IMF REVIEW TEAM IN MALAWI

UNCLAS SECTION 01 OF 02 LILONGWE 001067

SIPDIS

SENSITIVE

STATE FOR AF/S ADRIENNE GALANEK
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE PLEASE PASS TO TREASURY/INTL AFFAIRS/AF/LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON EFIN PREL MI
SUBJECT: IMF REVIEW TEAM IN MALAWI

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SUMMARY
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1. (U) The International Monetary Fund's Staff Monitoring
Program assessment team has briefed donor mission
representatives twice since its arrival in Malawi. The team
leader has characterized the GOM's performance as good
through the end of September and outlined a scenario under
which the Fund may start a new Poverty Reduction and Growth
Facility by April. This preliminary assessment confirms our
impression of Malawi's generally good fiscal performance
since the current administration took office in May. End
summary.

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MEETING TARGETS BY A WIDE MARGIN
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2. (U) In briefings on November 9 and November 17, the
leader of the International Monetary Fund's (IMF) Staff
Monitoring Program (SMP) assessment team John Green
appraised Malawi's macroeconomic performance as "so far, so
good." The team is assessing the GOM's performance through
the end of September and will be in Malawi until 26
November. Before leaving the country, the team expects to
issue an assessment letter and brief the press.


3. (U) The team considers Malawi to be meeting its targets
"by a wide margin," the margin being due in part to delays
in planned expenditures for commercial maize. Even after
the maize buy, Malawi will still meet all quantitative
targets. The country is reportedly on track for seven of
its eight structural measures, with an agreement to delay
the eighth (which concerns submission of outstanding check
numbers to the Reserve Bank) until 1 December. Based on the
tight expenditure control the team has seen so far, the IMF
is canceling plans it had to bring in a team to assist in
expenditure management.


4. (U) Green reported that the team had overestimated
inflation in its planning; it now appears that inflation
will be 14 to 15 percent at year end, as opposed to the 16-
18 percent forecast in July and September. As well, the
foreign exchange inflows have been higher than projected,
owing to an increase of $40 to $60 million in tobacco
revenues over last year. Forex reserves now stand at 1.7
months in the central bank.

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DONOR CONCERNS
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5. (SBU) Donor representatives raised three concerns at the
first IMF meeting: that the GOM might decide to break its
budget in spending on a new building for Parliament, that
the civil service wage reforms could be so unpopular as to
spur a free-spending remedy, and that the IMF might be
pressing the Reserve Bank to raise interest rates. On the
parliament building, Green said the IMF is not concerned,
because any new building would take several years to
construct, and thus poses no immediate danger to the budget.
The civil service pay issue is "more worrisome" according to
Green, and "if it's a budget buster, then that's a problem."
Green did note that the IMF has always seen the wage reform
as difficult, and that it was confident that the issues
could be successfully worked through. (NOTE: Finance
Minister Goodall Gondwe acknowledged that the GOM
miscalculated the net effect of the wage package, and that
settling government workers' concerns about a net decrease
in take-home pay would be easily resolved, with little
effect on the budget. End note.) On interest rates, the
IMF position is that the RBM should raise rates only if
inflation begins to rise.


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NEXT STEPS
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6. (U) Under the current SMP, the IMF will continue to
monitor performance with quarterly assessment missions. The
next mission will come in mid-February to look at
performance through the end of December. According to
Green, in the best case IMF would negotiate a new PRGF to
take effect from 1 April.

COMMENT

7. (SBU) The initial IMF briefings accord with our view of
the GOM's performance since May. While it is still
distinctly possible that the situation may break down as it
has in the past, the current Government seems to understand
the importance of establishing a culture of fiscal
responsibility and re-establishing its good name with
international financial institutions. Indeed, Gondwe has
cautioned donors against prematurely celebrating the success
of fiscal reforms, saying the GOM still has plenty of work
ahead of it. Meanwhile, USG support, via the Millennium
Challenge Account's Threshold Program, can help boost
precisely the same areas that both the IFIs and the
Government have identified as central: fiscal policy and
control of corruption.

GILMOUR