Press Release No. 96/59

Press Release: IMF Approves Second Annual ESAF Loan for Malawi

December 5, 1996

The International Monetary Fund (IMF) approved the second annual loan under the enhanced structural adjustment facility (ESAF)¹, in an amount equivalent to SDR 15.3 million (about US$22 million), to support Malawi's economic program in 1996/97. The loan is available in two equal installments, the first of which is available on December 13, 1996.

Background

In 1995, Malawi adopted comprehensive measures aimed at addressing large financial imbalances. These efforts led to IMF support under a three-year ESAF in October 1995 (see Press Release 95/54). Malawi's performance under the first-year program has been satisfactory. Real GDP growth in 1995 rebounded to 9 percent after a sharp drop in 1994; inflation rose to 75 percent in 1995 reflecting in part large food price increases caused by a less than normal maize crop, but cumulative inflation during the first nine months of 1996 was a negative 0.6 percent, owing to a partial reversal of those increases; and the external position improved significantly, with a marked increase in gross international reserves despite a shortfall in external grants. The fiscal deficit was reduced sharply and further progress was made in structural reforms, notably in agriculture, the external sector, and the privatization of public enterprises. Malawi accepted the obligations of Article VIII effective December 1995.

Medium-Term Strategy and the 1996-97 Program

Malawi's medium-term strategy aims to consolidate the gains achieved thus far, and to sustain economic growth within a framework of financial stability. The overall macroeconomic objectives are: (a) to achieve an average annual GDP growth rate of 7 percent during 1996-98; (b) to attain an annual inflation rate of 6 percent by end-1998; (c) to reduce the external current account deficit (excluding grants) from 14.1 percent of GDP in 1995 to about 6.4 percent of GDP in 1998; (d) and, given the economy's vulnerability to external shocks, to build up international reserves to the equivalent of 4.5 months of imports by end-1998. The program also seeks to accommodate pressing social needs, within the constraints of fiscal sustainability, through continued shifts away from nonproductive and low-priority expenditure.

The program for 1996-97 aims to achieve real GDP growth of 11 percent in 1996 and 5 percent in 1997, an annual inflation rate of 8 percent by end-1997, and an increase in gross official international reserves to the equivalent of 4.5 months by end-1997. To achieve these objectives the program will rely on the continued pursuit of tight financial policies. The overall budget deficit (excluding grants) will be reduced from 13.6 percent of GDP in 1995 to 9.0 percent of GDP in 1996, and to 7.6 percent of GDP in 1997. The program envisages several measures to strengthen fiscal management. On the expenditure side, in addition to temporarily reinstating the cash budget, the program seeks efficient expenditure allocation and control through improved budget procedures. Reforms on the revenue side include a broadening of the tax base, the creation of an autonomous revenue authority, and the introduction of a value-added tax. To ensure achievement of the inflation targets, the fiscal program is designed to avoid any domestic financing. Monetary policy will be consistent with the growth, inflation, and balance of payments objectives of the program, and will allow for faster growth in credit to the private sector.

Structural Reforms

Malawi will continue to take measures to reestablish agriculture as an engine of growth, increase food security, and alleviate poverty. The liberalization of agricultural marketing and production arrangements has already resulted in substantial improvements in the growth of smallholder production and diversification into nontraditional or drought-tolerant crops. The privatization program, which started in early 1996, aims at bringing to the point of sale 26 public enterprises in 1996/97, and 20 more in 1997/98. To regain momentum in civil service reform, the government is developing a comprehensive action plan to provide, among other things, for the elimination of agencies, departments, and ministries with duplicating or overlapping functions. The government will enhance the outward orientation of the economy by improving Malawi's access to seaports and restricting the number of import and export items requiring licenses to only those warranted by security, health, and environment considerations.

Addressing Social Issues

Higher economic growth and inflation reduction are contributing significantly to poverty reduction. The government's poverty alleviation program will also continue to focus on efforts to reform agriculture to benefit smallholders, reallocate budgetary resources to the social sectors, limit population growth, and improve the role of women in economic activities. Two notable government projects being implemented are the free primary education program introduced in 1994 and the Malawi Social Action Fund to support community-based work programs.

The Challenge Ahead

Malawi's efforts at reestablishing financial stability have contributed greatly to recent economic expansion and to the recent decline in inflation, which also benefited from good weather conditions. Continuation of such efforts are essential to achieve low inflation on a lasting basis. Having laid a basis for deepening structural reforms, expeditious implementation of the next stages, in particular civil service reform and privatization, are crucial to the attainment of the economic and social objectives under the program. To enhance its prospects for success, Malawi's efforts will require the continued assistance of the donor community.

Malawi joined the IMF on July 19, 1965, and its quota ² is SDR 50.9 million (about US$73 million). Malawi's outstanding use of IMF financing currently totals SDR 75.43 million (about US$108 million).