SUBSIDIES WORSEN MALAWI'S FOOD SHORTAGE

UNCLAS SECTION 01 OF 03 LILONGWE 000946

SIPDIS

SENSITIVE
SIPDIS

STATE FOR AF/S MELINDA TABLER-STONE
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE FOR EB/IFD/ODF LINDA SPECHT
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: ECON EINV EAGR EAID MI
SUBJECT: SUBSIDIES WORSEN MALAWI'S FOOD SHORTAGE

REF: LILONGWE 913

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SUMMARY
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1. (SBU) In a year marked by severe shortages of food and
fertilizer, it is increasingly clear that the government's
interventions in these commodities have considerably
deepened the crisis. The current shortage of maize is in
part a result of the GOM's insistence on selling subsidized
maize through its ADMARC parastatal at roughly half the
import equivalent price. Fertilizer has followed a similar
pattern: by announcing a heavy subsidy for all, the GOM
effectively shut down private commercial sales. Both of
these actions have constrained new imports. The net effect
is a shortage of food five months before the next harvest,
and a potentially disastrous shortage of fertilizer only
weeks before planting season begins. End summary.


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WHO CONTROLS MAIZE, CONTROLS MALAWI
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2. (SBU) At the root of Malawi's chronically disrupted food
and fertilizer markets is the misuse of the Agricultural
Development and Marketing Corporation (ADMARC),a
once-mighty agricultural monopoly. That the Banda-era
institution survives to this day is proof of Malawian
policymakers' addiction to popular subsidies, an almost
willful ignorance of how markets work, and an abiding
distrust of the private sector. In essence, ADMARC has
been used as a state tool in trying--and consistently
failing--to maintain a command economy in the dominant
agricultural commodity and food staple: maize.


3. (SBU) Since last year, the GOM has kept ADMARC's retail
price for maize at MK17/kg ($0.14/kg) as the commercial
price has reached double that. As the impending shortage
became apparent, the GOM began making plans for large
commercial imports of maize on the order of 100,000 metric
tons (MT) even as it was asking "donor countries" to
mobilize a major effort for humanitarian relief. The
diplomatic and development missions pushed back, asking
Malawi to limit its commercial imports and instead allocate
money for humanitarian relief. It has done that to some
extent, essentially splitting its purchases between
humanitarian and commercial purposes.


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POOR SIGNALING COMPLICATES THE PROBLEM
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4. (SBU) Still, the government failed to settle firmly on
the size and nature of its commercial intervention, much
less communicate that intention to the marketplace, leaving
private-sector buyers to assume the worst. Thus, as
happened in the food crisis of 2001/02, consumers have
avoided paying the higher prices offered by private
traders. These, in turn, have had little revenue, and less
forward price incentive, to finance imports. The same
signal has discouraged large farmers from growing maize
commercially, which they tell us would happen if the retail
price floor reached the MK20-26 ($0.16-21) price range
(i.e., an increase between 20 and 50 percent). Meanwhile,
the landed cost of imported maize has risen as regional
stocks have declined and transport prices have increased.


5. (SBU) This situation was expensive for the GOM but
stable until ADMARC stocks predictably began to run out.
At this writing, the exhaustion of cheap ADMARC stocks is
creating a panic that "there is no maize" in many trading
centers, when in fact there are at least some private
stocks, available for higher prices
(MK28-36/kg)($0.23-29). At the urging of foreign
development missions, the Cabinet approved a "cost
recovery" price of MK22-24/kg ($0.18-20) (still subsidized,

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since actual cost recovery would be MK28-32/kg),but has so
far failed to communicate the change formally to ADMARC.
With the GOM struggling against impeachment in Parliament,
it is very unlikely to do so, though this modest change
could still stimulate private imports. The most likely
result will be sharp price spikes on the private side as
ADMARC stocks run out, and more people will spill over into
the humanitarian relief pool. (At the grassroots level,
the high price and scarcity of maize have stimulated an
increase in winter cropping, which could ameliorate the
crisis in some areas. Unfortunately, the GOM does not
measure winter crops well, so the effect is unpredictable
at this point.)


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GOVERNMENT TAKES FERTILIZER BACK
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6. (SBU) The fertilizer market has suffered from much the
same pattern of intervention from the GOM, though on a less
spectacular scale. The market had made considerable
progress in liberalizing and building a private
distribution network until this year. Last year, the
private sector imported roughly 95 percent of total
fertilizer imports. But the GOM, still feeling the sting
from having bungled last year's targeted free fertilizer
scheme, determined to do things itself this year. It has
settled on roughly a 50 percent subsidy on some 135,000 MT
of fertilizer, including some 70,000 MT of its own
imports. (The country's total demand is about 220,000
MT.) Contributing its two cents to the debate, the main
opposition party has demanded a universal subsidy, so as to
cover its political base of tobacco farmers.


7. (SBU) As if displacing about 1/3 of the market weren't
bad enough, the GOM was late solidifying its plans and bad
at communicating what those plans were. So, around July,
commercial fertilizer sales came to a standstill as buyers
waited to see what the subsidy scheme would be. Since most
fertilizer companies are thinly capitalized, they have been
unable to order the quantities of fertilizer they think
will be needed before the November-December planting
season. Fertilizer that would normally have been ordered,
shipped, and distributed by August-September has yet to be
ordered, and it is now practically too late.

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COMMENT: BAD POLITICS, WORSE INSTINCTS
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8. (SBU) The Mutharika administration came into office on a
platform of fiscal responsibility and economic reform, and
it has performed reasonably well in general. But where it
comes to maize and the intensive agricultural inputs needed
to grow maize, it has clung to the old state-centric way of
doing things. At the political level, Mutharika's weakness
in Parliament has made it necessary buy off the opposition
with deeper and broader fertilizer subsidies than it
wants. With half the Parliament crying for impeachment,
the increasingly gross subsidies on maize have become
untouchable.


9. (SBU) Perhaps in perfect politics-free vacuum, the
Mutharika administration may have continued the nascent
liberalization of the agriculture markets. But even among
the economic liberals in the government, it is not clear
that free-market ideas can win over cultural instinct when
it comes to food. Malawians of the political class still
distrust "traders" (a term generally preceded in the local
press by "unscrupulous" and often by "Asian"),and they
tend to blame them for any market failure. (2001/02 is
viewed by many otherwise free-marketers as the year the
private sector let Malawi down.) In a lean year, these
instincts are exaggerated, and the state is driven to try
to control the markets further, deepening the failure.
That is happening now, and there is next to no chance of
breaking free until next year. If history provides any
pattern, this year's disaster will somehow be blamed on

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unscrupulous traders, and the government may cling even
tighter to its command-economy approach to food.
EASTHAM