Malawi's Plan to Create a Stable and Sustainable Economy

February 2, 2024

Adherence to the authorities' macroeconomic adjustment and reform program would help Malawi overcome current and future challenges

Stagnant growth, unsustainable debt, and the adverse effects of multiple shocks, including an outbreak of cholera and Cyclone Freddy last year, have compounded Malawi's economic challenges. The IMF Executive Board recently approved a $175 million Extended Credit Facility (ECF) arrangement that aims to support the government’s commitment to economic reforms that are designed to jumpstart inclusive and sustainable growth. IMF Country Focus interviewed Malawi’s Resident Representative Nelnan Koumtingue about recent developments and challenges that lie ahead.

What are the goals of this program?

One of the most urgent goals of the ECF arrangement is to support the authorities’ commitment to restore macroeconomic stability—that is, to create an environment of low or moderate inflation and a stable exchange rate.

What are some of the challenges facing Malawi?

Malawi has struggled to sustain growth and to reduce poverty and food insecurity for decades, despite large inflows of official development assistance. The past three years have been particularly difficult. Sizable external emergency financing—about $690 million in the past three years from the IMF and the World Bank alone—was extended. To maintain the provisions of basic public goods and services, the government also borrowed from domestic financial institutions. These institutions resorted to the central bank, which injected more money into the economy. More money in circulation, however, meant more pressure on the exchange rate and prices.

How can Malawi best succeed with the new program?

The main thing will be for the authorities to stay the course on their reform agenda. Their efforts to stabilize the economy began to get traction under the 2022-23 Staff Monitored Program. The ECF-supported program aims to build on that to help stabilize the economy by restoring and maintaining sustainable levels of fiscal and current account deficits, an adequate level of gross international reserves, and limited debt vulnerabilities. Staying the course with the program also means making tangible progress on structural reforms in macro-critical areas such as public financial management, developing markets (including the foreign exchange market), and improving governance and institutions while protecting vulnerable households.

The road ahead remains challenging, but macroeconomic stability is a necessary condition to build a foundation for inclusive and sustainable growth and resilience to climate-related shocks. The ECF-supported program is a beginning, not an end.

What role does the international community play in helping Malawi achieve its goals?  

The ECF arrangement is an endorsement of the Malawian authorities’ commitment and capacity to implement sound macroeconomic policies. Along with this, the international community, in particular the official sector, is supporting the authorities with the debt restructuring process, grants and concessional loans to support the social sector and development spending, and technical assistance.

How is Malawi progressing on the debt restructuring process?

The authorities are in the process of completing their external debt restructuring, and the country remains in arrears on servicing commercial external debt while discussions continue. Malawi’s creditors have given assurances to support the country as Malawi critically needs an immediate debt relief to maintain the provisions of basic public goods and services at this difficult time.

Was the devaluation (in November 2023) needed?

The devaluation was a difficult policy decision and imposed short-term hardship on the population. For a long time, Malawi has been importing more than it exports by borrowing abroad. As borrowing became difficult, foreign exchange shortages emerged. The first step in easing this imbalance was to allow the exchange rate to be more in line with demand and supply. Going forward, it will be important to facilitate a market-clearing exchange rate on an ongoing basis. Sustainable levels of fiscal and current account deficits would help stabilize the exchange rate and prices.

What can you tell us about next steps?

There are semi-annual reviews to assess progress on the agreed economic and financial policies. The first of these reviews is expected to take place in late-July. The funds approved under the ECF arrangement will be disbursed after successful completion of each review. Each review is expected to further catalyze additional grant financing and capital inflows.

The IMF team recently visited Blantyre and Lilongwe to take stock of recent economic developments and progress toward program implementation, and will remain engaged throughout the program period. 

Press Release: https://www.imf.org/en/News/Articles/2024/01/25/pr2428-malawi-imf-staff-concludes-visit

FAQs on Malawi:  https://www.imf.org/en/Countries/MWI/malawi-qandas

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Nelnan Koumtingue is the IMF’s Resident Representative in Malawi.