VZCZCXRO0842
RR RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0714 2271435
ZNR UUUUU ZZH
R 151435Z AUG 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 3140
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEATRS/DEPT OF TREASURY WASHDC 0460
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUEAIIA/CIA WASHDC

UNCLAS LILONGWE 000714 
 
SIPDIS 
 
STATE FOR AF/S 
STATE FOR EB/IFD/ODF, EB/IFD/OMA 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA 
TREASURY FOR OTA - BOB WARFIELD 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN PGOV MI
SUBJECT: MALAWI APPROVES BUDGET IN TIME FOR HIPC REVIEW 
 
REF: A) LILONGWE 654  B) LILONGWE 437 
 
¶1. (SBU) SUMMARY: ON THE HEELS OF THE BOTCHED HANDLING OF 
A CORRUPTION CASE AGAINST FORMER PRESIDENT BAKILI MULUZI 
(REF A), THE GOVERNMENT OF MALAWI MANAGED TO PASS THE 
NATIONAL BUDGET ON AUGUST 3 AFTER WEEKS OF TENSE, 
PROTRACTED WRANGLING WITH THE OPPOSITION-DOMINATED 
PARLIAMENT.  THE OPPOSITION EXTRACTED SEVERAL 
CONCESSIONS, INCLUDING INCREASED FUDING FOR MPS AND THE 
QUIET DISCONTINUATION OF THE MULUZI CASE, IN EXCHANGE FOR 
PASSAGE OF THE BUDGET.  THE GOM REMAINS ON TRACK FOR DEBT 
RELIEF UNDER THE HIGHLY INDEBTED POOR COUNTRIES (HIPC) 
PROGRAM, WHICH IS EXPECTED TO OCCUR LATER THIS YEAR.  END 
SUMMARY. 
 
¶2. (SBU) MALAWI'S NATIONAL ASSEMBLY APPROVED ITS FY 
2006/07 BUDGET TOTALING MWK 140.7 BILLION (USD 1.03 
BILLION) ON AUGUST 3.  THE MAJORITY (BUT ORDINARILY 
DIVISIVE) OPPOSITION SUCCESSFULLY RALLIED TO CHANGE 
SEVERAL LINE ITEMS AND TO DELAY APPROVAL OF THE 
ALLOCATION FOR THE MINISTRY OF INFORMATION AND TOURISM, 
WHOSE MINISTER, PATRICIA KALIATI, REFUSED TO APOLOGIZE TO 
OPPOSITION LEADERS AFTER CASTIGATING THEM DURING A JULY 
PRESS CONFERENCE.  PARLIAMENT FINALLY MANAGED TO PASS THE 
BUDGET AFTER BARRING KALIATI FROM THE PROCEEDINGS. 
 
¶3. (SBU) DEMANDS BY THE OPPOSITION TO INCREASE 
ALLOCATIONS FOR SEVERAL LINE ITEMS - INCLUDING FERTILIZER 
SUBSIDIES, LEGISLATIVE SALARIES, AND FUNDING FOR LOCAL 
GOVERNMENT ELECTIONS - RESULTED IN A USD 14.6 MILLION 
INCREASE OVER GOVERNMENT'S ORIGINAL REQUEST.  THE 
FERTILIZER SUBSIDY BILL ROSE FROM USD 40 MILLION TO USD 
53 MILLION, REFLECTING HIGHER THAN ANTICIPATED QUOTES FOR 
THE PURCHASE OF FERTILIZER.  THE INCREASED BUDGET 
REQUIRES GOVERNMENT TO RECALCULATE THE FINANCING 
MECHANISM TO COVER THE LARGER THAN ANTICIPATED BUDGET 
DEFICIT OF USD 43 MILLION (2 PERCENT OF GDP). 
 
¶4. (SBU) MALAWI'S RECURRENT BUDGET IS HEAVILY 
SUPPLEMENTED BY DONOR INFLOWS AMOUNTING TO MORE THAN 40 
PERCENT.  NONE OF THE DONORS PROVIDING BUDGET SUPPORT 
HAVE SO FAR PROTESTED AGAINST THE APPROPRIATION INCREASE. 
INTERNATIONAL MONETARY FUND (IMF) COUNTRY REPRESENTATIVE 
THOMAS BAUNSGAARD TOLD ECONOFF THAT THE REVISED 
FERTILIZER FIGURE REFLECTED MORE PRAGMATIC BUDGETING 
BASED ON ACTUAL QUOTES.  HE VIEWED THIS AS AN IMPROVEMENT 
OVER LAST YEAR'S PLANNING, WHICH VASTLY UNDERESTIMATED 
FERTILIZER PRICES, RESULTING IN SIGNIFICANT COST 
OVERRUNS.  BAUNSGAARD NOTED THAT THE BUDGET WAS IN LINE 
WITH THE POVERTY REDUCTION AND GROWTH FACILITY (PRGF) 
FRAMEWORK, AND SPECULATED THAT OVERPERFORMANCE IN TAX 
COLLECTION WOULD HELP OFFSET THE DEFICIT.  IT REMAINS TO 
BE SEEN HOW GOVERNMENT WILL MANAGE TO MAKE UP THE 
REMAINDER OF THE DIFFERENCE. 
 
¶5. (U) THE 2006/07 BUDGET RESOURCE PACKAGE INCLUDES DEBT 
CANCELLATION BENEFITS OF USD 30 MILLION. PASSING OF THE 
BUDGET WAS REQUIRED FOR SUCCESSFUL PRGF PROGRAM REVIEW, A 
NECESSARY CONDITION FOR MALAWI REACHING THE HIPC 
COMPLETION POINT AND DEBT CANCELLATION.  THE GOM APPEARS 
TO BE ON TRACK FOR HIPC COMPLETION THIS YEAR (REF B). 
OVERALL PERFORMANCE UNDER PRGF HAS BEEN POSITIVE, AND 
MISSED HIPC TRIGGERS IN THE HEALTH AND EDUCATION SECTORS 
MAY BE WAIVED. 
 
¶6. (SBU) COMMENT: PASSING THIS YEAR'S BUDGET REQUIRED 
SHREWD POLITICAL MANEUVERING BY FINANCE MINISTER GOODALL 
GONDWE, WHO UNDERSTOOD BETTER THAN ANYONE THE NEED TO 
COMPROMISE IN ORDER TO SECURE THE GREATER OBJECTIVE OF 
DEBT RELIEF.  LOCAL IMF AND WORLD BANK (WB) 
REPRESENTATIVES HAVE INDICATED THAT MALAWI IS MORE OR 
LESS ON TRACK FOR HIPC QUALIFICATION BASED ON ECONOMIC 
TARGETS (I.E., SATISFACTORY PRGF IMPLEMENTATION AND GOOD 
MACROECONOMIC PERFORMANCE) AND EXPECT THE IMF BOARD TO 
CONVENE AROUND THE END OF AUGUST TO MAKE A DETERMINATION. 
EASTHAM