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Identifier
Created
Classification
Origin
05LILONGWE409
2005-05-13 11:56:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

MALAWI'S BUDGET CONSULTATIONS

Tags:   ECON  EFIN  PREL  KMCA  BUD  FIN 
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						UNCLAS SECTION 01 OF 02 LILONGWE 000409 

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/BEN CUSHMAN
TREASURY FOR OTA/TAX/BOB WARFIELD
MCC FOR KEVIN SABA

E.O. 12958: N/A
TAGS: ECON EFIN PREL KMCA BUD FIN
SUBJECT: MALAWI'S BUDGET CONSULTATIONS

This message is sensitive but unclassified--not for Internet
distribution.

-------
SUMMARY
-------

UNCLAS SECTION 01 OF 02 LILONGWE 000409

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/BEN CUSHMAN
TREASURY FOR OTA/TAX/BOB WARFIELD
MCC FOR KEVIN SABA

E.O. 12958: N/A
TAGS: ECON EFIN PREL KMCA BUD FIN
SUBJECT: MALAWI'S BUDGET CONSULTATIONS

This message is sensitive but unclassified--not for Internet
distribution.

--------------
SUMMARY
--------------


1. (U) In preliminary budget consultations with donors,
Finance Minister Goodall Gondwe sketched an FY 2005/06 budget
that would include some tax reform, allocations for
humanitarian food relief, and a comparatively modest
fertilizer subsidy. The budget for development will be
increased by 35 percent, largely to be spent on road
maintenance and reforestation. While Gondwe offered no
numbers, Malawian news media report a total budget of MK113
billion ($1 billion), a 10 percent increase in real terms
over the previous year. It remains to be seen whether the
increase will deliver better government. End summary.


--------------
TAX REFORM IN 2005/06
--------------


2. (SBU) Gondwe opened his briefing with an overview of the
tax reforms being considered by the Ministry. As part of the
legislative package to be presented to Parliament at the end
of May, Gondwe will propose tax reforms with three aims:
greater fairness to instill confidence for investors,
enhanced transparency, and a more efficient organization for
the Malawi Revenue Authority. The changes will include
removal of discretionary exemptions, changes to ensure timely
VAT refunds, some small changes to individual income tax
levels, and greater emphasis on tax collection from
non-compliant businesses and individuals. Several times
during the briefing, Gondwe went out of his way to praise the
U.S. Treasury's assessment work, which he said had given much
more useful insight and advice than other technical
assistance teams (including IMF).


--------------
FOOD AND FERTILIZER
--------------


3. (U) The budget will likely include funding to import
12,000 metric tons of maize for humanitarian relief and
30,000 MT for commercial sale (about half last year's
commercial buy). Donors are expected to donate funds for

78,000 MT of humanitarian grain, on top of 60,000 MT already
sourced to top up the strategic grain reserves. Total
humanitarian supplies should be 150,000 MT, nearly all donor
funded. As reported previously, the exact extent of the need
depends on reports due in late May.


4. (U) On the ever-controversial topic of fertilizer
subsidies, Gondwe said that the GOM would not continue
previous years' targeted input program of free seed and
fertilizer to smallholders, which has been largely
underwritten by the UK. Based on the poor results of last
year's program, the GOM and UK have agreed to drop the
program. Having no fertilizer subsidy is politically
difficult, so the GOM plans to introduce a subsidy only on
the specific fertilizers used for maize, available for one
bag (either 25 or 50 kg) per farmer. Gondwe presented this
as a cheaper, quasi-self-targeting alternative to the TIP and
the universal fertilizer subsidies of the past. He estimated
the cost to be MK1.5 - 2 billion ($13-18 million).


-------------- --------------
INHERITED PROBLEMS; NEW DONOR MONEY FUNDS NEW GROWTH EFFORT
-------------- --------------


5. (U) Outlining his main concerns, Gondwe listed several
familiar problems: a domestic debt stock of MK60 billion
($530 million), inherited arrears of MK10.5 billion ($92
million), and increased government wages (implemented in 2004
to satisfy World Bank and IMF conditionalities). While
Gondwe hopes to retire a modest amount of debt, he is clearly
frustrated by the fact that donor budget support precludes
running the large surplus necessary to retire a major portion
of the debt. Another looming concern is the need for
government pension reform. Gondwe hopes to introduce an
employee contribution scheme this year, administered from
outside the government, with a retirement age of 60 rather
than the current 55.


6. (U) Gondwe has so far offered no numbers, but unofficial
reports show a total budget of MK113 billion ($1 billion), of
which MK65 billion is funded from GOM revenues and MK45
billion from donors, with a deficit of MK3 billion. Most of
the increase (from MK91 billion in 2004/05) would be from
resumption of normal donor inflows after a new IMF program
begins around mid-year. As far as spending goes, Gondwe
intends to grow the development budget from MK23 billion to
MK31 billion, consistent with the President's emphasis on
economic growth over social spending. Much of the increase
would be put into road maintenance and reforestation in
critical watersheds. Gondwe has indicated in other
conversations that he will likely cut back on education
spending until he is convinced that the education ministry
can improve its performance.


--------------
COMMENT: CONTINUED PROGRESS, IF IT ALL FOOTS
--------------


7. (SBU) The numbers will tell the tale, but from early
indications, it appears that Gondwe is still going in the
right direction. If donor contributions tick up as expected,
the GOM will have more to spend, and the preliminary overview
suggests that it is focused as strongly as ever on not
overspending. This is a welcome change. Still, while the
macro-level discipline is there, the ministries have yet to
show that they can get anything done with the money they get.
The next test is whether the Mutharika administration, given
a bit more resources, can deliver better government.
GILMOUR