## 1mwiea2020002

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### Executive summary — context, request, and staff support
- Presidential elections in June 2020: President Chakwera secured 59 percent of the vote.
- Rapid acceleration of COVID-19 cases in Malawi and adverse global and regional spillovers significantly worsened the macroeconomic outlook.
- An additional urgent balance of payments need of 2.9 percent of GDP has arisen—bringing the total external financing gap in 2020 to 5.0 percent of GDP.
- Authorities requested an additional disbursement of 52.1 percent of quota (SDR 72.31 million) under the RCF “exogenous shock” window; 30 percent of the disbursement would finance the government budget.
- This follows the May 1, 2020 Board approval of a 47.9 percent of quota RCF disbursement (SDR 66.44 million) without budget support.
- New government cancelled the ECF on September 24, 2020 and expressed interest in a new ECF once a broader reform agenda is in place and pandemic uncertainty subsides.
- Authorities requested debt servicing relief under the G20 DSSI; discussions are ongoing.
- CCRT provided debt relief covering up to two years’ debt service to the Fund (SDR 32.842 million); initial tranche SDR 7.202 million covered April-October 2020; second tranche SDR 7.202 million to be discussed by the Board on October 5, 2020.
- Fund staff support the second RCF drawing; two RCF disbursements expected to fill 46 percent of the 2020 financing gap.
- $30 million of financing under this RCF will be provided directly to the Treasury as direct budget support.

### Recent developments and macroeconomic stance
- COVID-19 cases and deaths: around 5700 confirmed cases and 178 deaths as of September 16; infections rose from 36 cases and 3 fatalities at end-April 2020 to 5772 cases and 179 deaths as of September 29, 2020.
- Partial lockdown instituted after first confirmed cases in April; cases accelerated during June-August.
- 2020H1 activity benefitted from strongest maize harvests in recent years, stepped-up domestically-financed development projects, clearance of domestic arrears, and election spending.
- Sectors hit: manufacturing and wholesale and retail trade (partial lockdown, political uncertainties, electricity outages).
- External flows: exports struggled (mainly agricultural including tobacco and tea); imports declined due to lower fuel prices and reduced private-sector and project imports but partly offset by increased public sector imports (notably health care); remittances, tourism, and FDI weakened.
- Inflation and monetary policy:
  - Inflation declined to 7.6 percent in August 2020; non-food inflation remained under 5 percent.
  - RBM maintained its policy rate at 13.5 percent.
- Banking system: well capitalized, liquid, and profitable but NPLs rose from 4.8 percent at end-June 2019 to 6.6 percent at end-June 2020.
- Private sector credit growth: 2 percent in 2020H1.
- RBM liquidity measures: lowering reserve requirements, moratorium on debt service for SMEs until end-2020; government payment of domestic arrears (0.9 percent of GDP) helped.
- Domestic primary deficit expanded to 2.5 percent of GDP in FY 2019/20 (a 3.4 percent of GDP deterioration relative to pre-pandemic expectations).

### Outlook and downside risks
- Growth projections:
  - 2020: 0.6 percent
  - 2021: 2.2 percent
  - 2022–25 average: 6.4 percent
  - Long-term stabilization around 5.5 percent
- Real per capita income: in 2020 more than 2 percent lower than in 2019.
- Inflation: 9.1 percent in 2020 and 9.5 percent in 2021; expected to moderate towards 5 percent over the medium-term. Non-food inflation: around 5 percent near term, moderating towards 3-4 percent over the medium-term.
- Current account (excluding official transfers): expected to widen to 20.5 percent of GDP in 2020 and 20.3 percent of GDP in 2021—a deterioration of 2.4 and 2.3 percentage points relative to IMF Country Report 20/168.
- Domestic primary deficit projected at 4.4 percent of GDP in FY 2020/21.
- Public debt projected to reach 78 percent of GDP in 2021.
- Key downside risks:
  - Wider spread of COVID-19 domestically.
  - Slower global and regional recovery.
  - Longer disruptions to international trade, reduced tourism/remittances/FDI.
  - Rapidly rising inequalities and food insecurity, and climate shocks affecting agriculture, activity, and inflation.

### Fiscal and external financing needs (key figures)
- Pandemic-related financing needs in FY 2020/21 (Text Table 2 entries):
  - Revenue shortfalls: RCF I 2.1 percent of GDP; RCF II 1.8 percent of GDP; Draft Budget 0.9 percent of GDP.
  - Spending: RCF I 0.6 percent of GDP; RCF II 3.2 percent of GDP; Draft Budget 3.2 percent of GDP.
  - Financing needs: RCF I 2.7 percent of GDP; RCF II 5.0 percent of GDP; Draft Budget 4.1 percent of GDP.
  - Financing sources (RCF II): Foreign 1.8 percent of GDP (of which RCF II 0.3 percent of GDP); Domestic 3.2 percent of GDP.
- Compared to IMF Country Report 20/168, an additional external financing gap of $243 million (2.9 percent of GDP) emerged in 2020 after accounting for:
  - 0.1 percent of GDP in CCRT debt relief (until mid-October 2020);
  - absence of ECF disbursements in the remainder of 2020;
  - assumption that the full amount of the DSSI is received from all creditors;
  - reserves decline to 3.1 months of imports.
- Overall balance of payments deteriorates from a previously projected deficit of 2.0 percent of GDP to a deficit of 4.5 percent of GDP in 2020.
- External financing gap for 2020–21 totals 7.7 percent of GDP or about $655 million.
- Malawi: COVID-19 External Financing Needs, 2020 (Text Table 3 extracts, Millions of U.S. dollars):
  - Financing needs from COVID-19 pandemic (A): 3,083.7 ; 5,126.1
  - Widening of current account deficit, excluding official current transfers: 1,031.2 ; 2,973.5
  - Widening of trade and service account deficit: -20.0 ; 1,551.8
  - Decline in private transfers: 1,051.2 ; 1,421.7
  - Deterioration in capital and financial account: 2,052.4 ; 2,162.6
  - Decline in FDI: 1,221.4 ; 1,301.5
  - Decline in medium and long term loans: 30.0 ; 310.4
  - Undisbursed funds from incomplete 4th and 5th reviews under ECF arrangement2 00.0 ; 570.7
  - Policy adjustment (lower accumulation of gross reserves) (B): 1,321.6 ; 931.1
  - External financing gap (A-B): 1,762.1 ; 4,195.0
  - Additional financing (selected): Grants for debt relief under IMF CCRT: 3 50.1 ; 50.1
  - Financial support from other donors: 430.5 ; 2,042.4 (incl. AfDB, WB, EU, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID)
    - Of which: World Bank: 370.4 ; 760.9
    - Of which: African Development Bank: 00.0 ; 450.5
    - Of which: EU: 00.0 ; 610.7
  - G20 DSSI: 00.0 ; 180.2
  - Disbursement under IMF RCF I: 931.1 ; 911.1
  - Disbursement under IMF RCF II: 00.0 ; 1,021.2
  - Residual gap: 350.4 ; 00.0

### Major COVID-related fiscal measures (selected, percent of GDP)
- Health care FY19/20 Est. — RCF I — RCF II: 0.6 ; 0.5 ; 0.8
  - On-Budget: 0.4 ; 0.3 ; 0.6
  - Additional health care workers/risk allowances: 0.1 ; 0.1 ; 0.3
  - Goods and services: 0.3 ; 0.2 ; 0.3
  - Government-financed: 0.2 ; 0.2 ; 0.1
  - Development partner-financed: 0.1 ; 0.0 ; 0.2
  - Off-Budget: 0.2 ; 0.2 ; 0.2
  - Goods and services, development partner-financed: 0.2 ; 0.2 ; 0.2
- Education (on-budget): 0.0 ; 0.0 ; 0.2
  - Government-financed: 0.0 ; 0.0 ; 0.2
- Social spending (all on-budget)2 0.1 ; 0.3 ; 2.4
  - Social Assistance (SCTP): 0.0 ; 0.2 ; 0.5
    - Government-financed3: 0.0 ; 0.0 ; 0.0
    - Development partner-financed: 0.0 ; 0.2 ; 0.5
  - AIP (formerly FISP): 0.0 ; 0.0 ; 1.9
  - Other (incl. on-budget maize purchases): 0.1 ; 0.1 ; 0.0
- Tax waivers4: 0.0 ; 0.0 ; 0.1
- Total: 0.7 ; 0.8 ; 3.5
- Government-financed: 0.4 ; 0.4 ; 2.6

### Fiscal stance, revenue, and expenditure policy points
- FY 2020/21 stance: temporary relaxation; provisional budget approved June 30, 2020.
- Targeted domestic primary deficit: 4.4 percent of GDP in FY 2020/21.
  - This is 3.1 percent of GDP larger than in IMF Country Report 20/168; 6.4 percent of GDP larger than prior to the pandemic (IMF Country Report 19/361).
- Staff advised against doubling the PIT threshold and encouraged adjustments to PIT rate schedule to increase progressivity and recoup revenue loss.
- VAT refunds: staff recommended paying VAT refunds soon after approval (0.3 percent of GDP) and clearing unpaid refunds (0.1 percent of GDP as of end-June 2020); authorities budgeted to pay 0.2 percent of GDP.
- Revenue administration improvements: increased fees and charges, digitalization, tolling fees, e-payment platforms, remote engagement with large taxpayers, continued desk reviews/audits, documentary customs checks for largest importers, pre-clearance facilities.
- ITAS (four modules) rollout: remaining modules targeted for early 2021 (progress slowed by capacity constraints).
- Staff supports AIP objectives but prefers targeted cash transfers (e.g., SCTP); staff noted risks re: narrow maize focus, farmer registry/National ID linkage, beneficiary literacy affecting e-voucher functioning.
- Payroll review to eliminate ghost workers and fraud by early 2021 while safeguarding recently hired health and education staff. FY 2020/21 public sector salary increase: 0.9 percent of GDP (likely permanent).

### Monetary, exchange rate, and financial sector measures
- RBM stance:
  - Stands ready to provide additional liquidity.
  - Intends to maintain policy rate, reserve requirements, and Lombard rate at current levels; will consider further easing if liquidity pressures increase.
  - Prepared to use existing facilities to provide liquidity to commercial banks; ELA anticipated for small banks.
  - Moratorium on debt service extensions considered case-by-case.
- Banking supervision: intensified daily liquidity risk monitoring and enhanced offsite monitoring.
- FX and exchange rate policy:
  - Gradual pursuit of greater exchange rate flexibility agreed, noting limited near-term export benefits and risks to inflation.
  - Bilateral exchange rate against the U.S. dollar: broadly stable in recent months, depreciated by 2 percent since July.
  - Reserves coverage: staff-assessed adequate level 3.6 months; projected reserves decline to 3.1 months of imports if no additional support in 2020.

### RCF request, use, and capacity to repay
- Authorities requested RCF “exogenous shock” disbursement: 52.1 percent of quota (SDR 72.31 million or US$101.8 million).
- Purpose: address urgent balance of payments needs from COVID-19 intensification; bolster international reserves; make 30 percent of disbursement available as budget support for urgent health supplies and protection of the most vulnerable.
- Institutional arrangement: memorandum of understanding between Ministry of Finance and RBM clarifying repayment responsibilities.
- Development partner support actively sought including $204 million in 2020 from World Bank, AfDB, EU, DFID, GAVI, UN, Irish Aid, GIZ, and KfW.
- If no additional support in 2020 or if downside risks materialize: reserves would fall below 3.1 months of imports.
- With this RCF disbursement and cancellation of current ECF:
  - Outstanding PRGT credit would reach 221 percent of quota.
  - Total PRGT disbursements over a twelve month-period would reach 123 percent of quota.
  - These remain below allowable limits given temporary Executive Board decisions increasing access limits.

### Debt sustainability, risk ratings, and projections
- Debt risk ratings:
  - Moderate risk of external debt distress.
  - High overall risk of debt distress.
- Staff assess Malawi’s debt to be sustainable.
- Under extreme shock scenario (assumes 6 percent decline in exports in 2021), PV of external debt to exports projected to breach benchmark.
- Present value of total public debt-to-GDP projected to remain above the benchmark over the projected period.
- Drivers of higher debt metrics: increases in domestic debt due to significantly larger primary deficits under current policies during FY 2020/21–FY 2021/22; revenue shortfalls; higher health and social spending; doubling of PIT threshold; substantial increase in public sector wage bill; introduction of the AIP.
- DSA assumptions include full receipt of DSSI and CCRT relief through April 2022.

### Banking sector indicators (selected)
- Regulatory Tier 1 capital to risk weighted assets: 12.4 ; 13.8 ; 15.3 ; 15.5 ; 17.0 ; 18.8
- Total regulatory capital to risk weighted assets: 15.8 ; 17.0 ; 19.4 ; 19.0 ; 21.0 ; 22.0
- Total capital to total assets (regulatory capital): 17.1 ; 16.7 ; 15.9 ; 14.7 ; 16.4 ; 16.0
- Non-performing loans to gross loans and advances: 10.6 ; 17.0 ; 15.7 ; 6.1 ; 6.3 ; 6.6
- Provisions to non-performing loans: 25.7 ; 25.5 ; 34.5 ; 42.4 ; 38.6 ; 35.6
- Return on assets (ROA): 3.1 ; 2.7 ; 2.3 ; 2.2 ; 2.7 ; 3.2
- Return on equity (ROE): 19.2 ; 18.4 ; 15.7 ; 16.6 ; 20.5 ; 23.6
- Liquid assets to deposits and short-term liabilities: 59.0 ; 72.3 ; 77.0 ; 63.3 ; 58.9 ; 58.2
- Total loans to total deposits: 58.5 ; 54.2 ; 45.1 ; 47.4 ; 54.2 ; 52.4

### External financing requirement and sources (Table 6 highlights, Millions of USD)
- Total requirement: -1,468 ; -1,459 ; -1,835 ; -1,911 ; -1,815 ; -1,841 ; -1,865 ; -1,874
  - Current account, excluding official transfers: -1,418 ; -1,349 ; -1,722 ; -1,765 ; -1,704 ; -1,709 ; -1,708 ; -1,707
  - Debt amortization: -58 ; -44 ; -55 ; -61 ; -76 ; -81 ; -87 ; -72
  - Gross reserves accumulation (- increase): 8 ; -65 ; -58 ; -85 ; -35 ; -51 ; -70 ; -96
- Total sources: 1,468 ; 1,459 ; 1,416 ; 1,674 ; 1,767 ; 1,804 ; 1,846 ; 1,874
  - Expected disbursements (official): 933 ; 1,136 ; 1,152 ; 1,427 ; 1,515 ; 1,560 ; 1,587 ; 1,620
    - Grants: 806 ; 977 ; 989 ; 1,176 ; 1,295 ; 1,332 ; 1,348 ; 1,371
    - Medium- and long-term loans: 127 ; 160 ; 164 ; 251 ; 220 ; 228 ; 239 ; 249
  - Private sector (net): 533 ; 295 ; 283 ; 273 ; 289 ; 276 ; 293 ; 303
- Financing gap (selected): 0 ; 0 ; 419 ; 237 ; 49 ; 37 ; 19 ; 0
- Gross official reserves (millions of U.S. dollars): 750 ; 815 ; 873 ; 958 ; 993 ; 1,044 ; 1,114 ; 1,210
- Months of imports: 3.0 ; 3.1 ; 3.1 ; 3.3 ; 3.3 ; 3.3 ; 3.4 ; 3.5

### Capacity to repay the Fund (selected projected payments)
- Projected payments based on existing and prospective drawings (SDR millions): 3.31 ; 18.50 ; 25.87 ; 22.43 ; 23.17 ; 33.52 ; 47.90 ; 40.53 ; 37.46 ; 34.12 ; 21.16 ; 0.06 ; 0.06 ; 0.06
- US$ Millions equivalent: 4.57 ; 25.67 ; 36.02 ; 31.31 ; 32.43 ; 47.09 ; 67.30 ; 56.94 ; 52.63 ; 47.94 ; 29.73 ; 0.08 ; 0.08 ; 0.08
- Selected ratios (percent of exports of goods and services): 0.37 ; 2.27 ; 2.89 ; 2.35 ; 2.26 ; 3.01 ; 3.97 ; 3.11 ; 2.67 ; 2.25 ; 1.30 ; 0.00 ; 0.00 ; 0.00
- Percent of quota (selected): 2.38 ; 13.33 ; 18.64 ; 16.16 ; 16.69 ; 24.15 ; 34.51 ; 29.20 ; 26.99 ; 24.58 ; 15.24 ; 0.04 ; 0.04 ; 0.04

### Letter of Intent — selected commitments and measures
- Growth revision: anticipated 2020 growth revised to 0.6 percent from pre-pandemic projection of 5.1 percent.
- Additional urgent balance of payments need: about US$419 million in 2020 (compared to US$176 million previously).
- Request: additional disbursement of 52.1 percent of quota (SDR 72.31 million); request US$30 million to be made available to National Treasury as budget support.
- Secured at least 0.5 percent of GDP (US$45 million) in additional budget support commitments since first RCF disbursement.
- Transparency commitments: publish procurement documentation and ex-post validations; publish quarterly statements on COVID-19 commitments and payments within 90 days after each quarter beginning FY 2019/20Q4; publish COVID-19 related salary costs in monthly salary report within 3 weeks after each month beginning September 2020; NAO quarterly audits within 180 days after each quarter beginning FY 2019/20Q4; comprehensive post-COVID audit within 180 days of pandemic’s conclusion.
- Policy commitments: implement comprehensive revenue mobilization strategy (including VAT reforms) in FY 2021/22; continue reforms in tax administration, procurement, PFM (including new IFMIS), public investment management, SOE oversight, and debt management; RBM to transition towards inflation targeting by 2025.
- Debt treatment: requested temporary debt service suspension under G-20 DSSI; Malawi receiving SDR 32.842 million under CCRT grants to cover scheduled debt service to IMF from April 14, 2020 to October 13, 2022.
- Safeguards: update 2018 safeguards assessment before Board approval of any subsequent arrangement; provide RBM external audit reports and authorize IMF discussions with RBM external auditors.

### Staff appraisal and main policy recommendations
- Staff view: relaxation of FY 2020/21 stance appropriate to accommodate deteriorated outlook and critical pandemic response measures (health care, social assistance, food security).
- Recommended medium-term measures soon after pandemic abates:
  - Strengthen domestic debt management.
  - Implement comprehensive domestic revenue mobilization strategy.
  - Align measures with new long-term growth strategy.
- Concerns noted: recent large public sector salary increase likely permanent and could constrain fiscal space.
- Financial stability: continue measures supporting SMEs; further strengthen banking supervision for early risk identification.
- Transparency: continue commitments to make COVID-19 related spending transparent and efficient.

*IMF staff report content; Reserve Bank of Malawi; Letter of Intent dated September 24, 2020.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and request
- Presidential elections in June 2020 resulted in a change of government, with President Chakwera securing 59 percent of the vote.
- Rapid acceleration of COVID-19 cases in Malawi and adverse global and regional spillovers have significantly worsened the macroeconomic outlook.
- An additional urgent balance of payments need of 2.9 percent of GDP has arisen—bringing the total external financing gap in 2020 to 5.0 percent of GDP.
- The authorities have requested an additional disbursement of 52.1 percent of quota (SDR 72.31 million) under the “exogenous shock” window of the Rapid Credit Facility (RCF), where 30 percent of the disbursement would finance the government budget.
- This request follows the May 1, 2020 Board approval of a 47.9 percent of quota RCF disbursement (SDR 66.44 million) without budget support.
- The new government cancelled the Extended Credit Facility (ECF) on September 24, 2020 and expressed interest in discussing a new ECF once a broader reform agenda is in place and pandemic-related uncertainty subsides.
- The authorities have requested debt servicing relief from bilateral creditors under the G20 Debt Service Suspension Initiative (DSSI) and discussions are ongoing.
- The IMF’s Catastrophe Containment and Relief Trust (CCRT) provided debt relief covering up to two years’ debt service to the Fund (SDR 32.842 million); an initial tranche of SDR 7.202 million was provided covering debt service to the IMF during April-October 2020; and a second tranche of SDR 7.202 million will be discussed by the Board on October 5, 2020.

### Macroeconomic policies and authorities’ priorities
- Authorities are committed to policies discussed in IMF Country Report 20/168.
- The new administration has prioritized transparency and efficiency in government spending to manage and contain the impact of the pandemic.
- Fiscal stance has been temporarily loosened to mitigate the crisis and support recovery.
- Monetary policy focuses on containing inflation; the Reserve Bank of Malawi (RBM) stands ready to provide liquidity as needed.
- Banking supervision has been stepped up to ensure financial sector stability.
- As the authorities develop a new long-term growth strategy they plan to prioritize higher, more resilient, and broad-based medium-term growth and governance reforms while preserving macroeconomic stability and debt sustainability.

### Staff assessment and support
- Fund staff support the authorities’ request for a second RCF drawing given the accelerating pandemic and adverse spillovers creating an urgent balance of payments need.
- Staff considers a second RCF drawing appropriate given the authorities’ strong interest, as contained in the attached Letter of Intent, to transition to a new ECF once the medium-term development strategy is finalized and pandemic uncertainty subsides.
- The two RCF disbursements are expected to fill 46 percent of the 2020 financing gap, with the remainder covered by financial support from development partners including the World Bank, African Development Bank, and the European Union.
- $30 million of financing under this RCF will be provided directly to the Treasury as direct budget support.
- The catalytic role of the Fund will remain essential given a projected financing gap for next year.

### Recent economic developments
- As of September 16, there were around 5700 confirmed COVID-19 cases and 178 deaths.
- A partial lockdown was instituted after the first confirmed cases in April; cases accelerated during June-August.
- Economic activity in 2020H1 benefitted from the strongest maize harvests in recent years, stepped-up domestically-financed development projects, clearance of domestic arrears, and spending to hold elections.
- Partial lockdown, political uncertainties, and electricity outages weighed on manufacturing and wholesale and retail trade.
- Exports, mainly agricultural (including tobacco and tea), struggled because of reduced global demand, border closures, and higher trade transit costs.
- Imports declined due to lower international fuel prices and reduced private-sector and foreign-financed project imports, partly offset by increased public sector imports (notably in health care).
- Global slowdown weighed on remittances, tourism, and foreign direct investment; project-related inflows slowed but were broadly balanced by COVID-19 related aid.
- Inflation declined to 7.6 percent in August 2020 reflecting the good harvest and lower international fuel prices; non-food inflation remained under 5 percent.
- The RBM maintained its policy rate at 13.5 percent.
- Banking system remains well capitalized, liquid, and profitable but non-performing loans (NPLs) rose from 4.8 percent at end-June 2019 to 6.6 percent at end-June 2020.
- Private sector credit growth was subdued at 2 percent in 2020H1.
- To ease liquidity strains, RBM measures included lowering reserve requirements and a moratorium on debt service for SMEs until end-2020; government payment of domestic arrears (0.9 percent of GDP) also helped.
- The domestic primary deficit expanded to 2.5 percent of GDP in FY 2019/20 (a 3.4 percent of GDP deterioration relative to pre-pandemic expectations).

### Outlook and risks
- Growth is expected to fall to 0.6 percent in 2020 and to 2.2 percent in 2021 (0.4 and 0.3 percentage points below projections in IMF Country Report 20/168).
- A gradual recovery is expected during 2022-25 with growth averaging 6.4 percent.
- Real per capita income in 2020 will be more than 2 percent lower than in 2019.
- Inflation is anticipated at 9.1 percent in 2020 and 9.5 percent in 2021; it is expected to moderate towards 5 percent over the medium-term. Non-food inflation is expected to remain around 5 percent in the near term and moderate towards 3-4 percent over the medium-term.
- The current account deficit (excluding official transfers) is anticipated to widen, reaching 20.5 and 20.3 percent of GDP in 2020 and 2021 respectively—a deterioration of 2.4 and 2.3 percentage points relative to IMF Country Report 20/168.
- The domestic primary deficit is projected at 4.4 percent of GDP in FY 2020/21.
- Public debt is projected to reach 78 percent of GDP in 2021.
- Financing constraints: domestic liquidity expected to be mainly channeled to government financing; liquidity pressures as households and businesses draw on savings and banks face rising NPLs; increased donor financing will mainly finance imports (notably health care).

### Fiscal and external financing needs (key figures)
- Text Table 2: pandemic-related financing needs in FY 2020/21:
  - Revenue shortfalls: RCF I 2.1 percent of GDP; RCF II 1.8 percent of GDP; Draft Budget 0.9 percent of GDP.
  - Spending: RCF I 0.6 percent of GDP; RCF II 3.2 percent of GDP; Draft Budget 3.2 percent of GDP.
  - Financing needs: RCF I 2.7 percent of GDP; RCF II 5.0 percent of GDP; Draft Budget 4.1 percent of GDP.
  - Financing sources (RCF II): Foreign 1.8 percent of GDP (of which RCF II 0.3 percent of GDP); Domestic 3.2 percent of GDP.
- Compared to IMF Country Report 20/168, an additional external financing gap of $243 million (2.9 percent of GDP) has emerged in 2020, after accounting for:
  - 0.1 percent of GDP in CCRT debt relief (until mid-October 2020);
  - absence of ECF disbursements in the remainder of 2020;
  - assumption that the full amount of the DSSI is received from all creditors in line with agreed term sheets;
  - reserves decline to 3.1 months of imports.
- The overall balance of payments deteriorates from a previously projected deficit of 2.0 percent of GDP to a deficit of 4.5 percent of GDP in 2020.
- Together, the two RCF disbursements are expected to fill 46 percent of the 2020 financing gap; the rest is expected from development partners including the World Bank, African Development Bank, and the European Union.
- $30 million of financing under this RCF will be provided directly to the Treasury as direct budget support.
- Large balance of payments needs related to the pandemic are expected to persist in 2021; the external financing gap for 2020-21 totals 7.7 percent of GDP or about $655 million.

*IMF — Executive Summary, September 24, 2020.*

### 7.      The outlook remains highly uncertain and subject to considerable downside risks.

### 7.      The outlook remains highly uncertain and subject to considerable downside risks.

### Outlook and downside risks
- Some downside risks in IMF Country Report 20/168 have started to materialize, including:
  - a more significant spread of COVID-19 within Malawi;
  - slower than envisaged global and regional economic recovery.
- Further delays in economic normalization, beyond 2021, would result in:
  - longer disruptions to international trade and related transit costs;
  - reduced inflows from tourism, remittances, and FDI.
- Other risks:
  - Rapidly rising inequalities and food insecurity could lead to social discontent.
  - A climate shock could reduce agricultural production, depress economic activity, and raise inflation.

### Malawi: COVID-19 External Financing Needs, 2020 (Text Table 3) — key figures
- Table heading: Malawi: COVID-19 External Financing Needs, 2020 (Millions of U.S. dollars)
- Notes in table:
  - Financing needs from the pandemic are estimated relative to projections under the 2nd and 3rd reviews of the 2018-21 ECF arrangement (IMF Country Report 19/361).
  - Scheduled disbursements in 2020 totaled SDR 40.81 million (US$57.4 million or 0.7 percent of GDP). The accelerating spread of the pandemic and urgent nature of the current balance of payments needs makes it difficult to conclude any ECF reviews and the authorities have asked to cancel the existing ECF.
  - Reflects financial support from the second tranche of debt relief under the IMF CCRT. The first tranche is recorded as a grant in the balance of payments table and corresponds to the amount of SDR 7.202 million for the period April 14-October 13, 2020.
- Extracted line items and numeric entries as presented:
  - Financing needs from COVID-19 pandemic (A)3083.7 5126.1
  - Widening of current account deficit, excluding official current transfers1031.2 2973.5
  - Widening of trade and service account deficit-20.0 1551.8
  - Decline in private transfers 1051.2 1421.7
  - Deterioration in capital and financial account2052.4 2162.6
  - Decline in FDI1221.4 1301.5
  - Decline in medium and long term loans30.0 310.4
  - Undisbursed funds from incomplete 4th and 5th reviews under ECF arrangement2 00.0 570.7
  - Policy adjustment (lower accumulation of gross reserves) (B)1321.6 931.1
  - External financing gap (A-B)1762.1 4195.0
  - Additional financing:1762.1 4195.0
  - Grants for debt relief under IMF CCRT3 50.1 50.1
  - Financial support from other donors 430.5 2042.4 (incl. AfDB, WB, EU, UN, GAVI, DFID, Irish Aid, GIZ, KfW, USAID)
    - Of which: World Bank370.4 760.9
    - Of which: African Development Bank00.0 450.5
    - Of which: EU00.0 610.7
  - G20 DSSI00.0 180.2
  - Disbursement under IMF RCF I931.1 911.1
  - Disbursement under IMF RCF II00.0 1021.2
  - Residual gap350.4 00.0
  - RCF IRCF II

### Policy priorities and implemented measures
- Government priorities:
  - Limit the pandemic’s social and economic impact.
  - Preserve macroeconomic stability, including debt sustainability.
  - Develop a long-term growth strategy founded on improved governance, resilience, and broad-based economic growth.
- Measures actively implemented to mitigate the pandemic’s impact:
  - Strengthening the health system (requiring at least 0.4 percent of GDP in FY 2020/21), including:
    - developing testing capabilities;
    - equipping treatment centers;
    - importing medical equipment and supplies;
    - continued payment of risk allowances and salaries for additional medical staff;
    - raising public awareness.
    - Development partners, who finance and administer nearly half of total health care provision in Malawi (mostly off-budget), have also increased their outlays (Text Table 4).
  - Stepping-up social spending:
    - Social cash transfer program (SCTP) increased to help the most vulnerable. The SCTP is administered by the government and financed by development partners (on-budget) except for one district financed by government.
  - Introducing the Affordable Input Program (AIP, replacing FISP), expected to reach four times as many smallholder farmers to support rural households and food security.
  - Increasing education outlays and transfers to universities to facilitate re-opening, provide access to clean water, and facilitate e-learning.
  - Supporting the private sector with tax waivers, reduced waiting time for pension gratuity payments, loan restructuring, a moratorium on debt service for SMEs (until end-2020), and waiving fees on mobile money transactions.

### Major COVID-related fiscal measures (Text Table 4) — selected figures
- Table heading: Malawi: Major COVID-Related Fiscal Measures, FY 2019/20-20/21 (Percent of GDP)
- Selected line items and numeric entries as presented:
  - Health care FY19/20 Est. RCF I RCF II: 0.6 0.5 0.8
    - On-Budget0.4 0.3 0.6
    - Additional health care workers/risk allowances0.1 0.1 0.3
    - Goods and services0.3 0.2 0.3
    - Government-financed0.2 0.2 0.1
    - Development partner-financed0.1 0.0 0.2
    - Off-Budget0.2 0.2 0.2
    - Goods and services, development partner-financed0.2 0.2 0.2
  - Education (on-budget)0.0 0.0 0.2
    - Government-financed0.0 0.0 0.2
  - Social spending (all on-budget)2 0.1 0.3 2.4
    - Social Assistance (SCTP)0.0 0.2 0.5
      - Government-financed3 0.0 0.0 0.0
      - Development partner-financed0.0 0.2 0.5
    - AIP (formerly FISP)0.0 0.0 1.9
    - Other (incl. on-budget maize purchases)0.1 0.1 0.0
  - Tax waivers4 0.0 0.0 0.1
  - Total0.7 0.8 3.5
  - Government-financed0.4 0.4 2.6

### Fiscal stance, revenue, and expenditure policy discussions
- FY 2020/21 stance:
  - Staff and authorities agreed on a temporary relaxation of the FY 2020/21 stance to accommodate the deteriorated outlook and need for medium-term consolidation.
  - A provisional budget (approved June 30, 2020) allows for essential spending until the draft budget is approved by Parliament.
  - Targeted domestic primary deficit (4.4 percent of GDP) is:
    - 3.1 percent of GDP larger than in IMF Country Report 20/168;
    - 6.4 percent of GDP larger than prior to the pandemic (IMF Country Report 19/361).
  - Widening driven largely by revenue shortfalls and pandemic-related measures.
- Fiscal policy discussions included:
  - Doubling of the PIT threshold:
    - Staff strongly advised against this regressive measure.
    - Staff encouraged considering adjustments to PIT rate schedule to increase progressivity and partially recoup revenue loss, and broader use of tax deferrals and less frequent filing.
  - VAT refunds:
    - Staff recommended paying VAT refunds soon after approval (0.3 percent of GDP) and clearing unpaid refunds (0.1 percent of GDP as of end-June 2020).
    - Authorities budgeted to pay 0.2 percent of GDP.
  - Improving non-tax revenue collection via increased fees and charges, digitalization, and tolling fees, with caution to limit corruption vulnerabilities.
  - Revenue administration continuity measures: e-payment platforms, remote engagement with large taxpayers, continued desk reviews/audits, documentary customs checks for largest importers, pre-clearance facilities, and remote monitoring of exempted/duty suspended goods.
  - Rolling-out the Integrated Tax Administration System (ITAS, four modules), with remaining modules targeted for early 2021 (progress slowed by capacity constraints).
  - Implementing the AIP:
    - Staff supports objectives but preferred targeted cash transfers (e.g., SCTP) as more effective for rural households.
    - Staff concerns: narrow maize focus vs. FISP support for other crops; risks if farmer registry and National ID system are not sufficiently linked; beneficiary literacy constraints affecting e-voucher functioning.
  - Rationalizing the wage bill:
    - Payroll review to eliminate ghost workers and fraud by early 2021 while safeguarding recently hired health and education staff.
    - Staff noted savings unlikely to offset the FY 2020/21 public sector salary increase (0.9 percent of GDP), which will likely be permanent and is coupled with the doubling of the PIT threshold.
    - Staff suggested redirecting resources to targeted cash transfers to more vulnerable households.
  - Reprioritizing non-essential spending on goods and services and development projects in non-health areas, guided by lower-priority, low-efficiency projects.
  - Further reprioritization to be used as contingency if COVID-19 related revenue shortfalls and spending exceed the approved budget.

### Monetary policy, liquidity, and banking sector measures
- Reserve Bank of Malawi (RBM) stance:
  - RBM stands ready to provide additional liquidity to preserve financial stability.
  - Intends to maintain the policy rate, reserve requirements, and Lombard rate at current levels.
  - Will consider further easing of monetary policy if liquidity pressures increase, taking into account inflation developments.
  - Prepared to use existing facilities to provide liquidity to commercial banks; Emergency Liquidity Assistance (ELA) anticipated for small banks; large banks maintain sufficient liquidity and capital buffers.
  - Any extensions of the moratorium on debt service to be considered on a case-by-case basis rather than blanket extensions.
- Banking supervision:
  - Intensified with daily liquidity risk monitoring and enhanced offsite monitoring (regular preliminary risk assessment summaries, bilateral meetings, supervisory letters).
  - To contain credit risks, RBM stepped up collection and virtual discussions with banks; banks and supervisors collect information about borrowers and exposures subject to the moratorium.

### Exchange rate policy and FX market development
- Staff and authorities agreed on gradually pursuing greater exchange rate flexibility while noting limited near-term benefits to exports and risks to inflation.
- Bilateral exchange rate against the U.S. dollar:
  - Broadly stable in recent months, although depreciated by 2 percent since July.
  - Depreciation has reduced the premium between RBM and forex bureau rates.
- Considerations:
  - In the pandemic environment (border closures, heightened trade transit costs), depreciation may not boost exports or tourism but could substantially raise the import bill for essential goods and services, raise inflation, and erode purchasing power.
  - RBM is studying obstacles to FX market development and developing an action plan to deepen the market and channel RBM’s role to dampening excess volatility and accumulating reserves (IMF Country Report No. 18/336).

### Transparency, governance, and audit measures
- Commitment to transparency and efficiency in COVID-19 spending:
  - PPDA to publish procurement documentation including names of beneficial owners; ex-post validation of delivery on a contract-by-contract basis.
  - Ministry of Finance to:
    - publish quarterly statements on commitments and payments of COVID-19 related activities within 90 days after each quarter, beginning FY 2019/20Q4;
    - publish specifics of COVID-19 related salary costs in the monthly salary report within 3 weeks after each month, beginning with the September 2020 report;
    - include COVID-related spending in budget funding and cash management analysis monthly;
    - publish funding earmarked for COVID-19 related spending, including revenues from new taxes and disbursements of development partner grants and loans, within 3 weeks after each month, beginning with revenues for September.
  - National Audit Office (NAO) to:
    - prepare quarterly audits of COVID-19 related spending (to be completed within 180 days after each quarter, beginning with FY 2019/20Q4) for submission to Cabinet;
    - conduct a comprehensive post-COVID-19 audit of relevant spending by government and ADMARC to be published and submitted to Parliament within 180 days of the pandemic’s conclusion.
- Broader fiscal oversight improvements continue: budgeting processes, cash management, financial reporting, bank account reconciliation, and SOE oversight.
- Additional governance measures:
  - Accountant General’s office to post consolidated annual financial statements and monthly bank reconciliation compliance reports on the Ministry of Finance website.
  - Independent teams (e.g., Farmers Union of Malawi) to monitor AIP implementation; NAO to perform quarterly audits of the program.

### Long-term reform strategy priorities (new government)
- Strategy aims to enhance poverty-reducing and resilient growth while maintaining macroeconomic stability, with priorities including:
  - Ensuring sufficient fiscal space for resilience building and social/development spending while lowering debt vulnerabilities.
    - Continued improvements in spending efficiency and finalizing a domestic revenue mobilization strategy for implementation from FY 2021/22.
    - Revenue strategy expected to include: implementing income tax on a worldwide basis, addressing BEPS issues, strengthening withholding taxes, rationalizing income tax exemptions, adopting comprehensive VAT reforms and property taxation, modernizing excise taxes, strengthening taxation of the informal sector, and implementing a wide array of tax administration measures.
    - Substantially increase non-tax revenue and improve own-revenue generation capacity by SOEs and statutory bodies through rationalizing service delivery and improving costing.
  - Improving governance with focus on addressing corruption and increasing transparency and accountability across tax administration, procurement, public financial management (including implementation of a new IFMIS), public investment management, SOE oversight, and debt management.
  - In agriculture: improve productivity (including through the AIP and allowing maize exports) and the efficiency of ADMARC.
  - RBM to continue gradual transition towards an inflation targeting framework by 2025; and, once the crisis abates, study and address obstacles to FX market development to implement greater exchange rate flexibility while keeping reserves adequate.
  - Strengthening resilience to climate change and promoting more broad-based private sector development and export diversification through priority resilience-building projects; improving healthcare, gender equality, and education; enhancing the business environment; improving agricultural productivity and reforming agricultural regulations and market intervention systems; and raising access to finance by addressing structural challenges such as improving property rights.

*Source: IMF staff report content.*

### 15.      The authorities are requesting a disbursement under the RCF “exogenous shock”

### 15.      The authorities are requesting a disbursement under the RCF “exogenous shock”

### RCF request and purpose
- Authorities request a disbursement under the RCF “exogenous shock” window equivalent to 52.1 percent of quota (SDR 72.31 million or US$101.8 million).
- Purpose: address additional urgent balance of payments needs caused by the sudden exogenous shock from an intensification of the COVID-19 pandemic.
- Expected uses:
  - Bolster international reserves.
  - Make 30 percent of the disbursement available as budget support to finance the authorities’ response to the COVID-19 pandemic.
  - Budget support specifically intended for purchases of urgent health supplies and efforts to protect the most vulnerable.
- Institutional arrangements:
  - A memorandum of understanding has been signed between the Ministry of Finance and the RBM clarifying responsibilities for repaying Fund resources.
  - Authorities have expressed strong interest in discussions on a new Extended Credit Facility.

### Additional external financing and reserves implications
- Development partner support:
  - Authorities are actively seeking additional support beyond what has already been disbursed or committed, including $204 million in 2020 from the World Bank, African Development Bank, EU, DFID, and GAVI, UN, Irish Aid, GIZ, and KfW.
- If no additional support in 2020 or if downside risks materialize:
  - Remaining external financing gap would be closed with a further drawdown of international reserves.
  - Reserves coverage would fall under 3.1 months of imports—below the staff assessed adequate level of 3.6.
- Discussions are underway with development partners, including the World Bank, to meet the financing gap in 2021; the Fund’s engagement is expected to have an important catalytic role.

### Capacity to repay and PRGT/RCF access
- With this RCF disbursement and cancellation of the current ECF arrangement:
  - Outstanding PRGT credit would reach 221 percent of quota.
  - Total PRGT disbursements over a twelve month-period would reach 123 percent of quota.
- These are below allowable limits given temporary Executive Board decisions:
  - (i) double the annual access on emergency financing under the “exogenous shock” window of the RCF to 100 percent of quota on April 6, 2020;
  - (ii) increase the limit for PRGT disbursements over a twelve month period from 100 to 150 percent of quota on July 13, 2020.
- Mitigating factors:
  - Malawi’s strong track record in meeting IMF obligations.
  - Low indebtedness and availability of concessional financing.
  - Support under the CCRT will ease the near-term burden.

### Debt sustainability assessment
- Risk ratings:
  - Malawi is at moderate risk of external debt distress and high overall risk of debt distress (Annex I) based on an update of the April 2020 Debt Sustainability Analysis (IMF Country Report No. 20/168)—staff assess Malawi’s debt to be sustainable.
- Projections and scenarios:
  - The present value of external debt to exports is projected to breach the benchmark under the most extreme shock scenario (which assumes a 6 percent decline in exports in 2021 should recovery from the COVID-19 shock be slower than expected).
  - All other indicators remain below relevant benchmarks in the baseline scenario.
  - The present value of total public debt to GDP is projected to remain above the benchmark over the projected period.
- Drivers of higher debt metrics:
  - Increases in domestic debt due to significantly larger primary deficits under current policies, especially during FY 2020/21–FY 2021/22.
  - Main reasons: revenue shortfalls; higher health and social spending due to COVID-19; doubling of the PIT threshold; a substantial increase in the public sector wage bill; introduction of the AIP.
  - These factors raise risks to debt sustainability compared to the April 2020 Debt Sustainability Analysis.

### Safeguards
- Authorities commit to an updated safeguards assessment before Board approval of any subsequent arrangement to which the safeguards policy applies.
  - This includes authorization for Fund staff to hold discussions with the RBM’s external auditors and to access the RBM’s most recent external audit reports.
- Background:
  - 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 on a comprehensive ELA framework.
  - Limited progress on addressing concerns over the RBM’s reserve management practices.

### Staff appraisal, macroeconomic impact, and policy considerations
- Additional external financing needs:
  - Accelerated spread of the pandemic and deteriorated global/regional economic situation created additional external financing needs since the RCF disbursement approved on May 1, 2020.
  - These additional urgent balance of payments needs are estimated at 2.9 percent of GDP, bringing the total external financing gap in 2020 to 5.0 percent of GDP.
- Growth and income impacts:
  - Economic growth expected to decline from 4.5 percent in 2019 to 0.6 percent in 2020.
  - Real per capita income falling by 2 percent.
- Fiscal effects:
  - Shortfall in tax revenues and increased pandemic-related spending widen the FY 2020/21 domestic primary deficit to 4.4 percent of GDP (whereas a 2 percent of GDP surplus was targeted prior to the pandemic).
  - Tightening domestic liquidity has created a fiscal financing gap, partially filled with budget support from the African Development Bank.
- Staff views and recommendations:
  - The relaxation of the FY 2020/21 stance is appropriate to accommodate the deteriorated economic outlook and critical pandemic response measures, including increased spending on health care, social assistance, and measures to ensure future food security.
  - New government committed to formulating medium-term measures soon after the pandemic passes, including:
    - Strengthening domestic debt management.
    - Implementation of a comprehensive domestic revenue mobilization strategy.
    - Alignment with the new long-term growth strategy under development.
  - Concerns:
    - Recent decision to grant a large public sector salary increase likely permanent and could constrain fiscal space for development initiatives.
  - Financial stability:
    - Measures to support financial stability (including support for SMEs) appear effective and should be continued.
    - Further strengthening banking supervision remains key for early identification of potential risks.
  - Transparency:
    - Authorities undertaking steps to fulfill commitments in IMF Country Report 20/168, including ensuring that all government spending to manage and contain the impact of the COVID-19 pandemic is transparent and efficient.

*Source: IMF staff report excerpt supplied in the content unit.*

### 22.      Staff supports the authorities’ request for a disbursement under the Rapid Credit

### 1mwiea2020002 - 22. Staff supports the authorities’ request for a disbursement under the Rapid Credit

### Staff recommendation and disbursement
- Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 72.31 million (52.1 percent of quota).
- The first Rapid Credit Facility (RCF) disbursement was approved by the Board on May 1, 2020; and the second disbursement is scheduled for Board discussion on October 2, 2020.
- The proposed second disbursement under the RCF will close the immediate external and fiscal financing needs with a limited drawdown in international reserves.

### Rationale for support
- Support is based on the urgent balance of payments needs arising from a sudden exogenous shock stemming from the intensification of the COVID-19 pandemic in Malawi, a worsened global and regional outlook, and the authorities’ existing and prospective policies to address this external shock and the balance of payments difficulties, and the additional financing secured from other development partners since the first RCF disbursement.
- While there is significant uncertainty surrounding the outlook, Malawi is assessed to be at moderate risk of external debt distress and its capacity to repay the Fund remains strong.

### Authorities’ commitments and program intentions
- The authorities are committed to pursuing reforms in support of higher, more resilient, and broad-based medium-term growth and governance reforms while preserving macroeconomic stability.
- The authorities have expressed their intent to request a new multi-year ECF arrangement that is aligned with their new long-term economic reform program.
- The accelerating spread of the pandemic and urgent nature of the current balance of payments needs makes it difficult to discuss design of a new ECF arrangement at this time.

### Selected fiscal and external indicators (as presented)
- Current account (percent of GDP): -20.5 -17.1 -17.2 -17.8 -19.9 -16.8 -18.0 -20.3 -18.9 -18.3 -17.6 -16.8
- Gross official reserves (US$ millions): 750 815 950 861 873 1,097 900 958 993 1,044 1,114 1,210
- Financing gap (Table 1 / Table 4a entries): 0.00 0.00 0.0 175.9 418.8 0.0 65.2 236.6 48.8 37.0 18.7 0.0
- Disbursement under IMF RCF I: 93.0 91.0 (Table entries)
- Disbursement under IMF RCF II: 101.8 (Table entries)
- External debt (public sector, percent of GDP): 31.2 29.5 29.5 31.4 31.8 29.1 33.0 34.4 34.7 34.9 34.9 34.7
- NPV of public external debt (percent of exports): 123.3 117.4 110.8 136.3 150.5 107.7 132.1 148.6 145.5 141.2 152.7 145.9

### Near-term outlook and risks (as presented)
- The intensification of the COVID-19 pandemic and a worsened global and regional outlook underpin urgent balance of payments needs.
- There is significant uncertainty surrounding the outlook.
- Malawi is assessed to be at moderate risk of external debt distress, but capacity to repay the Fund is described as strong.

*International Monetary Fund staff report (excerpts).*

### 1. Regulatory Tier 1 capital to risk weighted assets12.413.8     15.3     15.517.018.8

### 1mwiea2020002 - 1. Regulatory Tier 1 capital to risk weighted assets12.413.8     15.3     15.517.018.8

### Banking sector: Regulatory capital ratios
- Regulatory Tier 1 capital to risk weighted assets: 12.4 13.8 15.3 15.5 17.0 18.8
- Total regulatory capital to risk weighted assets: 15.8 17.0 19.4 19.0 21.0 22.0
- Total capital to total assets (total capital refers to regulatory capital): 17.1 16.7 15.9 14.7 16.4 16.0

### Banking sector: Asset composition and quality
- Non-performing loans to gross loans and advances: 10.6 17.0 15.7 6.1 6.3 6.6
- Provisions to non-performing loans: 25.7 25.5 34.5 42.4 38.6 35.6
- Total loans and advances to total assets: 40.0 34.8 28.0 63 30.5 33.2 31.7
- Foreign currency loans to total loans and advances: 28.6 21.8 27.9 24.3 20.9 35.4

### Banking sector: Earnings and profitability
- Return on assets (ROA): 3.1 2.7 2.3 2.2 2.7 3.2
- Return on equity (ROE): 19.2 18.4 15.7 16.6 20.5 23.6
- Non-interest expenses to gross income: 51.4 50.0 49.7 52.1 51.8 48.6
- Interest margin to gross income: 50.2 47.8 50.8 46.5 59.6 48.6
- Non-interest income to revenue: 30.5 28.0 27.3 34.2 33.6 34.9
- Net interest income to assets: 9.7 9.7 8.7 7.9 8.4 4.2
- Personnel expenses to non-interest expenses: 45.3 43.8 46.5 42.9 43.0 42.2

### Banking sector: Liquidity
- Liquid assets to deposits and short-term liabilities: 59.0 72.3 77.0 63.3 58.9 58.2
- Total loans to total deposits: 58.5 54.2 45.1 47.4 54.2 52.4
- Liquid assets to total assets: 43.3 50.4 55.0 44.8 39.8 40.0
- Foreign exchange liabilities to total liabilities: 26.1 19.7 19.8 13.8 15.8 13.5

*Source: Reserve Bank of Malawi.*

### External financing requirement and sources (Table 6, Millions of USD)
- Total requirement: -1468 -1459 -1835 -1911 -1815 -1841 -1865 -1874
  - Current account, excluding official transfers: -1418 -1349 -1722 -1765 -1704 -1709 -1708 -1707
  - Debt amortization: -58 -44 -55 -61 -76 -81 -87 -72
  - Gross reserves accumulation (- increase): 8 -65 -58 -85 -35 -51 -70 -96
- Total sources: 1468 1459 1416 1674 1767 1804 1846 1874
  - Expected disbursements (official): 933 1136 1152 1427 1515 1560 1587 1620
    - Grants: 806 977 989 1176 1295 1332 1348 1371
    - Medium- and long-term loans: 127 160 164 251 220 228 239 249
  - Private sector (net): 533 295 283 273 289 276 293 303
- IMF ECF (net): 2 27 -19 -26 -37 -33 -34 -49
  - Drawings: 31 43 0 0 0 0 0 0
  - Repayments: 29 16 19 26 37 33 34 49
- Financing gap: 0 0 419 237 49 37 19 0
- Gross official reserves (millions of U.S. dollars): 750 815 873 958 993 1044 1114 1210
- Months of imports: 3.0 3.1 3.1 3.3 3.3 3.3 3.4 3.5

### Indicators of capacity to repay the Fund (Table 7 highlights)
Projected payments based on existing drawings (SDR millions):
- Principal: 3.3 18.4 25.8 22.4 23.1 33.5 33.4 26.0 22.9 19.6 6.6 0.0 0.0 0.0
- Charges and interest: 0.01 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06

Projected payments based on existing and prospective drawings (SDR millions and US$ Millions):
- SDR millions: 3.31 18.50 25.87 22.43 23.17 33.52 47.90 40.53 37.46 34.12 21.16 0.06 0.06 0.06
- US$ Millions: 4.57 25.67 36.02 31.31 32.43 47.09 67.30 56.94 52.63 47.94 29.73 0.08 0.08 0.08

Selected ratios (Projected payments based on existing and prospective drawings):
- Percent of exports of goods and services: 0.37 2.27 2.89 2.35 2.26 3.01 3.97 3.11 2.67 2.25 1.30 0.00 0.00 0.00
- Percent of debt service: 5.60 27.02 32.86 23.88 24.45 33.28 45.02 31.24 27.30 23.33 13.79 0.04 0.05 0.05
- Percent of quota: 2.38 13.33 18.64 16.16 16.69 24.15 34.51 29.20 26.99 24.58 15.24 0.04 0.04 0.04
- Percent of gross official reserves: 0.56 3.00 3.83 3.19 3.12 4.21 5.54 4.35 3.81 3.35 2.04 0.01 0.01 0.01
- Percent of GDP: 0.06 0.31 0.41 0.35 0.35 0.48 0.66 0.53 0.46 0.39 0.23 0.00 0.00 0.00

Projected level of credit outstanding (SDR millions and US$ Millions):
- SDR millions: 304.1 285.6 259.8 237.5 214.3 180.9 133.0 92.6 55.2 21.1 0.0 0.0 0.0 0.0
- US$ Millions: 421.0 396.9 362.2 331.8 300.5 254.5 187.2 130.3 77.6 29.7 0.0 0.0 0.0 0.0

Selected memorandum items:
- Exports of goods and services (millions of U.S. dollars): 1,250 1,132 1,245 1,331 1,438 1,563 1,694 1,829 1,974 2,127 2,292 2,470 2,662 2,869
- Debt service (millions of U.S. dollars): 81.6 95.0 109.6 131.1 132.6 141.5 149.5 182.3 192.8 205.5 215.6 212.8 181.1 176.7
- Quota (SDR millions): 138.8 (each year listed)
- Gross official reserves (millions of U.S. dollars): 815 855 940 982 1,041 1,118 1,214 1,308 1,383 1,431 1,458 1,473 1,584 1,656
- GDP (millions of U.S. dollars): 7,663 8,406 8,698 9,018 9,333 9,722 10,141 10,727 11,468 12,245 13,083 13,955 14,854 15,834

### Letter of Intent: Key fiscal and program points (selected)
- Economic outlook and impact of COVID-19:
  - Anticipated growth in 2020 revised down to 0.6 percent from pre-pandemic projection of 5.1 percent.
  - Additional urgent balance of payments need estimated at about US$419 million in 2020 (compared to US$176 million previously).
  - Additional external financing gap estimated at 2.9 percent of GDP (US$243 million) in 2020.
- Requests and financing:
  - Request additional disbursement of 52.1 percent of quota (SDR 72.31 million) under the “exogenous shock” window of the RCF.
  - Request US$30 million of the requested RCF disbursement be made available to the National Treasury account at the RBM as budget support.
  - Secured at least 0.5 percent of GDP (US$45 million) in additional budget support commitments since the first RCF disbursement.
- Transparency, governance, and public financial management measures:
  - Publish procurement documentation and results on the PPDA website for COVID-19 related competitive bids and direct procurement.
  - Publish ex-post validation of delivery on a contract-by-contract basis and quarterly statements on commitments and payments of COVID-19 related activities (within 90 days after the end of each quarter, beginning with FY 2019/20Q4).
  - Publish COVID-19 related costs in monthly salary report and monthly budget funding and cash management analysis (within 3 weeks after end of each month, beginning with revenues for September 2020).
  - National Audit Office to submit quarterly audits of COVID-19 related spending to the Minister of Finance (within 180 days after the end of each quarter, beginning with FY 2019/20Q4) and publish a comprehensive audit after the pandemic (within 180 days after the end of the pandemic).
  - Accountant General to post consolidated annual financial statements (Summary Volume I, including the audit opinion, within 7 months after the close of the fiscal year)—statements for FY2017/18 and FY2018/19 to be posted by September 30.
  - Monthly bank reconciliation compliance reports to be posted within 6 weeks after the end of each month (beginning with October reports to be posted by end-October).
- Policy commitments and reforms:
  - Implement a comprehensive revenue mobilization strategy (including VAT reforms) in FY 2021/22.
  - 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 2025 and study obstacles to FX market development.
  - Request cancellation of the previous Extended Credit Facility (ECF), approved in April 2018, as of September 24, 2020.
- Debt treatment and repayment capacity:
  - Capacity to repay the Fund remains strong and Malawi’s external risk of debt distress remains moderate.
  - Requested temporary debt service suspension from official bilateral creditors under the G-20 DSSI; freed resources under the DSSI to be used for COVID-19 health spending and mitigating measures.
  - 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.
- Safeguards and publication:
  - Commit to update the 2018 safeguards assessment before IMF Board approval of any subsequent arrangement to which the safeguards policy applies and provide RBM’s most recently completed external audit reports.
  - Authorize the IMF to publish the Letter, the staff report and associated documents related to the request for disbursement under the RCF.

### Debt distress and risk classification (summary lines)
- Risk of external debt distress: Moderate
- Overall risk of debt distress: High
- Macroeconomic projection excerpt: "Growth is expected to fall to 0.6 percent in 2020 and to 2.2 percent in 2021 (0.4 and" 

*Source: IMF staff; Reserve Bank of Malawi; Letter of Intent dated September 24, 2020.*

### 0.3 percentage points below projections in

### 0.3 percentage points below projections in

### Economic outlook and growth projections
- GDP growth is expected to fall to 0.6 percent in 2020 and to 2.2 percent in 2021.
- Economic recovery is expected during 2022-25 with growth averaging 6.4 percent.
- Over the long-term, growth is expected to stabilize around 5.5 percent.
- The outlook is subject to considerable downside risks related to the COVID-19 pandemic and policy responses.

### Fiscal and external balances (selected projections and impacts)
- Domestic primary balance (relative to pre-pandemic projections) is expected to deteriorate to:
  - -2.5 percent of GDP in FY 2019/20
  - -4.4 percent of GDP in FY 2020/21
  - -3.5 percent of GDP in FY 2021/22
- Current account deficit, excluding official transfers, is expected to widen to:
  - 20.5 percent of GDP in 2020
  - 20.3 percent of GDP in 2021
- Government revenues (excluding grants, in percent of GDP) projections include:
  - 19.5, 20.2, 18.8, 16.6, 18.3, 18.1, 19.5, 20.9, 21.6, 22.1, 16.5, 18.4, 20.5 (as listed in Table 1)

### Debt dynamics and risk ratings
- Mechanical risk rating under the external DSA: Moderate
- Mechanical risk rating under the public DSA: High
- Malawi’s composite indicator (CI) score: 2.72 (current vintage: 2019 CPIA and 2020 April WEO)
  - Threshold for weak debt carrying capacity: 2.69
- Malawi is at moderate risk of external debt distress and high overall risk of debt distress.
- Present value of total public debt-to-GDP is projected to remain above the benchmark over the projected period under the baseline scenario.
- PV of PPG external debt-to-GDP (selected projected values): 19.2, 20.3, 21.9, 22.5, 22.7, 22.5, 22.3, 18.1, 17.6 (as shown in Table 1)
- PV of PPG external debt-to-exports (selected projected values): 117.4, 152.2, 156.2, 152.1, 146.8, 139.7, 133.1, 101.7, 87.5 (Table 1)
- PV of public debt-to-GDP ratio (selected projected values in Table 2): ......49.0 57.9 66.1 69.0 70.5 71.3 70.5 65.8 57.6

### Key debt and financing stocks and flows (selected table extracts)
- External debt (nominal) historical and projected (percent of GDP): 36.5, 34.6, 32.7, 34.9, 39.4, 39.5, 39.4, 39.1, 38.8, 32.7, 31.3, 30.5, 36.8 (Table 1)
- Of which: public and publicly guaranteed (PPG) external debt (percent of GDP): 32.8, 31.2, 29.5, 31.9, 36.3, 36.4, 36.4, 36.1, 35.9, 30.2, 29.6, 26.9, 34.0 (Table 1)
- Identified net debt-creating flows (percent of GDP): 16.5, 15.4, 12.3, 18.8, 20.5, 16.5, 15.9, 15.2, 14.4, 13.0, 10.5, 11.4, 15.4 (Table 1)
- Non-interest current account deficit (percent of GDP): 22.0, 20.2, 16.8, 19.8, 21.8, 20.2, 19.6, 18.8, 18.0, 16.7, 14.1, 13.6, 18.5 (Table 1)
- Exports (percent of GDP): 16.9, 16.1, 16.3, 13.3, 14.0, 14.8, 15.5, 16.1, 16.7, 17.8, 20.1 (Table 1)
- Imports (percent of GDP): 44.2, 42.4, 39.3, 38.1, 40.4, 39.9, 40.2, 40.2, 40.2, 39.7, 39.8 (Table 1)
- Gross external financing need (Billion of U.S. dollars): 1.4, 1.4, 1.3, 1.7, 1.9, 1.8, 1.8, 1.8, 1.8, 2.2, 3.3 (Table 1)
- Grant element of new public sector borrowing (in percent): .........41.3 46.4 48.8 48.8 50.9 52.0 53.1 49.5 ...50.0 (Table 1)
- Grant-equivalent financing (in percent of GDP) (selected): .........4.4 4.5 4.1 4.2 4.0 3.7 3.2 2.1 ...3.8 (Table 1)

### Public sector debt indicators (selected)
- Public sector debt (percent of GDP) historical and projected: 57.1, 59.7, 59.5, 69.1, 78.2, 81.3, 83.0, 83.8, 83.0, 77.5, 69.3, 48.0, 79.7 (Table 2)
- Of which: external debt (percent of GDP): 32.8, 31.2, 29.5, 31.8, 34.4, 34.7, 34.9, 34.9, 34.7, 29.7, 29.5, 26.9, 32.9 (Table 2)
- Primary deficit (percent of GDP) projections: 3.5, 2.1, 2.0, 7.1, 7.2, 5.4, 4.1, 3.1, 1.9, 0.0, 0.7, 1.5, 2.9 (Table 2)
- Debt service-to-revenue and grants ratio (selected projections): 35.6, 25.3, 27.0, 33.2, 63.9, 89.7, 101.7, 109.7, 115.1, 140.9, 180.7 (Table 2)
- Gross financing need (percent of GDP, selected): 7.6, 3.6, 7.6, 13.6, 21.0, 25.1, 28.0, 30.2, 30.9, 35.5, 32.8 (Table 2)

### Stress tests and sensitivity analysis (high-level results)
- Under baseline and alternative scenarios, several indicators show sensitivity:
  - PV of debt-to-exports and PV of debt-to-GDP ratios increase under shocks (Table 3).
  - One-time 30 percent nominal depreciation raises PV of debt-to-GDP and other ratios (Table 3, B5).
  - Tailored tests include combined contingent liabilities and natural disaster scenarios (Table 3, C1 and C2).
- Specific breaches are indicated by bold values in the sensitivity tables (Table 3 and Table 4), highlighting vulnerability to growth, primary balance, exports, and exchange rate shocks.

### Financing strategy and policy recommendations
- External financing in the form of concessional project loans is expected to gradually increase; grant element of project loans will remain relatively high with no access to market financing.
- Risk that pace of concessional financing may accelerate if absorption capacity increases faster than expected.
- Given increased risk to public debt sustainability driven mainly by higher domestic primary deficits, recommended policy actions include:
  - Fiscal consolidation efforts to reduce domestic primary deficits.
  - Strengthening domestic debt management, including the gradual lengthening of the maturity of the domestic debt portfolio as market conditions allow.
  - Implementation of a comprehensive revenue mobilization strategy (including VAT reforms) in FY 2021/22.
  - Progress in 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.
- The authorities participate in the DSSI and have requested assistance from bilateral creditors; the DSA assumes the full amount of the DSSI is received from all creditors in line with agreed term sheets.
- This assessment assumes debt relief from the IMF under the Catastrophe Containment window of the CCRT through April 2022.

*Prepared by the staffs of the International Monetary Fund and the International Development Association (IDA); Malawi: Joint Bank-Fund Debt Sustainability Analysis, September 24, 2020.*

### 2.5 percentage points of GDP in

### 2.5 percentage points of GDP in

### Key developments and macroeconomic impact
- COVID-19 infections rose from "36 cases and 3 fatalities" at end-April 2020 to "5772 cases and 179 deaths" as of September 29, 2020.
- GDP growth is now expected to decline to "0.6 percent" in 2020, compared to a projection of "1 percent" in May 2020.
- The overall balance of payments is projected to record a deficit of "4.5 percent of GDP", against the previous estimate of "2.0 percent".
- The total external financing gap during 2020-21 is "7.7 percent of GDP" or "$655 million".
- External financing needs in 2020 were estimated at "2.9 percent of GDP"; the external financing gap is now "5.0 percent of GDP in 2020".
- The authorities request emergency financing under the Rapid Credit Facility (RCF) of "SDR 73.31 million", equivalent to "52.1 percent of quota".

### Fiscal impact and public finances
- Revenue shortfalls and increased critical spending are anticipated to worsen the domestic primary deficit by "over 3 percent of GDP in FY2020/21".
- Measures taken to limit budget pressures include reducing the number of development projects in the FY 2020/21 budget and reviewing long-incomplete projects.
- Commitment control system strengthened; all Ministries Departments and Agencies (MDAs) required to strictly operate within budget provisions.
- Payroll review to eliminate ghost workers and fraudulent claims; savings expected to mitigate revenue loss from the doubling of the personal income tax (PIT) threshold.
- Authorities are in technical discussions with the Fund on possible adjustments to the PIT rate schedule and credit drawback to recoup revenue loss.

### Policy responses to the pandemic
- Health and social assistance measures ramped up: developing testing capabilities, equipping treatment centers, hiring additional medical staff, intensifying public awareness campaigns.
- Since September 1, 2020, initial steps to re-open the economy: lifting restrictions on commercial air travel and phased reopening of schools.
- Social and fiscal measures:
  - Expansion of the social cash transfer program (SCTP).
  - Introduction of tax waivers on imports of medical equipment, medicine and other supplies.
  - Introduction of a new Affordable Input Program (AIP), replacing the Farm Input Subsidy Program (FISP); AIP to be evaluated after its first year with the objective to enhance efficiency and reduce fiscal outlay over time without compromising objectives.
- Monetary and financial sector measures by the Reserve Bank of Malawi (RBM):
  - Lowering the policy rate, the Liquidity Reserve Requirement (LRR) and the Lombard Rate.
  - Activation of the Emergency Liquidity Assistance (ELA) framework to support small banks.
  - Enhanced monitoring of financial sector risks, daily liquidity risk monitoring, and intensified banking supervision and offsite monitoring.
  - RBM stands ready to provide additional liquidity if warranted.

### Debt and external support
- Authorities engaging bilateral creditors for debt servicing relief under the G20 Debt Service Suspension Initiative (DSSI).
- The document includes graphical indicators (qualification of the Moderate category, debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, debt service-to-exports ratio) with thresholds noted: for the PV debt/GDP and PV debt/exports thresholds, "x is 20 percent and y is 40 percent"; for debt service/Exports and debt service/revenue thresholds, "x is 12 percent and y is 35 percent."

### Post-crisis strategy and structural reforms
- Medium-term objectives: preserve macroeconomic stability and ensure higher, more inclusive and resilient growth.
- Policy directions:
  - Strengthen resilience to climate change.
  - Promote broad-based private sector development and export diversification.
  - Raise access to finance.
- Revenue and public financial management reforms:
  - Implement a comprehensive revenue mobilization strategy beginning in FY 2021/22.
  - Continue reforms in tax administration including rolling-out the Integrated Tax Administration System (ITAS).
  - Improve governance, fight corruption, increase transparency and accountability.
  - Implement a new IFMIS, further procurement reforms, public investment management, strengthening debt management, and enhancing oversight of state-owned enterprises.
  - Automate collections of fees and charges to limit corruption vulnerabilities and prevent budget fragmentation.
- Monetary policy framework:
  - RBM committed to greater exchange rate flexibility to absorb shocks.
  - Plan to gradually transition towards an inflation targeting framework by "2025" and address obstacles to FX market development.

### Requests and outlook
- Authorities seek Executive Directors’ support for a disbursement under the Rapid Credit Facility to sustain pandemic containment and dampen economic impact.
- Authorities look forward to further engagement with the Fund through a multi-year Extended Credit Facility (ECF) arrangement aligned to their long-term vision and medium-term development strategy, once pandemic-related uncertainty abates.

*Statement by Mr. Dumisani Mahlinza, Executive Director for Malawi, and Mr. Ted Sitimawina, Senior Advisor to the Executive Director — September 24, 2020*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mwiea2020002.pdf_