US embassy cable - 04LILONGWE179

UNCLAS SECTION 01 OF 03 LILONGWE 000179 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/S, AF/EPS, EB/IFD/OMA 
TREASURY FOR IMF AND WORLD BANK EXEC DIRECTORS 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, MI, Development, Economic 
SUBJECT: MALAWI: DONORS SPLIT OVER BANK AND FUND PROGRAMS 
 
 
Summary 
------- 
1.  (SBU) Minster of Finance Jumbe made a pitch on March 
1 for donors to support Malawi's IMF and World Bank 
programs.  Stating that statistical discrepancies in its 
submission to the Fund have been largely resolved, Jumbe 
claimed that Malawi has made progress on its 
macroeconomic stabilization program and needs assistance 
to make further progress.  Repeated failures to meet 
targets, foot-dragging on agreed upon goals, and 
questionable financial submissions by the GOM have 
depleted donor confidence, and a split has emerged among 
donors over whether a "tough love" approach is the best 
way to move forward.  Although we are mindful of Malawi's 
need for assistance and do not wish to scuttle the Bank's 
Structural Adjustment Credit, we continue to question GOM 
commitment to its macroeconomic program, and judge that 
resuming disbursements now without significant fiscal and 
structural progress would send the wrong signals to those 
who will be elected in May.  End summary. 
 
GOM, World Bank Make a Pitch to the Bilateral Donors 
--------------------------------------------- ------- 
2.  (U) On March 1, Minister of Finance Jumbe briefed 
bilateral donors on the GOM's progress with its IMF 
Poverty Reduction and Growth Facility (PRGF) and with the 
World Bank's proposed $50 million Structural Adjustment 
Credit (SAC, sometimes referred to as FIMAG) for Malawi. 
Representatives from Norway, Britain, the EU, Germany, 
and Canada were present, as was World Bank Country Manger 
Dunstan Wai and a staff member from the local IMF office. 
The Ambassador, AID Director, and Econoff attended for 
the U.S. Mission. 
 
3.  (U) Wai opened the meeting by stating that "a pattern 
of inconsistencies" in the GOM's data submissions to the 
IMF had led to donor doubts about performance under the 
PRGF.  Wai noted that the World Bank was seeking a 
"comfort letter" from the IMF regarding Malawi's 
macroeconomic performance before going forward with the 
SAC, and, given that linkage, that bilateral donor doubts 
had the potential to affect the timing and substance of 
the SAC.  He suggested that the meeting be used to 
clarify recent GOM actions. 
 
4.  (SBU) In response, Minister Jumbe stated that 
statistical discrepancies in the GOM's submissions to the 
IMF came from a succession of estimates and "tentative 
figures," rather than actual returns.  He stated that the 
GOM had repeatedly corrected errors, that there "was 
nothing funny" in the numbers, and that, after a 
verification exercise, the discrepancy had been reduced 
from 3.2 billion Malawi Kwacha ($29 million) to MK 227 
million ($2 million).  (Note: The fact that the IMF has 
not given a quantitative evaluation locally for months, 
and the continuing absence of an IMF Resident 
Representative, has not helped matters.  We would suggest 
that it would be in the IMF's, and the GOM's, best 
interests to place a temporary representative in Malawi 
during this crucial time for the PRGF.) 
 
5.  (SBU) Outlining overall performance, Jumbe 
acknowledged that the GOM had spent beyond its fiscal 
targets as of December, but stated that factors "beyond 
our control," such as higher-than-expected interest 
payments, had caused the overexpenditure.  He placed 
ultimate blame squarely on the donors, stating that "if 
we had received donor funds, we would have lowered 
interest rates and made our budget."  On the GOM's 
performance toward PRGF "prior actions" and structural 
criteria, Jumbe claimed that significant progress is 
being made. 
 
6.  (SBU) Jumbe also stated that the proposed 
Supplemental Budget was at an advanced stage, and that it 
would be submitted to Parliament within the next three 
weeks.  He stated that, despite a MK 6 billion in extra 
domestic revenue, the budget would call for authorization 
of a MK 11 billion ($100 million) deficit, a significant 
change from the MK 3 billion surplus targeted for FY 
2003/04.  He cited MK 7 billion in missing donor support, 
unbudgeted interest expenses, and MK 3 billion in new 
development budget expenses as the primary components of 
the spending swing.  (Comment: While we will have to wait 
to see the complete budget for a proper evaluation, the 
spending swing and enormous proposed deficit cast doubt 
on both fiscal discipline and the program's overall 
effectiveness.) 
 
7.  (SBU) Jumbe plainly stated that "Malawi needs help" 
and pitched that "things are not so bad."  He asked for 
donor support for the Fund and Bank programs to help 
"those of us" behind the macroeconomic stabilization 
program (a reference we took to exclude President 
Muluzi).  He also made a veiled threat that the collapse 
of the Bank and Fund programs could compromise the 
conduct of May's Presidential and Parliamentary 
elections. 
 
Donors Split Over Way Forward 
----------------------------- 
8.  (SBU) In this meeting and in other recent exchanges, 
divisions have appeared among the donors over how to deal 
with GOM performance and its Fund and Bank programs. 
Repeated failures to meet program criteria, foot-dragging 
on structural reforms requiring primarily political will 
(i.e., strengthening the Corrupt Practices Act or 
publishing of a report on last year's maize scandals), 
questionable data submissions to the IMF and CABS group, 
and a penchant for blaming the donors for missed targets 
have contributed to a general deterioration of confidence 
in the GOM and a willingness to delay or suspend programs 
while waiting for performance improvements.  At the same 
time, however, it is recognized that Malawi's economy is 
fragile and that the poor would bear the brunt of aid 
cuts.  Different levels of tolerance for the humanitarian 
risks involved, and emotional and financial investments 
in cherished development projects, have split the donors. 
Nor are the donors in agreement on whether our focus 
should be on sending the right signals to May's incoming 
government or salvaging what we can from the current one. 
 
9.  (SBU) The breakdown by donors, by tolerance for a 
"tough love" approach, is as follows: 
 
--Norway has shown the least tolerance for a "tough love" 
approach, and the Norwegian Ambassador showed great 
frustration during the meeting that more aid was not 
reaching schools and hospitals.  His personal frustration 
may also reflect the impending visit of Norway's Minister 
of Development, who is reportedly less sympathetic to 
Malawi's case than the Ambassador.  Norway has made 
bilateral disbursements since the October PRGF review, 
and has discussed the idea of basing all of its 2004/05 
disbursements on the current CABS review in order to 
provide "predictability" to GOM aid inflows. 
 
--The UK appears to be internally split, with some 
Department of International Development (DfID) staff 
wishing to disburse their last 5 million pound tranche of 
support, and others (including the High Commissioner) 
taking a tougher line.  The High Commissioner told the 
Ambassador today that while the donors -- including the 
Fund and the Bank -- "can't walk away" from Malawi, the 
GOM needs to "bend over backwards" to restore its 
credibility and open a path forward.  The UK is in a 
particularly difficult spot vis-a-vis the release of its 
last aid tranche, as its aid is conditioned on the IMF's 
assessment, but no assessment is likely to be forthcoming 
before the end-March close of the British fiscal year. 
 
--Though not represented on the Fund or Bank Executive 
Boards, the EU has been relatively forgiving on GOM 
fiscal performance but has take a tough public and 
private line regarding GOM failures to implement 
structural reforms.  The EU is funding, for example, the 
audit of arrears required as a PRGF "prior action," and 
the GOM's dragging-out of the audit contract's signing 
(which took approximately eight months of negotiations) 
have grated on EU sensibilities.  So have the GOM's 
delays in providing reliable fiscal data to the CABS 
group, which have delayed the formalizing of the CABS 
group's current assessment by more than two weeks. 
 
--To contacts throughout the government, the U.S. 
Ambassador has stated that for real development to occur, 
the GOM needs to do what is necessary to energize 
Malawi's private sector and to reassure investors that 
sufficient anti-corruption measures are being taken. 
Keeping fiscal and structural pledges to the IMF would 
aid that effort, and he has stressed that measures which 
require primarily political will (like the PRGF 
structural conditions dealing with corruption) serve as a 
litmus test for outside observers and potential 
investors.  The aim, he has stated, is to avoid the 
dynamic fostered by the donors' repeated willingness to 
"lower the bar" for the GOM -- a dynamic that continues 
to undercut the Fund program (with negative consequences 
for growth and poverty reduction) and has sustained donor 
dependency.  He has urged other donors to remember that 
the signals we send about keeping commitments today will 
define our relationship with May's new administration. 
 
--Canada, as represented by CIDA, has also pushed the 
message that the donor-GOM dynamic, where the GOM is not 
held to its commitments, is unhealthy and must be 
changed.  CIDA has reserved its harshest criticism, 
though, for the Fund and the Bank's unrealistic 
assumptions and projections, which have been put in place 
for internal bureaucratic Bank and Fund purposes (and to 
which the GOM has been complicit in order to keep up 
funding), but which set up the GOM to fail in succeeding 
reviews. 
 
Comment 
------- 
10.  (SBU) The World Bank clearly engineered the meeting 
between the Minister of Finance and bilateral donors to 
resolve lingering questions about GOM performance and to 
build support for the SAC among Executive Board member 
countries.  With Malwi's case already having been delayed 
once for the World Bank Executive Board, the effort comes 
very late, and as one EU contact put it, "Confidence 
can't be restored by organizing one meeting...." 
 
11.  (SBU) Confidence in the GOM indeed remains a key 
question for us.  We continue to question GOM commitment 
to its macroeconomic stabilization plan, as evinced by 
repeated failures to meet fiscal and structural criteria. 
And while we do not seek to scuttle Malawi's Bank and 
fund programs, resuming disbursements now absent progress 
on fiscal and structural criteria would undercut our long- 
term development goals in Malawi. 
 
BROWNING