US embassy cable - 04LILONGWE1013

UNCLAS SECTION 01 OF 02 LILONGWE 001013 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S BRUCE NEULING 
STATE FOR EB/IFD/OMA 
STATE FOR EB/IFD/ODF 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EINV, EPET, EFIN, PGOV, MI, Economic 
SUBJECT: MALAWI HIKES FUEL PRICES, BUT NOT ENOUGH 
 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
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SUMMARY 
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1. (SBU) The Government of Malawi has recently raised retail 
fuel prices for the first time since March 2004.  The 
increase amounts to 8.9 percent on gasoline and diesel, 
reflecting only about half of the increase in world petroleum 
prices during the past six months.  The increase, which is 
expected to have immediate inflationary implications, comes 
at a time of increasing inflationary pressure in Malawi. 
Whereas the inflation of a full price pass-through could 
derail Malawi's IMF staff-monitored program, interference in 
the pricing mechanism may be of concern during the upcoming 
IMF staff visit.  End summary. 
 
 
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A MODEST INCREASE, LONG DELAYED 
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2. (U) On October 22, the GoM raised retail fuel prices by 
8.9 percent, the first price increase since last March. 
Prices went from MK94.30 to MK102.70 ($0.88 to $0.96) per 
liter for gasoline and from MK87.60 to MK95.40 ($0.82 to 
$0.89) for diesel.  An increase had been recommended by the 
Petroleum Control Commission (PCC) since April, but for 
political reasons, former President Bakili Muluzi had quashed 
adjustments in the run-up to May elections.  The new 
administration of President Bingu wa Mutharika had not 
addressed the issue since its assumption of office at the end 
of May and indeed had promised within the past month that 
prices would not be raised. 
 
3. (SBU) As a result of increases in world fuel prices, the 
government-controlled consortium of private fuel importers, 
Petroleum Importers Ltd. (PIL), was facing potential losses 
of MK 30-40 million ($280,000 - $374,000) per month, 
according to one member of the consortium.  (NOTE: PIL 
includes two U.S. business interests: ExxonMobil and Caltex. 
End Note.)  PIL had not yet reached a crisis, largely because 
the retail price includes levies for price stabilization and 
for reimbursing PIL when prices are not adjusted quickly 
enough.  However, the price stabilization fund, which is 
designed to smooth out short-term spikes in world prices, was 
on its way to exhaustion before the end of October.  At that 
point, PIL would have had to cut back on import volumes, 
causing fuel shortages. 
 
 
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INFLATIONARY REALITIES 
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4. (SBU) On October 5, the PCC had recommended that gasoline 
be increased to MK108 and diesel to MK102.  These prices 
would have reflected world increases (estimated locally at 
17-20 percent), but they would also have brought inflationary 
pressure to bear on the Malawian economy.  Because of 
Malawi's reliance on overland imports, and disproportionately 
on fuel-inefficient trucking, the inflationary impact of fuel 
price hikes is rapid and widespread.  This fact is 
intensified by timing: the spring and summer here (October to 
March) are the high season for inflation, due to seasonality 
in agricultural input and food prices.  And any inflation 
above 20 percent would put Malawi off-track for its IMF 
staff-monitored program. 
 
5. (SBU) For understandable reasons, then, the Government 
chose not to unleash the PCC's automatic pricing mechanism, 
which is designed to pass through sharp increases in world 
prices (greater than 5 percent).  Instead, GoM has simply 
increased the levy that reimburses the importers for import 
losses caused by artificially low prices.  In essence, this 
allows the importers (PIL) to recover most of their losses 
directly, while sparing the public the collateral increases 
that an adjustment in the base price would entail (through 
percentage-based increases in other levies and profit 
margin). 
 
 
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COMMENT: A SENSIBLE MIDDLE COURSE? 
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6. (SBU) While the 8.9 percent price hike may seem a sensible 
middle course between an inflationary full-price adjustment 
and popular but irresponsible inaction, there are some 
downsides to this course.  First, it suppresses the PCC's 
automatic pricing mechanism, which continues Muluzi's 
practice of tinkering with the pricing and levy structure to 
meet the exigencies of the day.  If full adjustment follows 
next year, after inflationary pressures have subsided, the 
GOM's solution may be viewed as a wise interim measure.  On 
the other hand, if the Kwacha is devalued, or if an 
inflationary cycle picks up for other reasons, full 
adjustment may be put off, leading to a bigger shock later. 
Second, industry sources tell us that Malawi's low retail 
prices are driving some informal exports, which could result 
in shortages. 
 
7. (SBU) Finally, and perhaps most importantly, it is unclear 
at this juncture how the IMF will view continued suspension 
of PCC's automatic pricing mechanism.  Its proper functioning 
was a required prior action for previous IMF facilities, and 
IMF's November staff visit could highlight this as a 
recurring problem.  In our view, it is more likely the IMF 
will see the partial adjustment as an understandable effort 
to avoid both fuel shortages and inflationary price shock. 
 
 
GILMOUR