Donor Dependence, Donor Withdrawal: What to Make of Malawi’s Cashgate Scandal
David Cameron and Joyce Banda, 2012. Photo by Adam Gasson / Commonwealth Secretariat, shared with cc license via Flickr
Malawi has relied heavily on foreign aid since independence. Aid came with stronger conditions for economic and democratic governance following multiparty reform in 1994 and donors have multiple times since shown a willingness to withdraw aid when these conditions are unmet. In the wake of the recent Cashgate scandal, many foreign donors have suspended aid to Malawi. Donors under the Common Approach to Budget Support (CABS) announced after its review meeting in November that it was going to delay aid to Malawi; the decision followed similar announcements from the European Union, the UK’s DfID, and Norway. In total, it is estimated that because of Cashgate, $150 million in aid that was committed to Malawi is not being disbursed.
For background on the Cashgate scandal, the Wikipedia entry is fairly comprehensive (if somewhat politically biased). But in brief: Cashgate refers to a corruption scandal in Malawi where government funds have been siphoned through fraudulent payments and loopholes via the country’s Integrated Financial Management Information System (IFMIS) payment platform. Malawians dubbed the scandal Cashgate because the first arrests made were of low-level bureaucrats found with stockpiles of cash in their homes and vehicles. The scandal has been sensational from the start – prior to the first Cashgate arrests, Malawi’s Budget Director Paul Mphwiyo was shot on September 13, after having received numerous death threats in connection with his cracking down on fraudulent government contracts and embezzling loopholes. To date, 81 people have been arrested and 35 bank accounts have been frozen. Estimates of funds siphoned during Cashgate range from $20 million to $100 million (and one report even went so high as $250 million).
The financial system through which the funds were stolen, IFMIS, has been heralded as an anti-corruption solution. There hasn’t been systematic assessment of the impact of IFMIS on corruption, but it was expected to deter corruption by increasing risks of detection. IFMIS is one example of a technical solution to a problem in developing countries.
But the problem with government spending and budgeting in Malawi was not technical – it was political. In 2004, political scientist Lise Rakner and colleagues identified four primary political obstacles to public finance management in Malawi:
- Incentives facing the key stakeholders from civil service, the executive branch, politicians (MPs), as well as private sector appear to undermine the formal processes and institutions at each stage of the budget process.
- Accountability institutions are not effective, because they are undermined through subversion, under funding and political patronage.
- There is at present insufficient demand for economic accountability from civil society in Malawi.
- Donor conditionality linked to economic accountability produces unintended consequences.
The Rakner et al. report predates the institution of IFMIS in Malawi and in it there is no mention of technical problems in managing Malawi’s public finances. If a technical solution were sufficient in improving public finance management, the IFMIS should not have taken eight years since implementation to find graft (unless the theft of government funds is new, which no one is claiming). For the IFMIS to have any impact on government corruption, it would require some political change. The four political obstacles Rakner et al. identified in 2004 are largely still problematic in Malawi today, with one important exception.
Pressure from civil society
A major shift in the ten years since Rakner et al.’s report has been the increased engagement of Malawian civil society organizations on issues related to economic governance. During Banda’s tenure in office, civil society leaders have been vocal in the media, for example, the recent pressure on government to not delay in publishing the forensic audit report for Cashgate. (The forensic audit report was scheduled to be released this past Friday, but a government spokesperson has said the report will not be available until February 14th.)
There have also been calls from civil society for the president to publicly declare her assets, which she has not yet done (nor did her predecessor, Mutharika, when faced with the same demands). There was a bill passed in Parliament and then signed into law by Banda in late 2013 that established the Office of the Director of Public Officers Declarations, but there’s been no progress to date on Malawian politicians actually declaring their personal wealth.
Civil society organizations have even gone so far as to take their demands for better economic governance to the streets. Chief among the list of demands from protesters who took to the streets on July 20, 2011 (in which 19 demonstrators were killed by police) was for better economic governance. In October 2013, Consumer Association of Malawi (CAMA), a civil society group, organized a demonstration in Malawi’s capital as the Cashgate scandal was unfolding, calling for presidential candidates to declare their assets before the upcoming May 2014 elections and warning Malawian voters “not to elect a president with a record of mismanagement of government coffers.”
Precedent for corruption and donor withdrawal
Though Cashgate has drawn a lot of attention domestically and around the world, theft of public finances is not a new phenomenon in Malawi. For example, a scholar of foreign aid and governance, Ryan Briggs, closely examined foreign aid projects in Malawi during the Muluzi presidency (1994-2004). One example he shares is of an $11.8 million World Bank school construction project that managed to only produce one-third of its expected outputs despite having spent its entire budget. Project evaluation documents point to a lack of oversight and overcompensation of contractors. Later investigations by Malawi’s Anti-Corruption Bureau found that money from the project went to then-ruling party politicians.
Relatedly, donor withdrawal of aid in response to government corruption in Malawi is also not new. In a paper I have with co-authors on aid allocation and effectiveness, we write:
Malawian presidents have struggled with donor pressures. Fiscal indiscipline during the Muluzi (1994-2004) and Mutharika (2005-2012) presidencies prompted the International Monetary Fund (IMF) to suspend lending in 2001 and 2011, respectively (Resnick, 2012). Both IMF lending suspensions occurred during the presidents’ respective second (and constitutionally final) term in office.
Political impacts of Cashgate and donor withdrawal
Cashgate is different from earlier donor withdrawals in Malawi in that it has occurred during Joyce Banda’s first term in office. She is running for the presidency[1] in Malawi’s tripartite elections scheduled for May 20, 2014 and the scandal poses serious challenges for Banda’s presidential election campaign. First, Cashgate has eroded public confidence in Banda’s ability to lead the country. Civil society leaders have even claimed to have evidence that the president was involved in the corruption.
Second, donor withdrawal of budgetary support obviously cripples Banda’s ability to manage the needs of the country, as roughly 37% of Malawi’s budget comes from foreign support. Already, civil servants have experienced pay-day delays. The government is short on cash, and has had to drastically cut ministry budgets. The last time donors pulled budgetary support (following Mutharika’s autocratic turn in 2011), it crippled local foreign currency reserves and made even more dramatic the economic decline Malawi was experiencing. As I wrote in an article with Malawian political scientist Boniface Dulani:
Medical supplies, including life-saving antiretroviral treatment for HIV patients, were often out of stock, prompting Malawi’s international partners to intervene by directly importing medicines into the country. Just before Mutharika’s death, Malawians were queuing for sugar, a crop grown and refined in Malawi.
Relatedly, in the wake of the scandal and the subsequent donor withdrawal, the Malawi government implemented austerity measures to control government spending. For example, there is a moratorium on internal and external travel of government officials, including the president. Travel is now limited to “critical” engagements or those not funded by the government. Critics of President Banda refer to her “globetrotting” as tantamount to defying the government ban on travel; the pressure from civil society leaders is sufficient such that Banda made sure to include in her departing remarks on a recent trip to Nigeria that her invitation there came with full funding. She has had no answer, however, to critics of her local travel to promote chiefs, a mostly ceremonial duty that could be seen as largely driven by electoral motives.
Finally, some have even pointed to the potential that her political opponents have gained financially in the scandal, and they are poised to use the siphoned funds to unseat her. There is no publicly available, reliable poll data to estimate how the scandal has affected Banda’s chances of winning the election in May, though one non-representative poll conducted by a major daily newspaper in Malawi in September showed Banda polling fourth in a tight race.
Donors have pulled out precisely when Banda needs things to go well in order to win the upcoming election and it is unclear whether it is fair to pin the problem on Banda.[2] As I suggest above, IFMIS is a technical solution that has the ability to increase transparency, but it requires political will to investigate the financial discrepancies that come to light. Whereas many of corruption prosecutions in the past in Malawi have focused on political opponents, the current scandal has implicated high-level officials in Banda’s government and her party. Banda may actually deserve the credit she is claiming for exposing the corruption of public finances. (There are multiple other interpretations, but her argument isn’t completely baseless.)
What can be learned from donor withdrawal?
The suspended aid to Malawi (estimated at $150 million) will not resume until there is “clear assurance, independently verified that [donor] resources are all being used for their intended purpose,” said Sarah Sanyahumbi, a DfID official in Malawi that chairs CABS. This is one challenge of providing aid as budgetary support rather than program support . Aid to support government budgets takes control over how money is spent from the donors and vests it in the government. When public finance problems arise, it seems budget-supporting donors are somewhat limited with an “all-or-nothing” option – and in the wake of Cashgate, these donors chose “nothing” by withholding support. In contrast, the US, which has also been vocal about Cashgate, has not suspended aid in the wake of the scandal.[3] The US provides all of its aid via program support. Direct program support allows donors to have more control over how funds are spent and thus be more flexible when responding to allegations of misuse of funds.
Furthermore, the adoption of the Aid Management Platform by Malawi’s Ministry of Finance has increased transparency of where project aid is going – literally, on a map. However, as I’ve noted above, a technical solution is only one step towards action. Technical fixes to development problems also need political will. Ground-truthing project aid disbursements is possible, but have any civil society organizations in Malawi or other interested parties used the publicly available Aid Management Platform to identify aid project locations and investigate the status of projects?
Malawi’s experience could be instructive to others – particularly its neighbor, Mozambique. Mozambique’s budget also relies heavily on foreign aid and currently risks suspension of a third of the $400 million it is expected to receive in budget support from major donors because of poor democratic and economic governance (Norway has already frozen aid to Mozambique). Mozambique is also having elections this year, but not until October. The later elections give Mozambique’s political leaders an opportunity to see how events unfold in Malawi to help inform them of the actions necessary to maintain power.
Analysts often point to civil society as weak in the African context, but the current political situation in Malawi has largely been influenced by the actions of those outside of government. Perhaps it is because the nature of the scandal – where government funds have been siphoned by the politically connected – sufficiently makes suspect anyone within government. Only after the audit report is made public will we have a better understanding of how Cashgate happened, and which parts of government (and what amounts of aid) were most affected. IFMIS may, in the end, prove very helpful in identifying public finance misuse. Donors’ withdrawal and threats of withdrawal have certainly incentivized the government to move swiftly in prosecuting offenders. However, the Cashgate scandal may be introducing the rest of the world to a promising democratic development in Malawi: a more vocal and active civil society, empowered by a public willing to take to the streets to have its demands heard. It’s unclear whether foreign aid has had any hand in that development, which should raise bigger questions about how much democratic development can come from outside Malawi, and how much of the heavy lifting is done by Malawians themselves.
[1] I hesitate to say “re-election” here because Joyce Banda came to be president not as a result of having won the previous election but following the sudden death of former President Bingu wa Mutharika in April 2012.
[2] This is not to suggest I support Banda’s bid in the upcoming presidential election.
[3] NB: The International Monetary Fund (IMF) had suspended aid after the initial accusations of graft in the Cashgate scandal. But following an in-country assessment, the IMF recently announced it would resume its disbursement.
An abbreviated, edited version of this post is running as a two-part series on the AidData blog, The First Tranche.
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