About two weeks ago, the International Monetary Fund (IMF) Executive Board met to review Malawi’s performance in line with the Bretton Woods’ 12-month Staff- Monitored Programme with Executive Board involvement — an informal agreement to monitor the member country’s economic programme.
The verdict was appealing to local authorities; Malawi is on track.
“The authorities are taking corrective actions necessary to demonstrate their capacity to implement the agreed macroeconomic adjustment and reforms, as well as to build the policy track record needed to support their prospective request for an Extended Credit Facility (ECF) arrangement,” says IMF Deputy Managing Director, and acting Board Chairperson Bo Li in a statement.
This could mean that Lilongwe is inching closer to an ECF programme, an IMF’s main tool for medium-term financial support to low-income countries.
An ECF arrangement brings about financial assistance to countries, like Malawi, with a volatile balance of payment (BoP) position—a record of all transactions by a country and the rest of the world. It helps mitigate foreign exchange scarcity on the market.
- Advertisement -
The arrangement is also touted for its “signalling effect” of triggering direct budget support and restoring donor confidence.
The IMF-supported programme came to a halt in 2020 when the Tonse Alliance administration requested a new four-year ECF programme “that would be better aligned with Malawi’s long-term development strategy, Malawi 2063.”
Walk towards a ‘deal’
The fund then proposed several measures to the government towards unlocking an ECF arrangement.
- Advertisement -
- Advertisement -
Key is a quest for prudence in public finance management and ensuring stability in macroeconomic fundamentals including inflation, exchange rate, and improved BoP position to facilitate speedy economic recovery and sustainable growth.
The IMF put it to the government to work towards narrowing the fiscal deficit, seen at K1.32 trillion or 8.7 percent of gross domestic product (GDP) in the 2023-24 national budget.
Also, the fund expects Malawi to work towards narrowing the public debt levels. Cumulatively, Malawi’s total public debt has been growing over the past decades to K7.9 trillion, an equivalent of 69.93 percent of the GDP.
The Treasury then vouched to have the budget deficit to GDP ratio reduced by one percent each financial year.
The government also developed a debt restructuring plan in an attempt to narrow the public debt, a strategy which serves as a cornerstone for restoring debt sustainability.
The debt strategy is designed to achieve debt sustainability and to close financing gaps.
It seeks to bring external public debt back to a moderate risk of debt distress in the medium term through a combination of policy adjustment and the necessary debt treatment.
In Malawi’s Memorandum of Economic and Financial Policies, Finance Minister Sosten Gwengwe and Reserve Bank of Malawi Governor Wilson Banda reaffirms commitment to the cause.
They say Malawi would endeavour to improve efficiency of public spending and to reduce non-critical spending.
“We will continue stepping up our efforts to address governance weaknesses and reduce vulnerabilities to corruption, including through enhancing transparency, accountability, and digitisation of public financial management, enhancing autonomy and governance of the RBM, and strengthening of its foreign exchange reserves position and management,” the memorandum reads.
According to the IMF, successful debt restructuring is vital to delivering macroeconomic stability.
Fiscal discipline, supported by a robust Public Financial Management system and timely production of comprehensive fiscal reports, remains critical.
Outlook and ECF deal prospects
But the local economy has largely been volatile faced with myriad challenges, albeit ‘necessary’ interventions by the authorities, according to the fund.
Malawi has been affected by a series of shocks—both natural and exogenous—including an outbreak of cholera and Cyclone Freddy lately.
These, and other catastrophes, caused significant loss of life and damage to infrastructure, thereby weakening growth prospects.
However, accelerated implementation of reforms to restore macroeconomic stability and support economic recovery remains key.
“…but the authorities are addressing challenges and continue to commit to the PMB’s agreed macroeconomic adjustment path and policy reforms,” says the IMF.
Local analysts feel consistency in prudent public finance management, coupled with tight monetary policy interventions, would guarantee an ECF deal in the short term.
Malawi University of Business and Applied Sciences economist Betchani Tchereni said efforts to deal with inflationary pressure and exchange rate volatility fused with some austerity measures would yield the desired fruit.
“The horizon looks good to unlock the ECF which would, itself, unlock other opportunities to improve the BoP position. So far, the RCF is on track together with the satisfactory meeting of the other requirements especially in governance. We may get a better story this October,” Tchereni said.
