## 1mwiea2023001

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---

### Executive summary — context and recent developments
- Shocks since PMB approval (November 11, 2022): cholera outbreak, Cyclone Freddy; emergency financing of $88.3 million under the Food Shock Window of the Rapid Credit Facility on November 21, 2022.
- Real GDP growth:
  - 2022: 0.8 percent (decelerated from revised official rate of 4.6 percent in 2021).
- Inflation:
  - Average inflation in 2022: 20.8 percent (up from 9.3 percent in 2021).
  - Inflation (y-o-y) reached 29.3 percent in May 2023.
  - RBM policy rate raised to 22 percent, from 18 percent in April 2023.
- FY2022/23 fiscal outcomes (April/March):
  - Overall deficit: 11.8 percent of GDP (vs. 9.0 percent projected at PMB).
  - Domestic primary deficit: 3.8 percent of GDP (vs. PMB’s 0.6 percent).
  - Government recapitalization of RBM increased government capital transfers by 1.4 percentage points of GDP.
- External sector and reserves:
  - Current account deficit in 2022: 3.2 percent of GDP (much narrower than 14.8 percent of GDP projected at PMB and 14.1 percent of GDP outturn in 2021).
  - Gross official reserves as of end-2022: 1 percent of GDP (readily available gross reserves were $120.2 million at end-2022).
  - External strains: shortages of foreign exchange, difficulties securing trade credit, widening spread between official and bureau exchange rates (44 percent at end-May 2023), increased informal imports.

### Outlook, risks, and key projections
- Growth and inflation outlook:
  - Growth downgraded to 1.7 percent for 2023 (from 2.4 percent at PMB) due to Cyclone Freddy.
  - Average inflation expected to reach 24.8 percent in 2023 (up from 22.7 percent at PMB); projected to decline toward about 6.5 percent in the medium term.
- FY23/24 budget and RBM recapitalization:
  - Approved budget larger than at PMB approval, mostly to accommodate RBM capital injections.
  - Projected RBM capital injection peaks at an estimated 2.2 percent of GDP in FY23/24 and then should wind down.
- External debt and financing:
  - Malawi’s external debt currently assessed to be unsustainable; sustainability depends on successful external debt restructuring.
  - Total external financing gap (2023–2028) projected at around $1.5 billion (roughly 12 percent of 2022 GDP) under baseline assumptions.
- Key projections and selected indicators (series as reported):
  - Consumer prices (end of period): 11.5; 26.0; 25.4; 20.4; 24.4; 15.2; 9.9; 7.6; 6.5; 6.5
  - Current account (percent of GDP): -14.1; -14.8; -3.2; -13.6; -7.9; -9.0; -8.6; -7.6; -6.3; -5.9
  - Total public debt (percent of GDP): 61.5; 76.6; 75.2; 74.6; 80.2; 80.2; 80.9; 79.6; 78.1; 75.1
  - Gross official reserves (US$ millions, selected): 429; 172; 120; 409; 499; 747; 846; 996; 1,106; 1,202
  - RBM policy rate progression: 12 percent (May 2022) to 22 percent (May 2023)
  - Spread between Forex bureau rate and RBM rate: 44 percent (end-May 2023)

### Program performance, targets, and structural benchmarks
- Quantitative Targets (QTs) and Indicative Targets (ITs):
  - Four out of six end-December and continuous QTs and one out of three end-December ITs were not met.
  - Four out of seven Structural Benchmarks (SBs) were not met.
- Missed targets — main drivers:
  - Difficulty in slowing previously budgeted expenditures and expenditure overruns driven by inflation.
  - Continued reliance on the central bank to supply foreign exchange.
  - Delays in external debt restructuring and unanticipated consequences of the kwacha devaluation (statutorily required recapitalization of RBM and higher government procurement prices).
- Specific QT outcomes and notes:
  - Change in NIR of the RBM (floor) was missed by US$7 million at end-December; reserve assets projected US$172 million at inception but outturn was US$120 million; NIR ended 2022 at -US$1,238 million (vs. -USD$584 million projected).
  - Continuous QT on zero ceiling for contracting or guaranteeing new nonconcessional external debt was not met due to a TMU definition issue and a US$50 million guarantee extended before program approval but during FY2022/23.
  - QT on RBM financing of the central government (ceiling) at end-December 2022 and IT for end-March were not met largely because the government was required by law to recapitalize the RBM after the 25-percent kwacha devaluation in May 2022.
  - QT on monetary base was met for end-December 2022 and end-March 2023.
- Structural Benchmarks (selected):
  - SB on quarterly allotments: met.
  - SB on strategy to clear arrears: not met (draft strategy prepared but not approved by Cabinet).
  - SB on publication of audited quarterly reports to be replaced by publication of monthly reports (stronger commitment).
  - SB on foreign exchange auctions elevated to a prior action and met (first auction conducted on June 19, with official exchange rate depreciating 2.7 percent).
  - ALCO SB: not met though ALCO had its first meeting in June.

### Fiscal policy — stance, measures, and risks
- FY2023/24 budget stance:
  - Incorporates larger expenditure and domestic financing than at PMB approval to reflect RBM recapitalization.
  - Budget anchored on realistic revenue estimates and expenditure rationalization; wage bill to grow below inflation while protecting social spending.
  - Targeted improvement in domestic primary balance (excluding RBM recapitalization flows): about 1.3 percentage points of GDP in FY2023/24 (compared with 1.4 percentage points envisaged at program approval).
  - Overall deficit projected to narrow by 1.3 percentage points of GDP (compared with 0.6 percentage change in the PMB).
- Revenue measures totaling MWK 57 billion (0.4 percent of GDP):
  - Temporary supernormal bank profits tax: MWK17.5 billion.
  - Increase rate on advance income tax to 10 percent from 3 percent: MWK6.6 billion.
  - Requirement for affixing or printing of electronic tax stamps on beverages: MWK6 billion.
  - New stamp duties on various instruments, including motor vehicles: MWK4 billion.
  - Presumptive tax for small businesses with turnover less than MWK12.5 million: MWK2 billion.
- Expenditure and social spending:
  - Budget remains tight; large interest bill on domestic debt: 5.9 percent of GDP.
  - Continued support for social cash transfers, Affordable Inputs Program (AIP), maize purchases, livestock development initiatives, maize seed subsidies, and other agricultural spending.
  - FY2022/23 food security fiscal measures (selected):
    - Social Cash Transfer: Proposed K 2 billion; Amount Spent K 2 billion.
    - Affordable Inputs Program: Proposed K 69.8 billion; Amount Spent K 144.2 billion.
    - Maize/Other Food Stuffs Purchase–Lean season response: Proposed K 12.6 billion; Amount Spent K 12.6 billion.
    - Agriculture Sector support: Proposed K 8.6 billion; Amount Spent K 26.5 billion.
    - Sub-Total: Proposed K 97.9 billion; Amount Spent K 186.1 billion.
- Contingency options if slippage occurs:
  - Additional domestic borrowing (costly: pressures on money growth, exchange rate, inflation).
  - Further cuts in primary or other expenditure (e.g., faster wage bill rationalization, winding down AIP for more targeted support), which would compromise public goods delivery and risk financial-sector instability if not managed well.
- Arrears and PFM:
  - Verified arrears of national budget entities up to March 31, 2022; draft arrears clearance strategy prepared but not yet Cabinet-approved.
  - Strengthened commitment controls in arrears, quarterly allotments, and contract management recommended; IFMIS rollout and institutionalization critical to prevent further accumulation.

### Monetary policy, price stability, and FX strategy
- Monetary policy stance and instruments:
  - RBM committed to maintain tight monetary policy and positive real interest rates; policy rate raised to 22 percent by May 2023.
  - Measures to contain reserve money growth: draining excess liquidity (raise required reserves, RBM sales of government securities, OMOs), contain net claims on government to meet zero ceiling on RBM financing.
  - Issuance of promissory notes to recapitalize RBM losses from exchange rate movements (required by law) will be adjusted for the zero ceiling on RBM financing of the government.
- Rebuilding external buffers and FX policy:
  - RBM to purchase foreign exchange while limiting FX sales to the market and to wind down foreign exchange swaps with non-residents to reduce rollover risks and costs.
  - RBM resumed foreign exchange auctions (first on June 19); auctions to continue monthly to facilitate price discovery and reduce exchange rate misalignment.
  - Reserve accumulation objective: achieve at least 3 months (and targeted paths toward 4+ months) of import cover in the medium term; target gross reserves to reach $499 million by December 2023 in projections (path assumes mobilization of non-debt-creating flows).
- Monetary and financial sector risks:
  - Banking sector increasing exposure to government securities; concentration risks and squeezed private-sector lending.
  - Banking sector currently well capitalized and profitable, but liquidity sometimes inadequate; industry NPLs at 7.4 percent in May 2023 (up from 2.0 percent in May 2022).

### Debt sustainability, restructuring strategy, and debt management
- Debt distress assessment:
  - Malawi’s external and overall public debt assessed as “in distress.”
  - Conditional on successful external debt restructuring, external debt would be considered sustainable on a forward-looking basis.
- Debt strategy pillars and medium-term targets (under restructuring strategy baseline):
  - PV of debt-to-GDP ratio to reach below 30 percent.
  - PV 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.
  - Corresponding NPV debt reduction sought at time of PMB: US$579 million via maturity extension and reprofiling.
- DSA findings and stress tests (selected):
  - PV of overall public debt-to-GDP around 67 percent in 2022; PV of PPG external debt-to-GDP (selected year 2023): 23.8.
  - Near-term debt service burden: around 60 percent of exports in 2023 (significant external debt servicing needs).
  - Public DSA: PV of overall public debt reaches 68.8 percent of GDP in 2023; overall public debt service peaks at 147 percent of revenues in 2025.
  - Stress tests include a contingent liability shock of one-off 11 percentage points of GDP.
- Negotiations and creditor engagement:
  - Legal and financial advisors hired in May 2022; negotiations with commercial and official bilateral creditors ongoing but progress slow.
  - Malawi in arrears with Trade and Development Bank (TDB) as agreed to facilitate negotiations; current on obligations to AFREXIM Bank.
- Debt management improvements:
  - Updated and published medium-term debt strategy (MTDS) reflecting ceiling on new non-concessional external debt contracted or guaranteed.

### Governance, transparency, SOE oversight, and anti-corruption
- PFM and IFMIS:
  - IFMIS started July 2021; as of May 2023, 50 MDAs included; additional 30 MDAs to be added July 1, 2023.
  - Commitment to route allotments, commitments, and cash outlays through IFMIS; publish reconciled monthly/quarterly fiscal reports.
  - Contract Management module piloted mid-November 2022; roll-out by end-December 2023.
- SOE oversight:
  - Detailed reporting initiated for high-risk SOEs; regular monitoring of management accounts; annual consolidated SOE report prepared.
- Anti-corruption and governance measures:
  - Financial Crimes Court operationalized.
  - Plans to digitalize asset declarations and facilitate lifestyle audits; strengthen collaboration among FIA and Director of Public Prosecutions for asset tracing, freezing, confiscation.
  - Preparing Memorandum of Understanding between ACB and agencies to facilitate data sharing.
  - Request for IMF technical assistance on governance diagnostic.
- Procurement concerns and corrective actions:
  - Barter trade deal to secure fertilizer in exchange for crops did not follow procurement procedures; deal nullified; confirmation provided that Fund has full repository of contracts giving rise to actual or contingent external debt liabilities.
  - Preparations underway for follow-up actions to implement audit recommendations for EDF and COVID-19 spending (structural benchmark for October 2023).

### Program monitoring, reporting, and safeguards
- Reporting and data commitments:
  - Bi-weekly, monthly, quarterly, and annual reporting timetables established; RBM and MOFEA to provide a comprehensive set of macro and financial data as specified.
  - Authorities submitted April and May IFMIS reports and restarted FX auctions (June); technical improvements to IFMIS reporting remain to be addressed.
- Safeguards and RBM governance:
  - RBM adopted a risk management policy; prepared revised framework for management of foreign reserves for Board endorsement.
  - Outstanding safeguards recommendations include amendments to the RBM Act and external auditors’ verification of NIR data within ten weeks after each test date.

### Risk assessment and policy responses (selected)
- Top selected risks and policy responses:
  - Delay in debt work out — Relative Likelihood High; Impact High — Policy Response: Work with debt advisor(s) and take decisive policy action to restore debt sustainability and close financing gap.
  - Governance weaknesses — Relative Likelihood High; Impact High — Policy Response: Strengthen institutions, roll out IFMIS, and strengthen public investment management (PIM).
  - Delayed PFM reforms and lack of expenditure control — Relative Likelihood High; Impact High — Policy Response: Accelerate PFM reforms, strengthen commitment control, communicate regularly.
  - Fiscal dominance undermining monetary policy — Relative Likelihood High; Impact High — Policy Response: Strengthen RBM independence, maintain positive real interest rate, reinstate clear monetary operational framework.
  - Commodity price volatility — Relative Likelihood High; Impact Medium — Policy Response: Tighten monetary policy, increase exchange rate flexibility, strengthen FX reserve buffer, apply automatic fuel price adjustment mechanism.
  - Social discontent — Relative Likelihood High; Impact High — Policy Response: Maintain social priority spending and strengthen governance measures.

### Staff appraisal and policy priorities (implied)
- Immediate policy priorities:
  - Expedite and complete external debt restructuring to reduce near-term debt service pressures and restore debt sustainability.
  - Pursue fiscal consolidation: about 1½ percentage points of GDP per year reduction in domestic primary deficit in FY2023/24 and a medium-term primary balance of 0 percent of GDP to stabilize public debt (cumulative consolidation of 6.0 percentage points over four years from FY2022/23).
  - Strengthen PFM: full IFMIS rollout, quarterly allotments aligned with realistic revenue projections, strict commitment controls to prevent arrears accumulation.
  - Rebuild FX reserves: RBM to become a net buyer of FX, limit market sales, wind down FX swaps, and continue FX auctions for price discovery.
  - Maintain tight monetary policy to curb inflation and ensure positive real interest rates.
  - Protect social spending while rationalizing and prioritizing other expenditures; reform and better-target the Affordable Inputs Program (AIP).
  - Strengthen governance and procurement practices; implement audit recommendations and seek IMF technical assistance for governance diagnostics.

*IMF staff summary based on the provided chapter text.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### CONTEXT AND RECENT DEVELOPMENTS
- Malawi has been affected by a series of shocks since PMB approval on November 11, 2022, including an outbreak of cholera and Cyclone Freddy, and received $88.3 million in emergency financing under the Food Shock Window of the Rapid Credit Facility on November 21, 2022.
- Real GDP growth:
  - 2022: 0.8 percent (decelerated sharply from revised official rate of 4.6 percent in 2021).
- Inflation:
  - Average inflation in 2022: 20.8 percent (up from 9.3 percent in 2021).
  - Inflation (y-o-y) reached 29.3 percent in May 2023.
  - RBM policy rate raised to 22 percent, from 18 percent in April 2023.
- Fiscal outcomes FY2022/23 (April/March):
  - Overall deficit: 11.8 percent of GDP (vs. 9.0 percent projected at PMB).
  - Domestic primary deficit: 3.8 percent of GDP (vs. PMB’s 0.6 percent).
  - Government recapitalization of RBM increased government capital transfers by 1.4 percentage points of GDP.
- External sector and reserves:
  - Current account deficit in 2022: 3.2 percent of GDP (much narrower than 14.8 percent of GDP projected at PMB and 14.1 percent of GDP outturn in 2021).
  - Gross official reserves as of end-2022: 1 percent of GDP.
  - External strains: shortages of foreign exchange, difficulties securing trade credit, widening spread between official and bureau exchange rates, increased informal imports.

### OUTLOOK AND RISKS
- Cyclone Freddy effects:
  - Growth downgraded to 1.7 percent for 2023 (from 2.4 percent at PMB).
  - Average inflation expected to reach 24.8 percent in 2023 (up from 22.7 percent at PMB).
- FY23/24 budget:
  - Approved budget envelope larger than at PMB approval, mostly to accommodate capital injections to the RBM.
  - Projected RBM capital injection peaks at an estimated 2.2 percent of GDP in FY23/24 and then should wind down.
- External debt restructuring:
  - Fiscal sustainability and PMB completion rely on a successful conclusion of the government’s external debt restructuring process in the near future; delays increase financing challenges and jeopardize access to an ECF arrangement.
- Risk assessment:
  - Downside risks: slippages in program implementation, prolonged debt restructuring, further external shocks, weaker-than-expected policy implementation leading to wider financing gaps, greater monetary financing, higher inflation and exchange rate pressure, further weather-related shocks, or another surge in food/fuel/fertilizer prices.
  - Upside risks: faster-than-anticipated macroeconomic impact of policy actions, faster development of mining projects, successful export diversification and formalization of informal activity, and budget overperformance.

### PROGRAM PERFORMANCE
- Targets and benchmarks:
  - Four out of six end-December and continuous Quantitative Targets (QTs) and one out of three end-December Indicative Targets (ITs) were not met.
  - Four out of seven Structural Benchmarks (SBs) were not met.
- Contributing factors to missed targets:
  - Difficulties in slowing previously budgeted expenditures.
  - Continued reliance on the central bank to supply foreign exchange.
  - Delays in external debt restructuring.
  - Unanticipated consequences of the kwacha devaluation (statutorily required recapitalization of the central bank and higher prices for government purchases).
- Corrective actions by authorities:
  - Commitment to adhere to the FY23/24 budget with quarterly allotments aligned with realistic revenue projections.
  - Rebuilding foreign exchange reserves.
  - Enhancing coverage, timeliness, and reporting of the repository of guarantees and underlying contracts to IMF staff.
  - Completing two prior actions for the first review:
    - (i) submitting April and May IFMIS reports to IMF staff;
    - (ii) restarting foreign exchange auctions to facilitate price discovery in the foreign exchange market.
  - Both prior actions were met.

### POLICY DISCUSSIONS
- Overall focus:
  - Corrective actions necessary to overcome mixed program performance and implementation challenges so the authorities can build the policy track record needed to support a future request for an Extended Credit Facility (ECF) arrangement.

A. Fiscal Policy: Containing Domestic Borrowing and Regaining Fiscal Discipline
- FY2023/24 budget characteristics:
  - Incorporates larger expenditure and domestic financing than anticipated at PMB approval, accounting for RBM recapitalization.
  - Budget anchored on realistic revenue estimates and expenditure rationalization, including containing the wage bill to grow below inflation while protecting social spending.
  - Targeted improvement in domestic primary balance (excluding RBM recapitalization flows): about 1.3 percentage points of GDP in FY2023/24 (compared with 1.4 percentage points of GDP envisaged at program approval).
  - Overall deficit projected to narrow by 1.3 percentage points of GDP (compared with 0.6 percentage change in the PMB).
  - Domestic financing expected to be in line with FY2022/23 outturn but larger than anticipated at PMB approval.
- Revenue measures totaling MWK 57 billion (0.4 percent of GDP):
  - Temporary supernormal bank profits tax: MWK17.5 billion.
  - Increase rate on advance income tax to 10 percent from 3 percent: MWK6.6 billion.
  - Requirement for affixing or printing of electronic tax stamps on beverages: MWK6 billion.
  - New stamp duties on various instruments, including motor vehicles: MWK4 billion.
  - Presumptive tax for small businesses with turnover less than MWK12.5 million: MWK2 billion.
  - Note: Some measures are new; some were planned for FY22/23 but implemented with delay.
- Expenditure stance:
  - Budget remains tight with expenditure rationalized without cutting social expenditure.
  - Large interest bill on domestic debt: 5.9 percent of GDP, limiting discretionary spending room.
- Social and food security spending:
  - Continued support for social cash transfers, the Affordable Inputs Program, maize purchases, livestock development initiatives, maize seed subsidies, and other agricultural spending.
  - Spending on food security met established targets and is expected to continue into FY23/24.
  - Heightened health expenditure related to cholera outbreak management.
- Public financial management (PFM) imperatives:
  - Critical to implement PFM commitments, including routing allotments, commitments, and cash outlays through IFMIS.
  - Authorities committed to announce quarterly allotments aligned with the macroeconomic framework and financial outturns, and to allow MDAs to commit only up to their allotment through IFMIS.
  - Implementing IFMIS, institutionalizing reporting, and expanding its coverage are essential for improved budget execution and commitment controls.

*Source: EXECUTIVE SUMMARY, 1mwiea2023001*

### 16.      Without any room for fiscal slippage, concerted effort by the authorities and other

### 16.      Without any room for fiscal slippage, concerted effort by the authorities and other domestic stakeholders to prepare  for fiscal financing challenges is important.

### Fiscal preparedness, contingency options, and arrears
- If there is slippage in budget execution, two main options to fill additional financing gaps are identified, both with significant costs:
  - Additional domestic borrowing: leads to further pressure on money growth, the exchange rate, and inflation and would erode purchasing power of the population already living in poverty and food insecurity.
  - Further cuts in primary or other expenditure: options include faster rationalization of the wage bill and more aggressive winding down of the Affordable Inputs Program (AIP) in exchange for more targeted support to the most vulnerable; these would compromise delivery of public goods and services and risk financial sector instability if not managed well.
- Contingency planning is important given that additional external sources (grants, concessional loans, external debt relief) are already exhaustively accounted for to execute the budget as passed.
- The authorities intend to clear the backlog of domestic arrears:
  - Verified arrears of national budget entities up to March 31, 2022.
  - A draft strategy to clear arrears has been prepared to ensure settlement respects fiscal framework limits and available resources; the draft strategy has not yet been approved by the Cabinet (SB, ¶33).
  - Strengthened commitment controls in arrears, quarterly allotments, and contract management recommended to prevent further accumulation.

### Oversight of state-owned enterprises (SOEs)
- Steps taken in compliance with the new PFM Act:
  - Initiated detailed reporting for high-risk SOEs.
  - Undertaken regular monitoring of management accounts of relevant SOEs.
  - Prepared an annual consolidated report of all SOEs.
- These steps can help prevent fiscal slippages and mitigate fiscal risks from public enterprises, contingent on timely availability of reports; staffing and data-complication challenges remain.

### Achieving price stability and monetary policy stance
- The RBM has raised the policy rate and will remain vigilant to address inflation; excessive money growth must be curtailed quickly.
- Measures to contain money growth include sterilization of excess liquidity created through foreign exchange purchases by the RBM to build up reserves.
- The authorities commit to maintain a tight monetary policy stance by setting the policy rate to ensure positive real interest rates.
- The RBM will work to contain net claims on government to meet the quantitative target on zero ceiling on RBM financing of the government.
- Footnote: The issuance of promissory notes to recapitalize central bank losses from exchange rate movements (required by law) will be adjusted for the zero ceiling on RBM financing of the government.

### Banking sector risks and financial oversight
- In the absence of other government financing sources, banks will have to continue increasing exposure to government securities, posing concentration risks and squeezing growth-enhancing lending to the private sector.
- Current conditions:
  - The banking sector is currently well capitalized, with sufficient profitability but liquidity seems to be at times inadequate (Figure 3).
- Further increases in banking sector exposure to the public sector and further increases in interest rates may pose potential risks to soundness.
- Authorities committed to remain vigilant and continue strengthening financial sector oversight.

### Rebuilding external buffers and foreign exchange policy
- Rebuilding a foreign exchange buffer is critical to regain confidence in the foreign exchange market.
- Low level of official FX reserves has led to loss of market confidence, shortages of foreign exchange and trade credit, and higher demand for RBM foreign exchange sales to secure strategic imports, making reserve accumulation more difficult.
- RBM has accrued losses due to its net foreign exchange liability position, putting pressure on the fiscal balance.
- Authorities’ commitments:
  - Reverse the vicious circle by purchasing foreign exchange while limiting foreign exchange sales to the market.
  - Mitigate foreign exchange swap rollover risks and decrease financing costs by winding down foreign exchange swaps with non-residents in accordance with their plan to reduce the open swap position over the medium term.
  - Allow greater flexibility and reduce misalignment in the exchange rate by facilitating price discovery through foreign exchange auctions.
- First auction and impact:
  - The first such auction was conducted on June 19, in small size but with high participation by authorized dealer banks.
  - The official exchange rate depreciated 2.7 percent in response.
  - The authorities published results of this auction and shared relevant details with IMF staff and committed to continue auctions on a monthly basis.

### Restoring debt sustainability
- Current assessment: Malawi’s external debt is currently assessed to be unsustainable but would be considered sustainable on a forward-looking basis if the government is successful in its restructuring strategy.
- Authorities’ external debt strategy aims to bring external public debt back to a moderate risk of debt distress in the medium term through policy adjustment and debt treatment.
- Under the strategy, all external solvency and liquidity ratios in the Debt Sustainability Analysis cross their respective thresholds under the baseline forecast in the next five years, assuming mobilization of non-debt-creating flows (including debt treatment and external grant support).
- Negotiations and creditor status:
  - Authorities continue to engage in negotiations to achieve debt restructuring; staff assesses these as challenging but credible.
  - Of its largest commercial creditors, Malawi remains in arrears with Trade and Development Bank (TDB)—as agreed to facilitate further negotiations—and is current on its obligations to AFREXIM Bank.
  - Progress remains slow in negotiations; Malawi is obtaining credible and specific financing assurances from official bilateral creditors.
- Domestic debt concerns:
  - Domestic debt burden is eroding fiscal space for public services, social safety nets, and investment.
  - Interest costs of that debt are projected to remain elevated in the medium term, underscoring need for urgent fiscal consolidation and limited margin to respond to future shocks.
- Debt management improvements:
  - With IMF and World Bank technical assistance, authorities updated and published a medium-term debt strategy (MTDS) to account for on-budget externally and domestically-financed projects.
  - The MTDS reflects the ceiling on new non-concessional external debt contracted or guaranteed.

### Governance, transparency, and anti-corruption measures
- Authorities taking steps to improve fiscal transparency and data recording, reporting, and monitoring at MOFEA and RBM to prevent use of public resources for private gain.
- Corrective actions and audits:
  - Implementing corrective actions related to audits of COVID-19 expenditure and the audit of the Export Development Fund (EDF).
  - Preparations underway for follow-up actions to implement audit recommendations for EDF and the two tranches of COVID-19 spending (structural benchmark for October 2023).
  - Law enforcement actions related to COVID-19 spending have been fully carried out; work remains on compiling and implementing audit recommendations.
- Anti-corruption agenda progress:
  - Operationalized a Financial Crimes Court.
  - Working to digitalize asset declarations and facilitate lifestyle audits; strengthen collaboration among the Financial Intelligence Agency and the Director of Public Prosecutions for tracing, freezing, and confiscating assets.
  - Preparing a Memorandum of Understanding between the Anti-Corruption Bureau and various agencies to facilitate data sharing.
  - Efforts to reduce smuggling by publishing and reconciling strategic import data.
  - AML/CFT regime legal and regulatory framework needs strengthening to meet FATF standard.
  - Authorities requested IMF technical assistance to conduct a governance diagnostic.
- Procurement concerns:
  - A reported barter trade deal to secure fertilizer in exchange for crops raised governance concerns because proper procurement and authorization procedures were not followed, as confirmed in the Attorney General (AG)’s legal opinion.
  - Corrective actions taken: nullifying the deal, confirming Fund has full repository of contracts that would give rise to actual or contingent external debt liabilities of the government and the RBM, confirming commitment to adhere to limits on contracting and guaranteeing non-concessional and concessional external debt set forth in the PMB, and requesting governance diagnostic technical assistance from Fund staff.

### Program modalities, performance, and structural benchmarks
- Performance summary:
  - Performance on QTs, ITs, and SBs was mixed, with four out of six end-December QTs not met.
  - Specifics:
    - The QT on the domestic primary fiscal balance (floor) at end-December 2022 and the IT at end-March were not met; the size of the deviation was contained for the latter. Revenue targets were met, as were targets on social spending.
    - The continuous QT on zero ceiling on contracting or guaranteeing of new nonconcessional external debt was not met because the TMU defines this ceiling as a cumulative flow from the beginning of the fiscal year; a guarantee of US$50 million that had been extended before the program approval but still during FY2022/23 constituted a breach of the program target.
    - The QT on the change in net international reserves (NIR) of the RBM (floor) was missed by US$7 million at end-December and the IT for end-March was met.
      - Reserve assets of the RBM were projected at US$172 million at program inception but the outturn was lower at US$120 million largely because of unanticipated realization of rollover risks associated with foreign currency swaps (US$100 million) which was only partially offset by savings in government forex spending.
      - Foreign currency drains (FCD) were projected at US$756 million at PMB approval but the outturn was much higher at US$1,358 million mostly because the debt service arrears that were due to be restructured before end-2022 became part of FCD.
      - NIR (equal to reserve assets minus FCD) therefore ended 2022 at -US$1,238 million which was much larger negative than the -USD$584 million projected at PMB approval.
      - The QT was set on the change rather than the level of NIR; despite the large shortfall, the QT was missed only by US$7 million for end-December 2022 and met for end-March 2023.
      - Going forward, it is proposed to split FCD into two parts: (i) predictable, steady foreign currency drains of the RBM; and (ii) part subject to progress on the debt restructuring process. Only the former would be included to monitor program targets while both would be included in the assessment of Malawi’s vulnerability to external shocks.
    - The QT on accumulation of external payments arrears was met on a continuous basis as of end-December 2022 and end-March, excluding external debt subject to rescheduling or restructuring per the TMU.
    - The QT on RBM financing of the central government (ceiling) at end-December 2022 and the IT for end-March were not met, largely because:
      - (1) the government was required by law to provide an automatic recapitalization of the RBM to address losses following the 25-percent kwacha devaluation in May 2022; and
      - (2) the RBM was not able to partially net out the losses with a positive profit until April 2023.
    - The QT on the monetary base was met both for end-December 2022 and end-March 2023.
    - The IT on contracting or guaranteeing of new concessional external debt was not met due to differences in ceiling definitions; since the beginning of the program, the government contracted one new concessional loan with African Development Bank, amounting to XUA1.64 million (about USD 2.1 million), which on its own would not have constituted a breach.
- Structural Benchmarks (SBs):
  - As of the first review, three SBs were met on time.
  - SB on quarterly allotments was met.
  - SB on strategy to clear arrears was not met.
  - SB on publication of audited quarterly reports will be replaced with publication of monthly reports (a stronger and more timely commitment).
  - SB on foreign exchange auctions was elevated to a prior action for the first review and was met.
  - Authorities requested modification of the SB on submission of amendments to the RBM Act to Parliament by end-October 2023; this will be replaced with submission to public consultation first then to the Parliament, by end-October.
  - SB on the Asset Liability Management Committee (ALCO) was not met, though ALCO had its first meeting in June.
  - SB to produce a follow-up action report on recent audit recommendations is on track for October 2023.

### Program adjustments, reporting, and safeguards
- Authorities requested modification of QTs and ITs for end-June and end-September, in line with updated projections; they proposed revising the NIR definition to avoid unnecessary volatility due to timing uncertainties in the debt restructuring process.
- In line with prior actions, authorities submitted April and May IFMIS reports to IMF staff and began in June conducting regular foreign exchange auctions.
  - Technical issues remain with IFMIS submissions, including adding the full set of MDAs into the data set and arranging outputs to allow easy comparison against revenue targets and quarterly expenditure allotments.
  - IMF staff will continue to work with authorities to strengthen monthly IFMIS reports.
- RBM safeguards progress:
  - RBM adopted a risk management policy and aligned procedures for market operations with the RBM Act.
  - A revised framework for management of foreign reserves was prepared in consultation with Fund staff and submitted for Board endorsement.
  - Outstanding recommendations remain, including amendments to the RBM Act (SB) and external auditors’ verification of NIR data within ten weeks after each test date; verification was delayed for the end-October 2023 test date.

### Risks to the program and staff appraisal
- Key risk: Policy implementation. Slower- or weaker-than-expected implementation would create wider financing gaps, greater monetary financing of fiscal deficits, and further pressure on inflation and the exchange rate, undermining macroeconomic stability efforts.
- Staff appraisal:
  - Performance under the PMB has been mixed; authorities committed to strengthen implementation and establish a strong track record.
  - Steadfast implementation and unwavering commitment are critical to restore macroeconomic stability, complete the second review, and support a request for a perspective ECF arrangement.
  - The recent fertilizer barter deal is concerning from a governance perspective; procurement practices should be strengthened, supported by corrective actions taken.
  - Successful debt restructuring is vital; no reasonable mix of adjustment and financing alone can deliver macroeconomic stability.
  - The external debt restructuring strategy aims to bring external debt service down substantially through significant treatment of commercial and official bilateral debt.
  - A concerted effort among authorities, creditors, and international development partners is crucial; time is of the essence as further delays would result in greater financing gaps and a higher cost to the people of Malawi.

*IMF staff summary based on the provided chapter text.*

### 39.      Fiscal discipline, supported by a robust PFM system and timely production of

### 39.      Fiscal discipline, supported by a robust PFM system and timely production of comprehensive fiscal reports

### Fiscal discipline and public financial management (PFM)
- Fiscal discipline, supported by a robust PFM system and timely production of comprehensive fiscal reports, remains critical.
- Fiscal consolidation plans should be anchored on:
  - enhanced revenue mobilization,
  - expenditure rationalization,
  - mobilization of grants.
- Consolidation will need much stronger cash management and commitment controls than in the past.
- Improvements in fiscal reporting are needed to enhance budget execution.

### Fiscal financing challenges and domestic debt
- There is no room for fiscal slippage; concerted effort by the authorities and other domestic stakeholders to prepare for fiscal financing challenges is important.
- Domestic debt service is now eroding much-needed fiscal space, compromising already-limited delivery of public goods and services and ultimately the attainment of the Malawi Vision 2063.
- Domestic debt pressures are putting pressure on:
  - money growth,
  - the exchange rate,
  - inflation.
- Concerted effort is required to address fiscal financing challenges, especially given that discussions to secure additional external sources (grants, concessional loans, external debt relief) are already exhaustively accounted for to execute the budget as passed.

### Price stability and central bank (RBM) actions
- Price stability supported by fiscal consolidation is critical to prevent a further erosion of purchasing power for those living in poverty and food insecurity.
- The RBM needs to persist in efforts to reduce inflation and anchor inflation expectations by:
  - containing reserve money growth,
  - aligning the policy rate with inflation to ensure positive real costs of borrowing,
  - raising required reserves if needed.
- The RBM should remain vigilant to safeguard financial sector stability, given the banking sector’s large exposures to government and associated potential risks.

### Rebuilding buffers and foreign exchange reserves
- Rebuilding buffers is critically important to reduce Malawi’s vulnerability to external shocks.
- The RBM’s commitment to rebuild its foreign exchange reserves requires implementation of its strategy to wind down unsustainable policies, including:
  - excessive use of swaps,
  - sales of foreign exchange to support strategic imports in the absence of trade credit.
- Quickly rebuilding the RBM’s foreign exchange reserve assets is critical to:
  - restoring the normal functioning of trade credit,
  - ensuring the steady supply of essential commodities in the country with little foreign exchange intervention by the RBM.
- This process should coincide with steps to promote price discovery and eliminate misalignment of the exchange rate.

### Governance and institutional reforms
- Addressing weaknesses in governance and institutions should be an important priority.
- Authorities should:
  - press ahead with implementation of their anti-corruption agenda,
  - document progress on recent audits,
  - publish and reconcile strategic import data.

*Source: IMF content unit 1mwiea2023001 - section 39–43.*

### 44.      In the light of the above, staff assesses that the program remains on track to achieve

### 1mwiea2023001 - 44.      In the light of the above, staff assesses that the program remains on track to achieve

### Real sector developments
- Real GDP growth projection for 2023 was revised down from 2.4 percent (PMB approval) to 1.7 percent to reflect the impact of Cyclone Freddy.
- Inflationary pressures are showing signs of easing—consistent with developments in broad money growth.
- Pressure on the exchange rate remains high with the spread between the Forex bureau rate and the RBM rate at 44 percent at end-May 2023.
- Despite falling international crude oil prices since July 2022, pump prices have not been adjusted since September 2022.

### Fiscal sector developments and risks
- Revenue in FY2022/23 was higher than in the past but expenditure was substantially higher partly because of growing interest payments.
- The rising domestic debt service is the result of growing domestic debt due to overly optimistic revenue projections and lack of commitment control over the years.
- Interest payments and other recurrent spending have increased, crowding out social spending, while capital spending has been under executed.
- Public debt has reached historically high levels and the debt restructuring process is on-going.
- Official aid came in strong (with higher share of on-budget support) to help Malawi weather this dire economic situation.

### Monetary and financial sector developments
- Sovereign security issuances since 2020 are accompanied by RBM’s liquidity injection via open market operations, leading to a rapid increase in monetary base.
- The RBM has been raising the monetary policy rate since May 2022, from 12 percent to 22 percent in May 2023, but the deposit rate has remained at below 5 percent, leaving bank deposits/savings to lose value and currency in circulation stay high.
- The FY23/24 budget implementation is predicated on other depository corporations (ODCs) buying more securities, but ODCs are already highly exposed to the central government.
- Broad money growth is dominated by growth in net claims to CG, which more than offsets contraction in net foreign assets.
- Banks are meeting prudential regulations, but liquidity has at times been inadequate.

### External sector developments
- Scarce foreign exchange reserves have been diverted to secure strategic imports; fertilizer imports were notably lower in 2022/23 and failed to peak at the planting season.
- Fuel imports have also been squeezed in the face of higher prices and foreign exchange shortages.
- Tobacco exports remain an important source of foreign exchange and are expected to rebound in the coming months given crops were largely unaffected by Cyclone Freddy.
- The merchandise trade deficit contracted sharply in 2022, largely reflecting a reported squeeze on other imports.
- As foreign assets (in particular reserve assets) of the RBM declined, trade credit dried out and RBM's net forex sales increased, leading to a further decline in reserve assets.

### Key projections and selected indicators (as reported)
- Consumer prices (end of period): 11.5; 26.0; 25.4; 20.4; 24.4; 15.2; 9.9; 7.6; 6.5; 6.5
- Current account (percent of GDP): -14.1; -14.8; -3.2; -13.6; -7.9; -9.0; -8.6; -7.6; -6.3; -5.9
- Total public debt (percent of GDP): 61.5; 76.6; 75.2; 74.6; 80.2; 80.2; 80.9; 79.6; 78.1; 75.1
- Gross official reserves (US$ millions, selected): 429; 172; 120; 409; 499; 747; 846; 996; 1,106; 1,202 (series as reported)
- RBM policy rate progression: 12 percent (May 2022) to 22 percent (May 2023)
- Spread between Forex bureau rate and RBM rate: 44 percent (end-May 2023)

### Analysis and implied policy priorities from the source text
- Strengthen fiscal discipline to address growing domestic debt service driven by optimistic revenue projections and weak commitment control.
- Address composition of spending where rising interest and recurrent outlays are crowding out capital and social spending and where capital spending is under executed.
- Reduce ODCs’ concentrated exposure to the central government and limit further monetary financing that expands the monetary base.
- Restore and protect foreign exchange reserves by prioritizing scarce FX for strategic imports and supporting export recovery (noting tobacco export prospects).
- Consider adjustments to pump prices in light of falling international crude prices since July 2022 (pump prices not adjusted since September 2022).

*Sources: Reserve Bank of Malawi, Ministry of Finance, Malawi Energy Regulatory Authority, US EIA, National Statistics Office of Malawi, OECD Creditor Reporting System, Malawian authorities, and IMF staff estimates and projections.*

### 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.217.721.6

### 1mwiea2023001 - 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.217.721.6

### Banking sector capital and capitalization metrics
- 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.217.721.6
- 2. Total regulatory capital to risk weighted assets21.020.820.720.924.8
- 3. Total capital to total assets
  - 1 16.413.114.311.613.6
  - Note: In the total capital to total assets series, total capital refers to regulatory capital.

### Asset composition and quality
- 1. Non-performing loans to gross loans and advances6.36.34.56.37.4
- 2. Provisions to non-performing loans38.632.932.529.933.0
- 3. Total loans and advances to total assets 33.231.229.22926.7
- 4. Foreign currency loans to total loans and advances20.914.711.311.112.7
- Source: Reserve Bank of Malawi.

### Earnings and profitability
- 1. Return on assets (ROA)2.73.03.44.15.4
- 2. Return on equity (ROE)20.522.826.033.340.4
- 3. Non-interest expenses to gross income51.849.043.740.334.8
- 4. Interest margin to gross income59.665.649.752.252.4
- 5. Non-interest income to revenue33.634.431.630.531.3
- 6. Net interest income to assets8.48.07.994.7
- 7. Personnel expenses to non-interest expenses43.042.543.443.745.9

### Liquidity indicators
- 1. Liquid assets to deposits and short-term liabilities58.957.552.553.558.4
- 2. Total loans to total deposits54.250.047.942.939.8
- 3. Liquid Assets to total assets39.839.637.339.442.9
- 4. Foreign exchange liabilities to total liabilities15.816.114.213.813.3

### External financing requirement and sources (Table 6, 2022–28; Millions of U.S. Dollars; Unless Otherwise Indicated)
- Total requirement-583   -1,989    -1,454    -1,238    -1,202    -1,034-956
- Current account, excluding official transfers-471   -1,022-963-944-862-762-752
- Debt amortization-64-589-242-196-190-161-109
- Gross reserves accumulation (- increase)-49-378-249-99-150-110-95
- Total sources5831,2371,1791,057981936940
- Expected disbursements (official)1,1341,4641,1581,068992872918
- Grants8551,108918867841755774
- Medium- and long-term loans279355240201151117145
- Private sector (net)-611-187624463128100
- IMF (net)60-39-41-55-74-65-79
- Drawings91000000
- Repayments31394155746579
- Financing gap 07522751812219816
- Gross official reserves1204997478469961,1061,202
- Months of imports0.62.33.33.74.24.54.7
- Source: IMF staff estimates.

### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses (selected)
- Intensification of regional conflict(s)
  - Relative Likelihood High; Impact Medium
  - Policy Response: Strengthen intra-regional trade among sub-Saharan African countries to overcome supply chain disruptions.
- Commodity price volatility
  - Relative Likelihood High; Impact Medium
  - Policy Response: Tighten monetary policy, increase exchange rate flexibility, strengthen FX reserve buffer, apply the automatic fuel price adjustment mechanism and replenish the fuel price stabilization to ensure adequate energy supplies and contain fiscal cost/contingent liabilities.
- Social discontent
  - Relative Likelihood High; Impact High
  - Policy Response: Encourage the authorities to maintain social priority spending; undertake promised reforms transparently and equitably; strengthen governance measures.
- Systemic financial instability
  - Relative Likelihood Medium; Impact Medium
  - Policy Response: Upfront action to address debt sustainability and avoid external non-concessional borrowing; rely on grants and highly concessional loans.
- Abrupt global slowdown or recession
  - Relative Likelihood Medium; Impact Medium
  - Policy Response: Encourage the authorities to expand the domestic revenue base.

- Regional and Domestic Risks (selected)
  - Delay in debt work out
    - Relative Likelihood High; Impact High
    - Policy Response: Work with debt advisor(s) and take decisive policy action to restore debt sustainability and close financing gap.
  - Governance weaknesses
    - Relative Likelihood High; Impact High
    - Policy Response: Strengthen institutions, roll out IFMIS, and strengthen public investment management (PIM).
  - Delayed PFM reforms and lack of expenditure control
    - Relative Likelihood High; Impact High
    - Policy Response: Accelerate implementation of PFM reform programs, strengthen commitment control, and communicate regularly and transparently.
  - Fiscal dominance resulting in deficient conduct of monetary policy
    - Relative Likelihood High; Impact High
    - Policy Response: Strengthen RBM independence, maintain a positive real interest rate, reinstate a clear and effective monetary operational framework.
  - Natural disasters related to climate change
    - Relative Likelihood High; Impact High
    - Policy Response: Build economic resilience through human capital investment and addressing deforestation.

### Memorandum of Economic and Financial Policies (MEFP) — policy objectives and recent developments
- Program context and objectives
  - The Government of Malawi has embarked on a wide-ranging macroeconomic and structural reform program aligned with Malawi Vision 2063 and the Staff Monitored Program with Executive Board involvement (PMB).
  - Objectives: restore macroeconomic stability, set foundation for inclusive growth, enhance resilience to natural disasters and shocks.
- Recent shocks and challenges
  - Cyclone Freddy (March 2023) caused significant deaths and destruction of critical infrastructure.
  - Late 2022–early 2023 cholera outbreak; inflation standing at 29.2 percent as of end-May 2023.
  - Balance of payments pressures and external debt assessed as unsustainable under the DSF-LIC.
- Policy commitments and corrective actions
  - Continue comprehensive debt restructuring to restore debt sustainability and build track record toward an IMF-supported Extended Credit Facility (ECF).
  - Completed two prior actions for the first review: (i) submitting April and May IFMIS reports to IMF staff; and (ii) restarting foreign exchange auctions.
  - Requesting modification of QTs and ITs for end-June and end-September to align with updated projections.
  - Fiscal policy: Passed FY2023/24 budget aligned with macroeconomic adjustment path; focus on enhanced domestic revenue mobilization and expenditure rationalization.
  - Monetary policy: RBM tightened monetary policy stance to help contain inflationary pressures.
  - Governance and PFM: Commit to enhancing transparency, accountability, digitization of PFM, enhancing RBM autonomy and governance, and strengthening foreign exchange reserves position and management.
- Recent economic developments
  - Real GDP growth: recovery from 0.9 percent in 2020 to 4.6 percent in 2021; declined to an estimated 0.8 percent in 2022 due to two tropical storms, agricultural season disruptions, intermittent electricity supply, and spillovers from the war in Ukraine.

*Source: Excerpts from the IMF staff report and attachments for Malawi (Reserve Bank of Malawi; IMF staff estimates; MEFP, June 30, 2023).

### 7.      Fiscal policy faced challenges in FY2022/23. The deficit in FY2022/23  is MWK 1.48 billion

### 1mwiea2023001 - 7.      Fiscal policy faced challenges in FY2022/23. The deficit in FY2022/23  is MWK 1.48 billion

### Fiscal outturn FY2022/23
- The overall fiscal deficit in FY2022/23 is MWK 1.48 billion (11.8 percent of GDP), compared to a projection of MWK 1.08 billion (9.0 percent of GDP) at the time of the PMB.
- The domestic primary fiscal deficit in FY2022/23 was MWK 479 billion (3.8 percent of GDP), compared to a projection of 0.6 percent at the time of the PMB.
- Slippage was largely on the expenditure side, driven by inflation-induced expenditure overruns and a late revised FY2022/23 budget that made reversal of spending difficult.
- Tax revenue outturn was 12.7 percent of GDP, close to the 13.1 percent projected at PMB approval.

### External position, reserves, and exchange rate
- Current account deficit narrowed to 3 percent of GDP in 2022 from 14 percent of GDP in 2021, partly due to a large devaluation and import compression.
- Readily available gross reserves were $120.2 million at end-2022, up from $71.7 million at end-2021.
- Reserve accumulation was limited in part due to sizeable external debt service and underperformance of exports.
- Since the 25 percent exchange rate devaluation at end-May 2022, the spread between the US$/Kwacha bureau and the official exchange rate has reopened and widened to over 40 percent.
- Cyclone Freddy has put further strain on gross reserves.

### Inflation and monetary policy
- Average overall inflation in 2022 rose to 20.8 percent from 9.3 percent in 2021.
- Inflation (year on year) in May 2023 was 29.2 percent; food and non-food y-o-y inflation reached 38.8 percent and 18.4 percent, respectively.
- Drivers include exchange rate pass-through from the 25 percent devaluation in May 2022, increases in prices of fuel, fertilizer and imported food, global supply disruptions, and the expansionary fiscal stance in FY22/23.
- The Reserve Bank of Malawi (RBM) raised the policy rate by 400 basis points to 22 percent in April 2023.

### Banking sector and financial soundness
- The banking sector is broadly stable, well capitalized, with sufficient liquidity and profitability, and meets minimum regulatory requirements for capital adequacy and liquidity ratios.
- Industry-wide non-performing loans stood at 7.4 percent in May 2023, up from 2.0 percent in May 2022, remaining above the recommended limit of 5.0 percent.
- Exposure of banks to the public sector has continued to increase.

### Food security and climate risks
- Risk to food security is high and has increased due to climate-induced shocks and lingering spillovers from the war in Ukraine.
- Destruction of crops caused by Cyclone Freddy will add to pressure on food security and reduce foreign-exchange-earning agricultural exports (tobacco).

### Outlook and macroeconomic projections
- Growth is expected to recover from 0.8 percent projected in 2022 to 1.7 percent in 2023.
- Medium-term growth is projected to settle around 4.6 percent, supported by greater macroeconomic stability and structural reforms.
- Average year-on-year inflation is expected at 24.8 percent in 2023 and projected to decline thereafter towards about 6.5 percent in the medium term.
- Target for gross reserves: aim to accumulate to reach $499 million by December 2023; gross reserves are projected to recover to over 4.5 months of imports in the medium term.
- The reserve accumulation path assumes the external financing gap will be filled with non-debt creating flows, either debt relief or grants, and concessional loans.
- Risks: without sufficient external buffers, BOP pressures may intensify; further weather-related shocks; adverse effects from the war in Ukraine.

### Fiscal policy objectives and adjustment path
- Program objectives include (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, and (vi) addressing weaknesses in governance.
- The passed FY2023/24 budget aims for a fiscal adjustment of about 1½ percentage points of GDP in FY2023/24.
- Envisaged reduction of the domestic primary deficit excluding flows related to RBM recapitalization is 1.3 percentage points of GDP in FY2023/24.
- In the medium term, a primary balance of 0 percent of GDP is needed to stabilize public debt, representing a cumulative fiscal consolidation of 6.0 percentage points (in terms of domestic primary balance) over the four years from FY2022/23.
- Fiscal consolidation during FY2023/24 will focus on (i) stepping up implementation of the Domestic Revenue Mobilisation Strategy (DRMS), (ii) rationalizing and prioritizing expenditures, (iii) introducing and implementing sound commitment controls measures and (iv) implementing well targeted measures to support low-income households.

### Revenue measures being implemented
- DRMS launched December 2021 aims to increase revenue by 5 percent of GDP over five years; DRMS incorporated into MRA strategic plan and a DRMS Monitoring Committee formed in FY2022/23.
- Specific measures:
  - PAYE Brackets: introduced additional income tax brackets in April 2022.
  - Advance income tax: full implementation rolled out May 2022, raised additional revenue amounting to MWK 6 billion; rate will increase from 3 percent to 10 percent in FY 2023/24.
  - Tax stamps on beverages: requirement for electronic tax stamps on specified beverages expected to be operational in FY2023/24.
  - New stamp duties: to apply to various instruments, including motor vehicles, in FY2023/24.
  - Presumptive tax for small businesses with turnover less than MWK12.5 million; block management system rollout starting with Lilongwe, Blantyre and Mzuzu.
  - Review and streamlining of tax incentives with incorporation into new Taxation Act, VAT Act, and Customs and Excise Act under review.
  - Bank Supernormal Profits Tax: additional income tax of 10 percent for bank profits above MK10 billion (profits below MK10 billion taxed at 30 percent; profits above MK10 billion taxed at 40 percent); temporary measure to be reviewed next fiscal year.
  - Introduce VAT on specified products (listed in text).
  - Increase withholding tax on contractors from 3 percent to 10 percent.
  - Collect rental income tax from residential houses via registration project.

### Tax administration and non-tax revenue improvements
- Integrated Tax Administration System (ITAS/Msonkho online) go-live December 2022 with all modules by March, 2023; taxpayer-facing modules operational; outstanding modules relate to authority functions (audit and risk profiling).
- Measures to improve non-tax revenues: ensure SOEs comply with PFM Act by opening a holding account with RBM; ensure MDAs remit non-tax revenue to MG1 account; increase some fees and charges; plans to automate payment systems and enforce dividend and surplus policy.

### Expenditure prioritization and social protection
- Focus on improving efficiency and reducing non-critical spending while protecting vulnerable groups and investing in infrastructure.
- Affordable Input Program (AIP) reforms: first phase implemented with National Integrated Social Safety Net Program and Unified Beneficiary Register to reduce duplication; measures to prevent cost overrun include increasing farmer contribution and capping Government Subsidy; plan to phase out AIP in subsequent phases and move poorest farmers to social protection and others to commercial programs.
- Wage bill rationalization: Personnel Audit (2021) recommendations; commitments include flushing out ghost workers, freezing new hires except in critical areas, and strengthening approval processes in HRMIS.
- Floor on social spending as an indicative target under the program covering Government contribution to health and basic and secondary education, SCTP and AIP.
- Box 1: FY2022/23 fiscal measures to mitigate food insecurity (selected figures):
  - Social Cash Transfer: Proposed Amount K 2 billion; Amount Spent K 2 billion.
  - Affordable Inputs Program: Proposed Amount K 69.8 billion; Amount Spent K 144.2 billion.
  - Maize/Other Food Stuffs Purchase–Lean season response: Proposed Amount K 12.6 billion; Amount Spent K 12.6 billion.
  - Livestock Development Initiatives: Proposed Amount K 0.5 billion; Amount Spent K 0.6 billion.
  - Maize Seed subsidy: Proposed Amount K 4.4 billion; Amount Spent K 0.2 billion.
  - Agriculture Sector support: Proposed Amount K 8.6 billion; Amount Spent K 26.5 billion.
  - Sub-Total: Proposed K 97.9 billion; Amount Spent K 186.1 billion.

### SOE oversight, arrears, and public finance management reforms
- Strengthened oversight of SOEs: detailed reporting to Parliament for high-risk SOEs (Blantyre Water Board, ESCOM, ADMARC, NOCMA and EGENCO); quarterly monitoring of management accounts; annual consolidated SOE report in compliance with PFM Act.
- Arrears: verification completed for national budget entities from 1 July 2017 to 30 March 2022; discussions with Auditor General on unverified arrears; commitment to settle arrears within fiscal framework and available resources and to avoid accumulation through quarterly allotments, enhanced commitment controls and contract management module within IFMIS.
- IFMIS and commitment control:
  - IFMIS started July 2021; as of May 2023, 50 MDAs included; additional 30 MDAs to be added July 1, 2023.
  - Contract Management module piloted mid-November 2022 with Ministries of Health and Transport; roll-out to remaining MDAs by end-December 2023 and further functionalities during FY2024.
  - Expand IFMIS coverage from April 2023 to include items transacted outside IFMIS, including all revenue actuals, domestic debt issuance receipts, debt servicing payments, transfers to local councils, non-IFMIS MDAs, and advances to embassies.
  - Electronic Funds Transfer (EFT) used exclusively for government payments across all MDAs; Government to cease acting as a participating bank in the interbank payment system.
  - Consolidated fiscal reports: working to record transactions from July 2021, auto-reconciliation of bank statements started, compiling IFMIS-generated monthly fiscal reports and aim to publish quarterly IFMIS-generated comprehensive fiscal reports starting in FY2023/24, backed by reconciled bank statements submitted within three weeks from month end.
- PFM Act: new PFM Act passed March 2022; drafting regulations and Treasury instructions to be finalized before end-September 2023; drafts to be shared with IMF and development partners prior to promulgation.

*Source: 1mwiea2023001 - chapter content on fiscal policy and related macroeconomic context.*

### 26.      Monetary  policy will focus on containing inflationary pressures. To anchor inflation

### 1mwiea2023001 - 26.      Monetary  policy will focus on containing inflationary pressures. To anchor inflation

### Monetary policy stance and tools
- Monetary policy will focus on containing inflationary pressures and anchoring inflation expectations; authorities stand ready to tighten monetary policy as needed.
- Monetary program anchored on containing reserve money growth.
- Measures to contain money growth against excess liquidity created through sizeable foreign exchange purchases envisaged to build up FX reserves:
  - Maintain a tight monetary policy stance by setting the monetary policy rate to ensure positive real interest rates to tame inflation.
  - Drain excess liquidity through various instruments including raising required reserves, RBM’s sales of government securities, and Open Market Operations (OMO) for sterilization purposes.
  - The RBM will contain net claims on government to meet the zero ceiling on RBM financing of the government.

### Financial sector stability
- Risk drivers:
  - Further increase in banking sector exposure to the public sector.
  - Hikes in interest rates may pose potential risks to financial sector soundness.
- Policy actions to promote financial stability:
  - Monitor closely the banking system’s exposure to the government through securities and swap operations.
  - Reassess loan and collateral quality needs of commercial banks.

### Rebuilding external buffers and exchange rate policy
- Objectives:
  - Rebuild FX buffers sustainably and maintain a market-determined exchange rate.
- Reserve accumulation strategy and FX operations:
  - Implement the agreed path towards accumulating foreign exchange reserves; the RBM will purchase foreign exchange necessary to build reserves and limit foreign exchange sales to the market—becoming a net purchaser of foreign exchange.
  - Reserve accumulation strategy intended to help achieve at least 3 months of import cover in the medium term.
  - Monitor short-term foreign currency drains to consistently monitor RBM’s external vulnerability.
  - Mitigate FX swap rollover risks and decrease swap costs by winding down FX swaps with non-residents, in accordance with the plan to reduce the open swap position during the medium term.
  - RBM will resume transparent foreign exchange auctions to promote price discovery and greater flexibility in the exchange rate and to foster development of the interbank FX market (PA) and will continue those auctions on a monthly basis.
  - Ensure coordination between the government and the RBM to achieve external sector policy goals; government will stay on track with the fiscal program to manage fiscal implications on foreign exchange and improve the medium-term current account balance.

### Restoring debt sustainability and closing financing gaps
- Current assessment:
  - Malawi’s overall and external public debt is assessed to be in debt distress, reflecting legacy debts driven by unsustainable fiscal and external policies.
  - Restoring public debt sustainability is a top priority.
- Debt restructuring strategy and targets:
  - Both external and domestic debt are assessed as unsustainable under current policies; conditional on completion of ongoing debt restructuring, debt is sustainable on a forward-looking basis.
  - Strategy pillars include policy adjustment and necessary debt treatment to bring external public debt back to a moderate risk of debt distress in the medium term.
  - Debt strategy targets for the next five years under the baseline:
    - present value of debt-to-GDP ratio to reach below 30%
    - present value of debt-to-exports ratio below 140%
    - external debt service-to-exports ratio below 10%
    - external debt-to-revenue ratio below 14%
  - Mobilization of non-debt creating flows, including debt treatment and mobilization of external grant support from development partners, to close external and fiscal financing gaps.

### Debt management, transparency, and fiscal adjustment
- Measures to ensure sustainable public debt:
  - Updated and published 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.
  - MTDS reflects the ceiling on new non-concessional external debt contracted or guaranteed as required by the Fund’s Debt Limit Policy.
  - Adopt best practices for data reporting and transparency; fulfil reporting duties to the Fund during staff program reviews or upon request.
  - Continue integrating public debt data into IFMIS and publish 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.
  - Undertake a fiscal adjustment while limiting the impact on economic growth and protecting vulnerable populations through revenue mobilization efforts.
  - Continue implementation of the National Export Strategy and reduce dependence on agricultural exports to build resilience to climate shocks and support medium-term growth.

### Strengthening governance, RBM autonomy, and safeguards
- Reserve management and RBM governance:
  - Developed a revised framework for management of foreign reserves in accordance with recommendations of the 2021 Safeguards Assessment Report; ensure endorsement by ALCO and the Board.
  - RBM Board has established an Asset Liability Management Committee (ALCO) in accordance with recommendations of the 2021 Safeguards Assessment Report.
  - Prepare, in consultation with Fund staff, and submit amendments recommended by the 2021 safeguards assessment to the RBM Act to public consultation first then to Parliament (SB).
  - To strengthen accuracy of RBM program monitoring data:
    - institute a policy for external auditors to verify NIR data within 10 weeks after each test date; and
    - submit monetary data through standard reporting forms to the Fund on a regular basis.

### Addressing governance weaknesses and corruption
- COVID-19 funds misappropriation highlights need to address governance weaknesses; preparations underway for follow-up actions to implement audit recommendations for two tranches.
- Export Development Fund (EDF) governance weaknesses pose contingent liability risks; Government working on modalities to merge EDF with Malawi Agricultural and Industrial Investment Corporation, PLC (MAIIC).
- Public procurement and contract transparency:
  - Commitment to conduct procurement transparently and in accordance with PFM Act; steps to nullify a barter trade deal undertaken without proper procedures.
  - Government has a manual repository of contracts (also recorded in excel) and provided Fund staff a full repository of contracts that could give rise to actual or contingent external debt liabilities of government and RBM.
  - Requested governance diagnostic technical assistance from Fund staff to identify weaknesses in regulation, legislation, and compliance.
- Anti-corruption strategy and operational measures:
  - Government adopted a strategy to combat corruption composed of Pursue, Prevent, Protect, Prepare.
  - Office of the Director of Public Asset Declarations (ODPOD) to digitise asset declarations and establish interface between ODPOD and Anti-Corruption Bureau (ACB) to facilitate lifestyle audits by September 2023.
  - Strengthen collaboration among Financial Intelligence Agency (FIA), Director of Public Prosecutions (Asset Forfeiture Unit) and ACB to trace assets for freezing and confiscation by September 2023.
  - Financial Crimes Court operationalized to fast track prosecution of financial related crimes.
  - Removed requirement for ACB to obtain consent from Director of Public Prosecution to effect arrests for suspected corruption cases.
  - ACB to establish and sign a Memorandum of Understanding with selected MDAs by June 2023 to facilitate data and information sharing.
  - Request technical assistance from the IMF for a governance diagnostic.

### Enhancing transparency and accountability of strategic imports
- Government to ensure publication of strategic imports data in a timely manner:
  - MERA has started publishing monthly volume, value, and prices of fuel importation by importers.
  - Ministry of Agriculture, with Malawi Fertilizer Association, will publish fertilizer data for the AIP.
  - Central Medical Stores Trust (CMST) will publish data for medical supplies.

### Program monitoring, targets, and structural benchmarks (high-level)
- Macroeconomic policies under the PMB complemented by a structural program; Prior Actions and Structural Benchmarks for November 2022–November 2023 anchor the reform agenda.
- Selected quantitative target examples (as presented in the program tables):
  - Monetary base (ceiling on stock) (upper bound) QT 590.2 607.6 578.5 633.3 685.6
  - Monetary base (ceiling on stock) QT 573.0 570.9 met 589.9 561.7 met 614.9 665.6
  - Monetary base (ceiling on stock) (lower bound) 555.8 572.2 544.8 596.4 645.6
  - Domestic revenue (floor) IT 1,202.7 1,230.6 met 1,603.5 1,658.5 met 418.1 834.6
  - Domestic primary fiscal balance (floor) QT -17.1 -36.2 -198.8 not met -70.0 -304.4 not met -7.4 -83.0
  - RBM financing of central government (ceiling) QT 0.0 158.2 215.9 not met 0 158.2 212.2 not met 0 0
  - New domestic arrears (ceiling) IT 0.0 n.a. n.a. 0 148.3 not met 0 0
  - Social spending (floor) IT 503.7 610.4 met 669.3 868.1 met 203.2 409.8
  - Change in net international reserves of the RBM (floor) QT 141.3 122.7 116.0 not met 7.0 -23.8 -16.3 met 87.9 150.4
  - Accumulation of external payments arrears (ceiling) QT 0 0 met 0 0 met 0 0
  - Contracting or guaranteeing of non-concessional external debt (ceiling) QT 0 0 met 0 0 met 0 0
  - Contracting or guaranteeing of concessional external debt (ceiling) IT 152 84 not met 302 84 not met 0 0
  - Program exchange rate (kwacha per US$) 1,026.4 1,026.4 1,026.4 1,026.4 1,026.4
- Structural benchmarks and prior actions cited include IFMIS rollout, audited fiscal report submission, pre-announcement and restart of forex purchases via auction, preparation and amendment of the RBM Act, establishment and operationalization of ALCO, follow-up reports on COVID-spending audit and EDF audit, and submission of IFMIS-generated in-year reports to IMF staff.

*Source: Malawi program documents as presented in the supplied content.*

### 1.      This memorandum sets out the understandings between  the Malawian  Authorities and

### 1.      This memorandum sets out the understandings between  the Malawian  Authorities and

### Coverage
- Government is defined as:
  - the budgetary central government of Malawi,
  - extra-budgetary units of the central government,
  - transfers to local government.
- Excluded: 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 basis: central bank survey, other depository corporations survey, and depository corporations survey, in accordance with the Monetary and Financial Statistics (MFS) Manual and Compilation User Guide (2016).

### Program exchange rates
- All foreign currency-related assets, liabilities, and flows evaluated at “program exchange rates” except items affecting government fiscal balances (measured at current RBM exchange rates).
- Program exchange rates are those that prevailed on end-September 2022. Exchange rates for program purposes (30-Sep-22):
  - Gold bullion LBM US$/troy ounce 1660.61
  - SDR to US$ exchange rate 0.78
  - Euro to US$ exchange rate 0.97
  - Yuan to US$ exchange rate 7.10
  - Yen to US$ exchange rate 144.74
  - Sterling UK to US$ exchange rate 1.11
  - Australian $ to US$ exchange rate 0.65
  - Canadian $ to US$ exchange rate 1.38
  - Swiss Franc to US$ exchange rate 0.98
  - Kuwaiti dinar to US$ exchange rate 0.31
  - Saudi Arabian riyal to US$ exchange rate 3.76
  - UAE dirham to US$ exchange rate 3.67
  - South African rand to US$ exchange rate 17.98
  - Malawian kwacha to US$ exchange rate 1026.4
- Sources: IMF (International Financial Statistics); and Reserve Bank of Malawi.
- Note: LBM connotes London Bullion Market.

### Quantitative and indicative targets (QTs and ITs)
- QTs established for December 31, 2022 and June 30, 2023.
- ITs established for March 31, 2023 and September 30, 2023.
- Targets cover:
  - 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 — Targets 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,
  - 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 and User Guide (2016).

### Definitions — Targets for Fiscal Sector
- 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 Government Financial Statistics Manual (GSFM) 2014 Chapter 5, recorded on a cash basis.
  - Excluded: external loans and grants; transfers from extra-budgetary funds; proceeds from the sale of financial assets; revenue from privatizations or from the 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.
  - Excluded flows: those related to recapitalization of the RBM.
- Net foreign borrowing of the government definition:
  - 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 definition:
  - includes all grants and foreign financing not directly linked to externally financed projects.
  - Excluded: external project financing, BOP support from the IMF as defined in the Memorandum of Understanding between the MOFEA and RBM, donor inflows (in kwacha) from foreign currency-denominated donor pool accounts for Joint Funds (e.g., health, education, agriculture) held in financial institutions.
- Adjustors:
  - Adjustor on domestic primary fiscal balance – general budget support:
    - If general budget support shortfall (or excess), the floor on domestic primary fiscal balance will be adjusted downward (or upward) by the full amount by which the foreign currency-denominated inflows from general budget support fall short of (or exceed) the program baseline.
    - The kwacha value of the cumulative shortfall (or excess) calculated at the program exchange rate.
    - General budget support measured as cumulative flow from the beginning of the fiscal year.
  - Table (USD Millions) for CY2023:
    - CY2023Q2 General budget support 0
    - CY2023Q3 General budget support 0
    - CY2023Q2 Multi Donor Trust Fund 0
    - CY2023Q3 Multi Donor Trust Fund 17

- Ceiling on RBM Financing of the Government:
  - Definition: gross borrowing from the RBM by the government (including ways and means advances, loans, holdings of local registered stocks, government securities at cost value, and promissory notes) minus government deposits at the RBM.
  - Excluded flows: those related to recapitalization of the RBM.
  - Adjustor:
    - For cash management purposes, ceiling on RBM financing of the central government for December 31, 2022; June 30, 2023; and September 2023 is subject to an upward adjustment of up to 10 percent of the average inflation-adjusted (by the GDP deflator) 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.
  - Specifics:
    - 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 made on the due date.
    - Payments for goods and services are arrears if, following receipt, unpaid beyond the fiscal year or beyond contractually agreed grace period.
    - Monthly reporting will include outstanding purchase orders, payables, and cash expenses on goods and services.
    - New pensions arrears deemed to exist if stock of pension increases during the end of fiscal year; monthly reporting to include outstanding pension payments in the last quarter due.
- Floor on Social Spending:
  - Social spending definition (functional classification): sum of central government spending on health, education, and government social protection (comprising government expenditures by ministries of health, education, and gender, children, disability and social welfare; National Aids Commission; and spending on Affordable Inputs Program (AIP) and maize).
  - Policy commitment: social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program.

### Definitions — Targets for External Sector
- Floor on Change in Net International Reserves (NIR) of the RBM:
  - NIR of the RBM definition: reserves assets (RA) of the RBM minus foreign currency drains (FCD) of the RBM.
  - Values of all foreign assets and FCD converted into U.S. dollars at each test date using program cross exchange rates listed in Table 1.
  - Change in NIR calculated quarterly as difference between stock of NIR on test date and end-date of previous quarter.
- Reserve assets definition (per International Reserves and Foreign Currency Liquidity Guidelines/BPM6, paragraph 6.64):
  - (i) monetary gold holdings of the RBM;
  - (ii) holdings of SDRs;
  - (iii) the reserve position in the IMF;
  - (iv) foreign convertible currency holdings;
  - (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks;
  - (vi) loans to foreign banks redeemable upon demand;
  - (vii) foreign securities;
  - (viii) other unpledged convertible liquid claims on nonresidents.
- Foreign currency drains (FCD) of the RBM are defined as the sum of:
  - outstanding medium and short-term liabilities of the RBM (including as an agent of the government), to the IMF. (SDR allocations excluded);
  - 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) all foreign currency debt service falling due in the next 12 months (4 quarters), except to creditors to which the RBM and the RBM as an agent of the government is in arrears and/or servicing via other means, in line with the debt restructuring strategy;
    - (b) swap outstanding with remaining maturity of less than one year.
- Adjustors Applied to change in NIR Program Floor:
  - 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; conversely adjusted downward by the full amount of any shortfall.
    - Recorded in original currency of payment and converted to U.S. dollars using program cross exchange rates.
  - Table (USD Millions) for CY2023:
    - CY2023Q2 General budget support 0
    - CY2023Q3 General budget support 0
    - CY2023Q2 Multi Donor Trust Fund 0
    - CY2023Q3 Multi Donor Trust Fund 17

- Ceiling on Accumulation of External Payment Arrears:
  - Definition: debt service obligations (principal and interest) of the government or the RBM to nonresidents that have not been paid at the time they are due, or if a grace period has lapsed, as specified in contractual agreements.
  - Exemption: external debt subject to rescheduling or restructuring in line with the debt restructuring strategy is exempt, provided the government makes a good faith effort to reach a collaborative agreement.
  - Monitoring: continuous basis.
- Ceiling on Contracting or Guaranteeing Non-Concessional and Concessional External Debt:
  - Definition of public and publicly guaranteed debt aligned with Guidelines on Public Debt Conditionality and includes contracted or guaranteed commitments for which value has not been received.
  - Debt definition for program purposes:
    - a current (not contingent) liability, created under a contractual arrangement through provision of value in assets or services, requiring future payments in assets or services to discharge principal and/or interest.
    - Contracted when all conditions for entry into effect met, including approval by the National Assembly.
    - Contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements also considered contracting of debt.
  - Forms of debt include:
    - Loans (advances of money including deposits, bonds, debentures, commercial loans, buyers’ credits; repurchase agreements and official swap arrangements),
    - Suppliers’ credits (deferred payments after delivery of goods/services),
    - Lease agreements (debt equals present value at inception of all lease payments expected for the period, excluding payments necessary for operation, repair, maintenance).
  - Under this definition arrears, penalties, and judicially awarded damages from failure to make payment under contractual obligation that constitutes debt are debt.
  - Definition of concessional vs non-concessional external debt:
    - Debt considered concessional if it includes a grant element of at least 35 percent and non-concessional otherwise.
    - Grant element = (nominal value of loan − present value of loan) expressed as a percentage of nominal value.
    - Present value calculated at contracting date as discounted sum of all future debt service payments.
    - Discount rate used for this purpose is 5 percent per annum.
    - Ceiling applies to contracting and guaranteeing of debt with nonresidents by the government, the RBM, and state-owned enterprises, unless 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 beginning of fiscal year.
- Short-term debt: outstanding stock with original maturity of one year or less.
- Medium- and long-term debt: outstanding stock with original maturity of more than one year.
- Excluded from limit on non-concessional external debt: use of IMF resources.
- Swaps in debt service: debt service payments should include swaps based on net change in the position (in line with debt definition).
- Foreign exchange swaps: contracting or renewing foreign currency swaps with nonresident banks beyond the program amount would be subject to the ceiling of non-concessional external debt.

### Reporting requirements
- Government of Malawi will provide data listed in Table 2 (not reproduced here).
- 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 10 weeks.
  - Annual data: provided within six months after the end of the year.
- Authorities will inform IMF staff of changes in economic and financial policies that could affect program outcomes. Policies include, but are not limited to:
  - customs and tax laws (including tax rates, exemptions, allowances, and thresholds),
  - development agreements,
  - wage policy,
  - financial support to public and private enterprises.
- Authorities will 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.

*Source: 1mwiea2023001 (Memorandum of Understanding between the Malawian Authorities and the IMF) *

### 33.      The authorities will furnish an official communication to the IMF describing program

### 1mwiea2023001 - 33.      The authorities will furnish an official communication to the IMF describing program

### Reporting requirements and data flows (Table 2 summary)
- Agencies: RBM (Reserve Bank of Malawi), MOFEA (Ministry of Finance and Economic Affairs), MRA, NSO, AG.
- Frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I).
- Key RBM reporting items (frequency of data / reporting / publication):
  - Exchange Rates, Spread between exchange bureau mid rate and the official exchange mid rate: D / 2W / D RBM.
  - Volume of transactions in the interbank money market and Lombard Facility, including banking system liquidity: D / 2W / M RBM.
  - Foreign Exchange Cashflow (including Reserve Assets, Sources and Uses of foreign currency) (Telex Table 14): D / 2W / M RBM.
  - RBM intervention and ADB’s Sales and Purchases of FX: D / 2W / M RBM.
  - Foreign Exchange Swaps: continuous / 2W / M RBM.
  - Reserve/base money, FMO transactions, and RBM conversion of ways and means account to government securities: M / M / M RBM.
  - Monetary and Financial Statistics Standard Report Forms (1SR, 1SG, 2SR, 2SG, 3SG, 5SR in Telex Table 1): M / M / M RBM.
  - Consumer Price Index and monthly statistical bulletin (Telex Table 5): M / M / M RBM.
  - Detailed issue and maturity profile for all government securities (Telex Table 6 & 7): M / M / M RBM.
  - Central government domestic borrowing (Telex Table 8, 13, 20): M / M / M RBM.
  - RBM financing of the central government: M / M / M RBM.
  - Government Project Funds through the RBM (Telex Table 9): M / M / M RBM.
  - Interest rates (Telex Table 12): M / M / M RBM.
  - RBM foreign exchange cash flow and intervention (Telex Table 14, 27): M / M / M RBM.
  - ADBs FCDA Balances (Telex Table 15): M / M / M RBM.
  - Banking System Liquidity (Required and Excess Reserves) (Telex Table 16): M / M / M RBM.
  - RBM Holding of Treasury Bills and Conversion of Ways and Means Advances (Telex Table 17): M / M / M RBM.
  - Reserve Assets of the Monetary Authorities (as defined in Chapter 1 of International Reserves and Foreign Currency Liquidity: Guidelines For A Data Template) (Telex Table 19): M / M / M RBM.
  - Foreign Currency Drains of the Monetary Authorities (as defined in Chapter 3 of International Reserves and Foreign Currency Liquidity Guidelines For A Data Template) (Telex Table 19): M / M ... RBM.
  - Financial soundness indicators by banks (Telex Table 34): M / M ... RBM.
  - Forex Bureau Trade Volume (Telex Table 35): M / M / M RBM.
- Key MOFEA reporting items:
  - New external loans contracted or guaranteed by the government and disbursement schedule: Continuous / Continuous / Continuous MOFEA.
  - Revenue collected by MRA, by major revenue line: D / 2W / M MOFEA.
  - Accumulation of new domestic government arrears: M / M / M MOFEA.
  - Strategic Imports (value, volume, and prices): M / M / M MOFEA.
  - Fiscal table (GFS based), including revenue, grants, expenditure, balance, and composition of financing of the central government: M / M ... MOFEA.
  - In-year comprehensive monthly fiscal reports: M / M / Q MOFEA.
  - Exports and imports of goods and subcomponents (to be added to Telex tables submissions): M / M / Q MOFEA.
  - On and off-budget project reports: Q / Q / Q MOFEA.
  - Stocks of public sector and public-guaranteed debt: Q / Q / Q MOFEA.
  - Quarterly external debt service (actual and projections): Q / Q ... MOFEA.
  - Debt service payments on domestic debt (outturn and projections): M / Q / Q MOFEA.
  - Report on IMF program performance: Q / Q ... MOFEA.
  - Quarterly report on clearance of government domestic arrears: Q / Q ... AG.
  - Exports and imports of services, and subcomponents: A / A / A MOFEA.
  - Annual financial reports of the 5 high-risk parastatals (ADMARC, BWB, ESCOM, EGENCO, NOCMA): A / A ... MOFEA.
  - Consolidated financial statements and audit opinion: A / A / A AG.
  - Consolidated budget execution reports: M / M / A AG.
  - GDP/GNP, by activity and expenditure, at constant and current prices: A / A / A MOFEA.
- Notes and definitions included in the table:
  - 2: Both market-based and officially-determined interest rates, including discount rates, money market rates, interbank money market rate, rates on treasury bills, notes, and bonds.
  - 3: Reserve assets include reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 4: Includes a memorandum section which includes Net International Reserves based as defined in this TMU.
  - 5: Detailed information on amounts, currencies, terms and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government.
  - 6: In accordance with the definition of arrears in the TMU Paragraph 17.
  - 7: Foreign and domestic banks, and domestic nonbank financing.
  - 8: Includes borrowing of 8 major parastatals: ADMARC, ESCOM, EGENCO, Malawi Housing Corporation, NOCMA, Northern Regional Water Board, Lilongwe Water Board, and Blantyre Water Board (BWB).
  - 9: ADMARC, BWB, ESCOM, EGENCO, and NOCMA.

### Supplementary Letter of Intent (July 12, 2023) — key points
- The authorities submitted revised data for the continuous Quantitative Target (QT) on contracting or guaranteeing of nonconcessional external debt.
- The TMU under the Staff Monitored Program with Executive Board Involvement (PMB) measures this ceiling cumulatively from the beginning of the fiscal year.
- The earlier submission omitted a guarantee extended before program approval but during FY2022/23; including it constitutes a breach of the program target set at zero for the duration of the PMB.
- Commitments to improve repositories and reporting:
  - MOFEA will maintain an up-to-date, comprehensive repository of sovereign guarantees and underlying contracts at the Department of Debt and Aid.
  - RBM Financial Market Department will maintain an up-to-date comprehensive repository of guarantees (including foreign currency payment guarantees) and underlying contracts.
  - MOFEA will coordinate with RBM to ensure accuracy of reporting to IMF staff on a continuous basis.
- Statement: Authorities remain confident that implementation of measures and policies described in the MEFP submitted on June 30, 2023, will attain the objectives of the PMB.
- Signatories:
  - Honorable Sosten Alfred Gwengwe, Minister of Finance and Economic Affairs.
  - Dr. Wilson T. Banda, Governor of the Reserve Bank of Malawi.
- Attachment: Revised Table 1 of the Memorandum of Economic and Financial Policies.

### Revised Table 1: Quantitative and Indicative Targets (selected figures, 2022–23)
- Note: “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.
- I. Monetary targets (billions of kwacha)
  - Monetary base (ceiling on stock) (upper bound) QT: 590.2 (End-Dec.); 607.6 (End-Mar. Adjusted); 578.5 (End-Jun. QT Est.); 633.3 (End-Sep. Status); 685.6 (End-Dec. IT).
  - Monetary base (ceiling on stock) QT: 573.0 (End-Dec.); 570.9 (End-Mar. Adjusted); met 589.9 (End-Jun. QT Est.); 561.7 (End-Sep. Status); 614.9 (End-Dec. IT); 665.6 (End-Jun. IT).
  - Monetary base (ceiling on stock) (lower bound) QT: 555.8 (End-Dec.); 572.2 (End-Mar. Adjusted); 544.8 (End-Jun. QT Est.); 596.4 (End-Sep. Status); 645.6 (End-Dec. IT).
- II. Fiscal targets (billions of kwacha)
  - Domestic revenue (floor) IT: 1,202.7 (End-Dec.); 1,230.6 (End-Mar. Adjusted; met); 1,603.5 (End-Jun. QT Est.); 1,658.5 (End-Sep. Status; met); 418.1 (End-Dec. IT); 834.6 (End-Jun. IT).
  - Domestic primary fiscal balance (floor) QT: -17.1 (End-Dec.); -36.2 (End-Mar. Adjusted); -198.8 (End-Jun. QT Est.; not met); -70.0 (End-Sep. Status); -304.4 (End-Dec. IT; not met); -7.4 (End-Jun. IT); -83.0 (End-Dec. IT).
  - RBM financing of central government (ceiling) QT: 0.0 (End-Dec.); 158.2 (End-Mar. Adjusted); 215.9 (End-Jun. QT Est.; not met); 0 (End-Sep. Status); 158.2 (End-Dec. IT); 212.2 (End-Jun. IT; not met); 0 (End-Dec. IT).
  - New domestic arrears (ceiling) IT: 0.0 (End-Dec.); n.a. (End-Mar. Adjusted); n.a. (End-Jun. QT Est.); 0 (End-Sep. Status); 148.3 (End-Dec. IT; not met); 0 (End-Jun. IT); 0 (End-Dec. IT).
  - Social spending (floor) IT: 503.7 (End-Dec.); 610.4 (End-Mar. Adjusted; met); 669.3 (End-Jun. QT Est.); 868.1 (End-Sep. Status; met); 203.2 (End-Dec. IT); 409.8 (End-Jun. IT).
- III. External sector targets (US$ millions, unless otherwise indicated)
  - Change in net international reserves of the RBM (floor) QT: 141.3 (End-Dec.); 122.7 (End-Mar. Adjusted); 116.0 (End-Jun. QT Est.; not met); 7.0 (End-Sep. Status); -23.8 (End-Dec. IT); -16.3 (End-Jun. IT; met); 87.9 (End-Dec. IT); 150.4 (End-Jun. IT).
  - Accumulation of external payments arrears (ceiling) QT: 0 (continuous) met / 0 met / 0.
  - Contracting or guaranteeing of nonconcessional external debt (ceiling) QT: 0 (continuous) 50 not met / 0 50 not met / 0 0.
  - Contracting or guaranteeing of concessional external debt (ceiling) IT: 15284 not met / 30 284 not met / 0 0.
- Memorandum item:
  - Program exchange rate (kwacha per US$): 1,026.4 for End-Dec., End-Mar., End-Jun., End-Sep., End-Dec. (values identical across listed dates).

### Debt Sustainability Analysis (DSA) — assessment and key findings
- Overall assessments:
  - Malawi’s external and overall public debt is assessed as “in distress”—unchanged from November 2022 DSA—given the deteriorating macroeconomic outlook and lack of progress on debt restructuring.
  - The DSA presents Malawi’s debt outlook prior to implementation of the authorities’ planned external debt restructuring.
- Baseline scenario findings:
  - The Present Value (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.
  - Significant external debt servicing needs: around 60 percent of exports in 2023 falling due in the near term.
  - Debt service-to-exports ratio remains in breach beyond the medium-term horizon.
  - PV of Malawi’s overall public debt-to-GDP was around 67 percent in 2022 and remains significantly above the threshold through the medium term.
  - Conclusion: Malawi’s debt is currently unsustainable.
  - Required action: Timely and complete implementation of the authorities’ debt restructuring strategy would be required for the external debt burden to be considered sustainable on a forward-looking basis.
- Framework and classification notes:
  - The current DSA follows the revised Debt Sustainability Framework (DSF) for LICs and Guidance Note (2017) in effect as of July 1, 2018.
  - Malawi’s Composite Indicator (CI) uses CPIA vintage 2021 and IMF April 2023 WEO; CI remains ‘weak’ with a CI score of 2.42.
  - 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.

### Public debt coverage and methodology notes
- Coverage for the DSA:
  - Central government debt: included.
  - Central government guaranteed debt: included.
  - Central bank debt contracted on behalf of the government: included.
  - Exclusions due to data limitations: debt held by state and local governments, other elements in the general government (e.g., social security fund, extra budgetary funds), nonguaranteed SOE debt.
- Contingent liabilities and shocks:
  - Contingent liabilities shock from SOE debt kept at default value of 2 percent to reflect risks associated with nonguaranteed SOE debt currently excluded.
  - No current public-private partnerships reported that subject the authorities to contingent liabilities.
  - Government requested World Bank support to create a contingent liability framework under the FY24 SDFP.
- Default parameter values and deviations:
  - Default shock of 2% of GDP for contingent liabilities where government-guaranteed debt is not fully captured.
  - Default financial market minimum value: 5 percent of GDP.
  - Total of default additions: 11.0 percent of GDP (sum of several default values).
  - Noted reasons for deviations from defaults: limited coverage, 0.6 percent for contingent liabilities due to swaps, 1.3 percent for government guaranteed debt.

### Background and recent macroeconomic developments (selected figures)
- Shocks since PMB approval: outbreak of cholera; Cyclone Freddy.
- Real GDP growth:
  - 2022: 0.8 percent.
  - 2021 (revised official rate): 4.6 percent.
- Inflation:
  - Average inflation in 2022: 20.8 percent (up from 9.3 percent in 2021).
  - Inflation (y-o-y) reached 29.3 percent in May 2023.
  - Factors: 25-percent currency devaluation in May 2022, high global prices for fuel, fertilizer, and food, supply disruptions.
  - RBM policy rate raised to 22 percent in April 2023 from 18 percent.
- Fiscal outcomes FY22/23 (April/March):
  - Overall deficit reached 11.8 percent of GDP (compared with 9.0 percent projected at time of PMB).
  - Domestic primary deficit: 3.8 percent of GDP (compared with PMB’s 0.6 percent).
  - Drivers: higher project grants increased revenue but expenditure overruns were larger due to higher food, fuel, fertilizer prices, cholera outbreak, Cyclone Freddy, and slower-than-expected public expenditure adjustments due to PFM weaknesses.
  - Recapitalization of RBM required by law after May 2022 devaluation increased government capital transfers by 1.4 percentage points of GDP.
- Money growth: has begun to decelerate but reduction of fiscal deficit and government borrowing is needed to achieve price stability and reduce money creation that crowds out private financing.

*Source: IMF staff and authorities as presented in the provided content unit.*

### 6.      Meanwhile, external strains—including shortages of foreign exchange, difficulties in

### 1mwiea2023001 - 6.      Meanwhile, external strains—including shortages of foreign exchange, difficulties in

### External strains, trade, and FX reserves
- External strains noted: shortages of foreign exchange, difficulties securing trade credit, widening spread between official and bureau exchange rates.
- Reported imports sharply contracted, reducing the current account deficit to 3.2 percent of GDP in 2022 (compared with 14.8 percent of GDP projected at the time of the PMB and the 14.1 percent of GDP outturn in 2021).
- Contributing factors to the reported import contraction:
  - Depreciation of the exchange rate and reported difficulties in acquiring foreign exchange.
  - Likely increase in informal imports (corroborated by a large discrepancy between fuel imports data from the customs authority and other sources), amid stigma associated with transacting away from the official exchange rate.
- Impact on the private sector: cost and difficulty of securing foreign currency have weighed on private sector consumption and investment in some sectors.
- Gross official reserves stood at 1% of GDP as of end-2022.
- RBM actions and conditions:
  - Struggled to accumulate reserves despite imposition of surrender requirements on exporters.
  - Pressure to provide foreign exchange to meet demand from importers following withdrawal of international banks confirming letters of credit (LCs), particularly for fuel and other strategic imports.
  - Rollover risks of RBM’s foreign currency swaps materialized near end-2022, keeping the stock of foreign exchange reserves low.
  - In June 2023, the RBM restarted FX auctions to facilitate price discovery for the exchange rate.

### Debt restructuring strategy (Box 1 summary)
- Strategy objective: restore debt sustainability after external debt (share of GDP) increased by over 80 percent over the previous decade.
- Advisors: legal and financial advisors hired in May 2022 to support a credible restructuring process and creditor engagement.
- Strategy pillars and targets (medium term, under baseline of the strategy):
  - Bring external public debt back to a moderate risk of debt distress through policy adjustment and debt treatment so all external DSA solvency and liquidity ratios move below thresholds.
  - Specific medium-term ratio targets under the strategy:
    - Present value of debt-to-GDP ratio falls below 30 percent.
    - Present value of debt-to-exports ratio falls below 140 percent.
    - Debt service-to-exports ratio falls below 10 percent.
    - Debt-to-revenue ratio falls below 14 percent.
  - Mobilize non-debt-creating flows (including grants and debt relief) to close external and fiscal financing gaps.
  - Corresponding NPV debt reduction sought at time of PMB: US$579 million via maturity extension and reprofiling.
- Negotiations status:
  - Ongoing negotiations with commercial and official bilateral creditors; progress slow to date.
  - Malawi running arrears vis-à-vis Trade and Development Bank (TDB) as agreed to facilitate negotiations; remains current on obligations towards AFREXIM Bank and official creditors.
  - Authorities are obtaining financing assurances consistent with the restructuring strategy and PMB parameters; timeline uncertain but hopeful of progress in coming months.

### Underlying assumptions and macro baseline (post-PMB adjustments)
- Growth:
  - Real GDP growth projected at 1.7 percent in 2023 (down from 2.4 percent projected at time of PMB), recovering to 4.6 percent in the medium term in line with the PMB.
  - Weaker near-term growth reflects Cyclone Freddy impact, FX shortages, and external shocks.
- Inflation:
  - CPI inflation projected to reach 24.8 percent in 2023 (up from 22.7 percent at the time of the PMB).
  - Inflation returns to around 6.5 percent in the medium term as external shocks fade and money growth is brought under control.
- Fiscal adjustment:
  - Aim to stabilize public debt by end of medium term; reduce primary deficit (preliminarily estimated at 4.6 percent of GDP in 2022) to the debt-stabilizing primary deficit by 2028 at the latest.
  - Size of fiscal adjustment set at about 1½ per centage point of GDP per year (on domestic primary balance).
  - Expenditure adjustment focus: scale back Affordable Input Programme (fertilizer subsidies) via improved targeting and efficiency; reallocation toward growth foundations and boosting human and physical capital.
  - Supported by new revenue measures and tax administration improvements.
- Reserves objective:
  - RBM to rebuild gross official reserves to at least four months of imports cover as soon as possible but no later than by end of medium term; requires RBM to reduce sales of foreign exchange to the market and become a consistent net buyer.
- Current account and external financing:
  - Current account deficit projected to widen as imports rebound (and informal imports reduce), then improve gradually; current account balance reaches around 6 percent of GDP in 2028 (relative to 9.5 percent of GDP at time of PMB).
  - Exports of goods and services increase from 9 percent of GDP in 2022 to 15.3 percent of GDP in 2028.
  - Total external financing gap (2023–2028) projected at around $1.5 billion (roughly 12 percent of 2022 GDP).
  - Baseline assumes no debt treatment; net domestic financing fills residual gap on market terms; prospective concessional budget support grants and loans assumed to come in CY2023 Q4.
  - In medium term, external debt stock smaller as share of GDP and largely composed of financing from multilateral creditors.

### Realism, pace of adjustment, and downside risks
- Realism tools: baseline broadly aligned with Malawi’s historical experience and cross-country experiences; nominal external and overall public debt trajectories similar to November 2022 DSA.
- Pace of fiscal adjustment: ambitious—falls within top quartile of historical data on LIC adjustment programs.
- Growth projection: stronger than implied by fiscal impulse alone due to expected catch-up post-Cyclone Freddy and catalytic effects of reforms.
- Balance of risks: tilted to the downside.

### Debt-carrying capacity and stress tests
- Debt-carrying capacity based on Composite Indicator (CI) assessed as weak.
- CI components and score reported (CI Score = 2.42; CI rating = Weak).
- Stress tests conducted:
  - Standard scenarios and contingent liability stress test (one-off increase of 11 percentage points in debt-to-GDP ratio in second year to capture contingent liabilities including FX swaps, SOEs, and potential bank recapitalization).
  - Tailored commodity price shock scenario reflecting tobacco’s share (nearly half of Malawi’s total goods exports): calibrated as a decline in prices in the second year to lower end of the 68 percent confidence interval in IMF commodity price forecasts, unwinding over six years.

### External DSA findings
- External public debt assessed to be in debt distress given ongoing restructuring negotiations.
- Baseline: PV of PPG external debt-to-GDP ratio remains below threshold, but other solvency and liquidity indicators breach thresholds for prolonged periods.
- Near-term debt service burden: reaches 60 percent of exports and 45 percent of revenue in 2023.
- If debt restructuring strategy executed successfully alongside macro adjustment, debt would be sustainable on a forward-looking basis: relevant solvency and liquidity indicators would fall below thresholds by 2028 or sooner, lowering risk to moderate in the medium term.

### Public DSA findings
- Overall public debt assessed to be in distress given ongoing external debt restructuring negotiations and domestic fiscal slippages.
- PV of overall public debt reaches 68.8 percent of GDP in 2023 (threshold = 35 percent).
- Overall public debt service peaks at 147 percent of revenues in 2025 and remains high in the medium term.
- Successful external debt restructuring would significantly reduce PV and servicing costs of overall public debt, though indicators remain elevated; overall risk of public debt distress would remain high in this scenario.

### Key policy implications and recommendations (derived from the text)
- Expedite and complete external debt restructuring negotiations with commercial and official bilateral creditors to achieve the planned NPV reduction (US$579 million target at PMB) and reduce near-term debt service pressures.
- Implement the agreed macroeconomic adjustment program:
  - Pursue fiscal consolidation of about 1½ per centage point of GDP per year in domestic primary balance to stabilize public debt by end of medium term.
  - Improve targeting and efficiency of the Affordable Input Programme and reallocate spending toward growth-enhancing and human/physical capital investments.
  - Introduce new revenue measures and strengthen tax administration.
- RBM to take decisive steps to rebuild gross official reserves to at least four months of imports cover, including reducing FX sales and becoming a consistent net buyer; maintain tight monetary policy to bring inflation down to around 6.5 percent in the medium term.
- Mobilize non-debt-creating external flows (grants, debt relief) and secure financing assurances consistent with the restructuring strategy and PMB parameters to close the external financing gap (~$1.5 billion for 2023–2028).
- Address vulnerabilities from export concentration and climate-related shocks by boosting exports (agriculture commercialization, attract anchor firms, expand mining) and maintaining predictable foreign currency aid flows.

*Source: 1mwiea2023001 (excerpt).*

### 20.      Malawi is currently in debt distress, but conditional on the successful completion of the

### 20. Malawi is currently in debt distress, but conditional on the successful completion of the government’s debt restructuring strategy, its external debt would be considered sustainable on a forward-looking basis

### Debt sustainability assessment
- Malawi is currently in debt distress.
- Conditional on successful completion of the government’s debt restructuring strategy, Malawi’s external debt would be considered sustainable on a forward-looking basis.
- Absent restructuring, the debt burden is assessed to be unsustainable, given significant and sustained breaches of the DSA’s solvency and liquidity indicators.

### Risks and uncertainties
- The assessment is subject to significant risk and uncertainty.
- Slow progress on the completion of Malawi’s debt restructuring strategy will make it increasingly difficult to close the government’s financing gaps the longer negotiations continue.
- There is limited room for further slippage on the ambitious fiscal adjustment and associated public financial management measures envisioned as part of the PMB.
- Malawi is vulnerable to a range of external shocks and will remain even more so if the authorities fail to rebuild external buffers.
- The level of foreign exchange reserves is now historically low.

### Mitigating factors and upside risks
- Authorities’ strong commitment to macroeconomic adjustment, including corrective actions to complete the first review of the PMB, is a mitigating factor.
- Expedited and comprehensive implementation of necessary policy actions could catalyze a positive feedback loop: as the outlook improves, resilience is strengthened, and confidence is boosted.
- Further upside risks include successful efforts to pursue export diversification, including sooner-than-expected development of mining projects, which would enhance Malawi’s capacity to meet future debt servicing needs.

### Authorities' views and policy intent
- The authorities broadly agree with the World Bank’s and IMF’s staff assessments.
- They remain determined to take bold policy action and to build a track record to support a future application for a UCT-quality Fund program.
- This will include strong corrective actions as necessary to ensure the PMB remains on track.
- Restoring macroeconomic stability will require:
  - Political commitment to strong fiscal and external adjustment.
  - Meaningful debt relief as set out in the authorities’ external debt restructuring strategy.
- The authorities view the PMB, approved in November 2022, as critical to sustain the reform agenda and lay the foundations for deeper reforms under a new Upper Credit Tranche (UCT) arrangement.
- They are committed to steadfast implementation of reforms under the PMB to:
  - Build a track record of reform implementation.
  - Timely address protracted BOP challenges under a Fund-supported program.
  - Catalyze much-needed donor support.

### Key quantitative indicators and projections (selected figures from the DSA tables and tests)
- External debt (nominal) series (percent of GDP): 2020: 32.9; 2021: 31.5; 2022: 34.4; 2023: 37.1; 2024: 35.3; 2025: 33.5; 2026: 30.9; 2027: 28.8; 2028: 27.0; 2029: 25.3; 2030: 23.8; 2031: 22.5; 2032: 21.3; 2033: 20.3; 2043: 12.9
- Change in external debt (percent of GDP): 2020: 5.1; 2021: -1.4; 2022: 2.8; 2023: 2.7; 2024: -1.8; 2025: -1.8; 2026: -2.6; 2027: -2.1; 2028: -1.8; 2029: -1.7; 2030: -1.5; 2031: -1.3; 2032: -1.2; 2033: -1.0; 2043: -1.4
- Identified net debt-creating flows (percent of GDP): 2020: 11.1; 2021: 11.2; 2022: 2.8; 2023: 5.0; 2024: 6.2; 2025: 6.3; 2026: 4.5; 2027: 4.1; 2028: 3.7; 2029: 3.7; 2030: 3.5; 2031: 2.6; 2032: 2.2; 2033: 2.1; 2043: -0.5
- Non-interest current account deficit (percent of GDP): 2020: 13.6; 2021: 13.8; 2022: 2.9; 2023: 4.9; 2024: 7.5; 2025: 7.8; 2026: 6.5; 2027: 6.2; 2028: 5.7; 2029: 5.8; 2030: 5.6; 2031: 4.6; 2032: 4.3; 2033: 4.2; 2043: 1.4
- Exports (percent of GDP): 2020: 8.2; 2021: 9.5; 2022: 9.0; 2023: 10.2; 2024: 13.5; 2025: 14.2; 2026: 14.5; 2027: 15.1; 2028: 15.3; 2029: 15.0; 2030: 14.7; 2031: 14.4; 2032: 14.1; 2033: 13.8; 2043: 10.6
- Imports (percent of GDP): 2020: 25.8; 2021: 26.7; 2022: 14.6; 2023: 19.3; 2024: 24.2; 2025: 24.5; 2026: 24.0; 2027: 23.4; 2028: 23.1; 2029: 22.8; 2030: 22.4; 2031: 21.3; 2032: 20.8; 2033: 20.4; 2043: 14.9
- PV of PPG external debt-to-GDP ratio (selected years): 2023: 23.8; 2024: 19.2; 2025: 21.9; 2026: 20.8; 2027: 19.2; 2028: 18.0; 2029: 16.8; 2030: 15.7; 2031: 14.7; 2032: 13.9; 2033: 13.1; 2043: 12.4; memorandum value also shows 7.8 in one cell.
- PV of PPG external debt-to-exports ratio (selected years): 2023: 264.7; 2024: 187.1; 2025: 162.3; 2026: 145.9; 2027: 132.3; 2028: 119.3; 2029: 110.1; 2030: 104.8; 2031: 100.1; 2032: 96.5; 2033: 92.9; 2043: 90.2; memorandum value also shows 73.1 in one cell.
- PPG debt service-to-exports ratio (selected years): 2023: 7.2; 2024: 6.8; 2025: 12.0; 2026: 59.8; 2027: 25.2; 2028: 20.1; 2029: 18.3; 2030: 12.9; 2031: 10.5; 2032: 9.5; 2033: 8.2; 2043: 8.5; 5.6 appears in a later cell.
- PPG debt service-to-revenue ratio (selected years): 2023: 4.6; 2024: 4.9; 2025: 7.8; 2026: 44.7; 2027: 23.6; 2028: 18.7; 2029: 17.0; 2030: 11.6; 2031: 9.4; 2032: 8.8; 2033: 8.1; 2043: 6.9; 7.0 and 6.3 and 19.8 appear in other cells.
- Gross external financing need (Billion of U.S. dollars): 2020: 1.6; 2021: 1.8; 2022: 0.5; 2023: 1.4; 2024: 1.1; 2025: 1.1; 2026: 0.9; 2027: 0.9; 2028: 0.8; 2029: 0.8; 2030: 0.8; 2031: 0.7; 2032: 0.7; 2033: 0.7; 2043: 0.2
- Real GDP growth (in percent) (selected values): 2020: 0.9; 2021: 4.6; 2022: 0.8; 2023: 1.7; 2024: 3.3; 2025: 3.8; 2026: 4.3; 2027: 4.5; 2028: 4.6; 2029: 4.6; 2030: 4.6; 2031: 4.6; 2032: 3.6; 2033: 4.1
- GDP deflator in US dollar terms (change in percent) (selected values): 2020: 6.4; 2021: 0.7; 2022: -0.3; 2023: 1.3; 2024: -19.2; 2025: -1.4; 2026: -0.5; 2027: 0.8; 2028: 1.0; 2029: 1.1; 2030: 1.1; 2031: 0.9; 2032: 1.1; 2033: 1.1; 2043: 4.3
- Effective interest rate (percent) (selected values): 2020: 0.7; 2021: 1.0; 2022: 1.1; 2023: 3.5; 2024: 1.5; 2025: 1.7; 2026: 0.9; 2027: 0.5; 2028: 0.8; 2029: 0.8; 2030: 0.8; 2031: 0.8; 2032: 0.8; 2033: 0.7; 2043: 0.9
- Growth of exports of G&S (US dollar terms, percent) (selected values): 2020: -19.2; 2021: 23.3; 2022: -5.5; 2023: 17.5; 2024: 10.0; 2025: 7.9; 2026: 6.0; 2027: 9.2; 2028: 6.9; 2029: 3.6; 2030: 3.7; 2031: 3.6; 2032: 3.4; 2033: 3.4; 2043: 3.9
- Growth of imports of G&S (US dollar terms, percent) (selected values): 2020: 0.3; 2021: 9.2; 2022: -44.9; 2023: 35.5; 2024: 4.9; 2025: 3.5; 2026: 1.6; 2027: 2.7; 2028: 4.2; 2029: 4.6; 2030: 3.8; 2031: 0.3; 2032: 3.1; 2033: 4.0; 2043: 3.4
- Grant element of new public sector borrowing (percent) (selected values): 2024: 47.6; 2025: 49.2; 2026: 47.7; 2027: 47.5; 2028: 47.0; 2029: 53.1; 2030: 53.1; 2031: 53.1; 2032: 53.7; 2033: 53.7; 2043: 53.7; 2050.8 appears in another cell.
- Government revenues (excluding grants, percent of GDP) (selected values): 2020: 12.8; 2021: 13.2; 2022: 13.8; 2023: 13.7; 2024: 14.4; 2025: 15.3; 2026: 15.7; 2027: 16.7; 2028: 17.1; 2029: 17.2; 2030: 17.3; 2031: 17.3; 2032: 17.2; 2033: 17.2; 2043: 13.0; 13.3 and 16.3 appear in other cells.
- Aid flows (Billion of US dollars) (selected values): 2020: 0.4; 2021: 0.4; 2022: 0.7; 2023: 0.7; 2024: 0.5; 2025: 0.3; 2026: 0.4; 2027: 0.3; 2028: 0.3; 2029: 0.3; 2030: 0.3; 2031: 0.2; 2032: 0.2; 2033: 0.2
- Grant-equivalent financing (percent of GDP) (selected values): 2023: 5.4; 2024: 4.5; 2025: 2.8; 2026: 3.0; 2027: 1.9; 2028: 2.0; 2029: 1.9; 2030: 1.8; 2031: 0.8; 2032: 0.6; 2033: 0.6; 2043: 0.4; 205: 2.3 appears in another cell.
- Nominal GDP (Billion of US dollars) shows varying cell entries in the table.
- Sensitivity analysis highlights (Table 3): Baseline PV of debt-to-GDP series for 2023–33: 19, 22, 21, 19, 18, 17, 16, 15, 14, 13, 12. Alternative and bound tests produce higher values and multiple bold breaches are indicated in the source tables for various scenarios (e.g., PPG debt service-to-exports ratio shows extreme values like 59.8 under baseline 2026).
- Public debt indicators (Table 4): Baseline total public debt benchmark 35 (constant), baseline public debt series include values such as 69, 68, 69, 68, 69, 68, 65, 62, 58, 56, 53, 51 for 2023–2033 in various rows; multiple scenario and bound tests yield elevated ratios and several breaches of benchmarks in tailored tests (e.g., C1. Combined contingent liabilities).

*Source: IMF staff report content as provided in the 1mwiea2023001 content unit.*

### Introduction

### Introduction

### Program Performance
- As at end-December 2022, four out of six continuous Quantitative Targets (QTs) and one out of three Indicative Targets (ITs) were not met.
- The December 2022 QT on Net International Reserves (NIR) was missed by a small margin; the March 2023 IT was met.
- Targets on Reserve Bank of Malawi (RBM) financing of government were missed largely due to the issuance of a promissory note in line with the legal obligation to recapitalize the central bank.
- Targets related to contracting or guaranteeing external debt were missed because ceilings were set from the beginning of the program while the TMU defines them as starting at the beginning of the fiscal year.
- Since the program start:
  - No non-concessional external debt has been guaranteed or contracted.
  - New concessional debt has remained within the target.
- Revenue targets and targets on social spending were met.
- Structural benchmarks (SB):
  - Three out of seven SBs were met, including the SB on quarterly allotments and the SB on the strategy to clear arrears.
  - The SB on publication of audited quarterly reports will be replaced by publication of monthly reports.
  - Four SBs were missed due to challenges in eliminating previously budgeted expenditures, overreliance on the central bank for foreign exchange supplies, delays in the external debt restructuring process, effects of the kwacha devaluation in May 2022, and the statutorily required recapitalization of the central bank.
- Corrective actions and prior actions taken:
  - Commitment to adhere to the FY23/24 budget through quarterly allotments aligned with realistic revenue projections.
  - Commitment to rebuild foreign exchange reserves, enhance coverage and timeliness, and report the repository of guarantees and underlying contracts to the IMF.
  - Prior actions met: submission of April and May IFMIS reports to IMF staff; resumption of foreign exchange auctions to facilitate price discovery.
  - Authorities requested a modification of the SB on submission of amendments to the RBM Act to Parliament by end-October 2023 (second review) due to ongoing consultations with Fund staff.

### Recent Economic Developments and Outlook
- Real GDP growth:
  - Recovered from 0.9 percent in 2020 to 4.6 percent in 2021.
  - Declined to an estimated 0.8 percent in 2022.
  - Downgraded from initial projections of 2.4 percent to 1.7 percent in 2023 due to Cyclone Freddy, cholera outbreaks, spillovers from the war in Ukraine, and infrastructure damage.
  - Projected to rebound to 4.6 percent in the medium term, supported by more efficient implementation of policies, commissioning of new mines, and execution of the export diversification strategy.
- Risks to the growth outlook include a protracted war in Ukraine, adverse weather events, and delays in the debt restructuring process.
- Inflation and external accounts:
  - Inflation rose from 9.3 percent in 2021 to 20.8 percent in 2022, reflecting exchange rate depreciation and elevated import prices for fuel, food, and fertilizer.
  - Current account deficit narrowed from 14 percent of GDP in 2021 to 3 percent of GDP in 2022, partly reflecting compression of imports amid low external reserves.
  - Official reserves at end-2022 covered 1.5 months of imports of goods and services.
  - Imports related to the cholera outbreak and humanitarian assistance after Cyclone Freddy exerted additional pressure on gross reserves.

### Fiscal Policy and Debt Management
- Fiscal consolidation and targets:
  - Authorities aim for a medium-term objective of a primary balance of 0 percent of GDP and stabilization of public debt.
  - They project a reduction of the domestic primary deficit excluding flows related to recapitalization of the RBM of about 1.3 percentage points of GDP in FY2023/24.
- Revenue mobilization:
  - The Domestic Revenue Mobilization Strategy (DRMS) aims to increase revenue by 5 percent of GDP over the next five years.
  - DRMS institutionalization: incorporated in the Malawi Revenue Authority’s (MRA) strategic plan; DRMS Monitoring Committee formed in FY2022/23 with officials from MoFEA, MRA, Accountant General, Immigration Department, Malawi Police Service, and Registrar General.
  - DRMS measures include introduction of PAYE brackets, implementation of advance income tax, new stamp duties, and introduction of VAT on selected products.
  - Implementation of the Integrated Tax Administration System (ITAS) is on track.
- Expenditure rationalization and social protection:
  - Authorities are rationalizing and prioritizing expenditures while preserving social support to vulnerable households.
  - Reforms to the Affordable Input Program (AIP): first-phase reforms implemented, allowing the National Integrated Social Safety Net Program using the Unified Beneficiary Register to reduce duplication.
  - Measures to prevent AIP cost overruns include increments to farmer contribution and capping the government subsidy; plans to phase out the AIP in subsequent reform stages.
  - Farmers at the lower income spectrum moved to social protection programs; higher-income farmers moved to commercial agriculture programs supported by development partners.
  - Public wage bill management: actions following the 2021 Personnel Audit include removing ghost workers and freezing new hiring except in critical areas such as health and education.
- Debt restructuring and financing strategy:
  - Authorities continuing negotiations with creditors within a debt restructuring strategy designed to achieve debt sustainability and close financing gaps.
  - Strategy focuses on resolving external debt challenges including solvency and liquidity concerns.
  - Authorities seek specific and credible assurances from official bilateral creditors and have contracted a debt advisor.
  - Emphasis on non-debt creating flows including grant financing.
  - Commitment to strengthen debt management, monitoring, recording, and reporting.

### Monetary, Exchange Rate, and Financial Sector Policies
- Monetary policy stance:
  - RBM raised the policy rate by 400 basis points to 22 percent in April 2023 to contain inflationary pressures.
  - RBM stands ready to tighten monetary policy as needed and commits to contain reserve money growth in line with its monetary program.
  - Instruments used include raising required reserves, RBM sales of government securities, and Open Market Operations (OMO) to mop up excess liquidity.
- FX management and market measures:
  - RBM will implement the agreed path towards accumulating foreign exchange reserves while limiting foreign exchange sales to the market.
  - RBM will monitor short-term foreign currency drains and wind down FX swaps with non-residents to reduce swap costs and rollover risks, consistent with plans to reduce the open swap position in the medium term.
  - RBM resumed transparent foreign exchange auctions in June 2023 (PA) to promote price discovery, greater flexibility in the exchange rate, and foster development of the interbank FX market.
- Financial sector stability:
  - Malawi’s banking sector remains well capitalized with sufficient profitability, although liquidity remains tight in certain instances.
  - Authorities will monitor banking system exposure to government securities and reassess loan and collateral quality needs of commercial banks.

### Structural, Governance Reforms and Climate Adaptation
- Governance and procurement:
  - Authorities renewed commitment to ensure transparency in public procurement in accordance with the Public Finance Management (PFM) Act and appropriate procedures.
  - Working to reverse a recent barter trade deal to follow proper procurement and authorization procedures.
  - Requested IMF technical assistance on governance diagnostics to identify vulnerabilities in regulation, legislation, and compliance.
  - Implementing a broader governance reform agenda including a strategy to combat corruption as set out by the President in his 2023 State of the Nation Address.
  - Enhancing oversight of state-owned enterprises (SOEs) and implementing the new IFMIS.
- RBM governance and safeguards:
  - A revised framework for management of foreign reserves has been developed in line with recommendations of the 2021 Safeguards Assessment Report.
  - Reserve Bank Board established an Asset Liability Management Committee (ALCO).
  - In consultation with Fund staff, authorities are committed to preparing and submitting amendments to the RBM Act to public consultation first and then to Parliament by end-October 2023.
- Climate vulnerability and adaptation:
  - Malawi faces increased frequency and intensity of droughts, flooding, and erratic rainfall, disrupting food systems and infrastructure.
  - Authorities recognize need for climate adaptation finance to develop resilient infrastructure and climate-smart agricultural practices.
  - Working with partners to develop a more efficient agricultural subsidy program to target the most vulnerable households.
  - Authorities aim to reduce dependence on agriculture through implementation of the National Export Strategy.

### Conclusion and Policy Intentions
- Authorities remain committed to reforms under the PMB and are undertaking corrective actions to strengthen program performance.
- Re-affirmed commitment to implement agreed macroeconomic adjustment and reforms to build the policy track record needed to support a future request for an Extended Credit Facility (ECF) arrangement.
- Authorities seek continued engagement with the IMF and Executive Board support to stabilize macroeconomic conditions and place the economy on a sustainable and inclusive development path.

*Source: Introduction (1mwiea2023001)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mwiea2023001.pdf_