Malawi: Seventh and Eighth Reviews Under the Extended Credit Facility Arrangement and Request for Waivers for Nonobservance of Performance Criteria, Extension of the Arrangement, Augmentation of Access, Modification of Performance Criterion, and Rephasing of Disbursements—Informational Annex
Author: International Monetary Fund. African Dept.
Publication Date:
24 Jun 2016
eISBN:
9781498318228
Language:
English
Keywords:
ISCR; CR; staff appraisal; statement; report; staff representative; bank work program; internal audit function; financial asset; bank request; bank portfolio; Balance of payments statistics; External sector statistics; Government finance statistics
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This paper provides a review of the economic performance of Malawi under the program supported by an Extended Credit Facility (ECF) arrangement. Malawi's economy has been hit hard by weather-related shocks for a second consecutive year, further weakening growth and worsening food insecurity. Growth is estimated to have declined from 5.7 percent in 2014 to 3 percent in 2015 and is projected to drop further to 2.7 percent this year. Under the ECF program, the macroeconomic framework in the near term will be anchored on a policy mix incorporating a tight monetary stance and a level of domestic fiscal financing consistent with disinflation.

Abstract

This paper provides a review of the economic performance of Malawi under the program supported by an Extended Credit Facility (ECF) arrangement. Malawi's economy has been hit hard by weather-related shocks for a second consecutive year, further weakening growth and worsening food insecurity. Growth is estimated to have declined from 5.7 percent in 2014 to 3 percent in 2015 and is projected to drop further to 2.7 percent this year. Under the ECF program, the macroeconomic framework in the near term will be anchored on a policy mix incorporating a tight monetary stance and a level of domestic fiscal financing consistent with disinflation.

Relations With The Fund

(As of March 31, 2016)

Membership Status

Joined: July 19, 1965; Article VIII

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Latest Financial Arrangements:

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Overdue Obligations and Projected Payments to Fund 1

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

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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.

Implementation of Catastrophe Containment and Relief (CCR): Not Applicable.

As of February 4, 2015, the Post-Catastrophe Debt Relief Trust has been transformed to the Catastrophe Containment and Relief (CCR) Trust.

Safeguards Assessments:

The 2012 safeguards assessment confirmed that legal reforms were required to address the RBM’s lack of operational autonomy. The assessment also reiterated the need to enhance oversight of foreign reserves management, expand disclosures contained in the financial statements and strengthen data compilation procedures. Since then, the RBM has taken steps to ensure that its external audit and financial statements are accordance with international standards. The RBM continues to publish its financial statements while the internal audit function benefitted from implementing the recommendations of an external quality review. Legal amendments were also enacted in 2015 to limit direct advances to the government and strengthen audit and accountability requirements.

The safeguards monitoring visit to the RBM in February 2016 found that all recommendations of the 2012 assessment were implemented, with the exception of the remaining weaknesses in the RBM Act that continue to impede on the bank’s autonomy. Steps are underway to address control weaknesses identified in the banking operations. The 2016 monitoring assessment recommended that the RBM’s internal audit function assess the operating effectiveness of the enhanced controls through special audits. Also, revision of the investment policy is needed to limit concentration of investments in institutions with a credit rating below investment grade.

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 has allowed substantial volatility in the exchange rate. 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 December 11, 2015.

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.

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 was published in February, 2005.

Technical Assistance:

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Joint Managerial Action Plan

(May 6, 2015)

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Relations With the African Development Bank Group

(As of May, 2016)

AfDB operations in Malawi date back to 1969. The AfDB Malawi Field Office was opened in 2007. As at 31st March, 2016, the Bank had provided significant and diversified support to Malawi, with cumulative commitments worth UA852.8 million (about US$1.3 billion) to finance 102 operations including 12 studies and 2 lines of credit.

The current Country Strategy Paper (CSP) of the Bank covering 2013–17 is fully aligned to the second Malawi Growth and Development Strategy (MGDS II) covering the period 2011–16 and the Bank’s corporate priorities in the Long Term Strategy (LTS, 2013¶22). 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.

The Bank has to date approved projects in the water, agriculture and roads sectors and in Public Financial Management in line with the CSP priorities. 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 (US$64 million). This was followed by the approval in January 2016 of a private sector loan of US$300 million for the Nacala Port and Railway Project, which has a component for Malawi. Other regional infrastructure projects in the pipeline, include the Malawi-Mozambique Power Inter-connector Project and the Songwe River Basin Development Project. The Bank will also promote private investment in infrastructure development, through Public Private Partnerships (PPPs). Currently, the Bank is providing capacity building support to the Malawi Public Private Partnership Commission on PPPs.

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 Board 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. Implementation of ISP I has commenced.

The Bank has also provided Malawi with quick disbursing budget support. Following Government’s 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 an ADF Grant for the Crisis Response Budget Support operation for Malawi in July 2012, in the amount of US$40 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.

In April, 2015, the African Development Fund Board approved a grant of US$30 million for the Protection of Basic Services Programme. This is ring fenced Sector Budget Support, 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.

Three new operations are programmed for approval in 2016: (i) the Agricultural Sector Budget Support (US$17 million) which is designed to mitigate fiscal pressures related to the drought induced food shortage; (ii) the Agricultural Infrastructure and Youth in Agri-Business Project (US$22 million); (iii) the Lilongwe Water Distribution Network Project (US$56 million); and (iv) the Economic Census and Macro-economic Modelling Project (US$1 million).

Box. AfDB Ongoing Operations

The Bank’s current portfolio includes three projects in the agriculture sector: (i) Agriculture Infrastructure Support Project; (ii) Climate Adaptation for Rural Livelihoods; and (iii) Small Holder Irrigation and Value Addition Project. 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 centres of Jenda, Malomo, Monkey Bay and Chitekesa; (ii) the Competitiveness and Job Creation Project, which seeks 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 which 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 supporting the Mzuzu-Nkhata Bay Road Rehabilitation Project and the Multinational Nacala Road Corridor Phase IV. Currently, the overall Bank portfolio is rated satisfactory. In the water sector, the Bank is providing support for two projects: the Sustainable Rural Water and Sanitation for Improved Health and Livelihood Project and the Mzimba Integrated Urban Water Project of US$5 million, co-financed with OFID. The two on-going Institutional Support Projects are providing support for the Public Financial Management Reform Programme.

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 Expenditure Tracking Study. 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 May 20, 2016

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Malawi: Tables of Common Indicators Required for Surveillance

(As of May 20, 2016)

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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).

1

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

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Cover IMF Staff Country Reports
Malawi: Seventh and Eighth Reviews Under the Extended Credit Facility Arrangement and Request for Waivers for NonObservance of Performance Criteria, Extension of the Arrangement, Augmentation of Access, Modification of Performance Criterion, and Rephasing of Disbursements-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 182
Publisher:
International Monetary Fund
ISBN:
9781498318228
ISSN:
1934-7685
Pages:
111
DOI:
https://doi.org/10.5089/9781498318228.002