MALAWI -- IMF REVIEW POSITIVE, BUT CAUTIONARY ON

UNCLAS SECTION 01 OF 02 LILONGWE 000321 SIPDIS SENSITIVE SIPDIS STATE FOR AF/S- DAN MOZENA, CHRIS KARBER STATE FOR EB/IFD/OMA, EB/IFD/ODF - KERRI DIZOLGIO TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA - BEN CUSHMAN E.O. 12958: N/A TAGS: EFIN EINV EAGR EAID PGOV ECON MI SUBJECT: MALAWI -- IMF REVIEW POSITIVE, BUT CAUTIONARY ON SPENDING REF: (A) LILONGWE 126 B) LILONGWE 226 LILONGWE 00000321 001.2 OF 002 ¶1. (U) Summary. An International Monetary Fund (IMF) mission led by Calvin MacDonald provided a positive assessment of Malawi's performance under the Poverty Reduction and Growth Facility (PRGF) program during an April 12 outbrief. The team praised Malawi's robust economic growth, significantly reduced inflation and exchange rate stability, but noted concern regarding higher-than-expected expenditures for fertilizer and development projects which had caused Malawi to breach its discretionary spending target and prompted a brief delay in the PRGF review (ref A). The successful completion of the third consecutive PRGF review in March marked a new record for positive economic performance for the country since emerging from the Muluzi era of fiscal mismanagement and unrestrained spending. Malawi is definitely on the right path, but still has much work ahead to stimulate private sector-led growth. With campaigning already underway for the 2009 elections, staying on track and focused on the reform agenda will be a major challenge over the next two years. End Summary. -------------- -------------- Strong Economic Performance Continues - Most Targets Met -------------- -------------- ¶2. (U) Economic performance continued to be strong during the third PRGF with Malawi reaching most of the end December targets, including the net foreign and domestic assets targets. During the April 12 outbrief, the IMF cited estimated growth figures of 7.9 percent for 2006 and 5.5 percent for 2007, reflecting back-to-back bumper maize harvests. Inflation had come down to 9 percent at end February 2007 (following 11 years of double digit inflation),a trend that is expected to continue this year, and revenue collection had been strong. Public financial management had also continued to improve, according to IMF team leader Calvin MacDonald. -------------- Ongoing Budgetary Challenges for GOM -------------- ¶3. (U) While the review was generally positive, MacDonald noted that Malawi had failed to meet the net domestic borrowing target. Following unplanned spending increases on fertilizer and new projects earlier this year, the Government of Malawi (GOM) needed to work hard to contain expenditures going forward. The IMF urged the GOM to prioritize and carefully manage expenditures in the coming year. ¶4. (U) Finance Minister Gondwe agreed that the government's fertilizer subsidy program "had gone haywire;" unchecked printing and distribution of fertilizer coupons far beyond the initial target of 150,000 tons had cost the GOM approximately MK 2.5 billion (USD 18 million) more than anticipated. However, he unabashedly defended expenditures for development projects, such as dams and irrigation systems, which were essential in his view. Aside from fertilizer, Gondwe believed that the GOM could contain expenditures in other areas and still reach end June targets. ¶5. (U) Gondwe talked at length about parliament's refusal to pass the supplemental budget (ref B). Although parliamentary approval was not actually required and the rejection will not impede government's ability to continue spending money for the remainder of the year, Gondwe explained that he wanted to inform parliament of how government intended to spend increased revenue, which was 2.8 percent greater than expected. (Comment: Though the revenue overshoot provided the money, the motivation for presenting the supplemental was political: to demonstrate that the GOM intended to spread the benefits of HIPC debt relief to the population through increased spending. The opposition voted down the supplemental to deny government this public relations boon and because of the unfortunate statement dissing the opposition by a junior minister LILONGWE 00000321 002.2 OF 002 during the debate. End Comment.) ¶6. (SBU) Gondwe said that he would continue to consult closely with the opposition, whose cooperation would be needed in June to pass the new national budget and again in November since government planned to change the financial year to coincide with the calendar year starting in 2008. (Comment: The opposition recently announced its intent to reject the proposed change, arguing that a newly-elected government coming into power in May would be unfairly "saddled with the national budget of the defeated government" until the end of the year. We have since learned that the administration has opted to abandon the planned change and has instructed ministers to submit revised budget requests for the full 12-month period by the end of this week. End Comment.) -------------- Forex Market Reform: Bandits Must Go! -------------- ¶7. (SBU) The Finance Minister also discussed the forex market, announcing that the GOM planned to "liberalize the forex market completely" and was devising new operating standards for bureaus. Gondwe complained that Malawi's current bureau operators (comment: mostly Asian Muslims. End comment) were "like bandits" engaged in money laundering and other inappropriate and illegal transactions, allowing vital forex to leak out of the country. The government felt strongly, he said, that existing bureau operators had "embedded habits" and were beyond reform, hence the GOM planned to shut them down and "start afresh with new bureaus" operated by commercial banks, and eventually allow other institutions with "good reputations" to come in later. -------------- Comment -------------- ¶8. (SBU) The government has done a commendable job establishing macroeconomic stability and generally improving economic conditions during the past few years, thereby setting the scene for future development. The government's major fiscal challenge moving forward is to manage expectations related to recently-won debt relief and resist expenditure pressures, which will doubtless prove difficult for President Mutharika in the run-up the 2009 elections. With the carrot of debt relief under the Highly Indebted Poor Countries (HIPC) program already bestowed, the IMF and other stakeholders are working hard to keep the GOM on track and focused on the substantial economic and market reform priorities that remain -- not an easy task now that political campaigning has begun and Mutharika's weak administration is struggling to get consensus on virtually all legislation it pursues. EASTHAM