MALAWI GAINS MULTILATERAL DEBT RELIEF

UNCLAS LILONGWE 000769

SIPDIS

STATE FOR AF/S
STATE FOR EB/IFD/ODF, EB/IFD/OMA
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA
TREASURY FOR OTA - BOB WARFIELD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAID EFIN PGOV MI
SUBJECT: MALAWI GAINS MULTILATERAL DEBT RELIEF


1. (U) Summary: The World Bank and IMF have recommended Malawi for
HIPC Completion Point, providing for the erasure of most of the
country's external debt under the Multilateral Debt Relief
Initiative (MDRI). Malawi's foreign debt will fall from $2.9
billion to about $400 million. Domestic debt remains very high, but
the GOM has pledged to continue efforts to reduce it. End Summary.



2. (U) Minister of Finance Goodall Gondwe and the IMF and World Bank
resident reps held a joint press conference in Blantyre on September
1 to announce the recent IMF and WB board recommendations for
completion point under the Heavily Indebted Poor Countries (HIPC)
initiative. Malawi will be the 20th country to gain debt relief
under the MDRI. Savings in debt service payments will be $110
million annually, and average annual debt service payments will fall
to approximately $5 million. Malawi successfully completed all but
two of its HIPC completion point triggers-- in teacher training and
health spending-- and was granted waivers.


3. At the same time, the IMF announced Malawi's satisfactory
performance in the second review of its Poverty Reduction Growth
Facility (PRGF),and authorized the next release of $7.3 million of
PRGF funds to the GOM.


4. (SBU) Comment: The MDRI relief will go a long way toward reducing
Malawi's indebtedness, but the country must strengthen its efforts
to reduce domestic debt, which remains at a crippling level.
Domestic debt service payments consume 15% of the national budget.
Heavy govenment debt and continued borrowing have squeezed local
credit markets and kept domestic interest rates at over 25%.
Despite the GOM's good fiscal performance in the past two years, the
domestic debt places a drag on the economy that must be lifted in
order for significant long term growth and investment to take place.
We are helping: A U.S. treasury advisor funded under the Millennium
Challenge Account Threshold Program is presently in Malawi looking
specifically at securitization of pre-2004 "arrearages" (essentially
unpaid invoices for services and commodities provided to the
government) which comprise a significant portion of the domestic
debt burden.


5. (SBU) Malawi must also move very carefully in taking on any new
debt. World Bank/IMF estimates show that under a pessimistic
scenario in which the GOM incurs new debt and export growth is slow,
Malawi could see a significant rise in indebtedness as early as

2012. The Finance Minister has pledged to continue the GOM's effort
to reduce domestic debt and "not do something foolish just because
we have received this relief." If Malawi is to avoid falling into
the debt trap once again, he must do everything in his power to
limit borrowing and spending and to light a fire under the country's
still-sluggish economy.

EASTHAM