Malawi: Second and Third Reviews Under the Three-year Extended Credit Facility Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and Augmentation of Access— Informational Annex
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International Monetary Fund. African Dept.
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Publication Date:
06 Dec 2019
eISBN:
9781513521756
ISBN:
9781513521756
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English
Keywords:
ISCR; CR; ECF arrangement; SDR; resilience to climate change; Malawi's resilience; reconstruction; equivalent of SDR; debt service; Fiscal stance; Africa; Global; budget support; RBM financing; financing gap; donor support; security spending; Fiscal accounting and reporting; Budget planning and preparation
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November 7, 2019

Abstract

November 7, 2019

Contents

November 7, 2019

Key Issues

Context. Economic growth is recovering after last year’s drought and insect infestations—despite the impact of Tropical Cyclone Idai in the south and political protests following the May 2019 presidential election. The authorities are requesting an augmentation of access under the Extended Credit Facility (ECF) of 20 percent of quota (SDR 27.76 million) to finance significant reconstruction imports.

Program performance. All quantitative performance criteria (QPC) for end-December 2018 and end-June 2019, were met except on the primary fiscal balance which was missed by 1.5 and 2.5 percent of GDP due to revenue shortfalls and expenditure overruns—despite a consolidation of 2 percent of GDP during FY 2018/19. Indicative targets (ITs) on domestic arrears and social spending were met. Based on corrective measures, the authorities request waivers of non-observance. Most structural benchmarks were completed (some with delay).

Program strategy. The authorities aim to entrench macroeconomic stability, preserve debt sustainability, and advance governance reforms while attaining higher, more inclusive, and resilient growth. Essential reconstruction and security spending will be accommodated by reprioritizing spending and a modest relaxation in the FY 2019/20 domestic primary balance target (relative to the first review under the ECF arrangement). Governance reforms focus on enhancing public financial management, investment spending efficiency, and monitoring of state-owned enterprises. Monetary policy remains targeted on containing inflation and exchange rate flexibility will buffer shocks and preserve competitiveness. Financial sector resilience continues to be strengthened.

Staff views. Staff supports the authorities’ request for completion of the second and third reviews under the ECF arrangement, waivers of non-observance for the missed QPCs—given the authorities’ commitment to corrective measures—and the request for augmentation of access. This would result in a disbursement of SDR 31.55 million and help catalyze donor support.

Approved By

David Robinson (AFR) and S. Ali Abbas (SPR)

Discussions on the second and third reviews under the ECF arrangement and request for augmentation of access were held on September 10–18, 2019 in Lilongwe and Blantyre. The staff team comprised Ms. Mitra (head), Ms. Farahbaksh, Ms. Gwenhamo, Ms. Yoon (all AFR), Mr. Lee (SPR), Mr. Swistak (FAD), Mr. Banda (local economist), and Mr. Anderson (FAD long-term expert). Mr. Robinson (AFR) and Mr. Sitima-wina (OED) joined in key discussions. Mr. Hettinger (World Bank) joined the technical meetings. Ms. Ourigou assisted in the preparation of the staff report. The mission held discussions with Hon. Joseph Mwanamvekha, Minister of Finance; Dr. Dalitso Kabambe, Governor of the Reserve Bank of Malawi; and other senior officials. The mission also met representatives of the private sector, civil society, and development partners and held a press conference.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS

  • MACROECONOMIC OUTLOOK AND RISKS

  • PERFORMANCE UNDER THE PROGRAM

  • POLICY DISCUSSIONS

  • A. Preserving Debt Sustainability

  • B. Sustaining Macroeconomic Stability

  • C. Advancing Governance Reforms

  • PROGRAM MODALITIES AND SAFEGUARDS

  • STAFF APPRAISAL

  • BOX

  • 1. Malawi and Climate Change

  • FIGURES

  • 1. Recent Economic Developments, 2013–20

  • 2. Recent Monetary Developments, 2014–20

  • 3. Fiscal Developments and Outlook, 2013–20

  • 4. Selected Financial Stability Indicators, 2014–19

  • TABLES

  • 1. Selected Economic Indicators, 2017–24

  • 2a. Central Government Operations, 2017/18–23/24 (Billions of Kwacha)

  • 2b. Central Government Operations, 2017/18–23/24 (Percent of GDP)

  • 2c. Central Government Quarterly Operations in FY 18/19 and FY 19/20 (Billions of Kwacha)

  • 3a. Monetary Authorities’ Balance Sheet, 2018–20 (Billions of Kwacha)

  • 3b. Monetary Survey, 2018–20 (Billions of Kwacha)

  • 4a. Balance of Payments, 2017–24 (Millions of USD)

  • 4b. Balance of Payments, 2017–24 (Percent of GDP)

  • 5. Selected Banking Soundness Indicators, 2013–19

  • 6. External Financing Requirement and Source 2017–24

  • 7. Schedule of Disbursements under ECF Arrangement, 2018–21 (Millions of SDR)

  • 8. Indicators of Capacity to Repay the Fund, 2019–32

  • 9. Projected External Borrowing

  • 10. Quantitative Targets, 2018–20

  • 11a. Structural Benchmarks, 2018–19

  • 11b. Structural Benchmarks, 2019–20

  • ANNEX

  • I. Risk Assessment Matrix

  • APPENDIX

  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies

    • Attachment II. Technical Memorandum of Understanding

Context

1. In May 2019, the incumbent President Peter Mutharika and his party were re-elected for a second term, forming a minority government. The main opposition parties are contesting the presidential election results in court and demanding the Electoral Commission Chair resign. Protests have resulted in considerable property damage and economic disruption. Development challenges have been compounded by chronic electricity shortages, high youth unemployment, and alleged corruption.

2. Tropical Cyclone Idai had significant humanitarian tolls and infrastructure costs requiring reconstruction. The cyclone struck southern Malawi in March and resulted in severe flooding affecting over a million people—taking over 60 lives, ruining crops, and destroying homes, hospitals, schools, and other critical infrastructure. Recovery and reconstruction (projected to cost $370 million or 5 percent of GDP) would build resilience for Malawi, which is globally amongst the countries most vulnerable to climate change (Box 1).1

3. The new government expressed its commitment to the policy priorities in the ECF and have requested an augmentation in access under the ECF to finance imports for post-cyclone reconstruction. The second review was not completed in Spring 2019 as, prior to the elections, agreement could not be reached on measures to bring the FY 2018/19 position back on track by end-June, the end of the fiscal year. The agreed FY 2019/20 program corrects for the slippage in FY 2018/19 while prioritizing security spending and post-cyclone rehabilitation and reconstruction. During 2019H2 and 2020, the reconstruction will involve about $204 million (3 percent of GDP) in imports of goods and services, resulting in a balance of payments financing gap of $125 million (1.6 percent of GDP)—net of policy adjustments of about $80 million (1 percent of GDP) reflecting reprioritization of fiscal spending and use of foreign currency reserves buffers. The proposed $40 million augmentation would help fill this financing gap and would complement $15 million of donor support and $120 million of World Bank support ($50 million of which will replace previously planned near-term projects) over 2019–20. Securing further donor financing to enable more rapid progress towards the SDGs will require accelerating reforms in agriculture, public financial management, and procurement.

Recent Developments

4. Economic growth is strengthening despite the impact of Cyclone Idai—rising from 3.2 percent in 2018 to 4.5 percent in 2019—driven by reconstruction, increased electricity generation and an agricultural rebound. Cyclone-related agricultural losses were more than compensated by bumper harvests in the rest of the country, resulting in significantly larger agricultural production following last year’s widespread drought and insect infestations (Text Figure 1). However, delays in imports transiting through cyclone-damaged parts of Mozambique and Malawi, pre-election uncertainties, and disruptions from post-election protests weigh on manufacturing and wholesale and retail trade. Inflation is anticipated to average 9.1 percent this year, reflecting elevated food prices due to cyclone-related supply chain disruptions and hoarding by suppliers, while non-food inflation remains on a downward trend (Text Figure 2).

Text Figure 1.
Text Figure 1.

Malawi: Maize Production and Prices

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.
Text Figure 2.
Text Figure 2.

Malawi: Inflation

(Year-on-year percentage changes)

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.

5. The fiscal position improved in FY 2018/19 (relative to FY 2017/18) but not as much as programmed under the ECF arrangement (Text Table 1). The primary deficit was reined in by 2 percent of GDP relative to last year but exceeded the program target (adjusted for deviations in grants and debt service payments relative to the first review under the ECF arrangement) by 2.5 percent of GDP. The authorities indicated that income tax revenues were hurt in the last quarter of the fiscal year due to reduced activity in manufacturing and services following the post-cyclone disruption in imports and business closures during protests (income tax revenues did not benefit from the agricultural rebound). Nontax revenues underperformed due to lower than anticipated dividends from the Reserve Bank of Malawi (RBM) and state-owned enterprises (SOEs). Rural electrification and domestically-financed development projects planned for FY 2019/20 were implemented faster than envisaged. The remaining spending overruns mainly reflect cyclone disaster relief, spending to ensure safety during elections and post-election protests, and transfers to universities to raise salaries following staff strikes. Foreign-financed development spending was lower than programmed due to shortfalls in grants that were only partially offset by increased project-based concessional foreign borrowing. The deficit was largely financed domestically, without any net financing from the RBM.

Text Table 1.

Malawi: Central Government Operations

(FY 2017/18–2018/19, percent of GDP)1

article image

The program target for FY 2018/19 was the overall primary balance.

Sources: Malawian authorities; IMF staff estimates.

6. The cyclone increased current account pressures in 2019H2 due to a sharp rise in imports for reconstruction. Offsetting factors in the first half of the year including disruptions from the cyclone and policy uncertainty ahead of elections slowed import growth for the full year. Exports remained broadly stable with strengthening exports of cotton, edible nuts, and sugar compensating for reduced tobacco exports (reflecting lower global demand). Consequently, the current account deficit is expected to improve from 20.6 percent of GDP in 2018 to 18.4 percent of GDP in 2019.2 Given continued large reconstruction imports in 2020, international reserves coverage in months of prospective imports is expected to remain around 2.9 by end-2019.

7. For the first time in two years, the Kwacha fluctuated substantially against the US dollar (Text Figure 3). A 6 percent depreciation in 2019H1—the largest since mid-2016—was followed by a 5 percent appreciation in 2019Q3. Nevertheless, the real effective exchange rate appreciated about 13 percent over the past twelve months (August 2018-August 2019) due to large headline inflation differentials with trading partners (non-food inflation differentials are smaller).

Text Figure 3.
Text Figure 3.

Malawi: Gross Reserves and Nominal Exchange Rate

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.

8. In 2019H1, the RBM loosened monetary policy in line with reduced inflationary pressures. Following a trend decline in non-food inflation, reduced international fuel prices, and declines in average Treasury bill yields (for all tenors), the policy rate was reduced by 150 basis points (bps) in January and another 100 bps in May to 13.5 percent. The rate has remained unchanged in 2019H2. Reserve requirements were also reduced by 250 and 375 bps to 5 and 3.75 percent on local and foreign currency deposits, respectively, and the Lombard rate by 310 bps to 14.9 percent (all in January). The additional liquidity from these policy changes as well as weak demand for repurchase agreements (reflecting their low rates) used by the RBM to mop up liquidity have resulted in greater interbank rate volatility—the rate was below the interest rate corridor for extended periods twice this year (Figures 4 and 5, MEFP ¶4). Credit growth rose from 11.5 percent at end-2018 to 18.8 percent in August 2019.

Text Figure 4.
Text Figure 4.

Malawi: Interest Rate Corridor

(Percent, Jan.2017–Jul.2019)

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.
Text Figure 5.
Text Figure 5.

Malawi: Policy, Interbank and Treasury Bill Interest Rates

(Percent, Mar.2017–Jun.2019)

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

9. The banking system remains well capitalized, liquid, and profitable. Non-performing loans declined by 1.3 percentage points since end-2018 to 4.8 percent at end-June 2019, while provisioning increased to 55 percent of total loans. The RBM’s June 2019 stress test showed that overall the banking system is resilient to interest rate and income risk shocks but vulnerable to some credit and liquidity risk shocks. One small loss-making bank was recapitalized and another is looking for a partner to inject capital and may otherwise exit the market. The cyclone had little impact on banks.

Macroeconomic Outlook and Risks

10. Growth is expected to accelerate. Manufacturing and wholesale trade are anticipated to be boosted by new electricity sources coming on line from 2020 (more than offsetting any adverse effects from fiscal consolidation), while post-cyclone reconstruction will also provide an impetus to growth. Growth is projected to reach 5 percent in 2020, rising to 6.5 percent over the medium-term, with greater access to finance and more resilient infrastructure—including enhanced electricity generation and irrigation (e.g., the Shire Valley project), crop diversification, and better road networks.

11. Inflation is anticipated to continue moderating while the current account gradually improves. Inflation is projected to decline to 8.7 percent in 2020 and converge towards 5 percent over the medium-term, benefitting from improved agricultural resilience gradually lowering food prices, lower international fuel prices, and strengthened fiscal and monetary policy implementation. The current account deficit will narrow to about 15 percent of GDP but only gradually as sizeable infrastructure-related imports will partly offset the impact of lower fuel import prices and steady growth of non-traditional exports. International reserves are expected to rise just above 4 months of prospective imports supported by strengthened competitiveness, export diversification, and fiscal restraint.

12. Risks are tilted to the downside. Legislation introducing interest rate caps was rejected in March 2019 by the previous Parliament but remains a much-discussed populist measure. The new minority government will need to build consensus to advance reforms. If protests continue into next year, urban economic activity could substantially decline. If growth fails to accelerate, then with Malawi’s growing population, job creation would be insufficient to absorb new entrants into the labor market resulting in higher rates of unemployment. Adverse weather conditions—intensified by climate change—and infestations could hurt growth, raise inflation, and increase balance of payments pressures. Escalated global trade tensions could depress export demand and raise import costs (Annex I: Risk Assessment Matrix). On the upside, accelerated reform implementation could boost investor and donor confidence, potentially unlocking external financing, including additional concessional funding.

Performance Under the Program

13. All but one quantitative performance criteria (QPC) were met at end-December 2018 and end-June 2019 (Table 10). The primary balance target (adjusted for deviations in grants, and debt service payments relative to the first review under the ECF arrangement) was missed by 1.5 percent of GDP in December due to front-loading of planned spending for the year and 2.5 percent of GDP in June due to revenue shortfalls and expenditure overruns. The indicative targets (ITs) on new domestic arrears and on social spending were met for both end-December and end-June.

14. Program-supported reforms advanced, addressing several important gaps that had been previously identified in public financial management (Table 11a).

  • The end-December 2018 structural benchmarks (SBs) on commitment control and cash management were met and those covering the publication of five reports by Ministries, Departments, and Agencies (MDAs), debt, and bank account reconciliation were completed by end-March 2019. Regulations, policies, and guidelines for SOE oversight are complete except cabinet approval of the dividend policy (new SB for end-December 2020).

  • The end-June 2019 SBs on publication of five reports by MDAs, commitment control, and expansion of accounts covered by IFMIS were met. The SBs covering quarterly consolidated financial reports, debt, bank account reconciliation, and the pilot audit of SOEs were completed by mid-September. The ex-post performance audits of two (out of three) capital projects was completed on time; completion of the remaining audit—delayed by accounting system issues—is expected by June 2020. The SBs on budget release and expanding budget coverage of IFMIS will be completed by end-2020 as they required approval of the FY 2019/20 budget, which took place in October. The end-September 2019 SB on the RBM’s strategy for unwinding its holding of government securities was met.

  • The end-December 2019 SB on the audit of the public sector investment program (PSIP) database was completed in June 2019. This will be an important step towards improving project management and more accurate projections of project-based donor support.

15. Corrective measures have been agreed for the missed QPCs and the authorities request waivers of nonobservance on this basis. Spending has been reduced relative to the FY 2018/19 outcome, returning to levels envisaged during the first review under the ECF arrangement and consistent with maintaining critical growth-enhancing spending. Despite corrective measures, the domestic primary balance falls short by 0.4 percent of GDP of what was targeted during the first review under the ECF arrangement in order to accommodate spending on post-cyclone reconstruction and security to ensure public safety (¶18).

Policy Discussions

Policies are anchored on preserving debt sustainability, entrenching macroeconomic stability, and advancing governance reforms in support of attaining higher, more inclusive, and resilient growth. Improving revenue outcomes and spending management—especially investment spending efficiency and monitoring of SOEs to contain fiscal risks—will be critical for strengthening the fiscal path, against the backdrop of large post-cyclone reconstruction needs and the urgency to raise resilience to climate change. Tight monetary policy will contain inflation. Greater exchange rate flexibility and strengthening financial sector resilience will help buffer shocks and support broad-based private sector development. Governance reforms continue to gain momentum—including in public financial management and debt management—and are expected to gradually catalyze donor support.

A. Preserving Debt Sustainability

16. Malawi is at moderate risk of external debt distress and high overall risk of debt distress. The Low-Income Country Debt Sustainability Framework (LIC DSF), carried out jointly by the staffs of the IMF and the World Bank (Annex II: Debt Sustainability Analysis) indicate that:

  • All baseline external debt indicators are below their policy-dependent debt burden thresholds. Stress tests highlight vulnerabilities to export shocks given the country’s narrow export base and heavy reliance on rain-fed agriculture.

  • The baseline present value (PV) of the public debt-to-GDP ratio remains above the benchmark until 2027—a consequence of high interest rates on domestic debt accumulated during 2014–17 (when inflation ranged between 20–30 percent) and of primary deficits averaging 2.5 percent of GDP over the past four years (partly due to natural disasters). Stress tests underline continued vulnerability to climate change shocks.

17. Staff and the authorities agreed on the need for firm actions to prevent future fiscal slippages and reduce debt vulnerabilities. Public debt will be reduced from 62 to 44 percent of GDP by 2027—corresponding to the PV of public debt falling below the LIC DSF threshold for a country with weak debt carrying capacity. To this end, a domestic primary surplus of 2 percent of GDP will be targeted during FY 2020/21–24/25, reinforced by a revenue mobilization strategy, continued improvements in budget planning and management, procurement, public investment management, oversight of SOEs, and debt management (¶20, 25). The program limit of no non-concessional external borrowing will continue.

B. Sustaining Macroeconomic Stability

Fiscal Policy

18. To preserve debt sustainability, the authorities are committed to fiscal adjustment in FY 2019/20 while prioritizing post-cyclone reconstruction and public safety (MEFP ¶17). A tightening of the domestic primary balance (by 2.1 percentage points relative to FY 2018/19) to target a surplus of 0.9 percent of GDP balances these competing objectives (Text Table 2). This represents a 0.4 percentage point of GDP loosening relative to the first review under the ECF arrangement. Domestic revenue is lower by 0.2 percent of GDP and spending is higher by 0.2 percent of GDP; the latter reflects post cyclone rehabilitation and reconstruction and additional security spending of 2.3 percent of GDP offset by 2.1 percent of GDP in spending cuts (0.5 percent of GDP from goods and services and 1.6 percent of GDP from domestically-financed capital spending). The resulting expenditure envelope will be in line with the spending levels of recent years (except FY 2018/19) and consistent with maintaining critical growth-enhancing spending. Spending commitments will be carefully monitored (MEFP ¶23) and undertaken as revenues materialize in order to avoid fiscal slippages. Key measures include:

  • Revenues are anticipated to be 1.6 percent of GDP lower than at the time of the first review under the ECF due to lower grant projections (1.4 percent of GDP) and slightly lower tax and non-tax revenue projections (0.2 percent of GDP).

    • Post-election political uncertainty is expected to continue weighing on revenues. Nevertheless, tax measures in the approved FY 2019/20 budget, which have already come into effect, will help contain revenue shortfalls. These include new environmental taxes (a vehicle tax and excises on plastic products), an import surcharge on select goods (e.g., alcohol, cigarettes), and increased withholding taxes—most of which are progressive and, as experienced with past revenue measures, are expected to have limited impact on economic growth.3 Increased imports will widen the tax base.

    • User fees and charges are being adjusted upwards and their enforcement stepped up; and road tolling fees are being introduced. Implementation of the revised dividend policy will enforce SOE dividend payments.

    • World Bank budget support for post-cyclone reconstruction of 0.6 percent of GDP ($40 million) was disbursed at end-FY 2018/19 and will be spent in FY 2019/20.

  • Expenditures are anticipated to be 0.5 percent of GDP higher than at the time of the first review under the ECF due to higher projections of interest spending (0.2 percent of GDP) and slightly higher projections of spending on goods and services and subsidies and transfers (0.3 percent of GDP).

    • Wage and pension increases will be contained to inflation; and new hiring will be limited to essential staff.

    • Goods and services spending is 0.2 percent of GDP higher than in the first review under the ECF arrangement, reflecting increased spending for post-cyclone rehabilitation support (0.2 percent of GDP) and ensuring public safety (0.5 percent of GDP) partially offset by reductions in generic goods and services (0.4 percent of GDP) and maize purchases (given overstocking; 0.1 percent of GDP). The reduction in goods and services spending relative to FY 2018/19 is expected to have limited impact on the economy since the savings is primarily from a reduction in imports of equipment to safely hold elections.

    • To support post-cyclone reconstruction domestically-financed capital spending will be reoriented towards resilient reconstruction (1.5 percent of GDP) with an equivalent cut in previously planned projects—of which 0.8 percent of GDP in projects were already executed in FY 2018/19 and 0.7 percent of GDP in projects will either be delayed or cut. Further increases in capital spending are constrained by implementation capacity. Better targeting of the iron sheet subsidy will cut costs by 0.1 percent of GDP.

    • The risk of food insecurity is being addressed through reforms in the Farm Input Subsidy Program (FISP) spending and ADMARC’s strategic grain reserves (which has no impact on the budget). Better targeting of FISP is expected to reduce costs by 0.1 percent of GDP this year.

Text Table 2.

Malawi: Central Government Operations

(FY 2018/19–2019/20, Percent of GDP)1

article image

The program target in FY 2019/20 is the domestic primary balance. In previous years, the program target was the overall primary balance.

In FY 2018/19, other goods and services spending includes 1.2 percent of GDP in spending to hold elections and rural electrification spending that is 0.4 percent of GDP higher than past outcomes.

Sources: Malawian authorities; IMF staff estimates.

19. Over the near and medium-terms, raising revenues, reorienting spending and increasing its efficiency, as well as containing fiscal risks will be critical to reducing debt vulnerabilities and supporting disinflation and higher, more inclusive, and resilient growth.

  • To expand space for growth-enhancing spending and building resilience to climate change, a comprehensive review of the tax system will be undertaken and a domestic revenue mobilization strategy put in place and incorporated into the FY 2020/21 budget (MEFP ¶20). The resulting measures (including reduction of VAT exemptions and increased use of excise taxation) are projected to yield at least 0.3 percent of GDP in FY 2020/21 and 0.2 percent of GDP in following years. Tax revenues will be further enhanced with risk-based audits, improved tax compliance, and rollout of the Integrated Tax Administration System (ITAS); and non-tax revenues improved by moving fees and charges towards marginal cost pricing, enlarging the coverage of road tolls, and increasing digitalization. Tax revenue collections will be closely monitored and any gaps in administration will be immediately addressed. All of these measures will also promote a better business environment through strengthened transparency and reduced corruption.

  • The composition of spending will be shifted toward growth-enhancing areas and ensuring adequate social safety nets (MEFP ¶21). The authorities plan to review FISP eligibility and voucher value aiming to halve the cost over the medium-term. Public sector employment reforms are also planned. Transfers to public entities will be reduced by bolstering their revenue generating capacity and management. Enhancement of public investment management will support spending efficiency (MEFP ¶19). To this end, the authorities agreed to begin implementing the findings of the recent PSIP audit (especially project rationalization), strengthen PSIP linkages to the budgeting and budget execution processes, and continue building capacity.

  • Fiscal risks will be contained through improved SOE oversight (MEFP ¶18)—including submission to Parliament and publication of a consolidated annual report on SOEs and developing a prototype SOE database—and continuing rigorous implementation of the automatic fuel pricing mechanism.

Monetary, Exchange Rate, and Financial Sector Policies

20. Monetary policy will continue to focus on containing inflation. With non-food inflation on a downward path and running just above 5 percent, at the lower end of the RBM’s target, policy rate reductions during 2019H1 appear appropriate. Amid rising food prices, staff and the authorities agreed that the monetary policy stance should be calibrated to keep inflation in single digits. The authorities continue to expand capacity in developing high frequency data, liquidity forecasting, and the forecasting and policy analysis system (FPAS) modeling to support eventual transition toward inflation targeting.

21. Recent changes to the monetary policy framework should be reviewed. In September, the RBM shifted the reference rate (the basis for banks’ lending rates) from the Lombard rate to a weighted average of the Lombard rate, the interbank rate, Treasury bill rates, and the savings rate—with a view to improving financial intermediation and, ultimately, access to finance. Staff stressed this new reference rate formula is less transparent than using the policy rate and could raise banks’ intermediation costs as it is less predictable. Instead, the RBM should continue addressing structural barriers to reducing the cost of borrowing, including with a road map to improve access to finance. The RBM agreed to consult with the Fund, by end-2020, and review this policy as well as examine whether the foreign currency reserve requirement rate should be raised and unified with the local currency rate (MEFP ¶10). Staff urged the RBM to raise repurchase agreement rates in order to more effectively mop up liquidity and keep the interbank rate aligned with the policy rate.

22. Exchange rate flexibility will help cushion shocks and preserve competitiveness. The authorities reiterated their commitment to a flexible exchange rate regime—noting the recent fluctuations in the Kwacha against the U.S. dollar—and stressed that their intervention in the FX market is solely for accumulating reserves and smoothing excess volatility. Staff noted the importance of deepening the interbank FX market as pricing is currently determined in a segmented and underdeveloped interbank FX market while most transactions occur in the retail market and directly with the RBM—neither of which contribute to interbank market price formation.4 As a first step, the RBM will prepare a report on obstacles to FX market development (MEFP ¶15).

23. The authorities are committed to strengthening banking resilience and financial sector oversight (MEFP ¶10,12–14). All banks are fully compliant with the IFRS9 standards. Regulations to enhance the Domestic Systemically Important Banks supervision took effect in June 2019 and amendments to the Banking Act of 2010 and Financial Services Act of 2010—aligning the legal framework for bank resolution closer to international best practices—as well as a consumer protection bill will be submitted to Parliament by end-2020. Staff recommended continued vigilance given recent credit growth. The RBM is encouraging banks to improve their loan recovery and analysis of collateral quality, including enhancing the collateral registry. A new reporting template for credit bureaus has improved the quality of reporting to banks. Increased foreign currency lending (which tripled to 23 percent over the past decade) is being closely monitored.

C. Advancing Governance Reforms

24. Strengthening governance and reducing corruption vulnerabilities remain critical to improving economic outcomes and bolstering confidence. Progress in key areas include:

  • Important steps have been taken to enhance the RBM’s independence and deepen the domestic debt market (MEFP ¶10, 11). In December 2018, Parliament approved a new RBM Act, which prohibits monetary financing of the government (except for short-term advances that have to be repaid in cash). To safeguard the RBM’s independence, it was agreed that no more conversions of ways and means cash advances into government securities will take place. Between end-2017 and end-June 2019, the RBM’s holdings of government securities declined by 12 percent. In particular, its share of the total stock of Treasury bills declined from 2.6 to 0.1 percent and of Treasury notes from 76 to 39 percent. These efforts are supported by increased engagement of the Ministry of Finance (MoF) debt management unit in domestic debt management policies and operations in collaboration with the RBM; and routine publication of an issuance calendar indicating the volume of securities to be offered in each auction. Staff and the authorities agreed on the importance of developing a strategy for building reliable benchmarks in the Treasury bill market. A comprehensive Medium-Term Debt Management Strategy for 2018–22 has been developed.

  • Public Financial Management (PFM) reforms are beginning to improve fiscal discipline, transparency, and integrity but risks remain (MEFP ¶23–27). These reforms focus on cash management, routine fiscal reporting and bank reconciliation, reconciliation of debt data between the MoF and the RBM, strengthening the quality control of fiscal reporting, improving the medium-term budgetary framework, and further broadening current IFMIS coverage. The authorities have ambitious plans for implementing a new IFMIS from July 2020. Staff cautioned against proceeding too quickly, which could create governance challenges stemming from implementation slippage and simultaneous introduction of new practices and technologies. Mitigating measures could include change management, training, phased implementation, credible quality assurance, and a transparent governance framework.

Program Modalities and Safeguards

25. The authorities are requesting an augmentation of access under the ECF to meet new balance of payments needs associated with post-cyclone reconstruction. The augmentation of SDR 27.76 million (20 percent of quota, provided in three equal tranches) would bring total access under the program to SDR 105.835 million (76.25 percent of quota, Table 7).

26. Malawi’s capacity to repay the Fund remains strong (Table 8). Financing assurances are in place for the remainder of the program with external financing requirements mainly met through project loans from multilateral and bilateral donors. Malawi has a strong track record in meeting its obligations to the Fund in a timely manner.

27. Modifications to the program and monitoring. The domestic primary balance replaces the existing primary balance QPC to reduce the effect of uncertainties in predicting external grants and loans on the measurement of fiscal performance. The domestic primary balance will be calculated by subtracting current expenditures (except interest), domestically-financed development expenditures, and net lending from domestic revenues. A new IT on net foreign borrowing (based on net disbursements of concessional external debt) by the central government has been introduced. New SBs for the fourth and fifth reviews are proposed on cabinet approval of an SOE dividend policy, developing a domestic revenue mobilization strategy, adoption of electronic funds transfers and implementation of treasury management systems, and a report on obstacles to foreign exchange market development. The program will continue to be reviewed semi-annually based on performance criteria, indicative targets (Table 10), and structural benchmarks (Table 11b). Targeted technical assistance remains critical to achieving program objectives.

Table 1.

Malawi: Selected Economic Indicators, 2017–24

article image
Sources: Malawian authorities and IMF staff estimates and projections.

The fiscal year starts in July and ends in June. The current financial year, 2020, runs from July 1, 2019 to June 30, 2020.

Domestic primary balance is calculated by subtracting current expenditures (except interest payment) and domestically-financed development expenditures from tax and nontax revenues.

Based on the findings of recent technical support missions, confirming the reliability of the trade data produced by the Malawi National Statistics Office (NSO), the IMF has now adpoted the NSO’s current account data. Previously, the series reported by the IMF was based on staff estimates. Errors and omissions were adjusted by offsetting amounts, leaving the overall balance unchanged for historical data. Errors and omissions are projected at zero and short-term capital and other inflows projections are adjusted in the financial account. Future TA missions on capital and financial accounts’ statistics will seek to better identify the offsetting flows to the current account adjustment.

The current account assuming the financing gap is not closed, excludes $40 million of budget support from the World Bank in 2019.

Table 2a.

Malawi: Central Government Operations, 2017/18–23/24

(Billions of Kwacha)

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Sources: Malawi Ministry of Finance and IMF staff projections.

This includes promissory notes issued for the repayment of domestic arrears accumulated before FY2014/15.

Excludes issuance of promissory notes for securitization of arrears.

Other external loans include program loans other than budgetary support.

Adjusted primary balance is calculated by subtracting shortfalls in budget support grants, dedicated grants, and budget support loans, as well as increase in debt service payments to WB and AfDB.

Domestic primary balance is calculated by subtracting current expenditures (except interest payment) and domestically-financed development expenditures from tax and nontax revenues.

Table 2b.

Malawi: Central Government Operations, 2017/18–23/24

(Percent of GDP)

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Sources: Malawi Ministry of Finance and IMF staff projections.

This includes promissory notes issued for the repayment of domestic arrears accumulated before FY2014/15.

Excludes issuance of promissory notes for securitization of arrears.

Other external loans include program loans other than budgetary support.

Adjusted primary balance is calculated by subtracting shortfalls in budget support grants, dedicated grants, and budget support loans, as well as increase in debt service payments to WB and AfDB.

Domestic primary balance is calculated by subtracting current expenditures (except interest payment) and domestically-financed development expenditures from tax and nontax revenues.

Table 2c.

Malawi: Central Government Quarterly Operations in FY 18/19 and FY 19/20

(Billions of Kwacha)

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Sources: Malawi Ministry of Finance and IMF staff estimates.

This includes promissory notes issued for the repayment of domestic arrears accumulated before FY2014/15.

Excludes issuance of promissory notes for securitization of arrears.

Other external loans include program loans other than budgetary support.

Domestic primary balance is calculated by subtracting current expenditures (except interest payment) and domestically-financed development expenditures from tax and nontax revenues.

Table 3a.

Malawi: Monetary Authorities’ Balance Sheet, 2018–20

(Billions of Kwacha, unless otherwise indicated)

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Sources: Reserve Bank of Malawi; and IMF staff projections.
Table 3b.

Malawi: Monetary Survey, 2018–20

(Billions of Kwacha, unless otherwise indicated)

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Sources: Reserve Bank of Malawi; and IMF staff projections.
Table 4a.

Malawi: Balance of Payments, 2017–24

(Millions of USD, unless otherwise indicated)

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Sources: Malawian authorities; and IMF staff estimates and projections.

Based on the findings of recent technical support missions, confirming the reliability of the trade data produced by the Malawi National Statistics Office (NSO), the IMF has now adpoted the NSO’s current account data. Previously, the series reported by the IMF was based on staff estimates. Errors and omissions were adjusted by large offsetting amounts, leaving the overall balance unchanged for historical data. Errors and omissions are projected at zero and short-term capital and other inflows projections are adjusted in the financial account. Future TA missions on capital and financial accounts’ statistics will seek to better identify the offsetting flows to the current account adjustment.

Includes estimate for project grants not channeled through the budget.

In months of imports of goods and nonfactor services in the following year.

Table 4b.

Malawi: Balance of Payments, 2017–24

(Percent of GDP)

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Sources: Malawian authorities; and IMF staff estimates and projections.

Based on the findings of recent technical support missions, confirming the reliability of the trade data produced by the Malawi National Statistics Office (NSO), the IMF has now adpoted the NSO’s current account data. Previously, the series reported by the IMF was based on staff estimates. Errors and omissions were adjusted by large offsetting amounts, leaving the overall balance unchanged for historical data. Errors and omissions are projected at zero and short-term capital and other inflows projections are adjusted in the financial account. Future TA missions on capital and financial accounts’ statistics will seek to better identify the offsetting flows to the current account adjustment.

Includes estimate for project grants not channeled through the budget.

In months of imports of goods and nonfactor services in the following year.

Table 5.

Malawi: Selected Banking Soundness Indicators, 2013–19

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Source: Reserve Bank of Malawi.
Table 6.

Malawi: External Financing Requirement and Source, 2017–24

(Millions of USD)

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Source: IMF staff estimates.
Table 7.

Malawi: Schedule of Disbursements Under ECF Arrangement, 2018–211

(Millions of SDR)

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Source: IMF staff estimates.

Includes proposed augmentation.

Using Malawi’s current quota after effectiveness of the 14th General Review of Quotas.

Each review is also subject to obervance of standard continuous performance criteria.

Table 8.

Malawi: Indicators of Capacity to Repay the Fund, 2019–32

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Source: IMF staff projections.
Table 9.

Malawi: Projected External Borrowing

(January 1, 2019–December 31, 2019)
PPG external debt contracted or guaranteed1 Volume of new debt (US$ million) PV of new debt (US$ million)
Sources of debt financing
Consessional debt, of which 2 124 60
Multilateral debt 124 60
Bilateral debt 0 0
Non-concessional debt, of which 2 0 0
Semi-concessional3 0 0
Commercial terms4 0 0
Use of debt financing
Infrastructure 124 60
Budget Finanicng 0 0
Memo Items
Indicative projections
2020 59 30–38
2021 44 23–29
Source: IMF staff projections.

Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate.

Debt with a grant element of at least 35 percent.

Debt with a positive grant element below 35 percent.

Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value.

Table 10.

Malawi: Quantitative Targets, 2018–201

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Source: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU).

“PC” means Performance Criterion and “IT” means Indicative Target. The PC test date for the 2nd Review is end-December 2018 and for the 3rd Review is end-June 2019. Test dates for future reviews will be end-June and end-December. End-September and end-March targets are ITs.

PC applies to upper bound only. See TMU for details.

Targets are subject to an adjustor for budget support, as specified in the TMU.

Targets are subject to an adjustor for budget support and debt service payments and donor-funded social sector expenditures, as specified in the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Targets are subject to an adjuster equivalent to 10 percent of the average of the inflation adjusted domestic revenues of the previous three fiscal years, as specified in the TMU.

Defined as stocks.

Priority social spending as defined in the TMU and quantified in the authorities’ budget.

Evaluated on a continuous basis.

The domestic primary balance will replace the primary balance as a PC, beginning with the end-December 2019 PC.

Table 11a.

Malawi: Structural Benchmarks, 2018–19

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Sources: IMF staff and Malawian authorities.

Ministry, department, and agency.

Performace mangement plan and budget.

Table 11b.

Malawi: Structural Benchmarks, 2019–20

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Sources: IMF staff and Malawian authorities.

Ministry, department, and agency.

28. Implementation of recommendations from the July 2018 updated safeguards assessment has been slower than the timeline envisaged in the assessment. The assessment recommended legal amendments to strengthen the RBM’s governance and autonomy which were enacted in 2019 and will be further enhanced with the elimination of the conversion of cash advances into securities, as well as, following legal review, legislation needed to eliminate any ambiguity in this regard (¶24). Limited progress has been made in addressing concerns over the RBM’s reserve management practices though the authorities have informed staff that steps are being initiated with support from the World Bank. A recent lapse in the RBM’s banking for the government suggests a deterioration in controls which the RBM is taking steps to address. An emergency liquidity assistance (ELA) framework is being developed. Staff is continuing to engage with the authorities on these issues.

Staff Appraisal

29. Malawi’s macroeconomic outlook is positive but vulnerable to climate change shocks. This year, solid growth prevailed because Cyclone Idai only affected southern Malawi and harvests were bountiful in the rest of the country. In recent years, this was not always the case, where extreme droughts, floods, or both have taken a much larger toll on economic activity. Over the medium-term, with more resilient infrastructure (enhanced electricity generation and irrigation) and crop diversification, growth will strengthen and its susceptibility to weather shocks will decline. Improved competitiveness will support a narrowing of the current account deficit. Prudent policy implementation will contain inflation to single digits.

30. Debt vulnerabilities have risen and firm actions are needed to reduce them. Malawi is at moderate risk of external debt distress and high overall risk of debt distress. While some fiscal consolidation was achieved in FY 2018/19 and additional consolidation is envisaged in FY 2019/20, the pace of consolidation is slower than previously envisaged due to the need to accommodate post-cyclone reconstruction needs and increased security spending. This places increased emphasis on the authorities’ delivering their planned medium-term fiscal adjustment to lower debt vulnerabilities. The authorities’ medium-term plan appropriately focuses on strong revenue mobilization, further reorientation of spending towards growth-enhancing items, and advancing public investment management reforms. In particular, new borrowing should focus on projects with high rates of return that are closely aligned to development priorities and rely on concessional loans to contain borrowing costs. The upcoming submission to Parliament of an annual report on all SOEs will be an important step towards containing contingent liabilities.

31. Governance and transparency reforms—critical to reducing vulnerabilities to corruption, containing fiscal spending, and catalyzing donor support—are advancing. Good progress is being made in reforms to cash management, fiscal reporting, bank reconciliation, debt, improving the medium-term budgetary framework, and further broadening IFMIS coverage. The authorities are committed to implementing a new IFMIS but this needs to be carefully managed to minimize governance challenges stemming from implementation slippage and simultaneous introduction of new practices and technologies. Staff welcomes ongoing efforts to deepen the domestic debt market and the increased engagement of the MoF in this area. The RBM has reduced its holdings of government securities and the new RBM Act enhances the RBM’s independence. Staff urged the authorities to press forward with implementation of the remaining safeguards recommendations.

32. Monetary policy should continue to anchor inflation and the recent increase in exchange rate flexibility is welcome. While policy rate reductions earlier this year appear appropriate, persistently high food prices call for calibrating the monetary policy stance to preserve single-digit inflation. To avoid extreme bouts of excess liquidity in the market and maintain the interbank rate within the corridor, staff recommended raising repurchase agreement rates. Continued exchange rate flexibility will be critical for cushioning shocks and enhancing competitiveness and will be facilitated by a deepening of the interbank FX market.

33. The banking system remains resilient. All banks are fully compliant with the IFRS9 standards. Non-performing loans have been reduced and provisioning increased. Plans for enhancing the collateral registry and steps to improve the quality of credit bureaus’ reporting should support deeper financial intermediation. While credit to the private sector has picked up in recent months, sustainably increasing access to finance will require addressing structural barriers to reduce the cost of borrowing.

34. Staff supports the completion of the second and third reviews under the ECF, the request for waivers of non-observance for the end-December 2018 and end-June 2019 QPCs on the primary balance, and the request for augmentation of access. These recommendations are based on the authorities’ commitment to corrective fiscal measures and on the strength of the reform agenda articulated by the authorities in their MEFP.

Malawi and Climate Change

Malawi is extremely vulnerable to climate change: the frequency and intensity of droughts, intense rainfall, and flash floods have increased over the last 50 years (Figure 1). Globally, Malawi is ranked as the 23rd most vulnerable to climate change (MapleCroft, 2018) and 21st least prepared to adapt (Notre Dame Global Adaptation Initiative (ND-GAIN) Index, 2015). Against the backdrop of a rapidly growing population1, reliance on rain-fed agriculture and poor infrastructure drive these vulnerabilities—each natural disaster poses a risk to food security and worsening income inequality.

Figure 1.
Figure 1.

Malawi: Recent Economic Developments, 2013–20

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.
uA01fig01

Weather-related Catastrophes in Malawi, 1967–2019

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Source: EM-DAT: The Emergency Events Database.

Natural disasters have substantial macroeconomic costs for Malawi. An event study finds that even two years after the natural disaster, real GDP growth falls short of its pre-disaster rate (Figure 2).2 Recouping lost physical and human capital can take years and reduced agriculture production spills over to livestock, food processing, and other sectors. Adverse revenue effects and large social assistance and reconstruction needs results in a lasting deterioration of the fiscal position, even two years after the disaster, weighing on debt. In the aftermath of a disaster, reduced agricultural exports, increased trade transit costs, and imports for reconstruction can raise current account pressures.

Figure 2.
Figure 2.

Malawi: Recent Monetary Developments, 2014–20

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.
uA01fig02

Real GDP Growth, Fiscal Balance, and Public Capital Spending Before and After Natural Disaster

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Source: EM-DAT: The Emergency Events Database.

A range of disaster relief policies are in place—including an emergency response plan with defined decision-making processes and readiness to contain disruptions to public services. Steps are being taken to improve mitigation, for example, with new environmental taxes.

However, a strategic approach to building resilience is still being developed. The National Disaster Recovery Framework and the 2017 Strategic Program for Climate Resilience are a good start. However, a realistic and costed roadmap is needed and it should include (i) structural resilience (roadways, energy, crops, livestock, fisheries, irrigation water supply systems); (ii) financial resilience (self-insurance, risk-transfer instruments); (iii) contingency planning to support post-disaster social; and policy buffers.

1 With a 3 percent per annum growth rate, Malawi’s population is expected to triple by 2050. 2 The study covers episodes of natural disaster over the last two decades. While it does not determine causality, the study provides a useful benchmark in the absence of sufficient data for econometric analysis. A natural disaster is defined as one that results in damage and losses of at least 0.5 percent of GDP.
Figure 3.
Figure 3.

Malawi: Fiscal Developments and Outlook, 2013–20

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.
Figure 4.
Figure 4.

Malawi: Selected Financial Stability Indicators, 2014–19

Citation: IMF Staff Country Reports 2019, 361; 10.5089/9781513521756.002.A002

Sources: Malawian authorities; IMF staff estimates.

Annex I. Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline scenario path, which is most likely to materialize in the view of IMF staff. The Relative Likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline scenario.

The policy response suggested by Fund staff assumes all other circumstances remain unchanged. For a combination of shocks, policy responses would need to be modified to avoid conflicts.

Appendix I. Letter of Intent

November 1, 2019

Madame Georgieva

Managing Director

International Monetary Fund

700, 19th Street, N.W.

Washington, D.C. 20431

United States

Dear Madame Georgieva:

1. On November 21, 2018, the Executive Board of the International Monetary Fund (IMF) completed the first review under the three-year Extended Credit Facility (ECF) arrangement for Malawi. This letter and the attached Memorandum of Economic and Financial Policies (MEFP) report on recent economic developments and performance under the ECF arrangement since that time as well as on the policies we plan to implement during FY 2019/20 and over the medium term.

2. We have made solid progress towards our program objectives under the ECF, notwithstanding continued challenges from climate shocks—including devastating flooding from Cyclone Idai in March 2019—power shortages, and election-driven spending pressures.

3. All but one continuous as well as end-December 2018 and end-June 2019 quantitative performance criteria (QPC) were met. The QPC on the primary fiscal balance target (adjusted for deviations in budget support, dedicated grants, and debt service payments relative to the first review under the ECF) was missed in December 2018 due to front-loading of planned spending for the year; and it was missed in June 2019 primarily due to (i) shortfalls in tax revenues (reflecting the slowdown in businesses affected by the cyclone, election uncertainties, and demonstrations) (ii) lower than anticipated dividends (iii) unexpected goods and services spending to support post-cyclone disaster relief, increased spending to ensure safety during elections and post-election demonstrations; and (iv) spending pressures ahead of the elections which resulted in bringing forward domestic development projects planned for FY 2019/20 and raising investment in rural electrification. Strong remedial actions are being taken. Notwithstanding, significant spending needs for post-cyclone reconstruction and for ensuring safety during demonstrations and other political events, the FY 2019/20 stance will be tightened relative to FY 2018/19 (and remain broadly unchanged relative to the FY 2019/20 stance agreed at the time of the first review under the ECF). We are actively improving efficiency in tax and non-tax collection, project management and capacity as well as coordinating with donors to improve the accuracy of our information on donor flows.

4. Some structural benchmarks (SBs) were met on time. Most of the remaining end-December 2018 SBs were delayed due to unexpected capacity constraints and were completed by end-March 2019. Of the remaining end-June 2019 SBs, some were completed by end-March 2019 and most of the rest are expected to be complete by end-2019. The indicative targets (ITs) on social spending and on no new domestic arrears were met for both end-December 2018 and end-June 2019. Highlighting our commitment to improving project management and forecasting use of foreign project financing, the end-December 2019 structural benchmark on performing an audit of the Public-Sector Investment Program (PSIP) database was already completed in June 2019; and we have begun implementing the audit’s recommendations.

5. We are actively entrenching macroeconomic stability and enhancing more inclusive and resilient growth, in line with the Malawi Growth and Development Strategy (MGDS) III and the policies agreed in our macroeconomic program supported by the ECF. Despite growing inflationary pressures, we have contained inflation to single digits. Economic growth is expected to accelerate from just above 3 percent in 2018 to around 4.5 percent in 2019 and to 6–7 percent over the medium term.

6. We are committed to maintaining debt sustainability while pursuing our ambitious infrastructure development plans. We will continue to ensure that new loans are concessional and accompanied by solid feasibility studies (by an independent third party when required for donor-funded projects) and that the macroeconomic implications (including on debt) are carefully considered.

7. Program implementation will be monitored through quantitative performance criteria, structural benchmarks and indicative targets as described in the Technical Memorandum of Understanding (TMU), Attachment II.

8. Based on the strength of the policies outlined in this letter and the MEFP and considering our performance under the program we request (i) waivers of non-observance for the QPC on the primary fiscal balance for end-December 2018 and end-June 2019; (ii) the introduction of a new QPC on the domestic primary balance to replace the existing QPC on the primary balance; (iii) modification of the end-December 2019 and end-June 2020 PCs on reserve money and net international reserves of the RBM; (iii) completion of the second and third reviews under the ECF; and (iv) an augmentation of access of 20 percent of quota under the ECF arrangement to support resilient reconstruction in the aftermath of Cyclone Idai.

9. We are confident that the policies contained in the attached MEFP are adequate to achieve the objectives of our program, but we will take any further measures that may be needed to attain these objectives. The Government of Malawi will consult with the Fund staff on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with Fund policies on such consultations. Malawi will provide the Fund staff with any information that may be necessary for monitoring the implementation of the measures to achieve program objectives.

10. The Government of Malawi authorizes the IMF to make this letter and the attached MEFP and TMU, as well as the related Staff Report available to the public, including through the IMF internet website.

Yours sincerely,

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Attachments:

  • 1. Memorandum on Economic and Financial Policies (MEFP)

  • 2. Technical Memorandum of Understanding (TMU)

Attachment I. Memorandum of Economic and Financial Policies

November 1, 2019

I. Recent Economic Developments

1. In March 2019, Tropical Cyclone Idai devastated southern Malawi. Flooding from the cyclone took more than 60 lives, destroyed crops, homes, hospitals, schools, roads, and other critical infrastructure. Our Post-Disaster Needs Assessment estimates resilient reconstruction costs at 5 percent of GDP (about $370 million). We are grateful to our development partners for their assistance in providing immediate disaster relief and are now appealing for support in financing resilient reconstruction. To this end, the World Bank has disbursed $40 million of budget support and approved $50 million of project financing. We are requesting IMF assistance through an augmentation of access equivalent to 20 percent of quota.

2. Moderate growth is expected for Malawi’s economy despite the devastating impact of the cyclone.

  • The economy is expected to grow at 4.5 percent in 2019, up from 3.2 percent last year. The improvement reflects post-cyclone reconstruction and an agricultural rebound. Cyclone-related agricultural losses were more than compensated by bumper harvests in the rest of the country. As a result, agricultural production was significantly higher than in 2018, where widespread drought and insect infestations destroyed much of the agricultural output. Continued macroeconomic stability is supporting confidence. However, lower global tobacco demand hurt tobacco exports (our main export) and on-going electricity shortages continue to weigh on manufacturing and wholesale and retail trade.

  • Inflation remains in single digits and on a declining trend. Non-food inflation fell from 8.2 percent at end-2018 and is expected to end 2019 around 5.7 percent, in part, reflecting improved inflation expectations following two years of single digit inflation. However, food prices remain elevated as the cyclone disrupted supply chains and suppliers stocking maize in case of future weather shocks. As a result, average headline inflation is expected at 9.1 percent in 2019—similar to the 2018 rate of 9.2 percent.

  • The current account deficit persists in 2019. Cyclone Idai and slowing global demand for our key export weighed on exports while import needs remain high, including for post-cyclone reconstruction materials and election-related spending.

3. Fiscal policy faced challenges in FY 2018/19.

  • At the time of the first review in November 2018, we had set a zero primary balance target for FY 2018/19 under the ECF arrangement, corresponding to an end-December 2018 target of -0.1 percent of GDP (performance criterion). By end-December 2018, the primary balance target (adjusted for deviations in budget support, dedicated grants, and debt service payments relative to the first review under the ECF) was missed by 1.5 percent of GDP primarily due to front-loading of planned spending for the year. However, by end-June 2019 the primary balance target (adjusted for shortfalls in grants) was missed by 2.5 percent of GDP due to (i) a shortfall in corporate income tax (0.6 percent of GDP) reflecting the slowdown in businesses affected by the cyclone, election uncertainties, and post-election demonstrations; (ii) weak dividend collection (0.4 percent of GDP); (iii) unexpected goods and services spending to support post-cyclone disaster relief and rehabilitation and increased spending to ensure safety during elections and post-election demonstrations (0.4 percent of GDP); (iv) raising salaries to settle strikes by university staff (0.1 percent of GDP); (v) payment of arrears arising from court rulings (0.1 percent of GDP); and (v) spending pressures ahead of the elections which resulted in bringing forward domestic development projects planned for FY 2019/20, implementing new ones, and raising investment in rural electrification (1.3 percent of GDP). However, foreign-financed development spending was less than anticipated (0.6 percent of GDP) reflecting shortfalls in grants (0.9 percent of GDP) that were only partially offset by increased project-based concessional foreign borrowing (0.2 percent of GDP). We did not incur any external payment arrears or contract or guarantee new non-concessional external debt (performance criteria).

  • The domestically-financed portion of the fiscal deficit was financed by banks and non-banks and there was no net financing by the Reserve Bank of Malawi (RBM).

4. We loosened monetary policy in line with reduced inflationary pressures. After observing a trend decline in non-food inflation, reduced international fuel prices, and declines in average Treasury bill yields (for all tenors), the policy rate was reduced by 150 basis points in January and another 100 basis points in May to 13.5 percent. Given upward pressures on food prices, the policy rate has remained unchanged in the second half of the year. In January, the reserves requirements were reduced by 250 and 375 basis points to 5 and 3.75 percent on local currency and foreign currency deposits, respectively, and the Lombard rate by 310 basis points to 14.9 percent. The interbank rate immediately fell below the corridor’s lower bound and was realigned with the policy rate in April when the system’s excess liquidity was absorbed though commercial banks’ purchase of government securities from the RBM and a pick-up in credit growth from 11.5 percent at end-2018 to 17.1 percent in June 2019. In September, the interbank rate fell below the corridor’s lower bound due to lower uptake of government securities by the market. Efforts are being made to realign the interbank rate with the policy rate. The stock of reserve money for both end-December and end-June 2019 remained within the upper bound set under the ECF arrangement (performance criteria).

5. For the first time in two years, the Kwacha fluctuated substantially against the US dollar. A 6 percent depreciation in the second quarter of 2019—the largest since mid-2016—was followed by a 5.5 percent appreciation in the third quarter of 2019. While the net depreciation across the three quarters is small, it underlines our commitment to exchange rate flexibility which we consider critical for cushioning shocks and enhancing competitiveness. The real effective exchange rate appreciated by around 13 percent over the past twelve months (August 2018-August 2019). Net international reserves overperformed its end-December 2018 and end-June 2019 targets (performance criteria) by $57 and $17 million, respectively.

6. Banking system resilience continues to improve. On aggregate, the banking system has been well capitalized and profitable. Over the past two years, non-performing loans (NPLs) have declined from 15.7 percent at end-2017 to 4.8 percent in June 2019, largely due to write offs and loan recovery and overall growth in bank lending. Over the same period, with the adoption of IFRS9 requirements, provisioning has increased from 34.5 to 54.4 percent. One small bank with a negative capital adequacy ratio was able to recapitalize and another loss-making bank is looking for a partner to inject capital and may otherwise exit the market. The RBM’s June 2019 stress test showed that overall, the banking system is resilient to interest rate and income risk shocks but vulnerable to some credit and liquidity risk shocks.

II. Economic Outlook and Policies

A. Economic Outlook

7. Economic growth is expected to strengthen to around 5 percent in 2020 and towards 6.5 percent over the medium. In the near term, economic activity will be driven by post-cyclone reconstruction, investment in more climate-change resilient infrastructure, and improved electricity generation—from new electricity sources coming on line—which will support increased manufacturing and wholesale trade activity. Over the medium term, growth will be supported by greater access to finance, crop diversification (e.g., cassava and sweet potatoes), and more resilient infrastructure—including enhanced electricity generation and distribution, better quality and coverage of irrigation, and improved telecommunications and road networks. Combined with ongoing stabilization, reform programs such as those to improve competitiveness and governance as well as increased investment will solidify confidence, spur economic diversification, and support higher and more sustained inclusive growth and increase job and business opportunities for our young and dynamic population. Inflation is expected to moderate to around 8.5 percent in 2020 with lower food and international fuel prices. Over the medium-term, it is expected to gradually converge to our objective of 5 percent in line with strong fiscal and monetary policy implementation and contained food and international fuel prices.

8. Short-term risks are tilted to the downside. Malawi’s agriculture-driven economy is vulnerable to adverse weather conditions, which are being intensified by climate change, and to pest infestations. Food security should be preserved by the already accumulated substantial food reserves and we are closely monitoring the situation. Escalated global trade tensions could depress export demand and raise import costs. This combined with volatile tobacco exports could induce stress on the exchange rate. A slower than expected disinflation process could raise interest rates, increasing the government’s interest bill and hampering access to finance. On the upside, better than expected harvests and higher than expected export commodity prices could boost medium-term growth.

B. Monetary and Financial Sector Policies

9. Monetary policy will continue focusing on entrenching disinflation. It will aim to maintain single digit inflation in order to achieve the medium-term objective of 5 percent. Our monetary policy formulation and implementation will be consistent with this objective.

10. We will complete the transition to an interest rate-based operational framework and aim to adopt inflation targeting over the medium-term.

  • As laid-out in the RBM’s 2019–21 strategic plan, full-fledged inflation targeting continues to be our medium-term strategic objective, and we are committed to further improve our interest-rate based monetary policy framework. To this end, we will continue to improve primary and secondary market operations to further strengthen monetary policy transmission. With a view to strengthening the transmission mechanism along the yield curve, and in consultation with the market, we have modified the reference rate for base lending rates of commercial banks from the Lombard rate to the weighted average of the Lombard rate, the Interbank rate, all types of Treasury bill rates, and the savings rate. We will continue to monitor its implementation and review as and when necessary in consultation with the IMF. We will continue to expand capacity in developing high frequency data, liquidity forecasting, and the forecasting and policy analysis system (FPAS) modeling.

  • In line with a favorable economic outlook, the RBM adjusted downwards the policy rate, the liquidity reserve requirements (LRR), and the Lombard rate in early-2019. Going forward, the RBM will continue to review the economic conditions and take necessary decisions consistent with the 5 percent medium-term inflation objective. This may include re-aligning the foreign currency LRR with the local currency LRR.

  • We will take steps to further improve the government securities market. To avoid market distortions and sustain policy effectiveness, we will ensure that interest rates on all government securities continue to be determined through auctions. To deepen the secondary securities market, we will disclose volumes to be offered in auctions, avoid cancelation of auctions. We will improve on the planning for government security issuance by establishing an annual borrowing plan with updates as necessary and an issuance plan. The issuance calendar will include the volume of securities to be issued in each auction.

  • While recognizing the urgency of stemming the cost of borrowing, we believe that the fundamental solution lies in addressing structural barriers: promoting mobile technology, managing risks and reducing the cost of doing business for banks, strengthening financial frameworks, and improving property rights. In view of this, we will develop a road map to improve access to finance by December 2019 (structural benchmark).

11. We will continue to bolster the RBM’s independence and effectiveness.

  • We have successfully repealed and replaced the RBM Act with a new RBM Act 2018 to enhance the mandate of the RBM—including its autonomy and eliminating avenues for monetary financing of the government debt by prohibiting it from purchasing government securities in the primary market and by limiting credit to the government to short-term advances that must be repaid in cash. The RBM will not convert ways and means cash advances to the government into government securities. We will also ensure that the revisions to the PFM Act, aimed at modernizing and strengthening the PFM legal framework, will be aligned with the amended RBM Act.

  • The RBM’s holdings of government securities have been reduced (by 12 percent since end-2017), mainly through sales in the secondary market, without any adverse effects on monetary policy implementation and public debt management. In particular, the RBM’s share of the total stock of Treasury notes fell from 76 to 39 percent between end-December 2017 and end-June 2019; and its share of Treasury bills fell from 2.6 to 0.1 percent during the same period. Going forward, a strategy to guide future unwinding of RBM holdings of government securities has been developed. This strategy centers around targeting the appropriate level and composition of government securities to be held by the RBM for monetary policy purposes; and ensuring the transition to this target minimizes any adverse effects on the yield curve and market appetite for primary issuance by the government and is mindful of any adverse effect on the RBM’s profitability.

12. Financial sector stability will continue to be safeguarded.

  • All banks are fully compliant with IFRS9 standards, which went into effect in January 2018. We will ensure that all banks continue having adequate provisioning in line with the IFRS9 standards and ensure that their NPLs remain within the regulatory requirement. To reduce the time required to recover collateral associated with NPLs, we will encourage banks to enhance their loan recovery efforts. Banks will also be encouraged to improve analysis of collateral quality, including enhancing the collateral registry.

  • To improve banking system efficiency, we have taken measures to reduce the banking system’s overhead costs (e.g., credit referencing system and the national ID registry). Going forward, as T-bill rates decline, banks that have been relying on government securities for their profit margins will need to modify their business models and reduce interest rate spreads. To address loan concentration risks, we will continue close monitoring, surveillance of large borrowers, and enforcement of the single borrower exposure limit. Regulations aimed at enhancing the Domestic Systemically Important Banks supervision took effect in June 2019.

  • Given rising bank lending in foreign currency, we will remain vigilant and ensure that all banks meet the net open position requirement and that lending in foreign currency is made particularly to clients with sources of foreign currency earnings. In this context, we will continue to review our prudential toolkit.

13. New initiatives are gradually being implemented. Regulations related to the revised AML/CFT framework that was enacted in 2017 were developed and gazetted in 2018. We will encourage commercial banks to develop skills in the banking sector and increase financial literacy amongst the population. We will further improve financial infrastructure, including facilitating mobile banking infrastructure and increasing non-bank financial intermediation. We will continue to increase protection of creditors’ and borrowers’ rights by improving contract enforcement.

14. We will keep strengthening the regulatory framework of the financial system. To this end, we will re-submit to Parliament, before end-2020, amendments to the Banking Act of 2010 for eventual enactment. These amendments, which were informed by IMF technical assistance recommendations, will align the legal framework for bank resolution closer to best practices and provide more options for dealing with problem banks. We are developing a consumer protection bill to be submitted to Parliament by end-2020.

15. We are fully committed to the floating exchange rate regime. We see this as a fundamental precondition for the success of our economic policies as it cushions shocks and supports economic diversification and the RBM will continue to intervene only to dampen excess volatility and accumulate reserves. In support of greater exchange rate flexibility, we will focus on deepening the interbank FX market. Going forward, the research department of the RBM will undertake a comprehensive study, which will include consulting other central banks in the region and private sector participants, to determine obstacles to FX market development (a report will be prepared by June 2020, structural benchmark) and the best framework for intervening in the FX market.

C. Fiscal Policy

16. Our fiscal policy stance will support disinflation and help reduce debt vulnerabilities. To this end, we strive to increase domestic revenues and contain spending within available resources, avoid accumulation of domestic and external arrears, and avoid non-concessional external borrowing. Continued implementation of prudent fiscal policies in the near- and medium-terms is necessary to keep the public debt-to-GDP ratio on a downward trajectory and prevent the private sector from being crowded out and productive government expenditure from being replaced by debt servicing costs.

17. Cognizant of fiscal slippages in recent years, in FY 2019/20, we will aim to restore budget balance. The approved FY 2019/20 budget foresees a primary surplus of 1.5 percent of GDP. As this is largely based on optimistic revenue growth, we plan to backload spending in the second half of the year and only spend as revenues materialize. In this way, at a minimum, a domestic primary surplus of 0.9 percent of GDP (which translates to a primary deficit of 0.8 percent of GDP) will be targeted in order to continue entrenching macroeconomic stability while prioritizing post-cyclone rehabilitation and reconstruction. Relative to FY 2018/19, this represents a tightening of the domestic primary balance by 2.1 percent of GDP and the overall primary balance by 1.5 percent of GDP—including partial corrections for last year’s revenue shortfalls and expenditure overruns. Important measures we will adopt to achieve this target include:

  • Raise tax revenues including through introducing excises on plastic bags, pipes, and packaging, adjusting excise rates for inflation and applying it on sales price, and introducing a presumptive tax on commercial passenger vehicles, carbon tax on motor vehicles, and an import surcharge on select goods (such as alcohol, cigarettes, and some foods) and a withholding tax on interest earned by Trust Funds and commissions to mobile network operators—altogether adding at least 0.3 percent of GDP relative to the outturn in FY 2018/19. Increased imports will widen the tax base (0.2 percent of GDP). We will also freeze the current PIT schedule (including keeping the tax-free bracket in line with the minimum wage), refrain from introducing further exemptions, allowances and rate reductions and ensure enough funds for paying timely VAT refunds.

  • Continue enhancing tax administration efforts based on more efficient use of risk analysis and enhanced monitoring, risk-based audits, rolling out the Integrated Tax Administration System (ITAS), improving the registration system, on-time filing and payment compliance, better enforcement of tax penalties and more effective use of the ASYCUDA World system for enforcement of trade taxes. Gains of at least 0.1 percent of GDP is expected from these ongoing improvements in tax administration.

  • Increase user fees and charges to adjust for inflation and progress toward marginal cost pricing and improve their enforcement. We will also introduce road tolling fees.

  • Implement dividend policy to ensure profits and surpluses realized by SOEs and statutory bodies are duly remitted to the government; the share of dividends due to government will be increased and investment needs of statutory bodies will be met through budget appropriation rather than retention of surpluses.

  • Limit wage and pension increases to inflation and limit new hiring to essential staff. The recent 40 percent increase in the minimum wage is not expected to affect the government wage bill as most government salaries are already well above the minimum wage.

  • Reduce the maize procurement budget (assuming no extraordinary needs during FY 2019/20) and limit coverage of the Farm Input Subsidy Program.

  • Reduce transfers to public entities by improving their revenue generating capacity.

  • Reduce goods and services spending in non-priority areas—including on staff travel, purchase of motor vehicles, and office equipment—and channel those savings towards supporting cyclone victims and rehabilitation and security in a volatile post-election environment; non-essential recurrent spending will also be strictly limited.

  • Increase social spending (in line with implementation capacity) with a significant portion targeted towards supporting cyclone victims and rehabilitation.

  • Reorient spending on development projects towards post-cyclone resilient reconstruction, which will replace planned spending that was brought forward in FY 2018/19. Additional space will be created by reducing or delaying planned spending and better targeting of the iron sheet subsidy.

18. We plan to step up measures to enhance the oversight of state-owned enterprises (SOEs). Weak oversight and financial reporting are a challenge to adequate monitoring and management of risks to the budget and public debt from the SOEs. In this regard, we finalized and issued guidelines on issuance of guarantees, letters of consent and comfort, and indemnities in August 2018. Regulations related to ownership of SOEs were finalized in April 2019 and guidelines on the preparation of performance management plans and budgets were finalized in May 2019. Dividend and surplus policy have advanced and will be finalized by the Cabinet by end-2019 (structural benchmark). The mandate of the Public Finance Management Systems (PFMS) will be revised in line with revisions to the PFM Act with a view to strengthening its role in parastatal oversight. Pilot audits of the largest SOEs have been completed in collaboration with National Audit Office (NAO) and the report was submitted to Parliament in September 2019. By March 2020, we plan to submit to Parliament and publish on the Ministry of Finance (MoF) website a consolidated annual report on SOEs, including risk analysis case studies on ENGENCO, NOCMA, ADMARC, and the Blantyre Water Board that are in line with the recommendations of the IMF’s technical assistance in this area (structural benchmark). We will conduct a risk analysis case study on ESCOM and publish on the MoF website by June 2020. We will also develop a prototype SOE database by end-2019.

19. As part of our efforts to raise spending efficiency, we aim to enhance our public investment management. We will prioritize (with rankings) the largest public investment projects based on rigorous cost-benefit analysis, absorptive capacity, growth, poverty reduction, and debt sustainability considerations. Large projects (concessional and potentially non-concessional) under consideration are listed in Table 3. We have piloted ex-post reviews/performance audits of two major capital projects in collaboration with the NAO and the reports were finalized in September 2019. The audit of a third project is also underway and will be finalized by June 2020. To increase the usefulness of the Public-Sector Investment Program (PSIP) database as a platform for the oversight and monitoring of investment projects, an audit of the PSIP database’s coverage and the efficiency and timeliness of its processes was recently completed with the support of IMF technical assistance (structural benchmark). As a next step, we will begin implementing the findings of the audit (especially project rationalization) and continue building capacity (including through extensive training). We have also strengthened PSIP linkages to the budgeting and budget execution processes, including the publication of the PSIP as part of the budget documentation (Document no. 6) and will be recording multi-year commitments from FY 2020/21. In addition to raising efficiency, our efforts to improve public investment management (including project management and capacity), will support more accurate projections of project-based donor support disbursements.

20. Over the near- and medium-terms, we are committed to implementing broad-based tax reforms to foster an efficient, transparent, and fair tax system as well as enhance revenue mobilization, compliance, and the business environment.

  • We will undertake a comprehensive review of our tax system with a view to further mobilizing domestic revenues and increasing the efficiency and equity of taxation. By end-March 2020, we will develop a domestic revenue mobilization strategy (structural benchmark) and start implementing it in FY2020/21. The strategy will aim to streamline tax incentives, including the industrial rebate scheme; expand the VAT base by removing unnecessary exemptions; improve the efficiency of excise taxation, including through more comprehensive taxation of passenger vehicles; increase income tax productivity and its resilience to base erosion (especially corporate income tax); improve SME taxation; and introduce recurrent property taxes. The strategy will include plans for implementing more progressive tax policies, including unwinding of past regressive tax measures. These measures should yield, on a net basis, at least 0.3 percent of GDP in FY 2020/21 and 0.4 percent of GDP over FY2021/22–22/23. They will be used to finance post cyclone reconstruction and build greater resilience to climate change.

  • To strengthen tax administration, we will (i) continue to advance a risk-based approach to tax compliance through increased data analysis; (ii) enhance the tax registry and improve the registration system (under 50 percent of the TINS issues are active taxpayers); (iii) continue enforcing stiff penalties on malpractice of the use of EFDs and other instances of non-compliance, including due to abuse of transfer-pricing regulations; (iv) target improvement of on-time filing and payment compliance across all tax types to at least 50 percent; (v) continue increasing efficiency of customs, including by effective use of the ASYCUDA World system and its further integration with other agencies’ IT systems; and (vi) by February 2020, adopt an integrated tax administration system (ITAS)—including full adoption in the large taxpayer office and the two other offices (in Blantyre and Lilongwe)—which will also improve transparency of business processes and reduce corruption. Some key milestones in the rollout of ITAS include (i) procurement of hardware by end-November 2019; (ii) begin piloting test ITAS in two tax offices (Blantyre and Mzuzu stations) by end-December 2019; and (iii) data cleaning and migration for all active taxpayers by March 2020. Through these measures we intend—at the minimum—to enhance revenues by 1 percent of GDP cumulatively over FY 2020/21–22/23.

  • To improve non-tax revenues, especially various fees and charges collected by MDAs, we will enhance the Treasury oversight role, conduct a business process review in MDAs in terms of revenue collection and management processes and ensure efficiency enhancement by leveraging the use of technology. We will also keep adjusting user fees and charges for inflation and periodically undertake a comprehensive review to make progress towards marginal cost pricing and better enforcement. These efforts are expected to gradually increase fees collections (departmental receipts) by at least 0.1 percent of GDP cumulatively during FY 2020/21–22/23. We will also install toll gates in strategic locations and introduce toll fees to mobilize more revenue for road infrastructure rehabilitation.

  • We are also committed to working with donors to improve the accuracy of information on donor flows, especially the disbursements. This will be done through enhanced use of the aid management platform and joint portfolio reviews.

21. Our near- and medium-term budgeting plans include enhancing the composition and quality of government spending, while containing fiscal slippages. Unbudgeted expenditures (e.g., in goods and services) will be avoided and we will only recruit critical personnel, while wage and pension increases will be limited to the inflation rate. We seek to reduce the wage bill through public sector employment reforms—a recent pilot review revealed gaps in grading and promotion policies. Any shortfalls in budget grants will be partly compensated by cutting non-priority spending (contingency items in the budget include limiting external travel and deferral of non-priority maintenance and investment projects, altogether about 0.2 percent of GDP). The composition of public investment will continue focusing on pro-growth and poverty reducing expenditures. With high development needs and limited fiscal space, raising efficiency of spending in priority areas such as social spending will be at the core of our medium-term budgeting plan. SOEs will not be required to undertake public investment spending (off-budget financing). We will avoid arrears in paying contractors, especially to SMEs. To do so, we shall put into place measures to enhance the allocational mix of health and education budgets, improve fiscal transparency and accountability at the national and sub-national levels, strengthen program-based budgeting, and engender efficiency in frontline service delivery. Beginning in FY 2020/21, we plan to achieve additional savings of at least 0.1 percent of GDP per year by reviewing and further limiting the eligibility and voucher value in the Farm Input Subsidy Program and limiting transfers by at least 0.2 percent of GDP by FY2021/22 by improving management of universities and statutory bodies and rationalizing their administrative staff and increasing the role of private sector where possible.

22. We will also develop a plan to address the challenges involved in the current decentralization process. This will include addressing issues of capacity and controls at the local level and eventually adopting a legal framework for budget systems and fiscal policy coordination.

D. Public Financial Management Reform

23. We continue to make strides in public financial management reforms. We have routinized monthly bank reconciliation of the payment bank accounts, except for salary accounts which will be routinely reconciled from July 2020 (with all backlog for FY 2016/17–2019/20 cleared). The automated transfer system reconciliation covering the payments of net salaries to all employee bank accounts (60 percent of gross pay) is already performing and the current year’s payments of deducted amounts will be routinely matched by end-December 2019. We will continue to maintain fully reconciled domestic debt data across the responsible units in the RBM and the responsible unit in MoF (structural benchmark). To improve control and accountability, we have routinized monthly submission by MDAs of fiscal reports on the monthly funding release and publication of the report summaries on the MoF website (structural benchmark). We will continue to strengthen the quality control of these reports (including sanctions on controlling officers in MDAs for misreporting or non-compliance). We are publishing consolidated monthly statements of the government’s declared commitments and payment arrears on the MoF website including information on overdue (for more than 90 days) payments. More systematic commitment controls, constrained by forecasts of cash availability, will help prevent the accumulation of new payment arrears; more comprehensive reporting on payment arrears will help provide early warning and resolution of commitment control failures and enable sanctioning of controlling officers who incurred them.

24. Building on recent advances, we plan to further improve our financial reporting. We have begun producing quarterly consolidated financial reports based on reconciled bank accounts and certified by the Auditor General within six months after the end of the quarter. In FY 2019/20, we plan to produce them within four months after the end of each quarter; and beginning in FY 2020/21, we plan to produce them within 90 days after the end of each quarter (structural benchmark). We plan to regularly publish them on the MoF website. The first quarter FY 2018/19 financial reports were submitted to the Auditor General for certification in February 2019; the certification was completed in March 2019. The second quarter FY 2018/19 financial reports were submitted to the Auditor General for certification in May 2019; the certification was completed and the report published in September 2019. The third quarter FY 2018/19 financial reports were submitted to the Auditor General for certification in June 2019; the certification was completed and the report published in September 2019. In the same vein, we will continue producing and publishing on the MoF website monthly budget execution reports by vote and economic classification. Progressively, expenditure reporting will be based on actual payments and not funding. The annual consolidated financial statements for 2017/18 were submitted for audit within the statutory 4 months following the end of the financial year; an unqualified audit opinion was issued in January 2019. Timely reporting will mean that Parliament will discuss reports that are not only reliable but also relevant. In addition, we will adopt the electronic fund transfer (EFT) as the government’s main payment method by end-June 2020 (structural benchmark). To this end we will complete a pilot of EFT transaction processing by end-March 2020 prior to extending EFT to Other Recurrent Transaction (ORT) and development payments. We will also implement TMS, as the current IFMIS bank reconciliation module, to the MG1 and losses and compensation accounts by end-December 2019 and the remaining three pool accounts by end-March 2020(structural benchmark). The early adoption of EFT and implementation of TMS will facilitate the move toward automated monthly reconciliation of all bank accounts.

25. Improved financial reporting will provide a good basis for migrating to a new IFMIS. In March 2019, the contract for a new IFMIS was issued and the supplier team has since been mobilized. The new IFMIS will allow for better financial reporting, transaction efficiencies, enhanced budget formulation and execution controls and security. An IFMIS steering committee, under the chair of the Secretary to the Treasury, has been constituted to oversee the planning, progress and implementation of the new IFMIS. Important preparatory work, including an agreement on the chart of accounts and bank account structures to be supported by the new IFMIS is almost complete. Drawing on the IMF’s technical assistance and the World Bank’s advice, we will put in place a realistic and comprehensive implementation plan (e.g., a phased approach supported by government teams and strong project management), a transparent governance framework, credible quality assurance, and a robust strategy to assure readiness (e.g., network/data center and business process re-engineering) ensuring that maximum benefits are achieved from the investments. Recognizing that implementing a new IFMIS will take time and will benefit from those good practices already in place, we will continue allocating resources towards maintenance of the current IFMIS and expand most of its real time coverage to include all major TSA sub-accounts (including non-donor funded projects, receipts, and debt servicing payment) and important interfaces (notably, linking HRMIS and IFMIS) and debt transactions by end-2019. We will shift from monthly to quarterly budget release for commitment purposes, combined with monthly cash release, and require MDAs to commit against the released budget through IFMIS beginning in July 2020 From January 2020, we will pilot using IFMIS to record commitments of all types of expenditure (based on purchase or order contracts), prior to the submission of new contracts to the Secretary of Treasury for vetting and all domestic debt commitments, expenditures, and payments in real time; we intend to publish commitments against budget allocation as well as outstanding bills.

26. Operations of the Cash Management Committee have been strengthened. This was done by establishing a functional Cash Management Unit under the Secretary to the Treasury. The unit has been preparing a cash forecast of the next twelve months (soon after parliamentary approval of the budget) and it will be regularly updated. The unit prepares a variance analysis on forecasting errors every three months, reports a summary of the meeting minutes, and takes actions to improve MDA submissions—which was done for the first time in December 2018 and has since become a regular practice. By March 2020, we will review our banking arrangements and develop a strategy for building on the current core-Treasury Single Account (TSA) structure. We will continue identifying and closing dormant bank accounts and bringing all major balances within the core-TSA.

27. We are developing a medium-term strategy that aims at solidifying the present gains. We will embark on building human capacity through training to ensure that the reforms being implemented are sustained. A review of the PFM Act, currently underway, aims to ensure that laws and regulations are brought in line with the reforms that are taking place and emphasize a performance-based rewards and sanctions regime. Strengthening of oversight institutions such as the National Audit Office, Central Internal Audit Unit and the Public Accounts Committee of Parliament will continue under the medium-term strategy that is being developed. We will also strengthen medium-term performance and efficiency of our budget by better linking MDA strategic planning and budgeting, improving the credibility of the Medium-Term Expenditure Framework, and strengthening the framework for engaging key stakeholders. Building on the enactment of a new Public Procurement and Disposal of Assets Authority Act, which closes various loopholes under the old act, we intend to improve our procurement framework continuously, to enhance transparency, control, and accountability. We have already started by publishing all procurement information on the Public Procurement and Disposal of Assets Authority website. A recently completed diagnostic study on procurement will inform future reforms. We will also use the performance contract with controlling officers to hold them accountable for adhering to relevant rules and procedures and strengthen procurement audits. Over time, we will consider gradually moving to an e-procurement system.

E. Structural Reforms

28. The Malawi Growth and Development Strategy (MGDS III) envisages a significant improvement of Malawi’s business climate. The objective of building productivity and competitiveness will require unlocking private sector potential. To this end, we will continue to improve the business environment, including by easing procedures to start a business and deal with construction permits, strengthening contract enforcement, and enhancing insolvency processes.

29. We will also implement deep reforms in agricultural regulations and market intervention systems, agricultural subsidies, and land management systems:

ADMARC: A comprehensive strategic review of ADMARC (Agricultural Development and Marketing Corporation) has been completed. Based on this review’s findings, we will implement a reform program to better balance maize price stabilization against fiscal sustainability and improve transparency and efficiency in this area. Concrete steps will be taken to strengthen ADMARC’s financial sustainability, e.g., by separating the social and commercial functions within ADMARC.

  • Control of trade: The Control of Goods Act has been amended to conform to international trade best practices and efforts are underway to finalize subsidiary legislation which will adequately define the public interest grounds needed to determine the thresholds for intervention. New bans or review of existing bans will be reviewed in consultation with stakeholders.

  • FISP: We will continue FISP reform, focusing on containing its budget impact, an increased role for the private sector, better governance, and better beneficiary targeting.

  • Land reform: We will continue implementing new land laws based on the lessons learned from our pilot programs.

F. Debt Management

30. Malawi is classified as being at moderate risk of external debt distress and at high overall risk of debt distress due to high domestic debt. We will limit our external borrowing to high priority projects which are in line with the MGDS III and maximize the grant element of external borrowing to ensure that total debt (and guarantees) contracted is consistent with debt sustainability. While MGDS III lays out ambitious goals for critical infrastructure projects, we are committed to ensuring that their financing preserves debt sustainability.

31. We plan to strengthen debt management and monitoring. We have developed a comprehensive medium-term debt strategy and will keep updating it. The Debt Management Committee is operational and will assess both domestic and external borrowings. The committee will ascertain loan concessionality and ensure debt sustainability taking into consideration the entire borrowing plan and the medium-term debt strategy. Borrowing in the FY 2019/20 budget will be consistent with our objectives of social development and poverty reduction and debt sustainability. We will ensure that new loans are concessional and accompanied by solid feasibility studies (by an independent third party when required for donor-funded projects) and that the macroeconomic implications (including on debt) are carefully considered. We will further improve our debt monitoring by allocating sufficient resources and increase training.

32. We will take steps to improve coordination of debt and liquidity management as well as deepen the domestic debt market. By end-2019, MoF’s Debt and Aid Management Division’s front office operations will have more active engagement in domestic debt management policies and operations in collaboration with the RBM (i.e., the division will lead preparation of the DSA and formulation of the MTDS, the division will be an active participant in weekly meetings of the short-term borrowing committee, and prepare an annual borrowing plan—reflected by the planned financing for the year and an issuance calendar; structural benchmark). Better cash flow forecasts (as outlined above) are helping to improve debt and liquidity management coordination. We are gradually lengthening the maturity of government securities and developing a government securities benchmark issuance policy that will concentrate the amounts of benchmark tenors in maturity buckets of 3, 5, 7, and 10-years to develop the government securities yield curve. We will continue to develop the Treasury Bill yield curve by issuing 91, 182, and 364-day maturities in auctions. We will continue to publish the indicative amounts in an issuance calendar that will be confirmed closer to auctions through announcements, and we will adhere to these announced auction schedules.

G. Fuel Pricing and Import Regime

33. We will continue to improve our fuel security situation. We have three fuel storage depots (capable of holding about 25 percent of annual consumption) and guidelines for their operation which clarifies the framework for collaboration between the storage operator and fuel importers or distributors. The framework has been running well with fuel importers who are in the process of integrating the facilities as a part of their logistics chain. It will enable the augmented storage cost to be fully passed on to the pump price. Since 2013, our fuel import regime had been based on private sector imports with cost recovery guaranteed by the automatic fuel pricing mechanism. Fuel imports were done jointly by a traditional private sector consortium (PIL) and NOCMA, based on their 2013 MOU, which expired in June 2018. Two new pieces of legislation have been promulgated to develop the wholesale and retail markets and have been strictly enforced since February 2019.

34. The fuel import regime will remain unchanged for the rest of the 2019/20 fiscal year. However, we will continue to evaluate the balance of security and efficiency under the current regime as more experience is gained. In particular, we are committed to ensuring a level-playing field for all market participants, while also putting in place a safeguard against, potentially disastrous, supply disruption. Given the importance of safeguarding governance risks in the sector, any further change in the fuel import regime or operation of the facility will be done in a transparent manner, with full private sector participation. We will produce, publish, and discuss with all stakeholders a fully-costed and well-thought out proposal for any change prior to implementation.

35. We remain committed to retaining and implementing the fuel price automatic adjustment mechanism. This mechanism has enabled full cost recovery by fuel importers while precluding government subsidy. The rule is that over ±5 percent change in the formula-based underlying price triggers a price adjustment; and all other price changes are absorbed by the Price Stabilization Fund (PSF). Recently, to avoid sudden or large pump price increases, discretion has been applied and the PSF has been used to subsidize fuel distributors in place of the automatic price adjustment mechanism. This led to a pause in the adjustment of prices at the pump since October 2016. However, increases in imported oil prices led the Malawi Energy Regulatory Authority (MERA) to approve significant increases in petroleum and diesel prices in 2018—although the increases were partly undone this year due to a decline in the international oil price. Going forward, we intend to exercise strict restraints on the use of discretion over the ±5 percent price adjustment rule with a view to protect the PSF and avoid a backloaded, lumpy price adjustment. To increase transparency and accountability, we will disclose more information on the aggregate use of the PSF including publishing on the MERA website the audited reports on its use and management.

H. Gender Equity

36. We take note of the importance of addressing gender inequality in achieving inclusive growth. Gender disparities hinder economic growth by impeding full realization of Malawi’s human resource potential and aggravate economic exclusion, making it harder for women to escape from poverty. Policy interventions will continue to focus on adolescent girls given the high potential impact of breaking the cycle of deprivation at an early stage of life.

  • Ending child marriages: The constitutional amendment to raise the minimum age for marriage from 15 to 18 was a critical first step. In addition, we plan to develop a comprehensive national program of action which will entail multifaceted strategic interventions—from social protection, to law enforcement, to health (particularly sexual and reproductive health), child protection, and public education.

  • Keeping girls in school: We will continue to facilitate larger and more effective investment on classrooms, teachers, and education materials. We will also broaden our demand side interventions (e.g., more social assistance and targeted subsidy programs; which would be gender-sensitive).

  • Assets and credit. Given the significance of a matrilineal system of land inheritence in Malawi, we are commited to the formalization of customary land rights that are key to women’s access to finance. Policy interventions for access to finance, including gender neutral ones, will further help level the playing field.

  • Labor market policies. We will consider non-gender-neutral policy options (e.g., childcare support) to help increase women’s labor market participation.

III. Structural Program for 2019–20

37. The macroeconomic policies supported by the ECF will be complemented by a strong structural program, which will make the transmission of economic policy more efficient. The Structural Benchmarks for 2019–20 (Table 2) signal our commitment to a strong reform agenda in key sectors of the economy.

I. Structural Benchmarks and Program for 2019

Fiscal Sector

  • Submission to the MoF of five reports by the MDAs by mid-following month and publication of the summary on the MoF website (except for the reconciliation report which will be submitted 6 weeks after the end of the month). Maintain/strengthen sanctions on MDAs for misreporting/non-compliance (continuous).

  • Prepare quarterly consolidated financial reports (including all MDAs) with fully reconciled bank accounts and publish within four months after the end of each quarter in FY 2019/20 and within 90 days after the end of each quarter in following years. The financial reports should be certified by the Auditor General. (continuous).

  • Reconcile all debt data between the MOF and RBM (continuous).

  • Cabinet approval of the dividend policy relating to SOEs (end-December 2019).

  • Ensure DAD front office operations include more active engagement in domestic debt management policies and operations in collaboration with the RBM (end-December 2019).

  • Submit to Parliament and publish on the MoFEPD website a consolidated annual report on SOEs (including case studies for ENGCO, NOCMA, ADMARC, and Blantyre Water Board, end-March 2020).

  • Develop a domestic revenue mobilization strategy (end-March 2020).

  • EFT adoption and TMS implementation (five pool bank accounts) facilitating the move toward automated monthly reconciliation of all bank accounts. TMS implementation of two accounts will be targeted for end-2019 and the remaining three for end-March 2020 (end-June 2020).

Financial Sector

  • Develop a roadmap for increasing access to finance (end-December 2019).

  • The research department of the RBM will review and prepare a report on the obstacles to FX market development (end-June 2020).

IV. Program Monitoring

38. The program will be monitored on a semi-annual basis, through quantitative targets (Table 1) and structural benchmarks (Table 2). Quantitative targets for end-December 2019 and end-June 2020 are performance criteria while those for end-March 2020 and end-September 2020 are indicative targets. The fourth and fifth reviews under the program will be completed on or after April 15, 2020 and October 15, 2020, respectively.

Table 1.

Malawi: Quantitative Targets, 2018–201

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Source: IMF staff projections.

Targets are defined in the technical memorandum of understanding (TMU).

“PC means Performance Criterion and IT” means Indicative Target. The PC test date for the 2nd Revew is end-December 2018 and for the 3rd Review is end-June 2019 Test dates for future reviews wll be end-June and end-December End-September and end-March targets are ITs.

PC applies to upper bound only See TMU for details.

Targets are subject to an adjustor for budget support as specified in the TMU.

Targets are subject to an adjustor for budget support and debt servce payments and donor-funded social sector expenditures, as specified in the TMU.

Defined as a cumulative flow, starting from the beginning of the fiscal year.

Targets are subject to an adjuster equivalent to 10 percent of the average of the inflation adjusted domestic revenues of the prevous three fiscal years, as specified in the TMU.

Defined as stocks.

Priority social spending as defined in the TMU and quantified in the authorities’ budget

Evaluated on a continuous basis.

The domestic primary balance will replace the primary balance as a PC beginning with the end-December 2019 PC.

Table 2.

Malawi: Structural Benchmarks, 2019–201

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Sources: IMF staff and Malawian authorities.

Ministry, department, and agency.

Table 3.

Malawi: Pipeline of Large Projects Under Consideration

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Source: Malawian authorities.

Attachment II. Technical Memorandum of Understanding

November 1, 2019

I. Introduction

1. This memorandum defines the quantitative performance criteria, benchmarks, and indicative targets for the program, as described in the Memorandum of Economic and Financial Policies (MEFP) for the period [November 22], 2019 – April 30, 2021 supported by the Extended Credit Facility (ECF) arrangement and sets out the data reporting requirements.

2. Coverage: The central government includes ministries, departments, and agencies, and all other units of government that exercise authority over the entire economic territory. However, in contrast to the System of National Accounts 1993 (SNA 1993) and Government Finance Statistics Manual 2001 (GFSM 2001) standards, nonprofit institutions that are controlled and financed by the central government are excluded for purposes of this memorandum. The accounts of the monetary authorities include those of the Reserve Bank of Malawi (RBM). Monetary aggregates under the program are based on the nine-bank monetary survey.

II. Quantitative Performance Criteria and Indicative Targets

3. Quantitative performance criteria are established for December 31, 2019 and June 30, 2020 with respect to:

  • Reserve money (ceiling);

  • Domestic primary balance of the central government, cash basis (floor);

  • RBM financing of the central government (ceiling);

  • Net official international reserves (NIR) of the RBM (floor);

  • Accumulation of external payments arrears (ceiling);

  • Contracting and guaranteeing of non-concessional external debt (ceiling).

4. Indicative targets are established for March 31, 2020 and September 30, 2020 with respect to the above variables, and for these dates as well as December 31, 2019 and June 30, 2020 with respect to:

  • New domestic arrears (ceiling);

  • Social spending (floor);

  • Net foreign borrowing of the central government (ceiling).

J. Targets for Monetary Aggregates

  • The Stock of Reserve Money (ceiling)

5. A ceiling applies to the upper bound of a reserve money band (set +/-3 percent) around a central reserve money target.

6. Definition. Reserve money is defined as the sum of currency issued by the RBM, including the vault cash of commercial banks, and balances of commercial bank accounts with the RBM. It includes required reserves held for kwacha deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM.

7. Reporting requirement. Data on reserve money will be transmitted to the IMF on a weekly basis. This transmission will include weekly balance sheet of the RBM which will show all items listed above in the definitions of reserve money.

K. Targets for Fiscal Sector

  • Domestic Primary Balance (floor)

8. A floor applies to the cumulative flow of domestic primary balance since the beginning of the fiscal year.

9. Definition. Domestic primary fiscal balance is defined (i) domestic revenue (total revenue less grants) less (ii) the sum of current expenditures (net of domestic and foreign interest payment), domestically-financed development expenditure, and net lending plus (iii) the discrepancy (see paragraph 10). A positive (negative) discrepancy, implying underfinancing (overfinancing), raises (lowers) the domestic primary balance.

10. Discrepancy is defined as the negative of the sum of: (i) the sum of domestic revenue and grants, minus the sum of current expenditure, development expenditure, and net lending and (ii) the sum of net domestic borrowing (see paragraph 11) and net foreign borrowing of the central government (see paragraph 22). A positive (negative) discrepancy implies underfinancing (overfinancing).

11. Net domestic borrowing of the central government is measured as the sum of (i) net borrowing from the RBM (including, but not limited to, ways and means advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits); (ii) net borrowing from commercial banks (including, but not limited to, advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits); (iii) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and all government securities); and (iv) amortization of zero-coupon promissory notes. All government securities and locally registered stocks are valued at cost rather than face value. Transfers from extra-budgetary funds will not be considered revenues for this performance criterion. They will be treated the same as borrowing from the private sector (as their accounts are outside the definition of government) and therefore as domestic borrowing. Asset sales or privatization revenues will be accounted for under financing as a separate category, separate from domestic or foreign financing in calculating net domestic borrowing.

12. Adjustors. The program floor on domestic primary balance will be adjusted down by the full amount by which budget support exceeds the program baseline.

13. Budget support includes all grants and foreign financing not directly linked to additional budgetary expenditure. Excluded from this definition is external project financing to fund particular activities, such as financial support from the IMF, and donor inflows (in kwacha) from the U.S. dollar-denominated donor pool accounts for the Joint Funds on health, education, and agricultural, held in the Malawi banking system.

14. Reporting requirement. Data on domestic primary balance will be transmitted to the IMF on a monthly basis, within [4] weeks from the end of the month.

  • RBM Financing of the Central Government (ceiling)

15. Definition. RBM financing of the central government is defined as net borrowing by the central government from the RBM (including through ways and means advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits).

16. Adjustors. For cash management purposes, the ceiling on RBM financing of the central government for September 2019, December 2019, and March 2020 is subject to an upward adjustment of up to 10 percent of the average inflation adjusted annual domestic revenue of the previous three financial years.

17. Reporting requirement. Data on the RBM financing of the central government will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month.

  • New Domestic Arrears (ceiling)

18. Definition. Domestic arrears are overdue payment obligations of the central government other than external payment arrears, including on wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, principal payments on domestic loans, and tax refunds. Domestic interest payments are in arrears when the payment is not made on the due date. Payments on wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when they remain unpaid for more than 30 days beyond their due date. Payments for goods and services are deemed to be in arrears if they have not been made within 90 days of the due date, or – if a grace period has been agreed – within the contractually agreed grace period. Tax refunds are in arrears if not paid within the time limit as set forth in respective tax laws.

19. Reporting requirement. Data on new domestic arrears will be transmitted to the IMF on a monthly basis from the beginning of the fiscal year.

  • Social Spending (floor)

20. Definition. Using functional classification of expenditure, social spending is computed as the sum of central government spending on health, education, and government social protection (comprising the government expenditures by the ministries of health, education, and gender, children, disability and social welfare; National Aids Commission and spending on FISP and maize). To maintain Malawi’s commitment and progress toward poverty reduction, the social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program.

21. Reporting requirement. Social spending will be reported on a monthly basis from the beginning of the fiscal year.

L. Targets for External Sector

  • Net Foreign Borrowing of the Central Government (ceiling)

22. Definition. Net foreign borrowing of the central government is defined as disbursements of external debt as defined in paragraphs 35 and 36 including loans by official creditors (both multi-and bilateral creditors) minus amortization due.

23. Reporting requirement. Data on net foreign borrowing will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month.

  • Net International Reserves (NIR) of the RBM (floor)

24. Definition. The NIR of the RBM is defined as gross reserves minus IMF and other short-term liabilities. The values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the program cross exchange rates listed in Table 1.

Table 1.

Malawi: Cross rates for Nominal Exchange Rate and Gold Price for the 2018–21 ECF Arrangement

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Sources: IMF (International Financial Statistics) and Reserve Bank of Malawi.

LBM connotes London Bullion Market.

25. Gross reserve assets of the RBM are defined by the International Reserves and Foreign Currency Liquidity Guidelines for a Data Template as external assets immediately available and controlled by RBM “for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency’s exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing).” (BPM6, paragraph 6.64).

26. Gross reserve assets include the following: (i) monetary gold holdings of the RBM; (ii) holdings of SDRs; (iii) the reserve position in the IMF; (iv) foreign convertible currency holdings; (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; (vi) loans to foreign banks redeemable upon demand; (vii) foreign securities; and (viii) other unpledged convertible liquid claims on nonresidents. It excludes the following: (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through any derivatives liabilities (including currency swaps) with remaining maturity of one year or less; (vi) assets obtained through deposit liabilities of domestic commercial banks (including reserve requirement in foreign currency) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and (c) foreign reserves blocked for letters of credit.

27. Gross reserve liabilities of the RBM are defined as the sum of the following: (i) outstanding medium and short-term liabilities of the RBM to the IMF; (ii) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year; (iii) foreign currency denominated liabilities arising from outstanding derivatives; and (iv) all foreign currency denominated liabilities to residents (including, for instance, foreign currency denominated deposits of domestic banks and other residents with the RBM). SDR allocations are excluded from gross reserve liabilities of the RBM.

28. Adjustors applied to NIR program floor:

  • Budget support. The program floor on NIR will be adjusted upward by the full amount by which the U.S. dollar-denominated inflows from the budget support exceed the program baseline. In the event of a shortfall in budget support inflows, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 29. The budget support is measured as the cumulative flow from the beginning of the fiscal year. They will be recorded in the original currency of disbursement and then converted to U.S. dollars using the above defined program cross exchange rates.

  • Donor accounts for the social sector (including health and education Joint funds, and the NAC). The floor on the NIR of the RBM will be adjusted upward by the full amount by which the donor inflows from the U.S. dollar-denominated donor accounts for Joint funds and NAC held in the RBM are higher than the program baseline. In the event of a shortfall, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 29. These donor inflows are measured as the cumulative receipts by the budget from the beginning of the fiscal year. They will be recorded in the original currency of disbursement and then converted to U.S. dollars using the above defined program cross exchange rates.

  • Debt service payments (including both interest and principal). The floor on NIR of the RBM will be adjusted upward by the full cumulative amount by which debt service payments to the WB and the AfDB fall short of the program baseline. In the event of any excess of debt service payments to the WB and the AfDB, the downward adjustment of the NIR floor will be subject to the limitation outlined in paragraph 29. Debt service payments will be measured as the cumulative payments from the beginning of the fiscal year. They will be recorded in the original currency of payments and then converted to U.S. dollars using the above defined program cross exchange rates.

29. The total downward adjustment to the NIR floor from the combined impact of: (i) a shortfall of budget support relative to the program projections; (ii) a shortfall of inflows to the donor accounts for the social sector relative to the program projections; and (iii) any excess of debt service payments to the WB and the AfDB relative to the program projections, will be subject to a cumulative limit of US$65 million.

30. Reporting requirement. Data on foreign assets and foreign liabilities of the RBM will be transmitted on a monthly basis, including sub-components and a breakdown of assets that are pledged or encumbered. This transmission will include daily and weekly data on RBM’s foreign exchange liabilities to commercial banks (including required reserves with the RBM) and the exchange rate used for their conversion into kwacha will be shown separately.

31. Net foreign assets (NFA) of the RBM are defined as its gross foreign assets (GFA) minus its gross foreign liabilities. Gross foreign liabilities are equal to gross reserve liabilities as defined in paragraph 25, plus any other foreign liabilities not listed in that paragraph.

32. Gross foreign assets (GFA) of the RBM are defined as gross reserves assets as defined in paragraph 23, plus (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and (c) foreign reserves blocked for letters of credit

  • Accumulation of External Payment Arrears (ceiling)

33. Definition. External payment arrears consist of debt service obligations (principal and interest) of the central government or the RBM to nonresidents that have not been paid at the time they are due, as specified in contractual agreements, except on external debt subject to rescheduling or restructuring. This performance criterion will be monitored on a continuous basis.

34. Reporting requirement. Data on external payment arrears will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month.

  • Contracting or Guaranteeing of Non-Concessional External Debt (ceiling)

35. Definition of debt, for the purposes of the TMU, is set out in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), and also includes contracted or guaranteed commitments for which value has not been received. For program purposes, the term “debt” is understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take several forms; the primary ones being as follows:

  • i. Loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchange of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the loan funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • ii. Suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • iii. Lease agreements, that is, arrangements under which the lessee is allowed to use a property for a duration usually shorter than that of the life of the property in question, but without transfer of ownership, while the lessor retains the title to the property. For the purposes of this guideline, the debt is the present value (at the inception of the lease) of all the lease payments expected for the period of the agreement, except payments necessary for the operation, repair, and maintenance of the property.

36. Definition of non-concessional external debt. Short-, medium-, and long-term debt is considered concessional if it includes a grant element of at least 35 percent1 and non-concessional if otherwise. The grant element is defined as the difference between the nominal value of the loan and its present value, expressed as a percentage of the nominal value of the loan. The present value of the debt at the date on which it is contracted is calculated as the discounted sum of all future the debt service payments at the time of the contracting of the debt.2 The discount rate used for this purpose is 5 percent per annum. The ceiling on non-concessional debt applies to the contracting and guaranteeing of debt with nonresidents by the central government, the RBM, and state-owned enterprises, unless an explicit selective exclusion is made. This performance criterion is monitored on a continuous basis. The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received. The ceiling is measured cumulatively from the beginning of the fiscal year.

37. Short-term debt: Outstanding stock of debt with an original maturity of one year or less.

38. Medium- and long-term debt: Outstanding stock of debt with a maturity of more than one year.

39. Excluded from the limit on non-concessional external debt is the use of IMF resources, and any kwacha-denominated government security holdings and stock holdings by nonresidents. Excluded from the limit are also (i) debts classified as international reserve liabilities of the RBM; (ii) new debt issued to restructure, refinance, or repay existing debt up to the amount actually used for the above-mentioned purposes; (iii) normal import financing; and (iv) arrangements to pay overtime obligations arising from judicial awards to external creditors. A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

III. Reporting Requirements

40. For the purpose of program monitoring, the Government of Malawi will provide the data listed in Table 2 below with monthly data within four weeks of the end of each month, and annual data as available.

Table 2.

Malawi: Summary of Reporting Requirements

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Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

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

Agriculture Development and Marketing Corporation, Electric Supply Company of Malawi, Electricity Generation Company of Malawi, Malawi Housing Corporation, National Oil Company of Malawi, Northern Regional Water Board, Lilongwe Water Board, and Blantyre Water Board.

Foreign and domestic banks, and domestic nonbank financing.

Detailed information on the amounts, currencies, terms and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government.

Provided no more than four weeks after the end of each month.

41. The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Malawi) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. The authorities will similarly inform the IMF staff of any non-concessional external debt contracted or guaranteed by the central government, the RBM, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities.

42. The authorities will furnish an official communication to the IMF describing program quantitative performance and structural benchmarks within eight weeks of a test date. The authorities will, on a regular basis, submit information to IMF staff with the frequency and submission time lag as indicated in Table 2.
1

Post-Disaster Needs Assessment published by the Government of Malawi with financial and technical support from the World Bank, Global Facility for Disaster Reduction and Recovery, and the United Nations.

2

Fund staff has adopted the Malawi National Statistics Office’s (NSO) trade data based on its improved reliability. Previously, the IMF’s reported series was based on staff estimates. Consequently, the IMF’s reported current account deficit widened for 2017 from 11.1 to 25.6 percent of GDP (reflecting export shares revised downward by 10.6 percent of GDP and import shares revised upward by 3.8 percent of GDP); and for 2018 from 9.3 to 20.6 percent of GDP (reflecting export shares revised downward by 11.5 percent of GDP and services and shares of imports and unrequited transfers revised upward by 4.0 and 4.2 percent of GDP). Errors and omissions were adjusted by offsetting amounts, leaving the overall balance unchanged. Future TA missions on capital and financial accounts’ statistics will seek to better identify the offsetting flows to the current account adjustment.

3

Revenue reducing measures in the budget (e.g., increased income tax exemptions) will be offset by broadening the non-import tax base.

4

Box 1, IMF Country Report 18/336.

1

The IMF website gives an instrument (link hereafter) that allows the calculation of the grant element for a wide range of financing packages: http://www.imf.org/external/np/pdr/conc/calculator.

2

The calculation of concessionality takes into account all aspects of the loan agreement, including maturity, grace period, schedule, commitment and management fees commissions.

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Cover IMF Staff Country Reports
Malawi: Second and Third Reviews Under the Three-Year Extended Credit Facility Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and Augmentation of Access-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 361
Publisher:
International Monetary Fund
ISBN:
9781513521756
ISSN:
1934-7685
Pages:
119
DOI:
https://doi.org/10.5089/9781513521756.002
  • <sup><xref rid="RA01fig01" ref-type="fig">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Maize Production and Prices

  • <sup><xref rid="RA01fig02" ref-type="fig">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Malawi: Inflation

    (Year-on-year percentage changes)

  • <sup><xref rid="RA01fig03" ref-type="fig">Text Figure 3.</xref></sup>
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    Text Figure 3.

    Malawi: Gross Reserves and Nominal Exchange Rate

  • <sup><xref rid="RA01fig04" ref-type="fig">Text Figure 4.</xref></sup>
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    Text Figure 4.

    Malawi: Interest Rate Corridor

    (Percent, Jan.2017–Jul.2019)

  • <sup><xref rid="RA01fig05" ref-type="fig">Text Figure 5.</xref></sup>
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    Text Figure 5.

    Malawi: Policy, Interbank and Treasury Bill Interest Rates

    (Percent, Mar.2017–Jun.2019)

  • <sup><xref rid="RA01fig06" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Malawi: Recent Economic Developments, 2013–20

  • View in gallery

    Weather-related Catastrophes in Malawi, 1967–2019

  • <sup><xref rid="RA01fig07" ref-type="fig">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Malawi: Recent Monetary Developments, 2014–20

  • View in gallery

    Real GDP Growth, Fiscal Balance, and Public Capital Spending Before and After Natural Disaster

    (in percent of GDP unless otherwise indicated)

  • Figure 3.
    View in gallery
    Figure 3.

    Malawi: Fiscal Developments and Outlook, 2013–20

  • Figure 4.
    View in gallery
    Figure 4.

    Malawi: Selected Financial Stability Indicators, 2014–19

Text Figure 1.

Malawi: Maize Production and Prices
Text Figure 2.

Malawi: Inflation

(Year-on-year percentage changes)
Text Figure 3.

Malawi: Gross Reserves and Nominal Exchange Rate
Text Figure 4.

Malawi: Interest Rate Corridor

(Percent, Jan.2017–Jul.2019)
Text Figure 5.

Malawi: Policy, Interbank and Treasury Bill Interest Rates

(Percent, Mar.2017–Jun.2019)
Figure 1.

Malawi: Recent Economic Developments, 2013–20

Weather-related Catastrophes in Malawi, 1967–2019
Figure 2.

Malawi: Recent Monetary Developments, 2014–20

Real GDP Growth, Fiscal Balance, and Public Capital Spending Before and After Natural Disaster

(in percent of GDP unless otherwise indicated)
Figure 3.

Malawi: Fiscal Developments and Outlook, 2013–20
Figure 4.

Malawi: Selected Financial Stability Indicators, 2014–19