Lilongwe: Malawi’s programme with the IMF is off track after the country failed to successfully complete a second review of its economic performance, the Fund’s resident representative Ruby Randall said on Monday. Malawi’s failure to complete the assessment under an Extended Credit Facility (ECF) puts future support in jeopardy after the country’s key donors last week said they would link aid to a positive review from the IMF.
Said Randall at a news conference in Lilongwe: "The ECF programme is off track because of a failure to complete the second ECF review. Non-completion of the review is costly for two reasons: it delays the adjustment that is critically needed to reposition and diversify the economy and the Cabs [Common Approach to Budget Support] partners have singled out that an essential condition for the provision of the budget support is the existence of an on track Fund programme."
Randall said the kwacha is over-valued and the current exchange rate is a significant barrier to economic diversification as it discourages local and foreign investment. "The [Malawi] authorities made a public commitment to addressing that overvaluation by adopting a package of measures that includes exchange rate flexibility and liberalisation of the foreign exchange regime," said Randall.
The kwacha has been pegged at K150.80 to the dollar since devaluation from K138.50 at the end of 2009. Finance Minister Ken Kandodo last month defended the decision not to devalue the kwacha when he addressed the Economics Association of Malawi (Ecama) symposium in Lilongwe. He argued devaluation would be inflationary and hurt the poor.
But Randall yesterday countered that argument, saying the inflationary consequences of devaluation can be managed through the concurrent pursuit of tight fiscal and monetary policies.
"The poor can be insulated from any potential inflationary impacts of exchange rate policy through a continuation of the fertiliser subsidy and perhaps some expansion of targeted social safety net programmes such as cash transfers and transparent fuel subsidies to society’s most vulnerable. This is in sharp contrast to the potentially harmful inflationary consequences stemming from recourse to domestic financing," she said.
IMF approved a three-year $79.4 million (about K12 billion) facility for Malawi in February last year, which amounts to 75 percent of its quota in the Fund. But the programme has been hit by government’s failure to devalue the kwacha, as demanded by IMF, and failure to implement public finance management reforms, among other issues.
Kandodo on Monday confirmed Malawi’s programme with IMF is off track but expressed optimism that it will be back on track. He said government is discussing the issue with the Fund, but did not say how it proposes to get the programme back on track.
Randall said the programme being off track does not mean that IMF has suspended the programme. She also said IMF will continue to engage government in talks. Malawi successfully completed the first IMF review last December and drew the equivalent of about $21.4 million (about K3.2 billion).
Fast facts
1. The 2011/12 national budget is worth K304 billion.
2. Domestic revenue represents 79 percent of the budget, with the balance of K65 billion expected from donor grants.
3. Donors under Cabs last week expressed concern over the zero-deficit budget.
4. The donors also noted with concern lack of endorsement of the budget by the IMF.3. Uladi Mussa previously served in Mutharika’s administration as Cabinet minister and DPP as one of first vice-president.
