## 1mwiea2021001 — "1. Reform Scenario, 2021-25" ## Source details **Canonical URL:** [1mwiea2021001 — "1. Reform Scenario, 2021-25"](https://www.imf.org/-/media/files/publications/cr/2021/english/1mwiea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1mwiea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1mwiea2021001.pdf.json) --- ### Context and recent policy shifts - New administration (since mid-2020) anchors policy on "Malawi Vision 2063" targeting upper-middle income status by 2063 and prioritizes governance and transparency reforms. - Authorities requested an arrangement under the Extended Credit Facility (ECF); a special audit of foreign exchange reserves in response to noncomplying disbursements (“misreporting”) under the 2018 ECF arrangement has been committed to; resolving the misreporting case is a pre-condition for a new Fund arrangement. - Personnel changes and a Vice President’s Taskforce introduced structural changes to the civil service, allowances, employment contracts, and public procurement. ### Macroeconomic imbalances and drivers - Fiscal deficits and financing - Budget deficits financed mainly by costly domestic borrowing. - External budget support and grants averaged 5.8 percent of GDP during 2005-13 but fell to 1.8 percent of GDP since the 2013 “Cashgate”. - Rising domestic financing since 2018 and non-concessional RDB borrowing contributed to public debt of 55 percent of GDP in 2020 (of which 10 percent of GDP was non-concessional external debt). - Current account and reserves - Current account deficits fluctuated around 12-15 percent of GDP since 2015. - Gross international reserves declined to $406 million (or about 1½ months of next year’s imports) at end-October 2021. - RBM FX intervention and short-term currency swaps with RDBs were used to maintain a broadly stable nominal exchange rate; swaps were scaled back by new RBM leadership since July 2020. - COVID-19 impacts and policy response - Authorities eased fiscal and monetary policy since March 2020. - National COVID-19 Vaccine Deployment Plan targets reaching 20 percent of the population (3.8 million) by end-2021 via COVAX; an additional 100,000 doses covering 0.5 percent of the population secured through the African Union. As of mid-October, 2.8 percent of the total population was fully vaccinated. - Growth and sectoral vulnerabilities - Real GDP growth declined from 5.4 percent in 2019 to 0.9 percent in 2020. - Real GDP growth in 2021 is projected to pick up to 2.2 percent, helped by a good harvest. - Growth highly vulnerable to extreme weather events and to tobacco export stagnation. ### Inflation, exchange rate, and monetary stance - Inflation developments - Non-food inflation: 4.9 percent at end-2020 → 7.2 percent at end-September 2021. - Food inflation remained above 10 percent despite a good harvest. - Headline inflation: 7.6 percent at end-2020 → 8.9 percent at end-September 2021. - Exchange rate and reserves management - GIR declined from US$766 million at end-June 2020 to US$406 million at end-October 2021. - Reported GIR figures include encumbered deposits; these will be excluded once audited numbers become available. - Pressure on inflation emerging after monetary expansion and currency depreciation since mid-2020 as RBM scaled back FX intervention. ### External position, debt, and sustainability - External position - External position in 2020 assessed as substantially weaker than level implied by medium-term fundamentals and desired policies. - Current account deficit: 12.6 percent of GDP in 2019 → 13.6 percent of GDP in 2020. - Staff’s reserve adequacy model estimates an adequate level at 3.9 months of next year’s imports for credit constrained economies; Malawi’s GIR at 2 months is inadequate. - Debt levels and outlook - Public debt: 55 percent of GDP in 2020; staff baseline projects increase from 54.8 percent of GDP in 2020 to 85.7 percent of GDP in 2026 under current policies. - External debt: 10 percent of GDP was non-concessional external debt in 2020. - Debt distress assessment: external and public debts are assessed in "high risk of debt distress"; external and public debt are assessed as unsustainable under current policies. - Drivers worsening debt service: downgrade in debt carrying capacity from medium to low; DSA reclassification of medium-term domestic bonds held by nonresidents as external debt; conversion of RBM short-term reserve liabilities to medium-term external debt. - External arrears at end-2020 were rescheduled in 2021; repayments to Spain started in May 2021 and will continue to November 2023; repayments to TDB met up to April 2022. - External financing needs - External financing needed (financing gap) estimated at about 4-5 percent of GDP each year in the medium term. - Covering financing needs in staff baseline relies on: (i) disbursement of ratified but undisbursed concessional loans; (ii) additional nonconcessional external borrowing (including nonresident participation in the domestic debt market); and (iii) net domestic financing. ### Outlook and projections (under announced policies) - Growth - Staff projects gradual recovery to reach 4.5 percent growth by 2023, amounting to a small positive per capita growth. - Projection assumes: (i) sustained increase in public investment relative to past decade levels with strong fiscal multipliers; (ii) maintenance of a fiscal deficit on the order of 10 percent of GDP over the medium term; (iii) continued access to sizable and further growing RDB financing and domestic borrowing. - Authorities project higher near-term impact from domestically financed capital spending and are exploring mining sector potential. - Inflation - CPI inflation projected at 10 percent at end-2021 and about 6.8 percent at the end of the medium term, conditional on a well anchored monetary policy stance. - Reserves and vulnerability - Gross international reserves projected to remain at about 1½ months of next year’s imports with financial support from RDBs; limited buffers to absorb shocks. ### Risks and spillovers - Downside risks (tilted to the downside) - High-probability, high-impact: sudden stop in RDB financing could trigger abrupt real exchange rate adjustment, import compression, severe impacts on growth and financial stability, and adverse effects on the most vulnerable. - Other risks: another COVID-19 wave; weather-related shocks; governance issues; fiscal dominance; further accumulation of external non-concessional borrowing. - Upside risks - Faster recovery supported by mining sector, successful resolution of unsustainable debt service, and strong reforms could resume donor budget support. - Global transmission - Inward spillovers of easy liquidity in advanced economies channeled through RDBs; normalization of advanced economy monetary policy could reduce RDB appetite and trigger a sudden stop. ### Policy implications and authorities’ intentions - Preconditions for IMF support and donor catalysis - Restoring debt sustainability in the medium term is a pre-requisite for IMF support; sizeable support from the international community, including nondebt creating flows (debt relief and budget support) from RDBs and other partners, is vital because adjustment alone cannot restore debt sustainability. - Policy priorities signaled by authorities - Implement revenue measures, manage expenditures, focus on export diversification, continue governance and transparency reforms, complete special audit of foreign exchange reserves, and resolve misreporting to regain donor confidence and budget support. ### Reform scenario (Box 1) — 2021–25 - Objective: stabilize public debt and return Malawi to moderate risk of debt distress within the medium term. - Fiscal adjustment - Size of fiscal adjustments set at about 1 percentage point of GDP each year (consistent with technical assistance recommendations). - External sector adjustment - Corresponding external sector adjustment of 1½ percent of GDP each year, supported by greater exchange rate flexibility and stronger monetary and fiscal policy. - Financing gap - Reform scenario financing gap: about US$1.6 billion or about 4 percent of GDP each year in the medium term. - If gap financed by nonconcessional borrowing, risk of debt distress remains high; if filled by nondebt creating flows (debt relief and budget support grants), Malawi can return to a moderate risk of debt distress. - Baseline assumption: external financing gap closed by additional RDB borrowing, increasing stock of debt from US$0.9 billion in 2020 to US$3.5 billion by 2025; residual fiscal gaps covered by domestic borrowing. - Adjustment timing - Any reform delays would make adjustment larger and more abrupt. --- ### Fiscal policy, arrears clearance, and Domestic Revenue Mobilization ### Fiscal developments and medium-term stance - Expenditure expanded from 19.6 percent of GDP in 2018/19 to an estimated 22.2 percent of GDP in 2020/21. - Drivers: COVID-19 containment, one-off election-related expenditures, civil service wage increase in October 2020, expansion of Affordable Input Program (AIP) from just under 1 million to 3.8 million beneficiaries (cost increase from 0.5 percent of GDP to 1.5 percent of GDP). - Interest payments jumped from 2.9 percent of GDP to 3.8 percent of GDP in 2018/19 and 2020/21 respectively. - Overall deficit for FY2020/21 estimated at 7.5 percent of GDP (vs. 5.8 percent of GDP in FY2019/20). ### Arrears clearance (September 2021 measures) - Domestic arrears audited and verified: approximately MWK 158.9 billion (1.7 percent of GDP), commitments up to June 2020. - Clearance strategy components: - Issuing zero-coupon promissory notes: MWK 145 billion (of which MWK 110 million issued as of August 2021). - Cash payments for small amounts: MWK 5 billion. - Tax refunds: MWK 9 billion. ### Domestic Revenue Mobilization Strategy (DRMS) targets and timing - Revenue targets from DRMS: - Aim to raise at least an additional 2 percent of GDP (cumulative) from tax policy measures (broadening VAT and CIT bases, excise and carbon taxes, PIT reforms). - Tax administration measures should raise at least an additional 0.5 percent of GDP (cumulative) over the medium term. - Text Table 1 (summary changes relative to FY 2020/21, in percent of GDP) - Domestic Revenue increases: 0.7 (2021/22), 1.1 (2022/23), 1.6 (2023/24), 2.2 (2024/25). - Policy measures contributing: 0.3 (2021/22), 0.7 (2022/23), 1.3 (2023/24), 2.0 (2024/25). - Tax administration measures: 0.0 (2021/22), 0.1 (2022/23), 0.3 (2023/24), 0.5 (2024/25). - Expenditure (excl. interest and foreign-financed development spending) changes: 0.2 (2021/22), (1.1) (2022/23), (1.3) (2023/24), (1.6) (2024/25). - Overall Balance changes: (0.5) (2021/22), 0.0 (2022/23), 0.3 (2023/24), 1.0 (2024/25). - Domestic Primary balance changes: 0.5 (2021/22), 2.2 (2022/23), 2.9 (2023/24), 3.8 (2024/25). ### Expenditure reprioritization and PFM improvements - Reprioritization goals: - Curtail growth in wages; reform AIP and goods and services spending; reduce non-critical spending. - Expected fiscal space freed: 2 percent of GDP (part redirected to development expenditure). - Commitment controls and IFMIS - Complete IFMIS implementation; passage of the PFM Act; publish comprehensive monthly fiscal reports. - IFMIS rollout accelerated and rolled out to all MDAs in July 2021 (authorities’ implementation). - If arrears continue to accumulate, adopt a strategic clearance strategy rather than relying solely on promissory notes. - Social protection - Social spending (health and social cash transfers) largely off-budget and donor-funded; recommendation to review and adjust size of transfers for inflation. --- ### Debt Sustainability Analysis (DSA), Post-Financing Assessment (PFA) and Capacity to Repay ### Coverage and key DSA findings - DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government. - Public debt used for DSA: PPG external and public domestic debt covering central government and RBM contracted/guaranteed debt; excludes some state/local government and non-guaranteed SOE debt. - Public debt: 54.8 percent of GDP in 2020 (text repeats 55 percent elsewhere). - External PPG debt stock: $3,760.0 thousand (100.0 percent; 33.0 percent of GDP) at end-2020 (table of composition provided). - DSA assessment: risk of external debt distress downgraded to High; overall risk of debt distress maintained at High; public debt assessed Unsustainable under current policies. ### Drivers, projections, and shocks - Drivers of deterioration: downgrade in debt carrying capacity to Weak (CI score 2.56); reclassification of external debt from currency to residency basis; conversion of RBM short-term reserve liabilities to medium-term external debt. - Baseline projections (selected) - Total public debt projected to increase from 54.8 percent of GDP in 2020 to 85.7 percent of GDP in 2026 under current policies. - PV of public external debt and debt-service indicators show large and protracted breaches on several metrics. - Financing assumptions in baseline - Project loans ratified but undisbursed: US$1.32 billion as of end-June 2021 assumed disbursed in medium term. - Additional loans of US$2.6 billion contracted from RDBs during medium term assumed. - Total new external borrowing in 2021-26: $3.9 billion. - Domestic borrowing averages about 9 percent of GDP each year during medium term; assumed interest rates: 3-year bond at 11.5 percent; 10-year bond at 17 percent. - Stress tests and tailored shocks - Combined contingent liabilities one-time debt shock: equivalent to 9 percent of GDP in 2021 (captures limited public debt coverage and contingent liabilities). - Commodity shock: tailored to tobacco exposure; shocks cause PV debt-to-exports and PV debt-to-GDP to rise and remain elevated. ### Post-Financing Assessment (PFA) and IMF exposure - Malawi’s outstanding credit to the Fund exceeds 200 percent of quota, triggering a PFA. - 2018 ECF provided SDR 78.075 million (56.25 percent of quota) augmented by SDR 27.76 million (20 percent of quota) in November 2019. - Two RCFs in May and October 2020 provided total access of SDR 138.8 million (100 percent of quota). - Total outstanding credit about 206 percent of quota as of mid-November 2021. - Capacity to repay - Assessment: Malawi’s capacity to repay the Fund has deteriorated from strong to weak under current policies. - Consequences: sustained fiscal and current account deficits; deterioration in gross reserves; significant financing risks including sudden stop risk and fiscal dominance. - Projected payments and exposure (selected) - Projected payments based on existing drawings (SDR millions) include principal flows such as 25.8, 22.4, 23.1, 33.5, 47.9, 144.2 in specified years (table provided). - Projected level of credit outstanding based on existing and prospective drawings declines over time in projections (SDR millions series provided). - Indicative ratios: percent of exports, percent of debt service, percent of quota, percent of gross official reserves, percent of GDP (selected series provided). --- ### Monetary policy, reserves, financial sector, and data issues ### Monetary policy and liquidity management - Staff recommends anchoring monetary framework on containing reserve money growth to stabilize inflation pressures. - RBM should allow greater exchange rate flexibility while maintaining price stability as primary objective. - Suggested RBM instruments to drain excess liquidity: - deposit auctions; sales of government securities; issuance of RBM's own securities. - Authorities reduced policy rate to 12 percent (by 150 basis points) in November 2020 and held it steady thereafter. - Reserve money and broad money year-on-year growth rose 33 percent and 25 percent respectively in September 2021 (due in part to not fully sterilizing decline in FX intervention). ### Financial sector supervision and soundness - Banking sector indicators (selected) - Regulatory Tier 1 capital to risk weighted assets: 17.0, 18.5, 18.8, 17.6, 17.4, 20 - Non-performing loans to gross loans and advances: 6.3, 5.8, 6.6, 6.2, 6.3, 8.3 - Share of NPLs stabilized to 6.4 percent at end-July (source text). - Banking sector remains well capitalized, liquid and profitable based on available data. - Staff recommendations - Monitor RBM and commercial banks’ exposures to government securities. - Reassess loan and collateral quality; improve credit risk management and develop micro- and macroprudential tools. - Emergency measures - ELA framework introduced and used for one commercial bank in April 2021. - Debt moratorium and SME loan restructuring remain in place on case-by-case basis. ### Reserves, exchange rate, and data quality - Gross reserves decline and measures - GIR: US$766 million at end-June 2020 → US$406 million at end-October 2021; RBM reintroduced 30 percent surrender requirement on export proceeds in August 2021 as temporary measure. - SDR allocation in August 2021 provided liquidity equivalent to about US$190 million or about 1.6 percent of GDP; transferred to the Government and sold to RBM in exchange for Kwacha to meet short-term FX reserve liabilities. - Reserve management and data quality recommendations - Adopt a reserve management strategy; address issues with reserve assets and liabilities data, including possible inclusion of encumbered assets inflating reported reserves. - Establish Board’s Assets and Liabilities Committee (ALCO) and enhance Board oversight of FX reserve management. - Undertake a special audit of foreign exchange reserves and improve frequency and quality of reporting (IRFCL-format gross international reserves with separate line for pledged deposits). - Exchange rate policy advice - Rapid adjustment towards a market-clearing exchange rate is necessary given chronic FX shortages and low reserves; support adjustment with tight monetary policy and credible fiscal adjustment. - Over medium term, a sufficient REER adjustment in the range of 30 percent is necessary to improve competitiveness. - Prioritize development of a well-functioning FX interbank market; treat the 30 percent surrender requirement as temporary. ### Data shortcomings and capacity development (CD) - Data gaps hamper surveillance: national accounts, fiscal, monetary, and external sector statistics shortcomings detailed. - STA and other TA missions engaged to improve SRFs, CPI, BOP, and monetary reporting; RBM started reporting SRFs and an independent line for pledged deposits. - CD priorities include cash management, implementing DRM strategy, improving reserve management, FX market development, central bank operations, trade and monetary and financial statistics, and strengthening debt recording. --- ### Governance, PFM, and anti-corruption measures ### Governance weaknesses and actions - Weaknesses are long-standing; current administration has taken action but more efforts needed. - Follow-up on mismanagement of COVID-19 funds: NAO auditing two additional tranches of MWK 17.2 billion and MWK 5.3 billion with a view to finalize reports by end-December 2021. - Publication of COVID-19 procurement details on PPDA website ongoing but significantly delayed. - Authorities strengthening Anti-Corruption Bureau, Financial Intelligence Authority, and PPDA. ### Policy advice (macro-critical) - Address fiscal governance weaknesses and reduce corruption vulnerabilities in PFM, fiscal transparency, and procurement. - Swiftly implement PFM reforms and publish timely comprehensive IFMIS-generated fiscal reports. - Complete remaining COVID-19 spending audits and take follow-up actions on NAO findings; IMF staff ready to provide TA for auditing emergency spending. - Strengthen reserve management and address governance weaknesses identified by the Safeguards Assessment. ### Arrears and transparency commitments (COVID-19 spending) - Implementation date for the comprehensive audit: “within 180 days after the end of the pandemic.” - Publication commitments (from October 2020 LOI) include: publish procurement documentation on PPDA website; publish ex-post validation of delivery; quarterly statements on commitments and payments of COVID-19 related activities within 90 days after quarter; specify COVID-19 related costs in monthly salary report within 3 weeks after month; National Audit Office to submit quarterly audits within 180 days after the end of each quarter and publish comprehensive audit within 180 days after the end of the pandemic. --- ### Capacity Development (CD) strategy and structural priorities ### CD strategic focus and TA modalities - CD strategy will support IFMIS roll-out gains across budget preparation, cash management, commitment control, banking arrangements, accountability, and payment efficiency. - TA priorities: PFM, DRM/tax policy and revenue administration, RBM reserve and FX market management, statistics, and strengthening the National Audit Office. - Major TA providers: FAD, LEG, MCM, STA, AFRITAC East, and resident FAD advisors. ### PFM, DRM, statistics and RBM priorities - PFM: complete IFMIS implementation; verify arrears (July 1, 2017–June 30, 2020); strengthen fiscal risk management and SOE oversight; improve public investment management. - DRM: support quantifying and implementing DRMS; assess ITAS and tax compliance, customs controls, VAT compliance, and MRA integrity. - Statistics: improve national accounts (including GDP revision policy), BOP, monetary statistics (SRFs), CPI update, broaden fiscal statistics coverage and debt statistics. - RBM: deepen interbank FX market and improve FX reserve management. ### Human capital and education (Annex VI) - Net enrollment: 90 percent primary; 15 percent secondary. - Primary school completion rate: 52 percent. - Transition rate to secondary school: 38 percent. - Repetition rate for std1: 33 percent. - Pupil-teacher ratios: twice the world average for primary and four times the world average for secondary. - Gender issues: secondary-school dropout rate for girls more than double that of boys; marriage affects 42 percent of girls (leading cause of dropout). --- ### Climate resilience and inclusive growth (Annex VII) ### Vulnerability and impacts - Malawi vulnerable to frequent climate-induced disasters: eight drought episodes (1980–2020); 30 flood episodes in past two decades. - Natural disasters have lasting impacts: real GDP growth does not return to pre-disaster rate despite increases in domestic capital spending; agricultural households particularly hard hit. ### Deforestation, energy use, and drivers - Deforestation exacerbates vulnerability to floods and landslides; drivers include demand for fuelwood (households and tobacco industry), agriculture land clearing, forest fires, illegal timber and charcoal production, and lack of low-cost alternative energy sources. ### Policy directions - Prioritize cost-effective investment in alternative energy sources and sustainable power generation mix guided by Malawi Renewable Energy Strategy (2017). - Prioritize investment in education and human capital to support resilience, income diversification, and disaster preparedness. - Rebalance agricultural spending away from fiscally unsustainable maize input subsidies toward investments that promote diversification and growth. --- ### Authorities’ views and engagement with creditors - Authorities broadly concur with staff’s assessment that capacity to repay the Fund is currently weak and concur with policies needed to address risks. - Actions underway: - Engaging with creditors, including RDBs, for rescheduling existing debt. - Engaging with traditional and nontraditional donors for possible voluntary debt buy-back schemes to offset more expensive debt. - Discussions with World Bank on better targeting of AIP; VAT Act review removing banking fees and charges from VAT exempt list. - New PFM Act to include a Debt Retirement Fund; IFMIS rolled out to all MDAs in July 2021. --- *Source: IMF staff report — "1. Reform Scenario, 2021-25" (Content unit: 1mwiea2021001).* ### 1. Reform Scenario, 2021-25 __________________________________________________________________________ 14 ### 1. Reform Scenario, 2021-25 ### Context and recent policy shifts - New administration (since mid-2020) aims for inclusive and self-reliant growth under "Malawi Vision 2063" anchored on the Sustainable Development Goals, targeting upper-middle income status by 2063. - Authorities have prioritized improved governance and transparency and addressed gaps that led to the loss of budget support; actions include personnel changes and a Vice President’s Taskforce to introduce structural changes to the civil service, allowances, employment contracts, and public procurement. - Authorities requested an arrangement under the Extended Credit Facility (ECF). A special audit of foreign exchange reserves in response to noncomplying disbursements (“misreporting”) under the 2018 ECF arrangement has been committed to; resolving the misreporting case is a pre-condition for a new Fund arrangement. ### Macroeconomic imbalances and drivers - Fiscal deficits and financing - Budget deficits have remained high, financed mainly by costly domestic borrowing. - External budget support and grants averaged 5.8 percent of GDP during 2005-13 but fell to 1.8 percent of GDP since the 2013 “Cashgate”. - Rising domestic financing since 2018 and non-concessional regional development bank (RDB) borrowing contributed to public debt of 55 percent of GDP in 2020 (of which 10 percent of GDP was non-concessional external debt). - Current account and reserves - Current account deficits fluctuated around 12-15 percent of GDP since 2015. - Gross international reserves declined to $406 million (or about 1½ months of next year’s imports) at end-October 2021. - Reserve Bank of Malawi (RBM) FX intervention and short-term currency swaps with RDBs were used to maintain a broadly stable nominal exchange rate; these swaps were scaled back by the new RBM leadership since July 2020. - COVID-19 impacts and policy response - The authorities eased fiscal and monetary policy since March 2020. - National COVID-19 Vaccine Deployment Plan targets reaching 20 percent of the population (3.8 million) by end-2021 via COVAX; an additional 100,000 doses covering 0.5 percent of the population secured through the African Union. As of mid-October, 2.8 percent of the total population was fully vaccinated. - Growth and sectoral vulnerabilities - Growth is highly vulnerable to extreme weather events (droughts, floods, Cyclone Idai) and to tobacco export stagnation. - Real GDP growth declined from 5.4 percent in 2019 to 0.9 percent in 2020. - Real GDP growth in 2021 is projected to pick up to 2.2 percent, helped by a good harvest. ### Inflation, exchange rate, and monetary stance - Inflation developments - Non-food inflation rose from 4.9 percent at end-2020 to 7.2 percent at end-September 2021. - Food inflation remained above 10 percent despite a good harvest. - Headline inflation increased from 7.6 percent at end-2020 to 8.9 percent at end-September 2021. - Exchange rate and reserves management - Pressure on inflation is emerging following monetary expansion and currency depreciation since mid-2020 as the RBM scaled back FX intervention. - GIR declined from US$766 million at end-June 2020 to US$406 million at end-October 2021. - GIR figures reported include encumbered deposits; these will be excluded once audited numbers become available. ### External position, debt, and sustainability - External position - Malawi’s external position in 2020 is assessed to be substantially weaker than the level implied by medium-term fundamentals and desired policies. - Current account deficit expanded from 12.6 percent of GDP in 2019 to 13.6 percent of GDP in 2020. - Malawi’s GIR at 2 months of next year’s imports is inadequate to absorb external shocks; staff’s reserve adequacy model estimates an adequate level at 3.9 months of next year’s imports for credit constrained economies. - Debt levels and outlook - Public debt stood at 55 percent of GDP in 2020; staff baseline projects public debt would increase from 54.8 percent of GDP in 2020 to 85.7 percent of GDP in 2026 under current policies. - External debt: 10 percent of GDP was non-concessional external debt in 2020. - Debt distress assessment: external and public debts are assessed in "high risk of debt distress"; external and public debt are assessed as unsustainable under current policies. - Drivers worsening debt service: change in debt carrying capacity from medium to low; DSA moved from currency to residency basis to classify medium-term domestic bonds held by nonresidents as external debt; conversion of RBM short-term reserve liabilities to medium-term external debt. - Existence of external arrears at end-2020 which were rescheduled in 2021; repayments to Spain started in May 2021 and will continue to November 2023; repayments to TDB met up to April 2022. - External financing needs - External financing needed (financing gap) is estimated at about 4-5 percent of GDP each year in the medium term. - Covering financing needs in staff baseline relies on: (i) disbursement of ratified but undisbursed concessional loans; (ii) additional nonconcessional external borrowing (including nonresident participation in the domestic debt market); and (iii) net domestic financing. ### Outlook and projections (under announced policies) - Growth - Staff projects gradual recovery to reach 4.5 percent growth by 2023, amounting to a small positive per capita growth. - The projection assumes: (i) sustained increase in public investment relative to past decade levels with strong fiscal multipliers of public investment; (ii) maintenance of a fiscal deficit on the order of 10 percent of GDP over the medium term (and external current account deficits of similar size); (iii) continued access to sizable and further growing RDB financing as well as domestic borrowing to cover large financing gaps. - Authorities project a higher and near-term impact of domestically financed capital spending on growth than staff; authorities are exploring the mining sector for investment and growth potential. - Inflation - CPI inflation projected at 10 percent at end-2021 and about 6.8 percent at the end of the medium term, conditional on a well anchored monetary policy stance. - Reserves and vulnerability - Gross international reserves projected to remain at about 1½ months of next year’s imports with financial support from RDBs, leaving Malawi vulnerable to shocks. - Reserve liabilities (currency swaps and trade credit) projected to increase during the medium term. - Limited buffers would be available to absorb external shocks such as adverse climate events. ### Risks and spillovers - Downside risks (tilted to the downside) - High-probability, high-impact risk: sudden stop in RDB financing could trigger abrupt real exchange rate adjustment, import compression, severe impacts on growth and financial stability, and adverse effects on the most vulnerable. - Other risks: another COVID-19 wave; weather-related shocks; governance issues leading to inefficient public resource use and delays in PFM reforms and domestic revenue mobilization; fiscal dominance in monetary policy; further accumulation of external non-concessional borrowing. - If these risks materialize, an abrupt adjustment may be inevitable. - Upside risks - Faster recovery supported by the mining sector, successful resolution of unsustainable debt service, and strong reforms program implementation could boost confidence and pave the way for resumption of budget support from development partners. - Transmission of global conditions - Inward spillovers of easy liquidity in advanced economies have been channeled through RDBs; Malawi’s access to nonconcessional RDB financing has been supported by ample global liquidity that made on-lending attractive; normalization of advanced economy monetary policy could reduce RDB appetite and trigger a sudden stop. ### Policy implications and authorities’ intentions - Preconditions for IMF support and donor catalysis - Restoring debt sustainability in the medium term is a pre-requisite for IMF support; sizeable support from the international community, including nondebt creating flows (debt relief and budget support) from RDBs and other partners, is vital because adjustment alone cannot restore debt sustainability. - Policy priorities signaled by authorities - Implement revenue measures, manage expenditures, focus on export diversification to reduce fiscal and current account deficits. - Continue governance and transparency reforms, complete special audit of foreign exchange reserves, and resolve misreporting to regain donor confidence and budget support. *Source: IMF staff report — "1. Reform Scenario, 2021-25" (Content unit: 1mwiea2021001).* ### 16. In the authorities’ assessment, the fiduciary environment around the recently issued ### 1mwiea2021001 - Excerpt (Sections 16–34) ### Fiduciary environment and governance risk - The authorities’ assessment: the fiduciary environment around the recently issued Local Currency Infrastructure Bond is very good and funds are ringfenced that the risk of funds being misused is very minimal. - Overall characterization of governance risk by authorities: medium. - Governance arrangements for both local and foreign financed projects: Project Steering Committees, Technical Committees and mandatory external annual audit. ### Debt sustainability actions and creditor engagement - Authorities’ actions: - Engaging with creditors, including the RDBs. - Engaging with RDBs and other donors for possible voluntary debt buy back schemes to offset more expensive debt. - Context and strategic anchor: - As a fragile state, Malawi needs donor budget support as borrowing on nonconcessional terms to meet basic spending needs of a rapidly expanding population is not sustainable. - Fiscal and external policy effort should be anchored around debt-stabilizing primary fiscal and current account balances guided by the DSA; combined with the authorities’ immediate and upfront actions to restore debt sustainability. ### Fiscal policy — background and recent developments - Historical challenges: - Expenditure overruns due to weak commitment controls, revenue shortfalls due to optimistic budget projections, and rising domestic borrowing. - Withdrawal of external budget support and grants financing since 2013; domestic primary deficit remained at around 1 percent for several years. - Costly domestic borrowing resulted in a rapid increase in interest payments, widening the overall deficit. - Recent outturns and drivers: - Expenditure expanded from 19.6 percent of GDP in 2018/19 to an estimated 22.2 percent of GDP in 2020/21. - Drivers include COVID-19 containment, one-off expenditures (e.g., for the 2019-2020 elections), a civil service wage increase in October 2020, and expansion of the Affordable Input Program (AIP) from just under 1 million beneficiaries to 3.8 million beneficiaries increasing the cost from 0.5 percent of GDP to 1.5 percent of GDP. - Interest payments jumped from 2.9 percent of GDP to 3.8 percent of GDP in 2018/19 and 2020/21, respectively. - Revenue mobilization: - The authorities prepared the Domestic Revenue Mobilization Strategy (DRMS) with IMF and development partner support, focused on tax administration improvements and policy reform. - Implementation has begun on measures such as introducing an import withholding tax in the FY 2021/22 Budget. - Concurrently, the authorities increased the tax-free threshold in the Personal Income Tax (PIT), reducing the tax base. - Fiscal balances: - The overall deficit for FY2020/21 is estimated at 7.5 percent of GDP, well above the 5.8 percent of GDP seen in FY2019/20. - Compared to the projection in the October 2020 Staff Report, tax revenue outperformed in FY2020/21; expenditure outturn was slightly above projected, driven by higher interest payments and spending on goods and services, partly offset by delays in executing capital spending. - Medium-term stance: - The government plans to maintain the current fiscal policy stance through the medium term with a strong focus on capital expenditure for long-term inclusive growth. - Authorities are reviewing the VAT Act, including rationalizing the list of exempt and zero-rated items, which could lead to additional revenue. ### Arrears clearance - Authorities announced arrears clearance measures in September 2021. - Domestic arrears audited and verified: approximately MWK 158.9 billion (1.7 percent of GDP), reflecting commitments made up to June 2020. - Clearance strategy components: - Issuing zero-coupon promissory notes: MWK 145 billion (of which MWK 110 million has been issued as of August 2021). - Cash payments for small amounts outstanding: MWK 5 billion. - Tax refunds: MWK 9 billion. - These measures follow an earlier arrears clearance effort which ended in FY2018/19. ### Policy advice — restoring debt sustainability and fiscal consolidation - Near-term priorities: - Priority for expenditure on COVID-19 containment measures, administration of vaccines, and completion of capital expenditure projects started in FY2021/22. - Debt sustainability goal and fiscal anchors: - Restore debt sustainability by addressing legacy unsustainable debt and anchoring the fiscal program at a minimum reaching a debt stabilizing primary balance so that Malawi can return to a moderate risk of debt distress within the medium term. - Both public and external debt are assessed as unsustainable. - Primary deficit and adjustment path: - The primary deficit is projected at about 4.3 percent for FY2021/22. - Target: reach a balanced position not later than 2026. - Required pace of adjustment: equivalent to at least 1 percentage point of GDP adjustment during FY2022/23-FY2025/26. - Note: With this pace of adjustment, total public debt will continue to rise over the medium term and debt sustainability will not be restored under the baseline; however, it can help reduce the risk of debt distress to “moderate” in the medium term if supported by strong reforms and nondebt creating flows (e.g., debt relief and budget support grants). Delays or lack of support would make the size of adjustment larger and sharper. - Realism and governance: - Realism in budget forecasts and public financial management (PFM) reforms would help contain fiscal deficits and debt (¶25). ### Domestic Revenue Mobilization Strategy (DRMS) prioritization and targets - Ministerial-level guidance is needed to determine policy priorities and speed of implementation. - Revenue targets from DRMS: - Aim to raise at least an additional 2 percent of GDP (cumulative) of revenue from tax policy measures such as broadening the VAT and CIT bases, reforming excise and carbon taxes, and further reforming the PIT. - Tax administration measures should raise, as a minimum, an additional 0.5 percent of GDP (cumulative) over the medium term. - Text Table 1 (summary changes relative to FY 2020/21, in percent of GDP) highlights: - Domestic Revenue increases: 0.7 (2021/22), 1.1 (2022/23), 1.6 (2023/24), 2.2 (2024/25). - Policy measures contributing to revenue: 0.3 (2021/22), 0.7 (2022/23), 1.3 (2023/24), 2.0 (2024/25). - Tax administration measures: 0.0 (2021/22), 0.1 (2022/23), 0.3 (2023/24), 0.5 (2024/25). - Expenditure (excl. interest and foreign-financed development spending) changes: 0.2 (2021/22), (1.1) (2022/23), (1.3) (2023/24), (1.6) (2024/25). - Overall Balance changes: (0.5) (2021/22), 0.0 (2022/23), 0.3 (2023/24), 1.0 (2024/25). - Domestic Primary balance changes: 0.5 (2021/22), 2.2 (2022/23), 2.9 (2023/24), 3.8 (2024/25). ### Expenditure reprioritization and PFM improvements - Reprioritization goals: - Rationalize expenditure by curtailing growth in wages; reform the AIP and goods and services spending; and reduce non-critical spending. - Expected fiscal space freed: 2 percent of GDP (Text table 1), part redirected to development expenditure aligned with Vision 2063 and post-pandemic recovery plan. - Commitment controls and IFMIS: - Improvements in commitment controls are critical to prevent arrears accumulation, contain public debt size, and strengthen fiscal governance. - IFMIS rollout has accelerated and will help with (i) expenditure control, particularly multi-year commitments, and (ii) timely reconciliation of revenue, expenditure and financing data across institutions, enhancing debt data management. - Interim changes in business processes and culture are needed alongside high-level political commitment, communication, and incentives for MDAs. - Important reforms: complete IFMIS implementation, passage of the Public Financial Management (PFM) Act, and publication of a comprehensive monthly fiscal report building on existing quarterly budget performance reports. - If arrears continue to accumulate, a more strategic clearance strategy is needed (prioritization, negotiation with creditors) rather than relying on promissory notes alone. ### Social spending and protection of vulnerable groups - Social spending to protect the vulnerable (health and social cash transfers) is largely off-budget and funded by development partners. - Recommendation: review and adjust the size of transfers for inflation so they continue to cover basic consumption needs of the most vulnerable households. ### Reform scenario (Box 1) — 2021–25 - Objective: stabilize public debt and return Malawi to moderate risk of debt distress within the medium term. - Fiscal adjustment: - Size of fiscal adjustments set at about 1 percentage point of GDP each year, consistent with policy adjustments identified in technical assistance reports (Text Table 1). - External sector adjustment: - Corresponding external sector adjustment of 1½ percent of GDP each year, supported by greater exchange rate flexibility and stronger monetary and fiscal policy. - Financing gap: - The reform scenario has a financing gap of about US$1.6 billion or about 4 percent of GDP each year in the medium term. - If the gap is financed by nonconcessional borrowing, the risk of debt distress will remain high. - If the gap is filled by nondebt creating flows (e.g., debt relief and budget support grants), Malawi can return to a moderate risk of debt distress. - Any reform delays would make the size of adjustment larger and more abrupt. - Baseline note: - The baseline assumes the external financing gap would be closed by additional borrowing from RDBs, with the stock of debt increasing from US$0.9 billion in 2020 to US$3.5 billion by 2025. Residual fiscal financing gaps would be covered by domestic borrowing. ### Authorities’ views and risks - Authorities’ positions: - Understand need for fiscal adjustment and working on reforms to narrow the deficit. - Discussions with the World Bank on better targeting of the AIP are ongoing. - VAT Act review has removed banking fees and charges from the list of VAT exempt items. - User fees and charges under review; introduction of toll fees to fund road maintenance announced. - The new PFM Act will include creation of a Debt Retirement Fund to retire short term debt; new revenue measures for this fund are under development. - Distinguish between borrowing for current expenditure and borrowing to finance infrastructure investment; ringfenced share of new debt issuance for key infrastructure projects. - Optimistic on projected revenue path due to tax administration initiatives, tax incentives review, renewed mining sector interest, and gold market reforms. - Confident in PFM reforms: IFMIS rolled out to all MDAs in July 2021 and the new PFM Act expected to enhance commitment control and fiscal reporting. - Key risk: - Main risk under both baseline and reform scenarios is a sudden stop of available financing, especially from regional development banks. If realized, an abrupt forced adjustment would significantly affect growth, financial stability, and the most vulnerable. ### Monetary policy and financial sector background - Monetary policy stance: - Accommodative in 2020. - RBM reduced the policy rate to 12 percent (by 150 basis points) in November 2020 and has kept it steady since then. - Not fully sterilizing the monetary impact of the decline in foreign exchange intervention resulted in reserve money and broad money year-on-year growth rising 33 percent and 25 percent, respectively, in September 2021. - Liquidity and banking measures: - Emergency Liquidity Assistance (ELA) framework introduced; used for one commercial bank in April 2021. - Debt moratorium and restructuring of loans to SMEs remains in place, to be approved on a case-by-case basis. - Share of nonperforming loans (NPLs) stabilized to 6.4 percent at end-July from around 8 percent in preceding months. - Based on available data, the banking sector remains well capitalized, liquid and profitable. *MALAWI — INTERNATIONAL MONETARY FUND (excerpt).* ### 35. The monetary framework needs to remain anchored on containing reserve money ### 35. The monetary framework needs to remain anchored on containing reserve money ### Monetary policy framework and liquidity management - Staff recommendation: keep the monetary framework anchored on containing reserve money growth to stabilize inflation pressures. - RBM should allow for greater flexibility in the exchange rate (¶40) while maintaining price stability as its primary objective. - Suggested RBM instruments to drain excess liquidity: - deposit auctions - sales of its holdings of government securities - issuance of RBM's own securities - Authorities’ view: - Agree monetary policy needs to be stronger to counteract inflationary pressure expected from greater exchange rate flexibility. - RBM is concerned stronger monetary policy could increase the cost of borrowing for the government and private sector investments. ### Financial sector supervision and credit risk - Staff findings and recommendations: - RBM’s and commercial banks’ exposures to government securities need close monitoring. - Loan and collateral quality needs reassessment to promote financial sector stability. - Given high credit growth, need improved credit risk management and development of micro and macroprudential policy tools. - Authorities’ view: - Agree on need for improved financial sector supervision and are seeking relevant technical assistance from the Fund. ### Rebuilding external buffers, exchange rate, and reserves - Background facts: - Trade deficit widened further in 2020. - Tobacco exports have been on a declining trend since 2014; in 2020 U.S. suspension of imports of Malawi's tobacco and COVID-19 lowered tobacco and other exports. - Imports continued to increase even when fuel prices were declining; 2020 increases partly reflect COVID-19 related imports and imports of fertilizers in support of the AIP. - The REER appreciated by over 30 percent since 2016 partly due to limited movement in the nominal exchange rate. - The current account deficit increased from 6 percent in 2014 to 13.6 percent of GDP in 2020. - RBM’s gross reserve assets declined to below adequate levels (¶8). - In August 2021, RBM re-introduced a 30 percent surrender requirement on export proceeds to manage foreign exchange shortages while winding down RBM’s role as supplier of foreign exchange. - The SDR allocation, approved in August 2021, provided liquidity support equivalent to about US$190 million or about 1.6 percent of GDP; it was transferred to the Government of Malawi and sold to RBM in exchange for Malawian Kwacha to meet short-term FX reserve liabilities. - Policy advice (key points): - A rapid adjustment towards a market-clearing exchange rate is necessary given chronic FX shortages and low reserves; anticipation of future adjustment may exacerbate hoarding. - Support the adjustment with a tight monetary policy stance; an adjustment may be accompanied by a temporary spike in prices but need not be followed by prolonged Kwacha depreciation and inflation if RBM contains reserve money growth (Text Table 2). - Support the adjustment with a credible fiscal adjustment program (¶19); note historical mismatch in 2012 episode where deficit from 2012/13 to 2015/16 averaged 7 percent of GDP and in 2012/13 widened by 2 percent of GDP (from 5.8 to 7.8 percent), undermining monetary tightening. - Over the medium term, a sufficient REER adjustment, in the range of 30 percent, is necessary to improve export competitiveness, contain import growth, and bring the current account deficit to more sustainable levels. - Calibrate energy strategy carefully: include cost-effective investment in alternative energy sources and move towards a sustainable power generation mix guided by Malawi Renewable Energy Strategy (2017); transition may pressure the FX market. - RBM communications should be transparent and timely to enhance effectiveness of monetary and exchange rate policies. - Foreign exchange market development: - The temporary 30 percent surrender requirement on export proceeds should be used only temporarily. - Priority is to develop a well-functioning FX interbank market that allows transparent currency exchange and facilitates price discovery. - Authorities’ views on exchange rate and FX market: - Prefer gradual exchange rate adjustment; concerned greater flexibility will cause a spike in inflation as in 2012. - RBM will remain vigilant and stand ready to tighten monetary policy as needed. - RBM is addressing obstacles to FX market development, including eliminating the daily 5 Kwacha band among bids submitted by banks. - Authorities view switching from net seller to net purchaser of forex in short to medium term as unattainable given tight liquidity. - Authorities are expanding the export base to include mining and non-traditional agricultural exports like legumes, maize, and industrial cannabis. - Authorities issued guidelines requiring authorized dealer banks to sell 30 percent of all their purchases on the interbank market to prop up activity; current FX market concentrated on retail trading with very limited interbank activity. ### Reserve management and data quality - Staff findings and recommendations: - RBM needs a reserve management strategy and must address issues with reserve assets and liabilities data promptly. - Strategy should clarify how RBM will manage risks associated with reserve assets and liabilities and how it will enhance recording, monitoring, and reporting. - RBM’s inability to reverse short-term currency swaps or stay within a cap of a revolving trade credit facility should not be repeated. - Issues with reserves data, especially possible inclusion of encumbered assets that inflate reported reserves, need prompt resolution. - Governance for risk assessment and management should follow recommendations of the recent safeguards assessment report. - RBM should improve data quality and reporting frequency and timeliness. - Authorities’ view: - Plan to adopt a reserve management strategy to rebuild reserves. - RBM committed to conduct a special audit of foreign exchange reserves and is scaling up internal reconciliation exercises and improving foreign exchange data quality and reporting frequency. ### Governance challenges and public financial management - Background facts: - Weaknesses in governance are long-standing; current administration has taken action but more efforts are needed. - Follow-up on mismanagement of COVID-19 funds: NAO auditing two additional tranches of MWK 17.2 billion and MWK 5.3 billion with a view to finalize reports by end-December 2021. - Implementation of COVID-19 related governance measures committed under two RCFs approved in April and October 2020 has been significantly delayed, though audits have started. - Quarterly statements on commitments and payments of COVID-19 related activities have been produced and published for FY19/20 and FY20/21 with significant delay. - Publication of COVID-19 procurement details on PPDA website is ongoing but updates significantly delayed. - Authorities are strengthening institutions with constitutional mandates to fight corruption: Anti-Corruption Bureau, Financial Intelligence Authority, and PPDA. - Policy advice: - Address fiscal governance weaknesses and reduce vulnerabilities to corruption in PFM, fiscal transparency, and procurement—these are macro-critical. - Swiftly implement PFM reforms and start publishing timely comprehensive IFMIS-generated fiscal reports (¶22). - Complete remaining COVID-19 spending audits and take follow-up actions on NAO findings; Fund staff stand ready to provide TA for auditing emergency spending and to discuss governance diagnostics. - Urged RBM to strengthen reserve management and address governance and control weaknesses identified by the Safeguards Assessment report; establish Board’s Assets and Liabilities Committee (ALCO) and enhance Board oversight of FX reserve management. - Authorities’ view: - Committed to regular reporting of expenditures and revenues; Access to Information law supports periodic sharing of fiscal reports with public/civil society. - Will publish key reports quarterly on internet and other media channels. - Institutionalized audits at local council level and state-owned enterprises. - Acting on NAO audit report findings to document cases and determine corrective actions including disciplinary or legal measures. - With IMF support, investigating possible noncomplying disbursements (“misreporting”) related to performance criteria on the floor of Net International Reserves (NIR) under the 2018 ECF arrangement; RBM has started submitting reserve numbers at higher frequency and improved data reporting, implementing TA recommendations including IRFCL-format gross international reserves data with a separate line for estimated size of pledged deposits (value subject to change upon completion of the special audit). ### Building the foundation for growth; public investment and resilience - Background facts: - Lack of sustained economic growth, frequent weather-related shocks, and fast population increase have left per capita income stagnant. - Extreme weather events depress productivity, damage housing and infrastructure, and risk food security. - Deforestation driven by tobacco plantations and rising demand for fuelwood aggravates vulnerability to floods, landslides, and food insecurity. - Population growth strains schooling and limits human capital investment highlighted in Malawi Vision 2063. - Domestically-financed development expenditure suffered cash rationing: between 2014/15 and 2019/20 domestically financed development expenditure was cut by a third of its budgeted level. - Domestic development expenditure fell from an average of 1.6 percent of GDP prior to 2013/14 to 0.9 percent of GDP. - Policy advice: - With no fiscal space, prioritizing and improving efficiency of public sector investment is critically important. - Prioritize investment in education and building resilience to climate change and weather-related shocks, notably floods and droughts. - Strengthen resilience in the agriculture sector including measures to halt deforestation, safeguard food security, and develop sustainable energy sources (e.g., solar and renewable energy sources). - Restore debt sustainability (see DSA). ### Post-Financing Assessment (PFA) and IMF credit exposure - Key facts: - Malawi’s outstanding credit to the Fund exceeds 200 percent of quota and therefore requires a Post-Financing Assessment (PFA). - Malawi’s 2018 ECF provided SDR 78.075 million (56.25 percent of Malawi’s quota), later augmented by SDR 27.76 million (20 percent of quota) in November 2019. - Following COVID-19, Malawi requested two RCFs in May and October 2020 providing total access of SDR 138.8 million (100 percent of quota). - Elevated Fund resource use increased Malawi’s outstanding credit to reach about 206 percent of quota, triggering the PFA. - Total outstanding credit based on existing drawings to the IMF is about 206 percent of quota, as of mid-November 2021, equivalent to 32 (20.9) percent of exports, and about 95 (69) percent of reserves in 2022 (2024). *Source: IMF staff report content (1mwiea2021001 - 35).* ### 61. Malawi’s capacity to repay the Fund is weak under current policies. Malawi’s capacity to ### 61. Malawi’s capacity to repay the Fund is weak under current policies ### Assessment of capacity to repay - Malawi’s capacity to repay has deteriorated from strong—at the time of the request for RCF in October 2020—to weak given current policies. - Key drivers of the weakening: - Macroeconomic imbalances. - High debt burden and debt vulnerabilities. - Much reduced budget support and other grants financing. - Consequences: - Sustained fiscal and current account deficits in the near to medium term. - Deterioration in gross reserves which are critically below reserve adequacy levels. - Significant financing risks, including: - Risk of a sudden stop of available financing, especially from RDBs, creating rollover risks to external debt. - Fiscal dominance that undermines effective monetary policy. - Delays in external adjustment and reserve accumulation. ### Policy recommendations to restore capacity and build buffers - Exchange rate and reserves: - Allow greater flexibility in the exchange rate to help contain external imbalances and rebuild reserves. - Support this with a well-functioning and transparent foreign exchange interbank market and a foreign exchange reserve management strategy. - Promptly address data shortcomings related to reserves, especially possible inclusion of encumbered assets that inflate reported reserves. - Fiscal policy and debt sustainability: - Adopt a strong fiscal adjustment program with pillars: - Redouble efforts on domestic revenue mobilization. - Reprioritize expenditure through curtailing growth in wages while safeguarding capital spending. - Reform the Affordable Input Program (AIP) and goods and services spending. - Strengthen public sector governance and institutions to safeguard scarce resources and strengthen policy effectiveness. - Restore debt sustainability over the medium term to moderate risk of debt distress. - Seek sizeable support from the international community, including RDBs, in the form of nondebt creating flows (e.g., debt relief and budget support). - Ensure realism in budget forecasts and implement public financial management (PFM) reforms. - Monetary and financial sector policy: - RBM should remain ready to tighten monetary policy in the face of inflationary pressures and stay vigilant on financial sector supervision. - Anchor the monetary program on containing reserve money growth. - Monitor RBM’s and commercial banks’ exposures to government securities given high public debt held by the banking sector. - Reserve governance and audits: - Undertake a special audit of foreign exchange reserves. - Govern reserve risk assessment and management guided by recommendations of the recent IMF Safeguards Assessment. - Temporary measures: - The surrender requirement reintroduced to address foreign exchange shortages is appropriate only as a temporary measure and should be lifted as conditions improve. ### Authorities' response - The authorities concurred with staff’s assessment that the capacity to repay the Fund is currently weak. - They broadly concurred with the policies needed to address risks to Malawi’s capacity to repay the IMF. - The authorities’ detailed views on the proposed policies in case risks materialize are presented in paragraphs 28–32 of the source. ### Safeguards and institutional issues - An updated safeguards assessment of the RBM found significant deterioration of safeguards since the 2018 assessment. - Governance arrangements, including Board oversight, and the internal control environment are considered weak. - Recommendations include: - Establish the Board as RBM’s main decision-making body responsible for oversight and policy formulation and introduce collegiality in executive management. - Amend the central bank legal framework to safeguard autonomy and enhance collegiality in executive management. - Strengthen foreign reserves management practices. - The governance structure for reserve risk assessment should follow the recent IMF Safeguards Assessment recommendations. ### Capacity development (CD) and data shortcomings - CD priorities (guided by Malawi’s Capacity Development Strategy and absorption capacity) will focus on: - Cash management and reporting within PFM. - Implementing domestic revenue mobilization strategy. - Improving foreign exchange reserve management. - Foreign exchange market development. - Improving central bank operations. - Improving trade and monetary and financial statistics. - Strengthening debt recording to expand coverage of fiscal and public sector debt statistics to a broader government perimeter. - Data shortcomings that hamper surveillance: - Need to enhance quality of rebased GDP numbers by improving data sources; reconciling GDP by production and by expenditure approach; and introducing a revision policy in line with international standards. - RBM has started implementing STA TA mission recommendations on Standardized Report Forms (SRF) and begun regular reporting of SRFs to IMF; public dissemination expected by end-December 2021. - Residual issues remain; STA remains engaged to address them. ### Staff appraisal and macroeconomic outlook - Pandemic and debt burden effects: - Malawi’s economy severely affected by the pandemic and debt burden, but signs of gradual recovery exist and daily COVID-19 positive cases remain relatively low. - Growth and inflation projections: - Real GDP growth in 2021 is projected to pick up to 2.2 percent from 0.9 percent in 2020. - Inflation is expected to increase to 9 percent in 2021 from 8.6 percent in 2020, driven by increases in prices for fuel, fertilizer and food. - Per capita growth remains in the negative region in 2021; medium-term outlook depends on continued external financing. - Financing gap and reserves: - The financing gap is estimated at about 4-5 percent of GDP each year. - External and public debt are assessed to be unsustainable under current policies. - RBM’s reserve assets are projected to reach 1½ month of next year’s imports by end-2021 despite emergency RCF assistance in 2020 and SDR allocation in 2021. - Risks: - Main risk is a sudden stop of available financing, especially from RDBs, potentially leading to abrupt real exchange rate adjustment, import compression, significant impacts on growth and financial stability, and adverse effects on the most vulnerable. - Restoring debt sustainability: - Requires addressing legacy unsustainable debt and anchoring fiscal policy to at least reach a debt stabilizing primary balance to return to a moderate risk of debt distress within the medium term. - Near-term priority: expenditure on COVID-19 containment measures and vaccine administration. - Medium-term priority: strong fiscal adjustment to stabilize public debt; delaying adjustment will exacerbate eventual adjustment needed. - Adjustment measures include domestic revenue mobilization, expenditure reprioritization (curtail wage growth, safeguard capital spending), AIP and goods and services reform, and reducing non-critical spending. ### Conclusions - The post-financing assessment (PFA) concludes Malawi’s capacity to repay the IMF is weak under current policies. - The assessment highlights urgent need to: - Restore debt sustainability. - Undertake policy reforms to rebuild fiscal and external buffers. - Secure support from development partners. - Data improvements, especially consolidated fiscal statistics and balance of payments data (notably foreign exchange reserves data), are critical to strengthen surveillance; IMF stands ready to support these efforts through technical assistance. *Source: IMF staff report excerpts on Malawi (post-financing assessment and staff appraisal).* ### 76. It is recommended that the next article IV consultation takes place on the standard 12- ### 1mwiea2021001 - 76. It is recommended that the next article IV consultation takes place on the standard 12- ### Recent Economic Developments (2000–21) - Real GDP growth: - Real GDP growth to reach 0.9 percent in 2020 from 5.4 percent in 2019. - Chart reference: Real GDP Growth, 2014-21 (Percent). - Inflation and money: - "While inflation has been stable, thanks to low food and fuel prices until recently, broad money growth is on the rise." - Inflation series shown as Headline inflation (y-o-y) and Non-food inflation (y-o-y). - Exchange rate and reserves: - "In turn, pressure on the exchange rate and passthrough effects on inflation are emerging..." - "External buffers declined to a critically low level." - Drivers of the decline in gross official reserves in 2020: "Swap open operations and other FX net outflows." - Exchange Rates series (Malawi Kwacha per U.S. dollar): RBM rate and Forex bureaux rate (Jan-18 to Sep-21 shown). - Gross International Reserves, 2017-21 (Million U.S. dollars) series displayed. - Trade composition and pressures: - "Fuel and fertilizers imports, with stagnant exports, weigh on widening trade and current account balances." - Exports and Imports, 2015 (USD million) depicted with Petroleum, Fertilizers, Tobacco exports, Merchandise trade balance. ### Fiscal Developments and Outlook (2014–21) - Revenue and expenditure: - "Revenues are holding up, while expenditure is exceeding previous years’ average partly due to emergency response." - "Overly optimistic budget revenue projections and lack of commitment control have led to an increase in net domestic financing." - Composition and execution: - "Interest payments and other recurrent spending have increased ... while capital spending has been under executed." - Public debt: - "Public debt to reach historically high levels." - Policy priority: - "Creating fiscal space is important to support investment in education, which will form the foundation of sustainable growth." - Charts and series: - Revenue and Expenditure, 2013-21 (percent of GDP). - Composition of Expenditure, 2005-21 (percent). - Malawi: Public Debt, 2006-20 (percent of GDP). - Difference between Execution and Budgeted, 2014-21 (MWK billion). ### Selected Economic Indicators, 2020–26 (Table 1 — key figures) - National accounts and prices: - GDP at constant market prices series: 0.9 2.2 2.2 2.2 3.5 4.5 4.0 4.0 4.1 (arranged across years 2020–26 as in table). - Nominal GDP (billions of Kwacha): 8,815 6,933 9,976 9,712 11,114 12,661 14,158 15,663 17,287. - GDP deflator: 8.5 8.5 8.5 7.8 10.6 9.0 7.5 6.4 6.0. - Consumer prices (end of period): 7.6 9.5 9.5 10.0 11.3 9.3 7.8 6.8 6.8. - Consumer prices (annual average): 8.6 9.5 9.5 9.0 11.7 9.8 8.4 7.2 6.8. - Investment and savings (percent of GDP): - National savings: -6.0 -5.9 -4.1 -6.5 -4.4 -3.3 -1.2 -0.8 -0.7. - Gross investment: 7.5 14.4 10.1 8.6 9.8 9.8 9.6 9.9 9.7. - Government investment (percent of GDP): 5.4 8.1 5.7 6.1 7.0 6.3 6.5 6.8 6.6. - Private investment (percent of GDP): 2.2 6.4 4.4 2.5 2.9 2.9 3.0 3.1 3.1. - Central government (fiscal year basis): - Revenue (percent of GDP): 14.9 20.0 14.1 14.8 14.3 14.3 14.4 14.3 14.4. - Tax and nontax revenue: 13.4 17.4 12.3 13.1 13.1 13.2 13.4 13.5 13.7. - Grants: 1.5 2.6 1.8 1.7 1.2 1.2 1.1 0.9 0.6. - Expenditure and net lending: 21.5 33.0 23.0 22.2 24.7 23.8 23.8 24.1 24.7. - Overall balance (excluding grants): -8.1 -15.6 -10.8 -9.1 -11.6 -10.6 -10.4 -10.6 -11.1. - Overall balance (including grants): -6.6 -13.0 -8.9 -7.4 -10.4 -9.5 -9.3 -9.7 -10.4. - Total domestic financing and financing gap/residual gap series listed in table. - Money and credit: - Broad money growth: 17.2 10.9 10.9 10.2 14.4 13.9 11.8 10.6 10.6. - Net foreign assets (change): -39.1 4.7 5.0 -19.9 -0.8 1.0 2.0 2.9 2.9. - Net domestic assets and net claims on government series as in table. - Credit to the private sector (percent change): 16.4 11.7 11.7 30.1 14.2 12.6 10.1 9.4 7.5. - External sector (US$ millions): - Exports (goods and services): 966 1,245 1,246 1,078 1,197 1,331 1,522 1,704 1,890. - Imports (goods and services): 3,052 3,402 3,410 3,208 3,298 3,262 3,248 3,520 3,693. - Gross official reserves (US$ millions): 566 958 974 394 402 415 461 498 511. - Months of imports (reserves): 2.1 3.3 3.4 1.4 1.5 1.5 1.6 1.6 1.6. - Current account (percent of GDP): - Current account: -13.6 -20.3 -14.1 -15.0 -14.3 -12.6 -10.8 -10.7 -10.4. - Debt indicators (percent of GDP unless otherwise indicated): - External debt (public sector): 32.9 34.4 24.1 31.9 34.7 36.3 37.6 39.5 41.5. - Domestic public debt: 21.9 43.7 30.1 27.1 29.5 32.6 36.8 40.9 44.2. - Total public debt: 54.8 78.2 54.2 59.0 64.3 68.9 74.4 80.4 85.7. - NPV of public external debt (percent of exports): 171.6 148.6 149.3 153.5 169.9 179.6 25.0 26.5 27.9. ### Central Government Operations (Tables 2a and 2b — selected fiscal flows) - Revenue (Billion Kwacha, selected years): - REVENUE: 1,132.6 1,263.8 1,363.8 1,271.3 1,102.4 1,637.0 1,870.6 2,085.1 2,287.5 across 2018/19–2025/26. - Taxes: 986.7 1,068.7 1,136.0 1,044.1 978.0 1,451.9 1,666.8 1,877.3 2,103.7. - Grants: 109.3 126.6 157.9 170.3 91.7 132.8 137.5 133.6 101.7. - Expenditure (Billion Kwacha, selected lines): - EXPENDITURE total: 1,509.3 1,822.8 2,049.7 1,995.1 1,903.3 2,718.1 3,080.8 3,489.7 3,958.3. - Interest payments: 224.3 261.7 348.3 299.7 293.4 536.9 671.2 829.7 993.2. - Acquisition of Non-Financial Assets (Development Expenditure): 305.1 323.4 354.1 570.8 395.9 550.0 603.8 699.8 788.3. - Social Benefits: 110.9 124.8 244.4 221.8 287.2 334.6 347.0 353.4 376.0. - Fertiliser payments (Farm Input Subsidy Program prior to FY20/21): 28.4 30.1 121.1 129.7 189.0 196.0 200.6 201.2 217.0. - Balances and financing: - Overall Balance (incl. grants and discrepancy) (Billion Kwacha): -371.3 -494.2 -690.7 -723.8 -798.5 -1,081.1 -1,210.2 -1,404.6 -1,670.8. - Primary Balance: -147.0 -231.7 -337.6 -424.1 -505.1 -544.2 -538.9 -574.9 -677.6. - Domestic Primary Balance (Billion Kwacha): -66.9 -148.1 -233.9 -243.2 -395.6 -347.5 -317.8 -323.3 -373.5. - Net financing and components shown in table (foreign financing, domestic financing, amortization, financing gap). ### Monetary and Financial Sector (Tables 3a, 3b and banking indicators) - Central bank (Table 3a): - Monetary base (selected entries): 312 324 315 342 318 400 366 390 446 508 568 629 694 (Mar 2022–2026 series shown). - Net foreign assets (central bank) series: 258 -150 -251 -303 -405 -394 -189 -542 -562 -550 -508 -441 -364. - Annual growth of reserve money (percent): 14.1 4.8 -4.6 12.8 2.0 23.6 16.0 14.0 14.4 13.9 11.8 10.6 10.4. - 91-day treasury bill rate: 7.5 7.6 9.9 9.9 10.0 10.0 (periods shown). - NFA of the central bank (US$ millions): -91 -626 -655 -532 -511 -490 -231 -651 -601 -531 -451 -365 -281. - Depository corporations (Table 3b): - Broad money liabilities (Billions of Kwacha): 1,320 1,410 1,456 1,541 1,614 1,744 1,593 1,698 1,943 2,214 2,476 2,739 3,023. - Net foreign assets (NFA): 222 -147 -233 -183 -302 -269 -136 -489 -503 -483 -436 -364 -147. - Domestic claims and net claims on central government series provided. - Annual growth of broad money (percent): 7.5 6.8 12.1 17.2 22.3 32.1 13.0 16.6 14.4 13.9 11.8 10.6 10.4. - Annual growth of credit to the private sector (percent): 22.1 12.1 12.1 15.6 16.4 18.9 27.0 23.1 30.1 14.2 12.6 10.1 9.4 7.5. - Banking soundness: - Table 5 indicates Selected Banking Soundness Indicators, 2019–21 (headings only shown in source). ### External Sector and Balance of Payments (Tables 4a and 4b) - Current account and trade: - Current account balance (US$ millions): -1,389.9 -1,606.7 -1,819.3 -1,792.4 -1,614.5 -1,414.0 -1,433.6 -1,436.0 (2019–26 series). - Merchandise trade balance (US$ millions): -1,696.6 -1,911.5 -2,061.6 -2,024.3 -1,850.4 -1,649.1 -1,681.9 -1,683.6. - Exports (US$ millions): 996.8 784.8 892.6 1,005.4 1,130.7 1,313.1 1,487.2 1,664.0. - Of which Tobacco (US$ millions): 460.6 370.5 388.5 398.9 416.8 433.0 455.3 483.1. - Imports (US$ millions): -2,693.3 -2,696.3 -2,954.2 -3,029.7 -2,981.0 -2,962.2 -3,169.1 -3,347.6. - Of which Petroleum products: -232.0 -220.2 -292.0 -288.8 -289.4 -293.7 -305.6 -317.9. - Of which Fertilizers: -211.1 -238.4 -250.3 -260.3 -268.1 -276.2 -287.3 -296.0. - Capital and financial accounts: - Capital account balance (US$ millions): 938.0 1,036.9 1,110.4 1,052.3 978.9 840.2 713.0 628.3. - Project and dedicated grants: 143.8 156.2 152.4 147.0 138.5 124.7 94.1 77.8. - Off-budget project support: 794.1 880.7 958.0 905.3 840.4 715.5 618.9 550.5. - Financial account balance (US$ millions): 1,434.2 1,354.0 322.1 208.2 236.0 273.3 395.4 327.6. - Foreign direct investment (net): 104.8 91.8 93.8 157.4 160.9 164.0 182.8 198.3. - Medium- and long-term loans (net): 131.3 104.2 228.4 4.0 28.1 58.0 157.3 -35.5. - SDR allocation: 0.0 0.0 190.0 0.0 0.0 0.0 0.0 0.0. - Reserves and financing: - Overall balance (US$ millions): -23.8 -377.0 -386.8 -531.9 -399.6 -300.4 -325.1 -480.1. - Financing (US$ millions): 23.8 377.0 386.8 531.9 399.6 300.4 325.1 480.1. - Gross official reserves (US$ millions): 753.3 565.5 394.0 401.8 414.6 460.9 497.7 511.5. - Months of imports: 3.0 2.1 1.4 1.5 1.5 1.6 1.6 1.6. - Financing gap entries presented, including projected financing gaps. - Memo and ratios: - Current account balance (percent of GDP): -12.6 -13.6 -15.0 -14.3 -12.6 -10.8 -10.7 -10.4. - Merchandise trade balance (percent of GDP) and other percent-of-GDP series in Table 4b. - Nominal GDP (millions of U.S. dollars): 11,031 11,847 12,108 12,577 12,855 13,102 13,408 13,812 (2019–26 series). *Sources: Reserve Bank of Malawi; Ministry of Finance; Malawian authorities; and IMF staff estimates and projections.* ### 1. Regulatory Tier 1 capital to risk weighted assets17.018.518.817.617.420 ### 1mwiea2021001 - 1. Regulatory Tier 1 capital to risk weighted assets17.018.518.817.617.420 ### Banking sector indicators (capital, asset quality, earnings, liquidity) - Regulatory capital ratios - Regulatory Tier 1 capital to risk weighted assets: 17.0, 18.5, 18.8, 17.6, 17.4, 20 - Total regulatory capital to risk weighted assets: 21.0, 22.2, 22.0, 20.6, 20.8, 23.6 - Total capital to total assets (regulatory capital definition): 16.4, 16.0, 16.0, 13.5, 13.1, 14 - Asset composition and quality - Non-performing loans to gross loans and advances: 6.3, 5.8, 6.6, 6.2, 6.3, 8.3 - Provisions to non-performing loans: 38.6, 35.6, 35.6, 41.2, 32.9, 25 - Total loans and advances to total assets: 33.2, 31.7, 31.7, 33.0, 31.2, 30.8 - Foreign currency loans to total loans and advances: 20.9, 35.4, 35.4, 14.7, 14.7, 12.9 - Earnings and profitability - Return on assets (ROA): 2.7, 5.3, 3.2, 3.0, 3.0, 3.3 - Return on equity (ROE): 20.5, 41.9, 23.6, 197.4, 22.8, 24.5 - Non-interest expenses to gross income: 51.8, 56.2, 48.6, 49.1, 49.0, 46.3 - Interest margin to gross income: 59.6, 52.7, 48.6, 66.5, 65.6, 70.3 - Non-interest income to revenue: 33.6, 34.9, 34.9, 33.5, 34.4, 29.7 - Net interest income to assets: 8.4, 4.2, 4.2, 6.2, 8.0, 2.1 - Personnel expenses to non-interest expenses: 43.0, 42.2, 42.2, 42.6, 42.5, 43.7 - Liquidity - Liquid assets to deposits and short-term liabilities: 58.9, 60.1, 58.2, 57.2, 57.5, 56.8 - Total loans to total deposits: 54.2, 52.4, 52.4, 53.5, 50.0, 50 - Liquid assets to total assets: 39.8, 33.5, 40.0, 40.0, 39.6, 38.9 - Foreign exchange liabilities to total liabilities: 15.8, 13.5, 13.5, 13.8, 16.1, 14.3 *Source: Reserve Bank of Malawi.* ### Indicators of Capacity to Repay the Fund (selected projections, SDR millions and related shares) - Projected payments based on Existing Drawings (SDR millions) — Principal: 0.0, 25.8, 22.4, 23.1, 33.5, 47.9, 144.2, 44.6, 46.1, 247.7, 39.6, 92.2, 18.5, 18.5, 13.6, 8.7, 0.0 - Projected payments based on Existing Drawings — Charges and interest (SDR millions): 0.0, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1 - Projected Payments based on Existing and Prospective Drawings (SDR millions): 0.0, 25.8, 22.4, 23.1, 33.5, 47.9, 144.2, 44.6, 46.1, 247.7, 39.6, 92.2, 18.5, 18.5, 13.6, 8.7, 0.0 - US$ Millions (corresponding): 0.0, 37.8, 33.0, 34.3, 49.9, 71.7, 466.2, 46.2, 69.0, 714.3, 59.4, 333.3, 62.7, 27.8, 22.0, 13.0, 0.0 - Percent of exports of goods and services (selected): 0.0, 3.1, 2.4, 2.2, 2.9, 3.8, 3.1, 3.0, 2.9, 2.2, 1.1, 0.9, 0.6, 0.4, 0.0 - Percent of debt service (selected): 0.0, 7.1, 6.0, 6.3, 10.4, 11.3, 9.8, 4.5, 8.5, 8.6, 7.7, 3.5, 5.5, 2.7, 1.9, 1.2, 0.0 - Percent of quota (selected): 0.0, 18.6, 16.1, 16.7, 24.1, 34.5, 23.1, 87.8, 33.2, 34.3, 34.3, 28.6, 16.0, 13.3, 9.8, 6.3, 0.0 - Projected level of credit outstanding (SDR millions) based on Existing and Prospective Drawings (selected): 285.6, 259.8, 237.5, 214.3, 180.9, 133.0, 92.6, 55.2, 21.1, 0.0 - Corresponding US$ Millions (selected): 414.5, 381.3, 351.0, 318.7, 270.2, 199.6, 138.9, 82.8, 31.7, 0.0 - Percent of exports of goods and services (selected): 38.5, 31.9, 26.4, 20.9, 15.9, 10.6, 6.6, 3.6, 1.3, 0.0 - Percent of debt service (selected): 81.5, 72.2, 64.4, 58.6, 56.5, 31.7, 18.7, 10.2, 3.8, 0.0 - Percent of quota (selected): 205.8, 187.2, 171.1, 154.4, 130.3, 95.9, 66.7, 39.7, 15.2, 0.0 - Percent of gross official reserves (selected): 105.2, 94.9, 84.7, 69.1, 54.3, 39.0, 25.2, 11.7, 3.3, 0.0 - Percent of GDP (selected): 3.4, 3.0, 2.7, 2.4, 2.0, 1.4, 1.0, 0.5, 0.2, 0.0 - Memorandum items (selected levels) - Exports of goods and services (millions of U.S. dollars): 1,078; 1,197; 1,331; 1,522; 1,704; 1,890; 2,093; 2,305; 2,440; 2,592; 2,793; 2,942; 3,082; 3,286 - Debt service (millions of U.S. dollars): 508.4; 528.1; 543.5; 543.9; 478.5; 629.7; 740.8; 812.5; 829.7; 878.1; 940.1; 1,032.2; 1,087.5; 1,116.0 - Quota (SDR millions): 138.8 (repeated) - Gross official reserves (millions of U.S. dollars): 394, 402, 415, 461, 498, 511, 551, 708, 972, 1,305, 1,714, 2,130, 1,872, 1,738 - GDP (millions of U.S. dollars): 12,108; 12,577; 12,855; 13,102; 13,408; 13,812; 14,558; 15,409; 16,307; 17,258; 18,235; 19,304; 20,437; 21,723 *Source: IMF staff projections.* ### External Stability Assessment — key findings and policy implications - Overall assessment for 2020 - The external position in 2020 was substantially weaker than the level implied by medium-term fundamentals and desirable policies, after considering COVID-19 and natural disaster adjustors. - Current account deficit: expanded from 12.6 percent of GDP in 2019 to 13.6 percent of GDP in 2020. - Gross reserves: declined by close to US$200 million to US$ 565.5 million at end-2020; continued declining trend during first half of 2021. - Reserve adequacy (credit constrained model): 3.9 months of imports coverage. - CA model based REER assessment: shows a large overvaluation despite continued depreciation in most months in 2020; depreciation continues at a very slow pace in 2021. - Drivers of the 2020 current account widening - Exports: significant decline driven by COVID-19 impacts on goods trade and the U.S. ban on imports of Malawi’s tobacco (in effect between November 2019 and August 2020). - Imports: levelling-off overall, but strategic imports (fuel and fertilizers) significant. - Strategic imports and concerns - Fuel and fertilizers account historically for around 18 percent of total goods imports. - Fuel imports: uptick since 2015; largest increase (close to 350 million liters) in 2020; government energy strategy expects further increases. - Fertilizer imports: steady and significant increase since 2016; 2020 saw a significantly large value and volume of imports potentially related to inventory pileup and/or subsidy-related imports. - Concern that import costs must deliver results (increase in agricultural production or diversification of agricultural exports). - Policy recommendations to correct external imbalances - Well-calibrated fiscal and external adjustment supported by a feasible financing mix. - Further fiscal consolidation to provide room for imports financing. - Gradual exit from taking open swap positions. - More exchange rate adjustments. - Resumption of tobacco exports to the United States. - Immediate and upfront actions to restore debt sustainability given external debt vulnerabilities. ### Risk Assessment Matrix — selected high-probability/high-impact risks and policy responses - Global risks - Uncontrolled COVID-19 local outbreaks and subpar/volatile growth in affected countries: Relative likelihood High; Impact High. - Policy response: cushion income losses; increase spending on health and social protection; follow public health guidance; build health system capacity; use containment measures if required. - Global resurgence of the COVID-19 pandemic: Relative likelihood Medium; Impact High. - Policy response: faster containment via effective vaccine rollout. - Rising commodity prices amid bouts of volatility: Relative likelihood Medium; Impact Medium. - Policy response: tighten monetary policy, increase exchange rate flexibility, strengthen FX reserve buffer, gradually adjust energy and fertilizer prices to market, apply automatic fuel price adjustment mechanism, replenish fuel price stabilization. - Regional and domestic risks - Excessive external borrowing at non-concessional terms with a possibility of a sudden stop: Relative likelihood High; Impact High. - Policy response: prudent public investment program, secure concessional financing, assess borrowing impact on debt sustainability, commit to credible fiscal program to reduce debt distress to moderate level. - Governance weaknesses: Relative likelihood High; Impact High. - Policy response: strengthen institutions, roll out IFMIS, strengthen public investment management (PIM). - Delayed PFM reforms and lack of expenditure control: Relative likelihood Medium; Impact High. - Policy response: accelerate PFM reforms, strengthen corruption control, improve transparency and communication. - Fiscal dominance affecting monetary policy conduct: Relative likelihood Medium; Impact High. - Policy response: strengthen RBM independence, adopt clear monetary operational framework. - Higher frequency and severity of natural disasters related to climate change: Relative likelihood Medium; Impact High. - Policy response: build economic resilience through human capital investment and addressing deforestation. - Financial market shock risk - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia: Relative likelihood Medium; Impact High. - Policy response: upfront action on debt sustainability, avoid external non-concessional borrowing, rely on grants and highly concessional loans. ### Implementation status of 2018 Article IV recommendations (selected) - Restore macroeconomic stability - Political uncertainty, legacy debt burden, and COVID-19 resulted in persistent macroeconomic imbalances. - Strengthen fiscal position to preserve debt sustainability - Primary deficit: increased from 1.9 percent of GDP in FY2018/19 to 2.7 percent of GDP in FY2019/20 due to pandemic and election-related spending; domestic revenue mobilization showed little results. - Improve quality of public spending - Authorities undertook an audit of PSIP database and a pilot audit of two capital projects; efforts to reprioritize expenditure toward high-return and social-priority spending continue. - Strengthen governance and transparency - New administration took actions after NAO audit identified irregularities in COVID-19-related procurement and contracts; administrative actions taken against implicated civil servants. - Greater exchange rate flexibility - Exchange rate fairly stable leading to about 30 percent overvaluation and reserve depletion; obstacles to FX market development impede exchange rate movement. - Safeguard financial sector stability - Banking system remained stable and well-capitalized; non-performing loans remained stable; IFRS9 requirements are in place. ### Capacity Development Strategy — context and priorities - Political and strategic context - President Chakwera took office in June 2020; in January 2021 launched Malawi 2063 to entrench macroeconomic stability, higher inclusive growth, human capital investment, climate resilience, and debt sustainability. - Authorities aim to restore macroeconomic stability through reforms tackling governance weaknesses and strengthening PFM and cash management. - Past IMF TA and training results - PFM TA to Ministry of Finance: reforms commenced in bank reconciliation, payment efficiency, in-year/year-end reporting, budgeting, expenditure control, cash management, SOE oversight, public investment management, preparation for IFMIS roll-out, and fiscal risk management. - More effort needed on IFMIS implementation, cash management, and improving quality, analysis, use, and publication of data. - RBM TA: financial sector supervision and FPAS; FPAS TA on forecasting, inflation and monetary policy analysis supported modernization of monetary policy framework. - Statistics TA: progress toward improving quality and reporting of national accounts, monetary, BOP, government finance and financial statistics. *Source: Reserve Bank of Malawi.* ### 3. Going forward, the CD strategy for Malawi should focus on supporting the proposed ### 1mwiea2021001 - 3. Going forward, the CD strategy for Malawi should focus on supporting the proposed ### Overview and strategic focus - CD strategy will support the proposed program and the authorities’ objectives outlined in Malawi 2063 Vision. - Emphasis on delivering expected gains from the new IFMIS across budget preparation, cash management, commitment control, banking arrangements, accountability, and payment efficiency. - Lessons from the IFMIS piloting phase launched in July 2020 should be applied to ensure full rollout meets efficiency, security, expenditure control, accountability, and sustainability objectives. - TA priorities will span PFM, DRM/tax policy and revenue administration, RBM reserve and FX market management, statistics, and strengthening the National Audit Office. - Major TA providers expected to continue: FAD, LEG, MCM, and STA, with substantial delivery by AFRITAC East and resident FAD advisors. ### Public Finance Management (PFM) — priorities, objectives, and challenges - Priorities / Objectives: - Implementation of the new IFMIS as an enabler for key PFM reforms in budget preparation, expenditure control, bank reconciliation, cash management, payment efficiency and accountability. - Completion of the verification of arrears covering the period July 1, 2017-June 30, 2020 certified by the Auditor General to support the strategy of arrears clearance. - Strengthen the management of fiscal risks and the oversight of state-owned enterprises. - Improve public investment management systems. - Key challenges: - Steps to stabilize and optimize the new IFMIS before full roll out to all MDAs have been delayed and could potentially delay the full launch of the new IFMIS. - Technical issues from the pilot phase should be addressed through a security audit of the new IFMIS and investing in change management. - Additional support and closer coordination among development partners (DPs) required. ### Tax Policy and Revenue Administration (DRM) - TA objectives: - Support authorities in quantifying and implementing the Domestic Resource Mobilization (DRM) strategy. - Assess (and improve) ITAS implementation. - Diagnose issues in taxation of the informal sector and prepare compliance strategy for micro and small taxpayers. - Review and redesign customs clearing controls and procedures, improve VAT compliance, and promote integrity within MRA. - Timing and challenges: - The COVID-19 pandemic has slowed down finalization of the DRM strategy. - DRM implementation can only begin in the fiscal year (FY2021/22). ### Reserve Bank of Malawi (RBM) — FX reserve management and market development - TA will be tailored to: - Deepen interbank foreign exchange market. - Improve foreign exchange reserve management given the need to rebuild official foreign exchange reserves. ### Statistics — priorities and coverage - Continue improving compilation and dissemination of statistics and developing staff capacity, with focus on: - National accounts (including methodologies and metadata, establishing a GDP revision policy). - Balance of Payments (BOP) statistics. - Monetary and financial statistics in standard reporting format. - Other priority actions: - Update and improve the consumer price index. - Update periodic benchmark estimates for better national accounts estimates. - Broaden coverage of fiscal statistics to the entire public sector. - Expand sectoral and instrument coverage of public sector debt statistics. - Disseminate high frequency fiscal and debt data. ### Capacity building and institutional strengthening - CD strategy will support TA to strengthen the capacity of the National Audit Office. - Engagement strategy will consider varying absorption and implementation across institutions and work streams, working closely with other development partners. - Strategy is closely aligned with previous CSN developed in September 2020. ### Authorities’ views and specific CD interests - Authorities generally agree with staff on CD priorities. - Specific interest areas: - DRM Strategy (DRMS) financial modelling to forecast revenue from the extractive sector, including forecasting revenues for two prospective mining investment ventures and ongoing investment in gold mining. - Capacity development focused on tax expenditure reporting to inform Ministry of Finance implementation of the incentives scheme and exemptions. ### Country engagement strategy context — fragility, aid, and vulnerabilities - Official development assistance (ODA) is estimated to have averaged US$1.1 billion or 12 percent of GDP during 2005-20. - Despite support, sustaining growth has been challenging due to frequent natural disasters; GDP growth barely kept up with population growth, leaving per capita income stagnant. - Malawi is classified as fragile by the IMF; Malawi’s CPIA average is 3.2 (CPIA threshold cited for IMF fragility classification is 3.2 or lower). - World Bank fragility threshold referenced: CPIA threshold of 3.0 or lower (Malawi does not meet the World Bank’s fragile-state definition). - Less than 20 percent of Sustainable Development Goals (SDGs) have been met. - External shocks: - Over past two decades Malawi has had at least one climate shock every year. - Examples: El Niño-induced drought that resulted in nearly 40 percent of the population becoming food insecure; Cyclone Idai (Mar 2019); COVID-19 Pandemic (Mar 2020-Present). - Consequences of shocks include: declines in tax revenues when fiscal needs rise, inflationary pressures when crops are destroyed, pressures on international reserves, and jeopardized reform implementation. ### Sources and consequences of fragility — identified structural constraints - Key factors constraining inclusive growth and social outcomes: - Inadequate investment in human capital, especially education. - Dependence on rain-fed agriculture and lack of crop diversification; two thirds of the population employed in agriculture, contributing about 30 percent of GDP; agricultural exports (tobacco, tea, and sugar) account for about 80 percent of agricultural exports. - Insufficient infrastructure: electricity (dependence on hydroelectricity), irrigation, transport and trade logistics; frequent and lengthy electricity shortages; poor irrigation coverage; limited transport infrastructure and high transport costs. - Policy reference: Detailed policy measures elaborated in the National Resilience Strategy (NRS) 2018-30. ### Annex VI — Raising Educational Attainment: findings and implications - Rationale: - Human capital is critical to inclusive growth by raising productivity, diversifying income sources, and improving resilience. - Enrollment and completion statistics: - Net enrollment rate: 90 percent for primary school and 15 percent for secondary school. - Primary school completion rate: 52 percent. - Transition rate to secondary school: 38 percent. - Around 90 percent of children at primary school age attend primary school standard 1. - High repetition rate: 33 percent for std1. - By standard 5, probability of attending the next standard declines to about 50 percent of standard 1. - Pupil-teacher ratios: - Malawi’s pupil-teacher ratio is twice the world average for primary school and four times the world average for secondary school. - If number of teachers remains the same, pupil-teacher ratio is anticipated to worsen to 80 percent in secondary school by 2025 and stabilize at 2018 level for primary school. - Gender and dropout patterns: - In secondary school, dropout rate for girls is more than double that of boys due to marriage and pregnancy. - Marriage affects 42 percent of girls (noted elsewhere as a policy concern); marriage and pregnancy are leading causes for girls dropping out at secondary level. - Household determinants: - Income and wealth critically affect school attendance; father’s education level is a strong predictor of primary and secondary attendance. - Removing school fees is a positive step; sustaining per capita income growth, supporting poorer families with ancillary costs (e.g., uniforms, books), and expanding social cash transfer systems are important complementary measures. *International Monetary Fund — Malawi: Country Report excerpt* ### Annex VII. Fostering Climate Change Resilience and Inclusive ### Annex VII. Fostering Climate Change Resilience and Inclusive Growth ### Vulnerability and Frequency of Natural Disasters - Malawi is vulnerable to increasingly frequent and unpredictable climate-induced natural disasters, such as droughts, floods, and extreme storms. - Between 1980 and 2020, Malawi experienced eight episodes of droughts, leaving a dark history of hunger, food insecurity, and loss of lives. - Floods are increasing with 30 episodes in the past two decades. - Epidemics, often associated with storms and floods, rose in the 2000s but subsided in the 2010s. - In 2019, heavy rainfall in the Northern region triggered a deadly landslide. - The event study considers natural disasters that results in damage and losses of at least 0.5 percent of GDP. ### Economic and Fiscal Impacts of Disasters - Natural disasters have lasting impact on growth: - An event study finds that real GDP growth does not return to the pre-disaster rate despite increases in domestic capital spending (Text Figure 2). - Droughts and severe precipitation ravage both physical and human capital, depressing productivity even in the medium-term. - Agricultural households are especially hard hit by income loss, deterioration of farmland, destruction of household property, and food insecurity. - Flooding from extreme precipitation may trigger epidemics (e.g., cholera or malaria) through contamination of water supply and creation of stagnant water breeding grounds for disease vectors. - Rebuilding efforts usher economic recovery but fiscal responses stretch government resources, highlighting the macro-criticality of climate change in Malawi. ### Deforestation, Energy Use, and Drivers - Malawi has a long history of reforestation efforts dating back to the 1920s but with little success. - Deforestation compounds climate impacts by diminishing natural protection to floods and landslides; deforestation continues for multiple reasons: - Demand side: fuelwood continues to be the primary energy source used by households and the tobacco industry (Text Figure 4). - Forest thinning is aggravated by agriculture land clearing and forest fires. - Supply side failures of reforestation efforts include: - lack of sustained political support, - lack of funding, - facilitation of illegal timber, allocation of logging plots, production and trafficking of charcoal, - lack of low-cost alternative energy sources to fuelwoods, - lack of support by farmers who need to prioritize food security and other valuable resources such as fruit, timber, fiber, and medicine. ### Cost-Effective Investments and Policy Directions - Cost-effective investment in alternative energy sources to fuelwoods and in human capital is critical to promote resilience to climate-related shocks and inclusive growth. - Alternative energy policy guidance: - Move away from firewood and charcoal—which aggravate deforestation, land degradation, and vulnerability to floods and landslides leading to food insecurity—towards sustainable power generation mix, guided by Malawi Renewable Energy Strategy (2017). - Emphasize sustainability and cost effectiveness given the fiscal situation. - Human capital and education: - Education is shown to alleviate the extent per capita income would decline during storms (Text Figure 5). - Education supports income diversification toward off-farm agriculture activities and non-agriculture sources. - A more conscious approach to population growth through education can ease food security concerns and support conservation efforts. - Education can increase effectiveness of early warnings and thereby improve disaster preparedness (Annex VI). *Source: Annex VII. Fostering Climate Change Resilience and Inclusive Growth (provided content).* ### 2021. Implementation date for the ### 1mwiea2021001 - 2021. Implementation date for the ### COVID-19 spending transparency and audit implementation - Implementation date for the comprehensive audit is “within 180 days after the end of the pandemic.” - Reporting - Quarterly statements and reports on COVID-19 related spending across all MDAs have been produced and published for FY19/20 and FY20/21, but with a significant delay due to capacity constraints. - The Ministry of Finance has faced difficulties in separating COVID-19 spending from total spending based on data they receive from MDAs. - Publication commitments in the October 2020 LOI (RCF II): - Regularly publish procurement documentation—including tenders, bids, and names of awarded companies, products or services procured and their costs, and names of the beneficial owners of the awarded companies—on the Public Procurement and Disposal of Assets (PPDA) website (https://www.ppda.mw/#). - Apply these transparency measures to all COVID-19 related competitive bids and direct procurement by all Ministries, Agencies and Departments (MDAs). - Publish results of ex-post validation of delivery on a contract-by-contract basis on the PPDA website. - Publish (on the Ministry of Finance website and in the press) quarterly statements on commitments and payments of COVID-19 related activities (in all MDAs, within 90 days after the end of each quarter, beginning with FY 2019/20Q4). - Specify COVID-19 related costs in the published monthly salary report (costs of hiring additional medical staff, risk allowances, all within 3 weeks after the end of each month, beginning with the September 2020 report) as well as in the monthly budget funding and cash management analysis. - Publish funding earmarked for COVID-19 related spending, including revenues from any new taxes and disbursements of development partner grants and loans (within 3 weeks after the end of each month, beginning with revenues for September 2020). - The National Audit Office will submit quarterly audits of COVID-19 related spending (across all MDAs) to the Minister of Finance (within 180 days after the end of each quarter, beginning with FY 2019/20Q4) for submission to Cabinet and, once the pandemic abates, will publish and submit to Parliament a comprehensive audit of COVID-19-related spending (across all MDAs and the Agricultural Development and Marketing Corporation (ADMARC), within 180 days after the end of the pandemic). ### Fund relations — membership, quotas, and holdings - Membership Status: Joined: July 19, 1965; Article VIII - General Resources Account: - Quota 138.80 SDR Million 100.00 percent - Fund holdings of currency (exchange rate) 136.36 SDR Million 98.24 percent - Reserve tranche position 2.44 SDR Million 1.76 percent - SDR Department: - Net cumulative allocation 199.40 SDR Million 100.00 percent - Holdings 4.37 SDR Million 2.19 percent ### Outstanding purchases, loans, and recent arrangements - Outstanding Purchases and Loans: - RCF Loans 138.75 SDR Million 99.06 percent quota - ECF Arrangements 146.88 SDR Million 105.82 percent quota - Latest Financial Commitments — Arrangements (Amount Approved / Amount Drawn; SDR Million): - ECF 04/30/2018 — Expiration 09/24/2020 — 105.84 / 53.85 - ECF 07/23/2012 — Expiration 06/29/2017 — 138.80 / 138.80 - ECF 02/19/2010 — Expiration 07/22/2012 — 52.05 / 13.88 - Outright Loans: - RCF 10/02/2020 — Expiration 10/06/2020 — 72.31 / 72.31 - RCF 05/01/2020 — Expiration 05/05/2020 — 66.44 / 66.44 - Note: The 2018 ECF was cancelled by the authorities on September 24, 2020 as presented in the request in the October 2020 Request for Rapid Credit Financing. ### Overdue obligations and projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Forthcoming payments by year (columns correspond to 2021 2022 2023 2024 2025 in table): - Principal: 25.81 22.37 23.11 33.46 - Charges/Interest: 0.02 0.10 0.10 0.10 0.10 - Total: 0.02 25.91 22.47 23.21 33.56 ### HIPC Initiative, MDRI, and CCR implementation - Implementation of HIPC Initiative — Enhanced Framework: - Decision point date December 2000 - Assistance committed by all creditors (US$ Million) 1,057.00 - Of which: IMF assistance (US$ million) 45.27 (SDR equivalent in millions) 33.37 - Completion point date Aug 2006 - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member 33.37 - Interim assistance 11.57 - Completion point balance 21.80 - Additional disbursement of interest income 3.82 - Total disbursements 37.19 - Implementation of Multilateral Debt Relief Initiative (MDRI): - MDRI-eligible debt (SDR Million) 37.87 - Financed by: MDRI Trust 14.53 - Remaining HIPC resources 23.34 - Debt Relief by Facility (SDR Million): - December 2006 — N/A / PRGF 7.91 / Total 7.91 - September 2006 — 10.84 / 19.12 / 29.96 - Implementation of Catastrophe Containment and Relief (CCR): - Date of Board Decision / Date / Amount Committed (SDR million) / Amount Disbursed (SDR million): - N/A 04/13/2020 7.20 7.20 - N/A 10/02/2020 7.20 7.20 - N/A 04/01/2021 7.81 7.81 - N/A 10/06/2021 6.72 6.72 ### Safeguards assessment (RBM) - The 2021 safeguards assessment of the RBM is substantially completed. - Key findings: - It found significant deterioration of safeguards at the RBM since the 2018 assessment. - Governance arrangements and the internal control environment are considered weak. - Recommended reforms: - Governance reform should establish the Board as the RBM’s main decision-making body responsible for oversight and policy formulation, and introduce collegiality in executive management. - Amendments of the central bank legal framework are needed to safeguard the central bank’s autonomy and enhance collegiality in executive management. - The RBM will also need to strengthen management of foreign reserves. ### Exchange arrangements and Article IV - In May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent, and adopted a de jure floating exchange rate regime. - Since May 2012, the RBM has not set a target rate and allowed substantial volatility in the exchange rate. - The U.S. dollar exchange rates have shown remarkable stability since October 2016; accordingly, the de facto exchange rate arrangement is classified as “stabilized”. - Inflows of foreign exchange and swap arrangements allowed for increases in international reserves until 2020. - The exchange regime is free of restrictions and multiple currency practices. - The RBM reintroduced in August 2021 a surrender requirement to address foreign exchange shortages which is treated as a temporary measure to address extraordinary circumstances and should be lifted as conditions improve. - Article IV Consultation: The Executive Board concluded the last Article IV consultation with Malawi on April 30, 2018. ### Technical assistance (since 2015, as of November 2021) — selected items and modalities - Recent (2021) virtual missions and workshops focused on: - 11/21 FAD MOF Supporting implementation of a new ITAS — Virtual Mission - 11/21 AFE MOF Improving quality of general government fiscal data — Virtual Mission - 11/21 AFE NSO Compilation of GDP expenditure and production — Virtual Mission - 09/21 AFE MOF Using tax data for GDP compilation — Virtual Mission - 09/21 FAD MOF Developing a VAT compliance improvement plan — Virtual Mission - 09/21 FAD MOF Integrating performance budgeting and IT systems — Virtual Mission - 09/21 FAD MOF Excise management — Virtual Mission - 08/21 AFE MOF Strengthening project appraisal and selection — Virtual Mission - 07/21 AFE NSO Continued compilation of GDP expenditure — Virtual Mission - 07/21 FAD MOF Audit of high risk sectors for VAT — Virtual Mission - 06/21 STA NSO CPI Update — Virtual Mission - 05/21 MCM RBM Principles for financial market infrastructures training — Workshop - 05/21 MCM RBM Review of oversight framework — Workshop - 04/21 STA RBM Monetary and financial statistics — Virtual Mission - 04/21 FAD MOF Strengthen excise management — Virtual Mission - 03/21 STA RBM External sector statistics — Virtual Mission - Historical missions (2015–2020) covered topics including Macro-fiscal forecasting, Supply and use tables, Monetary policy operations, External sector statistics, National Accounts, TSA/IFMIS, Revenue administration, PFM, debt management, banking supervision, and many others (listed with dates and modalities in the source). ### Joint Managerial Action Plan (as of November 9, 2021) — selected World Bank analytical products and lending expected delivery dates - Analytical and Advisory Activities: - Impact Evaluation of Emergency Response and Post Crash Care in Malawi and Tanzania — April 29, 2022 - Using Remote Tracking to Detect and Deter Medications Theft in Malawi — December 22, 2021 - Malawi Poverty Assessment FY21 — March 28, 2022 - Malawi Economic Monitor — May 31, 2022 - Malawi: Overcoming Challenges to Transform Human Capital — May 20, 2022 - Malawi Country Gender Assessment and Evaluation of Coordinated Response to GBV/SEA — November 30, 2021 - Malawi Transport InfraSAP2.0 — June 30, 2022 - Malawi programmatic poverty analysis on project outcomes and poverty/vulnerability using RFMS — June 2, 2023 - Malawi: Energy Sector Financial Strengthening — August 31, 2022 - Mobilizing Long-term Finance in Malawi — June 28, 2022 - Malawi Country Climate and Development Report — July 29, 2022 - Malawi: A Deep-Dive Study for Promoting Resilient Urban Development and Driving Sustainable Regional Growth — June 22, 2022 - Malawi Programmatic JET Country Economic Memorandum — April 14, 2023 - Malawi Gender Platform Lending — March 29, 2024 - Lending (expected delivery dates): - Lilongwe Water and Sanitation Project- Additional Financing — December 16, 2021 - Agriculture Sector Wide Approach Support Project II Additional Financing — December 31, 2021 - Shire Valley Transformation Program - Phase 2 — June 21, 2022 - Social Support for Rural Livelihoods Project Additional Financing — May 31, 2022 - Additional Financing for Malawi COVID-19 Emergency Response and Health Systems Preparedness Project — May 13, 2022 - Mpatamanga Hydro Power Project — April 5, 2022 - Malawi Growth and Resilience Development Policy Financing — April 29, 2022 *Source: 1mwiea2021001 - 2021. Implementation date for the (IMF staff report content as provided).* ### 8. Malawi Transport Asset Management and Safety Project July 28, 2022 ### 8. Malawi Transport Asset Management and Safety Project July 28, 2022 ### A. IMF–World Bank Interaction and Requests - IMF request to World Bank: - Updates on WB support to Malawi - Frequency: Continuous - World Bank request to IMF: - Regular updates and exchange of views on medium-term macroeconomic and fiscal projections including sharing detailed excel tables on Real, Monetary, Fiscal and External Sectors - Frequency: Continuous - Agreement on joint products and missions (next 12 months): - Debt Sustainability Analysis (update) - Timing: December, 2021 ### B. Relevant Projects Listed on the Same Page - Transport-related project: Malawi Transport Asset Management and Safety Project (title and date as given: July 28, 2022) - Other listed project on page: Sustainable Transmission and Energy Access in Malawi (October 25, 2022) ### C. Relations with the African Development Bank (AfDB) — Overview and Strategic Alignment (As of November 2021) - Historical engagement: - AfDB operations in Malawi date back to 1969. - AfDB Group Malawi Country Office opened in 2007. - Cumulative commitments and scale (as of September 30, 2021): - Cumulative commitments: UA 1,010.2 billion (about US$1.4 billion) - Number of operations financed: 116 operations, including thirteen studies and two lines of credit - Country Strategy Paper (CSP) 2018-2022 alignment: - Fully aligned with the third Malawi Growth and Development Strategy (MGDS III, 2017-22), Malawi Vision 2063, and the AfDB’s corporate priorities in the Long-Term Strategy (LTS, 2013–22) and High 5 priorities. - CSP objectives and pillars: - Overall aim: Support foundations of private sector led growth by investing in infrastructure and promoting diversification and transformation agenda. - Pillar I: Investing in infrastructure development through energy and transport. - Strategic objective: Improve competitiveness and efficiency of private and public sector by extending infrastructure, limiting bottlenecks, and reducing investment constraints that increase business transaction costs. - Outcomes include: improved connectivity to local and regional markets, reduced transport costs, and increased private sector investment in energy and transport. - Pillar II: Investing in economic transformation by strengthening agriculture value addition and developing water infrastructure. - Strategic objective: Boost economic diversification and build resilience by reducing cost of market entry, underpinning the creation of firms and jobs that contribute to broadening the tax base and enhancing macro-stability. - Outcomes include: increased productivity and production, increased market development and diversification, empowered local communities, and improved health and wellness. - Crosscutting themes mainstreamed into the CSP: - Environment and climate change - Skills and training especially amongst the youth - Economic and financial governance - Rationale: - Given the rapidly growing population, the economy needs to create more economic opportunities to generate increased revenues for the government to provide required social services and public goods, while ensuring a dynamic and growing private sector. - Project approvals since CSP approval (October 2018) — as of September 30, 2021: - Number of new projects approved: 9 new projects - Total amount: about USD 220.64 million (UA157.6 million) over the period 2018–2020 - Sectors: water, agriculture, and roads - Funding sources: - About 62% (UA 97.6 million) of the approved resources secured from the African Development Fund - Remaining balance from Nigerian Trust Fund, Global Environmental Facility and Special Relief Fund - Recently approved projects (examples listed): - Nkhata Bay Town Water Supply and Sanitation Project (USD 15 million) — October 2018 - Shire Valley Transformation Programme (USD 35 million) — December 2018 - Additional Financing to Sustainable Rural Water and Sanitation Infrastructure Project (USD amount not fully provided in the excerpt) *Source: 1mwiea2021001 - 8. Malawi Transport Asset Management and Safety Project July 28, 2022 (excerpt).* ### 2.5 million) in May 2019; (iv) Post Cyclone IDAI Emergency Recovery for Malawi (USD 22.5 million) in ### 1mwiea2021001 - 2.5 million) in May 2019; (iv) Post Cyclone IDAI Emergency Recovery for Malawi (USD 22.5 million) in ### AfDB financing, approvals, and pipeline (2017–2022) - Recent AfDB approvals and emergency disbursements: - USD 2.5 million in May 2019. - Post Cyclone IDAI Emergency Recovery for Malawi: USD 22.5 million in June 2019. - Multinational Nacala (Nsipe-Liwonde Rehabilitation) Road Project: USD 37 million in June 2019. - Emergency Relief Assistance (April 2019): USD 1.5 million (USD 1 million to Mozambique and USD 250,000 each to Malawi and Zimbabwe). - Sustainable Fisheries and Aquaculture development project: USD 13.44 million (UA 9.6 million) in October 2019. - Financing for promoting competitiveness in tourism: USD 980,000 (UA 0.7 million) in July 2020. - COVID-19 Response Support Program (budget support): USD 46 million (UA 32.9 million) in July 2020. - Co-financing and administered resources: - EU grant of 18 million Euros (grant) on 25 February 2019 to co-finance the Multinational Nacala Road Corridor Development Project Phase V. - AfDB administering OFID USD 12 million loan for Nkhata Bay Town Water Supply and Sanitation Project. - Planned projects for 2021–2022: - Digitalization, Financial Inclusion and Competitiveness Project: USD 13.7 million (due in 2021). - Africa Disaster Risk Financing (ADRiFi): USD 4.9 million (due for approval in 2021). - Agriculture Commercialization, Value Addition & Youth Agribusiness Project: USD 20 million (due in 2022). - Rehabilitating and Upgrading of M5 Road (North-South Road Corridor Project – Benga-Nkhotakota-Dwangwa Road): USD 49.7 million (planned to be approved in early 2022). - Non-sovereign/private sector window considerations for 2021–2022: - Voltalia Kanengo Dzuwa Limited (VKDL Solar Project). - Mbongozi Hydro Electric Project. - Mpatamanga 350MW hydro project. ### Objectives, sectoral impacts, and non-lending support - Objectives of interventions: - Strengthen economic transformation by enhancing agriculture value chains, increasing mechanization, increasing access to finance, improving market linkages, and supporting crop diversification. - Underpin new income opportunities for emerging commercial farmers and strengthen linkages to small-scale farmers with increased focus on women and youth. - Support small industry development through agro-processing and light industrialization to expand the economy and create jobs. - Water sector interventions expected to: - Increase capacity of water reservoirs, small dams harvesting schemes. - Improve access to potable water to free up time in rural areas especially for women. - Support water resource management in key water basins such as Songwe River and Lake Malawi, impacting energy, agriculture, tourism, and fisheries. - Private sector and regional infrastructure support: - USD 300 million long-term senior loan (2017) to finance Nacala Rail and Port Project; included USD 18.1536 million allocation to Central African Railways Company Limited (CEAR) of Malawi. - USD 1 million Nacala Rail and Port Value Additional TA Project to help local SMEs and farmers. - Soft commodity finance facility of USD 20 million (2016, regional) to Meridan Consolidated Investment Limited for purchasing soft commodities directly from small-scale farmers in Malawi, Mozambique and Zimbabwe. - Non-lending analytical and technical assistance: - Feasibility study for Kholombidzo Hydro Power Project (2017). - Feasibility study for establishment of an Agriculture Cooperative AfDB (2017), leading to government launch of Malawi Agricultural and Industrial Investment Corporation Plc. - Grant support to Private Public Partnership Commission (PPPC) to build PPP negotiation capacity through a “hot line” arrangement. - Technical assistance to Malawi Postal Cooperation for E-Post Strategy and Action Plan. - Analytical studies including Domestic Resource Mobilization Study for Malawi, TA to the Reserve AfDB of Malawi to strengthen macro-economic forecasting capacity, Public Expenditure Review with the World Bank, and Expenditure Tracking Study support. ### Public finance management (PFM) and budget support - Past AfDB budget support and PFM interventions: - ADF Grant for Crisis Response Budget Support operation: USD 40 million following re-engagement with IMF and approval of US$157 million ECF arrangement in July 2012 (RFSSP program). - Restoration of Fiscal Stability and Social Protection (RFSSP) program objectives: restoring fiscal stability, enhancing public finance management, and supporting social protection; two components to strengthen PFM transparency and accountability and social protection systems. - Protection of Basic Services Program (PBS) grant: USD 30 million approved in 2015; disbursed in one tranche in July 2015. - Food Crisis Response Budgetary Support followed PBS in 2016. - PFM institutional support: - Two PFM Institutional Support Projects (USD 7 million) approved to strengthen internal control systems following ‘cashgate’—one closed in June 2018, the other closed in December 2019. - AfDB supported review of the PFM Act, tax administration reforms (including upgrading ASYCUDA, Tax Appeals Tribunal legislative framework, review of Customs and Excise Act), public procurement reforms, strengthening financial management systems, Treasury Instructions, Treasury Funds Management Guidelines, audit of Treasury Funds, and strengthening IFMIS oversight. - New IFMIS rolled out to all MDAs on 1 July 2021; authorities working to produce comprehensive fiscal reports using the new system and to modify chart of accounts and output-based structures with East AFRITAC. - AfDB COVID-19 Budget Support project (July 2020) resulted in publication of COVID-19 procurements. ### Statistical issues and data adequacy (as of November 15, 2021) - Overall assessment: - Data provision has shortcomings that are serious and significantly hamper surveillance. - Most affected areas: national accounts, fiscal, monetary and external sector statistics. - National accounts: - GDP rebased from 2010 to 2017. - Malawi’s nominal GDP for 2017 revised upwards by 38.4 percent from MK4,635.4 billion (US$6.35 billion) in the 2010 base year to MK6,417.3 billion (US$8.8 billion) in the 2017 base year. - GDP by production and by expenditure discrepancy: around 14 percent. - NSO planning to introduce a revision policy before end-2022. - Price statistics: - CPI weights currently based on IHS4 (2016–2017); NSO will update CPI using expenditure data from the 5th Integrated Household Survey (IHS5) conducted from April 2019 to April 2020. - TA missions assisted with updating CPI in 2021, computing weights from IHS5 according to COICOP. - PPI weights based on Annual Economic Survey 2012; need updating and expanded coverage. - NSO developing export-import price indexes. - Government finance statistics shortcomings: - Sizeable statistical discrepancy between above and below the line data due to differences in coverage; above the line coverage narrower than RBM financing reports. - Tax revenue data timely but not always reconcilable with deposits in the Malawi Government Account due to reporting/timing differences; finances and operations of Malawi Revenue Authority unusually opaque. - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in Ministry of Finance fiscal reports. - Ministry of Finance does not include zero-coupon promissory notes issued to clear arrears in fiscal reporting. - Interest payments reported on a currency basis rather than residency of the holder of the security. - Annual government finance data for Budgetary Central Government in GFSM 2014 presentation are reported for publication in GFSY but not disseminated domestically. - STA TA missions encouraged compilation and reporting of high frequency data for Budget Central Government in GFSM 2014 framework and assisted in compiling data for extrabudgetary units (EBUs). - Monetary and financial statistics: - RBM started compiling and reporting monetary data to STA using standardized report forms (SRFs); moved completely to reporting in SRFs after STA TA in April–May 2021. - TA missions assisted RBM in improving monetary operations framework (April 2019) and domestic asset management strategy (January 2020). - External sector statistics (ESS): - NSO compiles annual trade and BOP data; previously trade data lagged by more than nine months; latest available BOP data was for 2016; IIP data available up to 2019. - ESS mission by STA in March 2021 focused on goods trade coverage, compilation, timeliness, and assessment of BOP and IIP compilation. - As of October 31, 2021, NSO provided goods trade data up to March 2021. - STA recommended accelerating timeliness of trade data dissemination to (at least) within two months from the end of a reference month. - RBM regularly reports daily exchange rate data, monthly international reserves data, and FXI data; international reserves data follow IRFCL template; RBM started reporting an independent line for estimated size of pledged deposits and submits a daily FX cashflow table regularly. - Government provides granular breakdowns on external debt on top of end-year stock data. - Data standards and quality: - Malawi implemented the e-GDDS; National Summary Data Page (NSDP) went live on November 15, 2016. - Data ROSC published on February 17, 2005. - Table of Common Indicators Required for Surveillance: table entries provided as of October 30, 2021 (dates and frequencies listed in original table; methodological soundness and accuracy assessments noted). ### Debt Sustainability Analysis (DSA) findings and risks (November 30, 2021) - DSA assessment changes: - Risk of external debt distress downgraded from moderate to High risk of debt distress. - Overall risk of debt distress maintained at High. - Granularity in risk rating: overall and external public debt assessed as Unsustainable under current policies. - Reasons for deterioration in debt indicators: - Downgrade in debt carrying capacity from medium to weak; Composite Indicator (CI) score is 2.56. - Change in definition of external debt from currency to residency basis, improving classification and capturing medium-term domestic bonds held by nonresidents as external debt. - Conversion of RBM’s short-term reserve liabilities to medium-term external debt. - Projections and vulnerabilities: - Total public debt projected to increase over the near to medium term. - Malawi faces large financing needs in coming years and low level of international reserves, implying high risk of future distress. - Main risk to the baseline: sudden stop of available financing, especially from regional development banks (RDBs); if materialized, an abrupt forced adjustment with significant impact on growth, financial stability and vulnerable populations would be inevitable. - Context and policy stance: - Despite macroeconomic challenges, authorities committed to prioritizing debt service payments and Malawi remains current on all debt obligations. - Malawi characterized as a fragile economy with elevated poverty rates, food insecurity and frequent weather-related shocks; substantial development and social spending needs, high legacy debt burden, and much lower budget support and grants financing contribute to sustained fiscal and current account deficits. - Institutional and procedural notes: - Current DSA follows the revised Debt Sustainability Framework (DSF) for LICs and Guidance Note (2017) in effect as of July 1, 2018. - Malawi’s debt-carrying capacity based on the CI uses October 2021 WEO and 2020 WB’s CPIA. *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### 1. The DSA covers central government debt, central government guaranteed debt, and ### 1mwiea2021001 - 1. The DSA covers central government debt, central government guaranteed debt, and ### Coverage and scope - DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government (Text Table 1). - Public debt used for this DSA is public and publicly guaranteed (PPG) external and public domestic debt, covering debt contracted and guaranteed by the central government and the Reserve Bank of Malawi (RBM). - Exclusions due to data limitations: debt held by state and local governments, other elements in the general government (such as the social security fund and extra budgetary funds), and non-guaranteed state-owned enterprise (SOE) debt. - Contingent liabilities shock from SOE debt is kept at the default value of 2 percent to reflect risks associated with non-guaranteed SOE debt, currently excluded from the analysis. ### Background and context - DSA is prepared in the context of the 2021 Article IV Consultation. - The last Low-Income Country DSA (LIC-DSF) considered by the Executive Board was October 2020 as part of a request under the Rapid Credit Facility (RCF). - Malawi is subject to the IDA Sustainable Development Finance Policy (SDFP), successor to the Non-Concessional Borrowing Policy (NCBP). - Malawi implemented Performance and Policy Actions (PPAs) related to Debt Transparency, Debt management, and Fiscal Sustainability, including a zero non-concessional borrowing ceiling in FY21; FY21 PPAs were satisfactorily implemented and 3 PPAs are being prepared for FY22. ### Vulnerabilities and structural challenges - Major drivers of fragility: high poverty rates, food insecurity, frequent weather-related shocks, weak governance, poor quality of public administration, limited fiscal space, and high public debt. - Malawi is one of the most vulnerable countries to climate change and has the third lowest GDP per capita in sub-Saharan Africa. - Resulting economic dynamics: - GDP growth barely kept up with population growth; real per capita growth negative in the past decade. - Debt levels projected to increase in the medium term, crowding out private investment and hindering medium-term prospects. ### Fiscal and external position (key figures and recent developments) - Public debt stood at 55 percent of GDP in 2020. - External PPG debt stock reached $3.76 billion (33 percent of GDP) at end-2020. - Non-concessional external debt outstanding: 10 percent of GDP in 2020 (mostly financed fuel, fertilizer, and other strategic imports). - External debt composition (2020, thousands of U.S. Dollars, unless otherwise indicated): - Total External Debt: 3,760.0 (100.0 percent; 33.0 percent of GDP) - Official multilateral: 2,214.8 (58.9 percent; 19.4 percent of GDP) - World Bank-IDA: 1,104.3 (29.4 percent; 9.7 percent of GDP) - IMF: 432.3 (11.5 percent; 3.8 percent of GDP) - Official bilateral: 434.2 (11.5 percent; 3.8 percent of GDP) - AFREXIM bank: 757.0 (20.1 percent; 6.6 percent of GDP) - Trade Development Bank (TDB): 145.0 (3.9 percent; 1.3 percent of GDP) - Spain (Arrears): 8.2 (0.2 percent; 0.1 percent of GDP) - TDB (Arrears): 209.0 (5.6 percent; 1.8 percent of GDP) - Malawi had arrears to Spain and a non-official/commercial creditor at end-2020; authorities engaged in negotiations in 2021 with repayments starting for Spain in May 2021 through November 2023 and obligations to TDB met up to April 2022. - Near-term debt service concentration: - 79 percent of total debt service in 2021 is to non-official/commercial creditors. - 72 percent of total debt service in 2022 is to non-official/commercial creditors. - DSA and macro-framework assume CCRT debt service relief through April 2022 equivalent to about SDR 33 million; DSSI potential savings estimated at US$1.15 million (0.01 percent of GDP) over May 2020 to December 2021. ### Reserve Bank of Malawi (RBM) actions and external debt dynamics - RBM started a three-year revolving trade credit facility with a cap of $250 million in 2012 to meet foreign exchange needs for strategic imports. - RBM used forex swaps with domestic and RDBs as difficulty staying within the US$250 million cap emerged. - RBM converted short-term currency swap open positions to a medium-term forex facility of US$450 million at end June 2020, contributing to a sharp increase in external PPG debt (external PPG debt rose from 27.7 percent of GDP in 2019 to 33 percent of GDP in 2020). ### Underlying macroeconomic assumptions and projections (baseline) - Baseline assumes broadly status quo fiscal and monetary policy in medium term absent policy adjustment, with near-term mitigation of COVID-19 impacts. - Fiscal domestic primary deficit assumed to remain about -3.2 percent of GDP (statement in ¶8). - Reserve monetary growth anchored to achieve 6 percent by end of medium term. - Real effective exchange rate (REER) projected to adjust by about 14 percent during the medium term (baseline assumes REER will adjust by about half of the appreciation observed since 2016 in the next five years). - Changes from October 2020 DSA (selected): - Real GDP growth projection for 2021: 2.2 percent (unchanged). - Real GDP growth path revised down by about 2 percentage points in the medium term relative to the October 2020 DSA. - Inflation: headline inflation increased from 7.6 percent at end-2020 to 8.9 percent at end-September 2021; CPI inflation projected at 10 percent at end-2021 and about 7 percent at end of medium term (conditional on well anchored monetary policy stance). - Fiscal primary deficit revised to reflect expansionary near-term stance, peaking at 6.5 percent of GDP in 2022 and averaging 5 percent in the medium term (2021-25). - Beyond medium term, DSA assumes a fiscal primary surplus of 0.1 percent of GDP on average over 2026-41 (to restore debt sustainability). - Current account deficit revised to 15 percent in 2021 and projected to decline to about 10 percent of GDP in the medium term. - Gross official reserves: revised down from US$566 million (2.1 months of imports) in 2020 to US$394 million (1.4 months of next year’s imports) in 2021; expected to remain about US$400-500 million (1½ months of imports) through 2026 under assumption of external financing from RDBs filling a financing gap of about 20 percent of GDP during 2021-26. ### Growth drivers and risks - Medium-term growth dependent on: - Sustained increase in public investment with strong fiscal multipliers. - Maintenance of a fiscal deficit in the order of 10 percent of GDP over the medium term and external current account deficits of comparable size. - Continued access to sizable and growing RDB financing and domestic borrowing despite unsustainable debt. - Risks highlighted: - Continued dependence on non-concessional loans from RDBs (APR of about 7-8 percent) increases borrowing cost and sustainability risks. - Debt burden projected to grow, crowding out private investment. - External sector position substantially weaker than implied by fundamentals and desirable policies. ### Financing mix and borrowing terms (assumptions) - External borrowing assumptions: - All project loans ratified but undisbursed (US$1.32 billion as of end-June 2021) will be disbursed during the medium term. - Additional loans of US$2.6 billion will be contracted from RDBs during the medium term to fill financing gaps. - IDA19 disbursement for FY22 assumed in line with FY21 outturn. - Total new external borrowing in medium term (2021-26): $3.9 billion (significantly higher than October 2020 DSA: $1.27 billion). - Average grant element of new borrowing projected to become significantly low; APR of 8 percent is assumed for new borrowing. - Domestic borrowing assumptions: - Remaining financing gap picked up by domestic bank and nonbank institutions. - Domestic borrowing averages about 9 percent of GDP each year during the medium term. - Assumed interest rates: 3-year bond at 11.5 percent; 10-year bond at 17 percent. - New bond issuance will move towards longer maturities: share of bonds with maturity greater than 7 years expected to increase from 5% of new issuance to 20% by 2032. ### Debt service composition projections (selected) - External debt service shares by creditor type: - 2021: Official multilateral 12.6 percent; AfDB, IMF, WB 7.8 percent; Official bilateral 8.5 percent; Others 78.9 percent (of total external debt service). - 2022: Official multilateral 19.5 percent; AfDB, IMF, WB 15.4 percent; Official bilateral 8.4 percent; Others 72.1 percent. - 2026: Official multilateral 78.5 percent; AfDB, IMF, WB 67.2 percent; Official bilateral 21.5 percent; Others 10.0 percent. - Notable creditor shares: AFREXIM 58.5 percent of 2021 external debt service; AFREXIM projected 53.4 percent in 2022 and 0.0 percent in 2026; TDB 8.6 percent in 2021 and 7.8 percent in 2022. _This DSA excerpt was prepared jointly by the staff of the IMF and World Bank, in collaboration with the authorities of Malawi._ ### 10. The realism tools suggest that the baseline scenario is credible compared to Malawi’s ### 10. The realism tools suggest that the baseline scenario is credible compared to Malawi’s ### Realism tools and projection comparisons - Current DSA projections compared to previous DSAs: - Current DSA reflects latest revisions to the medium-term outlook and policy direction in presence of the COVID-19 shock and the need of development spending to achieve Malawi Vision 2063. - The difference between the current DSA and the previous DSA is large (reasons discussed above (¶5)). - Debt-creating flows: - Important contribution of the nominal interest rate over the 5-year projected change, reflecting compositional changes in the external debt (¶4). - Unexpected debt increases: - Unexpected increases in PPG external debt: 14.7 percent of GDP. - Unexpected increases in public debt: 28 percent of GDP. - Drivers of unexpected public debt accumulation: unexpected increase in primary deficits and unexpected depreciation of the real exchange rate. ### Fiscal realism and growth projections - Primary balance realism: - Anticipated adjustment in the primary balance: 0.5 percentage points of GDP — assessed as in line with other LICs. - Growth projections: - Growth projections for 2021 and 2022 are optimistic relative to what is suggested by the fiscal multiplier realism tool, driven by expected rebound after attenuation of COVID-19 shock. - Public investment plans: - Authorities plan to ramp up public investment to generate growth (reflected in bottom panels of Figure 4). ### Debt-carrying capacity (Composite Indicator, CI) - CI assessment: - Malawi’s CI based on the current vintage (2021 CPIA) is assessed as Weak. - CI score (current vintage): 2.56. - Previous DSA CI score (October 2020): 2.84 (classified as Medium under that assessment). - CI interpretation thresholds: - Weak if CI value is below 2.69. - Medium if between 2.69 and 3.05. - Strong if above 3.05. - CI calculation components and contributions (as presented): - CPIA: Coefficient 0.385; 10-year average value 3.196; CI Score component 1.234; Contribution 48%. - Real growth rate (in percent): Coefficient 2.719; 10-year average value 3.772; CI Score component 0.104; Contribution 4%. - Import coverage of reserves (in percent): Coefficient 4.052; 10-year average value 25.387; CI Score component 1.03; Contribution 40%. - Import coverage of reserves^2 (in percent): Coefficient -3.990; 10-year average value 6.445; CI Score component -0.26; Contribution -10%. - Remittances (in percent): Coefficient 2.022; 10-year average value 1.465; CI Score component 0.03; Contribution 1%. - World economic growth (in percent): Coefficient 13.520; 10-year average value 3.137; CI Score component 0.421; Contribution 17%. - CI Score total: 2.56 (CI rating: Weak). ### External debt and public debt thresholds (as determined by CI classification) - External debt burden thresholds (Weak): - PV of debt in % of Exports: 140 - GDP: 30 - Debt service in % of Exports: 10 - Revenue: 14 - TOTAL public debt benchmark: - PV of total public debt in percent of GDP: 35 - External debt burden thresholds by capacity class (excerpt shown): - Weak / Medium / Strong — PV of debt in % of Exports: 140 / 180 / 240 - Weak / Medium / Strong — GDP: 30 / 40 / 55 - Weak / Medium / Strong — Debt service in % of Exports: 10 / 15 / 21 - Weak / Medium / Strong — Revenue: 14 / 18 / 23 ### Scenario stress tests and tailored shocks - Standard and contingent liability stress tests conducted (Text Table 7, Tables 3 and 4). - Combined contingent liabilities one-time debt shock: - Equivalent to 9 percent of GDP in 2021, to capture limited public debt coverage (2 percent of GDP, instead of default level of zero), contingent liabilities from SOEs (equivalent to 2 percent of GDP), and the need for bank recapitalization. - Tailored commodity price shock: - Rationale: tobacco exports >50 percent of total exports (goods and services) over the previous three-year period. - Shock: commodity exports are shocked by a commodity price gap in the second year of projection, which converges to baseline in 6 years. - Outcome: decline in exports to one standard deviation below historical average in years 2 and 3 causes PV debt-to-exports and PV debt-to-GDP to rise and remain elevated above baseline over the medium term. - Contingent liability tailored test elements (as presented): - 1 The country's coverage of public debt: Default (central government, central bank, government-guaranteed debt). - 2 Other elements of the general government not captured: 1.0 percent of GDP — Reasons: Limited coverage. - 3 SoE's debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP — (presented as "1/2 percent of GDP2"). - 4 PPP: 35 percent of PPP stock — 0.00 - 5 Financial market (default minimum value): 5 percent of GDP — 5 - Total (2+3+4+5) (in percent of GDP): 9.0 - Note: The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If already included, country team may reduce to 0%. ### External DSA assessment - Risk and sustainability: - Malawi’s external and public debt assessed to be in high risk of debt distress. - Granularity in risk rating assesses that public debt under current policies is unsustainable. - Arrears and rescheduling: - Arrears to the TDB and Spain at end-2020 have been rescheduled and payments started on an agreed schedule. - External debt indicators: - Large and protracted threshold breaches on a number of external debt stock and external debt service indicators (both external debt-service to exports and external debt-service to revenue ratios). - PV debt-to-GDP ratio stays below threshold during medium to long term, but PV debt-to-exports ratio only becomes below threshold after the medium term. - These indicators signal significant pressure on servicing external debt in the medium to long term. ### Public DSA assessment and projections - Overall public debt assessment: - Overall public debt assessed to be high and unsustainable under current policies. - PV of public debt-to-GDP ratio remains above the threshold and other indicators do not stabilize over time. - Baseline projections: - Total public debt projected to rise from medium to long term in the baseline scenario. - Under baseline (Figure 2) — all three public debt burden indicators are above their indicative thresholds. - PV of debt-to-GDP ratio reaches 80 percent by 2031. - Debt to revenue ratio grows to reach 500 percent. - Debt service to revenue ratio grows to reach 135 percent. - Contributing factors: - Malawi’s inability to sustain growth, partly due to frequent weather-related shocks. - High cost of sovereign borrowing (most recent infrastructure bond issuances in August 2021 was priced at 23 percent). - High level of existing debt with a large fraction being on non-concessional terms. ### Risk rating, vulnerabilities, and financing risks - Risk rating: - External and public debt at high risk of debt distress; granularity indicates public debt under current policies is unsustainable. - Main risks to baseline: - Sudden stop of available financing especially from RDBs — assessed by WB and IMF staff as main risk; if materialized, abrupt forced adjustment with significant impact on growth, financial stability, and the most vulnerable populations becomes inevitable. - Additional risks: weaker-than-expected policy implementation, fiscal slippage, macroeconomic uncertainty (especially weather shocks), tighter global financial conditions, increase of essential import costs, weak and diverging global economic recovery depressing export growth. - Policy implementation note: - Authorities continuing improvements in tax administration to help compliance and revenue collection going forward. ### Policy recommendations to contain debt vulnerabilities - Fiscal policy and public finances: - Strong fiscal adjustment program over the medium term needed to stabilize public debt. - Redouble efforts on domestic revenue mobilization. - Reprioritize expenditure by curtailing growth in wages while safeguarding capital spending. - Reform the Affordable Input Program (AIP) and goods and services; reduce non-critical spending. - Realism in budget forecasts and public financial management (PFM) reforms to contain deficits and debt. - Strengthen public sector governance and institutions to safeguard scarce resources and strengthen policy effectiveness. - External position and reserves: - Allow greater flexibility in the exchange rate. - Contain external imbalances and rebuild reserves to reduce vulnerabilities to external shocks. - Support measures by a well-functioning and transparent foreign exchange interbank market and a foreign exchange reserve management strategy. - Authorities need to promptly address data shortcoming related to reserves, especially possible inclusion of encumbered assets that inflate reported reserves. - Structural reforms for sustained inclusive growth: - Promote diversification and commercialization in the agriculture sector to increase incomes and resilience. - Rebalance agricultural spending away from fiscally unsustainable maize input subsidies toward investments that promote diversification and growth; make subsidy programs affordable, more cost-efficient, and reduce fiscal risks. - Institute predictable and transparent trade policies; implement and monitor trade measures under the Control of Goods Act to safeguard food security while increasing export potential and developing value chains. - Assess rules for implementation of export mandate regulations in consultation with the private sector to avoid market distortions. - Ensure ADMARC’s market interventions are transparent, timely, and predictable. - Policies to increase diversification outside agriculture: expand reliable access to electricity (progress on energy investment projects and stronger governance at key sector utilities). - Reform tax policies and administration and business regulations to increase transparency, reduce ad hoc changes, and support value addition. - Review tax regime, levies, and tariffs in mobile and ICT sectors to enable greater customer access; foster competition in broadband infrastructure development. - Reduce Government domestic borrowing to ease pressures on interest rates and enable broader access to finance for SMEs. *Source: IMF staff report content provided in the PDF chapter/section.* ### 22. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. They a re ### 22. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. They are undertaking policy action to address debt sustainability through engagement with creditors, including RDBs for rescheduling existing debt. Authorities are also engaging with traditional and nontraditional donors for possible voluntary debt buy back schemes to offset more expensive debt. ### Authorities' assessment and policy actions - Authorities agree broadly with the World Bank’s and IMF’s staff assessments. - Policy actions underway: - Engagement with creditors, including RDBs, for rescheduling existing debt. - Engagement with traditional and nontraditional donors for possible voluntary debt buy-back schemes to offset more expensive debt. - Strategic development objective: - Launch of Vision 2063 to guide development plans and propel Malawi to an inclusive and self-reliant industrialized upper middle-income country. - Fiscal and program needs: - The authorities emphasize that program support from the Fund is becoming increasingly urgent. - The authorities commit to entrenching macroeconomic stability, enabling growth, and reducing poverty and inequality, while implementing necessary reforms without causing undue social and economic harm. ### Economic context and key macro projections - Pandemic and shocks: - Since June (year preceding December 13, 2021), the administration faced COVID-19 impacts and ongoing effects from 2019 weather-related shocks, compounded by governance and legacy issues. - The pandemic amplified preexisting vulnerabilities, causing scarring, persistent fiscal imbalances, and elevated public debt. - Real GDP growth (in percent) — historical and projections as presented: - 4.4, 5.4, 0.9, 2.2, 3.5, 4.5, 4.0, 4.0, 4.1, 5.5, 0.0, 3.8, 4.5 - Short-term projection highlighted in statement: - Real GDP growth in 2021 is projected to rise to 2.2 percent, while real per capita income has declined. ### Debt sustainability and DSA-related indicators (select) - Authorities are undertaking debt-management actions to improve debt sustainability (rescheduling, buy-backs). - Selected DSA indicator snapshots (baseline DSA tables and figures presented in the source): - PV of PPG external debt-to-GDP ratio (selected entries): 21.9, 20.7, 22.4, 23.8, 25.0, 26.5, 27.9, 28.1, 16.9 - The DSA includes multiple stress and tailored tests (e.g., natural disaster, commodity price, combined contingent liabilities) and presents projections for FY2021–31 under baseline, alternative scenarios, bound tests, and tailored tests. - The authorities and staff assume that additional financing needs generated by stress tests are covered by PPG external MLT debt in the external DSA, with default terms of marginal debt based on baseline 10-year projections. - Fiscal priorities and constraints: - Persistent fiscal imbalances and elevated public debt constrain policy space, increasing the need for short- to medium-term donor and Fund support. ### Policy implications and requests - Immediate needs: - Short- to medium-term support from the IMF and donor community to stabilize the macroeconomic situation and support reforms. - Reform approach: - Implement necessary reforms to restore macroeconomic stability and promote inclusive growth, while aiming to avoid undue social and economic harm. - Debt strategy: - Continue creditor engagement (including RDBs) to reschedule existing debt. - Pursue voluntary debt buy-back options with donors to replace more expensive debt instruments and improve debt-service profiles. *Statement by Ms. Mannathoko and Ms. Nainda on Malawi, December 13, 2021; figures and projections as presented in the source.* ### Introduction ### Introduction ### Overview and authorities' stance - Malawian authorities appreciated candid and constructive discussions with staff during the Article IV consultations and broadly share the thrust of staff’s appraisal of macroeconomic challenges and related policy priorities. - Authorities value earlier support received under the Rapid Credit Facility and the debt relief under the CCRT, alongside the general allocation of SDRs. - The new administration is addressing governance issues inherited from the previous administration, has reset its relationship with the Fund, and has requested a new Extended Credit Facility (ECF) program to help secure macroeconomic stability and catalyze donor support. - Authorities continue to work on resolution of outstanding legacy issues to pave the way for progress on program negotiations; they are implementing prior actions to lay groundwork for a Fund-supported program. ### Recent economic developments, COVID-19 vaccine deployment and outlook - Real GDP projections: - 0.9 percent in 2020 - 2.2 percent in 2021 - 3.5 percent in 2022 - Drivers of 2021 expansion: favorable weather conditions and support of agricultural input subsidies, contributing to a good harvest and increased tobacco production for export. - Pandemic impact: - Economy remains heavily impacted by COVID-19. - A severe second wave largely subsided around March 2021; a third wave beginning in June led to a sharp increase in case numbers in the third quarter. - Vaccination progress and targets: - At least 1,476,957 doses administered so far. - About 3.2 percent of the population fully vaccinated. - Target: vaccinate 60 percent of the population by December 2022; this target faces challenges due to limited vaccine quantities and slow rollout. - Government is scaling up communication to address vaccine hesitancy. - Inflation and external sector: - Headline inflation rose from 7.6 percent in December 2020 to 9.8 percent in October 2021, mainly driven by increases in food, fuel, and agricultural input prices. - Food inflation remains above 10 percent despite a good harvest. - Current account deficits continue to constrain gross international reserves. - Risks to outlook: - Downside risks from pandemic uncertainties and the emergence of the Omicron variant. - Medium-term risks from climate change that could exacerbate imbalances, deepen economic scarring and poverty. - Agriculture employs nearly 80% of the population, primarily in smallholder production, increasing vulnerability to climatic shocks. - Recent increases in frequency, intensity and unpredictability of climate shocks; floods and the two cyclones in 2019 caused significant loss of life, scarring and displacement. ### Fiscal policy and debt sustainability - Authorities see the need for fiscal adjustment to ensure fiscal and debt sustainability and are exploring options focused on revenue mobilization and expenditure management to narrow the fiscal deficit. - Domestic Revenue Mobilization Strategy (DRMS): - Prepared with Fund TA and other development partners to strengthen tax administration and expand the tax base. - Some DRMS measures are being implemented, including the introduction of an import withholding tax in the FY 2021/22 Budget. - Debt management: - Authorities are consulting with staff on stabilizing debt and engaging creditors to address debt sustainability. - Authorities acknowledge staff’s call for a fast pace of adjustment to reduce the risk of debt distress to “moderate” in the medium term. - New PFM Act provides for creation of a Debt Retirement Fund to be funded via new revenue measures under development. - Authorities scaled down the number of development projects funded in the FY 2020/21 budget and plan continuous review of projects to limit budget pressures and manage domestic debt. - Commitment control system strengthened to operate strictly within budget provisions, in line with arrears clearance strategy. - Expenditure control and subsidy reform: - Fast-tracked implementation of Integrated Financial Management and Information System (IFMIS) to strengthen expenditure control and manage multi-year commitments to avoid accumulation of arrears across MDAs. - New Affordable Input Program (AIP) replaced the Farm Input Subsidy Program (FISP); AIP will be reviewed after one year with focus on enhancing efficiency and reducing fiscal outlay over time without compromising objectives. ### Monetary, financial sector and exchange rate policies - Banking sector: remains well capitalized, liquid and profitable, though pandemic and central bank policy response necessitate risk monitoring. - Reserve Bank of Malawi (RBM) pandemic response: - Maintained an accommodative monetary stance. - Lowered the Liquidity Reserve Requirement and the Lombard Rate. - Activated an Emergency Liquidity Assistance framework. - Granted a debt moratorium and allowed loan restructuring to SMEs impacted by the pandemic. - RBM supervision and technical assistance: - Requested Fund technical assistance to strengthen monitoring of financial sector risks. - Intensified banking supervision with daily liquidity risk monitoring and enhanced offsite monitoring. - Exchange rate and monetary framework: - RBM recognizes need for greater exchange rate flexibility and is engaged in technical discussions with staff on the least disruptive approach to adjustment. - Authorities concur that monetary policy needs to be stronger to counteract inflationary pressure expected from greater exchange rate flexibility. - Plan to gradually transition towards an inflation targeting framework by 2025. - Authorities are concerned about the impact of tighter monetary policy on government debt service and the cost of borrowing given significant debt. ### Governance - New administration prioritizes transparency and efficiency and is addressing governance weaknesses from the previous administration. - Legacy issues: - Authorities reported possible provision of inaccurate information by previous administration to the Fund and are working closely with staff to resolve them. - RBM has started submitting higher frequency and improved quality data, with measures to avoid recurrence. - Specific governance measures: - Special audit of foreign exchange reserves of the RBM to be completed before the end of the first half of 2022. - RBM and Ministry of Finance have scaled up internal reconciliation exercises and increased frequency of reporting to the Fund. - Implementation of TA recommendations around economic governance, including reporting gross international reserves in line with the Data Template on International Reserves and Foreign Currency Liquidity. - COVID-related transparency: - Progress on COVID audits and addressing capacity constraints. - Quarterly statements on commitments and payments of COVID-19 related activities across all MDAs produced and published for FY19/20 and FY20/21. - Publication of COVID-19 related procurement details on the PPDA website, including beneficial owner(s) of companies awarded contracts, is progressing. - Strengthening anti-corruption institutions: measures underway to strengthen Anti-Corruption Bureau, Financial Intelligence Authority and the PPDA. ### Growth, structural reforms and climate resilience - Growth potential: - Malawi has underexploited mineral, water and tourism potential that could contribute to growth, revenues and development. - Authorities are exploring possible investment and growth potential in the mining sector and prioritizing export diversification. - An analysis of key transformative structural reforms to unlock this potential may be considered in the next Article IV cycle. - Investment prioritization: - Authorities agree on the need to prioritize investment under fiscal constraints, reprioritize capital expenditure, and prioritize policies to achieve higher productivity. - Plans to accelerate human capital investment to foster equity and inclusive growth, including technical and vocational skills and entrepreneurship, in line with Vision 2063. - Climate strategy: - Updated government strategy on climate change in February 2021 focused on three pillars: - (i) human capacity building to strengthen skills for green, low emission and climate resilient development - (ii) institutional capacity - (iii) climate change financing - Authorities seek financial and technical support from development partners to implement the climate strategy. ### Conclusion and policy priorities - Authorities committed to finding means to ensure macroeconomic stability to support sustainable higher growth and to addressing legacy issues. - Urgency of successful conclusion to negotiations for a new multi-year ECF program to support stabilization efforts and place the country on a more sustainable path, arresting further deterioration in macroeconomic and socio-economic conditions. - Fund support is seen as catalytic to help close sizeable financing gaps and mobilize donor funding. - Authorities remain steadfast in implementing prior actions to prepare for a Fund-supported program. *1mwiea2021001 - Introduction* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mwiea2021001.pdf_