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

IMF News, February 19, 2010

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

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Bibliographic details

• Published: February 19, 2010

Approval and program basics

• Executive Board approved a three-year, SDR 52.05 million (about US$79.4 million) arrangement for Malawi under the Extended Credit Facility (ECF) to support the authorities’ economic program for the period 2010-2012.
• The ECF arrangement represents 75 percent of Malawi’s SDR 69.4 million quota in the Fund.
• A one-year Exogenous Shocks Facility (ESF) arrangement for SDR 52.05 million expired on December 2, 2009; prior PRGF arrangement was completed on August 4, 2008.
• Malawi reached the completion point for the enhanced Heavily Indebted Poor Countries (HIPC) Initiative on August 31, 2006.

Executive Board statement — policy orientation

• Program aims to support Malawi’s Growth and Development Strategy by restoring internal and external equilibrium and addressing key structural constraints.
• Fiscal policy: authorities 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.
• Parastatals: limit budgetary impact of deficits by allowing for greater cost recovery and initiating a medium-term plan for restructuring Air Malawi’s debts.
• Fertilizer subsidy: progress toward more transparent accounting of the fertilizer subsidy program and enhanced fiscal accounting and reporting.
• Monetary policy: tightened monetary policy; intend to control growth of monetary aggregates by ensuring fiscal discipline and prudent credit growth.
• Exchange rate and reserves: program designed to build reserves and achieve a properly valued exchange rate; adoption of a flexible exchange rate and steps to liberalize the foreign exchange market are welcomed.
• Structural agenda: strengthen the Public Financial and Economic Management unit in the Ministry of Finance; enhance social safety net targeting and consider expansion of donor-financed pilot transfer program; strengthen tax administration and broaden tax base to allow value-added tax rate reduction to regional norms.
• Private sector and utilities: create enabling environment for private investment by reforming utility companies, expanding access to utility services, strengthening regulatory environment, expanding infrastructure capacity and quality, promoting investor access to finance, and reforming legal and regulatory frameworks.

Recent economic developments (summary)

• Growth: record agricultural harvests supported economic growth of 9.8 percent in 2008 and an estimated 7.6 percent in 2009.
• Inflation: inflation has remained moderate.
• Financial sector: only modestly affected by global turmoil; remains well-capitalized and profitable.
• Policy loosening in run-up to May 2009 elections led to high government domestic borrowing in fiscal year 2008/09, rapid money and credit growth, and low international reserves; end-June 2009 ESF program targets were missed by wide margins.
• Balance of payments: weak balance of payments threatens exchange rate and price stability and medium-term growth; de facto pegging to the U.S. dollar from 2006 to late 2009 moderated inflation but contributed to real effective exchange rate appreciation and external imbalances.
• Recent measures: initial steps at market liberalization, gradual depreciation of the exchange rate, and strengthened budgetary spending controls; continued policy adjustment and external support remain critical.

Program objectives and structural measures

• Restore external equilibrium:
  • Liberalize the foreign exchange regime for current account transactions to allow a market-clearing exchange rate to emerge and eliminate measures inconsistent with the IMF’s Articles of Agreement by end-2011.
  • Attain international reserve coverage of a minimum of three months of imports by end-2012.
• Maintain internal equilibrium:
  • Pursue 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:
  • Create budget room for more social and pro-poor spending and improve structure of social safety net to protect poor households from shocks and policy adjustments, including exchange rate depreciation.
• Build competitiveness:
  • Improve public financial management, tax administration, efficiency and solvency of public utilities, enhance business climate, expand infrastructure capacity and quality, promote investor access to finance, and reform legal and regulatory frameworks.
• Prior actions and first-year commitments:
  • Prior action: 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.
  • First-year commitments:

(i) make fully operational the PFEM unit; (ii) develop a time-bound plan to restart and liberalize the interbank foreign exchange market; (iii) continue implementation of financial sector reforms and improve monetary and exchange rate policy transparency.

• Over the final two years: continue improving transparency and solvency of public utilities.

Key statistics (Malawi: Selected Economic Indicators, 2007–11)

• GDP at constant market prices (percent change): 2007: 8.6; 2008: 9.8; 2009: 7.6; 2010 (Proj.): 6.0; 2011 (Proj.): 6.3
• Consumer prices (end of period): 2007: 7.5; 2008: 9.9; 2009: 7.7; 2010 (Proj.): 9.2; 2011 (Proj.): 8.5
• Consumer prices (annual average): 2007: 7.9; 2008: 8.7; 2009: 10.1; 2010 (Proj.): 8.3
• Central government (percent of GDP)
  • Revenue and grants: 2007: 31.6; 2008: 31.2; 2009: 30.1; 2010 (Proj.): 35.2; 2011 (Proj.): 32.2
  • Tax and non tax revenue: 2007: 18.7; 2008: 19.9; 2009: 21.4; 2010 (Proj.): 22.6; 2011 (Proj.): 22.8
  • Grants: 2007: 12.9; 2008: 11.3; 2009: 8.8; 2010 (Proj.): 12.7; 2011 (Proj.): 9.4
  • Expenditure and net lending: 2007: 36.0; 2008: 36.2; 2009: 36.1; 2010 (Proj.): 33.9
  • Overall balance (excluding grants): 2007: -17.2; 2008: -16.5; 2009: -14.6; 2010 (Proj.): -13.5; 2011 (Proj.): -11.2
  • Overall balance: 2007: -4.3; 2008: -5.0; 2009: -5.8; 2010 (Proj.): -0.8; 2011 (Proj.): -1.8
• Money and credit (change in percent of broad money at the beginning of the period)
  • Money and quasi money: 2007: 36.9; 2008: 33.1; 2009: 19.4; 2010 (Proj.): 16.7; 2011 (Proj.): 13.9
  • Net foreign assets 2: 2007: 41.9; 2008: -10.1; 2009: -18.4; 2010 (Proj.): 13.6; 2011 (Proj.): 10.4
  • Credit to the rest of the economy (percent change): 2007: 32.8; 2008: 45.5; 2009: 27.9; 2010 (Proj.): 28.4
• External sector (US$ millions)
  • Exports, f.o.b.: 2007: 731.7; 2008: 969.2; 2009: 1,004.8; 2010 (Proj.): 1,119.9; 2011 (Proj.): 1,229.7
  • Imports, c.i.f.: 2007: -1,182.3; 2008: -1,722.8; 2009: -1,809.6; 2010 (Proj.): -1,739.8; 2011 (Proj.): -1,843.0
  • Usable gross official reserves 2: 2007: 217.1; 2008: 239.0; 2009: 114.0; 2010 (Proj.): 276.9; 2011 (Proj.): 407.3
  • (months of imports): 2007: 1.2; 2008: 1.3; 2009: 0.6; 2010 (Proj.): 1.4; 2011 (Proj.): 2.1
  • (percent of reserve money): 2007: 93.2; 2008: 35.0; 2009: 81.3; 2010 (Proj.): 126.6; 2011 (Proj.): —
• Current account (percent of GDP): 2007: -1.5; 2008: -6.4; 2009: -8.6; 2010 (Proj.): -2.2
• Current account, excl. official transfers (percent of GDP): 2007: -15.5; 2008: -21.8; 2009: -21.9; 2010 (Proj.): -18.7; 2011 (Proj.): -15.9
• Nominal effective exchange rate (percent change): 2007: -8.8; 2008: 20.2; 2009: ...
• Real effective exchange rate (percent change): 2007: -7.8; 2008: 24.9; 2009: ...
• Overall balance (percent of GDP): 2007: 0.5; 2008: -1.0; 2009: 4.4; 2010 (Proj.): 3.6
• Terms of trade (percent change): 2007: -1.7; 2008: 5.9; 2009: 13.7; 2010 (Proj.): -3.1; 2011 (Proj.): -2.9
• Debt stock and service (percent of GDP, unless otherwise indicated)
  • External debt (public sector): 2007: 14.4; 2008: 16.0; 2009: 19.1; 2010 (Proj.): 21.8; 2011 (Proj.): 23.3
  • NPV of debt (percent of avg. exports): 2007: 0.0; 2008: 42.1; 2009: 64.3; 2010 (Proj.): 62.1; 2011 (Proj.): 65.4
  • (additional series): 51.5; 58.7; 66.4; 72.3
  • External debt service (percent of exports): 2007: 3.2; 2008: 6.7; 2009: 1.8; 2010 (Proj.): 2.2
  • Net domestic debt (central government): 2007: 11.8; 2008: 19.0; 2009: 20.3; 2010 (Proj.): 14.0; 2011 (Proj.): 11.0
  • Treasury bill rate (period average)3: 2007: 10.9; 2008: 11.9
• Notes:
  • 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.

Press Release No. 10/52 — February 19, 2010; sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates and projections.

References

• Malawi and the IMF
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home