Malawi's New IMF Loan Boosts Prospects for Sustained Growth
By Ruby Randall, Adelaide Matlanyane, Charles Amo Yartey, and Joe Thornton
IMF African Department
April 1, 2010
- Malawi's seven straight years of growth reflect sound policies, debt relief
- Undiversified economy still vulnerable to weather- and aid-related shocks
- New loan program aims to galvanize donor support, technical assistance
Malawi’s recent robust economic growth has enabled one of Africa’s poorest countries to make real strides in reducing chronic food insecurity and progress toward poverty reduction and development targets.
However, this growth has led to rapidly rising imports and foreign exchange shortages, which threaten the sustainability of the country’s strong recent macroeconomic performance.
Malawi was among the first countries to receive a new loan under the IMF’s Extended Credit Facility (ECF), designed to support countries with medium-term balance of payments needs. Approved by the IMF’s Executive Board in February 2010, the $80.1 million ECF program will set the conditions for sustaining growth—the key objective of Malawi’s Growth and Development Strategy—and addressing the country’s external imbalance.
Recent economic performance
Malawi’s seven-year period of uninterrupted growth (see chart)—even amid a global recession—reflects the benefits of generally sound macroeconomic policies and of debt relief from the Heavily Indebted Poor Countries (HIPC) initiative. Buoyed by several bumper harvests for tobacco, the principal cash crop, and maize, stemming from good rainfall and the distribution of subsidized fertilizer, Malawi’s agriculture-based economy weathered well the global economic storm. It also advanced further toward meeting the United Nations Millennium Development Goals.
Successive plentiful harvests have also contributed toward enhanced food security and a moderation in inflation. As a result, from 1990 to 2007, child malnutrition rates fell from over 24 percent (among the highest in sub-Saharan Africa) to about 18 percent, and child mortality rates were almost halved, from 221 per 1,000 children under 5 to 120 per 1,000.
Nevertheless, despite some economic gains, poverty remains entrenched. Malawi also remains vulnerable to weather- and aid-related shocks owing to the undiversified nature of the economy and heavy donor dependence, and has made only limited progress toward economic diversification and agricultural reform. Through its continued engagement with the international financial community and donors, Malawi aims to address obstacles to sustained growth and poverty reduction.
Malawi’s performance under its most recent Poverty Reduction and Growth Facility arrangement (from August 2005 to August 2008) was largely successful, with domestic debt declining as a share of GDP and HIPC debt relief in 2006 helping to lower the overall debt burden. In addition, fiscal and monetary restraint led to much lower inflation and interest rates, and macroeconomic stability was complemented by a range of structural reforms.
Performance under the Exogenous Shocks Facility (ESF) arrangement (from December 2008 to December 2009) was less successful, owing both to fiscal overspending in the run-up to the May 2009 presidential and parliamentary elections, and the failure to address foreign exchange shortages. High fertilizer and fuel prices, combined with rising farmer incomes and public spending, all led to unexpectedly rapid import growth, which outpaced the growth of exports and contributed to a widening of the external current account deficit and to falling international reserves.
The de facto fixed exchange rate prevented the nominal exchange rate from adjusting to balance foreign exchange demand and supply, resulting in foreign exchange rationing and a tightening of restrictions on current transactions. As a result of these slippages, the ESF program expired on December 2, 2009, without the completion of any program reviews.
The new ECF arrangement seeks to help Malawi overcome its recent economic challenges and support the medium-term objectives set out in the Malawi Growth and Development Strategy. Key features of the new program are
• Enhancing macroeconomic stability through the pursuit of prudent fiscal and monetary policies, and by creating room in the budget for more social and pro-poor spending, including through a strengthening in revenue administration and public financial management, tax policy reforms, and improving the solvency and efficiency of public enterprises
• Establishing a properly valued exchange rate, strengthening reserve accumulation, and addressing underlying structural weaknesses in the foreign exchange market over the medium term in order to eliminate all current account restrictions by end-2011
• Improving the structure of the social safety net to protect poor households from shocks and policy adjustments, including exchange rate depreciation, and
• Improving the business climate through a strengthening in utilities’ financial and investment performance, and through regulatory reform.
The new program will support these efforts by helping to galvanize additional donor assistance, in the form of both balance of payments support and project grants and concessional loans, and by providing technical assistance in public financial management, taxation policy, tax administration, balance of payments statistics, and other areas.
The IMF is also working with the World Bank, within the context of the ECF arrangement, to increase the availability of resources for private sector investment through the implementation of the authorities’ Financial Sector Development Strategy, designed to help develop and deepen the financial sector; and the enhancement of the private sector’s role in the agricultural sector.