Abstract
Progress on fiscal policy during 2006/07 in Malawi was slower than expected. The 2006/07 (July-June) fiscal strategy focused on reducing domestic debt. In the third Poverty Reduction and Growth Facility (PRGF) review, the end-June target for domestic debt repayments was increased substantially. Domestic borrowing exceeded the adjusted target at end-December 2006 by MK 4.1 billion (0.9 percent of GDP). The government partially redressed this overrun by curtailing discretionary spending in the fourth quarter, as the scale of the end-December overrun became clear.
December 17, 2007
The following information has become available since the issuance of the staff report. These developments do not change the thrust of the staff appraisal.
Revisions to estimates of gross reserves
The RBM has revised and reduced the end-June 2007 figure for gross reserves by US$19.5 million. The revisions involve reclassifications that bring reporting in line with the latest technical memorandum of understanding (TMU). As a result, the RBM has also reduced its estimate of end-June net foreign assets (NFA) and increased the estimate for net domestic assets (NDA) by the same amount. Staff will follow up and verify this information and subsequently report to the Executive Board. Despite these revisions, the end-June 2007 performance criteria on NFA and NDA were still met. Moreover, the revision does not affect the framework and policies underlying the program.
Despite the lower end-June number, new preliminary data imply that gross reserves of the RBM at end-September 2007 were US$34 million higher than the estimate in the staff report, which was based on data available at the time of the review mission. End-September estimates for NFA are correspondingly higher and estimates for NDA correspondingly lower by the same amount. The reserve accumulation during the third calendar quarter is consistent, inter alia, with the reported strength in tobacco exports. These revisions do not affect program targets for end-December 2007.
In other areas:
The agricultural season now appears to be under way satisfactorily, despite some administrative difficulties with the agricultural input subsidy program and the later-thanusual arrival of the rains in parts of the country.
Data received on the fiscal performance during the first fiscal quarter broadly confirm the assessment in the staff report. In addition, as expected, the World Bank has disbursed US$20 million in program support.
The large monetary overhang from mid-2007 appears to be receding. Year-over-year growth in reserve money has dropped from near 50 percent at end-September to about 20 percent at end-November. The exchange rate has remained stable and inflation has remained stable at 7.2 percent in October.
On December 12, the Board of Directors of the Millennium Challenge Corporation selected Malawi to be eligible for compact assistance.