## cr17184

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### Country context and growth performance
- Per capita GNI was US$320 in 2016.
- Per capita income grew at an average of little more than 1.5 percent between 1995 and 2014, versus 2.8 percent for non-resource-rich African economies.
- Agriculture accounts for about a third of GDP and supports livelihoods for two thirds of the population.
- Recurrent external (climate-related) shocks and domestic political/governance shocks contributed to economic stagnation and slow poverty reduction.
- Malawi exhibits many characteristics of fragile and conflict-affected countries in the functioning of governance institutions, although it is not strictly classified as a fragile state.

### Poverty, human development, and vulnerability
- Non-monetary improvements and health/education indicators:
  - Primary school completion rates rose by 17 percentage points between 2004 and 2013 to reach 75 percent.
  - Proportion of households with school-aged children attending school reached 63 percent in 2013.
  - Stunting among children under five fell from 53 percent to 37 percent between 2004 and 2015 (DHS).
  - Under-five mortality declined from 133 deaths per 1,000 live births in 2004 to 64 deaths per 1,000 live births in 2015 (DHS).
  - Declines in prevalence, incidence, and deaths associated with HIV/AIDS, malaria, and tuberculosis have been observed, particularly since 2000.
- Monetary poverty (IHS3 / international measures):
  - Using a basic needs basket costing 37,000 kwachas per person per year, 50 percent of the population were classified as poor in 2010.
  - Approximately 25 percent lived in extreme poverty (inability to satisfy food needs) in 2010.
  - Rural poverty increased from 56 percent in 2004 to 57 percent in 2010; extreme poverty rose from 24 percent to 28 percent.
  - Using the international poverty line of US$1.90 per person per day (at 2011 international prices), the poverty rate was 71 percent in 2010, up from 64 percent in 1997.
- Recent shocks and projections:
  - Large-scale floods of 2015 and the major drought of 2016 had major impacts on growth and likely increased poverty.
  - World Bank macro-poverty forecast: population below the international poverty line changed from 70.9 percent in 2010 to 69.6 percent in 2016.
  - Panel exercise (IHS3): 22 percent of households expected to become poor in 2013 when only household characteristics were used; rose to 42 percent when expected shocks, particularly rainfall shocks, were included.
- Food insecurity:
  - In 2013, 81 percent of poor rural households consumed fewer than 2,100 kilocalories per capita per day.
  - In 2013, 65 percent of all households (and 84 percent of rural households) reported experiencing food insecurity for at least 1 month per year — a 15 percentage point increase since 2010.
- Survey context:
  - Last full household survey reference point: Third Integrated Household Survey (IHS3) of 2010/11.
  - 2016/17 Fourth Integrated Household Survey was in the field at the time of the document.

### Development planning and MGDS performance
- MGDS history:
  - MGDS I: 2006–2011; built on earlier strategies.
  - MGDS II: 2012–2016; objective of reducing poverty through sustainable economic growth and infrastructure development.
- MGDS II outcomes and constraints:
  - Major governance shocks: 2012 policy-induced recession, fuel and foreign exchange shortages, and the “cashgate” corruption scandal of 2013.
  - Fiscal imbalances, public finance management weaknesses, and off-budget donor aid led to rising debt, high inflation, high interest rates, and poor business confidence.
  - Economic Development Document (EDD) serves as an interim medium-term plan while MGDS III is prepared.
- Institutional/strategic reforms signalled:
  - Need for more realistic planning, fewer priorities, and greater emphasis on implementation.
  - Climate change elevated as a major consideration.
  - Formation of a quasi-independent National Development and Planning Commission to improve planning independence.

### Key policy priorities (five priority areas)
- Agriculture and climate change management.
- Education and skills development.
- Energy and industrial development.
- Transport and ICT infrastructure development.
- Health and population management.

### Sectoral challenges and recommended strategic directions
- Agriculture and rural livelihoods:
  - Agricultural growth volatile and frequently outpaced by population growth; past gains relied on factor accumulation.
  - Recommended: reallocate resources to target rural poor, introduce climate-smart agriculture, invest in irrigation and water management, and transition to diversified, commercial farming.
- Climate risk management:
  - Droughts more frequent and intense over past four decades; 2015/16 drought resulted in around 40 percent of the population experiencing food insecurity.
  - Recommended: modernize institutions and policies, expand social safety nets, and invest in resilient infrastructure.
- Structural transformation and urbanization:
  - Slow urbanization; nonfarm opportunities volatile; constraints include limited access to finance, markets, electricity, and low rural human capital.
  - Recommended: invest in education and skills, power and connectivity, and policies to facilitate sustainable urbanization.
- Macroeconomic stability and public resource allocation:
  - Fiscal slippages and governance failures undermine growth and investment; high inflation and interest rates harm the poor.
  - Evidence suggests limited impact on growth or poverty from major public expenditure programs such as the FISP.
  - Recommended: strengthen macroeconomic and fiscal management, improve public financial management, and enhance public expenditure effectiveness.
- Social and gender inequality:
  - Female-headed households disadvantaged; women have 28 percent lower productivity on average than male counterparts in agriculture.
  - Recommended: close gender gaps in agriculture and nonfarm sectors and invest in girls’ education.
- Population growth and human capital:
  - Fertility persistently high; population expected to double in approximately two decades.
  - Recommended: increase investments in education and skills of youth to harness a demographic dividend and manage population pressures.

### MGDS III strategic intent and KPAs (2017–2022)
- MGDS III focus:
  - Prioritize resilience to climate and economic shocks, inclusivity, and “leaving no one behind.”
  - Stated minimum growth target: 6 percent as the minimum required to reduce poverty given current poverty and population growth.
- Agriculture and Climate Change Management:
  - Strategy: mechanised large scale commercial farming, agro-processing, mechanisation, water harvesting, and large scale irrigation targeting medium to large scale farmers.
  - Use ASWAp and domestically mobilised resources; align with National Agriculture Policy (NAP).
- Education and Skills Development:
  - Improve learning outcomes, emphasise girls’ education, ECD/ECE, technical colleges, vocational training, and tertiary access to capture demographic dividend.
- Energy and Industrial Development:
  - Reliable power critical; notable investments/planned generation and projects:
    - MCC invested $350 million in transmission/distribution networks.
    - Planned generation: as much as 470 MW by 2020.
    - Pipeline projects and expected additions: Songwe River Basin project (2018) splitting 300MW between Malawi and Tanzania; Kholombidzo Hydroelectric adding 100MW in 2020; Mozambique-Malawi interconnector possibly by 2018 adding 50-100MW; Zambia-Malawi interconnector adding 50-100MW; Tedzani Falls (Japanese funded) adding 20MW.
  - Promote rural electrification, renewable energy, and National Industrial Policy supported by education and skills interventions.
  - National Export Strategy focus on product clusters: oil seed products, sugarcane products and manufactures, complementing tobacco through value addition.
- Transport and ICT Infrastructure:
  - Priority on road network, feeder roads, Nacala railway, and ICT infrastructure to reduce transport costs and improve competitiveness.
  - ICT strategies to attract investment and expand access, education, and monitoring tools.
- Health and Population Management:
  - Population dynamics:
    - Annual growth rate: 2.8 percent.
    - Population growth from 9.9 million in 1998 to 17.3 million in 2017.
    - Projected population: 45 million by 2050 based on 2.8 percent growth rate.
  - Policies: strengthen community health services, prevention/management of Essential Health Package (EHP) conditions, staffing norms, and health impact assessments.

### Implementation approach and governance
- Implementation instruments:
  - MGDS III to be implemented through policies, programmes and limited flagship projects via PSIP focusing on a few catalytic projects.
  - Sector Working Groups (SWGs) to coordinate MDAs, CSOs, private sector, development partners, and other stakeholders.
- Stakeholder consultation:
  - Broad consultative process involving District Executive Committees, Area Development Committees, MDAs, development partners, Members of Parliament, political parties, academia, media, private sector, special interest groups, CSOs and FBOs.
  - Inclusion of marginalised groups such as women, girls, people with disability, the elderly and people living with HIV and AIDS.

### Community resilience and disaster risk management
- Disaster risk management objectives:
  - Mainstream disaster risk reduction into sector policies, increase community resilience, and improve preparedness, response and recovery.
- Systems and measures:
  - Establish comprehensive disaster risk identification, assessment and monitoring systems.
  - Establish people-centred early warning systems.
  - Promote safety culture, interdisciplinary research on disaster risk management technologies, community-based risk reduction, good land use planning, resilient infrastructure, and strengthened preparedness capacity.

### Fiscal and debt framework — pressures and recent trends
- Fiscal pressures and debt:
  - Government payment arrears discovered amounting to about K157.0 billion (about 5.5 percent of GDP) in 2014.
  - Public debt rose from 28 percent in 2011 to 54 percent at end-2016.
  - Malawi classified as at moderate risk of debt distress; Joint Debt Sustainability Analysis (June 2016) by the IMF and World Bank: public debt is sustainable but faces a moderate risk of distress.
- Central Government budgetary operations (percent of GDP) — selected series
  - Revenue: 27.5 (2012/13); 22.8 (2013/14); 21.5 (2014/15); 21.4 (2015/16)
  - Total Domestic Revenue: 17.3; 19.7; 18.7; 17.7
  - Tax Revenue: 15.7; 17.3; 16.3; 15.9
  - Nontax Revenue: 1.6; 2.4; 2.4; 1.8
  - Grants: 10.2; 3.1; 2.8; 3.7
    - Budget Support: 4.5; 0.3; 0; 0.5
    - Dedicated Grants: 3.7; 1; 1.1; 1.8
    - Project Grants: 2; 1.8; 1.7; 1.4
  - Total Expenditure and Net Lending: 28.4; 28.9; 27.9; 28.4
  - Current Expenditure: 22.4; 24.4; 22.5; 23.6
    - Wages and salaries: 5.7; 6.2; 6.9; 6.4
    - Interest Payments: 1.9; 4.4; 4.0; 3.8
      - Domestic: 1.7; 4.2; 3.8; 3.4
      - Foreign: 0.2; 0.2; 0.3; 0.3
    - Goods and Services: 8.4; 7.9; 5.5; 5.7
      - Generic Goods and Services: 3.5; 2.9; 2.7; 2.4
      - Other Goods and Services: 4.9; 5.0; 2.8; 3.3
    - Subsidies and Transfers: 5.7; 5.6; 4.9; 4.9
      - o/w Fertilizer and seed subsidy: 3; 2.7; 1.9; 1.8
    - Arrears: 0.7; 0.4; 1.2; 2.5
  - Development Expenditure: 6.0; 4.5; 5.3; 4.7
    - Domestic: 1.8; 0.9; 1.0; 0.6
    - Foreign: 4.2; 3.6; 4.4; 4.1
  - Overall Balance: -0.9; -6.1; -6.5; -6.7
  - Total Financing: 1.8; 6.1; 6.5; 6.4
    - Foreign financing (net): 1.9; 2.0; 2.5; 1.9
      - Borrowing: 2.2; 2.4; 2.9; 2.4
      - Budget Support: 0.0; 0.6; 0.0; 0.0
      - Project loans: 2.2; 1.8; 2.2; 1.9
      - Other External loans: 0.0; 0.0; 0.7; 0.5
      - Amortisation: -0.3; -0.4; -0.4; -0.5
    - Net Domestic Financing: -0.1; 4.2; 3.3; 1.7
    - Discrepancy: -0.9; -0.1; 0.0; 0.3

### Fiscal policy implications and medium-term strategy
- Revenue and expenditure evolution:
  - Domestic revenues improved from 17.3 percent of GDP in 2012/13 to 17.7 percent of GDP in 2015/16.
  - On-budget ODA dropped from 10.2 percent of GDP in 2012/13 to 3.7 percent of GDP in 2015/16; significant ODA transmitted off-budget with slower disbursement due to low absorptive capacities.
  - Development expenditure decreased from 6.0 percent of GDP to 4.7 percent of GDP; domestically financed development expenditure declined by 1.2 percentage points from 1.8 percent of GDP in 2012/13.
- Debt policy and constraints:
  - Foreign borrowing restricted to concessional loans meeting international thresholds; to fund development programmes.
  - Domestic borrowing to be reduced by retiring maturing debt instead of securitization.
- Medium-term targets and fiscal rules:
  - Target: development expenditure to increase substantially to about 25.0 percent of the total budget in medium to long term.
  - Tax and non-tax revenue collection expected to rise to about 20.0 percent of GDP by 2019/20, contingent on reforms.
  - Grants expected to stabilise around 3 percent of GDP over the five year implementation period.
  - Foreign borrowing expected to rise to 2.5 percent of GDP to finance specific projects within priority areas.
  - Fiscal policy actions highlighted:
    - a. Reduce share of interest payments by reducing domestic debt stock.
    - b. Slow growth in wage bill by slowing unplanned recruitment, payroll irregularities and restructuring the public service.
    - c. Review policies such as FISP, Decent Housing and Accommodation Subsidy Programme (DHASP) and social cash transfers.
    - d. Review and strengthen alignment of the budget to national development strategies.

### Implementation timetable, consultations, and targets
- Launch and timeframe:
  - MGDS III expected to be finalised and launched by the end of June 2017 and will guide national development from July 2017 to June 2022.
  - Draft to be ready by end of May 2017; to be discussed by a Committee of Principal Secretaries before Cabinet approval.
- Growth target:
  - Economy expected to grow by at least 6.0 percent annually during the five years.
- Priority resource mobilisation:
  - Government will concentrate on domestic resource mobilisation to fund priority areas adequately and increase the share of domestic resources to the development budget to around 25 percent of total budget.

*IMF Country Report cr17184 — Economic Development Document extracts (May 2017)*

### 1. Malawi is a small open economy in Sub-Saharan Africa with a per capita GNI of just US$320

### 1. Malawi is a small open economy in Sub-Saharan Africa with a per capita GNI of just US$320

### Country context and growth performance
- Per capita GNI was US$320 in 2016.
- Per capita income grew at an average of little more than 1.5 percent between 1995 and 2014, versus 2.8 percent for non-resource-rich African economies.
- The economy is dominated by agriculture, which accounts for about a third of GDP and supports livelihoods for two thirds of the population.
- Malawi exhibits many characteristics of fragile and conflict-affected countries in the functioning of governance institutions, although it is not strictly classified as a fragile state.
- Recurrent external (climate-related) shocks and domestic political/governance shocks have contributed to economic stagnation and slow poverty reduction.

### Poverty, human development, and vulnerability
- Non-monetary improvements over the last ten years include partial or full achievement of 4 of 8 Millennium Development Goals (MDGs), aided by large ODA flows.
- Education and health indicators:
  - Primary school completion rates rose by 17 percentage points between 2004 and 2013 to reach 75 percent.
  - Proportion of households with school-aged children attending school reached 63 percent in 2013.
  - Stunting among children under five fell from 53 percent to 37 percent between 2004 and 2015 (DHS).
  - Under-five mortality declined from 133 deaths per 1,000 live births in 2004 to 64 deaths per 1,000 live births in 2015 (DHS).
  - Declines in prevalence, incidence, and deaths associated with HIV/AIDS, malaria, and tuberculosis have been observed, particularly since 2000.
- Monetary poverty remains pervasive and largely stagnant:
  - Using a basic needs basket costing 37,000 kwachas per person per year, 50 percent of the population were classified as poor in 2010.
  - Approximately 25 percent lived in extreme poverty (inability to satisfy food needs) in 2010.
  - Rural poverty increased from 56 percent in 2004 to 57 percent in 2010; extreme poverty rose from 24 percent to 28 percent.
  - Using the international poverty line of US$1.90 per person per day (at 2011 international prices), the poverty rate was 71 percent in 2010, up from 64 percent in 1997.
- Recent shocks and projections:
  - Large-scale floods of 2015 and the major drought of 2016 have had major impacts on growth and likely increased poverty.
  - World Bank macro-poverty forecast projects that the population living below the international poverty line changed from 70.9 percent in 2010 to 69.6 percent in 2016.
  - A panel exercise based on IHS3 predicted 22 percent of households were expected to become poor in 2013 when only household characteristics were used; this rose to 42 percent when expected shocks, particularly rainfall shocks, were included.
- Food insecurity:
  - In 2013, 81 percent of poor rural households consumed fewer than 2,100 kilocalories per capita per day.
  - In 2013, 65 percent of all households (and 84 percent of rural households) reported experiencing food insecurity for at least 1 month per year—a 15 percentage point increase since 2010.
- As of the document, the 2016/17 Fourth Integrated Household Survey was in the field; the last full survey reference point is the Third Integrated Household Survey (IHS3) of 2010/11.

### Malawi’s development planning (MGDS background and performance)
- MGDS I: operated 2006–2011; built on the Malawi Economic Growth Strategy of 2004 and the Malawi Poverty Reduction Strategy (2002–2005).
- MGDS II: guided development during 2012–2016; shared the objective of reducing poverty through sustainable economic growth and infrastructure development.
- MGDS II reforms emphasized diversification, improved governance, and human capital development, but implementation was weak:
  - Major governance shocks included a policy-induced recession in 2012, fuel and foreign exchange shortages, and the “cashgate” corruption scandal of 2013.
  - Fiscal imbalances and public finance management weaknesses, together with off-budget donor aid, resulted in rising debt, high inflation, high interest rates, and poor business confidence.
- The Economic Development Document serves as an interim medium-term plan while MGDS III is prepared.
- Reforms and institutional changes:
  - Recognition of the need for more realistic planning, fewer priorities, and greater emphasis on implementation.
  - Climate change is now a major consideration.
  - Formation of a quasi-independent National Development and Planning Commission to improve planning independence.

### Key policy priorities for poverty reduction (five priority areas identified)
- Agriculture and climate change management.
- Education and skills development.
- Energy and industrial development.
- Transport and ICT infrastructure development.
- Health and population management.

### Sectoral challenges and recommended strategic directions
- Agriculture and rural livelihoods:
  - Agricultural growth has been volatile and frequently outpaced by population growth.
  - Growth to date has relied on factor accumulation (land and labor); shrinking farm sizes and high population density limit future gains.
  - Heavy reliance on rain-fed agriculture exposes farmers to price and weather shocks and low productivity.
  - Past institutions and policies have exacerbated price volatility and undermined incentives for commercial investment.
  - Recommended actions: reallocate resources to provide comprehensive and targeted support to the rural poor, introduce climate-smart agriculture, invest in irrigation and water management, and transition subsistence farming toward diversified, commercial agriculture.
- Climate risk management:
  - Droughts have become more frequent, widespread, and intense over the past four decades.
  - The 2015/16 drought resulted in around 40 percent of the population experiencing food insecurity.
  - Recommended actions: modernize institutions and policies, expand social safety nets, and invest in resilient infrastructure to increase resilience to climate-related shocks.
- Structural transformation and urbanization:
  - Urbanization has been very slow; rural-to-nonfarm labor shifts are occurring but nonfarm opportunities are volatile with short business lifespans.
  - Constraints include limited access to finance, markets, electricity in rural areas, and low rural human capital.
  - Recommended actions: invest in education and skills, critical infrastructure (power, connectivity, access to finance), and adopt policies to facilitate faster, sustainable urbanization.
- Macroeconomic stability and public resource allocation:
  - Macroeconomic instability—driven by fiscal slippages and governance failures—undermines growth and investment.
  - High inflation disproportionately affects the poor and raises costs of finance and exchange rate instability.
  - Fiscal consolidation measures have sometimes reduced public spending or increased revenue in ways that adversely impact the poor.
  - Evidence suggests limited impact on growth or poverty from major public expenditure programs such as the FISP (Farm Input Subsidy Program).
  - Recommended actions: strengthen macroeconomic and fiscal management, improve public financial management, and enhance the effectiveness of key public expenditure programs to maximize impact on the poor.
- Social and gender inequality:
  - Female-headed households face disadvantages in agriculture and nonfarm businesses.
  - Women have smaller land plots, use fewer inputs, receive less extension and investment, and have 28 percent lower productivity on average than male counterparts.
  - Women in the nonfarm sector have less access to finance, capital, and technology.
  - Recommended actions: close the gender gap in agriculture and nonfarm sectors and invest in girls’ education to raise long-term growth and reduce fertility.
- Population growth and human capital:
  - Fertility has remained persistently high; the population is expected to double in approximately two decades.
  - High population growth will intensify pressure on land, service delivery, and make poverty reduction harder.
  - High fertility lowers productivity by limiting women’s ability to engage in more productive work.
  - Recommended actions: increase investments in education and skills of youth to harness a demographic dividend and manage population pressures.

### Conclusions and policy implications
- Exogenous climate-induced shocks are a major source of volatility, exacerbating macroeconomic instability and hindering escape from a cycle of vulnerability.
- Reliance on basic farming methods and rain-fed agriculture, combined with population growth, make food security recurrent and stress land use, soil fertility, and forest resources.
- Weak public financial management transmits shocks into fiscal indiscipline, worsening macroeconomic instability.
- Malawi faces twin pressures from climate vulnerability and weak fiscal management that together undermine stability.
- The recent food security crisis has increased urgency for politically challenging reforms to reduce distortions in agricultural policy and rebuild public financial management and accountability.
- These reforms, along with anticipated scale-up of development finance, present a potential pathway to address chronic poverty if implementation is effective.
- Central challenge: improving actual implementation of policy objectives through functional strengthening of public sector institutions to better absorb shocks, prioritize finite resources, and maximize domestic and foreign resource impact.
- Noted remaining governance gaps—particularly in public procurement—require continued efforts to strengthen oversight and accountability to reduce the risk of recurrence of “cashgate”-type events.

*Economic Development Document for Malawi, May 2017 — Ministry of Finance, Economic Planning and Development*

### 3.0 Community Resilience and Disaster Risk Management .......................................................... 12

### 3.0 Community Resilience and Disaster Risk Management .......................................................... 12

### Foreword
- Malawi faces various economic challenges including: low productivity; narrow and raw export base with high reliance on few commodities; lack of alternative energy sources; and poor transport network and ICT facilities.
- Natural disasters in 2015 and 2016 affected implementation of the Malawi Growth Development Strategy (MGDS) II and achievement of its goals.
- A review of MGDS revealed that most targets achieved were linked to Millennium Development Goals and identified 9 gaps to be addressed in successor development strategies.
- The Economic Development Document (EDD) aims to highlight intervention areas for the national development strategy over the next five years to promote economic performance and attain the GDP growth rates of over 7.2 percent.

### 1.0 National Economic Development in Malawi — Background and Strategic Context
- Since independence in 1964, Malawi executed 10-year development policies (DEVPOLS) up to the early 1990s, implemented Structural Adjustment Programmes (SAPs) in the early 1980s, adopted Poverty Alleviation Programmes (PAPs) in the late 1990s, launched Vision 2020 in 2000, and developed MPRSP (2002–2005), MGDS (2006–2011), and MGDS II (2011–2016).
- MGDS II aimed to reduce poverty through sustainable economic growth and infrastructure development, recognizing the need to complement human and social development with improved labour productivity and structural transformation.
- MGDS II had six thematic areas: sustainable economic growth; social support and disaster risk management; social development; infrastructure development; governance; and gender and capacity development.
- Nine Key Priority Areas (KPAs) under MGDS II:
  - Agriculture and Food Security
  - Transport Infrastructure and Nsanje World Inland Port
  - Energy, Industrial Development, Mining and Tourism
  - Education, Science and Technology
  - Public Health, Sanitation, Malaria and HIV and AIDS Management
  - Integrated Rural Development
  - Green Belt Irrigation and Water Development
  - Child Development, Youth Development and Empowerment
  - Climate Change, Natural Resources and Environmental Management
- Assumptions underpinning MGDS II included: ability to sustain and accelerate real GDP growth rates; prudence in fiscal and monetary management; political stability; conducive macroeconomic environment; increased export diversification and value addition; effective aid and domestic debt management; adequate resources and capacity to implement activities; entrenchment of good governance; effective social protection; and continued political commitment.

### Implementation Outcomes and Constraints
- Major impediments to achieving MGDS II goals:
  - Growth averaged 4.1 percent between 2011 and 2015, below the expected average of 7.2 percent.
  - Adoption of a flexible foreign exchange regime accompanied by a massive devaluation of 52 percent of the Malawian Kwacha and subsequent currency instability.
  - Withdrawal of donor budget support due to the cash gate scandal.
  - Floods and drought in 2015 and 2016 leading to massive food shortages.
- Areas of progress aligned with MDGs:
  - Increased girl-boy ratio in primary and secondary education.
  - Enactment of laws promoting gender equality and women empowerment related to inheritance, gender equality, marriage and trafficking.
  - Reduced gender disparity in access to tertiary education and increased proportion of girls entering public universities.
  - Reduced HIV prevalence and universal access to ART.
  - Increased access to safe water.
- Persistent needs:
  - Accelerate public sector reforms and public financial management to enhance accountability.
  - Stronger focus on delivery of development results.
  - Create an enabling private sector environment to improve the doing business climate and global competitiveness.
  - Implement measures to arrest unsustainable population growth.
  - Implement a national food and nutrition security strategy aligned with the SADC Food and Nutrition Security Strategy.

### 1.2 Macroeconomic Overview — Performance and Drivers
- Historical growth dynamics:
  - Negative growth in 2001 of -5.0 percent (WDI) partly due to poor agricultural performance.
  - Peak growth of 9.6 percent in 2007.
  - Average growth of 4.1 percent between 2011 and 2015; growth slowed to 1.9 percent in 2012.
- Agriculture:
  - Contributes around 30.0 percent to GDP.
  - Drives growth in other sectors, particularly manufacturing.
  - Periods of growth above 7.2 percent (2007–2009) were significantly supported by agriculture, including the farm input subsidy programme (FISP) and favorable weather.
- Inflation and interest rates:
  - Average annual inflation fluctuated, peaking at 27.3 percent in 2013.
  - Target/expected average inflation rate for the MGDS II five years was 5.9 percent.
  - Lending rates ranged from 18 percent in 2011 to 33.6 percent in December 2016.
- GDP per capita:
  - Increased at an average of 2.6 percent in the last ten years up to US$494 reported in 2015.
- Foreign exchange reserves:
  - Remained low due to a low and undiversified export base; reserves mostly below the minimum level of three months of import cover.
- Fiscal and financing pressures:
  - Cashgate scandal led to withdrawal of development partner budget support; government resorted to domestic borrowing, increasing domestic arrears.

### 1.3 Socio-Economic Profile — Poverty, Inequality, and Demographics
- Poverty:
  - 50.7 percent of the population living below the poverty line.
  - 25 percent living in extreme poverty.
  - Slight decline in poverty from 52.4 percent in 2005 to 50.7 percent in 2011; remained steady thereafter (IHS3).
  - Rural poverty: 57.0 percent poor; urban poverty: 17.0 percent poor.
- Inequality:
  - Gini coefficient increased from 0.39 in 2005 to 0.45 in 2014.
  - Southern Region has the largest Gini-coefficient.
- Gender and households:
  - Female-headed households constitute 57.0 percent of total households and are poorer than male-headed households (43.0 percent).
- Vulnerability drivers (World Bank, 2006):
  - Over-reliance on rain-fed agriculture prone to climatic shocks.
  - Animal and plant diseases causing crop and livestock losses.
  - Volatility of maize, fertilizer, and tobacco prices.
  - Prevalence of HIV/AIDS, Malaria, tuberculosis and anaemia.
  - Increased frequency and intensity of climate-related disasters.
- Demographics and employment:
  - Population in 2015 estimated at 16.3 million and increasing at 3.1 percent per annum.
  - Employment rate at 79.6 percent.
  - About 64.1 percent of employed persons are in agriculture, forestry and fisheries.
  - Rapid population growth places pressure on natural resources and public service provision, increasing budgetary pressure.

### 1.4 Development Challenges — Table Summary (textual)
- Challenge 1 — Low productivity: Cause — lack of complementary investments in agriculture and limited access to information, inefficient patterns and composition of public expenditure in agriculture.
- Challenge 2 — Narrow and raw export base, high reliance on tobacco, sugar, tea and few others: Cause — Slow implementation of or lack of diversification programme.
- Challenge 3 — Poor doing business environment: Cause — Despite recent improvements more still needs to be done on starting a business; access to electricity; registering property; getting credit; protecting investors; high taxes; trading across borders; and enforcing contracts and resolving insolvency.
- Challenge 4 — Land degradation and natural resource depletion: Cause — High population growth, limited access to electricity, and lack of energy alternatives.
- Challenge 5 — Lack of alternative sources of energy: Cause — Inadequate investment, inadequate policy environment.
- Challenge 6 — Inadequate ICT facilities: Cause — Inadequate investment.
- Challenge 7 — Inadequate access road network: Cause — Inadequate investment.

### 1.5 Objective of the Economic Development Document (EDD)
- Purpose:
  - The EDD reflects intervention areas for the national development strategy over the next five years and is developed in line with the IMF’s new policy on Poverty Reduction Strategy (PRS) documentation.
- Major goal:
  - Highlight development areas Malawi will emphasize to promote economic performance and attain GDP growth rates of over 7.2 percent as stipulated in MGDS II.
- Focus:
  - The EDD highlights priorities Malawi will focus on in the medium term to accelerate socio-economic development and reduce poverty.

*Source: cr17184 - 3.0 Community Resilience and Disaster Risk Management .......................................................... 12*

### 1.6  Key Priority Areas of the National Development Plan –   The MGDS III

### 1.6 Key Priority Areas of the National Development Plan – The MGDS III

### Overview and strategic intent
- MGDS III focuses on sectors determined to spur economic growth and development for Malawi for the period 2017 to 2022.
- Emphasis on addressing identified economic challenges with particular focus on ensuring resilience to shocks such as climate change and other economic shocks.
- Focus on sectors that will form a platform for inclusive growth and on the principle of "leaving no one behind" to ensure inclusivity in the growth process.
- Five key priority areas (KPAs) identified: (i) agriculture and climate change management; (ii) education and skills development; (iii) energy and industrial development; (iv) transport and ICT infrastructure development; and (v) health and population management.
- "6 percent growth is taken as a minimum target if the country is to reduce poverty considering the current poverty levels and the level of population growth."

### 1.6.1 Agriculture and Climate Change Management
- Context:
  - Malawi remains an agro-based economy dominated by rain fed subsistence farming, smallholder farming and traditional farming methods, leaving many vulnerable to shocks (price fluctuation, weather variations).
  - Strategy focus: mechanised large scale commercial farming complemented with agro-processing, value addition and manufacturing.
- Climate response:
  - Promotion of adaptive technologies and/or mitigation programmes.
  - Promotion of environmental management, conservation and climate-smart agriculture technologies.
- Sector policies and implementation instruments:
  - Pooling of resources through the Agriculture Sector Wide Approach (ASWAp) and using domestically mobilised resources.
  - Government focus on commercialisation, mechanisation, water harvesting and development, and large scale irrigation targeting medium to large scale farmers.
  - Alignment with National Agriculture Policy (NAP) goal to achieve sustainable agricultural transformation, with positive effects expected in:
    - (I) agricultural production and productivity;
    - (ii) diversification of agricultural production and market surpluses;
    - (iii) use of irrigation in crop production;
    - (iv) mechanisation of farming and agro-processing activities;
    - (v) agro-processing and value addition of agricultural products.

### 1.6.2 Education and Skills Development
- Rationale:
  - Direct linkages to other sectors (e.g., manufacturing); improving education standards expected to increase productivity, reduce poverty and yield social benefits.
  - Youthful population with majority of youths unemployed; education and skills development key to capturing demographic dividend and supplying skilled labour.
- Policy focus areas:
  - Improve learning outcomes across different levels and promote education of girls.
  - Improve relevance and quality of education to meet industry needs.
  - Focus on Early Childhood Development (ECD) and Early Childhood Education (ECE), primary and secondary education, special needs education and improving access to tertiary education.
  - Emphasise technical colleges and vocational training to serve youths leaving secondary school who are not admitted into universities.
  - Ensure availability of skilled labour for increased production and productivity.

### 1.6.3 Energy and Industrial Development
- Context and needs:
  - Long and persistent load shedding has negatively affected industrial development; reliable power supply is critical for a productive, competitive and resilient economy.
  - Energy required at household, industrial and social services levels (education and health).
- Notable investments and planned generation:
  - MCC has invested $350 million in transmission/distribution networks.
  - Planned electricity generation projects expected to generate as much as 470 MW by 2020.
  - Pipeline projects include:
    - Songwe River Basin project (2018), a regional project, splitting 300MW equally between Malawi and Tanzania (involves irrigation, power, and potable water);
    - Millennium Challenge Corporation project ($350 million invested over 4 years) ending in September 2018 (project covers installing distribution/transmission);
    - Kholombidzo Hydroelectric (feasibility study done), adding 100MW in 2020;
    - Mozambique-Malawi interconnector possibly by 2018, adding 50-100MW;
    - Zambia-Malawi interconnector, adding 50-100MW;
    - Tedzani Falls (Japanese funded), adding 20MW.
- Industrial and private sector development:
  - Reliable energy is essential to improve production and attract investors.
  - Private Sector Development recognised as the engine of economic growth; industrial development is a priority.
  - Trade, industry and private sector development strategy aims to build Malawi’s productive base and export capacity while empowering the poor, farmers, youth, women and other vulnerable groups.
- Sector policies and implementation instruments:
  - Implement energy policy to increase access to affordable, reliable, sustainable, efficient and modern energy for all Malawians; enhance electricity generation and distribution.
  - Continue rural electrification via establishment of a Rural Electrification Agency as a semi-autonomous legal entity, the Rural Electrification Fund and renewable energy activities.
  - Promote solar and other renewable energy sources in rural areas to reduce deforestation.
  - National Industrial Policy to increase manufacturing’s share of GDP through enhanced productivity, supported by education and skills interventions (e.g., community colleges).
  - National Export Strategy (NES) to promote local industries and increase exports focusing on three product clusters: oil seed products, sugarcane products and manufactures, complementing tobacco through value addition.

### 1.6.4 Transport and ICT Infrastructure
- Transport constraints:
  - High cost of doing business largely due to high transport costs from poor roads and absence of alternative transport modes.
  - Development of road network and other transport facilities expected to reduce costs, improve competitiveness and attract investors.
  - Feeder roads crucial for access to schools, health facilities and markets.
  - Nacala railway highlighted for easing movement of goods and people.
- ICT importance:
  - ICT infrastructure critical for communication, broadcasting, trade, investment and as an enabler for social services (health and education).
- Sector policies and implementation instruments:
  - National transport policy goal: development of coordinated and efficient transport infrastructure fostering safe, competitive, viable, affordable, equitable and sustainable transport services.
  - Expected outcomes from policy implementation: reduced travel time and transport costs for persons and goods; enhanced access to inputs; improved access to local and international product markets; improved access to social and public services for urban and rural populations.
  - Strategy concentration on construction and rehabilitation of roads and railway transport infrastructure.
  - ICT strategies include:
    - Creating a conducive environment to attract investment in ICT infrastructure and services;
    - Developing a reliable, fast, adaptive and robust national ICT infrastructure that feeds into international networks;
    - Intensifying ICT education and training in all sectors;
    - Improving ICT access by all communities;
    - Developing monitoring and evaluation tools and techniques for the sector.

### 1.6.5 Health and Population Management
- Rationale:
  - Healthy population key to increased productivity and sustainable economic growth; strong correlation between health status and level of development.
  - Poor health is costly to the economy and associated with under-development.
  - Access to quality health care is low among the rural poor; improving health will accelerate economic growth and yield government savings and improved citizen productivity.
- Population dynamics and policy challenge:
  - Malawi population annual growth rate: 2.8%.
  - Population growth from 9.9 million in 1998 to 17.3 million in 2017.
  - Based on the 2.8% growth rate, population projected to reach 45 million by 2050.
  - Government will continue promoting policies to control rapid population growth over the next five years.
- Sector policies and implementation instruments:
  - Goals to be achieved through:
    - Strengthening delivery of community health services;
    - Community participation;
    - Prevention, management and control of Essential Health Package (EHP) conditions (high impact and cost effective interventions);
    - Establishing staffing norms for all levels of health care facilities;
    - Advocating systematic assessments of health impacts of rapidly changing environments (technology, working practices, sources of energy, commercial production and urbanization).

### 2.0 Implementation of the MGDS III
- Implementation approach:
  - MGDS III will be implemented using various policies, programmes and flagship projects.
  - Government to ensure existing policies are aligned to the new national development strategy via comprehensive policy reviews and encourage formulation and implementation of new policies where existing ones are no longer relevant.
- Flagship projects and the PSIP:
  - Priority areas anchored on carefully identified flagship projects designed to play catalytic roles across sectors.
  - Departure from previous practice: PSIP will focus on limited flagship projects to ensure adequate resourcing and to generate desired changes in targeted sectors.
  - Non-priority sectors will continue receiving government support to ensure a conducive environment for effective implementation of priority areas (e.g., governance institutions to ensure accountability).
- Stakeholder coordination:
  - MGDS III will guide development activities among government MDAs, Civil Society Organisations (CSOs), the private sector, academia, research institutions, development partners and the public.
  - Government will continue using Sector Working Groups (SWGs) as a mechanism for implementing MGDS III and domesticating international commitments and ensuring aid effectiveness.

### 3.0 Community Resilience and Disaster Risk Management
- Context and objectives:
  - Changing climate has increased disaster frequency in Malawi and surrounding countries.
  - Disaster risk management policy goal: sustainably reduce disaster losses in lives and socio-economic and environmental assets of individuals, communities and the nation.
  - National Disaster Risk Management Policy to mainstream disaster risk reduction strategies into sector policies, plans and budgets at all levels; increase community resilience; and improve preparedness for effective response and recovery.
- Systems and measures:
  - Establish and operationalise a comprehensive system for disaster risk identification, assessment and monitoring.
  - Establish a people-centred early warning system ensuring newly established and existing systems are comprehensive, effective, people-centred and integrated.
  - Promote a culture of safety and resilience-enhancing interventions through interdisciplinary and policy-oriented research on appropriate disaster risk management technologies and approaches.
  - Redress underlying risks via promotion of sustainable and long-term community-based disaster risk reduction measures; good land use planning; construction of resilient infrastructure; and strengthening preparedness capacity for effective response and recovery.

*IMF Country Report cr17184 – 1.6 Key Priority Areas of the National Development Plan – The MGDS III*

### 4.0 Fiscal and Debt Framework

### 4.0 Fiscal and Debt Framework

### Fiscal context and pressures
- Declining resource envelope against growing expenditure requires effective priority setting.
- Suspension of budget support in 2013 and reduction of dedicated grants created pressure on the budget and resulted in reduction of some expenditure.
- Government contribution to the development budget has fallen to around 1 percent of GDP due to decline in budget support and disbursements of dedicated and project grants.
- Widening fiscal imbalance has led to a continual trend towards reduced development expenditure to offset overruns in recurrent spending.
- Discovery of government payment arrears to the private sector of about K157.0 billion (about 5.5 percent of GDP) in 2014 increased demands on the resource envelope.
- Public debt rose from 28 percent in 2011 to 54 percent at end-2016.
- Malawi is classified as at moderate risk of debt distress; vulnerabilities arise from sharp increase in domestic debt and growing interest burden.
- Joint Debt Sustainability Analysis (June 2016) by the IMF and the World Bank: public debt is sustainable but faces a moderate risk of distress.

### Central Government Budgetary Operations (Percent of GDP)
- Revenue: 27.5 (2012/13); 22.8 (2013/14); 21.5 (2014/15); 21.4 (2015/16)
- Total Domestic Revenue: 17.3; 19.7; 18.7; 17.7
- Tax Revenue: 15.7; 17.3; 16.3; 15.9
- Nontax Revenue: 1.6; 2.4; 2.4; 1.8
- Grants: 10.2; 3.1; 2.8; 3.7
  - Budget Support: 4.5; 0.3; 0; 0.5
  - Dedicated Grants: 3.7; 1; 1.1; 1.8
  - Project Grants: 2; 1.8; 1.7; 1.4
- Total Expenditure and Net Lending: 28.4; 28.9; 27.9; 28.4
- Current Expenditure: 22.4; 24.4; 22.5; 23.6
  - Wages and salaries: 5.7; 6.2; 6.9; 6.4
  - Interest Payments: 1.9; 4.4; 4.0; 3.8
    - Domestic: 1.7; 4.2; 3.8; 3.4
    - Foreign: 0.2; 0.2; 0.3; 0.3
  - Goods and Services: 8.4; 7.9; 5.5; 5.7
    - Generic Goods and Services: 3.5; 2.9; 2.7; 2.4
    - Other Goods and Services: 4.9; 5.0; 2.8; 3.3
  - Subsidies and Transfers: 5.7; 5.6; 4.9; 4.9
    - o/w Fertilizer and seed subsidy: 3; 2.7; 1.9; 1.8
  - Arrears: 0.7; 0.4; 1.2; 2.5
- Development Expenditure: 6.0; 4.5; 5.3; 4.7
  - Domestic: 1.8; 0.9; 1.0; 0.6
  - Foreign: 4.2; 3.6; 4.4; 4.1
- Overall Balance: -0.9; -6.1; -6.5; -6.7
- Total Financing: 1.8; 6.1; 6.5; 6.4
  - Foreign financing (net): 1.9; 2.0; 2.5; 1.9
    - Borrowing: 2.2; 2.4; 2.9; 2.4
    - Budget Support: 0.0; 0.6; 0.0; 0.0
    - Project loans: 2.2; 1.8; 2.2; 1.9
    - Other External loans: 0.0; 0.0; 0.7; 0.5
    - Amortisation: -0.3; -0.4; -0.4; -0.5
  - Net Domestic Financing: -0.1; 4.2; 3.3; 1.7
  - Discrepancy: -0.9; -0.1; 0.0; 0.3

### Revenue and expenditure evolution and implications
- Domestic revenues improved from 17.3 percent of GDP in 2012/13 to 17.7 percent of GDP in 2015/16.
- On-budget Official Development Assistance (ODA) dropped from 10.2 percent of GDP in 2012/13 to 3.7 percent of GDP in 2015/16; significant ODA is being transmitted off-budget with slower disbursement due to low absorptive capacities at project level (MEM, 2016).
- Expenditure and net lending marginally decreased to 28.4 percent of GDP in 2015/16 from 28.5 percent of GDP in 2012/13.
- Current expenditure increased by 1.2 percentage points from 22.4 percent of GDP in 2012/13.
- Development expenditure decreased from 6.0 percent of GDP to 4.7 percent of GDP; domestically financed development expenditure declined by 1.2 percentage points from 1.8 percent of GDP in 2012/13; foreign financed development expenditure decreased by 0.5 percent of GDP.

### Debt policy and constraints
- Foreign borrowing will be restricted to concessional loans that meet internationally agreed thresholds to ensure sustainability and will be used to fund development programmes.
- Domestic borrowing will be reduced by retiring maturing debt instead of securitization.

### Medium term fiscal strategy and targets
- Medium term expenditure framework aims to rationalise expenditure to allocate more resources to capital formation and social sectors while ensuring sustainability of public finances.
- Target: development expenditure to increase substantially to about 25.0 percent of the total budget in medium to long term to promote economic growth and development.
- External borrowing to be used largely for development programmes rather than financing consumption.

### Fiscal rules and priority policy actions
- A package of bold fiscal rules will be developed to constitute fiscal policies in the medium to long term.
- Specific areas requiring concerted efforts:
  - a. Reduction in the share of interest payments by reducing domestic debt stock;
  - b. Slowing growth in wage bill by slowing unplanned recruitment, payroll irregularities and restructuring the public service;
  - c. Review the current policies such as FISP, Decent Housing and Accommodation Subsidy Programme (DHASP) and social cash transfers among other social protection interventions. These reduce discretionary resources that could otherwise be channelled towards productive areas; and
  - d. Review and strengthen alignment of the budget to national development strategies.

### 5.0 Spending Framework (projections and priorities)
- With shrinkage of foreign aid channelled through the budget, priority areas will mainly be implemented using domestic resources and foreign concessional borrowing.
- Tax and non-tax revenue collection is expected to rise to about 20.0 percent of GDP by 2019/20 financial year, contingent on administrative and policy reforms in revenue administration.
- Grants are expected to stabilise around 3 percent of GDP for the five year period of implementation; improved project implementation and absorption could increase this ratio.
- Foreign borrowing is expected to rise to 2.5 percent of GDP to finance specific projects within the priority areas.
- Government envisages increasing the share of domestic resources that goes to the development budget to around 25 percent of total budget to promote economic growth.

### 6.0 Launch Date and Timeframe for Implementation
- MGDS III expected to be finalised and launched by the end of June 2017 and will be the guiding national development strategy from July 2017 to June 2022.
- Draft document to be ready by end of May 2017; to be presented to a Committee of Principal Secretaries for discussion and policy advice before submission to Cabinet for approval.
- The National Planning Commission, upon approval, mandated to spearhead implementation of MGDS III.

### 7.0 Consultation Process
- Development of the strategy was consultative and participatory.
- Consultations involved District Executive Committees, Area Development Committees (ADCs), MDAs, development partners, Members of Parliament, representatives for political parties, the academia, the media, the private sector, special interest groups, Civil Society Organisations (CSO) and Faith Based Organisations (FBOs).
- Consultation requests: suggestions on interventions for the next five years; stakeholder roles in implementation; Government role to ensure effective implementation; suggestions to improve implementation given past policies/plans were not implemented as expected.
- Footnote: Interest groups included the marginalised groups such as women, girls, people with disability, the elderly and people living with HIV and AIDS.

### 8.0 Conclusion and growth target
- Despite policies including DEVPOLs, SAPs and the MGDSs, socio-economic development has hardly been attained and poverty remains a big concern.
- Contributing factors: inadequate implementation of some policies/plans, agricultural land degradation, low production and productivity, poor access to markets, high transport costs, and negative effects of climate change.
- Government will concentrate on domestic resource mobilisation to fund priority areas adequately.
- Growth target: economy expected to grow by a rate of at least 6.0 percent annually during the five years.
- Five Key Priority Areas (KPAs) identified through national consultations:
  - agriculture and climate change management;
  - education and skills development;
  - energy and industrial development;
  - transport and ICT infrastructure development; and
  - health and population management.
- Government and stakeholders are committed to implementing these KPAs in full through provision of necessary and adequate resources, with emphasis on development policies to spur economic growth.

*Source: cr17184 - 4.0 Fiscal and Debt Framework*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17184.pdf_