Press Release No. 05/188

Press Release: IMF Executive Board Approves US$55.9 Million Three-Year Arrangement for Malawi Under the PRGF and Additional Interim Assistance Under the Enhanced HIPC Initiative

August 5, 2005

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement for Malawi under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 38.17 million (about US$55.9 million) to support the government's program of economic reform and poverty reduction through private sector-led growth. The first disbursement under the program will amount to SDR 5.4 million (about US$7.9 million).

The Executive Board also approved an additional amount equivalent to SDR 4.628 million (about US$6.8 million) in interim assistance from the IMF under the Heavily Indebted Poor Countries (HIPC) Initiative to be applied in broadly equal amounts in the remainder of 2005 and the first half of 2006.

The last PRGF arrangement for Malawi was approved in December 2000, (see Press Release No. 00/79) and expired in December 2004 after only one review was completed. The authorities subsequently requested a staff-monitored program covering July 2004 to June 2005 to build a performance track record. Performance under the SMP to date has been satisfactory.

In commenting on the Executive Board's discussion on Malawi, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair stated:

"Malawi's economic performance has improved since mid-2004 under the program monitored by Fund staff. After several years of economic deterioration, significant progress has been made in restoring macroeconomic stability, strengthening economic growth, and stabilizing the government's domestic debt. The government is committed to continued strong policy implementation, especially budget implementation, to consolidate these gains.

"The authorities' new three-year economic program emphasizes policies and reforms to promote a sound macroeconomic environment and private sector development. These are necessary for sustained poverty reduction and economic growth in Malawi. Priority will also be given to sharply reducing the domestic debt in order to free resources for priority areas and to further reduce real interest rates. The authorities will need to remain vigilant in containing inflationary pressures. Implementation of structural reforms will be a key determinant of sustained poverty reduction.

"In light of the recent drought conditions, food security is an overarching priority of the government. Permanent measures will need to be put in place to ensure food security in the future.

"Since taking office in May 2004, the government and stakeholders have worked together to enhance the implementation of strategies to strengthen economic growth and to set priorities for tax reform. The government is currently updating its poverty reduction strategy to reflect these developments as well as scaled-up donor support for the health sector," Mr. Kato said.

ANNEX

Recent Economic Developments

Malawi is one of the poorest countries in Africa. Two-thirds of the population live in poverty; the incidence of malaria is very high; and approximately 15 percent of the adult population is infected with HIV. Significant progress toward the Millennium Development Goals (MDGs) will require sustained aid inflows.

Malawi's economy improved during 2004, but unfortunately, prospects for 2005 have been affected by a dry spell early in the year. Real GDP growth rose from less then 4 percent in 2003 to 4.5 percent in 2004 due to a rebound in tobacco production. However the drought in early 2005 is estimated to have cut the harvest of Malawi's food staple—maize—by about 25 percent, causing a potential humanitarian crisis in addition to dampening overall economic growth prospects to about 2 percent this year.

Core (nonfood) inflation fell to 13.25 percent at the end of 2004, from more than 20 percent at the end of 2003. Food price inflation rose over the period, causing an increase in overall consumer price inflation. The early 2005 drought is expected to push up food prices temporarily later in the year and the depreciation of the kwacha is expected to be partially passed through to nonfood prices.

Program Summary

The government's economic program aims to promote growth by fostering a financially sound and stable macroeconomic environment and by undertaking structural measures to improve economic efficiency. The program will build on recent successes in macroeconomic stabilization and on strengthening public institutions and infrastructure. Policies are guided by the objectives set out in Malawi's 2002 Poverty Reduction Strategy Paper (PRSP) that identify economic growth, especially in the rural areas as the best way to alleviate poverty.

The government's main economic objectives over the next three years are to raise economic growth to near 6 percent a year, with an emphasis on rural incomes, to increase health services and educational opportunities, to reduce core inflation to the 5-8 percent range, to run a fiscal surplus to reduce the government's domestic debt to less than 15 percent of GDP from over 24 percent, and to build international reserves to at least two months of imports.

To these ends, fiscal policies will aim at reducing the government's absorption of domestic resources while allowing for increases in pro-poor and pro-growth spending. It is expected that this will help ease pressures on real interest rates and allow for the maintenance of a competitive exchange rate. The structural reform agenda will include measures to improve macroeconomic policy implementation, and to increase overall economic efficiency, such as the repair and expansion of the existing road network, the completion of an interconnector from the Cahorra Bassa hydroelectric dam, and the sale of Malawi Telecom.

In view of Malawi's critical external debt sustainability, even after reaching the HIPC completion point, the authorities are committed to obtain or guarantee only concessional loans and to make every effort to secure grants.

Malawi became a member of the IMF on July 19, 1965; its quota is SDR 69.4 million (about US$101.7 million), and its outstanding use of IMF credit currently totals SDR 54.4 million (about US$ 79.8 million).

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a PRSP. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework to foster growth and reduce poverty. 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.