LUKEWARM IMF REVIEW OF MALAWI

UNCLAS SECTION 01 OF 02 LILONGWE 000437 SIPDIS SENSITIVE SIPDIS STATE FOR AF/S- DAN MOZENA, LOIS CECSARINI, GABRIELLE MALLORY STATE FOR EB/IFD/ODF - LINDA SPECHT AND ELAINE JONES TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA - BEN CUSHMAN STATE PLEASE PASS TO MCC - KEVIN SABA PARIS FOR D'ELIA E.O. 12958: N/A TAGS: EFIN EINV ECON MI SUBJECT: LUKEWARM IMF REVIEW OF MALAWI REF: (A) LILONGWE 269 (B) LILONGWE 294 LILONGWE 00000437 001.3 OF 002 ¶1. (U) Summary. During a May 15 briefing, the International Monetary Fund (IMF) assessment team characterized the Government of Malawi's (GOM) overall performance under the Poverty Reduction and Growth Facility (PRGF) program as "positive," though there were some notable areas of concern. Some structural targets had been met late and the IMF was concerned that Malawi might fail to meet Highly Indebted Poor Countries (HIPC) trigger conditions in the health and education sectors by mid year, necessitating a formal waiver request. The team criticized the GOM for the growing import backlog and poor foreign exchange rate management, and expressed serious concern over the recent halt in sales of Malawi's major export commodity, tobacco. End Summary. -------------- POSSIBLE HICCUP IN HIPC PROCESS? -------------- ¶2. (SBU) While the International Monetary Fund (IMF) team was hopeful that the GOM would achieve Highly Indebted Poor Countries (HIPC) completion by mid year, team leader Calvin MacDonald noted that waivers would be required if education and health targets were not met in time. At stake is an estimated USD 26 to 27 million Multilateral Debt Relief Initiative (MDRI) package. As outlined during previous visits, HIPC completion also hinges on critical pension and wage reforms, implementation of which has been abysmal so far (ref A). MacDonald said that the IMF would work closely with the GOM in these areas and continue to help develop crucial tax policy initiatives. -------------- -------------- PERSISTENT CHALLENGES: FOREX SHORTAGE AND EXCHANGE RATE POLICY -------------- -------------- ¶3. (U) MacDonald expressed concern regarding the closure of Malawi's tobacco auction following a misguided government- imposed pricing scheme (ref B). The disruption had resulted in a substantial reduction in forex to the banking sector and affected the Reserve Bank of Malawi's ability to manage the import backlog and to reach the net foreign assets target. Continued sales delays, he warned, would further reduce forex inflows and harm overall macroeconomic performance in the next six months or so. Finance Minister Goodall Gondwe responded that he hoped the situation in the tobacco sector would be "normalized" and the auctions would reopen soon. ¶4. (U) During the visit, the IMF team had suggested possible import demand reduction strategies and had worked with the bank to improve quantification of the import backlog, MacDonald reported. They had also engaged in a "vigorous debate" with the GOM over its exchange rate policy. The IMF encouraged a managed policy with greater flexibility. Gondwe conceded that the GOM had been "tardy" at times in adjusting the exchange rate. The problem, he explained, arose when the exchange rate reached its maximum point allowable within the predetermined exchange rate band, then remained stationary for some time until regulators agreed upon a new limit. ¶5. (SBU) Comment: Despite its relatively positive assessment, the IMF is clearly concerned with the recent closure of the country's state-controlled tobacco auction, which generates some 60 percent of Malawi's forex inflow. President Mutharika's imprudent intervention in the market could prove disastrous given the country's very limited forex reserves and sizeable import backlog. This situation will be compounded if the expected HIPC completion point is missed or delayed. In addition to keeping more dollars in Malawi, the windfall of HIPC and MDRI relief would allow the government some room to pay down its very expensive domestic debt stock, which in turn would ease some of the inflationary pressure on the kwacha. LILONGWE 00000437 002.2 OF 002 EASTHAM