Press Release No. 03/174

Press Release: IMF Completes In Principle First Review of Malawi's PRGF Arrangement, Approves in Principle US$9.2 Million Disbursement, and Approves US$6.6 Million in Interim Assistance under the HIPC Initiative

October 20, 2003

The Executive Board of the International Monetary Fund (IMF) today completed in principle the first review of Malawi's economic performance under a Poverty Reduction and Growth Facility (PRGF) arrangement and approved in principle the disbursement in an amount equivalent to SDR 6.44 million (about US$9.2 million). The IMF Board's decision will become effective upon a further decision following the World Bank's Executive Board review of Malawi's Poverty Reduction Strategy Paper Progress Report, scheduled for October 23, 2003. The Executive Board also agreed to the authorities' request to extend the arrangement through December 20, 2004 and to resume interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative by approving the release of an amount equivalent to SDR 4.628 million (about US$6.6 million) to help Malawi meet its debt service payments on its existing debt to the IMF.

As part of its review of Malawi's performance under its IMF-supported economic program, the Executive Board also granted waivers for nonobservance of performance criteria pertaining to the ceilings on the stock of reserve money and net domestic financing of the central government. The Board also approved waivers regarding the commencement of full operations of a unit in the Ministry of Finance designed to monitor the activities of parastatals and the completion of a first quarterly report on the parastatals that had been due by December 31, 2000. Another waiver was granted on the compilation by the Ministry of Finance of monthly reviews which would summarize commitment levels and arrears and assess the prospects for meeting the budget targets in 2000/01.

Malawi's PRGF arrangement was approved on December 21, 2000 (see Press Release No. 00/79), for SDR 45.11 million (about US$64.5 million). So far, Malawi has drawn SDR 6.44 million (about US$9.2 million).

The PRGF is the IMF's most concessional facility for low income countries. PRGF-supported programs are 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 (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period.

After the Executive Board's discussion on Malawi, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, stated:

"Malawi has made broadly satisfactory progress in establishing a record of performance during the first half of 2003 to underpin the completion of the review under the PRGF arrangement. Despite a severe drought and related food shortage, some measure of fiscal discipline has been restored, and the fiscal targets under the track-record program have been broadly met. The attainment of the monetary program objectives, however, was impeded by the shortfall in emergency and budgetary aid, and the failure to dispose of the government's maize purchase as earlier envisaged.

"Notwithstanding these recent gains, Malawi continues to face daunting economic and social challenges. Sustained political commitment will, therefore, continue to be needed to reverse the economic deterioration, ensure macroeconomic stability, improve public service delivery, and promote poverty reduction.

"The strong fiscal adjustment envisaged in the 2003/04 budget will be key to signaling the return to macroeconomic stability, which is a precondition for growth and poverty reduction. In particular, the government's strategy to make substantial repayments on domestic debt will be critical to reducing high real interest rates and interest payments, and to revitalizing the private sector. It will be essential that the authorities continue to demonstrate their political commitment to the steadfast execution of this strategy, especially in the run up to the general elections in May 2004.

"Strengthened expenditure control will be crucial to restoring fiscal discipline, and treasury officials, to be placed in line ministries, will help secure overall treasury control on commitments and payments. Recent increases in pro-poor outlays are welcome, but further strong efforts to prioritize expenditures will be essential to increase the resources allocated to pro-poor expenditures in line with the Malawi Poverty Reduction Strategy (MPRS), and ensure more rapid progress in attaining the millennium development goals. It will also be critical that the authorities' adjustment efforts be supported by enhanced external financial aid.

"Sustained implementation of the fiscal strategy will greatly facilitate the Reserve Bank of Malawi's anti-inflation strategy aimed at reducing and maintaining inflation in the lower single digits. Together with a sufficiently tight monetary stance, this will be key to reversing entrenched inflationary expectations, and creating financial conditions supportive of private sector expansion.

"Looking ahead, it will be important for Malawi to accelerate the implementation of structural reforms. Key reforms in the agricultural sector with support from the World Bank and other donors will strengthen food security safeguards and safety nets. Civil service reform and continued public enterprise restructuring and divestiture will help reduce the need for budget subsidies, improve service delivery, and allow the private sector to take over commercial activities. Further expeditious progress in improving governance will be essential to enhance the management of public resources and attract external financial support from donors.

"The authorities' full commitment to the program at the highest level is encouraging. Going forward, strong ownership and decisive and unwavering implementation of the program by the Malawian authorities will provide a basis for continued support from the IMF. This will also protect the program against policy slippages and help ensure timely support from the international donor community," Mr. Sugisaki stated.