Mozambique Malawi

COUNTRY REPORT

Mozambique Malawi

The full publishing schedule for Country Reports is now available on our web site at http://www.eiu.com/schedule.

3rd quarter 1999

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.20) 7499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: http://www.eiu.com

Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 London: Jeremy Eagle Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023 This publication is available on the following electronic and other media:

Online databases NewsEdge Corporation (US) Microfilm FT Profile (UK) Tel: (1.718) 229 3000 World Microfilms Publications Tel: (44.20) 7825 8000 (UK) DIALOG (US) CD-ROM Tel: (44.20) 7266 2202 Tel: (1.415) 254 7000 The Dialog Corporation (US) LEXIS-NEXIS (US) SilverPlatter (US) Tel: (1.800) 227 4908 M.A.I.D/Profound (UK) Tel: (44.20) 7930 6900

Copyright © 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 1351-8089

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1

Contents

3 Summary

Mozambique

5 Political structure 6 Economic structure 7 Outlook for 1999-2000 10 Review 10 The political scene 13 Economic policy 16 The economy 17 Industry 17 Agriculture 18 Energy 18 Transport and communications 20 Tourism 21 Foreign trade and payments

Malawi

23 Political structure 24 Economic structure 25 Outlook for 1999-2000 28 Review 28 The political scene 31 Economic policy and the economy 34 Agriculture 35 Foreign aid, trade and payments

37 Quarterly indicators and trade data

List of tables

9 Mozambique: forecast summary 14 Mozambique: IMF, selected economic indicators 19 Mozambique: port traffic 20 Mozambique: rail traffic 21 Mozambique: external debt 27 Malawi: forecast summary 28 Malawi: presidential election results, Jun 15th 1999 29 Malawi: legislative election results, Jun 15th 1999

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 2

32 Malawi: trends in the Treasury-bill market, 1999 33 Malawi: listed companies on the MSE, end-May 1999 34 Malawi: tobacco prices 35 Malawi: trade balance with Zimbabwe 36 Malawi: external debt 37 Mozambique: quarterly indicators of economic activity 38 Malawi: quarterly indicators of economic activity 39 Mozambique: foreign trade 40 Malawi: foreign trade

List of figures

9 Mozambique: gross domestic product 14 Mozambique: exchange rates 15 Mozambique: minimum monthly salary 16 Mozambique: consumer prices 27 Malawi: gross domestic product 27 Malawi: kwacha real exchange rates 34 Malawi: tobacco production by leaf type, 1998

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 3

June 28th 1999 Summary

3rd quarter 1999

Mozambique Outlook for 1999-2000: Tensions will mount between the ruling Frelimo and the main opposition party, Renamo, amid uncertainty about the precise date of the national elections, due by the end of 1999. Frelimo will increasingly focus on formulating its electoral strategy, with the president and leader of the party, Joaquim Alberto Chissano, emphasising Frelimo’s crucial role in Mozambique’s economic recovery since the end of the civil war. Meanwhile, Renamo’s electoral strategy will remain dishevelled and unconvincing, which, as polling day approaches, will force the party to rely on familiar tactics of disruption and obstreperousness. Renamo will try to squeeze as much political capital as possible from the fact that Frelimo is struggling to organise the elections within the tight timetable. The outlook for the economy remains bright, with real GDP growth expected to average 11.5% in 1999 and 2000. Inflation is forecast to rise to an average of 4% per year. The current-account deficit will widen more rapidly than previously forecast, from $971m in 1999 to $1.05bn in 2000.

Review: It has become increasingly unlikely that Frelimo will manage to organise national elections by December 1999, and the party has been urged to delay the poll. Nevertheless, Frelimo has begun to campaign in earnest, emphasising its economic record and accompanying social improvements. The Renamo leader, Afonso Dhlakama, has decided not to form a coalition with 12 small extra-parliamentary parties. The public debate on constitutional reforms has fallen behind schedule. New legislation has been introduced to curtail employment of expatriates. Espionage charges have been dropped against a South African diplomat, Robert McBride. The IMF has approved a three-year ESAF. Value-added tax was introduced on June 1st, a crucial criterion for reaching the completion point of the World Bank/IMF HIPC initiative. The minimum wage has been increased by 27%. The INE has recalculated Mozambique’s national accounts, resulting in a substantial upward revision to GDP. A deal has been reached between the government and Enron over access to the Pande gasfield. Cotton output is expected to fall in 1999. The telecoms utility is to be part-privatised. Port traffic has declined. The state airline, LAM, has posted a small profit for 1998. A major tourism project has been announced for Vilanculos, Inhambane province.

Malawi Outlook for 1999-2000: The opposition MCP-Aford alliance will maintain its conviction that President Bakili Muluzi’s victory in the national election should be annulled on the grounds that the registration process was grossly mismanaged. Although the High Court has ruled in favour of the opposition before, it remains to be seen whether it will be willing to consider the annulment of the election results. Meanwhile, the MCP and Aford will keep the pressure on the ruling UDF in parliament, attempting to lure the support of four independent members who now hold the balance of power. The 1999/2000 (July-June) budget will probably be presented in mid-July, with an

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 4

expected budget deficit target of 5.8% of GDP. Real GDP growth is expected to slow slightly from 5% in 1999 to 4.6% in 2000, while average inflation will drop dramatically over the same period, from 45.1% to 13.5%. The current- account deficit will widen from $248m in 1999 to $274m in 2000.

Review: Bakili Muluzi has been re-elected as president for another five-year term, although the UDF has failed to secure a parliamentary majority. The MCP-Aford alliance has rejected the election results on a constitutional technicality. The election has served to highlight deep regional cleavages in Malawi. A television station has been launched. The government has managed to keep to fiscal targets in the first three quarters of the 1998/99 fiscal year. The privatisation programme has remained on course, which has helped to preserve relations with international donors. Inflation is still on the rise, with the CPI reaching a year-on-year rate of 56.6% in March. Rumours of another devaluation of the kwacha have been denied. Malawi has signed a preliminary agreement with Mozambique on currency convertibility. Early indications from the 1999 auctions suggest firmer tobacco prices than in 1998. Malawi has criticised Zimbabwe over the terms of the current trade accord between the two countries. The total external debt stock declined from $2.3bn at end-1996 to $2.2bn at end-1997, according to recent World Bank data. Late note: A new cabinet was announced on June 27th 1999.

Editors: Noah Beckwith; Todd Moss All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Our next Country Report will be published in October

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 5

Mozambique

Political structure

Official name República de Moçambique

Form of state Unitary republic

Legal system Based on Portuguese/Roman law and the 1990 constitution

National legislature 250-member Assembléia da República (parliament) elected by direct, universal, adult suffrage every five years

National elections October 1994 (legislative and presidential); next national elections due by December 1999 (legislative and presidential)

Head of state President, chosen by direct universal suffrage; currently Joaquim Alberto Chissano

National government The president and his appointed prime minister and Council of Ministers; last major cabinet reshuffle 1994

Main political parties Frente de Libertação de Moçambique (Frelimo) is the main and ruling party; the main opposition group is the former rebel Resistência Nacional de Moçambique (Renamo). There is a host of small parties, but the only group in 1994 to win the 5% of the electoral vote needed to secure parliamentary representation was the União Democrática (UD)

Prime minister Pascoal Mocumbi

Ministers in the presidency Defence & security affairs Almerinho Manhenje Economic & social affairs Eneias Comiche Parliamentary affairs Francisco Madeira

Key ministers Agriculture & fisheries Carlos Agostinho de Rosário Culture, youth & sports Matheus Katupha Education Arnaldo Nhavoto Finance Tomás Salomão Foreign affairs Leonardo Simão Health Aurélio Zilhão Industry, commerce & tourism Oldemiro Baloi Interior Almerinho Manhenje Justice José Ibraimo Abudo Labour Guilherme Mavila Mineral resources & energy John William Kachamila National defence Aguiar Mazula Public works & housing Roberto Costley White Social welfare Filipe Manjate State administration Alfredo Gamito Transport & communications Paulo Muxanga

Central bank governor Adriano Maleiane

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 6 Mozambique

Economic structure

Latest available figures

Economic indicators 1994 1995a 1996a 1997a 1998b GDP at market prices (MT bn) 8,652 13,195 19,363 22,446 25,581 Real GDP growth (%) 7.5 4.3 7.1 11.1 11.3 Consumer price inflationc (av; %) 70.2 54.1 16.6 5.8 –1.3 Population (m) 14.0 14.7 15.3 15.7a 16.1 Exports fob ($ m) 147a 174 226 234 255 Imports cif ($ m) 1,019a 729 802 855 965 Current-account balanced ($ m) –870a –680 –665 –711 –778 Total external debt ($ m) 5,649 5,751e 5,842e 7,300e 7,150a External debt-service ratio, paid (%) 33.0 27.5e 28.1e 24.9e 33.5 Cashew nut productionf (‘000 tonnes) 29 33e 67e 35e 49 Raw cotton productionf (‘000 tonnes) 49 53e 51e 74e 80 Prawn production (‘000 tonnes) 6.6 7.5e 7.8e 8.6e n/a Exchange rate (av; MT:$) 6,039 9,024e 11,294e 11,544e 11,853e

June 26th 1999 MT12,518:$1

Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Agriculture 26.3 Private consumption 55.2 Industry & fisheries 17.9 Government consumption 14.2 Construction 11.3 Gross domestic investment 53.3g Transport & communications 11.4 Exports of goods & services 24.9 Commerce & others 33.3 Imports of goods & services –47.6 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1997 $ m Principal imports 1997 $ m Prawns 90.2 Machinery & equipment 139.0 Cashew nuts & coconut 29.3 Vehicles, transport equipment & spare parts 113.8 Cotton 22.2 Fuel 92.3 Timber 13.8 Textiles 43.4 Copra 4.6 Metal products 38.9

Main destinations of exports 1996h % of total Main origins of imports 1996h % of total Spain 17.1 South Africa 54.6 South Africa 15.8 Zimbabwe 6.6 Portugal 11.7 Saudi Arabia 5.4 US 10.4 Portugal 3.8 a Official estimates. b Preliminary official estimates. c December, year on year. d Excluding transfers. e Actual. f Marketed production. g EIU estimate. h IMF actuals.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 7

Outlook for 1999-2000

The political temperature With national elections due by the end of 1999, the combination of is set to rise— uncertainty over the precise date of the poll and intense wrangling between the ruling Frente de Libertação de Moçambique (Frelimo) and the main opposition party, the Resistência Nacional de Moçambique (Renamo), will make for a tense political scene. The uncertainty will, however, be limited to the timing and outcome of this crucial poll—the second multiparty election since the end of the civil war—and will neither dent confidence in the economy nor jeopardise the consolidation of democracy in Mozambique. For his part, the president and leader of Frelimo, Joaquim Alberto Chissano, will have to manage delicately the thorny constitutional and electoral issues on the agenda in the run-up to the poll.

With Mr Chissano now formally endorsed as Frelimo’s presidential candidate, the party has turned its attention to formulating an effective campaign, which will focus on rekindling support in large parts of the country including— worryingly—its own traditional southern stronghold. The central theme of the Frelimo campaign will be the steady improvement of the economy since the mid-1990s. The ruling party will seek to squeeze as much political capital as possible from the rapid rates of economic growth and progress with provision of basic social services since the end of the civil war. However, given that the associated benefits have been unequally distributed, the government will have to ensure that it does not alienate large sections of the population who have yet to enjoy the fruits of political and economic reconstruction.

—and the timing of the In addition to elaborating its own electoral strategy, the government will election will be crucial— concentrate on the logistical and administrative arrangements required to organise the holding of national elections before the end of the year. Indeed, Frelimo has come under considerable pressure to delay the poll, given the tight timetable in which complicated electoral preparations must be made, most notably voter registration. However, the party is also mindful of the risk of failing to hold the election in 1999, which could provoke a potentially damaging constitutional crisis if the government were forced to extend its five- year mandate, which expires in December. Although Renamo has signalled its willingness, at least in principle, to postpone the elections, if a delay is required, Frelimo will be keen to avoid the contingency of having to solicit support from the opposition.

—but the task is daunting— With the political drawbacks of a postponement patently clear, Frelimo will struggle to organise the elections before end-1999. Tellingly, the Comissão Nacional de Eleições (CNE, the national electoral commission) has refused to commit itself to an election date, and as the municipal elections in 1998 exemplified, the preparation and deployment of electoral machinery in Mozambique is a lengthy and cumbersome process. A familiar pattern of crisis and brinkmanship with the opposition may therefore develop in the coming months, which will probably be resolved at the eleventh hour. The litmus test of the government’s ability to organise the poll in time will be the voter registration campaign, currently scheduled for July 20th-September 17th.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 8 Mozambique

Frelimo’s recent decision to shorten the period of voter registration has, however, provoked vociferous criticism from Renamo (see The political scene). Indeed, the frequency and severity of Renamo’s snipes at the government will only intensify in the coming months, as the party keeps up the pressure on the government to commence negotiations on postponement.

—and is complicated by In addition to the challenge of organising the elections, the debate on the constitutional reforms promulgation of the new constitution will also occupy the government, which is keen to see the issue resolved before the poll. Discussions in the Assembléia da República (parliament) on amendments to the first draft of the new constitution are scheduled for late July, and are likely to prove acrimonious, with Renamo intent on blocking any changes unless its demand are met.

An IMF ESAF will underpin The next phase of Mozambique’s economic and structural reform programme structural reforms— will receive IMF backing through a three-year enhanced structural adjustment facility (ESAF), worth SDR59m ($79m). The ESAF will run from 1999 to 2002, and the first tranche of SDR8.4m ($11.2m) was to be made available to the government on July 8th. Having successfully stabilised key macroeconomic indicators—notably inflation and the exchange rate—since the mid-1990s, the IMF will now expect the government to proceed with some of the more thorny areas of reform. Highest on the agenda will be poverty alleviation and the improvement of basic social services, particularly healthcare and education. The Fund will also expect rapid progress on the fiscal front, notably an increase in government revenue, a strengthening of the tax administration, and a reduction in exemptions and tax distortions.

The fact that the IMF has approved the ESAF will provide a further boost to the confidence in the economy of international donors and investors. Even higher levels of development assistance are likely to materialise in the coming months as a result of the IMF’s resounding endorsement of the Chissano administration’s record of economic management. The government will have little difficulty in meeting fiscal and monetary targets agreed with the Fund.

—and the outlook for the Meanwhile, the outlook for the economy remains bullish, and the rapid rate of economy remains bright— expansion that has resulted from the government’s prudent economic policies, underpinned by low inflation and a stable currency, will continue over the forecast period. So far, political uncertainty associated with the election has not proved a destabilising factor on the economy. Indeed, the indications are that real GDP growth, which is forecast to average 11.5% in 1999 and 2000, will continue to be buoyed by several so-called mega-projects and broad-based expansion across a range of sectors. Domestic and international confidence in the economy will be further strengthened by the recent approval of a $2.5bn investment in the Maputo Iron and Steel Project (see The economy). It will be noted that the EIU’s growth projections are considerably more optimistic than those suggested by the IMF (see Economic policy). Mozambique has consistently exceeded IMF growth targets since the mid-1990s, and our forecasts are based on the assumption that the Fund has once again erred on the side of conservatism.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 9

Meanwhile, the exchange rate will be allowed to depreciate gently, in line with the government’s decision in late 1998 to loosen monetary policy slightly so as to safeguard export competitiveness. This, in turn, will help the Chissano administration to meet its inflation target.

—although the current- The current-account deficit is now expected to widen from $971m in 1999 to account deficit will widen $1.05bn in 2000. Large purchases of heavy industrial inputs associated with the mega-projects will swell the import bill, outstripping growth in merchandise exports. Exports are now projected to rise from $300m in 1999 to $425m in 2000, benefiting from a welcome, if modest, improvement in world commodity prices. Although the gentle depreciation of the currency will continue to enhance export competitiveness, the full rehabilitation of the country’s infrastructure will be necessary if more rapid export growth is to be achieved. As far as the invisibles account is concerned, the benefits of falling debt-service payments will be offset by a rising trade deficit.

Mozambique will reach the The reduction of Mozambique’s total external debt stock—according to the HIPC “completion point” latest edition of the World Bank’s Global Development Finance, Mozambique’s total debt stood at $5.99bn in 1997—under the World Bank/IMF heavily indebted poor countries (HIPC) debt-relief initiative has reached so-called completion point. The final decision on the debt reduction deal was taken by the boards of directors of the World Bank and IMF at the end of June. Given that Mozambique has achieved all of the criteria required under the HIPC initiative, including the implementation of value-added tax (VAT), the reaching of the completion point was virtually assured, and will reduce the country’s Mozambique: debt burden by almost two-thirds, from around $2.27bn to $1bn in net present gross domestic product % change, year on year value terms. The country’s debt-service obligations will also fall to an annual

Mozambique average of $73m in 1999-2005, comparing favourably with an average of Africa $169m in the absence of the HIPC initiative. 12

10 Mozambique: forecast summary 8 ($ m unless otherwise indicated) a a b b 6 1997 1998 1999 2000 Real GDP growth (%) 11.1 11.3 11.5 11.5 4 Consumer price inflation (av; %) 5.8 –1.3 4.0 4.0 2 Merchandise exports fob 234 255 300 425 0 1996(a) 97(b) 98(b) 99(c) 2000(c) Merchandise imports cif 855 965 1,083 1,200 (a) Official estimates. (b) EIU estimates. (c) EIU forecasts. Sources: EIU; IMF, International Financial Statistics; World Current-account balance –711 –778 –971 –1,045 Economic Outlook. Exchange rate (av; MT:$) 11,544c 11,853c 12,446 13,068 a EIU estimates. b EIU forecasts. c Actual.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 10 Mozambique

Review

The political scene

The prospects for a timely The organisation of national elections, due by the end of 1999, is proving to be election diminish— a political headache for the ruling Frente de Libertação de Moçambique (Frelimo), led by the president, Joaquim Alberto Chissano (2nd quarter 1999, page 9). Although the Assembléia da República (parliament) voted in late March to approve the membership of the independent electoral commission, the Comissão Nacional de Eleiçoes (CNE)—a major hurdle, which has involved considerable wrangling with the main opposition party, the Resistência Nacional de Moçambique (Renamo—1st quarter 1999, page 7)—the constitutional requirement that the election be held by end-1999 looms ever-more dauntingly over the government. While the composition of the CNE was an important step—the body is formed of eight Frelimo appointees, six from Renamo and one from União Democrática—independent observers nevertheless remain concerned that there is too little time to make the administrative and logistical arrangements required to hold the poll. Among the most pressing preparations include the compilation of a new voter register, organisation of voter education campaigns, training and deployment of the more than 11,000 staff required for voter registration alone, printing of materials, and the tender for contracts for the provision of other goods and services.

—and Frelimo is urged to According to a report prepared by the European parliamentarians for Africa postpone the poll— (Awepa), the completion of arrangements for the election is not feasible before January 2000. In theory, the poll could be held in December 1999 if the time allocated for voter registration and campaigning is restricted. However, both dates preclude any major glitches, which is highly unlikely in the Mozambican context, let alone the fact that the onset of the rainy season in December will render large parts of the country inaccessible. Awepa and other political parties have therefore urged the government to consider postponing the poll until the end of the rainy season in March or April 2000. However, the government has so far remained intransigent on the issue, reticent to co-opt the opposition in order to amend the constitution so as to extend its mandate beyond end-1999.

Frelimo appears to have realised that the legislature’s delay in appointing the independent CNE (2nd quarter 1999, page 9), combined with the sheer magnitude of the task of organising the poll, may cost it dearly. While the government remains adamant that it is proceeding on the assumption that the election will be held in late 1999, the CNE has announced that it is to shorten the voter registration period to July 20th-September 17th, after which it will make a formal recommendation on a date for the poll. The curtailment of the campaign has been vigorously criticised by the Renamo leader, Afonso Dhlakama, who has warned that it may result in a reduced number of rural registrations.

—but campaigning still Despite concerns over the election date, Frelimo has begun to prepare its gets under way— electoral strategy. During a conference in the capital, Maputo, in May the party’s central committee nominated the head of state, Mr Chissano, as its

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 11

presidential candidate. Frelimo’s political commission has also appointed an election team, the Escritório Central de Eleições, to conduct the campaign, headed by Mariano Matsinha, a former minister for security and prominent figure during the struggle for independence. Some independent political analysts have been perplexed by the choice of Mr Matsinha, not only because he is strongly associated with the party’s revolutionary origins, but also because he headed Frelimo’s disappointing election campaign in 1994, which was characterised by complacency and the use of anachronistic political slogans, a tactic that nearly lost the party the election.

—accompanied by familiar Frelimo’s election campaign is, not surprisingly, centred on a core of familiar rhetoric themes, such as the glorification of the party’s role in the liberation struggle and the resistance to the apartheid regime in South Africa. It is also seeking to capitalise on the steady economic and social progress made since the end of the civil war. On a more confrontational note, Frelimo is also hoping to highlight Renamo’s unsavoury practices and political allegiances during the civil war, notably the catalogue of well-documented atrocities and human rights abuses that it committed, and its alliance with apartheid South Africa. The early indications are that such attacks on Renamo will only intensify in the run-up to the poll, as emotive rhetoric is increasingly deployed to sway voters. Undue reliance on such tit-for-tat politics may prove a risky strategy, given the fact that there remains a general weariness of the ruling party’s tendency to glorify the era of the one-party state. Although it is highly unlikely that Frelimo will lose the presidential election, it may be vulnerable in the parliamentary poll. The growing recognition of this fact probably underlies its increasing aggressiveness and plans to mobilise the sizeable party apparatus for its campaign.

Renamo tries to cobble Renamo has been attempting to cobble together its own electoral strategy, and together an electoral has held a series of seminars in central and northern Mozambique, attended by strategy— Mr Dhlakama, although it is still to hold its party congress, scheduled for July 26th-29th. Although Renamo has yet to begin campaigning in earnest, it is attempting to put together a shadow cabinet and to present a more convincing case that it would be capable of effective and responsible government were it to win the election. Meanwhile, moderate Renamo figures in the legislature will increasingly try to seek out independent politicians who might be willing to co-operate with the party. These elements of Renamo’s strategy do suggest a greater degree of cohesiveness than previously displayed. However, there is every indication that its campaign will be characterised by familiar practices of disruption and general obstreperousness. Worryingly, Mr Dhlakama has threatened to render the five provinces that Renamo won in the 1994 election ungovernable if the government does not respect the party’s wishes.

—and Mr Dhlakama dithers The recent attempt by a group of 12 smaller extra-parliamentary opposition over forming a coalition parties to form a grand coalition with Renamo was received cautiously by Mr Dhlakama, who initially saw little advantage in an alliance with parties of such limited capacity and support. By late June, however, the Renamo leader seemed to be coming round to the idea. Meanwhile, other opposition parties have continued to fare poorly. The União Moçambicana de Oposição, a newly

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 12 Mozambique

formed coalition of four opposition parties, has moved to expel one of its members, the Partido de Renovação Democrática, although a fifth party, the Partido Democrático por Reconciliação Moçambicana, has signalled its desire to join the partnership. Extra-parliamentary parties have remained weak since their formation before the first multiparty elections in 1994, with none managing to mount a serious campaign or to present any formidable challenge to Frelimo and Renamo. It is unlikely that any of these parties will be able to gain the threshold of 5% of the vote required for parliamentary representation.

The debate on Public debate on the first draft of the new constitution, which is being constitutional reforms is conducted through hearings at the provincial level, is due to be concluded behind schedule soon, following which the draft will be debated in parliament, probably in late July. An ad hoc parliamentary commission has been formed to draft amendments. It is unclear whether the draft constitution will be approved in parliament, given Renamo’s insistence that it will withhold its support until there are amendments to the national anthem, flag and emblem.

Mozambique makes While Mozambique’s regional policy has continued to focus on pursuing a overtures to the Angolan peaceful settlement to the conflict in the Democratic Republic of Congo (DRC), government the country has adopted a more overtly supportive position towards the Angolan government since fighting intensified between the ruling Movimento Popular de Libertação de Angola (MPLA) and the rebel União Nacional para a Inependência Total de Angola (UNITA). In a statement to parliament on March 29th, Mr Chissano stated that all members of the Southern African Development Community (SADC), of which he is vice-chairman, were obliged to support the MPLA in its fight against UNITA. Despite the fact that relations with Angola have cooled since early 1998, given Mozambique’s refusal to become involved militarily in the Congolese civil war, the president’s statement has been interpreted as an indication that the Chissano administration would like to put relations with Angola on a sounder footing (4th quarter 1998, page 11). However, Angola has failed to replace the Zambian head of state, Frederick Chiluba, with Mr Chissano as the chief mediator in the Congolese conflict (2nd quarter 1999, page 11) although the latter did visit Rwanda, Zambia, Angola and Congo in February as part of a mediation exercise.

The employment of In a long-anticipated move, the government has taken measures to restrict the expatriates is curtailed employment of foreign labour in Mozambique. On June 4th the minister for labour, Guilherme Mavila, revealed new regulations consistent with labour legislation approved in parliament in 1998, including a new quota system for the employment of foreign workers in private companies. Under a sliding system, new private companies must ensure that 40% of managerial positions are held by Mozambican nationals, with the proportion rising to 90% after ten years. Existing companies that have already been in operation for ten years must ensure that 90% of managerial positions are held by Mozambicans within five years. Companies are also required to pay a fee of between 7% and 15% of the contracted salary of each foreign worker employed.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 13

The new measures have been greeted cautiously by the business community, which had indicated a preference for voluntary quotas, and is alarmed at both the cost of compliance and the expanded powers of inspection granted to the Ministry of Labour. Nevertheless, the new legislation enjoys broad public and parliamentary support, and has successfully addressed the growing problem of the domination of the managerial sector by foreign workers. By the same token, with management and vocational skills in critically short supply, the hitherto large proportion of foreign workers in managerial positions has not been surprising in the context of rapid economic expansion.

Espionage charges against Charges of espionage and arms-trafficking against a senior South African a South African diplomat, Robert McBride, were formally dropped by the Supreme Court on are dropped March 26th, ending a long and embarrassing diplomatic saga between the South African and Mozambican governments. Mr McBride was imprisoned for six months in Mozambique before being released on bail in September 1998 (4th quarter 1998, page 11). The episode served to highlight the bureaucracy and inefficiency of the Mozambican judicial system, and drew attention to the murky realities of what is believed to be substantial cross-border trade in arms, in which the security forces of both countries have been implicated. Mr McBride’s arrest was widely thought to have been orchestrated by right- wing apartheid-era elements of the South African security establishment.

Economic policy

The IMF grants On June 28th the IMF approved a three-year enhanced structural adjustment Mozambique an ESAF— facility (ESAF) worth SDR59m ($79m), in support of the government’s economic reform programme for 1999-2002. The ruling Frente de Libertação de Moçambique (Frelimo) was praised for achieving high rates of economic expansion since the mid-1990s, while simultaneously reducing the annual rate of inflation from 70% in 1994 to –1.3% in 1998. Structural reforms under the new ESAF will focus on:

• restructuring of public enterprises and the privatisation programme; • revising career streams and compensation in public administration; • adoption of indirect monetary policy instruments; • elimination of administrative barriers to investment and trade; • enhancing fiscal sustainability by improving transparency of budgeting; • further withdrawal of the state from the economy; and • boosting competition in the banking sector.

Together with structural reforms, the main focus of the ESAF programme will be on poverty alleviation. With some 70% of the population still living below the poverty line, the improvement and extension of basic social services throughout the country will be a top priority.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 14 Mozambique

Mozambique: IMF, selected economic indicators (% change, year on year) 1998 1999 2000 Real GDP growth 12.0 9.7 7.0 Consumer price inflation (av) 0.6 1.5 6.6 Consumer price inflation (end-period) –1.3 5.5 5.0 Exports fob 7.9 18.6 9.4 Imports fob 14.3 60.8 –20.5 Total revenue 14.9 17.9 20.2 Total expenditure & net lending 7.5 28.9 5.6 Current expenditure 23.3 24.2 9.0 Capital expenditure & net lending –5.5 33.7 2.2 Source: IMF.

Frelimo has kept disciplined fiscal and monetary policy measures firmly in —as economic policy place in recent months, and there is little reason to expect this to change. As remains on course and VAT anticipated, an increase in the rate of monetary expansion has facilitated a is introduced slightly faster depreciation of the exchange rate against the dollar, a deliberate Mozambique: exchange rates policy designed to address concerns about the strength of the metical Inverted scales (1st quarter 1999, page 12). The nominal metical:dollar exchange rate declined MT'000:$; left scale by 1.4% in the year to May 1999, while it appreciated by 3.3% against the MT'000:R; right scale 11.4 1.9 South African rand in the year to March. The magnitude of the movements

11.6 2.0 attests to the cautious exchange-rate policy of the Banco de Moçambique (BoM, the central bank), which has tried to achieve a small depreciation in the 11.8 2.1 effective exchange rate in 1999.

12.0 2.2

12.2 2.3 The effectiveness of the government’s fiscal policy, which has centred on boosting revenue, was underpinned by the introduction of value-added tax 12.4 2.4 (VAT) on June 1st, which replaces the sales and consumption taxes. The new 12.6 2.5 Jan . . Apr . . Jul . . Oct . . Jan . . Apr . indirect tax has been introduced at a rate of 17%. Although the legislation on 99 1998 VAT came into effect on April 1st, implementation was delayed until June to Source: Banco de Moçambique Mercado Cambial. allow for further preparations by the Ministry of Finance. The introduction of VAT was one of the principal conditions of reaching the so-called completion point of the World Bank/IMF heavily indebted poor countries (HIPC) initiative. The government was determined to implement VAT in a timely manner, despite signals from the World Bank and IMF that delays for technical reasons would be acceptable. In contrast, the private sector requested that implementation be postponed until January 2000, claiming that more time was required for compliance.

The minimum wage is In the interests of domestic political expediency, particularly in the run-up to increased by 27% national elections, in April the government agreed to a 27% rise in the statutory minimum wage during its annual tripartite wage negotiations held with employers and workers through the offices of the Comissão Consultiva de Trabalho (CCT). Labour representatives had demanded a 41% rise, while businesses offered 13.5%.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 15

Mozambique: minimum monthly Conveniently, the new legislation took effect on May 1st—in recent years May salary Day celebrations have been marred by workers and unions, which have chosen

MT'000; left scale the event to air grievances with economic policies, particularly privatisation. $; right scale The minimum monthly wage was increased from MT353,000 ($28) to 450 45

400 40 MT450,000 for urban workers, and from MT240,000 to MT305,000 for rural

350 35 workers. The minimum wage has risen by 57% in dollar terms since 1996, and 300 30 by 112% since bottoming out in 1993 at $17/month. Urban wages were 250 25 devastated by high inflation in the late 1980s and early 1990s, but have 200 20 recovered since economic stabilisation measures were introduced in 1996. The 150 15

100 10 minimum wage is now competitively aligned with most of Mozambique’s

50 5 neighbours. However, given that GDP per head continues to lag far behind

0 0 1988 89 90 91 92 93 94 95 96 97 98 99 other countries in the region, the government will come under pressure to contain further steep wage increases in the interests of preserving Source: Organização de Trabalhadores de Moçambique. Mozambique’s competitiveness.

A bond market is In keeping with Bretton Woods directives and the government’s objective of launched— deepening and enhancing the efficiency of the financial sector, in February the BoM launched a bond market through the auction of MT60bn ($4.8m) of Treasury bills. The contracting of short-term debt by the central bank will ostensibly cover the government’s temporary financing needs during the current financial year, although the principal purpose of the measure was to deepen the financial sector and introduce more indirect monetary policy instruments. The T-bills were purchased by four local banks and offered to the public at an interest rate of 10% with a maturity of three years. Public interest in the issue was strong—the T-bills were heavily oversubscribed—indicating buoyant demand for new financial investment instruments in Mozambique.

The central bank has also launched a new financial index, the Maputo interbank offered rate (Maibor), which will be used as the reference guide for domestic and international financial transactions. The rate was to be published daily by the BoM from July 1st. The index will be a composite rate established between the central bank and the six largest commercial banks based on average lending rates, including the interbank money market that has been operating since September 1997. Interbank operations currently extend over a maximum period of 30 days, although this will rise to 90 days from July 1st, and to six months within a year. While prime lending rates currently range between 15% and 19%, the average interbank market rate is around 8%.

—along with a business A new business confidence index has been launched by the main business environment index lobby group, the Comissão de Trabalho das Associações (CTA), the auditing company KPMG and the Mozambique-South Africa Chamber of Commerce. The index, based on a quarterly survey of 100 companies, will measure the impact on business of socio-economic and political developments, including macroeconomic policy, developments in infrastructure and provision of services, and financial, monetary, labour and environmental policies.

An alternative dispute In April parliament approved a bill that will provide for the establishment of resolution bill is passed alternative channels for handling disputes in the private sector, covering arbitration, conciliation and mediation tribunals. Implementation of the bill

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 16 Mozambique

will initially be funded by a grant from the US Agency for International Development (USAID). The bill was designed to address what has become an increasingly critical need for alternative mechanisms to circumvent, or at least alleviate the pressure on, the largely paralysed judiciary, which continues to suffer from severe capacity constraints and a consequent backlog of cases. The private sector is currently unable to rely on the court system to enforce contracts or resolve legal disputes in reasonable time. Moreover, according to a report presented to parliament by the attorney-general, António Namburete, only 26% of the 18,715 people currently in Mozambican jails are serving sentences, with the remainder either awaiting trial or a decision by the authorities to prosecute. Mr Namburete confirmed that the judicial system was in crisis owing to a shortage of resources, the lack of adequately trained judicial staff, outdated policing and judicial methods, overcrowded prisons and an antiquated penal code. He also criticised the police for excessive use of preventative detentions, failure to procure adequate evidence in many cases, and poor conditions of police prisons, in which prisoners awaiting trial are remanded. Budgetary allocations to the Ministry of Justice have risen in recent years, facilitating staff increases. However, these additional resources remain woefully insufficient to rectify the problem.

The economy

GDP is recalculated by the New data recently released by the Instituto Nacional Estatística (INE, the INE and inflation is kept national statistical institute) suggest that, after an extensive recalculation of under control Mozambique’s national accounts, economic activity has been considerably greater than previously thought. Real GDP in 1997 has been re-evaluated at $3.3bn, up from $1.9bn, while GDP per head in that year has also been revised upwards by nearly 70%, from $125 to $211. Although all Mozambican data should be treated with caution, the revised figures are roughly in line with the EIU’s perspective—we have long maintained that the size of the Mozambican economy was underestimated both by national agencies, and by the World Bank Mozambique: consumer prices (a) and IMF. On the basis of the new data, Mozambique’s GDP per head has now % change, year on year surpassed that of neighbouring Malawi, although it remains the third poorest 6 member of the Southern African Development Community (SADC), and is the ninth largest economy in the organisation, roughly comparable to Namibia. 4

2 Economic expansion has continued to be underpinned by price stability and the benefits of foreign direct investment (FDI), notably the approval of the 0 $2.5bn Maputo Iron and Steel Project (MISP; see Industry). Accumulated -2 inflation for the year to May 1999 was 3.5%, and the government is on course to achieve average annual inflation of around 4% in 1999, after concerns about -4 the effects of deflation in 1998 (2nd quarter 1999, page 13). Given that -6 Jan . . Apr . . Jul . . Oct . . Jan . . Apr . inflationary pressures tend to abate in the second half of the calendar year, 1998 99 owing to the deflationary impact of the agricultural harvest—food retains the (a) Maputo consumer price index. heaviest weighting in Mozambique’s consumer price index (CPI)—the govern- Source: National Statistics Institute. ment will easily achieve its inflation target, and may in fact undershoot it.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 17

Industry

The government reaches a The long-running dispute between the government and the US company deal with Enron— Enron over access to the Pande gasfield (1st quarter 1999, pages 15-16) was finally resolved on April 30th when a framework agreement was signed in Maputo between the minister of energy, John Kachamila, and the vice- president of Enron, Tony Way. Enron has finally managed to secure a firm commitment from the government that sufficient gas will be channelled from Pande for the requirements of the Maputo Iron and Steel Project (MISP). Failure to secure such an agreement, owing to efforts by the energy ministry to divert all or part of the gas reserves from the Pande concession to a competing consortium, had come close to derailing the $2.5bn MISP. Over the next two years Enron and its equity partner in MISP, South Africa’s Industrial Development Corporation (IDC), will proceed with project development and raising finance. The plant is expected to enter into production in 2004 after a three-year construction period. It is hoped that world prices and demand for steel will also be firmer then.

—paving the way for MISP is the largest foreign direct investment (FDI) in Mozambique to date. The Mozambique’s largest cost of the iron and steel plant has been put at $2.1bn, while the development project of the Pande field and a 800-km pipeline to Maputo has been valued at $400m. The Pande gas pipeline is to be an open-access service provider, leaving the government the option of co-operating with other companies exploring for gas in Mozambique. MISP will employ 5,000 workers during the construction period and 1,000 once operational, although substantial indirect employment is also expected to be generated. Annual exports from the plant are forecast at over $700m, more than 200% of Mozambique’s estimated exports in 1998.

The management of urban The tender for the private management contract to run the urban water supply water companies is companies in five Mozambican cities—Maputo, Beira, Nampula, Quelimane privatised and Pemba—has been won by the French firm Société aménagement urbain et rural (SAUR) international. A new company, Aguas de Moçambique, which includes local partners, is expected to conclude a detailed contract with the public works ministry, leading to the issuing of management contracts towards the end of the third quarter of 1999. Ownership of the physical infrastructure will remain with the government of Mozambique, but a new regulatory body will oversee the sector.

Agriculture

A contraction in the cotton Lower domestic prices and weak international demand for cotton are expected sector is expected— to result in a 22% drop in cotton production in 1999. According to the national cotton institute, this year’s cotton harvest is expected to reach only 70,000 tonnes, a 22% decline on the 1998 harvest of 90,000 tonnes. The government has also agreed to a substantial reduction of the minimum producer price for cotton of 21%, following a protracted dispute over the past year with private-sector cotton buyers, who insisted that local prices must reflect trends in international commodity prices. Cotton has been the cash

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 18 Mozambique

crop that has recovered most significantly in the 1990s, with production increasing threefold between 1990 and 1998. Meanwhile a new cotton ginning factory has been opened in Morrumbala (Zambezi province) by Portuguese investors. It is the first new cotton gin opened in Mozambique in 24 years, and the investment has been interpreted as further evidence of rising confidence in the economy on the part of foreign investors.

—and the government A bill promulgated by backbenchers of the ruling Frente de Libertação de delays a crucial decision Moçambique (Frelimo) to ban exports of unprocessed cashew nuts has been on cashews deferred for study by a special commission. The government’s success in dodging the issue, in effect, by referring it to the commission will have come as a relief. Frelimo was keen to avoid a public showdown over its cashew policy, which has become a heated issue since the liberalisation of raw nut exports.

Energy

Cahora Bassa proposes Viega Anjos, the new chairman of the Cahora Bassa dam company, arbitration— Hidroeléctrica de Cahora Bassa (HCB), has proposed that the protracted dispute between HCB, the Portuguese government (the owners of HCB) and the South African utility Eskom, be resolved by international arbitration. HCB is seeking to renegotiate its existing contract signed with Eskom in 1984, and reaffirmed in 1988, whereby the price charged for electricity was to be R0.02/kwh, which HCB judges to be too low. HCB has been in a position to supply electricity to Eskom since power lines between the dam and South Africa were reconnected at the end of 1997 (1st quarter 1998, page 16). Since then, the dispute has cost HCB an annual R250m ($42m) in forgone revenue.

Meanwhile, the state utility, Electricidade de Moçambique (EDM), has announced plans to extend the supply of power from the Cahora Bassa dam to the northern provinces of Niassa and Cabo Delgado. Negotiations between EDM and the Norwegian and Swedish development co-operation organisations on funding for transmission lines are ongoing.

—while the EIB provides The European Investment Bank (EIB), the long-term lending arm of the EU, has financing for the agreed to loan r46m ($47m) to the Mozambique Transmission Company regional power grid (Motraco). The funds will be used to build two overhead power lines and substations to transport electricity from South Africa’s power grid to those in Mozambique and Swaziland. The project is also to provide power to Mozambique’s southern electricity grid, serving the capital, Maputo.

Transport and communications

The telecoms utility is to be The government has revealed plans to part-privatise the telecommunications partly privatised— utility, Telecomunicações de Moçambique (TDM), in the near future. The deputy minister for transport and communications, António Fernando, announced that legislation currently being prepared would allow the company to gain access to domestic and foreign private capital to fund its expansion and modernisation. TDM would seek a foreign partner with technological expertise

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 19

capable of modernising the company, whose stake would initially be limited to 30%, with a future ceiling of 50%. TDM has improved the quality of its equipment and services in recent years, and has changed its pricing strategy, ending cross-subsidisation by cutting the cost of international calls and bringing down the price of domestic services to market rates. The company is to be allowed to retain its monopoly for five years in preparation for competition. The capital required to raise teledensity in Mozambique to 2 tele- phones per 100 from the current rate of 0.3 per 100 has been estimated by TDM at $500m.

—while port traffic Recent figures indicate that port traffic declined by 15.2% in 1998, reflecting declines stagnation in international transit traffic, and poor performance in the state ports and railways company, Caminhos de Ferro de Moçambique (CFM). Throughput in Beira dropped sharply, declining by 31.7%, while throughput in Maputo grew marginally, by 1.5%. In contrast, growth in domestic traffic remains buoyant, with tonnage up sharply for the second consecutive year at Mozambique’s smaller northern ports of Nacala, Quelimane and Pemba. Southbound coastal traffic for the main shipping company, Mozline, which has roughly 70% of the market share, was up by 60% in the first half of 1999, reflecting growing commercial activity and an increase in exports from the north. The bulk of coastal shipping has traditionally been northbound, carrying supplies for the central and northern provinces, with ships returning southwards largely empty. Mozline projects that total traffic will increase by 27% in 1999.

Mozambique: port traffic (‘000 tonnes unless otherwise indicated) % change 1995 1996 1997 1998 1998/97 Maputo 2,625.2 3,179.5 3,417.3 3,468.5 1.5 Beira 4,159.7 4,590.8 4,708.7 3,215.7 –31.7 Nacala 492.1 423.3 479.5 503.3 5.0 Quelimane 160.3 158.2 257.3 299.7 16.5 Pemba 71.0 52.9 103.1 118.8 15.2 Total (incl others) 7,508.3 8,404.7 8,965.9 7,606.0 –15.2 Source: Caminhos de Ferro de Moçambique (CFM).

Meanwhile, there has been further foot-dragging on the privatisation of CFM under the direction of the company’s somewhat xenophobic managing director, Rui Fonseca. Rapid progress is particularly unlikely on the Maputo concession in the coming months, given the sensitivity of the issue and the fact that it is an election year. Direct negotiations between CFM and the various private companies selected as bidders for the management of port and rail facilities under concession (lease) contracts have largely ground to a halt over disagreement on the value of CFM’s assets, which the company is accused of inflating. According to the World Bank resident representative in Maputo, James Coates, an agreement will eventually be reached, although foreign parties face tough bargaining for the rights to CFM’s operations.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 20 Mozambique

Meanwhile, CFM has entered into a deal to privately manage the Malawi National Railways (MNR). CFM, together with the group of foreign companies involved in the Nacala corridor project—the Sociedade de Desenvolvimento de Corridor de Nacala—won the tender for the company over British and South African competitors.

Mozambique: rail traffic (‘000 tonnes unless otherwise indicated) % change 1995 1996 1997 1998 1998/97 CFM South (Maputo) 1,825.9 2,666.8 2,607.2 3,081.4 18.2 CFM Centre (Beira) 1,062.9 1,181.2 987.5 764.6 –22.6 CFM North (Nacala) 215.1 237.2 250.3 269.8 7.8 Total 3,103.9 4,085.2 3,845.0 4,115.8 7.0 Source: CFM.

The state airline posts a The state airline, Linhas Aéreas de Moçambique (LAM), announced a small small profit operating profit of MT3.1bn ($248,000) in 1998, keeping the company in surplus for the third consecutive year. Total passenger traffic grew by 6.7% in 1998, from 189,359 passengers to 202,133. Domestic traffic rose by 3.7%, while traffic on regional routes to South Africa and Zimbabwe increased by 19%. Traffic on LAM’s only intercontinental flight, its weekly service to Lisbon, fell by 6%. The airline continued to enjoy strong growth in the first quarter of 1999, with total passenger traffic rising by 15%, while regional traffic jumped by 27%. The government has yet to present a timetable for the partial divestiture of LAM, following the failure of an earlier attempt to sell the airline in 1997 (1st quarter 1998, page 17).

Tourism

A major investment in A large tourism investment is being planned in the Vilanculos area of Vilanculos is announced— Inhambane province, Mozambique’s principal tourist destination, some 700 km north of Maputo. Zimbabwe Sun Hotels (ZSH) plans to spend an initial $5m on the construction of a beach resort, scheduled to commence in 2000. The resort will represent the largest investment in the area, almost doubling the capacity of the six existing beach lodges. Meanwhile, other tourism operators in the area are planning to expand operations by opening additional resorts. According to the director of ZSH’s resort division, Alun Thomas, the company plans to develop the Vilanculos and Bazarutto archipelago area as a regional destination, together with Zimbabwe’s Victoria Falls and Kruger Park in South Africa, to be promoted through the company’s own network of resorts and hotels. Tourism has grown rapidly in the area since the opening of an international airport at Vilanculos in 1996. ZSH, which is owned by the Delta Corporation, has also announced plans to explore the opening of a hotel in Beira, as well as other investments in Mozambique.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Mozambique 21

—while the Blanchard A tourism “mega-project” proposed for the 236,000-ha Maputo elephant project steams ahead reserve south of the capital suffered a setback following the death in mid- March of its main backer, the US investor James Blanchard III. Mr Blanchard’s heirs and other investors in the project, notably the Elephant Coast company, nevertheless plan to pursue the development of the area, and negotiations are continuing on the construction of two hotels and a beach lodge. However, the project has overshot several deadlines stipulated in the agreement with the Mozambican government, and is under some pressure to demonstrate tangible progress. Direct management of the wildlife in the area has been taken over from the government agency, the Departamento da Floresta e Fauna Bravia, and game is being stocked. Agreements have not yet been concluded with the communities inside the boundaries of the reserve, nor have large-scale investors in the project been identified.

Foreign trade and payments

Mozambique nears Final discussions on Mozambique’s full accession to the World Bank/IMF completion point of the highly indebted poor countries (HIPC) initiative—symbolised by the reaching HIPC initiative of the so-called completion point—were held at the end of June (2nd quarter 1999, page 20).

Mozambique: external debt ($ m unless otherwise indicated; year-end) 1995 1996 1997 Total external debt 5,726 5,782 5,991 Long-term debta 5,245 5,418 5,475 Short-term debt 279 182 327 of which: interest arrears on long-term debt 250 164 209 Use of IMF credit 202 181 189 Public & publicly guaranteed long-term debta 5,198 5,376 5,430 Official creditors 5,152 5,348 5,412 Multilateral 1,277 1,488 1,626 Bilateral 3,875 3,860 3,786 Private creditors 46 27 18 Total debt service 162 141 104 Principal 85 92 59 Interest 77 49 45 of which: short-term debt 1 1 3 Ratios (%) Total external debt/GNP 326.7 270.9 232.9 Debt-service ratiob 34.5 26.0 18.6 Short-term debt/total external debt 4.9 3.2 5.5 Concessional debt/total external debt 51.1 55.6 56.5 a Long-term debt is defined as having original maturity of more than one year. b Debt service as a percentage of earnings from goods and services. Source: World Bank, Global Development Finance, 1998.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 22 Mozambique

Approval of the drastic reduction of Mozambique’s total external debt stock was considered by the executive boards of the IMF and World Bank, signalling the end of the 18-month interim period since Mozambique was first admitted to the programme. Mozambique has achieved all of the requisite performance criteria under the HIPC programme, including the stabilisation of key macroeconomic indicators and the implementation of important structural reforms, notably value-added tax (VAT). Full admission to the HIPC programme, which will result in the cancellation of $1.44bn of Mozambique’s external debt stock, will reduce the country’s debt burden considerably.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malawi 23

Malawi

Political structure

Official name Republic of Malawi

Form of state Unitary republic

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

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

National elections June 15th 1999 (presidential and legislative); next elections due 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 to a second term in June 1999 (legal challenges pending)

National government Cabinet, chaired by the president; new cabinet named on June 27th 1999

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 & minister of defence Bakili Mulizi Vice-president Justin Malewezi

Key ministers Agriculture & irrigation Aleke Banda Commerce & industry Kaliyoma Phimisa Education, sports & culture Ken Lipenga Finance Cassim Chilumpha Foreign affairs Brown Mpinganjira Health & population Lionel Patel Home affairs & internal security Patrick Mbewe Information Clement Stambuli Justice & attorney-general Peter Fachi Labour & vocational training Leonard Mangulama Land, housing & physical planning Thengo Maloya Natural resources & environment Harry Thompson Presidential affairs Rodwell Munyenyembe Tourism & wildlife George Mtafu Transport & public works Peter Chupa Water development Yusuf Mwawa Women, youth & community services Mary Banda

Central bank governor Matthews Chikaonda

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 24 Malawi

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998a GDP at market prices (MK m) 10,251 22,435 34,853 41,703 57,924 Real GDP growth (%) –12.9 13.5 14.5 5.2 3.2b Consumer price inflation (av; %) 34.7 83.4 37.6 9.2 29.7c Populationd (m) 9.46 9.79 10.14 10.44 10.81 Exports fob ($ m) 363 424 518 546 467 Imports fob ($ m) 639 631a 618a 597a 579 Current-account balance ($ m) –450 –410a –151a –65a –231 Reserves excl gold ($ m) 42.8 110.0 225.7 162.2 269.7c Total external debt ($ m) 2,025 2,242 2,312 2,206 2,232 External debt-service ratio, paid (%) 20.6 26.2 16.2 12.4 24.0 Tobacco production (‘000 tonnes) 97 130 141 158 133b Exchange rate (av; MK:$) 8.736 15.284 15.309 16.444 31.073c

June 25th 1999 MK43.195:$1

Origins of gross domestic product 1996 % of total Components of gross domestic product 1996 % of total Agriculture 41.1 Government consumption 18.9 Manufacturing 10.9 Private consumption 61.8 Utilities & construction 6.3 Gross fixed capital formation 11.5 Transport & distribution 15.5 Change in stocks 2.3 Government 12.3 Net exports of goods & services 5.5 Others 13.9 GDP at market prices 100.0 GDP at factor cost 100.0

Principal exports fob 1997b $ m Principal imports cif 1996b $ m Tobacco 249 Industrial 151 Tea 66 Petroleum 60 Cotton 28 Transport equipment 43 Sugar 27 Foodstuffs 40 Apparel 22

Main destinations of exports 1997e % of total Main origins of imports 1997e % of total South Africa 12.8 South Africa 34.1 US 11.9 Zimbabwe 17.0 Germany 10.2 Zambia 7.5 Netherlands 9.2 UK 4.1 a EIU estimates. b Official estimate. c Actual. d UN estimates; excludes Mozambican refugees; preliminary results from the 1998 census point to a lower population of 9.8m in 1998, but major revisions are expected. e Based on partners’ trade returns, subject to a wide margin of error.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malawi 25

Outlook for 1999-2000

Mr Muluzi’s victory will President Bakili Muluzi’s electoral victory will be challenged in the courts by continue to be opposed— the opposition alliance. The coalition of the Malawi Congress Party (MCP) and the Alliance for Democracy (Aford) announced only days after the results were released that it will ask the High Court to annul Mr Muluzi’s victory on the grounds that the registration process was grossly mismanaged (see The political scene). The opposition will also continue to charge that the results violate the constitution. The constitution apparently requires that the president must win the votes of a majority of registered voters, rather than simply a majority of votes cast. According to the official results, Mr Muluzi won more than 50% of votes cast, but, owing to an estimated 94% turnout, the support of only 48% of registered voters. While there does appear to be a constitutional issue at stake, and the High Court has ruled in favour of the opposition in several other recent cases (see The political scene), the Court may be reluctant to remove Mr Muluzi at this point. Instead, the stage may be set for calls for constitutional reform—an issue on which opposition parties in many other African countries have seized after they have lost elections.

—while the MCP-Aford In addition to the legal challenge, it appears that the opposition alliance will alliance will challenge the wage a public campaign to undermine Mr Muluzi’s presidency. The MCP-Aford UDF in parliament presidential candidate, Gwanda Chakuamba, has publicly declared himself the real president of Malawi, an indication that the opposition intends to increase pressure on Mr Muluzi’s fragile hold on power. In parliament, however, the MCP-Aford alliance may be able to capture a majority of the seats. One seat remains open and it is likely eventually to go to the MCP, giving the alliance a total of 96 seats, just one seat short of a majority. Competition between Mr Muluzi’s United Democratic Front (UDF) and the MCP-Aford alliance should intensify as both sides try to lure the support of the four independent members, who now hold the balance of power in parliament.

Malawi will remain divided The election results will leave Malawi firmly divided along regional and ethnic on regional lines lines. As in the 1994 election, the main political parties managed to gain substantial support only in their own strongholds: the UDF in the southern region; the MCP in the central region; and Aford in the northern region. These inflexible political divisions also roughly correspond to Malawi’s ethnic and linguistic divisions, which could potentially lead to heightened tensions and even outbreaks of unrest. The burning of four mosques in the northern region as opposition supporters protested at Mr Muluzi’s presidential victory demonstrates how political rivalry can quickly degenerate into ethnic and religious violence. The calls by some smaller parties that local languages be given more prominence in schools and official affairs may also indicate that regional issues will continue to be high on Malawi’s political agenda.

A new budget will be Traditionally presented in June each year, the budget for 1999/2000 (July-June) presented in July has been delayed owing to the elections. Some officials at the Ministry of Finance have indicated that the budget will be presented in mid-July. Before the elections the government was compiling a budget based on preliminary

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 26 Malawi

projections of real GDP growth of 5.5%, down from the 6% projected several months ago (2nd quarter 1999, pages 31-32). The budget is also likely to include macroeconomic targets for international reserve levels of around 4.5 months of import cover and an inflation rate of 23% by the end of 1999. The overall budget deficit target will probably remain at 5.8% of GDP, in line with the data released with the IMF agreement in December 1998. Non-wage public expenditure will continue to centre on social services, particularly primary education, health and the police. The budget is also expected to allocate funds for the local elections to be held in the 1999/2000 fiscal year.

The real GDP growth rate An improved economic climate is expected to bring Malawi real GDP growth of will rise to 5% in 1999 5% for 1999, up from 3.2% in 1998. Healthy agricultural harvests, improved government management and the effects of higher tobacco prices are all having a positive impact on the economy. Although the government has officially forecast real GDP growth of 5.5%, expansion in the manufacturing sector is likely to remain subdued. Assuming normal rains, these factors should remain in place in 2000, although post-election austerity is forecast to dampen government expenditure, cooling the economy to a projected real GDP growth rate of 4.6%.

Inflation is set for a The relative stability of the kwacha and a healthy harvest of food crops are steep fall— expected to bring the year-on-year rate of inflation—which stood at 56.6% in March—down, starting from about July. The year-on-year rate will drop significantly in September because the steep price increases in August- September 1998 will no longer be reflected in the annualised rate. With the year-end inflation rate forecast to drop to 22.6%, average annual inflation for 1999 is expected to be 45.1%. In 2000 the government has projected the average rate of inflation at just 7.4%. However, assuming normal rains and the resumption of a nominal depreciation of the kwacha, the EIU expects inflation to remain higher, at an annual average rate of 13.5%.

—and the kwacha is The kwacha, which has been held to a stable rate band of MK43-45:$1 in the forecast to slip first half of 1999, is expected to resume its slide against the dollar in the third and fourth quarters. In particular, the kwacha will come under renewed pressure once foreign-currency inflows cease from the tobacco auctions, which are expected to close by September. In addition, the exchange-rate policy of the Reserve Bank of Malawi (the central bank), which clearly favoured an anti- inflationary stance prior to the election, may ease to reflect other policy aims. Most importantly, a weaker kwacha will assist in diversifying the economy by making domestic producers more competitive and, at the same time, raising the income of tobacco producers, as has happened this year (see Agriculture). We expect the exchange rate to slip by about 11% from end-1998 to MK49.4:$1 by end-1999, giving an average exchange rate of MK46.3:$1 for the year. In 2000 this trend is expected to continue, with the average exchange rate forecast at MK54.7:$1, about 15% lower than the annual average for 1999.

The current-account deficit As the positive effects of higher tobacco prices, which were up by 18% in early will widen slightly in 1999 June, compared with the same period of 1998, are cancelled out by lower overall tobacco production, Malawi’s tobacco export earnings are forecast at $174m in 1999, just below the estimated $177m earned in 1998. Conversely,

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Malawi 27

higher tea production will be offset by lower international prices. Overall exports are, therefore, expected to remain roughly steady at $466m. Imports are forecast to remain about the same as in 1998, as lower demand from a stagnating manufacturing sector is offset by higher international oil prices. In 2000 export earnings are forecast to rise to $518m as tobacco prices remain steady but production recovers to 1997 levels. Imports, however, will also rise, as oil prices continue on an upward trend and import demand recovers with the expansion of the economy. The invisibles balance will remain stable in 1999, although there will be a slight deterioration in 2000, as higher tourism receipts are more than offset by increased costs of import-related services. Overall, the current-account deficit is expected to widen from an estimated $231m in 1998 to $248m in 1999 and $274m in 2000.

Malawi: forecast summary ($ m unless otherwise indicated) 1997a 1998b 1999c 2000c Real GDP growth (%) 5.2 3.2d 5.0 4.6 Consumer price inflation (av; %) 9.2 29.7a 45.1 13.5 Merchandise exports fob 546 467 466 518 of which: tobacco 249 177 174 225 Merchandise imports fob 597b 579 577 631 Current-account balance –65b –231 –248 –274 Exchange rate (av; MK:$) 16.4 31.1a 46.3 54.7 a Actual. b EIU estimates. c EIU forecasts. d Official estimate.

Malawi: gross domestic product Malawi: kwacha real exchange rates (c) % real change, year on year 1990=100 110 16

14 Malawi 100 Africa 12 90 10 MK:R 8 80 6 70 4

2 60

0 1996 97 98(a) 99(b) 2000(b) MK:DM 50 MK:$ (a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 9697(a) 97 98(a) 98 99(b) 99 20002000(b) Economic Outlook.

Review

The political scene

Mr Muluzi is re-elected— The president, Bakili Muluzi, has been re-elected to a new five-year term in national elections held on June 15th. The official results presented by the Electoral Commission (EC) indicated that Mr Muluzi won 2.4m votes (52%), while his main adversary, Gwanda Chakuamba—the candidate for the opposition alliance of the Malawi Congress Party (MCP) and the Alliance for Democracy (Aford)—received 2.1m votes (45%). Mr Muluzi was sworn in for his second presidential term on June 21st. In his inaugural speech in Blantyre—after arriving at the stadium in a red Rolls Royce—he called for national reconciliation and unity amongst all Malawians, hinting at the deep regional divisions highlighted by the election results (see below).

Malawi: presidential election results, Jun 15th 1999

Candidate Party Votes (‘000) % of total Bakili Muluzi UDF 2,433 52.3 Gwanda Chakuamba MCP-Aford 2,107 45.2 Kamulepo Kalua MDP 68 1.5 Others – 47 1.0 Total – 4,655 100.0 Source: http://www.Malawi.Net.

—but the opposition Despite Mr Muluzi’s apparent confidence, his victory was immediately challenges his victory challenged in the courts by the MCP-Aford alliance, who filed papers at the in court High Court in the capital, Lilongwe, on June 20th calling for the official result to be annulled. The opposition’s case is based on the assertion that the constitution requires the president to win the votes of a majority of registered voters (as opposed to total votes actually cast), and that the registration process was flawed and heavily favoured Mr Muluzi. However, there were no judges available to hear the opposition’s case in Lilongwe because they were all in Blantyre for Mr Muluzi’s inauguration ceremony. The MCP-Aford alliance held an alternative rally in Lilongwe on June 21st, where Mr Chakuamba claimed that he was the real president of Malawi because he won substantial votes in all the regions, while Mr Muluzi only won votes in the south. Statements made by the opposition since the election indicate that Malawi may witness a protracted political and legal struggle (see Outlook for 1999-2000).

The UDF fails to win Mr Muluzi’s presidential victory was also clouded by the fact that his party, the parliamentary majority— United Democratic Front (UDF), failed to win a parliamentary majority. The UDF won just 93 of the 193 seats in the National Assembly, four seats short of an outright majority—a repeat of the results in 1994, when the UDF also fell short by just a handful of seats. The MCP took 66 seats, Aford won 29 seats, while four independent candidates also won seats. (The election was cancelled in one constituency in the Mchinji district because one of the candidates died. Elections for that seat will be held later, but the district has historically voted

solidly for the MCP.) These results give the MCP-Aford alliance 95 seats, also just short of an absolute majority, thus potentially putting the legislative balance in the hands of the four independents.

Malawi: legislative election results, Jun 15th 1999 (seats won) Northern Central Southern Party region region region Total UDF 1 16 76 93 MCP 4 54 8 66 Aford 28 1 0 29 Independent 0 1 3 4 Total 33 73a 87 192a

a The election for one seat was postponed, owing to the death of a candidate. Source: http//www.Malawi.Net.

While the results are a blow to the ambitions of the UDF as a whole, several of the party’s senior officials also lost their seats, most notably: the minister of agriculture and former minister of finance, Aleke Banda; the health minister, Harry Thompson; the minister of home affairs, Melvyn Moyo; the minister of foreign affairs, Mapopo Chipeta; and the parliamentary speaker, Rodwell Munyenyembe. Nevertheless, they may be able to maintain their cabinet posts. The constitution states that cabinet members cannot be sitting members of parliament (MPs)—a rule that has apparently been ignored since 1995.

Voting patterns divide Also similar to the 1994 results are the stark regional voting patterns (see table). Malawi along regional The UDF remains largely a party of the southern region, Malawi’s most pop- lines— ulous, while the MCP’s stronghold is in the central region. Aford took 28 of its 29 seats in the northern region. These regional divisions are also partly indic- ative of ethnic and linguistic cleavages. Malawi’s major ethnic groups include the Yao (who are mostly Muslim) and the Senna in the south, the Chewa in the central region, and the Tumbuka and Tonga in the north. While Malawi has not seen the ethnic-inspired violence that has occurred in other countries in the region, ethnicity is implied in much of the regional rhetoric of politicians.

—and there is some unrest Following the election results, supporters of the opposition alliance protested following the results— at Mr Muluzi’s victory by burning down four mosques, presumably because Mr Muluzi is Muslim. In another post-election incident, the army was forced to quell disturbances instigated by MCP-Aford supporters. The protesters allegedly urged the military to “take over”, and two journalists who reported this incident were apparently later arrested for attempting to incite a coup.

—but the elections are Easing fears of potential unrest, the June 15th elections took place under largely peaceful largely peaceful conditions. As during the lengthy campaign period, there were reports of minor scuffles between rival parties, particularly in the northern region, but no indications of systematic intimidation or violence.

Preparations have been The preparations for Malawi’s elections were badly organised from the start. chaotic— One source of the troubles was the replacement by Mr Muluzi in July 1998 of the independent and assertive chairman of the EC, Judge Anastasia Msosa, with another judge, William Hanjahanja, who was believed to be more pliant—and ultimately proved to be less efficient.

When voter registration began in March 1999, more than one-third of the stations failed to open, and many remained closed for weeks. Mr Hanjahanja blamed the delays on the late arrival of imported photo-identification cameras from Ghana, but several civic groups alleged that there were political motives behind the problems, pointing to regional disparities in the opening of registration centres. In the face of the many glaring problems with registration, the EC was forced to extend the exercise from May 3rd to May 14th.

—forcing the poll to However, Malawi’s constitution stipulates that there must be a 21-day period be delayed between the end of registration and the polling date, in order to allow the public to inspect the electoral roll. The extension of the registration period therefore made the new polling date of May 25th unconstitutional, despite Mr Muluzi’s reasoning that the country could not afford to delay its elections any further (the original date of May 18th had been changed several months earlier in anticipation of such problems). The EC agreed with the president and declared that the elections would go ahead on May 25th. However, the opposition parties balked and took the EC to the High Court. The Court ruled in their favour, thus postponing the election for a second time, to June 15th. As a result, parliament, which had been dissolved in March, was recalled for an emergency session on May 21st to approve the new election timetable.

By the end of May the EC had severely lost credibility as a neutral body. Its chief elections officer, Stuart Winga, was dismissed for incompetence, while Mr Hanjahanja, who was widely viewed as favouring the ruling UDF, and responsible for gross mismanagement, resigned as chairman, citing ill health. He was replaced by Justice James Kalaile.

The EC concedes on the Another issue that caused confusion at the polls was the ongoing battle alliance ballot issue between the MCP-Aford alliance and the EC. The EC had refused to accept the ballot papers of the alliance, claiming that candidates from two different parties—Mr Chakuamba of the MCP for president and Aford’s Chakufwa Chihana for vice-president—could not run under one banner. The alliance challenged the decision in court, which ruled in its favour on April 15th. However, the EC appealed to the High Court, a move which increased criticism that the commission was a tool of the UDF and was attempting to undermine the opposition. On May 29th the EC dropped the case, and Mr Chakuamba and Mr Chihana appeared on the same ballot paper, but under the symbol of the MCP.

A television station Malawi ended its years without a television network on March 29th, when a is launched limited service of Television Malawi was launched. The new network broadcasts programmes from 7 pm to 9.15 pm to the country’s four urban centres—Blantyre, Lilongwe, Zomba and Mzuzu. The station expects soon to reach most parts of the country, following the installation of new transmission

equipment in strategic places across the country. The television network is run by Benson Tembo, a former deputy general manager of the Malawi Broadcasting Corporation, which is widely criticised for airing pro-government propaganda. The television network broadcasts feature a ten-minute news bulletin, a 30-minute local music show and other imported programmes.

Late note: A new cabinet was announced on June 27th (see Political structure). The only ministers to keep their portfolios were the minister of finance, Cassim Chilumpha, the minister for agriculture, Aleke Banda, and the minister for justice and attorney-general, Peter Fachi. The vice-president, Justin Malewezi, also kept responsibility for privatisation. The main changes were to move responsibility for defence to the president, Mr Muluzi, while notable shifts were Harry Thompson from health to natural resources and the environment, Brown Mpinganjira from education to foreign affairs, and Kaliyoma Phimisa from labour to commerce and industry.

Economic policy and the economy

Malawi’s fiscal situation The government has managed to keep expenditure within the budget for the is reported to be first three quarters (through to end-March) of the 1998/99 fiscal year (July- improving— June). Nominal tax revenue collection has been modestly higher than originally targeted, both as a result of better administration by the new revenue authority and because the original revenue forecasts had assumed lower rates of inflation. After three quarters of the fiscal year, figures point to a budget deficit, excluding grants, of 10.6% of GDP. Including grants, the deficit could be as low as 2.6% of GDP, well within the targets agreed with the IMF. However, the final quarter is likely to show a sharp upturn in government spending during the prolonged election period of April-June, and there are signs that some parastatals have been mounting unserviceable debts to the central government, especially the Petroleum Control Commission (2nd quarter 1999, page 31). The EIU therefore expects the final budget deficit to be closer to 4% of GDP.

—and the privatisation While there has been an unavoidable pause in the government privatisation programme remains programme during the campaign and election period, 14, mostly small, state- on course— owned enterprises (SOEs) have been sold to private buyers. Although this is only about half of the SOEs on the government’s current list, the programme so far remains largely on schedule. More importantly, however, prior to its dissolution in March, parliament reportedly approved a plan for the sale of assets held by the Malawi Development Corporation (MDC) and the Agricultural Development and Marketing Corporation (Admarc). The government has also apparently approved guidelines for the sale of its remaining shares in the Commercial Bank of Malawi (CBM) and the National Bank of Malawi (NBM), although no firm timetable is available.

—keeping relations with Progress on divestiture and the government’s improved fiscal performance, donors on track especially during a bitterly fought election campaign, have kept relations with the IMF and other donors on a sound footing over the past quarter. The IMF’s approval of Malawi’s latest enhanced structural adjustment facility (ESAF) in

December 1998 (1st quarter 1999, page 28) has led to continued inflows from other donors, most notably the World Bank. The second phase of a Bank- sponsored fiscal restructuring and deregulation programme is generally on track, and loans for other projects have been forthcoming, including a new $30m road project.

Inflation is still rising— Malawi’s inflation rate continued to climb in early 1999, as the effects of the devaluation of the kwacha in mid-1998 continue to be felt. The consumer price index (CPI) reached a year-on-year rate of 56.6% in March, up from 56.1% in February. The severe impact of currency movements on consumer prices highlights Malawi’s dependence on imported commodities and inputs. The rebound in international oil prices earlier this year has also affected the land- locked economy, driving transportation costs higher. Increases in the food component of the CPI have also been pushing up inflation in the early months of 1999, but should have the opposite effect in June-July once the seasonal harvest eases pressure on food prices.

—but Treasury-bill rates In a bid to curb inflationary pressures, the Reserve Bank of Malawi (RBM, the rally before retreating central bank) had increased its purchase of Treasury bills in January-March, raising the nine-month rate from about 30% a year ago to more than 65% by mid-April. However, the actual impact of higher T-bill rates on domestic inflation is limited, given the thin market and also, perhaps, because the RBM, in a policy unusual for the region, allows foreigners to purchase T-bills. As tobacco sales had already begun, by April the market was awash with foreign currency. Over the course of late April and early May the nine-month rate therefore fell again to under 50% by early June, while the yield curve has flattened considerably. While this appears to result in negative real T-bill rates, the anticipation of a modest drop in inflation in June-July, followed by a severe drop in September (see Outlook for 1999-2000), will almost certainly result in much further declines in rates in coming weeks, and the yield curve may soon invert.

Malawi: trends in the Treasury-bill market, 1999 (%; annualised effective rates) Maturity Apr 16th Jun 4th 3-month 49.2 45.1 6-month 55.7 47.0 9-month 66.2 48.2 Source: Stockbrokers Malawi Ltd.

Rumours of another Under heavy political fire for the effects of last year’s devaluation of the devaluation are denied— currency, the government has gone to great pains to reassure the public that another steep fall is not imminent. On June 3rd the then minister for agriculture, Aleke Banda, who was also chairman of the cabinet committee on the economy, but who lost his seat in the recent elections, was forced to deny widespread rumours that a devaluation would occur shortly after the elections. Mr Banda, a former finance minister, told a meeting of business leaders in Blantyre that reports of an impending devaluation were unfounded, as inflows from donors had been strong, and that tobacco prices were better than had been expected.

—and the kwacha remains The RBM has maintained a managed floating exchange-rate policy, aiming to largely stable allow the nominal exchange rate to reflect market forces, while also intervening to maintain foreign-reserve targets and to smooth out temporary volatility. After very small fluctuations in the exchange rate over the past few months, the kwacha has appreciated marginally to MK43.2:$1 by mid-June from MK44.1:$1 in late March. Since the August 1998 devaluation, the largely stable nominal exchange rate, combined with soaring rates of inflation, has resulted in a steadily appreciating real exchange rate. While this is partly a result of deliberate government policy to contain inflationary pressures, it also indicates a loss of competitiveness for Malawi’s non-traditional export industries, especially in the context of a depreciating Mozambican currency. However, this effect will be moderated by currency stability in Zimbabwe, although that country’s current exchange-rate policy remains extremely fragile and will be closely watched by RBM officials.

Malawi and Mozambique Malawi and Mozambique have signed a preliminary agreement to allow use of move towards currency their currencies in both countries from September 1999. The governor of the convertibility Mozambican central bank, Adriano Maleiane, announced the agreement on May 19th, claiming that it would allow the legal direct convertibility of the two currencies, the Malawian kwacha and the Mozambican metical. According to the agreement, business people and travellers will be able to convert one currency directly into the other at banks of the neighbouring country. Mr Maleiane added that if the arrangement proves successful it will be extended to other countries in the Southern African Development Community (SADC), such as Tanzania.

The Blantyre Hotels The sale of Blantyre Hotels Limited (BHL) to a consortium of local and foreign takeover boosts buyers has given a small boost to extremely low levels of liquidity on the stockmarket liquidity Malawi Stock Exchange (MSE). In early June Mandala Limited sold 72% of BHL’s ordinary shares to three buyers: 26% to the National Insurance Company (NICO), 20% to the Press Trust and 26% to the Texas-based FCA Investment Company. The trade accounted for 96% of all trades that week, highlighting the market’s low liquidity levels and confirming that nearly all trades occur among a few small players. Since the beginning of 1999 the share index, representing a weighted average of the MSE’s six listed shares, has increased from 221 to about 241, or a 9% nominal gain.

Malawi: listed companies on the MSE, end-May 1999 Market capitalisation Price/earnings % of total MK m $ m ratio (%) market Blantyre Hotels Ltd (BHL) 132 3.0 6.8 1.8 Commercial Bank of Malawi (CBM) 1,090 24.9 5.1 15.1 National Insurance Company (NICO) 160 3.7 6.3 2.2 Press Corporation Ltd (PCL) 1,762 40.3 4.4 24.2 Packaging Industries of Malawi (PIM) 168 3.8 4.1 2.3 Sugar Company of Malawi (Sucoma) 3,892 89.1 4.3 54.0 Total 7,204 164.8 4.5a 100.0b a Weighted average. b May not sum owing to rounding. Source: Stockbrokers Malawi Ltd.

Agriculture

Tobacco prices improve Despite fears of a collapse in international tobacco prices, reports from the on 1998 1999 auctions indicate a recovery in prices after a 20% drop in 1998. By early June, the seventh week of the auctions, a total of 41m kg of tobacco had been sold, with the burley leaf variety, which accounts for 85% of Malawi’s production, selling at an average price of $1.49/kg, up by 18% from $1.26/kg at the same period of 1998. These higher prices should partly offset this year’s lower output, estimated at just 117,000 tonnes, down from 133,000 tonnes in 1998. While this indicates that overall earnings from tobacco should remain nearly steady in 1999, the higher prices will have a positive impact on the local-currency-denominated incomes of tobacco farmers, who are predom- inantly smallholders. In local-currency terms, the average price for burley as of early June has nearly doubled from MK32.5/lb ($1.23/lb) in 1998 to MK64.8/lb in 1999, representing a strong real increase in farmers’ incomes.

Malawi: tobacco pricesa ($/kg; av) % change % change Leaf type 1998 1999 ($) (MK) Burley 1.26 1.49 18 99 Flue-cured 1.20 1.44 20 102 Dark-fired (main leaf) 1.61 1.76 9 84

a Average for season to June 2nd. Source: Tobacco Auction Holdings.

Malawi: tobacco production by leaf type, 1998 % of total

Others 1 Dark-fired (main leaf) 4

Flue-cured 10

Burley 85

Source: Tobacco Control Commission.

There is further The price band for maize in the coming crop year has been set at MK5-12/kg, intervention in the which roughly reflects the import and export parity prices. The government is maize market hoping to use the pricing structure to enhance incentives for private traders. Instead of reverting to price controls, however, the government is planning to convert the Strategic Grain Reserve (SGR) into a National Food Reserve Agency (NFRA), which will intervene in the maize market when prices deviate from the prescribed price band. Nevertheless, it is still not clear where the government

will find the resources to mop up any potential surpluses. While the giant Agricultural Development and Marketing Corporation (Admarc) is expected to be commercialised soon, and eventually privatised, its role in managing the maize market remains unclear. Although Admarc will scale down its dominant involvement in the purchase and sale of maize, it will still be mandated to ensure that outlying and remote markets are serviced.

Foreign aid, trade and payments

Malawi criticises its trade The government has expressed dissatisfaction with its current trade pact with agreement with Zimbabwe Zimbabwe. Zimbabwean products, which include a wide range of items from textiles to food, are widely available in Malawi, but Malawian exporters have not successfully penetrated the Zimbabwean market. According to IMF data, Malawi imported $137m of Zimbabwean goods in 1997, but exported only $6m to Zimbabwe that year. Similarly, Malawi’s trade deficit with Zimbabwe has grown steadily from $45m in 1993 to $131m in 1997.

Malawi: trade balance with Zimbabwe ($ m) 1993 1994 1995 1996 1997 Exports to Zimbabwe 2 4 4 5 6 Imports from Zimbabwe –47 –86 –106 –124 –137 Balance –45 –82 –102 –119 –131 Source: IMF, Direction of Trade Statistics, Yearbook.

In order to address this trade imbalance, Malawi’s director of trade in the Ministry of Commerce and Industry, Geoffrey Mkandawire, announced in late May that a task-force had been formed to propose changes in the existing trade agreement. The main item of concern to Malawi is the rule of origin clause, which currently states that goods must have at least 25% local raw material content to qualify for duty-free entry. Mr Mkandawire said that because many Malawian manufacturers must import most of their raw materials, they are not reaching the 25% threshold. The task-force intends to amend the rules to classify imported raw materials from the other country as local, thus permitting Malawian companies to process Zimbabwean raw materials and then re-export them back to Zimbabwe free of duty.

Foreign reserves hold Malawi’s holdings of international reserves have held roughly steady in the up before the tobacco first four months of 1999, thanks to strong donor inflows following the new auctions programme agreed with the IMF (2nd quarter 1999, page 36). According to the IMF’s International Financial Statistics, total international reserves at the end of April were $241m, down from $270m in January. Following the opening of the tobacco auctions in April, the increasing inflows of foreign capital should cause reserves to rise again.

Debt relief will be back on The international non-governmental organisation (NGO) Oxfam International the agenda at the encouraged the Group of Eight (G8, or G7 plus Russia) at its summit on G8 summit— June 18th-20th in Cologne, Germany, to cancel part of Malawi’s foreign debt. According to Oxfam’s programme officer for Malawi, Maxwell Mphwina, the

organisation pressed the G8 leaders to cancel about $500m of Malawi’s external debt. Although Malawi is unlikely to qualify for relief from the World Bank/IMF heavily indebted poor countries (HIPC) programme, the World Bank and other donors have started work on a proposal to set a multilateral debt relief fund that will help with debt servicing. This would release government funds to be used for basic social services.

—but Malawi’s debt stock According to recently released statistics from the World Bank, Malawi’s total declines in 1997 external debt stock fell from $2.3bn at the end of 1996 to $2.2bn at the end of 1997. This was mainly owing to a rapid decline in short-term debt, which dropped from $100m to just $27m, most probably as a result of a failure to contract new short-term debt in a volatile currency environment (by definition, short-term debt has a maturity of less than one year). In addition, $21m in principal arrears on long-term debt were accumulated, about one-half to private creditors. This would partly explain the fall in total debt-service paid to just $78m in 1997, and the decline in the debt-service ratio to just 12.4%, significantly down from 27.7% in 1995. Malawi’s total debt has also fallen below the psychologically important threshold of 100% of GNP, while the country’s debt portfolio has seen a softening in terms as the ratio of concessional loans to total debt has grown to more than 88%.

Malawi: external debt ($ m unless otherwise indicated; debt stocks as at year-end) 1995 1996 1997 Total external debt 2,242 2,312 2,206 of which: long-term debta 2,083 2,092 2,073 short-term debt 44 100 27 Public & publicly guaranteed long-term debta 2,083 2,092 2,073 Official creditors 2,055 2,068 2,052 Private creditors 28 24 21 of which: commercial banks 0 0 0 Total debt service 118 89 78 Ratios Total external debt/GNP 158.2 103.6 89.0 Debt-service ratiob 27.7 16.9 12.4 Concessional loans/total debt 84.6 84.0 88.2 a Long-term debt is defined as having an original maturity of more than one year. b Debt service as a percentage of earnings from exports of goods and services. Source: World Bank, Global Development Finance.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 37

Quarterly indicators and trade data

Mozambique: quarterly indicators of economic activity

1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production Annual totals Teaa ' 0 0 0 t o n n e s ( 1 . 5 ) ( 1 . 5 ) n / a Maize “ ( 1,153a ) ( n / a ) n / a Prices Monthly av Consumer pricesb 1995=100 155.6 153.0 150.7 152.7 159.1 n/a n/a n/a n/a change year on year % 8.2 2.9 5.5 5.5 2.2 n/a n/a n/a n/a Money End-Qtr M1, seasonally adj: MT bn 6,221.2 6,157.9 6,522.1 6,727.7 6,568.2 7,213.0 7,582.0 7,621.8 7,802.1 change year on year % 22.3 17.8 23.5 18.5 5.6 17.1 16.3 13.3 18.8 Foreign tradec Qtrly totals Exports fob $ m 46586576457974n/a n/a Imports cif “ 250 338 307 334 274 350 324 n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 348.1 436.5 436.6 517.3 532.1 521.7 523.6 608.4 642.6 Exchange rate Market rate MT:$ 11,493 11,395 11,655 11,543 11,625 11,813 12,074 12,366 12,438d a Estimate, including production for subsistence. b Maputo. c DOTS estimate. Figures are subject to revision. d End-April, 12,509. Sources: UN Food and Agricultural Organisation; IMF, International Financial Statistics; Direction of Trade Statistics, quarterly.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 38 Quarterly indicators and trade data

Malawi: quarterly indicators of economic activity

1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production: agriculture Annual totals Te a ' 0 0 0 t o n n e s ( 4 4 . 1 ) ( 3 2 . 8 a )n/a Production: industry Monthly av General index 1984=100 126.5 126.0 126.4 132.4 148.3 124.1b n/a n/a n/a Electricity m kwh 66.5 80.2 86.2 80.4 76.6 87.7 91.7 90.1c n/a Construction Plans approved, Blantyre MK m 17.9 24.5 14.1d 41.2 21.7 22.1 31.4 48.2c n/a Prices Consumer prices: 1995=100 149.3 153.3 145.9 152.2 177.5 184.1 188.6 229.2 277.1 change year on year % 7.1 6.8 9.0 13.9 18.9 20.1 29.3 50.6 56.1 Money End-Qtr M1, seasonally adj: MK m 2,946.9 2,885.3 3,460.3 3,441.5 4,063.0 4,157.5 4,386.0 5,387.1 5,876.8e change year on year % 9.9 14.5 21.9 16.9 37.9 44.1 26.7 56.5 n/a Foreign trade Qtrly totals Exports fob MK m 1,655.0 1,536.8 2,743.1 2,548.2 2,569.8 2,454.4 3,043.7f n/a n/a of which: tobacco ” 1,006.5 675.3 1,944.5 1,800.3 914.6 1,334.1 2,156.4f n/a n/a Imports cif “ 2,393.4 2,323.7 4,602.5 3,528.1 3,360.9 4,402.2 3,114.3f n/a n/a Exchange holdings End-Qtr Monetary authorities: foreign exchange $ m 142.11 179.47 209.88 159.15 149.21 187.74 180.69 259.77 230.46g Exchange rate Market rate MK:$ 15.368 15.355 17.258 21.228 25.168 26.449 40.927 43.884 44.082h

Note. Annual figures of most of the series above will be found in the Country Profile. a January-September. b Average for April-May. c October only. d Average for August-September. e End-February. f Total for July-August. g End-April, 237.64. h End-April, 43.691.

Sources: National Statistical Office, Monthly Statistical Bulletin; IMF, International Financial Statistics.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 39

Mozambique: foreign trade ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1992 1993 1994 1995 Imports cif 1995 Shrimps 64.6 68.8 62.8 73.1 Food, beverages & tobacco 138.2 Cotton, raw 10.8 11.1 18.9 19.8 Transport equipment 131.0 Wood 0.4 1.2 2.2 9.6 Machinery 122.5 Cashew nuts 17.6 8.2 3.3 9.5 Chemicals 82.1 Sugar 6.7 n/a 11.0 7.3 Mineral fuels 73.4 Copra 4.2 2.5 3.4 6.1 Metals & manufactures 47.0 Lobsters 4.9 3.2 3.6 3.7 Total incl others 727.0 Citrus 1.1 0.9 1.3 1.3 Coal 0.0 0.0 0.2 0.5 Total incl others 139.3 131.9 155.4 169.4

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports foba 1994 1995 1996 1997 Imports cifa 1994 1995 1996 1997 Spain 34 39 41 51 South Africa 436 678 609 647 South Africa 26 32 18 36 Zimbabwe 67 82 96 107 US 15 28 25 29 Portugal 48 54 55 55 Portugal 23 27 28 28 US 43 54 24 50 Japan 24 31 17 20 UAE 33 37 41 46 India 16 6 29 14 Saudi Arabia 64 36 39 45 Hong Kong n/a 1 4 10 Japan 41 20 23 34 Germany 7 5 7 8 India 17 32 27 26 Italy 13 8 10 8 UK 60 23 25 26 Zimbabwe 5 6 7 8 Germany 21 22 21 26 Total incl others 218 235 227 245 Norway 2 2 5 24 Italy 22 26 31 23 China 7 13 12 18 France 26 34 27 17 Total incl others 1,053 1,255 1,214 1,229 a DOTS estimates.

Sources: National sources; IMF, Direction of Trade Statistics, yearbook, quarterly.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 40 Quarterly indicators and trade data

Malawi: foreign trade (MK m) Jan-Dec Jan-Dec Jan-Sep Imports cif 1994 1995 1996 Machinery & transport equipment 1,499.6 2,057.8 2,098.1 of which: road vehicles & tractors 581.8 954.8 909.7 Chemicals 726.9 1,759.1 1,124.2 Mineral fuels 361.6 858.7 911.1 Food, beverages & tobacco 676.4 979.5 691.6 of which: cereals 497.7 778.7 495.3 Textile fibres & manufactures incl clothing 272.1 466.5 522.5 Iron & steel & manufactures 297.8 397.9 305.1 Pulp, paper & manufactures 162.8 258.2 246.0 Total incl others 4,655.5 7,869.3 6,620.6

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Aug Domestic exports foba 1994 1995 1996 1997 1998 Tobacco, unmanufactured 1,689.0 4,474.0 4,408.4 5,426.6 4,405.1 Tea 261.2 421.5 400.3 673.3 998.6 Sugar 224.0 335.5 434.1 380.2 649.9 Cotton, raw 15.0 40.9 212.8 220.4 66.5 Pulses 24.9 125.8 79.6 119.9 90.9 Coffee 128.2 235.5 168.1 202.8 139.3 Total incl others 2,722.3 5,996.0 7,178.8 8,259.4 7,355.7

Jan-Dec Jan-Dec Jan-Sep Jan-Dec Jan-Dec Jan-Sep Exports fob 1994 1995 1996 Imports cif 1994 1995 1996 Germany 446.2 899.9 580.8 South Africa 1,441.4 2,360.7 1,780.4 South Africa 381.1 666.2 532.1 UK 717.2 1,210.9 1,174.9 US 281.4 868.3 531.3 Zimbabwe 473.5 743.6 643.1 UK 355.9 458.1 259.5 France 109.3 128.8 410.3 Netherlands 224.1 601.7 248.9 Japan 302.6 386.0 346.3 Japan 237.1 332.8 215.0 China 151.8 246.0 272.4 Zimbabwe 68.7 107.8 196.4 Germany 187.2 713.4 230.1 Mozambique 65.4 151.1 178.2 US 158.9 205.6 126.7 Portugal 10.2 40.3 167.5 Zambia 115.1 93.7 109.0 Tanzania 19.4 99.0 92.6 Italy 79.4 77.1 98.7 Total incl others 2,909.8 6,766.0 4,537.2 Total incl others 4,655.5 7,647.4 6,620.6 a Estimates.

Source: National Statistical Office, Monthly Statistical Bulletin.