US embassy cable - 04LILONGWE1067

UNCLAS SECTION 01 OF 02 LILONGWE 001067 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE PLEASE PASS TO TREASURY/INTL AFFAIRS/AF/LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, MI, Economic 
SUBJECT: IMF REVIEW TEAM IN MALAWI 
 
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SUMMARY 
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1. (U) The International Monetary Fund's Staff Monitoring 
Program assessment team has briefed donor mission 
representatives twice since its arrival in Malawi.  The team 
leader has characterized the GOM's performance as good 
through the end of September and outlined a scenario under 
which the Fund may start a new Poverty Reduction and Growth 
Facility by April.  This preliminary assessment confirms our 
impression of Malawi's generally good fiscal performance 
since the current administration took office in May.  End 
summary. 
 
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MEETING TARGETS BY A WIDE MARGIN 
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2. (U) In briefings on November 9 and November 17, the 
leader of the International Monetary Fund's (IMF) Staff 
Monitoring Program (SMP) assessment team John Green 
appraised Malawi's macroeconomic performance as "so far, so 
good."  The team is assessing the GOM's performance through 
the end of September and will be in Malawi until 26 
November.  Before leaving the country, the team expects to 
issue an assessment letter and brief the press. 
 
3. (U) The team considers Malawi to be meeting its targets 
"by a wide margin," the margin being due in part to delays 
in planned expenditures for commercial maize.  Even after 
the maize buy, Malawi will still meet all quantitative 
targets.  The country is reportedly on track for seven of 
its eight structural measures, with an agreement to delay 
the eighth (which concerns submission of outstanding check 
numbers to the Reserve Bank) until 1 December.  Based on the 
tight expenditure control the team has seen so far, the IMF 
is canceling plans it had to bring in a team to assist in 
expenditure management. 
 
4. (U) Green reported that the team had overestimated 
inflation in its planning; it now appears that inflation 
will be 14 to 15 percent at year end, as opposed to the 16- 
18 percent forecast in July and September.  As well, the 
foreign exchange inflows have been higher than projected, 
owing to an increase of $40 to $60 million in tobacco 
revenues over last year.  Forex reserves now stand at 1.7 
months in the central bank. 
 
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DONOR CONCERNS 
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5. (SBU) Donor representatives raised three concerns at the 
first IMF meeting: that the GOM might decide to break its 
budget in spending on a new building for Parliament, that 
the civil service wage reforms could be so unpopular as to 
spur a free-spending remedy, and that the IMF might be 
pressing the Reserve Bank to raise interest rates.  On the 
parliament building, Green said the IMF is not concerned, 
because any new building would take several years to 
construct, and thus poses no immediate danger to the budget. 
The civil service pay issue is "more worrisome" according to 
Green, and "if it's a budget buster, then that's a problem." 
Green did note that the IMF has always seen the wage reform 
as difficult, and that it was confident that the issues 
could be successfully worked through.  (NOTE: Finance 
Minister Goodall Gondwe acknowledged that the GOM 
miscalculated the net effect of the wage package, and that 
settling government workers' concerns about a net decrease 
in take-home pay would be easily resolved, with little 
effect on the budget.  End note.)  On interest rates, the 
IMF position is that the RBM should raise rates only if 
inflation begins to rise. 
 
 
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NEXT STEPS 
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6. (U) Under the current SMP, the IMF will continue to 
monitor performance with quarterly assessment missions.  The 
next mission will come in mid-February to look at 
performance through the end of December.  According to 
Green, in the best case IMF would negotiate a new PRGF to 
take effect from 1 April. 
 
COMMENT 
7. (SBU) The initial IMF briefings accord with our view of 
the GOM's performance since May.  While it is still 
distinctly possible that the situation may break down as it 
has in the past, the current Government seems to understand 
the importance of establishing a culture of fiscal 
responsibility and re-establishing its good name with 
international financial institutions.  Indeed, Gondwe has 
cautioned donors against prematurely celebrating the success 
of fiscal reforms, saying the GOM still has plenty of work 
ahead of it.  Meanwhile, USG support, via the Millennium 
Challenge Account's Threshold Program, can help boost 
precisely the same areas that both the IFIs and the 
Government have identified as central: fiscal policy and 
control of corruption. 
 
GILMOUR