The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of US$88.327 million (SDR 69.40 million) to Malawi under the new Food Shock Window of the Rapid Credit Facility. [1]
Concurrently, the Executive Board discussed a 12-month Staff-Monitored Program (SMP) for Malawi, which was approved by the Management of the IMF on November 11. With timely implementation of the program, the SMP would help the authorities establish a track record of policy implementation, possibly paving the way to an IMF-supported upper credit tranche (UCT) program.
The Executive Board, which recently amended the policy for SMPs to allow for Program Monitoring with limited Board involvement (PMB) [2] on October 4, 2022, assessed that Malawi’s policy program is sufficiently robust to meet the stated objectives under the SMP and that its implementation is expected to achieve the purpose of building a track record toward a UCT-quality Fund arrangement. The Board noted that the program would benefit from limited Board involvement given concerted international efforts by creditors and donors to provide substantial new financing and debt relief, and Malawi’s significant outstanding Fund credit under emergency financing instruments.
Washington, DC: The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of US$88.327 million (SDR 69.40 million) under the Food Shock Window of the Rapid Credit Facility to help Malawi address urgent balance of payment needs related to the global food crisis. Food insecurity in Malawi has increased significantly owing to multiple tropical storms, below-average crop production, and increasing prices for food and agricultural inputs such as fertilizer and seed. As a result, about 20 percent of the population is projected to be acutely food insecure during the upcoming 2022/23 lean season (October 2022-March 2023), or more than twice as many people as in 2021.
The authorities also requested the Staff-Monitored Program and Program Monitoring with Board involvement to build a track record of policy implementation, possibly paving the way to an IMF-supported Upper Credit Tranche (UCT)-quality program. The Board and Management welcomed the steps the authorities have taken since the Article IV Consultation in December 2021 to stabilize the economy and build the foundation for inclusive growth.
Following the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and acting Chair, issued the following statement:
Malawi is facing a challenging economic and humanitarian situation, with foreign exchange shortages and an exchange rate misalignment leading to a sharp decline in imports including fuel, fertilizer, medicine, and food. Emergency financial assistance under the RCF’s new food shock window would help address urgent balance-of-payments needs and mitigate the impact of the food shock.
The Management-approved staff monitored program (SMP) is sufficiently robust to meet the authorities’ stated objectives, and its implementation is expected to achieve the purpose of building a track record toward an Upper Credit Tranche (UCT) -quality program supported by a Fund arrangement.
Malawi’s track-record building SMP will benefit from limited Board involvement given the ongoing concerted international effort by creditors and donors to provide substantial new financing and debt relief to Malawi, as well as Malawi’s significant outstanding Fund credit under emergency financing instruments.
Fiscal discipline, supported by a realistic budget, an enhanced Public Financial Management system and timely production of comprehensive fiscal reports, is important. Restoring price stability and ensuring financial sector stability will help build a foundation for private sector-led growth.
Rebuilding external buffers will be critically important to reduce Malawi’s vulnerabilities to external shocks. The RBM’s commitment to rebuild its foreign exchange reserves, requiring implementation of its strategy to wind down unsustainable policies including excessive use of swaps and trade credit to maintain strategic imports and other quasi-fiscal operations, is welcome.
While debt is sustainable on a forward-looking basis, risks to the program are high. It will be critical to swiftly implement the authorities’ debt restructuring strategy, which aims to bring Malawi back to moderate risk of debt distress in the medium term. The credible process underway to restructure the authorities’ debt to commercial creditors, which in itself would restore debt sustainability albeit with high risk, is welcome. Swift progress is also needed on the reprofiling of official bilateral debt. A concerted effort among the authorities, their creditors and the international development partners will be crucial to ensure a successful implementation of the debt restructuring strategy.
Addressing weaknesses in governance and institutions and enhancing transparency will be important. In this regard, strong corrective actions to address the issues that led to misreporting under the 2018 ECF, including implementation of the recommendations of the 2021 safeguards assessment, and measures to strengthen foreign exchange reserve management are welcome. The authorities are urged to move to a UCT-quality program as soon as feasible.
[1] The Food Shock Window provides, for a period of a year, a new channel for emergency Fund financing to member countries that have urgent balance of payment needs due to acute food insecurity, a sharp increase in their food import bill, or a shock to their cereal exports.
[2] SMPs are informal agreements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board. Under recent reforms to the policy on staff monitored programs, the Executive Board, in specified circumstances, has limited involvement, not amounting to endorsement of the policy program. In such cases, the Board’s role is limited to (i) opining on the robustness of the member’s policy program to meet the objectives stated in the Management approved SMP and to achieve the purpose of building or rebuilding a track record toward a UCT-quality program, and (2) in the context of reviews, to indicate if the member is on track to achieve these objectives.
Source: International Monetary Fund
