Press Release: IMF Mission and Malawi Authorities Reach Staff-Level Understandings on a New ECF-Supported Program

IMF News, June 6, 2012

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Canonical URL: Press Release: IMF Mission and Malawi Authorities Reach Staff-Level Understandings on a New ECF-Supported Program

IMF team visited Lilongwe during May 23-June 6, 2012 for discussions in the context of the 2012 Article IV consultation and the authorities’ intention to request a new three year arrangement under the IMF’s Extended Credit Facility (ECF).
Meetings were held with: Her Excellency President Joyce Banda; Minister Ken Lipenga (Finance); Governor Charles Chuka (Reserve Bank of Malawi); Deputy Minister Khwauli Msiska (Economic Planning and Development); Secretary to the Treasury Randson Mwadiwa; senior government and RBM officials; members of the Budget and Finance Committee of the National Assembly; representatives of Malawi’s international development partners, civil society, and the banking and business communities.
Mission chief: Mr. Tsidi Tsikata issued the concluding statement.

The mission reached staff-level understandings with the authorities on an economic program for the fiscal years 2012/13–2014/15 that could be supported by a new ECF arrangement in the amount of SDR104 million (about US$157 million).
The new arrangement is subject to approval by the IMF’s Executive Board which is expected to consider the authorities’ request in July 2012.
The new arrangement will replace the three-year arrangement approved in February 2010 which the authorities have requested be cancelled.

Prior conditions:
- Severe foreign exchange shortage that slowed economic activity; enterprises scaled down operations for lack of imported inputs; fuel shortages disrupted transportation services and energy supplies, with ripple effects across all sectors.
- Growing stock of payments arrears had led to loss of external credit lines and a negative outlook for recovery.
- Shortages were triggered by a fall in the country’s tobacco earnings and aid inflows in 2011.
Authorities’ earlier response and consequences:
- A small devaluation accompanied by a tightening of restrictions on foreign exchange transactions created distortions, fostered a parallel foreign exchange market, and boosted informal activity at the expense of the formal economy, with adverse consequences for government revenues.
- The official exchange rate failed to anchor inflation expectations as a growing share of imports was being priced at the significantly depreciated parallel market exchange rate.

Policy measures implemented:
- A devaluation that increased the price of foreign exchange by nearly 50 percent.
- Adoption of a floating exchange rate regime.
- Lifting of several restrictions on foreign exchange transactions.
- Judicious intervention in the foreign exchange market by the Reserve Bank of Malawi (RBM) to help clear some backlog of external payments while tightening domestic liquidity conditions.
Effects observed:
- Parallel foreign exchange market virtually eliminated.
- Private sector reaction: exporters welcomed higher local-currency incomes; importers optimistic about foreign exchange availability; banks reported increased purchases of foreign exchange from customers.
- Development partners pledged to substantially increase their support to the FY2012/13 budget.

Stated objectives of the ECF-supported program:
- Fiscal sustainability.
- Gradual build up of international reserves to help cushion the economy against external shocks.
- Guide implementation of policies to create a stable macroeconomic environment needed to achieve the main objective of MGDS II: reducing poverty through sustained private sector led growth and wealth creation.
Role of the FY2012/13 budget:
- Vehicle for implementing the ECF-supported program.
- High priority on ensuring adequate provisions for scaling up social protection programs to mitigate the impact of the devaluation on the most vulnerable.
Fiscal and monetary stance:
- Fiscal discipline required to keep overall government spending within the available resource envelope while protecting top priorities and avoiding excessive domestic borrowing and accumulation of huge domestic arrears.
- Monetary policy geared toward achieving price stability, while providing room for growth in credit to the private sector.
- Authorities agreed on limits to the government’s total borrowing from the RBM and on steps to enhance the operational independence of the RBM.

Mission concerns:
- Significant and growing risks to public finances from operations of state-owned enterprises and the setting of prices and tariffs below cost recovery levels.
Petroleum sector measures and recommendations:
- Welcomed recent changes to pricing and taxation of petroleum products and the adoption of an automatic adjustment mechanism to ensure retail prices reflect the true cost of importation.
- If new rules are adhered to, fuel prices should move up and down in line with world prices.
- To contain fiscal risks from the operations of the National Oil Company of Malawi (NOCMA), the mission urged authorities to limit NOCMA operations to managing the country’s strategic fuel reserves and to revert to reliance on the private sector for regular fuel importation.

Issue discussed:
- Recent revelation that the Ministry of Finance inflated revenue data reported to parliament in the context of the midyear review of the budget earlier in 2012.
Mission recommendation:
- Malawi Revenue Authority should report information on its monthly revenue collections directly to the public and not just to the Ministry of Finance.
Authorities’ request:
- Technical assistance from the IMF and other partners to improve the quality of a wide range of economic statistics.

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

Press Release No. 12/205, June 6, 2012.