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Blantyre - Malawi President Joyce Banda on Thursday dissolved her entire 25-member cabinet in a move a presidential source said was in response to a multi-million dollar fraud scandal.
The move was announced by Banda's office which said she will announce a new cabinet in “due course”.
The treasury and the president's powerful office have been rocked by a spate of multi-million dollar fraud scandals this year.
“Obviously the sackings have got to do with the ongoing crisis at the treasury,” a source in Banda's office told AFP.
The European Union warned on Thursday that it will not release 29 million euros ($39 million) in scheduled financing to the aid-dependent nation until the government deals with the fraud.
“There is need for a clean-up before we make our disbursement,” Alexander Baum, the head of the EU mission in Malawi, said in a statement.
In one of the biggest fraud cases ever recorded in the country, the principal accountant in Banda's office authorised payment of one billion kwacha ($3 million) to a ghost firm, according to the state-appointed Anti-Corruption Bureau.
In another case, a junior officer who earns $100 a month was found with $25,000 cash at his house during a raid by the police.
Ten government employees have been arrested over the past two weeks on fraud charges in the so-called Capital Hill cash-gate scandal, named after the seat of government.
Last month nine senior police officers were jailed for 14 years each for fraud involving $164,000.
Banda, who came to power last year following the sudden death of Bingu wa Mutharika, has come under growing pressure to fire the finance minister and other key government officials.
Around 300 consumer activists on Thursday staged a peaceful march in the administrative capital Lilongwe demanding “immediate” action from the president following the record multi-million dollar fraud unearthed last week.
“We are demanding an independent forensic audit to check into the plunder and the resignation of the finance minister, the accountant general and several senior officials from affected government ministries,” Billy Mayaya, a leading rights activist, told AFP.
The EU is set to release the funds in December to support the deeply impoverished country's budget, which is bankrolled up to 40
percent by foreign donors.
Donors are “watching with keen interest and the EU will make its disbursement of the pledged budgetary support of 29 million euros depending on how government deals with the crisis,” said Baum.
Since taking charge, Banda has overseen a raft of policy changes in a bid to boost the economy and repair ties with donors.
Her government has vowed to carry out a forensic audit to ascertain the level of fraud and corruption in the public sector.
But the EU is proposing external auditors be hired to do the job because the auditor general's office cannot be trusted and may not have the capacity to handle it.
“All this massive looting was happening under the very nose of the auditor general's office and the malpractice was not detected or discovered,” Baum said.
Prosecutors estimate that one third of Malawi's revenue is lost to fraud and ghost workers.
A top treasury official who was on the verge of busting a corruption ring, was last month shot and seriously wounded by a gunman in what Banda suspects was a targetted attack to silence him.