Back in favour with IMF, donors

Malawi's return to good grace with the International Monetary Fund will unfasten the wallets of important donor nations, IRIN was told on Wednesday. A decision by the IMF executive board to approve a US $9.2 million loan disbursement, plus an additional $6.6 million of what it terms as "interim assistance" to Malawi, will unlock previously withheld donor funding. The IMF had barred budget support for Malawi since 2001 as a result of government overspending. Major Western governments had also demanded greater transparency and frozen their funding. Up to 80 percent of Malawi's development budget is provided by donors. A European Union spokesman in Lilongwe, Charles Undulu, told IRIN on Wednesday the IMF's decision to approve disbursements, following an appraisal of Malawi's recent fiscal track record, had given "us the green light" to follow suit. "We were withholding about Euro 15 million (about US $17.4 million) of funding meant for the transport and health sectors. If things had been on track, it would have been released two years ago, but as you know, all the donors were waiting for recommendations from the IMF," Undulu said. The IMF has now completed its review of Malawi's economic performance under a Poverty Reduction and Growth Facility (PRGF) arrangement and approved, in principle, the disbursement of about US $9.2 million. "The IMF board's decision will become effective upon a further decision, following the World Bank's executive board review of Malawi's Poverty Reduction Strategy Paper [PRSP] Progress Report, scheduled for 23 October 2003. The [IMF] executive board also agreed to the authorities' request to extend the arrangement through [to] 20 December 2004, and to resume interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative by approving the release of an amount equivalent to [special drawing rights] SDR 4.628 million (about US $6.6 million) to help Malawi meet its debt service payments on its existing debt to the IMF," the Fund said in a statement. The PRGF is the IMF's most concessional facility for low-income countries. PRGF-supported programmes are based on country-owned poverty reduction strategies, adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). "This is intended to ensure that PRGF-supported programmes are consistent with a comprehensive framework for macroeconomic, structural and social policies, to foster growth and reduce poverty," the IMF said. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years, with a five-and-a-half year grace period. The favourable IMF review has paved the way for major Western donor countries - the United Kingdom, Norway and Sweden - to release funding support for Malawi. The EU will now provide Euro 5.5 million (about US $6.4 million) of financial aid by December 2003, "and then a further Euro 10 million (US $11.6 million) by June 2004, depending on satisfactory IMF reviews [of Malawi's performance]". Undulu said the UK, Norway and Sweden would join in the IMF's quarterly review of the government's performance. "There are some conditions attached to this [EU aid]. Malawi has to strictly control public spending; start repaying the government's domestic debt; carry out structural reforms in parastatals, the agricultural sector and the civil service; while reducing government expenditure overall to protect priority poverty reduction expenditure; and implementing new financial management systems, so that aid and the government's own revenues are used for purposes agreed by parliament," Undulu explained. Amendments to tighten up the Corrupt Practices Act, and allowing the national anti-corruption agency to review an audit of the National Food Reserve Agency - which controversially sold off the country's strategic grain reserves ahead of widespread food shortages - were also key to continued donor support. According to the Fund, Malawi had shown renewed fiscal discipline in 2003, despite a severe drought and related food shortages. The country "continues to face daunting economic and social challenges. Sustained political commitment will, therefore, continue to be needed to reverse the economic deterioration, ensure macroeconomic stability, improve public service delivery, and promote poverty reduction," the IMF's deputy managing director and acting chairman, Shigemitsu Sugisaki, said in a statement. "If the government does not meet [its] commitments, budget support is likely to be suspended again," Undulu warned. The donors' squeeze on foreign aid has been blamed for the depreciation of the Malawi Kwacha against the dollar, and the inlation felt by ordinary Malawians. A recent Famine Early Warning Systems Network (FEWS NET) report warned of the threat to food security because of the "hike in the price of inputs, which are already difficult for farmers to afford". Rafiq Hajat, of the Blantyre-based Institute for Policy Interaction, noted that the local currency had depreciated by 20 percent in the last quarter. "[To the point] where you pay US $1 for about K110. This has had a knock-on effect on the price of all basic commodities, including the price of fuel," he told IRIN.