Press Release No. 08/175

Press Release: IMF Executive Board Completes Sixth and Final Review Under PRGF Arrangement for Malawi, Increases Financial Assistance to Mitigate the Impact of Fertilizer and Fuel Prices, and Approves US$ 24.7 Million Disbursement

July 14, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the sixth and final review of Malawi's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement.

In the context of this review the Executive Board decided to increase access under the program by SDR 10.41 million (about US$16.9 million) to SDR 48.58 million (about US$ 79.0 million), to help meet a larger balance of payments need brought about by higher fuel and fertilizer prices. The Executive Board also waived the non-observance of the end-December 2007 performance criterion on central government domestic borrowing. The completion of the review enables the release of SDR 15.18 million (about US$ 24.7 million), which will fully disburse the total amount available under the arrangement.

The three-year PRGF arrangement for Malawi was approved on August 5, 2005 (see Press Release No 05/188), originally for a total amount of SDR 38.2 million (about US$ 62.1 million) to support the government's economic program for 2005-2007.

Following the Executive Board's discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

"The Malawi authorities are to be commended for the performance under the PRGF-supported program. Helped by favorable weather and debt relief, growth has been robust, poverty has been reduced, inflation has fallen to single digits, and the debt situation has improved. A major fiscal consolidation supported a decline in interest rates and a large expansion in credit to the private sector.

"The strong growth is expected to continue and spread beyond agriculture, although rising fuel and fertilizer prices are increasing the downside risk and adding inflation pressure. Further efforts to improve the business environment would help support growth.

"Strong revenue performance helped fiscal policy implementation. However, repeated expenditure overruns remain a concern. Despite efforts to accelerate public financial management reforms, capacity constraints remain serious, and budget preparation, execution, and control need to be further strengthened. Firm fiscal discipline and continued strong political commitment will be required to meet the 2008/09 budget targets.

"Malawi has been hit hard by a large increase in the price of key imports in 2007 and 2008, notably of fuel and fertilizers. In this light, Malawi's low level of international reserves is a concern for financial stability and food security, and against that background, the Board agreed to Malawi's request for augmentation of access under the PRGF. Further consolidation of government net domestic debt will facilitate the further accumulation of international reserves without jeopardizing growth and crowding out the private sector. Additional donor support would help greatly in smoothing the needed adjustment.

"The monetary overhang and excess reserves in the banking sector need to be reduced. This will make monetary policy more effective in helping Malawi adjust to the external price shocks and prevent a reemergence of inflation," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.