## 1mwiea2022001 ## Source details **Canonical URL:** [1mwiea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1mwiea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mwiea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mwiea2022001.pdf.json) --- ### Executive summary — crisis, response, and program focus - Crisis drivers: - Foreign exchange shortages and exchange rate misalignment reduced imports of fuel, fertilizer, medicine, and food. - Large fiscal deficits, nearly 10 percent of GDP in FY2021/22, financed largely by domestic bank borrowing, causing rapid money growth and inflation of 25.9 percent in September 2022. - Food insecurity worsened after tropical storms, below-average crop production, and higher prices for food and agricultural inputs; about 20 percent of the population projected to be acutely food insecure in the 2022/23 lean season (October 2022-March 2023). - Authorities’ responses: - FY2022/23 budget submitted March 2022 aiming at fiscal consolidation of about 2½ percentage points of GDP. - RBM raised policy rate by 200 basis points in April 2022 and devalued the Kwacha by 25 percent in May 2022. - Debt advisor hired in May 2022 to pursue sizeable debt treatment to reach moderate risk of debt distress in the medium term. - IMF engagement: - Request for disbursement of 50 percent of quota under the Rapid Credit Facility—Food Shock Window (FSW). - Comprehensive restructuring of external public debt initiated. - Staff Monitored Program with Executive Board Involvement (PMB) requested for 12 months to build track record toward an Extended Credit Facility (ECF). - Program policy pillars: - Socially-conscious fiscal consolidation; greater exchange rate flexibility; debt restructuring; price stability and financial soundness; governance improvements. - Outlook highlights: - Growth: 0.8 percent (2022), 2.4 percent (2023), medium-term 4.5 percent. - Inflation: decline to 20.4 percent by end-2023 and to 6.5 percent over the medium term. - Gross reserves recovery to 3.7 months of imports over the medium term. - Balance of risks: tilted to the downside; critical dependencies include steadfast policy implementation, timely debt operation progress, and donor grant financing. *Source: EXECUTIVE SUMMARY (1mwiea2022001) — IMF mission reports and accompanying materials (November 14, 2022).* ### Fiscal policy, budget revision, and public financial management - FY2022/23 targets and adjustment: - Aim to reduce domestic primary deficit to about 0.6 percent of GDP from 4.1 percent of GDP in FY2021/22. - Net domestic financing projected to decline to 5.6 percent of GDP in FY2022/23 from 7.4 percent of GDP in FY2021/22. - Primary fiscal balance expected to improve by an annual 1½ percent of GDP over the medium term. - Fiscal consolidation strategy balances expenditure containment and revenue improvement; adopt MTEF consistent with fiscal anchor. - Domestic revenue mobilization (DRMS): - Current revenue: 13.4 percent of GDP. - Measures introduced: additional income tax brackets and advance income tax. - Committed measures: presumptive tax for small businesses; rationalize preferential GST items; review Taxation Act and Customs and Excise Act; strengthen withholding tax; BEPS measures; excise tax reform; ITAS (Msokho) online rollout. - Nontax revenue: review fees/charges for full cost recovery; ensure MDAs remit to MG1 account. - Expenditure and social protection: - Social spending broadly carved out; floor on social spending as an indicative target covering SCTP and AIP. - AIP cost controls: augment farmer contributions and cap Government Subsidy; medium-term plan to phase out AIP and replace with SCTP and public works. - Wage bill measures: hiring freeze (excluding frontline health and education); strengthen payroll/pension approval processes. - Cash management, commitment controls, and arrears: - Verified arrears up to June 30, 2020; verify up to March 31, 2022 (SB). - Arrears clearance strategy being prepared; quarterly allotments and IFMIS-based commitment limits to prevent new arrears. - New IFMIS rollout and interim EFT from July 2021 to improve budget execution and cash management. - SOE oversight: - Initiate detailed reporting for high-risk SOEs; monitor management accounts regularly; prepare annual consolidated SOE report (MEFP ¶23). ### Monetary policy, exchange rate, and external buffers - Monetary policy stance and actions: - RBM committed to tighten policy to achieve price stability and anchor policy at containing reserve money growth while building FX reserves. - Actions taken: raise monetary policy rate by 200 basis points in April; another 200 basis points to 18 percent (discount rate to 20 percent) in October MPC meeting; further increases as needed to secure positive real returns. - Medium-term intent: maintain the real interest rate below the growth rate to support private-sector led growth. - Monitor banking sector exposures to government securities via SRFs and reassess loan/collateral quality. - Exchange rate and reserve strategy: - RBM devalued the Kwacha by 25 percent in May 2022 and introduced pilot FX auctions to foster price discovery. - Reserve accumulation measures include winding down quasi-fiscal operations (fuel import financing), reducing outstanding swaps from US$420 million at end-2021 to about US$140 million by end of medium term, and active FX purchases from commercial banks. - RBM introduced surrender requirements (CFM) in August 2021 (tightened March 2022) with intention to wind down as market normalizes. - Reserve and external position (selected figures): - Gross reserves (after excluding encumbered deposits): US$72 million end-2021; revised from US$394.0 million in the 2021 Article IV. - Gross official reserves (staff projections): 429 (2021), 172 (2022), 409 (2023), 682 (2024), 835 (2025), 980 (2026), 1,039 (2027) — US$ millions. - Months of imports (gross reserves): 1.6 (2021), 0.6 (2022), 1.5 (2023), 2.5 (2024), 3.1 (2025), 3.6 (2026), 3.7 (2027). ### Debt sustainability, restructuring strategy, and financing - Debt distress assessment: - External and overall public debt assessed as in debt distress and unsustainable under current policies. - Pre-treatment external debt service projected at 55.6 percent of exports in 2022. - 2022 debt service projections: - Principal debt service excluding IMF: $569 million. - Interest payments: $119 million. - Commercial debt service (principal and interest): $468 million. - Debt strategy pillars and targets: - Sizeable NPV reduction of commercial debt and reprofiling of official bilateral debt (LIC-DSF 5 percent discount rate). - Targets to reach by medium term: PV debt-to-GDP below 30 percent; PV debt-to-exports below 140 percent; external debt service-to-exports below 10 percent; external debt-to-revenue below 14 percent. - Net present value debt reduction sought: US$579 million (Box 1). - Financing mix next 12 months: external financing need US$841 million; prospective debt relief 396 (47 percent), prospective RCF 88 (10 percent), prospective grants 318 (38 percent); residual gap 395. - Public debt dynamics (selected series): - Total public debt: 64.0 (2021), 76.6 (2022), 74.6 (2023), 74.5 (2024), 73.8 (2025), 72.6 (2026), 71.0 (2027) — percent of GDP. - External debt: 32.8 percent of GDP in 2021; external and domestic shares and creditor composition detailed in DSA excerpts. - Program financing and conditionality: - RCF-FSW access set at 50 percent of quota (SDR 69.40 million, about US$88.3 million); IMF would cover 10 percent of external financing need for next 12 months. - PMB to span November 2022–November 2023 with QTs, ITs, structural benchmarks, and prior actions; quantitative targets for end-December 2022 and end-June 2023. ### Social protection, food insecurity, and targeted measures - Food insecurity and shocks: - About 20 percent of the population projected acutely food insecure during 2022/23 lean season; WFP estimate: 3.8 million Malawians in need Oct 2022-Jan 2023. - Recent shocks: Tropical Storm Ana and Tropical Cyclone Gombe in Q1 2022; crop losses of 94,000 hectares. - Observed price impacts: bread +50 percent; flour +25 percent; cooking oil +55 percent; margarine +40 percent; diesel +31 percent; petrol +20 percent; kerosene +14 percent. - Programmatic social measures and FY2022/23 fiscal allocations (Box 1 and Box in PMB): - Proposed social spending sub-total (K billion) = 97.9 including: - Social Cash Transfer: 2 (K billion) - Affordable Inputs Program: 69.8 (K billion) - Maize/Other Food Stuffs Purchase—Lean season response: 12.6 (K billion) - Maize Seed subsidy: 4.4 (K billion) - Agriculture Sector support: 8.6 (K billion) - Livestock Development Initiatives: 0.5 (K billion) - Floor on social spending set as an indicative target covering SCTP and AIP. - Measures to prevent AIP cost overruns: augment farmer contributions and cap government subsidy; plan to phase out AIP over five years (reduce beneficiaries 20 percent each fiscal year). - Unified Beneficiary Register and Consolidated Social Protection Program to reduce duplication and better target support. - PFM and accountability for social spending: - Quarterly reporting and Social Spending Tracker; periodic audits; IFMIS coverage expansion and publication of audited IFMIS-generated comprehensive fiscal reports starting FY2023/24. ### Capacity to repay the Fund and Fund indicators - Capacity to repay: - Could become adequate subject to full PMB implementation and debt restructuring, but significant risks persist. - Total outstanding credit (existing and prospective drawings) projected at about 329.2 percent of quota by end-2022, equivalent to 33.7 percent of exports and about 253.9 percent of gross official reserves. - Total repayments to the IMF in 2022: 1.0 percent of exports and 7.5 percent of gross official reserves. - Fund obligations and projected credit outstanding (selected figures): - Projected level of credit outstanding (SDR millions): 329.2 (2022), 306.9 (2023), 283.7 (2024), 250.3 (2025), 202.5 (2026), 162.0 (2027). - Percent of exports (Projected Level): 33.7 (2022), 28.8 (2023), 25.8 (2024), 21.9 (2025), 16.8 (2026), 12.3 (2027). - Mitigating factors for repayment capacity: commitments by official creditors to provide concessional financing/grants; authorities’ track record servicing Fund obligations; strong policy commitment. - Staff support: - Staff supports disbursement under RCF-FSW access equivalent to SDR 69.40 million (50 percent of quota) and supports PMB with EBI. ### Macro outlook, key projections, and balance of payments - Real GDP (constant market prices): 0.8 (2022), 2.4 (2023), 3.2 (2024), 3.8 (2025), 4.3 (2026), 4.5 (2027). - Consumer prices (end of period): 26.0 (2022), 20.4 (2023), 15.2 (2024), 9.9 (2025), 7.7 (2026), 6.5 (2027). - Current account (percent of GDP): -14.6 (2021), -14.8 (2022), -13.6 (2023), -14.3 (2024), -13.1 (2025), -11.2 (2026), -9.6 (2027). - Balance of payments (US$ millions, current account balance): -1,750.7 (2021), -1,740.3 (2022), -1,447.0 (2023), -1,549.3 (2024), -1,455.9 (2025), -1,294.9 (2026), -1,167.6 (2027). - External financing requirements and sources (US$ millions): - Total requirement: -2,321 (2022), -1,945 (2023), -2,043 (2024), -1,798 (2025), -1,615 (2026), -1,360 (2027). - Total sources: 1,988 (2022), 1,422 (2023), 1,760 (2024), 1,584 (2025), 1,404 (2026), 1,296 (2027). - Expected disbursements (official): 1,867 (2022), 1,301 (2023), 1,620 (2024), 1,435 (2025), 1,251 (2026), 1,111 (2027). - Grants: 1,577 (2022), 1,030 (2023), 1,357 (2024), 1,203 (2025), 1,047 (2026), 966 (2027). - IMF (net): -31 (2022), -34 (2023), -35 (2024), -49 (2025), -69 (2026), -59 (2027). - Financing gap / residuals shown in staff tables for program planning. - Gross official reserves (US$ millions): 429.2 (2021), 171.7 (2022), 409.1 (2023), 681.8 (2024), 835.3 (2025), 979.6 (2026), 1,039.3 (2027). - Months of imports: 1.6 (2021), 0.6 (2022), 1.5 (2023), 2.5 (2024), 3.1 (2025), 3.6 (2026), 3.7 (2027). ### Risks, scenario analysis, and contingency measures - Key risks (high or medium likelihood and potential high impact): - Intensifying spillovers from Russia’s war in Ukraine (High likelihood; High impact) — policy response: strengthen intra-regional trade. - Commodity price shocks (High likelihood; High impact) — policy response: tighten monetary policy, increase exchange rate flexibility, strengthen FX buffer. - Delay in debt workout (High likelihood; High impact) — policy response: continue debt strategy implementation with advisor, decisive policy action to restore sustainability. - Governance weaknesses and delayed PFM reforms (High likelihood; High impact) — policy response: accelerate PFM reform implementation, strengthen anti-corruption measures. - Natural disasters related to climate change (Medium likelihood; High impact) — policy response: build resilience through human capital investment and reforestation/climate adaptation. - Stress tests and DSA insights: - Without debt restructuring, external debt service projected at 55.6 percent of exports in 2022; debt indicators breach thresholds in several scenarios. - Baseline with restructuring aims to bring debt indicators below relevant thresholds by medium term (PV debt-to-GDP <30 percent; PV debt-to-exports <140 percent; external debt service-to-exports <10 percent; external debt-to-revenue <14 percent). - Contingency measures: - Further restrain nominal wage growth and fully utilize revenue increases (inflation tax) as fiscal contingency. - Prioritize expenditures to protect vulnerable households and human/physical capital if fiscal space tightens. ### Governance, safeguards, and data reporting - Governance and safeguards actions: - Special audit of RBM foreign exchange reserves completed mid-June 2022 confirming prior noncomplying disbursements; corrective measures implemented. - Amendments to RBM Act and operationalization of ALCO; safeguards assessment (2021) found deterioration since 2018 and recommended comprehensive governance reform. - Anti-corruption agenda anchored on 4 Ps: Prosecuting, Preventing, Protecting, Preparing; audits uncovered misappropriation of COVID-19 funds and EDF issues. - Authorities committed to governance diagnostic under PMB with IMF TA. - Data, reporting, and TMU-based monitoring: - Quantitative Targets (QTs) and Indicative Targets (ITs) with specific test dates (end-Dec. 2022 and end-June 2023 QTs; end-Mar. and end-Sep. 2023 ITs). - Selected QTs/ITs include monetary base ceilings (end-Dec. 590.2; end-Mar. 607.6; end-Jun. 62.2; end-Sep. 74.2 — billions of kwacha as presented), domestic revenue floors (1,202.7; 1,603.5; 2,130.6; 2,657.6 — billions of kwacha), domestic primary fiscal balance (floor) amounts, social spending floors, and change in NIR (US$ millions). - Reporting timetables: bi-weekly, monthly, quarterly, and other frequencies specified in TMU; external and fiscal reporting to be improved and published (IFMIS-generated quarterly audited reports from FY2023/24). - Program exchange rate (kwacha per US$) memorandum item: 1,026.4 for program dates shown. ### Banking sector and financial soundness indicators (selected) - Capital and profitability (selected ratios): - Regulatory Tier 1 capital to risk weighted assets: 17.0 17.4 17.2 18.9 18.3 - Return on assets (ROA): 2.7 3.0 3.4 3.9 3.5 - Return on equity (ROE): 20.5 22.8 26.0 31.8 28.2 - Asset quality and liquidity (selected ratios): - Non-performing loans to gross loans and advances: 6.3 6.3 4.5 4.9 6.1 - Liquid assets to deposits and short-term liabilities: 58.9 57.5 52.5 46.8 49.0 - Total loans to total deposits: 54.2 50.0 47.9 44.7 47.0 - Notes: banking sector described as broadly stable, well capitalized, sufficient liquidity, and profitable, but industry NPLs 5.7 percent in September 2022 (marginally above recommended 5.0 percent). *Source: IMF staff report content for Malawi (content unit 1mwiea2022001).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### An economic and humanitarian crisis - Foreign exchange shortages together with exchange rate misalignment led to a sharp decline in imports including fuel, fertilizer, medicine, and food. - Large fiscal deficits, nearly 10 percent of GDP in FY2021/22, have been largely financed by domestic bank borrowing, resulting in rapid money growth and inflation of 25.9 percent in September 2022. - Exchange rate pass-through and hikes in food prices added to inflationary pressure. - Food insecurity has increased dramatically due to multiple tropical storms, below-average crop production, and rising prices for food and agricultural inputs such as fertilizer and seeds, expected to affect the current planting season. - About 20 percent of the population is projected to be acutely food insecure during the upcoming 2022/23 lean season (October 2022-March 2023), more than twice as many as in 2021. ### The authorities’ emerging response - FY2022/23 budget submitted in March 2022 aiming at fiscal consolidation of about 2½ percentage points of GDP. - Reserve Bank of Malawi (RBM) tightened monetary policy in April 2022 by raising the policy rate by 200 basis points and devalued the Kwacha in May by 25 percent to begin correcting a large real exchange rate overvaluation. - Authorities hired a debt advisor in May 2022 aiming for a sizeable debt treatment to bring Malawi back to moderate risk of debt distress in the medium term. ### Fund engagement - Authorities requested a disbursement of 50 percent of quota under the Rapid Credit Facility-Food Shock Window (FSW) to address urgent balance-of-payments needs and mitigate the food shock, including strengthening cash transfer programs to vulnerable households. - In parallel, a comprehensive restructuring of external public debt has been initiated to restore debt sustainability. - Significant new grant financing has been mobilized from multilateral and bilateral official partners. - Authorities requested a twelve-month Staff Monitored Program with Executive Board Involvement (PMB) to build a track record towards an Extended Credit Facility Arrangement (ECF). ### Policy and reform effort under the PMB - Focus areas: - Socially-conscious fiscal consolidation to contain domestic borrowing while protecting vulnerable households amid rising food prices. - Moving towards greater flexibility of the exchange rate to rebuild foreign exchange reserves and reduce vulnerabilities to external shocks. - Undertaking a debt restructuring to help restore debt sustainability. - Achieving price stability and maintaining financial soundness to support private-sector led growth. - Addressing longstanding governance weaknesses to reduce corruption and improve efficient and effective use of limited public resources. ### Risks - Risks to the policy and reform agenda are exceptionally high. - Restoring macroeconomic stability and debt sustainability will critically depend on: - Steadfast implementation of policies and reforms. - Timely progress with the envisaged debt operation. - Sustained engagement of donors with grant financing. ### Context (selected points) - The democratic change in government in mid-2020 marked a break from the past; the administration’s long-term growth strategy is “Malawi Vision 2063”. - The economy has been weighed down by unsustainable debt with external debt service representing about 56 percent of exports. - Public debt accumulation started after the 2013 “Cashgate” as on-budget support shifted to off-budget support and forgone funding of the budget was replaced by domestic borrowing and increased external nonconcessional borrowing. - Malawi is not in a position to implement an Upper Credit Tranche (UCT)-quality economic program and needs to build a track record for a UCT-quality arrangement. ### Recent economic developments (selected points) - End-2021 gross official reserves, after adjusting for encumbered deposits, stood at US$72 million, resulting in large negative net international reserves (NIR) of - US$1.3 billion at end 2021. - The country faced consecutive cyclones in the first half of 2022, rising commodity prices, and forex shortages. - Food inflation peaked at 33.7 percent in September 2022. - Current planting season of maize (November through December) is expected to suffer from high fertilizer and seed prices. - Economic growth in 2022 is projected at 0.8 percent (compared with 3.5 percent at the time of the 2021 Article IV consultation). - Monetary base growth remained high at 24 percent at end-August, largely due to high net domestic financing of fiscal deficit, which averaged 8.6 percent in FY2020/21 and FY2021/22. - Gross reserves at end 2021 stood at US$72 million, a downward revision from US$394.0 million in the 2021 Article IV Consultation because of the exclusion of encumbered deposits. - External debt service in 2022 would be US$719 million; without debt treatment, debt service is projected at about 55.6 percent of exports of goods and services. - RBM implemented a surrender requirement of 30 percent of exports and, in May 2022, devalued the Malawi Kwacha. ### Outlook and risks - Growth is projected to recover to 2.4 percent in 2023. - Medium-term growth projected at 4.5 percent (0.4-percentage point higher than in the Article IV consultation). - Inflation projected to decline to 20.4 percent by end-2023 and to further moderate to 6.5 percent over the medium term, reflecting monetary and fiscal tightening and reserve rebuilding. - Gross reserves projected to recover to 3.7 months of imports over the medium term through RBM FX purchases, debt treatment, and exiting quasi-fiscal operations. - Balance of risks is tilted to the downside (Annex II). Key downside risks include delays in nondebt-creating inflows, weaker-than-expected policy implementation, weather-related events, supply chain disruptions, and further surges in fuel, food, and fertilizer prices. - Upside risks include start of mining exports, successful export diversification/formalization of informal exports, and continued improvements in tax administration. ### Policies supporting the program (overview) - Fiscal consolidation to contain domestic borrowing and regain fiscal discipline. - Monetary policy tightening and measures to achieve price stability and maintain financial soundness. - Rebuilding external buffers through reserve accumulation, debt treatment, and nondebt-creating inflows. - Undertaking a debt restructuring to restore debt sustainability. - Tackling governance challenges and strengthening anti-corruption measures. - Building the foundation for inclusive growth and resilience to climate shocks. *Source: EXECUTIVE SUMMARY (1mwiea2022001) — IMF mission reports and accompanying materials (November 14, 2022).* ### 14. The revised FY2022/23 budget will support ambitious fiscal adjustment. The budget ### 14. The revised FY2022/23 budget will support ambitious fiscal adjustment ### A. Fiscal adjustment and budget targets - The budget law will be revised at the mid-year review to reflect the latest projections on revenue performance and the execution of development expenditure. - Authorities aim to reduce the domestic primary deficit to about 0.6 percent of GDP, from 4.1 percent of GDP in FY2021/22. - Net domestic financing is projected to decline to 5.6 percent of GDP in FY2022/23 from 7.4 percent of GDP in FY2021/22. - The primary fiscal balance is expected to improve by an annual 1½ percent of GDP over the medium term to stabilize debt dynamics. - The fiscal consolidation strategy places equal weights on expenditure containment and revenue improvement. - Authorities plan to adopt a Medium-Term Expenditure Framework (MTEF) consistent with the fiscal anchor. ### B. Domestic revenue mobilization (DRMS) - Current revenue is stated as 13.4 percent of GDP. - Measures already introduced in 2022: additional income tax brackets and advance income tax. - Committed further DRMS measures include: - introduce the presumptive tax for small businesses; - rationalize the list of items subject to preferential General Sales Tax (GST) treatment; - review tax incentive regimes to revamp the Taxation Act and Customs and Excise Act; - strengthen the withholding tax regime; - introduce measures to address Base Erosion and Profit Shifting (BEPS); - reform excise tax rates; - continue efforts to improve tax administration such as the online rollout of the Integrated Tax Administration System (ITAS), also called Msokho. - Nontax revenue measures: review fees and charges to reflect full cost recovery; ensure MDAs account for their revenue collections in IFMIS and remit nontax revenue collections to Malawi Government consolidated (MG1) account. ### C. Expenditure rationalization and social protection - Social expenditure is broadly carved out from required fiscal consolidation to mitigate increased food insecurity. - A floor on social spending is set as an indicative target (IT) under the program; this IT covers contributions to social safety net programs including the Social Cash Transfer Program (SCTP) and the Affordable Inputs Program (AIP). - Steps taken to prevent fertilizer-related cost overruns in the AIP: augmentations of farmer contributions and capping the Government Subsidy (MEFP ¶22 and MEFP Box 1). - Medium-term plan (with development partner support): phase out AIP and replace it with SCTP and public works programs. - Wage bill rationalization measures: hiring freeze (excluding frontline service delivery staff in health and education); strengthen approval processes for payroll and pension changes. ### D. Cash management, commitment controls, and arrears - Past issues: optimistic revenue projections and weak commitment controls led to accumulation of sizeable arrears from multiyear projects and utility bills. - Problems identified: MOFEA lacked a full picture of government commitments; monthly budget releases incentivized commitments outside IFMIS; limited disciplinary measures; controls concentrated at payment stage rather than commitment stage; backlog of bank reconciliations reduced credibility of public finances. - Measures: a flow chart has been elaborated to guide and strengthen cash management and debt issuance (MEFP ¶24 and MEFP Text Figure 1). - New IFMIS rollout and PFM reforms (including interim Electronic Funds Transfer (EFT)) from July 2021 aim to improve budget preparation, cash management, commitment controls, banking arrangements, accountability, and payment efficiency. - Authorities verified arrears of national budget entities up to June 30, 2020; will verify those up to March 31, 2022 (SB). - Authorities are preparing an arrears clearance strategy to respect fiscal framework limits and available resources. - Going forward: quarterly allotments and contract management to prevent further arrears; MDAs to commit up to allotment amounts through IFMIS; MDA payments limited to monthly cash releases aligned with allotments. ### E. Oversight of state-owned enterprises (SOEs) - Weak oversight and financial reporting of SOEs pose risks to the budget and public debt. - In compliance with the new PFM Act, authorities plan: - initiate detailed reporting for high-risk SOEs; - undertake regular monitoring of management accounts of relevant SOEs; - prepare an annual consolidated report of all SOEs (MEFP ¶23). ### F. Monetary policy and financial stability - The RBM will tighten monetary policy to achieve price stability (MEFP ¶25) and anchor policy at containing reserve money growth while building FX reserves. - RBM commitments: - align the monetary policy rate with inflation to ensure positive real returns on government securities; - raise required reserves if needed; - raise the discount rate to discourage banks from accessing the discount window. - Actions taken: raise monetary policy rate by 200 basis points in the April MPC meeting; another 200 basis points to 18 percent (and the discount rate to 20 percent) in the October MPC meeting. - Further increases will be implemented as needed to ensure these rates move into positive territory in real terms. - Medium-term intent: maintain the real interest rate below the growth rate to support private-sector led growth. - Financial sector vigilance: monitor RBM’s and commercial banks’ large exposures to government securities via timely submission of Standardized Report Forms (SRFs); reassess loan and collateral quality (MEFP ¶26). ### G. Rebuilding external buffers and exchange rate flexibility - RBM reserve accumulation strategy components (MEFP ¶27): - wind down unsustainable policies (e.g., excessive use of currency swaps and trade credit to maintain strategic imports and quasi-fiscal operations); - engage in sustainable policies to enhance price competitiveness and reserve accumulation (e.g., net purchases of foreign exchange from commercial banks). - RBM has begun taking measures (Box 1). - RBM committed to allow greater exchange rate flexibility via small pilot foreign exchange auctions to facilitate price formation; TA from the Fund will support development of the forex interbank market. - Box 1 — Reserve Accumulation Measures, 2022: - The RBM conducted a one-off 25 percent of devaluation in May 2022. - The RBM began to wind down the quasi-fiscal operation of financing fuel imports in Q3 and intends to cease it by end-2022 and let Petroleum Importers Limited (PIL) take over fuel importation. - The RBM will wind down the use of short-term borrowing, aiming to reduce outstanding swaps from US$420 million at the end of 2021 to about US$140 million by the end of the medium term. - The RBM will actively engage in purchasing foreign exchange from the market to rebuild external buffers. - The RBM introduced surrender requirements (a CFM) in August 2021 (further tightened in March 2022), with an intention to wind down the requirements as the forex market normalizes. - The RBM will create opportunities for price discovery and enhance transparency in forex trading, developing the forex market (SB). ### H. Debt sustainability, treatment, and debt management - Debt assessment: - At the time of the 2021 Article IV consultation (December 2021) Malawi’s external and overall public debt were assessed as high risk of debt distress, and unsustainable under current policies. - At the time of this report, Malawi’s external and overall public debt are assessed as in debt distress, and both external and overall public debt are unsustainable under current policies. - Pre-treatment external debt service would be 55.6 percent of projected exports in 2022 (Text Figure 1). - 2022 debt service projections: - Principal debt service excluding repayments to the IMF would amount to $569 million in 2022. - Interest payments would amount to $119 million in 2022. - The share of commercial debt service (principal and interest) would amount to $468 million. - Debt strategy measures: - Authorities hired debt advisors in May and began negotiations with commercial and official bilateral creditors (MEFP ¶29). - First step: sizeable net present value reduction of commercial debt and reprofiling of official bilateral debt (based on the LIC-DSF 5 percent discount rate). - Reprofiling of official bilateral debt expected before a potential UCT-quality arrangement is requested. - Treatment of private and official bilateral debt would bring external debt service down significantly in the near term and below the 10 percent of exports threshold by end of the medium term. - Fully implementing the strategy would restore debt sustainability and improve the outlook to moderate risk of debt distress by the end of the medium term (MEFP ¶30). - Debt management improvements are underway with IMF and World Bank TA (MEFP ¶31). ### I. Governance, safeguards, and anti-corruption - Program focus on improving data recording, reporting, and monitoring at MOFEA and RBM; IFMIS implementation and publication of strategic imports data are highlighted (MEFP ¶24, 32, 37). - Corrective actions following the 2018 ECF misreporting case: - Special audit of RBM’s foreign exchange reserves completed for the first three reviews under the 2018 ECF arrangement in mid-June 2022, confirming noncomplying disbursements under the previous ECF arrangement. - Implemented corrective measures to strengthen reserve management in line with the 2021 Safeguards Assessment recommendations. - Improvements in PFM (¶18-19); amendments to the RBM Act; establishment and operationalization of the Asset Liability Management Committee (ALCO) at the RBM. - Presentation of the misreporting case to the Executive Board planned on November 16, 2022. - Broader anti-corruption agenda anchored on 4 Ps: Prosecuting, Preventing, Protecting, Preparing. - Audits uncovered misappropriation of Covid-19 public funds (MEFP ¶34) and funds at the Export Development Fund (EDF), a wholly owned subsidiary of the RBM (MEFP ¶35). - Authorities have started implementing and following up on audit recommendations and committed to undertaking a governance diagnostic under the PMB with IMF TA (MEFP ¶36). - Safeguards assessment update (2021) found deterioration of safeguards at the RBM since 2018; comprehensive governance reform required to: - establish the Board as de facto main decision-making body responsible for oversight and policy formulation; - strengthen collegiality in executive management; - safeguard RBM operational autonomy including prohibiting quasi-fiscal activities; - strengthen foreign reserves management practices. ### J. Inclusive growth, climate resilience, and development priorities - “Malawi Vision 2063” aims to reach upper-middle income status by 2063, focusing on: - poverty reduction; - investing in human capital; - resilience in physical capital to climate shocks, including the agricultural sector. - Constraints: lack of sustained economic growth due to frequent climate shocks and fast population growth; per capita income stagnant; compounded by COVID-19 pandemic and spillovers from the war in Ukraine. - Policy priorities to support inclusive growth while safeguarding fiscal envelope: raise educational attainment; finance and invest in climate change resilience; strict adherence to policy and reform agenda is emphasized. ### K. Program modalities: PMB and Food Shock Window - The Staff-Monitored Program with Executive Board Involvement (PMB) will build a track-record during debt restructuring toward a potential ECF arrangement. - PMB duration: planned for a 12-month period spanning November 2022 to November 2023. - Malawi faces an urgent BOP need of US$841 million over the next 12 months related to the food-price shock. - Malawi qualifies for the Food Shock Window: identified by the Global Report on Food Crises (GRFC) as experiencing a food crisis and expected to experience a negative shock to its current account in 2022 exceeding the 0.3 percent of GDP threshold. - The IMF would cover 10 percent of the external financing need for the next 12 months (Text Table 1). - Due to time needed for debt restructuring and obtaining credible financing assurances, Malawi is not immediately in a position to implement an ECF arrangement. - Access under the Food Shock Window of the Rapid Credit Facility: set at 50 percent of quota (about US$88.3 million); 100 percent of access proposed to be allocated to budget support to facilitate large and upfront fiscal adjustment. - A Memorandum of Understanding between the RBM and the Ministry of Finance clarifies responsibilities for timely servicing of Malawi’s financial obligations to the IMF. - Policy commitments under the PMB will cover November 2022–November 2023 with quantitative targets for end-December 2022 and end-June 2023; monitoring via semi-annual reviews based on quantitative targets, indicative targets (MEFP Table 1), structural benchmarks (MEFP Table 2), and prior actions (MEFP Table 3). *Source: IMF staff report excerpts.* ### 39. Capacity to Repay the Fund. Malawi’s capacity to repay the Fund would become ### 39. Capacity to Repay the Fund. ### Capacity to repay — key indicators and projections - Malawi’s capacity to repay the Fund would become adequate—but with significant risks—subject to full program implementation under the PMB and debt restructuring. - All of the indicators on capacity to repay remain above the top quartile of past UCT-quality arrangements for PRGT programs during most of the program period (Figure 5). - Total outstanding credit based on existing and prospective drawings to the IMF is projected at about 329.2 percent of quota by end-2022, equivalent to 33.7 percent of exports, and about 253.9 percent of gross official reserves. - Total repayments to the IMF are also significant in 2022 (1.0 percent of exports and 7.5 percent of gross official reserves) (Table 7). - Mitigating factors needed: commitments by official creditors to provide additional concessional financing or grants, the authorities’ track record of servicing debt obligations to the Fund, and strong commitment of the authorities to implement the needed macroeconomic adjustment. ### Assurances from private creditors and arrears - Malawi has arrears vis-à-vis Trade Development Bank (TBD) while it is current on its obligations towards AFREXIM Bank. - Staff assessment on Lending Into Arrears (LIA) Policy for TBD’s claims: - Requirements are met because (i) prompt Fund support is considered essential for successful implementation of Malawi’s adjustment program, and (ii) Malawi is pursuing appropriate policies and making a good faith effort to reach a collaborative agreement with its private creditors. - With respect to AFREXIM Bank’s contribution to restore debt sustainability, assurances derive from staff’s judgment that a credible process for debt restructuring is underway and such restructuring will likely deliver an outcome that restores debt sustainability to moderate risk in the medium term. - Evidence of creditor engagement and preparedness: - Malawi has hired debt advisors. - Engaged in early discussions with creditors on a restructuring strategy consistent with restoration of debt sustainability. - Shared relevant information on its financial situation and its debt situation. - Given creditors an early opportunity to give input into the restructuring. - Malawi has also not incurred any arrears on bilateral official claims. ### Risks to the program - The debt operation required to reduce macroeconomic vulnerabilities is sizeable and risky, including potential delays in obtaining financing assurances, especially from bilateral official creditors and comprehensive collateralization of the borrowing from AFREXIM Bank. - Additional risks stem from possible delays in: - (i) strengthening the PFM and cash management control, - (ii) scaling up of foreign exchange purchases by the RBM, - (iii) scaling down of the excessive use of short-term instruments by the RBM, - (iv) addressing governance issues identified in the special audit on foreign exchange reserves or the 2021 Safeguards Assessment Report. - Climate shocks represent an additional risk. - Corruption-related risks remain high despite many cases occurring under the former government (examples: the misreporting case and COVID funding incident). - Mitigating factors include: - significant fiscal tightening, - the RBM’s strong commitment for further efforts for greater flexibility in the foreign exchange market, - authorities’ implementation of recommendations from the special audit and the 2021 safeguards assessment, - undertaking a proposed governance diagnostic exercise. - Staff note that further restraining nominal wage growth while fully utilizing an increase in revenue (inflation tax) could be a fiscal contingency measure. ### Authorities’ policy and reform program - Authorities’ objectives under the PMB: - address immediate BOP needs, - put the country back on a sustainable path, - set a strong foundation for achieving long-term objective of attaining inclusive growth and building resilience to climate shocks. - Policy focus areas: - ambitious fiscal consolidation to contain domestic borrowing, - moving towards greater flexibility of the exchange rate, - rebuilding foreign exchange reserves, - undertaking a debt treatment to help restore debt sustainability, - achieving price stability, - maintaining financial soundness, - addressing longstanding governance weaknesses. ### Adjustment strategy, financing, and protection of the vulnerable - Strategy envisages an adequate mix of adjustment, financing, and debt relief. - Burden sharing under the program will put Malawi on a recovery path while protecting the vulnerable and poor population. - Components to restore debt sustainability by the end of the medium term: - authorities’ fiscal adjustment plan, - ambitious debt treatment, - adjustment in external policies, - on-budget development assistance from development partners. - In the absence of fiscal space, authorities must prioritize expenditures to support the vulnerable and safeguard human and physical capital accumulation by improving the efficiency of public sector investment. ### Fiscal discipline, PFM, and fiscal reporting - Fiscal discipline supported by: - approval of a realistic budget, - an enhanced PFM system, - timely production of comprehensive fiscal reports. - The revised FY2022/23 budget would further reduce the domestic primary deficit. - Fiscal consolidation plans anchored on enhanced revenue mobilization, expenditure rationalization and mobilization of grants will need: - much stronger cash management and commitment controls than in the past, - improvements in fiscal reporting to enhance budget execution. ### Monetary policy, price stability, and financial sector stability - Restoring price stability and ensuring financial sector stability will help build a foundation for private-sector led growth. - RBM policy actions recommended: - persist in efforts to reduce inflation and anchor inflation expectations by containing reserve money growth, - stand ready to align the monetary policy rate with inflation to ensure positive real returns on government securities, - raise the required reserves if needed. - RBM vigilance required given the banking sector’s large exposures to government securities and associated potential risks. ### Rebuilding external buffers - Rebuilding foreign exchange reserves is critically important to reduce Malawi’s vulnerabilities to external shocks. - RBM commitments and required actions: - implement strategy to unwind unsustainable policies including excessive use of swaps and trade credit to maintain strategic imports and other quasi-fiscal operations, - start engaging in sustainable policies to enhance price competitiveness and reserve accumulation through net purchases of foreign exchange in relation to commercial banks. ### Upfront debt treatment and debt restructuring strategy - Upfront debt treatment will help bring Malawi back to moderate risk of debt distress in the medium term. - Authorities’ debt restructuring strategy aims to bring external debt service down substantially through: - significant treatment of commercial debt, - eventual reprofiling of official bilateral debt. - Successful implementation requires a concerted effort among the authorities, their creditors and international development partners. ### Governance and institutional reforms - Addressing weakness in governance and institutions is an important priority. - Actions undertaken and planned: - corrective actions to address the misreporting under the 2018 ECF, including the special audit of RBM’s foreign exchange reserves completed in June 2022 and decisively implementing several corrective measures to strengthen foreign exchange reserve management, - implementation of an anti-corruption agenda anchored on the 4 Ps, - audits of Covid-19 public funds and the EDF which uncovered misappropriation of funds, - restructuring of ADMARC, - commitment to undertake a governance diagnostic exercise under program, leveraging IMF TA. - The government should follow through with strong implementation of audit recommendations to decisively stamp out corruption. *Source: 1mwiea2022001 - 39. Capacity to Repay the Fund. Malawi’s capacity to repay the Fund would become* ### 49. Staff supports the authorities’ request for a disbursement under the Rapid Credit ### 1mwiea2022001 - 49. Staff supports the authorities’ request for a disbursement under the Rapid Credit ### Support for Request - Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility—Food Shock Window with access equivalent to SDR 69.40 million (50 percent of quota). - Staff also supports a Staff Monitored Program with Executive Board Involvement. - Support is provided in the context of an on-going food crisis and a concerted effort among the authorities, their creditors and the international development partners to support Malawi. ### Risk Assessment and Mitigating Factors - Risks to the program are high. - Risks can be mitigated by: - The authorities’ commitment. - Measures taken thus far. - The government's efforts to address socio-economic fragility and to maintain political stability. ### Real Sector Developments (selected points) - Real GDP slowed to 0.8 percent in 2022 from 5.4 per cent in 2019. - Inflationary pressures are rising given the surge in fuel, food and fertilizers prices, and broad money growth. - Spread between the Forex bureau rate and the RBM rate was 32 percent at end-September 2022. ### Fiscal Sector Developments (selected points) - Revenues are holding up while expenditure is exceeding previous years’ average due to emergency response and fuel and fertilizers price hikes and slippages. - Interest payments and other recurrent spending have increased, crowding out social spending. - Public debt projected to reach historically high levels. - On-budget support comparable to pre-2013 levels is noted as crucial. ### Monetary Sector Developments (selected points) - Banking sector is highly exposed to the public sector; capacity to absorb securities may be maxed out. - Monetary policy rate was raised to 14 percent in May 2022. - Policy stance has become de facto much looser with rapid growth in currency in circulation. - Monetary base growth is associated with growth in net claims to the central government and claims to ODCs, offsetting contraction in net foreign assets. ### External Sector Developments (selected points) - Imports add strain to scarce foreign exchange reserves; fertilizer import volume increased relative to previous years. - Fuel import volumes in 2020 and 2021 are higher than historical average levels. - Tobacco exports have not returned to pre-drought average earnings. - Spillovers from the war in Ukraine are adding to fuel and fertilizer imports while exports remain stagnant. - External buffers are depleted; sales of FX to authorized dealers and non-concessional loan repayments to regional development banks drained FX buffers in 2021. ### Capacity to Repay and Fund Indicators (selected points) - Figures and charts compare Malawi’s capacity-to-repay indicators to EF arrangements for PRGT countries (2010–2020 comparators shown in figures). - Metrics presented include percent of gross international reserves, percent of GDP, percent of PPG external debt, percent of revenue incl. grants, percent of exports of goods and services, and percent of PPG external debt service. ### Key Macroeconomic Projections and Indicators (selected highlights from Tables) - GDP at constant market prices: 0.8 (2022), 2.4 (2023), 3.2 (2024), 3.8 (2025), 4.3 (2026), 4.5 (2027). - Nominal GDP (billions of Kwacha): 9,599 (2021), 11,354 (2023), 14,018 (2024), 16,684 (2025), 19,278 (2026), 21,641 (2027), 24,048 (beyond). - Consumer prices (end of period): 26.0 (2022), 20.4 (2023), 15.2 (2024), 9.9 (2025), 7.7 (2026), 6.5 (2027). - National savings (percent of GDP): -5.4 (2021), -4.8 (2022), -3.6 (2023), -3.1 (2024), -4.1 (2025), -2.7 (2026), -2.1 (2027). - Gross investment (percent of GDP): 9.2 (2021), 9.9 (2022), 10.1 (2023), 11.2 (2024), 9.0 (2025), 8.5 (2026), 7.5 (2027). - Overall balance (including grants) on fiscal year basis (percent of GDP): -7.5 (2021), -9.7 (2022), -9.0 (2023), -8.4 (2024), -6.8 (2025), -5.6 (2026), -5.0 (2027). - Total public debt (percent of GDP): 64.0 (2021), 76.6 (2022), 74.6 (2023), 74.5 (2024), 73.8 (2025), 72.6 (2026), 71.0 (2027). - Gross official reserves (US$ millions): 429 (2021), 172 (2022), 409 (2023), 682 (2024), 835 (2025), 980 (2026), 1,039 (2027). - Months of imports (gross reserves): 1.6 (2021), 0.6 (2022), 1.5 (2023), 2.5 (2024), 3.1 (2025), 3.6 (2026), 3.7 (2027). - Current account (percent of GDP): -14.6 (2021), -14.8 (2022), -13.6 (2023), -14.3 (2024), -13.1 (2025), -11.2 (2026), -9.6 (2027). ### Balance of Payments (selected figures, US$ millions) - Current account balance: -1,750.7 (2021), -1,740.3 (2022), -1,447.0 (2023), -1,549.3 (2024), -1,455.9 (2025), -1,294.9 (2026), -1,167.6 (2027). - Exports (goods and services): 1,262 (2021), 1,294 (2022), 1,421 (2023), 1,477 (2024), 1,544 (2025), 1,638 (2026), 1,792 (2027). - Imports (goods and services): -3,255 (2021), -3,406 (2022), -3,173 (2023), -3,292 (2024), -3,265 (2025), -3,217 (2026), -3,261 (2027). - Gross official reserves: 429.2 (2021), 171.7 (2022), 409.1 (2023), 681.8 (2024), 835.3 (2025), 979.6 (2026), 1,039.3 (2027). - IMF (net) purchases/repurchases and amortization noted in tables with detailed yearly amounts. ### Fiscal Operations (selected fiscal-year amounts, Billions of Kwacha) - Revenue: 1,363.8 (2020/21 actual), 1,186.5 (2021/22 Prel.), 1,955.8 (2022/23 Budget), 2,035.0 (2023/24 Revised Budget). - Taxes: 1,136.0 (2020/21 actual), 978.3 (2021/22 Prel.), 1,534.8 (2022/23 Budget), 1,561.3 (2023/24 Revised Budget). - Expenditure (total): 2,049.7 (2020/21 actual), 1,920.6 (2021/22 Prel.), 2,839.9 (2022/23 Budget), 2,877.2 (2023/24 Revised Budget). - Interest: 348.3 (2020/21 actual), 271.2 (2021/22 Prel.), 520.7 (2022/23 Budget), 645.1 (2023/24 Revised Budget). - Fertiliser payments (line item): 121.1 (2020/21 actual), 156.6 (2021/22 Prel.), 100.8 (2022/23 Budget), 69.8 (2023/24 Revised Budget). *Source: IMF staff report content for Malawi (content unit 1mwiea2022001).* ### 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.218.918.3 ### 1mwiea2022001 - 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.218.918.3 ### Banking sector indicators — Capital - Regulatory Tier 1 capital to risk weighted assets: 17.0 17.4 17.2 18.9 18.3 - Total regulatory capital to risk weighted assets: 21.0 20.8 20.7 22.3 21.5 - Total capital to total assets (total capital refers to regulatory capital): 16.4 13.1 14.3 13.6 12.3 ### Banking sector indicators — Asset composition and quality - Non-performing loans to gross loans and advances: 6.3 6.3 4.5 4.9 6.1 - Provisions to non-performing loans: 38.6 32.9 32.5 40.7 34.7 - Total loans and advances to total assets: 33.2 31.2 29.2 28.8 30.8 - Foreign currency loans to total loans and advances: 20.9 14.7 11.3 10.0 13.3 ### Banking sector indicators — Earnings and profitability - Return on assets (ROA): 2.7 3.0 3.4 3.9 3.5 - Return on equity (ROE): 20.5 22.8 26.0 31.8 28.2 - Non-interest expenses to gross income: 51.8 49.0 43.7 40.9 41.7 - Interest margin to gross income: 59.6 65.6 49.7 47.8 49.3 - Non-interest income to revenue: 33.6 34.4 31.6 32.6 32.2 - Net interest income to assets: 8.4 8.0 7.9 2.3 4.4 - Personnel expenses to non-interest expenses: 43.0 42.5 0€ 43.4 44.7 42.1 ### Banking sector indicators — Liquidity - Liquid assets to deposits and short-term liabilities: 58.9 57.5 52.5 46.8 49.0 - Total loans to total deposits: 54.2 50.0 47.9 44.7 47.0 - Liquid Assets to total assets: 39.8 39.6 37.3 33.6 35.8 - Foreign exchange liabilities to total liabilities: 15.8 16.1 14.2 13.7 16.0 *Source: Reserve Bank of Malawi.* ### External Financing Requirement and Sources, 2022–27 (Millions of U.S. Dollars; Unless Otherwise Indicated) - Years: 2022 2023 2024 2025 2026 2027 - Total requirement: -2,321 -1,945 -2,043 -1,798 -1,615 -1,360 - Current account, excluding official transfers: -1,739 -1,446 -1,548 -1,455 -1,294 -1,166 - Debt amortization: -482 -262 -222 -190 -177 -134 - Gross reserves accumulation (- increase): -100 -237 -273 -153 -144 -60 - Total sources: 1,988 1,422 1,760 1,584 1,404 1,296 - Expected disbursements (official): 1,867 1,301 1,620 1,435 1,251 1,111 - Grants: 1,577 1,030 1,357 1,203 1,047 966 - Medium- and long-term loans: 291 271 263 232 203 145 - Private sector (net): 152 155 175 198 222 244 - IMF (net): -31 -34 -35 -49 -69 -59 - Drawings: 0 0 0 0 0 0 - Repayments: 31 34 35 49 69 59 - Financing gap: 33 25 23 28 32 21 4 (presented as 33252328321421164 in source formatting) - Gross official reserves: 172 409 682 835 980 1,039 - Months of imports: 0.6 1.5 2.5 3.1 3.6 3.7 *Source: IMF staff estimates.* ### Indicators of Capacity to Repay the Fund, 2022–34 (selected series; In Percent; Unless Otherwise Indicated) - Fund Obligations based on Existing Drawings (SDR millions) — Principal: 21.9 22.4 23.1 33.5 47.8 40.5 37.4 34.1 21.1 0.0 0.0 0.0 0.0 0.0 - Charges and interest: 0.9 14.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 54.6 4.65 (as presented) - Total Obligations based on Existing and Prospective Drawings (SDR millions): 22.8 227.0 227.7 638.1 152.4 945.1 255.9 452.5 939.6 418.5 318.5 34.6 54.6 54.6 4.65 (source formatting preserved) - US$ Millions (corresponding series): 30.7 33.9 23.7 145.1 287.1 0761.4476.1771.6153.9825.2325.236.336.336.33 (source formatting preserved) - Percent of exports of goods and services: 2.37 2.53 2.51 3.32 4.34 3.43 4.01 3.56 2.57 1.07 1.03 0.25 0.24 0.23 - Percent of debt service: 4.27 9.46 11.08 16.43 21.02 28.08 39.45 32.23 25.99 14.30 13.69 3.85 3.82 3.68 - Percent of quota: 16.44 19.47 20.00 27.46 37.82 32.51 40.30 37.89 28.56 13.35 13.35 3.35 3.35 3.35 - Percent of gross official reserves: 17.89 8.78 5.45 6.14 7.25 5.91 6.63 5.91 4.27 1.74 1.60 0.37 0.35 0.33 - Percent of GDP: 0.26 0.34 0.34 0.46 0.62 0.50 0.59 0.53 0.38 0.17 0.16 0.04 0.04 0.03 - Projected Level of Credit Outstanding based on Existing and Prospective Drawings (SDR millions): 329.2 306.9 283.7 250.3 202.5 162.0 110.7 62.8 27.8 13.9 0.0 0.0 0.0 0.0 - US$ Millions (Projected Level): 436.0 409.1 380.6 337.7 274.8 221.1 151.1 85.7 37.9 18.9 0.0 0.0 0.0 0.0 - Percent of exports of goods and services (Projected Level): 33.7 28.8 25.8 21.9 16.8 12.3 7.9 4.3 1.8 0.8 0.0 0.0 0.0 0.0 - Percent of GDP (Projected Level): 3.7 3.9 3.5 3.0 2.4 1.8 1.2 0.6 0.3 0.1 0.0 0.0 0.0 0.0 - Net Use of Fund Credit (SDR milions): 47.5 -22.4 -23.1 -33.5 -47.8 -40.5 -51.3 -47.9 -35.0 -13.9 -13.9 0.00 0.00 0.0 - Disbursement and purchases: 69.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Repayment and repurchases: 21.9 22.4 23.1 33.5 47.8 40.5 51.3 47.9 35.0 13.9 13.9 0.0 0.0 0.0 Selected memorandum items: - Exports of goods and services (millions of U.S. dollars): 1,294 1,421 1,477 1,544 1,638 1,792 1,901 2,014 2,103 2,347 2,441 2,539 2,629 2,724 - Debt service (millions of U.S. dollars): 719.2 379.5 335.2 312.1 338.1 218.8 193.1 222.2 207.7 176.4 184.3 164.6 165.7 172.1 - Quota (SDR millions): 138.8 repeated across series as presented - Gross official reserves (millions of U.S. dollars): 172 409 682 835 980 1,039 1,149 1,212 1,264 1,447 1,574 1,710 1,831 1,933 - GDP (millions of U.S. dollars): 11,781 10,619 10,809 11,116 11,554 12,182 12,866 13,600 14,387 15,202 16,096 17,049 18,049 19,114 *Source: IMF staff projections.* ### Annex I — Food Insecurity in Malawi (key findings and policy responses) - Malawi is ranked at the bottom quartile of the Global Food Security Index (GFSI) (2021) across three sub-components: availability, affordability, and quality and safety. - Key vulnerabilities: - Food affordability: exposure to food price shocks from natural disasters and exchange rate passthrough, especially fuel and fertilizer prices. - Food quality and safety: low nutritional quality of average diets. - Food availability: insufficiency of national food supply. - Recent shocks: - Tropical Storm Ana and Tropical Cyclone Gombe in Q1 2022; Ana resulted in the highest recorded rainfall since the 1960s in Southern region and crop losses of 94,000 hectares (e.g., maize, sorghum, millet, rice). - Spillovers from war in Ukraine increased food and fertilizer import prices and disrupted supply chains, compounding risks. - Observed price impacts: - Prices of bread and flour spiked by 50 percent and 25 percent, respectively. - Prices of cooking oil and margarine increased by 55 percent and 40 percent, respectively. - Authorities increased domestic energy prices: diesel by 31, petrol by 20, kerosene by 14. - Government measures in FY2022/23: - Removed VAT on cooking oil and drinking water. - Removed middlemen in fertilizer procurement. - Removed solar panel import duty. - Development Partners support: expansion of social protection programs, food assistance, top-ups to the Social Cash Transfer Programme (SCTP), and in-kind maize contributions with cash top-ups. *Source references in text: The Economist’s Global Food Security Index (GFSI) (2021); World Food Program, March 2022. Food Security Brief.* ### Annex II — Risk Assessment Matrix (selected risks, likelihood, impact, and policy responses) - Intensifying spillovers from Russia’s war in Ukraine - Relative Likelihood: High - Impact if Realized: High - Policy Response: Strengthen intra-regional trade among sub-Saharan African countries to overcome supply chain disruptions. - Commodity price shocks - Relative Likelihood: High - Impact if Realized: High - Policy Response: Tighten monetary policy, increase exchange rate flexibility, strengthen FX reserve buffer, apply automatic fuel price adjustment mechanism, replenish fuel price stabilization. - Systemic social unrest - Relative Likelihood: High - Impact if Realized: Low - Policy Response: Increase social priority spending, undertake promised reforms transparently and equitably, strengthen governance measures. - Local Covid-19 outbreaks - Relative Likelihood: Medium - Impact if Realized: Medium - Policy Response: Faster vaccine rollout domestically to build health system capacity. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Impact if Realized: Medium - Policy Response: Upfront action to address debt sustainability, avoid external non-concessional borrowing, rely on grants and highly concessional loans. - Delay in debt workout - Relative Likelihood: High - Impact if Realized: High - Policy Response: Continue implementation of the debt strategy with debt advisor; take decisive policy action to restore debt sustainability and close financing gap. - Governance weaknesses - Relative Likelihood: High - Impact if Realized: 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 if Realized: High - Policy Response: Accelerate PFM reform implementation, strengthen corruption control, communicate transparently. - Fiscal dominance resulting in deficient monetary policy - Relative Likelihood: Medium - Impact if Realized: High - Policy Response: Further strengthen RBM independence; adopt clear monetary operational framework. - Natural disasters related to climate change - Relative Likelihood: Medium - Impact if Realized: High - Policy Response: Build economic resilience through human capital investment and address deforestation. ### Annex III — External Sector Assessment (summary and policy implications) - Overall assessment (2021): Malawi’s external position was substantially weaker than implied by fundamentals and desirable policies. - 2021 current account (CA) deficit widened to 14.6 percent from 13.6 percent in 2020. - CA deficit financed by very expensive external non-concessional loans and swaps. - High external debt and large debt-service burden jeopardize low gross reserves. - SDR allocation in 2021 was used for repayment obligations and did not build reserves or finance productive investment. - Potential policy responses: - Develop a diversified and competitive export sector. - Align official exchange rate to market rate and develop exchange rate market. - Implement a coherent package of policies to restore confidence for non-debt-creating grants and FDI recovery: fiscal consolidation, monetary tightening, FX market development, strengthening financial supervision, improving governance and reducing corruption. - Improve data compilation and reporting. - Current Account specifics: - 2021 CA deficit further widened to 14.6 percent (from 13.6 percent in 2020) due to a large increase in value and volume of imports. - Exports of goods in 2021 increased marginally; imports (notably fuel and fertilizers) increased further. - CA deficit in 2022 expected to increase to 14.8 percent due to higher oil and commodity import prices and a large one-off exchange rate devaluation. - Very large interest payments on non-concessional external borrowing add to trade deficits. *Source: Reserve Bank of Malawi.* ### 14.8 percent of GDP in 2021. This points to a large gap of -10.2 percent of GDP compared to a cyclically ### 1mwiea2022001 - 14.8 percent of GDP in 2021. This points to a large gap of -10.2 percent of GDP compared to a cyclically ### Current account position and REER assessment - CA-Actual: -14.6 (in percent of GDP) - Cyclical contributions (from model): ( - ) 0.2 (in percent of GDP) - COVID-19 adjustor: ( - ) 0.1 (in percent of GDP) - Natural disasters and conflicts: ( - ) -0.2 (in percent of GDP) - Adjusted CA: -14.8 (in percent of GDP) - CA Norm (from model, cyclically adjusted): -4.6 (in percent of GDP) - Adjusted CA Norm: -4.6 (in percent of GDP) - CA Gap: -10.2 (in percent of GDP) - o/w Relative policy gap: 2.0 (in percent of GDP) - Elasticity: -0.28 - REER Gap (in percent): 36.9 - Staff assessment: 2021 REER assessed as overvalued by about 37 percent based on the CA model. - REER dynamics and exchange rate policy: - REER appreciated about 24.8 percent since 2016. - Reserve Bank of Malawi devalued the Kwacha by 25 percent in May (to correct overvaluation). - Spread between official rate and market (forex bureau) rate widened through April 2022, narrowed after the May devaluation, then began widening sharply from September reflecting inflation pressure and FX shortage. - Recommendation: development of the exchange rate market and more flexible exchange rate system to help narrow the current account deficit and allow the exchange rate to act as a shock absorber. ### Capital and financial accounts; external financing - Project loans and off-budget support: about 8 percent of GDP in past years (data caveat noted). - Foreign direct investment: estimated to be less than 1 percent of GDP. - SDR allocation contribution to financial account balance in 2021: about one third. - Policy measures: RBM reintroduced a surrender requirement to exporters in August 2021 (assessed as a CFM) and tightened the measure in March 2022. - Assessment: - Significant FX drains due to large external debt and non-concessional external borrowing. - Gross reserves extremely low: 0.3 months of import coverage at end-2021 and estimated to have reduced further by end-April 2022. - Use of surrender requirement would be justified given the imminent crisis situation, but authorities must pursue warranted macroeconomic, financial and exchange rate policies; data reporting to the Fund needs improvement. ### FX intervention, reserves adequacy, and recent reserve movements - Gross reserves: below $80 million at end-2021; readily available gross reserves reported as $71.7 million at end-2021. - Gross reserves equivalent: 0.3 months of imports at end-2021. - SDR allocations in August 2021: about USD190 million; converted to U.S. dollars immediately and used for repayment obligations within months. - Surrender requirement: 30 percent of proceeds from exports reintroduced in August 2021 and tightened in March 2022 so that all exporters have to surrender; staff sees the measure has not been successful in replenishing foreign currency in the market. - Main sources of declining gross reserves: large principal and interest repayments on non-concessional external loans and rolling over short-term swaps. - Reserve adequacy model for credit-constrained economies: adequate level around 3.9 months of imports for Malawi. - Staff recommendation: accumulate gross reserves to about 3.7 months of imports within a few years, recognizing it will take time given current low levels and high debt, and considering large import dependency and vulnerability to climate events. ### Recent macroeconomic developments and outlook - Real GDP growth: - 2020: 0.9 percent - 2021: estimated 2.2 percent - 2022 (projected): 0.8 percent - 2023 (expected recovery): 2.4 percent - Medium term: projected to hover around 4 percent - Factors affecting growth: two tropical cyclones in 2022 Q1, delayed/early cessation of rains in 2021/22 agricultural season, intermittent electricity supply, spillovers from the war in Ukraine (higher fuel, fertilizer, and food prices). - Fiscal outcome FY2021/22: - Deficit: MWK 792 billion (9.7 percent of GDP), compared to budgeted MWK 724 billion. - FY2021/22 runs for three quarters from 2021Q3-2022Q1 due to fiscal year shift. - Inflation: - Medium-term objective: 5.0 percent - Headline inflation: 7.6 percent at end-2020; 25.9 percent at end-September 2022. - Year-on-year inflation expected at 26 percent at end-2022 and projected to decline towards about 6.5 percent by the end of the medium term. - Drivers: exchange rate pass-through, lingering impact of expansionary fiscal stance in FY21/22, accommodative monetary policy stance, higher prices of fuel, fertilizer and imported food amid global supply disruptions. - Banking sector: - Broadly stable, well capitalized, sufficient liquidity, profitable. - Industry-wide non-performing loans: 5.0 percent in September 2021; 5.7 percent in September 2022 (marginally above the recommended limit of 5.0 percent). - Food security and social impact: - World Food Program (WFP) estimate: 3.8 million Malawians will experience acute food insecurity and be in need of food assistance during the lean season October 2022-January 2023. - Outlook on external balances and reserves: - Gross reserves projected to recover to 3 months of imports by the end of the medium term. - Reserve accumulation path assumes external financing gap filled with non-debt creating flows (debt relief or grants). - Program financing request: - Requesting emergency financing under the Rapid Credit Facility (RCF) - Food Shock Window equivalent to 50 percent of Malawi’s IMF quota, approximately US$88.3 million. - Requesting a Staff Monitored Program with Executive Board Involvement (PMB) to support policy actions and build a track record toward an IMF-supported ECF. ### Policy priorities, reforms, and program conditionality - Near-term objectives: - Restore macroeconomic stability to provide foundation for inclusive recovery. - Implement measures to enhance fiscal discipline, maintain price stability and financial soundness, rebuild external buffers, and restore debt sustainability. - Address governance weaknesses and corruption; improve transparency and accountability of public financial management (PFM); strengthen autonomy and governance of RBM and foreign exchange reserves management. - Fiscal policy stance: - Prioritize expenditure to safeguard social safety net programs such as the Social Cash Transfer Program (SCTP) and protect investment in infrastructure. - Execute a revised FY2022/23 budget based on realistic revenue estimates. - Replace non-concessional external financing with grants and other non-debt creating flows where possible. - Monetary and exchange rate policy: - Maintain an appropriate monetary stance to contain inflation. - Align external policies to economic fundamentals; allow exchange rate to adjust and serve as shock absorber. - Wind down currency swap operations as RBM builds up foreign reserves. - Structural and governance reforms: - Advance structural reforms to support sustainable and inclusive growth. - Strengthen PFM, RBM reporting of official foreign exchange reserves, and transparency in reserve management. - Continue the comprehensive debt restructuring process to restore debt sustainability and build a track record under the PMB. - Program implementation and transparency: - Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) describe policies and monitoring arrangements. - Authorities intend to make public the IMF staff report, this letter, the MEFP, the TMU, the informational annex, and the debt sustainability analysis carried out by IMF and World Bank staff. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mwiea2022001.pdf* ### 12. Risks to the outlook are significant. While the risk of a sudden stop of existing trade credit ### 12. Risks to the outlook are significant. ### Key risks - The risk of a sudden stop of existing trade credit facilities and forex swaps could, if realized, trigger an imminent BoP crisis. - Another COVID-19 wave and weather-related events remain relevant risks. - The war in Ukraine could compound risks through supply chain disruptions and the surge in fuel, food and fertilizer prices, resulting in additional financing needs and increasing risks to food insecurity. *ECONOMIC AND FINANCIAL POLICIES FOR THE PROGRAM PERIOD* ### Program objectives (Malawi 2063) - (i) restoring macroeconomic stability - (ii) enhancing fiscal discipline - (iii) maintaining price stability and financial soundness - (iv) rebuilding external buffers - (v) restoring debt sustainability and closing the financing gap - (vi) addressing weaknesses in governance ### A. Fiscal Policy — overarching stance - Regain fiscal discipline and restore debt sustainability through enhanced revenue collection, managed expenditures, and improved transparency and monitoring of budget execution. ### Fiscal targets and adjustment (FY2022/23 and medium-term) - Revised FY2022/23 budget foresees measures to reduce the fiscal deficit to 7.1 percent of GDP. - Upfront fiscal adjustment of about 3¾ ppts of GDP in FY2022/23. - Envisaged reduction of the domestic primary deficit to 0.6 percent of GDP in FY2022/23 compared to 4.1 percent of GDP in FY2021/22. - Reduction in Net Domestic Financing by 2⅓ percent of GDP to 5.5 percent of GDP in FY22/23 relative to FY21/22. - Medium-term: a primary surplus of 0 percent is needed to stabilize public debt, representing a cumulative fiscal consolidation of 4.0 percentage points (in terms of domestic primary balance) over the next four years. - Fiscal consolidation focus during remainder of FY2022/23: (i) implement Domestic Revenue Mobilisation Strategy (DRMS) timely, (ii) rationalize and prioritize expenditures, (iii) introduce and implement sound commitment controls measures, (iv) implement well targeted measures to support low-income households. ### Implementation and expenditure control measures - Revised FY2022/23 budget (PA) submitted to the Cabinet on November 9, 2022. - Announce quarterly allotments aligned with macro-framework and outturns; MDAs to commit up to this amount through IFMIS; MDA payments limited to monthly cash releases aligned with allotments. - Pilot introduction of allotment system in specified MDAs with effect from November 2022 and aim to extend practice to all MDAs via the 2023-24 budget speech. ### Revenue mobilization (DRMS and measures) - DRMS launched in December 2021 with objective to increase revenue by 5 percent of GDP in the five years of implementation. - DRMS Monitoring Committee comprising MoFEA, MRA, Accountant General, Immigration Department, Malawi Police Service and Registrar General in FY2022/23. - Specific measures: - PAYE Brackets: introduced additional income tax brackets in April 2022. - Advance income tax: full implementation rolled out in May 2022 which raised additional revenue amounting to MWK 6 billion. - Tax stamps on beverages: requirement for electronic tax stamps on alcohol, energy drinks, flavored water, carbonated soft drinks and opaque non-alcoholic drinks; expected operational in the last quarter of FY2022/23. - Taxes for small businesses: presumptive tax for small businesses with turnover less than MWK12.4 million; gazetting process underway; regulations expected in place by end November 2022; block management system to be rolled out in full to all commercial centers once regulations in place. Block management commenced in Lilongwe, Blantyre and Mzuzu. - Tax Incentives: establishment of Special Economic Zones announced in FY2022/23 budget; reviewing and streamlining tax incentives to be incorporated in new Taxation Act and Customs and Excise Act under review. - Revised budget will incorporate additional reforms including VAT base broadening and repealing tax exemptions to the Special Economic Zones. ### Tax administration and non-tax revenue measures - Go-live launching of Integrated Tax Administration System (ITAS/Msonkho online) December 2022 with all modules by March, 2023. - Improve non-tax revenues by reviewing fees and charges to reflect full cost recovery where possible; automating payment systems and business processes of MDAs; enforcing dividend and surplus policy; ensuring SOEs comply with PFM Act by opening a holding account with the RBM; ensuring MDAs remit non-tax revenue collection to MG1 account through departmental receipts accounts. ### Expenditure prioritization and reforms - Improve efficiency of public spending and reduce non-critical spending. - Affordable Input Program (AIP) reforms: - Implement first phase by having a Consolidated Social Protection Program using the Unified Beneficiary Register to reduce duplication. - Measures to prevent cost overrun in the AIP, including increment to farmer contribution while capping the Government Subsidy and fast-tracking beneficiary reform. - Plan to phase out the AIP in five years by reducing the number of beneficiaries by 20 percent every fiscal year. - Move the lowest income farmers to social protection programs and higher-end farmers to commercial agriculture programs supported by development partners. - Rationalize the wage bill: - Personnel Audit carried out in 2021 provided recommendations. - Commit to freeze new hiring to the public service except in critical areas such as health and education; strengthen approval processes to payroll and pension changes within existing HRMIS. - Establish a floor on social spending as an indicative target (IT) under the program, comprising Government contribution to health and basic and secondary education spending, and social safety net spending including SCTP and AIP. - Fiscal measures to mitigate food insecurity detailed in Box 1. ### Box 1 — Fiscal Measures to Mitigate Food Insecurity, FY2022/23 (Proposed) - Social Cash Transfer: Amount Proposed (K billion) = 2; Justification: help vulnerable groups; Reporting: Social Spending Tracker. - Affordable Inputs Program: Amount Proposed (K billion) = 69.8; Justification: cushion farmers from high/increased prices of fertilizers; Reporting: Line item in the budget, monthly reports and social spending tracker. - Maize/Other Food Stuffs Purchase—Lean season response: Amount Proposed (K billion) = 12.6; Justification: procure additional maize and other foodstuffs under Disaster Affairs Department for lean season response (December 2022 - March 2023); Reporting: Social Spending Tracker. - Livestock Development Initiatives: Amount Proposed (K billion) = 0.5; Justification: target livestock farms such as Dwambadzi; Reporting: Social Spending Tracker. - Maize Seed subsidy: Amount Proposed (K billion) = 4.4; Justification: provide good quality seeds to vulnerable population; Reporting: Social Spending Tracker. - Agriculture Sector: Amount Proposed (K billion) = 8.6; Justification: support Ministry of Agriculture in Agricultural extension services and land conversation agricultural measures; Reporting: Line item in the budget through monthly budget execution reports. - Sub-Total (K billion) = 97.9 ### SOE oversight, arrears, and IFMIS enhancements - Strengthen oversight of SOEs; keep close track of government guaranteed debt of SOEs. - Undertake detailed reporting for high-risk SOEs including Blantyre Water Board, ESCOM, ADMARC, NOCMA, EGENCO; monitor management accounts quarterly; prepare an annual consolidated report of all SOEs in compliance with the new PFM Act. - Arrears: completed verification of arrears of national budget entities from 1st July 2017 to 30th June, 2020. Discussions with Auditor General on unverified arrears and on arrears submitted from MDAs up to March, 2022. Commitment to settle arrears within limits of fiscal framework and available resources and avoid further accumulation through quarterly allotment and contract management. - Contract Management module of IFMIS: starting mid November 2022 implement quarterly commitment limits backed by monthly payment fundings and roll out contract management module beginning with Ministries of Health and Transport; pilot phase until March 2023; full roll out to all MDAs from 1st April 2023. - Expand coverage of transactions recorded in IFMIS to include transactions currently outside IFMIS; from 1st April, 2023 include budgets and actuals of all debt issuance receipts and servicing payments, transfers to local councils, and advances to embassies. - Review bank account structure for public debt to ensure compliance with new PFM Act and facilitate transaction recording. - Cash management and debt issuance: strictly adhere to budget execution process (Text Figure 1 workflow). - Move to exclusive use of Electronic Funds Transfer (EFT) for government payments across all MDAs in FY2023/24 or as soon as planned RBM upgrade completed; GOM will cease to act as a participating bank in the interbank payment system. - IFMIS coverage expanded to include all national government cash inflows and outflows, including all MG1 and public debt issuance and servicing transactions from July 2021. Auto-reconciliation of government’s bank statements has started; domestic budget execution data compiled for April through to September 2022. - Publish quarterly audited IFMIS-generated comprehensive fiscal reports starting in FY2023/24, backed by reconciled bank statements submitted within three weeks from the end of each month to the Cash Management Committee, MDAs and IMF staff. - Pass new PFM Act in March 2022; draft regulations and Treasury instructions to support implementation to be finalized by March 2023 and June 2023 respectively. ### B. Maintaining Price Stability and Financial Soundness - Monetary policy focus: contain inflationary pressures and anchor inflation expectations; stand ready to tighten monetary policy as needed. - Monetary program anchored on containing reserve money growth; contain money growth against excess liquidity from sizeable foreign exchange purchases envisaged to build up FX reserves. - Measures include: - Tightening the monetary policy stance by raising the monetary policy rate to attain positive real interest rates. - Draining excess liquidity through instruments including raising required reserves, RBM’s sales of government securities, and considering Open Market Operations (OMO) for sterilization purposes. - Financial sector stability measures: - Monitor banking system exposure to government through securities and swap operations. - Reassess loan and collateral quality needs of commercial banks. ### C. Rebuilding External Buffers - External policies to support rebuilding FX buffers sustainably and maintain a market-determined exchange rate. - Actions taken and planned: - 25 percent one-off exchange rate adjustment at end-May 2022 to realign exchange rate with market clearing rate; narrowed exchange spread with forex bureau rate from over 28 percent at end-April 2022 to 2 percent at end-May 2022, but spread has since widened due to speculation and forex shortages. - Aim to maintain kwacha as market driven. - Implement agreed path to accumulate foreign exchange reserves and slow down direct forex sales to the market in support of imports; RBM will become a net purchaser of foreign exchange. - Gradually wind down existing swap open position guided by foreign exchange accumulation path. - Strategy aims to help achieve a 3-months import cover by the end of the medium term. - Monitor reserve liabilities so that RBM’s net international reserves (NIR) will reach an adequate level as quickly as possible. - Arrange small pilot foreign exchange auctions to facilitate price formation and development of the interbank FX market. - Ensure coordination between government and RBM; government will review its policies and implications on foreign exchange to help contain the current account deficit. *Source: IMF staff-monitored program documents for Malawi, chapter on risks and economic and financial policies.* ### 28. Malawi’s overall and external public debt is assessed to be in debt distress and both ### 28. Malawi’s overall and external public debt is assessed to be in debt distress and both ### Debt assessment and overarching strategy - Malawi’s overall and external public debt is assessed to be in debt distress and both external and public debt are assessed as unsustainable under current policies. - This situation mainly reflects legacy debts driven by unsustainable fiscal and external policies. - Restoring public debt sustainability is the top priority to support macroeconomic stability and to lay the foundation for sustainable and inclusive growth. - A debt restructuring strategy has been developed to serve as the cornerstone for restoring debt sustainability: - A debt advisor has been engaged to support a credible restructuring process based on adequate creditor engagement. - All creditors were approached early in the process and the authorities are committed to achieving a debt treatment that puts debt back on a sustainable path consistent with the macroeconomic parameters of the program. ### Debt strategy pillars and targeted DSA thresholds - The debt strategy is designed to achieve debt sustainability and to close financing gaps. It relies on the following pillars to overcome current external debt challenges, including solvency and liquidity concerns: - Bringing external public debt back to a moderate risk of debt distress in the medium term through a combination of policy adjustment and the necessary debt treatment. The debt strategy targets all external DSA solvency and liquidity ratios to cross their respective thresholds under the baseline in the next five years. This means: - (i) the baseline of the present value of debt-to-GDP ratio to reach below 30%, - (ii) the present value of debt-to-exports ratio below 140%, - (iii) the external debt service-to-exports ratio below 10%, and - (iv) the external debt-to-revenue ratio below 14% in the medium-term. - Mobilization of non-debt creating flows to ensure the external and fiscal financing gaps are closed over the program period, including through the debt treatment and the mobilization of external grant support from development partners. ### Public debt management, transparency, and fiscal adjustment measures - Commitments to ensure debt remains on a sustainable path include: - Updating the medium-term debt strategy (MTDS) to take into account on-budget externally and domestically financed projects either contracted or expected as reflected in the macro-fiscal framework. The MTDS will also reflect the ceiling on new non-concessional external debt contracted or guaranteed [performance criterion] that will apply to Malawi as required by the Fund’s Debt Limit Policy. - Adopting best practices in data reporting and transparency, and fulfilling reporting duties to the Fund during the Staff’s program review or upon request: - Continue integrating public debt data into IFMIS. - Further enhance transparency by publishing regular reports on outstanding debt figures on official websites. - Build capacity around debt management and financing and seek technical assistance from the IMF and other partners. - Undertaking a strong fiscal adjustment while limiting the impact on economic growth and protecting vulnerable populations through revenue mobilization efforts. - Pursuing an export diversification strategy to rebuild external buffers over the medium term and improve liquidity; the strategy aims to reduce dependence on agricultural exports, build resilience to climate shocks, and support medium-term economic growth. ### Governance, central bank reforms, and reserve management - Strengthening Reserve Bank of Malawi’s (RBM) autonomy, governance arrangements, and reserve management are cornerstones of the program: - RBM’s gross reserve management strategy has been established in accordance with recommendations of the 2021 Safeguards Assessment Report (corrective action prior to presenting the misreporting case to the Board). - The RBM Board has established an Asset Liability Management Committee (ALCO) in accordance with recommendations of the 2021 Safeguards Assessment Report; ALCO is fully operationalized (SB). - Prepare, in consultation with Fund staff, and submit the amendments to the RBM Act to Parliament as recommended by the 2021 safeguards assessment (SB). - To strengthen accuracy of RBM’s program monitoring data: - Institute a policy to have external auditors verify NIR data within 10 weeks after each test date. - Submit monetary data through standard reporting forms to the Fund on a regular basis. ### Misreporting of NIR and corrective actions - A special audit of RBM’s foreign exchange reserves for the first three reviews under the 2018 ECF was completed mid-June 2022 and confirmed the noncomplying disbursements under the previous ECF (corrective action prior to presenting the misreporting case to the Board). - Implemented corrective measures include: - RBM now submits to Fund staff monetary and financial statistics (MFS) using the Standard Reporting Form (SRF), supported by Fund Technical Assistance. - Submitting terms of existing foreign exchange swaps and other reserve liabilities to Fund staff on a regular basis. - Published RBM’s restated financial statements for 2018-2021 in accordance with the 2021 Safeguards Assessment recommendations. - Realigned value of the kwacha with the market determined rates at end-May 2022. - Going forward remedial measures to rebuild external buffers, address macroeconomic imbalances, and improve data quality include: - Continuous and timely reporting to Fund staff of reconciled sources and uses of foreign exchange reserves of the RBM. - Establishing a registry to consolidate records of all liabilities and contracted facilities, including pledges and encumbrances, to strengthen transparency, recording and monitoring of RBM’s liabilities. - Committing to fiscal discipline to ensure fiscal and external sustainability over the medium-term. ### Audits and governance of COVID-19 spending and public entities - Misappropriation of COVID-19 public funds prompted urgent governance actions: - Audits completed: - Audit report for MWK 6.2 billion completed by the National Audit Office (NAO) in March 2021, made public in April 2021; government implementing recommendations, with recovery of some misappropriated funds; implicated officials faced disciplinary actions and criminal charges. - Audits of two other tranches amounting MWK 17.2 billion and MWK 5.0 billion, outsourced to external auditors, completed and submitted to the Ministry of Finance and Parliament in April 2022; preparations underway for specific follow-up actions to implement audit recommendations. - Governance weaknesses at the Export Development Fund (EDF) pose contingent liability risks; EDF is a wholly owned subsidiary of RBM and the Government is working on modalities to merge EDF with Malawi Agricultural and Industrial Investment Corporation, PLC (MAIIC). ### Broader anti-corruption and governance agenda - Government adopted a strategy to combat corruption aligned with the President’s “golden thread of conditions” emphasizing rule of law, law enforcement, and absence of corruption. - Strategic response components: (a) Pursue; (b) Prevent; (c) Protect; and (d) Prepare. - Implementation measures with specific timing: - Office of the Director of Public Asset Declarations will digitise asset declarations and establish an interface system between ODPOD and ACB to facilitate lifestyle audits by September 2023. - Strengthen collaboration among the Financial Intelligence Agency (FIA), the Director of Public Prosecutions (Asset Forfeiture Unit) and ACB in tracing assets for freezing and confiscation by September 2023. - Operationalization of the Financial Crimes Court. - ACB will establish and sign a Memorandum of Understanding of cooperation with a selected MDAs by June 2023 to facilitate data and information sharing for combating corruption purposes. - Request for a governance diagnostic technical assistance from the IMF. ### Transparency of strategic imports - The Government will ensure publication of strategic imports data on a timely manner: - MERA will publish monthly volume, value, and prices of fuel importation by importer. - Ministry of Agriculture, with support of Malawi Fertilizer Association, will publish fertilizers data for the AIP. - Central Medical Stores Trust (CMST) will publish medical supplies data. ### Program monitoring, structural benchmarks, and selected quantitative targets - The macroeconomic policies under the Staff Monitored Program (PMB) are complemented by a structural program composed of Prior Actions, Structural Benchmarks (November 2022–November 2023), Quantitative Targets (QTs) and Indicative Targets (ITs). - Selected quantitative and indicative targets (2022–23) (values preserved as in source): - Monetary base (ceiling on stock) (upper bound) QT: - End-Dec. 590.2 (billions of kwacha) - End-Mar. 607.6 - End-Jun. 62.2 - End-Sep. 74.2 - Monetary base (ceiling on stock) (another row) IT: - 573.0, 589.9, 642.9, 654.6 (billions of kwacha) - Monetary base (ceiling on stock) (lower bound) IT: - 555.8, 572.2, 623.6, 634.9 (billions of kwacha) - Domestic revenue (floor) IT: - 1,202.7; 1,603.5; 2,130.6; 2,657.6 (billions of kwacha) - Domestic primary fiscal balance (floor) QT: - -17.1; -70.0; 54.9; 104.0 (billions of kwacha) - RBM financing of central government (ceiling) QT: - 0; 0; 0; 0 - New domestic arrears (ceiling) IT: - 0; 0; 0; 0 - Social spending (floor) IT: - 503.7; 669.3; 203.2; 409.8 (billions of kwacha) - Change in net international reserves of the RBM (floor) QT (US$ millions): - 141.3; 7.0; 209.0; 54.7 - Accumulation of external payments arrears (ceiling) QT: - 0; 0; 0; 0 - Contracting or guaranteeing of non-concessional external debt (ceiling) QT: - 0; 0; 0; 0 - Contracting or guaranteeing of concessional external debt (ceiling) IT: - 1530; 1530 - Program exchange rate (kwacha per US$) memorandum item: - 1,026.4; 1,026.4; 1,026.4; 1,026.4 - Notes from the TMU excerpt: - “QT” means Quantitative Target and “IT” means Indicative Target. The QT test date for the 1st Review is end-December 2022. Test dates for future reviews will be end-June 2023. End-March and end-September 2023 targets are ITs. - Several targets are subject to adjustors and definitions as specified in the TMU. ### Structural benchmarks and prior actions (selected) - Structural Benchmarks (examples and timing): - Roll out full functionalities of IFMIS to all MDAs by End-March 2023 to achieve interconnectedness, internal control over transactions, and comprehensive coverage. - Submit the audited fiscal report of FY2021/22 to IMF staff by End-December 2022 to foster accountability and monitoring. - Notify the FY2022/23 Q3 quarter allotment to the pilot MDAs by End-December 2022. - Complete verification of arrears of national budget entities from July 1, 2020 to March 31, 2022 certified by the Auditor General by End-December 2022. - Approval by the Cabinet of an arrears clearance and prevention strategy prepared in consultation with staff by End-February 2023. - Pre-announcement of forex purchases to allow market-price formation by End-November 2022 to deepen the interbank FX market. - Prepare and submit amendments to the RBM Act as recommended by the 2021 safeguards assessment by End-June 2023. - Establish and operationalize ALCO by End-March 2023. - Publish a follow-up report related to the COVID-spending audit report and EDF’s audit report by End-October 2023. - Prior Actions under the PMB (status and dates preserved): - Completion of special external audit of the foreign exchange reserves of the RBM: Conducted from March through June 2022; Completed on June 17, 2022. - Submit the FY2022/23 Revised Budget that is in line with the macroeconomic framework to the Cabinet: Submitted on November 9, 2022. *Source: IMF staff and Malawian authorities, as presented in the program documents.* ### 2. The government is defined as the budgetary central government of Malawi, extra- ### 2. The government is defined as the budgetary central government of Malawi, extra- ### Coverage and institutional scope - Government: budgetary central government of Malawi, extra-budgetary units of the central government, and transfers to local government. - Excludes: public nonfinancial corporations, public financial corporations, operations of local councils and social security funds. - Budgetary central government: central government entities with budgets controlled by the Ministry of Finance and Economic Affairs (MOFEA). - Financial sector coverage: Reserve Bank of Malawi (RBM) and other depository corporations (ODC). - Monetary aggregates: based on central bank survey, other depository corporations survey, and depository corporations survey, in accordance with the Monetary and Financial Statistics (MFS) 2016 manual. ### Program exchange rates - For evaluation of performance criteria (ITs), all foreign currency-related assets, liabilities, and flows are evaluated at “program exchange rates” except items affecting government fiscal balances, which are measured at current RBM exchange rates. - The program exchange rates are those that prevailed on end-September 2022. ### Quantitative and indicative targets (coverage and test dates) - Quantitative Targets established for: December 31, 2022 and June 30, 2023. - Indicative Targets established for: March 31, 2023 and September 30, 2023. - Targets apply to: - Monetary base (ceiling) - Domestic revenue (floor) - Domestic primary balance of the government (floor) - RBM financing of the central government (ceiling) - New domestic arrears (ceiling) - Social spending (floor) - Change in net international reserves (NIR) of the RBM (floor) - Accumulation of external payments arrears (ceiling) - Contracting or guaranteeing of non-concessional external debt (ceiling) - Contracting or guaranteeing of concessional external borrowing (ceiling) ### Definitions and modalities for monetary aggregates - Ceiling on the Stock of Monetary Base: - A ceiling applies to the upper bound of a monetary base band (set +/-3 percent) around the monetary base target. - Monetary base definition: - Currency in circulation, ODCs’ deposit holdings at the RBM, and those deposits of money-holding sectors at the RBM that are also included in broad money as defined in the Monetary and Financial Statistics (MFS) Manual (2016). ### Fiscal sector targets and definitions - Floor on Domestic Revenue: - A floor applies to the cumulative flow of domestic revenue since the beginning of the fiscal year. - Program domestic revenue definition: tax and nontax revenue, or other revenue as defined in GFSM 2014 Chapter 5, recorded on a cash basis. - Excludes: external loans and grants; transfers from extra-budgetary funds; proceeds from sale of financial assets; revenue from privatizations; revenue from granting or renewal of licenses; investment proceeds on government assets. - Floor on Domestic Primary Fiscal Balance: - A floor applies to the cumulative flow of domestic primary fiscal balance since the beginning of the fiscal year. - Domestic primary fiscal balance definition: (i) domestic revenue less (ii) the sum of recurrent budget expenditure (net of domestic and foreign interest payments), and domestically-financed budget development expenditure. - Net foreign borrowing of the government: - Defined as sum of project and program loan disbursements from official creditors (both multi- and bilateral creditors), holdings of government securities by non-residents, and commercial borrowing from non-residents, minus amortization due. - General budget support: - Includes all grants and foreign financing not directly linked to externally financed projects. - Excludes: external project financing to fund particular activities, BOP support from the IMF as defined in the Memorandum of Understanding between MOFEA and RBM, and donor inflows (in kwacha) from foreign currency-denominated donor pool accounts for Joint Funds. - Adjustors: - Adjustor on domestic primary fiscal balance – general budget support: - If general budget support inflows fall short of (or exceed) the program baseline, the floor on domestic primary fiscal balance will be adjusted downward (or upward) by the full amount of the kwacha value of the cumulative shortfall (or excess), calculated at the program exchange rate. - Ceiling on RBM Financing of the Government: - RBM financing definition: net borrowing from the RBM by the government (including ways and means advances, loans, holdings of local registered stocks, government securities, and promissory notes minus deposits). - Adjustor for cash management: ceiling for December 31, 2022, March 31, 2023, June 30, 2023, and September 2023 is subject to an upward adjustment of up to 10 percent of the average inflation adjusted annual domestic revenue of the government for the past three fiscal years. - Ceiling on New Domestic Arrears: - Domestic arrears definition (PFM Act): all unpaid bills, inclusive of contractual and statutory obligations, after the end of financial year. - Wages and salaries, transfers, and compensations are arrears when unpaid for more than 30 days beyond due date. - Domestic interest payments are in arrears when not paid on the due date. - Payments for goods and services are arrears if not paid beyond the fiscal year after receipt of goods/services or beyond the contractual grace period. - Monthly reporting: outstanding purchase orders, payables, and cash expenses on goods and services will be reported. - New pensions arrears: deemed to exist if the stock of pension increases during the end of the fiscal year; monthly reporting to include outstanding pension payments in the last quarter due. - Floor on Social Spending: - Social spending defined as on-government spending on social protection using the Unified Beneficiary Register, education expenditure, and health expenditure. - Social protection includes: social cash transfer, climate-smart public works, and AIP. - Education: expenditure on early childhood education, primary, and secondary education services. - Health: expenditure on basic health care package provided by primary and tertiary facilities. ### External sector targets and definitions - Floor on Change in Net International Reserves (NIR) of the RBM: - NIR definition: reserves assets (RA) of the RBM minus foreign currency drains (FCD) of the RBM. - All foreign assets and FCD values converted into U.S. dollars at each test date using program cross exchange rates listed in Table 1. - Change in NIR is calculated on a quarterly basis between the stock of the NIR on the test date and that of the end-date of the previous quarter. - Reserve assets definition: - As per International Reserves and Foreign Currency Liquidity Guidelines and BPM6, paragraph 6.64: includes (i) monetary gold holdings of the RBM; (ii) holdings of SDRs; (iii) the reserve position in the IMF; (iv) foreign convertible currency holdings; (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; (vi) loans to foreign banks redeemable upon demand; (vii) foreign securities; and (viii) other unpledged convertible liquid claims on nonresidents. - Foreign currency drains (FCD) definition: - Sum of: (i) outstanding medium and short-term liabilities of the RBM to the IMF (SDR allocations excluded); and (ii) all foreign currency liabilities of the RBM and the RBM as an agent of the government to come due within the next 12 months (4 quarters), including (a) foreign currency debt service falling due in the next 12 months (4 quarters) and (b) swaps outstanding with remaining maturity of less than one year. - Adjustors applied to change in NIR program floor: - Adjustment clause on NIR – debt service and fees: - Program floor on change in NIR will be adjusted upward by the full amount by which the debt restructuring reduces debt service, or downward by which debt service increases or if fees related to debt restructuring incur. - The debt service adjustment includes changes in the debt repayment schedule due to restructuring relative to the baseline. - Adjustment clause on NIR – general budget support: - Program floor on change in NIR will be adjusted upward by the full amount by which foreign currency-denominated inflows from budget support exceed the program baseline, and downward by the full amount by which they fall short of the program baseline. - They will be recorded in the original currency of payment and then converted to U.S. dollars using the program cross exchange rates. ### External payment arrears and debt ceilings - Ceiling on Accumulation of External Payment Arrears: - External payment arrears definition: debt service obligations (principal and interest) of the government or the RBM to nonresidents not paid at due date, or if a grace period has lapsed, as specified in contractual agreements. - External debt subject to rescheduling or restructuring based on official announcement of the debt restructuring strategy is exempted from being included as external payment arrears. - Monitored on a continuous basis. - Ceiling on Contracting or Guaranteeing Non-Concessional and Concessional External Debt: - Definition of public and publicly guaranteed debt: per paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements and includes contracted or guaranteed commitments for which value has not been received. - Debt for program purposes: a current (not contingent) liability created under contractual arrangement through provision of value in the form of assets or services, requiring future payments in assets or services to discharge principal and/or interest. - Debt considered contracted when all conditions for its entrance into effect have been met, including approval by the National Assembly. - Contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements is considered contracting of debt. - Forms of debt include: - i. Loans (advances of money, deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - ii. Suppliers’ credits (deferred payments after delivery of goods/services). - iii. Lease agreements (debt equals present value at inception of all lease payments expected for the period, except payments for operation, repair, and maintenance). - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Definition of concessional and non-concessional external debt: - Debt is concessional if it includes a grant element of at least 35 percent and non-concessional if otherwise. - Grant element: difference between nominal value of the loan and its present value, expressed as a percentage of nominal value of the loan. - Present value of the debt at contracting date is the discounted sum of all future debt service payments at time of contracting. - Discount rate used: 5 percent per annum. - Ceiling on concessional and non-concessional debt applies to contracting and guaranteeing of debt with nonresidents by the government, the RBM, and state-owned enterprises, unless an explicit selective exclusion is made. - Performance criterion monitored on a continuous basis. - Ceiling applies to debt and commitments contracted or guaranteed for which value has not been received, measured cumulatively from the beginning of the fiscal year. - Short-term debt: outstanding stock of debt with an original maturity of one year or less. - Medium- and long-term debt: outstanding stock of debt with an original maturity of more than one year. - Exclusion: use of IMF resources is excluded from the limit on non-concessional external debt. - Swaps in debt service: debt service payments should include swaps based on the net change in the position. - Foreign exchange swaps: contracting or renewing foreign currency swaps with nonresident banks beyond the program amount is subject to the ceiling of non-concessional external debt. ### Reporting requirements and timelines - Data reporting timetables: - Bi-weekly submissions: data reported with a lag of one week. - Monthly and quarterly submissions: data reported within 3 weeks. - Data submissions requiring audit: reported within 8 weeks. - Annual data: provided within six months after the end of the year. - Authorities’ reporting and notification obligations: - Inform IMF staff of any changes in economic and financial policies that could affect the outcome of the financial program, including but not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), development agreements, wage policy, and financial support to public and private enterprises. - Inform IMF staff of any concessional or non-concessional external debt contracted or guaranteed by the government, the RBM, or any statutory bodies, and any accumulation of new external payments arrears on such debt. - Furnish an official communication to the IMF describing program quantitative performance, structural benchmarks, and indicative targets within 8 weeks of a test date. - Selected reporting items and frequencies (summary): - Exchange Rates, spread between exchange bureau midrate and the official exchange midrate: D, 2W reporting to RBM. - Volume of transactions in interbank money market and Lombard Facility, including banking system liquidity: D, 2W reporting to RBM. - Foreign Exchange Cashflow (including Reserve Assets, Sources and Uses of foreign currency) (Telex Table 14): D, 2W reporting to RBM. - RBM intervention and ADB’s Sales and Purchases of FX: D, 2W reporting to RBM. - Foreign Exchange Swaps: continuous, 2W reporting to RBM. - Reserve/base money, FMO transactions, and RBM conversion of ways and means account to government securities: M reporting and publication by RBM. - Monetary and Financial Statistics Standard Report Forms (1SR, 1SG, 2SR, 2SG, 3SG, 5SR in Telex Table 1): M reporting and publication by RBM. - Consumer Price Index and monthly statistical bulletin (Telex Table 5): M reporting and publication by RBM. - Detailed issue and maturity profile for all government securities (Telex Table 6 & 7): M reporting and publication by RBM. - Central government domestic borrowing (Holdings of local registered stocks, treasury bills, treasury notes and other government securities) (Telex Table 8, 13, 20): M reporting and publication by RBM. - RBM financing of the central government: M reporting and publication by RBM. - Government Project Funds through the RBM (Telex Table 9): M reporting and publication by RBM. - Interest rates (Telex Table 12): M reporting and publication by RBM. - RBM foreign exchange cash flow and intervention (Telex Table 14, 27): M reporting and publication by RBM. - ADBs FCDA Balances (Telex Table 15): M reporting and publication by RBM. - Banking System Liquidity (Required and Excess Reserves) (Telex Table 16): M reporting and publication by RBM. - RBM Holding of Treasury Bills and Conversion of Ways and Means Advances (Telex Table 17): M reporting and publication by RBM. - Reserve Assets of the Monetary Authorities (as defined in ...): M reporting and publication by RBM. *Source: Malawi program technical memorandum of understanding (TMU) content provided.* ### Chapter 1 of International Reserves and Foreign Currency ### Chapter 1 of International Reserves and Foreign Currency ### Summary of reporting and data templates - Reporting cadence labels in the source: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I). - Selected reporting items and responsible agencies (examples extracted from the source): - Foreign Currency Drains of the Monetary Authorities (Telex Table 19) — RBM — frequency: M M M. - Government securities auction results (Telex Table 20) — RBM — frequency: M M M. - Swap account, agricultural Swap account, NAC account held at RBM (Tables 24, 25, 26) — RBM — frequency: M M ... . - RBM Foreign Exchange Deposits (Telex Table 32) — RBM — frequency: M M M. - Financial soundness indicators by banks (Telex Table 34) — RBM — frequency: M M ... - Balance of payments — RBM / NSO — frequency: A A A. - Continuous reporting item: New external loans contracted or guaranteed by the government and disbursement schedule — MOFEA — frequency: Continuous. - Revenue collected by MRA, by major revenue line — MOFEA — frequency: D 2W M. - Fiscal table (GFS based), including revenue, grants, expenditure, balance, and composition of financing of the central government — MOFEA — frequency: M M ... . - Exports and imports of goods and subcomponents (to be added to Telex tables submissions) — MOFEA — frequency: M M Q. - Notes on definitions and inclusions: - Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - Memorandum section includes Net International Reserves based as defined in this TMU. - Detailed information required on amounts, currencies, terms and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government. - Accumulation of new domestic government arrears treated in accordance with the definition of arrears in TMU Paragraph 17. ### Public debt coverage used in the DSA - Coverage: central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government. - Public debt for the DSA: public and publicly guaranteed (PPG) external and public domestic debt, covering debt contracted and guaranteed by the central government and the Reserve Bank of Malawi (RBM). - 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 nonguaranteed state-owned enterprise (SOE) debt. - Contingent liabilities shock from SOE debt kept at the default value of 2 percent to reflect risks associated with nonguaranteed SOE debt currently excluded from analysis. ### Context and macroeconomic background - The DSA is conducted in the context of a request for disbursement under the Rapid Credit Facility (RCF) and a Staff Monitored Program with Executive Board Involvement (PMB). - Malawi is subject to the IDA Sustainable Development Finance Policy (SDFP), which includes a Zero Nonconcessional Debt Ceiling. - Recent shocks and macro developments: - Real GDP growth in 2022 projected to decline to 0.8 percent. - Malawi faced two tropical cyclones in the first quarter of the year, rising commodity prices, and forex shortages. - A 25 percent currency devaluation at end-May (year not restated in the excerpt) contributed to inflation pressures and de facto rationing of foreign exchange. - About 20 percent of the population projected to be acutely food insecure at the “Crisis” level (IPC Phase 3 or higher) during the 2022/23 lean season (October 2022-March 2023); the population living at the crisis level more than doubled since last year. - Fiscal outcomes and drivers: - FY2021/22 (April/March) fiscal deficit: 9.7 percent of GDP. - Budget support and on-budget project grants averaged 5.8 percent of GDP during 2005-13 and reduced to about 1.8 percent of GDP since 2013. - Overly optimistic budget revenue projections, weak commitment control, and delayed fiscal consolidation contributed to higher domestic financing and fiscal deterioration. ### Debt dynamics and composition (key figures) - Total public debt increased from 45.3 percent of GDP in 2019 to 64.0 percent of GDP in 2021. - External debt rose to 32.8 percent of GDP in 2021 from 27.8 percent in 2019. - Public external debt constituted 51.2 percent of total debt in 2021. - Creditor composition of public external debt (2021 shares reported): - Official creditors: 72 percent of total public external debt. - Official multilateral creditors: 60.3 percent of outstanding public external debt in 2021. - IDA: 30.6 percent. - African Development Bank (AfDB): 11.1 percent. - IMF: 10.2 percent. - Other multilaterals: 8.4 percent. - Official bilateral debt: 11.7 percent. - Debt outstanding with nonofficial commercial banks: 28.0 percent of total external debt. - AFREXIM bank: 16.1 percent (largest private creditor). - Among nonofficial commercial bank debt, 5.8 percent is from foreign exchange swaps with nonresidents, amounting to US$221.7 million. ### Debt stock and debt service (selected numbers from Text Table 2) - Total public debt stock (reported): 7,521 (In Million US$) — Percent total debt 100.0 — Percent GDP 64.0 (end-2021 nominal GDP reported as 12,004). - External debt (end-2021): 3,853 (In Million US$) — Percent total debt 51.2 — Percent GDP 32.8. - Multilateral creditors (end-2021): 2,324 (In Million US$) — Percent total debt 30.9 — Percent GDP 19.8. - IMF stock: 394 (In Million US$) — Percent total debt 5.2 — Percent GDP 3.4. - World Bank: 1,178 (In Million US$) — Percent total debt 15.7 — Percent GDP 10.0. - AfDB: 427 (In Million US$) — Percent total debt 5.7 — Percent GDP 3.6. - Other Multilaterals: 325 (In Million US$) — Percent total debt 4.3 — Percent GDP 2.8. - Commercial creditors (end-2021): 857 (In Million US$) — Percent total debt 11.4 — Percent GDP 7.3. - AFREXIM (end-2021): 619 (In Million US$) — Percent total debt 8.2 — Percent GDP 5.3. - TDB (end-2021): 238 (In Million US$) — Percent total debt 3.2 — Percent GDP 2.0. - Domestic debt (end-2021): 3,668 (In Million US$) — Percent total debt 48.8 — Percent GDP 31.2. - T-Notes held by residents: equivalent to US$3,466 million (noted as 46.1 percent of total debt and 29.5 percent of GDP in table context). - Foreign exchange swaps with resident banks by RBM: $202.2 million. - Memo items: - Contingent liabilities: 192 (In Million US$) — Percent total debt 2.6 — Percent GDP 1.6. - Collateralized debt (end-2021): 619 (In Million US$) — Percent total debt 8.2 — Percent GDP 5.3. - Debt service concentration and near-term burdens: - Near-term debt service is highly concentrated among commercial creditors with nonconcessional terms (no grace period, typical maturity 4-6 years). - Debt service to AFREXIM: $284 million in 2022 and $201 million in 2023. - Debt service to TDB: $184 million in 2022 and $5.8 million in 2023. - Debt service to AFREXIM and TDB together equivalent to 65 percent of external debt service in 2022. ### Assessment of debt distress and restructuring prospects - Risk ratings (as reported): - Risk of external debt distress: In Debt Distress. - Overall risk of debt distress: In Debt Distress. - Granularity in the risk rating: Unsustainable. - Application of judgment: No. - DSA baseline and indicators: - Under the baseline scenario, the PV of PPG external debt-to-GDP ratio remains below the threshold throughout the horizon. - Breaches observed in PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue ratios over the medium term; heaviest burden in the near term with external debt-to-exports ratio at 55.6 percent in 2022. - PV of debt-to-exports ratio remains above the threshold of 140 percent, especially if the residual financing gap were financed externally. - Solvency indicator (PV of public debt-to-GDP ratio) remains above the threshold throughout the medium term and beyond. - Restructuring and policy engagement: - Malawi has arrears vis-à-vis Trade Development Bank (TBD) while it is current on obligations to AFREXIM Bank. - Staff assesses that requirements of the IMF’s Lending Into Arrears (LIA) Policy are met for TBD given prompt Fund support is essential and Malawi is pursuing appropriate policies and good faith negotiations. - A credible process for restructuring debt to AFREXIM Bank is underway; assurances derive from IMF staff judgment that credible restructuring will likely deliver an outcome that restores debt sustainability to moderate risk in the medium term. - Authorities have hired debt advisors, engaged creditors early, shared relevant information, and given creditors opportunity to input into restructuring strategy. - The authorities’ debt restructuring strategy, if implemented, would bring Malawi’s risk of debt distress to moderate in the medium term. - Compared to the November 2021 DSA (where near-term debt service to external nonofficial creditors was projected at US$468 million in 2022 and US$207 million in 2023), the envisaged debt operations would reduce debt service for nonconcessional loans substantially in 2022; from 2023, commencement of possible grace periods would provide substantial relief. ### Key vulnerabilities and policy implications highlighted - Major vulnerabilities: - Exposure to natural disasters, commodity-price shocks, and spillovers from the war in Ukraine. - Foreign exchange scarcity and inflationary pressures following a 25 percent currency devaluation (end-May). - Heavy near-term debt service concentrated on commercial creditors with nonconcessional terms. - Large FY2021/22 fiscal deficit of 9.7 percent of GDP and rising public debt (64.0 percent of GDP in 2021). - Policy implications and inferred actions (as reflected in the source): - Implement credible debt restructuring strategy to reduce near-term external debt service and restore sustainability to moderate risk. - Maintain good-faith engagement with commercial creditors and multilateral/bilateral creditors, including use of debt advisors and information sharing. - Pursue fiscal consolidation and stronger budget execution, including realistic revenue projections and commitment control, to stabilize public financing needs. - Monitor and report detailed fiscal and external financing information per the reporting templates to support transparency and debt-management decisions. *Prepared by the International Monetary Fund and the International Development Association (excerpts from the Malawi Joint Bank-Fund Debt Sustainability Analysis).* ### Box 1. Malawi: Debt Restructuring Strategy, October 2022 ### Box 1. Malawi: Debt Restructuring Strategy, October 2022 ### Debt restructuring strategy: objectives and pillars - Purpose: Serve as the cornerstone for restoring debt sustainability and closing financing gaps. - Legal and financial advisors hired in May 2022 to support a credible restructuring process with adequate creditor engagement. - Early engagement with all creditors; negotiations in good faith ongoing (noted exception: TDB). - Key pillars: - Bring external public debt back to a moderate risk of debt distress in the medium term through policy adjustment and necessary debt treatment. - Targets for baseline medium-term ratios (post-restructuring): - Present value of debt-to-GDP ratio: to reach below 30 percent. - Present value of debt-to-exports ratio: below 140 percent. - External debt service-to-exports ratio: below 10 percent. - External debt-to-revenue ratio: below 14 percent. - Mobilize non-debt-creating flows (grants and debt relief) to close external and fiscal financing gaps over the program period. - Net present value (NPV) debt reduction sought: US$579 million. ### Underlying macroeconomic and fiscal assumptions (selected) - Reform program: Assumes strict implementation of a reform program that began in early 2022 (FY2022/23 budget passage, fiscal consolidation in March, monetary policy rate increases in April and October, 25 percent devaluation in May). - Financing assumptions: Replacement of nonconcessional external financing by nondebt-creating flows (grants and debt relief). Authorities assumed current on existing obligations except for TDB (negotiations ongoing). - Growth: - Real GDP growth projection for 2022 revised from 3.5 percent to 0.8 percent. - Growth projected to improve to 2.4 percent in 2023 and reach 4.5 percent in the medium term. - Long-term real GDP growth path revised downward from 5.5 percent to 4.6 percent. - Inflation: - CPI inflation projected at 26.0 percent at end-2022. - Long-term inflation projected at about 6.5 percent. - Assumes monetary and fiscal policy well anchored; reserve money growth kept in line with projected nominal GDP growth; real interest rates returning to positive figures. - Fiscal balance and consolidation: - Projected fiscal primary deficit in FY2022/23 revised down to 3.3 percent of GDP from 4.8 percent. - Authorities’ program projects the fiscal primary deficit turning into a surplus of 0.7 percent of GDP by FY2025/26. - DSA assumes a balanced fiscal primary balance over 2025-42. - Revised FY2022/23 budget reduces the domestic primary balance by 3½ percentage points of GDP relative to FY2021/22 via wage bill restraint, reductions in goods and services, the AIP, and domestically-financed development spending. - Combined cumulative adjustment: about 7.2 percentage points of GDP in the medium term (about 1½ percentage points of GDP per year). - Domestic revenue measures: - Measures assumed to enhance domestic revenue by about 3 percentage points of GDP during 2022-27 (short of the government’s 5 percent target). - Already introduced: additional income tax brackets and advance income tax in 2022. - Further commitments: presumptive tax for small businesses, rationalize preferential GST items, review tax incentive regimes, strengthen withholding tax regime, BEPS measures, reform excise tax rates, rollout of Integrated Tax Administration System (ITAS/Msokho). - Nontax revenue measures: review fees and charges toward full cost recovery; ensure MDAs account for and remit collections to MG1 account. - Expenditure composition: - Primary expenditure projected to decrease by about 3 percentage points of GDP during 2022-27 through adjustments to wage bill, AIP, and goods and services. - Increase in social protection spending of 0.2 percent of GDP to better target low-income households. - External sector: - Current account deficit revised to 14.8 percent of GDP in 2022; projected to decline to 9.6 percent by end-2027. - Exports of goods and services projected to increase from 11.0 percent of GDP in 2022 to 14.7 percent of GDP by end-2027. - Strategy excludes potential mining projects from export projections (cautious approach). - Reserves: - Gross official reserves revised to US$72 million (0.3 months of imports) in 2021 and US$172 million (0.6 months of next year’s imports) in 2022. - Reserve accumulation path assumes recovery to 3.7 months of imports by 2027. - External financing gap assumed to be filled with nondebt-creating flows (debt relief or grants). - Real effective exchange rate (REER): - REER adjustment of about 39 percent assumed (gap identified in External Sector Assessment). - Frontloaded adjustment in 2022 of 34 percent. - Achieved via greater flexibility in nominal exchange rate, tight monetary policy, fiscal consolidation, and reduction of RBM external borrowing. - Central bank operations: - RBM will purchase foreign exchange to build reserves and sterilize to stem money growth; may issue central bank bills if insufficient government securities holdings for sterilization. ### Financing mix and debt management assumptions - External borrowing: - Baseline assumes no nonconcessional external borrowing. - Concessional borrowing elevated in near term at about 2½ percent of GDP, declining to about 1½ percent of GDP by end of medium term. - Envisaged sizable grants mobilized through the Multi-Donor Trust Fund (MDTF) and IDA operations; new IMF financing in 2022 assumed conditional on RCF approval. - Domestic borrowing: - Remaining financing gap assumed to be picked up by domestic bank and nonbank institutions. - Outstanding domestic debt projected to increase from 37.7 percent of GDP in 2022 to 42.2 percent of GDP in 2027, then decrease thereafter. - Composition of government securities issuance: 15 percent Treasury bills, rest Treasury notes (tenors 2 to 6 years). - Interest rates projected to move with the policy rate: range from 19 percent for Treasury bills to 22.5 percent for 6-year Treasury Notes in 2022. - Net domestic borrowing averages about 4 percent of GDP each year during the medium term. - Assumed interest rates: 3-year bond at 17½ percent and 10-year bond at 22½ percent. - New bond issuance will move gradually to longer maturities; share of bonds with maturity greater than 7 years expected to increase from 5 percent of new issuances to 15 percent by 2042. ### Financing gap and burden sharing (next 12 months) - Projected external financing gap for next 12 months: US$841 million (about 7 percent of GDP). - Envisaged burden sharing/financing mix includes debt treatment, concessional loans and grants. - Debt relief projected to close 47 percent of the financing gap. - Text Table 4 (Next 12 months, mil US$ and % of total): - Financing Gap: 841 (100) - Prospective Debt relief: 396 (47) - Prospective RCF: 88 (10) - Prospective Grants: 318 (38) - IDA: 23 (8) - MDTF and Other Support: 80 - Residual Gap: 395 ### Realism and risk assessment (selected) - Realism tools indicate the baseline is credible relative to Malawi’s historical and cross-country experience. - Debt dynamics: - Current DSA reflects reform program and anticipated debt restructuring to place debt on a sustainable path; external and public debt peak and decline on a downward medium-term trajectory. - Debt-creating flows: increased contribution of nominal interest rate over the 5-year projected change due to compositional changes in external debt; primary deficit contribution to public debt accumulation reduced under the program. - Unexpected increases in PPG external debt and public debt were about 13.1 and 36.5 percent of GDP, respectively, above LIC DSF medians. Drivers include unexpected increase in current account deficit, primary deficit, and real interest rate. *Source: Box 1. Malawi: Debt Restructuring Strategy, October 2022 (IMF).* ### 18. Ambitious improvement in the primary balance in the next three years is in the top ### 18. Ambitious improvement in the primary balance in the next three years is in the top quartile of historical data on LIC adjustment programs ### Fiscal projections and realism assessment - Anticipated adjustment in the primary balance: 4.9 percentage points of GDP in the next three years. - Growth projection: - 2022 projection: in line with what is suggested by the fiscal multiplier realism tool. - 2023 projection: characterized as optimistic and assumes the authorities’ reform policies yield good results. - Authorities plan to ramp up public investment to generate growth; medium-term real growth projection was revised downward reflecting vulnerability to recurrent natural disasters amid climate change. ### Debt-carrying capacity (Composite Indicator, CI) - CI final classification: Weak. - CI score (current vintage, 2021 CPIA): 2.34. - Country also classified as having “weak quality of debt monitoring.” - CI determination inputs include: World Bank CPIA, real GDP growth, import coverage of reserves, remittances as percent of GDP, and world economic growth. - CI thresholds: - Weak if CI value is below 2.69; medium if between 2.69 and 3.05; strong if above 3.05. - Text Table 5 (CI calculation) key figures preserved exactly: - CI Score: 2.34 (100%) - CPIA contribution: coefficient 0.385, 10-year average 3.19, component 1.235 (53%) - Real growth rate (in percent): coefficient 2.7, 10-year average 1.94, component 0.107 (5%) - Import coverage of reserves (in percent): coefficient 4.05, 10-year average 2, component 16.33, component 0.662 (28%) - Import coverage of reserves^2 (in percent): coefficient -3.99, 10-year average 2.667, component -0.11 (-5%) - Remittances (in percent): coefficient 2.02, 10-year average 1.564, component 0.031 (1%) - World economic growth (in percent): coefficient 13.52, 10-year average 3.05, component 0.411 (18%) ### External debt burden thresholds and public debt benchmark - External debt burden thresholds by CI classification (text table preserved): - PV of debt in % of Exports: Weak 140; Medium 180; Strong 240 - PV of debt in % of GDP: Weak 30; Medium 40; Strong 55 - Debt service in % of Exports: Weak 10; Medium 15; Strong 21 - Revenue: Weak 14; Medium 18; Strong 23 - Applicable TOTAL public debt benchmark: - PV of total public debt in percent of GDP: 35 ### Scenario stress tests conducted - Types of stress tests: - Standard scenarios stress test. - Contingent liability stress test. - Tailored commodity price shock scenario given high share of tobacco exports. - Combined contingent liabilities tested include: - One-time debt shock equivalent to 10 percent of GDP in 2021 (to capture limited public debt coverage). - Contingent liabilities due to foreign exchange swaps. - Contingent liabilities from SOEs equivalent to 2 percent of GDP. - Need for bank recapitalization (equivalent to default level of 5 percent of GDP). - Commodity shock scenario specifics: - Tobacco exports share: more than 50 percent of total exports (goods and services) over the previous three-year period. - Commodity exports are shocked by a commodity price gap in the second year of projection which converges to the baseline in 6 years. - Price gap defined as difference between baseline commodity price in the second year and the lower end of the 68 percent confidence interval from IMF’s commodity price forecast distribution for fuel and nonfuel commodities. - Shock informed by analysis of commodity price busts in a sample of 34 commodity-intensive LICs during 1990-2015; elasticities within range of Spatafora and Samake (2012) and Cespedes and Velasco (2013). ### External DSA findings (pre-restructuring scenario) - Overall and external public debt assessment: in debt distress. - Baseline without debt restructuring (authorities’ reforms incorporated) projections: - Public debt would increase from 64 percent of GDP in 2021 to 76.6 percent of GDP in 2022. - External debt would reach 38.9 percent of GDP in 2022. - Stock indicators: - PV of PPG external debt to GDP ratio and PV of external debt to export ratio stay below or reach threshold during the medium term; but would remain substantially above the threshold if the residual financing gap were financed externally. - Flow indicators highlight near-term debt-service burden without restructuring: - External debt service to exports ratio: 56 percent in 2022 and 27 percent in 2023. - Debt service-to-revenue ratio: 43 percent in 2022 and 25 percent in 2023. - Box 3 illustrative scenario: absence of debt restructuring leads to large debt service needs; repayment under original terms implies declining external debt stocks but a large financing gap. If residual financed externally (including arrears), sustained breach of debt-to-export ratio over the medium term. ### Stress test implications and vulnerabilities - Stress tests show Malawi’s debt vulnerability to shocks in exports and the exchange rate: - Exports shocks elevate PV debt-to-exports ratio and debt service-to-exports ratio. - Exchange rate shocks affect debt service-to-revenue ratio and PV debt-to-GDP ratio. - Historical scenario (real GDP growth, primary balance-to-GDP ratio, GDP deflator, noninterest current account, net FDI flows remain at historical averages) indicates baseline policies bring debt ratios onto a descending path, but stress tests reveal susceptibility to shocks. ### Public DSA findings - Overall public debt assessed to be in distress: - PV public debt-to-GDP ratio remains above the threshold over time. - PV public debt-to-GDP ratio peaks at 66 percent in 2022. - PV of public debt-to-revenue and grants ratio reaches 405 percent in 2022. - Debt service-to-revenue and grants ratio reaches 118 percent in 2022. - Contributing factors to the severe debt burden: - Inability to sustain growth, partly due to frequent weather-related shocks. - High cost of sovereign borrowing. - Weak macroeconomic management/governance. - High level of existing debt with a large fraction on nonconcessional terms. ### Risk assessment and policy implications - Risk rating: external and public debt in debt distress; public debt under current policies assessed as unsustainable. - Key risks to program success: - Need for a sizeable debt operation; risk of delays in obtaining financing assurances from bilateral official creditors. - Comprehensive collateralization of borrowing from AFREXIM bank. - Possible delays in cash management and commitment controls could derail fiscal consolidation. - RBM’s program to scale up foreign exchange purchases and reduce swap arrangements or costly short-term trade credits could face delays, jeopardizing reserve accumulation. - Climate shocks. - Lack of monetary tightening could prolong price instability and exchange rate volatility. - Loss of market confidence could trigger drawdown on foreign exchange deposits, capital flight, and worsened foreign exchange liquidity. - Mitigating factors noted: - Significant fiscal tightening. - RBM’s strong commitment for greater flexibility in the foreign exchange market. - Authorities implementing recommendations from the special audit and the 2021 safeguards assessment, and undertaking a proposed governance diagnostic exercise. - Further restraining nominal wage growth while fully utilizing an increase in revenue (inflation tax) as a fiscal contingency measure. ### Policy recommendations and conditionalities - Debt restructuring combined with commitment to macroeconomic adjustment is necessary for return to moderate risk of debt distress in the medium term. - Fiscal policy and public financial management measures: - Strong commitment to fiscal discipline to contain fiscal deficits and public debt. - Reform the AIP (Annual Investment Program) and realism in budget forecasts. - Public financial management (PFM) reforms and strengthening public sector governance and institutions. - Avoid RBM financing of the government and external nonconcessional borrowing. - External sector and monetary measures: - Allow for greater flexibility in the exchange rate. - Develop a well-functioning and transparent foreign exchange interbank market and adopt a foreign exchange reserve management strategy. - Improve fiscal, monetary, and external sector data compilation and reporting. - Structural reforms to support inclusive growth and diversification: - Increase diversification outside agriculture, enhance productivity, value addition, and job creation. - Implement well-targeted and cost-efficient subsidy programs for the agriculture sector. - Design well-tailored reforesting and climate adaptation plans. - Expand reliable access to electricity, including sustainable energy investment projects. - Address informality, boost the business environment, and raise competitiveness through measures such as tax reforms and stronger governance in key sectors. - Development partner support: The World Bank is supporting Malawi in addressing weaknesses in public financial management, strengthening fiscal position, promoting agricultural commercialization, and improving resilience against shocks. _Italic: Source — IMF country DSA chapter text unit provided in the content unit._ ### 29. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. ### 1mwiea2022001 - 29. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. ### Policy intent and program objectives - The authorities are in broad agreement with the WB’s and IMF’s staff assessments. - The authorities have recently reiterated their request for an ECF arrangement. - The proposed PMB would aim to: - restore macroeconomic stability, including debt sustainability; - address weaknesses in governance; - build the foundation for sustainable and inclusive growth. - Restoring macroeconomic stability will require political commitment to strong fiscal and external adjustment accompanied by a debt treatment. - The Fund program would catalyze support from the international community, which would be essential given Malawi’s immediate financing needs which are best met through grants and nondebt creating flows. - Addressing weaknesses in governance will focus on enhancing transparency and accountability of public financial management and foreign exchange management of the Reserve Bank of Malawi. - The reform agenda will reflect inputs from the Safeguards Assessment Report completed in December 2021. ### Stress tests, debt dynamics, and downside scenarios (figures and notes) - Figure 1 / Figure 2 / Figure 3 / Figure 4 present indicators of public and publically guaranteed external debt, indicators of public debt under alternative scenarios, historical and projected debt dynamics, and realism tools for Malawi (2021–32 / FY2022–32). - Stress test methodology notes (selected): - "The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented." - "The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department." - "Note: All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal debt are based on baseline 10-year projections." - Customization / default settings excerpts shown in figures: "n.a.", "No", "Yes", "User defined", and numeric entries such as "5.0%", "6", "34". ### Key projections and indicators (external DSA excerpts) - External debt (nominal) series (selected contiguous string as presented): 27.832.932.838.937.135.633.630.928.822.115.024.829.7 - Change in external debt (selected line): 2.95.1-0.16.1-1.8-1.5-2.0-2.7-2.1-0.8-0.7 - Identified net debt-creating flows (selected line): 9.010.912.913.19.111.310.07.76.84.33.09.17.7 - Non-interest current account deficit (selected line): 12.613.614.313.210.513.112.210.29.37.05.611.29.9 - Exports and imports (selected lines): - Exports 10.88.210.511.013.413.713.914.214.715.211.5 - Imports 27.625.827.128.929.930.529.427.826.825.120.5 - Net current transfers (negative = inflow): -5.8-5.6-5.3-6.2-7.7-5.6-5.2-5.4-4.7-4.7-5.0-4.9-5.3 - Endogenous debt dynamics (selected line): -2.7-1.9-0.60.7-0.4-0.6-0.9-1.1-1.1-0.8-0.6 - Residual (selected line): -6.1-5.8-13.0-7.0-10.9-12.7-12.0-10.4-8.9-5.1-3.7-6.7-8.7 ### Sustainability indicators and key macro assumptions (external DSA excerpts) - Sustainability indicators (selected contiguous string as presented): PV of PPG external debt-to-GDP ratio......24.822.223.622.521.319.518.213.79.1 - PV of PPG external debt-to-exports ratio......235.5202.3176.6164.9153.3137.7124.090.279.1 - PPG debt service-to-exports ratio0.00.06.455.626.722.720.220.612.27.66.1 - PPG debt service-to-revenue ratio0.00.04.943.224.620.217.818.311.16.97.1 - Gross external financing need (Billion of U.S. dollars)1.31.51.82.21.41.61.51.41.21.01.2 - Key macroeconomic assumptions (selected lines): - Real GDP growth (in percent)5.40.92.20.82.43.23.84.34.54.64.63.53.8 - GDP deflator in US dollar terms (change in percent)5.96.4-0.9-2.6-12.0-1.4-0.9-0.30.91.21.3-2.0-1.0 - Effective interest rate (percent) 4/ 0.00.01.03.01.51.41.21.00.80.80.80.11.2 - Growth of exports of G&S (US dollar terms, in percent)7.6-19.230.62.69.83.94.56.19.44.03.80.36.2 - Growth of imports of G&S (US dollar terms, in percent)12.80.36.74.6-6.83.7-0.8-1.51.44.13.54.02.0 - Grant element and aid flows (selected lines): - Grant element of new public sector borrowing (in percent).........45.948.548.547.646.350.4............ - Aid flows (in Billion of US dollars) 5/ 0.30.40.40.50.60.50.40.30.20.20.2 - Grant-equivalent financing (in percent of GDP) 6/ .........3.65.44.63.12.51.60.70.4...2.6 - Grant-equivalent financing (in percent of external financing) 6/ .........66.380.678.673.872.373.453.753.7...72.3 ### Public sector DSA highlights (Table 2 excerpts) - Public sector debt series (selected contiguous string as presented): 45.354.864.076.674.674.573.872.671.059.344.641.869.2 - Change in public sector debt (selected line): 1.49.59.212.6-2.0-0.1-0.7-1.2-1.6-1.7-1.2 - Identified debt-creating flows (selected line): 1.48.87.2-1.8-8.4-5.0-3.9-2.8-2.7-2.6-2.12.8-3.7 - Primary deficit (selected line): 1.55.04.82.7-0.5-0.2-0.9-1.5-1.7-0.8-0.62.1-1.0 - Revenue and grants (selected line): 14.814.515.616.218.718.817.817.717.216.510.015.617.6 - Primary (noninterest) expenditure (selected line): 16.319.520.418.918.218.617.016.215.515.79.417.616.5 - Residual (selected line): 0.00.62.014.46.45.03.21.61.10.90.81.63.3 - Sustainability indicators (selected contiguous string as presented): PV of public debt-to-GDP ratio 2/ ......56.565.563.263.062.561.860.951.238.9 - Debt service-to-revenue and grants ratio 3/18.418.521.6118.0101.4112.7102.8108.6106.686.599.7 - Gross financing need 4/4.27.78.121.918.521.017.417.716.713.59.3 - Key macro and fiscal assumptions (selected): - Real GDP growth (in percent)5.40.92.20.82.43.23.84.34.54.64.63.53.8 - Average nominal interest rate on external debt (in percent)0.00.00.63.11.91.61.31.10.90.80.80.11.3 - Average real interest rate on domestic debt (in percent)5.29.56.80.40.35.88.510.59.85.44.84.76.4 - Inflation rate (GDP deflator, in percent)7.76.36.517.320.615.311.37.66.35.85.814.79.8 - Primary deficit that stabilizes the debt-to-GDP ratio 5/0.1-4.5-4.4-9.91.5-0.1-0.2-0.3-0.10.90.67-2.9-0.6 ### Sensitivity and bound tests (selected excerpts) - Table 3 (PPG external debt sensitivity) and Table 4 (Public debt sensitivity) present: - Baseline and multiple alternative scenarios (A1, B1–B6, C1–C3). - Thresholds and bolded breaches where thresholds are exceeded. - Example baseline snippets preserved as presented: - Baseline2224232120181716151414 - Threshold3030303030303030303030 - Baseline2021771651531381241171081029390 - Threshold140140140140140140140140140140140 - Additional baseline and scenario contiguous strings as presented for other metrics, including: Baseline56272320211210111088; Baseline432520181811910977. *Source: 1mwiea2022001 - 29. The authorities are in broad agreement with the WB’s and IMF’s staff assessments.* ### 2. Alternative Scenario :[Customize, enter title]6870747880818282828180 ### 2. Alternative Scenario :[Customize, enter title]6870747880818282828180 ### Debt-Related Stress Test Results (PV of Debt-to-Revenue, Debt Service-to-Revenue, PV of Debt-to-GDP) - TOTAL public debt benchmark 3535353535353535353535 - Baseline: - 405 338 335 350 350 353 335 318 306 314 310 - A. Alternative Scenarios - A1. Key variables at their historical averages in 2022-2032 2/405 361 371 396 395 391 364 343 327 319 301 - A2. Alternative Scenario :[Customize, enter title]118 94 109 94 99 94 92 95 90 82 80 - B. Bound Tests (PV of Debt-to-Revenue / Debt Service-to-Revenue / PV of Debt-to-GDP sequences follow): - B1. Real GDP growth6665676868686765636261 - B2. Primary balance6667717070696764626058 - B3. Exports6665686766656461585755 - B4. Other flows 3/6666676666656360585654 - B5. Depreciation6663626159585653504846 - B6. Combination of B1-B56665656463626057545351 - B1. Real GDP growth (scenario numbers)405 346 355 378 383 393 377 362 354 370 371 - B2. Primary balance (scenario numbers)405 359 376 393 394 398 378 359 347 357 353 - B3. Exports (scenario numbers)405 347 360 376 376 379 360 342 329 338 332 - B4. Other flows 3/ (scenario numbers)405 351 356 372 372 375 356 338 325 333 329 - B5. Depreciation (scenario numbers)405 343 333 343 339 339 318 298 284 287 279 - B6. Combination of B1-B5 (scenario numbers)405 349 345 357 356 358 338 319 307 317 312 - C. Tailored Tests (scenario numbers) - C1. Combined contingent liabilities405 388 384 402 402 406 386 367 354 364 360 - C2. Natural disaster405 393 391 410 412 417 398 379 367 380 377 - C3. Commodity price405 340 333 344 341 342 327 314 306 317 317 - C4. Market Financing n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a. - Projection block (alternate baseline set): - Baseline118 101 113 103 109 107 99 98 91 89 87 - A. Alternative Scenarios - A1. Key variables at their historical averages in 2022-2032 2/118 105 120 110 112 106 95 90 82 76 70 - A2. Alternative Scenario :[Customize, enter title]118 94 109 94 99 94 92 95 90 82 80 - B. Bound Tests (second block) - B1. Real GDP growth118 103 118 109 116 115 107 107 101 99 98 - B2. Primary balance118 101 118 113 117 115 107 106 99 97 95 - B3. Exports118 101 113 103 109 107 99 98 92 90 88 - B4. Other flows 3/118 101 113 103 109 107 99 98 92 90 88 - B5. Depreciation118 98 109 99 104 101 94 93 86 83 81 - B6. Combination of B1-B5118 99 111 105 109 107 99 98 92 91 88 - C. Tailored Tests (second block) - C1. Combined contingent liabilities118 101 126 114 118 116 108 107 101 99 97 - C2. Natural disaster118 103 128 116 121 119 110 110 104 102 100 - C3. Commodity price118 101 110 99 102 99 92 92 87 85 84 - C4. Market Financing n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a. - Notes: - Sources: Country authorities; and staff estimates and projections. - 1/ A bold value indicates a breach of the benchmark. - 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. - 3/ Includes official and private transfers and FDI. - Projections 1/ - Headings indicated: PV of Debt-to-Revenue Ratio; Debt Service-to-Revenue Ratio; PV of Debt-to-GDP Ratio ### Fund Relations and Financial Commitments - Membership Status: - Joined: July 19, 1965; Article VIII - General Resources Account: - Quota 138.80 SDR Million 100.00 %Quota - Fund holdings of currency (exchange rate) 136.36 98.24 - Reserve tranche position 2.44 1.76 - SDR Department: - Net cumulative allocation 199.40 SDR Million 100.00 %Allocation - Holdings 9.75 4.89 - Outstanding Purchases and Loans: - RCF Loans 138.75 99.96 %Quota - ECF Arrangements 129.74 93.47 %Quota - Latest Financial Commitments — Arrangements: - ECF 04/30/2018 09/24/2020 105.84 Amount Approved (SDR Million) 53.85 Amount Drawn (SDR Million) - ECF 07/23/2012 06/29/2017 138.80 138.80 - ECF 02/19/2010 07/22/2012 52.05 13.88 - Outright Loans: - RCF 10/02/2020 10/06/2020 72.31 72.31 - RCF 05/01/2020 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 Fund (SDR Million) - (Based on existing use of resources and present holdings of SDRs): - 2022: Principal 8.67; Charges/Interest 0.91; Total 9.58 - 2023: Principal 22.37; Charges/Interest 4.71; Total 27.08 - 2024: Principal 23.11; Charges/Interest 4.71; Total 27.82 - 2025: Principal 33.46; Charges/Interest 4.71; Total 38.17 - 2026: Principal 47.84; Charges/Interest 4.71; Total 52.55 ### HIPC, 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 - Note: Assistance committed under different frameworks expressed in different NPV terms; amounts cannot be added. - 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 7.91 7.91 - September 2006 10.84 19.12 29.96 - MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. - Implementation of Catastrophe Containment and Relief (CCR): - N/A 04/13/2020 Amount Committed (SDR million) 7.20 Amount Disbursed (SDR million) 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 - N/A 12/15/2021 3.91 3.91 - Note: As of February 4, 2015, the Post-Catastrophe Debt Relief Trust has been transformed to the CCR Trust. ### Governance, Safeguards, and Exchange Arrangements - Safeguards Assessments: - The 2021 safeguards assessment of the RBM is substantially completed. It found significant deterioration of safeguards at the RBM since the 2018 assessment. - Governance arrangements and the internal control environment are considered weak. - Recommendations: Governance reform should establish the Board as the RBM’s main decision-making body responsible for oversight and policy formulation, and to 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: - 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; the de facto exchange rate arrangement is classified as “stabilized” given USD rate stability since October 2016. - Inflows of foreign exchange and swap arrangements allowed 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; this is treated as a temporary measure to be lifted as conditions improve. - In May 2022, kwacha was devalued by 25 percent to correct for a large real exchange rate overvaluation for the first time since 2012. - Article IV Consultation: - The Executive Board concluded the last Article IV consultation with Malawi on December 13, 2021. - FSAP and ROSC: - A joint team of the World Bank and the IMF visited Malawi under the FSAP during missions in July and December 2007; FSSA issued June 2008 (SM/08/198). - FSAP development module conducted mid-2017. - Corporate Governance and Accounting and Auditing ROSC missions visited in February and June 2007. - FAD fiscal transparency module update issued March 2007. ROSC on data module (September 2003 mission) published October 2004. ### Capacity Development (selected entries since 2020, as of October 20, 2022) - 10/22 STA MOF Strengthen the quality of GFS/PSDS — Virtual Mission - 09/22 FAD MRA Strengthen the management of MRA’s tax arrear’s function and improve debt management capacity — Mission - 08/22 MCM RBM Enhance the RBM’s understanding of systematic risk in domestic systematically important banks — Mission - 08/22 FAD MRA Review the deployment of new Information Tax Administration System (ITAS) — Virtual Mission - 07/22 FAD MRA Review the Revenue Mobilization Thematic Fund (RMTF) project — Mission - 07/22 FAD MRA Review MRA’s proposed organizational design for the Domestic Tax Division — Virtual Mission - 06/22 FAD MRA Assess the effectiveness of the tax audit program — Virtual Mission - 05/22 AFE MOF Strengthen project appraisal and selection techniques — Mission - 05/22 FAD MRA Tax Administration Diagnostic Assessment Tool training workshop — Virtual Mission - 04/22 AFE NSO Designing new IIP and PPI bulletin — Virtual Mission - 04/22 MCM RBM Basel III framework with a focus on credit, operational and liquidity risk — Virtual Mission - (Additional entries through 01/20 MCM RBM Projection of the Central Bank balance sheet — Mission are included in the source list.) ### Joint Managerial Action Plan (As of October 20, 2022) - A. Mutual Information on Relevant Work Programs — World Bank FY23 Analytical and Advisory Activities and Lending pipeline listed (titles and target dates provided in source). - B. Requests for Work Program Inputs: - IMF request to World Bank: Updates on WB support to Malawi — Continuous - World Bank request to IMF: Regular updates and exchange of views on medium-term macroeconomic and fiscal projections including sharing detailed excel tables on Real, Monetary, Fiscal and External Sectors — Continuous - C. Agreement on Joint Products and Missions: Joint products in next 12 months (detailed items listed in the source). *Sources: Country authorities; and staff estimates and projections. Projections and tables as presented in the source document.* ### 1. Debt Sustainability Analysis (update) December, 2021 ### 1. Debt Sustainability Analysis (update) December, 2021 ### African Development Bank (AfDB) relations and operations in Malawi - AfDB operations in Malawi date back to 1969. The AfDB Group Malawi Country Office was opened in 2007. - As of September 30, 2021, cumulative commitments: UA 1,010.2 billion (about US$1.4 billion) to finance 116 operations, including thirteen studies and two lines of credit. - AfDB Malawi Country Strategy Paper (CSP) 2018-2022 alignment: - Fully aligned with MGDS III (2017-22), Malawi Vision 2063, AfDB Long-Term Strategy (LTS, 2013–22) and High 5 priorities. - CSP pillars: - 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: improved connectivity to local and regional markets, reduced transport costs, 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 and underpinning firm and job creation. - Outcomes: increased productivity and production, increased market development and diversification, empowered local communities, improved health and wellness. - Crosscutting themes: Environment and climate change, skills and training (especially youth), economic and financial governance. - CSP financing and projects: - CSP (2018-2022) financed from ADF 14 and ADF-15 resources with an indicative financing envelop of USD 391.3 million. - Bank approved twelve projects (exceeding ten initially planned) across transport, agriculture, water, sanitation, economic governance, and skills development. - About 62% (UA 97.6 million) of approved resources secured from the African Development Fund; remaining balance from Nigerian Trust Fund, Global Environmental Facility, and Special Relief Fund. - Recently approved projects (selected): - Africa Disaster Risk Financing Programme (USD 4.7 million) in June 2022. - Malawi Emergency Food Production (USD 20 million). - Technical Assistance for the Catchment Based Climate Resilient Water Security Project (USD 865 thousand) in June 2021. - Support for Digitization, Financial Inclusion and Competitiveness in December 2021. - Cofinancing and administered funds: - 18 million Euros (grant) co-financing Multinational Nacala Road Corridor Development Project Phase V (25 February 2019). - OFID USD 12 million loan for Nkhata Bay Town Water Supply and Sanitation Project. - Projects approved during 2021-2022 under implementation or planned: - Digitalization, Financial Inclusion and Competitiveness Project: USD 13.7 million – 8 December 2021. - Africa Disaster Risk Financing (ADRiFi): USD 4.9 million – 2 June 2022. - Rehabilitating and Upgrading of M5 Road (North-South Road Corridor Project – Benga-Nkhotakota-Dwangwa Road): USD 49.7 million (planned approval in late 2022). - USD 20 million originally for Agriculture Commercialization, Value Addition & Youth Agribusiness Project repurposed to Agriculture Emergency Food Production Project. - Expected impacts of interventions: - Strengthen agriculture value chains, increase mechanization, increase access to finance, improve market linkages, support crop diversification. - Create 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 to increase capacity of water reservoirs, small dams harvesting schemes, and improve access to potable water; support water resource management in key basins such as Songwe River and Lake Malawi affecting energy, agriculture, tourism, and fisheries. - Planned scaling up and pipeline under ADF-16 and beyond: - Consideration of two projects for financing from the Non-Sovereign Operation private sector window: - Voltalia Kanengo Dzuwa Solar Project: USD 15.8 million with a Partial Risk Guarantee facility for Voltalia Solar PV Project of USD 2.3 million. - NBS Bank Limited: USD 7.9 million. - AfDB engaging with World Bank and other partners for co-financing; promoting private investment in energy via PPPs and innovative instruments such as Partial Risk Guarantees. - Project completion review of CSP2018-2022 conducted in June 2022 to guide formulation of new CSP 2023-2027. - Government requested Bank Priority Areas remain the same as in 2018-2022 CSP. - Under ADF 16, Bank in 2023 will finance: - Rumphi and Blantyre Water Supply and Sanitations Systems Project: USD 33.4 million. - Shire Valley Transformation Project phase two: USD 26 million. ### Assessment of Data Adequacy for Surveillance (As of October 20, 2022) - General 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. - STA providing TA to NSO on reconciling GDP by expenditure and GDP by production with rebased figures. - GDP by production and by expenditure had a discrepancy of around 14 percent; following assessment in July 2022, GDP by production was still four percent larger than GDP by expenditure. - Revised GDP estimates expected to be published by end-2022. - Price Statistics: - NSO will update CPI weights using expenditure data from the 5th Integrated Household Survey (IHS5) conducted from April 2019 to April 2020. - Current CPI weights based on 4th Integrated Household Survey (IHS4) conducted during 2016-2017. - AFRITAC East (AFE) provided TA in 2021 to update CPI, develop weights from 5th IHS expenditure data and according to COICOP. - Producer Price Index (PPI) based on outdated weights from Annual Economic Survey 2012; index coverage should be expanded. - NSO developing export-import price indexes. - Government Finance Statistics (GFS): - Accuracy and reliability affected by source data weaknesses and inadequate recording systems. - Key shortcomings and issues: - Published budgetary central government data show a sizeable statistical discrepancy between above and below the line data due to differences in coverage; coverage for above the line data is considerably narrower than financing information reported by RBM. - Tax revenue data received timely but not always reconcilable with deposits in the Malawi Government (MG) Account. - Reporting practices and timing differences affect reconciliation; finances and operations of Malawi Revenue Authority are unusually opaque. - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in fiscal reports prepared by the Ministry of Finance. - Ministry of Finance does not include zero-coupon promissory notes, recently issued to clear arrears, in its fiscal reporting. - Interest payments currently reported on a currency basis rather than based on residency of the holder of the security. - Actions and assistance: - Significant TA from the Fund and other donors to strengthen expenditure monitoring, accounting, and statistical reporting; results have lagged. - New IFMIS rolled out to all MDAs on 1 July 2021; authorities working to produce comprehensive fiscal reports using new system. - Authorities working with East AFRITAC to modify chart of accounts and output-based structures. - Annual government finance data for Budgetary Central Government in GFSM 2014 presentation reported for publication in the Government Finance Statistics Yearbook (GFSY), but not disseminated domestically. - STA TA missions encouraged compilation and reporting of high frequency data in GFSM 2014 framework and assisted compiling data for extrabudgetary units (EBUs) to expand coverage to central government. - Monetary and Financial Statistics: - STA has worked with Reserve Bank of Malawi (RBM) over five years to establish SRF-based reporting. - RBM submits SRF-based monetary and financial statistics to Fund staff; yet to be published in International Financial Statistics. - RBM compiles and disseminates all core Financial Soundness Indicators (FSIs) and nine additional FSIs. - Malawi reports several Financial Access Survey (FAS) indicators, including mobile/internet banking, mobile money, gender-disaggregated data, and UN-adopted indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) to monitor SDG Target 8.10. - External Sector Statistics (ESS): - NSO compiles trade statistics and Balance of Payments (BOP) data. Trade in Goods compiled monthly; timeliness improved to up to two months from reference period but inconsistencies remain. - Annual BOP and International Investment Position (IIP) compiled up to 2021 with most standard components reported; quarterly BOP and IIP data not available. - Lack of timeliness and accuracy of ESS significantly hampers staff work on projections and macroframework of external sector development. - STA mission (March–April 2022) focused on improving coverage, compilation, and timeliness of goods trade data and assessing BOP and IIP compilation; mission noted quality issues in trade data and recommended improvements in source data collections, staff capacity, and intra-agency cooperation. - RBM reporting: - Daily exchange rate data, monthly international reserves data, and FXI data regularly reported. - International reserves data follow IRFCL template; RBM started reporting an independent line for estimated size of pledged deposits. - Value of pledged deposits subject to change upon completion of special audit of foreign exchange reserves. - RBM started submitting a daily FX cashflow table regularly. - External debt data: Government of Malawi now provides granular breakdowns on top of end-year stock data. - Recommendation: NSO, RBM, and GOM should continue improving coordination and implement TA recommendations; government should allocate sufficient resources for regular surveys. ### Data Standards and Quality - Malawi participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes essential macroeconomic and financial data on its National Summary Data Page since November 2016 (URL provided in source). - Timeliness of data disseminated under the e-GDDS needs improvement. - Data ROSC published on February 17, 2005. ### Statement by Malawi Executive Directors — Key points (selected) - Authorities thanked management and staff for facilitating request for emergency financing under the new Food Shock Window (FSW) and a Staff Monitored Program with Board involvement (PMB). - Authorities view rapid financing under the FSW as critical to alleviate food shortages; PMB would help sustain reform momentum and pave way for a new Upper Credit Tranche (UCT) program. - Multiple shocks and food insecurity: - Overlapping external and domestic shocks have kept growth below pre-pandemic levels: lingering pandemic effects, spillovers from the war in Ukraine, multiple and successive tropical storms, below-average crop production, and increasing prices for food and agricultural inputs (fertilizers and seeds). - MVAC report for the 2022/23 consumption season (released in August) shows about 2.3 million people face food insecurity and require urgent assistance. - A total of 3.8 million people (about 20 percent of the population) will face critical food security challenges in the coming 5 to 6 months. - Macroeconomic effects and outlook: - Fuel shortages, high oil prices, and extended electricity blackouts contributed to decelerating growth from 2.2 percent in 2021 to 0.8 percent in 2022; outlook subject to significant downside risks. - Inflation accelerated from 7.6 percent at end-2020 to 25.9 percent year-on-year in September 2022, with food inflation reaching 33.7 percent. - Persistent foreign exchange shortages; stock of international reserves at about 1.6 months of import cover at end-2021. - Urgent BOP need assessed at US$841 million over the next 12 months, reflecting repercussions of the food-price shock. - Prospective financing under the RCF would cover only 10 percent of external financing needed for the next 12 months, highlighting the need for additional donor support. *Source: 1mwiea2022001 - 1. Debt Sustainability Analysis (update) December, 2021* ### 5. The strengthening of social protection has become critically important considering ### 5. The strengthening of social protection has become critically important considering ### Social protection: current stance and planned measures - Poverty incidence and food insecurity in Malawi ranks amongst the highest in the world. - Authorities are preserving existing social protection programs to cushion vulnerable households. - Plan to establish a floor on social spending as an indicative target (IT) under the PMB, comprising: - government contribution to health and basic and secondary education spending, - several social safety net programs such as the social cash transfer program (SCTP) and Affordable Input Program (AIP). - Intended beneficiaries and support modalities: - Vulnerable groups targeted: the elderly, children, and the disabled. - Support via social cash transfers and additional resources to cushion farmers from increased prices of fertilizers. - Food-security and agricultural measures: - Procure additional maize and other food stuffs under the Disaster Affairs Department for lean season response (December 2022 - March 2023). - Distribute quality seeds to the vulnerable population to enhance maize production. ### Implementation, safeguards, and program adjustments - Commitments to accountability and cost control: - Undertake periodic audits in the context of annual fiscal reporting to the National Assembly under the PMB. - Take measures to prevent cost overruns from escalating fertilizer prices in the AIP by: - augmentations of farmer contributions, - limiting the Government Subsidy. - Authorities stand ready to take any additional measures over and above those pronounced in the MEFP, in consultation with staff. ### Policy Measures Under the PMB — Debt management and fiscal policy - Overarching objective: - Foster fiscal discipline to restore debt sustainability and lay the groundwork for sustainable and inclusive growth. - Debt restructuring strategy: - Aim: bring external public debt levels back to moderate risk of debt distress in the medium-term through policy adjustment and debt treatment. - Target: all external Debt Sustainability Analysis (DSA) solvency and liquidity ratios to cross their respective thresholds under the baseline in the next five years. - Actions: - Engaged a debt advisor to support a credible restructuring process. - Approached all creditors early and committed to achieving a debt treatment that places the country’s debt back on a sustainable path consistent with program objectives. - Fiscal consolidation focus for remainder of FY2022/23: - (i) Strengthening implementation of the domestic revenue mobilization strategy (DRMS) in a timely manner. - (ii) Rationalizing and prioritizing spending. - (iii) Introducing and implementing sound commitment controls through IFMIS. - (iv) Implementing well targeted measures to support low-income households. - Specific reforms and oversight: - Rolled out first phase of reforms to the fertilizer and seed subsidy program under the AIP through introduction of a Consolidated Social Protection Program using the Unified Beneficiary Register to reduce duplication and improve beneficiary targeting. - Planned measures include: - Strengthening oversight of state-owned enterprises (SOEs). - Monitoring SOE management accounts on a quarterly basis. - Preparing an annual consolidated report of all SOEs to ensure compliance with the new PFM Act. - Revenue mobilization targets and measures: - DRMS launched in December 2021. - Main target: increase revenue by 5 percent of GDP during the 5-year implementation of the strategy. - Measures already or planned: - PAYE brackets: introducing additional income tax brackets starting in April 2022. - Full implementation of the advance income tax in May 2022 which raised additional revenue. - Other pipeline measures: tax stamps on beverages, taxes for business, and tax incentives to help unlock foreign investment. - Launching of the Integrated Tax Administration System (ITAS), also called Msonkho online, expected go-live in December 2022, with all modules expected to be integrated by March 2023. ### Governance, transparency, and PFM - Steps to address governance weaknesses and reduce corruption vulnerabilities: - Enhancing transparency and accountability of public financial management (PFM). - Strengthening autonomy and governance of the Reserve Bank of Malawi (RBM). - Strengthening foreign exchange reserves management. - Legislative and regulatory actions: - Passed the new PFM Act in March 2022 to align the legal framework with ongoing PFM reforms. - Drafting regulations and Treasury instructions to support implementation of the new Act, intended to be finalized by March 2023 and June 2023, respectively. ### Monetary and financial sector policies - RBM objectives and operational stance: - Core focus: restore price stability by anchoring inflation expectations, including through tightening monetary policy as needed. - Maintain a reserve money targeting framework to curtail monetary growth, while limiting foreign exchange interventions. - Implement agreed path towards accumulating foreign exchange reserves to rebuild reserve assets, including by reducing direct foreign exchange sales to the market in support of imports. - Gradually wind down the existing swap open position as guided by the foreign exchange accumulation path. - Financial sector oversight and risks: - Considering increased banking sector exposure to the public sector and recent interest rate hikes, RBM remains attentive to these risks and will continue to strengthen financial sector oversight. - Monitoring banking system’s sovereign exposure through securities and swap operations. - Reassessing loan and collateral quality needs of commercial banks to promote financial stability. ### Conclusion and program framing - Importance of transparency and accountability in use of Fund resources emphasized. - Role of Fund support under the PMB: - Provide a strong anchor for effective coordination and implementation of policies that support macroeconomic stability. - Act as a bridge towards deeper reforms under a UCT-arrangement that could catalyze additional donor support and anchor the authorities’ broader reform agenda. - Authorities’ request: - Seek Executive Directors’ support for emergency financing to sustain efforts to deal with acute food insecurity along with an SMP-PMB as a bridge towards a possible successor ECF arrangement and the authorities’ long-term development plan under Vision 2063. *Source: 1mwiea2022001 - 5. The strengthening of social protection has become critically important considering* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mwiea2022001.pdf_