Pro-poor policy advocates and civil society orgnisations (CSOs) have asked the Malawi Government to tread carefully and avoid slippages that may derail implementation of the Extended Credit Facility (ECF) with the International Monetary Fund (IMF).
The call comes in the wake of a study by Oxfam in Malawi and the CSOs Governance Group on the Effectiveness of IMF ECF and Budget Support in Malawi.
In an interview yesterday, Oxfam in Malawi country director Lingalireni Mihowa said while government has managed expenditure, revenue targets fall short, a development that points to some budget assumptions not materialising.
She said: “We would like to encourage the government to remain on course with the implementation of our ECF programme with the IMF. Within the precarious economic situation, the government should as much as possible be able to meet the targets under the programme.
“And if there are any difficulties with some targets; let us be clear on the corrective measures that we are taking.”
In November 2023, Malawi secured the four-year ECF worth $175 million to stabilise her ailing economy, which helped to unlock direct budgetary support from multilateral institutions such as the European Union (EU).
But economists at the time observed that while the facility offers short-term relief, its success was dependent on effective governance, transparency and prudent use of funds.
During yesterday’s interview, Mihowa said the successful implementation of the ECF programme will facilitate more inflows of finances from bilateral and multilateral partners, which will support the economy to recover while giving government the fiscal space to strengthen efforts to grow the economy through investments in productive sectors.
The study carried out by consultant Winford Masanjala under the leadership of Oxfam in Malawi together with the Economics Association of Malawi, Malawi Economic Justice Network, Youth and Society, Civil Society Agriculture Network and Centre for Social Accountability and Transparency, observed that despite the government’s commitments and IMF conditionality, the chance that policy commitments made by Malawi today will remain valid in the coming periods is very low.
In the policy brief, he noted that Malawi’s engagement with the IMF is characterised by non-compliance to agreed performance targets and structural benchmarks, resulting in non-completion of reviews and subsequent suspension or cancellation of facilities.
Masanjala, a University of Malawi associate professor of economics, observed that Malawi has completed or fully drawn down only four of the 13 facilities with IMF.
He said the country rarely abides by spending targets underlying the ECF conditionality with fiscal prudence remaining elusive although it is a primary objective of all facilities that Malawi has contracted.
IMF records show that Malawi successfully completed programmes in 1982, 1988, 1995 and 2005 while in 2018 the country agreed to a 14th programme worth $112 million (about K196 billion) which the Tonse Alliance administration cancelled in August 2020 on the basis that its priorities did not match with conditionalities.
In 2000, Malawi and the IMF agreed that the 2001/02 national budget would incorporate decisive cuts in non-priority spending. However, the fiscal plan that was eventually approved by Parliament ended up being three percent of the gross domestic product (GDP), more expansionary than agreed.
In the post-Cashgate era, Masanjala noted that Malawi Government has replaced lost direct budget support with domestic borrowing largely to finance recurrent spending, an arrangement that has contributed to a rapid accumulation of public debt which now stands at an equivalent to just over 80 percent of GDP currently.
The ECFs, which have encouraged Reserve Bank of Malawi (RBM) independence in the hope of minimising fiscal dominance, have, however, seen the monetary policy being ineffective in moderating inflation as price stability has become the primary short-term objective of monetary policy.
At the same time, the potential impact of budget support, which is unlocked by the ECF, has waned as it has long been volatile and trending downward relative to government expenditure needs.
Data shows that the relative contribution of total grants has been in decline from a peak of 38 percent in 2007/08 to 11 percent in the 2023/24 budget of K3.7 trillion.
To this, Masanjala, in the brief, said: “Complementary reforms that would increase impact of aid are never implemented in full and a lot of policy-induced structural constraints in the economy remain.”
Former RBM and Ministry of Finance and Economic Affairs economist Lesley Mkandawire says there are several factors that lead to ECF slippages which Malawi is still vulnerable to.
While observing that the culprit in many years of implementing ECF is slippage in fiscal targets, which include expenditure and debt buildup, he faulted IMF for setting conditions that are usually not for the prescription to work.
Secretary to the Treasury Betchani Tchereni referred The Nation to Ministry of Finance and Economic Affairs spokesperson Williams Banda who last evening asked for more time.
According to the IMF, one of the most urgent goals of the current ECF arrangement is to support the authorities’ commitment to restoring macroeconomic stability and creating an environment of low or moderate inflation and a stable exchange rate.
The ECF has since unlocked direct budget support from the EU and the African Development Bank after almost a decade of a freeze in such aid modality in the wake of revelations of the plunder of resources at Capital Hill due to weak public finance management.
Reform efforts in the four-year programme, currently under first review, focus on bringing back the country to a sustainable fiscal path, rebuilding external buffers, restoring debt sustainability and external viability while mitigating the effects of El Nino-induced shocks.
Malawi has been a member of the International Monetary Fund since July 1965 and her current quota is SDR138 million. She has since concluded 18 arrangements (loans) with the fund; the first came on October 31 1979 and the 18th on November 23, 2023.
