Press Release No. 00/79

The International Monetary Fund's (IMF) Executive Board today approved in principle a three-year SDR 45.11 million (about US$58 million) arrangement under the Poverty Reduction and Growth Facility (PRGF)¹ to support economic and structural reforms in Malawi.

A final decision by the Executive Board is pending discussion of Malawi's interim Poverty Reduction Strategy Paper (PRSP) by the World Bank's Executive Board, which is expected to today, as well. A final IMF decision will enable the release of a first loan under the PRGF arrangement in an amount equivalent to SDR 6.44 million (about US$8 million). Further disbursements under the credit arrangement will be on a semiannual basis and subject to Executive Board review.

After the Executive Board's discussion of Malawi's economic and structural reform program, Horst Köhler, Managing Director and Chairman, made the following statement:

"The interim PRSP provides a sound basis for concessional lending by the Fund and adequately outlines the process for the development of a full PRSP in a broad-based participatory manner. The authorities' schedule for completing the PRSP by mid-2001 is appropriate, as is the general framework for poverty alleviation in the interim PRSP, including its focus on macroeconomic stability, effective public services, private sector development, social safety nets and steps to address the HIV/AIDS pandemic. Directors noted that further analysis would be needed before completion of the full PRSP, so that interventions could be costed and prioritized and core targets and monitoring mechanisms developed.

"Directors noted the improvement in Malawi's economic performance during the 1995-99 Poverty Reduction and Growth Facility (PRGF) and the policy achievements of the last year, in particular the establishment of firmer control over government spending and borrowing. The recent resurgence in the inflation rate and continued slow growth underscore, however, the need for sustained and comprehensive macroeconomic adjustment and reform, including adherence to monetary targets.

"The objectives of the authorities' new three-year program include the achievement of a sustainable GDP growth of at least 4.5 percent, a reduction of inflation to low levels, a significant improvement in Malawi's external position, and a reduction in the number of people beneath the poverty line. These objectives will be achieved by reducing monetary growth, achieving a balanced fiscal position, improving spending control, deepening structural reform, strengthening governance and prioritizing pro-poor expenditure. Reserve money will be the operational target for monetary policy and the exchange rate will be allowed to float freely.

"On the fiscal side, crucial features of the program are a new commitment control system and the avoidance of further spending arrears. Intervention in maize marketing and subsidization of petroleum will not be resumed. A new parastatal enterprise reform and monitoring unit is being established in the Ministry of Finance. The surtax will soon be extended to wholesale and retail stages, making it equivalent to a value-added tax. The authorities are committed to improved targeting and monitoring of government spending.

"The program seeks to preserve the gains to smallholder agriculture from the liberalization of tobacco growing and marketing, by avoiding any burdensome restrictions on tobacco buyers. Directors also underscored the critical importance of improving governance. They welcomed the authorities' commitment to pursue outstanding cases of corruption, fraud, abuse of office and misappropriation of public funds and looked forward to a further strengthening of the institutional and legal environment in this area.

"A final decision on Malawi's debt relief under the enhanced HIPC Initiative is pending action today by the World Bank's Executive Board. A press release will be issued jointly with the World Bank following this action," Mr. Köhler said.

ANNEX

Program Summary

Malawi is projected to maintain real GDP growth between 3-4 percent in 2000. Consumer price inflation in November reached 35 percent having fallen to 22 percent in June. The fiscal deficit declined marginally in FY1999/2000, and the current account deficit narrowed despite higher oil prices and lower tobacco prices. The PRGF-supported program for 2000-01 will have a number of important features, including a targeted reduction of inflation by end-2001 to 10 percent, growth of at least 3 percent, and an increase in the level of gross reserves to 4.7 months of imports.

On the fiscal side, the authorities are strengthening the expenditure control system, and moving to tighten the financial operations and monitoring of parastatls. Privatization of public enterprises will also be extended. At the same time, the liberalization of the agriculture and petroleum sectors will be sustained under the program. More broadly, crucial governance issues will be further advanced, including efforts to recover misapproriate funds and address fraud and corruption.

Malawi became a member of the IMF on July 19, 1965; its quota² is SDR 69.4 million (about US$90 million), and its outstanding use of IMF credit currently totals SDR 56.9 million (about US$73 million).

Malawi: Selected Economic and Financial Indicators, 1998-2001 1998 1999 2000 2001   Prel. Proj. Proj.   (Percentage change, unless otherwise indicated) GDP and prices     GDP at constant market prices 2.0 4.0 3.2 3.0 Per capita GDP (in U.S. dollars) 157.8 163.1 ... ... Consumer prices (end of period) 53.0 28.2 30.0 10.0 GDP deflator 26.2 41.1 25.5 16.8           Money and credit 1/         Money and quasi money 55.6 33.6 20.9 16.8 Net foreign assets 110.0 11.5 31.1 47.0 Net domestic assets -54.5 22.1 -10.2 -30.2 Credit to the government -29.9 -2.9 2.7 -43.3 Credit to the rest of the economy 18.5 20.6 16.3 19.5           (In percent of GDP, unless otherwise indicated) Central government 2/         Revenue (excluding grants) 17.7 17.3 19.0 19.0 Expenditure 29.8 29.8 30.4 27.3 Domestic balance (cash modified basis) 3/ -4.0 -2.8 -1.3 -1.2 Overall balance (cash modified basis, excluding grants) -11.9 -12.3 -11.4 -8.3 Overall balance (cash modified basis, including grants) -5.5 -5.0 0.0 0.0           Saving and Investment         National saving 1.7 -1.3 0.6 0.6 Domestic saving 5.8 0.3 2.3 2.2 Net factor income and private transfers -4.1 -1.6 -1.7 -1.6 Foreign saving 4/ 11.6 17.1 15.2 15.4 Gross investment 13.3 15.8 15.8 16.0           External sector         Exports, f.o.b. 31.0 24.7 24.9 28.0 Imports, c.i.f. 5/ 33.4 37.3 36.1 39.3 External current account (including official transfers) -2.5 -8.3 -7.8 -7.7 External debt 142.7 143.3 156.5 180.4 Debt-service ratio 6/ 18.2 17.7 20.6 20.0 Terms of trade (1990=100) 71.9 62.3 58.5 59.8 Kwacha per U.S. dollar exchange rate (period average) 7/ 31.1 44.2 59.1 ...           Gross official reserves         End-period stock (millions of US dollars) 257.8 244.2 224.0 276.3 In months of imports of goods and nonfactor services 4.0 4.2 3.9 4.7 External debt (disbursed and outstanding, end of period; millions of US dollars) 2,479 2,589 2,706 2,824 Sources: Malawian authorities; and IMF staff estimates and projections.           1/ End of period expressed as change in percent of money and quasi money at the beginning of the period. 2/ Fiscal year July 1 - June 30. 3/ The domestic balance is defined as revenue less total expenditure, foreign interest, and foreign-financed development expenditure. 4/ External current account, excluding official transfers. 5/ Including drought-related maize operations in 1998. 6/ In percent of exports of goods and nonfactor services in the following period. Before any assistance under the HIPC Initiative. 7/ For 2000, January through November. 1On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility, was renamed the Poverty Reduction and Growth Facility, and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper, or PRSP. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Malawi, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5%, and are repayable over 10 years with a 5 ½ year grace period on principal payments. 2A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.