## cr18336

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**Canonical URL:** [cr18336](https://www.imf.org/-/media/files/publications/cr/2018/cr18336.pdf)

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---

### Key issues and program purpose
- ECF-supported program aims to entrench macroeconomic stability and to foster higher, more inclusive, and resilient growth.
- SDR 108.2 million), equivalent of 56.25 percent of Malawi’s quota in the IMF, to support the country’s economic and financial reforms.
- Program performance described as satisfactory by Mr. Tao Zhang, Deputy Managing Director and Acting Chair, while noting recent fiscal deterioration.

### Recent developments (performance and macro indicators)
- Growth and agriculture
  - Economic growth moderated from 4 percent in 2017 to 3.2 percent in 2018.
  - One sixth of the population is at risk of food insecurity due to insufficient rain and insect infestations affecting maize.
  - Two thirds of the population are employed in agriculture (primarily maize farming), vulnerable to frequent droughts and a single harvest per year.
- Inflation and monetary policy
  - Inflation rose from 7.1 percent at end-2017 to 9.3 percent in August 2018 and is expected to end the year at 9.5 percent.
  - The Reserve Bank of Malawi (RBM) maintained the policy rate at 16 percent.
  - Interbank rate aligned with the policy rate; average real bank lending rates have declined.
- Fiscal performance
  - Overall fiscal deficit in FY 2017/18 was 1.3 percent of GDP larger than programmed.
  - Primary deficit (excluding budget support and dedicated grants) widened by 0.8 percent of GDP.
  - Expenditure overruns driven by maize purchases for food security, increased spending to ensure safe elections, and payments of past arrears (including court-ruled payments totaling 0.3 percent of GDP).
  - FY 2017/18 Central Government Operations (percent of GDP, Prog./Est./Change):
    - Tax revenue: 17.6 / 17.5 / -0.1
    - Non-tax revenue: 1.9 / 2.3 / 0.3
    - Budget support and dedicated grants: 1.0 / 0.5 / -0.5
    - Project grants: 1.8 / 0.9 / -0.9
    - Elections spending: 0.2 / 0.6 / 0.4
    - Maize spending: 0.5 / 0.7 / 0.2
    - Arrears payments: 1.3 / 1.6 / 0.3
    - Overall balance: -7.0 / -8.4 / -1.3
    - Primary balance (excluding budget support and dedicated grants): -4.0 / -4.9 / -0.8
    - Nominal GDP (in MK billions): 476 / 447 / 35 / -29
- External sector and reserves
  - Current account deficit declined from 11.1 percent of GDP in 2017 to a projected 9.3 percent of GDP in 2018.
  - Reserves coverage in months of prospective imports expected to decline from 3.4 at end-2017 to 2.9 at end-2018.
  - End-June reserves target overperformed due to solid global tobacco demand, growth in other commodities, and reduction in commercial banks’ net foreign assets.
- Financial sector
  - Banking system is well capitalized and profitable.
  - Non-performing loans declined from 15.7 percent at end-2017 to 9.3 percent in August 2018.
  - Provisions almost doubled with adoption of IFRS9 requirements.
  - RBM’s June 2018 stress test indicated some individual banks remain vulnerable to credit, liquidity, and interest rate shocks.
- Exchange rate
  - Nominal exchange rate has been stable against the U.S. dollar for two years.
  - IMF reclassified Malawi’s de facto arrangement from floating to stabilized in the 2017 AREAER.
  - REER appreciated nearly 5 percent during the first nine months of 2018 relative to the same period in 2017; nominal depreciation was about 2 percent against trading partners.

### Program performance and staff views
- Quantitative performance criteria (QPC)
  - Most QPCs were met at end-June 2018, with significant overperformance on international reserves and reduction in RBM holdings of government securities.
  - QPC on the primary fiscal balance was missed by 0.9 percent of GDP due to expenditure overruns.
  - Continuous QPC on new non-concessional external debt was missed due to a technical oversight in the Technical Memorandum of Understanding.
- Structural benchmarks
  - Two structural benchmarks were observed on time; most others have been completed with delay.
- Staff recommendation and conditionality
  - Staff supports completion of the first review under the ECF arrangement and waivers of non-observance for the missed QPCs, given authorities’ commitment to corrective measures.
  - Completion would result in the disbursement of SDR 11.15 million and help catalyze donor support.

### Program strategy and policy priorities
- Fiscal policy
  - Preserve debt sustainability, correct recent spending overruns, and create space for growth-enhancing expenditure.
  - Program fiscal targets strengthened, including tightening of the FY 2018/19 target to correct for FY 2017/18 slippage and partially adjust for postponed budget support.
- Monetary and exchange rate policy
  - Tight monetary policy to contain inflation.
  - Greater exchange rate flexibility recommended to cushion against external shocks and preserve competitiveness.
- Governance, public financial management, and structural reforms
  - Key governance and PFM reforms include:
    - Routinizing bank reconciliation.
    - Improving commitment control and cash management.
    - Enhancing transparency of the budget process.
    - Further improvements to public investment management.
    - Strengthening oversight of state-owned enterprises.
    - Improving debt management.
    - Aligning the AML/CFT framework with international standards.
  - Authorities encouraged to maintain momentum in safeguarding financial sector stability by improving banks’ risk management and closely monitoring large borrowers.
- Private sector and growth
  - Structural reforms to support private sector development and private-sector-led growth.
  - Growth, currently barely above population growth, expected to gradually improve over the medium-term with continued macroeconomic stability and ongoing structural reforms.

### Macroeconomic outlook and risks
- Growth projections
  - Growth expected to rebound to 4.0 percent in 2019 reflecting increased electricity generation and growing infrastructure investment.
  - Medium-term growth projected to reach around 6.5 percent assuming improved irrigation infrastructure and cropping techniques, enhanced electricity generation, better road and telecommunications networks, increased donor assistance, and greater access to finance for the private sector.
- Inflation and current account
  - Inflation projected to moderate to 8.9 percent in 2019 and to around 5 percent over the medium term.
  - Current account deficit expected to gradually narrow towards 7.5 percent of GDP.
  - International reserves projected to rise to around 4.5 months of prospective imports with strengthened competitiveness, export diversification, and fiscal restraint.
- Risks
  - Governance-related donor withholding after the 2013 cashgate scandal keeps donor funding low; the World Bank may delay disbursement of $80 million (1.1 percent of GDP) of budget support until FY 2019/20.
  - Electricity shortages, weak agricultural harvests, and shallow FX market pose downside risks to growth, inflation, and external stability.
  - Political pressures in the election run-up could weaken policy and reform implementation.

### Fiscal framework and debt sustainability
- Medium-term fiscal framework and LIC-DSF
  - New LIC DSF indicates Malawi is at moderate risk of external debt distress and high overall risk of debt distress—driven by growing public domestic debt.
  - Stress tests highlight vulnerabilities of total public debt to shocks in export revenues, exchange rate, weather, and contingent liabilities.
  - To ensure debt sustainability:
    - Future primary balances (excluding budget support and dedicated grants) tightened by an average of 0.2 percent of GDP relative to program request—reducing public debt from 55 percent of GDP to below 40 percent of GDP by 2028.
    - Authorities suspended contracting of new non-concessional external debt; exceptions to be considered only in later reviews on a case-by-case basis with independent feasibility studies.
- Central Government Operations — Text Table 2 (selected percent of GDP entries)
  - Tax and nontax revenue: Prog. 19.5; Est. 19.8; Change 0.3; Proj. 20.2.
  - Budget support and dedicated grants: Prog. 1.0; Est. 0.5; Change -0.5; Proj. 1.1.
  - Development spending — Foreign financed: Prog. 4.8; Est. 3.1; Change -1.6.
  - Overall balance: Prog. -7.0; Est. -8.4; Change -1.3.
  - Primary balance (excluding budget support and dedicated grants): Prog. -4.0; Est. -4.9; Change -0.8.

### Revenue mobilization and public investment efficiency
- Revenue measures
  - Implement VAT reverse charge mechanism on imported services; use of VAT withholding.
  - Widen corporate income tax base by applying a debt-to-equity ratio (adding almost 0.3 percent of GDP relative to FY 2017/18 outturn).
  - Ramp up tax administration (adding about 0.1 percent of GDP) and reinforce dividends and fees (adding about 0.2 percent of GDP).
  - If implemented, measures should increase the tax-to-GDP ratio by about 1 percent of GDP by FY 2022/23.
- Public investment efficiency
  - Pilot ex-post review/performance audit of major capital projects with the National Audit Office.
  - Assess usefulness of the Public-Sector Investment Program (PSIP) database, including an audit of its coverage and efficiency/timeliness.

### Monetary, exchange rate, and financial sector policies
- Monetary policy
  - Tight stance required to preserve declining inflation trajectory.
  - Introduction of a band around the upper limit of reserve money to support RBM operations.
  - RBM expanding capacity in high frequency data, liquidity forecasting, and FPAS modeling to support transition toward inflation targeting.
  - RBM published a communication strategy.
- Exchange rate flexibility
  - Greater exchange rate flexibility critical to cushioning shocks and enhancing competitiveness.
  - RBM interventions intended for accumulating reserves and smoothing FX supply seasonality, not to stabilize the exchange rate.
  - Staff recommended sequencing: enhanced communication of RBM’s FX objectives, timely publication of interbank transactions, more prudent risk management, development of a transparent auction-based FX intervention system.
  - Note: During first seven months of the year, RBM’s FX purchases (sales) were nearly 50 percent (40 percent) of total sales (purchases) of authorized dealer banks.
- Financial sector resilience and oversight
  - RBM working with banks to reduce most banks’ NPLs to around 5 percent by end-2018 through recovery or write-offs.
  - Importance of improving banks’ risk management and collateral analysis emphasized.
  - Regulations enhancing consolidated and Domestic Systemically Important Banks supervision to take effect as of end-March 2019.
  - April 2018 directive limiting FX lending to borrowers with FX generating activities and to banks’ FX deposit balance.

### Governance, PFM, and SOE oversight
- Key PFM and governance measures
  - Routinize bank reconciliation; reconcile debt data between MoF and RBM.
  - Strengthen quality control of monthly fiscal reporting, cash management, and medium-term budgetary framework.
  - Prevent further accumulation of arrears and close out transactions pertaining to past arrears.
  - Broaden IFMIS coverage and implement plans for acquiring a new IFMIS.
- SOE oversight
  - Issue regulations, policies, and guidelines for SOE monitoring and develop a prototype SOE database.
  - Pilot audit of the largest SOEs to be submitted to Parliament; produce a published consolidated annual report on SOEs.
  - Finalize and issue draft regulations covering ownership, payment of dividend and surplus, and preparation of performance management plans and budgets by end-December 2018.

### Program monitoring, structural benchmarks, and prior actions
- Program review cadence
  - Program reviewed semi-annually based on performance criteria, indicative targets, structural benchmarks, and prior actions.
  - All prior actions expected to be met prior to Board discussion.
- Structural benchmarks (selection and status)
  - Monetary policy communication strategy: Target end-June 2018 — Met.
  - Monthly cash forecasts for FY 2018/19: Target end-June 2018 — Met.
  - New RBM Act 2018 submission to Parliament: Target end-October — Not submitted by end-October but to be completed as a prior action.
  - Bank account reconciliation (July 2017–May 2018) completed by end-July 2018 except for salary accounts — to be automated in phases by June 2019.
  - Forensic audit for FY 2013/14-14/15 complete and submitted to Anti-Corruption Bureau; report available after investigations conclude.

### External financing, capacity to repay, and disbursement schedule
- Capacity to repay
  - Malawi’s capacity to repay the Fund remains strong (Table 8); financing assurances are in place for the remainder of the program.
- Schedule of Disbursements under ECF Arrangement, 2018–21 (Millions of SDR)
  - Amount per tranche: 11.15 SDR each.
  - % of Quota per tranche: 8.033 (first six tranches), final tranche 11.175 (8.051).
  - April 30, 2018 — Executive Board Approval. Status: Disbursed.
  - October 15, 2018 — Observance of performance criteria for June 30, 2018, and completion of first review.
  - Total for the ECF: 78.075 SDR (56.25 percent of quota).
  - Memorandum item: Malawi's Quota (millions SDR): 138.80.
- Indicators of capacity to repay (selected series)
  - Projected Payments (Existing + Prospective, SDR millions): 11.59 12.53 14.45 19.08 26.45 23.01 24.88 26.73 24.46 18.21 15.16 10.68 6.22 1.76
  - Percent of exports of goods and services (Projected Payments): 0.90 0.91 0.99 1.22 1.59 1.34 1.35 1.35 1.15 0.80 0.62 0.41 0.22 0.06
  - Projected level of credit outstanding (SDR millions, Existing+Prospective): 159.51 169.91 178.41 171.11 145.31 122.99 98.77 72.64 48.83 31.21 16.76 6.71 1.10 0.0

### Debt Sustainability Analysis (DSA) — baseline and stress tests
- DSA classifications and projections
  - External debt: moderate risk of debt distress.
  - Overall public debt distress: high overall risk of debt distress due to increasing public domestic debt.
  - Baseline: PPG external debt projected to peak at 34.8 percent of GDP in 2020; PV of debt-to-GDP around 20.4 percent in 2020 and declining over the long term.
- Key stress-test results
  - One-time 30 percent nominal depreciation in 2019 raises PV of debt-to-GDP to 25.5 percent in that year.
  - Natural disaster one-off shock (10 percent of GDP) elevates PV of total debt-to-GDP ratio to 55 percent and keeps it above 35 percent even in 2028.
- Policy recommendations from DSA
  - Strengthen fiscal discipline; secure concessional financing; prudently appraise public investments; broaden the revenue base; strengthen PFM; closely monitor contingent liabilities; avoid excessive domestic borrowing.

### Financial sector indicators (selected)
- Banking sector regulatory and capital ratios (series)
  - Regulatory Tier 1 capital to risk weighted assets: 16.4 16.2 13.5 12.4 13.8 15.3 15.8
  - Regulatory total capital to risk weighted assets: 20.2 19.1 17.1 15.8 17.0 19.4 19.3
  - Total capital to total assets: 14.3 15.4 17.6 17.1 16.7 15.9 16.8
- Asset quality and provisioning
  - Non-performing loans to gross loans and advances: 9.4 15.4 14.9 10.6 17.0 15.7 9.3
  - Provisions to non-performing loans: 26.8 29.1 31.8 25.7 25.5 34.5 50.8
- Liquidity and lending
  - Liquid assets to deposits and short-term liabilities: 45.4 59.1 62.4 59.0 72.3 77.0 59.5
  - Total loans to total deposits: 72.4 56.6 58.3 58.5 54.2 45.1 68.9
  - Foreign currency loans to total loans and advances: 7.9 13.5 19.1 28.6 21.8 27.9 25.4

### Risks and the Risk Assessment Matrix (selected)
- Global risks (examples)
  - Tight global financial conditions — Relative Likelihood: High; Impact if Realized: Medium.
  - Weakening demand in key partner economies — Relative Likelihood: Medium; Impact if Realized: Medium.
  - Energy prices volatility — Relative Likelihood: Medium; Impact if Realized: Medium.
- Regional and domestic risks (examples)
  - Expansionary fiscal policies — Relative Likelihood: High; Impact if Realized: High.
  - Delayed PFM reforms and lacking expenditure control — Relative Likelihood: High; Impact if Realized: High.
  - Spending pressures ahead of elections — Relative Likelihood: High; Impact if Realized: High.
- Policy advice across risks
  - Maintain fiscal discipline; tighten monetary policy as needed; deepen FX and domestic debt markets; accelerate PFM reforms; strengthen banking supervision and oversight of SOEs.

### Staff recommendation and next steps
- Staff supports completion of the first review under the ECF and waivers for non-observance of:
  - the end-June 2018 QPC on the primary balance, and
  - the continuous QPC on not contracting new non-concessional external debt.
- Rationale: authorities’ commitment to corrective fiscal and debt management measures; strong policy implementation during the second half of 2018; completion of prior actions; strength of reform agenda in MEFP.
- Program modifications and monitoring
  - Modified end-December 2018 PCs proposed for primary fiscal balance, net international reserves, and reserve money to reflect fiscal slippage and updated budget support profile.
  - IFMIS-related SBs realigned to the third review; new SBs proposed for unwinding RBM holdings of government securities, reforming SOE oversight, and improving public investment management.
  - Targeted technical assistance remains critical to achieving program objectives.

*Source: IMF staff report (cr18336).*

### 108.2 million), equivalent of 56.25 percent of Malawi’s quota in the IMF, to support the

### cr18336 - 108.2 million), equivalent of 56.25 percent of Malawi’s quota in the IMF, to support the

### Key issues and program purpose
- The authorities’ ECF-supported program aims to entrench macroeconomic stability and to foster higher, more inclusive, and resilient growth.
- SDR 108.2 million), equivalent of 56.25 percent of Malawi’s quota in the IMF, to support the country’s economic and financial reforms.
- Following the Executive Board meeting, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, stated program performance has been satisfactory, while noting recent fiscal deterioration.

### Recent developments (performance and macro indicators)
- Growth and agriculture
  - Economic growth moderated from 4 percent in 2017 to 3.2 percent in 2018.
  - One sixth of the population is at risk of food insecurity due to insufficient rain and insect infestations affecting maize.
  - Two thirds of the population are employed in agriculture (primarily maize farming), vulnerable to frequent droughts and a single harvest per year.
- Inflation and monetary policy
  - Inflation rose from 7.1 percent at end-2017 to 9.3 percent in August 2018 and is expected to end the year at 9.5 percent.
  - The Reserve Bank of Malawi (RBM) maintained the policy rate at 16 percent.
  - The interbank rate aligned with the policy rate; average real bank lending rates have declined.
- Fiscal performance
  - The overall fiscal deficit in FY 2017/18 was 1.3 percent of GDP larger than programmed.
  - The primary deficit (excluding budget support and dedicated grants) widened by 0.8 percent of GDP.
  - Expenditure overruns were driven by maize purchases for food security, increased spending to ensure safe elections, and payments of past arrears (including court-ruled payments totaling 0.3 percent of GDP).
  - FY 2017/18 Central Government Operations (percent of GDP, Prog./Est./Change):
    - Tax revenue: 17.6 / 17.5 / -0.1
    - Non-tax revenue: 1.9 / 2.3 / 0.3
    - Budget support and dedicated grants: 1.0 / 0.5 / -0.5
    - Project grants: 1.8 / 0.9 / -0.9
    - Elections spending: 0.2 / 0.6 / 0.4
    - Maize spending: 0.5 / 0.7 / 0.2
    - Arrears payments: 1.3 / 1.6 / 0.3
    - Overall balance: -7.0 / -8.4 / -1.3
    - Primary balance (excluding budget support and dedicated grants): -4.0 / -4.9 / -0.8
    - Nominal GDP (in MK billions): 476 / 447 / 35 / -29 (table formatting preserved as in source)
- External sector and reserves
  - The current account deficit declined from 11.1 percent of GDP in 2017 to a projected 9.3 percent of GDP in 2018.
  - Reserves coverage in months of prospective imports expected to decline from 3.4 at end-2017 to 2.9 at end-2018.
  - End-June reserves target overperformed due to solid global tobacco demand, growth in other commodities, and reduction in commercial banks’ net foreign assets.
- Financial sector
  - Banking system is well capitalized and profitable.
  - Non-performing loans declined from 15.7 percent at end-2017 to 9.3 percent in August 2018.
  - Provisions almost doubled with adoption of IFRS9 requirements.
  - RBM’s June 2018 stress test indicated some individual banks remain vulnerable to credit, liquidity, and interest rate shocks.
- Exchange rate
  - The nominal exchange rate has been stable against the U.S. dollar for two years.
  - The IMF reclassified Malawi’s de facto arrangement from floating to stabilized in the 2017 AREAER.
  - REER appreciated nearly 5 percent during the first nine months of 2018 relative to the same period in 2017; nominal depreciation was about 2 percent against trading partners.

### Program performance and staff views
- Quantitative performance criteria (QPC)
  - Most QPCs were met at end-June 2018, with significant overperformance on international reserves and reduction in RBM holdings of government securities.
  - The QPC on the primary fiscal balance was missed by 0.9 percent of GDP due to expenditure overruns.
  - The continuous QPC on new non-concessional external debt was missed due to a technical oversight in the Technical Memorandum of Understanding.
- Structural benchmarks
  - Two structural benchmarks were observed; most others have been completed with delay.
- Staff recommendation and conditionality
  - Staff supports completion of the first review under the ECF arrangement and waivers of non-observance for the missed QPCs, given authorities’ commitment to corrective measures.
  - Completion would result in the disbursement of SDR 11.15 million and help catalyze donor support.

### Program strategy and policy priorities
- Fiscal policy
  - Focus on preserving debt sustainability, including correcting for recent spending overruns and creating space for growth-enhancing expenditure.
  - Program fiscal targets have been strengthened, including a tightening of the FY 2018/19 target to correct for FY 2017/18 slippage and partially adjust for postponed budget support.
- Monetary and exchange rate policy
  - Tight monetary policy to contain inflation.
  - Greater exchange rate flexibility is recommended to cushion against external shocks and preserve competitiveness.
- Governance, public financial management, and structural reforms
  - Key governance and PFM reforms include:
    - Routinizing bank reconciliation.
    - Improving commitment control and cash management.
    - Enhancing transparency of the budget process.
    - Further improvements to public investment management.
    - Strengthening oversight of state-owned enterprises.
    - Improving debt management.
    - Aligning the AML/CFT framework with international standards.
  - Authorities encouraged to maintain recent momentum in safeguarding and strengthening financial sector stability by improving banks’ risk management and closely monitoring large borrowers.
- Private sector and growth
  - Advancing structural reforms will support private sector development and private-sector-led growth.
  - Growth, currently barely above population growth, is expected to gradually improve over the medium-term with continued macroeconomic stability and ongoing structural reforms.

### Macroeconomic outlook and risks
- Growth projections
  - Growth is expected to rebound to 4.0 percent in 2019 reflecting increased electricity generation and growing infrastructure investment.
  - Over the medium term, growth is projected to reach around 6.5 percent assuming improved irrigation infrastructure and cropping techniques, enhanced electricity generation, better road and telecommunications networks, increased donor assistance, and greater access to finance for the private sector.
- Inflation and current account
  - Inflation is projected to moderate to 8.9 percent in 2019 and to around 5 percent over the medium term.
  - The current account deficit is expected to gradually narrow towards 7.5 percent of GDP.
  - International reserves are projected to rise to around 4.5 months of prospective imports with strengthened competitiveness, export diversification, and fiscal restraint.
- Risks
  - Governance-related donor withholding after the 2013 cashgate scandal keeps donor funding low; the World Bank may delay disbursement of $80 million (1.1 percent of GDP) of budget support until FY 2019/20.
  - Electricity shortages, weak agricultural harvests, and shallow FX market pose downside risks to growth, inflation, and external stability.

*International Monetary Fund, November 5, 2018*

### 12.      Risks are tilted to the downside. In the election run-up, political pressures could weaken

### 12.      Risks are tilted to the downside. In the election run-up, political pressures could weaken

### Risks
- Political pressures in the election run-up could weaken policy and reform implementation.
- Intensified governance challenges could further postpone donor support.
- Combined risks (political pressures, adverse weather, infestations, worsened terms of trade) could:
  - weigh on growth,
  - raise inflation,
  - increase balance of payments pressures.
- Tighter global financial conditions and weak global growth could:
  - depress export growth,
  - reduce donor financing.
- Upside scenario: faster reform implementation and higher export prices could boost medium-term growth.

### External and exchange rate indicators (Text Figure 6)
- Figure title: Malawi: REER, NEER, and U.S. Dollar Exchange Rates
- Sources: Malawian authorities; IMF staff estimates.

### Performance under the program
- Most quantitative performance criteria (QPC) for end-June 2018 were met (Table 10).
- QPC outcomes:
  - Net international reserves overperformed by $119 million.
  - RBM holdings of government securities were reduced by MK 43 billion (program permitted an increase of MK 69 billion).
  - Stock of reserve money was within the programmed upper bound.
  - Continuous QPC on the non-accumulation of external payment arrears was observed.
  - QPC on the primary fiscal balance (after adjusting for deviations in budget support, dedicated grants, and debt service payments relative to program request) was missed by 0.9 percent of GDP due to expenditure overruns.
  - Continuous QPC on not contracting new non-concessional external debt was missed by about 2 percent of GDP.
- Indicative target (IT) of a zero ceiling on new domestic arrears was missed by about MK 1 billion due to arrears incurred by universities (gradually being settled out of each university’s own budget with no impact on central government budget or contingent liabilities).
- The IT on social spending overperformed.
- Structural benchmarks (SBs):
  - Program-supported reforms advanced although only two SBs were met on time.
  - RBM developed a monetary policy communication strategy ahead of end-June target date.
  - Monthly cash forecasts for FY 2018/19 were completed for end-June.
  - New RBM Act 2018 (in lieu of an amended act) was not submitted to Parliament by end-October but submission will be completed as a prior action.
  - SBs covering reforms to reconcile debt and improve commitment control were completed with delays.
  - Only two of five MDAs reports for March-June 2018 were published on MoF website; remaining three will be published as a prior action.
  - Bank account reconciliation (July 2017-May 2018) was completed by end-July 2018 target date except for salary accounts, which will be incorporated in phases by June 2019; from FY 2019/20 reconciliation of all accounts will be automated.
  - Forensic audit for FY 2013/14-14/15 is complete and submitted to the Anti-Corruption Bureau for criminal investigation; report will be available once investigations conclude, after which opening and closing balances of FY 2015/16 can be adjusted.

### Corrective measures and authorities' requests
- Corrective measures agreed for missed QPCs; authorities request waivers of nonobservance on this basis.
- Primary balance for FY 2018/19 tightened to correct FY 2017/18 slippage and partially adjust for postponement of budget support.
- Authorities identified non-priority spending cuts (limiting external travel and deferral of non-priority maintenance) equivalent to 0.2 percent of GDP (MEFP ¶21) to partially compensate for future shortfalls in grants and other revenues.
- Authorities committed to working with donors to improve accuracy of information on donor flows, especially timing of disbursements (MEFP ¶20), including:
  - enhanced use of the aid management platform,
  - joint portfolio reviews.
- Authorities working to raise project implementation capacity, including improvements in public investment management (MEFP ¶19).
- Measures to strengthen debt management capacity already taken and to continue.

### Policy discussions — Anchors and objectives
- Policies anchored on:
  - entrenching macroeconomic stability,
  - strengthening governance,
  - attaining higher, more inclusive and resilient growth.
- Fiscal path strengthened to preserve debt sustainability.
- Governance reforms stepped up to catalyze donor support and span:
  - commitment control,
  - bank reconciliation,
  - investment spending efficiency,
  - monitoring of state-owned enterprises,
  - debt management.
- Tight monetary policy to contain inflation.
- Greater exchange rate flexibility and advances in financial sector resilience and structural reforms to support broad-based private sector development.

### A. Sustaining Macroeconomic Stability — Fiscal Policy
- Authorities committed to tightening fiscal stance in FY 2018/19 (MEFP ¶17).
- Primary deficit excluding budget support and dedicated grants will be reined in by 1.1 percent of GDP in FY 2018/19 (relative to program request, Text Table 2).
  - Most adjustment corrects for previous year’s spending overruns; rest adjusts for postponement of World Bank budget support (assumed disbursed in FY 2019/20).
- End-December 2018 and end-June 2019 fiscal targets revised accordingly (Table 10).
- Key revenue measures:
  - Implement VAT reverse charge mechanism on imported services.
  - Use of VAT withholding.
  - Widen corporate income tax base by applying a debt-to-equity ratio (adding almost 0.3 percent of GDP relative to the outturn in FY 2017/18).
  - Ramp up tax administration via better use of risk analysis, cleansing the tax registry, better use of penalties (adding about 0.1 percent of GDP relative to the outturn in FY 2017/18).
  - Reinforce dividends (especially from SOEs and statutory bodies) and raise fees and charges to maintain real values and progress toward marginal cost pricing (adding about 0.2 percent of GDP relative to the outturn in FY 2017/18).
- Key spending-side measures:
  - Cuts to goods and services targeting non-priority spending (internal travel, motor vehicle purchases, office supplies).
  - Domestically-financed capital spending better aligned with implementation capacity; efforts to raise its efficiency.
  - Reduce subsidies to SOEs and statutory bodies in tandem with improvements in their revenue generating capacity.
  - Consideration of freeze on replacement hiring.
- Budget measures to benefit low income earners:
  - Increase in income tax threshold for lowest tax bracket.
  - Increased spending on goods and services to ensure safety during elections.
  - More student loans.
  - Additional 5 percent wage increase (relative to the program request which already incorporated a 15 percent increase) for government employees in bottom half of wage scale.
  - Hiring of new medical workers.
- Risk of food insecurity addressed through increased FISP spending (budgeted to rise in line with number of vulnerable households) and ADMARC’s strategic grain reserves (no impact on the budget).

### Text Table 2 — Central Government Operations (FY 2017/18-2019/20, Percent of GDP)
- Revenue
  - Tax and nontax revenue: Prog. 19.5; Est. 19.8; Change 0.3; Prog. 19.5; Proj. 20.2; Change 0.8; Prog. 19.5; Proj. 20.0; Change 0.6
  - Budget support and dedicated grants: Prog. 1.0; Est. 0.5; Change -0.5; Prog. 2.2; Proj. 1.1; Change -1.2; Prog. 1.1; Proj. 2.1; Change 1.1
  - Project grants: Prog. 1.8; Est. 0.9; Change -0.9; Prog. 0.9; Proj. 1.3; Change 0.4; Prog. 1.6; Proj. 1.4; Change -0.2
- Spending
  - Wages: Prog. 6.6; Est. 6.7; Change 0.1; Prog. 7.0; Proj. 7.4; Change 0.4; Prog. 7.0; Proj. 7.4; Change 0.4
  - Generic goods and services: Prog. 2.7; Est. 2.7; Change 0.0; Prog. 2.4; Proj. 2.3; Change -0.2; Prog. 2.4; Proj. 2.4; Change 0.1
  - Elections: Prog. 0.2; Est. 0.6; Change 0.4; Prog. 0.6; Proj. 1.0; Change 0.3; Prog. 0.1; Proj. 0.0; Change 0.0
  - Social spending & FISP: Prog. 2.4; Est. 2.6; Change 0.2; Prog. 2.3; Proj. 2.4; Change 0.2; Prog. 2.3; Proj. 2.5; Change 0.2
  - Transfers to public entities: Prog. 2.3; Est. 2.2; Change -0.1; Prog. 1.3; Proj. 1.2; Change -0.1; Prog. 1.3; Proj. 1.3; Change -0.1
  - Arrears: Prog. 1.3; Est. 1.6; Change 0.3; Prog. 0.1; Proj. 0.1; Change 0.0; Prog. 0.1; Proj. 0.1; Change 0.0
  - Interest: Prog. 4.0; Est. 4.0; Change 0.0; Prog. 3.5; Proj. 3.9; Change 0.5; Prog. 2.8; Proj. 3.8; Change 1.1
  - Other current spending: Prog. 3.5; Est. 3.9; Change 0.4; Prog. 3.0; Proj. 3.1; Change 0.1; Prog. 3.0; Proj. 3.1; Change 0.1
  - Development spending — Foreign financed: Prog. 4.8; Est. 3.1; Change -1.6; Prog. 4.1; Proj. 3.7; Change -0.4; Prog. 3.8; Proj. 3.7; Change -0.1
  - Development spending — Domestically financed: Prog. 1.9; Est. 1.7; Change -0.2; Prog. 1.7; Proj. 1.4; Change -0.3; Prog. 2.0; Proj. 2.0; Change 0.0
  - Discrepancy: 0.3; -0.4; -0.7; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Overall balance: Prog. -7.0; Est. -8.4; Change -1.3; Prog. -3.4; Proj. -3.9; Change -0.5; Prog. -2.6; Proj. -2.7; Change -0.2
  - Primary balance (excluding budget support and dedicated grants): Prog. -4.0; Est. -4.9; Change -0.8; Prog. -2.2; Proj. -1.1; Change 1.1; Prog. -0.9; Proj. -1.0; Change -0.2

### Medium-term fiscal framework and debt sustainability
- New Low-Income Country Debt Sustainability Framework (LIC DSF) indicates:
  - Malawi is at moderate risk of external debt distress and high overall risk of debt distress—driven by growing public domestic debt.
- Stress tests highlight vulnerabilities of total public debt to exogenous shocks, especially:
  - export revenues,
  - exchange rate,
  - weather-related shocks,
  - contingent liabilities.
- To ensure progress toward debt sustainability:
  - Future primary balances (excluding budget support and dedicated grants) will be tightened by an average of 0.2 percent of GDP relative to program request—reducing public debt from 55 percent of GDP to below 40 percent of GDP by 2028.
  - Authorities have suspended contracting of new non-concessional external debt.
  - Exceptions to the suspension preferred to be considered only in later reviews on a case-by-case basis for new loans backing priority growth-enhancing projects—accompanied by independent third-party feasibility studies and fiscal measures, consistent with maintaining a moderate risk of external debt distress and the programmed fiscal path.

### Revenue mobilization and public investment efficiency
- Authorities aim to balance medium-term fiscal adjustment across spending and revenues.
- Revenue efforts to be stepped up (MEFP ¶20) through:
  - tax policy measures: streamlining tax incentives, expanding the VAT base, improving SME taxation.
  - tax administration measures: rollout of the Integrated Tax Administration System, improving tax compliance.
  - If implemented, these measures should increase the tax-to-GDP ratio by about 1 percent of GDP by FY 2022/23.
- Public investment reforms to raise efficiency:
  - pilot ex-post review/performance audit of major capital projects with the National Audit Office (NAO),
  - assess usefulness of the Public-Sector Investment Program (PSIP) database, including an audit of its coverage and efficiency/timeliness.

### Fuel pricing mechanism and SOE oversight
- Automatic fuel pricing mechanism:
  - Eliminates government subsidies; import price changes outside a ±5 percent threshold trigger domestic price changes; changes within threshold absorbed by Price Stabilization Fund (PSF).
  - Since October 2016, PSF has been subsidizing fuel distributors for almost all price changes.
  - Petroleum and diesel prices were increased this year to safeguard the PSF.
  - Staff urged more regular implementation of automatic pricing mechanism and disclosure of PSF’s financial statement.
  - Changes to fuel import regime should be transparent and include stakeholder consultations.
- Enhanced SOE oversight critical to containing fiscal risks:
  - Following large bailout of ADMARC, other SOEs have requested similar support.
  - Authorities will issue regulations, policies, and guidelines for SOE monitoring (including financial positions) and develop a prototype SOE database.
  - A pilot audit of the largest SOEs will be submitted to Parliament and a published consolidated annual report on SOEs will be produced.

### Monetary, exchange rate, and financial sector policies
- Monetary policy:
  - Tight monetary policy stance required to preserve declining inflation trajectory (MEFP ¶9, 10).
  - Introduction of a band around the upper limit of reserve money supports RBM operations and better targeting of interbank rates.
  - Authorities expanding capacity in high frequency data, liquidity forecasting, and FPAS modeling to support eventual transition toward inflation targeting.
  - RBM published a communication strategy to enhance transparency.
- Exchange rate flexibility:
  - Greater exchange rate flexibility critical to cushioning shocks and enhancing competitiveness (MEFP ¶15).
  - RBM interventions intended for accumulating reserves and smoothing FX supply seasonality, not to stabilize exchange rate.
  - Staff recommended a well-sequenced action plan to deepen interbank market and moderate RBM’s role, including:
    - enhanced communication of RBM’s FX intervention objectives and strategies,
    - more timely publication of information on interbank transactions,
    - more prudent risk management and oversight,
    - development of a more transparent auction-based system of FX intervention.
  - Note: During first seven months of the year, RBM’s FX purchases (sales) were nearly 50 percent (40 percent) of total sales (purchases) of authorized dealer banks.
- Financial sector resilience and oversight:
  - Authorities monitor and enforce prudential norms.
  - RBM working with banks to reduce most banks’ NPLs to around 5 percent by end-2018 through recovery or write-offs.
  - Importance of improving banks’ risk management and analysis of collateral quality emphasized.
  - RBM will continue close monitoring of large borrowers and enforcement of single borrower exposure limit.
  - Regulations enhancing consolidated and Domestic Systemically Important Banks supervision to take effect as of end-March 2019.
  - Higher FX lending (from 8 percent in 2012 to 25 percent in August 2018) is being closely monitored; directive issued in April 2018 limiting FX lending to borrowers with FX generating activities and to banks’ FX deposit balance.
  - RBM to ensure banks meet net open position requirement.
  - RBM engaging with commercial banks to improve credit to SMEs and develop a roadmap for increasing access to finance.
  - By July 2019, authorities will re-submit to Parliament amendments to the Banking Act of 2010 and Financial Services Act of 2010.
  - Authorities plan to gazette and enact regulations related to the revised AML/CFT framework (enacted in 2017) and have committed to strengthening asset declaration system and use of AML/CFT tools to improve governance.

### B. Advancing Governance Reforms
- Improving governance, transparency, and reducing corruption critical to strengthening economic outcomes and bolstering donor confidence.
- Key ongoing actions:
  - Bolstering RBM independence by unwinding RBM’s significant holdings of government securities (MEFP ¶11):
    - RBM will submit new RBM Act 2018 to Parliament to enhance autonomy and eliminate avenues for monetization of deficits.
    - RBM reduced its holdings of government domestic debt by 13 percent between end-2017 and end-August 2018.
    - RBM is developing a multi-year unwinding strategy to be clearly communicated to smooth market reactions.
  - Deepening the domestic debt market to eliminate need for monetizing deficits and strengthen debt management framework (MEFP ¶32), including better coordination between RBM and debt/liquidity management.
  - Public Financial Management (PFM) reforms (MEFP ¶23-27) to raise fiscal discipline, transparency, and integrity, focusing on:
    - routinizing fiscal reporting and bank reconciliation,
    - reconciling debt data between MoF and RBM,
    - strengthening quality control of monthly fiscal reporting,
    - strengthening cash management and medium-term budgetary framework,
    - preventing further accumulation of arrears and closing out transactions pertaining to past arrears,
    - broadening coverage of current IFMIS and implementing plans for acquiring a new IFMIS.

*Source: IMF staff report (cr18336).*

### 26.       Malawi’s capacity to repay the Fund remains strong (Table 8). Financing assurances are

### Malawi’s capacity to repay the Fund remains strong (Table 8)

### Capacity to repay and financing assurances
- Malawi’s capacity to repay the Fund remains strong (Table 8).
- Financing assurances are in place for the remainder of the program.
- Malawi has a solid track record in meeting its obligations to the Fund.

### Modifications to the program and monitoring
- To reflect corrections for the fiscal slippage in FY 2017/18, the updated profile of budget support, and lower than expected growth for 2018, modification of the end-December 2018 PCs for the primary fiscal balance, net international reserves, and reserve money are proposed.
- IFMIS-related SBs will be realigned with the budget cycle: these SBs are proposed for the third review instead of the second.
- New SBs proposed:
  - developing a strategy for the unwinding of RBM holdings of government securities,
  - reforming oversight of SOEs,
  - improving public investment management.
- Timing of new SBs: proposed for the second, third and fourth reviews respectively.
- Program review cadence and instruments:
  - The program will continue to be reviewed semi-annually based on performance criteria, indicative targets (Table 10), structural benchmarks (Tables 11a, b, and c), and prior actions (Table 12).
  - All prior actions are expected to be met prior to the Board discussion.
- Targeted technical assistance remains critical to achieving program objectives.

### Safeguards assessment of the Reserve Bank of Malawi (RBM)
- An updated safeguards assessment of the RBM was completed in July 2018.
- Key findings:
  - RBM’s financial reporting and audit mechanisms continue to adhere to international practices.
  - Risks in foreign reserves management remain elevated due to lapses in oversight and departures from leading practices.
  - RBM’s governance arrangements and autonomy are undermined by weak legal provisions, and significant outstanding credit to the government.
- Key recommendation:
  - Strengthen the RBM’s legal framework — this is a structural benchmark for the first review.

### Staff appraisal — macroeconomic outlook and risks
- Overall assessment: Malawi’s macroeconomic outlook is positive but downside risks dominate.
- Growth expectations:
  - Growth is expected to rebound next year and strengthen over the medium term, assuming improved infrastructure, better cropping techniques, and increased donor assistance.
- Inflation:
  - Single-digit inflation is anticipated to continue in line with prudent policies and declines in food and international fuel prices.
- Current account:
  - The current account deficit is expected to narrow supported by strengthened competitiveness and fiscal restraint.
- Downside risks highlighted:
  - Political pressures ahead of elections could weaken reform implementation.
  - Governance challenges could further postpone donor support.
  - Adverse weather could harm agriculture.

### Fiscal position and debt sustainability
- The fiscal position needs to be strengthened to preserve debt sustainability.
- Program adjustments:
  - The program’s primary balance target for FY 2018/19 has been tightened to correct for the FY 2017/18 slippage and partially adjust for the postponement of World Bank budget support.
  - The following year’s target will be loosened with the arrival of the postponed budget support.
- Medium-term requirement:
  - Medium-term primary balances need to be tightened to rein in Malawi’s growing public debt.
- Debt distress assessment:
  - Under the new LIC-DSF, Malawi’s overall risk of debt distress is assessed as high, while the risk of external debt distress remains medium.

### Public investment management and SOE oversight
- Advancing reforms in public investment management and SOE oversight is critical to containing fiscal risks.
- Expected actions by authorities:
  - Audit the performance of major capital projects and improve oversight and monitoring.
  - Formalize a structure for monitoring contingent liabilities from SOEs.
  - Submit to Parliament audits of the largest SOEs and an annual report on all SOEs.
- Staff emphasis:
  - Regular implementation of the automatic fuel pricing mechanism to avoid government subsidies.

### Governance, transparency, and PFM reforms
- Improving governance and transparency and reducing vulnerabilities to corruption, especially in PFM, are paramount to improved economic outcomes and catalyzing donor support.
- Progress noted:
  - Advances in routinizing bank reconciliation.
- Critical remaining reforms:
  - Quickly incorporate the salary accounts into reconciliation processes.
  - Improve commitment control, cash management, and enlarge IFMIS coverage.
  - Strengthen the debt management framework for better fiscal reporting and integrity.
  - Develop and communicate a strategy for unwinding RBM holdings of government securities to bolster RBM independence.
  - Enhance use of AML/CFT tools and an asset disclosure system.

### Monetary policy and exchange rate policy
- Policy stance:
  - Tight monetary policy is appropriate given current inflationary pressures to preserve the declining inflation trajectory.
- Exchange rate policy recommendation:
  - Greater exchange rate flexibility is needed to cushion shocks and enhance competitiveness.
- Market and operational recommendations:
  - Deepen the interbank market.
  - Moderate the RBM’s role in the market.
  - Develop a more transparent auction-based FX intervention system.

### Banking system resilience
- Improvements undertaken:
  - Adoption of IFRS9 requirements.
  - RBM’s vigilance and regular stress testing of banks’ balance sheets.
- Effects observed:
  - Significant reduction in NPLs and increased provisioning.
- Remaining priorities:
  - Maintain momentum and ensure further increases in provisioning from the still low levels.
  - Improve banks’ risk management, analysis of collateral quality, and business models.
  - Closely monitor large borrowers and foreign currency lending developments.
  - Accelerate efforts to align the AML/CFT framework with international standards.

*International Monetary Fund staff appraisal as presented in the source text.*

### 35.      Staff supports the completion of the first review under the ECF and the request for

### 35. Staff supports the completion of the first review under the ECF and the request for

### Staff recommendation on program review and waivers
- Staff supports completion of the first review under the ECF and the request for waivers of non-observance for:
  - the end-June 2018 QPC on the primary balance, and
  - the continuous QPC on not contracting new non-concessional external debt.
- Rationale for support:
  - authorities’ commitment to corrective fiscal and debt management measures;
  - strong policy implementation during the second half of 2018;
  - completion of prior actions for this review;
  - strength of the reform agenda articulated by the authorities in their MEFP.

### Exchange rate super-stability (Box 1)
- Key observation:
  - Since August 2016, the Kwacha/USD exchange rate fluctuated within a narrow band of +/- 1 percent with market pressures fully borne by reserve changes.
- Causes of super-stability:
  - limited price discovery in the segmented and underdeveloped interbank FX market;
  - most transactions occur in the retail market and directly with the RBM, neither of which contribute to price formation in the interbank market;
  - concentration of FX liquidity among a handful of corporate clients trading directly with commercial banks;
  - RBM intervention: accumulating reserves when FX inflows peak and supplying FX to commercial banks during the lean season to limit market speculation.
- Market structure issues to address:
  - frequent RBM interventions on both sides obscure objectives and strategy, confusing market participants and demotivating interbank trade;
  - interbank market relies on previous day’s traded prices and phone calls, with limited visibility of same-day transaction prices or volumes;
  - severe segmentation between large and small banks, foreign and local banks, with FX liquidity trapped in different pockets—reducing trust among commercial banks to trade with each other.
- Policy implication:
  - Promote a more active interbank FX market and gradually moderate the RBM’s role by addressing the challenges above.
- Source cited in box:
  - Aide-Memoire, Malawi monetary and foreign exchange operations and repo market development, East AFRITAC, July 2017.

### Recent economic developments (highlights from Figures and text)
- Headline inflation:
  - picked up slightly in 2018H1 and remains high compared to neighboring countries.
- Fiscal stance:
  - became expansionary in second half of 2017/18.
- Current account:
  - deficit improved somewhat due to lower project-related imports.
- Growth:
  - Real GDP growth is expected to moderate to 3.2 percent in 2018 after a rebound in 2017.
- Donor assistance:
  - affected by the cashgate scandal since 2013/14, particularly low for 2017/18.
- REER/NEER:
  - REER broadly stable since 2016 reflecting stability of the NEER.
- Exchange rate behavior (chart labels):
  - Daily Exchange rate (Malawi Kwacha per USD) shown with +1 % from mean and -1 % from mean.
  - Exchange Market Pressure Index (EMPI) and contributions from change in reserves and change in US$ per MK.

### Recent monetary developments (highlights)
- Interest rates and credit:
  - Average real prime lending rate has remained elevated.
  - Credit growth weak in real terms since mid-2012.
- Money and liquidity:
  - Broad money growth trend reversed in mid-2015, mostly due to valuation effect of a depreciating Kwacha.
  - Active liquidity management reduced excess liquidity in the banking system since mid-2016.
- Selected chart observations (labels):
  - Credit to the Private sector (12-month rate of change), Money Growth (12-month), Real Interest Rates (Lending Rate, 91 Day T-Bill Rate, Interbank Rate), Commercial Bank Excess Liquidity (Billions of Kwacha).

### Fiscal developments and outlook (highlights from Figure 3 and Table 2 series)
- Revenue and grants:
  - In 2018, domestic revenue remained high while grants received were lower than previous years.
- Financing composition:
  - Increased fiscal financing needs met by foreign and private domestic financing.
  - Increased domestic public debt.
- Spending:
  - Total spending in 2017/18 was higher than previous years, despite lower development spending.
- Selected numeric indicators from Table 1 (preserve exact values as presented):
  - Real GDP growth (percent change series): 2.3 4.0 3.5 3.2 4.5 4.0 5.0 5.5 6.0 6.5
  - Nominal GDP (billions of Kwacha) (series): 3,910 4,503 5,068 5,007 5,654 5,625 6,341 7,112 7,947 8,852
  - Consumer prices (end of period) series: 20.0 7.1 9.0 9.5 7.5 8.9 7.6 6.5 6.1 5.0
  - Current account (percent of GDP) series: -13.0 -11.1 -8.9 -9.3 -8.1 -7.6 -7.9 -7.7 -7.7 -7.6
  - Gross official reserves (US$ millions series): 605 758 703 695 755 791 936 1,099 1,260 1,453
  - Months of imports (series): 2.8 3.4 3.0 2.9 3.1 3.2 3.6 3.9 4.2 4.5
  - Total public debt (percent of GDP series): 55.6 57.7 54.3 57.3 54.4 56.1 55.4 54.0 52.0 49.8
  - Primary balance (percent of GDP, fiscal-year basis, memorandum): -2.8 -0.6 -3.0 -4.3 0.1 0.0 1.1 0.4 0.4 0.4
  - Primary balance (excluding budget support and dedicated grants): -4.3 -2.4 -4.0 -4.9 -2.2 -1.1 -1.0 -0.6 -0.6 -0.6
- Central government operations (Table 2a highlights, Billions of Kwacha):
  - Revenue (series start): 98 91,140 1,065 1,007 1,264 1,206 1,194 1,318 1,402 1,542 1,758 1,994 (table formatting preserved as supplied).
  - Expenditure and net lending (series start): 1,201 1,336 1,414 1,384 1,488 1,387 1,402 1,472 1,566 1,756 1,986 2,239.
  - Overall balance (including grants) (Billions): -212 -196 -349 -376 -225 -181 -208 -153 -164 -214 -227 -244.
  - Issuance of promissory notes for securitizing domestic arrears (memorandum): 590 587 300 0 0 0 0 0 0 0 0 0.
  - Nominal GDP (fiscal year) (Billions): 4,183 4,735 4,764 4,735 5,292 5,339 5,292 5,953 5,956 6,697 7,497 8,365.
- Quarterly central government operations (Table 2c highlights, Billions of Kwacha):
  - Annual revenue FY17/18: 1,007.3; projected annual revenue FY18/19: 1,193.8.
  - Annual expenditure FY17/18: 1,383.7; projected annual expenditure FY18/19: 1,402.2.
  - Overall balance (including grants) FY17/18 (annual): -376.4; FY18/19 projected annual: -208.3.

### Financial stability indicators (Figure 4 and Table 5 reference)
- Bank sector key indicators (chart labels and table headings):
  - Capital: Tier 1 capital to risk weighted assets; Total capital to total assets.
  - Profitability: Return on equity; Return on assets.
  - Asset quality: NPLs to total loans and advances.
  - Liquidity: Liquid assets to deposits and short-term liabilities; Liquid assets to total assets.
- Table 5 (title only shown in source): Selected Banking Soundness Indicators, 2012–18. (Detailed cell values not included in supplied excerpt beyond the table heading.)

### Balance of payments and external sector (Table 4 highlights)
- Current account balance (US$ millions series): -709.8 -686.7 -602.9 -637.0 -572.1 -553.3 -604.7 -627.3 -671.0 -708.9.
- Merchandise trade balance (US$ millions series): -595.8 -650.0 -623.2 -590.9 -544.9 -605.3 -608.5 -637.3 -685.9 -730.1.
- Exports (US$ millions series): 1,480.3 1,542.0 1,714.9 1,701.9 1,805.8 1,813.8 1,927.3 2,052.7 2,188.6 2,345.4.
- Imports (US$ millions series): -2,076.2 -2,192.0 -2,338.0 -2,292.8 -2,350.7 -2,419.1 -2,535.8 -2,690.1 -2,874.5 -3,075.5.
- Tobacco exports (US$ millions series, “Of which: Tobacco”): 578.5 583.9 634.3 586.3 664.5 621.3 655.3 691.1 728.9 772.7.
- Gross official reserves (US$ millions series, memorandum): 605.0 757.9 702.7 695.3 754.8 790.7 935.8 1,099.2 1,259.6 1,453.2.
- Months of imports (memorandum): 2.8 3.4 3.0 2.9 3.1 3.2 3.6 3.9 4.2 4.5.
- Financial account (US$ millions series): 111.2 385.4 201.1 284.5 270.7 288.6 338.4 365.7 403.6 429.6.
- Overall balance (US$ millions series): -106.3 129.9 -53.2 -69.7 38.0 82.2 134.2 174.8 198.1 226.2.

Source: IMF staff and Malawian authorities as presented in the supplied chapter content.

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

### cr18336 - 1. Regulatory Tier 1 capital to risk weighted assets16.416.213.512.413.8

### Banking sector regulatory and capital ratios
- Regulatory Tier 1 capital to risk weighted assets: 16.4 16.2 13.5 12.4 13.8 15.3 15.8
- Regulatory total capital to risk weighted assets: 20.2 19.1 17.1 15.8 17.0 19.4 19.3
- Total capital to total assets: 14.3 15.4 17.6 17.1 16.7 15.9 16.8

### Asset composition and quality
- Non-performing loans to gross loans and advances: 9.4 15.4 14.9 10.6 17.0 15.7 9.3
- Provisions to non-performing loans: 26.8 29.1 31.8 25.7 25.5 34.5 50.8
- Total loans and advances to total assets: 50.8 40.5 40.3 40.0 34.8 28.1 32.3
- Foreign currency loans to total loans and advances: 7.9 13.5 19.1 28.6 21.8 27.9 25.4

### Earnings and profitability
- Return on assets (ROA): 5.0 4.8 4.0 3.1 2.7 2.3 2.2
- Return on equity (ROE): 36.9 37.5 26.8 19.2 18.4 15.7 16.2
- Non-interest expenses to gross income: 36.8 39.7 45.4 51.4 50.0 49.7 51.7
- Interest margin to gross income: 36.8 39.7 --- 50.2 47.8 50.8 48
- Non-Interest Income to Revenue: --- 31.8 37.8 30.5 28.0 27.3 31.2
- Net Interest Income to Assets: --- 9.1 8.4 9.7 9.7 8.7 5.8
- Personnel expenses to non-interest expenses: 46.0 45.4 45.1 45.3 43.8 46.5 44.3

### Liquidity indicators
- Liquid assets to deposits and short-term liabilities: 45.4 59.1 62.4 59.0 72.3 77.0 59.5
- Total loans to total deposits: 72.4 56.6 58.3 58.5 54.2 45.1 68.9
- Liquid Assets to total assets: 34.5 43.7 48.8 43.3 50.4 55.0 43.3
- Foreign exchange liabilities to total liabilities: 17.9 26.3 --- 26.1 19.7 19.8 16.3

*Source: Reserve Bank of Malawi.*

### External financing requirements and sources, 2016–23 (Millions of USD)
- Years: 2016 2017 2018 2019 2020 2021 2022 2023
- Total requirement: -780 -887 -648 -774 -805 -852 -897 -973
- Current account, excluding official transfers: -709 -702 -636 -628 -604 -626 -670 -708
- Debt amortization: -137 -32 -74 -51 -56 -62 -67 -71
- Gross reserves accumulation (- increase): 65 -153 63 -95 -145 -163 -160 -194
- Total sources: 780 887 648 774 805 852 897 973
- Expected disbursements (official): 627 573 400 571 588 636 687 745
- Grants: 496 333 282 422 400 435 465 505
- Medium- and long-term loans: 130 240 118 150 189 200 222 240
- Private sector (net): 105 305 246 188 204 227 247 260
- IMF (net): 525 315 12 -10 -37 -32
- IMF Drawings: 762 732 313 216 00
- IMF Repayments: 25 22 29 17 20 26 37 32
- Financing gap: 0 0 0 0 0 0 0 0
- Gross official reserves (end): 605 758 695 791 936 1,099 1,260 1,453
- Months of imports: 2.8 3.4 2.9 3.2 3.6 3.9 4.2 4.5

*Source: IMF staff estimates.*

### Schedule of Disbursements under ECF Arrangement, 2018–21 (Millions of SDR)
- Amount per tranche: 11.15 SDR each
- % of Quota per tranche: 8.033 (first six tranches), final tranche 11.175 (8.051)
- Availability dates and conditions:
  - April 30, 2018 — Executive Board Approval of Three Year ECF arrangement. Status: Disbursed
  - October 15, 2018 — Observance of performance criteria for June 30, 2018, and completion of first review.
  - April 15, 2019 — Observance of performance criteria for December 31, 2018, and completion of second review.
  - October 15, 2019 — Observance of performance criteria for June 30, 2019, and completion of third review.
  - April 15, 2020 — Observance of performance criteria for December 31, 2019, and completion of fourth review.
  - October 15, 2020 — Observance of performance criteria for June 30, 2020, and completion of fifth review.
  - April 15, 2021 — Observance of performance criteria for December 31, 2020, and completion of the sixth review. Status: Availability date listed.
- Total for the ECF: 78.075 SDR (56.25 percent of quota)
- Memorandum item: Malawi's Quota (millions SDR): 138.80

*Source: IMF staff estimates.*

### Indicators of Capacity to Repay the Fund, 2018–31 (selected series)
- Projected payments based on existing drawings (Principal, SDR millions): 11.43 11.89 13.80 18.44 25.81 22.37 20.88 18.28 11.55 4.18 1.12 0.00 0.00 0.00
- Charges and interest (SDR millions): 0.16 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64
- Projected payments based on prospective drawings (Principal, SDR millions): 0.00 0.00 0.00 0.00 0.00 0.00 3.35 7.81 12.27 13.39 13.39 10.04 5.58 1.12
- Projected Payments (Existing + Prospective, SDR millions): 11.59 12.53 14.45 19.08 26.45 23.01 24.88 26.73 24.46 18.21 15.16 10.68 6.22 1.76
- US$ Millions (Projected Payments Existing+Prospective): 16.62 18.02 20.80 27.46 38.07 34.34 37.13 39.90 36.51 27.18 22.63 15.94 9.28 2.63
- Percent of exports of goods and services (Projected Payments): 0.90 0.91 0.99 1.22 1.59 1.34 1.35 1.35 1.15 0.80 0.62 0.41 0.22 0.06
- Percent of debt service (Projected Payments): 12.44 20.36 21.38 24.46 29.47 26.25 26.34 26.75 23.96 17.66 14.15 10.03 5.81 1.65
- Percent of quota (Projected Payments): 8.35 9.03 10.41 13.75 19.06 16.58 17.93 19.26 17.62 13.12 10.92 7.69 4.48 1.27
- Percent of gross official reserves (Projected Payments): 2.39 2.28 2.22 2.50 3.02 2.36 2.33 2.28 1.91 1.30 0.98 0.62 0.33 0.08

- Projected level of credit outstanding (SDR millions, Existing+Prospective): 159.51 169.91 178.41 171.11 145.31 122.99 98.77 72.64 48.83 31.21 16.76 6.71 1.10 0.0
- US$ Millions (Projected credit outstanding): 229.02 244.52 256.72 246.32 209.11 176.81 142.01 104.57 70.24 44.92 24.19 9.61 1.60 0.0
- Percent of exports of goods and services (Projected credit outstanding): 12.41 12.31 12.21 11.08 8.76 6.95 5.23 3.52 2.21 1.30 0.70 0.20 0.00 0.0
- Percent of quota (Projected 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 (Projected credit outstanding): 32.9 30.9 27.4 22.4 16.6 12.2 8.9 6.0 3.7 2.1 1.0 0.4 0.1 0.0

Memorandum items:
- Exports of goods and services (millions of U.S. dollars): 1,844 1,982 2,111 2,247 2,394 2,565 2,748 2,948 3,162 3,388 3,630 3,873 4,144 4,435
- Debt service (millions of U.S. dollars): 133.6 88.5 97.3 112.3 129.2 130.8 141.0 149.1 152.4 153.9 159.9 159.0 159.7 159.3
- Quota (SDR millions): 138.8 (each year 2018–2031)
- Gross official reserves (millions of U.S. dollars): 695 791 936 1,099 1,260 1,453 1,593 1,747 1,915 2,098 2,310 2,554 2,844 3,163
- GDP (millions of U.S. dollars): 6,820 7,257 7,672 8,141 8,696 9,307 9,954 10,641 11,384 12,192 13,054 13,974 14,954 15,980

*Source: IMF staff projections.*

### Projected External Borrowing (January 1, 2018–December 31, 2018)
- PPG external debt contracted or guaranteed (US$ million): 439
- Volume of new debt (US$ million): 227
- PV of new debt (US$ million): (presented as 227 under concessional debt)
- Sources of debt financing:
  - Concessional debt: 439 (multilateral debt: 439; bilateral debt: 0)
  - Non-concessional debt: 0 (semi-concessional: 0; commercial terms: 0)
- Use of debt financing: Infrastructure 439 (227 PV)
- Memo Items — Indicative projections: Year 2: 10 882 -101; Year 3: 16 161 -74

*Source: IMF staff projections.*

### Quantitative Targets, 2018–19 (selected highlights)
- Reserve money (ceiling on stock) (upper bound) (millions of kwacha): various program and estimate values including PC303,482 300,792 Met299,091 323,385 326,115 300,406 308,798 340,106 346,236 340,175
- Reserve money (ceiling on stock): 294,643 290,380 313,966 316,617 291,656 299,804 330,200 336,151 330,267
- Primary balance (floor) (millions of kwacha): PC -144,929 -163,338 -205,170 Not Met 44,906 29,813 -4,456 16,219 -2,684 3,625 89 -1,236
- RBM financing of central government (ceiling): PC 69 -43 Met 0 0 0
- New domestic arrears (ceiling): IT 0 1,000 Not met 0
- Social spending (floor) (millions of kwacha): IT 186,132 279,952 Met 87,972 175,944 182,207 263,917 273,310 351,889 364,413 103,104
- Net international reserves of the RBM (floor) (US$ millions): PC 434.1 408.7 527.7 Met 454.7 480.2 428.6 488.2 436.6 484.5 460.4 473.1
- New non-concessional external debt contracted (ceiling): PC 0 127 Not Met 12
- Program exchange rate (kwacha per US$): 725 725 725 725 732 725 732 725 732 725 732

Note: Detailed target definitions, adjustors, and memorandum items are defined in the TMU.

### Structural benchmarks (May 2018–February 2020)
Public financial management (continuous/monthly/quarterly benchmarks):
- Submission of five reports by the MDAs by mid-following month and publication on the MoF website. Status (May–Oct 2018): Not Met / Partially Implemented.
- Set-up and maintain a transparent commitment control system for all MDAs; compile consolidated commitments centrally by the MOF monthly and publish. Status: Not Met / Implemented with Delay.
- Prepare quarterly consolidated financial statements (including all MDAs) with fully reconciled bank accounts and publish within six months (first year) and within 90 days thereafter. Target start: Quarterly from March 31, 2019. Status: NA.
- Reconcile all bank accounts MG1 and seven operating accounts and ways and means transactions within 90 days monthly. Status: Not Met / Partially Implemented.
- Reconcile all debt data between the MOF and RBM (monthly). Status: Not Met / Implemented with Delay.
- Prepare monthly cash forecasts of the next 12 months from all MDAs. Target: End-June 2018. Status: Met.
- Adjust bank reconciliation of FY2013-14 – 2014-15 based on forensic audit of MK236 billion. Target: End-June 2018. Status: Not Met.

Financial sector benchmarks:
- Develop a monetary policy communication strategy. Target: End-June 2018. Status: Met.
- Submit to Parliament amendments to the RBM Act per the IMF Safeguards Monitoring Report (dated 6 June 2016). Target: End-October 2018. Status: Not Met; Subsequently Modified to Prior Action.

Further structural benchmarks (November–December 2018) include continued PFM and reconciliation tasks, CMU variance analysis by End-December 2018, and draft regulations for PMPBs by End-December 2018.

Structural benchmarks for 2019 include:
- Pilot ex-post reviews/performance audits of major capital projects. Target: End-June 2019.
- Submit report on pilot audit of main public corporations. Target: End-June 2019.
- Move from monthly to quarterly budget release. Target: End-June 2019.
- Bring all TSA sub-accounts into IFMIS. Target: End-June 2019.
- Use IFMIS to record commitments/expenditures and disclose accumulated commitments and outstanding bills monthly. Target: End-August 2019.
- Audit PSIP database. Target: End-December 2019.
- Streamline DAD operations for domestic debt management. Target: End-December 2019.
- Submit consolidated annual report on SOEs to Parliament and publish on MoFEPD website. Target: End-February 2020.
- Develop strategy to pace unwinding of RBM holdings of government securities. Target: End-September 2019.
- Develop roadmap for increasing access to finance. Target: End-December 2019.

*Sources: IMF staff and Malawian authorities.*

### Prior actions
- Submission to the MoF of the three remaining reports for April-September 2018 by MDAs and publication on the MoF website. Macro rationale: Improve fiscal transparency.
- Remobilize the IFMIS steering committee by holding a meeting. Macro rationale: Improve fiscal transparency.
- Publication of the RBM's communication strategy. Macro rationale: Enhance RBM credibility and prepare for the eventual implementation of inflation targeting.
- Submit to Parliament amendments to the RBM Act in line with the IMF Safeguards Monitoring Report (dated 6 June 2016). Macro rationale: Preserve financial and debt sustainability.

*Sources: IMF staff and Malawian authorities.*

*Italic: Source: IMF staff estimates; Reserve Bank of Malawi; IMF staff projections as presented in the original document.*

### Annex I.  Malawi: Risk Assessment Matrix

### Annex I. Malawi: Risk Assessment Matrix

### Global risks
- Tight global financial conditions  
  - Relative Likelihood in next 1–3 years: High  
  - Impact if Realized: Medium  
  - Impact summary: Increased financial volatility makes foreign investors more risk averse, reduces financial flows, raises debt service costs and refinancing risks, contributes to currency depreciation, elevates inflationary pressures and undermines growth prospects.  
  - Policy advice: Keep fiscal discipline and make monetary policy consistent with growth and inflation objectives, maintain adequate foreign reserves, and smooth short-term exchange rate volatility.

- Weakening demand in key partner economies  
  - Relative Likelihood in next 1–3 years: Medium  
  - Impact if Realized: Medium  
  - Impact summary: Weak external demand dampens exports and donor financing, depressing real GDP growth.  
  - Policy advice: Adopt policies to increase fiscal space to respond to contingencies, tighten monetary policy and increase exchange rate flexibility to absorb shocks, strengthen FX reserve buffer to facilitate adjustment, and continue efforts to diversify the export base.

- Energy prices volatility  
  - Relative Likelihood in next 1–3 years: Medium  
  - Impact if Realized: Medium  
  - Impact summary: Energy price fluctuations and higher fuel demand and import prices can add to balance of payments pressures and increased domestic production costs.  
  - Policy advice: Tighten monetary policy, increase exchange rate flexibility, strong FX reserve buffer, use the automatic fuel price adjustment mechanism and adjust electricity prices to smooth price movement, ensure adequate energy supplies and contain additional fiscal cost/ contingent liabilities.

### Regional and domestic risks
- Expansionary fiscal policies  
  - Relative Likelihood in next 1–3 years: High  
  - Impact if Realized: High  
  - Impact summary: Domestic borrowing for unduly high fiscal deficits leads to inflationary pressures, crowding out the private sector; there is a risk of reemergence of payment arrears.  
  - Policy advice: Pursue restrictive fiscal policies, adopt corrective measures to limit spending, exert effective commitment control systems, increase revenue mobilization, and improve debt management.

- Delayed PFM reforms and lacking expenditure control  
  - Relative Likelihood in next 1–3 years: High  
  - Impact if Realized: High  
  - Impact summary: Uneven progress of PFM reform and deficient expenditure control undermine confidence in budgetary processes and efforts to effectively and transparently manage expenditure.  
  - Policy advice: Accelerate implementation of PFM reform programs, strengthen corruption control, and communicate regularly and transparently.

- Excessive external borrowing  
  - Relative Likelihood in next 1–3 years: Medium  
  - Impact if Realized: High  
  - Impact summary: Implementing an over-ambitious capital investment program, especially, if financed with non-concessional external loans, debilitates the precarious medium to long-term debt sustainability position.  
  - Policy advice: Elaborate a prudent and well appraised public investment program, secure concessional financing, and assess the impact of borrowing on debt sustainability.

- Deficient conduct of monetary policy  
  - Relative Likelihood in next 1–3 years: Medium  
  - Impact if Realized: High  
  - Impact summary: Conflicting signals on policy intentions confuse market participants’ confidence.  
  - Policy advice: Improve the communication of monetary policy and adopt a clear and effective monetary operational framework.

- Deteriorating financial stability  
  - Relative Likelihood in next 1–3 years: Medium  
  - Impact if Realized: Medium  
  - Impact summary: Increasing non-performing loans and deteriorating financial positions threaten financial sector stability.  
  - Policy advice: Strengthen banking supervision and inspection to contain emerging risks by developing early warning systems and countervailing measures, eliminate domestic arrears accumulation.

- Spending pressures ahead of elections  
  - Relative Likelihood in next 1–3 years: High  
  - Impact if Realized: High  
  - Impact summary: Weak policy discipline and reform efforts could lead to macro-economic policy slippages.  
  - Policy advice: Maintain strong political commitment to program implementation and strengthen vigilance and control in expenditure monitoring.

*Notes: The Relative Likelihood is IMF staff’s subjective assessment. The policy responses assume all other circumstances remain unchanged; combinations of shocks require modified responses.*

### Annex II — Joint Bank-Fund Debt Sustainability Analysis (key findings)
- Overall assessments  
  - External debt: assessed to be at a moderate risk of debt distress, with some space to absorb shocks.  
  - Overall public debt distress: Malawi is assessed to be at high overall risk of debt distress, mainly reflecting increasing amounts of domestic debt at high interest rates.

- Debt projections and concerns  
  - The present value of total public debt is projected to decline throughout the program period but would breach the benchmark through 2025.  
  - Projected borrowing path and debt policies remain broadly unchanged since the last DSA. Fiscal discipline should be strengthened to avoid accumulation of domestic debt at high interest rates. Close attention needed to financing terms of proposed infrastructure investments given limited headroom for further borrowing.

- Recommendations to enhance resilience  
  - Strengthen fiscal discipline.  
  - Secure concessional financing and prudently appraise public investment programs.  
  - Diversify the economy, particularly exports.  
  - Broaden the revenue base.  
  - Strengthen public financial management.

### Public debt coverage and composition (selected statistics)
- Coverage: DSA uses public and publicly guaranteed (PPG) external and public domestic debt, covering central government and the Reserve Bank of Malawi (RBM). Data limitations exclude some state and local government debt, other general government elements, and non-guaranteed SOE debt; stress tests include adjustments for uncovered public sector portions.

- Public external debt (end-2017): about US$2.04 billion (33.2 percent of GDP), up from $1.72 billion in 2016 (32 percent of GDP). Increase in 2017 reflects $382 million of new disbursements and principal payments of about US$150 million, plus $20 million in guarantees to SOEs.

- Creditor composition (2017): multilateral creditors 78 percent of total external PPG debt; main provider IDA, followed by ADF and the IMF; China and India are main bilateral creditors. Public external debt at end-2017 was concessional with average grant element above 35 percent.

- New concessional external loans signed this year: $439 million (all from multilateral creditors) financing water and sanitation, irrigation, agricultural commercialization, financial advancement for rural markets, and digitalization.

- Public domestic debt: 24.5 percent of GDP at end-2017; expected to rise to 26.1 percent in 2018—3.9 percentage points higher than envisaged in the previous DSA. Primary deficit in FY 2017/18 was 4.3 percent compared to previously programmed level of 3.4 percent (net of a shortfall in grants).

- Guarantees to SOEs included in DSA: MK 17 billion (0.4 percent of GDP).

- As of August 2018: nonresidents hold about MK 117 billion treasury bills and notes denominated in kwacha (10 percent of total or about 2 percent of GDP); classified as domestic for DSA purposes.

- Composition of gross domestic debt (Total as percent of GDP): 2012: 13.8; 2013: 19.8; 2014: 19.0; 2015: 21.0; 2016: 23.5; 2017: 24.5. (Breakdowns include Treasury bills, Treasury notes, Ways and means advances, promissory notes, commercial bank advances, guarantees to SOEs—values preserved in source tables.)

### Macro framework and baseline assumptions (selected projections and assumptions)
- Real GDP growth: projected 3.2 percent this year, rebound to 4 percent next year, and gradually stabilize at 6.5 percent over the long term.

- Inflation: projected to rise to 9.5 percent by end-2018 before resuming a gradual disinflation path to reach 5 percent by 2023.

- Private sector credit growth: expected 8 percent this year, 10 percent next year, averaging about 14 percent during 2020–2023.

- Tax revenue to GDP ratio: anticipated to edge up by 0.4 percentage points during FY 2017/18–2018/19 and gradually rise in the medium to long term.

- External financing and project disbursements: project capital spending covered by external loans projected to reach 3.7 percent of GDP in FY 2018/19 and FY 2019/20.

- Gross official reserves: $733 million as of end-September; expected to moderate to about $700 million this year, covering 2.9 months of next year’s imports; projected to rise to cover 4.5 months of imports by 2023.

- Net domestic financing: assumed to moderate to 4.7 percent in FY 2018/19 (after spike to 6.3 percent in FY 2017/18); beyond FY 2018/19 expected to be contained within 2 percent of GDP.

- Capital account flows: project grants, dedicated grants, and off-budget support totaled around 6 percent of GDP over the past 5 years; expected to average 5-6 percent of GDP over the medium term.

*Source: cr18336 - Annex I. Malawi: Risk Assessment Matrix (IMF).*

### 10. Over the longer term, external financing in the form of project support loans is

### 10. Over the longer term, external financing in the form of project support loans is

### External financing outlook
- External financing in the form of project support loans is expected to gradually moderate while foreign direct investment will play an increasingly important role.
- The grant element of project loans will remain relatively high over the forecast period, with no access to market financing.
- Project and dedicated grants are expected to decline to less than one percent over the long term.
- No resumption of budget support operations is assumed beyond the World Bank disbursement in FY 2019/20.

### Realism tools, fiscal adjustment, and growth prospects
- The realism tools suggest that the baseline macroeconomic assumptions are reasonable.
- Fiscal adjustment and growth:
  - Total fiscal adjustments (reduction in primary deficit) are projected at 4 percent of GDP between 2017 and 2020.
  - The last observed growth rate is 4 percent in 2017; a standard fiscal multiplier used for comparison is 0.4.
  - Baseline medium-term growth forecasts build in structural improvements (agriculture, electricity, transportation, access to finance, business environment, governance) expected to lift growth potential well above historical average.
  - Risks are tilted to the downside: external risks include adverse weather, infestations, worsened terms of trade; internal risks include intensified governance challenges and weaker-than-expected reform implementation.
- Investment outlook:
  - Public and private investment rates are expected to remain broadly unchanged starting in 2019.
  - The shortfall of project grants and loans in the current year led to a drop in foreign-financed development spending, weighing on public investment.
  - The projected 5-year average contribution of government capital to real GDP growth is expected to remain unchanged from the last DSA.

### Debt carrying capacity and scenario design
- Debt carrying capacity classification:
  - Composite Indicator (CI) score: 2.65.
  - Threshold for “weak” classification: 2.69; Malawi’s CI of 2.65 places it in the “weak” category.
- Tailored stress tests:
  - Combined contingent liabilities one-time debt shock: equivalent to 9 percent of GDP in 2019, capturing:
    - Limited public debt coverage assumption: 2 percent of GDP (instead of default zero).
    - Contingent liabilities from SOEs: equal to default level of 2 percent of GDP.
    - Bank recapitalization need: equal to default level of 5 percent of GDP (average cost to the government of a financial crisis in a low-income country since 1980).
  - Natural disaster one-off shock: 10 percent of GDP to external PPG debt-to-GDP ratio in 2019 (applied by judgment due to Malawi’s historical vulnerability to weather-related shocks).

### External DSA baseline and alternative scenarios
- Baseline scenario:
  - PPG external debt projected to peak at 34.8 percent of GDP in 2020.
  - PV of debt-to-GDP ratio in 2020: 20.4 percent.
  - PV of PPG external debt expected to decline gradually to around 15 percent over the long term.
  - Debt service-to-exports ratio expected to average around 5 percent in the next six years and gradually decline to about 4 percent over the longer term.
- Historical scenario:
  - External debt projected to increase and breach the PV of debt-to-GDP threshold over the long term.
  - Assumptions held at historical levels: current account deficit elevated at 10 percent of GDP; FDI subdued at 1.5 percent of GDP.
- Stress-test extreme shocks:
  - One-time nominal exchange rate depreciation of 30 percent in 2019 is the most extreme shock for PV of debt-to-GDP and debt service-to-revenue, raising PV of debt to 25.5 percent of GDP in the same year.
  - An export shock (nominal export growth set to historical average minus one standard deviation) in 2019 and 2020, equivalent to a decline of 4 percent each year, is the most extreme shock for PV debt and debt service-to-exports ratio.

### Overall public debt dynamics and risks
- Public debt levels and composition:
  - Total public debt projected to edge down to 57.3 percent this year, from 57.7 percent in 2017.
  - Public domestic debt expected to peak at 26.1 percent this year (up from 24.5 percent in 2017), then decline to just below 20 percent by 2023.
  - With RBM no longer financing the central government deficit (limited to liquidity management), net domestic financing will be met by commercial banks and non-banks.
  - Expected average nominal interest rates on domestic debt: gradually moderate from around 18 percent now to below 15 percent through the medium term.
- PV of total debt:
  - Under the baseline, PV of total debt-to-GDP ratio projected to remain continuously above the benchmark throughout 2025.
  - Under all standard and tailored stress tests, PV of total debt-to-GDP ratio remains above the benchmark through 2023, sometimes well above it.
  - Natural disaster shock elevates PV of total debt-to-GDP ratio to 55 percent and keeps it above 35 percent even in 2028.
  - Natural disaster shock is the most extreme for the debt service-to-revenue ratio, adding nearly 25 percent of revenue to the debt service burden in the peak year of 2021.

### Risk rating, vulnerabilities, and policy recommendations
- Risk assessment:
  - Malawi is assessed to have a moderate risk of external debt distress.
  - Overall risk of debt distress is high due to high public domestic debt.
  - Main risks to the assessment: limited data coverage; macroeconomic uncertainty (especially weather shocks); weaker-than-expected policy implementation; tighter global financial conditions and weak global economy depressing export growth.
- Key policy recommendations:
  - Increase fiscal restraint and budget credibility to contain fiscal deficits and reduce domestic borrowing at high interest rates; strengthen expenditure prioritization in line with development priorities.
  - Apply prudence in project selection: focus on projects with high returns aligned to development priorities and rely on concessional loans that contain borrowing costs; avoid crowding out private credit by reining in domestic borrowing.
  - Broaden the revenue base and strengthen public financial management: maximize impact of finite domestic resources, broaden tax base (note: currently under 50 percent of the TINS issues are active taxpayers), and strengthen public procurement and public financial management.
  - Reduce the sovereign-bank nexus: large exposure of bank balance sheets to the sovereign risks a negative feedback loop if fiscal challenges emerge or liquidity conditions tighten.
  - Closely monitor contingent liabilities: estimate, disclose, manage, and contain contingent liabilities—especially those in the financial sector and state-owned enterprises—given past examples (RBM recapitalization, ADMARC bailout).
- Authorities’ views:
  - The authorities agreed with the DSA assessment of external debt distress risk remaining “moderate” and overall risk of debt distress as high.
  - Authorities acknowledged significant vulnerabilities from growing public domestic debt and commit to ensuring financing of critical infrastructure projects preserves debt sustainability.

*Source: IMF staff report (cr18336).*

### 2.5 percentage points of GDP in

### cr18336 - 2.5 percentage points of GDP in

### Debt sustainability findings and qualification (2018–2028)
- Figure label: "Figure 5. Malawi: Qualification of the Moderate Category, 2018-2028"
- Qualification thresholds specified:
  - For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent.
  - For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
- Space classifications shown: Threshold, Limited space, Some space, Substantial space, (1-X)*Threshold, (1-Y)*Threshold.
- Key series illustrated (2018–2028): Debt service-to-revenue ratio; PV of debt-to-exports ratio; PV of debt-to-GDP ratio; Debt service-to-exports ratio.

### External Debt Sustainability Framework — Baseline scenario (2015–2038)
- External debt (nominal) (in percent of GDP)
  - 2015: 36.9
  - 2016: 36.2
  - 2017: 36.9
  - 2018: 34.7
  - 2019: 34.7
  - 2020: 34.8
  - 2021: 34.3
  - 2022: 33.4
  - 2023: 32.8
  - 2028: 32.3
  - 2038: 26.7
- Of which: public and publicly guaranteed (PPG)
  - 2015: 33.5
  - 2016: 32.0
  - 2017: 33.2
  - 2018: 31.2
  - 2019: 31.4
  - 2020: 31.5
  - 2021: 31.1
  - 2022: 30.4
  - 2023: 29.9
  - 2028: 25.1
  - 2038: 23.6
- Change in external debt (in percent of GDP)
  - 2015: 4.6
  - 2016: -0.7
  - 2017: 0.8
  - 2018: -2.2
  - 2019: 0.0
  - 2020: 0.1
  - 2021: -0.5
  - 2022: -0.9
  - 2023: -0.6
  - 2028: -0.2
  - 2038: -1.0
- Identified net debt-creating flows (percent of GDP)
  - 2015: 5.4
  - 2016: 16.4
  - 2017: 4.8
  - 2018: 6.3
  - 2019: 4.2
  - 2020: 3.9
  - 2021: 3.5
  - 2022: 3.3
  - 2023: 3.1
  - 2028: 2.3
  - 2038: -0.3
- Non-interest current account deficit (percent of GDP)
  - 2015: 8.6
  - 2016: 12.7
  - 2017: 10.8
  - 2018: 8.9
  - 2019: 7.3
  - 2020: 7.6
  - 2021: 7.4
  - 2022: 7.4
  - 2023: 7.4
  - 2028: 6.9
  - 2038: 4.7
- Deficit in balance of goods and services (percent of GDP)
  - 2015: 11.1
  - 2016: 16.6
  - 2017: 15.0
  - 2018: 12.5
  - 2019: 11.9
  - 2020: 11.3
  - 2021: 11.2
  - 2022: 11.3
  - 2023: 11.2
  - 2028: 11.0
  - 2038: 9.1
- Exports (percent of GDP)
  - 2015: 25.5
  - 2016: 29.4
  - 2017: 27.0
  - 2018: 27.0
  - 2019: 27.3
  - 2020: 27.5
  - 2021: 27.6
  - 2022: 27.5
  - 2023: 27.8
  - 2028: 27.3
- Imports (percent of GDP)
  - 2015: 36.6
  - 2016: 46.0
  - 2017: 42.0
  - 2018: 39.5
  - 2019: 39.2
  - 2020: 38.8
  - 2021: 38.8
  - 2022: 38.8
  - 2023: 38.8
  - 2028: 36.4
- Net current transfers (negative = inflow) (percent of GDP)
  - 2015: -4.9
  - 2016: -5.8
  - 2017: -6.1
  - 2018: -5.3
  - 2019: -6.4
  - 2020: -5.4
  - 2021: -5.5
  - 2022: -5.6
  - 2023: -5.7
  - 2028: -5.9
  - 2038: -6.0
- Net FDI (negative = inflow) (percent of GDP)
  - 2015: -1.8
  - 2016: -3.1
  - 2017: -2.1
  - 2018: -2.0
  - 2019: -2.1
  - 2020: -2.3
  - 2021: -2.4
  - 2022: -2.5
  - 2023: -2.5
  - 2028: -2.9
  - 2038: -3.6
- Endogenous debt dynamics (percent of GDP)
  - 2015: -1.5
  - 2016: 6.8
  - 2017: -3.9
  - 2018: -0.6
  - 2019: -1.0
  - 2020: -1.4
  - 2021: -1.5
  - 2022: -1.6
  - 2023: -1.7
  - 2028: -1.7
  - 2038: -1.4
- Contribution from nominal interest rate (percent of GDP)
  - 2015: 0.3
  - 2016: 0.3
  - 2017: 0.3
  - 2018: 0.4
  - 2019: 0.3
  - 2020: 0.3
  - 2021: 0.3
  - 2022: 0.3
  - 2023: 0.3
  - 2028: 0.3
  - 2038: 0.3
- Contribution from real GDP growth (percent of GDP)
  - 2015: -0.9
  - 2016: -1.0
  - 2017: -1.3
  - 2018: -1.1
  - 2019: -1.3
  - 2020: -1.6
  - 2021: -1.8
  - 2022: -1.9
  - 2023: -2.0
  - 2028: -2.0
  - 2038: -1.7
- Residual (percent of GDP)
  - 2015: -0.8
  - 2016: -17.1
  - 2017: -4.0
  - 2018: -8.5
  - 2019: -4.2
  - 2020: -3.9
  - 2021: -3.9
  - 2022: -4.2
  - 2023: -3.7
  - 2028: -2.5
  - 2038: -0.8
- Sustainability indicators
  - PV of PPG external debt-to-GDP ratio (selected years)
    - 2018: 22.4
    - 2019: 20.5
    - 2020: 20.3
    - 2021: 20.4
    - 2022: 20.2
    - 2023: 19.7
    - 2028: 18.7
    - 2038: 16.0
  - PV of PPG external debt-to-exports ratio (selected years)
    - 2018: 82.7
    - 2019: 75.7
    - 2020: 74.3
    - 2021: 74.1
    - 2022: 73.0
    - 2023: 71.5
    - 2028: 67.0
    - 2038: 58.8
  - PPG debt service-to-exports ratio (selected years)
    - 2018: 7.2
    - 2019: 12.8
    - 2020: 4.3
    - 2021: 7.2
    - 2022: 4.5
    - 2023: 4.6
    - 2028: 3.8
  - PPG debt service-to-revenue ratio (selected years)
    - 2018: 10.0
    - 2019: 20.2
    - 2020: 6.0
    - 2021: 9.5
    - 2022: 6.1
    - 2023: 6.3
    - 2028: 4.8
  - Gross external financing need (Billion of U.S. dollars)
    - Values shown: 0.6, 0.7, 0.6, 0.6, 0.5, 0.5, 0.5, 0.6, 0.6, 0.7, 0.6 (selected)
- Key macroeconomic assumptions (selected)
  - Real GDP growth (in percent)
    - 2015: 2.9
    - 2016: 2.3
    - 2017: 4.0
    - 2018: 3.2
    - 2019: 4.0
    - 2020: 5.0
    - 2021: 5.5
    - 2022: 6.0
    - 2023: 6.5
    - 2028: 6.5
    - 2038: 5.7
  - GDP deflator in US dollar terms (change in percent) (selected)
    - 2015: 2.7
    - 2016: -16.8
    - 2017: 8.9
    - 2018: 7.2
    - 2019: 2.3
    - 2020: 0.7
    - 2021: 0.6
    - 2022: 0.8
    - 2023: 0.5
    - 2028: 0.5
    - 2038: 1.1
  - Effective interest rate (percent)
    - 2015: 0.9
    - 2016: 0.7
    - 2017: 0.9
    - 2018: 1.3
    - 2019: 0.9
    - 2020: 0.9
    - 2021: 0.9
    - 2022: 0.9
    - 2023: 0.9
    - 2028: 1.1
    - 2038: 0.7
  - Growth of exports of G&S (US dollar terms, in percent) (selected)
    - 2015: -7.2
    - 2016: -1.9
    - 2017: 4.0
    - 2018: 10.6
    - 2019: 7.5
    - 2020: 6.6
    - 2021: 6.4
    - 2022: 6.6
    - 2023: 7.1
    - 2028: 7.2
    - 2038: 6.9
  - Growth of imports of G&S (US dollar terms, in percent) (selected)
    - 2015: -2.4
    - 2016: 6.8
    - 2017: 3.5
    - 2018: 4.0
    - 2019: 5.6
    - 2020: 4.5
    - 2021: 6.1
    - 2022: 6.9
    - 2023: 7.0
    - 2028: 6.4
    - 2038: 6.6
  - Grant element of new public sector borrowing (in percent) (selected)
    - 2018–2023 entries: 45.5, 46.7, 47.6, 48.9, 46.6
    - Later projection values around: 46.6, 46.6, 46.6, 46.8 (selected)
  - Government revenues (excluding grants, in percent of GDP)
    - 2015: 18.5
    - 2016: 18.6
    - 2017: 19.7
    - 2018: 20.6
    - 2019: 20.1
    - 2020: 20.1
    - 2021: 20.4
    - 2022: 20.7
    - 2023: 20.9
    - 2028: 21.1
    - 2038: 21.3
  - Aid flows (Billion of US dollars) (selected)
    - 2015: 0.4
    - 2016: 0.3
    - 2017: 0.4
    - 2018: 0.2
    - 2019: 0.4
    - 2020: 0.4
    - 2021: 0.4
    - 2022: 0.4
    - 2023: 0.4
    - 2028: 0.5
    - 2038: 0.4
  - Grant-equivalent financing (in percent of GDP) (selected)
    - Projection values: 2.8, 4.6, 4.1, 4.1, 4.0, 4.1, 2.7, 1.2, 3.6 (selected; some periods omitted)
  - Nominal GDP (Billion of US dollars) (selected)
    - Listed sequence includes: 6.4, 5.4, 6.2, 6.8, 7.3, 7.7, 8.1, 8.7, 9.3, 13.1, 26.3 (selected entries)
- Memorandum items
  - PV of external debt (selected)
    - Values shown: 26.1, 23.9, 23.7, 23.7, 23.3, 22.7, 22.2, 21.1, 17.6
  - In percent of exports (selected): 96.5, 88.5, 86.6, 85.9, 84.5, 82.5, 80.6, 75.9, 64.5
  - Total external debt service-to-exports ratio (selected): 7.2, 12.8, 5.9, 8.7, 5.8, 5.8, 6.2, 6.5, 6.1, 5.2, 4.1
  - PV of PPG external debt (Billion of US dollars) (selected): 1.4, 1.4, 1.5, 1.6, 1.6, 1.7, 1.8, 2.4, 4.2
  - (PVt-PVt-1)/GDPt-1 (in percent) (selected): 0.3, 1.1, 1.3, 1.0, 0.9, 1.0, 1.2, 0.7
  - Non-interest current account deficit that stabilizes debt ratio (percent of GDP) (selected): 4.1, 13.5, 10.1, 11.1, 7.3, 7.5, 7.9, 8.3, 8.0, 7.0, 5.7

### Public Sector Debt Sustainability Framework — Baseline scenario (2015–2038)
- Public sector debt (percent of GDP)
  - 2015: 54.4
  - 2016: 55.6
  - 2017: 57.7
  - 2018: 57.3
  - 2019: 56.1
  - 2020: 55.4
  - 2021: 54.0
  - 2022: 52.0
  - 2023: 49.8
  - 2028: 42.4
  - 2038: 50.1
- Of which: external debt (percent of GDP)
  - Mirrors external figures: 33.5, 32.0, 33.2, 31.2, 31.4, 31.5, 31.1, 30.4, 29.9, 25.1, 23.6
- Change in public sector debt (percent of GDP)
  - 2015: 6.7
  - 2016: 1.1
  - 2017: 2.1
  - 2018: -0.3
  - 2019: -1.2
  - 2020: -0.8
  - 2021: -1.4
  - 2022: -2.0
  - 2023: -2.2
  - 2028: -1.4
  - 2038: -1.1
- Identified debt-creating flows (percent of GDP)
  - 2015: 6.1
  - 2016: -0.8
  - 2017: 0.4
  - 2018: -0.4
  - 2019: -1.4
  - 2020: -1.0
  - 2021: -1.3
  - 2022: -1.5
  - 2023: -1.9
  - 2028: -1.2
  - 2038: -1.1
- Primary deficit (percent of GDP)
  - 2015: 2.7
  - 2016: 2.4
  - 2017: 3.6
  - 2018: 0.3
  - 2019: -1.0
  - 2020: -0.2
  - 2021: -0.3
  - 2022: -0.4
  - 2023: -0.6
  - 2028: 0.4
  - 2038: 0.5
- Revenue and grants (percent of GDP)
  - 2015: 21.7
  - 2016: 21.3
  - 2017: 23.0
  - 2018: 22.4
  - 2019: 23.5
  - 2020: 22.8
  - 2021: 23.2
  - 2022: 23.6
  - 2023: 23.8
  - 2028: 22.5
  - 2038: 23.3
- Of which: grants (percent of GDP)
  - 2015: 3.2
  - 2016: 2.7
  - 2017: 3.3
  - 2018: 1.8
  - 2019: 3.4
  - 2020: 2.7
  - 2021: 2.9
  - 2022: 2.8
  - 2023: 2.9
  - 2028: 1.4
  - 2038: 0.5
- Primary (noninterest) expenditure (percent of GDP)
  - 2015: 24.4
  - 2016: 23.7
  - 2017: 26.5
  - 2018: 22.7
  - 2019: 22.6
  - 2020: 22.6
  - 2021: 22.9
  - 2022: 23.1
  - 2023: 23.2
  - 2028: 22.9
  - 2038: 22.4
- Automatic debt dynamics (percent of GDP)
  - 2015: 3.4
  - 2016: -2.9
  - 2017: -3.2
  - 2018: -0.7
  - 2019: -0.5
  - 2020: -0.7
  - 2021: -0.9
  - 2022: -1.1
  - 2023: -1.3
  - 2028: -1.6
  - 2038: -1.6
- Contribution from interest rate/growth differential (percent of GDP)
  - 2015: -1.6
  - 2016: -0.6
  - 2017: -0.8
  - 2018: 0.2
  - 2019: -0.9
  - 2020: -1.1
  - 2021: -1.2
  - 2022: -1.3
  - 2023: -1.7
  - 2028: -2.0
  - 2038: -1.9
- PV of public debt-to-GDP ratio (selected)
  - 2018: 46.9
  - 2019: 47.0
  - 2020: 45.7
  - 2021: 44.9
  - 2022: 43.5
  - 2023: 41.7
  - 2028: 39.6
  - 2038: 31.5
- PV of public debt-to-revenue and grants ratio (selected)
  - 2018: 204.0
  - 2019: 209.7
  - 2020: 194.4
  - 2021: 196.5
  - 2022: 187.4
  - 2023: 176.9
  - 2028: 140.0
  - 2038: 97.3
- Debt service-to-revenue and grants ratio (selected)
  - 2018: 22.0
  - 2019: 36.0
  - 2020: 40.6
  - 2021: 29.7
  - 2022: 36.3
  - 2023: 43.4
  - 2028: 19.1
- Gross financing need (selected)
  - 2018: 4.4
  - 2019: 5.7
  - 2020: 12.9
  - 2021: 7.0
  - 2022: 7.6
  - 2023: 9.7
  - 2028: 4.7
- Key fiscal and macro assumptions (selected)
  - Real GDP growth (percent): same series as external DSA (e.g., 2015: 2.9; 2023: 6.5; 2028: 6.5; 2038: 5.7)
  - Average nominal interest rate on external debt (percent) (selected): 1.2, 1.1, 1.1, 1.5, 1.0, 1.0, 1.0, 1.0, 1.1, 1.1, 1.0, 1.1
  - Average real interest rate on domestic debt (percent) (selected): -1.4, 3.3, 6.8, 9.4, 6.8, 8.3, 8.9, 9.4, 8.7, 7.0, 5.2, 2.0, 7.9
  - Inflation rate (GDP deflator, percent) (selected): 20.9, 19.5, 10.7, 7.8, 8.0, 7.4, 6.3, 5.4, 4.6, 4.6, 5.2, 16.3, 5.6
  - Growth of real primary spending (deflated by GDP deflator, percent) (selected): 15.8, -0.7, 16.4, -11.6, 3.3, 5.2, 6.7, 7.3, 6.9, 5.6, 6.6, 5.2, 4.4
  - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP) (selected): -4.0, 1.3, 1.5, 0.7, 0.2, 0.5, 1.0, 1.5, 1.6, 1.8, 1.6, -0.4, 1.3

### Sensitivity analysis — Public and PPG external debt (2018–2028)
- Table 3 baseline PV of debt-to-GDP ratio (selected years)
  - Baseline: 20.5, 20.3, 20.4, 20.2, 19.7, 19.3, 19.1, 18.9, 18.9, 18.8, 18.7
- Alternative scenarios (A1: Key variables at historical averages 2018–2028)
  - PV of debt-to-GDP ratio under A1 (selected): 20.5, 22.2, 24.0, 25.7, 27.4, 29.1, 31.0, 32.9, 35.0, 37.1, 39.3
- Bound tests (B1–B6) and tailored tests (C1–C3) results presented for:
  - PV of debt-to-GDP ratio; PV of debt-to-exports ratio; Debt service-to-exports ratio; Debt service-to-revenue ratio.
- Thresholds indicated:
  - PV of debt-to-GDP threshold: 30
  - PV of debt-to-exports threshold: 75
  - Debt service-to-exports threshold: 10
  - Debt service-to-revenue threshold: 140
- Examples of bound test outcomes (selected)
  - B1. Real GDP growth — PV of debt-to-GDP: 20.5, 21.0, 21.9, 21.6, 21.1, 20.7, 20.4, 20.3, 20.2, 20.2, 20.1
  - B5. One-time 30 percent nominal depreciation — PV of debt-to-exports: 75.7, 74.3, 66.4, 65.5, 64.2, 62.9, 62.2, 61.7, 61.5, 61.8, 61.8

### Sensitivity analysis — Public debt (2018–2028)
- Table 4 baseline PV of public debt-to-GDP ratio (selected)
  - Baseline: 47.0, 45.7, 44.9, 43.5, 41.7, 39.6, 37.9, 36.1, 34.5, 33.0, 31.5
- Public debt benchmark: 35
- PV of Debt-to-Revenue Ratio (baseline, selected)
  - Baseline: 209.7, 194.4, 196.5, 187.4, 176.9, 166.1, 164.2, 157.6, 151.5, 145.7, 140.0
- Debt Service-to-Revenue Ratio (baseline, selected)
  - Baseline: 29.7, 36.3, 43.4, 46.9, 49.2, 48.1, 47.1, 46.2, 43.8, 41.1, 38.5
- Alternative scenarios and bound tests (B1–B6) and tailored tests (C1–C2) produce higher or lower trajectories; examples:
  - A1. Key variables at historical averages: PV of public debt-to-GDP evolves to 47, 43, 40, 37, 33, 30, 27, 24, 22, 20, 18 (selected series shown in compressed notation in source).

### Program implementation: Letter of Intent (Excerpt, October 30, 2018)
- Progress summary:
  - "We have made solid progress toward our program objectives under the IMF’s Extended Credit Facility (ECF), notwithstanding continued challenges from climate shocks, power shortages, and election-driven spending pressures."
- Quantitative performance criteria (QPC):
  - "Most continuous and end-June 2018 quantitative performance criteria (QPC) were met, with two of the QPCs significantly overperforming."
  - QPC on the primary fiscal balance target was missed due to unexpected maize purchases, court-ruled arrears payments, and increases in spending to hold elections.
  - Remedial actions: adopting a tighter than originally agreed fiscal stance in FY 2018/19; identifying non-priority spending items to cut; coordinating with donors to improve accuracy of information on donor flows.
  - QPC on non-concessional external debt was missed due to an oversight in the Technical Memorandum of Understanding (TMU); TMU amended going forward.
- Structural benchmarks (SBs) and indicative targets (ITs):
  - "Some structural benchmarks (SBs) were met on time. Most of the remaining SBs were delayed due to unexpected capacity constraints and will be completed by end-October."
  - Appointment of an IMF resident PFM advisor after a four-month gap (June–October) to support meeting future SBs.
  - The IT on social spending was met.
  - The IT on no new domestic arrears was missed by MK 1 billion.
- TMU clarification footnote (excerpt):
  - A nonresident bank purchased Treasury Notes of MK 92 billion in the domestic market, which constitutes contracting of new non-concessional external debt according to the TMU.
  - Oversight in TMU: excluded Treasury Bills but not Treasury Notes from items subject to the QPC.
  - TMU modified going forward to exclude both Treasury Notes and Treasury Bills from the QPC on new non-concessional external debt.

*Sources: Country authorities; and staff estimates and projections.*

### 4. We are actively entrenching macroeconomic stability and enhancing more inclusive and

### 4. We are actively entrenching macroeconomic stability and enhancing more inclusive and 

### Recent Economic Developments
- Economic growth and inflation
  - The economy is expected to grow at 3.2 percent this year, down from 4 percent last year.
  - Inflation rose from 7.1 percent at end-2017 to an anticipated 9.5 percent for end-2018.
  - Upward pressures stem from higher maize prices and increases in fuel prices (15 percent in July/October) and electricity tariffs (45 percent in February/July/October).
  - Deployment of diesel generators partly improved electricity generation capacity but supply shortages continue to challenge manufacturing and wholesale and retail trade.
- Fiscal developments and arrears
  - When the ECF arrangement was approved, the overall deficit combined with arrears payments was expected to exceed the original budget by 3.2 percent of GDP.
  - Primary deficit target under the ECF arrangement was set at 3 percent of GDP.
  - By end-June 2018, the primary deficit target was missed by 0.9 percent of GDP (adjusted for shortfalls in grants).
  - Bailout of ADMARC’s maize purchase loan contributed 1 percent of GDP to higher-than-budgeted spending.
  - The performance criterion on contracting new non-concessional external debt was considered met but technically missed due to an oversight in the TMU.
  - RBM’s holdings of government securities were reduced by MK 43 billion during FY 2017/18—far exceeding the performance criterion ceiling of MK 69 billion on RBM financing of the government.
- Arrears outstanding and settlement
  - Outstanding arrears dating back to FY 2012/13 were mostly paid in FY 2017/18 largely through the issuance of zero interest promissory notes (1.5 percent of GDP).
  - As of end-June 2018, MK 8 billion of court-ruled arrears, interest, and legal fees still need to be settled.
  - About MK 1.1 billion (0.02 percent of GDP) of new arrears were accrued in FY 2017/18.
- Monetary policy and reserves
  - Policy rate has been kept at 16 percent after a 600 basis point reduction in 2017.
  - Reserve money growth slowed since end-2017 and end-June 2018 stock was within the upper bound set under the ECF arrangement (a performance criterion).
  - The Kwacha has been stable against the US dollar since December 2016.
  - The real effective exchange rate appreciated 1.3 percent during the first seven months of 2018 relative to the same period in 2017.
  - Net international reserves overperformed its end-June target by $119 million (a performance criterion).
- Banking system
  - NPLs declined from 15.7 percent at end-2017 to 9.5 percent in August 2018 mainly due to write offs and loan recovery.
  - Provisions almost doubled with adoption of IFRS9 requirements.
  - Two banks at the borderline of minimum core capital in December 2017 improved through capital injection, asset recovery, and write-offs.
  - RBM’s June 2018 stress test showed several individual banks vulnerable to credit, liquidity, and interest rate shocks.

### Economic Outlook
- Growth and inflation projections
  - The economy is expected to rebound to 4.0 percent in 2019 and rise towards 6.5 percent over the medium term.
  - Inflation is expected to remain at around 9 percent in 2019 and over the medium term is expected to converge to the objective of 5 percent.
- Growth drivers and medium-term supports
  - Near-term drivers: increased electricity generation and growing infrastructure investment.
  - Medium-term supports: crop diversification (e.g., cassava and sweet potatoes), improved irrigation, enhanced electricity generation, better road and telecommunication networks, increased donor assistance, greater access to finance, stabilization and reform programs to improve competitiveness, and increased investment.
- Risks
  - Short-term risks are tilted to the downside: vulnerability to weather and pest shocks, spending pressures in the run-up to the 2019 elections, slow reform implementation possibly postponing donor support, fluctuations in foreign exchange revenues (volatile tobacco exports and short-term capital flows), and a slower than expected disinflation process that could raise interest rates.
  - Upside: better than expected harvests and higher than expected commodity prices could boost medium-term growth.
  - Food security: preserved by already accumulated substantial food reserves and close monitoring.

### Monetary and Financial Sector Policies
- Monetary policy stance and framework
  - Monetary policy will continue focusing on entrenching disinflation and aim to maintain the inflation rate in single digits while keeping real interest rates significantly positive.
  - Caution will be exercised in policy rate decisions to anchor inflation expectations; should inflationary pressures gain momentum, monetary policy will be further tightened (except for liquidity provision to banks facing liquidity challenges).
  - Interbank rates will be kept within the corridor and concentration will be on a few tenors in repo operations.
  - Completion of transition to an interest rate-based operational framework and aim to adopt inflation targeting over the medium-term.
  - By end-June 2018, a monetary policy communication strategy (a structural benchmark under the ECF arrangement) was developed and planned for publication by end-October 2018.
  - Continued expansion of capacity in high frequency data, liquidity forecasting, and FPAS modeling.
- RBM independence and operations
  - Develop a multi-year strategy by September 2019 to gradually unwind most RBM holdings of government securities (RBM’s financing had raised holdings to around 40 percent of its assets).
  - Strategy actions to include reducing existing OMO liabilities and agreeing on a switching operation converting some RBM portfolio long-term notes into maturities facilitating use in OMOs; government to refinance these securities in the market on maturity.
  - Communicate the strategy publicly once developed to smooth market reactions.
  - Repeal and replace the RBM Act with a new RBM Act 2018 to enhance RBM mandate, autonomy, and eliminate avenues for monetization of deficits (except for cash flow management); amended Act to be submitted to Parliament by mid-November 2018.
  - Revisions to the PFM Act will be aligned with the amended RBM Act to strengthen the PFM regulatory framework.
- Financial sector stability measures
  - By March-2019, all banks are expected to comply with IFRS9 standards (effective January 2018); the IFRS9 directive was gazetted in April 2018.
  - Target to reduce NPLs towards 5 percent by end-2018 and encourage improved collateral analysis and enhanced collateral registry to reduce recovery time.
  - Measures to reduce banking system overhead costs (e.g., credit referencing system and national ID registry).
  - As T-bill rates decline, banks reliant on government securities for margins will need to modify business models and reduce interest rate spreads.
  - Continued monitoring, surveillance of large borrowers, and enforcement of the single borrower exposure limit.
  - Regulations enhancing consolidated and Domestic Systemically Important Banks supervision to take effect as of end-March 2019.
  - April 2018 Financial Services (Foreign Currency Lending Ratio) Directive limits foreign currency lending to borrowers engaged in foreign currency generating activities and up to 90 percent of a bank’s foreign currency deposit balance; net open position requirement to be enforced.
- Regulatory and infrastructure initiatives
  - Regulations related to revised AML/CFT framework enacted in 2017 to be gazetted by December 2018.
  - Roadmap for increasing access to finance (especially for SMEs) to be formulated by December 2019; engagement with financial sector to improve SME credit provision.
  - Ongoing improvements: skills development in banking sector, financial literacy, mobile banking infrastructure, non-bank financial intermediation, and improved contract enforcement.
  - Re-submit amendments to the Banking Act of 2010 and Financial Services Act of 2010 to Parliament before end-June 2019 to align bank resolution framework with best practices.
  - Operationalization of Payment Systems Act supported by the Interoperability of Retail Payment Systems Directive (September 2017) and several RBM directives issued in July 2018 (Consolidated Supervision, Licensing, Corporate Governance Requirements, Capital Adequacy and Credit Risk Management, Governance Requirements for Banks and Bank Holding Companies).
  - RBM preparing E-money Regulations and directive on mandatory use of point of sale (POS) devices by qualifying merchants.
- Exchange rate policy
  - Full commitment to the floating exchange rate regime as a precondition for policy success, cushioning shocks and supporting diversification.
  - Develop a well-sequenced action plan to support greater exchange rate flexibility: deepen the interbank FX market, moderate RBM’s role to dampen excess volatility and accumulate reserves when needed.
  - RBM to identify and communicate objectives and modalities of FX intervention; frequently and regularly publish prices and volumes of interbank transactions; conduct prudent risk management and oversight.
  - Consideration of a more transparent auction-based system of FX intervention.

### Fiscal Policy
- Fiscal objectives and stance
  - Fiscal policy will support disinflation and maintain debt sustainability by containing spending within available resources, avoiding accumulation of domestic and external arrears, and avoiding non-concessional external borrowing.
  - Continued prudent fiscal policies are necessary to keep public debt-to-GDP ratio on a downward trajectory and prevent crowding out of the private sector.
- FY 2018/19 budget and targets
  - The approved FY 2018/19 budget foresees a relatively high primary deficit (0.8 percent of GDP) but aims to restore the budget balance.
  - Target primary fiscal balance: 0.1 percent of GDP (targeted through measures and higher tax and non-tax revenues to fund increased wages and additional hires).
  - Significant tightening relative to FY 2017/18 includes corrections for last year’s spending overruns and measures to cope with expected shortfall in budget support.
- Measures to achieve fiscal targets
  - Expeditiously implement and enforce tax measures announced in the 2018/19 budget, including new transfer-pricing rules, debt-to-equity ratio, VAT withholding and VAT reverse charge mechanism on imported services.
  - Enhance tax administration using risk analysis and progress in cleansing the tax registry.
  - Increase user fees and charges to adjust for inflation and progress toward marginal cost pricing and improve their enforcement.
  - Revise dividend policies to ensure profits and surpluses realized by SOEs are duly remitted to the government.
  - Reinforce collection of tax arrears (e.g., use of distraint actions), including those owed by parastatals; clear all remaining tax refund arrears.
  - Ensure Malawi Revenue Authority (MRA) has sufficient resources (at least 3 percent of gross tax collections) to pay tax refunds on time.
  - Reduce generic goods and services spending in non-priority areas (e.g., limiting internal travel, purchase of motor vehicle, and office supplies); strictly limit non-essential recurrent expenditures.
  - Reduce transfers to public entities by improving their revenue generating capacity; SOE reforms to reduce likelihood of bailout requests.
  - Reduce the maize procurement budget (assuming no extraordinary needs during FY 2018/19) while sustaining reforms to FISP.
  - Safeguard social spending and, if possible, increase it as its quality improves.
  - Align domestically financed capital spending with implementation capacity and increase focus on enhancing spending efficiency.

*Memorandum on Economic and Financial Policies (MEFP), October 30, 2018 — Attachment I to letter from the Government of Malawi*

### 18.      We plan to step up measures to enhance the oversight of SOEs. Weak oversight and

### We plan to step up measures to enhance the oversight of SOEs.

### Oversight of SOEs
- Weak oversight and financial reporting makes it difficult to adequately monitor and manage risks to the budget and public debt from the SOEs.
- Planned measures and timelines:
  - Finalize and issue regulations, policies, and guidelines by December 2018 covering ownership, payment of dividend and surplus, and preparation of the performance management plans and budgets (PMPBs).
  - Revise the mandate of the Public Finance Management Systems (PFMS) in line with revisions to the PFM Act.
  - Conduct pilot audits of the largest SOEs in collaboration with National Audit Office (NAO) and submit these reports to Parliament by June 2019.
  - By February 2020, submit to Parliament and publish on the MoF website a consolidated annual report on SOEs, including risk analysis case studies on ESCOM, ADMARC, and the Blantyre Water Board, aligned with IMF technical assistance recommendations.
  - Develop a prototype SOE database by March 2019.

### Public investment management and PSIP
- Aim: raise spending efficiency and prioritize public investment projects based on cost-benefit analysis, absorptive capacity, growth, poverty reduction, and debt sustainability.
- Actions and timelines:
  - Conduct pilot ex-post reviews/performance audits of some major capital projects in collaboration with the NAO (end-June 2019).
  - Audit the PSIP database’s coverage and the efficiency and timeliness of its processes by December 2019 to increase its usefulness for oversight and monitoring.

### Tax reforms (near- and medium-term)
- Objectives: simple, efficient, transparent, and fair tax system; broaden domestic revenue mobilization.
- Tax administration measures:
  - Continue to advance a risk-based approach to tax compliance through increased data analysis.
  - Enhance the tax registry, improve the registration system, and enlarge the tax base (note: under 50 percent of the TINS issued are active taxpayers).
  - Place stiff penalties on malpractice of the use of EFDs and other instances of non-compliance, including due to abuse of transfer-pricing regulations.
  - Target to improve on-time filing and payment compliance across all tax types to at least 50 percent.
  - Adopt an integrated tax administration system (ITAS) by December 2019 to improve transparency of business processes and reduce corruption.
- ITAS rollout milestones:
  - Cleansing data for the tax registry by September 2019.
  - Migrating data for all active taxpayers by December 2019.
  - Begin piloting test ITAS in the LTO and two other tax offices by September 2019.
- Tax policy measures:
  - Streamline tax incentives, review the industrial rebate scheme, discontinue discretionary granting of tax holidays.
  - Expand the VAT base by removing unnecessary exemptions, improve SME taxation, assess implications of the PAYE allowance increase, and review taxation of small taxpayers.
  - Undertake a comprehensive review of the tax system to mobilize more domestic revenue and increase efficiency.
- Donor flows:
  - Work with donors to improve accuracy of information on donor flows and disbursements via enhanced use of the aid management platform and joint portfolio reviews.

### Budgeting, spending composition, and decentralization
- Near- and medium-term budgeting goals:
  - Enhance composition and quality of government spending while containing fiscal slippages.
  - Avoid unbudgeted expenditures (e.g., in goods and services) and non-essential recruitment; limit wage increases to the inflation rate; continue FISP reforms.
  - Contingency measures to partly compensate for grant shortfalls include cutting non-priority spending (contingency items include limiting external travel and deferral of non-priority maintenance and investment projects, altogether about 0.2 percent of GDP).
  - Focus public investment composition on pro-growth and poverty reducing expenditures.
  - Enhance allocational mix of health and education budgets, improve fiscal transparency and accountability at national and sub-national level, strengthen program-based budgeting, and improve frontline service delivery efficiency.
- Decentralization:
  - Develop a plan to address capacity and controls at the local level and adopt a legal framework for budget systems and fiscal policy coordination.

### Public Financial Management (PFM) reform — reconciliations, reporting, and commitment control
- Bank reconciliations:
  - Routinized monthly bank reconciliation (structural benchmark under the ECF arrangement), except for salary accounts which will be incorporated by:
    - December 2018 for FY 2016/17,
    - June 2019 for FY 2017/18,
    - September 2019 for FY 2018/19 when current for FY 2019/20.
  - Continue to maintain fully reconciled domestic debt data within and across responsible units in the RBM and MoF (structural benchmark under the ECF arrangement).
  - Plan to complete adjustment of the bank reconciliation of FY 2013/14-14/15 based on forensic audit findings and adjust opening and closing balances of the bank reconciliation of FY 2015/16 once criminal investigation based on the forensic audit is complete.
- Fiscal reporting and commitment control:
  - Routinized monthly submission by MDAs of fiscal reports on monthly funding release for two out of five reports (structural benchmark under the ECF arrangement) and publication of report summaries on the MoF website; remaining three to be completed by end-October 2018.
  - Strengthen quality control of these reports, including sanctions on controlling officers for misreporting or non-compliance.
  - Set up an online commitment control system; published consolidated monthly statements of government commitments on the MoF website including information on overdue (for more than 90 days) payments (structural benchmark under the ECF arrangement).
  - More systematic commitment control to enable timely detection of arrears and sanctioning of controlling officers who incurred them without approval of the Minister of Finance.

### Financial reporting, IFMIS rollout and IFMIS expansion
- Financial reporting:
  - Produce quarterly certified consolidated financial reports within six months after the end of the quarter with fully reconciled items.
  - Continue producing and publishing monthly budget execution reports by vote and economic classification on the MoF website.
  - First quarter 2018/19 financial reports to be submitted to the Auditor General by end-March 2019 with fully reconciled bank accounts.
- EFT and automatic daily reconciliation:
  - Complete rollout of electronic fund transfer (EFT) by June 2019, including to the entire salary account.
  - Treasury Management System (TMS) module in IFMIS will permit automatic daily bank reconciliation.
- IFMIS implementation strategy and coverage expansion:
  - Put in place a realistic and comprehensive implementation strategy (phased approach, master plan, vendor implementation plan), a transparent governance framework (remobilize IFMIS Steering Committee by end-October), credible quality assurance, and robust readiness strategy (network/data center and business process re-engineering).
  - Continue maintenance of current IFMIS while expanding its applications to include all TSA sub-accounts (including projects, receipts, and debt servicing payment) by June 2019 and expenditure commitments (including linking HRMIS and IFMIS) and debt transactions by August 2019.
  - Once IFMIS expansion complete, publish commitments against budget allocation as well as outstanding bills by August 2019.
  - Shift from monthly to quarterly budget release and allow MDAs to commit to the released budget through IFMIS beginning July 2019.

### Cash management and Treasury Single Account (TSA)
- Strengthened operations:
  - Established a fully functional Cash Management Unit under the Secretary to the Treasury.
  - In June, prepared a cash forecast of the next twelve months (for FY 2018/19); plan to make monthly practice.
  - From December 2018, prepare a variance analysis on forecasting errors every three months, report a summary of meeting minutes, and act to improve MDA submissions.
- TSA and bank account rationalization:
  - Introduce a Treasury Single Account (TSA) by June 2019 and bring most bank accounts into IFMIS by June 2019.
  - Consolidated bank accounts and aim to rationalize all remaining commercial bank accounts under the TSA by June 2019.

### Medium-term strategy and governance strengthening
- Human capacity:
  - Build human capacity through training to sustain reforms.
- Legal and oversight framework:
  - Review the PFM Act to align laws and regulations with ongoing reforms and emphasize a performance-based rewards and sanctions regime.
  - Strengthen oversight institutions: National Audit Office, Central Internal Audit Unit, and the Public Accounts Committee.
- Budget performance and procurement:
  - Better link MDA strategic planning and budgeting, improve credibility of the Medium-Term Expenditure Framework, and strengthen stakeholder engagement.
  - Build on enactment of a new Procurement Act; publish all procurement information on the Public Procurement and Dispose of Assets Authority website.
  - Use performance contracts with controlling officers to enforce adherence to rules and strengthen procurement audits.
  - Consider gradual move to an e-procurement system as part of overall IFMIS implementation strategy.

### Structural reforms: business climate, agriculture, and land
- Business climate (MGDS III):
  - Improve procedures to start a business and deal with construction permits, strengthen contract enforcement, and enhance insolvency processes to unlock private sector potential.
- Agricultural sector reforms:
  - ADMARC: Implement a reform program based on a comprehensive strategic review to balance maize price stabilization against fiscal sustainability and improve transparency and efficiency.
  - Control of trade: Amended Control of Goods Act; finalize subsidiary legislation to define public interest grounds for intervention thresholds; review new or existing bans in consultation with stakeholders.
  - FISP: Continue reforms focusing on containing budget impact, increased role for private sector, better governance, and better beneficiary targeting.
- Land reform:
  - Continue implementing new land codes based on lessons from pilot programs; commit to formalization of customary land rights to improve women’s access to finance.

### Debt management
- Risk classification:
  - Malawi is classified as being at moderate risk of external debt distress and at high overall risk of debt distress due to high domestic debt.
- Borrowing strategy and constraints:
  - Limit unified external borrowing to high priority MGDS III projects and maximize the grant element of external borrowing to ensure consistency with debt sustainability.
  - Ensure new loans are, in principle, concessional and accompanied by solid feasibility studies from an independent third party; non-concessional borrowing may be considered in exceptional cases in the context of later reviews with early consultation with the IMF and the World Bank.
- Strengthening debt management and market development:
  - Maintain and update a comprehensive medium-term debt strategy; Debt Management Committee to assess domestic and external borrowings and ascertain loan concessionality.
  - Improve debt monitoring by allocating sufficient resources and increasing training.
  - By December 2019, streamline the MoF’s Debt and Aid Management Division activities by establishing a specialized unit for front office domestic debt management in collaboration with the RBM.
  - Gradually lengthen maturity of government securities and develop a government securities benchmark issuance policy concentrating benchmark tenors in maturity buckets of 3, 5, 7, and 10-years to develop the yield curve.
  - Continue developing the T-Bill yield curve by issuing 91, 182, and 364-day maturities in auctions.
  - Publish indicative amounts in an issuance calendar confirmed closer to auctions through announcements and adhere to announced auction schedules.

### Fuel pricing and import regime
- Storage and import framework:
  - Three fuel storage depots capable of holding about 25 percent of annual consumption; operational guidelines clarify collaboration between storage operator and fuel importers/distributors.
  - Since 2013, fuel import regime based on private sector imports with cost recovery guaranteed by the automatic fuel pricing mechanism; previous MOU (2013) expired in June 2018; two new pieces of legislation promulgated to develop wholesale and retail markets.
- Policy stance for 2018/19 and governance:
  - Fuel import regime to remain unchanged for the rest of the 2018/19 fiscal year while evaluating balance of security and efficiency; ensure level-playing field and safeguards against supply disruption; any changes to be transparent with full private sector participation and preceded by a fully-costed proposal discussed with stakeholders.
- Fuel price automatic adjustment mechanism:
  - Retain and implement mechanism where over ±5 percent change in formula-based underlying price triggers a price adjustment; all other price changes absorbed by the Price Stabilization Fund (PSF).
  - Recent discretionary pauses and use of PSF led to paused pump price adjustments since October 2016; MERA approved significant increases in petroleum and diesel prices in 2018 to narrow the gap between landed cost and pump price and protect the PSF.
  - Going forward, exercise strict restraint on discretion over the ±5 percent rule to protect the PSF and avoid backloaded, lumpy price adjustments.
  - Consider disclosing more information on the use of the PSF (e.g., its financial statement) to increase transparency and accountability.

### Gender equity
- Rationale:
  - Addressing gender inequality is important for inclusive growth; disparities impede Malawi’s human resource potential and aggravate economic exclusion, making it harder for women to escape poverty. Focus interventions on adolescent girls to break cycles of deprivation early.
- Planned policy interventions:
  - Ending child marriages: Develop a comprehensive national program of action spanning social protection, law enforcement, health (particularly sexual and reproductive health), child protection, and public education following the constitutional amendment raising minimum age for marriage from 15 to 18.
  - Keeping girls in school: Increase investment in classrooms, teachers, and education materials; broaden demand-side interventions (e.g., more social assistance and targeted subsidy programs; gender-sensitive).
  - Assets and credit: Formalize customary land rights (given matrilineal systems of land inheritance) to improve women’s access to finance; policy interventions for access to finance including gender-neutral measures to level the playing field.
  - Labor market policies: Consider non-gender-neutral options (e.g., childcare support) to increase women’s labor market participation.

*MALAWI — INTERNATIONAL MONETARY FUND*

### 37.      The macroeconomic policies supported by the ECF will be complemented by a strong

### cr18336 - 37.      The macroeconomic policies supported by the ECF will be complemented by a strong

### Prior Actions (to be completed before program request goes to IMF Executive Board)
- Submission to the MoF of the three remaining reports for April-September 2018 (from the continuous SB) by the MDAs and their publication on the MoF website.
- Remobilize the IFMIS steering committee by holding a meeting.
- Publication of the RBM's communication strategy.
- Submit to Parliament amendments to the RBM Act, which are in line with the recommendations of the IMF Safeguards Monitoring Report, dated 6 June 2016.

### Structural Benchmarks and Program for 2018 — Fiscal and Financial Measures
- Fiscal sector (continuous/monthly/quarterly measures):
  - Submission of five reports by the MDAs by mid-following month and publication of the summary on the MoF website (except for the reconciliation report which will be submitted and published 6 weeks after the end of the month). Maintain/strengthen sanctions on MDAs for misreporting/non-compliance (continuous).
  - Maintain a transparent commitment control system for all MDAs; MoF to centrally compile consolidated commitments of the government by end of the following month and place it on the MoF website. Classify bills overdue for more than 90 days by age. ST to apply sanctions to the controlling officers of the MDAs for incurring arrears without the approval of the Minister of Finance (continuous).
  - Prepare quarterly consolidated financial reports (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. The financial reports should be certified by the Auditor General (continuous).
  - Reconcile all bank accounts MG1 and six operating accounts (except salary accounts until September 2019) and ways and means transactions within 90 days after the end of each month signed by the Accountant General and Secretary to the Treasury. The reconciliation should clear all the backlog and have a track record of three consecutive months (continuous).
  - Reconcile all debt data between the MOF and RBM (continuous).
  - CMU undertakes variance analysis on forecasting errors every three months, reports a summary of minutes of the meeting, and takes actions to improve MDA submissions (end-December 2018).
  - Finalize and issue the draft regulations, policies and guidelines covering issues of ownership, payment of dividend and surplus, and preparation of PMPBs (end-December 2018).

- Financial sector (2018 measures summarized under 2019 planning where applicable):
  - Publication of the RBM's communication strategy (listed as a prior action to enhance RBM credibility and prepare for the eventual implementation of inflation targeting).

### Structural Benchmarks and Program for 2019–20 — Fiscal and Financial Reforms
- Fiscal sector (benchmarks and target dates):
  - Same continuous structural benchmarks as for 2018.
  - Pilot ex-post reviews/performance audits of some major capital projects in collaboration with the NAO (end-June 2019).
  - Submit to Parliament a report on the pilot audit of the main public corporations in collaboration with the NAO (end-June 2019).
  - Move from monthly to quarterly budget release (set in a conservative manner), and allow MDAs to commit, through IFMIS, up to the released budget (end-June 2019).
  - Bring all TSA sub-accounts into IFMIS including projects, receipts and payments (end-June 2019).
  - Use IFMIS to record commitments or all types of expenditure (based on purchase orders or contracts) prior to the submission of new contracts to the ST for vetting (includes linking HRMS and IFMIS) and all domestic debt commitments, expenditures, and payments in real time. Disclose on the MoF website information on (i) accumulated commitments against the budget allocation and (ii) outstanding bills classified by age, on a monthly basis, 30 days after the reference period (end-August 2019).
  - Audit of the Public-Sector Investment Program (PSIP) database, including the efficiency and timeliness of its processes, and its coverage (end-December 2019).
  - Streamline activities of DAD to ensure its front office operations include more active engagement in domestic debt management policies and operations in collaboration with the RBM (end-December 2019).
  - Submit to Parliament and publish on the MoFEPD website a consolidated annual report on SOEs (including case studies for ESCOM, ADMARC, and Blantyre Water Board, end-February 2020).

- Financial sector:
  - Develop a strategy to pace the unwinding of RBM holdings of government securities that minimizes adverse effects on public debt management and monetary policy implementation (end-September 2019).
  - Develop a roadmap for increasing access to finance (end-December 2019).

### Program Monitoring
- Monitoring frequency and instruments:
  - The program will be monitored on a semi-annual basis, through quantitative targets (Table 1) and structural benchmarks (Tables 2, 3a, and 3b).
  - Quantitative targets for end-December 2018 and end-June 2019 are performance criteria while those for end-September 2018, end-March 2019, and end-September 2019 are indicative targets.
  - The second and third reviews under the program will be completed on or after April 15, 2019 and October 15, 2019, respectively.

### Key Quantitative Targets and Outcomes (Table 1 highlights)
- I. Monetary targets (millions of kwacha) — Reserve money (ceiling on stock) (upper bound) (PC)
  - End-Sept 2018 Prog. 303,482; Est. 300,792; Status Met 299,091
  - End-Dec 2018 Prog. 323,385; Est. 326,115
  - End-Mar 2019 Prog. 300,406; Est. 308,798
  - End-Jun 2019 Prog. 340,106; Est. 346,236
  - End-Sept 2019 Prog. 340,175
- Reserve money (ceiling on stock) (other rows presented in table)
  - 294,643; 290,380; 313,966; 316,617; 291,656; 299,804; 330,200; 336,151; 330,267
  - 285,803; 281,668; 304,547; 307,118; 282,906; 290,810; 320,294; 326,067; 320,359

- II. Fiscal targets (millions of kwacha)
  - Primary balance (floor) (PC)
    - End-Sept 2018 Prog. -144,929; Est. -163,338; Status -205,170; Not Met
    - End-Dec 2018 Prog. 44,906; Est. 29,813
    - End-Mar 2019 Prog. -4,456; Est. 16,219
    - End-Jun 2019 Prog. -2,684; Est. 3,625
    - End-Sept 2019 Prog. 89; Est. -1,236
  - RBM financing of central government (ceiling) (PC)
    - End-Sept 2018 PC 69; Est. -43; Status Met; subsequent entries 0 0 0 0 0 0 0
  - New domestic arrears (ceiling) (IT)
    - End-Sept 2018 IT 0; Prog. 1,000; Status Not met
    - Subsequent entries 0 0 0 0 0 0 0
  - Social spending (floor) (IT)
    - End-Sept 2018 IT 186,132; Est. 279,952; Status Met
    - End-Dec 2018 Prog. 87,972; Est. 175,944
    - End-Mar 2019 Prog. 182,207; Est. 263,917
    - End-Jun 2019 Prog. 273,310; Est. 351,889
    - End-Sept 2019 Prog. 364,413; Est. 103,104

- III. External sector targets (US$ millions, unless otherwise indicated)
  - Net international reserves of the RBM (floor) (PC)
    - End-Sept 2018 PC 434.1; Est. 408.7; Status 527.7; Met
    - End-Dec 2018 Prog. 454.7; Est. 480.2
    - End-Mar 2019 Prog. 428.6; Est. 488.2
    - End-Jun 2019 Prog. 436.6; Est. 484.5
    - End-Sept 2019 Prog. 460.4; Est. 473.1
  - Accumulation of external payments arrears (ceiling) (PC): entries 0 0 Met 0 0 0 0 0 0 0
  - New non-concessional external debt contracted (ceiling) (PC)
    - End-Sept 2018 PC 0; Est. 127; Status Not Met (note in table footnote regarding a nonresident bank purchase of T-notes of MK92 billion constituting new non-concessional external debt and subsequent TMU modification)

- Memorandum items (selected)
  - Net foreign assets of the RBM (US$ millions, end of period): 339.8; 434.5; 360.4; 385.9; 316.0; 393.9; 324.0; 390.2; 347.8; 360.4
  - Budget support (US$ millions): 84.3; 89.1; 79.1; 79.1; 0.0; 79.0; 79.0; 79.0; 0.0; 0.0
  - Budget support (millions of kwacha): 62,633.8; 65,088.4; 60,000.0; 60,000.0; 0.0; 60,000.0; 0.0; 60,000.0; 0.0; 0.0
  - Nominal external concessional borrowing (US$ millions): 166; 116; 357; 0; 53; 104; 79; 137; 105; 49
  - Debt service payments to the World Bank and AfDB (US$ millions): 13.4; 12.0; 3.8; 7.5; 19.8; 12.1; 24.9; 16.7; 30.1; 5.2
  - Joint Fund on Health receipts (millions of kwacha): 6,569; 0; 2,288; 4,577; 4,577; 6,865; 6,865; 9,153; 9,153; 1,831
  - Joint Fund on Education receipts (millions of kwacha): 6,987; 4,716; 4,325; 8,651; 8,656; 12,976; 12,983; 17,301; 17,311; 2,000
  - Program exchange rate (kwacha per US$): 725 repeated across periods with a shift to 732 in some entries and a TMU note: "Starting from End-September 2019, the program exchange rate is changed to the level that reflects the actual (instead of indicative) exchange rate, consistent with the TMU."

- Footnotes and adjustments (selected)
  - "PC" means Performance Criterion and "IT" means Indicative Target. The PC test date for the 2nd Review will be end-December 2018. Test dates for future reviews will be end-June and end-December. End-September and end-March targets are ITs.
  - Targets are defined in the technical memorandum of understanding (TMU).
  - Targets are subject to an adjustor for budget support and debt service payments, as specified in the TMU.
  - Targets are subject to an adjustor for donor-funded social sector expenditures consistent with the TMU.
  - Defined as a cumulative flow, starting from the beginning of the fiscal year (for several fiscal targets).
  - PC applies to upper bound only. See TMU for details.
  - Evaluated on a continuous basis for accumulation of external payments arrears.
  - A nonresident bank purchased T-notes of MK92 billion in the domestic market, which constitutes contracting new non-concessional external debt according to the TMU. This is due to an oversight in the TMU which excluded T-bills but not T-notes from the items subject to the PC. The definition of the external debt PC in the TMU has been modified going forward to exclude both T-notes and T-bills from the PC on new non-concessional external debt.

### Table 2 — Prior Actions: Measures and Macro Rationale (summary)
- Submission to the MoF of the three remaining reports for April-September 2018 (from the continuous SB) by the MDAs and publish on the MoF website. — Improve fiscal transparency.
- Remobilize the IFMIS steering committee by holding a meeting. — Improve fiscal transparency.
- Publication of the RBM's communication strategy. — Enhance RBM credibility and prepare for the eventual implementation of inflation targeting.
- Submit to Parliament amendments to the RBM Act, which are in line with the recommendations of the IMF Safeguards Monitoring Report, dated 6 June 2016. — Preserve financial and debt sustainaiblity.

### Structural Benchmarks 2018 (Table 3a) — Public Financial Management (selected)
- Continuous/monthly from May 15, 2018:
  - Submission to the MoF of five reports by the MDAs by mid-following month and publication of the summary on the MoF website (except reconciliation report submitted 6 weeks after month end). Maintain/strengthen sanctions on MDAs for misreporting/non-compliance. — Macro rationale: Improve fiscal transparency; prevent accumulation of new domestic arrears; reduce vulnerabilities to corruption.
- Continuous/monthly from May 31, 2018:
  - Maintain a transparent commitment control system for all MDAs; MoF to centrally compile consolidated commitments of the government by end of the following month and place it on the MoF website. Classify bills overdue for more than 90 days by age. ST to apply sanctions to controlling officers of MDAs for incurring arrears without Minister of Finance approval. — Macro rationale: Better control on all government commitments and arrears, if any.
- Continuous/quarterly from March 31, 2019:
  - Prepare quarterly consolidated financial reports (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 following years. The financial reports should be certified by the Auditor General. — Macro rationale: Improve fiscal transparency and integrity of the accounting system; routinize reconciliation of all bank accounts; strengthen cash planning; reduce vulnerabilities to corruption.
- Continuous/monthly from July 29, 2018:
  - Reconcile all bank accounts MG1 and six operating accounts (except salary accounts until September 2019) and ways and means transactions within 90 days after the end of each month signed by the Accountant General and Secretary to the Treasury. The reconciliation should clear all the backlog and have a track record of three consecutive months. — Macro rationale: Routinize reconciliation of all bank accounts; strengthen cash planning; improve the integrity of the accounting system; reduce vulnerabilities to corruption.
- Continuous/monthly from April 30, 2018:
  - Reconcile all debt data between the MOF and RBM. — Macro rationale: Enhance debt management; improve transparency and monitoring of public debt.
- End-December 2018:
  - CMU undertakes variance analysis on forecasting errors every three months, reports a summary of minutes of the meeting, and takes actions to improve MDA submissions. — Macro rationale: Strengthen cash and debt management; timely implementation of the budget; reduce vulnerabilities to corruption.
  - Finalize and issue the draft regulations, policies and guidelines covering issues of ownership, payment of dividend and surplus, and preparation of PMPBs. — Macro rationale: Mitigate fiscal risks associated with SOEs; enhance transparency in financial performance and market operations.

### Structural Benchmarks 2019 (Table 3b) — Detailed Benchmarks and Macro Rationale
- End-June 2019:
  - Pilot ex-post reviews/performance audits of some major capital projects in collaboration with the NAO. — Improve efficiency of public investment.
  - Submit to Parliament a report on the pilot audit of the main public corporations in collaboration with the NAO. — Mitigate fiscal risks associated with SOEs; enhance transparency in financial performance and market operations.
  - Move from monthly to quarterly budget release (set in a conservative manner), and allow MDAs to commit, through IFMIS, up to the released budget. — Interconnectedness; internal control over transactions; eliminate unnecessary duplications; and achieve comprehensive coverage in IFMIS.
  - Bring all TSA sub-accounts into IFMIS including projects, receipts and payments. — Enhance cash management; achieve comprehensive coverage in IFMIS; and strengthen controls on bank reconciliation and reporting; reduce vulnerabilities to corruption.
- End-August 2019:
  - Use IFMIS to record commitments or all types of expenditure (based on purchase orders or contracts) prior to the submission of new contracts to the ST for vetting (includes linking HRMS and IFMIS) and all domestic debt commitments, expenditures, and payments in real time. Disclose on the MoF website information on (i) accumulated commitments against the budget allocation and (ii) outstanding bills classified by age, on a monthly basis, 30 days after the reference period. — Interconnectedness; internal control over transactions; eliminate unnecessary duplications; achieve comprehensive coverage in IFMIS; reduce vulnerabilities to corruption.
- End-December 2019:
  - Audit of the Public-Sector Investment Program (PSIP) database, including the efficiency and timeliness of its processes, and its coverage. — Improve efficiency of public investment.
  - Streamline activities of DAD to ensure its front office operations include more active engagement in domestic debt management policies and operations in collaboration with the RBM. — Enhance debt management; improve transparency and monitoring of public debt.
- End-February 2020:
  - Submit to Parliament and publish on the MoFEPD website a consolidated annual report on SOEs (including case studies for ESCOM, ADMARC, and Blantyre Water Board). — Mitigate fiscal risks associated with SOEs; enhance transparency in financial performance and market operations.
- Financial sector:
  - Develop a strategy to pace the unwinding of RBM holdings of government securities that minimizes adverse effects on public debt management and monetary policy implementation (end-September 2019). — Improve debt management and governance.
  - Develop a roadmap for increasing access to finance (end-December 2019). — Increase financial sector intermediation.

### Technical Memorandum of Understanding — Coverage and Targets (Attachment—II, October 30, 2018)
- Coverage:
  - The memorandum defines the quantitative performance criteria, benchmarks, and indicative targets for the program described in the MEFP for the period November 21, 2018-April 30, 2021 supported by the ECF arrangement, and sets out the data reporting requirements.
  - The central government includes ministries, departments, and agencies, and all other units of government that exercise authority over the entire economic territory. Nonprofit institutions that are controlled and financed by the central government are excluded for purposes of this memorandum.
  - 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.
- Quantitative performance criteria and indicative targets (summary):
  - Quantitative performance criteria are established for December 31, 2018 and June 30, 2019 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).
  - Indicative targets for March 31, 2019 and September 30, 2019 with respect to the above variables, and for these dates as well as December 31, 2018 and June 30, 2019 with respect to:
    - New domestic arrears (ceiling);
    - Social spending (floor).
- Definitions and reporting:
  - 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.
  - Reserve money definition: sum of currency issued by the RBM, including the vault cash of commercial banks, and balances of commercial bank accounts with the RBM; includes required reserves held for kwacha deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM.
  - Reporting requirement: Data on reserve money will be transmitted on a weekly basis including weekly balance sheet of the RBM.
  - Floor on Primary Balance: applies to the cumulative flow of primary fiscal balance since the beginning of the fiscal year.
  - Definition of the primary balance: 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.
  - Definition of net domestic borrowing: sum of (1) net borrowing from the RBM (including, but not limited to, ways and means advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits); (2) net borrowing from commercial banks (including, but not limited to, advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits); (3) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and all government securities); and (4) holdings of promissory notes. All government securities 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 and therefore as domestic borrowing. Asset sales or privatization revenues will be accounted for under financing as a separate category.

*Source: IMF staff projections and Malawian authorities.*

### 11.      Definition of net foreign borrowing of the central government: net foreign borrowing is

### 11.      Definition of net foreign borrowing of the central government: net foreign borrowing is

### Definition of net foreign borrowing
- Net foreign borrowing is defined as the sum of project and budget support loans by official creditors (both multi- and bilateral creditors) and commercial external borrowing, minus amortization due.
- Dedicated grants can finance current spending and be reclassified as project grants if used as foreign financed capital spending.

### Definition of budget support
- Budget support includes all grants and foreign financing not directly linked to additional budgetary expenditure.
- Excluded: external project financing to fund particular activities, 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.

### Adjustors affecting the primary balance
- 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.
  - Budget support is measured as the cumulative flow from the beginning of the fiscal year.
  - It is recorded in the original currency of disbursement and then converted into kwacha using the program exchange rate listed in Table 1.
- Adjustor on primary balance – donor accounts for the social sector (including agriculture, the national aids commission (NAC), and Joint Funds on health and education):
  - The floor on primary balance will be adjusted upward by the full amount in kwacha by which the donor inflows from the U.S. dollar-denominated donor accounts for social sector are higher than 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 from the beginning of the fiscal year, recorded in the original currency and converted into kwacha using the program exchange rate listed in Table 1.
- Adjustor clause on primary balance – debt service payments (payments including both interest and principal):
  - 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.
  - Debt service payments are recorded in the original currency of payments and converted into kwacha at the program exchange rate listed in Table 1.
- Cap:
  - 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.

### Ceiling on RBM financing of the central government
- Definition of RBM financing of the central government:
  - RBM financing is defined as net borrowing from the RBM by the central government (including ways and means advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits).
- Adjustor:
  - 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).
- 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.

### 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.
  - Tax refunds are in arrears if not paid within the time limit as set forth in respective tax laws.

### 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 ministries of health, education, and gender, children, disability and social welfare; and NAC, FISP, and maize).
  - Social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program.
- Donor pool-funded expenditures:
  - Donors pool resources in Joint Funds managed by a fiscal agent; these funds are released outside normal government procedures to the relevant sector.
- Reporting requirement:
  - Social spending and financial flows into and out of Joint Funds will be reported on a monthly basis from the beginning of the fiscal year.

### Targets for external sector — Net International Reserves (NIR) of the RBM
- Definition of NIR of the RBM:
  - NIR is defined as gross reserves minus IMF and other short-term liabilities.
  - Values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the program cross exchange rates listed in Table 1.
- Definition of gross reserve assets (per BPM6, paragraph 6.64):
  - 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)."
- 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.
- Exclusions from gross reserve assets:
  - (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 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 assets blocked when used as collateral, assets lent to third parties not available before maturity, and foreign reserves blocked for letters of credit.
- Gross reserve liabilities:
  - 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.
  - SDR allocations are excluded from gross reserve liabilities.
- Adjustors applied to the NIR program floor:
  - Adjustment clause on NIR – budget support:
    - NIR floor adjusted upward by the full amount by which U.S. dollar-denominated inflows from budget support exceed 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.
    - Budget support measured as cumulative flow from the beginning of the fiscal year; recorded in original currency and converted to U.S. dollars using program cross exchange rates.
  - Adjustment clause on NIR – donor accounts for the social sector (health and education Joint funds, and the NAC):
    - NIR floor adjusted upward by the full amount by which donor inflows from the U.S. dollar-denominated donor accounts 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.
    - Donor inflows measured as cumulative receipts by the budget from the beginning of the fiscal year; recorded in original currency and converted to U.S. dollars using the program cross exchange rates.
  - Adjustment clause on NIR – debt service payments (interest and principal):
    - NIR floor 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, the downward adjustment of the NIR floor will be subject to the limitation outlined in paragraph 27.
    - Debt-service payments measured cumulatively from the beginning of the fiscal year; recorded in original currency and converted to U.S. dollars using the program cross exchange rates.
- Cap:
  - The total downward adjustment to the NIR floor from the combined impact of (i) a shortfall of budget support; (ii) a shortfall of inflows to the donor accounts for the social sector; and (iii) any excess of debt service payments to the WB and the AfDB, will be subject to a cumulative limit of US$65 million.
- 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.
  - 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.

### Net Foreign Assets (NFA) and Gross Foreign Assets (GFA) of the RBM
- Definition of NFA:
  - NFA are defined as gross foreign assets (GFA) minus gross foreign liabilities.
  - Gross foreign liabilities are equal to gross reserve liabilities (paragraph 24) plus any other foreign liabilities not listed in that paragraph.
- Definition of GFA:
  - GFA are defined as gross reserves assets (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 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 assets blocked when used as collateral, assets lent by RBM to third parties not available before maturity, and foreign reserves blocked for letters of credit.

### 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.

### Ceiling on new non-concessional external debt
- Definition of debt (TMU and Guidelines reference):
  - Debt means a current (not contingent) liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets or services at some future point(s) in time.
  - Forms of debt include:
    - i. Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, and official swap arrangements).
    - ii. Suppliers’ credits (deferral of payment after delivery).
    - iii. Lease agreements (present value at inception of lease payments expected for the period, excluding operation/repair/maintenance payments).
- Definition of non-concessional external debt:
  - Short-, medium-, and long-term debt is considered concessional if it includes a grant element of at least 35 percent and non-concessional if otherwise.
  - The grant element is the difference between the nominal value of the loan and its present value, expressed as a percentage of the nominal value.
  - The present value of the debt at contracting is calculated as the discounted sum of all future debt service payments at the time of contracting.
  - The discount rate used is 5 percent per annum.
  - The ceiling applies to contracting and guaranteeing of debt with nonresidents by the central government, the RBM, and state-owned enterprises, unless an explicit selective exclusion is made.
  - The ceiling is monitored continuously and measured cumulatively from the beginning of the fiscal year; it applies to debt and commitments contracted or guaranteed for which value has not been received.
- Definitions by maturity:
  - 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.
- Exclusions from the limit on non-concessional external debt:
  - Use of IMF resources.
  - Any kwacha-denominated government security holdings and stock holdings by nonresidents.
  - Debts classified as international reserve liabilities of the RBM.
  - New debt issued to restructure, refinance, or repay existing debt up to the amount actually used for those purposes.
  - Normal import financing (self-liquidating).
  - Arrangements to pay overtime obligations arising from judicial awards to external creditors.

### Reporting requirements
- Monthly data:
  - 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.
- Prior notice of policy changes:
  - The authorities will inform 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 (including customs and tax laws, wage policy, and financial support to public and private enterprises).
  - The authorities will similarly inform 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: cr18336 - 11.      Definition of net foreign borrowing of the central government: net foreign borrowing is*

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

### cr18336 - 39.      The authorities will furnish an official communication to the IMF describing program

### Reporting obligation
- 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.

### Summary of reporting requirements (Table 2)
- Frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I).

- 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: 2 W; Frequency of Reporting: W; Frequency of Publication: M; Agency: RBM
  - Note: Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

- 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: 3 M; Frequency of Reporting: M; Frequency of Publication: M; Agency: RBM
  - Note 3: Both market-based and officially-determined, including discount rates, money market rates, interbank money market rate, rates on treasury bills, notes and bonds.

- 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: 4 A; Frequency of Reporting: A; Frequency of Publication: ...; Agency: MOF
  - Note 4: 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.

- Borrowing of the 8 major parastatals — Frequency of Data: 4 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: 5, 6, 7 M; Frequency of Reporting: M; Frequency of Publication: M; Agency: MOF
  - Note 5: Foreign and domestic banks, and domestic nonbank financing.
  - Note 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.
  - Note 7: 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: 6 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: 6 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

### Relations with the Fund — selected factual data (As of October 5, 2018)
- 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 SDR Million 98.24
  - Reserve tranche position 2.44 SDR Million 1.76
- SDR Department:
  - Net cumulative allocation 66.37 SDR Million 100.00%Allocation
  - Holdings 1.35; 2.03
- Outstanding Purchases and Loans:
  - ESF Arrangements 3.47 SDR Million 2.50%Quota
  - ECF Arrangements 151.60 SDR Million 109.22%Quota
- Latest Financial Arrangements (Type / Date of Arrangement / Expiration Date / Amount Approved (SDR Million) / Amount Drawn (SDR Million)):
  - ECF 04/30/2018 04/29/2021 78.08 11.15
  - ECF 07/23/2012 06/29/2017 138.80 138.80
  - ECF 02/19/2010 07/22/2012 52.05 13.88

- Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming 2018 2019 2020 2021 2022
  - Principal 6.77 11.89 13.80 18.44 25.81
  - Charges/Interest 0.16 0.63 0.63 0.63 0.63
  - Total 6.72 12.51 14.42 19.06 26.44

### Debt relief and HIPC/MDRI implementation
- Implementation of HIPC Initiative: Enhanced Framework
  - 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 2 3.82
    - Total disbursements 37.19
  - Note 1: Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.
  - Note 2: Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

- Implementation of Multilateral Debt Relief Initiative (MDRI):
  - MDRI-eligible debt (SDR Million) 1 37.87
    - Financed by: MDRI Trust 14.53
    - Remaining HIPC resources 23.34
  - Debt Relief by Facility (SDR Million)
    - Eligible Debt / Delivery Date / GRA / PRGF / Total
    - December 2006 N/A 7.91 7.91
    - September 2006 10.84 19.12 29.96
  - Note 1: The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

- Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable.

### Safeguards assessment and exchange arrangements (selected findings)
- Safeguards Assessments (2018 update):
  - The 2018 update assessment found that the financial reporting and audit mechanisms continue to adhere to international practices, as noted during the 2016 monitoring visit.
  - Governance arrangements and autonomy of the RBM continue to be undermined by weak legal provisions, significant credit to the government, and the presence of government officials on the Board and audit committee.
  - Risks in foreign reserves management remain elevated due to limits that are inconsistent with leading practices and lapses in oversight.

- Exchange Arrangements:
  - In May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent, and adopted a de jure 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 730/US$.
  - The de facto exchange rate arrangement is classified as “stabilized”.
  - Inflows of foreign exchange have allowed for a strong increase in international reserves.
  - The exchange regime is free of restrictions and multiple currency practices.

### Technical assistance (selected entries since 2015, as of October 15, 2018)
- 10/18 FAD MOF Revenue Administration Mission
- 10/18 ICD RBM Policy analysis and forecasting Mission
- 10/18 MCM RBM Insurance Supervision and Regulation Mission
- 09/18 FAD MOF Revenue Administration Workshop
- 08/18 FAD MOF Macro-fiscal forecasting Mission
- 08/18 FAD MOF PFM/ IFMIS Mission
- 06/18 STA MOF Government finance statistics Workshop
- 06/18 MCM MOF/RBM Developing Local Securities Market Mission
- 06/18 FIN/LEG RBM Central Bank law Mission
- 06/18 FAD MOF PFM/Budget Execution and Controls Mission
- 06/18 FAD MOF Strengthening oversight of SOEs Mission
- 05/18 STA NSO National accounts Mission
- 04/18 FAD MOF Public Investment Management Mission
- 03/18 STA NSO National Accounts Mission
- 03/18 STA RBM Monetary and financial statistics Mission
- 03/18 STA MOF Government finance statistics Mission
- 03/18 FIN/LEG RBM Safeguards Assessment Mission Mission
- 03/18 FAD MOF PFM/ Fiscal risk Mission
- 03/18 FAD MOF Revenue Administration Mission
- 03/18 ICD RBM Policy analysis and forecasting Mission
- 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
- (Additional entries continue in the same detailed chronological format in the source.)

*Source: cr18336 - 39. The authorities will furnish an official communication to the IMF describing program (PDF chapter).*

### 1.  Debt Sustainability Analysis (update)

### 1.  Debt Sustainability Analysis (update)

### Relations with the African Development Bank (AfDB) — operations and priorities
- AfDB operations in Malawi date back to 1969; Malawi Country Office opened in 2007.
- Cumulative commitments as of September 30, 2018: UA 898 million (about US$1.3 billion) to finance 108 operations, including thirteen studies and two lines of credit.
- AfDB Malawi Country Strategy Paper (CSP) 2013–17 aligned with MGDS II (2011-16) and the Bank’s Long-Term Strategy (LTS, 2013–22). New CSP for 2018–22 prepared and expected to be approved before the end of October 2018; will focus on private sector development by addressing infrastructure constraints (water, power, roads) and private-sector policy.

### Approved projects and financing (selected)
- 2016 Board approvals:
  - Agriculture Infrastructure and Youth in Agri-Business Project: US$22 million
  - Food Crisis Response Budgetary Support Program: US$16 million
  - Jobs for Youth Project: US$12 million
- 2017 approvals:
  - Nacala Rail and Port Value Addition Technical Assistance Project: US$1.7 million
  - Malawi Economic Census Project: US$1 million
- January 2018 approval:
  - Promoting Investment and Competitiveness in the Tourism Sector Project: US$9.8 million
- Projects expected to be approved by end-October 2018:
  - Shire Valley Transformation Programme: US$34.3 million
  - Nkhata Bay Water Supply Project: US$14.7 million
- Pipeline energy projects: Songwe River Basin Development Project; Malawi-Zambia Power Inter-connector Project; Kholombidzo Hydro Power Project.
- Shire Valley Transformation Programme expected to cover 42,000 hectares.

### Budget support, PFM, and related assistance
- Following government re-engagement with IMF and approval of US$157 million Extended Credit Facility (ECF) in July 2012, AfDB approved an ADF Grant for Crisis Response Budget Support: US$40 million.
- Restoration of Fiscal Stability and Social Protection (RFSSP): objectives included restoring fiscal stability, enhancing PFM, and supporting social protection; focused on PFM transparency and accountability and social protection systems.
- 2015 African Development Fund grant: Protection of Basic Services Program (PBS) — US$30 million (disbursed in one tranche in July 2015).
- PFM Institutional Support Projects: total US$7 million (one closed in June 2018; the other expected to close in May 2019). PFM support includes:
  - Tax administration reforms (upgrading ASYCUDA, Tax Appeals Tribunal framework, review of Customs and Excise Act)
  - Public procurement reforms
  - Strengthening financial management systems (review of PFM Act, Treasury Instructions, Treasury Funds Management Guidelines, audit of Treasury Funds, strengthening IFMIS oversight)
- Support for Private Public Partnership Commission (PPPC) to build PPP negotiation capacity via a “hot line” for international legal advice.
- Technical assistance to Malawi Postal Corporation for E-Post Strategy and Action Plan.
- Analytical work and feasibility studies: Kholombidzo Hydro Power Project feasibility (2017); agriculture financing feasibility study expected conclusion end-2018; Domestic Resource Mobilization Study; TA to Reserve Bank of Malawi to strengthen macroeconomic forecasting; Public Expenditure Review and Expenditure Tracking Study support.

### Financial mobilization and private finance
- AfDB to lead mobilization of donor resources and private finance for Songwe Hydro Power Project (multinational with Tanzania).
- Promotion of private investment in energy via PPPs and innovative instruments such as Partial Risk Guarantees.
- Co-financing engagements with World Bank for energy and Shire Valley Transformation Programme.

### Statistical issues — assessment of data adequacy for surveillance
- General: Data provision has some shortcomings but is broadly adequate for surveillance.
- National Accounts:
  - Latest available actual GDP estimates at current prices are for 2011.
  - STA TA supported experimental quarterly estimates for 2010 to 2015 (not disseminated); further review and update expected by November 2018.
  - Limited staff capacity prevents regular compilation and dissemination.
- Price Statistics:
  - Updated and revised CPI introduced in April 2018.
  - CPI weight reference period: December 2017 (based on 2016–17 integrated household survey); index reference period: 2017 (December 2017=100).
  - New CPI excludes imputed rent and food produced for own consumption (conceptual differences with old series).
  - PPI weights derived from Annual Economic Survey 2012; weights should be updated and coverage expanded.
  - NSO developing export-import price indexes.
- Government Finance Statistics (GFS):
  - Source data weaknesses and inadequate system of recording source data affect accuracy and reliability.
  - Key shortcomings:
    - Published data for budgetary central government show a sizeable statistical discrepancy between above and below the line data due to differences in coverage.
    - Tax revenue data received timely but not always reconcilable with deposits in Malawi Government (MG) Account because of reporting methods and timing differences.
    - Finances and operations of the Malawi Revenue Authority are 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 but results have lagged; government pledged to strengthen PFM and fiscal reporting and is working with East AFRITAC to modify chart of accounts and output-based structures.
  - Annual government finance data for Budgetary Central Government in GFSM 2014 presentation are reported for publication in GFSY but not disseminated domestically.
  - Process to procure new IFMIS has been initiated.
- Monetary and Financial Statistics (MFS):
  - Reserve Bank of Malawi (RBM) yet to compile/report monetary data to STA using standardized report forms (SRFs).
  - March 2018 mission assisted in developing SRFs for central bank accounts (1SR) and other depository corporations (2SR).
  - RBM submitted test data to STA in July 2018 and is committed to regular SRF-based MFS reporting.
  - Suggested improvements to source data for other financial corporations (insurance companies and pension funds).
- Financial Sector Surveillance:
  - April 2017 TA mission led to compilation and submission to STA of financial soundness indicators (FSIs) per FSI Guide methodology.
  - Twelve core and thirteen encouraged FSIs are reported and published on Fund website.
  - Reporting timeliness (beyond 3-months) needs improvement.
- External Sector Statistics (ESS):
  - NSO compiles annual balance of payments and IIP statistics following BPM6.
  - Estimates rely on monthly merchandise trade statistics, banking data, and government information.
  - Balance of payments survey not conducted since 2010; foreign private capital survey being conducted in 2018 for first time since 2013.
  - In absence of regular survey data, previous estimates updated using proxies.
  - NSO should obtain current and capital transfer data related to foreign aid separately from Debt and Aid Department.
  - Large net errors and omissions (NEOs) in recent years (for instance, around 2.5 percent of GDP in 2017), raising concerns on quality of balance of payments data.
  - January 2018 TA mission noted likely underestimation of net acquisition of currency and deposits under other investment as main contributor to large NEOs; 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 E-forms data for BOP and IIP; government should allocate sufficient resources for regular surveys.

### Data standards, quality, and reporting
- Malawi implemented the e-GDDS; National Summary Data Page (NSDP) went live on November 15, 2016.
- Data ROSC published February 17, 2005.
- Authorities report to STA: Monetary and financial statistics; balance of payments and international investment position statistics; government finance statistics — but timeliness is irregular.

### Selected items from Malawi: Table of Common Indicators Required for Surveillance (as of October 5, 2018)
- Exchange Rates: Date of latest observation — Current; Date received — 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 — 08/2018; Date received — 09/2018; Frequency of Data — M; Frequency of Reporting — M; Frequency of Publication — M.
- Reserve/Base Money: 08/2018 (latest observation); 09/2018 (received); M / M / M.
- Broad Money: 08/2018; 09/2018; M / M / M.
- Central Bank Balance Sheet: 08/2018; 09/2018; 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: 08/2018; 09/2018; M / M / M.
- Interest Rates: 08/2018; 09/2018; M / M / M.
- Consumer Price Index: 08/2018; 09/2018; M / M / 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 – Central Government: Q2/2018 (latest observation); 09/2018 (received); Frequency: M / M / 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: Q2/2018; 09/2018; M / M / M.
- External Current Account Balance: 2017; 09/2018; A / A / A.
- Exports and Imports of Goods and Services: 2017; 09/2018; 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: Q2/2018; 09/2018; A / Q / I.
- International Investment Position: 2017; 09/2018; A / A / A.

*Statement by Mr. Mahlinza, Executive Director and Mr. Sitima-wina, Senior Advisor on Malawi — November 21, 2018*

### Introduction

### Introduction

### Authorities' stance and program context
- The authorities appreciate the constructive dialogue during the recent program review mission and broadly concur with the staff appraisal and key policy conclusions.
- The Extended Credit Facility (ECF) arrangement remains instrumental in anchoring the macroeconomic policy framework and supporting the objectives of the national development strategy.
- Malawi is implementing the third Malawi Growth and Development Strategy (MGDS III 2018–23), which focuses on enhancing competitiveness and building resilience through growth-enhancing investment and economic diversification.
- The authorities request Executive Directors’ support for the completion of this first review under the ECF arrangement and request modification and waivers for non-observance of two performance criteria.

### Performance under the ECF Arrangement
- All four prior actions related to structural benchmarks in public financial management and the financial sector have been met.
- 4 of the 6 quantitative performance criteria (QPC) for end-June 2018 were met.
  - Met with significant margin: QPC on net international reserves.
  - Met with significant margin: QPC on holdings of government securities by the Reserve Bank of Malawi (RBM).
  - Observed: QPC on stock of reserve money.
  - Observed: continuous QPC on the non-accumulation of external payment arrears.
- Missed QPCs:
  - QPC on the primary fiscal balance was missed by 0.9 percent of GDP due to unexpected maize purchases to ensure food security, court-ruled arrears settlements, and expenditure overruns related to safety measures for the forthcoming general elections.
  - Continuous QPC on new non-concessional external debt was missed due to a technical oversight in the Technical Memorandum of Understanding (TMU).
- Corrective measures: authorities have tightened the primary balance for FY2018/19 and are taking measures to strengthen debt management capacity.
- The authorities request waivers for non-observance of two QPCs.

### Recent economic developments and macroeconomic outlook
- Growth:
  - Real GDP growth: 4 percent in 2017.
  - Real GDP growth expected to moderate to 3.2 percent in 2018 (attributed to low agricultural output and constraints in manufacturing, and wholesale and retail trade from electricity shortages).
  - Growth in 2019 expected to rebound to 4.0 percent reflecting increased electricity generation and growing infrastructure investment.
  - Medium-term projection: growth around 6.5 percent supported by robust agricultural production driven by improved irrigation infrastructure, enhanced electricity generation, better road and telecommunications networks, and greater access to finance for the private sector.
- Inflation:
  - Headline inflation reached 9.5 percent in September 2018 from 7.1 percent at the end of 2017 owing to higher maize prices and cumulative increases in electricity tariffs.
  - Over the medium term, inflation is projected to remain in single digit territory at around 5 percent aided by the continued implementation of tight fiscal and monetary policy and, low food prices.
- Current account and reserves:
  - Current account deficit: 13.6 percent of GDP in 2016; narrowed to 11 percent of GDP in 2017.
  - Projected current account deficit: 9.3 percent in 2018 due to an increase in global demand for tobacco.
  - Medium-term: current account deficit anticipated to gradually narrow to around 7.5 percent, with foreign reserves rising to 4.5 months of prospective import cover.

### Fiscal policy and public financial management reforms
- Fiscal stance: committed to preserving debt sustainability while safeguarding social spending.
- Revenue mobilization measures:
  - Tighten the primary balance for FY2018/19.
  - Implement broad based tax reforms including: streamlining tax incentives, repeal of the industrial rebate scheme, widening the corporate tax base, introducing a thin capitalization or earnings stripping rule, and expanding the coverage of VAT.
  - Rollout of the integrated tax administration system (ITAS), branded “msonkho-online”.
  - Reinforce remittance of dividends from state-owned enterprises (SOEs) and increase fees and charges on some government services to maintain real values and progress towards marginal cost pricing.
- Expenditure controls and SOE oversight:
  - Enhanced controls to avoid further accumulation of domestic arrears and curtailed recourse to domestic financing from the RBM.
  - Tightened commitment controls and a system to track the stock of commitments for all MDAs.
  - Rationalize expenditures: cuts to non-priority goods and services; reduce subsidies to SOEs and statutory bodies in tandem with improvements in their revenue generating capacity.
  - Enhanced oversight and reporting of all SOEs, issuance of revised regulations/policies/guidelines for monitoring SOEs, pilot audit report of the largest SOEs and a consolidated annual report of SOEs to be submitted to Parliament.
  - Align funding to domestically-financed capital spending with implementation capacity.
- PFM progress and debt policy:
  - Established a fully functional Cash Management Unit, improved commitment control, and enhanced debt management and monitoring capacity.
  - Developed a comprehensive medium-term debt strategy to be updated continuously.
  - Suspended contracting of new non-concessional external debt; exceptional non-concessional borrowing may be considered on a case-by-case basis for priority growth-enhancing projects supported by independent third-party feasibility studies and fiscal measures consistent with maintaining a moderate risk of external debt distress.
  - Expand IFMIS coverage to enhance controls and improve fiscal reporting.

### Monetary, exchange rate, and financial sector policies
- Monetary policy:
  - Commitment to a tight monetary policy stance to keep inflation on a declining trajectory while keeping real interest rates significantly positive.
  - Policy rate decisions to anchor inflation expectations; RBM to keep interbank rates within the corridor established around the upper limit of reserve money.
  - Medium-term objective: complete the transition to an interest rate-based operational framework and adopt inflation targeting.
  - Continue to improve primary and secondary market operations, develop high frequency data, liquidity forecasting, and the forecasting and policy analysis system (FPAS) modeling.
- Exchange rate policy:
  - Authorities reiterate full commitment to the floating exchange rate regime.
  - Interventions intended mainly to accumulate reserves and smoothen the seasonality of FX supply, not to stabilize the exchange rate.
  - Plan to develop a well-sequenced action plan to deepen the interbank FX market, moderate their role, reduce excess volatility and accumulate reserves when required.
- Financial sector stability:
  - Banking system described as well capitalized and profitable with improving resilience.
  - Non-performing loans (NPLs) declined from 15.7 percent at end-2017 to 9.3 percent in August 2018 reflecting write offs and loan recovery.
  - Provisions almost doubled in keeping with IFRS9 requirements.
  - Goal: reduce most banks’ NPLs to around 5 percent by end-2018.
  - RBM engaging with commercial banks to improve credit to SMEs and develop a roadmap for increasing access to finance.
  - Regulations related to the revised AML/CFT framework enacted in 2017 are being developed with a plan to gazette them by December 2018 to strengthen the asset declaration system and support anti-corruption efforts.

### Structural reforms
- Authorities will continue reforms to address governance challenges, strengthen public finance management, and improve the investment climate by addressing doing business indicators.
- To enhance inclusive growth and address inequality, efforts will be stepped up in financial intermediation to boost access and affordability of credit.
- Structural reforms are emphasized as necessary to complement macroeconomic policies, reduce vulnerabilities to corruption and catalyze donor support.

### Conclusion
- Authorities reiterate their commitment to enhancing governance, entrenching macroeconomic stability, and attaining higher sustainable inclusive growth.
- They value Fund support in pursuing their national development agenda and look forward to the Executive Directors’ support in completing this review.
- Going forward, they will implement a policy mix of prudent fiscal and monetary policies, complemented by growth-enhancing structural reforms.

*Source: cr18336 - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18336.pdf_