* Malawi seen as cautionary tale on cutting aid
* Mutharika starts strong, ends as despised leader
* New President Banda pressed to end petrol, forex crunch
By Jon Herskovitz
LILONGWE, April 16 (Reuters) - Malawi President Bingu wa Mutharika's fight with foreign donors may have cost him his life.
When the 78-year-old collapsed from cardiac arrest a week ago - and subsequently died - simple medicines he needed were out of stock because of a foreign currency shortage exacerbated by his policies.
The Health Ministry's pharmaceutical warehouse, across the street from the Lilongwe hospital the ailing president was rushed to, should have held those life-saving drugs, according to hospital officials in the capital.
But its construction was delayed due to a budget crunch caused by an aid freeze over a fight he picked with donors.
Even if the warehouse had been completed, its shelves would have been largely empty because the country did not have the money to buy foreign pharmaceuticals.
If doctors had been able to put Mutharika on life support, he probably would not have survived for long.
The precarious electric grid was under pressure as more Malawians returned home to watch TV and listen to radio reports about the failing health of a much loathed leader.
The hospital's emergency generator was out of diesel due to fuel shortages that grew the longer he ruled.
Down the road from the hospital in Kawale 1, Lilongwe's biggest township, sympathy for the once respected leader had long run out.
"We wanted him to die," said James Sinsamara, in front of a burned-out store where police had killed two protesters in anti-government demonstrations in July.
Malawi was once the darling of international donors. Programmes to subsidise fertiliser and provide seeds to farmers created an economic revival in the early years of Mutharika's rule that made it one of the world's fastest growing economies.
Landlocked, with 13 million people and a GDP estimated by the IMF to be about $5.6 billion this year, many people outside the region might have trouble finding Malawi on a map.
But for international relief agencies it is a prime destination, with South Korean missionaries, the European Union, USAID and Chinese conglomerates bringing in money and equipment to a country with low crime, massive poverty and a large Christian population.
When Mutharika came to power in 2004, the former World Bank economist was seen as a bland technocrat, leading a party that did not have a majority in parliament.
He made a good start. Farm support programmes helped the economy post annual growth of 7 percent between 2005 and 2010, turning the country of subsistence farmers into a food exporter.
Life expectancy improved from about 40 in 2000 to 52.2 in 2009 and cuts were made in high HIV/AIDS infection rates.
Many Malawians praised his early years but said his worst tendencies became exaggerated after he won re-election.
"He was arrogant to start but became a power unto himself when he won a second term and his party won an outright majority in parliament in 2009," said a political insider who asked not to be named.
Mutharika, described by one donor government diplomat as "contrarian by nature", then shoved aside central bankers, ministers and MPs to grab control of economic policy.
Billboards with his image proclaimed he was "propelling Malawi into the future", showing projects such as an inland river port which turned into a colossal waste of money.
He called himself the "Economist-in-Chief" and brushed off a meeting with an IMF delegation, saying they were too junior to have an audience with him.
He once refused a meeting with a top diplomat from a Western power, saying he was in another city. But at the time of the scheduled appointment he appeared at a venue near the hotel where the envoy was staying.
Critics at home were harassed and jailed. Independent newspapers were threatened.
Months before his death, he gathered some of his country's most powerful CEOs to discuss economic policy only to lecture them for days about how they should run their companies.
He expelled the British ambassador about a year ago over a leaked diplomatic cable in which the president was described as "autocratic and intolerant of criticism". In response, Britain froze aid worth $550 million over four years.
In a watershed moment for the normally peaceful country, 20 anti-government protesters were killed by Mutharika's police in July 2011, prompting international condemnation and a suspension of other aid projects.
One of the biggest was a $350 million construction project from the U.S. aid agency Millennium Challenge Corporation to rehabilitate power lines and stations.
This put under pressure a budget that traditionally relied on foreign donors to bankroll about 40 percent of spending and made worse a foreign currency crisis.
Tobacco sales, which usually accounted for 60 percent of foreign currency revenues, plunged on diminishing international demand and the decreasing quality of the local product.
The Malawian Church, one of the most powerful forces in the deeply religious country, last month condemned Mutharika for pursuing poor economic policies, political violence, tribalism, nepotism and for badly conducting international relations.
In a letter read to the faithful during Palm Sunday, the Church of Central Africa Presbyterian Nkhoma Synod said: "We need to pray against poor and selfish decisions by government".
The currency crisis caused queues for petrol and doubled the price of essentials for the typical Malawian, who struggles to get by on less than a dollar a day.
Mutharika made things worse by telling donors they could go to hell and proposing a "zero deficit budget" that cut spending and raised taxes on the few firms and individuals with the money to pay them.
This pushed more of the formal economy into the black market, stifled the few sectors responsible for job creation, and, combined with the loss of international support for the budget, sent the economy on a downward spiral.
Mutharika blamed Satan, international donors and political opponents for the fiscal woes and cozied up to the Chinese, who helped build a massive parliament building in the capital.
He wore Chinese-style attire and took out a $90 million loan from the Import & Export Bank of China to build a massive luxury hotel in Lilongwe.
Humanitarian aid from other major donors was not cut, but large chunks were diverted away from influence by Mutharika.
But these projects still suffered as the price of petrol, often smuggled in from neighbouring Zambia, hit about $8.25 a litre on the black market.
"Every programme we had was being impacted by the fuel shortage," said Doug Arbuckle, the mission director of USAID in Malawi.
Medicine to fight malaria could not be delivered to remote areas. The maternal mortality rate, already one of the highest in Africa, increased. There was not enough money to buy gloves and bandages for midwives and more mothers were dying because there was no fuel to transport them to clinics.
"The government cut funding for training. Nursing students are sitting at home because they cannot afford to pay for school," said Dorothy Ngoma, executive director of the National Organisation of Midwives and Nurses of Malawi, the country's largest healthcare union.
In the private sector, a major sugar refiner was exporting its goods abroad to raise hard cash, resulting in queues a mile long.
When Thomas Banda Nkosi opened his franchise business of South Africa's Steers and Debonair restaurants in the city of Blantyre two years ago, he envisioned success and growth. He achieved neither.
"Any franchise business in Malawi is now struggling. We can't pay royalties on time because the banks have no forex. It's difficult to import stocks and the result has been massive layoffs," said Nkosi.
Malawi became a cautionary tale of what happens when aid is diverted and a leader defies those trying to help.
The IMF is concerned about Malawi's over-valued currency the kwacha which is officially set at 165 to the dollar but trades at about double on the black market.
"Now that he is gone, we are praying the dollars will come back," said taxi driver James Sikelo.
The new president, Joyce Banda, has talked to major donors including Britain and the United States to restore aid packages worth nearly $1 billion. The diplomatic corps showed their support by visiting her home before she was officially installed as the new leader.
The new president of Zambia, Michael Sata, is making the transition easier, contributing 5 million litres of petrol that should help the economy.
Banda, a 61-year-old policeman's daughter who won recognition for championing the education of underprivileged girls, now enjoys widespread support among a population whose lives grew increasingly difficult under Mutharika.
She could signal her intention to repair ties with the IMF, which has suspended a $79 million aid facility due to conflict with Mutharika, by devaluing the kwacha.
The IMF has said too much of the state's precious foreign currency reserves are being used to defend the kwacha.
She can also ease concerns of donors by meeting international calls to restore the independence of the central bank, protect human rights and ensure a free media.
Finance Minister Ken Lipenga said the economy could return to its fast rate of growth if aid was restored. But the country needed to move away from tobacco and increase the strength of its value-added businesses.
"We really need to start generating forex for ourselves," he told Reuters. (Additional reporting by Mabvuto Banda in Lilongwe and Olivia Kumwenda in Johannessburg; Editing by Pascal Fletcher and Giles Elgood)