On December 11, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation1 with Malawi.
Bold economic reforms undertaken in mid-2012, namely the devaluation of the currency, the adoption of a floating exchange rate regime, the liberalization of foreign exchange markets, and the introduction of an automatic fuel price adjustment mechanism transformed the policy environment and greatly improved the outlook of the economy. But uneven policy implementation, high inflation, and a weak balance of payments position–dependent on a narrow export base and financed by volatile donor inflows–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. 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. Over 2012–14, real GDP growth and inflation averaged 4.3 percent and 24.5 percent, respectively.
The economic outlook 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. Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015 due in large part to heavy floods in early 2015 followed by drought which resulted in an estimated decline of about 30 percent in the maize harvest (the main staple). As a result, an estimated 2.8 million persons remain at risk of food insecurity. Growth is projected to rise gradually to about 5.5 percent over the medium term. Inflation is expected to rise to 25.4 percent at end-2015 and is estimated to ease in 2016 and reach single digits at end-2017 if fiscal and monetary policies tighten, and international prices for food and petroleum products remain low. The external current account deficit will remain in the 8 percent range over the medium term reflecting the demand for imports associated with developmental projects, rapid population growth, and the slow pace of export diversification.
Executive Board Assessment2
Executive Directors expressed concerns about the policy slippages that have prevented Malawi from achieving sustained growth and low inflation. They agreed that the outlook is subject to downside risks from continued weather related supply shocks, the interruption of donor budget support, and weaker demand for Malawi’s exports. Accordingly, Directors emphasized that restoration of macroeconomic stability was a critical near term priority. In this context, they underlined the need for fiscal consolidation and tighter monetary policy. Going forward, with implementation of sound macroeconomic policies and structural reforms, Directors expected growth to rebound gradually over the medium term along with a decline in inflation.
Directors underscored the benefits of improved revenue mobilization to respond to rising demand for public services from a rapidly growing population and to reduce aid dependence. Directors recommended broadening the tax base, strengthening tax compliance, and modernizing tax administration. Directors emphasized that ensuring medium term fiscal sustainability while safeguarding social spending will require improvements in the allocation and targeting of public spending. Directors stressed the need to accelerate public financial management reforms to restore trust and confidence in the budget process and foster donor re-engagement. Directors also cautioned that the envisaged changes should not make public sector pensions fiscally untenable.
Directors welcomed Malawi’s commitment to the flexible exchange rate regime and the automatic fuel pricing mechanism, both of which have served Malawi well. They cautioned that changes to the fuel import regime involving a greater role for the state-owned company should be transparent and include safeguards against the emergence of contingent liabilities for the budget.
Directors called for intensified efforts to enhance financial sector resilience and its role in fostering inclusive growth. They noted that credit and concentration risks pose a significant threat to banking system stability and warranted continuous vigilance.
Directors encouraged the authorities to implement structural reforms to remove supply bottlenecks, increase agricultural productivity and improve the business environment.