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International Monetary Fund. African Dept.
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Publication Date:
20 Dec 2021
eISBN:
9781616354886
ISBN:
9781616354886
Language:
English
Keywords:
IMF arrangement; Malawi vision; transparency policy; macroeconomic imbalance; sizeable financing support
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IMF Country Report No. 21/269

Abstract

IMF Country Report No. 21/269

Copyright Page

IMF Country Report No. 21/269

MALAWI

2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALAWI

December 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Malawi, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its December 13, 2021 consideration of the staff report that concluded the Article IV consultation with Malawi.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on December 13, 2021, following discussions that ended on November 4, 2021, with the officials of Malawi on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 30, 2021.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staff of the IMF and the World Bank.

  • A Statement by the Executive Director for Malawi.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2021 International Monetary Fund

Press Release

PR21/377

IMF Executive Board Concludes 2021 Article IV Consultation with the Republic of Malawi

FOR IMMEDlATE RELEASE

Washington, DC – December 13, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Malawi on December 13, 2021.

Malawi’s economy has been severely affected by the COVID-19 pandemic and faces additional challenges. Growth has contracted by 4½ percent in 2020 compared to pre-pandemic levels in 2019, while the number of cumulative positive cases of COVID-19 has more than doubled in the first half of 2021. In recent months, there are signs of gradual recovery and daily COVID-19 positive cases remain relatively low. Helped by a good harvest, real GDP growth in 2021 is projected at 2.2 percent, up from 0.9 percent in 2020. Inflation is expected to increase to 9.0 percent in 2021 from 8.6 percent in 2020, driven by increases in prices for fuel, fertilizers, and food.

President Chakwera’s Malawi Vision 2063 aims for the country to reach upper-middle income status by 2063 by investing in physical and human capital. Under announced policies, which aim to implement a gradual pace of adjustment and maintain fiscal and current account deficits over the medium term to meet substantial development and social spending needs, the economy is projected by staff to recover gradually to reach 4.5 percent growth by 2023.

The outlook is predicated on the assumption of continued domestic and external financing. It assumes Malawi will be able to sustain higher public investment than experienced in the past decade, have strong fiscal multipliers, maintain fiscal and external deficits on the order of 10 percent of GDP over the medium term, and continue to access sizable financing from regional development banks and domestic borrowing to close an estimated financing gap of about 4–5 percent of GDP each year. The growing debt burden is, however, projected to crowd out private sector investment and hinder medium-term economic prospects. Moreover, in spite of emergency COVID-19 assistance in 2020 and SDR allocation in 2021, the Reserve Bank of Malawi (RBM)’s gross reserve assets are projected to decline to 1½ months of next year’s imports by end-2021, leaving the economy vulnerable to shocks.

Uncertainty surrounding the outlook remains high, and risks are tilted to the downside. The main risk to the outlook is a sudden stop of available financing especially from regional development banks. If this risk materializes, it could lead to an abrupt real exchange rate adjustment, import compression, significant impacts on growth and financial stability, and an adverse effect on the most vulnerable.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that Malawi’s economy has been severely affected by the pandemic and commended the authorities for their efforts to support the economy. Despite signs of gradual recovery, downside risks to the outlook persist. Directors stressed the need for determined implementation of policy adjustments to address Malawi’s macroeconomic imbalances, restore debt sustainability, rebuild external buffers, and reduce poverty and inequality to improve social outcomes.

Directors underscored that restoring debt sustainability requires both addressing the legacy debt burden and adopting a strong fiscal adjustment program. While expenditures on containment measures and vaccine administration remain important in the near term, redoubling efforts on domestic revenue mobilization, curtailing and prioritizing current spending, and public financial management reforms are critical. Directors expressed concerns over Malawi’s high risk of overall and external public debt distress.

Directors noted that a tighter monetary policy stance would be needed if inflationary pressures materialize. In this regard, they encouraged careful monitoring of money growth and pressure on the exchange rate. Directors also underscored the importance of vigilant financial sector supervision, through close monitoring of potential risks to financial stability and the development of prudential policy tools.

Directors noted the substantially weaker external position relative to the level implied by economic fundamentals and desirable policies. They stressed that allowing for greater exchange rate flexibility through a careful approach, containing external imbalances, and rebuilding external buffers are critical to reducing Malawi’s vulnerabilities to external shocks.

Directors noted potential noncomplying disbursements during the 2018 Extended Credit Facility arrangement with the IMF and the need for resolution of this case of potential misreporting ahead of a new program. They urged the authorities to deliver on their commitment to conduct a special audit of foreign exchange reserves and improve the frequency and quality of data reporting.

Directors called forfurther efforts to strengthen public sector governance and institutions to safeguard scarce resources, strengthen policy effectiveness, and improve transparency and data provision, including on commitments and payments of COVID-19 related spending. Enhancing a robust cash management and control system of the national budget and strengthening the Board’s oversight of foreign exchange reserve management at the RBM are im portant.

Directors noted the catalytic role that an IMF arrangement could play to support the adjustment effort and mobilize donor financing. They emphasized that progress towards an arrangement would depend on strong commitment to an adjustment program, sizeable financing support from the international community and Regional Development Banks in the form of nondebt creating flows.

While Malawi remains current on its payments to the IMF, Directors concurred with the post-financing assessment (PFA) conclusion, including with respect to Malawi’s capacity to repay the IMF.

It is expected that the next Article IV consultation with Malawi will be held on the standard 12-month cycle.

Table 1.

Malawi: Selected Economic Indicators, 2020–26

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

Thecurrentfinancialyear, 2021, runs from July 1, 2020 to June30, 2021. FY2021/22 covers 1 July 2021 to 31 March 2022, to accommodate the transition to an April -March fiscal year starting from FY2022/23.

Please note that government fiscal statistics are reported foil owing the Government Finance Statistics Manual (2014) starting 2020 projection sand going forward.

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

Title Page

MALAWI

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION

November 30, 2021

KEY ISSUES

Context. Malawi, a fragile state with one of the highest incidences of poverty, food insecurity and frequent weather-related shocks, has been severely affected by the pandemic. There are signs of gradual recovery and daily COVID-19 positive cases remain relatively low: real GDP growth in 2021 is projected to pick up to 2.2 percent from 0.9 percent in 2020 helped by a good harvest. However, inflation is expected to increase to 9 percent in 2021 from 8.6 percent in 2020, driven by increases in prices of fuel, fertilizer and food, leaving real per capita growth in the negative region.

Substantial development and social spending needs, a high debt burden from the past, and much reduced budget support and other grants financing since 2013 are contributing to sustained fiscal and current account deficits in the near to medium term. The financing gap is estimated at about 4–5 percent of GDP each year, and the overall and external public debt are assessed to be unsustainable under current policies. The large financing needs over the coming years and low international reserves suggest high risk of future debt distress. The debt burden is projected to crowd out private sector investment and to hinder medium-term economic prospects. Moreover, in spite of emergency assistance in 2020 and SDR allocation in 2021, the Reserve Bank of Malawi (RBM)’s gross reserve assets are projected to reach 1½ month of next year’s imports by end-2021, leaving this fragile state vulnerable to external shocks. Risks to the outlook are tilted to the downside. The main risk is a sudden stop of available financing especially from the regional development banks (RDBs), and if this risk materializes, it could lead to an abrupt real exchange rate adjustment, import compression, significant impacts on growth and financial stability, and an adverse effect on the most vulnerable.

Focus of the Article IV consultation. The authorities’ current policies are focused on a gradual and backloaded pace of fiscal and external adjustment and heavy reliance on nonconcessional borrowing from RDBs to address the large financing needs. This policy mix further elevates risks to the outlook. Staff urged the authorities to take upfront policy adjustments to address Malawi’s macroeconomic imbalances. Discussions centered on policies to support urgent needs to address the humanitarian situation, restore debt sustainability, and rebuild fiscal and external buffers.

Fiscal policy. It will be important to anchor Malawi’s fiscal framework in a way that stabilizes debt as well as taking immediate and upfront actions to restore debt sustainability as external public debt at 33 percent of GDP, a third of which on nonconcessional terms, is not compatible for a fragile state with urgent humanitarian spending needs and infrastructure deficits. Efforts to strengthen domestic revenue mobilization, reprioritize expenditure, increase realism in budget forecasts, and improve public financial management will be important in this regard. Given pressing debt service needs, delaying adjustment will exacerbate pressures down the road. Moreover, sizable support from the international community, including the RDBs, in the form of nondebt creating flows (e.g., debt relief and budget support) are vital as the adjustment alone cannot restore debt sustainability.

Monetary policy. The Kwacha has appreciated substantially in real effective terms in recent years, owing to limited nominal exchange rate adjustment, contributing to high current account deficits and a loss of foreign exchange reserves. Greater exchange rate flexibility accompanied by a stronger monetary and fiscal policy stance would help address foreign exchange shortages and potential inflationary pressures. Developing a well-functioning and transparent foreign exchange interbank market, enhancing recording, monitoring, and reporting of reserve assets as well as liabilities, and formulating a foreign exchange reserve management strategy are also critical. Moreover, there are potential noncomplying disbursements under the 2018 Extended Credit Facility (ECF)due to the possible inclusion of encumbered assets that inflate reported reserves. The authorities have committed to undertake a special audit of foreign exchange reserves.

Governance. Strengthening public sector governance and institutions would help safeguard scarce resources, reduce vulnerabilities to corruption, and strengthen policy effectiveness. The mission urged publication of comprehensive fiscal reports to further enhance budget transparency and accountability. It is also important for the authorities to complete COVID-19 spending audit reports of two remaining tranches and take follow-up actions on the findings of the audit report completed by the National Audit Office (NAO) which identified irregularities and mismanagement in the procurement and contract awarded process of COVID-19 related public funds.

Approved By

Vivek Arora (AFR) and Björn Rother (SPR)

Virtual missions were held during July 20–27, 2021 and October 28-November4, 2021. The staff team comprising Ms. Saito (head), Ms. Farid, Ms. Gwenhamo, Ms. Yoon, Ms. Shirakawa (all AFR), Ms. Hashimoto (SPR), Ms. Prihardini (FAD), Mr. Banda (local economist), and Mr. Anderson (FAD long-term expert) exchanged information and held discussions with the Hon. Felix Mlusu (Minister of Finance), Dr. Wilson Banda (Governor of the Reserve Bank of Malawi, RBM), other senior government and RBM officials, representatives from the banking sector, development partners, and civil society organizations. Ms. Nainda (OED) joined the discussions. Mr. Guzman and Mr. Ould Abdallah provided research support and Ms. Lertprasert assisted the team in the preparation of this report. The team thanks the authorities for their collaboration and fruitful discussions.

Contents

  • CONTEXT

  • RECENT ECONOMIC DEVELOPMENTS

  • OUTLOOK, SPILLOVERS, AND RISKS

  • POLICIES FOR ECONOMIC STABILITY AND GROWTH

  • A Fiscal Policy: Enhancing Fiscal Discipline

  • B. Maintaining Price Stability and Financial Soundness

  • C. Rebuilding External Buffers

  • D. Tackling Governance Challenges

  • E. Building the Foundation for Growth

  • POST-FINANCING ASSESSMENT

  • OTHER ISSUES

  • STAFF APPRAISAL

  • BOX

  • 1. Reform Scenario, 2021–25

  • FIGURES

  • 1.Recent Economic Developments, 2000–21

  • 2. Fiscal Developments and Outlook, 2014–21

  • TABLES

  • 1. Selected Economic Indicators, 2020–26

  • 2a. Central Government Operations, 2018/19–25/26 (Billions of Kwacha)

  • 2b. Central Government Operations, 2018/19–25/26 (Percent of GDP)

  • 3a. Central Bank Survey, 2020–26

  • 3b. Depository Corporations Survey, 2020–26

  • 4a. Balance of Payments, 2019–26 (Millions of USD)

  • 4b. Balance of Payments, 2019–26 (Percent of GDP)

  • 5. Selected Banking Soundness Indicators, 2019–21

  • 6. Indicators of Capacity to Repay the Fund, 2021–34

  • ANNEXES

  • I. External Stability Assessment

  • II. Risk Assessment Matrix

  • III. Implementation of the 2018 Article IV Recommendations

  • IV. Capacity Development Strategy

  • V Country Engagement Strategy

  • VI. Raising Educational Attainment in Malawi

  • VII. Fostering Climate Change Resilience and Inclusive Growth

  • VIII. National Accounts Rebasing

  • IX. Implementation of Governance Commitments under 2020 RCFs

  • APPENDIX

  • I. Draft Press Release

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussbn by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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Cover IMF Staff Country Reports
Malawi: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 269
Publisher:
International Monetary Fund
ISBN:
9781616354886
ISSN:
1934-7685
Pages:
112
DOI:
https://doi.org/10.5089/9781616354886.002