Frequently Asked Questions on Malawi 2025 Article IV

Malawi has been facing economic challenges for a long time, including external shocks, structurally low growth, persistent inflation, unsustainable fiscal and debt dynamics. The country's economy has grown only modestly and the average person’s income has seen little improvement. Each year, the government has been spending more than it collects from taxes and international aid, leading to a growing budget deficit and rising public debt. On top of these challenges, Malawi is also vulnerable to natural disasters and has difficulty accessing funds from abroad.

Inflation, which is the rate at which prices for goods and services rise, reached 30.7 percent in early 2024, mainly due to high food prices and pressures on the exchange rate. The country's foreign reserves, which are funds held in foreign currencies, fell to very low levels, and public debt reached 88 percent of the country's total economic output in end-2024. These issues have been worsened by drought and a decrease in Official Development Assistance.

Assuming the continuation of current policies, budget financing challenges and foreign exchange shortages will impact growth prospects. Economic growth is projected to rise modestly to 3.4 percent by 2029, while inflation is likely to remain high at around 15 percent. The current account deficit, which is the difference between the value of goods and services a country imports and exports, is expected to decrease mainly because the country will be able to afford fewer imports. Public debt will continue to rise.

A more positive path is possible. This would involve the government raising more revenue and tightening its belt, the central bank making it harder to borrow to fight inflation, allowing the currency’s value to reflect the realities of the economy, and implementing structural reforms. These steps could lead to better outcomes such as higher growth, lower inflation and a healthier external balance.

The IMF’s latest report for Malawi emphasizes a simple but crucial principle: the need to live within its means. Why is this so vital? First, because spending more than a country raises in revenue leads to borrowing and potentially to debt distress if the borrowing is expensive and unsustainable. This is where Malawi finds itself today, with public debt at roughly the same level that it was before receiving a major debt-relief in 2006. While external grant could theoretically cover these gaps, it is not the case in Malawi now and is unlikely to be the case in the future. Second, the more the government borrows domestically the more it floods the economy with kwachas. With more kwachas and fewer foreign currencies, this creates immense pressure on the exchange rate, leading to distortions and creating a thriving illegal market if the exchange rate cannot adjust. This harms legitimate businesses and makes imports more expensive.

To correct these imbalances, IMF advice is to focus on expanding the tax base by reducing exemptions, improving tax administration, and enhancing expenditure efficiency while safeguarding priority social spending. The goal is not just to raise more money, but also to share the financial burden as fairly as possible among the population. Building trust in these efforts requires strengthening how public money is managed and having a clear medium-term plan for managing public finances. Improvements in how the government spends on goods and services, oversees public companies, and reports on its spending would complement these efforts. Continuing the current level of spending, without raising more revenue, can lead to a rising interest bill, which is what Malawi is experiencing now. This interest spending does not benefit the poorest. Hence, to make the national debt manageable again, Malawi needs to make progress on restructuring its commercial loans from abroad and find ways to reduce the high interest rates it pays on its domestic borrowings.

The IMF’s policy advice is not about letting the currency lose its value in an uncontrolled way. It's about moving towards a unified, market-clearing exchange rate in the context of a broader and coordinated package of reforms. A broadly unified rate encourages foreign exchange to flow through official channels, making it more accessible for legitimate trade and investment, and simultaneously curbing the distortions and corruption fostered by the illegal market. Without these supporting reforms, however, the IMF recognizes that a currency devaluation can lead to higher inflation, currency speculation, and possibly lower growth—particularly in import-dependent, undiversified economies like Malawi.

This exchange rate reform needs to work in tandem with fiscal discipline, where the government collects taxes better and spends more efficiently to reduce inflationary pressures, and manages its debt better to reduce reliance on borrowing. It also requires structural reforms to diversify exports, improve the business environment for investment, and boost overall productivity. Finally, social safety nets are crucial to cushioning the short-term impact of these adjustments on vulnerable populations. The IMF believes this comprehensive approach will create the stable foundation needed for the success of Malawi’s Agriculture, Tourism, Mining and Manufacturing (ATMM) strategy.

It can feel counterintuitive to recommend higher interest rates when an economy is struggling, as this can make borrowing more expensive for both individuals and the government. However, the primary reason the IMF pushes for this is to combat extremely high and persistent inflation.

Inflation acts like a hidden tax by reducing the value of money and hits the poorest the hardest, as they spend a larger proportion of their income on essential goods. The soaring cost of living erodes confidence, discourages long-term investment, and ultimately causes more harm to sustainable growth than the temporary pain of higher rates.

By making it more expensive to borrow, higher interest rates aim to reduce the amount of money circulating and chasing too few goods. This can ease pressure on prices and encourage savings and investment. While this might slow growth in the short term and increase the government’s interest burden, the IMF's view is that controlling inflation is a critical first step. This difficult but necessary policy measure, coupled with fiscal discipline and structural reforms, is a critical step to stabilize the economy and lay the groundwork for future, healthier growth.