IMF Executive Board Concludes 2018 Article IV Consultation with Malawi
May 4, 2018
On April 30, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malawi. [1] At the same time, the Board also approved a new three-year Extended Credit Facility Arrangement for Malawi and a press release on this was issued separately.
The economy recently rebounded from two years of drought. Growth picked up from 2.3 percent in 2016 to an estimated 4.0 percent in 2017 owing to a recovery in agricultural production. Inflation has been reduced below 10 percent—from high double digits in recent years—due to the stabilization of food prices, prudent fiscal and monetary policies, and a stable exchange rate. The current account deficit narrowed to 10.0 percent of GDP in 2017 from 13.6 percent in 2016, following lower maize imports and higher prices for some exports. The banking system remains stable though vulnerabilities have somewhat increased.
While the authorities regained control over the budget during FY16/17, this proved challenging during FY17/18. Revenue shortfalls and expenditure overruns, including the bailout of maize purchase loans by a parastatal exerted significant pressures on the budget. The authorities are implementing remedial measures to improve the fiscal position in FY18/19. These measures will also help contain public debt which has doubled over the last decade, reaching 55 percent of GDP in 2017, after the withdrawal of donor budget support, securitization of arrears, and recapitalization of the Reserve Bank of Malawi and two public commercial banks.
Economic growth is expected to increase gradually, reaching over 6 percent in the medium term. Growth will be supported by enhanced infrastructure investment and social services as well as an
improved business environment, which will boost confidence and unlock the economy’s potential for higher, more broad-based, and resilient growth and employment. Downside risks to growth include political pressures in the run-up to next year’s elections that could weaken policy discipline and reform efforts, weather-induced shocks, and declines in agricultural commodity prices.
Executive Board Assessment [2]
“Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for achieving macroeconomic stability, and noted that economic activity has rebounded after two consecutive years of drought, driven by a recovery in agricultural production. However, growth has been insufficient to significantly reduce poverty or improve weak social indicators. Moreover, the fiscal position deteriorated in 2017 and public debt has doubled over the past decade. While the medium-term outlook is broadly favorable, risks and vulnerabilities remain.
“To address these challenges, Directors stressed the need for determined implementation of Malawi’s Growth and Development Strategy for 2018-23 and a strong commitment to the Fund-supported program under the Extended Credit Facility to entrench macroeconomic stability and ensure higher, inclusive and resilient growth. In this context, they urged the authorities to be mindful of political economy and capacity constraints faced in the past, and called for strong program ownership to achieve the ambitious growth and social-inclusion agenda.
“Directors underscored the importance of the authorities’ fiscal adjustment plans in maintaining macroeconomic stability. They noted that domestic debt rose sharply after the withdrawal of donor budget support, securitization of arrears, and bank recapitalization, raising the debt service burden and reducing space for much-needed infrastructure and social spending. Directors stressed the importance of improving debt management and broadening the coverage of domestic debt through enhancing data on state owned enterprises (SOEs).
“Directors cautioned against giving in to spending pressures in the run-up to the
2019 general elections and highlighted that increased spending efficiency will create room for more social spending and targeted infrastructure investment. Further, they emphasized the importance of prioritizing large investment projects, with concessional donor financing and private sector participation. Directors also underscored that public financial management and procurement reforms are necessary to address governance challenges and bolster donor confidence. Over the medium term, broad-based tax reforms will also foster a more efficient, transparent, and fair tax system.
“Directors encouraged greater exchange rate flexibility to cushion against external shocks.
They also highlighted the importance of strengthening the monetary policy framework and reducing fiscal dominance. Directors encouraged the authorities to strengthen banking supervision, while improving financial intermediation and access to finance.
“Directors emphasized that structural reforms are essential for growth, job creation, private sector development, economic diversification and resilience. In this context, they noted
the need to improve the quality and coverage of critical infrastructure, reduce regulatory burdens, and streamline judicial processes. Deep agricultural market reforms would also ensure food security and ease the burden on the budget.
“It is expected that the next Article IV consultation with Malawi will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
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Malawi: Selected Economic Indicators, 2016–23 |
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|
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|||||
|
Est. |
Proj. |
|||||||||||
|
National accounts and prices (percent change, unless otherwise indicated) |
||||||||||||
|
GDP at constant market prices |
2.3 |
4.0 |
3.5 |
4.5 |
5.0 |
5.5 |
6.0 |
6.5 |
||||
|
Nominal GDP (billions of Kwacha)1 |
3,910 |
4,503 |
5,068 |
5,654 |
6,300 |
6,993 |
7,752 |
8,623 |
||||
|
GDP deflator |
19.5 |
10.7 |
8.8 |
6.8 |
6.1 |
5.2 |
4.6 |
4.4 |
||||
|
Consumer prices (end of period) |
20.0 |
7.1 |
9.0 |
7.5 |
6.5 |
5.5 |
5.0 |
5.0 |
||||
|
Consumer prices (annual average) |
21.7 |
11.5 |
10.4 |
7.6 |
6.9 |
5.9 |
5.2 |
5.0 |
||||
|
Investment and savings (percent of GDP) |
||||||||||||
|
National savings |
-2.8 |
3.7 |
4.4 |
4.8 |
5.1 |
5.4 |
5.8 |
5.9 |
||||
|
Gross investment |
10.8 |
13.7 |
13.4 |
12.9 |
13.0 |
13.1 |
13.5 |
13.5 |
||||
|
Government |
4.4 |
7.0 |
6.5 |
6.0 |
5.9 |
6.0 |
6.2 |
6.2 |
||||
|
Private |
6.4 |
6.7 |
6.8 |
7.0 |
7.1 |
7.1 |
7.2 |
7.3 |
||||
|
Saving-investment balance |
-13.6 |
-10.0 |
-8.9 |
-8.1 |
-7.9 |
-7.7 |
-7.7 |
-7.6 |
||||
|
Central government (percent of GDP on a fiscal year basis)2 |
||||||||||||
|
Revenue |
21.7 |
23.6 |
22.4 |
22.6 |
22.1 |
22.4 |
22.5 |
22.5 |
||||
|
Tax and nontax revenue |
18.0 |
20.1 |
19.5 |
19.5 |
19.5 |
19.5 |
19.6 |
19.6 |
||||
|
Grants |
3.7 |
3.5 |
2.8 |
3.1 |
2.7 |
2.9 |
2.9 |
2.9 |
||||
|
Expenditure and net lending |
28.5 |
28.7 |
29.7 |
26.0 |
24.7 |
24.8 |
24.6 |
24.3 |
||||
|
Overall balance (excluding grants) |
-10.5 |
-8.6 |
-10.1 |
-6.5 |
-5.3 |
-5.3 |
-5.0 |
-4.7 |
||||
|
Overall balance (including grants) |
-6.8 |
-5.1 |
-7.3 |
-3.4 |
-2.6 |
-2.3 |
-2.0 |
-1.8 |
||||
|
Foreign financing |
1.9 |
2.5 |
3.2 |
1.3 |
1.9 |
2.0 |
2.0 |
1.9 |
||||
|
Total domestic financing |
5.0 |
4.3 |
5.9 |
3.1 |
0.7 |
0.4 |
0.1 |
-0.1 |
||||
|
Financing gap |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||
|
Discrepancy |
0.3 |
0.0 |
0.3 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||
|
Primary balance |
-2.8 |
-0.6 |
-3.0 |
0.1 |
0.2 |
0.2 |
0.2 |
0.2 |
||||
|
Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated) |
||||||||||||
|
Money and quasi money |
15.2 |
19.7 |
12.6 |
11.6 |
11.4 |
11.0 |
10.9 |
11.2 |
||||
|
Net foreign assets |
2.1 |
11.1 |
-0.6 |
4.7 |
10.3 |
12.1 |
13.6 |
14.7 |
||||
|
Net domestic assets |
13.1 |
8.6 |
13.2 |
6.8 |
1.1 |
-1.2 |
-2.7 |
-3.4 |
||||
|
Credit to the government |
17.5 |
20.3 |
4.1 |
3.0 |
0.4 |
0.2 |
0.0 |
-0.4 |
||||
|
Credit to the private sector (percent change) |
4.6 |
0.4 |
4.1 |
6.7 |
11.6 |
12.7 |
14.3 |
14.5 |
||||
|
External sector (US$ millions, unless otherwise indicated) |
||||||||||||
|
Exports (goods and services) |
1,603 |
1,695 |
1,857 |
1,975 |
2,100 |
2,234 |
2,386 |
2,562 |
||||
|
Imports (goods and services) |
2,520 |
2,547 |
2,747 |
2,769 |
2,927 |
3,110 |
3,326 |
3,572 |
||||
|
Gross official reserves |
605 |
757 |
703 |
755 |
898 |
1,061 |
1,237 |
1,442 |
||||
|
(months of imports) |
2.9 |
3.3 |
3.0 |
3.1 |
3.5 |
3.8 |
4.2 |
4.5 |
||||
|
(percent of reserve money) |
182.3 |
197.0 |
175.2 |
178.3 |
199.7 |
221.1 |
240.3 |
259.8 |
||||
|
Current account (percent of GDP) |
-13.6 |
-10.0 |
-8.9 |
-8.1 |
-7.9 |
-7.7 |
-7.7 |
-7.6 |
||||
|
Current account, excl. official transfers (percent of GDP) |
-13.6 |
-10.3 |
-10.1 |
-8.1 |
-7.8 |
-7.7 |
-7.7 |
-7.6 |
||||
|
Current account, excl. project related imports (% of GDP) |
-10.3 |
-6.2 |
-6.0 |
-5.2 |
-4.5 |
-4.4 |
-4.3 |
-4.2 |
||||
|
Real effective exchange rate (percent change) |
-13.3 |
... |
... |
... |
... |
... |
... |
... |
||||
|
Overall balance (percent of GDP) |
-1.9 |
2.1 |
-0.8 |
0.5 |
1.8 |
2.2 |
2.5 |
2.7 |
||||
|
Financing gap |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||
|
Terms of trade (percent change) |
-0.2 |
-4.6 |
-5.9 |
-1.1 |
-0.9 |
-1.2 |
-0.8 |
-0.5 |
||||
|
Debt stock and service (percent of GDP, unless otherwise indicated) |
||||||||||||
|
External debt (public sector) |
33.2 |
32.6 |
32.1 |
32.2 |
32.2 |
32.0 |
31.6 |
31.2 |
||||
|
NPV of Public external debt (percent of exports) |
76.3 |
77.2 |
74.2 |
72.2 |
71.3 |
70.0 |
69.0 |
68.3 |
||||
|
Domestic public debt |
21.2 |
22.6 |
22.2 |
22.2 |
20.3 |
18.5 |
16.7 |
14.6 |
||||
|
Total public debt |
54.4 |
55.1 |
54.3 |
54.4 |
52.6 |
50.5 |
48.2 |
45.7 |
||||
|
External debt service (percent of exports) |
12.3 |
10.4 |
7.5 |
5.4 |
5.3 |
5.2 |
4.6 |
4.0 |
||||
|
External debt service (percent of revenue excl. grants) |
19.3 |
14.4 |
10.4 |
7.8 |
7.6 |
7.5 |
6.6 |
5.7 |
||||
|
91-day treasury bill rate (end of period) |
24.0 |
... |
... |
... |
... |
... |
... |
... |
||||
|
Sources: Malawian authorities and IMF staff estimates and projections. |
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1 The current GDP base year is 2010. |
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|
2 The fiscal year starts in July and ends in June. The current financial year, 2018, runs from July 1, 2017 to June 30, 2018. |
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[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.
[2] 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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