## 2. Macroeconomic Projections Under a Reform Scenario

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### Background and Context
- Macroeconomic malaise despite sequential ECFs and donor inflows averaging nearly 7 percent of GDP per year; slowing per capita GDP growth and recent negative per capita outcomes.
- Fiscal and external pressures:
  - Fiscal deficit rose from a small surplus in 2010 to almost 11 percent of GDP in FY2023/24.
  - Malawi highly susceptible to external shocks, particularly climatic shocks, and lacks policy instruments and buffers.
  - 2023 ECF automatically terminated on May 14, 2025, eighteen months after approval without completing a review.
- 2024 economic activity and macro indicators:
  - Real GDP growth: 1.8 percent (2024), down from 1.9 percent (2023).
  - Import dependence: exceeds 30 percent of GDP.
  - Domestic financing needs crowded out private sector activity.
  - Money growth: 45 percent as of end-2024.
  - Inflation: peaked at 30.7 percent y-o-y in February 2024; eased to 27.7 percent in May 2024; non-food inflation continued to accelerate.
  - Policy rate: unchanged at 26 percent since February 2024; real rates are negative.
  - Official-parallel exchange rate spread: around 100 percent.
  - Current account deficit: almost 22 percent of GDP in 2024 (from 17 percent in 2023).
  - Gross reserves: estimated 0.4 months of imports at end-2024 (adequate range: at least 2.5-3 months).
  - External commercial creditor arrears: US$669 million at end-2024.
  - Total public debt: 88 percent of GDP as of end-2024.

### Outlook: Baseline versus Reform Scenario
- Baseline (current policies through elections, with forced adjustments):
  - Real GDP growth: from 1.8 percent in 2024 to 3.4 percent by 2029.
  - Inflation: remains high, settles at about 15 percent over the medium term.
  - Current account deficit: halves to about 10 percent of GDP.
  - Public debt: continues rising and remains on an unsustainable path.
- Reform scenario (prudent fiscal, monetary, exchange rate policies and structural reforms):
  - Potential real growth: 4.2 percent.
  - Inflation: 8 percent.
  - Public debt dynamics improve in outer years; public debt starts declining from 2028 in illustrative reform scenario.
- Authorities’ projections:
  - Authorities expect real GDP to expand by 3 percent in the current year (from 1.8 percent last year).
  - Authorities project inflation to decelerate to 17 percent in 2026.
  - Authorities developing medium-term reform program to be finalized after September election.

### Sensitivities and External Developments
- Direct trade impacts from geopolitical uncertainty: relatively muted (Malawi exports ~5 percent to the United States).
- Indirect impacts: potentially significant via declines in grant inflows as donors retrench.
- USAID withdrawal and ODA cuts:
  - Malawi received over 2 percent of GDP worth of USAID assistance in 2024.
  - Preliminary estimates: 32 of 39 active/planned USAID projects cancelled, worth almost US$94 million (equivalent to ~0.6 percent of GDP or 3 percent of imports).

### Risks and Key Downside Factors
- Main downside risks:
  - Lower-than-expected grants and food production.
  - Additional trade tensions.
  - Delayed reforms deepening macro instability.
  - Cancellation of USAID programs and difficulties securing sufficient external financing, risking decumulation of reserves and/or import compression.
  - Lower food production projected to be about 15 percent short of domestic needs.
  - Potential social tensions in run-up to elections.
- Upside risks:
  - Greater-than-expected mining investment and change in policy direction.

### Policy Priority: Stabilize and Transition to Private-Sector-led Growth
- Immediate priority: stabilize the economy and transition from aid-dependent to private-sector-led growth via coordinated fiscal and monetary policy to:
  - Regain credibility.
  - Improve debt dynamics.
  - Rebuild fiscal and external buffers.
  - Reduce inflation.
- Fiscal dominance is a critical obstacle undermining RBM independence and monetary policy transmission.

### The Missing Puzzle Piece: Sustainable Fiscal Adjustment Path
- FY2025/26 budget: largely continues current policies; limited progress in revenue mobilization.
- Baseline fiscal trajectory:
  - Total expenditure envelope remains large; slightly higher recurrent expenditure as share of GDP (primarily due to interest).
  - Overall deficit remains around 11 percent over the medium-term.
  - Primary balance gradually improves as interest crowds out primary spending.
  - Potential decline in grant inflows expected to further constrain fiscal space and reduce public investment.
- Interest bill dynamics:
  - Interest bill projected to rise to 8 percent of GDP in FY2025/26.
  - By 2026, interest bill anticipated to exceed 40 percent of total government revenue (including grants).
- Required fiscal adjustment (DSA and staff analysis):
  - Primary deficit of about 1 percent of GDP required to stabilize public debt (note in source: “This figure should not be taken at face value. Please see DSA supplement.”).
  - Over medium-term, primary balance should reach a surplus of about 2 percent of GDP to build buffers, support development spending, reduce inflation, and fill donor financing gaps for health and education.
  - Illustrative reform scenario approaches this level; public debt starts declining from 2028.
- Recommended fiscal framework and revenue measures:
  - Adopt a Medium-term Fiscal Framework to guide annual budgeting.
  - Mobilize domestic revenue through tax policy and administrative measures:
    - Broaden VAT base: eighteen zero-rated items and twenty-one exemptions, equivalent to 14 percent and 40 percent of the VAT base, respectively.
    - Identify and cost existing tax expenditures to eliminate legacy, regressive and inefficient measures.
    - Use both direct and indirect tax instruments to support formalization and equitable burden sharing (Annex II).
  - Strengthen and accelerate tax administration reforms:
    - Integrated tax administration system (ITAS, “Msonkho”) broadly in place; legacy system to be decommissioned by end of year.
    - Malawi Revenue Authority (MRA) to build data marts, identify tax expenditures with IMF CD support, and review institutional structure.
  - Improve spending efficiency and reduce interest bill:
    - Activate Human Resources module in IFMIS to manage wage bill.
    - Address expenditure enforcement and procurement gaps.
    - Prioritize protecting human capital and social protection spending, including in-kind transfers and expanding social registry given USAID withdrawal.

### Fiscal Aggregates (Text Table 1, percent of GDP)
- REVENUE: 17.2, 18.5, 21.3, 19.1, 18.5 (2022/23; 2023/24 Est.; Mid-year Budget; Prel. Proj. 2024/25; 2025/26)
- Taxes: 12.6, 13.2, 15.0, 14.1, 14.3
- Grants: 3.9, 4.3, 5.7, 4.0, 2.7
- EXPENDITURE: 27.5, 29.1, 27.8, 29.2, 29.2
- EXPENSE: 18.8, 23.3, 20.5, 22.0, 22.6
- Compensation of employees: 6.1, 6.1, 6.0, 6.1, 5.8
- Interest: 4.9, 5.2, 6.7, 6.6, 8.2
- Acquisition of Non-Financial Assets (Development Expenditure): 8.7, 5.7, 7.3, 7.2, 6.7
  - Foreign (Part I): 6.9, 4.2, 6.0, 5.2, 4.6
  - Domestic (Part II): 1.8, 1.5, 1.3, 2.0, 2.1
- Overall Balance (incl. grants): -10.3, -10.6, -6.5, -10.1, -10.7
- Domestic Primary Balance, excluding RBM: -2.4, -1.9, 0.5, -2.9, -1.5
- Notes: Fiscal statistics follow Government Finance Statistics Manual (2014) starting 2020 projections onward; FY2022/23 is April–March.

### Public Financial Management: Progress, Gaps, and Priorities
- Progress: increased IFMIS coverage and continued bank reconciliation; gaps remain evidenced by FY2024/25 spending overruns.
- Priority measures:
  - Mandate all public projects to enter PSIP under updated Public Finance Management Act; strengthen PSIP oversight and monitoring.
  - Ramp up IFMIS, cash management and fiscal reporting; public monthly IFMIS-based budget execution reporting; avoid new arrears.
  - Improve procurement: accelerate electronic government procurement, improve public access to procurement data (MAPS (2023) recommendations), complete G2G governance guidance.
  - Strengthen SOE oversight: expand SOE risk assessment coverage and publish risks in budget process via a “Fiscal Risk and Management Strategy” annex to FY2025/26 mid-year budget.
- Authorities’ medium-term fiscal objective: reduce overall deficit to 6 percent of GDP (a 4 percent of GDP adjustment).

### Achieving Price Stability: Monetary Policy and Inflation Drivers
- Key dynamics:
  - Money growth contributes to overall and non-food inflation; fiscal dominance illustrated in staff analysis (Annex III).
  - With limits on direct monetary financing, RBM injects liquidity by purchasing government securities from banks via rediscounting facility; excess liquidity pressures exchange rate.
  - Monthly seasonally adjusted m-o-m food inflation averaged 2 percent since 2020 (27 percent annualized).
- Policy recommendations for RBM:
  - Re-anchor inflation expectations in line with price stabilization mandate.
  - With elevated inflation through 2025, raise policy rate to a real positive level until inflation eases; consider raising the liquidity reserve requirement as a second-best option.
  - Prioritize open market operations (OMO) at fixed rate with full allotment to mop-up excess liquidity and sterilize purchases of government securities in the secondary market.
  - RBM should address deviations in the 91-day T-bill rate from other short-term rates indicating potential issues in policy transmission.

### Exchange Rate Policy and External Buffers
- Exchange rate and parallel market:
  - De jure: floating supported by inflation targeting; de facto: “stabilized” exchange rate regime.
  - Staff estimate real appreciation of over 26 percent since November 2023, erasing much of the 44 percent devaluation.
  - Parallel market spread peaked over 150 percent earlier in 2025.
- Reform priorities:
  - Exchange rate unification is short-term priority as part of broader stabilization package; include social safety nets to offset short-run household impacts.
  - Administrative measures (import/export bans, price caps, licensing renewals) are distortive and cannot substitute formal policy responses.
- Regime options:
  - Managed float: can mitigate pass-through inflation but needs adequate reserves and credible willingness to adjust.
  - Free floating: effective shock-absorber once credibility re-established and structural impediments addressed.
- Multiple currency practices (MCPs):
  - Four MCPs arose between February and March 2024 related to RBM-managed rates and FX operations; updated data suggests all MCPs continue to arise.

### Financial Sector Stability, Vulnerabilities, and Recommendations
- System-level strength and exposures:
  - Banks: well-capitalized, liquid, highly profitable partly due to government securities holdings.
  - Key statistics:
    - Capital adequacy ratio: 22.1 percent (system-wide, end-April 2025).
    - Liquid assets to deposits and short-term liabilities: 54.5 percent (end-April 2025); regulatory minimum: 25 percent.
    - Return-on-Assets (ROA) aggregate: 7.5 percent (end-April 2025); Sub-Saharan Africa average ROA: 3.3 percent (2023).
    - Average profit growth of banks (weighted by assets): 79.2 percent between 2023 and 2024.
- Bank-level vulnerabilities (selected figures preserved):
  - Trading-book net open position in FX: 4 percent of core capital (end-March).
  - Non-performing loans (aggregate): 9.8 percent in November 2024 → 7.7 percent in April 2025 (regulatory threshold: 5 percent).
  - Banks’ holdings of government securities: 45 percent of total assets in April.
  - ODC holdings of government securities: grew by 78 percent y-o-y in 2024.
  - Private sector credit growth: 30 percent in 2024; 22 percent y-o-y through end-April.
- Staff supervisory recommendations:
  - RBM and supervisors to closely monitor FX risk and credit risk; enhance systemic risk analysis and use IMF TA stress testing tools.
  - Reserve Bank should refrain from outright purchases of government securities (including via rediscounting facility) as liquidity management or financing tool.
  - Monitor and contain sovereign–bank nexus given high bank exposure to government borrowing.

### Structural and Governance Priorities Relevant to Financial Stability
- Improve investment climate (reduce regulatory burden, address FX surrender requirements).
- Restore automatic fuel pricing mechanism and market-based fuel prices to reduce inefficiencies and increase FX availability.
  - Fuel-related arrears: over 950 billion Kwacha (US$540 million) by the Price Stabilization Fund to importers; over 450 billion Kwacha (US$250 million) by importers to the Treasury for unpaid fuel levies.
  - May data: petroleum and diesel pump prices about 34 and 19 percent under cost, respectively.
- Continue anticorruption reforms: strengthen Anti-Corruption Bureau (ACB), Financial Crimes Court, pass Judicial Service Administration Bill.
- AML-CFT: progress on legal definitions and Beneficial Ownership data; systematic collection of prosecution and asset recovery data outstanding.
- Strengthen RBM independence and governance in line with IMF advice (RBM Act (2018) objectives; ongoing amendment following 2021 Safeguards Assessment).

### Debt Dynamics, DSA Findings, and Restructuring
- Debt and financing status:
  - Malawi in arrears to external commercial creditors: US$669 million at end-2024.
  - Total public debt: 88 percent of GDP at end-2024.
  - Recent reprofiling agreements with some official bilateral creditors (China EXIM and Kuwait Fund) represent a small share of external debt; discussions continuing with India EXIM and Saudi Fund.
  - Limited progress with external commercial creditors.
- DSA assessments and required adjustment:
  - DSA indicates primary deficit of about 1 percent of GDP required to stabilize public debt; medium-term primary surplus of about 2 percent of GDP advised to build buffers.
  - Under reform scenario with external debt restructuring broadly in line with October 2022 strategy, net present value of external debt is significantly reduced but external-restructuring-only scenario is insufficient to reach moderate risk of debt distress without deeper haircuts or export upside.
- Selected DSA projection highlights (series as presented):
  - Real GDP Growth (percent change): 2.4, 2.4, 2.9, 2.7, 3.4, 3.1, 3.7, 3.3, 4.0, 3.4, 4.2, 3.4.
  - Inflation - Annual Average (percent): 25.8, 27.7, 13.4, 21.7, 8.2, 18.8, 7.8, 15.3, 7.9, 15.3, 8.0, 15.4.
  - Revenue (percent of GDP): 19.2, 19.1, 19.3, 18.6, 20.3, 17.8, 22.3, 19.0, 22.0, 19.0, 21.4, 18.4.
  - Overall balance (percent of GDP): -10.0, -10.1, -12.5, -10.7, -12.0, -13.1, -9.3, -11.9, -6.8, -10.7, -5.8, -10.7.
  - Gross official reserves (levels): 178, 118, 362, 164, 544, 272, 725, 370, 851, 440, 924, 558.
  - External debt (percent of GDP): 40.2, 31.6, 38.7, 29.1, 38.1, 25.8, 36.1, 22.7, 33.7, 19.6, 31.2, 16.9.
  - Total public debt (percent of GDP): 90.4, 80.2, 93.4, 80.6, 97.6, 81.4, 97.4, 82.2, 96.3, 82.8, 93.8, 83.0.

### External Sector Assessment and Exchange Rate Considerations
- Overall assessment: Malawi’s external position in 2024 substantially weaker than implied by fundamentals and desirable policies.
- Current Account:
  - CA deficit: 21.9 percent of GDP in 2024 (higher goods imports more than offset tobacco rebound).
  - EBA-lite: cyclically adjusted CA deficit: 22.3 percent of GDP in 2024; CA norm: -5.5 percent of GDP; CA Gap: 16.7 percent of GDP.
- REER assessment:
  - REER appreciated by 17 percent in 2024.
  - Staff estimate REER overvalued by 126 percent relative to level implied by fundamentals and desirable policies (note data uncertainty).
- Reserves and FX:
  - Reserves declined to about 0.4 months of imports in 2024; Fund’s reserve adequacy model suggests at least 2.6-3.0 months.
- Policy recommendations:
  - Coordinate fiscal, monetary, and exchange rate policies.
  - Adopt tighter fiscal stance to contain imports and reduce monetary financing.
  - Exchange rate adjustment and gradual removal of capital controls combined with structural reforms to reduce distortions and attract capital inflows.
  - Avoid further non-concessional external debt.

### Domestic Revenue Mobilization (Annex II) — Key Findings and Recommendations
- Revenue performance:
  - Tax revenue: 13.2 percent of GDP in FY2023/24.
  - VAT: 26.7 percent of tax collections; PIT: 24.7 percent; CIT: 24.5 percent; Excise duties: 13.4 percent; Customs duties: 10 percent.
- VAT specifics and gaps:
  - C-efficiency ratio: 0.2 in 2022 (0.12 below SSA average).
  - VAT effort: 46.5 percent (ranked 61 out of 70).
  - Estimated compliance and policy gaps: 4.8 percent and 5 percent of GDP, respectively.
  - Effective standard VAT rate: 7.9 percent (statutory rate: 16.5 percent).
  - VAT base composition: 44 percent of VAT base subject to standard rate; 40 percent exempt; 14 percent zero-rated; 18 zero-rated and 21 exempt supplies.
- Income and corporate tax issues:
  - Income tax compliance gap: 3.3 percent of GDP.
  - Corporate income tax standard rate: 30 percent; CIT revenue rose from 2.0 percent of GDP (FY2019/20) to 3.2 percent of GDP (FY2023/24).
  - Generous incentives, tax holidays, and interest deductibility contribute to base erosion.
- Excise revenue:
  - Averaged 1.8 percent of GDP over the past decade.
  - Most excises (except cigarettes) are ad valorem.
- Informality and administrative constraints:
  - Informal sector estimated at 40 percent of GDP; only 1.3 percent of businesses formal.
  - Delayed VAT refunds: average processing time 132 days; unpaid VAT claims MWK 14.3 billion (Jan 2023).
  - MRA uses multiple legacy systems; full Msonkho Online implementation pending.
- Policy recommendations (selected):
  - Short-term: broaden VAT base by rationalizing exemptions and zero rates; repeal exemptions and zero-rating of business inputs; align presumptive tax threshold with VAT registration threshold.
  - Medium/long-term: treat presumptive tax as minimum tax for active MSMEs; broaden CIT base by eliminating discretionary incentives; cap interest deductibility (e.g., at 30 percent of EBITDA); gradually reduce CIT rate to 28 - 25 percent.
  - Strengthen excise policy: shift from ad valorem to specific excises on goods with negative externalities; align rates regionally.
  - Sequence reforms with administrative capacity building and clear communication.

### Data Adequacy, DSA Classification, and Staff Conclusions
- Data issues:
  - GDP and BOP available only at annual frequency with lag; significant discrepancies in BOP data (errors and omissions 4-6 percent of GDP in 2021-2023).
  - Several national accounts series need updating; employment data latest 2022.
  - Staff conclusion: "The data provided to the Fund have some shortcomings that somewhat hamper surveillance."
- DSA key findings:
  - Malawi’s external and overall public debt assessed as “in distress.”
  - PV of overall public debt-to-GDP around 79 percent in 2024 and significantly above threshold; breaches in PV of debt-to-exports, debt service-to-revenue, and debt service-to-exports.
  - Policy implication: bring public debt on downward trajectory through medium-term macro adjustment, growth-supporting reforms, and addressing high domestic interest bill.
- Annex IX corrective actions:
  - Construct quarterly national accounts, rebase annual GDP series, enhance fiscal data compilation and dissemination, publish timely public sector debt statistics, improve BOP and IIP data, and strengthen RBM–NSO–MoF data exchange.

### Consolidated Key Statistics and Projections (selected exact figures preserved)
- Real GDP growth: 1.9 percent (2023); 1.8 percent (2024); staff macro outlook under current policies: 2.4 percent in 2025, gradually to 3.4 percent over medium term.
- Inflation: 35.0 percent (Jan 2024); annual average 32.2 percent (2024); 27.7 percent (end-May 2025); projected average 28 percent in 2025, settling around 15 percent over medium term under baseline.
- Current account deficit: 21.9 percent of GDP (2024).
- Gross reserves: 0.4 months of imports (end-2024); projected 1.3 months by 2030 under baseline.
- Interest bill: nearly 7 percent of GDP in FY2024/25; projected to exceed 8 percent in FY2025/26.
- Total public debt: 88 percent of GDP (end-2024).
- Banks: aggregate capital adequacy ratio 22.1 percent (end-April 2025); liquid assets to deposits and short-term liabilities 54.5 percent (end-April 2025); aggregate ROA 7.5 percent (end-April 2025).

### Staff Recommended Policy Package (condensed)
- Fiscal:
  - Urgent fiscal consolidation anchored in domestic revenue mobilization.
  - Adopt MTFF, strengthen MRA, broaden VAT base, eliminate inefficient tax expenditures, protect human capital and social spending, improve PFM and procurement.
- Monetary and financial:
  - Re-anchor inflation expectations; tighten monetary policy to achieve positive real rates; mop-up excess liquidity via OMOs; discontinue rediscounting facility for government financing; strengthen RBM independence and governance; enhance financial supervision and stress testing.
- Exchange rate:
  - Unify and move to a market-clearing exchange rate; consider managed float as short-term option; build reserves and SDR holdings to avoid high net charges and IMF arrears risk.
- Structural and governance:
  - Improve investment climate, restore automatic fuel pricing mechanism, continue AML-CFT and anticorruption reforms, strengthen SOE oversight, and improve macroeconomic and financial data collection and timeliness.

*Source: IMF staff summary of “2. Macroeconomic Projections Under a Reform Scenario” and accompanying annexes from the provided Malawi chapter content.*

### 2. Macroeconomic Projections Under a Reform Scenario ________________________________________ 26

### 2. Macroeconomic Projections Under a Reform Scenario ________________________________________ 26

### Background and Context
- Despite sequential ECFs and donor inflows averaging nearly 7 percent of GDP per year, Malawi has experienced macroeconomic malaise evidenced by slowing per capita GDP growth and recent negative per capita outcomes (see Text Figure 1).
- The fiscal deficit rose from a small surplus in 2010 to almost 11 percent of GDP in FY2023/24.
- Malawi is highly susceptible to external shocks, particularly climatic shocks, and lacks policy instruments and buffers.
- General elections scheduled for September have reduced policy traction under the ECF; the 2023 ECF automatically terminated on May 14, 2025, eighteen months after approval without completing a review.
- Economic activity in 2024:
  - Real GDP growth declined to 1.8 percent (from 1.9 percent in the previous year) due to drought-impacted agricultural production and critical FX shortages.
  - Import dependence exceeds 30 percent of GDP.
  - Domestic financing needs crowded out private sector activity.
- FY2024/25 fiscal performance versus mid-year budget:
  - Domestic revenue, excluding RBM dividends, fell short by 1.2 percentage points of GDP relative to mid-year projections.
  - Delayed tax policy and administrative measures (including VAT bill amendment and a voluntary tax compliance window for motorcycle operators) contributed to revenue shortfall.
  - Domestic primary expenditure, excluding RBM recapitalization costs, was 2.2 percentage points of GDP higher than mid-year estimates.
  - Estimated domestic primary balance, excluding RBM recapitalization costs and dividends, is -2.9 percent of GDP versus 0.5 percent in the mid-year budget and -1.9 percent in FY2023/24 (Text Table 1).
- Inflation and monetary context:
  - Money growth was 45 percent as of end-2024.
  - Inflation peaked at 30.7 percent, y-o-y in February 2024, and eased to 27.7 percent in May 2024; non-food inflation continued to accelerate.
  - Policy rates remained unchanged at 26 percent since the last increase in February 2024; real rates are negative.
  - Wide official-parallel exchange rate spread around 100 percent contributed to pass-through inflation and increased recourse to the parallel market.
- External sector and reserves:
  - Current account deficit expanded to almost 22 percent of GDP in 2024 (from 17 percent in 2023), with higher goods imports offsetting a strong rebound in tobacco exports.
  - Gross reserves dropped to an estimated 0.4 months of imports at end-2024, well below the assessed adequate range of at least 2.5-3 months.
  - Malawi’s external position is assessed to be substantially weaker than implied by fundamentals and desirable policies, including an overvalued REER.
- Debt and financing:
  - Malawi is in arrears to its external commercial creditors: US$669 million at end-2024.
  - Total public debt was 88 percent of GDP as of end-2024.
  - Little progress on debt restructuring negotiations with external commercial creditors.

### Outlook and Reform Scenario Projections
- Baseline (continuation of current policies through elections with some forced adjustments due to financing constraints):
  - Real GDP growth: from 1.8 percent in 2024 to 3.4 percent by 2029.
  - Inflation: remains high, settles at about 15 percent over the medium term.
  - Current account deficit: halves to about 10 percent of GDP due to import compression and higher nominal GDP.
  - Public debt: continues rising and remains on an unsustainable path.
- Reform scenario (prudent fiscal, monetary, exchange rate policies and structural reforms):
  - Higher potential real growth: 4.2 percent.
  - Lower inflation: 8 percent.
  - Durable improvements in external balances and reserves; public sector debt dynamics improve in outer years (public debt starts declining from 2028 in illustrative reform scenario).
- Sensitivities and external developments:
  - Direct trade impacts from increasing geopolitical uncertainty are relatively muted (Malawi exports about 5 percent to the United States).
  - Indirect impacts are potentially significant, primarily from declines in grant inflows as donor countries retrench aid programs.
- Authorities’ outlook:
  - Authorities expect real GDP to expand by 3 percent in the current year (from 1.8 percent last year).
  - Authorities project inflation to decelerate to 17 percent in 2026.
  - Authorities are developing a medium-term reform program to be finalized after the September election.

### Risks and Key Downside Factors
- Main downside risks include:
  - Lower-than-expected grants and food production.
  - Additional trade tensions.
  - Delayed reforms deepening macroeconomic instability.
  - Cancellation of USAID programs and difficulties in securing sufficient external financing, risking decumulation of reserves and/or compression of imports.
  - Lower food production projected to be about 15 percent short of domestic needs.
  - Potential social tensions in the run-up to elections.
- Upside risks:
  - Greater-than-expected mining investment and a change in policy direction.

### Policy Discussions and Key Recommendations
- Immediate priority: stabilize the economy and transition from an aid-dependent to a private-sector led economy via coordinated fiscal and monetary policy to regain credibility, improve debt dynamics, rebuild fiscal and external buffers, and reduce inflation.
- Fiscal dominance is a critical obstacle undermining RBM independence and monetary policy transmission; addressing fiscal dominance is essential.

A. The Missing Puzzle Piece: Sustainable Fiscal Adjustment Path
- FY2025/26 budget largely continues current policies, delaying necessary adjustment; limited progress in revenue mobilization.
- Under the baseline:
  - Total expenditure envelope remains large; slightly higher recurrent expenditure as a share of GDP (primarily due to interest).
  - Overall deficit remains around 11 percent over the medium-term.
  - Primary balance gradually improves as interest crowds out primary spending.
  - Potential decline in grant inflows expected to further constrain fiscal space and reduce public investment.
- Interest bill dynamics:
  - Interest bill is projected to rise to 8 percent of GDP in FY2025/26.
  - By 2026, the interest bill is anticipated to exceed 40 percent of total government revenue (including grants) and remain elevated over the medium term.
  - Rising interest costs squeeze domestically financed investment and pro-poor spending and aggravate the sovereign-banking sector nexus.
- Required fiscal adjustment (as indicated by DSA and staff analysis):
  - A primary deficit of about 1 percent of GDP is required to stabilize public debt (note: “This figure should not be taken at face value. Please see DSA supplement.”).
  - Over the medium-term, the primary balance should reach a surplus of about 2 percent of GDP to build fiscal buffers, support development spending, reduce inflation, and fill donor financing gaps for health and education.
  - The illustrative reform scenario approaches this level of adjustment and public debt starts declining from 2028.
- Recommended fiscal framework and revenue measures:
  - Adopt a Medium-term Fiscal Framework to guide annual budgeting.
  - Mobilize domestic revenue through a combination of tax policy and administrative measures:
    - Broaden the VAT base: there are eighteen zero-rated items and twenty-one exemptions, equivalent to 14 percent and 40 percent of the VAT base, respectively.
    - Identify and cost existing tax expenditures with a view to eliminating legacy, regressive and inefficient measures.
    - Over the longer-term, use both direct and indirect tax instruments to support formalization, equitable burden sharing and sustainable revenue (see Annex II).
  - Strengthen and accelerate tax administration reforms:
    - Integrated tax administration system (ITAS, “Msonkho”) is broadly in place; legacy system to be decommissioned by end of year.
    - Malawi Revenue Authority (MRA) should focus on building data marts for registration, enforcement and audit; identify tax expenditures with IMF CD support; and review MRA institutional structure.
  - Improve spending efficiency and reduce the interest bill:
    - Activate the Human Resources module in IFMIS to help manage the wage bill and improve efficiency.
    - Address expenditure enforcement and procurement gaps.
    - Prioritize protecting human capital and social protection spending (including in-kind transfers and expanding the social registry), noting withdrawal of USAID programs places additional pressure on the public budget.

- Fiscal aggregates (Text Table 1, percent of GDP):
  - REVENUE: 17.2, 18.5, 21.3, 19.1, 18.5 (2022/23; 2023/24 Est.; Mid-year Budget; Prel. Proj. 2024/25; 2025/26)
  - Taxes: 12.6, 13.2, 15.0, 14.1, 14.3
  - Grants: 3.9, 4.3, 5.7, 4.0, 2.7
  - EXPENDITURE: 27.5, 29.1, 27.8, 29.2, 29.2
  - EXPENSE: 18.8, 23.3, 20.5, 22.0, 22.6
  - Compensation of employees: 6.1, 6.1, 6.0, 6.1, 5.8
  - Interest: 4.9, 5.2, 6.7, 6.6, 8.2
  - Acquisition of Non-Financial Assets (Development Expenditure): 8.7, 5.7, 7.3, 7.2, 6.7
    - Foreign (Part I): 6.9, 4.2, 6.0, 5.2, 4.6
    - Domestic (Part II): 1.8, 1.5, 1.3, 2.0, 2.1
  - Overall Balance (incl. grants): -10.3, -10.6, -6.5, -10.1, -10.7
  - Domestic Primary Balance, excluding RBM: -2.4, -1.9, 0.5, -2.9, -1.5
  - Notes:
    - Fiscal statistics follow Government Finance Statistics Manual (2014) starting 2020 projections onward. Fiscal year FY2022/23 is April–March.
    - Domestic primary balance is calculated by subtracting current expenditures (except interest payment) and domestically-financed development expenditures from tax and non-tax revenues, and excluding RBM dividends and recapitalization costs.

- Implementation priorities to restore macro stability:
  - Urgent fiscal consolidation focused on domestic revenue mobilization.
  - Strengthen tax administration and decommission legacy IT systems.
  - Reduce interest bill through consolidation to free fiscal space for priority spending.
  - Improve social protection targeting and protect critical services amid potential donor withdrawal.

*Source: IMF staff summary of “2. Macroeconomic Projections Under a Reform Scenario” from the provided Malawi chapter content.*

### 16.      Public financial management improvements are progressing and remain critical for

### 16.      Public financial management improvements are progressing and remain critical for fiscal governance and building credibility

### Public financial management: progress, gaps, and priority measures
- Progress noted: increased IFMIS coverage and continued bank reconciliation efforts; gaps remain as evidenced by the FY2024/25 spending overruns.
- Priority measures and findings:
  - Continue increasing the efficiency of public investment:
    - All public projects are mandated to enter the Public Sector Investment Program (PSIP) under the updated Public Finance Management Act.
    - Strengthen oversight and monitoring of investment projects, including multi-year projects, by expanding information in the budget document and improving the PSIP platform.
  - Enhance budget credibility and reporting:
    - Need to ramp up implementation of the new IFMIS, cash management and fiscal reporting.
    - Spending envelopes in the budget are not adhered to, largely due to statutory commitments and unexpected spending needs, resulting in mid-year adjustments and rising fiscal deficits during the year.
    - Recommendations: hold to hard spending constraints at the MDAs (including a contingency buffer); base the spending envelope on more realistic revenue assumptions; publicly report budget execution from IFMIS on a monthly basis, following Government Financial Statistics Manual 2014 standards; continue automated bank reconciliation; avoid incurrence of new arrears.
    - Footnote: For this, the authorities still need to fill gaps in IFMIS use across MDAs, for example, Part I foreign financed development spending, domestic debt transactions, and revenues from MRA.
  - Improving the procurement system:
    - System is complex and faces challenges in compliance, integration into IFMIS and budget processes, competition, and availability of procurement expertise.
    - The planned government-to-government (G2G) fuel purchase regime could present new risks.
    - Recommendations: accelerate electronic government procurement, improve public access to procurement data in line with MAPS (2023) recommendations, and complete guidance on the G2G governance framework.
  - Strengthening SOE oversight:
    - Rising contingent liabilities and arrears from poorly performing SOEs pose a fiscal risk, compounded by limited reporting and data gaps.
    - Recommendation: expand coverage of SOE risk assessment and publish these risks in the budget process by including a “Fiscal Risk and Management Strategy” annex to the FY2025/26 mid-year budget.

### Authorities’ views on fiscal adjustment and revenue
- The MoF objective: reduce the overall deficit to 6 percent of GDP over the medium-term (a 4 percent of GDP adjustment).
- Authorities concur on the need for domestic revenue increases; note the interest rate bill dynamic poses a significant obstacle to fiscal retrenchment and more development spending.
- They will develop a more detailed fiscal program later this year, with some front loading of revenue measures, and emphasize accounting for political economy constraints.
- Authorities maintained that revenue buoyancy experienced in FY2024/25 would continue based on on-going tax administration measures (e.g., digitalization, tax stamps, tax debt collections, audits), suggesting about 10 percentage point higher nominal tax revenue growth than under IMF staff projections.

### Restoring debt sustainability
- Recent debt reprofiling agreements with some official bilateral creditors are welcome but represent a small share of external debt.
  - Agreements in force: China EXIM and the Kuwait Fund for Arab Economic Development.
  - Discussions continuing with India EXIM and the Saudi Fund for Development.
- Authorities continued engagement with external commercial creditors to achieve a restructuring that would ensure that the risk of debt distress returns to a moderate level in the medium term; limited progress has been made.
- The stock of domestic public debt has risen sharply in recent years and is projected to continue rising under the baseline.
- Reducing risks to public debt sustainability requires:
  - A sustained medium-term macroeconomic adjustment;
  - Steps to substantially reduce the domestic interest bill, including through sustained fiscal adjustment and new external concessional financing.
- Efforts to strengthen public debt management and statistics:
  - Authorities implementing recommendations from the Fund’s report on strengthening public debt statistics, including publishing quarterly debt data on a timely basis.
  - The most recent debt report, covering data through end-September 2024, was published in November 2024.

### Achieving price stability
- Accelerating inflation drivers:
  - Shocks to food supply and an expanding parallel market spread, in the context of loose fiscal and monetary conditions.
  - Persistent and elevated domestic fiscal financing has led to accelerated money growth and inflation.
  - Staff analysis: money growth contributes to overall—and non-food—inflation, illustrating deleterious effects of fiscal dominance (see Annex III).
  - With limits on direct monetary financing, the RBM injects liquidity by purchasing government securities from banks in the secondary market via its rediscounting facility; resulting excess liquidity exerts pressure on the exchange rate.
  - Since 2015 under ECF reforms, these advances from the RBM have been limited to 10 percent of last year’s revenue and must be zero at the end of the fiscal year (RBM Amendment Act, 2015).
- Structural inflation dynamics:
  - Monthly, seasonally adjusted, month-on-month food inflation has been trending up, averaging 2 percent since 2020 (27 percent annualized), due to structural constraints: under-investment in irrigation and transportation, inefficient land use, fertilizer shortages, and climatic shocks.
  - Entrenched inflation expectations also contribute (farmers’ price demands at harvest reflect anticipated input prices six months ahead).
- Policy recommendations for RBM:
  - Re-anchor inflation expectations in line with its price stabilizing mandate.
  - With elevated inflation expected to continue through 2025, raise the policy rate to a real positive level until inflation credibly eases; raising the liquidity reserve requirement (which is unremunerated) as a second-best option.
  - Prioritize open market operations (OMO) at fixed rate with full allotment to mop-up excess liquidity and sterilize purchases of government securities in the secondary market.
  - Note: The interest rate on 91-day T-bills has deviated from other short-term interest rates, suggesting potential issues in policy transmission.

### Restoring external buffers and exchange rate policy
- Exchange rate and parallel market dynamics:
  - De jure regime: floating supported by inflation targeting; RBM operates a de facto “stabilized” exchange rate regime.
  - Staff estimate real appreciation of over 26 percent since November 2023, substantially erasing the benefits of the 44 percent devaluation.
  - Parallel market spread peaked at over 150 percent earlier this year.
  - Effects of an overvalued official rate: tax on exporters, subsidy to imports, burden on the BoP, increased informality, incentivized escape of foreign exchange from the system, and broader economic distortions.
  - Anecdotal indicators: Malawian banks’ and households’ net-FX assets at BIS banks amounted to US$74 and US$200 million at the end of 2024 (BIS, Locational Banking Statistics).
- Exchange rate unification and reform priorities:
  - Exchange rate unification is a short-term reform priority to avoid a high inflation, low growth trap and needs to be part of a broader macro stabilization package.
  - Authorities should start planning for adjustment, including introduction of a mid-year budget consistent with stabilization, while monetary policy is tightened.
  - The package should include social safety nets to offset short-run impacts on households.
  - Administrative measures (import/export bans, price caps, licensing renewals, restrictions on accessing the parallel FX market) cannot replace formal policy responses and exacerbate distortions.
- Regime options and operational guidance:
  - A “managed float” can help mitigate pass-through inflation but needs adequate reserves and a credible willingness to adjust the exchange rate when fundamentals are misaligned; RBM should clarify objectives, intervention mechanism, nominal exchange rate target or bands, and determination method.
  - A “free floating” regime would be an effective shock-absorber once policy credibility is re-established and structural impediments are addressed; as Malawi’s inflation differentials are likely difficult to manage, a managed rate may require frequent adjustments and approximate a floating rate.
  - Building Malawi’s SDR holdings could help avoid incurring high net charges and reduce the risk of arrears to the Fund.
- Multiple currency practices (MCPs):
  - Authorities maintain four MCPs subject to Fund approval under Article VIII, section III:
    - First MCP arose on February 1, 2024 from rates managed by the RBM applied to FX transactions by Authorized Dealer Banks and RBM FX spot transactions.
    - Second MCP arose on March 18, 2024 from the FX auction using the same fixed RBM rate.
    - Third MCP arose on February 8, 2024 from the rate used by the RBM in its spot leg of FX swaps.
    - Fourth MCP arose on February 8, 2024 from the forward rate used by the RBM in its FX swaps.
  - Updated data suggests all MCPs continue to arise (impermissible spreads continue to materialize since these dates).
  - Staff advised these would be resolved with an exchange rate alignment and continued exchange rate flexibility.

### Financial sector stability and performance
- Banks remain well-capitalized, liquid and highly profitable due to holdings of government securities with high rates.
- Key statistics (exact figures preserved):
  - System-wide, aggregate capital adequacy ratio: 22.1 percent as of end-April 2025.
  - Liquid assets to deposits and short-term liabilities ratio: 54.5 percent at end-April, regulatory minimum of 25 percent.
  - Return-on-Assets (ROA) ratios ranged from 1.3 to 10.5 percent at the end of April, with an aggregate level of 7.5 percent.
  - Sub-Saharan African average ROA: 3.3 percent in 2023.
  - The average profit growth of banks, weighted by market share of assets, was 79.2 percent between 2023 and 2024.

*Source: IMF staff and Malawian authorities as presented in the chapter.*

### 33.      Bank-level data indicates   some pockets of vulnerabilities within the financial sector.

### Bank-level data indicates some pockets of vulnerabilities within the financial sector

### Banking-sector vulnerabilities and risks
- Trading-book based net open position in foreign currency of banks: 4 percent of core capital as of end-March.  
- Total net FX liabilities position (trading and banking books) implies some risk exposure in the event of currency depreciation.  
- Non-performing loans (aggregate): declined from a peak of 9.8 percent in November 2024 to 7.7 percent in April 2025; regulatory threshold: 5 percent.  
- Banks’ holdings of government securities: 45 percent of total assets in April.  
- Both banks and non-bank financial institutions have significant exposure to government borrowing, heightening the banking–sovereign nexus.  
- Foreign exchange risk and credit risk from the macroeconomic outlook warrant continued close monitoring by the RBM and enhanced systemic risk analysis.  
- Stress testing tools developed with previous IMF TA would support assessment of these growing risks.

### Recent credit and government financing dynamics
- ODC holdings of government securities: grew by 78 percent y-o-y in 2024.  
- Private sector credit growth: 30 percent in 2024; negative in real terms; 22 percent year-on-year through end April (Figure 2 referenced in source).  
- Increased domestic financing needs and resulting high interest rates, combined with poor macroeconomic conditions heightening credit risk, have limited private sector credit growth in recent months.

### Authorities’ views on financial stability and supervision
- Authorities consider the financial system to be stable and broadly concur with IMF staff on adequate sectoral capitalization in the context of high profits.  
- Authorities acknowledge rising financial risks from concentration of financial sector assets in government securities.  
- RBM’s supervision of exchange rate risk is based on net open position calculated using banks’ trading book FX positions; authorities agreed on potential risks from mismatches in banking-book FX positions and the need for further monitoring.  
- Authorities downplayed crowding out, emphasizing the public sector’s role in filling financing gaps, particularly for micro/SME and agricultural sectors.

### Policy and supervisory recommendations (from staff)
- RBM and supervisors should maintain close monitoring of foreign exchange risk and credit risk, and enhance systemic risk analysis.  
- Use stress testing tools developed with previous IMF TA to assess vulnerabilities.  
- The Reserve Bank should refrain from outright purchases of government securities (including via the rediscounting facility) as a liquidity management or government financing tool.  
- Monitor and contain the sovereign–bank nexus given high bank exposure to government borrowing.

### Structural reforms, governance, and data priorities relevant to financial stability
- Improving the investment climate (e.g., reducing regulatory burden, addressing FX surrender requirements) would help attract investment and diversify the economy.  
- Market-based fuel prices and restoring the automatic fuel price mechanism would reduce inefficiencies, increase FX availability, and improve fiscal revenues.  
  - Accumulated arrears related to fuel: over 950 billion Kwacha (US$540 million) by the Price Stabilization Fund to importers; over 450 billion Kwacha (US$250 million) by importers to the Treasury for unpaid fuel levies.  
  - May data suggests petroleum and diesel pump prices were about 34 and 19 percent under cost, respectively.  
- Continue anticorruption reforms, strengthen the Anti-Corruption Bureau (ACB), enhance the Financial Crimes Court, pass the Judicial Service Administration Bill, and improve inter-agency collaboration and information sharing.  
- On AML-CFT: progress made on legal definition of terrorism finance offense, amendments to cover the non-profit sector and Beneficial Ownership data; systematic collection and management of data on cases, prosecutions, convictions and assets recovered remains outstanding.  
- Strengthen RBM independence and governance in line with IMF advice (RBM Act (2018) objectives; ongoing amendment following the 2021 Safeguards Assessment). Outstanding reforms include controls over open market operations and lending to banks, divestiture from the Export Development Fund (EDF), and internal audit capacity improvements.  
- Improvements in data quality and availability are required: timelier publication of annual national accounts, construction of quarterly national accounts, completion and funding of surveys (including the Integrated Household survey), and closer RBM–NSO and RBM–Ministry of Finance data exchange.

### Macroeconomic outlook and implications for the financial sector
- Staff macro outlook under current policies: real GDP growth of 2.4 percent in 2025, gradually increasing to 3.4 percent over the medium term.  
- Inflation projection: average 28 percent in 2025, settling at around 15 percent over the medium term.  
- Downside risks include lower-than-anticipated grant inflows and food production, additional global trade tensions, delayed reforms, and insufficient external financing. Upside risk: greater-than-expected mining investment and production.  
- Fiscal adjustment focused on domestic revenue mobilization is critical to reduce crowding out, lower interest costs, and create space for private credit growth.  
- Tighter fiscal and monetary policies are recommended to support disinflation, reduce broad money growth, and re-anchor inflation expectations; policy package should include support for the most vulnerable.  
- A unified and market clearing exchange rate is critical to reduce imbalances; managed float may provide a short-term nominal anchor but a floating exchange rate is preferred given low reserves and external vulnerability.

### Consolidated key statistics and projections (exact values preserved)
- Trading-book net open position in FX: 4 percent of core capital as of end-March.  
- Non-performing loans: 9.8 percent in November 2024; 7.7 percent in April 2025; regulatory threshold: 5 percent.  
- Banks’ government securities holdings: 45 percent of total assets in April.  
- ODC holdings of government securities: grew by 78 percent y-o-y in 2024.  
- Private sector credit growth: 30 percent in 2024; 22 percent year-on-year through end April.  
- Fuel-related arrears: over 950 billion Kwacha (US$540 million) and over 450 billion Kwacha (US$250 million).  
- Pump prices: about 34 and 19 percent under cost for petroleum and diesel, respectively (May data).  
- Staff macro projections: real GDP growth 2.4 percent in 2025, gradually increasing to 3.4 percent over the medium term; inflation averaging 28 percent in 2025 and around 15 percent over the medium term.

### Key recommendations summarized (from staff and boxes)
- Fiscal: prioritize fiscal policy for macro stability and debt reduction; implement a revenue-based fiscal adjustment by expanding the tax base and closing exemptions; improve expenditure efficiency and public investment management; implement effective commitment and expenditure controls; strengthen public procurement, fiscal risk analysis and SOE oversight; build policy credibility through an MTFF and regular IFMIS-based reporting.  
- Monetary and financial: re-anchor inflation expectations and tighten effective monetary policy by mopping up excess liquidity, sterilizing government borrowing, and increasing key interest rates to positive real levels; discontinue the rediscounting facility; improve fiscal–monetary coordination; maintain strong financial sector oversight and monitor sovereign–bank nexus.  
- Exchange rate: adopt a unified and market-clearing exchange rate, implement consistent macroeconomic policies, accumulate reserves and maintain necessary SDR holdings to prevent IMF arrears.  
- Structural and governance: improve investor climate by reducing regulations, removing distortions, and improving FX availability; continue 2024 Governance Diagnostic reforms in rule of law, AML-CFT, anti-corruption, and central bank governance; continue Safeguards Assessment reforms to support RBM independence and operations; strengthen macroeconomic and financial data collection and reporting.

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

### 1.6 percent of GDP in 2029-2030. The fiscal adjustment is based on feasible tax policy changes with only

### 1mwiea2025001-source-pdf - 1.6 percent of GDP in 2029-2030. The fiscal adjustment is based on feasible tax policy changes with only

### Reform scenario: macroeconomic projections and fiscal impacts
- Fiscal adjustment reaches 1.6 percent of GDP in 2029-2030.
- The fiscal adjustment is based on feasible tax policy changes with only limited expenditure restraint.
- The primary and overall balances under the reform scenario worsen temporarily relative to the baseline due to RBM recapitalization costs resulting from the one-off depreciation.
- Exchange rate flexibility:
  - Reduces the current account deficit and allows for faster reserves accumulation due to an improved trade balance and the formalization of a share of the transactions taking place in the parallel market.
  - The improvement in the current account as a percent of GDP is less pronounced because reduced inflation means that nominal GDP growth (the denominator) is lower.
- An external commercial debt restructuring is assumed to take place broadly in line with the authorities’ October 2022 strategy, resulting in a significant reduction in the net present value of external debt.

### Debt dynamics and medium-term outlook
- Debt dynamics improve gradually under the reform scenario as lower debt-creating flows overcome the effects of:
  1. Exchange rate depreciation (which raises the USD value of external debt).
  2. Lower inflation (which reduces nominal GDP growth).
- The reform scenario, with external debt restructuring only:
  - Avoids a disorderly adjustment and starts improving debt dynamics.
  - Is not sufficient to meet the authorities’ objective of achieving a moderate risk of debt distress over the medium term.
  - Would require a further reduction in debt service costs (e.g., through a deeper haircut on external commercial debt) or an upside shock to exports to reach that objective.
- Overall public debt dynamics improve after 2027 but would remain vulnerable to shocks and reform fatigue and illustrate sub-optimal distributional factors.

### Key projection highlights (selected figures from the reform and baseline projections)
- Real GDP Growth (percent change): 2.4, 2.4, 2.9, 2.7, 3.4, 3.1, 3.7, 3.3, 4.0, 3.4, 4.2, 3.4 (series as presented).
- Inflation - Annual Average (percent): 25.8, 27.7, 13.4, 21.7, 8.2, 18.8, 7.8, 15.3, 7.9, 15.3, 8.0, 15.4 (series as presented).
- Revenue (percent of GDP): 19.2, 19.1, 19.3, 18.6, 20.3, 17.8, 22.3, 19.0, 22.0, 19.0, 21.4, 18.4 (series as presented).
- Overall balance (percent of GDP): -10.0, -10.1, -12.5, -10.7, -12.0, -13.1, -9.3, -11.9, -6.8, -10.7, -5.8, -10.7 (series as presented).
- Primary balance (percent of GDP): -3.4, -3.5, -4.4, -2.4, -1.8, -2.5, 0.5, -0.6, 1.4, 0.4, 1.9, 0.7 (series as presented).
- Current account (percent of GDP): -18.0, -17.3, -17.3, -15.1, -17.0, -13.9, -15.7, -12.5, -14.2, -11.1, -13.4, -10.2 (series as presented).
- Gross official reserves (levels): 178, 118, 362, 164, 544, 272, 725, 370, 851, 440, 924, 558 (series as presented).
- External debt (percent of GDP): 40.2, 31.6, 38.7, 29.1, 38.1, 25.8, 36.1, 22.7, 33.7, 19.6, 31.2, 16.9 (series as presented).
- Total public debt (percent of GDP): 90.4, 80.2, 93.4, 80.6, 97.6, 81.4, 97.4, 82.2, 96.3, 82.8, 93.8, 83.0 (series as presented).

### Box 3 — Withdrawal of ODA flows (USAID and other donors)
- In January 2025, USAID announced a massive reduction of its global projects, as some other donors also retrenched.
- Malawi received over 2 percent of GDP worth of USAID assistance in 2024 (one of the highest levels in the SSA region, compared to a 0.5 percent average).
- Preliminary estimates suggest Malawi will see 32 of its 39 active or planned projects cancelled, worth almost US$94 million.
  - This is equivalent to about 0.6 percent of GDP (of the current active programs worth about 1.1 percent of GDP) or 3 percent of imports.
  - Per Center for Global Development estimates, this is the 6th largest global cut as a share of national income.
- Sectoral impacts:
  - Health sector-related activities were affected most, followed by education and development sectors.
- Government response and fiscal implications:
  - The government currently has no fiscal space to take up the slack, but hopes to support the most vital projects over time by delaying new domestic investment projects.
  - All but one of the saved projects, worth about US$66.8 million, are in the health sector.
  - Separately, in 2024, the U.S. Millennium Challenge Corporation signed a US$350 million, 5-year agreement under the Malawi Transport and Land Compact, but the agency has since been shut down, putting further fiscal pressure on the government to meet critical infrastructure needs through additional borrowing.

### Box 4 — Illustrative impact of global developments (sensitivity analysis)
- Background:
  - Malawi’s main export: tobacco (~44 percent).
  - Fuel constitutes over 16 percent of total imports on average.
  - BoP is primarily affected by global developments from energy prices and changes in official assistance.
- Illustrative sensitivity assumptions:
  - Use standard deviations of fuel, commodity, and maize prices over the past 10 years.
  - Assume only fuel price developments are positive.
  - Assume a price shock hits Malawi in June for six months, applying one half of this standard deviation in 2025 and a return to the previous growth path in 2026.
  - For grants, assume an additional 10 percent reduction over the baseline and cancellation of the total two-year Millennium Challenge Account (MCA) contract of US$350 million.
- Illustrative impact:
  - This shock could deteriorate Malawi’s BoP by under 5 percent of GDP over two years.
- Selected sensitivity numbers (change to baseline projections):
  - Fuel imports: US$, mn 491 -> -94.3 (stress) -> -93.1 (recovery); % of GDP 4.2 -> -0.8 -> -0.6.
  - Tobacco exports: US$, mn 545 -> -70.2 -> -71.5; % of GDP 4.6 -> -0.6 -> -0.5.
  - Maize imports: US$, mn 95 -> 14.4 -> 16.4; % of GDP 0.8 -> 0.1 -> 0.1.
  - Grant inflows: US$, mn 894 -> -281 -> -267; % of GDP 7.6 -> -2.4 -> -1.7.
  - Combined: US$, mn -319 -> -305; % of GDP -2.7 -> -2.0.

### Box 5 — Balance of payments statistical issues
- From 2021-2023, errors and omissions in Malawi’s balance of payments data were large (4-6 percent of GDP) and positive, indicating the overall balance was higher (or less negative) than would have been expected.
- Misaligned official exchange rate and foreign exchange surrender requirements:
  - Act as a tax on conversion of foreign exchange at the official rate.
  - Incentivize under-reporting of foreign exchange sources (e.g., exports) and use of informal channels for remittances.
  - Create incentive to over-report the value of imports (over-invoicing) to justify purchase of scarce foreign exchange at the official rate and capture the spread in the parallel market.
- Evidence and implications:
  - Analysis of international goods trade data shows the value of goods exported to Malawi—as reported by partners—is consistently lower than Malawi’s reported value of goods imported into Malawi; discrepancies are large (20-40 percent).
  - If this reflects systematic over-invoicing, the current account deficit could be over-stated (implying lower errors and omissions).
  - Limited evidence of under-invoicing of exports; asymmetry may reflect tobacco sales at the official exchange rate.
  - Informal inflows (e.g., remittances) are a possible source of financing for imports and may help explain large and persistent positive errors and omissions; authorities’ crackdown on informal remittance networks suggests these inflows are material though data is not available.

*Source: 1mwiea2025001-source-pdf.*

### Box 6. Malawi: Malawi’s Fuel Price Mechanism in the Regional Context

### Box 6. Malawi: Malawi’s Fuel Price Mechanism in the Regional Context

### Background
- Malawi is landlocked and imports fuel mainly by road through the ports of Dar es Salaam, Tanga in Tanzania, and Beira and Nacala in Mozambique.
- Under the Liquid Fuels and Gas (Production and Supply) Act, maximum pump prices for petrol and diesel are regulated and uniform throughout the country.
- Fuel pricing was based on the automatic fuel pricing mechanism (AFPM), introduced in May 2012 as part of ECF-supported program reforms, to ensure that pump prices reflect international oil price and exchange rate movements.
- The Malawi Energy Regulatory Authority (MERA) set fuel pump prices monthly, adjusted upwards or downwards if the change in the import price (IBLC) exceeded ±5 percent.
- If changes in the IBLC fell below ±5 percent, MERA compensated fuel importers through the Price Stabilization Fund (PSF) to ensure relatively stable prices and cost recovery.
- The authorities suspended operation of the AFPM in November 2024, and more recently suspended the open tender system, opting for a new Government-to-Government (G2G) fuel procurement system, citing Kenyan and Ugandan models.

### Recent fuel price developments and arrears accumulation
- MERA estimates that Malawian petroleum and diesel pump prices are now about 32 percent and 19 percent under cost recovery, respectively, due to the non-operation of the AFPM.
- Accumulated arrears and fiscal/sector consequences:
  - MERA owes over MK950 billion in import losses to Petroleum Importers Limited (PIL) and the state-owned National Oil Company of Malawi (Nocma) via the PSF, which is empty of balances.
  - K450 billion worth of fuel related levies remain unpaid to the Government, crippling programs to maintain and expand roads and rural electrification.
- The government plans an eventual fuel price increase (likely after the September election) sufficient to off-set costs and to replenish the price stabilization fund, although it could take it several years to clear the backlog to fuel importers.

### Malawi prices in the regional context
- Malawi’s mark-up formula is relatively higher at 100 percent versus 60-40 percent in Tanzania and Zambia, implying, ceteris paribus, that prices in Malawi should be regionally higher.
- However, taking into account the over-valued Kwacha (see Figure), Malawi pump prices are well below regional prices, prompting extensive smuggling and further burdening Malawi’s Balance of Payments (BoP).
- Anecdotal behavior: Zambians cross the border, convert to Kwacha in the parallel markets, purchase fuel, and “re-export” informally back to Zambia.

*Source: IMF staff summary of Box 6, Malawi: Malawi’s Fuel Price Mechanism in the Regional Context*

### 1. Regulatory Tier 1 capital to risk weighted assets17.417.217.

### 1. Regulatory Tier 1 capital to risk weighted assets17.417.217.

### Banking indicators: Capital, Asset Composition, Earnings, Liquidity
- Regulatory Tier 1 capital to risk weighted assets: 17.4, 17.2, 17. (series line: 17.4 17.2 17.)
- Total regulatory capital to risk weighted assets: 20.8, 20.7, 20.9, 20.1, 20.0, 20.1, 21.4, 23.2, 23.5, 24.0, 23.9
- Total capital to total assets (total capital refers to regulatory capital): 13.1, 14.3, 11.6, 11.0, 10.6, 10.6, 11.1, 12.3, 12.5, 12.7, 12.2

Asset Composition and Quality
- Non-performing loans to gross loans and advances: 6.3, 4.5, 6.3, 6.1, 9.0, 9.8, 9.4, 9.4, 9.5, 8.7, 7.7
- Provisions to non-performing loans: 32.9, 32.5, 29.9, 33.4, 29.8, 31.6, 32.6, 32.7, 33.8, 33.2, 36.3
- Total loans and advances to total assets: 31.2, 29.2, 29, 26.3, 23.7, 23.3, 22.8, 23.1, 22.6, 22.8, 22.3
- Foreign currency loans to total loans and advances: 14.7, 11.3, 11.3, 11.2, 7.1, 9.3, 15.5, 14.8, 10.2, 9.4, 8.9, 8.5

Earnings and Profitability
- Return on assets (ROA): 3.0, 3.4, 4.1, 5.1, 5.1, 5.9, 5.7, 5.6, 7.9, 7.8, 7.7, 7.5
- Return on equity (ROE): 22., 8. 26.0, 33.3, 39.5, 52.1, 49.7, 49.2, 63.1, 61.1, 58.2, 58.2
- Non-interest expenses to gross income: 49.0, 43.7, 40.3, 34.4, 23.0, 29.9, 29.5, 32.8, 32.9, 27.3, 27.1
- Interest margin to gross income: 65.6, 49.7, 52.2, 50.5, 53.4, 54.0, 55.0, 68.0, 56.0, 56.2, 56.5, 55.1
- Non-interest income to revenue: 34.4, 31., 30.6, 30.5, 32.1, 26.9, 26.0, 25.4, 25.5, 24.8, 24.2, 25.7
- Net interest income to assets: 8.0, 7.9, 9.0, 9.8, 9.8, 10.8, 11.7, 1.2, 2.5, 3.9, 4.9
- Personnel expenses to non-interest expenses: 42.5, 43.4, 43.7, 43.9, 38.7, 38.9, 38.9, 38.7, 39.3, 38.8, 39.1, 39.5

Liquidity
- Liquid assets to deposits and short-term liabilities: 57.5, 52.5, 53.5, 54.7, 53.1, 55.0, 53.4, 54.8, 55.7, 54.7, 54.5
- Total loans to total deposits: 50.0, 47.9, 42.9, 38.5, 35.6, 35.3, 34.5, 34.9, 34.8, 35.1, 33.5
- Liquid assets to total assets: 39.6, 37., 33.9, 40.5, 39.8, 40.6, 39.8, 40.4, 40.3, 40.6, 40.1
- Foreign exchange liabilities to total liabilities: 16.1, 14.2, 13.8, 15.3, 14.1, 15.5, 10.1, 9.9, 12.4, 11.5, 12.8

- Source: Reserve Bank of Malawi.
- Note: Dec-20, Dec-21 referenced in original series.

*Italicized source attribution: Reserve Bank of Malawi (data series as presented in the source).* 

### External financing requirement and sources, 2024–30 (Millions of US$, unless otherwise indicated)

### Total requirement and composition (2024–2030)
- Total requirement: -2,694, -3,447, -2,784, -2,888, -2,838, -2,804, -2,936 (2024–2030)
- Current account, excluding official transfers: -2,653, -2,610, -2,555, -2,616, -2,615, -2,603, -2,686
- Debt amortization: -92, -868, -183, -164, -126, -132, -132
- Gross reserves accumulation (- increase): 523, 1, -46, -108, -97, -70, -118

### Total sources and components
- Total sources: 2,694, 2,547, 2,385, 2,553, 2,567, 2,629, 2,936
- Expected disbursements (official): 1,275, 1,166, 1,173, 1,294, 1,274, 1,208, 1,247
- Grants: 1,009, 899, 896, 1,093, 1,190, 1,159, 1,230
- Medium- and long-term loans: 266, 266, 277, 201, 84, 49, 17
- Private sector (net): 1,460, 1,434, 1,284, 1,321, 1,369, 1,500, 1,751
- IMF (net): -41, -52, -71, -62, -76, -79, -61
- Drawings: 0, 0, 0, 0, 0, 0, 0
- Repayments: 415, 271, 627, 679, 61

### Derived items
- Financing gap: 0, 90, 039, 933, 527, 217, 50
- Gross official reserves: 149, 118, 164, 272, 370, 440, 558
- Months of imports: 0.4, 0.3, 0.4, 0.7, 0.9, 1.0, 1.3

- Source: IMF staff estimates.

*Italicized source attribution: IMF staff estimates (Table 6).* 

### Debt decomposition, 2024–27 (Millions of US$, unless otherwise indicated)

### Creditor profile and totals (Actual, 2024–2027)
- Total debt: 10,264, 11,595, 12,972, 14,874
- External debt: 4,385, 4,574, 4,688, 4,716

Multilateral creditors (2024–2027)
- Multilateral creditors total: 3,068, 3,283, 3,419, 3,479
- IMF: 412, 367, 306, 252
- World Bank: 1,718, 1,842, 1,871, 1,845
- AfDB: 463, 475, 467, 459
- Other Multilaterals: 475, 599, 775, 922

Other creditors
- Bilateral creditors: 362, 339, 318, 297
- Paris Club: 11, 11
- Non-Paris Club: 361, 338, 317, 296
- Commercial creditors: 955, 183, 822, 9
- Domestic debt: 5,879, 7,021, 8,284, 10,158

Memorandum items (selected)
- Collateralized debt: 439, 100, 260
- Multilateral and collateralized debt (percent of external debt): 70, 72, 73, 74
- Multilateral debt (percent of GDP): 26, 23, 21, 19
- o/w: IMF and WB (percent of external debt): 49, 48, 46, 44
- o/w: IMF and WB (percent of GDP): 18, 15, 14, 11
- Collateralized debt (percent of external debt): 10, 2, 10
- Collateralized debt (percent of GDP): 4, 10, 0

- Sources: Malawian authorities; and IMF staff calculations.

*Italicized source attribution: Malawian authorities; IMF staff calculations (Table 7).* 

### Capacity to Repay, 2024–37 (Selected metrics)

### Fund obligations based on existing drawings (SDR millions; US$ millions; percent indicators)
- Principal (SDR millions): 23.1, 33.5, 47.8, 40.5, 51.3, 53.2, 40.3, 19.2, 19.2, 5.3, 0.0, 0.0, 0.0, 0.0
- Charges and interest: 7.8, 5.9, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6, 5.6
- US$ Millions: 41.0, 52.3, 71.4, 61.7, 76.4, 79.0, 61.6, 33.2, 33.3, 14.6, 7.5, 7.5, 7.5, 7.5
- Percent of exports of goods and services: 2.9, 3.4, 4.2, 3.4, 4.0, 3.9, 2.9, 1.5, 1.4, 0.6, 0.3, 0.3, 0.3, 0.2
- Percent of debt service: 24.5, 5.3, 19.7, 20.0, 26.8, 27.0, 22.4, 13.1, 12.4, 5.7, 3.0, 3.0, 3.1, 3.0
- Percent of quota: 22.2, 28.4, 38.5, 33.2, 41.0, 42.4, 33.1, 17.8, 17.9, 7.8, 4.0, 4.0, 4.1, 4.1
- Percent of gross official reserves: 27.5, 44.2, 43.5, 22.6, 20.7, 18.0, 11.0, 5.4, 4.9, 1.9, 0.8, 0.7, 0.6, 0.6
- Percent of GDP: 0.3, 0.4, 0.4, 0.3, 0.4, 0.3, 0.2, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0

### Projected level of credit outstanding based on existing drawings
- SDR millions: 310.1, 276.7, 228.8, 188.3, 137.1, 83.8, 43.6, 24.4, 5.3, 0.0, 0.0, 0.0, 0.0, 0.0
- US$ Millions: 406.9, 369.1, 306.0, 252.5, 184.1, 112.6, 58.5, 32.8, 7.1, 0.0, 0.0, 0.0, 0.0, 0.0
- Percent of exports of goods and services: 28.4, 24.1, 17.9, 14.0, 9.6, 5.6, 2.8, 1.4, 0.3, 0.0, 0.0, 0.0, 0.0, 0.0
- Percent of debt service: 243.3, 37.7, 84.3, 81.7, 64.6, 38.5, 21.3, 13.0, 2.6, 0.0, 0.0, 0.0, 0.0, 0.0
- Percent of quota: 223.4, 199.3, 164.9, 135.7, 98.7, 60.4, 31.4, 17.6, 3.8, 0.0, 0.0, 0.0, 0.0, 0.0
- Percent of gross official reserves: 273.1, 311.9, 186.2, 92.7, 49.8, 25.6, 10.5, 5.4, 1.1, 0.0, 0.0, 0.0, 0.0, 0.0
- Percent of GDP: 3.4, 2.5, 1.8, 1.3, 0.9, 0.5, 0.2, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0

### Net use of Fund credit (SDR milions)
- Net Use of Fund Credit: -23.1, -33.5, -47.8, -40.5, -51.3, -53.2, -40.3, -19.2, -19.2, -5.3, 0.0, 0.0, 0.0, 0.0
- Disbursement and purchases: 0.00 (series)
- Repayment and repurchases: 23.1, 33.5, 47.8, 40.5, 51.3, 53.2, 40.3, 19.2, 19.2, 5.3, 0.0, 0.0, 0.0, 0.0

Memorandum items:
- Exports of goods and services (millions of U.S. dollars) (2024–2036): 1,433, 1,531, 1,710, 1,805, 1,912, 2,007, 2,105, 2,268, 2,430, 2,547, 2,659, 2,776, 2,898, 3,024
- Debt service (millions of U.S. dollars): 167.3, 97.8, 363.0, 308.9, 284.8, 292.7, 274.6, 252.9, 268.4, 254.2, 248.2, 248.1, 247.4, 247.9
- Quota (SDR millions): 138.8 (repeated series)

- Source: IMF staff projections.

*Italicized source attribution: IMF staff projections (Table 8).* 

### Reflections on Long Term Engagement and Possible Paths Forward

### Historical engagement and outcomes
- Since 1995, Malawi engaged in seven different ECF-supported programs focusing on fiscal adjustment, PFM, ER flexibility, increasing FX supply, lower inflation, improving debt management and debt dynamics, and structural reforms targeting fiscal governance and limiting fiscal risks (i.e., SOEs).
- Malawi benefited from high grant-based support from the donor community.
- Program disbursement record: three fully disbursed; others ended soon after approval; average disbursement rate of 60 percent.
- Macroeconomic outcomes over thirty years: real GDP growth averaged 4.4 percent (3.5 percent excluding the post-HIPC boom period).
- GNI per capita in 2024: about USD595; USD365 higher than in 1995.
- SSA’s GNI per capita in 2023: USD1,620, USD890 higher than in 1995.
- Characterization of Malawi’s economy: elevated inflation, deteriorating fiscal balances, and depreciating exchange rates over much of the period.

### Lessons from peer countries (selected)
- Fiscal adjustments coordinated with monetary policy produced primary balance improvements between 4.5 and 6.5 percentage points of GDP in Ghana (2014), Egypt (2017), Jamaica (2012), and Ethiopia.
- Ghana: comprehensive fiscal strategy including improved tax compliance and public expenditure discipline.
- Jamaica: tax policy reforms, spending discipline, PFM; maintained more than 6 percent of GDP primary surplus for seven years.
- Debt strategies: Angola (2020), Ghana (2022), Jamaica (2021) pursued sustainable debt dynamics through restructuring, fiscal adjustment, and reforms.
- Exchange rate unifications: Tanzania (2014), Egypt (2016), Ethiopia (2019) implemented FX liberalizations and coordinated policies to stabilize inflation and support growth.

*Italicized source attribution: IMF country review and staff analysis (Annex I).* 

### Domestic Revenue Mobilization (Annex II)

### Revenue performance and structure
- Malawi’s domestic revenue to GDP ratio lags regional peers between 2004 and 2024.
- Taxes on income, profits, and capital gains: increased from 5.8 percent of GDP in FY2013/14 to 6.5 percent of GDP in FY23/24.
- Taxes on goods and services: remained around 5.5 percent of GDP on average.
- In FY2023/24, tax revenue amounted to 13.2 percent of GDP; composition of total tax collections:
  - VAT: 26.7 percent
  - PIT: 24.7 percent
  - CIT: 24.5 percent
  - Excise duties: 13.4 percent
  - Customs duties: 10 percent

### VAT specifics and gaps
- VAT revenue: increased from 2.8 percent of GDP in 2006 to 3.8 percent of GDP in 2018; remained around 3.6 percent of GDP thereafter.
- VAT performance indicators:
  - C-efficiency ratio: 0.2 in 2022 (0.12 below the SSA average)
  - VAT effort: 46.5 percent (ranked 61 out of 70 countries)
- Estimated compliance and policy gaps: 4.8 percent and 5 percent of GDP, respectively.
- Effective standard VAT rate: 7.9 percent (statutory rate: 16.5 percent)

### Income and corporate tax issues
- Income tax compliance gap: estimated at 3.3 percent of GDP.
- PAYE system: progressive rate schedule; Fringe Benefits Tax flat rate of 30 percent.
- Policy recommendations noted:
  - Raise the zero-rate bracket and lower the income level at which the top marginal rate of 35 percent applies to improve distributional fairness.
  - Reduce variation in tax burden across types of investment income by increasing withholding taxes (WHTs) on payments from a business to residents and taxing foreign investment income at rates applied to domestic-source investment income.
- Corporate income tax (territorial system): standard rate of 30 percent; CIT revenue rose from 2.0 percent of GDP in FY2019/20 to 3.2 percent of GDP in FY2023/24.
- Factors suppressing CIT revenue: too generous tax incentives and exemptions; generous interest deductibility leading to base erosion.

*Italicized source attribution: IMF staff (Annex II).*

### 6. Excise revenue in Malawi has remained at a low level, averaging at 1.8 percent of GDP,

### 6. Excise revenue in Malawi has remained at a low level, averaging at 1.8 percent of GDP

### Excise revenue performance and design
- Excise revenue averaged at 1.8 percent of GDP over the past decade.
- Possible drivers of low excise revenue:
  - Smuggling of excisable goods from neighboring countries.
  - Neighboring countries' rate structures.
- Structure of excises:
  - Except for cigarettes, all of Malawi’s excise taxes are ad valorem (AV) instead of specific.
  - Advantages and disadvantages of AV excises:
    - Help maintain revenue during inflation without requiring legislative updates.
    - Result in less stable collections for volatile goods like petroleum.
    - More vulnerable to under-invoicing and rent-seeking.
    - Can unintentionally discourage consumption of higher-priced, higher-quality goods (e.g., filtered cigarettes), making them less effective than specific excises in reducing negative health or environmental impacts.

### Government initiatives (Domestic Revenue Mobilization Strategy and MRA reforms)
- Domestic Revenue Mobilization Strategy (DRMS) (2021-2026) objectives:
  - Improve revenue performance by broadening the tax base, enhancing efficiency and equity in tax collection, and increasing non-tax revenues.
  - Seeks to increase the revenue-to-GDP ratio by five percentage points by 2026.
  - Implemented measures so far include:
    - Introducing an import withholding tax in the FY 2021/22 Budget.
    - Increasing the tax-free threshold in the PIT.
- Malawi Revenue Authority (MRA) institutional reforms and modernization efforts:
  - Rollout of the Msonkho Online tax administration system to enhance digital service delivery.
  - Restructuring of the Domestic Taxes Division (DTD) to align with international best practices.
  - Promoting cultural transformation within the institution to improve performance.
  - Cleaning and updating the taxpayer register to ensure data accuracy.
  - Integrating the administration of various taxes into a harmonized legal framework.
  - Upgrading the call center for improved taxpayer engagement.
  - Implementing a block management system nationwide.
  - Developing a comprehensive risk management framework alongside capacity building in key functional areas.
  - Expected outcome: a more efficient, transparent, and robust revenue system capable of financing Malawi’s development priorities.

### Impediments to domestic revenue mobilization
- High degree of informality:
  - Informal sector estimated at 40 percent of GDP.
  - Only 1.3 percent of businesses are estimated to be formal.
  - According to the 2013 Malawi Labor Force Survey, 88.7 percent of labor force is in the informal sector.
  - Of the informal businesses, 74 percent operate in rural areas, which involve excessive administration and compliance costs.
- Presumptive tax regime and effects on formalization:
  - Presumptive tax replaces turnover tax for individuals with turnover between MWK 2 million and MWK 6 million.
  - Applies lump-sum rates (from MWK 0 to 225,000) based on deemed turnover determined by tax officials using indicators like electricity usage or shop size.
  - Regime broadly taxes turnover at 2 percent and avoids issues like bunching, but:
    - Remains slightly regressive for lower earners.
    - Raises concerns of business splitting to evade higher tax brackets.
    - Becomes more attractive than regular income tax at higher turnover levels, discouraging formalization as firms grow.
- VAT base limitations and related statistics:
  - Only 44 percent of the VAT base is subject to the standard rate.
  - 40 percent of the VAT base is exempt.
  - 14 percent of the VAT base is zero-rated.
  - There are 18 zero-rated supplies and 21 exempt supplies; within “industrial & construction machinery” there are 55 sub-categories of exempt supplies.
  - The zero-rate applicable to building materials accounts for 0.17 percent of GDP.
- Withholding tax (WHT) constraints:
  - Revenue potential curtailed by exemption certificates granted to registered taxpayers, government ministries and departments, and tax-exempt persons.
  - Certain imports under specific customs procedure codes and transactions with duty-free status are also exempt.
  - The VAT withholding system can contribute to excessive VAT credit accumulation and cash flow constraints for suppliers.
- Limited administrative capacity (TADAT 2023 findings and specific issues):
  - TADAT (2023) shows improvements since 2015: advancements in 12 indicators, stability in 11, declines in 3.
  - Key administrative challenges:
    - Taxpayers’ identification:
      - MRA lacks a central or whole-of-taxpayer view of active registered taxpayers.
      - Delayed full implementation of Msonkho Online (MO) has led to use of three separate systems—MO, SAS2, and manual processes—compromising accuracy of the taxpayer register.
      - An FAD revenue administration analysis estimated that an additional MWK 51.4 billion could have been collected in VAT if there was full filing compliance by taxpayers who submitted tax declarations over the past two fiscal years.
    - Delays in VAT refunds:
      - VAT Act mandates refunds within 30 days of receiving a taxpayer’s application.
      - MRA’s analysis revealed an average processing time of 132 days.
      - Reported stock of unpaid VAT claims as of January 2023 stood at MWK 14.3 billion.
    - Customs enforcement:
      - Prevalence of excise smuggling has reduced excise revenues and undermined domestic consumption of excisable goods.
      - Weak border enforcement risks downsizing or closure of local industries, with job losses and reduced PAYE and CIT collections.
    - Accountability and transparency framework:
      - External oversight limited by delayed audits and minimal public reporting.
      - Annual reports, business plans and reports on taxpayer perception surveys are not published.
      - Limited capacity dedicated to the large taxpayer office (LTO) and medium-taxpayer office (MTO), delaying costly compliance measures for the MSME sector.

### Tax incentives, exemptions, and revenue impact
- Corporate Income Tax incentives and issues:
  - Export Allowance: 30 percent of taxable income for processed qualifying goods and 10 percent for unprocessed qualifying goods.
  - Investment Allowance: allows most businesses to deduct in the first-year 100 percent of the cost of new and unused industrial buildings, and plant or machinery equipment.
  - International transport allowance: additional 25 percent deduction over and above actual costs (i.e., 125 percent).
  - Authority to provide zero percent tax holiday for up to 10 years or 15 percent preferential tax rate permanently for a “priority” company.
  - Broad range of capital gains exemptions (e.g., transfers to a trust, disposal of personal/domestic assets).
  - Generous interest deductibility when debt is more than three times equity aids corporate tax base erosion.
  - Special Economic Zones Act (approved in late 2023) allows for exemption of CIT for an initial period of five years.
- Value-added Tax specifics:
  - 18 zero-rated supplies; zero-rate on building materials equals 0.17 percent of GDP.
  - 21 exempt supplies; only 44 percent of VAT base taxed at standard rate; 40 percent exempt; 14 percent zero-rated.
- Effect of incentives and discretionary exemptions:
  - Tax holidays, preferential rates, and allowances are often poorly targeted and inefficient, resulting in substantial revenue losses without significantly boosting economic activity.
  - Discretionary management of exemptions can create opportunities for preferential treatment, lack of transparency, market distortion, and rent-seeking.

### Policy recommendations
- Short-term DRM objectives (increase revenue from informal economy, broaden VAT base):
  - Broadening the VAT base by rationalizing exemptions and zero rates and focusing on compliance improvement measures, for example:
    - Repeal all exemptions and zero-rating of business inputs.
    - Ensure non-resident online vendors and platforms charge and remit VAT on their sales of cross-border services to Malawi consumers and unregistered businesses.
    - Repeal preferential VAT treatment of supplies of motor vehicles provided under the Customs Codes.
    - Limit the exemption for food to a narrower list disproportionately consumed by the lowest income quintiles.
    - Align the upper turnover tax threshold for the presumptive income tax regime (currently at MWK 12.5 million) with the VAT registration threshold of MWK 25 million.
  - Enhancing excise taxation and border control:
    - Retain excises on gaming, gambling and lotteries, airtime/data, and jewelry.
    - Improve enforcement against smuggling and the sales of illicit goods by introducing pre-paid tax stamps and continuously monitoring market penetration of illicit goods.
- Medium- and long-term objectives (formalization, improved compliance, sustainable revenue increases):
  - Complement VAT reforms with well-designed direct tax measures aimed at encouraging compliance and gradual formalization rather than immediate revenue gains.
  - IMF CD on personal income tax planned for summer 2025 will lead to further recommendations as authorities consider broader updates and reform of the relevant legislation.
  - Direct tax recommendations:
    - Treat the presumptive tax as a minimum tax for all active MSMEs and provide credit for the presumptive tax where businesses submit turnover tax or income tax returns in excess of the presumptive tax.
    - Broaden the corporate income tax base by eliminating discretionary and overly generous tax incentives, restricting excessive interest deductions (e.g., capping them at 30 percent of EBITDA), and rationalizing existing tax preferences (such as export and investment allowances).
    - Enhance tax competitiveness by gradually reducing the CIT rate to a range of 28 - 25 percent.
  - Indirect tax recommendations:
    - Strengthen excise policy by shifting from ad valorem to specific excises on goods with negative externalities (alcohol, tobacco, and vehicles) and aligning rates, especially on beer and spirits, with the regional average to protect the domestic beer industry and reduce smuggling.
    - Enhance efficiency of revenue management, including automated verification to allow timely VAT refund processing, and improve filing compliance by leveraging registration functionality in the ITAS.
- Sequencing and implementation principles:
  - Reform requires alignment of the pace and scope of tax policy changes with progress in administrative capacity development.
  - Effective reform requires strong political leadership, clear communication with taxpayers, and a well-sequenced, transparent process led by a committed champion supported by government.
  - Reforms should be packaged holistically to balance trade-offs, minimize uncertainty, and build credibility, rather than relying on piecemeal adjustments.
  - Adequate time and resources must be allocated for the MRA to develop IT systems, train staff, and prepare legal and procedural tools before implementing major changes.
  - Building administrative capacity, fostering policy coherence, and maintaining continuity in tax leadership are essential for sustainable tax reform outcomes.

### Annex III. External and domestic drivers of inflation (selected points)
- Inflation trends:
  - Year-over-year (y-o-y) inflation has stayed above 20 percent over the past three years, oscillating around 30 percent since end-2023.
  - Seasonally adjusted month-on-month inflation averaged about 2 percent (27 percent annualized) over the past three years.
- Food inflation and agricultural shocks:
  - Climate shocks (tropical cyclones, drought, floods) over the past three years have reduced agricultural output and contributed to elevated food inflation.
  - Maize production in FY2024/25 remained 20.3 percent lower compared to the five-year average.
  - Monthly seasonally adjusted food inflation trended up from about 0.85 percent average in 2020 to over 4 percent by end 2024.
- Non-food inflation drivers:
  - Non-food inflation has co-moved with money growth and depreciation, though the connection has weakened recently.
  - Total value of goods imports as a share of GDP estimated at 27 percent in 2024.
  - Exchange rate devaluations coincided with large jumps in non-food inflation over the past two years.

*International Monetary Fund — Chapter 6, “Excise revenue in Malawi has remained at a low level, averaging at 1.8 percent of GDP”*

### 4. The official exchange rate has remained almost unchanged over the past year, but

### 4. The official exchange rate has remained almost unchanged over the past year, but

### Exchange rate dynamics and market pressures
- Official exchange rate stability contrasts with large depreciation in the informal market:
  - Informal market rate premium reportedly reached around 150% in March 2025 before declining to above 100 percent the next month.
- Large exchange rate pressures, coupled with continued rapid growth in monetary aggregates, drive substantial inflationary pressure, particularly for non-food inflation.
- The significant gap between the informal and official exchange rate distorts market dynamics and limits potential transmission and shock-absorbing effect through the exchange rate channel.

### Recent monetary policy responses and monetary aggregates
- Monetary policy actions in 2024 and early 2025:
  - Four Monetary Policy Committee meetings took place in 2024; the policy rate remained fixed at 26 percent.
  - The last policy rate hike of 2 percentage points (ppts) occurred in February 2024.
  - Authorities increased the Liquidity Reserve Requirement (LRR) ratio for domestic currency deposits by 125 basis points in November 2024.
- Monetary and credit developments (exact figures):
  - Broad money growth remained elevated.
  - y-o-y net claims on the government growth of 83 percent as of end-February 2025.
  - Credit to the private sector growth of 20 percent as of end-February 2025.
- Recent monetary tightening efforts have proven insufficient to curb stubbornly high inflation.

### Empirical analysis: exchange rate pass-through and money growth linkages
- Analytical approaches used:
  - Local projection method to quantify exchange rate pass-through to food and non-food inflation.
  - PPP-based exchange rate measure constructed from food-basket price comparisons with neighboring countries.
  - Bayesian VAR (BVAR) model with potentially time-varying parameters to assess the link between money growth and inflation.
- Local projection results (Jordà (2005) framework):
  - A 1percentage point (ppt) exchange rate depreciation shock was associated with an approximately 0.1 ppt immediate increase in monthly inflation, relative to the 2.1 percent average m-o-m inflation during 2024.
  - The estimated impact is almost immediate, with most of the impact realized within the same month, and dissipates over the following two months.
- PPP-based assessment:
  - Local prices for a comparable food basket (maize, cooking oil, sugar) were used to compute a PPP-implied exchange rate measure.
  - Trends in the PPP-based measure illustrate pass-through to prices from depreciation in the informal market and suggest potential influence of speculation and lack of market confidence on the parallel market spread.
- BVAR findings on money growth and inflation:
  - Time-varying parameters are preferred; the relationship between money growth and inflation remains significant despite weakening during the 2000s.
  - Impulse responses of inflation to a lagged reserve money growth shock indicate a persistent and positive association between reserve money growth and overall inflation.
  - With government financing contributing a large share of broad money growth, results imply significant inflationary pressure from fiscal deficits and declining external, official financing.
  - Evidence points to fiscal dominance and a broken link in monetary policy transmission, with the size of the fiscal deficit serving as a strong driver of monetary growth.

### Conclusions and policy implications
- Macroeconomic interlinkages:
  - The interlinkage between the exchange rate, fiscal financing, and inflation underscores the need for monetary tightening and careful policy design.
  - Continued government borrowing leading to monetary growth, widening spreads between policy and short-term borrowing rates, and limited private sector borrowing and saving hinder monetary policy effectiveness.
- Key policy implications (as presented):
  - The presence of fiscal dominance results in substantial monetary expansions due to fiscal deficits and contributes to inflationary pressure; this highlights the importance of sound fiscal management practices, including realistic budget planning and effective cash management, to dampen inflationary pressure.
  - Achieving monetary stability is crucial to stabilize consumer prices; fixing the official exchange rate does not shield the economy from the effect of monetary fluctuations on prices, since current market prices of key household consumption items already reflect depreciation in the parallel market.

*Prepared by Sunwoo Lee. Sources: Reserve Bank of Malawi; National Statistics Office of Malawi; FAO; World Food Programme; IMF staff estimates and calculations.*

### 6. Together, these macroeconomic and structural constraints have resulted in regionally

### 1mwiea2025001-source-pdf - 6. Together, these macroeconomic and structural constraints have resulted in regionally

### Macroeconomic and structural constraints, food prices, and FDI
- Malawi exhibits regionally high and variable food prices and low FDI.
- Maize prices in Malawi are more volatile and higher; Malawi’s maize price volatility is described as “double the standard deviation of Zambia.”
- Since these countries experience broadly similar weather events and transportation costs, deviations in Malawi’s maize prices suggest the existence of production constraints in Malawi.
- Since 2016, Malawi’s average annual FDI inflows are about a percentage point lower than Zambia, Tanzania, and Rwanda; differences reflect endowments and the investment climate.

### Potential growth and trend real GDP
- Trend real GDP implies potential annual growth of around 2 percent.
- Excluding recent shock years with drought and cyclone (2022-2024) raises the estimated potential growth slightly to just over 3 percent.
- Both estimates indicate trend real GDP has been declining since 2008 from about 6 percent.
- Population growth averages about 2.6 percent; at 3 percent growth, output would be substantially insufficient to raise Malawians out of poverty.

### Status of key recommendations from the 2021 Article IV
- Restore macroeconomic stability
  - Increasing government debt, FX shortages, insufficient monetary policy responses, and natural disasters have kept the inflation rate stubbornly high and dragged down growth.
- Strengthen fiscal position to preserve debt sustainability
  - Domestic primary deficit increased to nearly 3.5 percent of GDP in FY2024/25, driven by revenue shortfalls and expenditure overruns.
  - Domestic revenue mobilization efforts showed limited progress.
  - Domestic financing of fiscal deficit and resulting interest expense as a share of total expenditure has risen significantly.
- Safeguard financial sector stability
  - The banking system remained well-capitalized and liquid, but credit risk is building and banks’ exposure to government securities is rapidly increasing.
- Greater exchange rate flexibility
  - Two devaluations (May 2022 and November 2023) aimed at aligning official and market rates; official rate remained broadly unchanged since November 2023.
  - Consequences: appreciation in the real effective exchange rate (REER), depletion of reserves, and growing parallel market spread.
- Rebuild external buffers
  - Chronic FX shortages, limited exchange rate flexibility, and central bank FX sales have resulted in reserves at critically low levels and an underdeveloped FX interbank market.
- Strengthen governance and transparency
  - NIR audits conducted by an external auditor, latest report for March 2024.
  - RBM Act amendment is in progress following 2021 and 2024 Safeguards Assessments.

### Risk Assessment Matrix — selected high-likelihood/high-impact risks and policy responses
- Trade policy and investment shocks — High likelihood, Low impact
  - Policy note: Mobilize domestic resources, increase expenditure efficiency, align exchange rate regime with market forces to cushion against lower development assistance and incentivize inflows.
- Sovereign debt distress — High likelihood, High impact
  - Policy note: Mobilize domestic resources, increase expenditure efficiency, progress in key PFM areas, align exchange rate regime.
- Fiscal dominance and deficient monetary policy conduct — High likelihood, High impact
  - Policy response: Strengthen RBM independence; maintain a positive real interest rate; reinstate a clear and effective monetary operational framework; stop outright purchasing of government securities in the secondary market.
- Governance weaknesses — High likelihood, High impact
  - Policy response: Strengthen institutions, increase IFMIS coverage, strengthen public investment management.
- Delayed PFM reforms and weak DRM — High likelihood, High impact
  - Policy response: Accelerate PFM reforms, strengthen commitment control, communicate transparently on budget execution, strengthen automatic fuel pricing mechanism, address procurement concerns.
- Lack of reform traction and political-economy constraints — High likelihood, High impact
  - Policy response: Communicate costs of inaction and benefits of reforms; outreach to non-government sectors; prioritize recommendations considering political economy.
- Natural disasters related to climate change — High likelihood, High impact
  - Policy response: Build economic resilience; address deforestation; appraise climate risk; implement adaptation and disaster risk management policies.

### External sector assessment — overall and current account
- Overall assessment: Malawi’s external position in 2024 was substantially weaker than implied by fundamentals and desirable policies; difficulty accumulating FX reserves and widening parallel-official exchange rate gap.
- Current Account (CA)
  - CA deficit grew to 21.9 percent of GDP in 2024, primarily due to higher goods imports; this compares with the 2020-2023 average of about 16 percent of GDP.
  - Baseline projection: CA deficit projected to settle around 10 percent of GDP over the medium term, reflecting nominal GDP growth and import compression given limited external financing.
  - EBA-lite model estimates:
    - Cyclically adjusted CA deficit: 22.3 percent of GDP in 2024.
    - CA norm (from model): -5.5 percent of GDP.
    - CA Gap: 16.7 percent of GDP.
    - Relative policy gap: 1.9 (p.p.).
    - Elasticity: -0.1.

### Real exchange rate (REER) assessment
- Background and facts:
  - REER appreciated by 17 percent in 2024, reflecting relatively high domestic inflation and a stable nominal exchange rate since the November 2023 devaluation.
  - Spread between official exchange rate and parallel market widened to 170 at end-year 2024, peaked at 150 percent in March 2025, and declined to 110 percent as of April 2025.
- Assessment:
  - EBA-lite CA model suggests the REER was substantially overvalued—by 126 percent—relative to the level implied by medium-term fundamentals and desirable policy settings.
  - Note on data uncertainty: this level may be over-estimated in view of the 44 percent depreciation in November 2023 and estimated real appreciation since of about 26 percent.

### Capital and financial accounts; reserves; external financing
- Capital and financial accounts
  - Capital account balance: 6.3 percent of GDP in 2024, down slightly from 2023; projected to decline to about 5 percent of GDP over the medium term.
  - Financial account flows historically volatile and concentrated in other investment; data quality considered poor.
  - Project-related disbursements projected to gradually decline over the medium term.
  - Foreign direct investment: 1.3 percent of GDP in 2024; projected to remain stable as a share of GDP.
  - Authorities maintain a surrender requirement on exports classified as an outflow Capital Flow Management measure (CFM).
- FX intervention and reserves
  - Reserves declined in 2024 to about 0.4 months of imports after earlier improvement in 2023.
  - Background: RBM foreign currency purchases were insufficient to offset sales for strategic imports and other expenses; the de jure exchange rate is floating but de facto stabilized.
  - Reserve adequacy assessment: Fund’s reserve adequacy model for credit constrained economies suggests Malawi should maintain reserves equal to at least 2.6-3.0 months of import cover; this is considerably higher than the 0.4 months estimated for 2024.
  - Rebuilding external buffers requires coordinated policy effort and successful external debt restructuring on terms consistent with medium-term debt sustainability; gradual elimination of FX outflow restrictions once conditions stabilize would help attract FX and reduce distortions.
- Foreign assets and liabilities (2023, percent of GDP)
  - NIIP: -39.8
  - Gross Assets: 7.4
  - Debt Assets: 4.1
  - Gross Liab.: 47.2
  - Debt Liab.: 40.1
- Assessment: Malawi is a net debtor; gross liabilities are primarily concessional loans and some FDI, which limits external stability risks. Reducing the large CA deficit would support a reduction in the net debtor position over the medium term.

### Policy recommendations to address external imbalances
- Coordinate fiscal, monetary, and exchange rate policies.
- Adopt a tighter fiscal stance to contain imports and reduce monetary financing that fuels inflation.
- Lower inflation to mitigate REER appreciation and loss of external competitiveness.
- Exchange rate adjustment and gradual removal of capital controls, combined with structural reforms, to reduce distortions and attract capital inflows (including projects with export potential, e.g., mining).
- Avoid exposure to further non-concessional external debt; normalize controls as conditions improve.
- Improve data quality on external flows.

### IMF capacity development (CD) strategy and activities (FY2025/26 focus and recent spending)
- CD alignment: TA aims to strengthen revenue administration and public financial management, migration to new IFMIS, tax compliance, tax policy, financial sector supervision, monetary policy forecasting capacity, and national accounts and BOP reporting quality.
- CD priorities and objectives (selected):
  - Public Finance Management: credible medium-term budget formulation, fiscal risk management, oversight of state-owned enterprises, improve public investment management.
  - Tax Policy and Revenue Administration: income tax legislation, mining fiscal regime analysis, customs administration, domestic revenue mobilization.
  - Banks supervision and regulation: implement risk-based supervision and strengthen stress testing at RBM.
  - Monetary policy operations: modernize monetary policy framework, forecasting, improve RBM FX operations and surveillance.
  - Statistics: improve national accounts, fuel imports, BOP, IIP, Government Finance Statistics, public sector debt statistics, and monetary statistics; support NSO to rebase annual GDP series and introduce quarterly series.
  - Governance: implement action plan following Governance Diagnostic TA.
- CD spending and allocations
  - CD spending in Malawi from FY2022-25: 6.6 Million USD (reported as $6.63 million USD in one table).
  - Current CD by Department (FY2026): $2.25 million USD.
  - Past CD by sector (FY2022–25):
    - Fiscal Policy and Management Sector: $5.61 million USD.
    - Financial and Monetary CD (MCM): $0.68 million USD.
    - Real Sector CD: $0.28 million USD.
    - External Sector CD: $0.06 million USD.
  - Distribution note: About ¾ of total CD support over the last 4 years came from FAD; MCM’s share in total CD is projected to increase in FY26.

*Source: IMF staff and Malawian authorities (content unit: 1mwiea2025001-source-pdf).*

### Annex IX. Data Issues

### Annex IX. Data Issues

### Data Adequacy Assessment
- Table 1 heatmap median rating: CBCCBBC (National Accounts), Coverage: CBCCB, Consistency: CBCB, Inter-sectoral Consistency: CB, Median Rating: CD, B.
- Frequency and Timeliness (questionnaire result snippet): DABCA (National Accounts), A (Prices), B (Government Finance Statistics), C (External Sector Statistics), D (Monetary and Financial Statistics).
- Staff conclusion: "The data provided to the Fund have some shortcomings that somewhat hamper surveillance."
- Rationale for staff assessment:
  - GDP and BOP data available only at annual frequency, with a significant lag.
  - Significant discrepancies in Balance of Payments data (Box 5) hamper external sector assessment.
  - Several national accounts series need updating, including employment data (latest figures from 2022).
  - Exchange rate (daily), inflation, banking sector balance sheets using standardized report forms, FX interventions, and international reserves data (monthly) are regularly reported by the RBM.

### Data Gaps, Other Data Issues, and Changes since Last Article IV
- Use of data/estimates: "Staff does not use any data and/or estimates in the staff report in lieu of official statistics."
- Other data gaps: "The absence of recent labor force participation and fixed capital formation data poses a challenge for the real sector assessments."
- Changes since last consultation:
  - Authorities continue efforts to increase data coverage and improve data provision with Fund and World Bank technical assistance.
  - Work on greater transparency in strategic imports and reconciliation of fuel imports data from varying sources (Annex VIII ¶2).
  - Efforts to support timely publication of quarterly debt data (¶20).
  - Progress on bank reconciliation and enhancing IFMIS coverage, with the Malawi Defence Force and state residences added to coverage.
  - RBM increased coverage of standardized report forms to include deposit taking microfinance institutions.

### Corrective Actions and Capacity Development Priorities
- Staff recommendations:
  - Continue efforts to construct quarterly national accounts data.
  - Enhance fiscal data compilation and dissemination (Page 11, Bullet 1).
  - Improve transparency by regularly publishing public sector debt statistics.
  - Implement TA recommendations to ensure regular data updates in the external sector.
  - Rebase the annual GDP series.
  - Facilitate more granular data exchange between the National Statistical Office of Malawi and RBM.
  - Strengthen data sharing and management among enforcement agencies (page 25, Box1).
  - Improve capital and financial accounts data.
  - Provide additional funding and capacity building for planned surveys aimed at addressing data gaps (¶40).

### Data Standards Initiatives and Dissemination
- Participation: Malawi participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes data on its National Summary Data Page since November 2016.
- Table 3 (Common Indicators Required for Surveillance) summary (as of June 17, 2025):
  - Exchange Rates: Date of Latest Observation Apr-25; Date Received May-25; Frequency of Data D; Frequency of Reporting W; Expected Frequency D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation Apr-25; Date Received May-25; Frequency of Data M; Frequency of Reporting M; Expected Frequency M.
  - Reserve/Base Money; Broad Money; Central Bank Balance Sheet: Date of Latest Observation Apr-25; Date Received May-25; Frequency of Data M; Frequency of Reporting M; Expected Frequency M.
  - Consumer Price Index: Date of Latest Observation Apr-25; Date Received May-25; Frequency of Data M; Frequency of Reporting M; Expected Frequency M.
  - GDP/GNP: Date of Latest Observation 2023; Date Received May-24; Frequency of Data A; Frequency of Reporting A; Expected Frequency A.
  - Central government revenue/expenditure/balance: Date of Latest Observation Dec-24; Date Received Mar-25; Frequency of Data Q; Frequency of Reporting Q; Expected Frequency Q.
  - International Investment Position: Date of Latest Observation Dec-23; Date Received Apr-24; Frequency of Data A; Frequency of Reporting A; Expected Frequency A.
- Notes on frequency and timeliness codes preserved exactly as in source (e.g., “D”, “W”, “M”, “Q”, “A”, "SA", "I", "NA", "NLT").

### Debt Sustainability: Key Findings and Risks
- Overall assessment: Malawi’s external and overall public debt is assessed as “in distress,” unchanged from November 2023 DSA.
- DSA context: Analysis presents debt outlook prior to authorities’ planned external debt restructuring; negotiations ongoing with limited progress to official bilateral creditors only.
- Baseline scenario outcomes:
  - PV of PPG external debt-to-GDP remains below the risk threshold throughout forecast horizon.
  - Breaches observed in PV of debt-to-exports, debt service-to-revenue, and debt service-to-exports ratios; debt service-to-exports remains in breach through the medium term.
  - PV of Malawi’s overall public debt-to-GDP was around 79 percent in 2024 and remains significantly above the threshold through and beyond the medium term.
- Classification:
  - Risk of external debt distress: In Debt Distress.
  - Overall risk of debt distress: In Debt Distress.
  - Granularity in risk rating: Unsustainable.
  - Application of judgment: No.
- Policy implication: "Bringing public debt firmly on a downward trajectory through a medium-term macroeconomic adjustment, growth-supporting reforms, and addressing the high domestic interest bill." Implementation of authorities’ debt restructuring strategy necessary for external debt burden to be considered sustainable.

### Public Debt Coverage and Shocks Used in DSA
- Coverage: DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government.
- Exclusions due to data limitations: debt held by state and local governments; other elements in general government (e.g., social security fund and extra budgetary funds); nonguaranteed SOE debt.
- Contingent liabilities shock from SOE debt kept at default value of 2 percent (to reflect nonguaranteed SOE debt risks currently excluded).
- Text Table 1 shock and coverage items (values preserved exactly):
  - Other elements of the general government not captured in 1.: 0 percent of GDP
  - Used for the analysis: 2.5
  - SoE's debt (guaranteed and not guaranteed by the government) 1/: 2 percent of GDP
  - PPP: 35 percent of PPP stock; 0.0
  - Financial market (default value of 5 percent of GDP is the minimum value): 5 percent of GDP; 5.0
  - Total (2+3+4+5) (in percent of GDP): 9.5

### Background and Recent Macroeconomic Developments Relevant for Data and Debt Analysis
- Public debt trends: "Total public debt as a percent of GDP is almost back to where it was prior to the completion of the Highly Indebted Poor Country (HIPC) process in 2006."
- 2024 macro developments:
  - Real GDP growth: 1.8 percent (drought-induced poor harvest contributed).
  - Inflation averaged 32 percent in 2024.
  - Current account deficit: 22 percent of GDP in 2024 (higher goods imports more than offset rebound in exports).
  - Gross reserves at end-2024: 0.4 months of imports.
  - About a fifth of the country faces high levels of food insecurity.
- Fiscal developments:
  - FY24/25 estimated primary deficit: 3.3 percent of GDP.
  - Total public debt at end-2024: about 88 percent of GDP.
  - Interest bill reached nearly 7 percent of GDP in FY2024/25; projected to exceed 8 percent in FY2025/26.
- External adjustment and FX issues:
  - Overvalued exchange rate contributes to persistent current account deficits.
  - Chronic shortages of foreign exchange; RBM struggles to accumulate FX reserves.
  - Expected decline in aid flows from some bilateral partners will exacerbate challenges.

### Composition of Public Debt (selected figures from Text Table 2 and related tables)
- Aggregate 2025 (In Million US$)(Percent total debt)(Percent GDP):
  - Total: 10,328 ; 100 ; 88 ; 32
  - External: 4,385 ; 42 ; 37 ; 9
  - Multilateral creditors: 3,068 ; 30 ; 26 ; 1
    - IMF: 412 ; 4 ; 4 ; 0
    - World Bank: 1,718 ; 17 ; 15 ; 1
    - AfDB: 463 ; 4 ; 4 ; 0
    - Other Multilaterals: 475 ; 5 ; 4 ; 0
      - IFAD: 144 ; 1 ; 1 ; 0
      - OFID: 86 ; 1 ; 1 ; 0
  - Bilateral Creditors: 362 ; 4 ; 3 ; 0
    - Paris Club: 1 ; 0 ; 0 ; 0
    - Non-Paris Club: 361 ; 3 ; 3 ; 0
      - EXIM China: 193 ; 2 ; 2 ; 0
      - EXIM India: 92 ; 1 ; 1 ; 0
  - Local debt with non-residents: 31 ; 0 ; 0 ; 0
  - Commercial creditors2: 903 ; 9 ; 8 ; 7
    - AFREXIM: 439 ; 4 ; 4 ; 3
    - TDB: 464 ; 4 ; 4 ; 4
  - FX Swaps with non-residents: 21 ; 0 ; 0 ; 0
  - Domestic: 5,944 ; 58 ; 51 ; 23
    - Held by residents, total: 5,769 ; 56 ; 49 ; 23
    - FX Swaps with resident: 175 ; 2 ; 1 ; 0
  - Memo item: Collateralized debt: 439 ; 4 ; 4
- Footnote: "Malawi is currently in default on its commercial debt."

### Domestic Debt Market Features
- End-2024 holdings: roughly a third of domestic debt held by resident banks, domestic non-bank sector (e.g., pension and insurance funds), and the Reserve Bank of Malawi (RBM), respectively.
- Foreign participation: small and dwindling share; growing exposure from non-bank corporates.
- Instrumental composition: RBM issues treasury notes across 2 to 10 years, issuance concentrated on short end.
- T-bill share of total domestic debt outstanding as of end-2024: 13 percent.

*Source: IMF staff report excerpts from "Annex IX. Data Issues" and related DSA text, Malawi Staff Report for the 2025 Article IV Consultation — Debt Sustainability Analysis.*

### 8.      The authorities face challenges in implementing their debt restructuring strategy (Box 1).

### 8.      The authorities face challenges in implementing their debt restructuring strategy (Box 1)

### Debt restructuring progress and challenges
- Malawi has received financing assurances from its largest official bilateral creditors, has agreements in force with two of them and is in discussions to finalize the details with the others.
- Malawi has agreements in force with China EXIM and the Kuwait Fund for Arab Economic Development. Discussions are continuing with India EXIM and the Saudi Fund for Development.
- The authorities continue to negotiate with their commercial creditors (Afreximbank and the Eastern and Southern African Trade and Development Bank (TDB)), where arrears amounted to $669 million as at end-2024.
- The timeline to complete commercial creditor negotiations is uncertain and there are risks of further delays.
- Delays reflect concerns over medium-term implications of the restructuring: for Malawi, access to future financing; for creditors, precedent for others in the region.
- Notwithstanding the recent expiration of their financing arrangement with the Fund, the authorities remain committed to achieving their debt restructuring strategy.
- Tangible progress would help pave the way for new concessional inflows from multilateral partners in the context of declining aid flows.

### Fund program status
- The IMF’s Extended Credit Facility arrangement with Malawi automatically expired in mid-May 2025.
- Approved in November 2023, the program terminated in line with Fund policies because no program review was successfully completed within an 18-month period.

### Box 1 — Background on Malawi’s Debt Restructuring Strategy
- In 2022, the authorities announced a debt restructuring strategy to restore debt sustainability after a decade in which Malawi’s external debt as a share of GDP had roughly doubled.
- The authorities hired legal and financial advisors and approached all external creditors early in the process.
- The debt restructuring strategy relies on the following pillars:
  - Bringing external public debt back to a moderate risk of debt distress in the medium term through a combination of policy adjustment and the necessary debt treatment. Targets under the strategy for medium term ratios are:
    - present value of debt-to-GDP ratio below 30 percent,
    - present value of debt-to-exports ratio below 140 percent,
    - debt service-to-exports ratio below 10 percent,
    - debt-to-revenue ratio below 14 percent.
  - Mobilization of non-debt-creating flows to close external and fiscal financing gaps, including through debt treatment and mobilization of external grant support from development partners.
  - A substantial NPV debt reduction via significant maturity extension and reprofiling of scheduled payments to provide near-term liquidity relief and bring medium-term external debt service costs to a sustainable level.

### Baseline macroeconomic assumptions and outlook
- Staff’s baseline is that the fundamental impediments to growth and fiscal dominance will not be meaningfully addressed, resulting in lower growth and higher inflation over the medium-term relative to the baseline under the recently expired ECF.
- Some fiscal, monetary, and exchange rate adjustment is assumed starting late 2025 after the elections, forced by limits on domestic financing and continued foreign exchange shortages, but the external adjustment will fall short of what is needed.
- The baseline assumes higher imports (and lower exports) over the medium term, with limited accumulation of foreign exchange reserves.
- No debt restructuring is assumed in the baseline.

### Key changes relative to the November 2023 DSA and projections
- Economic growth remains weaker in the near-term; near-term growth recovers from a poor 2024 outturn on the back of an improved agricultural harvest.
- Over the medium term, real GDP is expected to grow around 3.4 percent of GDP, below previous assumptions.
- CPI inflation is projected to average 28 percent in 2025, coming down only gradually to 15 percent over the medium term.
- Baseline assumes a worse fiscal outlook and less ambitious fiscal adjustment path relative to previous assumptions; a large primary deficit is assumed in 2025 due to election year spending.
- Gross official reserves are projected to increase only gradually to an estimated 1.3 months of imports by 2030 (adequacy level assessed at about 2.5-3 months of imports).
- Exports of goods and services are projected to decline slightly as a share of GDP (to about 8 percent).

### Quantified baseline projections (selected)
- The remaining external financing gap—cumulative during 2025-30—is 12.3 percent of GDP (about US$2.1 billion).
- Arrears on external commercial debt are projected to persist; for DSA purposes, debt service to these creditors is assumed to be financed via exceptional financing that is present value neutral and incurs no debt service over the DSA horizon.
- Domestic financing is assumed to fill the residual financing gap on market terms with new issuance shares:
  - T-bill issuance expected to represent 15 percent of newly-issued domestic,
  - 55 percent in 2- and 3-year T-notes,
  - remainder issued across the curve.
- The average real rate of 5.4 percent on new debt is assumed (above historical average of 4.6 percent).
- RBM is assumed to continue buying government debt in the secondary market, exacerbating inflation and reducing incentive for banks to lend to the private sector.

### Table excerpt — Selected numerical projections (percent or percent change where indicated)
- Real GDP Growth (Current): 2025 = 2.4, 2026 = 2.7, 2027 = 3.1, 2028 = 3.3, 2029 = 3.4, 2030 = 3.4, Avg. 2031-2044 = 3.4
- Inflation (Current, year-on-year percent change): 2025 = 27.7, 2026 = 21.7, 2027 = 18.8, 2028 = 15.3, 2029 = 15.3, 2030 = 15.4, Avg. 2031-2044 = 16.2
- Primary Balance (Current, percent of GDP): 2025 = -3.6, 2026 = -2.6, 2027 = -1.9, 2028 = -1.5, 2029 = -0.9, 2030 = -0.5
- Current Account Deficit (Current, percent of GDP): 2025 = 17.3, 2026 = 15.1, 2027 = 13.9, 2028 = 12.5, 2029 = 11.1, 2030 = 10.2, Avg. 2031-2044 = 7.4
- Exports of Goods and Services (Current, percent of GDP): 2025 = 10.2, 2026 = 10.1, 2027 = 9.6, 2028 = 9.1, 2029 = 8.6, 2030 = 8.0, Avg. 2031-2044 = 8.6
- FDI (Current, percent of GDP): 2025 = 1.3, 2026 = 1.3, 2027 = 1.3, 2028 = 1.3, 2029 = 1.3, 2030 = 1.3, Avg. 2031-2044 = 1.3

### DSA findings — external and public debt sustainability
- Malawi’s overall and external public debt are assessed to be in debt distress.
- The PV of PPG external debt-to-GDP ratio remains below the threshold under the baseline, but there are significant and sustained breaches of other solvency and liquidity indicators.
- The PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue ratios start the forecast period above their respective thresholds and remain so for several years—until 2033 in the case of debt-service-to-exports.
- Malawi is in arrears to its external commercial creditors.
- Under the baseline, the PV of overall public debt is projected to rise gradually, reaching 88 percent of GDP in 2035, significantly above the threshold for countries with weak debt-carrying capacity (35 percent).
- Overall public debt service is projected to grow steadily, hitting 213 percent of revenues and grants in 2035.

### Stress tests and scenario analysis
- A contingent liability stress test features a one-off increase of 9.5 percentage points in the debt-to-GDP ratio in the second year of the projection to capture contingent liabilities from government guaranteed debt, SOEs, and potential future bank recapitalization needs.
- A commodity price shock scenario tests a prolonged decline in commodity prices (tobacco accounts for nearly half of Malawi’s total goods exports), calibrated to a decline in prices in the second year to the lower end of the 68 percent confidence interval in the IMF’s commodity price forecasts, unwinding over six years.
- The sustainability of Malawi’s debt is particularly sensitive to developments in exports and the exchange rate.

### Risks, vulnerabilities, and realism of baseline
- The realism tools suggest the baseline is broadly consistent with recent experience: external debt creation primarily driven by the current account deficit, offset by price and exchange rate movements and other non-debt creating flows.
- Grant inflows into Malawi are around 5 percent of GDP (slightly below historical average of 6 percent of GDP since 2008 reflecting USAID’s withdrawal).
- The trajectory for total public debt as a share of GDP is projected to increase gradually due to persistent fiscal deficits financed via high-cost domestic debt.
- The outlook is subject to significant uncertainty, with risks skewed to the downside, including climate shocks, further reductions in foreign aid flows, geopolitical uncertainty, import bans, and lack of monetary tightening.
- Upside risks include export diversification, infrastructure investments for agricultural productivity, and development of major mining projects (not currently reflected in the macro framework).

### Policy implications and recommendations
- To reduce risks from rising public debt the authorities need to:
  - take steps to reduce their interest bill (e.g., a fiscal adjustment that would both reduce the need for new borrowing and help lower the risk premium on new debt),
  - attract additional, concessional external financing or grants where possible.
- A medium-term strategy to restore debt sustainability should include:
  - (i) a sustained macroeconomic adjustment,
  - (ii) growth-supporting reforms,
  - (iii) finalizing debt relief negotiations with creditors,
  - (iv) securing highly concessional external financing, ideally grants.
- Further delays to completion of the debt restructuring process will make it increasingly difficult to close the government’s financing gaps.
- Without meaningful fiscal adjustment, reliance on more expensive domestic debt issuance will crowd out spending on growth and poverty reduction.

*Source: Excerpt from 1mwiea2025001-source-pdf (IMF staff report text).*

### 22.      The authorities agreed on the need to ensure debt sustainability. The authorities

### 22. The authorities agreed on the need to ensure debt sustainability. The authorities

### Fiscal adjustment objective and strategy
- Objective: reduce the overall deficit to 6 percent of GDP over the medium-term (a 4 percent of GDP adjustment).
- Strategy elements:
  - Increase domestic revenue through reduction of informality.
  - Rationalization of tax expenditures.
  - Administrative measures to strengthen revenue collection.
- Fiscal constraint noted: the interest rate bill dynamic poses a significant obstacle to fiscal retrenchment and to supporting more development spending.
- Commitment to increase the primary balance to reduce borrowing and debt.

### Debt restructuring and creditor engagement
- Authorities underscored challenges to reaching a successful agreement with external commercial creditors on a debt restructuring but remain committed to their restructuring strategy.

### Key public debt indicators and stress-test context (figures cover 2025–35)
- Figures and stress-test outputs are presented for 2025–35 (Figure 1 and Figure 2).
- Stress-test parameters and annotations appearing in the figures include:
  - Threshold: 1.8%
  - Benchmark values appearing in Figure 2: 4%, 81%, 14%, 1.8%, 30, 77, 6.0%, 33, 11, 1.8%
  - Notes: “Most extreme shock 1/” and definition explaining selection of the most extreme stress test; reference to one-off breaches.
- Borrowing and marginal debt assumptions noted in the figures:
  - External PPG MLT debt considered for covering additional financing needs generated by shocks.
  - Shares of marginal debt and terms of marginal debt referenced (e.g., Avg. nominal interest rate on new borrowing in USD; Avg. maturity (incl. grace period); Avg. grace period).
- Graphical indicators shown include:
  - Debt Service-to-Revenue Ratio
  - PV of Debt-to-Exports Ratio
  - PV of Debt-to-GDP Ratio
  - Debt Service-to-Exports Ratio
  - PV of Debt-to-Revenue Ratio
  - Debt Service-to-Revenue Ratio (Most extreme shock: Combined contingent liabilities)
  - PV of Debt-to-GDP Ratio (Most extreme shock: Growth)

### Drivers of debt dynamics (Figure 3)
- Figures decompose debt changes into contributors over past and projected 5-year intervals:
  - Components shown include Residual, Price and exchange rate, Real GDP growth, Nominal interest rate, Current account + FDI, Change in PPG debt, Other debt-creating flows, Real exchange rate depreciation, Primary deficit.
- Visuals present:
  - Gross Nominal PPG External Debt and Gross Nominal Public Debt trajectories (in percent of GDP; DSA vintages).
  - Unexpected changes in debt (difference between anticipated and actual contributions on debt ratios).
  - Distribution across LICs for which LIC DSAs were produced (interquartile ranges and medians).

### Realism tools and growth–adjustment interactions (Figure 4)
- Tools and charts address interaction between fiscal adjustment and growth:
  - Public and Private Investment Rates (contributions to real GDP growth; percent, 5-year average).
  - Fiscal Adjustment and Possible Growth Paths: bars show annual projected fiscal adjustment (right-hand scale) and lines show possible real GDP growth paths under different fiscal multipliers (left-hand scale).
  - Distribution of 3-year adjustment in primary balance across Fund-supported programs since 1990; projected 3-year adjustment metrics and percent of sample.
- Specific annotations and scales mentioned:
  - Projected period references and scales for contribution to real GDP growth (percent of GDP) and 3-Year Adjustment in Primary Balance (Percentage points of GDP).

*Source: Malawi country DSA and accompanying figures (2025–35).*

### 2.5 percentage points of GDP in

### 1mwiea2025001-source-pdf - 2.5 percentage points of GDP in

### Key findings and overall projections
- External debt (nominal) was 33.5 percent of GDP in 2022 and is projected to decline to 10.9 percent of GDP by 2045, with intermediate values: 43.2 (2023), 37.4 (2024), 31.6 (2025), 29.1 (2026), 25.8 (2027), 22.7 (2028), 19.6 (2029), 16.9 (2030), 15.8 (2031), 14.7 (2032), 13.7 (2033), 13.0 (2034), 12.5 (2035), 10.9 (2045).
- Public sector debt peaked historically and is projected: 74.4 (2022), 83.6 (2023), 87.6 (2024), then 80.2 (2025), 80.6 (2026), 81.4 (2027), 82.2 (2028), 82.8 (2029), 83.0 (2030), 91.5 (2035), 106.3 (2045).
- Change in external debt: 3.1 (2022), 9.7 (2023), -5.8 (2024), -5.8 (2025), -2.5 (2026), -3.3 (2027), -3.2 (2028), -3.0 (2029), -2.7 (2030), -1.1 (2031), -1.1 (2032), -1.0 (2033), -0.7 (2034), -0.5 (2035), -0.1 (2045).
- Identified net debt-creating flows (external): 15.4 (2022), 14.1 (2023), 26.4 (2024), 15.3 (2025), 13.0 (2026), 11.8 (2027), 10.5 (2028), 9.2 (2029), 8.4 (2030), 7.6 (2031), 7.0 (2032), 6.5 (2033), 6.1 (2034), 6.1 (2035), 4.4 (2045).
- Gross external financing need (Billion of U.S. dollars): 2.1 (2022), 2.4 (2023), 2.6 (2024), 3.3 (2025), 2.6 (2026), 2.6 (2027), 2.5 (2028), 2.5 (2029), 2.5 (2030), 2.5 (2031), 2.4 (2032), 2.3 (2033), 2.2 (2034), 2.3 (2035), 2.4 (2045).

### External DSA—current vulnerabilities and indicators
- Non-interest current account deficit: 17.4 (2022), 17.0 (2023), 21.5 (2024), 16.8 (2025), 14.5 (2026), 13.4 (2027), 12.0 (2028), 10.7 (2029), 9.9 (2030), 9.1 (2031), 8.5 (2032), 8.0 (2033), 7.6 (2034), 7.5 (2035), 5.8 (2045).
- Exports: 11.8 (2022), 11.3 (2023), 12.1 (2024), 10.2 (2025), 10.1 (2026), 9.6 (2027), 9.1 (2028), 8.6 (2029), 8.0 (2030), 8.1 (2031), 8.3 (2032), 8.4 (2033), 8.5 (2034), 8.5 (2035), 9.0 (2045).
- Imports: 30.5 (2022), 29.6 (2023), 35.6 (2024), 28.4 (2025), 25.8 (2026), 24.3 (2027), 22.5 (2028), 20.6 (2029), 19.2 (2030), 18.4 (2031), 18.0 (2032), 17.6 (2033), 17.3 (2034), 17.3 (2035), 16.2 (2045).
- Net current transfers (negative = inflow): -4.0 (2022), -3.7 (2023), -4.4 (2024), -3.3 (2025), -3.0 (2026), -3.0 (2027), -2.9 (2028), -2.8 (2029), -2.6 (2030), -2.5 (2031–2034), -2.5 (2035), -3.0 (2045).
- Net FDI (negative = inflow): -1.1 (2022), -1.0 (2023), -1.3 (2024), -1.3 (2025–2035), -1.6 (2045).
- Endogenous debt dynamics contribution: -0.9 (2022), -2.0 (2023), 6.2 (2024), -0.3 (2025), -0.2 (2026), -0.3 (2027–2035), -0.2 (2045).

### Sustainability indicators (external)
- PV of PPG external debt-to-GDP ratio (selected years shown): 27.9 (2025), 22.9 (2026), 20.4 (2027), 18.5 (2028), 16.3 (2029), 14.2 (2030), 12.4 (2031), 11.3 (2032), 10.5 (2033), 9.9 (2034), 9.3 (2035), 8.9 (2045), 6.7 (memory item).
- PV of PPG external debt-to-exports ratio (selected years): 229.8 (2025), 223.3 (2026), 202.8 (2027), 192.9 (2028), 179.3 (2029), 166.3 (2030), 154.1 (2031), 139.5 (2032), 126.2 (2033), 117.1 (2034), 110.1 (2035), 104.4 (2045), 74.7 (memory item).
- PPG debt service-to-exports ratio: 7.2 (2022), 11.6 (2023), 11.7 (2024), 64.0 (2025), 21.2 (2026), 17.1 (2027), 14.9 (2028), 14.6 (2029), 13.0 (2030), 11.2 (2031), 11.0 (2032), 10.0 (2033), 9.3 (2034), 8.9 (2035), 5.6 (2045).
- PPG debt service-to-revenue ratio: 6.2 (2022), 9.8 (2023), 9.9 (2024), 45.7 (2025), 14.7 (2026), 11.3 (2027), 9.3 (2028), 8.5 (2029), 7.2 (2030), 6.2 (2031), 6.3 (2032), 5.8 (2033), 5.4 (2034), 5.2 (2035), 4.6 (2045).

### Public sector debt dynamics and fiscal metrics
- Public sector debt (percent of GDP) and composition:
  - Public sector debt: 74.4 (2022), 83.6 (2023), 87.6 (2024), 80.2 (2025), 80.6 (2026), 81.4 (2027), 82.2 (2028), 82.8 (2029), 83.0 (2030), 91.5 (2035), 106.3 (2045), historical average 53.9, projections average 84.6.
  - Of which: external debt matches the external DSA figures (33.5 in 2022 to 10.9 in 2045).
- Change in public sector debt: 15.6 (2022), 9.2 (2023), 4.0 (2024), -7.4 (2025), 0.4 (2026), 0.8 (2027–2029), 0.2 (2030), 1.6 (2035), 1.2 (2045).
- Identified debt-creating flows (public): 5.0 (2022), 7.0 (2023), -7.9 (2024), -8.3 (2025), -2.0 (2026), -0.4 (2027), -0.1 (2028), 0.0 (2029), -0.5 (2030), 0.0 (2035), -0.2 (2045).
- Primary deficit: 4.6 (2022), 2.9 (2023), 4.4 (2024), 3.5 (2025), 2.6 (2026), 1.9 (2027), 1.0 (2028), 0.7 (2029), 0.6 (2030), 0.5 (2035), 0.3 (2045).
- Revenue and grants (percent of GDP): 17.4 (2022), 17.6 (2023), 18.5 (2024), 17.4 (2025), 17.1 (2026), 17.7 (2027), 17.7 (2028), 17.0 (2029), 16.8 (2030), 16.8 (2035), 13.0 (2045).
- Automatic debt dynamics: 0.3 (2022), 4.0 (2023), -12.3 (2024), -11.8 (2025), -4.6 (2026), -2.3 (2027), -1.1 (2028), -0.8 (2029), -1.0 (2030), -0.4 (2035), -0.5 (2045).
- Contribution from average real interest rate and growth:
  - Contribution from average real interest rate (selected): -4.3 (2022), -11.6 (2023), -11.9 (2024), -9.8 (2025), -2.5 (2026), 0.1 (2027), 1.5 (2028), 1.9 (2029), 1.7 (2030), 2.5 (2035), 3.0 (2045).
  - Contribution from real GDP growth: -0.5 (2022), -1.4 (2023), -1.5 (2024), -2.1 (2025), -2.1 (2026), -2.4 (2027), -2.6 (2028), -2.7 (2029), -2.7 (2030), -2.9 (2035), -3.4 (2045).
- PV of public debt-to-GDP ratio (selected): 78.3 (2025), 72.2 (2026), 73.0 (2027), 74.7 (2028), 76.3 (2029), 77.8 (2030), 78.8 (2031), 88.5 (2035), 102.6 (2045).
- Debt service-to-revenue and grants ratio: 32.3 (2022), 33.7 (2023), 45.1 (2024), 144.4 (2025), 109.4 (2026), 146.3 (2027), 142.6 (2028), 171.6 (2029), 172.0 (2030), 213.0 (2035), 334.1 (2045).
- Gross financing need (public): 10.2 (2022), 8.9 (2023), 12.7 (2024), 28.6 (2025), 21.3 (2026), 27.8 (2027), 26.3 (2028), 29.9 (2029), 29.5 (2030), 36.3 (2035), 43.9 (2045).

### Sensitivity analysis—risks and thresholds
- Sensitivity analysis for PPG external debt and public debt indicates several scenarios and bound tests across 2025–2035. Bold values (in the source) indicate breaches of thresholds or benchmarks.
- Selected threshold references:
  - External PV debt threshold: 30 (threshold repeated across years).
  - Public sector total debt benchmark: 35 (benchmark repeated).
- Example stress impacts (PPG external debt indicators, baseline vs. scenarios):
  - Baseline PV of debt-to-GDP (2025–2035) series excerpt: 23 20 19 16 14 12 11 11 10 9 9 9 8 8 8.
  - Bound test B1 (Real GDP growth) and B2 (Primary balance) produce worsened trajectories relative to baseline; specific year-by-year values are provided in the source tables.
- Sensitivity analysis tables include tailored tests such as Combined contingent liabilities and Commodity price shocks; some tailored tests are marked "n.a." where not applicable.

### Macroeconomic and financing assumptions
- Real GDP growth (percent): 0.9 (2022), 1.9 (2023), 1.8 (2024), 2.4 (2025), 2.7 (2026), 3.1 (2027), 3.3 (2028), 3.4 (2029–2035), 2.9 (2045), average projections 3.2.
- GDP deflator in US dollar terms (change in percent): -0.5 (2022), 5.3 (2023), -13.8 (2024), 23.7 (2025), 10.5 (2026), 7.6 (2027), 8.0 (2028), 8.1 (2029), 8.3 (2030), 3.4 (2031), 0.4 (2032–2034), 0.3 (2035), 0.8 (2045), projections average 6.5.
- Effective interest rate (percent): 0.9 (2022), 0.9 (2023), 0.8 (2024), 1.5 (2025), 2.0 (2026), 1.8 (2027), 1.9 (2028–2034), 1.6 (2035), 0.9 (2045), projections average 1.9.
- Growth of exports of G&S (US dollar terms, percent): -6.4 (2022), 2.5 (2023), -5.8 (2024), 6.8 (2025), 11.7 (2026), 5.6 (2027), 5.9 (2028), 5.0 (2029), 4.9 (2030), 7.7 (2031), 7.2 (2032), 4.8 (2033), 4.4 (2034–2035), -0.7 (2045), projections average 6.2.
- Growth of imports of G&S (US dollar terms, percent): 1.9 (2022), 4.3 (2023), 5.5 (2024), 1.1 (2025), 2.9 (2026), 4.7 (2027), 3.0 (2028), 2.5 (2029), 4.1 (2030), 2.8 (2031), 1.7 (2032), 1.5 (2033), 1.6 (2034), 3.7 (2035), 3.0 (2045), projections average 5.9, 2.7 (memory item).
- Grant element of new public sector borrowing (percent): 14.3 (2025), 35.0 (2026), 36.1 (2027), 37.2 (2028), 34.9 (2029), 29.8 (2030), 29.9 (2031), 30.2 (2032), 46.5 (2033), 50.5 (2034), 51.7 (2035), 52.5 (2045), projections average 36.0.
- Government revenues (excluding grants, percent of GDP): 13.8 (2022), 13.3 (2023), 14.4 (2024), 14.3 (2025), 14.6 (2026), 14.5 (2027), 14.6 (2028–2034), 10.8 (2045), projections average 14.6.
- Aid flows (Billion of US dollars): 0.7 (2022), 1.0 (2023), 0.7 (2024), 0.6 (2025), 0.5 (2026), 0.6 (2027), 0.7 (2028), 0.6 (2029), 0.6 (2030), 0.6 (2031), 0.7 (2032), 0.7 (2033), 0.8 (2034), 0.9 (2035), 1.3 (2045).
- Grant-equivalent financing (percent of GDP): 4.1 (2025), 3.3 (2026), 3.7 (2027), 3.3 (2028), 2.5 (2029), 2.2 (2030), 2.3 (2031–2034), 2.4 (2034), 2.5 (2035), projections average 2.8.
- Grant-equivalent financing (percent of external financing): 39.3 (2025), 69.5 (2026), 81.4 (2027), 91.6 (2028), 93.6 (2029), 96.8 (2030), 97.1 (2031), 97.3 (2032), 96.7 (2033), 93.8 (2034), 91.4 (2035), projections average 86.2.

### Fund relations, financing arrangements, and arrears
- IMF membership: Joined July 19, 1965; Article VIII.
- Quota and holdings (SDR Million): Quota 138.80 (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).
- SDR Department allocations: Net cumulative allocation 199.40 (100.00 percent); Holdings 11.27 and 5.65 (as listed).
- Outstanding Purchases and Loans (SDR Million; percent of quota): RCF Loans 208.15 (149.96 percent of quota); ECF Arrangements 98.43 (70.92 percent).
- Latest financial commitments (arrangements):
  - ECF Nov 15, 2023 – May 14, 2025; Amount Approved 131.86 (SDR Million); Amount Drawn 26.37.
  - ECF Apr 30, 2018 – Sep 24, 2020; Amount Approved 105.84; Amount Drawn 53.85.
  - ECF Jul 23, 2012 – Jun 29, 2017; Amount Approved 138.80; Amount Drawn 138.80.
- Outright RCF loans (approved and drawn): Nov 21, 2022 (69.40 approved, 69.40 drawn); Oct 02, 2020 (72.31/72.31); May 01, 2020 (66.44/66.44).
- Overdue obligations and projected payments to Fund (SDR Million): Principal 29.93 (2025), 47.84 (2026), 40.47 (2027), 51.29 (2028), 53.21 (2029); Charges/Interest 2.83 (2025), 5.62 (2026–2029); Total 32.76 (2025), 53.46 (2026), 46.09 (2027), 56.91 (2028), 58.83 (2029).
- HIPC Initiative (Enhanced Framework): Decision point date December 2000; Assistance committed by all creditors (US$ Million) 1,057.00; Of which: IMF assistance (US$ million) 45.27 (SDR equivalent 33.37); Completion point date Aug 2006. Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 33.37; Interim assistance 11.57; Completion point balance 21.80; Additional disbursement of interest income 3.82; Total disbursements 37.19.
- MDRI-eligible debt (SDR Million): 37.87; Financed by: MDRI Trust 14.53; Remaining HIPC resources 23.34.
- Catastrophe Containment and Relief (CCR) disbursements (SDR million): 04/13/2020 7.20 disbursed; 10/02/2020 7.20; 04/01/2021 7.81; 10/06/2021 6.72; 12/15/2021 3.91.

### Exchange rate policy, MCPs, and FX restrictions
- De jure exchange rate arrangement: floating. De facto classification: ‘stabilized’.
- Since November 2023 devaluation of 44 percent (under an Extended Credit Facility approved the same month), the official exchange rate remained broadly constant against the US dollar.
- Malawi maintains multiple Market Conduct Policies (MCPs) subject to Fund approval:
  - MCP arising from rates managed by RBM and applied to FX transactions by Authorized Dealer Banks (ADBs) and RBM FX spot transactions.
  - MCP arising from the FX auction using the same fixed RBM rate.
  - MCP arising from the rate used by the RBM in its spot leg of FX swaps.
  - MCP arising from the forward rate used by the RBM in its FX swaps.
- Three foreign exchange restrictions maintained by Malawi:
  1. Unavailability and undue delays in accessing FX for current payments and transfers due to authorities' rationing and limiting exchange rate adjustment.
  2. Ban on accessing foreign exchange for unrelated current international transactions by customers who fail to comply with advance payment requirements.
  3. Requirement to provide a tax clearance certificate prior to permitting transfers for certain current transactions.

### Safeguards assessment and institutional recommendations
- The 2024 safeguards assessment update for the Reserve Bank of Malawi (RBM) found progress on 2021 recommendations: improvements in governance practices and restoration of financial reporting integrity.
- Outstanding issues and recommended actions (as identified in the source):
  - Amend the RBM Act as previously recommended.
  - Strengthen Board oversight and involvement in policymaking, including Board role in approval of key institutional policies.
  - Strengthen controls over open market operations and lending to banks.
  - Address risks of non-compliance with legal limits on advances to the government.
  - Divestiture from the Export Development Fund (EDF).
  - Improve internal audit capacity and methodology.
- Progress since the assessment: RBM Board adopted a new investment policy for foreign reserves; internal audit plans expanded to include audits of foreign reserves management and open market operations. However, overall progress has been slow and several key recommendations remain outstanding.

### Article IV and engagement timeline
- Malawi is on the standard 12-month Article IV cycle. The Executive Board concluded the last Article IV consultation on December 13, 2021.
- Staff report informational annex prepared by The African Department (in consultation with other departments). Document date listed as July 3, 2025 with a statement by Executive Director dated July 18, 2025.

*Source: Country authorities; and staff estimates and projections. (Extracted from the provided PDF tables and text.)*

### Introduction

### Introduction

### Overview
- Authorities welcomed the Article IV Consultation mission led by Mr. Tyson and broadly share staff’s appraisals; recommendations align with Malawi 2063 (MW2063) First 10-Year Implementation Plan (MIP-1).
- Reform agenda priorities: restoring macroeconomic stability and achieving socially inclusive growth, emphasizing climate-resilient agriculture, improved foreign exchange management, and macroeconomic stability.

### Key policy aims
- Targeted public investment in agriculture, tourism, manufacturing, and mining (ATMM) to boost productivity, stimulate growth, and increase domestic revenue.
- Combined with sound fiscal and monetary policies, these efforts are expected to ease inflationary pressures and lay the foundation for stronger growth from 2026 onward.

### Final note
- Authorities look forward to continued engagement with the Fund, including the possibility of a successor arrangement post-election.

### *Source: 1mwiea2025001-source-pdf - Introduction*

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### Recent Economic Developments and Outlook
- Real GDP growth:
  - 2023: 1.9 percent.
  - 2024: 1.8 percent.
  - Projected for 2025: approximately 3.0 percent, supported by the Affordable Inputs Program (AIP) and favorable 2024/25 agricultural season weather.
- Inflation:
  - Headline inflation: 35.0 percent in January 2024 (decade-high).
  - Annual average inflation for 2024: estimated at 32.2 percent (compared to 28.8 percent in 2023).
  - Inflation declined to 27.7 percent by the end of May 2025.
  - Authorities project inflation to remain above 20 percent for the remainder of 2025; more pronounced deceleration projected in 2026 with tighter monetary policy.
- External sector:
  - Current account deficit widened to 22 percent of GDP in 2024 (from 17 percent of GDP in 2023).
  - Official reserve assets declined to a level covering less than one months of import requirements.
- Downside risks highlighted: unfavorable climatic conditions, shrinking ODA, ongoing trade tensions, geopolitical tensions, volatility in global commodity markets, and potential delays in reform implementation due to financing constraints.

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### Fiscal Policy and Debt Management
- Revenue and expenditure:
  - 2024/25 fiscal year: 39.9 percent nominal increase in tax revenue collections compared to the previous fiscal year.
  - Total revenues increased to an estimated 19.1 percent of GDP (from 18.5 percent in FY2023/24).
  - Public expenditures reached 29.2 percent of GDP.
  - Overall fiscal deficit: 10.1 percent of GDP (compared to 10.6 percent in the previous year).
- Medium-term objective:
  - Aim to reduce the fiscal deficit to 6 percent of GDP over the medium term, representing a targeted fiscal adjustment of 4 percent of GDP.
- Policy measures undertaken/planned:
  - Digitalization of tax administration, introduction of tax stamps, strengthening of audit and VAT inspection frameworks, intensified debt recovery efforts.
  - Broaden the VAT base, especially through informal sector integration.
  - Advance PFM reforms: strengthen expenditure controls, enhance cash and debt management frameworks, improve quality and timeliness of fiscal reporting.
  - Secure full participation of all creditor groups as part of a comprehensive debt restructuring strategy.
- Debt negotiations:
  - Substantial progress with bilateral creditors; engagement with external commercial creditors remains challenging.

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### Monetary and Exchange Rate Policies
- Monetary stance:
  - Policy rate raised to 26 percent in January 2024.
  - Maximum borrowing costs reached 37 percent.
  - Liquidity Reserve Ratio (LRR) raised in May 2024 to absorb excess liquidity.
  - Authorities emphasize balanced, adaptive policy calibrated to manage inflation while preserving recovery momentum; close coordination with fiscal policy and structural reforms is critical.
- Exchange rate regime:
  - Authorities share staff’s view on exchange rate unification but favor a gradual approach due to past realignment outcomes (limited conversion of foreign reserves from informal to formal sector; partial realization of pledged ODA; intensified inflationary pressures).
  - Medium-term preference: transition to a managed-float regime.
  - Short-term preference: maintain a fixed exchange rate to anchor inflation expectations and support price stability.
  - Authorities caution premature exchange rate flexibility could cause excessive depreciation and heightened inflation, requiring significantly higher foreign exchange reserves.
- Timing of fiscal adjustments to support exchange rate stability:
  - Fiscal adjustments are scheduled to be undertaken following the elections in September 2025.
  - Strategy includes allowing commercial banks to finance importation of crucial products to enable central bank accumulation of foreign exchange reserves.

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### Financial Sector Policies
- Banking sector resilience:
  - High liquidity, strong profitability, robust capitalization; capital adequacy and funding ratios remain well above regulatory requirements.
- Credit quality and vulnerabilities:
  - Non-performing loans (NPLs) ratio: 7.7 percent as of end-April 2025 (statutory threshold: 5.0 percent).
  - Improvement from 9.8 percent recorded in November 2024.
  - High concentration of credit exposure and lagged COVID-19 effects contributed to deterioration.
  - Continued accumulation of net foreign liabilities and high government claims pose vulnerabilities amid fiscal imbalances and currency depreciation.
- Policy actions and reforms:
  - Strengthen stress testing and enhance surveillance frameworks with Fund technical assistance; expand stress testing with rigorous scenario analyses.
  - Introduce capital surcharge for domestically systemic banks.
  - Continue application of existing provisioning standards.
  - Implement targeted interventions to address external imbalances and enhance financial resilience.
  - Basel III implemented on January 1, 2025.

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### Structural Reforms and Governance
- Private sector and diversification:
  - Priority on creating an enabling environment for private investment and private sector–led diversification to foster macroeconomic stability and inclusive growth.
  - Operationalization of the ATMM initiative as a significant step.
- Public financial management and governance:
  - Commitment to advancing remaining PFM reforms, addressing issues from the 2024 Governance Diagnostic, and acting on Safeguards Assessment recommendations.
  - Strengthen AML/CFT framework and enhance central bank independence.
- State-owned enterprises (SOEs):
  - Reform focus: strengthen SOE oversight with improved governance frameworks, rigorous financial reporting standards, enhanced performance monitoring, expanded coverage of SOE risk assessments, and increased transparency and accountability.
- Home-grown economic program:
  - Program in final design phase to stimulate supply side and boost potential real GDP growth; aligns with MW2063 and MIP-1.
  - Program emphasizes fiscal consolidation, revenue-enhancing and expenditure-management reforms, and structural reforms.
  - Quantitative performance targets to be set for monetary base, overall and domestic primary fiscal balances, recurrent expenditure (as a share of domestic revenue), and net international reserves (NIR) to be monitored quarterly.
  - Active participation from key Ministries, Departments, and Agencies (MDAs) and ongoing technical assistance and capacity development are essential.

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### Conclusion
- Authorities remain firmly committed to:
  - Restoring macroeconomic stability.
  - Strengthening fiscal governance.
  - Fostering conditions for inclusive, private sector–led growth.
- Expected outcomes:
  - Reduced economic vulnerabilities, enhanced public sector efficiency, and unlocking long-term development potential.
- Continued engagement with the Fund and development partners sought to support implementation of reforms.

*Source: 1mwiea2025001-source-pdf - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mwiea2025001-source-pdf.pdf_