US embassy cable - 04LILONGWE896

UNCLAS SECTION 01 OF 02 LILONGWE 000896 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK 
STATE FOR EB/IFD/ODF MARLENE BREEN 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EAID, EFIN, PREL, MI, Economic, Development 
SUBJECT: MALAWI HAS THE MONEY--NOW WHAT? 
 
REF: LILONGWE 854 
 
This cable is sensitive but unclassified--not for Internet 
distribution 
 
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SUMMARY 
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1. (U) The World Bank vice president for Africa recently 
briefed donors in Lilongwe, confirming that the Bank was 
disbursing $25 million in order to support the new 
government's fiscal reform agenda and to avoid a currency 
crisis.  He reported that the GOM is looking to raise the bar 
on economic performance and that the Bank is emphasizing the 
need to improve the investment climate.  Both the Bank and 
donors continue to express cautious support for Mutharika's 
fiscal agenda, stressing that it depends on continued 
performance. 
 
 
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WORLD BANK TO MALAWI: KEEP GOING 
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2. (SBU) At a briefing for donor chiefs of mission in 
Lilongwe on September 13, World Bank vice president for 
Africa Callisto Madavo gave his perspective on a round of 
meetings with GOM officials centered on the disbursement of 
the first half of a $50 million structural adjustment credit. 
  He confirmed that the Bank took early action for two 
reasons: to give an encouraging signal to the reformist 
government of President Bingu wa Mutharika, and to provide 
balance of payment support before seasonal foreign exchange 
pressure produces a currency crisis (see reftel).  After 
acknowledging Mutharika's progress in imposing fiscal 
discipline and prosecuting corruption, Madavo made it clear 
that the Bank will release the second tranche only if its 
established triggers are hit. 
 
3. (U) Madavo portrayed the Bank as being concerned in the 
medium term about accelerating growth from the current 4 
percent to 6, the level targeted for long-term poverty 
reduction.  The Bank sees two main priorities: increase in 
agricultural productivity (suffering from years of 
malpractice and neglect) and creation of a 
confidence-inspiring climate for new investment.  Madavo 
stressed that enabling private-sector growth is the only 
alternative to continued dependence and poverty.  The Bank 
hopes to reorient thinking about the economy from poverty 
reduction to wealth creation. 
 
4. (U) According to Madavo, in his meetings with Minister of 
Finance Goodall Gondwe he heard an interest in "raising the 
level of ambition," to get beyond the current crisis and make 
Malawi a performer in the region.  Gondwe has said the 
country should be well positioned to do this without dramatic 
funding increases, because program implementation has plenty 
of room for improvement.  Gondwe is reported to have asked 
Madavo to carry a message to donors to allow him "space to 
operate"--meaning some latitude and time to consider 
different policy options and directions. 
 
 
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DONORS: CAN OPTIMISM BE REALISTIC? 
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5. (SBU) The donor reaction to Madavo's presentation was 
positive, but several representatives took pains to register 
continued concern about budgetary discipline.  One donor 
expressed particular concern about promised fertilizer 
subsidies; accounts of the subsidy program have ranged from a 
highly targeted subsidy to a general price reduction subsidy. 
 (NOTE: In a subsequent conversation, Gondwe said opposition 
MPs are pressing for a general subsidy; he reported that he 
is demanding a zero-sum approach to the budget, and that MPs 
are reluctant to propose realistic trade-offs.  The public 
confusion about what subsidy is actually in the budget can be 
explained by the fact that the political battle is still in 
progress.  End Note.)  Other donors noted that the signals 
from the Mutharika government are not perfectly clear, and 
that there is plenty of precedent for fiscal recidivism. 
These expressions of skepticism notwithstanding, the donors 
are following the Bank's lead in opening their purses: Norway 
is considering release of a $3 million tranche of budget 
support, and the UK intends to release nearly $9 million 
during Mutharika's September visit to London, with another 
$18 million by the end of the calendar year. 
 
 
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COMMENT: STAYING SOBER AIN'T EASY 
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6. (SBU) Madavo's message, as represented to the donors, is 
dead right.  We were encouraged to hear the practical 
reasoning for the September disbursement, and agree that any 
congratulations must be accompanied by the reminder that we 
are still watching.  One benefit of an early Bank disbursal 
is that it allows everyone to see how this government behaves 
when it is relatively flush, especially given the presence of 
an IMF staff monitoring program.  The more seasoned members 
of the donor community here are the most skeptical, having 
heard more or less the same promises many times before. 
However strong the public support for responsible governance, 
there is constant political pressure to return to old 
spending habits, based on widespread ignorance of--or 
disregard for--clear economic imperatives.  (Though 
considering the donors' forgiving behavior in the past, the 
reality of economic imperatives here may not be so clear.) 
 
7. (SBU) Gondwe's recent budget address to Parliament 
stressed the need for a series of transitional budgets to put 
the house back in order, followed by more ambitious 
developmental budgets once investment money becomes 
available.  One hopes that Parliament will have enough 
patience, and the administration enough discipline, to avoid 
the lapse that so many here seem to expect.  This much is 
certain: sound but dull fiscal policy does not have the 
popular appeal of reckless handouts, and seeing it through 
will involve real political risk.  It is up to the donors to 
make it clear that breaking discipline will carry its own 
risks. 
 
RASPOLIC