Malawi—Letter of Intent

August 22, 2002

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. Malawi is facing a serious food shortage. Although there is still considerable uncertainty surrounding the estimate of the food gap, it will be more severe than the one experienced at the beginning of the year. The macroeconomic framework underlying our letter of July 19, 2002 was predicated on the Food and Agricultural Organization (FAO)/World Food Program (WPF) May 2002 estimate, which identified an import requirement of 485,000 metric tons (maize equivalent) to cover the food gap expected until the new harvest in April 2002. However, more recently, the Ministry of Agriculture and Irrigation, together with USAID's Famine Early Warning System (FEWS), has revised the gap upward to about 580,000 metric tons (maize equivalent).

2. One-third of our population (about 3.2 million people) is expected to require humanitarian aid (including about 200,000 metric tons of food aid). We are grateful that donors have been making pledges broadly covering this need, and the first shipments have arrived in Malawi.

3. To cover the remaining food requirement, the government intends to import maize of up to 350,000 metric tons (equivalent to about US$97 million), as needed. Private traders would not be able to handle an operation of this size, but we are involving the private sector in the importation in an effort to build up its capacity.

4. Payment for these imports, however, could result in a fall of international reserves of the Reserve Bank of Malawi (RBM) to a level that we regard as insufficient as a protection from unforeseen shocks. Thus, without additional financial assistance, our country would not have the resources it might need to feed its people without jeopardizing its macroeconomic objectives. Given the humanitarian risks involved and our experience last year, we believe that there is a need for swift action.

5. Thus, the government requests a purchase from the Fund of the equivalent of SDR 17.35 million (25 percent of quota) under the Fund's policy on emergency assistance. Although the amount of the assistance is small relative to our total needs, we believe that the speed with which the resources could become available will assist us in seeking additional assistance from other donors.

6. Since a large part of the population is unable to afford maize at import cost, we will distribute this maize at a subsidized price, at a cost of about 1½ percent of GDP, resulting in a domestic fiscal deficit of about 6 percent of GDP; we are developing mechanisms to ensure effective private sector involvement in the distribution. The ability to cope with the impending shortage has been seriously eroded by the crisis earlier this year, when the poor sold their assets to purchase food. Thus, in addition to the one-third of the population receiving humanitarian aid, we believe that another one-third of the population (the remainder of those classified as poor) will need assistance as it will not have the purchasing power to afford the maize at import cost. Our preferred option would have been to provide a targeted subsidy. However, as there is little time to act and existing targeting mechanisms do not extend to the urban poor, the government decided that a price subsidy was the most efficient way to provide such a transfer. We are planning to set the price at MK 17.5 per kilogram, which we believe should be high enough to not discourage local maize production in the future.

7. As the government's maize operations have given rise to governance issues in the past, we will ensure that the current food security operation will be carried out transparently. First, we have decided that all transactions are to be carried out through the National Food Reserve Agency (NFRA). Second, the operation will be financed through the RBM, and proceeds from the sale of maize will be deposited by the NFRA in an account at the RBM. Third, we have created a task force that will monitor and control all aspects of the operation. The task force includes representatives from the government, the NFRA, and Agricultural Development and Marketing Corporation (ADMARC), donors, and the Malawi Economic Justice Network (MEJN), the umbrella organization for 61 civil society organizations. Fourth, we intend to publish on a monthly basis information on the food security operation, including the cost and volume of imports and the price and quantity of imports sold domestically. Finally, in particular in light of the uncertainty of the food gap estimates, we will update the assessment of the food situation and revise our operation, as needed. Any reassessment will be communicated to all stakeholders.

8. The great uncertainty regarding the estimate of the food shortage again highlights the urgency of the need to improve agricultural statistics. As a first step, we have transferred the responsibility for agricultural statistics from the Ministry of Agriculture and Irrigation to the National Statistics Office, as agricultural extension workers in the ministry had incentives to overestimate production in past years. We will seek donor assistance to overhaul the collection and compilation of agricultural statistics.

9. We would also like to take the opportunity to provide an update on the measures that we intended to implement by July 2002. The RBM has developed a medium-term action plan for the review of the financial sector regulatory framework. To remove ghost workers from the payroll, we have audited the payroll of the Ministry of Education, which accounts for 60 percent of the entire civil service, and have adjusted the payroll starting in August 2002. Audits of the Ministries of Health, Police, and Defense will be completed by October 2002, and an audit of the Ministry of Agriculture will follow. To strengthen the operation of the Credit Ceiling Authority (CCA) system, we have assigned staff of the Ministry of Finance and Economic Planning to the RBM, eliminated unused budget balances in the CCA system carried forward between fiscal years, and reformatted the CCA system to include priority pro-poor expenditure (PPEs). Moreover, the cabinet has issued a directive on the divestiture options of ADMARC's main subsidiaries. While the liquidation of David Whitehead and Sons has been approved in principle, we have issued an information memorandum for privatization that requests responses for either an outright purchase of the assets, a concession or a management contract, as an interest in buying the company has been recently expressed. We have removed the import bans on cooking oil, dairy products and dry cells, but have introduced import licenses on dairy products and dry cells. These import licenses are being issued liberally and the one on cement is being issued automatically.

10. The government will continue to cooperate with the Fund and is confident that the first review under the Poverty Reduction and Growth Facility (PRGF) arrangement can be completed at year's end. We have attached a revised Table 1 on the quantitative benchmarks of our letter of July 19, 2002, reflecting lower net international reserves on account of higher food imports. Moreover, we intend to undertake an early repurchase of the emergency assistance, after replenishing our international reserves at end-2002. The government does not intend to impose new or intensify existing restrictions on payments and transfers for current international transactions, introduce new or intensify existing trade restrictions for balance of payment purposes, or enter into bilateral payments agreements, which are inconsistent with Article VIII of the Fund's Articles of Agreement.

Sincerely yours,