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Identifier
Created
Classification
Origin
06LILONGWE20
2006-01-06 11:29:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

BUSINESSES PROTEST MALAWI'S FOREX PRACTICES

Tags:   EFIN  EINV  ECON  MI 
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RR RUEHJO
DE RUEHLG #0020/01 0061129
ZNR UUUUU ZZH
R 061129Z JAN 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2196
INFO RUEHLO/AMEMBASSY LONDON 0180
RUEHFR/AMEMBASSY PARIS 0072
RUEHJO/AMCONSUL JOHANNESBURG 0175
RUEATRS/DEPT OF TREASURY WASHDC 0402
RUEAIIA/CIA WASHDC
						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.

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SUMMARY
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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.




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THE BUSINESS COMMUNITY PROTESTS A HIGH-KWACHA POLICY


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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.)




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IMF NOT ENGAGED YET


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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.




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COMMENT: PRESSURE FROM BUSINESS OUTWEIGHED BY GOM'S OWN
BUSINESS INTEREST


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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