The staff team was headed by Atish Ghosh (PDR) and included Magnus Alvesson (AFR), Li Cui (PDR), Gamal El-Masry (AFR), and Christiane Roehler (FAD).
At the time of the first review, the PRGF arrangement was extended by one year, through December 20, 2004.
External budgetary support was also delayed, and in some cases withheld, because the donor community was unwilling to support, or indirectly finance, the former President’s bid for a third term in office, which would have necessitated a constitutional amendment.
Preliminary indications suggest that in the run-up to the May 2004 elections, there have been significant expenditure overruns in the first half of 2004.
To reduce the effect of high or hyper-inflationary outliers, the inflation rate is scaled as π̃ =π/(1+π), where π is the inflation rate expressed as a decimal fraction.
For this calculation, the discount rate for the stock of pre-debt relief debt is unchanged from the assumption underlying the Decision Point document. Therefore, the effect of the fall in global discount rates on the stock of debt does not account for the rise in the NPV. However, the flow of additional borrowing has probably been on less concessional terms than would have been assumed in the Decision Point document due to the fall in discount rates.
A recent study by Chirwa and Mlachila (IMF Staff Papers, Vol. 51, No. 1, 2004) shows that there is little evidence that opening the banking sector to new entries has reduced the market share of the two leading banks or that it is likely to lead to an decline in interest rate spreads. The government still maintains sizeable influence on these two banks through its direct or indirect (i.e., via the Press Corporation) holdings.
The standard tariff regime is relatively simple, consisting of three categories of ad valorem rates of about 5–10 percent for most raw materials and inputs, 10 percent for intermediate products, and 30 percent for final products. However, a complex tariff regime remains in place because of preferential rates granted to COMESA and SADC members.
Removal of export licensing requirements were conditions under the ESAF-supported program (see Appendix I).
Since June 2000, almost 80 weeks of fiscal-related technical assistance has been provided to Malawi.
As measured from the 1997/98 household survey. The 1991/92 household survey computed a Gini coefficient of 0.62, but because of methodological differences the two measures are not comparable.
A household survey is expected in 2005.
Additional resources are being made available for an anti-malaria program.
The Fund has generally refrained from advising the Malawi authorities on agricultural and food security policies, other than reiterating and supporting those policies advocated by other international and multilateral organizations (such as the World Food Program, the World Bank, and the European Union). In some cases, it has highlighted the fiscal and balance of payments impact of government intervention in the food market. While such endorsement of policies advocated by other international and multilateral organizations was appropriate inasmuch as these interventions had macroeconomic consequences, the Fund has not always emphasized sufficiently the need to implement complementary reforms. For instance, in line with the results of a study financed by the European Commission, a performance criterion on the avoidance of new borrowing by the National Food Reserve Agency was included in the 2000 PRGF arrangement, and staff advised that the physical stock of strategic grain reserve be reduced to 60,000 tons. Another key component of that study—that sufficient international reserves be built up and set aside to import fresh maize in the event of food shortages, was mentioned in the staff report but not given sufficient emphasis (for example, by raising the floor for net international reserves correspondingly). During the most recent food emergency that was anticipated in 2002/03, the Fund provided emergency assistance of SDR 17.35 million (about US$23 million) and accommodated the government subsidy for maize operations in the fiscal program (see Box 2).
There is a large body of literature on the inflation-growth nexus, particularly as applied to developing countries. See, for example, Ghosh and Phillips (1998) who argue that, beyond a very low inflation “kink” (which they put at around 3 percent per year), the marginal benefit for growth from lowering inflation increases as the inflation rate declines. According to their estimates, each halving of the inflation rate is associated with higher per capita growth of ½ percent per year. Other studies (e.g., such as Sarrel (1996)), put the kink at somewhat higher inflation rates, but none finds that the kink is higher than up to about 8 percent per year. Zalduendo (2004) considers the effects of various structural reforms—and their sequencing—on the level and growth rate of output. He finds that macroeconomic stabilization—lowering inflation and maintaining budgetary discipline—should precede other reforms and is key to raising the economy’s growth rate.
The debt-stabilizing budget balance is computed as
For this purpose, a cointegrating regression between real GDP and broad money (deflated by the consumer price index) was estimated, from which nominal money growth rates consistent with the program’s inflation and growth targets can be derived.
The bias in program projections is statistically significant at the 1 percent level for inflation, but only at the 15 percent level for the fiscal deficit and for the current account deficit, and is insignificant for the growth projection.
Around one-half of these amounts represent budgetary support, the rest are project-related grants. However, many project grants are not captured in either the BOP statistics or the budget so these figures may significantly underestimate the extent of external support that Malawi receives.
At the time of the first review (October, 2003), the performance criterion on the banking system’s net claims on the central government was strengthened by (i) eliminating a symmetric adjustor for deviations of balance of payments support from the program baseline (henceforth the ceiling would only be adjusted downwards in the event of higherthanexpected inflows; (ii) adjusting downwards for accumulation of domestic arrears; (iii) adjusting downwards for any domestic non-bank financing.
To give a rough indication, overspending in 2000/01 and in 2002/03 on state residences, national assembly, and offices of the President and Vice Presidents amounted to more than 50 percent of the budgeted amount.
For instance, the staff appraisal for the Request for the 2000 PRGF arrangement noted that “The risks to the program are high …given Malawi’s mixed record of implementation … However, the authorities’ commitment is strong and parliament has supported both the overall approach and the tightening of spending control.”
The Fund would, of course, continue to provide policy advice through its surveillance activities.
In particular, to ensure that fiscal targets had not been met by accumulating arrears.