Press Release No. 95/54

The International Monetary Fund (IMF) has approved a series of loans for Malawi over the next three years under the enhanced structural adjustment facility (ESAF)¹ totaling the equivalent of SDR 45.8 million (about $69 million), in support of the Government's 1995-1998 economic and structural reform program. Of this total, the equivalent of SDR 15.27 million (about $23 million) will be disbursed in the first year of the program in equal semiannual installments, the first of which will be available on October 31, 1995.

Background

During the first half of 1994, Malawi's financial position deteriorated rapidly, mainly because of excessive budgetary expenditures in the period leading up to the country's first multiparty elections in May. A massive recourse to bank financing resulted and contributed to an acceleration of inflation, which was worsened by the drought and by the sharp depreciation of the national currency. Performance under the program that was supported by the Fund's stand-by arrangement covering the period November 1994-June 1995 was undermined by institutional weaknesses, particularly the failures to implement fully expenditure monitoring and control mechanisms and to improve customs revenue collection. In 1994, the budget deficit (including grants) almost trebled to 15.1 percent of GDP, consumer price increases accelerated to 66 percent by year end and, because of the drought, GDP declined by over 12 percent.

The 1995-98 Program

The medium-term economic strategy of the new Malawian authorities places a high priority on economic stabilization and restoration of fiscal discipline. The overall macroeconomic objectives for the period 1995/96-1997/98 are to: (a) achieve real GDP growth of over 4.5 percent in 1996-98; (b) bring the rate of inflation sharply down to 5 percent by the end of 1998; and (c) attain a more sustainable balance of payments position by the end of the program period. The strategy relies on fiscal restraint, strengthening of the key institutions of macroeconomic management, aggressive structural reforms to reduce the scope of the public sector and the ownership concentration in the economy, mobilization of domestic savings and foreign private investment, and channeling more investment into the agricultural and social sectors

Within this strategy, the program for 1995-96 aims at real economic growth of 9.9 percent in 1995 and 5.4 percent in 1996, limiting inflation to 35.8 percent in 1995 and 6.2 percent in 1996. It also seeks to reduce the external current account deficit, excluding official transfers, from 18.4 percent of GDP in 1994 to 14.3 percent in 1995 and to 16.7 percent in 1996.

To these ends, fiscal policy is intended to reduce the overall central government deficit to about 4 percent in 1995-96. On the revenue side, the efficiency of the tax system will be improved, and measures will be taken to comprehensively reform customs, surtax, and excise taxes. On the expenditure side, the program envisages implementation of the cash budget and the expenditure monitoring system. Monetary policy will aim at rapidly cutting back the rate of inflation through reducing the liquidity overhang, which partly results from earlier excessive government borrowing from the banking system.

Structural Reforms

Civil service reform and planned government restructuring are an important part of the program's proposed structural reforms. The authorities will also address the adequacy of public sector remuneration in the context of a comprehensive reform package, and will put in place the legal and institutional framework for privatization of public enterprises by early 1996. In this regard, the Government will address the concentration of ownership by encouraging transparent and widespread participation in the privatization process. The authorities intend to accelerate the revitalization of agriculture through elimination of restrictions on access of small holders to land and the most profitable cash crops. The adoption of better technology, especially the use of fertilizer and hybrid seeds, is to play an important role in boosting productivity. Malawi is making use of technical assistance to strengthen its limited capacity to implement macroeconomic and structural reforms. Technical assistance is being provided in the areas of budget management, customs, bank supervision, and foreign exchange management.

Addressing Social Costs

Measures to alleviate poverty and provide a social safety net include liberalizing agricultural marketing and production arrangements, increasing smallholder quotas on burley tobacco, providing free primary education, and increasing budgetary outlays on other social services. Greater emphasis will be placed on providing health services and water to underserved remote areas.

The Challenge Ahead

An early restoration of fiscal discipline will be crucial to Malawi's financial stability. In view of the important role of external financing, a strong commitment to the implementation of the program will be essential to avoid slippages that could undermine donor confidence and impede timely disbursements.

Malawi joined the IMF on July 19, 1965 and its quota² is SDR 50.9 million (about $76 million). Its outstanding use of IMF credit currently totals SDR 70 million (about $105 million).

Malawi: Selected Economic Indicators   1993 1994* 1995** 1996** 1997**   (percent change) Real GDP 10.8 –12.4 9.9 5.4 4.5 Consumer prices     (end of period) 18.4 66.0 35.8 22.0 12.0     (percent of GDP) Central government balance including grants     (deficit –) –5.4 –15.1 –4.1 –3.9 –3.3 External current account balance excluding official transfers     (deficit –) –16.8 –18.4 –14.3 –16.7 –12.8 Sources: Malawian authorities; and IMF estimates. *Estimates. **Projections. 1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5-1/2-year grace period. 2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.