 24.00 24.00 n/a Discount rate (end-period; %) 46.80 46.80 46.80 46.80 43.00 40.00 40.00 n/a Lending rate (av; %) 52.00 52.00 52.00 52.00 50.67 47.50 47.50 n/a Treasury bill rate (av; &) 35.78 45.02 46.12 44.9 38.90 37.07 37.57 n/a M1 (end-period; MK m) 10,458.5 10,014.4 9,123.9 12,117.7 12,745.4 12,738.8 13,044.5 n/a M1 (% change, year on year) 31.1 10.1 6.5 6.9 21.9 27.2 43.0 n/a M2 (end-period; MK m) 19,428 19,557 18,148 21,570 22,955 23,597 24,092 n/a M2 (% change, year on year) 16.6 15.5 13.8 4.4 18.2 20.7 32.8 n/a Debt-service payments (MK m) 1,663.8 1,433.6 1,263.3 1,678.3 2,007.6 2,180.7 n/a n/a Principal 1,210.3 849.9 740.6 1,036.7 1,459.3 1,617.1 n/a n/a Interest payments 437.8 583.0 341.2 361.6 339.9 561.3 n/a n/a Prices National composite consumer prices (2000=100) 119.5 129.4 142.3 138.3 137.5 145.1 157.3 150.9 National composite consumer prices (% change, year on year) 28.2 24.6 16.3 15.7 15.0 12.1 10.5 9.1 Sectoral trends Electricity production (av; m kwh) 98.1 92.6 86.7 98.1 102.3 98.3 n/a n/a Tea production (‘000 tonnes) 2.7 6.1 17.0 10.0 4.0 8.2 n/a n/a Tobacco auction sales (‘000 tonnes) 123.0 0.0 0.0 72.9 64.5 0.0 n/a n/a Tobacco auction sales (MK m) 3,970.0 0.0 0.0 6,609.5 5,614.1 0.0 n/a n/a Foreign trade & reserves Exports fob (MK m) 10,638 7,717 5,767 7,030 11,190 10,497 n/a n/a Tobacco 5,979 4,839 1,650 3,425 6,366 6,446 n/a n/a Imports cif (MK m) -11,137 -11,706 -9,457 -9,050 -15,858 -17,288 n/a n/a Trade balance -499 -3,989 -3,690 -2,020 -4,668 -6,791 n/a n/a Reserves excl gold (end-period; US$ m) 303.8 206.7 145.3 198.7 199.7 165.2 122.3 113.6

Sources: National Statistical Office, Monthly Statistical Bulletin; Reserve Bank of Malawi, Financial & Economic Review; IMF, International Financial Statistics.

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Outlook for 2004-05

Political outlook

Domestic politics Malawi’s political scene will be dominated by the next presidential and legislative elections, which have been set for May 18th 2004. President Bakili Muluzi’s preferred successor, Bingu wa Mutharika (the minister of economic planning and development), will be the candidate of the ruling party, the United Democratic Front (UDF), in the presidential election. As Mr Mutharika was only appointed to the cabinet in March 2003 and has not been in the party that long he is regarded with suspicion by many senior UDF members. Mr Mutharika’s political inexperience and lack of a support base will mean that he will be heavily dependent on Mr Muluzi, who will remain UDF party chairman after he steps down as national president. Mr Mutharika will be unlikely to risk deviating too much from Mr Muluzi’s wishes over the forecast period. After the elections, the essentially self-serving nature of Malawian politics is unlikely to change with those in power wanting to maintain their access to the patronage rights that political office confers. The strong nationwide organisation of the UDF will ensure that Mr Mutharika wins the presidential election and that the UDF wins the legislative election. Given that the UDF is contesting the election in an alliance with the Alliance for Democracy (Aford)!the third largest party in parliament!for the opposition to stand a real chance in the presidential election, it needs to field a single candidate. However, unifying around one candidate will be very difficult for the opposition. The Malawi Congress Party (MCP), the main opposition party, remains split into three factions, none of which are co-operating with each other. Furthermore, John Tembo, the MCP’s new party president and its candidate for the presidential election, was disqualified from running in the 2004 presidential race by Malawi’s High Court in August. Brown Mpinganjira, the leader of the National Democratic Alliance (NDA), is trying to adopt the role of leader of the opposition but, although he is a high-profile figure, his support base is limited to the Mulanje area in the south. As many parties are based more around personalities than ideologies, opposition division is likely to ensure another term for the UDF.

International relations Regional instability, mainly because of events in Zimbabwe, will be a deterrent to foreign investors, even though Malawi is unlikely to become directly involved in any disputes. Mr Muluzi, in preparation for his retirement, is taking a more active role in international affairs. Donors welcomed Mr Muluzi’s decision not to stand for president again, but will continue to monitor the situation in Malawi closely. Bilateral assistance may be withheld if the government tries to limit democratic rights or judicial independence ahead of the elections, even if agreed economic targets are met.

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Economic policy outlook

Policy trends Economic policymaking is currently disorganised, although the main aim appears to be the short-term goal of getting the UDF re-elected. This has brought the economy to the brink of collapse. It is this risk of total economic collapse that appears to have motivated the IMF to indicate that it will resume lending to Malawi by the end of 2003, even though performance targets (particularly with regard to fiscal management) are not being met. The IMF has not disbursed any funds under Malawi’s three-year (2000-03), US$58m, poverty reduction and growth facility (PRGF) since December 2000. The government’s adherence to IMF targets has been very poor and is not expected to improve until after the 2004 elections. Excessive government spending (and a lack of donor support) have caused an explosion of domestic debt, the servicing of which is becoming a severe burden. The resumption of donor support should allow some of the debt to be retired. If this does not happen, there is a real risk of a government default, which would cause a complete crisis in the banking sector and all the knock-on effects of this on the rest of the economy. Officially, the poverty reduction strategy paper (PRSP), published in April 2002, is driving policy, but the government’s commitment to the document has been very weak. The primary objective of the PRSP is to reduce poverty by empowering the poor and diversifying the economy away from agriculture. However, the PRSP accepts that during the next few years the primary sector will be the focus of poverty-reduction efforts. Successful implementation will depend on improving farmers’ access to finance and public services. Given that the IMF is expected to resume lending despite the fact that the authorities have not complied with most of its conditions, the government’s commitment to the PRSP’s agenda will be limited.

Fiscal policy The finance minister, Friday Jumbe, unveiled the budget for fiscal year 2003/04 (July-June) on July 4th. The government is relying on increased donor funding to reduce the fiscal deficit to around 3% of GDP in 2003/04. The projected increase in donor support to MK23.5bn (US$209m) from MK9bn (US$80m) in 2002/03 is expected to increase total revenue (plus grants) to MK59.9bn (US$609m) from MK41.4bn (US$539m) in 2002/03. However, some donors will be wary about committing too much to the country given the continued lack of expenditure control and current estimates for grants are probably too high. Domestic revenue is also likely to fall below target in 2003/04, owing to the cut in surtax from 20% to 17.5% in the new budget and a decline in revenue from the tobacco auctions as more of the crop is acquired directly by merchants. We expect total revenue and grants to be closer to MK52bn in 2003/04. The government projects that total expenditure will rise from MK53.9bn in 2002/03 to MK56.5bn in 2003/04. As electioneering is already in full swing, it is very unlikely that expenditure will remain within the government’s target. The Economist Intelligence Unit expects total expenditure to be nearer to MK64bn in 2003/04. Nonetheless, owing to the resumption of donor inflows, we are forecasting that the fiscal deficit will narrow to 7.2% of GDP in 2003/04. After the elections the government is expected to become more determined in tackling the fiscal deficit, but the 2003/04 budget will not benefit from this. For

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the fiscal deficit to be reduced substantially there would need to be much greater control over government expenditure than currently exists, but slight improvements should cause the fiscal deficit to narrow to 5.5% of GDP in 2004/05 and 5% of GDP in 2005/06.

Monetary policy Given the chronic fiscal indiscipline, maintaining a tight monetary policy will remain the main priority of the Reserve Bank of Malawi (RBM; the central bank). The RBM will attempt to control inflation by managing broad money supply through open-market operations and adjustments to the bank rate. The RBM is aware of the damage that real interest rates of over 35% are doing to the economy, but rates will not be reduced until government borrowing is brought under control. Given our forecast for the fiscal deficit, we do not expect much easing of interest rates before the elections, although it is possible that the RBM may bow to government pressure to reduce rates. After the elections there is likely to be a gradual reduction in rates, although fiscal problems will prevent this from being too dramatic. Reducing the high reserve requirement (currently 30%) would encourage the commercial banks to reduce the spread between lending and deposit rates, which is currently over 20 percentage points, but this would be inflationary and so the RBM is unlikely to attempt it during the forecast period. Therefore, the interest-rate environment will remain a major hindrance to private-sector activity and development.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.3 3.9 4.1 OECD 1.8 1.9 2.4 2.6 EU 1.0 0.6 1.9 2.3 Exchange rates ¥:US$ 125.3 118.1 116.8 116.0 US$:€ 0.945 1.115 1.165 1.135 SDR:US$ 0.772 0.721 0.707 0.713 Financial indicators ¥ 2-month private bill rate 0.10 0.07 0.10 0.10 US$ 3-month commercial paper rate 1.70 1.08 1.38 3.56 Commodity prices Oil (Brent; US$/b) 25.0 27.6 19.6 18.9 Tobacco (US$/tonne) 3,100 3,150 3,200 3,250 Tea (US$/kg) 1.5 1.5 1.4 1.4 Food, feedstuffs & beverages (% change in US$ terms) 12.7 5.6 1.7 5.8 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Improved growth in the US in the second half of 2003 will help the global economy to grow by around 3.3% in 2003. Global growth will return to trend level in 2004 and 2005, at 3.9% in 2004 and 4.1% in 2005. The US will continue to lead the way, as structural rigidities will dampen growth prospects in the EU and Japan. The prospects for Malawi’s main commodity exports will be mixed during the outlook period. Tobacco prices fetched at local auctions depend to a

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considerable extent on local factors, but we expect international prices to remain stable over the forecast period, averaging US$3,225/tonne. Global oversupply will cause the tea price to fall from an average of US$1.47/kg in 2003 to US$1.4/kg in 2004 and US$1.37/kg in 2005.

Economic growth Economic growth will continue to be strongly influenced by the tobacco harvest. After a disappointing year in 2003, when famine caused smallholder farmers to concentrate on producing maize ahead of burley tobacco, we are expecting an improvement in the tobacco crop in 2004. However, given that tobacco prices are falling and as the depreciation of the kwacha is expected to continue, the cost of the necessary imported inputs (particularly fertiliser) will become increasingly out of reach for the smallholder farmer. Therefore, we are expecting a decline in the burley crop in 2005. As instability is expected to continue in Zimbabwe, tobacco merchants will continue to encourage Malawian estate farmers to increase production of the higher-value, flue-cured Virginia crop throughout the forecast period. Low international prices for tea throughout the forecast period will discourage commercial farmers from increasing production, limiting its contribution to real GDP growth, but rising international prices should stimulate sugar production. Outside agriculture, financial services will continue to perform well because of the real return available on Treasury-bills. Greater foreign ownership of domestic banks and the possibility of further foreign entrants into financial services will reduce the prospect of a financial crisis. However, owing to high real interest rates, a growing tax burden and regional competition, the contraction of the manufacturing sector will continue. The only sector of the economy expected to show substantial growth over the forecast period is distribution, owing to Malawi’s increased reliance on imported goods as the domestic productive base is eroded. Higher tobacco output and increased government spending ahead of the elections will lift real GDP growth from an estimated 1.7% in 2003 to 2.6% in 2004. The slowdown in growth in tobacco output will reduce real GDP growth to 2.3% in 2005.

Inflation The downward trend in inflation appears to have ended. Year-on-year inflation stood at 8.7% in July, up from 8.5% in June, owing to a slight rise in food prices. Higher import and fuel prices will put upward pressure on inflation until the start of next year’s maize harvest in March!food contributes 58.4% of the consumer price index (CPI). Nonetheless, owing to the increased availability of food, average inflation is estimated at 11.6% in 2003, the lowest annual rate since 1997. The expected normalisation of the food supply situation, the forecast depreciation of the kwacha and expansionary government spending ahead of the elections will cause average inflation to rise to 13% in 2004. Provided that the kwacha remains relatively stable and the maize harvest is reasonable, an improvement in fiscal discipline will reduce average inflation to 12.2% in 2005.

Exchange rates The kwacha is forecast to continue depreciating modestly until the start of the 2004 tobacco auction season (the main source of foreign exchange) in April. Inflows from the tobacco auctions should keep the kwacha relatively stable until the closure of the auctions in September, from when it is forecast to

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resume its downward trend until the start of the 2005 tobacco auctions. Performance for the remainder of 2005 should follow the same trend as 2004. Throughout the forecast period the kwacha will remain vulnerable to further sharp falls!potential triggers could be further delays to the resumption of donor funding and a deterioration in political stability ahead of the elections. Overall, we expect the kwacha to depreciate from an average of MK98.3:US$1 in 2003 to MK120.2:US$1 in 2004 and MK132.3:US$1 in 2005.

External sector The trade balance will be largely determined by tobacco exports. Prices of burley tobacco are expected to fall throughout the forecast period, as the increased price of imported inputs will limit farmers’ use of these, to the detriment of crop quality. However, this will be broadly offset by the increase in production of the higher-value, flue-cured crop by estate farmers. Overall, we forecast an increase in tobacco exports in 2004, owing to increased plantings, before lower prices and higher costs result in lower export receipts in 2005. Sugar production and exports are expected to increase over the forecast period, but low international tea prices will result in a decline in revenue from tea exports. Import growth will be contained by shortages of foreign exchange and a lack of investment. The slow growth in imports will increase services debits!these are principally costs associated with foreign trade. Although tourism receipts, the main source of services credits, are expected to rise slightly, the services deficit is expected to widen slightly over the forecast period. A reduction in interest payments on external debt under the IMF-World Bank’s enhanced heavily indebted poor countries (HIPC) initiative will reduce the deficit on the income account. Inflows of donor aid will ensure a healthy surplus on the current-transfers account, although this is expected to decline slightly in 2004, as the country will no longer be receiving emergency famine assistance, before rising again in 2005 as donor relations improve after the elections. Overall, the current-account deficit is expected to narrow from an estimated 9.4% of GDP in 2003 to 9.2% of GDP in 2004, as tobacco exports increase, and to 8.3% of GDP in 2005, owing to higher donor transfers.

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Forecast summary (% unless otherwise indicated) 2002a 2003b 2004c 2005c Real GDP growth 1.7b 1.7 2.6 2.3 Gross industrial growth -3.2b -2.0 0.0 0.5 Gross agricultural production growth 2.3b 2.0 3.0 2.5 Consumer price inflation (av) 14.7 11.6a 13.0 12.2 Consumer price inflation (year-end) 11.5 12.9a 12.1 13.2 Short-term interbank rate 50.5 48.0a 43.5 40.0 Government balance (% of GDP) -8.4b -7.2 -5.5 -5.0 Exports of goods fob (US$ m) 396.7 399.8 441.8 425.0 Imports of goods fob (US$ m) 634.6 623.2 635.6 645.2 Current-account balance (US$ m) -185.9 -151.0 -138.6 -130.8 Current-account balance (% of GDP) -10.2b -9.4 -9.2 -8.3 External debt (year-end; US$ bn) 2.8 3.0 2.8 2.8 Exchange rate MK:US$ (av) 76.69 98.34a 120.15 132.25 Exchange rate MK:¥100 (av) 61.18 83.27a 102.91 114.01 Exchange rate MK:€ (av) 72.46 109.68a 139.97 150.10 Exchange rate MK:SDR (av) 99.33 136.46a 170.02 185.42 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Bingu Wa Mutharika is chosen A three-day convention of the ruling United Democratic Front (UDF) in mid- as the UDF's candidate August endorsed Bingu wa Mutharika as the party’s presidential candidate and a former minister, Cassim Chilumpha, as his running mate for the presidential election on May 18th 2004. These appointments reflect the wishes of the president, Bakili Muluzi (July 2003, page 13). Public pronouncements indicated that any UDF member was welcome to stand against the officially anointed team, the sole condition being that all applications had to be submitted 21 days ahead of the convention. A number of high-profile UDF members were known to be aggrieved over Mr Muluzi’s support for Mr Mutharika. The vice-president, Justin Malewezi; the commerce and industry minister, Sam Mpasu; and the former environmental affairs minister, Harry Thomson, had all been rumoured to be planning to contest Mr Mutharika’s appointment. Eventually the only two

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candidates to file their applications were the former sports minister, Moses Dossi, and the deputy agriculture minister, Joe Manduwa. The 21-day deadline was introduced to the party’s constitution at a mini- convention in Blantyre (the commercial capital) on July 7th. Ostensibly its purpose was to allow all the interested individuals a chance to campaign. However, because of all the speculation over high-profile challenges to Mr Mutharika, in reality it was to give the UDF hierarchy plenty of warning over who they were dealing with and a chance to discredit them. Mr Dossi and Mr Manduwa were both threatened for daring to stand against Mr Mutharika and Mr Manduwa withdrew from the race one week before the convention, citing intimidation. Mr Dossi, who was sacked from the cabinet at the height of the succession row, campaigned on the promise of introducing a new generation of leadership to the party!he is 50 years old, 20 years younger than Mr Mutharika. Although there was no violence during the convention, unlike that of the Malawi Congress Party (MCP; July 2003, page 17), strong pressure was believed to have been exerted to ensure a façade of unity and support for the anointed team, while at the same time presenting an outside face of democratic compliance. In free and fair conditions any opponent to Mr Mutharika would have picked up significant support; as it was, Mr Dossi received only 12 votes, compared with 1,294 for Mr Mutharika.

Friday Jumbe appears to put For a while the local press touted several names as potential candidates his name forward including the finance minister, Friday Jumbe. Mr Jumbe quickly disassociated himself from this movement, claiming that he had no presidential aspirations and was interested only in pursuing his current ministerial position. There is thought to be some substance to the rumours that Mr Jumbe was indeed interested!the UDF treasurer-general and founder member of the party, Patrick Mbewe, resigned in mid-July in protest over the way that Mr Mutharika was imposed on the party and was reportedly campaigning for Mr Jumbe. Indeed, Mr Jumbe went as far as taking out half-page advertisements in local newspapers denying his interest in the presidency, a move that raised far more publicity than simply denying the story to journalists. The finance minister may well consider it worthwhile biding his time for the moment. Any future leadership challenge will be helped by the fact that a presidential commission of enquiry has cleared Mr Jumbe of corruption charges over the sale of the country’s maize reserves (October 2002, page 15)!a contributory factor to the famine that Malawi has recently emerged from. Mr Jumbe was the general manager of the state-run Agricultural Development and Marketing Corporation (Admarc) at the time of the sales, an institution that played a key role in the disappearance of the maize reserve. The setting up of a hand-picked presidential commission to investigate the sales was unprecedented, as normally such an investigation would be conducted by the Anti-Corruption Bureau, and suggested that Mr Jumbe was unlikely to be found guilty (April 2003, page 16).

Bakili Muluzi will remain Of all the appointments made at the UDF convention, the most important may party chairman have been the appointment of Mr Muluzi as the party’s national chairman for a five-year period. Previously the UDF was led by its president!a role held by

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Mr Muluzi since the party was formed in 1992!but this position was abolished at the mini-convention in July. The party justified this change in terms of the separation of powers; the national chairman is supposed to be solely responsible for party affairs, whereas the party president has also been the national president for most of the party’s lifetime. Mr Mutharika is relatively unknown, has no power base within the UDF and owes his position entirely to Mr Muluzi. He is, therefore, expected to be compliant with the wishes of Mr Muluzi. The appointment of Mr Mutharika and Mr Chilumpha with little or no consultation among the party has raised much criticism, as has Mutharika’s age, and his capability. Since his appointment, it has become apparent that Mr Mutharika has little public presence or political experience. Early public utterances were notable for gaffes, including a pledge for protection of Mr Muluzi to prevent him being prosecuted like the former president of Zambia, Frederick Chiluba. (Mr Chiluba also selected a relatively unknown politician, Levy Mwanawasa, to replace him so that he could retain influence after a failed attempt to get the constitution amended to allow him to run for another term. This backfired as Mr Mwanawasa purged the old administration to build up his own power base!Mr Chiluba is currently standing trial on corruption charges.)

The third-term issue is still not This criticism of Mr Mutharika raises the possibility that the third-term issue dead might be revisited. A bill proposing that the constitutional limit on the number of terms that a president may serve be increased from two to three was supposed to have been withdrawn at the most recent session of parliament, which ran through July and August (July 2003, page 16). This did not happen. Although the appointment of Mr Mutharika as the UDF’s presidential candidate was thought to have finally put an end to speculation over the third term, his recent performance has raised some concerns as to whether the third- term issue is really dead. There is a belief that Mr Muluzi is intending to capitalise on the relative obscurity and unpopularity of Mr Mutharika. A possible scenario is that Mr Muluzi will claim that he has been obliged to step in following the criticism of Mr Mutharika, particularly if the latter’s opponents within the party feel that he is jeopardising its chances of re-election and therefore depriving individual MPs of access to patronage. In this way, Mr Muluzi may be able to convince his party and members of the coalition with Aford that supporting a constitutional amendment that allows him to stand for a third term is the only way to hold on to power.

UDF campaigning is already The UDF appears to be taking no chances in consolidating its grassroots well under way support. Campaigning in the rural areas in particular has begun at a much earlier stage and on a much larger scale than was the case before the last two elections, which provides a clear indication of the UDF’s concern over its popular backing. The campaigning so far has included the provision of new vehicles (in UDF colours) to rural centres for use by local stalwarts and the widespread use of state media and resources by the president, including the distribution of copious amounts of free maize at every opportunity. Interestingly, this has resulted in queries in the media as to the source of the

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maize"the impression given by the president is that it has come from his own resources. Mr Muluzi’s reaction to these queries has been angry and abusive, although in a campaign speech in late July the president admitted that it was state-owned maize. As the Economist Intelligence Unit expected, following the resignation of the agriculture minister, Aleke Banda, from the UDF in March (July 2003, page 18), the national press has become more critical of the ruling party. Previously, questions about the source of maize handouts, for example, would never have appeared in print. However, the resignation of Mr Banda from the UDF has lost the party the support of The Nation, which is owned by Mr Banda and edited by his daughter. The only other daily, The Daily Times, is owned by Blantyre Print and Publishing, which is connected to the Malawi Congress Party (MCP), the main opposition party. A plethora of other regular and irregular publications have also become increasingly vocal in their criticisms. It is arguable that the UDF has little to worry about from the print media!its outreach is very limited compared with the electoral base, being confined mainly to the principal urban centres. The UDF itself retains tight control over the Malawi Broadcasting Corporation, which provides the sole national radio station and which the majority of the rural population relies on for information.

Mr Tembo’s political career is The conviction of the MCP leader, John Tembo, on contempt of court charges on the brink of collapse was upheld by the High Court in late August. Mr Tembo and the MCP deputy secretary, Kate Kainje, were originally convicted of contempt of court in October 2002 (January 2003, page 17) for holding a party convention in Lilongwe (the capital) on June 22nd 2002, despite a court injunction granted to the then party president, Gwanda Chakuamba, stopping this. Mr Tembo is now appealing to the Supreme Court over the High Court’s decision. If this fails it will, in effect, be the end of his formal political career as the presiding judge ruled that contempt of court is “criminal and borders on moral turpitude”. Anyone convicted on these grounds is constitutionally barred from serving in parliament or the government for seven years!Mr Tembo is 72-years old. Mr Tembo was elected party president and the MCP’s candidate for the presidential election on April 29th, displacing Mr Chakuamba, who became vice-president (July 2003, page 17). The prospect that Mr Tembo may be prevented from standing has implications not just for the MCP, but potentially for the presidential election. MCP members have so far rallied around their party president, but there is a growing realisation that with the elections only eight months away it may be too risky to back a candidate that may not be able to contest them. Therefore, three alternative strategies have been put forward. Perhaps the most likely is that Mr Chakuamba will assume the party’s nomination. However, there has been an intense contest between Mr Tembo and Mr Chakuamba for the party leadership ever since the former MCP leader and self-appointed president-for-life, Hastings Banda, died in 1997, so Mr Tembo will be loathe to back Mr Chakuamba, who came second in the 1999 election. The second option is that Mr Tembo, who is likely to retain the post of party president, will claim that as his recent election shows he has the support of the party, he should be allowed to select a replacement from within its ranks. This

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would be difficult for many party members to accept, so the third option would be for Mr Tembo’s chosen candidate to stand in another MCP leadership election. There is a strong possibly that Mr Tembo will act as the power behind the throne should his chosen candidate become the party’s presidential candidate, which would mean that the new candidate!no obvious names spring forward!would retain his hostility to an opposition alliance. The position is likely to be different if Mr Chakuamba becomes the party’s presidential candidate. Mr Chakuamba fought the 1999 election in an alliance with the Alliance for Democracy (Aford), and it is likely that he would be far more amenable than Mr Tembo to entering into a broad-based alliance ahead of the 2004 polls!this would be the opposition’s best chance of defeating the UDF.

Dissident Aford members form Five former members of Aford, the third largest party in parliament, have a new party announced plans to form a new political party, the Genuine Alliance for Democratic Change (GADC). Aford has been split since early 2002, when its leader, Chakufwa Chihana, aligned the party with the UDF (April 2002, page 34). Five of the party’s MPs opposed this move and, led by Green Mwamondwe, formed the grouping known as Genuine Aford (Gaford). On August 5th, Davis Katsonga, the parliamentary speaker, suspended the Gaford members from parliament on the grounds that they had joined a politically motivated pressure group. This contravened a controversial amendment to Section 65 of the constitution introduced in July 2001 (to stop members of the UDF joining the National Democratic Alliance!July 2001, page 32). In line with all the other MPs threatened under Section 65, the Gaford members continued to sit in parliament ahead of their case being subjected to a judicial review. Aware of this legal paralysis, the Gaford MPs decided to register themselves as a fully fledged political party. Again this process was dragged through the courts, as Aford claimed that the new party’s name was too similar to theirs and would confuse voters. The High Court ruled that the names were not sufficiently similar, arguing that the Malawi National Democratic Party (MNDP) and the Malawi Democratic Party (MDP) both contested the 1994 and 1999 elections. However, the Supreme Court granted the injunction sought by Aford and prevented Gaford from registering. Instead of waiting for the results of a judicial review, Mr Mwamondwe said that the grouping would call itself the GADC and would soon register as a formal political party. The National Democratic Alliance (NDA), led by Brown Mpinganjira, formerly a leading member of the UDF, has also finally registered as a political party. Mr Mpinganjira has cemented his strong support base in the south, around the Mulunje area, but has failed to make much progress in other areas of the country.

Government is embarrassed Malawi recently hit the international headlines following a bizarre incident that by arrest of al-Qaida suspects began when five foreigners were arrested on June 22nd. Police initially claimed that this was the result of an immigration problem. However, it was subsequently announced that the five were suspected of being members of the international terrorist organisation, al-Qaida, and had been on the watch list of the US Central Intelligence Agency since the bombing of the US embassies in

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Kenya and Tanzania in 1998. Before the government could hand the suspects over to the US, the High Court ruled that detaining and deporting them without charge was against the law. The government defied this and the five were spirited away during the night. This sparked outbreaks of civil unrest throughout the country. The five detainees comprise: two Sudanese who were involved with the Islamic Zakaat Fund Trust in Blantyre, which sponsors students and runs Radio Islam; a Saudi from the Prince Sultan bin Aziz Special Committee on Relief, which has recently opened three eye treatment centres; and two Turks, one the executive director of the Bedir International School, the other a restaurant owner. The five went five weeks without making any contact with family members and what happened during this period is unclear. They claim that they were initially taken from Blantyre to Lilongwe, before being flown to Zimbabwe. Four weeks later they were flown to Khartoum, Sudan, where they were released without charge. They also claim not to have met any American officials. These movements have not been adequately explained and are very strange, as the US does not have good relations with either Zimbabwe or Sudan. The Malawian government insists that it has not been briefed on what happened to the five while they were in custody. It was certainly very surprised when the suspects were released, as it had staunchly defended its position in what it considered a joint operation between US and Malawian intelligence. Government sensitivity over the issue was illustrated by the dismissal of a local journalist for broadcasting an interview with the wives of the suspects!who claimed that Mr Muluzi had apologised and blamed the Americans for their husbands’ predicament!while they were still being held. In early September the High Court dropped all charges against the five men, none of whom have returned to Malawi. There is no evidence that the five were planning any operations in Malawi. Whatever kudos the government got from the US for supporting it in the “war on terrorism”, the episode went down very badly domestically. The covert deportation of the suspects sparked rioting in a number of areas. The religious tensions threatened to escalate when a Christian leader was arrested for “inciting religious intolerance” by distributing potentially incendiary literature after a number of churches had been burned down. There is a religious element to politics in Malawi. Mr Muluzi is a Muslim and some Christian groups have complained of alleged favouritism to Muslims. It is also notable that whereas Malawi’s main churches all fiercely opposed Mr Muluzi’s ultimately doomed attempt to have the constitution amended so that he could run for a third term, Muslim groups supported this (January 2003, page 17). Although a small group of Muslims threatened to disrupt next year’s elections, inter-religious tension is expected to remain under control.

Economic policy

2003/04 budget relies on The finance minister, Friday Jumbe, presented the 2003/04 (July-June) budget, renewed donor support Macroeconomic Stability: A Precondition for Economic Growth and Poverty Reduction in Malawi, on July 4th. The government is relying on increased donor

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funding to reduce the fiscal deficit to around 3% of GDP in 2003/04, from 8.4% of GDP in 2002/03. The projected increase in donor support to MK23.5bn (US$209m) from MK9bn (US$80m) in 2002/03 is the main factor behind the expected rise in total revenue and grants to MK60bn from MK41.4bn in 2002/03. As we assume that IMF lending will resume before the end of 2003 (July 2003, page 20), triggering the release of budgetary support currently being withheld by bilateral donors, donor funding will increase, although probably not by as much as the government is budgeting for. The government appears to be relying on further good performance by the Malawi Revenue Authority to reach its target for domestic revenue. This may be difficult to achieve, as the main tax change was a cut in surtax (in effect, value- added tax) from 20% to 17.5%. The coverage of the surtax was increased in the 2002/03 budget (July 2002, page 18) so that it now covers the wholesale and retail sectors, as well as the import and manufacturing sectors, and the rate was increased for a number of goods previously taxed at 10%. However, many retailers hiked their prices way beyond the level justified by the tax change (January 2003, page 21), and others did not register for surtax, but still charged it to their customers. The government hopes that the reduction in the surtax rate will result in lower prices for consumers, although unscrupulous retailers will no doubt attempt not to pass this on, using the fall in the kwacha against the US dollar to justify unchanged prices. The only other significant tax change was a reduction in the withholding tax on supplies of goods and services from 10% to 4%. This is to be offset by the withdrawal of exemption certificates, which have been exploited by some suppliers. Again, this will do little to add to domestic revenue. Additionally, the government’s real GDP growth projections of 3.4% in 2003 and 4.3% in 2004 are overly optimistic, casting further doubt as to whether the budgeted revenue total can be reached. The government projects that total expenditure will rise to MK56.5bn in 2003/04, from MK53.9bn in 2002/03. The resumption of donor support and a satisfactory maize harvest will ease spending pressure, and the government has pledged to adhere to a number of new expenditure controls. Education, science and technology is allocated the largest proportion of revenue, MK8.8bn, followed by health and population, which gets MK4bn. Although much of this money is consumed by salaries, the government has increased the allocation for pro-poor expenditure, from 6.4% of GDP in 2002/03 to 7% of GDP in 2003/04. Those sectors that the government considers to be future sources of growth have been given the greatest increase in their allocation. The Ministry of Commerce and Industry’s budget was increased by 140% to MK270m to fund activities promoting private-sector growth. The allocation for the department of mines was increased by 100% to MK70m, while the Ministry of Tourism was given MK169.5m to promote tourist activity. In addition, funds have been allocated for the construction and maintenance of roads and for the promotion of tourism. The government service charge on hotel, motel and lodge accommodation was also reduced from 10% to 5%.

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Government finances (MK bn; fiscal years Jul-Jun) 2002/03 2003/04 Budgeted Actual Budgeted Total revenue & grants 43.15 41.43 59.97 Domestically generated 27.14 32.47 36.01 Donor funded 16.01 8.96 23.45 Total expenditure 45.26 53.94 56.53 Recurrent 32.82 n/a 41.69 Development 12.44 n/a 14.84 Balance -2.11 -12.51 3.44

Source: Ministry of Finance.

Implementation will be key to As with all of Malawi’s recent budgets, if policy is conducted in line with the the success of the budget 2003/04 budget, there will be an improvement in the fiscal deficit and a movement towards greater macroeconomic stability by allowing the government to retire some of its domestic debt. However, in recent years implementation has been lacking. Mr Jumbe stressed the primacy of the Malawi Poverty Reduction Strategy, the Public Sector Investment Programme and the Medium Term Expenditure Framework in compiling the budget. However, all of these were in place in 2002/03, but none were adequately adhered to and the fiscal deficit substantially overshot its target. Poor financial controls within the public sector and overspending are the real problems. An integrated financial management information system (IFMIS) was proposed around five years ago when there was an arrears problem in a number of ministries and was supposed to be fully introduced in the 2001/02 budget (October 2001, page 40). This has still not been installed in all ministries, and in those where it has been set up, the necessary expenditure returns and projected commitments have not been met, so the system has been unable to work properly. The management of public finances in Malawi is often hostage to political concerns, and therefore measures aimed at reducing expenditure are usually unsuccessful. For example, a recent attempt to clamp down on travel allowances by only giving these for trips of ten days or more (rather than five days previously) has simply resulted in ministers extending their trips. Parliamentary scrutiny of government expenditure is minimal: government MPs want to maintain their access to funds, while opposition MPs do not want to seriously tackle the abuses of power as they believe that they might be in office one day. Civil society groups are mainly concerned with the pro-poor allocations and do not tend to look at the bigger picture. Therefore, given that electioneering is already in full swing, it is very unlikely that expenditure will remain within the government’s target in 2003/04.

The budget says that In the 2003/04 budget the government committed itself to proceeding with the privatisation is to continue privatisation of parastatals that could be “better managed by the private sector”. This may be an important caveat as it implies that it is down to the government to decide which parastatals this applies to, which could create a problem with donors. Nonetheless, the budget acknowledged that only four of the remaining 10 major parastatals!Air Malawi, Escom, Malawi Telecommunications and the Southern Region Water Board!made profits in

2002. For the new fiscal year the government pledged to improve the regulatory framework and infrastructure to facilitate foreign investment and enhance compliance in the payment of bills to parastatals by government departments.

The David Whitehead The presidential commission of enquiry into the sale of integrated textile privatisation is to go ahead producer, David Whitehead, has dominated privatisation issues over the last quarter. The commission was established to examine the sale of the company after the management claimed that the company was worth at least MK300m (US$2.8m) compared with the MK37m sale price agreed with a consortium comprising a local group, Mapeto Wholesalers, and Jimtex of India (July 2003, page 24). As expected, the commission recommended that the sale should go ahead on the basis agreed and that the sale had been conducted in accordance with the regulations and in a fully transparent manner. A renewal of negotiations is awaited before the deal can proceed, but the government must first repay debts that it owes to Stanbic!the Commercial Bank of Malawi (CBM) was formally integrated into the Stanbic family earlier this year after the latter acquired a 70% stake in the CBM in 2001 (January 2002, page 41). This is expected imminently, whereupon the finalisation of the sale and handover is expected to proceed as quickly as possible. In a sop to the David Whitehead workforce, the new owners agreed to change their original plans of making some staff redundant and closing the factory temporarily after the handover; all workers will now retain their jobs and the factory will remain open. The David Whitehead saga had the potential to undermine the whole privatisation programme and this has been averted only narrowly. The baseless challenging of the sale terms by its management could well have produced a dangerous precedent. Although ultimately thrown out by the courts, the publicity and public sympathy generated was unprecedented and unwelcome. The saga has certainly damaged Malawi’s profile as an investment destination.

The domestic economy

Economic trends

Low tobacco revenue causes After six months of relative stability the kwacha plunged from MK89.9:US$1 on the kwacha to slump July 16th to MK108.1:US$1 on August 22nd. The kwacha is prone to sharp depreciations around the end of the tobacco season (usually in September), the last was in September and October 2000, when it lost one-third of its value against the US dollar. The kwacha’s fall appears to have been triggered by an announcement that revenue from the tobacco auctions, the main source of foreign exchange, was going to be down by around 5% on last year’s disappointing level. The Economist Intelligence Unit warned of the risk of the kwacha collapsing if donor disbursements were not resumed before the end of the 2003 tobacco auctions (July 2003, page 12) and it appears that importers had similar concerns. Once the announcement was made, importers began honouring their foreign currency obligations early rather than risk a fall in the currency that would cause them kwacha-denominated losses. This caused an

increase in demand for foreign exchange which resulted in a depreciation of the kwacha, which was only stemmed by the Reserve Bank of Malawi (RBM; the central bank) selling around US$10m of its foreign-currency reserves on the domestic market. To prevent further declines in the kwacha it is vital that donor support resumes later this year, as foreign-exchange reserves are at their lowest level for eight years!according to the RBM, foreign-exchange reserves were US$113.2m at the end of July, equivalent to only 1.8 months of import cover! making further intervention very risky. The fall in the kwacha has already begun to feed through into inflation. Fuel prices were raised by an average of 20% on August 23rd, with petrol rising by 22% and diesel by 15%, to MK76.6/litre and MK53/litre respectively.

Inflation appears to have Year-on-year inflation appears to have bottomed out. Prior to July inflation had bottomed out fallen in 22 out of the last 23 months, from 29.9% in August 2001 to 8.5% in June 2003!the lowest rate since June 1997. However, in July year-on-year inflation rose to 8.7%. The downward trend over 2003 was caused by the increased availability of cheap maize, stemming from free donor handouts and a bumper harvest. Inflation in food prices!which contribute 58.4% of the basket used to calculate the consumer price index!fell from 12.3% in January to just 4% in June, when it declined by 7% in month-on-month terms because of the cut in the price of maize sold by the Agricultural Development and Marketing Corporation (Admarc; see Agriculture). Year-on-year food price inflation began to rise again in July, as supply deteriorated slightly, causing a rise in headline inflation. With maize stocks gradually being used up as the year progresses, food price inflation will continue to rise. This will be bolstered by the impact of the fall in the kwacha, which should ensure that the government’s year-end target of 7.5% is missed.

Agriculture

Tobacco revenue is down The Limbe floors closed at the end of July and the Mzuzu and Lilongwe floors again closed by the end of August. In prior years the auction sales have continued through September and occasionally into October. Results from the tobacco auctions have again been disappointing. Burley tobacco, which comprises the

majority of the national crop and is grown by smallholder farmers, registered a substantially lower volume sold over the auction floors than in previous years!average prices paid at the auction floors were also down. As production of the speciality dark-fired varieties was negligible, the only good results were for flue cured. Tobacco merchants have been encouraging estates to grow the flue-cured crop (mainly Virginia tobacco) to compensate for the collapse of output in Zimbabwe (where flue-cured Virginia is the main variety grown). Volumes have increased, but not by as much as had been earlier predicted. Overall combined volumes were more than 5% down on 2002, while the total value raised at the auction floors was US$7.5m lower. The early closure of the auctions reflects the lower volumes. What makes the performance of the tobacco crop so disappointing is that the growing conditions for the crop were good (April 2003, page 22). A principal reas on fo r the fal l in bu rley pro du cti on was far mers ’ co ncern abou t foo d security after last year’s famine, which made maize cultivation more pressing than the production of cash crops. The degree to which the burley crop is being smuggled out of the country for sale in Mozambique, Zambia and, to a lesser extent, Tanzania, is less easy to ascertain, although it is probably an increasingly common phenomenon. Although prices are generally lower abroad, bypassing the auction floors means that the smallholder does not have to pay auction floor charges or the withholding tax levied at the auction floor, which together cost the farmer 13.5% of the gross price. The industry is aware that smuggling is an increasing problem, but Malawi’s porous borders make this difficult to tackle. Reducing the auction charges appears to be the main way to tackle the problem and the recent budget promised a review of tobacco marketing arrangements, including an improvement of marketing channels and a possible reduction of levies, although the government’s room for manoeuvre over the latter is limited as these make an important contribution to its revenue. The continued decline in tobacco revenue threatens to create a vicious circle where lower revenue and a steadily depreciating currency make the necessary imported inputs less affordable to most farmers. Without the suitable application of these inputs, volume and quality will continue to decline.

Diversification efforts are Despite these concerns over the future of Malawi’s primary export crop, the making little progress government’s attempts at agricultural diversification are making little headway. This is partly because of poor policy choices. Given that Chakufwa Chihana was awarded the agricultural portfolio for purely political reasons and with an election looming, it is unlikely that a clear policy will emerge in the short term. Recent discussions have focused on the possibility of pushing cassava as an alternative crop, including its use for downstream operations. It is not known what, if any, studies have been undertaken to justify the government’s interest in promoting this crop. Cassava does grow well in Malawi, as it does in many other countries, but whether it is suitable for large-scale commercial production is another matter. Its high starch content does provide commercial downstream products!starch is particularly useful for glues used in a variety of industrial applications, as well as for fermentation into alcohol. However, these downstream products are used on a relatively small scale in Malawi, and substantial further research into the viability of increased domestic processing

and potential export markets is required before the government will be able to encourage smallholders to diversify from tobacco.

Smallholders are encouraged The lack of coherence in the government’s crop diversification strategy is to grow macadamia trees illustrated by recent initiatives to encourage smallholder farmers to grow macadamia trees. Although macadamia are well suited to Malawi’s climate, it is doubtful whether many smallholders will be prepared to tend to the macadamia trees for the seven years it takes before they bear fruit. And even if smallholders do not take up macadamia cultivation in large numbers, there is already insufficient capacity to process all of the established plantings once they come into production. At present macadamia are mainly grown on tea estates.

Maize production is up by 26% Final estimates by the Ministry of Agriculture, Irrigation and Food security put on 2001/02 maize production in crop year 2002/2003 (October-September) at 1.98m tonnes, compared with last year’s harvest of 1.6m tonnes. This is because of a 21% increase in the planted area and a 5% increase in yield. The improved yield is the result of three factors: more conducive weather conditions, the wider distribution of free seed and inputs via the Starter Pack Programme, and donor provision of free maize allowing farmers to use more for planting rather than consumption.

The substantial improvement in food security compelled the National Food Reserve Agency to sell 100,000 tonnes of maize in August, halving the size of the strategic maize reserve. This maize was purchased at the height of last year’s famine, when the government underestimated the donor response and informal food imports, resulting in an overstock. As this year’s bumper harvest meant that people were not buying the maize, it was starting to spoil. Eight undisclosed companies won the tenders for the maize by bidding between US$90/tonne and US$110/tonne, resulting in a loss to the government of around US$15m. (The maize was originally bought at an average price of US$250/tonne, but the improved harvest throughout the region!including a 2m tonne surplus in South Africa!means that demand is much lower now.) The maize was sold internationally so as not to depress local prices.

Although the maize harvest is much improved, owing to poor internal distribution some areas of the country are still suffering from food insecurity. This is particularly the case in the parts of Central region that were hit hardest by the recent famine, as people there were so busy looking for food they did not have time to adequately prepare their fields for their crops. HIV/AIDS is adding to food insecurity by removing some of those that would have worked the land. The UN World Food Programme (WFP) estimates that 670,000 people in Malawi!mostly the chronically ill, the elderly and AIDS orphans!require around 44,500 tonnes of aid until next June. Feeding these people should not be a problem as the WFP has already been pledged US$246m of the US$308m it is appealing for to provide 500,000 tonnes of maize for people in the region (mainly Zimbabwe). Most of the food destined for Malawi will be distributed in January and February, just before the new harvest, when stocks are running low.

Prospects for the 2003/04 Prospects for the 2003/04 harvest are less promising. As smallholder farmers harvest are less promising are expected to have retained some grain for planting after this year’s bumper harvest, the government is scaling back the Starter Pack Programme from 3m farmers to 1.7m. Potentially more damaging is the low maize price!Admarc reduced its retail price from MK17/kg to MK10/kg in June in response to lower domestic prices, which ranged between MK5.91/kg and MK13.48/kg that month. Private traders are aware that they will be unable sell maize at much more than the Admarc price, and will thus offer even less to the farmers they buy from. Such a low price is a big disincentive for smallholder farmers to produce surplus maize to sell. Another problem is the recent fall in the kwacha, which will increase the price of imported inputs, particularly fertilisers, which are essential for boosting maize production. Ultimately, weather conditions remain central to determining how good the maize crop is. Although the weather is now beginning to warm up after being dry and reasonably cold for the last few months, it is too early to judge how sufficient rains will be.

Tea production is up by 8.2% The outlook for tea, the country’s second crop, is better. According to the Tea Association of Malawi, production in the first seven months of 2003 was 30.2m kg, up by 8.2% on the same period in 2002. Good growing conditions, particularly in the Mulanje district, are the principal reason for this improvement. The sector was given a further boost by the sale of the Conforzi estate, one of the leading local producers, after several failed attempts. Conforzi has been in receivership for the past two years, although it was being operated as a going concern. It was sold to a consortium of local Asian trading organisations that are believed to have links with the president, Bakili Muluzi.

A record sugar crop in 2002/03 Sugar production is also up so far this year. Malawi’s sole sugar producer, The Sugar Corporation of Malawi (Sucoma), had record production of 260,441 tonnes in the 2002/03 season (July-June), up 20.9% on 2001/02 production, after several years of substantial investment and favourable growing conditions. Owing to the effects of the famine on the spending power of consumers, particularly in rural areas, domestic demand accounted for barely half of Sucoma’s production. Competition from black market imports from Zimbabwe also had some effect, although tough action taken by the government in

curbing these imports!after prompting by Sucoma!was reasonably successful. Sucoma exported 126,000 tonnes of sugar in 2002/03: 50,000 tonnes of these exports were to the EU and US markets under various trade protocols, while a further 7,000 tonnes was exported to countries within the Southern African Development Community trading bloc. The remainder was exported to a number of other countries!regional demand was boosted by a drought in Kenya, which hit local production and exports. Growing conditions for the current milling season have been good. Some problems have, however, been experienced owing to the disruption to the energy supply caused by the flooding that reduced the Electricity Supply Company of Malawi’s generating capacity by around 50% in the second quarter of the year (July 2003, page 29). Although this did not affect the mills, some of the irrigation equipment is dependent on electricity.

Mining

Government continues to push In an attempt to diversify the economy away from tobacco, the Ministry of development of mining sector Natural Resources and Environmental Affairs held discussions on the formulation of a new mineral policy in Lilongwe in June. Initial efforts will focus on the development of a new geological map of the country. Malawi has exploitable deposits of bauxite, asbestos, graphite and uranium, but, unlike its neighbours, has never developed large-scale mining activity. This may be about to change, owing to the recent discovery of 11m tonnes of monazite-bearing ore at Kangankunde Hill in Southern region. It is possible that the ore reserves! which contain 2% rare earth and 8% strontium!are even greater, as much of the surrounding area was not surveyed. The ore body has been mined for much of the past century, but never on a commercial basis. Part of the reason for this was poor transport links. Neither of the minerals have local applications! strontium is used in the making of flares and the refining of zinc, while rare earth is used in magnets!therefore access to a port is vital. It is hoped that the development of the Nacala corridor (January 2003, page 27) will encourage foreign investor interest in developing the deposit. In August the Ministry of Natural Resources and Environmental Affairs embarked on a process to restart exploitation of small-scale deposits of alluvial gold found in the Lisungwe river valley in Central region. Gold was last mined in the area in the 1930s, but the ministry believes there is the potential to recover 100 oz of gold per month.

Industry

The Portland Cement The Portland Cement Company quarry at Changalume, near Zomba, has Company quarry has closed closed. Although the quarry still has large reserves, it had reached a stage where extraction was becoming more expensive and not economically viable. Portland, owned by Lafarge of France, is now importing clinker from sister companies in Zambia and Zimbabwe. Even though the company had long warned that it would eventually have to close the quarry because of rising costs, there was a political outcry when the announcement was finally made.

Former employees, supported by the Malawi Development Corporation, put together a management buy-out plan to continue production and supply clinker to the Portland plant in Blantyre. This now appears to have been dropped and the site has been leased to the army to use for conducting exercises.

Financial services

Central bank stops banking An expected tie-up between a local development bank, Indebank, and investment in Zimbabwe Botswana-incorporated Century International (part of a Zimbabwean group, Century Holdings) did not go ahead following intervention by the RBM, the banking-sector regulator. The RBM granted approval to the deal in principle in November 2002, but it was concerned about the modalities of the sale. Although not stated, it is also believed that the RBM was concerned about Century’s financial state, following the significant losses it recorded during 2002. Indebank had planned an expansion into the retail sector with Century’s support, on the back of its own boutique retail banking operation which has been established for 10 years as Indefinance. Despite the failure of the deal with Century, Indebank is still in the process of establishing additional branches in Blantyre, Limbe and Lilongwe.

Foreign trade and payments

Foreign-exchange reserves The latest data from the IMF’s International Financial Statistics show that continue to fall foreign-exchange reserves had fallen to US$113.6m in June, the lowest level for nearly eight years. Reserves have declined in every month of 2003 so far, owing to the substantial maize imports bought by the government to combat the famine and disappointing revenue from the tobacco auctions. As US$10m of reserves were used to halt the depreciation of the kwacha in August, it is likely that foreign-exchange reserves are currently below US$100m, equivalent to around six weeks of import cover (the IMF’s recommended minimum is three months). The resumption of donor inflows is vital, otherwise reserves will continue to decline, putting the kwacha under more pressure.

Textile exports to the US According to the US government’s most recent Africa Growth and Opportunity increase Act (AGOA) trade data, in the year to July 2003 Malawian exports to the US under AGOA were only US$23.5m, compared with US$24.2m in the same period in 2002. Under AGOA, qualified countries in Sub-Saharan Africa are allowed to export various products duty free to the US. Malawi’s main AGOA exports in the first seven months of 2003 were agricultural products!mainly sugar. Most countries, including Malawi, have chosen to concentrate on textiles, as this is relatively labour intensive and therefore a good source of employment. Encouragingly, textile and apparel exports to the US under AGOA increased from US$5.5m in the first seven months of 2002 to US$10.5m in the same period of 2003. The sale of the David Whitehead textile factory (see Economic policy) should allow a further increase in textile exports. Nigeria continues to be the largest exporter to the US under AGOA, although this is almost entirely composed of crude oil.

US imports, total and under AGOA (US$’000) AGOA Jan-Jul AGOA Jan-Jul Total 2001 Total 2002 AGOA 2001 AGOA 2002 2002 2003 Nigeria 8,916,476 5,819,603 5,688,461 5,409,660 2,730,111 5,415,471 South Africa 4,429,539 4,235,974 923,243 1,342,594 689,418 955,374 Angola 2,775,670 3,231,266 0 0 0 0 Lesotho 217,165 321,475 129,592 318,029 175,031 198,187 Mauritius 275,127 280,433 53,975 114,292 65,952 82,172 Swaziland 65,036 114,464 14,770 81,252 38,232 66,198 Malawi 71,800 68,109 39,159 37,533 24,214 23,470 Namibia 37,845 57,353 93 1,717 136 12,969 Botswana 21,118 29,732 1,221 4,578 2,329 2,717 Zambia 15,584 7,790 775 83 44 159 Mozambique 7,060 8,160 5,278 5,916 17 1,920 Total (incl others) 21,060,499 18,208,044 8,179,347 8,991,729 4,725,458 7,925,793

Source: US International Trade Commission.