UNCLAS SECTION 01 OF 02 LILONGWE 000838

SIPDIS

SENSITIVE

STATE FOR AF/S T. CRAIG
TREASURY FOR INTERNATIONAL AFFAIRS / AFRICA / LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON EINV PGOV PREL KCOR MI
SUBJECT: MALAWI'S PRIVATE SECTOR OPTIMISTIC ABOUT MUTHARIKA

REF: A. LILONGWE 768

B. LILONGWE 728

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

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SUMMARY
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1. (U) A recent visit to Malawi's business capital, Blantyre,
showed the private sector to be generally optimistic about
the new administration's economic direction. The consensus
is that President Mutharika seems to be serious about cutting
corruption and winning donor support through fiscal
discipline. While business leaders are reserving some
measure of scepticism, they say sticking to modest reforms
will drive economic growth. End summary.


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SURPRISING OPTIMISM
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2. (U) In the course of routine calls on a variety of private
sector contacts in Blantyre, the financial and industrial
center of Malawi, Econoffs heard a surprising level of
optimism about the prospects of the new government led by
President Bingu wa Mutharika. Leaders from the finance,
construction, agriculture, trade, transportation, and
manufacturing sectors expressed approval of the
administration's early moves against corruption and efforts
to bring government spending under control. Several of our
interlocutors said that if Mutharika accomplishes nothing
other than these two objectives, he would breathe new life
into the Malawian economy.


3. (SBU) The economic context of this optimism is decidedly
grim in most respects: representatives from one sector after
another told us that their part of the economy is stagnant at
best, with steady shrinkage the norm. A fund for small to
medium-sized enterprises told us that high interest rates
resulting from a decade of irresponsible government spending
have made new investment all but impossible. Whatever demand
has survived in this contracting economy is being crowded out
by an insatiable demand for public debt. The largest
commercial bank freely admits that two-thirds of its money is
in government paper instead of loans. Exporters and
construction industry leaders described a crippling drain of
skilled workers, deteriorated agricultural productivity, and
a tarnished reputation in the international investment
community.


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SOLID SIGNS OF CREDIBILITY
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4. (SBU) Still, the prevailing sentiment agrees with the IMF
Article IV team's report: that confidence in the economy is
high enough to drive growth the instant interest rates come
down (see ref A). Mutharika's quick establishment of a
government austerity program, his campaign to build public
support for corruption prosecutions, and his apparent bid to
establish a government independent from the ruling party (ref
B), are evidently a sharp enough departure to cause hope.
The chairman of the Malawi Stock Exchange and the managing
director at a discount house told us money is beginning to
show early signs of exiting the money market in favor of
equities. This is seen as a good sign that the financial
community is beginning to believe the government's promises
to bring spending under control. Foreign exchange pressure,
which could drive a devaluation and a round of inflation, is
mercifully low, thanks to a weak dollar and the central
bank's successful efforts to control the exchange rate (to be
reported via septel).

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COMMENT: NEW GOVERNMENT, NEW ECONOMY
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5. (SBU) While this sampling of private-sector opinion is
hardly scientific, it does point to a clear common
understanding of the economic situation in Malawi: that the
main problem with the economy has been the government. Only
slightly less clear is the level of confidence in the
Mutharika government's determination and ability to effect
change. The political will seems to be there, in our
interlocutors' view, but it seems too good to be true. There
is still some concern that Mutharika will be co-opted or
out-maneuvered by more experienced politicians, or simply
fall into the African corruption trap on his own. The level
of expectation for the government is modest (control spending
and corruption, never mind other new initiatives), but the
appraisal of Malawi's economic resilience is bright, provided
the government can deliver on those modest expectations.

RASPOLIC