VZCZCXRO2534
RR RUEHDU RUEHJO RUEHMR
DE RUEHLG #0433/01 1421048
ZNR UUUUU ZZH
R 221048Z MAY 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2775
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0218
RUEHFR/AMEMBASSY PARIS 0113
RUEHJO/AMCONSUL JOHANNESBURG 0209
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC

UNCLAS SECTION 01 OF 02 LILONGWE 000433 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S GABRIELLE MALLORY 
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
STATE PLEASE PASS TO MCC 
PARIS FOR G. D'ELIA 
LONDON FOR R. BELL 
JOHANNESBURG FOR FCS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAGR MI
SUBJECT: TOBACCO MARKET IMPASSE RISKS FOREX CRISIS 
 
REF: A) LILONGWE 275 B) LILONGWE 294 
 
LILONGWE 00000433  001.2 OF 002 
 
 
------- 
SUMMARY 
------- 
 
¶1. (U) Malawi's tobacco auctions closed again May 11 in a 
continuing dispute over prices.  Before this shutdown, a 
combination of government price controls, weak demand, and a 
large crop were slowing throughput in the market to about 60 
percent of normal. About 30 percent of all tobacco presented 
for auction is going unsold because bids are not hitting the 
GOM-mandated reserve price.  The constricted revenues from 
tobacco could have an impact on Malawi's strained forex 
situation as the GOM loosens its control over the exchange 
rate.  End summary. 
 
 
----------------------------- 
A RUNNING DISPUTE OVER PRICES 
----------------------------- 
 
¶2. (SBU) On 11 May, a running dispute between growers and 
buyers once again reached a pitch sufficient to shut down the 
state-run auction floor.  The issue is whether buyers are 
abiding by the minimum price scheme dictated by President 
Bingu wa Mutharika in March.  The buyers have consistently 
maintained that some of the prices for the 70-odd grades of 
tobacco are workable, but many are not, and that the average 
price is too high.  For their part, the growers are divided 
into two camps: those who want to sell at the highest bid, 
and those who want to hold out for the government's minimums. 
 Government, led by Mutharika, has made a big show of facing 
down the "neo-colonialist" buyers with its price scheme, and 
has threatened to kick them out of the country and sell the 
tobacco itself if the buyers continue to "cheat the poor 
farmer."  This populist rhetoric will make it difficult for 
Mutharika to back down to prices that might actually move the 
tobacco. 
 
 
------------------------------ 
DESPITE GOOD CROP, LOW VOLUMES 
------------------------------ 
 
¶3. (U) As if this situation needed further complexity and 
confusion, it is beginning to look as if the 2006 selling 
season may not meet the optimistic expectations for the year 
anyway.  Growers and the GOM had expected good rains and an 
extensive  fertilizer subsidy to boost production volumes, 
quality, and revenues.  Buyers from the two major exporters, 
US-owned AllianceOne and Limbe Leaf (Universal Leaf), have 
told us that weak demand and inefficiencies resulting from 
the government price scheme have seriously reduced the 
volumes of tobacco being bought for export. One exporter told 
us the volumes are about 60 percent of the usual flow for 
this point in the season: 12,000 bales per day as opposed to 
a normal 20,000.  Total volume to date is roughly 25 million 
kilograms of a larger-than-average 125-130 million kg. crop. 
At least one source has put the total volume at 45 percent of 
last year's volume at this point in the season.  Both major 
buyers estimated early in the season that up to 15 million 
kg. may go unsold. 
 
¶4. (SBU) Outside the industry, it is widely felt that the 
buyers are trying to force the government to back down by 
offering deliberately low prices and keeping volumes low. 
While there may be some truth to that view, even the head of 
the parastatal Tobacco Control Commission privately says the 
government's prices are too high, and that it will have to 
back down.  It is less clear how the government can get there 
from here. 
 
 
----------------------- 
THE REAL PROBLEM: FOREX 
----------------------- 
 
 
LILONGWE 00000433  002.2 OF 002 
 
 
¶5. (SBU) The centrality of tobacco in Malawi's economy would 
be difficult to overstate.  Tobacco produces around 60 
percent of the country's export earnings, and it does so in 
the space of a few months of the year.  This year, it so 
happens that the IMF is considering Malawi for HIPC 
completion point, contingent upon satisfactory progress of 
its Poverty Reduction and Growth Facility (PRGF) plan.  One 
of the key performance measures is reduction of its import 
backlog and loosening of its foreign exchange policy.  With 
pent-up demand for forex, recent loosening has dropped the 
kwacha to less than 140/USD.  However, this will have no 
effect on the import backlog without a ready supply of 
dollars (usually supplied by tobacco sales), and without such 
a supply to support demand for kwacha, a looser exchange 
policy may cause the currency to slip precipitously.  In 
short, Bingu could not have picked a worse time for a 
showdown with the tobacco exporters.  A recent visit with the 
financial sector in Blantyre confirmed that the seasonal flow 
of forex has not happened this year, to the point that people 
are starting to worry. 
 
 
--------------------------------------------- --------- 
COMMENT: POOR JUDGEMENT AND COMMAND-ECONOMY TENDENCIES 
--------------------------------------------- --------- 
 
¶6. (SBU) This latest battle in the tobacco wars has 
highlighted two troubling trends.  First is the government's 
poor sense of the connection between tobacco and its 
situation vis-a-vis the IMF: it failed to recognize the 
weakness of its negotiating position, and it seemed not to 
consider the timing of the all-important HIPC decision in 
deciding to try dictating prices.  Secondly, Mutharika seems 
not to have understood that, where private exporters are 
concerned, it is a negotiation.  The GOM's command-economy 
mindset has gotten the better of patience and common sense, 
and it is proving to have been a spectacularly 
counterproductive lapse. 
EASTHAM