VZCZCXRO8867
RR RUEHDU RUEHJO RUEHMR
DE RUEHLG #0269/01 0820746
ZNR UUUUU ZZH
R 230746Z MAR 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2541
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0194
RUEHFR/AMEMBASSY PARIS 0086
RUEHJO/AMCONSUL JOHANNESBURG 0197
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0437

UNCLAS SECTION 01 OF 02 LILONGWE 000269 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S GABRIELLE MALLORY 
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
STATE PLEASE PASS TO MCC FOR KEVIN SABA 
PARIS FOR D'ELIA 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON MI
SUBJECT: IMF: MALAWI SCORES SATISFACTORY REVIEW 
 
REF: LILONGWE 224 
 
LILONGWE 00000269  001.2 OF 002 
 
 
This message is sensitive but unclassified--not for internet 
distribution. 
 
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SUMMARY 
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¶1. (U) The IMF's assessment mission has given Malawi passing 
marks in the second review of its 2005 program.  Citing 
strong fiscal performance, the team predicted that Malawi 
would reach HIPC completion point at mid year.  The team 
expects fiscal difficulty in the first half of 2006, because 
of higher than planned expenditures on food and agricultural 
inputs.  The team also noted that while Malawi met all 
quantitative targets, at least some structural targets were 
met late.  They also faulted Malawi for continued high 
backlogs of import payments, the result of controlling 
foreign exchange rates too tightly.  End summary. 
 
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A GOOD REPORT CARD 
------------------ 
 
¶2. (U) As expected (see reftel), the IMF's second quarterly 
mission to evaluate Malawi's Poverty Reduction and Growth 
Facility (PRGF) reported satisfactory performance in its 
outbrief on 21 March.  Team leader Calvin MacDonald said all 
quantitative benchmarks had been met, as well as most 
structural benchmarks, though some of the latter had been met 
late.  This successful review, if approved by the board, 
would give Malawi six months of satisfactory performance 
under a PRGF--a condition for debt relief under the Highly 
Indebted Poor Country (HIPC) program and the Multilateral 
Debt Relief Initiative.  MacDonald indicated that the IMF 
anticipates providing $13 million in debt relief in the 
second half of CY06 and $20.5 million during CY07. 
 
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CHALLENGES: AGRICULTURAL SPENDING AND FOREX 
------------------------------------------- 
 
¶3. (SBU) The first half of CY06 does hold some challenges for 
Malawi.  The IMF expects the GOM to have some difficulty 
meeting its budget numbers in the first half of CY06 (second 
half of Malawi's FY05/6) because of higher than planned 
spending on maize and fertilizer imports.  (Both of these 
extra expenditures have been ascribed to the poor 2005 
harvest, but there are early signs that the administration 
may have set itself a pattern for heavy intervention in the 
fertilizer and maize markets.  GOM plans to spend MK5.5 
billion ($42 million) on fertilizer next year, compared with 
MK6.9 billion ($53 million) this year.)  And it was clear 
that the IMF intends to hold Malawi to account for not having 
adopted a "more flexible" foreign exchange policy.  MacDonald 
said the IMF had agreed on a plan to measure and reduce the 
import backlog over the rest of the year.  (The backlog 
results from an overvalued kwacha, which has effectively 
dried up the supply of dollars for private importers.) 
 
¶4. (U) Fiscal year 2006/7, which begins in July, comes with 
happier prospects.  The IMF agrees with the GOM's forecast of 
8.5 percent growth, which is a modest figure for a rebound 
year.  With a good harvest, budget pressure should be less, 
and a good tobacco and tea harvest should help with foreign 
currency reserves.  Inflation is expected to decline 
gradually to as little as 7 percent by the end of the fiscal 
year.  The GOM projected continued paydown on domestic debt, 
from 19.7 percent of GDP in FY05/6 to 16.1 percent in FY06/7. 
 While this is behind the program's 19.3 and 15 percent, 
respectively, it is still a massive improvement from 24 
percent in the last fiscal year. 
 
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RISKS: WAGES, MANAGEMENT, FOOD SPENDING 
--------------------------------------- 
 
¶5. (SBU) The IMF's MacDonald outlined several risks for the 
 
LILONGWE 00000269  002.2 OF 002 
 
 
coming year, starting with government pension and wage growth 
that have resulted from recent reforms.  IMF is concerned 
mainly that the reforms be carefully implemented and 
monitored to hold to the budget.  (Up to now, the reforms can 
perhaps best be described as spastic, with frequent 
withdrawals of announced benefits, after-the-fact changes, 
and catch-up payments to compensate for yawning gaps in the 
implementation.)  In order to have a chance at accomplishing 
this, the finance ministry will have to strengthen itself 
considerably. 
 
¶6. (U) Finally, MacDonald suggested that the international 
community engage with the GOM on food security, to ensure the 
efficiency and appropriateness of future operations, and on 
financial management capacity, especially in view of the 
upcoming HIPC windfall.  He said he had asked the GOM to come 
up with an action plan for public finance reform and hopes 
for participation from Malawi's development partners.  He 
specifically cited with approval the Millennium Challenge 
Account Threshold program in this area. 
 
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COMMENT 
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¶7. (SBU) Generally, Embassy agrees with the positive 
assessment of this IMF review team.  Certainly the government 
has done an admirable job in re-establishing fiscal 
discipline over the past year and a half.  That it has not 
also institutionalized better financial management is to be 
expected at this point; institutional reforms are much more 
difficult and lengthy to effect than quick spending cuts.  We 
agree also with the subtext of MacDonald's suggested 
interventions for donors: the biggest risks appear to center 
on the GOM's capacity to make itself more efficient at 
managing money, and its resolve to avoid a fiscal derailment 
over food and agriculture giveaways.  Policymakers here have 
a long way to go before they trust the private sector with 
the crucial agricultural sector, and running it themselves 
will be both expensive and counterproductive. 
EASTHAM