Breaking away

Jack Ree, IMF Malawi Resident Representative, discusses the potential turnaround of Malawi's economic situation through the ECF program. Analyzing the program's progress, initial objectives, fiscal deficits, money and inflation dynamics, and the key factors affecting Malawi's economic journey so far.

• Malawi Economy
• IMF
• Economic Development
• Fiscal Deficits
• Inflation Dynamics

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1. Breaking away CAN ECF TURN MALAWI S ECONOMIC FORTUNE? JACK REE, IMF MALAWI RESIDENT REPRESENTATIVE

2. Outline How did the program go so far? What now?

3. How did the program go so far?

4. Initial Objectives THREE PILLARS: Breaking the vicious macroeconomic chain Preventing an unravelling Preserving gains in PFM Switching gear from the fire fights Addressing the unfished task

5. Fiscal deficits Money and Inflation 40.0 Weak growth Money Printing Digression: IMF Dogma? 35.0 30.0 25.0 Long run relation between RM growth and inflation firm Inflation and depreciati on Investor retrenchm ent 20.0 The relationship moved closer to one to one after exchange rate floating 15.0 10.0 5.0 - 1/1/2002 8/1/2002 3/1/2003 10/1/2003 5/1/2004 12/1/2004 7/1/2005 2/1/2006 9/1/2006 4/1/2007 11/1/2007 6/1/2008 1/1/2009 8/1/2009 3/1/2010 10/1/2010 5/1/2011 12/1/2011 7/1/2012 2/1/2013 9/1/2013 4/1/2014 11/1/2014 6/1/2015 1/1/2016 8/1/2016 3/1/2017 10/1/2017 5/1/2018 (5.0) CPI (12m yoy) RM growth Linear ( CPI (12m yoy) ) Linear (RM growth)

6. RM stylized fact 1 800.00 40 Digression: IMF Dogma? 35 600.00 30 400.00 25 NCG -key RM driver in the long run 200.00 20 NFA shifted position sine 2012 ECF - 15 (200.00) OMO little limit on RBM s capacity for liquidity mopping (complications: banking system stress and crowding out). 10 (400.00) 5 (600.00) 0 (800.00) -5 7/1/1999 3/1/2000 11/1/2000 7/1/2001 3/1/2002 11/1/2002 7/1/2003 3/1/2004 11/1/2004 7/1/2005 3/1/2006 11/1/2006 7/1/2007 3/1/2008 11/1/2008 7/1/2009 3/1/2010 11/1/2010 7/1/2011 3/1/2012 11/1/2012 7/1/2013 3/1/2014 11/1/2014 7/1/2015 3/1/2016 11/1/2016 7/1/2017 3/1/2018 Base money NCG NFA (prog ex) OMO, etc RM growth Series1 Linear (Base money) Linear (NCG) Linear (RM growth)

7. RM stylized fact 2 800 40 35 Digression: IMF Dogma? 600 30 400 25 NCG s mirroring with RM indicates difficulty in sterilizing the liquidity impact 200 20 15 0 NFA almost always fully sterilized: no crowding out issue! 10 -200 5 RM up-runs in the past were led by NFA and were benign -400 0 -600 -5 7/1/1999 2/1/2000 9/1/2000 4/1/2001 11/1/2001 6/1/2002 1/1/2003 8/1/2003 3/1/2004 10/1/2004 5/1/2005 12/1/2005 7/1/2006 2/1/2007 9/1/2007 4/1/2008 11/1/2008 6/1/2009 1/1/2010 8/1/2010 3/1/2011 10/1/2011 5/1/2012 12/1/2012 7/1/2013 2/1/2014 9/1/2014 4/1/2015 11/1/2015 6/1/2016 1/1/2017 8/1/2017 3/1/2018 NCG NFA (prog ex) Base money OMO, etc RM growth

8. Govt draws down advances to pay a contractor; who uses this to repay the bank; RBM sterilizes it. (Bank s loan is transformed to repo: crowding out) An exporter brings dollar, which end up in RBM through sterilized intervention (Bank s NFA is transformed to Repo: benign) BANK BANK Deposit (Mr. A) +100 NFA +100 NFA -100 Reserve deposit +100 Reserve deposit -100 Repo +100 Contractor Loan (Mr. A) -100 Reserve deposit +100 Reserve deposit -100 Repo +100 RBM RBM Reserve deposit +100 NFA +100 Reserve deposit +100 Reserve deposit -100 Repo +100 Advance to govt +100 Reserve deposit -100 Repo +100

9. RBM's budget financing (Billion kwacha) 500 Net credit to government (ECF request) 450 Net credit to government 400 Test date Score card-PCs 350 300 Monetary targets: very well done 250 200 150 100 50 - Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Mar-12 Sep-12 Dec-12 Mar-13 Sep-13 Dec-13 Mar-14 Sep-14 Dec-14 Mar-15 Sep-15 Dec-15 Mar-16 Sep-16 Dec-16 Mar-17 Sep-17 Dec-17 Mar-18 Sep-18 Dec-18 Mar-19 Sep-19 Dec-19 Mar-20

10. Fiscal Balance (percent of GDP) 3 1 Score card-PCs -1 -3 Monetary targets: very well done -4.3 -5 Fiscal targets: there were issues -7 -9 -8.4 2018 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Overall Balance (ECF request) Overall primary balance (ECF request) Overall Balance Overall primary balance test date

11. PFM-101 Effective Bank recon MDA reports Commitment control Score card-SBs PFM-102 OK Monetary targets: very well done Cash forecast Debt reconciliation Fiscal targets: there were issues Monetary Better RBM Act Communication strategy

12. What now?

13. Challenges lying right ahead

14. Malawi-inflation and elections (percent, year) 100 90 Election trauma? 80 70 We (almost) never preserved macro stability through elections 60 50 And that s why convincing people that it s different this time isn t easy 40 30 20 10 0 1/1/1989 1/1/1990 1/1/1991 1/1/1992 1/1/1993 1/1/1994 1/1/1995 1/1/1996 1/1/1997 1/1/1998 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019

15. Global gloom (REO, Oct 2018)

16. And regional gloom (REO, Oct 2018) COMMODITY OUTLOOK MIXED GROWTH OUTLOOK MEDIOCRE

17. And uneven siverlining (REO, Oct 2018) Fuel price up Other commodity outlook down

18. Challenges lying right ahead

19. Mind risks: Debt Cotributors of debt consoliation: 2018-23 (percent of GDP, annual average change) Public Debt (percent of GDP) 0.2 60.0 - 1 50.0 (0.3) (0.2) 40.0 residual (0.4) 30.0 exchange rate 2/ 20.0 (0.6) rc - gc 1/ Primary deficit 10.0 (0.9) (0.8) Change of Debt-GDP ratio - 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 (1.0) (1.2) ECF request 1st review (1.2) start (1.4)

20. FX rate and reserves (MK/USD, $ million) 900.0 1.06 800.0 Mind risks- reserves 1.04 700.0 600.0 1.02 Goldilocks scenario for 2016-17 500.0 1 That s might be ending, and vigilance called for 400.0 May be afford the exchange rate superstability 300.0 0.98 200.0 0.96 100.0 - 0.94 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013 7/1/2013 10/1/2013 1/1/2014 4/1/2014 7/1/2014 10/1/2014 1/1/2015 4/1/2015 7/1/2015 10/1/2015 1/1/2016 4/1/2016 7/1/2016 10/1/2016 1/1/2017 4/1/2017 7/1/2017 10/1/2017 1/1/2018 4/1/2018 7/1/2018 10/1/2018

21. Can we break away from the past trend of high inflation and low growth? Growth and inflation 30.0 25.0 20.0 Is our growth forecast achievable: A promised land scenario? 15.0 Larger growth than historical average: but that s what s needed 10.0 Key is realism of our inflation forecast. 5.0 - GDP growth Growth forecast Inflation Inflation forecast Growth history Growth history (2007-11)

22. A macroeconomic window of opportunity? Can ECF turn Malawi s economic fortune? Break away from the election-led cycles in the past: all eyes on the next six months Brining growth not a rocket science: bring infrastructure, but without toppling debt sustainability