I. Introduction

1. On behalf of our Malawian authorities, we thank management and staff for their timely response to the request for emergency financial assistance under the Rapid Credit Facility (RCF).

2. The Malawi economy has been severely affected by the COVID-19 pandemic, causing exceptional and urgent balance of payments needs. To help fill the external financing gap, estimated at 2.1 percent of GDP in 2020, the authorities request emergency financing from the Rapid Credit Facility (RCF) in the amount of SDR 66.44 million, equivalent to 47.9 percent of quota. The large balance of payments need is expected to persist into 2021, with the total external financing gap during 2020–21 totaling 3 percent of GDP or $240 million. Given that the duration and severity of the pandemic remains unknown, the projected outlook is highly uncertain, and should the situation deteriorate, the balance of payments needs and associated external financing gap could increase significantly.

3. To ensure COVID-related resources are used for their intended purpose, the authorities will undertake quarterly audits of COVID-19 related spending and submit a comprehensive audit to Parliament. They will also publish procurement information on the Public Procurement and Disposal of Assets (PPDA) website.

II. Program Performance

4. Performance under the Extended Credit Facility (ECF) arrangement has been broadly satisfactory, with all end-December 2019 quantitative performance criteria met. At the same time, substantial progress has made in advancing the structural reform agenda. The authorities remain fully committed to meeting the objectives of the current ECF arrangement and look forward to the completion of the 4^th review once there is greater clarity on the outlook which remains clouded by the evolving nature of the pandemic.

III. Impact of the COVID-19 Pandemic

5. Since the first three confirmed cases of COVID-19 were announced on April 2, 2020, the cases had risen to thirty-six as at April 29, 2020, with three fatalities. These numbers are likely to continue rising as work to enhance the testing capacity continues. Testing centers have so far been established with assistance from development partners including DFID, UNICEF, and the Global Fund.

6. The global and regional spillovers from the COVID-19 pandemic and implementation of domestic containment measures has disrupted economic activity in Malawi. Consequently, exports have declined, trade transit costs have increased and, remittances, tourism and foreign direct investment (FDI) have declined. The overall balance of payments is expected to weaken, with the external financing gap in 2020–21 totaling almost 3 percent of GDP or about $240million. In addition, GDP growth is expected to sharply decline by 4 percentage points to 1 percent in 2020. The net effect of these external factors combined with the slowdown in domestic activity related to the lockdown continue to weigh on growth prospects.

7. The near-term economic impact of the pandemic is expected to be severe. Revenue shortfalls and additional spending to mitigate the effects of the pandemic are anticipated to worsen the domestic primary deficit by nearly 4 and 3 percent of GDP compared to pre-pandemic projections for FY 2019/20 and FY 2020/21, respectively. The resultant fiscal deficit is expected to be financed through domestic borrowing and budget support from the World Bank.

IV. Policy Responses to the Pandemic

8. Shortly after the first reported cases of COVID-19 in Malawi, the authorities instituted a lockdown to curb the spread of the pandemic, including closing schools and banning large gatherings. In parallel, they quickly developed a response plan, with support of the World Health Organization (WHO) and other development partners. In line with this plan, they have ramped up health care and social assistance spending, including developing testing capabilities, equipping treatment centers, hiring additional medical staff, and intensifying public awareness campaigns. Given the anticipated revenue shortfalls, the authorities plan to create budgetary space for COVID-19 spending as they craft the FY 2020/21 budget by delaying spending on non-essential goods and services and the implementation of development projects that are not critical to tackling the pandemic.

9. The authorities have also implemented measures to mitigate the impact on vulnerable households and businesses. These include protection of farmers’ incomes and ensuring food security through continued purchases of maize from farmers by the Agricultural Development and Marketing Corporation (ADMARC) for storage and distribution during the lean period; expansion of the social cash transfer program (SCTP) to help the most vulnerable households; tax waivers on imports of medical equipment, medicine and other supplies; and lower international fuel prices through the automatic fuel price adjustment mechanism. In addition, the President and his Cabinet have also taken a voluntary pay cut of 10 percent for three months to free up resources in support of the response. The authorities have also injected liquidity into the economy by paying domestic arrears accrued by the Roads Fund Administration during FY2012–19. Of the verified bills, half have already been cleared and the other half is expected to be cleared by end-2020.

10. 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 and lowered the Lombard Rate by 50 percent. In addition, the RBM has activated the newly established Emergency Liquidity Assistance (ELA) framework to support small banks in the event of worsening liquidity conditions. They have also enhanced the monitoring of financial sector risks to ensure smooth functioning of the banking. Further, small and medium-sized enterprises (SMEs) have been given a three-month moratorium on their debt services, and their loans are being restructured on a case by case basis. At the same time, the RBM remains committed to implementing greater exchange rate flexibility to absorb shocks.

V. Post-crisis Measures

11. Supported by the ECF, the authorities remain committed to pursuing their medium-term economic reform program which seeks to entrench macroeconomic stability and achieve higher, more inclusive and resilient growth. In this respect, the reform program encompasses strengthening resilience to climate change and promoting broad-based private sector development and export diversification as well as raising access to finance. To reinforce medium-term public debt sustainability and create fiscal space for critical resilience building and, social and development spending, a domestic revenue mobilization strategy is expected to be implemented as soon as the pandemic passes.

12. While significant progress has been achieved in governance reforms, the authorities will press ahead with efforts to enhance governance including through further procurement reforms, public financial management, public investment management and oversight of state-owned enterprises.

VI. Conclusion

13. Our authorities remain committed to implementing prudent macroeconomic policies that would further entrench macroeconomic stability and achieve higher, more inclusive and resilient growth once the crisis is over. They look forward to Executive Directors’ support for a disbursement under the Rapid Credit Facility to sustain their efforts to contain the spread of the pandemic and to dampen the impact on the economy. Our authorities consider Fund financing instrumental to catalyze additional grant and concessional financing from development partners to strengthen their efforts to contain the pandemic. They greatly appreciate the provision of debt relief under the CCRT.