## _cr04380 ## Source details **Canonical URL:** [_cr04380](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04380.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04380.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04380.pdf.json) --- ### Executive Summary - Economic performance since the 2002 Article IV consultation was disappointing: adverse weather and large fiscal policy slippages. - Inflation reduced to 10 percent in 2003. - Kwacha–U.S. dollar exchange rate stable for the past 12 months (as of report). - Malawi’s PRGF arrangement (approved December 2000) effectively lapsed; the second review could not be completed because of spending overruns. - Dr Bingu wa Mutharika elected president in May 2004 with 35 percent of the vote. - A staff-monitored program (SMP) launched July 2004; the 2004/05 budget approved late September and is in line with the SMP. Performance so far has been satisfactory. ### Recent developments and macroeconomic outlook - Growth and inflation: - Economy grew by an average of 3 percent in 2002-03; stagnated in per capita terms. - Maize production: normal levels in 2003; 2004 maize harvest estimated below normal. - Tobacco production decreased in 2003 but expected to grow by 10 percent in 2004. - Inflation decreased from above 20 percent in early 2002 to single digits in 2003; expansionary policy in FY2003/04 has recently put upward pressure on prices. - Poverty and social indicators: - Per capita GDP about US$160. - Approximately two-thirds of the population estimated to live on less than one dollar a day in 1997-98. - Selected indicators: - Adult literacy rate (percent of people ages 15+): 1990: 51.8; 1995: 55.9; 2001: 61.0; 2002: 61.8. - Under 5 mortality rate (per 1,000): 1990: 241.0; 1995: 216.0; 2001: 188.0; 2002: 182.0. - Prevalence of HIV (percent of women ages 15-24): 14.9. - Access to an improved water source (percent of population): 57.0. - External sector and reserves: - 2002 current account deficit of 25 percent of GDP—about one-half related to maize imports—financed through drawdown in official reserves and external assistance. - Donor balance of payments support resumed after first PRGF review in late 2003 but curtailed when program implementation went off track; resumed in September 2004 as prospects improved. - Terms of trade deteriorated reflecting increases in food import prices and rising world market oil prices. ### Fiscal developments and public debt - Fiscal slippages and expenditure: - Domestic primary expenditure exceeded program plans by more than 5 percent of GDP in each of 2002/03 and 2003/04. - Major contributors: unbudgeted maize imports of 3.9 percent of GDP in 2002/03; above-budget spending in executive services, national assembly, police, military, arrears repayments, subventions, and election costs in 2003/04; wage overruns both years. - PRGF went off track in early 2004; revised program based on March 2004 supplementary budget not implemented; domestic primary expenditure exceeded revised target by 3½ percent of GDP. - Key budget figures (percent of GDP, Box 1 table extracts): - Revenue and grants: 2001/02 Actual 24.1; 2002/03 Prog. 28.6; 2003/04 Actual 27.7; 2004/05 SMP 35.2; 2004/05 Actual 36.0; SMP column 35.7. - Tax revenue: 2001/02 Actual 15.3; 2002/03 Prog. 16.1; 2003/04 Actual 17.7; 2004/05 Prog. 19.3; 2004/05 Actual 20.3; SMP 20.7. - Grants: 2001/02 Actual 6.9; 2002/03 Prog. 10.6; 2003/04 Actual 6.9; 2004/05 Prog. 13.0; 2004/05 Actual 12.0; SMP 11.7. - Total expenditure and net lending: 2001/02 Actual 31.9; 2002/03 Prog. 31.4; 2003/04 Actual 39.7; 2004/05 Prog. 35.2; 2004/05 Actual 40.3; SMP 43.3; SMP column 40.0. - Interest (total): 2001/02 Actual 5.1; 2002/03 Prog. 4.7; 2003/04 Actual 7.1; 2004/05 Prog. 9.6; 2004/05 Actual 10.7; SMP 11.0; SMP column 9.0. - Domestic interest: 2001/02 Actual 3.9; 2002/03 Prog. 3.2; 2003/04 Actual 5.7; 2004/05 Prog. 8.0; 2004/05 Actual 9.2; SMP 9.5; SMP column 7.8. - Overall Balance: 2001/02 Actual -7.9; 2002/03 Prog. -2.7; 2003/04 Actual -12.1; 2004/05 Prog. -0.5; 2004/05 Actual -5.2; SMP -7.3; SMP column -4.3. - Net domestic debt (central government): 2001/02 Actual 10.2; 2002/03 Prog. 5.1; 2003/04 Actual 21.2; 2004/05 Prog. 15.6; 2004/05 Actual 19.5; SMP 25.9; SMP column 23.7. - Domestic primary expenditure: 2001/02 Actual 21.0; 2002/03 Prog. 20.2; 2003/04 Actual 26.4; 2004/05 Prog. 17.6; 2004/05 Actual 19.4; SMP 22.8; SMP column 23.2. - Pro-poor expenditures: 2001/02 Actual 6.6; 2002/03 Prog. 6.2; 2003/04 Actual 7.2; 2004/05 Prog. 7.0; 2004/05 Actual 6.7; SMP 6.8; SMP column 7.5. - Nominal GDP (millions of Kwacha): 2001/02 133,004; 2002/03 150,794; 2003/04 154,340; 2004/05 Prog. 174,600; 2004/05 Actual 181,525; SMP 181,560; SMP column 216,129. - Net domestic debt more than doubled over the past two financial years to 26 percent of GDP at end-June 2004 (text reference). ### Monetary policy, liquidity, and exchange rate - Monetary aggregates and policy: - Broad money growth consistently near or above 30 percent since late 2002. - RBM lowered the Bank Rate (discount rate) in three steps to 25 percent. - NDA rapidly expanded while NFA declined; reserve money and broad money impacted by these shifts. - An unexplained rise in cash outside the banking system complicated sterilization efforts. - Exchange rate: - Real and nominal effective exchange rates depreciated by nearly 50 percent between January 2002 and September 2003. - Since August 2003, US$/kwacha rate was stable while inflation began to accelerate. - Financial sector: - Government securities make up about one-half of commercial bank assets. - Banks remained well capitalized; ratio of nonperforming loans declined from 13 percent in June 2003 to 10 percent in March 2004. - High returns on government securities continued to benefit the financial sector. ### Structural reforms and public financial management - Progress and measures: - Several parastatals privatized; reforms in telecommunication, electricity and water sectors. - ADMARC’s monopoly in maize marketing abolished; law regulating ADMARC repealed in December 2003 to separate social and commercial activities. - Anti-Corruption Bureau strengthened via amendment to the Corrupt Practices Act requiring cases not prosecuted to be reported to parliament. - New administration enacted a policy of zero tolerance on corruption; arrests of several high ranking officials and special commission report on Strategic Grain Reserve mismanagement. - Public financial management: - New Public Finance Management Act, Public Audit Act, and Public Procurement Act passed mid-2003 and being implemented. - Final public accounts for 2002/03 ready for presentation to parliament within 12 months for the first time in many years. - New Department of Public Procurement under the Office of the President funded by its own budget line for the first time in 2004/05. - First phase of external audit of domestic arrears underway with an interim report completed. - Numerous donor-assisted programs to strengthen expenditure procedures underway, but implementation slow. ### Program performance, SMP and policy path - PRGF status and SMP: - PRGF arrangement effectively lapsed; second PRGF review circulation to Directors on April 8, 2004 was withdrawn because of spending overruns. - SMP adopted to establish a track record that could lead to a new PRGF arrangement; SMP covers 2004/05 fiscal year (July–June) and will be monitored quarterly. - With strong performance over two test dates (six months), a PRGF could be considered. - Medium-term emphasis: - Outlook depends on restoring fiscal discipline. Strong up-front adjustment and implementation would avoid an unsustainable spiral of higher domestic debt and interest payments. - Policies aim to provide environment for private sector growth through a stable macroeconomic environment and adequate infrastructure. - Food security and social policies: - Authorities to continue active role in preventing food shortages through buildup of maize stocks and introduction of a fertilizer subsidy. - Government appealed for donor assistance to address expected food shortage. - Interim HIPC debt relief and government maize operations discussed (Box 3 and Box 4 referenced). ### Medium-term scenarios — Adjustment and Delayed Adjustment (illustrative projections) - Adjustment scenario (selected series): - Real GDP growth: 3.1 4.1 4.1 4.3 4.9 5.6 5.9 - Inflation (average): 10.5 10.4 19.9 9.4 7.8 6.2 6.0 - Revenues (percent of GDP): 20.7 23.5 24.0 23.7 23.6 23.5 23.4 - Grants (percent of GDP): 6.9 12.5 11.7 11.9 10.0 8.3 7.8 - Expenditures (percent of GDP): 39.7 43.3 40.0 38.3 36.0 35.1 34.5 - Domestic primary expenditures: 26.4 22.8 23.2 22.2 22.5 22.7 22.9 - Domestic interest: 5.7 9.5 7.8 6.8 4.2 3.0 2.3 - Overall balance (including grants): -12.1 -7.3 -4.3 -2.7 -2.4 -3.3 -3.3 - Central government debt (net, percent GDP): 21.2 25.9 23.7 22.9 21.5 19.6 18.3 - Interest rate (weighted, percent): 42.2 37.9 31.6 26.2 19.9 15.7 12.7 - Nominal GDP growth (percent): 15.5 17.6 19.0 16.2 13.1 12.1 11.9 - Delayed adjustment scenario (selected series): - Real GDP growth: 3.1 4.1 2.5 1.0 2.0 3.0 3.0 - Inflation (average): 10.5 10.4 30.3 4.0 16.0 12.0 10.0 - Revenues (percent of GDP): 20.7 23.5 22.2 22.2 22.4 22.6 22.6 - Grants (percent of GDP): 6.9 12.5 9.4 8.0 7.9 7.9 7.8 - Expenditures (percent of GDP): 39.7 43.3 42.9 37.6 36.7 35.4 33.3 - Domestic primary expenditures: 26.4 22.8 23.7 19.2 17.7 17.2 16.5 - Domestic interest: 5.7 9.5 9.1 9.6 9.7 8.9 7.5 - Overall balance (including grants): -12.1 -7.3 -11.3 -7.4 -6.4 -4.9 -2.9 - Central government debt (net, percent GDP): 21.2 25.9 27.3 29.9 31.8 29.9 27.1 - Interest rate (weighted, percent): 42.2 37.9 41.4 36.3 33.4 30.7 27.7 - Key qualitative contrasts: - Adjustment scenario: up-front fiscal effort and falling interest rates create space for pro-poor spending and private investment and growth recovery to 5–6 percent. - Delayed adjustment: higher domestic borrowing, accelerating inflation, persistently high interest rates, increasing debt ratios, and larger eventual cost to the economy and poverty programs. ### 2004/05 policy package — Staff-Monitored Program (main elements and targets) - Domestic borrowing limited to 2 percent of GDP, in line with the SMP. - Underlying fiscal effort targeted at 2 percent of GDP; a mid-year review is planned. - Revenue: modest increase expected from tax efficiency gains and increases in nontax user fees. - Priority expenditure initiatives: civil service wage reform, food security, ADMARC restructuring, and domestic arrears repayment. - Food security policy: maize imports and a targeted input program (subsidized fertilizer and seed maize). - Excluding wage reform, these initiatives add about 2¼ percent of GDP to expenditures. - Wage reform expected to hold wage bill close to 7 percent of GDP. - Monetary framework: - Money to remain the nominal anchor to achieve 10 percent inflation by the end of 2005; RBM to contain broad money growth and mop up liquidity overhang from end-2003/04. - Exchange rate and surrender requirements: - Market determined exchange rate; RBM intervention limited to meeting net international reserve target and moderating seasonal fluctuations. - Foreign exchange surrender requirement maintained at 40 percent (with 60 percent for tobacco, sugar, and tea to commercial banks, and 100 percent of smallholders’ proceeds from tobacco auctions converted into kwacha by the RBM). - Structural measures: focused on financial management and strengthening budget monitoring and control; specific measures included in the SMP. ### Trade, growth strategy, and structural issues - Trade: - Trade system largely free of restrictions; simple average tariff about 14 percent since 2001; maximum rate in four tariff bands is 30 percent. - Regional integration: SADC and COMESA frameworks; Malawi ahead in tariff reduction and plans to press for a common external tariff aligned with their structure. - Growth strategy: - Medium-term growth expected to stem from agriculture; land reform policy approved with enabling legislation expected sometime in 2005. - Emphasis on diversification away from tobacco (agro-processing, textiles, tourism). - Constraints to private sector: transportation bottlenecks, electricity shortages, and very high interest rates. ### Poverty, HIPC, and food security - Pro-poor spending jeopardized by rising domestic interest payments; annual GDP growth of more than 5 percent required to achieve MDG of income poverty reduction to below 40 percent. - External debt sustainability: - Indicators deteriorated somewhat after HIPC Decision Point (2000); preliminary NPV of debt-to-exports estimated to peak at 327 percent in 2003 (text reference). - External debt remains a serious concern even after HIPC completion point. - Food security measures: - Near term: government intends to purchase up to 130,000 metric tons of maize. - Two-tier fertilizer subsidy: about 800,000 subsistence farmers to receive fertilizer and seed (starter pack); other small and some midsize farmers to receive a fertilizer subsidy. - Staff concern about sustainability of fertilizer subsidy; burden could be reduced by addressing structural impediments in the fertilizer market. ### Interim HIPC Debt Relief (Box 3) — scope and status - Interim HIPC relief granted by some multilateral and official creditors; delays in program implementation affected delivery. - Fund interim assistance resumed after approval of the first PRGF review and extended until September 2004. - AfDB interim assistance exhausted by end-2003. - Paris Club extension: second and third phases signed March 2001 entered into force November 2003, extending the interim period until end-2004. - Japan changed delivery mechanism in late 2002: forgive debt as it becomes due; official commercial debt to be rescheduled under Paris Club terms. ### Balance of Payments, reserves and external financing (selected figures) - Current account balance (including grants, USD millions): -116.5 (2001); -221.2 (2002); -149.8 (2003); -107.7 (2005 prog); -165.1 (2006 proj); -155.0 (2007 proj). - Exports (USD millions): 426.6 (2001); 421.1 (2002); 402.1 (2003); projections through 2007 up to 516.5. - Imports (USD millions): -584.5 (2001); -726.8 (2002); -629.6 (2003); projections through 2007 up to -724.5. - Gross official reserves (USD millions): 202.9 (2001); 162.1 (2002); 120.7 (2003); 199.5 (2005 prog); later projections vary. - Debt relief (USD millions): 27.4; 30.6; 47.5; 77.9; 49.1; 56.4; 59.4; 56.7 (series by year as presented). - Residual financing gap: 0.0; 0.0; 0.0; 0.0; 0.0; 9.9; 66.2; 94.6 (selected entries). ### Monetary and financial data highlights (selected) - Reserve money (end-period, millions of Kwacha examples): 7,245 (2002); 8,877 (2003); Q3 2004: 9,879; Q4 2004: 10,682; Q1 2005: 8,717; Q2 2005: 9,836. - Money and quasi-money (millions of Kwacha): 20,058 (2002); 23,983 (2003); Q1 2004: 25,402; Q2 2004: 27,210; later examples up to 49,998. - Net foreign assets (USD millions, Monetary Survey): 93.8 (2002); 148.6 (2003); 65.0 (Q1 2004); series show volatility including negative entries. - Net domestic assets and credit to government expanded sharply: credit to government (net) examples 7,372 (2002); 5,520 (2003); 9,218 (Q1 2004); 15,626 (Q2 2004); further increases in projections. ### Statistical and data issues - Data quality and reporting gaps: - Government finance data not reported for inclusion in GFSY or IFS. - Recurrent and development expenditure reporting shortcomings; arrears data likely incomplete. - National accounts source data inadequate, coverage gaps for informal sector. - CPI based on 1997/98 household survey; improvements recommended. - Institutional measures: - NSO expanded Lilongwe office; NSO and NEC harmonize national accounts figures. - RBM reporting improvements: monthly monetary survey covers more than 90 percent of banking sector; MFS mission noted significant progress. - Ongoing need to strengthen institutional responsibilities and harmonize statistics. ### Ex post assessment, authorities’ view, and IMF engagement - EPA findings: performance under Fund-supported programmes generally fell short because of lack of ownership, weak planning, insufficient monitoring, and lax enforcement. - Authorities agreed with main findings but argued programme agendas were sometimes overloaded and targets overly ambitious; stressed need for measures focused on areas under direct control and realistic targets. - Authorities requested assistance in establishing a performance track record within an SMP; preferred SMP duration 4-6 months rather than 12 months to avoid prolonged loss of donor support. - Staff commitment: provide periodic assessments to development partners and work toward a new PRGF arrangement after six months of strong performance. ### Conclusions and policy recommendations - Overriding challenge: establish conditions for sustained growth and significant poverty reduction. - Near-term priorities: - Address domestic debt by bringing public expenditure under control. - Reduce inflation by reining in monetary growth. - Foster private sector development and job creation through structural reforms and infrastructure investment. - Borrowing strategy and debt policy: - Follow a prudent borrowing strategy; borrow on highly concessional terms only. - Increase reliance on grants. - SMP and PRGF sequencing: - A credible short SMP track record (two test dates/six months) could justify reconsideration of a PRGF arrangement, taking account of the Board’s views on the EPA. - Food security and social programs: - Implement targeted input program and maize stock buildup while ensuring fiscal sustainability of subsidies. *Source: Malawi — IMF staff report material (excerpt) as presented in the document _cr04380.* ### 2004. The second review could not be completed because of fiscal slippages and delays in ### 2004. The second review could not be completed because of fiscal slippages and delays in ### Executive Summary - Economic performance since the 2002 Article IV consultation has been disappointing: adverse weather conditions and large fiscal policy slippages. - Inflation reduced to 10 percent in 2003. - Kwacha–U.S. dollar exchange rate stable for the past 12 months. - Malawi’s Poverty Reduction and Growth Facility (PRGF) arrangement (approved in December 2000) has effectively lapsed. The second review could not be completed because of spending overruns. - Dr Bingu wa Mutharika elected president in May 2004 with 35 percent of the vote. - A staff-monitored program (SMP) launched in July 2004; the 2004/05 budget was approved in late September and is in line with the SPM. Performance so far has been satisfactory. ### Recent developments and macroeconomic outlook - Growth and inflation: - Economy grew by an average of 3 percent in 2002-03; stagnated in per capita terms. - Agricultural production rebounded; maize production reached normal levels in 2003; 2004 maize harvest estimated below normal. - Tobacco production decreased in 2003 but expected to grow by 10 percent in 2004. - Inflation decreased from above 20 percent in early 2002 to single digits in 2003; expansionary policy in FY2003/04 has recently put upward pressure on prices. - Poverty and social indicators: - Per capita GDP about US$160. - Approximately two-thirds of the population estimated to live on less than one dollar a day in 1997-98. - Progress in literacy and access to better drinking water since 1990; selected indicators include: - Adult literacy rate (percent of people ages 15+): 1990: 51.8; 1995: 55.9; 2001: 61.0; 2002: 61.8. - Under 5 mortality rate (per 1,000): 1990: 241.0; 1995: 216.0; 2001: 188.0; 2002: 182.0. - Prevalence of HIV (percent of women ages 15-24): 14.9 (year not specified in table excerpt). - Access to an improved water source (percent of population): 57.0 (year not specified in table excerpt). - External sector and reserves: - External current account deficit (excluding grants) mirrored government balance and emergency maize imports in 2002. - 2002 current account deficit of 25 percent of GDP—about one-half related to maize imports—financed through drawdown in official reserves and external assistance. - Donor balance of payments support resumed after first PRGF review in late 2003 but curtailed when program implementation went off track; resumed in September 2004 as prospects improved. - Terms of trade deteriorated reflecting increases in food import prices and rising world market oil prices. ### Fiscal developments and public debt - Fiscal slippages and expenditure: - Domestic primary expenditure exceeded program plans by more than 5 percent of GDP in each of 2002/03 and 2003/04. - Major contributors: unbudgeted maize imports of 3.9 percent of GDP in 2002/03; above-budget spending in executive services, national assembly, police, military, arrears repayments, subventions, and election costs in 2003/04; wage overruns both years. - PRGF went off track in early 2004; revised program based on March 2004 supplementary budget not implemented; domestic primary expenditure exceeded revised target by 3½ percent of GDP. - Budget numbers (percent of GDP, as presented in Box 1 table): - Revenue and grants: 2001/02 Actual 24.1; 2002/03 Prog. 28.6; 2003/04 Actual 27.7; 2004/05 SMP 35.2; 2004/05 Actual 36.0; SMP column lists 35.7. - Tax revenue: 2001/02 Actual 15.3; 2002/03 Prog. 16.1; 2003/04 Actual 17.7; 2004/05 Prog. 19.3; 2004/05 Actual 20.3; SMP 20.7. - Grants: 2001/02 Actual 6.9; 2002/03 Prog. 10.6; 2003/04 Actual 6.9; 2004/05 Prog. 13.0; 2004/05 Actual 12.0; SMP 11.7. - Total expenditure and net lending: 2001/02 Actual 31.9; 2002/03 Prog. 31.4; 2003/04 Actual 39.7; 2004/05 Prog. 35.2; 2004/05 Actual 40.3; SMP 43.3; SMP column shows 40.0. - Interest: 2001/02 Actual 5.1; 2002/03 Prog. 4.7; 2003/04 Actual 7.1; 2004/05 Prog. 9.6; 2004/05 Actual 10.7; SMP 11.0; SMP column 9.0. - Domestic interest: 2001/02 Actual 3.9; 2002/03 Prog. 3.2; 2003/04 Actual 5.7; 2004/05 Prog. 8.0; 2004/05 Actual 9.2; SMP 9.5; SMP column 7.8. - Overall Balance: 2001/02 Actual -7.9; 2002/03 Prog. -2.7; 2003/04 Actual -12.1; 2004/05 Prog. -0.5; 2004/05 Actual -5.2; SMP -7.3; SMP column -4.3. - Financing (total): 2001/02 Actual 6.9; 2002/03 Prog. 2.7; 2003/04 Actual 11.7; 2004/05 Prog. 1.8; 2004/05 Actual 6.4; SMP 8.2; SMP column 4.3. - Net domestic debt (central government): 2001/02 Actual 10.2; 2002/03 Prog. 5.1; 2003/04 Actual 21.2; 2004/05 Prog. 15.6; 2004/05 Actual 19.5; SMP 25.9; SMP column 23.7. - Domestic primary expenditure: 2001/02 Actual 21.0; 2002/03 Prog. 20.2; 2003/04 Actual 26.4; 2004/05 Prog. 17.6; 2004/05 Actual 19.4; SMP 22.8; SMP column 23.2. - Pro-poor expenditures: 2001/02 Actual 6.6; 2002/03 Prog. 6.2; 2003/04 Actual 7.2; 2004/05 Prog. 7.0; 2004/05 Actual 6.7; SMP 6.8; SMP column 7.5. - Nominal GDP (millions of Kwacha): 2001/02 133,004; 2002/03 150,794; 2003/04 154,340; 2004/05 Prog. 174,600; 2004/05 Actual 181,525; SMP 181,560; SMP column 216,129. - Net domestic debt more than doubled over the past two financial years to 26 percent of GDP at end-June 2004 (text reference). ### Monetary policy, liquidity, and exchange rate - Monetary aggregates and policy actions: - Broad money growth consistently near or above 30 percent since late 2002. - RBM lowered the Bank Rate (discount rate) in three steps to 25 percent. - Broad money growth and reserve developments: NDA rapidly expanded, while NFA declined; reserve money and broad money series depicted in figures (text description). - An unexplained rise in cash outside the banking system complicated sterilization efforts. - Exchange rate and real effective rate: - Real and nominal effective exchange rates depreciated by nearly 50 percent between January 2002 and September 2003. - Since August 2003, US$/kwacha rate was stable while inflation began to accelerate. - Financial sector: - Government securities make up about one-half of commercial bank assets. - Banks remained well capitalized; ratio of nonperforming loans declined from 13 percent in June 2003 to 10 percent in March 2004. - High returns on government securities continued to benefit the financial sector. ### Structural reforms and public financial management - Progress and measures: - Several parastatals privatized; reforms in telecommunication, electricity and water sectors. - ADMARC’s monopoly in maize marketing abolished; law regulating ADMARC repealed in December 2003 to separate social and commercial activities. - Anti-Corruption Bureau (ACB) strengthened via amendment to the Corrupt Practices Act requiring cases referred to the Director of Public Prosecution but not prosecuted be reported to parliament. - New administration enacted a policy of zero tolerance on corruption; arrests of several high ranking officials and a special commission report on Strategic Grain Reserve mismanagement. - Public financial management: - New Public Finance Management Act, Public Audit Act, and Public Procurement Act passed in mid-2003 and being implemented. - Final public accounts for 2002/03 were ready for presentation to parliament within 12 months for the first time in many years. - New Department of Public Procurement under the Office of the President funded by its own budget line for the first time in 2004/05. - First phase of external audit of domestic arrears underway with an interim report completed. - Numerous donor-assisted programs to strengthen expenditure procedures underway, but implementation slow. ### Program performance and policy path - PRGF status and SMP: - PRGF arrangement effectively lapsed; second PRGF review circulation to Directors on April 8, 2004 was withdrawn because of spending overruns. - SMP adopted to establish a track record that could lead to a new PRGF arrangement; SMP covers 2004/05 fiscal year (July–June) and will be monitored quarterly. With strong performance over two test dates (six months), a PRGF could be considered. - Medium-term outlook and policy emphasis: - Medium-term outlook depends on restoring fiscal discipline. With strong up-front adjustment and implementation, the 2004/05 budget would avoid an unsustainable spiral of higher domestic debt and interest payments. - Medium-term policies aim to provide an environment for private sector growth through a stable macroeconomic environment and adequate infrastructure. - Food security and social policies: - Authorities to continue active role in preventing food shortages through buildup of maize stocks and introduction of a fertilizer subsidy. Government appealed for donor assistance to address expected food shortage. - Interim HIPC debt relief and government maize operations are discussed in text boxes (Box 3 and Box 4 referenced). ### Assessment and follow-up - Ex Post Assessment (EPA) and authorities’ view: - Authorities agreed with main findings of the Ex Post Assessment of Malawi’s performance under Fund-supported programs but felt the structural reform agenda had been at times overloaded and program targets overly ambitious. - A new PRGF arrangement could be considered after a six-month track record of sustained policy implementation and taking into account the Board’s views of the EPA. _Staff report and related materials as presented in the document excerpt._ ### 2004. Unfortunately, only two of eight scheduled disbursements were made because of ### _cr04380 - 2004. Unfortunately, only two of eight scheduled disbursements were made because of ### Report on discussions — overarching messages - Malawi’s overriding economic policy challenge: establish conditions for sustained growth and significant poverty reduction. - Near-term priorities: address domestic debt by bringing public expenditure under control; further reduce inflation by reining in monetary growth; foster private sector development and job creation through structural reforms and investment in basic infrastructure. - The authorities requested assistance in establishing a performance track record within an SMP; a new PRGF arrangement would take into account (i) the IMF Executive Board’s views on the EPA, and (ii) strong performance over two test dates (six months). - Key program risks identified: budget implementation and inflation. The authorities affirmed commitment to budget objectives but noted weak expenditure controls and monetary overhang uncertainties. ### Medium-Term outlook — adjustment scenario (illustrative projections incorporated with the 2004/05 budget) - Real GDP growth (Adjustment scenario): 3.1 4.1 4.1 4.3 4.9 5.6 5.9 - Inflation (average, Adjustment scenario): 10.5 10.4 19.9 9.4 7.8 6.2 6.0 - Fiscal (in percent of GDP) — Adjustment scenario: - Revenues: 20.7 23.5 24.0 23.7 23.6 23.5 23.4 - Grants: 6.9 12.5 11.7 11.9 10.0 8.3 7.8 - Expenditures: 39.7 43.3 40.0 38.3 36.0 35.1 34.5 - Of which: Domestic primary expenditures 1/: 26.4 22.8 23.2 22.2 22.5 22.7 22.9 - Of which: Domestic interest: 5.7 9.5 7.8 6.8 4.2 3.0 2.3 - Overall balance (including grants): -12.1 -7.3 -4.3 -2.7 -2.4 -3.3 -3.3 - Underlying balance 2/: -1.8 -0.9 1.2 1.6 1.1 0.8 0.5 - Financing and other items — Adjustment scenario: - Foreign financing (net): -0.5 0.2 2.3 0.2 1.2 2.8 2.5 - Domestic financing (net): 12.2 8.0 1.9 2.5 1.2 0.5 0.8 - Statistical discrepancy: 0.3 -0.9 0.0 0.0 0.0 0.0 0.0 - Memorandum domestic debt dynamic variables — Adjustment scenario: - Central government debt (net, percent of GDP): 21.2 25.9 23.7 22.9 21.5 19.6 18.3 - Interest rate (weighted, percent): 42.2 37.9 31.6 26.2 19.9 15.7 12.7 - Nominal GDP growth (percent): 15.5 17.6 19.0 16.2 13.1 12.1 11.9 - Primary balance plus foreign finance (percent of GDP): -6.8 2.4 5.9 4.4 3.0 2.6 1.5 - Debt stabilizing level of primary balance and foreign financing (percent of GDP): 2.7 4.3 3.3 2.4 1.6 0.8 0.2 - Key qualitative points for the adjustment scenario: - The 2004/05 budget framework incorporated significant fiscal adjustment and targeted an underlying fiscal effort of 2 percent of GDP. - Domestic interest payments expected to fall compared with 2003/04 because of reduction in interest rates from 45 to 25 percent (November 2003 May 2004) and the reduction in the domestic debt ratio. - The adjustment in 2004/05 is projected to create conditions for declining debt ratio and interest rate, enabling higher pro-poor spending and private investment and allowing growth to pick up to the 5-6 percent annual rate seen as needed for significant poverty reduction. ### Medium-Term outlook — delayed adjustment scenario (illustrative consequences of postponed fiscal restraint) - Real GDP growth (Delayed adjustment scenario, in percent): 3.1 4.1 2.5 1.0 2.0 3.0 3.0 - Inflation (average, Delayed adjustment scenario): 10.5 10.4 30.3 4.0 16.0 12.0 10.0 - Fiscal (in percent of GDP) — Delayed adjustment scenario: - Revenues: 20.7 23.5 22.2 22.2 22.4 22.6 22.6 - Grants: 6.9 12.5 9.4 8.0 7.9 7.9 7.8 - Expenditures: 39.7 43.3 42.9 37.6 36.7 35.4 33.3 - Of which: Domestic primary expenditures 1/: 26.4 22.8 23.7 19.2 17.7 17.2 16.5 - Of which: Domestic interest: 5.7 9.5 9.1 9.6 9.7 8.9 7.5 - Overall balance (including grants): -12.1 -7.3 -11.3 -7.4 -6.4 -4.9 -2.9 - Underlying balance 2/: -1.8 -0.9 -0.9 3.0 4.7 5.4 6.1 - Financing and other items — Delayed adjustment scenario: - Foreign financing (net): -0.5 0.2 1.2 0.2 0.6 2.8 2.5 - Domestic financing: 12.2 8.0 10.1 7.2 5.8 2.1 0.4 - Statistical discrepancy: 0.3 -0.9 0.0 0.0 0.0 0.0 0.0 - Memorandum domestic debt dynamic variables — Delayed adjustment scenario: - Central government debt (net, percent GDP): 21.2 25.9 27.3 29.9 31.8 29.9 27.1 - Interest rate (weighted, percent): 42.2 37.9 41.4 36.3 33.4 30.7 27.7 - Nominal GDP growth (percent): 15.5 17.6 40.0 20.0 15.0 14.0 12.0 - Primary balance plus foreign finance (percent of GDP): -6.8 2.4 -1.0 2.4 3.9 6.8 7.1 - Debt stabilizing level of primary balance and foreign financing (percent of GDP): 2.7 4.3 0.4 4.5 5.5 5.3 4.7 - Key qualitative points for the delayed adjustment scenario: - Delayed fiscal restraint would lead to higher domestic borrowing, accelerating inflation, persistently high interest rates, and increasing debt ratios. - Government forced to adjust in later year(s) would face significant cost to the economy including lower growth and fewer resources for pro-poor programs. - Staff and authorities agreed that delayed policy actions and their consequences were to be avoided. ### 2004/05 policy package — Staff-Monitored Program (Box 2) — main elements and targets - Domestic borrowing limited to 2 percent of GDP, in line with the SMP. - Underlying fiscal effort targeted at 2 percent of GDP; a mid-year review is planned. - Revenue: expected modest increase owing to tax efficiency gains and increases in nontax user fees. - Priority expenditure initiatives: civil service wage reform, food security, ADMARC restructuring, and domestic arrears repayment. - Food security policy components: maize imports and a targeted input program (subsidized fertilizer and seed maize). - Excluding the wage reform, these initiatives add about 2¼ percent of GDP to expenditures. - Wage reform expected to hold wage bill close to 7 percent of GDP. - Money to remain the nominal anchor to achieve 10 percent inflation by the end of 2005; RBM to contain broad money growth and mop up liquidity overhang from end-2003/04. - Exchange rate: market determined; RBM intervention limited to meeting net international reserve target and moderating seasonal fluctuations. Foreign exchange surrender requirement maintained at 40 percent (with 60 percent for tobacco, sugar, and tea to commercial banks, and 100 percent of smallholders’ proceeds from tobacco auctions converted into kwacha by the RBM). - Structural measures focused on financial management and strengthening budget monitoring and control; specific measures included in the SMP. ### Fiscal policy and expenditure management - Immediate objective: arrest adverse debt dynamics by limiting spending to high priority areas. - Government targeted domestic borrowing of 2 percent of GDP and agreed additional resources (higher tax collections or lower debt interest bill) would be earmarked for debt reduction. - Medium-term objective: reduce the ratio of expenditures to GDP to lower tax burden and dependence on donor assistance. - Restructuring measures: reductions in number of cabinet positions and ministries; relocation of the president’s office to Lilongwe completed. Potential savings in range of ½ to 1 percent of GDP a year (estimates not yet firm). - Volatile external aid has reflected recurrent slippages in policy implementation; e.g., mid-2003/04 budget support disbursements equivalent to 4 percent of GDP were delayed when large fiscal slippages became apparent and certain structural targets were not accomplished. - Authorities requested technical assistance to rebuild budget execution and monitoring capacity. ### Monetary and exchange rate policy - Monetary anchor: achieve 10 percent inflation by end-2005 and reduce to 5-8 percent range in the medium term. - RBM actions: mop up liquidity overhang, postpone reducing liquid reserve requirement until market conditions permit, monitor bank deposits and credit weekly, raise Bank Rate if necessary. - Exchange rate: market determined; interventions limited and constrained by low reserve levels; surrender requirements maintained as noted above. - Existing exchange arrangement judged desirable given dependence on a single export crop and seasonal monetary variations; real exchange rate broadly appropriate evidenced by buoyant tobacco exports in 2004. ### Trade, growth strategy, and structural issues - Trade system largely free of restrictions; simple average tariff about 14 percent since 2001; maximum rate in four tariff bands is 30 percent. - Regional integration: SADC and COMESA frameworks; Malawi ahead in tariff reduction and plans to press for a common external tariff aligned with their structure rather than a proposed 30 percent. - Medium-term growth strategy: government to facilitate growth and job creation by providing stable macro environment, reliable public infrastructure, and efficient government institutions. Private sector constraints cited: transportation bottlenecks, electricity shortages, and very high interest rates. - Agriculture-focused growth: medium-term growth expected to stem from agriculture; land reform policy approved with enabling legislation expected sometime in 2005; strengthened rural credit scheme announced. Emphasis on diversification away from tobacco (agro-processing, textiles, tourism). ### Poverty, debt sustainability, and food security - Pro-poor spending jeopardized by rising domestic interest payments and other expenditures; annual GDP growth of more than 5 percent required to achieve the MDG of income poverty reduction to below 40 percent of the population. - External debt sustainability: indicators deteriorated somewhat after HIPC Decision Point (2000); preliminary NPV of debt-to-exports estimated to peak at 327 percent in 2003, mainly because of lower than expected tobacco exports. External debt remains a serious concern even after HIPC completion point. - Food security policies: - Near term: government intends to purchase up to 130,000 metric tons of maize to offset lower-than-average harvest. - Two-tier fertilizer subsidy: about 800,000 subsistence farmers to receive fertilizer and seed (starter pack); other small and some midsize farmers to receive a fertilizer subsidy. - Staff concerned about sustainability of fertilizer subsidy; government and experts indicated the burden could be reduced by addressing structural impediments in the fertilizer market as part of agriculture policy review. ### Ex post assessment of past Fund-supported program performance - Main findings from EPA: - Performance had generally fallen short of expectations because of lack of ownership, weak planning, insufficient monitoring, and lax enforcement of regulations. - External resources not always well used due to limited implementation capacity and governance issues. - Periods of fastest growth coincided with relatively prudent fiscal and monetary policies. - Authorities’ views: agreed with findings but noted past program design shortcomings (overloaded structural reform agendas, overly ambitious targets), and that some slippages reflected reasons beyond their control; they stressed need for structural measures limited to areas under direct control and for targets that they can achieve before agreeing to completion dates. - Staff commitment: provide periodic assessments to development partners in an interim period and work toward a new PRGF arrangement after six months of strong performance. *Source: Malawi — IMF staff report material (excerpt).* ### Box 3. Interim HIPC Debt Relief ### Box 3. Interim HIPC Debt Relief ### Scope and delivery of interim relief - Interim HIPC relief has been granted by some multilateral and official creditors. - Delays in program implementation affected the delivery of the Fund’s interim assistance. - Fund interim assistance was resumed after the approval of the first PRGF review and extended until September 2004. - Interim assistance approved by the AfDB at the time of the decision point was exhausted by end-2003. - Other multilateral creditors have indicated that they will start providing relief after the completion point. ### Paris Club and bilateral arrangements - Bilateral agreements covering the original interim period were signed with all Paris Club creditors, except France. - The second and third phases of the Paris Club agreement signed in March 2001 entered into force in November 2003, extending the interim period until end-2004. - Agreements with Germany, Italy, Spain, and Sweden are still pending. ### Japan’s change in delivery mechanism - The government of Japan decided to change the way it delivers debt relief in late 2002. - Instead of providing grants in return for repayment of ODA debt, Japan will forgive the debt as it becomes due. - It was expected that the formal agreement between the governments of Malawi and Japan would be signed soon. - It was also decided that Japan’s official commercial debt will be rescheduled under Paris Club terms. ### Key implications and status - Some interim relief sources (AfDB) were exhausted by end-2003, implying reliance on resumed Fund assistance and pending creditor actions. - The Paris Club extension to end-2004 provides an expanded interim timeframe, but several bilateral agreements remained outstanding. - Japan’s policy shift changes timing and modality of relief (debt forgiveness as due and Paris Club rescheduling for official commercial debt), with a formal Malawi–Japan agreement anticipated. *Source: _cr04380 - Box 3. Interim HIPC Debt Relief* ### Part I (foreign-financed)3,8596,0905,6431,63917,2313,4274,2594,1454,97416,804 ### _cr04380 - Part I (foreign-financed)3,8596,0905,6431,63917,2313,4274,2594,1454,97416,804 ### Central Government Operations (2003/04 - 2004/05) - Part I (foreign-financed) fiscal amounts (Kwacha, implied rows from table): 3,859; 6,090; 5,643; 1,639; 17,231; 3,427; 4,259; 4,145; 4,974; 16,804. - Part II (domestically financed): 380; 600; 338; 1,963; 3,281; 498; 527; 543; 576; 2,143. - Overall balance (including grants): -4,410; -993; 34; -7,864; -13,233; -5,133; -3,181; -689; -254; -9,257. - Total financing: 4,459; 2,134; 520; 7,824; 14,938; 5,133; 3,181; 689; 254; 9,257. - Foreign (net): 377; 411; 441; -804; 425; -927; 2,531; 1,153; 2,307; 5,063. - Borrowing: 1,624; 2,591; 2,109; 861; 7,185; 888; 3,722; 2,736; 3,870; 11,215. - Program: 0; 0; 0; 0; 0; 2,844; 2,041; 3,035; 7,921. - EDRC: 372; 360; 326; 327; 1,386; 332; 182; 0; 5; 14. - Project: 1,252; 2,231; 1,783; 534; 5,799; 556; 695; 695; 834; 2,781. - Amortization: -1,535; -2,141; -2,091; -1,810; -7,577; -2,783; -1,920; -1,869; -1,856; -8,428. - Special loans (net): 0; 0; 0; 0; 0; 0; 311; 285; 293; 889. - Japanese debt relief account: 379; -252; 375; 257; 759; 600; 600; 0; 0; 1,200. - EU food security account: 0; 0; 0; 0; 0; 0; 0; 700; 0; 700. - WB EDRC accounts (NY): -9; 12; 13; 48; -11; 258; -332; -182; 0; -514. - Domestic (net): 4,082; 1,723; 798; 8,628; 14,512; 6,060; 651; -464; -2,053; 4,194. - Statistical discrepancy: -49; -1,140; -554; 39; -1,704; 0; 0; 0; 0; 0. - Memorandum items: - Net domestic debt (T-bills valued at cost): 36,674; 38,397; 38,476; 47,104; 47,104; 53,165; 53,815; 53,351; 51,298; 51,298. - Program support and HIPC Initiative debt relief: 1,210; 2,896; 4,402; 1,334; 9,841; 1,310; 8,005; 4,605; 5,414; 19,334. - Primary balance (including grants): 877; 3,586; 5,233; -2,906; 6,790; 385; 814; 4,455; 4,517; 10,170. - Underlying balance: 652; 481; 1,721; -3,679; -1,645; 1,132; -2,389; 777; 2,972; 2,492. - Fiscal ratios (percent of GDP) — selected items, FY 2003/04 and FY 2004/05 projections by quarter and year: - Total revenue and grants: 7.9; 10.0; 10.5; 7.6; 36.0; 7.2; 9.6; 9.5; 9.4; 35.7. - Revenue: 5.5; 5.8; 6.0; 6.3; 23.5; 5.3; 5.6; 6.7; 6.4; 24.0. - Tax revenue: 4.8; 4.8; 5.1; 5.7; 20.3; 4.8; 4.9; 5.3; 5.7; 20.7. - Taxes on income and profits: 2.0; 2.0; 2.3; 2.5; 8.7; 2.0; 2.3; 2.3; 2.6; 9.2. - Taxes on goods and services: 2.1; 2.3; 2.2; 2.5; 9.2; 2.2; 2.1; 2.4; 2.5; 9.3. - Taxes on international trade: 0.7; 0.6; 0.7; 0.8; 2.8; 0.7; 0.6; 0.7; 0.8; 2.7. - Grants: 2.4; 4.2; 4.5; 1.3; 12.5; 1.9; 4.0; 2.8; 3.0; 11.7. - Total expenditure: 10.3; 10.5; 10.5; 11.9; 43.3; 9.5; 11.1; 9.8; 9.5; 40.0. - Current expenditure: 8.0; 6.8; 7.2; 10.0; 32.0; 7.7; 8.9; 7.6; 6.9; 31.2. - Wages and salaries: 1.6; 1.6; 1.7; 1.8; 6.8; 1.6; 1.8; 1.8; 1.9; 7.1. - Interest payments: 2.9; 2.5; 2.9; 2.7; 11.0; 2.6; 1.8; 2.4; 2.3; 9.0. - Domestic interest: 2.6; 2.1; 2.5; 2.3; 9.5; 2.3; 1.5; 2.1; 1.9; 7.8. - Foreign interest: 0.3; 0.4; 0.4; 0.4; 1.5; 0.3; 0.3; 0.3; 0.3; 1.2. - Goods and services: 2.2; 1.6; 1.6; 3.8; 9.3; 2.4; 2.9; 2.0; 2.0; 9.3. - Of which: maize purchases (percent of GDP) 0.0; 0.0; 0.0; 0.0; 0.0; 0.6; 0.7; 0.0; 0.0; 1.3. - Subsidies and other current transfers: 1.0; 1.0; 0.9; 1.2; 4.1; 1.2; 2.2; 1.4; 0.8; 5.6. - Development expenditure: 2.3; 3.7; 3.3; 2.0; 11.3; 1.8; 2.2; 2.2; 2.6; 8.8. - Part I (foreign-financed) as percent of GDP: 2.1; 3.4; 3.1; 0.9; 9.5; 1.6; 2.0; 1.9; 2.3; 7.8. - Overall balance (including grants, percent of GDP): -2.4; -0.5; 0.0; -4.3; -7.3; -2.4; -1.5; -0.3; -0.1; -4.3. - Total financing (percent of GDP): 2.5; 1.2; 0.3; 4.3; 8.2; 2.4; 1.5; 0.3; 0.1; 4.3. - Net domestic debt (T-bills at cost, percent of GDP): 20.2; 21.1; 21.2; 25.9; 25.9; 24.6; 24.9; 24.7; 23.7; 23.7. - Primary balance (including grants, percent of GDP): 0.5; 2.0; 2.9; -1.6; 3.7; 0.2; 0.4; 2.1; 2.1; 4.7. - Nominal GDP (Kwacha): 181,560; 181,560; 181,560; 181,560; 181,560; 216,129; 216,129; 216,129; 216,129; 216,129. Sources cited in table: Malawian authorities; Fund staff projections. ### Monetary Authorities' Balance Sheet (2002-05) - Reserve money (end-period, in millions of Malawi kwacha): 7,245 (2002); 8,877 (2003); Q3 2004: 9,879; Q4 2004: 10,682; Q1 2005: 8,717; Q2 2005: 9,836; Q3 2005: 12,846; Q4 2005: 13,743; later projections include 12,058; 12,393; 18,723; 18,800; 17,193; 14,864; 18,674. - Currency outside banks: 4,306; 6,067; 6,226; 5,964; 5,558; 7,827; 8,160; 7,838; 7,211; ...; 11,072; ... (projections incomplete). - Cash in vault: 509; 683; 852; 1,101; 909; 1,079; 1,173; 1,449; 1,382; ...; 1,418; ... - Commercial bank deposits with RBM: 2,430; 2,128; 2,801; 3,617; 2,250; 930; 3,512; 4,455; 3,465; ...; 6,233; ... - Net foreign assets (NFA, Kwacha): 3,998; 7,194; 1,531; -3,558; -4,467; -3,7 (typo in source appears as -3,7); -330; -1,210; 1,455; 698; 7,852; -8; -1,275; -322; -1,472; 3,685. - NFA (in millions of U.S. dollars): 50.9; 93.9; 19.0; -40.8; -48.8; -3.7; -11.2; 13.4; 6.4; 87.3; -0.1; -11.7; -3.0; -13.5; 33.8. - Gross foreign assets: 124.9; 167.1; 114.0; 103.4; 85.0; 89.8; 81.2; 115.6; 106.3; 185.5; 93.6; 81.3; 84.8; 73.1; 114.1. - Foreign liabilities: -74.0; -73.3; -95.0; -144.2; -133.7; -93.4; -92.4; -102.2; -99.9; -98.2; -93.7; -93.0; -87.8; -86.6; -80.2. - Net domestic assets: 3,247; 1,683; 8,348; 14,239; 13,184; 10,166; 14,056; 12,288; 11,360; 4,541; 18,731; 20,075; 17,515; 16,336; 14,988. - Credit to government (net): 4,313; 1,386; 4,661; 9,666; 11,334; 10,613; 10,487; 8,245; 9,323; 7,986; 17,215; 19,815; 20,466; 20,002; 17,949. - Credit to statutory bodies (net): 314; 314; 314; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0. - Credit to domestic banks: 3; 6; 3; 3; 118; 3; 138; 3; 3; 4; 2; 3; 3; 3; 3. - Other items (net): -1,383; -22; 3,370; 4,570; 1,731; -450; 3,431; 4,039; 2,034; -3,448; 1,514; 257; -2,954; -3,669; -2,964. - Open market operations: -5,908; -6,621; -7,201; -5,850; -7,018; -9,212; -4,566; -2,914; -5,233; -11,379; -5,199; -6,816; -9,635; -10,070; -8,990. - Encumbered reserves: 1,306; 2,001; 6,513; 5,105; 2,998; 1,784; 1,989; 759; 761; 1,744; 305; 1,013; 1,013; 1,013; 1,013. - Memorandum items: - Seasonally adjusted reserve money: 8,803; 8,703; 9,406; 10,542; 10,619; 9,595; 12,236; 13,496; 14,707; ...; 18,191; 17,908; 16,884; 18,129; 18,144. - Net domestic debt — central government: 12,505; 13,518; 17,643; 25,821; 28,734; 32,654; 36,674; 38,397; 38,476; ...; 47,104; 53,165; 53,815; 53,351; 51,298. - Public sector net domestic debt: 14,100; 18,753; 20,183; 22,005; 24,417; 31,253; 30,753; 33,065; 34,386; ...; 35,088; 40,165; 42,985; 43,420; 42,340. - Nonbank holdings (of public sector debt): 10,069; 13,724; 14,323; 14,703; 16,134; 21,248; 20,345; 22,277; 23,973; ...; 25,119; 28,434; 30,008; 30,859; 28,593. Sources: Reserve Bank of Malawi; and IMF staff estimates and projections. ### Monetary Survey (2002-05) - Money and quasi-money (millions of kwacha): 20,058 (2002); 23,983 (2003); Q1 2004: 25,402; Q2 2004: 27,210; Q1 2005 onward examples: 26,641; 31,521; 33,869; 35,183; 35,776; 42,741; 44,044; 44,164; 42,218; 49,998. - Money (narrow): 9,712; 12,791; 13,213; 13,440; 13,421; 17,154; 18,008; 17,464; 17,012; 23,503; ... - Quasi-money: 10,346; 11,192; 12,189; 13,770; 13,220; 14,367; 15,861; 17,718; 18,764; 19,238; ... - Of which foreign currency deposits: 3,094; 3,560; 3,655; 4,505; 4,549; 4,772; 5,886; 5,362; 7,234; 7,719; ... - Net foreign assets (NFA, kwacha): 7,208; 11,391; 5,222; -380; -489; 3,883; 3,322; 5,466; 6,128; 6,585; 4,911; 6,082; 4,496; 10,960. - NFA (USD millions): 93.8; 148.6; 65.0; -4.4; -5.3; 43.2; 30.7; 50.4; 56.3; 60.5; 45.1; 55.8; 41.3; 100.6. - Net domestic assets (NDA): 12,851; 12,592; 20,180; 27,590; 27,130; 27,638; 30,547; 29,717; 29,649; 36,156; 39,133; 38,083; 37,722; 39,038. - Credit to government (net): 7,372; 5,520; 9,218; 15,626; 17,995; 19,458; 20,410; 18,694; 19,068; 27,023; 30,865; 31,516; 31,052; 28,999. - Credit to private sector: 6,998; 6,838; 6,916; 7,363; 7,541; 9,665; 8,888; 9,809; 9,544; 10,459; 10,362; 10,660; 11,923; 13,428. - Memorandum items (seasonally adjusted broad money): 21,925; 22,911; 24,608; 27,471; 29,120; 30,112; 32,811; 35,520; 39,106; 40,830; 42,667; 44,587; 46,148; 47,763. - Velocity of money (annual GDP divided by average broad money): 6.0; 5.9; 6.1; 5.9; 5.8; 5.6; 5.4; 5.2; 4.8; 4.5; 4.5; 4.7; 5.2; 5.4. Sources: Reserve Bank of Malawi; and IMF staff estimates and projections. ### Balance of Payments (2001-07) - Current account balance (including grants, USD millions): -116.5 (2001); -221.2 (2002); -149.8 (2003); -107.7 (2005 prog); -165.1 (2006 proj); -155.0 (2007 proj); -165.7; -198.1. - Trade balance: -157.9; -305.7; -227.5; -159.9; -226.6; -209.2; -203.4; -207.9. - Exports: 426.6; 421.1; 402.1; 466.5; 476.4; 484.1; 499.4; 516.5. - Imports: -584.5; -726.8; -629.6; -626.4; -703.0; -693.3; -702.7; -724.5. - Services balance: -66.3; -165.1; -88.7; -90.8; -74.8; -72.2; -78.6; -81.8. - Interest public sector (net): -17.8; -20.2; -25.5; -24.3; -24.1; -20.2; -22.9; -21.4. - Receipts: 8.7; 2.5; 1.5; 4.9; 1.3; 3.5; 5.3; 5.4. - Payments (amounts due before debt relief): -26.5; -22.7; -27.0; -29.2; -25.4; -23.7; -28.2; -26.8. - Unrequited transfers (net): 107.7; 249.6; 166.4; 143.0; 136.3; 126.4; 116.2; 91.7. - Private receipts/payments and official receipts detailed in table (e.g., Official receipts: 98.3; 235.3; 154.0; 133.1; 123.7; 113.5; 103.1; 78.3). - Balance of payments assistance line examples: 51.0; 12.8; 41.7; 73.2; 62.6; 58.5; 48.1; 28.3. - Capital account balance (incl. errors and omissions): 85.0; 64.7; 102.0; 102.6; 130.7; 121.0; 78.0; 76.1. - Medium- and long-term flows: 59.8; 23.8; 29.5; 56.9; 56.8; 64.6; 40.0; 40.5. - Disbursements: 127.0; 81.0; 115.3; 127.4; 131.6; 133.6; 118.4; 118.4. - Amortization (amounts due before debt relief): -67.2; -57.2; -68.6; -70.5; -77.6; -69.0; -78.3; -77.8. - Foreign direct investment and other inflows: 28.0; 37.6; 43.2; 45.8; 44.1; 30.9; 32.9; 35.6. - Overall balance (USD millions): -31.5; -156.5; -47.7; -5.1; -34.4; -34.0; -87.7; -122.0. - Financing (negative increases in reserves shown as positive financing): 31.5; 156.5; 47.8; 5.1; 34.4; 24.1; 21.5; 27.4. - Gross official reserves (USD millions): 202.9; 162.1; 120.7; 199.5; 91.5; 110.8; 109.0; 118.3. - In months of imports (various measures): 3.0; 2.7; 1.8; 3.1; 1.4; 1.7; 1.6; 1.6. - Debt relief (USD millions): 27.4; 30.6; 47.5; 77.9; 49.1; 56.4; 59.4; 56.7. - Residual financing gap (+ underfinanced): 0.0; 0.0; 0.0; 0.0; 0.0; 9.9; 66.2; 94.6. Memorandum items: - Current account balance (percent of GDP) excluding official transfers: -12.6; -24.5; -17.8; -13.3; -16.2; -13.9; -13.3; -12.9. - Including official transfers: -6.8; -11.9; -8.8; -6.0; -9.2; -8.1; -8.2; -9.3. - Export value growth (percent): 6.2; -1.3; -4.5; 7.5; 18.5; 1.6; 3.2; 3.4. - Import value growth, excluding maize (percent): 2.3; 1.1; 6.3; 0.4; 11.7; -1.4; 1.4; 3.1. Sources: Malawian authorities; and IMF staff estimates and projections. ### Millennium Development Goals (selected indicators) - Eradicate extreme poverty and hunger: - Poverty gap at $1 a day (%): 14.8 (1998 noted). - Prevalence of child malnutrition (% of children under 5): 29.9; 25.4. - Population below minimum level of dietary energy consumption (%): 39.0; 33.0. - Achieve universal primary education: - Net Primary Enrollment Rate (%): 99.0 (1994 reference noted). - Percentage of cohort reaching grade 5 (%): 34.2 (1994 reference). - Youth literacy rate (% ages 15-24): 67.3; 71.8; 72.5. - Promote gender equality: - Ratio of girls to boys in primary and secondary education (%): 88.4. - Ratio of young literate females to males (% ages 15-24): 71.4; 76.0; 76.7. - Share of women employed in the nonagricultural sector (%): 11.3; 12.2. - Proportion of seats held by women in national parliament (%): 6. - Reduce child mortality: - Under 5 mortality rate (per 1,000): 216; 188; 182. - Infant mortality rate (per 1,000 live births): 133; 117; 113. - Immunization, measles (% of children under 12 months): 90; 82; 69. - Improve maternal health: - Maternal mortality ratio (per 100,000 live births, modeled estimate): 1,800. - Births attended by skilled health staff (%): 55.6 (2000 reference). - Combat HIV/AIDS, malaria and other diseases: - Prevalence of HIV, female (% ages 15-24): 14.9. - Contraceptive prevalence rate (% of women ages 15-49): 22.0; 30.6. - Number of children orphaned by HIV/AIDS: 470,000. - Incidence of tuberculosis (per 100,000 people): 432; 431.3. - Tuberculosis cases detected under DOTS (%): 39; 40; 36. - Environmental and infrastructure indicators: - Forest area (% of total land area): 27.6. - Nationally protected areas (% of total land area): 11.3. - CO2 emissions (metric tons per capita): 0.1. - Access to an improved water source (% of population): 57 (2000 reference). - Access to improved sanitation (% of population): 76 (2000 reference). - Fixed line and mobile telephones (per 1,000 people): 3.7; 10.6; 15.2. - Personal computers (per 1,000 people): 1.3. Source: World Development Indicators database, 2004 and http://www.developmentgoals.org. (References to years provided in table footnotes where applicable.) *Sources: Malawian authorities; Reserve Bank of Malawi; IMF staff estimates and projections as presented in the provided tables.* ### Introduction ### _cr04380 - Introduction ### Overview - The ex post assessment was prepared by the International Monetary Fund against a background of Malawi’s persistent failure to implement Fund-supported programmes and an inability to observe budgetary limits. - The new administration identified key institutional and procedural obstacles to sound fiscal management and has taken measures to address them. - Immediate policy actions by the new President, Dr. Bingu wa Mutharika, included relocating the presidency to Lilongwe and reducing the cabinet from 49 ministers to 20. ### Fiscal consolidation measures and administrative reforms - Cabinet reduction: from 49 ministers to 20. - Relocation of the presidency: consolidated operations in Lilongwe (previously split between Lilongwe and Blantyre). - Expected impacts described: - Immediate budgetary impact and improved efficiency of government operations. - Mindset shift among senior officers toward economizing resources. - Reduction in duplicated activities (residences, offices, travel) and associated travel budget reflecting daily commuting between the two cities. ### Governance, procurement, and public financial management - Governance institutions active over the past 10 years: Anti-Corruption Bureau, Director of Public Prosecution, Auditor-General’s office; historically few prosecutions or convictions of senior officials. - Actions taken within three months of the new government: - High-profile cases brought to courts; in one or two cases convictions have been sustained. - Changes of top-level personnel in oversight institutions and augmentation of their resources. - Procurement policy: - Previous relaxation of procurement rules (empowerment policy) allowed middle-men to participate, contributing to corruption (e.g., “education scam”). - Government halted that policy and reestablished rules and regulations to restore checks and balances. - Budget discipline: - Ministries previously ignored budgetary allocations; extra-budgetary expenditures became routine. - New requirement: ministries must work strictly within budgetary limits; extra-budgetary expenditures sharply constrained. - Sanctity of the budget being enforced as required by the Public Finance Management Act. ### Fiscal outcomes and domestic debt concerns - For the past five months, measures have reestablished fiscal discipline; the government was able to observe fiscal and financial targets, often by wide margins. - Concern: large domestic stock of debt dominated by short-term Treasury Bills. - Policy linkage: resolving domestic debt stock and lowering interest rates would reduce the interest bill and support continued fiscal consolidation. ### IMF engagement, PRGF, and donor support - Government requests timely resumption of a PRGF programme after establishing a needed track record. - Rationale: - PRGF would anchor donor community support to help reduce and restructure domestic debt resulting from past fiscal indiscipline. - Prolonged absence of Fund, World Bank and bilateral donor support is considered highly unsustainable. - Government view on SMP: - A long Staff-Monitored Programme (SMP) of one year is tantamount to disengagement because no donor funds would be disbursed in that period. - Government considers a SMP of 4-6 months more realistic than a 12-month SMP to establish a credible track record while avoiding extended loss of donor support. ### General observations on IMF role and mission conduct - The document ascribes a neutral role to the IMF; the Government believes responsibility for slippages should fall on both IMF staff and the authorities. - Concerns about IMF staff behavior: - Instances of perceived policy inflexibility by IMF staff. - Suggestion that staff positions are sometimes defined by Management in Washington before mission arrival, limiting in-country discussion and flexibility. - High turnover of mission chiefs over the review period disrupted policy continuity, notably regarding interest rate policy and projections of the interest bill. ### Other observations (numbered points from source) 1. Performance under the PRGF supported programme was poor (Paragraph 13). - Fiscal laxity and vagaries of donor support anchored some essential expenditures. - “Off and on” donor support led to large build up of domestic debt and budgetary interest bills. - During 2002/2003, government-financed emergency maize operations depleted central bank foreign exchange reserves due to delays by the World Bank and some donors; government resorted to domestic borrowing to finance imports, creating interest rate pressure. 2. Monopolies and oligopolies dominate many activities including banking, cement, petroleum, retailing, tobacco auctioning, and transportation (Paragraph 24). - National Bank of Malawi and Stanbic still command almost two thirds of the market. - Number of banks increased from three to eleven over ten years; smaller banks such as First Merchant Bank and INDE Bank challenge dominance. 3. Corruption and governance (Box 3). - Corruption grew over past ten years but is now being addressed through legislation and institutions; President Bingu wa Mutharika adopted a “zero tolerance” stance. - High-profile cases are being tried and some convictions achieved. 4. Structural reform progress uneven (Paragraph 41). - Implementation problems partly due to poor sequencing of reforms. - Example: removal of subsidies on agricultural inputs in the 1980s without assessing food security impacts; emergency maize import costs in the 1990s and 2002 exceeded subsidy costs. - Parastatal reforms were hastily implemented without full private sector support, increasing unemployment and insecurity. 5. Programme objectives, design, conditionality, and ownership (Paragraph 43). - Government embraces objectives: low interest rates, stable exchange rate, low inflation, growing economy. - Concern: programme targets, particularly structural conditionalities, were sometimes too ambitious and ignored capacity constraints and realities (e.g., assumption of zero-borrowing target despite drought and donor suspension). 6. Lack of ownership at highest political levels contributed to slippages (Paragraph 57). - Government contends that fiscal slippages were largely due to higher-than-anticipated outlays on domestic debt service, partly resulting from non-fulfillment of donor commitments and emergency maize imports. - Four out of seven structural conditions were missed because the World Bank failed to act on time. 7. Selectivity and donor linkage to Fund programmes (Paragraph 58). - Linking donor support to Fund-supported programmes has centralized programme design with the Fund and reduced scope for independent domestic policy design. - Government argues that prolonged disengagement with the Fund is not viable because donors will not provide financial support outside a formal Fund-supported programme. - Cites experiences of Benin, Ghana, Tanzania, and Uganda where Fund-supported programmes transformed economic programmes. 8. Phasing of further Fund engagement (Paragraph 63). - Any further programme engagement should be carefully phased to allow the authorities to build a track record without overburdening implementation capacity. - Government emphasizes the need for a Fund-supported programme and rejects a long SMP as effectively disengagement. 9. SMP duration and track record (Paragraph 63). - The ex-post assessment team recommends a credible track record under an SMP prior to formal programme engagement but did not suggest a time frame. - Government view: a 12-month SMP is too long; a SMP of 4-6 months would be more realistic to preserve donor support and establish a track record. ### Conclusion (signed) - The Malawi economy remains fragile and vulnerable to shocks. - Programme disengagement or a longer SMP would have a destabilizing effect; Government strongly believes that prolonged disengagement is not a viable option. - The signaling (Gatekeeper) role of the IMF makes it imperative to have a programme. /s/ Goodall E. Gondwe Minister of Finance ### Selected factual indicators and administrative data (as reported) - Membership status: Joined 07/19/1965; Article VIII (December 7, 1995). - Quota: 69.40 (SDR million) 100.0 (percent). - Fund holdings of currency: 84.46 (SDR million) 121.7 (percent). - Reserve position in Fund: 2.29 (SDR million) 3.3 (percent). - Net cumulative SDR allocation: 10.98 (SDR million) 100.0 (percent). - Holdings: 0.32 (SDR million) 2.94 (percent). - Outstanding Purchases and Loans (SDR million percent Quota): - Poverty Reduction and Growth Facility (PRGF) arrangements: 46.53 - Emergency Assistance: 17.35 - Total listed: 67.04 25.0 - Financial arrangements (selected): - PRGF: Approval Date 12/21/2000; Expiration Date 12/20/2004; Amount Approved 45.11 (SDR million); Amount Drawn 12.88 (SDR million). - ESAF/PRGF: Approval Date 10/18/1995; Expiration Date 12/16/1999; Amount Approved 50.96 (SDR million); Amount Drawn 50.96 (SDR million). - Stand-by arrangement: Approval Date 11/16/1994; Expiration Date 06/30/1995; Amount Approved 15.00 (SDR million); Amount Drawn 12.73 (SDR million). - Projected obligations to Fund (in millions of SDRs; based on existing use of resources and present holdings of SDRs): - 2004 Principal 3.95; Charges/Interest 0.30; Total 4.25. - 2005 Principal 12.36; Charges/Interest 0.94; Total 13.30. - 2006 Principal 17.86; Charges/Interest 0.74; Total 18.61. - 2007 Principal 13.41; Charges/Interest 0.43; Total 13.84. - 2008 Principal 5.37; Charges/Interest 0.28; Total 5.65. - HIPC Initiative (Enhanced Framework): - Decision point date 12/21/00. - Total assistance (US$ million) 643.00. - Of which: Fund assistance (SDR million) 23.14. - Delivery of Fund assistance (SDR million): Interim assistance disbursed 6.94; Total disbursements 6.94. - Exchange rate: On September 30, 2004, MK 108.95 = US$1.00. - Article IV consultation cycle: standard 12-month; last Article IV consultation concluded by the Executive Board on August 5, 2002 (Country Report No. 02/181). - Resident Representative: Mr. Thomas Baunsgaard since August 16, 2004. *Source: _cr04380 - Introduction* ### 2.02 million (US$0.85 million in loans and US$1.16 ### _cr04380 - 2.02 million (US$0.85 million in loans and US$1.16 ### Areas in Which the Bank Leads — Sectoral Projects and Focus - Private sector and IFC focus: - IFC financing total: 2.02 million (US$0.85 million in loans and US$1.16 million in equity). - Future focus: expanded IFC assistance in manufacturing, mining and tourism to reduce dependence on agriculture. - Education and health: - Multi-Sectoral AIDS Project: US$35 million in grants; approved in FY04; project period 2004 through 2008. - Secondary Education project: US$48 million; approved in FY98; slated to close in December 2004. - Health Sector Project and Education Sector Support Project: under preparation for Board presentation in FY05. - Social protection and community development: - MASAF III: US$60 million total; US$27 million in the form of an IDA grant; approved in FY03. - MASAF objectives: decentralization, community capacity building, social safety nets (e.g., skills training for AIDS orphans), facilitate delivery of social services. - Infrastructure: - Road Maintenance Project: US$30 million; approved in FY99; objectives include institutional strengthening, sector reform, backlog maintenance/rehabilitation. - Pipeline (FY05): Integrated Infrastructure Services Project to support rural energy and transport needs. - Privatization: - Privatization and Utility Reform Project (PURP): US$28.9 million; approved in FY00; supports divestiture, technical assistance, strengthening public enterprises. - Government’s Privatization Commission identified ~100 public enterprises for privatization. - Agriculture: - Community based Rural Land Development Project: US$27 million; approved April 2004; involves acquisition of idle land and transfer to small farmers. - Structural Adjustment Credit FIMAG supports agricultural policy reforms (referenced for details in paragraph 19). - Irrigation, Rural Livelihoods and Agriculture project: under preparation for FY06; objectives: implement National Irrigation Development Policy and Strategy, support new Extension Strategy, improve market access and smallholder efficiency. - Environment: - Mulanje Mountain Biodiversity Conservation Project: US$7 million; approved in FY01; objectives: conservation awareness, strengthen Forest Department capacity, community participation. - MASAF framework: promotes environmentally-sound community development and community resource management projects. - Knowledge sharing: - Global Distance Learning Network Project: US$4 million; approved March 2004; to finance Development Learning Center (DLC) training Malawian civil servants in technical, policy development, and management fields. - Poverty monitoring: - Bank assisting National Statistical Office via PRSP Trust Fund for the Second Integrated Household Survey (design, collection, processing, dissemination). - Poverty Assessment planned for FY06 using the new household data. ### Areas Where the Bank and the Fund Share the Lead - Poverty reduction strategy: - PRSP finalized April 2002. - Joint IDA-IMF staff assessment presented July 19, 2002. - Strategy endorsed by IMF Board on August 5, 2002 and World Bank Board on August 29, 2002. - Joint Staff Assessment (JSA) of first PRSP Annual Review completed October 2003. - PRSP judged highly participatory with appropriate macroeconomic framework and financing plan. - Debt sustainability and HIPC: - “Malawi: Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative” presented December 8, 2000. - Recommended reduction: US$331 million in Net Present Value (NPV) terms with respect to IDA debt based on proportional burden sharing accounting for 51 percent of total public debt (69 percent of total multilateral debt). - Equivalent to 44 percent of outstanding World Bank group debt in NPV terms at end-December 1999. - IMF and Bank staffs working jointly on update of HIPC Activity Action Plan (AAP) report for Malawi. - Budgetary planning, revenue administration, public expenditure reforms: - FRDP III: last adjustment operation; approved in FY00; fully disbursed; supported budgetary reforms, liberalization of petroleum pricing and marketing, telecommunications and financial sectors, and creation of affordable social safety net. Technical Assistance parallel project closed June 2004. - FIMAG (Fiscal Management and Accelerating Growth): US$50 million structural adjustment credit; first tranche US$25 million released in September 2004. - FIMAG program focuses: (i) strengthening public expenditure management, (ii) privatizing state-owned enterprises, (iii) small-holder agriculture and land reform, and (iv) HIV/AIDS. - All first tranche conditions (for Board presentation) have been met. - FIMTAP (Financial Management, Transparency and Accountability Project): US$24 million; FY03; assists capacity building in accounting, auditing, public finance management, and introduces IFMIS. - Civil service and wage reform: - World Bank-financed study produced road map; Government committed to begin implementation in early 2004. - Reforms include streamlining allowances, consolidating them in the tax base, rationalizing salary grades, and moving towards a unified salary structure. Supported under the proposed IMF program. - Humanitarian assistance: - Emergency Drought Recovery Credit (EDRC): US$50 million total; US$21 million in the form of an IDA grant; approved FY03. - IMF Emergency Credit: US$23 million; approved September 2002 to support food imports. ### Areas in Which the Fund Leads — Macroeconomic and Statistical Priorities - Macroeconomic stability, fiscal and monetary policy: - Malawi faces repeated fiscal slippages, unpredictable monetary policies, rapidly rising domestic debt, and persistently high real interest rates. - Fund engagement: financial support and technical assistance to address these challenges. ### Malawi: Statistical Issues — Overview and Institutional Measures - General assessment: - Draft Report on the Observance of Standards and Codes, November 2003: legal and institutional framework broadly adequate, but shortcomings in scope, accuracy, and reliability of data. - Need to strengthen Statistic Act provisions to define Ministry of Finance responsibility for government finance statistics and Reserve Bank of Malawi responsibility for monetary statistics. - Malawi participates in the GDDS and receives technical assistance under DFID-sponsored project for Anglophone African countries. - Organizational measures: - NSO expanded Lilongwe office to relocate some sections from Zomba. - NSO and National Economic Council (NEC) now harmonize national accounts figures and present a common set. - RBM and Ministry of Finance and Planning hold meetings to harmonize government debt and related statistics. - Ongoing need to sustain and intensify harmonization efforts. ### Real Sector — National Accounts, Prices, Trade - National accounts: - NSO compiles national accounts; final estimates are comprehensive but source data are inadequate. - Gaps exist especially for medium- and small-scale establishments and informal activities. - Statistical techniques for national accounts compilation are deficient; validation processes limited. - National accounts published in the Statistical Yearbook and Quarterly Statistical Bulletin with significant time lag. - Note: coverage includes "GDP from the production side at constant prices, GDP by expenditure at current prices, gross national income and its components, national disposable income and use of disposable income, and the capital finance account." - Prices: - Consumer Price Index (CPI) available monthly; based on 1997/98 household survey results and regional price collectors. - CPI could be improved by systematic, comprehensive, and consistent quality adjustment of product prices and by evaluating CPI trends against import/export and commodity prices. - Trade: - Preliminary trade estimates available with a lag of two to three months; data received electronically from six major ports. - Adjustment of imports from c.i.f. to f.o.b. prices is not appropriate. - Data reconciliation with bordering countries is lacking. ### Government Finance — Reporting and Data Quality Issues - Reporting gaps: - Malawi is not reporting government finance data for inclusion in the Government Finance Statistics Yearbook (GFSY) or in International Financial Statistics (IFS). - Some fiscal data reported on a cash basis to AFR; administrative records are manual; systems designed to provide adequate information but suffer serious quality problems and inconsistencies complicating program monitoring. - Identified data problems: - Tax revenue data: received timely but not always reconciled with deposits into the MG Account No. 1. - Nontax revenue collected by line ministries: not properly accounted for in Ministry of Finance fiscal reports and includes capital revenue. - Recurrent expenditure data: serious shortcomings partly due to insufficient bank reconciliation at line ministry level; discrepancies between funding-based fiscal reports and recorded expenditure reports from line ministries for wages and other recurrent transactions; reallocation across budget lines contributes to discrepancies. - Development expenditure reporting: domestically-financed development expenditure based on funding released to line ministries; externally funded expenditure based on reported project grants and loans; timing and financing modality differences cause substantial differences between expenditure flows and financing data; many donor projects not incorporated in the budget and thus not captured. - Expenditure arrears data likely incomplete: Commitment Control System reporting partial; ministry-level data inconsistent; previously unknown arrears cleared through the “special activities” vote; recent audit of domestic arrears in [8] ministries and agencies uncovered sizable previously unreported arrears. - Budget classification and chart of accounts: ABB (activities-based budget) used for presentation; pro-poor expenditures identified only in ABB and no bridge table maps ABB into program classification used for expenditure reporting and accounting — pro-poor expenditures cannot be monitored. - Financing estimates: based on monetary and debt data rather than government records; reporting on treasury bills directly issued to RBM at times slow. - Technical assistance and government commitments: - Authorities have received significant technical assistance from the Fund and other donors to strengthen expenditure monitoring, accounting, and statistical reporting, but results have not been adequate. - New government pledged to strengthen public financial management and fiscal reporting and to establish a work plan to effectively utilize donor technical assistance. ### Monetary Accounts — RBM Reporting and Improvements - Monetary and financial statistics (MFS): - RBM reports MFS to STA regularly; reported MFS generally in line with Fund’s data needs. - MFS mission (April - May 2004) noted significant progress in implementing recommendations from August - September 2002 MFS mission. - Improved coverage: monthly monetary survey now accounts for more than 90 percent of the banking sector. - Remaining recommendations: improve institutional coverage of financial corporations, sectorization of the domestic economy, and classification of financial instruments to fully adhere to the Monetary and Financial Statistics Manual methodology. - Database and reporting forms: - Mission completed development of an integrated database for RBM, STA, and AFR for publication and operational needs. - Standardized Report Forms (SRF) discussed; RBM examining SRF with a view to reporting monetary data to the IMF using SRF as soon as feasible. ### Balance of Payments — Methodology and Data Sources - Concepts and methodology: - Concepts and definitions broadly conform to BPM4; progress made in transition to BPM5 methodology. - NSO provided balance of payments data to IMF’s Statistics Department for publication in the 2003 Balance of Payments Statistics Yearbook. - Data sources and compilation: - Liberalization of exchange controls increased reliance on balance of payments surveys as major source for services, direct investment flows, and other private sector financial transactions. - Primary sources (surveys and ITRS reports) supplemented by secondary sources: foreign trade statistics from MRA customs declarations, debt statistics from MOF, and net foreign assets from RBM. *Source: IMF staff report content from the supplied _cr04380 PDF excerpts.* ### APPENDIX IV ### APPENDIX IV ### Core Statistical Indicators (As of September 30, 2004) - Date of latest observation by indicator: - Exchange Rates: 03/04 - International Reserves: 03/04 - Reserve Money: 07/04 - Central Bank Balance Sheet: 07/04 - Broad Money: 07/04 - Treasury and RBM Bill Interest Rates: 07/04 - Consumer Price Index: 01/04 - Exports/Imports: 10/03 - Current Account Balance: 2000 - Overall Government Balance: 04/04 - GDP/ GNP: 2000 - External Debt Service: 04/01 - Date received (sample): - Exchange Rates: 04/04 - International Reserves: 04/04 - Reserve Money: 09/04 - Central Bank Balance Sheet: 09/04 - Broad Money: 09/04 - Treasury and RBM Bill Interest Rates: 09/04 - Consumer Price Index: _03/04_ - Exports/Imports: 03/04 - Current Account Balance: 05/01 - Overall Government Balance: 06/04 - GDP/ GNP: 03/01 - External Debt Service: 05/01 - Frequency of data (codes): - D = daily; W = weekly; B = biweekly; M = monthly; Q = quarterly; A = annual. - Source and reporting metadata (codes): - A = direct report by the authorities; N = official publication. - C = cable or facsimile; M = e-mail. - C = unrestricted use (confidentiality). - Frequency of publication examples: - Exchange Rates: M - International Reserves: M - Reserve Money: M - Central Bank Balance Sheet: Q - Broad Money: M - Treasury and RBM Bill Interest Rates: W - Consumer Price Index: M - Exports/Imports: A - Current Account Balance: A - Overall Government Balance: A - GDP/ GNP: A - External Debt Service: M ### Selected Social and Demographic Indicators (Malawi, Latest Single Year) - Population: - Total population (millions): 5.2 7.3 11.0 688.9 2,494.6 (columns correspond to 1970-75, 1980-85, 1995-2003, Sub-Saharan Africa, Low-Income Countries) - Growth rate (annual average for period): 3.0 3.2 2.2 2.5 1.9 - Urban population (percent of population): 7.7 10.3 15.5 33.1 30.6 - Total fertility rate (births per woman): 7.5 7.5 6.1 5.1 3.5 - Poverty (percent of population) (note: These data are for 1998): - National: 65.3 - Urban: 54.9 - Rural: 66.5 - Income: - GNI per capita (World Bank Atlas method; U.S. dollars): 130 160 160 450 430 - GNI per capita (PPP - current international dollars): 213 355 573 - Price indices: - Consumer price index (1995=100): ...9.95 33.8...... - Food price index (1995=100): ...8.44 77.5...... - Income distribution: - Gini index: ......50.3...... - Lowest quintile (percent of income or consumption): ......4.9...... - Highest quintile (percent of income or consumption): ......56.1...... - Public expenditure (percent of GDP): - Health: ......7.8 6.0 4.4 - Education: 2.5 3.3 4.1 3.4 2.5 - Access to improved water source (percent of population): - Total: ......57.0 58.2 76 - Urban: ......95.0 82.8 90 - Rural: ......44.0 46.5 70 - Immunization rate (percent under 12 months): - Measles: ...49.0 69.0 57.6 65 - DPT: ...55.0 64.0 53.7 65 - Child malnutrition (percent under 5 years): ...29.9 25.4...... - Life expectancy at birth (years): - Total: 42.2 45.5 37.5 45.8 59 - Male: 41.5 44.8 37.1 46.6 58 - Female: 42.9 46.3 38.0 45.1 60 - Mortality (per 1,000 live births / population): - Infant: 189.0 157.0 113.0 103.1 78.6 - Under 5: 330.0 265.0 182.0 173.9 120.8 - Adult (15-59) Male: 479.4 428.6 701.0 519.5 260.9 - Adult (15-59) Female: 387.9 348.6 653.0 461.1 259.1 - Births attended by skilled health staff (percent): ......55.6...... - Source: World Bank, World Development Indicators, 2004 and http://www.developmentgoals.org. ### HIPC Completion Point Triggers Update – September 2004 - Background: - Malawi reached the decision point in December 2000. - Total amount of debt relief assistance to Malawi is equivalent to around US$1.0 billion in nominal terms (US$643 million in NPV terms). - Debt relief will be delivered between January 2001 and December 2020 by providing 55 percent relief on annual debt service due. - Creditor composition and IDA specifics: - IDA accounts for 51 percent of the entire external debt (and 69 percent of multilateral debt). - IDA approved debt relief for US$588 million in nominal terms (US$331 million in NPV terms), equivalent to US$29 million of debt relief on average per year. - Interim relief prior to completion point cannot exceed one third of the total assistance to be provided by IDA (in NPV terms). - Completion point conditions (could be reached in late 2005 if achieved): - (i) Satisfactory macroeconomic performance (minimum six-month track record under a new PRGF). - (ii) One-year satisfactory MPRSP implementation: Full MPRSP completed in April 2002 and endorsed in August 2002; first APR approved in October 2003 indicates limited implementation; second APR expected in Fall 2004. Satisfactory one-year implementation could be met at the earliest in Fall 2004. - (iii) Satisfactory implementation of outstanding completion point triggers (substantial progress achieved on some; others outstanding). ### Completion Point Triggers — Outstanding and Met - Completion point triggers not met (examples and status): - Safety nets: - Rationalization and prioritization of existing and new programs under the National Safety Net Strategy: Partially met. Concept paper approved by cabinet in February 2002. Safety nets unit created but not yet coordinating safety nets policy. Inception phase with DFID assistance ongoing, limited progress. - Establishment of monitoring and evaluation of the National Safety Net Strategy: Partially met. Monitoring and evaluation of some individual projects is carried out; evaluation of overall policy has not started. - Health: - Completion of "phase one" reforms of the Central Medical Stores (CMS): Not met. Work proceeded slowly. Reforms being discussed in context of Health SWAP. - Education: - Reallocate budgetary resources from secondary school boarding (except for "special needs" education) to teaching and learning materials: Partially met. Some secondary schools still operating as boarding. - Land Policy: - Submission of draft Land Law to parliament: Not met. Land policy adopted by cabinet in January 2003; submission of Land Law to parliament expected in 2004. - Microfinance: - Establishment of a monitoring system covering all microfinance institutions: Not met. (Government feels this is not their role—need to follow up) - Completion point triggers already met (examples and status): - Public expenditure: - Quarterly expenditure reporting as per format jointly developed by MOF/IDA: Met. Format agreed. Pro-poor expenditures published on the government web site. - Implement IFMIS in four pilot ministries: Met. IFMIS will be rolled out to all ministries as part of the FIMTAP project. - Microfinance: - Approval by Cabinet of the 'Microfinance Policy': Met. Policy approved at end-October 2002. - Increase number of microfinance clients by 20 percent: Probably met. (Difficult to verify.) - Governance: - Separation of fiscal management and audit functions under new legislation: Met. New Audit Act and Financial Management Act approved by parliament in May 2003. The Procurement Act also passed in May 2003. - Safety nets: - Transform universal starter-pack distribution into a Targeted Input Program (TIP) for 2001/02: Met in 2001/02. Decision to revert to almost universal TIP in 2002/03 and 2003/04 due to food crisis. Voucher-based TIP and subsidy planned in 2004/05 for 60 percent of households. - Health: - A share of health expenditure of at least 13 percent of discretionary recurrent budget: Met. 15.2 percent for 2001/02 (revised budget) and 18.4 percent for 2002/03 (budget). - Recruitment, training and deployment of at least 200 nurse technicians, 50 new medical assistants and 20 radiography technicians per annum: Met. Training over 500 nurse technicians; 130 medical assistants and 20 radiography technicians. - Budget for drugs and medical supplies in line with BHA standard (US$1.25 per capita): Met. Drugs budget at $1.44 and $1.23 in 2001/02 and 2002/03 respectively. - HIV/AIDS: - Implementation of National Aids Strategy; fully staffed, functional and autonomous National AIDS Control Secretariat: Met. National AIDS Secretariat operational since end-2001; need for additional staffing. - 75 percent of all condom outlet points with condoms in stock at any given time: Met. 80 percent availability in grocery shops, and 65 percent availability in public hospitals. (Difficult to verify.) - Continuous availability of testing kits at all blood transfusion sites (increase from 1500 to 2500): Met. More than 3000 testing kits supplied by end-2003. - Implementation of an effective Behavior Change Communication Strategy: Met. Implementation has started. - Syndromic Management of STI in all Central, District and major CHAM hospitals: Met. - Education: - Share of education sector expenditure in discretionary recurrent budget of at least 23 percent: Met. 29.1 percent for 2001/02 (revised budget) and 29.1 percent for 2002/03 (budget). - Yearly enrollment of 6000 students for teacher training and institution of in-service training for primary teachers: Met (need to verify). About 2850 teachers graduated in 2001/02 and 3150 in 2002/03. Double cohort system planned in January 2004 would bring total number to over 6000. - Pre-packaging of donor-supplied primary textbooks for each school and direct supply from the supplier to the schools: Met. Donor-supplied textbooks are pre-packed and directly supplied. ### External Debt Sustainability Analysis (DSA) — Summary and Assumptions - Baseline stock and trend: - Malawi’s stock of external debt at end-1999: US$2,608 millions in nominal terms, equivalent to 144 percent of GDP. - At end-2003, debt reached 166 percent of GDP. - Main baseline assumptions: - Real GDP growth recovery rising to 6 percent per year by 2010 and stabilizing at 5.5 percent thereafter. - Export volumes growth: about 3.5 percent over 2005-10 and 4 percent thereafter. - Tobacco share: about 60 percent of total exports initially, slowly reduced to 50 percent by 2023. - Import volumes growth: projected about 3.5 percent per year. - Foreign direct investment: average US$35 million during 2005-10 and increase to US$55 million during 2011-20. - Official grants: about US$90 million during 2005-10 and about US$125 million during 2011-20. - Loan disbursements: increase from an average of about US$120 million during 1999-2004 to US$200 million during 2005-09 and to US$260 during the next decade. - Malawi assumed to reach the HIPC completion point at end-2005. - DSA results and sensitivities: - Under the baseline scenario: - Nominal public debt relative to GDP peaks in 2003 at 166 percent of GDP and falls after reaching the HIPC completion point. - By 2023 nominal debt-to-GDP would be less than half the level reached at end-2003. - NPV of debt-to-export ratio (current-year exports) declines from 514 percent in 2003 to 325 percent in 2023 due to high reliance on foreign loans. - Alternative scenarios indicate: - External debt indicators are significantly sensitive to the level of concessionality of new borrowing. - If key macroeconomic variables remain at historical averages, the NPV of debt-to-exports will revert to levels experienced in 2003 even after reaching the completion point. - Bound tests: - An "export shock" (bound test B2) results in a substantial increase in the NPV of debt-to-export ratio (from 429 percent to 714 percent) and in the debt service ratio (from 13 percent to 33 percent) in 2005. *Source: _cr04380 - APPENDIX IV, APPENDIX V, APPENDIX VI, APPENDIX VII (Malawi statistical and analytical appendices, as of September 30, 2004)._* ### Conclusions: ### Conclusions ### External debt sustainability — main findings - The external debt sustainability remains a serious concern, even after reaching HIPC completion point. - Unless the authorities make a serious effort to maintain effective macroeconomic policy implementation, the external debt indicators will significantly deteriorate. - Sustaining faster growth policies would be key to Malawi’s debt sustainability. - Intensification of structural reforms to increase export is vital, in particular to reduce Malawi’s dependence on tobacco exports. ### Policy recommendations and borrowing strategy - The alternative scenarios show that Malawi’s government should follow a prudent borrowing strategy. - Borrowing under high concessional terms only. - Increase reliance on grants. ### Key indicators and projected vulnerabilities (selected from staff simulations and tables) - External debt (nominal) (selected years in table): 156.7; 160.5; 148.8; 166.3; 161.3; 88.7; 89.9; 91.4; 92.8; 94.8; 78.8. - Identified net debt-creating flows (selected values): 12.5; 5.4; -3.8; 35.3; 20.2; 14.6; 9.3; 7.4; 6.6; 3.3; 0.0. - Non-interest current account deficit (selected values): 3.4; 5.3; 10.7; 5.8; 4.3; 7.2; 7.8; 6.8; 6.9; 7.8; 8.2; 6.1; 2.4; 4.8. - Exports (percent of GDP, selected entry in table): 26.9; Imports (percent of GDP, selected entry): 39.4. - Net FDI (negative = inflow) (selected values): -1.6; -1.6; -2.0; -1.2; 0.9; -2.5; -2.5; -1.6; -1.6; -1.7; -1.6; -1.5; -1.3; -1.5. - Endogenous debt dynamics (selected values): 10.6; 1.7; -12.5; 30.6; 14.8; 9.4; 4.1; 1.2; 0.0; -1.3; -1.1. - NPV of external debt (selected projections in table): 114.5; 133.1; 126.7; 120.3; 118.4; 114.0; 110.1; 102.1; 80.8. - In percent of exports (NPV): 450.1; 514.4; 427.5; 428.8; 427.8; 420.1; 407.2; 393.6; 324.6. - Debt service-to-exports ratio (in percent) (selected sequence): 20.2; 19.1; 16.8; 21.7; 19.5; 12.7; 9.2; 9.4; 9.6; 9.3; 11.3. - Total gross financing need (billions of U.S. dollars) (selected values): 124.4; 155.8; 240.8; 175.1; 198.6; 169.2; 156.9; 186.5; 208.0; 218.9; 229.4. - Non-interest current account deficit that stabilizes debt ratio (selected values): -9.2; 1.5; 22.3; -10.3; 12.9; 79.3; 5.7; 6.3; 6.8; 5.5; 4.5. ### Macroeconomic assumptions and performance indicators (selected) - Real GDP growth (in percent) (selected values and sequence in table): -24.7; -20.9; -4.1; -21.7; 19.2; -17.8; -8.5; -5.6; -3.9; -0.5; 0.9; -5.9; 2.4; 2.4; 2.2. - GDP deflator in US dollar terms (change in percent) (selected values): 25.2; 26.3; 14.0; 33.3; 20.2; 11.1; 14.6; 14.2; 8.9; 6.7; 5.7; 10.2; 4.0; 4.0; 4.2. - Effective interest rate (percent) (selected values): 1.3; 1.0; 0.8; 1.4; 0.4; 1.0; 0.9; 0.6; 0.9; 0.9; 0.9; 0.9; 0.9; 0.9; 1.0. - Growth of exports of G&S (US dollar terms, in percent) (selected values): -9.5; 6.9; -3.2; 2.1; 13.9; -7.1; 20.1; 2.0; 3.3; 4.2; 6.2; 4.8; 6.2; 5.7; 6.0. - Growth of imports of G&S (US dollar terms, in percent) (selected values): -14.7; 2.2; 34.1; 3.7; 21.2; -20.9; 10.4; -0.9; 1.8; 3.4; 7.1; 0.1; 4.6; 4.7; 4.6. - Grant element of new public sector borrowing (in percent) (selected entries): 40.4; 54.4; 44.7; 86.8; 105.2; 84.2; 69.3; 56.0; 55.1; 59.7. ### Sensitivity and stress-test outcomes (selected) - Baseline NPV of debt-to-GDP ratio (selected years): 133; 127; 120; 118; 114; 110; 102; 81. - Alternative Scenario A2 (new public sector loans on less favorable terms) produces higher debt ratios relative to baseline in several years (table entries show increases across 2004-23). - Bound tests such as Real GDP growth at historical average minus one standard deviation and one-time 30 percent nominal depreciation show materially higher NPV of debt-to-exports ratios and debt service ratios under stress scenarios (table entries provide scenario-by-scenario values). *Source: Staff simulations and Public Information Notice (PIN) No. 04/132 (November 24, 2004).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04380.pdf_