IMF cuts Malawi 2013 growth forecast on inflation, drought

Sun Jan 6, 2013 9:06am EST

* Inflation, drought and forex crunch hurting economy

* IMF's Lagarde sees rebound for troubled economy

By Mabvuto Banda

LILONGWE, Jan 6 (Reuters) - The International Monetary Fund expects Malawi's economy to grow by 5.5 percent this year, more than double the rate estimated for 2012, but slightly lower than the 5.7 percent the IMF had previously projected.

IMF head Christine Lagarde said a spike in inflation, lower-than-expected foreign exchange earnings and a drought that has cut into farm production have hurt the economy. But she was optimistic reforms would restore financial stability.

"Malawi has already made significant progress in addressing the serious imbalances that were hampering economic growth just a few months ago," she said at the weekend, wrapping up a two-day visit to the country.

Malawi President Joyce Banda, who took office less than a year ago, has been trying to rebuild an economy sent into a tailspin by her predecessor, but prices have soared since she devalued the currency on International Monetary Fund advice.

Lagarde said investors were set to return and inflation, running at about 33 percent in December, was poised to drop this year because of Banda's economic policies.

"Following these reforms, the economic wheels started spinning again," Lagarde said, urging the country to stay on course.

But many economists do not share her optimism, saying the drought has severely damaged the maize crop while earnings from tobacco, a major source of hard currency for the destitute country, have dropped by more than 50 percent since 2010.

The economy of the aid-dependent country had been teetering under former President Bingu wa Mutharika, who picked fights with donors. The cut in aid, which has traditionally accounted for 40 percent of the budget, coincided with a steady decline in tobacco sales.

Banda, who took office in April 2012 after Mutharika died of a heart attack, has restored aid flows, but soaring commodity prices have made her unpopular, pushing inflation to 33.3 percent in December, far higher than the forecast of around 18 percent for 2012. (Editing by Jon Herskovitz and Helen Massy-Beresford)

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