IMF Executive Board Concludes 2009 Article IV Consultation with Malawi

Public Information Notice (PIN) No. 10/38
March 16, 2010

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.

On February 19, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malawi.1


Malawi stands at a critical juncture following its recent progress on macroeconomic stability. The 2009 Article IV consultation discussions and Extended Credit Facility program negotiations focused on the design of a medium-term program to restore Malawi’s external equilibrium while sustaining a high rate of growth and poverty reduction, in line with Malawi’s poverty reduction and growth strategy.

Malawi’s macroeconomic performance has improved significantly over the past two years and the country’s agricultural-based economy has weathered the global economic storm relatively well. Good weather and the distribution of subsidized fertilizer have contributed to robust growth and moderate inflation in recent years. After reaching 9.8 percent in

2008, real GDP growth is estimated at 7.6 percent in 2009 buoyed by an increase in agricultural production and the expansion of the service sector. Inflation has remained moderate. After rising in late 2008, in response to food and fuel price shocks, consumer price inflation decreased steadily to 7.5 percent in the 12 months to October 2009.

Fiscal policy loosened significantly in the run-up to the 2009 presidential and parliamentary elections. Sizeable budget overruns on fertilizer and goods and services spending during fiscal year 2008/09, combined with a modest shortfall in foreign financing, led to a high level of domestic borrowing and meant that the central government deficit was well above the budget. The fiscal year 2009/10 budget is a return to a prudent fiscal stance and the preliminary results on the execution through the first half of the fiscal year to December 2009 are in line with the budget, adjusted for delays in donor support.

A weak balance of payments threatens exchange rate and price stability and medium-term growth. The de facto pegging of the Malawi kwacha to the U.S. dollar from 2006 to late 2009 contributed to the moderation of inflation. However, persistent inflation differentials with trade partners and the de facto peg led to some appreciation of Malawi’s real effective exchange rate in recent years. The combination of rapid growth of domestic incomes in the non-tradable sectors and the exchange rate appreciation have led to an imbalance between the growth of imports and exports and widened the deficits in the external current account and balance of payments.

Malawi’s medium-term outlook is favorable, within the context of successful implementation of the ECF-supported program (see Press Release No. 10/52). Growth is expected to remain buoyant, but moderate somewhat relative to the high growth of the recent past. Over the medium term, growth is expected to be supported by the expansion of productive capacity at the Kayelekera uranium mine and the exploitation of niobium (a niche mineral for steelmaking), as well as the development of the sugar sector. Inflation is expected to remain moderate. Although the depreciation of the exchange rate could exert pressure on prices, the solid maize harvest, stable fuel prices, and restrained fiscal and monetary policies should contain inflationary pressures. International reserves should rise as a result of a substantial expected inflow of donor assistance; seasonal inflows, once the new harvest season begins; and a reduction of import growth followed by some greater export growth, as exchange rate adjustments and liberalization of the foreign exchange market bring about a market-based price that can be supported without foreign exchange rationing.

There are several key downside risks to the economic outlook including foreign exchange shortages, uncertainties in the external environment, and changes in the international environment for tobacco consumption. Delays in relieving the foreign exchange shortage could threaten growth, fiscal revenues and investor confidence. A slower global recovery could dampen export demand, investor interest, remittances, and access to foreign capital, and thereby impair growth and the balance of payments. The medium-term prospects for burley tobacco, the largest export commodity, are uncertain.

Executive Board Assessment

Executive Directors observed that the Malawian economy has proven resilient during the global economic crisis by sustaining high growth and moderate inflation. The financial sector remains well-capitalized and sound; Malawi’s food security was enhanced through increased agricultural output; and progress was made towards the achievement of the Millennium Development Goals. At the same time, Directors noted that Malawi’s external position remains weak and that official reserves have fallen to well below prudential levels, and they regretted last year’s policy slippages. Directors therefore called on the authorities to seize the opportunity of their renewed program engagement with the Fund to restore internal and external equilibrium and address key structural constraints, while supporting strong growth and poverty reduction.

Directors welcomed the adoption of a more prudent fiscal stance in the 2009/10 budget following last year’s slippages, which partly reflected the impact of high fertilizer prices. They stressed the importance of adhering to the deficit target by containing nonpriority spending. Directors supported the steps to minimize the budgetary impact of deficits in key parastatals by announcing tariff adjustments to enhance cost recovery, and beginning to devise a plan for dealing with Air Malawi’s debt. They also welcomed the more transparent accounting of the fertilizer subsidy program, recent improvements in fiscal accounting and reporting, and measures to ensure that budgetary targets on priority social spending are met. Directors encouraged the authorities to make the Public Financial and Economic Management unit in the Ministry of Finance fully operational, and looked forward to further steps to strengthen public spending management and develop a strong debt management policy. They supported the ongoing efforts to improve tax administration and broaden the tax base.

Directors welcomed the tightening of monetary policy and encouraged the Malawian authorities to control the growth of monetary aggregates by ensuring fiscal discipline and prudent credit expansion. They encouraged the development of financial markets over the medium term, which would allow greater reliance on interest rate adjustments to help control inflation.

Directors endorsed the authorities’ objectives to build international reserves, achieve a properly valued exchange rate, and liberalize the foreign exchange market. They saw the reversion of the foreign exchange surrender requirement and the gradual depreciation of the nominal exchange rate as encouraging steps, and looked forward to Malawi’s full adherence to Article VIII obligations by end-2011. Directors welcomed the authorities’ commitment to undertake further policy adjustments, including of the exchange rate, should continued evidence emerge of excess demand for foreign exchange. They noted the importance of exchange rate flexibility to avoid an overly contractionary fiscal and monetary stance.

Directors commended the authorities for recent progress in strengthening financial regulation and supervision. They welcomed the recent passage of the amendments to the Banking and Insurance Acts. Directors looked forward to cabinet approval and implementation of the Financial Sector Development Strategy, designed to enhance financial inclusiveness, deepening, and competitiveness.

Directors encouraged the authorities to create an enabling environment for private investment and growth by developing a comprehensive strategy for reforming the utility companies and expanding access to utility services. They also advised the adoption of market-friendly agricultural sector policies. Close cooperation with Malawi’s development partners will be important to help build capacity in these areas.

Malawi: Selected Economic Indicators, 2007–111

  2007   2008   2009   2010 2011
Act.   Act.   Prel.   Proj. Proj.

National accounts and prices (percent change, unless otherwise indicated)

GDP at constant market prices

8.6   9.8   7.6   6.0 6.3

Consumer prices (end of period)

7.5   9.9   7.7   9.2 8.5

Consumer prices (annual average)

7.9   8.7   8.5   10.1 8.3

Central government (percent of GDP)

  • Revenue and grants

31.6   31.2   30.1   35.2 32.2
  • Tax and non tax revenue

18.7   19.9   21.4   22.6 22.8
  • Grants

12.9   11.3   8.8   12.7 9.4
  • Expenditure and net lending

36.0   36.2   36.1   36.0 33.9
  • Overall balance (excluding grants)

-17.2   -16.5   -14.6   -13.5 -11.2
  • Overall balance

-4.3   -5.0   -5.8   -0.8 -1.8

Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)

Money and quasi money

36.9   33.1   19.4   16.7 13.9

Net foreign assets 2

41.9   -10.1   -18.4   13.6 10.4

Credit to the rest of the economy (percent change)

32.8   45.5   27.9   28.4 19.4

External sector (US$ millions, unless otherwise indicated)


Exports, f.o.b.

731.7   969.2   1,004.8   1,119.9 1,229.7

Imports, c.i.f.

-1,182.3   -1,722.8   -1,809.6   -1,739.8 -1,843.0

Usable gross official reserves 2

217.1   239.0   114.0   276.9 407.3

(months of imports)

1.2   1.3   0.6   1.4 2.1

(percent of reserve money)

    93.2   35.0   81.3 126.6

Current account (percent of GDP)

-1.5   -6.4   -8.6   -1.8 -2.2

Current account, excl. official transfers (percent of GDP)

-15.5   -21.8   -21.9   -18.7 -15.9

Nominal effective exchange rate (percent change)

-8.8   20.2   ...   ... ...

Real effective exchange rate (percent change)

-7.8   24.9   ...   ... ...

Overall balance (percent of GDP)

0.5   -1.0   -1.8   4.4 3.6

Terms of trade (percent change)

-1.7   5.9   13.7   -3.1 -2.9

Debt stock and service (percent of GDP, unless otherwise indicated)

External debt (public sector)

14.4   16.0   19.1   21.8 23.3

NPV of debt (percent of avg. exports)

0.0   42.1   64.3   62.1 65.4

NPV of debt (percent of avg. exports)

41.9   51.5   58.7   66.4 72.3

External debt service (percent of exports)

3.2   6.7   1.3   1.8 2.2

Net domestic debt (central government)

11.8   19.0   20.3   14.0 11.0

Treasury bill rate (period average)3

13.9   10.9   11.9   ... ...

Sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates and projections.


1 The ECF scenario assumes an initial depreciation and that the real exchange rate is kept constant during the

program period. Correcting the underlying exchange rate misalignment is a key element of the macroeconomic framework.

2 Programmed usable reserves in 2009 excludes the SDR allocation, while the projection includes the SDR allocation.

3 Average t-bill rate. Data for 2009 are shown as of November 30th.

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. An explanation of any qualifiers used in summings up can be found here:


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