IMF Staff Completes Review Mission to Malawi

A team from the International Monetary Fund (IMF), led by Oral Williams, visited Lilongwe March 9—23, 2016 to conduct discussions on the seventh and eighth reviews under the Extended Credit Facility (ECF) arrangement.1

At the end of the mission, Mr. Williams issued the following statement:

“Regarding program performance, the authorities have demonstrated a concerted effort to put the program back on track. Program targets on net domestic financing and net domestic assets of the Reserve Bank of Malawi for end December 2015 were met. However, the buildup in net international reserves fell short of the end-December program floor owing to lower-than expected export revenues and some smoothing of the excessive volatility in the foreign exchange market. On the structural side, reforms in the financial sector were carried out as planned. Improvements in public financial management (PFM), in particular bank reconciliations, are gaining momentum but this needs to be sustained.

“The prolonged adverse effects of the El Niño-induced drought, a strengthening dollar, and lower-than-expected export receipts have hit the economy hard. The drought has also placed an estimated 2.8 million people at risk of food insecurity which is being addressed by the authorities and the donor community. Real GDP growth which fell sharply to 3 percent in 2015 is expected to be within 3—4 percent range in 2016, depending on the improvement in weather conditions. Rising food prices and a sharp depreciation of the kwacha contributed to annual inflation increasing to about 25 percent at end-December 2015. Inflation has since fallen slightly to 23.4 percent in February 2016 and non-food inflation has been on a clear declining trend, suggesting that the appropriate adjustments in monetary and fiscal policies are having their intended effects.

“Commitment to the flexible exchange rate regime and the automatic fuel pricing mechanism have helped Malawi to respond to external shocks. The kwacha which depreciated by more than 35.6 percent from July 2015 to early March 2016–a trend mirroring that of neighboring countries–has begun to stabilize. This in part reflects efforts by the central bank to absorb excess liquidity from the banking system, greater fiscal discipline, and the advent of the tobacco season.

“The mission reached understandings to ensure that recent improvements in macroeconomic policy implementation are sustained. Restoring macroeconomic stability by bringing inflation–which has been stuck above 20 percent since mid-2012–down to single digits, remains the most important policy challenge in the near term. The revised fiscal framework recently approved by parliament is sufficient to meet the end-June 2016 program target on net domestic financing. Prudent fiscal policy, when combined with a tight monetary stance to maintain positive real interest rates, should place inflation on a downward path. Discussions also focused on measures to ensure that the PFM reforms envisaged under the program are fully implemented. The mission welcomed the authorities' efforts to strengthen commitment controls over spending, by requiring Ministries, Departments, and Agencies to provide detailed fiscal reports before receiving additional allocations.

“Discussions also focused on the broad parameters of the FY16/17 budget in order to guide policy implementation. In doing so, the mission emphasized the need to exercise restraint on the wage bill which now accounts for about 34 percent of revenues. It also underscored the need to mobilize domestic revenues in line with Malawi's sustainable development goals by broadening the tax base and strengthening tax compliance.

“Based on progress to date, it is anticipated that a request to complete the seventh and eighth reviews under the ECF-supported program could be submitted for consideration by the IMF's Executive Board in May 2016. The mission would like to thank the authorities for their hospitality and constructive cooperation.

“The mission met with President Arthur Peter Mutharika, Minister of Finance Goodall Gondwe, Governor of the Reserve Bank of Malawi (RBM) Charles Chuka, other senior government and RBM officials, a broad range of national stakeholders outside government, as well as representatives of Malawi's development partners.”

1TheECFis a lending arrangement that provides sustained program engagement over the medium to long-term in case of protracted balance of payments problems. The arrangement for Malawi in an amount equivalent to SDR 104.1 million (about US$ 144.4 million) was approved on July 23, 2012 (seePress Release No. 12/273).