Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Malawi

December 14, 2015

On December 11, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation1 with Malawi.

Bold economic reforms undertaken in mid-2012, namely the devaluation of the currency, the adoption of a floating exchange rate regime, the liberalization of foreign exchange markets, and the introduction of an automatic fuel price adjustment mechanism transformed the policy environment and greatly improved the outlook of the economy. But uneven policy implementation, high inflation, and a weak balance of payments position–dependent on a narrow export base and financed by volatile donor inflows–continue to pose macroeconomic challenges. Furthermore, the “cashgate” scandal uncovered in 2013 involving a large-scale theft of public funds damaged Malawi’s economic outlook significantly. The subsequent withdrawal of donors’ budgetary support and fiscal and monetary policy slippages prevented the achievement of key objectives of sustainable and inclusive growth, and low inflation under Malawi’s Growth and Development Strategy. Over 2012–14, real GDP growth and inflation averaged 4.3 percent and 24.5 percent, respectively.

The economic outlook remains difficult reflecting the negative impact of weather-related shocks, the ongoing suspension of budget support, persistently high inflation and weaker global demand which could hurt Malawi’s exports. Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015 due in large part to heavy floods in early 2015 followed by drought which resulted in an estimated decline of about 30 percent in the maize harvest (the main staple). As a result, an estimated 2.8 million persons remain at risk of food insecurity. Growth is projected to rise gradually to about 5.5 percent over the medium term. Inflation is expected to rise to 25.4 percent at end-2015 and is estimated to ease in 2016 and reach single digits at end-2017 if fiscal and monetary policies tighten, and international prices for food and petroleum products remain low. The external current account deficit will remain in the 8 percent range over the medium term reflecting the demand for imports associated with developmental projects, rapid population growth, and the slow pace of export diversification.

Executive Board Assessment2

Executive Directors expressed concerns about the policy slippages that have prevented Malawi from achieving sustained growth and low inflation. They agreed that the outlook is subject to downside risks from continued weather related supply shocks, the interruption of donor budget support, and weaker demand for Malawi’s exports. Accordingly, Directors emphasized that restoration of macroeconomic stability was a critical near term priority. In this context, they underlined the need for fiscal consolidation and tighter monetary policy. Going forward, with implementation of sound macroeconomic policies and structural reforms, Directors expected growth to rebound gradually over the medium term along with a decline in inflation.

Directors underscored the benefits of improved revenue mobilization to respond to rising demand for public services from a rapidly growing population and to reduce aid dependence. Directors recommended broadening the tax base, strengthening tax compliance, and modernizing tax administration. Directors emphasized that ensuring medium term fiscal sustainability while safeguarding social spending will require improvements in the allocation and targeting of public spending. Directors stressed the need to accelerate public financial management reforms to restore trust and confidence in the budget process and foster donor re-engagement. Directors also cautioned that the envisaged changes should not make public sector pensions fiscally untenable.

Directors welcomed Malawi’s commitment to the flexible exchange rate regime and the automatic fuel pricing mechanism, both of which have served Malawi well. They cautioned that changes to the fuel import regime involving a greater role for the state-owned company should be transparent and include safeguards against the emergence of contingent liabilities for the budget.

Directors called for intensified efforts to enhance financial sector resilience and its role in fostering inclusive growth. They noted that credit and concentration risks pose a significant threat to banking system stability and warranted continuous vigilance.

Directors encouraged the authorities to implement structural reforms to remove supply bottlenecks, increase agricultural productivity and improve the business environment.


Malawi: Selected Economic Indicators, 2012–18
 
  2012 2013 2014 2015 2016 2017 2018
  Act. Act.  Est. Proj.
 

National accounts & prices (% change, unless otherwise indicated)

             

GDP at constant market prices

1.9 5.2 5.7 3.0 4.5 5.2 5.5

Nominal GDP (billions of Kwacha)

1,502 2,011 2,570 3,198 3,933 4,564 5,190

GDP deflator

17.7 27.3 20.9 20.8 17.7 10.3 7.8

Consumer prices (end of period)

34.6 23.5 24.2 25.4 13.6 9.3 8.2

Consumer prices (annual average)

21.3 28.3 23.8 21.9 19.8 11.8 8.8

Investment and savings (percent of GDP)

             

National savings

2.8 4.0 3.9 4.9 5.1 5.2 5.4

Gross investment

12.1 12.7 12.0 12.8 12.9 13.0 13.1

Government

5.8 5.3 4.6 6.6 5.6 5.8 5.6

Private

6.3 7.4 7.5 6.2 7.3 7.2 7.5

Saving-investment balance

-9.3 -8.7 -8.1 -7.9 -7.8 -7.8 -7.7

Central government (percent of GDP on a fiscal year basis)1

             

Revenue

18.7 27.5 22.8 21.4 22.4 22.2 22.5

Tax and nontax revenue

15.6 17.3 19.7 18.6 18.5 18.6 18.9

Grants

3.1 10.2 3.1 2.8 3.9 3.5 3.6

Expenditure and net lending

23.5 28.5 28.9 27.1 26.2 24.7 25.3

Overall balance (excluding grants)

-7.9 -11.2 -9.2 -8.5 -7.7 -6.1 -6.4

Overall balance (including grants)

-4.8 -1.0 -6.1 -5.7 -3.8 -2.5 -2.8

Foreign financing

1.1 1.9 2.0 2.5 3.1 2.2 2.8

Domestic financing

4.7 -0.1 4.2 3.3 0.7 0.3 0.1

Discrepancy

-1.1 -0.8 -0.1 0.0 0.0 0.0 0.0

Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)

             

Money and quasi money

22.9 35.1 20.7 31.8 21.3 14.8 16.4

Net foreign assets

9.3 26.5 20.6 23.8 15.0 5.9 9.0

Net domestic assets

13.6 8.6 0.1 8.0 6.3 8.8 7.5

Credit to the government

0.0 11.3 -5.9 2.3 -0.6 0.4 0.1

Credit to the private sector (percent change)

25.4 14.4 20.0 15.1 16.5 18.6 19.5

External sector (US$ millions, unless otherwise indicated)

             

Exports (goods and services)

1,421 1,657 1,751 1,558 1,698 1,861 1,943.2

Imports (goods and services)

2,282 2,315 2,388 2,186 2,264 2,452 2,556.0

Gross official reserves

236 397 588 683 745 772 895.4

(months of imports)

1.2 2.0 3.2 3.6 3.6 3.7 3.7

(percent of reserve money)

69.1 108.3 130.3 143.8 146.9 142.3 150.8

Current account (percent of GDP)2

-9.3 -8.7 -8.1 -7.9 -7.8 -7.8 -7.7

Current account, excl. official transfers (percent of GDP)2

-12.3 -10.0 -8.1 -8.3 -8.0 -7.8 -7.6

Real effective exchange rate (percent change)

-17.9 -14.9 8.8 ... ... ... ...

Overall balance (percent of GDP)

1.6 3.1 2.7 1.0 0.5 0.9 2.0

Terms of trade (percent change)

-2.6 1.1 1.5 11.1 -1.5 -3.0 -1.1

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

             

External debt (public sector)

20.1 25.5 26.6 34.0 31.7 30.0 30.4

NPV of external debt (percent of exports)

53.3 77.3 102.7 117.2 103.6 89.2 84.9

Domestic public debt

13.8 19.8 14.9 14.0 13.4 12.4 11.1

Total public debt

33.8 45.3 41.5 48.0 45.1 42.3 41.4

External debt service (percent of exports)

1.4 1.7 4.2 9.5 11.4 9.5 4.9

External debt service (percent of revenue excl. grants)

2.1 2.8 6.6 12.4 16.3 13.6 7.2

91-day treasury bill rate (end of period)

20.0 32.3 26.9 ... ... ... ...
 

Sources: Malawian authorities and IMF staff estimates and projections.

1 The fiscal year starts in July and ends in June. The current financial year, 2015, runs from July 1, 2014 to June 30, 2015.

2 Numbers reflect re-classification of project and dedicated grants from current account to capital account.

Malawi: Selected Economic Indicators, 2012–18
 
  2012 2013 2014 2015 2016 2017 2018
  Act. Act.  Est. Proj.
 

National accounts & prices (% change, unless otherwise indicated)

             

GDP at constant market prices

1.9 5.2 5.7 3.0 4.5 5.2 5.5

Nominal GDP (billions of Kwacha)

1,502 2,011 2,570 3,198 3,933 4,564 5,190

GDP deflator

17.7 27.3 20.9 20.8 17.7 10.3 7.8

Consumer prices (end of period)

34.6 23.5 24.2 25.4 13.6 9.3 8.2

Consumer prices (annual average)

21.3 28.3 23.8 21.9 19.8 11.8 8.8

Investment and savings (percent of GDP)

             

National savings

2.8 4.0 3.9 4.9 5.1 5.2 5.4

Gross investment

12.1 12.7 12.0 12.8 12.9 13.0 13.1

Government

5.8 5.3 4.6 6.6 5.6 5.8 5.6

Private

6.3 7.4 7.5 6.2 7.3 7.2 7.5

Saving-investment balance

-9.3 -8.7 -8.1 -7.9 -7.8 -7.8 -7.7

Central government (percent of GDP on a fiscal year basis)1

             

Revenue

18.7 27.5 22.8 21.4 22.4 22.2 22.5

Tax and nontax revenue

15.6 17.3 19.7 18.6 18.5 18.6 18.9

Grants

3.1 10.2 3.1 2.8 3.9 3.5 3.6

Expenditure and net lending

23.5 28.5 28.9 27.1 26.2 24.7 25.3

Overall balance (excluding grants)

-7.9 -11.2 -9.2 -8.5 -7.7 -6.1 -6.4

Overall balance (including grants)

-4.8 -1.0 -6.1 -5.7 -3.8 -2.5 -2.8

Foreign financing

1.1 1.9 2.0 2.5 3.1 2.2 2.8

Domestic financing

4.7 -0.1 4.2 3.3 0.7 0.3 0.1

Discrepancy

-1.1 -0.8 -0.1 0.0 0.0 0.0 0.0

Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)

             

Money and quasi money

22.9 35.1 20.7 31.8 21.3 14.8 16.4

Net foreign assets

9.3 26.5 20.6 23.8 15.0 5.9 9.0

Net domestic assets

13.6 8.6 0.1 8.0 6.3 8.8 7.5

Credit to the government

0.0 11.3 -5.9 2.3 -0.6 0.4 0.1

Credit to the private sector (percent change)

25.4 14.4 20.0 15.1 16.5 18.6 19.5

External sector (US$ millions, unless otherwise indicated)

             

Exports (goods and services)

1,421 1,657 1,751 1,558 1,698 1,861 1,943.2

Imports (goods and services)

2,282 2,315 2,388 2,186 2,264 2,452 2,556.0

Gross official reserves

236 397 588 683 745 772 895.4

(months of imports)

1.2 2.0 3.2 3.6 3.6 3.7 3.7

(percent of reserve money)

69.1 108.3 130.3 143.8 146.9 142.3 150.8

Current account (percent of GDP)2

-9.3 -8.7 -8.1 -7.9 -7.8 -7.8 -7.7

Current account, excl. official transfers (percent of GDP)2

-12.3 -10.0 -8.1 -8.3 -8.0 -7.8 -7.6

Real effective exchange rate (percent change)

-17.9 -14.9 8.8 ... ... ... ...

Overall balance (percent of GDP)

1.6 3.1 2.7 1.0 0.5 0.9 2.0

Terms of trade (percent change)

-2.6 1.1 1.5 11.1 -1.5 -3.0 -1.1

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

             

External debt (public sector)

20.1 25.5 26.6 34.0 31.7 30.0 30.4

NPV of external debt (percent of exports)

53.3 77.3 102.7 117.2 103.6 89.2 84.9

Domestic public debt

13.8 19.8 14.9 14.0 13.4 12.4 11.1

Total public debt

33.8 45.3 41.5 48.0 45.1 42.3 41.4

External debt service (percent of exports)

1.4 1.7 4.2 9.5 11.4 9.5 4.9

External debt service (percent of revenue excl. grants)

2.1 2.8 6.6 12.4 16.3 13.6 7.2

91-day treasury bill rate (end of period)

20.0 32.3 26.9 ... ... ... ...
 

Sources: Malawian authorities and IMF staff estimates and projections.

1 The fiscal year starts in July and ends in June. The current financial year, 2015, runs from July 1, 2014 to June 30, 2015.

2 Numbers reflect re-classification of project and dedicated grants from current account to capital account.


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.

2 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 summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.




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