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 LILONGWE 00000181 001.2 OF 002 ¶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 -------------- --- ¶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 -------------- -------------- ¶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 -------------- ¶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 -------------- ¶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 -------------- ¶7. The IMF is not currently discussing a follow-on program to the current one-year ESF. The team indicated, however, that the Fund LILONGWE 00000181 002 OF 002 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