Bruised ego leaves Malawi with $550m budget deficit

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, Fergus Cochrane-Dyet, which promptly froze aid worth $550 million over the next four years.

Other countries are said to be contemplating similar action, throwing 40 per cent of the 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 has drawn up a budget predicated on zero foreign hand-outs.

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.

The farming sector, whose strong performance over the last five years has underpinned annual economic growth of seven 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.

The programme, which provides subsidies to small farmers, has been in place since 2004 and has boosted harvests in a country that has historically suffered from food shortages.

In the last four years, Britain has spent $20 million on the programme.

Malawi is expected to harvest 3.8 million tonnes of maize this year, up from 3.5 million the previous year, despite some dry periods during the year.

But because of cutbacks to the programme, Malawi has already announced that this year it will only import 90,000 tonnes of fertiliser, half of last year's amount.

And the number of farmers under the programme is also expected to be reduced from the 1.6 million families who have benefited from the subsidy, so hunger could increase in rural areas.Malawi's former colonial master has also suspended visa-free travel for President wa Mutharika, his wife, and other top officials pending a "review" of bilateral ties, High Commission political officer Lewis Kulisewa said.

Britain has also suspended its $49 million grant that went to funding Malawi's public health sector.

The Department for International Development made its final aid disbursement in March and has decided not to renew a six-year funding commitment which ends in June.

Throw in the fact that the country has severe social problems and grinding poverty - Malawi has an HIV/AIDS rate of 11 per cent and average per capita income of less than $1 a day - and it looks as though President wa 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."