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:
result GDP growth; GDP deflator; burden indicator; tobacco export; financing mix assumption; Debt sustainability analysis; Debt burden; Debt service
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MALAWI

Abstract

MALAWI

Title page

MALAWI

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS

November 30, 2021

Approved By

Vivek Arora and Bjoern Rother (both IMF), Marcello Estevao and Asad Alam (both IDA)

Prepared by the International Monetary Fund and the International Development Association.1

Malawi: Joint Bank-Fund Debt Sustainability Analysis2

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In comparison to the previous Debt Sustainability Analysis (DSA), Malawi’s risk of external debt distress has been downgraded from moderate to high risk of debt distress and overall public debt has been maintained at high risk of debt distress. Granularity in risk rating has changed and staff now assess that the overall and external public debt are unsustainable under current policies. Large financing needs in the coming years and low level of international reserves suggest high risk of future distress. The change is due to significant debt vulnerabilities that emerged since the last DSA as reflected in large and protracted threshold breaches on one of two debt stock burden indicators and both of the debt service burden indicators. Debt burden indicators in this DSA (relative to the previous DSA) deteriorated due to: (i) a downgrade in the debt carrying capacity from medium to weak; (ii) a change in the definition that external debt is based on, from a currency to a residency basis, which accurately classifies and captures medium-term domestic bond held by nonresident as external debt; and (Hi) the conversion of the Reserve Bank of Malawi’s (RBM) short-term reserve liabilities to medium-term external debt.

Despite the challenging macroeconomic situation, the authorities remain committed to prioritizing debt service payments and Malawi remains current on all its debt obligations. Malawi has been severely affected by the pandemic. It is a fragile economy with elevated poverty rates, food insecurity and frequent weather-related shocks. Moreover, substantial development and social spending needs, a high debt burden from the past, and much lower budget support and grants financing are contributing to sustained fiscal and current account deficits in the near to medium term. Thus, total public debt is projected to increase over the near to medium term but at the same time, Malawi’s exposure to financing risks is significant. Staff assess the main risk to the baseline is a sudden stop of available financing especially from the regional development banks (RDBs).3 If this risk materializes, an abrupt forced adjustment becomes inevitable, with a significant impact on growth, financial stability and the most vulnerable segments of the population.

Public Debt Coverage

1. The DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government (Text Table 1).4 Public debt used for this DSA is public and publicly guaranteed (PPG) external and public domestic debt, covering debt contracted and guaranteed by the central government and the Reserve Bank of Malawi (RBM). Due to data limitations, it does not include debt held by state and local governments, other elements in the general government (such as the social security fund and extra budgetary funds), or non-guaranteed state-owned enterprise (SOE) debt.5

Text Table 1.

Malawi: Coverage of Public Sector Debt, 2020

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background

2. This DSA is being conducted in the context of the 2021 Article IV Consultation. The last Low-Income Country DSA (LIC-DSF) was considered by the Executive Board in October 2020 as part of the request for disbursement under the Rapid Credit Facility (RCF).6 Malawi is subject to the IDA Sustainable Development Finance Policy (SDFP) which is the successor of Non-Concessional Borrowing Policy (NCBP).7

3. Malawi’s sources of fragility are driven by high poverty rates, food insecurity and frequent weather-related shocks, leaving per capita income stagnant Malawi is one of the most vulnerable countries to climate change and has the third lowest GDP per capita in sub-Saharan Africa (Text Figure 1). Major droughts, floods, combined with the fallout from the COVID-19 pandemic weigh heavily on economic activity and incomes. These challenges are compounded by weak governance, and poor quality of public administration combined with limited fiscal space and high public debt. High public debt has, in turn, contributed to high real interest rates, which further weighs on lending to the private sector and growth. Thus, sustaining Malawi’s growth in the past decade has been challenging. As a result GDP growth barely kept up with population growth, leaving real per capita growth in the negative region. Moreover, exiting from fragility is not expected in the medium term as debt levels are projected to increase and crowd out private sector investment and to hinder medium-term economic prospects.

Text Figure 1.
Text Figure 1.

Malawi: Vulnerability to Climate Change Erodes GDP per Capita, 2019

(Index)

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

Source: Notre Dame Global Adaption Initiative; and IMF World Economic Outlook

4. Substantial development and social spending needs, a high debt burden from the past, and much lower budget support and grants are contributing to sustained fiscal and current account deficits in the near to medium term. Budget deficits have remained high, reflecting limited adjustment in spending and low domestic revenue mobilization. Deficits have been financed mainly by costly domestic borrowing, as external budget support and grants financing (that averaged 5.8 percent of GDP during 2005–13) have been reduced significantly (1.8 percent of GDP) since the 2013 “Cashgate”.8 Rising domestic financing (since 2018) as well as borrowing from regional development banks (RDBs) on non-concessional basis has significantly increased Malawi’s public debt which stood at 55 percent of GDP in 2020. Non-concessional external debt outstanding of 10 percent of GDP in 2020, mostly financed fuel, fertilizer, and other strategic imports (Text Figure 2; Text Table 2).

Text Figure 2.
Text Figure 2.

Malawi: Fiscal Challenges Confronting a Fragile Economy, 2005–21

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

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

Malawi: External Debt, 2020

(Thousands of U.S. Dollars, unless otherwise indicated)

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Sources: Malawian Authorities; and IMF staff calculations.

Debt stock on disbursement basis.

For arrears that existed at the end of 2020, the authorities engaged on a good faith negotiation and agreed on a new repayment schedule in 2021.

5. Regional Development Banks’ (RDBs’) participation in the domestic bond market increased the share of commercial debt to 33 percent of total external PPG debt The total external PPG debt stock reached $3.76 billion (33 percent of GDP) at end-2020, comprising two thirds of multilateral and bilateral concessional loans and the rest in commercial terms. Malawi had arrears to Spain and a non-official/commercial creditor at the end of 2020. The authorities have been engaged in good faith negotiations in 2021 with both creditors (Spain and TDB) and repayments have started based on agreed rescheduling: (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. (Text Table 2). The WB and IMF staffs received confirmation from the authorities that Malawi is current on all its external and domestic debt obligations, while there is no pending debt restructuring.

6. Moreover, near-term debt service is highly concentrated on non-official/commercial creditors. The downward revision to growth outlook and new external borrowings during 2018–20 have put pressure on debt service, though some of this pressure was alleviated as the debt relief became available from the Catastrophe Containment and Relief Trust (CCRT) and the G20 Debt Service Suspension Initiative (DSSI).9 Terms of borrowing from non-official sources are highly non-concessional (119). As a result near-term debt service is majority to non-official creditors; 79 percent and 72 percent of total debt service in 2021 and 2022, respectively (Text Table 3).

Text Table 3.

Malawi: External Debt Service, 2021–26

(Percent of total external debt service)

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Sources: The Malwian authorities; and IMF staff calculations.

7. External PPG debt has increased by a large margin in 2020, partly due to the conversion of the RBM’s short-term reserve liabilities to medium-term debt. External PPG debt increased from 27.7 percent of GDP in 2019 to 33 percent of GDP in 2020. In 2012, the RBM started using a three-year revolving trade credit facility with a cap of $250 million to meet foreign exchange needs for strategic imports such as fuel and fertilizers. As exports of tobacco continued to stagnate, however, the RBM began to face difficulties in staying within the US$250 million cap and began to use forex swaps with domestic and RDBs.10 As trade deficits continue to widen, the RBM faced difficulties in reversing currency swap open positions and staying within the cap of revolving trade credit facility. The RBM converted short-term currency swap open position to a medium-term forex facility of US$450 million at end June 2020, resulting in a sharp increase in external PPG debt.

Underlying Assumptions

8. The key macroeconomic assumptions have been updated from the DSA that accompanied the RCF request (the October 2020 DSA hereafter).11 In the absence of policy adjustment under the baseline scenario, it is assumed that the authorities’ fiscal and monetary policy stance will remain broadly status quo in the medium term, while mitigating the negative impact of COVID-19 predominantly in the near term: the fiscal domestic primary deficit will remain at about-3.2 percent of GDP; the reserve monetary growth will be anchored to achieve 6 percent by the end of the medium term; and the real effective exchange rate is projected to adjust by about 14 percent during the medium term. Changes to the underlying assumptions from the October 2020 DSA are as follows (Text Table 4):

Text Table 4.

Malawi: Underlying DSA Assumptions

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Sources: Malawian authorities and IMF staff calculations and projections.

Previous is October 2020 DSA recalculated with rebased GDP.

Fiscal data refers to fiscal year; e.g. 2021 = FY2020/21

  • The real GDP growth projection for 2021 remains unchanged from the October 2020 DSA at 2.2 percent.12 However, the real GDP growth path in the medium to long term has been revised down: by about 2 percentage points in the medium term and less in the long term. While improvements in agricultural productivity and the services sector will be important drivers of growth, this revised medium-term outlook depends critically on: (i) a sustained increase in public investment with strong fiscal multipliers of public investment; (ii) the maintenance of a fiscal deficit in the order 10 percent of GDP over the medium term (and external current account deficits of comparable size); and (iii) continued access to sizable and further growing RDBs financing as well as domestic borrowing to cover large financing gaps despite unsustainable debt (119). As a result, the debt burden will continue to grow, and it is projected to crowd out private investment and hinder medium-term economic prospects. The long-term outlook is predicated on the sustained increase in public investment leading to an increase in the economy’s potential output. Continuing to depend on non-concessional loans from the RDBs however comes with risks (1118).

  • Pressure on inflation is emerging. Headline inflation has increased from 7.6 percent at end-2020 to 8.9 percent at end-September 2021 partly due to currency depreciation and its passthrough effect on non-food inflation; food inflation remains above 10 percent despite a good harvest. CPI inflation is projected at 10 percent at end-2021 and about 7 percent at the end of the medium term provided that the monetary policy stance will be well anchored.

  • The exchange rate is projected to gradually adjust in real term in the medium term. Unlike the current baseline, no REER adjustment was assumed under the second RCF. The nominal exchange rate has been kept stable since 2016 and has contributed to appreciating the currency by about 30 percent in real terms. The RBM has been allowing for greater flexibility in the nominal exchange rate since the summer 2020 but only gradually and it has continued to appreciate in real term. The baseline assumes that the real effective exchange rate (REER) will adjust by about half of the appreciation observed since 2016 in the next five years.

  • The fiscal primary deficit has been revised to reflect the expansionary fiscal stance in the near term which peaks to 6.5 percent of GDP in 2022 and an average of 5 percent in the medium term (2021–25), as the current government is committed to maintain a minimum level of capital expenditure to support its developmental needs. Beyond the medium term, the fiscal program is anchored around the debt stabilizing primary balance as informed by the DSA and expressed in the authorities commitment to retore debt sustainability, as such the DSA assumes a fiscal primary surplus of 0.1 percent of GDP, on average over the period 2026–41. In the October 2020 DSA, however, primary balance was assumed to adjust under the 2018 ECF in place at the time.

  • The current account deficit has been revised to 15 percent in 2021 and is projected to decline in the medium term but only to about 10 percent of GDP as the fiscal deficits are projected to remain at about 10 percent of GDP. Staff projects a deterioration in service receipts (especially in hotel and transportation services). Over the medium term, the current account deficit is expected to remain high, which is consistent with the projection on fiscal. Exports are expected to increase by 2024 considering the resumption of tobacco exports to the United States, lifting the export ban on maize, and other export diversification efforts into other agricultural exports. The external sector assessment shows that Malawi’s external sector position is substantially weaker than implied by fundamentals and desirable policies (2021 Article IV Consultation Staff Report).

  • Gross official reserves were projected to increase from US$884 million (3.1 months of next year’s imports) in 2020 to US$974 million (3.4 months of next year’s imports) in 2021 in the October 2020 DSA. In this DSA it is revised down from US$566 million (2.1 months of imports) in 2020 to US$394 million (1.4 months of next year’s imports) in 2021 despite of emergency RCF assistance in 2020 and SDR allocation in 2021. Gross official reserves are expected to remain at about US$400–500 million (1!/2 months of imports) through 2026 under the assumption that the financing gap of about 20 percent of GDP during the medium term (2021–26) will be met with external financing from the RDBs as in the past (see below).

9. The assumption for the financing mix and borrowing terms are in line with the Malawi’s Medium-Term Debt Management Strategy (MTDS) which aims to gradually reduce short-term debt. The financing mix assumptions are as follows:

  • External borrowing. The baseline assumes: (i) all the project loans ratified but undisbursed (US$1.32 billion as of end-June 2021) will be disbursed during the medium term; and (ii) additional loans (US$2.6 billion) will be contracted from RDBs to fill the financing gaps during the medium term. The baseline also assumes that IDA19 disbursement for FY22 will remain in line with FY21 outturn. In total, new external borrowing of $3.9 billion in the medium term (2021–26) which is significantly higher than the October 2020 DSA ($1.27 billion). The average grant element of new borrowing is projected to become significantly low over the medium term (about 40 percent at the time of the October 2020 DSA). The main reason for the decline in the grant element is its dependency on RDBs which have been lending at annual percentage rate (APR) of about 7–8 percent and have been filling the financing gap in the absence of donor support. The APR of 8 percent is assumed for the new borrowing.

  • Domestic borrowing. The baseline assumes the remaining financing gap will be picked up by domestic bank and nonbank institutions. Given the size of fiscal deficits that the authorities are planning to maintain, domestic borrowing averages about 9 percent of GDP each year during the medium term (which is higher than the size of bond purchases by banks observed in the past). The interest rate for 3-year bond and 10-year bond are assumed at 11.5 percent and 17 percent respectively. New bond issuance will move gradually towards longer maturity bonds, the share of bonds with a maturity greater than 7 years is expected to increase from 5% of new issuance to 20% by 2032.

Realism of the Baseline Assumptions

10. The realism tools suggest that the baseline scenario is credible compared to Malawi’s historical experience and cross-country experiences (Figures 3 and 4).

  • The left-hand side panels of Figure 3 show the evolution of projections of external and public debt to GDP ratios for the current DSA the previous DSA (the October 2020 DSA), and the DSA from 5 years ago. The current DSA reflects the latest revisions to the medium-term outlook and policy direction of the authorities in presence of COVID-19 shock and the need of development spending to achieve the goals of the Malawi Vision 2063. The difference between the current DSA and the previous DSA is large for the reasons discussed above (115).

  • Debt-creating flows charts (middle panel) show that the important contribution of the nominal interest rate over the 5-year projected change, reflecting the compositional changes in the external debt (114).

  • The unexpected increases in PPG external debt and public debt (right-hand side panels of Figure 3) are about 14.7 and 28 percent of GDP, respectively, which are both above the median of the countries producing LIC DSF. The drivers of the unexpected public debt accumulation are unexpected increase in primary deficits and unexpected depreciation of the real exchange rate.

11. Modest improvements in the primary balance in the next three years is in the middle of historical data on LIC adjustment programs (Figure 4). The second DSF realism tool assesses the realism of the fiscal projection. The top-left panel of Figure 4 highlights that the anticipated adjustment in the primary balance of 0.5 percentage points of GDP is in line with other LICs. The top-right panel of Figure 4 shows that growth projection for 2021 and 2022 are optimistic relative to what is suggested by the fiscal multiplier realism tool. This is because of the economic rebound that is expected after the attenuation of the negative impact of COVID-19 shock. The bottom two panels reflect the authorities’ plan to ramp up public investment to generate growth.

Country Classification and Model Signal

12. Malawi’s debt-carrying capacity based on the Composite Indicator (Cl) is assessed as weak (Text Table 5).13 The Cl is determined by the World Bank’s CPIA and other variables informed by the macroeconomic framework, such as real GDP growth, import coverage of reserves, remittances as percent of GDP, and growth of the world economy. Malawi’s Cl based on the current vintage (2021 CPIA) has been downgraded to ‘weak’ with a Cl score of 2.56 compared to ‘medium’ Cl score of 2.84 under the DSA presented in the context of Malawi’s request for RCF on October 2020. In addition, Malawi is classified as “weak quality of debt monitoring” in line with the country’s debt-recording capacity. The four external debt burden thresholds and the total public debt benchmark are determined by this classification of the debt carrying capacity (Text Figure 6).

Text Table 5.

Malawi: Composite Index

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Text Table 6.

Malawi: Debt Carrying Capacity and Thresholds

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Scenario Stress Tests

13. Standard scenarios stress test and a contingent liability stress test are conducted (Text Table 7, and Tables 3 and 4). A stress test combined contingent liabilities of a one-time debt shock (equivalent to 9 percent of GDP) in 2021, to capture the potential impact of limited public debt coverage (2 percent of GDP, instead of the default level of zero) and contingent liabilities from SOEs14 (equivalent to 2 percent of GDP) and the need to for bank recapitalization.15

Text Table 7.

Malawi: Public Debt Coverage and Magnitude of the Contingent Liability Tailored Stress Test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1,), If it is already included in the government debt (1,) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

14. A second tailored scenario presented is a commodity price shock (Tables 3 and 4). Given the high share of Malawi’s tobacco exports in total exports (goods and services) of more than 50 percent over the previous three-year period, the DSA also conducts a stress test where commodity exports are shocked by a commodity price gap in the second year of projection, which converges to the baseline in 6years.16 A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the PV of debt-to-exports ratio and PV of debt-to-GDP to rise and remain elevated exceeding the baseline projections over the medium term.

Table 1.

Malawi: External Debt Sustainability Framework, Baseline Scenario, FY 2018–41

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r – g – p(1+g) + Ɛα (1+r)]/(1+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, p = growth rate of GDP deflator in U.S. dollar terms, £=nominal appreciation of the local currency, and α share of local currency-denominated external debt in total external debt.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Assumes that PV of private sector debt is equivalent to its face value.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 2.

Malawi: Public Sector Debt Sustainability Framework, Baseline Scenario, FY2018–41

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Residency-based.

The underlying FV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 3.

Malawi: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, FY2021–31

(Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

External DSA

15. Malawi’s external and public debt is assessed to be in high risk of debt distress and granularity in risk rating assess that public debt under current policies is unsustainable. The arrears to the TDB and Spain at the end of 2020 have been rescheduled and payments have started on an agreed scheduled. Under the baseline, the external DSA assesses that Malawi’s external debt is high because there are large and protracted threshold breaches on a number of external debt stock and external debt service burden indicators (both external debt-service to exports ratio and external debt-service to revenue ratios). One of the stock indicators, the PV debt to GDP ratio, stay below the threshold during the medium to long term, but the other indicator, the PV debt to export ratio, only become below the threshold after the medium term. These indicators all point to significant pressure on servicing the external debt in the medium to long term.

16. The stress scenarios highlight Malawi’s debt is vulnerable to any shocks in exports, the exchange rate and non-debt flows such as aid flows. The historical scenario, which assumes that real GDP growth, the primary balance-to-GDP ratio, the GDP deflator, the non-interest current account, and net FDI flows permanently remain at their historical averages, indicates that the baseline is in line with the historical pattern. Various stress test scenarios presented in Figure 1 show that Malawi’s debt is vulnerable to shocks in exports (see the PV debt to export ratio and the debt service to export ratio), those in the exchange rate (see the debt service to revenue ratio), and those in non-debt flows (see the PV debt to GDP ratio).

Public DSA

17. Malawi’s overall public debt is assessed to be high and unsustainable under current policies, as external debt is unsustainable and the PV of public debt-to-GDP ratio remains above the threshold and other indicators do not stabilize over time. Total public debt is projected to rise from medium to long term in the baseline scenario. Unlike the historical scenario under which public debt indicators gradually decline to threshold level in the long term, all three public debt burden indicators are above their indicative thresholds under the baseline (Figure 2). The PV of debt-to-GDP ratio reaches 80 percent by 2031 and the debt to revenue ratio and the debt service to revenue ratio grow to reach 500 percent and 135 percent, respectively. These numbers point to the severity of the debt burden on the economy. There are many factors contributing to the situation, Malawi’s inability to sustain growth, partly due to frequent weather-related shocks; high cost of sovereign borrowing (e.g., the most recent infrastructure bond issuances in August 2021 was priced at 23 percent); and the high level of existing debt with a large fraction being on non-concessional term.

Risk Rating and Vulnerabilities

18. Malawi’s external and public debt is at high risk of debt distress and granularity in risk rating assesses that public debt under current policies is unsustainable. The assessment reflects the significant debt vulnerabilities emanating from the large and protracted threshold breaches on a number of debt stock and debt service burden indicators. Malawi’s exposure to financing risks is significant. The WB and IMF Staff assess the main risk to the baseline is a sudden stop of available financing especially from RDBs. If this risk materializes, an abrupt forced adjustment with a significant impact on growth, financial stability and the most vulnerable population becomes inevitable. Additional risks to the ratings assessment arise from weaker-than expected policy implementation, fiscal slippage, macroeconomic uncertainty (especially from weather shocks), tighter global financial conditions, increase of essential imports costs and a weak and diverging global economic recovery which could depress export growth. Authorities are continuing to implement improvements in tax administration, which will help with compliance and revenue collection going forward.

19. Containing Malawi’s debt vulnerabilities requires policy adjustment to address macroeconomic imbalances and upfront actions to return to moderate risk of debt distress with a sustainable path. Over the medium term, a strong fiscal adjustment program is needed to stabilize the public debt. 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. Realism in budget forecasts and public financial management (PFM) reforms would help containing fiscal deficits and debt. This needs to be supported by strengthening public sector governance and institutions to help safeguard scarce resources and strengthen policy effectiveness. In addition, given how Malawi’s external position is assessed to be substantially weaker than the level implied by economic fundamentals and desirable policies, allowing for greater flexibility in the exchange rate, containing external imbalances, and rebuilding reserves are critical in reducing Malawi’s vulnerabilities to external shocks. This should be supported by a well-functioning and trans parent 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.

20. Malawi also needs significant structural reforms to support sustained inclusive growth in the medium to long term. Promoting diversification and commercialization in the agriculture sector will be key to increasing incomes and strengthening resilience. The government needs to rebalance spending in the agriculture sector away from fiscally unsustainable maize input subsidies and toward investments that promote diversification and growth. Subsidy programs need to be affordable, more cost-efficient, and should reduce fiscal risks. In addition, commercializing agriculture requires predictable and transparent trade policies. As such, a sound implementation and monitoring framework of trade measures under the Control of Goods Act would help safeguard food security and balance this with increasing export potential, as well as development of various value chains. As part of this, the rules for the implementation of export mandate regulations should be assessed in consultation with the private sector to avoid creating additional market distortions. A reliable, transparent trade policy would, in turn, stimulate investment and commercialization, which could increase production, food security, and exports in the medium term. The Agricultural Development and Marketing Corporation’s (ADMARCs) market interventions also need to be transparent, timely, and predictable.

21. Policies to increase diversification outside of agriculture will also be critical to enhance productivity, value addition, and job creation. Key to this will be expanding reliable access to electricity, which calls for continued progress on energy investment projects and stronger governance at key sector utilities. In addition, the Government should reform tax policies and administration and business regulations, to increase transparency, reduce ad hoc changes, and support value addition. The government can harness growth in the mobile and Information Communication Technology (ICT) sectors by reviewing the tax regime, levies, and tariffs to enable greater customer access; and fostering competition in the broadband infrastructure development market. Finally, reducing Government domestic borrowing will ease pressures on interest rates, enabling broader access to finance for Small and Medium-Sized Enterprises (SMEs).

Authorities’Views

22. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. They are undertaking policy action to address debt sustainability through engagement with creditors, including RDBs for rescheduling existing debt. Authorities are also engaging with traditional and nontraditional donors for possible voluntary debt buy back schemes to offset more expensive debt.

Figure 1.
Figure 1.

Malawi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 2.
Figure 2.

Malawi: Indicators of Public Debt Under Alternative Scenarios, FY2021–31

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Malawi: Drivers of Debt Dynamics- Baseline Scenario

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Malawi: Realism Tools

Citation: IMF Staff Country Reports 2021, 269; 10.5089/9781616354886.002.A003

Table 4.

Malawi: Sensitivity Analysis for Key Indicators of Public Debt, FY2021–31

(Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

The current DSA follows the revised Debt Sustainability Framework (DSF) for LICs and Guidance Note (2017) in effect as of July 1, 2018.

2

Malawi’s debt-carrying capacity based on the Composite Indicator (Cl), which is based on the October 2021 WEO and the 2020 WB’s CPIA, is assessed as weak. The Cl score is 2.56.

3

Regional Development Banks (RDBs) also include other financial institutions, such as export credit agencies and exclude African Development Bank.

4

The definition of external and domestic debt uses a residency criterion.

5

The contingent liabilities shock from the SOE debt is kept at the default value of 2 percent to reflect risks associated with non-guaranteed SOE debt, currently excluded from the analysis due to data availability constraints.

6

This DSA is prepared jointly by the staff of the IMF and World Bank, in collaboration with the authorities of Malawi. The last joint DSA can be found in IMF Country Report No. 20/288, October 2020.

7

The World Bank’s Sustainable Development Finance Policy (SDFP) approved in 2020 builds on lessons learned from the Non-Concessional Borrowing Policy (NCBP) to further strengthen the focus on debt sustainability and debt transparency. Malawi has implemented a Performance and Policy Actions (PPAs) related to Debt Transparency, Debt management, and Fiscal Sustainability. Among these one relates to azero non-concessional borrowing ceiling in FY21. Malawi satisfactorily implemented its FY21 PPAs and is now preparing 3 PPAs forFY22. Under the SDFP, countries under LIC DSF in debt distress with unsustainable outlook, a zero ceiling on non-concessional borrowing applies. A non-zero ceiling could be considered, for example, for arrears clearance operations only if other financing options are not available. Ex-ante exceptions to the framework may be granted in cases where non-concessional borrowing is linked to projects with high economic, financial and social return.

8

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

9

The DSA and macro-framework assume CCRT debt service relief through April 2022 equivalent to about SDR 33 million. The last 3 months of debt service relief is subject to the availability of CCRT resources. The authorities are also participating in DSSI, and potential savings are estimated at US$1.15 million or 0.01 percent of GDP over the period May 2020 to December 2021.

10

Fuel imports were just under US$200 million in 2010 and 2020 but the volume has increased from 277 million liters to 325 million liters over ten years.

11

See IMF Country Report No. 20/288, 2020. The relative to GDP ratios are calculated using rebased GDP.

12

The National Statistics Office (NSO) has rebased GDP from 2010 to 2017. Post-rebasing, the preliminary GDP estimate for 2020 by the NSO and the Ministry of Economic Planning indicates that real GDP growth declined from 5.4 percent in 2019 to 0.9 percent in 2020 due to adverse impact of the pandemic on the economy especially on the service sector. The growth for 2021 is however projected rebound at 2.2 percent due to good harvest.

13

The Cl captures the impact of the different factors through a weighted average of the World Bank’s 2020 Country Policy and Institutional Assessment (CPIA) score, the country’s real GDP growth, remittances, international reserves, and world growth. A country’s debt-carrying capacity would be assessed as weak if its CI value is below2.69, medium if it lies between 2.69 and 3.05, and strong if it is above 3.05. Malawi’s debt-carrying capacity based on the Cl, which is based on the October 2021 WEO and the 2020 CPIA, is assessed as weak. The Cl score is 2.56.

14

The SOE external liabilityis identified based on a Fund staff survey conducted in 2016.

15

The need for bank recapitalization is equivalent to the default level of 5 percent of GDP to the average cost to the government of a financial crisis in a low-income country since 1980.

16

The price gap is defined as the difference between the baseline commodity price in the second year of projection and the lower end of the 68 percent confidence interval from the IMF’s commodity price forecast distribution for fuel and non-fuel commodities which may be found at IMF Primary Commodity Prices. The size and duration of these responses were informed by the analysis of episodes of commodity price busts in a sample of 34 commodity-intensive LICs during 1990–2015. The elasticities are within the range of estimates found in the literature (e.g., Spatafora ad Samake,2012. “Commodity Price Shocks and Fiscal Outcomes,” IMF Working Paper No. 12/112; and Cespedes and Velasco, 2013. “Was This Time Different? Fiscal Policy in Commodity Republics,” NBER Working Paper No. 19748).

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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="RA003fig01">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Malawi: Vulnerability to Climate Change Erodes GDP per Capita, 2019

    (Index)

  • <sup><xref ref-type="fig" rid="RA003fig02">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Malawi: Fiscal Challenges Confronting a Fragile Economy, 2005–21

  • <sup><xref rid="RA003fig03" ref-type="fig">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Malawi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31

  • <sup><xref rid="RA003fig04" ref-type="fig">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Malawi: Indicators of Public Debt Under Alternative Scenarios, FY2021–31

  • <sup><xref rid="RA003fig05" ref-type="fig">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Malawi: Drivers of Debt Dynamics- Baseline Scenario

  • <sup><xref rid="RA003fig06" ref-type="fig">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    Malawi: Realism Tools

Text Figure 1.

Malawi: Vulnerability to Climate Change Erodes GDP per Capita, 2019

(Index)
Text Figure 2.

Malawi: Fiscal Challenges Confronting a Fragile Economy, 2005–21
Figure 1.

Malawi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31
Figure 2.

Malawi: Indicators of Public Debt Under Alternative Scenarios, FY2021–31
Figure 3.

Malawi: Drivers of Debt Dynamics- Baseline Scenario
Figure 4.

Malawi: Realism Tools