If one were to go to the corridors of Capital Hill, they are likely to ‘smell’ excitement in the air. Why? The International Monetary Fund (IMF) Executive Board, which discussed the second review under Malawi’s Staff Monitored Programme with Executive Board Involvement, on Wednesday approved a 48-month arrangement under the Extended Credit Facility (ECF). Who can blame them? However, I want the reader to judge for himself or herself if IMF officials gave us the approval while smiling or grumbling.
Washington, DC: The Executive Board of the International Monetary Fund (IMF) discussed the Second Review of the Staff-Monitored Program with Executive Board Involvement (PMB) and approved a 48-month arrangement under the Extended Credit Facility (ECF) for Malawi with access of 95 percent of quota, equivalent to SDR131.86 million (about US$175 million). The decision allows an immediate disbursement of SDR26.37 million (about US$35 million).
Malawi has struggled to sustain growth for decades despite large inflows of official development assistance.
The past three years have been particularly difficult with stagnating growth and widening macroeconomic imbalances due to unsustainable debt and the effects of multiple shocks, including an outbreak of cholera and cyclone Freddy this year alone.
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Malawi’s external debt is unsustainable and debt service needs are eroding limited fiscal space. Despite sizeable external emergency financing, the large fiscal budget deficit necessitated domestic financing.
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This has been addressed in large part through monetary financing, putting pressure on the exchange rate and increasing the rate of inflation. The ECF arrangement aims to support the authorities’ commitment to restore macroeconomic stability, build a foundation for inclusive and sustainable growth, including to strengthen resilience to climate-related shocks, and address weaknesses in governance and institutions. The arrangement is also expected to catalyze grant financing and capital inflows including foreign direct investment and trade credit.
Following the Executive Board discussion on Malawi, Ms. Gita Gopinath, First Deputy Managing Director, and acting Chair, issued the following statement:
“The Malawian authorities have shown unwavering commitment to the Staff- Monitored Program with Executive Board Involvement (PMB) and together with tangible progress on securing debt treatment, have established a track record for an Extended Credit Financing arrangement with the IMF.
The ECF arrangement will support the ongoing macroeconomic adjustment and reforms, catalyze grant financing and foreign direct investment, and provide a framework for structural reforms”.
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“Successful external debt restructuring is vital as there is no reasonable mix of adjustment and financing alone that can deliver macroeconomic stability. The Malawian authorities are seeking comparable treatment from all official bilateral creditors and continue to pursue good faith negotiations with commercial creditors. However, time is of the essence for debt relief, as further delays would result in greater financing gaps, which could then only be closed at an undesirably high cost to the population”.
“Fiscal discipline, supported by a robust public financial management system and timely production of comprehensive fiscal reports, remains critical. Concerted effort by the authorities and other domestic stakeholders to prepare for fiscal financing challenges is important.
Price stability is critical to prevent a further erosion of purchasing power.
Rebuilding international reserve buffers and allowing for greater flexibility in the exchange rate are critically important to bring back trade credit and to reduce Malawi’s vulnerability to external shocks. Addressing weakness in governance and institutions will be important”.
“Shifting Malawi’s growth model from a consumption-driven to a production-driven one and from a government-led to a private-sector-led one is a core principle of Malawi 2063 and is vital to make Malawi’s growth inclusive, sustainable, and resilient to climate-related shocks”.
“The PMB was sufficiently robust to meet its objectives”.— Source: IMF
