Malawi urged to strengthen public sector governance and institutions to safeguard Malawi’s scarce resources

The International Monetary Fund (IMF) Executive Board has called for additional efforts to strengthen public sector governance and institutions to safeguard Malawi’s scarce resources.

The Board has also recommended that the Malawi Government should strengthen policy effectiveness, and improve transparency and data provision, including on commitments and payments of Covid-19-related spending.

The recommendations are contained in a press release the Executive Board issued at the conclusion of the 2021 Article IV consultation with the Malawi Government.

During the consultation, reads the press release, the Executive Directors noted that Malawi’s economy has been severely affected by the pandemic and commended the authorities for their efforts to support the economy.

“Malawi’s economy has been severely affected by the Covid-19 pandemic and faces additional challenges. It observes that growth has contracted by 4½ percent in 2020 compared to pre-pandemic levels in 2019, while the number of cumulative positive cases of Covid-19 has more than doubled in the first half of 2021,” reads the statement.

“In recent months, there are signs of gradual recovery and daily Covid-19 positive cases remain relatively low. Helped by a good harvest, real GDP [gross domestic product] growth in 2021 is projected at 2.2 percent, up from 0.9 percent in 2020. Inflation is expected to increase to 9.0 percent in 2021 from 8.6 percent in 2020, driven by increases in prices for fuel, fertilizers, and food.

“President Chakwera’s Malawi Vision 2063 aims for the country to reach upper middle income status by 2063 by investing in physical and human capital. Under announced policies, which aim to implement a gradual pace of adjustment and maintain fiscal and current account deficits over the medium term to meet substantial development and social spending needs, the economy is projected by staff to recover gradually to reach 4.5 percent growth by 2023,” it adds.

However, IMF assumes that Malawi will be able to sustain higher public investment than experienced in the past decade, have strong fiscal multipliers, maintain fiscal and external deficits on the order of 10 percent of GDP over the medium term, and continue to access sizable financing from regional development banks and domestic borrowing to close an estimated financing gap of about 4-5 percent of GDP each year.

But the Fund warns that the growing debt burden may crowd out private sector investment and hinder medium term economic prospects.

“Moreover, in spite of emergency COVID-19 assistance in 2020 and SDR allocation in 2021, the Reserve Bank of Malawi (RBM)’s gross reserve assets are projected to decline to 1½ months of next year’s imports by end-2021, leaving the economy vulnerable to shocks,” says IMF, adding that enhancing a robust cash management and control system of the national budget and strengthening the Board’s oversight of foreign exchange reserve management at the RBM are important.

The directors noted the catalytic role that an IMF arrangement could play to support the adjustment effort and mobilize donor financing.

They emphasized that progress towards an arrangement would depend on strong commitment to an adjustment program, sizeable financing support from the international community and Regional Development Banks in the form of non-debt creating flows.

The statement says while Malawi remains current on its payments to the IMF, the directors concurred with the post-financing assessment (PFA) conclusion, including with respect to Malawi’s capacity to repay the IMF.

It is expected that the next Article IV consultation with Malawi will be held on the standard 12-month cycle.

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