IMF GIVES MALAWI ECONOMY A THUMBS UP

UNCLAS SECTION 01 OF 02 LILONGWE 000778 SIPDIS SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EAID MI SUBJECT: IMF GIVES MALAWI ECONOMY A THUMBS UP LILONGWE 00000778 001.2 OF 002 ¶1. Summary. In an October 9 briefing to Heads of Mission, the IMF presented a solidly favorable view of the GOM's economic performance and the outlook for the next year. The meeting highlighted strong economic indicators virtually across the board, with only a couple weak areas. The review under Malawi's Poverty Reduction and Growth Facility (PRGF) provided the GOM with a passing grade, allowing continuation of the program. End summary. ¶2. Andy Berg, Chief of the IMF's PRGF Mission to Malawi, briefed Heads of Mission on the results of the recent IMF visit October 9. Charge' attended along with HOMs from Germany, Norway, UK, DFID, JICA, UNDP and the World Bank. The Minister of Finance and a number of officials from his ministry were also present from the GOM. Overall, Berg provided a very positive report, indicating that the IMF and GOM had reached agreement ad referendum on a set of policies that would allow conclusion of the 4th review of progress under Malawi's PRGF. He predicted that the IMF board would bless the agreement before the end of the year. THE GOOD NEWS -------------- ¶3. Berg's discussion of Malawi's economic indicators was a litany of good news, with only a couple of weak spots of no special concern. On GDP growth, the GOM will be revising its estimate for the current year ('07) upward to 7.5 percent, based on strong performance in the agricultural sector - particularly maize - and related sectors. Berg said that the IMF is also predicting strong growth in '08 of around 7 percent, up from earlier estimates of 6 percent. The IMF was also impressed with the trends in domestic investment. Investors had told IMF representatives that because "three years of growth and stability are even better than two" for building investor confidence. Finance Minister Gondwe added that he hoped to add a fourth year to the total. ¶4. Inflation, currently at 7.2 percent is trending down toward 7 percent. Although fuel prices may cause a brief spike, the tendency is clearly down. The government debt burden has declined from 14.4 percent of GDP in 2006 to 12.4 this year. Foreign exchange reserves have held steady at 180 million USD, despite some pressure resulting from delays in (donor) budget support. With a resumption in budget support, the IMF expects modest accumulation/strengthening in the fourth quarter. ¶5. Malawi's current monetary policy is not entirely clear, but the IMF says that the Reserve Bank of Malawi is pursuing a medium-term inflation target of 5-7 percent, allowing for some short-term shocks. The IMF approves of this strategy, and although the money supply has grown somewhat faster than agreed, the IMF is not concerned that this will spark an increase in inflation. The IMF was also not worried about the GOM missing its spending target by 1 percent, noting that the small fiscal overshooting has been offset by "buoyant revenues." ¶6. In response to a question from the UNDP, Berg noted that there appeared to be more resilience in the budget this year than in past years to overcome potential shocks such as bad weather or crop failure. Minister Gondwe agreed, noting that "we will be better prepared for shocks than we have been in previous years" due to a stronger fiscal position, healthier reserves and more stored grain from this year's good harvest. GRADUATION FROM PRGF? -------------- ¶7. Buoyed by Malawi's recent economic performance, Gondwe told local media that the country may no longer need the PRGF and the external disciplines it entails. Following the IMF visit the Minister publicly suggested that Malawi may instead seek to enter the IMF's Policy Support Instrument (PSI) program after the current PRGF expires in the third quarter of 2008. The Minister told the press "We still have almost a year before we have another program but we now could go into Policy Support Instruments. As a country this means that we are now big boys and we should concentrate on managing our affairs." COMMENT: IF THE WEATHER HOLDS -------------- ¶8. Malawi's current outlook is nearly as positive as could be hoped for. The Mutharika administration's attention to sound economic fundamentals has brought noteworthy results. Despite the good news, Malawi's economy is still overly dependent on the agricultural harvest. A serious crop failure could easily negate the rosy predictions for next year, despite the increased reserve stocks. Indeed, the LILONGWE 00000778 002.2 OF 002 modest volumes of grain being offered on the market gives some reason to question whether government reserves are truly as full as claimed. Still, the past year did see record maize harvests, so the country is clearly in a better position than in some years past. SULLIVAN