On November 15 2023, the Board of Executive Directors of the International Monetary Fund (IMF) approved a $175 million four-year Extended Credit Facility (ECF) programme for Malawi.
The ECF arrangement aimed at supporting the authorities’ commitment to restore macroeconomic stability, build a foundation for inclusive and sustainable growth, including strengthening resilience to climate-related shocks, and addressing weaknesses in governance and institutions.
The arrangement was also expected to catalyse grant financing and capital inflows including foreign direct investment and trade credit.
The approval of the programme brought some excitement among authorities as the ECF was deemed to have a signaling effect that Malawi was doing well in managing its finances.
The ECF was believed to be key to helping Malawi unlock aid taps that had closed in the absence of such a programme. This, the authorities believed, would help in jumpstarting the otherwise fragile economy.
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But one year down the line, has the ECF programme helped to strengthen the local economy as envisaged?
Economics Association of Malawi (Ecama) president Bertha Bangara Chikadza Tuesday said the ECF somehow helped as Malawi saw a couple of donors who stopped supporting the budget and the country coming back.
“But as a country we have habitually failed to complete ECF and out of 13 facilities between 1994 and 2023, only 23 percent of 3 facilities were fully drawn down.
“This gives us a picture that fulfilling the conditions fully outlined by ECF is not easy, especially for an economy such as Malawi with a lot of macroeconomic imbalances and continuously experiencing fiscal slippages,” she said.
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According to Chikadza, if the ECF were to be implemented fully with all its conditions, then it could be easy to measure its effectiveness on the economy.
“Otherwise, with the current situation, we cannot be talking of building foreign exchange reserves at the expense of fuel importation and bringing the country to a standstill.
“Like we argued initially, the ECF is supposed to come with a buffer of reserves to cushion the country in times such as these,” she said.
The economists’ chief noted that the challenges have been numerous.
“For example, we started the ECF and devalued with no noticeable amount of foreign exchange reserves as a cushion for the devaluation which was effected. Thus, it has affected the stability of the currency since we are kind of chasing a moving average.
“Secondly, we suffered a dry spell which reduced food production and our exports. This has raised inflation and widened further government budget deficit as fiscal slippages were imminent. In addition, we have not contained our expenditures as anticipated and the domestic revenue generation has been outpaced by expenditures.
“In addition, with declining exports, we have not managed to build the reserves as the ECF stipulates. This, coupled with fuel shortages, I do not think it is plausible to be building reserves while the country suffers from lack of fuel to move production around and across the country. As such, fulfilling ECF seems a daunting task, especially since the economy is not stable in many areas,” Chikadza said.
Scotland-based economist Velli Nyirongo Tuesday said while the ECF programme was hailed as a potential game-changer, its success is far from guaranteed.
According to Nyirongo, the success of the programme hinges on the government’s capacity to implement agreed reforms, manage funds transparently, and address systemic challenges.
He observed that weaknesses in these areas have significantly limited the programme’s impact, with structural issues such as corruption and inefficiency further hindering progress.
“Key factors that have undermined its success include delays in enacting critical reforms, such as addressing subsidies and enhancing efficiency in public spending.
“Resistance from vested interest groups, a lack of decisive action against corruption, and political interference have frequently disrupted the government’s reform agenda.
“In retrospect, however, it is clear that without the ECF, the country’s economic situation would have been considerably worse,” Nyirongo said.
On his part, Blantyre-based economist Marvin Banda yesterday said the ECF was never meant to help the local economy.
“There is a common misconception of what the ECF is designed for. It’s not to provide forex but confidence on structural changes, it doesn’t bear fruit in the first year. The lag effect is usually longer than 48 months,” he said.
He observed that the ECF was meant to aid structural changes and that these take time to manifest in the real sector and it is understandable that the mismatch in the micro-macro sectors be felt by the citizens.
According to Banda, the economic climate is taking into consideration the challenges that the real sector is experiencing, adding that to continue the programme would mean a further streamlining in fiscal expenditure which is against the hopes of the people.
“The ECF alone cannot solve productivity issues which are the responsibility of the private sector and every citizen in Malawi. The call for patriotism cannot be louder, in order for this program to work, the nation has to leverage the donor confidence to make changes that are led by Malawians.
“What you however see is a fragmentation of the citizenry in profiteering from shortages experienced in the real sector which is a shame. Hoarding of strategic resources in the hope to take advantage of seasonally anticipated shortages has led to a further deterioration of the macro and micro climate.
“It is up to every citizen to consolidate and band together in order to become a more productive nation because donor confidence can disappear but if the nation produces and reduces it insatiable appetite for exorbitant imports then we will consolidate the structural gains which would then manifest itself in the reduction of the current account deficit and bolster forex reserves. This all starts at the top,” Banda said.
Finance Minister Simplex Chithyola Banda recently said the ECF programme has seen a number of development partners such as the World Bank and the EU resuming budget support to Malawi.
For example, the World Bank Board of Executive Directors on December 12 last year, approved a $137 million Malawi First Growth and Resilience Development Policy Operation with Catastrophe Deferred Drawdown Option (Cat-DDO), which consisted of an immediate release of $80 million to support reforms and recovery and a $57 million Cat- DDO that could be triggered in the event of a crisis.
And on October 16, 2024, the European Union signed a €55 million financing agreement with the Government of Malawi signalling the resumption of budget support to Malawi after a 10 year break.
Since the IMF team visited Malawi for the first review of the ECF in May this year, there has been little to no progress on the programme. In fact, the first review is yet to be concluded.
In August this year, the United States Government said Malawi may not meet the commitments necessary to receive a second tranche of the IMF ECF in the coming months.
Among others, the US has noted that low revenue collection, ballooning expenditures, and delayed full implementation of the Integrated Financial Management and Information System had put at risk Malawi staying on track with the IMF.
US Department of Treasury Deputy Assistant Secretary for Africa and the Middle East Eric Meyer expressed deep concern that the development would impact all Malawians, and particularly Malawi’s most vulnerable citizens.
