VZCZCXRO0030
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0126/01 0471108
ZNR UUUUU ZZH
P 161108Z FEB 07
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC PRIORITY 3868
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0236
RUEHFR/AMEMBASSY PARIS 0136
RUEHJO/AMCONSUL JOHANNESBURG 0224
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0486

UNCLAS SECTION 01 OF 03 LILONGWE 000126 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S- DAN MOZENA, LOIS CECSARINI, KAMANA MATHUR 
STATE FOR EB/IFD/ODF 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA - BEN CUSHMAN 
STATE PLEASE PASS TO MCC - KEVIN SABA 
 
E.O. 12958: N/A 
TAGS: EFIN EINV EAGR EAID PGOV ECON MI
SUBJECT: MALAWI AND IMF POSTPONE PRGF REVIEW OVER BUDGETARY 
ISSUES 
 
REF: LILONGWE 85 
 
LILONGWE 00000126  001.2 OF 003 
 
 
¶1. (SBU) Summary.  The International Monetary Fund (IMF) 
Resident Representative in Malawi, Thomas Baunsgaard, 
notified post on February 15 that the IMF and the 
Government of Malawi (GOM) had agreed to a "short" 
postponement of the IMF Board's third review of the Malawi 
Poverty Reduction and Growth Facility (PRGF) program (and a 
USD 7 million disbursement under the PRGF) due to a 
discrepancy in budgetary figures.  Although this is 
expected to be only a short delay and should not have an 
impact on the economy, Malawi's budget overrun of USD 54 
million is a clear signal that its budget process needs 
strengthening.  The IMF review had been scheduled for 
February 16.  End Summary. 
 
--------------------------------------------- ------ 
USD 54 Million Budget Overrun to Cover Inflated 
Fertilizer Subsidy Program and "Problem Ministries" 
--------------------------------------------- ------ 
 
¶2. (SBU) According to Baunsgaard, when the Malawians 
presented their plans for the supplemental budget to be 
introduced in Parliament next week, it deviated from what 
had been agreed earlier with the IMF in terms of budget 
targets.  The first problem was "sloppy" numbers in the 
documentation, but more significantly it proposed a larger- 
than-expected amount of funding for the just-concluded 
fertilizer subsidy as well as a new government program to 
purchase maize.  There were also substantial amounts in the 
supplemental budget for defense, the police, and certain 
other "problem ministries" which typically underestimate 
their utility and rental expenditures and need to be bailed 
out lest they fall in arrears.  The total budget overrun 
amounts to MK 7.5 billion (USD 54 million), some MK 2.5 
billion (USD 18 million) of which the IMF estimates is 
attributable to cost overruns from the fertilizer subsidy 
program.  Baunsgaard said the IMF had been consulting with 
the Finance Minister, who is in Taiwan, and who has agreed 
to bring the numbers back to what was earlier agreed. 
 
--------------------------------------------- ---------- 
Economy Buoyant, but GOM Needs to Improve Budget Process 
--------------------------------------------- ---------- 
 
¶3. (SBU) Baunsgaard believed that the negative budget 
impact would be offset by strong revenue collections and 
increased budgetary support from the donor community (note: 
some donors are apparently prepared to move forward their 
contributions in response to the budget overrun), hence the 
end June targets were achievable.  Economic performance had 
been good and he felt confident that they still had a "good 
basis to go to the board" to discuss performance under the 
PRGF.  Nevertheless, significant cost overruns for the 
second consecutive year both in the fertilizer subsidy 
program and the "problem ministries" were serious cause for 
concern moving forward.  Baunsgaard was particularly 
concerned that the Ministry of Finance had taken a "hands 
off" approach this year and had not monitored government 
financial activities.  It was good, Baunsgaard noted, that 
the GOM was "facing up to it now," but fundamental changes 
were needed in this area to avoid overruns of this 
magnitude in the future. 
 
¶4. (SBU) Treasury Secretary Randson Mwadiwa cojfirmed to 
Econoff that the ministry was in the process of revising 
the draft supplementary budget, which it planned to present 
to Parliament on February 19.  According to Mwadiwa, after 
obtaining debt relief under the Heavily Indebted Poor 
Countries (HIPC) initiative, the GOM had agreed with the 
IMF to budget a total sum of MK 1.6 billion (USD 11.4 
million), available as a result of Malawi's significantly 
reduced debt service payments, to finance new projects in 
priority areas.  However, the GOM later decided (without 
consulting the IMF) to budget an additional MK 700 million 
(USD 5 million) to fund various education and 
infrastructure projects (note: Mwadiwa did not mention any 
allocations related to the agricultural sector).  Mwadiwa 
claimed that the GOM felt pressured by the public to share 
 
LILONGWE 00000126  002.2 OF 003 
 
 
dividends in response to "increased expectations of the 
public" post HIPC in order to demonstrate that the country 
was making progress economically.  However, after learning 
of the IMF's concerns, the GOM had agreed to reduce the 
draft budget to the original figure of MK 1.6 billion (11.4 
million) by either scaling back or postponing proposed 
public works projects.  Mwadiwa inferred that the IMF did 
not trust the GOM to stick with the lower figure since the 
IMF is waiting to conduct its review until after the budget 
is actually presented to Parliament (Comment: Baunsgaard 
confirmed that the IMF did feel there was some risk that 
the commitments might not be good given that Finance 
Minister Goodall Gondwe was abroad, hence the decision to 
hold off on the board meeting until sometime after February 
¶19.  End comment.) 
 
------------------------------------- 
New GOM Plan to Manage Maize Surplus? 
------------------------------------- 
 
¶5. (SBU) According to Baunsgaard, 4he GOM had had included 
a line item to purchase maize for its Strategic Grain 
Reserve (SGR), but the IMF had reminded the government that 
this was not part of the original agreement, and pointed 
out that it was not feasible to buy maize at this time 
since there were no surplus funds available and no clear 
reason for doing do.  Consequently, the GOM agreed to 
postpone the issue until the regular budgetary session 
later in the year.  With regard to the fertilizer subsidy 
program, Baunsgaard noted that the IMF was aware that there 
were cost overruns, but that the estimates stated in the 
budget were "far higher than the actual expenditure 
incurred," hence the figure needed to be revised. 
 
¶6. (U) According to current sales figures, the IMF 
estimates that the GOM has distributed more than 175,000 
tons of fertilizer this year (compared to 105,000 tons last 
year).  The GOM had originally planned to distribute 
150,000 tons of fertilizer at a cost of MK 7 billion (USD 
50 million), but continued to print and distribute coupons 
far beyond the initial target.  Broad distribution of 
fertilizer through this very costly -- but generally 
effective -- program, combined with good rains and 
increased planting of improved seed has resulted in a 
promising crop (reftel).  Unofficial first round crop 
estimates provided by the GOM on February 9 project total 
maize production of 3.1 million metric tons (MT), which 
would far exceed the national food requirement. 
 
¶7. (U) With excess maize stock remaining from last year's 
bumper crop of 2.6 million MT, maize prices have dropped 
fifty percent during the pre-harvest period.  This is in 
stark contrast to the usual pre-harvest period -- commonly 
referred to as the "hungry season" -- when maize is 
typically scarce, driving prices up.  Maize exports are 
currently banned and there is increasing pressure from 
grain traders to lift export restrictions.  Baunsgaard 
pointed out that this is clearly an area that needs to be 
addressed, and agreed that exports should be through the 
private sector, not via government purchases and exports. 
However, he stated it is not the place of the IMF to offer 
policy advice; this guidance must come from those donors 
who are engaged in food security issues and have expertise 
in the agricultural sector. 
 
¶8. (U) It is not clear what purpose uhe proposed maize 
purchases would serve, but Baunsgaard speculated that it 
was part of a developing government strategy to manage the 
surplus, perhaps through "managed" exports.  Earlier this 
month, the media reported that Secretary of Agriculture 
Patrick Kabambe had assured concerned farmers that the 
government would ensure that they could sell their crops to 
ADMARC at "better prices" than they are currently 
receiving.  Last year, the GOM instructed its grain trading 
agency, the Agricultural Development and MarketiNg 
Corporation (ADMARC), to purchase surplus maize in 
anticipation that ADMARC would recoup the money through 
grain sales.  But with selling prices twice that of 
privately-traded maize, ADMARC has been unable to unload 
 
LILONGWE 00000126  003.2 OF 003 
 
 
the 85,000 tons it already holds and there is growing 
concern that the GOM will have to cover its sizeable loans. 
 
------- 
Comment 
------- 
 
¶9. (SBU) Although the IMF's decision to delay the PRGF 
review is not expected to have a negative impact on the 
board's decision, it does send a signal that Malawi's 
budget process needs to be strengthened and made credible. 
A centralized budget system is needed to ensure realistic 
budget projections, and the Finance Ministry must monitor 
the budget closely to prevent cost overruns and diversion 
of funds.  The IMF is clearly concerned about the impact of 
the fertilizer subsidy program and the lack of financial 
monitoring that resulted in substantial cost overruns for 
the second consecutive year.  Excess maize supply, which 
could possibly result in a price crash, is also very 
worrisome. 
 
¶10. (SBU) The GOM remains extremely cautious in its 
handling of maize following devastating food shortages in 
2002 that were exacerbated by export of strategic grain 
reserve stocks in 2001.  In its determination to guarantee 
sufficiency, the GOM is constraining the entire maize 
sector, causing serious price distortions that risk future 
food shortages as farmers shift production.  The challenge 
for Malawi will be to strike a balance between continued 
liberalization of its maize market and establishment of an 
appropriate level of strategic planning to address periodic 
shortages.  Though it has apparently decided to drop the 
issue of a maize purchase program for the moment, President 
Mutharika has stated that the government would not be 
pressured to sell ADMARC, which will not only distribute 
maize, according to his vision, but "will ensure people in 
rural areas have somewhere to sell their farm produce." 
Next year's budget will undoubtedly propose significant 
fertilizer distribution and maize purchases once again. 
End Comment. 
 
EASTHAM