Malawi and the IMF
Country's Policy Intentions Documents
Free Email Notification
of Intent, Memorandum of Economic Policies, and Technical Memorandum of
Mr. Horst Köhler
On December 21, 2000 the Executive Board approved a three-year Poverty Reduction and Growth Facility (PRGF) arrangement aimed at bringing down inflation, accelerating growth and reducing poverty. In the attached memorandum on economic policies, we report on progress in implementing our program supported by the PRGF arrangement and describe the economic and financial policies for 2002.
As the implementation of the program has been unsatisfactory, the government of Malawi is intent on establishing a strong track record correcting the fiscal stance, adhering to the monetary program, and implementing the delayed structural reforms as prior actions as outlined in the attached memorandum on economic policies. This will enable the government to reach the objectives set forth in the Malawi Poverty Reduction Strategy Paper (MPRSP) and the December 8, 2000 memorandum on economic policies.
July 19, 2002
I. Background and Program Implementation
1. The implementation of our economic reform program was not satisfactory and the macroeconomic situation remains tenuous as private sector activity is being strained by expansionary fiscal policies. While monetary policy has been tight, and the core inflation has declined to less than 10 percent, real interest rates remain very high, reflecting the expansionary fiscal stance combined with persistent inflation expectations. The fiscal program has been derailed by several major bailouts of parastatals, overspending on the wage bill and travel, and revenue shortfalls from tax cuts, a decline in firms' profitability, and depressed demand for dutiable imports. Growth is likely to have been negative last year and is forecast to stay below 2 percent in 2002. Moreover, Malawi is now faced with a serious food situation, and large shortages are expected later in 2002.
2. The Malawi Poverty Reduction Strategy Paper (MPRSP), launched on April 24, 2002, identifies as the main challenge for poverty reduction a move to a higher growth path through private sector development. The MPRSP is built around four strategic pillars. The first consists of strategies that will enhance rapid, sustainable, pro-poor economic growth and structural transformation. The second focuses on human capital development. The third pillar involves strategies to improve the quality of life of the most vulnerable. And the fourth pillar covers issues of good governance. Key obstacles to private sector development, particularly in the crucial agricultural sector, are the following: the lack of macroeconomic stability, the still considerable involvement of government in the economy, especially through the parastatal sector, and weaknesses in governance. The economic and structural policies described in this letter emanate from the MPRSP (as indicated by chapter references to the MPRSP) and address these obstacles.
3. The prolonged period of fiscal borrowing and its effect on interest rates have started to create unsustainable debt dynamics, is crowding out the private sector, and has weakened growth. To turn around this situation and move Malawi toward a higher growth trajectory, we are committed to implementing the following three-pronged strategy (Chapter 188.8.131.52). First, we have been containing expenditure since March 2002 and will implement a 2002/03 (July - June) budget that envisages an ambitious fiscal adjustment to reverse the fiscal expansion of the last two years. At the same time, the 2002/03 budget makes further room for spending that benefits the poor. Second, a strengthened expenditure management system will enable us to closely monitor the implementation of fiscal policies. Third, we will accelerate parastatal reform to avoid future recourse to bailouts from the budget. This strategy will help make the domestic debt situation more manageable and create the room needed for private sector development.
4. Consistent with attaining the objective of macroeconomic stability, we target a further reduction in end-period inflation to 5 percent in 2002. To this end, the Reserve Bank of Malawi (RBM) will continue to keep a tight monetary stance. In tandem with the fiscal adjustment, this monetary stance will lead to a reduction in interest rates and a rebound in private sector activity.
II. Policies and Measures for 2002
A. Disaster Relief
5. With regard to the food shortages expected for later this year, pledges of humanitarian aid broadly cover the estimated food aid requirements and the government will undertake commercial food imports through the National Food Reserve Agency (NFRA) to ensure that sufficient quantities of food are available in Malawi. Moreover, the government will provide a subsidy estimated at 1.1 percent of GDP, mostly benefiting the segment of the population that is expected to be outside the target group for food aid but has insufficient income to fully satisfy the minimum caloric requirement at import parity prices.
6. The government will address the operational weaknesses in the implementation of the current food security strategy that failed to prevent this year's food crisis. Our food security policy is based on four pillars: early warning systems to monitor the food situation and indicate shortages between six and nine months in advance; a physical buffer stock of between 30,000 and 60,000 metric tons to address a short-term emergency; sufficient international reserves at the central bank to finance any imports for a more prolonged crisis; and social safety net programs to meet the food needs of the poor. However, during 2001, an immediate response to the food crisis was compromised as the crucial early warning systems turned out to be relying on flawed agricultural crop estimates. This failure had tragic consequences as we relied on these systems and had sold off almost the entire buffer stock as part of the process to replenish it with the maize from the approaching harvest. The government has since transferred the responsibility of producing agricultural crop estimates to the National Statistical Office (NSO) and decided to undertake an external audit financed by donor assistance of the sale of the buffer stock. All elements of the forthcoming food security operation will be set out transparently, clearly communicated to the public, and carefully monitored and controlled, including through civil society participation.
B. Fiscal Policy
7. The overall financial envelope for the 2002/03 budget envisages a reduction in the domestic deficit to 5½ percent of GDP from 8 percent of GDP in 2001/02. The adjustment in the 2002/03 budget will come from the trimming down of nonpriority expenditure (2¼ percent of GDP), the enhancement of revenue (1¼ percent of GDP), and savings from the interest bill (1 percent of GDP). But the 2002/03 budget will also increase the allocation to priority pro-poor expenditure (PPE) by ¾ of one percent of GDP, building upon the already higher allocation for PPEs in the 2001/02 budget (which increased by 1¾ percent of GDP), while ensuring food security through a maize subsidy (about 1 percent of GDP). To support the implementation of the budget, we have strengthened expenditure control and introduced a system for tracking pro-poor spending, so as to enable MPRSP stakeholders to monitor the budget execution.
8. Most of the adjustment will come from cutting back nonpriority expenditure. To that end, the government will:
9. To ensure a decisive turnaround, the government will also implement tax measures. We intend to:
10. On expenditure control measures (Chapter 184.108.40.206), we will enhance the operation of the Credit Ceiling Authority (CCA) system by end-July 2002 by:
11. To protect execution of the pro-poor oriented part of the 2002/03 budget, the government will put in place a monitoring and control framework to track pro-poor expenditure (Chapter 6.3.1), consisting of the following elements:
12. To facilitate expenditure management, the monitoring and analysis of the budget will be strengthened by (Chapter 6.3):
13. In addition, we will also address the following areas:
C. Structural Reforms
14. The MPRSP emphasizes that progress in parastatal reform is essential to achieve the macroeconomic, poverty-reduction, and growth objectives.
15. We are committed to improving governance (Chapter 220.127.116.11). Thus, the government has:
E. Monetary Policy
16. The RBM will continue to use the broad money stock (M2) as the nominal anchor to control inflation, with reserve money as the operational target. For 2002, annual inflation is targeted at 5 percent; to this end, the RBM will limit year-end reserve money growth to less than 8 percent. The principal instruments to achieve these targets will be open market operations (Chapter 18.104.22.168).
17. Consistent with the use of money as the nominal anchor, the exchange rate of the kwacha will remain market determined. The RBM's intervention will therefore be limited to meeting the net official reserves target and smoothing exchange rate movements.
18. The RBM will resume its comprehensive review of the financial sector regulatory framework, with a view to developing a medium-term action plan by June 2002. To strengthen it's financial reporting and controls, the RBM has created an oversight committee and developed a timetable to implement the recommendations of the Fund's safeguards assessment.
F. External Sector
19. The government's trade strategy will focus on (Chapter 22.214.171.124)
G. Statistics and Transparency
20. Recent events have highlighted serious shortcomings in our core data bases that we will address by
22. We are firmly committed to implementing the policies set out above to bring our economic program back on track.
1. This memorandum sets out the definitions for quantitative program targets under which Malawi's performance under the program supported by a Poverty Reduction and Growth Facility (PRGF) arrangement will be assessed. Monitoring procedures and reporting requirements are also specified.
I. Quantitative Program Targets
2. Targets for June 30, 2002, September 30, 2002, and December 31, 2002 have been established with respect to
3. A target that is applicable on a continuous basis has been established with respect to the ceilings on the stock of external arrears of the central government and the RBM.
II. Institutional Definitions
4. The central government includes all units of government that exercise authority over the entire economic territory. However, in contrast to the System of National Accounts (SNA) and government finance statistics (GFS) standards, nonprofit institutions that are controlled and financed by the central government are excluded for the purposes of this memorandum.
5. The accounts of the monetary authorities include the balance sheet of the RBM and the central government's holdings of international reserves.1
III. Limits on Monetary Aggregates
A. Reserve Money
6. A ceiling on the stock of reserve money applies. For the purposes of the program, the stock of reserve money for the quarter will be calculated as the arithmetic average (mean) of the stock of reserve money at all working days (Monday, Tuesday, Wednesday, Thursday, and Friday) in the quarter.
7. Reserve money consists of currency issued by the RBM and balances of commercial banks accounts with the RBM. It includes required reserves held for kwacha deposits and any other domestic currency-reservable liabilities and other demand and time deposits held with the RBM.
8. Adjusters. The ceiling on the stock of reserve money will be adjusted downward for a decrease in the reserve requirement ratio and the ceiling will be adjusted upward for an increase in the ratio, taking into account any change in the share of reserve assets which can be held with a discount house.2 For each month of a particular quarter, the following calculation would be undertaken: [(1- the old percent of reserve assets which can be held at discount houses) multiplied by (the program baseline required reserve ratio) minus (1 - the new percent of reserve assets which can be held at a discount houses) multiplied by the new required reserve ratio] multiplied by the amount of reservable deposit liabilities in commercial banks as at the end of the previous calendar month. To determine the adjustment for a quarter, an average is calculated over the adjustment for each month in the quarter and the adjustment of the month preceding the quarter; in the calculation of the average, a weight of one third is given to both the adjustment in the first and second month in the quarter, and a weight of one sixth is given to both the adjustment in the last month in the quarter and the month preceding the quarter. The average is then applied to the target for the respective quarter.
B. Limit on Net Foreign Assets of the Monetary Authorities
9. A floor applies to the level of net foreign assets (NFA) of the monetary authorities. NFA will be valued in U.S. dollars at actual end-of-period exchange rates. Monetary gold will be valued at the fixed RBM accounting rate. NFA will be calculated as the difference between gross international reserve assets and international reserve liabilities.
10. Gross international reserve assets of the monetary authorities are defined as the sum of
11. International reserve liabilities of the monetary authorities are defined as the sum of
12. Adjusters. The floor on NFA will be adjusted upward, up to a maximum of US$50 million, for balance of payments support (including grants and loans) in excess of the programmed level as set out in the table on quantitative targets. The floor on NFA will be adjusted downward, up to a maximum of US$50 million, for balance of payments support (including grants and loans) falling short of the programmed level as set out in the table on quantitative targets.
13. Balance of payments support shall comprise all grant and loan external financing that is not automatically linked to additional budgetary expenditure. Project financing to fund particular activities is excluded from this definition, including food security funding from the European Union. Loan financing from the IMF is also excluded from the baseline balance of payments support. Given the large magnitudes involved, debt relief under the HIPC Initiative will be included in the projection of baseline balance of payments support.
IV. Limit on the Financing of the Central Government
14. A ceiling applies on the total financing flows of the central government (TFCG) which is measured cumulatively from December 31, 2001 for the end-June 2002 target; and cumulatively from June 30, 2002 for the end-September 2002 and end-December 2002 targets.
15. TFCG is defined as the sum of the change in the stock of net credit from domestic banks and nonbanks, the change in domestic payment arrears, privatization proceeds from government assets that accrue to the central government,3 the change in the net deposits in the account held with the Bank of Tokyo-Mitsubishi in Japan, external balance of payments support as defined in paragraph 13, and other external debt instruments as defined below minus amortization of external debt. Project loans and grants are not included in the financing definition.
16. Net credit from domestic banks is computed as the sum of (i) net borrowing from the RBM (including ways and means advances, loans, holdings of local registered stocks, and holdings of treasury bills minus deposits), (ii) net borrowing from commercial banks (including advances, holdings of local registered stocks and holdings of treasury bills minus deposits), and (iii) holdings of promissory notes. The treasury bills and local registered stocks are valued at cost.
17. Net credit from domestic nonbanks includes (i) holdings of local registered stocks by the private sector and other financial institutions, (ii) holdings of Treasury bills by the private sector and other financial institutions, (iii) supplier credits, and (iv) holdings of promissory notes. The treasury bills and local registered stocks are valued at cost.
18. Domestic budgetary arrears are defined as the net accumulation of new budgetary arrears during the current fiscal year.
19. New budgetary arrears are defined as those payments delayed on central government commitments during the current fiscal year, including on wages and salaries, pensions, transfers, domestic interest, goods and services, and payments to the Malawi Revenue Authority (MRA) for tax refunds. Payments on wages and salaries, pensions, and transfers are in arrears when they remain unpaid for more than 30 days beyond their due date.4 Domestic interest payments are in arrears when the payment is not made on the due date. Payments for goods and services are deemed to be in arrears if they have not been made (i) within 30 days of the date of invoice, or--if a grace period has been agreed--(ii) within the contractually agreed grace period.
20. The account held with the Bank of Tokyo-Mitsubishi in Japan was set up for the delivery of Japanese debt relief. The net deposit in the account is calculated as the cash debt relief deposited by Japan5 minus withdrawals from the account6 valued at the end-month Yen-kwacha exchange rate.
21. The definition of external debt instruments is set out in Executive Board Decision No. 6230-(79/140) of August 3, 1979, and as amended by Decision Nos. 11096-(95/100), October 25, 1995, and 12274-(00/85) August 24, 2000. For the purpose of this memorandum, "other external debt instruments" of paragraph 15 include in particular special loans such as external supplier credits and external holdings of promissory notes; excluded are external balance of payment loans; instruments to restructure, refinance, or prepay existing debts; and any kwacha- denominated treasury bill and local registered stock holdings by nonresidents.
22. Amortization of external debt is defined as amortization of project loans, balance of payment loans, and other external debt instruments.
23. Adjusters. The ceiling on TFCG will be adjusted downward for any transfer from the RBM to the central government and upward for promissory notes issued to cover RBM's operational losses in 2001.
V. Clearance of New Domestic Budgetary Arrears of the Central Government
24. Should at any time during the program new domestic budgetary arrears of the central government (as defined in paragraph 19 above) be verified, then the government will clear these arrears by no later than the end of the fiscal quarter following the fiscal quarter in which these arrears were accumulated.
VI. Limits on External Debt
A. Limit on Medium- and Long-Term External Debt
25. A ceiling applies to the contracting and guaranteeing by the central government, the RBM, or other agencies on behalf of the central government on debt with nonresidents with original maturities of over one year. The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received. The ceiling is measured cumulatively from December 31, 2001 for the end-June 2002 target; and cumulatively from June 30, 2002 for the end-September 2002 and end-December 2002 targets.
26. The definition of debt, for the purpose of the limit, is set out in Executive Board Decision No. 6230-(79/140) of August 3, 1979,7 and as amended by Decision Nos. 11096-(95/100), October 25, 1995, and 12274-(00/85) August 24, 2000.
27. Excluded from the limit is the use of Fund resources; adjustment lending from the World Bank, the African Development Bank, and other multilateral agencies; debts to restructure, refinance, or prepay existing debts; concessional debts; and any kwacha- denominated treasury bill and local registered stock holdings by nonresidents.
28. For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt (i.e., grant element is equal to nominal value minus NPV divided by nominal value). The NPV of debt at the time of its disbursement is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the currency-specific commercial interest reference rates (CIRRs), as published by the OECD. For debt with a maturity of at least 15 years, the ten-year average CIRR will be used to calculated the NPV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. For the purposes of the program through December 2002, the CIRRs published by the OECD in May 2002 will be used (http://www.oecd.org/). For example, based on July 2000 CIRR rates, a U.S. dollar-denominated debt with a 10-year maturity would be considered concessional if the interest rate did not exceed 3 percent.
B. Limit on Short-Term External Debt
29. A ceiling applies to the contracting and guaranteeing by the central government, the RBM, or other agencies on behalf the central government of debt with nonresidents with original maturities of one year or less. The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received. The ceiling is measured cumulatively from December 31, 2001 for the end-June 2002 target; and cumulatively from June 30, 2002 for the end-September 2002 and end-December 2002 targets.
30. The definition of debt, for the purpose of the limit, is set out in Executive Board Decision No. 6230-(79/140) of August 3, 1979, and as amended by Decision Nos. 11096-(95/100), October 25, 1995, and 12274-(00/85) August 24, 2000.
31. Excluded from the limit are (i) debts classified as international reserve liabilities of the RBM; (ii) debts to restructure, refinance, or prepay existing debts; (iii) kwacha-denominated treasury bills and local registered stocks held by nonresidents; (iv) normal import financing; and (v) convertibility guarantees of the kwacha by the RBM. A financing arrangement for imports is considered to be "normal" when the credit is self-liquidating.
VII. Limit on External Payment Arrears
32. A continuous target applies on the nonaccumulation of external payment arrears on external debt contracted or guaranteed by the central government or the RBM. External payments arrears consist of external debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements.
VIII. Reporting Requirements for Technical Memorandum of Understanding
33. The authorities have committed themselves to using the best available data, so that any subsequent data revisions will not lead to a breach of a target. All revisions to data will be promptly reported to the Fund staff, particularly when the changes are significant. The likelihood of significant data changes will be communicated to Fund staff as soon as the risk becomes apparent to the authorities. All data will be reported electronically in the format and frequency set out below and within the period specified.
34. On a weekly basis within five working days of the end of the respective week, the balance sheet of the monetary authorities will be reported; and on a weekly basis (each Wednesday) with a two day lag, daily gross reserves, the daily US dollar to kwacha exchange rate, daily net interventions of the RBM in the foreign exchange market, daily reserve money, the daily net volume on open market operations, and the results of treasury bill and RBM bill auctions will be reported (reporting agency: RBM).
35. On a monthly basis within 30 working days of the end of the respective month, the monetary survey, the monetary authorities' accounts, the commercial banks' accounts, the international reserves position, local registered stock holdings, treasury bill holdings, interest rates, exchange rates, the consumer price index, guarantees extended by the RBM or central government on foreign operations of Malawian residents (reporting agency: RBM); and a consolidated table on total financing of the central government, including domestic and foreign financing will be reported (reporting agencies: RBM and Ministry of Finance).
36. On a monthly basis within 30 calendar days of the end of the respective month, the fiscal accounts of the central government, tables summarizing by line ministries achievement of commitment levels and arrears in the CCS3 and CCS4 returns, CCA, supplementary CCA, and reimbursement to commercial banks, and, within 45 days, a review summarizing the monthly reports by line ministries on commitment levels and arrears and assessing prospects for meeting budget targets will be reported (reporting agency: Ministry of Finance).
37. On a monthly basis within 30 calendar days of the end of the respective month, central government reports on spending on priority (poverty-related) programs (reporting agency: Ministry of Finance); and the revenue data and SGS import data will be reported (reporting agency: Malawi Revenue Authority (MRA).
38. On a quarterly basis within 45 calendar days of the end of the respective calendar quarter, the borrowings of the ten major parastatals (reporting agency: Ministry of Finance); a report on performance under the program (reporting agencies: RBM and Ministry of Finance); and a report on the verified expenditure arrears will be transmitted (reporting agency: Auditor General).
1The counterpart entry to the central government's international reserve assets will be classified as "net credit to central government."
2Currently, 25 percent of reserve assets can be held with discount houses.
3Some receipts from the privatization of parastatals have been split between the central government and the holding companies of the former parastatals. Only those receipts that accrue to the central government constitute financing of the central government.
4Pension benefits that are being assessed following retirement are not considered to be in arrears.
5Accounted for as a grant above the line.
6Accounted for as expenditure above the line.