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The Executive Board of the International Monetary Fund (IMF) on Monday approved a disbursement of US$88.327 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 IMF Executive Board, which recently amended the policy for SMPs to allow for Program Monitoring with limited Board involvement (PMB) 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.
Authorities in Malawi 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.
Read full statement by Mr. Bo Li, Deputy Managing Director and acting Chair, issued after loan to Malawi was approved.
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.