US embassy cable - 04LILONGWE503

UNCLAS SECTION 01 OF 02 LILONGWE 000503 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, MI, Development, Economic 
SUBJECT: IMF: TEAM LOOKS FOR FRESH START 
 
 
Summary 
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1.  (SBU) Visiting IMF officials told donors that poor 
fiscal and monetary performance had caused the Fund's 
Executive Board not to consider Malawi's case in April. 
Given the country's poor performance, the current facility 
(which was to have run through December) has been abandoned. 
Having lost confidence in the GOM's ability to perform, IMF 
officials returned to Malawi not to negotiate but to explore 
alternative ways forward with the new government.  One 
possibility would be a fast-tracked informal program 
designed to give Malawi the chance to rapidly demonstrate 
commitment to targets and to create a positive track record 
of performance.  We support giving the new government the 
opportunity to prove itself, because Malawi ultimately 
requires both fiscal discipline and external aid to address 
its poverty.  End summary. 
 
IMF Team Back in Lilongwe 
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2. (U) IMF Mission Chief for Malawi John Green and Africa 
Department Senior Advisor Michael Nowak visited Malawi (on 
slightly different schedules) between June 1 and June 5. 
Green met with the Charge, AID Director, and Econoff on June 
1, and Nowak and Green briefed donors on their visit on June 
3.  Nowak and Green met President Mutharika on June 4. 
 
3.  (SBU) In line with what the IMF has been saying in 
Washington, Nowak and Green described the Fund's experience 
with Malawi as "uneven," with a poor track record by 
international standards.  They stated that the Fund's 
reputation and credibility had been undermined by events in 
Malawi and that Fund management's "time and patience were 
running out."  The goal of their visit, said Nowak, was not 
to negotiate on the current program, but to "explore ways 
forward." 
 
4.  (SBU) Nowak suggested that a short-duration informal 
program (staff-monitored from Washington) to establish a 
track record would be one possible option.  Such a program 
would be built around two pillars: 1) a set of required 
fiscal policy actions; and 2) quantitative targets on key 
macroeconomic indicators.  Noting that a "lack of commitment 
and intent at the highest levels," as well as some capacity 
restraints, had characterized Malawi's program under former 
President Muluzi, Nowak offered that a new program could 
come with some technical assistance, but he kept the need 
for Malawi to demonstrate performance as a key theme. 
 
5.  (SBU) In response to questions from some skeptical 
donors, Green elaborated on the reasons the IMF did not go 
forward with an Executive Board meeting about Malawi in 
April.  Green stated that the GOM overspent significantly in 
March and April, and that it had engaged in some dodgy 
financing as well. Nowak said he was confident the Fund had 
made the right decision by not going forward.  An IMF 
staffer added that the overspending had been significant 
enough that GOM domestic debt has increased by approximately 
5.7 billion kwacha (c. 52 million USD) since March. 
 
6.  (SBU) The election of President Mutharika on May 20 
created the opportunity for a new beginning, stated Nowak, 
but Malawi needs to convince the Board and the Fund staff 
that it can meet realistic and agreed-upon targets. If 
Malawi can do so, Nowak outlined a best-case scenario in 
which the Fund could perhaps begin disbursements as early as 
October through a staff-monitored program. 
 
7. (SBU) Several donors expressed their short-term concerns 
about the state of Malawi's economy between now and the time 
Fund disbursements could take place, and there was some 
discussion of the feasibility of donors de-linking their 
direct budgetary support programs from the IMF and 
disbursing now. 
 
8. (SBU) Similarly, others wanted to know if a Letter of 
Assessment from the Fund would be sufficiently strong to 
enable the World Bank to go forward with its Structural 
Adjustment Credit before the Fund itself makes 
disbursements.  The Fund, Nowak stressed, has to provide 
honest assessments of a country's performance, despite what 
implications those assessments may have. Expressing some 
discomfort with the way other donors piggy-back on the Fund, 
Nowak pointed out that "we are not a credit rating agency." 
 
Comment 
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9.  (SBU) The IMF has had a rough ride with Malawi over the 
past year, but we think they have struck the right balance 
with the current approach.  Malawi needs aid, and 
Mutharika's government represents a new chance to get the 
IMF program on track without compromising the program's 
integrity.  Given Malawi's poor past performance, however, 
disbursements cannot follow mere promises.  Whatever program 
form it takes, we (along with other donors) would like to 
see the Mutharika government be given a chance to quickly 
show its commitment (or lack thereof) to reform and to 
fiscal discipline, because aid, and growth, will only be 
able to follow where the government's performance leads. 
 
DOUGHERTY