MALAWI'S PLEA TO THE IMF: SAME OLD DOG, SAME OLD

C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000022

SIPDIS

DEPT FOR AF/S, AF/EPS, EB/IFD/OMA
TREASURY FOR OASIA
TREASURY PLEASE PASS TO IMF AND WORLD BANK EXEC DIRECTORS
USAID FOR AA/AFR, AFR/DP, AFR/SA

E.O. 12958: DECL: 01/08/2013
TAGS: EFIN ECON PGOV KCOR EAID MI
SUBJECT: MALAWI'S PLEA TO THE IMF: SAME OLD DOG, SAME OLD
TRICKS

REF: A. 03 LILONGWE 1143


B. 03 LILONGWE 1223

C. 03 LILONGWE 1267

D. 03 LILONGWE 1295

Classified By: P/E Officer Marc Dillard for reasons 1.5 b/d.

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

1. (C) Presidential Economic Advisor Goodall Gondwe
reportedly met with the Treasury Department in Washington in
December to make a pitch for waivers on Malawi's IMF
commitments. Contrary to his message, we assess that a lack
of political will has caused the GOM's persistently missed
fiscal and structural commitments (reftels). Moreover, there
are signs that performance on key conditions is
deteriorating. With elections coming in May 2004, we believe
that messages sent now about the importance of political will
and follow-through will determine donor-GOM relations for
years to come. Given current performance, we recommend that
waivers not be granted, particularly on structural
conditions. End summary.

Mr. Gondwe Goes to Washington
--------------

2. (SBU) In mid-December, we alerted Washington that GOM
officials might use planned negotiations at World Bank
headquarters to make a pitch for waivers to its IMF program
conditions (ref D). It has come to our attention that
Presidential Economic Advisor Goodall Gondwe did exactly that
on December 22, approaching the Treasury Department with an
appeal for support ahead of a potential February review.


3. (SBU) Gondwe reportedly argued that IMF engagement is
especially necessary ahead of upcoming May elections, that
fiscal slippages are largely the result of IMF
miscalculations and delays in donor disbursements, and that
the GOM is making significant progress on missed structural
conditions. We disagree.

GOM Performance on Fiscal, Monetary Conditions
-------------- -

4. (SBU) Without arguing the details of the GOM's likely
failure to meet its most recent fiscal conditions (refs A, B,
and C),we note that the GOM has been a serial breaker of its
fiscal pledges since the inception of its Poverty Reduction
and Growth Facility (PRGF) in December 2000. It was a lack
of fiscal discipline that drove Malawi's PRGF off track in
2001, and, while the IMF's underestimation of domestic
interest payments will undoubtedly contribute to current
expenditure overruns, the pattern of broken promises remains.


5. (SBU) In addition, we note that President Muluzi used the
resumption of IMF disbursements in October to announce new
spending initiatives (ref B),and that shortly after
Christmas he announced that Malawi's 120,000 civil servants
would receive an immediate raise along with a second raise in
June or July. There is confusion over whether and how the
raise might be implemented and its potential fiscal impact is
unknown, not least because a contact in the Ministry of
Finance has told us the President's announcement caught the
Ministry's budget division by surprise. The Secretary of the
Treasurer has also stated that the raise has not been
contemplated in the revised budget, soon to be presented.
The program, however, would clearly run contrary to the GOM's
fiscal commitments to the IMF.

Old, New Issues on Structural Conditions
--------------

6. (SBU) We continue to see lack of political will within
the GOM to adhere to its structural conditions under the
PRGF. Two missed conditions, in particular, have come to be
considered by several key donors as measures of the
government's commitment to reform: 1) a requirement that an
amendment to the Corrupt Practices Act be submitted to
Parliament to allow the Anti-Corruption Bureau to prosecute
cases without prior approval from the politically appointed
Director of Public Prosecutions (DPP); and 2) a requirement
that a complete audit of domestic arrears be conducted.
Substantial progress has been made on neither.


7. (SBU) On the anti-corruption amendment, the GOM has
advanced the weak argument that the legislation was not
introduced to Parliament (as had been promised only weeks
before the session) because checks and balances are needed to
prevent politically-motivated prosecutions. What, then, we
have asked our interlocutors, is the judicial branch for?
The issue of anti-corruption in Malawi is not about checks
and balances. It is about the GOM's credibility, which is
now extremely low, as the prosecutions of several Cabinet and
senior ruling party members have been quietly blocked under
the current legislative formulation (ref D). As one
Anti-Corruption Bureau official recently told the Embassy,
"The only time we get to act is when a Minister involved
falls out of government." As noted in ref D, in four weeks
of Parliament in November and December (and a special one-day
session convened on December 30),the GOM refused to let the
anti-corruption legislation be brought to the floor for
debate.


8. (SBU) GOM performance on the arrears audit has involved
similar foot-dragging. Though first introduced as a
requirement of the EU's bilateral program in 2001, the
audit's most recent deadline was completion by December 2003.
According to the local EU office, which will fund the audit,
the contract -- as prepared by the EU in July 2003 -- may (if
all goes well) be signed this week.


9. (SBU) Even if the audit contract is signed, our EU
contact stated that the audit may not proceed, because there
are indications that the GOM may have changed the audit
contract's terms of reference since the EU completed the
tender process in July 2003. If those terms have changed
significantly in the six months the GOM has spent signing the
contract with KPMG, the EU will be required to re-tender the
contract by its own transparency regulations, delaying the
audit's start again. The EU is having an internal discussion
about holding back bilateral support tied to the audit until
the actual auditing has begun, he stated.


10. (SBU) Asked for his assessment of the GOM's intentions
on the contract, our EU interlocutor stated that it was
originally thought that the delays were the result of
incompetence and mismanagement. Now, however, he stated
that, "personally," he believed they were "just buying time."
"We all expect arrears to be a problem...perhaps in the
billions of kwacha."

Analysis and Recommendation
--------------

11. (C) Just as on fiscal matters, the GOM's performance on
structural criteria has been lacking and shows signs of going
in the wrong direction. A third (not yet much talked about)
structural condition, for the Anti-Corruption Bureau (ACB) to
release a report on potential corruption involving the
National Food Reserve Agency, was due at the end of December
and apparently needs to be added to the list of missed
conditions. The Attorney General is reportedly implicated,
and one ACB official openly worried to us that the report
will be buried. Moreover, the Deputy Director of the ACB's
contract has not been renewed. When the ACB gets aggressive
with politicians, our contact continued on to say, "they come
back and fire us." GOM credibility on its anti-corruption
efforts -- and by extension its performance on structural
reform -- deteriorates all the while.


12. (C) It is worthwhile to note that Goodall Gondwe, the
GOM's emissary to the Treasury Department, encumbers an
advisory position that is funded through a World Bank
program. The purpose of his position is to get President
Muluzi world-class economic analysis to support performance
on Bank and Fund programs. A Malawian, Gondwe formerly
worked as the Deputy Director for the Africa Division at the
IMF (where the current IMF team leader for Malawi was a
subordinate) and he appears to be skillfully working his
contacts at the Fund to the GOM's advantage. His messages
should be filtered with care: he has stakes with more than
one player in this exchange, and he may be angling for a
senior administration appointment after May's elections.
Shortly after his December message to the Ambassador on the
proposed anti-corruption amendment (ref D),we learned that
Gondwe had not coordinated with the Attorney General, who had
control of the legislation, and that the "GOM" opinion he
presented was fragmented among senior administration members.


13. (C) Gondwe was right about one thing: now is a critical
juncture for Malawi. May's elections will usher in a new
administration, and the messages the IMF sends today about
the necessity to follow through on commitments will set the
tone for donor-GOM relations for years to come. The governing
elite in Malawi is very small, and today's and tomorrow's
bureaucrats and politicians are drawing lessons from this
episode. We believe that medium- to long-term Malawian
performance -- on a range of bilateral and multilateral
issues -- hinges on the country's leadership learning to take
responsibility for itself. Given current GOM performance, we
therefore advise against granting waivers for repeated broken
promises, particularly on structural conditions.
BROWNING