IMF Executive Board Concludes 2006 Article IV Consultation with Malawi

Public Information Notice (PIN) No. 07/49
May 3, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2006 Article IV Consultation with Malawi is also available.

On March 14, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malawi.1


Malawi is at a critical juncture following its progress on macroeconomic stability, attainment of the Heavily Indebted Poor Countries (HIPC) completion point in August 2006, and the recent launch of the Malawi Growth and Development Strategy, which outlines an ambitious agenda of structural reform to enhance growth and reduce poverty.

The Article IV discussions focused on the three key challenges facing Malawi over the medium term, which frame macroeconomic policy over the near term. The three challenges that need to be addressed include raising growth rates, improving economic management capacity, and managing a possible scaling up of external aid. Malawi also needs a large increase in external private capital and aid flows to finance its medium-term development goals.

Malawi's macroeconomic performance has improved for the past two years. This follows a prolonged period of weak policy implementation, aggravated by drought and deteriorating terms of trade that resulted in anemic growth, a domestic debt spiral, accelerating inflation, and dwindling external reserves. Over the previous five years, Malawi experienced per capita output growth that was on average negative. By the end of the fiscal year 2003/04, domestic debt had reached almost 25 percent of GDP and domestic interest costs consumed almost a quarter of the budget. Official external reserves had fallen below one month of imports.

In 2005/06, Malawi continued to make progress in stabilizing the macroeconomic environment and economic policy implementation was broadly satisfactory. Real GDP growth reached 5.3 percent, while overall inflation was around 15 percent. Overall fiscal performance was satisfactory given the food crisis. Domestic borrowing was larger than programmed, largely because of unanticipated food security spending and accelerated repayments of domestic arrears, but domestic debt still fell below 20 percent of GDP. The Reserve Bank of Malawi pegged the exchange rate through the second half of 2005, resulting in a shortage of external reserves and unpaid private external arrears, but instituted a more flexible exchange rate policy in January 2006. The resulting depreciation helped clear the private external arrears by the end of July, despite weak foreign exchange inflows following the May disruptions to the tobacco auctions. Following the February reduction in the liquidity reserve ratio, the authorities tightened reserve money growth to reduce excess liquidity and contain inflationary risks. The mop-up, however, was incomplete, and the fiscal year ended with a modest monetary overhang-though broad money stayed on target. As intended, lowering the reserve ratio eased financial intermediation costs, raising deposit rates and reducing interest rate spreads.

The government's keyeconomic objectives for 2006/07 are largely the same as those presented in the budget. A bumper harvest will support a rebound in real GDP growth to 7 percent, prospects for inflation falling below 10 percent remain positive, and official external reserves are expected to rise to 1.7 months of imports. Macroeconomic performance in the first fiscal quarter of 2006/07 was broadly satisfactory, though a delay in donor budget support put the monetary program under pressure. The government has adjusted its fiscal program for 2006/07. IMF debt relief under the Multilateral Debt Relief Initiative will now be used to reduce domestic debt this year, though this should not affect planned expenditures substantially. The government has increased planned expenditures on maize purchases, wages and development projects, because of an increase in projected tax revenues and budget support.

The key medium-term macroeconomic objective is to consolidate macroeconomic stability-reducing domestic debt and inflation-to lay the foundation for higher growth and poverty reduction. The outlook assumes that the economy becomes less prone to external shocks and that the costs of doing business decline. It is cautiously based on current information concerning aid commitments. Output growth could be high because of the scope for catch-up from recent years and prospects of increased investment. Further reduction of domestic debt to below 10 percent of GDP is the key fiscal objective, as this would free resources for the private sector. Higher aid flows and lower domestic interest costs would also allow higher priority spending.

Executive Board Assessment

Executive Directors welcomed Malawi's satisfactory macroeconomic performance under its Poverty Reduction and Growth Facility-supported program, notwithstanding the pressures arising from the food crisis of 2005/06, which was eased by additional spending on food security. The economic prospects for 2006/07 are favorable, and the recent bumper harvest should support a rebound in growth and a reduction in inflation. Nevertheless, Malawi's economy remains vulnerable to weather-related shocks, dependence on external budget support, and volatile world oil prices. Directors encouraged the authorities to maintain fiscal discipline and strengthen the level of external reserves to provide a cushion against shocks, while protecting pro-poor spending.

Directors considered that the delivery of debt relief and the launch of the Malawi Growth and Development Strategy (MGDS) position Malawi well to make faster progress toward macroeconomic stability and poverty reduction. At the same time, rising expectations of spending on infrastructure and social priorities stemming from the granting of debt relief need to be contained, and measures taken to ensure that all public spending is efficient and effective. In that connection, Directors urged the authorities to complete the public expenditure review being undertaken with the World Bank, and incorporate the findings of annual performance reviews of the MGDS into the budget. They also called for a reduction in the domestic debt burden, which will help promote long-term fiscal sustainability, lower interest costs to the budget, and make room for larger poverty-reducing, health care, and education spending.

Directors observed that higher aid and private capital flows will be critical to meeting Malawi's development objectives, but that absorbing these flows while maintaining prudent monetary and fiscal policies will be a challenge. Against that background, an appropriate balance needs to be struck between using these resources immediately and setting some aside as reserves until they can be used efficiently. Directors welcomed the authorities' commitment to improving governance and economic management capacity, especially public financial management.

Directors welcomed the improvement in the management of the exchange rate system, and the authorities' commitment to a flexible exchange rate regime. The current level of the real exchange rate appears to be broadly appropriate.

Directors welcomed the authorities' intention to strengthen financial intermediation, which is a prerequisite for private sector growth. Improving the regulatory framework, better protecting creditor rights, and encouraging greater competition in the financial sector should be important elements of the authorities' strategy in this regard. Directors looked forward to the recommendations of the Financial Sector Assessment Program to be completed later in the year.

Directors supported the authorities' medium-term emphasis on improving Malawi's growth potential while maintaining macroeconomic stability. At the same time, an ambitious agenda of structural reforms needs to be implemented rapidly if serious inroads are to be made in reducing poverty. In this vein, the cost of doing business needs to be lowered, access to credit enhanced, and the delivery of public services improved.

Malawi: Selected Economic Indicators, 2004-06


2004 2005 2006
Act. Act. Est.

National income and prices

GDP at constant market prices

5.1 2.1 8.5

Nominal GDP (billions of kwacha)

207.2 245.7 305.1

Nominal GDP per capita (U.S. dollars)

150.9 161.4 170.7

GDP deflator

12.5 15.4 14.4

Consumer prices (end of period)

13.7 16.5 9.9


14.1 17.2 10.0


13.3 15.8 9.7

Consumer prices (annual average)

11.4 15.5 14.0

Investment and savings (percent of GDP)

National savings

4.5 -3.1 7.6

Of which: domestic savings

-10.6 -23.9 -13.1

unrequited transfers

17.3 22.8 22.4

Gross investment

14.4 13.0 14.6

Foreign savings

9.9 16.1 7.0

Central government (percent of GDP)

Revenue (excluding grants)

23.2 25.5 24.3

Expenditure and net lending

44.0 43.1 43.6

Underlying balance 1/

0.8 -0.7 0.9

Overall balance (excluding grants)

-20.8 -17.6 -19.3

Overall balance

-6.6 -1.5 -3.4

Money and credit (change in percent of

beginning-of-year M2)

Money and quasi money

29.8 14.3 22.0

Net foreign assets

6.0 5.1 24.4

Net domestic assets

23.8 9.2 -2.4

Credit to the government

10.3 2.1 -2.1

Credit to the rest of the economy

11.3 5.6 7.7


4.5 4.7 4.8

External sector (millions of U.S. dollars)

Exports, f.o.b.

501.5 507.4 466.5

Imports, c.i.f.

810.2 -1,069.6 -889.3

Usable gross official reserves

119.3 131.2 143.4

(months of imports)

1.1 1.4 1.6

Current account (excluding transfers)

-27.3 -38.9 -29.4

Nominal effective exchange rate

-4.3 -11.4 ...

Real effective exchange rate

5.5 0.1 ...

Terms of trade

-2.5 -10.2 -1.2

Debt stock and service (percent of GDP)

External debt (public sector)

155.3 143.0 50.6

NPV of debt (percent of avg. exports)

257.7 361.0 33.6

External debt service (percent of exports)

21.6 22.1 30.7

Net domestic debt (central government)

22.6 21.9 17.4

Domestic interest payment

8.4 6.3 4.9

Treasury bill rate (period average)

28.6 24.39 ...

Sources: Malawian authorities; and IMF staff estimates and projections.

1/ A measure of domestic adjustment effort (i.e., domestic primary balance excluding maize and the Health SWAp). Definition: Overall balance plus statistical discrepancy, excluding grants, revenue and expenditure from maize, interest, foreign-financed development expenditures, and the Health SWAp

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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