President Muluzi is planning to travel to Europe to discuss the suspensions
At least four of Malawi's major donors have suspended aid to the impoverished southern African state citing widespread corruption and economic mismanagement.
The news emerged in a leaked confidential memorandum from Malawi's Finance Minister Mathews Chikaonda to President Bakili Muluzi.
He says in the letter, that I have seen a copy of, that both the European Union and the United States have suspended development aid.
It says the EU has not only suspended the release of 15m Euros ($13m) but has also demanded a refund of seven million Euros already disbursed.
Anomalies
The EU delegation discovered anomalies while carrying out an audit, discovering that funds had been used for projects outside any bilateral agreement.
The delegation's economic advisor, Theo Kaspers, said the EU had written a fresh memorandum of understanding with conditions which had to be signed.
The United States government, through the US Agency for International Development (USAID), has also diverted at least $6m of the $7m meant for Malawi to another country.
It said the move came in response to the Malawi Government's decision to suspend its privatisation programme.
Other donors, notably Britain, have also put on hold development aid to Malawi because of corruption, mismanagement and political violence.
Denmark, whose envoy Orla Bakdal was forced to leave after the Danish embassy questioned how its money was being used, has also scaled down sponsored projects in Malawi.
Bad timing
The suspensions could not come at a worse time for Malawi.
The government needs to imports thousands of
tonnes of maize to offset the worsening food crisis.
Mr Chikaonda has recommended that the cabinet be informed on the developments to discuss other ways of raising money.
He has also suggested that President Muluzi and himself travel to Brussels to discuss developments with the EU.
Meanwhile, the practical effects of the aid suspensions are already being felt.
New salaries for teachers, the police and medical workers - which President Muluzi promised last June - have yet to materialise, already fuelling sporadic strike actions.