Policy Reform and Adjustment in an Economy under Siege: Malawi 1980-87

Abstract

public sector.This was followed by a series of major investments of a mainly non-productive character (palaces, military aviation, a new international airport, elite private college), which were in part financed by borrowing from the Eurocurrency market.The overall balance of payments went into deficit in 1978.The final element in the making of an economic crisis was the failure of the 1979-80 season rains in the southern half of the country, which hit the smallholder maize crop especially hard. B. Policy Loans since 1980In 1980, an ¡MF Standby was negotiated, conditional on demand management measures to correct the balance of payments deficit.But the poor international terms of trade, combined with the weakness of the agricultural sector from drought (smallholders) and managerial weakness (new tobacco estates), made it impossible to restore equilibrium in international payments without the use of tougher measures than the government was then prepared to contemplate.Thus negotiations were opened with the World Bank for a two-year Structural Adjustment Loan (SAL-I), which was agreed in 1981, along with the reactivation of the IMF Standby, which had broken down earlier in the year.This was followed by a second SAL (SAL-II) in 1983, expiring in 1985.From 1985, SAL-Ill was agreed, this being followed by a supplementary SAL-ITT financing package at the beginning of 1987.At the time of writing, preparatory work was being undertaken for SAL-TV, which should run from 1987 to 1989.The economy is now heavily dependent on the budgetary and foreign exchange support provided by SALs.On the expiry of the first IMF Standby, a new IMF Extended Facility (EFF) was negotiated in 1983, and maintained up to early 1986, at which time the government was not able to draw the final tranche.At the time of writing, the government did not have a Standby facility with the ¡MF.The conditionality of SAL-I was mild2, and it provided a breathing space in which the World Bank and the government could study and negotiate an 2 For more detailed discussion see Kydd and Hewitt, 1986:352.

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