US embassy cable - 05LILONGWE348

UNCLAS LILONGWE 000348 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK AND KENDRA GAITHER 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF LINDA SPECHT 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
JOHANNESBURG FOR FCS 
MCC FOR KEVIN SABA 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, MI, Agriculture, Economic 
SUBJECT: IMF MALAWI PROGRAM DEPENDS ON FOOD SOLUTION 
 
REF: LILONGWE 198 
 
This message is sensitive but unclassified-not for Internet 
distribution. 
 
 
SUMMARY 
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1. (U) As the IMF's team comes to negotiate a new program for 
Malawi, it is clear that the central issue is food.  The poor 
crop is expected to lower GDP to 0-2 percent, and food-driven 
inflation is already rising.  The need for humanitarian 
relief has become clear, and one of the main points to be 
negotiated is the size and nature of the GOM's response. End 
summary. 
 
2. (U) The International Monetary Fund's Malawi team arrived 
in Lilongwe early this week hoping to conclude negotiations 
for a new Poverty Reduction and Growth Facility (PRGF).  As 
reported in reftel, both parties agreed in March to suspend 
negotiations until the country's food situation could be 
clarified enough for budget purposes.  With second-round crop 
estimates showing a clear need for a humanitarian food 
program, it is hoped the GOM will be able to quantify the 
budget impact of its food needs enough to conclude talks with 
the IMF. 
 
3. (SBU) The IMF's initial look at economic performance is 
encouraging, considering the circumstances.  On account of 
the poor maize crop, the IMF expects to revise its GDP 
projections for 2005 down to 0-2 percent.  Inflation has 
edged up to 14.9 percent, mainly because food prices have not 
experienced their usual seasonal drop as the harvest comes 
in.  Budget performance for the past quarter is on target 
despite lower donor revenue than in the previous two 
quarters.  However, foreign reserves are very low, with about 
one month of reserves on hand.  GOM has cancelled its earlier 
plans to sell some foreign currency to absorb Kwacha 
liquidity, opting instead to maintain the meager reserves it 
has. 
 
4. (SBU) In the IMF team's view, the lack of foreign currency 
should preclude any large government-funded grain 
importations.  But the budget drafts the GOM has shown the 
team indicate plans to import 100,000 metric tons of maize, 
at a cost of MK3.5 billion ($32 million), for resale during 
the upcoming fiscal year (July-June).  The team has not 
discussed the details of the plan, nor has the GOM shared any 
plans with donors. 
 
 
COMMENT 
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5. (SBU) The PRGF discussions hinge almost entirely on the 
GOM's plans for food security.  Up to now, the GOM has 
characterized the situation as a nationwide food shortage, 
while donors think of it as local humanitarian needs 
developing as the season progresses.  The proposed solutions 
are accordingly out of phase: GOM appears to want to import 
maize for commercial sale in order to keep prices down; 
donors want to let the commercial price float, creating 
incentives for commercial traders to import grain into the 
country. 
 
6. (SBU) Meanwhile, there is a standoff about humanitarian 
assistance.  Most donors (including the USG) cannot commit 
firm numbers for humanitarian assistance in advance.  The GOM 
would clearly like to see donors address the humanitarian 
problem, leaving the GOM free to intervene with commercial 
imports to hold prices down--a politically popular approach. 
(A similar intervention in 2001/2 resulted in disastrously 
high prices and acute shortages.) At this point, it appears 
that donors cannot give the assurance the GOM is looking for 
to excuse itself from humanitarian relief efforts.  With the 
IMF insisting on a fiscally responsible solution, the GOM may 
have less than a week to redefine how it thinks about food 
crises. 
GILMOUR