US embassy cable - 05LILONGWE946

UNCLAS SECTION 01 OF 03 LILONGWE 000946 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S MELINDA TABLER-STONE 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
STATE FOR EB/IFD/ODF LINDA SPECHT 
STATE PLEASE PASS TO MCC FOR KEVIN SABA 
PARIS FOR D'ELIA 
JOHANNESBURG FOR FCS 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EAGR, EAID, MI 
SUBJECT: SUBSIDIES WORSEN MALAWI'S FOOD SHORTAGE 
 
REF: LILONGWE 913 
 
LILONGWE 00000946  001.2 OF 003 
 
 
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SUMMARY 
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1. (SBU) In a year marked by severe shortages of food and 
fertilizer, it is increasingly clear that the government's 
interventions in these commodities have considerably 
deepened the crisis.  The current shortage of maize is in 
part a result of the GOM's insistence on selling subsidized 
maize through its ADMARC parastatal at roughly half the 
import equivalent price.  Fertilizer has followed a similar 
pattern: by announcing a heavy subsidy for all, the GOM 
effectively shut down private commercial sales.  Both of 
these actions have constrained new imports.  The net effect 
is a shortage of food five months before the next harvest, 
and a potentially disastrous shortage of fertilizer only 
weeks before planting season begins.  End summary. 
 
 
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WHO CONTROLS MAIZE, CONTROLS MALAWI 
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2. (SBU) At the root of Malawi's chronically disrupted food 
and fertilizer markets is the misuse of the Agricultural 
Development and Marketing Corporation (ADMARC), a 
once-mighty agricultural monopoly.  That the Banda-era 
institution survives to this day is proof of Malawian 
policymakers' addiction to popular subsidies, an almost 
willful ignorance of how markets work, and an abiding 
distrust of the private sector.  In essence, ADMARC has 
been used as a state tool in trying--and consistently 
failing--to maintain a command economy in the dominant 
agricultural commodity and food staple: maize. 
 
3. (SBU) Since last year, the GOM has kept ADMARC's retail 
price for maize at MK17/kg ($0.14/kg) as the commercial 
price has reached double that.  As the impending shortage 
became apparent, the GOM began making plans for large 
commercial imports of maize on the order of 100,000 metric 
tons (MT) even as it was asking "donor countries" to 
mobilize a major effort for humanitarian relief.  The 
diplomatic and development missions pushed back, asking 
Malawi to limit its commercial imports and instead allocate 
money for humanitarian relief.  It has done that to some 
extent, essentially splitting its purchases between 
humanitarian and commercial purposes. 
 
 
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POOR SIGNALING COMPLICATES THE PROBLEM 
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4. (SBU) Still, the government failed to settle firmly on 
the size and nature of its commercial intervention, much 
less communicate that intention to the marketplace, leaving 
private-sector buyers to assume the worst.  Thus, as 
happened in the food crisis of 2001/02, consumers have 
avoided paying the higher prices offered by private 
traders.  These, in turn, have had little revenue, and less 
forward price incentive, to finance imports.  The same 
signal has discouraged large farmers from growing maize 
commercially, which they tell us would happen if the retail 
price floor reached the MK20-26 ($0.16-21) price range 
(i.e., an increase between 20 and 50 percent).  Meanwhile, 
the landed cost of imported maize has risen as regional 
stocks have declined and transport prices have increased. 
 
5. (SBU) This situation was expensive for the GOM but 
stable until ADMARC stocks predictably began to run out. 
At this writing, the exhaustion of cheap ADMARC stocks is 
creating a panic that "there is no maize" in many trading 
centers, when in fact there are at least some private 
stocks, available for higher prices 
(MK28-36/kg)($0.23-29).  At the urging of foreign 
development missions, the Cabinet approved a "cost 
recovery" price of MK22-24/kg ($0.18-20) (still subsidized, 
 
LILONGWE 00000946  002.2 OF 003 
 
 
since actual cost recovery would be MK28-32/kg), but has so 
far failed to communicate the change formally to ADMARC. 
With the GOM struggling against impeachment in Parliament, 
it is very unlikely to do so, though this modest change 
could still stimulate private imports.  The most likely 
result will be sharp price spikes on the private side as 
ADMARC stocks run out, and more people will spill over into 
the humanitarian relief pool.  (At the grassroots level, 
the high price and scarcity of maize have stimulated an 
increase in winter cropping, which could ameliorate the 
crisis in some areas.  Unfortunately, the GOM does not 
measure winter crops well, so the effect is unpredictable 
at this point.) 
 
 
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GOVERNMENT TAKES FERTILIZER BACK 
-------------------------------- 
 
6. (SBU) The fertilizer market has suffered from much the 
same pattern of intervention from the GOM, though on a less 
spectacular scale.  The market had made considerable 
progress in liberalizing and building a private 
distribution network until this year.  Last year, the 
private sector imported roughly 95 percent of total 
fertilizer imports.  But the GOM, still feeling the sting 
from having bungled last year's targeted free fertilizer 
scheme, determined to do things itself this year.  It has 
settled on roughly a 50 percent subsidy on some 135,000 MT 
of fertilizer, including some 70,000 MT of its own 
imports.  (The country's total demand is about 220,000 
MT.)  Contributing its two cents to the debate, the main 
opposition party has demanded a universal subsidy, so as to 
cover its political base of tobacco farmers. 
 
7. (SBU) As if displacing about 1/3 of the market weren't 
bad enough, the GOM was late solidifying its plans and bad 
at communicating what those plans were.  So, around July, 
commercial fertilizer sales came to a standstill as buyers 
waited to see what the subsidy scheme would be.  Since most 
fertilizer companies are thinly capitalized, they have been 
unable to order the quantities of fertilizer they think 
will be needed before the November-December planting 
season.  Fertilizer that would normally have been ordered, 
shipped, and distributed by August-September has yet to be 
ordered, and it is now practically too late. 
 
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COMMENT: BAD POLITICS, WORSE INSTINCTS 
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8. (SBU) The Mutharika administration came into office on a 
platform of fiscal responsibility and economic reform, and 
it has performed reasonably well in general.  But where it 
comes to maize and the intensive agricultural inputs needed 
to grow maize, it has clung to the old state-centric way of 
doing things.  At the political level, Mutharika's weakness 
in Parliament has made it necessary buy off the opposition 
with deeper and broader fertilizer subsidies than it 
wants.  With half the Parliament crying for impeachment, 
the increasingly gross subsidies on maize have become 
untouchable. 
 
9. (SBU) Perhaps in perfect politics-free vacuum, the 
Mutharika administration may have continued the nascent 
liberalization of the agriculture markets.  But even among 
the economic liberals in the government, it is not clear 
that free-market ideas can win over cultural instinct when 
it comes to food.  Malawians of the political class still 
distrust "traders" (a term generally preceded in the local 
press by "unscrupulous" and often by "Asian"), and they 
tend to blame them for any market failure.  (2001/02 is 
viewed by many otherwise free-marketers as the year the 
private sector let Malawi down.)  In a lean year, these 
instincts are exaggerated, and the state is driven to try 
to control the markets further, deepening the failure. 
That is happening now, and there is next to no chance of 
breaking free until next year.  If history provides any 
pattern, this year's disaster will somehow be blamed on 
 
LILONGWE 00000946  003.2 OF 003 
 
 
unscrupulous traders, and the government may cling even 
tighter to its command-economy approach to food. 
EASTHAM