Press Release No. <a name="P16_75"></a>04/252

The following statement was issued on November 25, 2004 in Lilongwe at the conclusion of an International Monetary Fund (IMF) staff mission:

"An IMF mission visited Lilongwe during November 9-23, 2004 to review performance under the Staff Monitored Program (SMP) with the IMF.¹ The mission met with a broad range of senior government officials, including the Minister of Finance and the Governor of the Reserve Bank of Malawi, and private sector representatives. The mission also discussed with the authorities economic policies for the remainder of the current budget year and some medium-term issues.

"In July 2004, the Government of Malawi requested an SMP to support the government's efforts to reestablish its track record of economic policy implementation. The program aims to address macroeconomic imbalances by containing government borrowing and holding down inflationary pressures. The SMP, which is closely aligned to the 2004/05 budget approved by Parliament, supports key government initiatives, including the targeted input program (TIP), the purchase of maize to alleviate the expected shortage, and the recent increases in civil service pay. While these initiatives are costly, the mission agrees that food security and a more efficient civil service pay structure are important government priorities. The success of the SMP will, therefore, depend on adherence to the approved budget provisions for these and all other spending items.

"In general, the mission was encouraged by recent signs that Malawi's economy is strengthening. Preliminary information indicates that economic growth picked up in 2003-04; it is now estimated to be around 4¼ percent in 2004, in part because of a very large increase in tobacco production that is also contributing to a rise in foreign exchange earnings. Average inflation has remained in the 10-12 percent range, but it is projected to rise temporarily to14½ percent around the end of the year because of the impact of higher fuel and maize prices.

"The mission welcomed the progress observed under the SMP through end-September. In particular, discretionary spending and net domestic financing to the government were significantly below their ceilings due to the new government's effort to rein in spending by rejecting requests for extra budgetary spending and the postponement of maize purchases into the October-December period. Targets on net foreign and net domestic assets of the Reserve Bank of Malawi (RBM) were comfortably met, pointing toward strong performance by the RBM in mopping up the monetary overhang and in building the necessary level of reserves during the tobacco marketing season. The authorities have also implemented measures to improve financial management, particularly in the areas of budget monitoring and expenditure control.

"Going forward, the mission encouraged the authorities to continue the implementation of reforms in order to improve Malawi's growth prospects and social conditions. The success of the SMP, however, depends critically on adherence to the approved budget provisions, and the government will need to counter quickly any pressures that develop. The government is already addressing higher-than-expected costs stemming from the civil service wage reform. It is equally important that the RBM continue to mop up the monetary overhang and take the needed steps to contain inflation.

"The IMF remains committed to helping Malawi achieve macroeconomic stabilization, sustainable growth, and poverty reduction. The mission team plans to return to Malawi in February to monitor the country's financial performance through December and to continue the policy dialog. Strong performance under the SMP would provide a basis for a new financial arrangement under the Poverty Reduction and Growth Facility (PRGF)."

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¹ The Staff Monitored Program document can be found at www.imf.org. Copies are also available at the IMF office in Lilongwe.