IMF MALAWI REVIEW: ANOTHER GOOD QUARTER

UNCLAS SECTION 01 OF 02 LILONGWE 000994

SIPDIS

SENSITIVE
SIPDIS

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
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: ECON EFIN EINV MI
SUBJECT: IMF MALAWI REVIEW: ANOTHER GOOD QUARTER


LILONGWE 00000994 001.2 OF 002


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SUMMARY
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1. (SBU) The IMF's country team today delivered its first
quarterly review of Malawi's new Poverty Reduction and Growth
Facility (PRGF). Malawi has met substantially all of its
targets, although it appears headed to miss its net asset
target next month. The IMF is recommending a looser foreign
exchange policy to bring down the value of the kwacha and
build foreign assets. Other economic measures are on track,
most notably inflation and domestic debt, and the team
expects to recommend HIPC completion by mid-2006. The team
expressed concern that the GOM was being distracted by the
volatile political situation here, a concern that we share.
End summary.


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HITTING THE TARGETS, BUT FOREX IS WORRISOME
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2. (U) In a briefing on 21 November, the International
Monetary Fund's country team reported another quarter of
satisfactory progress on fiscal and monetary policy. The
team said the GOM had met all quantitative targets, including
ceilings on domestic debt and government wage expenses and a
floor on net foreign assets. Nearly all structural targets
were met, the exception being the establishment of a wage
schedule for future government wage adjustments; IMF expects
closure on this by end of year.


3. (U) The IMF's chief concern at this point is net foreign
assets, which will likely miss the target in December and
possibly for some brief period beyond. The team predictably
attributed this problem to a combination of import pressures
(mainly the result of high oil prices, but also increased
food imports) and lower than projected forex earnings from
this year's tobacco auctions (the result of poor quality
harvests). An overly rigid foreign exchange policy,
resulting in an overvalued kwacha, has exacerbated the
shortage of foreign currency. The team reports that it is
working the GOM for a "prudent and flexible" exchange rate
policy, which essentially means allowing the kwacha to
continue to slip. (Note: The current black-market premium of
about MK12-15/USD suggests that the kwacha should slip from
MK121/USD to around MK133-136/USD, or 10-12 percent. End
note.)


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SOLID PROJECTIONS, AND LIKELY HIPC COMPLETION
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4. (U) For the remainder of the fiscal year, the IMF team
projects net domestic debt will stay below the 19.8 percent
(of GDP) target, thanks mainly to the GOM agreeing to smaller
increases in government wages. (If the GOM follows through
on its proposed tax administration reforms, there is
considerable room for improvement on the revenue side, which
is not factored into current projections.) The team also
sees inflation staying below its 16.7 percent target at
fiscal year end (June). GDP growth is expected to rebound
next year--an easy task following a drought year, provided
there is not another drought.


5. (U) The IMF team expects to present a board recommendation
for HIPC completion in May, with "one or two" waiver points,
one of them almost certainly being the privatization of the
state agricultural conglomerate Admarc. HIPC completion
depends mainly on six months of satisfactory PRGF performance
and the same period of satisfactory performance on the
Poverty Reduction Strategy. The value of IMF debt service
relief would be on the order of $12 million; the World Bank's
debt service relief would jump from about $40 to $80 million.




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CONCERN OVER POLITICAL DISTRACTION
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6. (SBU) In a side conversation following the briefing,
several members of the team expressed concern over the
political situation in Malawi. Their worries center on two
points: the political gridlock that is preventing the
government from getting even basic legislative action, and
the growing distractions on finance minister Goodall Gondwe's
attention. (Gondwe is standing for Parliament in the
December 6 by-elections.) One member went so far as to say
the Minister's attention to the IMF visit was markedly less
than on previous visits; indeed, he missed the outbrief
because of a campaigning commitment.


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COMMENT: ONE LAST CHANCE AT REDEMPTION
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7. (SBU) Overall, fiscal performance is the one bright spot
on the Malawian political landscape. The IMF's resident
representative regularly describes GOM performance as
remarkable, an assessment with which we agree. Much of that
performance has happened by the force of Gondwe's
personality, and by his relative political neutrality (and,
strangely, by the political neutrality of the budget issue in
Malawi). But as the political opposition becomes more
fractious, and as President Bingu wa Mutharika demands more
political involvement from Gondwe, there is some danger that
he will take his eye off the ball. While this looks unlikely
at this point, it is cause enough for concern. One of the
last remaining chances for Mutharika's political redemption
is a strong economic recovery, which is still a real
possibility. Gondwe has put the fundamental policies into
place, and it is largely a matter of time before they produce
visible street-level results. In the meantime, though, he
will have to pay attention and withstand growing pressure to
fall back into the well-worn rut of fiscal mismanagement.
EASTHAM