ECONOMY-MALAWI: IMF Resumes Lending

By IPS Correspondents Reprint | | Print |

Frank Phiri

BLANTYRE, Oct 21 2003 (IPS) - Local economists have welcomed Monday’s decision by the International Monetary Fund to resume aid to Malawi, but warned government to keep its promise of fiscal discipline through cutting over-expenditure in non-priority areas such as foreign travel.

"We expect the government to treat the aid and its conditionalities with kid gloves to avoid angering the donors again," said Perks Ligoya of the Economics Association of Malawi (ECAMA).

The International Monetary Fund (IMF) Monday approved a 9.2-million-U.S.-dollar aid disbursement to lift the lid on three years of lending sanctions on Malawi. The resumption of the aid has raised hopes of an economic recovery in the poor southern African country of more than 10 million people.

The approval followed conclusion of the review of Malawi’s economic performance under a Poverty Reduction and Growth Facility (PRGF) by the IMF executive board in Washington on Monday, according to a statement by the lender.

It said the IMF Board’s decision would become effective upon a further decision following World Bank’s Executive Board review of the Malawi Poverty Reduction Strategy Paper (MPRSP) on Oct. 23.

IMF also said it has agreed to Malawi’s request for resumption of interim assistance under the Heavily Indebted Poor Countries (HIPC) initiative by approving release of 6.6 million U.S. dollars "to help Malawi meet its debt service payments to the IMF".

IMF Deputy Managing Director Shigemitsu Sugisaki said Malawi has made satisfactory progress in restoring ‘some’ measure of fiscal discipline and targets during the first half of 2003, despite a prevailing severe drought and related food shortage.

"Not withstanding these recent gains, Malawi continues to face daunting economic and social challenges. Sustained political will, therefore, continue to be needed to reverse economic deterioration, ensure macroeconomic stability, improve public service delivery and promote poverty reduction," he said.

Local economists agree.

Ligoya warned the government against diverting donor resources for election-related expenditure. General elections are due in Malawi in May 2004.

"The problem is, when we get the money, government will get excited thinking they have triumphed," said Collins Magalasi of the Malawi Economic Justice Network (MEJN).

He criticised the penchant for unnecessary foreign travels by senior government officials.

Last month President Bakili Muluzi cancelled a trip to the UN General Assembly in New York following pressure from civil society that the visit would waste over K74 million (740,000 U.S. dollars) of taxpayer’s money. Ironically, Muluzi, with a bloated delegation, opted for a trip to Japan to attend the annual Japan-Africa Development summit.

IMF suspended aid to Malawi under PRGF – its most concessional facility for low-income countries – in 2001 following implementation slippages by the Lilongwe government. Malawi only managed to withdraw about 9.2 million U.S. dollars on Dec. 21, 2000, out of 64.5 million U.S. dollars of the PRGF arrangement.

The IMF’s suspension of aid signalled Malawi’s other traditional bilateral donors in Europe to pull the aid plug. They froze 75 million U.S. dollars worth of balance of payments for Malawi, and demanded repayments of misused money in the interim.

But the three-year drought threw the Malawi economy in the deep end, and government had to resort to heavy borrowing from the domestic market to balance its budget.

The situation had a disastrous impact on private sector as it pushed up interest rates at more than 45 percent, on the back of fast drying forex reserves which resulted in rapid depreciation of the Malawi kwacha.

At least 30 companies closed shop since 1999 owing to the tough economic conditions following aid suspension, according to studies by Polytechnic, a branch of the University of Malawi.

"Doing business is like cycling to the top of a mountain," said Mathews Chikaonda of Press Corporation Limited (CPL), Malawi’s largest conglomerate listed as a depository on the London Stock Exchange (LSE).

Responding to critics, finance minister Friday Jumbe vowed Tuesday to take unpopular decisions to ensure government stays on track with conditionalities accompanying the release of the aid.

He said expectations were that other donors withholding millions of dollars in form of balance of payments and budgetary support in Europe would thaw their aid. "It’s not an extra bonus to us because it was already factored in the budget but it would give us a foothold to start building our economy," he said.

But the Malawi Chambers of Commerce and Industry (MCCI) warned government that the aid resumption "will not cure all the country’s ills".

"There’s no need for overexcitement because this aid will not be enough to cater for everything," said MCCI’s Chancellor Kaferapanjira, referring to famine.

More than 400,000 people will need food aid from Jan. to Mar. next year, according to last week’s joint Food and Agricultural Organisation (FAO) and World Food Programme (WFP) Crop Supply Assessment Mission report released in the capital, Lilongwe.

The food shortage, which hit most of southern Africa last year, has affected implementation of Malawi’s 2002/2003 budget, said Finance minister, Jumbe.