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
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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
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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
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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