- Why does Malawi needs support from the IMF?
- How will IMF financing help the Malawian people?
- What are the goals of the Extended Credit Facility?
- What are the policy priorities?
- How much is the ECF and how will you ensure that the money is well spent?
- Is Malawi's debt sustainable?
- What are the next steps in the restructuring process?
- How will the program protect society’s most vulnerable? Will the program entail cuts in social programs?
- Does the exchange rate need to be devalued again?
Why does Malawi needs support from the IMF?
Malawi has struggled to sustain growth for decades, despite large inflows of official development assistance. The past three years have been particularly difficult, with stagnating growth and widening macroeconomic imbalances due to unsustainable debt and the lingering effects of multiple shocks. Malawi’s external debt is unsustainable and debt service needs are eroding limited fiscal space. Despite sizeable external emergency financing in the past few years, the large fiscal budget deficit necessitated domestic financing. This has been addressed in large part through monetary financing, putting pressure on the exchange rate and increasing the rate of inflation.
The ECF arrangement will aim to support the authorities’ program and their commitment to restore macroeconomic stability, build a foundation for inclusive and sustainable growth, including greater resilience to climate-related shocks, and address weaknesses in governance and institutions. The arrangement is also expected to catalyze grant financing and capital inflows including foreign direct investment and trade credit.
How will IMF financing help the Malawian people?
The approved financing is a testament of the support of the IMF and the international community to Malawi and its ambitious macroeconomic adjustment and reform program. This support, along with additional financing from other institutions and donors, should ease Malawi’s financial difficulties.What are the goals of the Extended Credit Facility?
The purpose of an ECF arrangement is to assist PRGT-eligible member countries with a protracted balance of payments problem in implementing economic programs aimed at making significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.
The new ECF-supported program for Malawi, in particular, will aim at restoring macroeconomic stability, building a foundation for inclusive and sustainable growth (including strengthening resilience to climate-related shocks), and addressing weaknesses in governance and institutions.
What are the policy priorities?
The authorities’ policy priorities span a wide range of areas. Specifically:
Fiscal policy will aim at achieving a debt-stabilizing primary balance in the medium-term through a package of expenditure adjustment and revenue mobilization measures. The authorities are committed to applying fiscal discipline, containing domestic borrowing, and improving public financial management.
Monetary policy will remain anchored on containing money growth. It will aim to tame inflation by ensuring positive real interest rates.
The banking system remains stable though exposure to government securities needs to be closely monitored.
External sector policies will focus on rebuilding official international reserves, reducing shortages of foreign exchange, and facilitating a market-determined exchange rate.
The authorities are committed to ramp up their efforts to improve data quality and timely submission of the data to the IMF staff.
How much is the ECF and how will you ensure that the money is well spent?
The Executive Board of the International Monetary Fund (IMF) discussed the Second (and last) Review of the Staff-Monitored Program with Executive Board Involvement (PMB) and approved a 48-month arrangement under the Extended Credit Facility (ECF) for Malawi in an amount equivalent to SDR131.86 million (about US$175 million), with an immediate disbursement of SDR26.37 (about US$35 million).
The program focuses on improving data recording, reporting, and monitoring. Together with the authorities’ commitments to reforms such as the publication of comprehensive fiscal reports on the monthly basis, this will help ensure efficient and transparent use of public resources.
Is Malawi's debt sustainable?
Malawi’s external debt is unsustainable but would be considered sustainable on a forward-looking basis if the government is successful in its restructuring strategy. The authorities remain committed to bringing external public debt back to a moderate risk of debt distress in the medium term through a combination of policy adjustment, financing, and debt treatment.What are the next steps in the restructuring process?
The authorities are in the process of completing their external debt restructuring. Malawi has received specific and credible financing assurances from its largest official bilateral creditors, China and India, and will seek comparable treatment from other official bilateral creditors. The authorities are also engaged in good faith negotiations with commercial creditors. Malawi is in arrears on commercial debt while these discussions continue.How will the program protect society’s most vulnerable? Will the program entail cuts in social programs?
Protecting the vulnerable is a core objective of IMF programs, and that is certainly the case for the program with Malawi. In general, IMF-supported programs seek to boost social spending to improve socioeconomic outcomes and help promote inclusive growth.
To safeguard social protection and to protect the vulnerable, the authorities have established a floor on social spending as an indicative target (IT) under the program. This will comprise of Government contributions to health and basic and secondary education spending, as well as a number of social safety net spending programs, including the Social Cash Transfer Program (SCTP) and Affordable Inputs Program (AIP).
Under the ECF arrangement, contributions from official bilateral donors towards the multi-donor trust fund are anticipated and this will support the SCTP.