By Ed Cropley
JOHANNESBURG, June 3 (Reuters) - Seldom can a bruised ego have come with such a hefty price tag.
Outraged at a leaked British diplomatic cable calling him "autocratic and intolerant of criticism", Malawi president Bingu wa Mutharika booted out the ambassador of his country's biggest donor, which promptly froze aid worth $550 million over the next four years.
Other countries are said to be
contemplating similar action, throwing 40 percent of the Mutharika government's annual funding into doubt.
Rather than back down and patch up ties with London -- as everybody from newspaper editors to the Chinese ambassador are urging him to do -- the former World Bank economist has dug in his heels and is drawing up a budget predicated on zero foreign handouts.
If the proposed cuts go through in Friday's budget, and donors stick to their guns, the consequences for Malawi's 13 million people could be disastrous.
The first economic victim could be the kwacha.
The currency has been pegged at 150 to the dollar since a devaluation from 138.5 at the end of 2009, but the country is in the grip of a perennial hard currency shortage and the absence of millions of dollars in foreign aid will only make that worse.
Another devaluation at a time of high international oil and food prices is likely to unleash serious inflation, reversing the broad trend of declining price pressures over the last five years that has underpinned strong economic growth.
Inflation in April eased slightly to 7.1 percent from 7.2 percent the previous month.
For graphic of Malawi's kwacha and inflation, click on:
TIME BOMB
The farming sector, whose strong performance over the last five years has underpinned annual economic growth of 7 percent or more, is also likely to take a hammering.
Britain has made clear its aid freeze includes a maize seed and fertiliser subsidy programme that sat at the heart of Malawi's economic boom because of the bumper maize harvests it produced.
Given the likely juddering slowdown in growth, the prospects for Malawi's stock market -- not the most lively of bourses at the best of times -- are dismal.
The liquidity squeeze is also likely to filter through into the banking system, making it more expensive for Mutharika's government to finance day-to-day operations such as paying civil servants' salaries.
Already short-term debt yields are creeping up, with 91-day treasury bills going for 7.3 percent this week, compared to 4.9 percent in mid-March.
Throw in severe social problems and grinding poverty -- Malawi has an HIV/AIDS rate of 11 percent and average per capita income of less than $1 a day -- and it looks as though Mutharika could be courting revolution.
"This budget is a time bomb," the Maravi Post said in an editorial. "Failure to properly implement the budget to the people's satisfaction means that any slight shock could trigger a North Africa/Middle East-type of revolution right here in Malawi." (Editing by Ed Stoddard and Patrick Graham)
JOHANNESBURG, June 3 (Reuters) - Seldom can a bruised ego have come with such a hefty price tag.
Outraged at a leaked British diplomatic cable calling him "autocratic and intolerant of criticism", Malawi president Bingu wa Mutharika booted out the ambassador of his country's biggest donor, which promptly froze aid worth $550 million over the next four years.
Other countries are said to be
contemplating similar action, throwing 40 percent of the Mutharika government's annual funding into doubt.
Rather than back down and patch up ties with London -- as everybody from newspaper editors to the Chinese ambassador are urging him to do -- the former World Bank economist has dug in his heels and is drawing up a budget predicated on zero foreign handouts.
If the proposed cuts go through in Friday's budget, and donors stick to their guns, the consequences for Malawi's 13 million people could be disastrous.
The first economic victim could be the kwacha.
The currency has been pegged at 150 to the dollar since a devaluation from 138.5 at the end of 2009, but the country is in the grip of a perennial hard currency shortage and the absence of millions of dollars in foreign aid will only make that worse.
Another devaluation at a time of high international oil and food prices is likely to unleash serious inflation, reversing the broad trend of declining price pressures over the last five years that has underpinned strong economic growth.
Inflation in April eased slightly to 7.1 percent from 7.2 percent the previous month.
For graphic of Malawi's kwacha and inflation, click on:
TIME BOMB
The farming sector, whose strong performance over the last five years has underpinned annual economic growth of 7 percent or more, is also likely to take a hammering.
Britain has made clear its aid freeze includes a maize seed and fertiliser subsidy programme that sat at the heart of Malawi's economic boom because of the bumper maize harvests it produced.
Given the likely juddering slowdown in growth, the prospects for Malawi's stock market -- not the most lively of bourses at the best of times -- are dismal.
The liquidity squeeze is also likely to filter through into the banking system, making it more expensive for Mutharika's government to finance day-to-day operations such as paying civil servants' salaries.
Already short-term debt yields are creeping up, with 91-day treasury bills going for 7.3 percent this week, compared to 4.9 percent in mid-March.
Throw in severe social problems and grinding poverty -- Malawi has an HIV/AIDS rate of 11 percent and average per capita income of less than $1 a day -- and it looks as though Mutharika could be courting revolution.
"This budget is a time bomb," the Maravi Post said in an editorial. "Failure to properly implement the budget to the people's satisfaction means that any slight shock could trigger a North Africa/Middle East-type of revolution right here in Malawi." (Editing by Ed Stoddard and Patrick Graham)
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