IMF Lends Malawi $156 Million to Help Boost Foreign Reserves

Government has taken bold steps to counter foreign exchange shortages

Program balances need to lower inflation with goal of higher social spending

New policies stress public financial management, better business climate

The loan, under a three-year Extended Credit Facility arrangement approved July 23, backs program objectives that include low inflation, increasing international reserves, and reforms to expand financial services and improve the investment climate in order to promote sustained inclusive growth.

In its regular review of Malawi’s economy, the IMF said recent policy measures implemented by the authorities will help boost export earnings and foreign assistance, slow down the growth of imports, and help the authorities build up international reserves to provide a buffer against external shocks. International reserves had fallen to precariously low levels by early 2012. After hovering around the equivalent of one month of imports during most of 2011, reserves fell to about half a month of imports by April 2012.

Malawi experienced a smooth transition to a new government following the sudden death of President Mutharika in April 2012. The new administration led by President Joyce Banda moved swiftly to address the country’s chronic foreign exchange problems that had resulted in severe shortages of critical imports, including fuel, inputs for production, and medicines.

The authorities devalued the kwacha, adopted a flexible exchange rate regime, and removed restrictions on foreign exchange transactions which had fostered the growth of a parallel market in foreign exchange. Concurrently, the authorities adjusted the prices of petroleum products and adopted an automatic adjustment mechanism to ensure that these prices reflect their true import costs, thus removing burdensome subsidies on the budget.

Malawi’s development partners have responded favorably to the new administration’s economic policies and repeal of laws that were seen as infringing on human rights and freedoms.

Poverty reduction goal

The new government has approved Malawi’s second Growth and Development Strategy which had been under preparation for some time. The strategy’s principal objective is poverty reduction through sustained growth and infrastructure development. The plan gives high priority to removing bottlenecks in energy and transport infrastructure that have been widely cited as impediments to investment and economic diversification in Malawi.

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