By Sarah Jane Staats (Center for Global Development)

The Millennium Challenge Corporation (MCC) board of directors suspended Malawi’s $350 million compact in March. Fast forward three months: Malawi has a new president—Joyce Banda—who is moving quickly to improve the country’s governance and economy. The MCC’s June board meeting was expected to be about terminating Malawi’s compact; instead, it will be about whether to lift the compact suspension. And Banda will be in Washington this weekend to make her case to the MCC and other parts of the U.S. government. My view: signals are positive, but the MCC should be patient.

The MCC signed its $350 million compact with Malawi in April 2011, but MCC management put the compact on hold in July following political violence and related concerns with Malawi’s commitment to good governance under then-president Bingu wa Mutharika (who was also telling international aid donors to “go to hell” and most of them responded by pulling aid funding). The MCC board of directors suspended the compact during their March board meeting and put the Malawian government leadership on notice to shape up or risk a compact termination decision at the June board meeting. Shortly thereafter, President Mutharika died of a heart attack and Joyce Banda was sworn in as the new president on April 7.

There’s a lot of enthusiasm for the new president who swiftly sacked the police chief, promised to reverse laws limiting press freedom and criminalising homosexuality, devalued the local currency, introduced a floating exchange rate regime, lifted controls on currency trading and is eager to attract donor aid back to Malawi. One can imagine that the U.S. government is eager to support an incoming, female African president who is saying all the right things about getting the country back on track with good governance and a strong economy. And it’s fantastic that Banda and Malawian government officials attribute some of their policy reform efforts to their desire to qualify for MCC funds (the so-called MCC “incentive effect” in practice). But the question is whether or not the MCC is the right tool, right now.

The MCC was founded on the principle that it would provide five-year aid compacts in partnership with countries who have demonstrated commitments—not just promises—to good governance, investments in people, and economic growth. And the MCC was specifically segregated from U.S. strategic foreign policy objectives that often direct U.S. aid spending. But the MCC is often the first line of offense (think rush to reward post-Arab Spring Tunisia) and defense (think Rep. Wolf’s (R-VA) aim to cut MCC funding to Malawi if it allows Sudanese President Omar Bashir into the country). Malawi is just the latest example in which the MCC is caught between pressure to use all available U.S. foreign policy tools and the desire to stick to the MCC’s core eligibility principles that set it apart from other U.S. foreign aid.

What would the MCC need to see to credibly lift Malawi’s suspension?

Reversal of Malawi’s laws that limit democratic rights. President Banda has said she would repeal several laws including those limiting press freedoms and criminalizing homosexuality. Malawi’s minister of information is reporting the law that would have allowed him to ban unfavourable press has already been repealed. The MCC should have evidence that Banda has at least sent the laws back to parliament but preferably suspended them outright or repealed them through parliament.
An IMF agreement on economic reforms. The IMF has just returned from a mission in Malawi and reached a staff-level agreement on a $157 million program. This is a big step in the right direction, but the IMF agreement is still subject to approval by the IMF board in July. Prior to the board decision, the IMF should release comfort letters that would allow some donors, like the African Development Bank, to expedite funds to Malawi. So far only the United Kingdom has resumed budget support; other donors are waiting for the IMF agreement and MCC movement without an IMF agreement in place would be a major departure from agency practice.
Publication of the Malawi Human Rights Commission and Malawian government commission reports on the July 20, 2011 violence. Publication of the reports is critical, but content matters too in terms of whether or not Malawians believe the right individuals are being held accountable for their actions.

These three aspects would help the MCC make the case that the pattern of actions that led to the suspension of Malawi’s compact have been reversed. It’s no coincidence that these items fall into the MCC’s three policy performance buckets used to determine country eligibility: democratic reforms, economic policies and investments in people.

But even if progress is made in these three areas, I would still argue the MCC should be patient. The MCC—unlike other U.S. assistance mechanisms—would be entering a minimum six-year partnership with the country and would benefit from more evidence that the changes are in place and aren’t likely to be lost amidst further volatility. The MCC will also need to redesign the compact which will take time. (Even if the MCC were to lift the suspension now, funds wouldn’t start flowing for at least six months.) Part of the MCC’s many virtues is its ability—and need—to be patient. And the MCC funds for Malawi will still be available even if the MCC waits a few more months.

The political reality is that the United States will want to support Banda and her opportunity for democratic and economic reforms. Here’s how the United States could signal support and still promote reform without sacrificing MCC principles:

Channel other U.S. funds to Malawi. Economic Support Funds—managed out of the State Department generally for political rather than development purposes—are one option. Malawi is also one of twenty U.S. Feed the Future countries and was originally on the fast track for these development funds.
Issue direct and public statements of support. These could come from any part of the U.S. government and should certainly come from the MCC board of directors.
Send an MCC mission to Malawi. MCC missions to eligible countries generate an enormous amount of local press and attention in country. A visit itself—tied with public statements from staff—could buttress Banda’s reform efforts.

For me, much of the question rests on where and how MCC can have the most policy leverage. In March, I was initially skeptical about the MCC decision to suspend and not terminate the Malawi compact, but I was persuaded that suspension left a small window of policy leverage open. In my mind, lifting the MCC suspension before there is evidence of tangible change limits future MCC policy leverage and puts the MCC reputation at risk. In contrast, holding out the incentive for MCC assistance for even a few more months might actually help Banda further the reforms she and the United States are both eager to see.

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