VZCZCXRO4048
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0889/01 2831113
ZNR UUUUU ZZH
R 101113Z OCT 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 3378
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEATRS/DEPT OF TREASURY WASHDC 0469
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 LILONGWE 000889 
 
SIPDIS 
 
STATE FOR AF/S, AF/EPS 
STATE FOR EB/IFD/ODF, EB/IFD/OMA 
USAID FOR AFR/SA, ARF/DP, PPC/AA, PPC/MCA 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA 
TREASURY FOR OTA - BOB WARFIELD 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN KMCA PGOV MI
SUBJECT: MALAWI: THE CASE FOR MCA COMPACT ELIGIBILITY 
 
REF: Lilongwe 848 
 
LILONGWE 00000889  001.2 OF 003 
 
 
¶1. (SBU) Summary: Over the past two years, Malawi has embarked on a 
process of positive reform, led by the government of President 
Mutharika, that has effectively reversed many years of corruption 
and misrule.  The GOM has decisively taken control of its own 
development agenda, and has embraced the MCA Threshold Program, 
which complements a broader reform process taking place in the 
country.  Malawi's goals are very well aligned with the objectives 
of the Millennium Challenge, and we believe the time is right for 
Malawi to be considered for MCA Compact eligibility.  End summary. 
 
MCA and Malawi: Made for Each Other 
----------------------------------- 
 
¶2. (U) When President Mutharika took office in May 2004, he 
announced two priorities: fighting corruption and fixing the 
country's economy.  The president argued that unless Malawi could 
curb its rampant corruption, precious public resources would 
continue to disappear and investors and donors would shun the 
country.  He further reasoned that the way to reduce Malawi's 
grinding poverty is to grow the country's economy, and not depend on 
handouts from donors.  He exhorted Malawians to work harder to build 
"a producing and exporting country." 
 
¶3. (U) Mutharika focused his efforts on improving the macroeconomic 
environment by reining in government spending, reducing borrowing, 
and inviting the IMF to monitor the GOM's finances.  At the same 
time, the president took firm control of the country's development 
agenda.  He launched a home-grown national development plan, the 
Malawi Growth and Development Strategy, to replace the 
donor-designed Poverty Reduction Strategy Paper.  The new plan 
emphasizes economic growth and improvement of investment conditions, 
so that Malawi can grow its way out of poverty and begin to pay for 
its own social services.  Mutharika also insisted that the new 
government deliver results.  For the first time ever, cabinet 
ministers were compelled to produce monthly results reports, and he 
personally chastised ministers who failed to deliver.  He fired 
poor-performing senior civil servants, and shifted others to new 
positions to inject new energy into their work.  He ordered the 
consolidation of most government ministries to offices in the 
capital Lilongwe from locations in the provincial cities of Zomba 
and Blantyre, saving money and improving efficiency. 
 
¶4. (U) The MCC Board recognized the changes taking place in Malawi, 
and in November 2004 invited the country to apply for Threshold 
assistance.  The Threshold program was an appropriate first step for 
Malawi, given the brief track record of Mutharika's government at 
that time, and the tendency of the previous Muluzi administration to 
backslide on reforms.  As reported in reftel, the Threshold program 
has seen several early successes and has complemented well the other 
reforms that are going on in Malawi. 
 
Strong Performance in All Three MCA Indicator Areas 
--------------------------------------------- ------ 
 
¶5. (U) Malawi has demonstrated impressive performance in all three 
of the key MCA indicator areas of ruling justly, investing in 
people, and promoting economic freedom.  Although Malawi slipped 
very slightly on the FY-2007 MCA corruption indicator (from .02 
above the median to .03 below), the data do not tell the whole 
story. 
 
¶6. (U) President Mutharika has made his "zero tolerance" 
anti-corruption campaign the centerpiece of his administration, and 
the GOM has scored important successes.  The effort, supported by 
the Threshold plan and other donors, is aimed at punishing acts of 
past corruption as well as improving governance and strengthening 
institutions and the rule of law in order to prevent future 
corruption.  Several senior officials (a cabinet minister, the mayor 
of the largest city, and senior civil servants) have been convicted 
of corruption, and many other cases are in process. As reported 
reftel, a range of regulatory and administrative reform efforts are 
underway to improve accountability, transparency and efficiency in 
government.  For the first time in Malawi's post-independence 
history, the National Assembly is playing an active and much more 
assertive role in its oversight of the executive branch, conducting 
regular committee hearings and making policy recommendations. 
 
¶7. (U) Furthermore, the lag of the corruption indicator data does 
not fully reflect these developments.  The FY-2007 indicator is 
based on 2005 data, which were collected from a number of studies 
 
LILONGWE 00000889  002.2 OF 003 
 
 
conducted in 2004 and perhaps earlier.  The new government took 
office and began its reforms in mid-2004, and its efforts are very 
likely not documented in the data upon which the indicator is based. 
 
 
¶8. (U) Malawi has shown remarkable leadership in health care, 
particularly in HIV/AIDS and malaria.  The WHO recently commended 
Malawi for its highly successful scale-up of anti-retroviral 
therapy, one of the best in Africa.  Malawi's distribution program 
of insecticide treated bednets is considered to be the worldwide 
best-practice model for other countries to follow.  The country's 
inoculation rates are very solid, and Malawi has recently made 
significant gains in infant and maternal mortality. 
 
¶9. (U) Without doubt, Malawi's greatest transformation in the past 
two years has taken place in the economy, with a performance that 
has earned glowing praise from the IMF and international donors.  As 
with corruption, the scorecard data lag and do not give the whole 
picture.  Under the guidance of the highly capable finance minister, 
Goodall Gondwe, the new government from the outset restrained 
spending and placed itself under the watchful eye of an IMF Staff 
Monitored Program.  Following a year of good performance under the 
SMP, Malawi successfully qualified for a new IMF Poverty Reduction 
Growth Facility in August 2005, along with new budget support from 
bilateral donors.  Continued strong performance over the past year 
brought Malawi to HIPC Completion Point in August 2006, with full 
debt relief under the Multilateral Debt Relief Initiative.  The 
GOM's increased accountability, control of spending, and debt relief 
have all contributed to an optimistic outlook for the country's 
macroeconomic picture.  Inflation has recently fallen from over 16 
percent to approximately 12 percent, and is projected to fall to 10 
percent by the end of 2006.  Malawi's projected fiscal deficit for 
the 2006-07 budget is 2 percent of GDP.  Domestic interest rates are 
also projected to decline, as the GOM's fiscal restraint and reduced 
borrowing lessens the pressure on local credit markets and frees up 
more capital for private sector investment. 
 
¶10. (U) In response to Malawi's poor performance in the most recent 
World Bank "Doing Business" survey (and the related MCA indicator), 
the GOM has recently convened a task force led by the Minister of 
Trade to correct a number of deficiencies.  The task force is 
focused on five areas-- licenses, taxes, trade across borders, 
access to credit, and closing a business-- and has prioritized 
"stroke of the pen" regulatory changes that can be quickly 
implemented.  For example, opening a small business currently 
requires multiple licenses that are very costly.  Depending on the 
nature of the enterprise, a businessperson might need four or five 
licenses that cost more than a year's wages for the average 
Malawian.  The task force is proposing to collapse those licenses to 
a single permit and to slash the fees to a reasonable level.  The 
task force also wants to equalize the fees paid by Malawians and 
foreigners, cut the top marginal company tax rate, and streamline 
the tax payment system.  This reform effort is just starting, but if 
the GOM follows its own action plan, it should begin to improve its 
"Doing Business" rating within a year or two. 
 
Bumps in the Road 
----------------- 
 
¶11. (U) Despite the positive reforms and good performance of the 
past two years, there have been notable problems, particularly with 
political stability and governance.  Mutharika's strong stand 
against corruption precipitated his resignation from his own party 
in early 2005, after which he formed a new party that became the 
ruling minority.  His former party colleagues retaliated with an 
attempted impeachment, and the president further roiled the 
opposition by pursuing minor criminal cases against outspoken 
opposition MPs.  The opposition eventually dropped its impeachment 
drive, but the contentious atmosphere in Parliament remains, most 
recently demonstrated by the June-August session that took over 
twice as long as planned to approve the national budget.  This nasty 
"tit-for-tat" political infighting has diverted leaders' energy and 
attention from the urgent business of reform and development, and 
has diminished ordinary Malawians' confidence in their political 
leaders to work together in the best interests of the country. 
Mutharika has also moved slowly in making appointments to key 
positions; the country's two top prosecutorial jobs are currently 
unfilled, and there are many vacant positions on boards and 
commissions that perform important oversight functions for 
government and parastatal operations. 
 
¶12. (U) Also of concern is the GOM's continued attachment to statist 
 
LILONGWE 00000889  003.2 OF 003 
 
 
economic policies.  Malawi has one of the highest levels in Africa 
of government intervention in the economy, a legacy of the Banda 
dictatorship that exerted strong control in virtually every economic 
sector.  The GOM clings to inefficient and unprofitable state-owned 
enterprises, both for political reasons and because many senior 
leaders still believe that government should control at least some 
of the commanding heights of the economy.  This is particularly true 
of Malawi's all-important agricultural sector, where again this 
year, the GOM will buy and distribute almost all of the country's 
requirement of fertilizer, because they don't trust the private 
sector to supply this "strategic" commodity.  The GOM began a 
serious privatization program in 1997, and by 2004 approximately 55 
of 110 state enterprises slated for privatization had been sold off. 
 Mutharika stated his intention to continue the effort, but in his 
two years in office, only one privatization-- the national telephone 
company-- has been carried out.  These economic white elephants 
continue to drain the treasury and place a drag on the overall 
efficiency of the economy. 
 
Making it Stick 
--------------- 
 
¶13. (U) The above problems notwithstanding, President Mutharika has 
decisively embarked on a strong path of reform, and he has no 
intention of turning back.  Mutharika's reforms are by no means 
irreversible, but several factors give cause for optimism that the 
positive trends will continue.  The Malawian public is hungry for 
change, and strongly supports the reform efforts.  Malawians were 
greatly dissatisfied with the corruption and misrule of former 
president Muluzi, and his ten years in power are commonly referred 
to as "the lost decade."  The people of Malawi suffered for 30 years 
under the dictatorship of Hastings Kamuzu Banda, and many feel that 
Muluzi's maladministration robbed them of an important opportunity 
to move ahead and prosper. 
 
¶14. (U) Malawians are conservative by nature, and many wish to 
restore the basic values of honesty and hard work for which their 
country was known throughout the region, particularly during the 
earlier years of Dr. Banda's rule.  Many Malawians take pride in the 
reputation that Malawi enjoyed during the 1960s and '70s for having 
relatively low levels of corruption and good accountability for 
international aid funding.  Mutharika has successfully tapped this 
longing for a return to a perceived former glory, and has enjoyed 
strong public backing for cleaning up the affairs of the country. 
 
Great Potential, With Help from MCA 
----------------------------------- 
 
¶15. (SBU) Malawi is a country with great potential.  The country has 
fertile soil, adequate water resources, an enormous labor pool, and 
a wealth of farming expertise; hence, its best prospects lie in the 
development of agribusiness.  Unlike many of its neighbors, Malawi 
has no history of ethnic or tribal violence.  The factors that are 
holding Malawi back at this time are incomplete policy reforms, 
inefficient transportation links to the global market, and weak 
infrastructure.  An MCA Compact could be the key to removing those 
constraints and helping to push the country into a new era of 
economic growth and prosperity.  The process of developing the 
Compact proposal would also help keep the country's leaders focused 
on the development agenda, particularly in the coming two years as 
the next general election of 2009 approaches. 
 
¶16. (SBU) Malawi's reforms since 2004 have embodied all of the 
tenets of the MCA philosophy: economic growth, policy reform, and an 
emphasis on results, in a process developed and led by Malawians. 
The country possesses solid fundamentals that place it in an 
excellent position to take advantage of the "shot in the arm" that 
MCA Compact assistance would provide.  For this reason, we believe 
that Malawi is an excellent fit for MCA, and we advocate Compact 
eligibility at the earliest opportunity. 
 
GILMOUR