Malawi proposes change in IMF conditions

Malawi has proposed changes in some of International Monetary Fund (IMF) conditions, specifically to increase borrowing from the domestic market.

Malawi Government, as indicated by the IMF country report, has proposed for an increase in the performance criteria for end-March 2013 and end-September 2013 by, among other things, raising the ceiling on the central government’s net domestic borrowing.

In an interview on Monday, Ministry of Finance spokesperson Nations Msowoya said the proposed change was on account on delays in grants disbursements.

“The revision that you are referring to in second quarter was on the account of delays in disbursements of grants earmarked for the Education Sector Wide Approach.

Some grants were delayed as a result the government borrowed hence the request for an increase for that quarter. These grants were received in quarter three and have been used to offset the borrowing incurred. As such the closing position at the end of the fiscal years will remain unchanged,” said Msowoya.

The IMF report indicates that actual central government’s net domestic borrowing by end-December 2012 stood at negative K18.2 billion.

However, the cumulative ceiling has been revised from K4.4 billion to negative K3.4 billion by end-March 2013, negative K15.02 to negative K18.61billion by end-June 2013, and negative K5.21 billion by end-September.

By end-December 2013, IMF targets net domestic borrowing to improve to positive K25.21 billion and before slightly declining to positive K21.28 billion by end-March 2014.

Economics Association of Malawi (Ecama) executive director Nelson Mkandawire, in a telephone interview on Monday, said the increase in the domestic borrowing is going to be a burden to Malawians.

“Certainly, government will increase borrowing due to the deficit in the 2013/14 budget. With the heavy domestic borrowing interest rates are likely to remain high which is a burden for Malawians.

Taxes are already heavy on the poor and the increase in interest rates as a result of heavy domestic borrowing is going to be an extra burden,” he said.

But, in both 2012/13 and 2013/14 budget statements, Minister of Finance Ken Lipenga promised to be committed to fiscal discipline by among others reducing domestic borrowing.

“The fiscal anchor for the 2013/14 fiscal year, like that of the current financial year, remains “No Net Domestic Financing” with a planned net domestic debt repayment of K7.2 billion, which is equivalent to 0.5 percent of GDP.

This fiscal stance is intended to reduce the domestic debt stock to allow the private sector space to borrow at reasonable rates for productive investment. The private sector as the engine for growth and development must be allowed to operate in a conducive environment. One such element in this atmosphere is financing at reasonable interest rates,” Lipenga said in the 2013/14 budget statement.

Since May this year, government has upped its domestic borrowing through treasury bills from around K2 billion per week to over K5 billion. Consequently T-Bills rates have been rising from an average 32.45 percent on May 14 to 33.36 percent on May 21 before moving climbing to 35.35percent on May 28.

The rise in T-Bills rates is likely to cast doubt on a possible decline in commercial bank interest rates which are over 40 percent, unless Reserve Bank of Malawi moves in to reduce its base lending rate which it has maintained at 25 percent since December 2012.

IMF, in July 2012 approved a new three-year arrangement for Malawi under the Extended Credit Facility (ECF) in an amount equivalent to $156.2 million (K54.6 billion).

In May 2012, prior to the IMF agreement, the Joyce Banda administration moved swiftly to devalue the kwacha by about 49 percent, adopted a flexible exchange rate regime and liberalised current account transactions to address the country’s chronic balance of payment problems and improve the outlook for poverty reduction and growth.