## 1. Malawi and Climate Change ## Source details **Canonical URL:** [1. Malawi and Climate Change](https://www.imf.org/-/media/files/publications/cr/2019/1mwiea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mwiea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mwiea2019001.pdf.json) --- ### Context - May 2019: President Peter Mutharika re-elected for a second term; minority government; main opposition contesting results in court; protests caused property damage and economic disruption. - Development challenges: chronic electricity shortages, high youth unemployment, alleged corruption. - Tropical Cyclone Idai (March 2019) struck southern Malawi: - Affected over a million people. - Over 60 lives lost. - Ruined crops and destroyed homes, hospitals, schools, and other critical infrastructure. - Recovery and reconstruction projected to cost $370 million or 5 percent of GDP. - Malawi ranked among countries most vulnerable to climate change globally. - Government requested augmentation in access under the ECF to finance imports for post-cyclone reconstruction. ### Reconstruction financing and program adjustments - Reconstruction (2019H2 and 2020): - Imports of goods and services: about $204 million (3 percent of GDP). - Balance of payments financing gap: $125 million (1.6 percent of GDP)—net of policy adjustments of about $80 million (1 percent of GDP) reflecting reprioritization of fiscal spending and use of foreign currency reserves buffers. - Proposed financing package: - Augmentation under the ECF: $40 million. - Complementary donor support: $15 million. - World Bank support: $120 million ($50 million will replace previously planned near-term projects) over 2019-20. - Policy note: Securing further donor financing to enable more rapid progress towards the SDGs requires accelerating reforms in agriculture, public financial management, and procurement. ### Recent developments — growth, inflation, and external position - Real GDP growth: - 2018: 3.2 percent - 2019: 4.5 percent (driven by reconstruction, increased electricity generation, agricultural rebound) - Agricultural sector: Cyclone-related agricultural losses more than compensated by bumper harvests elsewhere. - Inflation: - Anticipated average in 2019: 9.1 percent (elevated food prices due to cyclone-related supply disruptions and hoarding) - Non-food inflation on a downward trend. - Current account deficit: - 2018: 20.6 percent of GDP - 2019 expected: 18.4 percent of GDP - International reserves coverage: expected to remain around 2.9 months of prospective imports by end-2019 given large reconstruction imports. ### Exchange rate and monetary developments - Kwacha movements in 2019: - 2019H1: 6 percent depreciation against US dollar (largest since mid-2016) - 2019Q3: 5 percent appreciation - Real effective exchange rate: appreciated about 13 percent over August 2018–August 2019 due to headline inflation differentials. - RBM monetary easing in 2019H1: - Policy rate: reduced by 150 basis points in January and another 100 basis points in May to 13.5 percent. - Reserve requirements: reduced by 250 and 375 basis points to 5 and 3.75 percent on local and foreign currency deposits, respectively (January). - Lombard rate: reduced by 310 basis points to 14.9 percent. - Market effects: - Additional liquidity and weak demand for repurchase agreements increased interbank rate volatility; interbank rate below the interest rate corridor for extended periods twice in 2019. - Credit growth: 11.5 percent at end-2018 → 18.8 percent in August 2019. ### Financial sector soundness - Banking system: well capitalized, liquid, and profitable. - Non-performing loans (NPLs): declined by 1.3 percentage points since end-2018 to 4.8 percent at end-June 2019. - Provisioning: increased to 55 percent of total loans. - RBM June 2019 stress test: system resilient to interest rate and income risk shocks but vulnerable to some credit and liquidity risk shocks. - Bank adjustments: one small loss-making bank recapitalized; another seeking a partner or may exit market. - Cyclone impact on banks: little effect. ### Macroeconomic outlook and risks - Growth projections: - 2019: 4.5 percent (outturn) - 2020: projected 5 percent - Medium-term: projected to rise to 6.5 percent with greater access to finance and more resilient infrastructure (enhanced electricity generation and irrigation, crop diversification, better road networks) - Inflation projections: - 2019: expected average 9.1 percent - 2020: projected 8.7 percent - Medium-term: convergence towards 5 percent - Current account projections: - 2018: 20.6 percent of GDP - 2019: 18.4 percent of GDP - Medium-term: projected to narrow to about 15 percent of GDP (sizeable infrastructure-related imports will partly offset improvements) - International reserves: expected to rise just above 4 months of prospective imports over the medium term, supported by strengthened competitiveness, export diversification, and fiscal restraint. - Downside risks: - Possible introduction of interest rate caps (discussed despite rejection in March 2019) could impede financial sector functioning. - Continued protests could substantially reduce urban economic activity. - Adverse weather intensified by climate change and infestations could hurt growth, raise inflation, and increase balance of payments pressures. - Escalated global trade tensions could depress export demand and raise import costs. - Upside scenario: accelerated reform implementation could boost investor and donor confidence, potentially unlocking external financing including additional concessional funding. ### Fiscal performance and program monitoring - FY 2018/19 fiscal position: improved relative to FY 2017/18 but did not meet ECF program targets. - Primary deficit: reduced by 2 percent of GDP relative to prior year but exceeded the program target (adjusted for deviations in grants and debt service payments relative to the first review) by 2.5 percent of GDP. - Revenue dynamics FY 2018/19: - Income tax revenues hurt in last quarter due to reduced manufacturing and services activity following import disruptions and business closures during protests. - Non-tax revenues underperformed due to lower than anticipated dividends from RBM and SOEs. - Spending overruns due to: cyclone disaster relief, security spending for elections/post-election protests, and transfers to universities to raise salaries after strikes. - Foreign-financed development spending: lower than programmed due to shortfalls in grants; partly offset by increased project-based concessional foreign borrowing. - Financing: deficit largely financed domestically, without any net financing from RBM. ### Program performance, structural benchmarks, and corrective measures - Quantitative performance criteria (QPC): - All but one QPC were met at end-December 2018 and end-June 2019. - Primary balance target (adjusted) missed by 1.5 percent of GDP in December and by 2.5 percent of GDP in June due to front-loading of planned spending, revenue shortfalls, and expenditure overruns. - Indicative targets on new domestic arrears and on social spending met for both end-December and end-June. - Structural benchmarks (SBs) and PFM reforms: - End-December 2018 SBs on commitment control and cash management: met. - Publication SBs, debt and bank account reconciliation SBs: completed by end-March 2019. - SOE oversight regulations/policies/guidelines complete except cabinet approval of the dividend policy (new SB for end-December 2020). - End-June 2019 SBs on publication of five reports by MDAs, commitment control, and expansion of accounts covered by IFMIS: met. - SBs on quarterly consolidated financial reports, debt, bank account reconciliation, and pilot SOE audits: completed by mid-September 2019. - Ex-post performance audits: two of three capital projects completed on time; remaining audit delayed by accounting system issues, expected by June 2020. - SBs on budget release and expanding IFMIS coverage: to be completed by end-2020 due to FY 2019/20 budget approval timing (October). - End-September 2019 SB on RBM’s strategy for unwinding its holding of government securities: met. - End-December 2019 SB on audit of the PSIP database: completed in June 2019. - Corrective measures and waivers: - Corrective measures agreed for missed QPCs; authorities request waivers of nonobservance. - Spending reduced relative to FY 2018/19 outcome, returning to levels envisaged during the first review while maintaining critical growth-enhancing spending. - Despite measures, domestic primary balance falls short by 0.4 percent of GDP of the first review target to accommodate post-cyclone reconstruction and security spending. ### Policy framework and priorities - Policy anchors: preserve debt sustainability, entrench macroeconomic stability, advance governance reforms to attain higher, more inclusive, and resilient growth. - Fiscal priorities: - Improve revenue outcomes and spending management, especially investment spending efficiency and monitoring of SOEs to contain fiscal risks. - Balance large post-cyclone reconstruction needs with urgency to raise climate resilience. - Monetary and financial sector policy: - Tight monetary policy to contain inflation (noting RBM’s partial loosening in 2019H1 and need for prudent stance going forward). - Greater exchange rate flexibility and strengthening financial sector resilience to buffer shocks and support private sector development. - Governance reforms: - Continue momentum in public financial management and debt management reforms to gradually catalyze donor support. --- ### Debt sustainability, risks, and recommended fiscal consolidation - Risk assessment: - LIC DSF: baseline external debt indicators below policy-dependent thresholds, but stress tests highlight vulnerability to export shocks due to narrow export base and reliance on rain-fed agriculture. - Baseline PV of public debt-to-GDP remains above the benchmark until 2027 due to: - High interest rates on domestic debt accumulated during 2014–17 (inflation 20-30 percent), and - Primary deficits averaging 2.5 percent of GDP over the past four years (partly due to natural disasters). - Public debt reduction objective: reduce public debt from 62 to 44 percent of GDP by 2027—bringing PV of public debt below the LIC DSF threshold for a country with weak debt carrying capacity. - Program constraint: no non-concessional external borrowing allowed. - Authorities’ consolidation commitments: - Target domestic primary surplus of 2 percent of GDP during FY 2020/21-24/25, reinforced by: - Domestic revenue mobilization strategy. - Improvements in budget planning and management, procurement, public investment management, SOE oversight, and debt management. - FY 2019/20 adjustment: - Tightening of domestic primary balance by 2.1 percentage points relative to FY 2018/19 to target a surplus of 0.9 percent of GDP. - This reflects a 0.4 percentage point of GDP loosening relative to the first review under the ECF (0.2 percent of GDP lower domestic revenue and 0.2 percent of GDP higher spending for rehabilitation and security). - Selected central government indicators (percent of GDP): - Revenue: 22.6 → 21.2 (Change ‐1.4) - Tax: 18.1 → 17.4 (Change ‐0.7) - Non‑tax revenue: 2.2 → 1.7 (Change ‐0.4) - Budget support: 0.0 → 0.6 (Change 0.6) - Project grants: 2.3 → 1.5 (Change ‐0.9) - Spending: 26.5 → 27.8 (Change 1.3) - Interest: 3.9 → 4.2 (Change 0.3) - Domestically financed development spending: 1.4 → 2.2 (Change 0.8) - Overall balance: ‐3.9 → ‐6.5 (Change ‐2.6) - Domestic Primary Balance: 1.4 → ‐1.2 (Change ‐2.6) - FY 2019/20 program target (domestic primary balance) projected: 1.3 → 0.9 (Change ‐0.4) - Key revenue and expenditure measures: - Revenue measures: new environmental taxes, import surcharge on select goods, increased withholding taxes, user fees adjusted upward, road tolling fees introduced, revised dividend policy to enforce SOE dividend payments. - Expenditure adjustments: higher interest spending (0.2 percent of GDP), slightly higher goods and services and subsidies/transfers (0.3 percent of GDP), wage and pension increases contained to inflation, new hiring limited to essential staff. - Domestically-financed capital spending reoriented towards resilient reconstruction (1.5 percent of GDP) with equivalent cuts/delays totaling 1.5 percent of GDP. - Targeted cuts: iron sheet subsidy 0.1 percent of GDP; FISP targeting to reduce costs by 0.1 percent of GDP this year. ### Debt coverage, composition, and stress testing highlights - Public and publicly guaranteed (PPG) external debt: about US$2.15 billion in 2018 (31.2 percent of GDP). - 2018 PPG composition (US$ million; share): - Total: 2,151 (100) - Multilateral: 1,708 (79) — IDA: 919 (43); ADF: 325 (15); IMF: 222 (10); IFAD: 79 (4); Other multilateral: 163 (8) - Bilateral: 424 (20) — China: 220 (10); India: 145 (7); Others: 59 (3) - Commercial: 0.4 - Guarantees to SOE: 20 (1) - DSA projections and stress tests: - Total public debt projected to rise to 61.8 percent in 2019 (from 59.5 percent in 2018) reflecting increase in domestic debt; public domestic debt expected to peak at 32 percent in 2019. - Baseline: PPG external debt projected to peak at 29.8 percent of GDP in 2019; PV of debt-to-GDP ratio peaking at 19 percent in 2019 and declining thereafter. - Stress tests: export shock (nominal export growth = historical average minus one standard deviation) equivalent to declines of 8 percent in 2020 and 2021 would cause PV debt-to-exports and debt service-to-exports ratios to breach thresholds. - Tailored shocks include contingent liability one-off of 9 percent of GDP in 2020 and natural disaster shock adding 10 percent of GDP to external PPG debt in 2020. - Under all standard and tailored stress tests, PV of total debt-to-GDP ratio remains above the benchmark through 2023 in many scenarios; natural disaster shock elevates PV of total debt-to-GDP to 59 percent and above 40 percent even in 2029. - DSA risk classification: - Risk of external debt distress: Moderate - Overall risk of debt distress: High ### Policy implications from DSA - Increase fiscal restraint and budget credibility to contain deficits and reduce domestic borrowing at high interest rates. - Prioritize project selection and financing terms: focus on high-return projects aligned to development priorities and rely on concessional loans. - Broaden revenue base and strengthen public financial management. - Reduce sovereign‑bank nexus exposure and closely monitor contingent liabilities (SOEs, financial sector). - Continue implementation of Medium-Term Debt Management Strategy (MTDS) and improve debt monitoring capacity. ### IMF program modalities and monitoring - Authorities requested augmentation of access under the ECF of SDR 27.76 million (20 percent of quota) in three equal tranches, bringing total access under the program to SDR 105.835 million (76.25 percent of quota). - Program monitoring adjustments: - Domestic primary balance replaces existing primary balance QPC. - New indicative target on net foreign borrowing (net disbursements of concessional external debt). - New SBs for fourth and fifth reviews (e.g., cabinet approval of an SOE dividend policy, development of domestic revenue mobilization strategy, adoption of electronic funds transfers and implementation of TMS, report on obstacles to FX market development). - ECF disbursement schedule (SDR millions) highlights: - 11.15 (8.033) April 30, 2018 — Disbursed - 11.15 (8.033) October 15, 2018 — Disbursed - Subsequent tranches scheduled through April 15, 2021; Total for the ECF: 105.835 (76.250) - Program reviewed semi‑annually against QPCs, ITs, and SBs; targeted technical assistance critical. ### Structural reforms, PFM, SOE oversight, and IFMIS migration - PFM reform priorities and timelines: - Strengthen cash management, monthly bank reconciliations, routine fiscal reporting, debt data reconciliation between MoF and RBM, quality control of fiscal reporting, improve MTBF, broaden IFMIS coverage. - New IFMIS planned for July 2020; staff cautioned for phased implementation with change management, training, quality assurance. - Adopt electronic funds transfer (EFT) as main government payment method by end-June 2020 (SB). - Implement Treasury Management System (TMS) across pool accounts (SB targets end-2019 and end-March 2020). - SOE oversight: - Regulations/guidelines on SOE ownership and oversight issued; dividend policy to be approved by Cabinet (End-December 2019 / End-2019 noted; elsewhere referred to end-2019 and end-2020 depending on SB). - Pilot SOE audits completed; plan to submit consolidated annual report on SOEs to Parliament and publish on MoF website (End-March 2020). - Develop prototype SOE database by end-2019. - Public investment management (PIM): - Prioritize projects based on cost-benefit, absorptive capacity, growth, poverty reduction, and debt sustainability. - Pilot ex-post reviews/performance audits of major capital projects; two of three completed by September 2019; third expected by June 2020. ### Monetary policy framework and FX market development - Monetary policy objective: contain inflation and transition to inflation targeting over the medium-term; aim to keep inflation single-digit and converge to 5 percent. - Operational changes: - RBM shifted reference rate in September to a weighted average of Lombard, interbank, Treasury bill rates, and savings rate; staff view recommends review with Fund consultation by end-2020. - Staff urged raising repurchase agreement rates to better mop up liquidity and align interbank rate with policy rate. - Exchange rate policy: - Authorities committed to a flexible exchange rate regime; intervention only for reserve accumulation and smoothing excess volatility. - Need to deepen interbank FX market; RBM to prepare report on obstacles to FX market development (MEFP ¶15) with a structural benchmark by end-June 2020. - Financial sector supervision: - All banks fully compliant with IFRS9. - Regulations for Domestic Systemically Important Banks supervision effect June 2019. - Amendments to Banking Act 2010 and Financial Services Act 2010, and consumer protection bill to be submitted to Parliament by end-2020. - Monitoring concerns: rapid credit growth, increased foreign currency lending (tripled to 23 percent over the past decade), loan recovery and collateral quality. - New credit bureau reporting template and collateral registry improvements encouraged. ### Risk Assessment Matrix — key global and domestic risks - Global risks (Relative Likelihood / Impact if Realized / Policy advice): - Rising protectionism and retreat from multilateralism: High / Medium — increase exchange rate flexibility, strengthen FX reserve buffer, step-up structural reforms. - Weakening demand in key partner economies: Medium/High / Medium — create fiscal space, tighten monetary policy, increase exchange rate flexibility, diversify exports. - Sharp rise in risk premia and financial vulnerability: High / Medium — keep fiscal discipline, align monetary policy, maintain adequate foreign reserves. - Energy price volatility: Medium / Medium — tighten monetary policy, increase exchange rate flexibility, apply automatic fuel price adjustment mechanism and replenish PSF. - Higher frequency/severity of natural disasters: Medium / High — improve infrastructure quality, modernize disaster reduction measures, allow fiscal buffer, secure multiple trade corridors. - Regional and domestic risks: - Expansionary fiscal policies: High / High — pursue restrictive fiscal policies, corrective measures, effective commitment control, increase revenue mobilization. - Delayed PFM reforms and lacking expenditure control: High / High — accelerate PFM reforms, strengthen corruption control, communicate transparently. - Slow growth: Medium / High — step-up structural reforms for diversification, access to finance, climate resilience. - Excessive external borrowing: Medium / High — prudent public investment program, secure concessional financing, assess impact on debt sustainability. - Deficient conduct of monetary policy: Medium / Medium — improve communication and operational framework. - Deteriorating financial stability: Medium / Medium — strengthen supervision, early warning systems, eliminate domestic arrears accumulation. ### Key macro and program numeric highlights (preserve source values) - Growth and inflation: - GDP at constant market prices series (selected projection entries): 4.0 3.2 3.2 4.0 4.5 5.1 5.5 6.0 6.5 6.5 - Consumer prices (annual average) series (selected): 11.5 9.1 9.2 9.0 9.1 8.7 7.4 6.4 5.8 5.0 - External sector (US$ millions; selected): - Exports (goods and services) series (selected): 1,053 1,844 1,112 1,982 1,239 1,365 1,482 1,611 1,749 1,902 - Imports (goods and services) series (selected): 2,756 2,695 2,927 2,846 3,109 3,270 3,486 3,629 3,819 4,015 - Gross official reserves (selected): 758 695 750 791 777 950 1,097 1,204 1,342 1,489 - Months of imports (selected): 3.1 2.9 2.9 3.2 2.9 3.3 3.6 3.8 4.0 4.1 - Central government (percent of GDP; selected fiscal year series): - Revenue series (selected years): 23.4 21.3 21.1 22.6 21.2 22.0 22.5 23.1 23.3 23.3 - Expenditure and net lending series (selected): 28.4 29.2 28.9 26.5 27.8 26.8 25.7 25.0 24.6 24.7 - Overall balance (including grants series, selected): -5.0 -7.9 -7.9 -3.9 -6.6 -4.9 -3.2 -2.0 -1.3 -1.4 ### ECF access and Fund repayment capacity indicators - Authorities requested augmentation: SDR 27.76 million (20 percent of quota), bringing total access under program to SDR 105.835 million (76.25 percent of quota). - ECF disbursement schedule totals: 105.835 (76.250) SDR. - Indicators of capacity to repay Fund (selected projections): - Projected payments based on existing and prospective drawings (SDR millions, selected years): 3.44 14.34 18.98 26.35 22.91 23.65 29.40 29.91 23.66 20.60 17.25 8.90 1.66 0.54 - Projected level of credit outstanding (SDR millions, selected years): 179.1 206.1 198.9 173.1 150.7 127.6 98.7 69.4 46.2 26.2 9.5 1.1 0.0 0.0 *Source: IMF staff report — "1. Malawi and Climate Change" (excerpt).* ### 1. Malawi and Climate Change ___________________________________________________________________ 18 ### 1. Malawi and Climate Change ### Context - In May 2019, President Peter Mutharika and his party were re-elected for a second term, forming a minority government; main opposition parties are contesting the presidential election results in court and demanding the Electoral Commission Chair resign. Protests have caused considerable property damage and economic disruption. - Development challenges include chronic electricity shortages, high youth unemployment, and alleged corruption. - Tropical Cyclone Idai struck southern Malawi in March, causing severe flooding affecting over a million people, taking over 60 lives, ruining crops, and destroying homes, hospitals, schools, and other critical infrastructure. - Recovery and reconstruction projected to cost $370 million or 5 percent of GDP; reconstruction would build resilience for Malawi, which is globally amongst the countries most vulnerable to climate change. - The government requested an augmentation in access under the ECF to finance imports for post-cyclone reconstruction. ### Reconstruction financing and program adjustments - Reconstruction (2019H2 and 2020) will involve about $204 million (3 percent of GDP) in imports of goods and services. - This results in a balance of payments financing gap of $125 million (1.6 percent of GDP)—net of policy adjustments of about $80 million (1 percent of GDP) reflecting reprioritization of fiscal spending and use of foreign currency reserves buffers. - The proposed augmentation under the ECF is $40 million; this would complement $15 million of donor support and $120 million of World Bank support ($50 million of which will replace previously planned near-term projects) over 2019-20. - Securing further donor financing to enable more rapid progress towards the SDGs will require accelerating reforms in agriculture, public financial management, and procurement. ### Recent developments — growth, inflation, and external position - Real GDP growth rose from 3.2 percent in 2018 to 4.5 percent in 2019, driven by reconstruction, increased electricity generation, and an agricultural rebound. - Cyclone-related agricultural losses were more than compensated by bumper harvests elsewhere, producing significantly larger agricultural output after prior drought and insect infestations. - Inflation is anticipated to average 9.1 percent in 2019, reflecting elevated food prices due to cyclone-related supply chain disruptions and hoarding; non-food inflation remains on a downward trend. - Current account deficit expected to improve from 20.6 percent of GDP in 2018 to 18.4 percent of GDP in 2019. - International reserves coverage in months of prospective imports is expected to remain around 2.9 by end-2019 given continued large reconstruction imports. ### Exchange rate and monetary developments - For the first time in two years, the Kwacha fluctuated substantially against the US dollar: a 6 percent depreciation in 2019H1 (largest since mid-2016) was followed by a 5 percent appreciation in 2019Q3. - The real effective exchange rate appreciated about 13 percent over the twelve months August 2018–August 2019 due to large headline inflation differentials with trading partners. - The RBM loosened monetary policy in 2019H1: - Policy rate reduced by 150 basis points in January and another 100 basis points in May to 13.5 percent. - Reserve requirements reduced by 250 and 375 basis points to 5 and 3.75 percent on local and foreign currency deposits, respectively (all in January). - Lombard rate reduced by 310 basis points to 14.9 percent. - Additional liquidity and weak demand for repurchase agreements increased interbank rate volatility; the interbank rate was below the interest rate corridor for extended periods twice in 2019. - Credit growth rose from 11.5 percent at end-2018 to 18.8 percent in August 2019. ### Financial sector soundness - The banking system remains well capitalized, liquid, and profitable. - Non-performing loans declined by 1.3 percentage points since end-2018 to 4.8 percent at end-June 2019. - Provisioning increased to 55 percent of total loans. - RBM’s June 2019 stress test: banking system resilient to interest rate and income risk shocks but vulnerable to some credit and liquidity risk shocks. - One small loss-making bank was recapitalized; another is seeking a partner to inject capital and may otherwise exit the market. - The cyclone had little impact on banks. ### Macroeconomic outlook and risks - Growth projections: - 2019: 4.5 percent (actual/outturn) - 2020: projected to reach 5 percent - Medium-term: projected to rise to 6.5 percent with greater access to finance and more resilient infrastructure (enhanced electricity generation and irrigation, crop diversification, and better road networks). - Inflation: - 2019: expected average 9.1 percent - 2020: projected 8.7 percent - Medium-term: convergence towards 5 percent - Current account: - 2018: 20.6 percent of GDP - 2019: 18.4 percent of GDP - Projected to narrow to about 15 percent of GDP over time, though sizeable infrastructure-related imports will partly offset improvements. - International reserves expected to rise just above 4 months of prospective imports over the medium term, supported by strengthened competitiveness, export diversification, and fiscal restraint. - Downside risks: - Possible introduction of interest rate caps (rejected in March 2019 by previous Parliament but still discussed) could impede financial sector functioning. - Continued protests could substantially reduce urban economic activity. - Adverse weather conditions intensified by climate change and infestations could hurt growth, raise inflation, and increase balance of payments pressures. - Escalated global trade tensions could depress export demand and raise import costs. - Upside scenario: accelerated reform implementation could boost investor and donor confidence, potentially unlocking external financing including additional concessional funding. ### Fiscal performance and program monitoring - FY 2018/19 fiscal position improved relative to FY 2017/18 but not as much as programmed under the ECF arrangement. - Primary deficit reduced by 2 percent of GDP relative to prior year but exceeded the program target (adjusted for deviations in grants and debt service payments relative to the first review) by 2.5 percent of GDP. - Revenue dynamics in FY 2018/19: - Income tax revenues hurt in last quarter due to reduced manufacturing and services activity following import disruptions and business closures during protests. - Non-tax revenues underperformed due to lower than anticipated dividends from RBM and SOEs. - Spending overruns mainly reflect cyclone disaster relief, security spending to ensure safety during elections and post-election protests, and transfers to universities to raise salaries following staff strikes. - Foreign-financed development spending was lower than programmed due to shortfalls in grants, only partially offset by increased project-based concessional foreign borrowing. - The deficit was largely financed domestically, without any net financing from the RBM. ### Program performance and reforms - Quantitative performance criteria (QPC): - All but one QPC were met at end-December 2018 and end-June 2019. - The primary balance target (adjusted for deviations in grants and debt service payments relative to the first review) was missed by 1.5 percent of GDP in December and by 2.5 percent of GDP in June due to front-loading of planned spending, revenue shortfalls, and expenditure overruns. - Indicative targets on new domestic arrears and on social spending were met for both end-December and end-June. - Structural benchmarks (SBs) and public financial management reforms: - End-December 2018 SBs on commitment control and cash management were met. - Publication SBs, debt and bank account reconciliation SBs were completed by end-March 2019. - Regulations, policies, and guidelines for SOE oversight are complete except cabinet approval of the dividend policy (new SB for end-December 2020). - End-June 2019 SBs on publication of five reports by MDAs, commitment control, and expansion of accounts covered by IFMIS were met. - SBs on quarterly consolidated financial reports, debt, bank account reconciliation, and pilot SOE audits were completed by mid-September 2019. - Ex-post performance audits of two (out of three) capital projects completed on time; remaining audit delayed by accounting system issues, expected by June 2020. - SBs on budget release and expanding budget coverage of IFMIS to be completed by end-2020 due to FY 2019/20 budget approval timing (October). - End-September 2019 SB on RBM’s strategy for unwinding its holding of government securities was met. - End-December 2019 SB on audit of the public sector investment program (PSIP) database was completed in June 2019. - Corrective measures and waivers: - Corrective measures agreed for missed QPCs; authorities request waivers of nonobservance on this basis. - Spending reduced relative to FY 2018/19 outcome, returning to levels envisaged during the first review under the ECF arrangement while maintaining critical growth-enhancing spending. - Despite corrective measures, the domestic primary balance falls short by 0.4 percent of GDP of what was targeted during the first review to accommodate post-cyclone reconstruction and security spending. ### Policy framework and priorities - Policy anchors: preserving debt sustainability, entrenching macroeconomic stability, and advancing governance reforms to attain higher, more inclusive, and resilient growth. - Fiscal priorities: - Improve revenue outcomes and spending management, especially investment spending efficiency and monitoring of SOEs to contain fiscal risks. - Balance large post-cyclone reconstruction needs with the urgency to raise resilience to climate change. - Monetary and financial sector policy: - Tight monetary policy to contain inflation (noting the RBM’s partial loosening in 2019H1 and the need for prudent stance going forward). - Greater exchange rate flexibility and strengthening financial sector resilience to buffer shocks and support private sector development. - Governance reforms: - Continued momentum in public financial management and debt management reforms expected to gradually catalyze donor support. *Source: IMF staff report — "1. Malawi and Climate Change" (excerpt).* ### 16. Malawi is at moderate risk of external debt distress and high overall risk of ### 16. Malawi is at moderate risk of external debt distress and high overall risk of debt distress ### Debt sustainability and risks - LIC DSF indicates all baseline external debt indicators are below their policy-dependent debt burden thresholds, but stress tests highlight vulnerabilities to export shocks given the country’s narrow export base and heavy reliance on rain-fed agriculture. - The baseline present value (PV) of the public debt-to-GDP ratio remains above the benchmark until 2027—a consequence of: - high interest rates on domestic debt accumulated during 2014–17 (when inflation ranged between 20-30 percent), and - primary deficits averaging 2.5 percent of GDP over the past four years (partly due to natural disasters). - Stress tests underline continued vulnerability to climate change shocks. - Public debt reduction objective: reduce public debt from 62 to 44 percent of GDP by 2027—corresponding to the PV of public debt falling below the LIC DSF threshold for a country with weak debt carrying capacity. - Program constraint: the program limit of no non-concessional external borrowing will continue. ### Fiscal policy and consolidation measures - Authorities agreed on firm actions to prevent future fiscal slippages and reduce debt vulnerabilities, targeting a domestic primary surplus of 2 percent of GDP during FY 2020/21-24/25, reinforced by: - a domestic revenue mobilization strategy, - improvements in budget planning and management, procurement, public investment management, oversight of SOEs, and debt management (¶20, 25). - FY 2019/20 adjustment: - Tightening of the domestic primary balance by 2.1 percentage points relative to FY 2018/19 to target a surplus of 0.9 percent of GDP. - This represents a 0.4 percentage point of GDP loosening relative to the first review under the ECF arrangement. - Domestic revenue is lower by 0.2 percent of GDP and spending is higher by 0.2 percent of GDP (reflecting post-cyclone rehabilitation and additional security spending of 2.3 percent of GDP offset by 2.1 percent of GDP in spending cuts). - Key revenue measures and projections: - Revenues are anticipated to be 1.6 percent of GDP lower than at the time of the first review under the ECF due to lower grant projections (1.4 percent of GDP) and slightly lower tax and non-tax revenue projections (0.2 percent of GDP). - World Bank budget support for post-cyclone reconstruction of 0.6 percent of GDP ($40 million) was disbursed at end-FY 2018/19 and will be spent in FY 2019/20. - Tax measures in the approved FY 2019/20 budget include new environmental taxes, an import surcharge on select goods, and increased withholding taxes. - User fees and charges are being adjusted upwards; road tolling fees are being introduced; revised dividend policy to enforce SOE dividend payments. - Key expenditure adjustments: - Expenditures are anticipated to be 0.5 percent of GDP higher than at the time of the first review due to higher interest spending (0.2 percent of GDP) and slightly higher goods and services and subsidies/transfers (0.3 percent of GDP). - Wage and pension increases will be contained to inflation; new hiring limited to essential staff. - Domestically-financed capital spending reoriented towards resilient reconstruction (1.5 percent of GDP) with equivalent cuts in previously planned projects (0.8 percent of GDP already executed in FY 2018/19; 0.7 percent of GDP delayed or cut). - Better targeting of the iron sheet subsidy will cut costs by 0.1 percent of GDP. - Better targeting of FISP expected to reduce costs by 0.1 percent of GDP this year (ADMARC strategic grain reserves reform has no impact on the budget). - Selected central government operations indicators (FY 2018/19 — FY 2019/20; percent of GDP; from Text Table 2): - Revenue: 22.6 → 21.2 (Change ‐1.4) - Tax: 18.1 → 17.4 (Change ‐0.7) - Non‑tax revenue: 2.2 → 1.7 (Change ‐0.4) - Budget support: 0.0 → 0.6 (Change 0.6) - Project grants: 2.3 → 1.5 (Change ‐0.9) - Spending: 26.5 → 27.8 (Change 1.3) - Interest: 3.9 → 4.2 (Change 0.3) - Domestically financed development spending: 1.4 → 2.2 (Change 0.8) - Overall balance: ‐3.9 → ‐6.5 (Change ‐2.6) - Domestic Primary Balance: 1.4 → ‐1.2 (Change ‐2.6) - FY 2019/20 program target (domestic primary balance) projected: 1.3 → 0.9 (Change ‐0.4) - Medium-term revenue strategy: - Comprehensive review of the tax system and a domestic revenue mobilization strategy to be incorporated into the FY 2020/21 budget (MEFP ¶20). - Projected yields from these measures: at least 0.3 percent of GDP in FY 2020/21 and 0.2 percent of GDP in following years. - Additional measures: risk-based audits, improved tax compliance, rollout of the Integrated Tax Administration System (ITAS), moving fees towards marginal cost pricing, expanding road toll coverage, increasing digitalization. ### Monetary, exchange rate, and financial sector policies - Monetary policy focus: containing inflation; non-food inflation running just above 5 percent (at the lower end of the RBM’s target). - Policy rate reductions during 2019H1 appear appropriate; stance should be calibrated to keep inflation in single digits. - RBM expanding capacity in high frequency data, liquidity forecasting, and FPAS modeling to support transition toward inflation targeting. - Monetary framework changes and staff recommendations: - RBM shifted the reference rate from the Lombard rate to a weighted average of the Lombard rate, interbank rate, Treasury bill rates, and the savings rate in September. - Staff view: the new reference rate formula is less transparent and could raise banks’ intermediation costs; RBM should consult with the Fund by end-2020 and review the policy, and examine whether the foreign currency reserve requirement rate should be raised and unified with the local currency rate (MEFP ¶10). - Staff urged RBM to raise repurchase agreement rates to better mop up liquidity and align the interbank rate with the policy rate. - Exchange rate policy: - Authorities committed to a flexible exchange rate regime and intervene solely for accumulating reserves and smoothing excess volatility. - Need to deepen the interbank FX market; RBM will prepare a report on obstacles to FX market development (MEFP ¶15). - Financial sector oversight and resilience: - All banks are fully compliant with the IFRS9 standards. - Regulations to enhance Domestic Systemically Important Banks supervision took effect in June 2019. - Amendments to the Banking Act of 2010 and Financial Services Act of 2010, and a consumer protection bill, will be submitted to Parliament by end-2020. - Monitoring concerns: recent credit growth, increased foreign currency lending (which tripled to 23 percent over the past decade), and loan recovery/collateral quality. - New reporting template for credit bureaus has improved quality of reporting to banks; RBM encouraging improvements to the collateral registry. ### Governance reforms, SOE oversight, and program modalities - Governance and anti-corruption: - RBM independence enhanced by a new RBM Act (December 2018) prohibiting monetary financing of the government (except short-term advances repaid in cash). - No more conversions of ways and means cash advances into government securities will take place. - Between end-2017 and end-June 2019, RBM’s holdings of government securities declined by 12 percent: share of Treasury bills declined from 2.6 to 0.1 percent; Treasury notes from 76 to 39 percent. - Routine publication of an issuance calendar and engagement of MoF debt management unit in domestic debt management policies/operations. - A comprehensive Medium-Term Debt Management Strategy for 2018-22 has been developed. - Public Financial Management (PFM) reforms: - Reforms focus on cash management, routine fiscal reporting and bank reconciliation, reconciliation of debt data between MoF and RBM, quality control of fiscal reporting, improving MTBF, and broadening IFMIS coverage. - Authorities plan to implement a new IFMIS from July 2020; staff cautioned against proceeding too quickly and recommended mitigating measures (change management, training, phased implementation, quality assurance, transparent governance). - SOE oversight: - Containment of fiscal risks through improved SOE oversight (MEFP ¶18): submission to Parliament and publication of a consolidated annual report on SOEs, development of a prototype SOE database, and continued implementation of the automatic fuel pricing mechanism. - Upcoming submission to Parliament of an annual report on all SOEs highlighted as important to contain contingent liabilities. - Program modifications and financing: - Authorities requested an augmentation of access under the ECF of SDR 27.76 million (20 percent of quota, provided in three equal tranches), bringing total access under the program to SDR 105.835 million (76.25 percent of quota). - Malawi’s capacity to repay the Fund remains strong; financing assurances in place for the remainder of the program with external financing requirements mainly met through project loans from multilateral and bilateral donors. - Program monitoring: domestic primary balance replaces the existing primary balance QPC; a new IT on net foreign borrowing (net disbursements of concessional external debt) introduced; new SBs for fourth and fifth reviews proposed (e.g., cabinet approval of an SOE dividend policy, development of a domestic revenue mobilization strategy, adoption of electronic funds transfers and implementation of treasury management systems, report on obstacles to FX market development). - Program reviewed semi‑annually based on performance criteria, indicative targets, and structural benchmarks; targeted technical assistance remains critical. - Safeguards and RBM governance: - Implementation of recommendations from the July 2018 updated safeguards assessment has been slower than envisaged. - Legal amendments to strengthen RBM governance and autonomy were enacted in 2019; conversion of cash advances into securities eliminated. - Limited progress in addressing concerns over RBM’s reserve management practices; steps being initiated with World Bank support. - A recent lapse in the RBM’s banking for the government suggests deterioration in controls; an emergency liquidity assistance (ELA) framework is being developed. ### Staff appraisal and key policy recommendations - Macroeconomic outlook: - Malawi’s macroeconomic outlook is positive but vulnerable to climate change shocks. - Solid growth this year partly because Cyclone Idai only affected southern Malawi and harvests were bountiful elsewhere; historically extreme droughts and floods have negatively affected activity. - Over the medium term, resilient infrastructure (enhanced electricity generation and irrigation) and crop diversification should strengthen growth and reduce weather shock susceptibility; improved competitiveness should narrow the current account deficit; prudent policy should contain inflation to single digits. - Core assessment: - Debt vulnerabilities have risen and firm actions are needed to reduce them: Malawi is at moderate risk of external debt distress and high overall risk of debt distress. - Pace of consolidation slower than previously envisaged due to post-cyclone reconstruction and increased security spending, placing emphasis on delivering the planned medium-term fiscal adjustment. - Policy recommendations: - Deliver medium-term fiscal adjustment with strong revenue mobilization and reorientation of spending toward growth-enhancing items. - Advance public investment management reforms and focus new borrowing on projects with high rates of return aligned to development priorities, relying on concessional loans to contain borrowing costs. - Strengthen SOE oversight (including annual consolidated reporting to Parliament) to contain contingent liabilities. - Continue monetary policy calibration to keep inflation single-digit, review the new reference rate formula with Fund consultation by end-2020, and deepen the interbank FX market. - Continue PFM and governance reforms, implement IFMIS cautiously with mitigation measures, and pursue targeted technical assistance to achieve program objectives. *IMF staff report: Malawi — Debt sustainability, fiscal and macroeconomic policy assessment, and program modalities.* ### 31. Governance and transparency reforms—critical to reducing vulnerabilities to ### 31. Governance and transparency reforms—critical to reducing vulnerabilities to ### Governance and transparency reforms: progress and risks - Good progress is being made in reforms to cash management, fiscal reporting, bank reconciliation, debt, improving the medium-term budgetary framework, and further broadening IFMIS coverage. - The authorities are committed to implementing a new IFMIS but this needs to be carefully managed to minimize governance challenges stemming from implementation slippage and simultaneous introduction of new practices and technologies. - Staff welcomes on-going efforts to deepen the domestic debt market and the increased engagement of the MoF in this area. - The RBM has reduced its holdings of government securities and the new RBM Act enhances the RBM’s independence. - Staff urged the authorities to press forward with implementation of the remaining safeguards recommendations. ### Monetary policy and exchange rate management - Monetary policy should continue to anchor inflation and the recent increase in exchange rate flexibility is welcome. - While policy rate reductions earlier this year appear appropriate, persistently high food prices call for calibrating the monetary policy stance to preserve single-digit inflation. - To avoid extreme bouts of excess liquidity in the market and maintain the interbank rate within the corridor, staff recommended raising repurchase agreement rates. - Continued exchange rate flexibility will be critical for cushioning shocks and enhancing competitiveness and will be facilitated by a deepening of the interbank FX market. ### Banking sector resilience and financial intermediation - The banking system remains resilient. - All banks are fully compliant with the IFRS9 standards. - Non-performing loans have been reduced and provisioning increased. - Plans for enhancing the collateral registry and steps to improve the quality of credit bureaus’ reporting should support deeper financial intermediation. - While credit to the private sector has picked up in recent months, sustainably increasing access to finance will require addressing structural barriers to reduce the cost of borrowing. ### IMF program support and staff recommendations - Staff supports the completion of the second and third reviews under the ECF, the request for waivers of non-observance for the end-December 2018 and end-June 2019 QPCs on the primary balance, and the request for augmentation of access. - These recommendations are based on the authorities’ commitment to corrective fiscal measures and on the strength of the reform agenda articulated by the authorities in their MEFP. ### Climate vulnerability, impacts, and resilience (Box 1) - Malawi is extremely vulnerable to climate change: the frequency and intensity of droughts, intense rainfall, and flash floods have increased over the last 50 years. - Globally, Malawi is ranked as the 23rd most vulnerable to climate change (MapleCroft, 2018) and 21st least prepared to adapt (Notre Dame Global Adaptation Initiative (ND-GAIN) Index, 2015). - Drivers of vulnerability: a rapidly growing population, reliance on rain-fed agriculture, and poor infrastructure—each natural disaster poses a risk to food security and worsening income inequality. - Natural disasters have substantial macroeconomic costs for Malawi: an event study finds that even two years after the natural disaster, real GDP growth falls short of its pre-disaster rate. - A natural disaster is defined as one that results in damage and losses of at least 0.5 percent of GDP. - In the aftermath of a disaster, reduced agricultural exports, increased trade transit costs, and imports for reconstruction can raise current account pressures. - Current disaster relief and mitigation steps: - An emergency response plan with defined decision-making processes and readiness to contain disruptions to public services. - New environmental taxes as part of mitigation efforts. - Additional strategic needs: a realistic and costed roadmap that should include: - (i) structural resilience (roadways, energy, crops, livestock, fisheries, irrigation water supply systems); - (ii) financial resilience (self-insurance, risk-transfer instruments); - (iii) contingency planning to support post-disaster social; and policy buffers. - Population projection note: With a 3 percent per annum growth rate, Malawi’s population is expected to triple by 2050. - Study coverage note: The study covers episodes of natural disaster over the last two decades. While it does not determine causality, the study provides a useful benchmark in the absence of sufficient data for econometric analysis. *IMF staff summary based on chapter content.* ### 3.2 percent in 2018. ### 3.2 percent in 2018. ### Growth and donor assistance - Real GDP Growth: "3.2 percent in 2018." - Donor assistance: "Donor assistance was adversely impacted by the cashgate scandal since 2013, and has yet to recover." - Real effective exchange rate: "The REER has depreciated over the past year, following nominal exchange rate depreciation." ### Monetary developments - Average interest rates: "Average interest rates continued to decline in 2019." - Money growth: "Money growth has declined over the past six years." - Credit: "Real credit to the private sector continued to pick up in 2019." - Liquidity: "Excess liquidity in the banking system spiked in 2019H1 and then declined back to average levels (as of July)." ### Fiscal developments and outlook - Domestic revenue: "Domestic revenues (the main source of government revenue)is anticipated to increase slightly in FY2019/20..." - Central government financing: "...reducing domestic financing pressures..." - Public debt: "...and stabilizing public debt." - Expenditure: "...whereas total spending is expected to decline relative to previous years..." ### Financial stability indicators - Capital, profitability, NPLs, liquidity: Figures and series shown for "Tier 1 capital to risk weigthed assets", "Total capital to total assets", "Return on equity", "Return on assets (rhs)", "NPLs to total loans and advances", "Liquid assets to deposits and short-term liabilities", and "Liquid Assets to total assets" across 2014–19 (see source charts). ### Key statistics and projections (selected table excerpts preserved verbatim) - National accounts and prices (percent change, unless otherwise indicated) - "GDP at constant market prices4.03.23.24.04.55.15.56.06.56.5" - "Nominal GDP (billions of Kwacha)4,550 5,007 5,0545,625 5,702 6,466 7,279 8,163 9,141 10,166" - "GDP deflator10.97.87.78.08.07.96.75.85.14.4" - "Consumer prices (end of period)7.19.59.98.99.87.97.05.95.35.0" - "Consumer prices (annual average)11.59.19.29.09.18.77.46.45.85.0" - Investment and savings (percent of GDP) - "National savings -8.91.9 -9.14.7 -6.0-4.6 -3.6-2.2-1.1-0.1" - "Gross investment13.411.3 11.512.3 12.412.6 13.3 13.513.713.9" - Central government (percent of GDP on a fiscal year basis) - "Revenue23.421.3 21.122.6 21.222.0 22.5 23.123.323.3" - "Tax and nontax revenue19.919.8 19.620.2 19.119.8 20.3 20.720.820.8" - "Grants3.51.51.52.32.02.22.22.42.52.5" - "Expenditure and net lending28.429.2 28.926.5 27.826.8 25.7 25.024.624.7" - "Overall balance (including grants)-5.0-7.9 -7.9-3.9 -6.6-4.9 -3.2-2.0-1.3-1.4" - "Foreign financing2.52.62.60.61.10.91.11.11.01.1" - "Total domestic financing4.37.87.84.86.94.32.10.90.30.3" - Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated) - "Money and quasi money 19.711.9 11.412.3 12.813.4 12.8 12.612.512.3" - "Net foreign assets 11.1 -11.5 -7.87.4 -0.310.1 10.89.410.09.5" - "Net domestic assets8.523.5 23.04.99.83.32.03.22.52.8" - "Credit to the government 21.39.87.32.91.62.31.80.10.20.4" - "Credit to the private sector (percent change)0.48.0 11.510.1 13.714.8 15.2 16.116.216.1" - External sector (US$ millions, unless otherwise indicated) - "Exports (goods and services)1,053 1,844 1,1121,982 1,239 1,365 1,4821,611 1,749 1,902" - "Imports (goods and services)2,756 2,695 2,9272,846 3,109 3,270 3,4863,629 3,819 4,015" - "Gross official reserves758695750791777950 1,097 1,204 1,342 1,489" - "Months of imports3.12.92.93.22.93.33.63.84.04.1" - "Current account (percent of GDP, assuming financing gap is closed)-22.3-9.3 -20.6-7.6 -18.4 -17.2 -16.8 -15.7 -14.8 -14.0" - Balance of Payments (selected lines, millions of USD) - "Current account balance -1,388.8 -637.0 -1,418.6 -553.3 -1,442.8 -1,426.6 -1,480.6 -1,471.2 -1,494.4 -1,509.3" - "Merchandise trade balance -1,556.5 -590.9 -1,663.5 -605.3 -1,732.5 -1,802.5 -1,890.8 -1,910.9 -1,966.2 -2,036.5" - "Exports896.5 1,701.9 929.8 1,813.8 1,038.3 1,144.6 1,239.3 1,343.1 1,454.2 1,577.9" - "Imports-2,452.9 -2,292.8 -2,593.3 -2,419.1 -2,770.8 -2,947.1 -3,130.1-3,254.1 -3,420.4 -3,614.5" - "Unrequited transfers (net)466.6 362.0 560.3 462.7 607.5 667.6 722.8 759.3 801.6 843.7" - "Capital account balance317.5 282.8 263.5 346.9 326.0 399.5 457.8 504.7549.9 578.8" - "Financial account balance380.1 285.6 789.5 288.6 1,035.8 1,160.2 1,183.5 1,114.3 1,117.9 1,111.0" - "Gross reserves757.9 695.3 750.1 790.7 777.0 950.0 1,097.1 1,204.4 1,342.2 1,488.8" - "Months of imports3.12.92.93.22.93.33.63.84.04.1" ### Quarterly and fiscal tables (highlights) - Central government operations (selected): revenue, tax revenue, grants, expenditure, current expenditure, wages and salaries, interest payments, development expenditure, and financing lines are presented in detailed quarterly and fiscal year tables (2017/18–2023/24) with values in Billions of Kwacha and percent of GDP. - Monetary authorities’ balance sheet and monetary survey: reserve money, net foreign assets, net domestic assets, money and quasi-money, credit to government, credit to private sector, and related memoranda for 2018–20 are shown in tables. *Source: 1mwiea2019001 - 3.2 percent in 2018.* ### 1. Regulatory Tier 1 capital to risk weighted assets16.213.512.4 13.8 15.3 15.5 16.9 17.2 16.4 ### 1mwiea2019001 - 1. Regulatory Tier 1 capital to risk weighted assets16.213.512.4 13.8 15.3 15.5 16.9 17.2 16.4 ### Capital adequacy - Regulatory Tier 1 capital to risk weighted assets: 16.2, 13.5, 12.4, 13.8, 15.3, 15.5, 16.9, 17.2, 16.4, 16.2 - Regulatory total capital to risk weighted assets: 19.1, 17.1, 15.8, 17.0, 19.4, 19.0, 20.2, 20.7, 20.4, 20.1 - Total capital to total assets: 15.4, 17.6, 17.1, 16.7, 15.9, 14.7, 15.6, 16.4, 16.2, 16.4 ### Asset composition and quality - Non-performing loans to gross loans and advances: 15.4, 14.9, 10.6, 17.0, 15.7, 6.1, 6.2, 6.1, 4.8, 4.5 - Provisions to non-performing loans: 29.1, 31.8, 25.7, 25.5, 34.5, 42.4, 46.0, 48.7, 55.0, 54.4 - Total loans and advances to total assets: 40.5, 40.3, 40.0, 34.8, 28.0, 30.5, 29.5, 30.3, 32.6, 34.9 - Foreign currency loans to total loans and advances: 13.5, 19.1, 28.6, 21.8, 27.9, 24.3, 26.9, 16.9, 23.4, 20.9 ### Earnings and profitability - Return on assets (ROA): 4.8, 4.0, 3.1, 2.7, 2.3, 2.2, 1.8, 1.9, 2.8, 2.8 - Return on equity (ROE): 37.5, 26.8, 19.2, 18.4, 15.7, 16.6, 14.3, 14.6, 21.2, 21.3 - Non-interest expenses to gross income: 39.7, 45.4, 51.4, 50.0, 49.7, 52.1, 54.0, 53.0, 52.0, 51.8 - Interest margin to gross income: 39.7, ---, ---, 50.2, 47.8, 50.8, 46.5, 46.1, 51.1, 50.2, 49.6 - Non-Interest Income to Revenue: 31.8, 37.8, 30.5, 28.0, 27.3, 34.2, 31.5, 29.0, 32.6, 33.0 - Net Interest Income to Assets: 9.1, 8.4, 9.7, 9.7, 8.7, 7.9, 0.7, 2.1, 4.4, 5.2 - Personnel expenses to non-interest expenses: 45.4, 45.1, 45.3, 43.8, 46.5, 42.9, 44.9, 44.1, 43.9, 44.0 ### Liquidity - Liquid assets to deposits and short-term liabilities: 59.1, 62.4, 59.0, 72.3, 77.0, 63.3, 64.8, 60.7, 59.1, 56.4 - Total loans to total deposits: 56.6, 58.3, 58.5, 54.2, 45.1, 47.4, 46.6, 46.9, 51.0, 54.5 - Liquid assets to total assets: 43.7, 48.8, 43.3, 50.4, 55.0, 44.8, 46.1, 42.2, 41.7, 39.6 - Foreign exchange liabilities to total liabilities: 26.3, ---, ---, 26.1, 19.7, 19.8, 13.8, 17.6, 26.1, 18.7, 19.1 ### ECF disbursements schedule, 2018–21 (Millions of SDR) - Amounts and availability dates: - 11.15 (8.033) April 30, 2018 — Executive Board Approval of Three Year ECF arrangement. Status: Disbursed - 11.15 (8.033) October 15, 2018 — Observance of performance criteria for June 30, 2018 and completion of first review. Status: Disbursed - 11.15 (8.033) October 15, 2019 — Observance of performance criteria for December 31, 2018, and completion of second review. - 20.40 (14.697) October 15, 2019 — Observance of performance criteria for June 30, 2019, and completion of third review. - 20.40 (14.697) April 15, 2020 — Observance of performance criteria for December 31, 2019, and completion of fourth review. - 20.41 (14.705) October 15, 2020 — Observance of performance criteria for June 30, 2020, and completion of fifth review. - 11.175 (8.051) April 15, 2021 — Observance of performance criteria for December 31, 2020, and completion of the sixth review. - Total for the ECF: 105.835 (76.250) - Memorandum item: 138.80 *Source: IMF staff estimates.* ### Indicators of capacity to repay the Fund, 2019–32 (selected projections) - Projected payments based on existing drawings (SDR millions): - Principal: 3.3, 13.8, 18.44, 25.81, 22.37, 23.11, 20.51, 13.78, 6.41, 3.35, 0.00, 0.00, 0.00, 0.00 - Charges and interest: 0.14, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54, 0.54 - Projected payments based on prospective drawings (SDR millions): - Principal: 0, 0, 0, 0, 0, 0, 8.35, 15.59, 16.71, 16.71, 16.71, 8.36, 1.12, 0.00 - Charges and interest: 0 (all years listed) - Projected payments based on existing and prospective drawings (SDR millions): 3.44, 14.34, 18.98, 26.35, 22.91, 23.65, 29.40, 29.91, 23.66, 20.60, 17.25, 8.90, 1.66, 0.54 - Same series in US$ Millions: 4.76, 19.75, 26.27, 36.66, 32.01, 33.22, 41.30, 42.01, 33.23, 28.93, 24.23, 12.50, 2.33, 0.76 - Percent of exports of goods and services: 0.38, 1.45, 1.77, 2.28, 1.83, 1.75, 2.02, 1.90, 1.40, 1.13, 0.88, 0.42, 0.07, 0.02 - Percent of debt service: 5.41, 20.97, 24.63, 29.07, 25.06, 24.63, 29.21, 28.69, 21.89, 18.30, 15.07, 7.92, 1.49, 0.49 - Percent of quota: 2.48, 10.33, 13.67, 18.98, 16.51, 17.04, 21.18, 21.55, 17.05, 14.84, 12.43, 6.41, 1.20, 0.39 - Percent of gross official reserves: 0.61, 2.08, 2.39, 3.04, 2.38, 2.23, 2.52, 2.35, 1.71, 1.38, 1.07, 0.51, 0.09, 0.03 - Percent of GDP: 0.06, 0.24, 0.30, 0.39, 0.32, 0.31, 0.36, 0.34, 0.25, 0.21, 0.16, 0.08, 0.01, 0.00 ### Projected level of credit outstanding based on existing and prospective drawings - SDR millions (selected years): 179.1, 206.1, 198.9, 173.1, 150.7, 127.6, 98.7, 69.4, 46.2, 26.2, 9.5, 1.1, 0.0, 0.0 - US$ Millions (selected years): 246.3, 284.6, 275.9, 241.2, 211.1, 179.6, 139.0, 97.6, 65.1, 36.9, 13.3, 1.6, 0.0, 0.0 - Percent of exports of goods and services: 19.9, 20.8, 18.6, 15.0, 12.1, 9.4, 6.8, 4.4, 2.7, 1.4, 0.5, 0.1, 0.0, 0.0 - Percent of debt service: 280.0, 302.1, 258.6, 191.3, 165.3, 133.2, 98.3, 66.7, 42.9, 23.3, 8.3, 1.0, 0.0, 0.0 - Percent of quota: 129.0, 148.5, 143.3, 124.7, 108.6, 91.9, 71.1, 50.0, 33.3, 18.9, 6.8, 0.8, 0.0, 0.0 - Percent of gross official reserves: 31.7, 30.0, 25.1, 20.0, 15.7, 12.1, 8.5, 5.5, 3.4, 1.8, 0.6, 0.1, 0.0, 0.0 - Percent of GDP: 3.2, 3.4, 3.1, 2.6, 2.1, 1.7, 1.2, 0.8, 0.5, 0.3, 0.1, 0.0, 0.0, 0.0 ### Memorandum items (selected macro projections) - Exports of goods and services (millions of U.S. dollars): 1,239, 1,365, 1,482, 1,611, 1,749, 1,902, 2,049, 2,208, 2,379, 2,560, 2,754, 2,963, 3,188, 3,430 - Debt service (millions of U.S. dollars): 88.0, 94.2, 106.7, 126.1, 127.7, 134.9, 141.4, 146.4, 151.8, 158.1, 160.8, 157.8, 156.2, 155.6 - Quota (SDR millions): 138.8 (each year listed) - Gross official reserves (millions of U.S. dollars): 777, 950, 1,097, 1,204, 1,342, 1,489, 1,636, 1,787, 1,943, 2,098, 2,260, 2,462, 2,653, 2,849 - GDP (millions of U.S. dollars): 7,636, 8,290, 8,787, 9,380, 10,070, 10,798, 11,552, 12,306, 13,127, 13,985, 14,922, 15,912, 16,945, 18,097 ### Projected external borrowing (January 1, 2019–December 31, 2019) - PPG external debt contracted or guaranteed (US$ million) and PV of new debt (US$ million): - Concessional debt, of which: 124, 60 (volume 124, PV 60) - Multilateral debt: 124, 60 - Bilateral debt: 0, 0 - Non-concessional debt, of which: 0, 0 - Semi-concessional: 0, 0 - Commercial terms: 0, 0 - Use of debt financing: - Infrastructure: 124, 60 - Budget Financing: 0, 0 - Indicative projections (memo): 2020 59 30-38; 2021 44 23-29 ### Quantitative targets, 2018–20 (selected) - Reserve money (ceiling on stock) (upper bound) (millions of kwacha): Prog./IT figures and status reported (examples): 326,115; 298,112; Met; 308,798; 281,997; 346,236; 318,376; Met; 340,175; 324,219; 318,529; 343,225; 362,598 - Primary balance (floor) (millions of kwacha, PC): -4,456; -3,770; -83,657; Not Met; -2,684; -168,145; 89,757; -125,614; Not Met; -1,236; -101,537; -93,418; -48,574; -14,061 - Domestic primary balance (floor) (PC): -37,872; -92,565; -66,909; -42,339; -12,976; 53,112; 16,739 - RBM financing of central government (ceiling) (PC): 0; 93,710; 25,418; Met; 0; -150,228; 0; 0; Met; 0; 0; 0; 0; 0 - New domestic arrears (ceiling) (IT): 0; 0; Met; 0; 0; 0; 0; Met; 0; 0; 0; 0; 0 - Social spending (floor) (IT) (millions of kwacha): 182,207; 208,717; Met; 273,310; 318,515; 364,413; 406,385; Met; 103,104; 229,991; 350,619; 449,469; 126,966 - Net international reserves of the RBM (floor) (US$ millions, PC): 428.6; 429.5; 486.2; Met; 436.6; 503.0; 460.4; 470.8; 487.8; Met; 473.1; 486.7; 523.4; 557.0; 597.2 - Contracting or guaranteeing of non-concessional external debt (ceiling) (PC): 0; 0; Met; 0; 0; 0; 0; Met; 0; 0; 0; 0; 0 - Net foreign borrowing of the central government (ceiling) (IT): 77.3; 48.9; 61.0; 72.8; 25.7 (mem.) - Program exchange rate (kwacha per US$): 732 (all periods listed) ### Structural benchmarks, 2018–20 (selected) - Public financial management: - Submission to the MoF of five reports by the MDAs by mid-following month and publication of the summary on the MoF website (continuous, monthly from May 15, 2018). Rationale: Improve fiscal transparency; prevent accumulation of new domestic arrears; reduce vulnerabilities to corruption. Status entries: Not Met; Implemented with Delay; Met. - Maintain a transparent commitment control system for all MDAs; MoF to centrally compile consolidated commitments by end of following month and place on MoF website; classify bills overdue for more than 90 days. (Continuous, monthly from May 31, 2018). Status: Met / Met. - Prepare quarterly consolidated financial reports with fully reconciled bank accounts and publish within specified timelines; certified by Auditor General. (Continuous, quarterly from March 31, 2019). Status: N/A; Not Met; Implemented with Delay. - Reconcile all bank accounts MG1 and six operating accounts within 90 days after end of each month. (Continuous, monthly from July 29, 2018). Status: Not Met; Implemented with Delay. - Reconcile all debt data between the MOF and RBM. (Continuous, monthly from April 30, 2018). Status: Not Met; Implemented with Delay. - CMU variance analysis on forecasting errors every three months. (End-December 2018). Status: Met / N/A. - Finalize and issue draft regulations, policies and guidelines covering SOE ownership, dividend and surplus, and preparation of PMPBs. (End-December 2018). Status: Not Met; Implemented Except Dividend Policy. - Pilot ex-post reviews/performance audits of major capital projects. (End-June 2019). Status: N/A; Not Met; Two of three project reviews completed. - Submit to Parliament a report on pilot audit of main public corporations. (End-June 2019). Status: N/A; Not Met; Implemented with Delay. - Move from monthly to quarterly budget release and allow MDAs to commit through IFMIS up to released budget. (End-June 2019). Status: N/A; Not Met. - Bring all TSA sub-accounts into IFMIS including projects, receipts and payments. (End-June 2019). Status: N/A; Met. - Use IFMIS to record commitments prior to submission of new contracts; disclose accumulated commitments and outstanding bills on MoF website. (End-August 2019). Status: N/A; Not Met. - Audit of PSIP database. (End-December 2019). Status: N/A; Met. - Financial sector: - Develop a strategy to pace the unwinding of RBM holdings of government securities. (End-September 2019). Rationale: Improve debt management and governance. Status: N/A; Met. - Develop a roadmap for increasing access to finance. (End-December 2019). Rationale: Increase financial sector intermediation. - RBM research department review on obstacles to FX market development. (End-June 2020). Rationale: Deepen interbank FX market; improve market functioning. *Source: Reserve Bank of Malawi; IMF staff projections; IMF staff and Malawian authorities.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks - Rising protectionism and retreat from multilateralism. - Relative Likelihood in next 1–3 years: High - Impact if Realized: Medium - Impact summary: Escalated global trade tensions could depress export demand and raise import costs. - Policy advice: Increase exchange rate flexibility to absorb shocks, strengthen FX reserve buffer to facilitate adjustment, and step-up structural reforms to support economic diversification and competitiveness. - Weakening demand in key partner economies. - Relative Likelihood in next 1–3 years: Medium/High - 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. - Sharp rise in risk premia and increased financial vulnerability. - Relative Likelihood in next 1–3 years: High - Impact if Realized: Medium - Impact summary: Sharp rise in funding costs reduce financial flows, raise debt service costs and refinancing risks, elevates inflationary pressures and undermines growth prospects. Build-up of financial vulnerability encouraged by lose monetary policy and excessive risk-taking could reduce resilience to external shocks. - Policy advice: Keep fiscal discipline and ensure monetary policy is consistent with growth and inflation objectives, maintain adequate foreign reserves, and smooth short-term exchange rate volatility. - Energy price volatility. - Relative Likelihood in next 1–3 years: Medium - Impact if Realized: Medium - Impact summary: Energy price fluctuations stemming from supply and demand shocks can add to balance of payments pressures and increased domestic production costs. - Policy advice: Tighten monetary policy, increase exchange rate flexibility, strengthen FX reserve buffer, gradually adjust electricity prices to reflect market prices, apply the automatic fuel price adjustment mechanism and replenish the fuel price stabilization fund to ensure adequate energy supplies and contain additional fiscal cost/contingent liabilities. - Higher frequency and severity of natural disasters. - Relative Likelihood in next 1–3 years: Medium - Impact if Realized: High - Impact summary: Frequent natural disasters can hamper production capacity, impose additional burden on public debt and cause severe economic damage. - Policy advice: Improve infrastructure quality, invest in modernizing disaster reduction measures, relocate people from vulnerable areas, allow fiscal buffer for future disasters and secure multiple trade corridors. - Note: "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline scenario path, which is most likely to materialize in the view of IMF staff. The Relative Likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline scenario." - Note: "The policy response suggested by Fund staff assumes all other circumstances remain unchanged. For a combination of shocks, policy responses would need to be modified to avoid conflicts." ### 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 an effective commitment control system, and increase revenue mobilization. - 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. - Slow growth. - Relative Likelihood in next 1–3 years: Medium - Impact if Realized: High - Impact summary: Insufficient jobs for new entrants into the labor market, given Malawi’s fast-growing population, would result in higher unemployment rates. - Policy advice: Step-up structural reforms to support economic diversification and competitiveness, access to finance, and resilience to climate change. - 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: Medium - Impact summary: Conflicting signals on policy intentions confuse market participants’ confidence. - Policy advice: Continue improving 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. *Source: Annex I. Risk Assessment Matrix (Malawi), IMF country report content.* ### 8. Short-term risks are tilted to the downside. Malawi’s agriculture-driven economy is ### 8. Short-term risks are tilted to the downside. Malawi’s agriculture-driven economy is ### Short-term risks and outlook - Agriculture-driven economy vulnerable to adverse weather conditions, climate change, and pest infestations; food security supported by "already accumulated substantial food reserves" (monitoring ongoing). - Escalated global trade tensions could depress export demand and raise import costs. - Volatile tobacco exports combined with the above could induce stress on the exchange rate. - A slower-than-expected disinflation process could raise interest rates, increasing the government’s interest bill and hampering access to finance. - Upside risks: better-than-expected harvests and higher-than-expected export commodity prices could boost medium-term growth. ### Monetary and Financial Sector Policies - Monetary policy focus: - Continue entrenching disinflation; aim to maintain single digit inflation to achieve the medium-term objective of 5 percent. - Monetary policy formulation and implementation will be consistent with the 5 percent medium-term objective. - Operational framework transition and inflation targeting: - Complete transition to an interest rate-based operational framework and aim to adopt inflation targeting over the medium-term. - RBM’s 2019-21 strategic plan: full-fledged inflation targeting is the medium-term strategic objective. - Improve primary and secondary market operations to strengthen monetary policy transmission. - Modified reference rate for base lending rates of commercial banks from the Lombard rate to the weighted average of the Lombard rate, the Interbank rate, all types of Treasury bill rates, and the savings rate; implementation will be monitored and reviewed as necessary in consultation with the IMF. - Continue expanding capacity in high frequency data, liquidity forecasting, and the FPAS modeling. - Recent policy adjustments and future stance: - In early-2019 RBM adjusted downwards the policy rate, the liquidity reserve requirements (LRR), and the Lombard rate. - RBM will continue to review economic conditions and take necessary decisions consistent with the 5 percent medium-term inflation objective; this may include re-aligning the foreign currency LRR with the local currency LRR. - Government securities market reforms: - Ensure interest rates on all government securities continue to be determined through auctions to avoid market distortions. - To deepen the secondary market: disclose volumes to be offered in auctions, avoid cancelation of auctions. - Improve planning for government security issuance by establishing an annual borrowing plan with updates and an issuance plan; the issuance calendar will include the volume of securities to be issued in each auction. - Structural measures to reduce borrowing costs and improve access to finance: - Promote mobile technology, manage risks and reduce the cost of doing business for banks, strengthen financial frameworks, and improve property rights. - Develop a road map to improve access to finance by December 2019 (structural benchmark). ### Central bank independence and RBM holdings - RBM Act and PFM alignment: - Repealed and replaced the RBM Act with a new RBM Act 2018 to enhance RBM mandate, autonomy, and prohibit purchasing government securities in the primary market; limit credit to government to short-term advances repaid in cash. - RBM will not convert ways and means cash advances to the government into government securities. - Revisions to the PFM Act will be aligned with the amended RBM Act. - RBM holdings of government securities: - RBM holdings reduced by 12 percent since end-2017, mainly through sales in the secondary market. - RBM’s share of the total stock of Treasury notes fell from 76 to 39 percent between end-December 2017 and end-June 2019. - RBM’s share of Treasury bills fell from 2.6 to 0.1 percent during the same period. - A strategy to guide future unwinding of RBM holdings has been developed, centering on targeting appropriate levels and composition of holdings to support monetary policy while minimizing adverse effects on the yield curve, primary issuance appetite, and RBM profitability. ### Financial sector stability and regulatory measures - IFRS9 and provisioning: - All banks fully compliant with IFRS9 standards (effective January 2018); ensure adequate provisioning and that NPLs remain within regulatory requirement. - Encourage banks to enhance loan recovery efforts and improve analysis of collateral quality, including enhancing the collateral registry. - Banking system efficiency and structural adjustments: - Measures taken to reduce overhead costs (e.g., credit referencing system and the national ID registry). - As T-bill rates decline, banks relying on government securities for profit margins will need to modify business models and reduce interest rate spreads. - Continue monitoring loan concentration risks, surveillance of large borrowers, and enforcement of the single borrower exposure limit. - Regulations for Domestic Systemically Important Banks supervision took effect in June 2019. - Foreign currency lending and prudential oversight: - Given rising bank lending in foreign currency, ensure all banks meet the net open position requirement and lending in foreign currency is made particularly to clients with sources of foreign currency earnings. - Continue to review the prudential toolkit. - AML/CFT and financial infrastructure: - Regulations related to the revised AML/CFT framework (enacted in 2017) were developed and gazetted in 2018. - Encourage commercial banks to develop sector skills and increase financial literacy. - Improve financial infrastructure, facilitate mobile banking infrastructure, increase non-bank financial intermediation, and increase protection of creditors’ and borrowers’ rights by improving contract enforcement. - Legal and supervisory reforms: - Re-submit to Parliament, before end-2020, amendments to the Banking Act of 2010 to align bank resolution legal framework closer to best practices. - Develop a consumer protection bill to be submitted to Parliament by end-2020. ### Exchange rate policy and FX market development - Commitment to floating exchange rate regime as fundamental for policy success; RBM will intervene only to dampen excess volatility and accumulate reserves. - Plan to deepen the interbank FX market and undertake a comprehensive study (including regional central bank and private sector consultations) to determine obstacles to FX market development and best framework for intervening in the FX market; a report will be prepared by June 2020 (structural benchmark). ### Fiscal Policy: stance and targets - Fiscal policy will support disinflation and help reduce debt vulnerabilities by increasing domestic revenues, containing spending within available resources, avoiding accrual of domestic and external arrears, and avoiding non-concessional external borrowing. - Continued prudent fiscal policies needed to keep public debt-to-GDP ratio on a downward trajectory and prevent private sector crowding out. - FY 2019/20 objectives and targets: - Aim to restore budget balance in FY 2019/20. - Approved FY 2019/20 budget foresees a primary surplus of 1.5 percent of GDP. - Plan to backload spending and spend only as revenues materialize; target a domestic primary surplus of 0.9 percent of GDP (which translates to a primary deficit of 0.8 percent of GDP) as a minimum to entrench macroeconomic stability while prioritizing post-cyclone rehabilitation and reconstruction. - Relative to FY 2018/19, this represents a tightening of the domestic primary balance by 2.1 percent of GDP and the overall primary balance by 1.5 percent of GDP. - Key measures to achieve targets: - Raise tax revenues through multiple measures projected to add at least 0.3 percent of GDP relative to the outturn in FY 2018/19, and increase imports widening the tax base by 0.2 percent of GDP. Measures include: - Introducing excises on plastic bags, pipes, and packaging. - Adjusting excise rates for inflation and applying it on sales price. - Introducing a presumptive tax on commercial passenger vehicles, carbon tax on motor vehicles, and an import surcharge on select goods (such as alcohol, cigarettes, and some foods). - Introducing a withholding tax on interest earned by Trust Funds and commissions to mobile network operators. - Freeze the current PIT schedule (including keeping the tax-free bracket in line with the minimum wage), refrain from introducing further exemptions, allowances and rate reductions, and ensure enough funds for timely VAT refunds. - Continue enhancing tax administration to yield at least 0.1 percent of GDP from improved administration (risk analysis, risk-based audits, rolling out ITAS, improving registration, on-time filing/payment compliance, stronger penalties, improved use of ASYCUDA World). - Increase user fees and charges for inflation adjustment and progress toward marginal cost pricing; introduce road tolling fees. - Implement dividend policy to ensure SOE profits and surpluses are remitted to the government; increase share of dividends due to government and meet statutory bodies’ investment needs through budget appropriation rather than retention of surpluses. - Limit wage and pension increases to inflation and limit new hiring to essential staff; note: recent 40 percent increase in the minimum wage is not expected to affect the government wage bill as most government salaries are already well above the minimum wage. - Reduce the maize procurement budget (assuming no extraordinary needs during FY 2019/20) and limit coverage of the Farm Input Subsidy Program. - Reduce transfers to public entities by improving their revenue generating capacity. - Reduce goods and services spending in non-priority areas (staff travel, purchase of motor vehicles, office equipment) and channel savings to cyclone victims, rehabilitation and security; strictly limit non-essential recurrent spending. - Increase social spending in line with implementation capacity, with significant portion targeted to cyclone victims and rehabilitation. - Reorient development spending toward post-cyclone resilient reconstruction; create space by reducing or delaying planned spending and better targeting the iron sheet subsidy. ### State-owned enterprises (SOEs) oversight and public investment management - SOE oversight measures and benchmarks: - Issued guidelines on issuance of guarantees, letters of consent and comfort, and indemnities in August 2018. - Regulations related to ownership of SOEs finalized in April 2019. - Guidelines on preparation of performance management plans and budgets finalized in May 2019. - Dividend and surplus policy to be finalized by the Cabinet by end-2019 (structural benchmark). - Revise PFMS mandate in line with revisions to the PFM Act to strengthen parastatal oversight. - Pilot audits of the largest SOEs completed with NAO; report submitted to Parliament in September 2019. - By March 2020 plan to submit to Parliament and publish on the MoF website a consolidated annual report on SOEs, including risk analysis case studies on ENGENCO, NOCMA, ADMARC, and the Blantyre Water Board (structural benchmark). - Conduct a risk analysis case study on ESCOM and publish on the MoF website by June 2020. - Develop a prototype SOE database by end-2019. - Public investment management (PIM) and PSIP reforms: - Prioritize largest public investment projects based on cost-benefit analysis, absorptive capacity, growth, poverty reduction, and debt sustainability considerations. - Piloted ex-post reviews/performance audits of two major capital projects; reports finalized in September 2019. Audit of a third project underway and to be finalized by June 2020. - Completed an audit of the PSIP database’s coverage and processes with IMF technical assistance (structural benchmark); will begin implementing findings (especially project rationalization) and continue capacity building. - Strengthened PSIP linkages to budgeting and budget execution, including publication of PSIP as part of budget documentation (Document no. 6) and recording multi-year commitments from FY 2020/21. - Improving PIM will support more accurate projections of project-based donor disbursements. ### Broad-based tax reforms and revenue mobilization strategy - Comprehensive tax system review and domestic revenue mobilization (DRM) strategy: - Develop a domestic revenue mobilization strategy by end-March 2020 (structural benchmark) and start implementing it in FY2020/21. - Strategy aims to streamline tax incentives (including industrial rebate scheme), expand VAT base by removing unnecessary exemptions, improve excise taxation (including more comprehensive taxation of passenger vehicles), increase income tax productivity and resilience to base erosion (especially corporate income tax), improve SME taxation, and introduce recurrent property taxes. - Strategy to include plans for more progressive tax policies, including unwinding past regressive tax measures. - Expected revenue yield: at least 0.3 percent of GDP in FY 2020/21 and 0.4 percent of GDP over FY2021/22-22/23; measures will finance post cyclone reconstruction and resilience to climate change. - Tax administration strengthening and ITAS rollout: - Continue advancing a risk-based approach to tax compliance via increased data analysis and tax registry improvements (under 50 percent of the TINS issued are active taxpayers). - Target on-time filing and payment compliance across all tax types to at least 50 percent. - By February 2020 adopt an integrated tax administration system (ITAS) with full adoption in the large taxpayer office and the two other offices (Blantyre and Lilongwe), improving transparency and reducing corruption. - ITAS rollout milestones: - Procurement of hardware by end-November 2019. - Begin piloting test ITAS in two tax offices (Blantyre and Mzuzu stations) by end-December 2019. - Data cleaning and migration for all active taxpayers by March 2020. - Revenues expected to be enhanced by at least 1 percent of GDP cumulatively over FY 2020/21-22/23 from these measures. - Non-tax revenues and user fees: - Enhance Treasury oversight, conduct business process reviews in MDAs, leverage technology to improve revenue collection and management. - Adjust user fees and charges for inflation and periodically review to progress towards marginal cost pricing and better enforcement. - Expected to increase departmental receipts by at least 0.1 percent of GDP cumulatively during FY 2020/21-22/23. - Install toll gates in strategic locations and introduce toll fees to mobilize revenue for road rehabilitation. - Donor coordination: - Work with donors to improve accuracy of information on donor flows and disbursements through enhanced use of the aid management platform and joint portfolio reviews. *Source: 1mwiea2019001 - 8.* ### 21. Our near- and medium-term budgeting plans include enhancing the composition and ### 21. Our near- and medium-term budgeting plans include enhancing the composition and ### Near- and medium-term budgeting plans - Enhance the composition and quality of government spending while containing fiscal slippages. - Avoid unbudgeted expenditures (e.g., in goods and services). - Recruit only critical personnel; limit wage and pension increases to the inflation rate. - Seek to reduce the wage bill through public sector employment reforms; a recent pilot review revealed gaps in grading and promotion policies. - Compensate shortfalls in budget grants partly by 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). - Continue focusing public investment composition on pro-growth and poverty reducing expenditures. - Prioritize raising efficiency of spending in priority areas such as social spending given high development needs and limited fiscal space. - SOEs will not be required to undertake public investment spending (off-budget financing). - Avoid arrears in paying contractors, especially to SMEs. - Measures to be put in place to enhance allocational mix of health and education budgets, improve fiscal transparency and accountability at national and sub-national levels, strengthen program-based budgeting, and engender efficiency in frontline service delivery. - Beginning in FY 2020/21, plan to achieve additional savings of at least 0.1 percent of GDP per year by reviewing and further limiting the eligibility and voucher value in the Farm Input Subsidy Program. - Limit transfers by at least 0.2 percent of GDP by FY2021/22 by improving management of universities and statutory bodies, rationalizing their administrative staff, and increasing the role of private sector where possible. ### Decentralization process - Develop a plan to address challenges in the current decentralization process, including capacity and controls at the local level. - Eventually adopt a legal framework for budget systems and fiscal policy coordination. ### Public Financial Management Reform - Routinized monthly bank reconciliation of the payment bank accounts, except salary accounts which will be routinely reconciled from July 2020 (with all backlog for FY 2016/17-2019/20 cleared). - Automated transfer system reconciliation covering payments of net salaries to all employee bank accounts (60 percent of gross pay) is already performing; current year’s payments of deducted amounts will be routinely matched by end-December 2019. - Continue to maintain fully reconciled domestic debt data across responsible units in the RBM and the responsible unit in MoF (structural benchmark). - Routinized monthly submission by MDAs of fiscal reports on the monthly funding release and publication of the report summaries on the MoF website (structural benchmark); continue strengthening quality control of these reports (including sanctions on controlling officers in MDAs for misreporting or non-compliance). - Publish consolidated monthly statements of the government’s declared commitments and payment arrears on the MoF website including information on overdue (for more than 90 days) payments. - Implement more systematic commitment controls, constrained by forecasts of cash availability, to help prevent accumulation of new payment arrears; more comprehensive reporting on payment arrears to provide early warning and enable sanctioning of controlling officers who incurred them. ### Financial reporting improvements and IFMIS migration - Begun producing quarterly consolidated financial reports based on reconciled bank accounts and certified by the Auditor General within six months after the end of the quarter. - In FY 2019/20, plan to produce them within four months after the end of each quarter; beginning in FY 2020/21, plan to produce them within 90 days after the end of each quarter (structural benchmark). - Regular publication of these reports on the MoF website. - First quarter FY 2018/19 financial reports submitted to the Auditor General for certification in February 2019; certification completed in March 2019. - Second quarter FY 2018/19 reports submitted in May 2019; certification completed and report published in September 2019. - Third quarter FY 2018/19 reports submitted in June 2019; certification completed and report published in September 2019. - Continue producing and publishing monthly budget execution reports by vote and economic classification; progressively base expenditure reporting on actual payments and not funding. - Annual consolidated financial statements for 2017/18 were submitted for audit within the statutory 4 months following the end of the financial year; an unqualified audit opinion was issued in January 2019. - Adopt electronic fund transfer (EFT) as the government’s main payment method by end-June 2020 (structural benchmark); complete a pilot of EFT transaction processing by end-March 2020 prior to extending EFT to Other Recurrent Transaction (ORT) and development payments. - Implement TMS, as the current IFMIS bank reconciliation module, to the MG1 and losses and compensation accounts by end-December 2019 and the remaining three pool accounts by end-March 2020 (structural benchmark). - Early adoption of EFT and implementation of TMS to facilitate automated monthly reconciliation of all bank accounts. ### IFMIS replacement and interim measures - Contract for a new IFMIS issued in March 2019; supplier team mobilized. - New IFMIS expected to allow better financial reporting, transaction efficiencies, enhanced budget formulation and execution controls and security. - IFMIS steering committee constituted under the chair of the Secretary to the Treasury to oversee planning, progress and implementation. - Preparatory work including agreement on chart of accounts and bank account structures to be supported by the new IFMIS is almost complete. - Will put in place a realistic and comprehensive implementation plan (e.g., phased approach supported by government teams and strong project management), a transparent governance framework, credible quality assurance, and a robust readiness strategy (e.g., network/data center and business process re-engineering). - Continue allocating resources towards maintenance of the current IFMIS and expand most of its real time coverage to include all major TSA sub-accounts (including non-donor funded projects, receipts, and debt servicing payment) and important interfaces (notably, linking HRMIS and IFMIS) and debt transactions by end-2019. - Shift from monthly to quarterly budget release for commitment purposes, combined with monthly cash release, and require MDAs to commit against the released budget through IFMIS beginning in July 2020. - From January 2020, pilot using IFMIS to record commitments of all types of expenditure (based on purchase or order contracts), prior to submission of new contracts to the Secretary of Treasury for vetting and all domestic debt commitments, expenditures, and payments in real time. - Intend to publish commitments against budget allocation as well as outstanding bills. ### Cash management and banking arrangements - Operations of the Cash Management Committee strengthened by establishing a functional Cash Management Unit under the Secretary to the Treasury. - Unit prepares a cash forecast of the next twelve months (soon after parliamentary approval of the budget) and will regularly update it. - Unit prepares a variance analysis on forecasting errors every three months, reports a summary of meeting minutes, and takes actions to improve MDA submissions—a practice begun in December 2018 and now regular. - By March 2020, review banking arrangements and develop a strategy for building on the current core-Treasury Single Account (TSA) structure. - Continue identifying and closing dormant bank accounts and bringing all major balances within the core-TSA. ### Medium-term strategy and governance - Develop medium-term strategy to solidify gains, including building human capacity through training to sustain reforms. - Review of the PFM Act underway to align laws and regulations with 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 of Parliament. - Strengthen medium-term performance and efficiency of the budget by better linking MDA strategic planning and budgeting, improving credibility of the Medium-Term Expenditure Framework, and strengthening stakeholder engagement. - Build on enactment of new Public Procurement and Disposal of Assets Authority Act to improve procurement framework continuously to enhance transparency, control, and accountability. - Publish all procurement information on the Public Procurement and Disposal of Assets Authority website; a recently completed diagnostic study on procurement will inform future reforms. - Use performance contracts with controlling officers to hold them accountable and strengthen procurement audits; consider gradually moving to an e-procurement system. ### Structural reforms - MGDS III aims to significantly improve Malawi’s business climate to unlock private sector potential and build productivity and competitiveness. - Continue to improve business environment by easing procedures to start a business and deal with construction permits, strengthening contract enforcement, and enhancing insolvency processes. - Implement deep reforms in agricultural regulations and market intervention systems, agricultural subsidies, and land management systems: - ADMARC: comprehensive strategic review completed; implement reform program to better balance maize price stabilization against fiscal sustainability and improve transparency and efficiency; separate social and commercial functions within ADMARC to strengthen financial sustainability. - Control of trade: Control of Goods Act amended to conform to international trade best practices; finalize subsidiary legislation to define public interest grounds for intervention thresholds; review new bans or existing bans in consultation with stakeholders. - FISP: continue FISP reform focusing on containing its budget impact, increased role for private sector, better governance, and better beneficiary targeting. - Land reform: continue implementing new land laws based on lessons learned from pilot programs. ### Debt management - Malawi classified at moderate risk of external debt distress and at high overall risk of debt distress due to high domestic debt. - Limit external borrowing to high priority projects aligned with MGDS III and maximize the grant element of external borrowing to ensure total debt (and guarantees) contracted is consistent with debt sustainability. - Commit to ensuring financing for critical infrastructure projects preserves debt sustainability. - Developed a comprehensive medium-term debt strategy and will keep updating it. - Debt Management Committee operational to assess domestic and external borrowings, ascertain loan concessionality and ensure debt sustainability considering entire borrowing plan and medium-term debt strategy. - Borrowing in the FY 2019/20 budget to be consistent with objectives of social development, poverty reduction and debt sustainability. - Ensure new loans are concessional and accompanied by solid feasibility studies (by an independent third party when required for donor-funded projects) and that macroeconomic implications (including on debt) are carefully considered. - Improve debt monitoring by allocating sufficient resources and increasing training. - By end-2019, MoF’s Debt and Aid Management Division’s front office operations to have more active engagement in domestic debt management policies and operations in collaboration with the RBM; division will lead preparation of the DSA and formulation of the MTDS, be active in weekly short-term borrowing committee meetings, and prepare an annual borrowing plan and issuance calendar (structural benchmark). - 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 government securities yield curve. - Continue developing the Treasury Bill yield curve by issuing 91, 182, and 364-day maturities in auctions. - Continue to publish indicative amounts in an issuance calendar confirmed closer to auctions through announcements, and adhere to announced auction schedules. ### Fuel pricing and import regime - Continue improving fuel security: three fuel storage depots capable of holding about 25 percent of annual consumption and guidelines clarifying collaboration framework between storage operator and fuel importers or distributors. - Framework enables augmented storage cost to be fully passed on to the pump price. - Since 2013, fuel import regime based on private sector imports with cost recovery guaranteed by the automatic fuel pricing mechanism. - Fuel imports were done jointly by a traditional private sector consortium (PIL) and NOCMA based on 2013 MOU which expired in June 2018. - Two new pieces of legislation promulgated to develop wholesale and retail markets and strictly enforced since February 2019. - Fuel import regime to remain unchanged for rest of the 2019/20 fiscal year; will continue to evaluate balance of security and efficiency and ensure a level-playing field while putting safeguards against supply disruption. - Any further changes to regime or facility operation to be done transparently with full private sector participation and preceded by a fully-costed proposal discussed with stakeholders. - Remain committed to retaining and implementing the fuel price automatic adjustment mechanism: rule is that over ±5 percent change in the formula-based underlying price triggers a price adjustment; all other price changes absorbed by the Price Stabilization Fund (PSF). - Recent discretion applied to avoid sudden or large pump price increases; PSF used to subsidize fuel distributors instead of automatic adjustment, leading to a pause in pump price adjustment since October 2016. - Increases in imported oil prices led MERA to approve significant increases in petroleum and diesel prices in 2018—partly undone this year due to a decline in the international oil price. - Intend to exercise strict restraints on discretion over the ±5 percent rule to protect the PSF and avoid backloaded, lumpy price adjustments. - Increase transparency and accountability by disclosing more information on aggregate use of the PSF including publishing on the MERA website the audited reports on its use and management. ### Gender equity - Recognize importance of addressing gender inequality to achieve inclusive growth; gender disparities hinder economic growth and aggravate economic exclusion. - Policy interventions will focus on adolescent girls to break cycle of deprivation early: - Ending child marriages: constitutional amendment to raise minimum age for marriage from 15 to 18 was a critical first step; plan to develop a comprehensive national program of action entailing multifaceted strategic interventions across social protection, law enforcement, health (particularly sexual and reproductive health), child protection, and public education. - Keeping girls in school: continue facilitating larger and more effective investment on classrooms, teachers, and education materials; broaden demand-side interventions (e.g., more social assistance and targeted subsidy programs; which would be gender-sensitive). - Assets and credit: committed to formalization of customary land rights important to women’s access to finance given significance of a matrilineal system of land inheritence in Malawi; policy interventions for access to finance, including gender neutral ones, will help level the playing field. - Labor market policies: consider non-gender-neutral policy options (e.g., childcare support) to help increase women’s labor market participation. *Source: 1mwiea2019001 - 21.* ### 37. The macroeconomic policies supported by the ECF will be complemented by a strong ### 1mwiea2019001 - 37. The macroeconomic policies supported by the ECF will be complemented by a strong structural program ### Structural program overview - The ECF-supported macroeconomic policies will be complemented by a strong structural program to make transmission of economic policy more efficient. - Structural Benchmarks for 2019-20 (Table 2) signal commitment to a strong reform agenda in key sectors of the economy. ### Structural Benchmarks and Program for 2019 — Fiscal sector (selected benchmarks and target dates) - Submission to the MoF 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 6 weeks after the end of the month). Maintain/strengthen sanctions on MDAs for misreporting/non-compliance. — Continuous (monthly from May 15, 2018). - Prepare quarterly consolidated financial reports (including all MDAs) with fully reconciled bank accounts and publish within four months after the end of each quarter in FY 2019/20 and within 90 days after the end of each quarter in following years. The financial reports should be certified by the Auditor General. — Continuous (quarterly from March 31, 2019). - Reconcile all debt data between the MOF and RBM. — Continuous (monthly from April 30, 2018). - Cabinet approval of the dividend policy relating to SOEs. — End-December 2019. - Ensure DAD 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 ENGENCO, NOCMA, ADMARC, and Blantyre Water Board). — End-March 2020. - Develop a domestic revenue mobilization strategy. — End-March 2020. - EFT adoption and TMS implementation (five pool bank accounts) facilitating the move toward automated monthly reconciliation of all bank accounts. TMS implementation of two accounts will be targeted for end-2019 and the remaining three for end-March 2020. — End-June 2020. ### Structural Benchmarks — Financial sector (selected benchmarks and target dates) - Develop a roadmap for increasing access to finance. — End-December 2019. - The research department of the RBM will review and prepare a report on the obstacles to FX market development. — End-June 2020. ### Program monitoring and review timetable - The program will be monitored on a semi-annual basis, through quantitative targets (Table 1) and structural benchmarks (Table 2). - Quantitative targets for end-December 2019 and end-June 2020 are performance criteria while those for end-March 2020 and end-September 2020 are indicative targets. - The fourth and fifth reviews under the program will be completed on or after April 15, 2020 and October 15, 2020, respectively. ### Quantitative performance criteria and indicative targets (scope and variables) - Performance criteria are established for December 31, 2019 and June 30, 2020 with respect to: - Reserve money (ceiling); - Domestic primary balance of the central government, cash basis (floor); - RBM financing of the central government (ceiling); - Net official international reserves (NIR) of the RBM (floor); - Accumulation of external payments arrears (ceiling); - Contracting and guaranteeing of non-concessional external debt (ceiling). - Indicative targets are established for March 31, 2020 and September 30, 2020 with respect to the above variables, and for these dates as well as December 31, 2019 and June 30, 2020 with respect to: - New domestic arrears (ceiling); - Social spending (floor); - Net foreign borrowing of the central government (ceiling). ### Selected numerical targets and program definitions (preserve source definitions and numeric values exactly) - Reserve money: a ceiling applies to the upper bound of a reserve money band (set +/-3 percent) around a central reserve money target. - Definition of reserve money: 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 for reserve money: data transmitted to the IMF on a weekly basis, including weekly balance sheet of the RBM. - Domestic Primary Balance (floor): a floor applies to the cumulative flow of domestic primary balance since the beginning of the fiscal year. - Definition of domestic primary fiscal balance: domestic revenue (total revenue less grants) less the sum of current expenditures (net of domestic and foreign interest payment), domestically-financed development expenditure, and net lending plus the discrepancy (paragraph 10). - Discrepancy: the negative of the sum of: (i) the sum of domestic revenue and grants, minus the sum of current expenditure, development expenditure, and net lending and (ii) the sum of net domestic borrowing and net foreign borrowing of the central government. - Net domestic borrowing definition: sum of (i) 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); (ii) 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); (iii) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and all government securities); and (iv) amortization of zero-coupon promissory notes. All government securities and locally registered stocks are valued at cost rather than face value. - Adjustor for domestic primary balance: the program floor will be adjusted down by the full amount by which budget support exceeds the program baseline. - Budget support definition: includes all grants and foreign financing not directly linked to additional budgetary expenditure; excludes external project financing to fund particular activities, such as financial support from the IMF, and donor inflows (in kwacha) from the U.S. dollar-denominated donor pool accounts for the Joint Funds on health, education, and agricultural, held in the Malawi banking system. - Reporting requirement for domestic primary balance: data transmitted to the IMF on a monthly basis, within [4] weeks from the end of the month. - RBM financing of the central government (ceiling): defined as net borrowing by the central government from the RBM (including through ways and means advances, loans, holdings of local registered stocks, promissory notes, and all government securities minus deposits). - Adjustors for RBM financing ceiling: ceiling for September 2019, December 2019, and March 2020 is subject to an upward adjustment of up to 10 percent of the average inflation adjusted annual domestic revenue of the previous three financial years. - Reporting requirement for RBM financing: data transmitted to the IMF on a monthly basis within 4 weeks from the end of the month. - New domestic arrears (ceiling) definition: 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. Domestic interest payments are in arrears when the payment is not made on the due date. 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. 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. ### Table highlights — selected numeric entries (as presented) - Reserve money (ceiling on stock) (upper bound) PC: 326,115; 298,112; Met; 308,798; 281,997; 346,236; 318,376; Met; 340,175; 324,219; 318,529; 343,225; 362,598. - Reserve money (ceiling on stock): 316,617; 289,429; 299,804; 273,784; 336,151; 309,103; 330,267; 314,776; 309,251; 333,228; 352,037. - Reserve money (ceiling on stock) (lower bound): 307,118; 280,746; 290,810; 265,570; 326,067; 299,830; 320,359; 305,333; 299,974; 323,231; 341,476. - Primary balance (floor) PC: -4,456; -3,770; -83,657; Not Met; -2,684; -168,145; 89; 7,657; -125,614; Not Met; -1,236; -101,537; -93,418; -48,574; -14,061. - Domestic primary balance (floor) PC: -37,872; -92,565; -66,909; -42,339; -12,976; 53,112; 16,739. - RBM financing of central government (ceiling) PC: 0; 93,710; 25,418; Met; 0; -150,228; 0; 0; Met; 0; 0; 0; 0; 0. - New domestic arrears (ceiling) IT: 0; 0; Met; 0; 0; 0; 0; Met; 0; 0; 0; 0; 0. - Social spending (floor) IT: 182,207; 208,717; Met; 273,310; 318,515; 364,413; 406,385; Met; 103,104; 229,991; 350,619; 449,469; 126,966. - Net international reserves of the RBM (floor) PC (US$ millions): 428.6; 429.5; 486.2; Met; 436.6; 503.0; 460.4; 470.8; 487.8; Met; 473.1; 486.7; 523.4; 557.0; 597.2. - Net foreign borrowing of the central government (ceiling) IT (US$ millions): 77.3; 48.9; 61.0; 72.8; 25.7. - Memorandum: Net foreign assets of the RBM (US$ millions, end of period): 316.0; 428.4; 324.0; 444.2; 347.8; 422.9; 360.4; 373.8; 410.5; 444.1; 484.3. - Program exchange rate (kwacha per US$): 732 (repeated across periods). ### Pipeline of large projects under consideration (selected projects and potential cost in USD) - Construction of Chilumba to Mbeya Railway Line — 978,412,162 - Reconstruction and Rehabilitation of Limbe - Marka Railway Section — 724,556,771 - Coal Fired Power Generation Programme — 777,364,865 - Lake Malawi Water Supply project — 438,234,959 - Diamphwe Bulk Water Supply Project (DBWSP) — 294,035,797 - Construction of a new terminal building and reconstruction of existing runways at Chileka International Airport — 194,612,120 - Kaphatenga - Nkhotakota - Dwangwa rehabilitation project — 154,054,054 - Up-Scaling Production and Marketing of Legumes, Rice and Fruits — 135,197,655 - Construction of Residential Houses for Government Institutions — 108,412,162 - Construction of Lambilambi Dam: Implementation Phase — 97,346,486 - Programme for Rural Irrigation Development (PRIDE) — 82,156,757 - Irrigation Development Programme (IDP) — 74,324,324 - Provision of Residential and Office Accommodation for the Malawi Police Service — 74,089,298 - Balaka - Salima (period) — 67,837,838 - Construction of Judiciary Headquarters — 66,593,153 - Construction of By-Pass and Chileka Dual Carriage in Blantyre City — 58,452,703 - Construction of Mzimba Dam — 48,736,959 - Projects under consideration but more analysis required (selected): Chilinga - Muloza (Upgrading) — 48,479,730; Detailed Design and Construction of multi-purpose Dam for Kasungu Water Supply Scheme — 39,244,459; Migration of Police Communication System from Analogue to Digital Platform — 38,390,640; Detailed design of Multi-purpose Surface Water Source and Construction Supervision for Mponela Town — 37,343,842; Malawi Rural Electrification and Construction of Power lines — 31,386,838; Construction of Blantyre and Mzuzu Cancer Centres — 29,252,703; Karonga Water Supply Project — 28,737,162; Mchinji rb - area 18 rb - Kanengo — 25,675,676; Backbone Fibre Project — 22,393,959; Nkhatabay Water Supply Project — 22,146,622; Construction of Staff Houses — 21,588,856; Upgrading Rehabilitation and Extension of Liwonde Water Supply Project to include Balaka — 19,557,095; Proposal for Extension of Mangochi Water Supply System to Lakeshore Areas — 16,454,632; Chilumba Water Supply Project — 15,202,703; Rumphi Water Supply Project — 14,884,710; Upgrading Rehabilitation and Extension of Nchalo Water Supply Project — 10,693,711; Kawere - Mkanda road project — 10,270,270. *Source: IMF staff projections; sources: IMF staff and Malawian authorities.* ### 19. Reporting requirement. Data on new domestic arrears will be transmitted to the IMF on a ### 19. Reporting requirement. Data on new domestic arrears will be transmitted to the IMF on a ### Social Spending (floor) - Definition: - 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; National Aids Commission and spending on FISP and maize). - To maintain Malawi's commitment and progress toward poverty reduction, the social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program. - Reporting requirement: - Social spending will be reported on a monthly basis from the beginning of the fiscal year. ### Targets for External Sector — Net Foreign Borrowing of the Central Government (ceiling) - Definition: - Net foreign borrowing of the central government is defined as disbursements of external debt as defined in paragraphs 35 and 36 including loans by official creditors (both multi- and bilateral creditors) minus amortization due. - Reporting requirement: - Data on net foreign borrowing will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month. ### Targets for External Sector — Net International Reserves (NIR) of the RBM (floor) - Definition of NIR: - The NIR of the RBM is defined as gross reserves minus IMF and other short-term liabilities. - The values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the program cross exchange rates listed in Table 1. - Gross reserve assets (per BPM6, paragraph 6.64) — defined as external assets immediately available and controlled by RBM for balance of payments needs, intervention, and related purposes. - 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; - (viii) other unpledged convertible liquid claims on nonresidents. - Gross reserve assets exclude: - (i) any foreign currency claims on residents; - (ii) capital subscriptions in international institutions; - (iii) foreign assets in nonconvertible currencies; - (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; - (v) assets obtained through any derivatives liabilities (including currency swaps) with remaining maturity of one year or less; - (vi) assets obtained through deposit liabilities of domestic commercial banks (including reserve requirement in foreign currency); - gross reserves that are in any way encumbered or pledged, including, but not limited to: - (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; - (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; - (c) foreign reserves blocked for letters of credit. - Table 1. Malawi: Cross rates for Nominal Exchange Rate and Gold Price for the 2018-21 ECF Arrangement (as of 31-Dec-2017) - Gold bullion LBM US$/troy ounce 1,257.13 - SDR to US$ exchange rate 0.707 - Euro to US$ exchange rate 0.845 - Yuan to US$ exchange rate 6.594 - Yen to US$ exchange rate 112.950 - Sterling UK to US exchange rate 0.746 - Australian $ to US exchange rate 1.308 - Canadian $ to US exchange rate 1.278 - Swiss Franc to US exchange rate 0.987 - South African rand to US exchange rate 0.081 - Malawian Kwacha to US$ exchange rate 732.03 - Sources: IMF (International Financial Statistics) and Reserve Bank of Malawi. - Note: LBM connotes London Bullion Market. - Gross reserve liabilities of the RBM include: - (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; - (iii) foreign currency denominated liabilities arising from outstanding derivatives; - (iv) all foreign currency denominated liabilities to residents (including, for instance, foreign currency denominated deposits of domestic banks and other residents with the RBM). - SDR allocations are excluded from gross reserve liabilities of the RBM. ### Adjustors applied to NIR program floor - Budget support: - The program floor on NIR will be adjusted upward by the full amount by which the U.S. dollar-denominated inflows from the budget support exceed the program baseline. - In the event of a shortfall in budget support inflows, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 29. - Budget support is measured as the cumulative flow from the beginning of the fiscal year, recorded in the original currency and converted to U.S. dollars using the defined program cross exchange rates. - Donor accounts for the social sector (including health and education Joint funds, and the NAC): - The floor on the NIR of the RBM will be adjusted upward by the full amount by which the donor inflows from the U.S. dollar-denominated donor accounts for Joint funds and NAC held in the RBM are higher than the program baseline. - In the event of a shortfall, the downward adjustment of the NIR floor will be subject to the limitations outlined in paragraph 29. - These donor inflows are measured as the cumulative receipts by the budget from the beginning of the fiscal year, recorded in original currency and converted to U.S. dollars using the defined program cross exchange rates. - Debt service payments (including both interest and principal): - The floor on NIR of the RBM will be adjusted upward by the full cumulative amount by which debt service payments to the WB and the AfDB fall short of the program baseline. - In the event of any excess of debt service payments to the WB and the AfDB, the downward adjustment of the NIR floor will be subject to the limitation outlined in paragraph 29. - Debt service payments will be measured as the cumulative payments from the beginning of the fiscal year, recorded in original currency and converted to U.S. dollars using the defined program cross exchange rates. - Limitation on downward adjustment: - The total downward adjustment to the NIR floor from the combined impact of: - (i) a shortfall of budget support relative to the program projections; - (ii) a shortfall of inflows to the donor accounts for the social sector relative to the program projections; and - (iii) any excess of debt service payments to the WB and the AfDB relative to the program projections, - will be subject to a cumulative limit of US$65 million. - Reporting requirement: - Data on foreign assets and foreign liabilities of the RBM will be transmitted on a monthly basis, including sub-components and a breakdown of assets that are pledged or encumbered. - This transmission will include daily and weekly data on RBM's foreign exchange liabilities to commercial banks (including required reserves with the RBM) and the exchange rate used for their conversion into kwacha will be shown separately. ### Net foreign assets (NFA) and Gross foreign assets (GFA) of the RBM - NFA: - Defined as gross foreign assets (GFA) minus gross foreign liabilities. - Gross foreign liabilities are equal to gross reserve liabilities as defined above, plus any other foreign liabilities not listed earlier. - GFA: - Defined as gross reserve assets as defined above, 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, but not limited to: - (a) assets blocked when used as collateral for third party loans and third-party payments, or pledged to investors as a condition for investing in domestic securities; - (b) assets lent by RBM to third parties that are not available before maturity, and are not marketable; - (c) foreign reserves blocked for letters of credit. ### Accumulation of External Payment Arrears (ceiling) - Definition: - 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. - Reporting requirement: - Data on external payment arrears will be transmitted to the IMF on a monthly basis within 4 weeks from the end of the month. ### Contracting or Guaranteeing of Non-Concessional External Debt (ceiling) - Definition of debt (per TMU and paragraph 8 of the Guidelines on Public Debt Conditionality): - Debt means a current, that is, not contingent, liability created under a contractual arrangement through provision of value in assets (including currency) or services, requiring obligor to make one or more payments in the future to discharge principal and/or interest. - Primary forms of debt: - i. Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - ii. Suppliers’ credits (deferral of payments after delivery of goods/services). - iii. Lease agreements (debt equals present value at inception of all lease payments expected for the period of the agreement, except payments necessary for operation, repair, and maintenance). - Definition of non-concessional external debt: - Debt is 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 at the date contracted is calculated as the discounted sum of all future debt service payments at contracting, using a discount rate of 5 percent per annum. - The ceiling on non-concessional debt 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 applies to debt and commitments contracted or guaranteed for which value has not been received. - The ceiling is measured cumulatively from the beginning of the fiscal year. - Debt maturity definitions: - 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; - (i) debts classified as international reserve liabilities of the RBM; - (ii) new debt issued to restructure, refinance, or repay existing debt up to the amount actually used for those purposes; - (iii) normal import financing (a financing arrangement for imports is "normal" when the credit is self-liquidating); - (iv) arrangements to pay overtime obligations arising from judicial awards to external creditors. ### III. REPORTING REQUIREMENTS (summary) - Data provision: - 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. - Policy-change notification: - The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Malawi) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. - The authorities will similarly inform the IMF staff of any non-concessional external debt contracted or guaranteed by the central government, the RBM, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. *Extracted from the provided IMF content unit.* ### 42. The authorities will furnish an official communication to the IMF describing program ### 1mwiea2019001 - 42. The authorities will furnish an official communication to the IMF describing program ### Reporting requirements and data-sharing obligations - The authorities will furnish an official communication to the IMF describing program quantitative performance and structural benchmarks within eight weeks of a test date. - The authorities will, on a regular basis, submit information to IMF staff with the frequency and submission time lag as indicated in Table 2. - Key reporting frequencies (as shown in Table 2): - Frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I). - Selected data series and reporting agencies (frequency of data / frequency of reporting / frequency of publication / agency): - Exchange Rates: D / W / D / RBM - International reserve assets and reserve liabilities of the Monetary Authorities: W / W / M / RBM - Gross international reserves and foreign exchange purchases and sales: D / W / M / RBM - Reserve/base money, OMO transactions, and RBM conversion of ways and means account to government securities: W / W / M / RBM - Broad money: M / M / M / RBM - Consolidated balance sheet of the banking system: M / M / M / RBM - Financial soundness indicators by banks: Q / Q / ... / RBM - Annual financial reports of the 8 major parastatals: A / A / ... / MOF - Borrowing of the 8 major parastatals: SA / SA / ... / MOF - Report on IMF program performance: Q / Q / ... / MOF - Consumer Price Index and monthly statistical bulletin: M / M / M / NSO - Exports and Imports of Goods and services, and subcomponents: M / M / Q / NSO - Balance of payments: A / A / A / NSO - GDP/GNP, by activity and expenditure, at constant and current prices: A / I / A / NSO - Notes attached to Table 2: - Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - Interest rates: both market-based and officially-determined, including discount rates, money market rates, interbank money market rate, rates on treasury bills, notes and bonds. - The 8 major parastatals are: 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. - Detailed information required on debt includes amounts, currencies, terms and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government. - Fiscal table (GFS based) provided no more than four weeks after the end of each month. ### Relations with the Fund — membership, access, and payment projections - Membership: Joined: July 19, 1965; Article VIII. - General Resources Account: - Quota: 138.80 SDR Million (100.00 percent) - Fund holdings of currency (exchange rate): 136.36 SDR Million (98.24 percent) - Reserve tranche position: 2.44 SDR Million (1.76 percent) - SDR Department: - Net cumulative allocation: 66.37 SDR Million (100.00 percent) - Holdings: 2.82 and 4.25 (values listed as holdings) - Outstanding Purchases and Loans: - ECF Arrangements: 150.86 SDR Million; 108.69 percent of quota (presentation: "150.86 108.69") - Latest Financial Arrangements (ECF): - ECF dated 04/30/2018, Expiration Date 04/29/2021, Amount Approved (SDR Million) 78.08, Amount Drawn (SDR Million) 22.30 - ECF dated 07/23/2012, Expiration Date 06/29/2017, Amount Approved 138.80, Amount Drawn 138.80 - ECF dated 02/19/2010, Expiration Date 07/22/2012, Amount Approved 52.05, Amount Drawn 13.88 - Overdue Obligations and Projected Payments to Fund (SDR Million; forthcoming by year): - Forthcoming 2019: Principal 3.30; Charges/Interest 0.15; Total 3.44 - 2020: Principal 13.80; Charges/Interest 0.59; Total 14.38 - 2021: Principal 18.44; Charges/Interest 0.59; Total 19.02 - 2022: Principal 25.81; Charges/Interest 0.59; Total 26.40 - 2023: Principal 22.37; Charges/Interest 0.59; Total 22.95 ### Debt relief, HIPC, and MDRI implementation - HIPC Initiative — Enhanced Framework: - Decision point date: December 2000 - Assistance committed by all creditors (US$ Million): 1,057.00 - IMF assistance (US$ million): 45.27 - IMF assistance (SDR equivalent in millions): 33.37 - Completion point date: Aug 2006 - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member: 33.37 - Interim assistance: 11.57 - Completion point balance: 21.80 - Additional disbursement of interest income: 3.82 - Total disbursements: 37.19 - MDRI (Multilateral Debt Relief Initiative): - MDRI-eligible debt (SDR Million): 37.87 - Financed by: MDRI Trust 14.53; Remaining HIPC resources 23.34 - Debt Relief by Facility (SDR Million): - Delivery Date December 2006: GRA N/A; PRGF 7.91; Total 7.91 - Delivery Date September 2006: GRA 10.84; PRGF 19.12; Total 29.96 ### Safeguards, exchange regime, and assessments - Safeguards Assessment (2018 update): - Financial reporting and audit mechanisms continue to adhere to international practices, consistent with the 2016 monitoring visit. - Governance arrangements and autonomy of RBM remain undermined by weak legal provisions, significant credit to the government, and presence of government officials on the Board and audit committee. - Elevated risks in foreign reserves management due to limits inconsistent with leading practices and lapses in oversight. - Legal amendments recommended in the July 2018 assessment were enacted in 2019 and will be further enhanced with elimination of conversion of cash advances into securities and additional legislation following legal review. - Limited progress on reserve management; steps are being initiated with World Bank support. An emergency liquidity assistance (ELA) framework is being developed. - 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, RBM has not set a target rate and has allowed substantial volatility. U.S. dollar exchange rates showed stability between October 2016 and April 2019 at around MK 730/US$. - The de facto exchange rate arrangement was classified as “stabilized” (subject to change if volatility since April 2019 persists). - The exchange regime is free of restrictions and multiple currency practices. - Article IV Consultation: - The Executive Board concluded the last Article IV consultation with Malawi on April 30, 2018. - FSAP and ROSCs: - FSAP team visited Malawi in July and December 2007; FSSA issued June 2008. An FSAP development module was conducted mid-2017. - Corporate Governance and Accounting and Auditing ROSC missions: February and June 2007. - Fiscal transparency update: March 2007. Data module ROSC based on September 2003 mission published October 2004. ### Technical assistance (January 2015—September 2019) - Technical assistance covered a wide range of topics and agencies (RBM, MOF, NSO and others) with modalities including missions, workshops, and training. - Selected entries (date / department / ministry-agency / purpose/topic / modality): - 08/19 MCM RBM Cyber risk supervision Mission - 07/19 MCM RBM National payment system Mission - 07/19 FAD MOF Macro-fiscal forecasting Mission - 07/19 STA NSO Supply and use tables Mission - 04/19 MCM RBM Monetary policy operations Mission - 04/19 STA NSO External sector statistics Mission - 03/18 FIN/LEG RBM Central Bank law Mission - 03/18 FIN/LEG RBM Safeguards Assessment Mission - 01/18 STA NSO Price statistics Mission - 12/17 FAD MOF Budgeting Mission - 01/15 FAD MOF Action plan for implementing priority PFM reforms Mission - Numerous other missions and workshops addressed PFM, revenue administration, national accounts, monetary and financial statistics, debt management, banking supervision, and related capacity-building. ### Joint Managerial Action Plan (as of September 19, 2019) - Section A — Mutual information on relevant work programs (World Bank analytical and advisory activities and lending items listed with provisional mission timing and expected delivery dates). Selected items: - Malawi Service Delivery Indicators: Oct 28 – Nov 1, 2019; Nov 25 – 29, 2019; Expected delivery December 2019 - Malawi National Electrification Program: October 2019 - Impact Evaluation of Emergency Response and Post-Crash Care in Malawi and Tanzania: Expected delivery December 2020 - Malawi Public Expenditure Review (PER): Oct 14 – 18, 2019; Expected delivery June 2020 - Malawi Economic Monitor 2019-20: Expected delivery June 2020 - Mw-Digital Moonshot and Opportunities in the Digital Economy: Sept 30 – Oct 4, 2019; Expected delivery September 2020 - Lending highlights include projects with provisional mission dates and expected delivery dates (e.g., Mozambique Malawi Regional Interconnector Project; Platform for National Social Protection Project; Mpatamanga Hydro Power Project). - Section B — Requests for work program inputs: - IMF request to World Bank: Updates on WB support to Malawi — Continuous - World Bank request to IMF: Regular updates and exchange of views on medium-term macroeconomic and fiscal projections including sharing detailed excel tables on Real, Monetary, Fiscal and External Sectors — Continuous *Source: Malawi — Second and Third Reviews under the Three-Year Extended Credit Facility Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and Augmentation of Access—Informational Annex (November 7, 2019).* ### 1. Debt Sustainability Analysis (update) ### 1. Debt Sustainability Analysis (update) ### Risk assessment and summary findings - Risk of external debt distress: Moderate - Overall risk of debt distress: High - Granularity in the risk rating: Some space to absorb shocks - Application of judgement: No - Two external debt burden indicators (PV of debt-to-exports ratio and debt service-to-exports ratio) would breach the thresholds determined by Malawi’s debt carrying capacity under the exports shock. - Malawi’s debt carrying capacity is classified as “weak” according to the composite indicator score determined by the World Bank’s Country Policy and Institutional Assessment (CPIA) Index and other fundamentals. Relevant thresholds for external debt under this category: - PV of debt-to-GDP ratio: 30 percent - PV of debt-to-exports ratio: 140 percent - Debt service-to-exports ratio: 10 percent - Debt service-to-revenue ratio: 14 percent - Benchmark on total public debt (sum of public and publicly guaranteed external debt and public domestic debt): PV of total debt-to-GDP ratio 35 percent - The present value of total public debt to GDP is projected to decline throughout the program period but would breach the benchmark until 2027. ### Key quantitative public debt facts (coverage and composition) - Public and publicly guaranteed (PPG) external debt: about US$2.15 billion in 2018 (31.2 percent of GDP), up from $2.04 billion in 2017 (32.8 percent of GDP). - Increase in PPG external debt during 2018 mainly reflects $127 million of new disbursements (with $97 million from multilaterals and $30 million from bilateral creditors) and principal payments of about US$50 million. - Composition of PPG medium- and long-term external debt (2018, million U.S. dollars; shares shown where provided): - Total: 2,151 (100) - Multilateral: 1,708 (79) - IDA: 919 (43) - ADF: 325 (15) - IMF: 222 (10) - IFAD: 79 (4) - Other multilateral: 163 (8) - Bilateral: 424 (20) - China: 220 (10) - India: 145 (7) - Others: 59 (3) - Commercial: 0.4 (share effectively 0) - Guarantees to SOE: 20 (1) - Public external debt at end-2018 was concessional with an average grant element above 35 percent. - New concessional external loans signed in 2019 as of end-July: $124.5 million (mainly from multilateral creditors), financing priority infrastructure projects. - Data on private external debt remains unavailable but amounts are not believed to be large. ### Public debt coverage and contingent liabilities (tailored stress test design) - Public debt used for the DSA: public and publicly guaranteed (PPG) external and public domestic debt, covering debt contracted and guaranteed by the central government and the Reserve Bank of Malawi (RBM). - Not included due to data limitations: debt held by state and local governments, other elements in the general government (such as the social security fund and extra budgetary funds), or non-guaranteed SOE debt. - For the DSA, the contingent liability of the general government is assumed to be 2 percent of GDP (whereas it is assumed to be zero for many countries). - Adjustment in stress tests to reflect portions of the public sector not captured in reported debt data; tailored shock parameters (Text Table 1) used for: - Other elements of the general government not captured: 1.0 percent of GDP - SoE's debt (guaranteed and not guaranteed): 1/2 percent of GDP - PPP: 35 percent of PPP stock (0.00 shown in the table) - Financial market shock: 5 percent of GDP - Total (2+3+4+5) in percent of GDP: 9.0 ### Background on recent debt developments and creditor profile - Public external debt is held mainly by multilateral creditors (79 percent of total); the main provider is the International Development Association (IDA), followed by the African Development Fund (ADF) and the IMF. China and India are the main bilateral creditors. - Recent new concessional borrowing in 2019 (as of end-July) supports water and sanitation, irrigation, agricultural commercialization, financial advancement for rural markets, and digitalization. ### Policy implications and recommendations - Strengthen budget credibility and fiscal discipline to avoid accumulation of domestic debt at high interest rates. - Exercise close attention to financing terms of any proposed infrastructure investments given limited headroom for further borrowing. - Step up efforts to enhance resilience to shocks by: - Further diversifying the economy, particularly exports. - Broadening the revenue base. - Strengthening public financial management (PFM). ### Notes on public finance coverage improvements and PFM reforms - Authorities committed to strengthening oversight and monitoring of SOEs, including: - Conducting pilot audits of the largest SOEs. - Publishing consolidated annual reports on SOEs. - Developing a prototype SOE database over the next few years. - The AfDB-supported PFM Institutional Support Projects: two projects approved for US$7 million (one closed in June 2018; the other expected to close in May 2019). PFM support focuses on: - Tax administration reforms (upgrading ASYCUDA, Tax Appeals Tribunal legislative framework, review of the Customs and Excise Act). - Public procurement reforms. - Strengthening financial management systems (reviewing the PFM Act, Treasury Instructions, Treasury Funds Management Guidelines, audit of Treasury Funds, strengthening IFMIS oversight). ### Selected development partner operations and financing (AfDB-related highlights) - AfDB cumulative commitments to Malawi: UA 967 million (about US$1.4 billion) to finance 113 operations, including thirteen studies and two lines of credit (as of September 20, 2019). - AfDB Malawi Country Strategy Paper (CSP) 2018–2022 aligned with MGDS III (2017–22) and AfDB Long-Term Strategy (LTS, 2013–22) and High 5 priorities; two pillars: (I) infrastructure (energy and transport) and (II) economic transformation (agriculture value addition and water infrastructure). - Since CSP approval in October 2018, AfDB approved USD 113 million for 6 operations in water, agriculture, and roads. About 91% of approved resources secured from the African Development Fund; remainder from Nigerian Trust Fund, Global Environmental Facility, and Special Relief Fund. - Recently approved AfDB projects and amounts: - Nkhata Bay Town Water Supply and Sanitation Project: USD 15 million (October 2018) - Shire Valley Transformation Programme: USD 35 million (December 2018) - Additional Financing to Sustainable Rural Water and Sanitation Infrastructure Project: USD 2.5 million (May 2019) - Post Cyclone IDAI Emergency Recovery for Malawi: USD 22.5 million (June 2019) - Multinational Nacala (Nsipe-Liwonde Rehabilitation) Road Project: USD 37 million (June 2019) - Emergency Relief Assistance approved April 2019: USD 1.5 million (USD 1 million to Mozambique; USD 250,000 each to Malawi and Zimbabwe) - AfDB administering OFID USD 12 million loan in support of Nkhata Bay project - Planned Sustainable Fisheries and Aquaculture Development and Watershed Management Project: USD 13 million (planned approval early October) - Regional Nacala Rail and Port financing (2017): USD 300 million long-term senior loan, including USD 18.1536 million allocation to Central African Railways Company Limited (CEAR) of Malawi - Nacala Rail and Port Value Additional TA Project: USD 1 million - Soft commodity finance facility (2016 regional project): USD 20 million to Meridan Consolidated Investment Limited - AfDB support to non-lending activities: feasibility studies for Kholombidzo Hydro Power Project and establishment of an Agriculture Cooperative AfDB; technical assistance for PPPC and e-Post Strategy and Action Plan; analytical studies including Domestic Resource Mobilization Study and Public Expenditure Review with the World Bank. - AfDB pipeline focus: scale up lending to the energy sector (Songwe River Basin Development Project, Malawi-Zambia Power Inter-connector Project, Kholombidzo Hydro Power Project), mobilize donor resources and private finance for Songwe Hydro Power Project (multinational with Tanzania), and promote private investment in energy through PPPs and innovative instruments (e.g., Partial Risk Guarantees). Planned support beyond 2019 includes the Enhancing Competitiveness & Improving Access to Digital Project and Multinational North-South Road Corridor Project (Salima – Dwangwa Road). - Past budget support operations: - Following re-engagement with IMF and approval of US$157 million ECF in July 2012, AfDB approved an ADF Grant for Crisis Response Budget Support operation for US$40 million (Restoration of Fiscal Stability and Social Protection—RFSSP). - Protection of Basic Services Program (PBS) grant approved in 2015: US$30 million (disbursed July 2015). - Food Crisis Response Budgetary Support followed the PBS operation in 2016. - AfDB will continue to coordinate closely with the IMF in the design of future budget support operations to ensure alignment with sound macroeconomic policies. *Prepared by the staffs of International Monetary Fund and the International Development Association (IDA), November 7, 2019.* ### 5. Public domestic debt is held by commercial banks, the non-bank financial sector, ### 1mwiea2019001 - 5. Public domestic debt is held by commercial banks, the non-bank financial sector, ### Composition and recent shifts in holders of public domestic debt - Recent spike in public domestic debt reflects a progressive shift of debt from external to domestic borrowing (Text Table 3, Text Figure 1). - Between July 2018 and July 2019: - RBM’s share of outstanding treasury bills and notes declined from 33.0 percent to 30.5 percent. - Commercial banks’ share increased from 20.1 percent to 26.9 percent. - As the RBM has stopped financing the central government deficit (RBM financing is limited to intra-year liquidity management), all net domestic financing will be met by commercial banks and non-banks. - The RBM will further unwind its holdings of government securities to be absorbed by private sector investors as the domestic debt market continues to develop. ### Levels, drivers, and composition of public domestic debt - Public domestic debt was 28.4 percent of GDP at end-2018. - Public domestic debt is expected to edge up to 32 percent in 2019—7 percentage points higher than envisaged in the previous DSA. - Drivers of higher domestic debt and the primary deficit: - The primary deficit (net of budget support and dedicated grants) in FY 2018/19 was 3.4 percent compared to the previously programmed level of 1.1 percent. - Reasons cited: - Faster than envisaged implementation of rural electrification and domestically-financed development spending planned for FY 2019/20. - Expenditure overruns related to ensuring safety during elections and post-election protests. - Disaster relief after Cyclone Idai. - The current DSA continues to incorporate guarantees to SOEs of MK 17 billion (0.4 percent of GDP). - Text Table 3: Composition of Gross Domestic Debt (Percent of GDP) — Selected series (2012–2018): - Treasury bills at cost value: 9.0, 9.1, 6.9, 6.2, 5.8, 5.6, 10.0 - Treasury notes: 2.7, 1.8, 5.4, 9.6, 12.9, 15.1, 15.8 - Local registered stocks (LRS): 0.20, 0.07, 0.04, 0.00, 0.02, 0.00, 0.00 - Ways and means advances from RBM: 1.7, 5.2, 3.0, 0.9, 0.9, 1.0, 1.4 - Promissory notes: 0.1, 3.6, 3.7, 4.2, 3.7, 2.3, 0.8 - Commercial bank advances: 0.100, 0.007, 0.005, 0.019, 0.004, 0.004, 0.001 - Guarantees to SOEs: n.a., n.a., n.a., n.a., n.a., 0.374, 0.336 - Total (including guarantees to SOEs): 13.8, 19.8, 19.0, 21.0, 23.3, 24.2, 28.3 ### Nonresident holdings and classification of kwacha-denominated debt - As of July 2019, nonresidents held about MK 428 billion kwacha-denominated Treasury Notes. - This is 28 percent of total (of those instruments) or about 7.5 percent of projected 2019 GDP. - Due to difficulties in monitoring such debt, the current DSA uses a currency-based definition for domestic/external debt, classifying kwacha-denominated debt owed to nonresidents as domestic. - The terms of these treasury bills/notes held by nonresidents and residents are the same. ### Macroeconomic framework and fiscal outlook underlying the DSA - The macro framework is consistent with the scenario in the Staff Report for the Second and Third Reviews of the ECF arrangement (Text Table 4 and Box 1). - Fiscal stance and adjustment: - To compensate for expenditure overruns in FY 2018/19 and rein in debt buildup, while accommodating post-flood recovery and reconstruction needs following Cyclone Idai, the DSA maintains a domestic primary balance of 0.9 percent of GDP in FY 2019/20—a 2.1 percentage point improvement relative to FY 2018/19. - The improvement is achieved mainly through: - Higher tax revenues (e.g., improved revenue collection, impact of expeditiously implemented tax policies). - Reduced goods and services spending (including unwinding of spending related to the holding of elections). - Prioritizing post-cyclone rehabilitation and aligning capital spending with implementation capacity while prioritizing resilient reconstruction. - Efforts to enhance SOE oversight and monitoring are expected to help generate SOEs’ revenue generation capacity, ensure more efficient spending and public service delivery, and reduce potential transfers and eliminate bailouts. - The current stance is a 0.4 percentage point loosening relative to the first review under the ECF arrangement, reflecting: - a 0.2 percent of GDP shortfall in domestic revenues, and - about 0.3 percent of GDP in increased spending (including 0.2 percent of GDP for post cyclone rehabilitation, 1.5 percent of GDP for reconstruction, and 0.5 percent of GDP for additional security), partially offset by 1.9 percent of GDP in spending cuts or reprioritization. - Key macro assumptions and projections (Box 1): - Real GDP growth: projected to rise to 4.5 percent this year, edge up to 5.1 percent next year, and gradually stabilize at 5.5 percent over the long term. - Inflation: projected to moderate below 9 percent by end-2019 and reach 5 percent by 2024. - Exchange rate: projected to remain constant in real effective terms. - Private sector credit growth: expected to strengthen to about 16 percent over the medium term. - Tax revenue to GDP ratio: anticipated to edge up by 0.6 percentage points during FY 2019/20 and gradually rise thereafter with policy and administration measures. - External debt: will be mainly contracted with multilateral creditors on concessional terms. - New disbursements on external loans: project capital spending covered by external loans projected at 3.9 percent of GDP in FY 2019/20. - Gross official reserves: $690 million as of end-July; expected to increase to about $777 million at year-end, covering 2.9 months of next year’s imports; projected to cover 4.1 months of imports by 2024. - Net domestic financing: assumed to moderate to 4.0 percent in FY 2019/20, following peaks above 6 percent in FY 2017/18–19/20; expected to be contained within 1 percent of GDP by FY 2023/24. ### Realism checks, risks, and financing assumptions - Historical capital account support: - Capital account flows (project grants, dedicated grants, and off-budget support) totaled around 6 percent of GDP over the past 5 years and are expected to average 5-6 percent of GDP over the medium term. - External financing outlook: - External project support loans are expected to gradually increase; grant element of project loans will remain relatively high with no access to market financing. - Project and dedicated grants expected to decline to less than one percent over the long term, with no resumption of budget support operations assumed beyond the World Bank disbursement in FY 2019/20 for disaster relief and reconstruction. - Realism tool findings: - Total fiscal adjustments (reduction in primary deficit) projected at 2.3 percent of GDP between 2018 and 2021—middle of the top quartile among low-income countries’ historical distribution. - Projected growth path lies above that implied by assuming only a fiscal impact from the last observed growth rate (3.2 percent in 2018), reflecting expected improvements in growth drivers (agriculture, electricity, roads, telecom, finance access, structural reforms). - Noted substantial downside risks: adverse weather, infestations, worsened terms of trade, intensified governance challenges, weaker-than-expected reform implementation. - Private investment rates expected to remain broadly unchanged starting in 2020; public investment rates trending up to 6.8 percent in 2024. - Projected 5-year average contribution of government capital to real GDP growth expected to remain broadly unchanged from the last DSA but higher than historical average. ### Debt carrying capacity, stress tests, and external DSA results - Debt carrying capacity: - Malawi’s CI based on current vintage (2018 CPIA and 2019 April WEO) is 2.72, above the threshold value of 2.69; however, considering previous vintage CI of 2.64, debt carrying capacity remains classified as “weak”. - Note: An upgrade from “weak” to “moderate” requires CI above 2.69 for at least two consecutive vintages. - Applicable external debt burden thresholds and total public debt benchmark: - PV of debt in % of exports: 35 - PV of total public debt in percent of GDP: 140 - PV of debt in % of GDP: 30 - Debt service in % of exports: 10 - Debt service in % of revenue: 14 - Two tailored stress tests: - One tailored stress test combines contingent liabilities of a one-time debt shock equivalent to 9 percent of GDP in 2020 to capture: - limited public debt coverage (2 percent of GDP, instead of default zero), - contingent liabilities from SOEs (2 percent of GDP), - need for bank recapitalization (5 percent of GDP). - Second tailored stress test: a natural disaster induced one-off shock of 10 percent of GDP to external PPG debt-to-GDP ratio in 2020 (justified by Malawi’s historical vulnerability to weather-related shocks, including recent drought, floods, and a cyclone). - External DSA results: - Baseline: all debt burden indicators remain below their indicative thresholds. - PPG external debt projected to peak at 29.8 percent of GDP in 2019, with PV of debt-to-GDP ratio peaking at 19 percent in 2019. - PV of PPG external debt expected to decline gradually to around 16 percent over the long term. - Debt service-to-exports ratio expected to average around 7 percent in the next six years and gradually decline to about 4 percent over the longer term. - Historical scenario: external debt projected to increase if historical averages persist, though likelihood considered low. - Under standard and tailored stress tests: all but two debt burden indicators remain below indicative thresholds. - An export shock (nominal export growth = historical average minus one standard deviation), equivalent to a decline of 8 percent each in 2020 and 2021, is the most extreme shock for PV debt-to-GDP, PV debt, and debt service to exports ratios; under this shock both PV debt-to-exports and debt service-to-exports ratios would increase above their indicative thresholds over the medium term. ### Overall debt outlook and projections - Total public debt: - Projected to rise to 61.8 percent this year, from 59.5 percent in 2018. - This reflects a 1-percentage-point decrease of PPG external debt and a 3.7 percentage point increase of public domestic debt. - Public domestic debt expected to peak at 32 percent this year, before gradually declining to 21.3 percent by 2024, supported by continuous improvements in primary balances. - PV of total debt-to-GDP ratio: - Projected to remain continuously above the benchmark throughout 2026. - Path broadly unchanged from last DSA; previously expected to decline below 35 percent of GDP by 2026. - The larger-than-previously-envisioned domestic primary deficit for FY 2018/19 (-1.2 percent of GDP) is more than offset by corrective measures anticipated to produce domestic primary surpluses in following years (0.9 percent of GDP in FY20/21 and around 2 percent of GDP in each of the next three fiscal years). *Source: Malawian authorities and IMF staff calculations as presented in the DSA chapter.* ### 19. Under all the standard and tailored stress test scenarios, the PV of the total debt- ### 1mwiea2019001 - 19. Under all the standard and tailored stress test scenarios, the PV of the total debt- ### Stress test findings - Under all the standard and tailored stress test scenarios, the PV of the total debt-to-GDP ratio remains above the benchmark through 2023, sometimes even well above it. - The natural disaster shock elevates the PV of the total debt-to-GDP ratio to 59 percent and above 40 percent even in 2029. - The real GDP growth shock is the most extreme shock for the PV of debt-to-revenue ratio and is expected to raise PV of debt by nearly 256 percent of revenue in the peak year of 2021. - The growth shock is the most extreme shock for the debt service-to-revenue ratio: lower growth of 2.5 percent for 2020 and 2021 would raise the debt service to nearly 90 percent in the medium term. ### Risk rating and vulnerabilities - Malawi is assessed to have a moderate risk of external debt distress with some space to absorb shocks, but a high overall risk of debt distress due to high public domestic debt. - Main risks to the ratings assessment: - Weaker-than-expected policy implementation. - Limited data coverage. - Macroeconomic uncertainty (especially from weather shocks). - Tighter global financial conditions. - A weak global economy which could depress export growth. - Mitigating factors cited: - Adoption of the MTDS (Medium-Term Debt Management Strategy) including cost and risk analysis of alternative borrowing strategies. - Prospects of stable demand for T-bills/T-notes; for many large banks, around 40 percent of their balance sheet is composed of T-bills/T-notes. - Planned domestic revenue mobilization strategy to be incorporated into the FY 2020/21 budget and a comprehensive review of the tax system expected to strengthen revenue going forward. - Despite a high overall risk of debt distress, these factors underpin the assessment that the debt outlook remains sustainable. ### Policy recommendations and priority actions - Increasing fiscal restraint and budget credibility: - Increase fiscal restraint and budget credibility to contain fiscal deficits and reduce domestic borrowing at high interest rates. - Ensure realistic revenue projections and prioritization of expenditures within the available resource envelope. - Strengthen expenditure prioritization in line with development priorities to achieve higher, more diversified, and resilient growth. - Prudent project selection: - Exercise close attention and prudence in project identification and financing terms for proposed infrastructure investments given limited headroom for further borrowing. - Focus on projects with high returns that are closely aligned to development priorities and rely on concessional loans that contain borrowing costs. - Reign in domestic borrowing, which currently occurs at high interest rates, to avoid crowding out private sector credit expansion. - Broadening the revenue base and strengthening public financial management: - Maximize the impact of finite domestic resources given high aid dependency and risks of negative financing shocks (delayed donor support or lower-than-expected revenue collection). - Broaden the tax base (e.g., currently under 50 percent of the TINS issues are active tax payers). - Strengthen public procurement and public financial management. - Reducing the sovereign‑bank nexus: - Address significant exposure of bank balance sheets to the sovereign (large role of RBM and commercial banks as sources of domestic financing for the central government) to avoid negative feedback loops if fiscal challenges emerge or liquidity tightens. - Closely monitoring contingent liabilities: - Step up efforts to estimate, disclose, manage, and contain contingent liabilities, especially in the financial sector and state-owned enterprises. - Recent examples noted where contingent liabilities materialized include recapitalization of the RBM due to exchange rate devaluation and the ADMARC bailout, which contributed to unexpected increases in the debt-to-GDP ratio, crowding out private credit and jeopardizing debt sustainability. *International Monetary Fund — Malawi (excerpt).* ### 22. The authorities agreed with the DSA assessment of the risk of external debt ### 22. The authorities agreed with the DSA assessment of the risk of external debt ### Assessment and authorities' position - The authorities agreed with the DSA assessment that the risk of external debt distress remains “moderate” and the overall risk of debt distress is high. - They acknowledged significant vulnerabilities from growing public domestic debt. - The authorities stated a strong need for critical infrastructure projects and committed to ensuring that financing of those projects preserves debt sustainability. ### Key indicators and sustainability findings (selected) - External debt (nominal) and PPG share: - External debt (nominal): 35.9 (2016); 36.5 (2017); 34.7 (2018); 33.0 (2019); 32.5 (2020); 32.0 (2021); 30.9 (2022); 29.5 (2023); 28.4 (2024); 26.3 (2029); 27.6 (2039). - Of which: public and publicly guaranteed (PPG): 31.8 (2016); 32.8 (2017); 31.2 (2018); 29.8 (2019); 29.5 (2020); 29.1 (2021); 28.0 (2022); 26.8 (2023); 25.8 (2024); 24.2 (2029); 26.1 (2039). - Change in external debt: - Change in external debt (annual): -1.0 (2016); 0.7 (2017); -1.9 (2018); -1.7 (2019); -0.5 (2020); -0.4 (2021); -1.2 (2022); -1.3 (2023); -1.1 (2024); -0.2 (2029). - Identified net debt-creating flows (percent of GDP): - Identified net debt-creating flows: 21.5 (2016); 15.9 (2017); 15.0 (2018); 14.6 (2019); 13.0 (2020); 12.1 (2021); 10.5 (2022); 9.3 (2023); 8.3 (2024); 8.2 (2029); 6.5 (2039). - Non-interest current account deficit: 18.1 (2016); 22.0 (2017); 20.2 (2018); 18.1 (2019); 17.0 (2020); 16.6 (2021); 15.4 (2022); 14.6 (2023); 13.7 (2024); 13.5 (2029). - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio (excerpted): 19.9; 18.9; 18.2; 18.2; 17.6; 16.9; 16.3; 14.8; 15.9 (various projection years shown). - PV of PPG external debt-to-exports ratio (excerpted): 123.3; 116.3; 110.8; 107.7; 102.5; 97.2; 92.3; 80.4; 79.4. - PPG debt service-to-exports ratio (selected values): 17.4; 9.3; 6.4; 7.1; 6.9; 7.2; 7.8; 7.3; 7.1; 5.8; 4.4. - PPG debt service-to-revenue ratio (selected values): 20.2; 8.0; 5.1; 6.1; 5.5; 5.9; 6.5; 6.1; 6.0; 5.2; 5.4. - Gross external financing need (Billion of U.S. dollars): 1.0; 1.3; 1.4; 1.3; 1.3; 1.3; 1.3; 1.3; 1.2; 1.6; 2.5. - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): 2.3 (2016); 4.0 (2017); 3.2 (2018); 4.5 (2019); 5.1 (2020); 5.5 (2021); 6.0 (2022); 6.5 (2023); 6.5 (2024); 5.5 (2029); 5.5 (2039). - GDP deflator in US dollar terms (change in percent): -16.1 (2016); 9.1 (2017); 7.4 (2018); 5.9 (2019); 3.3 (2020); 0.5 (2021); 0.7 (2022); 0.8 (2023); 0.7 (2024); 1.1 (2029); 1.5 (2039). - Effective interest rate (percent): 0.7 (2016); 0.9 (2017); 0.9 (2018); 0.8 (2019); 0.8 (2020); 0.8 (2021); 0.8 (2022); 0.9 (2023); 0.9 (2024); 1.0 (2029); 0.8 (2039). - Growth of exports of G&S (US dollar terms, in percent): -7.1 (2016); -10.7 (2017); 5.6 (2018); 11.4 (2019); 10.2 (2020); 8.6 (2021); 8.7 (2022); 8.6 (2023); 8.7 (2024); 7.6 (2029); 8.5 (2039). - Growth of imports of G&S (US dollar terms, in percent): -4.3 (2016); 13.0 (2017); 6.2 (2018); 6.2 (2019); 5.2 (2020); 6.6 (2021); 4.1 (2022); 5.2 (2023); 5.1 (2024); 6.8 (2029); 7.6 (2039). - Government revenues (excluding grants, in percent of GDP): 18.5 (2016); 19.5 (2017); 20.2 (2018); 18.8 (2019); 20.5 (2020); 20.5 (2021); 20.7 (2022); 20.7 (2023); 20.8 (2024); 20.8 (2029); 16.5 (2039). - Public sector debt (selected from public DSA): - Public sector debt: 55.1 (2016); 57.1 (2017); 59.5 (2018); 61.8 (2019); 60.0 (2020); 58.1 (2021); 53.9 (2022); 50.1 (2023); 47.2 (2024); 41.4 (2029); 29.2 (2039). - Of which: external debt (public): 31.8 (2016); 32.8 (2017); 31.2 (2018); 29.8 (2019); 29.5 (2020); 29.1 (2021); 28.0 (2022); 26.8 (2023); 25.8 (2024); 24.2 (2029); 26.1 (2039). - PV of public debt-to-GDP ratio (selected): 48.2; 51.0; 49.4; 47.6; 43.8; 40.5; 37.9; 32.3; 19.4 (various projection years shown). - Debt service-to-revenue and grants ratio (selected): 36.0; 35.6; 24.7; 35.4; 45.8; 49.8; 45.8; 45.3; 42.7; 47.2; 16.5. - Gross financing need (percent of GDP, selected): 5.7; 7.6; 7.4; 9.7; 9.7; 11.2; 10.3; 10.0; 9.9; 11.4; 3.6. ### Stress tests, scenarios, and breaches (high-level) - External DSA stress tests display alternative scenarios and bound/tailored tests for 2019–2029 covering: - Historical scenario, Combined contingent liabilities, Natural disaster, Commodity price shock, Market financing, One-time 30 percent nominal depreciation, and combinations (e.g., Combination of B1-B5). - Sensitivity analysis (selected outcomes for PV of debt-to-exports ratio and PV of debt-to-GDP ratio under scenarios): - Baseline PV of debt-to-exports ratio: 116.3 (2019); 110.8 (2020); 107.7 (2021); 102.5 (2022); 97.2 (2023); 92.3 (2024); 89.0 (2025); 86.2 (2026); 83.9 (2027); 81.9 (2028); 80.4 (2029). - Under A1 (key variables at their historical averages): PV of debt-to-exports rises to 119.2 by 2029. - Under B6 (Combination of B1-B5): PV of debt-to-exports reaches 122.2 by 2029. - Debt service-to-exports and debt service-to-revenue ratios under various shocks show some scenarios producing higher ratios but many projection paths trending down or stabilizing over the medium term (see sensitivity tables). ### Policy implications and commitments - Authorities recognize that growing public domestic debt is a material vulnerability to overall debt sustainability. - Policy priority: ensure financing for critical infrastructure while preserving debt sustainability. - Implicit policy focus areas (from DSA structure and authorities' commitments): - Careful selection and financing terms for infrastructure projects to avoid increasing debt vulnerabilities. - Monitoring of public domestic debt accumulation given its role in raising overall debt distress risk. - Use of stress-test results and tailored scenario analysis (e.g., natural disasters, commodity shocks, contingent liabilities) to inform borrowing strategies and fiscal policy. *Source: 1mwiea2019001 - 22. The authorities agreed with the DSA assessment of the risk of external debt* ### 1. Our authorities appreciate the candid dialogue during the recent program ### 1. Our authorities appreciate the candid dialogue during the recent program review mission ### Performance under the ECF Arrangement - Authorities broadly concur with the staff appraisal and key policy conclusions. - Request augmentation of access under the ECF arrangement to finance imports for post cyclone reconstruction and to place the economy back on a firm recovery path. - Request Executive Directors’ support towards completion of the second and third reviews under the ECF arrangement and waivers for non‑observance of performance criteria. - Quantitative performance criteria (QPC) and indicative targets (ITs): - All QPCs for end-December 2018 and end-June 2019 were met except the QPC on the primary fiscal balance. - ITs on new domestic arrears and on social spending were met for both end-December and end-June. - Most structural benchmarks (SBs) in the financial sector and public financial management were met. - Primary fiscal balance misses: - Missed by 1.5 percent of GDP at end-December 2018 due to front-loading of planned spending. - Missed by 2.5 percent of GDP at end-June 2019 due to revenue shortfalls and expenditure overruns driven by: unbudgeted post-cyclone relief and rehabilitation; spending to ensure safety during and after elections; payment of arrears from court rulings; transfers to universities for salary increases after staff strikes. - Authorities have tightened spending relative to FY 2018/19 outcome, returning to levels envisaged during the first review; request waivers for the two QPC non-observances. ### Recent Economic Developments and Macroeconomic Outlook - Growth: - Malawi economy expected to grow at 4.5 percent in 2019, up from 3.2 percent in 2018. - Medium-term growth projected to accelerate to 6-7 percent supported by robust agricultural production, improved irrigation, crop diversification, increased electricity generation, greater access to finance and improved business climate. - Risk: adverse weather conditions exacerbated by climate change could weigh on growth. - Inflation: - Headline inflation declined from 9.9 percent at end-2018 to 9.2 percent in September 2019. - Expected to average 9.1 percent during the year. - Medium-term: expected to remain in single digit territory and gradually converge to 5 percent with tight fiscal and monetary policies. - Note: food prices remain elevated due to supply disruptions from the cyclone and grain hoarding. - External sector: - Cyclone Idai impacted some agricultural exports but was partially offset by strengthening of drought-resistant export commodities such as cotton, sugar, pulses and edible nuts. - Current account deficit anticipated to narrow from 20.6 percent in 2018 to 18.4 percent of GDP in 2019. - Medium-term: current account deficit expected to narrow to around 15 percent of GDP, with foreign reserves rising above 4 months of prospective imports. - Cyclone Idai impacts and reconstruction cost: - Southern Malawi hit by Tropical Cyclone Idai in March 2019 causing significant loss of lives and property and damage to vital infrastructure. - Projected post-cyclone relief and rehabilitation expenses around $370 million. ### Fiscal Policy and Public Financial Management Reforms - Fiscal stance: - Authorities committed to prudent fiscal policies to keep public debt on a downward path while safeguarding social spending and critical growth-enhancing expenditures. - All spending commitments to be carefully monitored and undertaken as revenues materialize to avoid fiscal slippages. - Revenue mobilization and tax measures: - Broad-based tax reforms and stepped up enforcement of tax compliance; a domestic revenue mobilization strategy to be ready for implementation with the FY2020/21 budget. - FY 2019/20 budget incorporates new tax measures currently being implemented: a presumptive tax on commercial passenger vehicles; a carbon tax on motor vehicles; excises on plastic products; and import surcharge on select goods (e.g., alcohol, cigarettes). - MRA enhanced use of the ASYCUDA World system; an Integrated Tax Administration System (ITAS) will be rolled out. - User fees and charges have been raised and collection enhanced; fees to be periodically reviewed and adjusted towards marginal costs. - Dividend remittances by SOEs to be reinforced through implementation of the revised dividend policy. - Expenditure management and SOE oversight: - Medium-term rationalization of expenditures and enforcement of controls to prevent re-emergence of domestic payment arrears and ensure debt sustainability. - For FY 2019/20, expenditure cuts implemented with savings used to support cyclone victims and rehabilitation; domestically financed capital projects reoriented to boost disaster resilience. - Wage and pension increases aligned with inflation; new hiring confined to essential staff. - Revised regulations, policies and monitoring guidelines for SOEs issued; audit of the public sector investment program (PSIP) database completed to inform investment decisions and enhance public investment management and procurement. - Public financial management progress: - Progress in cash management, commitment controls, regular publication of reports by Ministries, Departments and Agencies (MDAs), and enhanced debt management and monitoring capacity. - Plans to expand IFMIS coverage to enhance controls and improve fiscal reporting. - A comprehensive medium-term debt strategy developed and to be updated regularly. ### Monetary, Exchange Rate and Financial Sector Policies - Monetary policy: - Continued focus on containing inflation within single digits. - Reserve Bank of Malawi (RBM) plans to complete transition to an interest rate-based operational framework and adopt inflation targeting over the medium-term. - Capacity expansion in high frequency data, liquidity forecasting, and the forecasting and policy analysis system (FPAS) modeling. - RBM modified the reference rate for base lending rates of commercial banks from the Lombard rate to a weighted average of four rates; implementation to be monitored and reviewed as necessary. - Exchange rate policy: - Authorities committed to a flexible exchange rate regime; interventions made solely for accumulation of foreign reserves and smoothing volatility. - RBM working to deepen the interbank FX market guided by a well-sequenced action plan informed by a comprehensive study to determine obstacles to FX market development. - Financial sector stability: - Priority on safeguarding financial sector stability and strengthening resilience through enhanced supervision and regulatory framework. - Non-performing loans (NPLs) declined from 15.7 percent at end-2017 to 4.8 percent in June 2019. - All banks fully compliant with IFRS9 standards; provisioning substantially increased. - RBM encouraged banks to enhance loan recovery, improve analysis of collateral quality and strengthen the collateral registry to reduce recovery time for collateral associated with NPLs. ### Structural Reforms - Structural reform priorities: - Implementation of comprehensive structural reforms to attain higher and more inclusive growth. - Progress in public financial management reforms, reduced vulnerabilities to corruption and improved transparency. - Efforts to promote financial inclusion and boost access and affordability of credit to enhance inclusive growth and address inequality. - Disaster risk and resilience: - Transitioning from a disaster reactive system to a preventive system, building on the National Disaster Recovery Framework and the 2017 Strategic Program for Climate Resilience. - A Disaster Risk Financing (DRF) strategy to anticipate, prepare and better respond to disasters was approved by Cabinet. - A broad resilience strategy including risk-transfer instruments and measures to minimize fiscal budget impact is being finalized. - Continued focus on more resilient infrastructure (enhanced electricity generation and irrigation) and crop diversification. - Commitment to implement the automatic fuel pricing mechanism to enable full cost recovery by fuel importers and eliminate need for government subsidy. - Business environment reforms: - Continued reforms to ease procedures to start a business and obtain construction permits, strengthen contract enforcement and enhance insolvency processes. ### Conclusion - Authorities reiterate commitment to entrenching macroeconomic stability and enhancing governance for higher, more inclusive and sustainable growth. - Policy combination: prudent fiscal and monetary policies accompanied by growth-enhancing structural reforms. - Appreciation expressed to the international community, including the World Bank and the African Development Bank, for assistance in providing immediate disaster relief in response to Cyclone Idai; further support welcomed for significant reconstruction needs. - Authorities value Fund engagement and look forward to Executive Directors’ support in completing the second and third reviews under the ECF. *1mwiea2019001 - 1. Our authorities appreciate the candid dialogue during the recent program review mission* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mwiea2019001.pdf_