Identifier
Created
Classification
Origin
04LILONGWE283
2004-04-02 14:31:00
CONFIDENTIAL
Embassy Lilongwe
Cable title:  

IMF: SOME PROGRESS UNDERCUT BY FRESH PROBLEMS

Tags:  EFIN ECON PGOV MI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000283 

SIPDIS

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

E.O. 12958: DECL: 04/02/2014
TAGS: EFIN ECON PGOV MI
SUBJECT: IMF: SOME PROGRESS UNDERCUT BY FRESH PROBLEMS

REF: A. LILONGWE 240


B. LILONGWE 179

C. DILLARD/DAVIS EMAIL OF 3/10/2004

Classified By: Pol/Econoff Marc Dillard for reasons 1.5 b/d.

Summary
-------
C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000283

SIPDIS

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

E.O. 12958: DECL: 04/02/2014
TAGS: EFIN ECON PGOV MI
SUBJECT: IMF: SOME PROGRESS UNDERCUT BY FRESH PROBLEMS

REF: A. LILONGWE 240


B. LILONGWE 179

C. DILLARD/DAVIS EMAIL OF 3/10/2004

Classified By: Pol/Econoff Marc Dillard for reasons 1.5 b/d.

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

1. (C) Malawi has made progress on its macroeconomic
stabilization program, but it is unclear if that progress
will be enough for the Executive Board to approve further
disbursements, IMF Mission Chief to Malawi John Green told
donors on March 23. Behind the scenes, an IMF staff member
told Pol/Econoffs that the team's objective for its mission
was to package a program that was a technically defensible
way to disburse money without creating a precedent for
exceptional disbursements to other countries. The GOM has
made some structural progress as part of its program, but
fresh revelations about poor elections budget implementation
and improper grain handling pose significant threats to the
GOM's agreement with the IMF. In upcoming meetings with IMF
staff, we recommend USG officials probe for information on
the program's sustainability and effectiveness in dealing
with Malawi's biggest macroeconomic threat -- its burgeoning
domestic debt. End summary.

Another Statistic-Free Outbrief by the IMF
--------------

2. (SBU) IMF Mission Chief for Malawi John Green gave
assembled donor Chiefs of Mission a ten-minute, nearly
statistic-free outbrief about Malawi's Poverty Reduction and
Growth Facility (PRGF) performance on March 23. Green stated
that while the GOM's performance had not looked strong in
November, he had good news: "nearly all" fiscal targets had
been met for mid- to end-February, and the government is now
focusing on its economic program. On structural conditions,
Green stated that "many had been met, while some had not,"
and that "the team hopes it will be enough" for the program
to go forward. He stated that the team would tell the
Executive Board that there has been clear progress, and
rhetorically asked and answered, "Will this be enough? I
don't know."


3. (SBU) Asked to elaborate, Green ran through structural

criteria that had been due by end-December. Completed items
included approval of a wage policy, completion of a public
service pension scheme, and the hiring of a pay policy
advisor (which was delayed, but had been accomplished March
22). Two wage policy conditions had not been met, but one
(presumably the consolidation of civil service allowances
into the GOM salary structure) was "too ambitious." (The
other unmet condition appears to be the establishment of a
public service renumeration board.) On the two contentious
conditions that had been turned into prior actions, Green
stated that the submission to Parliament of the "compromise"
amendment to the Corrupt Practices Act (ref A) appeared to
satisfy the prior action, and that the Anti-Corruption
Bureau's (ACB) report on the National Food Reserve Agency
(NFRA) was "almost done." (Note: Green chose his words
carefully. While the GOM's actions on the Corrupt Practices
Act do appear to satisfy the IMF's prior action language,
they would not have satisfied the originial second review
condition.)


4. (SBU) Green stated that the GOM "met almost all of its
quantitative criteria for its September targets," although it
had missed its net domestic assets target "by a small
margin." Shifting to December targets, he stated that
government borrowing "missed by a large margin," due mainly
to delayed disbursements by donors, higher resulting interest
payments on the domestic debt, and inaccurate IMF projections
on interest rate reductions. "We have to mention" that GOM
spending was higher than budgeted, he added, but so were
revenues.


5. (SBU) Green finished with the information that the IMF
and GOM had established new targets under the supplementary
budget, and that he was "pretty sure" that the fourth quarter
would see net domestic debt repayment.


6. (C) Green did not raise how the GOM would achieve
domestic debt reduction in FY2004/05, which he had identified
in a March 15 donor inbrief as a critical issue. "The
problem with next year," he said on March 15, "is that the
numbers do not add up if the objective is debt repayment."
Green then floated that there would be a gap of 3% of GDP
between what donors are expected to give to Malawi and the
resources required for meaningful debt reduction -- an
estimate which he quickly backed off and qualified as
speculative. Interestingly, Green refused during the donor
inbrief to comment on the current size of more than MK 3
billion "statistical discrepancy" between expenditure and
financing numbers the IMF had found in the GOM's early 2004
submission, saying that he had been "chastised" for revealing
too much to donors. His closer holding of information about
performance was matched by the GOM, which clearly cracked
down on access to numbers during the visit. Even the Reserve
Bank of Malawi's Director of Research and Statistics, usually
a well-placed source on these discussions, was asked to leave
discussions deemed sensitive. Only the senior-most
management remained.

IMF Staff Member: "It's a political decision...."
-------------- --------------

7. (SBU) IMF Team Economist Cecilia Mongrut visited
Pol/Econoffs on March 17 as part of the staff's efforts to
forecast bilateral donor inflows over the next year and to
look for the extra 3% of GDP (around $60 million) loosely
posited by Green as necessary for meaningful debt reduction.
Mongrut arrived at the Embassy knowing that the USG does not
give direct budgetary assistance to the GOM, but recalled
that the Embassy had provided useful background and context
on GOM actions and asked to use the meeting to discuss GOM
structural performance, emerging rumors of improper handling
of maize reserves, and overall economic trends.


8. (SBU) Pol/Econoffs briefed Mongrut, extensively covering
observations about performance on the structural conditions
and on prior actions, but also touching on the fiscal and
monetary programs and on the real economy. In great detail,
Emboffs discussed the importance of the ACB's report on NFRA
performance, given the four similar reports on corruption in
the maize sector that the GOM has buried during the past two
years and their large, negative fiscal impact on the IMF
program (ref C). Mongrut took notes on the various maize
corruption cases, but offered little specific on GOM
performance other than that, when bilateral disbursements did
not appear in late-2003, the GOM did not cut its expenditures
as required by its program. When domestic revenues went up,
she stated that the GOM spent the unexpected monies instead
of applying them to higher-than-expected interest charges.


9. (C) As the meeting wound down, Mongrut appeared tired of
discussing program specifics and spoke more generally about
Malawi. (Please strictly protect.) "We're working on the
program up here," she said, pointing to an imaginary
document, "but it comes down to a political decision here,"
and motioned underneath the hypothetical document. Presented
with the Embassy view that Malawi needs aid to address
poverty, but that the current cycle (contrived program
targets, followed by missed, then relaxed criteria, with new,
tougher, contrived targets proposed) has taught GOM officials
to disregard program requirements and created a
counter-productive long-term dynamic, she demurred. She
explained that the team was looking for a way to craft a
technical program that was defensible, because the IMF
worries about its country-by-country treatment. "The point
is," she concluded, "not to present a program that is an
(humanitarian) exception, because other countries would then
ask for exceptions, too," and she implied that the team had
been tasked to find a way to make Malawi's program and its
numbers work.

Recent Developments: Maize, Election Problems Surface
-------------- --------------

10. (SBU) As reported in ref A, the GOM successfully passed
a supplementary budget during its March session along with
the "compromise" amendment to the Corrupt Practices Act.
Both actions appear to satisfy IMF prior actions. Work on
the comprehensive audit of arrears continues, with more than
twenty auditors reportedly working on ten ministries, but
contacts at the EU (please protect) believe the audit will
drag out longer than forecast and not be done before end-May.
(Note: The auditors have reportedly asked for more time and
resources, but it is not clear whether the request signals
something about cooperation, the magnitude of arrears, or
simply that the technical difficulty of the records search
was underestimated.)


11. (SBU) Of greater concern, the Malawi Electoral
Commission (MEC),with which the donors painstakingly put
together an aid-supported elections budget in 2003, has
announced that it cannot stick to its $14.6 million
allocation and requires an additional $10 million (presumably
from the donors) to carry out May's presidential and
parliamentary elections. Upon investigation, it has become
clear that (along with unbudgeted expenditures for an
extended registration period) the MEC spent unbudgeted funds
on vehicles and that expensive allowances and "emoluments"
that had been removed from the original budget have been
re-inserted. When the MEC proposal to the donors got a
chilly reception, it turned to the Treasury for more money, a
request not factored into the supplementary budget.


12. (SBU) In another example, shortly before the IMF team
arrived in Malawi, President Muluzi responded to constituent
complaints about a lack of maize in some areas by announcing
in a public rally that grain parastatal ADMARC depots would
receive shipments within five days. The GOM subsequently
distributed thousands of tons of maize from the Strategic
Grain Reserve (SGR) and from commercial stocks outside of the
channels that have been set up to avoid the maize corruption
scandals of the past few years. This was in direct
contravention of an agreement made by the GOM with the
donors. At least 30,000 tons appear to have been taken out
of the Strategic Grain Reserve, with another 40,000 tons
taken from commercial stocks, all of which are being sold at
the heavily subsidized price of MK 10 per kilo. This has led
to an outcry in the donor community, and donor experts have
not been satisfied with Ministry of Finance explanations of
how the SGR will be replenished and how the stocks will be
paid for. Information on the maize movements continues to
surface, and the Embassy has no firm estimates of the costs.
World Bank Country Manager Dunstan Wai told Pol/Econoff on
April 1, however, that the IMF had discussed with the GOM
shifting MK 1.4 billion ($13 million) in associated expenses
to the 2004/05 budget.

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

13. (C) Malawi's case is a difficult one. Delays and heavy
pressure have sometimes resulted in relative performance
improvements; some officials within the GOM are focusing on
the economic program; and some progress on structural
conditions has been made since November. (The IMF has given
us too little to make an informed judgment about recent
fiscal and monetary performance.) We continue to see,
however, a lack of commitment to the program at senior
political levels, and, as the Mission has documented,
performance improvements have evaporated in the past as soon
as it looks like funds will be disbursed -- which appears to
be happening again. No one wants to get in the way of
Malawi's third presidential and parliamentary elections, and
the maize is already gone from its silos, leaving its
magnitude-as-yet-unknown fiscal impact behind. Which leads
us to the conclusion that new, fungible disbursements from
the World Bank and Fund would most likely be applied to
unbudgeted maize and election expenses, minimizing the
disbursements' potential to move Malawi out of its debt
spiral.


14. (C) Comment continued. We understand that the IMF staff
will soon be briefing USG agencies in Washington on Malawi's
recent performance. We would urge those meeting with staff
to probe deeply on the program's sustainability and the
likelihood that domestic debt will be reduced. With
elections just weeks away, we believe that further
information on those topics will be key to USG
decision-making before Malawi's case comes before the
Executive Board.

DOUGHERTY