IMF mission says inflation rising but Malawi economy rebounding

An International Monetary Fund (IMF) team, which has been conducting discussions for the 2021 Article IV Consultation with the Malawi government and other stakeholders has said Malawi’s economy is showing signs of recovery as daily COVID-19 positive cases remain relatively low, but the recovery is gradual.

However, the IMF says Malawi needs to urgently address the humanitarian situation, restore debt sustainability, and rebuild fiscal and external buffers, and that support from development partners will be critical.

The discussions were held virtually between July 20-27, 2021 and October 28-November 4, 2021. The IMF Mission was led by led by Mika Saito.

Mika Saito led the IMF delegation

According to a statement issued in Washington, United States on Friday, November 5, 2021, discussions with the Malawi government centred on policies to address Malawi’s macroeconomic vulnerabilities and invest in physical and human capital to achieve the authorities’ vision of upper-middle income status by 2063.

The IMF says substantial development and social spending needs, a high debt burden from the past, and limited availability of budget support is leading to sustained fiscal and current account deficits.

“In the mission’s view, it would be beneficial for Malawi to anchor its fiscal program in a way that stabilizes its debt quickly. Given already pressing debt service needs, delaying adjustments will exacerbate pressures down the road.

“Redoubling efforts on domestic revenue mobilization, reprioritizing expenditure through curtailing growth in wages while safeguarding capital spending, reforming the Affordable Input Program (AIP) and goods and services, and reducing non-critical spending would help in this regard. Realism in budget forecasts and public financial management reforms would help containing fiscal deficits and debt.

“Limited movements in the exchange rate since 2016 led to a substantial appreciation of the Kwacha in real effective terms, higher current account deficits, and a loss of foreign exchange reserves. Allowing for greater exchange rate flexibility and strengthening the monetary and fiscal policy stance would help address chronic foreign exchange shortages and potential inflationary pressures,” reads the statement in part.

The IMF also says developing a well-functioning and transparent foreign exchange interbank market and formulating a foreign exchange reserve management strategy are also critical.

“Strengthening public sector governance and institutions would help safeguard scarce resources and strengthen policy effectiveness. The mission urged publication of comprehensive fiscal reports to further enhance budget transparency and accountability. It is also important for the authorities to complete remaining COVID-19 spending audit reports and take follow-up actions on the findings of the National Audit Office’s completed audit reports which pointed to the misappropriation of COVID-related public funds.

“The mission welcomed the increased availability of statistics, especially in the monetary and national accounts. Further efforts across areas, particularly consolidated fiscal statistics and balance of payments data, would be helpful and the IMF stands ready to support these efforts through technical assistance,” it says.

According to the IMF, real GDP growth in 2021 is projected to increase to 2.2 percent, from 0.9 percent in 2020, helped by a good harvest. Inflation is expected to reach 9 percent in 2021, from 8.6 percent in 2020, driven by increases in prices of fuel, fertilizer and food.

The IMF team met with Minister of Finance, Felix Mlusu, Governor of the Reserve Bank of Malawi, Dr. Wilson Banda, other senior government officials, representatives from the banking sector, development partners, and civil society organizations.

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