Malawi: Staff Report for the 2015 Article IV Consultation—Informational Annex
Author: International Monetary Fund. African Dept.
Publication Date:
18 Dec 2015
eISBN:
9781513551470
Language:
English
Keywords:
ISCR; CR; fiscal policy; monetary policy slippage; authority; fuel import regime; FAD; RBM autonomy; RBM staff; Ministry of Finance's debt; NSO balance of payments; Malawi-Mozambique Power Inter-connector Project; Budget planning and preparation; Financial statistics
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This 2015 Article IV Consultation highlights that bold economic reforms undertaken in mid-2012 in Malawi transformed the policy environment and greatly improved the outlook of the economy. Over 2012-14, real GDP growth and inflation averaged 4.3 percent and 24.5 percent, respectively. The economic outlook remains difficult reflecting the negative impact of weather-related shocks, the ongoing suspension of budget support, persistently high inflation and weaker global demand which could hurt Malawi's exports. Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015.

Abstract

This 2015 Article IV Consultation highlights that bold economic reforms undertaken in mid-2012 in Malawi transformed the policy environment and greatly improved the outlook of the economy. Over 2012-14, real GDP growth and inflation averaged 4.3 percent and 24.5 percent, respectively. The economic outlook remains difficult reflecting the negative impact of weather-related shocks, the ongoing suspension of budget support, persistently high inflation and weaker global demand which could hurt Malawi's exports. Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015.

Relations with the Fund

(As of September 30, 2015)

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.

Overdue Obligations and Projected Payments to Fund1

(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 arrangement 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 May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent, and adopted a floating exchange rate regime. Since May 2012, the RBM has not set a target rate and allowed substantial volatility in the exchange rate, including recent depreciation to around MK 555 per U.S. dollar at end-September 2015. Official actions continue to play a role in influencing the exchange rate, but the exchange rate movements are largely market determined and staff found that the authorities’ practice of determining the exchange rate of commercial banks through moral suasion has ceased, thereby removing the official action that gave rise to the multiple currency practice identified in August 2006 and manifested by the significant spread between the commercial bank and foreign exchange bureau rates. Malawi maintains a system free from restrictions on the making of payments and transfers for current international transactions.

Article IV Consultation:

Malawi is on a 24-month Article IV consultation cycle. The Executive Board concluded the last Article IV consultation with Malawi on July 23, 2012. The Article IV was delayed due to the program going off track in the wake of the “cashgate” scandal involving the large scale theft of public funds that came to light in October 2013.

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

(October 27, 2015)

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Relations with the African Development Bank Group

(As of September, 2015)

AfDB operations in Malawi date back to 1969. The Malawi Field Office was opened in 2007. As at 30th September, 2015, the Bank had provided significant and diversified support to Malawi, with cumulative commitments worth UA 873.7 million (about US$ 1.2 billion) to finance 102 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) for Malawi covering 2013–17. The Bank’s current 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 CSP, currently under implementation, 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 and enhance competitiveness, the Bank has scaled-up support to regional infrastructure to deepen the country’s integration with its neighbors. In 2014, the Bank approved the Nacala Road Corridor Phase IV Project while other regional infrastructure projects are in the pipeline, including the Malawi-Mozambique Power Inter-connector Project. The Bank will also support Public Private Partnerships (PPPs) in infrastructure development. The CSP mid- term review was undertaken in 2015 and the strategic priorities have been maintained.

The Bank has deepened its support for PFM Reforms and capacity building in coordination with other Development Partners. In September, 2015, the Bank approved a grant of US $ 2.61 million for Phase II of the on-going PFM Institutional Support (ISP). ISP II is providing support for two components: (i) enhancing transparency, control and compliance in the area of procurement and; (ii) strengthening capacity in revenue administration. This was in addition to the US$ 4.2 million approved in 2013 for the PFMISP I.

The Bank has also provided Malawi with quick disbursing budget support. 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$ 36 million). The Bank designed the Restoration of Fiscal Stability and Social Protection (RFSSP) program whose objective was 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 had two components: (i) strengthened PFM transparency and accountability, and (ii) strengthened social protection system. The Bank disbursed UA 4 million (US$ 5.6 million) as additional budgetary support in June 2013. In April, 2015, the Bank approved a grant of US $ 30 million for the Protection of Basic Services Programme. This is a ring fenced Sector Budget Support programme, which is designed to protect critical expenditures in health, education and social protection and improve accountability following suspension of general budget support. The grant was disbursed in one tranche in July, 2015.

Box. AfDB Ongoing Operations

The Bank’s ongoing operations comprise the following: two projects in the agriculture sector: (i) Agriculture Infrastructure Support Project (AISP); and (ii) Climate Adaptation for Rural Livelihoods and Agriculture Project (grant from Global Environment Facility). There are currently three projects providing support to the social sector and for economic empowerment: (i) the Local Economic Development project is developing infrastructure in four rural growth centers of Jenda, Malomo, Monkey Bay and Chitekesa; (ii) 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 (iii) 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 on Information and Communication Technology (ICT). In the transport sector the Bank is providing support for the Mzuzu-Nkhata Bay Road Rehabilitation Project and the Multinational Nacala Road Corridor Phase IV. As at 30th September 2015, the overall Bank portfolio was rated satisfactory with an average disbursement rate of 30%. In the water sector, the Bank is providing support for the Sustainable Rural Water and Sanitation for Improved Health and Livelihood Project to improve access to water. In line with the CSP program, the Bank approved three new operations in 2015; the Protection of Basic Services Programme (US $ 30 million), the Public Financial Management Institutional Support II (US $ 2.61 million) and the Mzimba Urban Water Integrated Project (US$ 5.0 million). The latter project is co-financed with OPEC Fund for International Development.

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. In 2013, the Bank collaborated with the World Bank and other partners on the Public Expenditure Review. The Bank has in addition provided support for the Public Expenditure Tracking Study in collaboration with other DPs. 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 also undertook the Domestic Resource Mobilization Study for Malawi in 2013/2014 and provided TA to the Reserve Bank of Malawi to strengthen capacity in macro-economic forecasting.

Statistical Issues

Malawi—Statistical Issues Appendix

As of November 2, 2015

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Malawi: Tables of Common Indicators Required for Surveillance

(As of November 2, 2015)

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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 discounts 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

Some legislation that is designed to address this issue has recently been approved.

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Cover IMF Staff Country Reports
Issue 345
Volume/Issue:
Volume 2015: Issue 345
Publisher:
International Monetary Fund
ISBN:
9781513551470
ISSN:
1934-7685