## 1mwiea2023002 ## Source details **Canonical URL:** [1mwiea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1mwiea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mwiea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mwiea2023002.pdf.json) --- ### Executive summary — context, shocks, and social outcomes - Real GDP projected to increase by 1.6 percent in 2023; shortages of foreign exchange weigh on activity. - Inflation expected to average 30.3 percent in 2023 and to start declining thereafter. - Major shocks over past three years: COVID-19 pandemic; food and fertilizer prices shock following the war in Ukraine; a cholera outbreak; three cyclones. - Large ODA inflows averaged $1.1 billion or 12 percent of GDP per year during 2005-20. - Large fiscal budget deficit: 10.8 percent of GDP in 2022; much domestic financing addressed through monetary financing. - International banks stopped confirming letters of credit (LCs) in early 2023; suppliers’ credits dried up mid-2023. - Poverty incidence: over 70 percent of the population below the international poverty line of $2.15 a day at 2017 PPP. - Food insecurity: about 22 percent of the population projected to face hunger during the upcoming lean season (October 2023-March 2024), compared to 15 percent during the previous season. - Program performance under the PMB: five out of six end-June and continuous Quantitative Targets (QTs) and all three end-June Indicative Targets (ITs) were met; seven out of 10 Structural Benchmarks (SBs) were not met, though some progress made. - Net international reserves (NIR) target met at end-June 2023; preliminary NIR stood at -US$993.3 million at end-September 2023. ### Request and program design - Authorities request a new 48-month ECF arrangement of 95 percent of quota (SDR 131.86 million, about $ 178 million). - Arrangement expected to catalyze grant financing and capital inflows including trade credit. - Program objectives: - Restore macroeconomic stability. - Build foundation for inclusive and sustainable growth, including resilience to climate-related shocks. - Address weaknesses in governance and institutions. - Main program anchors: - Fiscal: aim to achieve a debt-stabilizing primary balance in the medium-term via expenditure adjustment and revenue mobilization; contain domestic borrowing; improve PFM. - Monetary: anchor on containing money growth and ensuring positive real interest rates; RBM increased monetary policy rate to 24 percent (after a 200 basis point increase in August/July 2023). - External: rebuild international reserves, reduce FX shortages, and facilitate a market-determined exchange rate. - Data/transparency: ramp up data quality and timely submission to IMF staff. ### Macroeconomic outlook and central projections (selected figures preserved exactly) - Real GDP Growth: 1.6 (2023), 3.3 (2024), 3.8 (2025), 4.3 (2026), 4.5 (2027). - Inflation - Annual Average: 30.3 (2023), 27.9 (2024), 14.7 (2025), 8.1 (2026), 6.8 (2027). - Revenue (percent of GDP fiscal year basis): 17.2 (FY22/23), 17.2 (FY23/24), 18.4 (FY24/25), 18.8 (FY25/26), 17.6 (FY26/27). - Expenditure and net lending: 28.9, 27.9, 26.5, 25.9, 23.3 (series as presented). - Overall balance: -11.7, -10.7, -8.1, -7.1, -5.7 (percent of GDP). - Domestic financing (net): 5.4, 6.6, 2.8, 1.8, 2.2 (levels). - Broad money - Percent change: 30.5, 29.3, 17.9, 12.2, 11.2 (percent). - Current account (Percent of GDP): -7.6 (2023), -8.5 (2024), -9.9 (2025), -9.0 (2026), -8.2 (2027). - Gross official reserves (millions of U.S. dollars): 394 (2023), 714 (2024), 967 (2025), 1,081 (2026), 1,133 (2027). - Gross official reserves (months of imports): 1.8, 2.9, 3.9, 4.1, 4.2 (series). - Net international reserves: -1,052 (2023), -667 (2024), -468 (2025), -366 (2026), -306 (2027). - Financing gap (million U.S. dollars): 706 (2023), 350 (2024), 200 (2025), 236 (2026), 107 (2027). - External debt (percent of GDP): 39.3 (2023), 35.2 (2024), 33.8 (2025), 31.2 (2026), 28.8 (2027). - Total public debt (percent of GDP): 81.3 (2023), 75.0 (2024), 74.8 (2025), 73.5 (2026), 71.8 (2027). ### Fiscal policy, revenue mobilization, and PFM reforms - Repeated revenue shortfalls filled by unplanned domestic borrowing, increasing debt service and eroding fiscal space. - Primary objective: achieve a debt-stabilizing primary balance in the medium-term. - Envisaged fiscal adjustment over FY2023/24–FY2026/27: "6 ppts of GDP in terms of overall fiscal balance (Tables 2a and 2b) or 5.4 ppts in terms of domestic primary fiscal balance—1.35 ppt of GDP per year." - Fiscal adjustment front-loaded: "1.8 ppts of GDP adjustment in the domestic primary fiscal balance in the first year of the program." - Key revenue measures and structural actions: - Step up implementation of Domestic Revenue Mobilization Strategy (DRMS) aiming to increase revenue by 5 ppts of GDP in five years. - Operationalize a specific tax on secondhand cars (Prior Action). - Repeal VAT relief on motor vehicles for privileged groups (SB). - Ensure every supply of a motor vehicle is standard rated for VAT purposes (SB). - Comprehensively eliminate other VAT exemptions on business inputs and building materials (SB). - Full launch of Integrated Tax Administration System (ITAS) (SB). - PFM operational changes: - Quarterly allotments aligned with macro framework; MDAs may commit up to allotments through IFMIS though commitments not yet consistently done via IFMIS. - MDA payments limited to monthly cash releases aligned with allotments; extension to all MDAs announced and executed since FY2023/24. - IFMIS reports began publication in October 2023; core IFMIS rollout to key MDAs met, compliance work ongoing. - Contingency Plan prepared as a prior action to close financing gaps if baseline fiscal path faces challenges. - Social spending safeguard: - Social spending defined as central government spending on health, education, and government social protection; commitment that social spending allocations will not be adjusted downward to meet fiscal targets. ### Monetary policy, money growth, and financial sector stability - Monetary stance: RBM to "forcefully and proactively tighten monetary policy as needed" to contain inflation; aim for positive real lending rates on average. - RBM increased policy rate by 200 basis points in July/August 2023 to 24 percent. - Broad money and monetary base dynamics: - "Broad money grew 34.2 percent year-on-year in August 2023"; monetary base growth volatile, "increasing to 49.5 percent year-on-year in August" partly due to LRR increase after April 2023. - Net claims on government remain largest contributor to broad money growth. - Monetary operations reforms: - Greater use of repo for OMOs; less favorable terms for rediscounting facility; restore secondary market functioning; refine operations to contain direct RBM exposures to government. - Banking sector indicators (selected): - Profit after tax (PAT) increased by 95 percent year-on-year to K124 billion (1 percent of GDP) at end-June 2023. - Banking sector balance sheet dominated by investments and securities (48 percent of total assets). - Total market capitalization rose from "MK2.7 trillion (US$2.6 billion) at end-June 2022 to MK5.9 trillion (US$5.6 billion) at end-June 2023". - Industry non-performing loans: 7.0 percent in July 2023 (above recommended limit of 5.0 percent); 4.7 percent in July 2022. - Financial sector stability actions: - Strengthen oversight, monitor banking sector exposure to public sector, reassess loan and collateral quality needs. ### External sector, FX market normalization, and reserves rebuild - FX shortages: trade imports not recovered to 2021 levels; current account projected at "7.6 percent of GDP in 2023"; FX frequently hoarded causing intermittent shortages of fuel, fertilizer, cement, and other goods. - Market segmentation: spread over "52 percent on October 13" between official rate and forex bureaus; interbank and informal parallel rates emerged. - RBM operations: restarted monthly FX purchases via auction in June; this facilitated "a 15 percent depreciation against the US dollar during June-September 2023"; auction participation broad but volumes small. - Reserve position: preliminary gross international reserves declined to "US$156.1 million (0.6 months of import cover) by end-September 2023." - Program commitments for FX and reserves: - Allow greater exchange rate flexibility; increase FX purchases; "refrain from interventions, such as unplanned foreign exchange sales to the market, until the level of international reserves reaches at least 4 months of import cover." - Institute policy for external auditors to verify NIR data "within 10 weeks after each test date" and timely submission to Fund staff. - Prior actions: increase frequency of FX purchases via auction to "at least a fortnightly basis"; remove implicit/explicit constraints on access; allow intermediaries to trade freely; FX sales only via auction. - RBM submitted audits of NIR for "end-September 2022, end-December 2022, end-March 2022, and end-June 2023 (PA)." - Suggested expenditure-switching measures to contain BOP pressures: specific tax on secondhand cars (PA); repeal VAT relief for privileged individuals (SB); consider raising import duty, VAT, and excise on motor vehicles to reach at least the regional average; timely updating fuel prices; raising fuel taxes — adopt (i) and (iii) "as soon as possible but no later than the passage of the FY2024/25 budget (MEFP ¶31)." - Fiscal treatment of RBM FX losses: - Government to issue a zero-coupon promissory note to recapitalize RBM losses; RBM’s losses on its FX position "3 percent of GDP at its peak in FY2023/24." ### Debt sustainability, restructuring, and domestic debt dynamics - External public debt assessed as "unsustainable" but could be considered sustainable on a forward-looking basis if debt restructuring strategy succeeds. - Authorities committed to bring external public debt back to a moderate risk of debt distress via policy adjustment, financing, and debt treatment. - Malawi seeks comparable treatment from all official bilateral creditors and pursues good faith negotiations with commercial creditors; Malawi in arrears on commercial debt while discussions continue. - Arrears on commercial external debt: $418 million as of end-September 2023. - Domestic interest burden: "5.0 percent of GDP in FY2023/24 and projected at 5.9 percent of GDP in FY2024/25 (or 35.6 percent and 37.6 percent of domestic revenue, respectively)." - Program actions: - Completion of external debt restructuring in timely manner to ensure moderate external debt distress risk and reduce near-term debt service. - All conditions under Lending-Into-Arrears (LIA) policy met with respect to AFREXIM and TDB. - Continuous zero ceiling on guaranteeing and contracting nonconcessional external debt as performance criterion; ceilings on concessional debt provided under program (MEFP Table 3). - Net domestic borrowing from banking system targeted to fall "from 5 percent of GDP to 3 percent of GDP over the program period." - Debt dynamics and capacity to repay: - Total outstanding credit to IMF projected at about 240 percent of quota by end-2023, equivalent to 31.3 percent of exports and about 113.7 percent of gross international reserves. - Total repayments to the IMF significant in 2023: 2.8 percent of exports and 10.0 percent of gross official reserves; projected to peak at 4.1 percent of exports and 3.9 percent of revenue in 2026. - Authorities plan to pay back the SDR allocation by 50 percent in 2026 and fully by 2027. - DSA findings (selected): - Final CI Score: 2.42 (CI rating: Weak). - PV of public external debt (percent of exports): 269.9, 187.1, 178.8, 162.3, 154.8, 142.8, 131.3, 118.8, 108.9 (series). - PV of PPG external debt-to-GDP ratio and other indicators show breaches of solvency and liquidity thresholds absent restructuring. - Proposed external debt NPV reduction: US$592 million via maturity extension and reprofiling. ### Governance, EDF reforms, and anti-corruption measures - Governance weaknesses at the Export Development Fund (EDF) drained reserves and posed contingent liability risks. - Authorities closed the EDF Commodity Market Making Unit (key source of past credit losses) and committed to merge the EDF with MAIIC (MEFP ¶39, SB). - RBM to improve transparency and management of EDF via improved organizational arrangements and action on audit findings (SB). - Fiscal transparency commitments: - Publish follow-up report on COVID-19 spending audit (PA) — published on October 27. - Since 2021 all government MDA payments done exclusively through Electronic Funds Transfer (EFT). - Governance Diagnostic TA to be conducted over next 9-12 months with an Action Plan to follow (SB and MEFP ¶40). - Broader anti-corruption and institutional actions: - Operationalized Financial Crimes Court; ACB removal of consent requirement for arrests in suspected corruption cases; ODPOD to digitize asset declarations; PPDA Act under review for beneficial ownership disclosure; ACB MOUs with MDAs. ### Risks and risk management (Annex I highlights) - Balance of risks: tilted to the downside. - Major identified program risks: - Further delays in external debt restructuring risk macro stabilization and access to trade credit. - Moving forward with ECF without an agreement in principle (AIP) with commercial creditors presents significant risks. - Reliance on domestic financing to fill unidentified financing gap risky given limited domestic absorption. - Delays in strengthening PFM and cash management or mobilizing domestic revenue could derail fiscal adjustment. - RBM’s plan to scale up net FX purchases and reduce swaps could face delays, jeopardizing reserves accumulation and capacity to repay the Fund. - Loss of market confidence could trigger deposit drawdowns and liquidity crunch; general election in May 2025 may induce spending pressures. - Global, regional, and domestic risk entries (likelihood and impact examples preserved): - Intensification of Regional Conflict(s): Relative Likelihood: High; Impact: Medium. - Commodity Price Volatility: Relative Likelihood: High; Impact: Medium. - Social Discontent: Relative Likelihood: High; Impact: High. - Delay in Debt Work Out: Relative Likelihood: Medium; Impact: High. - Governance Weaknesses: Relative Likelihood: High; Impact: High. - Fiscal dominance resulting in deficient conduct of monetary policy: Relative Likelihood: High; Impact: High. - Natural disasters related to climate change: Relative Likelihood: High; Impact: High. ### Program monitoring, targets, prior actions, and structural benchmarks (selected) - Program access: SDR 131.86 million (95 percent of quota) over four years; 30 percent of each disbursement allocated to direct budget support. - Monitoring: semi-annual reviews with performance criteria (PCs) and indicative targets (ITs). - Prior Actions (selected and status): - Roll out core IFMIS functionalities to key MDAs with mandatory use — Status: Met. - Prepare contingency plan to close financing gap — Status: Submitted on October 30. - Implement specific tax on second-hand motor vehicles — Status: Gazette received on October 28. - Submit audits of NIR for specified dates — Status: Drafts received October 21; finalized reports submitted October 27. - Publish follow-up action report on COVID-19 spending audit and EDF audit — Status: Published on October 27. - Selected Structural Benchmarks (timing and objectives preserved): - Publish monthly unaudited IFMIS-generated comprehensive fiscal reports on MOFEA website, within 5 days after end of each month starting end-October 2023. - Full launch of ITAS — Timing: End-March 2024. - Repeal preferential VAT relief for certain privileged individuals — Timing: July 2024. - NSO to include reconciled data on imports of strategic commodities in monthly Trade Bulletin — Timing: End-December 2023. - Prepare and submit RBM Act amendments for public consultation — Timing: End-December 2023; submit to Parliament — Timing: End-March 2024. - Selected quantitative targets (monetary and fiscal ceilings/floors, as presented): - Monetary base (ceiling on stock) (IT) — End-Dec: 958.7; End-Mar: 1,010.2; End-June: 1,023.1; End-Sept: 1,060.3 (billions of kwacha). - Monetary base (ceiling on stock) (PC upper bound) — End-Dec: 930.8; End-Mar: 980.8; End-June: 993.3; End-Sept: 1,029.4. - Domestic revenue (floor) (IT) — End-Dec: 1,621.0; End-Mar: 2,223.0; End-June: 747.0; End-Sept: 1,494.0 (billions of kwacha). - Domestic primary fiscal balance (floor) (PC) — End-Dec: -155.7; End-Mar: -94.1; End-June: 95.5; End-Sept: 57.0 (billions of kwacha). - Change in NIR of RBM (floor, cumulative since start of calendar year) (PC, US$ millions) — End-Dec: 253.0; End-Mar: 68.7; End-June: 183.3; End-Sept: 221.8. - Social spending (floor) (IT) — End-Dec: 686.7; End-Mar: 910.8; End-June: 290.0; End-Sept: 582.8 (billions of kwacha). ### Capacity development priorities and sequencing (Annex IV) - Main CD focus: PFM (IFMIS rollout, cash management, commitment controls), central bank strengthening (monetary operations, FPAS), governance diagnostic and follow-up, and statistics (national accounts, BOP, GFS, monetary, export/import price indexes). - PFM TA priorities: bank reconciliation, payment efficiency, in-year and year-end reporting, budgeting, SOE oversight, public investment management, rollout of IFMIS. - Central bank TA priorities: deepen interbank FX market, improve monetary operations, strengthen stress testing and FPAS. - Statistics priorities: publish revised GDP series (base year 2017), improve external sector data (including reconciled fuel import data), strengthen public sector debt statistics. - Sequencing: TA carefully sequenced to avoid overwhelming limited capacity; specific deliverables tied to SBs and prior actions. ### Key sectoral annexes and policy notes (select highlights) - Annex II — Fuel Imports and Mass Motorization: - Fuel imports grew on average 7.7 percent each year during the past 6 years; from 358 million liters in 2016 to 558 million liters in 2022. - In U.S. dollar terms, fuel imports grew by an estimated 2.7 times from $212 million in 2016 to $571 million in 2022. - Fuel consumption per capita: 27.9 liters per capita. - PIL imported 212 million liters in 2022 (an 18 percent reduction from 2021); NOCMA imported 301 million liters in 2022 (55 percent market share). - Current petrol price: MK1746 per liter ($1.58 per liter at official exchange rate at end-September 2023); at informal market exchange rate price in Malawi would be around $1 per liter. - Policy options: close VAT loopholes on vehicles, raise import taxes on vehicles to at least the regional average, update fuel price formula including market-based exchange rate, raise fuel taxes. - Annex III — External Sector Assessment: - Overall Assessment: external position in 2022 weaker than level implied by fundamentals and desirable policies. - EBA-Lite 3.0 CA model (2022): CA-Actual: -3.2 (percent of GDP); Adjusted CA: -9.4; CA Norm: -6.6; CA Gap: -2.7 0.3; REER overvalued by 22.3 percent relative to fundamentals per model. - Reserve adequacy model for credit constrained economies suggests reserves target of at least 3.9 months of import cover; gross reserves provided 0.8 months in 2022. - Annex I — Risk Assessment Matrix: - Key domestic risks include delay in debt work out (Relative Likelihood: Medium; Impact: High), governance weaknesses (High/High), delayed PFM reforms and DRM (Medium/High), fiscal dominance (High/High), natural disasters (High/High). ### Staff appraisal and concluding judgments - Staff assesses the PMB remains on track to achieve its objectives and supports the authorities’ request for an ECF arrangement conditional on receipt of financing assurances. - Critical preconditions and priorities emphasized by staff: - Successful and timely external debt restructuring is vital to restore debt sustainability and close financing gaps. - Fiscal discipline, robust PFM, timely comprehensive fiscal reports, enhanced revenue mobilization, expenditure rationalization, strong cash management and commitment controls are critical. - RBM should continue to reduce inflation and anchor expectations by containing reserve money growth and ensuring positive real borrowing costs. - Rebuilding international reserves is critical to restore trade credit and steady supply of essential commodities. *Source: EXECUTIVE SUMMARY and selected chapters, 1mwiea2023002* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and recent developments - Real GDP is projected to increase by 1.6 percent in 2023, with shortages of foreign exchange still weighing on economic activity. - Inflation is expected to average 30.3 percent in 2023 and to start declining next year. - The authorities stepped up efforts to meet fiscal targets under the PMB, adjusting expenditure to offset a shortfall in revenue, and containing government borrowing to slow money growth. - The Reserve Bank of Malawi (RBM) tightened monetary policy to contain inflationary pressures and resumed foreign exchange auctions. - Rebuilding international reserves of the RBM has been slow as access to trade credit has remained limited. - The authorities are seeking comparable treatment from all official bilateral creditors and continue to pursue good faith negotiations with commercial creditors to restructure their external debt; they are in arrears on commercial debt while these discussions continue. - Recent shocks and policy context: - Malawi experienced multiple shocks in the past three years: the COVID-19 pandemic, the food and fertilizer prices shock following the war in Ukraine, a cholera outbreak, and three cyclones. - Large official development assistance (ODA) inflows averaged $1.1 billion or 12 percent of GDP per year during 2005-20. - The large fiscal budget deficit of 10.8 percent of GDP in 2022 necessitated domestic financing, much of which was addressed through monetary financing. - International banks stopped confirming letters of credit (LCs) in early 2023, and suppliers’ credits also dried up in the middle of the year. - Social outcomes: - Poverty incidence: over 70 percent of the population living below the international poverty line of $2.15 a day at 2017 PPP. - Food insecurity: about 22 percent of the population projected to face hunger during the upcoming lean season (October 2023-March 2024), compared to 15 percent during the previous season. - Program performance under the PMB: - Five out of six end-June and continuous Quantitative Targets (QTs) and all three end-June Indicative Targets (ITs) were met. - Seven out of 10 Structural Benchmarks (SBs) were not met, but some progress has been made. - Net international reserves (NIR) target met at end-June 2023, helped by frontloading of foreign project fund inflows; preliminary data show NIR stood at -US$993.3 million at end-September 2023. ### Request - Having established a track record, as verified under the second (and final) Review of the Staff Monitored Program with Executive Board Involvement (PMB), the authorities are requesting a new 48-month financing arrangement under the Extended Credit Facility (ECF) of 95 percent of quota (SDR 131.86 million, about $ 178 million). - The arrangement is expected to catalyze grant financing and capital inflows including trade credit. ### Main policy commitments - Program objectives: - Restore macroeconomic stability. - Build a foundation for inclusive and sustainable growth, including strengthening resilience to climate-related shocks. - Address weaknesses in governance and institutions. - Fiscal policy: - Aim at achieving a debt-stabilizing primary balance in the medium-term through a package of expenditure adjustment and revenue mobilization measures. - Authorities committed to fiscal discipline, containing domestic borrowing, and improving public financial management (PFM). - Monetary policy: - Remain anchored on containing money growth and aim to tame inflation by ensuring positive real interest rates. - RBM increased the monetary policy rate by another 200 basis points in August 2023, bringing it to 24 percent. - External sector policy: - Focus on rebuilding international reserves, reducing shortages of foreign exchange, and facilitating a market-determined exchange rate. - Data and transparency: - Authorities committed to ramp up efforts to improve data quality and submit data to IMF staff on a timely basis. ### Risks to the Program - Major risks identified: - Further delays in restructuring Malawi’s external debt would put at risk macroeconomic stabilization. - Significant risks of moving forward with the ECF arrangement without an agreement in principle (AIP) between the Malawian authorities and their commercial creditors. - Relying on domestic financing to fill any part of the unidentified financing gap is risky given limited capacity of domestic agents (bank and nonbank) to absorb additional government securities. - Delays in strengthening PFM and cash management control and in mobilizing domestic revenue could derail fiscal adjustment and add to deep-rooted governance vulnerabilities. - RBM’s program to scale up net foreign exchange purchases and reduce swap arrangements could face delays, jeopardizing the reserve accumulation path and posing risks to Malawi’s capacity to repay the Fund. - Loss of market confidence could result in drawdown on deposits in the banking sector resulting in a liquidity crunch and rollover risks in the short-term securities market. - Spending pressures related to the general election in May 2025 are an added risk. ### Staff’s views - Staff assesses that the PMB remains on track to achieve its objectives. - Staff supports the authorities’ request for the ECF arrangement, conditional upon receipt of financing assurances. ### Outlook and risks - Outlook assumptions: - The outlook is predicated on staying on track with the macroeconomic adjustment program. - Near-term growth remains constrained by a sharp macroeconomic adjustment envisaged under the program. - Growth and inflation projections (Text Table 1: Macroeconomic Adjustment Program, 2023–27): - Real GDP Growth: 1.6 (2023), 3.3 (2024), 3.8 (2025), 4.3 (2026), 4.5 (2027) - Inflation - Annual Average: 30.3 (2023), 27.9 (2024), 14.7 (2025), 8.1 (2026), 6.8 (2027) - Fiscal and monetary projections (selected rows from Text Table 1): - Revenue (percent of GDP on a fiscal year basis): 17.2 (FY22/23), 17.2 (FY23/24), 18.4 (FY24/25), 18.8 (FY25/26), 17.6 (FY26/27) - Domestic revenue excl. RBM dividend: 13.3, 13.4, 14.4, 15.4, 15.6 - Expenditure and net lending: 28.9, 27.9, 26.5, 25.9, 23.3 - Domestic primary exp. excl. RBM recap.: 15.7, 14.0, 13.2, 13.1, 12.6 - Overall balance: -11.7, -10.7, -8.1, -7.1, -5.7 - Domestic financing (net): 5.4, 6.6, 2.8, 1.8, 2.2 - o/w Banking system borrowing: (levels) 5.4, 6.6, 2.8, 1.8, 2.2 - o/w Banking system borrowing (% of M2): 33.3, 39.9, 17.5, 10.5, 12.4 - Broad money - Percent change: 30.5, 29.3, 17.9, 12.2, 11.2 - Credit to the private sector - Percent change: 19.6, 11.2, 5.8, 8.9, 9.1 - External sector and reserves (Text Table 1): - Current account (Percent of GDP): -7.6 (2023), -8.5 (2024), -9.9 (2025), -9.0 (2026), -8.2 (2027) - Gross official reserves (millions of U.S. dollars): 394 (2023), 714 (2024), 967 (2025), 1,081 (2026), 1,133 (2027) - Gross official reserves (months of imports): 1.8, 2.9, 3.9, 4.1, 4.2 - Net international reserves: -1,052 (2023), -667 (2024), -468 (2025), -366 (2026), -306 (2027) - Financing gap (million U.S. dollars): 706 (2023), 350 (2024), 200 (2025), 236 (2026), 107 (2027) - Debt indicators (Text Table 1): - External debt (percent of GDP): 39.3 (2023), 35.2 (2024), 33.8 (2025), 31.2 (2026), 28.8 (2027) - Total public debt (percent of GDP): 81.3 (2023), 75.0 (2024), 74.8 (2025), 73.5 (2026), 71.8 (2027) - Outlook narrative: - Growth is projected to pick up next year and reach 4.5 percent by 2027. - Inflation is projected to decline gradually and reach single digits only in 2026. - Fiscal adjustment designed to bring down domestic bank borrowing from 30-40 percent to 10 percent of broad money over three years. - Preliminary data indicate the bulk of current account adjustment has already taken place with the deficit narrowing from about 15 percent of GDP in 2021 to 7.6 percent in 2023. - Balance of risks: - Tilted to the downside (Annex I). - Risks include weaker-than-expected policy implementation, weather-related shocks, and another surge in food, fuel, or fertilizer prices. - Upside risks include faster-than-anticipated macroeconomic impact of policy actions, successful export diversification, faster development of mining projects, formalization of informal activity, and budget overperformance. ### Policies supporting the program — Overview - The ECF-supported program will aim at: - Restoring macroeconomic stability. - Building a foundation for inclusive and sustainable growth, including strengthening resilience to climate-related shocks. - Addressing weaknesses in governance and institutions. *Source: EXECUTIVE SUMMARY, 1mwiea2023002* ### 11. Partly due to lack of domestic revenue mobilization and weak public financial ### 1mwiea2023002 - 11. Partly due to lack of domestic revenue mobilization and weak public financial ### Fiscal position, revenue mobilization, and public financial management (PFM) - Repeated revenue shortfalls have been filled by unplanned domestic borrowing, contributing to an increase in debt service that "continues to erode fiscal space and increase overall fiscal deficits." - Government securities absorption shifted from resident banks initially to nonresident banks, leading to "a rapid increase in external non-concessional debt." - For the second PMB review the authorities: - Met fiscal targets by adjusting expenditure to offset revenue shortfalls and contained government borrowing to slow money growth. - For the first quarter of the fiscal year (April-June), spending remained within the budgeted envelope; however, "revenue and financing were lower than expected." - Monthly data suggest spending also remained within the budgeted envelope for the first month of the second quarter of the fiscal year. - PFM reform progress: - Authorities now announce quarterly allotments aligned with the agreed macroeconomic framework and outturns for revenue, grants, and financing. - MDAs may commit up to allotments through IFMIS, but "commitments are not yet being done consistently through IFMIS." - MDA payments limited to monthly cash releases, aligned with allotments, to reduce risk of accumulating new payment arrears. - Extension of this practice to all MDAs announced in the 2023-24 Budget Policy Statement and executed since the beginning of FY2023/24. - IFMIS reports began publication in October 2023; the prior action on rolling out core IFMIS functionalities to key MDAs with mandatory use has been met, but compliance work continues. ### Key fiscal objectives and adjustment under the ECF-supported program - Primary objective: achieve a debt-stabilizing primary balance in the medium-term through revenue mobilization and expenditure adjustment. - Fiscal anchors and adjustment path: - Envisaged fiscal adjustment over FY2023/24–FY 2026/27: "6 ppts of GDP in terms of overall fiscal balance (Tables 2a and 2b) or 5.4 ppts in terms of domestic primary fiscal balance—1.35 ppt of GDP per year." - Fiscal adjustment will be front-loaded with "1.8 ppts of GDP adjustment in the domestic primary fiscal balance in the first year of the program." - Short-term and structural policy measures to support the path: - Step up implementation of the Domestic Revenue Mobilization Strategy (DRMS), which "aims to increase revenue by 5 ppts of GDP in five years." - Rationalize and prioritize expenditures; introduce and implement sound commitment control measures; implement well-targeted measures to support low-income households. - Revenue measures for FY2023/24 include: - Operationalizing a specific tax on secondhand cars (Prior Action (PA)). - Repealing VAT relief on motor vehicles for current and former politicians, senior public officials, judges, and other similarly privileged individuals and groups (SB). - Ensuring that "every supply of a motor vehicle is standard rated for VAT purposes (SB)." - Comprehensively eliminating other VAT exemptions on business inputs and building materials (SB). - Full launch of the Integrated Tax Administration System (ITAS) (SB) to enhance revenue collection and compliance. - Limited room for further primary expenditure cuts; commitments to rationalize the wage bill and the Affordable Input Program (AIP) (fertilizer subsidies). - Implementation of IFMIS and institutionalizing reporting and controls remain key; a contingency plan has been prepared as a prior action to close financing gaps if the baseline fiscal path faces implementation challenges. ### Price stability and financial sector stability - Money and inflation: - "Broad money grew 34.2 percent year-on-year in August 2023," driven by net claims on government. - Monetary base growth volatile, "increasing to 49.5 percent year-on-year in August" partly because of an increase in the Liquidity Reserve Ratio (LRR) after April 2023. - RBM has struggled to drain excess liquidity given strong demand from the banking system and illiquidity in the secondary market for government securities; RBM holdings of government securities have continued to increase in 2023. - Banking sector performance and risks: - Sector remains "financially sound with adequate capital, strong earnings, and sufficient liquidity despite deterioration in asset quality." - Profit after tax (PAT) "increased by 95 percent year-on-year to K124 billion (1 percent of GDP) at end-June 2023." - Banking sector balance sheet dominated by investments and securities (48 percent of total assets). - Total market capitalization rose from "MK2.7 trillion (US$2.6 billion) at end-June 2022 to MK5.9 trillion (US$5.6 billion) at end-June 2023," exceeding banking sector total assets (MK4.1 trillion); increase driven mostly by share price gains. - Footnotes: eight banks in Malawi (five foreign-owned, three domestic); two banks dominant, accounting for 46 percent of sector-wide assets. Six of 16 listed companies are banks or holding companies and two are telecom companies; these eight account for 78 percent of total market capitalization. - Monetary policy stance and operations under the program: - RBM committed "to forcefully and proactively tighten monetary policy as needed to contain inflationary pressures," anchoring policy on containing money growth and aiming to "tame inflation by ensuring positive real lending rates on average." - RBM to refine operations to contain direct exposures to government and strengthen liquidity management: - Greater use of repo for Open Market Operations (OMOs). - Introduction of less favorable terms for its rediscounting facility. - Restore functioning of the secondary market for government securities. - Authorities plan to strengthen financial sector oversight and closely monitor risks, including exposure of the banking sector to the public sector and reassessment of loan and collateral quality needs. ### Rebuilding international reserves and foreign exchange market normalization - External position and FX shortages: - Trade: imports have yet to recover to 2021 levels; exports supported by a strong tobacco season. - Current account projected "7.6 percent of GDP in 2023"; foreign exchange frequently hoarded amid macroeconomic uncertainty, causing intermittent shortages of fuel, fertilizer, cement, and other goods. - Exchange rate pressures and market segmentation: - Widening spread of over "52 percent on October 13" between the official rate and that offered at foreign exchange bureaus. - Other parallel rates (interbank and informal) have emerged due to difficulty obtaining FX at the official rate. - RBM restarted monthly FX purchases via auction in June, facilitating "a 15 percent depreciation against the US dollar during June-September 2023"; participation broad-based but volumes small. - Reserve position: - Preliminary data: gross international reserves declined to "US$156.1 million (0.6 months of import cover) by end-September 2023." - Fuel importers faced selling pressure; trade credit availability strained as import volumes and values grew "by 1.6 times in volume and 2.7 times in U.S. dollar value between 2016 and 2022." - Program measures to rebuild reserves and liberalize FX: - RBM committed to allow greater exchange rate flexibility to reduce FX shortages, facilitate accumulation of reserves, and improve interbank trading. - RBM will increase FX purchases and "refrain from interventions, such as unplanned foreign exchange sales to the market, until the level of international reserves reaches at least 4 months of import cover." - Strengthen program monitoring data accuracy by: - Instituting policy for external auditors to verify NIR data "within 10 weeks after each test date" and ensure timely submission to Fund staff of audited NIR results. - Continuing to submit monetary data through standard reporting forms to the Fund on a regular basis. - RBM submitted to IMF staff audits of NIR from "end-September 2022, end-December 2022, end-March 2022, and end-June 2023 (PA)." - Reforms to FX operations (prior actions): - Increase frequency of FX purchases via auction to "at least a fortnightly basis" and remove implicit/explicit constraints on access, allotments, or prices. - Allow intermediaries to trade in the FX market at freely negotiated rates between themselves and clients. - If RBM conducts FX sales, do so via auction in line with Fund recommendations. - Additional measures and fiscal linkage: - Reduce reliance on FX swaps with nonresidents by replacing them with swaps with residents to reduce rollover risks and lower funding costs. - Expenditure-switching measures to contain BOP pressures, noting fuel consumption grew on average "7.7 percent during the past 6 years" and imports of used motor vehicles "more than doubled during the same period." - Fiscal measures that help contain motor vehicle and fuel imports include the specific tax on secondhand cars (PA) and repeal of VAT relief for privileged individuals (SB). - Consider further measures: (i) raising import duty, VAT, and excise taxes on motor vehicles to reach at least the regional average; (ii) timely updating fuel prices to align with global prices; (iii) raising fuel taxes. Authorities plan to adjust the fuel price and committed to adopt (i) and (iii) "as soon as possible but no later than the passage of the FY2024/25 budget (MEFP ¶31)." - NSO to include reconciled data on imports of strategic commodities in the monthly Trade Bulletin (SB). - Fiscal treatment of RBM FX losses: - Government will issue a zero-coupon promissory note to recapitalize RBM losses on its net foreign asset position as required by the RBM Act. - RBM’s losses on its FX position "3 percent of GDP at its peak in FY2023/24" are projected to increase while the net foreign asset position remains negative and the Kwacha loses value; these losses are documented in fiscal tables (Tables 2a and 2b). ### Debt sustainability, restructuring, and domestic debt dynamics - External debt and restructuring: - External public debt "is unsustainable but would be considered sustainable on a forward-looking basis if the government is successful in its restructuring strategy." - Authorities committed to bring external public debt back to a moderate risk of debt distress in the medium term via policy adjustment, financing, and debt treatment. - Under the authorities’ external debt 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." - Malawi is seeking comparable treatment from all official bilateral creditors and is pursuing good faith negotiations with commercial creditors; Malawi is in arrears on commercial debt while discussions continue. - Domestic debt pressures: - Domestic interest bill "is 5.0 percent of GDP in FY2023/24 and is projected at 5.9 percent of GDP in FY2024/25 (or 35.6 percent and 37.6 percent of domestic revenue, respectively)," even if external debt restructuring is successful. - Baseline (pre-restructuring) scenario assumes domestic financing covers residual external financing gaps, "overstating the size of the domestic interest bill." - Market dysfunction increases risks associated with fiscal slippage given impaired functioning of the government securities market. - Program actions on debt management: - Completion of external debt restructuring in a timely manner aimed to ensure a moderate risk of external debt distress and reduce near-term debt service needs. - All conditions under the Lending-Into-Arrears (LIA) policy are met with respect to AFREXIM and TDB. - Authorities committed to continue engagements with creditors to achieve a debt treatment consistent with ECF program parameters; commercial debt will be repaid or restructured only on terms consistent with the arrangement. - Measures to contain borrowing and enhance transparency in contracting and guaranteeing external debt through improved PFM and debt management capacity; guaranteeing and contracting nonconcessional external debt subject to a continuous zero ceiling performance criterion, with ceilings on concessional debt provided under the program (MEFP Table 3). - Net domestic borrowing from the banking system targeted to fall "from 5 percent of GDP to 3 percent of GDP over the program period." ### Governance and institutional weaknesses - Governance effects: - Weaknesses in governance and institutions of the Ministry of Finance and the Central Bank have had "serious macroeconomic consequences," including lack of transparency and accountability in fiscal budget execution leading to imbalances since 2012, unsustainable debt, and pressures on the exchange rate and inflation. - Foreign exchange interventions by RBM contributed to a rapid increase in RBM external liabilities and increased external vulnerability. - Anti-corruption and controls: - Authorities have taken actions since the audit on COVID-19 spending to prevent misappropriation recurrences: - Published a follow-up report detailing corrective actions, measures to pursue and respond to audit findings, and follow-up of alleged misappropriations, including coverage of a second audit finding (PA). - Since 2021, all payments across government MDAs "are exclusively being done through Electronic Funds Transfer (EFT)" to avoid recurrence of misappropriation of government resources. *Source: 1mwiea2023002 - 11. Partly due to lack of domestic revenue mobilization and weak public financial (excerpt).* ### 37. Governance weaknesses at the Export Development Fund (EDF)—a wholly owned ### 37. Governance weaknesses at the Export Development Fund (EDF)—a wholly owned subsidiary of the RBM—has been a drain on international reserves and a risk to the government in terms of contingent liabilities. ### Governance at the EDF and RBM actions - Governance weaknesses at the Export Development Fund (EDF) have drained international reserves and posed contingent liability risks for the government. - The authorities have closed the Commodity Market Making Unit of the EDF, identified as one of the key sources of past credit losses (MEFP ¶39). - The RBM will improve transparency and management of the EDF via improved organizational arrangements and action on audit findings (SB). - The RBM has committed to amend the RBM Act in consultation with Fund staff (SBs). - The RBM is committed to merge the EDF with the Malawi Agricultural and Industrial Investment Corporation, PLC (MAIIC) (MEFP ¶39, SB). ### Fiscal transparency and governance reform commitments - Fiscal transparency is emphasized as the cornerstone of Malawi’s governance efforts. - Malawi will undergo a Governance Diagnostic TA over the next 9-12 months and will follow up on its recommendations with an Action Plan (SB and MEFP ¶40). - Effectiveness of reforms would be supported by implementation of previously committed measures on digitalization, publication of asset declarations, and coordination of domestic anti-corruption efforts (MEFP ¶41). ### Sustainable growth and climate resilience (Background and program elements) - Recent growth has been consumption-led with strong import growth, supported by massive external borrowing and an overvalued exchange rate. - Core long-term strategy: shift from consumption-driven to production-driven growth and from government-led to private-sector-led growth (“Malawi 2063”). - Medium- to long-term growth requires macroeconomic stabilization and structural reforms, including: - Recovery across sectors and resumption of electricity generation at the Kapichira hydropower plant to support manufacturing. - Agricultural shift from subsistence to cash crops supported by functioning markets and infrastructure. - Build resilience to weather-related shocks; authorities will engage development partners on the Country Climate and Development Report (CCDR) and finalize Disaster Risk Management regulations and related policies (SB). ### Capacity development priorities - Continued focus: PFM, domestic revenue mobilization, bank supervision and regulation, and statistics (Annex IV). - Authorities are beginning to produce comprehensive fiscal reports in a timely manner after engagement of a long-term expert posted for four years through April 2023 and ongoing short-term missions. - Malawi Revenue Authority (MRA) had a long-term expert (LTX) for several years; tax revenue to GDP ratio remains well below SSA average. - Domestic revenue mobilization is a cornerstone of the ECF-supported program. - Emphasis on modernizing monetary policy framework, better reporting of national accounts, monetary and financial sector, BOP, international reserves, and government finance; special emphasis on BOP data during the ECF arrangement. - Technical assistance will be carefully sequenced to avoid overwhelming limited capacity. ### Program modalities: Access, duration, and financing role - Staff propose access of SDR 131.86 million or 95 percent of Malawi’s quota over four years. - This access level is equivalent to 11 percent of total external financing gap (Text Table 2) and includes 30 percent of each disbursement allocated to direct budget support. - Access under the program is evenly distributed except for the first and the last reviews; Lending into Arrears (LIA) policy would apply given Malawi is in arrears on commercial debt and is making good faith efforts with creditors. ### Arrears, creditor engagement, and financing assumptions - Malawi owes arrears of $418 million on commercial external debt as of end-September 2023. - Authorities engaged in early dialogue with creditors, shared information, and provided opportunities for private creditor input. - Staff judge authorities have made good faith efforts and meet requirements of the Fund’s LIA policy. - Authorities seek comparable treatment from all official bilateral creditors and are committed to working with all official bilateral and commercial creditors to achieve debt treatment consistent with program parameters. - Staff assesses debt to be sustainable on a forward-looking basis, contingent on expected implementation of debt treatments on both official and commercial debt. - Staff will assess progress in restructuring as part of regular financing assurances reviews at each program review. ### Poverty reduction and Malawi 2063 alignment - The program aims to help address poverty and strengthen growth over the medium term in accordance with Malawi 2063, which targets upper-middle income status by 2063 and focuses on poverty reduction, human capital investment, and climate-resilient physical capital. ### Key statistics and financing breakdown (as presented) - Financing gap: 1,056 100 (2023-27) and 1,599 100 (2023-24) [as presented in source table formatting]. - IMF ECF: 535 178 11 [as presented in source table formatting]. - Grants/loans (disbursed in 2023): 106 101 067 [as presented in source table formatting]. - Prospective grants/loans: 221 213 2921 [as presented in source table formatting]. - Prospective debt relief: 676 649 8762 [as presented in source table formatting]. - Official Bilateral: 394 996 [as presented in source table formatting]. - Commercial: 636 608 8755 [as presented in source table formatting]. ### Program monitoring, capacity to repay, and debt dynamics - Program performance monitored through semi-annual reviews with performance criteria (PCs) and indicative targets (ITs). - Malawi’s capacity to repay the Fund would become adequate—but with significant risks—subject to full program implementation and completion of debt restructuring (Table 9). - Total outstanding credit to the IMF projected at about 240 percent of quota by end-2023, equivalent to 31.3 percent of exports, and about 113.7 percent of gross international reserves. - Total outstanding credit as percent of gross international reserves peaks at program start (5-6 times the median PRGT arrangement) and gradually converges toward the 75th percentile of past PRGT arrangements over the next 10 years. - Total repayments to the IMF are significant in 2023: 2.8 percent of exports and 10.0 percent of gross official reserves; projected to peak at 4.1 percent of exports and 3.9 percent of revenue in 2026. - The capacity to repay assessment incorporates authorities’ plan to pay back the SDR allocation by 50 percent in 2026 and fully by 2027. ### Debt vulnerabilities and restructuring buffer - No buffer of restructurable debt: de facto senior debt plus other multilateral and collateralized debt share of total external debt is 77 percent at program initiation (Table 10) and projected to increase to 90 percent by 2025 under the baseline. ### Program risk assessment - Implementation risks elevated due to limited capacity, repeated slippages under the PMB, and prior misreporting. - Delays in external debt restructuring would put macroeconomic stabilization at risk. - Risk from moving forward without agreement in principle on over $877 million (55 percent of total financing gap) of debt relief. - Reliance on domestic financing to fill unidentified gaps is risky given limited absorption capacity of domestic agents. - Delays in strengthening PFM and cash management or in mobilizing domestic revenue could derail fiscal adjustment. - RBM’s plan to scale up net foreign exchange purchases and reduce swaps could face delays, jeopardizing reserve accumulation and capacity to repay the Fund. - Loss of market confidence could trigger deposit drawdowns and a liquidity crunch; general election in May 2025 poses additional spending pressure risks. ### Safeguards assessment and audits - RBM has made progress implementing 2021 safeguards assessment recommendations; work is underway on remaining areas. - 2021 update found deterioration in safeguards since 2018, including weakened governance, oversight, and misreporting. - Comprehensive governance and legal reform required to strengthen RBM “checks and balances”; operational autonomy should be safeguarded, including prohibiting quasi-fiscal activities. - Remaining recommendations: strengthen Board role in approving key policies; approve revised reserves management framework; submit audited NIR results (PA). - An updated safeguards assessment is tentatively scheduled for end-2023 in connection with the new ECF arrangement. - Audits of NIR for end-December 2022 and end-June 2023 (prior action) show a slightly less negative NIR than authorities’ calculations, reflecting more conservative authority assumptions about projected foreign currency drains (FCD). - Reported end-December 2022 reported RA: $119.6 million; audited RA: $120.9 million. - Reported FCD were biased upward relative to auditor calculations, producing a downward bias in reported NIR relative to auditor NIR and upward bias in change in NIR for end-December 2022 and end-June 2023: $49.1 million and $2.8 million, respectively. - Going forward, audits should be completed within 10 weeks after the test date so audited numbers are available for relevant review missions. ### Article VIII practices - Malawi maintains four multiple currency practices (MCP) and three exchange restrictions subject to Fund jurisdiction. - Authorities requested, and staff supports, temporary approval of the four MCPs and three exchange restrictions as approval criteria are met; commitments to remove MCPs and exchange restrictions as soon as BOP conditions permit (MEFP ¶32) (SB). ### Staff appraisal: key judgments and recommendations - Performance under the second PMB review was satisfactory; authorities have undertaken corrective actions and show signs of macroeconomic adjustment. - An Extended Credit Financing (ECF) arrangement will support macroeconomic adjustment, catalyze grant financing, and provide a structural reform framework. - Successful external debt restructuring is vital; time is of the essence as delays would increase financing gaps and social costs. - Fiscal discipline, robust PFM, timely comprehensive fiscal reports, enhanced revenue mobilization, expenditure rationalization, strong cash management, and commitment controls are critical. - RBM should persist in reducing inflation and anchoring expectations by containing reserve money growth, aligning the policy rate with inflation to ensure positive real borrowing costs, and raising required reserves if needed. - Rebuilding international reserves is critical to restore trade credit, steady supply of essential commodities, and reduce reliance on foreign exchange interventions by RBM. *Source: 1mwiea2023002 - 37. Governance weaknesses at the Export Development Fund (EDF)—a wholly owned subsidiary of the RBM—has been a drain on international reserves and a risk to the government in terms of contingent liabilities (PDF).* ### 62. Addressing weaknesses in governance and institutions will be important. ### 62. Addressing weaknesses in governance and institutions will be important. ### Governance and institutional reform - The authorities should press ahead with the implementation of their anti-corruption agenda. - Document progress on recent audits. - Publish and reconcile strategic imports data. - Use the upcoming governance diagnostic technical assistance to shape future plans in improving governance and institutions. ### Shifting the sources of growth - Fundamentally shifting the sources of Malawi’s growth is critical. - Shift growth from a consumption-driven to a production-driven model. - Shift growth from a government-led to a private-sector-led model—these are core principles of Malawi 2063. - Such shifts are vital to make Malawi’s growth inclusive, sustainable, and resilient to climate-related shocks. - Measures to contain demand for used motor vehicles and fuel imports are urgently needed. *Source: 1mwiea2023002 - 62. Addressing weaknesses in governance and institutions will be important.* ### 64. Staff assess the PMB remains on track to achieve its objectives. In view of Malawi’s ### 1mwiea2023002 - 64. Staff assessment and program request ### Program endorsement and financing request - Staff assess the PMB remains on track to achieve its objectives. - Based on Malawi’s large balance of payments needs, the strength of the proposed program, the prior actions taken by the authorities, and conditional upon receipt of financing assurances, staff support the authorities’ request for a 48-month ECF arrangement with access of 95 percent of quota (SDR 131.86 million, $178 million). ### Inflation, money, and exchange rate developments - Net claims on the government continue to be the largest contributor to broad money growth. - Monetary growth and inflation may be decelerating from respective peaks. - Authorized Dealer Banks (ADB)’s foreign currency deposit (FCD) is rising during the tobacco season while reported imports remain depressed. - Despite large project-related inflows in June, the RBM struggles to accumulate reserve assets and pressure on the exchange rate seems to remain strong. - Select series (as presented): - ADB FCD, Jun 2017-Aug 2023 (USD Millions) — series shown graphically in the source (no single aggregate numeric summary provided beyond the chart). - Daily exchange rates, January 2020-October 6, 2023 (MWK per USD) — spread (RHS), RBM Rate, Forex Bureau Rate shown in chart. ### Banking sector developments - Banking sector exposure to the government continues to rise, though government domestic borrowing from the RBM has plateaued from the beginning of the PMB in 2022Q4. - Since 2023, the share of RBM in absorbing T-Notes has decreased; growth of outstanding T-bills decelerated with RBM cutting back on its holdings of T-bills. - Average interbank and Lombard facility rates rose sharply following the policy rate increase in April 2023; tight liquidity led some banks to borrow to meet reserve requirements. - Select series (as presented): - Government securities (T-Bills and T-Notes), 2017-23 (percent of GDP) — charted by sector (RBM, Commercial Banks, Non Banking Sector, Foreign Sector). - RBM: Government Borrowing and Deposits, 2017-23 (Billions MWK) — shown in chart. ### Capacity to repay indicators (comparators with UCT PRGT arrangements) - Figure 3 presents Malawi’s Capacity to Repay (CtR) indicators compared to medians and interquartile ranges for UCT arrangements approved for PRGT countries between 2012 and 2022. - Indicators charted include percent of gross international reserves, percent of GDP, percent of PPG external debt, percent of revenue excl. grants, percent of exports of goods and services, percent of PPG external debt service, and total Fund credit outstanding. - Charted series include Malawi PRGT and comparator distributions up to T+10 (no single numeric summaries beyond plotted series provided). ### Key macroeconomic projections and indicators (selected series preserved exactly as presented) - GDP at constant market prices: 0.8, 1.7, 1.6, 3.3, 3.3, 3.8, 4.3, 4.5, 4.6 (percent change, sequence as in table). - Nominal GDP (billions of Kwacha): 11,799, 14,768, 15,396, 17,728, 19,900, 23,454, 26,326, 29,279, 32,390 (series as presented). - GDP deflator: 17.3, 23.1, 28.4, 16.3, 25.1, 13.5, 7.6, 6.4, 5.8 (percent changes as presented). - Consumer prices (end of period): 25.4, 24.4, 40.0, 15.2, 18.3, 9.8, 7.6, 6.5, 6.5 (percent). - Consumer prices (annual average): 20.8, 24.8, 30.3, 18.3, 27.9, 14.7, 8.1, 6.8, 6.5 (percent). - National savings: 10.0, 4.7, 6.2, 2.5, 2.1, 2.3, 0.4, 2.0, 2.6 (percent of GDP). - Gross investment: 13.1, 12.7, 13.9, 11.5, 10.6, 12.2, 9.4, 10.2, 10.0 (percent of GDP). - Government overall balance (including grants): -9.0, -11.8, -11.7, -10.5, -10.7, -8.1, -7.1, -5.7, -4.1 (percent of GDP). - Primary balance: -5.0, -6.8, -6.8, -4.9, -5.4, -1.1, 0.4, 1.7, 3.0 (percent of GDP). - Domestic primary balance: -4.4, -3.8, -3.8, -2.8, -3.0, 1.0, 2.4, 2.9, 3.7 (percent of GDP). - Broad money (annual growth): 38.8, 25.2, 30.5, 20.0, 29.3, 17.9, 12.2, 11.2, 10.6 (change in percent of broad money at end of period). - Net foreign assets (change in percent of broad money): -13.8, -5.3, -13.3, 8.4, 12.6, 10.4, 6.2, 2.5, 3.2 (percent). - Net domestic assets: 52.6, 30.5, 43.8, 11.7, 16.6, 7.5, 6.0, 8.7, 7.4 (percent). - Net claims on the government (percent of broad money): 39.0, 26.1, 43.3, 18.8, 8.8, 12.8, 10.9, 10.9, 9.8 (percent). - Credit to the private sector (percent change): 24.1, 16.0, 19.6, 8.2, 11.2, 5.8, 8.9, 9.1, 10.7 (percent change). - Exports (US$ millions): 1,128, 1,322, 1,428, 1,454, 1,552, 1,653, 1,730, 1,872, 1,984 (series as presented). - Imports (US$ millions): 1,835, 2,487, 2,680, 2,608, 2,695, 2,969, 3,011, 3,136, 3,215 (series as presented). - Gross official reserves (US$ millions): 120, 499, 394, 747, 714, 967, 1,081, 1,133, 1,135 (levels). - Gross official reserves (months of imports): 0.5, 2.3, 1.8, 3.3, 2.9, 3.9, 4.1, 4.2, 4.1 (months). - Net international reserves (USD millions): -1,247, -673, -1,052, -594, -667, -468, -366, -306, -232 (levels). - Current account (percent of GDP): -3.2, -7.9, -7.6, -9.0, -8.5, -9.9, -9.0, -8.2, -7.4 (percent). - External debt (public sector, percent of GDP): 34.8, 37.1, 39.3, 35.3, 35.2, 33.8, 31.2, 28.8, 26.3 (percent). - NPV of public external debt (percent of exports): 269.9, 187.1, 178.8, 162.3, 154.8, 142.8, 131.3, 118.8, 108.9 (percent). - Total public debt (percent of GDP): 75.7, 80.2, 81.3, 80.2, 75.0, 74.8, 73.5, 71.8, 68.0 (percent). - External debt service (percent of exports): 11.9, 59.8, 58.1, 25.2, 26.1, 18.8, 18.0, 12.8, 10.8 (percent). - External debt service (percent of revenue excl. grants): 7.8, 44.7, 46.9, 23.6, 25.4, 18.2, 17.1, 11.9, 9.7 (percent). ### Fiscal operations (selected central government figures preserved exactly as presented) - Revenue (Billions of Kwacha): 1,186.5, 2,187.3, 2,643.0, 2,845.9, 3,824.0, 4,555.2, 4,751.7, 5,654.7 (series as table rows). - Taxes (Billions of Kwacha): 978.3, 1,598.2, 2,028.6, 2,140.8, 2,906.7, 3,621.8, 4,110.0, 4,863.8. - Grants (Billions of Kwacha): 149.8, 494.5, 422.1, 529.1, 545.0, 656.5, 499.0, 657.2. - Expenditure (Billions of Kwacha): 1,920.6, 3,671.8, 4,267.7, 4,618.0, 5,501.1, 6,272.3, 6,306.4, 6,881.9. - Overall Balance (incl. grants and discrepancy, Billions of Kwacha): -792.1, -1,484.4, -1,624.8, -1,772.1, -1,677.1, -1,717.0, -1,554.7, -1,227.2. - Primary Balance (Billions of Kwacha): -462.9, -857.5, -756.9, -887.8, -232.4, 98.0, 463.6, 894.6. - Net incurrence of liabilities (Billions of Kwacha): 844.5, 1,484.4, 1,624.8, 1,772.1, 1,677.1, 1,717.0, 1,554.7, 1,227.2. - Total financing (Billions of Kwacha): 844.5, 1,484.4, 1,393.4, 1,381.8, 984.4, 903.3, 910.4, 654.4. - Foreign financing (net, Billions of Kwacha): 213.9, 416.0, 89.3, 67.7, -60.0, 64.4, -113.2, -167.4. - Domestic financing (net, Billions of Kwacha): 569.7, 1,068.3, 1,105.0, 1,314.1, 1,044.4, 838.9, 1,023.6, 821.8. - Memorandum: Nominal GDP (fiscal year, Billions of Kwacha): 8,290.2, 12,698.7, 15,508.3, 16,522.2, 20,788.4, 24,172.2, 27,064.6, 30,056.7. ### Monetary authorities and monetary survey (selected levels and growth rates) - Monetary base (levels, Billions of Kwacha across presented dates): 571, 562, 615, 690, 880, 931, 981, 993, 1,029, 1,173, 1,383, 1,552, 1,726, 1,909 (series). - Net foreign assets of monetary authorities (NFA, Billions of Kwacha): -955, -1,025, -919, -964, -1,008, -1,455, -1,330, -1,257, -1,347, -1,075, -632, -341, -229, -56 (series). - Broad money liabilities (Billions of Kwacha): 2,782, 2,721, 2,804, 3,226, 3,100, 3,630, 3,347, 3,725, 4,015, 4,692, 5,530, 6,207, 6,903, 7,637. - Annual growth of broad money (percent): 38.8, 32.2, 18.2, 36.0, 25.1, 30.5, 23.0, 15.5, 29.5, 29.3, 17.9, 12.2, 11.2, 10.6. - Annual growth of credit to the private sector (percent): 24.1, 24.9, 15.7, 19.4, 17.9, 19.6, 25.4, 15.6, 13.4, 11.2, 5.8, 8.9, 9.1, 10.7. ### Balance of payments (selected aggregates, US$ millions and percent of GDP) - Current account balance (US$ millions): -397.1, -1,023.7, -998.6, -964.1, -950.0, -1,121.6, -1,050.7, -1,005.1, -968.8 (series). - Merchandise trade balance (US$ millions): -651.8, -1,163.9, -1,237.5, -1,143.3, -1,126.3, -1,282.9, -1,247.5, -1,194.0, -1,191.8. - Exports (US$ millions): 937.2, 1,127.7, 1,234.1, 1,253.0, 1,351.1, 1,444.4, 1,513.1, 1,645.5, 1,746.4. - o/w Tobacco (US$ millions): 372.9, 446.0, 530.0, 462.4, 528.4, 537.4, 547.0, 556.8, 568.0. - Imports (US$ millions): -1,588.9, -2,291.6, -2,471.6, -2,396.4, -2,477.4, -2,727.4, -2,760.6, -2,839.5, -2,938.2. - o/w Petroleum products (US$ millions): -239.1, -208.7, -500.0, -196.6, -500.6, -497.5, -500.3, -506.3, -526.7. - o/w Fertilizers (US$ millions): -208.3, -223.7, -235.5, -230.5, -249.4, -253.2, -258.8, -265.6, -273.6. - o/w Project related (US$ millions): -421.8, -467.7, -558.1, -335.8, -318.2, -392.5, -234.4, -238.1, -226.7. - Financial account balance (US$ millions): -396.3, -420.9, -286.0, 58.9, -40.9, 168.3, 154.2, 134.2, 124.5. - Gross reserves (US$ millions): 120.2, 498.5, 393.7, 747.5, 714.2, 967.3, 1,081.1, 1,132.9, 1,135.5. - Financing gap (US$ millions): 0.0, 752.1, 600.3, 275.0, 349.7, 199.9, 236.4, 107.2, 24.3 (series as presented). - Financing gap (percent of GDP): 0.0, 5.8, 4.6, 2.6, 3.1, 1.8, 2.0, 0.9, 0.2. ### Risks and implementation considerations (drawn from presented material) - Large balance of payments needs underpin the request for external financing (ECF) and condition staff support on receipt of financing assurances. - Reserve accumulation remains challenging for the RBM despite episodic inflows (e.g., project-related inflows in June). - Elevated government exposure to the banking sector and continued reliance on domestic financing highlight fiscal and financial sector vulnerabilities. - Tight domestic liquidity and higher policy rates have led to increased interbank and Lombard facility use. *Source: IMF staff assessment and Malawi program documents as presented in the content unit.* ### 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.217.719.9 ### 1. Regulatory Tier 1 capital to risk weighted assets17.017.417.217.719.9 ### Capital Adequacy - Regulatory Tier 1 capital to risk weighted assets: 17.0, 17.4, 17.2, 17.7, 19.9 - Total regulatory capital to risk weighted assets: 21.0, 20.8, 20.7, 20.9, 22.8 - Total capital to total assets (total capital refers to regulatory capital): 16.4, 13.1, 14.3, 11.6, 12.8 ### Asset Composition and Quality - Non-performing loans to gross loans and advances: 6.3, 6.3, 4.5, 6.3, 6.9 - Provisions to non-performing loans: 38.6, 32.9, 32.5, 29.9, 35.9 - Total loans and advances to total assets: 33.2, 31.2, 29.2, 29, 27.1 - Foreign currency loans to total loans and advances: 20.9, 14.7, 11.3, 11.1, 11.5 ### Earnings and Profitability - Return on assets (ROA): 2.7, 3.0, 3.4, 4.1, 5.4 - Return on equity (ROE): 20.5, 22.8, 26.0, 33.3, 41.1 - Non-interest expenses to gross income: 51.8, 49.0, 43.7, 40.3, 34.2 - Interest margin to gross income: 59.6, 65.6, 49.7, 52.2, 51.8 - Non-interest income to revenue: 33.6, 34.4, 31.6, 30.5, 31.8 - Net interest income to assets: 8.4, 8.0, 7.9, 5.4 - Personnel expenses to non-interest expenses: 43.0, 42.5, 43.4, 43.7, 45.5 ### Liquidity - Liquid assets to deposits and short-term liabilities: 58.9, 57.5, 52.5, 53.5, 55.9 - Total loans to total deposits: 54.2, 50.0, 47.9, 42.9, 39.7 - Liquid Assets to total assets: 39.8, 39.6, 37.3, 39.4, 41.3 - Foreign exchange liabilities to total liabilities: 15.8, 16.1, 14.2, 13.8, 15.9 ### Data source - Source: Reserve Bank of Malawi. *Source: IMF staff (content unit: 1mwiea2023002).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks — Likelihood, Impact, and Policy Responses - Intensification of Regional Conflict(s) - Relative Likelihood: High - Impact if Realized: Medium - Description: Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, refugee flows, FDI and financial flows, and payment systems. - Policy Response: Strengthen intra-regional trade among sub-Saharan African countries to overcome supply chain disruptions. - Commodity Price Volatility - Relative Likelihood: High - Impact if Realized: Medium - Description: A succession of supply disruptions (e.g., due to conflicts and export restrictions) and demand fluctuations (e.g., reflecting China reopening) causes recurrent commodity price volatility, external and fiscal pressures, and social and economic instability. - 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 if Realized: High - Description: Supply shocks, high inflation, real wage drops, and spillovers from crises in other countries worsen inequality, trigger social unrest, and give rise to financing pressures and damaging populist policies with possible spillovers to other Emerging Markets and Developing Economies. This exacerbates imbalances, slows growth, and triggers market repricing. - Policy Response: Encourage the authorities to maintain social priority spending in the face of development assistance contraction to build the resiliency of vulnerable populations. Undertake promised reforms in a transparent and equitable manner. Strengthen governance measures. - Systemic Financial Instability - Relative Likelihood: Medium - Impact if Realized: Medium - Description: Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing markets dislocations and adverse cross-border spillovers. - Policy Response: Upfront action to address debt sustainability and avoiding external non-concessional borrowing. Resorting to debt management strategy which relies on grants and highly concessional loans. - Abrupt Global Slowdown or Recession - Relative Likelihood: Medium - Impact if Realized: Medium - Description: Global and idiosyncratic risk factors combine to cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and markets fragmentation. - Policy Response: Encourage the authorities to expand the domestic revenue base in order to compensate for any fall in development assistance. - Note on likelihood definitions: - "low" indicates a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent. - “Short term (ST)” and “medium term (MT)” indicate that the risk could materialize within 1 and 3 years, respectively. ### Regional and Domestic Risks — Likelihood, Impact, and Policy Responses - Delay in Debt Work Out - Relative Likelihood: Medium (assuming that we are moving forward with an ECF request) - Impact if Realized: High - Description: Further delays in debt workout can reduce access to trade credit, foreign exchange swaps, and other short-term loans, worsen foreign exchange shortages and result in difficulties in importing key commodities (fuel, medicine and food) and servicing debt; which would in turn exacerbate dire macroeconomic conditions, poverty, and food insecurity. - Policy Response: Work with debt advisor(s) and take decisive policy action that is needed to restore debt sustainability and close financing gap. - Governance Weaknesses - Relative Likelihood: High - Impact if Realized: High - Description: Overly ambitious capital investment beyond the country’s absorptive capacity and weak institutions can result in a misuse of public resources, resulting in a rise in debt with little impact on growth. Conflicting signals on policy intentions can also adversely affect market participants’ confidence. - Policy Response: Strengthen institutions to address weaknesses in governance, roll out of IFMIS, supported by the authorities’ credible reforms. Strengthen public investment management (PIM). - Delayed PFM Reforms, Lack of Expenditure Control, and DRM - Relative Likelihood: Medium - Impact if Realized: High - Description: Uneven progress of PFM reform, deficient expenditure control, and lack of progress in domestic revenue mobilization (DRM) undermine confidence in budgetary execution and efforts to effectively and transparently manage expenditure within available resources. Re-emergence of arrears resulting from delays in PFM reforms will add to debt distress. - Policy Response: Accelerate implementation of PFM reform programs, strengthen commitment control, maintain DRM efforts, and communicate regularly and transparently on the budget execution within available resources. - Fiscal dominance resulting in deficient conduct of monetary policy - Relative Likelihood: High - Impact if Realized: High - Description: Inability to keep reserve money growth in line with nominal GDP growth can result in pressure on the exchange rate, the RBM’s foreign exchange reserves, and inflation. Conflicting signals on policy intentions can also adversely affect market participants’ confidence. - 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 if Realized: High - Description: More frequent natural disasters with severe damages to infrastructure can amplify supply chain disruptions, inflationary pressures, and water and food shortages. They would also reduce medium-term growth prospects. - Policy Response: Build economic resilience, through human capital investment, and addressing deforestation. --- ### Annex II. Fuel Imports and Mass Motorization — Findings, Drivers, and Policy Options ### Key findings and statistics - Fuel imports grew on average 7.7 percent each year during the past 6 years; from 358 million liters in 2016 to 558 million liters in 2022. - Growth rates exceeded population growth (2.7 percent), urban population growth (4.2 percent) and real GDP growth (3.2 percent). - In U.S. dollar terms, fuel imports grew by an estimated 2.7 times from $212 million in 2016 to $571 million in 2022. - Fuel consumption per capita: 27.9 liters per capita. - PIL (Petroleum Importer Limited) imported 212 million liters in 2022, an 18 percent reduction from 2021. - NOCMA’s imports grew from 209 million liters in 2021 to 301 million liters in 2022. NOCMA now has a 55 percent market share. - Current petrol price: MK1746 per liter ($1.58 per liter at official exchange rate at end-September 2023). - Comparisons at official exchange rates: Tanzania $1.282 per liter; Mozambique $1.350 per liter; Zambia $1.402 per liter; Zimbabwe $1.650 per liter; Germany $2.016 per liter; UK $1.913 per liter. - At the informal market exchange rate the price in Malawi would be around $1 per liter. - International banks stopped confirming letters of credit (LC) since the end of 2022. - PIL enjoys an open credit line of $20 million (on a rolling, monthly basis) with one of Malawi’s main oil suppliers but has struggled to purchase US$20 million per month to service the credit line. - RBM has been selling foreign exchange to meet demand for fuel imports. - Japanese secondhand car imports more than doubled from 2,948 cars in 2016 to 7,368 cars in 2022. - Stock of used motor vehicles tripled from 28 thousand in 2015 to 86 thousand in 2022. ### Drivers and mechanisms - Fuel consumption growth appears rooted in misaligned policies rather than fundamentals. - Increased role of public sector in imports (shift to NOCMA) amid foreign exchange shortages. - Fuel prices are regulated by MERA using a formula based on the official exchange rate, bulk import prices, and a mark-up. Price adjustments have not been regular (last adjustment in second half of 2022). - Rapid motorization driven by large inflows of Japanese secondhand cars and comparatively low vehicle prices in Malawi (reflecting lower taxation levels). Online services facilitate imports. - Mass motorization increases fuel demand and creates political pressure for low and stable fuel prices. - Under-taxation of vehicles and fuel implies a sizeable loss of potential revenue. ### Policy options recommended - Close VAT loopholes and ensure all residents pay the full tax on vehicle imports. - Raise import taxes on vehicles to (at least) the regional average. - Update the fuel price formula, including by applying a market-based exchange rate. - Raise fuel taxes. --- ### Annex III. External Sector Assessment — Assessment, Models, and Policy Responses ### Overall assessment and policy implications - Overall Assessment: The external position of Malawi in 2022 was weaker than the level implied by fundamentals and desirable policies. - Key constraints: Continued struggle to accumulate foreign exchange reserves, periodic shortages of key imports, and a significant debt service burden on existing external debt despite limiting uptake of new non-concessional external debt. - Potential Policy Responses: Develop a diversified and competitive export sector, reduce misalignment of the exchange rate, fiscal consolidation, monetary tightening, strengthen financial supervision, improve governance and reduce corruption, and significant improvement in data compilation and reporting. ### Current Account (CA) - Background: Reported CA deficit narrowed to 3.2 percent of GDP in 2022 from 14.1 percent in 2021 due to reduction in consumption of goods purchased abroad and an increase in informal imports. - Medium-term projection: CA deficit expected to stabilize around 7 percent of GDP. - EBA-Lite model results (2022): - CA-Actual: -3.2 (in percent of GDP) - Cyclical contributions (from model): (-)0.2 - COVID-19 adjustors: (-)0.1 - Additional temporary/statistical factors: 6.0 - Natural disasters and conflicts: (-)-0.1 - Adjusted CA: -9.4 - CA Norm (from model): -6.6 - CA Gap: -2.7 0.3 - o/w Relative policy gap: -0.5 - Elasticity: -0.1 - REER Gap (in percent): 22.3 -2.1 - Notes: Based on the EBA-lite 3.0 methodology. Cyclically adjusted, including multilateral consistency adjustments. Additional statistical adjustment to correct for distortions introduced by the assumed temporary increase in the share of informal goods trade in 2022. Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (0.1 percent of GDP). - Assessment: The EBA-Lite 3.0 CA model suggests Malawi’s external sector position is weaker than implied by medium-term fundamentals and desirable policies. Cyclically-adjusted CA deficit after adjustments stood at 9.4 percent of GDP in 2022, pointing to a gap of 2.7 percent of GDP compared to the cyclically-adjusted CA norm of -6.6 percent of GDP; 0.5pp explained by quantifiable deviations from desirable policies. ### Real Exchange Rate (REER) - Background: REER depreciated by 5 percent in 2022; spread between official exchange rate and market (forex bureau) rates widened significantly in 2022 and remained elevated through the first half of 2023. - Assessment: The EBA-Lite CA model suggests the REER is overvalued—by 22.3 percent—relative to the level implied by fundamentals and desirable policy settings. This is less than the spread between the official rate and the bureau rate, suggesting the rate consistent with fundamentals may lie between the two. The REER model of the gap suggests the exchange rate is closer to fair value, illustrating uncertainty. ### Capital and Financial Accounts - Background: Capital account declined slightly to 6.2 percent of GDP in 2022 (versus an average of 8.8 percent in the preceding five years) but projected to recover in 2023 and remain relatively stable through the medium term. Capital account comprises mostly on and off-budget grants for fixed capital formation. Financial account is volatile and data quality is considered poor. FDI: 0.3 percent of GDP in 2022. - Policy considerations: Under the PMB, Malawi reduced reliance on new non-concessional external debt and an ECF arrangement is expected to catalyze further donor support. The use of the surrender requirement can be considered justified given crisis conditions but should be normalized as conditions improve. Data quality needs improvement. ### FX Intervention and Reserves Level - Background: Gross reserves reached less than 1 percent of GDP in 2022. Situation stabilized in 2023 reflecting RBM’s capacity to retain foreign currency associated with project-related and other flows, but outright purchases remain insufficient to offset sales for strategic imports. Exchange rate regime is ‘de jure’ floating but ‘de facto’ stabilized. - Assessment: Reserve adequacy model for credit constrained economies suggests Malawi should maintain reserves equal to at least 3.9 months of import cover. Malawi’s gross reserves provided 0.8 months of import cover in 2022. - Policy implication: Rebuilding external buffers will require determined central bank effort and successful completion of Malawi’s external debt restructuring strategy. A more sustainable and equitable exchange rate regime would attract more foreign exchange and reduce distortions and incentives for corruption and smuggling. *Source: 1mwiea2023002 - Annex I. Risk Assessment Matrix.* ### Annex IV. Capacity Development Strategy for FY2023/24 ### Annex IV. Capacity Development Strategy for FY2023/24 ### Overview of capacity development support - The Fund continues to provide TA and training to support the authorities’ reforms and help build capacity, coordinating closely with TA from other development partners. - Main CD focus areas: public financial management (PFM), central bank strengthening, governance diagnostic, and statistics (national accounts, BOP, government finance, monetary and financial statistics, export and import price indexes). ### PFM and IFMIS implementation - PFM TA focused on: bank reconciliation, payment efficiency, in-year and year-end financial reporting, budgeting, expenditure control, cash management, SOE oversight, public investment management, implementation of the new IFMIS, and management of fiscal risks. - Key needs identified: - Ramp up implementation of the new IFMIS. - Improve cash management and commitment controls. - Achieve automatic reconciliation with the government’s bank statements. - Improve fiscal reporting, quality, analysis, use and publication of available information. - Structural benchmark example: - Roll out full functionalities of IFMIS to all MDAs (End-March 2023) — Status: Not Met; Moved to a PA for the ECF arrangement. ### Central bank (RBM) TA priorities - TA to RBM has focused on financial sector supervision and Forecasting and Policy Analysis System (FPAS) TA on forecasting and inflation and monetary policy analysis to support modernizing its monetary policy framework. - Going forward, TA should be tailored to: - Deepen interbank foreign exchange market. - Improve central bank monetary operations to better manage money growth. - Strengthen the stress testing framework of the RBM (continued TA recommended). - Operational items and statuses: - Establish an executive Asset Liability Management Committee (ALCO) and fully operationalize it (End-March 2023) — Status: Not Met; Implemented with a delay. - Pre-announcement of forex purchases to allow for market-price formation (End-November 2022) — Status: Not met; Replaced to PA. ### Governance and anti-corruption support - TA will support a governance diagnostic to identify governance weaknesses and corruption vulnerabilities. - Follow-up actions: - Follow-up action report on the COVID-19 spending audit report and EDF’s audit report (End-October 2023) — Status: Moved to a prior action for the ECF arrangement. - Objective: Develop an action plan with specific deliverables and deadlines following the diagnostic. ### Statistics and data transparency - TA has focused on improving the quality and regular reporting of: - National accounts, BOP, government finance statistics, monetary and financial statistics, export and import price indexes. - Additional needs: - Additional efforts to refine Malawi’s external sector data (including reconciling varying sources of fuel imports data). - Failure to capture a growing share of trade activity has made interpretation of Malawi’s balance of payments position increasingly challenging. - Specific deliverables: - The National Statistics Office (NSO) to publish the revised GDP series by production and by expenditure for the base year 2017. - Strengthen public sector debt statistics. ### TA priorities mapped to objectives (summary table) - Public Finance Management - Step up implementation of the new IFMIS as an enabler for key PFM reforms in fiscal reporting, budget preparation, expenditure control, bank reconciliation, cash management, payment efficiency and accountability. - Strengthen management of fiscal risks and oversight of state-owned enterprises. - Improve public investment management systems. - Tax Policy and Revenue Administration - Enhance domestic resource mobilization including through broadening the tax base to include informal sector and rolling out the new Integrated Tax Administration System (ITAS) and supporting fine-tuning and implementation of the mining tax policy regime. - Review and redesign customs clearing controls and procedures, improve VAT compliance and promote integrity within MRA. - Banks supervision and regulation - Strengthen the stress testing framework of the Reserve Bank of Malawi. - Monetary policy operations - Enhance the effectiveness of open market operations. - Governance - Undergo a governance diagnostic and develop an action plan with deliverables and deadlines. - Statistics - Continue improving compilation and dissemination of statistics and staff capacity across national accounts, CPI, PPI, export/import price indexes, fuel imports, BOP, IIP, Government Finance Statistics, public sector debt statistics, and monetary statistics. ### Program performance, risks, and recent macroeconomic indicators - Under the Staff Monitored Program with Board Involvement (PMB) approved November 2022: - Performance under the Second Review (end-June 2023 targets) improved relative to the first review; 5 out of 6 quantitative targets (QTs) were met. - The quantitative target (ceiling) on the stock of monetary base was not met. - Key macroeconomic and program numbers and statements: - Inflation: 28.6 percent (y-o-y) at end-August 2023. - The government requests a four-year ECF-supported arrangement in the total amount equivalent to SDR 131.86 million for the period November 2023-October 2027. - The government requests immediate disbursement of the first tranche, totaling SDR 26.372 million (19 percent of quota). - The President assumed office on 28th June, 2020. - The country is in debt distress and external debt has been assessed as unsustainable according to the IMF and World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF). - Notable program-level targets and outcomes (excerpted figures from program tables): - Monetary base (ceiling on stock) examples: 590.2; 607.6; 578.5; 633.3; 0.096; 85.6 (as appearing in program tables). - Domestic revenue (floor) examples: 1,202.7; 1,230.6; 1,603.5; 1,658.5; 418.1; 488.6; 834.6. - Social spending (floor) examples: 503.7; 610.4; 669.3; 868.1; 203.2; 208.6; 409.8. - Change in net international reserves of the RBM (floor) examples: 141.3; 122.7; 116.0; 7.0; -23.8; -16.3; 87.9; 120.2; 150.4. - Program exchange rate (kwacha per US$): 1,026.4. - Program implementation notes: - Several structural benchmarks under the PMB were not met and were moved to prior actions or to the ECF arrangement (examples include IFMIS roll out, Cabinet approval of an arrears clearance and prevention strategy, and pre-announcement of forex purchases). - Raising Liquidity Reserve Ratio (LRR) in April 2023 increased commercial banks' deposit holdings at the RBM, which had adverse implications for meeting monetary base targets despite RBM open market operations to mop up liquidity. *Source: Annex IV. Capacity Development Strategy for FY2023/24 (as provided).* ### 4. This Memorandum presents the economic and financial policies that the Government ### 4. This Memorandum presents the economic and financial policies that the Government will implement under the ECF-supported arrangement ### Overarching objectives and commitments - Overarching objective: restore macroeconomic stability to build the foundation for sustainable and inclusive growth as envisaged in Malawi 2063. - Near-term priority: steadfast implementation of ambitious reform efforts to address elevated BoP pressure and improve lives of the Malawian people. - Commitments under the ECF-supported program: - Deliver on agreed program targets, including through the prior actions. - Make tangible and expedited progress on the debt restructuring process to fully restore debt sustainability in line with the parameters that underpinned the ECF request. - Implement the FY2023/24 budget as passed and submit the FY2024/25 budget in line with the macroeconomic framework. - Implement a Contingency Plan to address any challenge to the baseline fiscal path. - Reserve Bank of Malawi (RBM) commitment to tighten monetary policy to help contain inflationary pressures. - Strengthen transparency, accountability, and digitization of public financial management (PFM); enhance autonomy and governance of the RBM; and strengthen foreign exchange reserves position and management. ### Recent economic developments — key findings and indicators - Real GDP growth: - Projected at 1.6 percent in 2023, down from 1.7 percent at the time of the first PMB review. - Growth influenced by continued shortages of foreign exchange and tighter monetary policy, offset somewhat by stronger-than-originally-expected tobacco exports. - Inflation: - Expected to average 30.3 percent in 2023, up from 24.8 percent projected at the time of the first review. - RBM increased the policy rate by another 200 basis points in July 2023, bringing it to 24 percent. - Food prices decelerated more slowly during the 2023 harvest season; non-food inflation began to slow. - Program ownership and implementation: - Authorities stepped up engagement with staff and data sharing. - Revenue broadly coming in on target; expenditure contained. - Money growth flattening relative to a year ago; foreign exchange beginning to return to the system. - Performance under the Staff Monitored Program: - End-June Quantitative Targets (QTs) and Indicative Targets (ITs): five out of six end-June and continuous QTs met; all three end-June ITs met. - Structural Benchmarks (SBs): seven out of 10 SBs were not met, though some progress occurred. - Monetary target not met because RBM could not mop up sufficient liquidity through open market operations. - Fiscal outturns: - Fiscal overall balance reached MWK1.5 trillion (11.7 percent of GDP) in FY2022/23. - Fiscal outturns on track to contain overall deficit for FY2023/24 and FY2024/25 at MWK1.8 trillion (a decline to 10.7 percent of GDP) and MWK1.7 trillion (a further decline to 8 percent of GDP), respectively (FY2023/24 paragraph vs later text shows MWK1.8 and MWK1.7 with 11 percent and 8 percent — preserve both presentations where they appear). - External sector and reserves: - Current account deficit narrowed to 3.2 percent of GDP in 2022 from 14 percent of GDP in 2021 partly due to a large devaluation and import compression. - Readily available gross international reserves: $156.1 million at end-September 2023, up from $120 million at end-2022. - RBM restarted purchases of foreign exchange via regular auctions. - Spread between US$/Kwacha bureau and official rate widened to over 50 percent. - Banking sector: - Broadly stable and well capitalized; meets minimum regulatory requirements for capital adequacy and liquidity ratios. - Industry-wide non-performing loans remained above recommended limit of 5.0 percent, at 7.0 percent in July 2023, up from 4.7 percent in July 2022. - High exposure to government securities is being monitored. - Food security risks: - High and increasing due to climate-induced shocks, lingering spillovers from the war in Ukraine, and destruction from Cyclone Freddy. ### Outlook — projections and assumptions - Growth projections: - Growth expected to recover to 1.6 percent in 2023 (from 0.8 percent in 2022). - Projected to reach 4.5 percent in the medium-term (one paragraph) and around 4.6 percent in the medium-term (another paragraph) as macroeconomic stabilization and reforms materialize; both figures appear in the text. - Inflation projections: - Average year-on-year inflation expected at 30.3 percent in 2023. - Projected to decline towards about 6.5 percent in the medium term, supported by well anchored monetary and fiscal policy, movements of the currency, passthrough to inflation as RBM builds reserves and winds down currency swap operations. - External position and reserves: - Current account deficit expected to widen to 7.6 percent in the year (with imports still artificially compressed), before settling around 7.4 percent in the medium term. - Target to accumulate gross reserves to reach $394 million by December 2023. - Gross reserves projected to recover to over 4 months of imports in the medium term. - Reserve accumulation path assumes external financing gap filled with non-debt creating flows (debt relief or grants) and concessional loans. - Risks: - Significant. Without sufficient external buffers, BOP pressures may intensify. - Further weather-related shocks could disrupt activity. - War in Ukraine could exacerbate supply chain disruptions and surges in fuel, food and fertilizer prices, increasing financing needs and food security risks. ### Program objectives and policy anchors - Program objectives: - (i) restoring macroeconomic stability, - (ii) enhancing fiscal discipline, - (iii) maintaining price stability and financial soundness, - (iv) rebuilding external buffers, - (v) restoring debt sustainability and closing the financing gap, - (vi) addressing weaknesses in governance. - Program anchored by Malawi 2063 and its First 10 Year Implementation Plan (MIP-1). ### Fiscal policy stance and targets - Fiscal strategy: - Regain fiscal discipline and restore macroeconomic stability via enhanced revenue collection, expenditure management, and improved transparency and monitoring of budget execution. - FY2023/24 and FY2024/25 budgets: - FY2023/24 budget aligned with program macroeconomic framework; anchors spending to revenue projections so net domestic financing is contained. - Budget aims for fiscal adjustment of about 1.9 percentage points (ppt) of GDP in FY2023/24. - Envisaged reduction of the domestic primary deficit is 0.8 ppt of GDP in FY2023/24. - Preliminary data suggest domestic primary fiscal balance roughly on track to contain overall deficit for FY2023/24 and FY2024/25 at MWK1.8 and MWK1.7 trillion (a decline to 11 percent of GDP and a further decline to 8 percent of GDP, respectively). - Contingency Plan developed to close financing gap if baseline fiscal path faces challenges (PA). - Fiscal adjustment size and timing: - Aim to reach a debt stabilizing primary fiscal balance as soon as possible. - Envisaged fiscal adjustment of about 1.7 ppt of GDP per year (in terms of domestic primary balance), or a cumulative 6.7 ppt over four years from FY2023/24. - Excluding RBM recapitalization, adjustment would be about 1.3 ppt per year over four years. - FY2023/24 consolidation focus: - (i) step up implementation of Domestic Revenue Mobilization Strategy (DRMS); - (ii) rationalize and prioritize expenditures; - (iii) introduce and implement sound commitment control measures; - (iv) implement well targeted measures to support low-income households. - Quarterly allotments and expenditure controls: - Announce quarterly allotments aligned with macro-framework and outturns for revenue, grants and expenditure; allow MDAs to commit up to this amount through IFMIS. - MDA payments limited to monthly cash releases aligned with allotments to reduce risk of new payment arrears. - Extension of practice to all MDAs announced in FY2023-24 Budget Policy Statement and being executed. - Commit to improve information, toolkits and communication channels to align allotments with timing of purchases/expenses; define calendar for issuing allotments and funding releases. ### Revenue mobilization and specific tax measures (DRMS and budget measures) - DRMS objective and institutional steps: - DRMS launched in December 2021 with objective to increase revenue by 5 percent of GDP over five years. - DRMS incorporated into Malawi Revenue Authority’s (MRA) strategic plan. - DRMS Monitoring Committee formed in FY2022/23 comprising MoFEA, MRA, Accountant General, Immigration Department, Malawi Police Service and Registrar General. - Specific revenue and tax measures being implemented or planned: - Advance income tax (AIT): - Introduced in May 2022 at rate of 3 percent on commercial imports, raising MWK6 billion. - In FY2023/24, AIT rate increased to 10 percent and extended to non-compliant exporters without a tax clearance certificate. - Electronic tax stamps: - Requirement to affix/print electronic tax stamps on alcohol (spirits, whiskey, malt beer, opaque beer), energy drinks, flavored water, carbonated soft drinks, opaque non-alcoholic drinks and cigarettes. - Expected to be operational in FY2024/25. - New stamp duties: - New stamp duties to apply to various instruments, including motor vehicles, in FY2023/24. - Electronic stamp duty system introduced in 2023 and extended to motor vehicles, transfer of property and shares. - Taxes for small businesses: - Presumptive tax introduced for small businesses with annual turnover less than MWK12.5 million. - Block Management System (BMS) rollout in commercial centers: Blantyre, Mzuzu, Limbe and Lilongwe; plan to roll out to all major cities by December 2024. - Tax incentives: - Establishment of Special Economic Zones announced in FY2022/23 to catalyze foreign investment. - System of tax incentives under review to streamline incentives; recommendations to be incorporated in new Taxation Act, Value Added Tax Act, and Customs and Excise Act to be submitted with FY2024/25 budget. - Streamlining will not contradict SBs committed under the program. - Bank Supernormal Profits Tax: - Additional income tax of 10 percent for bank profits above MWK10 billion. - Profits below MWK10 billion taxed at 30 percent; profits above MWK10 billion taxed at 40 percent. - Temporary measure to be reviewed next fiscal year. - Value Added Tax (VAT) changes: - Standard rate VAT introduced on a list of products including exercise books with hard covers; rye flour; other cereal flour; groats and meal of wheat and other cereals; rolled or flaked grains of oats or other cereals; other worked grains of oats or other cereal; cereal, germ, whole rolled flaked or ground; roasted malt; and malt roasted of barley, oats, rye, sorghum or millets. - Repeal VAT relief for current and former politicians, senior public officials, judges and similar privileged individuals and groups (SB). - Ensure every supply of motor vehicle is standard rated for VAT purposes (SB). - Eliminate VAT exemptions and zero-rating for business inputs (SB) and repeal VAT relief for building materials by July 2024 (SB). - Rolling out VAT module in Msonkho Online (Integrated Tax Administration System) has enhanced detection of: - discrepancies between Output VAT on filed tax returns by suppliers and Input VAT by buyers exaggerating VAT refunds; - non-reporting of Output VAT sales in Msonkho Online to suppress VAT revenue; - non-registered taxpayers charging VAT and making fraudulent VAT claims; - re-assessment of corporate income tax and VAT refunds. - MRA engaging concerned taxpayers to reclaim illegitimate VAT refunds and collect evaded tax revenue. - Withholding tax on contractors: - Increased from 3 percent to 10 percent to improve compliance in construction industry. - Rental income tax enforcement: - Project to register all houses in cities and towns and start enforcing payment of rental income tax. ### Tax administration and governance measures - Msonkho Online (Integrated Tax Administration System): - Launched in December 2022. - Not all modules operational (registration, payment, filing); plan to operationalize outstanding modules by end-March 2024 (SB). - Legal and institutional measures: - Implement the Tax Administration Act and establish the Revenue Appeal Tribunal by December 2023. - Publish MRA’s corporate strategic plan and annual reports to enhance transparency. *Source: 1mwiea2023002 - 4. This Memorandum presents the economic and financial policies that the Government will implement under the ECF-supported arrangement.* ### 24. To improve non-tax revenues, we have implemented measures, including ensuring that ### 1mwiea2023002 - 24. To improve non-tax revenues, we have implemented measures, including ensuring that ### Non-tax revenue measures and expected impacts - Implemented measures to ensure SOEs comply with the PFM Act by opening a holding account with the RBM. - Ensured MDAs remit non-tax revenue collection to MG1 account through their departmental receipts’ accounts. - Increased some fees and charges to reflect, where possible, full cost recovery; more increases to fees and charges are planned. - Planned additional measures: automating payment systems and business processes of MDAs; enforcing the dividend and surplus policy. - Expected benefits: centralization of financial transactions, enhanced efficiency and transparency in government revenue collection, improved accountability and reconciliation, reduced revenue leakages, and improvement of non-tax revenue contribution to domestic revenue. ### National payment system and e-payments gateway - Enabling interoperability across bank payment channels (Point of Sales (POSs), debit and credit cards, customer accounts, and mobile network operators’ wallets) through a national switch as the backbone of the national electronic payments (e-payments) gateway. - An international firm that developed the switch has been re-engaged to provide an e-payments solution and is working on operationalization of technical and functional specifications for infrastructure and software installation. - The E-government department is ensuring systems of major non-tax revenue MDAs are technology-ready to be connected when the gateway rolls out in March 2024. - Anticipated outcome: digitization will centralize transactions and reduce leakages, increasing non-tax revenue collection. ### Expenditure prioritization and social protection - Emphasis: improve efficiency of public spending and reduce non-critical spending while supporting the vulnerable and investing in infrastructure. - Affordable Input Program (AIP) reforms: - Implemented first phase: National Integrated Social Safety Net Program using the Unified Beneficiary Register to reduce duplication in beneficiary access. - Measures to prevent cost overrun in AIP include increment to farmer contribution, capping the Government Subsidy, and fast-tracking beneficiary reform. - Commitment to phase out the AIP; moved lowest-income farmers to social protection programs and higher-income farmers to commercial agriculture programs (supported by development partners). - Wage bill rationalization: - Personnel Audit carried out in 2021 provided recommendations. - Commitments: flush out ghost workers; freeze new hiring into public service except critical areas (health and education); strengthen approval processes to payroll and pension changes within existing HRMIS. - Social spending floor: - Established as an indicative target (IT) under the program to safeguard social protection and protect the vulnerable. - Comprises Government contribution to health and basic and secondary education spending, and social safety net spending including the Social Cash Transfer Program (SCTP) and AIP. ### Oversight and reporting of State-Owned Enterprises (SOEs) - Strengthened oversight due to weak financial reporting posing budget and public debt risks. - Actions: - Keep close track of government-guaranteed debt of SOEs. - Detailed reporting to Parliament for FY2021/22 for high-risk SOEs: Blantyre Water Board, ESCOM, ADMARC, NOCMA and EGENCO. - Quarterly monitoring of management accounts of relevant SOEs. - Continue preparing an annual consolidated report of all SOEs in compliance with the new PFM Act. ### IFMIS implementation, arrears, commitment control, and PFM reforms - IFMIS rollout and usage: - New IFMIS started in July 2021; as of end-August 2023, all MDAs but two are included in IFMIS (PA). - Exploit IFMIS to enable PFM reforms: interim Electronic Funds Transfer (EFT), improved budget preparation, cash management, commitment control, banking arrangements, accountability, and payment efficiency. - Domestic arrears: - Verification completed for arrears of national budget entities from 1st July 2017 to 30th March, 2022. - In discussion with the Auditor General on unverified arrears and on inspected but not verified arrears. - Arrears Clearance and Prevention Strategy to be submitted to Cabinet by end-December 2023 and approved by end-March 2024 (SB). - Settling arrears within fiscal framework and available resources: paying amounts below MWK100 million through regular budget and issuing zero coupon promissory notes for amounts above MWK100 million. - Institutional improvements: i) assign monitoring of in-year overdue payments to Accountant General Department; ii) ensure expenditures accounted and converted into debt when issuing promissory notes; iii) develop and maintain up-to-date database on arrears by December 2023; iv) establish by March 2024 a Guiding Framework for issuance of promissory notes with limits and reporting requirements. - Prevent further arrears via quarterly allotment, enhanced commitment controls, contract management module within IFMIS; promote prepaid meters for MDAs and rehabilitate water reticulation systems to reduce water wastage. - Contract management module of IFMIS: - Started mid November 2022: implemented quarterly commitment limits (backed by monthly payment fundings) and rolled out contract management module to two MDAs (Ministries of Health and Transport). - Plan: increase pilot MDAs by 10 in January 2024 and expand in phases during FY2024/25; finalize roll out to remaining MDAs by end-FY2024/25. - Implementation steps: i) capture all existing contracts/commitments in IFMIS; ii) issue quarterly spending limits and monthly payment funding; iii) require all financial transactions entered through IFMIS at commitment stage. - Expand IFMIS transaction coverage from April, 2023 to include items previously outside IFMIS: actuals of all revenue, domestic debt issuance receipts and all debt servicing payments, transfers to local councils, non IFMIS MDAs, advances to embassies; capture development partner–financed project expenditure (Development Part 1); agree codes for MRA tax refunds and banking arrangements for budget support grants and loans. - Configure, test, and accept by March 2024 the solution for Malawi Defence Force (MDF) and State Residences to transact in SAP-IFMIS. - Complete revenue module rollout to all major revenue collecting agencies and roll out revenue, project systems, asset management and recognition, and contract management modules during FY2024/25. - Bank account reconciliation and MG1: - Reviewed bank account structure for public debt for PFM Act compliance. - Step up reconciliation within IFMIS of the MG1 bank statement by finalizing configuration and supply of electronic bank statements in specified format with IMF TA support. - By end-FY2023/24 commitments: i) upload to IFMIS all MG1 payments and receipts transacted outside IFMIS since July 2021; ii) develop business processes and banking arrangements to prevent future direct deposits to or payments from MG1; iii) establish reconciliation of current transactions while reducing SAP-IFMIS backlog and accounting for balance migrated from EPICOR-IFMIS. - RBM requested to furnish electronic bank statement to MoFEA by 31st October 2023. - Enhance commitment controls: - Since July 2023, all but two MDAs operate under new commitment controls framework. - Actions: provide guidance and trainings to MDAs; capture procurement plan information to inform quarterly allotments; by end-FY2023/24 establish direct lines of contact with key MDAs for near-term cash needs; draft new Treasury Instructions to institutionalize new budget execution process; monitor implementation through regular reports. - Cash management and debt issuance: - Strict adherence to budget execution process stipulated in the flow chart shown in the MEFP at PMB approval in November 2022. - Electronic Funds Transfer (EFT): - Expenditure exclusively done through EFT for government payments across all MDAs. - Government to cease acting as a participating bank in the interbank payment system in Automatic Transfer System (ATS) when RBM’s Flexcube upgrade is finalized by 31st March 2024. - Consolidated fiscal reports and transparency: - Expanding IFMIS coverage to include all national government cash inflows and outflows, including all MG1 and public debt issuance and servicing transactions; recording missing data from July 2021 to March 2024. - Auto-reconciliation of government bank statements has started; compiled domestic budget execution data for FY2023/24. - Publish unaudited IFMIS-generated comprehensive fiscal reports on MOFEA website starting in FY2023/24 (the “Dashboard” Text Tables 2 and 3) to enhance transparency and accountability (SB). - From FY2024/25, reports will be backed by reconciled bank statements submitted within three weeks from the end of each month. - Improve recording of capital expenditure by closing data gaps on project expenditures financed by development partners. - PFM Act legal framework: - New PFM Act passed in March 2022. - Draft Regulations and Treasury Instructions shared with IMF and development partners for feedback. - Finalize Regulations by October 2023 and Treasury Instructions by June 2024. ### Key fiscal dashboard figures (Text Table 2: In billions of MWK, YTD as of September 30, 2023) - CodeDescription - Appropriation (FY 23/24 Budget) - Quarterly Allotment 3/ - IFMIS Commitments - IFMIS Outturns 1/ - Revenue255412751377 - Tax Revenue2128987992 - Grants312211244 - Other Revenue11477141 - Total Expenditure3779197416801584 - 21Compensation of Employees917456450448 - 22Use of Goods & Services548344382348 - 24Interest915400414414 - 26Grants303132191179 - 27Social Benefits249141177140 - 28Other Expense161698 - 31Non Financial Assets8314865647 - Overall Balance-1225-699-208 - Domestic Financing 2/1103411243 - Net Borrowing from Reserve Bank238 - Net Borrowing from Commercial Banks-17 - Net Borrowing from Non-Bank Sector22 - Unreconciled Financing121288-36 - Notes: - 3/ Quarterly allotments are the sum of Q1 2023 and Q2 2023 Allotments - 2/ Domestic Financing outturns are taken from change in net domestic borrowing at cost value relative to start of fiscal year. - 1/ Revenue outturns are taken from Quarterly Fiscal Tables, data are through Q2 2023 ### Monetary policy and financial sector stability - Monetary policy stance: - Tighten forcefully and proactively as needed to contain inflationary pressures; program anchored on containing reserve money growth. - Maintain a tight monetary policy stance by setting the monetary policy rate to ensure positive real interest rates. - Contain RBM’s net claims on Government in line with program targets via greater use of repurchase agreements for OMOs and less favorable terms for RBM’s rediscounting facility. - Strengthen RBM capacity to manage excess liquidity via reserve requirement changes, sale of securities, and OMOs. - Financial sector stability: - Risks: increased banking sector exposure to public sector and hikes in interest rates. - Ongoing actions: monitor banking system’s exposure to government through securities; reassess loan and collateral quality needs of commercial banks. ### Rebuilding external buffers and external sector policies - FX and reserves strategy: - RBM restarted purchases of foreign exchange via monthly auction in June 2023 to encourage price discovery. - Allow greater flexibility in exchange rate to substantially reduce FX shortages. - Increase effectiveness and transparency of FX operations going forward (PA). - Rebuild foreign exchange reserves to reach at least 3.9 months of import cover in the medium term; RBM will purchase FX as necessary to deliver this path while limiting sales and becoming on average a net purchaser. - Monitor short-term foreign currency drains to maintain external buffers sustainably. - Monitor and mitigate FX swap rollover risks and lower swap costs by winding down FX swaps with non-residents to reduce open swap position in the medium term. - Ensure government–RBM coordination to support external sector goals; adherence to agreed fiscal program to support well-functioning FX market. - Enhance foreign exchange earnings through Agriculture, Tourism and Mining (ATM) sectors per MIP-1: - Agriculture: operationalization of mega-farms to increase exports and promote import substitution. - Tourism: promote infrastructure and step up tourism marketing to attract international tourists. - Mining: explore opportunities and accelerate Mining Development Agreements. - Measures to contain demand for fuel and motor vehicle imports: - Gazette specific tax regime on secondhand motor vehicles (PA). - Repeal preferential treatment for motor vehicles and VAT relief for privileged individuals and groups (SB). - Reinforce automatic price adjustment mechanism aligning local fuel prices to international fuel prices. - Additional measures to be implemented as soon as possible but no later than passage of the FY2024/25 budget: (i) raise import duty and excise tax on motor vehicles to raise price to (at least) the regional average; (ii) raise fuel taxes. *Source: 1mwiea2023002 - 24. To improve non-tax revenues, we have implemented measures, including ensuring that (PDF chapter).* ### 32. We maintain four multiple currency practices (MCP) and three exchange restrictions ### 32. We maintain four multiple currency practices (MCP) and three exchange restrictions ### Multiple currency practices and exchange restrictions - We maintain four multiple currency practices (MCP) and three exchange restrictions subject to approval under Article VIII. - These measures are temporary and maintained mostly for balance of payments reasons. - They are nondiscriminatory and do not give us an unfair competitive advantage. - Commitment: eliminate these measures during this ECF-supported program as soon as our balance of payments conditions permit (SB). - Complementary actions: efforts to eliminate balance of payments problems and strengthen our tax administration system will facilitate the elimination of these measures. - Policy commitment: We will not impose or intensify existing restrictions on payments and transfers for current international transactions or adopt new or modify MCPs. ### Restoring debt sustainability — objectives and targets - Malawi’s overall and external public debt is assessed to be in debt distress. - Restoring public debt sustainability is the top priority to support macroeconomic stability and lay the foundation for sustainable and inclusive growth. - Debt strategy pillars: - Bring external public debt back to a moderate risk of debt distress in the medium term through a combination of policy adjustment and the necessary debt treatment. - Target all external DSA solvency and liquidity ratios to cross their respective thresholds under the baseline in the next five years: - baseline of the 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% in the medium-term - Follow best practices in sovereign debt restructuring, taking into consideration inter-creditor equity and comparability of treatment of all official bilateral creditors; engage with private creditors in good faith. - Seek from the largest bilateral creditors, China and India, specific and credible assurances that are in line with program parameters; continue working with all creditors to achieve suitable debt treatment consistent with program parameters and resolve debt to all official bilateral creditors on comparable terms. - Mobilize non-debt creating flows, including external grant support from development partners, to ensure the external and fiscal financing gaps are closed over the medium term. ### Debt restructuring negotiations and arrears - We continue to pursue good faith negotiations with commercial and official bilateral creditors and are in arrears on commercial debt while these discussions continue. - Commitment: commercial debt will be repaid or restructured only on terms that are consistent with the parameters of the ECF-supported arrangement. - We have provided IMF staff with a timeline for completing the restructuring process; this timeline will form part of the assessment at the next financing assurances review. - Understanding: as long as arrears are outstanding, approval of this arrangement and each Fund disbursement is subject to a financing assurances review in which the Board considers, inter alia, whether adequate safeguards remain in place for further use of Fund’s resources and whether Malawi’s adjustment efforts are undermined by developments in creditor-debtor relations. ### Strengthening debt management, monitoring, recording, and reporting - Commitment to pursue public finances consistent with debt sustainability and implement measures to strengthen debt management, monitoring, recording and reporting. - Specific measures: - 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, that applies to Malawi as required by the Fund’s Debt Limit Policy. - Adopt best practices in data reporting and transparency; fulfil reporting duty to the Fund during Staff’s program review or upon request. - Continue to integrate public debt data into IFMIS. - Continue to 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. - Rebuild external buffers and improve liquidity by continuing to implement the National Export Strategy and aim to reduce Malawi’s dependance on agricultural exports. ### Governance reforms and safeguards - Fiscal transparency, strengthening RBM’s autonomy, governance arrangements, and reserve management are program cornerstones. - Actions: - Continue to develop and refine timely, accurate and reliable fiscal data and make it readily available to the public on the MoFEA website. - RBM Board established an Asset Liability Management Committee (ALCO) in accordance with recommendations of the 2021 Safeguards Assessment Report. - Developed a revised framework for management of foreign reserves in accordance with recommendations of the 2021 Safeguards Assessment Report and shall ensure its endorsement by the Board. - Discussions with Fund staff on prepared draft amendments to the RBM Act are in progress; once finalized, submit the amendments to parliament as recommended in the 2021 Safeguards Assessment Report (SB). - To strengthen accuracy of RBM’s program monitoring data: - instituted a policy to have external auditors verify NIR data within 10 weeks after each test date and will ensure timely submission of the audited NIR results - continue to submit monetary data through standard reporting forms to the Fund on a regular basis ### Addressing misuse of COVID-19 funds and anti-corruption measures - Publish a follow-up report related to the COVID-19 spending audit report, detailing corrective actions and measures to pursue and respond to audit findings, including follow-up of alleged misappropriation of funds as well as the coverage of a second audit findings (PA). - Since 2021, all payments across Government MDAs are exclusively being done through Electronic Funds Transfer (EFT); payment of allowances is linked to employment number and one bank account number. - Operationalized the Financial Crimes Court to fast-track prosecution of financial related crimes and removed the requirement by the Anti-Corruption Bureau (ACB) to obtain consent from the Director of Public Prosecution to effect arrests for suspected corruption cases. - PPDA Act is undergoing review to provide for declaration of beneficial ownership in the bidding process and to address anti-competitive practices by bidders; review will require Procuring and Disposal Entities (PDEs) to scrutinize highly priced bids in relation to indicative prices of the PPDA. - ACB has signed Memorandum of Understanding with selected MDAs to facilitate data and information sharing; ACB is enhancing anti-corruption initiatives by setting up satellite offices, intends to undertake lifestyle audit and is formulating Whistle Blowers Protection Bill. ### Export Development Fund (EDF) reforms and contingent liabilities - Governance weaknesses at the Export Development Fund (EDF) pose a risk to the government in terms of contingent liabilities. - EDF is a wholly owned subsidiary of RBM; Government is working on modalities to merge EDF with Malawi Agricultural and Industrial Investment Corporation, PLC (MAIIC) (SB). - Publish a follow-up action report on EDF’s audit recommendations. - Reforms undertaken: - Closed the Commodity Market Making Unit which was one of the key sources of the credit losses (SB). - Strengthened deal origination by decoupling origination from credit risk assessment, established a peer review committee, and introduced a fully-fledged treasury function. - Established an enterprise-wide risk management function, including recruitment of an expert to mitigate operations risks. - Developed policies and procedures including Liquidity and Funds Management Policy, Counterparty Guidelines, Risk Management Policy, Risk Appetite Policy, Pricing Guidelines, and Environmental and Social Policy. - Expanded the Board, established various working internal committees, and introduced a balanced scorecard system. ### Public procurement, diagnostics, and follow-up - Renewed commitment that public procurement is conducted transparently and in full accordance with proper procedures and the PFM Act. - Maintain a repository of contracts and make available to Fund staff a full repository of contracts that would give rise to actual or contingent external debt liabilities of the government and the RBM. - Commit to following appropriate public procurement procedures and adhering to limits on contracting and guaranteeing nonconcessional and concessional external debt set forth in the ECF-supported program. - Requested a governance diagnostic technical assistance from Fund staff to identify weaknesses in regulation, legislation, and compliance; will undergo the diagnostic over the next 9-12 months and will follow up on the recommendations (SB). ### Broader anti-corruption strategy and implementation timelines - Government adopted a strategy to combat corruption with four components: (a) Pursue; (b) Prevent; (c) Protect; and (d) Prepare. - To facilitate implementation: - Office of the Director of Public Asset Declarations (ODPOD) will digitize asset declarations and establish an interface system between ODPOD and Anti-Corruption Bureau (ACB) to facilitate lifestyle audits by September 2023. - Strengthen collaboration among the Financial Intelligence Agency (FIA), the Director of Public Prosecutions (Asset Forfeiture Unit) and ACB in tracing assets belonging to suspects for freezing and subsequent confiscation by September 2023. ### Transparency of strategic imports - Government will ensure publication of strategic imports data on a timely manner. - National Statistics Office (NSO) will be empowered by the Ministry of Finance and Economic Affairs to work closely with institutions that collect data on fuel (such as MERA), fertilizers for the AIP (Ministry of Agriculture), and pharmaceuticals (Central Medical Store Trust) to ensure monthly Trade Bulletin provides reconciled data on imports of these strategic commodities. - NSO will reflect data of these strategic commodities on separate line within their monthly Trade Bulletin for close monitoring purposes (SB). *Source: 1mwiea2023002 - 32. We maintain four multiple currency practices (MCP) and three exchange restrictions* ### 43. The macroeconomic policies under the ECF-supported arrangement will be ### 43. The macroeconomic policies under the ECF-supported arrangement will be ### Macroeconomic program overview - The ECF-supported arrangement is complemented by a strong structural program to increase the efficiency and effectiveness of economic policies. - Performance criteria (PCs) and indicative targets (ITs) under the ECF-supported arrangement are outlined in Table 3. - Prior Actions are summarized in Table 4; Structural Benchmarks are summarized in Table 5. - Attachment II: Technical Memorandum of Understanding dated November 8, 2023, sets out definitions, targets, adjustors, and reporting requirements. ### Performance Criteria and Indicative Targets (Table 3 — selected items) - Target types and test dates: - “PC” means Performance Criteria and “IT” means Indicative Target. - The PC test date for the 1st Review is end-March 2024. The test dates for the future review will be in end-September 2024. End-December 2023 and end-June 2024 targets are ITs. - I. Monetary targets (billions of kwacha) — Monetary base (ceiling on stock) (upper bound) (IT): - End-Dec: 958.7 - End-Mar: 1,010.2 - End-June: 1,023.1 - End-Sept: 1,060.3 - I. Monetary targets — Monetary base (ceiling on stock) (PC applies to upper bound only): - PC (upper bound): - End-Dec: 930.8 - End-Mar: 980.8 - End-June: 993.3 - End-Sept: 1,029.4 - I. Monetary targets — Monetary base (ceiling on stock) (lower bound): - End-Dec: 902.9 - End-Mar: 951.4 - End-June: 963.5 - End-Sept: 998.5 - II. Fiscal targets (billions of kwacha): - Domestic revenue (floor) (IT): - End-Dec: 1,621.0 - End-Mar: 2,223.0 - End-June: 747.0 - End-Sept: 1,494.0 - Domestic primary fiscal balance (floor) (PC): - End-Dec: -155.7 - End-Mar: -94.1 - End-June: 95.5 - End-Sept: 57.0 - RBM financing of central government (ceiling) (IT): End-Dec, End-Mar, End-June, End-Sept: 0 0 0 0 - New domestic arrears (ceiling) (IT): End-Dec, End-Mar, End-June, End-Sept: 0 0 0 0 - Social spending (floor) (IT): - End-Dec: 686.7 - End-Mar: 910.8 - End-June: 290.0 - End-Sept: 582.8 - III. External sector targets (US$ millions, unless otherwise indicated): - Change in net international reserves of the RBM (floor) (PC) (cumulative since beginning of calendar year): - End-Dec: 253.0 - End-Mar: 68.7 - End-June: 183.3 - End-Sept: 221.8 - Accumulation of external payments arrears (ceiling) (PC): End-Dec, End-Mar, End-June, End-Sept: 0 0 0 0 - Contracting or guaranteeing of nonconcessional external debt (ceiling) (PC): End-Dec, End-Mar, End-June, End-Sept: 0 0 0 0 - Contracting or guaranteeing of concessional external debt (ceiling) (IT): - End-Dec, End-Mar, End-June, End-Sept: 70 70 0 0 - Memorandum item: Program exchange rate (kwacha per US$) — program exchange rates are those that prevailed on end-September 2023. ### Prior Actions (Table 4 — selected actions, objectives, and status) - External Sector Reforms: - RBM to announce changes to its FX operations (increase frequency of purchase operations to at least on a fortnightly basis; allow FX intermediaries to trade at freely negotiated rates; conduct FX sales via auction if sales occur). - Objective: increase transparency, broaden participation, facilitate greater flexibility in the official exchange rate, reduce distortions and opportunities for corruption. - Status: Draft received on October 13. - Submit to IMF staff audits of NIR from end-December 2022, end-March, and end-June 2023. - Objective: foster transparency and monitoring of foreign exchange reserves; improve data quality. - Status: Draft audit reports received on October 21. Finalized reports submitted on October 27. - Fiscal Reforms: - Roll out core functionalities of IFMIS to key MDAs with mandatory use (include capturing contracts/commitments, issuance of quarterly spending limits and monthly payment funding, require all financial transactions to be entered through IFMIS at commitment). - Objective: interconnectedness; internal control over transactions; eliminate duplications; achieve comprehensive coverage; reduce vulnerabilities to corruption. - Status: Met. - Prepare a contingency plan to close the financing gap in case the baseline fiscal path faces implementation challenges. - Objective: minimize fiscal risks associated with shortages in domestic revenue and financing. - Status: Submitted on October 30. - Implement the specific tax on second-hand motor vehicles. - Objective: enhance revenue and improve tax and customs compliance culture; improve transparency in duty rates and contain secondhand car imports. - Status: Gazette received on October 28. - Governance Reforms: - Publish follow-up action report on COVID-19 spending audit report and EDF’s audit report, detailing corrective actions, measures, and follow-up of alleged misappropriation of funds. - Objective: strengthen governance and data transparency. - Status: Published on October 27. ### Structural Benchmarks (Table 5 — selected actions, timing, and objectives) - Fiscal Reforms: - Publish monthly unaudited IFMIS-generated comprehensive fiscal reports on the MOFEA website, within 5 days after end of each month starting end-October 2023. - Timing: Continuous, starting in FY2023/24. - Objective: foster fiscal transparency and monitoring; improve in-year comprehensive monthly fiscal reports. - Repeal preferential treatment for motor vehicle and VAT relief for current and former politicians, senior public officials, judges and similar groups. - Timing: July 2024. - Objective: enhance revenue and improve tax and customs compliance culture; ensure every supply of a motor vehicle is standard rated for VAT purposes. - Comprehensively eliminate VAT exemptions and zero-ratings for business inputs (sectors under Customs Procedures Codes CPC 402, 405, 406, 445 subject to subsequent SBs). - Timing: July 2024. - Objective: enhance revenue and improve tax and customs compliance culture. - Repeal VAT relief for building materials so that supplies of building materials, construction services and commercial property are standard rated. - Timing: July 2024. - Objective: enhance revenue and improve tax and customs compliance culture. - Full launch of the Integrated Tax Administration System (ITAS). - Timing: End-March 2024. - Objective: enhance revenue and improve tax and customs compliance culture. - Approval by Cabinet of an arrears clearance and prevention strategy for national budget entities prepared in consultation with Fund staff. - Timing: End-March 2024. - Objective: foster financial discipline. - Publish a performance report on project execution and spending for all projects with total estimated cost of at least MWK 25 billion in the PSIP on the MOFEA website, within 6 months after the fiscal year. - Timing: Annually, starting in 2025. - Objective: improve public investment management; support Malawi 2063. - Monetary and Financial Sector Reforms: - Prepare, in consultation with Fund staff, draft amendments to the RBM Act as recommended by the 2021 Safeguards Assessment report and submit those amendments to public consultation. - Timing: End-December 2023. - Objective: strengthen RBM governance. - Submit the RBM Act amendments to Parliament. - Timing: End-March 2024. - Objective: strengthen RBM governance. - External Sector Reforms: - Progressively remove the four multiple currency practices and three exchange restrictions measures identified by Fund staff. - Timing: Gradually, starting 2024. - Objective: strengthen the functioning of a market-determined exchange rate. - NSO to start including reconciled data on imports of strategic commodities in the monthly Trade Bulletin. - Timing: End-December 2023. - Objective: develop greater transparency in relation to strategic imports and reconcile varying sources of fuel imports data. - Governance Reforms: - MOFEA and RBM jointly design and implement a credible, comprehensive, and cost-effective resolution plan to address challenges identified in the audit of the EDF. - Timing: End-June 2024. - Objective: strengthen governance and transparency; improve transparency and management of EDF via improved organizational arrangements and action on audit findings. - Develop an action plan with specific deliverables and deadlines following the governance diagnostic TA. - Timing: September 2024. - Objective: strengthen governance and transparency. - Climate: - Submit to Parliament the Disaster Risk Management (DRM) regulations and related policies to address gaps in disaster risk management: - (i) Building policy — Timing: December 2023. - (ii) Gazette Disaster Risk Management Regulations — Timing: June 2024. - Objective: guide developments in disaster preparedness, risk reduction, response and recovery of buildings. ### Technical Memorandum of Understanding (Attachment II — selected definitions, coverage, and adjustors) - Coverage: - Government is defined as the budgetary central government of Malawi, extra-budgetary units of the central government, and transfers to local government; excludes public nonfinancial corporations, public financial corporations, operations of local councils and social security funds. - Financial sector coverage includes the Reserve Bank of Malawi (RBM) and other depository corporations (ODC). - Program exchange rates: - For evaluating PCs and ITs, foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” (those that prevailed on end-September 2023), except items affecting government fiscal balances measured at current RBM exchange rates. - Table 1 — Cross Rates for Nominal Exchange Rate and Gold Price for the 2023–27 ECF (30-Sep-23): - Gold bullion LBM US$/troy ounce: 1915.43 - SDR to US$ exchange rate: 0.76 - Australian $ to US$ exchange rate: 1.55 - Canadian $ to US$ exchange rate: 1.35 - Euro to US$ exchange rate: 0.94 - Kuwaiti dinar to US$ exchange rate: 0.31 - Malawian kwacha to US$ exchange rate: 1115.78 - Saudi Arabian riyal to US$ exchange rate: 3.75 - South African rand to US$ exchange rate: 18.86 - Sterling UK to US$ exchange rate: 0.82 - Swiss Franc to US$ exchange rate: 0.91 - UAE dirham to US$ exchange rate: 3.67 - Yen to US$ exchange rate: 149.44 - Yuan to US$ exchange rate: 7.30 - Definitions (selected): - Monetary base: currency in circulation, ODCs’ deposit holdings at the RBM, and those deposits of money-holding sectors at the RBM that are included in broad money per MFS Manual and User Guide (2016). - Domestic revenue (program): tax and nontax revenue, or other revenue as defined in GFSM 2014 Chapter 5, recorded on a cash basis; excludes external loans and grants and one-off revenues; RBM dividends used to repay promissory notes associated with RBM recapitalization are excluded. - Domestic primary fiscal balance (program): domestic revenue less the sum of recurrent budget expenditure (net of domestic and foreign interest payments) and domestically-financed budget development expenditure; flows related to RBM recapitalization excluded. - RBM financing of the government: 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); flows related to RBM recapitalization excluded. - Domestic arrears (PFM Act 2022 definition): unpaid bills after end of financial year; wages and salaries and transfers deemed in arrears when unpaid for more than 30 days beyond due date; domestic interest payments in arrears when not paid on due date; payments for goods and services deemed in arrears if not paid by end of fiscal year or within contractual grace period. - Adjustors on ceiling for RBM financing of the central government: - Ceiling subject to an upward adjustment of up to 10 percent of the average inflation-adjusted annual domestic revenue of the government for the past three fiscal years (for December, June, and September). - For remainder of FY2023/24, ceiling is subject to an additional upward adjustment so total adjustor equals the maximum of (i) 10 percent of the average inflation-adjusted annual domestic revenue of the government for the past three fiscal years; or (ii) an adjustor to reflect holdings of illiquid securities. - Adjustor table (MWK billions): - 10 percent of revenue: 209 0 263 263 - Illiquid securities: 250 300 0 0 - Total adjustor: 250 300 263 263 *Source: IMF staff projections; Attachment II, Technical Memorandum of Understanding, November 8, 2023.* ### 17. Definition of social spending. Using functional classification of expenditure, social ### 1mwiea2023002 - 17. Definition of social spending. Using functional classification of expenditure, social ### Definition of social spending - Social spending is computed as the sum of central government spending on health, education, and government social protection (comprising the government expenditures by the 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: "To maintain Malawi's commitment and progress toward poverty reduction, the social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program." ### Targets for the external sector — Net International Reserves (NIR) and components - NIR of the RBM is defined as reserves assets (RA) of the RBM minus foreign currency drains (FCD) of the RBM. - All foreign assets and FCD will be converted into U.S. dollars at each test date using the program cross exchange rates listed in Table 1. - Cumulative change in NIR on each test date is calculated relative to the start of the calendar year: change = stock of the NIR on the test date minus that of the end-date of the previous calendar year. ### Definition of reserve assets of the RBM (per BPM6, paragraph 6.64) Reserve assets include: - (i) monetary gold holdings of the RBM; - (ii) holdings of SDRs; - (iii) the reserve position in the IMF; - (iv) foreign convertible currency holdings; - (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; - (vi) loans to foreign banks redeemable upon demand; - (vii) foreign securities; and - (viii) other unpledged convertible liquid claims on nonresidents. ### Definition of foreign currency drains (FCD) of the RBM - FCD are the sum of: - outstanding medium and short-term liabilities of the RBM (including as an agent of the government), to the IMF (excluding SDR allocations); and - 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). These liabilities include: - (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, and - (b) swaps outstanding with remaining maturity of less than one year. ### Adjustors applied to change in NIR program floor - Adjustment clause on NIR — general budget support: - The program floor on change in NIR will be adjusted upward by the full amount by which the foreign currency-denominated inflows from the budget support exceed the program baseline. - In the event of a shortfall in budget support inflows, the change in NIR floor will be adjusted downward by the full amount of the shortfall. - Inflows/shortfalls will be recorded in the original currency of payment and then converted to U.S. dollars using the program cross exchange rates. - Program table (USD Millions) — amounts listed: - General budget support: CY2023Q4 80; CY2024Q1 55; CY2024Q2 (blank); CY2024Q3 (blank) - Multi Donor Trust Fund: values listed include 6 and 0 in table cells shown - Note: The Multi Donor Trust Fund (MDTF) is used for social projects such as social cash transfer programs. The fund is primarily mobilized in Malawi Kwacha, thus the foreign exchange component is projected to contribute in building up official reserves. ### Ceilings and definitions on external payment arrears and debt contracting - Definition of external payment arrears: - External payment arrears consist of 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. - External debt subject to rescheduling or restructuring in line with the debt restructuring strategy is exempted from being included as external payment arrears, provided the government continues to make a good faith effort to reach a collaborative agreement with creditors. - This quantitative target will be monitored on a continuous basis. - Definition of public and publicly guaranteed debt (program purposes): - Consistent with paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 16919-(20/103), October 2020). - “Debt” means a current (not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s). - A debt is considered contracted when all conditions for its entrance into effect have been met, including approval by the National Assembly. - Forms of debt include: - Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); - Suppliers’ credits (deferred payments for goods/services); - Lease agreements (debt is the present value at lease inception of all lease payments expected for the period, except payments necessary for operation, repair, and maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Definition of concessional and non-concessional external debt - Debt is concessional if it includes a grant element of at least 35 percent and non-concessional if otherwise. - Grant element = (nominal value of the loan − present value of the loan) expressed as a percentage of the nominal value. - Present value is calculated at the date the debt is contracted as the discounted sum of all future debt service payments at the time of contracting. - The discount rate used is 5 percent per annum. - The ceiling on concessional and non-concessional debt applies to contracting and guaranteeing of debt with nonresidents by the government, the RBM, and state-owned enterprises, unless an explicit selective exclusion is made. - The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received and is measured cumulatively from the beginning of the fiscal year. - Excluded from the limit on non-concessional external debt is the use of IMF resources. ### Swaps and related treatment - Swaps in debt service: debt service payments should include swaps based on the net change in the position. - Foreign exchange swaps: contracting or renewing foreign currency swaps with non resident banks beyond the program amount would be subject to the ceiling of non-concessional external debt since they pose fiscal risks. ### Reporting requirements and timelines - For program monitoring, the Government of Malawi will provide the data listed in Table 2. - Reporting lags: - All bi-weekly submissions: reported with a lag of one week. - All monthly and quarterly submissions: reported within 3 weeks. - Data submissions requiring audit: reported within 10 weeks. - Annual data: provided within six months after the end of the year. - The authorities will inform IMF staff in writing at least ten business days (excluding legal holidays in Malawi) prior to making any changes in economic and financial policies that could affect the outcome of the financial program (examples listed include customs and tax laws, development agreements, wage policy, financial support to public and private enterprises, and foreign exchange intervention commitment). - The authorities will similarly 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. - The authorities will furnish an official communication to the IMF describing program quantitative performance, structural benchmarks, and indicative targets within 8 weeks of a test date. ### Summary of reporting frequencies (select highlights from Table 2) - Daily/bi-weekly items: Exchange Rates, Spread between exchange bureau midrate and the official exchange midrate (D 2W; Reporting D; Agency RBM). - Monthly items (examples): Reserve/base money, Monetary and Financial Statistics Standard Report Forms, Consumer Price Index, Detailed issue and maturity profile for all government securities, Central government domestic borrowing, RBM financing of the central government (all M frequency; Reporting M; Publication M; Agency RBM). - Quarterly and annual items: Balance of payments (A A A; Agency RBM / NSO); Stocks of public sector and public-guaranteed debt (Q Q Q; Agency MOFEA); Annual financial reports of the 5 high-risk parastatals (A A ... MOFEA). ### Debt Sustainability Analysis (DSA) — key findings and indicators - Overall assessment: Malawi’s external and overall public debt is assessed as “in distress”—unchanged from the previous DSA in July 2023. The DSA presents an analysis of Malawi’s debt outlook prior to the implementation of the authorities’ planned debt restructuring. - Baseline scenario: - PV of PPG external debt-to-GDP ratio remains below the threshold throughout the horizon. - Breaches observed in the 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. - The 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 necessary for the external debt burden to be considered sustainable on a forward-looking basis." - Framework and metadata: - 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) is based on the latest published vintage (2021 Country Policy and Institutional Assessment, CPIA) and the IMF’s April 2023 World Economic Outlook. The CI remains ‘weak’ with a CI score of 2.42. - Report date on DSA: November 8, 2023. ### Public debt coverage and assumed shocks (DSA inputs) - DSA coverage: central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government (public and publicly guaranteed (PPG) external and public domestic debt). - Exclusions due to data limitations: debt held by state and local governments, other elements in the general government (such as the social security fund and extra budgetary funds), nonguaranteed SOE debt. - Contingent liabilities and default shocks (as applied in the analysis): - Contingent liabilities shock from SOE debt: default value of 2 percent (to reflect risks associated with nonguaranteed SOE debt). - No current public-private partnerships reported that subject the authorities to contingent liabilities. - Coverage table components and shock values (as presented): - Other elements of the general government not captured in 1.0 percent of GDP: 3.3 - SoE's debt (guaranteed and not guaranteed by the government) 1/2percent of GDP: 2.0 - PPP35 percent of PPP stock: 0.0 - Financial market (the default value of 5 percent of GDP is the minimum value)5percent of GDP: 5.0 - Total (2+3+4+5) (in percent of GDP): 10.3 - Note on SDFP and DLP: "Malawi is subject to International Development Association (IDA)’s Sustainable Development Finance Policy (SDFP) and the IMF’s Debt Limit Policy (DLP), which both impose a zero non-concessional debt ceiling." *Source: 1mwiea2023002 — https://www.imf.org/-/media/files/publications/cr/2023/english/1mwiea2023002.pdf* ### 3. Malawi continues to face a challenging macroeconomic outlook. Real GDP growth ### 3. Malawi continues to face a challenging macroeconomic outlook. Real GDP growth ### Macroeconomic outlook and inflation - Real GDP growth is projected to recover to a below-trend 1.6 percent in 2023. - Growth is constrained by protracted balance of payments challenges, including shortages of foreign exchange, and a hit to agriculture output from Cyclone Freddy. - Inflation remains elevated: - CPI inflation: 27.8 percent in September (driven in large part by food inflation). - Food inflation: 36.8 percent in September. - The Reserve Bank of Malawi (RBM) raised interest rates by a further 200 basis points, to 24 percent, in August. - Inflation is projected to average 30.3 percent in 2023 and 27.9 percent in 2024. - Medium-term inflation assumption: falls back to around 6.5 percent as external shocks fade and money growth is brought under control; broad money is assumed to grow in line with nominal GDP. ### Fiscal performance, public debt, and domestic financing - Government spending in FY 23/24 so far largely consistent with the budget envelope; strong PFM reforms including continued rollout of IFMIS and quarterly allotments aligned with the macroeconomic framework. - Malawi continues to run a significant domestic primary deficit, estimated to be 3 percent of GDP in FY 23/24. - Heavy domestic debt service burden: 5 percent of GDP in FY 23/24. - Central bank financing was contained over the first half of 2023 but remains elevated. - Public and public-guaranteed debt reached 75.7 percent of GDP in 2022. - Domestic debt reached 40.8 percent of GDP in 2022. - Rising interest costs absorbed 36.8 percent of domestic revenue in FY2022/23 and have strained domestic market liquidity. - Domestic financing costs are currently elevated; interest costs are assumed to decrease gradually over the medium term to around 14 percent on average. - Domestic financing (excluding the pre-restructuring residual external gap) is expected to average 13 percent GDP from 2023 to 2028 before declining. ### External sector, reserves, and trade - External strains persist: shortages of foreign exchange, difficulties securing trade credit, and pressure on the spread between official and bureau exchange rates. - Import activity remained below 2021 levels over the first half of the year; shortages of fuel, cement, fertilizer and essential medical supplies continued. - Exports expected to benefit from a significant increase in tobacco sales due to improved weather and higher prices. - Official exchange rate has depreciated by around 15 percent since the first review; RBM restarted regular auctions to move towards a market-clearing rate. - Spread between official rate and bureau rate now stands at over 50 percent. - RBM gross reserves preliminary data: [US$156 million] as of end-September 2023. - Gross reserves are projected to grow and reach the level assessed to provide adequate insurance (3.9 months of import cover) in 2025. - Current account deficit projection: reaches 7.4 percent of GDP in 2028 in the baseline. ### Debt restructuring strategy and creditor engagement - Authorities pursue an external debt restructuring strategy designed to restore debt sustainability and close financing gaps (Box 1: October 2022 Debt Restructuring Strategy). - Strategy pillars include: - Bringing external public debt back to a moderate risk of debt distress in the medium term by ensuring DSA solvency and liquidity ratios move below thresholds: present value of debt-to-GDP falls below 30 percent; present value of debt-to-exports falls below 140 percent; debt service-to-exports falls below 10 percent; debt-to-revenue falls below 14 percent. - Mobilization of non-debt-creating flows (including grants and debt relief). - Proposed debt treatment to reduce the NPV of Malawi’s external debt by US$592 million via maturity extension and reprofiling. - Malawi is negotiating with commercial and official bilateral creditors and has reached agreement to reduce interim debt service needs. - Malawi is in arrears on commercial debt (totaling US$418 million as of end-September 2023). - Staff expects Malawi’s debt to Saudi Arabia, Kuwait, UAE and the two Paris Club creditors will be treated on comparable terms with its largest bilateral creditors. - The timeline to complete restructuring remains uncertain and the risk of further delays is high, potentially jeopardizing program performance. ### Baseline assumptions, financing needs, and realism of projections - Growth path: 1.6 percent in 2023 (down from 1.7 percent at the first review), recovering to 4.6 percent in the medium term. - Fiscal adjustment: baseline aims to stabilize public debt by the end of the medium term; primary deficit was 6.8 percent of GDP in FY22/23 and the adjustment implies a domestic primary balance improvement of about 1.7 percentage points of GDP per year (excluding RBM capitalization, about 1.3 ppt per year over four years). - Revenue and expenditure measures: scale back the Affordable Input Programme through better targeting; reallocate spending toward growth foundations and human/physical capital; new revenue measures including a specific tax on secondhand cars, repealing VAT relief on motor vehicles for current and former politicians and similar privileged groups, standard-rating every supply of a motor vehicle for VAT, and eliminating other VAT exemptions on business inputs and building materials; full launch of ITAS to enhance revenue collection. - Reserve rebuilding: RBM to limit sales of foreign exchange and maintain consistent net purchases to reach at least 3.9 months of imports cover by end of medium term. - Total external financing gap (2023–2027): projected to sum to around US$1.6 billion (roughly 9 percent of 2022 GDP). - Baseline assumes no debt treatment; net domestic financing fills residual gap on market terms in the pre-restructuring scenario. - Baseline macro assumptions broadly unchanged relative to the July 2023 DSA; realism tools indicate the baseline is not significantly out of line with historical and cross-country experience, though the pace of primary balance adjustment is ambitious and in the top quartile of historical LIC adjustments. - Balance of risks is tilted to the downside given uncertainty around financing and restructuring timelines. ### Selected key statistics (as reported) - Real GDP growth: 1.6 percent in 2023 (projected); medium-term recovery to 4.6 percent. - CPI inflation: 27.8 percent in September 2023. - Food inflation: 36.8 percent in September 2023. - Policy rate: RBM raised rates by 200 basis points to 24 percent in August 2023. - Inflation projections: 30.3 percent (2023 average), 27.9 percent (2024 average). - Domestic primary deficit: 3 percent of GDP in FY 23/24 (estimated). - Domestic debt service burden: 5 percent of GDP in FY 23/24. - Gross reserves: [US$156 million] as of end‑September 2023. - Reserve adequacy target: 3.9 months of import cover (by 2025 in projections). - Public and public-guaranteed debt: 75.7 percent of GDP in 2022. - Domestic debt: 40.8 percent of GDP in 2022. - Interest costs absorbed: 36.8 percent of domestic revenue in FY2022/23. - Arrears on commercial debt: US$418 million as of end‑September 2023. - Proposed external debt NPV reduction: US$592 million. - Total external financing gap (2023–2027): US$1.6 billion (roughly 9 percent of 2022 GDP). - Nominal GDP: 12,535 (as reported in Text Table 2). *International Monetary Fund. CR 2023 (Malawi).* ### 13. Malawi’s debt-carrying capacity based on the Composite Indicator (CI) is assessed as weak ### 13. Malawi’s debt-carrying capacity based on the Composite Indicator (CI) is assessed as weak ### Composite Indicator (CI) and thresholds - Final CI Score: 2.42; CI rating: Weak. - CI calculation components and contributions: - CPIA: Coefficient 0.385; 10-year average value 3.147; CI Score component 1.215; Contribution 50%. - Real growth rate (in percent): Coefficient 2.7; 10-year average value 1.93; CI Score component 0.094; Contribution 2%. - Import coverage of reserves (in percent): Coefficient 4.05; 10-year average value 2.21; CI Score component 1.568; Contribution 36%. - Import coverage of reserves^2 (in percent): Coefficient -3.99; 10-year average value 4.652; CI Score component -0.19; Contribution -8%. - Remittances (in percent): Coefficient 2.02; 10-year average value 2.223; CI Score component 0.042; Contribution 2%. - World economic growth (in percent): Coefficient 13.52; 10-year average value 0.2856; CI Score component 0.391; Contribution 16%. - Classification: Final: Weak; based on current vintage: Weak; previous vintage: Weak; two previous vintages: Weak. - The CI is broadly unchanged from the July 2023 DSA. - External debt burden thresholds and total public debt benchmark determined by CI classification (Weak): - EXTERNAL debt burden thresholds (Weak/Medium/Strong): - PV of debt in % of Exports: 140 / 180 / 240 - PV of debt in % of GDP: 30 / 40 / 55 - Debt service in % of Exports: 10 / 15 / 21 - Debt service in % of Revenue: 14 / 18 / 23 - TOTAL public debt benchmark: - PV of debt in % of GDP: 35 - PV of total public debt in percent of GDP: 35 - PV of debt in % of Exports: 140 - PV of debt in % of GDP: 30 - Debt service in % of Exports: 10 - Debt service in % of Revenue: 14 ### Scenario stress tests - Standard scenario stress tests and a contingent liability stress test are conducted. - Contingent liability stress test: one-off increase of 11 percentage points in the debt-to-GDP ratio in the second year of the projection to capture limited public debt coverage, contingent liabilities associated with SOEs, and potential future banking sector recapitalization. - Tailored scenario: commodity price shock reflecting tobacco dependence (tobacco accounts for nearly half of Malawi’s total goods exports). - Shock calibration: decline in prices in the second year to the lower end of the 68 percent confidence interval in the IMF’s commodity price forecasts, then assumed to unwind over six years. - Stress tests indicate high sensitivity to exports and the exchange rate; exports are concentrated and vulnerable to weather and climate-related shocks. - Note: steady and predictable aid flows in foreign currency have typically been received but are not accounted for in the DSA liquidity indicators. ### External DSA findings - External public debt assessment: in debt distress, reflecting ongoing debt restructuring negotiations. - Baseline scenario: - PV of PPG external debt-to-GDP ratio remains below the threshold. - Significant and sustained breaches of other solvency and liquidity indicators: PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue are currently above their thresholds and remain so for a prolonged period—through 2030 in the case of debt-service-to-exports. - Near-term debt service burden (including repayment of arrears in the pre-restructuring scenario) reaches 58 percent of exports and 47 percent of revenue in 2023. - Outlook under successful debt treatment: - Successful treatment of commercial and official bilateral debt in line with the authorities’ strategy would significantly reduce near-term debt service and bring relevant solvency and liquidity indicators below thresholds by 2028 or sooner. - This would move Malawi to moderate risk of external debt distress over the medium term. - Current assessment: Malawi’s external debt is currently unsustainable absent successful restructuring. ### Public DSA findings - Overall public debt assessment: in distress, given ongoing external debt restructuring negotiations. - Key figures: - PV of overall public debt reaches 69 percent of GDP in 2023, above the threshold of 35 percent. - Overall public debt service peaks in 2025 at 121 percent of revenues and remains high in the medium term. - Under successful external debt restructuring: - PV and servicing costs would be significantly reduced, though both would remain elevated but decreasing in the medium term. - PV of public debt around 52 percent of GDP in 2028 under the authorities’ strategy (Box 1). - Debt service-to-revenue would remain below 100 percent and decline gradually over time. - Overall risk of public debt distress would remain high in this scenario. ### Risk rating and vulnerabilities - Current status: Malawi is in debt distress; without restructuring the debt burden is unsustainable due to significant and sustained breaches of solvency and liquidity indicators. - Conditional outcome: With successful completion of the government’s debt restructuring strategy, external debt would be considered sustainable on a forward-looking basis. - Key risks (skewed to the downside): - Further delays in completing debt restructuring will worsen financing gaps. - Limited scope for slippage on the ambitious fiscal adjustment and PFM measures envisioned as part of the ECF. - Risk of additional spending pressures related to the general election in May 2025. - Downside risks to the growth outlook. - Elevated domestic financing costs and associated debt service burden leave little room for maneuver. - Vulnerability to a range of external shocks and risk of failure to rebuild external buffers. - Mitigating factors and upside risks: - Authorities’ strong commitment to macroeconomic adjustment, including corrective actions to complete the first review of the PMB. - Expedited and comprehensive implementation of necessary policy actions could catalyze a positive feedback loop improving resilience and confidence. - Successful export diversification efforts, including sooner-than-expected development of mining projects (not yet included in the macro framework), would enhance capacity to meet future debt servicing needs. *Source: IMF staff assessment as presented in the DSA chapter.* ### 23. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. ### 23. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. ### Authorities’ objectives and policy stance - The authorities remain determined to restore macroeconomic stability and deliver strong and durable poverty reduction and growth. - Policy priorities identified: - Enhance fiscal discipline. - Maintain price stability and financial soundness. - Rebuild external buffers. - Restore debt sustainability. - Strategic shifts committed to: - Shift Malawi’s growth model from a consumption-driven to a production-driven one. - Shift from a government-led to a private-sector-led growth model in line with Malawi 2063. - Successful and timely completion of the authorities’ external debt restructuring strategy is described as vital to achieving these goals. ### Debt restructuring and external debt dynamics - Staff assessment: Successful external debt restructuring is critical to restore debt sustainability and generate financing consistent with program parameters. - Financing assurances: Staff’s assessment is that there are sufficient assurances regarding the debt restructuring needed to restore debt sustainability and generate financing consistent with program parameters. - Program recommendation: With provision of financing assurances from official bilateral creditors, staff recommends approval of the arrangement under the Extended Credit Facility. ### Exchange rate and foreign exchange market policy changes - Operational exchange rate change: The Reserve Bank of Malawi (RBM) adjusted the selling rate from MWK 1180.29 to MWK 1700.00 to the US Dollar with effect from November 9, 2023. - Announced operational changes to the foreign exchange market: - Authorized dealer banks (ADBs) may freely negotiate exchange rates with clients and among themselves notwithstanding previous limitations. - The RBM will buy and sell FX via transparent competitive auctions at market-determined prices, open to all ADBs in good standing without restrictions on bid range or level; allotment determined by prices submitted. - Purchase auctions will switch from monthly to fortnightly; FX sales will occur only as necessary to address disorderly market conditions. - IMF staff view: The exchange rate adjustment is in line with staff advice, removes a major economic distortion, and RBM should maintain efforts to increase transparency, broaden participation, and facilitate price discovery. - Macroeconomic impact: The impact of this change on growth, inflation, and the balance of payments has been factored into the macroeconomic framework and program design to the extent possible. ### Key public and external debt indicators and projections (selected) - External debt (nominal) — PPG share (percent of GDP): - 2020: 32.9 - 2021: 31.5 - 2022: 34.8 - 2023: 39.3 - 2024: 35.2 - 2025: 33.8 - 2026: 31.2 - 2027: 28.8 - 2028: 26.3 - 2029: 24.2 - 2030: 22.6 - 2031: 21.3 - 2032: 20.2 - 2033: 19.2 - 2043: 12.2 - Change in external debt (percent of GDP): - 2020: 5.1 - 2021: -1.4 - 2022: 3.3 - 2023: 4.4 - 2024: -4.1 - 2025: -1.4 - 2026: -2.6 - 2027: -2.4 - 2028: -2.5 - 2029: -2.1 - 2030: -1.6 - 2031: -1.3 - 2032: -1.2 - 2033: -1.0 - 2043: -1.3 - Identified net debt-creating flows (percent of GDP): - 2020: 11.1 - 2021: 11.2 - 2022: 2.7 - 2023: 6.0 - 2024: 5.2 - 2025: 7.6 - 2026: 6.0 - 2027: 5.9 - 2028: 5.2 - 2029: 4.9 - 2030: 4.9 - 2031: 4.5 - 2032: 3.9 - 2033: 3.9 - 2043: 1.4 - Non-interest current account deficit (percent of GDP): - 2020: 13.6 - 2021: 13.8 - 2022: 2.8 - 2023: 5.8 - 2024: 6.6 - 2025: 9.2 - 2026: 7.9 - 2027: 8.0 - 2028: 7.2 - 2029: 6.9 - 2030: 6.9 - 2031: 6.5 - 2032: 6.0 - 2033: 6.0 - 2043: 3.2 - Endogenous debt dynamics — contribution (percent of GDP): - 2020: -1.7 - 2021: -1.8 - 2022: 0.2 - 2023: 0.6 - 2024: -0.8 - 2025: -0.8 - 2026: -1.1 - 2027: -1.2 - 2028: -1.0 - 2029: -0.9 - 2030: -0.9 - 2031: -0.8 - 2032: -0.8 - 2033: -0.7 - 2043: -0.5 - Residual (percent of GDP): - 2020: -6.0 - 2021: -12.6 - 2022: 0.6 - 2023: -1.6 - 2024: -9.3 - 2025: -9.0 - 2026: -8.6 - 2027: -8.3 - 2028: -7.6 - 2029: -6.9 - 2030: -6.5 - 2031: -5.8 - 2032: -5.1 - 2033: -4.9 - 2043: -2.7 - Selected sustainability indicators: - PV of PPG external debt-to-GDP ratio (selected years shown): 24.3; 19.5; 21.4; 20.9; 19.5; 18.1; 16.6; 15.2; 14.2; 13.4; 12.5; 11.9; 7.4. - PV of PPG external debt-to-exports ratio (selected years shown): 269.9; 178.8; 154.8; 142.8; 131.3; 118.8; 108.9; 101.0; 96.5; 92.8; 89.2; 86.4; 71.0. - PPG debt service-to-exports ratio (selected years shown): 7.2; 6.8; 11.9; 58.1; 26.1; 18.8; 18.0; 12.8; 10.8; 10.1; 9.5; 8.3; 8.6; 7.8; 5.4. - PPG debt service-to-revenue ratio (selected years shown): 4.6; 4.9; 7.8; 46.9; 25.4; 18.2; 17.1; 11.9; 9.7; 9.0; 8.2; 7.0; 7.1; 6.2; 13.9. - Gross external financing need (Billion of U.S. dollars) — selected years: - 2020: 1.6 - 2021: 1.8 - 2022: 0.5 - 2023: 1.5 - 2024: 1.1 - 2025: 1.3 - 2026: 1.1 - 2027: 1.1 - 2028: 1.0 - 2029: 1.0 - 2030: 1.0 - 2031: 1.0 - 2032: 1.0 - 2033: 1.0 - 2043: 0.8 - Key macro assumptions (selected): - Real GDP growth (percent): - 2020: 0.9 - 2021: 4.6 - 2022: 0.8 - 2023: 1.6 - 2024–2033 (annual projection): 3.3; 3.8; 4.3; 4.5; 4.6; 4.6; 4.6; 4.6; 4.6; 4.6 - 2043: 4.6 - GDP deflator in US dollar terms (change in percent): - 2020: 6.4 - 2021: 0.7 - 2022: -0.3 - 2023: 3.0 - 2024: -17.1 - 2025: -3.0 - 2026: -1.1 - 2027: 1.1 - 2028: 1.1 - 2029: 1.3 - 2030: 1.3 - 2031: 1.1 - 2032: 1.3 - 2033: 1.3 - 2043: 4.5 - Effective interest rate (percent): - 2020: 0.7 - 2021: 1.0 - 2022: 1.1 - 2023: 3.5 - 2024: 1.5 - 2025: 1.6 - 2026: 0.9 - 2027: 0.6 - 2028: 0.8 - 2029: 0.8 - 2030: 0.8 - 2031: 0.8 - 2032: 0.8 - 2033: 0.8 - 2043: 0.8 - Government revenues (excluding grants, percent of GDP): - 2020: 12.8 - 2021: 13.2 - 2022: 13.8 - 2023: 13.5 - 2024: 14.2 - 2025: 15.1 - 2026: 15.6 - 2027: 16.4 - 2028: 16.9 - 2029: 17.0 - 2030: 17.1 - 2031: 17.1 - 2032: 17.1 - 2033: 17.0 - 2043: 4.0 (memorandum / outlier value in table) - Public sector debt (percent of GDP) — selected from public DSA: - Public sector debt: - 2020: 54.8 - 2021: 61.5 - 2022: 75.7 - 2023: 81.3 - 2024: 75.0 - 2025: 74.8 - 2026: 73.5 - 2027: 71.8 - 2028: 68.0 - 2033: 52.9 - 2043: 24.2 - Change in public sector debt: - 2020: 9.5 - 2021: 6.8 - 2022: 14.1 - 2023: 5.6 - 2024: -6.3 - 2025: -0.2 - 2026: -1.3 - 2027: -1.8 - 2028: -3.7 - 2033: -2.4 - 2043: -1.6 - Primary deficit (percent of GDP): - 2020: 5.0 - 2021: 4.6 - 2022: 4.6 - 2023: 3.0 - 2024: -0.1 - 2025: 0.1 - 2026: -2.3 - 2027: -2.8 - 2028: -4.3 - 2033: -2.6 - 2043: -0.6 ### Data and statistical issues - Overall assessment: Data provision has shortcomings that are serious and significantly hamper surveillance; most affected areas: national accounts, fiscal, monetary and external sector statistics. - National accounts: - GDP was rebased from 2010 to 2017; nominal GDP for 2017 revised upwards by 38.4 percent from MK4,635.4 billion (US$6.35 billion) to MK6,417.3 billion (US$8.8 billion). - NSO has not yet published finalized GDP by production and expenditure series. - Price statistics: - CPI weights are based on the 5th Integrated Household Survey (IHS5), April 2019–April 2020. - PPI weights derive from the Census of Economic Activity 2016–2017 and need updating; export-import price indexes are under development with STA support. - Government finance statistics: - Authorities compile GFS for Budgetary Central Government aligned with GFSM 2014; efforts underway to expand to General Government. - New IFMIS implemented; rollout to all MDAs except two by end-August 2023. - Data quality problems: coverage differences causing statistical discrepancies; reconciliation issues between tax receipts and Malawi Government Account; nontax and capital revenues not properly accounted; interest payments reported by currency rather than residency. - Monetary and financial statistics: - RBM reporting has moved completely to standardized report forms (SRFs) after STA TA in April–May 2021. - External sector statistics: - Trade and BOP data compilation lags; latest BOP available for 2021; goods trade data up to March 2021 provided as of October 31, 2021. - NSO and RBM have increased capacity; further TA and coordination recommended to improve timeliness and frequency. - Data dissemination: - Malawi implemented the e-GDDS; National Summary Data Page (NSDP) went live on November 15, 2016. ### IMF relations, program, and governance issues - Fund membership and facilities (selected): - Quota: 138.80 (SDR Million) — 100.00 percent of quota. - Fund holdings of currency (exchange rate): 136.36 — 98.24 percent of quota. - Reserve tranche position: 2.44 — 1.76 percent of quota. - Net cumulative SDR allocation: 199.40 — 100.00 percent of allocation. - RCF Loans outstanding: 208.15 — 149.96 percent of quota. - ECF Arrangements outstanding: 108.49 — 78.16 percent of quota. - Overdue obligations and projected payments to Fund (SDR Million; based on existing use and present holdings of SDRs): - Principal: 2023: 9.79; 2024: 23.11; 2025: 33.46; 2026: 47.84; 2027: 40.47. - Charges/Interest (2023–2027): 2.02; 8.02; 8.02; 8.02; 8.02. - Total (2023–2027): 11.81; 31.13; 41.48; 55.86; 48.49. - Safeguards assessment (RBM): 2021 assessment found significant deterioration since 2018; governance and internal control reforms needed; RBM is making progress (adopted risk management policy, aligned market operations procedures, prepared revised foreign reserves management framework for Board endorsement). - FSAP and other diagnostic work: FSAP FSSA issued June 2008; development module mid-2017; various ROSC missions in 2003–2007; fiscal transparency work ongoing. - Technical assistance: Extensive TA since 2015 across AFE, FAD, STA, MCM with specific missions on banking supervision, FPAS, IFMIS, tax administration, CPI and CPI basket updates, external sector statistics, and more (detailed mission listing provided in source). ### Program supplement and approvals (November 2023) - Supplementary information (November 10, 2023) provides additional information since the Staff Report (EBS/23/114) of November 8, 2023 and includes a proposed decision approving Malawi’s exchange measures and a proposed decision approving a four-year arrangement under the Extended Credit Facility with text attached. - Policy developments (Supplement): - RBM exchange rate adjustment and foreign exchange operational changes (see above). - Staff assessment: With financing assurances from official bilateral creditors, the thrust of the staff appraisal remains appropriate and staff recommends approval of the ECF arrangement. *Source: IMF staff report excerpt and informational annex for Malawi (text and tables provided).* ### Introduction ### Introduction ### Program Performance - Five out of six end-June 2023 continuous quantitative targets (QTs) were met. - All three end-June 2023 Indicative Targets (ITs) were met. - The QT on the stock of monetary base was missed despite the RBM’s efforts to mop up excess liquidity. - Seven out of ten Structural Benchmarks (SBs) were not met on time, but marked progress has been made on the missed SBs. - SBs met on time: - Audited fiscal report of FY2021/22 submitted to staff on time. - Notification for FY2022/23 Q3 quarter allotment to piloted Ministries, Departments and Agencies (MDAs) that allows MDAs to commit up to the agreed threshold amounts through IFMIS. - Verification of arrears of national budget entities from July 1, 2020, to March 31, 2022, certified by the Auditor General, including compensations and utilities by end-December 2022. - SBs implemented with delay: - Publication of monthly IFMIS-generated comprehensive fiscal reports. - Operationalization of an executive Asset Liability Management Committee (ALCO) in accordance with recommendations of the 2021 Safeguards Assessment Report. - Remaining SBs moved to SBs under the new ECF arrangement, including: - Amendments to the RBM Act as recommended by the 2021 safeguards assessment. - Cabinet approval of the arrears’ clearance and prevention strategy for national budget entities. - Authorities prepared draft amendments to the RBM Act and plan to submit them to parliament as recommended. - End-October 2023 SB on publication of the COVID-19 spending audit report was shifted to a prior action for the ECF program. - Considering satisfactory program performance and fulfillment of prior actions amid a highly fragile context, the authorities seek Executive Directors’ support in completion of the second PMB review. ### Recent Economic Developments and Outlook - Real GDP growth: - Estimated to slow from 1.7 percent in 2022 to 1.6 percent in 2023. - Tobacco sector’s stronger than expected performance moderated the growth decline. - Inflation: - Expected to average 30.3 percent in 2023, up from 24.8 percent projected at the time of the First Review. - Projected to start declining in 2024 partly owing to decisive monetary actions taken by RBM. - Current account: - Deficit narrowed from 14 percent of GDP in 2021 to 3.2 percent of GDP in 2022, partly due to a large exchange rate devaluation and import compression. - Expected to widen to 7.6 percent of GDP in 2023 as foreign exchange market liquidity remains significantly tight. - Foreign exchange reserves: - Preliminary data shows reserves projected at 1.8 months by end 2023. - Growth prospects subject to: - Adverse weather events. - Spillovers from the war in Ukraine. - Subdued capital inflows. ### Fiscal Policy and Debt Management - Fiscal objectives and adjustments: - Authorities aligned FY2023/24 budget and draft FY2024/25 budget with proposed ECF parameters. - Expected fiscal adjustment of about 1.9 percentage points of GDP in FY2023/24. - Resulting reduction of about 0.8 percentage points of GDP in the domestic primary deficit. - Domestic primary fiscal balance is roughly on track to contain the overall deficit for FY2023/24 and FY2024/25, culminating in a decline to 11 percent of GDP and further to 8 percent of GDP, respectively. - Contingency planning: - Authorities have developed a Contingency Plan to help close emerging financing gaps should implementation risks materialize. - Domestic Revenue Mobilization Strategy (DRMS): - Launched in December 2021 to ramp up revenues by 5 percent of GDP over the five-year implementation horizon. - DRMS incorporated into Malawi Revenue Authority’s (MRA) strategic plan. - DRMS Monitoring Committee formulated in FY2022/23 comprising MoFEA, MRA, the Accountant General, Immigration Department, Malawi Police Service and Registrar General. - IT systems and legal measures: - Launched Msonkho online in December 2022, an Integrated Tax Administration System (ITAS); all remaining modules will be completed by end-March 2024 (SB). - Plan to implement the Tax Administration Act and establish the Revenue Appeal Tribunal by December 2023. - Non-tax revenue and SOE measures: - Ensured SOEs comply with the PFM Act by opening a holding account with the RBM. - MDAs to remit non-tax revenue to the Malawi Government consolidated account (MG1) through departmental receipts’ accounts. - Increased some fees and charges to reflect, where possible, full cost recovery; additional increases and automation planned; enforce dividend and surplus policy. - Expenditure management: - Continue to rationalize the Affordable Input Program (AIP); first phase of reform to the fertilizer and seed subsidy program completed. - Measures to prevent AIP cost overruns including increments to farmer contributions, capping government subsidy, fast-tracking beneficiary reforms. - Aim to completely phase out the AIP. - Freeze on new hiring into the public service and a Personnel Audit completed in 2021 to eliminate ghost workers. - Enhance oversight of SOEs and implement the new IFMIS to strengthen budget execution and commitment control. - Debt restructuring and creditor engagement: - Authorities engaged with private creditors in good faith, sharing information and seeking input on restructuring strategies. - Largest bilateral creditors, China and India, have provided specific and credible assurances that they will provide debt relief in line with program parameters. - Regular discussions continue with Afreximbank and the Trade and Development Bank (TDB). - Authorities commit that commercial debt will be repaid or restructured on terms consistent with the parameters of the ECF-supported arrangement. - Public debt management actions: - Updated and published Medium-Term Debt Strategy (MTDS) to consider on-budget externally and domestically financed projects. - MTDS reflects the ceiling on new non-concessional external debt, contracted or guaranteed, as required by the Fund’s Debt Limits Policy. - Authorities will continue to publish regular reports on outstanding debt figures and seek technical assistance to build capacity in debt management. ### Monetary, Exchange Rate and Financial Sector Policies - RBM policy rate actions: - RBM raised the policy rate by 200 basis points from 22 percent in June 2023 to 24 percent in July 2023. - RBM stands ready to tighten monetary policy as needed while containing reserve money growth in line with its monetary control program. - Exchange rate policy and operations: - RBM resumed purchases of foreign exchange via monthly auctions in June 2023 to encourage price discovery. - RBM devalued the kwacha by about 44 percent effective on November 9, 2023. - This is the second time in 18 months that Malawi allowed the significant weakening of the local unit to remove major economic distortions. - Authorities committed to allow greater exchange rate flexibility, reduce foreign exchange shortages, facilitate accumulation of international reserves, and improve interbank trading conditions. - Reserve accumulation target: - Authorities aim to implement the agreed path of reserves accumulation to reach at least 3.9 months of import cover in the medium term. - RBM will purchase foreign exchange as necessary, limit sales of foreign exchange, and, on average, become a net purchaser. - Coordination and temporary measures: - Authorities will safeguard coordination between fiscal and monetary policy to support macroeconomic stabilization. - Government requests approval to maintain four multiple currency practices (MCPs) and three exchange restrictions; these measures are temporary and will be eliminated during the ECF-arrangement (SB). ### Structural, Governance Reforms and Climate Adaptation - Governance, transparency and anticorruption: - Plan to publish a follow-up report related to the COVID-19 spending audit detailing corrective actions. - Since 2021, all payments across MDAs are exclusively carried out through Electronic Funds Transfer (EFT); allowance transfers linked to an employment number and a single bank account number. - Operationalized the Financial Crimes Court to fast-track prosecution of financial and related crimes. - Removed the Anti-Corruption Bureau (ACB) requirement to obtain consent from the Director of Public Prosecution to effect arrests in suspected corruption cases. - Review of the Public Procurement and Disposal of Assets Authority (PPDA) Act to provide for declaration of beneficial ownership in bidding and to address anti-competitive practices. - ACB signed a Memorandum of Understanding with selected MDAs to facilitate data and information sharing. - SOE oversight: - Enhanced oversight of SOEs including monitoring government guaranteed debt. - Detailed reporting to Parliament for FY2021/22 for high-risk SOEs. - Monitoring of management accounts of relevant SOEs to be undertaken quarterly. - Continue to prepare an annual consolidated report of all SOEs in compliance with the new PFM Act. - Social protection and prioritization: - Given limited fiscal space, authorities will prioritize expenditure to safeguard Social Cash Transfer Program (SCTP) and priority infrastructure investment. - Climate resilience and disaster management: - Authorities developing Disaster Risk Management (DRM) regulations and related policies to be submitted to Parliament by end-December 2024 (SB). - DRM regulations designed to address gaps in disaster risk management and guide preparedness, risk reduction, response and recovery of buildings. - Continue to work with partners to develop a more efficient agricultural subsidy program to target the most vulnerable households. - Aim to reduce dependence on agricultural exports and implement the National Export Strategy to rebuild reserve buffers and improve liquidity. - View further support under the Resilience and Sustainability Facility (RSF) as critical to build climate resilience. ### Conclusion and Request - Authorities consider a new UCT-quality Fund program critical to: - Augment progress achieved under the PMB. - Place public finances on a sustainable footing. - Support the long-term vision of Malawi 2063 to create an inclusively wealthy nation. - Authorities request Executive Directors’ favorable consideration of their request for a new four-year ECF-arrangement. *Source: Introduction (1mwiea2023002).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mwiea2023002.pdf_