Monday, November 16, 2009

Malawi / Press Statement at the end of the IMF Staff Mission

LILONGWE, Malawi, November 12, 2009

Press Release No. 09/396

An IMF staff team concluded a two-week visit to Malawi today to conduct the discussions for the 2009 Article IV consultation1 and to initiate discussions on a new program that could be supported by the Extended Credit Facility (ECF), a new IMF lending instrument that is expected to be established shortly. The mission met with the Minister of Finance, the Governor of the Reserve Bank of Malawi, and other senior government officials, as well as with representatives from the donor community, civil society, and the business and banking sectors. The mission is grateful to the authorities for constructive discussions and warm hospitality.

At the conclusion of the mission, Ms. Janet Stotsky, mission chief for Malawi, issued the following statement:

“We have made good progress on discussions with the authorities on macroeconomic and structural policies to address Malawi’s economic challenges and keep the country on a path of sustained economic growth.

“Malawi has weathered the global economic storm relatively well. Growth in 2008 is estimated to have reached almost 10 percent, driven by a record tobacco harvest and rapid expansion in maize and service sectors. Growth is projected to remain robust in 2009, reflecting continued strong tobacco and maize crops, the start of uranium production, and expanding wholesale and retail trade. Production of maize has benefited from favorable rainfall and the government’s subsidized distribution of fertilizer to small farmers. Inflation has trended downward during 2009, reflecting moderation in food and fuel prices and restrained credit growth.

“Although fiscal consolidation in recent years has helped contain inflation and allowed a reduction in domestic debt, in fiscal year 2008/09 (ending in June 2009), the government missed its target for domestic borrowing by a substantial margin, mainly reflecting overspending on imported fertilizer and goods and services. Tobacco prices, in the now-completed harvest season, were lower than in 2008 but remained above their average level of earlier years. These results buoyed domestic incomes and exports, though rising imports and a slowing of foreign investment have led to continued weakness in the balance of payments. Official reserves are low, well below the 3 months of import cover or more that would be essential to reduce Malawi’s vulnerability to weather, terms of trade, aid, and other shocks.

“Discussions with the authorities centered on the macroeconomic framework that would address Malawi’s balance of payments difficulties and could be supported by an arrangement under the ECF. The authorities recognize that a tight 2009/10 fiscal policy stance is essential to reduce inflationary and real exchange rate pressures, and help bolster reserves, and they acknowledge the heavy reliance of the budget on donor funding. To this end, the government would target a net repayment of domestic borrowing of around 1.5 percent of GDP in 2009/10, slightly more than envisioned in the legislated budget. This objective would be achieved by undertaking additional measures to cut lower priority expenditures or shore up revenues, should revenues fall short of budget targets, while at the same time protecting pro-poor spending.

“The mission endorsed recent efforts by the Reserve Bank of Malawi to mop up excess liquidity. The mission also supported the authorities’ commitment to a more flexible exchange regime, which would lead to a better balance between supply and demand of foreign exchange. Structural reforms are also needed to ensure that, over time, the exchange regime supports a more rapid growth in exports relative to imports.

“The staff team also continued discussions with the authorities on structural measures to underpin macroeconomic objectives and sustain growth and development. These measures include reforms to improve the management of budgetary resources and parastatals, including key public utilities; and measures to strengthen the implementation of monetary and exchange rate policies.

“The IMF Executive Board is expected to conclude the Article IV consultation discussions in late January 2010. A request for an arrangement under the ECF could also be considered by the Board at the same time.”

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

SOURCE: International Monetary Fund (IMF)