IMF outlines deal terms

The International Monetary Fund (IMF) says Malawi needs to urgently address debt sustainability and resolve the misreporting to qualify for a new Extended Credit Facility (ECF) with the fund.

IMF stated the pre-requisites for the new deal in a statement issued yesterday after its Mika Saito-led team held discussions with Malawi Government officials from May 25 to June 3 2022 through hybrid and in-person meetings in Lilongwe.

Reads the IMF statement in part: “The [Malawian] authorities have requested an arrangement in the back of the protracted balance of payments problem.

“While IMF support and its catalytic role in mobilising donor support are critical at this juncture, being able to restore debt sustainability and resolving the misreporting case are pre-requisites for such support.

“While the authorities are addressing these issues, the IMF team conducted a mission to agree on macroeconomic framework, policies, and reforms.”

In the statement, Saito is quoted as having described the discussions as “positive and productive”.

She said: “We welcome the authorities’ recent steps to normalise the forex market in line with the recommendations of Article IV Consultation concluded by the IMF Executive Board in December 2021 to help to improve foreign exchange availability.

“The special audit of the official foreign exchange reserves of the Reserve Bank of Malawi [RBM] is now in the final stages. This report will form the basis for consideration of the pending misreporting of RBM Foreign Exchange Reserves by the Executive Board of the IMF.

“The authorities have engaged a debt adviser to support their efforts in addressing Malawi’s unsustainable public debt. As this work progresses, the discussions with the authorities will resume towards a staff-level agreement.”

Malawi is seeking a new ECF after cancelling the previous arrangement in September 2020, thereby forfeiting $70 million. The Nation established that total access under the cancelled three-year ECF was about $145 million which included the initial resource envelope of about $112.3 million approved in April 2018 plus $40 million under Augmentation of Access  approved in November  2019.

Briefing the media in Lilongwe yesterday, Minister of Finance and Economic Affairs Sosten Gwengwe said the IMF has taken the issue of misreporting seriously such that the Malawi Government pleaded that “it will never happen again”.

He said he was positive the IMF will grant Malawi the new four-year ECF when its executive board meets in mid-July this year.

The minister said the first leg of the negotiations with the fund, which is key in determining the success of the programme, was to agree on structuring of the programme parameters, including the macroeconomic framework for the next four years.

Said Gwengwe: “However, conclusion of our negotiations with the IMF for a new programme is dependent on the finalisation of the special audit on foreign exchange transactions and misreporting that happened at the Reserve Bank of Malawi during the period 2018 to 2020.

“The misreporting case is taken seriously by the IMF because Malawi was giving false information to the IMF in order for the fund to disburse balance of payment support.”

He said government has engaged Ernst & Young to conduct the special audit on the misreporting and the report is expected within two weeks.

Gwengwe said: “The worst scenario is that the IMF may ask for a refund of $70 million, which is a product of misreporting.

“In as much as this happened under a different regime, we own the mistake as a government and we have assured the IMF that this will not happen again. It was unfortunate and we have repented. With that assurance, I am really optimistic that we have high chances to get the facility.”

The other IMF condition is managing debt and the minister said this was under control as government has engaged reputable debt advisers who are working on a debt plan.

He said: “Malawi’s debt was classified as unsustainable mainly because of some concessional and, therefore, expensive loans that were contracted by RBM in 2018.

“As per the standing principles and guidelines of the IMF, no country can be on an IMF programme with unsustainable debt.”

On what would happen if the programme is not approved, the minister said that will signal more economic challenges.

During the news conference, RBM Governor Wilson Banda said he was more than confident that Malawi will clinch the deal having satisfied a number of set conditions.

Meanwhile, economic experts have said Malawi needs the programme more than before, noting that a negative IMF response will throw the country into serious economic turmoil.

Economist Milward Tobias said he expects the leadership to do something about the list of government officials allegedly implicated in some corruption as indicated in documents purported to be from Britain’s National Crimes Agency (NCA).

He said: “For diplomatic reasons the IMF may not say it, but the issue of corruption is serious.

“The appointing authority must suspend these officials to send a strong message. Donors are not taking this lightly. IMF is really key to open more doors for donor support and losing this programme is a recipe for disaster especially when we have already devalued the kwacha. We need the forex and this is dependent on this programme.”

On his part, Malawi University of Business and Applied Sciences associate economics professor Betchani Tchereni said missing out on the programme will have dire consequences to the economy which is already bleeding.

He said there is an opportunity for Malawi to get the nod of the IMF if it improves on governance structures, including the fight against corruption.

Tchereni said: “Looking at the political economy of our country, others think we are being bullied by the IMF and we can do without them. I do not think so. We must not use this as an excuse to continue doing the wrong things. The misrepresentation of facts or misreporting has put us in an awkward position today.”

Traditionally, the IMF programme has been known for its “signalling effect” of triggering direct budget support, although in recent years such an effect has been fading due to Malawi’s  ‘confidence deficit’ in the eyes of development partners as well as legacy issues in the aftermath of Cashgate, the plunder of public resources at Capital Hill exposed in September 2013.