Ministry of Finance, Economic Planning and Development, in trying to secure further confidence under the Extended Credit Facility (ECF), has expressed its commitment to the objectives of the three-year programme.
In a March 2015 Letter of Intent (LOI) by Finance Minister Goodall Gondwe and Reserve Bank of Malawi (RBM) Governor Charles Chuka addressed to the IMF managing director Christine Lagarde, government mentions Malawi’s aim of attaining strong inclusive growth by giving room to all players on the economic front to make a contribution.
The LOI also targets inflation as another area that needs attention, saying: “We will continue to implement a tight monetary policy stance capable of forcing inflation onto a clear downward trajectory.”
According to the LOI, Malawi’s overall target is a single digit inflation rate. In recent months, inflation has been on a downward slide and this has given confidence to the central bank, which recently made public its hope of achieving a 15 percent mid-year rate and an even lower 12 percent inflation by December 2015.
However, the attainment of single-digit inflation rate could be a mammoth task, with economic analysts saying that Malawi is likely to face inflation challenges rising from low food basket levels due to the recent floods.
Another objective that the government has set and, so far, lived up to is the target in the increase in foreign exchange reserves to at least three months of import cover, which it has surpassed by going up to about five months cushion, according to latest figures from RBM.
In attaining these targets, the LOI states the importance of preserving a flexible exchange rate regime and automatic fuel price mechanism (APM).
The kwacha has been on comparatively favourable trend currently trading at around K420 against the dollar compared to a record high K520 in the past year.
Currently, the exchange rate has been constant without undulating fluctuations, a healthy trend for planning.
Equally important, according to the letter, is the management of APM, which sees fuel prices being commensurate with trends on the world market.
The LOI reaffirms government commitment to maintaining positive real interest rates throughout the programme period.
The International Monetary Fund (IMF) last week approved the disbursement of $18.1 million (about K8 billion) after the successful completion of the fifth and sixth reviews under ECF.
To cement the dedication to the ECF objectives, the LOI says the fiscal programme for the 2014/15 financial year is calibrated to support a strong disinflation effort to restore private sector confidence in government’s ability to control fiscal expenditure and safeguard debt sustainability.
“To ensure viability, Malawi will combine this firm macroeconomic policy stance with the implementation of a far-reaching strategy to address weaknesses in our public finance management (PFM) system,” reads the LOI.