## 1mwiea2020001

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### Executive summary and request
- Malawi requested emergency financial assistance under the Rapid Credit Facility (RCF) to address an urgent balance of payments (BOP) need stemming from the COVID-19 pandemic.
- Authorities requested a disbursement of SDR 66.44 million (equivalent to 47.9 percent of quota or $93 million) under the RCF “exogenous shocks” window.
- Malawi also received SDR 7.202 million under the CCRT on April 13.
- The external financing gap is estimated at 2.1 percent of GDP ($176 million).

### Context, immediate impact, and channels of the shock
- Health and testing:
  - As of April 27, there were thirty-six confirmed cases of COVID-19 in Malawi and three deaths; testing capacity is limited.
- Political context:
  - New presidential elections scheduled for July 2, 2020 following Constitutional Court actions; President Mutharika has challenged the ruling in the Supreme Court.
- External channels:
  - Global and regional slowdown weighing on remittances, tourism, and FDI.
  - Trade transit costs increased due to border closures; project-related inflows slowed; trade and export disruptions (including partial closure of commodities markets).
- Domestic channels:
  - National lockdown since early April slowed domestic activity, especially manufacturing and wholesale/retail trade.
  - Maize harvests impacted in Central and Northern regions; sales reduced despite some stored harvests.
  - Lagged effects of lower international oil prices due to locked-in import contracts lasting 3-6 months.
- Financial sector:
  - Economic slowdown expected to raise banks’ non-performing loans and balance sheet pressures, especially for smaller, less liquid banks.
- Fiscal revenue effects:
  - Both domestic and customs tax revenues impacted; border closures produced significant reductions in customs and import VAT revenues; lockdown impeded domestic revenue collection.

### Macroeconomic and pre-COVID-19 backdrop (selected)
- Growth and inflation:
  - Growth rose to 4.5 percent in 2019.
  - Average inflation rose to 9.4 percent in 2019; non-food inflation stable at 5 percent.
  - Reserve Bank of Malawi policy rate maintained at 13.5 percent.
- External and fiscal positions:
  - Current account deficit narrowed to 17.2 percent of GDP in 2019 from 20.5 percent in 2018.
  - Reserves coverage improved from 3.0 months of prospective imports at end-2018 to 3.2 months at end-2019.
  - Domestic primary balance overperformed by 1 percent of GDP in FY 2019/20H1.
- Pre-pandemic outlook:
  - Growth was forecast at around 5 percent in 2020 and averaging just over 6 percent during 2022-25.
  - Inflation was expected to converge towards 5 percent by 2025; average inflation in 2020 expected near 10 percent.

### Macroeconomic projections and key numeric outcomes
- Growth:
  - Growth expected to fall to 1 percent in 2020 (four percentage points below pre-pandemic projections) and to 2.5 percent in 2021.
  - Real per capita income projected to decline by around 2 percent in 2020.
  - Growth averaging 6.4 percent during 2022-25 is projected.
- Inflation:
  - Projected to rise to 14.0 percent in 2020 and 10.7 percent in 2021; moderate towards 5 percent over the medium-term.
- Fiscal balances and financing needs:
  - Domestic primary deficit expected at 3.4 percent of GDP in FY 2019/20 and 1.3 percent of GDP in FY 2020/21.
  - Text Table summary (FY19/20 and FY20/21, Percent of GDP):
    - Revenue shortfalls: 1.3 and 1.5
    - Spending: 0.5 and 0.6
    - Health care: 0.3 and 0.3
    - Social spending: 0.1 and 0.3
    - Financing Needs: 1.7 and 2.2
    - Financing Sources: 1.7 and 2.2
      - Foreign: 0.5 and 0.2
      - Budget support: 0.4 and 0.0
      - Project grants: 0.1 and 0.2
      - Domestic: 1.2 and 1.9
- Current account:
  - Anticipated widening to 18.1 percent of GDP in 2020 and 18.0 percent of GDP in 2021.
  - In 2020, decline in remittances accounts for most deterioration; effects mitigated by domestic import contraction, lower oil import bill, and ceased outbound travel.

### External financing gap, quantified financing needs, and funding sources
- External financing gap:
  - Projected at $176 million (2.1 percent of GDP) in 2020 after accounting for:
    - Anticipated IMF disbursements (net of repayments) of 0.5 percent of GDP for the 4th and 5th reviews under the ECF.
    - 0.1 percent of GDP in debt relief under the IMF’s CCRT (until mid-October 2020).
    - Assumption that reserves in months of imports are maintained at 3.2.
  - Overall BOP deteriorates from a projected pre-pandemic surplus of 1.7 percent of GDP to a deficit of 2.0 percent of GDP.
  - External financing gap for 2020-21 totals almost 3 percent of GDP or about $240 million.
- Quantified COVID-19 financing needs (Text Table 2, Millions of U.S. dollars):
  - Financing needs from COVID-19 pandemic (A): 3083.7
    - Widening of current account deficit, excluding official current transfers: 1031.2
    - Widening of trade and service account deficit: -20.0
    - Decline in private transfers: 1051.2
    - Deterioration in capital and financial account: 2052.4
    - Decline in FDI: 1221.4
  - Policy adjustment (lower accumulation of gross reserves) (B): 1321.6
  - External financing gap (A-B): 1762.1
  - Additional financing: 1762.1
    - Prospective grants for debt relief under IMF CCRT: 50.1
    - Financial support from other donors (incl. WB, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID): 430.5
      - Of which: World Bank: 370.4
    - Disbursement under IMF RCF: 931.1
  - Residual gap: 350.4

### Immediate policy priorities and short-term fiscal/monetary measures (quantified)
- Fiscal measures implemented and supported by staff:
  - Increase health sector outlays by 0.3 percent of GDP in FY 2019/20 and at least 0.3 percent of GDP in FY 2020/21.
  - Increase social assistance under the SCTP; transfers to each recipient permanently raised by 40 percent in FY 2020/21.
  - Purchase and storage of maize by ADMARC financed by borrowing from banks and 0.1 percent of GDP from the budget for each of FY 2019/20 and FY 2020/21.
  - Tax waivers on imports of medical equipment, medicine and other supplies needed to counter the pandemic.
  - Temporarily reduced salaries of high-ranking government officials and delayed non-essential spending.
  - Clearance of domestic arrears: unpaid bills close to 1.1 percent of GDP; 0.8 percent of GDP were arrears as of end-December 2019; half cleared (0.4 percent of GDP) by end-March 2020 and the other half expected to be cleared by end-2020; remaining 0.3 percent of GDP in unpaid bills under dispute.
  - Continue automatic fuel pricing mechanism.
- Monetary and financial sector measures:
  - Reductions in the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent.
  - Lowering the Lombard Rate from 0.4 to 0.2 percentage points above the policy rate.
  - Loan restructuring and a three-month moratorium on debt service for SMEs, with provisioning relief to banks for restructured or on-moratorium loans.
  - Enhanced RBM monitoring of financial sector risks, intensified off-site supervision with daily monitoring.
  - Activation of Emergency Liquidity Assistance (ELA) framework.
  - Greater exchange rate flexibility while keeping reserves at an adequate level; study of obstacles to FX market development and action plan to deepen the market.

### Budget process, transparency, contingency planning, and safeguards
- FY 2020/21 budget to include COVID-19 measures; to be submitted to Cabinet in May and expected to be approved by Parliament by end-June.
- Contingency measures if revenue shortfalls and spending exceed projections: reprioritize non-essential spending, reduce purchases of motor vehicles and office equipment, and revenue administration measures to ensure business continuity.
- Transparency and oversight:
  - Regular publication of procurement documentation on PPDA website; PPDA to publish names of beneficial owners of awarded companies and conduct and publish ex-post validation of delivery.
  - Ministry of Finance to publish quarterly statements on commitments and payments of COVID-19 related activities and specify COVID-19 related costs in monthly salary report and budget funding and cash management analysis.
  - National Audit Office to submit quarterly audits of COVID-19 related spending to the Minister of Finance and, once pandemic abates, publish and submit to Parliament a comprehensive audit.
- Safeguards:
  - Commit to update the safeguards assessment before Board approval of any subsequent arrangement; provide IMF staff with RBM’s recent external audit reports and authorize external auditors to hold discussions with IMF staff.

### Program status, IMF engagement, and IMF role
- The 2nd and 3rd reviews under the ECF arrangement and request for augmentation (20 percent of quota) were approved by the Executive Board in November 2019.
- Discussions on the 4th review under the ECF arrangement to be continued when there is greater clarity on the outlook.
- Preliminary data suggest all quantitative performance criteria for the end-December 2019 test date were observed.
- Debt relief under the CCRT covering two years’ debt service to the Fund (SDR 32.842 million) was approved on April 13, 2020, with an initial tranche of SDR 7.202 million provided during April-October.
- Role of IMF financing:
  - IMF emergency financing under the RCF expected to help meet the large external financing gap and catalyze further concessional donor support.
  - With the RCF disbursement, outstanding PRGT credit would reach 167 percent of quota and total PRGT disbursements over a twelve month-period would reach 100 percent of quota, all within normal access limits.
  - Malawi’s capacity to repay the Fund remains strong; CCRT support will ease near-term burden.

### Debt sustainability assessment and medium-term outlook
- Debt risk:
  - Malawi is at moderate risk of external debt distress and high overall risk of debt distress based on an update of the November 2019 Debt Sustainability Analysis—staff assess Malawi’s debt to be sustainable.
  - DSA upgraded Malawi’s debt carrying capacity from “weak” to “medium”; Composite Index 2.84 in current vintage (2019 CPIA and 2019 October WEO) and 2.72 in previous vintage.
- Projections and indicators (selected):
  - Public sector debt (percent of GDP): 2019 = 59.5; 2020 = 66.5; 2021 = 69.9; 2022 = 68.8; 2023 = 68.0; 2024 = 67.4; 2025 = 65.8.
  - PV of public debt-to-GDP ratio (selected years): 2020 = 48.7; 2021 = 55.1; 2022 = 57.7; 2023 = 56.6; 2024 = 55.7; 2025 = 55.1.
  - Debt service-to-revenue and grants ratio (selected values): 2019 = 27.8; 2020 = 34.9; 2021 = 53.3; 2022 = 64.7; 2023 = 71.1; 2024 = 76.4; 2025 = 80.3.
  - Gross financing need (percent of GDP): 2019 = 8.0; 2020 = 11.7; 2021 = 15.2; 2022 = 16.9; 2023 = 18.2; 2024 = 19.5; 2025 = 19.6.
- Stress tests:
  - Under the most extreme shock scenario (assumes a 6 percent decline in exports that could occur in 2021), the present value of external debt to exports is projected to breach the benchmark; all other indicators remain below the benchmark under the baseline scenario.

### Staff assessment, decision, and recommendations
- Staff supports the authorities’ RCF request for SDR 66.44 million (47.9 percent of quota) to meet urgent BOP needs from the COVID-19 shock.
- Staff assessment and rationale:
  - Support based on urgent BOP needs from a sudden exogenous shock and authorities’ policy commitments (greater exchange rate flexibility; seek additional financing from development partners; continue medium-term reforms under ECF).
  - Malawi is assessed to be at moderate risk of external debt distress; capacity to repay the Fund remains strong.
- Recommended near-term stance:
  - A near-term widening of the budget deficit is appropriate given fiscal costs associated with the slowdown and the need for additional health care and social spending, subject to transparency and targeting.
  - Once crisis abates: boost domestic revenue mobilization and enhance public financial management to preserve debt sustainability.
- Policy implications under downside risks:
  - Slower global/regional recovery or greater spread of COVID-19 would increase BOP needs, reduce inflows from tourism/remittances/FDI, and worsen fiscal deficits—requiring additional external concessional support and domestic policy adjustments.

*International Monetary Fund staff report and Executive Board materials on Malawi (April 27, 2020).*

### 66.44 million (US$91 million or 47.9 percent of quota) to help Malawi  meet the urgent balance

### 66.44 million (US$91 million or 47.9 percent of quota) to help Malawi  meet the urgent balance

### Executive summary and request
- Malawi requested emergency financial assistance under the Rapid Credit Facility (RCF) to address an urgent balance of payments (BOP) need stemming from the COVID-19 pandemic.
- Authorities requested a disbursement of SDR 66.44 million (equivalent to 47.9 percent of quota or $93 million) under the RCF “exogenous shocks” window.
- Malawi also received SDR 7.202 million under the CCRT on April 13.
- The external financing gap is estimated at 2.1 percent of GDP ($176 million).

### Context and immediate economic impact
- As of April 27, there were thirty-six confirmed cases of COVID-19 in Malawi and three deaths; testing capacity is limited and cases are likely to rise.
- The national lockdown since early April, spillovers from the global and regional slowdown, border closures, and disruption of neighboring countries are weighing on exports, tourism, remittances, investment, and consumption.
- The public health system is described as poorly equipped to manage a major public health emergency.
- Political tensions: new presidential elections scheduled for July 2, 2020 following Constitutional Court actions; President Mutharika has challenged the ruling in the Supreme Court.

### Macroeconomic and pre-COVID-19 backdrop
- Growth and inflation:
  - Growth rose to 4.5 percent in 2019.
  - Average inflation rose to 9.4 percent in 2019; non-food inflation stable at 5 percent.
  - Reserve Bank of Malawi policy rate maintained at 13.5 percent.
- External and fiscal positions:
  - Current account deficit narrowed to 17.2 percent of GDP in 2019 from 20.5 percent in 2018.
  - Reserves coverage improved from 3.0 months of prospective imports at end-2018 to 3.2 months at end-2019.
  - Domestic primary balance overperformed by 1 percent of GDP in FY 2019/20H1.
- Pre-pandemic outlook:
  - Growth was forecast at around 5 percent in 2020 and averaging just over 6 percent during 2022-25.
  - Inflation was expected to converge towards 5 percent by 2025; average inflation in 2020 expected near 10 percent.

### Impact channels of the COVID-19 shock
- External channels:
  - Global and regional slowdown weighing on remittances, tourism, and FDI; trade transit costs increased due to border closures.
  - Project-related inflows slowed; trade and export disruptions (including partial closure of commodities markets).
- Domestic channels:
  - Lockdown slowed domestic activity, especially manufacturing and wholesale/retail trade.
  - Maize harvests impacted in Central and Northern regions; sales reduced despite some stored harvests.
  - Lagged effects of lower international oil prices due to locked-in import contracts lasting 3-6 months.
- Financial sector:
  - Economic slowdown expected to raise banks’ non-performing loans and balance sheet pressures, especially for smaller, less liquid banks.
- Fiscal revenue effects:
  - Both domestic and customs tax revenues impacted; border closures produced significant reductions in customs and import VAT revenues; lockdown impeded domestic revenue collection.

### Macroeconomic projections and key numeric outcomes
- Growth:
  - Growth is expected to fall to 1 percent in 2020 (four percentage points below pre-pandemic projections) and to 2.5 percent in 2021.
  - Real per capita income projected to decline by around 2 percent in 2020.
  - Growth averaging 6.4 percent during 2022-25 is projected.
- Inflation:
  - Projected to rise to 14.0 percent in 2020 and 10.7 percent in 2021; moderate towards 5 percent over the medium-term.
- Fiscal balances and financing needs:
  - Domestic primary deficit expected at 3.4 percent of GDP in FY 2019/20 and 1.3 percent of GDP in FY 2020/21 (just over a 4 and 3 percent of GDP deterioration in FY 2019/20 and FY 2020/21 relative to pre-pandemic expectations).
  - Text Table summary (FY19/20 and FY20/21, Percent of GDP):
    - Revenue shortfalls: 1.3 and 1.5
    - Spending: 0.5 and 0.6
    - Health care: 0.3 and 0.3
    - Social spending: 0.1 and 0.3
    - Financing Needs: 1.7 and 2.2
    - Financing Sources: 1.7 and 2.2
      - Foreign: 0.5 and 0.2
      - Budget support: 0.4 and 0.0
      - Project grants: 0.1 and 0.2
      - Domestic: 1.2 and 1.9
- Current account:
  - Anticipated widening to 18.1 percent of GDP in 2020 and 18.0 percent of GDP in 2021 (about 1 percent of GDP deterioration in each year relative to pre-pandemic expectations).
  - In 2020, decline in remittances accounts for most deterioration; effects mitigated by domestic import contraction, lower oil import bill, and ceased outbound travel.

### Authorities’ policy response and modalities of fund support
- Immediate policy and fiscal measures:
  - Increased health sector outlays.
  - Expanded social assistance and grain purchase programs to support incomes and food security of the most vulnerable.
  - Support to small and medium enterprises.
  - Measures to ease liquidity constraints in the banking system, including an emergency liquidity assistance framework and injections of liquidity as needed.
  - Commitment to greater exchange rate flexibility to buffer the external shock.
  - Commitment to audit COVID-19 related spending.
- Structural and medium-term priorities:
  - Continue policies to achieve higher and more broad-based medium-term growth and governance reforms while preserving macroeconomic stability and debt sustainability.
  - After the crisis abates: boost domestic revenue mobilization and enhance public financial management to safeguard medium-term debt sustainability.
- Role of IMF financing:
  - IMF emergency financing under the RCF expected to help meet the large external financing gap and catalyze further concessional donor support.
  - Additional concessional donor support deemed critical to close the remaining external financing gap and facilitate needed interventions while preserving macroeconomic stability.

### Program status and IMF engagement
- The 2nd and 3rd reviews under the ECF arrangement and request for augmentation (20 percent of quota) were approved by the Executive Board in November 2019.
- Discussions on the 4th review under the ECF arrangement to be continued when there is greater clarity on the outlook.
- Preliminary data suggest all quantitative performance criteria for the end-December 2019 test date were observed.
- Debt relief under the CCRT covering two years’ debt service to the Fund (SDR 32.842 million) was approved on April 13, 2020, with an initial tranche of SDR 7.202 million provided during April-October.

### Staff assessment and recommendations (as reflected in the statement)
- The IMF supports the authorities’ RCF request and the view that IMF financing will play a catalytic role in mobilizing additional financing from development partners.
- A near-term widening of the budget deficit is appropriate given fiscal costs associated with the slowdown and the need for additional health care and social spending, subject to transparency and targeting.
- The authorities’ commitment to auditing COVID-19 related spending is welcomed.
- Once the crisis abates, priority actions should include boosting domestic revenue mobilization and enhancing public financial management to preserve debt sustainability.

*International Monetary Fund staff report and Executive Board materials on Malawi (April 27, 2020).*

### 8.      Consequently, an external financing gap projected  at  $176 million (2.1 percent of

### Malawi: COVID-19 External Financing Needs and Policy Response

### External financing gap and balance of payments impact
- External financing gap projected at $176 million (2.1 percent of GDP) in 2020, after accounting for:
  - Anticipated IMF disbursements (net of repayments) of 0.5 percent of GDP for the 4th and 5th reviews under the ECF.
  - 0.1 percent of GDP in debt relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT, until mid-October 2020).
  - Assumption that reserves in months of imports are maintained at 3.2.
- Overall balance of payments deteriorates from a projected pre-pandemic surplus of 1.7 percent of GDP to a deficit of 2.0 percent of GDP.
- This reflects:
  - A projected current account deficit of 18.1 percent of GDP.
  - A capital and financial account surplus of only 16.1 percent of GDP (reduced by 2.7 percent of GDP relative to pre-pandemic expectations mainly due to reduced FDI).
- Large balance of payments needs related to the pandemic are expected to persist in 2021; the external financing gap for 2020-21 totals almost 3 percent of GDP or about $240 million.

### Downside risks
- Downside risks are substantial and could result in significantly larger balance of payments needs, including:
  - Slower than envisaged global or regional economic recovery.
  - More significant spread of COVID-19 within Malawi, which could make economic growth sharply negative.
- Policy implications of downside scenarios:
  - Longer disruptions to international trade and related transit costs.
  - Reduced inflows from tourism, remittances, and FDI.
  - Further deterioration in the fiscal deficit from lower tax revenues and added health and social assistance spending pressures, increasing fiscal financing needs.

### Quantified COVID-19 financing needs (Text Table 2, Millions of U.S. dollars)
- Financing needs from COVID-19 pandemic (A): 3083.7
  - Widening of current account deficit, excluding official current transfers: 1031.2
  - Widening of trade and service account deficit: -20.0
  - Decline in private transfers: 1051.2
  - Deterioration in capital and financial account: 2052.4
  - Decline in FDI: 1221.4
- Policy adjustment (lower accumulation of gross reserves) (B): 1321.6
- External financing gap (A-B): 1762.1
- Additional financing: 1762.1
  - Prospective grants for debt relief under IMF CCRT: 50.1
  - Financial support from other donors (incl. WB, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID): 430.5
    - Of which: World Bank: 370.4
  - Disbursement under IMF RCF: 931.1
- Residual gap: 350.4

### Immediate policy priorities and short-term fiscal/monetary measures
- Authorities’ immediate priority: limit pandemic impact and preserve macroeconomic stability while remaining committed to medium-term growth and governance reforms under the ECF.
- Fiscal measures implemented and supported by staff:
  - Increase health sector outlays by 0.3 percent of GDP in FY 2019/20 and at least 0.3 percent of GDP in FY 2020/21 (including developing testing capabilities, equipping treatment centers, importing medical equipment and supplies, hiring 2000 additional medical staff, and raising public awareness).
  - Increase social assistance spending under the social cash transfer program (SCTP); transfers to each recipient permanently raised by 40 percent in FY 2020/21 (for both government and foreign-financed portions).
  - Purchase and storage of maize by ADMARC financed by borrowing from banks and 0.1 percent of GDP from the budget for each of FY 2019/20 and FY 2020/21.
  - Tax waivers on imports of medical equipment, medicine and other supplies needed to counter the pandemic.
  - Temporarily reduced salaries of high-ranking government officials and delayed non-essential spending on goods and services and non-health development projects.
  - Clearance of domestic arrears accrued by the Roads Fund: unpaid bills close to 1.1 percent of GDP; 0.8 percent of GDP were arrears as of end-December 2019; half cleared (0.4 percent of GDP) by end-March 2020 and the other half expected to be cleared by end-2020 (assuming no additional pandemic-related spending needs); remaining 0.3 percent of GDP in unpaid bills under dispute.
  - Continue implementing automatic fuel pricing mechanism to help contain inflation.

- Monetary and financial sector measures:
  - Reductions in the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent (aligning rates on local and foreign currency LRR).
  - Lowering the Lombard Rate from 0.4 to 0.2 percentage points above the policy rate.
  - Loan restructuring and a three-month moratorium on debt service for SMEs, with provisioning relief to banks for restructured or on-moratorium loans.
  - Enhanced RBM monitoring of financial sector risks, intensified off-site supervision with daily monitoring, consideration of enhanced supervisory reporting.
  - Activation of Emergency Liquidity Assistance (ELA) framework to support banks on a case-by-case basis.
  - Greater exchange rate flexibility while keeping reserves at an adequate level; study of obstacles to FX market development and action plan to deepen the market.

### Fiscal measures quantified (Text Table 3, Percent of GDP)
- FY19/20 and FY20/21 estimated COVID-related fiscal measures (percent of GDP):
  - Health care: 0.3 (FY19/20), 0.3 (FY20/21)
    - On-Budget: 0.3, 0.3
    - Hiring additional health care workers: 0.0, 0.1
    - Goods and services: 0.3, 0.2
    - Government-financed: 0.2, 0.2
    - Development partner-financed: 0.1, 0.0
    - Off-Budget: 0.2, 0.2
    - Goods and services, development partner-financed: 0.2, 0.2
  - Social spending (all on-budget): 0.1, 0.3
    - Social assistance (SCTP): 0.0, 0.2
      - Government-financed: 0.0, 0.0
      - Development partner-financed (on-budget): 0.0, 0.2
  - Maize purchases (via ADMARC): 0.1, 0.1
  - Total: 0.5, 0.6
  - Government-financed: 0.3, 0.4

### Budget process, transparency, and contingency planning
- FY 2020/21 budget will include the measures above; to be submitted to Cabinet in May and expected to be approved by Parliament by end-June.
- Contingency measures being discussed if COVID-19 related revenue shortfalls and spending exceed projections at budget approval, including:
  - Reprioritizing non-essential spending on goods and services and development projects in non-health areas.
  - Reduced purchases of motor vehicles, office equipment, and non-essential recurrent spending.
  - Revenue administration measures to ensure business continuity during the pandemic.

- Fiscal oversight and transparency actions:
  - Regular publication of procurement documentation on the PPDA website continues during lockdown.
  - PPDA to publish names of beneficial owners of awarded companies and conduct and publish ex-post validation of delivery.
  - Ministry of Finance to publish quarterly statements on commitments and payments of COVID-19 related activities, specify COVID-19 related costs in monthly salary report and in budget funding and cash management analysis.
  - National Audit Office to submit quarterly audits of COVID-19 related spending to the Minister of Finance and, once pandemic abates, publish and submit to Parliament a comprehensive audit of COVID-19-related spending by the government and ADMARC.

### Medium-term reforms and resilience-building
- Commitment to advance medium-term economic reform program under the ECF to entrench macroeconomic stability and enhance poverty-reducing and resilient growth:
  - Implement domestic revenue mobilization strategy after the pandemic, including comprehensive VAT reforms and continued improvements in spending efficiency.
  - Continue reforms in tax administration, procurement, public financial management (including implementation of a new IFMIS in line with FAD advice), public investment management, oversight of state-owned enterprises, and debt management.
  - RBM to actively manage bank liquidity and gradually transition towards an inflation targeting framework by 2023; study and address obstacles to FX market development.
  - Strengthen resilience to climate change and promote private sector development and export diversification via priority resilience projects, health, gender, education improvements, business environment enhancements, agricultural regulation and market intervention reforms, and raising access to finance by improving property rights.

### IMF support, RCF disbursement, and debt outlook
- Authorities request a disbursement under the RCF “exogenous shock” window equivalent to 47.9 percent of quota (SDR 66.44 million or about US$93 million).
  - The disbursement would be provided to the RBM and meet 53 percent of the urgent BOP needs from the COVID-19 shock.
  - Budget support is not being proposed at this time given sufficient domestic liquidity and substantial off-budget donor-financed health and social assistance programs.
- Authorities actively seeking additional support from development partners, including $43 million in 2020 from the World Bank, DFID, GAVI, UN, Irish Aid, GIZ, and KfW.
- Absent additional support, the remainder of the external financing gap will be closed with a drawdown of international reserves, leaving reserves coverage at 3 months of imports (substantially below the staff assessed adequate level of 3.6).
- With the RCF disbursement, outstanding PRGT credit would reach 167 percent of quota and total PRGT disbursements over a twelve month-period would reach 100 percent of quota (assuming the 4th and 5th reviews under the ECF are completed in 2020), all within normal access limits.
- Malawi’s capacity to repay the Fund remains strong; Malawi has a strong track record in meeting obligations and servicing risks are mitigated by low indebtedness and availability of concessional financing. Support under the CCRT will ease the near-term burden.

### Debt sustainability assessment
- Malawi is at moderate risk of external debt distress and high overall risk of debt distress based on an update of the November 2019 Debt Sustainability Analysis—staff assess Malawi’s debt to be sustainable.
- Under the most extreme shock scenario (which assumes a 6 percent decline in exports that could occur in 2021), the present value of external debt to exports is projected to breach the benchmark; all other indicators remain below the benchmark under the baseline scenario.
- The present value of total public debt to GDP is projected to remain above the benchmark in the near and medium terms and then gradually decline under the baseline scenario, mainly reflecting larger primary deficits during FY 2019/20-20/21 resulting in increasing amounts of domestic debt.
- The DSA upgraded Malawi’s debt carrying capacity from “weak” to “medium” as the Composite Index exceeded the threshold of 2.69 for two consecutive vintages; it is 2.84 in the current vintage (2019 CPIA and 2019 October WEO) and was 2.72 in the previous vintage (2018 CPIA and 2019 April WEO).

### Safeguards and governance
- Authorities committed to undertaking an update of the safeguards assessment before Board approval of any subsequent arrangement to which the safeguards policy applies, including authorization for Fund staff to hold discussions with the RBM’s external auditors and access to recent external audit reports.
- Last safeguards assessment undertaken in July 2018; most safeguards recommendations implemented, including enactment of a new RBM Act in 2019 strengthening governance and autonomy and progress towards a comprehensive ELA framework; limited progress on concerns over RBM’s reserve management practices.

*Source: IMF staff report excerpt on Malawi’s COVID-19 external financing needs and policy response.*

### 18.      Staff welcomes the authorities’ swift efforts to contain and manage the spread of the

### 18.      Staff welcomes the authorities’ swift efforts to contain and manage the spread of the COVID-19 pandemic.

### Response measures and immediate actions
- The government quickly developed a response plan—with support of the World Health  Organization and other development partners—that requires additional health  and social assistance spending of 0.3 percent of GDP in 2020H1 (FY  2019/20) and 0.6 percent of GDP more in 2020H2  (FY 2020/21).
- Development partners have also stepped up their support to health and social assistance programs (substantial parts of which are implemented  off-budget), complementing  the authorities’ efforts.
- Soon after the first reported cases of COVID-19 in Malawi, a lockdown was instituted  to curb spread of the pandemic and testing and treatment facilities were ramped up.
- Measures being taken:
  - Ensure food security and support farmers’ incomes and SMEs through this difficult period.
  - Lower the local currency LRR rate to ease banking system liquidity  constraints.
  - Step up monitoring of financial  sector risks.
  - Announce a newly established ELA framework.
  - Maintain a flexible exchange rate to buffer the  shock.

### Economic impact and growth outlook
- Spillovers from the global slowdown and border closures and economic disruption in neighboring countries have:
  - Reduced exports.
  - Raised trade transit costs.
  - Weighed on remittances, tourism, and FDI.
- The external factors, combined with the slowdown in domestic activity related to the lockdown, is expected to reduce growth to 1 percent in 2020, well below pre-pandemic projections, and a contraction in real per capita terms.

### Balance of payments and fiscal implications
- An external financing gap, stemming from the pandemic, is estimated at 2.1 percent of GDP in 2020.
- Revenue shortfalls from the economic slowdown and additional spending to mitigate the effects of the pandemic are contributing to the widening of the domestic primary deficit to 3.4 percent of GDP in FY 2019/20 (nearly 4 percent of GDP deterioration from pre-pandemic projections).
- The widened deficit is expected to be financed mainly with budget support from the World Bank and by large domestic commercial banks.

### Policy commitments and medium-term strategy
- Given the deterioration in the near-term fiscal path, the authorities are committed to:
  - Preserving public debt sustainability.
  - Bringing down debt over the medium-term.
  - Implementing a comprehensive domestic revenue mobilization strategy soon after the pandemic passes.

*Source: 1mwiea2020001 - 18.      Staff welcomes the authorities’ swift efforts to contain and manage the spread of the*

### 21.      Against this background, staff supports the authorities’ request for a disbursement

### 1mwiea2020001 - 21.      Against this background, staff supports the authorities’ request for a disbursement

### Decision and Rationale
- Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 66.44 million (47.9 percent of quota).
- Support is based on the urgent balance of payments needs arising from a sudden exogenous shock stemming from the COVID-19 pandemic and the authorities’ existing and prospective policies to address this external shock and the balance of payments difficulties.
- Authorities’ policy commitments cited as part of the rationale:
  - Commitment to greater exchange rate flexibility.
  - Commitment to seek additional financing from other development partners.
  - Continued commitment to advancing their medium-term economic reform program, supported by the ECF arrangement, which seeks to entrench macroeconomic stability and enhance poverty-reducing and resilient growth.
- Staff assessment:
  - Malawi is assessed to be at moderate risk of external debt distress.
  - Malawi’s capacity to repay the Fund remains strong.
  - While the risks to the outlook are substantial, staff supports the disbursement given the urgent external financing need.

### Macroeconomic Context and Outlook (selected indicators as reported)
- GDP at constant market prices: 3.24.55.11.02.56.56.56.36.3
- Nominal GDP (billions of Kwacha): 5,0605,7116,4666,5287,3268,3019,24110,25611,373
- GDP deflator: 7.88.07.913.29.56.44.54.44.4
- Consumer prices (end of period): 9.911.57.915.77.86.65.05.05.0
- Consumer prices (annual average): 9.29.48.714.010.77.25.05.05.0
- National savings (percent of GDP): -7.2-4.7-4.6-6.2-4.3-2.8-2.3-1.6-1.2
- Gross investment (percent of GDP): 13.312.512.611.613.714.314.514.414.1

### Fiscal and Debt Indicators (selected)
- Central government revenue (percent of GDP, fiscal year basis): 21.021.122.020.420.421.922.722.722.6
- Tax and nontax revenue (percent of GDP): 19.619.119.818.218.219.420.120.120.1
- Grants (percent of GDP): 1.52.02.22.32.22.52.72.62.5
- Expenditure and net lending (percent of GDP): 28.928.226.829.727.728.027.527.326.7
- Overall balance (including grants) (percent of GDP): -7.9-7.0-4.9-9.3-7.3-6.1-4.8-4.7-4.1
- Primary balance (percent of GDP): -4.3-2.7-0.8-5.0-3.3-2.8-2.5-2.2-2.1
- Domestic primary balance: -2.6-1.20.9-3.4-1.3-0.4-0.10.20.3
- External debt (public sector) (percent of GDP): 31.229.629.531.433.032.832.632.432.2
- NPV of public external debt (percent of exports): 123.3115.4110.8136.3132.1126.0120.4131.8125.5
- Domestic public debt (percent of GDP): 28.230.030.535.136.836.035.435.033.6
- Total public debt (percent of GDP): 59.459.560.066.569.968.868.067.465.8
- External debt service (percent of exports): 9.86.56.98.38.89.58.98.68.3
- External debt service (percent of revenue excl. grants): 9.75.65.56.66.97.67.37.37.3

### Balance of Payments and External Financing (selected)
- Current account (US$ millions): -1,418.6-1,318.0-1,426.6-1,529.5-1,522.8-1,481.7-1,510.7-1,513.0-1,510.1
- Merchandise trade balance (US$ millions): -1,663.5-1,621.2-1,802.5-1,734.6-1,808.2-1,814.9-1,856.9-1,893.2-1,945.8
- Exports (US$ millions): 929.81,050.71,144.6985.41,067.51,146.51,232.91,334.71,446.1
  - Of which: Tobacco (US$ millions): 426.4397.1444.2353.5370.6377.7390.9409.2429.7
- Imports (US$ millions): -2,593.3-2,671.9-2,947.1-2,720.1-2,875.7-2,961.4-3,089.9-3,227.9-3,391.8
  - Of which: Petroleum products (US$ millions): -342.6-344.9-341.4-233.6-265.8-307.2-346.9-387.1-418.3
  - Project related imports (US$ millions): -131.5-198.9-189.3-194.3-258.5-269.7-288.5-293.2-293.0
- Unrequited transfers (net) (US$ millions): 560.3634.5667.6562.7618.9663.3698.4732.5778.3
- Capital account balance (US$ millions): 806.8931.8404.51,015.71,089.61,200.71,229.91,246.11,229.8
  - Project and dedicated grants (US$ millions): 92.4137.7166.5161.4199.4222.5243.1240.6230.9
  - Off-budget project support (US$ millions): 714.3794.1238.0854.3890.2978.2986.81,005.5998.9
- Financial account balance (US$ millions): 408.9434.61,160.2347.5422.0401.0393.2397.6426.8
- Gross official reserves (US$ millions): 750.1819.5950.0860.9900.2983.91,059.41,156.31,260.5
  - Months of imports: 3.03.23.33.23.33.43.53.73.8
- Financing gap (US$ millions): 0.00.00.0175.965.25.30.00.00.0
  - Of which: Prospective grants for debt relief under IMF CCRT: .......4.525.25.3.........
  - Financial support from other donors (incl. WB, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID): .......43.4...............
  - Of which: World Bank: .......37.0...............
  - Disbursement under IMF RCF: .......93.0...............
  - Residual gap: .......35.040.0............

### Monetary and Financial Indicators (selected)
- Reserve money (billions of Kwacha, selected observations): 255301299289274309330278332359363369
- Net foreign assets of monetary authorities (billions of Kwacha): 248315274313329338246353330281280279
- Money and quasi-money (billions of Kwacha): 1,0211,1421,1411,1961,1741,2631,2731,2931,3291,4351,4501,478
- Annual growth of broad money (percent): 17.014.66.211.415.010.711.68.113.213.613.914.3
- Credit to the private sector (percent change): 11.521.314.87.87.211.013.614.414.4
- 91-day treasury bill rate (end of period): 11.46.2 (table shows other historical values in context)

### Policy Implications and Recommendations (as reflected in text)
- Approve urgent external financing via IMF RCF (SDR 66.44 million) to meet COVID-19 related balance of payments needs.
- Maintain commitment to:
  - Greater exchange rate flexibility.
  - Seeking additional financing from development partners to close financing gaps (including prospective grants and donor support).
  - Continuing medium-term reforms under the ECF arrangement to entrench macroeconomic stability and promote poverty-reducing, resilient growth.
- Monitor substantial risks to the outlook given the pandemic and external vulnerabilities; continue to assess external debt distress risks and repayment capacity.

*Source: 1mwiea2020001 - 21.      Against this background, staff supports the authorities’ request for a disbursement*

### 3. Total capital to total assets

### 3. Total capital to total assets

### Asset composition and quality
- Total capital to total assets series: total capital refers to regulatory capital.
- Key ratios (percent unless otherwise stated):
  - Total capital to total assets: 17.1, 16.7, 15.9, 14.7, 16.4, 16.7
- Non-performing loans and provisioning:
  - Non-performing loans to gross loans and advances: 10.6, 17.0, 15.7, 6.1, 6.3, 5.9
  - Provisions to non-performing loans: 25.7, 25.5, 34.5, 42.4, 38.6, 42.2
- Loan composition:
  - Total loans and advances to total assets: 40.0, 34.8, 28.0, 63.0, 53.3, 33.3
  - Foreign currency loans to total loans and advances: 28.6, 21.8, 27.9, 24.3, 20.9, 20.9
- Source: Reserve Bank of Malawi.

### Earnings and profitability
- Key income and expense ratios (percent unless otherwise stated):
  - Return on assets (ROA): 3.1, 2., [note: source lists "3.12. 72.3..." — preserve listed figures in sequence]
  - Return on equity (ROE): 72.3, 2.2, 2.7, 2.9
  - Non-interest expenses to gross income: 19.2, 18.4, 15.7, 16.6, 20.5, 20.5
  - Interest margin to gross income: 51.4, 50.0, 49.7, 52.1, 51.8, 49.6
  - Non-interest income to revenue: 50.2, 47.8, 50.8, 46.5, 59.6, 58.1
  - Net interest income to assets: 30.5, 28.0, 27.3, 34.2, 33.6, 34.5
  - Personnel expenses to non-interest expenses: 9.7, 9.7, 8., 77.9, 8.4, 0.7
  - Additional profitability ratios listed: 45.3, 43.8, 46.5, 42.9, 43.0, 44.1

### Liquidity
- Liquid assets and funding ratios (percent unless otherwise stated):
  - Liquid assets to deposits and short-term liabilities: 59.0, 72.3, 77.0, 63.3, 58.9, 58.5
  - Total loans to total deposits: 58.5, 54.2, 45.1, 47.4, 54.2, 54.3
  - Liquid assets to total assets: 43.3, 50.4, 55.0, 44.8, 39.8, 39.6
  - Foreign exchange liabilities to total liabilities: 26.1, 19.7, 19.8, 13.8, 15.8, 15.6

### Note
- Source: Reserve Bank of Malawi.

### Table 6 — External Financing Requirement and Source, 2018–25 (Millions of USD)
- Total requirement: -1497, -1470, -1625, -1613, -1631, -1655, -1686, -1688
  - Current account, excluding official transfers: -1418, -1357, -1528, -1522, -1481, -1510, -1512, -1509
  - Debt amortization: -87, -44, -55, -52, -67, -70, -77, -75
  - Gross reserves accumulation (- increase): 8, -69, -41, -39, -84, -76, -97, -104
- Total sources: 1497, 1470, 1449, 1547, 1626, 1655, 1686, 1688
  - Expected disbursements (official): 933, 1142, 1152, 1296, 1402, 1440, 1467, 1459
    - Grants: 806, 971, 1015, 1088, 1200, 1229, 1245, 1229
    - Medium- and long-term loans: 127, 171, 137, 207, 202, 211, 222, 231
  - Private sector (net): 533, 301, 259, 262, 262, 247, 253, 271
  - SDR Allocation: 0,0,0,0,0,0,0,0
  - IMF ECF (net): 3,12,7,38,-10,-37,-33,-34,-42 [note: source formatting shows "312738-10-37-33-34-42" — preserved sequence as listed]
    - Drawings: 314357160000
    - Repayments: 016192637333442
- Financing gap (row values shown in source): 00,1766,55000
- Other donor and grant notes (as listed): Prospective grants for debt relief under IMF CCRT......5255; Financial support from other donors (incl. WB, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID)......43; Of which: World Bank37; Disbursement under IMF RCF......93; Residual gap......3540
- Gross official reserves (Millions of USD): 750, 819, 861, 900, 984, 1,059, 1,156, 1,261
- Months of imports: 3.0, 3.2, 3.2, 3.3, 3.4, 3.5, 3.7, 3.8
- Source: IMF staff estimates.

### Table 7 — Indicators of Capacity to Repay the Fund, 2020–33 (selected entries preserved exactly as listed)
- Projected payments based on existing drawings (SDR millions, by year 2020–2033): Principal: 3.3, 18.4, 25.8, 122.3, 723.1, 126.8, 220.0, 912.7, 29.6, 66.3, 10.0, 0.0, 0.0, 0.0, 0.0
- Charges and interest (SDR millions): 0.08, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05, 0.05
- Projected payments based on prospective drawings (SDR millions): Principal: 0,0,0,0,0,0,7,13.29,13.29,13.29,13.29,6.64,0.0,0.0,0.0
- Projected payments based on existing and prospective drawings (SDR millions): 3.38, 18.49, 25.86, 22.42, 23.16, 33.51, 33.43, 26.06, 23.00, 19.65, 6.69, 0.05, 0.05, 0.05, 0.05
- US$ Millions (corresponding): 4.67, 25.65, 36.00, 31.30, 32.42, 47.08, 46.97, 36.61, 32.31, 27.61, 9.40, 0.07, 0.07, 0.07
- Percent of exports of goods and services (selected years): 0.37, 2.20, 2.85, 2.29, 2.20, 2.94, 2.71, 1.95, 1.60, 1.27, 0.40, 0.00, 0.00, 0.00
- Percent of debt service (selected years): 5.72, 26.58, 32.21, 24.16, 24.64, 34.25, 32.65, 21.98, 19.59, 16.36, 5.57, 0.04, 0.05, 0.05
- Percent of quota (selected years): 2.44, 13.32, 18.63, 16.15, 16.69, 24.14, 24.09, 18.78, 16.57, 14.16, 4.82, 0.04, 0.04, 0.04
- Percent of gross official reserves (selected years): 0.57, 2.98, 4.00, 3.18, 3.06, 4.07, 3.73, 2.69, 2.22, 1.80, 0.59, 0.00, 0.00, 0.00
- Percent of GDP (selected years): 0.06, 0.30, 0.43, 0.36, 0.36, 0.50, 0.48, 0.35, 0.29, 0.23, 0.07, 0.00, 0.00, 0.00
- Projected level of credit outstanding based on existing and prospective drawings (SDR millions): 231.8, 213.3, 187.5, 165.1, 142.0, 108.6, 75.2, 49.2, 26.2, 6.6, 0.0, 0.0, 0.0
- US$ Millions (corresponding): 320.9, 296.4, 261.4, 230.8, 199.2, 152.8, 105.8, 69.2, 36.9, 9.3, 0.0, 0.0, 0.0
- Memorandum items (selected):
  - Exports of goods and services (millions of U.S. dollars): 1,250, 1,167, 1,264, 1,365, 1,476, 1,603, 1,736, 1,874, 2,022, 2,179, 2,347, 2,529, 2,724, 2,935
  - Debt service (millions of U.S. dollars): 81.6, 96.5, 111.8, 129.6, 131.6, 137.5, 143.9, 166.6, 164.9, 168.8, 168.8, 165.4, 139.3, 145.5
  - Quota (SDR millions): 138.8 repeated across years as listed
  - Gross official reserves (millions of U.S. dollars): 819, 861, 900, 984, 1,059, 1,156, 1,261, 1,363, 1,458, 1,535, 1,602, 1,664, 1,830, 1,997
  - GDP (millions of U.S. dollars): 7,663, 8,432, 8,441, 8,701, 9,018, 9,418, 9,829, 10,400, 11,121, 11,878, 12,694, 13,544, 14,421, 15,377
- Note: Financing support from the IMF CCRT is recorded as a grant for debt relief. Malawi is receiving SDR 32.842 million under the CCRT grants from the IMF to cover scheduled debt service to the IMF from April 14, 2020 to October 13, 2022.

### Table 8 — Structural Benchmarks Under ECF Arrangement, 2019–20 (selected benchmarks and status)
- 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 (except reconciliation report submitted 6 weeks after end of month). Continuous (monthly from May 15, 2018). Macro rationale: Improve fiscal transparency; prevent accumulation of new domestic arrears; reduce vulnerabilities to corruption. Status: Not Met / Implemented with Delay.
  - Prepare quarterly consolidated financial reports (including all MDAs) with fully reconciled bank accounts and publish within four months after end of each quarter in FY 2019/20 and within 90 days after end of each quarter in following years. Continuous (quarterly from March 31, 2019). Macro rationale: Improve fiscal transparency and integrity of the accounting system; routinize reconciliation of all bank accounts; strengthen cash planning; reduce vulnerabilities to corruption. Status: Not Met / Implemented with Delay.
  - Reconcile all debt data between the MOF and RBM. Continuous (monthly from April 30, 2018). Macro rationale: Enhance debt management; improve transparency and monitoring of public debt. Status: Met.
  - Cabinet approval of the dividend policy relating to SOEs. End-December 2019. Macro rationale: Mitigate fiscal risks associated with SOEs; enhance transparency in financial performance and market operations. Status: Not Met / Implemented with Delay.
  - Ensure DAD front office operations include more active engagement in domestic debt management policies and operations in collaboration with the RBM. End-December 2019. Macro rationale: Enhance debt management; improve transparency and monitoring of public debt. Status: Met.
  - 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. Status: Met.
  - Develop a domestic revenue mobilization strategy. End-March 2020. Macro rationale: Increase domestic revenues in an efficient and equitable manner. Status: Not Met / Expected for end-June 2020.
- Financial sector:
  - Develop a roadmap for increasing access to finance. End-December 2019. Macro rationale: Increase financial sector intermediation. Status: Not met / Partially completed, Expected for end-June 2020.
- Sources: IMF staff and Malawian authorities.

### Appendix I — Letter of Intent (Lilongwe, Malawi; April 27, 2020)
- COVID-19 impact and health response:
  - Additional health care and social assistance spending of 0.3 percent of GDP in the remainder of FY 2019/20 and at least 0.6 percent of GDP more in FY 2020/21.
  - Plans include developing testing capabilities, equipping treatment centers, hiring 2000 additional medical staff, and raising public awareness.
- Policy measures taken (selected):
  - ADMARC purchasing maize from farmers under COVID-19 enhanced measures to store and distribute during lean period.
  - Tax waivers on imports of medical equipment, medicine and other supplies directly needed to counter the pandemic.
  - Automatic fuel price adjustment mechanism continued; lower international fuel prices passed through to consumers.
  - SMEs given a three month moratorium on their debt service and loans restructured case-by-case.
  - Emergency Liquidity Assistance (ELA) framework activated; Reserve Bank of Malawi (RBM) reduced Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent and lowered the Lombard Rate from 0.4 to 0.2 percentage points above the policy rate.
  - RBM enhanced monitoring of financial sector risks and committed to greater exchange rate flexibility to ease balance of payments pressures.
- Arrears clearance and fiscal measures:
  - Plan to pay remaining arrears on domestic bills accrued by the Roads Fund during 2012-19. Auditor General verified unpaid bills close to 1.1 percent of GDP; 0.8 percent of GDP were arrears as of end-December 2019. By end-March 2020, 0.4 percent of GDP were cleared; remaining 0.4 percent of GDP will be paid by end-2020. Remaining 0.3 percent of GDP in unpaid bills are under dispute.
  - New procedures require MOF vetting and registration of contract sums against available funding before contract signing.
- Transparency and procurement commitments:
  - Publish procurement documentation on PPDA website for all competitive bids and direct procurement by MDAs; publish names of beneficial owners of awarded companies and results of ex-post validation of delivery.
  - Publish quarterly statements on commitments and payments of COVID-19 related activities (all MDAs); specify COVID-19 related costs in monthly salary report and budget funding and cash management analysis.
  - National Audit Office to submit quarterly audits of COVID-19 related spending to the Minister of Finance and, after pandemic abates, publish and submit to Parliament a comprehensive audit.
- Macroeconomic outlook and financing needs:
  - Growth expected to reduce to 1 percent in 2020, 4 percentage points below pre-pandemic projections.
  - Domestic primary deficit anticipated to worsen to 3.4 percent of GDP in FY 2019/20 and 1.3 percent of GDP in FY 2020/21 (over 4 and 3 percent of GDP deterioration relative to pre-pandemic projections).
  - External financing gap estimated at 2.1 percent of GDP (US$176 million) in 2020; total external financing gap during 2020-21 totaling 3 percent of GDP or $240 million even after CCRT support (SDR 32.842 million), with an initial tranche of SDR 7.202 million already disbursed.
  - Request for emergency financing from the IMF under RCF: SDR 66.44 million, equivalent to 47.9 percent of quota.
  - Intend to request suspension of debt service from official bilateral creditors in line with G-20 COVID-19 debt service relief initiative.
  - Actively seeking additional donor support beyond US$43 million already committed.
- Policy commitments and medium-term agenda:
  - Continue meeting objectives of current ECF arrangement; met all end-December 2019 quantitative performance criteria.
  - Prepare for implementation of comprehensive domestic revenue mobilization strategy (including VAT reforms) after pandemic.
  - Continue reforms in tax administration, procurement, public financial management (including implementation of a new IFMIS), public investment management, oversight of state-owned enterprises, and debt management.
  - RBM to gradually transition towards an inflation targeting framework by 2023 and study obstacles to FX market development.
  - Pursue medium-term program to entrench macroeconomic stability and enhance poverty-reducing and resilient growth, including resilience-building projects and reforms to promote private sector development and export diversification.

*Source: IMF staff and Malawian authorities (content unit: 1mwiea2020001 - 3. Total capital to total assets).*

### 15. In  line with  IMF safeguards policy, we commit  to undergo an update of the 2018 safeguards

### 1mwiea2020001 - 15. In  line with  IMF safeguards policy, we commit  to undergo an update of the 2018 safeguards

### Safeguards and audit commitments
- Commit to undergo an update of the 2018 safeguards assessment before IMF Board approval of any subsequent arrangement to which the safeguards policy applies.
- Commit to provide IMF staff with the RBM’s most recently completed external audit reports.
- Authorize external auditors to hold discussions with IMF staff.

### Policy commitments on external transactions and restrictions
- Do not intend to introduce measures or policies that would exacerbate balance of payments difficulties.
- Do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions.
- Do not intend to impose trade restrictions for balance of payments purposes.
- Do not intend to impose multiple currency practices.
- Do not intend to enter into bilateral payments agreements which are inconsistent with Article VIII of the Fund’s Articles of Agreement.

### COVID-19 context and request for IMF assistance
- Determination to meet the immense challenge posed by the COVID-19 pandemic.
- Support from the international community will be critical.
- Looking forward to an early approval of financial assistance by the IMF.
- Authorize the IMF to publish this Letter and the staff report for the request for disbursement under the RCF.

### Signatories
- Hon. Joseph M. Mwanamvekha, M.P — Minister of Finance, Economic Planning and Development
- Dr. Dalitso Kabambe — Governor of the Reserve Bank of Malawi

### Debt sustainability and macroeconomic projections
- 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
- Macroeconomic projections:
  - Growth is expected to fall to 1 percent in 2020
  - Growth is expected to fall to 2.5 percent in 2021—assuming it will take time for businesses to re-open after the partial lockdown ends and for trade flows to normalize.
  - An economic recovery is expected thereafter, with growth averaging 6.4 percent during 2022-

*Source: 1mwiea2020001 - 15. In  line with  IMF safeguards policy, we commit  to undergo an update of the 2018 safeguards*

### 25. Over the long-term, growth is expected to

### 25. Over the long-term, growth is expected to 

### Long-term growth and financing strategy
- Over the long-term, growth is expected to stabilize around 5.5 percent.
- External financing in the form of concessional project loans is expected to gradually increase.
- The pace of increase in project loans could accelerate if the economy’s absorption capacity increases faster than expected.
- The grant element of project loans will remain relatively high over the forecast period, with no access to market financing.

### Debt sustainability assessment and risk ratings
- Malawi’s debt carrying capacity is classified as “medium” (CI score 2.84 in current vintage; 2.72 in previous vintage), both above the threshold value of 2.69.
- Mechanical risk rating under the external DSA: Moderate.
- Mechanical risk rating under the public DSA: High.
- Malawi is at moderate risk of external debt distress and high risk of overall debt distress.
- The present value of total public debt to GDP is projected to exceed the benchmark for the near and medium terms and then gradually decline under the baseline scenario.
- The increase largely reflects larger primary deficits during FY 2019/20-20/21 resulting in increasing amounts of domestic debt.

### COVID-19 impact and macroeconomic projections incorporated in the DSA
- The DSA incorporates current projections of the impact from the COVID-19 pandemic:
  - GDP growth is expected to fall to 1 percent in 2020 and to 2.5 percent in 2021 as a lockdown substantially slows domestic activity.
  - The domestic primary balance is expected to deteriorate to -3.4 percent of GDP in FY 2019/20 and -1.3 percent of GDP in FY 2020/21 (relative to pre-pandemic projections).
  - The current account deficit is expected to widen to 18.1 percent of GDP in 2020 and remain broadly unchanged in 2021.
- Risks are heavily tilted to the downside; a faster-than-expected deterioration could worsen external and public debt indicators.

### Fiscal and debt projections (selected key statistics and assumptions)
- Public sector debt (percent of GDP): 2019 = 59.5; 2020 = 66.5; 2021 = 69.9; 2022 = 68.8; 2023 = 68.0; 2024 = 67.4; 2025 = 65.8; 2030 = 58.7; 2040 = 45.2.
- Of which: external debt (percent of GDP): 2019 = 29.6; 2020 = 31.4; 2021 = 33.0; 2022 = 32.8; 2023 = 32.6; 2024 = 32.4; 2025 = 32.2; 2030 = 28.4; 2040 = 28.6.
- Change in public sector debt (percent of GDP): 2019 = -0.1; 2020 = 7.0; 2021 = 3.3; 2022 = -1.0; 2023 = -0.8; 2024 = -0.6; 2025 = -1.6; 2030 = -1.4; 2040 = -0.7.
- Primary deficit (percent of GDP): 2019 = 2.2; 2020 = 4.8; 2021 = 3.7; 2022 = 2.5; 2023 = 2.0; 2024 = 2.2; 2025 = 1.6; 2030 = -0.3; 2040 = 0.6.
- Revenue and grants (percent of GDP): 2019 = 21.2; 2020 = 19.7; 2021 = 21.6; 2022 = 22.2; 2023 = 22.7; 2024 = 22.6; 2025 = 22.4; 2030 = 22.3; 2040 = 16.3.
- Of which: grants (percent of GDP): 2019 = 2.3; 2020 = 2.3; 2021 = 2.4; 2022 = 2.6; 2023 = 2.7; 2024 = 2.6; 2025 = 2.4; 2030 = 1.8; 2040 = 0.7.
- Automatic debt dynamics contribution (percent of GDP): 2019 = -2.3; 2020 = 0.5; 2021 = -0.3; 2022 = -3.2; 2023 = -2.5; 2024 = -2.5; 2025 = -2.8; 2030 = -0.9.
- Contribution from interest rate/growth differential (percent of GDP): 2019 = -1.0; 2020 = 0.4; 2021 = -1.5; 2022 = -4.4; 2023 = -3.7; 2024 = -3.7; 2025 = -3.9; 2030 = -1.1.
- PV of public debt-to-GDP ratio (selected years): 2020 = 48.7; 2021 = 55.1; 2022 = 57.7; 2023 = 56.6; 2024 = 55.7; 2025 = 55.1; 2030 = 47.0; 2040 = 33.7.
- Debt service-to-revenue and grants ratio (selected values): 2017 = 35.6; 2018 = 25.3; 2019 = 27.8; 2020 = 34.9; 2021 = 53.3; 2022 = 64.7; 2023 = 71.1; 2024 = 76.4; 2025 = 80.3; 2030 = 97.8; 2040 = 84.6.
- Gross financing need (percent of GDP): 2017 = 7.6; 2018 = 3.6; 2019 = 8.0; 2020 = 11.7; 2021 = 15.2; 2022 = 16.9; 2023 = 18.2; 2024 = 19.5; 2025 = 19.6; 2030 = 21.4; 2040 = 14.4.

- Key macroeconomic and fiscal assumptions (selected):
  - Real GDP growth (in percent): 2017 = 4.0; 2018 = 3.2; 2019 = 4.5; 2020 = 1.0; 2021 = 2.5; 2022 = 6.5; 2023 = 6.5; 2024 = 6.3; 2025 = 6.3; 2030 = 5.5; 2040 = 5.5.
  - Average nominal interest rate on external debt (in percent): 2017 = 1.0; 2018 = 1.1; 2019 = 1.0; 2020 = 1.0; 2021 = 1.4; 2022 = 1.0; 2023 = 1.1; 2024 = 0.9; 2025 = 0.9; 2030 = 1.0; 2040 = 1.1.
  - Average real interest rate on domestic debt (in percent): 2017 = 6.6; 2018 = 8.4; 2019 = 7.2; 2020 = 4.6; 2021 = 1.0; 2022 = 0.5; 2023 = 2.4; 2024 = 2.1; 2025 = 1.1; 2030 = 7.6; 2040 = 7.3.
  - Inflation rate (GDP deflator, in percent): 2017 = 10.9; 2018 = 7.8; 2019 = 8.0; 2020 = 13.2; 2021 = 9.5; 2022 = 6.4; 2023 = 4.5; 2024 = 4.4; 2025 = 4.4; 2030 = 4.9; 2040 = 16.0.
  - Growth of real primary spending (deflated by GDP deflator, in percent): 2017 = 16.2; 2018 = -7.2; 2019 = 3.3; 2020 = 6.0; 2021 = 5.9; 2022 = 4.2; 2023 = 6.6; 2024 = 6.5; 2025 = 2.7; 2030 = 2.8; 2040 = 0.3.
  - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP): 2017 = 1.9; 2018 = -0.9; 2019 = 2.3; 2020 = -2.2; 2021 = 0.4; 2022 = 3.6; 2023 = 2.9; 2024 = 2.9; 2025 = 3.2; 2030 = 1.1; 2040 = 1.3.
  - PV of contingent liabilities (not included in public sector debt): 0.0 for all years shown.

### Stress tests, scenarios, and sensitivity analysis (high-level)
- Stress tests assume additional financing needs generated by shocks are covered by PPG external MLT debt in the external DSA.
- Selected baseline and scenario indicators (PV of debt-to-GDP, PV of debt-to-revenue, debt service ratios) show notable sensitivity to shocks:
  - Example baseline PV of debt-to-GDP ratio series (2020–2030) shown in sensitivity tables: 18.9, 19.8, 19.8, 19.7, 19.5, 19.3, 18.6, 17.9, 17.3, 16.8, 16.5.
  - Tailored and bound tests include shocks such as one-time 30 percent nominal depreciation, combination shocks, natural disaster, and changes in real GDP growth, primary balance, exports, and other flows.
- Threshold breaches are identified in the sensitivity analysis tables where bold values indicate breaches of thresholds.

### Program context, financing request, and transparency measures
- The analysis was prepared in the context of the 2020 request for emergency financing under the IMF’s Rapid Credit Facility (RCF).
- Malawi authorities requested emergency financing from the RCF in the amount of SDR 66.44 million, equivalent to 47.9 percent of quota, to help fill an external financing gap estimated at 2.1 percent of GDP in 2020.
- The total external financing gap during 2020-21 is estimated at 3 percent of GDP or $240 million.
- To ensure COVID-related resources are used for their intended purpose, the authorities will:
  - Undertake quarterly audits of COVID-19 related spending and submit a comprehensive audit to Parliament.
  - Publish procurement information on the Public Procurement and Disposal of Assets (PPDA) website.
- Performance under the Extended Credit Facility (ECF) arrangement: all end-December 2019 quantitative performance criteria met.
- COVID-19 case count cited: first three confirmed cases announced on April 2, 2020; cases had risen to thirty-six as at April 29, 2020, with three fatalities.

*Prepared by the staffs of International Monetary Fund and the International Development Association (IDA), April 27, 2020. Malaw i: Joint Bank-Fund Debt Sustainability Analysis*

### 6. The global and regional spillovers from the COVID-19 pandemic and implementation

### 1mwiea2020001 - 6. The global and regional spillovers from the COVID-19 pandemic and implementation

### Economic impact and outlook
- The global and regional spillovers from the COVID-19 pandemic and implementation of domestic containment measures has disrupted economic activity in Malawi.
- Exports have declined, trade transit costs have increased and remittances, tourism and foreign direct investment (FDI) have declined.
- The overall balance of payments is expected to weaken, with the external financing gap in 2020-21 totaling almost 3 percent of GDP or about $240million.
- GDP growth is expected to sharply decline by 4 percentage points to 1 percent in 2020.
- The net effect of these external factors combined with the slowdown in domestic activity related to the lockdown continue to weigh on growth prospects.

### Fiscal implications and financing
- Revenue shortfalls and additional spending to mitigate the effects of the pandemic are anticipated to worsen the domestic primary deficit by nearly 4 and 3 percent of GDP compared to pre-pandemic projections for FY 2019/20 and FY 2020/21, respectively.
- The resultant fiscal deficit is expected to be financed through domestic borrowing and budget support from the World Bank.
- The authorities plan to create budgetary space for COVID-19 spending in the FY 2020/21 budget by delaying spending on non-essential goods and services and the implementation of development projects that are not critical to tackling the pandemic.

### Policy responses — containment and health-sector measures
- Shortly after the first reported cases of COVID-19 in Malawi, the authorities instituted a lockdown, including closing schools and banning large gatherings.
- They quickly developed a response plan with support of the World Health Organization (WHO) and other development partners.
- Health care and social assistance spending has been ramped up, including:
  - developing testing capabilities,
  - equipping treatment centers,
  - hiring additional medical staff,
  - intensifying public awareness campaigns.

### Policy responses — social protection, business support, and fiscal measures
- Measures to mitigate the impact on vulnerable households and businesses include:
  - protection of farmers’ incomes and ensuring food security through continued purchases of maize from farmers by the Agricultural Development and Marketing Corporation (ADMARC) for storage and distribution during the lean period;
  - expansion of the social cash transfer program (SCTP) to help the most vulnerable households;
  - tax waivers on imports of medical equipment, medicine and other supplies;
  - lower international fuel prices through the automatic fuel price adjustment mechanism.
- The President and his Cabinet have taken a voluntary pay cut of 10 percent for three months to free up resources in support of the response.
- The authorities have injected liquidity into the economy by paying domestic arrears accrued by the Roads Fund Administration during FY2012-19. Of the verified bills, half have already been cleared and the other half is expected to be cleared by end-2020.

### Policy responses — monetary and financial sector measures
- To ease banking system liquidity constraints, the Reserve Bank of Malawi (RBM):
  - reduced the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent;
  - lowered the Lombard Rate by 50 percent;
  - activated the newly established Emergency Liquidity Assistance (ELA) framework to support small banks in the event of worsening liquidity conditions;
  - enhanced monitoring of financial sector risks to ensure smooth functioning of the banking sector.
- Small and medium-sized enterprises (SMEs) have been given a three-month moratorium on their debt services, and their loans are being restructured on a case by case basis.
- The RBM remains committed to implementing greater exchange rate flexibility to absorb shocks.

### Post-crisis measures and reforms
- Supported by the ECF, the authorities remain committed to pursuing their medium-term economic reform program to entrench macroeconomic stability and achieve higher, more inclusive and resilient growth.
- The reform program encompasses:
  - strengthening resilience to climate change;
  - promoting broad-based private sector development and export diversification;
  - raising access to finance.
- To reinforce medium-term public debt sustainability and create fiscal space for critical resilience building and social and development spending, a domestic revenue mobilization strategy is expected to be implemented as soon as the pandemic passes.
- The authorities will press ahead with efforts to enhance governance, including further procurement reforms, public financial management, public investment management and oversight of state-owned enterprises.

### Conclusion and financing support
- Authorities remain committed to implementing prudent macroeconomic policies to entrench macroeconomic stability and achieve higher, more inclusive and resilient growth once the crisis is over.
- They look forward to Executive Directors’ support for a disbursement under the Rapid Credit Facility to sustain efforts to contain the spread of the pandemic and to dampen the impact on the economy.
- Authorities consider Fund financing instrumental to catalyze additional grant and concessional financing from development partners to strengthen their efforts to contain the pandemic.
- They greatly appreciate the provision of debt relief under the CCRT.

*Source: 1mwiea2020001 - 6. The global and regional spillovers from the COVID-19 pandemic and implementation*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mwiea2020001.pdf_