US embassy cable - 04LILONGWE22

C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000022 
 
SIPDIS 
 
DEPT FOR AF/S, AF/EPS, EB/IFD/OMA 
TREASURY FOR OASIA 
TREASURY PLEASE PASS TO IMF AND WORLD BANK EXEC DIRECTORS 
USAID FOR AA/AFR, AFR/DP, AFR/SA 
 
E.O. 12958: DECL: 01/08/2013 
TAGS: EFIN, ECON, PGOV, KCOR, EAID, MI, Economic 
SUBJECT: MALAWI'S PLEA TO THE IMF: SAME OLD DOG, SAME OLD 
TRICKS 
 
REF: A. 03 LILONGWE 1143 
 
     B. 03 LILONGWE 1223 
     C. 03 LILONGWE 1267 
     D. 03 LILONGWE 1295 
 
Classified By: P/E Officer Marc Dillard for reasons 1.5 b/d. 
 
Summary 
------- 
1.  (C) Presidential Economic Advisor Goodall Gondwe 
reportedly met with the Treasury Department in Washington in 
December to make a pitch for waivers on Malawi's IMF 
commitments.  Contrary to his message, we assess that a lack 
of political will has caused the GOM's persistently missed 
fiscal and structural commitments (reftels).  Moreover, there 
are signs that performance on key conditions is 
deteriorating.  With elections coming in May 2004, we believe 
that messages sent now about the importance of political will 
and follow-through will determine donor-GOM relations for 
years to come.  Given current performance, we recommend that 
waivers not be granted, particularly on structural 
conditions.  End summary. 
 
Mr. Gondwe Goes to Washington 
----------------------------- 
2.  (SBU) In mid-December, we alerted Washington that GOM 
officials might use planned negotiations at World Bank 
headquarters to make a pitch for waivers to its IMF program 
conditions (ref D).  It has come to our attention that 
Presidential Economic Advisor Goodall Gondwe did exactly that 
on December 22, approaching the Treasury Department with an 
appeal for support ahead of a potential February review. 
 
3.  (SBU) Gondwe reportedly argued that IMF engagement is 
especially necessary ahead of upcoming May elections, that 
fiscal slippages are largely the result of IMF 
miscalculations and delays in donor disbursements, and that 
the GOM is making significant progress on missed structural 
conditions.  We disagree. 
 
GOM Performance on Fiscal, Monetary Conditions 
--------------------------------------------- - 
4.  (SBU) Without arguing the details of the GOM's likely 
failure to meet its most recent fiscal conditions (refs A, B, 
and C), we note that the GOM has been a serial breaker of its 
fiscal pledges since the inception of its Poverty Reduction 
and Growth Facility (PRGF) in December 2000.  It was a lack 
of fiscal discipline that drove Malawi's PRGF off track in 
2001, and, while the IMF's underestimation of domestic 
interest payments will undoubtedly contribute to current 
expenditure overruns, the pattern of broken promises remains. 
 
5.  (SBU) In addition, we note that President Muluzi used the 
resumption of IMF disbursements in October to announce new 
spending initiatives (ref B), and that shortly after 
Christmas he announced that Malawi's 120,000 civil servants 
would receive an immediate raise along with a second raise in 
June or July.  There is confusion over whether and how the 
raise might be implemented and its potential fiscal impact is 
unknown, not least because a contact in the Ministry of 
Finance has told us the President's announcement caught the 
Ministry's budget division by surprise.  The Secretary of the 
Treasurer has also stated that the raise has not been 
contemplated in the revised budget, soon to be presented. 
The program, however, would clearly run contrary to the GOM's 
fiscal commitments to the IMF. 
 
Old, New Issues on Structural Conditions 
---------------------------------------- 
6.  (SBU) We continue to see lack of political will within 
the GOM to adhere to its structural conditions under the 
PRGF.  Two missed conditions, in particular, have come to be 
considered by several key donors as measures of the 
government's commitment to reform: 1) a requirement that an 
amendment to the Corrupt Practices Act be submitted to 
Parliament to allow the Anti-Corruption Bureau to prosecute 
cases without prior approval from the politically appointed 
Director of Public Prosecutions (DPP); and 2) a requirement 
that a complete audit of domestic arrears be conducted. 
Substantial progress has been made on neither. 
 
7.  (SBU) On the anti-corruption amendment, the GOM has 
advanced the weak argument that the legislation was not 
introduced to Parliament (as had been promised only weeks 
before the session) because checks and balances are needed to 
prevent politically-motivated prosecutions.  What, then, we 
have asked our interlocutors, is the judicial branch for? 
The issue of anti-corruption in Malawi is not about checks 
and balances.  It is about the GOM's credibility, which is 
now extremely low, as the prosecutions of several Cabinet and 
senior ruling party members have been quietly blocked under 
the current legislative formulation (ref D).  As one 
Anti-Corruption Bureau official recently told the Embassy, 
"The only time we get to act is when a Minister involved 
falls out of government."  As noted in ref D, in four weeks 
of Parliament in November and December (and a special one-day 
session convened on December 30), the GOM refused to let the 
anti-corruption legislation be brought to the floor for 
debate. 
 
8.  (SBU) GOM performance on the arrears audit has involved 
similar foot-dragging.  Though first introduced as a 
requirement of the EU's bilateral program in 2001, the 
audit's most recent deadline was completion by December 2003. 
 According to the local EU office, which will fund the audit, 
the contract -- as prepared by the EU in July 2003 -- may (if 
all goes well) be signed this week. 
 
9.  (SBU) Even if the audit contract is signed, our EU 
contact stated that the audit may not proceed, because there 
are indications that the GOM may have changed the audit 
contract's terms of reference since the EU completed the 
tender process in July 2003.  If those terms have changed 
significantly in the six months the GOM has spent signing the 
contract with KPMG, the EU will be required to re-tender the 
contract by its own transparency regulations, delaying the 
audit's start again.  The EU is having an internal discussion 
about holding back bilateral support tied to the audit until 
the actual auditing has begun, he stated. 
 
10.  (SBU) Asked for his assessment of the GOM's intentions 
on the contract, our EU interlocutor stated that it was 
originally thought that the delays were the result of 
incompetence and mismanagement.  Now, however, he stated 
that, "personally," he believed they were "just buying time." 
 "We all expect arrears to be a problem...perhaps in the 
billions of kwacha." 
 
Analysis and Recommendation 
--------------------------- 
11.  (C) Just as on fiscal matters, the GOM's performance on 
structural criteria has been lacking and shows signs of going 
in the wrong direction.  A third (not yet much talked about) 
structural condition, for the Anti-Corruption Bureau (ACB) to 
release a report on potential corruption involving the 
National Food Reserve Agency, was due at the end of December 
and apparently needs to be added to the list of missed 
conditions.  The Attorney General is reportedly implicated, 
and one ACB official openly worried to us that the report 
will be buried.  Moreover, the Deputy Director of the ACB's 
contract has not been renewed.  When the ACB gets aggressive 
with politicians, our contact continued on to say, "they come 
back and fire us."  GOM credibility on its anti-corruption 
efforts -- and by extension its performance on structural 
reform -- deteriorates all the while. 
 
12.  (C) It is worthwhile to note that Goodall Gondwe, the 
GOM's emissary to the Treasury Department, encumbers an 
advisory position that is funded through a World Bank 
program.  The purpose of his position is to get President 
Muluzi world-class economic analysis to support performance 
on Bank and Fund programs.  A Malawian, Gondwe formerly 
worked as the Deputy Director for the Africa Division at the 
IMF (where the current IMF team leader for Malawi was a 
subordinate) and he appears to be skillfully working his 
contacts at the Fund to the GOM's advantage.  His messages 
should be filtered with care: he has stakes with more than 
one player in this exchange, and he may be angling for a 
senior administration appointment after May's elections. 
Shortly after his December message to the Ambassador on the 
proposed anti-corruption amendment (ref D), we learned that 
Gondwe had not coordinated with the Attorney General, who had 
control of the legislation, and that the "GOM" opinion he 
presented was fragmented among senior administration members. 
 
13.  (C) Gondwe was right about one thing: now is a critical 
juncture for Malawi.  May's elections will usher in a new 
administration, and the messages the IMF sends today about 
the necessity to follow through on commitments will set the 
tone for donor-GOM relations for years to come. The governing 
elite in Malawi is very small, and today's and tomorrow's 
bureaucrats and politicians are drawing lessons from this 
episode.  We believe that medium- to long-term Malawian 
performance -- on a range of bilateral and multilateral 
issues -- hinges on the country's leadership learning to take 
responsibility for itself.  Given current GOM performance, we 
therefore advise against granting waivers for repeated broken 
promises, particularly on structural conditions. 
BROWNING