Press Release: IMF Approves Second Annual ESAF Loan for Malawi
IMF News, December 5, 1996
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- Published: December 5, 1996
Loan approval and financing terms
- The IMF approved the second annual loan under the enhanced structural adjustment facility (ESAF) in an amount equivalent to SDR 15.3 million (about US$22 million) to support Malawi's economic program in 1996/97.
- The loan is available in two equal installments, the first of which is available on December 13, 1996.
- ESAF loan terms: interest rate of 0.5 percent a year; repayable over 10 years, with a 5 1/2-year grace period.
Background and recent macroeconomic performance
- Malawi adopted comprehensive measures in 1995 to address large financial imbalances and received IMF support under a three-year ESAF in October 1995.
- Performance under the first-year program described as satisfactory.
- Key 1995–1996 outcomes:
- Real GDP growth in 1995 rebounded to 9 percent after a sharp drop in 1994.
- Inflation rose to 75 percent in 1995, reflecting large food price increases caused by a less than normal maize crop.
- Cumulative inflation during the first nine months of 1996 was a negative 0.6 percent, owing to a partial reversal of those increases.
- External position improved significantly, with a marked increase in gross international reserves despite a shortfall in external grants.
- The fiscal deficit was reduced sharply.
- Progress was made in structural reforms, notably in agriculture, the external sector, and the privatization of public enterprises.
- Malawi accepted the obligations of Article VIII effective December 1995.
- Malawi joined the IMF on July 19, 1965, and its quota is SDR 50.9 million (about US$73 million).
- Malawi's outstanding use of IMF financing currently totals SDR 75.43 million (about US$108 million).
Medium-term strategy (1996–98) and 1996-97 program objectives
- Medium-term objectives:
- Achieve an average annual GDP growth rate of 7 percent during 1996-98.
- Attain an annual inflation rate of 6 percent by end-1998.
- Reduce the external current account deficit (excluding grants) from 14.1 percent of GDP in 1995 to about 6.4 percent of GDP in 1998.
- Build up international reserves to the equivalent of 4.5 months of imports by end-1998.
- Social objective: accommodate pressing social needs within the constraints of fiscal sustainability through continued shifts away from nonproductive and low-priority expenditure.
- Program targets for 1996-97:
- Real GDP growth of 11 percent in 1996 and 5 percent in 1997.
- Annual inflation rate of 8 percent by end-1997.
- Increase in gross official international reserves to the equivalent of 4.5 months by end-1997.
- Fiscal and monetary framework:
- Overall budget deficit (excluding grants) reduced from 13.6 percent of GDP in 1995 to 9.0 percent of GDP in 1996, and to 7.6 percent of GDP in 1997.
- Fiscal measures on the expenditure side: temporarily reinstating the cash budget; efficient expenditure allocation and control through improved budget procedures.
- Revenue-side reforms: broadening of the tax base; creation of an autonomous revenue authority; introduction of a value-added tax.
- Fiscal program designed to avoid any domestic financing to ensure inflation targets.
- Monetary policy will be consistent with growth, inflation, and balance of payments objectives and will allow for faster growth in credit to the private sector.
Structural reforms
- Agriculture:
- Continue measures to reestablish agriculture as an engine of growth, increase food security, and alleviate poverty.
- Liberalization of agricultural marketing and production arrangements has resulted in substantial improvements in the growth of smallholder production and diversification into nontraditional or drought-tolerant crops.
- Privatization:
- Privatization program started in early 1996 aims at bringing to the point of sale 26 public enterprises in 1996/97, and 20 more in 1997/98.
- Civil service reform:
- Government developing a comprehensive action plan to eliminate agencies, departments, and ministries with duplicating or overlapping functions.
- External orientation:
- Improve Malawi's access to seaports.
- Restrict the number of import and export items requiring licenses to only those warranted by security, health, and environment considerations.
Addressing social issues and poverty alleviation
- Higher economic growth and inflation reduction are contributing significantly to poverty reduction.
- Government poverty alleviation program priorities:
- Reform agriculture to benefit smallholders.
- Reallocate budgetary resources to the social sectors.
- Limit population growth.
- Improve the role of women in economic activities.
- Two notable government projects:
- Free primary education program introduced in 1994.
- Malawi Social Action Fund to support community-based work programs.
The challenge ahead and donor support
- Continued efforts to reestablish financial stability are essential to achieve low inflation on a lasting basis.
- Expeditious implementation of next stages of structural reform—particularly civil service reform and privatization—is crucial to attaining economic and social objectives under the program.
- Malawi's efforts will require the continued assistance of the donor community.
Malawi: Selected Economic Indicators (as presented)
- Real GDP (percent change):
- 1994: -11.6
- 1995*: 9.0
- 1996**: 10.8
- 1997**: 5.0
- 1998**: (not listed)
- Consumer prices (end of period) (percent change):
- 1994: 66.0
- 1995*: 74.9
- 1996**: 4.0
- 1997**: 8.0
- 1998**: 6.0
- Overall fiscal balance, excluding grants (deficit-) (percent of GDP) 1/:
- 1994: -27.8
- 1995*: -13.6
- 1996**: -9.0
- 1997**: -7.6
- 1998**: -6.9
- External current account balance, excluding official transfers (deficit-) (percent of GDP):
- 1994: -17.8
- 1995*: -14.1
- 1996**: -6.8
- 1997**: -6.4
- 1998**: (not listed)
- Notes accompanying indicators:
- Sources: Malawian authorities; and IMF estimates and projections.
- *Preliminary.
- **Program.
- 1/ Fiscal year is April/March.
Press Release No. 96/59, December 5, 1996.