MALAWI TRIES NEW TOBACCO MARKETING SCHEME

UNCLAS LILONGWE 000127

SIPDIS

SIPDIS
SENSITIVE

STATE FOR AF/S G. MALLORY
PARIS FOR D'ELIA
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: EAGR ECON ETRD MI
SUBJECT: MALAWI TRIES NEW TOBACCO MARKETING SCHEME



1. (U) At the insistence of the World Bank, the GOM has
announced plans to take a baby step toward liberalizing its
state-controlled tobacco market this season. The Tobacco
Control Commission will establish three local commodity
exchanges as an experimental alternative to the sale of
tobacco through the state auction floors. The exchanges--in
effect local, liberalized auction floors--will allow any
registered buyer to buy tobacco from any seller in a sealed
bid auction. The buyer can then export directly or resell to
another registered buyer, but any resale within Malawi would
have to go through the state auction floor. The exchanges
themselves will be run by licensed exchange operators, who
will be responsible for collecting taxes and levies on all
tobacco sold. The operators will generate revenue by
imposing a transaction fee or commission to cover their
operating costs plus profit.


2. (SBU) The director of the Tobacco Control Commission,
Godfrey Chapola, is reluctantly implementing the directive to
move forward with the local exchanges. A life-long veteran
of the old state tobacco monopoly, he recently told us tha4
he "does not fully understand" how the exchanges will work.
Chapola conceded that the local exchanges should reduce
transport costs and queueing times for tobacco farmers. He
cited a loss of control over quality and a lack of
transparency as the main drawbacks. Whether this fear is
realistic or not, it resonates with a widespread distrust of
"middlemen," who are blamed for taking advantage of
il$iterate smallholders and compromising quality. The local
exchanges are expected to introduce a wider range of buyers,
mainly middlemen who will consolidate lots for export or
resale.


3. (U) Predictably, tobacco buyers have a more sanguine
perspective on the new exchanges. One of the biggest costs
to producers--and risks to buyers--is the very limited
capacity of Auction Holdings Limited, the parastatal operator
of the state-run floors, to deal with the seasonal surge of
tobacco leaf. Tobacco trucks have to wait in line for at
least two weeks and often more than two months to be
offloaded at the floor. Local exchanges help this situation
by being located closer to farmers and by offering more
points for the initial sale. In addition, one local exporter
told us the local markets are likely to improve quality,
since more farmers will be able to see firsthand the effect
of quality and presentation on price.


4. (U) COMMENT: The tussle over this small experiment brings
into sharp relief the differing interests of the old state
institutions (like the Tobacco Association of Malawi, Auction
Holdings, and the Tobacco Control Commission) and those of
buyers and sellers. While the`xtate institutions continue to
present themselves as champions of high quality for buyers
and high prices for sellers, they are increasingly seen as
relicts of the past, adding cost but not value. This view
has yet to spread to unsophisticated smallholders, but the
new markets may help. Certainly if they succeed, they will
help dislodge the almost genetically ingrained idea that
tobacco, as a strategic crop, must be controlled by the state.
GILMOUR