IMF Executive Board Completes First Review of Malawi's Three-Year PRGF Arrangement And Approves US$7.1 Million Disbursement

International Monetary Fund (Washington, DC)
February 24, 2006

The Executive Board of the International Monetary Fund (IMF) completed today the first review of Malawi's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. This enables Malawi to draw an amount equivalent to SDR 4.9 million (about US$7.1 million).
The Executive Board approved the three-year arrangement on August 5, 2005 (see Press Release No. 05/188), for a total amount of SDR 38.2 million (about US$54.9 million) to support the government's economic program for 2005-2007.
In commenting on the Executive Board's discussion on Malawi, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:
"The Malawian authorities are to be commended for the satisfactory performance under the PRGF-supported program against the backdrop of a severe food crisis. This builds on the success of the staff-monitored program and represents a welcome break from previous episodes of recurrent fiscal slippages. Performance in some areas had, however, remained uneven.
In particular, the overvaluation of the exchange rate had put pressure on external reserves and had led to a persistent backlog of unpaid import invoices. In this respect, the Fund welcomes the more flexible exchange rate policy implemented recently by the authorities, as well as their commitment to avoid an overvaluation of the currency, phase out informal administrative restrictions and eliminate delays in import payments. The authorities' commitment to sustain a tighter domestic policy stance will also be of critical importance.
"The authorities' program is based on realistic fiscal objectives and they are to be commended for observing the budget limits and improving public expenditure management. In light of the food crisis, the emphasis in the budget on food security in the near term is appropriate, and the government's efforts, in cooperation with donors, to contain the food emergency deserves to be supported. Going forward, it will remain important to manage near-term risks to the budget carefully.
"Malawi could reach the completion point under the HIPC Initiative in mid-2006 provided further progress is made towards implementing the remaining triggers and the authorities remain committed to maintaining a more flexible exchange rate system free from administrative restrictions.
A final assessment of progress towards completing key social sector triggers will also be critical. Reaching the HIPC completion point would immediately allow Malawi to qualify for further debt relief under the Multilateral Debt Relief Initiative," Mr. Kato said.
The PRGF is the IMF's concessional facility for low-income countries.
PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

Foreign investors interested in Malawi mining industry
BY Anthony Kasunda05:50:46 - 21 February 2006

Ministry of Mines, Natural Resources and Environment says some foreign investors had shown interest and commitment to explore Malawi’s potential in the mining industry.Deputy Minister Jimmy Banda said this on arrival from African Mining Partnership (AMP) in South Africa, adding about 30 ministers resolved to promote artisanal and small-scale mining.Banda said Malawi had mineral deposits in a number of areas that could provide opportunity to those who want to seriously venture into mining.He said Malawi delegation took advantage of the meeting to discuss with other government officials and international mining companies to assist develop the country’s mining sector.“Discussions with member states centred on capacity building, training and exchange programmes,” he said. “One company has already submitted an application for an exploration licence in Malawi.”Banda said he held discussions with managers of, among other institutions; The British Geological Survey, MINTEK, Energem, SDV Transami of South Africa, Omega Corp of Australia, Mine Africa of Canada and BRGM of France.The deputy minister, however, said there was threat by European Union member states to stop buying minerals from Africa, a move he said would stifle the continent’s economies.Banda said the threat by EU to close market for African minerals by September had sent shivers in mining countries, including Malawi.A Cape Town communiqué made available by the ministry says EU countries were concerned with health and environmental degradation mining was causing.Banda said an agreement was made to lobby EU to ensure that Registration, Evaluation and Authorisation of Chemicals (Reach) have no negative impact on African countries.He said it was agreed that a sustainable mining strategy that addresses health and safety and environmental hazards should be developed.“The issue of finding an alternative market in Asia was discussed but it was turned down,” he said. “It was resolved that we use our parliaments and Commonwealth Parliament to lobby EU to continue buying our minerals.”The deputy minister said there was fear among participants that the close of EU market would result in loss of employment in both private and public sectors.“The meeting also reiterated their commitment to pursuing ways in which mining and minerals industry can significantly contribute to poverty reduction and eradication,” he said.

Waterway project raises $2.5bn
by Taonga Sabola, 23 February 2006 - 07:44:25

Prospects of having the Shire-Zambezi Waterway in the near future look promising as the project has netted $2.5 billion of the estimated $6 billion required to see it through.Victor Lungu, Director of Transport Planning in the Ministry of Transport and Public Works, said in an interview last week there are very high hopes of getting the balance because more people have shown interest in the project.“We just need to put in place proper institutional structures to get the remaining money,” said Lungu.He said the money is mainly coming from foreign investors—the Development Bank of Southern Africa (DBSA), the Amalgamated Banks of South Africa (ABSA) and International Finance Corporation (IFC), a development financing arm of the World Bank.Lungu said the local private sector’s response has not been all that encouraging. “But they [private sector] need to play an active role by investing in this project which will bring high returns in the future once operational,” he said.He added that his ministry will conduct a number of meetings with the private sector to enlighten them on the benefits of the project.Members of the private sector last year asked the authorities of the project to come up with a feasibility study before they can pledge their support. This is yet to be done.They also asked government to give a breakdown of the $6 billion project cost which they said was scaring.The local private sector expressed its sentiments during a meeting with port authorities organised in Blantyre last July to lobby for their support.The Shire-Zambezi Waterway project is expected to provide the shortest route to the sea for landlocked Malawi as it connects the southern district of Nsanje and Indian Ocean port of Chinde over a 238-kilometre distance.A short route to the sea will mean a significant cut in costs for Malawi’s imports and exports which are high due to equally high transport costs.The country has one of the highest transport costs in the world estimated to contribute 30 percent to cost of exports and 50 percent or above to import costs, representing about $175 million total annual import bill which is currently growing at a rate of 7 to 8 percent annually.The project has generated interest in the region as indicated by the visit of Common Market for Eastern and Southern Africa (Comesa) Director of Infrastructure Amos Marawa who inspected the waterway last October.Marawa said the project will benefit many countries as it will make Malawi one of the main transportation hubs in Comesa. He said it will also help countries like Zambia, Zimbabwe, the Democratic Republic of Congo (DRC), Burundi, Rwanda and Tanzania by providing access to Indian Ocean ports through the Mtwara, Nacala and Sena corridors.Zambia and parts of DRC are expected to benefit from the project through the rail connection from Mchinji to Chipata. Lungu said studies are underway to connect the now dormant Lilongwe-Mchinji rail line to Zambia.The Egyptian Government also promised to support the project. Its experts were supposed to visit the country last year but failed due elections in their country, according to Lungu.“It’s not that they have withdrawn their interest in the project. We are still discussing with them on when they can come and they should be able to visit the country any time within the first quarter of the year,” said Lungu.Construction of Nsanje Port started with pomp last October but halted due to the rains.

Govt allowed Muluzi to import vehicles
BY Frank Namangale
02:42:42 - 22 February 2006

Malawi Revenue Authority (MRA) Commissioner of Customs and Excise told the High Court in Blantyre yesterday they allowed former president Bakili Muluzi to import cars, among other items, duty free based on instructions from State House and the Finance Minister.The revenue collecting body, according to court records, claims the former president owes it K111 million. Muluzi, who is UDF national chairman, is said to have imported over 100 cars, 5,000 T/shirts, 2,500 caps, 90,000 meters of cloth and 2,000 wrist watches among other items duty free using Presidents Salary and Benefits Act. The witness, Funwell Mzunga said the law did not allow Muluzi to import the goods in question and extend them for use by other persons (in this case UDF), explaining that there was a belief that the goods were being imported for personal use.Mzunga said it was discovered later towards the end of 2004 that the goods were being used by UDF.He said when re-examined by the MRA lawyer, there was no inclination in the letters from the State House that the goods being imported were for personal use.The witness said written instructions from State House between March and May 2004 to let the goods imported by Muluzi enter duty free were getting to him through then Commissioner General Ernest Mtingwi.Mzunga said MRA’s Chief Legal Counsel Dominic Mpango wrote Minister of Justice on his behalf when the amendment of a law on Presidents Salary and Benefits Act was enforced in 1994, seeking clarification on a point where it says, “the President would be allowed to import goods duty free for personal use”.“I did not understand the term personal use. Before the amendment, the law said goods for use by the President would be imported duty free. But the Justice Minister said the law was in order,” Mzunga said.The witness was cornered earlier by Muluzi’s lawyer David Kanyenda on why he did not exhibit in his affidavits documents to the effect that Muluzi imported the said items.Kanyenda also put it to the witness that there was no evidence that in as far as the witness’s affidavits were concerned to show that Muluzi imported the goods.The lawyer challenged the witness to point out at one individual who used the goods imported other than Muluzi and the witness said he could only point at an institution, UDF. Earlier, MRA lawyers Henry Ngutwa and Mpango objected to the cross-examination of witnesses that was supposed to be done sometime back, arguing lawyers for the defendant notified them of their intention to cross-examine their witnesses and they did not seek the court’s leave.Mpango asked Justice Healey Potani to object to the cross-examination and sought the court’s indulgence to direct them.But Kanyenda argued that no prejudice had been occasioned to MRA and objecting them to cross-examine the witnesses would operate to defeat the course of justice. He said the delay in serving the notice came because Muluzi was in the UK receiving medical treatment and had problems to seek instructions.Judge Potani agreed with Kanyenda that denying them a chance to cross-examine the witness would make the court experience difficulties in arriving at a fair decision and he allowed Muluzi’s lawyer to go ahead cross-examining Mzunga.Other witnesses were not around and the court adjourned the matter to a date yet to be set.MRA last year in January impounded UDF vehicles for nonpayment of duty but Muluzi managed to get an injunction to force MRA return the vehicles and were given back to him.

Export boom to cut trade deficit—bank

by Frank Phiri, 13 February 2006 - 05:24:23

A widely expected boom in agricultural production, coupled with a favourable exchange rate and aid inflows, will help reduce Malawi’s trade deficit this year, the Standard Bank Group has forecast. In a blueprint report for Malawi, Standard Bank—Africa’s biggest banking unit by assets—expects export earnings to rise by more than K4 billion (US$35.1 million) over 2005. The bank projects that a decline in emergency external food purchases will moderate imports, traditionally higher than exports because of food deficits. Malawi has since the mid 1990s registered trade deficits due to poor performance of major export commodities, namely tobacco and tea. Tobacco alone fetches more than 60 percent of Malawi’s total foreign exchange income. While exports have been failing, imports concurrently rose, particularly during drought years, which necessitated large-scale imports of relief maize to feed the hungry masses. The overall result for many years has been a deficit in the current account—the measure of a country’s balance of payments position or the difference between earnings from exports and spending on imports. A breakdown of Malawi’s balance of payments positions by Standard Bank indicates that exports will fetch about K74 billion (US$ 571.5 million) in 2006, up from about K69 billion (US$ 536.4 million) in 2005. The value of imports is forecast at about K125 billion (US$ 963.6 million), which is about K2.6 billion (US$ 20 million) less than in 2005. “Besides the support to the current account from the resumption of donor funding, exports are expected to increase in 2006, assuming normal weather conditions and a more favourable local currency price,” the bank said. “Imports will also be stimulated by expected gradual higher growth, although the effect will be moderated by a fall in emergency food imports and international oil prices,” it added. But the bank forecast the trade deficit to deteriorate to near 2005 levels by 2007. Last year, the deficit was a negative K58 billion (US$ 447.3 million). Standard Bank notes that progressive years of negative balance of payment positions often led to erosion of gross reserves and undermined stability of the kwacha, which has been depreciating. It says the government has to its credit, identified a number of potential products in agriculture, mining and spin-off opportunities like agro-processing in a bid to increase the export base and stem the trade deficit. Identification of auxiliary opportunities backed by agriculture in various sectors of the economy comes in the wake of Malawi’s heavy but unhealthy dependence on tobacco, which now faces various market restrictions due to the anti-smoking lobby. Thanks to the African Growth and Opportunities Act (Agoa), which allows duty-free entry of goods into the United States from eligible African states, direct and indirect apparel exports have emerged as a viable foreign exchange spinner for Malawi. The share of apparel exports in total exports increased from four percent in 1999 to nine percent in 2003, said the Standard Bank. In Africa, major export destinations for Malawi are South Africa and Egypt—accounting for 14 percent and nine percent of market share. The others are US (13 percent) and Germany (11 percent). With most of these export destinations, Malawi registers a negative trade deficit.