US embassy cable - 05LILONGWE994

UNCLAS SECTION 01 OF 02 LILONGWE 000994 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
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 
JOHANNESBURG FOR FCS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, MI 
SUBJECT: IMF MALAWI REVIEW: ANOTHER GOOD QUARTER 
 
 
LILONGWE 00000994  001.2 OF 002 
 
 
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SUMMARY 
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1. (SBU) The IMF's country team today delivered its first 
quarterly review of Malawi's new Poverty Reduction and Growth 
Facility (PRGF).  Malawi has met substantially all of its 
targets, although it appears headed to miss its net asset 
target next month.  The IMF is recommending a looser foreign 
exchange policy to bring down the value of the kwacha and 
build foreign assets.  Other economic measures are on track, 
most notably inflation and domestic debt, and the team 
expects to recommend HIPC completion by mid-2006.  The team 
expressed concern that the GOM was being distracted by the 
volatile political situation here, a concern that we share. 
End summary. 
 
 
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HITTING THE TARGETS, BUT FOREX IS WORRISOME 
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2. (U) In a briefing on 21 November, the International 
Monetary Fund's country team reported another quarter of 
satisfactory progress on fiscal and monetary policy.  The 
team said the GOM had met all quantitative targets, including 
ceilings on domestic debt and government wage expenses and a 
floor on net foreign assets.  Nearly all structural targets 
were met, the exception being the establishment of a wage 
schedule for future government wage adjustments; IMF expects 
closure on this by end of year. 
 
3. (U) The IMF's chief concern at this point is net foreign 
assets, which will likely miss the target in December and 
possibly for some brief period beyond.  The team predictably 
attributed this problem to a combination of import pressures 
(mainly the result of high oil prices, but also increased 
food imports) and lower than projected forex earnings from 
this year's tobacco auctions (the result of poor quality 
harvests).  An overly rigid foreign exchange policy, 
resulting in an overvalued kwacha, has exacerbated the 
shortage of foreign currency.  The team reports that it is 
working the GOM for a "prudent and flexible" exchange rate 
policy, which essentially means allowing the kwacha to 
continue to slip.  (Note: The current black-market premium of 
about MK12-15/USD suggests that the kwacha should slip from 
MK121/USD to around MK133-136/USD, or 10-12 percent.  End 
note.) 
 
 
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SOLID PROJECTIONS, AND LIKELY HIPC COMPLETION 
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4. (U) For the remainder of the fiscal year, the IMF team 
projects net domestic debt will stay below the 19.8 percent 
(of GDP) target, thanks mainly to the GOM agreeing to smaller 
increases in government wages.  (If the GOM follows through 
on its proposed tax administration reforms, there is 
considerable room for improvement on the revenue side, which 
is not factored into current projections.)  The team also 
sees inflation staying below its 16.7 percent target at 
fiscal year end (June).  GDP growth is expected to rebound 
next year--an easy task following a drought year, provided 
there is not another drought. 
 
5. (U) The IMF team expects to present a board recommendation 
for HIPC completion in May, with "one or two" waiver points, 
one of them almost certainly being the privatization of the 
state agricultural conglomerate Admarc.  HIPC completion 
depends mainly on six months of satisfactory PRGF performance 
and the same period of satisfactory performance on the 
Poverty Reduction Strategy.   The value of IMF debt service 
relief would be on the order of $12 million; the World Bank's 
debt service relief would jump from about $40 to $80 million. 
 
 
 
 
LILONGWE 00000994  002.2 OF 002 
 
 
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CONCERN OVER POLITICAL DISTRACTION 
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6. (SBU) In a side conversation following the briefing, 
several members of the team expressed concern over the 
political situation in Malawi.  Their worries center on two 
points: the political gridlock that is preventing the 
government from getting even basic legislative action, and 
the growing distractions on finance minister Goodall Gondwe's 
attention.  (Gondwe is standing for Parliament in the 
December 6 by-elections.)   One member went so far as to say 
the Minister's attention to the IMF visit was markedly less 
than on previous visits; indeed, he missed the outbrief 
because of a campaigning commitment. 
 
 
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COMMENT: ONE LAST CHANCE AT REDEMPTION 
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7. (SBU) Overall, fiscal performance is the one bright spot 
on the Malawian political landscape.  The IMF's resident 
representative regularly describes GOM performance as 
remarkable, an assessment with which we agree.  Much of that 
performance has happened by the force of Gondwe's 
personality, and by his relative political neutrality (and, 
strangely, by the political neutrality of the budget issue in 
Malawi).  But as the political opposition becomes more 
fractious, and as President Bingu wa Mutharika demands more 
political involvement from Gondwe, there is some danger that 
he will take his eye off the ball.  While this looks unlikely 
at this point, it is cause enough for concern.  One of the 
last remaining chances for Mutharika's political redemption 
is a strong economic recovery, which is still a real 
possibility.  Gondwe has put the fundamental policies into 
place, and it is largely a matter of time before they produce 
visible street-level results.  In the meantime, though, he 
will have to pay attention and withstand growing pressure to 
fall back into the well-worn rut of fiscal mismanagement. 
EASTHAM