MALAWI: POSITIVE IMF REVIEW

UNCLAS LILONGWE 000971 SIPDIS STATE FOR AF/S STATE FOR EB/IFD/ODF, EB/IFD/OMA TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA TREASURY FOR OTA - BOB WARFIELD SIPDIS E.O. 12958: N/A TAGS: ECON EAID EFIN PGOV MI SUBJECT: MALAWI: POSITIVE IMF REVIEW ¶1. (U) Summary: The IMF has given a positive assessment of Malawi's fiscal performance and expects the trend to continue in the near term. Malawi's biggest challenge over the coming year will be to manage expectations of a large dividend following recent HIPC debt relief, and to resist pressure to engage in new spending or take on new debt. The IMF is consulting on a range of economic governance issues to include as new benchmarks for Malawi's ongoing PRGF program. End summary. Positive Report, Recovering Economy -------------- ¶2. (U) In a November 6 briefing for donors as part of regular Article 4 consultations, IMF mission leader Calvin McDonald described Malawi's performance on its PRGF through end-June 2006 as "satisfactory" and "on track." McDonald said that Malawi had met all but two of its quantitative targets, and that the GOM's fiscal performance in the first quarter of the new fiscal year (July-September) was stronger than anticipated, especially on tax revenues. Government expenditures were restrained, and the level of foreign reserves is satisfactory. Import cover is expected to reach 1.8 months by the end of the year. ¶3. (U) McDonald spoke of "a new buoyancy" in the Malawian economy, reflected in strong tax revenues, particularly in the first quarter of the 2006-07 fiscal year. He said that private sector credit in the first quarter had grown by an annual rate of 20%, albeit from a very low base (Malawi's private sector credit is among the very lowest in sub-Saharan Africa). He predicted that private sector credit would continue to expand as inflation moderates, provided that the GOM maintains its restraint on new borrowing. McDonald projected inflation to fall from its current rate of 12% to single digits by mid-2007. At that point, he said, conditions will be right for "a measured reduction in interest rates." Near to Medium Term Challenges -------------- ¶4. (U) According to the IMF, Malawi's immediate challenge will be to manage the expectations of the general public, and particularly civil society organizations, about an expected windfall following the recent HIPC and Paris Club debt relief. While there may be a small amount of new money available in the coming months from African Development Bank debt relief and IMF "topping up" assistance, the vast majority of the HIPC relief has already been accounted for in the current year budget. The GOM is already facing pressure for increased spending, particularly on social programs. In order to maintain its good fiscal performance and keep macroeconomic reforms on track, the government must resist calls for new spending and taking on new debt. For its part, the IMF appears confident that the GOM will be able to do so. ¶5. (U) Beyond that, the Fund is engaging Malawi on next steps to "shift gears" from macroeconomic stabilization to stimulating private sector led economic growth. The mission engaged with a variety of players from government, banks, private sector, and donors to discuss ways in which Malawi can improve its business and investment climate. These include such diverse initiatives as simplifying the licensing of businesses, expanding private sector access to credit, improving statistical analysis of the economy, and strengthening public finance management. Some of these initiatives will added to the PRGF in 2007 as new performance benchmarks. Comment: Further Evidence of Reform -------------- ¶6. (U) The findings of the IMF mission confirm what we have previously reported in advocating for Malawi's MCC compact eligibility: that fiscal reforms are solidly on track and look good for the future, despite lagging MCC indicator data that reflect past poor performance. We too believe that the GOM will maintain its solid performance and spending restraint under the watchful eye of Finance Minister Goodall Gondwe, and that the overall economic conditions in Malawi will continue to improve over the next 12-24 months. EASTHAM