The report gives Malawi’s first review under the three year extended credit facility arrangement and requests for modification and waivers of non-observance of performance criteria.
Among others, the report highlights positive outlook on inflation, growth rate and recommends that automatic fuel pricing should be forcefully implemented.
“Growth is expected to rebound to 4.0 per cent in 2019, reflecting increased electricity generation and growing infrastructure investment.
Over the medium term, growth is projected to reach around 6.5 per cent assuming improved irrigation infrastructure and cropping techniques (including diversification to cassava and sweet potatoes), enhanced electricity generation, better road and telecommunications networks, increased donor assistance, and greater access to finance for the private sector,” reads the report.
Inflation is anticipated to remain in single digits while the current account gradually improves.
“Inflation is projected to moderate to 8.9 per cent in 2019 in line with a gradual reduction in food prices and to around 5 per cent over the medium term owing to tight fiscal and monetary policies and further declines in food prices as well as reduced international fuel prices,” the report says.
It adds that the current account deficit is expected to gradually narrow towards 7.5 per cent of GDP (Gross Domestic Product) and international reserves rise to around 4.5 months of prospective imports supported by strengthened competitiveness, export diversification and fiscal restraint.
IMF observes that risks are tilted to the downside.
The assessment is that in the election run-up, political pressures could weaken policy and reform implementation. Intensified governance challenges could further postpone donor support.
“These risks combined with adverse weather, infestations, and worsened terms of trade, could weigh on growth, raise inflation, and increase balance of payments pressures. Tighter global financial conditions and weak global growth could depress export growth and reduce donor financing.
“On the upside, faster reform implementation and higher export prices could boost medium term growth,” reads the report.
IMF recommends that the automatic fuel pricing mechanism should be implemented more forcefully to contain fiscal risks.
Under this mechanism, which eliminated government subsidies, import price changes outside a plus and minus 5 per cent threshold trigger domestic price changes. Any changes within the threshold are absorbed by the Price Stabilisation Fund (PSF).
However, since October 2016, the PSF has been subsidizing fuel distributors for almost all price changes. To safeguard the PSF, Petroleum and diesel prices were increased this year. Staff urged the authorities to regularly implement the automatic pricing mechanism and to increase transparency by disclosing the PSF’s financial statement.
Staff and the authorities agreed that changes to the fuel import regime should also be transparent and include stakeholder consultations.