Washington, DC: An International Monetary Fund (IMF) team led by Justin Tyson visited Malawi from May 22 to June 3 to hold meetings with the Malawian authorities and other counterparts from the public and private sectors and civil society for the 2025 Article IV consultation. Discussions focused on policies to restore macroeconomic stability, and the structural reforms needed to foster strong, inclusive, and durable growth.
Context, Macroeconomic Outlook, and Risks
The Malawian economy has been buffeted by several shocks. Real GDP growth declined slightly to 1.8 percent in 2024 as a drought affected agricultural production, while foreign exchange and fuel shortages dampened economic activity. Over 20 percent of the population is facing high levels of food insecurity, up five percentage points over 2023. Headline inflation began easing in late-2024 and reaccelerated in early-2025 in the context of maize prices rising to historical levels, elevated money growth and an increasing official-parallel exchange rate spread.
Fiscal and monetary policy has remained too accommodative. The FY2024/25 (April/March) fiscal balance fell short of budget targets and deteriorated relative to the previous year as revenue underperformed and expenditure ceilings were exceeded. Persistent and elevated domestic fiscal financing has fueled money growth and inflation, which in turn exerts pressure on the exchange rate. Monetary policy did not tighten sufficiently in the context of elevated government domestic borrowing. The broader reform momentum has been slowing.
Consequently, domestic, and external imbalances worsened. The current account deficit expanded further to about 22 percent of GDP and gross reserves are critically low, pointing to an overvalued exchange rate. The official-parallel spread is wide and may reflect other factors beyond fundamentals. Malawi remains in external debt distress and domestic debt is growing.
The macroeconomic outlook is subdued and dependent on the agricultural sector output and foreign grant support. Under current policies, the mission expects real GDP growth to be 2.4 percent in 2025 and gradually increase to 3.4 percent over the medium term. Inflation is projected to average 29 percent in 2025 and settle at around 14 percent over the medium term. The current account deficit is projected to improve to about 17 percent of GDP in 2025 based on lower fuel prices and a rebound in key exports. General elections, scheduled for September, have reinforced political-economy constraints to macroeconomic adjustment. After the expiry of the ECF arrangement, the Malawian authorities are designing a homegrown reform program.
Risks are tilted to the downside. Lower-than-anticipated grant inflows and food production, additional global trade tensions, and delayed reforms could deepen macroeconomic instability. Greater-than-expected mining investment and production constitute an upside risk.
Fiscal Policy
Returning to a sustainable fiscal adjustment path is a priority. Tackling the rising interest bill will create space for domestically-financed investment and pro-poor spending, while also ameliorating the sovereign-bank nexus.
Domestic revenue mobilization is urgently needed to achieve fiscal sustainability in an equitable way. This could be achieved through a combination of broadening the tax base and tax policy instruments (e.g., reducing exemptions, and personal and corporate income tax reform). Improving wage bill efficiency and rebalancing expenditures towards human capital and social protection could support these efforts.
Staff welcomes public financial management improvements, which remain critical for strengthening fiscal governance and building public trust. The authorities have made progress in expanding the coverage of the Integrated Financial Management and Information System (IFMIS), bank reconciliations, and increasing the efficiency of public investment. Reform efforts should continue to, inter alia, enhance budget development, execution, and reporting, improve the procurement system, and strengthen State Owned Enterprises (SOE) oversight.
Decisive steps are needed to restore debt sustainability. The authorities have achieved some progress with their bilateral creditors and continue to engage with their external commercial creditors to ensure that external debt is sustainable. Tangible progress on external debt restructuring could pave the way for new concessional inflows. This should be supported by steps to reduce the cost of domestic borrowing.
Price Stability and Exchange Rate Policy
Tighter fiscal and monetary policies would support disinflationary efforts and ease pressure on the exchange rate. High inflation hurts the economy in general, but especially the poorest and most vulnerable. A combination of more restrictive monetary policy and an urgent fiscal adjustment, including enhanced reporting on budget execution, could reduce broad money growth, support policy credibility and re-anchor inflation expectations. Structural constraints may also be contributing to entrenched inflation expectations.
A unified and market clearing exchange rate is critical to reducing imbalances and supporting the authorities' growth objectives. The current regime with a large and volatile spread between the parallel and official rate creates distortions, impedes exports, subsidizes some imports, and encourages informality and tax avoidance. Foreign direct investments and official aid flows are discouraged, and domestic revenues reduced. Eliminating these imbalances requires unifying the official and parallel exchange rates, at a level reflecting fundamentals and discounting speculative factors, and stabilizing the foreign exchange market. Consistency between the de facto exchange rate regime, the monetary policy framework and fiscal policy are needed to ensure sustainable growth.
Financial Sector Policies
The banking sector's credit and foreign exchange risks should be monitored to preserve financial stability. While the sector is well-capitalized, liquid, and profitable, its significant exposure to government borrowing and the net foreign liabilities position within the banking sector require continued careful monitoring.
Increased banking sector credit to the private sector would support economic growth. Fiscal adjustment would reduce crowding out of private sector due to public borrowing and support export-oriented investment. In addition, a lower inflation and interest rate environment would further support credit to businesses.
Structural Reforms
Improving the investment climate would help attract investment, diversify the economy, and move up the value chain. Sustained multi-year prudent fiscal policies and removing price distortions (e.g., re-activating the automatic fuel price mechanism) would bolster policy credibility and strengthen external competitiveness. Addressing key structural impediments to growth would durably support efforts to raise productive capacity, reduce inflation and improve self-sustainability, as envisaged under the authorities' Agriculture, Tourism, Mining and Manufacturing (ATMM) policy umbrella.
Further strengthening governance measures will support confidence in public service provision. Despite government reform efforts, including the two National Anti-Corruption Strategies, gaps persist. For example, the public procurement process and SOE operations would benefit from greater transparency and less discretionary decision-making.
The IMF mission team thanks the Malawian authorities and all other interlocutors for the candid discussions and their hospitality.
