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International Monetary Fund. African Dept.
This 2021 Article IV Consultation discusses that Malawi, a fragile state with one of the highest incidences of poverty, food insecurity and frequent weather-related shocks, has been severely affected by the coronavirus disease 2019 pandemic. The outlook is predicated on the assumption of continued domestic and external financing. It assumes Malawi will be able to sustain higher public investment than experienced in the past decade, have strong fiscal multipliers, maintain fiscal and external deficits on the order of 10 percent of gross domestic product (GDP) over the medium term, and continue to access sizable financing from regional development banks and domestic borrowing to close an estimated financing gap of about 4-5 percent of GDP each year. Substantial development and social spending needs, a high debt burden from the past, and much reduced budget support and other grants financing since 2013 are contributing to sustained fiscal and current account deficits in the near to medium term. The authorities’ current policies are focused on a gradual and backloaded pace of fiscal and external adjustment and heavy reliance on nonconcessional borrowing from regional development banks to address the large financing needs. This policy mix further elevates risks to the outlook. The IMF staff urged the authorities to take upfront policy adjustments to address Malawi’s macroeconomic imbalances. Discussions centered on policies to support urgent needs to address the humanitarian situation, restore debt sustainability, and rebuild fiscal and external buffers.
International Monetary Fund. Independent Evaluation Office

Abstract

This evaluation assesses how well IMF-supported programs helped to sustain economic growth while delivering adjustment needed for external viability over the period 2008–19. The evaluation finds that the Fund’s increasing attention to growth in the programs has delivered some positive results. Specifically, it does not find evidence of a consistent bias towards excessive austerity in IMF-supported programs. Indeed, programs have yielded growth benefits relative to a counterfactual of no Fund engagement and boosted post-program growth performance. Notwithstanding these positive findings, program growth outcomes consistently fell short of program projections. Such shortfalls imply less protection of incomes than intended, fuel adjustment fatigue and public opposition to reforms, and jeopardize progress towards external viability. The evaluation examines how different policy instruments were applied to support better growth outcomes while achieving needed adjustment. Fiscal policies typically incorporated growth-friendly measures but with mixed success. Despite some success in promoting reforms and growth, structural conditionalities were of relatively low depth and their potential growth benefits were not fully realized. Use of the exchange rate as a policy tool to support growth and external adjustment during programs was quite limited. Lastly, market debt operations were useful in some cases to restore debt sustainability and renew market access, yet sometimes were too little and too late to deliver the intended benefits. The evaluation concludes that the IMF should seek to further enhance program countries’ capacity to sustain activity while undertaking needed adjustment during the program and to enhance growth prospects beyond the program. Following this conclusion, the report sets out three recommendations aimed at strengthening attention to growth implications of IMF-supported programs, including the social and distributional consequences.

Alassane Drabo
The three main financial inflows to developing countries have largely increased during the last two decades, despite the large debate in the literature regarding their effects on economic growth which is not yet clear-cut. An emerging literature investigates the dependence of their effects on some country characteristics such as human and physical capital constraint, macroeconomic policy and institutional capacity. This paper extends the literature by arguing that climate shocks may undermine the effect of Foreign Direct Investment (FDI), official development assistance (ODA) and migrants’ remittances on economic expansion. Based on neoclassical growth framework, the theoretical model indicates that FDI, ODA, and remittances improve economic growth, and the size of the effect increases with good absorptive capacity. However, climate shocks reduce this positive effect of financial flows in developing countries. Using a sample of low and middle-income countries from 1995 to 2018, the empirical investigation confirms the theoretical conclusions. Developing countries should build strong resilience to climate change. Actions are also needed at global level to reduce greenhouse gases emissions, and build strong structural resilience to climate shocks especially in developing countries.