A team from the International Monetary Fund (IMF), led by Mr. Tsidi Tsikata, visited Lilongwe from July 7 to 15, 2014 to review recent economic developments, discuss the Government’s policy priorities, and assist with the development of the broad parameters of the Fiscal Year 2014/15 budget. The mission also took stock of program implementation under Malawi’s current Extended Credit Facility arrangement.1 At the end of the mission, Mr. Tsikata issued the following statement:

“Preliminary indications are that real Gross Domestic Product (GDP) growth in 2014 will be in the 5-6 percent range with strong contributions from the agriculture, information and communications, and wholesale and retail trade sectors. The ready availability of foreign exchange and fuel resulting from continuation of the flexible exchange rate regime and automatic fuel price adjustment mechanism will also support economic activity.

“The annual rate of inflation has been declining gradually in recent months, but remains high at 22.6 percent in May. The cashgate scandal and the associated loss of most budget support from Malawi’s development partners contributed to a sharp depreciation of the kwacha and a surge in inflation in the fourth quarter of 2013. In early 2014, with the approach of the tobacco season, foreign currency inflows began to increase, strengthening both the level of international reserves and the exchange rate, while food prices moderated with an abundant harvest. Under these influences, the annual rate of inflation resumed a downward trajectory.

“The Reserve Bank of Malawi (RBM) lowered its policy interest rate from 25 percent to 22.5 percent last week, based on its assessment of a favorable outlook for inflation. In view of lingering uncertainties about underlying price pressures, the mission urged the RBM to stand ready to tighten its policy stance in the event the pace of disinflation is slower than anticipated.

“Performance under the ECF-supported program has been mixed. The end-June 2014 target for international reserves was met comfortably. However, several other targets—e.g., on net domestic assets of the RBM and on net domestic borrowing by the government—were missed by substantial amounts. There was progress in implementing structural measures aimed at strengthening public financial management and the stability of the banking system, but several took longer than programmed.

“Looking forward, public resources are significantly constrained due to the high interest cost of domestic debt and the need to address a significant accumulation of domestic payment arrears. In the face of such a tight budget constraint, fiscal discipline will be critical to ensuring that spending is kept in line with available resources. In this regard, the authorities intend to make some of their budgetary outlays in Fiscal Year 2014/15 contingent on disbursements of external assistance from Malawi’s development partners. While it is likely that some domestic borrowing may be needed this year to ensure delivery of basic services and avoidance of new payment arrears, it is important that these amounts be limited so as to lend support to the disinflation effort and preserve international reserves.

“The mission strongly supports the government’s intention to continue reforms in public financial management. It welcomes the authorities’ plan to consolidate the diverse reform elements under one organizational structure. Aggressive implementation of the strategy, well coordinated with other stakeholders, has the potential to deliver the improvements needed to protect public resources, improve the efficiency of their allocation, and re-establish a degree of public confidence and trust.

“The authorities have requested that the IMF mission return to Malawi in October for program discussions. The mission advised that a clear demonstration of prudent policies and strengthened adherence to commitments under the current program over the coming months will be important for the success of the program discussion.

“The mission met His Excellency President Arthur Peter Mutharika, Minister of Finance and Economic Planning and Development Goodall Gondwe, Reserve Bank of Malawi Governor Charles Chuka, Secretary to the Treasury Newby Kumwembe, other senior government and RBM officials, as well as representatives of the business community, civil society and Malawi’s development partners.

“The mission expresses its gratitude for the constructive spirit in which discussions with the authorities and all stakeholders were held.”

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.