Bloomberg News

Malawi Aid Suspension May Curb Economic Growth, Deter Investment

July 27, 2011

July 27 (Bloomberg) -- The suspension of U.S. and U.K. aid to Malawi, which depends on donors to fund as much as 40 percent of its budget, is likely to deter investment and undermine a five-year economic boom in the southern African nation.

The U.S. yesterday put a $350.7 million grant on hold after security forces killed 18 people protesting about fuel shortages and rising food costs on July 20. The U.K., the biggest donor, has also cut funding and announced it is reviewing relations with Malawi after President Bingu wa Mutharika deported its envoy for criticizing him in a leaked diplomatic cable.

“Growth is likely to be impacted,” Yvonne Mhango, an economist with Renaissance Capital, said by phone today from Johannesburg. “Malawi has been experiencing foreign exchange shortages for a few years now. It is already experiencing fuel shortages. That’s going to get worse.”

The world’s biggest producer of the burley variety of tobacco can ill-afford the loss in donor aid. About 74 percent of its 15 million people live on less than $1.25 a day, according to the World Bank, even after growth averaged 7.25 percent over the past five years. The government has budgeted to spend 304 billion kwacha ($2 billion) in the fiscal year through June 2012, a 2 percent drop from the previous year, after revenue from the tobacco industry declined.

Finance Minister Ken Kandodo estimated on June 3 that the economy would grow 6.9 percent this year and 6.6 percent next year, saying higher mining and agricultural output would help offset a decline in foreign aid.

Growth Forecasts

Opposition parties and civil society groups have threatened more demonstrations if Mutharika pushes ahead with the arrest of organizers of last week’s protests. Police fought with tens of thousands of protesters in the towns of Mzuzu, Lilongwe, Blantyre and Karonga.

The crackdown prompted the Millennium Challenge Corp., a U.S. government agency, to suspend an accord signed three months ago.

“At the core of an MCC partnership is the expectation that countries maintain a demonstrated commitment to political pluralism, human rights, and the rule of law,” the organization said in an e-mailed statement yesterday. “MCC is deeply concerned by recent events in Malawi.”

Mutharika has offered talks with the protest leaders, while also telling them that he would “smoke you out.”

“The momentum for change is there,” Mhango said. “The protests showed people are unhappy with the status quo. People are not willing to lie down and take it. At this stage it doesn’t seem they want Mutharika to leave outright, they just want some sort of reform to ease the increased cost of living.”

--Editors: Philip Sanders, Gordon Bell

To contact the reporter on this story: Mike Cohen in London at mcohen21@bloomberg.net

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net


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