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Malawi: Donors Delay Aid as the Cashgate Scandal Unfolds

Despite pleas from the government and the arrest of former justice minister Ralph Kasambara, more international donors have followed suit in suspending aid to Malawi.
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A friend in need? President Joyce Banda of Malawi (right) meeting with UK Foreign Secretary William Hague. Photograph by UK Foreign and Commonwealth Office.

Blantyre, Malawi:

Malawi's government is deliberating over how to cope with suspensions in international aid as the country continues to reel from the recent high-level corruption scandal dubbed Cashgate.

The EU, UK and Norway have all said they will be withholding aid to Malawi, which relies on international assistance for 40% of its budget, and the latest to follow suit is the Common Approach to Budgetary Support (CABS), a group which includes the World Bank, African Development Bank and several European governments.

The administration of President Joyce Banda has been trying to demonstrate to donors that it is tackling government graft, and on Friday arrested former Justice Minister Ralph Kasambara, but donors have yet to be fully reassured.

Delaying donors

The Cashgate scandal broke in September following a failed assassination attempt on the government’s budget director, Paul Mphwiyo, who it is believed was about to reveal a corruption syndicate in government. Police raids following the shooting found several high-level officials with wads of cash hidden in their homes and cars.

A number of government figures were arrested and accused of exploiting a loophole in the government’s payment system – which was adopted in 2005 and known as the Integrated Financial Managing Information System (IFMIS) – to divert millions into their own pockets. According to some estimates, $250 million or more may have been stolen from government coffers in the Cashgate scandal.

At the opening of the CABS review meeting in Lilongwe on 7 November, Sarah Sanyahumbi, the group’s co-chair, said that although the donors could not speculate on the outcome of the ongoing investigations, the scandal has dented confidence in the government’s financial management systems.

“As a result of this, donor funds are currently delayed,” she said. “We will not be able to resume support through government systems until we have a clear assurance, independently verified, that our resources are all being used for their intended purpose.”

She continued: “I want to point out here, also, that once trust and confidence is lost, it takes time to rebuild this. And I’m afraid there are no quick fixes to this problem.”

CABS’ move came shortly after other individual donors had announced the suspension of their funding to Malawi over similar concerns. In October, the EU said it would be withholding a transfer of $40 million due in December; the UK’s Department for International Development (DfID) soon followed suit saying it was delaying the majority of its aid payments; and Norway cited its “zero-tolerance policy on corruption” as it suspended funding to the country.

The International Monitory Fund (IMF) meanwhile is deliberating on whether it will continue to disburse a $20 million fund as part of Malawi’s Extended Credit Facility.

Economic fears

The Cashgate scandal has dealt a heavy blow to President Banda’s efforts to win back donor confidence since taking office last year. Her predecessor, the late Bingu wa Mutharika, had fallen out with international donors, but Banda managed to rebuild relationships and enjoyed some positive developments including increased foreign exchange availability, improved availability of fuel, and reduced inflation.

Maxwell Mkwezalamba, who replaced Ken Lipenga as Malawi’s finance minister following the Cashgate scandal, has pleaded for donors to be merciful and insisted that the loss of budget support will spell disaster for the country.

“If it [foreign aid] doesn’t come which is likely to be the case, this means we have to have another look at our budget framework,” he said, adding that the country had been expecting $150 million from donors in the next quarter.

Mkwezalamba also commented that the aid freeze will limit the inflow of foreign currency especially during this off season of tobacco sales, which the country relies on for over 70% of its foreign exchange earnings.

Economic commentator Mabvuto Bamusi meanwhile has said he believes the suspension of aid will likely contribute to a rise in inflation that would in turn lead to the rising cost of living. He warns that Malawi could slide back to the situation that existed under the Mutharika’s leadership when, in the absence of donor aid, the country suffered from acute shortages of foreign exchange, a fuel shortage crisis, and a souring business environment.

Rebuilding efforts

Since Cashgate broke, President Banda has taken various actions to try to the curb the government graft that she said dates back to 2006, before she became president.

Soon after her return from the United Nations General Assembly in October, she dismissed her entire cabinet, and left out certain prominent figures – such as Finance Minister Ken Lipenga and Justice Minister Ralph Kasambara who allegedly played a role in the scandal – in the reshuffle.

With support from donor partners, Banda’s administration has also hired a forensic audit team from the UK to work with Malawian counterparts to investigate all government ministries and departments. And the loophole in the IFMIS government payment system has reportedly been sealed and the software upgraded.

Malawian police meanwhile have arrested various businessmen and government officials including Kasambara on 8 November over alleged connections to the shooting of Mphwiyo. The former justice minister’s arrest came barely a week after police searched his residence for a vehicle believed to have been used by Pika Manondo, a prime suspect in the shooting.

Other figures arrested include a number of government workers from Auditor General’s Office, while several local companies have been exposed as having been conduits for the stolen money which was paid to the firms without them providing any service to the government.

These actions have not yet managed to satisfy Malawi’s international donors and reassure them that their aid will necessarily be used for the purposes intended. However, while the country reels from the Cashgate scandal, some are hoping that this difficult episode will force the country into building strong foundations for the future.

As Sanyahumbi put is, the country must “make sure that 2013 goes down in history as the year that Malawi turned a corner and became a beacon in the region for strong, clean and accountable budgetary and financial management.”

In the meantime, however, Malawi is likely to face serious economic repercussions as it tries to come to terms with the removal of vast portions of its budget.

Correction 11/11/13: The first sentence of the section "Rebuilding efforts" has been changed. It was originally ambiguous and could be read that the Banda presidency, rather than this particular form of graft dates back to 2006. This has now been amended.

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Comments

Joyce Banda did not become President of Malawi in 2006, as the article states. That year, she became Foreign Minister, then Vice-President in 2009, and only President in April 2012. "Since Cashgate broke, President Banda taken various actions to try to the curb the government graft, which she said dates back to before she became president in 2006."

Thanks Nick.

The article was stating that this form of corruption, rather than the Banda presidency dates back to 2006. This is ambiguous and has been amended. Thank you.

Best wishes,

James Schneider, Editor

Excellent article, very informative. I hope you will keep us updated on how this scandal unfolds. Thanks!