MALAWI BUDGET DEBATE BEGINS

UNCLAS SECTION 01 OF 02 LILONGWE 000506 SIPDIS SENSITIVE STATE FOR AF/S ADRIENNE GALANEK AND BRUCE NEULING STATE FOR EB/IFD/OMA FRANCES CHISHOLM STATE FOR EB/IFD/ODF LINDA SPECHT TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN TREASURY FOR OTA/BOB WARFIELD JOHANNESBURG FOR FCS MCC FOR KEVIN SABA E.O. 12958: N/A TAGS: ECON EAID EFIN MI BUD FIN SUBJECT: MALAWI BUDGET DEBATE BEGINS This message is sensitive but unclassified--not for Internet distribution. -------------- SUMMARY -------------- ¶1. (SBU) Malawi's finance minister presented the FY 2005/06 budget on June 10 to open parliamentary debate. The budget includes a sharply lower deficit, some paydown of both domestic debt and government arrears, and line items for food security and a fertilizer subsidy. While opposition is threatening not to pass the budget, the GOM will likely use an impending IMF program, which depends on a sound budget, to quell serious contention. End Summary. -------------- -- BUDGET CUTS DEFICIT, PAYS DOWN DEBT AND ARREARS -------------- -- ¶2. (U) The overall 2005-06 budget is MK118.8 billion ($1.01 billion, or 45 percent of GDP) in expenditures against MK116.2 billion ($980 million, or 44 percent GDP) in revenues. This would reduce the deficit from 3 percent GDP in FY2004/05 to 1 percent GDP in FY2005/06. MK84 billion is in recurrent expenditures, with MK34 billion in development expenditures, a development increase of 48 percent over the current year. The largest increases are in health (up 35 percent nominally) and education (up 23 percent). Finance Minister Goodall Gondwe emphasized increases in the budgets of agencies responsible for financial controls and prosecution of corruption: the Auditor General, Attorney General, Anti-Corruption Bureau, and Public Prosecutions. ¶3. (U) Some of the deficit comes from Gondwe's addressing the domestic debt and arrears inherited from the previous government. The GOM intends to use MK2.3 billion to retire what Gondwe termed "huge" domestic debt (MK60 billion) and MK 2 billion against government arrears (around MK10 billion). He reiterated his intention to restructure toward cheaper, longer term debt. Both the size of the deficit and the determination to start paying down debt and arrears show a determination for the GOM to live within its means--a sharp break from the previous government. ¶4. (SBU) The budget also contains continued increases in spending on civil service wage reform, including a 17.5 percent general increase to take effect on 1 October. While this item raises recurrent expenditures, the donor community considers it a critical reform for making the government more effective. One reason for the higher than projected deficit in the current year is the mistakes in rolling out wage reforms, which eliminated a number of untaxed discretionary allowances and increased the taxable wages of most government workers. -------------- -------------- FOOD SECURITY: NECESSARY SPENDING AND POLITICAL SOPS -------------- -------------- ¶5. (U) The GOM has included MK5.6 billion ($47.5 million) to import food in this drought year. The number is up from earlier projections of MK5.2 billion mainly because of depreciation in the kwacha. The budgeted expense corresponds to the agreed arrangement with donors for food importation and distribution. ¶6. (SBU) The donors are less happy with the budget's allocation for fertilizer. After last year's poorly executed targeted program, the GOM is going back to a more universal fertilizer subsidy. The details are yet to be announced, but in his budget speech Gondwe described spending MK2.2 billion ($18.6 million) for a fertilizer subsidy (for 70,000 metric tons). In conjunction with this, GOM would spend another MK1.8 billion ($15.2 million) to run a cash-for-work road improvement program, aimed at enabling the rural poor to purchase the subsidized fertilizer. Gondwe announced that the fertilizer purchases would be made through a single purveyor--an approach that is already drawing criticism from donors and accusations of corruption from the opposition. -------------- A THREATENING ATMOSPHERE -------------- ¶7. (SBU) A number of media outlets are quoting opposition leaders as expressing a determination to sink the budget. The reasons for doing so are generally hazy, but they include dissatisfaction with the fertilizer subsidy, the GOM's plans for emergency food relief, and opposition to the President's newest pet project, the Shire/Zambeze waterway. Even the diplomatic community has weighed in, with the British High Commissioner publicly warning the opposition not to play politics with the budget. Privately, though, opposition leaders are far more rational in talking about the budget, and profess that the next few weeks will see a spirited but constructive debate. Judging from the unprecedented booing and heckling that greeted both the President's opening speech and the Minister of Finance's presentation speech, the opposition is feeling feisty and will likely push back on at least the points above. -------------- COMMENT: IMF IS GOVERNMENT'S TRUMP -------------- ¶8. (SBU) At the outset of the debate, it appears the budget will pass more or less intact. The GOM is philosophically close to the main opposition party, the Malawi Congress Party (MCP),on its general desire for fiscal responsibility. However, MCP clearly wants to take the fertilizer subsidy and the Malawi Rural Development Fund in a populist, and thus more expensive, direction. The question may not be whether they can get the support to pass a budget, but rather at what price. For its part, Government has a trump card in the IMF's impending program, which it is holding hostage to an approved budget that stays within the target range (which the draft budget does). Government will likely have to play that card before the game is over. GILMOUR