US embassy cable - 05LILONGWE506

UNCLAS SECTION 01 OF 02 LILONGWE 000506 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK AND BRUCE NEULING 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF LINDA SPECHT 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
TREASURY FOR OTA/BOB WARFIELD 
JOHANNESBURG FOR FCS 
MCC FOR KEVIN SABA 
 
E.O. 12958: N/A 
TAGS: ECON, EAID, EFIN, MI, BUD FIN, Parliament 
SUBJECT: MALAWI BUDGET DEBATE BEGINS 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
------- 
SUMMARY 
------- 
 
1. (SBU) Malawi's finance minister presented the FY 2005/06 
budget on June 10 to open parliamentary debate.  The budget 
includes a sharply lower deficit, some paydown of both 
domestic debt and government arrears, and line items for food 
security and a fertilizer subsidy.  While opposition is 
threatening not to pass the budget, the GOM will likely use 
an impending IMF program, which depends on a sound budget, to 
quell serious contention.   End Summary. 
 
--------------------------------------------- -- 
BUDGET CUTS DEFICIT, PAYS DOWN DEBT AND ARREARS 
--------------------------------------------- -- 
 
2. (U) The overall 2005-06 budget is MK118.8 billion ($1.01 
billion, or 45 percent of GDP) in expenditures  against 
MK116.2 billion ($980 million, or 44 percent GDP) in 
revenues.  This would reduce the deficit from 3 percent GDP 
in FY2004/05 to 1 percent GDP in FY2005/06.  MK84 billion is 
in recurrent expenditures, with MK34 billion in development 
expenditures, a development increase of 48 percent over the 
current year.  The largest increases are in health (up 35 
percent nominally) and education (up 23 percent).  Finance 
Minister Goodall Gondwe emphasized increases in the budgets 
of agencies responsible for financial controls and 
prosecution of corruption: the Auditor General, Attorney 
General, Anti-Corruption Bureau, and Public Prosecutions. 
 
3. (U) Some of the deficit comes from Gondwe's addressing the 
domestic debt and arrears inherited from the previous 
government.  The GOM intends to use MK2.3 billion to retire 
what Gondwe termed "huge" domestic debt (MK60 billion) and MK 
2 billion against government arrears (around MK10 billion). 
He reiterated his intention to restructure toward cheaper, 
longer term debt.  Both the size of the deficit and the 
determination to start paying down debt and arrears show a 
determination for the GOM to live within its means--a sharp 
break from the previous government. 
 
4. (SBU) The budget also contains continued increases in 
spending on civil service wage reform, including a 17.5 
percent general increase to take effect on 1 October.  While 
this item raises recurrent expenditures, the donor community 
considers it a critical reform for making the government more 
effective.  One reason for the higher than projected deficit 
in the current year is the mistakes in rolling out wage 
reforms, which eliminated a number of untaxed discretionary 
allowances and increased the taxable wages of most government 
workers. 
 
 
--------------------------------------------- ------- 
FOOD SECURITY: NECESSARY SPENDING AND POLITICAL SOPS 
--------------------------------------------- ------- 
 
5. (U) The GOM has included MK5.6 billion ($47.5 million) to 
import food in this drought year.  The number is up from 
earlier projections of MK5.2 billion mainly because of 
depreciation in the kwacha.  The budgeted expense corresponds 
to the agreed arrangement with donors for food importation 
and distribution. 
 
6. (SBU) The donors are less happy with the budget's 
allocation for fertilizer.  After last year's poorly executed 
targeted program, the GOM is going back to a more universal 
fertilizer subsidy.  The details are yet to be announced, but 
in his budget speech Gondwe described spending MK2.2 billion 
($18.6 million) for a fertilizer subsidy (for 70,000 metric 
tons).  In conjunction with this, GOM would spend another 
MK1.8 billion ($15.2 million) to run a cash-for-work road 
improvement program, aimed at enabling the rural poor to 
purchase the subsidized fertilizer.  Gondwe announced that 
the fertilizer purchases would be made through a single 
purveyor--an approach that is already drawing criticism from 
donors and accusations of corruption from the opposition. 
 
 
------------------------ 
A THREATENING ATMOSPHERE 
------------------------ 
 
7. (SBU) A number of media outlets are quoting opposition 
leaders as expressing a determination to sink the budget. 
The reasons for doing so are generally hazy, but they include 
dissatisfaction with the fertilizer subsidy, the GOM's plans 
for emergency food relief, and opposition to the President's 
newest pet project, the Shire/Zambeze waterway.  Even the 
diplomatic community has weighed in, with the British High 
Commissioner publicly warning the opposition not to play 
politics with the budget.  Privately, though, opposition 
leaders are far more rational in talking about the budget, 
and profess that the next few weeks will see a spirited but 
constructive debate.  Judging from the unprecedented booing 
and heckling that greeted both the President's opening speech 
and the Minister of Finance's presentation speech, the 
opposition is feeling feisty and will likely push back on at 
least the points above. 
 
 
---------------------------------- 
COMMENT: IMF IS GOVERNMENT'S TRUMP 
---------------------------------- 
 
8. (SBU) At the outset of the debate, it appears the budget 
will pass more or less intact.  The GOM is philosophically 
close to the main opposition party, the Malawi Congress Party 
(MCP), on its general desire for fiscal responsibility. 
However, MCP clearly wants to take the fertilizer subsidy and 
the Malawi Rural Development Fund in a populist, and thus 
more expensive, direction.  The question may not be whether 
they can get the support to pass a budget, but rather at what 
price.  For its part, Government has a trump card in the 
IMF's impending program, which it is holding hostage to an 
approved budget that stays within the target range (which the 
draft budget does).  Government will likely have to play that 
card before the game is over. 
GILMOUR