IMF Executive Board Approves New US$ 156.

2 Million Extended Credit Facility Arra ngement for Malawi Press Release No. 12/273 July 23, 2012 The Executive Board of the International Monetary Fund (IMF) today approved a ne w three-year arrangement for Malawi under the Extended Credit Facility (ECF) in an amount equivalent to SDR 104.1 million (about US$ 156.2 million). The Boards d ecision will enable an immediate disbursement equivalent to SDR 13.02 million (a bout US$ 19.5 million). The governments medium-term economic program supported by the ECF arrangement is based on Malawis second Growth and Development Strategy (MGDS II). The program is aimed at the achievement and maintenance of macroeconomic stability and impleme ntation of policies and structural reforms to spur growth, diversify the economy and reduce poverty. Following the Boards discussion of Malawi, Naoyuki Shinohara, Deputy Managing Dir ector and Acting Chair, issued the following statement: Malawis new administration moved swiftly to devalue the kwacha, adopt a flexible e xchange rate regime and liberalize current account transactions to address the c ountrys chronic balance of payment problems and improve the outlook for poverty r eduction and growth. The new ECF arrangement provides support for the authorities medium-term economic program based on Malawis second Growth and Development Strategy (MGDS II). Specif ic objectives of the program include macroeconomic stability with low inflation, increasing international reserves to provide a buffer against external shocks, and reforms to improve the investment climate and promote sustained inclusive gr owth. The authorities have adopted a prudent fiscal stance in the 2012/13 budget. Highe r donor support and a sizeable domestic revenue effort allow the government to i ncrease total spending slightly without recourse to domestic borrowing. Tight co ntrol over non-priority spending will be needed to ensure that expenditures are aligned with the governments priorities, including scaled up spending on social p rotection programs to mitigate the impact of adjustment measures on the poor. In order to achieve fiscal sustainability, the program includes measures to enhan ce domestic revenue mobilization and public financial management reforms to stre ngthen the budget process and avoid the accumulation of arrears. Monetary policy will be geared to achieving price stability, while providing room for sufficient credit to the private sector and supporting a build-up of intern ational reserves. Reforms will include measures to increase the operational inde pendence of the RBM. The RBM will continue to strengthen its monitoring and surv eillance of the financial system. The program supports the authorities multifaceted approach to promoting growth, in cluding measures to deepen the financial system and to enhance Malawis internatio nal competitiveness by addressing key supply-side bottlenecks in energy and tran sport infrastructure, Mr. Shinohara added. Annex Recent economic developments Malawi faced serious macroeconomic challenges in the last two years, including a severe shortage of foreign exchange, which translated into shortages of critica l imports such as fuel, inputs for production, and medicines. As a result, real GDP growth slowed to 4.3 percent in 2011, from an average annual rate of 8.3 per cent during 200710. Inflation has been on an upswing since early 2011, with the y ear-on-year headline rate reaching 17.3 percent in May 2012. The current account balance (including transfers) has fluctuated widely, driven mainly by aid flows and terms of trade. The new administration formed in April 2012 moved swiftly to begin addressing th e countrys chronic balance of payments problems. Specific measures implemented in clude: devaluation of the exchange rate; adoption of a floating exchange rate re gime; liberalization of the market. The adjustment measures are beginning to sho

w positive results. Sales of tobacco through official channels have increased an d the private sectors access to foreign exchange, including for fuel imports, has eased considerably Program Summary The specific objectives of the governments program include: Achievement and maintenance of a stable macroeconomic environment with low infla tion. Increasing useable international reserves from the equivalent of about one month of imports at end-2012 to 3 months of imports by end-2015. Boosting real GDP growth from 4.3 percent in 2012 to at least 6 percent per year from 2015. Scaling up social protection programs to mitigate the adverse impact of adjustme nt measures on the most vulnerable segments of the population. Key elements of the strategy for achieving these objectives include: Fiscal policy geared to strengthening domestic revenue mobilization, keeping gov ernment spending within available resources (domestic revenues, grants, and high ly concessional external loans) and in line with government priorities, and redu cing domestic debt Enhanced operational independence of the Reserve Bank of Malawi to enable it pur sue the objective of achieving low inflation and building up international reser ves from current very low levels. Structural reforms to deepen the financial system and make it more inclusive, an d measures to enhance the investment climate and international competitiveness, including improving transport infrastructure and energy supply and its reliabili ty. IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs E-mail: publicaffairs@imf.org Fax: 202-623-6278 Media Relations E-mail: media@imf.org Phone: 202-623-7100