IMF urges Malawi to tighten spending

The International Monetary Fund (IMF) has urged Malawi to tighten spending to avoid falling further into debt.

Malawi economy is stressed as donors have withheld aid and budgetary support due to the Cashgate scandal.

IMF said Malawi must contain spending within approved ceilings as that would allow fiscal policy to be supportive of monetary policy and mitigate the impact of inflation on the most vulnerable segments of the population.

“The mission has emphasized on the need for Malawi government to exercise greater control over spending commitments in line with available financing to avoid the accumulation of additional debt,” said Oral Williams, IMF’s mission head in a statement issued at the end of the review on Malawi’s Extended Credit Facility (ECF) arrangement.

Williams said preliminary indications are that economic activity has demonstrated considerable resilience with real Gross Domestic Product (GDP) growth for 2014 now projected between 5 and 6 percent, with contributions from the agriculture and retail trade sectors.

The IMF team held discussions with Finance Minister Goodall Gondwe, Reserve Bank of Malawi (RBM) Governor Charles Chuka, Secretary to the Treasury Ronald Mangani, other senior government and RBM officials, national stakeholders and Malawi’s development partners.

Williams, however, was worried that Malawi’s inflation remains high, in part because of uncertainties about the resumption of budget support.

“Policy implementation continues to take place under difficult circumstances,” Willams contends. ” Shortfalls in budget support due to the cashgate scandal have led to challenges in the execution of the previous and current year’s budget, with increased recourse to costly domestic financing and the accumulation of significant domestic debt.

–Weak kwacha–

He noted that at the same time, the exchange rate has weakened considerably, exacerbating inflationary pressures. Malawi kwacha has depreciated by about 20 percent in recent weeks trading at K520 from K450.

“The depreciation is in part seasonal, as the economy has entered the ‘lean season’ where export-related foreign exchange receipts are low. However, this has been compounded by ongoing shortfalls in budget support,” he added.

According to Williams the missions discussions focused on the policies necessary to return the economy to a strong, noninflationary, and inclusive-growth path.

“Significant agreement has been reached in a number of important areas. These include on fiscal policy, where the authorities intend to follow a restrained stance, and on monetary policy, which will remain tight until inflation returns to a clear, declining trend,” he says.

–Favourable outlook–

The mission, however, noted that despite a favourable outlook for international food and fuel products, the policy actions required to bring inflation to single digits would likely slow down economic growth in 2015.

Malawi Government has reiterated commitment to strengthen public financial management systems [PFMS] and to be guided by the gaps identified in the recently released forensic audit report.

On the ground Malawi President Peter Mutharika has intensified his fight against corruption by arresting several individuals linked to Cashgate.

The mission views implementation of meaningful reform in [PFMS] to be crucial in supporting the macroeconomic policy stance and boosting private sector confidence.

“This will in turn help catalyze investment required for strong growth over the medium term.”

Discussions with donors emphasized that vigorous implementation of reforms in this area would be a precondition for a resumption of budget support.

“The mission will continue to work with the authorities in addressing these challenges in the weeks ahead. Assuming a successful resolution of remaining issues, it is anticipated that a request to complete the Fifth and Sixth reviews under the ECF-supported program could be submitted for consideration by the IMF’s Executive Board in early 2015.”