MALAWI CONTINUES STRONG FISCAL PERFORMANCE

UNCLAS LILONGWE 000927

SIPDIS

SENSITIVE

STATE FOR AF/S MELINDA TABLER-STONE
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE FOR EB/IFD/ODF LINDA SPECHT
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA

E.O. 12958: N/A
TAGS: EINV EFIN MI
SUBJECT: MALAWI CONTINUES STRONG FISCAL PERFORMANCE


1. (U) The Reserve Bank of Malawi recently published its
mid-year economic and fiscal report, showing strong
performance across the board. Higher than projected domestic
revenue and sharply lower expenditures compensated for lower
revenues from external grants. Macroeconomic performance at
the end-June data cutoff was still strong, though projections
have since been revised downward, to 2.5 percent growth for
the year, due to the drought's impact on the agricultural
base of the economy.


2. (U) The real story is continued fiscal discipline. The
GOM has effectively transformed a lax, highly permeable
fiscal system into an expenditure regime that, if not exactly
watertight, is now at least controlled. The mid-year numbers
reflect this: total expenditures are 12 percent below budget
(MK40.2 billion ($330 million) vs. MK45.6 billion ($380
million)),and domestic revenue is 10 percent above budget
(MK26 billion ($210 million) vs. MK23.6 billion ($200
million)). The sharpest reduction on the spending side was
in recurrent expenditures (off a whopping 23 percent),while
interest payments werw slightly (10 percent) higher than
projected. Certainly the prospect of a new IMF program
helped motivate this performance, but it is clear that the
concepts of serious budgeting and performance to budget--a
bad joke under the last administration--is being taken
seriously.


3. (SBU) The bad news is that the new discipline has come
about largely by force of personality. Finance Minister
Goodall Gondwe, together with a handful of lieutenants, has
been able to establish monthly budget ceilings for the line
ministries and face them down when they threaten
non-cooperation. But Gondwe has not yet put in place the
machinery for proper financial management. The USG's own
Millennium Challenge threshold program, which is designed to
address corruption and financial mismanagement, should go
some ways toward addressing this, but the GOM will have to
show better implementation skills of its own before it makes
real progress.


4. (SBU) COMMENT: Implementation risk is a constant in
virtually everything the GOM plans to do. Despite what the
IMF resident representative accurately describes as
"spectacular performance" to date, continued good performance
is anything but certain. Besides the usual issues of lack of
capacity or competence, the Mutharika administration now
faces an increasingly belligerent opposition, which seems
almost to want the government to fail. At the very least, it
wants to get its own pound of fiscal flesh in return for
cooperation, and this in itself is perhaps the most salient
risk to real economic reform. One way to mitigate this risk
is for Malawi's development partners (particularly the IMF
and World Bank) to remind all parties that continued support
depends on continued performance, and not vice versa. We
continue to raise this issue with the political players on
the ground, and we encourage others to do the same.
EASTHAM