MALAWI: THE CASE FOR MCA COMPACT ELIGIBILITY

UNCLAS SECTION 01 OF 03 LILONGWE 000889

SIPDIS

STATE FOR AF/S, AF/EPS
STATE FOR EB/IFD/ODF, EB/IFD/OMA
USAID FOR AFR/SA, ARF/DP, PPC/AA, PPC/MCA
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA
TREASURY FOR OTA - BOB WARFIELD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAID EFIN KMCA PGOV MI
SUBJECT: MALAWI: THE CASE FOR MCA COMPACT ELIGIBILITY

REF: Lilongwe 848

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1. (SBU) Summary: Over the past two years, Malawi has embarked on a
process of positive reform, led by the government of President
Mutharika, that has effectively reversed many years of corruption
and misrule. The GOM has decisively taken control of its own
development agenda, and has embraced the MCA Threshold Program,
which complements a broader reform process taking place in the
country. Malawi's goals are very well aligned with the objectives
of the Millennium Challenge, and we believe the time is right for
Malawi to be considered for MCA Compact eligibility. End summary.

MCA and Malawi: Made for Each Other
--------------


2. (U) When President Mutharika took office in May 2004, he
announced two priorities: fighting corruption and fixing the
country's economy. The president argued that unless Malawi could
curb its rampant corruption, precious public resources would
continue to disappear and investors and donors would shun the
country. He further reasoned that the way to reduce Malawi's
grinding poverty is to grow the country's economy, and not depend on
handouts from donors. He exhorted Malawians to work harder to build
"a producing and exporting country."


3. (U) Mutharika focused his efforts on improving the macroeconomic
environment by reining in government spending, reducing borrowing,
and inviting the IMF to monitor the GOM's finances. At the same
time, the president took firm control of the country's development
agenda. He launched a home-grown national development plan, the
Malawi Growth and Development Strategy, to replace the
donor-designed Poverty Reduction Strategy Paper. The new plan
emphasizes economic growth and improvement of investment conditions,
so that Malawi can grow its way out of poverty and begin to pay for
its own social services. Mutharika also insisted that the new
government deliver results. For the first time ever, cabinet
ministers were compelled to produce monthly results reports, and he
personally chastised ministers who failed to deliver. He fired
poor-performing senior civil servants, and shifted others to new
positions to inject new energy into their work. He ordered the
consolidation of most government ministries to offices in the
capital Lilongwe from locations in the provincial cities of Zomba
and Blantyre, saving money and improving efficiency.


4. (U) The MCC Board recognized the changes taking place in Malawi,
and in November 2004 invited the country to apply for Threshold
assistance. The Threshold program was an appropriate first step for
Malawi, given the brief track record of Mutharika's government at
that time, and the tendency of the previous Muluzi administration to
backslide on reforms. As reported in reftel, the Threshold program
has seen several early successes and has complemented well the other
reforms that are going on in Malawi.

Strong Performance in All Three MCA Indicator Areas
-------------- --------------


5. (U) Malawi has demonstrated impressive performance in all three
of the key MCA indicator areas of ruling justly, investing in
people, and promoting economic freedom. Although Malawi slipped
very slightly on the FY-2007 MCA corruption indicator (from .02
above the median to .03 below),the data do not tell the whole
story.


6. (U) President Mutharika has made his "zero tolerance"
anti-corruption campaign the centerpiece of his administration, and
the GOM has scored important successes. The effort, supported by
the Threshold plan and other donors, is aimed at punishing acts of
past corruption as well as improving governance and strengthening
institutions and the rule of law in order to prevent future
corruption. Several senior officials (a cabinet minister, the mayor
of the largest city, and senior civil servants) have been convicted
of corruption, and many other cases are in process. As reported
reftel, a range of regulatory and administrative reform efforts are
underway to improve accountability, transparency and efficiency in
government. For the first time in Malawi's post-independence
history, the National Assembly is playing an active and much more
assertive role in its oversight of the executive branch, conducting
regular committee hearings and making policy recommendations.


7. (U) Furthermore, the lag of the corruption indicator data does
not fully reflect these developments. The FY-2007 indicator is
based on 2005 data, which were collected from a number of studies

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conducted in 2004 and perhaps earlier. The new government took
office and began its reforms in mid-2004, and its efforts are very
likely not documented in the data upon which the indicator is based.



8. (U) Malawi has shown remarkable leadership in health care,
particularly in HIV/AIDS and malaria. The WHO recently commended
Malawi for its highly successful scale-up of anti-retroviral
therapy, one of the best in Africa. Malawi's distribution program
of insecticide treated bednets is considered to be the worldwide
best-practice model for other countries to follow. The country's
inoculation rates are very solid, and Malawi has recently made
significant gains in infant and maternal mortality.


9. (U) Without doubt, Malawi's greatest transformation in the past
two years has taken place in the economy, with a performance that
has earned glowing praise from the IMF and international donors. As
with corruption, the scorecard data lag and do not give the whole
picture. Under the guidance of the highly capable finance minister,
Goodall Gondwe, the new government from the outset restrained
spending and placed itself under the watchful eye of an IMF Staff
Monitored Program. Following a year of good performance under the
SMP, Malawi successfully qualified for a new IMF Poverty Reduction
Growth Facility in August 2005, along with new budget support from
bilateral donors. Continued strong performance over the past year
brought Malawi to HIPC Completion Point in August 2006, with full
debt relief under the Multilateral Debt Relief Initiative. The
GOM's increased accountability, control of spending, and debt relief
have all contributed to an optimistic outlook for the country's
macroeconomic picture. Inflation has recently fallen from over 16
percent to approximately 12 percent, and is projected to fall to 10
percent by the end of 2006. Malawi's projected fiscal deficit for
the 2006-07 budget is 2 percent of GDP. Domestic interest rates are
also projected to decline, as the GOM's fiscal restraint and reduced
borrowing lessens the pressure on local credit markets and frees up
more capital for private sector investment.


10. (U) In response to Malawi's poor performance in the most recent
World Bank "Doing Business" survey (and the related MCA indicator),
the GOM has recently convened a task force led by the Minister of
Trade to correct a number of deficiencies. The task force is
focused on five areas-- licenses, taxes, trade across borders,
access to credit, and closing a business-- and has prioritized
"stroke of the pen" regulatory changes that can be quickly
implemented. For example, opening a small business currently
requires multiple licenses that are very costly. Depending on the
nature of the enterprise, a businessperson might need four or five
licenses that cost more than a year's wages for the average
Malawian. The task force is proposing to collapse those licenses to
a single permit and to slash the fees to a reasonable level. The
task force also wants to equalize the fees paid by Malawians and
foreigners, cut the top marginal company tax rate, and streamline
the tax payment system. This reform effort is just starting, but if
the GOM follows its own action plan, it should begin to improve its
"Doing Business" rating within a year or two.

Bumps in the Road
--------------


11. (U) Despite the positive reforms and good performance of the
past two years, there have been notable problems, particularly with
political stability and governance. Mutharika's strong stand
against corruption precipitated his resignation from his own party
in early 2005, after which he formed a new party that became the
ruling minority. His former party colleagues retaliated with an
attempted impeachment, and the president further roiled the
opposition by pursuing minor criminal cases against outspoken
opposition MPs. The opposition eventually dropped its impeachment
drive, but the contentious atmosphere in Parliament remains, most
recently demonstrated by the June-August session that took over
twice as long as planned to approve the national budget. This nasty
"tit-for-tat" political infighting has diverted leaders' energy and
attention from the urgent business of reform and development, and
has diminished ordinary Malawians' confidence in their political
leaders to work together in the best interests of the country.
Mutharika has also moved slowly in making appointments to key
positions; the country's two top prosecutorial jobs are currently
unfilled, and there are many vacant positions on boards and
commissions that perform important oversight functions for
government and parastatal operations.


12. (U) Also of concern is the GOM's continued attachment to statist

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economic policies. Malawi has one of the highest levels in Africa
of government intervention in the economy, a legacy of the Banda
dictatorship that exerted strong control in virtually every economic
sector. The GOM clings to inefficient and unprofitable state-owned
enterprises, both for political reasons and because many senior
leaders still believe that government should control at least some
of the commanding heights of the economy. This is particularly true
of Malawi's all-important agricultural sector, where again this
year, the GOM will buy and distribute almost all of the country's
requirement of fertilizer, because they don't trust the private
sector to supply this "strategic" commodity. The GOM began a
serious privatization program in 1997, and by 2004 approximately 55
of 110 state enterprises slated for privatization had been sold off.
Mutharika stated his intention to continue the effort, but in his
two years in office, only one privatization-- the national telephone
company-- has been carried out. These economic white elephants
continue to drain the treasury and place a drag on the overall
efficiency of the economy.

Making it Stick
--------------


13. (U) The above problems notwithstanding, President Mutharika has
decisively embarked on a strong path of reform, and he has no
intention of turning back. Mutharika's reforms are by no means
irreversible, but several factors give cause for optimism that the
positive trends will continue. The Malawian public is hungry for
change, and strongly supports the reform efforts. Malawians were
greatly dissatisfied with the corruption and misrule of former
president Muluzi, and his ten years in power are commonly referred
to as "the lost decade." The people of Malawi suffered for 30 years
under the dictatorship of Hastings Kamuzu Banda, and many feel that
Muluzi's maladministration robbed them of an important opportunity
to move ahead and prosper.


14. (U) Malawians are conservative by nature, and many wish to
restore the basic values of honesty and hard work for which their
country was known throughout the region, particularly during the
earlier years of Dr. Banda's rule. Many Malawians take pride in the
reputation that Malawi enjoyed during the 1960s and '70s for having
relatively low levels of corruption and good accountability for
international aid funding. Mutharika has successfully tapped this
longing for a return to a perceived former glory, and has enjoyed
strong public backing for cleaning up the affairs of the country.

Great Potential, With Help from MCA
--------------


15. (SBU) Malawi is a country with great potential. The country has
fertile soil, adequate water resources, an enormous labor pool, and
a wealth of farming expertise; hence, its best prospects lie in the
development of agribusiness. Unlike many of its neighbors, Malawi
has no history of ethnic or tribal violence. The factors that are
holding Malawi back at this time are incomplete policy reforms,
inefficient transportation links to the global market, and weak
infrastructure. An MCA Compact could be the key to removing those
constraints and helping to push the country into a new era of
economic growth and prosperity. The process of developing the
Compact proposal would also help keep the country's leaders focused
on the development agenda, particularly in the coming two years as
the next general election of 2009 approaches.


16. (SBU) Malawi's reforms since 2004 have embodied all of the
tenets of the MCA philosophy: economic growth, policy reform, and an
emphasis on results, in a process developed and led by Malawians.
The country possesses solid fundamentals that place it in an
excellent position to take advantage of the "shot in the arm" that
MCA Compact assistance would provide. For this reason, we believe
that Malawi is an excellent fit for MCA, and we advocate Compact
eligibility at the earliest opportunity.

GILMOUR