VZCZCXRO2420
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0574/01 2700951
ZNR UUUUU ZZH
O 260951Z SEP 08
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0022
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0269
RUEAIIA/CIA WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC
RUEHBS/USEU BRUSSELS 0034

UNCLAS SECTION 01 OF 03 LILONGWE 000574 
 
SENSITIVE 
SIPDIS 
 
LONDON FOR AFRICA WATCHER PETER LORD 
 
E.O. 12958: N/A 
TAGS: EFIN EAID PREL MI
SUBJECT: MALAWI:  DONORS TO SUPPORT GOM THROUGH FISCAL, BOP 
CRUNCH IN LEAD UP TO ELECTIONS 
 
REF: A. CO LILONGWE 365 
     ¶B. UN LILONGWE 513 
 
LILONGWE 00000574  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY:  A recent IMF visit to Malawi highlighted a 
$40 million dollar budget shortfall the GOM will face as a 
result of the rising cost of its much-vaunted fertilizer 
subsidy program.  Commercial borrowing to cover this gap 
would only exacerbate another looming problem: a foreign 
exchange shortage that is expected to take Malawi's reserves 
below one month's import coverage by early 2009.  Leading 
donors, including the IMF and World Bank, agreed informally 
on Sept. 24 that they should all do what they can to mitigate 
fiscal and forex pressures on the GOM as the country 
approaches crucial and highly competitive elections in May 
¶2009.  In return, the World Bank and IMF would seek only 
modest GOM commitments to 1) review recent policy decisions 
to restrict commercial trade in maize; and 2) scale back 
discretionary spending.  COMMENT: The goal of this approach 
would be to preserve the significant macroeconomic progress 
over the last several years through the dangerous electoral 
period.  The risk of the developing support package is that 
it might promote "moral hazard," encouraging irresponsible 
GOM behavior in the future such as selling off current 
government maize stocks at highly subsidized prices just 
prior to the election.  All things considered, post favors 
USG support for IMF and World Bank efforts.  END SUMMARY. 
 
IMF MISSION FLAGS IMPENDING FISCAL AND FOREX CRUNCH 
--------------------------------------------- ------ 
 
¶2.  (SBU) The mid-September visit of the IMF's 
Washington-based Country Director for Malawi, Andrew Berg, 
highlighted for both the GOM and its international 
development partners the major macroeconomic challenges the 
country will face in the coming months.  (Post previewed 
these challenges and their political context in ref A in 
June.)  IMF Resident Representative Maitlan MacFarland 
outlined the conclusions of the Mission and expected next 
steps at a meeting of donor country Heads of Mission (HOMs) 
Sept. 24 in Lilongwe. 
 
¶3.  (SBU) The first major challenge is fiscal.  As per 
reftel, the increased cost of fertilizer on the international 
market has raised the pricetag of the GOM's widely-praised 
fertilizer subsidy program by about USD 70 million.  Dialogue 
with the GOM during the IMF visit yielded agreement to reduce 
this expected budgetary gap to around USD 40 million using 
higher but still realistic estimates on expected GOM revenue, 
and making similar revisions to expected flows of 
already-promised foreign assistance.  The GOM also agreed to 
scale back some discretionary spending on development 
programs of its own. 
 
¶4. (SBU) The second major challenge is an expected crunch in 
foreign exchange reserves.  The increased cost of the 
fertilizer subsidy program together with higher oil prices 
have more than compensated for higher forex receipts from 
Malawi's bumper tobacco crop.  These negative developments 
mean that Malawi's reserves are already expected to drop 
below USD 200 million, the level of coverage for one month's 
imports, by early 2009, exacerbating what is always the most 
difficult quarter for forex reserves in Malawi.  The IMF 
warned that any significant GOM borrowing to cover its fiscal 
gap during the same period might provoke a balance of 
payments crisis, but noted that senior GOM leaders were aware 
of this danger. 
 
DONORS AGREE TO PROTECT MUTHARIKA'S PROGRESS 
--------------------------------------------- 
 
¶5. (SBU) The IMF ResRep prefaced his comments on Malawi's 
looming problems with a summary of the GOM's significant 
achievements over the last several years under President 
Mutharika.  He noted that real GDP growth had exceeded eight 
percent in both 2007 and 2008, and that barring bad weather, 
Malawi would likely see 6.5 percent growth in 2009. 
MacFarland predicted that inflation, which had risen over the 
last several months to 9.1 percent, had likely peaked, and 
would decline into 2009.  Interest rates had been rising, he 
pointed out, and excess liquity in the banking system 
lessening.  EU Resident Representative Alessandro Mariani 
commented that Malawi's difficulties with rising commodity 
prices were not unique, and that terms of trade shocks had 
 
LILONGWE 00000574  002.2 OF 003 
 
 
left many other developing countries in far worse shape than 
Malawi. 
 
¶6. (SBU) MacFarland, Mariani and other donor representatives 
at the HOMs' meeting agreed that the real challenge was to 
get through the eight months remaining until Malawi's 
national elections in May 2009.  To accomplish this, Malawi 
would need increased external support and GOM spending 
restraint.  MacFarland indicated that the IMF was prepared to 
help Malawi, although the just-concluded visit had not 
reached a formal agreement.  He said that Fund officials in 
Washington expected to continue talks with the GOM at the 
Fund's annual meetings in mid-October.  Talks so far had 
focused on a one-year agreement under the External Shocks 
Facility (ESF), rather than a renewal of Malawi's current 
Poverty Reduction and Growth Facility (PRGF).  The ESF could 
provide the GOM with access to more funds than the PRFG -- 
potentially around USD 50 million -- and over a shorter 
period.  The IMF envisioned pursuing a longer-term PRGF with 
whatever government emerged from Malawi's elections next 
year.  MacFarland said that the largest obstacle to agreement 
on the ESF at the moment was the lack of agreement between 
the GOM and World Bank on several issues, most notably recent 
GOM policy decisions related to maize markets and Malawi's 
marketing board, ADMARC (ref B). 
 
WORLD BANK PRESSES MAIZE CONCERNS, BUT NOT TOO HARD 
--------------------------------------------- ------- 
 
¶7. (SBU) World Bank Deputy Representative David Rohrbach 
briefed HOMs that the World Bank had not yet reached full 
agreement with the GOM on policy conditions for disbursements 
under Malawi's Poverty Reduction Support Credit (PRSC).  The 
main sticking point was the Bank's objection to recent price 
controls and restrictions on private traders in the market 
for maize, Malawi's staple food.  Other donors, including the 
USG, have shared this concern (ref B).  Rohrbach told HOMs 
that Finance Minister Goodall Gondwe had just written to the 
WB and other budget support donors to confirm that the GOM's 
recent restrictions on the maize trade were "temporary 
measures" designed to deal with "market anomalies."  Gondwe 
expected that the policies would be rescinded some time in 
early 2009.  The World Bank welcomed those comments, Rohrbach 
said, although it was not fully confident that ADMARC's role 
as exclusive buyer and seller of maize would be modified 
within the time frame Gondwe indicated.  Rohrbach indicated 
that at the end of the day, the Bank "was trying not to be 
dogmatic," and limit its ambitions to engaging the GOM in a 
meaningful dialogue on maize policy with a view toward 
addressing problems post-election.  He anticipated that if a 
couple of other more minor issues could be resolved, then an 
agreement was possible by mid-October to disburse PRSC funds. 
 
PASSING THE HAT 
--------------- 
 
¶8. (SBU) The World Bank rep told HOMs that the WB was 
considering increased support for Malawi to close its fiscal 
gap.  Nick Dyer, local representative of the UK's Department 
for International Development (DfID) indicated that his 
government was considering additional support worth nearly 
USD 20 million.  EU Rep Mariani pledged approximately USD 13 
million in additional funding.  Representatives from the 
African Development Bank and Irish Government indicated that 
they might be able to make USD 5 million and USD 2 million 
available respectively to support the fertilizer subsidy 
program.  ResRep MacFarland confirmed that the IMF would of 
course focus its efforts on balance of payments support.  He 
summarized the discussion by saying that the GOM's current 
problems were "serious, but surmountable" given the current 
attitudes of international partners and the GOM's own 
commitment to avoid election-year profligacy. 
 
DOWNSIDE RISKS 
--------------- 
 
¶9. (SBU) While there was broad agreement among HOMs about the 
need to preserve Malawi's current macro stability and  defer 
concerns about some key agricultural policies, DfID Rep Nick 
Dyer articulated the main downside risk to supporting the GOM 
through its fiscal and balance of payments difficulties: "The 
biggest concern in the near term is that the GOM could 
eventually sell off the maize stocks it is now accumulating 
 
LILONGWE 00000574  003.2 OF 003 
 
 
at highly subsized prices just prior to the elections.  This 
would significantly worsen the fiscal problem.  The GOM could 
also print money to cover increased electoral spending." 
USAID Mission Director Curt Reintsma also reminded the group 
that inadequate rainfall in the coming months could also 
dramatically transform the situation. 
 
COMMENT:  PRESERVING STABILITY NOW MAKES SENSE 
--------------------------------------------- -- 
 
¶10. (SBU) Malawi's current situation has all the hallmarks of 
a classic case study in development economics: budget 
shortfall, election-year temptations, balance of payment 
pressures and international financial institutions 
(IFIs)contemplating conditionalities.  There is reason to 
hope, however, that the ending will not be tragic.  Senior 
GOM officials, including Finance Minister Gondwe, have given 
credible commitments to show restraint; and leading donors 
and IFIs seem determined to avoid imposing unrealistic 
conditions at a politically sensitive moment.  Post believes 
that the USG should support efforts to ease macro pressures 
in Malawi, and then work with other donors to address policy 
concerns when the new Malawian government takes office. 
While there are clear political implications to supporting 
the GOM at the current juncture, our reasons for doing so 
would be non-partisan and based on Malawi's long-term 
interests. 
SULLIVAN