The Executive Board of the International Monetary Fund (IMF) has tipped the Malawi Government on the implementation of policy adjustments to address Malawi's macroeconomic imbalances, restore debt sustainability, rebuild external buffers, and reduce poverty and inequality to improve social outcomes.
The Board, in a statement issued at the conclusion of the 2021 Article IV consultation with the Malawi government, has observed that despite showing signs of gradual recovery from the effects of Covid-19 pandemic, downside risks to the outlook persist.
"Uncertainty surrounding the outlook remains high, and risks are tilted to the downside. The main risk to the outlook is a sudden stop of available financing, especially from regional development banks," reads the press release in part.
It warns that if this risk materializes, it could lead to an abrupt real exchange rate adjustment, import compression, significant impacts on growth and financial stability, and an adverse effect on the most vulnerable.
The Board also underscored that restoring debt sustainability requires both addressing the legacy debt burden and adopting a strong fiscal adjustment programme.
It said while expenditures on containment measures and vaccine administration remain important in the near term, redoubling efforts on domestic revenue mobilization, curtailing and prioritizing current spending, and public financial management reforms are critical.
"Directors expressed concerns over Malawi's high risk of overall and external public debt distress. Directors noted that a tighter monetary policy stance would be needed if inflationary pressures materialize. In this regard, they encouraged careful monitoring of money growth and pressure on the exchange rate.
"Directors also underscored the importance of vigilant financial sector supervision, through close monitoring of potential risks to financial stability and the development of prudential policy tools," emphasizes the press release.
It further states that the directors noted the substantially weaker external position relative to the level implied by economic fundamentals and desirable policies.
As such, they stressed that allowing for greater exchange rate flexibility through a careful approach, containing external imbalances, and rebuilding external buffers are critical to reducing Malawi's vulnerabilities to external shocks.
"Directors noted potential noncomplying disbursements during the 2018. Extended Credit Facility arrangement with the IMF and the need for resolution of this case of potential misreporting ahead of a new program. They urged the authorities to deliver on their commitment to conduct a special audit of foreign exchange reserves and improve the frequency and quality of data reporting," said the Executive Board.
The Ministry of Finance was not immediately available to comment.