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Identifier
Created
Classification
Origin
05LILONGWE506
2005-06-16 06:42:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

MALAWI BUDGET DEBATE BEGINS

Tags:   ECON  EAID  EFIN  MI  BUD  FIN 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
						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