IMF Staff Reaches Staff-level Agreement on an Extended Credit Facility Arrangement and Completes 2018 Article IV Discussions with Malawi

• Economic growth in the range of 3-5 percent is expected in 2018, followed by a rise to 6-7 percent over the medium term.
• The authorities will deploy strong remedial measures to address the widening of the budget deficit in the current fiscal year and shift to a slightly positive primary balance in the next fiscal year. They are committed to irrevocably close out the arrears clearance program.
• While the Malawi Growth and Development Strategy (MGDS) III lays out ambitious goals for critical infrastructure projects, the government is committed to ensuring their financing preserves debt sustainability.

An International Monetary Fund (IMF) team led by Pritha Mitra, Mission Chief for Malawi, visited Lilongwe from January 31-February 14, 2018 to conduct the 2018 Article IV Consultation and hold discussions with the Malawian authorities on a program supported by the IMF’s Extended Credit Facility (ECF) arrangement. ^[1]

At the end of the mission, Ms. Mitra issued the following statement:

“The IMF team reached a staff-level agreement with the authorities of Malawi on a three-year program that could be supported by an arrangement under the Extended Credit Facility (ECF) and concluded the 2018 Article IV discussions. The economic program would aim to entrench macroeconomic stability and foster higher, more inclusive, and resilient growth.

“Malawi is recovering from two years of drought. Economic growth in the range of 3-5 percent is expected in 2018, followed by a rise to 6-7 percent over the medium term. Growth will be supported by enhanced infrastructure investment and social services as well as an improved business environment, which will boost confidence and unlock the economy's potential for higher, more broad-based, and resilient growth and employment. Inflation at end-2018 is expected to reach 9 percent before gradually converging to around 5 percent over the medium term.

“While the authorities regained control over the budget during FY16/17, this proved challenging during FY 17/18. Revenue shortfalls and expenditure overruns, including the bailout of maize purchase loans by a parastatal exerted significant pressures on the budget.

“The authorities will deploy strong remedial measures to address the widening of the budget deficit in the current fiscal year and shift to a slightly positive primary balance in the next fiscal year. They are committed to irrevocably close out the arrears clearance program. The government will continue enhancing transparency in the budget process, strengthening the medium-term budgetary framework and cash management, and routinizing bank reconciliation.

“Monetary policy will focus on entrenching disinflation. It will aim to contain the inflation rate within single digits by end-2018 while keeping real interest rates positive. The banking system remains stable though vulnerabilities have somewhat increased. Financial sector stability will continue to be safeguarded including by requiring all banks comply with IFRS9 standards.

“While the Malawi Growth and Development Strategy (MGDS) III lays out ambitious goals for critical infrastructure projects, the government is committed to ensuring their financing preserves debt sustainability. Malawi’s debt has risen but its risk of debt distress remains “moderate”. To this end, investment planning will be critical – including rigorously prioritizing the pipeline of projects based, among other considerations, on credible cost-benefit analyses.

“The government will continue to improve the business environment, including easing procedures to start a business and deal with construction permits, strengthening contract enforcement, and enhancing the insolvency processes. It is also committed to implementing deep reforms including in agricultural regulations and market intervention systems, agricultural subsidies, and land management systems.

“The staff-level agreement and 2018 Article IV could be considered by the IMF Executive Board in April 2018.

“The team met with Minister of Finance Goodall Gondwe, Governor of the Reserve Bank of Malawi (RBM) Dalitso Kabambe, other senior government and RBM officials, a broad range of national stakeholders outside government, as well as representatives of Malawi’s development partners. The IMF team thanks the authorities for their warm hospitality, strong cooperation, and constructive discussions.”

^[1] The ECF is a lending arrangement that provides sustained program engagement over the medium to long-term in case of protracted balance of payments problems.

Distributed by APO Group on behalf of International Monetary Fund (IMF).