Malawi has forfeited $70 million (about K53 billion) under the three-year Extended Credit Facility (ECF) programme with the International Monetary Fund (IMF) following the new administration’s decision to cancel the programme.
Minister of Finance Felix Mlusu announced the cancellation of the programme when he tabled the full 2020/21 National Budget pegged at K2.2 trillion in Parliament on Friday.
In a written response to our questionnaire yesterday, IMF country representative Farayi Gwenhamo said the cancellation of the ECF arrangement implied that future disbursements under the remaining programme’s reviews will be cancelled.
However, she clarified that the cancellation of the programme will not affect resources already disbursed before the decision.
Our records, corroborated by the IMF, show that total access under the ECF was about $145 million and the funds included the initial resource envelope (about $112.3 million) approved in April 2018 plus the $40 million under Augmentation of Access approved in November 2019.
Resources under the Augmentation of Access were approved on November 22 2019 by fund’s Executive Board of Directors sitting in Washington D.C and were meant to support Malawi’s reconstruction efforts through the financing of imports in the aftermath of the devastating Cyclone Idai.
Of the $145 million ECF package, Gwenhamo said the disbursements done so far under the arrangement stood at $75 million. This means the country was yet to access$70 million under the facility.
She said: “While the remaining resources under the ECF will be cancelled, Malawi is also expected to receive emergency financing under the Rapid Credit Facility [RCF] within this year, ahead of the expected negotiation of a new ECF in early 2021.”
In the meantime, Gwenhamo said, the IMF is engaging the authorities on macroeconomic issues and policy reforms, including in the context of RCF.
Recently, authorities and the IMF staff team held discussions during August 24-September 3 2020 for Covid-19 emergency support to Malawi under RCF and work is currently underway to conclude the process. This will be the second time this year for Malawi to access emergency financing under the RCF which was designed to help with Covid-19 needs, following the first RCF disbursement in May 2020.
Traditionally, the IMF programme has been known for its “signalling effect” of triggering 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.
Reacting to the cancellation, former Mlusu’s predecessor Joseph Mwanamvekha faulted the timing and warned that by doing so, Malawi had taken a huge risk.
He said: “To me it is a timing issue. They should have allowed the programme to finish because it is only ending this December and later negotiate the new terms.
“By doing so [cancelling], we are going to lose a lot of money and we are not guaranteed that we may get the subsequent programme or if it [the new ECF] will be agreed.
“I don’t think they did a proper cost-benefit analysis because immediately after expiry, they could have negotiated another programme not necessarily cancelling it.”
Mwanamvekha said the sacrificed money could have gone a long way to mitigate the impact of Covid-19 pandemic while also mitigating the prevailing foreign currency shortage on the market.
Our analysis shows that the $70 million opportunity cost of cancelling the ECF programme represented 33 percent of the country’s monthly foreign exchange requirement (import cover) estimated at an average $209 million based on Reserve Bank of Malawi (RBM) statistics.
Another former minister of Finance Goodall Gondwe, who has previously worked at senior level at IMF Headquarters, declined to comment on the matter, saying he had not critically analysed the issue at hand.
He only said: “Things in the IMF are complicated… But there must be a reason for cancelling the programme.”
In a separate interview yesterday, Centre for Research and Consultancy executive director Milward Tobias said the “signalling effect” or “power” by the IMF is still intact and relevant to the donor community.
However, he argued that if the country is to receive on time the anticipated $100 million under the RCF, that could help offset the $70 million sacrificed under the ECF programme.
Said Tobias: “But if the processes delay to access proceeds under this RCF, that should be of greater concern but if the process is hurried, then we should not get worried as a country because we will have gained.
“However, the ECF programme has quick repayment conditions and helps the recipient country to retire it quickly without passing repayment burden to next generations.”
From the traditional donors point of view, African Development Bank (AfDB) acting country manager Fasika Eyerusalem yesterday said in a written response that the bank had already approved $45.07 million budget support operation for Malawi Covid-19 emergency response on July 22 this year, adding that the support aims to finance the government’s response to the health, social and economic impacts of the pandemic.
Out of the $45 million direct budget support to Malawi, $20.59 million (grant) was disbursed at the end of August and the remaining loan ($24.48 million) will be disbursed as soon as the bill is presented to Parliament.
Said Eyerusalem: “The budget support intervention will help boost the Malawi National Covid-19 preparedness and response plan that has been developed with multi-stakeholders including government, development partners and non-government organisations.
“The bank’s support aims to protect lives, strengthen public health systems, protect livelihoods through enhanced social protection systems, foster economic resilience and protect jobs.”
Both the European Union (EU) and the World Bank had not responded to our query, as we went to press.
We sought to find out on their prospects of unlocking budget support to Malawi in view of emerging issues including the cancellation of the IMF programme and the commitments made by the new regime.
When quizzed to clarify on the specific new policy changes that have necessitated the cancellation of the ECF programme, Ministry of Finance spokesperson Williams Banda said: “The new ECF will be negotiated next and IMF and government agreed for RCF that is faster and has no conditionalities.RCF can support both budgetary and Balance of Payments[BoP].”
Resources from the IMF also help the country cushion its BoP position—a record of all transactions by a country and the rest of the world—thereby mitigating the current foreign exchange scarcity on the market.