MALAWI'S 2008-09 BUDGET: STUCK IN PARLIAMENT, BUT

C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000415

SIPDIS

E.O. 12958: DECL: 07/16/2018
TAGS: EFIN ECON EAID MI
SUBJECT: MALAWI'S 2008-09 BUDGET: STUCK IN PARLIAMENT, BUT
TECHNICALLY SOUND

REF: A. LILONGWE 365

B. LILONGWE 366

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Classified By: Economic Officer D. Daley pursuant to 1.4c and d.

1.(SBU) SUMMARY. In May, the GOM presented to parliament a
2008-09 budget reflecting an almost 25 percent increase over
2007-08 actual expenditures. Supported by increased pledges
of donor grants and fairly robust projections of increased
domestic revenue, the overall budget does not appear to
threaten Malawi's recent progress on macroeconomic stability.
Given that the current budget covers an election year, it is
not surprising that several measures (such as civil service
wage increases) seemed calculated to have a broad popular
appeal. Nevertheless, the GOM's intention to continue paying
down its domestic debt shows commendable fiscal discipline
which was recently highlighted by IMF approval of an expanded
PRGF program. The 2008-09 budget includes a large increase
to the GOM's signature - and politically popular - fertilizer
subsidy program. The increases will cover part of the rising
costs of the inputs, but market prices are likely to drive
the overall bill well beyond budgeted levels. While approval
of the budget has been delayed due to the dispute over
Section 65 of the Constitution, parliament is likely approve
the current budget bill eventually with only minor changes.
In the meantime, Finance Minister Gondwe has indicated he has
fiscal authority to keep the GOM running. End summary.

Expenditures And Revenues Both Up Significantly
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2.(U) The GOM's draft 2008-09 budget includes total
expenditures and net lending of USD 1.6 billion. This
reflects an increase of almost 25 percent over 2007-08 actual
expenditures. One-off expenses for the population census and
the May 2009 general election account for over 20 percent of
this increase. Significant increases to the ministries of
Agriculture and Health, as well as programs in nutrition,
HIV/AIDS and the National AIDS Commission account for the
majority of the remaining increases.

3.(U) The draft budget is based upon projected revenue and
grants of USD 1.46 billion. This also reflects a substantial
increase (almost 20 percent) over 2007-08. More than half of
this increase is based upon increased grant pledges from the
donor community. As the budget makes use of only already
pledged grant money, this aspect of government resource
estimates can be considered relatively robust. (Comment: In
2007-08 grants received exceeded pledges by over USD 43
million. End Comment). The projected increase of USD 106
million in domestic revenue is less certain, although over
the past four years actual revenues have annually exceeded
target revenue.

No Significant Change In Resource Balance
--------------

4.(U) With grants expected to increase more than domestic
revenue in 2008-09, the share of the budget that is
donor-funded will increase from 41 to 43 percent. Given that
the budget uses grant figures based on actual donor pledges,
this is more indicative of growing donor support than any GOM
design.

Lean Pork
--------------

5.(U) With national elections scheduled for May 2009, it is
not surprising to find measures in the current budget that
might be characterized as pork. Indeed, the Ministry of
Irrigation and Water Development has seen its budget increase
50 percent, with the bulk of the total devoted to a
development program that will include small irrigation dams
and nearly 300 boreholes. In his budget speech Minister of
Finance Goodall Gondwe also highlighted programs to support
rural development and the social sector. Also included are
large increases for civil service pay, honoraria for
traditional authorities (village chiefs),and a higher
threshold income required before personal taxes must be paid.
One of the largest increases is a USD 23 million boost to
the fertilizer/input subsidy program, one of the government's
most popular and widely-acclaimed programs.

6.(U) Apart from the input subsidy program, most of these
initiatives represent relatively small elements of the budget
as a whole. Increases in payments to civil service and
traditional authorities this year are continuations of
initiatives begun in previous years. While some elements of
the 2008-09 budget were most likely designed in anticipation
of the upcoming election year, the overall impact appears to
be relatively restrained.

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Government Committed to Debt Reduction
--------------

7.(U) Although the 2008-09 budget anticipates a deficit of
over USD 140 million, the GOM anticipates drawing on existing
external loan facilities for more than this amount. This
will allow it to continue paying down its domestic debt by
almost USD 12 million.

Health Gets Another Shot In The Arm
--------------

8.(U) Already representing one of the largest shares of GOM
expenditures, the health sector in 2008-09 received some of
the largest increases. The Ministry of Health alone received
an increase of USD 38 million. Another USD 40 million
increase will go to nutrition programs, HIV/AIDS and the
National AIDS Commission. The health sector is one in which
the donor community is particularly active, and it is likely
that a significant share of these increases reflect
sector-specific increases in donor funding.

Education and Infrastructure Get Lip Service
--------------

9.(U) Although Minister Gondwe in his budget speech
highlighted GOM initiatives in road construction and
education, actual budget allotments paint a more mixed
picture. Capitol expenses for roads have actually decreased
from 2007-08 expenditures, although much of this can be
attributed to reclassifying maintenance costs as recurring
expenses. Similarly, while overall expenditure on education
has increased, the budget line for primary education has
actually gone down 22 percent.

Investment Incentives
--------------

10.(U) In addition to line items for public sector
expenditures, the 2008-09 budget also includes a range of tax
breaks as incentives for private sector investment. An
across-the-board reduction of the VAT tax from 17.5 percent
to 16.5 percent is aimed at keeping Malawi's tax burden below
the Southern African Development Community (SADC) average.
The new budget proposes to eliminate the VAT entirely on
manufacturing and construction equipment, and to remove
duties on a variety of capital goods for the power sector,
telecomms, mining, water utilities, dairy and fish farming,
and petroleum storage facilities. These measures expand on
tax breaks from past years for capital goods in the
agricultural, manufacturing and tourism sectors. These
incentives reflect a broad-gauge effort to attract investment
and to expand existing industries and infrastructure.

Fertilizer Subsidy: Fiscal Impact Huge
--------------

11.(U) Some of the largest increases in the 2008-09 budget,
as mentioned, can be found in the GOM's signature
agricultural input subsidy program. This program, which
focuses mostly on fertilizer and to a lesser extent seed
subsidies, is seen by the GOM as one of its great successes
and forms the cornerstone of its food security program. It
also dominates the budget, with the Ministry of Agriculture
consuming fully 14 percent of the total budget, with most of
this going to the subsidy program.

12.(C) Although large increases have been factored into the
budget to account for the rise of fertilizer costs, it
remains to be seen if these will be adequate given rapidly
increasing global prices for fertilizer. With the maize
harvest coming shortly before election time in May, the
government will want to do all it can to ensure a good crop
next year, and is unlikely to scale back on the quantities of
fertilizer subsidies. At the same time, it will be
politically difficult for the government to raise the cost to
consumers of the subsidized fertilizer. Indeed, the GOM has
committed to continuing the program with quantities
comparable to past years and at unchanged prices. With a
tight global fertilizer market, the final bill for the
subsidy program could easily balloon well beyond even the
budgeted increase. Minister Gondwe has reportedly speculated
that the final cost could be over 150 percent of the budgeted
figure.

The Budget As Bargaining Chip
--------------

13.(C) According to opposition Member of Parliament and
United Democratic Front (UDF) shadow finance minister Friday

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Jumbe, there are no serious issues with the government's
proposed budget. Although Jumbe took issue with certain
details of the budget, and complained of the government's
past failings to deliver what it promised in the budget, he
insisted that it would pass in a matter of days if the
government would agree to allow implementation of Section 65
(Ref B). Lacking such agreement, Jumbe said that the
opposition would not allow the budget to be passed. He
speculated, however, that the government may not really be
interested in having the budget actually pass. A budget
approved by parliament would impose some accountability on
the government, making it more difficult to dispense
political patronage as the election draws closer. Finance
Minister Gondwe stated on July 15 that he has fiscal
authority to keep spending to keep the GOM running for at
least several months into fiscal year 2008-9.

IMF Gives GOM a Passing Grade
--------------

14.(U) Meeting for its sixth and final review of Malawi's
performance under a three-year Poverty Reduction and Growth
Facility (PRGF),the International Monetary Fund commended
the GOM's performance and authorized the release of the final
tranche of funds available under the arrangement. Further,
the IMF Executive Board agreed to increase the total funds
available under the program by USD 16.9 million to help
address balance of payment needs resulting from higher fuel
and fertilizer prices.

Comment
--------------

14.(SBU) In most respects, Malawi's proposed 2008-09 budget
is reasonable and appears to be largely acceptable to the
parliamentary opposition. Despite the fact that 2009 is an
election year in Malawi, the budget as presented is not
fiscally irresponsible. Despite this, the political impasse
in Parliament is likely to prevent meaningful action on the
budget for some time. More worrisome in the long run is the
GOM's apparently open-ended commitment to a program of
heavily subsidized agricultural inputs. This public
commitment - from which it will be difficult to retreat in an
election year - has the potential to overextend government
spending. The IMF review reflects a vote of confidence in
the GOM, and its decision to increase funding will certainly
help in the immediate term. The PRGF, however, is still a
loan, despite its concessional terms, and cannot resolve
questions of the long-term sustainability of the subsidy
program in particular. Nonetheless, taken as a whole, the
GOM budget represents a serious effort to extend President
Mutharika's so far successful record of prudent fiscal
management and investments in development.
SULLIVAN