## 1. Malawi’s Gender Inequality—Breaking the Cycle

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### Context and macroeconomic stabilization
- Over the past five years, Malawi strengthened macroeconomic stabilization under the 2012–17 ECF arrangement through foreign exchange market liberalization and an automatic fuel-price mechanism.
- Inflation developments:
  - 35 percent at end-2012
  - 10 percent in mid-2017
- International reserves rebuilt from 0.5 months of imports in 2012 to well-above 3 by the end of the program.
- Growth and poverty:
  - Growth averaged 3.7 percent during 2012–17.
  - GDP per capita: $327 in 2017.
- Persistent challenges: pervasive poverty, weak social indicators, and gender inequality.
  - Malawi ranks 170th in gender equality (UNDP Human Development Report).
- Factors holding back growth and poverty reduction: delayed structural reforms; inflationary impact from exchange rate depreciation, monetization of government deficits after donor suspension (cashgate), and climate change-induced droughts.

### Human development and social indicators (selected exact figures)
- GDP (current, billions of US$): 6.3 (Malawi) — 1,529 (SSA) — 2017 (Est.)
- Exchange rate (per US$, end-period): 725...
- GDP per capita (current US$): 327 (Malawi) — 1,582 (SSA) — 2017 (Est.)
- GINI index (World Bank estimate): 46.1...
- Population, total (millions): 18.1 (Malawi) — 1,033 (SSA) — 2016
- Population ages 65 and above (% of total): 3.4 (Malawi) — 3.1 (SSA) — 2015
- Life expectancy at birth, total (years): 64.0 (Malawi) — 59.0 (SSA) — 2015
- Literacy rate, adult female (% of females ages 15 and above): 59.0 (Malawi) — 53.0 (SSA) — 2010
- Literacy rate, adult male (% of males ages 15 and above): 73.0 (Malawi) — 69.2 (SSA) — 2010
- School enrollment, primary (% net): 97.5 (Malawi) — 77.9 (SSA) — 2014
- School enrollment, primary, female (% net): 95.3 (Malawi) — 75.8 (SSA) — 2014
- School enrollment, primary, male (% gross): 144.0 (Malawi) — 102.0 (SSA) — 2014
- Mortality rate, under-5 (per 1,000 live births): 64.0 (Malawi) — 83.2 (SSA) — 2015
- Mortality rate, infant (per 1,000 live births): 43.4 (Malawi) — 56.4 (SSA) — 2015
- Nurses and midwives (per 1,000 people): 0.3 (Malawi) — 1.1 (SSA) — 2011
- Maternal mortality ratio (national estimate, per 100,000 live births): 570.0...
- Poverty headcount ratio at national poverty lines (% of population): 50.7...
- Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population): 70.9 (Malawi) — 41.0 (SSA) — 2013
- Poverty headcount ratio at $3.10 a day (2011 PPP) (% of population): 87.6 (Malawi) — 65.0 (SSA) — 2013
- Health expenditure, public (% of GDP): 6.0 (Malawi) — 2.3 (SSA) — 2014
- Current education expenditure, total (% of total expenditure in public institutions): 98.8 (Malawi) — 90.6 (SSA) — 2010

### Program request and public debt position
- Authorities requested a three-year arrangement under the Extended Credit Facility (ECF).
  - Arrangement would provide SDR 78.1 million (56.25 percent of quota).
- Malawi currently has outstanding obligations to the Fund equivalent to 110.16 percent of quota.
- Total public debt more than doubled since HIPC and MDRI in 2006—projected to reach 55 percent of GDP in 2018 (Box 3).

### Recent economic developments (2016–17 and FY 17/18 H1)
- Real growth:
  - Estimated at 4 percent in 2017 (up from 2.3 percent in 2016), driven by recovery in agricultural production.
- Inflation:
  - Declined to 7.1 percent by end-2017.
- Fiscal outcomes:
  - Revenue collection increased by almost 2 percentage points of GDP relative to the previous year.
  - Overall balance of 5.1 percent of GDP in FY 16/17, an improvement of 1.5 percentage points relative to the previous fiscal year.
- FY 17/18 H1 deterioration:
  - Overall deficit was 4.7 percent of GDP relative to 2.9 percent of GDP in FY 2016/17 H1.
  - Drivers: underperforming revenues (power outages, weaker customs collection), bailout of ADMARC (0.9 percent of GDP), and higher domestically financed development spending.
- Arrears resolution:
  - Domestic arrears of over 5 percent of GDP accumulated during July 2012–June 2017 are in the process of being cleared.
  - As of end-2017, almost all were securitized through zero interest promissory notes.
  - About 65 percent of these (in domestic and foreign currency) have already been repaid in cash; the rest will mature during FY 17/18 H2 and FY 18/19.

### Monetary and financial sector developments
- Monetary policy:
  - Nominal policy rate was reduced by 600 basis points to 16 percent during 2017 in response to down-trending nonfood inflation.
  - Average nominal bank lending rates fell by 7 percentage points in line with the policy rate; real interest rates remained high.
  - Result: negative real private sector credit growth.
- Reserve Bank operations:
  - Increased use of open market operations (mainly repo) and improvements in the deposit auction facility reduced interbank rate volatility.
- Banking system:
  - System remained stable, well capitalized and profitable on aggregate.
  - Two banks were at the borderline of the minimum core capital requirement as of end-2017.
  - NPLs declined by 1.3 percentage points to 15.7 percent of total loans in 2017 due to write-offs and recovery efforts.
  - RBM’s September 2017 stress test showed several individual banks vulnerable to credit and liquidity shocks.

### External sector and exchange rate
- Current account deficit:
  - Narrowed to an estimated 10.0 percent of GDP in 2017 from 13.6 percent in 2016 owing to lower maize imports and higher non-tobacco exports.
- Reserves:
  - Gross international reserves at end-2017: US$757 million.
  - Reserve import coverage: 3.3 months of prospective imports (up from 2.9 months in 2016).
- Exchange rate:
  - Nominal exchange rate stable against the U.S. dollar; kwacha stabilized within a 2 percent band against the U.S. dollar since August 2016.
  - AREAER reclassified Malawi’s de facto exchange rate arrangement from a float to a stabilized arrangement.

### Political environment and risks
- Political pressures mounting ahead of elections (preparations for 2019 Presidential and parliamentary elections).
- Risks (tilted to the downside):
  - Fall armyworm infestation, delayed rains, continued power shortages.
  - Macro policy slippages, weather-induced shocks, decline in agricultural commodity prices, reduced donor flows, slower-than-expected disinflation.
- Upside scenarios:
  - Better-than-expected agricultural commodity prices and harvests, and faster reform implementation.

### Macroeconomic outlook and projections (exact values)
- Growth projections:
  - Projected to moderate to 3.5 percent in 2018.
  - Gradually increase to 6 percent over the medium term.
- Inflation forecast:
  - Expected to rise to 9 percent at end-2018 due to weak maize harvest and electricity tariff increases.
  - Anticipated to gradually reduce to around 5 percent over the medium term.
- External position:
  - Current account deficit expected to narrow from 8.9 percent in 2018 to around 7.5 percent over the medium term.
- Reserves projection:
  - International reserves coverage expected to increase from 3.0 in 2018 to 3.8 in 2021 (months of imports).
  - Staff projects reserves to rise to about 3.8 months by 2021 and reach 4.5 months over the medium term.

### Gender inequality — findings and policy recommendations (preserved exactly)
- Key findings:
  - Gender inequality is one of Malawi’s most deeply entrenched socio-economic problems.
  - The UNDP Human Development Report ranks Malawi at 170th in the gender equality index out of 188 countries.
  - By age 18, about one in every two girls are married and one in three have given birth to a baby.
  - The aggregated lifetime social and economic costs of child marriages can be as high as 27 percent of Malawi’s current GDP (World Bank).
  - Gross enrollment rate for girls is significantly lower than for boys, and net enrolment for girls in secondary school is just 15 percent.
  - The average return for every dollar invested in girls’ secondary education can be as high as 18 percent.
  - More than two thirds of Malawi’s villages follow matrilineal lineage system.
- Policy recommendations:
  - End child marriages through multifaceted strategic interventions: social protection, law enforcement, health (particularly sexual and reproductive health), child protection, and public education; develop a comprehensive national program of action grounded in evidence.
  - Harmonize legislation to align with the Constitutional amendment raising the minimum age for marriage from 15 to 18, including the penal code and the Child Care, Protection and Justice Act; design strategies to deal with existing child marriages without depriving spouse rights protected under marriage and divorce.
  - Focus on keeping girls in school, with emphasis on secondary education: larger and more effective investment in classrooms, teachers and education materials; demand-side interventions such as more social assistance and targeted subsidy programs that are gender sensitive.
  - Formalization of customary land rights as part of land reform to improve women’s access to finance; protect joint marital property rights recognized under the Marriage Act (2015).
  - Labor market policies to increase women’s participation: childcare support, stronger measures against sexual harassment and gender based violence in the workplace.

### Building resilience against food crisis — findings and reforms (exact measures)
- Key findings:
  - Agriculture is extremely vulnerable to shocks due to reliance on maize, once-a-year harvests, lack of crop diversity, and poor irrigation.
  - Strategic Grain Reserve (SGR) under-procured to respond to recent food security challenges.
  - FISP (almost 3 percent of government’s budget) is inefficient, poorly targeted, and hurts economic diversification.
  - Maize market interventions and regular export bans undermined incentives for commercialization.
- Recommended measures:
  - Reform government procurement processes to improve SGR operations (supported by the World Bank and the European Union).
  - Redesign FISP to reduce the subsidy rate, introduce fixed value coupons, increase private sector participation in fertilizer distribution, and better target beneficiaries; savings could expand coverage of social cash transfers.
  - Reduce market interventions and adopt clearer and more transparent procedures for licensing imports and exports of maize.
  - Invest more in irrigation, incentives for agricultural diversification, and risk management to enhance productivity and resilience.
- Role of the ECF arrangement:
  - Support World Bank-led reforms to FISP and World Bank and European Union-led procurement reforms, scale up targeted social spending, create fiscal space for investment in irrigation, and minimize market interventions.

### Preserving debt sustainability and fiscal policy commitments (exact values and commitments)
- Debt assessment:
  - Malawi’s risk of external debt distress is moderate.
  - All baseline external debt burden indicators are below policy-dependent thresholds, but stress tests highlight vulnerabilities to export revenues and exchange rate shocks.
  - Rising domestic debt has increased vulnerabilities; total public debt projected to reach 55 percent of GDP in 2018.
- Policy commitments and program rules:
  - Future borrowing for large infrastructure needs to be balanced against elevating the risk of debt distress (MEFP ¶24).
  - Authorities agreed to suspend contracting of new non-concessional loans, with exceptions case by case for priority growth-enhancing projects—accompanied by fiscal measures that offset the debt impact of the non-concessional portion.
  - Authorities requested FAD Technical Assistance (Public Investment Management Assessment) with a mission planned for mid-2018.
  - State-owned enterprise reforms, beginning with enhanced oversight, aim to reduce contingent liabilities.
- Fiscal anchor and targets:
  - Target: reduction in public debt from 55 percent of GDP in 2018 to 45 percent of GDP over the medium-term.
  - FY 2017/18 actions:
    - Authorities cut spending by about 1 percent of GDP in the last four months of the fiscal year.
    - Primary balance projected to deteriorate from -0.6 percent of GDP in 2016/17 to -3.0 percent of GDP in 2017/18.
    - Any arrears (from FY 2012/13 to FY 2016/17) not already cleared anticipated to be fully cleared by end-June 2018 through securitization.
    - Deficit (including payment of arrears-related securities) financed by both foreign and domestic financing – including MK69 billion (1.7 percent of GDP) of RBM financing undertaken in the first half of the fiscal year; no additional RBM financing in the second half.
  - FY 2018/19 budget aims:
    - Improve the primary fiscal balance to about zero in FY 18/19.
    - Revenue measures: repealing the industrial rebate scheme and discontinuing tax holidays; strengthening tax administration with a risk-based tax compliance approach.
- Central Government Operations (Percent of GDP, 2017/18–2018/19) — selected exact figures:
  - Revenue: 22.4 (2017/18 Proj.), 22.6 (2018/19 Proj.), Diff 0.2
  - Expenditure and net lending: 29.7, 26.0, Diff -3.7
  - Wages and salaries: 6.6, 7.0, Diff 0.4
  - Interest payments: 4.0, 3.5, Diff -0.5
  - Subsidies and other current transfers: 5.0, 4.0, Diff -1.0
  - Transfers to public entities (including bailout of ADMARC): 2.3, 1.3, Diff -1.0
  - Development expenditure: 6.6, 5.7, Diff -0.9
  - Overall balance (including grants and discrepancy): -7.0, -3.4, Diff 3.6
  - Primary balance (including grants and discrepancy): -3.0, 0.1, Diff 3.1
- Key fiscal reforms (exact measures):
  - Maintain automatic fuel pricing mechanism (MEFP ¶39).
  - Tax reforms to yield about 0.2 percent of GDP beginning in FY 2019/20 (phased).
  - During the program, increase spending on health and education by 0.4 percent of GDP; domestically financed development spending increased by same amount financed by cuts to FISP and maize purchases.

### Monetary, exchange rate, and reserves policy (selected targets and plans)
- Monetary policy:
  - Preserve declining inflation trajectory via tight monetary policy (MEFP ¶18).
  - Gradual transition from monetary aggregate targeting to a full interest rate-based monetary framework and to inflation targeting over the medium term—conditional on reducing fiscal dominance (MEFP ¶19).
  - International reserves coverage expected to increase from 3.0 in 2018 to 3.8 in 2021 (months of imports).
- Exchange rate:
  - Authorities committed to a flexible exchange rate regime to support transition to inflation targeting (MEFP ¶23).
  - Staff emphasized that fluctuations somewhat above a 2 percent band around the U.S. dollar should not be considered disorderly when reserves are relatively stable.

### Financial sector stability and intermediation (selected commitments and indicators)
- Commitments and targets:
  - Ensure all banks comply with IFRS9 standards (effective January 2018).
  - Most banks to reduce their NPLs to around 5 percent by end-2018 through recovery or write-offs.
  - Monitor foreign currency lending (rose from about 8 percent in 2012 to 28 percent in 2017) and ensure net open position requirements are met.
- Banking system capital and performance (selected exact series):
  - Regulatory Tier 1 capital to risk weighted assets: 16.4 16.2 13.5 12.4 13.8 15.3
  - Non-performing loans to gross loans and advances: 9.4 15.4 14.9 10.6 17.0 15.7
  - Liquid assets to deposits and short-term liabilities: 45.4 59.1 62.4 59.0 72.3 77.0
  - Return on assets (ROA): 5.0 4.8 4.0 3.1 2.7 2.3

### Program modalities, monitoring, and safeguards
- ECF arrangement:
  - Three years from end-April 2018 to end-April 2021.
  - Disbursements proposed to be spread in equal installments totaling 78.075 SDR (56.25 percent of quota).
- Schedule of Disbursements (each installment): 11.15 / 8.033 (SDR / percent of quota) on specified dates from April 30, 2018 through April 15, 2021.
- Monitoring:
  - Semi-annual reviews based on quantitative performance criteria and structural benchmarks; test dates are the last day of each semester starting June 2018.
- Safeguards:
  - An update safeguards assessment of the RBM is underway and will be completed by the first review.
  - Structural benchmark to amend RBM legal framework to strengthen autonomy and limit RBM’s financing of the government.

### Staff appraisal and lessons (selected excerpts)
- Macroeconomic stabilization has been achieved—overcoming high inflation and a drought-induced humanitarian crisis—but growth remains lackluster.
- During the 2012–17 ECF arrangement:
  - Persistently high inflation was curbed.
  - Chronic foreign exchange shortages were addressed.
  - International reserves were rebuilt to comfortable levels.
  - PFM reforms reinforced budgetary processes following severe corruption scandals.
- Lessons underline need for stronger program ownership, realistic targets, prioritization of reforms, and continued PFM and procurement reforms to re-establish donor confidence.

*Source: IMF staff report (cr18115 - 1. Malawi’s Gender Inequality—Breaking the Cycle).*

### 1. Malawi’s Gender Inequality—Breaking the Cycle ______________________________________________ 18

### 1. Malawi’s Gender Inequality—Breaking the Cycle

### Context and macroeconomic stabilization
- Over the past five years, Malawi strengthened macroeconomic stabilization under the 2012–17 ECF arrangement.
- Key policy actions: foreign exchange market liberalization and an automatic fuel-price mechanism.
- Inflation developments:
  - 35 percent at end-2012
  - 10 percent in mid-2017
- International reserves rebuilt from 0.5 months of imports in 2012 to well-above 3 by the end of the program.
- Structural reforms, especially in public financial management (PFM), reinforced budgetary processes.
- Persistent challenges: pervasive poverty, weak social indicators, and gender inequality.
  - Malawi ranks 170th in gender equality (UNDP Human Development Report).
  - Gender issues include gender-based violence, early marriages, and poor maternal health.
- Growth and poverty:
  - Growth averaged 3.7 percent during 2012–17.
  - Low per capita GDP: $327 in 2017.
  - High poverty incidence (among the highest in sub-Saharan Africa).
- Factors holding back growth and poverty reduction:
  - Delayed implementation of structural reforms.
  - Inflationary impact of (i) exchange rate depreciation; (ii) monetization of government deficits—following suspension of donor financing after the cashgate scandal; and (iii) climate change-induced droughts.

### Human development and social indicators (Text Table 1 highlights)
- GDP (current, billions of US$): 6.3 (Malawi) — 1,529 (SSA) — 2017 (Est.)
- Exchange rate (per US$, end-period): 725...
- GDP per capita (current US$): 327 (Malawi) — 1,582 (SSA) — 2017 (Est.)
- GINI index (World Bank estimate): 46.1...
- Population, total (millions): 18.1 (Malawi) — 1,033 (SSA) — 2016
- Population ages 65 and above (% of total): 3.4 (Malawi) — 3.1 (SSA) — 2015
- Life expectancy at birth, total (years): 64.0 (Malawi) — 59.0 (SSA) — 2015
- Literacy rate, adult female (% of females ages 15 and above): 59.0 (Malawi) — 53.0 (SSA) — 2010
- Literacy rate, adult male (% of males ages 15 and above): 73.0 (Malawi) — 69.2 (SSA) — 2010
- School enrollment, primary (% net): 97.5 (Malawi) — 77.9 (SSA) — 2014
- School enrollment, primary, female (% net): 95.3 (Malawi) — 75.8 (SSA) — 2014
- School enrollment, primary, male (% gross): 144.0 (Malawi) — 102.0 (SSA) — 2014
- Mortality rate, under-5 (per 1,000 live births): 64.0 (Malawi) — 83.2 (SSA) — 2015
- Mortality rate, infant (per 1,000 live births): 43.4 (Malawi) — 56.4 (SSA) — 2015
- Nurses and midwives (per 1,000 people): 0.3 (Malawi) — 1.1 (SSA) — 2011
- Maternal mortality ratio (national estimate, per 100,000 live births): 570.0...
- Poverty headcount ratio at national poverty lines (% of population): 50.7...
- Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population): 70.9 (Malawi) — 41.0 (SSA) — 2013
- Poverty headcount ratio at $3.10 a day (2011 PPP) (% of population): 87.6 (Malawi) — 65.0 (SSA) — 2013
- Health expenditure, public (% of GDP): 6.0 (Malawi) — 2.3 (SSA) — 2014
- Current education expenditure, total (% of total expenditure in public institutions): 98.8 (Malawi) — 90.6 (SSA) — 2010

### Program request and public debt position
- Authorities requested a three-year arrangement under the Extended Credit Facility (ECF).
- The arrangement would provide SDR 78.1 million (56.25 percent of quota).
- Malawi currently has outstanding obligations to the Fund equivalent to 110.16 percent of quota.

### Recent economic developments (2016–17 and FY 17/18 H1)
- Real growth:
  - Estimated at 4 percent in 2017 (up from 2.3 percent in 2016), driven by recovery in agricultural production.
- Inflation:
  - Declined to 7.1 percent by end-2017.
- Fiscal outcomes:
  - Authorities regained control over budget execution in FY 16/17.
  - Revenue collection increased by almost 2 percentage points of GDP relative to the previous year.
  - Overall balance of 5.1 percent of GDP in FY 16/17, an improvement of 1.5 percentage points relative to the previous fiscal year.
- FY 17/18 H1 deterioration:
  - Overall deficit was 4.7 percent of GDP relative to 2.9 percent of GDP in FY 2016/17 H1.
  - Drivers: underperforming revenues (power outages, weaker customs collection), bailout of ADMARC (0.9 percent of GDP), and higher domestically financed development spending.
- Arrears resolution:
  - Domestic arrears of over 5 percent of GDP accumulated during July 2012–June 2017 are in the process of being cleared.
  - As of end-2017, almost all were securitized through zero interest promissory notes.
  - About 65 percent of these (in domestic and foreign currency) have already been repaid in cash; the rest will mature during FY 17/18 H2 and FY 18/19.

### Monetary and financial sector developments
- Monetary policy:
  - Tight monetary policy contained inflation; short-term money market rates kept positive in real terms and aligned with the policy rate.
  - Nominal policy rate was reduced by 600 basis points to 16 percent during 2017 in response to down-trending nonfood inflation.
  - Average nominal bank lending rates fell by 7 percentage points in line with the policy rate; real interest rates remained high.
  - Result: negative real private sector credit growth.
- Reserve Bank operations:
  - Increased use of open market operations (mainly repo) and improvements in the deposit auction facility reduced interbank rate volatility.
- Banking system:
  - System remained stable, well capitalized and profitable on aggregate.
  - Two banks were at the borderline of the minimum core capital requirement as of end-2017.
  - Non-performing loans (NPLs) declined by 1.3 percentage points to 15.7 percent of total loans in 2017 due to write-offs and recovery efforts.
  - RBM’s September 2017 stress test showed several individual banks vulnerable to credit and liquidity shocks.

### External sector and exchange rate
- Current account deficit:
  - Narrowed to an estimated 10.0 percent of GDP in 2017 from 13.6 percent in 2016 owing to lower maize imports and higher non-tobacco exports.
- Reserves:
  - Improved current account and World Bank inflows increased reserves by 0.4 months of prospective imports between end-2016 and end-2017.
- Exchange rate:
  - Nominal exchange rate stable against the U.S. dollar; kwacha stabilized within a 2 percent band against the U.S. dollar since August 2016.
  - AREAER reclassified Malawi’s de facto exchange rate arrangement from a float to a stabilized arrangement.
  - Small premium between RBM and forex bureau exchange rates, implying no foreign currency shortage.

### Political environment
- Political pressures mounting ahead of elections (preparations for 2019 Presidential and parliamentary elections).
- Weak public confidence in state institutions exacerbated by the electricity crisis.
- Parliament voted against reform bills earlier in the year that would adopt an absolute majority system for the Presidential election and require a minimum education level for Parliamentary candidates.

### Macroeconomic outlook and risks
- Growth projections:
  - Projected to moderate to 3.5 percent in 2018.
  - Gradually increase to 6 percent over the medium term.
  - Downside near-term factors: Fall armyworm infestation, delayed rains, continued power shortages.
  - Medium-term drivers for 6 percent growth: improved confidence, more robust agricultural production (infrastructure and cropping improvements), enhanced electricity generation, better transportation networks, improved access to finance, and increased donor-financed projects.
- Inflation forecast:
  - Expected to rise to 9 percent at end-2018 due to weak maize harvest and electricity tariff increases.
  - Anticipated to gradually reduce to around 5 percent over the medium term.
- External position and competitiveness:
  - REER appreciated by an average of 2.5 percent in 2017 following a 13 percent depreciation in 2016.
  - NEER depreciated by an average of 5 percent in 2017 following a 26 percent depreciation in 2016.
  - Staff assessed the external position as broadly in line with fundamentals (Annex III: External Stability Assessment).
  - Broader competitiveness indicators (World Bank’s Doing Business Indicators) point to persistent weaknesses.
  - Current account deficit expected to narrow from 8.9 percent in 2018 to around 7.5 percent over the medium term with improvements in competitiveness, export diversification, and fiscal restraint.
- Risks:
  - Tilted to the downside: political pressures in the election run-up could weaken policy discipline and reform efforts.
  - Other risks: macroeconomic policy slippages, weather-induced shocks, Fall armyworm infestations, decline in agricultural commodity prices, reduced donor flows, slower-than-expected disinflation.
  - Upside scenarios: better than expected agricultural commodity prices and harvests, and faster reform implementation.

### Authorities’ views
- Authorities broadly shared staff’s views on outlook and risks but were more optimistic on near-term growth.
  - Authorities expect growth of 4 to 5 percent in 2018 due to faster pick-up in private sector activity with reduced power shortages in H2 2018.
- Authorities concur with staff on inflation and the external position.
- Authorities agree on need for accelerated reforms to support more diverse and resilient private sector driven growth and envisage similar medium-term growth prospects.

### Article IV discussions: growth agenda and debt sustainability
- Discussions focused on Malawi’s growth agenda and preserving medium-term debt sustainability.
- Agreement on importance of prioritizing the agenda (especially infrastructure) and being mindful of capacity and financial constraints.

A. Fostering higher, more inclusive, and resilient growth
- Malawi Growth and Development Strategy (MGDS) III for 2018–23 adopted; finalized in 2017 Q4.
- MGDS III aims: build productivity, competitiveness, and resilience through stepped-up investment in infrastructure and social sectors, and reforms to improve financial market development and the business environment—including governance—against a sound macroeconomic backdrop.
- Authorities’ priorities: improve low quality and coverage of infrastructure (electricity, roads, telecommunications, water, irrigation) and social spending (education, healthcare, and gender issues).
- Staff and authorities concurred on need to advance reforms on multiple fronts while prioritizing the agenda; governance reforms related to PFM, procurement, and broader governance areas were emphasized.

*Source: IMF staff report (cr18115 - 1. Malawi’s Gender Inequality—Breaking the Cycle).*

### Box 3) are expected to catalyze concessional financing in these areas. Staff emphasized gains could

### cr18115 - Box 3) are expected to catalyze concessional financing in these areas. Staff emphasized gains could

### Preserving Debt Sustainability
- Malawi’s risk of external debt distress is moderate.
- The debt sustainability analysis (DSA) update indicates that all baseline external debt burden indicators are below their policy-dependent debt burden thresholds.
- Stress tests highlight vulnerabilities to exogenous shocks, especially export revenues and exchange rate—reflecting the country’s narrow export base and heavy reliance on rain-fed irrigation.
- Rising domestic debt has increased vulnerabilities. Domestic financing increased sharply after the withdrawal of donor budget support, securitization of arrears, and recapitalization of the RBM and two public banks.
- Total public debt more than doubled since HIPC and MDRI debt relief in 2006—projected to reach 55 percent of GDP in 2018.
- Policy commitments and program rules:
  - Future borrowing for large infrastructure needs to be balanced against elevating the risk of debt distress (MEFP ¶24).
  - Authorities agreed to suspend contracting of new non-concessional loans, with exceptions considered case by case for new loans backing priority growth-enhancing projects—accompanied by fiscal measures that offset the debt impact of the non-concessional portion of the loan.
  - Authorities concurred with staff on the importance of developing a comprehensive medium-term debt strategy, including prioritizing investments based on rigorous cost-benefit analysis, absorptive capacity, growth, poverty reduction, and debt sustainability considerations.
  - Requested FAD Technical Assistance (a Public Investment Management Assessment) with a mission planned for mid-2018.
  - State-owned enterprise reforms, beginning with enhanced oversight, aim to reduce contingent liabilities.
- Note on domestic debt composition: Domestic debt mainly includes the total stock of treasury bills, treasury notes, local registry stocks, and ways and means advances; covers zero coupon promissory notes not yet matured; promissory notes related to recapitalization of RBM (until end-September 2017); promissory notes for MSB’s toxic assets; and certified arrears for which promissory notes have not yet been issued.

### Sustaining Macroeconomic Stability
Fiscal policy
- Fiscal policy stance will support disinflation and debt sustainability (MEFP ¶24).
- Authorities will:
  - Keep spending within available resources.
  - Avoid accumulation of domestic and external arrears.
  - Limit non-concessional borrowing as well as the government’s recourse to domestic borrowing—particularly from the RBM.
  - Align the RBM Act with the PFM Act (applying recommendations of the IMF Safeguards Assessment) to eliminate avenues of RBM financing of the central government (except what is needed for cash flow management) and to enhance the RBM’s autonomy.
- Fiscal anchor: gradual improvements in the primary balance while safeguarding social spending (including spending on health and education), targeting a reduction in public debt from 55 percent of GDP in 2018 to 45 percent of GDP over the medium-term.
- FY 2017/18 actions and outcomes:
  - Authorities cut spending by about 1 percent of GDP in the last four months of the fiscal year.
  - Primary balance projected to deteriorate from -0.6 percent of GDP in 2016/17 to -3.0 percent of GDP in 2017/18.
  - Any arrears (from FY 2012/13 to FY 2016/17) not already cleared anticipated to be fully cleared by end-June 2018 through securitization.
  - Commitment controls tightened and system tracking the stock of commitments established (MEFP ¶4).
  - Deficit (including payment of arrears-related securities) financed by both foreign and domestic financing – including MK69 billion (1.7 percent of GDP) of RBM financing undertaken in the first half of the fiscal year; no additional RBM financing in the second half.
- FY 2018/19 budget aims:
  - Improve the primary fiscal balance to about zero in FY 18/19.
  - Revenue measures include repealing the industrial rebate scheme and discontinuing tax holidays; strengthening tax administration with a risk-based tax compliance approach.
  - Spending pressures from elections and hiring of new teachers to be offset by budgeting development spending in line with implementation capacity.
  - Expected spending reductions from lower interest payments, measures limiting non-essential recurrent expenditures and allowances, reduced maize procurement, FISP reforms, and absence of one-off items (ADMARC bailout and securitization of arrears).
- Medium-term tax and spending plans:
  - Tax reforms to foster a simple, efficient, transparent, and fair tax system (MEFP ¶26): streamline tax incentives, fully repeal the industrial rebate scheme, introduce a thin capitalization or earnings stripping rule, and redesign turnover taxation to increase effectiveness.
  - Shift reliance from taxation of labor and investment to consumption; revert recent measures that resulted in significant revenue loss such as the VAT exemption on cooking oil.
  - Composition of spending shifted toward growth-enhancing and poverty-reducing areas (MEFP ¶27): contain fiscal slippages, avoid unbudgeted expenditures, limit wage increases to the inflation rate, and limit non-essential recruitments.
  - Pension reforms to be revisited to reduce liabilities (MEFP ¶36, 37).
  - Develop plan to tackle decentralization challenges and eventually adopt a legal framework for budget systems and fiscal policy coordination.
  - Automatic fuel pricing mechanism to be maintained; any changes to fuel import regime to be transparent and consulted (MEFP ¶39).
- Key table figures (Central Government Operations, Percent of GDP, 2017/18–2018/19):
  - Revenue: 22.4 (2017/18 Proj.), 22.6 (2018/19 Proj.), Diff 0.2
  - Expenditure and net lending: 29.7, 26.0, Diff -3.7
  - Wages and salaries: 6.6, 7.0, Diff 0.4
  - Interest payments: 4.0, 3.5, Diff -0.5
  - Goods and services: 6.1, 5.6, Diff -0.4
  - Generic goods and services: 2.7, 2.4, Diff -0.3
  - National / local elections: 0.2, 0.6, Diff 0.4
  - Maize purchases: 0.5, 0.2, Diff -0.3
  - Subsidies and other current transfers: 5.0, 4.0, Diff -1.0
  - Transfers to public entities (including bailout of ADMARC): 2.3, 1.3, Diff -1.0
  - Fertilizer and seed subsidy: 0.7, 0.6, Diff -0.1
  - Issuance of zero interest promissory notes for securitizing domestic arrears: 1.2, 0.0, Diff -1.2
  - Development expenditure: 6.6, 5.7, Diff -0.9
  - Foreign financed: 4.8, 4.1, Diff -0.7
  - Domestically financed: 1.9, 1.7, Diff -0.2
  - Overall balance (including grants and discrepancy): -7.0, -3.4, Diff 3.6
  - Primary balance (including grants and discrepancy): -3.0, 0.1, Diff 3.1
- Footnotes and explanatory points:
  - IMF technical assistance tax policy recommendations yielding the highest gains have already been implemented. Remaining reforms estimated to yield about 0.2 percent of GDP beginning in FY 2019/20, expected to be fully implemented in a phased approach.
  - During the program, spending on health and education will be increased by 0.4 percent of GDP; domestically financed development spending will be increased by the same amount, financed by cuts to FISP and maize purchases.

Monetary and exchange rate policies
- Preserving a declining inflation trajectory requires a tight monetary policy stance (MEFP ¶18).
  - Staff advised continued tight monetary policy (except for liquidity provision to banks facing liquidity challenges).
  - Authorities intend to maintain positive real interest rates through open market operations in the interbank and treasury bill markets, keep interbank rates within the corridor, and concentrate on a few tenors in repo operations.
- RBM monetary framework plans (MEFP ¶19):
  - Gradual transition from monetary aggregate targeting to a full interest rate-based monetary framework and to inflation targeting over the medium term—conditional on reducing fiscal dominance.
  - Staff stressed narrowing the interest rate corridor through margin symmetry around the policy rate.
  - Transition requires capacity development in liquidity management, understanding the monetary transmission mechanism, development of high frequency data, and improvements in inflation forecasting.
  - RBM plans to improve communication with stakeholders and the public to raise policy credibility.
- Exchange rate policy (MEFP ¶23):
  - Authorities committed to a flexible exchange rate regime to support transition to inflation targeting, cushion shocks, and support economic diversification.
  - Staff noted the 2017 AREAER reclassification of Malawi’s de facto exchange rate arrangement from a float to a stabilized arrangement; authorities acknowledged and explained interventions were to build reserves and limit disorderly market conditions.
  - Staff emphasized that when reserves are relatively stable, exchange rate fluctuations somewhat above a 2 percent band around the U.S. dollar should not be considered disorderly market conditions.
- International reserves coverage expected to increase from 3.0 in 2018 to 3.8 in 2021 (months of imports).

### Increasing Spending on Infrastructure and Social Development
- Growth-enhancing infrastructure investment and social development spending will be increased through gains in efficiency and donor support.
- Authorities plan to raise infrastructure investment while maintaining macroeconomic stability and debt sustainability by:
  - Improving public investment management (focus on efficiency and project returns) and procurement.
  - Partnering with the private sector and development partners.
- Health, education, and other social spending anticipated to be increased by:
  - Higher off-budget project financing by donors (catalyzed by the program).
  - Efficiency gains in on-budget spending (MEFP ¶27).
- Staff advice: enhance allocation mix of health and education budgets (e.g., increase budget share of secondary and tertiary education), improve fiscal transparency and accountability at national and sub-national levels, strengthen program based budgeting, and engender efficiency in frontline service delivery.

### Tackling Governance Challenges
- Addressing major governance pitfalls critical to bolstering donor confidence.
- Initial focus on PFM and procurement reforms, followed by other broader areas (Box 3).
- Key PFM measures under the program (MEFP ¶28, 29, and 30):
  - Routine fiscal reporting and bank reconciliation for fiscal integrity and transparency.
  - Reconciling debt data between the Ministry of Finance (MoF) and RBM.
  - Strengthening quality control of monthly fiscal reporting.
  - Strengthening the medium-term budgetary framework and cash management.
  - Strong measures to prevent further accumulation of arrears including closing out all transactions pertaining to past arrears.
  - Immediate implementation plans for acquiring a new IFMIS.
- Procurement reforms:
  - Build on enactment of a new Procurement Act that closed several loopholes.
  - Improve procurement framework to enhance transparency, control, and accountability—publish all procurement information on the MoF website and use performance contracts to hold controlling officers accountable (MEFP ¶30).

### Improving Financial Intermediation
- Safeguarding financial sector stability is a key priority for the RBM (MEFP ¶20).
- Authorities continue to monitor and enforce compliance with prudential norms.
- RBM working with two banks to increase capitalization through remediation measures, including deadlines to reduce NPLs and improve business models.
- Commitments and targets:
  - Ensure all banks comply with IFRS9 standards (effective January 2018).
  - Most banks to reduce their NPLs to around 5 percent by end-2018 through recovery or write-offs.
- Risk management and supervision:
  - Banks need to improve risk management assessment and analysis of collateral quality.
  - Stress tests confirm loan concentration remains a major risk.
  - RBM to continue monitoring large borrowers and enforce single borrower exposure limit.
- Trends and vulnerabilities:
  - Foreign currency lending rose from about 8 percent in 2012 to 28 percent in 2017; RBM advised vigilance and ensuring all banks meet net open position requirement.
  - Main macro risk viewed by authorities: lower growth leading to higher NPLs.
  - High system-wide capital adequacy ratio and reduction in interest rates during 2017 expected to help mitigate risks.
  - September 2017 stress test: industry-wide resilience to credit and liquidity risk shocks; analysis showed industry anchored by a few healthy banks while majority were vulnerable to shocks; vulnerability expected to have improved with NPL reductions during September to December 2017.
- Access to finance and inclusion (MEFP ¶21, Selected Issues Paper):
  - Staff encouraged RBM engagement with commercial banks to improve credit to SMEs and develop a roadmap for increasing access to finance.
  - Need to develop banking sector skills, increase financial literacy, and improve banking system efficiency—engage banks to reduce overhead costs to lower interest rate spreads.
  - Enforce reporting duties to credit reference bureaus and support improvement of their processing capabilities.
  - Improve financial infrastructure, facilitate private sector role (e.g., mobile banking), and protect creditor’s and borrower’s rights to support greater financial intermediation.
- Regulatory strengthening (MEFP ¶22):
  - Authorities to re-submit to Parliament, before end-June 2018, amendments to the Banking Act of 2010 and Financial Services Act of 2010.
  - Amendments to align legal framework for bank resolution closer to best practices and provide more options for dealing with problem banks.
  - RBM preparing a Minimum Capital and Solvency Directive for Life Insurance Companies to raise their minimum capital requirement.
  - By end-2018, plan to gazette and enact regulations related to the revised AML/CFT framework (enacted in 2017).
  - Commitments to strengthen asset declaration system and use of AML/CFT tools to improve governance.

### Program Modalities and Safeguards
- ECF arrangement coverage and phasing:
  - The ECF arrangement will cover three years from end-April 2018 to end-April 2021.
  - Disbursements proposed to be spread in equal installments.
  - Staff considers Malawi has adequate capacity to repay the Fund given track record, program strength, favorable medium-term outlook, and sustainable debt position (Table 8).
- Monitoring of program performance:
  - Semi-annual program reviews based on quantitative performance criteria (Table 11) and structural benchmarks (Table 13), including critical unmet structural benchmarks under the 2012–17 ECF arrangement.
  - Test dates for quantitative performance criteria are the last day of each semester starting June 2018.
- Technical Assistance:
  - Targeted TA in key fiscal and monetary areas—including PFM, monetary policy framework, and financial sector supervision—planned to support implementation (Annex VI: Malawi’s Capacity Development Strategy Note Summary).
- Safeguards:
  - An update safeguards assessment of the RBM is underway and will be completed by the first review.
  - A safeguards-related measure to amend RBM's legal framework to strengthen autonomy and limit RBM’s financing of the government is incorporated in the program (structural benchmark).

### Staff Appraisal (extract)
- Macroeconomic stabilization has been achieved—overcoming high inflation and a drought-induced humanitarian crisis—but growth remains lackluster.
- During the 2012–17 ECF arrangement:
  - Persistently high inflation was curbed.
  - Chronic foreign exchange shortages were addressed.
  - International reserves were rebuilt to comfortable levels.
  - PFM reforms reinforced the budgetary processes following severe corruption scandals.
- Economic growth (averaging... [text truncated in source]).

*Source: cr18115 - Box 3) are expected to catalyze concessional financing in these areas. Staff emphasized gains could (cr18115 PDF).*

### 3.7 percent annually over the last five years) was insufficient to significantly reduce poverty. Malawi’s

### cr18115 - 3.7 percent annually over the last five years) was insufficient to significantly reduce poverty. Malawi’s

### Macroeconomic outlook and external position
- Growth is projected at 6 percent over the medium term, driven by agriculture, enhanced electricity generation, better transportation networks, improved access to finance, and increased donor-financed projects.
- Inflation is expected to remain in single digits, supported by prudent fiscal and monetary policies along with low international food and fuel prices.
- The external sector assessment suggests the external position is broadly in line with the level implied by medium-term fundamentals and desirable policies, though broader competitiveness indicators point to major challenges.

### Structural reforms and medium-term development priorities
- Deep structural reforms are required to achieve Malawi’s medium-term growth potential while ensuring inclusiveness and resilience:
  - Improve low quality and coverage of infrastructure, especially electricity, roads, telecommunications, water, and irrigation.
  - Increase social spending and raise access and affordability of credit.
  - Undertake deep agricultural market reforms.
  - Improve the business environment to build economic diversification and resilience.
- Successful implementation will hinge on prioritizing the agenda while accounting for capacity and financial constraints and pursuing a flexible exchange rate regime.

### Fiscal policy, public investment, and spending efficiency
- Improving the composition and efficiency of spending is critical to realizing development objectives and entrenching macroeconomic stabilization.
- Fiscal policy will support disinflation and debt sustainability through:
  - Revenue mobilization.
  - Lower interest bills.
  - FISP reforms.
  - More control over the wage bill and other current spending.
  - Measures to improve public investment management and spending efficiency to support higher and better quality infrastructure and social spending.
- Partnering with the private sector and development partners would provide additional support for these development objectives.

### Governance, public financial management, and anti-corruption
- Tackling governance challenges is needed to catalyze increased donor support.
- Authorities will implement PFM and procurement reforms—the focus of donors.
  - Greater commitment control to mitigate emergence of domestic payment arrears and limit domestic financing to budgeted amounts.
  - Routine bank reconciliation and fiscal reporting to foster fiscal integrity and transparency.
  - Improving the procurement framework to enhance transparency, control, and accountability.
- Effective use of AML/CFT tools and an enhanced asset disclosure system would support anti-corruption efforts.

### Financial intermediation and banking system resilience
- Better financial intermediation will broaden access to finance in support of inclusive growth:
  - Contain inflation through tight monetary policy, strengthen the monetary policy framework, improve communication, and reduce fiscal dominance—particularly eliminating central bank financing of the deficit—to help reduce the cost of borrowing.
  - Develop a roadmap to increase access to finance including measures to facilitate commercial bank lending to SMEs, develop financial literacy, raise banking system efficiency, and advance financial infrastructure.
- Banking system resilience needs strengthening:
  - Strengthen bank supervision, including ensuring AML/CFT compliance.
  - Resolve issues related to implementation of IFRS9 regulations and closely monitor banks’ compliance.
  - Align the AML/CFT framework with international standards.
  - Strengthen creditor rights and reduce lengthy judicial processes in recovering collateral to reduce high NPLs.

### IMF program support and statistics
- Staff supports the authorities’ request for a new three-year arrangement under the ECF.
  - Proposed access of 56.25 percent of quota (SDR 78.1 million), which will close the balance of payments financing gap.
  - Proposed access is in line with the access norm for a low-income country with outstanding concessional credit between 75 and 150 percent of quota.
- Macroeconomic statistics are broadly adequate for surveillance and program monitoring but major shortcomings exist especially in national accounts and balance of payments statistics; these will be addressed through implementation of Fund technical assistance advice.
- Staff recommends the next Article IV Consultation for Malawi be held on the 24-month cycle.

### Gender inequality — findings and policy recommendations
- Key findings:
  - Gender inequality is one of Malawi’s most deeply entrenched socio-economic problems.
  - The UNDP Human Development Report ranks Malawi at 170th in the gender equality index out of 188 countries.
  - By age 18, about one in every two girls are married and one in three have given birth to a baby.
  - The aggregated lifetime social and economic costs of child marriages can be as high as 27 percent of Malawi’s current GDP (World Bank).
  - Gross enrollment rate for girls is significantly lower than for boys, and net enrolment for girls in secondary school is just 15 percent.
  - The average return for every dollar invested in girls’ secondary education can be as high as 18 percent.
  - More than two thirds of Malawi’s villages follow matrilineal lineage system.
- Policy recommendations:
  - End child marriages through multifaceted strategic interventions: social protection, law enforcement, health (particularly sexual and reproductive health), child protection, and public education; develop a comprehensive national program of action grounded in evidence.
  - Harmonize legislation to align with the Constitutional amendment raising the minimum age for marriage from 15 to 18, including the penal code and the Child Care, Protection and Justice Act; design strategies to deal with existing child marriages without depriving spouse rights protected under marriage and divorce.
  - Focus on keeping girls in school, with emphasis on secondary education: larger and more effective investment in classrooms, teachers and education materials; demand-side interventions such as more social assistance and targeted subsidy programs that are gender sensitive.
  - Formalization of customary land rights as part of land reform to improve women’s access to finance; protect joint marital property rights recognized under the Marriage Act (2015).
  - Labor market policies to increase women’s participation: childcare support, stronger measures against sexual harassment and gender based violence in the workplace.

### Building resilience against food crisis — findings and reforms
- Key findings:
  - Malawi’s agricultural industry is extremely vulnerable to shocks that could lead to widespread food crisis due to reliance on maize, once-a-year harvests, lack of crop diversity, and poor irrigation.
  - The Strategic Grain Reserve (SGR) has not procured enough to respond to recent food security challenges.
  - The farm input subsidy program (FISP, almost 3 percent of the government’s budget) is inefficient, poorly targeted, and hurts economic diversification.
  - Maize market interventions and regular export bans undermined incentives for agricultural commercialization and reduced incentives for commercial investment.
- Recommended measures to prevent future food crisis:
  - Reform government procurement processes to improve SGR operations (supported by the World Bank and the European Union).
  - Redesign FISP to reduce the subsidy rate, introduce fixed value coupons, increase private sector participation in fertilizer distribution, and better target beneficiaries; savings could expand coverage of social cash transfers.
  - Reduce market interventions and adopt clearer and more transparent procedures for licensing imports and exports of maize to reduce uncertainty for producers and potential investors.
  - Invest more in irrigation, incentives for agricultural diversification, and risk management to enhance productivity and resilience.
- Role of the current ECF arrangement:
  - Help mitigate or prevent food crisis by supporting World Bank-led reforms to FISP and World Bank and European Union-led procurement reforms, scaling up targeted social spending, creating fiscal space for investment in irrigation, and minimizing market interventions.

*International Monetary Fund — cr18115 (excerpted content)*

### Box 3. Governance

### Box 3. Governance

### Corruption episodes and fiscal impact
- Severe weaknesses in Public Financial Management (PFM) facilitated the large-scale theft of public funds—the cashgate scandal of 2013—resulting in substantial arrears and loss of donor support.
- Weaknesses in procurement set the stage for corruption in maize purchases from Zambia managed by the state-owned Agricultural Development and Marketing Corporation (ADMARC) during the 2016 humanitarian crisis, maizegate.

### PFM and procurement reform efforts
- PFM reforms under the 2012-17 ECF arrangement aimed at:
  - improving the budget process;
  - building control over fiscal operations by strengthening commitment controls;
  - rationalizing government bank accounts;
  - reconciling government accounts;
  - increasing coverage and security of IFMIS; and
  - publishing budget execution.
- Implementation of these reforms was slow and remains incomplete.
- The current ECF arrangement is designed to:
  - complete reforms from the previous ECF arrangement and move to the next phase of PFM reforms;
  - improve fiscal transparency, monitoring, financial discipline, commitment controls, cash management, debt management, and integrity of the accounting system;
  - enhance monitoring and supervision of SOEs, public investment management, data recording and sharing, and statistical capacity building.
- In tandem, the World Bank and European Union are supporting the authorities’ in designing ‘good practice’ mechanisms to implement the new Procurement Act.

### Broader governance challenges and recommended measures
- Enhancing the rule of law, through a strengthened judiciary and interagency coordination framework, will be critical next steps.
- Measures that need to be initiated include:
  - further strengthening of fiscal institutions and accountability frameworks;
  - improving the AML/CFT framework (e.g., enhanced measures against politically exposed persons and strengthened information sharing and cooperation on financial intelligence);
  - reform in asset disclosures (e.g., scope of covered officials, beneficial ownership information and public access);
  - building anti-corruption institutions; and
  - improving tax compliance.

*Source: cr18115 - Box 3. Governance*

### 1. Regulatory Tier 1 capital to risk weighted assets16.416.213.512.413.8

### cr18115 - 1. Regulatory Tier 1 capital to risk weighted assets16.416.213.512.413.8

### Banking system capital ratios
- 1. Regulatory Tier 1 capital to risk weighted assets: 16.4 16.2 13.5 12.4 13.8 15.3
- 2. Regulatory total capital to risk weighted assets: 20.2 19.1 17.1 15.8 17.0 19.4
- 3. Total capital to total assets: 14.3 15.4 17.6 17.1 16.7 15.9

### Asset composition and quality
- 1. Non-performing loans to gross loans and advances: 9.4 15.4 14.9 10.6 17.0 15.7
- 2. Provisions to non-performing loans: 26.8 29.1 31.8 25.7 25.5 34.5
- 3. Total loans and advances to total assets: 50.8 40.5 40.3 40.0 34.8 28.1
- 4. Foreign currency loans to total loans and advances: 7.9 13.5 19.1 28.6 21.8 27.9

### Earnings and profitability
- 1. Return on assets (ROA): 5.0 4.8 4.0 3.1 2.7 2.3
- 2. Return on equity (ROE): 36.9 37.5 26.8 19.2 18.4 15.7
- 3. Non-interest expenses to gross income: 36.8 39.7 45.4 51.4 50.0 49.7
- 4. Interest margin to gross income: 36.8 39.7 --- 50.2 47.8 50.8
- 5. Non-Interest Income to Revenue: --- 31.8 37.8 30.5 28.0 27.3
- 6. Net Interest Income to Assets: --- 9.1 8.4 9.7 9.7 8.7
- 7. Personnel expenses to non-interest expenses: 46.0 45.4 45.1 45.3 43.8 46.5

### Liquidity
- 1. Liquid assets to deposits and short-term liabilities: 45.4 59.1 62.4 59.0 72.3 77.0
- 2. Total loans to total deposits: 72.4 56.6 58.3 58.5 54.2 45.1
- 3. Liquid Assets to total assets: 34.5 43.7 48.8 43.3 50.4 55.0
- 4. Foreign exchange liabilities to total liabilities: 17.9 26.3 --- 26.1 19.7 19.8

_Source: Reserve Bank of Malawi._

### External financing requirement and sources (2016–23, Millions of USD)
- Total requirement: -814 -917 -716 -691 -793 -837 -871 -926
  - Current account, excluding official transfers: -743 -636 -681 -571 -583 -610 -649 -690
  - Debt amortization: -137 -129 -90 -67 -67 -64 -46 -31
  - Gross reserves accumulation (- increase): 65 -152 55 -52 -143 -163 -176 -205
- Total sources: 814 917 599 605 710 761 871 926
  - Expected disbursements (official): 633 619 484 459 550 590 695 742
    - Grants: 497 341 348 339 406 437 467 500
    - Medium- and long-term loans: 136 278 136 120 144 153 228 242
  - Private sector (net): 130 294 145 163 179 197 213 227
  - IMF (net): 52 5 -29 -17 -20 -27 -37 -42
    - Drawings: 76 27 0 0 0 0 0 0
    - Repayments: 25 22 29 17 20 27 37 42
- Financing gap: 0 0 117 86 84 76 0 0
- Gross official reserves: 605 757 703 755 898 1061 1237 1442
- Months of imports: 2.9 3.3 3.0 3.1 3.5 3.8 4.2 4.5

_Source: IMF staff estimates._

### Schedule of Disbursements under ECF Arrangement, 2018–21 (Millions of SDR)
- Amount / % of Quota / Availability date / Conditions Necessary for Disbursement / Status
  - 11.15 / 8.033 / April 30, 2018 / Executive Board Approval of Three Year ECF arrangement. / 11.15 / 8.033
  - 11.15 / 8.033 / October 15, 2018 / Observance of performance criteria for June 30, 2018, and completion of first review. / 11.15 / 8.033
  - 11.15 / 8.033 / April 15, 2019 / Observance of performance criteria for December 31, 2018, and completion of second review. / 11.15 / 8.033
  - 11.15 / 8.033 / October 15, 2019 / Observance of performance criteria for June 30, 2019, and completion of third review. / 11.15 / 8.033
  - 11.15 / 8.033 / April 15, 2020 / Observance of performance criteria for December 31, 2019, and completion of fourth review. / 11.15 / 8.033
  - 11.15 / 8.033 / October 15, 2020 / Observance of performance criteria for June 30, 2020, and completion of fifth review. / 11.175 / 8.051 / April 15, 2021 / Observance of performance criteria for December 31, 2020, and completion of the sixth review.
- Total for the ECF arrangement: 78.075 / 56.25
- Memorandum item: Malawi's new Quota (millions SDR): 138.80

_Source: IMF staff estimates._

### Indicators of Capacity to Repay the Fund, 2018–31 (selected rows)
- Projected Payments based on Existing Drawings (SDR millions) — Principal: 20.41 11.89 13.80 18.44 25.81 21.25 18.65 16.05 9.32 1.95 0.00 0.00 0.00 0.00
- Charges and interest (SDR millions): 0.40 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53
- Projected Payments based on Prospective Drawings — Principal (SDR millions): 0.00 0.00 0.00 0.00 0.00 1.12 5.58 10.04 14.50 15.62 14.50 10.04 5.58 1.12
- Projected Payments based on Existing and Prospective Drawings (SDR millions): 20.81 12.42 14.33 18.97 26.34 22.90 24.76 26.62 24.35 18.10 15.03 10.57 6.11 1.65
- US$ Millions (same rows): 29.85 17.86 20.63 27.30 37.91 34.18 36.96 39.73 36.34 27.01 22.43 15.78 9.12 2.46
- Percent of exports of goods and services: 1.61 0.90 0.98 1.22 1.59 1.33 1.34 1.34 1.14 0.79 0.61 0.40 0.21 0.05
- Percent of debt service: 21.39 16.89 18.71 23.69 34.64 33.63 31.82 30.44 25.00 17.34 13.42 9.13 5.27 1.39
- Percent of quota: 14.99 8.95 10.32 13.67 18.98 16.50 17.84 19.18 17.54 13.04 10.83 7.62 4.40 1.19
- Percent of gross official reserves: 4.25 2.37 2.30 2.57 3.07 2.37 2.27 2.17 1.78 1.20 0.89 0.57 0.30 0.07
- Projected Level of Credit Outstanding based on Existing and Prospective Drawings (SDR millions): 159.5 169.9 178.4 171.1 145.3 122.9 98.7 72.6 48.8 31.2 16.7 6.7 1.1 0.0
- Projected Level of Credit Outstanding (US$ Millions): 229.0 244.5 256.7 246.3 209.1 176.8 142.0 104.5 70.2 44.9 24.1 9.6 1.6 0.0
- Percent of exports of goods and services (Credit Outstanding): 12.3 12.4 12.2 11.0 8.8 6.9 5.2 3.5 2.2 1.3 0.7 0.2 0.0 0.0
- Percent of debt service (Credit Outstanding): 164.1 231.1 232.8 213.7 191.0 174.0 122.2 80.0 48.3 28.9 14.4 5.6 0.9 0.0
- Percent of quota (Credit Outstanding): 114.9 122.4 128.5 123.3 104.7 88.6 71.1 52.3 35.2 22.5 12.1 4.8 0.8 0.0
- Percent of gross official reserves (Credit Outstanding): 32.6 32.4 28.6 23.2 16.9 12.3 8.7 5.7 3.4 2.0 1.0 0.3 0.1 0.0
- Memorandum items:
  - Exports of goods and services (millions of U.S. dollars): 1,857 1,975 2,100 2,234 2,386 2,562 2,757 2,966 3,192 3,432 3,690 3,967 4,265 4,585
  - Debt service (millions of U.S. dollars): 139.5 105.8 110.3 115.2 109.5 101.6 116.1 130.5 145.4 155.8 167.2 172.7 173.0 176.9
  - Quota (SDR millions): 138.8 (2018–2031 repeated)
  - Gross official reserves (millions of U.S. dollars): 703 755 898 1,061 1,237 1,442 1,631 1,829 2,038 2,261 2,508 2,773 3,068 3,396
  - GDP (millions of U.S. dollars): 6,746 7,024 7,431 7,895 8,445 9,100 9,801 10,568 11,392 12,283 13,234 14,249 15,331 16,463

_Source: IMF staff projections._

### Projected External Borrowing (January 1, 2018 - December 31, 2018)
- PPG external debt contracted or guaranteed (US$ million): Consessional debt, of which: 286
- Volume of new debt (US$ million): 286
- PV of new debt (US$ million): 143
- Multilateral debt: 286 143
- Bilateral debt: 0 0
- Non-concessional debt, of which: 0 0
  - Semi-concessional: 0 0
  - Commercial terms: 0 0
- Use of debt financing: Infrastructure 286 143; Budget Financing 0 0
- Memo Items — Indicative projections: Year 2: 366 183 -238; Year 3: 310 202 -155

_Source: IMF staff projections._

### Selected Indicators on the Millennium Development Goals (2000 and Latest Observations)
- Goal 1: Income share held by lowest 20 percent 1/: 3.9 5.5 (Latest Year 2010)
- Prevalence of underweight, weight for age (% of children under 5): 21.5 16.7 (Latest Year 2014)
- Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population) 1/: 63.6 70.9 (Latest Year 2010)
- Prevalence of undernourishment (percent of population): 28.6 20.7 (Latest Year 2015)
- Goal 2: Literacy rate, youth female (percent of females ages 15-24) 1/: 70.7 70.0 (Latest Year 2010)
- Literacy rate, youth male (percent of males ages 15-24) 1/: 82.1 74.3 (Latest Year 2010)
- Primary completion rate, total (percent of relevant age group): 62.0 79.3 (Latest Year 2014)
- School enrollment, primary (percent net) 1/: 96.2 97.5 (Latest Year 2009)
- Goal 3: Proportion of seats held by women in national parliament (percent): 9.3 16.7 (Latest Year 2015)
- Goal 4: Immunization, measles (percent of children ages 12-23 months): 73.0 85.0 (Latest Year 2014)
- Mortality rate, infant (per 1,000 live births): 103.5 43.4 (Latest Year 2015)
- Mortality rate, under-5 (per 1,000): 174.4 64.0 (Latest Year 2015)
- Goal 5: Births attended by skilled health staff (percent of total): 54.2 87.4 (Latest Year 2014)
- Maternal mortality ratio (modeled estimate, per 100,000 live births): 890.0 634.0 (Latest Year 2015)
- Goal 6: Prevalence of HIV, total (percent of population ages 15-49): 16.6 10.0 (Latest Year 2014)
- Goal 7: Improved water source (percent of population with access): 62.5 90.2 (Latest Year 2015)
- Other: Fertility rate, total (births per woman): 6.3 5.0 (Latest Year 2015)
- GNI per capita, Atlas method (current US$): 160.0 250.0 (Latest Year 2014)
- Life expectancy at birth, total (years): 44.1 63.8 (Latest Year 2015)

_Source: World Bank, World Development Indicators Database, 2016._

### Quantitative Targets, 2018-19 (selected items)
- Reserve money (ceiling on stock) (upper bound) (millions of kwacha): PC 303,482 299,091 323,385 300,406 340,106
- Reserve money (ceiling on stock) (millions of kwacha): 294,643 290,380 313,966 291,656 330,200
- Reserve money (ceiling on stock) (lower band): 285,803 281,668 304,547 282,906 320,294
- Fiscal targets — Primary balance (floor) (millions of kwacha): PC -144,929 44,906 29,813 16,219 3,625
- RBM financing of central government (ceiling): PC 690000
- Social spending (floor) (millions of kwacha): IT 186,132 87,972 175,944 263,917 351,889
- External sector targets — Net international reserves of the RBM (floor) (US$ millions): PC 434.1 454.7 480.2 488.2 484.5
- Memorandum items:
  - Net foreign assets of the RBM (US$ millions, end of period): 339.8 360.4 385.9 393.9 390.2
  - Budget support (US$ millions): 84.3 79.1 79.1 79.1 79.1
  - Budget support (millions of kwacha): 62,633.8 60,000.0 60,000.0 60,000.0 60,000.0
  - Program exchange rate (kwacha per US$): 725 725 725 725 725

_Source: IMF staff projections._

### Prior Actions (Public financial management and related)
- Publish detailed monthly budget execution data by vote and economic classification (main aggregates) on the MoF website. — Macro rationale: Foster fiscal transparency and monitoring — Status: Met
- Complete verification of arrears from July 1, 2012–June 30, 2017 certified by the Auditor General. — Macro rationale: Foster financial discipline — Status: Met
- Commitment that all domestic arrears prior to December 31, 2015, which are not certified by the Auditor General (MK 113 billion), will only be paid if required by law or by a court verdict; to be communicated to the Fund via letter. — Macro rationale: Foster financial discipline — Status: Met
- Reconcile all bank accounts MG1 and the operating accounts (excluding salary accounts) and ways and means for July 1, 2016-June 30, 2017 transactions signed by the Accountant General and Secretary to the Treasury. — Macro rationale: Strengthen cash planning; reconciliation of accounts; and improving the integrity of the accounting systems — Status: Met
- Complete the audit of FY2016-17 financial statements, and submit them to Parliament. — Macro rationale: Strengthen cash planning; reconciliation of accounts; and improving the integrity of the accounting systems — Status: Met

_Sources: IMF staff and Malawian authorities._

### Structural Benchmarks (2018–19) (selected)
- Public financial management — Submission of five reports by the MDAs by mid-following month and publication on the MoF website. Maintain/strengthen sanctions on MDAs for misreporting/non-compliance. — Target: Continuous — Macro rationale: Improve fiscal transparency; prevent accumulation of new domestic arrears
- Set-up and maintain a transparent commitment control system for all MDAs; compile consolidated commitments centrally by the MOF by the end of the following month and place on the Ministry of Finance website; classify bills overdue for more than 90 days; apply sanctions to controlling officers. — Target: Continuous — Macro rationale: Better control on all government commitments and arrears, if any.
- Prepare quarterly consolidated financial statements (including all MDAs) with fully reconciled bank accounts and publish within six months after the end of each quarter in the first year and within 90 days after the end of each quarter in the second and third; certified by the Auditor General. — Target: Continuous — Macro rationale: Improve fiscal transparency and integrity of the accounting system; routinize reconciliation of all bank accounts; strengthen cash planning.
- Reconcile all bank accounts MG1 and seven operating accounts and ways and means transactions within 90 days after the end of each month signed by the Accountant General and Secretary to the Treasury; clear backlog and achieve three consecutive months track record. — Target: Continuous — Macro rationale: Routinize reconciliation of all bank accounts; strengthen cash planning; improve the integrity of the accounting system.
- Reconcile all debt data between the MOF and RBM. — Target: Continuous — Macro rationale: Enhance debt management; improve transparency and monitoring of public debt.
- Prepare monthly cash forecasts (broken down by economic classification) of the next 12 months based on input from all MDAs. — Target: End-June 2018 — Macro rationale: Strengthen cash management; and timely implementation of the budget.
- Adjust the bank reconciliation of FY2013-14 – 2014-15 based on forensic audit findings of MK236 billion and adjust opening and closing balances of FY2015-16. — Target: End-June 2018 — Macro rationale: Routinize reconciliation of all bank accounts; strengthen cash planning; improve integrity of the accounting system.
- Financial sector — Develop a monetary policy communication strategy. — Target: End-June 2018 — Macro rationale: Prepare for the eventual implementation of inflation targeting.
- Additional 2018–19 benchmarks (selected): CMU undertakes variance analysis on forecasting errors [every three months] (End-December 2018); Implement areas of biggest potential for enhancing efficiency, planning and allocation of public investment (End-December 2018); All domestic debt commitments, expenditures and payments transacted through IFMIS in real time (End-December 2018); Develop a comprehensive medium-term debt strategy including reducing reliance on borrowing from RBM (End-December 2018); Link the HRMS and IFMIS systems (End-June 2019); Submit to Parliament amendments to the RBM Act in line with IMF Safeguards Monitoring Report recommendations (End-October 2018).

_Sources: IMF staff and Malawian authorities._

*Source: Reserve Bank of Malawi; IMF staff estimates and projections; World Bank World Development Indicators Database, 2016.*

### Annex I. Ex Post Peer-Reviewed Assessment

### Annex I. Ex Post Peer-Reviewed Assessment

### A. Introduction
- Malawi engaged in four Fund-supported program arrangements since 2005, with only one program successfully completed.
- The 2012–2017 ECF arrangement was for the equivalent of SDR 104.1 million (150 percent of quota), originally scheduled to expire on July 22, 2015, and extended five times before completion.
- The Executive Board approved an augmentation of access equivalent to 25 percent of quota after the combined seventh and eighth reviews, on June 20, 2016, to respond to the El Niño-induced drought, helping address a severe humanitarian crisis and catalyzing donor support.
- Text Table 1 (selected figures):
  - ECF, Jul 23, 2012 – Jun 29, 2017: Amount Approved 138.80 (SDR Million); Amount Drawn 138.80 (SDR Million).
  - ECF, Feb 19, 2010 – Jul 22, 2012: Amount Approved 52.05 (SDR Million); Amount Drawn 13.88 (SDR Million).
  - ESF, Dec 03, 2008 – Dec 02, 2009: Amount Approved 52.05 (SDR Million); Amount Drawn 34.70 (SDR Million).
- Malawi context and vulnerabilities:
  - Per capita income: US$327.
  - World Bank Human Development Index rank: 170 out of 188 countries.
  - World Bank Doing Business rank (2018): 110 out of 190 countries.
  - Malawi ranks in the bottom 25 percent of countries for most World Bank governance indicators.

### B. Program Objectives and Performance
- Program objectives (2012–17 ECF):
  - Maintain macroeconomic stability, promote inclusive growth, and reduce poverty.
  - Achieve single digit inflation and increase reserve coverage to at least three months of imports.
  - Strengthen public finances and debt management; support private and financial sector development.
  - Increase domestic revenue mobilization and emphasize expenditure control; structural reforms focused on fiscal transparency, PFM improvements, reducing fiscal dominance, and promoting financial stability and deepening.
- Shocks and policy slippages affecting implementation:
  - Adoption of a floating exchange rate and large devaluation led to much larger than anticipated inflation.
  - Cashgate scandal (2013) caused loss of confidence and withdrawal of donor budget support.
  - Fiscal dominance and monetization of fiscal deficits further fueled inflationary pressures.
  - Two-year drought and humanitarian crisis compounded effects toward the end of the program.
- Overall performance summary:
  - Reserves were increased and inflation decreased markedly only toward the end of the program.
  - Growth objectives were not met due to shocks, poor infrastructure, and weak business environment.
  - Fiscal performance fell short of program targets despite improvement in domestic revenue mobilization.
  - Structural reform implementation was repeatedly delayed, especially in PFM, resulting in multiple program extensions and combined/complementary reviews (e.g., combined third and fourth reviews; fifth and sixth reviews; seventh and eighth reviews; ninth review extended for humanitarian response).
- Quantitative target performance (high-level):
  - Net international reserves accumulation met consistently except in the eighth and ninth reviews due to drought effects.
  - Targets on net domestic assets of the central bank missed in almost half the program reviews.
  - Targets on non-concessional external borrowing not met three times.
  - Net domestic borrowing of the central government missed in four reviews.
  - Indicative targets for social spending missed in six reviews with a median deviation of 3.8 percentage points from the target.
  - Two incidents of misreporting: associated with the second review (non-observance of continuous Performance Criteria on new non-concessional external borrowing maturing after one year) and combined third and fourth review (non-accumulation of external payment arrears).

### C. Implementation of Structural Reforms and Technical Assistance
- PFM reforms: Implementation was particularly slow but sustained effort supported by Fund technical assistance (TA), including a resident PFM advisor.
- Achievements in PFM (Box 2 highlights):
  - Monthly budget execution data by vote posted on the MoF website six weeks after execution for 2015/16 fiscal year.
  - MDAs submitting five monthly financial reports with fully reconciled items (almost 90 percent compliance).
  - Reconciliation of main government bank accounts for the 2015/16 fiscal year.
  - Strengthened bank reconciliation capacity in the Auditor General’s Office.
  - Rationalization of government bank accounts with over 200 bank accounts closed.
  - Improved security of IFMIS and a ready-to-use treasury management system.
  - Regular commit/arrears reports and a cash management unit set up in October 2016 undertaking monthly and annual cash planning.
- TA and capacity development (Box 1 highlights):
  - Significant Fund TA and training in fiscal, monetary, financial sector, statistics, and legal areas.
  - Main TA focus: PFM after cashgate, tax policy and revenue administration, banking supervision, and monetary policy framework modernization.
  - Authorities implemented most tax policy recommendations, placing Malawi’s revenue as percent of GDP around the median for low income countries.
  - Government officials received IMF training in FPP, MMF, and MS courses.

### D. Macroeconomic Outcomes Under the Program
- Growth:
  - Average annual growth: 3.8 percent in 2012–17, compared with a projection of 7.5 percent.
  - National poverty rate: stagnated at over 50 percent and increased in rural areas.
  - Population growth: estimated at 3.1 percent.
  - Contributing factors to weak growth: policy uncertainty, governance issues, high inflation, liquidity constraints, drought impacts on maize production and hydroelectricity generation, higher operating costs, low capacity utilization.
- Inflation:
  - Averaged 23.4 percent during 2012–16 compared to a projection of 10.8 percent.
  - The kwacha depreciated by 54 percent during 2012–16, mostly a result of liberalization of the exchange rate regime.
  - Annual inflation declined since end-2016, falling to 7.7 percent in November 2017, reflecting tighter monetary policy and stabilization of maize prices.
- Fiscal stance and public debt:
  - Overall balances averaged -5.1 percent of GDP during 2012–17 compared with projections of -5.2 percent of GDP.
  - Strong domestic revenue mobilization (exceeded the median for LICs).
  - Unbudgeted wage increases, unplanned recruitment of teachers, and expenditure control slippages increased spending rigidities; wage bill and interest expenses accounted for about 50 percent of expenditure in FY 2016/17.
  - Regularization and securitization of pre-program domestic arrears (5½ percent of GDP) and withdrawal of 4½ percent of GDP in budget support led to high recourse to domestic financing and rising domestic debt.
  - Domestic debt rose from 10 percent of GDP in 2012 to 21.2 percent of GDP by end-2016.
- Financial sector:
  - NPLs rose from 10.6 percent in 2015 to 17 percent at end-2016.
  - Reduced liquidity and emergency interventions were required in two commercial banks.
  - Provisioning levels remained low and collateral recovery for NPLs has been lengthy.

### E. Lessons from the 2012–17 ECF Arrangement
- Appropriateness of Fund engagement:
  - The mode of Fund engagement was appropriate given an urgent and protracted BOP need in 2012 when international reserves were only 0.5 months of imports.
  - The objective of achieving macroeconomic stability was ultimately achieved despite mixed policy and reform implementation.
- Program design limitations:
  - Program design did not fully account for deep structural rigidities, weak implementation capacity, limited productivity, and limited economic diversification.
  - Authorities’ lack of ownership and governance challenges contributed to delays in implementation, misreporting, and program extensions.
  - Conditionality was modified during the program to account for the fragile institutional framework.
- Political-economy and capacity constraints:
  - Missed targets partly reflect insufficient incorporation of political-economy and capacity constraints (e.g., politically motivated unbudgeted wage increases in 2015).
  - Poor policy coordination (example: central bank halving liquid reserve requirements in 2015 after large fiscal slippages) illustrated lack of commitment.
  - When targets aligned with authorities’ objectives, implementation could be effective and rapid.
- Access and financing adjustments:
  - A series of shocks justified progressively higher access levels.
  - In hindsight, disbursements could have been more frontloaded to accommodate the large 2012/13 depreciation, but rephasing and program flexibility helped safeguard Fund resources during policy slippages.
  - Augmented financing helped counter the humanitarian crisis.
- Catalyzing donor support:
  - In 2012 strong measures implemented by the authorities led to 6.4 percent of GDP in donor support.
  - Withdrawal of donor budget support (3.1 percent of GDP) following cashgate and other slippages was gradually reversed as PFM measures under the ECF restored donor confidence.
  - Augmentation and flexibility under the ECF in response to the drought catalyzed donor support amounting to 2.1 percent of GDP.

*Source: Annex I. Ex Post Peer-Reviewed Assessment (cr18115) — IMF staff assessment of Malawi’s 2012–17 ECF arrangement.*

### 13. Policies under a possible successor program should focus on the following reform

### 13. Policies under a possible successor program should focus on the following reform

### Program ownership
- Uneven program implementation underscores the need for stronger and broader-based ownership across decision-making levels.
- Deficiencies evident in delays in implementing key PFM reforms, weak fiscal policies, and poor policy coordination.
- Ownership strongest at program start, supporting front-loading of conditionality.
- Realistic program targets, including for growth, are important to counter reform fatigue and reduce the risk of misreporting.

### Building economic resilience
- Climate change-induced weather shocks delayed achievement of macroeconomic stability despite access augmentation and program extensions.
- Building resilience requires:
  - Accumulating international reserves and fiscal buffers.
  - Improving irrigation infrastructure and agricultural productivity.

### Higher and more inclusive growth
- Requires a mix of medium-term policies within a context of macroeconomic stability and a balanced policy mix.
- Priorities:
  - Address infrastructure bottlenecks in energy, irrigation, and transportation to increase investor confidence.
  - Reforms to improve the business environment, education, and healthcare to raise productivity and enhance private sector investment.
  - Reduce excessive regulations, improve governance, and implement well-targeted social policies to improve access to and quality of education and healthcare.

### Fiscal policy
- Major challenge: balancing large infrastructure and social spending needs (requiring mainly external financing) against rising debt vulnerability.
- Securing concessional financing is critical and should be complemented by:
  - Better public investment management.
  - Prioritization of infrastructure projects in the budget.
  - Creating fiscal space to finance projects domestically, including improving public spending efficiency and addressing expenditure rigidities by containing the wage bill, lowering debt service, and better commitment controls.
- Increasing concessional financing requires serious efforts to improve governance, especially advancing PFM and procurement reforms to re-engage donors.

### PFM reforms
- Further strengthening PFM is critical to restoring fiscal integrity and enhancing transparency.
- Necessary measures:
  - Strong commitment controls.
  - Routine bank reconciliations.
  - Better cash management.
  - Regular fiscal reporting.
- For some donors, these are pre-requisites for resumption of budget support.

### Policy mix
- Maintain price stability and contain inflation to single digits to entrench macroeconomic stability.
- Fiscal policies should keep expenditures in line with available resources, minimizing domestic financing and especially monetization of deficits.
- Monetary policy should aim to maintain positive short-term real money market interest rates to promote private sector growth and encourage demand for the Kwacha.

### Monetary policy framework
- Framework needs further strengthening to support the central bank’s price stability objective.
- The central bank receives customized IMF TA to improve monetary operations and strengthen forecasting for policy analysis.
- A flexible exchange rate regime remains appropriate; sustain relative exchange rate stability that benefited from prudent monetary policy management.

### Safeguard and strengthen financial sector stability
- Enhance on-and-off-site supervision, enforce compliance with prudential norms, and upgrade supervisory skills at the central bank.
- Key actions:
  - Closely monitor banks' compliance with prudential norms.
  - Strengthen banking supervision, including AML/CFT.
  - Facilitate rationalization of the banking sector.
  - Increase provisioning commensurate with increased financial sector vulnerabilities.
  - Strengthen creditor rights and reduce lengthy judicial processes in recovering collateral to help reduce non-performing loans.

### Technical assistance
- Delays in crucial PFM reforms point to capacity challenges in addition to lack of commitment.
- Long-term advisors and follow up on implementation of TA recommendations are key to maintaining reform momentum.

### Data issues
- Overall data is broadly adequate for program monitoring.
- Deficiencies remain mainly in national accounts, balance of payments statistics, and debt management and will need to be addressed, including by Fund technical assistance.

### Stakeholders’ and the Authorities’ Assessment
- Stakeholders (post-program conference, August 2017) recognized achievements under the past ECF arrangement and challenges ahead; emphasized need to safeguard macroeconomic stability and PFM improvements.
- Stakeholders called for improved policy implementation and accountability, focus on raising inclusive growth and jobs, reinforcing resilience to climate shocks, improving governance (PFM and procurement), improving debt management and sustainability, and safeguarding financial sector stability.
- Given scarce resources and significant needs, stakeholders emphasized careful sequencing and prioritization and safeguarding pro-poor spending for the most vulnerable.
- Malawian authorities broadly concurred with staff’s assessment; appreciated Fund support during the humanitarian crisis and in strengthening PFM systems.
- Authorities welcomed continued Fund engagement, including TA and training, and indicated strong interest in a successor ECF arrangement.

### Key quantitative findings and indicators (preserved exactly as in source)
- Net foreign assets: -35 percent of GDP (as of end-2015).
- External liabilities: 53 percent of GDP.
  - Debt liabilities: 36 percent of GDP.
  - Inward FDI stock: 17 percent of GDP.
- Public sector loans: 33 percent of GDP (as of end-2017).
- Current account deficit: 10 percent of GDP (estimated for last year), down from 13.6 percent in 2016.
- Terms of trade change: -4.6 percent (impact noted).
- Export concentration: three products—tobacco, sugar, and tea – accounting for over three-quarters of total exports.
- Revenue increased from 18.0 to 20.1 percent of GDP.
- Overall deficit reduced from 6.8 to 5.1 percent in 2016/17.
- Inflation reduced from 24.2 percent at end-2014 to 7.7 percent at end-Nov 2017.
- Wage bill and interest expense account for 58% of revenue.

*cr18115 - 13. Policies under a possible successor program should focus on the following reform*

### 3. The current account (CA) gap is assessed to be within the range of [-1, 1] percent.

### 3. The current account (CA) gap is assessed to be within the range of [-1, 1] percent.

### Current account assessment and gaps
- Using the EBA-lite model, Malawi’s cyclically adjusted CA norm is estimated at -8.3 percent of GDP.
- Cyclically adjusted actual CA balance: -10.2 percent of GDP.
- Model-estimated CA gap (actual minus norm): -1.9 percent of GDP.
- Policy gap contribution to CA gap: 2.1 percent of GDP, decomposed as:
  - Own and global fiscal policy were loose relative to the desired medium-term position, leaving little fiscal policy gap (contribution: -0.1 percent).
  - Strong accumulation of reserves created a positive gap (contribution: 1.1 percent).
  - Own private credit (as share of GDP) was below the desirable level while global private credit was above desirable level, producing a negative credit gap and a higher-than-desirable CA from this policy gap alone (contribution: 1.1 percent).
- CA residual (unexplained part of CA gap): -4 percent of GDP, suggesting model missed Malawi-specific factors (investment-related imports, structurally narrow export base, vulnerability to weather shocks).
- Staff adjustment: staff assesses the CA norm to be 1 percentage point of GDP lower, yielding a staff-assessed CA gap of -0.9 percent of GDP (within the range of [-1, 1] percent).

### Real exchange rate (REER) assessment
- REER movement:
  - REER appreciated by about 2.5 percent in 2017 on average (following a 13 percent depreciation in 2016).
  - NEER depreciated by 5 percent in 2017 on average (compared to a 26-percent depreciation in 2016).
- Inflation and exchange rate context:
  - Inflation moderated to help narrow the inflation differential with trading partners; the Malawian kwacha was stable against the U.S. dollar throughout 2017.
  - Official intervention contributed to building foreign reserves and/or limiting FX volatility; IMF reclassified Malawi’s de facto exchange rate arrangement in 2017 AREAER from a float to a stabilized arrangement.
- EBA-lite REER norm and elasticity approach:
  - Norm of the natural logarithm of the REER index estimated at 4.7 versus actual value of 4.3 for 2017, implying an undervaluation of about 40 percent of REER (model inconsistency with negative CA gap).
  - Staff adopts elasticity approach: elasticity of CA to REER = -0.24 applied to staff-assessed CA gap of -0.9 percent yields an implied REER overvaluation of 3.8 percent.
  - Staff assesses the REER gap to be within the range of [-5, 5] percent.

### Capital and financial flows
- Net financial inflows recovered in the past year to the 2011-15 average (relative to GDP).
- Medium- and long-term loan disbursements doubled (agricultural support funds from the World Bank and stronger project support).
- Capital account balance (project, dedicated, and off-budget grants): 5.2 percent of GDP last year (improved from 2015 level; lower than 9.1 percent of GDP in 2016).
- Foreign direct investment flows: 2 percent of GDP (disappointing amid investor concerns over power shortages and rising factor costs).
- Capital and financial flows more than fully financed the current account deficit, producing a positive overall balance.

### Reserves and reserve adequacy
- Gross international reserves at end-2017: US$757 million.
- Reserve import coverage: 3.3 months of prospective imports of goods and services (up from 2.9 months in 2016).
- IMF ARA metric adequacy level (credit-constrained economies): 3.2 months of imports would be adequate for Malawi (assuming a low opportunity cost of holding reserves).
- Traditional adequacy metrics:
  - Broad money coverage: 52 percent (against a 20 percent threshold).
  - Short-term debt coverage: 360 percent (against a 100 percent threshold).
- Cautions:
  - Rise in reserves in 2017 reflected largely an $80 million World Bank agricultural support fund (equivalent to 0.4 months of imports), which is soon expected to be fully spent.
  - Over 2001–17, reserve import coverage averaged 1.8 months with a standard deviation of 0.9 months.
- Projections:
  - Reserves expected to rise to about 3.8 months by 2021 and reach 4.5 months over the medium term.

### Debt and vulnerability indicators
- Public and publicly guaranteed (PPG) external debt: about US$2 billion (32.6 percent of GDP) in 2017, up from $1.79 billion (33.2 percent of GDP) in 2016.
- Increase in PPG external debt during 2017 mainly reflects $382 million of new disbursements (with $353 million from multilaterals and $29 million from bilateral creditors) and repayment of about US$150 million of principal.
- Public external debt is held mainly by multilateral creditors (78 percent of total). Main providers: IDA (43 percent), ADF (14 percent), IMF (11 percent). China accounted for about 12 percent of total debt.
- Risk of external debt distress: Moderate; augmented by significant risks stemming from domestic public and/or private external debt.
- Policy implications: close attention to financing terms of proposed infrastructure investments given limited headroom for further borrowing; diversify the economy (particularly exports), broaden the revenue base, strengthen public finance management, and build fiscal buffers.

### Policy recommendations and risk-mitigation actions (summarized from staff advice)
- Fiscal and macro policies:
  - Keep fiscal discipline and make monetary policy consistent with growth and inflation objectives.
  - Pursue restrictive fiscal policies to limit spending; exert effective commitment control system; increase revenue mobilization.
  - Adopt policies to increase fiscal space to respond to contingencies and accelerate PFM reforms; strengthen corruption control; communicate regularly and transparently.
  - Elaborate a prudent and well appraised public investment program; secure concessional financing; assess borrowing impact on debt sustainability.
- Monetary and exchange rate management:
  - Tighten monetary policy and increase exchange rate flexibility to absorb shocks.
  - Maintain adequate foreign reserves and smooth short-term exchange rate volatility.
  - Improve communication of monetary policy and adopt a clear and effective monetary operational framework.
- Structural and external resilience:
  - Strengthen FX reserve buffer, diversify the export base, and continue efforts to broaden the revenue base.
  - Strengthen banking supervision and inspection to contain emerging risks; develop early warning systems and countervailing measures; eliminate domestic arrears accumulation.
  - Use automatic fuel price adjustment mechanism and adjust electricity prices (if needed) to smooth price movement and ensure adequate energy supplies.
- Contingency for external shocks:
  - Maintain strong political commitment to program implementation and strengthen vigilance and control in expenditure monitoring, especially given spending pressures ahead of elections.

*Source: cr18115 - 3. The current account (CA) gap is assessed to be within the range of [-1, 1] percent.*

### Box 1. Baseline Macroeconomic Assumptions

### Box 1. Baseline Macroeconomic Assumptions

### Growth and inflation
- Real GDP growth is projected to moderate to 3.5 percent in 2018 and gradually pick up and stabilize at 6.5 percent over the medium to long term.
- The long-term growth rate is about 1.5 percentage point higher than the average during 2008-17.
- Inflation (end-of period) is projected to rise temporarily from 7.1 percent at end-2017 to 9 percent this year (reflecting the impact of a rise in maize prices from a historically low level) before resuming a gradual disinflation path.
- Tight fiscal and monetary policies are expected to continue anchoring inflation expectations.
- Inflation is projected to reach 5 percent by 2022.

### Credit, exchange rate, and fiscal revenue
- Private sector credit growth is projected at 4 percent this year before strengthening to 8 percent in 2019 and averaging about 15 percent year-on-year during 2020–2023 in line with stronger real growth, compared to an 11.5 percent average envisaged in the last DSA.
- The exchange rate is projected to remain constant in real effective terms.
- The tax revenue to GDP ratio is expected to edge down by 0.3 percentage points in FY 17/18 from the previous fiscal year and return to a higher level of 17.8 percent by FY 22/23.
- In the long run, tax revenue is projected to rise gradually to around 18.5 percent of GDP in FY 36/37, thanks to progressive reforms to tax administration and policy.
- The tax revenue to GDP ratio is about 0.3 percentage point lower than assumed at the time of the last DSA.
- Total revenue to GDP ratio remains broadly unchanged from the last DSA.

### External financing and current account
- External debt will be mainly contracted with multilateral creditors on concessional terms, with the remainder being bilateral on broadly similar terms.
- Budget support from multilateral and bilateral donors is assumed to remain subdued in the medium term.
- For FY 18/19, the framework assumes about $80 million budget support grants from the World Bank.
- The current account deficit is projected to shrink gradually, reflecting large and persistent import needs.

### New disbursements on external loans and domestic financing
- For 2018, new disbursements on external loans are taken from the authorities’ fiscal framework, which projects capital spending covered by external loans to reach 4.8 percent of GDP in FY 17/18 and 4.1 percent in FY 18/19.
- It is assumed that external project loans will remain close to 2.5–2.6 percent of GDP in subsequent fiscal years.
- Net domestic financing is assumed to be limited to less than 1 percent of GDP in each fiscal year beyond FY 18/19, contributing marginally to the change in domestic debt.

### Debt sustainability assessment (summary)
- Based on the assumptions outlined above, Malawi’s debt is assessed to be sustainable with a moderate risk of debt distress.
- Malawi is classified as a “weak” performer, based on the quality of the country’s policies and institutions as measured by the three-year average of the rating under the World Bank’s Country Policy and Institutional Assessment (CPIA), implying lower (less accommodative) debt sustainability thresholds.
- Under the baseline scenario, all debt burden indicators remain below their indicative thresholds.
- The PPG external debt is projected to peak at 32.2 percent of GDP in 2019–20, with a PV of debt-to-GDP ratio of 20 percent.
- The PV of PPG external debt is expected to decline gradually to 13 percent over the long term.
- Debt service-to-exports ratio is expected to remain high at

*Source: Box 1. Baseline Macroeconomic Assumptions (cr18115).*

### 7.5 percent in 2018 (compared to a historical average of 4 percent), but has declined significantly

### cr18115 - 7.5 percent in 2018 (compared to a historical average of 4 percent), but has declined significantly

### Current debt outlook and key statistics
- Debt service was "7.5 percent in 2018 (compared to a historical average of 4 percent), but has declined significantly from a 10-year high of 12 percent in 2016 (the latter reflects a large amortization related to the debt restructuring operation with the PTA bank which was completed in 2017)."
- "The debt service is expected to gradually decline below 4 percent of exports over the long term."
- Under the baseline projection: "External debt (nominal) 2018 = 35.6 (percent of GDP); of which: public and publicly guaranteed (PPG) = 32.2 (percent of GDP)."
- "PV of external debt … 2018 = 24.8" and "PV of PPG external debt … 2018 = 21.1"
- "Debt service-to-exports ratio (in percent) 2018 = 7.4" and "PPG debt service-to-revenue ratio (in percent) 2018 = 10.2"
- "Total public debt is projected to peak at 54.4 percent in 2019 before receding as the fiscal primary balance starts to turn positive."
- "In PV terms, total public debt (at 43 percent of GDP in 2018) is projected to breach the LIC DSA benchmark of 38 percent (for those countries with weak policies and institutions) and remain above the benchmark until 2023."
- "Total debt service is expected to remain above 10 percent of revenue and grants over the medium term."
- "The gross domestic debt to GDP ratio is projected to decline gradually over the medium term, to around 15 percent of GDP at end-2023."

### Stress tests and scenario results
- Most extreme impacts arise under two bound tests (B3 and B6 in Table 2):
  - B3: "US dollar GDP deflator at historical average minus one standard deviation in 2019–20."
  - B6: "one-time depreciation of 30 percent in 2019."
  - Both shocks cause "the PV of debt to GDP, PV of debt to exports, and PV of debt to revenue to breach the thresholds and remain at elevated levels."
  - Liquidity indicators do not breach thresholds but are expected to steepen significantly, "especially under the depreciation shock for debt services to revenue ratio."
- Temporary shocks (B1, B2, B4, B5) also cause breaches:
  - B1: "Real GDP growth at historical average minus one standard deviation in 2019-2020."
  - B2: "Export value growth at historical average minus one standard deviation in 2019-2020."
  - B4: "Net non-debt creating flows at historical average minus one standard deviation in 2019-2020."
  - B5: "Combination of B1-B4 using one-half standard deviation shocks."
  - These "are also expected to cause the debt path to breach most thresholds for multiple years."
- Historical scenario (A1): "when the average current account deficit was around 10.1 percent of GDP and FDI was low (around 1.5 percent of GDP), all ratios are projected to breach the thresholds and remain at elevated levels."
- Table 2 illustrative values (selected):
  - PV of debt-to-GDP ratio baseline and shocks (2018–38): baseline series begins "74 72 71 70 69 68 61 46" (table presents detailed annual values).
  - PV of debt-to-exports ratio baseline and shocks (2018–38): baseline series begins "74 73 75 77 79 81 90 97" (table presents detailed annual values).
  - PV of debt-to-revenue ratio baseline and shocks (2018–38): baseline series begins "103 105 104 102 99 98 84 64" (table presents detailed annual values).
- Table 3 sensitivity snapshots (debt service ratios and other indicators) show baseline and scenario outcomes; e.g., "Debt service-to-exports ratio baseline = 85 55 54 54" and scenario ranges presented in table form.

### Public DSA, drivers, and dynamics
- "The risk of debt distress is heightened significantly when adding domestic public debt to external debt (Figure 2, Table 4–5)."
- Key drivers cited:
  - "Worsening of the primary deficit compared to the last DSA, notably in 2017 and 2018 (Text Table 3)."
  - High average real interest rate on domestic debt "partly reflecting lower inflation" despite stronger real GDP growth.
- Standard tests emphasize the importance of the primary deficit:
  - Under scenario A1 with "real GDP growth (of 5 percent) and primary balance at historical averages (of 1.3 percent), the PV of total public debt will be slightly worse than the baseline, with the PV debt-to-GDP ratio above 38 percent before 2023."
  - "The most severe impact comes from a temporary shock of a one-time 30 percent real depreciation in 2019, which will significantly worsen the debt path, sending the peak PV of total public debt to 51 percent of GDP in 2019."
- Public sector debt table highlights:
  - "Public sector debt 2018 = 54.3 (percent of GDP)" and series through projection period with peak and averages detailed in Table 4.
  - "PV of public sector debt … 2018-23 average = 43.6" and projection path presented in table form.
  - "Gross financing need 2018 = 7.2; 2019 = 9.7; 2020 = 9.4" and projected decline thereafter.

### Key macroeconomic and financing assumptions used in projections
- Real GDP growth (in percent) series starts: "2.9 2.3 4.0 5.0 2.2 3.5 4.5 5.0 5.5 6.0 6.5 5.2 6.5 6.5 6.5" (Table 1 and repeated elsewhere).
- GDP deflator in US dollar terms (change in percent) series includes values like "2.7 -16.4 9.0 -0.6 13.2 5.0 -0.4 0.8 0.7 0.9 1.2 1.4 1.2 0.6 1.0."
- Effective interest rate (percent) series includes values such as "2.3 1.8 1.3 1.0 0.6 0.9 0.9 0.9 1.0 1.0 1.0 1.0 1.1 1.1 1.1."
- Grant element of new public sector borrowing in projections: "49.9 49.5 49.7 49.6 48.4 48.4 49.3 48.4 48.4 48.4" (Table 1 and Table 4).
- Assumptions for domestic debt projections:
  - i) "the cost value of all maturing Treasury bills and the face-value of all maturing Treasury notes will be continuously rolled over;"
  - ii) "government’s net domestic financing will be limited to less than one percent of GDP beyond FY 18/19;"
  - iii) "all maturing promissory notes will be automatically converted into advances from the central Bank and ultimately rolled over into Treasury bills of varying maturities (91, 182 and 364 days) or Treasury notes of longer than one year maturity which could then be tradable in the secondary market."

### Policy recommendations and conclusions
- Overall assessment: "Malawi remains at moderate risk of debt distress, based on an assessment of external public debt, but overall risks have heightened compared to the last DSA, reflecting rising vulnerabilities to domestic debt and external conditions."
- Recommended policy actions:
  - Prudent project selection:
    - "Given limited headroom for further borrowing, close attention and prudence should be applied to project identification and the financing terms of any proposed infrastructure investments while balancing needs with rates of return and debt sustainability concerns."
    - Example from text: "For instance, taking a $600 million loan over the next three years, with a grant element of 37 percent, would raise the PV of debt to GDP ratio by 5 percentage points at the peak and lead the PV of debt to exports ratio to hit the 100 percent threshold."
  - Broadening revenue base and strengthening public financial management:
    - "Further efforts to maximize the impact of finite domestic resources, including broadening the tax base and strengthening public procurement and financial management."
  - Building fiscal buffers:
    - "Measures to increase fiscal buffers to enable the budget to withstand the impact of future external shocks are important."
  - Reducing the sovereign-bank nexus:
    - "There is a significant nexus between sovereign debt and the banking system since the RBM and commercial banks have been the main sources of domestic financing for the central government."
    - Large exposure could create a "negative feedback loop if fiscal challenges emerge or liquidity conditions tighten."
  - Closely monitoring contingent liabilities:
    - "Efforts should be stepped up to estimate, disclose, manage, and contain contingent liabilities, in particular of those related to financial sector and state-owned enterprises."
    - Past examples: "the recapitalization of the RBM due to devaluation and the ADMARC bailout" illustrated contingent liability risks.

*International Monetary Fund. MALAWI — Debt Sustainability Analysis and related projections as presented in the provided text.*

### Annex VI. Capacity Development Strategy Note for FY 2018—

### Annex VI. Capacity Development Strategy Note for FY 2018— Summary, December 2017

### A. Macroeconomic challenges
- Overarching strategy: safeguard macroeconomic stability through generally tight fiscal and monetary policy; focus first on locking in gains in disinflation and then on supporting inclusive growth.
- Inflation averaged 23.4 percent during 2012-2016, increasing the costs of public and private borrowing, reducing fiscal space, and suppressing investment.
- Sudden withdrawal of donor budget support after the cashgate scandal inflicted "colossal damages" to the economic outlook and exposed fundamental deficiencies in public financial management.
- Two consecutive years of drought reduced growth, revenue collection, and banking sector profitability.
- Developments in 2017:
  - Inflation rapidly fell to single digits.
  - Reserve coverage is well above 3 months.
  - Growth is expected to rebound.
  - Malawi completed the 9th and final review of the ECF arrangement in June 2017, including completing the bank reconciliation and audit of the government’s 2015/16 financial accounts.
- Authorities are interested in a successor ECF arrangement to anchor reforms and support fiscal discipline ahead of 2019 elections.

### B. Focus of recent technical assistance
- Main emphasis of past TA:
  - Implementing a PFM action plan addressing weaknesses in reconciling government bank accounts, commitment control, cash management, IFMIS, and basic fiscal reporting.
  - Safeguarding financial sector stability via TA on strengthening banking supervision and improving development of money and foreign exchange markets.
  - Implementing tax policy recommendations that bolstered government revenues amid suspended donor budget support.
- Training recipients and topics:
  - Malawi government officials were major recipients of training.
  - Majority of training in Macroeconomic Statistics, Financial Programming and Policies, Basel II supervisory framework, and Monetary and Financial Sector Analysis.
  - Since June 2016, the Reserve Bank of Malawi received customized training on inflation and monetary policy analysis to modernize its monetary policy framework.

### C. Forward-looking priorities
- Strategy focus: cement gains in PFM reforms by routinizing bank reconciliation and shifting focus to expenditure controls to restore public trust in PFM.
- Capacity building priorities include tax policy and revenue administration reforms to build resilience and reduce aid dependence; modernizing the monetary policy framework; strengthening risk-based banking supervision; improving Financial Market Infrastructure; and improving timeliness, quality, and coverage of statistics.
- Expected TA providers: FAD, MCM, and STA, supported by AFRITAC East.

- TA Priorities and Objectives:
  - Public Financial Management
    - Ensure routine fiscal reporting and bank reconciliations; strengthen commitment controls and cash management to prevent the emergence of domestic payment arrears; improve existing IFMIS coverage for comprehensive reporting; implement plans for a new IFMIS over the medium term.
  - Tax policy and revenue administration
    - Assess recent new tax reforms, as a follow up to the January 2016 tax policy diagnostic mission; prepare a diagnostic of tax and customs administration and assess the implementation of the authorities’ strategic plan for revenue mobilization and the emerging challenges.
  - Monetary policy framework
    - Improve central bank operations and its liquidity management; and prepare the monetary policy framework for transition to interest rate based policy. Develop a road map to implementing inflation targeting, and improve communication on RBM’s policy target to the markets.
  - Financial sector supervision
    - Strengthen risk-based supervision of the banking sector; support the implementation of consolidated supervision frameworks; prepare a diagnostic of the stability of the banking system; assess the status of the implementation of the Basel framework, and strengthen insurance and pension supervision.
  - Financial market infrastructure (FMI) and payments
    - Support the authorities’ efforts to adopt the international risk management standards for FMIs and equip the central bank to fulfill its oversight responsibilities in line with the CPSS-IOSCO Principles for financial market infrastructures (PFMI).
  - Statistics
    - Provide support for the authorities’ work on improving the national accounts, government finance, BOP, and monetary and financial statistics.

- Risks and mitigations:
  - Main risk: backsliding of PFM reforms. Continued support for routinizing bank reconciliations is key.
  - Statistics is most hampered by resource constraints; authorities have demonstrated commitment to implement TA recommendations.
  - Leveraging the resident PFM advisor with AFRITAC East support to mitigate PFM risks.
  - Increasing resources to the National Statistics Office (NSO) and closer coordination between NSO, RBM, and other Ministry of Finance entities to enhance statistics quality and policy formulation.

### Authorities' views
- General reaction:
  - Authorities appreciated feedback and agreed with analysis and views.
  - Concern: disparity between TA/training (knowledge sharing) and absorption/application/internalization. Some representatives requested a "cooling-off period" after TA delivery to internalize knowledge.
- Views on risks and impediments:
  - Agreed with staff’s view of risk (fatigue on PFM reform) and mitigation (resident PFM advisor).
  - Emphasized low public sector remuneration and overly-centralized human resource management as key impediments to sustaining capacity development gains.
- Ministry of Finance comments:
  - Broad agreement with PFM and tax revenue priorities.
  - Specific comments:
    - IFMIS: request TA on monitoring IFMIS implementation.
    - Tax diagnostic: unclear if needed given a prior TADAT assessment.
    - Assessing implementation of revenue strategy: uncertain whether IMF TA is needed.
- Reserve Bank of Malawi (RBM) comments:
  - Need guidance on optimal sequencing for transitioning to inflation targeting; absorption, application, and internalization of policy analysis and forecasting work is key.
  - Continued advances in FPAS is RBM’s key priority; FPAS is yielding good outcomes and is key for transition to an interest rate based monetary policy.
  - Data deficiency is a key weak link; RBM working closely with new NSO leadership to address the issue.
  - Adoption of a more flexible and forward-looking monetary policy framework has implications for monetary conditionality in future Fund-supported programs; RBM needs guidance on shift to review-based monetary conditionality.
  - Consolidated supervision priority due to prevalence of Pan African banks and local banks becoming Pan African; holding companies increase need for consolidated supervision.
  - Macroprudential: training has started; linking macroprudential with monetary policy is the key challenge. Courses alone are not effective; when coupled with attachments/secondments (boots on the ground), courses enhance knowledge transfer.
  - Peer learning (including through the Norges bank-IMF program) was particularly useful in financial stability.
  - Coordination: absence of effective mechanism for sharing data with the Treasury impedes further development of liquidity forecasting framework.

### Appendix I (selected extracts): Letter of Intent and MEFP highlights (April 12–13, 2018)
- Letter of Intent (April 13, 2018) summary:
  - Government requests a three-year arrangement equivalent to SDR 78.1 million (or 56.25 percent of quota) under the ECF arrangement for 2018–21.
  - Request first disbursement equivalent to SDR 11.15 million after Executive Board approval.
  - Program objectives: (i) entrench macroeconomic stability; and (ii) enhance more inclusive and resilient growth.
  - Supporting measures: increased spending on infrastructure and social sectors; tackling governance challenges; improving financial intermediation; advancing structural reforms.
  - Commitment to ensure consistency of MGDS III flagship projects with debt sustainability; new loans to be concessional and accompanied by solid feasibility studies; exceptional non-concessional loans to be discussed with IMF and World Bank with offsetting fiscal measures.
- Recent economic developments (MEFP, April 12, 2018):
  - Growth:
    - Growth rebounded in 2017 and is estimated to have reached 4 percent from 2¼ percent in 2016. Contributors: strong maize harvest, upswing of tobacco prices, disinflation, and kwacha stability.
  - Inflation:
    - Headline inflation rose slightly to 8.1 percent in January 2018 after declining for 17 straight months to a historic low.
    - On an annual average, inflation fell from 21.7 percent in 2016 to 11.5 percent in 2017; decline led by food prices which fell three times faster than non-food prices.
  - Fiscal developments:
    - Revenue collection increased by almost 2 percentage points of GDP in FY 16/17 due to IMF tax policy recommendations expanding VAT coverage and eliminating exemptions and a one-off capital gains tax mobilization.
    - FY 17/18 budget management faced challenges: deficit projected to exceed the original budget by around MK139 billion (3.2 percent of GDP) – net of MK51 billion in measures (paragraph 24). Tax revenues expected to fall short by MK62 billion; realized grants lower by MK14 billion; unexpected MK45 billion bailout of ADMARC’s maize purchase loan; arrears payments of MK58 billion; wage increases, higher goods and services spending, and higher interest bills together about MK20 billion.
  - Arrears:
    - Auditor General completed audit verification of around MK317 billion domestic arrears for July 2012–June 2017.
    - MK198 billion certified for payment; additional MK42 billion disputed or certified by Attorney General, total required payment MK240 billion.
    - As of end-December 2017, around MK224 billion securitized through zero interest promissory notes, leaving MK16 billion of certified arrears, interest, and legal fees to be settled.
  - Commitment controls:
    - Established commitment control system to track commitments; plan to operationalize by end-June 2018. Sanctions in place for MDAs failing to submit monthly reports.
  - Monetary policy:
    - Maintained tight stance keeping short-term money market rates positive in real terms. Interbank rate closely aligned with policy rate and within corridor system introduced in early 2016.
    - RBM’s use of open market operations (mainly repo) and improvements in deposit auction facility reduced interbank rate volatility.
    - Monetary Policy Committee reduced the policy rate by 600 basis points to 16 percent during 2017 in response to decline in nonfood inflation.
    - Average bank lending rates fell in line with policy rate decline, but real private sector credit growth was negative due to limited demand, high real interest rates, and tighter lending conditions.
  - Banking sector:
    - Banking system remained stable though vulnerabilities rose.
    - On aggregate, banks remained well capitalized and profitable.
    - Two banks recapitalized in 2017; one acquired by a reputable bank.
    - As of December 2017, two banks were at the borderline of the minimum core capital requirement; remediation measures underway with deadlines to reduce NPLs and improve business models.
    - NPLs declined by 1.3 percentage points to 15.7 percent of total loans in 2017 due to write offs and recovery efforts, particularly September–December 2017.

*Annex VI. Capacity Development Strategy Note for FY 2018— Summary, December 2017*

### 8.      The Kwacha has remained stable against the US dollar since December 2016. This

### 8.      The Kwacha has remained stable against the US dollar since December 2016. This

### Exchange rate and recent macro-financial context
- The Kwacha has remained stable against the US dollar since December 2016, reflecting:
  - success of monetary policy,
  - overall favorable balance of payment developments,
  - gradually improving confidence in the economy.
- The premium between the rate of the RBM and foreign exchange bureaus remained small.
- Taking into account developments in main trading partners, the real effective exchange rate appreciated (on average) by about 2.5 percent in 2017 after depreciating by 13 percent in 2016.

### Program objectives and key elements
- A window of macroeconomic opportunity has re-opened: disinflation has reached its goal and gains in economic growth need to be continued, while managing downside shock risks and delivering inclusiveness and resilience.
- Malawi Growth and Development Strategy III (MGDS III) objectives:
  - build a productive, competitive, and resilient nation through stepped-up investment in priority sectors, maintaining a sound macroeconomic framework, and improving governance;
  - maintain single digit inflation and achieve at least 6 percent growth by 2022;
  - substantially reduce poverty and improve human development, including addressing gender issues.
- Key pillars to achieve objectives:
  - reinforce macroeconomic stability and preserve gains from previous program; build external buffers given weather-related vulnerabilities and commodity price sensitivity; strengthen fiscal position to build buffers, contain inflation, and maintain a sustainable debt position; contain budgetary financing needs and avoid accumulating domestic and external arrears.
  - increase targeted spending on infrastructure and social development to raise growth potential while preserving macroeconomic stability; prioritize key infrastructure projects and maximize the grant element of external borrowing; maintain and gradually increase social spending (relative to GDP) in line with growth and improvements in spending efficiency and capacity.
  - strengthen public finance and debt management via enhanced transparency, strengthened medium-term budgetary framework and cash management, routinized bank reconciliation, and advancing procurement reforms.
  - undertake growth-enhancing structural reforms focusing on catalyzing economic transformation in agriculture and manufacturing.
- Financing request:
  - A three-year arrangement equivalent to SDR 78.1 million (or 56.25 percent of quota) with the IMF under the ECF arrangement for the period 2018–21.

### Economic outlook (A)
- 2018 short-run projection:
  - Real GDP growth expected to reach 3-5 percent in 2018.
  - Growth drivers: non-agricultural economy, tobacco production and exports, investment in infrastructure.
  - Agricultural growth anticipated weaker due to weak crop yield for the 2017/18 maize growing season (armyworm infestations and dry spells).
  - Growth constraints: weak rural purchasing power, increases in electricity tariffs, delays in recovery of power generation.
  - Although food prices may increase given weak maize production, tight monetary conditions and continuing disinflation on most other non-food items should help contain inflation by end-2018.
- Medium-term outlook:
  - Real GDP growth expected to gradually increase to around 6 percent in the medium term.
  - Inflation at end-2018 expected to reach 9 percent; medium-term objective is to reduce inflation to around 5 percent.
  - Prudent fiscal stance expected to improve debt sustainability and place domestic debt as a share of GDP on a declining trend over the medium term to below 50 percent.
- Risks:
  - Short-term risks tilted to the downside: weather and pest shocks, potential deterioration in agricultural production, fluctuations in foreign exchange revenue (including tobacco prices and short-term capital flows), reduced donor flows, slower disinflation raising interest costs, policy slippages ahead of 2019 elections.
  - Upside: better-than-expected harvests and higher commodity prices could boost medium-term growth.
  - Food security measures: substantial food reserves accumulated; situation being monitored.

### Monetary and financial sector policies (B)
- Monetary policy stance:
  - Focus on entrenching disinflation and maintaining single digit inflation by end-2018 while keeping real interest rates positive.
  - Cautious policy rate decisions to fend off inflation reversal; tighten policy if inflationary pressures gain momentum (except liquidity provision to banks facing liquidity challenges).
  - Maintain interbank rates within the corridor and concentrate on a few tenors in repo operations.
- Operational framework transition:
  - Complete transition to an interest rate-based operational framework and aim to adopt inflation targeting over the medium-term.
  - Improve primary and secondary market operations to strengthen monetary policy transmission.
  - Develop a monetary policy communication strategy to raise credibility.
  - Expand capacity in liquidity forecasting and FPAS modeling; develop high frequency data and deepen understanding of the monetary transmission mechanism.
- Financial sector stability measures and timelines:
  - All banks expected to comply with IFRS9 standards, which went into effect in January 2018.
  - Directives related to IFRS9 to be gazetted by April 2018.
  - Most banks expected to reduce their NPLs to around 5 percent through recovery or write-offs by end-2018.
  - Provisioning increased under IFRS9; all banks should be fully compliant with IFRS9 provisioning standards by end-2018.
  - Encourage improved analysis of collateral quality and establishment of a collateral registry to reduce time to recover collateral associated with NPLs.
  - Measures to reduce banking system overhead costs: establishment of the credit referencing system and the national ID registry to facilitate credit risk assessment.
  - Anticipated decline in T-bill rates (latter part of 2017) expected to push banks reliant on government securities toward more efficient business models and reduced interest rate spreads.
  - Continue monitoring loan concentration risks, surveillance of large borrowers, and enforcement of single borrower exposure limit.
  - Drafted regulations to enhance consolidated and Domestic Systemically Important Banks supervision to be effective as of end-2018.
  - Monitor rising bank lending in foreign currency; ensure all banks meet net open position requirement and that foreign currency lending is to clients with foreign currency earnings.
  - Ensure money market funds do not undertake deposit-taking activities.
- New initiatives and regulatory actions:
  - Concept for a deposit insurance scheme approved by Cabinet in January 2018; enactment contingent on reducing banking sector vulnerabilities.
  - Strengthen asset declaration system and use of AML/CFT tools; draft regulations related to revised AML/CFT framework enacted in 2017 to be gazetted by end-2018.
  - Formulate roadmap for increasing access to finance for SMEs and engage financial sector to improve SME credit provision.
  - Focus on skills development in the banking sector and increasing financial literacy.
  - Improve financial infrastructure (mobile banking, non-bank financial intermediation) and improve contract enforcement to increase protection of creditors’ and borrowers’ rights.
  - Re-submit amendments to the Banking Act of 2010 and Financial Services Act of 2010 to Parliament before end-June 2018 to align bank resolution framework with best practices; these amendments were previously submitted in March 2015 but returned for clarification.
  - Directive on Licensing and Regulation of Holding Companies to take effect in April 2018; guidelines on Islamic Banking approved in October 2017.
  - RBM preparing the Interoperability Directive to operationalize the Payment Systems Act (passed June 2016).
  - RBM preparing a Minimum Capital and Solvency Directive for Life Insurance Companies to raise minimum capital requirement.
- Exchange rate regime:
  - Full commitment to the floating exchange rate regime as fundamental to cushioning shocks and supporting economic diversification.

### Fiscal policy (C)
- Fiscal stance and objectives:
  - Support disinflation and maintain debt sustainability by containing spending within available resources, avoiding accumulation of domestic and external arrears, limiting non-concessional borrowing, and limiting government recourse to domestic borrowing—particularly from the RBM.
  - Align the RBM Act with the PFM Act (applying IMF Safeguards Assessment suggestions) to eliminate RBM financing of the central government except for cash flow management; submit amendments to Parliament by mid-April 2018.
  - Maintain prudent fiscal policies to keep public debt-to-GDP ratio on a downward trajectory and prevent crowding out and replacement of productive expenditure by debt service costs.
- Remedial measures for FY 2017/18:
  - Deployed strong remedial measures to correct unprogrammed widening of the FY 2017/18 budget deficit.
  - Mid-term revised budget envisages cutting budgeted expenditures by MK51 billion—mainly reducing development spending to reflect implementation capacity and cuts in goods and services spending.
- FY 2018/19 budget objectives and measures:
  - Aim to raise the primary fiscal balance to about 0.1 percent of GDP from -3.0 percent of GDP in FY 17/18.
  - Emphasis on containing expenditures and improving quality of spending.
  - Specific measures and plans:
    - Explore tax policy measures such as progress in repealing the industrial rebate scheme and discontinuing tax holidays.
    - Strengthen tax administration via risk-based tax compliance, enhanced tax registry, stiff penalties on EFD malpractice, and phased adoption of ITAS.
    - Raise budget for election-related spending to accommodate national elections (June 2019).
    - Wage bill to increase substantially reflecting hiring of two cohorts of new teachers to restore pupil to teacher ratio to 60; wages to be increased by about 10 to 15 percent (in line with inflation).
    - Maize procurement budget to be cut back significantly as extraordinary needs in FY 2017/18 dissipate; sustain reforms to the FISP.
    - Strictly limit non-essential recurrent expenditures.
    - Close out arrears clearance program by completing verification of old arrears and writing off all unsubstantiated arrears more than 2 years old.
    - Safeguard social and domestically financed capital spending and budget to keep pace with implementation capacity.
    - Enhance oversight of parastatals (ADMARC, ENGENCO, ESCOM, water boards) through regular publication of audited financial statements.

### Medium-term tax and budgetary reforms
- Tax policy reforms:
  - Implement broad-based tax reforms to foster a simple, efficient, transparent, and fair tax system.
  - Continue to streamline tax incentives and fully repeal the industrial rebate scheme.
  - Introduce a thin capitalization or earnings stripping rule.
  - Redesign turnover taxation to increase effectiveness.
  - Shift revenue reliance from taxation of labor and investment to consumption.
  - Revert measures that caused significant revenue loss (e.g., VAT exemption on cooking oil).
- Medium-term budgeting and expenditure quality:
  - Enhance composition and quality of government spending while containing fiscal slippages.
  - Shift public investment composition towards pro-growth and poverty-reducing expenditures.
  - Increase efficiency of spending in priority areas such as social spending; enhance allocation mix of health and education (increase budget share of secondary and tertiary education).
  - Improve fiscal transparency and accountability at national and sub-national levels; strengthen program-based budgeting.
  - Contain fiscal slippages, avoid out-of-budget expenditures, limit wage increases to inflation rate, avoid commitments for non-essential recruitments, and reform FISP.
  - Develop plan to address decentralization challenges including capacity and controls at local level and adopt a legal framework for budget systems and fiscal policy coordination.

### Public financial management reform (D)
- Bank reconciliation and fiscal transparency:
  - Recent success in achieving bank reconciliation provides foundation for expanding PFM reforms; routinize bank reconciliations.
  - Resolve statistical issues such as reconciling debt data between MoF and RBM.
  - Strengthen reliable system for budget control and reporting.
  - Maintain requirement for MDAs to submit five fiscal reports for monthly funding release and strengthen quality control and sanctions for misreporting or non-compliance; publish reports on MoF website.
  - Set up an online commitment control system and link HRMIS and IFMIS.
  - Compile and publish consolidated monthly statements of government commitments on MoF website and classify bills overdue for more than 90 days.
  - More systematic commitment control to enable timely arrears detection and sanctioning of control officers who incur unauthorised arrears.
- Financial reporting and IFMIS improvements:
  - Produce quarterly certified consolidated financial statements within six weeks after quarter end with fully reconciled items.
  - Produce and publish monthly budget execution reports by vote and economic classification based on actual expenditure (not funding) on MoF website.
  - Submit 2018/19 financial statements to the Auditor General by 31st October 2018 with fully reconciled bank accounts.
  - Clearance of backlog to provide a base for implementing a new IFMIS project that is more robust and comprehensive and addresses control weaknesses (payroll, project management, arrears and commitments).
- Cash management and Treasury Single Account (TSA) actions:
  - Strengthened operations of the Cash Management Committee by establishing a fully functional Cash Management Unit under the Secretary to the Treasury.
  - Initiate monthly cash forecasts for the next twelve months.
  - Introduce a Treasury Single Account (TSA) and bring all bank accounts into IFMIS:
    - Cut number of bank accounts in commercial banks in half by end-June 2018.
    - Close another quarter of remaining accounts by end-September 2018.
    - Merge remaining commercial bank accounts under the TSA by end-December 2018.
  - Prepare a time-bound action plan for replacing IFMIS and require all financial transactions to be recorded in the current and new IFMIS.

*International Monetary Fund — Malawi: selected program objectives, economic outlook, and policy measures as presented in the source content.*

### 30.      We are developing a medium-term strategy that aims at solidifying the present gains.

### 30.      We are developing a medium-term strategy that aims at solidifying the present gains.

### Medium-term strategy and public financial management
- Objective: Solidify present gains by building human capacity through training to ensure reforms are sustained.
- Review: A review of the PFM Act has commenced to align laws and regulations with ongoing reforms and to emphasize a performance-based rewards and sanctions regime.
- Oversight strengthening: Continue strengthening oversight institutions, including the National Audit Office, Central Internal Audit Unit, and the Public Accounts Committee.
- Budget performance and efficiency:
  - Better link MDA strategic planning and budgeting.
  - Improve credibility of the Medium-Term Expenditure Framework.
  - Strengthen the framework for engaging key stakeholders.
- Procurement reforms:
  - Build on the enactment of a new Procurement Act that closes loopholes under the old act.
  - Continuous improvement of the procurement framework to enhance transparency, control, and accountability.
  - Immediate step: publish all procurement information on the MoF website.
  - Use performance contracts with controlling officers to hold them accountable for adhering to rules and procedures and strengthen procurement audits.
  - Consider gradual move to an e-procurement system over time.

### E. Structural Reforms — business climate and agriculture
- Business environment improvements (MGDS III aims for significant improvement):
  - Recent milestones:
    - Establishing a new credit reference bureau.
    - Adopting a new law that establishes clear priority rules inside and outside of bankruptcy procedures.
    - Adopting a web-based customs data management platform.
    - Halving the fees charged by the Blantyre city council to process building plan approvals.
  - Planned measures: Ease procedures to start a business and deal with construction permits, strengthen contract enforcement, and enhance insolvency processes.
- Agricultural sector deep reforms:
  - ADMARC: Commissioned a comprehensive strategic review; will implement a deep reform program to better balance maize price stabilization against fiscal sustainability and improve transparency and efficiency.
  - Control of trade: Align export and import control systems with WTO norms, including amending the Control of Goods Act.
  - FISP: Continue FISP reform focusing on containing budget impact, increased role for the private sector, better governance, and better beneficiary targeting.
  - Land reform: Start implementing new land codes based on pilot program lessons.

### F. Debt Management
- Risk classification: Malawi is classified as being at moderate risk of debt distress based on its external position; domestic debt vulnerabilities have risen.
- Borrowing policy:
  - Limit unified external borrowing to high priority projects aligned with MGDS III.
  - Ensure total debt (and guarantees) contracted is consistent with debt sustainability.
  - Improve investment planning by rigorously prioritizing MGDS III pipeline projects based on credible cost/benefit analyses, growth, poverty-reduction, and debt sustainability considerations.
- Operational arrangements:
  - Debt Management Committee is operational and will assess any borrowing.
  - Develop a comprehensive medium-term debt strategy.
  - Ascertain loan concessionality and ensure debt sustainability considering the entire borrowing plan and the medium-term debt strategy.
  - Borrowing in the FY 18/19 budget will be consistent with social development and poverty reduction and with overall medium- to long-term debt sustainability.
  - New loans should, in principle, be concessional and accompanied by solid feasibility studies from an independent third party.
  - Exceptional non-concessional loans (based on extraordinary merits, e.g., growth-criticality) require prior discussion with the IMF and the World Bank and explicit agreement from the IMF, accompanied by high-quality fiscal measures to offset the debt impact of the non-concessional portion.
  - Improve debt monitoring by allocating sufficient resources and increasing training.

### G. Pension Reform
- Commitment: Reform the public pension scheme to ensure long-term fiscal viability.
- Findings:
  - Under the Pension Act of 2010, transformation from defined benefit to defined contribution was envisaged.
  - A review (including IMF technical assistance) determined the pension liability size renders that transformation fiscally untenable.
  - The existing defined benefit public pension scheme is not sustainable in the absence of reserves commensurate to liabilities; servicing accrued benefits would require disproportionately high budget subsidies.
- Reform approach: Revisit proposed reforms focusing on parameter adjustment to reduce liabilities. Possible changes may include:
  - (i) raising the service retirement age;
  - (ii) lowering the generosity of benefit indexation;
  - (iii) reducing accrual rates;
  - (iv) introducing a phased-in approach of contribution to implementing public service public scheme contributions.

### H. Fuel Import Regime
- Fuel security actions:
  - Completed construction of three fuel storage depots capable of holding about 25 percent of annual consumption.
  - Introduced operational guidelines clarifying collaboration between storage operator and fuel importer/distributors.
  - Framework operating experimentally and functioning with augmented storage cost fully passed to pump price.
- Import regime:
  - Since 2013, based on private sector imports with cost recovery guaranteed by automatic fuel pricing mechanism.
  - From 2017, imports done jointly by a traditional private sector consortium (PIL) and NOCMA, based on their agreement.
  - Regime remains unchanged for the 2018/19 fiscal year.
  - Plan to continue evaluating security vs efficiency; any further change will be open, transparent, with full private sector participation, and accompanied by a fully-costed proposal published and discussed with stakeholders prior to implementation.
  - Commitment to retain and implement the fuel price automatic adjustment mechanism to enable full cost recovery by fuel importers while precluding government subsidy.

### I. Gender Equity
- Rationale: Addressing gender inequity is important for inclusive growth and to unlock Malawi’s human resource potential; policy focus on adolescent girls.
- Planned interventions:
  - Ending child marriages:
    - Constitutional amendment raised minimum age for marriage from 15 to 18.
    - Plan to develop a comprehensive national program of action covering social protection, law enforcement, health (sexual and reproductive), child protection, and public education.
  - Keeping girls in school:
    - Facilitate larger and more effective investments in classrooms, teachers, and education materials.
    - Broaden demand-side interventions (e.g., more social assistance and targeted subsidy programs; which would be gender-sensitive).
  - Assets and credit:
    - Formalization of customary land rights given significance of a matrilineal system of land inheritance to women’s access to finance.
    - Policy interventions for access to finance, including gender-neutral ones, to help level the playing field.
  - Labor market policies:
    - Consider non-gender-neutral policy options (e.g., childcare support) to help increase women’s labor market participation.

### Prior Actions and Structural Program for 2018
- The macroeconomic policies supported by the ECF arrangement are complemented by a strong structural program.
- Prior Actions to be completed before program request goes to IMF Executive Board (all listed as Met):
  - Publish detailed monthly budget execution data by vote and economic classification (main aggregates) on the MoF website.
  - Complete verification of arrears from July 1, 2012 – June 30, 2017 certified by the Auditor General.
  - Commitment that all domestic arrears prior to December 31, 2015, not certified by the Auditor General (MK 113 billion), will only be paid if required by law or a court verdict (to be communicated to the Fund via letter).
  - Reconcile all bank accounts MG1 and the operating accounts (excluding salary accounts) and ways and means for July 1, 2016-June 30, 2017 transactions signed by the Accountant General and Secretary to the Treasury.
  - Complete the audit of FY 2016-17 financial statements, and submit them to the Parliament.

- Structural Benchmarks (selected highlights):
  - Public financial management (continuous or specified target dates):
    - Submission of five reports by MDAs by mid-following month and publication of their summaries on the MoF website (Continuous).
    - Set-up and maintain a transparent commitment control system for all MDAs; compile consolidated commitments centrally and publish on MoF website; classify bills overdue more than 90 days; apply sanctions to controlling officers for incurring arrears without Minister of Finance approval (Continuous).
    - Prepare quarterly consolidated financial statements (including all MDAs) with fully reconciled bank accounts and publish within six months after the end of each quarter in the first year and within 90 days after the end of each quarter in the second and third; financial statements certified by the Auditor General (Continuous).
    - Reconcile all bank accounts MG1 and seven operating accounts and ways and means transactions within 90 days after the end of each month; clear backlog and have a track record of three consecutive months (Continuous).
    - Reconcile all debt data between the MOF and RBM (Continuous).
    - Prepare monthly cash forecasts (broken down by economic classification) of the next 12 months based on input from all MDAs (End-June 2018).
    - Adjust the bank reconciliation of FY 2013-14 – 2014-15 based on findings of forensic audit of MK236 billion and adjust opening and closing balances of FY 2015-16 bank reconciliation (End-June 2018).
  - Financial sector:
    - Submit to Parliament amendments to the RBM Act in line with IMF Safeguards Monitoring Report recommendations dated 6 June 2016 (End-October 2018).
    - Develop a monetary policy communication strategy (End-June 2018).
  - Additional 2018-19 benchmarks (selected):
    - CMU undertakes variance analysis on forecasting errors every three months and reports summary (End-December 2018).
    - Implement areas with biggest potential for enhancing efficiency, planning and allocation of public investment (End-December 2018).
    - All domestic debt commitments, expenditures and payments transacted through IFMIS in real time (End-December 2018).
    - Develop a comprehensive medium-term debt strategy, including MoF preparation of a strategy for reducing reliance on borrowing from RBM (W&M Account) (End-December 2018).
    - Develop an action plan for updating IFMIS or acquiring a new IFMIS (End-December 2018).
    - Link the HRMS and IFMIS systems (End-June 2019).
    - Prepare and submit to the parliament an economic and fiscal policy statement containing overall expenditure ceiling in the medium term (End-June 2019).
    - Create and update budget legal framework dealing with decentralization and include a fiscal policy coordination framework (End-June 2019).
    - Bring all TSA sub-accounts into IFMIS including projects, receipts and payments (End-June 2019).
    - Enhance oversight mechanisms over large SOEs (including ADMARC, ENGENCO, and ESCOM), publish audited annual financial statements and fiscal risk statement (End-June 2019).
    - Develop a roadmap for increasing access to finance (End-December [year not specified in source excerpt]).

### Program monitoring
- Frequency: Program monitored on a semi-annual basis through quantitative targets (Table 1) and structural benchmarks (Table 3).
- Target classification:
  - Quantitative targets for end-June and end-December 2018 are performance criteria (PC).
  - Targets for end-September 2018 and end-March and end-June 2019 are indicative targets (IT).
- Review timing:
  - First review will be completed any time after October 15, 2018.
  - Second review will be completed any time after April 15, 2019.

### Key quantitative targets and memoranda (selected figures from Table 1)
- I. Monetary targets (millions of kwacha) — Reserve money (ceiling on stock) (upper bound) (PC):
  - End-Sept.: 303,482
  - End-Dec.: 299,091
  - End-Mar.: 323,385
  - End-Jun.: 300,406
  - End-Jun. (2019 column): 340,106
- Reserve money (ceiling on stock) (PC):
  - End-Sept.: 294,643
  - End-Dec.: 290,380
  - End-Mar.: 313,966
  - End-Jun.: 291,656
  - End-Jun. (2019 column): 330,200
- Reserve money (ceiling on stock) (lower band):
  - End-Sept.: 285,803
  - End-Dec.: 281,668
  - End-Mar.: 304,547
  - End-Jun.: 282,906
  - End-Jun. (2019 column): 320,294
- II. Fiscal targets (millions of kwacha):
  - Primary balance (floor) (PC):
    - End-Sept.: -144,929
    - End-Dec.: 44,906
    - End-Mar.: 29,813
    - End-Jun.: 16,219
    - End-Jun. (2019 column): 3,625
  - RBM financing of central government (ceiling) (PC): 690 000 (end-Sept. row shows 690000)
  - New domestic arrears (ceiling) (IT): 0 0 0 0 0
  - Social spending (floor) (IT):
    - End-Sept.: 186,132
    - End-Dec.: 87,972
    - End-Mar.: 175,944
    - End-Jun.: 263,917
    - End-Jun. (2019 column): 351,889
- III. External sector targets (US$ millions, unless otherwise indicated):
  - Net international reserves of the RBM (floor) (PC):
    - End-Sept.: 43.1
    - End-Dec.: 54.7
    - End-Mar.: 80.2
    - End-Jun.: 88.2
    - End-Jun. (2019 column): 84.5
  - Accumulation of external payments arrears (ceiling) (PC): 0 0 0 0 0
  - New non-concessional external debt contracted (ceiling) (PC): 0 0 0 0 0
- Memorandum items:
  - Net foreign assets of the RBM (US$ millions, end of period): 339.8, 360.4, 385.9, 393.9, 390.2
  - Budget support (US$ millions): 84.3, 79.1, 79.1, 79.1, 79.1
  - Budget support (millions of kwacha): 62,633.8, 60,000.0, 60,000.0, 60,000.0, 60,000.0
  - Nominal external concessional borrowing (US$ millions): 166, 357, 0, 104, 137 (presented as sequence in table)
  - Debt service payments to the World Bank and AfDB (US$ millions): 13.4, 3.8, 7.5, 12.1, 16.7
  - Debt service payments to the World Bank and AfDB (millions of kwacha): 9,994, 2,851, 5,821, 9,538, 13,337
  - Joint Fund on Health receipts (millions of kwacha): 6,569, 2,288, 4,577, 6,865, 9,153
  - Joint Fund on Education receipts (millions of kwacha): 6,987, 4,325, 8,651, 12,976, 17,301
  - Program exchange rate (kwacha per US$): 725 for each listed period

*Source: IMF staff projections; content as presented in the chapter.*

### INTRODUCTION

### INTRODUCTION

### Overview
- This memorandum defines the quantitative performance criteria, benchmarks, and indicative targets for the program, as described in the Memorandum of Economic and Financial Policies (MEFP) for the period April 30, 2018-April 30, 2021 supported by the Extended Credit Facility (ECF) arrangement, and sets out the data reporting requirements. (paragraph 1)

### Coverage
- The central government includes ministries, departments, and agencies, and all other units of government that exercise authority over the entire economic territory. However, in contrast to the System of National Accounts 1993 (SNA 1993) and Government Finance Statistics Manual 2001 (GFSM 2001) standards, nonprofit institutions that are controlled and financed by the central government are excluded for purposes of this memorandum. (paragraph 2)
- The accounts of the monetary authorities include those of the Reserve Bank of Malawi (RBM). Monetary aggregates under the program are based on the nine-bank monetary survey. (paragraph 2)

### Quantitative Performance Criteria and Indicative Targets
- Quantitative performance criteria are established for June 30, 2018 and December 31, 2018 with respect to: reserve money (ceiling); net official international reserves (NIR) of the RBM (floor); primary balance of the central government including grants, cash basis (floor); RBM financing of the central government (ceiling); accumulation of external payments arrears (ceiling); new non-concessional external debt (ceiling). (paragraph 3)
- Indicative targets for September 30, 2018, March 31, 2019, and June 30, 2019 with respect to the above variables, and for these dates as well as June 30, 2018 and December 31, 2018 with respect to new domestic arrears (ceiling) and social spending (floor). (paragraph 4)

### Targets for Monetary Aggregates — Ceiling on the Stock of Reserve Money
- A ceiling applies to the upper bound of a reserve money band (set +/-3 percent) around a central reserve money target. (paragraph 5)
- Definition: Reserve money is defined as the sum of currency issued by the RBM, including the vault cash of commercial banks, and balances of commercial bank accounts with the RBM. It includes required reserves held for kwacha deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM. (paragraph 6)
- Reporting requirement: Data on reserve money will be transmitted on a weekly basis. This transmission will include weekly balance sheet of the RBM which will show all items listed above in the definitions of reserve money. (paragraph 7)

### Targets for Fiscal Sector — Floor on Primary Balance
- A floor applies to the cumulative flow of primary fiscal balance since the beginning of the fiscal year. (paragraph 8)
- Definition of the primary balance: The program primary fiscal balance is measured from the financing side as the sum of net financial transactions of the central government – comprising the sum of net domestic borrowing, net foreign borrowing – less domestic and external interest payments. (paragraph 9)
- Definition of net domestic borrowing of the central government: net domestic borrowing is computed as the sum of (1) net borrowing from the RBM (including ways and means advances, loans, holdings of local registered stocks, government bonds, promissory notes, and holdings of treasury bills minus deposits); (2) net borrowing from commercial banks (including advances, loans, holdings of local registered stocks, government bonds and holdings of treasury bills minus deposits); (3) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and holdings of treasury bills); and (4) holdings of promissory notes. The treasury bills and locally registered stocks are valued at cost rather than face value. Transfers from extra-budgetary funds will not be considered revenues for this performance criterion. They will be treated the same as borrowing from the private sector (as their accounts are outside the definition of government) and therefore as domestic borrowing. Asset sales or privatization revenues will be accounted for under financing as a separate category, separate from domestic or foreign financing in calculating net domestic borrowing. (paragraph 10)
- Definition of net foreign borrowing of the central government: net foreign borrowing is defined as the sum of project and program loans by official creditors (both multi- and bilateral creditors) and commercial external borrowing, minus amortization due. Dedicated grants should finance current spending, and be reclassified as project grants if used as foreign financed capital spending. (paragraph 11)

Adjustors to the primary balance floor:
- Adjustor on primary balance – budget support: The floor of primary balance will be adjusted upward by the full amount by which cumulative kwacha receipts from budget support exceed the program baseline. In the event of a budget support shortfall, the floor on primary balance will be adjusted downward by the amount subject to the limitation outlined in paragraph 13. The kwacha value of the cumulative shortfall (excess) will be calculated at the program exchange rate. Budget support is measured as the cumulative flow from the beginning of the fiscal year. (paragraph 12)
- Adjustor on primary balance – donor accounts for the social sector (including Joint Funds on health and education, and agriculture and the NAC): The floor on primary balance will be adjusted upward by the full amount by which the donor inflows (in kwacha) from the U.S. dollar-denominated donor accounts for health, education, and other Joint Funds are higher than the donor inflows (in kwacha) to those accounts in the program baseline. In the event of a shortfall, the floor on primary balance will be adjusted downward by the amount subject to the limitation outlined in paragraph 13. Donor inflows are measured as receipts received (in kwacha) by the budget. Donor inflows are measured from the beginning of the fiscal year. (paragraph 12)
- Adjustor clause on primary balance – debt service payments: The floor on primary balance will be adjusted upward by the full cumulative amount by which debt service payments to the World Bank (WB) and the African Development Bank (AfDB) fall short of the program baseline. If the debt service payments are higher than the program baseline, the floor on primary balance will be adjusted downward by the amount subject to the limitation outlined in paragraph 13. The cumulative amount will be measured from the beginning of the fiscal year. (paragraph 12)
- The total downward adjustment to primary balance from a shortfall, relative to the program assumptions, of (i) budget support, (ii) donor inflows to the donor accounts for the social sector, and (iii) an excess of debt service payments to the WB and the AfDB will be capped at US$65 million. (paragraph 13)

### Targets for Fiscal Sector — Ceiling on RBM Financing of the Central Government
- Definition of RBM financing of the central government: RBM financing of the central government is defined as net borrowing from the RBM by the central government (including ways and means advances, loans, holdings of local registered stocks, government bonds, promissory notes, and holdings of treasury bills minus deposits). (paragraph 14)
- Adjustors: For cash management purposes, the ceiling on RBM financing of the central government for September 2018, December 2018, and March 2019 is subject to an upward adjustment of up to 10 percent of the previous financial year's domestic revenue (excluding grants). (paragraph 15)
- Reporting requirement: Data on the RBM financing of the central government will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month. (paragraph 16)

### Targets for Fiscal Sector — Ceiling on New Domestic Arrears
- Definition of domestic arrears: Domestic arrears are overdue payment obligations of the central government other than external payment arrears, including on wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, principal payments on domestic loans, and tax refunds. Payments on wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when they remain unpaid for more than 30 days beyond their due date. 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 within 90 days of the due date, or – if a grace period has been agreed – within the contractually agreed grace period. (paragraph 17)

### Targets for Fiscal Sector — Floor on Social Spending
- Definition of social spending: Using functional classification of expenditure, social spending is computed as the sum of central government spending on health, education, and government social protection (comprising the government expenditures by the ministry of gender, children and social welfare and the ministry of disability and elderly affairs). In order to maintain Malawi's commitment and progress toward poverty reduction, the social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program. (paragraph 18)
- Donor pool-funded expenditures in support of agriculture, health and education: In support of the health and education sectors, some donors pool resources (the donor pool) in Joint Funds, which are being managed by a fiscal agent. These funds are released outside normal government procedures (i.e., recurrent budget or development Part I budget) to the relevant sector. (paragraph 19)
- Reporting requirement: Financial flows into and out of Joint Funds will be reported on a monthly basis from the beginning of the fiscal year. (paragraph 20)

### Targets for External Sector — Floor on Net International Reserves (NIR) of the RBM
- Definition of net international reserves (NIR) of the RBM: The NIR of the RBM is defined as gross reserves minus IMF and other short-term liabilities. The values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the program cross exchange rates for the various currencies and then converted into kwacha using the program exchange rate for the U.S. dollar-kwacha exchange rate. The program exchange rates are stated in Table 1. (paragraph 21)
- Definition of gross reserve assets of the RBM: Gross reserve assets are defined by the International Reserves and Foreign Currency Liquidity Guidelines for a Data Template as external assets immediately available and controlled by RBM "for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency's exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing)." (BPM6, paragraph 6.64). (paragraph 22)
- Gross reserve assets include: (i) monetary gold holdings of the RBM; (ii) holdings of SDRs; (iii) the reserve position in the IMF; (iv) foreign convertible currency holdings; (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; (vi) loans to foreign banks redeemable upon demand; (vii) foreign securities; and (viii) other unpledged convertible liquid claims on nonresidents. It excludes: (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and (c) foreign reserves blocked for letters of credit. (paragraph 23)
- Gross reserve liabilities of the RBM are defined as the sum of: (i) outstanding medium and short-term liabilities of the RBM to the IMF; (ii) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year; and (iii) all foreign currency denominated liabilities to residents (including, for instance, foreign currency denominated deposits of domestic banks and other residents with the RBM). SDR allocations are excluded from gross reserve liabilities of the RBM. (paragraph 24)
- Definition of budget support: Budget support includes all grants and foreign financing not directly linked to additional budgetary expenditure. Excluded from this definition is external project financing to fund particular activities, such as financial support from the IMF, and donor inflows (in kwacha) from the U.S. dollar-denominated donor pool accounts for the Joint Funds on health, education, and agricultural, held in the Malawi banking system. (paragraph 25)

Adjustment clauses applied to the NIR program floor:
- Adjustment clause on NIR-budget support: The program floor on NIR will be adjusted upward by the full amount by which the U.S. dollar-denominated inflows from the budget support exceed the program baseline. In the event of a shortfall in budget support inflows, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 27. The budget support is measured as the cumulative flow from the beginning of the fiscal year. They will be recorded in the original currency of payment and then converted to U.S. dollars using the above defined program cross exchange rates. (paragraph 26)
- Adjustment clause on NIR-donor accounts for the social sector (including health and education Joint funds, and the NAC): The floor on the NIR of the RBM will be adjusted upward by the full amount by which the donor inflows from the U.S. dollar-denominated donor accounts for Joint funds and NAC held in the RBM are higher than the program baseline. In the event of a shortfall, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 27. These donor inflows are measured as the cumulative receipts by the budget from the beginning of the fiscal year. They will be recorded in the original currency of disbursement and then converted to U.S. dollars using the above defined program cross exchange rates. (paragraph 26)
- Adjustment clause on NIR-debt service payments: The floor on NIR of the RBM will be adjusted upward by the full cumulative amount by which debt service payments to the WB and the AfDB fall short of the program baseline. In the event of any excess of debt service payments to the WB and the AfDB, the downward adjustment of the NIR floor will be subject to the limitation outlined in paragraph 27. Debt service payments will be measured as the cumulative payments from the beginning of the fiscal year. They will be recorded in the original currency of payment and then converted to U.S. dollars using the above defined program cross exchange rates. (paragraph 26)
- The total downward adjustment to the NIR floor from the combined impact of a (i) a shortfall of budget support relative to the program projections; (ii) a shortfall of inflows to the donor accounts for the social sector relative to the program projections; and (iii) any excess of debt service payments to the WB and the AfDB relative to the program projections, will be subject to a cumulative limit of US$65 million. (paragraph 27)
- Reporting requirement: Data on foreign assets and foreign liabilities of the RBM will be transmitted on a monthly basis, including sub-components and a breakdown of assets that are pledged or encumbered. This transmission will include daily and weekly data on RBM's foreign exchange liabilities to commercial banks (including required reserves with the RBM) and the exchange rate used for their conversion into kwacha will be shown separately. (paragraph 28)

### External Sector — Net Foreign Assets (NFA) of the RBM
- Definition of Net Foreign Assets (NFA) of the RBM: The NFA of the RBM are defined as its gross foreign assets (GFA) minus its gross foreign liabilities. Gross foreign liabilities are equal to gross reserve liabilities as defined in paragraph 24, plus any other foreign liabilities not listed in that paragraph. (paragraph 29)
- Gross foreign assets (GFA) of the RBM are defined as gross reserves assets as defined in paragraph 23, plus (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are in any way encumbered or pledged, including, but not limited to: (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; and(c) foreign reserves blocked for letters of credit. (paragraph 30)

### External Sector — Ceiling on Accumulation of External Payment Arrears
- Definition of external payment arrears: External payment arrears consist of debt service obligations (principal and interest) of the central government or the RBM to nonresidents that have not been paid at the time they are due, as specified in contractual agreements, except on external debt subject to rescheduling or restructuring. This performance criterion will be monitored on a continuous basis. (paragraph 31)

### External Sector — Ceiling on New Non-Concessional External Debt
- Definition of debt (for the purposes of the TMU): The definition of debt is set out in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), and also includes contracted or guaranteed commitments for which value has not been received. For program purposes, the term “debt” is understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take several forms: (paragraph 32)
  - Loans: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchange of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the loan funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements). (paragraph 32.i)
  - Suppliers’ credits: contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided. (paragraph 32.ii)
  - Lease agreements: arrangements under which the lessee is allowed to use a property for a duration usually shorter than that of the life of the property in question, but without transfer of ownership, while the lessor retains the title to the property. For the purposes of this guideline, the debt is the present value (at the inception of the lease) of all the lease payments expected for the period of the agreement, except payments necessary for the operation, repair, and maintenance of the property. (paragraph 32.iii)

*Source: cr18115 - INTRODUCTION.*

### 33.      Definition of non-concessional external debt. Short-, medium-, and long-term debt is

### Definition of non-concessional external debt

### Concessionality threshold and calculation
- Debt is considered concessional if it includes a grant element of at least 35 percent and non-concessional if otherwise.
- The grant element is defined as the difference between the nominal value of the loan and its present value, expressed as a percentage of the nominal value of the loan.
- The present value of the debt at the date on which it is contracted is calculated as the discounted sum of all future the debt service payments at the time of the contracting of the debt.
- The discount rate used for this purpose is 5 percent per annum.
- The calculation of concessionality takes into account all aspects of the loan agreement, including maturity, grace period, schedule, commitment and management fees commissions.

### Debt maturity classifications
- Short-term debt: Outstanding stock of debt with an original maturity of one year or less.
- Medium- and long-term debt: Outstanding stock of debt with a maturity of more than one year.

### Coverage and application of the non-concessional debt ceiling
- The ceiling on non-concessional debt applies to the contracting and guaranteeing of debt with nonresidents by:
  - the central government,
  - the RBM,
  - and state-owned enterprises,
  - unless an explicit selective exclusion is made.
- This performance criterion is monitored on a continuous basis.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received.
- The ceiling is measured cumulatively from the beginning of the fiscal year.

### Exclusions from the non-concessional debt limit
- Excluded from the limit on non-concessional external debt:
  - the use of IMF resources,
  - any kwacha-denominated treasury bill and local registered stock holdings by nonresidents.
- Also excluded are:
  - (i) debts classified as international reserve liabilities of the RBM;
  - (ii) new debt issued to restructure, refinance, or repay existing debt up to the amount actually used for the above-mentioned purposes;
  - (iii) normal import financing;
  - (iv) arrangements to pay overtime obligations arising from judicial awards to external creditors.
- A financing arrangement for imports is considered to be "normal" when the credit is self-liquidating.

### Monitoring and reporting requirements
- The ceiling is a performance criterion monitored on a continuous basis.
- For program monitoring, the Government of Malawi will provide the data listed in Table 2 with monthly data within four weeks of the end of each month, and annual data as available.
- The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Malawi) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises.
- The authorities will similarly inform the IMF staff of any non-concessional external debt contracted or guaranteed by the central government, the RBM, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities.

*Source: cr18115 - 33. Definition of non-concessional external debt.*

### 39.      The authorities will furnish an official communication to the IMF describing program

### cr18115 - 39.      The authorities will furnish an official communication to the IMF describing program

### Reporting requirements and timelines
- The authorities will furnish an official communication to the IMF describing program quantitative performance and structural benchmarks within 8 weeks of a test date.
- The authorities will, on a regular basis, submit information to IMF staff with the frequency and submission time lag as indicated in Table 2.

- Key reporting lines and frequencies (as shown in Table 2):
  - Exchange Rates: Frequency of Data D; Frequency of Reporting W; Frequency of Publication D; Agency RBM.
  - International reserve assets and reserve liabilities of the Monetary Authorities: Frequency of Data W; Frequency of Reporting W; Frequency of Publication M; Agency RBM.
  - Gross international reserves and foreign exchange purchases and sales: Frequency of Data D; Frequency of Reporting W; Frequency of Publication M; Agency RBM.
  - Reserve/base money, OMO transactions, and RBM conversion of ways and means account to government securities: Frequency of Data W; Frequency of Reporting W; Frequency of Publication M; Agency RBM.
  - Broad money: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Central Bank balance sheet: Frequency of Data W; Frequency of Reporting W; Frequency of Publication M; Agency RBM.
  - Consolidated balance sheet of the banking system: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Interest rates: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Excess reserves by banks: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Volume of transactions in the interbank money market and foreign exchange markets and sales of foreign currencies by RBM to commercial banks: Frequency of Data D; Frequency of Reporting W; Frequency of Publication W; Agency RBM.
  - Government securities auction results: Frequency of Data W; Frequency of Reporting W; Frequency of Publication W; Agency RBM.
  - Spread between exchange bureau midrate and the official exchange midrate: Frequency of Data W; Frequency of Reporting M; Frequency of Publication W; Agency RBM.
  - Central government domestic borrowing: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Holdings of local registered stocks, treasury bills, treasury notes and other government securities: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Detailed issue and maturity profile for all government securities: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Financial soundness indicators by banks: Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication ...; Agency RBM.
  - RBM foreign exchange cash flow: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency RBM.
  - Bank statements of the agricultural SWAp account held at RBM: Frequency of Data M; Frequency of Reporting M; Frequency of Publication ...; Agency RBM.
  - Annual financial reports of the 8 major parastatals: Frequency of Data A; Frequency of Reporting A; Frequency of Publication ...; Agency MOF.
  - Borrowing of the 8 major parastatals: Frequency of Data SA; Frequency of Reporting SA; Frequency of Publication ...; Agency MOF.
  - Quarterly report on government domestic arrears: Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication ...; Agency AG.
  - Comprehensive list of tax and non-tax revenues: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency MOF.
  - Fiscal table (GFS based), including revenue, grants, expenditure, balance and composition of financing of the central government: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency MOF. (Provided no more than four weeks after the end of each month.)
  - Expenditure for domestically financed capital projects: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency MOF.
  - Data on Joint Funds on health and education: Frequency of Data M; Frequency of Reporting M; Frequency of Publication ...; Agency MOF.
  - Stocks of public sector and public-guaranteed debt: Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Agency MOF.
  - New external loans contracted or guaranteed by the government and disbursement schedule: Frequency of Data Continuous; Frequency of Reporting Continuous; Frequency of Publication Continuous; Agency MOF.
  - Quarterly external debt service (actual and projections): Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication ...; Agency MOF.
  - Debt service payments on domestic debt (outturn and projections): Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q; Agency MOF.
  - Accumulation of new domestic government arrears: Frequency of Data M, Q; Frequency of Reporting M, Q; Frequency of Publication M, Q; Agency MOF.
  - Report on IMF program performance: Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication ...; Agency MOF.
  - Consumer Price Index and monthly statistical bulletin: Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Agency NSO.
  - Exports and Imports of Goods and services, and subcomponents: Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q; Agency NSO.
  - Balance of payments: Frequency of Data A; Frequency of Reporting A; Frequency of Publication A; Agency NSO.
  - GDP/GNP, by activity and expenditure, at constant and current prices: Frequency of Data A; Frequency of Reporting I; Frequency of Publication A; Agency NSO.

- Table footnotes (selected):
  - 1 Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I).
  - 2 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 3 Both market-based and officially-determined, including discount rates, money market rates, interbank money market rate, rates on treasury bills, notes and bonds.
  - 4 Lists the 8 major parastatals: Agriculture Development and Marketing Corporation, Electric Supply Company of Malawi, Electricity Generation Company of Malawi, Malawi Housing Corporation, National Oil Company of Malawi, Northern Regional Water Board, Lilongwe Water Board, and Blantyre Water Board.
  - 5 Foreign and domestic banks, and domestic nonbank financing.
  - 6 Detailed information on the amounts, currencies, terms and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government.
  - 7 Provided no more than four weeks after the end of each month.

### Relations with the Fund — membership, quotas, and financial arrangements
- Membership Status: Joined: July 19, 1965; Article VIII.
- General Resources Account:
  - Quota 138.80 SDR Million 100.00 %Quota
  - Fund holdings of currency (exchange rate) 136.36 98.24
  - Reserve tranche position 2.44 1.76
- SDR Department:
  - Net cumulative allocation 66.37 SDR Million 100.00 %Allocation
  - Holdings 1.61 2.42
- Outstanding Purchases and Loans:
  - ESF Arrangements 6.94 SDR Million 5.00 %Quota
  - ECF Arrangements 145.96 SDR Million 105.16 %Quota
- Latest Financial Arrangements (selected row entries):
  - ECF 07/23/2012 — Expiration Date 06/29/2017 — Amount Approved (SDR Million) 138.80 — Amount Drawn (SDR Million) 138.80
  - ECF 02/19/2010 — Expiration Date 07/22/2012 — Amount Approved (SDR Million) 52.05 — Amount Drawn (SDR Million) 13.88
  - ESF 12/03/2008 — Expiration Date 12/02/2009 — Amount Approved (SDR Million) 52.05 — Amount Drawn (SDR Million) 34.70

- Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) — Forthcoming:
  - 2018 Principal 15.75; Charges/Interest 0.40; Total 16.15
  - 2019 Principal 11.89; Charges/Interest 0.53; Total 12.42
  - 2020 Principal 13.80; Charges/Interest 0.53; Total 14.33
  - 2021 Principal 18.44; Charges/Interest 0.53; Total 18.97
  - 2022 Principal 25.81; Charges/Interest 0.53; Total 26.34

### HIPC, MDRI, and debt relief details
- Implementation of HIPC Initiative:
  - Commitment of HIPC assistance — Decision point date December 2000.
  - Assistance committed by all creditors (US$ Million) 1,057.00.
  - Of which: IMF assistance (US$ million) 45.27.
  - (SDR equivalent in millions) 33.37.
  - Completion point date Aug 2006.
- Disbursement of IMF assistance (SDR Million):
  - Assistance disbursed to the member 33.37.
  - Interim assistance 11.57.
  - Completion point balance 21.80.
  - Additional disbursement of interest income 3.82.
  - Total disbursements 37.19.
- Implementation of Multilateral Debt Relief Initiative (MDRI):
  - MDRI-eligible debt (SDR Million) 37.87.
  - Financed by: MDRI Trust 14.53; Remaining HIPC resources 23.34.
- Debt Relief by Facility (SDR Million):
  - December 2006: GRA N/A; PRGF 7.91; Total 7.91.
  - September 2006: GRA 10.84; PRGF 19.12; Total 29.96.

### Safeguards, exchange regime, Article IV, and FSAP
- Safeguards Assessments:
  - A safeguards assessment is currently underway in conjunction with the authorities request for a new program.
  - The assessment will be completed by the first review and will update the findings of the 2012 safeguards assessment and the 2016 monitoring visit.
  - A key safeguards recommendation from past assessments, to strengthen RBM's legal framework, is incorporated in the program as a structural benchmark.
- Exchange Arrangements:
  - In May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent, and adopted a floating exchange rate regime.
  - Since May 2012, the RBM has not set a target rate and allowed substantial volatility in the exchange rate.
  - The U.S. dollar exchange rates have shown remarkable stability since October 2016, at a rate of around MK 725/US$.
  - Inflows of foreign exchange have allowed for a strong increase in international reserves.
  - Exchange rates remain largely market determined and the spread between the commercial bank and foreign exchange bureau rates has disappeared. The exchange rate is free of restrictions and multiple currency practices.
- Article IV Consultation:
  - The Executive Board concluded the last Article IV consultation with Malawi on December 11, 2015.
- FSAP, ROSCs, and OFC:
  - A joint team of the World Bank and the IMF visited Malawi under the FSAP program during two missions in July and December 2007.
  - The Financial System Stability Assessment (FSSA) was issued in June 2008 (SM/08/198).
  - An FSAP development module was conducted in mid-2017.
  - Corporate Governance and Accounting and Auditing ROSC missions visited Malawi in February and June 2007.
  - An update on the FAD mission on the fiscal transparency module was issued in March 2007. A ROSC on the data module, based on a September 2003 mission, was published in October 2004.

### Technical assistance (selected entries since 2015, as of February 28, 2018)
- 03/18 STA RBM Monetary and financial statistics Mission.
- 02/18 FAD MOF PFM / Financial controls Mission.
- 02/18 STA RBM Monetary and financial statistics Mission.
- 02/18 FAD MOF Customs administration Mission.
- 01/18 STA NSO External sector statistics Mission.
- 01/18 STA NSO Price statistics Mission.
- 12/17 FAD NSO National accounts Mission.
- 12/17 FAD MOF Budgeting Mission.
- 12/17 FAD MOF Tax administration Workshop.
- 11/17 STA MOF Government finance statistics Workshop.
- 11/17 MCM RBM Financial sector regulation Mission.
- 11/17 MCM RBM Banking supervision Mission.
- 11/17 STA NSO National account statistics Mission.
- 11/17 FAD MOF Debt management system Mission.
- 11/17 MCM / WB RBM / MOF Debt management strategy Mission.
- 10/17 STA MOF Government Financial Statistics Mission.
- 09/17 STA NSO Price Statistics Mission.
- 09/17 ICD RBM Policy analysis and forecasting Mission.
- 08/17 FAD MOF / MOF / NSO Macroeconomic forecasting Mission.
- 08/17 ICD RBM Policy analysis and forecasting Mission.
- 08/17 FAD MOF Public financial management Mission.
- 07/17 MCM RBM Forex operations and repo market Mission.
- 05/17 ICD / MCM RBM Forecasting / Policy Analysis System Mission.
- 05/17 FAD MOF Customs administration Mission.
- 05/17 FAD MOF Cash management and TSA Mission.
- 04/17 STA RBM Financial soundness indicators Mission.
- 04/17 FAD MOF Compliance risk analysis Mission.
- 04/17 FAD MOF Cash management Mission.
- 03/17 MCM RBM Financial market infrastructure Workshop.
- 01/17 MCM RBM Bank supervisory framework Mission.
- 01/17 ICD / MCM RBM Monetary policy framework Mission.
- 11/16 FAD MOF Taxpayer register Mission.
- 10/16 FAD MOF Risk management in customs Mission.
- 10/16 ICD / MCM RBM Forecasting / Policy Analysis System Training.
- 09/16 STA RBM General Data Dissemination System Mission.
- 09/16 FAD MOF PFM / Financial controls Mission.
- 08/16 STA NSO Consumer price Framework Mission.
- 07/16 ICD MOF Government financial statistics Training.
- 06/16 STA NSO National accounts statistics Mission.
- 06/16 LEG RBM Bank resolution Workshop.
- 05/16 MCM/ICD RBM Monetary policy framework Mission.
- 04/16 FAD MOF PFM Mission.
- 04/16 MCM RBM Basel framework Mission.
- 04/16 STA NSO National accounts statistics Mission.
- 03/16 MCM RBM IT risk Mission.
- 02/16 LEG RBM Safeguard assessment Mission.
- 02/16 MCM RBM Foreign exchange interventions Mission.
- 01/16 LEG RBM AML/CFT supervision Mission.
- 01/16 FAD MOF Tax reform Mission.
- 11/15 MCM RBM Interbank money market Mission.
- 11/15 FAD MOF Fiscal reporting Mission.
- 10/15 MCM RBM Repo market and forex swaps Workshop.
- 10/15 STA NSO National accounts statistics Mission.
- 09/15 FAD MOF Pension reform proposals Mission.
- 09/15 FAD MOF Expenditure control, bank reconciliation, and fiscal reporting Mission.
- 07/15 FAD MOF Cash planning and management Mission.
- 06/15 STA NSO Price Statistics Mission.
- 05/15 FAD RBM TADAT Pilot Assessment Mission.
- 04/15 FAD MOF Implementing priority PFM reforms II Mission.
- 04/15 STA NSO National Accounts Statistics Mission.
- 03/15 LEG RBM Helping draft Banking law amendments Mission.
- 03/15 STA MOF Government Finance Statistics Mission.
- 02/15 STA NSO Balance of Payments Statistics Mission.
- 02/15 STA NSO National Accounts Statistics Harmonization Workshop.
- 02/15 MCM RBM Advice on the Implementation of ICAAP/SREP supervisory framework Mission.
- 01/15 FAD MOF Action plan for implementing priority PFM reforms Mission.

*Source: IMF staff report informational annex (April 16, 2018), "STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—INFORMATIONAL ANNEX".*

### 1. Institutional and Non-Technical Drivers of Agriculture Sector

### 1. Institutional and Non-Technical Drivers of Agriculture Sector Performance

### Overview and Context
- Document dated: January 2018.
- Presents institutional, donor, and statistical factors affecting Malawi’s agriculture sector performance and related public finance and data issues.
- Emphasizes need to create more economic opportunities to generate increased government revenues while ensuring a dynamic private sector.

### African Development Bank (AfDB) Relations and Support
- AfDB operations in Malawi date back to 1969; Malawi Country Office opened in 2007.
- Cumulative commitments as of January 31, 2018: UA 898 million (about US$1.3 billion) to finance 108 operations, including thirteen studies and two lines of credit.
- AfDB Malawi CSP 2013–17 aligned with MGDS II (2011-16) and Long-Term Strategy (LTS, 2013–22); new CSP for 2018–22 under preparation, with integrated focus on private sector development and key infrastructure constraints (water, power, roads) and private sector policy.
- AfDB approvals (selected):
  - 2016: Agriculture Infrastructure and Youth in Agri-Business Project (US$22 million).
  - 2016: Food Crisis Response Budgetary Support Program (US$16 million).
  - 2016: Jobs for Youth Project (US$12 million).
  - 2017: Nacala Rail and Port Value Addition Technical Assistance Project (US$1.7 million).
  - 2017: Malawi Economic Census Project (US$1 million).
  - January 2018: Promoting Investment and Competitiveness in Tourism Sector Project (US$9.8 million).
- Quick-disbursing budget support examples:
  - ADF Grant for Crisis Response Budget Support: US$40 million following re-engagement with IMF and US$157 million ECF in July 2012.
  - Restoration of Fiscal Stability and Social Protection (RFSSP) program with components on PFM transparency and social protection.
  - 2015: African Development Fund grant US$30 million for Protection of Basic Services Program (PBS), disbursed in July 2015.
- AfDB PFM and institutional support:
  - Two PFM Institutional Support Projects (US$7 million) closing in 2018.
  - Support areas: ASYCUDA upgrade, Tax Appeals Tribunal legislative framework, public procurement reforms, IFMIS oversight, review of PFM Act.
- Analytical and non-lending support:
  - Feasibility study for Kholombidzo Hydro Power Project (2017).
  - Agriculture financing feasibility study underway, expected conclusion end-2018; objectives include assessing smallholder financing needs and evaluating options including an Agriculture Cooperative Bank.
  - Support to Private Public Partnership Commission (PPPC) for PPP negotiation capacity via a “hot line” for international legal advice.
  - TA to Malawi Postal Corporation for E-Post Strategy and Action Plan.
  - Analytical studies including Domestic Resource Mobilization Study, TA to Reserve Bank of Malawi for macro-forecasting, Public Expenditure Review, Expenditure Tracking Study.
- Future pipeline and priorities:
  - Scale up lending to energy sector: Songwe River Basin Development Project; Malawi-Zambia Power Inter-connector Project; Kholombidzo Hydro Power Project.
  - Bank leading donor mobilization and private finance for Songwe Hydro Power Project (multinational with Tanzania).
  - Promote private investment via PPPs and Partial Risk Guarantees.
  - Support Shire Valley Irrigation Project (part of Shire Valley Transformation Programme) in 2018: project to cover 42,000 hectares aimed at boosting production of high value crops and developing value chains; preparatory studies underway and co-financed with World Bank.

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- General: Data provision has some shortcomings, but it is broadly adequate for surveillance.
- National Accounts:
  - Latest available actual GDP estimates at current prices: for 2011.
  - Available GDP estimates at constant 2009 prices: for 2015.
  - NSO plans to release GDP series for 2012–15 in 2018 with STA TA support.
  - Main challenges: continuing budget constraints, lack of funds for requisite data collections, low staffing in national accounts unit.
- Price Statistics:
  - Updated and revised CPI introduced in January 2013; weight reference period 2010–11; index reference period 2012 (2012=100).
  - Updated PPI for manufacturing released April 2013; need to expand PPI coverage.
  - With STA TA, NSO released an updated CPI in February 2018 using expenditure weights from the 2016/17 Integrated Household Survey (IHS).
  - PPI weights derived from Annual Economic Survey 2012; weights should be updated and coverage expanded.
  - NSO developing export-import price indexes.
- Government Finance Statistics:
  - Source data weaknesses affect accuracy and reliability.
  - Key shortcomings and issues:
    - Sizeable statistical discrepancy between above and below the line data due primarily to differences in coverage.
    - Coverage of government for above-the-line data considerably narrower than financing reported by RBM.
    - Tax revenue data timely but not always reconcilable with deposits in Malawi Government (MG) Account due to reporting and timing differences; Malawi Revenue Authority finances/operations unusually opaque.
    - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in Ministry of Finance fiscal reports.
  - Authorities have received significant TA from Fund and donors to strengthen expenditure monitoring, accounting, and statistical reporting; results have lagged.
  - Government working with East AFRITAC to modify chart of accounts and output-based structures; procurement of new IFMIS initiated.
  - Recommendation from October 2017 STA mission: compile and report high frequency data for Budget Central Government in GFSM 2014 framework, expand coverage to extrabudgetary units (EBUs), collect quarterly EBUs data, align new Chart of Accounts to GFSM 2014.
- Monetary and Financial Statistics:
  - RBM yet to compile and report monetary data using standardized report forms (SRFs).
  - 2013 STA mission assisted developing SRFs for central bank accounts (1SR) and other depository corporations (2SR); RBM experienced implementation challenges.
  - RBM committed in March 2018 to submit SRF-based MFS to STA by June 2018.
  - Mission suggested improving source data for other financial corporations (insurance companies and pension funds) with work by June 2018.
- Financial Sector Surveillance:
  - Following April 2017 TA mission, Malawi compiled and submitted financial soundness indicators in line with FSI Guide methodology; data published on Fund website.
- External Sector Statistics (ESS):
  - NSO compiles annual balance of payments and IIP following BPM6 with considerable delays.
  - Estimates rely heavily on monthly merchandise trade statistics, banking data, and government departments.
  - Foreign private capital survey being conducted in 2018 for first time since 2013.
  - Balance of payments survey not conducted since 2010; business interviews survey no longer collects BOP data.
  - Absence of regular survey data leads to use of proxies and updates of previous estimates.
  - Large net errors and omissions (NEOs): around 2.5 percent of GDP in 2017.
  - Main contributor to large NEOs likely underestimation of net acquisition of currency and deposits under other investment category; current estimates do not capture deposits held in foreign banks or U.S. dollar held in cash by non-bank Malawian residents.
  - Data from RBM foreign exchange transaction system (E-forms) expected to be available by September 2018 and could substantially improve ESS.
  - NSO and RBM should ensure regular flow of data from this system for BOP and IIP compilation; government should allocate sufficient resources for regular surveys.

### Data Standards, Quality, and Reporting
- e-GDDS:
  - Malawi implemented the e-GDDS; National Summary Data Page (NSDP) went live on November 15, 2016.
  - Malawi is lagging for 19 data categories the authorities committed to disseminate under the e-GDDS.
  - Recommendations: update NSDP regularly, publish advance data release calendar, and make progress toward higher data standards.
- Data ROSC: published on February 17, 2005.
- Reporting to STA: authorities report Monetary and financial statistics, balance of payments and IIP statistics, and government finance statistics to STA for IFS publication; timeliness is irregular.

### Malawi: Table of Common Indicators Required for Surveillance (As of March 14, 2018) — Selected items and statuses
- Exchange Rates: Date of latest observation — Current; Frequency of Data — D; Frequency of Reporting — D; Frequency of Publication — D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation — 11/2017; Date received — 01/2018; Frequency of Data — M; Frequency of Reporting — M; Frequency of Publication — M.
- Reserve/Base Money: 11/2017; 01/2018; M; M; M.
- Broad Money: 11/2017; 01/2018; M; M; M.
- Central Bank Balance Sheet: 11/2017; 01/2018; M; M; M; Data Quality — Methodological soundness: LO, LO, LNO, O; Data Quality — Accuracy and reliability: LO, O, O, O, O.
- Consolidated Balance Sheet of the Banking System: 11/2017; 01/2018; M; M; M.
- Interest Rates: 11/2017; 01/2018; M; M; M.
- Consumer Price Index: Date of latest observation — 12/2017; Date received — 02/2018; Frequency — M; Frequency of Reporting — M; Frequency of Publication — M; Data Quality — Methodological soundness: O, LNO, O, O; Data Quality — Accuracy and reliability: LNO, O, O, O, NA.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: NA; NA.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of latest observation — Q2/2017; Date received — 10/2017; Frequency — M; Frequency of Reporting — M; Frequency of Publication — I; Data Quality — Methodological soundness: O, LO, O, O; Data Quality — Accuracy and reliability: O, LO, O, O, LNO.
- Stocks of Central Government and Central Government-Guaranteed Domestic Debt: Date of latest observation — Q2/2017; Date received — 10/2017; Frequency — M; Frequency of Reporting — M; Frequency of Publication — M.
- External Current Account Balance: 2016; 01/2018; A; A; A.
- Exports and Imports of Goods and Services: 09/2016; 08/2016; A; A; A; Data Quality — Methodological soundness: O, O, O, O; Data Quality — Accuracy and reliability: LO, O, LO, O, O.
- GDP/GNP: 2016; 12/2017; A; A; A; Data Quality — Methodological soundness: LO, LNO, LNO, LO; Data Quality — Accuracy and reliability: LNO, LNO, LO, LO, LNO.
- Gross External Debt: 06/2016; 01/2018; A; Q; I.
- International Investment Position: 2016; 01/2018; A; A; A.

*Source: 1. Institutional and Non-Technical Drivers of Agriculture Sector Performance, January 2018.*

### Introduction

### Introduction

### Authorities' stance and request
- Authorities appreciate constructive policy discussions during the recent Article IV consultations and program negotiations and broadly concur with the staff assessment and its conclusions.
- Authorities request a three-year arrangement under the Extended Credit Facility (ECF) to support economic policies and reforms to entrench macroeconomic stability and catalyze concessional financing for infrastructure development.
- All five prior actions have been completed.

### Strategic context
- Malawi launched the third Malawi Growth and Development Strategy (MGDS III) for 2018–23, aiming to boost productivity, enhance competitiveness, and build resilience through growth-enhancing investment and economic diversification.
- Objective: achieve higher, more inclusive, and resilient growth to meaningfully tackle poverty.

### Conclusion (from authorities)
- Authorities commit to an appropriate policy mix of prudent fiscal and monetary policies, complemented by structural reforms, and value Fund support for approval of the ECF arrangement.

---

### Recent Economic Developments and Macroeconomic Outlook
- Real GDP growth:
  - 2017: expected recovery to 4 percent, from 2.3 percent in 2016.
  - Medium-term projection: growth expected to reach 6 percent.
  - Drivers: rebound in agricultural output; pick-up in construction; wholesale and retail sectors; improved confidence; increased electricity generation and transportation; improved access to finance.
  - Constraint: manufacturing weighed down by prolonged electricity outages.
- Inflation:
  - Peak: 23.5 percent in July 2016.
  - End-2017: 7.1 percent.
  - Medium-term expectation: reach 5 percent.
  - Drivers of decline: stabilization of food prices, tight monetary policy, stable exchange rate; continued tight policy and low food and petroleum products’ prices expected to keep inflation in single digit territory in 2018.
- External sector:
  - Current account deficit:
    - 2016: 13.6 percent of GDP.
    - 2017: improved to 10.0 percent of GDP.
    - Medium-term expectation: narrow to around 7.5 percent.
  - Factors: lower maize imports after a bumper harvest; rebound in exports; favorable balance of payments developments; improved confidence; tight monetary policy.
  - Exchange rate: nominal exchange rate of the Malawi kwacha vs the U.S. dollar has been stable; premium between RBM and forex bureaus remains very small.
  - Foreign currency reserves: above three months of import cover.
  - Policy priorities going forward: improvements in competitiveness, export diversification, fiscal restraint, and improved GDP growth to narrow the current account deficit.

---

### Fiscal Policy and Public Financial Management
- Fiscal stance and priorities:
  - Commitment to pursue fiscal consolidation while protecting growth-enhancing and pro-poor expenditures and ensuring debt sustainability.
  - Enhance domestic revenue mobilization through broad-based tax reforms and expenditure rationalization.
- Tax reforms planned:
  - Streamline tax incentives.
  - Fully repeal the industrial rebate scheme.
  - Introduce a thin capitalization or earnings stripping rule.
  - Redesign turnover taxation to increase its effectiveness.
  - Guiding principle: shift reliance from taxation of labor and investment to consumption.
  - Malawi Revenue Authority (MRA) plans to launch the integrated tax administration system (ITAS), branded “msonkho-online” within the year, expected to enhance overall tax administration.
- Expenditure controls and arrears management:
  - Enhanced controls to avoid further accumulation of arrears and limit recourse to domestic financing, particularly from the RBM, and curb non-concessional borrowing.
  - Tightened commitment controls and a system to track the stock of commitments.
  - Compliance officers from the Internal Audit Department placed in all key ministries, departments, and agencies (MDAs) with plan to deploy to all MDAs to ensure payments have supporting documentation.
  - Budget implementation in first half of FY2017/18 was challenging due in part to lower than projected revenue collections; authorities committed to improve fiscal position by end June 2018 through expenditure cuts.
- Infrastructure and public investment:
  - Plan to raise needed infrastructure investments as soon as possible for key MGDS III flagship projects in electricity, transportation, telecommunications, water supply, and irrigation while maintaining macroeconomic stability and debt sustainability.
  - Approach: efficiency gains from improved public investment management and procurement, partnering with private sector and development partners.
  - Increase in health, education, and other social spending anticipated through efficiency gains in on-budget spending.
- External borrowing and debt management:
  - ECF approval expected to catalyze foreign financing for infrastructure.
  - Commitment to limit external borrowing to high priority projects to safeguard debt sustainability.
  - Improve investment planning by rigorously prioritizing MGDS III pipeline projects based on credible cost/benefit analyses, growth, poverty-reduction, and debt sustainability considerations.
  - Debt Management Committee to assess all borrowing to ascertain loan concessionality, considering the entire borrowing plan within the medium-term debt strategy.
- Public financial management reforms achieved and planned:
  - Established a fully functional Cash Management Unit.
  - Require all MDAs to submit five detailed fiscal reports as condition for receipt of regular monthly funding.
  - Fully reconciled government cashbook with the bank account.
  - Intend to improve procurement framework following enactment of a new Public Procurement Law:
    - Publish all procurement information on the Ministry of Finance’s website.
    - Use performance contracts to hold controlling officers accountable for non-adherence.
    - Consider gradual move to an e-procurement system over time.

---

### Monetary and Exchange Rate Policies
- Monetary policy stance:
  - Commitment to maintain tight monetary policy to rein in inflation.
  - RBM has used policy instruments to stabilize monetary conditions and bolster external reserves.
  - Aim to maintain positive real interest rates by ensuring policy rate remains above inflation through open market operations.
- Exchange rate policy:
  - Authorities acknowledge the 2017 AREAER reclassification of the de facto exchange rate arrangement and reiterate commitment to a flexible exchange rate regime.
  - Premium between RBM and forex bureaus remains very small, reflecting foreign currency availability and market-determined exchange rate.
- Monetary framework development:
  - RBM committed to develop an interest rate-based monetary policy framework and gradually transition from monetary aggregate targeting to a full interest rate-based framework and to inflation targeting over the medium-term.
  - Required actions: capacity development in liquidity management, deeper understanding of monetary transmission mechanism, improvements in inflation forecasting capacity.
  - Authorities appreciate IMF technical assistance received and look forward to further TA.
- Financial sector stability:
  - Priority to safeguard financial sector stability and resilience.
  - Enhance both on-site and off-site supervision of banks; enforce compliance with prudential norms, including asset classification and provisioning in context of IFRS9.
  - Commitment to strengthen regulatory framework to mitigate risks.
  - Plan to re-submit to Parliament amendments to the Banking Act of 2010 and Financial Services Act of 2010 to align bank resolution legal framework with best practices and provide more resolution options.
  - By end-2018, authorities plan to gazette regulations related to the revised AML/CFT framework (enacted in 2017) to strengthen asset declaration system and support anti-corruption efforts.

---

### Structural Reforms
- Need for far-reaching structural reforms to complement macroeconomic policies and reduce poverty.
- Governance and public sector reforms:
  - Continue reforms to address governance challenges, including strengthening public finance management and procurement.
  - Improve the investment climate.
- Agricultural reforms:
  - Pursue reforms in the agricultural sector, including on the farm inputs subsidy program (FISP).
- Financial sector access:
  - Step up efforts to improve financial intermediation to raise access and affordability of credit to the private sector.
- Fuel pricing:
  - Commitment to adhere to the automatic fuel pricing mechanism which has contributed positively to macroeconomic stability.

---

*Source: Introduction, cr18115 - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18115.pdf_