IMF programme faces first test

IMF programme faces first test

Economists say public debt, commitment to fiscal discipline and revenue performance remain pressure points in the first review of the International Monetary Fund (IMF) Extended Credit Facility (ECF) despite authorities’ efforts to stabilise the ailing economy.

They expressed the sentiments in separate interviews in response to The Nation questions on their expectations from the first review of the $175 million (about K297 billion) ECF granted last November with expectations to unlock direct budget support.

Former minister of Finance and Economic Planning and Development Joseph Mwanamvekha said the highlighted pressure points could threaten progress of the four-year ECF that seeks to restore and maintain sustainable levels of fiscal and current account deficits, an adequate level of gross international reserves and limited debt vulnerabilities.

Chikadza: Government has shown commitment

To be deemed to be on course means progress on structural reforms in critical areas such as public finance management, developing markets and improving governance and institutions while protecting vulnerable households.

But in the interview following the arrival of the IMF Mission on the first review of Malawi ECF programme approved on November 15, Mwanamvekha, an economist, said the government still faces pressures on public debt, fiscal discipline and price stability.

He said: “We still have challenges. What I can see is that there will be more pressure on public debt and revenue as pressure on expenditure increases due to many demands on the government including salary hikes, rising needs of ministries and government departments as well as climate shocks.

“Again, the exchange rate is not stable and price stability cannot be achieved as long as the exchange rate is unstable. Exchange rate plays a crucial role because we are a predominantly importing nation.”

Mwanamvekha, who said he wishes the government well, also observed that maize shortage threatens price stability, considering the weight of maize, at 53.7 percent, in the consumer price index, an aggregate basket used in computing inflation rate.

Ministry of Finance and Economic Affairs data shows that public debt stood at K13.1 trillion as of December 2023, consuming half of the tax revenue for annual repayment costs.

The rising debt comes at a time the country’s debt situation has so far remained unaddressed, according to the IMF.

At the same time, pressure on inflation has remained heightened, rising from 31.5 percent in the last quarter (Q4) 2023 to 33.4 percent in the first quarter (Q1) 2024 while foreign exchange reserves have also dwindled during the same period, from $248.3 million in Q4 2024 to $155 million in Q1 2024 although the Reserve Bank of Malawi concedes that there has been a moderation in exchange rate fluctuation.

The central bank also concedes that the exchange rate pass-through to inflation has dissipated faster.

In a separate interview, Economics Association of Malawi acting president Bertha Bangara Chikadza observed that given the short span between the coming into force of the ECF and the first review, it may not be easy to characterise meaningful changes in economic fundamentals attributed to the programme.

“The domestic economy remains fragile as evidenced by elevated consumer prices, persistent fiscal pressures and foreign exchange imbalances.

“However, government has shown commitment to adhere to the structural and quantitative benchmarks agreed under the ECF,” she said.

Chikadza observed that among other things on the benchmark, government is targeting a 7.6 percent fiscal deficit to the gross domestic product (GDP) in the 2024/25 financial year from 8.9 percent during the previous year while monetary policy custodians continue to pursue a tight monetary stance to bring about money supply growth and in turn, contain inflation.

She said: “In addition to the call for fiscal consolidation, enhancing production with emphasis on value addition and export promotion is pertinent, as well as restructuring the tax regimes in the country to attract more foreign direct investment.”

On his part, Scotland-based economist Velli Nyirongo said questions remain regarding the country’s fiscal discipline, noting that the increased frequency of government trips compared to last year’s non-essential travel ban raises concerns.

“Price stability also remains sticky, with inflation proving stubbornly persistent. To get back on track, several key areas demand immediate attention,” he said.

Treasury Secretary Betchani Tchereni yesterday was not immediately available for comment.

However, he is on record as having said the country is making big progress on her debt restructuring with most of the country’s creditors pledging debt relief for Malawi.

Tchereni also indicated that government is working on the response package to weather shocks the country is experiencing and has so far secured support from development partners that will help with the fiscal needs to deal with the weather shocks, including a $57 million disbursement from World Bank.

IMF resident representative Nelnan Koumtingue has since confirmed that the mission will be holding discussions in the ECF arrangement over the next two weeks.

Malawi sought a new ECF after cancelling the previous arrangement in September 2020, barely two months after the Tonse Alliance administration led by President Lazarus Chakwera ascended to power.

Following the cancellation, Malawi forfeited  $70 million and total access under the cancelled three-year ECF was about $145 million, including the initial resource envelope of about $112.3 million approved in April 2018 plus $40 million under Augmentation of Access approved in November 2019.

Published data shows that between 2023 and 2029, Malawi will have paid 67 percent of external sovereign debt service to Multilateral Development Banks.

As at December, of Malawi’s total external public debt of K6.62 trillion, K4.4 trillion is owed to multilateral creditors.

The World Bank is the country’s largest creditor with K2.2 trillion or 33 percent of Malawi’s total external public debt.

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