It has been some time since I wrote a commentary on Malawi’s economy. I guess the reason was that there was nothing much to write about. The economy has been flat or let me say, it has been negative compared to the growth projection given by Minister of Finance and Economic Development, Dr. Goodall Gondwe as presented in the National Budget on May 22 2015 in Parliament.
What has moved me to put my pen on paper is the media buzz created by the International Monetary Fund (IMF) when it declared Malawi back on track to benefit from the Extended Credit Facility (ECF) program following its judicious management of domestic finances. The questions I pose are: should Malawi celebrate this news? Should we commend the DPP Government and pat them on the back for a job well done?
Before building further on what I would like to share in this commentary, let me first contextualize why Malawi is in this predicament. It is not a myth that Malawi’s short-term growth prospects have deteriorated markedly. Two reputable international organization i.e. the World Bank and the International Monetary Fund, in 2015 gave similar reviews and reasons why Malawi’s economic well-being is worsening.
According to the World Bank, the deterioration has been largely due to weather shocks, increased instability in key micro-economic variables, and a decline in business confidence. In 2015, Malawi’s estimated rate of gross domestic product (GDP) growth was revised downwards to 2.8. This downward revision recognized the impact of weather shocks on the production of maize and other key crops, as well as uncertainty to the economic outlook resulting from the rising rate of inflation, which reached 24.7% in October 2015. All these have also contributed to continued high bank base lending rates and generally weak fiscal environment.
In 2015, the International Monetary Fund (IMF), indicated that Malawi’s persistent macroeconomic problems arise from uneven policy implementation, high inflation, and a weak balance of payments position that is financed by volatile donor inflows.
Inadequate corrective measures following the “cashgate” scandal which involved the theft of public funds contributed to fiscal imbalances that damaged Malawi’s economic outlook significantly. In conclusion, Malawi has not been able to achieve key objectives of sustainable growth and low inflation under its growth and development strategy. As a result of this, in December, 2015, Malawi failed to qualify for IMF’s extended credit facility (ECF).
Let me also take some time to explain what ECF is and how IMF provides financial assistance to countries through this facility. The ECF provides financial assistance to countries with protracted balance of payments problems. The ECF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of low-income countries (LICs), including in times of crisis.
Accessing the ECF facility by a country is determined on a case-by-case basis. This takes into account the country’s balance of payments need, the strength of its economic program and capacity to repay the Fund. Under the ECF, member countries agree to implement a set of policies that will help them support significant progress toward a stable and sustainable macroeconomic position over the medium term.
The IMF’s program conditionality is streamlined and focused on policy actions that are critical for achieving the program’s objectives. ECF-supported programs are based on the country’s own development strategy and aim to safeguard social objectives.
The IMF’s Executive Board play a critical role in assessing performance under the program and allowing the program to adapt to economic developments. On December 11, 2015, the Executive Board of the IMF concluded a review of the Malawi program.
In the case of Malawi, the review concluded that due to fiscal and monetary policy slippages and the lack of progress on agreed and key performance indicators, the ECF program was off track. This position does not only erode donor confidence, but also triggers uncertainty in the business sector which results in declining business confidence and investment. In turn, this makes it more challenging to see any substantial economic growth.
As of 2015, Malawi’s economic situation and outlook was miserable. A prudent government would then look for a quick turnaround to the situation with a focus on restoring macroeconomic stability in the near term through the pursuit of tighter fiscal and monetary policies geared toward placing inflation on a declining trend. In addition, to also accelerate the implementation of public financial management reforms in order to re-establishing trust and confidence in the budget implementation process.
The rest is history, and during the March 2016 IMF Malawi ECF arrangement program review, the IMF concluded that based on progress made by Malawi government, it is anticipated that a request to complete the seventh and eighth reviews under the ECF-supported program could be submitted for consideration by the IMF’s Executive Board in May 2016. According to the IMF, the Malawi government has demonstrated concerted and sustained effort to put the ECF program back on track.
Government managed to achieve key milestones as set in this ECF program. The set goals in the 2015 ECF program include; meeting set targets on net domestic financing and net domestic assets of the Reserve Bank of Malawi, reforms in the financial sector and improvements in public financial management (PFM), in particular bank reconciliations.
Recently, we have seen one major donor, the African Development Bank Group, coming back to Malawi pledging more support to Malawi. The Bank has committed to continue supporting Malawi in its efforts to diversify its economy, achieve sustainable growth and reduce poverty. The Bank’s President Dr Adesina announced an AfDB’s drought response package of US $35 million for Malawi, of which US $1 million will be put towards immediate assistance and US $7 million for fast response, with the remaining amount for projects to deal with food insecurity in Malawi.
After all this, the question remains: should Malawi cerebrate now? I guess yes. I think government has all the reasons to celebrate. The reason for cerebrating is not only that Malawi has qualified for ECF, but that is has implemented sound fiscal policies.
Of course, I should say there is more to be done by government; restoring macroeconomic stability by bringing inflation—which has been stuck above 20 percent since mid-2012—down to single digits, remains the most important policy challenge in the near term. Prudent fiscal policy, when combined with a tight monetary stance to maintain positive real interest rates, should place inflation on a downward path.
I will conclude by saying that, let Malawi and Malawians celebrate that the economy is going on the right track and bravo to the President and his government. Let me believe that more is to come. And I will like to also say that there is need to sustain the good work done this far in the spirit of hard work, integrity and patriotism.
*Tadala Mwale – Rural Development SpecialistFollow and Subscribe Nyasa TV :