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© 2002 International Monetary Fund
August 2002
IMF Country Report No. 02/181
Malawi: 2002 Article IV Consultation and Economic Program for 2002—Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2002 Article IV consultation and Economic Program for 2002 with Malawi, the following documents have been released and are included in this package:
the staff report for the 2002 Article IV consultation and Economic Program for 2002, prepared by a staff team of the IMF, following discussions that ended on May 14, 2002, with the officials of Malawi on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 19, 2002. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff supplement of July 29, 2002, updating information on recent economic developments.
the Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during the August 5, 2002 Executive Board discussion of the staff report that concluded the Article IV consultation.
The document (s) listed below have been or will be separately released.
| Joint Staff Assessment of the Poverty | Mission Concluding Statement |
| Reduction Strategy Paper | Poverty Reduction Strategy Paper |
| Letter of Intent* | Report on the Observance of Standards and |
| Memorandum of Economic and Financial | Codes—Fiscal Transparency Module |
| Policies* | Selected Issues and Statistical Appendix |
| Technical Memorandum of Understanding* |
| Joint Staff Assessment of the Poverty | Mission Concluding Statement |
| Reduction Strategy Paper | Poverty Reduction Strategy Paper |
| Letter of Intent* | Report on the Observance of Standards and |
| Memorandum of Economic and Financial | Codes—Fiscal Transparency Module |
| Policies* | Selected Issues and Statistical Appendix |
| Technical Memorandum of Understanding* |
*May also included in the Staff Report.
The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
700 19th Street, N.W. • Washington, D.C. 20431
Telephone: (202) 623 7430 • Telefax: (202) 623 7201
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Price: $15.00 a copy
International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
MALAWI
Staff Report for the 2002 Article IV Consultation and Economic Program for 2002
Prepared by the African Department
(In consultation with the Fiscal Affairs, Legal, Monetary and Exchange Affairs, Policy Development and Review, Statistics, and Treasurer’s Departments)
Approved by Michael Nowak and Shigeo Kashiwagi
July 19, 2002
Discussions on the Article IV consultation and the first review under the Poverty Reduction and Growth Facility (PRGF) were held in Lilongwe and Blantyre during February 26–March 13, 2001; May 7–16, 2001; July 12–24, 2001; November 4–22, 2001; February 25–March 10, 2002; and April 29–May 14, 2002; discussions were also held in Washington during October 11–12, 2001; and February 4–6, 2002. The Managing Director met with President Muluzi in Washington, D.C. on February 5, 2002.
The Fund staff teams included Alfred Kammer (head), Kristina Kostial, Johan Mathisen, Matthew Odedokun (all AFR), Arnold McIntyre and Helaway Tadesse (PDR), and Thomas Baunsgaard and James Brumby (FAD). Thomas Gibson and Girma Begashaw (Resident Representatives) also contributed to the missions. James Munthali and Anna Muganda from the Malawi Executive Director’s Office participated in some of the discussions. Members of the World Bank and the African Development Bank staff worked closely with the Fund, including through joint missions.
The Fund teams met with President Muluzi, Vice-President Malewezi, Ministers of Finance Chikaonda and Jumbe, Reserve Bank Governor Ngalande, other ministers, and senior government and central bank officials, as well as donors, civil society organizations, business groups, financial institutions, and the media.
In concluding the 2000 Article IV consultation and approving the request for a three-year arrangement under the PRGF, Directors noted with concern that macroeconomic stability had proved elusive, growth had been inadequate, and a large proportion of the population remained in poverty. They welcomed the authorities’ renewed commitment, but they stressed that achievement of the inflation target would require the steadfast implementation of policies and, in particular, depend critically on fiscal restraint and resistance to pressures on wages and other recurrent expenditure. Directors also stressed the importance of improved targeting of government spending toward the poor and urged the authorities to step up expeditiously the monitoring and control of parastatals. While acknowledging the recent initiatives to improve governance, Directors strongly urged the authorities to follow through vigorously on all investigations and prosecutions of fraud and corruption cases.
Malawi has accepted the obligations of Article VIII, Sections 2, 3 and 4 of the Articles of Agreement and maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions.
Contents
Executive Summary
I. Introduction
II. Recent Developments and Performance Under the Program
A. Macroeconomic Developments
B. Food Crisis
C. Structural Reforms, Governance, and the PRSP
D. Political Developments
III. Report on the Discussions
A. Medium-Term Framework
B. Macroeconomic Policies in 2002
Fiscal policy
Food security
Monetary policy
External sector
Structural reforms and governance
IV. Technical Assistance and Data Issues
V. Program Monitoring
VI. Staff Appraisal
Text Boxes
1. The Food Crises
2. Parastatal Reforms and Costs
3. Poverty and Social Impact Analysis (PSIA) of the Program
4. HIPC Initiative Debt Relief and External Debt Sustainability Indicators
5. HIV/AIDS
6. Report on the Observance of Standards and Codes (ROSC)
7. Governance
8. Safeguards Assessment of the Reserve Bank of Malawi (RBM)
9. Structural Conditionality
Figures
1. Index of Industrial Production (IPP), Actual and Annual Average December 1994–December 2001
2. Monthly CPI Inflation, January 1999–May 2002
3. Nominal and Real Interest Rates and Yield Curves, 1999–2002
4. Real and Nominal Effective and Equilibrium Exchange Rates, January 1997–April 2002
5. Domestic Deficit, 1999/2000–2002/03
6. Reserve Money, Actual Versus Program and Composition of Reserve Money, January 2001–June 2002
7. Current Account and Exports, 1995–2005
8. Revenue and Expenditure Composition, 1999/2000–2002/03
9. Policy Impact on Domestic Debt Stock, Interest Bill, and Interest Rates, 2000–05
Tables
1. Selected Economic and Financial Indicators, 2000–05
2. Central Government Operations, 2000/01–2003/04
3. Monetary Authorities’ Balance Sheet, 2000–05
4. Monetary Survey, 2000–05
5. Balance of Payments, 2000–07
6. Implementation of Structural Performance Criteria and Benchmarks Under the PRGF Arrangement
7. Pro-poor Current Expenditure (PPEs), 2000/01–2002/03
8. Implementation Status of Actions to Strengthen the Tracking of Poverty-Reducing Public Spending
Appendices
I. Letter of Intent
Attachment I. Memorandum on the Economic Policies of the Government of Malawi
Attachment II. Technical Memorandum of Understanding
II. Relations with the Fund
III. Relations with the World Bank Group
IV. Statistical Appendix
V. Selected Social and Demographic Indicators
Executive Summary
Recent developments
The disinflation program has been broadly successful, but a prolonged period of expansionary fiscal policy crowded out private sector activity. The monthly nonfood consumer price inflation has declined sharply and remained below 10 percent since February 2001, but it did pick up somewhat at the beginning of 2002. At the same time, real interest rates remain high, reflecting an expansionary fiscal policy and protracted inflation expectations. Malawi’s growth performance remains disappointing, with agricultural output stagnating and private sector activity weak.
While monetary policy has been tight, fiscal policy has been too expansionary. The targeted domestic fiscal deficit for 2000/01 (July–June) was exceeded by 3½ percent of GDP, and for 2001/02 it is projected to be exceeded by almost 7 percent of GDP.
Report on policy discussions
Policy advice through 2001 and 2002 was guided by the PRSP process, which early on recognized that only higher and sustained economic growth could reduce poverty.
The new Minister of Finance, who took office in January 2002, has publicly acknowledged that a decisive turnaround in fiscal policy is needed to halt the increase in public debt and to create an environment conducive to private sector-led growth. The 2002/03 budget is expected to involve significant adjustment, reducing the domestic deficit to 5½ percent of GDP from 8 percent of GDP in 2001/02. The size of the adjustment, compared with 2001/02, is ambitious; however, it has to be viewed in the context of the need to reverse a highly expansionary fiscal stance in the two preceding years and to bring the domestic debt situation under control. In support, the authorities will improve the monitoring and control of parastatals and accelerate efforts to strengthen expenditure management.
The Reserve Bank of Malawi (RBM) will maintain a tight monetary policy. The authorities stressed that the exchange rate would continue to be market determined, with the RBM’s intervention in the foreign exchange market limited to meeting the gross reserves target and moderating short-term fluctuations, without attempting to influence underlying market trends. The financial sector has been under some strain but remains sound.
Malawi’s most pressing issue now is to address a major food shortage expected for later this year in order to avert malnutrition and starvation. Donor pledges for humanitarian aid broadly cover the requirement identified by the FAO/WFP. Moreover, to close the remaining food gap, the government will import maize, which it will provide at a subsidized price.
Malawi’s economic data suffer from many serious deficiencies which hamper the authorities’ and the staff’s efforts to conduct accurate and timely policy analysis. Moreover, public dissemination of data is deficient and subject to long delays. The staff has assisted the authorities to improve official data, but sustained efforts are needed by the authorities to make lasting progress in the data quality and timeliness.
Front Matter Page
INTERNATIONAL MONETARY FUND
MALAWI
Staff Report for the 2002 Article IV Consultation and Economic Program for 2002 Supplementary Information
Prepared by the African Department
(In consultation with the Fiscal Affairs, Legal, Monetary and Exchange Affairs, Policy Development and Review, Statistics, and Treasurer’s Departments)
Approved by Michael Nowak and Masood Ahmed
July 29, 2002
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Public Information Notice (PIN) No. 02/92
FOR IMMEDIATE RELEASE
August 16, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
