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