Abstract
This collection of papers reviews Malawi’s economic performance under a program supported by the Extended Credit Facility (ECF). Drought conditions in parts of the country have dampened the near-term outlook for growth and have resulted in food insecurity for nearly 2 million inhabitants. The authorities have therefore implemented strong adjustment measures to address Malawi’s substantial external and internal imbalances. The IMF Executive Board has also decided to enable the immediate disbursement of an amount equivalent to SDR 13.02 million (about US$20 million), bringing total disbursements under the program to an amount equivalent to SDR 26.04 million (about US$40.1 million), which will help Malawi to accelerate growth under the ECF.
We thank staff for the excellent report and for their efforts to assist the Malawi authorities in the implementation of the Extended Credit Facility (ECF). My Malawi authorities would like to thank staff and Management for their candid assessment of recent economic developments and constructive dialogue and their support for Malawi’s request for completion of the first review under the ECF. They are especially thankful to the Executive Board and Fund Management for their continued support and valuable policy guidance against the backdrop of a very difficult domestic and global economic environment.
In view of the good performance under the program—with end-September 2012 quantitative performance criteria observed except for the level of the RBM’s net domestic assets (NDA) target as a result of the RBM’s extension of liquidity support to the banking system, and implementation of structural reforms on track—they request Directors’ support for the completion of the first review under the ECF and waiver of the nonobservance of the missed performance criterion. In addition, my authorities request for modification of performance criteria for the second and third reviews (test dates of end-December 2012 and end-March 2013, respectively) on the basis of a worse external environment than envisaged when the program was designed, a tightening of policies by the authorities, and additional donor support. My authorities want to assure the Executive Board that they will continue the policies agreed under the current Fund-supported economic program.
Malawi is at a historic crossroads. The government headed by President Joyce Banda has been implementing tough but critical macro and structural reforms aimed at turning around the economy. Among other things, these include devaluation of the Kwacha by close to 50 percent, then allowing it to float and the adoption of an automatic adjustment mechanism for retail prices of fuel. The economy however remains fragile, with further depreciation of the Kwacha by an additional 30 percent so far, triggering fluctuations in the prices of fuel. In addition to the reforms, the government has launched an 18 month Economic Recovery Plan (ERP) that focuses on a few priorities that are “pro-growth, represent quick wins, and are highly effective” and necessitates for social protection programs (Farmer Input Support Program and other assistance to small farmers, public works, school feeding, scholarships for girls, cash transfers). The plan also identifies diversified commercial agriculture, tourism, energy, mining and infrastructure/Information Technology and Communications as sectors that can help turn around the economy and provide the initial building blocks towards structural transformation, needed to successfully implement the Second Malawi Growth and Development Strategy (MGDSII.)
Economic Development Under the ECF
The macroeconomic environment is still fragile and achieving stability remains the overarching goal for my authorities through the continuance of the policy measures instituted so far. The growth estimate for 2012 was revised downwards from 4.3 percent earlier in the year to 1.9 percent owing to drought conditions in some parts of the country contributing to lower crop production and a spike in inflation, highlighting the urgent need for expediting food redistribution.
Driven by increases in fuel and domestically produced food prices as well as continuing depreciation of the exchange rate, the rate of inflation rose to 30.6 percent in October 2012, up from 28.3 percent during the preceding month and 9.8 percent at the beginning of the year. In addition, reflecting the decline in foreign exchange reserves and the increasing inflationary expectations, the Kwacha continued to depreciate faster than anticipated. These developments necessitated the need for measures that would stabilize the Kwacha in order to anchor inflation expectations. To this end, the RBM raised the Bank rate by 400 basis points to 25 percent in November which is in line with developments in both non-food inflation and the Treasury bill yield while keeping the Liquidity Reserve Requirement (LRR) at 15.5 percent. The RBM also closed on November 30th the uncollateralized lending window that it was extending to banks that have relied for a long time on borrowing from the RBM or interbank market to meet LRRs and has placed these banks under heightened scrutiny to ensure that they are on a path to meeting prudential liquidity requirements. The RBM also conducted open market operations to withdraw liquidity as part of its efforts to stabilize the exchange rate.
Outlook and policies going forward
Going forward, my authorities remain committed to the current exchange rate regime that allocates foreign exchange through a market-based system. They are also committed to continue modernizing the exchange rate and monetary policy framework.
On the fiscal side, the authorities have decided to tighten further their fiscal stance by committing to a repayment of 1.3 percent of GDP compared to the zero domestic borrowing as was initially planned at the inception of the program. They deem this necessary in order to ensure early attainment of macroeconomic stability. They will also continue to enhance domestic revenue mobilization, strengthen the public financial management systems and reiterate their commitments as outlined in their MEFP.
My Malawi authorities’ commitment to the implementation of a wide range of reforms underpins the current program’s objectives. Creating an enabling environment for private investment and growth is high on their agenda. Improving the stock and quality of infrastructure is a priority with the aim of enhancing productivity in the primary sectors and competitiveness of the country as a whole. In addition, they aim at expanding and ensuring quality health and education services towards meeting MDGs targets as well as ensuring food security at household and national levels. They also intend to review regulatory hurdles to doing business in Malawi and enhancing the country’s international competitiveness.
The conclusion of the ECF’s first review is a major achievement. Going ahead, my authorities are fully aware that continued effort is necessary, with the ultimate objectives of stabilizing the macroeconomic environment and restoring sustained inclusive growth. To this end my authorities intend to implement all the measures needed to fully meet the program’s targets as well as to adjusting their economic policies for the near term to deal with the emerging challenges and cement macroeconomic stability. They plan to continue directing their fiscal, monetary, exchange and debt policies toward achieving their near-term objectives of high growth, single digit inflation and building up of foreign reserves. In this regard, my authorities will continue to consult with the Fund and seek the support of development partners in formulating their policies. They foresee the continued Fund support to be an essential and timely input that will help them to sustain their effort to maintain macroeconomic stability and lay the foundation for enhanced growth over the medium term.
In closing, I wish to extend my authorities’ appreciation for the hard and diligent work of the Fund staff, both on the ground and on mission, and for their patience and professionalism that has made the difficult road so far a good basis for the success of the new program.