The Function and Governance of Imf Lending Policies in Malawi

The Function and Governance of IMF Lending Policies in Malawi

The International Monetary Fund was established at the United Nations Conference held in Bretton Woods, New Hampshire, United States in July, 1994. The IMF's goal is to build a framework of cooperation between nations into hasten up post-war reconstruction, to aid political stability, and to encourage peace (Lele 154).

The IMF membership is at 188 countries. According to the organizational structure, each participant country in the organization is allocated a quota according to its contribution to IMF reserves. The IMF performs economic survey of its members in order to provide technical assistance and training to its member states to help them build strong economies. Its main objective is to safeguard the stability of the international financial system which is essentially the structure of monetary transaction between countries that enable them to interact with one another. Other functions of the organization include monitoring and preventing international financial crises as well as cooperation with the member countries to promote the development as well as to eradicate poverty.

The IMF has three areas of focus in implementing its mandate and these include, surveillance of global economies, providing technical assistance and training to member states as well as providing financial loans.

The work of the IMF includes promoting global economic growth and stability and it accomplishes this goal by insisting that member countries develop comprehensive economic and financial policies. In order to achieve this, the IMF constantly conducts surveillance and reviews international, regional as well as national level economic developments of its member states.

In order to strengthen the member states’ capacity to create and implement effective financial policies, the IMF provides essential technical assistance and training. Facilitating technical assistance ensures that vital expertise is provided in the event of lack of capacity, and this means well-crafted economic policies and programs.

National governments encountering financial difficulties with balancing their finances are given a respite with IMF loans. IMF provides the member countries with options to offset their budgetary deficits by working together and forming policy programs supported by financing. These credit agreements between the IMF and member countries are dependent on pre-contracted terms and conditions. Loan access is dependent on the country’s quota in the organization but recently, the IMF lending policies were reformed to allow low-income countries to access double of their previous loan limits while concurrently reducing interest rates. This was done to strengthen the organization’s lending capacity to avert crises especially in the aftermath of the recent global economic crisis.

IMF has introduced policies during the 2008 financial crisis for granting loans to countries. These policies require that the applicant country should first reduce fiscal deficits and inflation levels, ensure that international reserves are shielded from depletion, minimize public spending through decrease of expenditure and increase of taxation, hike interest rates and minimize increase of money supply, prevent currency devaluation and provide financial sector liquidity as required.

Malawi is ranked as one of the world’s lowest per capita economies according to a study conducted by United Nations Development Program (UNDP 2006). More than 80% of the population in Malawi lives in the rural areas of which 65.3% live in poverty, (Malawi National Economic Council 2000).

Malawi’s Economy before 1960 was mainly commodity based and laid great emphasis on goods with the potential to be exported such as agricultural produce including tea, tobacco, coffee, as well as cotton. These crops were grown by only a select few who could afford expensive inputs required while the poor were practicing noncommercial crop production. The colonial government imposed the new farming technologies on the poor indigenous farmers with disregard to the appropriateness of the practices, and this led to growing poverty among the local farmers (Moyo 202).

At the dawn of independence in 1964, Malawi began investing in food production to ensure self-reliance in terms of having enough food for the farmer as well as for the entire nation. In order to attain this goal, the government-subsidized agricultural inputs and increased availability of essential farming implements. This greatly improved the living standard of the common citizen, but the only problem was that these crops did not generate adequate returns and poverty still remained a major economic obstacle.

To help alleviate the country’s poverty and to improve the economy, Malawi adopted Structural Adjustments Policies (SAPs) in 1986 as a condition to loans given by the IMF. These SAPs involved major reforms in the economic and agricultural sector. The SAPs imposed strict rules including increased privatization and reduced protection of domestic industries, currency devaluation, increased interest rates, elimination of subsidies of common goods such as food, changing regulations as well lowering standards to attract foreign investments. The changes in the agricultural sector involved removal of subsidies in which the poor farmers depended on and agricultural market liberalization. Market liberalization meant that farmers were no longer limited to buy or sell agricultural produce to the Malawi Agricultural Development and marketing Corporation (ADMARC) which opened the market to private entities and caused changes in product prices.

IMF is among the most powerful institutions globally and is among the major sources of loans to Developing countries. As the ‘last resort’ source of emergency loans, the IMF has the leverage to impose policies as well as dictate changes in the economies of borrower countries. According to Molina-Gallart and Muchhala (2012), economic policies attached to loans given by international financial institutions are being unfairly used as tools to compel developing nations to adopt market-oriented economic policies as observed