VZCZCXRO7995
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0321/01 1161303
ZNR UUUUU ZZH
P 261303Z APR 07
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC PRIORITY 4136
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0239
RUEHFR/AMEMBASSY PARIS 0140
RUEHJO/AMCONSUL JOHANNESBURG 0229
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0502

UNCLAS SECTION 01 OF 02 LILONGWE 000321 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S- DAN MOZENA, CHRIS KARBER 
STATE FOR EB/IFD/OMA, EB/IFD/ODF - KERRI DIZOLGIO 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA - BEN CUSHMAN 
 
E.O. 12958: N/A 
TAGS: EFIN EINV EAGR EAID PGOV ECON MI
SUBJECT: MALAWI -- IMF REVIEW POSITIVE, BUT CAUTIONARY ON 
SPENDING 
 
REF: (A) LILONGWE 126 B) LILONGWE 226 
 
LILONGWE 00000321  001.2 OF 002 
 
 
¶1. (U) Summary.  An International Monetary Fund (IMF) 
mission led by Calvin MacDonald provided a positive 
assessment of Malawi's performance under the Poverty 
Reduction and Growth Facility (PRGF) program during an 
April 12 outbrief.  The team praised Malawi's robust 
economic growth, significantly reduced inflation and 
exchange rate stability, but noted concern regarding 
higher-than-expected expenditures for fertilizer and 
development projects which had caused Malawi to breach its 
discretionary spending target and prompted a brief delay in 
the PRGF review (ref A).  The successful completion of the 
third consecutive PRGF review in March marked a new record 
for positive economic performance for the country since 
emerging from the Muluzi era of fiscal mismanagement and 
unrestrained spending.  Malawi is definitely on the right 
path, but still has much work ahead to stimulate private 
sector-led growth.  With campaigning already underway for 
the 2009 elections, staying on track and focused on the 
reform agenda will be a major challenge over the next two 
years.  End Summary. 
 
--------------------------------------------- ---------- 
Strong Economic Performance Continues - Most Targets Met 
--------------------------------------------- ---------- 
 
¶2. (U) Economic performance continued to be strong during 
the third PRGF with Malawi reaching most of the end 
December targets, including the net foreign and domestic 
assets targets.  During the April 12 outbrief, the IMF 
cited estimated growth figures of 7.9 percent for 2006 and 
5.5 percent for 2007, reflecting back-to-back bumper maize 
harvests.  Inflation had come down to 9 percent at end 
February 2007 (following 11 years of double digit 
inflation), a trend that is expected to continue this year, 
and revenue collection had been strong.  Public financial 
management had also continued to improve, according to IMF 
team leader Calvin MacDonald. 
 
------------------------------------ 
Ongoing Budgetary Challenges for GOM 
------------------------------------ 
 
¶3. (U) While the review was generally positive, MacDonald 
noted that Malawi had failed to meet the net domestic 
borrowing target.  Following unplanned spending increases 
on fertilizer and new projects earlier this year, the 
Government of Malawi (GOM) needed to work hard to contain 
expenditures going forward.  The IMF urged the GOM to 
prioritize and carefully manage expenditures in the coming 
year. 
 
¶4. (U) Finance Minister Gondwe agreed that the government's 
fertilizer subsidy program "had gone haywire;" unchecked 
printing and distribution of fertilizer coupons far beyond 
the initial target of 150,000 tons had cost the GOM 
approximately MK 2.5 billion (USD 18 million) more than 
anticipated.  However, he unabashedly defended expenditures 
for development projects, such as dams and irrigation 
systems, which were essential in his view. Aside from 
fertilizer, Gondwe believed that the GOM could contain 
expenditures in other areas and still reach end June 
targets. 
 
¶5. (U) Gondwe talked at length about parliament's refusal 
to pass the supplemental budget (ref B).  Although 
parliamentary approval was not actually required and the 
rejection will not impede government's ability to continue 
spending money for the remainder of the year, Gondwe 
explained that he wanted to inform parliament of how 
government intended to spend increased revenue, which was 
2.8 percent greater than expected.  (Comment:  Though the 
revenue overshoot provided the money, the motivation for 
presenting the supplemental was political: to demonstrate 
that the GOM intended to spread the benefits of HIPC debt 
relief to the population through increased spending.  The 
opposition voted down the supplemental to deny government 
this public relations boon and because of the unfortunate 
statement dissing the opposition by a junior minister 
 
LILONGWE 00000321  002.2 OF 002 
 
 
during the debate.  End Comment.) 
 
¶6. (SBU) Gondwe said that he would continue to consult 
closely with the opposition, whose cooperation would be 
needed in June to pass the new national budget and again in 
November since government planned to change the financial 
year to coincide with the calendar year starting in 2008. 
(Comment: The opposition recently announced its intent to 
reject the proposed change, arguing that a newly-elected 
government coming into power in May would be unfairly 
"saddled with the national budget of the defeated 
government" until the end of the year. We have since 
learned that the administration has opted to abandon the 
planned change and has instructed ministers to submit 
revised budget requests for the full 12-month period by the 
end of this week.  End Comment.) 
 
------------------------------------- 
Forex Market Reform: Bandits Must Go! 
------------------------------------- 
 
¶7. (SBU) The Finance Minister also discussed the forex 
market, announcing that the GOM planned to "liberalize the 
forex market completely" and was devising new operating 
standards for bureaus.  Gondwe complained that Malawi's 
current bureau operators (comment: mostly Asian Muslims. End 
comment) were "like bandits" engaged in money laundering 
and other inappropriate and illegal transactions, allowing 
vital forex to leak out of the country.  The government 
felt strongly, he said, that existing bureau operators had 
"embedded habits" and were beyond reform, hence the GOM 
planned to shut them down and "start afresh with new 
bureaus" operated by commercial banks, and eventually allow 
other institutions with "good reputations" to come in 
later. 
 
------- 
Comment 
------- 
 
¶8. (SBU) The government has done a commendable job 
establishing macroeconomic stability and generally 
improving economic conditions during the past few years, 
thereby setting the scene for future development.  The 
government's major fiscal challenge moving forward is to 
manage expectations related to recently-won debt relief and 
resist expenditure pressures, which will doubtless prove 
difficult for President Mutharika in the run-up the 2009 
elections.  With the carrot of debt relief under the Highly 
Indebted Poor Countries (HIPC) program already bestowed, 
the IMF and other stakeholders are working hard to keep the 
GOM on track and focused on the substantial economic and 
market reform priorities that remain -- not an easy task 
now that political campaigning has begun and Mutharika's 
weak administration is struggling to get consensus on 
virtually all legislation it pursues. 
 
EASTHAM