Executive summary
Macroeconomic outcomes have been good. Excellent weather, a supportive international environment, and generally strong policy implementation have led to high growth, falling inflation, rising international reserves and credit to the private sector, and falling domestic debt relative to GDP.
Progress on fiscal policy during 2006/07 was slower than expected. Revenue overperformance was used to finance higher discretionary spending. However, there were also large unforeseen nondiscretionary expenditures and aid shortfalls for administrative reasons that came to light late in the fiscal year. To partially redress these developments, the government curtailed the increase in discretionary spending in the second semester. Domestic borrowing exceeded the program target by 0.9 percent of GDP at end-December 2006 and 0.7 percent of GDP at end-June 2007.
The 2007/08 budget targets a small overall surplus. Program aid and domestic revenue projections have increased substantially since the budget was formulated, providing scope to absorb adverse shocks and revise spending plans. In view of past fiscal slippages, the program takes a cautious approach to setting end-December fiscal targets.
Monetary and exchange rate policy remains geared to maintaining moderate inflation. Reserve money is a key intermediate target, and the RBM also places weight on nominal exchange rate stability. This framework can be effective if the RBM supplies adequate reserves to the market and is flexible in adjusting intermediate targets as circumstances warrant.
The RBM met all its targets. However, strong demand for liquidity because of high growth and a strong harvest, and probably exacerbated by concerns over RBM losses in 2006, led to a large monetary expansion in mid-2007. The RBM is committed to redressing this monetary overhang, and the government has adopted a sound strategy to restore the RBM’s finances.
Progress on structural measures—aimed mostly at improving public financial management (PFM)—has been substantive if delayed in some cases. The centralization of utility payments (performance criterion) was partly overtaken by other reforms, but implemented insofar as it was still necessary. All but one structural benchmark were met, albeit mostly with delays. The program includes measures to improve debt management and budget execution.
An update of the 2006 debt sustainability analysis concludes that Malawi’s overall risk of external debt distress remains moderate.
Staff supports completion of the fourth and fifth reviews.
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