IMF Executive Board Concludes 2011 Article IV Consultation with Malawi

Public Information Notice (PIN) No. 12/88
July 23 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 23, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2012 Article IV Consultation with Malawi.1


After averaging over 8 percent a year during 2007–10, real GDP growth in Malawi fell to 4.3 percent in 2011, reflecting the impact of severe foreign exchange shortages. The country’s long standing foreign exchange problems intensified in 2011 because of lower tobacco export earnings and cuts in external aid as several donors reduced their financial support to Malawi when the authorities’ IMF-supported program went off track in the first half of 2011 and because of human rights and governance concerns. Delays in making payments abroad led to the loss of credit lines for several businesses, resulting in scaled down operations. A tightening of restrictions on foreign exchange transactions created distortions which fostered a parallel market in foreign exchange and boosted activity in the informal sector at the expense of the formal economy. Fiscal performance deteriorated, with the deficit widening from nearly 3 percent of GDP in FY2010/11 to 7 percent in FY2011/12, with a commensurate increase in domestic financing. The external current account deficit widened, reflecting slowing exports and the drop in external grants, and the international reserve position weakened further.

In May 2012, the new administration which assumed office in April under the leadership of President Joyce Banda devalued the kwacha, adopted a floating exchange rate regime, and liberalized current account transactions. The measures are beginning to show positive results as evidenced by increased sales of tobacco through official channels, a considerable easing of the private sector’s access to foreign exchange, and the near collapse of the foreign exchange parallel market. The policy environment has improved markedly, as have the prospects for reversing the slowdown in economic activity and exports.

Inflation has been on an upswing since early 2011, with the year-on-year rate reaching 17.3 percent in May 2012. Rising import costs have been the main factor behind the upswing, as a growing share of imports were being priced at the parallel market exchange rate before the May devaluation. The devaluation triggered large adjustments in the retail prices of petroleum products, which have had ripple effects to other prices. Inflation is expected to rise for a few months but with the implementation of restrained fiscal and monetary policies should begin to fall by early 2013.

Risks to the medium-term outlook from global spillovers are moderate-to-low. Slower euro area and world growth would adversely affect Malawi’s exports (mainly tobacco), but the overall impact on Malawi’s growth is expected to be low because of the authorities’ active efforts diversify exports and export markets. A substantial fall in tobacco prices on the other hand would adversely affect export proceeds and the income of farmers and dampen growth. The new government’s strong policy actions have reduced the risk of lower aid flows. Most of Malawi’s major donors are restoring or scaling up aid in response to the improved policy environment and the government’s efforts to repair strained relations by addressing concerns over human rights abuses and governance.

Executive Board Assessment

Executive Directors commended the new government for its strong commitment to reform, as evidenced by the swift implementation of bold measures to address Malawi’s chronic balance of payments problems and improve the outlook for poverty reduction and growth. The devaluation of the kwacha, adoption of a floating exchange rate regime, and liberalization of current account transactions have begun to show positive results, including increased access by the private sector to foreign exchange. Given Malawi’s vulnerability to external shocks, Directors considered that boosting international reserves from their current very low levels should be an immediate policy priority.

Directors agreed that fiscal discipline and tight monetary policy will be required to ensure that the nominal depreciation of the kwacha translates into a sustained real depreciation, critical for improving external competitiveness. In this context, they commended the authorities for the measures already taken to address internal imbalances, including the move toward cost-recovery tariffs for utilities and adoption of an automatic adjustment mechanism to ensure that the retail prices of petroleum products reflect import costs.

Directors welcomed the announcements of increased financial assistance by Malawi’s development partners which will allow the government to implement programs to mitigate the impact of the adjustment measures on the poor. They stressed the role of good economic management for attracting and sustaining aid inflows.

Directors were encouraged by the prudent stance of the FY2012/13 budget, and welcomed the scaling up of social protection programs. They advised the authorities to ensure that spending plans are in line with expected revenues and grants, and that they reflect Malawi’s growth and development priorities. To make progress toward longer-term fiscal sustainability, Directors welcomed the authorities’ intention to strengthen domestic revenue mobilization and public financial management to better control commitments and avoid the accumulation of expenditure arrears.

Directors agreed that tight monetary policy is needed to contain inflationary pressures following the devaluation of the kwacha. They looked forward to further steps to strengthen the operational independence of the RBM, and commended the authorities’ plan to introduce limits on government borrowing from the RBM. While Malawi’s banking system is sound, close monitoring to preserve financial stability should continue.

Directors welcomed the approval of the second Malawi Growth and Development Strategy (MGDS II), on which the new program is based. They supported the objective of promoting inclusive growth by improving the business climate, addressing key supply-side bottlenecks, deepening access to finance and strengthening social safety nets. They also recommended careful prioritization of the many programs and projects in MDGS II, given limited resources and constraints in institutional capacity.

Malawi: Selected Economic Indicators, 2009–12
  2009 2010 2011 2012
  Est. Prel. Proj. Proj.

National accounts and prices (percent change, unless otherwise indicated)


GDP at constant market prices

9.0 6.5 4.3 4.3

Nominal GDP (billions of kwacha) /1

710.2 812.4 879.8 1,068.1

GDP deflator

8.4 7.4 3.8 16.4

Consumer prices (end of period)

7.6 6.3 9.8 22.9

Consumer prices (annual average)

8.4 7.4 7.6 18.4

Investment and savings (percent of GDP)


National savings

20.7 24.7 9.6 12.0

Net factor income

-1.2 -2.0 -2.1 -3.0

Net official transfers

9.4 15.7 5.9 11.5

Net private transfers

5.1 4.7 4.6 5.6

Domestic savings

7.5 6.3 1.1 -2.2


-7.1 -0.8 -2.3 -6.9


14.6 7.0 3.4 4.7

National investment

25.6 26.0 15.5 16.2


6.5 9.6 6.9 7.5


19.1 16.4 8.6 8.7

Saving-investment balance /2

-4.8 -1.3 -5.9 -4.3


-5.0 1.5 -5.0 -5.3


0.1 -2.8 -0.9 1.0

Central government (percent of GDP on a fiscal year basis) /3



32.1 33.8 32.1 27.0

Tax and nontax revenue

20.5 23.5 24.5 21.5


11.6 10.3 7.6 5.5

Expenditure and net lending

37.8 33.8 35.0 34.0

Overall balance (excluding grants)

-17.3 -10.3 -10.5 -12.5

Overall balance

-5.7 0.1 -2.9 -7.0

Foreign financing

2.0 0.9 1.3 1.6

Domestic financing

3.7 -0.9 1.7 5.6


0.1 0.0 0.0 0.0

Discrepancy /4

-0.1 -0.1 -0.1 -0.2

Money and credit (change in percent of broad money at the


beginning of the period, unless otherwise indicated)


Money and quasi money

23.9 33.9 35.7 18.2

Net foreign assets

-15.5 13.3 -7.9 -1.2

Net domestic assets

39.5 20.6 43.6 19.5

Credit to the government

19.4 -9.2 19.7 11.0

Credit to the rest of the economy (percent change)

36.5 47.6 30.1 17.5

External sector (US$ millions, unless otherwise indicated)


Exports (goods and services)

1,050.2 1,360.4 1,408.7 1,386.1

Imports (goods and services)

1,961.1 2,425.4 2,214.5 2,257.6

Usable gross official reserves

140.5 279.6 190.2 204.5

(months of imports)

0.7 1.5 1.0 1.0

(percent of reserve money)

40.7 73.4 42.5 52.8

Current account (percent of GDP)

-4.8 -1.3 -5.9 -4.3

Current account, excl. official transfers (percent of GDP)

-14.2 -17.0 -11.9 -15.7

Real effective exchange rate (percent change)

-8.2 -0.4 10.7 ...

Overall balance (percent of GDP)

-2.0 2.2 -1.9 -0.5

Terms of trade (percent change)

7.7 3.0 -17.6 20.5

Debt stock and service (percent of GDP, unless otherwise indicated)


External debt (public sector)

15.9 16.0 16.2 20.3

NPV of debt (percent of exports)

57.1 44.6 48.1 52.2

External debt service (percent of exports)

1.3 1.3 1.6 2.4

External debt service (percent of revenue excl. grants)

1.4 1.5 1.7 3.6

91-day treasury bill rate (end of period)

10.5 6.2 6.8 ...

Sources: Malawian authorities and IMF staff estimates.

1/ Reflects substantial upward revisions to the historical national accounts data received in March 2011.


2/ The government saving—investment balance is calculated adding foreign grants to government savings above. The private savings—investment balance is calculated adding the items in the balance of payments, net of foreign grants, to private savings above.


3/ For example, 2009 refers to fiscal year 2008/09, which is from July 1, 2008, to June 30, 2009.


4/ For 2011/12 fiscal year, reflects the outturns of the first three quarters and the projections for the fourth quarter.

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. 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 summing up can be found here:


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