Mozambique Malawi

COUNTRY REPORT

Mozambique Malawi

3rd quarter 1996

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Summary

Mozambique, Malawi 3rd quarter 1996

July 24, 1996

Mozambique Political and economic structures Pages 2-3

Outlook: Despite modest cooperation between political parties, there is renewed potential for unrest in the run-up to next year’s local elections. Stability will be crucial if renewed investment interest and aid inflows are to be maintained. Pages 4-5

Review: Divisions within the ruling Frelimo party have become increasingly apparent, heightening tensions between Frelimo and Renamo. Religious tensions, too, have come to the fore. Donors have supported the government’s economic policy, but have encouraged more action against corruption and further measures to improve the private-sector operating environment. Mozambican businesses have complained of excessively restrictive macroeconomic policies. The agricultural harvest has proved to be the largest for many years. There has been interest in the Maputo Corridor and other investment opportunities, but the external sector remains in deficit. Pages 6-15

Malawi Political and economic structures Pages 16-17

Outlook: With the end of the coalition with AFORD, the UDF is short of a parliamentary majority but should be able to maintain effective government. Real GDP growth is forecast at 5% this year and 3% in 1997. Pages 18-20

Review: AFORD has withdrawn from its coalition with the UDF although some of its ministers have remained in the government. The prospects of AFORD and its leader, Chakufwa Chihana, have worsened, while the MCP has gained in credibility. The government has continued with its reforming agenda, although its commitment to fiscal restraint is not proven. The finance minister is optimistic on GDP growth and eager to accelerate the programme of privatisation. The kwacha has been stable. David Whitehead is for sale. Bumper harvests have brought relief to farmers and consumers alike. Leading donors have again endorsed the government’s management of the economy. Pages 20-26

Statistical appendices Pages 27-30

Editors: Gregory Kronsten; Noah Beckwith All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 2 Mozambique

Political structure: Mozambique

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 Assembleia Nacional (parliament) elected by direct, universal adult suffrage every five years

Last elections: October 1994 (legislative and presidential)

Next elections due: 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 are 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 economic & social affairs Eneias Comiche defence & security affairs Almerindo Manhanze parliamentary affairs Francisco Madeira

Key ministers agriculture & fisheries Carlos Agostinho de Rosario culture, youth & sports Matheus Katupha education Arnaldo Nhavoto foreign affairs Leonardo Simao health Aurelio Zilhao industry, commerce & tourism Oldemiro Baloi interior Colonel Manuel José Antonio justice José Ibraimo Abudo labour Guilherme Mavila mineral resources & energy John William Kachamila national defence Aguiar Mazula planning & finance Tomás Salomão public works & housing Roberto Costley White social action coordination Alcinda Abreu state administration Alfredo Gamito transport & communications Paulo Muxanga

Governor of the Banco de Moçambique Adriano Maleiane

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Economic structure: Mozambique

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a GDP at market prices MT bn 2,056.3 3,125.8 5,843.4 8,652.1 12,600.0 Real GDP growth % 4.9 –0.8 19.3 4.8 3.0 Consumer price inflation % 50.1 58.8 49.8 52.5 40.0 Population m 14.4 14.8 15.6 16.6 16.9 Exports fob $ m 162 139 132 150a 169 Imports cif $ m 899 855 955 1,019a 784 Current accountb $ m –738 –739 –825 –870a –684 Total external debt $ m 4,486 4,934 5,012 5,491 5,518 External debt-service ratio % 17.6 17.9 27.2 23.0 24.0 Cashew nut productionc ’000 tons 31 54 24 29 27 Raw cotton productionc ’000 tons 40 50 47 49 n/a Prawn production ’000 tons 7.7 6.8 7.3 6.6 n/a Exchange rate (av; MT:$) 1,434 2,517 3,874 6,039 9,024d

July 19, 1996 MT11,141:$1

Origins of gross domestic product 1993 % of total Components of gross domestic product 1993 % of total Agriculture 26.5 Private consumption 70.2 Industry & fisheries 15.1 Government consumption 16.8 Construction 10.6 Gross domestic investment 65.5 Transport & communications 14.4 Exports of goods & services 21.3 Commerce & others 33.4 Imports of goods & services –73.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1993 $ m Principal imports 1990 $ m Prawns 68.8 Consumer goods 337.8 Cotton 11.1 Equipment 200.7 Cashew nuts 8.2 Raw materials (excl oil) 159.5 Copra 2.5 Oil & products 95.9 Spare parts 83.6

Main destinations of exports 1993 % of total Main origins of imports 1993 % of total Portugal 17.1 France 12.1 Spain 16.1 USA 8.7 India 9.2 Saudi Arabia 6.7 Japan 8.3 Zimbabwe 6.3 a Official estimates. b Excluding transfers. c Marketed production. d Actual.

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Mozambique

Outlook

The pattern is set— The political themes which are set to dominate the coming quarters into early 1997 are clear. The ruling Frente de Libertação de Moçambique (Frelimo) will remain intact, but discontent within its ranks will become more pronounced; a split is unlikely at the moment. The squabbles between Frelimo and the Resistência Nacional de Moçambique (Renamo) will also persist. Some issues such as dual administration and the refusal by Renamo to allow state appointed teachers into certain central districts will be gradually resolved by compromise. Others, namely government interdiction of Renamo representatives on state bodies like the new national defence and security council (CNDS; see The political scene), will remain unresolved so long as Frelimo refuses to consider a government of national unity. In addition, the Frelimo- Renamo quarrel over increasing Christian/Islamic tensions will persist.

—and the instability is Slow and uneven economic growth and the lack of a coherent and popular confinable— government programme mean that a variety of social, religious and political tensions will challenge the rhetoric of peace and democracy. Banditry on the roads will preserve an atmosphere of uneasiness. Groups of the “forgotten” will protest, some causing more disruption than others. The victims of Operação Produção, in which young men caught without proper identity and work papers were rounded up and dispatched to distant state farms in the early 1980s, are reminding people that their return to the capital, Maputo, has yet to be arranged. Many demobilised soldiers are increasingly vocal in their demands for better treatment, now that their demobilisation payments have ceased.

Religious tension between Christians, especially Roman Catholics, and Muslims is likely to intensify. The churches are concerned that the government is favouring prominent Islamic groups and fear that external Islamic influence is growing. Whether this amounts to the beginnings of Islamic fundamentalism or not remains to be seen. However, religious tensions, latent during col- onial rule and the first 15 years of independence, have plenty of scope to grow more extreme.

—at least until the 1997 The present political climate is unlikely to change significantly until campaign- local elections ing begins in earnest for local elections, which will probably go ahead in 1997. From early next year political differences are likely to intensify, as Renamo seeks to capitalise on its perceived advantage in the populous centre of the country. Wherever Renamo is successful in local elections, the issue of dual administration that has dogged the transition to peace will be prominent. However, that does not preclude actual cooperation between Frelimo and

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Renamo representatives at the local level, which is often closer than national leaders would have it be.

Mozambique expands its Despite being one of the world’s poorest economies, Mozambique has enor- horizons— mous potential for rapid “catch-up” growth, which, if it materialises, could ameliorate some of the underlying social and political tensions. After years of war, economic stagnation and disinvestment, the country’s leaders are trying to exploit Mozambique’s natural resources and capitalise on its strategic coastal location. There is renewed hope for prudent policy-making and a revival of international business interest. A 5% annual rate of real GDP growth is targeted for 1996-98, and that figure excludes the contribution and potential knock-on effects of large-scale energy projects. Grand projects, such as the power link from Cahora Bassa to South Africa, a natural gas link from Inhambane Province to South Africa, an aluminium smelter plant and the much-discussed Maputo Corridor plans, are tangible evidence of increasing activity, whatever frustrations might delay their implementation. These projects should stimulate international private investment and could eventually boost export earnings significantly.

—although it is hampered Nevertheless, the Mozambican economy is still plagued by massive infrastruc- by a familiar policy tural and institutional weaknesses, exacerbated by an extreme external debt framework burden, and an awkward dependence on international donors and financial institutions. The road from present economic distortions and bottlenecks to the speedy growth promised by increased investment will supposedly be trav- ersed via standard policy reforms such as liberalisation of the private sector, the promotion of market economics and the pursuit of internal and external Gross domestic product macroeconomic balance. The reform process is already very well entrenched % real change, year on year and has gathered momentum since 1987, although the reforms remain diffi- Mozambique Africa cult to implement and their feasibility is often questionable. 20 There is evidence of gradual change, however. For example, while foreign aid 15 inflows remain vast, they are projected to decline in importance. Nonetheless,

10 the currents of continuity are strong enough to retard progress away from indigence and aid dependence. Private-sector interest, even enthusiasm, and 5 (a) actual investment are two different things. Hopes pinned on the Maputo Corridor may be too optimistic. Export earnings will increase (it would be 0 difficult for them not to), but this will not happen overnight: the relatively -5 encouraging export performance of 1995 was more attributable to favourable 1990 91 92 93 94 95 (a) Official estimate. movements in international prices than to genuine export growth; and it will Sources: EIU; IMF, International Financial Statistics; World Economic Outlook. be several years before the mega-projects such as the Gencor scheme to set up an aluminium smelter are operational. Moreover, even if Mozambique gets the best available terms for rescheduling its external debt of more than $5bn, it will still be saddled with a high debt-service ratio.

Performance targets are The government’s Policy Framework Paper for 1996-98 sets out targets for the laid out for 1996-98 main indicators. The economy, according to the framework paper, is on course for real annual growth of non-energy GDP of 5%; it is striving to cut inflation dramatically to a year-on-year rate of 10% by the end of 1998 and is hoping to accumulate gross international reserves equivalent to four months of import cover by the end of that year.

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Review

The political scene

Tensions persist within Amid ambitious plans for the economy, the country is struggling with the Frelimo— tensions endemic to political transition; tensions between the ruling Frente de Libertação de Moçambique (Frelimo) and the former rebel Resistência Nacional de Moçambique (Renamo) over institutionalising the peace; between Frelimo as a party and the Frelimo members of government; and widespread social, material, religious and political tensions throughout the country.

Schisms within Frelimo are nothing new, although after several years of relative cohesion in the 1970s and 1980s the party is perhaps returning to its roots as a coalition of broad interests. Internal differences have been sharpening for some time, however. In the past quarter the party’s Central Committee re- buked the government for failing to consult the party on reforms and for getting its priorities wrong. The committee is adamant that the government must focus on absolute poverty and employment generation. Its final com- muniqué opposed wholesale privatisation of the economy and warned that macroeconomic policies would lose all legitimacy if they were out of touch with the average Mozambican’s experience. Moreover, the statement rejected the pursuit of low inflation for its own sake, pressing the government for an equal if not greater commitment to stimulating economic growth. Much of the document represents a resounding critique of the direction of government economic policy. The tone of the document also caricatures some of the divisions within Frelimo itself. Several foreign agencies in Maputo, for example, see the issue in terms of a simple contest between hard-line socialist “dinosaurs” and the emergent technocrats of the cabinet. In reality, the tensions are more complex: some of those so-called technocrats are not necessarily fully dedicated to the policies they are urged to espouse in joint government, World Bank and IMF documents.

—between Frelimo and Not surprisingly, the construction of an acceptable set of institutions to under- Renamo— pin the peace remains elusive. The constitution envisaged an advisory role for the newly created national defence and security council (CNDS), but Renamo complains that the body ought to reflect the 1992 General Peace Accord and that its representatives should be included as well as those of Frelimo. The Frelimo general secretary, Manuel Tome, suggested that the composition of the CNDS could be altered, but not to the extent that the peace accord, essentially a temporary institution itself, might unduly relegate the constitution. Other Frelimo members take a harder line and insist that appointing opposition representatives to the CNDS would be tantamount to introducing a government of national unity by the back door, something Frelimo has insisted it is under no obligation to do.

Echoes of the dual administration row are evident in most sectors, not least education. In April Renamo was threatening, not for the first time, to expel teachers appointed by the national education ministry from areas principally within Renamo control, notably in various districts in Sofala Province. This

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was a reaction to government resistance to the incorporation into the system of teachers with a Renamo background but with allegedly inferior training and experience. By mid-June the minister of education, Arnaldo Nhavoto, was claiming that conditions were set for construction of schools in former Renamo zones. The Maputo daily newspaper Notícias at the same time reported that some 400 teachers who were under Renamo control during the war had been integrated into the national education system.

—and between the The demobilised troops are another group which feels its interests have been government and overlooked in the post-war settlement. Demonstrations and roadblocks are not demobilised troops uncommon, some of them sinister. The association of demobilised soldiers (Amodeg) has encouraged only peaceful protest action, following rioting in Alto Molocue (Zambezia Province) and Beira (Sofala Province), among other regions, but mutinies and protests have persisted, including one demon- stration by a group of more than a hundred demobilised soldiers in Machava, close to Maputo, in late May.

The armed forces are a Renamo’s attempt to make an issue out of reorganising the top leadership of the bone of contention new post-war armed forces backfired in April. Renamo alleged that the former rebel senior commander, Lieutenant-General Mateus Ngonhamo, was to be de- moted to allow the chief of staff, Lieutenant-General Lagos Lidimo, to enjoy superiority of rank. Lieutenant-General Ngonhamo was unmoved by Renamo’s support and argued that his first loyalty now was to the national army, not to the Renamo political leadership. The potential embarrassment of a demotion was, in any case, avoided by the easier measure of promoting Mr Lidimo.

The role of the new army, the Forças Armadas de Defesa de Moçambique (FADM), remains unclear. Two issues that might engage its newly trained offi- cers are the banditry on the country’s roads and the containment of the elusive so-called Chimwenje armed group roaming and occasionally marauding in central districts close to the Zimbabwean border. The two governments, in an attempt to facilitate crossborder movement, are cooperating to monitor the activities of Chimwenje. Joint police operations are intended to assess the group’s strength, whose precise identity and objectives are unknown, although it is assumed that it comprises Zimbabwean rebels and a few former Renamo guerrillas.

The influence of Islam is A bill to make official public holidays of two major Islamic sacred days has of growing concern stirred up religious antagonism between the country’s Roman Catholic leadership and Islamic leaders. The Roman Catholic Church, with the support of the Council of Christian Churches, issued an appeal in late April denouncing the alleged “Islamicisation” of Mozambique. The appeal has drawn sharp criticism from the Islamic community. Renamo, seizing on any opportunity to oppose the government, also came out against the bill, with familiar ominous warn- ings, this time about a potential religious war in Mozambique.

The backing of the president, Joaquim Alberto Chissano, for this bill highlights one of the dilemmas facing Frelimo: the party is keen to gain the trust and votes of Islamic communities throughout Mozambique, especially given that local elections will probably go ahead during 1997, but any overt measures

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favouring Muslims will anger influential Christian groups. It has not yet reached an impasse, but the government has been perceived to be tactless in the matter. Moreover, the bill has been discussed against a backdrop of agree- ments with Islamic states which appear to offer political and economic foot- holds in Mozambique. There is little genuine evidence of a spread of Islamism as such, although non-Muslims are watching events closely.

Mozambique participates After joining the Commonwealth at the end of 1995, a move criticised by in a new lusophone certain Portuguese and Mozambicans, the country is now deeply involved in community the foundation of a new community of Portuguese-speaking countries, the Comunidade dos Países de Língua Portuguesa (CPLP). Seven lusophone foreign ministers met in Maputo in April and agreed to a set of principles and objectives for the community, to be inaugurated officially in Lisbon in July. The members are Angola, Brazil, Cape Verde, Guinea-Bissau, Mozambique, Portugal and São Tomé e Príncipe. Within Mozambique, the creation of this new international grouping is popular among the establishment, although the Roman Catholic Church remains opposed to membership of the Commonwealth.

Economic policy

Donors back policy The government, the World Bank and the IMF have cooperated on a new intentions— Policy Framework Paper (PFP) for 1996-98. In mid-April this document was presented to the Paris meeting of the Consultative Group of some 30 donors to Mozambique. The net effect of the meeting is that donors have pledged $881m in support for 1996: $314m is designated as debt relief, and the government hopes to secure a more magnanimous reduction of its debt at the upcoming Paris Club creditor meeting (see Foreign trade and payments). The balance is split between investment, balance-of-payments support, food aid and miscel- laneous other programmes, all of it taking the form of either grants or soft loans. Meanwhile, the government is negotiating a third economic recovery credit (TERC) with the World Bank, to take over once the third tranche of the second credit (SERC) is disbursed later this year. These credits follow the origi- nal Structural Adjustment Facility (SAF) of 1987-90 and the Enhanced Structural Adjustment Facility (ESAF) of 1991-95.

—but wield the stick to At the Consultative Group meeting, donors applied the familiar carrot and speed the process stick treatment. The government’s commitment to reforms was lauded, and Mozambique was even hailed as an example to the rest of Africa of successful transition from war to peace. But there was also heavy pressure to speed up the last stages of the privatisation programme, to accelerate regulatory changes to facilitate private-sector business development, and to reallocate public expenditure away from defence and security towards health and education. The key criticisms were that the government is still not doing enough to eradicate corruption and that it is far too slow in improving the climate for private-sector investment. While the corruption problem is widespread, there is particular concern about high-level collusion with drug-smuggling. The Netherlands, among others, pressed the government to raise the profile of its anti-corruption campaigns.

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Industry does not find the Meanwhile, representatives of the business sector in Mozambique were com- environment enabling— plaining about policy priorities. A memorandum, which was signed by groups such as the Commercial Association, the Private Farmers’ Association, the Industrial Association, the Cashew Industry Association and the Hotel and Tourism Association, argued that privatised businesses bought on credit by Mozambican capitalists are stagnating for lack of financial resources, and that deflationary policy measures are too tough.

—but credit policy is, if Notwithstanding this, the government, and in particular the planning and anything, to be finance minister, Tomás Salomão, is adamant that stabilisation measures must tightened— come first. Monetary policy is certain to be tightened further, given the failure to achieve stabilisation in the 1987-96 period. The difficulties in implementing a contractionary monetary policy have been formidable, and there is a renewed effort to this end. While it is hoped in the PFP that the government will be able to increase its own repayments to the banking sector, monetary restraint will have to be effected by careful containment of private-sector credit.

—if the clearing banks can One of the key means by which policy designers hope to impose some disci- be disciplined pline on the financial system, however, is running into difficulties. Prior to the Consultative Group meeting, it was hoped that the two state-owned clearing banks, the Banco Comercial de Moçambique (BCM) and the Banco Popular de Desenvolvimento (BPD), would be privatised quickly. The plans had to be shelved as potential buyers were unenthusiastic, with just the Portuguese Banco Mello showing any interest, and that solely in the BCM.

Policy proliferation could In addition to monetary and fiscal restraint, the PFP contains almost 40 be part of the problem “objectives and policies”, each supported by one to three “strategies and measures”. The fundamental objective of the paper is to achieve “poverty-reducing economic growth”. The key policies are aimed at progressing with privatisation and introducing greater liberalisation measures in transport, tourism and agriculture. It is noteworthy, however, that all these policy objectives have been prevalent for almost a decade now, with a growth rate that, emerging from the desperately low economic base of the mid-1980s, has been only modest and hesitant. Mozambique, with its institutional sluggishness, appears to typify the overly complex reform programmes and insufficiently ambitious growth hopes that the internationally renowned US economist Jeffrey Sachs has in mind when he criticises World Bank and IMF programmes in Africa. There are, of course, grounds for criticising Mr Sachs’s analysis of economic growth and his policy recommendations, but some of his criticisms may be justified.

The economy

The economy grew by 3% Variable information lags mean that only a partial picture of actual economic in 1995— activity is available. Some indicators of this year’s activity and some still preliminary figures for 1995 are filtering through. Real GDP grew by an official, though preliminary, estimate of 3% in 1995, with the productive sectors ex- panding and government expenditure on services contracting. Behind this contraction was a reduction in foreign budgetary finance. Expenditure cuts had

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to be sharper than anticipated because of the government’s failure to raise revenue by a sufficient amount.

—despite another year of Year-end inflation was 55% in 1995, which, although lower than the previous missed targets— year’s figure (70%), was disappointing when compared with the target of 24%. The expansion of broad money in 1995 was 56%, most of it due to increased credit in the economy; and this in turn was mainly a function of the BCM and BPD failing to keep to credit ceilings.

—and a sluggish response Underlying the improvement of the current account in 1995 was a reduction of to export orientation imports and a favourable shift in export prices. Neither of these can be viewed as long-term trends. Although the 23% decline in imports (to $784m) represents the end of special programmes and lower foreign aid inflows, in the long term Mozambique must strive to sustain rising imports if it is to grow rapidly. All the more reason, therefore, why increased export volumes should form the basis of higher export earnings, since prices cannot be relied upon to rise regularly. The picture was uneven for the main commodities: prawn export earnings increased by 16.5%, despite a 4.1% drop in export volume; cotton export earnings rose by 4.4%, but there was a 2% fall in the volume exported. Cashew exports, however, began to show signs of recovery. Overall, the current-account deficit, excluding transfers, declined by almost $200m to $684m (or 145% of exports of goods and services).

There is room for modest Indicative figures for activity in 1996 are not straightforward, although with optimism in early 1996 regard to agriculture it is clear that the 1995/96 harvest has been healthier than in recent years, with a 22.4% increase in cereal production, and within this a 29% increase in the maize crop. Other economic developments involve big investment plans and privatisation measures. As mentioned above, the privatisation of the two state-owned clearing banks has stalled. The PFP envisaged that eight more companies would be floated by mid-1996, with a further eight to be offered for sale each half-year period thereafter: this would have meant that the privatisation programme could be completed by late 1997, making for one of the most comprehensive and rapidly implemented programmes in Africa. Lactacinos, a Maputo-based milk-processing company, was recently sold off to combined Portuguese and Italian interests. Pressure from the US Agency for International Development (USAID) and the World Bank to privatise the oil company, Petromoc, the ports and rail company, Caminhos de Ferro de Moçambique (CFM), and the troubled national airline, Linhas Aereas de Moçambique (LAM), is intensifying; however, government policy statements will only commit to a major restructuring at this stage. CFM, in particular, could be run successfully if various functions are contracted out; indeed, this is to some extent already working quite well.

Agriculture

A record This year’s harvest was the best on record since independence in 1975. The post-independence harvest latest estimate of the UN World Food Programme (WFP) puts the 1995/96 grain is produced— crop at 1.33m tons, thus nearly meeting the total grain requirement of 1,626,000 tons. The bulk of the shortfall is accounted for by wheat and rice

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requirements: the country does not grow wheat, and its rice crop is regularly insufficient. The distribution of this output has been typically uneven: the best marketed surpluses came from the northern provinces of Nampula, Cabo Delgado and Niassa, smaller surpluses were produced in the central provinces of Zambezia, Manica, Sofala and Tete, while the south’s contribution was typically lower. The overall harvest would have been better still were it not for the severe floods that destroyed crops in some river valleys early in 1996.

—but size is not everything The perennial problem of linking the northern surpluses with the grain short- falls in the south is compounded by what some allege to be excessively high producer prices fixed by the state. The WFP argues that the combination of high producer prices and high transport costs (including port and shipping costs since road links are poor) means that grain from Montepuez district in Cabo Delgado would cost the equivalent of at least $240/ton in Maputo, compared with the $165/ton offered for South African grain (including transport- ation costs). Good harvests throughout much of Southern Africa after exceptional rains mean that the WFP could well act on its threat to buy from Mozambique’s neighbours. Meanwhile, high producer prices are likely to ren- der the parallel market more attractive.

Cashew replanting gets One of the biggest cashew interests, the Portuguese company João Ferreira dos going Santos, is promoting the planting of cashew trees in Nampula Province with USAID funding. The plan is to replace trees felled by Cyclone Nadia in March 1994, and to plant 1.6 million trees, including a dwarf species imported from Brazil, with a grafting technique designed to produce a nut crop within two to three years rather than the usual nine years. The newest processing plant has been opened in Nacala by the Companhia de Cajú de Nacala, whose majority stakeholder is the Entreposto group, a Portuguese interest with widespread and long-established interests in Mozambique, including automobile importing. This plant has been reopened after costly rehabilitation, and it represents the complete privatisation of the cashew-processing industry. Having sold all of its interests, the government is presently busy dismantling the protective policies which have supported this segment of industry. The World Bank is extremely enthusiastic about this (2nd quarter 1996, page 10). The head of Entreposto has criticised this new policy as a case of “liberal fundamentalism”.

Land policy becomes In early June a national land conference took place, its deliberations feeding clearer— into draft legislation which aims to introduce greater clarity and tenure security into land holding. It is envisaged that individuals, companies and communities will be able to acquire land rights. Rural communities will automatically acquire rights according to customary systems. Others will have to apply for rights, which will only be granted after consultation (in principle, at least). Although the phrasing of the draft legislation is coy, it is clear that there is also provision for the beginnings of a land market, as land titles can be traded once secured.

—and South Africans trek The legislation will soon be tested by land disputes. Some of these may well north to Niassa centre on the allocation of free land rights for 50 years to large numbers of white South African farmers in Niassa Province. Between 300 and 1,000 of

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these farmers are expected to settle in Niassa over the next year, in accordance with a deal signed between the governments of Mozambique and South Africa in May. In return for granting land leases, the Mozambican government has secured South African assurances that Mozambican miners working across the border will receive good treatment, as Pretoria reacts to rising anti-immigrant sentiment with new legislation. Mozambique also clearly hopes for benefits in terms, inter alia, of grain self-sufficiency, increased agricultural exports and eco-tourism projects. Life will not be easy for the South Africans: there are still landmine worries, land disputes, poor infrastructural links and political opposition from some groups, including Renamo. Moreover, there is nothing to suggest that these particular South Africans are at the cutting edge of successful farming enterprise. There are also questions as to where the estimated $800m in funding required for road repairs will come from.

Transport and communications

Investors are called on to The Maputo Corridor continues to be the focus of attention. The South African construct the Maputo and Mozambican governments jointly hosted a Maputo Corridor investors’ Corridor conference in Maputo in May. The key to the whole plan is the Mozambican government’s insistence that 90% of the financing must come from the private sector. Consortia are springing up, tenders are being launched and interest is being shown. The governments have set up a team to assess incoming bids, for example, to build the toll road from Witbank (east of Johannesburg) to Maputo. The ABSA banking group in South Africa and Sumitomo of Japan are reported to be backing a consortium of South African and Mozambican firms to build the road. The other key component of plans for the corridor is the dredging of Maputo’s harbour to allow depth for larger ships. The state-owned Emodraga of Mozambique has signed an agreement with a South African firm, Pentow Marine, to set up a joint venture to undertake the dredging job; the EU is reported to be committed to funding this work. In addition, there are other components, such as upgrading the rail connections and setting up joint ventures, to manage the railways between the two countries.

The Maputo Corridor plan essentially involves:

• improving existing road and rail links;

• adding toll-road sections to shorten the link between Maputo’s port and South Africa’s industrial region of Gauteng;

• increasing telecommunications provisions along the link;

• providing a one-stop customs post at the border;

• generating infrastructure spurs (for example, to Nelspruit in South Africa’s Mpumalanga Province); and

• producing longer-term indirect development spin-offs for Mozambique.

The corridor may produce Other countries, such as Swaziland and Botswana, may also in time be included offshoots in the transport and development plans, while others like Namibia are unsett- led by the implications of the corridor for potential losses of activity. Judging

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Mozambique 13

by the documentation prepared for the investors’ conference, the potential for generating employment and investment opportunities, for dramatic increases in Mozambican export earnings and for reductions in migration to South Africa is considerable. This grand scheme appears to be evidence of the elusive “peace dividend” between Mozambique and South Africa; but it is probably more to do with the South African peace settlement than Mozambique’s. It remains to be seen whether the profits and employment opportunities generated by the corridor accrue evenly to both parties.

Meanwhile, a new South African tax of 125% on transit merchandise appears to have encouraged Southern African traders to use the ports of Maputo and Beira, regardless of the corridor’s status. Transit traffic through these ports appears to have risen significantly in the first half of 1996. This follows a 26% increase in cargo handling at Mozambican ports in 1995.

Transport parastatals are While the ports and rail company, Caminhos de Ferro de Moçambique (CFM), under pressure to change may yet escape privatisation by pressing on with restructuring and establishing leasing arrangements under various joint ventures, such as for the operation of Maputo’s citrus terminal, it seems unlikely that the national airline, Linhas Aereas de Moçambique (LAM), will be able to withstand pressure for it to be sold off. Indeed, LAM is currently on the list of parastatals for sale in the Unidade Técnica para a Reestruturação de Empresas (UTRE). Meanwhile, Sabin Air of Mozambique has begun to compete with LAM on the busy Maputo-Beira route and to provide the first scheduled flights to the tourist destinations of Vilankulos, Inhaca island and Ponta do Ouro.

Energy and minerals

South Africans plan to It is possible that the South African mining house Gencor may set up a vast build a big aluminium aluminium smelter either in Maputo or in Beira. The plant would take advan- smelter— tage of abundant cheap electricity generated by Mozambique’s Cahora Bassa dam. Production capacity could increase from an initial 245,000 tons/year (t/y) to 490,000 t/y if all goes well. Feasibility studies are under way for a project that would cost upwards of R4bn ($900m). Gencor is the main investor in the Hillside smelter in South Africa’s KwaZulu-Natal Province, which produces more than 400,000 t/y.

—requiring a new dam on An aluminium smelter in Mozambique may overload Cahora Bassa’s existing the Zambezi river capacity, and Hidroeléctrica de Cahora Bassa (HCB) is contemplating the construction of an entirely new dam at Mpanducua, 80 km downstream from the Cahora Bassa dam. While a new power plant on the north bank of the Zambezi river at Cahora Bassa is being considered, rehabilitation of the power lines from Cahora Bassa to South Africa is under way, with power flowing south again probably by March 1997 and export earnings reaching Mozambique from June 1997 to the (potential) tune of $100m a year.

Pande gas talks drag on Negotiations over the Enron deal to develop the Pande natural gasfield and to construct a pipeline from there to South Africa are still not fully resolved (2nd quarter 1996, page 12). The sticking point is in the details of the deal,

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 14 Mozambique

whereby South Africa’s Industrial Development Corporation (IDC) would become the guaranteed “anchor” customer for the gas.

Foreign trade and payments

Tourism is targeted as a Among the flurry of investment pledges and indications of interest, a number foreign exchange earner of companies have focused on Mozambique’s considerable tourism potential. Again, the country is likely to benefit from change in South Africa, which boasts the world’s highest growth in tourism. The Mozambican government has recently made the tourism tax regime simpler and less imposing: the tourist tax rate has been reduced from 23% to 13% (mainly accounted for by slicing off much of the circulation tax on tourism receipts). Improvements are under way or are in the pipeline in the Bazarutto Islands/Vilankulo area of coastal Inham- bane Province. There are also plans afoot to resuscitate the country’s game parks, including the Maputo elephant park, the Chimanimani reserve in Manica Province and a new park next to South Africa’s Kruger Park.

Customs are privatised One of the cornerstones of the government’s commitment to eradicating corruption and improving the recording (and taxing) of trade is the reform and privatisation of customs and excise. In July it appeared certain that the tender would be awarded to a UK company, Crown Agents. In June the planning and finance minister, Tomás Salomão, removed the national director of customs, Tomás Mazembe, from his post. Meanwhile, another UK-based company, Inchcape Testing Services, has taken over pre-shipment inspection services in Mozambique.

Debt service may be Mozambique’s external finances may have begun the long climb out of the clipped trough of imbalance. Export earnings were up in 1995, but official statistics still inadequately reflect actual foreign sales (1st quarter 1996, page 12). Some of the grandiose investment projects in train, being negotiated or being considered could eventually generate dramatic increases in foreign exchange earnings. Clearly, Mozambique is still far from overcoming its international debt burden or covering its rising import needs, but it is conceivable that the burden will be significantly reduced. An upcoming meeting of the Paris Club of official, bi- lateral creditors was expected to treat favourably the debt predicament of what remains, by international ranking, the poorest country in the world. The appli- cation of Naples Terms (67% reduction of net present value) should see actual annual repayments dropping, but it may still be some years before scheduled debt-service payments drop below 20% of export earnings. Only when actual repayments fall below 10-15% of the value of exports of goods and services will Mozambique quit the ranks of the “severely indebted low-income countries” on World Bank criteria.

Independent of the Paris Club negotiations, the Netherlands and Denmark have led an initiative to set up a fund dedicated to assisting Mozambican debt servicing. However, there remain awkward historical tangles in debt relations, chiefly the outstanding debt to the former Soviet Union. Mozambique accepts its commercial debt obligations, but rejects military debt liability to the former Soviet Union.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Mozambique 15

Impact of debt restructuringa ($ m) 1996 1997 1998 1999 2000 Total debt service 407.4 452.5 570.7 552.0 721.3 After debt restructuring 147.6 207.5 295.4 350.0 401.7 Total debt stock 5,699.8 6,035.9 6,308.9 6,468.9 6,381.3 After debt restructuring 5,033.3 5,459.5 5,845.9 6,081.8 6,125.4

a Assumes flow rescheduling under Naples Terms for 1996-2000, including arrears and topping up of the concessionality on previously rescheduled debt service under Toronto Terms; assumes comparable treatment by non-Paris Club creditors.

Source: Government of Mozambique, Policy Framework Paper for 1996-98.

Clamping down on If the government is to secure the most advantageous debt reduction and corruption may be the key rescheduling deals, it clearly must keep creditor and donor governments, and the World Bank and the IMF on its side (little of the debt is contracted with private commercial lenders overseas). Hence, the debt negotiations are affected by the same pressures as the Consultative Group meeting, and high among them is the issue of corruption. Certain major donors were adamant that the government was doing too little to check corruption, and major scandals need swift resolution. Sweden, for example, agreed to a new aid package after it was established that Mozambique would reimburse Swedish funds that went astray in a grant to the country’s seed and agricultural tool emergency programme.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 16 Malawi

Political structure: Malawi

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 177 seats, elected by direct universal suffrage for a term of five years

Last elections: May 1994 (presidential and legislative)

Next elections due: 1999 (presidential and legislative)

Head of state: president, elected by direct universal suffrage for a term of five years; currently Bakili Muluzi

National government: cabinet, chaired by the president; last major reshuffle June 1996

Political parties: United Democratic Front (UDF), the largest single party in the National Assembly with 85 seats in July 1996; Malawi Congress Party (MCP, 54 seats); Alliance for Democracy (AFORD, 33 seats); Malawi Democratic Party (MDP); Malawi National Democratic Party (MNDP); National Unity Party (NUP); National Patriotic Front (NPF); United Front for Multiparty Democracy (UFMD)

The government First vice-president & minister for defence Justin Malewezi (UDF)

Key ministers agriculture & livestock development Mapopa Chipeta (AFORD) commerce & industry Chakakala Chaziya (UDF) education Donton Mkandawire (UDF) energy & mining Dumbo Lemani (UDF) finance, economic planning & development Aleke Banda (UDF) foreign affairs George Ntafu (UDF) home affairs Wenham Nakanga (UDF) housing Tim Mangwazu (MNDP) information, broadcasting, post & communications Brown Mpinganjira (UDF) justice & attorney-general Cassim Chilumpha (UDF) labour & manpower development Kaliyoma Phimisa (UDF) lands & valuation Peter Fachi (UDF) local government & rural development Matembo Mzunda (AFORD) relief & rehabilitation affairs Richard Sembereka (UDF) transport & civil aviation Harry Thompson (UDF) works & supplies Abdul Pillani (UDF)

Governor of the Reserve Bank of Malawi Matthews Chikaonda

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Malawi 17

Economic structure: Malawi

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a GDP at market prices MK m 6,106 6,694 8,882 11,281 18,500 Real GDP growth % 7.8 –7.9 10.8 –12.4 9.5 Consumer price inflation % 12.6 22.7 19.6 34.7 83.3b Populationc m 8.70 9.02 9.30 9.60 10.00 Exports fob $ m 476 400 318 363 435 Imports fob $ m 416 415 340 521a 348 Current account $ m –209 –268 –102 –274 –77 Reserves excl gold $ m 153.2 40.0 56.9 42.8 110.0b Total external debt $ m 1,670 1,698 1,816 2,015 2,206 External debt-service ratio % 25.2 24.2 20.6 17.6 20.6 Tobacco production ’000 tons 118.5 136.1 133.2 97.6 130.2b Exchange rate (av; MK:$) 2.803 3.603 4.403 8.736 15.280b

July 19, 1996 MK15.34:$1

Origins of gross domestic product 1994 % of total Components of gross domestic product 1994 % of total Agriculture 31.3 Government consumption 22.7 Manufacturing 13.9 Private consumption 66.8 Utilities & construction 7.3 Gross fixed capital formation 11.0 Transport & distribution 17.4 Change in stocks 2.1 Government 15.6 Net exports of goods & services –2.7 Others 14.5 GDP at market prices 100.0 GDP at factor cost 100.0

Principal exports 1994 $ m Principal imports cif 1990 $ m Tobacco 250 Industrial 208 Tea 27 Plant & equipment 76 Sugar 26 Transport equipment 73 Coffee 15 Commodities 66

Main destinations of exports 1994d % of total Main origins of imports 1994d % of total USA 14.8 South Africa 41.3 South Africa 13.5 Zimbabwe 11.6 Germany 13.0 UK 7.1 Japan 11.7 Japan 6.9 a EIU estimates. b Actual. c Year-end, excluding Mozambican refugees. d Based on partners’ trade returns, subject to a wide margin of error.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 18 Malawi

Malawi

Outlook

In the confusion, the UDF Continued jostling and scrambling in the political arena is expected as a result of is well-placed— the collapse in early June of the coalition between the United Democratic Front (UDF) of the president, Bakili Muluzi, and the Alliance for Democracy (AFORD). A new political balance will be decided in the by-elections due (but not yet scheduled) for five vacant parliamentary seats. None of the three main parties have particularly strong ideological differences, so a variety of combinations of parties and personalities are theoretically possible. Confusion abounds as the UDF is four seats short of a clear parliamentary majority, but it can, for the moment, count on the votes of five AFORD cabinet members who have opted to stay in the coalition rather than give up their official positions. The UDF government can benefit from growing satisfaction and overall economic improvement as a result of the good rains and good harvests. It can reap rewards from the popular liberalisations and new freedoms it has ushered in to end the old autocratic rule of Hastings Kamuzu Banda. It also appears to have the support of the international donor community. Yet the party must prove to the public at large that it can deliver on its promises to improve standards of living and at the same time hold down the budget deficit. That may prove difficult for Mr Muluzi’s government to accomplish.

—but the MCP should be The UDF now faces stiff competition from the Malawi Congress Party (MCP). watched Managed by John Tembo, the party is growing in strength and confidence. With a secure core of support in the central region, the MCP is now seeking to attract renewed backers and to target the vacant parliamentary seats. The MCP is trying to have it both ways. It counts on unswerving support from its Women’s League and other loyal backers of the former president, while trying to portray itself as a thoroughly reformed and cleaned-up party ready to lead the new multiparty democracy that is Malawi today. The MCP has not come up with any new policies or alternative plans to manage the country, but the shrewd Mr Tembo appears successful in steering the party towards a new image. There may, however, be a split brewing in the party between Mr Tembo and the party’s ambitious vice-president, Gwanda Chakuamba.

Uncertainty beckons in AFORD is the main loser in this shift in Malawi’s political balance. Although its AFORD 33 parliamentary seats, centred in northern Malawi, are safe, the party has lost power and patronage with the dissolution of its coalition with the UDF. The AFORD leader, Chakufwa Chihana, is adrift as he does not hold a parliamentary seat. His autocratic leadership chafes many in AFORD, while others have lost respect for him as an unprincipled politician who has, in a short space of time, formed alliances with both the MCP and the UDF. Mr Chihana may well have difficulty in remaining at the helm of his troubled party.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Malawi 19

Good harvests will boost The good 1995/96 harvests reaped throughout Malawi will give a substantial the economy— boost to the economy. Bumper crops of maize, tobacco and cotton, as well as a number of other crops, should provide Malawi’s rural population with enough food to eat and crops to sell. Increased agricultural yields will boost other sectors of the economy, and the EIU’s forecast of real GDP growth of 5% this year stands unchanged, followed by 3% in 1997. Even with further good rains, growth in agricultural production is expected to slow next year, while investment in industry and services is set to remain sluggish on account of high interest rates. Despite some misgivings about economic mismanagement and corruption, Malawi continues to enjoy the confidence of its leading donors, and this will feed into spending on the infrastructure and welfare services.

Forecast summary ($ m unless otherwise indicated) 1994a 1995b 1996c 1997c Real GDP growth (%) –12.4 9.5 5.0 3.0 Consumer price inflation (%) 34.7 83.3a 40.0 20.0 Merchandise exports fob 363 435 440 430 Merchandise imports fob 521b 348 360 372 Current-account balance –274 –77 –44 –52 Average exchange rate (MK:$) 8.74 15.30a 15.50 16.80

a Actual. b EIU estimates. c EIU forecasts.

Gross domestic product Malawi kwacha: real exchange rate (c) % real change, year on year 1990=100 12 120 9

6 100 MK:R 3 MK:DM 0 80

-3 Malawi -6 60 Africa -9 MK:$

-12 40

-15 1993 94 95(a) 96(b) 97(b) 20 (a) EIU estimate. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 0 Economic Outlook. 1990 91 92 93 94 95 96(b) 97(b)

—but there are concerns There is growing concern about the ambitious targets set out by the finance, over government spending economic planning and development minister, Aleke Banda, when he pre- and inflation sented the budget at the end of March. Independent economists worry that the minister set an overchallenging target for reducing the budget deficit in 1996/97 (April-March) to 5.2% of GDP, down from the previous year’s 15%. Likewise, Mr Banda’s budget pledge to bring average inflation down to 20% this year sits uncomfortably with estimates from some local analysts that the rate in the first six months of 1996 was 50% compared with January-June 1995. There is also the danger that civil service demands for salary rises will be difficult to resist in the light of the cabinet’s recent decision to award ministers increases of 300%. The bumper grain harvests will, however, keep food price

increases down and help trim the average annual rate, from 83.3% in 1995, when it soared largely due to drought, to an estimated 40% this year.

Review

The political scene

AFORD pulls out of the After months of strained relations, the Alliance for Democracy (AFORD) has coalition— pulled out of the coalition in which it was a junior partner with the United Democratic Front (UDF) of the president, Bakili Muluzi. After repeatedly criticising the UDF, the AFORD leader, Chakufwa Chihana, resigned his position as second vice-president and minister of irrigation and water development on May 2. He accused the UDF of high-level corruption, lacking transparency and failing to uphold the principles of good governance. Mr Chihana claimed that he resigned to devote more time to work within his party. His resignation from the cabinet was followed on June 2 by the formal withdrawal of AFORD from the ruling coalition. This leaves Mr Muluzi and the UDF without a parliamentary majority. Of a total of 177 seats in the National Assembly, the UDF holds 85 seats, just four seats short of a majority. AFORD holds 33 seats while the Malawi Congress Party (MCP) has 54 seats. The remaining seats are vacant due to defections and deaths. The UDF is banking on its ability to garner the few seats it needs for a majority in the resulting by-elections and to poach some from AFORD.

—but some of its ministers The coalition split took place amid the confusion that has come to characterise sit tight— Malawi’s multiparty politics. While Mr Chihana and a majority of his party’s leaders agreed to dissolve the ten-month-old coalition with the UDF, three AFORD cabinet ministers and two deputy ministers decided that they prefer their lofty positions to being lowly parliamentary backbenchers. The votes of these renegade AFORD cabinet ministers give the UDF its needed parliamentary majority. AFORD is pressing in both the courts and in parliament to have the five rebels lose their National Assembly seats and to stand in fresh by-elections. In addition, its chief parliamentary whip, Webster Chomo, prepared a motion declaring that the five have effectively crossed the floor to become UDF members, thereby forcing new by-elections.

—placing in doubt the The effective defections of the AFORD cabinet members were followed by the party’s future— wavering of a few of the party’s MPs, who did not vote with their party in the National Assembly. Although Mr Chihana took the high ground by accusing the UDF of bad governance, the future of his party as a major political force is in question. It originally came into the ruling coalition from a position of weakness. In the elections of May 1994, despite an energetic nationwide campaign, AFORD failed to win any seats outside Mr Chihana’s home area, the poor and sparsely populated northern region. At first Mr Chihana took AFORD into a controversial alliance with its chief foe, the MCP, the party blamed by the people of the northern region for oppressing them for so long. Then the UDF wooed AFORD into a coalition, and Mr Chihana negotiated a deal at a

high price for the UDF. Mr Chihana was granted the post of second vice- president, and five of his party members were allotted full cabinet seats. The coalition was nonetheless questioned by some AFORD members because Mr Chihana had earlier painted the UDF as a merely warmed-up MCP, since Mr Muluzi and most other UDF leaders were previously members of the MCP in the one-party era.

—as well as Mr Chihana’s In the coalition Mr Chihana proved to be a prickly partner, so Mr Muluzi and leadership the UDF came increasingly to view the alliance with AFORD as expensive and unnecessary. There were widespread reports in April that Mr Muluzi offered AFORD’s respected Mapopa Chipeta the position of second vice-president. Mr Chihana pre-empted humiliation by attacking the UDF and leaving the coalition with his head held high, but the future of AFORD appears to be in question. It has been discredited for blithely entering into alliances with both the MCP and the UDF. Nobody is clear what the party stands for, despite Mr Chihana’s criticism of the UDF for corruption and favouritism towards the southern region. AFORD has failed to win any significant support outside its northern stronghold and now appears divided over the dissolution of the coalition with the UDF. A renewed coalition with the MCP would strengthen its role in parliament but would probably increase the defections of its members to the UDF. Mr Chihana himself has been criticised, from both inside and outside the party, for his authoritarian leadership. He will struggle to maintain effective leadership of the party, not least because he does not have a seat in the National Assembly.

The UDF has a residue of In contrast, Mr Muluzi’s UDF finds itself in a position of relative strength. The goodwill— party has benefited from the good rains and good harvests which have improved Malawi’s macroeconomic prospects and those of the average Malawian. The UDF retains a great deal of goodwill for the new freedoms it has brought in. On May 23 the government dropped the name Kamuzu from several public institutions and landmarks, such as the main stadium and highway in Blantyre, and Lilongwe Central Hospital. The changes are generally popular as they have further eroded the legacy of the highly personalised, autocratic rule of the previous president, Hastings Kamuzu Banda. Another reform is the government’s repeal of the 28-year-old ban preventing ethnic Asians from operating commercial businesses in the rural areas (2nd quarter 1996, pages 32-33). It is hoped that the move, approved by parliament on April 16, will spur economic development, although there are fears that the new Asian competition will close out opportunities for Malawians. Yet there is a limit to how long the UDF can sustain the goodwill, and the president is aware of this. “People cannot eat democracy ... nor can they feed their children with human rights,’’ said Mr Muluzi when opening parliament earlier this year. His government is under pressure to improve living standards and social services, to curb the rising crime rate and to reduce inflation.

—but may be picking up The circulation on April 22 of new currency notes and coins featuring the some bad habits portrait of Mr Muluzi prompted worries that the new government is taking on some of the trappings and glorification of the personality of the old Banda regime. The government argued that among Malawi’s many illiterate people

there was a belief that Dr Banda was still in power because his picture remained on the currency. Therefore, a new currency featuring Mr Muluzi was needed. The National Assembly was not pleased, and resolved that all future currency should not bear the likeness of any living leaders. In an intolerant vein, the president has warned journalists he would prosecute them if they misreported anything he said. Also receiving continued criticism is Mr Muluzi’s large cabinet of 32 ministers, including deputies. A move in April by the cabinet to award ministers salary increases of 300%, while the salaries of the vast majority cannot keep pace with inflation, has drawn a great deal of criticism.

The MCP also gains in The fortunes of the MCP are also on the rise. The party has stabilised its core of credibility— supporters from the central region, and appears to be making inroads among followers of both AFORD and the UDF. The astute John Tembo is manoeuvring the MCP into a solid political position. Mr Tembo, freed from jail after acquit- tal for the 1983 Mwanza murders but still on trial for allegedly plotting to kill seven Roman Catholic bishops, has helped the party shake off its image as the perpetrator of the bad old days. The MCP is fashioning itself a new image as a thoroughly reformed entity. Although the MCP vice-president, Gwanda Chakuamba, has called for early elections, it is not thought that the MCP wants to force an immediate challenge to the UDF. If the party can retain its substantial parliamentary and popular base, it will be in a very good position to whittle away the UDF’s support, and possibly topple it in the elections due in 1999. The MCP is looking for a new face to attract voters. In June the name of William Lunguzi was suggested in the newspapers as a possible new secretary- general for the party. Mr Lunguzi, a retired police commissioner who was also acquitted in the Mwanza trial, was a plausible candidate. However, on July 1 he died in a car accident in which Mr Chakuamba was also injured. The fatal accident prompted much speculation that there are bitter power struggles within the MCP and that Malawi still has a record for mysterious car accidents with political implications.

—while its former leader On May 19 Dr Banda celebrated what is believed to be his 96th birthday by is still dancing— dancing before a crowd of some 10,000 supporters outside his residence, Mudi House, in Blantyre. Wearing a three-piece suit and Homburg hat and waving a fly-whisk, all trademarks of his 30-year rule, Dr Banda carried out a sprightly dance for ten minutes with throngs of supporters. Speaking without referring to a written text, Dr Banda then called for an end to poverty. His energetic appear- ance contradicted medical reports of his frail and failing health. Last year he was pronounced too ill to attend his trial on charges of plotting to kill the Mwanza politicians in 1983. He was acquitted in absentia on all charges in December.

—and enjoys a court Dr Banda had more reason to dance following a court order of July 2 which victory ruled that he should retain control of Press Trust. It is hard to overestimate the importance of Press Trust as the holding company accounts for an estimated 30% of Malawi’s GDP. The conglomerate employs about 23,000 people. A justice of the High Court, Dunstan Mwaungulu, ruled that Dr Banda remained the valid trustee of Press Trust and that the UDF’s parliamentary action to transfer ownership of the corporation to the people of Malawi amounted to expropriation. Earlier, Dr Banda had requested $16m for his shares in Press

Trust, which the UDF rejected. The UDF has claimed that in 1994 a sum of MK41m ($4.7m) was illegally diverted from the corporation to fund the MCP’s election campaign. Clearly, to retain control of Press Trust is an important victory for Dr Banda, and possibly for the MCP as well.

Some of his loyalists A shadowy group loyal to Dr Banda has threatened to kill government officials threaten violence who tried to confiscate Press Trust, according to the UDF. The finance, economic planning and development minister, Aleke Banda (no relation), said in May that he was at the top of the hit-list. The death threats were reportedly issued by the Malawi Movement for the Restoration of Democracy, which is believed to be based in neighbouring Mozambique. The group could be the remnants of Dr Banda’s notorious Malawi Young Pioneers, which was forcibly disarmed and disbanded by the army before the 1994 elections. At that time, it was widely reported that some 2,000 disgruntled and armed members fled to Mozambique. Notwithstanding these reports, the ebb and flow of strength between the UDF, the MCP and AFORD, including the resignations and defections between the three, means that Malawi has a lively multiparty political scene. Accusations, scandals and disagreements add up to political activity that is more free and outwardly healthy than many of its Southern African neighbours.

Economic policy

Signals on fiscal restraint The strict cash budget system, instituted last year, is credited with helping to are mixed— keep the government to the austerity budget for 1996/97 (fiscal year starting on April 1), presented to parliament on March 22 by the minister for finance, economic planning and development, Aleke Banda (2nd quarter 1996, pages 29-30). The minister vowed to reduce last year’s frightening fiscal deficit of 15% of GDP (MK2.1bn) to a more reasonable 5.2% (MK1.2bn) in 1996/97. The budget concentrated on reducing the deficit and keeping Malawi on track with the ambitious economic reform targets agreed with the IMF. Under the new system, all ministerial current accounts have been transferred from the Reserve Bank of Malawi (the central bank) to commercial banks, which have firm instructions not to grant overdrafts. From the number of private-sector businesses owed large debts by the government, it appears that the cash budget system is effectively reining in government disbursements. However, public dissatisfaction at reduced public services will make it difficult to keep expenditure within Mr Banda’s limits. The 300% salary increases the cabinet awarded itself suggests that the government is not fully committed to keeping a lid on spending.

—but the finance minister In his budget speech, Mr Banda said that Malawi recorded real GDP growth of is bullish on growth— 8.5% in 1995/96, compared with a contraction of 10% the previous year. He forecast 10% real growth in 1996/97 on the back of the good rains which have boosted the small-scale agricultural sector, on which Malawi’s economy is based. The government’s aim is to bring down average inflation to 20% in 1996, followed by 5% for 1997. With an unofficially estimated rate of 50% for the first six months of 1996 (compared with the same period of 1995), however, the EIU feels that it will be an achievement to contain average annual inflation to 40% this year and 20% in 1997.

—and eager to privatise In his budget presentation, Mr Banda stressed that privatisation will be a major element in government policy. He said the government will sell 26 state-owned corporations in 1996, five of which would be listed on Malawi’s fledgling stock market. By the end of 1998 a total of 80 state corporations would be privatised and the proceeds would be used to reduce the government’s domestic debt.

Divestiture subsequently picked up speed with an announcement in mid-June by the chief executive of the Privatisation Commission, Dye Mawindo, that four companies have been offered for sale and controlling interests in two firms had already been purchased. The Commonwealth Development Corporation (CDC) has paid $5.6m for a controlling 51% stake in Portland Cement. Earlier in June South Africa’s Nampak had increased its investment in Packaging Industries Malawi to a controlling interest in a deal worth $1.6m. Auction Holdings, Malawi’s largest tobacco auctioneer, is also being offered for sale. Various small tobacco farmers may purchase shares, and many in Blantyre believe it will be the first government-owned company to be listed on the Malawi Stock Exchange.

The economy

Good harvests improve Good rains, good harvests and the government’s efforts to tighten fiscal policy the outlook— have combined to improve Malawi’s economic outlook. The optimism must be cautious, however. The government must still tackle inflation which is stub- bornly running at 50% year on year, down from 70% at the close of 1995.

—as interest rates edge With the slight drop in the inflation rate, the governor of the Reserve Bank of downwards— Malawi (the central bank), Matthews Chikaonda, has fulfilled his promises on borrowing costs by reducing the discount rate in late June from 50% to 47%. The prime lending rates of commercial banks started to fall as low as 40% in early July, from 48-57%. Mr Chikaonda insists that Malawi is on track to meet the demanding fiscal and monetary targets for 1996 set by the IMF within the SDR46m Enhanced Structural Adjustment Facility (ESAF) of October 1995. These targets include a reduction in year-on-year inflation to 20% by December 1996. However, pressures from the civil service for significant salary raises are expected to maintain inflationary pressures.

—and the kwacha remains The government’s efforts to improve the economic climate have helped to stable stabilise the Malawi kwacha, which remained firm at about MK15.3:$1 for the first half of 1996. (The Reserve Bank has also helped to defend the currency.) The finance, economic planning and development minister, Aleke Banda, expects the kwacha to remain at this level for the foreseeable future, but most economists argue that the kwacha is overvalued in view of inflationary trends. One clear improvement has been in the management of reserves of foreign exchange. Malawi currently holds foreign reserves equivalent to four months of imports, compared with less than one month a year ago.

Restrictions on Asian Increased commercial activity in Malawi’s rural areas, home to 85% of the traders are lifted population, is expected to increase now that the government has lifted the ban of 1968 on trading by ethnic Asians outside the urban areas. The former Banda

government had restricted the Asians, charging that they would pose an unfair advantage over African traders. However, black Malawians failed to take advantage of the restrictions and many rural commerce centres fell into disuse after the Asians left. Both the president’s United Democratic Front (UDF) and the Malawi Congress Party (MCP) voted to end the restrictions. Only Alliance for Democracy (AFORD) members voted against the measure.

Troubled David Malawi’s only textiles manufacturer, David Whitehead and Sons, has been put Whitehead is for sale up for sale. The company has recorded losses of more than $4m in the past 18 months. Mr Mawindo said that the Privatisation Commission is looking for an equity partner with technical expertise and financial muscle to turn the company around. He said the government would continue to have a say in the beleaguered company to protect its 3,000 employees, but that it would with- draw completely if it were to become profitable in two to three years. Started in 1967 as a joint venture between the UK-based conglomerate Lonrho and the state-owned agricultural trading firm ADMARC, David Whitehead used to enjoy a monopoly position and government protection from imported textiles. How- ever, with trade liberalisation came intense competition in the form of cheap Asian textiles and second-hand clothes. David Whitehead’s domestic sales plummeted from 20m metres in 1989 to just 3m metres in 1994/95. Lonrho transferred its shares to ADMARC in October 1994. Potential investors are going to look long and hard before buying into the troubles at David Whitehead.

The stock exchange awaits The Malawi Stock Exchange (MSE) remains quiet, with no companies listed by its first listing the end of June. The listing of Press Corporation shares has been delayed by the dispute over ownership of Press Trust (see The political scene). The same issue has prevented the listing of National Bank and Commercial Bank, since Press Trust has about a 40% shareholding in each. MSE officials say that the two most important players in the market’s development will be Press Trust and the government. Until it is clear what Hastings Kamuzu Banda wants to do with Press Trust, and what the government will accept, stock-market activity will be very slow.

Investors wanted to mine Investors are sought to exploit deposits of an estimated 28m tons of bauxite at bauxite deposits Mulanje Mountain in southern Malawi. About $88m is needed for the project, which would include an integrated bauxite mine, alumina plant and aluminium smelter. A study by the Abidjan-based African Development Bank shows that the mine could produce 540,000 tons of bauxite per year. The general manager of the Malawi Mining Investment and Development Corporation, Stanley Kalyati, has said that the South African conglomerate Gencor had expressed interest in buying alumina from Malawi if the project comes to fruition.

Agriculture

Bumper harvests bring Malawi’s food security, following several years of drought, has improved dra- relief matically thanks to the abundant rainfall in the 1995/96 season, which is officially expected to produce 1.9m tons of maize, compared with 1.1m tons in the previous season. About 1.7m tons of maize, Malawi’s staple food for the population of over 10 million, is expected from the smallholder peasant

farmers. The large-scale estate sector will account for the balance of 200,000 tons. Despite late rains lasting into June and some attacks by red locusts, the maize harvests are said to be good throughout the country. The bountiful maize harvest is credited with a 23% drop in maize prices nationwide in April. Good yields are also expected from rice and cotton.

Tobacco producers seem Tobacco farmers have this year succeeded in producing 19m kg of flue-cured better off in Zimbabwe tobacco and 115m kg of burley. In the tobacco auctions, which opened in mid-April, the new tobacco crop is fetching prices averaging $1.55/kg for burley tobacco and $1.80/kg for flue-cured. The prices paid by international buyers at the Malawi auctions are considerably lower than prices farmers receive in neighbouring Zimbabwe. On instructions from the president, the minister for agriculture and livestock development, Mapopa Chipeta, visited Zimbabwe in May and found prices averaging $1.87/kg for burley tobacco and $2.94/kg for flue-cured.

Foreign trade and payments

Donors endorse The government’s improved economic performance and its efforts to continue government policy— with liberalisation and with the removal of restrictions from the Banda era have won Malawi donor support. Malawi’s requirement of nearly $350m in external financing in 1996 has been met by donors, primarily the World Bank, the EU, the USA and Japan. The EU representative, Peter Christiansen, endorsed the Muluzi government’s efforts in April and noted that Malawi is a “very good pupil of the IMF and the World Bank”.

—highlighted by a new In May the World Bank announced a $106m loan from the International World Bank loan Development Association (IDA, its soft-loan arm) to fund Malawi’s Fiscal Restructuring and Deregulation Programme to generate economic growth and increased employment. The loan carries standard IDA terms of 40 years’ matur- ity and a ten-year grace period. The Bank said a study showed that while Malawi’s social spending compares favourably with other developing countries, it is not reaching broad sectors of the poor. It expects the programme to stimulate small-scale agriculture by removing pricing and marketing con- straints and to increase incentives for diversifying agricultural production. The programme also intends to improve health and education services to the poor.

Appendix 1

Annual indicators of economic activity in Mozambique

1988 1989 1990 1991 1992 1993 1994 1995 Production Annual totals Teaa ’000 tons 2 2 2 2 1 1 1 1 Maize “ 322 330a 453 327 133a 533a 526 734a Prices End-period Consumer pricesb 1985=100 548 822 1,091 1,638 2,602 3,897 5,943 8,320 change year on year % 50.0 49.9 32.8 50.1 58.8 49.8 52.5 40.0 Foreign tradec Exports fob $ m 103 105 126 162 139 132 147 169 Imports cifd “ 736 808 877 899 855 955 1,019 784 Exchange rate Year-end Mid-point rate MT:$ 626.20 828.49 1,044.64 1,737.74 2,737.62 5,279.01 6,455.35 9,900.00 a Estimated, including production for subsistence. b Maputo. c Source, National Planning Commission, Anuario Estatistico. d Including value of imports received as grants in kind.

Appendix 2

Quarterly indicators of economic activity in Malawi

1993 1994 1995 1996 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Production: agriculture Annual totals Tea ’000 tons 130 ( 99a ) ( 100a ) n/a Production: industry Monthly av General index 1984=100 140.5 119.5 118.0 140.6 115.4 107.5 117.9 148.0 124.4 n/a Electricity m kwh 69.2 65.8 71.9 74.8 64.7 68.0 72.7 76.0 69.5 62.8b Prices Consumer prices: 1990=100 176.8 195.1 203.0 210.3 273.5 239.0 375.0 409.6 493.3 560.1b change year on year % 17.9 23.1 28.1 30.4 54.7 22.5 84.7 94.8 80.4 n/a Money End-Qtr M1, seasonally adj: MK m 1,043.9 1,243.6 1,259.2 1,241.5 1,568.4 1,814.1 2,628.1 2,298.8 2,258.6 2,502.7c change year on year % 34.4 55.1 62.3 22.1 50.2 45.9 108.7 85.2 44.0 n/a Foreign trade Qtrly totals Exports fob MK m 470.1 356.7 416.2 970.8 1,062.0 843.9 1,056.6 2,386.0 1,906.9 n/a Imports cif “ 625.1 627.7 849.9 1,246.0 1,490.5 1,714.0 1,531.8 1,968.8 2,040.5 n/a Exchange holdings End-Qtr Monetary authorities: foreign exchange $ m 53.59 71.37 22.86 31.70 33.35 34.00 69.91 124.10 105.82 92.27c Exchange rate Market rate MK:$ 4.494 6.600 7.390 9.483 15.299 15.312 15.322 15.243 15.303 15.299

Note. Annual figures of most of the series above will be found in the Country Profile. a Estimate. b Average for January-February. c End-January.

Appendix 3

Foreign trade of Mozambique ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1991 1992 1993a Imports cif 1989 1990 Shrimps 60.8 64.6 68.8 Food 174 234 Cashew nuts 16.0 17.6 8.2 Other consumer goods 156 104 Cotton 8.8 10.8 11.1 Crude oil & products 72 96 Sugar 9.8 6.7 n/a Machinery & transport Copra 4.7 4.2 2.5 equipment 231 285 Citrus 1.9 1.1 0.9 Total incl others 808 877 Coal 0.2 0.0 0.0 Tea 0.8 0.2 0.0 Total incl others 162.4 139.3 131.9

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fobb 1992 1993 1994 1995 Imports cifb 1992 1993 1994 1995 Spain 37 35 34 44 South Africa n/a 325 436 n/a Japan 14 18 24 31 Zimbabwe 47 60 68 87 USA 19 8 15 28 Saudi Arabia 97 63 65 74 India 5 21 26 20 USA 165 41 43 54 South Africa 5 18 26 n/a UAE 29 32 33 37 Portugal 32 18 22 n/a France 91 30 26 34 China 35 6 5 10 Malawi 19 23 26 33 Italy 3 4 13 8 Italy 27 53 22 26 Germany 6 3 7 5 UK 33 36 60 25 Argentina 6 5 5 n/a Belgium-Luxembourg 19 17 19 24 Total incl others 266 199 224 229 Portugal 37 41 47 n/a Japan 28474120 Côte d’Ivoire 22 27 30 n/a Thailand 45 26 30 13 Total incl others 926 1,053 1,132 1,194 a Estimates. b DOTS estimates.

Appendix 4

Foreign trade of Malawi MK m Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Domestic exports fob 1991 1992 1993a 1994a 1995a Tea 103.81 106.73 156.70 261.20 414.40 Coffee 25.72 31.09 35.00 128.20 238.80 Sugar 79.67 97.77 68.80 224.00 404.80 Tobacco, unmanufactured 982.06 1,029.82 938.00 1,689.00 3,915.20 Cotton, raw 33.30 16.62 9.00 15.00 57.70 Total incl others 1,299.33 1,400.68 1,369.6 2,722.30 5,996.00

MK m Jan-Dec Jan-Dec Imports cif 1988 1989 Consumer goods 100.29 155.22 Plants & equipment 167.03 207.95 Vehicles 132.87 199.42 Building materials 66.72 79.24 Industrial inputs 355.00 441.00 Oils, fuels & lubricants 124.10 144.00 Total incl others 1,080.15 1,398.80

$ m $ m Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fobb 1992 1993 1994 1995 Imports cifb 1992 1993 1994 1995 South Africa 32 49 52 64 South Africa 207 200 193 237 Germany 92 36 50 60 Zimbabwe 45 47 54 n/a Japan 63 48 45 44 Germany 37 24 18 26 USA 58 60 57 40 UK 46 30 33 23 Mozambique 17 21 24 30 USA 15 17 21 20 UK 35 30 36 25 Austria 2 3 16 20 Netherlands 29 25 22 24 India 10 11 15 19 France 18 8 18 11 Hong Kong 19 17 20 17 Switzerland 8 4 6 9 Japan 44 26 32 15 Spain 10 6 7 7 France 37 8 7 13 Australia 6 6 6 7 Italy 6 8 8 7 Poland 8 5 7 6 Botswana 5 7 8 n/a Total incl others 447 353 386 394 Total incl others 615 453 467 534 a Estimates. b DOTS estimates.