IMF Executive Board Completes First Review of Malawi's Three-Year PRGF Arrangement and Approves US$7.1 Million Disbursement

Press Release No. 06/38
February 24, 2006

The Executive Board of the International Monetary Fund (IMF) completed today the first review of Malawi's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. This enables Malawi to draw an amount equivalent to SDR 4.9 million (about US$7.1 million).

The Executive Board approved the three-year arrangement on August 5, 2005 (see Press Release No. 05/188), for a total amount of SDR 38.2 million (about US$54.9 million) to support the government's economic program for 2005-2007.

In commenting on the Executive Board's discussion on Malawi, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Malawian authorities are to be commended for the satisfactory performance under the PRGF-supported program against the backdrop of a severe food crisis. This builds on the success of the staff-monitored program and represents a welcome break from previous episodes of recurrent fiscal slippages. Performance in some areas had, however, remained uneven. In particular, the overvaluation of the exchange rate had put pressure on external reserves and had led to a persistent backlog of unpaid import invoices. In this respect, the Fund welcomes the more flexible exchange rate policy implemented recently by the authorities, as well as their commitment to avoid an overvaluation of the currency, phase out informal administrative restrictions and eliminate delays in import payments. The authorities' commitment to sustain a tighter domestic policy stance will also be of critical importance.

"The authorities' program is based on realistic fiscal objectives and they are to be commended for observing the budget limits and improving public expenditure management. In light of the food crisis, the emphasis in the budget on food security in the near term is appropriate, and the government's efforts, in cooperation with donors, to contain the food emergency deserves to be supported. Going forward, it will remain important to manage near-term risks to the budget carefully.

"Malawi could reach the completion point under the HIPC Initiative in mid-2006 provided further progress is made towards implementing the remaining triggers and the authorities remain committed to maintaining a more flexible exchange rate system free from administrative restrictions. A final assessment of progress towards completing key social sector triggers will also be critical. Reaching the HIPC completion point would immediately allow Malawi to qualify for further debt relief under the Multilateral Debt Relief Initiative," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.



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