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Will IMF’s ECF save Malawi?

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Wilson Banda

Empty shelves, drug shortages and shutting down of travel agents are some of the immediate challenges that have engulfed Malawi in recent weeks as the country grapples with an acute shortage of foreign currency.

Ironically, this is happening right in the middle of sales of Malawi’s foreign exchange earner, tobacco.

Despite the conspicuous shortage of forex, the official exchange rate has remained stable at around K825 to the dollar while the black market rate continues to run away at K1,100 to the green buck.

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Last week, Reserve Bank of Malawi Governor Wilson Banda said Malawi desperately needs an Extended Credit Facility (ECF) programme with the International Monetary Fund (IMF) to revamp the ailing economy.

ECF provides financial assistance to countries with protracted balance of payment problems. The ECF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of low-income countries (LICs), including in times of crisis.

The ECF is the fund’s main tool for providing medium-term support to LICs.

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According Banda, the IMF gives a stump of approval and instills confidence in donors that a particular country has the right policy mix in managing its economy.

“In the absence of donor support, government ends up having to foot that bill [budget deficit] and that can be very taxing.

“This is why you find that in the past three to four years, there has been a lot of borrowing by government from the domestic market that has led to the crowding out of the private sector,” Banda said.

On Monday, President Lazarus Chakwera engaged IMF Managing Director Kristalina Georgieva ahead of IMF Mission visit to Malawi.

During the virtual interaction, Chakwera made a commitment to tighten public spending to make the most of the hard-earned taxes.

“I know that making sacrifices like reducing public spending and raising some taxes is painful, especially when it means reducing budgetary allocations for services like the Affordable Inputs Programme (AIP) as we have done, but it’s what we have to do temporarily to make tomorrow better permanently,” Chakwera said.

What does the IMF look for?

The ECF is available to all PRGT-eligible member countries that face a protracted balance of payments problem, i.e. when the resolution of the underlying macroeconomic imbalances would be expected to extend over the medium or longer term.

That said, access to ECF financing is determined on a case-by-case basis, taking into account the country’s balance of payments need, the strength of its economic programme and capacity to repay the fund, the amount of outstanding Fund credit and the country’s record of past use of Fund credit, and is guided by access norms.

Over the past six months or so, the contentious issue with Malawi has been the matter of foreign exchange misrepresentation to the IMF.

It is believed that the previous administration misreported on several occasions on gross reserve assets and net international reserves (NIR) for the period between 2018 and 2019, which remains a bone of contention between the IMF and the new administration.

Malawi was implementing the ECF from April 2018 and it was expected to run until April 2021.

Speaking in Lilongwe in October last year, IMF Director of African Department Abebe Aemro Selassie said the fund was seriously concerned about a misreporting case involving some of the targets during the implementation of the cancelled ECF on former governing Democratic Progressive Party (DPP)’s watch.

Would the ECF end Malawi’s economic challenges?

Economics Association of Malawi Executive Director Frank Chikuta said the ECF programme with the IMF would be crucial for Malawi as it would provide the much-needed stabilising effect.

He was, however, quick to note that the ECF is not a development facility, adding that there are other institutions which provide support in the development arena.

According to Chikuta, for Malawi to address foreign exchange challenges, it needs to address the structural challenges in the economy to make it export-led.

Commenting on the economic challenges rocking Malawi, former Finance minister Goodall Gondwe blamed it on the financial indiscipline that the country has embraced.

According to Gondwe, much as the structure of the economy is equally to blame for the meltdown, issues of discipline have not been given the necessary attention.

Among other things, Gondwe cited the huge fuel allowances given to top-level civil servants and the appetite for brand new cars at the time the economy is limping.

On his part, Financial Market Dealers Association (Fimda) president Mclewen Sikwese said the IMF programme, despite being very important, is not in itself the lasting solution to Malawi’s economic challenges.

Sikwese, however, said the lasting solution to the country’s economic woes lies in how Malawi would use the resources unlocked by the programme.

“However, you will note much has been spent on consumption rather than production that generates foreign exchange, hence the problem of foreign exchange in the country. The programme is the spark, how to sustain the fire is up to the country and our priotisation on use of the unlocked resources,” Sikwese said.

Centre for Research and Consultancy Director Milward Tobias agreed with Sikwese that an IMF programme in itself is not the lasting solution to Malawi’s problems but that it gives a perch to get to a lasting solution.

University of Malawi Economics Professor Ben Kaluwa said addressing the structural challenges in the economy would be crucial for the wellbeing of the local economy beyond the ECF programme.

If approved, the ECF programme being sought by Malawi will be the third in line.

The first ECF programme was granted on July 23 2012 and was worth $156.2 million.

The second ECF programme was granted on April 30 2018 worth $112.3 million.

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