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Malawi’s Banda Reverses Policy Mistakes to Lure Donors

Malawian President Joyce Banda is dismantling the policies of her predecessor that stopped aid to one of Africa’s poorest nations and plunged the country into a political and fiscal crisis.

It’s working. The International Monetary Fund on June 6 agreed to lend Africa’s second-biggest tea producer $157 million and the U.K., Malawi’s largest donor, has restored relations with the country. Just two months after succeeding Bingu wa Mutharika, who died in office, Banda has devalued the currency, promised to cut spending and scrap anti-gay laws condemned by human rights groups and leaders such as U.K. Prime Minister David Cameron and South African President Jacob Zuma.

“We brought this on ourselves because of carelessness and arrogance,” Banda, the continent’s second female president after Liberia’s Ellen Johnson-Sirleaf, said in an interview on April 27 in Pretoria, South Africa’s capital. “The last thing I want is to see poor Malawians suffering because of these mistakes we made.”

A May 7 devaluation of the kwacha by a third to 250 against the dollar may enable the government to restart its largest-ever bond sale, which was canceled in December, Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an interview on May 3. The government had planned to sell $182 million of two-, three-, four- and five-year debt. The bonds were to offer coupons of 8 percent to 10 percent.

‘Easing Constraints’

“Once you have got the building blocks in place, then you think about the bigger bond issuance and easing up some of the finance constraints of government,” Khan said.

The nation’s total budget revenue, including grants, will increase 20 percent to 394 billion kwacha ($1.46 billion) in the fiscal year through June 2013, Finance Minister Ken Lipenga said in a budget speech today in Lilongwe, the capital.

Mutharika, who died of a heart attack on April 5, refused IMF advice on the currency and last year expelled the U.K.’s envoy, who criticized the president for his autocratic behavior. A police crackdown against protesters in June last year that led to the death of 19 people prompted the U.S. to stop aid to the country.

Swiftly, Boldly

Banda has promised to mend relations with donors and help cut poverty in a nation where about 74 percent of the population of 16 million people live on less than $1.25 a day, according to World Bank estimates. Donor aid accounts for more than 40 percent of the budget in Malawi, a landlocked country between Zambia, Mozambique and Tanzania.

The president “has moved swiftly and boldly to change the policy environment,” Tsidi Tsikata, the Washington-based IMF’s head of mission to Malawi, said on a conference call on June 6. “The feedback we are getting from the private sector has been overwhelmingly positive.”

The kwacha has weakened another 7.4 percent since it was devalued, boosting potential earnings for tobacco and tea producers. The central bank has also eased restrictions on exporters, allowing tobacco producers to deposit dollars directly with commercial banks to ease a foreign-currency shortage. The currency was trading at 269.8950 against the dollar at 4 p.m. in Lilongwe.

“We carried out the devaluation and removed all the controls that were a problem in the past,” Lipenga, the finance minister, said in comments broadcast on Lilongwe-based MBC Radio on June 6. “That was the most important step to take.”

Inflation Hardships

Tobacco accounts for about 60 percent of foreign-exchange revenue. Malawi is the world’s largest producer of burley tobacco, a low grade of the crop used as a filler in cigarettes. Limbe Leaf Tobacco Co., a unit of Universal Corp., Alliance One Inc., Africa Leaf Malawi Ltd., RWJ Wallace Ltd. and Japan Tobacco Inc. are among buyers of tobacco in Malawi.

The policy changes won’t come without hardships, Banda said. A weaker currency may boost prices of food, fuel and other imports, threatening to stoke inflation that’s already at 12.4 percent, the highest level in almost six years. Banda forecast inflation will average 15 percent this year.

“The policy environment has changed quite dramatically,” the IMF’s Tsikata said. “This is not to say that they have solved all the problems overnight.”

AU Summit

The central bank raised its benchmark interest rate by 3 percentage points to 16 percent last month. The Malawi Energy Regulatory Authority on May 11 boosted fuel and electricity prices an average 30 percent and 63 percent respectively.

The U.K. pledged to support Banda’s changes. Her first speech to Parliament “did not hide concerns that donors” have, Kirk Hollingsworth, Britain’s deputy high commissioner in Malawi, said in an interview on May 17. “It will be rough at the beginning but the recovery will be done,” he said.

Banda’s courting of Western donors may put her at odds with other African leaders. The African Union will no longer hold its annual summit in Malawi, scheduled for next month, because the country is refusing to allow Umar al-Bashir, the president of Sudan who is wanted by the International Criminal Court for war crimes, to attend, The Associated Press reported.

Mutharika, a former World Bank economist who became president in 2004, was initially praised by the IMF for ending food shortages and boosting economic growth. He was re-elected in 2009 with 66 percent voters’ support, though his relationship with donors soon soured. The ruling Democratic Progressive Party expelled Banda in 2010, accusing her of sowing divisions. She remained the nation’s vice president in line with Malawi’s constitution.

“The president has clearly taken a decision to evaluate and repair the relationship with the IMF and donor organizations,” Francois Strydom, managing director of Senwes Ltd., South Africa’s largest grain trader, said in an interview on May 21. The steps she has taken “directly impact on boardroom decisions.”

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