Is IMF’s ECF hanging by the thread?

What came as a relief in November 2023,the International Monetary Fund (IMF) Extended Credit Facility (ECF) programme, is turning out to be difficult to sustain just months into the four-year programme.

The $175 million programme was secured on the commitment by Malawi Government to bring the economy back to stability and ensure sustainable growth that begins to reduce poverty.

As it stands, the first quarter of the current fiscal year has a quartery deficit of K371 billion driven by salaries, interest payments and development expenditure that recorded upsurges, according to Reserve Bank of Malawi (RBM) figures, putting expenditure at K1.47 trillion against revenue of K1.1 trillion.

Foreign reserves are on a two-months decline now after a four-months improvement and the combined official and private sector reserves were recorded at just 2.29 months of import cover at the end of July, lower than the corresponding month last year at 2.7 months.

With the World Bank reporting public debt at 91 percent of gross domestic product (GDP) and inflation rate at 33.7 percent and still rising, the outlook looks gloomy.

The US Government thinks Treasury is going overboard in spending, making them raise a red flag and calling the leadership to act in reversing the situation or else risk losing the hard- fought ECF.

Coming from the biggest bilateral donor with $415 million worth of support to Malawi this year, and had to send a high-ranking envoy to deliver the message of concern, this is a warning shot that things are becoming uncontrollable on both the fiscal and monetary policy fronts.

The US envoy, Eric Meyer, who is the Deputy Assistant Secretary for Africa and the Middle East at the US Department of the Treasury cited low revenue collection, ballooning expenditures and delayed full implementation of the Integrated Financial Management and Information System (Ifmis), saying they have put at risk Malawi staying on track with the IMF programme.

He observes that there have also been delays in reaching agreements on necessary debt restructuring with some of Malawi’s international creditors, saying this has been further complicated by deals that Malawi is pursuing with some investors that could undermine Malawi’s agreements with the IMF and bilateral creditors.

“At this point, we are concerned as it appears that Malawi may not meet the commitments necessary to receive a second tranche of the ECF in the coming months,” says Meyer.

He further discloses that he expressed deep concern in all his interactions with government officials about how this would impact all Malawians, particularly most vulnerable citizens.

“Urgent leadership and action are needed at all levels of the government to ensure Malawi stays on course with the ECF, implements the reforms it has committed to stabilise its economy, and builds the foundation for economic growth and the long-term benefit of all its citizens,” says Meyer.

However, Minister of Finance and Economic Affairs Simplex Chithyola Banda, as expected, assured that there was still government commitment to ensure sustenance of the ECF by adhering to the agreed performance levels amid the difficulties that the economy is facing.

But how serious should the minister be taken given that the evidence obtaining in the fiscal policy seems to show the opposite of what he assures?

Economist Lesley Mkandawire thinks it is difficult to sustain the ECF when the IMF finalises its first review.

“If you assess what IMF found as challenges in November 2023, remain challenges even when the first review of the ECF was done in May.

“The IMF staff expressed the same concerns that include unsustainable borrowing both domestically and externally,” he says.

Mkandawire said negotiations for restructuring have been slow, with only one bilateral creditor, China having given a nod while commercial creditors are not moving.

He further says fiscal discipline with non-functioning Ifmis is a tall order while price instability remain a feature that affects the vulnerable in society with their purchasing power diminishing.

Says Mkandawire: “International reserves have not grown as expected. One needs to assess whether recent devaluations have had an impact bringing back trade credits. Governance and transparency institutions have remained weak.

“These amplify the observation of the Treasury official from the US Government.”

The Malawi Government got the ECF programme with conditions on fiscal discipline to create fiscal space, ensure official exchange rate is realigned with the market rate and build foreign reserves to contain exchange rate volatility.

However, nine months after the programme rolled out with S$35 million first disbursement, the country’s economy continues to show signs of stress with inflation rising to 33.7 percent as of July while domestic revenue has not met the targets.

Malawi Revenue Authority tax collection outturn in the first quarter missed its target by K92 billion, about 12 percent of the targeted K748 billion after collecting just K656 billion.

In May, the IMF mission led by Mita Saito made observations that still stand now as expressed by the US Government.

“Fiscal discipline remains critical in the face of elevated spending pressures.

“Rebuilding international reserve buffers and normalising the foreign exchange market are critically important to facilitate the return of trade credit and reduce vulnerability to external shocks,” reads a statement by the IMF at the end of the mission.