IMF Executive Board Approves Three-Year US$79.4 Million Extended Credit Facility Arrangement for Malawi

Press Release No. 10/52
February 19, 2010

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 52.05 million (about US$79.4 million) arrangement for Malawi under the Extended Credit Facility (ECF) 1 to support the authorities’ economic program for the period 2010-2012.

A one-year Exogenous Shocks Facility (ESF) arrangement also for SDR 52.05 million (see Press Release) expired on December 2, 2009. The ESF arrangement was preceded by an arrangement under the Poverty Reduction and Growth Facility (PRGF) that was completed on August 4, 2008. Malawi reached the completion point for the enhanced Heavily Indebted Poor Countries (HIPC) Initiative on August 31, 2006.

The ECF arrangement approved today represents 75 percent of Malawi’s SDR 69.4 million quota in the Fund, of which the country became a member in July 1965.

Following the Executive Board’s discussion of the request by Malawi, Mr Takatoshi Kato, Deputy Managing Director and Acting Chair, made the following statement:

“Malawi’s economic program, supported by the Extended Credit Facility, aims to support Malawi’s Growth and Development Strategy by restoring internal and external equilibrium and addressing key structural constraints. The authorities have adopted a prudent fiscal stance in the 2009/10 budget by reigning in discretionary spending on goods and services while safeguarding priority social spending, and shoring up revenues. The budgetary impact of deficits in key parastatals will be limited by allowing for greater cost recovery and initiating a medium-term plan for restructuring Air Malawi’s debts. Progress is also made toward a more transparent accounting of the fertilizer subsidy program and enhanced fiscal accounting and reporting.

“The Malawian authorities have tightened monetary policy and intend to control the growth of monetary aggregates by ensuring fiscal discipline and prudent credit growth. The development of financial markets over the medium term would allow greater reliance on interest rate adjustments to help control inflation.

“The program is designed to build reserves and achieve a properly valued exchange rate to support growth and stability. The adoption of a flexible exchange rate and the steps taken to liberalize the foreign exchange market are welcome. The authorities have committed to undertake further policy adjustments, including of the exchange rate, if evidence emerges of continued excess demand for foreign exchange. Continued exchange rate flexibility will help to avoid an overly contractionary fiscal and monetary stance.

“Malawi’s structural reform agenda aims at strengthening the Public Financial and Economic Management unit in the Ministry of Finance, and enhancing the social safety net program through improved targeting of households and a possible expansion of the donor-financed pilot transfer program. Tax administration will be further strengthened and the tax base broadened to allow the value-added tax rate to be reduced to regional norms.

“The authorities intend to continue their efforts 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; strengthening the regulatory environment; and adopting market-friendly agricultural sector policies.”

Recent Economic Developments

Malawi’s agricultural-based economy has weathered the global economic storm well. Record agricultural harvests in recent years led to economic growth of 9.8 percent in 2008 and an estimated 7.6 percent in 2009. Inflation has remained moderate. The financial sector was only modestly affected by the global turmoil and remains well-capitalized and profitable.

A loosening of fiscal and monetary policies during the run-up to elections in May 2009 led to high government domestic borrowing in fiscal year 2008/09 (ending in June 2009), and rapid money and credit growth. This easing contributed to low international reserves. The end-June 2009 ESF program targets for net domestic repayment of the central government, and net domestic assets and net international reserves of the RBM were missed by wide margins. The fiscal year 2009/10 budget reflects a prudent fiscal stance, targeting a repayment of net domestic borrowing in line with the medium-term objectives to maintain a low deficit and create room for private sector credit.

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 helped to moderate inflation. But persistent inflation differentials with trade partners and the peg led to some appreciation of Malawi’s real effective exchange rate. Rapid growth of domestic incomes and exchange rate appreciation have led to an imbalance between the growth of imports and exports and widened external current account and balance of payments deficits.

The authorities have recently adopted a number of measures to address the external imbalance, including initial steps at market liberalization, gradual depreciation of the exchange rate, and strengthened budgetary spending controls. However, continued policy adjustment and external support are critical.

Program Summary

The authorities’ ECF-supported economic program aims to:

Restore external equilibrium by liberalizing the foreign exchange regime for current account transactions to allow a market-clearing exchange rate to emerge and to eliminate measures inconsistent with the IMF’s Articles of Agreement by end-2011; and by attaining international reserve coverage of a minimum of three months of imports to buffer against external shocks by end-2012.

Maintain internal equilibrium by pursuing prudent fiscal and monetary policies, as reflected in the fiscal year 2009/10 budget and through restrained monetary aggregate growth, to contain aggregate demand and inflation pressures and shift demand toward domestic output.

Sustain poverty reduction efforts by creating room in the budget for more social and pro-poor spending and improving the structure of the social safety net to protect poor households from shocks and policy adjustments, including exchange rate depreciation.

Build competitiveness by improving public financial management, tax administration, and the efficiency and solvency of public utilities, and by enhancing the business climate by expanding the capacity and quality of infrastructure, promoting investor access to finance, and reforming legal and regulatory frameworks governing financial supervision and the operation of other key economic activities.

The program also encompasses structural measures to underpin macroeconomic objectives and sustain high growth. The authorities have provided, as a prior action of the ECF-supported program, a transparent accounting of the execution of the fertilizer subsidy program in the fiscal year 2008/09 budget and of the budgeted figures in fiscal year 2009/10. The authorities committed to undertake further structural measures in three areas during the first year of the program:

(i) improving public financial management by making fully operational the PFEM unit;

(ii) developing a time-bound plan to restart and liberalize the interbank foreign exchange market; and

(iii) continuing with implementation of financial sector reforms, and improving monetary and exchange rate policy transparency. Over the final two years of the program, they intend to continue improving transparency and solvency of the public utilities.

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 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the Fund’s main tool for medium-term financial support to low-income countries by providing a higher level of access to financing, more concessional terms, enhanced flexibility in program design features, and more focused streamlined conditionality. Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years.


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