Abstract
IMF Country Report No. [22/352]
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IMF Country Report No. [22/352]
MALAWI
REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY AND REQUEST FOR A STAFF MONITORED PROGRAM WITH EXECUTIVE BOARD INVOLVEMENT—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALAWI
November 2022
In the context of the Request for Disbursement Under the Rapid Credit Facility and Request for a Staff Monitored Program with Executive Board Involvement, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 21, 2022, following discussions that ended on October 17, 2022, with the officials of Malawi on economic developments and policies underpinning the IMF arrangement under the Rapid Credit Facility. Based on information available at the time of these discussions, the staff report was completed on November 14, 2022.
A Debt Sustainability Analysis prepared by the staff of the IMF and the World Bank.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Malawi.
Letter of Intent sent to the IMF by the authorities of Malawi*
Memorandum of Economic and Financial Policies by the authorities of Malawi*
Technical Memorandum of Understanding*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
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© 2022 International Monetary Fund
Press Release
PR22/404
IMF Executive Board Approves US$88.3 Million in Emergency Financing Support to Malawi
FOR IMMEDIATE RELEASE
The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of US$88.327 million (SDR 69.40 million) to Malawi under the new Food Shock Window of the Rapid Credit Facility.1
Concurrently, the Executive Board discussed a 12-month Staff-Monitored Program (SMP) for Malawi, which was approved by the Management of the IMF on November 11. With timely implementation of the program, the SMP would help the authorities establish a track record of policy implementation, possibly paving the way to an IMF-supported upper credit tranche (UCT) program.
The Executive Board, which recently amended the policy for SMPs to allow for Program Monitoring with limited Board involvement (PMB)2 on October 4, 2022, assessed that Malawi’s policy program is sufficiently robust to meet the stated objectives under the SMP and that its implementation is expected to achieve the purpose of building a track record toward a UCT-quality Fund arrangement. The Board noted that the program would benefit from limited Board involvement given concerted international efforts by creditors and donors to provide substantial new financing and debt relief, and Malawi’s significant outstanding Fund credit under emergency financing instruments.
Washington, DC – November 21, 2022: The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of US$88.327 million (SDR 69.40 million) under the Food Shock Window of the Rapid Credit Facility to help Malawi address urgent balance of payment needs related to the global food crisis. Food insecurity in Malawi has increased significantly owing to multiple tropical storms, below-average crop production, and increasing prices for food and agricultural inputs such as fertilizer and seed. As a result, about 20 percent of the population is projected to be acutely food insecure during the upcoming 2022/23 lean season (October 2022-March 2023), or more than twice as many people as in 2021.
The authorities also requested the Staff-Monitored Program and Program Monitoring with Board involvement to build a track record of policy implementation, possibly paving the way to an IMF-supported Upper Credit Tranche (UCT)-quality program. The Board and Management welcomed the steps the authorities have taken since the Article IV Consultation in December 2021 to stabilize the economy and build the foundation for inclusive growth.
Following the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and acting Chair, issued the following statement:
Malawi is facing a challenging economic and humanitarian situation, with foreign exchange shortages and an exchange rate misalignment leading to a sharp decline in imports including fuel, fertilizer, medicine, and food. Emergency financial assistance under the RCF’s new food shock window would help address urgent balance-of-payments needs and mitigate the impact of the food shock.
The Management-approved staff monitored program (SMP) is sufficiently robust to meet the authorities’ stated objectives, and its implementation is expected to achieve the purpose of building a track record toward an Upper Credit Tranche (UCT) -quality program supported by a Fund arrangement.
Malawi’s track-record building SMP will benefit from limited Board involvement given the ongoing concerted international effort by creditors and donors to provide substantial new financing and debt relief to Malawi, as well as Malawi’s significant outstanding Fund credit under emergency financing instruments.
Fiscal discipline, supported by a realistic budget, an enhanced Public Financial Management system and timely production of comprehensive fiscal reports, is important. Restoring price stability and ensuring financial sector stability will help build a foundation for private sector-led growth.
Rebuilding external buffers will be critically important to reduce Malawi’s vulnerabilities to external shocks. The RBM’s commitment to rebuild its foreign exchange reserves, requiring implementation of its strategy to wind down unsustainable policies including excessive use of swaps and trade credit to maintain strategic imports and other quasi-fiscal operations, is welcome.
While debt is sustainable on a forward-looking basis, risks to the program are high. It will be critical to swiftly implement the authorities’ debt restructuring strategy, which aims to bring Malawi back to moderate risk of debt distress in the medium term. The credible process underway to restructure the authorities’ debt to commercial creditors, which in itself would restore debt sustainability albeit with high risk, is welcome. Swift progress is also needed on the reprof iling of official bilateral debt. A concerted effort among the authorities, their creditors and the international development partners will be crucial to ensure a successful implementation of the debt restructuring strategy.
Addressing weaknesses in governance and institutions and enhancing transparency will be important. In this regard, strong corrective actions to address the issues that led to misreporting under the 2018 ECF, including implementation of the recommendations of the 2021 saf eguards assessment, and measures to strengthen foreign exchange reserve management are welcome. The authorities are urged to move to a UCT-quality program as soon as feasible.
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MALAWI
REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY AND REQUEST FOR A STAFF MONITORED PROGRAM WITH EXECUTIVE BOARD INVOLVEMENT
November 14, 2022
EXECUTIVE SUMMARY
An economic and humanitarian crisis. Foreign exchange shortages together with exchange rate misalignment led to a sharp decline in imports including fuel, fertilizer, medicine, and food. Large fiscal deficits, nearly 10 percent of GDP in FY2021/22, have been largely financed by domestic bank borrowing, resulting in rapid money growth and inflation of 25.9 percent in September 2022. Exchange rate pass-through and hikes in food prices added to inflationary pressure. In addition, food insecurity in Malawi has increased dramatically under the impact of multiple tropical storms, below-average crop production, and increasing prices for food and agricultural inputs such as fertilizer and seeds. The latter are expected to affect the current planting season. As a result of these factors, about 20 percent of the population is projected to be acutely food insecure during the upcoming 2022/23 lean season (October 2022-March 2023), more than twice as many as in 2021.
The authorities’ emerging response. Since the Article IV consultation in December 2021, the Malawian authorities have taken steps to stabilize the economy and build the foundations for inclusive growth. The authorities submitted the FY2022/23 budget in March 2022 that aims at fiscal consolidation of about 21/2 percentage points of GDP. The Reserve Bank of Malawi (RBM) tightened the monetary policy stance in April 2022 by raising the policy rate by 200 basis points and devalued the Kwacha in May by 25 percent to start correcting for a large real exchange rate overvaluation for the first time since the devaluation of comparable size in 2012. The authorities also hired a debt advisor in May 2022 aiming for a sizeable debt treatment that would bring Malawi back to moderate risk of debt distress in the medium term.
Fund engagement. The authorities have requested a disbursement of 50 percent of quota under the Rapid Credit Facility-Food Shock Window (FSW) to address urgent balance-of-payments needs and mitigate the food shock including through a strengthening of cash transfer programs to vulnerable households. In parallel, they have initiated a comprehensive restructuring of external public debt to restore debt sustainability and have mobilized significant new grant financing from multilateral and bilateral official partners. To help guide their policy and reform agenda aimed at macroeconomic stabilization, inclusive growth, and more resilience to climate change, as well as to as support the ambitious debt operation, the authorities have also requested a twelve-month Staff Monitored Program with Executive Board Involvement (PMB) to build a track record towards an Extended Credit Facility Arrangement (ECF).
Policy and reform effort. Policies and reforms under the PMB will focus on: (i) socially-conscious fiscal consolidation to contain domestic borrowing while protecting vulnerable households from the impact of the necessary adjustment amid rising prices for food; (ii) moving towards greater flexibility of the exchange rate to help rebuild foreign exchange reserves to reduce Malawi’s vulnerabilities to external shocks; (iii) undertaking a debt restructuring to help restore debt sustainability; (iv) achieving price stability and maintaining financial soundness to support private-sector led growth; and (iv) addressing longstanding governance weaknesses to reduce corruption and improve efficient and effective use of limited public resources.
Risks. Risks to the authorities’ policy and reform agenda are exceptionally high. Restoring macroeconomic stability and debt sustainability will critically depend on steadfast implementation of policies and reforms, timely progress with the envisaged debt operation, and sustained engagement of donors with grant financing.
Approved By
Costas Christou (AFR) and Björn Rother (SPR)
Missions were held during October 5-8, 2022 in Lilongwe and October 11-17, 2022 in Washington, D.C. The staff team comprised Ms. Saito (head), Ms. Gwenhamo, Mr. Tapsoba, Ms. Yoon, Ms. Shirakawa, (all AFR), and Ms. Hashimoto (SPR). Mr. Banda (local economist), Mr. Anderson (FAD long-term expert) also joined discussions. The team met with H.E. President Chakwera, the Hon. Sosten Gwengwe (Minister of Finance), Dr. Wilson Banda (Governor of the Reserve Bank of Malawi, RBM), other senior government and RBM officials, representatives from the private sector and the international community. Ms. Nainda (OED) joined the discussions. Ms. Farid provided input, Mr. Ahluwalia provided research support, and Ms. Bravo assisted the team in the preparation of this report.
Contents
CONTEXT
RECENT ECONOMIC DEVELOPMENTS
OUTLOOK AND RISKS
POLICIES SUPPORTING THE PROGRAM
A. Fiscal Policy: Containing Domestic Borrowing and Regaining Fiscal Discipline
B. Achieving Price Stability and Maintaining Financial Soundness
C. Rebuilding External Buffers
D. Restoring Debt Sustainability
E. Tackling Governance Challenges
F. Building the Foundation for Inclusive Growth and Resilience to Climate Shocks
PROGRAM MODALITIES
STAFF APPRAISAL
BOX
1. Reserve Accumulation Measures, 2022
FIGURES
1. Real Sector Developments, 2010–22
2. Fiscal Sector Developments, 2005–22
3. Monetary Sector Developments, 2012–22
4. External Sector Developments, 2010–22
5. Capacity to Repay Indicators Compared to EF Arrangements for PRGT Countries
TABLES
1. Selected Economic Indicators, 2021–27
2a. Central Government Operations, Billions 2020/21–26/27 (Billions of Kwacha)
2b. Central Government Operations, FY 2020/21–26/27 (Percent of GDP)
3a. Monetary Authorities’ Balance Sheet, 2021–27
3b. Monetary Survey, 2021–27
4a. Balance of Payments, 2021–27 (Millions of US Dollars)
4b. Balance of Payments, 2021–27 (Percent of GDP)
5. Selected Banking Soundness Indicators, 2019–22
6. External Financing Requirement and Source, 2022–27
7. Indicators of Capacity to Repay the Fund, 2022–34
ANNEXES
I. Food Insecurity in Malawi
II. Risk Assessment Matrix
III. External Sector Assessment
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
The Food Shock Window provides, for a period of a year, a new channel for emergency Fund financing to member countries that have urgent balance of payment needs due to acute food insecurity, a sharp increase in their food import bill, or a shock to their cereal exports.
SMPs are informal agreements between national authorities and IMF staff to monitor the authorities’ economic program. As such, they do not entail endorsement by the IMF Executive Board. Under recent reforms to the policy on staff monitored programs, the Executive Board, in specified circumstances, has limited involvement, not amounting to endorsement of the policy program. In such cases, the Board’s role is limited to (i) opining on the robustness of the member’s policy program to meet the objectives stated in the Management approved SMP and to achieve the purpose of building or rebuilding a track record toward a UCT-quality program, and (2) in the context of reviews, to indicate if the member is on track to achieve these objectives.
