Malawi: Request for Disbursement Under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for Malawi
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International Monetary Fund. African Dept.
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Publication Date:
15 May 2020
eISBN:
9781513544472
ISBN:
9781513544472
Language:
English
Keywords:
ISCR; CR; financing; pandemic; emergency financing request; IMF lending tracker; revenue shortfall; development spending; banking system liquidity constraint; financial support; current account; debt relief; Imports; Debt service; Global; debt management; capital account; banking system; IMF staff; COVID-19
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi

Context

1. The impact of the COVID-19 pandemic is rapidly unfolding and the authorities have requested emergency Fund financial assistance under the Rapid Credit Facility (RCF). As of April 27, there were thirty-six confirmed cases of COVID-19 in Malawi and three deaths. These numbers are likely to rise rapidly as currently limited testing capacity improves. The public health system is poorly equipped to manage a major public health disaster. To curb spread of the pandemic, the government has implemented a response plan which was developed with the support of the World Health Organization and other development partners. The subsequent lockdown of Malawi (essential services continue to function) since early April and spillovers from the pandemic’s global and regional impact are creating severe economic pressures. To preserve macroeconomic stability—especially, to address urgent balance of payments needs—the authorities are seeking financial assistance under the RCF.

2. Discussions on the 4th review under the Extended Credit Facility (ECF) arrangement will be continued when there is greater clarity on the outlook—necessary for developing or modifying future performance criteria and setting timelines for structural reforms under the arrangement—which is clouded by the evolving nature of the pandemic. Preliminary data suggest that all the quantitative performance criteria for the end-December 2019 test date were observed and good progress has been made on the structural reform agenda, despite some delays (Table 8). The 2 nd and 3 rd reviews under the ECF arrangement and request for augmentation (equivalent to 20 percent of quota) were approved by the Executive Board in November 2019. Debt relief under the CCRT covering two years’ debt service to the Fund (SDR 32.842 million) was approved on April 13, 2020, with an initial tranche of SDR 7.202 million provided during April-October.

Table 1.

Malawi: Selected Economic Indicators, 2018–25

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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.

The current account assuming the financing gap is closed, includes $30 million of budget support from the World Bank in 2020.

The current account assuming the financing gap is not closed, excludes $30 million of budget support from the World Bank in 2020.

The suspension of debt service to Malawi’s official bilateral creditors under the G20 Initiative is not incorporated due to a lack of sufficient information at this time.

Table 2a.

Malawi: Central Government Operations, 2018/2019–2024/2025

(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.

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 2b.

Malawi: Central Government Operations, 2018/2019–2024/2025

(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.

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, 2018–25

(Millions of USD, unless otherwise indicated)

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

The IMF has adopted the Malawi National Statistics Office (NSO)’s capital and financial account data following adoption of the NSO’s current account data in 2019. Previously, the IMF’s reported series was based on staff estimates. Consequently, the IMF’s reported capital account balance increased from 3.8 percent of GDP to 11.7 percent of GDP in 2018 while financial account balance including net errors and omission decreased from 16.5 percent of GDP to 8.6 percent of GDP.

Includes estimate for project grants not channeled through the budget.

The suspension of debt service to Malawi’s official bilateral creditors under the G20 Initiative is not incorporated due to a lack of sufficient information at this time.

Financial support from the first tranche of debt relief under IMF CCRT is recorded as grant and corresponds to the amount of SDR 7.202 million for the period April 14-October 13, 2020.

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

Table 4b.

Malawi: Balance of Payments, 2018–25

(Percent of GDP)

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

The IMF has adopted the Malawi National Statistics Office (NSO)’s capital and financial account data following adoption of the NSO’s current account data in 2019. Previously, the IMF’s reported series was based on staff estimates. Consequently, the IMF’s reported capital account balance increased from 3.8 percent of GDP to 11.7 percent of GDP in 2018 while financial account balance including net errors and omission decreased from 16.5 percent of GDP to 8.6 percent of GDP.

Includes estimate for project grants not channeled through the budget.

The suspension of debt service to Malawi’s official bilateral creditors under the G20 Initiative is not incorporated due to a lack of sufficient information at this time.

Financial support from the first tranche of debt relief under IMF CCRT is recorded as grant and corresponds to the amount of SDR 7.202 million for the period April 14-October 13, 2020.

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

Table 5.

Malawi: Selected Banking Soundness Indicators, 2015–20

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Source: Reserve Bank of Malawi.

In the total capital to total assets series, total capital refers to regulatory capital.

Table 6.

Malawi: External Financing Requirement and Source, 2018–25

(Millions of USD)

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Source: IMF staff estimates.
Table 7.

Malawi: Indicators of Capacity to Repay the Fund, 2020–331

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Source: IMF staff projections.

Financing support from the IMF CCRT is recorded as a grant for debt relief. Malawi is receiving SDR 32.842 million under the CCRT grants from the IMF to cover scheduled debt service to the IMF from April 14, 2020 to October 13, 2022.

Table 8.

Malawi: Structural Benchmarks Under ECF Arrangement, 2019–20

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Sources: IMF staff and Malawian authorities.

Ministry, department, and agency.

3. Political tensions remain elevated. New presidential elections are scheduled for July 2, 2020—following the Constitutional Court’s February 2020 ruling nullifying the May 2019 presidential election results given their finding of systematic irregularities in the election proceedings. President Mutharika (who won by a narrow margin last May with just 38 percent of the votes) has challenged the ruling in the Supreme Court.

Pre-COVID-19 Economic Developments

4. Economic conditions strengthened in the second half of 2019.

  • Growth rose to 4.5 percent in 2019 despite the impact of Tropical Cyclone Idai—driven by reconstruction and an agricultural rebound. Stark agricultural losses in the South, where the cyclone hit, were more than compensated by bumper harvests in the rest of the country following widespread drought and insect infestations in 2018. Activity in other sectors, burdened with political uncertainties and continued electricity shortages, picked up in 2019Q4 with post-cyclone reconstruction.

  • To contain inflation, the Reserve Bank of Malawi (RBM) maintained its policy rate at 13.5 percent. Average inflation rose to 9.4 percent in 2019 reflecting rising food inflation caused by the cost of transporting food to the South of the country and suppliers hoarding maize. Non-food inflation was stable at 5 percent though increased activity in energy and mining raised credit to the private sector to 21.3 percent in 2019Q4. Based on available data, the banking system remains well capitalized, liquid, and profitable.

  • The domestic primary balance overperformed by 1 percent of GDP in FY 2019/20H1. Domestic revenues were in line with expectations. Underperformance of tax revenues—due to lower than expected imports, slow implementation of new tax measures, and weak income tax collection— was offset by large non-tax revenues. Transfers to public entities and the Farm Input Subsidy Program as well as spending on maize, health care, and domestically financed development were under-executed but the wage bill and spending on rural electrification and road maintenance were stepped up.

  • The current account deficit narrowed to 17.2 percent of GDP in 2019 from 20.5 percent in 2018. The improvement mainly reflects slow import growth—notwithstanding an increase in reconstruction-related imports at end-2019. Strengthened exports of non-tobacco commodities (e.g., sugar) compensated for reduced global tobacco demand and the suspension of Malawian tobacco exports to the U.S. following child labor allegations.1 Reserves coverage in months of prospective imports improved from 3.0 months at end-2018 to 3.2 months at end-2019.

5. The pre-COVID-19 outlook was favorable, notwithstanding important risks.

  • Economic growth was forecast at around 5 percent in 2020, with strong agricultural production, post-cyclone reconstruction, investments to build resilience to climate change, and improved electricity generation. Over the medium-term, greater access to finance, additional resilience investments, enhanced electricity generation and irrigation (e.g., the Shire Valley project), crop diversification, and better telecommunications were anticipated to boost growth to just over 6 percent.

  • Inflation was anticipated to converge towards 5 percent by 2025 at the latest, benefitting from strengthened fiscal and monetary policy implementation and improved resilience to climate change. However, in 2020, average inflation was expected to be near 10 percent due to elevated maize prices, with non-food inflation projected at 5 percent. Improvements in competitiveness, export diversification, and fiscal restraint were projected to gradually narrow the current account deficit.

  • Key risks to this outlook included political uncertainties denting confidence and reform implementation; lackluster economic growth raising food insecurity and unemployment; intensified natural disasters weighing on economic activity and raising inflation and balance of payments pressures; and escalated global trade tensions depressing export demand and raising import costs.

Impact of the COVID-19 Pandemic

6. The economy is expected to be severely impacted by the COVID-19 pandemic through several channels:

  • The global and resultant regional economic slowdown is weighing on remittances, tourism, and foreign direct investment (FDI) and border closures and economic disruptions in neighboring countries have multiplied trade transit costs—altogether worsening the balance of payments by about 3.6 percent of GDP in 2020 relative to the pre-pandemic expectations, despite a positive terms of trade shock. Project-related inflows have also slowed as the lockdown is hindering execution of development projects.

  • Exports, mainly agricultural products (including tobacco and tea) are projected at about 2 percent of GDP lower than pre-pandemic expectations in 2020—despite solid crop production owing to good weather—due to reduced global demand, border closures, and partial closure of Malawi’s commodities trading markets. Most of these harvests have been stored with the intent of selling them in late-2020 or early 2021, once the pandemic passes.

  • Lower international oil prices are having a lagged effect as oil import contracts (lasting 3–6 months) are locked-in at higher pre-pandemic prices for 2020Q1.

  • The lockdown has substantially slowed domestic activity, especially in domestic manufacturing and wholesale and retail trade. Maize harvests of flush fields in the Central and Northern regions are also suffering; harvests in the South are finished but sales are down given partial market closures.

  • The economic slowdown will raise banks’ non-performing loans and balance sheet pressures, especially for smaller, less liquid banks.

  • On the fiscal side, both domestic and customs tax revenues are impacted. Border closures, since end-March, have resulted in significant reductions of customs and import VAT revenues. The lockdown is impeding collection of domestic revenues.

7. A sharp deterioration in growth and fiscal and external balances is anticipated (Text Figure 1, Text Tables 1–2).

  • Growth is expected to fall to 1 percent in 2020 (four percentage points below pre-pandemic projections) and to 2.5 percent in 2021—assuming it will take time for businesses to re-open after the lockdown ends and for trade flows to normalize. This implies, in 2020, that real per capita income will decline by around 2 percent. A gradual recovery is expected thereafter, with growth averaging 6.4 percent during 2022–25. The rapid rise in unemployment and loss of incomes and purchasing power will take a toll on poverty, which is expected to improve much more slowly.

  • Inflation is projected to rise to 14.0 and 10.7 percent in 2020 and 2021; and moderate towards 5 percent over the medium-term. The impact of hoarding, market closures, and scarcity of imported inputs on both food and non-food prices more than offset the effect of lower economic growth and oil prices.

  • The domestic primary deficit is expected at 3.4 percent of GDP in FY 2019/20 and 1.3 percent of GDP in FY 2020/21 (just over a 4 and 3 percent of GDP deterioration in FY 2019/20 and FY 2020/21 relative to pre-pandemic expectations). This reflects revenue shortfalls attributed to lower activity from border closures, the lock down, and political uncertainties. Spending has also increased substantially on health care and social assistance, maize purchases, as well as preparations to hold new elections and payment of domestic arrears. The additional fiscal financing needs are anticipated to be financed with development partners’ support (mainly budget support from the World Bank) and domestic sources (mainly large banks, pension funds, and insurance companies).

  • The anticipated widening of the current account deficit to 18.1 percent of GDP in 2020 and 18.0 percent of GDP in 2021 is more limited (about 1 percent of GDP deterioration in each of 2020 and 2021 relative to pre-pandemic expectations). In 2020, the decline in remittances accounts for most of the deterioration, the effects of higher trade transit costs and reduced exports, remittances, and tourism mitigated by domestic import contraction, a lower oil import bill, and a cease in Malawians’ travel abroad. A slow global recovery in 2021 will weigh on the recovery of Malawi’s agricultural exports while imports will gradually rise with a pick-up in project-related imports and higher international oil prices.

Text Figure 1.
Text Figure 1.

Malawi: Real GDP Growth and Average Annual Inflation

(Percent)

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A001

Sources: Malawian authorities; IMF staff estimates.
Text Table 1.

Malawi: COVID-19 Fiscal Financing Needs, FY 2019/20–20/21 (Percent of GDP)

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

Malawi: COVID-19 External Financing Needs, 2020

(Millions of U.S. dollars)1,2

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Sources: Malawian authorities; IMF staff estimates.

Financing needs from the COVID-19 pandemic are estimated relative to projections under the 2nd and 3rd reviews of the ECF arrangement.

The IMF has adopted the Malawi National Statistics Office (NSO)’s capital and financial account data following adoption of the NSO’s current account data in 2019. Previously, the IMF's reported series was based on staff estimates. Consequently, the IMF’s reported capital account balance increased from 3.8 percent of GDP to 11.7 percent of GDP in 2018 while financial account balance including net errors and omission decreased from 16.5 percent of GDP to 8.6 percent of GDP.

Financial support from the first tranche of debt relief under IMF CCRT is recorded as grant and corresponds to the amount of SDR 7.202 million for the period April 14-October 13, 2020.

8. Consequently, an external financing gap projected at $176 million (2.1 percent of GDP) has emerged in 2020, after taking into account anticipated IMF disbursements (net of repayments) of 0.5 percent of GDP for the 4th and 5th reviews under the ECF and 0.1 percent of GDP in debt relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT, until mid-October 2020); and assuming reserves in months of imports is maintained at 3.2. The overall balance of payments deteriorates from a projected pre-pandemic surplus of 1.7 percent of GDP to a deficit of 2.0 percent of GDP. This reflects a projected current account deficit of 18.1 percent of GDP (described above) and a capital and financial account surplus of only 16.1 percent of GDP (reduced by 2.7 percent of GDP relative to pre-pandemic expectations mainly due to reduced FDI). Notably, large balance of payments needs, related to the pandemic are expected to persist in 2021, with the external financing gap for 2020–21 totaling almost 3 percent of GDP or about $240 million.

9. Downside risks to the outlook—either from a slower than envisaged global or regional economic recovery or from a more significant spread of COVID-19 within Malawi—are substantial and could result in significantly larger balance of payments needs. The extent of the current external shock is highly uncertain; and projections are based on a global scenario assuming a gradual economic normalization throughout 2021. Delays in such a normalization would lead to longer disruptions to international trade and related transit costs as well as inflows from tour is m, remittances, and FDI. Domestically, if the pandemic spreads widely across Malawi, economic growth could become sharply negative. The resulting impact on tax revenues as well as added health and social assistance spending pressures would lead to a further deterioration in the fiscal deficit— resulting in larger fiscal financing needs.

Policy Issues

The authorities’ immediate priority is to limit the impact of the pandemic and preserve macroeconomic stability. Beyond this short-term objective, the government remains committed to its medium-term strategy of attaining higher and more broad-based medium-term growth and governance reforms while preserving debt sustainability—supported by the ECF arrangement.

10. To mitigate the impact of the pandemic on Malawi, the government is implementing the following measures, which staff broadly support:

  • Increase health sector outlays related to containing and managing COVID-19— including developing testing capabilities, equipping treatment centers, importing medical equipment and supplies, hiring 2000 additional medical staff, and raising public awareness—by 0.3 percent of GDP in FY 2019/20 and at least 0.3 percent of GDP in FY 2020/21. Beyond this, development partners, who finance and administer nearly half of total health care provision in Malawi (mostly off-budget), are also in the process of increasing their outlays (Text Table 3).

  • Increase social assistance spending under the social cash transfer program (SCTP) to help the most vulnerable households mitigate the economic impact of the virus. Government spending on SCTP covers only one district and less than 10 percent of total SCTP spending; development partners directly finance and administer the rest of the SCTP program (on-budget). In response to COVID- 19, during FY 2019/20, under the foreign- financed portion of the SCTP, the number of beneficiaries—especially in urban areas—has been expanded through universal transfers to all residents of vulnerable urban neighborhoods (identified from census data). In FY 2020/21, the transfers provided to each recipient of the SCTP will be permanently raised by 40 percent (for both the government and foreign-financed portions).

  • Purchase and storage of maize by the Agricultural Development and Market Corporation (ADMARC, a state-owned enterprise), financed by borrowing from banks and 0.1 percent of GDP from the budget for each of FY 2019/20 and FY 2020/21. This measure is intended to mitigate the impact of partial market closures on farmers’ incomes and ensure food security for the second half of the year—especially for the most vulnerable.

  • Granted tax waivers on imports of medical equipment, medicine and other supplies directly needed to counter the pandemic.

  • To free resources to fight the pandemic, temporarily reduced salaries of high-ranking government officials and will delay spending on goods and services and development projects (in non-health areas)—including through review of on-going and planned projects—that are not essential to tackling the immediate crisis.

  • Injected liquidity into the economy, by paying domestic arrears accrued by the Roads Fund during 2012–19. The Auditor General has verified unpaid bills of close to 1.1 percent of GDP in the Roads Fund and certified that, of these unpaid bills, 0.8 percent of GDP were arrears as of end-December 2019. As of end-March 2020, the government had already cleared half of these (0.4 percent of GDP) and the other half is expected to be cleared by end-2020—assuming no additional pandemic-related spending needs. The remaining 0.3 percent of GDP in unpaid bills are under dispute. To prevent future arrears, procedures have been implemented that require Ministry of Finance vetting and registration of contract sums against available funding before contract signing.

  • Continue implementing the automatic fuel pricing mechanism, where the pass-through of lower international fuel prices will help contain inflation.

  • Introduced measures to ease banking system liquidity constraints. These include the recent reductions in the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent (aligning the rates on local and foreign currency LRR) and lowering the Lombard Rate from 0.4 to 0.2 percentage points above the policy rate; and loan restructuring and a three-month moratorium on debt service for small and medium enterprises (SMEs)— provisioning relief is being provided to banks with these restructured or on-moratorium loans. The RBM will carefully consider further easing of monetary policy should liquidity pressures increase, taking into account inflation developments.

    • The RBM stressed that banks’ decisions on restructuring will be applied on a case-by-case basis, based on an assessment of the borrower’s capacity to pay under the new terms and ensuring that borrowers that were highly unlikely to repay prior to the pandemic do not unduly benefit. In administering the moratorium, banks will ensure that borrowers facing temporary difficulties are not disincentivized to resume loan repayment at the end of the moratorium.

    • Banks will continue to assess the credit quality of the relevant exposures and identify situations in which borrowers are unlikely to pay. Banks and supervisors will also collect information about the scope of moratoria, identify precisely borrowers and exposures subject to these measures, and improve the quality of disclosure.

    • Enhance the RBM’s monitoring of financial sector risks and inject liquidity as needed to maintain a smoothly functioning banking system. Off-site supervision has been intensified with daily monitoring . Staff stressed the importance of ensuring regulatory reporting is not compromised; the introduction of enhanced supervisory reporting is being considered.

    • Activated the newly announced Emergency Liquidity Assistance (E LA) framework to support banks in the event of worsening liquidity conditions and to provide support to banks on a case by case basis. The ELA is anticipated to be used by small banks as the large banks have substantial liquidity and capital buffers.

    • Implement greater exchangerate flexibility to buffer shock s while keeping reserves at an adequate level. Recent exchange rate super-stability is arising from pricing being determined in a segmented and underdeveloped interbank FX market while most transactions occur in the retail market and directly with the RBM (IMF Country Report No. 18/336). The RBM is studying obstacles to FX market development and developing an action plan to deepen the market and channel the RBM’s role to dampening excess volatility and accumulating reserves—though under current circumstance reserves could be drawn upon in the event of unfilled external financing gaps.

Text Table 3.

Malawi: Major COVID-Related Fiscal Measures, FY 2019/20–20/21 (Percent of GDP)1

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Sources: Malawian authorities; IMF staff estimates.

Estimated cost of tax waivers on medical equipment, medicine, and supplies as well as reduced salaries of high ranking government officials and spending on goods and services to contain the virus are very small and, consequently, not included in this table.

These estimates are subject to upward revisions as development partners mobilize further support.

The government-financed increase in SCTP related to mitigating the impact of the pandemic is zero in FY 2019/20 and MK 1 billion in FY 2020/21.

11. The FY 2020/21 budget will include the fiscal measures described above to mitigate the impact of the pandemic. The budget will be submitted to Cabinet in May and is expected to be approved by Parliament by end-June. Contingency measures, should COVID-19 related revenue shortfalls and spending exceed projections at the time of budget approval, are being discussed. These could include reprioritizing non-essential spending on goods and services and development projects in non-health areas (¶10) and reduced purchases of motor vehicles, office equipment, and non-essential recurrent spending. Staff and the authorities agreed it would also be important to adopt revenue administration measures that ensure business continuity during the pandemic (elaborated in LOI ¶9).

12. The authorities are actively continuing improvements in fiscal oversight—especially in budgeting processes, cash management, and bank account reconciliation—consistent with the understandings reached under the ECF arrangement. Regular publication of procurement documentation (including tenders, bids, and names of awarded companies, products or services procured and their costs) on the Public Procurement and Disposal of Assets (PPDA) website is continuing during the lockdown. To ensure enhanced transparency and accountability of COVID-19 related spending, the PPDA will also publish the names of the beneficial owners of the awarded companies and conduct and publish a thorough ex-post validation of delivery; and the Ministry of Finance will publish quarterly statements on commitments and payments of COVID-19 related activities, specify COVID-19 related costs in the published monthly salary report and in their budget funding and cash management analysis. The National Audit Office will submit quarterly audits of COVID-19 related spending to the Minister of Finance (for submission to Cabinet) and, once the pandemic abates, will publish and submit to Parliament a comprehensive audit of COVID-19-related spending by the government and ADMARC.

13. Concurrently, the authorities are committed to advancing their medium-term economic reform program, supported by the ECF arrangement, which seeks to entrench macroeconomic stability and enhance poverty-reducing and resilient growth. Key measures include:

  • To strengthen medium-term public debt sustainability and ensure sufficient fiscal space for critical resilience building and social and development spending, a domestic revenue mobilization strategy will be implemented as soon as the pandemic passes—including comprehensive VAT reforms—as well as continued improvements in spending efficiency.

  • To improve governance and support the objectives above, reforms in tax administration, procurement, public financial management (including implementation of a new IFMIS in line with FAD advice), public investment management, oversight of state-owned enterprises, and debt management are continuing.

  • The RBM will continue to actively manage bank liquidity and gradually transition towards an inflation targeting framework by 2023; and study and address obstacles to FX market development.

  • Strengthening resilience to climate change and promoting more broad-based private sector development and export diversification. This includes implementing priority resilience building projects and improving healthcare, gender inequality, and education in coordination with donors, enhancing the business environment, reforming agricultural regulations and market intervention systems, and raising access to finance by addressing structural challenges such as improving property rights.

Modalities of Fund Support Under the Rapid Credit Facility

14. The authorities are requesting a disbursement under the RCF “exogenous shock” window equivalent to 47.9 percent of quota (SDR 66.44 million or about US$93 million). The disbursement would be provided to the RBM and would meet 53 percent of the urgent balance of payments needs caused by the sudden exogenous shock from the COVID-19 pandemic—budget support is not being proposed at this time given sufficient domestic liquidity to finance the larger deficits and that a substantial portion of health care and social assistance programs are off-budget programs financed and operated by development partners. The authorities are actively seeking additional support from development partners, beyond what has already been disbursed or committed (including $43 million in 2020 from the World Bank, DFID, and GAVI, UN, Irish Aid, GIZ, and KfW). Absent additional support in 2020 or a widening of the financing gap should downside risks materialize, the rest of the external financing gap will be closed with a drawdown of international reserves, leaving reserves coverage at 3 months of imports—substantially below the staff assessed adequate level of 3.6. The same applies to the financing gap in 2021—though development partners (including the World Bank) are currently discussing how to mobilize additional funds. Balance of payment difficulties are expected to be resolved by end-2021 without major policy adjustments—although the authorities are implementing immediate measures to mitigate the short-term economic impact and to preserve macroeconomic stability while continuing to advance reforms consistent with the understandings reached under the ECF arrangement.

15. Malawi’s capacity to repay the Fund remains strong. Malawi’s current ECF arrangement was approved in April 2018 for the amount of SDR 78.1 million (56.25 percent of quota) and augmented by SDR 27.76 million (20 percent of quota) in November 2019 at the time of the 2 nd and 3 rd reviews. With the RCF disbursement, outstanding PRGT credit would reach 167 percent of quota and total PRGT disbursements over a twelve month-period would reach 100 percent of quota (assuming the 4 th and 5 th reviews under the ECF are completed in 2020), all within normal access limits. Malawi has a strong track record in meeting its obligations to the Fund and servicing risks are mitigated by the country’s low indebtedness and the availability of concessional financing. Support under the CCRT will also ease the near-term burden.

16. Malawi is at moderate risk of external debt distress and high overall risk of debt distress (Annex I) based on an update of the November 2019 Debt Sustainability Analysis (IMF Country Report No. 19/361)2—staff assess Malawi’s debt to be sustainable. The present value of external debt to exports is projected to breach the benchmark under the most extreme shock scenario (which assumes a 6 percent decline in exports that could occur in 2021 should recovery from the COVID-19 shock be slower than expected)—all other indicators remain below the benchmark under the baseline scenario. The present value of total public debt to GDP is projected to remain above the benchmark in the near and medium terms and then gradually decline under the baseline scenario. This mainly reflects larger primary deficits during FY 2019/20-20/21 resulting in increasing amounts of domestic debt.

17. The authorities are committed to undertaking an update of the safeguards assessment before Board approval of any subsequent arrangement to which the safeguards policy applies. This would include an authorization for Fund staff to hold discussions with the RBM’s external auditors, and to have access to the RBM’s most recent external audit reports. The last safeguards assessment was undertaken in July 2018. Most safeguards recommendations have been implemented, including enactment of a new RBM Act in 2019 that strengthens the RBM’s governance and autonomy as well as progress towards implementation of a comprehensive ELA framework but limited progress has been made in addressing concerns over the RBM’s reserve management practices.

Staff Appraisal

18. Staff welcomes the authorities’ swift efforts to contain and manage the spread of the COVID-19 pandemic. The government quickly developed a response plan—with support of the World Health Organization and other development partners—that requires additional health and social assistance spending of 0.3 percent of GDP in 2020H1 (FY 2019/20) and 0.6 percent of GDP more in 2020H2 (FY 2020/21). Development partners have also stepped up their support to health and social assistance programs (substantial parts of which are implemented off-budget), complementing the authorities’ efforts. Soon after the first reported cases of COVID-19 in Malawi, a lockdown was instituted to curb spread of the pandemic and testing and treatment facilities were ramped up. Measures are being taken to ensure food security and to support farmers’ incomes and SMEs through this difficult period; the local currency LRR rate was lowered to ease banking system liquidity constraints; monitoring of financial sector risks has been stepped up; and a newly established ELA framework has been announced. A flexible exchange rate will be maintained to buffer the shock.

19. Nevertheless, the pandemic is having a severe impact on Malawi’s economy. Spillovers from the global slowdown and border closures and economic disruption in neighboring countries have reduced exports, raised trade transit costs, and weighed on remittances, tourism, and FDI. These external factors, combined with the slowdown in domestic activity related to the lockdown is expected to reduce growth to 1 percent in 2020, well below pre-pandemic projections, and a contraction in real per capita terms.

20. Based on these developments, the country is facing urgent balance of payments needs. An external financing gap, stemming from the pandemic, is estimated at 2.1 percent of GDP in 2020. Revenue shortfalls from the economic slowdown and additional spending to mitigate the effects of the pandemic are contributing to the widening of the domestic primary deficit to 3.4 percent of GDP in FY 2019/20 (nearly 4 percent of GDP deterioration from pre-pandemic projections)—expected to be financed mainly with budget support from the World Bank and by large domestic commercial banks. Given the deterioration in the near-term fiscal path, the authorities are committed to preserving public debt sustainability and to bring down debt over the medium-term, including through the implementation of a comprehensive domestic revenue mobilization strategy soon after the pandemic passes.

21. Against this background, staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 66.44 million (47.9 percent of quota). Staff’s support is based on the urgent balance of payments needs arising from a sudden exogenous shock stemming from the COVID-19 pandemic and the authorities’ existing and prospective policies to address this external shock and the balance of payments difficulties, including their commitment to greater exchange rate flexibility and to seek additional financing from other development partners. While the risks to the outlook are substantial, Malawi is assessed to be at moderate risk of external debt distress and its capacity to repay the Fund remains strong. The authorities continue to be committed to advancing their medium-term economic reform program, supported by the ECF arrangement, which seeks to entrench macroeconomic stability and enhance poverty-reducing and resilient growth.

Appendix I. Letter of Intent

Lilongwe, Malawi

April 27, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

1. The COVID-19 pandemic is having severe effects on both the health prospects for the general public and on the level of economic activity both across the globe and within our region.

2. In Malawi, there have so far been only a few confirmed cases of COVID-19 and limited loss of life. The low cases could be due to limited testing capacity as our local COVID-19 testing systems are only just being established with assistance from development partners and the private sector. Should the disease spread country-wide, the loss of lives could be substantial given our weak public health system.

3. With the pandemic’s global onset, our government quickly developed a response plan, with support of the World Health Organization (WHO) and other development partners. In line with this plan, we are undertaking additional health care and social assistance spending of 0.3 percent of GDP in the remainder of FY 2019/20 and at least 0.6 percent of GDP more in FY 2020/21—including developing testing capabilities, equipping treatment centers which requires importing medical equipment and supplies, hiring 2000 additional medical staff, and raising public awareness. To curb the pandemic’s spread, a close to full lockdown has been in place since early April and testing and treatment facilities have been ramped up.

4. We have taken a number of substantial measures to mitigate the economic impact of the pandemic. These include, but are not limited to: ADMARC (the state-owned enterprise for agricultural development and marketing) purchasing maize from farmers under COVID-19 enhanced measures to store and distribute during the lean period—this measure is intended to ensure protection of farmers’ incomes and food security (many farming households are amongst the most poor and vulnerable); tax waivers have been granted on imports of medical equipment, medicine and other supplies directly needed to counter the pandemic; lower international fuel prices are being passed-through to consumers with continued implementation of the automatic fuel price adjustment mechanism; small and medium enterprises (SMEs), have also been given a three mo nth moratorium on their debt service and their loans are being restructured on a case by case basis; and the newly established Emergency Liquidity Assistance (ELA) framework has been activated to support banks in the event of worsening liquidity conditions. To ease banking system liquidity constraints, the Reserve Bank of Malawi (RBM) recently reduced the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent (aligning the rates on local and foreign currency LRR) and lowered the Lombard Rate from 0.4 to 0.2 percentage points above the policy rate; the RBM stands ready to inject liquidity as needed to maintain a smoothly functioning banking system while carefully considering rising inflation. The RBM has also enhanced its monitoring of financial sector risks. To help mitigate the impact of the pandemic on our balance of payments, we are committed to greater exchange rate flexibility.

5. In the coming months, we intend to pay the remaining arrears on domestic bills accrued by the Roads Fund during 2012–19. The Auditor General has verified unpaid bills of close to 1.1 percent of GDP in the Roads Fund and certified that, of these unpaid bills, 0.8 percent of GDP were arrears as of end-December 2019. By end-March 2020, 0.4 percent of GDP of these arrears were cleared and the remaining 0.4 percent of GDP will be paid by end-2020. These payments will also contribute to injecting liquidity into the economy. The remaining 0.3 percent of GDP in unpaid bills are under dispute and will be settled immediately should their resolution require payment by the government. To prevent future arrears, we have introduced procedures that require MOF vetting and registration of contract sums against available funding before contract signing.

6. We will ensure that all government spending to manage and contain the impact of the COVID-19 pandemic is transparent and efficient. In line with our existing practices, we will regularly publish procurement documentation (including tenders, bids, and names of awarded companies, products or services procured and their costs) on the Public Procurement and Disposal of Assets (PPDA) website—this applies to all competitive bids and direct procurement by all Ministries, Agencies and Departments (MDAs). To ensure enhanced transparency and accountability, we will also publish on the PPDA website the names of the beneficial owners of the awarded companies and the results of a thorough ex-post validation of delivery; we will publish (on the Ministry of Finance website and in the press) quarterly statements on commitments and payments of COVID-19 related activities (in all MDAs); and we will specify COVID-19 related costs in our published monthly salary report (costs of hiring additional medical staff, risk allowances) as well as in our budget funding and cash management analysis. The National Audit Office will submit quarterly audits of CO VID-19 related spending (across all MDAs) to the Minister of Finance (for submission to Cabinet) and, once the pandemic abates, will publish and submit to Parliament a comprehensive audit of CO VID-19-related spending (across all MDAs and ADM ARC).

7. The near-term economic impact of the pandemic is expected to be severe, notwithstanding the mitigating measures we are undertaking. Spillovers from the global recession and border closures in neighboring countries have reduced exports, raised trade transit costs, and weighed on remittances, tourism, and foreign direct investment. These adverse impacts, including on the country’s foreign exchange reserves, are only partly offset by lower international oil prices and reduced import demand. The net effect of these external factors combined with the slowdown in domestic activity related to the lockdown is expected to reduce growth to 1 percent in 2020, 4 percentage points below pre-pandemic projections.

8. Related revenue shortfalls and additional spending to mitigate the effects of the pandemic are anticipated to worsen the domestic primary deficit to 3.4 percent of GDP in FY 2019/20 and 1.3 percent of GDP in FY 2020/21 (over 4 and 3 percent of GDP deterioration in FY 2019/20 and FY 2020/21 relative to pre-pandemic projections), expected to be financed domestically (mainly by banks) and with budget support from the World Bank. As we plan for FY 2020/21, we will seek to create budgetary space for COVID-19 spending and revenue shortfalls by delaying spending on goods and services and development projects (in non-health areas) that are not essential to tackling the immediate crisis, including through review of on-going and planned projects. The budget for FY 2020/21 submitted to Parliament will be in line with the recommendations of IMF staff.

9. We are also taking measures to support business continuity of revenue administration during the pandemic. These include promoting use of e-payment platforms and filing taxes using specific email addresses; specific teams engaging remotely with large taxpayers to assess the impact of COVID-19 on their operations and agree on specific terms for filing and paying taxes during the pandemic; continuing desk review for audits already in progress and completing the full audit when the lockdown is lifted; for the largest importers, applying documentary customs checks (desk audits) to verify classification and valuation of declarations; encouraging use of pre-clearance facilities for imports; and setting up remote monitoring of usage of exempted and duty suspended goods (focusing on those with a large revenue impact if diverted).

10. Based on these developments, we are experiencing an exceptional and urgent balance of payments need arising from the pandemic and our response to it. To help fill the resulting external financing gap, estimated at 2.1 percent of GDP (US$176 million) in 2020, we are requesting emergency financing from the IMF under the “exogenous shocks” window of Rapid Credit Facility (RCF) in the amount of SDR 66.44 million, equivalent to 47.9 percent of quota. These large balance of payments needs related to the pandemic, characterized by a large external financing gap, are expected to persist in 2021, with the total external financing gap during 2020–21 totaling 3 percent of GDP or $240 million—even after sup po r t under the CCRT which covers two year’s debt service to the Fund (SDR 32.842 million), with an initial tranche of SDR 7.202 million already disbursed. We intend to request the suspension of debt service from our official bilateral creditors, in line with the April 15 G-20 Finance Ministers’ endorsement of the COVID-19 debt service relief initiative. We are confident that IMF involvement in the international effort to assist Malawi in dealing with the global pandemic will play a catalytic role in securing additional support from our development partners (including the World Bank)—which we are actively seeking, beyond the US$43 million already committed.

11. The projected outlook assumes the spread of COVID-19 in Malawi is limited and that the lockdown (full or partial) is lifted by early summer. This outlook is highly uncertain and should the situation deteriorate, our balance of payments needs and associated external financing gap could rapidly and significantly increase.

12. We remain fully committed to meeting the objectives of our current Extended Credit Facility (ECF) arrangement with the IMF. We have met all end-December 2019 quantitative performance criteria and made substantial progress in advancing the structural reform agenda. Discussions on the 4th review under the ECF arrangement will be concluded as soon as there is clarity on the outlook, which is clouded by the evolving nature of the pandemic.

13. To strengthen medium-term public debt sustainability and ensure sufficient fiscal space for critical resilience building and social and development spending, we will prepare for implementation of our comprehensive domestic revenue mobilization strategy (including VAT reforms) soon after the pandemic passes. To support these objectives and improve governance, we will continue to progress in reforms in tax administration, procurement, public financial management (including implementation of a new IFMIS), public investment management, oversight of state-owned enterprises, and debt management. The RBM will continue to gradually transition towards an inflation targeting framework by 2023 and study and address obstacles to FX market development.

14. We will continue to pursue our medium-term economic reform program which seeks to entrench macroeconomic stability and enhance poverty-reducing and resilient growth—particularly by strengthening resilience to climate change and promoting more broad-based private sector development and export diversification. This includes implementing priority resilience building projects and improving healthcare, gender inequality, and education in coordination with donors, enhancing the business environment, reforming agricultural regulations and market intervention systems, and raising access to finance by addressing structural challenges such as improving property rights.

15. In line with IMF safeguards policy, we commit to undergo an update of the 2018 safeguards assessment before IMF Board approval of any subsequent arrangement to which the safeguards policy applies, provide IMF staff with the RBM’s most recently completed external audit reports, and authorize our external auditors to hold discussions with IMF staff.

16. We value our cooperation with the IMF and do not intend to introduce measures or policies that would exacerbate balance of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the Fund’s Articles of Agreement.

17. We are determined to meet the immense challenge we are facing due to the COVID-19 pandemic. Support from the international community will be critical, and we look forward to an early approval of financconcessionarye by the IMF.

18. We authorize the IMF to publish this Letter and the staff report for the request for disbursement under the RCF.

Sincerely yours,

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Although, the assessment of Malawi’s external and overall risk of debt distress remain unchanged from the November 2019 Debt Sustainability Analysis, Malawi’s debt carrying capacity under the current DSA has been upgraded from “weak” to “medium” as the Composite Index exceeded the threshold of 2.69 for two consecutive vintages; it is 2.84 in the current vintage (2019 CPIA and 2019 October WEO) and was 2.72 in the previous vintage (2018 CPIA and 2019 April WEO).

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Cover IMF Staff Country Reports
Malawi: Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 168
Publisher:
International Monetary Fund
ISBN:
9781513544472
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781513544472.002
  • <sup><xref ref-type="fig" rid="RA01fig01">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Real GDP Growth and Average Annual Inflation

    (Percent)

Text Figure 1.

Malawi: Real GDP Growth and Average Annual Inflation

(Percent)