OREANDA-NEWS. October 01, 2015. A team from the International Monetary Fund (IMF), led by Mr. Oral Williams, visited Lilongwe to conduct discussions for the 2015 Article IV Consultations,1 and to discuss progress under the Extended Credit Facility (ECF) arrangement.2 At the end of the mission, Mr. Williams issued the following statement:

The Malawian economy is facing difficult challenges due to weather-related shocks. As a result, a looming food crisis is expected to negatively impact an estimated 2.8 million persons. Real GDP growth is projected to fall to 3 percent in 2015 from 5.7 percent in 2014, reflecting the steep decline in the maize harvest in addition to weak private sector investment and consumption. After declining significantly during the first quarter of 2015, inflation picked up sharply to August led by rising food prices. Growth in credit to the private sector remains negative in real terms, and declined further in the face of ongoing economic uncertainties, persistently high inflation, and tight bank lending conditions.

After a period of stability since end-2014, the exchange rate against the dollar weakened from end-June to the beginning of September, before stabilizing. These developments in part reflected the strengthening of the dollar against most major currencies and excess demand for foreign exchange to finance imports.

Program targets on net international reserves and net domestic assets of the Reserve Bank of Malawi for end June 2015 were met. However, fiscal slippages equivalent to about 2 percent of GDP emerged during the second half of FY14/15, in part because of overspending on the wage bill, and these were exacerbated by revenue and external financing shortfalls. Corrective measures undertaken to offset the slippages were insufficient. As a consequence, the end-June 2015 program target on net domestic financing was not met. On the structural side, structural reforms in the financial sector were carried out as planned, but programmed improvements in public financial management (PFM) were delayed.

The mission reached understandings on measures to bring the ECF-supported program back on track. These commitments include a revised fiscal framework sufficient to meet the end-December 2015 program target on net domestic financing, and a tight monetary stance to maintain positive real interest ratesincluding by absorbing the remaining excess liquidity that had entered the system when the liquid reserve ratio was lowered in July. Discussion also focused on measures to ensure that the PFM reforms envisaged under the program are fully implemented.

Restoring macroeconomic stability by bringing inflationwhich has been stuck above 20 percent since mid-2012down to single digits, remains the key precondition to fostering and sustaining growth in the near- to medium-term. To this end, tight monetary and fiscal policies are needed. Given ongoing external financing shortfalls, the budget should be financed in a sustainable manner and expenditures prioritized with a view to safeguard social spending. Planned reforms to the farm input subsidy program aimed at increasing expenditure efficiencies are a welcome step, while measures to boost revenue mobilization are critical in responding to growing developmental needs. Strengthening public financial management systems is integral to safeguarding public resources and restoring confidence in budgetary processes.

Addressing existing infrastructure bottlenecks is key to boosting potential growth and creating job opportunities. These include improving transportation infrastructure, electricity supply, the business environment, and access to finance. The adoption of a strong debt management strategy will ensure that public debt remains sustainable as key loans are contracted for strategic projects in this area.

Ongoing initiatives to reduce vulnerabilities in the financial sector through the consolidation of weak banks, periodic stress-testing of banks balance sheets and the fostering of greater access to financial services are welcome.

Commitment to the flexible exchange rate regime and the automatic fuel pricing mechanism will help Malawi to respond to external shocks. The fuel importing regime has worked well and has ensured a reliable fuel supply that has supported growth. Any planned changes to the system should encompass consultations with all stakeholders to avoid growth-damaging disruptions in supply.

The mission met with Minister of Finance Dr. Goodall Gondwe, Governor of the Reserve Bank of Malawi Charles Chuka, other senior government and RBM officials, a broad range of national stakeholders outside government, as well as representatives of Malawis development partners.

Consideration of the 2015 Article IV by the IMFs Executive Board is expected by November 2015. The mission would like to thank the authorities for their warm hospitality and constructive cooperation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 The ECF is the IMFs main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under the ECF currently carries a zero interest rate, with a grace period of 5? years, and a final maturity of 10 years.