Malawi: Third and Fourth Review 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—Supplementary Information
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INTERNATIONAL MONETARY FUND

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INTERNATIONAL MONETARY FUND

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INTERNATIONAL MONETARY FUND

IMF Country Report No. 14/15

January 13, 2014

THIRD AND FOURTH REVIEW 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—SUPPLEMENTARY INFORMATION

Approved By

David Owen (AFR) and Mark Flanagan (SPR)

  • 1. This supplement focuses on recent developments regarding the government’s response to the recent fiscal scandal, and on the implementation of two remaining prior actions. In the latter context, at the time the staff report was issued, the interim report on the forensic audit had just been received and had not yet been assessed by staff nor discussed with the authorities; and there was a lack of sufficient information to assess performance in relation to the three quantitative targets set for mid-December 2013.

  • 2. Concerning recent developments, at a meeting of the inter-Ministerial Committee overseeing the implementation of the government’s Action Plan held on January 9, 2014, the authorities reported on several actions including:

    • • An IFMIS General Manager is now in place, and an IFMIS Advisor is due to assume office before the end of January 2014.

    • • Government has extended the contract of the IFMIS software vendor (Softech) to supply IFMIS security services through June 2014.

    • • The Asset Declaration Law has come into effect.

    • • Draft amendment to the Money Laundering Act has been completed with assistance from the World Bank. The authorities have requested a desk review by IMF staff before finalization and submission to parliament.

    • • The Director of Public Prosecutions has finalized investigation of eight court cases involving multiple defendants, with trials due to start in the week of January 13-17, 2014

  • 3. Staff are in frequent contact with all the major donors. The multilateral donors have indicated to staff that their plans for resuming budget support this fiscal year remain on track. Implementation of the Extraordinary Performance Assessment Framework is advancing at a satisfactory pace, with several actions already completed. Most of the remaining main actions are expected to be completed by end-February.

Forensic Audit and Interim Report

  • 4. The forensic audit commissioned by the government-covering budget transactions between April and September 2013-is scheduled to be submitted to the government by end-January 2014 (although it could slip into early February).1 At the request of Fund staff, the authorities asked the auditors to prepare an interim report by end-December 2013. Staff requested that the interim report cover: (i) audit status (coverage to date, outstanding areas, and estimate of completion date); (ii) substantive audit findings in aggregate form, including quantification of confirmed fraud or misappropriated amounts; and (iii) substantive system findings, such as identified failures in control systems and robustness of the reactivated IFMIS. Specific terms of reference for the audit and the status of work (through December 20, 2013) reflected in the interim report are presented in Table 1.

Table 1.

Malawi: Terms of Reference for Forensic Audit

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Table 2.

Main Findings of the Interim Forensic Audit and the Authorities’ Response

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  • 5. The interim report highlights progress with several strands of the audit work, although in some areas it has not progressed as far as hoped:

    • • An estimate of misappropriated funds is not yet available. The report notes that some of the checks associated with deleted transactions in the first fiscal quarter of FY2013/14 (July-September 2013) recovered by Softech have not been cashed. However, the auditors are also examining non-deleted transactions during this period, some of which may involve fraudulent payments. The auditors want to complete their investigations before providing a full estimate of the misappropriated amounts.

    • • With respect to testing of the robustness of the reactivated IFMIS, the auditors have undertaken an initial assessment based on high level analysis and have extracted data for further interrogation and profiling. Thus far, they have not identified any serious issues but will cover this more fully in the final report.

    • • Staff sought the authorities’ response to several specific findings on governance and control weaknesses, including shortcomings in the operations of the Accountant-General’s Department, the National Audit Office and the RBM (Table 2). The authorities’ responses indicate that nearly all the identified weaknesses are being addressed. However, it will be necessary to monitor the results of the various measures over a long period before a robust assessment can be made of their effectiveness.

    • • The interim report also noted a lack of budgetary control and management as evidenced by spending by several ministries that significantly exceeded the funding limits approved by the Ministry of Finance. Weaknesses in budget control are being addressed in the government’s Action Plan as well as in the ECF-supported program. The government has recently authorized the RBM to enforce funding limits of ministries. The authorities have also adopted templates in IFMIS (prepared with assistance of Fund staff) for closer monitoring of monthly budget execution by each ministry and the enforcement of expenditure ceilings. The government has also committed to begin publication of monthly expenditure reports for each ministry containing data on budget allocations, approved funding limits, and payments.

Mid-December 2013 Quantitative Targets

  • 6. Quantitative targets were set for December 13, 2013 (at the same level as end-December targets) to provide an indication of the prospects for meeting the end-December 2013 targets. The focus was on three key indicators: (i) government net domestic borrowing; (ii) net domestic assets (NDA) of the RBM; and (iii) net international reserves (NIR) of the RBM (Text Table). The net domestic borrowing and NIR targets were met with ample margins. The NDA target was missed by a small margin (about MK4 billion). However, the RBM undertook monetary operations that withdrew about MK10 billion worth of liquidity from the banking system in the second half of December. A full assessment will be made when more comprehensive data (including on adjustors) become available at the end of January 2014, but end-December actions together with preliminary indications of subdued government borrowing suggests that the end-December NDA target may have been met, and the macroeconomic program remains on track.

Malawi: Quantitative Targets, December 2013

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Source: Malawi authorities.

Defined as stocks.

Defined as a cumulative flow from beginning of fiscal year (July 1).

Staff Appraisal

  • 7. Staff welcomes the continued progress in implementing remedial actions to address the recent fraud, and the actions taken by the authorities toward meeting the end-December 2013 quantitative targets. Staff also welcomes the interim forensic audit report. While it did not contain all the information sought by Fund staff, it had enough information to assure staff that the remedial measures being implemented by the authorities to strengthen system controls and financial management are in the right areas. Some risks remain. It will be important to cautiously implement the fiscal spending program, to preserve buffers lest the final audit reveal slightly larger fund misappropriation. It will also be important for the authorities to complete the forensic audit and adopt all of the key recommendations in a timely manner.

1

Some of the work in support of court cases may take a bit longer to complete.

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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
Author:
International Monetary Fund. African Dept.