Abstract
INTERNATIONAL MONETARY FUND
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INTERNATIONAL MONETARY FUND
IMF Country Report No. 13/375
February 2014
MALAWI
THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR WAIVERS FOR NON-OBSERVANCE OF PERFORMANCE CRITERIA, EXTENSION OF THE ARRANGEMENT, REPHASING OF DISBURSEMENTS, AND MODIFICATION OF PERFORMANCE CRITERIA—STAFF REPORT; STAFF SUPPLEMENT; PRESS RELEASE ON THE EXECUTIVE BOARD DISCUSSION; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALAWI.
In the context of the Third and Fourth Reviews Under the Extended Credit Facility Arrangement, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 17, 2014, following discussions that ended on November 20, 2013, with the officials of Malawi on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on December 27, 2013.
A Staff Supplement of January 13, 2014 updating information on recent developments.
An Informational Annex prepared by staff of the IMF in consultation with staffs of the World Bank and African Development Bank.
A Debt Sustainability Analysis prepared by staffs of the IMF and the World Bank.
A Press Release including a statement by the Acting Chair of the Executive Board.
A Statement by the Executive Director for Malawi.
The documents listed below has been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Malawi *
Memorandum of Economic and Financial Policies by the authorities of Malawi *
Technical Memorandum of Understanding*
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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© 2014 International Monetary Fund
Title Page
December 27, 2013
MALAWI
THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUEST FOR WAIVERS FOR NONOBSERVANCE OF PERFORMANCE CRITERIA, EXTENSION OF THE ARRANGEMENT, REPHASING OF DISBURSEMENTS, AND MODIFICATION OF PERFORMANCE CRITERIA
Executive Summary
Donors have suspended some aid disbursements to Malawi in response to a scandal involving the theft of public funds. A group of public servants exploited weaknesses in the control environment of the government’s Integrated Financial Management Information System (IFMIS) to make fraudulent payments to several entities that had not provided any goods or services to the government. The authorities are implementing an Action Plan of remedial measures to prevent the recurrence of the fraud. Key elements of the action plan include strengthening security and management of IFMIS, a forensic audit, and identifying and prosecuting the perpetrators of the fraud.
Recovery is underway in many sectors of the economy, facilitated by increased availability of foreign exchange. This reflects the impact of policy reforms, including a strong response to exchange rate adjustment from the tobacco sector and re-established external credit lines. Inflation is falling, although more slowly than programmed.
Performance in relation to quantitative targets for the third ECF review (March test date) was good, but weakened for the fourth review (September test date). There was significant fiscal slippage (excessive domestic borrowing) during July-September 2013. This constrained the room for substituting domestic borrowing for the shortfall in aid flows. There has been progress in implementing structural benchmarks, but at a slower pace than programmed.
Discussions focused on managing the fall-out from the fiscal scandal and policies to reverse the fiscal slippage and lower inflation. A substantial decrease in aid receipts for the remainder of the fiscal year necessitated some reprioritization of spending plans as well as expenditure cuts. Fiscal and monetary policy need to be tightened to lower inflation pressures and safeguard international reserves.
Staff supports the authorities’ requests for waivers based on corrective actions and policy commitments. The authorities are implementing strong corrective actions to address the fraud and fiscal slippage, including several prior actions, and have also strengthened external debt management to ensure that they observe their commitment not to contract nonconcessional external debt. Staff further supports the requests for extension of the arrangement, rephasing of disbursements (including a halving of the disbursements originally associated with the third and fourth reviews and applying the balance to an additional review) and modifications of performance criteria.
Approved By
David Owen (AFR) and Mark Flanagan (SPR)
Prepared By
The African Department (in consultation with other departments)
Discussions for the third review were held in Lilongwe and Blantyre during June 11-25. A mission returned to Lilongwe from November 5 to 20, 2013 to hold discussions on the third and fourth reviews. Both missions were led by Mr. Tsikata (AFR). Other members of the June mission team were Messrs. Daal and Ghazanchyan and Ms. Carvalho (all AFR), Ms. Mitchell Casselle (MCM) and Ms. Randall (resident representative). The November mission team included Messrs. Reinke and Wu (both AFR), Mr. Amaglobeli (FAD), Mr. Peralta-Alva (SPR) and Mr. Oestreicher (resident representative). Mr. Tucker and Ms. Teferra (both OED) participated in the discussions in June and November, respectively.
The missions met with President Joyce Banda, Ministers of Finance Dr Ken Lipenga (June) and Dr. Maxwell Mkwezalamba (November), Reserve Bank of Malawi (RBM) Governor Charles Chuka, other senior government and RBM officials, as well as representatives of the business community, civil society organizations, and Malawi’s international development partners.
Contents
CONTEXT: FISCAL SCANDAL AND RISKS TO ECONOMIC RECOVERY
RECENT ECONOMIC DEVELOPMENTS AND PERFORMANCE UNDER THE PROGRAM
A. Recent Economic Developments and Near-Term Outlook
B. Performance Under the Program
POLICY DISCUSSIONS
A. Macroeconomic Framework
B. Fiscal Policy and Related Structural Reforms
C. Exchange Rate and Monetary Policies
D. Financial Sector Reforms
E. Business Climate and International Competitiveness
PROGRAM ISSUES
STAFF APPRAISAL
BOX
1. Action Plan to Address Weaknesses in Public Financial Management Exposed by Fiscal Scandal
TABLES
1. Selected Economic Indicators, 2011—16
2a. Central Government Operations: 2010/11—2015/16, (Billions of kwacha)
2b. Central Government Operations: 2010/11—2015/16 (Percent of GDP)
2c. Central Government Operations: 2013/14
3a. Monetary Authorities’ Survey, 2011—16
3b. Monetary Survey, 2011—16
4a. Balance of Payments, 2011—16 (US$ millions)
4b. Balance of Payments, 2011—16 (Percent of GDP)
5. External Financing Requirement and Source, 2009—17
6a. Original Schedule of Disbursements Under ECF Arrangement, 2012—15
6b. Proposed Schedule of Disbursements Under ECF Arrangement, 2012—15
7. Indicators of Capacity to Repay the Fund, 2013—22
8a. Quantitative Targets (2012—13)
8b. Quantitative Targets (2013—14)
9a. Prior Actions and Structural Benchmarks, July 2012—Nov 2013
9b. Prior Actions and Structural Benchmarks, Dec 2013—Sept 2014
10. Risk Assessment Matrix
APPENDIX
I. Letter of Intent
I. Memorandum on Economic and Financial Policies
II. Technical Memorandum of Understanding