BUSINESSES PROTEST MALAWI'S FOREX PRACTICES

UNCLAS SECTION 01 OF 02 LILONGWE 000020 SIPDIS SENSITIVE SIPDIS STATE FOR AF/S G. MALLORY 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: EFIN EINV ECON MI SUBJECT: BUSINESSES PROTEST MALAWI'S FOREX PRACTICES This message is sensitive but unclassified--not for internet distribution. -------------- SUMMARY -------------- ¶1. (SBU) Malawi's business community has recently stepped up its pleas to the GOM to loosen its foreign exchange policy, let the kwacha depreciate, and back off its heavy-handed informal controls on forex. Embassy has encouraged the local IMF representative to engage the central bank on this issue. We view the business community's new-found assertiveness as a positive development, though the GOM benefits from an expensive kwacha to import food and fertilizer during this hungry time of year. -------------- -------------- THE BUSINESS COMMUNITY PROTESTS A HIGH-KWACHA POLICY -------------- -------------- ¶2. (U) Under the auspices of the National Action Group, a public/private group for improving the business environment, Malawian businesses have begun formally protesting the Reserve Bank of Malawi's foreign exchange practices. The group, led by the Malawi Confederation of Chambers of Commerce and Industry (MCCCI),recently sent a letter to the central bank's governor urging that the institution loosen its control over the Malawi Kwacha's exchange rate. The letter blames the chronic shortage of foreign currency on an artificially high kwacha. According to the chief executive of the MCCCI, the situation has driven some export manufacturers to curtail production, because they are forced to pay for imported inputs at the parallel market rate (roughly a 10 percent premium),if they can find the currency at all. At the same time, a 40 percent mandatory conversion for exporters has meant that these companies often have to return to the parallel market to buy back their foreign currency at a premium, having just sold it at the official rate. ¶3. (U) The MCCCI has taken special exception to an additional informal control on currency that has reportedly become more pronounced in recent months. The RBM is reported to have begun questioning applications for imported goods and services, asking businesses to submit comparable quotes from local sources and even contacting local suppliers directly to verify prices. The business community views this as an unnecessary delay at best, and as unwelcome meddling with private sourcing decisions at worst. (Note: Embassy staff has heard this complaint from private sector contacts since mid-2005. While the practice surely contravenes IMF rules, the RBM sees it as a simple prioritization exercise. Of course, prioritization would happen through pricing mechanisms if the forex market were free. End note.) -------------- IMF NOT ENGAGED YET -------------- ¶4. (SBU) Given the International Monetary Fund's recent focus on Malawi's exchange rate policy (cited by their latest mission as the Fund's top concern),it is somewhat surprising that the Fund's resident representative has yet to discuss the issue of informal controls directly with the RBM. We have encouraged the local IMF mission to engage the RBM on this matter, which it agrees is of concern, as is the broader issue of the RBM's tight control on the exchange rate. To be fair, the IMF has been rightly focused on fiscal discipline for the past 18 months, and it has only recently become clear that it might be able to break that tight focus to address other problems. -------------- -------------- COMMENT: PRESSURE FROM BUSINESS OUTWEIGHED BY GOM'S OWN BUSINESS INTEREST -------------- -------------- LILONGWE 00000020 002 OF 002 ¶5. (SBU) It is an encouraging sign that business is at last openly protesting the GOM's opaque foreign exchange policy. Businesses have whined in private about this and other constraints for a long time, but they have been reluctant to lobby assertively in their own interest. Certainly the GOM has its reasons to maintain an expensive kwacha: it is walking a fiscal tightrope while importing food to fill this year's shortage and fertilizer to forestall a similar shortage next year. It can ill afford to allow import prices to jump 10 percent, even if that means squeezing business well past the threshold of pain. Ultimately, of course, the answer is for the GOM to get itself out of the grain and fertilizer business altogether. Besides allowing the private sector to serve these markets more efficiently, such a move would enable the GOM to view the foreign exchange rate with more equanimity, having no import business of its own to protect. EASTHAM