n IMF staff team, led by Mr. Tsidi Tsikata, concluded a two-week visit to Malawi today to conduct discussions for the 2012 Article IV consultation.1 The mission paid a courtesy call on His Excellency President Bingu wa Mutharika, and held discussions with Minister Ken Lipenga (Finance and Development Planning), Minister Peter Mutharika (Foreign Affairs and International Cooperation), Minister Goodall Gondwe (Natural Resources, Energy and Environment), Governor Perks Ligoya (Reserve Bank of Malawi (RBM)), Chief Secretary Bright Msaka (Office of the President and Cabinet), and other senior government and RBM officials, as well as with representatives from the donor community, civil society, trade unions and the business and banking sectors. The mission is grateful to the authorities for their cooperation and warm hospitality.
At the conclusion of the mission, Mr. Tsidi Tsikata, mission chief for Malawi, issued the following statement:
“We have had constructive discussions with the authorities on the economic challenges currently facing Malawi. The country is grappling with a severe foreign exchange shortage that contributed to a marked slowdown in economic activity in 2011. Real GDP growth slowed from an impressive average annual rate of 8.3 percent during 2007-10 to about 4½ percent in 2011. Agriculture has been the main engine of growth, supported by the government’s Farm Input Subsidy Program and good weather conditions. The foreign exchange situation has led to shortages of fuel, imported inputs and medicines. Several enterprises have scaled down or closed their operations and laid off workers.
“The current foreign exchange situation was triggered by a fall in tobacco earnings and aid inflows, but is symptomatic of Malawi’s weak balance of payments position. Over the years, persistent overvaluation of the Kwacha has contributed to growth in imports outpacing growth in exports, while official international reserves have remained at very low levels, thus rendering the economy highly vulnerable to external shocks. The authorities’ recent attempts to tighten restrictions on foreign currency transactions have created distortions which are boosting informal activity at the expense of the formal economy, with adverse consequences for official sources of foreign exchange and government revenues. Moreover, the official exchange rate is failing to anchor inflation expectations as a growing share of imports is being priced at the significantly depreciated parallel market exchange rate.
“Discussions focused on policies to address the foreign exchange crisis and create an environment conducive to the achievement of the main objective of the Malawi Growth and Development Strategy: poverty reduction through sustainable economic growth and infrastructure development. The mission recommended a package of policies, including adoption of a flexible exchange rate regime, in order to stem a slide toward output and export contraction and rising inflation. It pointed to examples of a number of African countries (including Ghana, Tanzania and Uganda) where reforms centered on liberalization of the exchange rate regime eliminated large premiums in the parallel exchange rate and reversed declines in output and exports.
“The mission emphasized the importance of appropriate fiscal and monetary policies for avoiding an inflation spiral. With an uncertain outlook for government revenues and mounting pressures for wage increases, the mission urged the authorities to base the 2012/13 budget on realistic estimates of revenues and grants, and to begin to identify lower priority expenditures that could be cut to make room for spending on social protection programs and growth promoting investments. The mission recommended that the Reserve Bank of Malawi make more active use of interest rate policy to mop up excess liquidity in the financial system in order to improve the outlook for inflation.
“The authorities indicated that they are in the process of formulating a comprehensive package of measures to address Malawi’s economic challenges in a holistic manner, including measures to enhance income generating activities for the poor. They hoped that the package would provide a basis for re-engaging in program discussions with the IMF. The mission assured the authorities that IMF staff stand ready to work with them and Malawi’s development partners, including the World Bank and the African Development Bank, in support of policies and reforms that would help achieve the goals of the Malawi Growth and Development Strategy.
“The IMF Executive Board is expected to conclude the Article IV consultation discussions in late-May 2012.”
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, every 12 months for countries without Fund programs and every two years for countries with a Fund program. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. Member countries are asked to consent to the publication of this report in order to facilitate wider public access.