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The IMF - Government of Malawi Agreement, 2005-2008

e - Briefing 7

National Action Group Forum

29 August 2005

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Summary

On August 5th, the IMF Board agreed to resume lending to Malawi, approving an initial disbursement of about $7.9m. Six additional payments, of similar amounts will be made every six months, with the final payment to be disbursed in May 2008, provided that various conditions are met. The loan, which totals about $55.8m, is part of the IMF's Poverty Reduction and Growth Facility (PRGF) and is available on highly concessionary terms with an annual interest rate of 0.5% to be repaid between 2010 and 2015.

Like other IMF loans, PRGF loans are always conditional upon recipient countries adhering to agreed reforms and limits on expenditure. All these reforms aim to stabilize the Malawi economy and many of these reforms will have a direct impact upon businesses.

Moreover, the resumption of lending by the IMF has enabled other donors in the CABS1 group to provide direct budget support to the government as grants. In fact, the primary use of this external assistance will be repayment of domestic debt. Reducing stock of debt means that those who have been lending to the government will need to find alternative ways to get a return on their funds, including the commercial banks who have invested heavily in Treasury Bills. The result of this should be that interest rates start to fall for both borrowers and savers. Lower real interest rates should facilitate increased borrowing and investment by the private sector, though rates would probably have to fall further for a significant uptake. In the immediate term, this will provide some relief for current borrowers.


Footnotes:
  1. Common Approach to Budgetary Support, including the European Union and governments of the United Kingdom, Norway and Sweden, whilst the World Bank is currently developing a structural adjustment credit.


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