IMF chief Christine Lagarde on Saturday urged Malawi to diversify its economy, saying a reliance on agriculture left the country's economic recovery under President Joyce Banda vulnerable.
"Agriculture still accounts for 30 percent of GDP and tobacco still accounts for almost half of total export earnings," Lagarde said in prepared remarks on the second day of an official visit.
"What this means is that Malawi and its people are too vulnerable. Vulnerable to the forces of nature. Vulnerable to the vagaries of global commodity markets. Vulnerable to people slipping back and forth between poverty and just getting by."
Lagarde praised reforms introduced by Banda and her government which she said had restored stability after inheriting a crisis characterised by foreign exchange shortages that crippled key imports such as fuel.
After taking office last April, Banda has overseen the devaluation of the kwacha currency by 50 percent, the easing of foreign exchange restrictions, and the raising of fuel prices and cutting of subsidies.
"Following these reforms, the economic wheels started spinning again," said Lagarde, the International Monetary Fund managing director.
"But progress is threatened anew by a slump in agriculture -- from a weather-related decline in maize production and a halving of the tobacco crop brought about by lower planting during the period of overvaluation."
The fund has halved its 2012 growth forecast for the impoverished nation to around two percent but predicts a rate of 5.5 percent this year.
The country's economic recovery plan set a foundation for improved growth, said Lagarde.
Private sector investment must be made easier and poor infrastructure in areas such as electricity and transport upgraded, she said, with Malawi scoring 129 out of 144 countries in the World Economic Forum's Global Competitiveness Index.
"I believe that the key to unlocking Malawi's potential lies in making it more competitive," said Lagarde.
"This should help with diversification, allowing the country to rely less on agriculture and gain a foothold in newer and promising areas."
The IMF, one of the main backers of the country's reforms, gave Malawi a three-year $157 million loan package in June after ties had broken down amid a spree of global aid suspensions.
In 2011, the global lender suspended a $79.4 million credit facility during the administration of the late president Bingu wa Mutharika, who died in April last year.
Donors provide up to 40 percent of the development budget and salaries for nearly 170,000 civil servants.
Criticised at home for devaluing the kwacha, Banda told a joint press conference late Friday that "there will be no backtracking on the reforms."
Under Mutharika, relations with the IMF had become tense after he refused to devalue the currency as the global lender had advised, arguing it would trigger inflation and hurt the poor. In the country, 39 percent of the 13 million people live on less than a dollar a day.
Several key donors, including former colonial power Britain, suspended aid, citing concerns about growing authoritarian tendencies in Mutharika's government.