US embassy cable - 04LILONGWE854

C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000854 
 
SIPDIS 
 
STATE FOR AF/S ADRIENNE GALANEK 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF MARLENE BREEN 
TREASURY FOR INTERNATIONAL AFFAIRS / AFRICA LUKAS KOHLER 
 
E.O. 12958: DECL: 09/02/2014 
TAGS: EFIN, ECON, EINV, PREL, PGOV, MI, Economic 
SUBJECT: MALAWI'S FISCAL PERFORMANCE IMPROVING 
 
REF: LILONGWE 839 
 
Classified By: Econoff William R. Taliaferro, for reasons 1.5 b and d 
 
------- 
SUMMARY 
------- 
 
1. (C) Based on performance in its first 100 days in office, 
the administration of President Bingu Wa Mutharika appears to 
be focusing effectively on fiscal discipline.  Recent 
consultations with Ministry of Finance officials and resident 
staff of the International Monetary Fund (IMF) and World 
Bank, as well as actions on the part of the GOM, indicate 
responsible budgeting and performance ahead of IMF targets. 
Based on this record, Embassy would not object to release of 
World Bank structural adjustment credit funds.  END SUMMARY. 
 
 
----------------------------------- 
FISCAL DISCIPLINE, REALISTIC BUDGET 
----------------------------------- 
 
2. (U) In his first 100 days, Mutharika has focused strongly 
on fiscal discipline and good governance.  As reported 
elsewhere (reftel), the new GOM has taken an aggressive 
public stance on corruption, backed by key personnel changes 
and increased funding.  On the fiscal side, the 
administration has cut the size of the cabinet, cut 
government-wide travel budgets, established and enforced 
monthly spending ceilings on the ministries, and adopted a 
more disciplined approach to government procurement.  A 
preview of the new budget, which is to be presented to 
Parliament on September 3, shows realistic planning in place 
of the donor-pleasing austerity of past budgets (which were 
routinely displaced by supplementary budgets, then just as 
routinely overrun). 
 
3. (C) The current budget is for total government spending of 
MK87 billion ($813 million), with a deficit of MK8 billion 
($75 million, or 4 percent of GDP).  While the budget 
contains several items of questionable economic criticality 
(for example, provisions for the GOM to import grain for the 
commercial market), it appears to include most, though not 
all, foreseeable expenditures.  The budget does include a 
civil service wage reform package, which has been called out 
by the international financial institutions as a badly needed 
structural reform. It does not include a possible 
Parliamentary pay hike, by-elections costs, nor possible 
outlays associated with moving government operations from 
Blantyre to Lilongwe.  Finance minister Goodall Gondwe 
acknowledges these as gaps in the budget, saying the GOM 
either has yet to decide these issues, or has not yet 
estimated the possible expenditures.  In general, there are 
very few changes since the IMF's Article IV mission reviewed 
the draft budget in late July. 
 
4. (C) According to Gondwe, there is some upside implicit in 
the budget, from a possible break in interest rates, 
replacement of short-term debt with cheaper long-term debt, 
and revenues from taxes implicit in the civil service reform 
package.  In conversations with donors, he has said the GOM 
may come close to balancing the budget by fiscal year end. 
 
 
---------------------- 
IMPRESSIVE PERFORMANCE 
---------------------- 
 
5. (C) The in-country IMF staff, which is conducting weekly 
performance reviews with the GOM and the central bank, has 
tracked Malawi's performance through 20 August.  The results 
are impressive: the new government has so far stayed within 
all quantitative targets.  The single most important measure, 
net domestic assets of the central bank (i.e., GOM's domestic 
debt), is an impressive MK4 billion ($37.3 million) lower 
than the target MK6 billion ($56 million).  Even if the GOM 
goes ahead with a MK2.9 billion ($27 million) grain buy--the 
largest likely hit to the budget--it will still be well below 
the IMF debt ceiling. 
 
 
------- 
COMMENT 
------- 
 
6. (C) Up to now, the Mutharika administration appears to be 
following a responsible fiscal course, both in spending 
against its interim budget and in creating a realistic budget 
for the balance of the fiscal year.  Given the upcoming 
seasonal pressure on the kwacha, and the budgetary pressure 
to stop growing domestic debt, the GOM is justifiably anxious 
to get budgetary and balance of payment support flowing at 
the earliest possible moment.  Only time will tell the 
difference between donor-pleasing gestures and a lasting 
commitment to reform, but it is clear that delaying support 
will worsen Mutharika's chances of reforming Malawi's 
economy.  Based on the current GOM's performance to date, and 
on the fragility of the economic situation, Embassy would 
have no objection to the immediate release of the first 
tranche of World Bank structural adjustment funds. 
 
RASPOLIC