International Monetary Fund (Washington, DC)

5 January 2013

Malawi - Economic Rebirth, Renewed Partnerships

document

Speech delivered by Christine Lagarde, Managing Director, International Monetary Fund at the Crossroads Hotel, in Lilongwe, Malawi on January 5, 2013

Good morning. It is a great pleasure to be here. From the moment I stepped off the plane and felt the incredible hospitality, I understood why Malawi is known as the "warm heart of Africa".

When I arrived yesterday, I had the honor of meeting President Joyce Banda. She is surely one of Africa's most inspiring, dynamic, and humane leaders. With her at the helm, I have great confidence in Malawi's future.

I would also like to recognize minister of finance, Ken Lipenga, and central bank governor, Charles Chuka for their wise economic leadership.

And of course, let me thank the Malawi Confederation of Chambers of Commerce and Industry and its president, Matthews Chikankheni, for hosting us today. And thanks to all of you for coming.

I would like to talk this morning about Malawi's future. Malawi is a country with great potential. Next year, in 2014, you will be celebrating 50 years of independence. But for too much of this period, Malawi has not lived up to this potential. The country went through decades of dictatorship and lost opportunities.

This leaves behind a bitter legacy--Malawi is one of the world's poorest countries and half of the population live on less than $1 a day.

The time has come for change--for Malawi to finally break through and secure its future. I am confident that you have reached such a tipping point. The new century offers great promises for Africa; and this promise should not pass Malawi by.

But forging a new Malawi for a new era is a collective effort. The government needs partnerships. Partnerships with the people of Malawi.

Partnerships with the international community, including the IMF.

So let me talk about three things this morning:

  1. The global and regional context in which Malawi finds itself.
  2. Why I believe Malawi is on the cusp of an economic rebirth.
  3. How the IMF can be an effective partner for Malawi along this journey.

1. Global and regional economic context

Let me begin with global economic developments. We expect the global recovery to continue next year, but it remains weak and subject to great uncertainty. There are some signs that growth may be stabilizing, but global activity seems stuck in low gear.

The news is a bit better in this region. We expect growth of around 5¼ percent in Sub-Saharan Africa this coming year. The low-income countries, housing two-thirds of Africa's people, are growing even more strongly--at around 6 percent.

But as long as the global turmoil persists, people on this continent remain at risk. The links are simply too strong--from trade, foreign investment, remittances, and aid. IMF research shows that a sustained global slowdown of 2 percentage points of GDP would reduce growth in sub-Saharan Africa by about 1¼ percentage points a year.

Where do the main risks come from? I do not think this is any mystery--from continued uncertainty about prospects in Europe, the United States, and China.

Let us also not forget the threat from food prices and food scarcity. So far, rising global food price pressures are concentrated in a few crops like maize, soybeans, and wheat. But drought and crop failure are becoming ever-present dangers in some areas, with grave consequences for livelihoods and even lives. Malawi is facing such pressures right now as a result of the poor recent maize crop. And the challenges will only get bigger as climate change continues its rapid advance.

So much for the bad news. Looking to the longer horizon, I am optimistic about Africa. Why? Because the region has great potential, and because the forces of destiny are on its side.

Look at Africa's performance over the past decade or so--after emerging Asia, it recorded the world's strongest growth rates. In some cases, the African lions even outpaced the Asian tigers in their first two decades.

During the crisis, sub-Saharan Africa held up well. Resilience was homegrown--African countries were able to take advantage of the strong foundations they had built in the years leading up to the crisis. Since 2000, debt levels fell from over 100 percent to under 40 percent of GDP, foreign exchange reserves more than doubled, and inflation halved. This performance was aided by comprehensive debt relief, including from the IMF.

Because of this, two-thirds of countries in the region were able to pursue expansionary policies during the crisis--letting deficits expand instead of slamming hard on the brakes. Two-thirds of countries were able to increase real spending on health and education, drawing a circle of protection around the most vulnerable people.

he strength and resilience of Africa also comes from a reorientation of trade and investment toward a more diverse set of partners. Today, nontraditional partners account for 50 percent of African imports and 60 percent of exports. China is now the region's largest single trading partner. So Africa is becoming more open to the wider world--and more open to itself, as intra-regional trade has also doubled since 1990.

Looking ahead, I believe the future of Africa shines brightly. Just look at some of the trends. In less than 30 years, Africa will have a labor force of more than a billion people. Africa's young people are its source of strength. It has demographic destiny on its side.

Of course, to seize the possibilities of tomorrow, Africa needs to take the initiative today. I see four key challenges:

Faster structural transformation--led by higher productivity in agriculture and greater competitiveness in manufacturing and services.

More inclusive growth and job creation--making sure that all, especially the poor, share in rising prosperity.

Better management of natural resources--so that all citizens can benefit from this source of wealth, making it a blessing rather than a curse.

Stronger financial sectors--so that all have access to financial services and credit can be channeled to where it is most needed.

I am confident about this future. But I want all countries to be benefit from it, including Malawi. The train bound for the new Africa is about the leave the station, and Malawi has a reserved seat.

2. A Malawian economic rebirth

This brings me to my second area--the economic rebirth of Malawi. The rebirth has its roots in recent crisis, but even deeper roots in insufficient diversification. Agriculture still accounts for 30 percent of GDP and tobacco still accounts for almost half of total export earnings.

What this means is that Malawi and its people are too vulnerable.

Vulnerable to the forces of nature. Vulnerable to the vagaries of global commodity markets. Vulnerable to people slipping back and forth between poverty and just getting by.

Because of this vulnerability, Malawi has seen too many false dawns. It has suffered from chronic shortages of foreign exchange. Growth was too narrowly-based to be inclusive, and has not reduced poverty, especially in the rural areas where most people live. In short, the economy was not working for the people.

When she took office last April, President Banda inherited a serious economic crisis. A crisis driven by Malawi's perennial problem--a dire shortage of foreign exchange that in turn caused severe shortages in critical imports like fuel, capital inputs, and medicine. Businesses were forced to lay off workers. The government could not pay its bills.

This forms the backdrop to Malawi's economic rebirth. Let me talk about what this rebirth means along three core dimensions--economic stability, economic growth, and human development.

Restoring economic stability

Let me begin with economic stability, the foundation upon which everything else is based.

There is a great Malawian proverb that says "one little arrow does not kill a serpent". And indeed, President Banda and her team moved quickly, moved boldly, and moved on many fronts. In short order, they managed to turn the situation around and restore stability.

They devalued the currency by 50 percent and moved to a flexible, market-based exchange rate system. They removed restrictions on foreign exchange transactions by banks and foreign exchange bureaus. This stopped the overvaluation and eased strains on foreign exchange.

They also increased petroleum prices and cut off subsidies by moving to an automatic adjustment mechanism. This helps the budget, including by freeing up resources for infrastructure and social spending. It helps equity, given that the better off captured most of the benefit from these subsidies. And it helps the environment.

Following these reforms, the economic wheels started spinning again. But progress is threatened anew by a slump in agriculture--from a weather-related decline in maize production and a halving of the tobacco crop brought about by lower planting during the period of overvaluation.

Because of this, we halved our growth estimate for 2012 to about 2 percent. But we expect a strong rebound to 5.5 percent this year, assuming strong policy commitment and normal weather conditions.

But this latest crisis goes beyond economics. It is a human crisis.

Today, almost 2 million people--12 percent of the population--face food insecurity. 2 million people stand at the verge of hunger.

This is an urgent priority. The government is certainly doing the right thing by deploying the grain reserve, partnering with World Food Program and providing in-kind food assistance. It will also be important to scale up public works and other social protection programs, and that means strengthening implementation capacity.

This must all be done while sealing in the gains of economic stability.

After all, with a low level of reserves, a key priority must be to stabilize the exchange rate and reduce inflation through tight monetary policy and fiscal restraint. There is no viable alternative.

Rejuvenating economic growth

Let me now talk about rejuvenating economic growth, the second dimension of economic rebirth. In reality, economic stability is really a means to an end--stronger growth and more job creation. It is about lifting the prospects of all Malawians--the cotton farmer in Nsanje, the tobacco grower in Kasungu, the rice farmer in Karonga.

I believe the government's Economic Recovery Plan lays the foundation for higher and better quality growth.

I believe that the key to unlocking Malawi's potential lies in making it more competitive. This should help with diversification, allowing the country to rely less on agriculture and gain a foothold in newer and promising areas.

That means making it easier for the private sector to invest, innovate, and expand. Right now, Malawi ranks poorly in the World Economic Forum's Global Competitiveness Index--129th out of 144 countries. It also means boosting investment and upgrading poor quality infrastructure, especially in electricity and transport.

I also believe that growth can become more inclusive. This means developing and protecting robust social safety nets. It means expanding access to financial services, so everybody--including the poor--can get access to credit. It means investing in skills, training, and education to equip the next generation of Malawians for the world that awaits them.

Improving human development

That brings me to the third dimension of rebirth--improving human development. This must always go together with stability and growth.

Indeed, we can look upon growth as merely a means to a higher end--creating the conditions for the flourishing of human potential.

President Banda understands this well. Consider how she puts it: "Growth is not merely GDP growth. Growth is about wealth and prosperity for all, opportunity for all, happiness for all, political and economic freedom for all. Growth is also about growing the number of children in school, and young people in jobs. Growth is about increasing the number of mothers who give safe birth in a hospital, and growing the number of families who have plenty of food".

In other words, growth is ultimately about human beings and the condition of peoples.

How is Malawi doing on this front? Well, if we look across the all-important Millennium Development Goals, I believe that progress is mixed.

Malawi has certainly made good progress across a number of areas--reducing child mortality, combating deadly diseases like HIV/ AIDS and malaria, ensuring environmental sustainability, and strengthening global partnerships for development. In these areas, the 2015 targets should be achieved.

But progress is lagging in other vital areas--such as eradication of extreme poverty, attaining universal primary education, promoting gender equality and empowering women, and improving maternal health. I urge the government to work at full steam to make up for any lost ground.

For at the end of the day, the acid test of our policies is how they actually help people--that holds for governments, and indeed for the IMF too.

3. Partnership between Malawi and the IMF

On that note, let me shift to my third area this morning--renewed partnerships for a new era. Malawi still has a long and hard road ahead, but it does not need to walk this road alone.

Experience teaches us that success comes easier when everybody comes to the table in a spirit of cooperation and solidarity, putting aside petty differences and seeking first the common interest. As another Malawian proverb puts it, "one head alone cannot carry the roof".

This starts inside the country. Government needs to form strong bonds with the social partners--all who have a vested interest in Malawi's future. That certainly includes the business community, labor representatives, and civil society organizations. In other words--people like yourselves.

Malawi also needs international partnerships, including with the IMF.

Remember, the IMF is like an economic club of 188 member countries who help each other times of need, knowing that the health of one affects the health of all.

So when the IMF stands with you, this is a proxy for the other 187 member countries standing with you, for the international community standing with you.

How do we help countries?

First, through our policy advice. The job of the IMF is to provide the most honest, objective advice to our members. In doing this, we draw on a wealth of experience across our near-universal membership, spanning almost 70 years. And we are constantly striving to do better.

The second way we help is through our lending. Our goal here is to cushion the economic and social costs of crises, giving the country time to get back on its feet. It is also to catalyze financial support, by providing a seal of approval on a country's reform program.

I believe that the IMF has a special responsibility to the low-income countries, its members on the frontier of success. So one of my big priorities last year was to put our Poverty Reduction and Growth Trust on a sustainable footing.

This has been done. Our members have delivered. We should now have enough concessional lending to meet members' needs in the years to come.

Even more, we will keep charging zero interest on concessional loans through the end of 2014. The message is loud and clear: we will continue to stand with our low-income members.

I think we have a good record here. A recent internal study found that low-income countries with Fund-supported programs score better on both growth and poverty reduction than their peers. Spending on health and education also rises faster in countries with IMF-supported programs than in developing countries as a whole--health spending by 1 percentage point, education spending by ¾ percentage points over five years.

The third way we help countries is through capacity building. Through technical assistance and training, we help countries build institutions from the bottom up. For without solid foundations, trying to improve the economy is like swimming into a rapidly advancing tide.

The IMF has stepped up its assistance to Africa. We now have four regional technical assistance centers, with a fifth coming on line in 2013, plus a regional training center. We provide hands-on assistance in priority areas like managing natural resource wealth.

Let me now turn to the IMF's partnership with Malawi.

Malawi, with its vulnerability to swings of fortune, surely deserves our support. And because we believe strongly in the government's reform program, we will continue to support Malawi. As the country transitions to a stronger, less volatile, and more diversified economy, we will be with you.

Our three-year Extended Credit Facility agreed last July seeks to restore stability, boost growth, and scale up social protection. We responded quickly to support the new government's reform program. I believe our support is already yielding economic dividends. It is also unlocking donor support for increased social protection and development expenditures.

We are also committed to helping Malawi build capacity and strengthen its institutions. We are working with the government in many areas--revenue administration, public financial management, the framework for monetary policy, financial sector supervision, and macroeconomic statistics.

Let us remember: the reform program is your program. It belongs to you.

You know your own country better than we do, and without country ownership, a policy program has little chance of success. Our job is to help, but the future of Malawi lies in your hands.

Conclusion

Let me conclude with some words from one of my favorite writers, George Bernard Shaw: "Imagination is the beginning of creation. You imagine what you desire; you will what you imagine; and at last you create what you will".

We can all imagine the kind of better world we want to leave our children and grandchildren. It is within our power to turn this vision into reality. So let us join together and be co-creators of a new Malawi, a new Africa, a new world.

Thank you.

Ads by Google

Copyright © 2013 International Monetary Fund. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.