MalawiвЂ™s economy improved during 2004, but prospects for 2005 have been adversely affected by a prolonged dry spell during the growing season. The dry spell mostly affected the maize harvest, MalawiвЂ™s food staple, and will require sound economic
management, supported by substantial donor assistance and fiscal resources.
Performance under the SMP has been satisfactory. This is in marked contrast to the weak policy implementation from 2001 to mid-2004. This demonstrates a renewed commitment by the authorities, and also the formulation of more realistic program objectives as called for in the EPA.
Fiscal latitude in the past has left the country with a high domestic debt burden. This is consuming a large share of government resources and diverting resources from private investment. Moreover, key aspects of the economic infrastructure have deteriorated and pushed up the cost of doing business. Fiscal policy will aim to reduce the governmentвЂ™s domestic debt, while allowing for increases in pro-poor and pro-growth spending. The 2005/06 budget framework envisages a large repayment of domestic debt, but also spending increases for health care and education and other pro-poor spending.
Monetary policy will aim to bring down inflation to the 5вЂ“8 percent range by 2008. Sufficient resources will be available for private sector credit. Because Malawi is vulnerable to external shocks and adverse weather conditions, the authoritiesвЂ™ medium-term framework targets a rebuilding of international reserves.
The structural reform agenda reflects the governmentвЂ™s vision for a more efficient public sector and for growth led by the private sector. Consequently, the program focuses on tax and civil service reform, steps to reduce financial intermediation costs, and improvements in economic infrastructure.
Policy implementation will require a sustained commitment at the highest political levels. Predictable donor inflows will help support good policy performance. Program implementation also remains vulnerable to exogenous shocks due to the lack of economic diversification.
As in the past, program performance faces risks from weak policy implementation, poor weather conditions, and volatile donor support.
In light of MalawiвЂ™s recent satisfactory performance under the SMP and the authoritiesвЂ™ commitment to macroeconomic stability, the staff recommends the approval of the authorities request for a three-year PRGF arrangement and additional
HIPC interim assistance. It also recommends that access reflect the balance of payments needs arising from the maize shortfall.