DEBT PROPOSAL A PLEASANT SURPRISE FOR MALAWI

UNCLAS LILONGWE 000227

SIPDIS

SENSITIVE

STATE FOR AF/S ADRIENNE GALANEK
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF LINDA SPECHT
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON EFIN PREL EAID PA MI BUD FIN
SUBJECT: DEBT PROPOSAL A PLEASANT SURPRISE FOR MALAWI

REF: STATE 31823


1. (SBU) Over the past week, Embassy has discussed the
relative merits of the U.S. and U.K. proposals for debt
relief to poor countries (reftel) with senior Malawian
officials in ministries of finance, foreign affairs, and
economic planning. To a person, our interlocutors have been
unaware of even the broad outlines of either position. They
appeared to know only that the U.K. has a proposal to relieve
debt, and that the U.S. opposes it. This grasp of the issue
reflects locally available news coverage of the issue, which
is dominated by BBC and Reuters.


2. (U) The GOM officials we talked to expected a harsh U.S.
position, offering little relief and heavy conditions. On
hearing the main points of our proposal, they expressed
surprise, appreciation, and some degree of suspicion. The
Secretary to the Treasury responded to our presentation by

SIPDIS
asking, "What's the catch?" His suspicion centered on the
possibility of added conditionalities; on further discussion,
it appeared that the sound-policy conditionality of the
Highly Indebted Poor Countries (HIPC) program would be
acceptable. Everyone we briefed was puzzled that the USG has
taken a low-profile approach to publicizing such an
attractive proposition.


3. (SBU) All the officials we briefed are trained economists,
and all saw drawbacks to the U.K. position when we explained
the main points of difference. Predictably, they considered
the plan to pay debt service, rather than forgive the
principal, to address the problem only for the short run,
perhaps encouraging irresponsible spending that would
compound the problem in the long run. They also appeared to
dislike the notion of borrowing against future aid
payments--an approach they said would likely lead to fiscal
misbehavior.


4. (SBU) COMMENT: The U.S. debt relief proposal fits well
with the GOM's current fiscal program, which aims at putting
the country back on a sound footing after a decade of
irresponsible borrowing and spending. The officials we spoke
with--senior civil servants--are leary of debt solutions that
take a "buy now--pay later" approach; they understand the
hazards all too well. They appear to want to get rid of
foreign debt and keep it off their books, so the U.S.
approach has great appeal. Malawian politicians, on the
other hand, may find irresistible the promise of lots of
money now with no payback for ten years. Such a plan puts
the pain well over the political horizon, and it could tempt
even the most stalwart disciplinarian.
GILMOUR