US embassy cable - 04LILONGWE283

C O N F I D E N T I A L SECTION 01 OF 03 LILONGWE 000283 
 
SIPDIS 
 
DEPT FOR AF/S, AF/EPS, EB/IFD/OMA 
TREASURY PLEASE PASS TO IMF AND WORLD BANK EXEC DIRECTORS 
 
E.O. 12958: DECL: 04/02/2014 
TAGS: EFIN, ECON, PGOV, MI, Economic Issues 
SUBJECT: IMF: SOME PROGRESS UNDERCUT BY FRESH PROBLEMS 
 
REF: A. LILONGWE 240 
 
     B. LILONGWE 179 
     C. DILLARD/DAVIS EMAIL OF 3/10/2004 
 
Classified By: Pol/Econoff Marc Dillard for reasons 1.5 b/d. 
 
Summary 
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1.  (C)  Malawi has made progress on its macroeconomic 
stabilization program, but it is unclear if that progress 
will be enough for the Executive Board to approve further 
disbursements, IMF Mission Chief to Malawi John Green told 
donors on March 23.  Behind the scenes, an IMF staff member 
told Pol/Econoffs that the team's objective for its mission 
was to package a program that was a technically defensible 
way to disburse money without creating a precedent for 
exceptional disbursements to other countries.  The GOM has 
made some structural progress as part of its program, but 
fresh revelations about poor elections budget implementation 
and improper grain handling pose significant threats to the 
GOM's agreement with the IMF.  In upcoming meetings with IMF 
staff, we recommend USG officials probe for information on 
the program's sustainability and effectiveness in dealing 
with Malawi's biggest macroeconomic threat -- its burgeoning 
domestic debt.  End summary. 
 
Another Statistic-Free Outbrief by the IMF 
------------------------------------------ 
2.  (SBU) IMF Mission Chief for Malawi John Green gave 
assembled donor Chiefs of Mission a ten-minute, nearly 
statistic-free outbrief about Malawi's Poverty Reduction and 
Growth Facility (PRGF) performance on March 23. Green stated 
that while the GOM's performance had not looked strong in 
November, he had good news: "nearly all" fiscal targets had 
been met for mid- to end-February, and the government is now 
focusing on its economic program.  On structural conditions, 
Green stated that "many had been met, while some had not," 
and that "the team hopes it will be enough" for the program 
to go forward.  He stated that the team would tell the 
Executive Board that there has been clear progress, and 
rhetorically asked and answered, "Will this be enough?  I 
don't know." 
 
3.  (SBU) Asked to elaborate, Green ran through structural 
criteria that had been due by end-December.  Completed items 
included approval of a wage policy, completion of a public 
service pension scheme, and the hiring of a pay policy 
advisor (which was delayed, but had been accomplished March 
22).  Two wage policy conditions had not been met, but one 
(presumably the consolidation of civil service allowances 
into the GOM salary structure) was "too ambitious."  (The 
other unmet condition appears to be the establishment of a 
public service renumeration board.)  On the two contentious 
conditions that had been turned into prior actions, Green 
stated that the submission to Parliament of the "compromise" 
amendment to the Corrupt Practices Act (ref A) appeared to 
satisfy the prior action, and that the Anti-Corruption 
Bureau's (ACB) report on the National Food Reserve Agency 
(NFRA) was "almost done."  (Note: Green chose his words 
carefully.  While the GOM's actions on the Corrupt Practices 
Act do appear to satisfy the IMF's prior action language, 
they would not have satisfied the originial second review 
condition.) 
 
4.  (SBU) Green stated that the GOM "met almost all of its 
quantitative criteria for its September targets," although it 
had missed its net domestic assets target "by a small 
margin."  Shifting to December targets, he stated that 
government borrowing "missed by a large margin," due mainly 
to delayed disbursements by donors, higher resulting interest 
payments on the domestic debt, and inaccurate IMF projections 
on interest rate reductions.  "We have to mention" that GOM 
spending was higher than budgeted, he added, but so were 
revenues. 
 
5.  (SBU)  Green finished with the information that the IMF 
and GOM had established new targets under the supplementary 
budget, and that he was "pretty sure" that the fourth quarter 
would see net domestic debt repayment. 
 
6.  (C) Green did not raise how the GOM would achieve 
domestic debt reduction in FY2004/05, which he had identified 
in a March 15 donor inbrief as a critical issue.  "The 
problem with next year," he said on March 15, "is that the 
numbers do not add up if the objective is debt repayment." 
Green then floated that there would be a gap of 3% of GDP 
between what donors are expected to give to Malawi and the 
resources required for meaningful debt reduction -- an 
estimate which he quickly backed off and qualified as 
speculative.  Interestingly, Green refused during the donor 
inbrief to comment on the current size of more than MK 3 
billion "statistical discrepancy" between expenditure and 
financing numbers the IMF had found in the GOM's early 2004 
submission, saying that he had been "chastised" for revealing 
too much to donors.  His closer holding of information about 
performance was matched by the GOM, which clearly cracked 
down on access to numbers during the visit.  Even the Reserve 
Bank of Malawi's Director of Research and Statistics, usually 
a well-placed source on these discussions, was asked to leave 
discussions deemed sensitive.  Only the senior-most 
management remained. 
 
IMF Staff Member: "It's a political decision...." 
--------------------------------------------- ---- 
7.  (SBU) IMF Team Economist Cecilia Mongrut visited 
Pol/Econoffs on March 17 as part of the staff's efforts to 
forecast bilateral donor inflows over the next year and to 
look for the extra 3% of GDP (around $60 million) loosely 
posited by Green as necessary for meaningful debt reduction. 
Mongrut arrived at the Embassy knowing that the USG does not 
give direct budgetary assistance to the GOM, but recalled 
that the Embassy had provided useful background and context 
on GOM actions and asked to use the meeting to discuss GOM 
structural performance, emerging rumors of improper handling 
of maize reserves, and overall economic trends. 
 
8.  (SBU) Pol/Econoffs briefed Mongrut, extensively covering 
observations about performance on the structural conditions 
and on prior actions, but also touching on the fiscal and 
monetary programs and on the real economy.  In great detail, 
Emboffs discussed the importance of the ACB's report on NFRA 
performance, given the four similar reports on corruption in 
the maize sector that the GOM has buried during the past two 
years and their large, negative fiscal impact on the IMF 
program (ref C).  Mongrut took notes on the various maize 
corruption cases, but offered little specific on GOM 
performance other than that, when bilateral disbursements did 
not appear in late-2003, the GOM did not cut its expenditures 
as required by its program.  When domestic revenues went up, 
she stated that the GOM spent the unexpected monies instead 
of applying them to higher-than-expected interest charges. 
 
9.  (C) As the meeting wound down, Mongrut appeared tired of 
discussing program specifics and spoke more generally about 
Malawi.  (Please strictly protect.)  "We're working on the 
program up here," she said, pointing to an imaginary 
document, "but it comes down to a political decision here," 
and motioned underneath the hypothetical document.  Presented 
with the Embassy view that Malawi needs aid to address 
poverty, but that the current cycle (contrived program 
targets, followed by missed, then relaxed criteria, with new, 
tougher, contrived targets proposed) has taught GOM officials 
to disregard program requirements and created a 
counter-productive long-term dynamic, she demurred.  She 
explained that the team was looking for a way to craft a 
technical program that was defensible, because the IMF 
worries about its country-by-country treatment.  "The point 
is," she concluded, "not to present a program that is an 
(humanitarian) exception, because other countries would then 
ask for exceptions, too," and she implied that the team had 
been tasked to find a way to make Malawi's program and its 
numbers work. 
 
Recent Developments: Maize, Election Problems Surface 
--------------------------------------------- -------- 
10.  (SBU) As reported in ref A, the GOM successfully passed 
a supplementary budget during its March session along with 
the "compromise" amendment to the Corrupt Practices Act. 
Both actions appear to satisfy IMF prior actions.  Work on 
the comprehensive audit of arrears continues, with more than 
twenty auditors reportedly working on ten ministries, but 
contacts at the EU (please protect) believe the audit will 
drag out longer than forecast and not be done before end-May. 
 (Note: The auditors have reportedly asked for more time and 
resources, but it is not clear whether the request signals 
something about cooperation, the magnitude of arrears, or 
simply that the technical difficulty of the records search 
was underestimated.) 
 
11.  (SBU) Of greater concern, the Malawi Electoral 
Commission (MEC), with which the donors painstakingly put 
together an aid-supported elections budget in 2003, has 
announced that it cannot stick to its $14.6 million 
allocation and requires an additional $10 million (presumably 
from the donors) to carry out May's presidential and 
parliamentary elections.  Upon investigation, it has become 
clear that (along with unbudgeted expenditures for an 
extended registration period) the MEC spent unbudgeted funds 
on vehicles and that expensive allowances and "emoluments" 
that had been removed from the original budget have been 
re-inserted.  When the MEC proposal to the donors got a 
chilly reception, it turned to the Treasury for more money, a 
request not factored into the supplementary budget. 
 
12.  (SBU) In another example, shortly before the IMF team 
arrived in Malawi, President Muluzi responded to constituent 
complaints about a lack of maize in some areas by announcing 
in a public rally that grain parastatal ADMARC depots would 
receive shipments within five days.  The GOM subsequently 
distributed thousands of tons of maize from the Strategic 
Grain Reserve (SGR) and from commercial stocks outside of the 
channels that have been set up to avoid the maize corruption 
scandals of the past few years.  This was in direct 
contravention of an agreement made by the GOM with the 
donors.  At least 30,000 tons appear to have been taken out 
of the Strategic Grain Reserve, with another 40,000 tons 
taken from commercial stocks, all of which are being sold at 
the heavily subsidized price of MK 10 per kilo.  This has led 
to an outcry in the donor community, and donor experts have 
not been satisfied with Ministry of Finance explanations of 
how the SGR will be replenished and how the stocks will be 
paid for.  Information on the maize movements continues to 
surface, and the Embassy has no firm estimates of the costs. 
World Bank Country Manager Dunstan Wai told Pol/Econoff on 
April 1, however, that the IMF had discussed with the GOM 
shifting MK 1.4 billion ($13 million) in associated expenses 
to the 2004/05 budget. 
 
Comment 
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13.  (C) Malawi's case is a difficult one.  Delays and heavy 
pressure have sometimes resulted in relative performance 
improvements; some officials within the GOM are focusing on 
the economic program; and some progress on structural 
conditions has been made since November.  (The IMF has given 
us too little to make an informed judgment about recent 
fiscal and monetary performance.)  We continue to see, 
however, a lack of commitment to the program at senior 
political levels, and, as the Mission has documented, 
performance improvements have evaporated in the past as soon 
as it looks like funds will be disbursed -- which appears to 
be happening again.  No one wants to get in the way of 
Malawi's third presidential and parliamentary elections, and 
the maize is already gone from its silos, leaving its 
magnitude-as-yet-unknown fiscal impact behind.  Which leads 
us to the conclusion that new, fungible disbursements from 
the World Bank and Fund would most likely be applied to 
unbudgeted maize and election expenses, minimizing the 
disbursements' potential to move Malawi out of its debt 
spiral. 
 
14.  (C) Comment continued.  We understand that the IMF staff 
will soon be briefing USG agencies in Washington on Malawi's 
recent performance.  We would urge those meeting with staff 
to probe deeply on the  program's sustainability and the 
likelihood that domestic debt will be reduced.  With 
elections just weeks away, we believe that further 
information on those topics will be key to USG 
decision-making before Malawi's case comes before the 
Executive Board. 
 
DOUGHERTY