History repeats itself in 2011

In 2001, the IMF froze its support to Malawi’s economic programme called the Poverty Reduction and Growth Facility (PRGF). Reading the red lights, donors who provide budget support to Malawi based on performance benchmarks agreed with the Fund, also withdrew their aid. It was the beginning of painful living for most Malawians. But as Dumbani Mzale analyses, history has just repeated itself.

Ten years later in 2011, Malawi finds itself back in the same rocky boat, after watching the IMF declare off-track another programme, the Extended Credit Facility (ECF), for the same wrong reasons: poor governance, weak public finance management and ill-defined monetary policy.

Here is the flash back.

In 2001, the IMF-supported PRGF also went off-track, mainly because of over-spending by the then administration of ex-president Bakili Muluzi.

PRGF was introduced, among other things, to replace the Enhanced Structural Adjustment Facility (Esaf) of the IMF as a lending window for poor countries such as Malawi, which became an IMF member in July 1965.

It was introduced in 1999 as a new IMF policy framework aimed at achieving significant poverty reduction in poor and indebted countries.

But after the programme was suspended, it was clear that Malawi experienced a considerable drop in aid flows with major implications on the poor and subsequent decimal economic growth rates.

In November-December 2001, members of Common Approach to Budget Support (Cabs), then consisting of UK and Sweden, decided to suspend budgetary support to Malawi “in view of government’s consistent failure to implement agreed economic reforms and follow a sound macroeconomic policy.”

Since then, the country never had a sustainable programme with the Fund until Bingu wa Mutharika took over government in 2004 and returned the country to the PRGF in August 2005.

The new PRGF went on to help Malawi reach the Highly Indebted Poor Countries (Hipc) completion point, leading to debt cancellation in September 2006.

Under the PRGF framework, Malawi attained successive robust economic growth rates averaging more than seven percent during its three-year implementation period. The climax of its success was in 2008, when it helped the local economy to expand by 9.7 percent, placing Malawi as the world’s second fastest growing economy during the year after oil-rich Qatar.

More opportunities opened up for Malawi as the IMF smiled again in 2008 by  approving a one-year, $77.1 million arrangement under the Exogenous Shocks Facility (ESF) designed  to support the authorities in their adjustment to the terms of trade shock caused by rapid increases in fuel and fertiliser prices in the first part of 2008.

After the expiry of ESF on December 2 2009, the IMF also extended its warm gesture on Malawi in form of the three-year $79.4 million ECF arrangement to support Malawi’s economic programme between 2010 and 2012.

History repeats itself

However, true to the saying that ‘history repeats itself,’ hell broke loose again for Malawi in June this year when IMF declared ECF off-track after failure by Malawi and IMF to successfully complete the programme’s second review.

Paradoxically, the Mutharika administration is a master of its own fate. After winning the IMF confidence in 2005, in June last year saw all the hard-earned confidence being blown-off.

Other contentious issues currently not resolved by the Malawi Government include the weakening of the kwacha in line with the realities on the ground, the setting up of unrealistic targets by the Malawi Government in the controversial zero-deficit budget, among others, according to the IMF.

But this time around, it is clear that minus the IMF-supported programme, things went sour during the year and economic repercussions are just overwhelming.

The country has for sometime been experiencing erratic fuel supply largely because of inadequate foreign exchange from tobacco and the freezing of budgetary support equivalent to 21 percent of the budget because of a lack of the IMF programme.

The donors, operating under Cabs, are currently withholding about $500 million (about K83.5 billion) in aid which has seriously choked government operations and compromised social services for the poor in the process.

Finance and Development Planning Minister Dr Ken Lipenga insists that the programme will be revived because authorities are working hard to patch up the holes.

Lipenga replaced Ken Kandodo, on whose watch the ECF veered off the rail. Whether a new broom can prove to be a better sweeper of the fiscal and monetary dirt currently engulfing the country is yet to be seen.

But prospects of an ECF programme come-back are mixed. While government moved to weaken the kwacha to a dollar by 10 percent in August, in a move to win back the IMF confidence, the IMF was not impressed.

During a joint annual general meeting in Washington, DC in September, former ECF mission chief for Malawi, Janet Stotsky, did not mince words, saying the 10 percent devaluation was not enough in the eyes of the Bretton Woods institution.

“No, we do not think that a 10 percent devaluation was enough. We also think that there is more that can be done than devaluation [to bring back the programme on track],” she said in an exclusive interview.

During the conference, Stotsky also pleaded with Malawi to create a national budget that is ‘prudential’ and also limit borrowing from the central bank in tandem with ECF stipulations.

What’s next for Malawi?

IMF country representative Ruby Randall said last week that revival of the programme will require the visit of an ECF review mission which will discuss with the Malawi authorities detailed findings and recommendations of the IMF’s Technical Assistance Team, which was in the country from December 1-12.

The technical team reviewed operational issues surrounding the liberalisation of Malawi’s foreign exchange regime for current account transactions and enhanced exchange rate flexibility. It also looked at the legal and regulatory framework of the country’s foreign exchange regime.

Asked to comment on Malawi’s chances of returning to the ECF programme, economics professor Ben Kaluwa was not too optimistic.

“It will take time and it will depend on how flexible the people [in government] are,” he said.

Pressed on the stumbling blocks that he sees would prevent Malawi from the return to the ECF, Kaluwa singled out exchange rate determination as the most critical factor.

In a separate interview, Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa said he remains hopeful and optimistic that the demands by the IMF will ultimately be met “and speedily yield and signal an opening of a fresh chapter.”

So far, RBM Governor Dr Perks Ligoya has missed his own deadline to devalue the kwacha by Christmas. Not the best of signs for a programme, is it?