International Development Committee - The Development Situation in Malawi Supplementary written evidence submitted by the Department for International Development

Summary

Since our original submission President Mutharika has died and been replaced by his Vice President, Joyce Banda. The political and economic context has changed. A new Cabinet has been appointed, Malawi has devalued and floated its currency, and early messages from the new administration on governance and human rights are encouraging. The appointment of a new High Commissioner to Malawi was announced on 25 April and President Banda has named Malawi’s High Commissioner to the UK (though final approvals on both sides are still pending). Donors, including DFID, are mobilising quickly to support Malawi and its new President. We have announced the release of £10m of funding to the health sector, and plan to provide a further £20 million of support quickly. The Secretary of State for International Development will discuss what else needs to be done with President Banda when he visits Malawi, accompanied by Diana Noble of CDC, at the end of May.

Opportunities for Economic Growth, Job Creation and Meeting The MDGs in Malawi

2. Our original submission to the Committee described the key economic challenges facing Malawi—short term macroeconomic instability, and longer term barriers to growth. Under President Banda, the new administration has stated that enhancing long term growth will be a priority. Major policy changes have already been made to address short term instability.

3. On 7 May the Reserve Bank of Malawi (RBM) devalued the currency by almost 50% to address the over-valuation of the exchange rate and the chronic forex shortages. Simultaneously they removed the key restrictions on trading foreign exchange, effectively moving from a fixed exchange rate to a floating rate. Malawi’s new financial year starts on 1 July. The Government’s next challenge will be to produce a budget, which sets Malawi on a course for longer term growth and avoids increasing inflation. The RBM also has very low levels of foreign exchange reserves, which makes it difficult for them to manage the new regime by providing emergency liquidity. Floating the exchange rate was a bold move, but an important step towards greater economic stability.

4. GoM is in intensive discussions with the IMF about a new programme. This will include reaching agreement on difficult fiscal and monetary policy issues. If discussions go well a new programme could be agreed in July. An IMF programme is a precondition for some types of donor support.

DFID Response

5. Since the devaluation, DFID has been working closely with the Government of Malawi (GoM) and other donors to see how we can help. GoM are well aware of the need to produce a credible budget. They have publicly listed programmes and spending areas they are considering cutting, and are working with teams from the World Bank and the IMF to make the difficult choices. This leaves two main problems—(1) how to mitigate the impact of devaluation (especially price rises) on the poor, and (2) how to help the RBM gather the reserves it needs to manage the new floating regime. To address the impact on the poor, donors are working on a rapid scale-up of existing social protection programmes.

6. The second problem, the shortage of reserves, requires a rapid response from donors. On 12 May the Secretary of State announced that the UK would release £10 million of support to Malawi’s health sector, and plans to bring forward a further £20 million of assistance. The details of this support are still being finalised. We are also in discussions with the Bank of England about the possibility of them providing technical assistance to the RBM to help them with the transition to the new currency regime.

The Changed Political Situation following the President’s Death

7. Since the death of President Mutharika and the succession of his Vice-President Joyce Banda, who had been expelled from the President’s DPP political party and formed her own, the political landscape has rapidly changed.

8. After being sworn in on 7 April, President Banda changed the Information Minister, Inspector-General of Police, head of the State Media, Secretary to the Treasury and the Reserve Bank Governor. Since then she has sworn in a new “inclusive” cabinet that sees the return of eight previous DPP Ministers and a selection of Ministers from other political parties, including her own People’s Party.

9. This signals an intent to restore relations with parts of the international community that were strained under the previous government. There have not yet been changes at the top of key accountability institutions. Parliament is due to resume on 18 May. We will then see whether a political opposition will be able to coalesce quickly and effectively, and whether the government can expect a difficult passage for appointments, legislative change and the July budget.

DFID’s Response

10. DFID Malawi has worked quickly with Foreign Office colleagues to show UK support for the new government. The appointment of a new High Commissioner to Malawi was announced on 25 April and President Banda has named Malawi’s High Commissioner to the UK (though final approvals on both sides are still pending).

11. We have made it clear to the new President and her government that the UK hopes to see, and is ready to support, moves to halt the economic and political decline. As the space to operate has expanded, DFID has also been able to move forward with more certainty on finalising and implementing our operational plan, which will be launched during the Secretary of State’s visit to Malawi. We will provide extra support to promote economic stability and to protect the poorest from the short term impact of economic reforms. We will look for ways to increase private sector investment and promote accountability.

12. In the area of governance and human rights, we will lobby for the speedy resolution of important outstanding issues, including the appointment of Electoral Commissioners, possible changes at the top of other constitutional bodies and review and potential repeal of recent controversial laws. We welcome indications from the President that she wishes these issues to be addressed quickly, and have offered support to the Law Commission to speed up this process. We will respond to further changes within our existing governance programmes, with a new programme to support democratic institutions, (currently in design, but which will include support for the preparation of elections in 2014) and with other, discrete programmes as necessary.

13. DFID will make the most of the new context to promote development, but we also recognise these are early days for the new government.

DFID Malawi

24 May 2012

Prepared 23rd July 2012