Malawi: 2021 Article IV Consultation-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:
20 Dec 2021
eISBN:
9781616354886
ISBN:
9781616354886
Language:
English
Keywords:
financing gap; fund financing of SDR; w financing gap; financing mix; debt vulnerability; Debt sustainability; International reserves; Global
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1. Malawi’s new government since mid-2020 has signaled a break from policies of the past and a focus on inclusive and self-reliant growth. President Lazarus Chakwera, leader of the Malawi Congress Party (MCP), won the presidential elections in June 2020. The new administration launched Malawi’s long-term growth strategy “Malawi Vision 2063” that aims for Malawi to reach upper-middle income status by 2063. The vision is anchored on the Sustainable Development Goals and aims to address underlying causes behind the lack of sustained economic growth and heavy reliance on aid over decades. Growth is seen as having been overly reliant on foreign aid and vulnerable to weather-related shocks, which affect tobacco exports (Text Figure 1).

Abstract

1. Malawi’s new government since mid-2020 has signaled a break from policies of the past and a focus on inclusive and self-reliant growth. President Lazarus Chakwera, leader of the Malawi Congress Party (MCP), won the presidential elections in June 2020. The new administration launched Malawi’s long-term growth strategy “Malawi Vision 2063” that aims for Malawi to reach upper-middle income status by 2063. The vision is anchored on the Sustainable Development Goals and aims to address underlying causes behind the lack of sustained economic growth and heavy reliance on aid over decades. Growth is seen as having been overly reliant on foreign aid and vulnerable to weather-related shocks, which affect tobacco exports (Text Figure 1).

Context

1. Malawi’s new government since mid-2020 has signaled a break from policies of the past and a focus on inclusive and self-reliant growth. President Lazarus Chakwera, leader of the Malawi Congress Party (MCP), won the presidential elections in June 2020. The new administration launched Malawi’s long-term growth strategy “Malawi Vision 2063” that aims for Malawi to reach upper-middle income status by 2063. The vision is anchored on the Sustainable Development Goals and aims to address underlying causes behind the lack of sustained economic growth and heavy reliance on aid over decades. Growth is seen as having been overly reliant on foreign aid and vulnerable to weather-related shocks, which affect tobacco exports (Text Figure 1).

Text Figure 1.
Text Figure 1.

Malawi: Extreme Weather Events and Growth, 2000–20

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: EM-DAT database; and IMF staff estimates.

2. Sizeable macroeconomic imbalances and unsustainable debt are besetting the authorities’ efforts and the outlook. This dire macroeconomic situation is the outcome of the policy choices of distant- and recent-past:

  • Fiscal deficits have resulted in unsustainable debt (Text Figure 2). Budget deficits have remained high, reflecting limited adjustment in spending and low domestic revenue mobilization. The deficit has been financed mainly by costly domestic borrowing, as external budget support and grants (that averaged 5.8 percent of GDP during 2005–13) has been much reduced (1.8 percent of GDP) since the 2013 “Cashgate”.1 Rising domestic financing (since 2018) as well as borrowing from regional development banks (RDBs) on a non-concessional basis has significantly increased Malawi’s public debt, which stood at 55 percent of GDP in 2020 (of which 10 percent of GDP was non-concessional external debt).

  • Current account deficits have contributed to dwindling gross international reserves. The Reserve Bank of Malawi (RBM)’s foreign exchange intervention in recent years has sought to maintain a broadly stable nominal exchange rate with short-term currency swaps with RDBs. The current account deficits fluctuated around 12–15 percent of GDP since 2015 as imports remained strong while tobacco exports stagnated. Gross international reserves declined to $406 million (or about 1!/2 months of next year’s imports) at end-October 2021.

  • The COVID-19 shock has exacerbated macroeconomic imbalances. The authorities responded with an easing of fiscal and monetary policy since March 2020 (IMF COVID-19 Policy Tracker for Malawi). A third round of COVID-19 infections hit the country in February 2021 before starting to decline mid-year (Text Figure 2). The government rolled out in February 2021 a National COVID-19 Vaccine Deployment Plan with a target of reaching 20 percent of the population (3.8 million) byend-2021, benefiting from the COVID-19 Vaccines Global Access (COVAX) Facility. In addition, 100,000 doses covering 0.5 percent of the population have been secured through the African Union. As of mid-October, 2.8 percent of the total population was fully vaccinated.

Text Figure 2.
Text Figure 2.

Malawi: Challenges Confronting a Fragile State, 2005–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawian authorities; IMF staff estimates.

3. The new administration is prioritizing improved governance and transparency and addressing gaps that led to the loss of budget support. In July 2020, key officials were replaced after being implicated in the mismanagement of COVID-19 public funds, potential money laundering, and other charges.2 Actions are already being taken against civil servants involved in the mismanagement of COVID-19 funds. In addition, a Vice President’s Taskforce has been formed mid-April to introduce structural changes to the civil service, including the system of allowances, employment contracts, and procurement in the public sector.

4. The authorities have requested an arrangement under the Extended Credit Facility (ECF). Given the protracted balance of payments problem, Malawi is facing challenges in implementing economic programs envisaged in Malawi Vision 2063 without support from the IMF and the international community at large. While IMF support and its catalytic role in mobilizing donor support is critical at this juncture, being able to restore debt sustainability in the medium term is a pre-requisite for such support. In this context, a strong commitment for an adjustment program as well as sizeable 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. Moreover, the authorities have committed to undertake a special audit of foreign exchange reserves in response to noncomplying disbursements (“misreporting”) under the 2018 ECF arrangement. Resolving the misreporting case would be a precondition for a new Fund arrangement.

Recent Economic Developments

5. Malawi’s economy has been severely affected by the pandemic; and while daily COVID-19 positive cases remain relatively low, recovery is gradual. The National Statistics Office (NSO) reports that real GDP growth declined from 5.4 percent in 2019 to 0.9 percent in 20203 (Figure 1; Annex VIII). While high frequency data on economic activity are limited, there are a few signs of recovery in 2021. The year-on-year increase in imports through September 2021 is 25 percent; domestic revenue through June is tracking the revenue-to-GDP ratio seen in previous years (Figure 2). Real GDP growth in 2021 is projected to pick up to 2.2 percent helped by a good harvest.

6. Pressure on inflation is beginning to emerge following a monetary expansion and currency depreciation since mid-2020 as the RBM began to scale back FX intervention. The accommodative monetary policy stance, exchange rate pass-through, and increases in prices of fuel and fertilizer are contributing to a rise in non-food inflation from 4.9 percent at end-2020 to 7.2 percent at end-September 2021. Food inflation remains above 10 percent despite a good harvest, reflecting supply chain disruptions related to COVID-19. As a result, headline inflation has increased from 7.6 percent at end-2020 to 8.9 percent at end-September 2021 (Figure 1).

7. Foreign exchange reserves have declined sharply as the RBM scaled back FX intervention. The currency swaps with RDBs (112) were scaled back by the new RBM leadership since July 2020. GIR declined from US$766 million at end-June 2020 to US$406 million at end-October 2021 (Figure 1).4

8. Malawi’s external position in 2020 is assessed to be substantially weaker than the level implied by medium-term fundamentals and desired policies (Annex I).5 The current account deficit expanded from 12.6 percent of GDP in 2019 to 13.6 percent in 2020, resulting mostly from a significant decline in exports and an increase in pandemic-related imports. Malawi’s GIR at 2 months of next year’s imports are inadequate to absorb external shocks.6

Outlook, Spillovers, and Risks

9. Economic growth is projected to recover to reach a small positive per capita growth but this outlook is predicated on the assumption that external financing from RDBs will continue. Under announced policies which maintain the accommodative fiscal policy stance, the economy is projected by staff to recover gradually to reach4.5 percent growth by 2023, a small positive per capita growth.7 This outlook depends critically on: (i) a sustained increase in public investment relative to levels experienced in the past decade (see 1158) with strong fiscal multipliers of public investment; (ii) the maintenance of a fiscal deficit on the order of 10 percent of GDP over the medium term (and external current account deficits of similar size); and (iii) continued access to sizable and further growing RDB financing as well as domestic borrowing to cover large financing gaps in spite of unsustainable debt (1112). As a result, however, the debt burden will continue to grow, and the debt burden is projected to crowd out private sector investment and to hinder medium-term economic prospects. Continuing to depend on non-concessional loans from the RDBs, however, comes with risks (1114) and at a cost (H12).

10. CPI inflation is projected at 10 percent atend-2021 and about 6.8 percent at the end of the medium term provided that the monetary policy stance is well anchored. The projection captures anticipated depreciation of the currency and passthrough to inflation as the RBM winds down foreign exchange interventions and currency swap operations. The success of the RBM in managing inflationary pressures would hinge on its ability to sterilize the monetary impact of reduced forex sales and the government’s commitment to contain fiscal deficits.

11. Gross international reserves are projected to remain at about 1½ months of next year’s imports with financial support from RDBs as in the recent past, leaving Malawi vulnerable to shocks. With only a gradual and limited adjustment in the exchange rate and limited fiscal adjustment envisaged, current account deficits are projected to remain elevated. As a result, the pressure on reserves will continue and the RBM’s reserve liabilities (in the form of currency swaps and trade credit) are projected to increase during the medium term. Limited buffers would be available to absorb external shocks such as adverse climate events. The external financing needed (shown as a financing gap in Box 1) is estimated at about 4–5 percent of GDP each year in the medium term.

12. Malawi’s overall and external public debts are assessed to be in high risk of debt distress; and both external and public debt are assessed as unsustainable under current policies. Malawi’s external debt distress rating, based on the DSA, has changed from “moderate risk of debt distress” (October 2020 DSA) to “high risk of debt distress; and granularity in risk rating assess that external and public debt are unsustainable under current policies.” There are sustained threshold breaches on a number of debt stock and debt service indicators, including an existence of external arrears atthe end of 2020 which have been rescheduled in 2021.8 The debt service burden is exacerbated by: (i) a change in debt carrying capacity from medium to low; (ii) moving the DSA from a currency to a residency basis in order to accurately classify and capture medium-term domestic bonds held by nonresidents as external debt; and (iii) the conversion of the RBM’s short-term reserve liabilities to medium-term external debt. Under the baseline scenario, public debt would increase further from 54.8 percent of GDP in 2020 to 85.7 percent of GDP in 2026 as the authorities rollover existing domestic and external debt. Covering these large financing needs would be achieved through: (i) disbursement of ratified but undisbursed concessional loans during the medium term; (ii) additional nonconcessional external borrowing (in the form of nonresident participation in the domestic debt market) as in the past; and (iii) net domestic financing for the remaining financing gap. The large financing needs over the coming years and low lovel of international reserves suggest high risk of future debt distress.

13. Inward spillovers of easy liquidity conditions in advanced economies are channeled through regional development banks. Malawi does not have access to international markets but has access to nonconcessional external financing through RDBs for several years. The RDB financing has been supported in recent years through ample liquidity on global markets, which made the interest spread attractive for on-lending operations to countries without access to international markets. Some of these banks have expanded debt security issuance and loan book by more than 10 times over the past 10 years.

14. Risks to the outlook are tilted to the downside.

  • A risk associated with growing RDB financing followed by a sudden stop is a high-probability and high-impact risk if the risk materializes. The attractiveness of on-lending operations by RDBs could be affected by a normalization of monetary policy in advanced economies. This effect could exacerbate a further worsening of Malawi’s outlook. A sudden stop could lead to an abrupt real exchange rate adjustment, import compression, significant impacts on growth and financial stability (with abrupt changes in consumption and investment behavior of both the public and the private sectors), and an adverse effect on the most vulnerable.

  • Other risks include uncertainty to the recovery due to risks of another COVID-19 wave and weather-related events. Domestic risks include governance issues affecting the efficient use of public resources and delays in PFM reforms and domestic revenue mobilization that in turn can lead to a further widening of macroeconomic imbalances. Additional risks include fiscal dominance in the conduct of monetary policy and accumulation of additional external non-concessional borrowing. If such risks materialize, an abrupt adjustment may be inevitable.

  • On the upside, faster recovery supported by the mining sector, successful resolution of unsustainable debt service, and strong reforms program implementation could boost confidence and pave the way for a resumption of budget support from development partners (Risk Assessment Matrix in Annex II).

Authorities’ Views

15. The authorities project a higher and near-term impact of domestically financed capital spending on growth compared to staff’s projection. They are exploring possible investment and growth potential in the mining sector that could result in positive growth spillovers and higher export receipts. The authorities plan to implement revenue measures as well as manage expenditures and focus on export diversification to reduce both fiscal and current account deficits.

16. In the authorities’ assessment, the fiduciary environment around the recently issued Local Currency Infrastructure Bond is very good and funds are ringfenced that the risk of funds being misused is very minimal. On this basis, the authorities see that the more appropriate overall characterization of the governance risk to be medium. Both local and foreign financed projects have the best governance structures, which include Project Steering Committees, Technical Committees and mandatory external annual audit.

17. The authorities are undertaking policy actions to address debt sustainability through engagement with creditors, including the RDBs. The authorities are also engaging with RDBs and other donors for possible voluntary debt buy back schemes to offset more expensive debt.

Policies for Economic Stability and Growth

As a fragile state, Malawi needs donor budget support as borrowing on nonconcessional terms to meet the basic spending needs of a rapidly expanding population is not sustainable. Given macroeconomic imbalances, the fiscal and external policy effort should be anchored around debt-stabilizing primary fiscal and current account balances guided by the DSA; combined with the authorities’ immediate and upfront actions to restore debt sustainability.

A. Fiscal Policy: Enhancing Fiscal Discipline

Background

18. Expenditure overruns due to weak commitment controls, revenue shortfalls due to optimistic budget projections, and rising domestic borrowing have characterized the fiscal landscape of the past several years. With the withdrawal of external budget support and grants financing since 2013, the domestic primary deficit remained at around 1 percent for several years. However, costly domestic borrowing resulted in a rapid increase in interest payments, widening the overall deficit (Text Figure 2).

19. More recently, expenditure has expanded substantially partly due to elections and the pandemic, while domestic revenue mobilization efforts showed little results.

  • Expenditure has expanded from 19.6 percent of GDP in 2018/19 to an estimated 22.2 percent of GDP in 2020/21. This reflects spending on COVID-19 containment, one-off expenditures (e.g., for the 2019–2020 elections) and policy measures. A civil service wage increase in October 2020 contributed to a rise in the wage bill. An expansion of the fertilizer and seed subsidy (Affordable Input Program, AIP) from just under 1 million beneficiaries to 3.8 million beneficiaries increased the cost from 0.5 percent of GDP to 1.5 percent of GDP. The buildup of debt has seen interest payments jump from 2.9 to 3.8 percent of GDP in 2018/19 and 2020/21, respectively.

  • The authorities have prepared the Domestic Revenue Mobilization Strategy (DRMS) with support from the IMF and other development partners. The DRMS is focused on improvements in tax administration and policy reform to expand the tax base. The authorities have begun to implement some of the measures identified in the DRMS, such as introducing an import withholding tax in the FY 2021/22 Budget. At the same time, they have increased the tax-free threshold in the Personal Income Tax (PIT), reducing the tax base.

20. The overall deficit for FY2020/21 is estimated at 7.5 percent of GDP, well above the 5.8 percent of GDP seen in FY2019/20 (Figure 2). Compared to the projection in the October 2020 Staff Report (IMF Country Report No. 20/288), tax revenue outperformed in FY2020/21. The Expenditure outturn was slightly above its projected level, driven by higher interest rate payments and spending on goods and services, but partly offset by delays in executing capital spending.

21. The government plans to maintain the current fiscal policy stance through the medium term. It sees a strong focus on capital expenditure going forward as being an important foundation for long-term inclusive growth. Efforts to improve revenue administration are ongoing, supported by capacity development from the IMF and other development partners. The authorities are reviewing the VAT Act, including rationalizing the list of exempt and zero-rated items, which could lead to additional revenue.

22. The authorities announced arrears clearance measures in September 2021. Domestic arrears mainly reflect unpaid bills from 2012 and 2013. Approximately MWK 158.9 billion (1.7 percent of GDP) in arrears have been audited and verified, reflecting commitments made up to June 2020. The clearance strategy consists of issuing zero-coupon promissory notes (MWK 145 billion, of which MWK 110 million has been issued as of August 2021), cash payments for small amounts outstanding (MWK 5 billion), and tax refunds (MWK 9 billion). These new measures follow an earlier arrears clearance effort which ended in FY2018/19.

Policy Advice

23. Restoring debt sustainability would require both addressing the legacy unsustainable debt burden and a forward-looking anchoring of Malawi’s fiscal program at a minimum reaching a debt stabilizing primary balance so that it can return to a moderate risk of debt distress within the medium term. Both public and external debt are assessed as unsustainable. In the near term, priority must be given to expenditure on COVID-19 containment measures, the administration of vaccines, and the completion of capital expenditure projects started in FY2021/22. Over the medium term, a strong fiscal effort is necessary to reduce the primary deficit, projected at about 4.3 percent for FY2021/22, to a balanced position9 not later than 2026. The pace of adjustment is equivalent to at least 1 percentage point of GDP adjustment during FY2022/23-FY2025/26. As shown in the reform scenario (Box 1), with this pace of adjustment, total public debt will continue to rise over the medium term and debt sustainability will not be restored. This pace of adjustment, however, can help reduce the risk of debt distress to “moderate” in the medium term, if supported by strong reforms, and nondebt creating flows (e.g., debt relief and budget support grants from creditors and development partners). Delays or a lack of support would make the size of adjustment larger and sharper.10 Realism in budget forecasts and public financial management (PFM) reforms would help contain fiscal deficits and debt (1125).

24. DRMS needs prioritization. Ministerial-level guidance is needed to determine policy priorities and speed of implementation. Staff underscored the importance of implementing the DRMS with an aim to raise at least an additional 2 percent of GDP (cumulative) of revenue from tax policy measures such as broadening the base of the value added tax (VAT) and corporate income tax (CIT), reforming excise and carbon taxes, and further reforming the PIT. In addition, tax administration measures should raise, as a minimum, an additional 0.5 percent of GDP (cumulative) over the medium term (see Text Table 1, based on DRM TA provided in May 2020).

Text Table 1.

Fiscal Policy Measures, change relative to FY 2020/21

(in percent of GDP)

article image
Source: Staff estimates.

25. Reprioritizing expenditure would provide fiscal space to expand macro-critical capital outlays. It is critical for the authorities to rationalize expenditure through curtailing growth in wages; reform the AIP and goods and services spending; and reduce non-critical spending11. This is expected to free 2 percent of GDP in fiscal space (Text table 1), part of which will be redirected to development expenditure and is in line with Vision 2063 and the post-pandemic recovery plan.

26. Improvements in commitment controls are critical in preventing further accumulation of arrears, containing the size of public debt, and strengthening fiscal governance. The pace of implementation of the new Integrated Financial Management and Information System (IFMIS) has accelerated and the new system will help with (i) expenditure control, particularly for managing multi-year commitments (a major source of arrears) and (ii) timely reconciliation of data (revenue, expenditure and financing) across institutions. The latter would also help enhance debt data management.12 In the interim, changes in business processes and culture can be instigated to prevent the creation of new arrears. This will require high-level political commitment, large-scale communication efforts and ensuring the right incentives for government ministries, departments, and agencies (MDAs). Staff stressed the importance of completing implementation of the IFMIS, the passage of the Public Financial Management (PFM) Act, and publication of a comprehensive monthly fiscal report building on the existing quarterly budget performance reports. If arrears continue to accumulate, a more strategic clearance strategy is needed (prioritization, negotiation with creditors) rather than relying on promissory notes alone.

27. The authorities need to work with development partners to ensure that social spending continues to support the vulnerable, particularly if risks materialize. The bulk of social spending to protect the vulnerable (health and social cash transfers) are off budget and funded by development partners. The size of the transfer should be reviewed and adjusted for inflation so that it continues to cover basic consumption needs of the most vulnerable households.

Malawi: Reform Scenario, 2021–25

The reform scenario aims to stabilize the public debt so that Malawi can return to moderate risk of debt distress within the medium term. Accordingly, the size of fiscal adjustments is set at about 1 percentage point of GDP each year, which is consistent with policy adjustments identified in recent technical assistance reports (Text Table 1).The scenario envisages rebuilding gross official reserves to return to an adequate level over the medium term. The corresponding size of external sector adjustment is 1½ percent of GDP each year. This would be supported by greater exchange rate flexibility and stronger monetary and fiscal policy. The reform scenario still has a financing gap of about US$1.6 billion or about 4 percent of GDP each year in the medium term. If the gap is financed by nonconcessional borrowing, the risk of debt distress will remain high. Moreover, if the financing gap were not filled, it could lead to an abrupt adjustment with significant impacts on growth and financial stability, and an adverse effect on the most vulnerable. But if it is filled by nondebt creating flows (e.g., debt relief and budget support grants), Malawi can return to a moderate risk of debt distress. Any reform delays would make the size of adjustment larger and more abrupt.

Box Table 1.

Malawi Baseline versus Reform Scenario: Selected Economic Indicators, 2021–25

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

The baseline assumes that the external financing gap would be cbsed by additional borrowing from RDBs, with the stock of debt increasing from US$0.9 billion in 2020 to US$3.5 billion by 2025. Residual fiscal financing gaps would be covered by domestic borrowing.

Authorities’ Views

28. The authorities understand the need for fiscal adjustment and continue to work on reforms to narrow the deficit. Discussions with the WB on better targeting of the AIP are ongoing. The review of the VAT Act has already resulted in the removal of banking fees and charges from the list of VAT exempt items. User fees and charges are also under review, and authorities recently announced the introduction of toll fees to fund road maintenance. The new PFM Act will include the creation of a Debt Retirement Fund, which will be used to retire short term debt and free fiscal space. New revenue measures for this fund are under development.

29. The authorities agree on the criticality of reducing the risk of debt distress back to moderate. But they make a distinction between borrowing to support current expenditure versus borrowing to finance infrastructure investment. In their view, additional debt incurred to finance infrastructure and social safety net projects is vital to generate growth and to exit fragility even if the debt is non-concessional. They ringfenced a share of new debt issuance for key infrastructure projects. The stimulus from the construction phase of these projects is also important for supporting employment and incomes in the aftermath of the pandemic.

30. The authorities are more optimistic than staff on the projected revenue path. Tax administration initiatives, such continued efforts in improving compliance are expected to reap significant gains in revenue. The authorities are undertaking tax incentives review. Renewed interest in mining sector investment and reforms in the gold market will also contribute to revenue in the medium term. The rise in revenue will reduce pressure for expenditure rationalization. The authorities are of the view that the bulk of expenditure (wages, pensions, interest payments) are rigid, with little room for retrenchment.

31. The authorities are confident with their PFM reforms. They note that the new IFMIS, successfully rolled out to all MDAs in July 2021, and the new PFM Act will enhance commitment control, fiscal reporting and help address longstanding governance challenges.

32. The authorities agreed that the main risk under both the baseline and reform scenarios is a sudden stop of available financing especially from the regional development banks. If this risk materialized, an abrupt forced adjustment with a significant impact on growth, financial stability, and the mostvulnerable population becomes inevitable.

B. Maintaining Price Stability and Financial Soundness

Background

33. The monetary policy stance has been accommodative in 2020. To mitigate the adverse impact of COVID-19, the RBM reduced the policy rate to 12 percent (by 150 basis points) in November 2020 and has kept it steady since then. Moreover, it has not been fully sterilizing the monetary impact of the decline in foreign exchange intervention, which resulted in reserve money (and broad money) year-on-year growth rising 33 percent and 25 percent, respectively, in September 2021.

34. An Emergency Liquidity Assistance (ELA) framework was introduced to support banks in the event of worsening liquidity conditions. The framework has been used for one commercial bank in April 2021. A debt moratorium and restructuring of loans to SMEs remains in place, to be approved on a case-by-case basis. The share of nonperforming loans (NPLs) in total loans has stabilized to 6.4 percent at end-July from around 8 percent in preceding months. Based on available data, the banking sector remains well capitalized, liquid and profitable (Table 5).13

Table 1.

Malawi: Selected Economic Indicators, 2020–26

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

The current financial year, 2021, runs from July 1, 2020 to June 30, 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 following the Government Finance Statistics Manual (2014) starting 2020 projections and going forward.

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

Table 2a.

Malawi: Central Government Operations, 2018/19–25/261

(Billion of Kwacha)

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Sources: Malawi Ministry of Finance and IMF staff projections.

FY2021/22 covers 1 July 2021 to 31 March 2022, to accommodate the transition to an April – March fiscal year starting from FY2022/23

Farm Input Subsidy Program prior to FY20/21

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

Table 2b.

Malawi: Central Government Operations, 2018/19–25/261

(Percent of GDP)

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Sources: Malawi Ministry of Finance and IMF staff projections.

FY2021/22 covers 1 July 2021 to 31 March 2022, to accom modate the transition to an April – March fiscal year starting from FY2022/23.

Farm Input Subsidy Program priorto FY20/21

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

Table 3a.

Malawi: Central Bank Survey, 2020–26

(Billions of Kwacha, unless otherwise indicated)

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

Including SDR allocation and the entire assets and liabilities of the RBM.

Table 3b.

Malawi: Depository Corporations Survey, 2020–26

(Billions of Kwacha, unless otherwise indicated)

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

Different treatment of external debt of reserve bank of Malawi between the past and projection periods leads to a surge in credit to private sector in 2021. This will be fixed after TA mission on the treatment of external debt.

Table 4a.

Malawi: Balance of Payments, 2019–26

(Millions of U.S. dollars, 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.

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

Table 4b.

Malawi: Balance of Payments, 2019–26

(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 1 6.5 percent of GDP to 8.6 percent of GDP.

Includes estimate for project grants not channeled through the budget.

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

Table 5.

Malawi: Selected Banking Soundness Indicators, 2019–21

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Source: Reserve Bank of Malawi.

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

Policy Advice

35. The monetary framework needs to remain anchored on containing reserve money growth in order to stabilize inflation pressures. Staff emphasized that the RBM should allow for greater flexibility in the exchange rate (1140) while maintaining price stability as its primary objective. In this regard, the RBM could use various instruments to drain excess liquidity from the system, including deposit auctions, sales of its holdings of government securities, and issuance of its own securities.

36. The authorities should remain vigilant on financial sector supervision. The RBM’s and commercial banks’ exposures to government securities need to be closely monitored. In addition, loan and collateral quality needs to be reassessed to promote financial sector stability. Given high credit growth, staff emphasized the need for improved credit risk management and developing micro and macro prudential policy tools.

Authorities’ Views

37. The authorities agree that monetary policy needs to be stronger to counteract inflationary pressure expected from greater flexibility in the exchange rate. However, the RBM has expressed concerns from the impact of stronger monetary policy stance on increasing the cost of borrowing for the government and private sector investments.

38. The authorities agree on the need for improved financial sector supervision and are seeking relevant technical assistance from the Fund.

C. Rebuilding External Buffers

Background

39. The trade deficit widened further in 2020.

  • Tobacco exports have been on a declining trend since 2014 (Text Figure 3). In 2020, however, in addition to a temporary U.S. suspension of imports of Malawi’s tobacco, the COVID-19 pandemic also lowered tobacco and other exports.

  • Imports continued to increase even during the period when fuel prices were declining. An increase in imports in 2020 partially reflect COVID-19 related imports and imports of fertilizers in support of the AIP.

Text Figure 3.
Text Figure 3.

Malawi: REER and Current Account Balance, 2012–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawian authorities; and IMF staff estimates.

40. The REER appreciated by over 30 percent since 2016 partly due to limited movement in the nominal exchange rate. The current account deficit increased from 6 percent in 2014 to 13.6 percent of GDP in 2020 and the RBM’s gross reserve assets declined to below adequate levels (118).

41. In August 2021, the RBM re-introduced a surrender requirement on export proceeds to manage the shortages of foreign exchange on a temporary basis.14 The 30 percent surrender requirement on export proceeds seeks to induce exporters to step up foreign exchange supply to the interbank market while the RBM winds down its role as the supplier of foreign exchange.

42. The Special Drawing Rights (SDR) allocation, approved in August 2021, provided liquidity support to Malawi. For Malawi, the SDR allocation is equivalent to about US$190 million or about 1.6 percent of GDP and it was transferred to the Government of Malawi. The authorities intend to use the SDR allocation to substitute the financing mix by reducing further accumulation of costly domestic borrowing, while maintaining the same budget envelope for FY2021/22. Through an arrangement between the RBM and Ministry of Finance governing the use of the SDR allocation, the government sold the SDR allocation to the RBM in exchange for Malawian Kwacha so that the RBM could meet short-term foreign exchange reserve liabilities due.

Policy Advice

43. Allowing for greater flexibility in the exchange rate, containing external imbalances, and rebuilding reserves are critical in reducing Malawi’s vulnerabilities to external shocks. Several elements need to come together to achieve this goal.

  • Given the chronic shortages of foreign exchange and low reserves, and to support the start of the adjustment, a rapid adjustment towards a market-clearing exchange rate is necessary. With the anticipation of an adjustment at a future time, hoarding of foreign exchange by market participants may be exacerbating shortages.

  • It is important to support this adjustment with a tight monetary policy stance. An adjustment towards a market-clearing rate may be accompanied by a temporary spike in prices. It does not, however, have to be followed by a prolonged period of Kwacha deprecation and inflation as in the case of 2012–16 episode, if the RBM is committed to contain reserve money growth (Text Table 2).

  • It is important to support this adjustment with a credible fiscal adjustment program (HI 9). In the 2012 episode, the fiscal policy stance was not compatible with the tight monetary policy stance. The deficit from 2012/13 to 2015/16 averaged 7 percent of GDP; and in 2012/13 the deficit widened by 2 percent of GDP (from 5.8 to 7.8 percent). Thus, there was continued pressure on the exchange rate, and hence inflation.

  • Given the misalignment in the real exchange rate and unsustainable level of current account deficits, over the medium term, a sufficient adjustment of the REER, in the range of 30 percent, is necessary to improve the competitiveness of Malawi’s exports, contain growth in imports, and bring the current account deficit back to more sustainable levels.15

  • Given that Malawi has large energy-related imports, the authorities also need to carefully calibrate the pace, cost, and effects of their energy strategy. Malawi needs to include cost-effective investment in alternative energy sources away from firewood and charcoal—which aggravates deforestation, land degradation, and vulnerability to floods, landslides and food insecurity— and move towards sustainable power generation mix, guided by Malawi Renewable Energy Strategy (2017). In transition, these energy-related policy choices may put pressure on the foreign exchange market.

  • The RBM’s communications should be transparent and timely because clear communication enhances the effectiveness of monetary and exchange rate policies.

Text Table 2.

Malawi: High vs. Low Inflation Episodes, 2012–21 (percent)

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Sources: RBM; IMF staff calculations.

44. Developing the foreign exchange interbank market is important. The newly introduced surrender requirement on export proceeds should be used only on a temporary basis. Instead, it is important to develop a well-functioning foreign exchange interbank market that allows for transparent currency exchange and facilitates price discovery.

45. The RBM needs to formulate its reserve management strategy and address issues with its reserve assets and liabilities data promptly. The strategy needs to clarify how the RBM will manage risks associated with reserve assets as well as reserve liabilities going forward. The strategy also needs to clarify how the RBM plans to enhance recording, monitoring, and reporting of reserve assets as well as liabilities. The RBM’s inability to reverse its short-term currency swaps or to stay within a cap of a revolving trade credit facility should not be repeated. Issues with the reserves data, especially the possible inclusion of encumbered assets that inflate reported reserves, need to be addressed promptly. Moreover, the governance structure under which risks are assessed and managed should be guided by recommendations of the recent safeguards assessment report. The RBM should strive to improve data quality and reporting frequency and timeliness.

Authorities’ Views

46. The authorities are of the view that a gradual exchange rate adjustment is the preferred policy option. The authorities believe that allowing for greater flexibility in the exchange rate will result in a spike in inflation as was observed in the 2012 episode and related concerns over fear of exchange rate passthrough on inflation. The RBM will remain vigilant to inflationary pressures and stand ready to tighten monetary policy as needed. In the meantime, the RBM is addressing obstacles to FX market development to deepen the foreign exchange market and pave the way for market-determined exchange rate by eliminating the daily 5 Kwacha band or the so called ‘reasonable difference’ among bids submitted by banks imposed by Guidelines for Foreign Exchange Trading Activities.

47. The authorities agree that rebuilding reserves is a top priority and plan to adopt a reserve management strategy with a view to rebuild reserves going forward. However, switching from being a net seller of forex to a net purchaser of forex in the short to medium term is seen as unattainable given tight liquidity conditions. The authorities are working on expanding the export base to include mining and non-traditional agricultural exports like legumes, maize, and industrial cannabis which will increase exports proceeds.

48. The authorities’ efforts to develop the foreign exchange market include issuing guidelines that require authorized dealer banks to sell 30 percent of all their purchases on the interbank market to prop up activity.16 Currently the foreign exchange market is concentrated on retail trading with very limited interbank activity.

D. Tackling Governance Challenges

Background

49. Weaknesses in governance are long-standing issues in Malawi, and the current administration is taking action in this area but more efforts are needed. The current administration has followed up the report on mismanagement of COVID-19 funds and has taken administrative actions against the civil servants allegedly involved. The National Audit Office (NAO) is conducting an audit on two additional tranches of MWK 17.2 billion and MWK 5.3 billion COVID-19 spending with a view to finalize the reports by end-December 2021. Implementation of COVID-19 related governance measures committed under Malawi’s two RCFs approved in April and October 2020 have been significantly delayed but progress on audits has started as mentioned above. Quarterly statements on commitments and payments of COVID-19 related activities (in all MDAs) have been produced and published for FY19/20 and FY20/21, but with a significant delaydue to capacity constraint and specification of COVID-19 related costs in monthly published salary reports have not yet started. Publication of COVID-19 related procurement details, including on beneficial owner(s) of companies awarded contracts, on the Public Procurement and Disposal of Assets Authority (PPDA) website is ongoing but updates are significantly delayed (Annex IX). Meanwhile, the authorities are taking measures to strengthen institutions that have a constitutional mandate to fight corruption, including the Anti-Corruption Bureau, the Financial Intelligence Authority and the PPDA.

50. The RBM is also taking action to strengthen governance. The RBM and the Ministry are scaling up internal reconciliation exercises, improving the quality of foreign exchange data, and increasing the frequency of reporting to the IMF. The RBM has committed to conduct a special audit of foreign exchange reserves of the RBM.

Policy Advice

51. Addressing fiscal governance weaknesses and reducing vulnerabilities to corruption— especially in the PFM, fiscal transparency, and procurement areas—are macro-critical. Staff underscored the importance of swiftly implementing PFM reforms and start publishing timely comprehensive IFMIS-generated fiscal reports (1122) which will improve the transparency and accountability of the use of public resources. Staff stressed the need to complete remaining COVID-19 spending audits and take follow-up actions on the findings of the NAO’s completed audit reports which pointed to irregularities and mismanagement of COVID-19 related public funds. Staff stand ready to support the authorities’ efforts with relevant TA to support auditing of emergency spending. Staff also stand ready to further discuss with the authorities governance issues, including conducting governance diagnostic in the near future.

52. Staff urged the RBM to strengthen its reserve management and to address governance and control weaknesses identified by the Safeguards Assessment report. Establishing the Board’s Assets and Liabilities Committee (ALCO) and enhancing the Board’s oversight of foreign exchange reserve management is critical in avoiding a sharp decline in external buffers observed in 2020–21 (117). Staff also reiterated the importance of establishing the RBM’s reserve management strategy and continuing to improve the frequency and quality of the RBM’s reserve data.

Authorities’ Views

53. The authorities are committed to regular reporting of expenditures and revenues. As outlined in the recently enacted Access to Information, the authorities are periodically sharing fiscal reports with members of the public or civil society who request such information. On a quarterly basis, the authorities will publish key reports on the internet and other media channels. In addition to specialized audits on COVID-19 responses the authorities have institutionalized audits at local council level and state-owned enterprises which account for large expenditures. The Government of Malawi commits to continue the production and publication of fiscal reports.

54. The authorities are taking actions following the publication of the NAO’s audit report identifying irregularities and mismanagement of COVID-19 related public funds. The authorities have moved to document the cases and evidence through the audit report with a view of determining the corrective actions, including taking disciplinary or legal measures.

55. With support from the IMF staff, the authorities are looking into possible noncomplying disbursements. Noncomplying disbursements (“misreporting”) could have resulted from the provision of inaccurate information on the performance criteria on the floor of Net International Reserves (NIR) under the 2018 ECF arrangement. This is a legacy issue which the new administration found and the RBM has started submitting reserve numbers at a higher frequency and improved the quality of data reporting to avoid similar occurrences in the future. The authorities have started reporting data by implementing TA recommendations, including the gross international reserves data following closely the Data Template on International Reserves and Foreign Currency Liquidity (IRFCL) that shows a separate line of the estimated size of pledged deposits. The value of pledged deposits is, however, subject to change upon the completion of the special audit of foreign exchange reserves.

E. Building the Foundation for Growth

Background

56. Lack of sustained economic growth, in part due to frequent weather-related shocks and fast population increase, has left per capita income stagnant (Text Figure 1 and Annex V). Extreme weather events are depressing productivity, adversely affecting housing and infrastructure, and risking food security (Annex V). Deforestation, one of key drivers of vulnerability to floods and droughts, is caused not only by tobacco plantations but also by fast growing demand for fuelwoods by Malawi’s growing population. Population growth is also putting strains on the schooling system (Annex VI), limiting human capital investment highlighted in the Malawi Vision 2063.

57. Domestically-financed development expenditure has suffered from cash rationing in the past. Malawi’s growth strategy has been focusing on electricity generation, transportation infrastructure, crop and export diversification, increased access to finance, and investment in human capital. Domestically-financed development expenditure, however, tends to be under-executed: on average, between 2014/15 and 2019/20, domestically financed development expenditure was cut by a third of its budgeted level. Cash rationing and reduction in donor support has seen domestic development expenditure fall from an average of 1.6 percent of GDP prior to 2013/14 to 0.9 percent of GDP.

Policy Advice

58. Given Malawi’s no fiscal space, prioritizing and improving the efficiency of public sector investment is critically important. Malawi has significant spending needs on physical and human capital investment and social safety net. Staff called for prioritizing investment in education and building resilience to climate change and weather-related shocks, most notably floods and droughts through strengthening resilience in the agriculture sector, including measures to halt deforestation, safeguarding food security, and developing sustainable energy sources (e.g., solar and renewable energy sources, see Annex VII), while restoring debt sustainability (see DSA).

Authorities’ Views

59. The authorities recognize the importance of creating fiscal space to further invest in education. Human capital development is identified in Vision 2063 as an enabler for faster economic development, particularly given Malawi’s youthful population. At the same time, building resilience to climate change and boosting inclusive growth, entails increasing public investment. Vision 2063 prioritizes development expenditure over non-critical recurrent expenditure.

Post-Financing Assessment

60. The level of Malawi’s outstanding credit to the Fund exceeds 200 percent of quota and therefore requires a Post-Financing Assessment (PFA) (formerly Post Program Monitoring).17 Malawi’s 2018 ECF provided Fund financing of SDR 78.075 million (56.25 percent of Malawi’s quota) which was later augmented by SDR 27.76 million (20 percent of quota) in November 2019.18 Following the COVID-19 outbreak, Malawi requested two subsequent RCFs in May and October 2020 to address urgent BoP needs related to the spread of the pandemic and economic downturn, providing total access of SDR 138.8 million (100 percent of quota). This elevated use of Fund resources increased Malawi’s outstanding credit to the Fund to reach about 206 percent of quota triggering the PFA Total outstanding credit based on existing drawings to the IMF is about 206 percent of quota, as of mid-November 2021, equivalent to 32 (20.9) percent of exports, and about 95 (69) percent of reserves in 2022 (2024).

61. Malawi’s capacity to repay the Fund is weak under current policies. Malawi’s capacity to repay has deteriorated from strong—at the time of the requestfor RCF in October 2020—to weak given current policies. This is due to Malawi’s macroeconomic imbalances, high debt burden and debt vulnerabilities, and much reduced budget support and other grants financing. These factors contributed to sustained fiscal and current account deficits in the near to medium term, and deterioration in gross reserves which are critically below reserve adequacy levels (see Annex I). Malawi is facing significant financing risks which in turn contributed to Malawi’s weak capacity to repay the Fund, these relate to risks of a sudden stop of available financing, especially from RDBs, resulting in rollover risks to external debt, fiscal dominance which undermines effective monetary policy, and delays in external adjustment and reserve accumulation effort.

62. Upfront policy action to address Malawi’s debt vulnerabilities and macroeconomic imbalances as well as intensifying efforts to build buffers would be crucial to help create policy space. The authorities should allow greater flexibility in the exchange rate to help contain external imbalances and rebuild reserves, thus reduce Malawi’s vulnerabilities to external shocks. This should be supported by a well-functioning and transparent foreign exchange interbank market and a foreign exchange reserve management strategy. On the latter, the authorities need to promptly address data shortcoming related to reserves, especially the possible inclusion of encumbered assets that inflate reported reserves. This needs to be supported by upfront policy action to restore debt sustainability over the medium term to moderate risk of debt distress. The authorities need to adopt strong fiscal adjustment program predicated on the following pillars: redoubling efforts on domestic revenue mobilization; reprioritizing expenditure through curtailing growth in wages while safeguarding capital spending, reforming the Affordable Input Program (AIP) and goods and services spending; and strengthening public sector governance and institutions to help safeguard scarce resources and strengthen policy effectiveness.

63. The authorities concurred with staff assessment. The authorities are of the view that the Post-Financing Assessment is important considering that the capacity to repay the Fund is currently weak. They broadly concurred with the policies needed to appropriately address risks to Malawi’s capacity to repay the IMF. Their detailed views on the proposed policies in case risks materialize (1162) are presented in paragraphs 28–32.

Other Issues

64. An updated safeguards assessment of the RBM is substantially completed. It found significant deterioration of safeguards at the RBM since the 2018 assessment. Governance arrangements, including Board oversight, and the internal control environment are considered weak. Governance reform should establish the Board as the RBM’s main decision-making body responsible for oversight and policy formulation and to introduce collegiality in executive management. Amendments of the central bank legal framework are needed to safeguard the central bank’s autonomy and enhance collegiality in executive management. The RBM will also need to strengthen its foreign reserves management practices.

65. Capacity Development (CD) will be critical in supporting the authorities’ reform efforts. Malawi’s capacity needs are guided by the priorities identified in Malawi’s Capacity Development Strategy, with due considerations given to absorption capacity (Annex IV). The CD will focus on cash management and reporting within the broad area of PFM; implementing domestic revenue mobilization strategy; improving foreign exchange reserve management; foreign exchange market development; improving central bank operations; and improving necessary trade and monetary and financial statistics; and strengthening debt recording to pave the way for expanding coverage of fiscal and public sector debt statistics to the broader perimeter of government.

66. Data provided to the Fund have some shortcomings that are serious and significantly hamper surveillance, despite steady improvements in reporting of macroeconomic statistics. On Malawi’s GDP rebasing, staff stress the need to enhance the quality of rebased GDP numbers by improving data sources; reconciling GDP by production and by expenditure approach, and introducing a revision policy in line with international standards (Annex VIII). To strengthen reserve accounting practices the RBM has started to implement the STA TA mission’s recommendations on Standardized Report Forms (SRF). The authorities started regular reporting of SRFs to IMF. Public dissemination of which is expected to begin by end-December 2021. Residual issues remain, and STA remains engaged with the authorities to address them.

Staff Appraisal

67. Malawi’s economy has been severely affected by the pandemic and debt burden. However, 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. Inflation is expected to increase to 9 percent in 2021 from 8.6 percent in 2020, driven by increases in prices for fuel, fertilizer and food, leaving per capita growth in the negative region.

68. Economic growth is projected to recover to reach a small positive per capita growth, but this outlook is predicated on the assumption that external financing from RDBs will continue and thus comes with risks. 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. Financing the vision faces challenges. Substantial development and social spending needs, a high debt burden, and much reduced budget support and other grants financing since 2013 are contributing to sustained fiscal and current account deficits in the medium term. 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.

69. Staff urge the authorities to take upfront policy adjustments to address Malawi’s macroeconomic imbalances. The financing gap is estimated at about 4–5 percent of GDP each year, and the external and public debt are assessed to be unsustainable under current policies. The large financing needs in the coming years and low level of 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 RCF assistance in 2020 and SDR allocation in 2021, the RBM’s reserve assets are projected to reach 1!/2 month of next year’s imports by end-2021. The main risk to this outlook is a sudden stop of available financing especially from RDBs, and if this 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.

70. Restoring debt sustainability would require both addressing the legacy unsustainable debt burden and a forward-looking anchoring of Malawi’s fiscal program at a minimum reaching a debt stabilizing primary balance so that it can return to a moderate risk of debt distress within the medium term. Malawi’s overall and external public debt are assessed to be at high risk of debt distress and unsustainable under current policies. In the near term, priority must be given to expenditure on COVID-19 containment measures and the administration of vaccines. Over the medium term, a strong fiscal adjustment program is needed to stabilize the public debt. Stabilizing public debt within the medium term is critical as delaying adjustment now will exacerbate the eventual adjustment needed. Redoubling efforts on domestic revenue mobilization, reprioritizing expenditure through curtailing growth in wages while safeguarding capital spending, reforming the Affordable Input Program (AIP) and goods and services; and reducing non-critical spending would help in this regard. Moreover, sizeable 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. Realism in budget forecasts and public financial management (PFM) reforms would help contain fiscal deficits and debt.

71. The RBM should stand ready to tighten monetary policy in the face of inflationary pressures and remain vigilant on financial sector supervision. To mitigate the adverse impact of COVID-19, RBM adopted an accommodative monetary policy in 2020. Going forward, the monetary program needs to remain anchored on containing reserve money growth and the RBM should remain vigilant to inflationary pressures and stand ready to tighten monetary policy. The RBM should also monitor the RBM’s and commercial banks’ exposures to the government securities as public debt held by the banking sector is already high.

72. Allowing for greater flexibility in the exchange rate, containing external imbalances, and rebuilding reserves are critical in reducing Malawi’s vulnerabilities to external shocks. Malawi’s external position is assessed to be substantially weaker than the level implied by economic fundamentals and desirable policies. Allowing for greater exchange rate flexibility, and strengthening monetary and fiscal policy, are needed to address foreign exchange shortages and potential inflationary pressures. The surrender requirement reintroduced to address foreign exchange shortages is appropriate only as a temporary measure to address extraordinary circumstances and should be lifted as conditions improve. A well-functioning and transparent foreign exchange interbank market and a foreign exchange reserve management strategy that clarifies the RBM’s objectives are also critical. Moreover, there are potential noncomplying disbursements under the 2018 ECF arrangement 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. The governance structure under which risks to its reserve position are assessed and managed should be guided by recommendations of the recent IMF Safeguards Assessment.

73. Strengthening public sector governance and institutions would help safeguard scarce resources and strengthen policy effectiveness. At the Ministry of Finance and other MDAs, enhancing a robust cash management and control system of the national budget is critical. The publication of comprehensive fiscal reports can also help to further enhance budget transparency and accountability. Moreover, strengthening debt management, monitoring and recording and reporting are critical to boosting public confidence. At the RBM, governance and control issues identified by the recent IMF Safeguards Assessment report, in particular, enhancing the Board’s oversight of foreign exchange reserve management as well as improving the frequency and quality of data is important going forward.

74. The post-financing assessment (PFA) concludes that Malawi’s capacity to repay the IMF is weak under current policies. The assessment reflects Malawi’s challenging financing conditions and significant financing needs. It serves to highlight the urgent need to restore debt sustainability, undertake appropriate policy reforms that rebuild fiscal and external buffers and secure support from development partners.

75. Data provided to the Fund have some shortcomings that are serious and significantly hamper surveillance. Staff welcomed the increased availability of statistics, especially in the monetary and national accounts. Further efforts across other areas, particularly consolidated fiscal statistics and balance of payments data, especially of foreign exchange reserves data, would be helpful and the IMF stands ready to support these efforts through technical assistance.

76. It is recommended that the next article IV consultation takes place on the standard 12-month cycle.

Figure 1.
Figure 1.

Malawi: Recent Economic Developments, 2000–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Sources: Reserve Bank of Malawi; Ministry of Finance; and IMF staff estimates.
Figure 2.
Figure 2.

Malawi: Fiscal Developments and Outlook, 2014–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Sources: Ministry of Finance; and IMF staff estimates.
Table 6.

Malawi: Indicators of Capacity to Repay the Fund1, 2021–34

(In millions of SDR, unless otherwise indicated)

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Source: IMF staff projections, financing support from the IMF CCRT is recorded as a grant for debt relief.

Annex I. External Stability Assessment

The external position in 2020 was substantiality weaker than the level implied by medium-term fundamentals and desirable policies.

Overall Assessment: The external position in 2020 was substantially weaker than the level implied by medium-term fundamentals and desirable policies, after considering the impacts from COVID-19 pandemic and natural disaster adjusters.1 The current account deficit expanded from 12.6 percent of GDP in 2019 to 13.6 percent in 2020, resulting mostly from a significant decline in exports whereas a slight import compression. For 2021, staff expects an only marginal improvement in the current account deficit, reflecting a slight recovery in exports although still far below from the pre-COVID level, along with imports remaining almost at the level of 2020. Gross reserves declined significantly, by close to US$200 million, to US$ 565.5 million at the end of 2020. It continued a declining trend during the first half of 2021. The adequacy of reserves level based on a model for credit constrained economies reveals 3.9 months of imports coverage. The CA model based REER assessment shows a large overvaluation, despite continued depreciation in most of months in 2020. Depreciation, at a very slow pace, continues in 2021. (Text Table 1).

Malawi: Model Estimates for 2020 (in percent of GDP)

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Additional cyclical adjustment to account for the temporary impact of the pandemic balances (-0.85 percent of GDP) and on tourism (-0.31 percent of GDP).

Cyclically adjusted, including multilateral consistency adjustments.

1. Current account deficits widened as tobacco exports stagnated. The widening of the current account deficit in 2020 came mostly from an expansion of trade deficits, due to a significant decline in exports whereas a leveling-off of imports. Declines in exports reflect both a slowdown in goods trades due to the COVID-19 pandemic as well as a dragging impact from the U.S. ban on imports of Malawi’s tobacco that was in effect between November 2019 and August 2020 (Text Figure 1).

2. On the imports side, fuel (petroleum products, paraffin, diesel, coal) and fertilizers are the main goods of strategic imports, and historically they account for around 18 percent of total goods imports. Regarding fuel imports, the import volume has seen an uptick since 2015 (a year with a drought) and, after a slight decline in 2019, saw a largest increase (close to 350 million liters) in 2020. Increasing fuel imports reflects the government’s energy strategy to meet increased electricity demand: however, the pace of fuel imports does not seem to align with a shift in energy supply mix. In addition, implied consumption is not consistent with the import values. The government expects a further increase in fuel imports as a shift from biomass to other biofuels accelerates.

3. Malawi experienced droughts from 2012 to 2013, and between 2015 and 2018, affecting 1.9 million people during the time. In those years, flood episodes occurred in other parts of Malawi. Imports value, as well as volume of fertilizers show a steady and significant increase since 2016, after a large drop from 2014 to 2015. The decline in import volume in these years, out of a drought, cast doubt on inventory of fertilizers (at the national level). The year 2020 saw a significantly large value and volume of imports, which might have to do with inventory pileup and/or subsidy related imports. Although the government foresees continuing of imports increase, the cost of imports needs deliver results such as an increase in agricultural production or an expansion of agricultural export diversity.

4. Overall, a well-calibrated fiscal and external adjustment supported by a feasible financing mix will be necessary to address Malawi’s macroeconomic imbalances. Further fiscal consolidation to provide room for imports financing, as well as a gradual exit from taking open swap positions, more exchange rate adjustments, and the resumption of tobacco exports to the United States would be necessary to correct external sector imbalances. Given the level of external debt vulnerabilities, taking immediate and upfront actions to restore debt sustainability is also important.

Figure 1.
Figure 1.

Malawi: Strategic Imports of Fuel and Fertilizers

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawi Authorities (2021), Malawi National Energy Policy (2018), Staff Calculations.

Annex II. Risk Assessment Matrix1

(Scale – high, medium, or low)

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Annex III. Implementation of the 2018 Article IV Recommendations

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Annex IV. Capacity Development Strategy

Context

1. President Chakwera was elected and took office in June 2020. In January 2021, the new authorities launched their long-term development vision, Malawi 2063, which articulates their commitment to implement policies to entrench macroeconomic stability and help to achieve higher, more inclusive, and durable growth by investing in human capital, building resilience to climate change while preserving debt sustainability The authorities aim to restore macroeconomic stability through a reform agenda focused on tackling governance weaknesses and strengthening PFM and cash management.

2. Past TA and training from the IMF supported the authorities’ reforms and helped to build capacity. PFM TA to the Ministry of Finance has enabled the authorities to commence reforms in the critical areas of bank reconciliation, payment efficiency, in-year and year-end financial reporting, budgeting, expenditure control, cash management, SOE oversight, public investment management, preparing for rolling out the new IFMIS and management of fiscal risks. However, more effort is needed to make progress on the implementation the new IFMIS and cash management and to improve the quality, analysis, use and publication of available information. TA to the Reserve Bank of Malawi on financial sector supervision and FPAS TA on forecasting and inflation and monetary policy analysis to support modernizing its monetary policy framework have gained traction and yielded results. Lastly, on statistics, TA helped Malawi to start progress towards improving the quality and regular reporting of data on national accounts, monetary, BOP, government finance and financial statistics.

CD Strategy and Priorities

3. Going forward, the CD strategy for Malawi should focus on supporting the proposed program and the authorities’ objectives outlined in Malawi 2063 Vision. Specifically, in the PFM area, the strategy will build upon recent PFM reform efforts to ensure that expected gains in budget preparation, cash management, commitment control, banking arrangements, accountability and payment efficiency are delivered from the government’s investment in the new IFMIS. It will be important that lessons learned from the new IFMIS piloting phase launched in July 2020 are applied to ensure that the full IFMIS rollout meets efficiency, security, expenditure control, accountability, and sustainability objectives. On the revenue side, TA will support the authorities’ renewed energy to implement tax policy and revenue administration reforms, focusing on the quantification and implementation of the new Domestic Resource Mobilization (DRM) strategy starting in the FY2021/22. Together, efforts to improve PFM and DRM will be critical for strengthening the fiscal path, recovery from the impact of the COVID-19 pandemic and managing the fiscal risks. TAto the Reserve Bank of Malawi (RBM) will be tailored to deepen interbank foreign exchange market and to improve foreign exchange reserve management given the need to rebuild official foreign exchange reserves. Improving the timeliness, quality and coverage of statistics will remain critical to supporting sound policymaking and monitoring performance under the proposed ECF. The focus will be on monetary and financial statistics in standard reporting format, improving the compilation methodologies and metadata for national accounts, establishing a GDP revision policy, improving BOP statistics, broadening the coverage of fiscal statistics to the public sector, and expanding sectoral and instrument coverage of public sector debt statistics. The CD strategy will also support TA that strengthens the capacity of the National Audit Office. This strategy is closely aligned with the previous CSN developed in September 2020. It is expected that FAD, LEG, MCM, and STA will continue to provide a significant amount of TA which would continue to be delivered to a large extent by AFRITAC East and the resident FAD advisors. The engagement strategy will consider varying absorption and implementation of TA across institutions and work streams, working closely with other development partners.

Key Overall CD Priorities Going Forward

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Authorities’ Views

The authorities are in broad agreement with staff on CD priorities. The authorities expressed interest in priority arears related to Malawi’s Domestic Revenue Mobilization Strategy (DRMS), which include financial modelling to forecast revenue from the extractive sector; specifically forecasting revenues for the two prospective mining investment ventures and the ongoing investment in gold mining. In addition, the authorities are interest in capacity development focused on tax expenditure reporting to inform the Ministry of Finance implementation of the incentives scheme and exemptions.

Annex V. Country Engagement Strategy

This forward-looking engagement strategy takes stock of fragilities faced by Malawi; provides an assessment of the IMF’s engagement with the country since the 2013 Cash gate scandal—including successive ECF arrangements; and lays out priorities for IMF engagement. The strategy anchors on a possible successor ECF arrangement on restoring macroeconomic imbalances and aligned with the authorities’ long-term development plan (Malawi Vision 2063).

1. Malawi has been supported by the international community including the IMF over the past decades and yet the exit from fragility is not in sight. The international community continued to support Malawi through budget and off-budget support, and project financing: the total official development assistance (ODA) is estimated to have averaged US$1.1 billion or 12 percent of GDP during 2005–20. Sustaining Malawi’s growth in the past decade, however, has been challenging, partly due to frequent natural disasters (H3). As a result, GDP growth barely kept up with population growth, leaving per capita income stagnant. Moreover, the exit from fragility is not in sight as the debt burden is projected to increase and crowd out private sector investment and to hinder medium-term economic prospects.

Text Figure 1.
Text Figure 1.

Malawi: Official Development Assistance, 2005–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Sources: OECD database on Official Develop merit Assistance; Ministry of Finance; and IMF Staff estimates.

2. Malawi suffers from social and institutional fragility.1 Malawi has not experienced significant conflict since 1993 but has the 3rd lowest per capita GDP in sub-Saharan Africa (SSA) (Text Figure 2). The incidence of poverty and food insecurity in Malawi is amongst the highest in the world; human development indicators rank amongst the lowest—especially gender-based violence, early marriages, and maternal health; and less than 20 percent of Sustainable Development Goals (SDGs) have been met. These challenges are compounded by weak governance, and poor quality of public administration combined with limited fiscal space and high public debt which weigh on the government’s ability to effectively implement policies; especially those targeted at improving incomes and living standards across the population.

Text Figure 2.
Text Figure 2.

Malawi: Social Indicators, 2010–2020

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: World Bank database, Global Hunger Index, and Human Development Index.

3. External shocks—including the current COVID-19 pandemic and frequent climate change shocks—risk derailing macroeconomic stability, efforts to boost growth, and institutions building. Over the past two decades, Malawi has had at least one climate shock every year (Text Figure 3). These shocks are often severe. For example, the El Nino-induced drought, resulted in nearly 40 percent of the population becoming food insecure (almost half of whom were children). Major droughts, floods, and now the fallout from the COVID-19 pandemic weigh heavily on economic activity and incomes. With each shock, tax revenues decline at a time when fiscal spending needs to mitigate the impact of the shock are high; inflationary pressures rise, particularly when corps are destroyed; international reserves pressures rise (even when exchange rate flexibility is applied); and the capacity to implement reforms is jeopardized—especially during the COVID-19 pandemic.

Text Figure 3.
Text Figure 3.

Malawi: Extreme Weather Events and Growth, 2000–20

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: EM-DAT database; and IMF staff estimates.

Sources and Consequences of Fragility

4. Malawi’s fragility stems primarily from several critical factors which present challenges for sustaining inclusive growth and improving social indicators.2 These include:

  • Inadequate investment in human capital development, especially education, to support inclusive and resilient growth. Poverty and inequality remain high in Malawi (111 above and Text Figure 1) which is further complicated by challenges related to raising educational attainment in Malawi. These include low school attendance rate, high repetition, and drop-out rates, especially for girls, partly due to early child marriage. The government has stepped up efforts to eliminate child marriage—affecting 42 percent of girls—and violence against women and children through changes in the legal framework and government intervention programs supported by development partners. However, it takes time to change behavioral patterns (Annex VI).

  • Dependence on rain-fed agriculture and lack of crop diversification. Two thirds of the population are employed in agriculture (primarily maize farming), contributing to about 30 percent of GDP. Each weather-related shock risks failure of major staple crops such as maize, contributing directly to rural poverty and indirectly to urban poverty—where food shortages result in food price inflation across the country while incomes decline in manufacturing and retail trade sectors that are closely linked to agriculture. Crop diversification and erosion protection are critical to boosting agricultural productivity. Malawi’s agricultural exports— tobacco, tea, and sugar (about 80 percent of Malawi’s agricultural exports)—are slightly more resilient to weather shocks than maize but they are vulnerable to shocks in global prices (Annex I).

  • Insufficient infrastructure, especially in electricity, irrigation, and transport to support economic activity. Frequent and lengthy electricity shortages disrupt economic activity. Malawi’s dependence on hydroelectricity is a root cause which calls for diversifying the energy mix towards solar, and wind power (Annex VII). In addition, poor coverage of irrigation systems to support the agriculture sector, and inadequate water sources creates shortages for households. Moreover, limited transport infrastructure and trade logistics pose significant challenges for this landlocked country, including high transport costs weighing on farmers and businesses. Maintenance of poorly constructed and heavily used roads crowds out government spending on other infrastructure.

Annex VI. Raising Educational Attainment in Malawi

Malawi has an abundant youth population. Increasing quality and quantity of education in Malawi will turn the growing generation into a key driver to achieve sustained and inclusive long run growth.

1. Human capital is critical for boosting inclusive growth. At an individual level, education raises productivity, diversifies sources of income, and, in turn, earnings potential, resilience to shocks, and standards of living—reducing inequalities. From a macroeconomic perspective, education improves the knowledge and skills of workers, which increases labor productivity, global competitiveness, and ultimately, long-run economic growth.

2. In Malawi, school attendance rates drop sharply with age. Enrollment drops between primary and secondary school. Net enrollment rate is 90 percent for primary school but merely 15 percent for secondary school—the large gap in primary and secondary enrollment rates is due to low primary completion rates (52 percent) and low transition rates (38 percent) to secondary school. (Text Figure 1).

Text Figure 1.
Text Figure 1.

Malawi: Selective Indicators of Education, 2016–18

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawi Education Management Information System (EMIS).

3. Malawi suffers from high repetition rate and drop-out rate. Around 90 percent of children at primary school age attend primary school standard 1 (the first year of school). However due to high repetition rate (33 percent for stdl) and drop-out rate, by the time they reach standard 5 (representing completion of the first half of primary school), the probability of attending the next standard declines to about 50 percent of standard 1. Anecdotal evidence suggests the reasons behind this are a combination of insufficient teacher resources dedicated to those children who need more attention and poor attendance—notably, high repetition rates at earlier ages may demotivate children from attending school (Text Figure 1).

4. Malawi’s pupil-teacher ratio is high and is anticipated to worsen to 80 percent in secondary school if number of teachers remains the same (Text Figure 2). Malawi’s pupil-teacher ratio is twice higher than that of world average for primary school and four times higher than that of world average for secondary school. The pupil teacher ratio has improved somewhat from 2010 to 2018 for primary school but it has worsened for secondary school since 2015. Improving quality of teaching could have synergistic effect by cutting repetition and drop-out rates and reducing pupil teacher ratio in primary school, leading to positive spillover to secondary school attendance rate.

Text Figure 2.
Text Figure 2.

Malawi: Pupil-Teacher Ratios, 2010–18

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: United Nations (2010-18). Human Development Index.Source: United Nations (2010-18). Human Development Index; and IMF staff projections.

5. In secondary school, the dropout rate for girls is more than double that of boys due to marriage and pregnancy. Girls fare better than boys in primary school but then dropout before reaching secondary school. The lack of financial capacity (or wealth), especially to pay school fees was reported as the main reason for dropping out both for boys and girls. Marriage (usually decided by the father) and pregnancy were the next most important factors for girls—3 times more girls than boys indicate marriage as the reason for dropping out and 15 times more girls indicate pregnancy, especially for secondary school attendance. These factors along with family responsibilities also played a role, but for boys much less so.

Text Figure 3.
Text Figure 3.

Malawi: Dropouts by grade and reason, 2018

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

6. Recent household survey shows that income and wealth of households critically affect school attendance, highlighting the importance of the affordability of education. Empirical analysis using the Fourth Integrated Household Survey shows that income (proxied by consumption, access to credit) and wealth (proxied by homeownership and the education level of parents) are critical determinants of school attendance; for example, the father’s education level which is a good proxy of household income and asset, is the strongest predictor for both primary and secondary school attendance. In this regard, the government’s elimination of school fees is a step in the right direction. Maintaining positive per capita income growth at the macroeconomic level, supporting poorer families for ancillary costs (e.g., uniforms, books), expanding the social cash transfer system would also be important.

Annex VII. Fostering Climate Change Resilience and Inclusive Growth

Climate change impedes Malawi’s sustained growth. Cost-effective investment in alternative energy sources to fuelwoods and human capital is critical in promoting resilience to climate-related shocks and inclusive growth.

1. Malawi is vulnerable to increasingly frequent and unpredictable climate-induced natural disasters, such as droughts, floods, and extreme storms. Between 1980 and 2020, Malawi experienced eight episodes of droughts, leaving a dark history of hunger, food insecurity, and loss of lives. Floods are also increasing with 30 episodes in the past two decades. Epidemics, often associated with storms and floods, also rose in the 2000s but subsided in the 2010s. In 2019, heavy rainfall in the Northern region triggered a deadly landslide.

2. Natural disasters have lasting impact on growth. An event study finds that real GDP growth does not return to the pre-disaster rate despite increases in domestic capital spending (Text Figure 2).1 Droughts and severe precipitation, hurt the economy by ravaging both physical and human capital, depressing productivity even in the medium-term. Agriculture households are especially hard hit from income loss, deterioration of farmland, destruction of household property, and food insecurity. Flooding from extreme precipitation may also trigger an epidemic, such as cholera or malaria, through contamination of water supply and stagnant water that serves as a breeding ground for disease harboring mosquitos. Although rebuilding efforts usher economic recovery, fiscal responses stretch government resources, highlighting the macro-criticality of climate change in Malawi.

Text Figure 1.
Text Figure 1.

Frequency of Natural Disasters

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Sources: EM-DAT; and IMF staff calculations.
Text Figure 2.
Text Figure 2.

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

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: EM-DAT: The Emergency Events Database. Background paper “Malawi: Building Resilience to Climate Change” By M. Farahbaksh with inputs from F. Gwenhamo, E. Endengle, A. Lagerborg, E. Mensah, M. Wang, J. Yao, and G.Zinabou.
uA001fig01

Malawi: Energy Mix, 1975–2009

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

3. Malawi has a long history of reforestation efforts dating back to 1920s and yet has had little success for various reasons. Deforestation compounds the effect of climate change by diminishing natural protection to floods and landslides, and yet deforestation continues in Malawi (Text Figure 3) for a number of reasons. On the demand side, fuelwood continues to be the primary energy source used by households and the tobacco industry (Text Figure 4). Forest thinning is also aggravated by agriculture land clearing and forest fires. On the supply side, reforestation efforts of the government and international organizations have failed for a number of reasons (the Coordination Union for Rehabilitation of the Environment, 2010; Walker, 2004): (i) lack of sustained political support, (ii) lack of funding, (iii) facilitation of illegal timber, allocation of logging plots, production and trafficking of charcoal, (iv) lack of low-cost alternative energy sources to fuelwoods, and (v) lack of support by farmers who need to prioritize food security and other valuable resources such as, fruit, timber, fiber, and medicine.

Text Figure 5.
Text Figure 5.

Reduction in Impact of Disasters on Per Capita Annual Medium-Term Growth if Malawi’s Structural Factors Are Improved to the Emerging and Developing Economy Average

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Sources: Sources: World Bank, World Development Indicators; and IMF 2020. Background paper “Malawi: Building Resilience to ClimateChange” By M. Farahbaksh with inputs from F. Gwenhamo, E. Ehdengle, A. Lagerborg.E. Mensah, M. Wang,J. Yao, and G. Zinabou.

4. Cost-effective investment in alternative energy sources to fuelwoods and human capital is critical in promoting resilience to climate-related shocks and inclusive growth. Promoting alternative energy sources is important but it needs to be sustainable and cost effective given the fiscal situation. Alternative energy sources need to move away from firewood and charcoal— which aggravates deforestation, land degradation, and vulnerability to floods, landslides leading to food insecurity— and towards sustainable power generation mix, guided by Malawi Renewable Energy Strategy (2017). Education is also shown to alleviate the extent per capita income would decline during storms (Text Figure 5), as it can support the population through income diversification toward off-farm agriculture activities and non-agriculture sources. A more conscious approach to population growth through education can also ease food security concerns and support conservation efforts. Finally, education can increase effectiveness of early warnings thereby improving disaster preparedness (Annex VI).)

Annex VIII. National Accounts Rebasing

In October 2020, the National Statistics Office (NSO) of Malawi completed and published the 2017 rebased Gross Domestic Product (GDP) using the production approach. This was supported by two TA missions conducted in November 2019 and July 2020. In December 2020 and January 2021, two IMF follow-up TA missions assisted the NSO to compile GDP by expenditure, considering the newly rebased GDP by production. The TA missions were unable to fully assess the quality of the recently rebased estimates, and a follow-up mission is planned in November 2021. Moving forward, the TA mission recommendations included: improving data sources; reconciling GDP by production and by expenditure and introducing revision policy in line with international standards.

1. As a result of the 2017 GDP rebasing, Malawi nominal GDP level for 2017 increased by 38.4 percent, bringing revenue-to-GDP, public and external debt-to-GDP ratios down to 14.9 percent, 49 percent and 22.7 percent, respectively. Malawi updated the base year from 2010 to 2017 for computing national accounts constant price estimates. The rebased GDP expands the coverage of the National Accounts and draws upon improved data sources. The coverage expanded with the use of the 2016/17 Census of Economic Activities (CEA), which had been conducted for the first time in Malawi. Other data sources include the 2018 Population and Housing Census (PHC) and the 2016/17 Integrated Household Budget Survey (IHS), the 2016 Survey of Non-Profit Institutions Serving Households and administrative sources. (Text Figure 1).

Text Figure 1.
Text Figure 1.

GDP Rebasing: Shift in Key Indicators

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawian authorities; and IMF staff calculations.

2. The GDP rebasing altered the compositional shares of industries in GDP away from traditional industries. Under the 2017 rebased GDP, the shares of agriculture, forestry and fishing, wholesale and retail trade, and real estate industries have decreased by 8.4 percentage points. Among the seven industries that comprise 75 percent of Malawi’s GDP, the shares of manufacturing, financial and insurance activities, and information and communication, increased by 3.5 percentage points (Text Figure 2).

Text Figure 2.
Text Figure 2.

Compositional Share of GDP, 2017

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A001

Source: Malawi authorities and IMFstaff calculations.

3. Rebased GDP by production and by expenditure has a discrepancy of around 14 percent, highlighting the importance of reconciliation of the two measures. Estimates for the 2017 rebased GDP are MK 6.5 billion by production approach and around MK 5.6 billion by expenditure approach. The TA mission in January 2021 found that the value added in most activities is overestimated after comparing between the 2017 rebased GDP by production and the CEA 2017 estimates.

4. To ensure reconciliation between the production and expenditure approaches of the 2017 GDP rebasing and in line with best practices, the TA mission recommended the following:

  • Data sources improvement, (i) Obtain data sources for GDP estimates after 2017, particularly from annual ad-hoc small-scale sample surveys and administrative sources. Data from CEA 2017 and IHS 2016/17 are limited after 2017. (ii) Conduct a household survey to estimate own-account construction value. This estimate is missing from the newly rebased GDP by production and expenditure and is expected to impact the GDP level due to its large share, (iii) Obtain and use tax data from the Malawi Revenue Authority (MRA) as the main source of information on economic units in estimating annual GDP series.

  • Reconciliation of the GDP estimate using the production and expenditure sides. The TA mission recommended to the NSO to finalize the GDP by expenditure and revise the GDP by production estimates, thereby narrowing the gap between the two GDP measures.

  • Revision analysis and announcement. In line with international best practices, the TA recommended informing users when the revised data will be published and provide a revision analysis commentary why revisions are necessary and justified.

The NSO requested a series of technical assistance and agreed to expand data sources and to improve the compilation of data components, reconcile GDP by production and by expenditure, and introduce revision policy in line with international standards.

Annex IX. Implementation of Governance Commitments under 2020 RCFs

Please see below summary of governance commitments under the 2020 RCFs and update to the status of implementation of these commitments .

article image
article image
1

“Cashgate”, a major corruption case that led to arrests, trials and convictions of a number of civil servants.

2

The officials included key personnel at the central bank, cabinet, and public procurement office.

3

IMF Country Report No. 19/361 projected real GDP growth to decline by 3.9 percentage points from 4.5 percent in 2019 to 0.6 percent in 2020.

4

GIR figures reported in this staff report include encumbered deposits, which will be excluded once an audited numbers become available.

5

The 2020 External Sector Assessment adjusts for the impact of COVID-19 pandemic and natural disasters.

6

The adequate level is estimated at 3.9 months of next year’s imports according to the staff’s reserve adequacy model for credit constrained economies.

7

The pandemic-specific factors are incorporated in addition to the standard fiscal multiplier (0.6) for 2022–23.

8

Malawi had external arrears outstanding to Spain and the Trade Development Bank (TDB) as of end 2020. The authorities have been engaged in good faith negotiation in 2021 with both creditors and repayments have started payments an agreed schedule: (i) repayments to Spain started in May 2021 and will continue to November 2023; and (ii) the authorities met their debt obligations to TBD up to April 2022.

9

The debt-stabilizing primarybalancein2026 under the reform scenario isO percent of GDP.

10

The debt-stabilizing primarybalancein2026 under the baseline scenario is 1½ percent of GDP. The primary deficit is projected at 5½ percent of GDP in 2025/26, which makes the size of adjustment needed to restore debt sustainability at 7 percentage points of GDP.

11

Under the baseline, the AIP remains broadly unchanged between FY2021/22 and FY2022/23 in level terms. However, the annualization to account for a 9-month fiscal year for FY2021/22 inflates the size of the AIP and other agriculture-related payments as a percent of GDP, since these payments are concentrated in one quarter.

12

The latest Debt Management Performance Assessment (DeMPA) by the World Bank was conducted in 2019.

13

Data may need revisions once COVID-19-related forbearance data become available.

14

The measure is being assessed by Staff as to whether it constitutes a capital flow management measure (CFM) according to the Fund’s the Institutional View and a multiple currency practice (MCP) under Article VIII.

15

The non-interest current account deficit that stabilizes debt in 2026 under the reform scenario is 7 percent of GDP.

16

The measure is being assessed by Staff as to whether it constitutes a CFM according to the Fund’s the Institutional View.

17

The section reports on the discussion under the Post Financing Assessment (PFA) policy which was initiated for Malawi on November 30, 2021. For a description of the PFA policy, see Policy Paper No. 2021/026.

18

On September 24, 2020, the newly appointed government canceled the ECF arrangement. At the time of cancelation of the ECF, SDR 53.85 million were disbursed. The authorities requested a new four-year ECF arrangement that would be better aligned with Malawi’s growth strategy’ Vision 2063’.

1

Additional adjustment to strip out transitory COVID-19 impacts, incorporated for 2020 ESA was -1.2 percent.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probabilitybetween30and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discuss ions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.

1

Malawi is classified as a fragile state by the IMF, where a country is considered fragile based on having either (i) weak institutional capacity measured by the World Bank Policy and Institutional Assessment (CPIA) score averaging 3.2 or lower (Malawi’s average is 3.2); and/or (ii) experience of conflict signaled by the presence of a peace-keeping or peace-building operation in the most recent three-year period (Malawi has had neither). According to the World Bank’s definition, Malawi is not a fragile state as the CPIA threshold applied by the World Bank is an average score of 3.0 or lower (https://www.worldbank.orq/en/topic/fraqilitvconflictviolence/brief/harmonized-list-of-fraqile-situations).

2

IMF Country Report 18/116 present the analysis that led to the derivation of these factors. Detailed policy measures to address these challenges are elaborated in the National Resilience Strategy (NRS) 2018-30.

1

The event study considers natural disasters that results in damage and losses of at least 0.5 percent of GDP. The before and after episodes are calculated using the two-year average value relative to the occurrence of the event.

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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
  • <sup><xref ref-type="fig" rid="RA001fig01">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Extreme Weather Events and Growth, 2000–20

  • <sup><xref ref-type="fig" rid="RA001fig02">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Malawi: Challenges Confronting a Fragile State, 2005–21

  • <sup><xref ref-type="fig" rid="RA001fig03">Text Figure 3.</xref></sup>
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    Text Figure 3.

    Malawi: REER and Current Account Balance, 2012–21

  • <sup><xref rid="RA001fig04" ref-type="fig">Figure 1.</xref></sup>
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    Figure 1.

    Malawi: Recent Economic Developments, 2000–21

  • <sup><xref rid="RA001fig05" ref-type="fig">Figure 2.</xref></sup>
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    Figure 2.

    Malawi: Fiscal Developments and Outlook, 2014–21

  • <sup>Figure 1.</sup>
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    Figure 1.

    Malawi: Strategic Imports of Fuel and Fertilizers

  • <sup><xref ref-type="fig" rid="RA001fig07">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Official Development Assistance, 2005–21

  • <sup><xref ref-type="fig" rid="RA001fig08">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Malawi: Social Indicators, 2010–2020

  • <sup><xref ref-type="fig" rid="RA001fig09">Text Figure 3.</xref></sup>
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    Text Figure 3.

    Malawi: Extreme Weather Events and Growth, 2000–20

  • <sup><xref ref-type="fig" rid="RA001fig10">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Selective Indicators of Education, 2016–18

  • <sup><xref ref-type="fig" rid="RA001fig11">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Malawi: Pupil-Teacher Ratios, 2010–18

  • <sup>Text Figure 3.</sup>
    View in gallery
    Text Figure 3.

    Malawi: Dropouts by grade and reason, 2018

  • <sup>Text Figure 1.</sup>
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    Text Figure 1.

    Frequency of Natural Disasters

  • <sup><xref ref-type="fig" rid="RA001fig14">Text Figure 2.</xref></sup>
    View in gallery
    Text Figure 2.

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

    (in percent of GDP unless otherwise indicated)

  • View in gallery

    Malawi: Energy Mix, 1975–2009

  • <sup>Text Figure 5.</sup>
    View in gallery
    Text Figure 5.

    Reduction in Impact of Disasters on Per Capita Annual Medium-Term Growth if Malawi’s Structural Factors Are Improved to the Emerging and Developing Economy Average

  • <sup><xref ref-type="fig" rid="RA001fig16">Text Figure 1.</xref></sup>
    View in gallery
    Text Figure 1.

    GDP Rebasing: Shift in Key Indicators

  • <sup><xref ref-type="fig" rid="RA001fig17">Text Figure 2.</xref></sup>
    View in gallery
    Text Figure 2.

    Compositional Share of GDP, 2017

Text Figure 1.

Malawi: Extreme Weather Events and Growth, 2000–20
Text Figure 2.

Malawi: Challenges Confronting a Fragile State, 2005–21
Text Figure 3.

Malawi: REER and Current Account Balance, 2012–21
Figure 1.

Malawi: Recent Economic Developments, 2000–21
Figure 2.

Malawi: Fiscal Developments and Outlook, 2014–21
Figure 1.

Malawi: Strategic Imports of Fuel and Fertilizers
Text Figure 1.

Malawi: Official Development Assistance, 2005–21
Text Figure 2.

Malawi: Social Indicators, 2010–2020
Text Figure 3.

Malawi: Extreme Weather Events and Growth, 2000–20
Text Figure 1.

Malawi: Selective Indicators of Education, 2016–18
Text Figure 2.

Malawi: Pupil-Teacher Ratios, 2010–18
Text Figure 3.

Malawi: Dropouts by grade and reason, 2018
Text Figure 1.

Frequency of Natural Disasters
Text Figure 2.

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

(in percent of GDP unless otherwise indicated)

Malawi: Energy Mix, 1975–2009
Text Figure 5.

Reduction in Impact of Disasters on Per Capita Annual Medium-Term Growth if Malawi’s Structural Factors Are Improved to the Emerging and Developing Economy Average
Text Figure 1.

GDP Rebasing: Shift in Key Indicators
Text Figure 2.

Compositional Share of GDP, 2017