Malawi's Plan to Create a Stable and Sustainable Economy

IMF News, February 2, 2024

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The IMF Executive Board approved a $175 million Extended Credit Facility (ECF) arrangement to support the government’s commitment to economic reforms.
Urgent goal: support the authorities’ commitment to restore macroeconomic stability by creating an environment of low or moderate inflation and a stable exchange rate.
ECF-supported program aims to restore and maintain:
- sustainable levels of fiscal and current account deficits,
- an adequate level of gross international reserves,
- limited debt vulnerabilities.
Program scope includes making tangible progress on structural reforms in macro-critical areas such as public financial management, developing markets (including the foreign exchange market), and improving governance and institutions while protecting vulnerable households.

Longstanding issues: stagnant growth, unsustainable debt, and persistent poverty and food insecurity despite large inflows of official development assistance.
The past three years have been particularly difficult.
Sizable external emergency financing—about $690 million in the past three years from the IMF and the World Bank alone—was extended.
To maintain basic public goods and services, the government borrowed from domestic financial institutions, which resorted to the central bank; the central bank injected more money into the economy, increasing pressure on the exchange rate and prices.
Specific shocks mentioned: an outbreak of cholera and Cyclone Freddy.

Authorities should stay the course on the reform agenda and sustain efforts initiated under the 2022-23 Staff Monitored Program.
Key policy priorities:
- Restore and maintain sustainable fiscal and current account deficits.
- Ensure an adequate level of gross international reserves.
- Limit debt vulnerabilities and complete external debt restructuring.
- Implement structural reforms in public financial management, market development (including foreign exchange market), governance, and institutions.
- Protect vulnerable households during adjustment.
Facilitate a market-clearing exchange rate on an ongoing basis.
Sustainable fiscal and current account deficits would help stabilize the exchange rate and prices.

The ECF arrangement signals endorsement of Malawi’s commitment and capacity to implement sound macroeconomic policies.
The international community, particularly the official sector, is supporting:
- the debt restructuring process,
- grants and concessional loans to support the social sector and development spending,
- technical assistance.

The authorities are in the process of completing their external debt restructuring.
The country remains in arrears on servicing commercial external debt while discussions continue.
Creditors have given assurances to support the country; Malawi critically needs immediate debt relief to maintain provisions of basic public goods and services.

The devaluation (in November 2023) was a difficult policy decision that imposed short-term hardship on the population.
Rationale: Malawi has been importing more than it exports by borrowing abroad; as borrowing became difficult, foreign exchange shortages emerged.
First step to ease the imbalance: allow the exchange rate to be more in line with demand and supply.
Going forward: facilitate a market-clearing exchange rate and sustain fiscal and current account balances to stabilize the exchange rate and prices.

Semi-annual reviews will assess progress on agreed economic and financial policies.
The first review is expected to take place in late-July.
Funds approved under the ECF arrangement will be disbursed after successful completion of each review.
Each review is expected to further catalyze additional grant financing and capital inflows.
The IMF team recently visited Blantyre and Lilongwe to take stock of developments and will remain engaged throughout the program period.

Content based on IMF Country Focus interview with Nelnan Koumtingue, IMF Resident Representative in Malawi (February 2, 2024).