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IMF for fiscal consolidation

REE—Malawi’s problems cannot be fixed without fiscal consolidation

International Monetary Fund (IMF) Country Representative, Jack Ree, has concluded his tenure of office. He takes up another responsibility at the IMF headquarters in Washington DC. Our reporter CHIMWEMWE MANGAZI engages Ree for an insight into his experience.

How would you describe your tenure of office in Malawi?

It was rich and rewarding. When I first arrived here in August 2016, the first inflation number one received was 24.3 percent. Donors were also extremely doubtful about Malawi’s public finance management, and kwacha was on a free fall. Now inflation is kept in single digits. The government’s consolidated financial accounts are, for the first time, compiled and audited quarterly. And the kwacha remains stable.

I am not saying that these were because of me or the IMF. But I believe that Malawi’s macroeconomic programme supported by IMF’s Extended Credit Facility played a role in this. First, as we saw during the last two years, the political economy is extremely powerful in countries like Malawi. And the ECF programme provided a fairly dependable shield for protecting macroeconomic stabilization against headwinds particularly of the elections. It also empowered and reinforced champions of reform within the government.

Second, the capacity challenge proved staggering which means that any macroeconomic adjustment and reform efforts should be closely knit together with capacity development for their actual implementation. During the last three years, I was able to be an additional hand on the pump, together with IMF’s Technical Assistance Missions and our resident Public Finance Management adviser. I am particularly proud to be a part of those flagship drives as the new IFMIS Project, the new RBM Bill, and the bank account reconcilation.

It was also very pleasing to find something that makes my presence here natural. Having never experienced an Asian Resident Representatives before, my Malawian counterparts initially needed some time to figure out and start enjoying me. But, soon, they all loved the Korean side of me, which brings a story of breakaway from a poverty trap and hopelessness. There was also something, deep inside, that made me connect with them easily. Perhaps that’s my Korean soul, which is characterized by groove and sorrow, which seem to flow in Malawian bloods as well.

What is your take on the local economy?

I am hopeful. Since the transition to the multi-party system in 1994, there were six elections and four waves of inflation. All the four inflation waves were all triggered by the elections and all elections, except for 2009 one stoked up renewed waves of inflation. And this was due to extravagant fiscal expenditure to win votes.

Malawi managed to break that cycle this time, with inflation remaining at single digits in an election year a rare window of macroeconomic opportunity. And all we need is to stay the course of macroeconomic stabilization. Then the single digit inflation will become a new reality. And this will let Malawi to finally shift the gear to growth as repeatedly proclaimed by the new Finance Minister and the Governor.

In fact, 2018-19 was a very difficult year, in view of both the elections and the flood therefore, maintaining a path of decisive consolidation was difficult. That’s why Malawi needs to gear up the fiscal adjustment more in 2019-20.

Rising domestic debt and lack of fiscal prudence have remained key challenges. Where is the country getting it wrong?

Malawi’s risk of external debt distress is moderate. However, its domestic debt has been growing at an unsustainably rapid speed over the last two years. This was mainly driven by two consecutive years of elevated budget deficits.

Debt is not necessarily a bad thing. Just like a person or a company, countries also need to borrow money to invest in their future; and, more dynamically a growing country can borrow more and on more favourable terms which can set in a virtuous circle between investment and finance.

Malawi’s problem is that debt is rising to finance consumption more than investment, and the value for money remains poor for those money that are funneled to investment. Without a fix, this set-up can trigger a vicious circle where debt financing triggers more strained debt servicing capacity, and diminishing appetite by the lenders.

What is the remedy to the above challenges?

The problem cannot be fixed without fiscal consolidation. While the consolidation should be done from both the expenditure and revenue sides, the emphasis should overtime shift to revenue sides, because revenue mobilisation is the only way to keep investing in public infrastructure and human capital while fending off a debt spiral.

As the same time, Malawi needs to significantly improve the efficiency of public investment. For that we need to upgrade the public finance management reform—away from the most basic layers of control (e.g., financial reporting and commitment control) to more sophisticated and complex ones (e.g., a single pipeline of scrutinized projects, and ex-post reviews of key projects).

Going forward, we are projecting Malawi’s debt-to-GDP ratio to decrease by about 10 percentage point of GDP within the next seven to eight years, provided that the programmed path of fiscal consolidation is adhered to.

What suggestions can you provide for the Malawi economy to move forward?

We just need to stay the course of fiscal consolidation. And then, we should shift our focus increasing on investing the public money wisely. In the medium term, we are projecting economic growth to rise to 6.5 percent. That will depend critically on whether Malawi can lock in macroeconomic stability—thereby winning back investor confidence to unlock private sector growth potential.

If that happens, growth will naturally come given Malawi’s low base of economic development and the scarcity of private capital that promises good returns. Make sure that we don’t backslide on reforms, particularly ones on economic governance. The authorities managed to significantly strengthen fiscal control, to ward off the likes of Cashgate, but these gains can only be sustained if there is a political will and capacity to sustain it. Powerful tools are already there. And Malawian should decide whether to use these tools well or rest them in an abandoned shack.

What next for you?

I and my wife are heading back to Washington. After a short break, I will start working on a large African country from Washington DC. We hope to come back to the field before my retirement because we enjoyed our tour of mission to Malawi so much.

I had the privilege of meeting and making friends with so many amazing people. My wife and I had a privilege of bringing boreholes to two villages (one on our own, and the other on our parents’ behalf) and had an opportunity to meet and encourage so many young volunteers. We also had the pleasure of singing intensively in the choir and share music, at times, with the local Malawians. I love Malawi and will never forget it.

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