IMF: MALAWI SCORES SATISFACTORY REVIEW

UNCLAS SECTION 01 OF 02 LILONGWE 000269

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STATE FOR AF/S GABRIELLE MALLORY
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA

E.O. 12958: N/A
TAGS: EFIN EINV ECON MI
SUBJECT: IMF: MALAWI SCORES SATISFACTORY REVIEW

REF: LILONGWE 224

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SUMMARY
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1. (U) The IMF's assessment mission has given Malawi passing
marks in the second review of its 2005 program. Citing
strong fiscal performance, the team predicted that Malawi
would reach HIPC completion point at mid year. The team
expects fiscal difficulty in the first half of 2006, because
of higher than planned expenditures on food and agricultural
inputs. The team also noted that while Malawi met all
quantitative targets, at least some structural targets were
met late. They also faulted Malawi for continued high
backlogs of import payments, the result of controlling
foreign exchange rates too tightly. End summary.

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A GOOD REPORT CARD
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2. (U) As expected (see reftel),the IMF's second quarterly
mission to evaluate Malawi's Poverty Reduction and Growth
Facility (PRGF) reported satisfactory performance in its
outbrief on 21 March. Team leader Calvin MacDonald said all
quantitative benchmarks had been met, as well as most
structural benchmarks, though some of the latter had been met
late. This successful review, if approved by the board,
would give Malawi six months of satisfactory performance
under a PRGF--a condition for debt relief under the Highly
Indebted Poor Country (HIPC) program and the Multilateral
Debt Relief Initiative. MacDonald indicated that the IMF
anticipates providing $13 million in debt relief in the
second half of CY06 and $20.5 million during CY07.

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CHALLENGES: AGRICULTURAL SPENDING AND FOREX
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3. (SBU) The first half of CY06 does hold some challenges for
Malawi. The IMF expects the GOM to have some difficulty
meeting its budget numbers in the first half of CY06 (second
half of Malawi's FY05/6) because of higher than planned
spending on maize and fertilizer imports. (Both of these
extra expenditures have been ascribed to the poor 2005
harvest, but there are early signs that the administration
may have set itself a pattern for heavy intervention in the
fertilizer and maize markets. GOM plans to spend MK5.5
billion ($42 million) on fertilizer next year, compared with
MK6.9 billion ($53 million) this year.) And it was clear
that the IMF intends to hold Malawi to account for not having
adopted a "more flexible" foreign exchange policy. MacDonald
said the IMF had agreed on a plan to measure and reduce the
import backlog over the rest of the year. (The backlog
results from an overvalued kwacha, which has effectively
dried up the supply of dollars for private importers.)


4. (U) Fiscal year 2006/7, which begins in July, comes with
happier prospects. The IMF agrees with the GOM's forecast of
8.5 percent growth, which is a modest figure for a rebound
year. With a good harvest, budget pressure should be less,
and a good tobacco and tea harvest should help with foreign
currency reserves. Inflation is expected to decline
gradually to as little as 7 percent by the end of the fiscal
year. The GOM projected continued paydown on domestic debt,
from 19.7 percent of GDP in FY05/6 to 16.1 percent in FY06/7.
While this is behind the program's 19.3 and 15 percent,
respectively, it is still a massive improvement from 24
percent in the last fiscal year.

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RISKS: WAGES, MANAGEMENT, FOOD SPENDING
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5. (SBU) The IMF's MacDonald outlined several risks for the

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coming year, starting with government pension and wage growth
that have resulted from recent reforms. IMF is concerned
mainly that the reforms be carefully implemented and
monitored to hold to the budget. (Up to now, the reforms can
perhaps best be described as spastic, with frequent
withdrawals of announced benefits, after-the-fact changes,
and catch-up payments to compensate for yawning gaps in the
implementation.) In order to have a chance at accomplishing
this, the finance ministry will have to strengthen itself
considerably.


6. (U) Finally, MacDonald suggested that the international
community engage with the GOM on food security, to ensure the
efficiency and appropriateness of future operations, and on
financial management capacity, especially in view of the
upcoming HIPC windfall. He said he had asked the GOM to come
up with an action plan for public finance reform and hopes
for participation from Malawi's development partners. He
specifically cited with approval the Millennium Challenge
Account Threshold program in this area.

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COMMENT
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7. (SBU) Generally, Embassy agrees with the positive
assessment of this IMF review team. Certainly the government
has done an admirable job in re-establishing fiscal
discipline over the past year and a half. That it has not
also institutionalized better financial management is to be
expected at this point; institutional reforms are much more
difficult and lengthy to effect than quick spending cuts. We
agree also with the subtext of MacDonald's suggested
interventions for donors: the biggest risks appear to center
on the GOM's capacity to make itself more efficient at
managing money, and its resolve to avoid a fiscal derailment
over food and agriculture giveaways. Policymakers here have
a long way to go before they trust the private sector with
the crucial agricultural sector, and running it themselves
will be both expensive and counterproductive.
EASTHAM