Malawi: Third and Fourth Reviews Under the Extended Credit Facility Arrangement, Requests for Waiver of Performance Criteria, Extension of the Arrangement, Rephasing of Disbursements, and Modification of Performance Criteria—Informational Annex
Author:
International Monetary Fund. African Dept.
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Publication Date:
07 Feb 2014
eISBN:
9781475573046
Language:
English
Keywords:
ISCR; CR; authority; development partner; expenditure execution; complying disbursement; ECF arrangement; payment arrears; Budget planning and preparation; Global; Southern Africa; RBM staff; RBM autonomy; urbanization review; financing information; development expenditure estimate; Government finance statistics; Financial statistics
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INTERNATIONAL MONETARY FUND

Abstract

INTERNATIONAL MONETARY FUND

Copyright Page

INTERNATIONAL MONETARY FUND

IMF Country Report No. 14/15

December 27, 2013

THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR WAIVER OF PERFORMANCE CRITERIA, EXTENSION OF THE ARRANGEMENT, REPHASING OF DISBURSEMENTS, AND MODIFICATION OF PERFORMANCE CRITERIA—INFORMATIONAL ANNEX

Prepared By

The African Department (In Consultation with Other Departments)

Contents

  • RELATIONS WITH THE FUND

  • JOINT MANAGERIAL ACTION PLAN

  • RELATIONS WITH THE AFRICAN DEVELOPMENT BANK GROUP

  • STATISTICAL ISSUES

Relations with the Fund

(As of November 30, 2013)

Membership Status

Joined: July 19, 1965; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Formerly PRGF.

Projected Payments to Fund 1

(SDR Million; based on existing use of resources and present holdings of SDRs):

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Implementation of Multilateral Debt Relief Initiative (MDRI):

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The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

Debt Relief by Facility (SDR Million)

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Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable

Safeguards Assessments:

An update safeguards assessment of the Reserve Bank of Malawi (RBM) with respect to the 2012 ECF was completed on December 27, 2012. The assessment reiterated the key safeguards concern – the lack of operational autonomy - and recommended that already envisaged amendments to the RBM Act to limit lending to government be expanded to strengthen RBM autonomy more broadly. The assessment also reiterated the need to enhance oversight of foreign reserves management along with measures to strengthen transparency of financial reporting.

Exchange Arrangements:

In 2006 the Fund determined that Malawi maintains a multiple currency practice (MCP) inconsistent with Article VIII, Section 3, due to a spread of more than 2% between the exchange rates of commercial banks and the rates of foreign exchange bureaus. At that time, the Fund determined that the spread resulted from official action by RBM, through informal limitation on the availability of foreign exchange and moral suasion on commercial banks.

In May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent, and adopted a floating exchange rate regime. Malawi maintains restrictions on the capital account. In light of these changes, staff intends to conduct a comprehensive assessment of Malawi’s exchange rate system shortly. While the de jure exchange rate arrangement is floating, staff’s latest assessment classified the de facto arrangement as “other managed”.

Article IV Consultation:

Malawi is on a 24-month Article IV consultation cycle. The last Article IV Consultation mission was conducted in conjunction with the discussions on the new ECF-supported program arrangement in May/June 2012. The Executive Board concluded the last Article IV consultation with Malawi on July 23, 2012.

Financial Sector Assessment Program (FSAP), Reports on Observance of Standards and Codes (ROSCs), and Offshore Financial Center (OFC) Assessments:

A joint team of the World Bank and the International Monetary Fund visited Malawi under the FSAP program during two missions in July and December 2007. The Financial System Stability Assessment (FSSA) was issued in June 2008 (SM/08/198).

Corporate Governance and Accounting and Auditing ROSC missions visited Malawi in February and June 2007.

An update on the FAD mission on the fiscal transparency module was issued in March 2007. A ROSC on the data module, based on a September 2003 mission, was published in October, 2004.

Technical Assistance:

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Joint Managerial Action Plan

(As of November 31, 2013)

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Relations with the African Development Bank Group

(As of December 19, 2013)

AfDB operations in Malawi date back to 1969. The Malawi Field Office was opened in 2007 and officially launched in July 2008 by AfDB President Dr. Donald Kaberuka. As at December 19, 2013, the Bank had provided significant and diversified support to Malawi, with cumulative commitments worth UA 829.8 million (about US$ 1.3 billion) to finance 99 operations including 12 studies and 2 lines of credit.

The AfDB Board of Directors on 30th January 2013 approved a new Country Strategy Paper (CSP) covering 2013–17. The Bank’s new CSP is fully aligned to the second Malawi Growth and Development Strategy (MGDS II) covering the period 2011–16, the Bank’s corporate priorities in the Long Term Strategy (LTS, 2013–22) and the Regional Integration Strategy Paper for Southern Africa (Southern African RISP, 2011–15). The new CSP l focuses on two pillars: (i) addressing infrastructure bottlenecks to competitiveness and growth; and (ii) supporting actions to expand private sector investment and trade. To ease challenges posed by Malawi’s landlocked position, the Bank has scaled-up support to regional infrastructure to deepen the country’s integration with its neighbors. Accordingly, more than 50 percent of the indicative lending operations are regional and will be financed with ADF XII, XIII and XIV resources. The Bank will also support Public Private Partnerships (PPPs) in infrastructure development.

Following Governments reengagement with the IMF and the approval of a new US$ 157 million Extended Credit Facility (ECF) arrangement for Malawi in July 2012, the Bank approved a new ADF Grant for the Crisis Response Budget Support operation for Malawi in July 2012, in the amount of UA 26 million (US$ 40 million). The Bank designed a Restoration of Fiscal Stability and Social Protection (RFSSP) program whose objective is to contribute to restoring fiscal stability and enhancing public finance management in Malawi, as well as support social protection measures to mitigate the adverse social impact of the devaluation of the Kwacha and the increases in fuel and electricity prices. In order to support this agenda, the RFSSP has two components: (i) strengthened PFM transparency and accountability, and (ii) strengthened social protection system. The Bank disbursed UA 4 million (US$ 6 million) as additional budgetary support in June 2013.

AfDB Ongoing Operations.

The Bank’s ongoing operations comprise the following: three projects in the agriculture sector: (i) Agriculture Infrastructure Support Project (AISP); (ii) Small-holder Crop Production and (iii) Marketing Project (SCPMP) and Climate Adaptation for Rural Livelihoods and Agriculture Project (grant from Global Environment Facility). The Bank is also implementing the National Water Development Programme (NWDP) in collaboration with Australian AID (AusAID), whilst the grants from the African Water Facility (AWF) are financing Strengthening Water Sector Monitoring & Evaluation Project and the Water and Sanitation Access project for the Urban Poor in the City of Blantyre which is aimed at improving access to improved water supply and sanitation services. There are currently four projects providing support to the social sector: (i) the Health SWAp Programme which is constructing and rehabilitating a total of 57 health facilities across the country; (ii)the Local Economic Development project is developing infrastructure in four rural growth centres of Jenda, Malomo, Monkey Bay and Chitekesa; (iii) the Competitiveness and Job Creation Project in Private sector which aims to improve the capabilities and the competitiveness of the private sector as well as increase export diversification and job creation ; and (iv) Support to Higher Education Science & Technology Project aims to increase access to technical, entrepreneurship, vocational and training (TEVET) and higher education in Malawi, with particular emphasis to Information and Communication Technology (ICT). In the transport sector the Bank is implementing the Trunk Roads Rehabilitation Project which includes Blantyre-Zomba road rehabilitation project (60 km) and the Lilongwe Bypass construction Project (13km) as part of the Multinational Nacala Road Corridor. As at the end of November 2013, the overall portfolio was rated satisfactory with a cumulative disbursement rate of 49%. In line with the CSP indicative program, the Bank approved three new operations, the Mzuzu-Nkhata Bay Road Rehabilitation Project (US$ 33.20m), Smallholder Irrigation and Value Addition Project (US$39.98m) funded by Global Agriculture and Food Security Project and the African Development Fund, and a multinational Nacala Road Corridor Development Project Phase IV (US$65.9m). The first two were approved in March and the third in Dec 2013. In October 2013, the Board also approved a UA2.98 million (about US$ 4.5 million) Public Finance Management Institutional Support Project to support the Government of Malawi in implementing its five-year Public Finance and Economic Management Reform Program (PFEMRP)through improved tax administration and procurement systems.

The Bank has also provided support for non-lending activities, including feasibility studies and analytic work to inform the design of new operations and policy dialogue. During 2012-2013 the Bank prepared a Private Sector Profile for Malawi and has also financed jointly with the World Bank and other partners a Public Expenditure Review. In addition, the Bank is supporting the Private Public Partnership Commission (PPPC) with a grant to implement the Capacity Building and Assessment of the Legislative and Institutional Framework for PPPs in Malawi. The Bank is also undertaking the Domestic Resource Mobilization Study for Malawi and providing TA to the Reserve Bank of Malawi to strengthen capacity in macro-economic forecasting.

Statistical Issues

Introduction

1. Although economic data provision has some shortcomings, it is broadly adequate for surveillance.

2. The data module of the Report on the Observance of Standards and Codes (data ROSC), published February 17, 2005, found that, while the institutional framework for the production of macroeconomic statistics was broadly adequate, there were shortcomings in the scope, accuracy, and reliability of data. The weakest areas are: national accounts, balance of payments statistics, government finances statistics, and monetary and financial statistics. A key STA recommendation was to formally assign the responsibility for the compilation of government finance statistics to the Ministry of Finance and responsibility for the compilation of monetary statistics to the RBM.

3. The authorities are making efforts to improve the quality and timeliness of economic and financial data through participation in the Fund’s General Data Dissemination System (GDDS) and the GDDS Project for Anglophone African Countries. Malawi is participating in the GDDS/PRSP and the monetary and financial statistics modules of the project. GDDS metadata have been posted on the Fund’s Dissemination Standards Bulletin Board (DSBB) since February 2007.

National accounts

4. The accuracy and reliability of the real sector data (including national accounts, prices, and trade) are affected by inadequate source data and timeliness. STA has recommended remedial actions, including the need for additional resources for the National Statistics Office (NSO). A long- term technical assistance program in the area of national accounts is being provided under a project by Norwegian counterparts. The NSO have revised the national accounts methodology to implement the SNA93 and to better account for the activities in the informal sector. New estimates for Real and Nominal GDP based on the base year 2007 are submitted.

Consumer prices

5. A consumer price index (CPI) is available on a timely basis. The CPI base is 2000, drawing on the 1997/98 household survey, and data (on urban and rural price indices) are collected on a monthly basis by regional price collectors. The CPI weights have been revised based on the 2010 planned Integrated Household Survey (IHS) and the new series will be available in March 2013.

Government finance statistics

6. The accuracy and reliability of the data are affected by inadequate source data. A key shortcoming in this area is inadequate system of recording source data. In addition, there are serious quality problems, including data inconsistencies, that complicate program monitoring:

  • • While tax revenue data are received in a timely fashion, it is not always possible to reconcile them with deposits in the Malawi Government (MG) Account

  • • Nontax revenue, including capital revenues collected by line ministries are not properly accounted for in the fiscal reports prepared by the Ministry of Finance.

  • • Data on recurrent expenditure suffer from serious shortcomings partly related to insufficient bank reconciliation between expenses records prepared by line ministries and financing information prepared by the Ministry of Finance. Line ministries submit spending reports to the Ministry of Finance based on recorded expenses, while the Ministry of Finances estimates expenses based on funding data (from the Credit Ceiling Authority). At times, there are sizable discrepancies between these two sources of data for both wages and other recurrent transactions-to some extent reflecting the widespread practice of reallocation across budget lines.

  • • Domestically financed development expenditure estimates are based on funding released to line ministries, and estimates on externally funded expenditure are based on reported project grants and loans. Owing to differences in timing and financing modalities (e.g., some donors require prefinancing of expenditure before reimbursement), there are substantial differences between the flow of expenses and corresponding financing data. In addition, many donor projects are still not incorporated in the budget, and hence the corresponding expenditure is not captured in government finance statistics. Some externally funded development expenditures are likely recurrent and reported capital expenditure therefore overstated.

  • • Data on expenditure arrears are likely incomplete, as reporting from the Commitment Control System appears to be only partial, and ministry level data are not consistent from report to report.

  • • Malawi’s current budget classification includes economic and program classification and program, but does not include an effective administrative/organizational classification.1 Expenditure data is loosely mapped to functional classification based on the CoFoG classification.

  • • The budget classification and chart of accounts may be adequate for some administrative, economic, functional and program classifications. An output-oriented activities-based budget classification (ABB) is used for the presentation of the budget. However, pro-poor expenditures that have been protected in line with the PRSP are only identified in the ABB classification. As no bridge table exists to map the ABB classification into the program classification used for expenditure reporting and accounting, pro-poor expenditures cannot be monitored. Under the ECF program, the government is expected to develop a mechanism for properly monitoring social expenditures.

  • • The government nomenclature program/subprogram currently used for the functional classification seems appropriate considering the nature of the items classified under this group. The items currently classified under this group include functions, programs and administrative levels. Although substantial elements of the current output based budget structure appear to be predominately functional in nature, it is not clear whether they are cleanly linked to classification of functions of government (CoFoG). As such, the government should review the current budget structure and the functional classification based on CoFoG (GFSM2001) to verify that they are aligned.

  • • The absence of a financial administrative structure, complete with vertical hierarchy of responsibilities inhibits the use of Government Finance Statistics (GFS). Budget funds are directed to organizations generally defined as cost centers (e.g., headquarters of ministries down to the level of secondary school principals). As such, there does not appear to be an effective hierarchal financial system. However, to be clear, over the past two years, sub-votes have been introduced to a number of Ministries, but not as yet, a system of warrants and sub-warrants have not been introduced.

  • • Financing estimates are based on monetary and debt data, rather than on government records of financing. Reporting on treasury bills directly issued to the RBM at times has been slow.

7. The authorities have received significant technical assistance from the Fund and other donors to strengthen expenditure monitoring and reporting, accounting, and statistical reporting, but results have lagged. The government has pledged to strengthen public financial management and fiscal reporting, and renewed efforts are being made to establish a work plan, including utilizing donor technical assistance more effectively. The authorities are currently working with East AFRITAC to modify its chart of accounts and output-based structures so that they could more easily be realigned to the national strategy and can be readily understood.

8. Government finance data are not reported for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS). An August 2005 and August 2007 STA mission that visited Lilongwe reiterated the importance of continued efforts to implement the Integrated Financial Management Information System (IFMIS), and encouraged the authorities to improve the coverage and sectorization of government financial operations and to correctly classify transactions according to international guidelines. The mission proposed, and discussed with the authorities, a migration plan and timetable to adopt the GFSM 2001 methodology.

9. A GFS TA mission visited Lilongwe in June 2011 in the context of the country’s participation in the GFS Module under the Enhanced Data Dissemination Initiative funded by DFID. It found that annual and sub-annual data for budgetary central government are compiled in GFSM 1986 format of the Ministry of Finance, but are not disseminated. A new chart of accounts aligned with the GFSM 2001 was introduced in the 2011–12 budget cycle, which applies to all general government units. A number of source data issues were identified and recommendations made to address them. Bridge tables linking the national classifications and GFSM 2001 classifications were prepared by the mission, and should be revised and used to compile GFS in GFSM 2001 format. A follow up mission is included in the RAP for FY 2013.

Monetary and financial statistics

10. Despite recent improvements, monetary and financial statistics (MFS) continue to have shortcomings. These includes irregular reporting to STA, lack of proper legislation to grant the authority to the RBM to require reporting from other institutions2; the sectorization of the domestic economy, and classification of financial instruments to ensure that the RBM adheres fully to the methodology of the Monetary and Financial Statistics Manual. The 2004, 2008, 2009, and 2010 missions noted and made a number of recommendations for addressing the above shortcomings. In addition to the above tasks, the 2008, 2009, and 2010 STA missions assisted RBM staff in developing the standardized report forms (SRFs) for the central bank accounts (1SR), other depository corporations (2SR), and monetary aggregates (5SR).

External sector statistics

11. The external sector statistics in Malawi exhibit serious deficiencies. Concepts and definitions used to compile the balance of payments statistics are in broad conformity with the guidelines presented in the fourth edition of the Balance of Payments Manual (BPM4), although there has been some progress in the transition to the methodology of BPM5. The National Statistical Office of Malawi (NSO) should now adopt the BPM6 methodology, on the basis of which the Malawi balance of payments metadata should also be updated. Balance of payments data remain weak in a number of key areas. The NSO balance of payments section remains crucially understaffed, as it has been since March 2008. Moreover, important data sources for balance of payments compilation ceased to be available during 2006–07, for example exchange control forms, which could supply information on imports of goods, services, and current transfers. Procedures for assessing the accuracy of trade data need to be improved.

12. The NSO had compiled new balance of payments data and validated the results from two key surveys: the BOP Survey and the survey on nonprofit institutions serving households (NPISH), both based on the BPM5 methodology. The NSO also compiled information from other important sources as well, namely: a) the 2009 Foreign Private Capital and Investor Perception Survey, b) monetary statistics from the Reserve Bank of Malawi (RBM), and c) other financial data provided by the Ministry of Finance (MoF). However, much remains to be done to improve the quality, coverage, and timelines of the balance of payments statistics. To this end, the NSO is a recipient of substantial amounts of technical assistance from the Fund and other organization. External support should be underpinned by providing adequate staffing and budget resources to the NSO.

13. Data on remittances are non-existent, despite anecdotal evidence that there are high remittances. As a first step the money transfer services should be required to report monthly data to the RBM. Data on foreign direct investment and portfolio flows are similarly weak. Project aid is currently classified as current transfers rather than in the capital account, and several large in-kind projects are not captured in the balance of payments data properly.

14. Due to capacity constraints and weak source data, the International Investment Position (IIP) is not being compiled. Capacity building programs, including Fund-provided training and technical assistance, seek to overcome these constraints to allow the compilation of the IIP in future. The RBM and Ministry of Finance’s Debt and Aid Department need to improve reporting of monetary and external debt data respectively.

Malawi: Tables of Common Indicators Required for Surveillance

(As of November 30, 2013)

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.

Reflects the assessment provided in the data ROSC or the Substantive Update (published on March 10, 2004, and based on the findings of the mission that took place during May 8–21, 2003) for the dataset corresponding to the variable in each row.

The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording, respectively, are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 9, except referring to international standards concerning, respectively, source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

1

Economic classifications were upgraded to GFS 2001 compatible framework in FY 2006/07.

2

Some legislation that is designed to address this issue has recently been approved. However, some of the pending legislation would give and strengthen the authority of the RBM in this regard.

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Cover IMF Staff Country Reports
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.
Volume/Issue:
Volume 2014: Issue 037
Publisher:
International Monetary Fund
ISBN:
9781475573046
ISSN:
1934-7685
Pages:
113
DOI:
https://doi.org/10.5089/9781475573046.002