U.S. freezes $350 million in aid after Malawi violence

Reuters News
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Posted: Jul 26, 2011 12:29 PM
U.S. freezes $350 million in aid after Malawi violence

By Frank Phiri and Mabvuto Banda

BLANTYRE (Reuters) - The United States has placed on hold a $350 million aid package for Malawi after the southern African country launched a deadly crackdown on protests against President Bingu wa Mutharika.

The United States, Britain and others admonished Mutharika's government, which has typically seen foreign aid bankroll about 40 percent of the state budget, for the attacks by soldiers and police on protesters that killed 19 this month.

The Millennium Challenge Corporation, a U.S. agency that provides development assistance to countries demonstrating a commitment to good governance, had signed a five-year, $350 million agreement with Malawi in April.

But it said in a statement on Tuesday: "MCC is deeply concerned by recent events in Malawi and is placing an immediate hold on all program operations in order to review its partnership with Malawi, including whether to recommend to its Board of Directors whether to suspend or terminate its assistance,."

The aid was aimed at helping the state with a $5 billion economy improve its dilapidated electric grid.

Only 7 percent of Malawians have access to electricity, with the rest relying on charcoal and firewood. Government officials say power outages cost the economy an estimated $16 million a year in lost production.

Malawi's public utility in June warned consumers to brace for blackouts until the end of the year as it planned to take about a quarter of the total output off-line for repairs of power plants.

"Since paraffin and fuel in general are scarce, we are going back to candles. This time forever. God help us," said Spencer Katawa, a Blantyre resident.

For most of the years since Mutharika, a former World Bank economist, came to power in 2004, Malawi has been one of the world's fastest-growing economies, with annual expansion near 10 percent, due mainly to a donor-funded fertilizer subsidy scheme that boosted maize harvests.

But even during the boom years, when sales of tobacco, its main export, were holding up, Malawi faced a perennial shortage of foreign exchange, putting strain on its currency, the kwacha, which is formally pegged at 150 to the dollar.

That has intensified this year as Mutharika has picked a fight with donors, with Britain -- the country's former colonial master and biggest benefactor -- being first in the firing line.

Malawi expelled the British ambassador over a leaked diplomatic cable that referred to Mutharika as "autocratic and intolerant of criticism."

Britain responded by expelling Malawi's representative to London and suspending aid worth $550 million over the next four years, a move that pushed the black-market kwacha rate out to 190 in anticipation of a more severe foreign exchange crunch.

(Writing by Jon Herskovitz)