The United Kingdom (UK) has congratulated President Dr. Lazarus McCarthy Chakwera and his administration on the approval of a US$174 million Extended Credit Facility (ECF) by the Executive Board of the International Monetary Fund (IMF).
The UK, in a statement which also welcomes the decision by the IMF Board, says the agreement marks the culmination of dedicated efforts by Malawian authorities to restructure Malawi’s unsustainable external debt, to design and implement a sustainable budget, and to improve the use of public funds through tighter scrutiny and control.
“These reforms and the new financing agreed under the ECF will help to stabilise Malawi’s economy and create the building blocks for investment and growth. To achieve this significant milestone, the Government of Malawi has had to take necessary but difficult policy decisions, and to implement austerity measures in the short-term in the pursuit of future growth and stability,” said UK in a statement shared with media on Wednesday night.
The statement assures that as a long-term and committed partner of Malawi, the UK will support the government’s efforts to protect vulnerable people during this difficult time.
“We are acutely aware of the hardships that Malawians are facing over this period of economic adjustment. To help with this, over the coming months we will be prioritising additional support for families who don’t have enough to eat, including through providing cash and food. There can be no doubt that for the longer- term growth and prosperity that is needed to prevent future hardship, Malawi needs a vibrant private sector and a more diverse economy that can create more jobs. The UK looks forward to working in partnership to support this goal,” concludes the statement.
The IMF Executive Board discussed the Second (and last) Review of the Staff-Monitored Program with Executive Board Involvement (PMB) and approved a 48-month arrangement under ECF for Malawi in an amount equivalent to SDR131.86 million (about US$175 million), with an immediate disbursement of SDR26.37 million (about US$35 million).
In a statement accompanied by the announcement of the facility, IMF acknowledges that Malawi continues to face a challenging macroeconomic environment, with years of unsustainable domestic and external borrowing and the adverse impact of multiple external shocks resulting in the widening of macroeconomic imbalances, including protracted balance of payment needs.
The IMF says the ECF-supported program will support the authorities’ macroeconomic adjustment and reform agenda aimed at restoring macroeconomic stability, building a foundation for inclusive and sustainable growth, and addressing weaknesses in governance.
“Malawi has struggled to sustain growth for decades despite large inflows of official development assistance. The past three years have been particularly difficult with stagnating growth and widening macroeconomic imbalances due to unsustainable debt and the effects of multiple shocks, including an outbreak of cholera and cyclone Freddy this year alone.
“Malawi’s external debt is unsustainable and debt service needs are eroding limited fiscal space. Despite sizeable external emergency financing, the large fiscal budget deficit necessitated domestic financing. This has been addressed in large part through monetary financing, putting pressure on the exchange rate and increasing the rate of inflation,” reads a statement from IMF.
It adds that the ECF arrangement aims to support the authorities’ commitment to restore macroeconomic stability, build a foundation for inclusive and sustainable growth, including to strengthen resilience to climate-related shocks, and address weaknesses in governance and institutions. The arrangement is also expected to catalyze grant financing and capital inflows including foreign direct investment and trade credit.
IMF First Deputy Managing Director and Acting Chair, Ms. Gita Gopinath, said the Malawian authorities have shown unwavering commitment to the Staff-Monitored Program with Executive Board Involvement (PMB) and together with tangible progress on securing debt treatment, have established a track record for an Extended Credit Financing (ECF) arrangement with the IMF.
“Fiscal discipline, supported by a robust public financial management system and timely production of comprehensive fiscal reports, remains critical. Concerted effort by the authorities and other domestic stakeholders to prepare for fiscal financing challenges is important. Price stability is critical to prevent a further erosion of purchasing power. Rebuilding international reserve buffers and allowing for greater flexibility in the exchange rate are critically important to bring back trade credit and to reduce Malawi’s vulnerability to external shocks. Addressing weakness in governance and institutions will be important”.
“Shifting Malawi’s growth model from a consumption-driven to a production-driven one and from a government-led to a private-sector-led one is a core principle of Malawi 2063 and is vital to make Malawi’s growth inclusive, sustainable, and resilient to climate-related shocks. The PMB was sufficiently robust to meet its objectives,” said Gopinath.