MALAWI: DONORS SPLIT OVER BANK AND FUND PROGRAMS

UNCLAS SECTION 01 OF 03 LILONGWE 000179

SIPDIS

SENSITIVE

DEPT FOR AF/S, AF/EPS, EB/IFD/OMA
TREASURY FOR IMF AND WORLD BANK EXEC DIRECTORS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV MI
SUBJECT: MALAWI: DONORS SPLIT OVER BANK AND FUND PROGRAMS


Summary
--------------

1. (SBU) Minster of Finance Jumbe made a pitch on March
1 for donors to support Malawi's IMF and World Bank
programs. Stating that statistical discrepancies in its
submission to the Fund have been largely resolved, Jumbe
claimed that Malawi has made progress on its
macroeconomic stabilization program and needs assistance
to make further progress. Repeated failures to meet
targets, foot-dragging on agreed upon goals, and
questionable financial submissions by the GOM have
depleted donor confidence, and a split has emerged among
donors over whether a "tough love" approach is the best
way to move forward. Although we are mindful of Malawi's
need for assistance and do not wish to scuttle the Bank's
Structural Adjustment Credit, we continue to question GOM
commitment to its macroeconomic program, and judge that
resuming disbursements now without significant fiscal and
structural progress would send the wrong signals to those
who will be elected in May. End summary.

GOM, World Bank Make a Pitch to the Bilateral Donors
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2. (U) On March 1, Minister of Finance Jumbe briefed
bilateral donors on the GOM's progress with its IMF
Poverty Reduction and Growth Facility (PRGF) and with the
World Bank's proposed $50 million Structural Adjustment
Credit (SAC, sometimes referred to as FIMAG) for Malawi.
Representatives from Norway, Britain, the EU, Germany,
and Canada were present, as was World Bank Country Manger
Dunstan Wai and a staff member from the local IMF office.
The Ambassador, AID Director, and Econoff attended for
the U.S. Mission.


3. (U) Wai opened the meeting by stating that "a pattern
of inconsistencies" in the GOM's data submissions to the
IMF had led to donor doubts about performance under the
PRGF. Wai noted that the World Bank was seeking a
"comfort letter" from the IMF regarding Malawi's
macroeconomic performance before going forward with the
SAC, and, given that linkage, that bilateral donor doubts
had the potential to affect the timing and substance of
the SAC. He suggested that the meeting be used to
clarify recent GOM actions.


4. (SBU) In response, Minister Jumbe stated that
statistical discrepancies in the GOM's submissions to the
IMF came from a succession of estimates and "tentative
figures," rather than actual returns. He stated that the
GOM had repeatedly corrected errors, that there "was
nothing funny" in the numbers, and that, after a
verification exercise, the discrepancy had been reduced
from 3.2 billion Malawi Kwacha ($29 million) to MK 227
million ($2 million). (Note: The fact that the IMF has
not given a quantitative evaluation locally for months,
and the continuing absence of an IMF Resident
Representative, has not helped matters. We would suggest
that it would be in the IMF's, and the GOM's, best
interests to place a temporary representative in Malawi
during this crucial time for the PRGF.)


5. (SBU) Outlining overall performance, Jumbe
acknowledged that the GOM had spent beyond its fiscal
targets as of December, but stated that factors "beyond
our control," such as higher-than-expected interest
payments, had caused the overexpenditure. He placed
ultimate blame squarely on the donors, stating that "if
we had received donor funds, we would have lowered
interest rates and made our budget." On the GOM's
performance toward PRGF "prior actions" and structural
criteria, Jumbe claimed that significant progress is
being made.


6. (SBU) Jumbe also stated that the proposed
Supplemental Budget was at an advanced stage, and that it
would be submitted to Parliament within the next three
weeks. He stated that, despite a MK 6 billion in extra
domestic revenue, the budget would call for authorization
of a MK 11 billion ($100 million) deficit, a significant
change from the MK 3 billion surplus targeted for FY
2003/04. He cited MK 7 billion in missing donor support,
unbudgeted interest expenses, and MK 3 billion in new
development budget expenses as the primary components of
the spending swing. (Comment: While we will have to wait
to see the complete budget for a proper evaluation, the
spending swing and enormous proposed deficit cast doubt
on both fiscal discipline and the program's overall
effectiveness.)


7. (SBU) Jumbe plainly stated that "Malawi needs help"
and pitched that "things are not so bad." He asked for
donor support for the Fund and Bank programs to help
"those of us" behind the macroeconomic stabilization
program (a reference we took to exclude President
Muluzi). He also made a veiled threat that the collapse
of the Bank and Fund programs could compromise the
conduct of May's Presidential and Parliamentary
elections.

Donors Split Over Way Forward
--------------

8. (SBU) In this meeting and in other recent exchanges,
divisions have appeared among the donors over how to deal
with GOM performance and its Fund and Bank programs.
Repeated failures to meet program criteria, foot-dragging
on structural reforms requiring primarily political will
(i.e., strengthening the Corrupt Practices Act or
publishing of a report on last year's maize scandals),
questionable data submissions to the IMF and CABS group,
and a penchant for blaming the donors for missed targets
have contributed to a general deterioration of confidence
in the GOM and a willingness to delay or suspend programs
while waiting for performance improvements. At the same
time, however, it is recognized that Malawi's economy is
fragile and that the poor would bear the brunt of aid
cuts. Different levels of tolerance for the humanitarian
risks involved, and emotional and financial investments
in cherished development projects, have split the donors.
Nor are the donors in agreement on whether our focus
should be on sending the right signals to May's incoming
government or salvaging what we can from the current one.


9. (SBU) The breakdown by donors, by tolerance for a
"tough love" approach, is as follows:

--Norway has shown the least tolerance for a "tough love"
approach, and the Norwegian Ambassador showed great
frustration during the meeting that more aid was not
reaching schools and hospitals. His personal frustration
may also reflect the impending visit of Norway's Minister
of Development, who is reportedly less sympathetic to
Malawi's case than the Ambassador. Norway has made
bilateral disbursements since the October PRGF review,
and has discussed the idea of basing all of its 2004/05
disbursements on the current CABS review in order to
provide "predictability" to GOM aid inflows.

--The UK appears to be internally split, with some
Department of International Development (DfID) staff
wishing to disburse their last 5 million pound tranche of
support, and others (including the High Commissioner)
taking a tougher line. The High Commissioner told the
Ambassador today that while the donors -- including the
Fund and the Bank -- "can't walk away" from Malawi, the
GOM needs to "bend over backwards" to restore its
credibility and open a path forward. The UK is in a
particularly difficult spot vis-a-vis the release of its
last aid tranche, as its aid is conditioned on the IMF's
assessment, but no assessment is likely to be forthcoming
before the end-March close of the British fiscal year.

--Though not represented on the Fund or Bank Executive
Boards, the EU has been relatively forgiving on GOM
fiscal performance but has take a tough public and
private line regarding GOM failures to implement
structural reforms. The EU is funding, for example, the
audit of arrears required as a PRGF "prior action," and
the GOM's dragging-out of the audit contract's signing
(which took approximately eight months of negotiations)
have grated on EU sensibilities. So have the GOM's
delays in providing reliable fiscal data to the CABS
group, which have delayed the formalizing of the CABS
group's current assessment by more than two weeks.

--To contacts throughout the government, the U.S.
Ambassador has stated that for real development to occur,
the GOM needs to do what is necessary to energize
Malawi's private sector and to reassure investors that
sufficient anti-corruption measures are being taken.
Keeping fiscal and structural pledges to the IMF would
aid that effort, and he has stressed that measures which
require primarily political will (like the PRGF
structural conditions dealing with corruption) serve as a
litmus test for outside observers and potential
investors. The aim, he has stated, is to avoid the
dynamic fostered by the donors' repeated willingness to
"lower the bar" for the GOM -- a dynamic that continues
to undercut the Fund program (with negative consequences
for growth and poverty reduction) and has sustained donor
dependency. He has urged other donors to remember that
the signals we send about keeping commitments today will
define our relationship with May's new administration.

--Canada, as represented by CIDA, has also pushed the
message that the donor-GOM dynamic, where the GOM is not
held to its commitments, is unhealthy and must be
changed. CIDA has reserved its harshest criticism,
though, for the Fund and the Bank's unrealistic
assumptions and projections, which have been put in place
for internal bureaucratic Bank and Fund purposes (and to
which the GOM has been complicit in order to keep up
funding),but which set up the GOM to fail in succeeding
reviews.

Comment
--------------

10. (SBU) The World Bank clearly engineered the meeting
between the Minister of Finance and bilateral donors to
resolve lingering questions about GOM performance and to
build support for the SAC among Executive Board member
countries. With Malwi's case already having been delayed
once for the World Bank Executive Board, the effort comes
very late, and as one EU contact put it, "Confidence
can't be restored by organizing one meeting...."


11. (SBU) Confidence in the GOM indeed remains a key
question for us. We continue to question GOM commitment
to its macroeconomic stabilization plan, as evinced by
repeated failures to meet fiscal and structural criteria.
And while we do not seek to scuttle Malawi's Bank and
fund programs, resuming disbursements now absent progress
on fiscal and structural criteria would undercut our long-
term development goals in Malawi.

BROWNING