US embassy cable - 04LILONGWE968

UNCLAS SECTION 01 OF 02 LILONGWE 000968 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
STATE FOR EB/IFD/ODF 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
TREASURY FOR INTERNATIONAL AFFAIRS AFRICA LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, ETRD, PREL, MI, BUD FIN, Economic, Parliament, Political 
SUBJECT: MALAWI'S BUDGET APPROVED 
 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
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SUMMARY 
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1. (U) Malawi's Parliament approved the FY 2004/05 budget on 
September 24.  During the course of deliberations, Parliament 
added MK4.2 billion ($39 million) of additional spending, 
principally for HIV/AIDS programs.  The deficit would remain 
at about MK8.5 billion ($79 million), or 4.3 percent of GDP, 
on a budget of MK89.9 billion ($840 million).  A number of 
likely expenditures are not included in the budget, though 
these may be balanced by expected but as yet unbudgeted donor 
revenues.  If the budget holds as written, Malawi will stay 
within the IMF's deficit ceiling, enabling a new IMF program 
and linked bilateral aid. The GOM will need both both 
discipline and luck to get through the November-March 
planting season.  End summary. 
 
 
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MAIN OBJECTIVE: TRANSITION TO STABILITY 
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2. (U) In his address to Parliament at the beginning of the 
budget session, Finance Minister Goodal Gondwe described the 
2004/05 budget as "transitional," on account of the huge debt 
inherited from the profligate spending of former president 
Bakili Muluzi.  This recurrent expenditure will keep the 
government from investing enough to drive economic growth. 
Government's main ambition for this year, Gondwe said, is to 
establish the practices and mindset necessary to effective 
fiscal discipline and good economic governance.  The goal of 
this budget, then, is to achieve a track record.  That will 
lay the groundwork both for macroeconomic stability (helped 
by renewed aid flows) and for the fiscal soundness needed for 
development investment in future years. 
 
3. (U) As presented to Parliament, Gondwe's budget would 
spend MK85.7 billion ($801 million), or about 40 percent of 
GDP, against revenues of MK77.2 billion ($721 million).  On 
the revenue side, MK52 billion is domestic revenue and MK25 
billion is foreign aid/grants.  The deficit of MK8.5 billion 
($79 million) would stay just at the International Monetary 
Fund's (IMF) deficit ceiling of 4.3 percent of GDP. 
 
 
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PARLIAMENT EXTENDS DEBATE, ADDS SPENDING FOR AIDS 
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4. (U) Parliament was reportedly far more engaged in debating 
this budget than in any previous year, adding an extra week 
to the normal two-week debate period.  This is thanks in part 
to a budget seminar for members of Parliament just prior to 
the session, and in part to the central place the Mutharika 
administration has given to fiscal matters.  The largest bone 
of contention appeared to be whether the GOM should assume 
donor revenues, which have been withheld for nonperformance 
in previous years.  At the end of the session, though, the 
budget stands substantially as drafted.  The largest 
allocations go to the ministries of education (MK10.6 
billion), health (MK9.1 billion), and agriculture (MK7 
billion).  Parliament added MK4.1 billion to the National 
AIDS Commission budget, which will be offset by a Global Fund 
grant. 
 
5. (SBU) Though the donor community is not enthusiastic about 
the size of the deficit, it is mostly satisfied with the 
reality of the budget.  Gondwe's budget includes all but a 
few predictable expenditures--a distinct improvement on the 
previous administration's notoriously unrealistic budgeting. 
The budget includes allocations for fertilizer subsidies and 
grain buys, which have traditionally been treated as 
off-budget emergency expenditures.  But the GOM is likely to 
make a few off-budget expenditures, including an MK800 
million rural microfinance facility, expenses for 
consolidating the government in Lilongwe, refurbishment of 
the chief of state's residence, and a civil service wage 
reform package. On the other hand, the budget makes 
conservative assumptions on interest rates (and thus on debt 
service expenditures) and deliberately leaves off several 
likely revenue sources which are politically contentious, 
such as higher effective tax rates on reformed government 
wages. 
 
 
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COMMENT: LUCK STILL HAS A PART IN THIS 
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6. (SBU) While the final document has not been published, it 
appears that the budget is in line with the draft, which was 
vetted through the IMF's staff monitoring program.  The big 
challenge for the Mutharika administration is to stay within 
the budgetary limits.  We have a couple of reasons to think 
Mutharika may succeed at this. 
 
7. (SBU) First, the budget does not appear to be designed to 
please donors.  There are some hard-to-swallow expenditures, 
but we view them as a crucial concession to reality.  The 
budget avoids most revenue risk and thus has some implicit 
upside.  For instance, the possibility of new IMF aid 
represents a substantial windfall that would allow 
accelerated domestic debt retirement and a corresponding cut 
in debt service.  Second, Mutharika has positioned fiscal 
responsibility and economic growth firmly at the front of his 
administration's ambitions.  He has emphasized this issue 
almost to the exclusion of all others, making it virtually 
impossible for him to push the issue aside in case of failure 
to perform, as his predecessor did time after time. 
 
8. (SBU) But there is still risk in the coming months.  The 
GOM has to survive the November-March planting season, when 
inflation will rise because of food shortages, and foreign 
exchange pressure will increase.  With slim forex reserves 
and excess liquidity in the system, a currency devaluation 
and an inflationary spiral are still very real possibilities. 
 To survive the next six months, the government will have to 
be competent, disciplined, and lucky. 
 
GILMOUR