UPDATE 1-IMF approves Malawi loan as price rises pinch

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WASHINGTON, Dec 3 (Reuters) - The International Monetary Fund said on Wednesday it had approved a $77.1 million loan for Malawi to help the country deal with the effects of higher fuel and fertilizer prices in 2008.

"Recent declines in the price of fuel and fertilizer should help over the medium term, but the negative effects of the earlier price hikes will persist over the next few months, because current imports of oil and fertilizers were contracted at earlier high prices," IMF Deputy Managing Director Takatoshi Kato said in a statement.

"In this light, Malawi's current low level of international reserves is a concern for financial stability and food security," he added.

The IMF said it would immediately disburse $51.4 million of the one-year loan to the government under the Fund's Exogenous Shocks Facility, which is designed to offer aid to countries hit by unforeseen events such as natural disasters, conflicts or dramatic commodity price fluctuations.

The IMF estimated that sharply higher global prices of oil, fertilizers and other imported goods in 2008 cut Malawi's trade balance by about $156 million.

The IMF-supported program will help contain pressure on Malawi's balance of payments and rebuild currency reserves, Kato said.

"Financing will be complemented by fiscal and monetary tightening," he said, adding that additional funding by donor countries will also help Malawi adjust to the shock.

"It will be important to enhance fiscal discipline, including through further improvements in public financial management," Kato said.

He urged Malawi's government to resist going on a spending spree in the run-up to May 2009 elections. (Reporting by Lesley Wroughton; Editing by Jan Paschal)