US embassy cable - 05LILONGWE927

UNCLAS LILONGWE 000927 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S MELINDA TABLER-STONE 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
STATE FOR EB/IFD/ODF LINDA SPECHT 
STATE PLEASE PASS TO MCC FOR KEVIN SABA 
PARIS FOR D'ELIA 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, MI, Economic Issues 
SUBJECT: MALAWI CONTINUES STRONG FISCAL PERFORMANCE 
 
1. (U) The Reserve Bank of Malawi recently published its 
mid-year economic and fiscal report, showing strong 
performance across the board.  Higher than projected domestic 
revenue and sharply lower expenditures compensated for lower 
revenues from external grants.  Macroeconomic performance at 
the end-June data cutoff was still strong, though projections 
have since been revised downward, to 2.5 percent growth for 
the year, due to the drought's impact on the agricultural 
base of the economy. 
 
2. (U) The real story is continued fiscal discipline.  The 
GOM has effectively transformed a lax, highly permeable 
fiscal system into an expenditure regime that, if not exactly 
watertight, is now at least controlled.  The mid-year numbers 
reflect this: total expenditures are 12 percent below budget 
(MK40.2 billion ($330 million) vs. MK45.6 billion ($380 
million)), and domestic revenue is 10 percent above budget 
(MK26 billion ($210 million) vs. MK23.6 billion ($200 
million)).  The sharpest reduction on the spending side was 
in recurrent expenditures (off a whopping 23 percent), while 
interest payments werw slightly (10 percent) higher than 
projected.  Certainly the prospect of a new IMF program 
helped motivate this performance, but it is clear that the 
concepts of serious budgeting and performance to budget--a 
bad joke under the last administration--is being taken 
seriously. 
 
3. (SBU) The bad news is that the new discipline has come 
about largely by force of personality.  Finance Minister 
Goodall Gondwe, together with a handful of lieutenants, has 
been able to establish monthly budget ceilings for the line 
ministries and face them down when they threaten 
non-cooperation.  But Gondwe has not yet put in place the 
machinery for proper financial management.  The USG's own 
Millennium Challenge threshold program, which is designed to 
address corruption and financial mismanagement, should go 
some ways toward addressing this, but the GOM will have to 
show better implementation skills of its own before it makes 
real progress. 
 
4. (SBU) COMMENT: Implementation risk is a constant in 
virtually everything the GOM plans to do.  Despite what the 
IMF resident representative accurately describes as 
"spectacular performance" to date, continued good performance 
is anything but certain.  Besides the usual issues of lack of 
capacity or competence, the Mutharika administration now 
faces an increasingly belligerent opposition, which seems 
almost to want the government to fail.  At the very least, it 
wants to get its own pound of fiscal flesh in return for 
cooperation, and this in itself is perhaps the most salient 
risk to real economic reform.  One way to mitigate this risk 
is for Malawi's development partners (particularly the IMF 
and World Bank) to remind all parties that continued support 
depends on continued performance, and not vice versa.  We 
continue to raise this issue with the political players on 
the ground, and we encourage others to do the same. 
EASTHAM