Press Release No. 98/63

Press Release: IMF Approves Third Annual ESAF Credit for Malawi

December 18, 1998

The International Monetary Fund (IMF) approved the third annual arrangement for Malawi under the Enhanced Structural Adjustment Facility (ESAF),¹ providing assistance equivalent to SDR 20.4 million (about US$27 million) in support of the government’s program for 1998–1999. The third annual loan, which has been augmented by SDR 5.15 million (about US$7 million), is available in two equal semiannual installments, the first of which is available on December 30, 1998.

Background

Malawi’s economic performance improved substantially during 1995–96 under the program supported by the first ESAF annual arrangement: real GDP growth rebounded to a yearly average of 12 percent, and inflation declined substantially. However, the track record of policy implementation weakened during the second year of the ESAF program: real GDP growth slowed to 5 percent in 1997; the overall fiscal deficit widened to 11.5 percent of GDP and Malawi’s currency, the kwacha, came under pressure and experienced several devaluations. With the objective of reestablishing a track record, Malawi embarked on an IMF-staff-monitored program during April-September 1998. The program targeted real GDP growth of 4.75 percent during 1998 and a significant reduction in the annual inflation rate to 12 percent by the end of the year. The program also called for resuming key reforms in the macroeconomic and structural areas. Malawi has achieved some progress under the staff-monitored program. The authorities succeeded in regaining control over the budgetary situation, revenue collections improved, and expenditure control and monitoring were strengthened. However, the country’s monetary program came under severe strain, owing to a sharp fall in export receipts and lower-than-expected external support for the budget. The kwacha was allowed to depreciate, and monetary policy had to be tightened considerably.

Medium-Term Strategy and the 1998–99 Program

The government’s medium-term development strategy aims to consolidate macroeconomic stability, attain sustainable economic growth that will reduce poverty and raise the overall living standards of Malawi’s population. The macroeconomic objectives for the medium term are to increase the rate of real GDP growth from about 3.5 percent in 1998 to 6 percent in 2001; reduce the average annual rate of inflation from about 27 percent in 1998 to about 5 percent in 2001; and to strengthen further the balance of payments. This will require an increase in gross investment to an average 19 percent of GDP, mainly on strengthening the level and productivity of private investment; continued improvement in infrastructure; and establishingreforms aimed at bolstering market competition. For 1998–99, the principal macroeconomic objectives are to achieve the following: average real GDP growth of at least 3.5 percent in 1998 and 5 percent in 1999; a 12-month inflation rate of 36 percent by end-1998 and 7 percent by end-1999; a small domestic primary deficit for 1998–99 and a recovery in gross international reserves to more than four months of imports. The monetary program for 1998–99 is aimed at lowering substantially the inflation rate and restoring conditions conducive to the maintenance of a stable exchange rate. In support of these objectives, Malawi will deepen and accelerate economic reforms in strategic areas.

Structural Reforms

The government’s agenda of structural reforms is designed to support the goal of pursuing widespread poverty reduction and an improvement in living standards. The authorities have addressed the issues relating to maize, petroleum, and electricity pricing, and they have expressed their determination to press ahead with structural reform in the areas of civil service, trade reform, and privatization. On October 6, 1998, the prices of petroleum products were increased by 55–80 percent to pass through the impact of exchange rate changes. Electricity tariffs were increased by 35 percent in early November to enable the Electricity Supply Corporation of Malawi (ESCOM) to break-even and catch up on delayed tariff adjustments. In reforming the civil service, the government has embarked on a job-grading exercise and an audit of registered employees to complement an ongoing functional review of all ministries. The authorities are also continuing with the privatization program; at least 15 enterprises are expected to be brought to the point of sale by March 1999, while preparatory work on the privatization of other enterprises will be intensified.

Social Issues

The government’s medium-term development strategy since 1994 has been to achieve accelerated economic growth, lower inequality, and generate a broad-based improvement in living standards. Malawi is a poor country; nominal per capita GNP in 1997 was only $220--less than half the sub-Saharan average; and income inequality is perhaps the highest in Africa. The authorities are continuing to liberalize agriculture, and their efforts to date have had a notably beneficial impact on the incomes of small farmers. In the education sector, the government introduced universal free primary education in 1994, and is now directing its efforts toward improving the quality of education.

The Challenge Ahead

The various adjustment measures taken so far in 1998 point to a renewed commitment on the part of the Malawian authorities to implement the reforms envisaged under the program. Malawi should continue to implement its adjustment programs with determination. Timely availability of external budgetary and technical assistance is the key to success of the program.

Malawi joined the IMF on July 19, 1965. Its quota² is SDR 50.9 million (about US$72 million). Malawi’s outstanding use of IMF financing currently totals SDR 59.8 million (about US$84 million).