Economy "strengthening" but still precarious

Despite some gains over the last year, Malawi's social and economic situation remains precarious, according to a recent International Monetary Fund (IMF) assessment. The IMF team was in the country to review the government's economic performance under the staff monitored programme (SMP) - a strong showing would provide the basis for a new financial arrangement under the poverty reduction and growth facility (PRGF). The mission noted that economic growth improved and inflation dropped during the 2003/04 financial year, but the aftershocks of a severe drought, which led to acute food shortages, had increased vulnerability. In a statement released on Wednesday, the IMF commended the government's "ownership of economic policies" and welcomed recent measures to stamp out corruption at the highest levels. IMF Resident Representative Thomas Baunsgaard this week told journalists in the capital, Lilongwe, that the Fund was "encouraged by recent signs that Malawi's economy is strengthening". He noted that growth had picked up in the past financial year and was now forecast to reach 4.25 percent in 2004/05, in part due to a significant increase in tobacco production, which had raised foreign exchange earnings. Higher fuel and maize prices would temporarily spur inflation to around 14 percent at the end of the financial year, the Fund said. The mission welcomed the progress made until the end of September under the SMP, pointing out efforts by the new government to rein in spending, despite requests for extra-budgetary amounts. The Reserve Bank of Malawi's targets for net foreign and domestic assets "were comfortably met". The IMF team encouraged President Bingu wa Mutharika to push ahead with fiscal reforms to further boost economic growth, and Minister of Finance Goodall Gondwe, present at the briefing, assured the IMF mission that the government would continue with austerity measures. "Government is implementing these reforms, not because it wants to be rewarded by the donors - it is important to do this because, at the end of it all, we want to see a sustained economic growth, which will in turn help in the reduction of interests rates, the inflation rate, and reduce poverty," he said. The IMF staff mission is expected back in the country by the end of February next year to assess the second quarter of the monitored programme from September to December. The IMF and other donors suspended financial support to Malawi some three years ago when the former government failed to meet spending targets and bring corruption under control.