Malawi risks losing more assistance from EU this year than the 100 million euros (about K21.4 billion or $210 million) it forfeited last year if it fails to revert to the suspended IMF programme.
Lilongwe has meanwhile said it is aware of the threat and discussions are underway to normalise the situation.
In a statement made available to The Nation over the weekend, European Union (EU) Ambassador Alexander Baum said in total, the union disbursed 52.2 million euros (about K11.1 billion) to Malawi under various programmes during 2011 and entered into new commitments of 55.2 million euros (about K11.8 billion).
Said the envoy: Ã¢â‚¬Å“This represents a dramatic reduction of about 100 million euros in grant money compared to the previous year 2010 when the EU disbursed 154 million euros and entered into new financial commitments for 146 million euros.
Ã¢â‚¬Å“Whereas the EUÃ¢â‚¬â„¢s disbursements for projects remained stable in 2011, the reduction is almost entirely due to the fact that budget support operations have been put on hold as the EU is unable to implement this type of programmes under the governmentÃ¢â‚¬â„¢s current economic policies in the absence of an agreement with the IMF.Ã¢â‚¬Â
Baum said resumption of general budget support will require the agreement from EU member states in the European Development Fund (EDF) committee and will take into account MalawiÃ¢â‚¬â„¢s current governance situation.
Last yearÃ¢â‚¬â„¢s loss in foreign exchange is almost equivalent to earnings from the countryÃ¢â‚¬â„¢s mainstay, tobacco, which dropped from $416 million in 2010 to $293 million in 2011.
What is at stake this year is almost 200 million euros, which includes 85 million euros of budget support already allocated to Malawi, but not yet approved.
In an interview on Monday, Finance and Development Planning Minister Dr. Ken Lipenga said government is aware about last yearÃ¢â‚¬â„¢s drop in EU support and the potential of losing more if governance concerns are not addressed and economic policies not improved.
Said Lipenga: Ã¢â‚¬Å“We are in continued discussions with the EU to make sure that we address the concerns… Also the EU in Malawi is arranging for me to meet the Mr. Nick Westcott, managing director for the Africa Department of the European External Action Service, for us to further our discussions.Ã¢â‚¬Â
Baum said that the EUÃ¢â‚¬â„¢s cooperation programme with Malawi currently has considerable flexibility and could make available an additional 112 million euros during 2012 or even reduce its aid allocation to Malawi when Brussels reviews the implementation of its aid programme at the end of this year.
MalawiÃ¢â‚¬â„¢s key partners have not released balance of payment support from its development partners since January 2011 due to concerns about economic governance.
Donors, who normally account for 40 percent of MalawiÃ¢â‚¬â„¢s budget, want the country revert to the IMFÃ¢â‚¬â„¢s Extended Credit Facility programme.
The IMF, among other measures, wants Malawi to devalue the official exchange rate further to between K230 and K250 against the dollar to address a foreign exchange shortage and stem a thriving black market.
However, President Bingu wa Mutharika is refusing to devalue the local currency, arguing doing so without any guarantee of safety nets or a cushion would severely hurt poor people and the economy in general.