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Identifier
Created
Classification
Origin
04LILONGWE1013
2004-10-27 14:25:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

MALAWI HIKES FUEL PRICES, BUT NOT ENOUGH

Tags:   ECON  ENRG  EINV  EPET  EFIN  PGOV  MI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
						UNCLAS SECTION 01 OF 02 LILONGWE 001013 

SIPDIS

SENSITIVE

STATE FOR AF/S BRUCE NEULING
STATE FOR EB/IFD/OMA
STATE FOR EB/IFD/ODF
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET EFIN PGOV MI
SUBJECT: MALAWI HIKES FUEL PRICES, BUT NOT ENOUGH


This message is sensitive but unclassified--not for Internet
distribution.

-------
SUMMARY
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1. (SBU) The Government of Malawi has recently raised retail
fuel prices for the first time since March 2004. The
increase amounts to 8.9 percent on gasoline and diesel,
reflecting only about half of the increase in world petroleum
prices during the past six months. The increase, which is
expected to have immediate inflationary implications, comes
at a time of increasing inflationary pressure in Malawi.
Whereas the inflation of a full price pass-through could
derail Malawi's IMF staff-monitored program, interference in
the pricing mechanism may be of concern during the upcoming
IMF staff visit. End summary.




--------------------------


A MODEST INCREASE, LONG DELAYED


--------------------------





2. (U) On October 22, the GoM raised retail fuel prices by
8.9 percent, the first price increase since last March.
Prices went from MK94.30 to MK102.70 ($0.88 to $0.96) per
liter for gasoline and from MK87.60 to MK95.40 ($0.82 to
$0.89) for diesel. An increase had been recommended by the
Petroleum Control Commission (PCC) since April, but for
political reasons, former President Bakili Muluzi had quashed
adjustments in the run-up to May elections. The new
administration of President Bingu wa Mutharika had not
addressed the issue since its assumption of office at the end
of May and indeed had promised within the past month that
prices would not be raised.



3. (SBU) As a result of increases in world fuel prices, the
government-controlled consortium of private fuel importers,
Petroleum Importers Ltd. (PIL), was facing potential losses
of MK 30-40 million ($280,000 - $374,000) per month,
according to one member of the consortium. (NOTE: PIL
includes two U.S. business interests: ExxonMobil and Caltex.
End Note.) PIL had not yet reached a crisis, largely because
the retail price includes levies for price stabilization and
for reimbursing PIL when prices are not adjusted quickly
enough. However, the price stabilization fund, which is
designed to smooth out short-term spikes in world prices, was
on its way to exhaustion before the end of October. At that
point, PIL would have had to cut back on import volumes,
causing fuel shortages.




--------------------------


INFLATIONARY REALITIES


--------------------------





4. (SBU) On October 5, the PCC had recommended that gasoline
be increased to MK108 and diesel to MK102. These prices
would have reflected world increases (estimated locally at
17-20 percent), but they would also have brought inflationary
pressure to bear on the Malawian economy. Because of
Malawi's reliance on overland imports, and disproportionately
on fuel-inefficient trucking, the inflationary impact of fuel
price hikes is rapid and widespread. This fact is
intensified by timing: the spring and summer here (October to
March) are the high season for inflation, due to seasonality
in agricultural input and food prices. And any inflation
above 20 percent would put Malawi off-track for its IMF
staff-monitored program.



5. (SBU) For understandable reasons, then, the Government
chose not to unleash the PCC's automatic pricing mechanism,
which is designed to pass through sharp increases in world
prices (greater than 5 percent). Instead, GoM has simply
increased the levy that reimburses the importers for import
losses caused by artificially low prices. In essence, this
allows the importers (PIL) to recover most of their losses
directly, while sparing the public the collateral increases
that an adjustment in the base price would entail (through
percentage-based increases in other levies and profit
margin).




--------------------------


COMMENT: A SENSIBLE MIDDLE COURSE?


--------------------------





6. (SBU) While the 8.9 percent price hike may seem a sensible
middle course between an inflationary full-price adjustment
and popular but irresponsible inaction, there are some
downsides to this course. First, it suppresses the PCC's
automatic pricing mechanism, which continues Muluzi's
practice of tinkering with the pricing and levy structure to
meet the exigencies of the day. If full adjustment follows
next year, after inflationary pressures have subsided, the
GOM's solution may be viewed as a wise interim measure. On
the other hand, if the Kwacha is devalued, or if an
inflationary cycle picks up for other reasons, full
adjustment may be put off, leading to a bigger shock later.
Second, industry sources tell us that Malawi's low retail
prices are driving some informal exports, which could result
in shortages.



7. (SBU) Finally, and perhaps most importantly, it is unclear
at this juncture how the IMF will view continued suspension
of PCC's automatic pricing mechanism. Its proper functioning
was a required prior action for previous IMF facilities, and
IMF's November staff visit could highlight this as a
recurring problem. In our view, it is more likely the IMF
will see the partial adjustment as an understandable effort
to avoid both fuel shortages and inflationary price shock.


GILMOUR