VZCZCXRO7275
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0700/01 3431509
ZNR UUUUU ZZH
R 081509Z DEC 08
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 0175
INFO RUEATRS/DEPT OF TREASURY WASH DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC
RUEHLO/AMEMBASSY LONDON 0285

UNCLAS SECTION 01 OF 02 LILONGWE 000700 
 
SENSITIVE 
SIPDIS 
 
LONDON FOR AFRICA WATCHER PETER LORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD MI
SUBJECT: MALAWI'S FOREIGN EXCHANGE RESERVES ALMOST ON EMPTY, IMF TO 
HELP 
 
REF: LILONGWE 574 and previous 
 
LILONGWE 00000700  001.4 OF 002 
 
 
¶1. SUMMARY: Malawi's foreign exchange reserves currently stand at 
less than two months' import cover.  The Reserve Bank of Malawi 
(RBM) has been forced to ration its limited foreign exchange 
allocations to commercial banks.  The situation is affecting the 
country's importers who are unable to get the foreign exchange they 
need to complete transactions.  Malawi's tobacco-dominated exports 
reached a record level in 2008, but higher global prices for 
petroleum and fertilizer have exhausted the supply quickly.  A 
recently approved IMF facility should ease the pain as early as this 
month.  Comment:  The GOM's managed exchange rate is forcing 
commercial banks to sell U.S. dollars at a twenty percent discount 
below the rates charged by private exchange bureaus.  This continues 
to put pressure on reserves and push more of the Malawi's limited 
foreign exchange away from the banks, the only institutions 
authorized to facilitate international transactions.  End Summary. 
 
Unusually Scarce FOREX Squeezes Economy 
--------------------------------------- 
 
¶2. For the first time since President Mutharika began to implement 
macroeconomic reforms, Malawi's foreign exchange reserves declined 
to below two months of import cover at the end of October 2008. 
Several companies who rely on imports to operate have complained 
that the Reserve Bank of Malawi (RBM) is severely rationing 
allocation of foreign exchange to the commercial banks.  The RBM 
admitted to emboff that the foreign exchange situation was serious 
and it was forced to ration its limited supply.  Companies have 
reported that suppliers of imported raw materials have threatened to 
stop shipments due to non-payment for previous orders. Some 
companies have complained that they have been forced to put 
customers on long wait-lists for deliveries, and have already lost 
business as a result. 
 
¶3. Traditionally, foreign exchange availability follows the 
agricultural cycle in Malawi.  It is plentiful from April through 
September (tobacco selling season), and scarce from November through 
March.  During periods of scarcity, importers/investors may 
experience extended periods without access to foreign exchange.  The 
significance of the current shortage is in its timing (very early) 
and magnitude (very severe).  At the end of October, foreign 
exchange reserves declined to 1.8 months of import cover and the 
situation is feared to get even worse before next April's tobacco 
harvest eases the situation. 
 
Surging Import Bill Outpaces Record Tobacco Earnings 
--------------------------------------------- ------- 
 
¶4. Malawi's import bill averages about US $140 million per month and 
primarily consists of petroleum products, agricultural inputs 
(fertilizers, equipment and chemicals), motor vehicles, industrial 
equipment and almost all manufactured products.  In turn, Malawi's 
exports are primarily agricultural, with tobacco accounting for more 
than half of total export earnings.  Despite record tobacco sales in 
2008, the global rise in fertilizer and petroleum prices has quickly 
exhausted this source of foreign exchange.  (Finance Minister Gondwe 
told the Ambassador ruefully that Malawi had bought forward 
contracts on fuel that had locked in prices at their peak.)  The 
remaining sources of foreign exchange are foreign project financing, 
donor support to the budget and balance of payments, and 
correspondent banks lines of credit. 
 
¶5. According to RBM, there are a couple of explanations for the 
shortage.  Current turbulence in the global financial/capital 
markets has drastically reduced trust and confidence among 
correspondent banks, affecting availability of credit lines and 
investment in each other's banks.  Secondly, the Malawi 
import-dependent economy is growing faster than its export sector, 
thereby widening its trade deficit and creating a bigger gap between 
demand and supply of foreign exchange.  Many development projects, 
such as the construction of roads and buildings, require imported 
materials.  Moreover, Malawi's imported goods sector has grown 
remarkably during the past few years.  The growth has been fueled by 
new GOM financial policies that have caused banks to move away from 
investing in treasury bills to private sector lending.  Small 
personal business loans have more than doubled since 2005 and most 
of these loans are to open trading businesses, buy cars, and or 
build houses.  Little has been invested in forex-generating 
businesses or agricultural production. 
 
¶6. The foreign exchange situation is unlikely to improve 
significantly in Malawi until the start of the tobacco selling 
season in mid-March.  Meanwhile the RBM is relying on the small 
export earnings it receives primarily from non-agricultural sources. 
 
 
LILONGWE 00000700  002.4 OF 002 
 
 
 
IMF Agreement Eases Pressure 
---------------------------- 
 
¶7. The Malawi government has just concluded with the IMF for an 
"Exogenous Shock Facility" that will help get the GOM through to 
tobacco season.  The ESF is a one-year facility that will make 
roughly USD 77 million available in front-loaded disbursements 
(about USD 50 million will be disbursed in December). 
 
¶8. Comment:  While the RBM will not admit it, a managed foreign 
exchange rate policy is part of the problem.  President Mutharika 
vowed during his inauguration speech in 2004 that there would be no 
depreciation of the Malawian kwacha during his tenure of office and 
he has been true to his word.  Financial institutions must adhere to 
rates within a set band linked to the U.S. dollar or risk decreased 
foreign exchange allocations from the RBM.  However, this policy 
does not apply to private foreign exchange bureaus.  There is 
currently a spread between commercial banks' rates and exchange 
bureaus of over twenty percent.  The spread is further driving the 
limited supply of foreign exchange in the country away from the 
banks, which have sole legal authority to facilitate international 
transactions, to a growing financial gray market.  End Comment. 
 
BODDE