MALAWI: IMF Backs U.S. $157 Million Loan to New Govt
the International Monetary Fund (IMF) visited Lilongwe during May 23-June 6,
2012 for discussions with Malawi’s new government, in the context of the 2012
Article IV consultation and the authorities’ intention to request a new three
year arrangement under the IMF’s Extended Credit Facility (ECF)1.
The mission
was received by Her Excellency President Joyce Banda, and held discussions with
Minister Ken Lipenga (Finance), Governor Charles Chuka (Reserve Bank of
Malawi), Deputy Minister Khwauli Msiska (Economic Planning and Development),
Secretary to the Treasury Randson Mwadiwa, and other senior government and RBM
officials, members of the Budget and Finance Committee of the National
Assembly, as well as with representatives of Malawi’s international development
partners, civil society, and the banking and business communities.
The mission
is grateful to the authorities for the constructive spirit in which discussions
were held and for their warm hospitality.
At the
conclusion of the mission, Mr. Tsidi Tsikata, mission chief for Malawi, issued
the following statement:
“We
congratulate President Banda on her assumption of the office of Head of State
and applaud the smooth transition to the new administration following the
unexpected death of President Bingu wa Mutharika in early April 2012. We extend
our condolences to the Mutharika family and the nation at large.
“The
mission has reached staff-level understandings with the authorities on an
economic program for the fiscal years 2012/13–2014/15 that could be supported
by a new ECF arrangement in the amount of SDR104 million (about US$157
million). The new arrangement is subject to approval by the IMF’s Executive
Board which is expected to consider the authorities’ request in July 2012.
The new
arrangement will replace the three-year arrangement approved in February 2010
which the authorities have requested be cancelled in order to start on a clean
slate.
A growing
stock of payments arrears had led to loss of external credit lines and a
negative outlook for a speedy recovery.
While the
foreign exchange situation was triggered by a fall in the country’s tobacco
earnings and aid inflows in 2011, the authorities’ response to these shocks—a
small devaluation accompanied by a tightening of restrictions on foreign
exchange transactions—created distortions which fostered a parallel foreign
exchange market and boosted informal activity at the expense of the formal
economy, with adverse consequences for government revenues.
Moreover,
the official exchange rate failed to anchor inflation expectations as a growing
share of imports was being priced at the significantly depreciated parallel
market exchange rate.
“The
new government has moved swiftly and boldly to change the policy environment and
begin to address Malawi’s chronic imbalance between foreign exchange earnings
on the one hand, and the demand for foreign exchange on the other.
A
devaluation that increased the price of foreign exchange by nearly 50 percent,
the adoption of a floating exchange rate regime, and the lifting of several
restrictions on foreign exchange transactions have virtually eliminated the
parallel market. Judicious intervention in the foreign exchange market by the
Reserve Bank of Malawi (RBM) has helped clear some of the backlog of external
payments while tightening liquidity conditions in the domestic market.
The mission
found overwhelming support in the private sector for the policy changes:
exporters welcomed the boost to their incomes in local currency terms, importers
were optimistic about the prospects for increased availability of foreign
exchange to support a recovery in economic activity, and banks reported
increased purchases of foreign exchange from customers. All stressed the
importance on improving the investment climate in order to strengthen Malawi’s
international competitiveness relative to countries in the sub-region.
The policy
changes have also been welcomed by Malawi’s development partners who have
pledged to substantially increase their support to the FY2012/13 budget.
“The
mission discussed the critical role of appropriate fiscal and monetary policies
for avoiding an inflation spiral and realizing the expected benefits from the
recent policy actions. To that end, the objectives of the program to be supported
by the new ECF arrangement include fiscal sustainability and a gradual build up
of international reserves to help cushion the economy against external shocks.
More
broadly, the program will guide the implementation of policies to create the
stable macroeconomic environment needed to achieve the main objective of the
second Malawi Growth and Development Strategy (MGDS II) of reducing poverty
through sustained private sector led growth and wealth creation.
“The
FY2012/13 budget will be an important vehicle for implementing the
ECF-supported program. The government is giving high priority to ensuring
adequate provisions for scaling up social protection programs in the budget to
mitigate the impact of the devaluation on the welfare of the most vulnerable
segments of the population.
Fiscal
discipline will be required to keep overall government spending within the
available resource envelope while protecting the government’s top priorities
and avoiding the recent history of excessive domestic borrowing and the
accumulation of huge domestic arrears.
Monetary
policy will be geared toward achieving price stability, while providing room
for growth in credit to the private sector.
The
authorities have agreed on limits to the government’s total borrowing from the
RBM and on steps to enhance the operational independence of the RBM.
“The
mission expressed concern over significant and growing risks to public finances
from the operations of state-owned enterprises and the setting of prices and
tariffs below cost recovery levels.
In this
regard, the mission welcomed the recent changes to the pricing and taxation of
petroleum products and the adoption of an automatic adjustment mechanism to
ensure that retail prices of these products reflect the true cost of
importation.
If the new
rules are adhered to, fuel prices should move up and down in line with world
prices. In order to contain fiscal risks from the operations of the National
Oil Company of Malawi (NOCMA), the mission urged the authorities to limit its
operations to its mandate of managing the country’s strategic fuel reserves and
to revert to reliance on the private sector for the importation of fuel to meet
the country’s regular consumption needs.
“The
mission discussed the issue of data integrity following the recent revelation
that the Ministry of Finance inflated revenue data reported to parliament in
the context of the midyear review of the budget earlier this year.
The mission
recommended that henceforth the Malawi Revenue Authority report information on
its monthly revenue collections directly to the public and not just to the
Ministry of Finance.
The
authorities requested technical assistance from the IMF and other partners to
improve the quality of a wide range of economic statistics.”
