* Banda facing election next year
* President has won praise for austerity measures
* Support eroded by graft scandal and inflation
By Mabvuto Banda
LILONGWE, Oct 10 Malawi President Joyce Banda
dissolved the cabinet on Thursday after police arrested several
junior officials in her government in recent weeks on suspicion
of stealing state funds.
The presidency of the southern African state said in a
statement that Banda, who came to office in April 2012, "will
announce a new cabinet in due course." It did not elaborate.
The presidency had said on Wednesday that Banda would meet
her cabinet the following day to discuss the financial scandal
and who was responsible.
It did not disclose details of Thursday's meeting, but a
senior government official, who asked not to be named, said
Banda told the cabinet that she had "lost faith" in them.
The scandal, known locally as "cash-gate", forced the
government to shut down its payment system last week so that it
could investigate over $4 million that went missing, delaying
the payment of salaries to teachers, nurses and doctors.
Banda, who faces an election next year, has won acclaim in
the West for austerity measures and moves to bolster the economy
of the aid-dependent, impoverished country.
But steps such as an IMF-backed devaluation of the kwacha
currency have stoked inflation, raised the price of food for the
rural poor and eroded Banda's domestic support.
The police said that about 10 junior government officials
had been arrested so far for suspected graft, and that they had
recovered tens of thousands of dollars in cash from their car
boots and homes.
A small group of protesters marched in the capital Lilongwe
on Thursday and delivered a petition calling for the sacking of
top officials, including Finance Minister Ken Lipenga, over the
scandal. Lipenga has denied any wrongdoing. He was not
immediately available for comment on Thursday.
Last week, envoys from eight Western donor nations, whose
aid traditionally has accounted for about 40 percent of the
state budget, asked Banda to deal with the alleged corruption at
the treasury and investigate an attack on the budget director.
"These are worrying developments that potentially risk
Malawi's stability, rule of law and reputation," the envoys said
in a statement.
Budget director Paul Mphwiyo was shot last month, but
survived the attack.
After the shooting, the government's Anti-Corruption Bureau
and police launched an investigation into the budget director
and unnamed ministers over suspected graft, indicating the
scandal extended beyond just a few junior officials.
"People have lost confidence in (Banda's) leadership and the
best thing she can do is to order the arrest of senior officials
involved and ask her finance minister to resign," Lazarus
Chakwera, leader of the opposition MCP, said at a public rally
over the weekend.
Malawi's troubled economy has shown signs of improvement in
the past few months with inflation that was once running over 30
percent easing slightly, while earnings from its main export
tobacco are expected to double this year from 2012.
(Additional reporting by Frank Phiri; Writing by Jon
Herskovitz; Editing by Mike Collett-White/Mark Heinrich)