Malawi’s destiny in own hands on IMF deal

Malawi is desperately seeking a new Extended Credit Facility (ECF) from the International Monetary Fund (IMF) hoping to unlock foreign aid inflows to help stabilise an economy on its knees and struggling to fulfill balance of payment obligations.

The situation Malawi has found itself in comes almost two years after the Tonse Alliance administration led by President Lazarus Chakwera in September 2020 cancelled an existing ECF negotiated by its predecessor. Through the cancellation, made when the new administration was barely two months in office, the country forfeited $70 million.

The Nation established that total access under the cancelled three-year ECF was about $145 million, which included the initial resource envelope of about $112.3 million approved in April 2018 plus $40 million under Augmentation of Access  approved in November  2019.

Malawi Government has been keeping its fingers crossed for a new ECF since the cancellation of the initial programme. In May this year, expectations were raised that the IMF Executive Board would make its assessment of Malawi’s case by mid-July. Before that defining moment, Malawi Government was tasked to urgently address debt sustainability and resolve the case of purported misreporting on foreign exchange transactions by the Reserve Bank of Malawi (RBM) to qualify for the new ECF.

Nothing much was heard about the deal thereafter until the past two weeks when IMF Malawi Country Office and the Ministry of Finance and Economic Affairs indicated there would be another round of discussions later this month.

While waiting for the stated mission, Malawians this week woke up to news that the IMF has cancelled the scheduled meetings due to some unresolved issues on debt sustainability.

In a desperate attempt to clarify on the IMF deal, Minister of Finance and Economic Affairs Sosten Gwengwe said debt advisory firm Global Sovereign Advisory advised for a default on loan obligations, a costly and risky move.

Developments surrounding discussions towards securing the IMF deal, in my view, reflect that Malawi Government did not do a proper job on the tasks outlined after the May round of discussions such that the IMF Executive Board may not have been amused. Put plainly, Malawi’s bid flopped and the process appears to be set for a restart.

IMF resident representative Farayi Gwenhamo this week said the Bretton Woods institution is assessing the audit report on alleged misreporting and “discussing with the authorities on corrective measures”.

I maintain my position expressed in an earlier write-up titled ‘Impediments I see in pursuit of an IMF deal’ published on June 16 2022 that when all is said and done, Malawi put itself in an awkward situation that is complicating its attainment of the new IMF programme. The first mistake was the premature termination of an existing ECF in September 2020 and the second was the revelation of purported misreporting or sugarcoating of the foreign exchange transactions by the previous administration.

My take is that if the cancelled ECF was left to run a full circle, Malawi would not have been in the mess it has found itself in. In fact, the programme would have enhanced the bargaining power. The cancellation was one ill-advised decision as the better evil was seeking a modification to address the problems, if any.

From Structural Adjustment Policies through Enhanced Structural Adjustment Policy to Poverty Reduction and Growth Facility as well as ECF, Malawi has had programmes with the IMF since independence from Britain in 1964. Malawi joined the IMF in 1965.

Most poor countries such as Malawi strive to be “associated” with the IMF for the sake of perceptions as the programme is widely known for its “signalling effect” of triggering direct budget support. But in recent years, the IMF programme’s effect has been fading due to Malawi’s ‘confidence deficit’ in the eyes of development partners as well as legacy issues in the aftermath of Cashgate, the plunder of public resources at Capital Hill exposed in September 2013.

In reality, IMF packages, which are basically loans, are not colossal and their impact on beneficiary economies has been mixed as in some cases, the prescription has tended to worsen the condition while in few other cases it has worked.

However, despite the fact that the IMF contribution is too low to make an impact, missing out on the same will still have dire consequences on the bleeding economy. For now, the World Bank is withholding about $100 million in direct budget support pending the ECF while the European Union and others may also be waiting in the wings.

Now that the outlook of having the ECF deal in the near future looks hazy, Malawi Government may be forced to opt for expensive loans which may not be a good path to take.

But moving forward, Malawi needs to stimulate the business environment to improve competitiveness and attract meaningful foreign direct investment. Until Malawi starts manufacturing, on a bigger scale, for exports to generate foreign exchange, the IMF will continue calling the shots.

The IMF spelt out its expectations, the ball is now in the Malawi Government’s court to improve governance structures, public finance management as well as demonstrate tangible efforts in fighting corruption.