VZCZCXRO9856
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0387/01 1901610
ZNR UUUUU ZZH
P 091610Z JUL 09
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC PRIORITY 0631
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHLO/AMEMBASSY LONDON 0382

UNCLAS SECTION 01 OF 02 LILONGWE 000387 
 
DEPT FOR AF/S, AF/EPS 
TREASURY FOR OASIA 
LONDON FOR AF WATCHER PETER LORD 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EAID ETRD PGOV MI
SUBJECT: MALAWI'S 2009-10 BUDGET: NO SURPRISES TO START MUTHARIKA'S 
SECOND TERM 
 
LILONGWE 00000387  001.4 OF 002 
 
 
¶1. Summary:  Minister of Finance Ken Kandodo presented the first 
budget of President Mutharika's second term to Malawi's National 
Assembly on July 3.  Largely a continuation of previous GOM economic 
policies, the budget contained no significant surprises.  Spending 
is projected to increase to USD 1.8 billion, up two percent over 
2008-09, and domestic debt will fall USD 46 million.  Agriculture 
continues to receive the largest expenditure, followed by transport 
and infrastructure, education, and health.  The budget includes a 
variety of tax reductions to spur business investment.  Kandodo 
noted that the agricultural input subsidy program would not be a 
long-term solution to food security in Malawi.  Instead, greater 
emphasis would be placed on the President's "Greenbelt" initiative 
and increasing irrigation and mechanization in the agricultural 
sector.  End summary. 
 
New Minister, Familiar Budget 
----------------------------- 
 
¶2. On July 3, new Minister of Finance Ken Kandodo presented his 
first budget to Malawi's National Assembly.  Kandodo was named as 
Minister in President Mutharika's second administration only three 
weeks ago.  Kandodo thanked former Finance Minister Goodall Gondwe 
(now Minister of Local Government and Rural Development) for his 
excellent service to Malawi and noted that Malawi has enjoyed strong 
growth in recent years, reaching 9.7 percent in 2008.  Kandodo 
projected this to continue, with growth forecast at 7.9 percent for 
¶2009.  The GOM projects 9.7 percent inflation in 2009 and 7.7 
percent in 2010. 
 
¶3. Total expenditure for FY 2009-10 is budgeted at USD 1.8 billion, 
a two percent increase over FY 2008-09 expenditures.  The GOM 
projects income of USD 1.7 billion, including USD 985 million in tax 
revenue, USD 164 million in non-tax revenue, and USD 571 million in 
grants.  The planned fiscal deficit is USD 88 million, equivalent to 
1.6 percent of GDP.  With foreign loans amounting to USD 134 
million, the overall budget will yield a surplus of USD 46 million 
that will be used to repay domestic debt. 
 
Expenditure Highlights 
---------------------- 
 
¶4. The priorities set in the 2009-10 budget follow the trend set in 
President Mutharika's previous administration.  The budget 
prioritizes economic growth while safeguarding food security, 
promoting health and development of human capital.  Agriculture and 
food security receive the largest allocations, USD 217 million.  As 
previously, the bulk of agriculture spending will be devoted to the 
administration's signature input subsidy program, which will provide 
low cost fertilizer to 1.7 million farmers.  Kandodo highlighted 
integrated rural development, especially development of 'rural 
growth centers,' as the administration's second key focus.  Other 
important sectors in the budget include transport and power 
infrastructure, education, and health. 
 
¶5. Kandodo noted that the agricultural input subsidy program would 
not be a long-term solution to food security in Malawi.  Instead, 
the GOM would place greater emphasis on irrigation and mechanization 
of the agricultural sector, as exemplified by the President's 
"Greenbelt" initiative.  Also noteworthy is the increased emphasis 
on education in the new budget, with the sector receiving a 27 
percent increase over last year's budget.  In the power sector, 
Kandodo highlighted the completion of the rehabilitation of the 
Tedzani II power station, commencement of the Kapichira II power 
station (to be completed in 30 months), and the power interconnector 
project with Mozambique. 
 
Tax Revenue Measures 
-------------------- 
 
¶6. Kandodo asserted that friendly tax policies implemented in the 
past have helped support strong economic growth and said this year's 
budget aims to consolidate such gains.  The budget plan raises the 
minimum turnover threshold for VAT registration from USD 14,000 to 
USD 44,000 and a simplified turnover tax of 2 percent replaces both 
VAT and company taxes for businesses making below the USD 44,000 
threshold, easing the tax burden on small business.  The GOM 
proposes to eliminate customs duties on a variety of items 
considered necessary in manufacturing or for development. 
 
Comment: 
--------- 
 
¶7. The 2009-10 budget continues the GOM's recent successful policies 
and contains no surprises.  It is clear that while Kandodo presented 
the budget, former Finance Minister Gondwe had a strong hand in its 
 
LILONGWE 00000387  002.4 OF 002 
 
 
drafting.  With small growth in overall expenditures, and a budgeted 
reduction in domestic debt, the budget reflects encouraging fiscal 
discipline.  Kandodo's admission that the GOM will move away from 
reliance on the widely popular agricultural input subsidy program is 
positive.  While effective in boosting Malawi's agricultural 
production in recent years, the program has been hugely expensive. 
 
BODDE