Mozambique Malawi€¦ · COUNTRY REPORT Mozambique Malawi July 2000 The Economist Intelligence...

COUNTRY REPORT

Mozambique

Malawi

July 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWThe forecast period will be characterised by relative political stability.Conflict within, and between, the leading opposition parties will intensify.Independents are likely to perform well in the local elections, which arescheduled for September. Foreign policy will focus on differentiating Malawifrom the less stable countries in the region in order to try to maintaininvestment flows. Donor pressure will ensure that tightening fiscal disciplineis central to economic policy, but domestic political considerations may leadto some slippage. Crop diversification will continue, but tobacco will retainits dominant role in the economy. In 2000 tobacco revenue is forecast to bedown on 1999, reducing overall real GDP growth and widening the current-account deficit. The fall in the South African rand against the US dollar willforce a sharp decline in the kwacha, which will increase importedinflationary pressure.

Key changes from last monthPolitical forecast• The failure of the opposition’s legal challenge to the 1999 presidential

elections will ensure a relatively smooth run for the president, BakiliMuluzi, and the MCP over the forecast period. However, squabblingwithin, and between, the leading opposition parties will intensify.

Economic policy outlook• In line with donor recommendations, market-oriented reforms—including

tight fiscal and monetary policy—will shape domestic policy in 2000-01.

Economic forecast• The EIU has revised its real GDP growth forecast for Malawi in 2000

downwards to 3.5%, owing to lower tobacco output and prices.

• The shortfall in tobacco revenue and the recent drop in the South Africanrand will force a steeper fall in the kwacha than we had previouslyanticipated. With the price of imports rising, the slowdown in inflation inApril and May is likely to be reversed.

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1

EIU Country Report July 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

Mozambique

5 Political structure6 Economic structure6 Annual indicators7 Quarterly indicators8 Outlook for 2000-018 Political forecast9 Economic policy outlook

10 Economic forecast12 The political scene15 Economic policy18 The domestic economy18 Economic trends19 Manufacturing20 Energy and mining21 Agriculture23 Infrastructure23 Financial and other services24 Foreign trade and payments

Malawi

27 Political structure28 Economic structure28 Annual indicators29 Quarterly indicators30 Outlook for 2000-0130 Political forecast31 Economic policy outlook32 Economic forecast35 The political scene38 Economic policy41 The domestic economy41 Economic trends43 Agriculture44 Infrastructure45 Services45 Mining46 Foreign trade and payments

2


List of tables11 Mozambique: forecast summary16 Mozambique: projected budget resources18 Mozambique: demographic and macroeconomic indicators, 1997-200424 Mozambique: ten largest companies25 Mozambique: net capital flows in Sub-Saharan Africa, 1993-9832 Malawi: international assumptions summary35 Malawi: forecast summary42 Malawi: fuel prices in Southern Africa, May 1st 200043 Malawi: fuel prices

List of figures7 Mozambique: exchange rate7 Mozambique: foreign reserves

11 Mozambique: gross domestic product16 Mozambique: public expenditure by classification19 Mozambique: inflation21 Mozambique: exploration blocks on offer, 200022 Mozambique: Manica province23 Mozambique: Maputo corridor road25 Mozambique: foreign direct investment35 Malawi: gross domestic product35 Malawi: kwacha real exchange rates41 Malawi: exchange rates42 Malawi: inflation

3


Summary

July 2000

Mozambique

The domestic political scene will continue to be dominated by the post-election manoeuvring of the government and the opposition party, Renamo.Renamo will to seek to be consulted on public appointments. The ruling party,Frelimo, has publicly adopted a hard line towards Renamo and is showing littleinclination to compromise, but foreign donors are pushing the government tosoften its attitude. The government is under pressure to renew theimplementation of economic reforms following election-related delays.Monetary policy is expected to be tightened owing to unexpectedly highgrowth in money supply. Fiscal policy will be expansionary, following thepledging of more than US$1.5bn in external assistance over the 2000-01period. The start-up of production from the Mozal aluminium mega-project sixmonths ahead of schedule will boost real GDP growth, which should reach7.5% in 2000 and 8.5% in 2001.

Renamo has repeated its claim to have won the December 1999 elections buthas grudgingly accepted that a recount is unlikely, focusing instead on havinginfluence over the appointment of governors in the provinces in which it wonmajorities. The president, Joaquim Alberto Chissano, has publicly underminedthe Renamo negotiator, Raul Domingos, perceived as a formidable opponent.Political violence broke out in a town in the northern province of Nampula.Frelimo has called a party conference to discuss its disappointing performancein the 1999 elections. Mr Chissano has backed negotiations between theAngolan government and UNITA rebels.

The 2000 budget has been presented. It projects an 8.5% increase in spendingin dollar terms, with social-sector spending accounting for 48% of the total.The government has drafted a poverty reduction strategy paper which aims toreduce the proportion of the population living below the poverty line from70% to 60% by 2004.

Monetary growth has been high, reaching 42% in the year to March 2000.Nevertheless, inflation has begun to stabilise. The Mozal aluminiummega-project has come on stream six months ahead of schedule, and Sasol hasgained control of the Pande gasfield from Enron of the US. A group of 40Zimbabwean farmers has settled in Mozambique.

Donors meeting in Rome to discuss post-flood assistance have pledgedUS$453m in aid for reconstruction, and the annual consultative group meetingresulted in US$530m of pledges. Within Africa, Mozambique received thelargest amount of foreign development assistance between 1993 and 1998.

July 7th 2000

Outlook for 2000-01

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4


Malawi

The president, Bakili Muluzi, and the United Democratic Front will presideover domestic political stability during the forecast period. Internal tension willdamage the Malawi Congress Party, and may cause the termination of itsalliance with the Alliance for Democracy. Foreign policy will concentrate ondifferentiating Malawi from the less stable countries in the region in order tomaintain investment flows. Economic policy will focus on the unpopularmeasures of strengthening fiscal discipline, increasing accountability andaccelerating liberalisation. Lower production, owing to poor rains, and lowerprices will reduce revenue from the tobacco crop in 2000. Real GDP growth isforecast to rise by 3.5% in 2000 and by 4.7% in 2001, when a return to normalclimatic conditions is expected. Lower export revenue and the fall in the SouthAfrican rand will force a sharp decline in the kwacha this year. Imported pricepressures, owing to higher oil prices and the fall in the kwacha, will underminethe government’s tight monetary policy. Growth in receipts from other cropswill not be enough to offset the shortfall in tobacco revenue, and higherimports will widen the current-account deficit to US$429m in 2000, before itnarrows to US$417m in 2001.

The legal challenge to the result of the 1999 presidential election has beendismissed. Parties have begun their preparations for the local elections,scheduled for September, but the preparations have been hit by logisticalproblems. The struggle for the leadership of the MCP, between the incumbentGwanda Chakuamba and John Tembo, has intensified.

The consultative group of donors has called for civil service reforms and areduction in government expenditure. The director of public prosecutions hasestimated that around one-third of all budgetary allocations are wasted. WorldBank help has been requested in the restructuring of Air Malawi. Thegovernment has decided to commercialise Admarc rather than privatise it.

Hit by a fall in the South African rand and expectations of disappointingtobacco revenue, the kwacha has begun to slide. The arrival of the first of thisyear’s maize harvest on the market has allowed year-on-year inflation to fall to23.5% in May. Fuel prices have been raised twice. Prices so far in the tobaccoauctions have been lower than in 1999. A new hydroelectric power scheme hasbeen finalised. The government has announced a major conference as part ofan effort to attract investment in mineral exploitation.

Malawi has decided to apply for debt relief under the IMF and World Bankheavily indebted poor countries initiative. Donors have pledged US$1.1bn tocover the country’s financing needs for the next three years.

Editor: Paul GambleEditorial closing date: July 7th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2000-01

The political scene

Economic policy


Foreign trade andpayments

Mozambique 5


Mozambique

Political structure

República de Moçambique

Unitary republic

Based on Portuguese/Roman law and the 1990 constitution

250-member Assembléia da República (parliament) elected by direct, universal, adultsuffrage every five years

December 1999 (legislative and presidential); next national elections due by December2004 (legislative and presidential)

President, chosen by direct universal suffrage; currently Joaquim Alberto Chissano

The president and his appointed prime minister and Council of Ministers; cabinetappointed in January 2000

Frente de Libertação de Moçambique (Frelimo) is the ruling party; the main oppositiongroup is the former rebel Resistência Nacional de Moçambique (Renamo). No other partywon more than 5% of the national vote needed to secure parliamentary representation.Ten small parties gained some seats in parliament by forming a coalition with Renamo

Prime minister Pascoal Mocumbi

Defence & security affairs Almerinho ManhenjeParliamentary & diplomatic affairs Francisco Madeira

Agriculture & rural development Helder Monteiro (Muteia)Culture Miguel MkainaDefence Tobias DaiEducation Alcido NguenhaEnvironmental co-ordination John William KachamilaFisheries Cadmiel MuthembaForeign affairs & co-operation Leonardo SimãoHealth Francisco SonganeHigher education, science & technology Lídia BritoIndustry & trade Carlos MorgadoInterior Almerinho ManhenjeJustice José Ibraimo AbudoLabour Mário SeveneMineral resources & energy Castigo LangaPlanning & finance Luísa DiogoPublic works & housing Roberto Costley WhiteState administration José ChichavaTourism Fernando SumbaneTransport & communications Tomás SalomãoVeteran’s affairs Antonio Hama ThaiWomen’s affairs & social welfare co-ordinationVirgínia MatabeleYouth & sport Joel Libombo

Adriano Maleiane

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Key ministers

Ministers in the presidency

Central bank governor

6 Mozambique


Economic structure

Annual indicators

1995 1996 1997 1998a 1999b

GDP at market prices (MT bn) 24,743 32,310 40,126 46,134 50,747

Real GDP growthc (%) 4.3 7.1 11.1 9.9 10.0

Consumer price inflation (year-end; %) 54.1 16.6 5.8 –1.3d 4.8d

Populatione (m) 15.0 15.7 16.1 16.4 16.8

Exports fob (US$ m) 174 226 234 255 280

Imports cif (US$ m) 729 802 855 965 1,550

Current-account balancef (US$ m) –680 –665 –711 –778 –1,047

Total reserves excl gold (US$ m) 195 344 517 608 654

Total external debt (US$ m) 7,458 7,566 7,639 8,208d 5,565

External debt-service ratio, paid (%) 34.5 26.0 18.2 18.0d 15.0

Cashew nut productiong (‘000 tonnes) 33 67 35 49 51

Raw cotton productiong (‘000 tonnes) 53 51 74 80 91

Prawn production (‘000 tonnes) 7.5 7.8 8.6 9.8 n/a

Exchange rate (av; MT:US$) 9,024 11,294 11,544 11,853d 12,446d

July 7th 2000 MT 16,100:US$1

Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total

Agriculture 26.3 Private consumption 5.2

Industry & fisheries 17.9 Government consumption 14.2

Construction 11.3 Gross domestic investment 5.3

Transport & communications 11.4 Exports of goods & services 24.9

Commerce & others 33.3 Imports of goods & services 49.6

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1998 US$ m Principal imports 1997 US$ m

Prawns 72.6 Machinery & equipment 139.0

Cotton 22.3 Vehicles, transport equipment & spare parts 113.8

Cashew nuts 19.1 Fuel 92.3

Sugar 8.4 Textiles 43.4

Copra 5.0 Metal products 38.9

Main destinations of exports 1998h % of total Main origins of imports 1998h % of total

Spain 15.9 South Africa 51.5

South Africa 15.5 Portugal 5.8

Portugal 10.7 US 3.8

US 9.7 Zimbabwe 2.9

a Official estimates. b EIU estimates. c Based on recalculation of national accounts data by National Statistics Institute. d Actual. e Extrapolatedfrom 1997 census. f Excluding transfers. g Marketed production. h Based on partners’ trade returns, subject to wide margin of error.

Mozambique 7


Quarterly indicators

1998 1999 20002 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Financial indicatorsExchange rate MT:US$ (av) 11,669 11,923 12,269 12,398 12,499 12,764 13,439 13,785 MT:US$ (end-period) 11,813 12,074 12,366 12,438 12,546 12,933 13,300 14,550M1 (end-period; MT bn) 5,043.7 5,408.5 5,613.0 5,678.1 5,867.5 6,111.1 6,954.4 6,928.9 % change, year on year 18.7 18.5 14.5 19.6 16.3 13.0 23.9 22.0M2 (end-period; MT bn) 8,677.3 9,259.4 9,817.7 9,965.4 10,368.8 11,107.4 12,901.3 13,407.3 % change, year on year 17.0 15.8 17.9 18.8 19.5 20.0 31.4 34.5

PricesConsumer pricesa

% change, year on year –1.2 –1.1 1.0 0.2 2.2 3.2 2.7 11.2

Sectoral trendsProduction (annual totals;’000 tonnes) Maize ( 1,124 ) ( 1,185 ) n/a Coconuts ( 450 ) ( 435 ) n/a Cotton ( 91 ) ( 91 ) n/a Cashew nuts ( 52 ) ( 53 ) n/a

Foreign trade & reserves (US$ m)Exports fobb 61.2 73.5 75.5 56.7 66.8 62.0 72.2 n/aImports cifb –270.9 –272.7 –294.5 –275.3 –315.7 –359.4 –322.7 n/aTrade balance –209.7 –199.2 –219.0 –218.6 –248.9 –297.4 –250.5 n/aReserves excl gold (end-period) 521.8 523.7 608.5 642.7 655.7 667.7 654.0 677.9

a Maputo. b DOTS estimates.

Sources: IMF, International Financial Statistics; IMF, Direction of Trade Statistics; FAO; National Statistics Institute; Bank of Mozambique.

8 Mozambique


Outlook for 2000-01

Political forecast

The domestic political scene will continue to be dominated by tension betweenthe governing Frente de Libertação de Moçambique (Frelimo) and oppositionResistência Nacional de Moçambique (Renamo) parties in the coming months.Sources of disagreement include Renamo’s continuing insistence that theDecember 1999 elections were marked by fraud—an assertion which hasgained little credence at home or abroad—and, more particularly, itsdetermination to secure a share of public appointments and some influence inthe administration of the provinces in which it won majorities.

Renamo is articulating these aims in a characteristically bellicose manner,adopting tactics such as aggressive public rhetoric, implicit threats of violenceand obstructiveness in parliament, but the government has shown little sign ofwillingness to compromise on the party’s demands and has moved toundermine Renamo publicly by leaking the results of supposedly secretnegotiations. The ruling party’s official thinking is that Renamo’s challengewill eventually fade and Frelimo will resume its historical political hegemonyin Mozambique. However, it appears to have been unnerved by Renamo’sresilience in the December 1999 elections, in which the opposition groupmaintained its hold over most of the populous centre and north of thecountry, despite four years of dramatic social and economic progress for whichthe government had hoped to gain some credit.

This result seems to have reinforced Frelimo’s determination to weaken andmarginalise the opposition. However, this may prove to be a risky strategy;Renamo is now one of Africa’s largest opposition parties—it has won nearly40% of the vote in two successive democratic elections—and cannot be easilyor safely excluded, a point which foreign donors sought to convey to thegovernment at the June consultative group annual meeting in Paris.

The main domestic priority will be to ensure that the new cabinet proceedswith the implementation of the official government programme. This willaddress concerns that administration and management have been subject toextended delays because of the preparations for the December 1999 elections,the transition to a new cabinet and the effect of the floods. The new cabinet isstill settling in, and donors will be watching the performances of the Ministryof Finance and the key social-sector ministries of health, education andagriculture with keen interest.

Mozambique will continue to focus on promoting dialogue and the peacefulsettlement of regional conflicts. This includes efforts to resolve the conflict inthe Democratic Republic of Congo—where four members of the SouthernAfrican Development Community (SADC) are involved as direct combatants—and in Angola. The Mozambican president, Joaquim Alberto Chissano, theoutgoing SADC chairman, has signalled his support for negotiations in both

Domestic politics

International relations

Mozambique 9


conflicts, suggesting that Mozambique will remain in dispute with traditionalallies such as Zimbabwe and Angola, for whom this is an unwelcome message.

However, if the donors’ call for greater inclusiveness in Mozambican politics,towards Renamo particularly, is unwelcome from the government’sperspective, the extensive assistance received for post-flood reconstruction hasagain demonstrated the level of goodwill and support that the Mozambicangovernment enjoys abroad. This is largely a reflection of the country’sexemplary record in economic management and democratic developmentsince 1994. The government’s primary concern in its relations with foreigndonors in the coming year will be the management of the extensive assistanceprogramme, and the ability of the country to absorb this effectively.

Economic policy outlook

Following the delays and disruption caused by the election campaign in 1999,the extensive flooding between January and March, and the difficultiesassociated with the transition to a new economic team, the government will beunder pressure to accelerate policy implementation. International donors, whohave made allowances for these factors, will now wish to see enhanced effortsto achieve benchmarks in the government’s poverty reduction and growthfacility agreement with the IMF—including civil service reforms and parastatalrestructuring—over the next six months. As a result, structural reforms, such asprivatisation, and efforts to increase budgetary transparency and efficiency willbe stepped up.

However, the government’s capacity to implement sound official objectivesremains a matter for concern, and although Mozambique has sought tochannel an increasing proportion of international assistance away fromdonors’ own implementation mechanisms and through the budget and stateinstitutions, the process is proving to be extremely uneven. The problem hasbeen made more apparent by the extensive international assistance receivedfor reconstruction—much of which, it now appears, will be disbursed bydonors directly—leading to the conclusion that Mozambique may even havetoo much international assistance.

Fiscal policy will be expansionary over the forecast period, driven by the inflowof assistance for the post-flood reconstruction programme. The 2000 budgetallows for an 8.5% increase in total spending in dollar terms, and additionalreconstruction assistance is to be made available from donor pledges made at aconference in Rome in May. Disbursement of these funds—totallingUS$453m—will be spread over the 18 months to end-2001.

Monetary policy is expected to be tightened in coming months owing tostrong growth in M3 money supply. Although monetary policy has not beenoverly lax, the Banco Central de Moçambique (BCM; the central bank) isseeking to lower inflation, stabilise the exchange rate and slow money growth.Measures adopted thus far—including raising interest rates on Treasury bills

Policy trends

Fiscal policy

Monetary policy

10 Mozambique


and the rediscount rate—have had little success, and thus a substantialtightening of monetary growth through a further rise in interest rates isexpected. Inflationary pressures are believed to have started to ease as supplyand distribution networks in the flood-affected southern and central areas ofthe country have begun to be re-established.

Economic forecast

The EIU is predicting that world growth will reach 4.6% on a purchasing-powerparity basis this year. GDP growth in the OECD is forecast to increase to 3.7%in 2000, before falling back to 2.9% in 2001 as US expansion slows towards amore sustainable rate. The booming US economy will continue to lead globalexpansion and this will help support stronger performance in the EU and Asia.World trade growth is projected to expand by 8.5% in 2000—the most rapidrate of expansion since 1997—and by 7.5% in 2001. Conditions in SouthernAfrica, where nervousness about the political situation in Zimbabwe hascontributed to rand instability, will have relatively little effect on Mozambiquegiven its comparatively low level of export penetration of the regional market.

The outlook for Mozambique’s commodity-based exports in 2000-01 is mixed.We forecast that the cotton price will recover to US$0.56/lb in 2000 andUS$0.68/lb in 2001—up by 28% on 1999 levels—but that prawn prices will fallby roughly 7% to US$14.8/kg in 2000 before recovering modestly to US$15/kgin 2001. We have raised our forecast for international oil prices, which are nowexpected to average US$24.5/barrel in 2000 and US$20/b in 2001. Higher oilprices, the strength of the dollar and the long-awaited recovery in the euro willall feed through into Mozambican inflation.

The economic outlook in Mozambique remains favourable. Despite the impactof severe flooding earlier in the year, which resulted in extensive infrastructuraldamage and disruption to agriculture and transport, the underlying sources ofeconomic growth—high levels of foreign direct investment, macroeconomicstability and a favourable policy environment—remain strong. Substantialinternational assistance for reconstruction is expected to fuel a boom ininvestment in public and private infrastructure, and the start-up of productionat the US$1.3bn Mozal aluminium smelter in June (six months ahead ofschedule) will provide a further boost to economic expansion this year. As aresult, we have raised our forecast for real GDP growth to 7.5% in 2000—one ofthe highest rates in the world—and to 8.5% in 2001.

Because of the disruption to agricultural marketing caused by the floods, and asharper depreciation of the metical, which has raised imported inflation, the rateof consumer price inflation is expected to be considerably higher than the trendof recent years, at an annual average of 10% in 2000. However, monthlyinflation is expected to ease during the second half of the year once supplymarkets return to normal, and the annual rate is expected to average 5% in 2001.

International assumptions

Economic growth

Inflation

Mozambique 11


The exchange rate of the metical against the US dollar is expected to stabiliseduring the remainder of 2000. Its instability during the first half of 2000 wascaused largely by the shock of the flooding and by the strength of the dollaragainst the rand (South Africa is Mozambique’s main trading partner).However, robust foreign reserves and tighter monetary policy, including anincrease in interest rates by the BCM, should now help to stabilise the metical.In fact, the recent fall is consistent with achieving the central bank’s officialtarget of an annual metical depreciation of 5% against a basket of currencies(so as to preserve competitiveness). In line with this, we expect the metical todepreciate to an annual average of MT14,000:US$1 in 2000 and toMT14,700:US$1 in 2001.

The start-up of production from the Mozal aluminium smelter six monthsahead of schedule will produce a substantial improvement in Mozambique’sexternal sector over the forecast period. Exports from Mozal are expected to beworth some US$90m in 2000, rising to US$400m in 2001. This will more thancompensate for slower growth of agricultural exports owing to unfavourableinternational prices. Imports will fall because of the completion ofconstruction work at Mozal, but the decline will be only marginal because ofan increase in imports related to post-flood reconstruction work. Overall, thedeficit on the trade account will narrow from US$1.27bn in 1999 to US$975min 2000 and US$525m in 2001.

Relief on sovereign debt service granted by official creditors in response to theflooding, combined with the debt reduction under the IMF and World Bank’sheavily indebted poor countries (HIPC) initiative, will substantially reducedebt-service payments and improve the country’s debt profile. As a result ofhigher exports and debt relief, the deficit on the current account will narrow toUS$871m in 2000 and to US$389m in 2001. This will easily be covered byconcessional aid inflows and robust levels of foreign direct investment.

Mozambique: forecast summary(% unless otherwise indicated)

1998a 1999a 2000b 2001b

Real GDP growth 9.9 10.0 7.5 8.5

Consumer price inflationc –1.3d 4.8d 10.0 5.0

Exports of goods fob (US$ m) 255 280 390 800

Imports of goods cif (US$ m) 965 1,550 1,365 1,325

Trade balance (US$ m) –710 –1,270 –975 –525

Current-account balance (US$ m) –778 –1,047 –871 –389

Exchange rate (av; MT:US$) 11,853d 12,446d 14,000 14,700

a EIU estimates. b EIU forecasts. c Year-end. d Actual.

Exchange rates

External sector

12 Mozambique


The political scene

Over the past quarter the main opposition party, Resistência Nacional deMoçambique (Renamo), has kept up its demand for a recount of the December1999 election results, repeating its claim to have won the polls and using itsplatform in parliament, the Assembléia da República, to voice its grievances.The party leader, Afonso Dhlakama, has also maintained his earlier threat (May2000, page 13) to establish a parallel administration in those areas where theparty won majorities, hinting that Renamo may not be able to preventviolence by its supporters.

Most of Renamo’s characteristically bellicose rhetoric was dismissed as bluster,but the party appeared to have been overtaken by events following an outbreakof violence in the northern district of Angoche in Nampula province on May5th. A commercial dispute in a local market took on political overtones when agroup of Renamo supporters stormed a local police station in an attempt tofree a detained member. Four people were killed by police in the ensuingstruggle and the station commander was wounded, while the Renamo memberescaped from jail. The government took a strong line on what it termedcriminal violence, and stated that Renamo members involved in the fracaswould be arrested. It also warned that it would act against politicians whoengaged in what it regarded as incitement, and that the immunity of RenamoMPs, including the party’s parliamentary leader, Ussufo Quitine, might belifted. The Renamo delegate in Angoche district, Alvaro Chale, was arrested onMay 15th despite maintaining that he had not been involved in the attack, buthe was later released on bail. Several Renamo members, including the localdelegate, remain on the run. Pressure increased in June when a Renamo rally inthe central city of Beira was broken up by the police, after the party failed tosubmit its request for official permission in time.

Since the first democratic elections in 1994, political violence, although notunknown, has been rare, and politicians of all persuasions have generally beencareful to avoid any direct incitement to such disturbances. After the incidentin Angoche Renamo trod a fine line, condemning “government harassment”and reviving its boast that it is able to mobilise an armed force, but beingcareful to stress that it does not advocate a return to war. Similarly, thegovernment, while stating that it would act to preserve law and order,professed its willingness to engage in discussion with the opposition.

The president, Joaquim Chissano, subsequently admitted on June 5th that thegovernment had entered into secret discussions with Renamo, handled by theminister of transport, Tomás Salomão. Mr Chissano insisted that the electionresults were not included in the discussion. Mr Dhlakama later admitted that,during the talks, he had dropped his demand for a recount of the vote and afresh election, stating that this would be impossible because of the floodsearlier in the year and the fact that donors would be unwilling to pay for newelections. Instead, he concentrated on the demand that qualified Renamocandidates be considered for the governorships of provinces where the party

Renamo repeats itsgrievances

There is political violencein Angoche

The two sides entersecret talks

Mozambique 13


had won majorities. Renamo later hinted that it would settle simply forconsultations on such appointments.

However, the government maintained its hardline approach towards Renamo,seeking to embarrass the party and to reinforce the public impression that it isunfit to govern by publicly revealing the venal nature of Renamo’s demands.In particular, the government stated that much of the discussion hadconcerned Renamo’s financial difficulties, and included requests for moneyand the consideration of its members for administrative appointments in thestate sector.

Mr Chissano also moved publicly to undermine Renamo’s negotiator, theformer parliamentary leader Raul Domingos, by claiming that Mr Domingoshad requested personal financial assistance and government protection(because of fears that his political rivalry with the Renamo leader, AfonsoDhlakama, would lead to retribution). The behaviour of the ruling Frente deLibertação de Moçambique (Frelimo) party reinforces the perception that itregards Mr Domingos as a more effective party leader and greater politicalthreat than Mr Dhlakama.

On July 7th Renamo’s national council announced that Mr Domingos wassuspended from all positions in the party while it set up a commission ofenquiry into his role in the talks with the government.

The prime minister, Pascoal Mocumbi, rejected Renamo’s request that itsmembers be appointed to the boards of public companies, stating that suchappointments were made solely on the basis of competence. There may be anelement of truth in this statement, but it has not been lost on Renamo nor onthe general public that most such appointments have gone to Frelimomembers—including former cabinet ministers—or to others closely associatedwith the ruling party. The issue has also underscored a major historicalproblem for Renamo, traditionally the party of outsiders: the excludedpopulations of the north and centre lack the education, skills and money tocompete at a national level. This constituency includes poor rural populationsand low-level functionaries who see their career aspirations blocked. Its coreperception is that wealth and administrative power is the monopoly of aneducated and moneyed elite, predominantly drawn from the south andintimately associated with Frelimo.

Frelimo held a national party meeting in the Maputo suburb of Matola fromMay 31st to June 5th, to assess its performance in the December 1999 electionand to begin preparations for the 2004 polls. Overall, the party’s electoralperformance was deemed to be disappointing. Although it made inroads in anumber of regions and increased its share of the vote overall, the party fell farshort of its objective of achieving a two-thirds majority—sufficient to allow itto alter the constitution unilaterally—and suffered reverses in Zambezia andNiassa provinces. More seriously, it failed to break Renamo’s hold on thecentral and northern provinces, where Frelimo has little historical legitimacy.In an address to the opening session, which was otherwise closed to the media,

Frelimo assesses itselection performance

Renamo is being excluded

14 Mozambique


the party secretary-general, Manuel Tomé, called for a frank and opendiscussion of Frelimo’s performance.

Controversially, Mr Tomé used the Frelimo national party meeting to attacksections of the domestic and international media, alleging that they had beenmanipulated by the opposition. Frelimo appears to believe that some membersof the media are insufficiently sceptical about Renamo’s claims of electoralfraud (May 2000, page 12). However, a report from the UK-based public mediaand election monitoring organisation, Article 19, has criticised excessive mediabias in favour of the government during the December 1999 election. Theorganisation commended the generally fair election campaign and notedimprovement among sections of the state media, including radio andtelevision, since the 1994 polls. However, it also noted that the state-alignedmedia has an in-built bias towards Frelimo. In particular, Article 19 questionedthe decision of the election monitoring organisation, the Comissão Nacionalde Eleições, to exempt two prominent newspapers from guidelines regardingopposition access and editorial balance on the questionable grounds that theyare privately owned. Ownership of the former state newspapers, the dailyMaputo-based Notícias and the weekly Domingo, was transferred to a privatecompany owned by the central bank and a parastatal insurance company in1993. The credibility of government claims that the newspapers are nowprivate has not been helped by the fact that the editorial staff and pro-government stance of the papers have remained the same under state andprivate control.

In August Mr Chissano is to give up the chairmanship of the Southern AfricanDevelopment Community, ending a year in office in which he has tried tobridge deep divisions in regional security issues—particularly the wars inAngola and the Democratic Republic of Congo (DRC)—by attempting topromote negotiated settlements through multilateral channels. This approach,which is closely aligned to that of South Africa, has frequently placedMozambique in conflict with Zimbabwe and Angola, countries which haveindicated that they expected partisan support from an old ally. Relations withAngola have been strained further by Mozambique’s reluctance to support thegovernment’s exclusively military approach to the civil war. In AprilMr Chissano gave an interview to the Angolan opposition newspaper, Folha-8,in which he indicated that Luanda should consider dialogue with the UniãoNacional de Resistência Total de Angola (UNITA) rebels as a means of endingthe long-standing conflict. An official for the Angolan government—which hasgenerally reacted strongly to any calls for negotiation—denied that any suchmessage had been communicated through official channels, and questionedthe accuracy of the press report.

Mozambique’s refusal to support Angola’s demand that an Organisation ofAfrican Unity conference in Togo on July 10-12th be boycotted, because ofTogo’s alleged violation of UN sanctions against UNITA, has exacerbatedtension. Angola has lobbied Mozambique hard on this issue, and in May itsminister of foreign affairs, João Miranda, travelled to Maputo to put his case tothe government. However, the Mozambican minister of foreign affairs,

Frelimo makes accusationsof media bias

Relations with Angola andZimbabwe are strained

Mozambique 15


Leonardo Simão, has stated that although Mozambique supports tightersanctions against UNITA, it saw no purpose in boycotting the summit. Frictionis also emerging between the two governments over the choice of a new UNrepresentative in Luanda. The UN has reportedly proposed a Mozambicannational, Agostinho Zacarias, for this position, a move which has been greetedcoolly by the Angolan government.

Relations between Mozambique and Zimbabwe are also tense, owing toMozambique’s refusal to sanction military intervention in the war in DRC, andmore recently because of its apparent lack of support for the administration ofthe president, Robert Mugabe, over the violent election and land reformcampaigns. Mr Chissano has called for a peaceful solution to the land conflictin Zimbabwe, and other members of his government have publicly andprivately expressed dismay at the authoritarianism of Mr Mugabe’sgovernment. This is partly because Mozambique wishes to avoid any contagioneffect: in May the prime minister sought to deflect suggestions that conflict inZimbabwe would have any impact on Mozambique, stating publicly that themanipulation of racial tension would have no role in the Frelimo party.

South African and Mozambican police launched a programme to locate andrecover weapons caches in Mozambique. According to the South African PoliceService, this resulted in the destruction of 150 firearms and 25,000 rounds ofammunition. Five previous joint operations since 1996 had led to the recoveryof 14,000 assault rifles and 3.4m rounds of ammunition, as well as anti-personnel mines and unexploded ordnance.

Communities displaced by the January-March flooding are continuing toreturn to their places of origin. According to the National Institute for DisasterManagement, 70% of the 491,000 people who sought refuge in governmentaccommodation centres during the floods have now returned home, eitherspontaneously or with outside assistance. A total of 677,000 people areexpected to require food relief and other assistance for reintegration over theperiod to October 2000.

Economic policy

The minister of finance, Luísa Diogo, presented the 2000 budget to parliamenton April 20th, four months later than normal owing to the election inDecember 1999. The budget reiterates the government’s economic priorities ofmaintaining macroeconomic stability, promoting poverty reduction throughgreater prioritisation of health, education, agriculture and social assistance, andestablishing an environment for rapid economic growth and private-sectordevelopment. Specific policy objectives for 2000 include:

• consolidating the implementation of value-added tax (VAT);

• modernising systems for internal and external revenue collection,including the hiring of additional auditors and tax inspectors; and

Weapons cachesare uncovered

Flood assistance continues

The 2000 budget ispresented to the assembly

16 Mozambique


• capacity building in government institutions, to increase the quantity andquality of public service delivery.

Total expenditure has been set at US$1.08bn—8.5% higher than the previousyear’s total—and total revenue, before grants, is estimated at US$513m (anincrease of 4.9% on the previous year). Nearly half of total budgetary spending(around 48%) will be funded by external assistance, underlining the country’shigh level of dependence on aid.

Strengthening official revenue, which is projected to rise from 12% of GDP in1999 to nearly 16% of GDP by 2010, is a major priority, particularly as tradeliberalisation means that revenue from import tariffs will shrink from 2% to0.5% of GDP during the same period. As a result, taxes, including VAT, areprojected to rise, underlining the need to strengthen government taxcollection.

In terms of spending, social-sector expenditure accounts for 48% of the total,with education representing 21% of this total and health 13%. Defence andsecurity spending accounts for 23%. The biggest increases in public spendingfor 2000 are for justice (up 44%), health (up 32%) and education (up 27%).

Mozambique: projected budget resources(US$ m)

1998 1999 2000 2005 2010

Revenues 449 489 513 802 1,304

Grants 327 455 333 370 390

Foreign financing (net) 185 60 171 198 196

Domestic financing (net) –155 –9 64 3 2

Total 806 996 1,081 1,374 1,893

Source: Ministry of Planning and Finance.

Revenue mobilisationis targeted

Mozambique 17


The government has prepared an interim poverty reduction strategy paper(PRSP), the drafting of which is a condition for debt relief (May 2000, page 27).The main objective of the paper is to reduce the overall rate of poverty fromthe current 69.3% to 60% by 2004, and to 50% by 2010. According to thereport, based on a 1996-97 study, Understanding Poverty and Well-Being inMozambique: the First National Assessment (1st quarter 2000, page 16), the maindeterminants of Mozambique’s high rate of poverty are:

• slow economic growth up to the early 1990s;

• poor education levels;

• high rates of household dependency;

• low agricultural productivity; and

• poor infrastructure.

The PRSP defines a set of actions and priorities, integrating governmentprogrammes and policies, to promote poverty reduction over the 2000-04period. The main elements of poverty reduction will be the maintenance ofgrowth rates of 7-9% a year over 2000-04, establishment of a medium-termfiscal policy which guarantees resources for poverty reduction activities,implementation of global policies which incorporate trade liberalisation,tightened customs management, studies to promote economic sectors, and areinforcement of government economic management capacity and linkage topoverty reduction.

Key points of the poverty reduction policy

• Maintain economic stability, and rapid and sustainable growth.

• Prioritise investment in human capital and social services including education, health,and access to clean water and sanitation.

• Develop rural infrastructure.

• Establish social security and safety net programmes for vulnerable members of thepopulation.

• Improve technical capacity to research, monitor and evaluate poverty.

The poverty-reductionstrategy is drafted

18 Mozambique


Mozambique: demographic and macroeconomic indicators, 1997-2004(Actual and projected)

1997 1998 1999 2000 2001 2002 2003 2004

Demographic indicatorsTotal population (m) 16.1 16.4 16.8 17.2 17.6 18.1 18.5 19.0Projected growth (%) 2.29 2.33 2.35 2.36 2.38 2.39 2.40 2.41Birth ratea 44.32 43.97 43.56 43.1 42.63 42.17 41.70 41.25Mortality ratea 21.34 20.27 19.21 18.19 17.19 16.20 15.23 14.29Life expectancy (years) 42.28 42.88 43.48 44.09 44.69 45.30 45.85 46.41Infant mortality rateb 145.45 142.00 138.99 135.79 132.58 129.37 126.47 123.56

Macroeconomic indicatorsNominal GDP (MT bn) 40,603 46,203 51,560 57,767 67,768 78,281 90,415 104,429Real growth rate (%) 11.1 9.9 10.0 8.3 8.0 8.0 7.5 7.5Average annual inflation (%) 5.9 0.6 1.3 6.6 5.0 5.0 5.0 5.0

Regional trends in poverty reduction (%)Reduction in poverty – – –2.1 –2.1 –2.1 –2.1 –2.1 –2.1National – – 69.4 67.3 65.2 63.1 61.0 58.9North – – 66.3 64.2 62.1 60.0 57.9 55.9Centre – – 73.8 71.7 69.6 67.6 65.5 63.4Southc – – 65.8 63.7 61.6 59.6 57.5 55.4

a Per 1,000 population, per year. b Among infants aged 0-1. c Includes Maputo city.

Sources: Ministério da Plano e Finanças; Instituto Nacional de Estatísticas.


Economic trends

Monetary growth reached 42% in the 12 months to March, and IMFbenchmarks for both M3 and credit to the economy were exceeded. Althoughthis is attributed to an increase in foreign-currency deposits and a flight frommeticais accounts rather than lax monetary policy, these developmentsconstitute a setback for the Banco de Moçambique (BCM; the central bank),which for several years has attempted—with some success—to reversedollarisation and promote greater use of local currency in domestictransactions. Higher monetary growth and inflation has prompted the BCM toadopt a tighter monetary stance, intervening in open-market operations whereit has raised interest rates on its Treasury bills and the rediscount rate, causing acorresponding rise in commercial lending rates.

The flight to foreign currency appears to have been driven by the weakness ofthe metical, which experienced a sharp depreciation in the first months of theyear after nearly three years of unprecedented stability against the dollar (May2000, page 20). The fall in the metical is the result of several factors, includingthe shock of the January-March floods and the rise in the value of the US dollarinternationally. The government’s T-bill operations are proceeding in keepingwith their original objectives of smoothing temporary financing gaps,providing an instrument for monetary policy and establishing a vehicle tomobilise domestic savings.

Monetary growthremains high

Mozambique 19


The high level of inflation—by Mozambican standards, at least—is also due toother factors, most particularly the disruption to transport and marketingoperations following flooding (May 2000, page 20), which reduced theavailability of many basic goods. Inflation is expected to stabilise as thisdisruption eases; more recent data indicate that this is already happening, withaverage month-on-month inflation standing at 14.6% in May.

Manufacturing

Mozambique’s first industrial mega-project, the US$1.3bn Mozal aluminiumsmelter being built outside Maputo by Billiton, the London-listed parent ofSouth Africa’s Gencor, officially began production on June 18th. The project,which took just over two years to build, was completed under budget and sixmonths ahead of schedule. Billiton’s partners in the Mozal project includeSouth Africa’s Industrial Development Corporation and a Japanese industrialgroup, Mitsubishi. Mozal is expected to reach full operational capacity of250,000 tonnes/year by March 2001, when its exports are likely to be worthsome US$400m a year—well in excess of Mozambique’s total exports in 1999.

This is not the only financial benefit as far as the government is concerned: thefactory is situated in an export-processing zone and qualifies for special taxincentives, but the government should still receive a 1% turnover tax and a 4%share of royalties, meaning that it is set to gain US$20m or more per year indirect tax revenue. The Mozal investment is enormous in relation to the size ofthe Mozambican economy, but the project has few linkages to other sectors; inits construction phase, foreign content accounted for roughly 90% of the total,with about two-thirds being sourced from South Africa alone. However, Mozalhas implemented a programme to promote the development of local suppliersthrough its charitable arm, the Mozal Foundation.

Inflation is stabilising

The Mozal mega-projectcomes on stream early

20 Mozambique


Energy and mining

The World Bank is supporting a new geological mapping project that willprovide geophysical and cartographic data on the country’s mining resources.The Bank believes that the sector has the potential to become a significantexport earner: official mining exports are low, at just 2.5% of total exports, butunrecorded exports from the informal sector are believed to be six to seventimes higher, at US$40m-50m per year (US$30m-40m in gemstones andUS$10m in gold).

There is also potential for a substantial increase in mining investment.Although this has been rising rapidly in recent years, it was still only US$19min 1998, according to figures from the National Institute of Mines—relativelylow when compared with other countries in Africa with similar geologicalpotential (1st quarter 2000, page 17).

Anglo American Corporation of South Africa is to undertake mineralprospecting in the central province of Tete. Exploration work for copper, cobaltand nickel is to be concentrated in the districts of Moatize and Chiponde.

After a long-running dispute over access to the Pande gasfield, a US company,Enron, and Sasol Corporation of South Africa have reached agreement oncontrol of the field. Under the agreement Sasol will build a single exportpipeline from the gasfields of northern Inhambane province to South Africa,via Maputo. Sasol will now have sole exploration and development rights tothe Pande field, acquired by Enron in 1995, and will be responsible for the saleand distribution of gas to customers including the US firm, which will purchasegas for its planned US$1.1bn steel project in Maputo (May 2000, page 21).

The agreement also puts Sasol in a dominant position regarding theproduction and supply of gas in Southern Africa, a situation likely to concernother companies exploring for gas in Mozambique. Sasol plans to spendUS$600m constructing a pipeline—with the Mozambican section costingroughly two-thirds of the total—to supply the natural gas market in SouthAfrica. According to a Sasol spokesperson, gas exports could start as early as2004. The company must also invest a further US$750m in associatedinfrastructure in South Africa to expand gas distribution.

The closing date for Mozambique’s first offshore licensing round has beenextended to October 31st 2000 (May 2000, page 24). A US company, Western-Geophysical, is managing the licensing round on behalf of Mozambique’s stateenergy company, Empresa Nacional de Hidrocarbonetos (ENH). The UScompany is undertaking its own exploration work, and marketing this andENH’s existing database to prospective investors. A group of 14 offshore blockswill be licensed in this first offshore round.

World Bank promotesmining investment

Sasol and Enron reachagreement

Mozambique 21


Agriculture

According to estimates from the National Food Early Warning System(NFEWS), production of coarse grains—maize, millet and rice—is set to fallsome 15% to 1.5m tonnes in 2000 because of the devastating floods earlier thisyear. Roughly 198,000 ha of crops were lost owing to the floods—some 5% ofthe total. Production of the staple maize crop is expected to decline by 7%, andmillet and rice outputs are expected to fall by 39% and 38% respectively.However, crop conditions in the provinces not affected by the flooding aredescribed as good, according to the NFEWS, and even in flood-affected areasthe distribution of seeds for the second season harvest has allowed somehouseholds to recover production. Nevertheless, output remains well belowdomestic needs, and food aid will be required for most of the year (see Thepolitical scene).

A number of cattle-ranching projects have been launched in the Zambezi deltaarea of Sofala and Zambezia provinces. In the most important cattle ranchingscheme, the Sena Sugar Company of Mauritius, which is rehabilitating a sugarmill and plantation at Marromeu in Sofala province, has announced aninvestment of US$1.5m to initiate livestock farming in Luabo district on the

Grain output will fall

Cattle-ranching projectsare announced

22 Mozambique


north bank of the Zambezi delta. The company plans to raise 10,000 head ofcattle, starting with the import of 2,000 heifers. Empresa Nacional deComércio, which is believed to have close links to the ruling Frente deLibertação de Moçambique (Frelimo) party, has announced a plan to investUS$300,000 in cattle ranching on 20,000 hectares of land on the south bank ofthe Zambezi in Marromeu. Another agribusiness company, Grupo Madal, hasannounced its intention to move 10,000 head of cattle from north ofQuelimane to the Luabo area.

A group of 40 Zimbabwean farmers has begun establishing farms in Manicaprovince. The farmers, who are expected to invest US$27m in the area over fiveyears, are setting up operations in the areas of Barue and Macossa in northernManica. The move predates the recent problems in Zimbabwe’s commercialfarming sector, as it follows two years of discussions between the Mozambicanauthorities and the Zimbabwean Commercial Farmers Association.Negotiations have been initiated with a further 150 Zimbabwean farmers whohave expressed interest in investing in Mozambique. The president, JoaqimAlberto Chissano, speaking at the World Economic Forum meeting in Durban(South Africa) in late June, stated that his government would welcome furtherZimbabwean commercial farmers who wished to invest in Mozambique.

Zimbabwean farmers settlein Mozambique

Mozambique 23


A UK-based company, Lonrho-Africa, has announced that it is to sell its localsubsidiary, the Lonrho-Mozambique Agro-Industrial Company (Lomaco), aspart of its plan to focus on its core operations. Lomaco currently has cottonplantations in Gaza and Cabo Delgado provinces, as well as a citrus plantationin Maputo province. The company is also to sell the Cardoso Hotel inMaputo, but will retain its energy division, Lonrho-Petroleum, which holdsthe onshore Rovuma oil-exploration block in the north of the country (May2000, pages 24-25).

Infrastructure

The new toll road from Maputo to South Africa was officially opened in June,18 months after construction began. The new road, which shortens thedistance to the South African border by around 35 km, is to be operated for 30years by a French-led consortium, Trans Africa Concessions. The first of twotoll plazas on the Mozambican side of the highway (there are three more inSouth Africa) has opened at Moamba, roughly 60 km north of the capital, anda second is to be constructed inside the city limits between Maputo and thesuburb of Matola. The toll for light vehicles and trucks is being set at MT33,000(US$2) and MT81,000-MT242,000 respectively.

Financial and other services

The government is close to completing negotiations with a Portuguese bankinggroup, Banco Comercial Português (BCP), over its shareholdings in two of thecountry’s largest banks, Banco Comercial de Moçambique (BCM) and BancoInternacional de Moçambique (BIM), a press statement released in June by theMinister of Finance, Luísa Diogo. The government had earlier expressedconcern that BCP’s dominant position—consolidated by its January takeover ofBCM’s parent company, Banco Mello—could damage competition in the localbanking sector, and indicated that the two institutions should be kept separate(May 2000, page 25). BCP has now agreed that it will not retain a majorityshareholding in BCM, and may dilute its equity stake in the bank in favour oflocal investors, concentrating instead on its shareholding in the smaller andmore profitable BIM. According to Ms Diogo, a general meeting of BCMshareholders is set to approve a large increase in the bank’s capital.

In the meantime, a large-scale fraud involving some MT7bn (US$435m) offunds has been discovered in BCM. Staff from the bank’s operationsdepartment have been detained by the police and an investigation iscontinuing. A fraud case from 1996, involving US$14m, is still before thecourts (May 2000, page 26).

A ranking by revenue of Mozambique’s 100 largest companies has beenproduced by the local branch of an international auditing firm, KPMG.According to the survey, which covers the 1997/98 financial year, five of the

Maputo toll road opens

The two largest banks areto be kept separate

Mozambique’s largestcompanies are ranked

Lonrho downsizesMozambican operations

24 Mozambique


top ten companies in Mozambique are wholly state-owned corporations andfour are in the energy sector. The total revenue of the top 100 companies isUS$1.3bn. The main sectors are agriculture and fisheries, energy, finance,communications and transport, and commerce and tourism. (A full list ofcompanies is available at http://www.sortmoz.com/aimnews.)

Mozambique: ten largest companies(Ranked by revenue; 1997/98 financial year)

Company Rank Sector Ownership Revenue (US$ m)

Hidroeléctrica de Cahora Bassa 1 Energy Portugal, state 98.3

Caminhos de Ferro de Moçambique 2 Transport State 75.6

Telecomunicações de Moçambique 3 Telecoms State 69.8

Cervejas de Moçambique 4 Beverages South Africa 63.2

Electricidade de Moçambique 5 Energy State 60.0

Banco Comercial de Moçambique 6 Finance Portugal & others 51.2

Linhas Aéreas de Moçambique 7 Transport State 43.4

BP Moçambique 8 Energy UK 39.2

Petromoc 9 Energy State 37.0

Coca-Cola Sabco 10 Beverages US, South Africa 31.3

Source: KPMG.

Foreign trade and payments

At a conference in Rome on May 3rd-4th donors pledged US$453m to helpMozambique repair the damage caused by extensive flooding in the countrybetween January and March this year. At the conference, chaired jointly bythe Mozambican government and the UN Development Programme, Maputopresented its post-emergency reconstruction programme (PERP) whichprioritises: the restoration of public services and recovery in affected areas;the support of vulnerable groups; the reconstruction of damaged anddestroyed infrastructure; and improved capacity for disaster management inthe public sector.

The PERP establishes a framework under which donor assistance forreconstruction can be channelled, and to this purpose a special account hasbeen established in the Banco Central de Moçambique (BCM; the centralbank). The government had clearly hoped that more of this assistance wouldbe directed through its own budget rather than taking the form of donorproject and programme aid, since this would chime with its long-standingobjective of increasing budgetary efficiency and transparency. To date,however, only one donor, the Netherlands, has provided such budgetaryassistance. The administration was more successful in its other objective, ofensuring that the donor funds pledged would be additional to the existingmoneys earmarked for Mozambique at the normal donor pledging session, theconsultative group (CG) meeting held in June (see below).

Reconstruction assistanceflows in

Malawi 25


Mozambique’s main donor conference, the CG, which was held in Paris onJune 7th-9th, resulted in pledges of assistance of US$530m in 2000 andUS$570m in 2001. This amount is over and above what was pledged in Rome,and covers the government’s normal financing and budgetary costs. At themeeting the government formally presented its budget and developmentobjectives for 2000, and engaged in programming discussions with donors onaid and budget management. Although it is meant to be an annual event, theprevious CG gathering had been held in September 1998, with the delays beingattributed to preparations for the December 1999 elections.

Between 1993 and 1998 Mozambique received the third largest amount of netcapital flows into Sub-Saharan Africa (behind only South Africa and Nigeria)and the largest amount of international development assistance, according todata from the IMF. The figures place Mozambique eighth in terms of foreigndirect investment (FDI) inflows, but this relatively weak ranking under-represents the trend, because the bulk of the US$500m investment in thecountry during this period took place after 1997; 40% (US$213m) of the totalwas committed in 1998 alone. FDI totalled US$334m in 1999, and furtherinvestor commitments in the transport, energy, communications andindustrial sectors indicate that FDI levels will remain high for several years.

Mozambique: net capital flows in Sub-Saharan Africa, 1993-98(av; US$ bn)

FDI Aid Total

South Africa 8.0 1.0 9.0

Nigeria 8.6 –0.8 7.8

Mozambique 0.5 4.8 5.3

Côte d’Ivoire 1.4 3.6 5.0

Tanzania 0.7 4.1 4.8

Uganda 0.7 3.3 4.0

Ghana 0.7 3.2 3.9

Ethiopia – 3.9 3.9

Angola 1.5 1.7 3.2

Zambia 0.4 2.6 3.0

Source: IMF, World Economic Outlook, April 2000.

Donors pledge US$1.1bnover two years

FDI is soaring

26 Mozambique


The domestic financial system has expanded strongly in recent years, but itremains underdeveloped and is not in a position to provide a significant sourceof finance for the country’s investment needs. Thus most project finance willcontinue to be provided from abroad, while official financing needs willcontinue to be met by grants and highly concessional lending.

Malawi 27


Malawi

Political structure

Republic of Malawi

Unitary republic

Based on English common law and the interim constitution, promulgated in May 1995

National Assembly of 193 seats, elected by direct universal suffrage for a five-year term

June 15th 1999 (presidential and legislative); next elections due by June 2004(presidential and legislative)

President, elected by direct universal suffrage for a term of five years; Bakili Muluzi wasre-elected for a second term in June 1999

Cabinet, chaired by the president; a new cabinet was named on March 1st 2000

United Democratic Front (UDF), the largest single party in the National Assembly;Malawi Congress Party (MCP), the main opposition party; Alliance for Democracy(Aford), Malawi’s third party. Smaller parties not represented in the National Assemblyinclude: the Malawi Democratic Party (MDP); Malawi National Democratic Party(MNDP); Mass Movement for the Young Generation (MM); National Unity Party (NUP);National Patriotic Front (NPF); United Front for Multiparty Democracy (UFMD)

President and Commander in Chief of the Armed Forces Bakili MuluziVice-president and Minister of Privatisation Justin Malewezi

Agriculture & irrigation Leonard MangulamaCommerce & industry Kaliyoma PhumisaDefence Rodwell MunyenyembeEducation, sports & culture Cassim ChilumphaFinance & economic planning Matthews ChikaondaForeign affairs Lilian PatelHealth & population Aleke BandaHome affairs & internal security Mangeza MalozaInformation Clement StambuliJustice & attorney-general Peter FachiLabour & vocational training Peter ChupaLand, housing & physical planning Thengo MaloyaNatural resources & environment Harry ThomsonPresidential affairs Ken LipengaTourism, national parks & wildlife George NtafuTransport & public works Brown MpinganjiraWater development Yusuf MwawaWomen, youth & community services Mary Banda

Elias Ngalande

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Political parties

Central bank governor

Key ministers

28 Malawi


Economic structure

Annual indicators

1995 1996 1997 1998 1999a

GDP at market prices (MK m) 22,822 35,536 41,559 52,405 78,663

Real GDP growth (%) 15.4 9.0 4.9 3.1 4.7

Consumer price inflation (%) 83.5 37.6 9.2 29.8 44.8b

Population (m) c 9.3 9.5 9.7 9.8 10.0

Merchandise exports fob (US$ m) 461 506 585 498 472

Merchandise imports fob (US$ m) 431 571 713 580 590

Current-account balance (US$ m) –140 –208 –286 –288 –355

Reserves excl gold (US$ m) 111 226 163 270 251b

Total external debt (US$ bn) 2.2 2.3 2.2 2.4 2.7

External debt-service ratio, paid (%) 24.3 16.6 13.8 15.4 20.2

Tobacco production (‘000 tonnes) d 130 141 158 134 134

Exchange rate (av; MK:US$) 15.284 15.309 16.444 31.073 44.088b

July 7th 2000 MK56.05:US$1

Origins of gross domestic product 1998e % of total Components of gross domestic product 1998 % of total

Agriculture 37.4 Government consumption 14.2

Small-scale 31.1 Private consumption 84.8

Transport & distribution 28.6 Gross fixed capital formation 11.4

Manufacturing 12.7 Change in stocks 2.5

Government 9.5 Net exports of goods & services –12.9

Utilities & construction 3.1 GDP at market prices 100.0

GDP at current factor cost (incl others) 100.0

Principal exports fob 1998b US$ m Principal imports cif 1998e US$ m

Tobacco 332 Industrial 151

Tea 48 Petroleum 60

Sugar 38 Transport equipment 43

Textiles 35 Foodstuffs 40

Coffee 10

Main destinations of exports 1998f % of total Main origins of imports 1998f % of total

South Africa 14.8 South Africa 36.1

US 8.8 Zimbabwe 18.2

Germany 8.5 Zambia 8.1

Netherlands 7.3 Japan 4.0

a EIU estimates. b Actual. c UN estimates; excludes Mozambican refugees. d Production marketed at the auction floors. e Official estimate. f

Based on partners’ trade returns; subject to a wide margin of error.

Malawi 29


Quarterly indicators

1998 19991 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Output trendsGeneral index (1984=100) 136.5 128.6 120.9 109.4 117.1 121.4 107.6 n/a % change, year on year 7.6 2.1 –4.4 –17.4 –14.2 –5.6 –11.0 n/a

Financial indicatorsExchange rate: MK:US$ (av) 22.752 25.701 32.463 43.376 43.734 43.632 43.510 45.477 MK:US$ (end-period) 25.168 26.449 40.927 43.884 44.082 43.203 43.612 46.438Interest rates %) Deposit (av) 13.50 16.25 17.75 28.75 34.00 34.00 34.00 30.83 Discount (end-period) 30.00 30.00 32.50 43.00 47.00 47.00 47.00 47.00 Lending (av) 31.67 35.00 36.00 48.00 54.00 54.00 54.00 52.33 Treasury bill (av) 25.85 36.78 27.34 41.95 46.03 46.98 41.74 37.73M1, (end-period; MK m) 3,429.2 4,739.5 4,995.6 4,999.2 4,998.6 6,874.2 6,880.9 6,651.2 % change, year on year 38.2 43.5 26.6 56.2 45.8 45.0 37.7 33.0M2, (end-period; MK m) 6,323 8,202 9,414 9,463 8,959 12,291 12,214 11,974 % change, year on year 29.5 30.9 31.2 60.0 41.7 49.9 29.7 26.5

PricesConsumer prices (1990=100) 717.6 744.2 762.5 926.3 1,120.1 1,137.3 1,089.3 1,213.9 % change, year on year 18.9 20.1 29.3 50.5 56.1 52.8 42.9 31.0

Sectoral trendsProduction Electricity (av; m kwh) 76.6 87.7 91.7 83.8 77.4 87.0 96.6 n/a Tea (‘000 tonnes) 20.3 9.6 2.6 7.9 17.1 9.4 3.4 n/aTobacco auction sales Volume (‘000 tonnes) 0.0 67.6 66.8 0.0 0.0 66.6 67.8 0.0 Value (MK m) 0.0 2,292.1 2,740.0 0.0 0.0 4,244.9 3,849.3 0.0Building plans approved, Blantyre (av; MK m) 21.7 22.1 31.4 34.9 n/a 38.8 57.0 n/a

Foreign trade & reservesExports fob (MK m) 2,569.8 2,452.3 5,278.5 6,130.5 3,024.3 3,723.5 7,514.2 4,759.4 Tobacco 914.6 1,334.1 3,748.8 2,530.0 1,206.0 2,279.8 5,692.1 1,171.1Imports cif (MK m) –3,360.9 –4,402.2 –5,220.8 –6,808.1 –6,199.9 –8,221.2 8,379.7 7,957.2Trade balance –791.1 –1,949.9 57.7 –677.6 –3,175.6 –4,497.7 –865.5 –3,197.8Reserves excl gold (end-period;US$ m) 154.3 191.4 189.6 269.7 236.1 273.5 277.4 250.6

Sources: National Statistical Office, Monthly Statistical Bulletin; Reserve Bank of Malawi, Financial & Economic Review; IMF, International Financial Statistics.

30 Malawi


Outlook for 2000-01

Political forecast

The alliance of the main opposition, Malawi Congress Party (MCP) andAlliance for Democracy (Aford), has indicated that it will appeal against a courtruling upholding the result of the 1999 presidential election. Nevertheless, thepresident, Bakili Muluzi, is expected to remain in power throughout theforecast period. A second case brought by the alliance over electoral fraud hasyet to be heard. However, even in the probable event that some evidence ofvote-rigging in favour of the ruling United Democratic Front (UDF) isdiscovered, this will not have been on a scale large enough to have affected theoutcome of the election. Changes to the composition of the ElectoralCommission, to increase its independence, and calls for constitutional reformprior to the next election are the most that can be expected from the case. Thiswill ensure that the domestic political scene remains generally stablethroughout 2000 and 2001.

All of the main parties, however, will be embroiled in some degree of internalconflict. Constitutionally, Mr Muluzi has to stand down at the next election,scheduled for 2004, and whether or not the UDF attempts to alter theconstitution—a decision not expected during the forecast period—leadingparty members will vie for position. More public, and potentially far moredamaging, will be the dispute within the MCP/Aford alliance, and in particularwithin the MCP itself, which will allow the UDF to maintain and possiblybuild on its slender majority in parliament. The MCP deputy-leader, JohnTembo, is beginning another campaign for the party leadership against theincumbent, Gwanda Chakuamba; given the regional power base that each has,this threatens to split the party. The dispute certainly jeopardises the future ofthe alliance, as members of both MCP factions are in favour of terminating therelationship with Aford. These internal squabbles are likely to intensify if thealliance performs poorly in the local elections, scheduled for September,although a delay to the elections cannot be ruled out. Independent candidatesare expected to perform well in the elections, benefiting from a disaffectedelectorate which has experienced a fall in living standards since the advent ofmultiparty rule. A low turnout is also likely.

Regional instability will continue to cause concern. The economy will be hurtby events in Zimbabwe, but this will be only through a worsening of theregion’s image—the South African rand has fallen sharply as investor concernshave grown, and the Malawian kwacha has begun to slide.

The direct economic impact of a collapse in Zimbabwe would be limited.Mr Muluzi has urged restraint in Zimbabwe, and is concerned about the effectregional troubles are having on investment in the region. Given the manyother bodies involved in resolving regional conflicts, and Mr Muluzi’s activerole in mediating between the two sides in the Sudanese civil war, Malawi willnot seek a larger role in regional conflict resolution. Instead, the country will

Domestic politics

International relations

Malawi 31


attempt to gain by differentiating itself from those involved in the conflict,and there is no chance that Malawi will get sucked into any of the currentregional wars. The only regional disputes involving Malawi will be traderelated, and will not pose a serious threat to bilateral relations. A disagreementwith South Africa over textiles will eventually be resolved, but, with the largebilateral trade deficit set to remain, similar disputes may well occur. Thetemporary suspension of Mozambican tobacco imports has brought threats ofretaliatory action, but bilateral co-operation on energy provision will continue.Provided the government can make progress in fiscal reforms, and allegationsof high-level corruption remain unproven, relations with donors should beuntroubled.

Economic policy outlook

Policy recommendations from the consultative group (CG) of donors largelycorrespond with the steps outlined in a 10-point plan presented in March bythe finance minister, Matthews Chikaonda. Strengthening fiscal discipline,increasing accountability and accelerating liberalisation are not popularpolicies and will prove difficult to implement, but significant slippage willjeopardise donor funding—the CG pledged US$1.1bn in aid and discussionsare under way for new loans from the IMF under the poverty reduction andgrowth facility (PRGF). Similarly, the government is expected to maintain atight monetary policy in 2000-01.

Mr Chikaonda has built up some credibility with the donor community, andthis should allow him enough leeway to win the support of most senior partymembers for such a programme. Nonetheless, because of concerns overdomestic popularity and vested interests the government is looking to reduceits reliance on donor support. Economic diversification efforts will continue asforeign governments discourage domestic consumption of tobacco, thecountry’s largest foreign-exchange earner, for health reasons. Malawi willexplore the potential of horticultural crops such as paprika, fruits, vegetablesand cut flowers, but no crop will replace tobacco as the leading foreign-currency earner over the forecast period. Attempts to exploit the country’smineral reserves will be less successful and, although the government isstarting to address the problem, inadequate power distribution will continue tohamper the manufacturing sector.

Tighter control will be placed on government expenditure, although there willbe resistance to Mr Chikaonda’s proposal that government departmentsobserve predefined monthly spending limits. Greater transparency and re-prioritisation should improve the efficacy of the spending undertaken. Civilservice reforms will further improve the fiscal position. Reforms aimed atimproving revenue collection have been successful so far in the 1999/2000fiscal year (July-June) and, together with a broadening of the tax base, shouldhelp to reduce the fiscal deficit. State expenditure will focus on governmentefforts to diversify the economy and improve social provision. Subsidies topublic-sector enterprises will be cut over the forecast period. The fiscal position

Policy trends

Fiscal policy

32 Malawi


will, however, remain heavily dependent on foreign grants. Any worsening ofrelations with foreign donors will jeopardise Mr Chikaonda’s fiscal discipline.

The Reserve Bank of Malawi (RBM, the central bank) is expected to maintain atight monetary policy, which will help inflation to fall over the forecast period.However, given the fall in the rand and the expected knock-on effect of this onthe kwacha and Malawian inflation, rates will have to stay higher for longerthan was previously forecast. Not only will this crowd out private investment,but it will also conflict with the government’s desire to source more of itsfunding requirement domestically as it will increase the cost of servicingdomestic debt. Mr Chikaonda has promised to increase the independence ofthe RBM, but if his 10-point plan is to be enacted, increased politicisation looksmore probable.

Economic forecast

The outlook for Malawi’s key exports in 2000-01 is mixed. The EIU forecaststhat tobacco prices will fall by 11.8% in 2000 to US$3,000/tonne, and willremain flat in 2001. Tea prices are expected to rise by 3.6% in 2000 toUS$1.83/kg, but will fall back to US$1.78/kg in 2001. We have reduced ourforecast for South African real GDP growth from 4.2% to 3.7% in 2000, inresponse to the effect on investor perceptions of the situation in Zimbabwe,which has caused a sharp fall in the rand and significantly reduced thepossibility of further interest rate cuts this year. The decline in the value of therand will have a negative impact on the currencies of all countries where alarge proportion of exports go to South Africa.

Malawi: international assumptions summary(% unless otherwise indicated)

1998 1999 2000 2001

GDP growthUS 4.3 4.2 5.0 2.9OECD 2.4 2.9 3.7 2.9EU 2.6 2.1 3.1 2.8

Exchange ratesUS$ effective (1995=100) 119.3 116.4 117.5 112.9¥:US$ 130.9 113.9 107.5 104.3US$:€ 1.12 1.07 0.97 1.04

Financial indicatorsUS$ 3-month commercial paper rate 5.34 5.18 6.52 6.55¥ 2-month private bill rate 0.72 0.27 0.05 0.64

Commodity pricesOil (Dated Brent; US$/b) 12.8 17.9 24.5 20.0Gold (US$/troy oz) 294.1 278.8 285.7 290.0Tobacco (US$/tonne) 3,342 3,403 3,000 3,000Tea (US$/kg) 2.01 1.75 1.83 1.78Food, feedstuffs & beverages (%change) –13.9 –18.6 –2.8 5.3Industrial raw materials (% change) –19.6 –4.3 16.8 8.8

Monetary policy

International assumptions

Malawi 33


We forecast that real GDP growth in the OECD will increase to 3.7% in 2000,before falling back to 2.9% in 2001. Growth in the US economy will continueto lead the way, and will help support recovery in the EU and Asia. World tradegrowth is projected to expand by 8.5% in 2000 and 7.5% in 2001. A rise in theprices of industrial raw materials, by 16.8% in 2000 and 8.8% in 2001, will feedthrough into Malawian inflation, as will the 37.2% jump in averageinternational oil prices forecast for 2000.

Prospects for economic growth remain essentially unchanged from ourprevious report. Production of tobacco, the main determinant of economicgrowth, is forecast to fall by around 5-10% on the 1999 output. Auction pricesfor tobacco are also forecast to fall in 2000. The outlook for other crops,however, is brighter. On the expenditure side, growth in governmentconsumption will slow from the 1999 level, which was boosted by pre-electionspending. Investment spending will grow by 5.5% as newly privatisedindustries upgrade their capital stock. Price and exchange rate uncertainty willslow private consumption growth, and net trade will remain the main engineof economic growth in 2001. Overall, real GDP growth is forecast to slow to3.5% in 2000, and, helped by a return to normal climatic conditions, increaseto 4.7% in 2001.

Tobacco growers have expressed great concern over the low prices they receivedat the start of the tobacco auctions this year. However, prices have sincerecovered and are not far from the levels reached at the same stage of the 1999season. With the higher-quality part of the crop yet to reach the market, some ofthe concern over price will be alleviated, although the late start to the rainyseason will mean that production will be lower. Prospects for other crops,especially those recently adopted as part of the government’s diversificationattempts, are much brighter, and this will encourage more farmers to convert tothese crops given tobacco’s uncertain long-term future. The manufacturingsector will struggle to compete, as trade barriers are reduced in the move towardsregional free trade. With interest rates remaining higher than was originallythought, a significant pick-up in the forecast period is unlikely. Continuedregional political troubles will hit tourism, but an expansion in the nascentfinancial services market will help growth in the services sector to accelerate.

Continued tight monetary policies should place downward pressure oninflation over the forecast period. However, a drop in the value of the kwachaagainst the US dollar will lead to growth in imported price inflation during2000. Higher international oil prices will continue to feed into inflation, and ifdonor wishes and Mr Chikaonda’s plan are followed, the gradual removal ofsubsidies will cause further rises in the price of fuel and other goods—includingmaize, the largest individual component of the consumer price index—previously supported by the government. As the effect of the fall in the kwachadrops out of the annual comparisons, inflation should average 23.8% in 2001,and miss the IMF’s target of ending the year below 10% by over 5 percentagepoints, after averaging 28.6% in 2000.

Economic growth

Inflation

34 Malawi


Lower tobacco export revenue and the fall in the South African rand will causethe kwacha to depreciate by over 40% this year against the US dollar. Theexchange rate is expected to average MK55.9:US$1 in 2000, ending the year atMK67.3:US$1. In 2001, we expect the kwacha to depreciate roughly in linewith inflation differentials, averaging MK73.1:US$1.

Although the current weakness in the South African rand has been causedmainly by the deteriorating political and economic situation in Zimbabwerather than by domestic economic fundamentals, the rand will not return to itspre-crisis level against the US dollar. We have revised our forecast for theaverage rand exchange rate from R6.3:US$1 to R6.7:US$1 in 2000. WithMalawian goods losing competitiveness against goods from their largesttrading partner, the slide in the kwacha began to accelerate in late May. Themain issue is whether this slide will retain its current pace, or whether a rapiddrop in value will occur, as happened in August 1998. As the timing of asudden fall is difficult to predict, we are currently forecasting a reasonablysteady decline during the remainder of 2000, which will accelerate once thetobacco auction season has closed in September.

Lower tobacco output and prices will reduce export revenue in 2000, whilehigher international oil prices will increase the import bill, lifting the tradedeficit to US$187m. A reversal of these trends in 2001 should enable the tradedeficit to improve to US$122m. A large deficit will remain on the servicesaccount, but continuing donor inflows will ensure a healthy surplus is postedon the current transfers account. Overall, the current-account deficit is forecastto reach US$429m in 2000 and US$417m in 2001.

The lower prices and the late start to the rains will ensure that export revenuefrom tobacco, the country’s largest source of foreign-exchange earnings, will bedown on the 1999 level, at US$223m, and overall export earnings will fall toUS$442m. However, rising international prices will lead to a significant rise inrevenue from the country’s second-largest export crop, tea, even though it wasalso affected by the rains. A return to normal rainfall patterns in 2001 willallow agricultural production to expand, and will increase total exports toUS$522m. Higher prices for imported goods—the result of the expecteddepreciation of the kwacha—will restrain import spending throughout theeconomy, although an increase in international oil prices will lift the overallimport bill to US$629m in 2000. In 2001, demand from newly privatisedenterprises will cause imports of industrial inputs to rise, but increased exportsshould help the trade deficit to fall. Higher oil prices will increase transportcosts, contributing to a further widening of the services deficit in 2000. Theservices account will worsen in 2001, even though world oil prices are expectedto fall, as trade volumes—and therefore transport costs—increase. Loansgranted at the recent CG meeting will ensure there remains a healthy surpluson the current transfers account, even after allowing for the loss of supportfrom Japan, previously Malawi’s largest bilateral donor.

External sector

Exchange rates

Malawi 35


Malawi: forecast summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP growth 3.1 4.7 3.5 4.7

Gross industrial output growth 5.3 1.0 4.5 3.8

Gross agricultural output growth 2.7 9.0 2.0 6.0

Gross fixed investment growth –9.4 5.5 6.5 5.5

Consumer price inflation Average 29.8 44.8a 28.6 23.8 Year-end 53.1 28.3a 28.9 15.6

Lending rate (av) 37.7 53.6a 36.1 31.3

Government balance (% of GDP) –1.6 –1.8 –0.7 –0.5

Merchandise exports fob (US$ m) 498b 472 442 522

Merchandise imports fob (US$ m) –580b –590 –629 –644

Current-account balance (US$ m) –288b –355 –429 –417 % of GDP –17.1b –19.9 –22.9 –22.5

Total foreign debt (year-end; US$ m) 2,444 2,693 2,972 3,356

Exchange rates (av) MK:US$ 31.07 44.09a 55.94 73.12 MK:¥100 23.74 38.71a 52.03 70.14 MK: € 27.74 41.33a 55.42 68.93

a Actual. b EIU estimates. c EIU forecasts.

The political scene

On May 19th Judge Justice Matamba, presiding at the High Court, upheld thevictory of the president, Bakili Muluzi, in the 1999 presidential election,against a challenge from the opposition Malawi Congress Party (MCP)/Alliancefor Democracy (Aford) alliance. The opposition challenged the results on thegrounds that although Mr Muluzi won the support of more than 50% of those

A challenge to the electionresults is defeated

36 Malawi


who voted, this did not equate to the support of over 50% of the totalelectorate (May 2000, page 38). The decision rested on the interpretation ofSection 80 (2) of the constitution, which states that the president must beelected by “a majority of the electorate”.

Both parties initially said they would abide by the High Court’s decision, butthe alliance subsequently appealed. Ideally, once the appeal has been heardthis ambiguity should be resolved, and this may be one of the unspecifiedconstitutional reforms promised in the state-of-the-nation address on June 5th.However, the precedents are not encouraging. The possibility of such anelectoral result had been raised by the Law Commission in 1998 and nothingwas done—ironically, the MCP itself sought to change the section by replacingthe word “electorate” with “those voting” in the same year. The second part ofthe alliance’s case, in which it alleges massive electoral fraud, and intimidationof its supporters, is to be heard later this year. The opposition has said it ishappy to keep the same judge.

A recently published report by the UK-based public media and electionmonitoring organisation, Article 19, criticised the conduct of the election.Although the 130-page report found no evidence of deliberate “politicallymotivated manipulation of the electoral process”, it did find direct evidence ofa disinformation campaign being run by groups directly connected to thegovernment, and it also accused the government of heavy media manipulationand serious procedural shortcomings. The project was managed by RobertJamieson, who has reportedly received threats to his life if he continues todistribute the report in Malawi.

After more than six years of delay, Malawi’s first-ever local elections shouldtake place in September. This date was originally announced in January (1stquarter 2000, page 29), and donors have been pressuring the government tostick to it. Previous postponements have been primarily due to logisticalproblems caused by a lack of resources, and these may delay the polls again.Donors have agreed to provide some funding, but many problems still remainand the polling, if it takes place according to schedule, is unlikely to runsmoothly. Crucially, the resources available are inadequate to allow theElectoral Commission to organise and monitor the polls properly, thusensuring that some of the results will be contested. Demarcation ofconstituencies has yet to be completed, and will be a considerable task—therewere 731 local wards in 1992, and in the Northern province aloneadministrators are proposing an additional 150 wards for the forthcomingpolls. Computerisation of electoral rolls only began earlier this year, more thaneight months behind schedule, owing to equipment and premises not beingready. A voter education campaign only began in June, and given low literacyrates this will be a time-consuming and complex task.

Whatever the problems, both main parties are preparing big campaigns.However, those likely to gain the most in the polls are the large number ofindependent candidates expected to stand on platforms relating to local issues.For many of the rural population, multiparty democracy has beenaccompanied by a decline in living standards, so strong support for

NGO criticises the conductof the election

Local elections are setfor September

Malawi 37


independents or a low turnout will signal dissatisfaction with the currentpolitical system. Indeed, there was a call from chiefs and journalists to banpolitical parties from contesting the elections, to encourage the population tobecome more involved in decisions on local democracy, but this was rejected.However, the local elections will provide an opportunity for a new generationof politicians to gain grassroots experience, which many in government lack,and this may strengthen democracy in the long term.

Following the failure—subject to an appeal—of the legal challenge againstMr Muluzi’s re-election, the leadership struggle in the MCP has intensified.Around a dozen MCP MPs have called for the resignation of the party leader,Gwanda Chakuamba. One of the rebel MPs is the MCP deputy leader, JohnTembo, and the remainder are supporters of Mr Tembo, who is clearly trying toadvance his own interests. Mr Chakuamba’s cause was further set back whenhe was banned from parliament for one year (subject to appeal) for truancyand disrespect of parliament, the president and the constitution. Mr Tembo hasbeen elected as leader of the opposition in parliament, but Mr Chakuamba isdetermined to hold on to the party leadership. In retaliation against what theyfeel was a move orchestrated by Mr Tembo, a group of Mr Chakuamba’ssupporters are planning an attempt to get Mr Tembo suspended from the MCPat a party conference scheduled for October.

Mr Tembo was right-hand man to the former president, Hastings Banda,during the years of one-party rule, and has never come to terms withMr Chakuamba’s appointment as party leader after Mr Banda stepped down inJuly 1997—Mr Tembo has already failed to unseat Mr Chakuamba twice.Mr Tembo has strong support in Central region, while Mr Chakuamba has hispower base in the south and probably has broader support among the party asa whole. However, both candidates are carrying baggage from the Banda era,and it will take new blood to lead the MCP back into power. The leadershipcampaign is currently being conducted mainly through newspapers, andalthough the problem will be discussed at the October convention, similarevents have occurred in the past and the party has never been able to resolvethe division. Party unity will be placed under even more strain if the MCPperforms badly in the local elections.

In recent months the foreign media have picked up on tension betweenMuslims and Christians in Malawi. Mr Muluzi, a Muslim, has been criticised bysome in the majority Christian community for allegedly wanting to turn thecountry into a Muslim nation, a fear reinforced by a strengthening of ties withMuslim states. There have been two areas of conflict. The first is theintroduction of religious teaching at secondary school level; previously thecurriculum had concentrated on Christianity and the Bible, but now teachingson the Koran and on traditional African religions will be included. The secondsource of tension is controversy over an audio tape containing a recenttranslation of the Koran into Chichewa, Malawi’s national language, whichallegedly confirms the supremacy of Jesus over Mohammed. Minor scuffleshave occurred between believers in the two religions, but foreign reports haveexaggerated what were only localised incidents. Although some members of

Clashes between Muslimsand Christians

The MCP leadership ischallenged again

38 Malawi


the Christian community are concerned about Malawi’s growing Muslimpopulation, the vast majority of the population appear to accept Malawi as asecular state, and the religious clashes are not an area of concern.

Regional relations have been dominated by the worsening of the political crisisin Zimbabwe. Mr Muluzi has urged the Zimbabwean president, Robert Mugabe,not to implement his controversial land reform policy and instead to try toresolve the situation by discussion with the UK. Local politicians were clearlydisturbed by events in Zimbabwe, and they have been trying to distanceMalawi from the regional troubles in order to retain foreign investors’ interest.

The impact of the crisis in Zimbabwe

Direct economic linkages are considerable. According to 1998 figures, Zimbabwe is thesource of 18% of Malawi’s imports, and currently these products are cheap owing to theartificial stability of the Zimbabwe dollar. However, this may not prove a problem asZimbabwe’s capacity to supply is questionable. Zimbabwe is the destination of only 5%of Malawi’s exports, providing the largest market for rice exports. Rice producers willtherefore be hit, but they constitute only a very small portion of the economy. Malawidoes not share a common border with Zimbabwe, so it is unlikely to suffer the effects ofa refugee influx.

The impact on the reputation of the region has been more important. Investors in SouthAfrican bonds have taken fright, leading to a sharp drop in the value of the rand againstthe US dollar this year. As South Africa is Malawi’s largest trading partner, the value ofthe kwacha has also began to slide (see The economy). Investor fears have also caused afall in the local stockmarket index. More importantly, with wars still raging in the DRCand Angola, and increasingly bleak predictions about the effects of the HIV/AIDSpandemic, direct investors may begin to shun the region.

There has been media speculation about the possibility of copy-cat land invasions inneighbouring countries. Land reform is on the agenda in Malawi, and a recentpresidential commission of inquiry called for the return of land to traditional chiefs (1stquarter 2000, page 31). However, rather than being seized by white farmers in colonialtimes, most of the land that is proposed for redistribution was appropriated bypoliticians in post-independence governments. There is no evidence that land invasionshave taken place and, while the commission’s report is still fresh, the government will beallowed time to act on its findings. Mr Muluzi has said that he would welcomecommercial farmers wishing to relocate from Zimbabwe.

Economic policy

Submissions to the consultative group (CG) meeting of donors held inLilongwe in May concentrated on the importance of reducing corruption andaccelerating reform. Malawi was granted US$1.1bn at the CG meeting (seeForeign trade and payments), but this was conditional on the governmentaddressing its economic liberalisation programme with renewed vigour. To this

Zimbabwe crisis has anegative effect

The CG meeting sets thepolicy agenda

Malawi 39


end, the 10-point plan announced by the finance minister, MatthewsChikaonda, in March was commended (May 2000, page 39). However, donorsreminded the government that implementation was vital and were concernedthat civil service reforms recommended at the first CG meeting in 1998 hadnot been implemented. The IMF, in their submission to the meeting, urged thegovernment to cut expenditure, calling in particular for the cutting back of theStarter Pack scheme, ending the support for maize prices and increasing fuellevies. These cuts are deeply unpopular, and the Starter Pack scheme, althougha burden on the exchequer, has assisted in the crop diversification programme.

The IMF announced three economic targets for Malawi at the meeting: toreduce inflation to at least 10% by the end of 2001; to increase real GDPgrowth to 5% per year; and to reduce the fiscal deficit from 3% of GDP to 1.4%of GDP in the 2000/01 budget. These goals may prove the basis of a draftinterim poverty reduction strategy paper, discussed at the meeting, but they areambitious and we do not expect that any of them will be achieved.Nonetheless, there will be enough movement in the right direction to ensurethat the funding granted is not affected.

Shortly before the CG meeting, the director of public prosecutions, FarhadAssani, stated that according to his estimates around one-third of all budgetaryallocations were wasted by civil servants each year. The main reason for thiswas the practice of writing cheques for inflated amounts. Such fraud is madepossible by loopholes in the outdated government accounting system, owingto a low level of computerisation. Resourcing difficulties and a lack of qualifiedauditors have exacerbated the problem. Accelerating civil service reform andrationalisation was an important part of the CG’s recommendations, andcurbing corruption was the focal point of Mr Muluzi’s state-of-the-nationaddress.

The government has appealed to the World Bank for funding after admittingthat its attempts to restructure Air Malawi, the state airline, had failed.Recently the company has introduced new routes and aircraft and cut its staff,but with 680 employees and only a combined total of 182 seats on its aircraft,there is a need for further job cuts. The government has asked the World Bankto fund a study to advise on how best to sell off its holding. Two possibilitiesare being considered; the outright sale of the government’s 100% stake, or theintroduction of a strategic partner. Senior officials at the airline are in favour ofthe second option, as they believe it will maintain the company’s nationalidentity. In preparation for the change in ownership, two subsidiaries are to belaunched—Air Malawi Cargo will have responsibility for transporting cargo,and Airport Handling will deal with all the ground duties. As a small airlinewith a limited domestic market, Air Malawi faces major challenges in thefuture. Proposed changes to competition law within some African states willallow larger airlines from other countries to transit to Malawi and collectpassengers for Air Malawi’s major service destination, Johannesburg.

The ending of government control over the Agricultural Development andMarketing Corporation (Admarc), which is responsible for supplying food at

Massive public-sector fraudis alleged

Air Malawi sell-off—WorldBank is asked to advise

Admarc is to becommercialised

40 Malawi


subsidised prices, was high on the request list at the CG meeting. Despite thispressure, the government has stated its intention to commercialise Admarc.According to the government, since Admarc embarked on the first phase ofcommercialisation earlier this year, performance has been impressive (nostatistical evidence was given), lessening the need to rush into privatisation.Once Admarc is fully commercialised it will no longer be directly involved inthe purchase, importation or sale of maize or farm inputs, according to thegovernment. It appears that the government wants to keep Admarc under itscontrol in order to ensure that is there is a buyer of last resort for remote areasnot served by the private sector. However, the private sector has had noproblem in buying tobacco from these areas. The government’s reluctance maybe more to do with the wide portfolio of interests Admarc has in a diversifiedrange of enterprises, two of which—National Bank of Malawi and Grain andMilling—are being prepared for privatisation.

Progress on other privatisations is also continuing at a slow pace. TheElectricity Supply Company of Malawi (Escom) is looking for strategic partners,but so far has not had any credible inquiries. Escom attributes this to the lowtariff rates in Malawi, which are only 60% of the average in the SouthernAfrican Development Community.

Malawi Posts and Telecommunications Corporation has been formally split,into Malawi Telecom and Malawi Posts Corporation. The aim of the split is toimprove service by increasing the provision of telephone lines and post boxesrespectively. After the split, the cost of sending a local letter increased by 300%,from MK0.6 to MK2, and annual post box rentals were increased by over3,000%, a move that met with no resistance as the price had been MK45 forover 15 years. The government is seeking a foreign partner for Malawi Telecom,but has not yet had any success.

The Telecoms regulator, Malawi Communications Regulatory Authority(MACRA), has become embroiled in a row between Malawi Telecom and twocell-phone operators, Telekom Networks and Celtel. The three had agreed on arevenue sharing deal on calls made to each other’s networks. Once the deal wasenacted it caused a large increase in costs for subscribers. In response to publicprotests MACRA stepped in, and has suspended the agreement until a viablealternative can be arranged. MACRA’s intervention may have wide-rangingeffects. Although initially beneficial to telephone subscribers, it could sendnegative signals to potential investors in the telecoms sector—Malawi Telecomis due for privatisation—as it shows the government is prepared to intervene incommercial agreements. Celtel is believed to have taken out an injunctionagainst MACRA, claiming it has exceeded its powers. Most calls fromcell-phones will go to landlines, so Malawi Telecom is likely to be the financialloser if the deal remains suspended.

Progress on otherprivatisations remains slow

Telecoms regulator steps in

Malawi 41



Economic trends

After relative stability during the first four months of the year, the speed of thedepreciation of the kwacha against the US dollar began to pick up in mid-May.Problems at the start of the tobacco auction season have led to a downwardrevision of estimated tobacco export revenue, and have put some pressure onthe kwacha—the exchange rate fell by 52% in 1998, the last time there was apoor harvest. However, the real reason for the slide in the kwacha is the sharpfall in the South African rand. The rand fell from R6.53:US$1 at the start ofApril to over R7.20:US$1 in late May, as investors sold South African assetsbecause of concern about the situation in Zimbabwe, rather than anyworsening of South Africa’s economic outlook. According to calculations madeby the Reserve Bank of Malawi (RBM, the central bank), import cover was 4.5months at the end of March. Nonetheless, the fall in the kwacha wasinevitable. The kwacha had been reasonably stable since August 1998 against aUS dollar that had appreciated considerably against the euro, the currency ofsome of Malawi’s leading export markets. Once the rand—the currency ofMalawi’s largest export market—started falling, a downward adjustment in thekwacha became necessary in order to restore export competitiveness. On June30th the kwacha stood at MK56.3:US$1, a fall of over 15% against the USdollar since the end of May. However, at MK53.9:€1 it has only depreciated by2% against the euro since the currency was launched in January 1999, anindication that the kwacha has further to fall.

The entry of the first of this year’s maize harvest on to the market allowed year-on-year inflation to fall to 23.5% in May. The good harvest will continue topush down inflation in the coming months, as food has a 55% weighting inthe national consumer price index. However, higher fuel and utility prices anda sliding kwacha will conspire to ensure that the recent improvement ininflation will only be temporary. Petrol prices were increased by 10.2% on May1st, and bus and taxi fares were raised by considerably more. Electricity tariffs

Regional contagion hitsthe kwacha

Good maize harvest reducesinflation temporarily

42 Malawi


rose by over 40% following pressure from the World Bank and the IMF. (TheElectricity Supply Company of Malawi had now increased tariffs by 110% inthe last 8 months.) The Ministry of Finance has announced an informal targetof reducing inflation to 7% by 2001. Donors require the government to cutexpenditure—and therefore subsidies—and the fall in the kwacha is stillworking its way through the economy, so this target seems unrealistic.

The government attributed the latest petrol price rise, the second in twomonths, to an increase in world prices and the depreciation of the kwacha. Thecurrency is sliding, a clear indication that more price rises are to come. Thesewill be very unpopular. The consumer rights body and the Human RightsCommission are threatening to take the government to court over the priceincreases, which have given Malawi the second highest petrol prices in theSouthern African Development Community (see table).

Malawi: fuel prices in Southern Africa, May 1st 2000(MK/litre)

Petrol Diesel Paraffin

Malawi 36.00 27.00 15.20

Botswana 16.01 14.50 13.39

Mozambique 25.73 20.00 10.66

South Africa 23.77 23.48 12.03

Tanzania 33.78 31.03 25.16

Zambia 36.83 34.52 18.25

Zimbabwe 27.86 25.24 8.39

Source: Petroleum Control Commission.

The price rise occurred three days after a consortium of oil companies,Petroleum Importers Limited (PIL), was given the right to import the country’sfuel. PIL, comprising Oil Company of Malawi, Mobil, Caltex, Total andPetroda, took over this responsibility from the parastatal Petroleum ControlCommission (PCC). Procurement rights were given to PIL on therecommendation of the IMF and the World Bank, as a means of controlling thefrequent rises in fuel prices. PIL aims to cut the cost of importing fuel by usingtransport and supply tenders, and intends to reduce operational costs by using

Fuel price risescause furore

Malawi 43


less staff. The PCC, which has debts estimated at MK560m (US$10m), willretain the right to import 20% of the country’s fuel requirement until the endof the year. This will not mean the end of the company: the government isforming a new oil company, Ortex, of which the Ministry of Finance will own75% and Admarc 25%. Ortex will take over 80% of the PCC’s assets and mostof its staff. Ortex has already announced that it will venture into the fuel retailbusiness.

Malawi: fuel prices(% increase from January 1st 1999 to May 1st 2000)

Petrol Diesel Paraffin

Fob pricea 103.0 35.5 55.1

Local pump price 63.6 38.5 38.2

a The price paid by the Petroleum Control Commission for the fuel.

Source: Petroleum Control Commission.

Agriculture

The tobacco auction season got off to an inauspicious start. Around 30 minutesinto the sales at the first auction, the price plummeted to an historic low of10 US cents/kg, and sales were suspended several times in mid-April becausefarmers were not prepared to accept the low prices on offer. Riot police werecalled to calm things down at one early auction. In response to complaintsfrom farmers that processing companies were deliberately importing largeamounts of foreign leaf in order to lower prices, the government intervenedand temporarily banned all tobacco imports. This affected Mozambique andZambia, who normally have their tobacco processed in Malawi as they do nothave facilities of their own to do this. It is true that tobacco traders have playeda part in developing the industry in neighbouring countries, but Malawiactually benefits from this because the re-export of processed tobacco increasesforeign exchange and real GDP growth, owing to the increase in domesticvalue added.

Prices have since bounced back—the ban on tobacco imports was lifted in earlyJune—although they remain below the 1999 level. However, it is not possibleto draw an accurate comparison at this stage as early sales are based on thelower leaves of the plant, which are not of such good quality and thereforecommand a lower price than the upper leaves, which have yet to reachauction. Poor rains have reduced the tobacco harvest, which is expected to be5-10% down on the 1999 harvest, and quality has also suffered, which willaffect export earnings from the crop. However, the main reason for the farmers’disappointing returns is that a bumper tobacco crop in Brazil has reduced theprice on the world markets.

Maize production is due to fall because of the late start to the rains and theflooding caused by the effects of cyclone Eline later in the season. A fall of 6%on the record crop of 1999 is expected, but the harvest will still result in a

Tobacco prospects arebrighter after bad start

Maize production will dropbut it is still at a high level

44 Malawi


surplus. Indeed, after the bumper harvest in 1999 government silos are stockedwith reserves of 860,00 tonnes, enough to cover almost three months’ foodneeds. With so much left over from 1999, the National Reserve Agency hasindicated that will not buy any of the surplus this year, allowing farmers toexploit the demand from flood-hit Mozambique.

The outlook for tea production this year is uncertain. Planters Tea Agency,which supplies growers with capital and resources, has forecast that the harvestwill rise from 43.9m kg in 1999 to 45m kg. Independent experts expect it to bedown by around 6% on the 1999 crop, owing to the erratic nature of the rains,which has also affected the quantity of the tea produced. However, tea pricesare improving because of cold weather in Kenya.

Sugar growing conditions have been close to ideal, and should result inincreased production. Sugar export revenue is likely to be further enhanced bythe installation of new sugar processing machinery by Sugar Corporation ofMalawi. This will allow the production of higher grade sugars which can beexported directly to the EU and the US. Early indications are that the paprikacrop will exceed the 1999 crop by as much as 25%. The inclusion ofgroundnuts and pigeon peas in the Starter Pack programme will increase theoutput of these two crops. A record rice crop is expected, but the benefits ofthis may not be realised as the main export market for this crop is Zimbabwe.

The agricultural liberalisation process and the international campaign againsttobacco production have encouraged traders to diversify into other cropswhich may develop into significant sources of revenue in the future. This yearis the first in which this strategy appears to be yielding results, and the outputof crops such as cayenne chillies, castor beans and various spices, includingcoriander and ginger, has increased substantially.

Infrastructure

The state power company, Escom, has finalised a MK5.9bn seven-year project, theKapichira hydroelectric power scheme. Kapichira is expected to add 128mw to thecountry’s current 215mw capacity by 2003. However, this will not be enough toend the regular power shortages Malawi experiences. These are the fault of thepower transmission network. In 1998 power demand was 190mw—this couldhave been supplied but for problems with the network, which desperately needsto be updated. Some of the revenue from the sale of power from the scheme willbe used to fund improvements in the transmission infrastructure. These areurgently needed, as power cuts disrupt business activity and hinder economicgrowth. Many manufacturers have gone to the expense of installing generators toensure a regular supply of power.

Lewis Mbilizi, the former chief executive of Air Malawi, has teamed up with alocal entrepreneur, Faruk Tayub, to launch the country’s second commercialairline, Malawi Express. Initially Malawi Express will have two aircraft—a 120-seatYak-42 passenger jet and an AN-12 cargo plane, both leased from Volga Atlantic

The outlook for teaproduction is uncertain

Other crops haveperformed well

Power capacity is tobe increased

New airline is launched

Malawi 45


Airlines in South Africa—and will provide services to South Africa for businesspassengers. Once it is established, the company will look to service routes to otherparts of the region and to the Middle East. Charter commercial flights havebegun, but a licence to allow the airline to fly carrier services into South Africahas yet to be acquired.

Services

The deregulation of petrol imports has coincided with an increase in activity inthe fuel retail sector. Petroda, a relatively new company owned by Tanzanianinvestors, opened its second combined fuel and shopping centre in Blantyre.Total, which has a long established presence in the country, is also preparing toopen new filling stations, and has introduced a card for fuel purchases that will beaccepted in all its filling stations throughout the country. The top limit on thecard is MK25,000, which must be prepaid, as by law all fuel purchases must bepaid in cash. The market leader, Oilcom, is introducing greater retail facilities intoits filling stations and is also opening some stations for 24 hours. Ortex, thecompany formed from the rump of the PCC, has announced that it will enter theretail fuel sector. It aims to have a countrywide network in operation soon, andpromises to cover those areas not currently served by its competitors. With petrolprices increasing, an intensification of competition will be good for theconsumer: Petroda did not pass on to its customers all the cost of the recent fuelprice increases, in order to undercut the majors.

Mining

As part of the government’s plans to diversify the economy, Malawi will host aninternational mining conference in August, to attract investment in the country’smineral reserves. In particular, the government is targeting the development ofbauxite deposits estimated at 28m tonnes on Mount Mulanje in the south, and ofdeposits of approximately 170m tonnes of titanium in Nsanje, on the country’ssouthern tip, and in Salima in Central province. A trade delegation headed by theMalawi Export Promotion Council visited South Africa and Namibia in May, tosound out potential partners for developing these and other reserves which havenot been exploited owing to the underdeveloped electricity generation sector. Themajor drawback for potential investors is the cost: it has been estimated thatexpenditure of at least US$800m would be required to construct the necessarytransport and electricity infrastructure.

Competition increases inthe fuel retail sector

Investment in mineralexploitation is sought

46 Malawi


Foreign trade and payments

At the meeting of the consultative group (CG) of donors in Lilongwe in May,Malawi chose to apply for debt relief under the IMF and World Bank heavilyindebted poor countries (HIPC) initiative. There had been considerable debatewithin the country about whether to take this route or whether to try toarrange bilateral agreements with donor countries. A study carried out byfinance ministry officials recommended the HIPC approach, as more than 80%of Malawi’s debt is owed to multilateral institutions. However, the decision toapply for the scheme will preclude the receipt of further loans from countriesthat disapprove of the HIPC scheme, in particular Japan. Malawi owes Japanaround US$300m (approximately 70% of total bilateral debt). The Japaneseoppose the HIPC scheme as they believe they will have to cancel new loansvery soon after they have been disbursed. However, this does not mean otherforms of assistance from Japan will stop.

Malawi was eligible for the HIPC scheme because of its large overall debt stock,rather than its debt-service burden. However, although Malawi is eligible forrelief, it has yet to qualify for it. Follow-up discussions on this will take place inWashington in June and a decision is scheduled for September, when interimdebt relief will be provided. It will take at least another two years before fullrelief is granted. Members of the Paris Club of creditor nations are likely toprovide 100% relief on aid and trade-related debts, totalling around US$30m.Debt-servicing to Japan will continue, however.

At the CG meeting donors pledged US$1.1bn in grants and concessional loansover the next three years, enough to cover Malawi’s expected externalfinancing needs over the period. This financing is conditional on thegovernment cutting waste and deepening economic reforms. The donoragenda fits in with the 10-point plan announced by the finance minister,Matthews Chikaonda, but the government has failed to implement policiesrecommended by donors in the past. It was indicated that if this were tocontinue, Malawi should not expect such levels of aid in the future.

Malawi chooses HIPCdebt scheme

Consultative grouppledges US$1.1bn

Mozambique Malawi€¦ · COUNTRY REPORT Mozambique Malawi July 2000 The Economist Intelligence...

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Transcript of Mozambique Malawi€¦ · COUNTRY REPORT Mozambique Malawi July 2000 The Economist Intelligence...