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Malawi - Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement, Request for Waivers for Non-Observance of Performance Criteria, Extensions of the Arrangement, Modification of Performance Criterion, and Rephasing of Disbursements-Staff Report; Press Release; and Statement by the Executive Director for Malawi
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Malawi: Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement, Request for Waivers for Non-Observance of Performance Criteria, Extension of the Arrangement, Modification of Performance Criterion, and Rephasing of Disbursements

Author(s):
International Monetary Fund. African Dept.
Published Date:
March 2015
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Context

A. Fiscal Scandal and its Aftermath

1. The discovery in October 2013 of a large theft of public funds, dubbed the “cashgate” scandal, exposed significant deficiencies in Malawi’s fiscal systems (MEFP, ¶3, ¶4, and ¶14). President Joyce Banda’s government responded quickly by launching a forensic audit and developing a short-term action plan of corrective measures in consultation with development partners (Appendix I). This allowed for completion in January 2014 of the delayed third and fourth reviews of the arrangement under the Extended Credit Facility (ECF). An interim audit report was issued in February 2014 and a final report was made public in October. In addition to providing details of the illicit transactions uncovered (MK20 billion or US$45 million), the report also provided broader insights into the deficiencies of public financial management (PFM) systems, including serious procurement-related problems.1 While there was an expectation that with sufficient progress budget support would resume, this has yet to fully materialize.

2. The scandal had major political and economic repercussions. Public concerns about governance were compounded in early 2014 by questions about the use of proceeds (US$15 million) from the sale of the presidential jet in 2013 to service a non-concessional loan ($145 million, not previously reported to staff) contracted in October 2013 to purchase military equipment. As the May 2014 presidential, legislative and local elections approached, and the impact of the lost budget support intensified in the second half of the fiscal year, policy discipline lapsed somewhat. Macroeconomic policies went off track, with monetary financing of the fiscal deficit, exchange rate depreciation and continuing high inflation. Against this background, President Banda and her party lost the May elections, and a new government under President Peter Mutharika came to power.

3. The new government committed itself to rebuilding trust in public institutions and correcting macroeconomic imbalances, in order to set the country on a path to sustainable and inclusive growth. It also signaled its intention to do this by taking steps to bring its Fund-supported program back on track. Nonetheless, facing huge challenges, it has taken time to address the underlying problems, resulting in delays to the fifth (end-December 2013 test date) and sixth (end-June 2014 test date) program reviews.

4. Staff held discussions with the new authorities commencing in July 2014. These were geared towards ascertaining their commitment to the objectives of the ECF-arrangement, assessing progress made in addressing weaknesses in PFM exposed by the “cashgate” scandal and reaching understandings on policies to stabilize the economy including advice on the parameters underpinning a revised budget. The new authorities felt strongly that the previously-developed action plan to address PFM weaknesses was not sufficiently focused and prioritized, and they worked closely with an IMF Fiscal Affairs Department (FAD) technical assistance (TA) mission to develop a more focused medium-term plan. Following review discussions in November and December, the authorities have implemented key prior actions in the areas of PFM, monetary and financial policies. They complied with most end-January 2015 informal macroeconomic targets which were set during the December 2014 mission, thereby demonstrating strong ownership and forming the basis for renewed engagement.

5. Progress has been made in implementing the short-term action plan adopted in the aftermath of cashgate (MEFP, ¶3, ¶14, and ¶15, and Appendix I). There has also been better coordination among the Anti-Corruption Bureau, Financial Intelligence Unit, the Malawi Revenue Authority and the Financial Fraud Unit of the Malawi Police Force in prosecuting the case files arising from the forensic audit report (Box 1). These efforts have been bolstered by technical assistance from the U.K. Crown prosecution service in assessing the quality of background evidence and asset recovery (MEFP ¶14). “Out of scope” transactions by the military and police that were identified by the final forensic audit report will be addressed through audits (MEFP ¶15). In addition, procurement practices across the public sector have been harmonized and the U.K authorities are providing bilateral assistance on the treatment of sensitive procurements by the military.

Recent Developments and Program Implementation

A. Recent Economic Developments

6. The cashgate scandal significantly damaged Malawi’s economic outlook. In response to the scandal, donors suspended budget support. The sudden withdrawal of donor assistance relative to the program (5½ percent of GDP in FY13/14) and the inability of the authorities to stay within budget limits resulted in the program going off track.

Box 1.Cashgate Accountability

The authorities are actively pursuing prosecutions arising from the “cashgate” scandal.

  • To date there have been five convictions and lengthy prison sentences for theft and money laundering and some recovery of assets (MK 183 million). In addition a military officer has been arrested in connection with so called “out of scope” (i.e. not cashgate-related) transactions associated with military procurements that were identified in the final forensic report.

  • The authorities’ are seeking convictions from the 53 case files derived from the final forensic report, with particular focus on large sums. They also intend to pursue prosecutions based on contraventions of section 88 of the PFM Act governing offences and discipline.

7. Against this backdrop, growth has held up but inflation has remained very high, while policies have proved challenging to implement (Figures 13).

  • Growth has nonetheless proved resilient so far, despite the shocks to confidence and policy slippages. Preliminary estimates indicate that real GDP growth was close to 6 percent in 2014, with strong contributions from the agriculture, wholesale and retail trade, and information and communication sectors. The ready availability of foreign exchange and fuel, as a result of policy reforms introduced in May 2012, has supported the expansion of economic activity. Despite the humanitarian toll, the macroeconomic impact of recent floods appears to be limited as only about half of one percent of arable lands was affected, although hydro-electricity generation was disrupted2.

  • Inflation has remained stubbornly high (averaging 23.8 percent in 2014), in part reflecting loose and accommodative monetary policy. In the absence of donor budget support, higher-than-programmed domestic financing of the deficit (5½ percentage points of GDP) in FY13/14 and high liquidity levels from largely unsterilized foreign exchange purchases during the tobacco season, fueled inflation expectations. More recently, a hike in the policy rate by 250 basis points to 25 percent in November, combined with a directive requiring that the current liquid reserve requirement (15.5 percent) be imposed on the foreign currency deposit equivalent in local currency, contributed to tightening liquidity and stabilizing the currency. Elevated inflation levels have triggered demands for wage increases by some public sector institutions but to date the authorities have largely held their ground.

  • The implementation of fiscal policy was difficult given shortfalls in external financing. Shortfalls in external financing led to increased recourse to domestic financing and the emergence of domestic payment arrears in FY2013/14. In addition, there were arrears from previous years which were being re-audited and verified to ensure their legitimacy and cross-referencing with individuals and entities identified in the forensic audit report3. As a result, public debt has risen sharply since end-2012, by 18.6 percentage points, to 75.8 percent of GDP by end-2014. In a bid to reduce the costs of servicing domestic debt, in December, the authorities restructured some kwacha-denominated domestic debt (amounting to 6 percent of GDP) by selling it to PTA bank—a regional development bank—for US$250 million. This operation lowered interest costs by 1000 basis points on the affected stock of debt and, as repayment will be made in local currency, significantly boosted official reserve cover.

  • The current account deteriorated in 2014, mainly reflecting the large drop in official transfers. An improvement in the merchandise deficit by 2 percentage points to about 10½ percent of GDP owing to strong growth in traditional exports was more than offset by the sharp decline in net official transfers by 6.6 percentage points of GDP. As a result the current account deficit (including net official transfers) widened by 3¼ percentage points to 5.1 percent of GDP and the exchange rate depreciated by 15 percent over the year, punctuated by periods of large volatility4. The proceeds from the domestic debt restructuring and purchases of foreign exchange on the domestic market during the tobacco season were used to bolster reserves, which rose to 2.9 months of imports at end-2014. This helped to restore confidence in the kwacha.

Figure 1.Malawi: Recent Developments, 2009–15

Sources: Malawian authorities and IMF staff estimates.

Figure 2.Malawi: Monetary Developments, 2011–November 2014

Source: Malawian authorities.

Figure 3.Malawi: Fiscal Developments, 2009–14

Sources: Malawian Authoroties and IMF Staff Estimates

B. Performance under the Program

8. Several quantitative targets for the fifth review (end-December 2013 test date) and for the sixth review (end-June 2014 test date) under the program were missed (Tables 9 and 10).

  • For the fifth review, one out of the three periodic performance criteria was not met, i.e. the ceiling on net domestic assets of the central bank (RBM).

  • For the sixth review two out of the three periodic PCs were not met. While the PC on net international reserves was observed comfortably, the PCs on net domestic assets (NDA) of the RBM and net domestic borrowing (NDF) by the government were missed by substantial amounts.

  • For both reviews two continuous performance criteria were not met, i.e. the ceiling on new non-concessional external debt maturing in more than one year and the ceiling on non-accumulation of external payments arrears. The ceiling on new non-concessional external debt was missed due to the contracting of three non-concessional loans: (i) the contracting in October 2013 of a medium-term non-concessional supplier’s credit for military equipment; (ii) the contracting, in April 2014, of a supplementary loan for the rehabilitation of an inter-city road, and (iii) the contracting in February 2015 of a loan for the construction of a cancer treatment center. The ceiling on non-accumulation of external payments arrears was missed due to the accumulation of arrears on the supply credit for the military equipment.

  • For both reviews, indicative targets for reserve money were missed, reflecting the unsterilized build-up of international reserves (NIR) and increased recourse to central bank financing of the budget. In addition, indicative ceilings on social spending were missed by a maximum of 4 percent due to external financing shortfalls.

Table 1.Malawi: Selected Economic Indicators, 2011–17
25-Feb-152011201220132014201520162017
Act.Act.Prog.1ActualProg.1Est.Proj.
National accounts and prices (percent change, unless otherwise indicated)
GDP at constant market prices4.31.95.05.26.15.75.55.76.0
Nominal GDP (billions of Kwacha)8811,0571,4121,4151,7441,8092,2242,5562,893
GDP deflator4.017.727.327.316.420.916.48.76.7
Consumer prices (end of period)9.834.620.123.59.724.212.08.07.0
Consumer prices (annual average)7.621.327.728.315.123.817.310.07.7
Investment and savings (percent of GDP)
National savings9.413.416.914.218.610.312.213.013.5
Gross investment15.316.920.416.021.215.415.615.716.1
Saving-investment balance−5.9−3.5−3.5−1.8−2.6−5.1−3.4−2.7−2.5
Central government (percent of GDP on a fiscal year basis)2
Revenue32.126.538.339.136.932.433.032.633.0
Tax and nontax revenue24.522.124.024.527.128.027.027.327.5
Grants7.64.414.214.59.84.46.15.35.5
Expenditure and net lending35.033.439.640.541.141.038.935.435.4
Overall balance (excluding grants)−10.5−11.3−15.6−15.9−13.9−13.1−11.9−8.1−8.0
Overall balance (including grants)−2.9−6.9−1.3−1.4−4.2−8.6−5.9−2.8−2.4
Foreign financing1.31.62.62.74.92.84.01.82.0
Domestic financing1.76.7−0.2−0.20.45.91.91.00.4
Discrepancy−0.1−1.5−1.1−1.1−1.2−0.10.00.00.0
Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)
Money and quasi money35.722.925.635.123.515.121.514.913.2
Net foreign assets−7.99.317.826.54.315.98.27.43.0
Net domestic assets43.613.67.98.619.2−0.913.37.510.2
Credit to the government19.70.016.311.3−7.5−10.46.1−0.9−2.1
Credit to the private sector (percent change)20.525.47.814.437.020.517.618.119.0
External sector (US$ millions, unless otherwise indicated)
Exports (goods and services)1,4091,4041,4991,6241,6311,7461,8472,0492,156
Imports (goods and services)2,2362,2662,2602,3132,4612,3812,5232,7542,899
Gross official reserves190215403397453599698791817
(months of imports)1.01.22.02.02.02.93.03.33.4
(percent of reserve money)42.663.1120.8108.3117.8131.5119.7122.3110.9
Current account (percent of GDP)−5.9−3.5−3.5−1.8−2.6−5.1−3.4−2.7−2.5
Current account, excl. official transfers (percent of GDP)−12.2−17.5−16.4−15.0−16.8−11.7−11.1−10.3−9.9
Real effective exchange rate (percent change)3−4.4..−17.9−14.911.5
Overall balance (percent of GDP)−1.62.22.44.46.44.31.51.71.4
Terms of trade (percent change)−16.1−3.10.30.62.52.18.1−3.5−2.2
Debt stock and service (percent of GDP, unless otherwise indicated)
External debt (public sector)16.9..37.741.544.038.947.335.334.131.9
NPV of external debt (percent of exports)48.153.349.478.944.590.488.285.075.4
Domestic public debt23.119.5---28.1---28.525.022.818.8
Total public debt40.057.2---72.1---75.860.256.950.7
External debt service (percent of exports)1.42.02.74.64.04.78.013.28.3
External debt service (percent of revenue excl. grants)1.52.95.07.56.17.111.317.49.8
91-day treasury bill rate (end of period)6.8..20.032.326.9
Sources: Malawian authorities and IMF staff estimates.

IMF Country Report No. 14/37.

The fiscal year starts in July and ends in June. The current financial year, 2015, runs from July 1, 2014 to June 30, 2015.

The figure for 2014 is the annual percent change of the REER at end-November 2014.

Sources: Malawian authorities and IMF staff estimates.

IMF Country Report No. 14/37.

The fiscal year starts in July and ends in June. The current financial year, 2015, runs from July 1, 2014 to June 30, 2015.

The figure for 2014 is the annual percent change of the REER at end-November 2014.

Table 2a.Malawi: Central Government Operations: 2011/12–2017/18(Billions of Kwacha)
25-Feb-152011/122012/132013/142014/152015/162016/172017/18
ActualActualProg.1ActualBudgetProj.Proj.
Revenue2574725835116416587748951,004
Tax and nontax revenue214297428441531537648745848
Tax Revenue188269375388476481579662754
Taxes on income and profits90129168181226237289329371
Taxes on goods and services84111162168207202237272313
Taxes on international trade183347415050637383
Other taxes−3−4−3−2−8−8−10−11−13
Nontax revenue2262854535557698294
Grants4317615470110121126150156
Budget support grants07831708700
Project grants18356441727276103101
Dedicated grants256459223941434754
Expenditure and net lending3244896486477487758419611,067
Current expenditure246385504547550582650716799
Wages and salaries7097137140163163193216246
Interest payments243393988010510810393
Domestic222988947591909185
Foreign245461419128
Goods and services95144156176161158184215245
Generic goods and services5360366570667790107
Road Maintenance77981011111518
Agricultural SWAp16922233
Health SWAp163223203131374449
Education SWAp92219192323293337
National / local elections01181111112
PFEM2301111
Statutory expenditures465743344
National AIDS Commission5517944556
Maize purchases1331455678
Rural Electrification Program88101111111111
Subsidies and other current transfers5798111125135145165182214
Pension and gratuities101620202525303439
Transfers to road and revenue authorities5811131414171723
Transfers to public entities172230324646424652
Fertilizer and seed subsidy2452506050607586101
Arrears payments012881010000
Development expenditure78104144100196191191245268
Foreign financed357211381147153133175182
Domestically financed423231204938587086
Net lending000022000
Overall balance (including grants)−66−16−66−136−107−117−67−66−63
Discrepancy3−15−14−18−200000
Overall balance (incl. grants and discrepancy)−81−30−84−138−107−117−67−66−63
Total financing (net)813084138107117676663
Foreign financing (net)163377459280425663
Borrowing1838835410399749099
Budget support loans103514370181819
Project loans173849406682577281
Other external loans40000018000
Amortization−3−5−6−9−11−20−32−34−36
Net domestic financing65−2793153725100
Memorandum items:
Domestic fiscal balance5−74−120−107−126−82−61−41−36
New securitized arrears---------39157--- --------
Nominal GDP9691,2081,5781,5781,9912,3772,7123,069
Sources: Malawi Ministry of Finance and IMF staff estimates.

IMF Country Report No. 14/37.

Nontax revenues in 2013/14 and 2014/15 include the RBM profit transfer to government of MK19.2 billion and MK10 billion, respectively.

Part of the discrepancy in 2012/13 is explained by the government’s issuance of promissory note for the RBM recapitalization in the magnitude of MK28.5 billion, which was included in financing but did not have an associated cash expenditure.

Other external loans in FY2014/15 include program loans from the World Bank for the financing of agriculture and education SWAPs and the National AIDS Commission (NAC).

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Sources: Malawi Ministry of Finance and IMF staff estimates.

IMF Country Report No. 14/37.

Nontax revenues in 2013/14 and 2014/15 include the RBM profit transfer to government of MK19.2 billion and MK10 billion, respectively.

Part of the discrepancy in 2012/13 is explained by the government’s issuance of promissory note for the RBM recapitalization in the magnitude of MK28.5 billion, which was included in financing but did not have an associated cash expenditure.

Other external loans in FY2014/15 include program loans from the World Bank for the financing of agriculture and education SWAPs and the National AIDS Commission (NAC).

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Table 2b.Malawi: Central Government Operations: 2011/12–2017/18(Percent of GDP)
25-Feb-152011/122012/132013/142014/152015/162016/172017/18
ActualActualProg.1ActualBudgetProj.Proj.
Revenue26.539.136.932.432.233.032.633.032.7
Tax and nontax revenue22.124.527.128.026.727.027.327.527.6
Tax Revenue19.422.323.724.623.924.124.424.424.6
Taxes on income and profits9.210.710.711.411.311.912.212.112.1
Taxes on goods and services8.79.210.310.710.410.210.010.010.2
Taxes on international trade1.92.73.02.62.52.52.72.72.7
Other taxes−0.3−0.3−0.2−0.1−0.4−0.4−0.4−0.4−0.4
Nontax revenue22.72.33.43.32.82.82.93.03.1
Grants4.414.59.84.45.56.15.35.55.1
Budget support grants0.06.42.00.40.00.40.30.00.0
Project grants1.92.94.12.63.63.63.23.83.3
Dedicated grants2.55.33.81.41.92.11.81.71.8
Expenditure and net lending33.440.541.141.037.638.935.435.434.7
Current expenditure25.431.932.034.727.629.227.326.426.0
Wages and salaries7.28.08.78.98.28.28.18.08.0
Interest payments2.52.85.96.24.05.34.63.83.0
Domestic2.22.45.66.03.84.63.83.32.8
Foreign0.20.30.30.20.30.70.80.50.3
Goods and services9.811.99.911.28.17.97.77.98.0
Generic goods and services5.55.02.34.13.53.33.33.33.5
Road Maintenance0.70.60.60.50.50.60.50.60.6
Agricultural swap0.00.01.00.60.10.10.10.10.1
Health SWAp1.72.61.41.31.61.61.51.61.6
Education SWAp0.91.81.21.21.21.21.21.21.2
National / local elections0.00.11.10.70.00.10.10.10.1
PFEM0.00.00.10.20.00.00.00.00.0
Statutory expenditures0.40.50.30.50.20.10.10.10.1
National AIDS Commission0.50.41.10.60.20.20.20.20.2
Maize purchases0.10.30.20.90.30.30.30.30.3
Rural Electrification Program0.00.70.50.60.60.60.50.40.4
Subsidies and other current transfers5.98.17.17.96.87.36.96.77.0
Pension and gratuities1.11.31.21.21.21.31.31.31.3
Transfers to road and revenue authorities0.60.70.70.80.70.70.70.60.7
Transfers to public entities1.81.91.92.02.32.31.81.71.7
Fertilizer and seed subsidy2.54.33.23.82.53.03.23.23.3
Arrears payments0.01.00.50.50.50.50.00.00.0
Development expenditure8.08.69.16.49.89.68.09.08.7
Foreign financed3.66.07.25.17.47.75.66.55.9
Domestically financed4.42.62.01.22.51.92.52.62.8
Net lending0.00.00.00.00.10.10.00.00.0
Overall balance (including grants)−6.9−1.3−4.2−8.6−5.4−5.9−2.8−2.4−2.0
Discrepancy3−1.5−1.1−1.2−0.10.00.00.00.00.0
Overall balance (including grants and discrepancy)−8.4−2.5−5.3−8.7−5.4−5.9−2.8−2.4−2.0
Total financing (net)8.32.55.38.75.45.92.82.42.0
Foreign financing (net)1.62.74.92.84.64.01.82.02.1
Borrowing1.93.15.33.45.25.03.13.33.2
Budget support loans0.10.02.20.91.90.00.70.70.6
Project loans1.83.13.12.53.34.12.42.62.6
Other external loans40.00.00.00.00.00.90.00.00.0
Amortization−0.3−0.4−0.4−0.6−0.6−1.0−1.4−1.3−1.2
Net domestic financing6.7−0.20.45.90.81.91.00.40.0
Memorandum items:
Domestic fiscal balance5−7.6−9.9−6.8−8.0−4.1−2.5−1.5−1.2
New securitized arrears---------2.57.9---------
Nominal GDP9691,2081,5781,5781,9912,3772,7123,069
Sources: Malawi Ministry of Finance and IMF staff estimates.

IMF country report No. 14/37.

Nontax revenues in 2013/14 and 2014/15 include the RBM profit transfer to government of MK19.2 billion and MK10 billion, respectively.

Part of the discrepancy in 2012/13 is explained by the government’s issuance of promissory note for RBM recapitalization in the magnitude of MK28.5 billion, which was included in financing, but did not have an associated cash expenditure.

Other external loans in FY2014/15 includes program loans from the World Bank for the financing of agriculture and education SWAPS and the National AIDS Commission (NAC).

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Sources: Malawi Ministry of Finance and IMF staff estimates.

IMF country report No. 14/37.

Nontax revenues in 2013/14 and 2014/15 include the RBM profit transfer to government of MK19.2 billion and MK10 billion, respectively.

Part of the discrepancy in 2012/13 is explained by the government’s issuance of promissory note for RBM recapitalization in the magnitude of MK28.5 billion, which was included in financing, but did not have an associated cash expenditure.

Other external loans in FY2014/15 includes program loans from the World Bank for the financing of agriculture and education SWAPS and the National AIDS Commission (NAC).

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Table 2c.Malawi: Central Government Operations: 2014/15 and 2015/16(Billions of Kwacha)
2014/152015/16
Q1Q2Q3Q4AnnualQ1Q2Q3Q4Annual
Prel.Proj.Proj.Proj.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue124.5178.0165.7189.6657.8162.2194.8190.6226.7774.3
Tax and nontax revenue117.0129.1133.6157.5537.2141.2154.5160.9191.2647.9
Tax revenue108.1116.0123.1133.3480.5131.1139.4149.0159.8579.3
Taxes on income and profits52.453.162.469.0236.863.664.776.384.2288.9
Taxes on goods and services45.951.950.553.8202.253.960.759.663.1237.3
Taxes on international trade11.713.012.412.849.914.716.515.716.263.0
Other taxes−1.8−2.1−2.2−2.3−8.4−1.2−2.5−2.6−3.8−10.0
Nontax revenue18.813.210.424.256.710.115.112.031.468.6
Grants7.548.932.132.0120.621.040.329.635.5126.5
Budget support grants0.00.00.08.08.00.00.00.07.07.0
Project grants5.618.017.630.471.618.719.019.219.176.1
Dedicated grants1.930.96.51.641.02.321.310.49.443.4
Expenditure and net lending171.7203.2204.6195.0774.5205.7210.0213.5212.0841.2
Current expenditure147.8164.3151.6117.8581.6160.9172.7170.1146.3650.0
Wages and salaries41.440.340.840.8163.348.947.548.248.2192.7
Interest payments38.722.226.318.0105.135.522.027.723.3108.5
Domestic38.119.920.612.591.030.216.623.619.389.7
Foreign0.62.35.75.514.15.35.44.14.018.7
Goods and services37.443.636.840.4158.240.751.443.248.7183.9
Generic goods and services16.322.914.612.266.016.226.917.117.377.5
Census0.00.00.00.00.00.00.00.00.00.0
Road Maintenance2.33.52.73.011.42.33.52.73.011.5
Agricultural swap0.01.01.00.02.00.60.60.60.62.4
Health SWAp5.74.38.013.031.06.85.19.515.436.8
Education SWAp5.25.05.08.223.56.67.27.57.528.9
National / local elections0.70.10.10.21.00.30.30.30.31.2
PFEM0.40.10.10.10.60.20.20.20.20.6
Statutory expenditures1.21.00.30.22.71.41.20.40.23.2
National AIDS Commission1.71.01.30.04.01.61.21.01.04.7
Maize purchases1.72.01.00.35.02.02.41.20.46.0
Rural Electrification Program2.32.82.83.211.12.82.82.82.811.1
Subsidies and other current transfers23.455.247.718.6144.935.951.951.126.1164.9
Pension and gratuities5.37.87.04.925.06.49.38.45.829.8
Transfers to road and revenue authorities4.04.03.03.014.03.94.24.54.817.4
Transfers to public entities and households8.912.714.010.746.39.110.611.311.342.2
Of which, roofing sheets and cement program0.01.54.01.57.00.00.00.00.00.0
Fertilizer and seed subsidy5.230.723.70.059.716.527.927.04.175.4
Arrears payments6.93.10.00.010.00.00.00.00.00.0
Development expenditure23.937.952.576.7191.044.837.343.465.7191.2
Foreign financed19.426.042.665.4153.329.621.229.852.2132.8
Domestically financed4.511.99.911.337.615.216.113.613.658.4
Net lending0.01.00.50.52.00.00.00.00.00.0
Overall balance (including grants)−47.2−25.2−39.0−5.4−116.7−43.5−15.2−22.914.7−66.9
Discrepancy13.90.00.0−13.90.00.00.00.00.00.0
Overall balance (including grants and discrepancy)−33.3−25.2−39.0−19.3−116.7−43.5−15.2−22.914.7−66.9
Total financing (net)33.325.239.019.3116.743.515.222.9−14.766.9
Foreign financing (net)13.81.523.141.479.73.0−2.58.533.342.3
Borrowing13.89.228.348.199.410.95.416.741.474.4
Budget support0.00.00.00.00.00.03.26.18.317.7
Project13.88.025.035.081.810.92.210.633.156.8
Other external loans0.01.23.313.117.60.00.00.00.00.0
Amortization0.0−7.7−5.2−6.7−19.6−7.8−8.0−8.2−8.1−32.1
Net domestic financing19.523.715.9−22.137.040.417.814.4−48.024.6
Memorandum item:
Domestic fiscal balance2−35.4−47.1−28.028.5−82.0−34.8−34.3−22.731.4−60.5
Sources: Malawi Ministry of Finance and IMF staff estimates.

Nontax revenue in 2014/15 includes the RBM profit transfer of MK10 billion to government.

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Sources: Malawi Ministry of Finance and IMF staff estimates.

Nontax revenue in 2014/15 includes the RBM profit transfer of MK10 billion to government.

Domestic fiscal balance is calculated by subtracting current and domestically-financed development expenditures from domestic revenues.

Table 3a.Malawi: Monetary Authorities’ Survey, 2012–17(Billions of Kwacha, unless otherwise indicated)
25-Feb-15201220132014201520162017
Dec.Dec.Mar.Jun.Sept.Dec.Mar.Jun.Dec.Dec.Dec.
Act.Prog.1Act.Prog.1Act.Prog.1Act.Act.Est.Proj.Proj.Proj.
Reserve money113135157134169145193192215223244261295334
Currency outside banks55766810093
Cash in vault1619131417
Commercial bank deposits with RBM4262887982
Net foreign assets (NFA)−2035422766616371148176173197242260
Foreign assets80165174154193188186189282303297312361388
Foreign liabilities−100−126−133−105−127−112−123−118−134−127−124−115−119−128
Net domestic assets13310011510710384130121664871645374
Credit to government (net)11011912610510875152161677463929386
Credit to domestic banks−140000000000000
Other items (net)37−20−112−59−22−400−278−28−40−12
Open market operations−14−25−5−3−5200
Others515−6507−22−40
Memorandum items:
Money multiplier3.43.73.33.83.13.82.92.82.82.82.82.82.82.8
Annual growth of reserve money (percent)54.636.138.649.969.214.752.642.636.832.126.221.413.313.2
91-day treasury bill rate20.032.313.021.119.20.0
NFA (US$ millions)−50869967161158158173315378390440531573
Foreign assets (US$ millions)247406404380470484467458599650670698791856
Foreign liabilities (US$ millions)−297−302−305−313−309−326−309−286−284−272−280−258−260−283
Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.

IMF Country Report No. 14/37.

Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.

IMF Country Report No. 14/37.

Table 3b.Malawi: Monetary Survey, 2012–17(Billions of Kwacha, unless otherwise indicated)
25-Feb-15201220132014201520162017
Dec.Dec.Mar.Jun.Sept.Dec.Mar.Jun.Dec.Dec.Dec.
Act.Prog.1Act.Prog.1Act.Prog.1Act.Act.Est.Proj.Proj.Proj.
Money and quasi-money386486522511518552559544601626671730838949
Money222201242244240
Quasi-money164321276315304
Of which: foreign currency deposits7213993128116
Net foreign assets (NFA)3210013493103125111114217230256267321346
Monetary authorities−2035422766616371148176173197242260
Gross foreign assets80165174154193188186189282303297312361388
Foreign liabilities−100−126−133−112−127−119−123−118−134−127−124−115−119−128
Commercial banks (net)5165926637644843695483707886
Net domestic assets355385388417415427449430383395415463518603
Credit to government (net)141204184186180140242236130141126166160142
Credit to statutory bodies (net)1918181841853555668
Credit to private sector219238250288265332270271302313324355419499
Other items (net)−24−75−65−75−33−65−69−80−53−64−40−64−67−46
Memorandum items:
Velocity of money (annualized GDP divided by broad money)2.72.92.72.92.92.92.83.13.03.03.03.03.03.0
Annual growth of broad money (percent)22.925.635.128.530.523.124.812.715.120.619.921.514.913.2
Annual growth of credit to the private sector (percent)25.48.914.425.815.743.416.617.720.518.319.817.618.119.0
NFA of the commercial banks (US$ millions)153.3160.9212.3163.390.3165.8120.1103.3146.6116.6186.6156.6171.6189.6
Gross foreign assets (US$ millions)199.5209.5242.1212.6131.1215.8166.7135.7169.0139.0209.0179.0194.0212.0
Foreign liabilities (US$ millions)−46.3−48.6−29.8−49.3−40.8−50.1−46.5−32.4−22.4−22.4−22.4−22.4−22.4−22.4
Foreign currency deposits(US$ millions)218.2325.5226.1272.7260.7
Nominal GDP (billions of Kwacha)105714151,8092,2242,5562,893
Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.

IMF Country Report No. 14/37.

Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.

IMF Country Report No. 14/37.

Table 4a.Malawi: Balance of Payments, 2011–17(US$ millions, unless otherwise indicated)
2011201220132014201520162017
Act.Act.Prog.3Est.Prog.3Proj.Proj.
Current account balance (including grants)−330.0−146.5−136.1−67.8−177.7−215.6−167.8−152.4−161.3
Merchandise trade balance−630.1−662.3−523.5−475.0−579.4−444.5−465.7−428.6−428.6
Exports1,262.71,255.31,385.31,467.81,505.21,570.41,662.01,869.72,026.3
Of which: Tobacco482.4480.9358.2432.8394.9480.7479.9495.1518.4
Uranium120.4154.4169.9169.9161.640.40.00.00.0
Imports−1,892.7−1,917.6−1,908.8−1,942.8−2,084.7−2,014.9−2,127.6−2,298.3−2,455.0
Of which: Petroleum−168.8−173.7−177.1−176.6−177.0−183.0−116.1−149.0−168.4
Services balance−312.8−334.5−382.0−373.0−394.3−361.4−408.8−472.2−529.9
Interest public sector (net)−5.6−10.0−9.1−9.1−10.0−19.3−48.4−36.9−37.7
Other factor payments (net)−109.7−124.8−135.2−150.3−134.1−151.9−150.5−159.3−178.1
Nonfactor (net)−197.5−243.9−237.6−213.6−250.3−190.2−209.9−276.1−314.1
Unrequited transfers (net)612.9850.3769.4780.2857.6590.3706.6748.5797.2
Private (net)256.0259.8273.8274.4295.5309.0323.8310.5328.0
Official (net)356.9590.5495.6505.8562.2281.2382.8438.0469.2
Receipts357.7591.3496.4506.6563.0282.0383.6438.8470.1
Budget support0.0181.473.573.0111.20.017.715.90.0
Project related1357.6409.8422.9433.6451.8282.0365.9423.0470.1
Payments−0.8−0.8−0.8−0.8−0.8−0.8−0.8−0.8−0.8
Financial account balance157.4243.3227.6238.7396.5397.8240.3247.1249.8
Medium- and long-term flows (net)108.976.0126.486.0271.7126.6131.9131.7121.4
Disbursements123.393.4137.196.7297.5188.5204.0205.0200.0
Budget support and other program loans0.00.033.122.4113.342.643.340.040.5
Project support53.376.096.563.3134.2130.9160.7165.1159.4
Other medium-term loans70.017.47.411.150.015.00.00.00.0
Amortization−14.4−17.4−10.7−10.7−25.7−61.8−72.0−73.3−78.6
Foreign direct investment and other inflows60.881.992.992.9114.2336.097.599.5109.4
Short-term capital0.70.70.70.80.80.80.90.91.0
Commercial banks net foreign assets−13.084.77.659.19.8−65.710.015.018.0
Errors and omissions−84.33.60.02.300000
Overall balance−88.393.391.5168.637.2182.172.594.788.5
Financing88.3−93.3−89.5−168.6−89.2−182.1−72.5−94.7−88.5
Gross reserves (- increase)89.4−45.6−136.3−161.2−101.4−202.4−98.6−92.8−65.4
Liabilities−1.1−47.646.8−7.412.220.326.1−1.9−23.1
Of which: IMF (net)−0.137.081.612.313.5−13.526.1−1.9−23.1
Purchases/drawings0.040.290.220.140.217.651.625.00.0
Repurchases/repayments0.13.28.67.826.631.125.527.023.1
Memorandum items:
Gross official reserves190.2215.4351.7397.0453.1599.4697.9790.7817.4
Months of imports21.01.22.02.02.02.93.03.33.4
Current account balance (percent of GDP)
Excluding official transfers−12.2−17.5−16.4−15.0−16.8−11.7−11.1−10.3−9.9
Including official transfers−5.9−3.5−3.5−1.8−4.0−5.1−3.4−2.7−2.5
Import price index (2005 = 100)143.4141.8134.8140.2134.5136.2119.8123.2125.2
Import volume (percent change)−13.7−11.0−3.92.5−1.94.98.75.96.1
REER (percent change)−4.4−17.9−14.9
Overall balance (percent of GDP)−1.62.22.44.46.44.31.51.71.4
Terms of trade (percent change)−16.1−3.10.30.62.52.18.1−3.5−2.2
Nominal GDP (millions of U.S. dollars)5,617.04,208.93,847.83,822.54,404.04,263.34,943.45,708.86,382.4
Sources: Malawian authorities; and IMF staff estimates and projections.

Includes estimate for project grants not channeled through the budget.

In months of imports of goods and nonfactor services in the following year.

IMF Country Report No. 14/37.

Sources: Malawian authorities; and IMF staff estimates and projections.

Includes estimate for project grants not channeled through the budget.

In months of imports of goods and nonfactor services in the following year.

IMF Country Report No. 14/37.

Table 4b.Malawi: Balance of Payments, 2011–17(Percent of GDP)
2011201220132014201520162017
Act.Act.Prog.2Est.Prog.2Proj.Proj.
Current account balance (including grants)−5.9−3.5−3.5−1.8−4.0−5.1−3.4−2.7−2.5
Merchandise trade balance−11.2−15.7−13.6−12.4−13.2−10.4−9.4−7.5−6.7
Exports22.529.836.038.434.236.833.632.831.7
Of which: Tobacco8.611.49.311.39.011.39.78.78.1
Uranium2.13.74.44.43.70.90.00.00.0
Imports−33.7−45.6−49.6−50.8−47.3−47.3−43.0−40.3−38.5
Of which: Petroleum−3.0−4.1−4.6−4.6−4.0−4.3−2.3−2.6−2.6
Services balance−5.6−7.9−9.9−9.8−9.0−8.5−8.3−8.3−8.3
Interest public sector (net)−0.1−0.2−0.2−0.2−0.2−0.5−1.0−0.6−0.6
Other factor payments (net)−2.0−3.0−3.5−3.9−3.0−3.6−3.0−2.8−2.8
Nonfactor (net)−3.5−5.8−6.2−5.6−5.7−4.5−4.2−4.8−4.9
Transfers (net)10.920.220.020.419.513.814.313.112.5
Private (net)4.66.27.17.26.77.26.65.45.1
Official (net)6.414.012.913.212.86.67.77.77.4
Receipts6.414.012.913.312.86.67.87.77.4
Budget support0.04.31.91.92.50.00.40.30.0
Project related16.49.711.011.310.36.67.47.47.4
Payments0.00.00.00.00.00.00.00.00.0
Financial account balance2.85.85.96.29.09.34.94.33.9
Medium- and long-term flows (net)1.91.83.32.26.23.02.72.31.9
Loan disbursements2.22.23.62.56.84.44.13.63.1
Budget support and other program loans0.00.00.90.62.61.00.90.70.6
Project support loans0.91.82.51.73.03.13.32.92.5
Other medium-term loans1.20.40.20.31.10.40.00.00.0
Amortization−0.3−0.4−0.3−0.3−0.6−1.5−1.5−1.3−1.2
Foreign direct investment and other inflows1.11.92.42.42.67.92.01.71.7
Commercial banks net foreign assets−0.22.00.21.50.2−1.50.20.30.3
Errors and omissions−1.50.11.30.10.00.00.00.00.0
Overall balance−1.62.22.44.40.84.31.51.71.4
Financing1.6−2.2−2.4−4.4−6.4−4.3−1.5−1.7−1.4
Gross reserves (- increase)1.6−1.1−3.5−4.2−6.6−4.7−2.0−1.6−1.0
Liabilities0.0−1.11.2−0.20.30.50.50.0−0.4
Of which: IMF (net)0.00.92.10.30.3−0.30.50.0−0.4
Purchases/drawings0.01.02.30.50.90.41.00.40.0
Repurchases/repayments0.00.10.20.20.60.70.50.50.4
Memorandum items:
Gross official reserves3.45.110.510.410.314.114.113.912.8
Current account balance (percent of GDP)
Excluding official transfers−12.2−17.5−16.4−15.0−16.8−11.7−11.1−10.3−9.9
Including official transfers−5.9−3.5−3.5−1.8−4.0−5.1−3.4−2.7−2.5
Value of exports of goods and services (percent change)3.6−0.310.315.78.87.55.811.05.2
Value of imports of goods and services (percent change)−7.81.30.12.18.92.96.09.25.3
Sources: Malawian authorities; and IMF staff estimates and projections.

Includes estimate for project grants not channeled through the budget.

IMF Country Report No. 14/37.

Sources: Malawian authorities; and IMF staff estimates and projections.

Includes estimate for project grants not channeled through the budget.

IMF Country Report No. 14/37.

Table 5.Malawi: Selected Banking Soundness Indicators, 2010–14(Percent)
Key ratiosDec-10Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14
Capital Adequacy
1. Regulatory Tier 1 capital to risk weighted assets15.616.518.716.216.616.417.616.116.216.214.714.914.5
2. Regulatory total capital to risk weighted assets20.320.122.119.219.520.221.119.419.019.118.318.317.8
3. Total capital to total assets15.814.615.313.914.714.315.515.115.215.417.117.918.7
Asset composition and quality
1. Non-performing loans to gross loans3.94.15.05.56.59.411.612.613.615.415.716.815.8
2. Provisions to non-performing loans31.536.920.930.534.526.827.130.527.629.130.328.330.7
3. Total loans and advances to total assets52.952.752.153.354.650.846.645.441.140.541.742.141.3
4. Foreign currency loans to total loansn.a.6.16.09.48.27.911.110.512.813.515.218.117.1
Earnings and profitability
1. Return on assets (ROA)4.23.55.45.14.95.05.34.75.04.84.54.94.6
2. Return on equity (ROE)29.424.738.036.735.136.940.536.238.737.531.933.530.8
3. Non-interest expenses to gross income50.246.045.444.344.336.837.637.838.039.743.943.242.1
4. Interest margin to gross income49.246.039.237.936.636.836.738.938.739.746.443.144.0
5. Personnel expenses to non-interest expensesn.a.39.7048.8246.5146.2346.0045.0946.7946.4645.4046.945.747.4
Liquidity
1. Liquid assets to deposits and short-term liabilities40.743.042.842.540.745.448.948.658.159.157.157.659.2
2. Total loans to total deposits73.270.970.375.976.472.467.064.857.956.660.162.061.0
3. Liquid Assets to total assets31.333.433.032.630.934.536.235.642.443.741.241.441.5
4. Foreign exchange liabilities to total liabilitiesn.a.7.8n.a.n.a.n.a.17.9n.a.n.a.n.a.26.3n.a.n.a.n.a.
Source: Reserve Bank of Malawi
Source: Reserve Bank of Malawi
Table 6.Malawi: External Financing Requirement and Source, 2011–17(In millions of US dollars)
25-Feb-152011201220132014201520162017
Total requirement−612−800−746−761−721−756−775
Current account, excluding official transfer−687−737−574−497−551−590−631
Debt amortization−14−17−11−62−72−73−79
Gross reserves accumulation (- increase)89−46−161−202−99−93−65
Total sources612800746761721757775
Expected disbursements (official)480684602470587643669
Grants357590506281383438469
Medium- and long-term loans1239397188204205200
Private sector (net)13279131305108115128
IMF (net)03712−1426−2−23
Drawings040201852250
Repayments03831262723
Gross official reserves190215397599698791817
Months of imports1.01.22.02.93.03.33.4
Source: IMF staff estimates.
Source: IMF staff estimates.
Table 7a.Malawi: Previous Schedule of Disbursements under ECF Arrangement, 2012–15(Millions of SDR)
Amount% of QuotaDate availableConditions Necessary for DisbursementStatus
13.0218.76July 23, 2012Executive Board Approval of Three Year ECF arrangement.Disbursed
13.0218.76December 15, 2012Observance of performance criteria for September 30, 2012 and completion of first review.Disbursed
13.0118.75March 15, 2013Observance of performance criteria for December 31, 2012 and completion of second review.Disbursed
6.519.38June 15, 2013Observance of performance criteria for March 31, 2013 and completion of third review.Disbursed
6.509.37December 15, 2013Observance of performance criteria for September 30, 2013 and completion of fourth review.Disbursed
13.0118.75March 15, 2014Observance of performance criteria for December 31, 2013 and completion of fifth review.
13.0118.75September 15, 2014Observance of performance criteria for June 30, 2014 and completion of sixth review.
13.0118.75March 15, 2015Observance of performance criteria for December 31, 2014 and completion of seventh review.
13.0118.75September 15, 2015Observance of performance criteria for June 30, 2015 and completion of eighth review.
104.10150.00Total for the ECF arrangement
Source: IMF staff estimates.
Source: IMF staff estimates.
Table 7b.Malawi: Proposed new Schedule of Disbursements under ECF Arrangement, 2012–16(Millions of SDR)
Amount% of QuotaDate availableConditions Necessary for DisbursementStatus
13.0218.76July 23, 2012Executive Board Approval of Three Year ECF arrangement.Disbursed
13.0218.76December 15, 2012Observance of performance criteria for September 30, 2012 and completion of first review.Disbursed
13.0118.75March 15, 2013Observance of performance criteria for December 31, 2012 and completion of second review.Disbursed
6.519.38June 15, 2013Observance of performance criteria for March 31, 2013 and completion of third review.Disbursed
6.509.37December 15, 2013Observance of performance criteria for September 30, 2013 and completion of fourth review.Disbursed
6.519.38March 15, 2014Observance of performance criteria for December 31, 2013 and completion of fifth review.
6.519.38September 15, 2014Observance of performance criteria for June 30, 2014 and completion of sixth review.
17.0024.50September 15, 2015Observance of performance criteria for June 30, 2015 and completion of the seventh review.
22.0231.73March 15, 2016Observance of performance criteria for December 31, 2015 and completion of the eighth review.
104.10150.00Total for the ECF arrangement
Source: IMF staff estimates.
Source: IMF staff estimates.
Table 8.Malawi: Indicators of Capacity to Repay the Fund, 2015–26
4-Mar-15201520162017201820192020202120222023202420252026
Projected Payments based on Existing Drawings:
(SDR millions)
Principal17.3517.8615.7120.4111.8912.4910.4110.413.901.300.000.00
Charges and interest0.000.000.000.000.110.080.050.030.010.000.000.00
Projected Payments based on Prospective Drawings:
(SDR millions)
Principal0.000.000.000.000.001.308.2110.4110.4110.419.112.20
Charges and interest0.000.000.000.000.130.130.120.090.070.040.010.00
Projected Payments based on Existing and Prospective Drawings:
SDR millions17.417.915.720.412.114.018.820.910.510.59.12.2
US$ Millions25.025.822.929.917.920.928.031.215.615.613.63.3
Percent of exports of goods and services1.41.31.11.20.70.70.90.90.40.40.30.1
Percent of debt service20.723.623.530.621.721.124.326.112.211.59.32.2
Percent of quota25.025.722.629.417.520.227.130.215.115.113.13.2
Percent of gross official reserves3.63.32.83.52.12.43.23.41.71.61.40.3
Projected Level of Credit Outstanding based on Existing and Prospective Drawings:
SDR millions147.6161.5145.8125.4113.599.176.951.532.616.33.20.0
US$ Millions213.0234.3213.0184.4168.3148.6115.377.248.924.44.80.0
Percent of exports of goods and services11.511.49.97.76.45.13.72.31.30.60.10.0
Percent of debt service176.8213.7218.5188.7204.2150.1100.164.438.118.03.30.0
Percent of quota212.7232.7210.1180.7163.6142.9110.874.247.023.54.60.0
Percent of gross official reserves30.529.626.121.519.417.413.18.55.22.50.50.0
Memorandum items:
Exports of goods and services (millions of U.S. dolla184720492156240326502909315134013673396942924644
Debt service (millions of U.S. dollars)120.5109.697.597.882.499.0115.2119.9128.3135.6145.9150.0
Quota (SDR millions)69.469.469.469.469.469.469.469.469.469.469.469.4
Gross official reserves (millions of U.S. dollars)697.9790.7817.4859.0868.1856.1881.4906.6931.9962.4991.31021.1
GDP (millions of U.S. dollars)4943570963827030753981228751944210183110021189612848
Source: IMF staff projections.
Source: IMF staff projections.
Table 9.Malawi: Quantitative Targets 20131
End-JuneEnd-SeptemberEnd-December
2013 (IT)2013 (PC)2013 (PC)
Target type2Prog.10Adj. Prog.10ActualStatusProg.10Adj. Prog.10ActualStatusProg.10Adj. Prog.10ActualStatus
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC108,487110,83972,920M87,85459,36581,224NM107,710110,715120,781NM
2. Ceiling on reserve money3IT106,902106,902126,570NM110,017110,017134,756NM135,223135,223156,899NM
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5, 6,7PC−18,605−16,253−2,492NM−5,218−2,01858,685NM72,04275,04773,683M
4. Floor on social spending (cumulative from beginning of fiscal year)8IT185,511185,511181,764NM15,33015,33048,952M106,617106,617105,007NM
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5, 6PC5346270M127117254M188177215M
6. Ceiling on the accumulation of external payments arrears7,9PC000000M002.2NM
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC00142NM000M00145.3NM
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC000000M000M
9. Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions9,10PCMMM
Memorandum items:
Net foreign assets of the RBM (US$ millions)−51516916786113
Budget support (US$ millions)2452445092719
Budget support (millions of kwacha)78,35578,21915,9782,8468,6456,080
Debt service payments to the World Bank and AfDB (US$ millions)661154
Debt service payments to the World Bank and AfDB (millions of kwacha)1,9201,9364654651,4751280
Health SWAp receipts (millions of kwacha)11,29015,0403,1944,8156,9713,711
Education SWAp receipts (millions of kwacha)23,2451,7644,8003,5489,19113,532
NAC receipts (millions of kwacha)12,2814414,2889993,0700
Program exchange rate (kwacha per US$)320320320320320320
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the biginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the biginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Table 10.Malawi: Quantitative Targets, 20141
25-Feb-15End-Mar.End-JuneEnd-Sep.
2014 (IT)20142014 (IT)
Target type2Prog.10Adj. Prog.Act.statusProg.10Adj Prog.Act.statusProg.10Adj Prog.Act.status
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC113,035115,595117,434NM94,81797,697142,547NM97,70197,701136,885NM
2. Ceiling on reserve money3IT134,392134,392169,100NM145,225145,225193,201NM151,232151,232192,097NM
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5,6,7PC52,01854,57881,548NM6,6229,50293,147NM−20,023−18,42319,521NM
4. Floor on social spending (cumulative from beginning of fiscal year)8IT170,424170,424167,106NM214,832214,832206,961NM
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5, 6PC169161262M260251259M269265475M
6. Ceiling on the accumulation of external payments arrears7,9PC004.2NM009.2NM0014NM
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC00145.3NM00149.3NM00149.3NM
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC000M000M000M
9. Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactionsPCMM
Memorandum items:
Net foreign assets of the RBM (US$ millions)67161158158167173
Budget support (US$ millions)111351676720967
Budget support (millions of kwacha)35,44511,13053,50921,36166,87821,361
Debt service payments to the World Bank and AfDB (US$ millions)647622
Debt service payments to the World Bank and AfDB (millions of kwacha)1,7771,3762,3061,920529529
Health SWAp receipts (millions of kwacha)7,234−4,9688,834−4,9682,4331,941
Education SWAp receipts (millions of kwacha)13,60014,46615,56714,4662,829994
NAC receipts (millions of kwacha)3,0701,8594,0303,4769710
Program exchange rate (kwacha per US$)320320320320320320
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’

Evaluated on a continuous basis.

IMF Country Report No. 14/37

9. Progress in the implementation of structural benchmarks set at the time of the third and fourth reviews was uneven (MEFP ¶13 and Table 13). Most of the PFM-related benchmarks were not met, as these reforms were overtaken by the immediacy of taking short-term corrective actions (¶1). The critical reforms required to address weaknesses in PFM systems were therefore set as prior actions to complete the current reviews (Table 14). Similarly a key financial sector reform—submission of the Banking and Financial Services Acts to parliament—that was pending was set as a prior action. In the area of monetary policy, amendments to the RBM Act limiting credit to government were a prior action for completing the reviews.

Table 11.Malawi: Informal Quantitative Targets
End-Sept 2014End-Dec 2014End-January 2015
Informal TargetsActualStatusProj.ActualStatusInformal targetsActualStatus
Ceiling on net domestic assets of the RBM (millions of kwacha)1132,004121,696Met84,63266,329Met94,63211,918Met
Ceiling on central government’s net domestic borrowing (millions of kwacha)28,52719,521Not Met44,00036,172Met46,00058,068Not Met
Floor on gross official reserves (US$ millions)3450457Met515586Met500631Met
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

NDA as reported by the RBM.

Defined as a cumulative flow from the beginning of the fiscal year.

Gross official reserves equal gross reserves assets as defined in the TMU.

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

NDA as reported by the RBM.

Defined as a cumulative flow from the beginning of the fiscal year.

Gross official reserves equal gross reserves assets as defined in the TMU.

Table 12.Malawi: Quantitative Targets, 20151
End-MarchEnd-JuneEnd-SeptEnd-Dec
2015 (IT)20152015 (IT)2015
Target type2Prog.Act.Prog.Act.Prog.Act.Prog.Act.
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC71,57487,03373,95983,792
2. Ceiling on reserve money3IT223,402243,828248,213260,545
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5,6,7PC59,08337,03040,40758,162
4. Floor on social spending (cumulative from beginning of fiscal year)8IT205,055257,43054,725146,687
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5, 6PC475487531537
6. Ceiling on the accumulation of external payments arrears7,9PC0000
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC0000
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC0000
9. Prohibition on the imposition or intensification of restrictions on the makingPC
of payments and transfers for current transactions9
Memorandum items:
Net foreign assets of the RBM (US$ millions)378390433440
Budget support (US$ millions)01807
Budget support (millions of kwacha)0800003224
Debt service payments to the World Bank and AfDB (US$ millions)8.2212.123.907.80
Debt service payments to the World Bank and AfDB (millions of kwacha)3,3044,8721,5683,136
Health SWAp receipts (millions of kwacha)15,66815,6682,11414,993
Education SWAp receipts (millions of kwacha)1,7433,38400
NAC receipts (millions of kwacha)00164332
Program exchange rate (kwacha per US$)402402402402
Sources: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

Sources: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

Table 13.Malawi: Structural Benchmarks set at the time of the Third and Fourth Reviews
MeasureTarget DateMacro RationaleStatus1
Structural benchmarks
Public financial management
Upload into IFMIS the audited manual transactions undertaken when IFMIS was suspended.End-Jan. 2014Enable better spending control an improve reportingNot met. Some manual transactions uploaded but others pending.
Clear the backlog of reconciliation of all government-controlled accounts at the RBM and commercials banks of transactions made until November 30, 2013End-Dec. 2013Improve spending controls.Not met.
Begin daily reconciliation of all government-controlled accounts at the RBM and commercial banks of transactions made until November 30, 2013March 1, 2014Improve spending controls.Not met.
Submit to Fund staff final forensic audit report.End-Jan. 2014Establish basis for improving PFM.Not Met. Final report submitted in September 2014
Provide Ministries, Departments and Agencies with quarterly spending ceilings consistent with quarterly fiscal targets in the program, and enforce ceilings.QuarterlyKeep spending within available resource envelope.Not met
Verify existing stock of government domestic arrears at end-September 2013.End-Dec, 2013To establish baseline for monitoring flow and stock of new arrears.Met
Report on the flow and stock of arrears at the end of each quarter starting with July-September 2013, within two months of the end of the quarter.February 2014, May 2014, August 2014To monitor re-emergence of new arrears.Not met.
Monetary Policy
Government authorizes for RBM to stop automatic conversion of overdrafts into government securities.End-Dec, 2013Reduce fiscal dominanceMet
Financial sector
RBM to publish a financial stability report on a semi-annual basis (March, September), with a lag of no more than four months.Semi-annual; July 2013 and January 2014Promote financial stability.Met
Submit to parliament amendments to the Banking Act and Financial Services Act along the lines recommended by March 2013 Fund (LEG) TA mission.31-Dec-13Promote financial stability by enhancing RBM’s bank resolution powers and tools.Not met.
Adopt a prompt corrective action framework for banks.31-Dec-13Promote financial stability by strenghtening enforcement of prudential regulations.Met
Complete the third party diagnostic assessments of the most vulnerable banks in line with understandings with IMF staff.End-Feb, 2014Financial stabilityNot met. Diagnostic reports completed in July 2014.
Complete the third party diagnostic assessments of all banks.30-Jun-14Financial stabilityNot met. Reports for the remaining banks were completed in October 2014.
Sources: IMF staff and Malawian authorities

Status as of end-November 2014.

Sources: IMF staff and Malawian authorities

Status as of end-November 2014.

Table 14.Malawi: Prior Actions
MeasureTarget dateMacro RationaleStatus
Prior Action
Fiscal policy
Implement expenditure cuts necessary to limit net domestic financing under the program ceiling for the fiscal year 2014/15 and issue a memo to cabinet outlining new expenditure ceilings.End-February 2015To ensure consistency between the budget and the program.Met
Public financial management
Ministry of Finance to issue a letter to the central bank to transfer revenues to main government account (MG1)End-February 2015First step towards better cash management and reconciliation of accounts.Met
Incorporate the main government bank accounts in IFMIS, including MG1 account and the six operational accounts, namely (i) salaries, (ii) other recurrent transactions, (iii) development, (iv) statutory, (v) advances, and (vi) deposits.End-February 2015Integrate key accounts into IFMIS progressively to ensure an improved accounting, cash management and reconciliation of accounts.Met
Monetary policy
Submit to parliament legislative amendments to limit RBM’s credit to government to a 10 percent of the previous year’s revenue.End-February 2015Reduce fiscal dominance to enhance effectiveness of monetary policy.Met
Financial sector
Submit to parliament amendments to the Banking Act and Financial Services Act in line with those recommended by March 2013 Fund (LEG) TA mission.End-February 2015Promote financial stability by enhancing RBM’s bank resolution powers and tools.Met
Sources: IMF staff and Malawian authorities
Sources: IMF staff and Malawian authorities

Macroeconomic Outlook and Risks

10. The macroeconomic outlook, while challenging, hinges on the authorities’ recommitment to the core polices and original objectives of the program (MEFP ¶2 and ¶18). These comprise the flexible exchange rate regime, the automatic fuel pricing mechanism, the attainment of single digit inflation by 2016 and reaching a reserve cover of at least three months of imports. Real GDP growth is projected to remain in the 5½–6 percent range, helped by a more stable policy environment, ongoing public investment in infrastructure and efforts being made to improve the business environment. Headline inflation is expected to decline to low double digits by end-2015 through a tighter stance of monetary policy and favorable international prices for food and fuel products. Helped by lower world oil prices, the current account deficit is expected to narrow from 5 percent of GDP in 2014 to under 3 percent of GDP in 2017 as nontraditional exports rebound over the medium-term, imports moderate following earlier surges associated with large public projects, and donor flows gradually recover, albeit not to previous high levels.

11. A number of downside risks remain. These could arise from capacity and institutional weaknesses in policy design and implementation, the absence of a recovery in donor financing, slower-than-expected growth in trading partners, or a possible deterioration in social conditions. In particular, a slower-than-expected disinflationary process could trigger further demands for wage increases. Weak international prices for tobacco could pose a risk but could be partially offset by lower oil prices. Adverse weather conditions continue to pose a significant risk because of the country’s reliance on rain-fed agriculture. The authorities noted that should these risks materialize, spending would have to be reprioritized and that the flexible exchange rate would serve as a shock absorber.

Policy Discussions

12. The authorities reiterated their commitment to the policies and objectives of the original program including containing public expenditures within available resources, bringing inflation back to single digits and increasing reserve cover to at least three months of imports (MEFP, ¶2 and ¶18). Their overriding goal in the near-term is to stabilize the macroeconomic situation, regain firm control over their fiscal systems, and safeguard the stability of the financial sector. Achieving these near-term goals is expected to encourage growth-promoting investment, foster private sector confidence, and address Malawi’s pressing development needs in the years ahead. In order to achieve these goals, the arrangement would be extended by 6 months. Given the passage of time since the last Board meeting, informal targets were set for end-January on net domestic assets of the central bank, gross international reserves and net domestic financing of the government to anchor polices. Two of three targets were met, gross international reserves and net domestic assets of the central bank. Net domestic financing was missed by (0.7 percent of GDP) on account of shortfalls in donor dedicated grants (1.2 percent of GDP) for social protection in health, education, and agriculture sectors and some outlays in response to the floods.

13. Discussions focused on key near-term program issues and policy measures needed to achieve the objectives of the original program. The macroeconomic framework was anchored on a policy mix that provides adequate fiscal domestic financing while ensuring a tighter overall monetary stance to tackle inflation. The continued commitment to the floating exchange rate will help the economy to adjust to external shocks. Key issues discussed include (i) ensuring that the FY2014/15 budget can deliver on its objectives, given unanticipated risks, potential shortfalls in budgeted external financing and the need to limit recourse to domestic financing; (ii) managing the fall-out of the fiscal scandal by designing upfront policy actions that restore confidence in PFM and the budgetary process ; (iii) tightening the monetary stance to rein in inflation while avoiding a squeeze on private sector credit and growth; and (iv) safeguarding financial sector stability by strengthening the regulatory framework.

A. Preserving the Objectives of the 2014/15 Budget and Mitigating Risks

14. The need to preserve debt sustainability and reduce inflation continues to anchor medium-term fiscal policy. Malawi’s debt has risen sharply (¶7) underscoring the need to place limits on the degree of domestic financing. The domestic fiscal balance is projected to narrow over the medium term—from 8 percent of GDP in FY13/14 to 4.1 percent in FY14/15 and under 2 percent by the end of the program period—which will be critical in placing public debt on a downward trend (Table 2b). While the program was initially based on zero domestic financing, this became untenable in the face of continued shortfalls in external financing and uncertainties regarding the resumption of donor support. Against this background, the program allows some limited domestic financings that is consistent with inflation targets and conservative assumptions on donor support.

15. The FY14/15 budget adopted by Parliament in early September 2014 was broadly in line with the program, but several factors threatened its implementation. The budget was based on an overall deficit (including grants) of 5.4 percent of GDP (down from 8.7 percent in FY13/14), of which 4.6 percent was expected to be covered by external financing and 0.8 percent by net domestic borrowing. The large fiscal adjustment planned for FY14/15 was mostly accounted for by a large reduction (over 5 percentage points of GDP) in current expenditures, with development spending protected. Staff identified four major factors that needed to be addressed in order for the budget to meet its objectives. These comprised (i) higher-than-budgeted domestic interest expenses; (ii) further shortfalls in external financing (available budget support is expected to amount to only half a percentage point of GDP, compared with over 6 percent in FY12/13); (iii) cost overruns in the administration of the fertilizer scheme; and (iv) the need to regularize past payment arrears. In order to reflect these developments in a revised budget, staff and the authorities identified significant additional expenditure cuts (mostly domestically financed capital), but also agreed that a moderately higher overall deficit would be more realistic (5.9 percent of GDP), with somewhat higher domestic financing (1.9 percent of GDP—still 4 percentage points less than in the previous year). Social spending in the FY14/15 budget (12.6 percent of GDP) is 21 percent higher than in the FY13/14 budget (Tables 10 and 12) with allocations to health, education and the fertilizer subsidy scheme accounting for 95 percent of outlays.

16. Staff discussed with the authorities the issue of regularizing the large stock of domestic arrears (MEFP, ¶23). Once verified and certified by the National Audit Office, arrears would be settled partly in cash and through the issuance of promissory notes in three tranches of maturities varying from one to three years. As the audited stock of arrears represents legitimate government liabilities, staff supported their regularization as necessary to restoring fiscal credibility by paying regular suppliers with recent arrears through cash within the limits of the budget and older arrears through securitization. Staff underscored the critical importance of strengthening commitment controls and holding controlling officers accountable in order to prevent the emergence of new domestic arrears. To this end, envisaged measures included the incorporation of all government accounts into the Integrated Financial Management Information System (IFMIS) to facilitate account reconciliation and to strengthen commitment controls and the periodic preparation of reports on stocks and flows of arrears (Tables 14 and 15)

Table 15.Malawi: Structural Benchmarks, 2015
MeasuresTarget dateMacro Rationale
Public financial management
Publish detailed monthly budget execution data by vote on the Ministry of Finance’s website no later than 6-weeks after execution.End-March 2015To foster greater fiscal transparency and monitoring.
Reconcile all government bank accounts MG1 and six operational accounts and ways and means for all 2014 transactions signed by the Accountant General and Secretary of the Treasury.End-March 2015To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General.End-March 2015To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
Prepare a report on the flow and stock of arrears at the end of each quarter starting with with end-September 2014 and within two months of the end of each six months.End-June 2015To monitor emergence of arrears.
Produce and publish monthly summary bank account control reports.End-September 2015To improve transparency and control.
Issue reports by international audit firms on bank reconciliations and summary bank account control reports.End-September 2015To improve transparency and restore public confidence.
Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain.End-December 2015Foster greater transparency.
Financial sector
Prepare a strategy to address banking sector wide issues raised by the third-party diagnostics assessments, including the high loan concentration among banks.End-March 2015To safeguard the stability of the financial system.
RBM to obtain from all undercapitalized banks to submit detailed, quarterly monitorable recapitalization and restructuring plans showing how they will reach the minimum capital adequacy level within one year.End-April 2015To safeguard the stability of the financial system.
RBM to obtain from all banks with significant deficiencies (e.g.: on loan documentation) reported by the diagnostic assessments to submit plans to address the deficiencies within one year.End-June 2015To safeguard the stability of the financial system.
RBM to develop contingency plans to intervene and resolve banks if they do not submit or comply with acceptable recapitalization plans.End-June 2015To safeguard the stability of the financial system.
Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and the United Nations Convention against Corruption (UNCAC).End-June 2015To ensure that: (i) enhanced customer due diligence is required with regard to domestic politically exposed persons ; (ii) suspicious transactions are reported when there is a suspicion that funds are the proceeds of a criminal activity ; (iii) there is adequate transparency of legal persons and arrangements; (iv) acts of corruption are adequately criminalized and constitute predicate crimes to money laundering; (v) self-self-laundering is criminalized, and (vi) there are appropriate administrative sanctions for failure to comply with AML/CFT requirements.
RBM issue a detailed report on compliance with regulations on loan classification and provisioning and concentration limits in line with existing directives.End-September 2015To safeguard the stability of the financial system.
RBM, in its supervisory capacity, to follow-up on possible breaches of compliance with the AML legal framework by banks revealed by the audit report, by applying supervisory actions mandated by the AML legal framework with regard to any breaches of compliance, including sanctions.End-December 2015To ensure compliance with AML standards.
Sources: IMF staff and Malawian authorities
Sources: IMF staff and Malawian authorities

B. Strengthening PFM Systems in the Wake of the Cashgate Scandal

17. Prior to the “cashgate scandal” Malawi’s PFM reforms were consolidated under a single framework aimed at strengthening the institutional setting. This comprised, a three year program (2011–14) with a total of 9 components covering the entire PFM cycle: planning, resource mobilization (including domestic and external resources), budgeting, procurement, accounting and financial management, cash and debt management, para-statal financing, monitoring and reporting, and external auditing. This program was complemented by donor engagement under the common approach to budget systems which instituted a program of monitoring progress made in implementing PFM reforms. While progress was made under cash management, budget execution and commitment controls, inadequacies of the IFMIS, and account reconciliations were exposed by the scandal.

18. Against this backdrop, understandings were reached with the new authorities on the sequencing of further reforms to bolster financial control and accountability. Discussions were guided by the findings and recommendations of the November 2014 FAD mission on strengthening PFM systems and the final forensic audit report. A number of recommendations of the FAD mission were incorporated in the program as prior actions or structural benchmarks in the PFM area (Table 14). The FAD mission identified the fragmentation of the accounting framework as a notable source of the weak control and accountability of the budget process. To address this shortcoming, two key prior actions that would reinforce commitment controls, facilitate the reconciliation of accounts and improve cash management were seen as critical to jump start the PFM reform strategy. The strategy that was prepared with IMF technical assistance is summarized in Box 2. The authorities have adopted the new PFM strategy following consultation with key stakeholders, including donors. The adoption of the new PFM strategy and its subsequent implementation was a prerequisite for donor resumption of budget support.

Box 2.Malawi Public Financial Management Strategy

The PFM strategy prioritizes reforms needed to address control and capacity weaknesses. It builds on gaps identified in the forensic audit and IMF TA reports and focuses on the following areas:

• Improved fiscal reporting: Expands coverage of IFMIS through the incorporation of all government accounts. Desired outcomes are improvements in data reliability, trial balance reports and monitoring of budget execution reports with the objective of improving integrity and transparency of accounting and financial data.

• Treasury cash flow management: Focuses on bank reconciliation through the rationalization of the number of government bank accounts. Enforcement of commitment controls through the IFMIS purchase order module, and subjecting the commitment process to internal audit in ministries is key to respecting budget allocations.

• Auditing: Reorients internal and external audit to focus on auditing key controls and reports, bank reconciliation, summary bank reports and IFMIS internal controls. The strategy envisages revising the functional reporting lines of internal audit to increase its effectiveness and hiring of international audit firms to address the existing capacity gaps in the auditing function.

• Strengthening the overall PFM control environment: Aims to improve the levels of technical and professional competence amongst staff engaged with financial management responsibilities. The strategy provides for awareness and instructional workshops, better access to the PFM legal framework, continuous capacity building and rationalizing the sanction regime and instituting mechanisms for effective enforcement. Going forward human resource policies relating to government employees including the common accounting service will be reviewed to attract and retain professionally competent staff.

19. The sustained implementation of PFM reforms is critical to restoring confidence and trust in budgetary processes and demonstrating ownership. In this context, key structural benchmarks are embedded in the PFM reform agenda and action plan (Table 15) and encompass increased reporting and transparency. Given the PFM weaknesses highlighted in past IMF TA and the forensic audit reports, an assessment by an international auditing firm confirming the status of implementation of forensic audit report recommendations will be undertaken to evaluate commitment to the reform process. With donor assistance, an international auditing firm has been contracted to conduct forensic audits on IFMIS during 2009–13 (MEFP ¶4).

C. Reining in Inflation and Stabilizing Expectations

20. Placing inflation on a downward trend is key to anchoring expectations. The RBM sent a strong signal of its policy commitment during the last quarter of 2014 by raising its policy rate by 250 basis points to 25 percent and increasing the liquid reserve requirement on foreign currency deposits (MEFP, ¶7). These two measures had the effect of raising interbank and treasury bill rates which now stand at levels close to the policy rate. The combination of this policy change, and the significant increase in reserve cover from the transaction with the PTA bank, reversed speculative pressure against the local currency In response to the policy change, banks have unwound their dollar positions as demand for the kwacha has increased. Looking forward, the RBM intends to ensure that its policy rate remains above the rate of inflation and that interbank and Treasury bill rates stay positive in real terms. Maintaining attractive real returns on domestic assets is expected to firm up confidence in the kwacha, thus mitigating the seasonal depreciation pressure which has been a major source of inflation. In parallel, the RBM will improve its communication with market participants through announcements to convey its commitment to price stability and enhance the transparency and credibility of its monetary policy.

21. The authorities have taken steps to address fiscal dominance. The cancellation of the automatic conversion of overdrafts into government securities by the RBM was a key step towards managing government borrowing from the central bank (MEFP ¶13). In addition, amendments to the RBM Act were submitted to parliament imposing an upper bound on total government borrowing from RBM to 10 percent of the previous year domestic revenue in any given year (prior action). This will impose a tighter limit on government borrowing from the central bank and enhance the credibility of monetary policy as the previous limit was 20 percent of advances only and excluded other forms of credit5.

22. The authorities reiterated their commitment to a flexible exchange rate regime. In this context, the central bank intends to intervene in the foreign exchange market mainly to manage excessive exchange rate volatility arising from the seasonal pattern of private foreign exchange inflows and the lumpy disbursement of external official flows. The recent augmentation of reserves and the projected gains from the upcoming tobacco buying season should provide sufficient cushion to allow achievement of both objectives.

23. Refinements in liquidity forecasting and management are envisaged to increase the effectiveness of the monetary transmission mechanism. A reduction in the lags in information flows on government’s daily cash flows will facilitate day-to-day liquidity management and decisions regarding absorption of structural liquidity. Although the authorities have an adequate set of monetary policy instruments such as repos and reverse repos, these could be strengthened in the context of the floating exchange rate regime through better use of multiple indicators besides reserve money.

D. Safeguarding Financial Sector Soundness

24. Steps have recently been taken to strengthen the regulatory framework for the banking sector. Migration to Basel II directives became effective on January 1, 2014. The RBM raised Tier 1 and total capital requirement ratios to 10 percent and 15 percent from 6 percent and 10 percent, respectively. With Fund TA, prudential norms in the areas of asset classification, provisioning, and liquidity were improved. In addition, a prompt corrective action (PCA) framework to strengthen and clarify existing triggers for early remedial action against distressed banks was adopted in 2014. Furthermore, as a prior action for the completion of the fifth and sixth reviews, amendments to the Banking and Financial Services Acts to align the legal framework for bank resolution more closely to international best practice have been submitted to Parliament.

25. Capitalization of the banking sector has improved with the introduction of minimum capital standards but some significant weaknesses remain (Table 5 and Figure 4). Official indicators show that all banks, except two now have higher capital adequacy ratios than required under the new Basel II standards. However, risk concentration is rising and loan quality deteriorating. The limited number of large borrowers in the economy has contributed to non-compliance with the risk concentration prudential norms by a number of banks. The large devaluation of the currency in May 2012 and the sharp shortfalls in external financing in 2013–14 have adversely affected banks balance sheets. The non-performing loans (NPLs) to gross loan ratio has increased sharply from 5 percent in early 2012 to about 16 percent in late 2014 reflecting shocks to the economy and the accumulation of government payment arrears. In order to address provisioning for NPLs, the authorities have issued in May 2014 a directive based on the Expected Recoverable Amount Method (ERAM) by imposing a provisioning rate that increases by 16.67 percentage points per quarter on NPLs past due after 90 days.6

Figure 4.Banking Soundness Indicators: Malawi Relative to its Neighbors, 2010–14

(Percent)

Sources: IMF’s Data Base and Malawian Authorities

26. The authorities remain committed to taking the appropriate steps to address risks posed by weaknesses in the financial sector. The strategy will encompass recapitalizing or intervening in weak banks and strengthening the regulatory and supervisory framework of the banking system. To enhance both on and off-site supervision, an external banking supervision advisor has been hired and commenced work in July 2014. In addition, the RBM stressed its commitment to closely monitor and enforce compliance with all prudential norms (MEFP, ¶28). Given shortcomings in the anti-money laundering (AML/CFT) framework identified by the forensic audit report, amending the AML/CFT Act, the Penal Code and the Corrupt Practices Act will address gaps and better align the regulatory framework with the Financial Action Task Force standards and the United Nations Convention Against Corruption (MEFP¶31 and benchmark).

27. Third-party diagnostic assessments of the health of the banking system were completed during 2014. These assessments covered verification of asset quality, liquidity, off balance sheet liabilities, analysis of profit and loss and assessment of the adequacy of regulatory capital. All major areas of concerns have been communicated by the RBM to the Board of Directors of each bank for action. Two weak banks were identified during the evaluation and the restructuring process has commenced for the weaker of the two banks, which envisages its sale or recapitalization (MEFP ¶26). The second bank has a significantly stronger capital position and will be addressed through a capital injection by shareholders.7 In light of the findings of the assessments and in consultation with the Fund, the RBM intends to identify and design an appropriate strategy within the legal framework to address sector wide issues, particularly with regard to risk concentration, recognition and provisioning of NPLs, and suitability of the legal and prudential frameworks, (MEFP ¶24; and structural benchmark).

E. Preserving Debt Sustainability

28. A new DSA undertaken jointly by Fund and World Bank Staff, indicates that Malawi remains at moderate risk of debt distress. Malawi’s public and publicly guaranteed external debt continued expanding through 2013 and 2014 and is estimated to have reached 32.2 percent of GDP in present value terms by the end of 2014. It is expected to gradually decline thereafter. The resulting breach in the corresponding debt threshold (30 percent of GDP) is expected to be marginal and short lived. More important, this breach is due not to accumulation of new debt, but to the restructuring of existing domestic debt through a sale to a regional development bank, which was negotiated by the government of Malawi to lower debt service costs and to raise its international reserves cover (¶7). The strong depreciation of the kwacha during the fourth quarter of 2014, which has subsided, also played an important role in causing the breach in the PV of external debt to GDP threshold.

29. Domestic debt has risen sharply following the drop in external financing and the recognition of past domestic arrears. As a result total public debt is significantly above the recommended benchmark of 40 percent of GDP in present value terms. At end-2013, the present value of total public debt stood at 55.9 percent of GDP, and reached what is expected to be its peak of 60.6 percent at end-2014. Domestic debt as a share of GDP is projected to decline with fiscal consolidation and the maintenance of a positive primary balance.

30. Greater efforts are needed to safeguard debt sustainability. Staff underscored the need for bold actions to strengthen debt management in the near-to-medium term to ensure that total public debt remain sustainable. The authorities plan to achieve this objective through the Debt Management Committee (DMC), a senior body that has been resuscitated to act as an apex advisory board on public debt management. This will introduce greater oversight and constitute an improvement in current procedures involving document preparation by junior level staff that may not be empowered to pronounce on conflicts between the contracting of debt and program conditionality. In this capacity, it is envisaged that the DMC will be responsible for preparing an annual debt management strategy, as part of the annual budget process, and monitoring it throughout the year. It will be charged with reviewing and recommending debt financing options—such as maturity structure and type of instrument—and will also be responsible for examining each borrowing to ascertain its concessionality and to ensure debt sustainability (MEFP, ¶ 21).

Program Issues

31. The implementation of several prior actions was a pre-requisite for completing the fifth and sixth reviews (Table 14). Adjustments to the approved budget in order to align it with the program were implemented through the issuance of a circular to Cabinet with the new expenditure ceilings. Thus all Ministries and Development Agencies (MDAs) are aware of the new expenditure limits and can plan accordingly ahead of submitting a revised budget to parliament On the PFM front, two prior actions were introduced as critical first steps to improve cash management, accounting and reconciliation of accounts. Two other prior actions to enhance the effectiveness of monetary policy and promote financial stability comprised submitting to parliament legislative amendments to limit RBM’s credit to government and to strengthen the regulatory framework of the banking system. In addition, while not a prior action, in November the authorities hiked the policy rate and issued the directive on the liquid reserve requirement to strengthen the policy mix geared to bringing inflation on a downward path. Informal quantitative targets for end-January 2015 on NDA, gross official reserves and NDF were also set to anchor monetary and fiscal policies, sustain a tightening of policies given the inflationary environment and improve reserve cover.

32. The authorities are requesting waivers for the non-observance of one periodic PC for the fifth review (end-December 2013 test date) and also for the non-observance of two periodic PCs for the sixth review (end-June 2014 test date). The ceiling on NDA of the RBM was not met in part because of the shortfalls in external financing. The PCs on (i) NDA of the RBM and (ii) government NDF were not met owing to continued difficulties in program implementation in the face of shortfalls in external financing and election uncertainties. An adequately financed budget and the implementation of PFM reforms (Box 2) are key to ensuring that future PCs are met. Given the suspension of budget support, the authorities’ commitment to implement a revised budget based on more realistic domestic financing, placing limits on RBM financing and strengthening PFM frameworks represent important safeguards to keeping the program on track. In particular, better fiscal reporting, cash flow management, auditing, compliance and commitment controls as envisaged in the early implementation of the PFM strategy should help restore fiscal discipline.

33. The authorities are also requesting waivers for the nonobservance of the continuous PCs on the contracting of non-concessional external debt maturing in more than one year, and on the accumulation of external payments arrears for the fifth and sixth reviews. The ceiling on the accumulation of non-concessional debt maturing in more than one year was missed, due to (i) the contracting of a supplementary loan for the rehabilitation of an inter-city road, which became effective in April 2014, and (ii) the contracting of a loan for the construction of a cancer center in February 2015. With respect to the infrastructure loan, efforts to obtain better terms were unsuccessful, and so the authorities decided to go ahead with the loan on the grounds that it was critical to addressing Malawi’s infrastructure gap, and to avoid accumulation of arrears to the contractor (MEFP, ¶10).) In staff’s view, the deviation was minor (the loan amount was $4 million with a grant element of 28 percent), does not threaten achievement of program objectives and corrective actions have been undertaken (¶30). The loan for the cancer treatment facility, which would amount to US$13 million, has been negotiated with the OPEC Fund for International Development (OFID) and is at 29 percent grant element. The authorities have not been able to secure concessional funding for the center from traditional development partners. Given the loans size and its concessionality, the debt dynamics are not envisaged to worsen significantly nor persistently. Corrective measures have been undertaken to strengthen debt management (¶30).

34. The authorities are also requesting an extension of the arrangement and a rephasing of disbursements (LOI). Given the delays in program implementation over the past year, they request an extension of the arrangement by six months to May 22, 2016 and the rephasing of disbursements associated with the seventh and eight reviews. The sudden stop in donor support and lapses in policy continuity generated by election uncertainties and the transition to a new government necessitate an extension of the arrangement and re-phasing in order to achieve the objectives of the program.

35. Malawi’s capacity to repay the Fund is adequate. The new disbursements under the ECF arrangement will have a negligible impact on debt and debt service ratios (Table 8) and Malawi’s risk of debt distress is moderate. Nevertheless, there are risks which could negatively affect program implementation. Risks to the program could arise from policy slippages that could ensue from lack of ownership of reforms and weak capacity that could constrain their implementation. The adoption of prior actions in PFM, dovetailed with a long-term PFM advisor and Fund TA should help to build capacity, strengthen systems, and help in the timely identification of emerging risks.

Staff Appraisal

36. The “cashgate scandal” damaged Malawi’s macroeconomic outlook and led to the program going off track. Consequently, program performance was uneven with several performance criteria for the fifth and sixth reviews not being observed. Staff regrets delays in program implementation and missed opportunities arising from the scandal that led to the program going off track.

37. The new authorities confirmed their strong commitment to the core policies and objectives of the program. These include the flexible exchange rate regime, which has served as a shock absorber and facilitated adjustment to external shocks, and the automatic fuel pricing mechanism, which has ensured reliable supplies. These reforms have underpinned economic activity, which has proven to be resilient with real GDP growth rate holding up at around 5½–6 percent. Bringing inflation down to single digits will reduce uncertainty and improving reserves cover to three months of imports will bolster policy buffers.

38. The implementation of PFM reforms is indispensable to restoring confidence and trust in the budget process and a resumption of budget support. The large scale theft of public funds undermined the government’s standing with the public and the donor community. Staff welcomes the authorities’ strategy to strengthen PFM systems and the initial steps that have already been taken. Timely implementation of the remainder of the strategy, including recommendations of the forensic audit and subsequent verification are essential to demonstrate the government’s commitment to addressing the impact of the fraud and ownership of the reform process. The sustained implementation of PFM reforms is critical to fostering full donor re-engagement.

39. Staff welcomes the RBM’s commitment to tighten monetary policy as needed to place inflation on a downward path. Achieving single-digit inflation and raising foreign reserves cover to at least three months of imports, should be the main goals of monetary policy during the program period. Given inflation’s persistence, it is imperative that the RBM remains vigilant and stands ready to further tighten monetary policy if inflationary expectations do not subside. Staff urges the timely adoption of amendments to the RBM Act, geared towards limiting fiscal dominance.

40. The authorities are encouraged to leverage the findings of the diagnostic reports on the health of the banking system to safeguard financial stability. Staff urges the authorities to enforce prudential norms and address weaknesses in the regulatory framework. To this end, the adoption by parliament of the Banking and Financial Services Acts and amending the anti-money laundering framework are critical additions to the authorities’ policy toolkit.

41. Greater efforts are needed to strengthen debt management. Despite Malawi’s classification of moderate risk of debt distress, public debt has risen sharply as a result of recent shocks. The authorities are encouraged to adopt a strong debt management strategy to ensure that total public debt is sustainable and the right balance of costs and risks is achieved. In this context, the debt management committee should be strengthened and given the necessary power to fulfill its mandate.

42. Staff recommends the completion of the fifth and sixth program reviews. This recommendation is based on strong policy implementation, including implementation of several prior actions since the new government took office as well as on the ambitious reform agenda articulated by the authorities in their MEFP. Staff also supports the authorities’ request for waivers on missed PCs for the fifth and sixth reviews based on the strong corrective actions already taken. Staff further supports the extension of the arrangement, rephasing of disbursements, the modification of the continuous PC on new non-concessional external debt maturing in more than one year, and the establishment of performance criteria for end-June 2015 and end-December 2015.

Appendix I. Progress in Implementing the Government’s Short-Term Action Plan

The status of implementation of selected actions in the Government’s Action Plan is summarized in the table below, based on the government’s implementation matrix based on the interim forensic audit report.

ACTIONSTATUS
Investigation and Prosecution
Profiling of properties and restrictions on assets. [Anti-Corruption Bureau.].• Assets (e.g., houses, vehicles and farms) of several public officials have been profiled.

• 60 out of 81 companies identified in investigations have been profiled.

• Restrictions have been imposed on access to 50 bank accounts.

• Restrictions have been imposed on the disposal of properties (e.g., houses, vehicles, land) of several persons/entities under investigation.
Prosecution of cases. [DPP and ACB].• 53 case files being used to pursue prosecutions. Three convictions to date and MK185 million in assets recovered.

• Prosecutions will also be pursued under Section 88 of the PFM Act governing offences and discipline.

• Joint investigate teams established among ACB, DPP, Financial Intelligence Unit and Malawi Revenue Authority.
Auditing
Undertake preliminary forensic audit covering April-September 2013.A preliminary report of the audit was submitted to government on February 21 2014. Report was submitted to Parliament on February 24 by the Minister of Finance. Final report made Public on October 30, 2014.
Undertake comprehensive forensic audit including forensic audit of arrears.Price Water House Coopers has been identified to carry out the Forensic Audit covering the period July 2009 to March 2014. This will be done with financial support from the German Agency for International Cooperation.
The Auditor General to table all reports from investigations and special audits in Parliament for action by the Public Accounts Committee.Preliminary forensic audit report was submitted to Parliament on February 24. Final report submitted to Parliament.
Institutionalize pre-auditing.Government Circular issued on the introduction of pre-auditing.
Accounting
Review the system’s security gaps and enhance system controls.• Security features enhanced.

• Physical access to IFMIS server room has been secured and stronger controls issued to limit system administrator access.
Enter into Service Level Agreement (SLA) with the software company for provision of functional and technical support including overseeing IT functions.• Draft Service Level Agreement (SLA) negotiated

• The SLA will define the specific terms as outlined in the contract between GoM and Softech including targets to be achieved and time frame. The new SLA is for the period January to June 2014.
Engage an ICT Security Officer.Officer recruited and commenced duties on November 1, 2014.
Appoint an IFMIS Manager to oversee the application side.IFMIS Manager at Deputy Director level was appointed by Government and an IFMIS Advisor was recruited with the support of the Germany.
Issue and enforce internal circular emphasizing controls surrounding payments and printing of checks within Accountant General Department.A circular reference number OA/1/15/13/270 dated 19th September 2013 was issued by the Secretary to the Treasury.

Circular issued by Accountant General.
Reconciliation of all Government accounts at RBM and commercial banks by December 31, 2013.Reconciliation of the backlog done to end December 2013. A report of items that did not automatically reconcile has been submitted to internal audit for follow up.

Internal audit has investigated un-reconciled items for the period July 2012 to December 2013 and will continue to investigate for June 2012 to July 2012.
Embark on daily bank reconciliation.Not done. FAD TA mission has made a number of recommendations.
Circulate daily IFMIS- generated check list to RBM and commercial banks.• The Accountant General’s Department has started circulating daily IFMIS generated electronic check list to the RBM and commercial banks.

• A check dispatch list generated by IFMIS is sent to RBM and RBM in turn posts it on a platform accessible by all commercial banks.

• Commercial banks are clearing checks through the IFMIS generated check lists.
Improve dialogue between RBM, Accountant General, and Treasury.Cash management Committee has been revived and is chaired by the Secretary to the Treasury.
Implement systems to enforce funding ceilings with IFMIS and the RBM.Instructions issued to RBM and capping began in January 2014.
Independent verification of the IFMIS system by appointing 4–5 consultants to the AGD to provide oversight and pre-audit services.• Two independent firms/consultants were recruited with EU support and have since finalized their work.

• There were some improvements in internal controls but more needs to be done.
Carry out an independent audit for payments made during the tenure of the manual system by end December 2013.• Internal audit report issued in December 2013

• Ministry of Finance/Accountant General considering the recommendations from the audit report

• All the manual payments have been captured into IFMIS and reconciliation of the same is underway
Administrative Measures
Disciplinary action for implicated officials (e.g., approvers of fraudulent payments and check signatories).2 principal secretaries and 18 accounting personnel have been suspended.
Rotation of staff.• Some officers have been posted to fill posts in ministries where suspects have been interdicted.

• Some officers whose roles are not clear have been posted to other ministries to pave the way for full investigations.

• 16 IT personnel have been posted out of the Accountant General’s Department.
Enforce the Malawi Public Service Code of Conduct.• Training envisaged under FAD PFM recommendations.
Enforce accountability of controlling officers and heads of departments/agencies in line with Public Finance Management Act, Public Audit Act, and Public Procurement Act.• The Department of Public Sector Reforms Management (PSRMU) in OPC has drawn a training program for all ministries, to Controlling Officers and their staff in Ethics.

• The workshops on Ethics are underway.

In March 2014 the following sessions were conducted: Training of Trainers (31 participants); High Level Consultation on Strengthening National Integrity and Accountability for all Principal Secretaries and Heads of Constitutional and Independent Bodies (44 participants); Ethics training for Directors of Finance, Human Resource, Administration, and Technical Directors Chief Accountants, and Chief Systems Analysts (135 participants).
• During the workshops all participants are required to sign a commitment to compliance with the Code of Conduct and Ethics, and this will be linked to an enforcement of prevailing rewards and penalties.

• The other group of participants will be trained from April to June and this will be a continuous process to December 2014. Participants commit to comply by signing declaration.
Legal and Institutional Reforms
Amend Money Laundering Act (including civil assets forfeiture direct access to financial information by Financial Intelligence Unit).Amendments proposed and discussions are ongoing between FIU/MoF and Ministry of Justice. Now a benchmark.
Assets Declaration bill.Was passed by parliament and signed into law by the President. Assets Declaration Act was assented to and has since been gazette.
Accelerate implementation of Public Finance and Economic Management Reform Program.A number of initiatives being undertaken through the Financial Reporting and Oversight Improvement Project including assessment of the Government Wide Area Network (GWAN) to improve access and availability of the GWAN, support toward the IFMIS through the engagement of the Softec, Epicor based IFMIS suppliers, Business Re-engineering Processes, facilitating trainings for the accounting and auditing personnel in order to improve their competencies as well as procurement of equipment to improve hardware infrastructure for effective operations of the accounting, payroll management, internal audit and external audit functions.
Appendix II. Letter of Intent

March 4, 2015

Madam Christine Lagarde

Managing Director

International Monetary Fund

700, 19th Street, N.W.

Washington, D.C. 20431

United States

Dear Madam Lagarde:

On January 17, 2014, the Executive Board of the International Monetary Fund (IMF) completed the third and fourth reviews under the three year Extended Credit Facility (ECF) arrangement for Malawi. At the same time, the Board extended the arrangement to November 2015. This letter and the attached Memorandum of Economic and Financial Policies (MEFP) report on recent economic developments and performance under the ECF arrangement since that time, and on the policies we plan to implement in the remainder of fiscal year 2014/15 and over the medium term.

The new government of Malawi, led by Professor Arthur Mutharika, assumed power last year in a very challenging economic environment. The large scale theft of public funds uncovered in late 2013—dubbed the “cashgate” scandal—exposed substantial weaknesses in our public finance management (PFM) systems and severely impacted our macroeconomic situation. The immediate effect was a suspension of all donor budget support, then valued at about 5 percent of GDP. As a result the fiscal situation became dire, and difficulties were compounded by an increased recourse to domestic financing. Domestic payment arrears emerged, inflationary pressures persisted and the exchange rate depreciated sharply.

Since that time, we have made significant efforts to stabilize our macroeconomic situation, regain control over our PFM systems, and safeguard the stability of our financial sector. We are confident that these ongoing efforts will restore private sector confidence in our policy stance, place inflation on a downward trajectory, and foster growth-promoting private investment.

We remain committed to the objectives of the original ECF-supported program, namely attaining strong inclusive growth, single digit inflation, and an increase of reserves to at least three months of import cover. Important to these ends will be preservation of our flexible exchange rate regime and automatic fuel pricing mechanism, both of which have served us well since 2012. We will continue to implement a tight monetary policy stance capable of forcing inflation onto a clear downward trajectory and will maintain positive real interest rates throughout the program period. Our fiscal program for FY2014/15 is calibrated to support such a strong disinflation effort and to restore private sector confidence in our ability to control fiscal expenditure and safeguard debt sustainability. We are combining this firm macroeconomic policy stance with the implementation of a far-reaching strategy to address weaknesses in our PFM system.

We are requesting waivers for the nonobservance of one periodic performance criterion (PC) related to the fifth review (end-December test date) and two periodic PCs for the sixth review (end-June 2014 test date) that were not met. The PCs on net domestic assets of the central bank and net domestic borrowing were missed mainly because of the difficulties arising from ongoing external financing shortfalls and uncertainties surrounding our recent tripartite elections.

The continuous ceilings on external payments arrears and on non-concessional debt were not met following the contracting and subsequent nonpayment of external obligations on a supplier’s credit for military equipment. With regard to the contracted non-concessional credit, we have taken remedial actions by renegotiating the supplier’s credit agreement, reducing substantially the value of transactions value of transactions with the supplier from US$145.3 million to US$33 million and have also taken further remedial measures to improve debt management capacity. With regard to the external payments arrears, we have normalized the outstanding arrears as explained in our February 19 letter, in response to your February 12 letter. On the basis of our remedial actions, we are requesting a waiver for the nonobservance of the performance criteria on the contracting of non-concessional external debt with a maturity of more than one year and on the accumulation of external payments arrears that resulted in non-complying disbursements.

The continuous ceiling on new non-concessional external debt maturing in more than one year was also not met due to the contracting of two non-concessional loans: (i) a supplementary loan for the rehabilitation of an inter-city road, which became effective in April 2014; and (ii) a loan we contracted in February 2015 for the construction of a cancer treatment center in Lilongwe. Efforts to obtain better terms for the infrastructure loan were unsuccessful and the government decided to go ahead with the loan on the grounds that it was relatively small (US$4 million), but also because it was critical to addressing Malawi’s infrastructure gap and necessary to avoid accumulation of arrears to the contractor. The construction of a cancer treatment center is a critical addition to Malawi’s health care infrastructure, as the incidence of cancer is rising quickly and the cost of referring patients to foreign hospitals is extremely high. The loan, (US$13 million), was negotiated with the OPEC Fund for International Development. It carries a 29 percent grant element and was only agreed after exhausting efforts to secure more concessional financing from other development partners.

Going forward, we are committed to take measures to improve our ability to monitor the concessionality of new external loans and to strengthen debt management in general. To these ends, we are resuscitating the Debt Management Committee. With members drawn from senior civil servants, this committee will be responsible for ascertaining the concessionality of every borrowing proposal, with a view to safeguarding debt sustainability and ensuring that all loans remain compliant with the Public Financial Management Act. We will discuss with Fund staff all new loan proposals before they are brought to the attention of the Cabinet or Parliament and ensure transparency of the grant element of loan proposals. We also will continue implementing the Debt management reform programme that was agreed with the IMF and World Bank, which is aimed at strengthening our debt management capacity. On this basis, we request a waiver for the nonobservance of the continuous ceiling on new non-concessional external debt with a maturity of more than one year.

We have undertaken the following prior actions before consideration of the fifth and sixth ECF arrangement reviews by the IMF’s Executive Board: (i) implementation of expenditure cuts necessary to limit net domestic financing under the program ceiling for the fiscal year 2014/15; (ii) issuance of a letter to the central bank to transfer revenues to the main government account; (iii) inclusion of our main government accounts (MG1 and the six operational accounts) in our information management system; (iv) submission to Parliament of legislative amendments to limit RBM’s credit to government to 10 percent of the previous year’s revenue; and (v) submission to Parliament of amendment to the Banking Act and the Financial Services Act in line with those recommended by March 2013 Fund TA mission.

On the basis of our overall performance, the corrective actions that are being taken, as well as the strength of policies set forth in the attached MEFP, we request that the Executive Board of the IMF complete the fifth and sixth reviews under the ECF arrangement and release the sixth and seventh tranches totaling SDR 13.02 million. We also request an extension of the arrangement by 6 months to May 22, 2016 to allow for the completion of the eighth review, as well as the rephasing of the remaining disbursements under the arrangement.

We believe that the policies set forth in the attached Memorandum of Economic and Financial Policies are adequate to achieve the objectives of the program, but we will take any further measures that may become appropriate for this purpose. We will consult with the Fund on the adoption of these measures, and in advance of any revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultation. Moreover, we will provide the IMF with such information as they request in connection with progress in implementing our policies and obtaining the objectives of the program.

The Government of Malawi authorizes the IMF to make this letter and the attached MEFP and Technical Memorandum of Understanding available to the public, including through the IMF internet website.

Yours sincerely,

/s//s/
Mr. Goodall Gondwe,Mr. Charles Chuka,
Minister of FinanceGovernor of the Reserve Bank of Malawi

Attachments:

- Memorandum on Economic and Financial Policies;

- Technical Memorandum of Understanding.

Attachment I. Memorandum on Economic and Financial Policies for the Fifth and Sixth Reviews under the ECF Arrangement March 2015

Background

1. This memorandum supplements the Memorandum of Economic and Financial Policies (MEFP) attached to the Letter of Intent dated December 26, 2013. It describes recent developments and performance under the ECF-supported arrangement since completion of the third and fourth reviews in January 2014. It also elaborates on the policies and structural reforms we intend to carry out in the year ahead to regain macroeconomic stability, improve our public financial management systems, and safeguard financial sector stability.

2. Tripartite elections at all levels of Government were held in May 2014. Despite some logistical issues, these elections were considered by independent observers to have been free and fair. Following the elections, a new Government, led by Professor Arthur Peter Mutharika, assumed power and committed to correcting macroeconomic imbalances and setting the country on a path to sustainable and inclusive noninflationary growth. In the sections below, we describe our policy agenda for significantly enhancing and accelerating our macroeconomic and structural reform process. Some of the modalities we intend to adopt represent a departure from those of the previous Government, a change largely motivated by altered circumstances and, in some cases, a more realistic evaluation of implementation capacity. The differences mainly reflect a recasting of priorities, but the underlying aim of rapidly regaining macroeconomic balance, rebuilding government fiscal systems, improving financial sector stability, and achieving our growth potential remains unchanged. We also remain committed to the fundamental reforms adopted in 2012 that established a flexible exchange rate and automatic fuel pricing mechanism, as we view these as necessary and appropriate to Malawi’s present economic circumstances.

Recent Economic Developments and Near Term Outlook

Impact of the “Cashgate” Scandal

3. The discovery of the theft of government funds in late 2013—dubbed the “Cashgate” scandal—revealed deficiencies in our fiscal systems on a scale previously unsuspected. Following the discovery, measures to improve our public financial management (PFM) system were adopted in October 2013 in the form of a Government Action Plan, which was developed in consultation with, and generously supported by, development partners. In March 2014, an independent assessment was made on 39 actions that were due for monitoring and verification. The assessment indicated that 22 of 66 actions were met, progress had been made on 10 others, 1 was not met and 6 could not be assessed. However, an internal assessment of these actions was done in October 2014 and showed that 48 actions were met, there was progress on 12 actions and 6 actions were yet to be met. Notwithstanding this progress, we realize that achieving credible and reliable PFM systems will require a more strategic and results based-approach.

4. One of the main undertakings of the government’s Action Plan was the commissioning of an external forensic audit with financial assistance from DFID. An interim report was issued in February and the final report was delivered to Government in October 2014. In addition to providing details of the illicit transactions uncovered—details that are now being used by our law enforcement agencies to carry out prosecutions and to effect recovery of stolen funds—the reports also provided insight into the deficiencies of our PFM system that had allowed the thefts to take place. This analysis, supplemented by technical assistance from the IMF and the donor community, has been helpful to us in designing a comprehensive action plan, with a well thought out design and sequencing of reforms, which we intend to vigorously implement over the remaining period of our IMF-supported program (see below). Currently, Government has engaged Price Waterhouse Coopers International to carry out comprehensive forensic audit on the Epicor System for the period 2009 to March 2013 with assistance from GIZ. Furthermore, Government has engaged private auditors to conduct comprehensive forensic audits on all independent sites (sub IFMIS systems) which include: State Residences, Malawi Defense Forces and the Malawi Police.

5. The “cashgate” scandal interrupted what would otherwise have been a period of economic recovery. After some initial trepidation following the floating of the exchange rate in May 2012, and the subsequent depreciation that followed, markets in Malawi had begun to see the substantial benefits of the new exchange rate regime. They had also come to recognize that the automatic fuel pricing mechanism had been responsible for eliminating the fuel shortages of the previous year. Following a good tobacco season in March-August 2013, substantial reserves were accumulated and this, combined with monetary tightening, had arrested the decline of the exchange rate. Inflation was on a downward trend, growth prospects appeared good and, with rising private sector confidence, we anticipated further macroeconomic stabilization and strong growth over the coming year.

6. The outbreak of “cashgate” significantly changed this outlook, and the suspension of budget support that followed continues to impact our macroeconomic position. With our budget for FY2013/14 heavily reliant on these cash disbursements, their sudden withdrawal necessitated fiscal adjustment on a scale that overwhelmed our weakened PFM systems. As a result, domestic borrowing limits were exceeded, and large domestic payments arrears accumulated. With the Reserve Bank financing a substantial portion of the government’s borrowing requirement, and with incomplete sterilization of foreign exchange reserve purchases, liquidity control became problematic. This led to un-programmed increases in reserve money and net domestic assets (NDA) of the Reserve Bank of Malawi (RBM) that compromised our disinflation program. Moreover, the loss of the foreign exchange associated with budget support and dedicated grants, in the absence of complete fiscal adjustment, also slowed reserve accumulation from what could otherwise have been achieved.

Recent Economic Developments

7. As of the final quarter of 2014, the macroeconomic situation remains mixed. Growth has shown considerable resilience, but inflation and recent exchange rate movements are worrisome. With the protracted period of uncertainty, private sector confidence has been eroded, and inflationary expectations remain high.

  • Growth has held up so far in 2014, with preliminary indications that real GDP growth will increase from 5.2 percent in 2013 to about 6 percent in 2014, led by strong outcomes from the agriculture, wholesale/retail trade, and information and communication sectors. The ready availability of foreign exchange and fuel appear to be continuing to support the recovery in economic activity. All major sectors of the economy are projected to register positive growth except the mining sector which will be adversely affected by the suspension of uranium production at Kayerekera mine since June 2014.

  • International trade remains strong. Exports are set to grow by 7 percent during 2014, driven by a recovery in tobacco production as well as continued export growth in traditional (tea, sugar, cotton) and nontraditional commodities (such as edible nuts). Growth in these sectors is expected to compensate for the closure of the Kayelekera Mine, which by 2013 was exporting the equivalent of one-third of total tobacco exports. Imports are expected to grow slowly at about 3.7 percent during 2014, sustained in part by the imports required by a large power plant investment Kapichira II. Overall, both the merchandise and services deficits are expected to improve during 2014.

  • The fiscal situation has been challenging. The “cashgate” scandal not only necessitated a sharp curtailment of programmed expenditure, but it also undermined trust in public financial management systems and raised concerns that the budget was not fully financed. In the event, with annual shortfalls in external disbursements amounting to almost 6.6 percent of GDP, our PFM systems proved too weak to enforce the discipline needed to follow the adjustment path agreed under the program. By the end of the 2013/14 fiscal year, domestic financing rose to about 6 percent of GDP and payment arrears (1.7 percent of GDP) had accumulated an amount substantially above our target level. Compounding the issue, we have also uncovered additional arrears that had been accumulated by the previous Government over the past several years.

  • The disinflation process stagnated in 2014 and inflation at end-2014 remained elevated, at 23 percent (year-on-year). This reflects, in part, high liquidity levels from largely unsterilized foreign exchange purchases during the tobacco season, and from some financing of the FY2013/14 fiscal deficit by the Reserve Bank of Malawi (RBM). In July 2014, in anticipation of a more favorable outlook for inflation, the RBM lowered its policy rate by 250 basis points to 22.5 percent. In retrospect, we now believe this move was somewhat premature, as the annual inflation rate accelerated over the subsequent two months rendering the policy rate negative in real terms. Since this was sending a conflicting signal to the market, we subsequently raised the rate back to 25 percent on October 30th. We believe this level is sufficiently positive in real terms to send appropriate signals to the private sector regarding our commitment to the disinflation process. This measure was followed by a directive restructuring the liquid reserve ratio (LRR) by requiring that the current LRR (15.5 percent) be imposed on foreign currency deposits in local currency rather than in foreign currency. This became effective on November 10, 2014, and is contributing to the absorption of liquidity from the banking system.

  • Interest rates on bank loans have remained elevated, and this has reduced the growth of private sector credit sharply. Anecdotal evidence suggests this is increasingly restricting new business investment which, combined with reduced real incomes from the inflation, will affect growth going forward. Evidence from the third-party diagnostics of individual banks suggests there has also been some impact on the health of the banking sector as non-performing loans have risen steadily since end-2012 and now stand at 15.8 percent of gross loans.

  • The exchange rate came under considerable pressure and depreciated by 15 percent in 2014. This is in part a seasonal phenomenon, as the rate usually weakens after the end of the tobacco buying season in August. However, it has been particularly acute so far this year, owing to the unattractive level of real kwacha interest rates prevalent up to November, and shortfalls in external financing. International reserve levels have reached a relatively healthy level of 2.9 months of import cover in December, but remain below our target level of three months. As it did last year, the RBM purchased substantial reserves during the 2014 tobacco buying period, helping to smooth exchange rate volatility during the first half year of 2014.

  • Malawi’s external public debt to GDP ratio is growing and is expected to reach 32 percent of GDP in net present value terms at end-2014. Nonetheless, this is not expected to worsen the debt dynamics significantly, as external debt remains mostly concessional. Our external debt service burden remains low, with a debt service ratio in 2014 of only 4.7 percent of exports of goods and services. In contrast, our domestic debt burden is becoming more worrisome due to increased recourse to domestic financing over the last two years, and from our recent decision to securitize past domestic arrears. As a result, total public debt as a share of GDP is set to reach 75.8 percent of GDP at end-2014.

Performance Under the Program

8. As a result of these developments, a majority of the periodic quantitative targets for end-December 2013 (fifth review test date) and end-June 2014 (sixth review test date) under the program were missed. The exception was the performance criterion on net international reserves (NIR), which was met comfortably for both test periods. In the first period, this was the result of the RBM refraining from exchange rate intervention after the end of a strong tobacco season in August 2013, as it preferred to maintain—at a cost of some exchange rate depreciation—a prudent level of reserves. The end-June 2014 target on NIR was met from the carry over effect of this, but also because of another strong tobacco season in mid 2014. However, incomplete sterilization of these purchases increased system liquidity and pushed NDA and reserve money of the RBM above program targets in both December 2013 and June 2014. The performance criterion (PC) on net domestic borrowing by government was met for the December 2013 test date but, as spending pressures became acute in the second half of the fiscal year, control over expenditure suffered and additional borrowing was undertaken that breached the end-June 2014 program ceiling. The indicative target on social spending was also missed, in part because of lower spending on the Farm Input Subsidy Program (FISP).

9. The continuous ceiling on the accumulation of nonconcessional external debt was missed, due to: (i) the contracting in October 2013 of a medium-term nonconcessional suppliers’ credit; (ii) the contracting in April 2014 of a supplementary loan for the rehabilitation of the Liwonde-Naminga road and (iii) the contracting in February 2015 of a loan for the construction of a cancer treatment center in Lilongwe. The continuous ceiling on external payments arrears was also missed as of October 2013 due to arrears incurred on the supplier’s credit loan. The above mentioned supplier’s credit with the Paramount group in 2013 was to acquire military equipment. Proceeds from the sale of the presidential jet in 2013 were used to make partial restitution of overdue payments on this credit agreement. On coming into office, however, the new Government determined that this contract was an anomaly and took steps to exit the agreement. To this end, we have renegotiated the contract so that it only includes equipment that has either been already delivered or currently in the production line, resulting in a reduction in the total value of the arrangement from $145.3 million to $33 million. We wish to reassure the Fund that the present government is committed to the PFM Act and that transactions and contracts of this nature will not be repeated in.

10. The supplementary loan for the Liwonde-Naminga road is relatively small (US$4 million) and was contracted with a relatively high grant element of 29 percent. We indicated to the Fund our intention to obtain financing for this project in order to close the financing gap in the project as agreed in the remedial measure of our current program. However, efforts to obtain better terms or financing from additional concessional lenders were unsuccessful. A decision to continue with the project was then made on the basis of its small size, that the government had already engaged a contractor, the strategic importance of this road, and the fact that it will not affect debt dynamics significantly or persistently. Moreover, delaying payments to the contractors would have incurred higher costs in terms of idle time, contract extension and penalties. The Government realized that this loan was nonconcessional but considering that works on the road had stalled, it would have been costly to terminate the contract with the contractor in view of the fact that the amount required to complete the road was small. Litigation and interest costs would have made the project even more costly than US$4 million. Furthermore, considering the strategic nature of the road, Government was determined to complete the works on the road because the works started a long time before the current program. Government made this borrowing on the basis on necessity and we undertake to stick to the agreed non-concessional borrowing for any future projects.

11. The ceiling on new nonconcessional external debt maturing in more than one year was also missed with the contracting of a loan in February 2015 for the construction of a cancer treatment center in Lilongwe. In Malawi Data from the cancer registry is showing that new cancer cases are rising quickly and the proportion of patients living with cancer and requiring continuous treatment is rising even faster. Chemotherapy, when available, is very expensive and is about $1400 per treatment. This is beyond the reach of the average Malawian. Radiotherapy is a more affordable and appropriate palliative modality for cancer patients. It is envisioned that the National Cancer Centre will be an outpatient radiotherapy and chemotherapy referral centre, catering for both fee paying and non paying patients. The proposed project will provide a cost efficient national and regional cancer centre drawing patients from around Malawi and neighboring countries. The National Cancer Centre is also expected to become a centre for learning, incorporating resources such as a joint hospital/cancer centre library and learning centre, along with facilities to enable the development of partnerships with nursing and medical schools. The loan, which amounts to US$13 million), was negotiated with the OPEC Fund for International Development and carries a 29 percent grant element. It was only agreed after exhausting efforts to secure more concessional financing from other development partners.

12. Under the Health SWAP 1, the Government made a plea to Development Partners to have the cancer project be included as part of the critical infrastructure needed for improved health. However Development Partners wanted the integration of cancer issues within the existing health delivery mechanism than a standalone facility. Realizing the high costs of cancer treatment in terms of referrals outside the country, in 2010 Government decided to finance the cancer centre using local resources and most of these funds were used on studies and obtaining approval from International Atomic Energy Agency (IAEA). After failing to secure funding from any of the traditional development partners whose funding is concessional, it was only OFID that agreed to finance this life saving facility (US$13 million). Just like all other OFID loans the Grant Element is 29 percent and the Government considers this very close to the grant element of 35 percent that is recommended by the Fund.

13. Progress on structural reform under the program has been uneven. We have verified the stock of government domestic arrears for 2013/14 financial year and those accumulated in previous years. The total stock of arrears stands at K157 billion (8 percent of GDP). However, as these numbers were very large and because some of the claimants are mentioned in the forensic audit report, we have asked the Auditor General to repeat the entire audit. Regarding arrears accumulated during FY13/14, further work is needed to verify that some of the infrastructure works presented in the claims were actually carried out. Government has authorized the RBM to stop the automatic conversion of overdrafts into government securities. This significantly reduced the stock of treasury bills held by the central bank, but had little effect on curbing the accumulation of government debt held in the form of advances. The RBM has regularly published a quarterly financial stability report, we have adopted a prompt corrective action framework for bank resolution, amendments to the RBM Act were submitted to Parliament (prior action), and third party diagnostics were completed for every bank in the system.

14. The forensic audit of the “Cashgate” period was completed and the full report was made publically available, and prosecutions of malefactors and recovery of stolen funds has begun and has met with some initial success. We are using the 53 case files arising from the forensic report to prosecute those individuals involved in theft of state funds and money laundering. To date there have been five convictions and MK 183 million has been recovered so far. With the assistance of an external asset recovery expert financed by the U.K we will endeavor to increase the efficacy of recoveries as prosecutions proceed. Investigative agencies, namely the Anti Corruption Bureau, Financial Intelligence Unit, the Financial Fraud Unit of the Malawi Police Force and the Malawi Revenue Authority are closely collaborating in getting evidence to pursue prosecutions under the Penal Code, the Corrupt Practices Act, the PFM Act and the Anti-Money Laundering framework. In recognition of gaps in the legal framework we will request technical assistance from the Fund in amending some of these acts.

15. Given “out of scope” transactions highlighted by the forensic audit report (transactions outside the auditors’ remit to investigate cashgate transactions), we have now harmonized procurement across the public sector and will conduct an audit of these transactions in each ministry. Auditors from the private sector will be employed to complement our existing audit function which will be centralized within the Ministry of Finance. To reinforce compliance with obligations under the PFM Act, controlling officers in each ministry and senior civil servants will be required to attend a series of workshops on the responsibilities and sanctions under the PFM Act. Moreover, all controlling officers will be issued with appointment letters with revised terms of reference. In addition to benchmark progress we will issue a report by an audit firm confirming the status of implementation of the forensic audit recommendations (end-December benchmark).

16. On a number of other structural commitments work has progressed, but closure has proved difficult. We have uploaded into IFMIS most of the manual transactions undertaken when our systems were suspended in October-November 2013. However, the completion of this exercise was delayed due to the pending validation of these transactions. The reconciliation has shown that few votes have still not been finalized in capturing their expenditures into the system. We have thus set a deadline of end-February 2015 as a final date of completing this assignment. Similarly, progress has been made towards doing daily reconciliation of government accounts with the RBM beginning January, 2014, but due to technical problems of Epicor based IFMIS it has been difficult to finalize adjusting the unreconciled items into the system. However, a 15 member team was assigned to manually do the reconciliation from 10th November, 2014 and we are hopeful that the assignment will be finalized by the end of February, 2015. As regards the follow up on the backlog, the Central Internal Audit Unit will finalize its work by end-February, 2015. We have not provided Departments and Agencies with quarterly spending ceilings, as we felt our resource envelope was too constrained, but we have continued to issue monthly ceilings. Moving to quarterly ceilings which will increase spending efficiency remains our intention and we will implement this soon as feasible. We also encountered administrative delays in submitting amendments to the Banking Act and Financial Services Act to Parliament.

17. Performance on the macroeconomic level since mid 2014 has been significantly better. In order to anchor monetary and fiscal policies, we agreed on informal targets with IMF staff for end-September and end-January 2015 on gross international reserves, net domestic assets of the RBM and government net domestic borrowing. While we missed the end-September 2014 target on net domestic borrowing, all others were met. Furthermore, we have carried out a number of structural measures, described below, as prior actions for completion of the fifth and sixth reviews.

Outlook and Key Economic Objectives

Key Goals

18. We remain committed to the objectives of the original program including increasing reserve cover to at least three months of imports and reducing inflation to single digits. Our overriding short-term goals are to stabilize our macroeconomic situation, regain firm control over our fiscal systems, and safeguard the stability of the financial sector. These are necessary conditions that must be met if we are to successfully address Malawi’s pressing development needs in the years ahead. Responsible fiscal and monetary policy combined with vigorous PFM reform are needed to restore confidence in the budget, reduce inflation, reverse the contraction of real incomes, and foster the private sector confidence needed to encourage growth-promoting investment.

19. To this end, we recently raised our policy rate from 22½ percent to 25 percent, a move that significantly tightened our monetary policy stance. We are supporting this measure with appropriate liquidity operations to ensure that the rate increase translates into an upward shift in other key interest rates and establishes sharply positive real interest rates throughout the economy, with particular attention to the rates on treasury bills. Concurrently, we have embarked on a series of accelerated PFM reforms designed to quickly regain control of our fiscal operations so that our stabilization program is not forced off track by unauthorized spending or by a further accumulation of arrears.

Macroeconomic Outlook and Risks

20. We view a restrictive policy position as necessary in the short term to stabilize our economy, but we recognize that this will exert a cost in near-term growth. Support from lower international prices for food and fuel and a stronger currency will assist in bringing inflation to single digits over the next 12 to 15 months. This will dampen growth somewhat in 2015. However, concurrently with this, we anticipate a steady increase in private sector confidence, as agents come to acknowledge that fiscal control is being regained, and that the stance of policy is leading us towards a sustainable macroeconomic position. Moreover, maintenance of positive real interest rates will begin to improve the attractiveness of the kwacha as a currency of investment. This should provide some relief to the exchange rate pressures recently experienced, as well as providing us with an additional policy tool, going forward, for limiting intra-year exchange rate volatility. As confidence, and subsequently investment and consumption levels gradually rises, we would expect activity to begin accelerating towards the end of the calendar year, setting the stage for sustainable, low inflation in 2016 and beyond.

21. We therefore view 2015 as a year to consolidate our position and lay the groundwork for a period of sustained noninflationary growth. Real growth in 2015 is expected to reach 5.5 percent (one percentage point lower than anticipated in our December 2013 MEFP) and to gradually increase to 6 percent in 2017. Inflation will decline to 12 percent by end-2015 and single digit levels towards end-2016. Fiscal restraint and a reliance on concessional foreign borrowing for the majority of our finance needs will allow some reduction in the stock of domestic debt relative to GDP to take place. Strong debt management in the near-to medium term will be implemented to ensure that debt is sustainable and the right balance of costs and risks is achieved. This will be attained by resuscitating the Debt Management Committee whose membership will be at senior level, which will look at each borrowing, to ascertain its concessionality and to insure debt sustainability. The Government will also continue implementing the Debt Management Reform Programme, that was agreed with IMF and World Bank that is aimed at strengthening the debt management capacity of the Debt and Aid Management Division. We aim to achieve a level of international reserves of at least 3.3 months of import cover by 2016 for general prudential purposes and in order to be better equipped to smooth seasonal fluctuations in the currency. Under a setting of macroeconomic stability, recovering growth, and higher confidence in the domestic currency, we expect the current account deficit to decline by about 1.7 percentage point of GDP by the end of 2015.

Policies

Fiscal Policy

22. Our fiscal program for FY2014/15 is calibrated to support a strong disinflation effort and to re-establish private sector confidence in our ability to control fiscal expenditure and safeguard debt sustainability. In an effort to catalyze confidence quickly by enhancing transparency, we will begin the regular monthly publication of our detailed fiscal operations. In light of the significant fiscal risks and uncertainties we face in the year ahead, we have introduced a number of adjustments and contingencies to our approved budget to ensure orderly execution. A circular informing Cabinet of these adjustments was issued as another prior action for completion of the reviews. When fully executed, this adjusted budget will result in about a 2¾ percentage points of GDP improvement in the overall balance relative to last year.

  • We have conservatively estimated total revenue at 33 percent of GDP, about ½ percentage points higher than last year. Tax revenue is projected at 0.5 percentage point of GDP below the outturn for last fiscal year to reflect uncertainties in the economic outlook. This is offset by an increase in foreign—mostly project—grants. Furthermore in a bid to enhance compliance and improve mobilization of domestic resources for Government, the Malawi Revenue Authority (MRA), is undertaking a Modernization Program under the theme “Innovation and Modernization”. The reforms and initiatives under this program are aimed at improving tax compliance in domestic taxes, promoting the use of enhanced ICT services which include electronic fiscal devices (EFD), and cargo scanners; and widening the tax registration net, among other benefits.

  • We have programmed significant adjustment on the expenditure side, where total outlays at 38.9 percent of GDP represent a decline from last year of 2 percentage points of GDP. The majority of this adjustment—5½ percentage points of GDP—falls on current expenditure. In addition to savings of 0.6 percentage points of GDP from not having to fund the elections this year, we have made a number of savings in other areas. In light of their potential second-round inflationary impact, we have contained the nominal increase in public sector wages, and the overall wage bill will decline by more than ½ percentage points of GDP. Domestic interest payments at 4.6 percent of GDP will remain high due to elevated rates associated with the disinflation effort but, with sharply reduced recourse to new domestic financing, this will still represent a decline of almost 1½ percentage points of GDP. Subsidies and other current transfers will continue to absorb a large share of current outlays to safeguard social spending, particularly the Farm Input Subsidy Program (FISP) and a new program for assisting our poorest citizens with housing construction, both of which we feel have sufficiently strong social and productive impact to justify their cost. Fortunately, falling world prices for fertilizers have allowed us to budget for both these programs within the share of GDP expended on the FISP alone last year. On the development side, we will increase capital spending by a 3.2 percentage points to 9.6 percent of GDP.

  • On the financing side, domestic borrowing will be sharply reduced, from almost 6 percent of GDP in FY2013/14 to about 2 percent this fiscal year. As a result, and because one of the effects of high inflation is to include in the interest bill an implicit repayment of real principal, net domestic debt stock (excluding the stock of domestic arrears) will fall from 22.2 percent of GDP in 2013 to 19.4 percent in 2014, a substantial reduction. Foreign assistance will be mainly limited to project loans and funds disbursed under the Sector-Wide Assistance Programs.

23. With IMF assistance we have finalized a methodology to regularize the large stock of domestic arrears accumulated from past years. We view this as necessary to restoring private sector confidence in government policies, but remain constrained by the size of the outstanding stock relative to our available resources. All arrears will be verified and audited. Of the arrears that accumulated in FY13/14 we have made arrangements in our fiscal program for cash payments of MK 10 billion in FY14/15. Remaining arrears accumulated in FY13/14 and those incurred before will be regularized through securitization in three equal tranches during the current fiscal year and in FY15/16 and FY16/17 budgets. We will deploy auditors in each ministry, strengthen commitment controls, and hold controlling officers accountable under the PFM Act for willful breach of voted allocations in order to prevent the emergence of new unauthorized payment obligations.

Monetary and Financial Sector Policies

24. Following a year where price increases have remained at unacceptably high levels, we are determined to use monetary policy to place inflation on a clear declining trajectory. To this end, we will ensure that the central bank rate remains well above the rate of inflation, and will use liquidity operations in the interbank and Treasury bill markets to ensure the attainment and maintenance of sharply positive real interest rates in our financial system. We will also improve communication with the commercial banks and other market participants so that they are aware of our commitment to regaining price stability. We anticipate that a steadfast adherence to these policies will gradually increase the transparency and credibility of monetary policy. This credibility will be enhanced by additional amendments to the RBM Act that we submitted to Parliament as a prior action for completion of the reviews. These amendments will visibly limit the possibilities for fiscal dominance by establishing an upper bound on total government borrowing—regardless of instrument—from the RBM in any given year. Supported by this assurance, and by demonstrated fiscal discipline and ongoing improvements in our PFM systems, we anticipate that the private sector will regain confidence that our policy framework and execution is effective and sustainable, with the result that lower inflationary expectations will begin to firm up. As this happens, and as attractive real returns on domestic assets are maintained, confidence in the kwacha is expected to increase, eventually mitigating the depreciation pressure on the domestic currency that is currently a major source of inflationary risk. Underpinning these policies will be a continued adherence to the flexible exchange rate regime, which we see as a fundamental precondition for the success of our economic adjustment policies.

25. We will combine tight monetary conditions with efforts to safeguard financial sector stability. We migrated to Basel II in early 2014, notably by raising Tier 1 and total capital requirement ratios to 10 percent and 15 percent from 6 percent and 10 percent, respectively. All banks, except two now have higher capital adequacy ratios than required under the new standard. With Fund TA, we have improved prudential norms in the areas of asset classification and provisioning. In addition, we have adopted a prompt corrective action (PCA) framework to strengthen and clarify existing triggers for early remedial action against distressed banks.

26. Third party diagnostic assessments were designed as a tool to identify problem banks as well as banking sector-wide issues. The diagnostic assessments of all banks have now been completed and reviewed. All major areas of concern have been communicated by the RBM to the boards of directors of the respective banks for their action. Reviews of measures taken by each bank to address these concerns will be conducted by the RBM through its regular on-site and off-site supervision activities. Further, in light of the findings of the assessments, the RBM will identify and design an appropriate strategy within the legal framework to address sector-wide issues.

27. Meanwhile, the restructuring process of the two weakest banks is underway and will be completed as soon as possible. A transaction advisor has completed the due diligence on one the banks and has submitted a report on possible restructuring options that encompass its sale or recapitalization. The next steps are to dispatch the Information Memorandum on the bank to all bidders and to select the preferred bidders.

28. The RBM is committed to taking further appropriate steps to address any risks in the financial sector. Efforts to strengthen the supervisory framework of the banking system are underway. This includes enhancement of both on-site and off-site supervision, as well as close monitoring and enforcement of compliance with all prudential norms. Furthermore, an external bank supervision advisor has been hired and commenced work in July 2014, focusing among other things, on enhancement of supervisory skills in the staff of RBM.

29. Loan concentration remains one of the major risk factors in our banking system. This risk has continued to rise from extension of large credit to a limited numbers of borrowers or to specific economic sectors and activities and could lead to challenges in liquidity and capital positions of banks, particularly in the wake of increasing levels of non-performing loans. The RBM will continue to closely monitor loan concentrations in the banking sector and will strictly limit waivers for specific exposures exceeding the loan concentration limit.

30. We also remain committed to strengthening the regulatory framework of the banking system. To this end, amendments to the Banking Act of 2010 and Financial Services Act of 2010 have been submitted to Parliament for enactment (prior action). These two amendments, which were informed by IMF technical assistance recommendations, will align the legal framework for bank resolution more closely with best practices and provide more options for dealing with problem banks.

Anti-Money Laundering Initiatives

31. In light of the findings of the forensic report that the Cashgate scheme was not an opportunistic theft but rather a complex system of fraud and money laundering, we will address gaps in our regulatory framework. These measures will include amending the Anti-Money Laundering/Controlling the Financing of Terrorism (AML/CFT) Act, the Penal Code and the Corrupt Practices Act, and aligning them with the Financial Action Task Force standards and the United Nations Convention Against Corruption. The Reserve Bank of Malawi will re-evaluate its capacity to monitor and supervise possible breaches of compliance with AML requirements by banks and apply appropriate supervisory sanctions with regard to any breaches of compliance.

Public Financial Management Reform

32. The Government continues to implement the Public Finance and Economic Management Reform Programme (PFEM RP). However, in light of the weaknesses that have been highlighted in the area of Public Finance Management (PFM), Government with technical assistance from the IMF has revised the process of revising the strategy for strengthening PFM systems. It should be noted that the strategy being developed falls within the overall PFEM RP, and that it specifically recommends addressing issues regarding fiscal reporting, bank reconciliation, enforcement of commitment control, improvement of other internal controls and strengthening the overall PFM control environment. In formulating the programme, it has recognised that most PFM rules and regulations of the GoM already follow well establish standards, but their enforcement and compliance remained major challenges. For this reason, the PFM Reform Programme will ensure that the established rules and regulations are followed by adopting a “getting the basics right first” approach. Furthermore, the revised PFM Reform Programme seeks to ensure efficient and effective resource utilization within the public sector, hence maximisation of value for money in public expenditure. Therefore, the programme will seek to bring key officers in all GoM ministries, departments and agencies (MDAs) to know and understand the public finance rules and regulations, and ensure that these are practiced. The Ministry of Finance, Economic Planning and Development will establish the means of identifying where fiscal infractions occur, and of correcting such infractions as quickly and effectively as possible. In this regard, the Ministry of Finance will enhance its capacity to report and deal with laxities in financial management within all MDAs.

33. Government of Malawi implemented EPICOR (version 7.5.5) based IFMIS, to serve the Government in managing public resources efficiently, effectively and transparently. Several operational and system deficiencies have been observed for a number of years and government has been commissioning a number of studies. These studies have revealed a number of weaknesses that have required urgent attention. We have conducted a comprehensive Business Processes Review and Reengineering (BPR) of the EPICOR based Integrated Financial Management Information System (IFMIS). The review revealed the weaknesses in the system with regards to: inadequacy of the security features, over customization of the system, limited staff manpower that affects segregation of duties, poorly defined and designed process interfaces, among others. Following the review, Government defined the functional requirements and specifications that will in turn ensure installation of a credible system that addresses the identified shortfalls. This included specifying for a system with robust security and control features, allowance for interfaces with other Government system for seamless flow of information.

34. Government has decided to procure a new system of IFMIS instead of upgrading the current version 7.5.5 to version 10. Government has identified five best and well known IFMIS systems in the world and plans to assess them in order to identify the most suitable one for Government business in Malawi. The EPICOR version 10 will be amongst the systems to be assessed. We have established IFMIS Steering and Technical Committees with clear terms of reference (ToRs) to oversee the procurement and implementation of the new IFMIS. These committees have already developed an implementation plan for the new system but also a plan for ensuring that the current system is secure and well functioning without disrupting Government business in accounting functions. While enhancements to the current system are already underway, Government has also finalised development of the bidding documents for the new system and procurement processes are expected to commence in January 2014. We believe with proper planning and technical expertise the new system will be up and running in July 2016. This will ensure that time lines are not being missed and milestones are being met as planned.

35. In order to strengthen the scrutiny and audit functions, we have moved the Central Internal Audit Unit to the Ministry of Finance, Economic Planning and Development from the Office of the President and Cabinet in order to revamp the internal audit functions. In recent times, the Government has recruited more internal auditors specialised in various fields other than accounting background alone to ensure that there is diversity in terms of areas of focus. We have engaged Cowater International of Canada to enhance capacity and skills in various types of audits especially in risk based internal audit. Cowater is also providing training in IT Audit.

36. We also plan to place an internal auditor in every MDA so as to detect fiscal infractions early enough for correction. The internal auditors will report to the Ministry of Finance. We are also in the process of engaging private internal auditors to help in transfer of skills to our internal auditors. In addition, we have engaged an experienced advisor in the Ministry of Finance, who will follow up on possible fiscal malpractices as reported by the internal auditors. The advisor will also assist the Ministry of Finance in strengthening the PFM framework.

37. In order to address the cash flow management, we have revitalised the cash management committee meetings and MDAs are being restricted to spend within their approved budgets, and requests for extra-budgetary funding is not being allowed. The Ministry of Finance plans to submit monthly expenditure reports to all MDAs. These will indicate monthly and cumulative expenditure figures as well as available balances on their allocations. This will allow MDAs to plan and limit their expenditures to the allocations. We have strengthened budget monitoring by re-orienting our Budget/desk officers to monitor budget performance better, and are required to submit monthly budget performance reports. This procedure involves the tracking of the accumulation of arrears by MDAs.

38. More importantly, we plan to enforce the legal mandates of the Minister and Secretary to the Treasury in applying sanctions as the requirements of the PFM legal and regulatory frameworks, including applying sanctions to institutions and individuals that fail to comply with those requirements.

39. To this end, we have developed a PFM strategy to operationalize our agenda and put in place institutional structures to monitor and control our progress. This action plan includes the key recommendations of the FAD technical assistance mission on PFM of which the transfer of revenues to the government’s main account will facilitate the reconciliation of government accounts (prior action) as well as elements from the forensic audit report.

The closure of redundant and dormant accounts, the preparation of reports on the stock of arrears, and the audit by an international firm of the status of implementation are key benchmarks.

Program Issues and Monitoring

40. For the fifth review (end-December 2013 test date) the periodic performance criterion (PC) on net domestic assets (NDA)and the indicative target (IT) on reserve money and social spending were not met, in part because of the shortfalls in external financing. For the sixth review, the periodic PC on NDA, net domestic financing (NDF), and the IT on reserve money and social spending were not met owing in part to continued difficulties in program implementation in the face of continued shortfalls in external financing and election uncertainties. For the fifth and sixth reviews, the continuous PC on the contracting of nonconcessional external debt with a maturity of more than one year was not met due to the contracting of the above-mentioned non-concessional loans. The RBM intensified its open market operations to ensure that the September 2014 informal targets on NDA and gross reserves agreed with the staff were met but that on NDF was missed. The RBM will continue to mop up liquidity through over issuance of Treasury bills and maintain a tight stance of monetary policy. Additional informal targets on gross reserves, NDA and NDF were set for end-January 2015 to anchor monetary and fiscal policies. Gross international reserves and NDA were met but NDF was missed due to shortfalls in donor dedicated grants for social sectors. On the basis of these corrective actions we have put in place, we request for a waiver for the nonobservance of the performance criterion for the fifth review on NDA. We also request for a waiver for the nonobservance of the performance criteria for the sixth reviews on NDA, net domestic financing (NDF). For the fifth and sixth reviews, we request waivers for the nonobservance of the performance criteria on nonconcessional external debt maturing in more than one year and on the accumulation of external payments arrears.

41. Program implementation will continue to be monitored with quantitative targets and structural benchmarks (TMU Tables 3 and 6). PCs have been established for June 2015 and December 2015. The seventh review is expected to be completed by mid-September 2015 based on the end-June 2015 test date and the sixth review is expected to be completed by mid-April 2016 based on the end-December 2015 test date.

Attachment II. Technical Memorandum of Understanding March 2015

1. This memorandum sets out the understandings between the Malawian authorities and the International Monetary Fund regarding the definitions of quantitative performance criteria, benchmarks, and indicative targets for the program supported by the ECF arrangement, and the related reporting requirements.

Coverage

2. The central government includes all units of government that exercise authority over the entire economic territory. Unless otherwise indicated, the central government does not include local governments, the Reserve Bank of Malawi (RBM), or any other public entity with autonomous legal personality. The accounts of the monetary authorities include those of the Reserve Bank of Malawi (RBM). Monetary aggregates under the program are based on the twelve-bank monetary survey.

Quantitative Performance Criteria: Definitions and Data Sources

A. Budget Support

3. Definition of budget support: Budget support includes all grants and foreign financing not directly linked to additional budgetary expenditure. Excluded from this definition is external project financing to fund particular activities, including food security funding from the European Union; loan financing from the IMF; and donor inflows from the U.S. dollar–denominated donor pool accounts for the health SWAp, education SWAp, agricultural SWAps, and National AIDS Commission (NAC) held in the Malawi banking system. Budget support is measured as a cumulative flow from the beginning of the fiscal year. It will be recorded in the original currency of disbursement and then converted into U.S. dollars using the program cross exchange rates listed in Table 6.

Table 1.Malawi: Quantitative Targets, 20131
End-JuneEnd-SeptemberEnd-December
2013 (IT)2013 (PC)2013 (PC)
Target type2Prog.10Adj. Prog.10ActualStatusProg.10Adj. Prog.10ActualStatusProg.10Adj. Prog.10ActualStatus
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC108,487110,83972,920M87,85459,36581,224NM107,710110,715120,781NM
2. Ceiling on reserve money3IT106,902106,902126,570NM110,017110,017134,756NM135,223135,223156,899NM
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5,6,7PC−18,605−16,253−2,492NM−5,218−2,01858,685NM72,04275,04773,683M
4. Floor on social spending (cumulative from beginning of fiscal year)8IT185,511185,511181,764NM15,33015,33048,952M106,617106,617105,007NM
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5, 6PC5346270M127117254M188177215M
6. Ceiling on the accumulation of external payments arrears7,9PC000000M002.2NM
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC00142NM000M00145.3NM
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC000000M000M
9. Prohibition on the imposition or intensification of restrictions on the makingPCMMM
of payments and transfers for current transactions9,10
Memorandum items:
Net foreign assets of the RBM (US$ millions)−51516916786113
Budget support (US$ millions)2452445092719
Budget support (millions of kwacha)78,35578,21915,9782,8468,6456,080
Debt service payments to the World Bank and AfDB (US$ millions)661154
Debt service payments to the World Bank and AfDB (millions of kwacha)1,9201,9364654651,4751280
Health SWAp receipts (millions of kwacha)11,29015,0403,1944,8156,9713,711
Education SWAp receipts (millions of kwacha)23,2451,7644,8003,5489,19113,532
NAC receipts (millions of kwacha)12,2814414,2889993,0700
Program exchange rate (kwacha per US$)320320320320320320
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the biginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the biginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Table 2.Malawi: Quantitative Targets, 20141
End-Mar.End-JuneEnd-Sep.
2014 (IT)20142014 (IT)
Target type2Prog.10Adj. Prog.Act.statusProg.10Adj Prog.Act.statusProg.10Adj Prog.Act.status
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC113,035115,595117,434NM94,81797,697142,547NM97,70197,701136,885NM
2. Ceiling on reserve money3IT134,392134,392169,100NM145,225145,225193,201NM151,232151,232192,097NM
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5,6,7PC52,01854,57881,548NM6,6229,50293,147NM−20,023−18,42319,521NM
4. Floor on social spending (cumulative from beginning of fiscal year)8IT170,424170,424167,106NM214,832214,832206,961NM
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5,6PC169161262M260251259M269265475M
6. Ceiling on the accumulation of external payments arrears7,9PC004.2NM009.2NM0014NM
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC00145.3NM00149.3NM00149.3NM
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC000M000M000M
9. Prohibition on the imposition or intensification of restrictions on the makingPCMM
of payments and transfers for current transactions9
Memorandum items:
Net foreign assets of the RBM (US$ millions)67161158158167173
Budget support (US$ millions)111351676720967
Budget support (millions of kwacha)35,44511,13053,50921,36166,87821,361
Debt service payments to the World Bank and AfDB (US$ millions)647622
Debt service payments to the World Bank and AfDB (millions of kwacha)1,7771,3762,3061,920529529
Health SWAp receipts (millions of kwacha)7,234−4,9688,834−4,9682,4331,941
Education SWAp receipts (millions of kwacha)13,60014,46615,56714,4662,829994
NAC receipts (millions of kwacha)3,0701,8594,0303,4769710
Program exchange rate (kwacha per US$)320320320320320320
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’

Evaluated on a continuous basis.

IMF Country Report No. 14/37

Table 3.Malawi: Quantitative Targets, 20151
End-MarchEnd-JuneEnd-SeptEnd-Dec
2015 (IT)20152015 (IT)2015
Target type2Prog.Act.Prog.Act.Prog.Act.Prog.Act.
I. Monetary targets (millions of kwacha)
1. Ceiling on net domestic assets of the RBM3, 4, 5, 6PC71,57487,03373,95983,792
2. Ceiling on reserve money3IT223,402243,828248,213260,545
II. Fiscal targets (millions of kwacha)
3. Ceiling on central government’s net domestic borrowing5,6,7PC59,08337,03040,40758,162
4. Floor on social spending (cumulative from beginning of fiscal year)8IT205,055257,43054,725146,687
III. External sector targets (US$ millions, unless otherwise indicated)
5. Floor on net international reserves of the RBM3, 5, 6PC475487531537
6. Ceiling on the accumulation of external payments arrears7,9PC0000
7. Ceiling on new nonconcessional external debt maturing in more than one year7,9PC0000
8. Ceiling on new nonconcessional external debt maturing in one year or less7,9PC0000
9. Prohibition on the imposition or intensification of restrictions on the makingPC
of payments and transfers for current transactions9
Memorandum items:
Net foreign assets of the RBM (US$ millions)378390433440
Budget support (US$ millions)01807
Budget support (millions of kwacha)0800003224
Debt service payments to the World Bank and AfDB (US$ millions)8.2212.123.907.80
Debt service payments to the World Bank and AfDB (millions of kwacha)3,3044,8721,5683,136
Health SWAp receipts (millions of kwacha)15,66815,6682,11414,993
Education SWAp receipts (millions of kwacha)1,7433,38400
NAC receipts (millions of kwacha)00164332
Program exchange rate (kwacha per US$)402402402402
Sources: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

Sources: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government’s net domestic borrowing.

“PC” means Performance Criterion, and “IT” means Indicative Target.

Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).

Target is subject to an adjuster for liquidity reserve requirement.

Targets are subject to an adjuster for budget support and debt service payments.

Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

Table 4.Malawi: Informal Quantitative Targets
End-Sept 2014End-Dec 2014End-January 2015
Informal TargetsActualStatusProj.ActualStatusInformal targetsActualStatus
Ceiling on net domestic assets of the RBM (millions of kwacha)1132,004121,696Met84,63266,329Met94,63211,918Met
Ceiling on central government’s net domestic borrowing (millions of kwacha)28,52719,521Not Met44,00036,172Met46,00058,068Not Met
Floor on gross official reserves (US$ millions)3450457Met515586Met500631Met
Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

NDA as reported by the RBM.

Defined as a cumulative flow from the beginning of the fiscal year.

Gross official reserves equal gross reserves assets as defined in the TMU.

Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates.

NDA as reported by the RBM.

Defined as a cumulative flow from the beginning of the fiscal year.

Gross official reserves equal gross reserves assets as defined in the TMU.

Table 5.Malawi: Prior Actions
MeasureTarget dateMacro RationaleStatus
Prior Action
Fiscal policy
Implement expenditure cuts necessary to limit net domestic financing under the program ceiling for the fiscal year 2014/15 and issue a memo to cabinet outlining new expenditure ceilings.End-February 2015To ensure consistency between the budget and the program.Met
Public financial management
Ministry of Finance to issue a letter to the central bank to transfer revenues to main government account (MG1)End-February 2015First step towards better cash management and reconciliation of accounts.Met
Incorporate the main government bank accounts in IFMIS, including MG1 account and the six operational accounts, namely (i) salaries, (ii) other recurrent transactions, (iii) development, (iv) statutory, (v) advances, and (vi) deposits.End-February 2015Integrate key accounts into IFMIS progressively to ensure an improved accounting, cash management and reconciliation of accounts.Met
Monetary policy
Submit to parliament legislative amendments to limit RBM’s credit to government to a 10 percent of the previous year’s revenue.End-February 2015Reduce fiscal dominance to enhance effectiveness of monetary policy.Met
Financial sector
Submit to parliament amendments to the Banking Act and Financial Services Act in line with those recommended by March 2013 Fund (LEG) TA mission.End-February 2015Promote financial stability by enhancing RBM’s bank resolution powers and tools.Met
Sources: IMF staff and Malawian authorities
Sources: IMF staff and Malawian authorities
Table 6.Malawi: Structural Benchmarks, 2015
MeasuresTarget dateMacro Rationale
Public financial management
Publish detailed monthly budget execution data by vote on the Ministry of Finance’s website no later than 6-weeks after execution.End-March 2015To foster greater fiscal transparency and monitoring.
Reconcile all government bank accounts MG1 and six operational accounts and ways and means for all 2014 transactions signed by the Accountant General and Secretary of the Treasury.End-March 2015To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General.End-March 2015To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
Prepare a report on the flow and stock of arrears at the end of each quarter starting with with end-September 2014 and within two months of the end of each six months.End-June 2015To monitor emergence of arrears.
Produce and publish monthly summary bank account control reports.End-September 2015To improve transparency and control.
Issue reports by international audit firms on bank reconciliations and summary bank account control reports.End-September 2015To improve transparency and restore public confidence.
Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain.End-December 2015Foster greater transparency.
Financial sector
Prepare a strategy to address banking sector wide issues raised by the third-party diagnostics assessments, including the high loan concentration among banks.End-March 2015To safeguard the stability of the financial system.
RBM to obtain from all undercapitalized banks to submit detailed, quarterly monitorable recapitalization and restructuring plans showing how they will reach the minimum capital adequacy level within one year.End-April 2015To safeguard the stability of the financial system.
RBM to obtain from all banks with significant deficiencies (e.g.: on loan documentation) reported by the diagnostic assessments to submit plans to address the deficiencies within one year.End-June 2015To safeguard the stability of the financial system.
RBM to develop contingency plans to intervene and resolve banks if they do not submit or comply with acceptable recapitalization plans.End-June 2015To safeguard the stability of the financial system.
Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and the United Nations Convention against Corruption (UNCAC).End-June 2015To ensure that: (i) enhanced customer due diligence is required with regard to domestic politically exposed persons ; (ii) suspicious transactions are reported when there is a suspicion that funds are the proceeds of a criminal activity ; (iii) there is adequate transparency of legal persons and arrangements; (iv) acts of corruption are adequately criminalized and constitute predicate crimes to money laundering; (v) self-self-laundering is criminalized, and (vi) there are appropriate administrative sanctions for failure to comply with AML/CFT requirements.
RBM issue a detailed report on compliance with regulations on loan classification and provisioning and concentration limits in line with existing directives.End-September 2015To safeguard the stability of the financial system.
RBM, in its supervisory capacity, to follow-up on possible breaches of compliance with the AML legal framework by banks revealed by the audit report, by applying supervisory actions mandated by the AML legal framework with regard to any breaches of compliance, including sanctions.End-December 2015To ensure compliance with AML standards.
Sources: IMF staff and Malawian authorities
Sources: IMF staff and Malawian authorities

B. Floor on Net International Reserves of the RBM

4. Definition of net international reserves (NIR) of the RBM: The NIR of the RBM is defined as gross reserve assets minus gross reserve liabilities. For evaluation purposes, the values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the program cross exchange rates for the various currencies. The program exchange rate of the Malawi Kwacha to the U.S. dollar is set at MK 402 = US$1.

5. Gross reserve assets of the RBM are defined in the International Reserves and Foreign Currency Liquidity Guidelines for a Data Template as external assets immediately available and controlled by RBM “for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency’s exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing)” (BPM6, paragraph 6.64).

6. Gross reserve assets of the RBM include the following: (i) monetary gold holdings of the RBM; (ii) holdings of SDRs; (iii) the reserve position in the IMF; (iv) foreign convertible currency holdings; (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; (vi) loans to foreign banks redeemable upon demand; (vii) foreign securities; and (viii) other unpledged convertible liquid claims on nonresidents. It excludes the following: (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and (c) foreign reserves blocked for letters of credit.

7. Gross reserve liabilities of the RBM are defined as the sum of the following: (i) outstanding medium and short-term liabilities of the RBM to the IMF; (ii) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year; and (iii) all foreign currency denominated liabilities to residents (including, for instance, foreign currency denominated deposits of domestic banks and other residents with the RBM). SDR allocations are excluded from gross reserve liabilities of the RBM.

Adjusters Applied to NIR Program Ceiling

8. The program floor on NIR will be adjusted as follows if budget support, inflows from donor accounts for the social sectors, and external debt service to the World Bank and the African Development Bank (ADB) deviate from their programmed levels:

• Budget support: The floor on the NIR of the RBM will be adjusted upward by the full amount by which the cumulative receipts from the budget support are greater than US$10 million above the program baseline (as defined in Table A). The floor on NIR of the RBM will be adjusted downward by the amount by which the cumulative receipts from budget support are less than the program baseline. This downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 9.

Table A.Program Baseline: Projected Budget Support, March–December, 2015

(In millions of USD, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Budget support0.017.70.00.0

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

• Donor pool accounts for the social sector, including health and education SWAps, and National AIDS Commission (NAC): The floor on the NIR of the RBM will be adjusted downward by the amount by which the donor inflows from the U.S. dollar-denominated donor accounts for SWAps and NAC held in the RBM are smaller than the program baseline (as defined in Table B). This downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 9. These donor inflows are measured as the cumulative receipts by the budget from the beginning of the fiscal year. They will be recorded in the original currency of disbursement and then converted to U.S. dollars using the above defined program cross exchange rates.

Table B.Program Baseline: Projected Inflows from Donor Accounts for the Social Sector, March–December, 2015

(In millions of USD, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Donor inflows47.751.46.837.9

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

• Debt service payments: The floor on NIR of the RBM will be adjusted upward (downward) by the full cumulative amount by which debt service payments to the World Bank and the African Development Bank fall short of (exceed) the program baseline (as defined in Table C). Debt service payments will be measured as the cumulative payments from the beginning of the fiscal year. They will be recorded in the original currency of payment and then converted to U.S. dollars using the above defined program cross exchange rates. This downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 9.

Table C.Projected Debt Service Payments to World Bank and AfDB, March–December, 2015

(In millions of USD, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Debt service8.212.13.97.8

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

9. Cumulative adjustment to the NIR program target: Notwithstanding the adjustments stipulated in paragraph 8, the total downward adjustment to the NIR program target from the combined impact of a (i) a shortfall of budget support relative to the program projections; (ii) a shortfall of inflows to the donor accounts for the social sector relative to the program projections; and (iii) any excess of debt service payments to the World Bank and the African Development Bank (ADB) relative to the program projections, will be subject to a cumulative limit of US$15 million.

C. Net Foreign Assets of the RBM

10. Definition of Net Foreign Assets (NFA) of the RBM: The NFA of the RBM are defined as its gross foreign assets (GFA) minus its gross foreign liabilities. Gross foreign liabilities are equal to gross reserve liabilities as defined in paragraph 7, plus any other foreign liabilities not listed in that paragraph.

11. Gross foreign assets (GFA) of the RBM are defined as gross reserves assets as defined in paragraph 6, plus (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and (c) foreign reserves blocked for letters of credit.

D. Reserve Money of the RBM

12. Definition of reserve money of the RBM (RM): Reserve money is defined as the sum of currency issued by the RBM, including currency outside banks, the vault cash of commercial banks, and balances of commercial banks’ accounts with the RBM. Commercial banks’ accounts with the RBM include required reserves held for local currency and foreign currency deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM.

E. Ceiling on Net Domestic Assets of the RBM

13. For program proposes, net domestic assets (NDA) of the RBM are defined in kwacha terms as reserve money less NFA of the RBM at the program exchange rate.

Adjusters Applied to NDA Program Ceiling

14. The program ceiling on NDA will be adjusted as follows if budget support, inflows from donor accounts for the social sector, and external debt service to the World Bank and the African Development Bank (ADB) deviate from their programmed levels:

• Budget support: For the purposes of this adjustor, cumulative receipts from budget support will be measured in the foreign currency of disbursement and converted to kwacha using the program exchange rates. The ceiling on NDA of the RBM will be adjusted downward by the amount that cumulative receipts from budget support exceed the sum of the program baseline (as defined in Table D) and the kwacha equivalent of US$10 million. The kwacha equivalent of US$10 million will be calculated as US$10 million multiplied by the program exchange rate. The ceiling on NDA of the RBM will be adjusted upward by the amount that cumulative receipts from budget support (in kwacha) fall short of the program baseline, with this upward adjustment to the NDA ceiling subject to the limitations described in paragraph 15. The kwacha equivalent of the upward adjustment will be calculated as the US dollar value of the adjustment multiplied by the program exchange rate.

Table D.Program Baseline: Projected Budget Support, March–December, 2015

(In billions of kwacha, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Budget support, at the program exchange rate0.08.00.00.0
Budget support plus kwacha equivalent of US$10 mil, at the program exchange rate0.012.20.00.0

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

• Donor pool accounts for the social sector (including health, education, and NAC): For the purposes of this adjustor, cumulative receipts from donor [pool] accounts for the social sector will be measured in the foreign currency of disbursement and converted to kwacha using the program exchange rates. The ceiling on NDA of the RBM will be adjusted upward by the amount by which the donor inflows to the budget (in kwacha) from the U.S. dollar-denominated donor accounts for the SWAps and NAC held in the RBM fall short of the donor inflow to those accounts in the program baseline (as defined in Table E). This upward adjustment to the NDA ceiling will be subject to the limitations described in paragraph 15. The kwacha equivalent of the upward adjustment will be calculated as the US dollar value of the adjustment multiplied by the program exchange rate.

Table E.Program Baseline: Projected Inflows from Donor Accounts, March–December, 2015

(In billions of kwacha, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Donor inflows, at the program exchange rate20.021.62.915.9

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

• Debt service payments: For the purposes of this adjustor, cumulative debt service payments (from the beginning of the fiscal year) will be measured in the foreign currency of payment and converted to kwacha using the program exchange rates. The ceiling on NDA of the RBM will be adjusted downward (upward) by the full cumulative amount by which debt service payments to the World Bank and the ADB falls short of (exceeds) the program baseline (as defined in Table F). The upward adjustment to the NDA ceiling will be subject to the limitations described in paragraph 15.

Table F.Program Baseline: Projected Debt Service Payments, March-December, 2015

(In billions of kwacha, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Debt service, at the program exchange rate3.34.91.73.1

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

• Additional adjustment for changes in the liquidity reserve requirement: The ceiling on NDA of the RBM will be adjusted downward for a decrease in the reserve requirement ratio on domestic deposits, and will be adjusted upward for an increase in the ratio. The adjustment will be spread equally over two quarters, starting in the quarter in which the reserve requirement ratio is reduced. The adjuster will be calculated as follows: (one minus the existing required fraction of reserve assets) multiplied by (the program baseline required reserve ratio minus the new required reserve ratio) multiplied by (the amount of average reservable deposit liabilities in commercial banks during the last month before the change in regulation). The program baseline required reserve ratio was 15.5 percent at end-June 2014.

15. Cumulative adjustment to the NDA program target: Notwithstanding the adjustments outlined above in paragraph 14, the total upward adjustment to NDA from the impact of (i) a shortfall of budget support relative to the program assumptions; (ii) a shortfall of inflows to the donor accounts for the social sector relative to the program assumptions; and (iii) an excess of debt service payments to the World Bank and the African Development Bank relative to the program assumptions will be capped at the kwacha equivalent of US$15 million. The kwacha equivalent of US$15 million will be calculated as US$15 million multiplied by the program exchange rate. The adjustment to the NDA ceiling for changes in the liquidity reserve requirement is independent of the other adjustments and is not subject to limitation.

F. Ceiling on Central Government Net Domestic Borrowing (CGDB)

16. Definition of central government net domestic borrowing (CGDB): CGDB is defined as the sum of (i) net borrowing from the RBM (including ways and means advances, loans, holdings of local registered stocks, government bonds, and holdings of treasury bills and treasury notes minus deposits); plus (ii) net borrowing from commercial banks (including advances, holdings of local registered stocks, and holdings of treasury bills and treasury notes minus deposits); plus (iii) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and holdings of treasury bills and treasury notes); plus (iv) holdings of promissory notes. Excluded from the CGDB ceiling are (i) promissory notes issued to cover exchange rate valuation losses of RBM; and (ii) government securities issued in 2014 and 2015 to clear government domestic arrears up to a maximum exclusion of MKW 157 billion. Treasury bills and locally registered stocks will be valued at cost rather than face value. The ceiling is measured as the change in the stock of CGDB cumulative from the beginning of the fiscal year, including promissory notes and securities transferred to the RBM from the treasury since the beginning of the fiscal year. Transfers from extra-budgetary funds will not be considered revenues for this performance criterion. Instead, they will be treated as domestic borrowing from the private sector (as their accounts are outside the definition of government). Asset sales or privatization revenues will be accounted for under financing as a separate category, separate from domestic or foreign financing in calculating CGDB.

Adjusters Applied to CGDB Program Ceiling

17. The program ceiling on CGDB will be adjusted as follows if budget support, inflows from donor accounts for the social sector, and external debt service to the World Bank and the African Development Bank deviate from their programmed levels.

18. The program ceiling on CGDB will be adjusted as follows if budget support, inflows from donor accounts for the social sector, and external debt service to the World Bank and the African Development Bank deviate from their programmed levels.

  • Budget support: For the purposes of this adjustor, cumulative receipts from budget support will be measured in the foreign currency of disbursement and converted to kwacha using the program exchange rates. The program ceiling on CGDB will be adjusted upward by the full amount by which cumulative receipts from budget support are less than the program baseline (as defined in Table D). This upward adjustment to CGDB will be subject to the limitations described in paragraph 20. In the event of excess budget support, the ceiling on CGDB will be adjusted downward by the amount that cumulative receipts from budget support exceed the sum of the program baseline (as defined in Table D) and the kwacha equivalent of US$10 million. The kwacha equivalent of US$10 million will be calculated as US$10 million multiplied by the program exchange rate.

  • Donor pool accounts for the social sector, including health and education SWAps, and NAC: For the purposes of this adjustor, cumulative receipts from donor pool accounts for the social sector will be measured in the foreign currency of disbursement and converted to kwacha using the program exchange rates. The ceiling on CGDB will be adjusted upward by the amount by which donor inflows to the budget from the U.S. dollar-denominated donor accounts for health, education, and other SWAps, and NAC held in RBM fall short of the program baseline (as defined in Table E). This upward adjustment to CGDB will subject to the limitations described in paragraph 19.

  • Debt service payments: For the purposes of this adjustor, cumulative debt service payments (from the beginning of the fiscal year) will be measured in the foreign currency of payment and converted to kwacha using the program exchange rates. The ceiling (floor) on CGDB will be adjusted downward (upward) by the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of (exceed) the program baseline (as defined in Table F). This upward adjustment to CGDB will subject to the limitations described in paragraph 20.

19. Cumulative adjustment to the CGDB program target: The total upward adjustment to CGDB from a shortfall of (i) budget support relative to the program baseline, (ii) donor inflows to the donor accounts for the social sector relative to the program baseline and (iii) an excess of actual debt service payments to the World Bank and the African Development Bank (ADB) relative to the program baseline will be capped at US$15 million. The kwacha equivalent of US$15 million will be calculated as US$15 million multiplied by the program exchange rate.

G. Ceiling on External Payment Arrears

20. Definition of external payment arrears: External payment arrears consist of debt-service obligations (principal and interest) of the central government or the RBM to nonresidents that have not been paid at the time they are due, as specified in contractual agreements, except on external debt subject to rescheduling or restructuring. This performance criterion will be monitored on a continuous basis.

H. Ceiling on Non-concessional External Debt

21. Definition of non-concessional external debt: The definition of debt, for program purposes, is set out in Executive Board Decisions No. 6230–(79/140) August 3, 1979, and as amended by Decisions No. 11096–(95/100), October 25, 1995; 12274–(00/85) August 24, 2000; and 14416–(09/91), August 31, 2009. For program purposes, short-, medium- and long-term debt is non-concessional if it includes a grant element of less than 35 percent, as indicated in Decision No. 11248–(96/38), April 15, 1996. The grant element is calculated using a discount rate of 5 percent. The ceiling on non-concessional debt applies to the contracting and guaranteeing of debt with nonresidents by the central government, the RBM, public enterprises, and other official sector entities, unless an explicit selective exclusion is made per paragraph 24. This performance criterion is monitored on a continuous basis. The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received. The ceiling is measured cumulatively from the beginning of the fiscal year.

22. Definition of short-term debt: Short-term debt is outstanding stock of debt with an original maturity of one year or less.

23. Definition of medium- and long-term debt: Medium- and long-term debt is outstanding stock of debt with a maturity of more than one year.

24. Excluded from the limit on non-concessional external debt is the following: (i) the use of IMF resources; (ii) any kwacha-denominated treasury bill and local registered stock holdings by nonresidents purchased from the secondary market; (iii) debts classified as international reserve liabilities of the RBM; (iv) new debt issued to restructure, refinance, or repay existing non concessional external debt as of December 31, 2014, up to the amount actually used for the above-mentioned purposes; (v) normal import financing; and (iv) arrangements to pay overtime obligations arising from judicial awards to external creditors—a financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

Quantitative Indicative Targets and Structural Benchmarks

25. Reserve money of the RBM: Reserve money of the RBM is defined in paragraph 12 above. The program baseline for reserve money is defined in Table G. No adjusters are applicable to reserve money targets for program purposes.

Table G.Projected Stock of Reserve Money, March-December, 2015

(In billions of kwacha, cumulative within the fiscal year1)

Mar-15Jun-15Sep-15Dec-15
Reserve money223.4243.8248.2260.5

Fiscal year runs from July 1 to June 30 of the following year

Fiscal year runs from July 1 to June 30 of the following year

26. Social spending: Using functional classification of expenditure, social spending is defined as the sum of central government spending on health, education, the farm input subsidy program, the cement and iron sheet program, and government social protection (comprising government expenditures by the Ministry of Gender, Children, and Social Welfare, the Ministry of Disability and Elderly Affairs, the local development fund, and the Poverty and Disaster Management Cost Center under the Office of the Vice President. In order to maintain Malawi’s commitment and progress toward poverty reduction and the MDGs, the social spending allocations in the government budget will not subject to downward adjusters under the program. Quarterly social spending under this definition is presented in Table 8.

Table 7.Malawi: Cross Rates for Nominal Exchanges Rates and Gold Price for Program
September 2014
Gold bullion LBM1 US$/troy ounce1,236.55
SDR to US$ exchange rate0.667
Euro to US$ exchange rate0.775
Yen to US$ exchange rate107.244
Yuan to US$ exchange rate6.153
Rand to US$ exchange rate10.978
UK £ to US$ exchange rate0.614
Source: IMF (International Financial Statistics)

LBM connotes London Bullion Market

Source: IMF (International Financial Statistics)

LBM connotes London Bullion Market

Table 8.Malawi: Social Spending: FY2013/14 Millions of Kwacha
QlQ2Q3Q4Total
ActualProj.Proj.Proj.Proj.
Category
Health Expenditure15,32118,82217,78217,22369,146
Wages9,2807,2597,2597,25931,058
Other Recurrent5,7569,5378,4978,19731,988
Ministry of Health ORT2,7974,7853,7913,79115,165
Local Assemblies ORT2,8934,5184,5564,25616,222
Subvented Organisations66234150150601
Development expenditure2842,0252,0251,7666,100
Education Expenditure30,35330,73830,92929,973121,993
Wages16,93314,47014,47014,47060,343
Other Recurrent13,08914,85813,97413,97255,891
Ministry of Education ORT3,3784,0143,6963,69614,784
Local Assemblies ORT1,8522,2652,0592,0578,232
Subvented Organisations7,8598,5798,2198,21932,876
Development expenditure3311,4112,4861,5325,758
Farm Input Subsidy Program5,48731,77713,222050,485
Cement and Iron Sheets Subsidy03,0001,0003,0007,000
Gender, Children, Disability and Social4366295165142,095
Wages257231231231949
Other Recurrent157250203203814
Development expenditure221488280332
Total Gender, Children, Disability and Social4366295165142,095
Local Development Fund1782,0721,1251,1254,500
Poverty and Disaster Management Cost37252626114
Wages209.79.71049
Other Recurrent1715161665
Total Social Expenditure52,24787,69265,11652,375257,429
Source: Malawian authorities
Source: Malawian authorities

27. Domestic arrears: Domestic arrears are defined as overdue payment obligations of the central government to residents, including on wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, and tax refunds. Payments on wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when they remain unpaid for more than 30 days beyond their due date. Domestic interest payments are in arrears when the payment is not made on the due date. Payments for goods and services are deemed to be in arrears if they have not been made within 90 days of the date of invoice, or—if a grace period has been agreed—within the contractually agreed grace period.

28. Structural benchmarks are contained in Tables 5 and 6.

Table 9.Malawi: Reporting Requirements
DataReportingDelivery
Data DescriptionFreq.AgencyFreq.LagDateMode
Gross international reserves, exchange rate, and foreign exchange
purchases and salesDRBMW2FE
Reserve money and its components (NDA and NFA), OMO transactions, and
RBM conversion of treasury bills; RBM balance sheetWRBMM3030E
Daily exchange rateDRBMW1FE
Treasury bill auction resultsWRBMW2FE
Spread between bureau midrate and the official exchange midrateWRBMM3030E
Spread between commercial bank midrate and the official exchange midrateWRBMM3030E
International Reserve and Foreign Currency Liquidity Data TemplateMRBMM3030E
NIR and its componentsWRBMW7FE
Centralgovernment domestic borrowingMRBMM3030E
Interest ratesMRBMM3030E
Holdings of local registered stocks and treasury billsMRBMM3030E
Detailed issue and maturity profile for treasury billsMRBMM3030E
Excess reserves by bankWRBMM3030E
Details of project and balance of payment supportMRBMM3030E
FCDA HoldingsMRBMM3030E
RBM foreign exchange cash flowMRBMM3030E
Foreign exchange exposure limits by bankMRBMM3030E
Bank statementsof the Health SWAp account held at RBMMRBMM3030E
Full banking survey (on monthly basis)MRBMM4515E
Financial soundness indicators by banksQRBMQ45T15E
NAC consolidated statement of sources and uses of funds (cashflow statemeMMOFM3030E
Health SWAp statement of sources and uses of fundsMMOFM3030E
Fiscal table (GFS) including revenue, expenditure, and financingMMOFM3030E
Revenue data (from MRA)MMOFM3030E
D\ata on expenditure for domestically financied capital projectsMMOFM3030E
New external loans contracted or guaranteed by the central government1QMOFQ30T30E
External debt services (actual and projections)QMOFQ30T30E
Borrowing of all major parastatals2QMOFQ45T15E
Annual Financial reports of the nine (9) major parastatals and MSBAMOFQ9030H
Report on IMF program performanceQMOFQ45T15E
Statement on new arrearsQAuGQ45T15E
Consumer price index and monthly statistical bulletinMNSOM3030E
Import and export dataMNSOM45T15E
Balance of payments, and quarterly statistical bulletinQNSOQ45T15E
National accounts, balance of payments, and quarterly statistical bulletinANSOBA45T15E
D-Daily, W-Weekly, M -Monthly, Q-Quarterly, BA-Bi-annual, F-Friday, 30-Every 30th, T30-Every third 30th, E-Electronic, H-Hard Copy

Detailed information on the amounts, currencies, terms, and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government.

Agriculture Development and Marketing Corporation (ADM ARC), Electric Supply Company of Malawi (ESCOM), Blantyre Water Board, Lilong we Water Board, Southern Region Water Board, Northern Region Water Board, Central Region Water Board, Malawi Housing Corporation, M alawi Communications Regulatory Authority.

D-Daily, W-Weekly, M -Monthly, Q-Quarterly, BA-Bi-annual, F-Friday, 30-Every 30th, T30-Every third 30th, E-Electronic, H-Hard Copy

Detailed information on the amounts, currencies, terms, and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government.

Agriculture Development and Marketing Corporation (ADM ARC), Electric Supply Company of Malawi (ESCOM), Blantyre Water Board, Lilong we Water Board, Southern Region Water Board, Northern Region Water Board, Central Region Water Board, Malawi Housing Corporation, M alawi Communications Regulatory Authority.

These were referred to as “out of scope” transactions, as they were not part of the auditors’ remit to investigate cashgate transactions.

The number deaths and displaced persons are estimated at 104 and 230,000 respectively. The number of displaced persons represented 2 percent of the population in affected districts. The authorities are implementing a recovery program with assistance from donors.

Arrears from FY13/14 and those that accumulated from previous years amounted to 8 percent of GDP.

The kwacha depreciated by 22 percent between September and November 2014 reflecting seasonal shortages in foreign exchange and economic uncertainties.

The 10 percent limit is also based on the model central bank law of the Southern African Development Community of which Malawi is a member.

The provisioning rate for NPLs then becomes 100 percent 18 months after the 90 days.

The contingent liabilities to the government of the two weak banks range between 0.4–0.6 percent of GDP.

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