Abstract
1. On behalf of the Malawian authorities, we thank management and staff for facilitating the authorities’ request for emergency financing under the new Food Shock Window (FSW) and a Staff Monitored Program (SMP) with Board involvement (PMB. Our authorities view rapid financing under the FSW as critical to alleviate food shortages, while the PMB would help sustain the reform momentum and pave the way for deeper reforms under a new Upper Credit Tranche (UCT) program.
1. On behalf of the Malawian authorities, we thank management and staff for facilitating the authorities’ request for emergency financing under the new Food Shock Window (FSW) and a Staff Monitored Program (SMP) with Board involvement (PMB. Our authorities view rapid financing under the FSW as critical to alleviate food shortages, while the PMB would help sustain the reform momentum and pave the way for deeper reforms under a new Upper Credit Tranche (UCT) program.
2. The economy of Malawi remains challenged by elevated vulnerability to frequent and large tropical cyclones and intermittent droughts that have undermined agricultural production and food self-sufficiency. More recently, rising internatio nal food, fuel, and fertilizer prices in the wake of the Russia-Ukraine war, have precipitated a cost-of-living crisis with disproportionate effects on vulnerable households. Consequently, emergency financing needs have emerged as the food import bill has increased substantially in the context of limited fiscal space. Against this backdrop, the authorities seek emergency financial support under the food shock window of the RCF amounting to 50 percent of quota. Rapid financing under the newly established FSW would be vital to fill the immediate financing gap created by the spillovers from the war, while a PMB is essential to restore macroeconomic stability and set the foundations for graduation to a fully-fledged UCT-program.
Impact of Multiple Shocks
3. Economic activity has been negatively affected by the overlapping external and domestic shocks in recent years, with growth remaining below pre-pandemic levels. The consistent cycle of vulnerabilities including from lingering pandemic effects, the spillovers from the war in Ukraine, multiple and successive tropical storms, below-average crop production, and increasing prices for food and agricultural inputs such as fertilizers and seeds, have culminated in rising food insecurity. Specifically, the Malawi Vulnerability Assessment Committee (MVAC) report for the 2022/23 consumption season, released in August, has shown that about 2.3 million people face food insecurity and require urgent assistance. At the same time, a total of 3.8 million people (about 20 percent of the population) will be facing critical food security challenges in the coming 5 to 6 months.
4. Furthermore, Malawi faces worsening fuel shortages compounded by the prevailing high oil prices alongside extended electricity blackouts. As a result, growth is projected to decelerate from 2.2 percent in 2021 to 0.8 percent in 2022 while the outlook remains subject to significant downside risks. Inflation accelerated from 7.6 percent at end-2020 to 25.9 percent year-on-year in September 2022, with food inflation reaching 33.7 percent. As the staff report rightly noted, the country faces persistent foreign exchange shortages, with the stock of international reserves at critically low levels with readily available gross reserves of about 1.6 months of import cover at end-2021. Overall, it is assessed that Malawi faces an urgent BOP need estimated at US$841 million over the next 12 months, reflecting the repercussions of the food-price shock. As a result, prospective financing under the RCF would only cover 10 percent of the external financing needed for the next 12 month, which highlights the need for additional donor support.
Response to Rising Food Insecurity
5. The strengthening of social protection has become critically important considering that poverty incidence and food insecurity in Malawi ranks amongst the highest in the world. In this context, the authorities are preserving existing social protection programs to cushion vulnerable households. Going forward, they plan to establish a floor on social spending as an indicative target (IT) under the PMB, comprising government contribution to health and basic and secondary education spending, as well as several social safety net programs such as the social cash transfer program (SCTP) and Affordable Input Program (AIP). These measures seek to support the vulnerable groups including the elderly, children, and the disabled by providing them with social cash transfers and additional resources to cushion farmers from increased prices of fertilizers. Furthermore, the authorities plan to procure additional maize and other food stuffs under the Disaster Affairs Department for lean season response (December 2022 - March 2023) and distribute quality seeds to the vulnerable population to enhance maize production, the country’s staple grain.
6. The authorities are determined to ensure that implementation of social protection programs achieve the desired outcomes. In this respect, they have committed to undertake periodic audits in the context of annual fiscal reporting to the National Assembly under the PMB. Further, they will take additional measures to prevent cost overruns from escalating fertilizer prices in the AIP, the Government subsidy program, through augmentations of farmer contributions as well as limiting the Government Subsidy. The authorities also stand ready to take any additional measures that may be needed over and above those pronounced in the MEFP and, in consultation with staff.
Policy Measures Under the PMB
Debt Management and Fiscal Policy
7. The authorities are committed to foster fiscal disciple to restore debt sustainability and lay the groundwork for sustainable and inclusive growth. To this end, they have adopted a debt restructuring strategy aimed to help restore debt sustainability and close attendant financing gaps. In particular, the strategy relies on bringing external public debt levels back to moderate risk of debt distress in the medium-term through a combination of policy adjustment and debt treatment. To this end, the debt strategy targets all external Debt Sustainability Analysis (DSA) solvency and liquidity ratios to cross their respective thresholds under the baseline in the next five years. To support a credible process for restructuring public debt, the authorities engaged a debt advisor to ensure their approach delivers the necessary contributions in a sustainable manner. Further, the authorities have approached all creditors early in the process and they are committed to achieve a debt treatment that places the country’s debt back on a sustainable path consistent with program objectives.
8. To achieve fiscal discipline and support efforts to bring debt towards a more sustainable path, the authorities fiscal consolidation efforts for the remainder of FY2022/23 will be geared towards (i) strengthening implementation of the domestic revenue mobilization strategy (DRMS) in a timely manner (ii) rationalizing and prioritizing spending, (iii) introducing and implementing sound commitment controls through IFMIS and (iv) implementing well targeted measures to support low-income households. To this end, the authorities have already rolled out the first phase of reforms to the fertilizer and seed subsidy program under the (AIP) through the introduction of a Consolidated Social Protection Program using the Unified Beneficiary Register to reduce duplication of access and improve beneficiary targeting. Other planned measures include strengthening the oversight of state-owned enterprises (SOEs) as well as monitoring SOE management accounts on a quarterly basis. In addition, to ensuring compliance with the new PFM Act, the authorities will prepare an annual consolidated report of all SOEs.
9. Sustained revenue mobilization efforts will continue to be supported by the DRMS launched in December 2021. The authorities’ main target is to increase revenue by 5 percent of GDP during the 5-year implementation of the strategy, including through PAYE brackets aimed at introducing additional income tax brackets starting in April 2022, which partly reversed the loss in revenue from previous changes in rates and brackets. They also rolled out full implementation of the advance income tax in May 2022 which raised additional revenue. Other measures in the pipeline include tax stamps on beverages, taxes for business, and tax incentives to help unlock the much-needed foreign investment. To strengthen tax administration, the authorities are on track with the launching of the Integrated Tax Administration System (ITAS), also called Msonkho online which is expected go-live in December 2022, with all modules expected to be integrated by March 2023.
10. The authorities are committed to stepping up efforts to address governance weaknesses and reduce corruption vulnerabilities, including through enhancing transparency and accountability of public financial management (PFM), strengthening autonomy and governance of the Reserve Bank of Malawi (RBM) and strengthening of its foreign exchange reserves management. In this context, they passed the new PFM Act in March 2022 to align the legal framework with ongoing PFM reforms. The authorities are also in the process of drafting the regulations and Treasury instructions to support the implementation of the new Act which they intend to finalize by March 2023 and June 2023, respectively.
Monetary and Financial Sector Policies
11. The RBM’s core focus is to restore price stability by anchoring inflation expectations, including through tightening monetary policy as needed. They intend to maintain a reserve money targeting framework to curtail monetary growth, while limiting foreign exchange interventions. At the same time, the central bank will implement the agreed path towards accumulating foreign exchange reserves to rebuild the country’s reserve assets, including by reducing direct foreign exchange sales to the market in support of imports. Concurrently, the RBM will gradually wind down the existing swap open position as guided by the foreign exchange accumulation path.
12. Considering the effects of the increase in the exposure of the banking sector to the public sector and recent interest rate hikes, the Reserve Bank remains attentive to these risks and continue to strengthen financial sector oversight. To promote financial stability, they are closely monitoring the banking system’s sovereign exposure through securities and swap operations as well as reassessment of loan and collateral quality needs of commercial banks.
Conclusion
13. The authorities recognize the importance of safeguarding transparency and accountability in the use of Fund resources as well as the signaling effects of a good track record under the SMP-PMB. Importantly, the Fund’s support under the PMB will provide a strong anchor for the effective coordination and implementation of policies that support macroeconomic stability, while working towards a possible successor ECF arrangement to restore macroeconomic imbalances and support the authorities’ long-term development plan under Vision 2063. They look forward to Executive Directors’ support for their request for emergency financing to sustain their efforts to deal with the acute food insecurity along with an SMP-PMB to act as a bridge towards deeper reforms under a UCT-arrangement, which catalyzes additional donor support, and anchor the authorities broader reform agenda.