US embassy cable - 05LILONGWE409

UNCLAS SECTION 01 OF 02 LILONGWE 000409 
 
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/BEN CUSHMAN 
TREASURY FOR OTA/TAX/BOB WARFIELD 
MCC FOR KEVIN SABA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, KMCA, BUD FIN, Economic 
SUBJECT: MALAWI'S BUDGET CONSULTATIONS 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
------- 
SUMMARY 
------- 
 
1. (U) In preliminary budget consultations with donors, 
Finance Minister Goodall Gondwe sketched an FY 2005/06 budget 
that would include some tax reform, allocations for 
humanitarian food relief, and a comparatively modest 
fertilizer subsidy.  The budget for development will be 
increased by 35 percent, largely to be spent on road 
maintenance and reforestation.  While Gondwe offered no 
numbers, Malawian news media report a total budget of MK113 
billion ($1 billion), a 10 percent increase in real terms 
over the previous year.  It remains to be seen whether the 
increase will deliver better government.  End summary. 
 
 
--------------------- 
TAX REFORM IN 2005/06 
--------------------- 
 
2. (SBU) Gondwe opened his briefing with an overview of the 
tax reforms being considered by the Ministry.  As part of the 
legislative package to be presented to Parliament at the end 
of May, Gondwe will propose tax reforms with three aims: 
greater fairness to instill confidence for investors, 
enhanced transparency, and a more efficient organization for 
the Malawi Revenue Authority.  The changes will include 
removal of discretionary exemptions, changes to ensure timely 
VAT refunds, some small changes to individual income tax 
levels, and greater emphasis on tax collection from 
non-compliant businesses and individuals.  Several times 
during the briefing, Gondwe went out of his way to praise the 
U.S. Treasury's assessment work, which he said had given much 
more useful insight and advice than other technical 
assistance teams (including IMF). 
 
 
------------------- 
FOOD AND FERTILIZER 
------------------- 
 
3. (U) The budget will likely include funding to import 
12,000 metric tons of maize for humanitarian relief and 
30,000 MT for commercial sale (about half last year's 
commercial buy).  Donors are expected to donate funds for 
78,000 MT of humanitarian grain, on top of 60,000 MT already 
sourced to top up the strategic grain reserves.  Total 
humanitarian supplies should be 150,000 MT, nearly all donor 
funded.  As reported previously, the exact extent of the need 
depends on reports due in late May. 
 
4. (U) On the ever-controversial topic of fertilizer 
subsidies, Gondwe said that the GOM would not continue 
previous years' targeted input program of free seed and 
fertilizer to smallholders, which has been largely 
underwritten by the UK.  Based on the poor results of last 
year's program, the GOM and UK have agreed to drop the 
program.  Having no fertilizer subsidy is politically 
difficult, so the GOM plans to introduce a subsidy only on 
the specific fertilizers used for maize, available for one 
bag (either 25 or 50 kg) per farmer.  Gondwe presented this 
as a cheaper, quasi-self-targeting alternative to the TIP and 
the universal fertilizer subsidies of the past.  He estimated 
the cost to be MK1.5 - 2 billion ($13-18 million). 
 
 
--------------------------------------------- -------------- 
INHERITED PROBLEMS; NEW DONOR MONEY FUNDS NEW GROWTH EFFORT 
--------------------------------------------- -------------- 
 
5. (U) Outlining his main concerns, Gondwe listed several 
familiar problems: a domestic debt stock of MK60 billion 
($530 million), inherited arrears of MK10.5 billion ($92 
million), and increased government wages (implemented in 2004 
to satisfy World Bank and IMF conditionalities).  While 
Gondwe hopes to retire a modest amount of debt, he is clearly 
frustrated by the fact that donor budget support precludes 
running the large surplus necessary to retire a major portion 
of the debt.  Another looming concern is the need for 
government pension reform.  Gondwe hopes to introduce an 
employee contribution scheme this year, administered from 
outside the government, with a retirement age of 60 rather 
than the current 55. 
 
6. (U) Gondwe has so far offered no numbers, but unofficial 
reports show a total budget of MK113 billion ($1 billion), of 
which MK65 billion is funded from GOM revenues and MK45 
billion from donors, with a deficit of MK3 billion.  Most of 
the increase (from MK91 billion in 2004/05) would be from 
resumption of normal donor inflows after a new IMF program 
begins around mid-year.  As far as spending goes, Gondwe 
intends to grow the development budget from MK23 billion to 
MK31 billion, consistent with the President's emphasis on 
economic growth over social spending.  Much of the increase 
would be put into road maintenance and reforestation in 
critical watersheds. Gondwe has indicated in other 
conversations that he will likely cut back on education 
spending until he is convinced that the education ministry 
can improve its performance. 
 
 
-------------------------------------------- 
COMMENT: CONTINUED PROGRESS, IF IT ALL FOOTS 
-------------------------------------------- 
 
7. (SBU) The numbers will tell the tale, but from early 
indications, it appears that Gondwe is still going in the 
right direction.  If donor contributions tick up as expected, 
the GOM will have more to spend, and the preliminary overview 
suggests that it is focused as strongly as ever on not 
overspending.  This is a welcome change.  Still, while the 
macro-level discipline is there, the ministries have yet to 
show that they can get anything done with the money they get. 
 The next test is whether the Mutharika administration, given 
a bit more resources, can deliver better government. 
GILMOUR