MALAWI: IMF FORGIVES OVERSPENDING, HIGHLIGHTS STRONG

UNCLAS SECTION 01 OF 02 LILONGWE 000181

SIPDIS

LONDON FOR AF WATCHER PETER LORD

E.O. 12958: N/A
TAGS: ECON EFIN ETRD MI
SUBJECT: MALAWI: IMF FORGIVES OVERSPENDING, HIGHLIGHTS STRONG
GROWTH

REF: A. 08 LILONGWE 700

B. LILONGWE 78

C. LILONGWE 152

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1. SUMMARY: A just-concluded IMF mission to Malawi found that the
GOM had sufficiently met Fund benchmarks to justify continuation of
the one-year ESF agreement extended in late 2008. The IMF team and
the GOM compromised on how to account for overspending on the 2008
fertilizer subsidy program. While noting further slippage on
targets for government domestic debt, the IMF team estimated that
GDP growth in 2008 reached an impressive 9.7 percent, on the
strength of a record tobacco harvest, a good maize crop and growth
in other sectors, especially telecommunications. With the 2009
maize and tobacco harvests looking good, and uranium production due
to begin this year, the IMF is predicting 7 percent growth in 2009.
End Summary.

IMF Review Team Satisfied with Malawi's Progress
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2. An IMF review team concluded a two-week mission to Malawi on
March 31 by giving the GOM a passing grade and approving the
continuation of the USD 77 million Exogenous Shock Facility (ESF)
extended in December of 2008 (Ref. A). In a briefing for the donor
community, the team reported that it had found a number of positive
aspects to Malawi's economy and had reached satisfactory compromise
agreements on the few issues of most concern.

Fertilizer Subsidy Overrun to Appear on Current Budget
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3. An agreement on the handling of the large budget overrun for the
2008-09 fertilizer subsidy program (Ref. B) was the most noteworthy
outcome from the mission. After extensive discussions the IMF team
was able to reach a compromise agreement with the GOM that will see
the program overrun reflected in the current year budget. Roughly
80 thousand metric tons of fertilizer purchased for this year's
subsidy program was not used. The Smallholder Farmer Fertilizer
Revolving Fund of Malawi (SFFRM),the semi-independent parastatal
responsible for sourcing and supplying the fertilizer, will be
required to carry the market value cost of the unused fertilizer,
with funding from private banks. The GOM will absorb the higher
cost at which the fertilizer was initially imported. The GOM will
also commit to purchase these stocks to supply part of the 2009-10
subsidy program. This plan will allow the GOM to have a significant
portion of the full costs of the program carried off its books.

Borrowing, ForEx Remain Concerns
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4. One target that the GOM has consistently missed is its level of
domestic borrowing. In view of the fact that this rate has been
reduced by almost 50 percent from earlier this decade, however, and
given the context of the global economic downturn, the IMF was
satisfied with GOM efforts to limit borrowing. The 2009-10 budget
will include some minor reduction in this debt level.


5. Extensive IMF-GOM discussions on the macroeconomic framework
underlying the 2009-10 budget focused on the need to support
sustained growth while at the same time reducing domestic debt and
increasing Malawi's foreign exchange reserves. Official reserves
remain at about one month's import cover. Increasing this level is
a key concern for the IMF.

Robust Growth Highlights Economy's Strengths
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6. Malawi's recent overall economic performance received high marks
from the IMF. The Fund recognized that Malawi is in an election
year and expressed satisfaction with the degree to which (apart from
the fertilizer) the GOM has maintained fiscal discipline. The team
estimated that GDP growth in 2008 reached a very impressive 9.7
percent, on the strength of a record tobacco harvest, a good maize
crop and growth in other sectors, especially telecommunications.
With estimates of the 2009 tobacco harvest very good, and with
uranium production at the Kayelekera mine due to begin in 2009, the
IMF is predicting that Malawi will enjoy lower, but still robust
growth at 7 percent in 2009. Although this forecast carries some
downside risk from the global economic slowdown, largely due to
uncertainty over global demand for tobacco (Ref. C),Malawi is still
likely to see some of the strongest growth in the world in 2009.

IMF Open to Further Support
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7. The IMF is not currently discussing a follow-on program to the
current one-year ESF. The team indicated, however, that the Fund

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would be open to such a discussion at the GOM's request starting
with its next scheduled review mission in September. Any new
program would likely be a more traditional, three-year, PRGF
program, since the ESF is designed to address short term shocks.

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


8. The basic message coming from the IMF seemed to be that the
economic/fiscal situation in Malawi is not ideal, but it could be
much worse. The news on growth figures for 2008 and 2009 is in fact
remarkably good, and makes Malawi something of a star performer in
the current global environment. Absorbing the excess cost of the
2008-09 fertilizer subsidy program will be painful, but will
hopefully not carry beyond this year. With foreign exchange
beginning to flow in from the current tobacco season, Malawi can now
say with come confidence that it has weathered the storm, at least
for now.

SULLIVAN