Malawi should accelerate public financial management reforms to restore trust and confidence in the budget process and foster donor re-engagement, the International Monetary Fund (IMF) Executive Board said on Tuesday.
But the global multi-lateral lender also says Malawi’s economic outlook remains difficult, encouraging authorities to implement structural reforms to remove supply bottlenecks, increase agricultural productivity and improve the business environment.
IMF, whose programme with Malawi is currently off-track, said this in a statement at the end of the 2015 Article Four consultation with Malawi.
Under Article Four of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with member countries like Malawi, usually every year.
While commending economic reforms undertaken in mid-2012, which it says transformed the policy environment and greatly improved the outlook of the economy, the fund observes that uneven policy implementation, high inflation, and a weak balance of payments position continue to pose macroeconomic challenges.
“Furthermore, the ‘Cashgate’ scandal uncovered in 2013 involving a large-scale theft of public funds damaged Malawi’s economic outlook significantly,” says IMF.
The subsequent withdrawal of donors’ budgetary support and fiscal and monetary policy slippages, prevented the achievement of key objectives of sustainable and inclusive growth, and low inflation under Malawi’s Growth and Development Strategy (MGDS).
Angered by Cashgate, uncovered between September and November 2013, Malawi’s major donors—who traditionally contributed about 40 percent of the national budget—withheld budget support worth $150 million, leaving a huge fiscal gap at Capital Hill.
Today, the donors, who are yet to resume budget support, are by-passing Capital Hill to finance Malawi through off-budget support mechanism.
Commenting on the economic outlook, IMF states that the future remains difficult reflecting the negative impact of weather-related shocks, the ongoing suspension of budget support, persistently high inflation and weaker global demand which could hurt Malawi’s exports.
The fund also maintains its earlier projection that real gross domestic product (GDP) growth is projected to fall by 2.7 percentage points to three percent in 2015 due in large part to heavy floods in January 2015 followed by drought.
On a positive note, IMF says directors welcomed Malawi’s commitment to the flexible exchange rate regime and the automatic fuel pricing mechanism, as they have served Malawi well.
Going forward, IMF also advises that with implementation of sound macroeconomic policies and structural reforms, it is expected that growth will rebound gradually over the medium term along with a decline in inflation. n