VZCZCXRO8780
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0594/01 3081254
ZNR UUUUU ZZH
R 041254Z NOV 09
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 0042
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0410
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 LILONGWE 000594 
 
SENSITIVE 
SIPDIS 
 
LONDON FOR AF WATCHER PETER LORD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID MI
SUBJECT: MALAWI: ECONOMY WEAKENS AS IMF BEGINS NEW MISSION 
 
REF: A. LILONGWE 489 
     ¶B. LILONGWE 78 
     ¶C. 08LILONGWE 700 
 
LILONGWE 00000594  001.2 OF 002 
 
 
¶1. (SBU) Summary:  Malawi escaped relatively unscathed from 
the global economic downturn, but strains on the economy are 
becoming increasingly apparent, with a shortage of foreign 
exchange particularly problematic.  An IMF team is in the 
country discussing with the GOM a possible financial program, 
and will be addressing issues of fiscal policy and the 
exchange regime.  With donor support funding over forty 
percent of the GOM budget, and that support often contingent 
upon a good report from the IMF, the potential consequences 
of this mission are significant.  Notwithstanding 
frustrations with some GOM economic policies, it is unlikely 
that the IMF or donors will want to jeopardize broader 
progress by withholding support, even if the GOM resists IMF 
policy prods.  End summary. 
 
CONTINUED GROWTH MASKS WEAKNESS IN THE ECONOMY 
--------------------------------------------- - 
 
¶2. (U) Malawi's economy continued to grow in 2009, with GDP 
growth projected at over 4%.  Malawi's financial sector 
weathered the global economic crisis with little damage, 
largely due to relatively few links to the global financial 
system and a generally risk averse lending culture.  Another 
good growing season produced a third successive year of 
surplus in the maize crop, Malawi's staple food. 
 
¶3. (U) Signs of weakness are beginning to appear, however. 
Auction prices in the 2009 season for Malawian tobacco, the 
country's primary export commodity, were down twenty-one 
percent from 2008's record levels.  This trend reflected 
generally lower global commodity prices.  While the price 
decrease was partly offset by a record crop size, tobacco 
earnings were still down USD 39 million, over eight percent 
lower than in 2008.  Prices for cotton were also down, 
leaving many farmers with little profit. 
 
¶4. (SBU) Malawi's foreign exchange reserves continued to be 
weak, even through the end of the tobacco season when forex 
reserves typically peak (Ref A).  The shortage led to 
companies developing large arrears owed to foreign suppliers, 
resulting in further costs from interest charges on late 
payments, storage and demurrage costs at ports.  According to 
a paper prepared by the Public Private Dialogue Forum, a 
group of GOM and private sector stakeholders, other effects 
of the shortage are that companies have lost advantageous 
business terms, commercial credit has become tighter, 
suppliers have suspended open accounts, and some companies 
have experienced stock-outs due to late payments.  Other 
companies have scaled down or temporarily stopped production 
since raw materials are not available or not delivered on 
time. Thomas Munthali, president of the Economics Association 
of Malawi, acknowledged adverse affect of the foreign 
exchange shortage on Malawi's overall economy, and said that 
going forward the impact will be especially great, although a 
detailed study would be needed to quantify it. 
 
IMF MISSION POTENTIALLY PIVOTAL 
------------------------------- 
 
¶5. (U) On October 27, an IMF team initiated a review with 
potentially serious consequences for Malawi.  At a briefing 
for the international donor community, IMF Country Director 
for Malawi Janet Stotsky said that the mission hopes to 
complete the Article IV consultations begun earlier in the 
year, work with the new government on a number of issues of 
interest to the IMF, and, discuss the existing Exogenous 
Shock Facility (ESF) program (Ref C). 
 
¶6. (SBU) Key issues for the IMF include:  1) Malawi's fiscal 
position, 2) reserves status, and 3) structural measures. 
Stotsky noted that Malawi had failed to meet the goals of the 
ESF program.  Malawi missed program targets on domestic 
borrowing and reserve levels, failed to repay debt as 
planned, spent well beyond budget levels, and failed to 
increase its reserves, which in fact shrank during the 
period.  She added that the IMF is seeking an assessment of 
how the current budget is being handled. 
 
¶7. (SBU) Stotsky also noted that Malawi's reserve position 
remains weak, and that the injection of USD 80 million in 
Special Drawing Rights (SDRs) had helped, but it was not 
enough.  She emphasized that the IMF had concerns regarding 
the overall foreign exchange regime.  Structural issues the 
IMF plans to discuss include bringing the private sector into 
 
LILONGWE 00000594  002.2 OF 002 
 
 
the agricultural subsidy program and issues of public 
financial management, especially within the subsidy program. 
 
¶8. (SBU) The IMF team is prepared to begin negotiations on a 
new program for Malawi, which would be an Extended Credit 
Facility (ECF).  The ECF replaces the Poverty Reduction 
Growth Facility (PRGF), but with lower financing charges and 
better access, according to Stotsky.  She said that under the 
best case scenario, the current mission could lay out a 
framework agreement that could go to the IMF board in 
January.  Any new agreement, however, will need to address 
the failure of the GOM to meet the ESF targets. 
 
FOREIGN EXCHANGE REGIME AND SPENDING ARE KEY 
-------------------------------------------- 
 
¶9. (SBU) Malawi's low foreign exchange reserves are a major 
concern for the IMF, which considers reform of the exchange 
regime essential.  It believes that the Malawi kwacha is 
overvalued at its current exchange rate.  Stotsky noted that 
the advantage of a three-year ECF program would be sufficient 
time for a rational transition to a new regime.  The IMF 
believes that institutionally Malawi should be able to make 
such a transition.  Stotsky emphasized that the team has not 
come with a mandate to get exchange reform or walk away, but 
she made clear the IMF belief that trying to address the 
reserve issue solely through fiscal/monetary measures could 
be damaging to the economy.  Stotsky did not indicate how the 
IMF would react if the GOM proves completely intransigent on 
exchange policy. 
 
¶10. (SBU) The IMF is also concerned with the GOM's lack of 
fiscal discipline over the past year.  Overspending on the 
input subsidy program (Ref. B) raised particular concern, but 
Stotsky noted the problem encompasses a more general 
inability to keep spending within the budget.  The donor 
community is also concerned over spending -- donors 
contributed 42 percent to the GOM revenue in direct budget 
support in 2008-2009. 
 
¶11. (SBU) The purchase by the GOM of an executive jet (a 
Dassault Falcon 900) for the president in particular has 
drawn the critical attention of the IMF mission.  At a time 
when the IMF and donors are looking for responsible fiscal 
management from the GOM in order to justify their continued 
financial support, the expenditure of an estimated USD 20 
million on this aircraft sends a very negative signal. 
 
COMMENT 
------- 
 
¶12. (SBU) The current IMF assessment comes at a critical 
point for Malawi.  With economic strains growing, 
particularly with regard to foreign exchange reserves, 
continued IMF and donor support is key.  The IMF clearly 
believes the GOM's exchange regime must change and donors are 
increasingly wary of budget overruns due to the subsidy 
program.  Both benefactors wield substantial leverage, but it 
is not clear to what extent either is willing to use that 
leverage.  We suspect that Malawi's solid democratic 
credentials and otherwise sound economic policies make it 
unlikely at this point that donors or the IMF will want to 
jeopardize progress by reducing support. 
BODDE