IMF ON MALAWI: STRONG PERFORMANCE, BUT RISK AHEAD

C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000406

SIPDIS

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/BEN CUSHMAN

E.O. 12958: DECL: 05/12/2015
TAGS: EFIN EINV ECON MI
SUBJECT: IMF ON MALAWI: STRONG PERFORMANCE, BUT RISK AHEAD

REF: LILONGWE 198

Classified By: EconOff W. Taliaferro for reasons 1.4 b and d

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SUMMARY
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1. (C) Following a recent visit from the IMF's country team,
the Resident Representative confirms that fiscal performance
was strong in the last quarter, despite much weaker than
expected donor inflows. The IMF and GOM have reached a
tentative agreement for a new Poverty Reduction and Growth
Facility (PRGF),but IMF will not finalize the program until
the food situation, and GOM's response to it, becomes
clearer. The ResRep expressed approval of recent loosening
of the exchange rate and predicts a return to a more flexible
exchange rate policy. IMF's approach is helping the finance
ministry and donors keep some fiscal discipline during a food
crisis year. End summary.


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STRONG PERFORMANCE--MAYBE TOO STRONG
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2. (C) As reflected in the IMF's recent press release on
Malawi, its latest review under the Staff-Monitored Program
showed very strong performance through the end of March.
This is especially impressive given that some $22 million in
payments from the EU and the African Development Bank have
slipped at least to the current quarter. IMF Resident
Representative Thomas Baunsgaard recently told us that the
GOM was able to hit its quantitative targets mainly by going
after a series of one-off revenue opportunities. He
expressed mild concern that the GOM had clawed forward too
aggressively, creating the possibility of a shortfall in the
current period. While the team would have preferred to see
small slippage against the quantitative targets, it sees
dogged determination by the GOM to hit the targets every
time. The basis of Malawi's strong fiscal performance
continues to be its containment of expenditures, particularly
in the face of weak donor inflows.


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FOOD CRISIS COMPLICATES CLOSURE ON PRGF
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3. (C) The IMF has reached an agreement on a PRGF program,
but the staff intends to hold back the program pending
clarification of the extent of the food crisis. The Malawi
Vulnerability Assessment Committee report, considered to be
the only reliable estimate, is due out at the end of this
month; preliminary numbers show humanitarian relief needs may
be upwards of 150,000 metric tons. IMF wants to hold off
signing a new program until it is clear the GOM will not have
to revise its intervention upward. Baunsgaard said a program
is likely to go to the board late June or early July.


4. (SBU) Asked about a worst-case food scenario, Baunsgaard
said a large intervention with weak donor support would have
two implications: increased domestic borrowing and a strain
on foreign currency reserves. Though Malawi has too much
domestic debt (about 23 percent of GDP),an intervention of,
say, $25 million would increase the debt stock by only 5
percent--a sustainable increase, though not desirable.
Foreign currency reserves, however, remain a major constraint
to importing food. With about $90 million (1.4 months of
cover) in reserves, a major intervention could bring reserves
to a dangerously low level. If a forex crisis appears
imminent, Baunsgaard said, some emergency action by IMF and
World Bank may be possible, depending on the size of the
shortfall. At this point, though, neither the extent of the
crisis nor the response by donors or the GOM is clear. The
only certainties are that a food crisis of significant
proportions is close at hand, and that it will strain
Malawi's already-strained budget even further.


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MORE FLEXIBLE EXCHANGE RATE
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5. (C) While the IMF has not made any official pronouncements
about the exchange rate, Baunsgaard shares in the general
approval of the recent adjustment in exchange rate policy, by
which the kwacha has slipped roughly six percent against the
dollar since the beginning of March. He said the GOM's
apparent intent is to bring monetary policy into closer
alignment with the official policy of a flexible exchange
rate with seasonal smoothing interventions. This will almost
certainly involve further depreciation over the next quarter
or two.


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COMMENT: IMF HAS IT ABOUT RIGHT
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6. (C) As reported earlier, the IMF's measured approach is
proving useful on two fronts. It gives the Ministry of
Finance good cover to argue for continued fiscal austerity,
including in its approach to the food crisis. It also gives
the donors a lever to argue against a massive commercial
grain program, the traditional and almost always disastrous
response to poor harvests. At this date, the donors and the
GOM are still wrestling over how to address the coming
humanitarian needs, but the discussion is mostly happening
within the bounds of fiscal prudence.
GILMOUR