For several months, confidence in the Malawi economy and its markets—especially financial markets—has been low as seen, for example, by the sharp depreciation of the kwacha at a time official foreign currency reserves were well above the three months internationally recommended import cover benchmark.
With such reserves, the kwacha should either have been stable or appreciated, but the opposite happened.
Wednesday’s announcement by the International Monetary Fund (IMF) that the Extended Credit Facility (ECF)—the fund’s main tool for medium-term financial support to low income countries such as Malawi—was off-track just drove confidence levels to new lows, leaving the country vulnerable both to internal and external shocks.
“The ECF is off-track and we have discussed a number of measures [to bring the programme back on track] starting with a revised budget,” said the IMF mission chief for Malawi Oral Williams in an interview at Capital Hill in Lilongwe where he jointly addressed a news conference with Minister of Finance, Economic Planning and Development Goodall Gondwe.
What is the impact of this development?
Normally, the material impact of such a move from the fund would be the freezing of direct aid to government by countries that provide budgetary support, which traditionally makes up 40 percent of the national budget.
But budgetary support is already in a comma, especially that which comes from bilateral donors. The economic system has not gotten over this yet, but it is the kind of shock that is being absorbed right now with painful results, of course.
It is only multilateral institutions such as the African Development Bank (AfDB), the World Bank and the European Union (EU) who have shown willingness to continue supporting the budget.
Would the three multilaterals respond to the IMF signal and run with their money as well? It is possible, but let us hope that their flexibility and patience that comes with multi-country member institutions will come into play here, although I won’t bet on it.
Then of course there is the credit line that Capital Hill taps from the $147 million soft credit that comes with the ECF during its life span that initially three years, but was extended by six months.
Any disbursements from the fund are definitely off the table now that we have run off the rails, thanks to our exceptional expertise at fiscal slippages and inability to fully implement post Cashgate Public Finance Management (PFM) reforms meant to avert a repeat of the financial scandal that has left the country deeply scarred.
But the biggest impact is that by flashing the ECF red card, the IMF may have just shoed away the little confidence the economy was left with.
Confidence will be so low that the kwacha—which had miraculously started gaining against major trading currencies in the past few days—is likely to start sliding again as speculators with long beaks start to massacre the local unit.
Internationally, the IMF decision means that it will be harder and more expensive for the Malawi Government and local companies to borrow commercially from the global financial system or secure lines of credit as trust in the ability to pay wanes on the back of degraded credit ratings.
And, believe me, with this, if you think there has been funding cuts to government ministries, departments and agencies, you haven’t seen anything yet.
Capital Hill will now be under pressure to sharply cut budget allocations, thereby curtailing expenditure, which will further depress an already panting economy—leading to meaningless economic growth.
Meaningless growth because for economic expansion to make a dent on poverty in Malawi the country has to grow by at least six percent.
Yet, the IMF has drastically revised the country’s projected growth rate as measured by gross domestic product (GDP) to just three percent from Gondwe’s budget estimate of more than seven percent for calendar 2015.
That means low production by companies, farmers and all those that contribute to the country’s economic programme.
It means that jobs will be scarcer; wages are likely to be flat and thousands of jobs could be lost as organisations try to survive by becoming leaner and agile. Ultimately, it means that more people will fall back into the poverty band and the number of ultra poor people will soar, further burdening the crumbling State.
Yes, it means that President Peter Mutharika and his Democratic Progressive Party (DPP) have not just an economic crisis on their hands, but also a social disaster that, if you add the 2.8 million people expected to starve this year, should keep everyone awake, including Parliament as it prepares to reconvene in the next few weeks.
You throw into the equation the rising inflation rate, high interest rates, the large fiscal deficit and the El Nino that is expected to sweep through Malawi and other countries in the region then you know that Malawi will need strong leadership that fosters bipartisanship and mobilizes people towards a common goal to survive the coming tsunami. Otherwise, be afraid, be very afraid. n