US embassy cable - 05LILONGWE227

UNCLAS LILONGWE 000227 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF LINDA SPECHT 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, EAID, PA, MI, BUD FIN, Economic 
SUBJECT: DEBT PROPOSAL A PLEASANT SURPRISE FOR MALAWI 
 
REF: STATE 31823 
 
1. (SBU) Over the past week, Embassy has discussed the 
relative merits of the U.S. and U.K. proposals for debt 
relief to poor countries (reftel) with senior Malawian 
officials in ministries of finance, foreign affairs, and 
economic planning.  To a person, our interlocutors have been 
unaware of even the broad outlines of either position.  They 
appeared to know only that the U.K. has a proposal to relieve 
debt, and that the U.S. opposes it.  This grasp of the issue 
reflects locally available news coverage of the issue, which 
is dominated by BBC and Reuters. 
 
2. (U) The GOM officials we talked to expected a harsh U.S. 
position, offering little relief and heavy conditions.  On 
hearing the main points of our proposal, they expressed 
surprise, appreciation, and some degree of suspicion.  The 
Secretary to the Treasury responded to our presentation by 
 
SIPDIS 
asking, "What's the catch?"  His suspicion centered on the 
possibility of added conditionalities; on further discussion, 
it appeared that the sound-policy conditionality of the 
Highly Indebted Poor Countries (HIPC) program would be 
acceptable.  Everyone we briefed was puzzled that the USG has 
taken a low-profile approach to publicizing such an 
attractive proposition. 
 
3. (SBU) All the officials we briefed are trained economists, 
and all saw drawbacks to the U.K. position when we explained 
the main points of difference.  Predictably, they considered 
the plan to pay debt service, rather than forgive the 
principal, to address the problem only for the short run, 
perhaps encouraging irresponsible spending that would 
compound the problem in the long run.  They also appeared to 
dislike the notion of borrowing against future aid 
payments--an approach they said would likely lead to fiscal 
misbehavior. 
 
4. (SBU) COMMENT: The U.S. debt relief proposal fits well 
with the GOM's current fiscal program, which aims at putting 
the country back on a sound footing after a decade of 
irresponsible borrowing and spending.  The officials we spoke 
with--senior civil servants--are leary of debt solutions that 
take a "buy now--pay later" approach; they understand the 
hazards all too well.  They appear to want to get rid of 
foreign debt and keep it off their books, so the U.S. 
approach has great appeal.  Malawian politicians, on the 
other hand, may find irresistible the promise of lots of 
money now with no payback for ten years.  Such a plan puts 
the pain well over the political horizon, and it could tempt 
even the most stalwart disciplinarian. 
GILMOUR