US embassy cable - 05LILONGWE406

C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000406 
 
SIPDIS 
 
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/BEN CUSHMAN 
 
E.O. 12958: DECL: 05/12/2015 
TAGS: EFIN, EINV, ECON, MI, Economic 
SUBJECT: IMF ON MALAWI: STRONG PERFORMANCE, BUT RISK AHEAD 
 
REF: LILONGWE 198 
 
Classified By: EconOff W. Taliaferro for reasons 1.4 b and d 
 
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SUMMARY 
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1. (C) Following a recent visit from the IMF's country team, 
the Resident Representative confirms that fiscal performance 
was strong in the last quarter, despite much weaker than 
expected donor inflows.  The IMF and GOM have reached a 
tentative agreement for a new Poverty Reduction and Growth 
Facility (PRGF), but IMF will not finalize the program until 
the food situation, and GOM's response to it, becomes 
clearer.  The ResRep expressed approval of recent loosening 
of the exchange rate and predicts a return to a more flexible 
exchange rate policy.  IMF's approach is helping the finance 
ministry and donors keep some fiscal discipline during a food 
crisis year.  End summary. 
 
 
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STRONG PERFORMANCE--MAYBE TOO STRONG 
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2. (C) As reflected in the IMF's recent press release on 
Malawi, its latest review under the Staff-Monitored Program 
showed very strong performance through the end of March. 
This is especially impressive given that some $22 million in 
payments from the EU and the African Development Bank have 
slipped at least to the current quarter.  IMF Resident 
Representative Thomas Baunsgaard recently told us that the 
GOM was able to hit its quantitative targets mainly by going 
after a series of one-off revenue opportunities.  He 
expressed mild concern that the GOM had clawed forward too 
aggressively, creating the possibility of a shortfall in the 
current period.  While the team would have preferred to see 
small slippage against the quantitative targets, it sees 
dogged determination by the GOM to hit the targets every 
time.  The basis of Malawi's strong fiscal performance 
continues to be its containment of expenditures, particularly 
in the face of weak donor inflows. 
 
 
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FOOD CRISIS COMPLICATES CLOSURE ON PRGF 
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3. (C) The IMF has reached an agreement on a PRGF program, 
but the staff intends to hold back the program pending 
clarification of the extent of the food crisis.  The Malawi 
Vulnerability Assessment Committee report, considered to be 
the only reliable estimate, is due out at the end of this 
month; preliminary numbers show humanitarian relief needs may 
be upwards of 150,000 metric tons.  IMF wants to hold off 
signing a new program until it is clear the GOM will not have 
to revise its intervention upward.  Baunsgaard said a program 
is likely to go to the board late June or early July. 
 
4. (SBU) Asked about a worst-case food scenario, Baunsgaard 
said a large intervention with weak donor support would have 
two implications: increased domestic borrowing and a strain 
on foreign currency reserves.  Though Malawi has too much 
domestic debt (about 23 percent of GDP), an intervention of, 
say, $25 million would increase the debt stock by only 5 
percent--a sustainable increase, though not desirable. 
Foreign currency reserves, however, remain a major constraint 
to importing food.  With about $90 million (1.4 months of 
cover) in reserves, a major intervention could bring reserves 
to a dangerously low level.  If a forex crisis appears 
imminent, Baunsgaard said, some emergency action by IMF and 
World Bank may be possible, depending on the size of the 
shortfall.  At this point, though, neither the extent of the 
crisis nor the response by donors or the GOM is clear.  The 
only certainties are that a food crisis of significant 
proportions is close at hand, and that it will strain 
Malawi's already-strained budget even further. 
 
 
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MORE FLEXIBLE EXCHANGE RATE 
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5. (C) While the IMF has not made any official pronouncements 
about the exchange rate, Baunsgaard shares in the general 
approval of the recent adjustment in exchange rate policy, by 
which the kwacha has slipped roughly six percent against the 
dollar since the beginning of March.  He said the GOM's 
apparent intent is to bring monetary policy into closer 
alignment with the official policy of a flexible exchange 
rate with seasonal smoothing interventions.  This will almost 
certainly involve further depreciation over the next quarter 
or two. 
 
 
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COMMENT: IMF HAS IT ABOUT RIGHT 
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6. (C) As reported earlier, the IMF's measured approach is 
proving useful on two fronts.  It gives the Ministry of 
Finance good cover to argue for continued fiscal austerity, 
including in its approach to the food crisis.  It also gives 
the donors a lever to argue against a massive commercial 
grain program, the traditional and almost always disastrous 
response to poor harvests.  At this date, the donors and the 
GOM are still wrestling over how to address the coming 
humanitarian needs, but the discussion is mostly happening 
within the bounds of fiscal prudence. 
GILMOUR