Malawi
Staff Report for 2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility

This 2009 Article IV Consultation highlights that Malawi’s macroeconomic performance has improved significantly over the past two years, and the country’s agricultural-based economy has weathered the global economic storm relatively well. Good weather and the distribution of subsidized fertilizer have contributed to robust growth and moderate inflation in recent years. Malawi’s medium-term outlook is favorable, within the context of successful implementation of the Extended Credit Facility-supported program. Growth is expected to remain buoyant, but moderate somewhat relative to the high growth of the recent past.

Abstract

This 2009 Article IV Consultation highlights that Malawi’s macroeconomic performance has improved significantly over the past two years, and the country’s agricultural-based economy has weathered the global economic storm relatively well. Good weather and the distribution of subsidized fertilizer have contributed to robust growth and moderate inflation in recent years. Malawi’s medium-term outlook is favorable, within the context of successful implementation of the Extended Credit Facility-supported program. Growth is expected to remain buoyant, but moderate somewhat relative to the high growth of the recent past.

I. Recent Developments and Performance under the ESF

1. Malawi’s agricultural-based economy has weathered well the global economic storm. Good weather and the distribution of subsidized fertilizer have contributed to robust growth and moderate inflation. After reaching 9.8 percent in 2008, real GDP growth is estimated at 7.7 percent in 2009 (Tables 1a and 1b and text figure), buoyed by a bumper maize harvest and services expansion (text table). Inflation has remained moderate. After rising in late 2008 following food and fuel price shocks, consumer price inflation decreased to 7.6 percent in the 12 months ending December 2009.

Table 1a.

Malawi: Selected Economic Indicators, 2008–14 1

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Sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates and projections.

The ECF scenario assumes an initial depreciation and that the real exchange rate is kept constant during the program period. Correcting the underlying exchange rate misalignment is a key element of the macroeconomic framework.

The increase in national savings in 2010 relative to 2009 results from the combined effect of expenditure-reducing policy, as the government pursues a tighter fiscal stance, and expenditure-switching policy as the devaluation effects a change in relative prices and also impacts the private sector.

Programmed usable reserves in 2009 excludes the SDR allocation, while the projection includes the SDR allocation.

Average t-bill rate. Data for 2009 are shown as of November 30th.

Table 1b.

Malawi: Selected Economic Indicators on a Fiscal Year Basis, 2008/09–2013/14 1

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Sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates and projections.

The ECF scenario assumes an initial devaluation and that the real exchange rate is kept constant during the program period. Correcting the underlying exchange rate misalignment is a key element of the macroeconomic framework.

The increase in national savings results from the combined effect of expenditure-reducing policy, as the government pursues a tighter fiscal stance, and expenditure-switching policy as the devaluation effects a change in relative prices and also impacts the private sector.

Text Figure.
Text Figure.

Malawi--Real GDP Growth and Inflation

(Percent, annual basis)

Citation: IMF Staff Country Reports 2010, 087; 10.5089/9781455204496.002.A001

Sources: Malawian authorites and Fund staff estimates.
Text Table.

Malawi—Contribution to Growth, 2004–09

(Percent of GDP)

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Sources: Malawian authorities and Fund staff estimates.

2. Following a number of years in which the central government repaid domestic debt and maintained modest overall deficits, fiscal policies loosened significantly in the run-up to the May 2009 presidential and parliamentary elections (Tables 2a and 2b, and Figure 1). Sizeable budget overruns on fertilizer and goods and services spending during fiscal year 2008/09 led to high domestic borrowing; hence, end-June ESF program targets on repayment of debt and net domestic assets of the RBM were missed by wide margins and the central government deficit was above target. The overrun on fertilizer reflected both high world prices and unbudgeted purchases of fertilizer. The fiscal year 2009/10 budget returns to a prudent fiscal stance. Preliminary results on execution through December 2009 are in line with the budget, adjusted for donor support delays.1

Table 2a.

Malawi: Central Government Operations 2008/09–2013/14

(Millions of kwacha)

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Sources: Malawi Ministry of Finance and IMF staff estimates.

Includes estimate for project loans not channeled through the budget.

Wages and salaries grow faster than nominal GDP to reflect salary increases for educational and health workers.

Health SWAp expenditures in 2009/10 are higher than budgeted owing to a reclassification of spending from generic goods and services, which have been reduced correspondingly.

Kwacha 2 billion in FY2009/10 represents a transfer from the Petroleum Stabilization Fund.

Excluding recapitalization of the RBM.

Table 2b.

Malawi: Central Government Operations 2008/09–2013/14

(Percent of GDP)

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Sources: Malawi Ministry of Finance and IMF staff estimates.

Includes estimate for project loans not channeled through the budget.

Wages and salaries grow higher than nominal GDP to reflect salary increases for educational and health workers.

Health SWAp expenditures in 2009/10 are higher than budgeted owing to a reclassification of spending from generic goods and services, which have been reduced correspondingly.

Excluding recapitalization of the RBM.

Figure 1.
Figure 1.

Malawi: Fiscal Developments, 2005/06–2009/10:

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 087; 10.5089/9781455204496.002.A001

Sources: Malawian authorities and IMF staff estimates

3. The monetary aggregates expanded rapidly in 2008 and early 2009 but tended to stabilize towards mid 2009. Broad money growth fell to 19.4 percent on a 12-month basis at end-October 2009, down from 33.1 percent at end-December 2008 (Tables 3a and 3b and Figure 2). The RBM’s policy rate remained at 15 percent in 2008 and 2009, while the six-month t-bill rate fell slightly during the year.

Table 3a.

Malawi: Monetary Authorities’ Balance Sheet, 2008–10

(Millions of kwacha, unless otherwise indicated)

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Sources: Reserve Bank of Malawi and IMF staff estimates and projections.

Including SDR allocation.

Includes recapitalization of RBM with a transfer of t-bills in the amount of 29.3 billion in January 2008.

Table 3b.

Malawi : Monetary Survey, 2008–10

(Millions of kwacha, unless otherwise indicated)

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Sources: Reserve Bank of Malawi and IMF staff estimates and projections.

Including SDR allocation.