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

November 7, 2019


November 7, 2019


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.







  • A. Preserving Debt Sustainability

  • B. Sustaining Macroeconomic Stability

  • C. Advancing Governance Reforms



  • BOX

  • 1. Malawi and Climate Change


  • 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


  • 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


  • I. Risk Assessment Matrix


  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies

    • Attachment II. Technical Memorandum of Understanding


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

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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.