Malawi Malawi at a Glance: 2003-04

Country Report January 2003

Malawi Malawi at a glance: 2003-04

OVERVIEW Presidential and legislative elections are not due in Malawi until June 2004, but attempts to amend the constitution to permit the president, Bakili Muluzi, to stand for a third presidential term will dominate the political agenda. An IMF team has completed its mission in Malawi and commented that Malawi has failed to meet its fiscal targets, owing to unauthorised spending. The IMF board is expected to discuss the team’s findings and is unlikely to resume funding unless the government displays evidence of having reined in expenditure in the first half of 2003. Real GDP growth is expected to edge up to 2% in 2003 and 2.6% in 2004, following a contraction of 1.3% in 2002 caused by drought. The fiscal deficit will remain high, at 6.8% of GDP in 2003/04 ( July-June) and 7.4% of GDP in 2004/05, owing to overspending. Key changes from last month Political outlook • John Tembo, the vice-president of the main opposition party, the Malawi Congress Party, and his supporters have withdrawn their support for the third-term bill as relations between Mr Tembo and Mr Muluzi have deteriorated. • Two MPS of the ruling United Democratic Front have broken ranks and withdrawn their support for the third-term bill. Economic policy outlook • An estimated US$8m has been illegally siphoned off from the state budget to pay for non-existent workers. This has caused the fiscal deficit to increase and the government has thus failed to fulfil the conditionalities imposed by the IMF. Therefore, the government will have to rein in its spending in early 2003 if the IMF is to resume funding under Malawi’s poverty reduction and growth facility. • It is vital that Malawi adheres to the IMF conditionalities, not only so that funding can resume, but also so that Malawi will be entitled to debt relief under the heavily indebted poor countries initiative. Economic forecast • The Economist Intelligence Unit’s growth forecast remains unchanged from last month, even though we have reduced our forecast for global growth. January 2003

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 9 Economic policy outlook 10 Economic forecast

13 The political scene

19 Economic policy

23 The domestic economy 23 Economic trends 25 Agriculture 27 Infrastructure

27 Foreign trade and payments

List of tables 10 International assumptions summary 13 Forecast summary 19 Press freedom index, 2002 20 Fiscal performance, 2002 22 Telecoms indicators

List of figures 13 Gross domestic product 13 Kwacha real exchange rates 23 Inflation 24 Money supply

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Malawi 3

Summary January 2003

Outlook for 2003-04 Although presidential and legislative elections are not due in Malawi until June 2004, attempts to amend the constitution to permit the president, Bakili Muluzi, to stand for a third presidential term will dominate the political agenda. The Economist Intelligence Unit is forecasting that, given its greater nationwide organisation, the ruling United Democratic Front (UDF) will win both the parliamentary and presidential elections. It is also highly likely that Mr Muluzi will be permitted to stand for a third term in office. An IMF team has completed its mission in Malawi and noted that Malawi has failed to meet its fiscal targets owing to unplanned expenditure. The IMF board is expected to discuss the team’s findings and it is unlikely to resume funding unless expenditure is reined in during the first half of 2003. Real GDP growth is expected to edge up to 2% in 2003 and 2.6% in 2004, following a contraction of 1.3% which was caused by drought. The fiscal deficit will remain high, at 6.8% of GDP in 2003/04 (July-June) and 7.4% in 2004/05, owing to election-related overspending.

The political scene The October 15th-November 1st parliamentary session ended without the tabling of a bill that, if passed, would have permitted the president to serve for three (instead of two) consecutive terms, because the UDF was unable to gather the requisite support. John Tembo, the vice-president of the largest opposition party, the Malawi Congress Party (MCP), and leader of the largest faction of the party, withdrew his backing for the third-term bid leaving the UDF far short of the two-thirds majority needed to get the bill passed. Equally worrying to the Muluzi camp was the increasing independence shown by some members of their own party: two UDF MPs openly withdrew their support for Mr Muluzi’s candidacy.

Economic policy The IMF mission to Malawi has expressed serious doubts about the government’s commitment to controlling its fiscal deficit and the IMF is unlikely to resume funding until there is some evidence that this has occurred. This is of particular concern, as Malawi needs to provide evidence that is has successfully completed a year under the IMF’s poverty reduction and growth facility if it is to qualify for debt relief under the IMF-World Bank’s heavily indebted poor countries initiative.

The domestic economy Higher food prices, owing to shortages, caused year-on-year inflation to rise to 16.5% in August, from 16.1% in July. As expected, the kwacha began its seasonal slide as the tobacco auctions closed and farmers purchased inputs, such as fertiliser, for next year’s crop.

Foreign trade and payments The World Bank approved a US$50m emergency drought recovery credit for Malawi on November 5th 2002. This will be used for famine relief.

Editors: Ravi Bhatia (editor); Pratibha Thaker (consulting editor) Editorial closing date: December 12th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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

Political structure

Official name Republic of Malawi

Form of state Unitary republic

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

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

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

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

National government Cabinet, chaired by the president; a new cabinet was named on November 5th 2000 and reshuffled in January 2002

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

President & commander-in-chief of the armed forces Bakili Muluzi Vice-president & minister of privatisation Justin Malewezi

Key ministers Agriculture & irrigation Aleke Banda Commerce & industry Peter Kaleso Defence Rodwell Munyenyembe Education, sports & culture George Ntafu Finance & economic planning Friday Jumbe Foreign affairs Lilian Patel Gender, youth & community services Mary Banda Health & population Yusuf Mwawa Home affairs & internal security Mangeza Maluza Information Clement Stambuli Justice & attorney-general Henry Phoya Labour & vocational training Yusuf Mwawa Land, physical planning & housing Thengo Maloya Local government Patrick Mbewe Natural resources & environment Harry Thomson Presidential affairs Ken Lipenga Wa t e r d eve l o p m e n t Dumbo Lemani Tourism, national parks & wildlife Bernard Chisale Transport & public works Kaliyoma Phumisa Poverty alleviation Lee Mlanga

Central bank governor Elias Ngalande

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Economic structure Annual indicators 1998a 1999a 2000a 2001b 2002b GDP at market prices (MK bn) 57.3 78.6 97.2 121.7 140.7 GDP (US$ bn) 1.8 1.8 1.6 1.7 1.8 Real GDP growth (%) 3.3 4.0 1.7 -1.5 -1.3 Consumer price inflation (av; %) 29.8 44.8 29.6 27.2a 16.7 Population (m)c 9.9 10.1b 10.3b 10.4 10.6 Exports of goods fob (US$ m) 538.6 447.0 405.5 406.8a 424.3 Imports of goods fob (US$ m) 579.3 673.0 563.2 582.2a 634.6 Current-account balance (US$ m) -43.6 -150.3 -89.0 -127.7a -170.2 Foreign-exchange reserves excl gold (US$ m) 269.7 250.6 246.9 206.7a 195.0 Total external debt (US$ bn) 2.4 2.8 2.7 2.7 2.9 Debt-service ratio, paid (%) 14.3 13.8 12.7 13.7 13.2 Exchange rate (av) MK:US$ 31.07 44.09 59.54 72.20a 76.68 a Actual. b Economist Intelligence Unit estimates. c 1989-98 based on preliminary results from 1998 census; subject to revisions.

Origins of gross domestic product 2000a % of total Components of gross domestic product 2000a % of total Agriculture 53.7 Private consumption 82.4 Industry 23.2 Government consumption 13.3 Manufacturing 13.0 Gross fixed capital formation 14.0 Services 23.1 Change in stocks 1.3 Net exports of goods & services -11.0

Principal exports fob 2000 US$ m Imports fob 2000 US$ m Tobaccob 247 Intermediate goods 424 Sugar 39 Capital goods 75 Tea 37 Consumer goods 65 Cotton 7 Coffee 5

Main destinations of exports 2000c % of total Main origins of imports 2000c % of total South Africa 19.5 South Africa 41.9 US 12.2 Zimbabwe 14.8 Japan 6.6 Zambia 10.1 Germany 10.5 India 2.9 a Official estimates. b Production marketed at the auction floors. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2000 2001 2002 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (MK m) Revenue and grants 7,124.5 8,933.2 6,435.2 7,723.6 8,506.7 5,774.0 n/a n/a Revenue 4,667.8 5,025.3 5,374.2 6,004.6 6,438.0 5,036.5 n/a n/a Grants 2,456.7 3,907.8 1,061.0 1,719.0 2,068.7 737.6 n/a n/a Expenditure 9,232.5 9,073.6 6,508.8 5,956.7 7,822.8 9,486.6 n/a n/a Balance before grants -4,564.7 -4,048.2 -1,134.6 47.9 -1,384.8 -4,450.2 n/a n/a Balance after grants -2,108.1 -140.4 -73.5 1,766.9 684.0 -3,712.6 n/a n/a Output trends General index (1984=100) 107.4 106.8 112.3 102.1 96.2 94.9 n/a n/a General index (% change, year on year) 7.2 -7.4 -7.6 -16.7 -10.4 -11.1 n/a n/a Financial indicators Exchange rate: MK:US$ (av) 61.339 79.357 79.768 76.817 67.435 64.769 70.999 75.948 Exchange rate: MK:US$ (end-period) 74.259 80.076 79.012 74.177 61.735 67.294 74.804 76.611 Exchange rate: nominal effective rate (1995=100) 34.1 27.2 26.6 28.7 32.5 33.8 31.4 28.4 Exchange rate: real effective rate (1995=100) 109.7 95.4 96.8 104.2 127.2 139.0 127.7 114.1 Interest rate: deposit rate (av; %) 32.50 32.83 37.50 41.33 30.50 30.50 30.50 30.50 Interest rate: discount rate (end-period; %) 44.50 50.23 56.16 46.80 46.80 46.80 46.80 46.80 Interest rate: lending rate (av; %) 52.00 53.33 59.00 61.67 52.00 52.00 52.00 52.00 Interest rate: treasury bill rate (av; &) 32.43 45.87 49.07 39.78 35.78 45.02 46.12 n/a M1 (end-period; MK m) 7,980.3 9,096.6 8,557.7 11,321.1 10,363.7 9,828.9 n/a n/a M1 (% change, year on year) 16.0 36.8 34.6 48.0 29.9 8.0 n/a n/a M2 (end-period; MK m) 16,661 16,929 15,938 20,654 19,333 19,372 n/a n/a M2 (% change, year on year) 36.4 41.4 35.6 47.9 16.0 14.4 n/a n/a Debt-service payments (MK m) 1,521.4 2,016.5 1,823.5 1,504.5 1,663.8 1,433.6 n/a n/a Principal 1,093.1 1,399.9 1,362.0 1,074.0 1,210.3 849.9 n/a n/a Interest payments 408.3 590.0 453.1 426.9 437.8 583.0 n/a n/a Prices Consumer prices (1990=100) 1,397.9 1,640.3 1,906.5 1,781.1 1,791.1 2,043.5 2,269.7 2,086.2 Consumer prices (% change, year on year) 28.3 35.1 30.9 25.7 28.1 24.6 19.0 17.1 Sectoral trends Electricity production (av; m kwh)a 96.5 91.9 84.7 93.7 99.4 n/a n/a n/a Tea production (‘000 tonnes) 4.0 10.2 18.4 9.6 2.7 6.1 17.0 n/a Tobacco auction sales (‘000 tonnes) 83.8 13.2 0.0 77.8 46.8 0.0 n/a n/a Tobacco auction sales (MK m) 5,315.0 1,060.5 0.0 6,451.1 3,999.9 0.0 n/a n/a Foreign trade & reserves Exports fob (MK m) 9,190 8,183 5,445 8,845 10,425 8,019 5,187 n/a Tobacco 6,685 3,969 1,560 5,985 n/a n/a n/a n/a Imports cif (MK m) -8,907 -11,339 -8,802 -8,500 -10,113 -10,052 -9,241 n/a Trade balance 125 -3,156 -3,357 345 312 -2,033 -4,054 n/a Reserves excl gold (end-period;US$ m) 209.5 246.9 303.7 293.0 303.8 206.7 145.3 198.7 a From 2001, consumption. Sources: National Statistical Office, Monthly Statistical Bulletin; Reserve Bank of Malawi, Financial & Economic Review; IMF, International Financial Statistics.

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Outlook for 2003-04 Political outlook

Domestic politics Malawi’s political scene will be dominated by the country’s next presidential and legislative elections, which are due in June 2004. Initial activity will focus on whether the current president, Bakili Muluzi, will serve a third–at present unconstitutional—term in office. The president is currently only permitted to serve two terms; an attempt to alter the constitution to remove this limit outright failed by only three votes in July. There had been much speculation that a motion would be tabled in the parliamentary session that ended on November 1st which, if passed, would have increased the number of terms that a president can serve from two to three, allowing Mr Muluzi to stand for another term. However, in the face of growing vocal opposition, both domestically and from donors, the motion was not tabled. It is now expected that the motion will be delayed until the ruling party, the United Democratic Front, finds a way to win opponents over to the third-term bill. Some MPs are known to be against the complete removal of the limit on the number of presidential terms that can be served, fearing that it could be exploited by aspiring dictators in a country that has a history of autocratic rule. A three-term limit would placate these MPs. However, public cynicism over the process has grown, fuelled by allegations that opposition MPs were bribed to support the open-term bill as well as by Mr Muluzi’s backtracking—he had earlier said that he would not stand for re-election even if his party wanted him to. Further allegations that MPs were financially induced to support the bill have been made by MPs who claim to have refused such offers. Nonetheless, supporters of the Muluzi third term will continue to lobby opposition MPs and once they are convinced that they have enough support, the third-term bill could be heard at an emergency session of parliament. The Economist Intelligence Unit believes there is a possibility that Mr Muluzi will find the support to enable him to stand for a third term. However, if Mr Muluzi does not muster up the necessary support, the most likely candidate to emerge from within the UDF is the current vice-president, Justin Malewezi. Despite all this, because the UDF has a greater nationwide organisation than the other parties, its candidate is best placed to win the presidential election. A greater blow to the prospects of the bill’s success is the decision by John Tembo, vice-president of the main opposition party, the Malawi Congress Party (MCP), and leader of the largest faction of the divided party, to withdraw his backing for the third-term bid. This action is viewed as a humiliating defeat for Mr Muluzi, and the president has retaliated by sharply criticising Mr Tembo in public. Mr Tembo is facing conviction on contempt of court charges, which may prevent him from standing as a parliamentary candidate in 2004. It is speculated that Mr Tembo, in a quid pro quo, will only support Mr Muluzi if the government drops charges against him and guarantees him a very senior position in the next government. However, relations between Mr Tembo and Mr Muluzi have deteriorated in recent weeks because of allegations of corruption that have been levied against Mr Tembo. This relationship will have

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to be repaired before the third-term bill can be tabled. There will be pressure on the courts to reverse Mr Tembo’s conviction.

Election watch The legislative election is scheduled for the same date as the presidential election, but the Economist Intelligence Unit expects the UDF to remain in power through the forecast period. The broad alliances that will contest the parliamentary poll already appear to be forming and are likely to be as follows: • a government bloc consisting of the UDF, the faction of the Alliance for Democracy (Aford) that supports the party’s leader, Chakufwa Chihana, and possibly the faction of the MCP headed by Mr Tembo (provided that the president and Mr Tembo are able to overcome their current difficulties); and • an opposition bloc comprising the pressure group, the National Democratic Alliance (NDA), the faction of the MCP that supports Gwanda Chakuamba (the MCP party president), and the remainder of Aford. The National Democratic Alliance (NDA) and its leader, Brown Mpinganjira, are likely to provide the strongest challenge to the UDF. However, the NDA is not, at present, formally registered as a political party; it prefers to operate as an informal pressure group. Several MPs within the UDF are thought to tacitly support it. The reason for their not openly supporting the NDA is that the constitution stipulates that when a sitting MP changes party, a by-election must be held. Not willing to recontest their seats, MPs prefer to support the NDA covertly. However, the government has ordered the NDA to register as a political party or face being banned and we expect the NDA to give in to this pressure and register as a formal political party before the elections. Widespread allegations of corruption, particularly over the sale of the national grain reserve, which has worsened the current famine, will damage support for the UDF. The finance minister, Friday Jumbe, who was general manager of the Agricultural Development and Marketing Corporation at the time of the sale, is to have his role in the incident investigated after considerable pressure from donors. If such a high-profile figure were to be found guilty of corruption it would seriously erode the population’s faith in multiparty democracy. Therefore, the possibility of a new party being formed that could harness voters’ disenchantment with the current crop of Machiavellian politicians cannot be discounted. If such a party were formed, headed by people unconnected with the political hierarchy and backed by the main church groups, it is possible that it could gain a foothold. The Malawi Forum for Unity and Development (Mafunde) fits some of these criteria, but has failed so far to capture the public’s imagination. Nevertheless, we expect the UDF to remain in power throughout the forecast period.

International relations Regional instability (mainly because of events in Zimbabwe) will be a cause for concern and a deterrent to foreign investors, even though Malawi is unlikely to become directly involved in any disputes. Donors have voiced their concerns about Mr Muluzi’s attempts to stand for a third term in office, and are particularly concerned that the necessary constitutional amendment should not be made without prior confirmation in a national referendum. Further bilateral assistance may be withheld if the government tries to limit democratic rights or

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judicial independence ahead of the elections, even if the agreed economic targets are met. However, slippage on agreed reforms will not prevent further pledges of emergency food aid while Malawi continues to be affected by the current famine.

Economic policy outlook

Policy trends Economic policy will be influenced by the need to restore donor support—the IMF has not disbursed any funds under Malawi’s three-year, US$58m poverty reduction and growth facility (PRGF) since December 2000. An improvement in fiscal discipline is essential if the Fund is to resume lending under the PRGF, and performance in the first quarter of fiscal year 2002/03 (July-June) has been very poor. An IMF mission has just completed its mission in Malawi and expressed serious doubts about the government’s commitment to implementing the agreed economic and financial reforms. Malawi’s government stated that it had failed to meet its financial targets as agreed with the IMF because of unplanned spending on “ghost workers”. The finance minister, Friday Jumbe, admitted that financial misreporting, in the form of debits of salary payments for non-existent employees, had increased the wage bill. The Fund’s Executive Board will debate its findings in December and, given the allegations that the overspending was primarily because of corruption, the board is highly likely to choose to withhold funding until the government reins in expenditure—this is only likely in mid- 2003. The Fund has already disbursed US$22m in 2002 in famine-related emergency aid. A second major problem between the government and donors is the poor implementation of policies outlined in the poverty reduction strategy paper (PRSP), published in April. The primary objective of the PRSP is to reduce poverty by empowering the poor. Although it acknowledges the long-term need to diversify the economy from its agricultural base, the PRSP accepts that during the next few years the primary sector will remain dominant and it therefore makes agricultural development the focus for poverty-reduction efforts. The PRSP outlines a three-pronged approach to agricultural development: increasing the utilisation of land; intensifying agricultural production; and engineering a shift to higher-value products. The success of each of these approaches depends on improving farmers’ access to finance and public services. Although the PRSP is supposed to be designed by the government in consultation with non- governmental agencies and donors, it is not clear how fully the government was involved in drawing it up, or how committed it is to implementing the policies contained in it. It was expected that the government would do just enough (to rein in fiscal expenditure) to get donors back on board, but even this has not happened; there seems to have been little or no implementation of agreed policies whatsoever. Fiscal policy Reducing the budget deficit is essential for ensuring macroeconomic stability and restoring donor funding. The fiscal deficit ballooned to an estimated 8.9% of GDP in 2001/02 (July-June). Mr Jumbe outlined a tough set of expenditure cuts and tax increases in the 2002/03 budget, and set a budget-deficit target of 1.4% of GDP. We consider this target unrealistic because, in addition to the government’s inability to rein in expenditure, the aggressive tax increases planned in the

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budget—particularly the extension of a 20% surtax (in effect, value-added tax) to the wholesale and retail sectors—will prove stifling to the private sector, which is the source of much of the government’s tax revenue, and encourage tax evasion. The government’s failure to deal with the worsening tobacco smuggling problem will deprive it of levies charged through the auction floors—another important source of revenue. Moreover, the government’s deficit target assumes the resumption of donor support to an extent that is now very unrealistic. Furthermore, as the government has also committed itself to increasing pro-poor expenditure in areas such as healthcare, education and importing maize to tackle the famine, there is little scope for cutting back on spending. Although the government is committed to rationalising parastatal employment, it may do little to reduce expenditure in the short term, owing to the cost of severance payments. If donor support is not resumed soon, the government will continue to finance the fiscal deficit through Treasury bills, adding to its debt-service obligations and further increasing expenditure through higher interest and debt repayments. Preliminary indications are that performance during the first quarter of 2002/03 was very poor; although collections by the Malawi Revenue Authority have exceeded the targets set, expenditure has not been restrained. Nonetheless, we are still assuming that the IMF will resume funding by the middle of 2003 and that the government will have some success in controlling expenditure; thus we expect the fiscal deficit to narrow to 6.6% of GDP in 2002/03. We believe that the government will succumb to the temptation of pre- election spending in the second half of 2003/04 and first half of 2004/05 when, owing to the uncertain political climate, a further suspension of donor funds cannot be ruled out. Therefore, we are forecasting that the fiscal deficit will widen to 6.8% of GDP in 2003/04 and 7.4% of GDP in 2004/05.

Monetary policy The Reserve Bank of Malawi (RBM; the central bank) will attempt to control inflation by managing broad money supply through the use of open-market operations. Greater fiscal discipline is needed to reduce lending to the public sector by the RBM; this has been a cause of previous bouts of monetary expansion. The RBM cut the bank rate again on October 21st, from 43% to 40%— the rate was 46.8% in late July—owing to a reduction in the amount of cash in circulation and the continued easing of non-food inflation. The interest rate cuts are probably premature, given the government’s poor fiscal performance to date. Real lending rates will remain high, hampering private-sector borrowing.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.0 2.7 3.2 3.9 OECD 0.7 1.6 1.9 2.6 EU 1.5 0.9 1.6 2.2 Exchange rates ¥:US$ 121.5 125.5 128.8 130.5 US$:€ 0.896 0.945 1.055 1.050 SDR:US$ 0.785 0.772 0.742 0.745

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2001 2002 2003 2004 Financial indicators ¥ 2-month private bill rate 0.17 0.10 0.10 0.10 US$ 3-month commercial paper rate 3.61 1.68 1.26 3.08 Commodity prices Oil (Brent; US$/b) 24.5 24.9 24.5 19.1 Tobacco (US$/tonne) 3,100 3,100 3,150 3,200 Tea (US$/kg) 1.6 1.5 1.5 1.4 Food, feedstuffs & beverages (% change in US$ terms) -1.9 13.1 11.5 -3.1 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

After a slower than expected recovery in late 2002 and early 2003, global economic growth will accelerate over the forecast period, to reach 3.2% in 2003 and 3.9% in 2004, compared with 2.7% in 2002. Uncertain prospects in other regional markets will limit the scope for expanding non-traditional exports. The prospects for Malawi’s main commodity exports will be mixed during the outlook period; tobacco prices fetched at local auctions depend mainly on local factors, but we expect international prices to remain stable over the forecast period, averaging US$3,175/tonne. Tea prices are forecast to average US$1.5/kg in 2003 and US$1.4/kg in 2004, owing to continued oversupply. Oil prices are forecast to average US$24.5/barrel in 2003 and US$19.1/b in 2004.

Economic growth A severe drought, the postponement of donor lending and inflationary financing of the fiscal deficit made economic conditions extremely difficult in 2002. Economic conditions will continue to be unfavourable in 2003, but inflows of emergency aid and the resumption of the starter pack programme will lead to some recovery in rural activity, assuming reasonable weather conditions. As always, the performance of the tobacco crop will be central to determining the country’s economic performance. As instability is expected to continue in Zimbabwe, tobacco merchants will continue to encourage Malawian farmers to increase production of the higher-value flue-cured crop and this crop is expected to do well. Disappointing revenue from the burley crop (the main tobacco crop grown in Malawi) in 2002 may discourage smallholder production in 2003, and many farmers may switch from tobacco to maize to ensure food security after the current famine. Low international prices for tea and coffee throughout the forecast period will discourage commercial farmers from increasing production of either crop, limiting their contribution to real GDP growth. Increasing international sugar prices should make this sector more dynamic and investment in new technology by the Illovo Sugar Company, one of the country’s two producers, has already begun to pay off—total sugar exports were up by 20.3% in the first seven months of 2002 compared with the same period in 2001. Efforts to diversify into horticulture and floriculture will continue to make slow and uneven progress; smallholders, in particular, will concentrate on growing food crops. Outside agriculture, financial services will continue to perform well, because of the real return available on T-bills. Greater foreign ownership of domestic banks, and the possibility of further foreign entrants from 2003, should increase competition in, and thereby the efficiency of, the financial services sector. Manufacturers will struggle to survive as taxes and regional competition erode their competitiveness and the contraction of the sector is expected to

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continue. Assuming good weather, the upward trend in agriculture should continue into 2004, although election-related expenditure will cause the fiscal deficit to widen and lead to higher inflation. Overall, real GDP is forecast to recover from a contraction of 1.3% in 2002, growing by 2% in 2003 and 2.6% in 2004.

Inflation Having declined for 11 consecutive months, year-on-year inflation rose to 15.4% in September 2002. This increase was not a surprise as food shortages usually begin to take effect from September, as smallholders consume the last of their crops. Maize shortages are expected to continue into early 2003, putting upward pressure on prices, though the government’s maize-price subsidy will limit the effect of these shortages on inflation. However, there will be a one-off rise in prices because of the extension of surtax to the wholesale and retail sectors, implemented on November 1st, 2002, which could add up to 10% to retail prices. Greater fiscal discipline is essential if there is to be a sustained reduction in inflation. Overall, inflation is estimated to have averaged 16.7% in 2002 and is forecast to fall to 13.2% in 2003, owing to an improvement in the food security situation. We are expecting a sharp fall in the kwacha in 2004, which will increase the price of imports, and a deterioration of fiscal discipline, so although inflation is forecast to average 13% in 2004, it will end the year at 15.4%.

Exchange rates Following the end of the tobacco auctions—the main source of foreign exchange—in October, the kwacha has fallen against the US dollar. The resumption of balance-of-payments assistance from donors, expected in 2003, will give some support to the kwacha. However, the currency is vulnerable to sharp falls and we predict that another sharp drop is likely during the forecast period. We expect this to happen in 2004, owing to political uncertainty over the election period; however, a sharp devaluation of the Zimbabwe dollar— which we are forecasting for the third quarter of 2003—could also trigger it. We expect the kwacha to depreciate from an average of MK76.68:US$1 in 2002 to MK89.32:US$1 in 2003 and MK102.57:US$1 in 2004.

External sector Tobacco growers are expected to continue switching to the higher-value flue- cured crop, owing to the ongoing disruption to farming in Zimbabwe and, assuming normal weather, we expect an increase in revenue from tobacco— Malawi’s main source of foreign exchange—over the forecast period. Sugar production, and therefore exports, are expected to increase, but low international tea prices will reduce revenue from tea exports. Growth in non- agricultural exports will remain stagnant. Imports are expected to increase only slightly in 2003, after being boosted by maize imports to deal with the famine in 2002. Imports will increase in 2004, as demand for imports of consumer and capital goods increases in line with the revival in real GDP growth. A large structural deficit will persist on the services account in 2003-04, owing to the high transport costs associated with foreign trade, though this will narrow from the spike caused by maize imports in 2002. A reduction in interest payments on external debt under the IMF-World Bank’s enhanced heavily indebted poor countries (HIPC) initiative will narrow the deficit on the income account. Continued inflows of donor aid will ensure a healthy surplus on the current transfers account, though this is expected to fall in 2004 as the country will not

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no longer be receiving emergency famine assistance. Overall, the current-account deficit is expected to narrow from an estimated US$170m (9.3% of GDP) in 2002 to US$119m (6.5% of GDP) in 2003, before widening to US$143m (7.8% of GDP) in 2004.

Forecast summary (% unless otherwise indicated) 2001a 2002b 2003c 2004c Real GDP growth -1.5b -1.3 2.0 2.6 Gross industrial growth 0.1b -0.8 1.2 2.0 Gross agricultural production growth -5.0b -4.5 2.8 3.0 Consumer price inflation (av) 27.2 16.7 13.2 13.0 Consumer price inflation (year-end) 22.1 15.7 10.9 15.4 Short-term interbank rate 56.2 49.9 41.0 38.0 Government balance (% of GDP) -8.9b -6.6 -6.8 -7.4 Exports of goods fob (US$ m) 406.8 424.3 459.7 471.4 Imports of goods fob (US$ m) 582.2 634.6 642.8 669.8 Current-account balance (US$ m) -127.7 -170.2 -118.6 -143.0 Current-account balance (% of GDP) -7.6 -9.3 -6.5 -7.8 External debt (year-end; US$ bn) 2.7b 2.9 3.0 2.8 Exchange rate MK:US$ (av) 72.20 76.68 89.32 102.57 Exchange rate MK:¥100 (av) 59.41 61.10 69.38 78.60 Exchange rate MK:€ (av) 64.66 72.46 94.24 107.70 Exchange rate MK:SDR (av) 91.92 99.32 120.45 137.68 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Parliamentary session does not In contrast to expectations fuelled by comments from members of the ruling debate the third-term issue United Democratic Front (UDF), the October 15th-November 1st parliamentary session passed without the tabling of a bill that, if passed, would have increased the number of consecutive terms that a president can serve from two to three. The circumstances surrounding the non-presentation of the bill are unclear. When the president, Bakili Muluzi, opened parliament he did not mention the third-term bill, which, if passed, would allow him to contest the 2004

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presidential election, and said that parliament should concentrate on the critical issues facing the nation, such as the ongoing famine and HIV/AIDS. The justice minister, Henry Phoya, who had been expected to present the bill, said that he would follow the president’s wishes and deal with other issues. This came as something of a surprise, as ahead of the parliamentary session there had been strong indications that the third-term bill would be tabled, and the president did little to quash this speculation. It appears that the main reason why the bill was not tabled was the growing vocal opposition to it both domestically and from donors, rather than concern over the serious problems that Malawi faces. There was also a strong possibility that the bill would have suffered a heavier defeat than the previous attempt to change the limit on the number of terms a president could serve—in July, a bill to remove the limit was defeated by three votes (July 2002, page 13). A parliamentary defeat would have been highly embarrassing for Mr Muluzi and it is now expected that the motion will be delayed until the UDF can find a foolproof way of ensuring that it gets passed, or that opponents to it can be won over. A major factor in Mr Muluzi’s calculations is likely to have been the decision by John Tembo, the vice- president of the Malawi Congress Party (MCP) and leader of the largest faction of the divided opposition party, to withdraw his backing from the third-term bill. Opposition support for the bill is vital as to be passed it needs to be approved by at least two-thirds of the MPs in the 193-seat parliament and the UDF only has 99 MPs. Mr Tembo’s decision appears to be related to his conviction on contempt of court charges, which may prevent him from standing as a parliamentary candidate in 2004. However, Mr Tembo is a wily political operator and may be using the support of the faction of MPs that he commands as a bargaining chip to ensure a leading position within the government after the 2004 elections. Of equal concern for supporters of a Muluzi third term is the increasing independence being shown by some UDF MPs.

Two UDF MPs are suspended Two UDF MPs challenged the third-term bill and joined a newly created pressure group, the Forum for the Defence of the Constitution, which is opposed to amending the constitution to allow Mr Muluzi to run for a third term (see below). The parliamentary speaker, Sam Mpasu, declared vacant the seats of the two MPs—Jan Sonke, formerly the deputy finance minister and the only white MP, and Joe Manduwa, the head of the parliamentary committee investigating the sale of the strategic maize reserve (April 2002, page 37). This was on the grounds that they had crossed the floor of the house; an amendment to the constitution made in July 2001 states that a by-election must be held whenever an MP joins any other political party, or any association or organisation whose objectives or activities are political in nature (October 2001, page 37). However, Mr Sonke has challenged this in court and is currently allowed to continue sitting as an MP while the matter is sub judice. Within the UDF, Mr Muluzi has declared Mr Sonke’s seat vacant and called for UDF members to step forward to be selected to replace him. The departure of Mr Sonke, who said that at least 10 other UDF MPs would not support the bill but were afraid to declare this publicly, is interesting, as he was considered a close personal friend of the president.

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Corruption is suspected in the In Mr Manduwa’s case, the problem appears to have been that he was upper echelons of government becoming too close to the truth in the investigation into the maize scandal. It has become increasingly apparent that senior figures within the UDF were heavily involved in the maize scandal, and the public naming of the current minister of finance, Friday Jumbe, as a candidate for investigation by the Anti-Corruption Bureau is a case in point. Mr Jumbe was general manager of the Agricultural Development and Marketing Corporation (Admarc) at the time of the sale of the strategic maize reserve, an institution that played a key role in the disappearance of the strategic maize reserve. In particular, the investigators are looking at how Mr Jumbe got the funds for the construction of the Superior Hotel in Blantyre while he was general manager of Admarc. Mr Jumbe claims that he used large loans from the National Bank of Malawi (NBM) and the Commercial Bank of Malawi (CBM) to fund the hotel. As general manager of Admarc, a major shareholder in NBM, Mr Jumbe was a board member of NBM, while the CBM was at the time considered a soft touch for the political hierarchy because relatives of Mr Muluzi held senior positions there— this has changed since a majority holding of the bank was acquired by Stanbic (January 2002, page 41). After the UDF declared Mr Manduwa’s seat vacant, he was automatically stripped of his position heading up the inquiry into the maize scandal. This, Mr Manduwa claimed, was an attempt to disrupt the investigation, which was due to present its report, believed to implicate various senior UDF members, to parliament in October. Only one month later, following significant domestic and donor pressure, Mr Muluzi ordered an urgent enquiry into Mr Jumbe’s role in the maize scandal. The UDF MP, Dzoole Mwale, replaced Mr Manduwa as head of the parliamentary committee investigating the maize sale. Mr Jumbe’s position looked vulnerable for a while, not least in terms of his credibility with the donor community. However, he appears to have weathered the storm for the time being. Like Mr Sonke, Mr Manduwa, who holds a constituency in the key Mulanje district, is challenging the situation through the courts.

An arrest warrant is issued for Brown Mpinganjira, the leader of the National Democratic Alliance (NDA), is Mr Mpinganjira looking increasingly formidable as a potential presidential candidate. Although the NDA is still only a pressure group, Mr Mpinganjira has said that he will give in to government pressure and register it as a fully fledged political party early in 2003. In an indication of his approach to running the party—and possibly his presidential style, should he achieve that office—he has also said that he will be the leader and has given no suggestion that this will be subject to a vote by NDA members. All the indications are that the new party will be a vehicle to enhance Mr Mpinganjira’s individual political aspirations. The UDF has been concerned about the threat that Mr Mpinganjira, a former finance minister, might pose ever since he broke away from the party in late 2000 (January 2001, page 36). After a slow start to his post-UDF political career, it is the actions of the UDF that are actually giving Mr Mpinganjira more credibility. An arrest warrant was issued in his name in September following the death of a UDF official in a confrontation with NDA officials (October 2002, page 18) which, it is claimed, was instigated by Mr Mpinganjira. The arrest warrant follows a series of far-

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fetched allegations which were made against Mr Mpinganjira, such as treason, none of which have been proved. The director of public prosecutions, Fahad Assani, has said that Mr Mpinganjira will not be arrested until a key witness to the incident is found and could not explain why an arrest warrant had been issued for Mr Mpinganjira before this had happened.

Mr Chikoanda may be a UDF Mr Mpinganjira currently appears to be the only viable opposition presidential presidential candidate candidate, which explains why he has endured so much harassment. As the prospect of the third-term bill being passed by parliament has receded in recent months, pressure within the UDF to consider other presidential candidates has increased. As the third-term issue is still unresolved, the UDF party congress which was scheduled for October, and at which the party’s candidate for the presidential election was to have been announced, was postponed. Nonetheless, there appears to have been much jostling within the party’s upper echelons over the leadership issue. As the Economist Intelligence Unit has previously highlighted (October 2002, page 14), the leading candidates are the vice- president, Justin Malewezi; the agriculture minister, Aleke Banda; the parliamentary speaker, Sam Mpasu; the communications minister, Clement Stambuli; and the minister of natural resources and environment, Harry Thomson. In addition, the former finance minister, Matthews Chikoanda, has begun to figure highly in speculation about who will be the party’s next leader. Mr Chikoanda, who was dismissed as finance minister in January 2002 (April 2002, page 35), was appointed chief executive officer of Press Corporation Limited (PCL), formerly the holding company of the ex-president-for-life, Hastings Banda, and the largest private-sector company in Malawi, a few months later. So far during his tenure at PCL Mr Chikoanda appears to have done little for the fortunes of the company, which badly needs to sell off some of its loss-making subsidiaries, although he has attained maximum press coverage for himself. Mr Chikoanda has a residual domestic popularity that many senior UDF politicians do not owing to his (unsuccessful) attempts to reform some of the government’s more profligate spending habits and because his reputation remains relatively untarnished by allegations of corruption. However, his efforts at spending reform have not endeared him to other UDF cabinet ministers and his political and business dealings have been characterised by an element of naivety, though this might not be a deterrent, depending on his backers.

The leader of the MCP is Mr Mpinganjira is not the only opposition leader who has been subjected to arrested legal proceedings instigated by the UDF over the last quarter. Gwanda Chakuamba, the leader of the MCP, was also arrested for allegedly forging Mr Muluzi’s signature in October. Although little evidence was provided and Mr Chakuamba was later released, it was alleged that he was responsible for forging the president’s signature on a letter distributed to all members of parliament that appeared to offer them money if they supported the third-term bid. Following allegations that the Aford leader, Chakufwa Chihana, offered similar financial inducements to his party’s MPs (October 2002, page 14), there have been further allegations that senior UDF members, and possibly the president himself, have been openly offering bribes to MPs in exchange for their

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support in a vote on the third-term bill. Given these allegations, some suspect that Mr Muluzi was the originator of the letter, though whether the president would be foolish enough to put such an offer in print is unclear. Whatever the case, the origin of letter has yet to come to light.

Reconciliation efforts within Within the MCP, Mr Chakuamba’s position continues to be contested by the the MCP have failed party’s vice-president, John Tembo. A seemly intractable split has developed in the party after its failure to achieve a parliamentary majority in the 1999 election caused simmering tensions to come out into the open (July 2000, page 37). Two factions of the party, headed by Mr Chakuamba and Mr Tembo respectively, have been operating independently for several years, but although a formal split appears inevitable before the 2004 election, this has yet to happen. There are two main reasons for this. First, according to the constitution, MPs that change political parties have to re-contest their seats in a by-election; therefore, all the MPs in the faction of the MCP that breaks away will have to re-contest their seats, a risk that most are not prepared to take. Second, both factions want to maintain the MCP name, and thus the loyalty the party can still count on in its heartland in the Central region, as well as its assets (but also its substantial liabilities). This split reaches down to local level, with both factions sending delegates to party meetings and trying to get parliamentary candidates from their faction selected. Some within the party sensibly consider that its best chance to win back power is if it can remain united and reconciliation talks have been instigated (though many MPs, particularly within the Tembo faction, appear more concerned with their own personal positions rather than the welfare of the party). However, these talks have been acrimonious and Mr Tembo has refused to attend them until Mr Chakuamba drops all the lawsuits against him (these concern who controls the party). In the party’s latest legal battle, Mr Tembo was convicted on contempt of court charges in October for holding an MCP convention in Lilongwe on June 22nd 2002, despite a court injunction granted to Mr Chakuamba banning this. According to the law, if an MP is convicted of dishonour, or moral turpitude, then he cannot stand for parliament for seven years, and in theory could be stripped of his parliamentary seat, but it is not clear whether Mr Tembo’s conviction falls under one of these categories. Although Mr Chakuamba and Mr Tembo remain in place, and neither shows any sign of relinquishing his position, the battle over the party leadership will continue both within and outside the courts. Aford is in a similar position, with Mr Chihana increasingly reviled by his own party. This stems from his decision in January 2002 to end the party’s alliance with the MCP and back the UDF (April 2002, page 34) and his subsequent offer of bundles of cash to the party’s MPs, allegedly in exchange for their support for the third-term bill (October 2002, page 14). Therefore, a split in Aford also appears inevitable.

A new anti-third-term group As the parliamentary opposition is immersed in its own troubles, it is not has been created surprising that civil society and religious groups have become the most vocal opponents to government policies and the third term bid. A new pressure group, the Forum for the Defence of the Constitution (FDC), was established in early

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October. The Public Affairs Committee—which represents many religious groups within the country and includes the influential Catholic Church—and non- governmental organisations have spearheaded the FDC. As its name suggests, the FDC’s rationale is to press politicians to respect the constitution. In particular, this relates to the constitutional limit (of two terms) placed on the number of consecutive terms that a president can serve and the need for a referendum if this is to be changed. Aside from the two UDF MPs that have joined the FDC (see above), the group claims the support of a number of MPs from Aford and the MCP.

An anti-third-term After a lengthy legal review and a number of challenges, the High Court ruled in demonstration turns violent late September that people had the right to stage peaceful demonstrations both for and against the third-term issue. In its ruling, the court said that it was the duty of the police to protect people who took part in peaceful demonstrations. This decision overturned a ban on peaceful demonstrations announced by Mr Muluzi in June on security grounds (July 2002, page 16). The president had argued that such marches could provoke public unrest. Sure enough, the first demonstration against the third term after the ban was lifted, organised by the FDC, ended in violence. Despite apparently having police approval, the FDC marchers clashed with UDF Young Democrats—the “security wing” of the party (October 2002, page 18)—who were marching in favour of a Muluzi third term. It is reported that some of the Young Democrats, who pelted FDC marchers with stones and sticks in full view of the police, were openly carrying guns and a senior NDA representative received severe injuries following a blow to the head with a panga. The growing physical violence suffered by MPs who oppose the third term—Sam Kandodo Banda of Aford was beaten up outside parliament in mid-October—and the admission of the police that they do not have enough resources to protect all MPs have caused some MPs to demand that they be allowed to carry guns to parliament for their own safety.

The opening of a new market The opening of a new market in Blantyre caused several days of rioting by street sparks riots vendors who were unable to get stalls. The government created the market in an attempt to move the vendors from the streets because of the problems they create in terms of security, cleanliness and health. However, the new market contained booths for only 400 vendors, whereas the local vendors association, which accounts for only a small amount of the total number of vendors, has 1,600 members. Nonetheless, following the official opening of the market the police attempted to force vendors off the streets and in a speech Mr Muluzi castigated the vendors and ordered them into the market. However, the vendors, who sell a very wide range of products, prefer to remain in the streets, as this is where their customers are. Aside from the inconvenience caused to Blantyre residents, this conflict could have interesting political implications as street vendors are regarded as having given considerable support and credibility to the UDF, and Mr Muluzi in particular, during the changeover to democracy in the early 1990s. Owing to their past support, Mr Muluzi and the UDF have been reluctant to order a clean-up of the city streets (except for special occasions such as intergovernmental conferences). The president’s recent change of attitude to the street vendors is unlikely to endear them to his efforts to secure a third term.

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Press freedom is rated in an The international pressure group, Reporters Without Borders, published its first international survey worldwide press freedom index in October. Journalists, researchers and legal experts were asked 50 questions on press freedoms in 139 countries. Malawi was positioned 84th in the survey, between Guatemala and Burkina Faso. Although there has been a sharp increase in the number of publications in Malawi in recent years and most of the print media is privately owned, neither of the two main daily newspapers are independent. Daily Times is owned by Blantyre Print and Publishing, which is connected to Mr Tembo and the MCP, and Nation is part-owned by Aleke Banda, the minister of agriculture and irrigation. Low-level repression of newspapers has increased as scrutiny of government policy and investigations into allegations of corruption have increased. The radio service provided by the government-owned Malawi Broadcasting Corporation is the main source of news for the rural population and the government also owns Television Malawi, the only national television station.

Press freedom index, 2002 Rank Score Benin 21 6.00 South Africa 26 7.50 Nigeria 49 15.50 Tanzania 62 21.25 Kenya 75 24.75 Guinea 79 26.00 Malawi 84 27.67 Burkina Faso 85 27.75 Chad 87 28.75 Angola 93 30.17 DRC 113 40.75 Zimbabwe 122 48.25 Eritrea 132 83.67

Source: Reporters Without Borders.

Economic policy

The IMF expresses doubts The preliminary findings of an IMF mission that visited Malawi in November about commitment to reforms suggest that funding under the poverty reduction and growth facility (PRGF) will not be resumed in December, as had been previously expected. The mission expressed “serious doubts” about the government’s commitment to implementing agreed economic and financial reforms. Discussions centred on the implementation of the 2002/03 (July-June) budget and a review of performance over the first quarter of the fiscal year.

The government has proved Fiscal performance has been poor during the first quarter of 2002/03; the deficit, unable to control expenditure of MK12.2bn (US$160m), is nearly double the deficit recorded in either the third or the fourth quarters of 2001/02, even though the Malawi Revenue Authority has exceeded its target for revenue collection. This is all the more lamentable as lax fiscal discipline is the main reason why funding under the PRGF has been suspended since December 2000—the Fund reiterated the importance of fiscal discipline in its latest Article IV report, which was only published in August 2002 (October 2002, page 19). In addition, the Fund had appeared keen to

resume lending, partly to offset criticism it had attracted over its role in the sale of the strategic grain reserve. As the finance minister, Friday Jumbe, acknowledged in an interview with the local newspaper, The Malawi Standard, the conditionalities that Malawi has with the IMF are not very difficult. Nonetheless, it appears that a lack of political will, together with outright corruption, have combined to prevent the government from reining in spending.

Fiscal performance, 2002 (MK m) Jan Feb Mar Apr May Jun Jul Aug Sep Revenue 2,895 1,886 2,303 2,557 2,601 4,522 3,156 2,726 3,928 Domestic revenue 2,984 1,883 2,302 2,556 2,564 3,540 3,156 2,726 3,928 Foreign grants & loans 0 3 0 1 38 982 0 0 0 Expenditure 3,892 3,843 4,770 5,505 5,152 4,028 7,247 7,467 7,069 Balancea -882 -1,959 -2,454 -4,412 -2,597 686 -4,342 -4,741 -3,141 a Does not sum in source. Source: Reserve Bank of Malawi.

Three main areas of concern were highlighted by the IMF mission. • First, planned increases in pro-poor expenditure have not been adhered to, but expenditure on wages and salaries in the ministries concerned—which include education, sports and culture, health and population, agriculture and irrigation, and water development—is over budget. The government attributed this to an increase in the number of healthcare personnel and teachers that was not budgeted for, though as this was the result of a government campaign to attract retired employees back to work, it should really have been factored into the budgetary calculations. • Second, the payment of termination dues to some senior military officers who retired during the first quarter. This also should not have come as a surprise to the government as these retirements were according to schedule. • Third, and of most concern, is the corruption that is ingrained within the civil service, such as the paying of “ghost workers” and the misuse of allowances. The auditor-general estimated that the payment of “ghost workers”—mainly civil servants who have resigned or died—accounts for over US$8m every year. Government accountants issue “ghost workers” with pay cheques that they then cash themselves. This problem is increasing, because many civil servants are dying of AIDS and the government does not know definitively how many civil servants there actually are, even though an audit of the government payroll is supposed to have started some time ago.

The IMF’s failure to resume Mr Jumbe subsequently said that the government is working on new measures funding will hit the economy to contain the deficit, but as it is estimated that the maize price subsidy will cost around MK3bn in 2002/03 (US$39m; though donors are funding much of this), and political considerations are likely to take priority as the elections approach, the government’s commitment to these new measures will have to be strong. At present, we expect that the government will do enough to allow the Fund to resume funding after its next review, which should take place towards the end of

the second quarter of 2003. But if this is not the case, there is a real concern that funding might not be resumed before the 2004 legislative and presidential elections, which are due by July. A restoration of PRGF funding by mid–2003 is also essential if the government wants to reach completion point under the IMF- World Bank’s heavily indebted poor countries (HIPC) debt-relief initiative in 2004. Completion point, at which a substantial reduction to the total debt stock is made, can only be reached after a country has successfully implemented its full poverty reduction strategy paper (PRSP) for one year, which the government has not so far been doing. The government’s failure to ensure a resumption of IMF funding will also have a short-term negative impact on the economy. The IMF had indicated that the full amount of the disbursements that had been withheld under the PRGF— US$47m—would be released if its mission to Malawi were successful. This would have triggered the release of £12.5m (US$19.7m) by the British government, €24m (US$24m) by the EU and smaller amounts from other donors. As foreign-exchange reserves are falling sharply (see Foreign trade and payments), this would have provided an important source of income for the government’s coffers, and, more significantly, would have stimulated a revival in business confidence. The 2002/03 budget was based on the resumption of donor support in December 2002 and, without this, the government will have to increase its deficit financing by issuing Treasury bills, which will be inflationary and crowd out private-sector borrowing.

The bank rate is cut again The Reserve Bank of Malawi (RBM; the central bank) cut the bank rate from 43% to 40% in October, owing to a reduction in the amount of cash circulating in the economy. This is the second surprise cut that the RBM has implemented in recent months; the rate was cut from 46.8% to 43% in July (October 2002, page 19). As with the previous cut, the latest one does not appear to be justified by developments in the economy. In July the RBM cited an improvement in the government’s commitment to reducing domestic debt as one of the main reasons for reducing the bank rate. The fiscal data subsequently released do not support this. The RBM had previously called for an improvement in fiscal discipline before it was prepared to reduce interest rates. That this is no longer an important constraint suggests that political influence may be being brought to bear on Reserve Bank policy. In the absence of IMF funds, the government will have to step up its issuing of T-bills to finance the fiscal deficit, and because T-bill rates are closely related to the bank rate, the RBM may have been encouraged to reduce the bank rate to lower the cost of financing the deficit. In theory, the cut in the base rate should stimulate private-sector borrowing, but real rates are still 23% and there are a host of structural problems that need to be addressed before the econ0mic climate becomes favourable to the private sector.

There are teething problems in Surtax (in effect, value-added tax) was extended in line with pronouncements in the extension of surtax the 2002/03 budget (July 2002, page 18)—and encouragement from the IMF—on November 1st so that it is now levied at 20% on the wholesale and retail sectors, as well as the import and manufacturing sectors. In addition, goods that were previously taxed at 10%—including electricity supplied to non-commercial premises, office cleaning and maintenance services, and photographic services—

will now be taxed at 20%. As is common with large tax changes in many African countries, the extension has caused confusion for shop owners and consumers and has been exploited by unscrupulous retailers. A survey conducted by a local newspaper, The Chronicle, in early November found that some prices had increased by up to 60% and that prices of zero-rated goods— mainly foodstuffs—had also increased. Although the MRA remains insistent that the one-off price increase caused by the extension of the surtax will be 8.8% (July 2002, page 18), prices charged by local retailers appear to have risen faster than this; the MRA ascribes this to a deterioration in the exchange rate. Such effects mean that, as with most tax rises, the changes has come in for much criticism from local pressure groups and companies, though the only criticism with real substance is that there has been a lack of education for consumers and retailers. In particular, the MRA’s publicity campaign did not make it clear that traders are only able to claim back surtax from goods acquired less than four months previously; goods acquired before then are not eligible and therefore traders have no choice but to apply the full 20% surtax on these goods when fixing prices. There are still concerns over the MRA’s capacity to fully implement the changes and retailers, wholesalers and consumers are likely to experience confusion and be vulnerable to exploitation for several months to come.

The sale of MTL hits further Another area where the government is performing poorly, although not problems specifically mentioned by the IMF review, is privatisation. In particular, the sale of Malawi Telecommunications (MTL) has run into further problems. The IMF had previously indicated that the government needed to show progress on the sale of MTL by the end of 2002, but following the withdrawal of Econet Wireless (a Zimbabwean company now operating from South Africa) from the consortium that was expected to buy 30% of the government’s shareholding (January 2002, page 40), this has not happened. Econet is believed to have pulled out because of a reassessment of the potential profitability of the venture. The government is preparing to re-offer MTL for sale and Press Corporation (PLC), a large holding company in the Econet consortium, is still interested in acquiring the shares and is looking for international telecommunications companies to support its bid. However, PCL faces financial difficulties of its own and is likely to have to reduce the size of the bid that it had previously planned to make. MTL remains highly politicised because of the continued attention being focused upon it by political elites, making it less desirable in the eyes of private investors.

Telecoms indicators 1996 1997 1998 1999 2000 Mainlines in operation 35,471 36,754 37,371 41,362 45,000 Waiting list for mainlines 29,854 30,902 31,554 31,554 25,000 Cellular phone subscribers 3,700 7,000 10,500 22,500 49,000 PCs in use n/a n/a 8,000 10,000 12,000 Internet users n/a 500 2,000 10,000 15,000

Source: International Telecommunications Union, African Telecommunication Indicators.

South African Airways (SAA) and British Airways have submitted bids for a 49% stake in Air Malawi. SAA is perhaps the most likely purchaser as it is in the

midst of a programme of regional expansion, having acquired Air Tanzania for US$20m in October 2002. The sale process has been going on for some time, the original deadline of May 31st, 2002, having been extended several times because the bids received were unsatisfactory. The government is looking for a strategic partner for Air Malawi and would prefer this to be a consortium. Progress on other privatisations seems to be picking up. The Admarc-owned subsidiary, Cold Storage Commission, has been sold to Malawian investors, as has the Grain & Milling Company, and the tendering process has closed for the sale of David Whitehead & Sons, Malawi’s sole textile producer.

The domestic economy Economic trends Higher food prices cause Year-on-year inflation rose to 16.5% in August from 16.1% in July, the first increase inflation to rise in the year-on-year rate since August 2001. This increase was not a surprise, as food shortages usually begin to take effect from this time of year as smallholders consume the last of their crops, and it was higher food prices, as well as a slight increase in petroleum prices, that caused the rise. Maize shortages are expected to continue into early 2003, putting upward pressure on prices, though the government’s maize price subsidy will limit the effect of this on inflation. There will, however, be a one-off rise in prices owing to the extension of surtax to the wholesale and retail sectors, implemented on November 1st 2002. Early indications are that this may add more to retail prices than the 8.8% that the government had estimated, though the impact is likely to be phased in.

The kwacha begins its seasonal slide

The kwacha has slid by around 7% against the US dollar since mid-November, to stand at MK86.25:US$1 on December 16th. This slide is not unexpected, as the currency tends to fall during the final quarter of the year owing to the end of the tobacco auction season, Malawi’s principal source of foreign exchange, and pressure on foreign exchange as farmers purchase imported inputs, such as fertiliser, for the following year’s crop. The fall has been exacerbated because of indications given by the recent IMF mission to Malawi (see Economic policy) that the country will not

receive the tranche of funding under its poverty reduction and growth facility (PRGF) that was expected in December (October 2002, page 27). The kwacha is expected to have depreciated by an average of 6% in 2002 after depreciating by an average of 21% during 2001. A shortage of foreign exchange According to latest data from the IMF’s International Financial Statistics, broad causes M2 growth to slow money supply (M2) growth continued to slow in 2002, reaching 12.6% in August. This decline has been caused mainly by a sharp contraction in net foreign assets, which were down by 29.1% in year-on-year terms in August. This fall reflects the effects of the continued absence of much donor support owing to the suspension of IMF assistance. Nonetheless, inflows from the tobacco auctions have caused net foreign assets to pick up somewhat from March, when they hit their low for 2002 of MK7.65bn, to MK12.66bn in August. This improvement is likely to be reflected in a pick-up in foreign-exchange reserves over the same period, although the IMF data only go as far as May, when reserves stood at US$181m, up US$36m on the March total (also the lowest for the year so far) but down US$134m on the total in August 2001. Import cover is expected to be 3.5 months for 2002, 3 months for 2003 and 3.6 months for 2004.

Malawi’s score deteriorates in According to the latest annual survey by the Heritage Foundation, a US think- an economic freedom index tank, Malawi ranked 131 out of 156 countries in its Economic Freedom Index for 2003 and scored 3.65, placing it in the “mostly unfree” category. This represents a deterioration of 3.5 compared with the 2000 score and is the first time that the country’s score has worsened since 1998. The fall in the score was caused by a worsening in two of the ten areas that the survey takes into consideration. • The first is the government’s fiscal burden, which deteriorated owing to the sharp increase in government expenditure in fiscal year 2001/02 (July-June). • Banking and finance was the second area where Malawi’s score deteriorated, owing to “new evidence of the extremely high level of government involvement in the banking sector”. The report does not state what this new evidence is, but it does not appear born out by activity in the banking sector over the past 12 months, specifically, the acquisition of 60% of the then state- owned Commercial Bank of Malawi by the South African bank, Stanbic (January 2002, page 41).

The worsening in Malawi’s score comes against a backdrop of an overall improvement in economic freedom in Sub-Saharan Africa; the scores of 19 countries improved compared with 13 whose scores declined. Three other countries were also given scores of 3.65—Ukraine, Yemen and Rwanda.

Agriculture

Donor action helps to alleviate According to the EU, the number of starving people in Malawi was likely to the famine increase by 1m during December 2002 to reach 3.3m. Despite this high figure, which represents over 30% of the population, owing to strong support from the donor community the famine is unlikely to be the catastrophe that it could have been. In fact, on the ground the effects of the famine appear less noticeable than they were during the same period of 2001. Donors and non-governmental organisations have been instrumental in establishing a distribution system that operates independently of the government throughout the country. This currently seems to be working in terms of delivering maize to the specified distribution points and to the most needy people. This is in contrast to previous years. However, there is still some uncertainty over the 250,000 tonnes of maize that the government has committed itself to importing through the National Food Reserve Agency. Nonetheless, the government has restated that this maize will be available and it has received funding from donors to support the subsidy which is keeping the maize price at MK17.5/kg, compared with the actual cost of maize imports of MK30/kg. As and when the maize purchased by the government becomes available, it will be distributed through the Agricultural Development and Marketing Corporation (Admarc). The government has also indicated that the number of distribution points has been increased dramatically and that controls will be in place to prevent abuse. It remains to be seen whether this will work, but because of the increased availability of maize owing to donor support there will be less scope for the major abuses seen in the past. The National Food Reserve Agency is being subject to a major independent audit of its operations, in preparation for the replenishment of its grain stocks through the EU. The new systems that are required to ensure transparency and accountability will come under particular scrutiny.

Prospects are good for a better Despite the poor rains of the last two years, which have been compounded by harvest in 2003 bad government policies to cause two consecutive years of famine, the prospects for the 2003 crop appear reasonable. Distribution of starter packs, which provide smallholder farmers with hybrid seed, and in most instances some type of legume crop, has been on a much wider scale than in the last few years (under what is now called the Targeted Input Programme). Around 3m farmers currently receive starter packs, compared with only 900,000 in 2001. Good early rains, particularly in the Southern region, are supporting expectations of an improved crop. In fact, although the early rainfall pattern has been patchy in some areas, the temporal distribution has been ideal for early and fast crop establishment while also enabling the full take-up of fertiliser (where applied) without the leaching out experienced during heavy rains. It is currently likely that some green maize will be available by the end of January.

Given the better availability of donor maize this season, there will be less pressure to eat the green maize instead of holding it until it is dry for future storage and this bodes well for the building up of future reserves. Against this brighter outlook, there are two potential threats to the next maize crop. The first is the impact of the expected El Niño weather phenomenon. Although the El Niño is expected to be relatively mild, previous El Niños have caused dry spells in the first quarter of the year, disrupting the rains that are vital for the maize crop. The second factor that may affect maize production is the government’s maize-price subsidy. Although this subsidy is politically expedient, particularly in urban areas, it does little to encourage smallholder farmers to produce a surplus for sale.

The outlook for the tobacco The outlook for Malawi’s main export crops is uncertain at this stage, as this is harvest is encouraging dependent on the adequacy and timeliness of the rains. There are indications that the 2003 tobacco crop, the source of around 60% of export receipts, will be better than the 2002 crop. This projection is based partly on the expected collapse in tobacco production in Zimbabwe—which the Economist Intelligence Unit forecasts will be 75m kg in 2003, compared with 234m kg in 2000—caused by the government’s mishandling of the land redistribution programme and the increased focus on Malawi and its neighbours as an alternative source of tobacco. Improved (though still poor) prices for burley tobacco in 2002 are also likely to encourage increased plantings, particularly as the resumption of the starter pack programme and the greater availability of maize will make rural farmers less anxious to produce maize to satisfy their immediate food requirements. Although Zimbabwe was a minor producer of burley tobacco—the main type of tobacco grown in Malawi—Zimbabwe’s tobacco estates were a major producer of flue-cured tobacco, which is of high quality and fetches more revenue than burley tobacco. Malawi has traditionally produced only a small fraction of the amount of flue-cured tobacco produced by Zimbabwe and even this had been declining. This decline is now being reversed and local agronomists expect production to jump to nearly 20m kg over the next few years, from 11m kg in 2002. The collapse of tobacco production in Zimbabwe has induced Malawi’s major tobacco merchants, Limbe Leaf Tobacco and Stancom, to move into production in their own right. In both cases, this has included taking over non- productive or non-performing estates, particularly those belonging to Press Agriculture and the former Kasungu Flue-cured Tobacco Association. In addition, the tobacco merchants have taken over the management of some privately owned estates and are providing finance to enable flue-cured growers to expand production and encouraging other estate owners to return to flue-cured production. Zimbabwean flue-cured farmers who have had their farms seized have been contracted to manage the estates on behalf of the tobacco merchants, and other farmers have also arrived in Malawi and taken leases on tobacco estates in their own right.

Tea output is up, although the The outlook for Malawi’s other leading cash crops is less good. The tea sector is sector is still struggling struggling with low international prices (we expect tea prices to continue falling in 2003), although those estates owned by foreign companies are still

performing reasonably well. The Mulanje area in the extreme south-west, which is a key tea producing district, has had continuous and good rainfall throughout the second half of 2002 and, as a result, has been able to continue production. In contrast, the adjacent Thyolo district has had limited rainfall over the period and production there has been poor to date. Higher production on the estates caused overall tea production for the first nine months of 2002 to increase to 31m tonnes, from 30.6m tonnes in the same period of 2001. An improvement in leaf quality has resulted in an improvement in prices fetched and total export revenue increased to US$12.1m in the first nine months of 2002, compared with US$10m in the same period in 2001. Macadamia is still an important area of diversification for the tea sector and will account for an increasing proportion of overall exports as more trees mature and start to bear fruit. The processing factory owned by Eastern Produce in Thyolo is being expanded to handle the expected increase in production and produce bought in from third parties.

Infrastructure

Food imports begin through Rehabilitation work on the rail link to Nacala in Mozambique, funded by the the Nacala corridor British and Canadian governments (October 2002, page 26) has been completed, allowing imports of food from Nacala to begin on December 2nd 2002. Nacala is the closest port to Malawi, but the rail link was badly damaged during the Mozambican civil war and attempts to revitalise it proved unsatisfactory until donors became involved in an attempt to expedite the entry of food imports into Malawi to tackle the current famine. Four new locomotives arrived in Nacala on November 19th and four more are due to be delivered by the end of January. The World Food Programme (WFP) believes that when all eight trains are in place, they will be capable of transferring 10,000 tonnes of food per month to Malawi, in addition to the 23,000 tonnes coming in via South Africa (through Zimbabwe and Mozambique). Management of the track and trains will be the responsibility of the Malawian and Mozambican governments. There are reports that one of the early trains came off the rails, so it may be some time before the WFP’s goal is achieved.

Foreign trade and payments

The World Bank approves a The World Bank approved a US$50m emergency drought recovery credit on US$50m recovery credit November 5th. The credit will not be used directly for famine relief, as relief agencies and the government are already covering this; instead, it will finance other essential inputs that have been sacrificed to fund food imports. Specifically, US$40m is to be spent on specific products to allow the government to continue to implement its poverty reduction strategy paper, such as agricultural inputs, equipment and spare parts, and school and medical supplies. US$8m has been allocated to public works programmes that will provide employment (and therefore incomes) in rural areas and the remaining US$2m will be used to finance technical assistance and research to strengthen the food security strategy. Of the US$50m, US$21m has been awarded as a grant and US$29m as an interest-free, 40-year loan. The World Bank estimated the total cost of crop failure at US$150m-180m.

In October the EU agreed to provide 90,000 tonnes of food aid worth €29m (US$29m). This is in addition to €16m distributed in the last quarter (October 2002, page 27) to support long-term food security. The EU gave a further €3m in early December 2002, which will be used to fund the milling and processing of 60,000 tonnes of maize.