Statement by Mr. Momodou Bamba Saho, Executive Director for Malawi, April 8, 2013

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Since April 2012, the Malawi government under the leadership of President Banda has continued to focus on implementing tough but critical macroeconomic and structural reforms aimed at turning around the economy. The government initiated a series of measures aimed at accelerating the economic adjustment program that was approved by the IMF Board last July. The policy initiatives cover a broad range of areas: fiscal policy, revenue administration, public financial management, monetary policy and structural reforms. My authorities have taken a pro-active approach to dealing with the challenges facing the country. With their current policy stance and the normalization of support from the international community since August 2012, as well as policy guidance from the Fund, my authorities are confident that they stand a good chance of shoring up their economy’s growth to its normal trajectory and achieving macroeconomic stability. My authorities broadly agree with the staff report as it presents a generally balanced assessment of recent macroeconomic developments and challenges and opportunities in the Malawian economy. My authorities reaffirm their commitment to the program as set out in their Memorandum of Economic and Financial Policies document.

Outcome of Recent Economic Policies

From its inception, the main objectives of the Fund-supported program have been to assist Malawi address the macroeconomic imbalances and regain its macroeconomic stability and set the stage for long-term development. To this end, the policy reforms so far have yielded some positive results, with the liberalization of the exchange rate attracting more foreign exchange inflows into the system and the re-establishment of some of the international credit lines. However, the exchange rate has continued to depreciate markedly partly as a result of pressures arising from the clearance of private sector external payments arrears that were much higher than estimated at the start of the program. Consequently, official international reserves have declined fueling perceptions in the market of continued scarcity of foreign exchange. Furthermore, the weak performance of tobacco and sugar, have weakened Malawi’s current account balance. The government has also continued to implement the automatic pricing adjustment mechanism for fuel. While the depreciation of the kwacha and the fuel price adjustments have increased the cost to consumers, the fuel supply situation has improved markedly.

My authorities recognize that policies may be inadequately implemented unless there is a parallel strengthening of the underlying administrative procedures and that ownership of the program by the citizens is a fundamental ingredient for its success. On the structural front significant achievements have been made since the beginning of the Fund-supported program. The Malawi Revenue Authority continues to publish monthly revenue collections; quarterly expenditure ceilings for line ministries ensure overall spending does not exceed the resource envelope; and the purchase order module of IFMIS is progressively being extended to all procurements, strengthening government commitment controls. To enhance effectiveness of RBM monetary operations, a memorandum of understanding between the RBM and Ministry of Finance has been signed clearly outlining the Ministry of Finance’s responsibility for meeting the interest costs of T-bills used for monetary operations.

Political Economy of the Reform Efforts

Over the past 10 months Malawi has achieved impressive macroeconomic adjustments. In particular, the authorities devalued the currency by 33 percent and concurrently adopted a floating exchange rate regime. The price of foreign exchange has since increased further by more than 50 percent. They also adopted an automatic price adjustment mechanism for petroleum products and adjusted utility tariffs, effectively removing government subsidies to fuel and utilities consumption. Monetary policy was tightened by increasing the policy rate by 12 percent to 25 percent. However, despite the tight monetary policy stance, including through open market operations, the continuing depreciation of the exchange rate and drought induced increases in local food prices have triggered the inflation rate to edge up to 37.9 percent in February. My authorities expect their policy actions would result in moderating the inflation rate by May/June.

There is a need to be mindful that the effects on the real economy have been far-reaching and painful, resulting in a growing public outcry as well as strikes by civil servants and other workers demanding higher wages over austerity measures and falling living standards due to the unintended negative consequences of the fiscal, monetary and exchange rate policies which have been implemented to achieve macroeconomic stability and sustainable growth. Even though the government implemented a social protection program aimed at ameliorating the impact of the reforms on the poor and vulnerable groups, it became necessary to address the growing pressures from rising social tensions. The authorities granted civil servants a wage increase, mostly for the lowest pay grades, funded through cuts and savings from other parts of the budget. This has helped in mitigating the discontent and in ending the strikes.

In addition, bank credit to the private sector has continued to weaken. Commercial banks’ base lending rate, currently at 40 percent and the accumulation of arrears by the public sector has hindered activity by firms, including entrepreneurial initiatives to move to export-oriented sectors. My authorities consider that such developments risk eroding the ownership of the adjustment program among significant sections of the population.

Nevertheless, despite the painful austerity measures, support for the ongoing reforms is continuing with envisaged recovery in 2013. There has also been some improved acceptability of the reforms by the general public as a result of periodic communications by the authorities as well as awareness campaigns.

Conclusion

My authorities have asked me to convey their deep appreciation to the Fund Executive Board and Management for their continued engagement and support. They are grateful to the Fund Mission for the constructive approach in providing policy advice and in helping the authorities build much needed capacity. In particular, my authorities want to thank the team for helping in identifying capacity shortfalls and for responding expeditiously to their requests for Fund technical assistance. By staying the course, my authorities are confident that Malawi is about to turn a new page on the long and arduous road towards growth and broad-based economic prosperity. In support of the continuing efforts by the government and the people of Malawi, my authorities are requesting the Board’s approval of the completion of the second review of the ECF program and modification of performance criteria.