A team from the International Monetary Fund (IMF), led by Mr. Tsidi Tsikata, visited Lilongwe and Blantyre from March 18 to April 3, 2014 to conduct discussions for the fifth review under Malawi's Extended Credit Facility (ECF) arrangement.1 The mission held discussions with Finance Minister Maxwell Mkwezalamba, Reserve Bank of Malawi (RBM) Governor Charles Chuka, Deputy Finance Minister Cornelius Mwalwanda, Secretary to the Treasury Newby Kumwembe, Attorney General Anthony Kamanga, other senior government and RBM officials, a broad range of national stakeholders outside government, as well as representatives of Malawi's development partners. The mission expresses its gratitude for the constructive spirit in which all its discussions were held.
At the end of the mission, Mr. Tsikata issued the following statement:
"Since our last visit in November 2013, policy implementation has taken place in a difficult environment with mixed results. Against the backdrop of the suspension of substantial external assistance due to the "cashgate" scandal, fiscal policy has been appropriately restrained and has contributed to stabilizing the exchange rate. However, the resulting expenditure compression has taken a heavy toll on the delivery of public services.
"Overall fiscal conditions will remain tight for the remainder of the fiscal year 2013/14, but strong revenue performance and the release of some external financing will allow some relaxation of the stringent constraints observed over the past two quarters.
"In discussing the fiscal outlook, the mission urged the authorities to be mindful of fiscal risks associated with potential contingent liabilities arising from the operations of state owned enterprises, including the Agricultural Development and Marketing Corporation (ADMARC), the National Food Reserve Agency NFRA, the Malawi Rural Development Fund (MARDEF) and the National Oil Company of Malawi (NOCMA).
"The authorities have made progress in addressing governance and public financial management (PFM) weaknesses, including through implementing the government's Action Plan. Going forward, it will be important to adapt the Action Plan into a strategic and comprehensive PFM reform program, including by reflecting the findings and recommendations of the preliminary forensic audit report government received in February 2014.
"The mission welcomes the accumulation of international reserves by the RBM and its plans to further boost the level of reserves during this year's tobacco season in order to provide the economy with a buffer against exogenous shocks. This will also allow the RBM to effectively intervene in the foreign exchange market to manage excessive volatility in the exchange rate arising from the highly season pattern of private foreign exchange inflows.
"Inflation remains high at nearly 25 percent, with the disinflation process complicated by the expansion of liquidity associated with RBM purchases of foreign exchange. The mission therefore recommends that the RBM tighten monetary policy more aggressively.
"Performance in relation to the targets and benchmarks for the fifth review was mixed. Most of the quantitative targets for end-December 2013 were met, including the target on net international reserves and net domestic borrowing by the government. However, the targets on the net domestic assets of RBM and on reserve money were missed by significant margins. The pace of implementation of structural benchmarks was slower than programmed, but almost all are now near completion.
"The mission and the authorities reached understandings on the broad parameters of the budget for the fiscal year 2014/15. Discussions will continue in the coming weeks to firm up the framework that will be presented to cabinet. Since the budget will be submitted to parliament by the government that will be formed after the May 20 elections, the mission proposes to return to Lilongwe in June to confirm the understanding reached during this mission, before it submits its report to IMF management and the Executive Board. Completion of the review would enable Malawi to receive a disbursement of SDR 13 million (about US$20 million) from the IMF."
1 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the Fund's main tool for medium-term financial support to low-income countries by providing a higher level of access to financing, more concessional terms, enhanced flexibility in program design features, and more focused streamlined conditionality. Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years.