## _cr05285 - Executive Summary ## Source details **Canonical URL:** [_cr05285 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05285.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05285.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05285.pdf.json) --- ### Executive Summary — Key findings and objectives - Malawi’s economy improved during 2004, but prospects for 2005 have been adversely affected by a prolonged dry spell during the growing season that mostly affected the maize harvest and will require sound economic management, supported by substantial donor assistance and fiscal resources. - Performance under the SMP has been satisfactory, in marked contrast to weak policy implementation from 2001 to mid-2004, demonstrating renewed commitment by the authorities and more realistic program objectives as called for in the EPA. - Fiscal policy aims to reduce the government’s domestic debt while allowing increases in pro-poor and pro-growth spending. The 2005/06 budget framework envisages a large repayment of domestic debt, but also spending increases for health care and education and other pro-poor spending. - Monetary policy will aim to bring down inflation to the 5–8 percent range by 2008. Sufficient resources will be available for private sector credit. The medium-term framework targets a rebuilding of international reserves given Malawi’s vulnerability to external shocks and adverse weather conditions. - Structural reform agenda focuses on tax and civil service reform, steps to reduce financial intermediation costs, and improvements in economic infrastructure to foster private-sector-led growth. - Program implementation requires sustained commitment at the highest political levels; predictable donor inflows will support good policy performance. Program implementation remains vulnerable to exogenous shocks due to lack of economic diversification. - Staff recommends approval of the authorities’ request for a three-year PRGF arrangement and additional HIPC interim assistance; access should reflect balance of payments needs arising from the maize shortfall. ### Requests and program scope - Government requests a three-year PRGF arrangement in the amount of SDR 38.17 million (55 percent of the quota), which includes about SDR 7 million (10 percent of quota) to address the 2005 food emergency. - Authorities request SDR 4.628 million in additional interim assistance from the IMF under the HIPC Initiative to be applied in broadly equal amounts in the remainder of 2005 and the first half of 2006. - Overarching objective: reduce poverty by fostering an environment favorable to private-sector-led growth; continued reliance on donor support given resource needs to reduce poverty and promote growth. ### Risks - Main risks to program performance: - weak policy implementation; - poor weather conditions; - volatile donor support. --- ### Macroeconomic developments and SMP performance - Real GDP growth: - rose from less than 4 percent in 2003 to 4½ percent in 2004, on account of a rebound in tobacco production. - early-2005 drought estimated to have cut the maize harvest by about 25 percent, dampening overall economic growth prospects to about 2 percent in 2005. - Inflation: - Core (nonfood) inflation fell to 13¼ percent at end-2004, from over 20 percent at end-2003. - Food price inflation rose and the early 2005 drought is expected to push food prices up temporarily later in the year. - Exchange rate and reserves: - Kwacha–U.S. dollar exchange rate largely unchanged from August 2003 through mid-March 2005; informal administrative procedures used early in 2005 but discontinued in mid-March. - Usable gross reserves at end-2004 were US$119 million and 1.3 months of imports; coverage fell to one month at end-March 2005 due to delays in budget support. - External accounts: - External current account deficit (excluding grants) in 2004 worsened to 19 percent of GDP from 17 percent in 2003. - Governance and financial sector: - Anticorruption efforts advanced; several former officials and one minister were arrested or investigated. - RBM closed a commercial bank in late May 2005 for foreign exchange reporting violations; it was reopened under RBM supervision. - SMP performance through March 2005: - Virtually all quantitative targets were observed; structural reforms implementation improved markedly. - Discretionary expenditures were within ceilings established in August 2004; TIP expenditures were above target. - Adjusted domestic financing target met because higher tax collections offset wage overrun. - Delays in external assistance caused domestic debt to continue to increase, though it fell relative to GDP. - Ceiling on net domestic assets of RBM was met and floor on net foreign assets was exceeded; higher foreign assets’ liquidity impact not fully mopped up, leading to higher monetary growth and credit than envisaged. ### Box — Impact of 2004 Civil Service Wage Reform (selected points) - Reform details: - Consolidated numerous untaxed allowances into basic pay; pay grades unified and reduced from 75 to 18; pay line realigned and partly decompressed. - General gross wages rose by 25 percent; minimum wage increased by 50 percent; pay to upper-level professionals increased; pay to top-tier contractuals frozen. - Fiscal and design consequences: - Incomplete and inaccurate planning information led to an overrun of about 1½ percent of GDP a year. - Employees reassigned to entry-level pay point of their grade, eliminating seniority and skill wage differentiation within grades. - Authorities’ commitments: - Keep the domestically financed wage bill within MK 20 billion in 2005/06, allowing an increase in the minimum wage in Q2 when civil service promotions are announced. - Cap the wage bill at 8 percent of GDP or less over the medium term; cap excludes pay increases for health care professionals funded under the health SWAP. - Contain pension costs by changing formula to use an average of an individual’s past wages rather than the wage in the last year in service. --- ### Health sector scaling-up and financing (Box 2) - Donors scaling up multiyear commitments through Health SWAp and the National AIDS Commission (NAC). - Commitments and program accommodation: - Health SWAp: some US$40 million to be disbursed in 2005/06, with a total of US$200 million committed for the initial six-year period. - NAC: budget includes US$40 million a year for drugs, prevention, and treatment. - IMF-supported program fully accommodates planned and additional donor-financed health spending. - Health outcomes and capacity constraints: - Life expectancy: 39 years. - Child mortality: 189 per 1,000 live births. - Vacancy rates at government health posts: as high as 50 percent. - Percentage of health care facilities able to deliver the Essential Health Package (EHP): 10 percent. - Nonwage Health Expenditures (in percent of GDP) - 2004/05 — 2005/06: - Government of Malawi: 1.3 — 1.3 - Health SWAp: 0.2 — 1.6 - NAC: 1.5 — 2.0 - Total: 3.0 — 4.9 ### Fiscal and monetary developments (2004/05) - Budgetary performance: - Ministries’ funding reduced by approximately 10 percent for last quarter of 2004/05 to keep expenditures within SMP targets. - Donor disbursements running ahead of expenditures as projects scale up; government deposits built up by about MK 1.8 billion. - Domestic financing could be higher than envisaged because of temporary shortfall in budget support. - Monetary and price policy: - Preliminary data indicate end-June monetary targets under the SMP were met. - RBM mopped up liquidity injections from domestic borrowing in April–June and unwound end-March repurchase positions. - Domestic petroleum prices adjusted in October 2004 and again in June 2005; stabilization fund remained solvent. --- ### The new program for 2005–08 — objectives and instruments - Key challenges: - High debt burden consuming large share of government revenue. - Insufficient public infrastructure and inadequate institutions. - Vulnerability to bad weather, food security risks, and high rates of HIV/AIDS. - Main objectives over next three years: - Raise economic growth to near 6 percent a year, with emphasis on rural incomes. - Increase health services and educational opportunities. - Reduce core inflation to the 5–8 percent range. - Run a fiscal surplus to reduce government domestic debt to less than 15 percent of GDP from over 24 percent. - Build international reserves to at least two months of imports. - Fiscal policy: - Reduce government absorption of domestic resources while allowing increases in pro-poor and pro-growth spending. - Target significant repayment of debt to reduce interest burden to around 3 percent of GDP. - Near-term savings to build on government reorganization after President Mutharika’s election. - Resource envelope: - Tax burden already high compared with peers; tax policy changes guided by competitiveness and revenue neutrality. - Significant and predictable donor budget support remains essential; humanitarian assistance needed periodically due to rain-fed maize dependence. - Monetary policy: - Aim to bring inflation to 5–8 percent by 2008. - Broad money will anchor the monetary program; foreign exchange sales and open-market operations primary liquidity levers. - Exchange rate and reserves: - Target rebuilding international reserves to at least two months of imports. - RBM to smooth exchange rate through tobacco cycle by purchasing dollars during marketing season and selling in other months. - External sector and diversification: - Improvement depends on broadening export base and sustained donor support. - Possible elimination of EU sugar regime in 2008 or drought could hurt exports; government assessing diversification options. - External debt sustainability: - Expected to remain a serious concern even after reaching HIPC completion point. - Authorities committed to obtain or guarantee only concessional loans and to seek grants. ### Institutional and structural reform agenda (selected) - HIPC completion point could be reached by mid-2006 if outstanding triggers are implemented, including six months of satisfactory PRGF performance (end-December 2005) and one year of successful MPRSP implementation. - Fiscal structural measures: - Tax reform: review completed in early 2005; from 2005/06 some tax rates reduced and base broadened while safeguarding domestic revenue. - Malawi Revenue Authority (MRA) to improve tax collections and taxpayer services. - Civil service wage policy to strengthen incentives and transparency; topping-up health professional salaries. - Shift to funded pension system under consideration. - New IFMIS to be implemented with assistance from Government of Tanzania. - Financial sector: - Market-based treasury bill auctions; reduction in RBM reserve requirement (currently 27.5 percent) could lower bank costs but implicit fiscal costs must be addressed. - Malawi Rural Development Fund (MARDEF) proposed; implies implicit government guarantee up to 2 percent of GDP; Parliament limited total transfers to MK 5 billion (2 percent of GDP). - Improve banking supervision; RBM to analyze sector using tighter credit quality classifications and consider an FSAP in FY2006/07. - Infrastructure and trade facilitation: - Priority on rural roads and international rail links; completion of interconnector from Cahorra Bassa hydroelectric dam would expand electricity supply by 2007. - Sale of Malawi Telecom under review. --- ### Medium-term projections (selected numeric indicators as presented) - GDP growth (percent change, calendar year basis): - 2003: 1/3.9 - 2004: 4.6 - 2005: 2.1 - 2006: 8.2 - 2007: 5.6 - 2008: 5.9 - Inflation (end of period CPI, percent change): - 2003: 1/9.8 - 2004: 13.7 - 2005: 16.9 - 2006: 3.9 - 2007: 7.0 - 2008: 6.9 - Underlying balance (percent of GDP, fiscal year basis): - 2003/04: 2/-0.9 - 2004/05: 1.1 - 2005/06: 1.4 - 2006/07: 1.9 - 2007/08: 1.3 - 2008/09: 0.9 - Domestic debt (percent of GDP, fiscal year basis): - 2003/04: 25.0 - 2004/05: 24.1 - 2005/06: 19.8 - 2006/07: 16.8 - 2007/08: 14.2 - 2008/09: 12.3 - Gross reserves (months of imports, calendar year basis): - 2003: 1.5 - 2004: 1.3 - 2005: 1.6 - 2006: 2.2 - 2007: 2.4 - 2008: 2.6 --- ### 2005/06 macroeconomic program — key policies and targets - Overview: - Focus on implementation of the budget and sound monetary policy. - Structural priorities: public expenditure management, central bank operations, and tax reform. - Immediate concern: food security due to dry spell in early 2005 and jump in fertilizer prices related to world oil prices. - Fiscal policy — framework and measures: - Budget envisages large repayment of domestic debt and spending increases for health care, education, and humanitarian maize relief. - Domestic underlying balance would improve by about ½ percent of GDP; tax revenue would decline slightly as percent of GDP; donor disbursements expected to rise. - Tax reform package (revenue neutral): - Increase zero rate bracket of PAYE; lower the top personal bracket. - Speed up VAT refunds by making tax refunds a statutory expenditure. - User fees to be adjusted with inflation. - With rise in petroleum taxes in early June, tax collections would remain over 21 percent of GDP. - Key expenditure policies for 2005/06: - Domestically financed government wage bill capped at MK 20 billion (7.7 percent of GDP); cap allows a 5 percent increase in government wages from October 2004 plus funds for normal promotions and wage differentiation. - TIP replaced by a subsidy on fertilizers mainly used for maize and barley tobacco grown by small-scale farmers; cost increased 0.3 percent of GDP relative to 2004/05 TIP. - Government maize purchases to rise to MK 5.6 billion (2.1 percent of GDP); most for humanitarian relief and donors expected to cover much of purchase and distribution costs. - Health-related purchases to increase by 2 percent of GDP; health care salaries to be topped up through Health SWAp over next five years. - Subventions to higher education increased to raise salaries for professionals not included in 2004 civil service wage reforms. - Domestic arrears repayment to rise to near 1 percent of GDP. - Four foreign missions to be closed during 2005/06; estimated savings to reallocate to remaining posts. - Budget discipline and enforcement: - Ministries expected to live within approved budgets; controlling officers exceeding budgets to be held accountable under the Finance Management Act. ### Monetary and exchange rate policies (2005/06) - Monetary objectives and instruments: - Aim to bring nonfood inflation to single digits by end-2006 while allowing moderate increase in private sector credit. - RBM will mop up liquidity from government domestic absorption by selling treasury bills during tobacco season and foreign exchange at other times. - Ceiling on net domestic assets and floor on net foreign assets remain program performance criteria; reserve money an indicative target. - Exchange rate policy: - Market determined exchange rate with RBM smoothing seasonal fluctuations through USD purchases/sales. - RBM eliminated informal administrative procedures used during February–mid-March 2005 and committed to avoid their future use. - External sector and balance of payments support: - 2005 outlook strongly affected by drought-related food imports: maize imports projected to rise by at least US$60 million and financed in part by grants. - Malawi to reduce or postpone nonessential government imports to use own resources. - World Bank expected to provide US$20 million in balance of payments support once PRGF arrangement approved. ### Structural agenda and public expenditure management (selected measures) - Immediate structural measures: - Improve accounting and expenditure controls at ministry level (structural benchmark). - Make credit ceiling module of payment system fully operational (performance criterion). - Review civil service wage policies before October (performance criterion). - Postpone new civil service pension system introduction until full impact assessed. - Implement comprehensive domestic arrears strategy; inventory of arrears as of end-June 2004 nearly 4 percent of GDP; implementation to begin by end-September 2005 (performance criterion). - Public expenditure management reforms: - Strengthen monthly funding tables and expenditure returns; withhold funding from ministries not providing returns. - Operationalize budget ceiling module to enable automatic rejection of unapproved payments. - Implement new payroll and human resource system by start of 2005/06 fiscal year; all government employees to register. - Replace current IFMIS with Tanzanian system after pilot tests revealed deficiencies; initiate pilot project including five cost centers and begin end-user training during 2005/06. --- ### Program financing, IMF access, and repayment capacity - Proposed IMF access: SDR 38.17 million (55 percent of quota); frontloaded due to food crisis and need to repay GRA purchases from 2002 emergency assistance. - Outstanding use of Fund resources as of end-May 2005: SDR 57.26 million (82.5 percent of quota). - Projected to fall to SDR 48.71 million (70.2 percent of quota) at end-2008. - Malawi’s capacity to repay: - Authorities’ record in paying external debt is unblemished. - Total debt service obligations expected to average about 11 percent of exports, and amount to only half of external reserves. - Program envisages increase in debt repayment to the Fund from SDR 13.4 million (3.5 percent of exports of goods and services) in 2005 to SDR 18.8 million (4.7 percent of exports of goods and services) in 2006 because of repayment under an emergency assistance drawing in September 2002; expected to fall in following years. - Note: While access of 45 percent of quota is a norm for fourth-time PRGF/ESAF users, staff proposes an additional SDR 6.94 because of the food crisis. ### Monitoring, conditionality, and safeguards - Key risks: inadequate policy implementation, external and weather shocks, volatility of donor support. - Reviews: first and second reviews based on end-September and end-December 2005 performance criteria; third review on end-March and end-June 2006 performance criteria. - Prior actions: (1) approval of 2005/06 budget in line with PRGF framework; (2) changes to pension formula to contain costs. - Structural performance criteria and benchmarks defined in MEFP Tables and TMU. - Safeguards: new full safeguards assessment of RBM initiated and expected to be completed before first program review; earlier assessment (July 2003) found vulnerabilities and several recommendations implemented. --- ### Data quality, reporting, and technical assistance - Quality of data for program monitoring is adequate and has improved during SMP. - Government improved dissemination of monetary and fiscal policy data to public and donors. - Authorities committed to strengthen technical capacity within government and RBM. - Technical assistance sought from Fund in statistics, tax policy, banking supervision, and monetary operations. ### Selected fiscal figures (Table 2b, fiscal-year basis) - Total revenue and grants (2004/05): 77,094 (millions of Malawi kwacha) - Total revenue and grants (2005/06 proj.): 86,378 (millions of Malawi kwacha) - Revenue (2004/05): 51,881; (2005/06 proj.): 55,295 (millions of Malawi kwacha) - Total expenditure and net lending (2004/05): 86,351; (2005/06 proj.): 95,521 (millions of Malawi kwacha) - Current expenditure (2004/05): 67,403; (2005/06 proj.): 71,726 (millions of Malawi kwacha) - Wages and salaries (2004/05): 15,300; (2005/06 proj.): 17,158 (millions of Malawi kwacha) - Interest payments (2004/05): 19,427; (2005/06 proj.): 19,462 (millions of Malawi kwacha) - Development expenditure (2004/05): 18,947; (2005/06 proj.): 23,207 (millions of Malawi kwacha) - Overall balance (including grants) (2004/05): -9,257; (2005/06 proj.): -9,143 (millions of Malawi kwacha) - Nominal GDP (2004/05): 216,129; (2005/06 proj.): 222,774 (millions of Malawi kwacha) - Net domestic debt (2004/05): 51,298; (2005/06 proj.): 53,710 (millions of Malawi kwacha) ### Selected monetary and external figures (Table 1a, calendar-year basis) - Money and quasi money change (2004): 25.5; (2005 est. SMP): 29.8 (percent of beginning-of-year M2) - Net foreign assets change (2004): 1.8; (2005 est. SMP): 6.0 (percent of beginning-of-year M2) - Exports, f.o.b. (2004): 476.4 (millions of U.S. dollars); (2005 est.): 470.4 (millions of U.S. dollars) - Imports, c.i.f. (2004): -703.0; (2005 est.): -866.2 (millions of U.S. dollars) - Usable gross official reserves (2004): 84.8; (2005 est.): 119.3 (millions of U.S. dollars) - Consumer prices (end of period) (2004): 20.0 percent; (2005 est. SMP): 13.7 percent - GDP at constant factor prices (2004): 3.9; (2005 est. SMP): 4.6 (percent) --- ### Food security (Box 4) — maize shortfall and response - Maize harvest 2004/05 expected to be 25 percent less than in 2003/04: crop expected to reach 1.3 million metric tons against a normal harvest of 1.8 million tons. - 2005/06 food security package design: - Humanitarian: 150,000 tons of maize to be distributed through Strategic Grain Reserve (SGR), including 27,000 tons in existing stocks; two thirds of purchase cost for remaining 123,000 tons financed by EU and DFID grants and in kind by WFP; further 70,000 tons may be funded by other donors; distribution cost borne by government. Estimates exclude replenishing SGR for 2006/07. - Commercial: 50,000 tons distributed commercially (existing stocks sold through Admarc at 17 kwacha per kg; import 30,000 tons to be sold to commercial distributors at cost recovery price). - Total fiscal cost of government’s food security transactions for FY05/06 estimated at 797 million kwacha. - Maize stocks and transactions (selected figures as presented): - Total maize transactions: 797 (millions of kwacha) - Humanitarian: 1,175 - EU/DFID grants3,461 - Purchase-3,835 - Distribution-801 - Commercial378 - Sale receipts1,344 - Purchase-967 - Maize stocks, '000 mt, eo: Carry over47; Purchases153; Distributions200 --- ### MARDEF (Box 2) — rural credit initiative - Objective: increase credit in rural areas targeting production by women and youth; loans MK 10,000 to MK 100,000. - Delivery via Malawi Savings Bank (MSB); initial government deposit MK 1 billion in MSB to increase lending capacity. - Government will not earn interest on these deposits; MSB encouraged to buy government securities to limit monetary impact and earmark interest for MARDEF administrative costs. - Expansion criteria: consider increasing deposit to MK 5 billion once MARDEF demonstrates success. - Implicit guarantee up to 2 percent of GDP noted elsewhere; Parliament limited total transfers to MK 5 billion (2 percent of GDP). --- ### External debt sustainability — outlook and conclusions - External debt stock at end-2004 about US$3 billion nominal, equivalent to 159 percent of GDP. - Baseline DSA results: - NPV of debt-to-export ratio projected to decline from about 215 percent in 2004 to about 192 percent by 2015 under assumptions including heavy grant support and reaching HIPC completion point in mid-2006. - External debt service as percent of exports expected to decline from 21 percent in 2004 to 8 percent in 2006 (after completion point), but increases to about 14 percent in 2015 in baseline. - Conclusions: - External debt sustainability remains a serious concern over the medium term, even after HIPC completion point. - Stress tests show Malawi should follow a prudent borrowing strategy—borrow on highly concessional terms and increase reliance on grants. - Reducing dependence on tobacco and diversifying exports is key to debt sustainability. --- ### Program monitoring, targets, and conditionality (selected quantitative targets and disbursements) - Quantitative targets and indicative targets defined in TMU; adjusters for balance of payments support and donor-funded health expenditures apply. - IMF proposed access: SDR 38.17 million (55 percent of quota); disbursement schedule frontloaded (total equivalent to 55 percent of quota (SDR 69.4 million): 38.17 00 1/ as presented). - Schedule of disbursements (selected lines as presented): - 5.4 190 Jul-05 — Executive Board approval of three-year PRGF arrangement - 4.9 245 Feb-06 — Completion of 1st review and observance of end-Sep. 2005 Performance Criteria - 4.9 245 May-06 — Completion of 2st review and observance of end-Dec. 2005 PCs - 6.6 800 Nov-06 — Completion of 3nd review and observance of end-Mar. and end-Jun. 2006 PCs - 6.6 800 May-07 — Completion of 4rd review and observance of end-Dec. 2006 PCs - 4.7 710 Nov-07 — Completion of 5th review and observance of end-Jun. 2007 PCs - 4.7 710 May-08 — Completion of 6th review and observance of end-Dec 2008 PCs - Performance criteria, structural benchmarks, and reporting timetables specified in MEFP and TMU (examples: operationalize credit ceiling module, compile employee database, implement arrears policy, publish monthly fiscal reports). --- *Source: _cr05285 - Executive Summary (IMF staff report excerpts).* ### Executive Summary ...................................................................................................... ### _cr05285 - Executive Summary ### Executive Summary — Key findings and objectives - Malawi’s economy improved during 2004, but prospects for 2005 have been adversely affected by a prolonged dry spell during the growing season that mostly affected the maize harvest and will require sound economic management, supported by substantial donor assistance and fiscal resources. - Performance under the SMP has been satisfactory, in marked contrast to weak policy implementation from 2001 to mid-2004, demonstrating renewed commitment by the authorities and more realistic program objectives as called for in the EPA. - Fiscal policy aims to reduce the government’s domestic debt while allowing increases in pro-poor and pro-growth spending. The 2005/06 budget framework envisages a large repayment of domestic debt, but also spending increases for health care and education and other pro-poor spending. - Monetary policy will aim to bring down inflation to the 5–8 percent range by 2008. Sufficient resources will be available for private sector credit. The medium-term framework targets a rebuilding of international reserves given Malawi’s vulnerability to external shocks and adverse weather conditions. - The structural reform agenda focuses on tax and civil service reform, steps to reduce financial intermediation costs, and improvements in economic infrastructure to foster private-sector-led growth. - Program implementation requires sustained commitment at the highest political levels; predictable donor inflows will support good policy performance. Program implementation remains vulnerable to exogenous shocks due to lack of economic diversification. - In light of satisfactory SMP performance and the authorities’ commitment to macroeconomic stability, staff recommends approval of the authorities’ request for a three-year PRGF arrangement and additional HIPC interim assistance. It also recommends that access reflect the balance of payments needs arising from the maize shortfall. ### Requests and program scope - Government requests a three-year PRGF arrangement in the amount of SDR 38.17 million (55 percent of the quota), which includes about SDR 7 million (10 percent of quota) to address the 2005 food emergency. - The authorities also request SDR 4.628 million in additional interim assistance from the IMF under the HIPC Initiative to be applied in broadly equal amounts in the remainder of 2005 and the first half of 2006. - Overarching objective: reduce poverty by fostering an environment favorable to private-sector-led growth; continued reliance on donor support given resource needs to reduce poverty and promote growth. ### Risks - Main risks to program performance: weak policy implementation, poor weather conditions, and volatile donor support. --- ### I. Background — Context and program history - Malawi is one of the poorest countries in Africa: two-thirds of the population live in poverty; incidence of malaria is very high; approximately 15 percent of the adult population is infected with HIV. Significant progress toward the MDGs will require sustained aid inflows. - Economic performance under the last PRGF arrangement was disappointing due to weak governance and program implementation, resulting in large fiscal slippages, an unsustainable domestic debt spiral, and low domestic investment; the arrangement lapsed after completing only one review. - In mid-2004 the newly elected government requested Fund staff to monitor its program (SMP) to establish a track record toward a new PRGF arrangement. - Directors, in the October 2004 Article IV consultation, commended the new government’s ownership of the program and actions to address corruption at the highest levels; they emphasized adhering to the 2004/05 budget. - HIPC completion point could be reached by mid-2006 if outstanding triggers are implemented. Authorities finalized the APR on PRS implementation for 2003/04 in early 2005 and submitted it to the IMF Executive Board in June. Malawi reached the decision point under the enhanced HIPC initiative in December 2000 and its PRS was endorsed in August 2002. - Parliament approved the 2005/06 budget on July 15. President Mutharika left the UDF and formed the DPP; the government does not have a formal majority in parliament and relied on opposition parties and independents for support during the budget sitting, which included political disagreements and calls for impeachment before agreement to proceed. --- ### II. Recent Developments and Performance Under the SMP — Macroeconomic outcomes and policy implementation - Real GDP growth: - rose from less than 4 percent in 2003 to 4½ percent in 2004, on account of a rebound in tobacco production. - the drought in early 2005 is estimated to have cut the maize harvest by about 25 percent, dampening overall economic growth prospects to about 2 percent in 2005. - Inflation: - Core (nonfood) inflation fell to 13¼ percent at end-2004, from over 20 percent at end-2003. - Food price inflation rose over the period, increasing overall consumer price inflation; the early 2005 drought is expected to push food prices up temporarily later in the year. - Exchange rate and reserves: - The kwacha–U.S. dollar exchange rate remained largely unchanged from August 2003 through mid-March 2005; informal administrative procedures were used early in 2005 to manage the exchange rate and safeguard resources for the food crisis but were discontinued in mid-March. - Usable gross reserves at end-2004 were US$119 million and 1.3 months of imports; coverage fell to one month at end-March 2005 as a result of delays in budget support. - The real effective exchange rate was relatively stable during most of the period as appreciation of the rand and euro mostly offset higher inflation in Malawi. - External accounts: - The external current account deficit (excluding grants) in 2004 worsened to 19 percent of GDP from 17 percent in 2003. Despite higher tobacco production, export performance did not improve due to temporary processing difficulties. The import bill rose reflecting stronger domestic demand and higher oil prices. - Governance and financial sector: - Anticorruption efforts advanced; several former government officials and one minister were arrested or are being investigated. - RBM closed a commercial bank in late May 2005 for repeated violations of foreign exchange reporting requirements; it was reopened shortly afterward under RBM supervision. - SMP performance through March 2005: - Virtually all quantitative targets were observed and implementation of structural reforms improved markedly, reflecting renewed commitment and more realistic program objectives. - Discretionary expenditures were within the ceilings established in August 2004 due to cost-saving measures (e.g., move of president’s residence to Lilongwe; reduction in number of ministers; elimination of special activities budget). Expenditures for the Targeted Input Program (TIP) were above target. - Adjusted domestic financing target was met because higher tax collections offset the wage overrun; tax buoyancy reflected administrative efficiencies, higher GDP growth, and possible underestimate of national income. - Delays in external assistance caused domestic debt to continue to increase, though it fell relative to GDP. - The ceiling on net domestic assets of the RBM was met and the floor on net foreign assets was exceeded; however, the liquidity impact of higher foreign assets was not entirely mopped up during 2004 and Q1 2005, leading to higher monetary growth and credit to the private sector than envisaged. Box 1 — Impact of 2004 Civil Service Wage Reform (selected points) - Reform details: - Numerous untaxed allowances were consolidated into basic pay; pay grades were unified and reduced from 75 to 18; the pay line was realigned and partly decompressed. - General gross wages rose by 25 percent; the minimum wage increased by 50 percent; pay to upper-level professionals increased; pay to top-tier contractuals was frozen. - Fiscal and design consequences: - Incomplete and inaccurate information at planning led to an overrun of about 1½ percent of GDP a year. - Employees were reassigned to the entry-level pay point of their grade, eliminating seniority and skill wage differentiation within pay grades—this will need to be addressed. - Authorities’ commitments: - Keep the domestically financed wage bill within MK 20 billion in 2005/06, allowing an increase in the minimum wage in Q2 of the fiscal year when civil service promotions are announced. - Cap the wage bill at 8 percent of GDP or less over the medium term. The cap excludes pay increases for health care professionals funded under the health SWAP. - Contain pension costs by changing the formula to use an average of an individual’s past wages rather than the wage in the last year in service. --- *Source: _cr05285 - Executive Summary (IMF staff report excerpts).* ### 9. Resources for the health sector increased sharply in 2004/05 (Box 2). In ### 9. Resources for the health sector increased sharply in 2004/05 (Box 2) ### Health sector scaling-up and financing - Donors began to scale up multiyear commitments through the Health SWAp and the National AIDS Commission (NAC). - Two initiatives: - Health SWAp: pooled donor resources to recruit and maintain health workers and fund existing and new programs. - Malawi Global Fund administered by NAC: scale up prevention and treatment of HIV/AIDS, malaria, and tuberculosis. - Medium-term commitments and program accommodation: - Through the Health SWAp, some US$40 million will be disbursed in 2005/06, with a total of US$200 million committed for the initial six-year period. - Through NAC, the budget includes US$40 million a year for drugs, prevention, and treatment. - The IMF-supported program includes this planned expenditure and fully accommodates any increase in spending from additional donor support. - Health outcomes and capacity constraints: - Life expectancy has declined to 39 years. - Child mortality: 189 per 1,000 live births. - Vacancy rates at government health posts as high as 50 percent. - Percentage of health care facilities able to deliver the Essential Health Package (EHP): 10 percent. - Nonwage Health Expenditures (in percent of GDP) - 2004/05 — 2005/06 - Government of Malawi: 1.3 — 1.3 - Health SWAp: 0.2 — 1.6 - NAC: 1.5 — 2.0 - Total: 3.0 — 4.9 ### Budgetary performance and fiscal adjustments - Budgetary performance through end-June expected to remain on track. - Ministry of Finance reduced funding to most ministries by approximately 10 percent for the last quarter of 2004/05 to keep expenditures within SMP targets. - Measures aim to make room for the higher wage bill and additional repayment of domestic arrears while achieving program targets for the overall deficit (including grants). - Donor disbursements are running ahead of expenditures as projects and purchases are scaled up; government deposits by end of fiscal year built up by about MK 1.8 billion, resulting in a lower level of net government debt. - Domestic financing of the government could be higher than envisaged because of a temporary shortfall in budget support. ### Monetary and price policy developments - Preliminary data suggest end-June monetary targets under the SMP were met. - The RBM mopped up liquidity injections caused by domestic borrowing in April–June and the unwinding of end-March repurchase agreement positions. - A large proportion of repurchase agreements issued to meet end-March targets matured in early April. - Domestic petroleum prices were adjusted in October 2004 and again in June 2005 to close the gap between world and local prices. - The petroleum price stabilization fund has remained solvent. - Importance noted that domestic prices remain in line with world prices through automatic adjustments. ### Program context: economic challenges and objectives (III. THE NEW PROGRAM FOR 2005-08) - Key challenges: - High debt burden consuming a large share of government revenue and diverting resources from private investment. - Insufficient public infrastructure, unreliable utilities, and inadequate institutions. - Vulnerability to bad weather, food security risks, and high rates of HIV/AIDS and other infectious diseases. - Over the next three years, main economic objectives: - Raise economic growth to near 6 percent a year, with emphasis on rural incomes. - Increase health services and educational opportunities. - Reduce core inflation to the 5–8 percent range. - Run a fiscal surplus to reduce government domestic debt to less than 15 percent of GDP from over 24 percent. - Build international reserves to at least two months of imports. ### Medium-term projections and policy focus - Growth and macro framework: - High GDP growth in 2006 expected from rebound in maize production; above-trend medium-term growth to result from macroeconomic and structural policies focused on rural activity, export diversification, and reduced import dependency. - Fiscal policy: - Aim to reduce government absorption of domestic resources while allowing increases in pro-poor and pro-growth spending. - Target a significant repayment of debt to reduce interest burden to around 3 percent of GDP to allow reallocation to education, health, and infrastructure. - Near-term savings to build on government reorganization after President Mutharika’s election. - Resource envelope: - Malawi’s overall tax burden is already high compared with peers; tax policy changes guided by competitiveness and revenue neutrality. - Significant and predictable donor budget support remains essential; humanitarian assistance will be needed periodically due to dependence on rain-fed maize production. - Monetary policy: - Aim to bring inflation to 5–8 percent by 2008. - Broad money will anchor the monetary program; foreign exchange sales and open-market type operations remain primary liquidity levers. - Exchange rate and reserves: - Target rebuilding international reserves to at least two months of imports. - RBM to smooth exchange rate through tobacco cycle by purchasing dollars during marketing season and selling in other months. - External sector and diversification: - Sustained improvement depends on broadening export base and sustained donor support. - Possible elimination of EU sugar regime in 2008 or drought could hurt exports; government assessing ways to diversify the economy. - External debt sustainability: - Expected to remain a serious concern even after reaching HIPC completion point. - Authorities committed to obtain or guarantee only concessional loans and make efforts to obtain grants. ### Institutional and structural reform agenda - HIPC completion point: - Could be reached by mid-2006 if outstanding triggers are implemented, including six months of satisfactory PRGF performance (end-December 2005) and one year of successful MPRSP implementation. - Progress needed in land and credit reform, IFMIS, procurement and distribution of medication, social safety nets, and teacher training. - Fiscal structural measures: - Tax reform: review completed in early 2005; starting 2005/06 some tax rates will be reduced and base broadened while safeguarding domestic revenue. - Malawi Revenue Authority to improve tax collections and taxpayer services; training of new tax professionals emphasized. - Civil service wage policy to strengthen incentives and transparency; additional incentives for key professionals, including topping-up health professional salaries. - Shift to funded pension system under consideration; moves depend on budget costs and macroeconomic consequences. - Public expenditure management to be strengthened with new IFMIS implemented with assistance from the Government of Tanzania. - Financial sector and credit availability: - Market-based policy implementation to continue; treasury bill yields have fallen by 20 percentage points but real interest rates remain above neighboring countries. - RBM to pursue market efficiency measures including market-based treasury bill auctions and monetary policy tools. - Reduction in RBM reserve requirement (currently 27.5 percent) could lower bank costs but implicit fiscal costs must be addressed. - Microfinance and rural credit: Malawi Rural Development Fund proposed; implies implicit government guarantee up to 2 percent of GDP; Parliament limited total transfers to MK 5 billion (2 percent of GDP). - Improve banking supervision capacity; RBM to analyze sector using tighter credit quality classifications (structural benchmark) and consider an FSAP in FY2006/07. - Infrastructure and trade facilitation: - Priority on repairing and building rural roads and improving international rail links; National Road Authority working with EU; rail links to Nacala and Beira being repaired with Mozambique. - Completion of an interconnector from Cahorra Bassa hydroelectric dam would expand electricity supply by 2007. - Sale of Malawi Telecom under review following due diligence problems. - Updated Public Sector Investment Project master list to capture donor-financed projects not previously in budget. - Privatization and commercialization: - Revised divesture plan focuses on efficient utilities and ADMARC; ADMARC first-phase restructuring planned for late 2005. - Governance and institutional capacity: - New procurement act (2003) to streamline government purchases. - Streamline business regulations and licensing to reduce costs of starting a business. - Strengthen legal system and commercial court; devolve more financial control to local governments with capacity building in accounting. - Continue to pursue low tariffs in regional trade discussions. ### Selected medium-term numeric indicators (as presented) - GDP growth (percent change, calendar year basis): - 2003: 1/3.9 - 2004: 4.6 - 2005: 2.1 - 2006: 8.2 - 2007: 5.6 - 2008: 5.9 - Inflation (end of period CPI, percent change): - 2003: 1/9.8 - 2004: 13.7 - 2005: 16.9 - 2006: 3.9 - 2007: 7.0 - 2008: 6.9 - Underlying balance (percent of GDP, fiscal year basis): - 2003/04: 2/-0.9 - 2004/05: 1.1 - 2005/06: 1.4 - 2006/07: 1.9 - 2007/08: 1.3 - 2008/09: 0.9 - Domestic debt (percent of GDP, fiscal year basis): - 2003/04: 25.0 - 2004/05: 24.1 - 2005/06: 19.8 - 2006/07: 16.8 - 2007/08: 14.2 - 2008/09: 12.3 - Gross reserves (months of imports, calendar year basis): - 2003: 1.5 - 2004: 1.3 - 2005: 1.6 - 2006: 2.2 - 2007: 2.4 - 2008: 2.6 *Source: IMF staff report excerpt (Box 2 and sections III–IV).* ### 29. Malawi’s macroeconomic program for 2005/06 ### 29. Malawi’s macroeconomic program for 2005/06 ### Overview - Focus: implementation of the budget and sound monetary policy. - Structural priorities: public expenditure management, central bank operations, and tax reform. - Immediate concern: food security due to a dry spell in early 2005 and a jump in fertilizer prices related to world oil prices. ### Fiscal policy — framework and measures - Budget framework: - Envisages a large repayment of domestic debt. - Spending increases for health care, education, and humanitarian maize for drought relief. - The domestic underlying balance would improve by about ½ percent of GDP. - Tax revenue would decline slightly as a percent of GDP. - Donor disbursements would rise owing to the food shortage and scaling up in the heath sector. - Tax reform package: - Broadly revenue neutral. - Reduce tax burden on very low income earners by increasing the zero rate bracket of the PAYE and lower the top personal bracket to improve international competitiveness. - Speed up VAT refunds by making tax refunds a statutory expenditure. - User fees to be adjusted to keep up with inflation. - With the rise in petroleum taxes in early June, tax collections would remain over 21 percent of GDP. - Key expenditure policies for 2005/06: - Domestically financed government wage bill capped at MK 20 billion (7.7 percent of GDP). - Cap allows for a 5 percent increase in government wages from October 2004 plus funds for normal promotions and wage differentiation. - Targeted input program (TIP) replaced by a subsidy on fertilizers mainly used for maize and barley tobacco grown by small-scale farmers. - Cost increased 0.3 percent of GDP relative to 2004/05 TIP. - Government committed to fiscally-sustainable assistance to agriculture in the medium term. - Government maize purchases would rise to MK 5.6 billion (2.1 percent of GDP); most for humanitarian relief and donors expected to cover much of purchase and distribution costs. - Health-related purchases to increase by 2 percent of GDP; much of the increase reflecting donor participation in the Health SWAP and funding for the National AIDS Council (NAC). - Health care salaries to be topped up through this mechanism over the next five years. - Subventions to higher education increased to raise salaries (professionals not included in 2004 civil service wage reforms). - Domestic arrears repayment to rise to near 1 percent of GDP as part of the overall arrears strategy (MEFP para. 44). - Four foreign missions to be closed during 2005/06, with further closings considered for the following year; savings to better fund remaining posts. - Budget discipline and enforcement: - Ministries expected to live within approved budgets; controlling officers who exceed budgets to be held accountable under the Finance Management Act (MEFP para. 53). - This enforcement mechanism proved effective in 2004/05. ### Monetary and exchange rate policies - Monetary policy objectives and instruments: - Aim to bring nonfood inflation to single digits by end-2006 while allowing for a moderate increase in private sector credit. - To contain broad money growth, the RBM will mop up liquidity from government domestic absorption by selling treasury bills during the tobacco marketing season and foreign exchange at other times. - Ceiling on net domestic assets and floor on net foreign assets remain program performance criteria; reserve money becomes an indicative target. - Exchange rate policy: - Market determined exchange rate with the RBM acting to limit seasonal exchange rate fluctuations through purchase and sale of U.S. dollars. - RBM eliminated informal administrative procedures used during February–mid-March 2005 and committed to avoiding their use in the future as part of the first review of the PRGF. - Staff will further review RBM operating procedures and use of informal restrictions during early 2005. - External sector and balance of payments support: - 2005 outlook strongly affected by drought-related food imports: maize imports projected to rise by at least US$60 million and would be financed in part by grants (MEFP Box 4). - Malawi would use own resources by reducing or postponing nonessential government imports such as vehicles. - World Bank expected to provide US$20 million in balance of payments support once the PRGF arrangement is approved. ### Structural agenda and public expenditure management - Main focus: public expenditure management (Boxes 4 and 5). - Immediate structural measures: - Improve accounting and expenditure controls at spending ministry level and strengthen budget execution reporting (a structural benchmark). - Make the credit ceiling module of the government’s new payment system fully operational (a performance criterion). - Review civil service wage policies before October to guide design of the wage increase and establish a better database on government employees (a performance criterion). - Postpone introduction of a new civil service pension system until full impact and compensatory measures are determined. - Implement comprehensive domestic arrears strategy approved by cabinet; inventory of arrears as of end-June 2004 nearly 4 percent of GDP; implementation to begin by end-September 2005 (a performance criterion). - Public expenditure management reforms (Box 5): - Improve cash management: strengthen monthly funding tables and ministry expenditure returns; withhold funding from ministries not providing adequate returns. - Operationalize budget ceiling module in payment system to enable effective monitoring through the Credit Ceiling Authority (CCA) and automatically reject unapproved payments. - Enforce funding ceilings and no new arrears; regular visits from Accountant General’s office; strictly enforce Public Finance Management Act provisions on personal responsibility of senior financial control officers for expenditure overruns. - Implement a new payroll and human resource system by the beginning of the 2005/06 fiscal year; all government employees to register. - Replace current IFMIS with the one used by the Tanzanian government after pilot tests revealed serious deficiencies; initiate a pilot project including five cost centers and begin end-user training during 2005/06. ### Program financing, access, and capacity to repay the Fund - Proposed IMF access: SDR 38.17 million (55 percent of quota). - Rationale: standard Fund policies and pressing need for balance of payments support related to food import needs. - Disbursements to be frontloaded because of food crisis and need to repay GRA purchases made in 2002 under emergency assistance policy. - Outstanding use of Fund resources: - As of end-May 2005: SDR 57.26 million (82.5 percent of the quota). - Projected to fall to SDR 48.71 million (70.2 percent of quota) at end-2008. - Malawi’s capacity to repay: - Record in paying external debt (Fund, World Bank, other creditors) is unblemished; authorities continued to service obligations in full. - Total debt service obligations expected to average about 11 percent of exports, and amount to only half of external reserves. - Program envisages increase in debt repayment to the Fund, before HIPC assistance, from SDR 13.4 million (3.5 percent of exports of goods and services) in 2005 to SDR 18.8 million (4.7 percent of exports of goods and services) in 2006 because of repayment under an emergency assistance drawing in September 2002; expected to fall in following years. - Note: While access of 45 percent of quota is a norm for fourth-time PRGF/ESAF users, staff proposes an additional SDR 6.94 because of the food crisis. ### Risks to the program and monitoring - Key risks during the three-year arrangement: - Inadequate policy implementation: requires continued commitment to reform at highest political levels. - External and weather shocks: vulnerability due to narrow export base and dependence on agriculture; underscores importance of reserve accumulation and growth through diversification. - Volatility of donor support: sustained program implementation needed to ensure donor flows materialize as anticipated. - Program monitoring and conditionality: - Close monitoring during the first year. - Reviews: first and second reviews based on end-September and end-December 2005 performance criteria; third review on end-March and end-June 2006 performance criteria. - Two prior actions: (1) approval of a 2005/06 budget in line with proposed PRGF framework; (2) changes to the pension formula to contain costs. - Quantitative performance criteria and indicative targets shown in Table 1 of the MEFP; structural performance criteria and benchmarks shown in Table 2 of the MEFP; quantitative and structural conditionality defined in the TMU. - Safeguards: - New full safeguards assessment of the RBM initiated and expected to be completed before the first program review. - Earlier assessment (July 2003) found vulnerabilities in external audit, internal control, and legal areas; several recommendations implemented and remaining concerns being addressed. *Source: _cr05285 - 29. Malawi’s macroeconomic program for 2005/06* ### 46. The quality of data for program monitoring purposes is adequate. Over the ### _cr05285 - 46. The quality of data for program monitoring purposes is adequate. Over the ### Data quality, dissemination, and capacity building - The quality of data for program monitoring purposes is adequate. - Over the course of the SMP, the quality and timing of the fiscal and monetary data needed to evaluate Malawi’s quantitative performance have improved. - The government has made improvements in disseminating monetary and fiscal policy data to the public and donor community. - The authorities are committed to strengthening technical capacity within the government and RBM. - The authorities are pursuing technical assistance from the Fund in several areas, including statistics, tax policy, banking supervision, and monetary operations. ### Policy implementation and macroeconomic performance - Policy implementation under the SMP has been much stronger than in previous years. - Through March 2005, Malawi met all quantitative conditions, with the exception of the ceiling on wages that was exceeded because the cost of civil service wage reform was underestimated. - Current spending was close to the budget approved by parliament, with nearly all ministries spending within their approved limits. - Macroeconomic performance during 2004 was better than expected; GDP growth exceeded initial projections mainly due to strong tobacco production. - Inflation picked up during 2004, but remained below the envisaged level. - Growth and inflation prospects for 2005 have been negatively affected by a dry spell during the crop growing season, producing a serious grain shortage that will require concerted action by government, donors, and NGOs. ### Fiscal stance, debt, and medium-term objectives - The authorities’ medium-term fiscal objectives are realistic. - The goal of reducing domestic debt to 15 percent of GDP or less and limiting non-priority spending is appropriate. - Freeing resources will allow addressing priority areas such as health, education, and public infrastructure, and help lower interest rates and maintain a competitive exchange rate. - Achievement of the projected reduction in domestic debt in 2005/06 and later years is critical. - Selected fiscal figures (from Table 2b, fiscal-year basis): - Total revenue and grants (2004/05): 77,094 (millions of Malawi kwacha) - Total revenue and grants (2005/06 proj.): 86,378 (millions of Malawi kwacha) - Revenue (2004/05): 51,881; (2005/06 proj.): 55,295 (millions of Malawi kwacha) - Total expenditure and net lending (2004/05): 86,351; (2005/06 proj.): 95,521 (millions of Malawi kwacha) - Current expenditure (2004/05): 67,403; (2005/06 proj.): 71,726 (millions of Malawi kwacha) - Wages and salaries (2004/05): 15,300; (2005/06 proj.): 17,158 (millions of Malawi kwacha) - Interest payments (2004/05): 19,427; (2005/06 proj.): 19,462 (millions of Malawi kwacha) - Development expenditure (2004/05): 18,947; (2005/06 proj.): 23,207 (millions of Malawi kwacha) - Overall balance (including grants) (2004/05): -9,257; (2005/06 proj.): -9,143 (millions of Malawi kwacha) - Nominal GDP (2004/05): 216,129; (2005/06 proj.): 222,774 (millions of Malawi kwacha) - Net domestic debt (2004/05): 51,298; (2005/06 proj.): 53,710 (millions of Malawi kwacha) - Central government targets and ratios (Table 1b, percent of GDP): - Revenue (excluding grants) (2004/05 SMP): 24.0 percent of GDP; (2005/06 proj.): 24.8 percent of GDP - Expenditure (2004/05 SMP): 40.0 percent of GDP; (2005/06 proj.): 42.6 percent of GDP - Overall balance (2004/05 SMP): -4.3 percent of GDP; (2005/06 proj.): -4.1 percent of GDP - Net domestic debt (central government) (2004/05 SMP): 23.7 percent of GDP; (2005/06 proj.): 24.1 percent of GDP ### Monetary policy, inflation, and exchange rate - The RBM will need to remain vigilant in containing inflationary pressures. - The domestic debt repayment projected for 2005/06 should ease the burden on monetary policy, but the high rate of money growth during 2004 and part of this year has weakened the currency and could lead to higher inflation. - It will be important for the RBM to meet its monetary targets. - The recent depreciation of the kwacha and the phasing out of informal administrative restrictions on foreign exchange are appropriate steps. - The government should refrain from administrative restrictions on foreign exchange sales and rebuild foreign exchange reserves by avoiding excessive intervention in support of the exchange rate. - Selected monetary and external figures (Table 1a, calendar-year basis): - Money and quasi money change (2004): 25.5; (2005 est. SMP): 29.8 (percent of beginning-of-year M2) - Net foreign assets change (2004): 1.8; (2005 est. SMP): 6.0 (percent of beginning-of-year M2) - Exports, f.o.b. (2004): 476.4 (millions of U.S. dollars); (2005 est.): 470.4 (millions of U.S. dollars) - Imports, c.i.f. (2004): -703.0; (2005 est.): -866.2 (millions of U.S. dollars) - Usable gross official reserves (2004): 84.8; (2005 est.): 119.3 (millions of U.S. dollars) - Consumer prices (end of period) (2004): 20.0 percent; (2005 est. SMP): 13.7 percent - GDP at constant factor prices (2004): 3.9; (2005 est. SMP): 4.6 (percent) ### Structural reform, competitiveness, and food security - Implementation of Malawi’s structural reform agenda will be a key determinant in sustained poverty reduction. - Improved financial management will help channel spending to high priority areas and reduce the chances of a buildup in domestic arrears. - Tax reform, infrastructure investment, privatization, and trade initiatives are critical to reduce business costs and promote industrial efficiency and competitiveness. - The rural development fund could foster growth and poverty reduction, but the government must implement the plan carefully to avoid unacceptable levels of bad loans. - Food security is an overarching policy priority. - The government’s early action to avert a food crisis in 2005/06, cooperation with donors, and ongoing zero tolerance for corruption will help avoid many problems seen during the 2002 crisis. - Food emergencies are becoming increasingly common in Malawi; more permanent solutions are needed. - Important steps include improving transportation infrastructure, willingness to change the fertilizer program, and revisiting agricultural policies. ### Poverty reduction strategy and Fund support - The staff welcomes the government’s initiative to update its poverty reduction strategy. - Since taking office in May 2004, the government and stakeholders have worked to enhance the growth pillar of the MPRS and set priorities for tax reform. - A revised poverty reduction strategy incorporating these developments and scaled-up donor support for the health sector is appropriate. - In light of Malawi’s recent satisfactory performance under the SMP and the authorities’ commitment to macroeconomic stability, the staff recommends: - Approval of the authorities’ request for a three-year PRGF arrangement. - Approval of additional HIPC interim assistance. - Rationale: - The 2005/06 budget will be in line with the proposed PRGF-supported program, and the revision to the pension formula will keep costs at the budgeted level. - The proposed access and phasing under the PRGF arrangement strike an appropriate balance between supporting Malawi’s efforts to achieve sustained growth and poverty reduction and the risks to the Fund. - The frontloading is justified by the balance of payments need associated with the serious maize shortage. *Source: Malawian authorities; and IMF staff estimates and projections (text and tables as provided).* ### Part I (foreign financed)5.99.47.89.311.410.59.910.0 ### _cr05285 - Part I (foreign financed)5.99.47.89.311.410.59.910.0 ### Central Government Operations (2002/03 - 2008/09) — Fiscal Balances and Financing - Part I (foreign financed): 5.9 9.4 7.8 9.3 11.4 10.5 9.9 10.0 - Part II (domestically financed): 1.4 1.8 1.0 1.2 1.4 1.5 2.0 2.0 - Net lending: 0.0 0.0 0.0 0.3 0.0 0.0 0.0 0.0 - Overall balance (including grants): -11.6 -7.8 -4.3 -4.1 -1.3 -0.9 -0.7 -1.1 - Total financing: 11.3 7.9 4.3 4.1 1.3 0.9 0.7 1.1 Foreign financing (net) - Foreign (net): -0.5 0.2 2.3 1.1 1.8 1.1 1.2 1.4 - Borrowing: 3.1 3.8 5.2 3.5 5.1 4.8 4.5 4.5 - Program: 0.0 0.7 3.9 2.3 1.2 1.4 1.3 1.4 - Project: 3.1 3.1 1.3 1.2 3.9 3.3 3.2 3.1 - Dedicated loans: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Amortization: -3.4 -4.0 -3.9 -3.5 -3.6 -3.7 -3.4 -3.1 - Special loans (net): -0.2 0.0 0.4 0.4 0.0 0.0 0.0 0.0 - Foreign bank accounts: 0.1 0.4 0.6 0.7 0.2 0.0 0.0 0.0 Domestic financing (net) - Domestic (net): 11.8 7.7 1.9 3.0 -0.5 -0.2 -0.5 -0.3 - Financial instruments: 11.9 7.7 1.9 3.0 -0.5 -0.2 -0.5 -0.3 - Banking system: 8.7 3.5 ... 2.2 -0.5 -0.2 -0.3 -0.2 - Nonbanks: 3.3 4.2 ... 0.8 0.0 -0.1 -0.1 -0.1 - Informal financing arrangements: -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Discrepancy (- is overfinancing): 0.3 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 Memorandum items - Nominal GDP: 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - Net domestic debt: 20.4 25.0 23.7 24.1 19.8 16.8 14.2 12.3 - Underlying balance 1/: -1.7 -0.9 1.2 1.1 1.4 1.9 1.3 0.9 - Cash foreign financing (net of amortization): 0.3 5.9 6.3 6.3 9.3 6.0 5.6 4.7 1/ The underlying balance is a measure of domestic adjustment effort, specifically the domestic primary balance, excluding maize operations and the Health SWAp. Definition: Overall balance plus statistical discrepancy, less grants, less revenue from maize, plus total interest, plus expenditures for maize and the Health SWAp, plus foreign-financed development expenditures. *Sources: Malawian authorities; and IMF staff estimates.* ### Monetary Authorities' Balance Sheet and Reserve Money (2004-06) - Reserve money (select data points): 18,800 16,728 17,193 17,967 14,864 16,196 18,674 18,674 19,580 20,894 20,904 17,896 23,013 - Net foreign assets (NFA) (in millions of Malawi kwacha): -1,275 3,369 -322 2,919 -1,472 93 3,685 1,080 4,061 8,507 7,223 5,162 10,101 - NFA (in millions of U.S. dollars): -11.7 30.9 -3.0 26.8 -13.5 1.4 33.8 9.9 33.0 69.2 58.7 42.0 82.1 Gross foreign assets and foreign liabilities (kwacha) - Gross foreign assets: 81.3 123.7 84.8 119.3 73.1 90.4 114.1 ... 117.7 163.8 142.2 128.5 166.5 - Foreign liabilities: -93.0 -92.8 -87.8 -92.5 -86.6 -88.9 -80.2 ... -84.7 -94.6 -83.5 -86.6 -84.4 Net domestic assets: 20,075 13,359 17,515 15,048 16,336 16,103 14,988 17,594 15,520 12,387 13,681 12,734 12,912 - Credit to government (net): 19,815 11,237 20,466 12,046 20,002 20,362 17,949 ... 22,181 19,415 20,376 17,456 16,474 - Open market operations: -6,816 -5,937 -9,636 -5,582 -10,071 -13,592 -8,991 ... -16,907 -17,441 -17,483 -15,856 -15,136 - Encumbered reserves: 1,013 1,013 1,013 1,013 1,013 1,037 1,013 ... 800 800 800 800 800 Memorandum items (seasonally adjusted) - Reserve money: 17,908 16,060 16,884 17,918 18,129 19,745 18,144 18,144 19,590 20,060 20,847 21,818 23,023 - Quarterly change: -1.6 -14.3 -5.7 11.6 7.4 10.2 0.1 0.1 -0.8 2.4 3.9 4.7 5.5 - Annual change: 46.4 30.2 25.1 29.8 23.3 34.8 -0.3 -0.3 4.6 24.9 16.3 10.5 17.5 - Money multiplier (selected): 2.34 2.60 2.57 2.54 2.84 2.75 2.68 2.68 2.62 2.51 2.54 2.83 2.64 *Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.* ### Monetary Survey and Broad Money (2004-06) - Money and quasi-money: 44,044 43,452 44,164 45,666 42,218 44,552 49,998 51,214 52,347 53,010 50,689 60,691 - Money (component) and Quasi money (component): Money ... 24,556 ... 25,443 ... 24,400 ... ; Quasi money ... 18,896 ... 20,222 ... 20,151 ... - Of which: foreign currency deposits ... 7,501 ... 7,120 ... 7,284 ... - Net foreign assets (NFA): 4,911 9,358 6,082 7,593 4,496 2,539 10,960 7,197 13,083 12,512 10,882 18,096 - NFA (in millions of U.S. dollars): 45.1 85.9 55.8 69.7 41.3 23.4 100.6 58.5 106.4 101.7 88.5 147.1 - Net domestic assets: 39,133 34,094 38,083 38,073 37,722 42,012 39,038 44,017 39,264 40,498 39,807 42,594 - Credit to government (net): 30,865 23,232 31,516 22,322 31,052 29,294 28,999 30,887 30,104 30,288 28,489 29,496 - Credit to private sector: 10,362 11,942 10,660 13,926 11,923 13,227 13,428 14,914 15,325 16,356 15,716 16,142 - Open market operations: -6,134 -5,639 -7,708 -5,372 -8,560 -5,782 -6,293 -7,970 -12,304 -12,846 -11,220 -10,499 Memorandum items - Seasonally adjusted broad money: 42,667 42,126 44,587 45,614 46,148 48,556 47,763 48,641 50,749 52,950 55,245 57,641 - Quarterly change: 4.5 3.8 4.5 8.3 3.5 6.5 3.5 0.2 4.3 4.3 4.3 4.3 - Annual change: 30.0 28.3 25.5 29.3 18.0 24.5 17.0 19.8 20.5 16.1 13.8 18.5 - Seasonally adjusted credit to private sector: 10,152 12,151 10,863 13,543 11,916 13,654 13,457 15,288 15,594 15,906 16,224 16,548 - Quarterly change: -2.7 13.3 7.0 11.5 9.7 0.8 12.9 12.0 2.0 2.0 2.0 2.0 - Annual change: 11.9 34.6 12.9 42.3 24.8 39.4 28.9 42.6 28.3 17.4 18.8 8.2 - Velocity of money (annual GDP divided by seasonally adjusted end-period broad money): 4.57 4.66 4.55 4.49 4.57 4.40 4.58 4.58 4.57 4.55 4.57 4.58 *Sources: Reserve Bank of Malawi; and IMF staff estimates and projections.* ### Balance of Payments, Current Account and Capital Flows (2001-08) Current account balance (including grants) - By year (2001–2008): -116.8 -216.2 -134.2 -165.1 -149.5 -118.7 -66.0 -109.7 -136.7 Trade and components - Trade balance: -158.0 -305.7 -351.0 -226.6 -395.8 -447.3 -392.1 -438.2 -460.5 - Exports: 426.6 421.1 440.6 476.4 470.4 536.4 571.5 591.0 617.3 - Imports: -584.5 -726.8 -791.6 -703.0 -866.2 -983.7 -963.6 -1,029.3 -1,077.8 Services and factor payments - Services balance: -66.3 -154.0 -88.2 -74.8 -84.6 -81.8 -89.0 -91.8 -93.8 - Interest public sector (net): -17.8 -20.2 -25.5 -24.1 -27.7 -23.8 -23.6 -21.3 -18.6 - Receipts: 8.7 2.5 1.5 1.3 0.7 0.6 4.6 6.2 8.2 - Payments (amounts due before HIPC debt relief): -26.5 -22.7 -27.0 -25.4 -28.4 -24.4 -28.2 -27.5 -26.8 - Other factor payments (net): -15.3 -24.5 -16.1 -15.7 -16.8 -17.1 -18.5 -19.6 -20.7 - Nonfactor (net): -33.2 -109.3 -46.6 -35.0 -40.1 -40.9 -46.9 -51.0 -54.4 Unrequited transfers (net) - Total unrequited transfers (net): 107.5 243.4 305.1 136.3 330.9 410.4 415.1 420.3 417.6 - Private (net): 9.7 8.1 141.1 12.7 117.6 131.4 134.1 136.7 139.5 - Private receipts: 21.6 21.6 156.4 28.2 127.8 141.7 144.6 147.5 150.5 - Private payments: -11.8 -13.4 -15.3 -15.5 -10.2 -10.4 -10.6 -10.8 -11.0 - Official (net): 97.7 235.3 164.0 123.7 213.3 279.0 281.1 283.7 278.1 - Official receipts: 98.3 235.3 164.0 123.7 213.3 279.0 281.1 283.7 278.1 - Balance of payments assistance (component examples): 51.0 12.8 41.7 62.6 64.3 89.9 86.5 80.4 74.4 - Project related: 47.3 76.1 87.5 61.0 149.0 175.6 194.5 203.2 203.7 Capital account and medium- and long-term flows - Capital account balance (incl. errors and omissions): 85.3 59.7 93.9 130.7 124.2 98.5 84.1 89.9 105.0 - Medium- and long-term flows: 59.8 23.8 10.9 56.8 16.2 56.8 25.6 23.0 34.4 - Disbursements: 127.0 81.0 96.7 131.6 95.3 122.7 103.9 103.9 112.7 - Amortization (amounts due before HIPC debt relief): -67.2 -57.2 -68.6 -77.6 -74.8 -65.9 -78.3 -80.8 -78.3 - Foreign direct investment and other inflows: 28.0 37.6 43.2 44.1 44.1 26.5 29.7 32.2 33.8 Overall balance and financing - Overall balance: -31.6 -156.5 -40.2 -34.4 -25.3 -20.2 18.1 -19.8 -31.7 - Financing (- increase in reserves): 31.5 156.5 40.2 34.4 25.3 20.2 -18.0 19.8 9.6 - Central bank financing and gross reserves contributors (selected): Central bank 11.8 111.4 -0.6 7.2 -15.7 -29.1 -70.5 -26.0 -41.7 - Gross reserves (- increase): 40.7 40.8 41.4 29.2 -6.0 -20.1 -68.6 -23.0 -40.8 Debt relief and residuals - Debt relief: 27.4 30.6 47.5 49.1 47.0 49.5 59.4 56.7 55.3 - Residual financing gap (+ underfinanced): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 22.1 Memorandum items (reserves, months of imports) - Gross official reserves (USD millions): 203.2 162.3 122.9 91.5 128.9 149.0 217.6 240.6 281.4 - Gross official reserves in months of imports 3/: 3.0 2.2 1.6 1.4 1.5 1.7 2.3 2.5 2.7 - Usable gross official reserves (USD millions): 184.6 103.4 115.6 84.8 119.3 142.2 210.8 233.8 274.6 Current account balance (percent of GDP) - Excluding official transfers: -12.5 -23.3 -16.9 -16.2 -19.3 -20.0 -16.6 -17.5 -17.1 - Including official transfers: -6.8 -11.2 -7.6 -9.2 -8.0 -6.0 -3.2 -4.9 -5.6 Trade and export/import growth - Export value growth (percent): 6.2 -1.3 4.6 18.5 6.8 14.0 6.5 3.4 4.4 - Import value growth, excluding maize (percent): 6.2 1.1 34.2 11.7 7.2 15.9 -2.0 6.8 4.7 *Sources: Malawian authorities; and IMF staff estimates and projections.* ### Gross Financing Requirements and Sources (2001-08) — Annual Profiles and Memoranda Gross financing requirements (selected) - By year (2001–2008): -278.3 -405.8 -383.3 -459.3 -501.2 -528.1 -528.7 -546.1 Components of gross financing requirements - External current account deficit (excl. official transfers): -215.2 -451.6 -298.1 -362.8 -397.7 -347.0 -393.4 -414.8 - Trade balance on goods and services: -191.1 -415.0 -397.7 -435.9 -488.2 -438.9 -489.2 -514.9 - Official debt amortization: -73.3 -63.4 -77.9 -88.5 -84.7 -105.7 -101.4 -86.6 - IMF repurchases and repayments: -6.0 -6.2 -9.3 -13.7 -18.8 -27.3 -20.5 -8.2 - Gross reserves contribution: 40.7 40.8 41.4 -6.0 -20.1 -68.6 -23.0 -40.8 - Change in NFA of commercial banks: -7.7 14.5 -6.7 -6.0 -0.1 -7.0 -11.0 -4.0 Sources of financing (selected) - Total sources: 278.3 405.8 383.3 459.3 501.2 528.2 528.7 524.1 - Private capital (net): 25.5 35.9 65.8 103.7 41.7 58.5 66.9 70.6 - Gross official assistance: 225.3 339.3 270.0 308.6 410.0 410.2 405.1 398.1 - Official Grants: 98.3 235.3 164.0 213.3 279.0 281.1 283.7 278.1 - Balance of payments support: 51.0 0.0 18.4 35.6 35.2 43.3 31.5 35.3 - Project support: 72.0 81.0 78.3 50.1 79.4 72.4 72.4 77.4 - Loan disbursements: 127.0 104.0 106.0 95.3 131.0 129.2 121.4 120.0 - Debt relief: 27.4 30.6 47.5 47.0 49.5 59.4 56.7 55.3 - Financing gap (surplus +/deficit -): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -22.1 Memorandum items (percent of GDP) - Gross financing requirements: -16.2 -20.9 -21.6 -22.9 -24.0 -23.5 -21.8 -20.8 - Current account balance, excluding official transfers: -12.5 -23.3 -16.8 -18.1 -19.1 -15.5 -16.2 -15.8 - Trade balance on goods and services: -11.1 -21.4 -22.4 -21.8 -23.4 -19.5 -20.2 -19.6 - Gross official assistance: 13.1 17.5 15.2 15.4 19.6 18.3 16.7 15.2 - Gross official assistance, net of amortization after debt relief: 10.5 15.8 13.5 13.3 18.0 16.2 14.9 14.0 *Sources: Malawian authorities; and IMF staff estimates and projections.* ### Quantitative Targets and Program Monitoring (FY2004/05) Selected quantitative targets and cumulative flows from June 30, 2004 (in millions of Malawi kwacha) - Ceiling on net domestic assets of the monetary authorities (stock): 18,731; Adjusted/Actual targets across periods: 1,344 -1,671 -5,371 -1,216 -1,697 -3,682 -2,396 -2,690 - Ceiling on central government's net domestic borrowing (stock): 47,104; cumulative flows/adjusted/actual: 6,060 3,046 892 6,711 6,230 -198 6,247 6,151 - Ceiling on central government wages and salaries (flow targets): targets and actuals include 3,400 ... 3,228 ... 7,300 ... 7,775 11,236 12,346 - Ceiling on central government discretionary expenditures (flow targets): targets and actuals include 8,278 ... 6,372 ... 20,126 ... 15,389 28,071 27,626 - Floor on net foreign assets of the monetary authorities (USD equivalent): -0.1 -11.6 16.1 31.0 -2.9 1.5 26.9 -13.4 1.5 - Ceiling on the accumulation of external payments arrears: 0.0 across evaluated periods - Ceiling on contracting nonconcessional external debt with original maturities over one year: 10.0 (target) - Memorandum item: Baseline for balance of payments support: 0.0 ... 27.7 58.0 ... 62.4 84.7 62.4 Notes - 1/ Targets are defined in the technical memorandum of understanding (TMU). - 2/ Targets are subject to an adjuster for balance of payment support. - 3/ Targets are subject to an adjuster for donor-funded health expenditures. - 4/ Evaluated on a continuous basis. - 5/ Loan contracted following an agreement by the previous government to purchase communication equipment for the Ministry of Defense. ### Structural Benchmarks Under the Staff-Monitored Program (selected) I. Public Expenditure Management - 1 Activate the credit ceiling module to reject all payments in excess of credit ceilings. - Implementation Date: End-January 2005 — Status: Completed, but further follow up is necessary. - 2 Submit the 2003/04 public accounts to the Public Accounts Committee of parliament. - Implementation Date: End-February 2005 — Status: Completed with a delay. - 3 Install CCA/reimbursement reporting software on computers of key MOF officials. Arrange for appropriate training. - Implementation Date: End-January 2005 — Status: Completed. - 4 Accountant General to review ledgers, CCS system, record keeping; develop inspection program (3-5 ministries per month); prepare short reports after visits. - Implementation Date: Inspection program End-January 2005; Summary reports Every month — Status: Completed; On going. - 5 Institute weekly management reporting system on CCAs, supplementary CCAs, and reimbursement. - Implementation Date: End-January 2005 — Status: Completed, but further follow up is necessary. - 6 Present to Cabinet statement on economic and financial policies for the FY 2005/06 budget. - Implementation Date: End-April 2005 — Status: Completed. - 7 Present to parliament draft budget for FY 2005/06 consistent with macro framework agreed with the IMF. - Implementation Date: End-June 2005 — Status: Completed. II. Arrears - 8 Produce list of central government arrears. - Implementation Date: End-May 2005 — Status: Completed. - 9 Produce list of arrears to the central government. - Implementation Date: End-May 2005 — Status: Delayed. - 10 Formulate policy for verification and repayment of arrears. - Implementation Date: End-June 2005 — Status: Completed. - 11 Prepare monthly arrears report on the basis of the CCS system. - Implementation Date: End-April 2005 — Status: Delayed. III. PRSP Implementation - 12 Complete draft of second Annual Progress Report (APR) and submit to IMF and World Bank staff. Draft should incorporate revised growth strategy and medium-term macro projections. - Implementation Date: End-January 2005 — Status: Completed. ### Schedule of Disbursements Under Proposed Three-Year PRGF Arrangement (in million of SDRs) - Total equivalent to 55 percent of Malawi's quota (SDR 69.4 million): 38.17 00 1/ - Disbursement schedule and conditionality (Amount — Date — Conditions Necessary for Disbursement): - 5.4 190 Jul-05 — Executive Board approval of three-year PRGF arrangement - 4.9 245 Feb-06 — Completion of 1st review and observance of end-Sep. 2005 Performance Criteria - 4.9 245 May-06 — Completion of 2st review and observance of end-Dec. 2005 PCs - 6.6 800 Nov-06 — Completion of 3nd review and observance of end-Mar. and end-Jun. 2006 PCs - 6.6 800 May-07 — Completion of 4rd review and observance of end-Dec. 2006 PCs - 4.7 710 Nov-07 — Completion of 5th review and observance of end-Jun. 2007 PCs - 4.7 710 May-08 — Completion of 6th review and observance of end-Dec 2008 PCs 1/ Equivalent to 55 percent of Malawi's quota (SDR 69.4 million). ### Indicators of Fund Credit, Fund Obligations and Prospects (2004–2015) Fund credit outstanding (selected) - In millions of SDRs (2004–2015): 59.5 52.6 51.3 49.3 48.7 44.6 42.0 38.7 32.3 23.9 16.3 8.6 - In millions of U.S. dollars (2004–2015): 90.0 80.0 78.0 75.0 74.1 67.8 63.8 58.7 49.1 36.3 24.7 13.1 - In percent of quota: 85.8 75.8 73.9 71.1 70.2 64.3 60.6 55.7 46.6 34.4 23.4 12.4 Existing stock and proposed disbursement - Existing stock (SDRs): 59.5 47.2 29.3 15.9 10.5 6.4 3.9 2.6 1.3 0.0 0.0 0.0 - Proposed disbursement (SDRs): 0.0 5.4 16.5 11.5 4.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Proposed disbursement (USD): 0.0 8.2 25.2 17.4 7.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Fund obligations and repayments (selected) - Fund obligations (annual): 9.9 13.4 18.8 14.1 5.9 4.6 3.1 3.8 6.8 8.9 8.0 7.9 - Fund total charges and interest: 0.7 1.0 0.9 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.3 - Fund total repayment/repurchase: 9.2 12.4 17.9 13.4 5.4 4.1 2.6 3.4 6.3 8.4 7.6 7.6 Net Fund credit and net use of Fund resources - Net Fund credit (annual): -9.2 -6.9 -1.3 -2.0 -0.6 -4.1 -2.6 -3.4 -6.3 -8.4 -7.6 -7.6 - Net use of Fund resources (annual): -9.9 -8.0 -2.3 -2.6 -1.1 -4.6 -3.1 -3.8 -6.8 -8.9 -8.0 -7.9 Ratios - Fund credit outstanding in percent of exports of goods and nonfactor services: 17.6 13.9 12.7 11.8 11.2 9.8 8.8 7.7 6.1 4.3 2.8 1.4 - Fund credit outstanding in percent of gross official reserves: 75.4 53.7 37.5 32.5 27.3 22.7 19.0 15.5 11.3 6.9 4.5 2.3 Memorandum items - Quota (SDR millions): 69.4 (constant) - Exports of goods and nonfactor services (USD millions): 511 578 614 634 662 694 727 764 803 845 890 937 - Gross official reserves (USD millions): 119 149 208 231 271 298 337 380 436 524 551 578 *Sources: Malawi authorities; and Fund staff estimates and projections.* ### 1. Eradicate extreme poverty and hunger (2015 target = halve 1990 $1 a day poverty and malnutrition rates) ### 1. Eradicate extreme poverty and hunger (2015 target = halve 1990 $1 a day poverty and malnutrition rates) ### Millennium Development Goals — Key indicators - Population below $1 a day (%) ............ - Poverty gap at $1 a day (%) 1/...14.8...... - Percentage share of income or consumption held by poorest 20% ...4.9...... - Prevalence of child malnutrition (% of children under 5) 27.629.925.4... - Population below minimum level of dietary energy consumption (%) 49.039.033.0... ### Education and gender indicators - Net primary enrollment rate (% of relevant age group) 49.799.0...... - Percentage of cohort reaching grade 5 (%) 64.534.2...... - Youth literacy rate (% ages 15-24) 63.267.371.872.5 - Ratio of girls to boys in primary and secondary education (%) 81.188.4...... - Ratio of young literate females to males (% ages 15-24) 67.671.476.076.7 - Share of women employed in the nonagricultural sector (%) 10.511.312.2... - Proportion of seats held by women in national parliament (%) ...6.0...... ### Health indicators - Under-5 mortality rate (per 1,000) 241216188182 - Infant mortality rate (per 1,000 live births) 146133117113 - Immunization, measles (% of children under 12 months) 81908269 - Maternal mortality ratio (modeled estimate, per 100,000 live births)......1,800... - Births attended by skilled health staff (% of total) 54.8...55.6... - Prevalence of HIV, female (% ages 15-24)......14.9... - Contraceptive prevalence rate (% of women ages 15-49) 13.022.030.6... - Number of children orphaned by HIV/AIDS (thousands)......470... - Incidence of tuberculosis (per 100,000 people)......432431 - Tuberculosis cases detected under DOTS (%) ...394036 ### Environmental and access indicators - Forest area (% of total land area) 35.2...27.6... - Nationally protected areas (% of total land area) ...11.311.311.3 - CO2 emissions (metric tons per capita) 0.10.10.1... - Access to an improved water source (% of population) 49...57... - Access to improved sanitation (% of population) 73...76... ### Infrastructure and connectivity - Fixed line and mobile telephones (per 1,000 people) 3.13.710.615.2 - Personal computers (per 1,000 people) ......1.31.3 - Youth unemployment rate (% of total labor force ages 15-24) ............ *Source: World Development Indicators database, 2004 and http://www.developmentgoals.org.* --- ### Table 7b. Malawi: Selected Social and Demographic Indicators — Key figures ### Population and demographic trends - Total population (millions)5.27.311.0688.92,494.6 - Growth rate (annual average for period)3.03.22.12.51.9 - Urban population (percent of population)7.710.315.533.130.6 - Total fertility rate (births per woman)7.57.56.15.13.5 ### Poverty and income - Poverty (percent of population) 1/ - National......65.3...... - Urban......54.9...... - Rural......66.5...... - GNI per capita (World Bank Atlas method; U.S. dollars)130160160450430 - GNI per capita (PPP - current international dollars)2003705701,7002,110 - Consumer price index (1995=100)...9.9533.8...... - Food price index (1995=100)...8.4477.5...... ### 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 ......7.86.04.4 - Education2.53.34.13.42.5 ### Access to services and health - Access to improved water source (percent of population) - Total......57.058.275.7 - Urban......95.082.889.7 - Rural......44.046.569.9 - Immunization rate (percent under 12 months) - Measles...49.069.057.664.7 - DPT...55.064.053.764.6 - Child malnutrition (percent under 5 years) ...23.925.4...41.7 - Life expectancy at birth (years) - Total42.245.537.545.858.9 - Male41.544.837.146.657.9 - Female42.946.338.045.159.8 - Mortality - Infant (per 1,000 live births)189.0157.0113.0103.178.6 - Under 5 (per 1,000 live births)330.0265.0182.0173.9120.8 - Adult (15-59) Male (per 1,000 population)479.4428.6701.0519.5310.5 - Adult (15-59) Female (per 1,000 population)387.9348.6653.0461.1259.1 - Births attended by skilled health staff (percent) ......55.6...... *Sources: World Bank, World Development Indicators, 2004; and http://www.developmentgoals.org.* --- ### Memorandum of Economic and Financial Policies (MEFP) — Summary of government requests and commitments ### Request for IMF support and program structure - Government requests a new PRGF arrangement in the amount of SDR 38.17 million (55 percent of quota). - Requests additional interim assistance under the enhanced HIPC initiative of SDR 4.628 million. - Program monitoring: quarterly performance criteria with semi-annual reviews and disbursements as specified in table 3 of the MEFP. - Anticipated first review—based on performance as of end-September 2005—to take place in February 2006. - Anticipated second review—based on performance as of end-December 2005—in May 2006. - Government authorizes IMF to make the letter, attached MEFP, and IMF staff report available to the public. ### Recent macroeconomic developments (as reported) - Economic growth accelerated in 2004, largely due to strong tobacco production. - Imports increased by 5 percent above real GDP growth. - Foreign reserve cover maintained at 1.4 month of imports (of the following year). - Maize crop reduced by an estimated 25 percent; estimated need to import 250,000 tons of maize by government and the private sector. - Monetary expansion from prior excessive government borrowing contributed to price pressures. - Key budget and monetary targets for end-March were observed; government ministries stayed within budget provisions for the first time in years. - Monthly fiscal data now published on the internet. ### Government assessment and policy stance - Belief that MEFP policies are adequate to achieve program objectives; prepared to implement additional steps as appropriate. - MEFP derived from Malawi Poverty Reduction Strategy Paper (MPRSP) and Annual Progress Report (APR); updates macroeconomic framework. - Successful implementation of PRGF-supported policies considered essential to reach Completion Point under enhanced HIPC Initiative and to help achieve the MDGs. --- ### Medium-term reform strategy and structural reform agenda ### Overarching objectives and targets - Medium-term objective: raise economic growth and reduce widespread poverty. - Anticipated growth to be based on agriculture and agricultural processing; expected growth rate of 6 percent by 2008. - Monetary policy objective: lower inflation to 8 percent and below in the medium term. - External debt situation expected to improve when the HIPC completion point is reached. ### Box 1 — Structural reforms in three core areas A. Improve public governance - Continued anti-corruption drive in support of zero tolerance for corruption in the public sector. - Focus on improving governance in public expenditure management, especially public procurement. - Initiatives on anti-money laundering and fraud protection. B. Enhancing macroeconomic management Fiscal - Continued efforts to enhance public expenditure management, including the implementation of the Tanzanian model for IFMIS, and budget implementation. - Build on the recent general review of tax policies and tax administration with the overall objective of making the tax system competitive and business friendly. - Continued civil service reform in the areas of wages, pensions, structure and size. - Eliminate the large stock of existing commercial arrears and forgo further arrears accumulation. Monetary - Review of the exchange rate regime with the objective of ensuring adequate exchange rate stability within an overall market determined environment. - Move towards granting full independence to the Reserve Bank as part of a SADC wide initiative. - Strengthen monetary policy instruments and promote money and exchange rate market development. C. Improving economic efficiency in support of private sector led growth Business environment - Strengthen the business environment by introducing a commercial court, streamlining business licensing, and strengthening tax administration. - Investment in public physical infrastructure—roads, railroads and bridges. - Negotiations towards entering the COMESA Customs Union in 2007 and the SADC FTA in 2008. - Revising the privatization divesture plan and privatize or commercialize the remaining state enterprises to improve their efficiency and service—especially for power and other public utilities. Agriculture - Support agricultural growth by improving the functioning of food markets, including removing practices (through legislation) that restrict free competition in food and input markets. - Initiatives to bolster non-tobacco exports. ### Governance, public services, and institutions - Commitments to zero tolerance for corruption, improving financial governance, economic governance, and political governance. - Plans to hold local government elections in 2005/06 and general elections in 2009. - Reforms to public institutions: introduce commercial court, streamline business licensing, strengthen tax administration. - Plans to address ESCOM operations and arrears; pursue regional power arrangements including interconnector to Cahorra Bassa in Mozambique. ### Financial access and rural credit - Establishment of Malawi Rural Development Fund (MARDEF) using Malawi Savings Bank and existing micro credit institutions to expand rural credit while managing default risks. --- *Source: Memorandum of Economic and Financial Policies, Government of Malawi, July 18, 2005; Tables and indicators drawn from World Development Indicators database, 2004 and http://www.developmentgoals.org.* ### Box 2. Malawi Rural Development Fund (MARDEF) ### Box 2. Malawi Rural Development Fund (MARDEF) ### Objective and target group - MARDEF established as a microfinance institution to increase credit in rural areas. - The fund will target the production of goods and services by women and youth. - Loans will be distributed across geographical districts. ### Loan terms and delivery mechanism - Loans will be between MK 10,000 and MK 100,000. - MARDEF will use the Malawi Savings Bank (MSB), a government-owned commercial bank, as the lending channel. ### Initial funding and monetary arrangements - The government deposited MK 1 billion in MSB to increase the bank’s lending capacity. - The additional lending capacity will be extended to MARDEF. - The government will not earn interest on these deposits. - MSB will be encouraged to buy government securities to limit the initial monetary impact of the transfer. - MSB will earmark interest earned on government securities for future MARDEF administrative costs. ### Cost recovery, operating expenses, and risk mitigation - MARDEF will adjust the interest charged on loans to reflect operating costs. - Administrative and operating expenses include: - (i) Contracting with existing microfinance institutions to assist in preparing and appraising projects and assisting clients in the formation of groups. - (ii) Paying premiums to insure against default risk. - On a monthly basis, the government will review MARDEF operations to ensure the fund is commercially viable. ### Expansion criteria - The government will consider increasing the initial deposit from MK 1 billion to MK 5 billion once MARDEF has demonstrated success, including loan repayment and acceptable operating costs. - Any decision to increase the deposit will consider the availability of government funds and the monetary impact. *Source: Box 2. Malawi Rural Development Fund (MARDEF) — _cr05285* ### Box 4. Food Security in Malawi ### Box 4. Food Security in Malawi ### Maize harvest and risk - 2004/05 maize harvest is expected to be 25 percent less than in 2003/04. - The crop is expected to reach 1.3 million metric tons, against a normal harvest of 1.8 million tons. - Estimates are tentative and there is the risk that the shortfall could be larger. - Donors have signaled readiness to provide additional resources should the need arise. ### 2005/06 food security package — design principles - Package aims to provide adequate food security for all Malawians while: - Ensuring appropriate incentives for private sector imports this year. - Supporting incentives for production in the following crop season. ### Main elements of the package (operational) - Humanitarian - 150,000 tons of maize will be distributed through the Strategic Grain Reserve (SGR) to the most vulnerable without charge. - This includes 27,000 tons in existing stocks. - Two thirds of the purchase cost for the remaining 123,000 tons will be financed by grants from the EU and DFID and in kind by WFP. - A further 70,000 tons may be funded by other donors. - The cost of distribution will be borne by the government. - These estimates do not include the costs of replenishing the SGR for 2006/07. - Commercial - 50,000 tons of maize will be distributed commercially. - Existing stocks will be distributed and sold through Admarc at 17 kwacha per kg. - Import 30,000 tons to be sold to commercial distributors at a cost recovery price. - Budget cost - The total fiscal cost of the government’s food security transactions for FY05/06 is estimated to be 797 million kwacha. ### Table figures (as presented) - Millions of kwacha - Total maize transactions-797 - Humanitarian-1,175 - EU/DFID grants3,461 - Purchase-3,835 - Distribution-801 - Commercial378 - Sale receipts1,344 - Purchase-967 - Maize stocks, '000 mt, eo - p0 - Carry over47 - Purchases153 - Distributions200 ### Budget savings and reallocation - Foreign missions - Plan to close four of 17 foreign missions in early 2005/06. - Estimated savings approximately MK 300 million per year; these savings will be reallocated to other missions. - Overall budget savings strategy - Use local decision making, accountability, and new budget discipline to hold non-priority costs to a minimum. - Past effectiveness noted: virtual elimination of budget overruns in 2004/05. ### Government-wide cost containment measures - Travel - Reviewing travel policy and implementation to fairly reimburse civil servants and eliminate over-reimbursements. - Travel policy for ministers in place; new policy for all staff by end-March 2006 emphasizing accountability. - Vehicles - Ministry of Finance to require ministries to produce vehicle inventories and report purchases and changes monthly. - Study of vehicle expenditures to inform cost-saving measures in the 2006/07 budget; no blanket prohibition on vehicle purchases. - Utilities - Introduce incentive mechanisms for savings in telephone, electric, and water use. - Install new meters, many prepaid, and consider similar approach for telephone control. ### Arrears strategy and amounts - Identify all domestic arrears - List developed as of end-June 2004 including MK 8.5 billion incurred by ministries and MK 2.2 billion stemming from court cases and other claims. - Verify all claims - A claim is valid only if backed by a contract signed by a government officer or invoice and proof that goods/services were provided. - Centralize arrears processing - Ministries sent claims with supporting documents to a technical team appointed by the Minister of Finance under the Accountant General. - Prioritization - Special team will organize certified claims according to a priority ranking established by the Cabinet; attention to penalty clauses, individuals (pension or salary arrears), and small firms. - Settlement - Means of settling domestic arrears will depend on certified arrears and offsetting factors such as unpaid taxes. - Remaining arrears exceed the 2005/06 budget provision of MK 2 billion; a settlement plan consistent with available resources has been developed. - Clearance of some arrears could involve payment in government securities and be phased over time. - New arrears - Improve financial management and adherence to commitment control system to avoid new arrears; any that emerge will be cleared quickly using the spending ministry’s resources. ### Tax policy adjustments and administration - Completed general review of tax policies and tax administration with support from US Treasury and the IMF Fiscal Affairs Department. - Principle: Any resulting changes must be revenue neutral. - Planned revisions in 2005/06 - Raise the threshold of personal income tax brackets to reduce burden on very low paid workers. - Begin to reduce the top most tax rate to attract key professionals to Malawi. - Look at increasing fees in line with inflation and introduce changes to the VAT system to improve competitiveness. - MRA actions - Implement key findings of the tax review: organizational review, staff training, computerization. - Classify VAT refunds as statutory expenditures and eliminate VAT exemptions on government purchases. ### Civil service wage and pension reforms - October 2004: new civil service pay policy introduced to improve transparency and unify pay across government; implementation phased. - Achievements to be protected in 2005/06 - Consolidation of wages and allowances into wages and salaries; unified pay scale. - Increased compensation of middle grades to attract and retain staff; further phased adjustments may be needed. - Review salaries for medical and other professional staff; potential raises based on retention needs. - 2005/06 wage bill cap - Wage bill will be capped at MK 20 billion (domestically financed). - To fit within the ceiling and correct anomalies, a general salary adjustment will need to be small. - Pay adjustment to be implemented in October 2005. - Pay system improvements - Implement new computerized employment system during the year; census of all civil servants has begun. - Review all salary adjustments at each grade prior to implementation. - Pension reform - Revised pension formula bases pensions and gratuities on a five-year average of wages rather than ending wage. - Raised the normal retirement age to 60 years. - Intend to move toward a funded, contributed system; will continue to investigate costs and benefits. ### Public expenditure management and transparency measures - Continue strengthening public expenditure management to institutionalize 2004/05 successes. - Supervision visits - Continue monthly visits to spending ministries; begin training sessions addressing capacity limitations in accounting departments (bank and cash book reconciliation). - Monitoring government payments - New electronic CCA system at the RBM provides information on funding balances and a mechanism to end unapproved (unfunded) spending; reconciling holding account balances prioritized. - End-year closing - Restart practice to cut off 2004/05 contracts in early June to reduce check float. - Require spending ministries to provide information on all checks written in [May and] June to the Accountant General for correct budget-year assignment. - Issue government circulars to alert ministries to these requirements. - Account reconciliation - Work with ministries to improve account reconciliation so CCA system data is more reliable. - Monthly funding - Implemented three-month funding levels for each vote; released monthly funding based on prior month tax collections less statutory expenditures. - Withhold funding when a ministry does not submit its expenditure return report for the previous month on time. - Financial control - Hold financial controlling officers responsible through the Public Finance Management Act, with provisions for disciplining officers who spend or commit funds in excess of approved limits. - Adoption of external system - Decide to adopt Tanzania’s public expenditure management system including their IFMIS and a shift to a central payment system, with assistance from Tanzanian officers. - Fiscal transparency - Submitted 2003/04 government accounts to parliament in June 2005. - Continue implementing reporting requirements set out in the Public Financial Management Act. - Budget process improvements - Refined development plans based on the Public Sector Investment Plan for the 2005/06 budget. - Strengthen medium-term planning through the medium-term expenditure framework. - Work to improve ministry funding by explicitly identifying spending from special accounts such as the health SWAp. ### Petroleum pricing - Domestic petroleum prices adjusted periodically during 2004/05, including a price increase in June 2005. - Petroleum stabilization fund remained in surplus during most of 2004/05. - Will adjust pump prices using established formula and rules; considering regional petroleum pricing best practices. ### Monetary and exchange rate policy objectives for 2005/06 - Objective: reduce inflationary pressures. - Inflation began to rise in 2004 reflecting maize shortage and liquidity injection caused by high government borrowing in 2003/04. - Liquidity management improved significantly in second half of 2004 due to containment of domestic borrowing by government. - Main instrument: purchase and sale of treasury bills. - Sales of foreign exchange to mop up liquidity will be more limited than in 2004 because of decision to withdraw from direct purchases of foreign exchange from smallholder tobacco farmers. - Exchange rate policy - Exchange value of the kwacha to be guided by market conditions with some intervention to smooth pressures related to the tobacco season and inflows of donor assistance. - Refrain from using administrative restrictions on the foreign exchange market over the program period. - Smooth fluctuations around the exchange rate offered by commercial banks during and after the tobacco marketing season. ### Banking supervision and money market reforms - Banking supervision - Commit to improving banking supervision operations; update directives governing supply of critical information to the RBM. - Plan initial analysis of commercial bank balance sheets using asset classification consistent with international standards. - Medium-term aim to increase resources to the department and implement a general restructuring. - Monetary policy instrument shifts - Aim to reduce dependence on rule-based instruments. - Remain committed to a lower liquidity reserve requirement (LRR) to reduce operating costs for commercial banks and allow lower lending rates and higher deposit rates. - Aim to reduce or eliminate the foreign currency surrender requirement; reforms to be reviewed in due course. - Preconditions and coordination - A well functioning money market is a precondition for market-based monetary instruments. - Strengthen coordination between the Ministry of Finance and the RBM to improve liquidity forecasting so RBM can announce accurate amounts for treasury bill auctions. *Source: _cr05285 - Box 4. Food Security in Malawi* ### 63. We will continue to implement the measures agreed at the time of the decision point ### _cr05285 - 63. We will continue to implement the measures agreed at the time of the decision point ### Implementation of PRSP/PRS and Poverty Monitoring - The MRSP was finalized in 2002 with assistance from development partners. - The first annual performance report (APR) was finalized in September 2003. - The second APR was completed and sent to the IMF and World Bank Executive Boards in June 2005; it: - Evaluates past performance. - Presents the medium-term macroeconomic framework for the next three years. - Discusses policies to be implemented from 2005 onward. - Identifies areas in which the original PRS was weak. - The policies included in the MEGS are described as basic to implementation of the PRSP strategy to ensure that growth takes place to attain poverty reduction. - Actions on poverty monitoring and evaluation: - Complete analysis of the 2004/05 Integrated Household Survey in the second half of 2005. - Formulate a new PRS in time for the 2006/07 budget. - Complete a comprehensive review of MPRS. ### Technical Assistance and Data Issues - Malawi will need technical assistance to support program implementation in: - public expenditure management, - tax reform, - monetary operations, - national accounts. - The government will formally request assistance on a priority basis with: - financial management, - monetary operations, - the book entry system at the RBM, - measurement of the national accounts. ### Program Monitoring - The PRGF-supported program will be monitored quarterly based on the quantitative and structural measures indicated in tables 1 and 2. - These targets are defined in the attached Technical Memorandum of Understanding (TMU). ### Selected Quantitative Targets (Table 1 excerpts; cumulative flows from June 30, 2005) - Monetary targets (In millions of Malawi kwacha / net foreign assets in millions of U.S. dollars) - Floor on net foreign assets of the monetary authorities (PC): 33.0, 36.1, 25.7, 9.0, 49.1 - Ceiling on net domestic assets of the monetary authorities (PC): 15,520, -3,133, -1,839, -2,786, -2,608 - Ceiling on reserve money (IT): 19,580, 1,314, 1,324, -1,684, 3,432 - Fiscal targets (In millions of Malawi kwacha) - Ceiling on central government's net domestic borrowing (PC): 53,710, -783, -599, -2,398, -1,391 - Ceiling on central government wages and salaries (PC): ..., 4,848, 9,934, 15,218, 20,730 - Ceiling on central government discretionary expenditures (IT): ..., 15,123, 29,424, 39,718, 49,669 - External targets (In millions of U.S. dollars) - Ceiling on the accumulation of external payments arrears (PC): ..., 0.0, 0.0, 0.0, 0.0 - Ceiling on new nonconcessional external debt with a maturity over one year (PC): ..., 0.0, 0.0, 0.0, 0.0 - Ceiling on new nonconcessional external debt with a maturity of less than one year (PC): ..., 0.0, 0.0, 0.0, 0.0 - Notes from table: - PC - performance criteria; IT - indicative target - Targets are defined in the technical memorandum of understanding (TMU). - 2/ Targets are subject to an adjuster for BOP support. - 3/ Targets are subject to an adjuster for donor-funded health expenditures. - 4/ Evaluated on a continuous basis. ### Prior Actions, Performance Criteria, and Structural Benchmarks (Table 2 highlights) - Prior Actions - Parliament approval of 2005/06 budget in line with macroeconomic framework specified in the TMU (para. 28). - Implement adjustment formula to the current pension system (TMU, para. 29). - Performance Criteria (dates) - Cabinet approval of arrears policy. Begin implementation (TMU, para. 30). End-Sep. 2005 - Compile new database of all public employees on the basis of DHRMD data forms (TMU, para. 31). End-Sep. 2005 - Make budget ceilings module in payment system fully operational (TMU, para. 32). End-Dec. 2005 - Develop and implement new travel policy, which includes mechanisms for monitoring adherence (TMU, para. 33). End-Mar. 2006 - Structural Benchmarks (dates) - Develop detailed schedule of wage adjustments by grade for 2005/06. End-Sep. 2005 - Publish monthly fiscal reports with one month lag (TMU, para. 34). End-Dec. 2005 - Prepare quarterly reports (with one month lag) on status of arrears. End-Dec. 2005 - Strengthen cash management and expenditure monitoring procedures by preparing reports as indicated in the TMU (para. 35 ). End-Mar. 2006 - Complete impact analysis of tighter credit quality classifications on commercial bank balance sheets (TMU, para. 36). End-Mar. 2006 ### Schedule of Disbursements During the First Year (Table 3; In million of SDRs) - Amount / Date / Conditions Necessary for Disbursement - 5.4190 Jul-05 Executive Board approval of three-year PRGF arrangement - 4.9245 Feb-06 Completion of 1st review and observance of end-Sep. 2005 Performance Criteria - 4.9245 May-06 Completion of 2st review and observance of end-Dec. 2005 PCs ### Technical Memorandum of Understanding — Key Definitions and Adjustment Clauses - Coverage and aggregates - Central government excludes nonprofit institutions controlled and financed by the central government (contrasting with SNA 1993 and GFSM 2001). - Monetary authorities include the Reserve Bank of Malawi (RBM) and central government’s holdings of international reserves. - Monetary aggregates based on the four-bank monetary survey. - Net Foreign Assets (NFA) of the monetary authorities - NFA defined as gross foreign assets minus liabilities; valued in U.S. dollars; monetary gold at RBM fixed accounting rate. - Gross foreign assets include: (1) monetary gold holdings of the RBM; (2) holdings of SDRs; (3) the reserve position in the IMF; (4) central government (treasury) holdings with crown agents; (5) holdings of convertible, liquid, and unpledged claims on non-residents. - Exclusions: foreign currency claims on residents, capital subscriptions in international institutions, assets in nonconvertible currencies, and gross reserves encumbered or pledged. - Gross foreign liabilities: (1) outstanding liabilities of the RBM to the IMF; (2) all short-term foreign currency liabilities of the RBM to non-residents with original maturity up to and including one year. - Adjustment clause on NFA—balance of payments support: - Floor on NFA will be adjusted upward (downward) by the full amount by which cumulative receipts from balance of payments support are greater (less) than the program baseline. - Downward adjustment capped at US$20 million and effective only if gross international reserves of the RBM are greater than US$200 million, with exception: in the second quarter of FY2005/06 the target will be adjusted downward up to US$25 million if the disbursement of the second tranche of the World Bank FIMAG is delayed. - Definition of balance of payments support: - Includes all grants and foreign financing not linked to additional budgetary expenditure. - Excludes external project financing for particular activities (including food security funding from the EU and usage of the Tokyo-Mitsubishi account) and loan financing from the IMF. - Measured as cumulative flow from July 1, 2005. - Net Domestic Assets (NDA) of the RBM - NDA defined as reserve money minus net foreign assets valued at the program exchange rate of MK 123 per US$1. - Reserve money consists of currency issued by the RBM and commercial banks’ balances with the RBM, including required reserves and other domestic currency reservable liabilities. - Adjustment clauses on NDA: - Balance of payments support adjuster: ceiling adjusted downward (upward) by full amount the cumulative flow of receipts from balance of payments support is greater (less) than program baseline; upward adjustment capped at US$20 million and effective only if gross international reserves > US$200 million, except in second quarter FY2005/06 where adjustment upward can be up to US$25 million if World Bank FIMAG second tranche is delayed. - Liquidity reserve requirement adjuster: ceiling adjusted downward for a decrease in reserve requirement ratio and upward for an increase; adjuster formula described in TMU (one minus percentage of reserve assets at discount houses) × (program baseline required reserve ratio minus new required reserve ratio) × reservable deposit liabilities in commercial banks as at end of quarter prior to change. - Central Government Domestic Borrowing (CGDB) - CGDB computed as sum of: (i) net borrowing from the RBM (ways and means advances, loans, holdings of local registered stocks, holdings of treasury bills minus deposits), (ii) net borrowing from commercial banks (advances, holdings of local registered stocks and treasury bills minus deposits), (iii) net borrowing from nonbanks (holdings of local registered stocks, holdings of treasury bills, supplier credits minus government deposits at Malawi Savings Bank), and (iv) holdings of promissory notes. Treasury bills and local registered stocks valued at cost. Excluded: promissory notes issued to cover RBM’s operational losses in 2002 and 2003. - Ceiling measured as cumulative flow from July 1, 2005. - Definitions of arrears: - June 2004 domestic arrears: all domestic arrears for which obligation to pay was established on or before June 30, 2004. - Domestic arrears encompass overdue payment obligations by central government other than external payment arrears, including wages and salaries, pensions, transfers, domestic interest, goods and services, court obligations, compensation claims, and payments to MRA for tax refunds. - Arrears timing: wages/salaries/pensions/transfers/court/compensation unpaid >30 days beyond due date; domestic interest unpaid on due date; goods and services unpaid within 30 days of invoice (or within contractually agreed grace period). - Adjustment clauses on CGDB: - Balance of payments support adjuster: ceiling adjusted downward (upward) by full amount cumulative receipts from balance of payments support are greater (less) than program baseline; upward adjustment capped at US$20 million and effective only if RBM gross international reserves > US$200 million, except second quarter FY2005/06 where upward adjustment can be up to US$25 million if World Bank FIMAG second tranche delayed. - Securitization of arrears: ceiling adjusted upward by full amount pre-2005 domestic arrears securitized. - Cash payment of arrears: ceiling adjusted downward by full amount by which payments for verified pre-2005 domestic arrears are less than program baseline; only payments charged against Accountant General vote and reported by Accountant General are recognized. - Maize revenue adjuster: ceiling adjusted upward (downward) by full amount cumulative receipts from sale of commercial maize through ADMARC and deposited in RBM maize account is less (greater) than program baseline. - Donor pool account for health SWAp adjuster: ceiling adjusted downward (upward) by full amount change (in Kwacha) of stock in US dollar denominated donor pool account for health SWAp at RBM is larger (smaller) than change (in Kwacha) in program baseline; change measured relative to stock as of June 30, 2005; stocks stated positive. - National AIDS Commission (NAC) accounts adjuster: ceiling adjusted downward (upward) by full amount change (in Kwacha) of stock in NAC accounts held in Malawi banking system larger (smaller) than change (in Kwacha) in program baseline; stock determined from quarterly NAC financial reports; change measured relative to stock as of June 30, 2005; stocks stated positive. ### Maize revenue, Health SWAp, and NAC funds (FY2005/06; In millions of Malawi Kwacha) - Maize revenue - Quarterly receipts: 170, 334, 840, 0, 1,344 - Cumulative receipts: 170, 504, 1,344, 1,344 - Health SWAp - Revenues: 754, 1,840, 947, 1,925, 5,466 - Wage expenditures: 177, 181, 184, 188, 730 - ORT Expenditures: 1,016, 1,046, 1,063, 1,075, 4,200 - Change in account balance: -439, 613, -299, 661, 536 - Cumulative wage expenditures: 177, 358, 542, 730 - Cumulative ORT expenditures: 1,016, 2,062, 3,125, 4,200 - Cumulative change in account balance: -439, 174, -125, 536 - National AIDS Commission (NAC) - Revenues: 1,269, 1,309, 1,340, 1,364, 5,282 - Expenditures: 1,269, 1,309, 1,340, 1,364, 5,282 - Change in account balance: 0, 0, 0, 0, 0 - Cumulative change in account balance: 0, 0, 0, 0 *Source: _cr05285 - 63. We will continue to implement the measures agreed at the time of the decision point* ### 20. Definition of central government wages and salaries: Central government wages ### 20. Definition of central government wages and salaries: Central government wages ### Definitions and scope - Central government wages and salaries include all payments that are classified as personnel emoluments in government budgets and accounts, including payments on arrears of personnel emoluments and allowances. - The ceiling on central government wages and salaries is measured as a cumulative flow from July 1, 2005. - External payment arrears: External payment arrears consist of external debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements, except on external debt subject to rescheduling or restructuring. A continuous performance criterion applies on the nonaccumulation of external payment arrears on external debt contracted or guaranteed by the central government, the RBM, or other agencies on behalf of the central government or the RBM. - Nonconcessional external debt (for the limit): The definition of debt follows Executive Board Decision No. 6230-(79/140) of August 3, 1979, as amended by Decisions No. 11096-(95/100), October 25, 1995; and 12274-(00/85) August 24, 2000. For program purposes, a medium- and long-term debt is nonconcessional if it includes a grant element less than 35 percent. - The ceiling on nonconcessional debt applies to contracting and guaranteeing by the central government, the RBM, or other agencies on behalf of the central government or the RBM on debt with nonresidents; it applies to debt and commitments contracted or guaranteed for which value has not been received. The ceiling is measured cumulatively from July 1, 2005. ### Adjustment clauses - Central government wages and salaries—donor-funded wages and salaries in the health sector: - The ceiling on central government wages and salaries will be adjusted upward (downward) by the full amount of donor-funded supplementary wages and salaries for the health sector that is greater (less) than the program baseline. - Central government discretionary expenditures—donor-funded central government discretionary expenditures in the health sector: - The ceiling on central government discretionary expenditures will be adjusted upward (downward) by the full amount of donor-funded central government discretionary health sector expenditures that is greater (less) than the program baseline. - For resources made available through the U.S. dollar denominated donor pool account for the health SWAp at the RBM (donor pool account), donor-funded central government discretionary expenditures in the health sector will be deemed to have been made according to the calculation: ‘outflows from the donor pool account to finance expenditures, expressed in Malawi Kwacha’ less ‘donor financed supplementary wages in the health sector’. ### Exclusions from the nonconcessional debt limit - Excluded: use of Fund resources, any kwacha-denominated treasury bill and local registered stock holdings by nonresidents. - Also excluded are: - (i) debts classified as international reserve liabilities of the RBM; - (ii) new debt issued to restructure, refinance, or repay existing debt up to the amount actually used for the above-mentioned purposes; - (iii) normal import financing (a financing arrangement for imports is considered “normal” when the credit is self-liquidating); - (iv) convertibility guarantees of the kwacha by the RBM; - (v) arrangements to pay over time obligations arising from judicial awards to external creditors. ### Quantitative indicative targets - Ceiling on reserve money: - Reserve money is defined as the sum of currency issued by the RBM and balances of commercial bank accounts with the RBM. It includes required reserves held for Kwacha deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM. - Ceiling on central government discretionary expenditures: - Defined as all expenditures excluding (i) wages and salaries, (ii) interest payments, and (iii) foreign-financed development expenditures (development Part I expenditures) which are related to specific projects. - Central government discretionary expenditures include statutory (i.e., nonvoted) expenditures for pensions and gratuities, and compensation and refunds; but exclude tax refunds (which are treated as a negative revenue). - Also include other recurrent expenditures (ORT), domestically financed development expenditures (development Part II expenditures), and net lending (if any). - Included are recurrent expenditures and development Part II expenditures for which cash financing is or was made available by donors; in particular all maize purchases for the Strategic Grain Reserve, purchases financed from the Japan debt relief account (see paragraph 19), and expenditures in the health sector financed from the donor pool account in the RBM for the health SWAp. - The ceiling is measured as a cumulative flow from July 1, 2005. ### Structural prior actions, performance criteria, and benchmarks - FY2005/06 budget approval: - The FY2005/06 budget passed by parliament should be in line with the program baseline, with other recurrent and domestic development expenditures of no more than MK 49.6 billion, a wage bill (including health SWAp) of no more than MK 20.7 billion, and tax policies in line with program assumptions. - Pension formula adjustment: - Adjustments to the formula used to calculate an individual’s benefit should allow for a total cost of pensions lower than MK 3.5 billion in 2005/06. - Domestic arrears strategy: - The government will identify, verify, and clear June 2004 domestic arrears in accordance with the guidelines set forth in the MEFP (para. 45). “Begin implementation” is defined as identifying all arrears, in addition to starting the process of verification. Ministries are expected to resolve any domestic arrears incurred since June 30, 2004 through their annual budget allocations. - Employee database: - The database will be based on the DHRMD data forms collected for the FY2005/06 government payroll, and should include information on all employees by ministry, grade, and salary. - Budget ceiling module (payments system at the RBM to be fully operational). Required steps: 1. All bank accounts are reconciled between the RBM and commercial banks. 2. All data are reconciled between the RBM holding accounts and the fiscal data according to the Ministry of Finance ledgers. 3. The Accountant General’s office provides the RBM with a list of check numbers for outstanding checks issued against the 2004/05 budget; these checks should be entered into the payment system to identify the float from the 2004/05 budget into fiscal year 2005/06 for the CCA system. - RBM should produce tables by CCA category listing funded amounts against total reimbursement for the current fiscal year. - The Accountant General should develop a concordance between budget votes, cost centers, and RBM holding accounts into which CCAs are credited, and produce tables by budget vote. - Travel policy: - The Ministry of Finance will develop a travel policy that will be ready for the FY2006/07 budget and will aim to reduce and account for all expenditure on travel. - Publication of fiscal reports: - The Ministry of Finance will publish monthly: the GFS fiscal table, the arrears clearance report, and the report on pro-poor expenditures. - Impact analysis: - Collect information on credits overdue 30 days or more but less than 180 days. Based on this information, complete an analysis of tightening credit quality classification to 90 days for substandard, 180 days for doubtful, and one year for loss. - Strengthening cash management: prepare and implement two reports: 1. A budget execution report based on a new monthly table by ministry and expenditure type (PE, ORT, and development, including below the line accounts like advances and imprests) that shows (i) approved budget per vote/ministry, (ii) funding released to ministries per funding table, (iii) commitments made as reported by ministries on commitment control system reports, (iv) expenditures as reported by ministries on expenditure returns, and (v) payments made according to CCA system. 2. An amended funding table indicating the allocation of funding based on three sources: the MG1 account, automatic payment by standing instruction (e.g., regular foreign payments or withholding), and foreign financing sources. ### Treatment in the fiscal accounts and balance of payments of certain CG accounts held abroad - Bank of Tokyo-Mitsubishi account (Japan debt relief): - Disbursements of cash debt relief into the account are accounted as grants with corresponding amounts of foreign financing (increases in the deposit account). - Withdrawals are accounted as central government expenditures with corresponding amounts of foreign financing (decreases in the deposit account). - Expenditures financed from this account are included in spending agencies budgets under current expenditures, or as development Part II expenditures (development expenditures financed by the Government of Malawi). - Flows are valued at the end-month exchange rate. - European Union grants for food security and the food reserve account: - Grants provide a cash reserve for purchase of food stuffs (in particular maize) at times of food shortages. - Deposits into the account held abroad are recorded as grants with corresponding amounts of foreign financing (increase in deposit accounts). - Withdrawals from the account held abroad are recorded as increase in foreign financing. - When resources are transferred to Malawi, they are to be held in a bank account in the banking system until needed, and are counted as part of net credit to government. - Withdrawals for payments to suppliers are recorded as an appropriate expenditure item and a decrease in the respective deposit account. - If the food reserve account operates like a revolving fund, all cash inflows are accounted as appropriately classified revenue and an increase in the deposit account. - The balance in the foreign and domestic food reserve accounts is reported separately in the monetary data. ### Reporting of certain transactions in the fiscal accounts - National Aids Commission (NAC): - Financial operations of the NAC are included in the fiscal accounts according to the NAC’s financial reports. Expenditures are typically classified as development Part I expenditures. Government ministries and departments that execute projects financed by NAC report these activities to NAC for inclusion in the NAC’s financial reports. - Donor pool funded expenditures for the Health SWAp: - Donor pool resources are held in a U.S. dollar-denominated account at the RBM until expenditures need to be financed. - Donor funded expenditures for the Health SWAp from the pooled resources will be deemed to have been made in the amount of outflows from the donor pool account to finance expenditures (typically either to Malawi government No. 1 account in Malawi Kwacha, or to pay directly for imports by the health sector). - Attribution to personnel emoluments, other recurrent transactions, and development Part II expenditures is based on cash flow projections and established donor commitments (e.g., supplementary wages and salaries for professional health cadres). - Expenditures for other recurrent transactions are typically estimated as the residual: outflows less expenditures for wages and salaries less expenditures for development Part II. ### Reporting requirements (selected entries and frequencies) - Examples of data, reporting frequency, agency, and delivery lag include: - Gross international reserves, exchange rate, and foreign exchange purchases and sales — D R B M W 2 F E - Reserve money, OMO transactions, and RBM conversion of treasury bills — D R B M W 2 F E - Treasury bill and RBM bill auction results — W R B M W 2 F E - RBM balance sheet and broad money estimate — W R B M W 7 F E - Four-bank monetary survey — M R B M M 30 30 E - Central government domestic borrowing — M R B M M 30 30 E - Interest rates — M R B M M 30 30 E - Holdings of local registered stocks, treasury bills, and RBM bills — M R B M M 30 30 E - Issue and maturity profile for treasury bills and RBM bills — M R B M M 30 30 E - Excess reserves by bank — D R B M M 30 30 E - Details of project and balance of payment support — M R B M M 30 30 E - Monthly exchange rates — M R B M M 30 30 E - Bank statements of both the Health SWAp and government maize account held at the RBM — M R B M M 30 30 E - Seven bank monetary survey and full banking survey — M R B M M 45 15 E - Financial soundness indicators by banks — Q R B M Q 45 T 15 E - Fiscal table (GFS) including revenue, expenditure, and financing — M M O F M 30 30 E - Funding tables on wages, other recurrent expenditures, and development — M M O F M 30 30 E - CCA, supplementary CCA, and reimbursement report — M M O F M 30 30 E - Pro-poor spending — M M O F M 30 30 E - Tokyo-Mitsubishi account statements — M M O F M 30 30 E - Revenue data (from MRA) — M M O F M 30 30 E - New external loans contracted or guaranteed by the central government — Q M O F Q 30 T 30 E - List of nonreschedulable external arrears by creditor — 2/Q M O F Q 30 T 30 E (to be reported by DAMD, including a detailed explanation) - Borrowing of the ten major parastatals — 3/Q M O F Q 45 T 15 E - Quarterly financial statements of the ten major parastatals and MSB — Q M O F Q 45 T 15 H - Report on PRGF performance — Q M O F Q 45 T 15 E - Report on verified pre 30. June 2004 expenditure arrears — Q Au G Q 45 T 15 E - Report on new post 30. June 2004 arrears verified by AuG — Q Au G Q 45 T 15 E - Annual audited financial statements of the ten major parastatals and MSB — A M O F A 90 Mar. 30 H - Consumer price index and monthly statistical bulletin — M N S O M 30 30 E - Import and export data — M N S O M 45 T 15 E - Balance of payments, and quarterly statistical bulletin — Q N S O Q 45 T 15 E - National accounts, balance of payments, and quarterly statistical bulletin — A N S O B A 45 Mar. 15; Sep. 15 E - Notes: - D-Daily, W-Weekly, M-Monthly, Q-Quarterly, BA-Bi-annual, A-Annual; F-Friday, 30-Every 30th, T30-Every third 30th; E-Electronic, H-Hard copy. - 2/ To be reported by DAMD, including a detailed explanation. - 3/ Agriculture Development and Marketing Corporation, Air Malawi, Electric Supply Company of Malawi, Malawi Development Corporation, Malawi Housing Corporation, Malawi Postal Corporation, Malawi Telecommunications Ltd., Northern Regional Water Board, Central Regional Water Board, and Southern Region Water Board. - 1/ Detailed information on the amounts, currencies, terms, and conditions, including debt contracted or guaranteed by the RBM or any other agency on behalf of the central government. ### Malawi: Relations with the Fund (As of May 31, 2005) — selected items - Membership Status: Joined 07/19/1965; Article VIII (December 7, 1995) - General Resources Account (SDR million; Percent Quota): - Quota: 69.40 — 100.00 - Fund holdings of currency: 84.46 — 121.70 - Reserve position in Fund: 2.29 — 3.30 - SDR Department (SDR million; Percent Allocation): - Net cumulative allocation: 10.98 — 100.00 - Holdings: 0.34 — 3.08 - Outstanding Purchases and Loans (SDR million; Percent Quota): - Poverty Reduction and Growth Facility (PRGF) arrangements: 39.91 — 17.35 - Emergency Assistance: 57.50 — 25.00 - Financial Arrangements (type, approval date, expiration date, amount approved (SDR million), amount drawn (SDR million)): - PRGF 12/21/2000 12/20/2004 45.11 12.88 - PRGF 10/18/1995 12/16/1999 50.96 50.96 - Stand-by arrangement 11/16/1994 06/30/1995 15.00 12.73 - Projected Obligations to Fund (in millions of SDRs; based on existing use of resources and present holdings of SDRs): - 2005 forthcoming principal and charges/interest totals produce: Total 10.72 (principal and charges combined shown in table); 2006 total 18.74; 2007 total 13.93; 2008 total 5.71; 2009 total 4.41. - Implementation of HIPC Initiative (Enhanced Framework): - Decision point date 12/21/00 - Assistance committed (NPV terms): Total assistance (US$ million) 643.00; Of which: Fund assistance (SDR million) 23.14 - Delivery of Fund assistance (SDR million): Amount disbursed 6.94; Interim assistance 6.94; Completion point 0.00; Additional disbursement of interest income 0.00; Total disbursements 6.94. - Safeguards Assessments: - Under the Fund’s safeguards assessment policy, the Reserve Bank of Malawi (RBM) is subject to a safeguards assessment with respect to the requested Poverty Reduction and Growth Facility. An off-site assessment was conducted in July 2001, followed by an update assessment, completed in July. *Source: _cr05285 - 20. Definition of central government wages and salaries: Central government wages (PDF).* ### 2003. The latter concluded that the RBM had made progress in remedying vulnerabilities, and it ### _cr05285 - 2003. The latter concluded that the RBM had made progress in remedying vulnerabilities, and it ### Exchange Arrangements - The exchange rate regime: managed float. - Exchange rate on May 31, 2005: MK 119.5 = US$1.00. ### Article IV Consultation - Consultation cycle: standard 12-month. - Last Article IV consultation concluded by the Executive Board on October 18, 2004 (Country Report No. 04/380). ### Technical Assistance (selected entries) - 01/00 — Duration: 1 year — Dept.: STA — Recipient: National Statistical Office — Purpose: Statistics Advisor. - 06/00 — Duration: 1 year — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Revenue administration Advisor. - 11/00 — Duration: 2 weeks — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Improving fiscal data and commitment control Mission. - 9/01 — Duration: 1½ weeks — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Expenditure tracking and fiscal ROSC Mission. - 11/01 — Duration: 2 weeks — Dept.: MAE — Recipient: RBM — Purpose: Monetary operations and further developing financial markets Mission. - 02/02 — Duration: 2 weeks — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Expenditure policy Mission. - 05/02 — Duration: 6 months — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Expenditure management Advisor. - 07/02 — Duration: 2 weeks — Dept.: STA — Recipient: National Statistical Office (NSO), RBM — Purpose: GDDS Anglophone project on national accounts statistics Mission. - 08/02 — Duration: 2 weeks — Dept.: STA — Recipient: RBM — Purpose: Monetary and financial statistics Mission. - 02/03 — Duration: 2 weeks — Dept.: MAE — Recipient: RBM — Purpose: Monetary operations, payments system, banking supervision Mission. - 08/03 — Duration: 2 weeks — Dept.: STA — Recipient: NSO — Purpose: GDDS Anglophone project on balance of payments statistics Mission. - 09/03 — Duration: 2 weeks — Dept.: STA — Recipient: NSO, Ministry of Finance, RBM — Purpose: ROSC on the quality of macroeconomic data Mission. - 02/04 — Duration: 2 weeks — Dept.: MFD — Recipient: RBM — Purpose: Monetary operations, credit quality assessment, payments system, banking supervision Mission. - 04/04 — Duration: 2 weeks — Dept.: STA — Recipient: RBM — Purpose: Monetary and financial statistics Mission. - 01/05 — Duration: 2 weeks — Dept.: LEG/MFD — Recipient: RBM — Purpose: AML/CFT Mission. - 03/05 — Duration: 2 weeks — Dept.: FAD — Recipient: Ministry of Finance — Purpose: Tax Policy Mission. ### Resident Representative - Mr. Thomas Baunsgaard since August 16, 2004. ### IMF–World Bank Relations: Overview - World Bank CAS approved May 14, 2003 (Report # 25906 MAI) covering FY04-06 transitional program. - CAS organized under three pillars: - i) strengthening economic management; - ii) establishing a platform for growth; - iii) improving service delivery and strengthening the safety net. ### World Bank Financial Engagement (key figures) - Total lending to Malawi as of May 2005: US$2,437 million. - Disbursed: US$2,146 million. - Active projects: 13 with net commitment of US$376 million. - Undisbursed balance: US$234 million. - Sectoral breakdown: Rural at 9%, Transport at 8%, Public and Private Sector Development and Finance at 32%, Social Sectors at 51%. - IFC investments: "a meager US$1.16 (US$0.64 million in loans and US$0.52 million in" (text as provided). ### World Bank–Led Operations (selected projects and amounts) - Multi-Sectoral AIDS Project: US$35 million in grants (FY04–2008). - Health Sector Support Project: US$15 million in grants (approved December 2004) — three components to deliver the Essential Health Package (EHP), staff expansion, and system/referral improvements. - First Education Sector Support Project: US$32.2 million in grants (approved May 2005) — six components including teacher development, secondary school learning conditions, School Health and Nutrition package, basic learning materials, capacity building and policy support, and fiduciary/procurement support. - Secondary Education Project: US$48.2 million — slated to close December 2005. - MASAF III (social protection): US$60 million, of which US$27 million is an IDA grant (approved FY03). - Road Maintenance Project: US$30 million (approved FY99). - Privatization and Utility Reform Project (PURP): US$28.9 million (approved FY00) — being restructured. - Community based Rural Land Development Project: US$27 million (approved April 2004). - Mulanje Mountain Biodiversity Conservation Project: US$7 million (approved FY01). - Global Distance Learning Network Project: US$4 million (approved March 2004). - Emergency Drought Recovery Credit (EDRC): US$50 million, of which US$21 million is an IDA grant (approved FY03) — closed November 2004. ### Joint IMF–World Bank Lead Areas and Cooperation - Poverty Reduction Strategy (PRSP): - Malawi PRSP finalized April 2002. - Joint IDA-IMF staff assessment presented July 19, 2002; endorsed by IMF and World Bank Boards in August 2002. - First APR approved October 2003 — indicated limited MPRSP implementation. - Second APR and Joint Staff Assessment Note for July 2003–June 2004 to be submitted to Boards in mid-2005 — also indicates limited implementation. - Third APR (July 2004–June 2005) expected in late 2005. - Debt relief and HIPC: - "Malawi: Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative" presented to the Board on December 8, 2000. - Total amount of debt relief assistance to Malawi: equivalent to around $1.0 billion in nominal terms (US$643 million in NPV terms). - Debt relief delivery: between January 2001 and December 2020 by providing 55 percent relief on annual debt service due. - IDA share: accounts for 51 percent of entire external debt (and 69 percent of multilateral debt). - HIPC Activity Action Plan update for Malawi recently completed (jointly). - Budgetary planning and public expenditure reforms: - Structural Adjustment Credit FIMAG: US$50 million; first tranche US$25 million released September 2004. - FIMAG focuses on: (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) — supports accounting, auditing, public finance capacity, and introduction of IFMIS. - Civil service and wage reform: - Government began implementation of study recommendations at the end of 2004: streamlining allowances, consolidating them in the base for personal income tax, rationalizing salary grades, and moving towards a unified salary structure. Supported under the IMF Staff Monitored Program. - Humanitarian assistance: - Emergency Drought Recovery Credit (EDRC): US$50 million (US$21 million IDA grant) — objectives: maintain key commitments, restore productive capability, and support longer term disaster management. - IMF Emergency Assistance: US$23 million approved in September 2002 for drought-related balance of payments support. ### Areas Where the Fund Leads - Macroeconomic stability, fiscal policy, and monetary policy (section heading retained as in source). *Source: _cr05285 - 2003. The latter concluded that the RBM had made progress in remedying vulnerabilities, and it* ### 24. Malawi is confronted with a number of macroeconomic challenges, including a ### 24. Malawi is confronted with a number of macroeconomic challenges, including a ### Macroeconomic challenges and Fund engagement - Malawi faces repeated fiscal slippages, unpredictable monetary policies, a rapidly rising level of domestic debt, and a persistently high level of real interest rates. - The Fund will work with the authorities through financial support and technical assistance to address these challenges and make steady progress. ### A. Real sector — national accounts, prices, and trade - General finding: Real sector statistics (national accounts, prices, trade) need substantial improvements; source data are limited and quality and timeliness must be improved. Additional resources are needed by the National Statistics Office (NSO). - National accounts: - NSO compiles national accounts; final estimates are comprehensive but underpinning source data are inadequate due to gaps for medium- and small-scale establishments and informal activities. - Statistical techniques for national accounts compilation are deficient; processes to assess and validate source, intermediate and final data are generally limited. - National accounts are published in the Statistical Yearbook and Quarterly Statistical Bulletin with a significant time lag. - Note: coverage claimed 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 and the financial account." - Prices: - A consumer price index (CPI) is available timely. - CPI is based on the 1997/98 household survey; data are collected monthly by regional price collectors. - CPI effectiveness could be improved by applying systematic, comprehensive, and consistent approaches to the quality adjustment of product prices. - Trade: - Preliminary trade estimates are available with a lag of two to three months. - Trade data are received electronically from six major ports. - Adjustment of imports from c.i.f. to f.o.b. prices is described as not appropriate. - Data reconciliation with bordering countries is lacking. ### B. Government finance — data weaknesses and reporting - General finding: Fiscal data reported on a cash basis to AFR; administrative records are manual; serious quality problems and data inconsistencies complicate program monitoring. - Specific deficiencies: - Tax revenue data are timely, but reconciliation with deposits into the MG Account No. 1 is not always possible. - Nontax revenue collected by line ministries is not properly accounted for in Ministry of Finance fiscal reports; it also includes capital revenue. - Recurrent expenditure data suffer from shortcomings partly due to insufficient bank reconciliation at line ministry level; fiscal reports show spending based on funding data (from the Credit Ceiling Authority) while line ministries submit spending reports based on recorded expenditure, producing sizable discrepancies for wages and other recurrent transactions. - Domestically-financed development expenditure is reported based on funding released to line ministries; externally funded expenditure is reported based on project grants and loans. Timing and financing modality differences produce substantial differences between expenditure flows and corresponding financing data. - Many donor projects are not incorporated in the budget; corresponding expenditure is not captured in reports. Some externally funded development expenditures likely are of recurrent nature, causing erroneous capital expenditure reporting. - Expenditure arrears reporting is likely incomplete; reporting from the Commitment Control System appears partial and ministry-level data are inconsistent across reports. Previously unknown arrears have been cleared through the “special activities” vote, questioning the accuracy of arrears and clearance data. - Budget classification and chart of accounts: an output-oriented activities-based budget classification (ABB) is used; pro-poor expenditures protected under the PRSP are identified only in the ABB classification. No bridge table maps the ABB classification into the program classification used for expenditure reporting and accounting, preventing monitoring of pro-poor expenditures. - Financing estimates are based on monetary and debt data rather than government records of financing. Reporting on treasury bills directly issued to the RBM at times has been slow. - Technical assistance and actions: - Authorities have received significant technical assistance from the Fund and other donors to strengthen expenditure monitoring/reporting, accounting, and statistical reporting, but results have not been adequate. - The new government pledged to strengthen public financial management and fiscal reporting and is renewing efforts to establish a work plan and effectively utilize donor technical assistance. - Reporting to IMF publications: - Malawi is not reporting government finance data for inclusion in the Government Finance Statistics Yearbook (GFSY) or in International Financial Statistics (IFS). ### C. Monetary accounts — Reserve Bank of Malawi (RBM) reporting - RBM reports monetary and financial statistics (MFS) to STA on a regular basis; reported MFS generally align with Fund data needs. - Progress noted: - Significant progress implementing recommendations from the MFS mission of August–September 2002; one notable achievement is improved coverage of the monthly monetary survey, now accounting for more than 90 percent of the banking sector. - Remaining issues and recommendations: - Important recommendations yet to be implemented: improvements needed in 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: - An integrated database was developed for RBM, STA, and AFR publication and operational needs. - Standardized forms (SRF) for reporting monetary data to STA were discussed; RBM is examining the SRF with a view to reporting monetary data to the IMF using SRF as soon as feasible. ### D. Balance of payments - Concepts and definitions broadly conform to BPM4 guidelines; progress has been made toward BPM5 methodology. - NSO provided data to the IMF’s Statistics Department for the 2003 Balance of Payments Statistics Yearbook. - Compilation relies heavily on balance of payments surveys (services, direct investment flows, other financial private sector transactions) due mainly to liberalization of exchange controls. - Primary sources (surveys and/or ITRS reports) are supplemented with secondary sources: foreign trade statistics from MRA customs declarations, debt statistics from MOF, net foreign assets from RBM, and donor grant information. - Institutional note: NSO expanded its Lilongwe office to relocate some sections from Zomba. ### Common Indicators Required for Surveillance (as of June 30, 2005) - Presentation: table lists indicators with Date of latest observation, Date received, Frequency of data, Frequency of reporting data, Source of data, Mode of reporting, Confidentiality, Frequency of publication. - Date of latest observation entries include: 06/05, 06/05, 06/05, 06/05, 05/05, 06/05, 05/05, 11/04, 11/04, 05/05, 2002, 12/03. - Frequency codes: D = daily; W = weekly; M = monthly; Q = quarterly; A = annual. - Source codes: A = direct report by the authorities; N = official publication. - Mode codes: C = cable or facsimile; M = e-mail. - Confidentiality code: C = unrestricted use. ### External Debt Sustainability Analysis (Appendix V) - Purpose: DSA presents Malawi’s external debt sustainability over the medium term using the framework for external debt sustainability in low income countries. - Scope and caveats: - The implications of the recent G8 debt cancellation proposal and the recently approved IDA14 replenishment (which will increase the grant component) have not been incorporated. - The macroeconomic framework corresponds to the authorities’ medium-term program to be supported by the proposed PRGF arrangement and incorporates donor information and recent pledges to finance the food gap. - The framework assumes a mix of grants and loans heavily dependent on grants, reducing Malawi’s borrowing relative to previous projections. Assuming envisaged grants are provided, Malawi could be in a less risky position than in previous projections. - Results are preliminary; a detailed HIPC DSA based on loan-by-loan reconciled information will be conducted at the completion point. - Key baseline figures and assumptions: - Stock of external debt at end-2004: about US$3 billion nominal, equivalent to 159 percent of GDP. - New borrowing during 2000-04 remained in line with anticipated new borrowing at HIPC decision point (based on end-1999 data). - Largest creditors: multilateral institutions; Japan is the largest bilateral creditor. - External sector assumptions used in the DSA: - Export volumes: expected to grow at about 4 percent over 2006-10 and 4.8 percent from then onward. - Tobacco: about 50 percent of total exports at end-2004, slowly falling to 40 percent by 2022. - Authorities’ plans to improve roads and railway connections are expected to significantly improve non-traditional exports. - Import volumes: projected to grow at about 4.5 percent per year. - Foreign direct investment: envisaged to average US$35 million during 2005-14 and increase to about US$60 million in subsequent years. - Official grants: expected to remain at about 10 percent of GDP during 2005-14 and decline slightly thereafter. - Residual financing gaps covered by concessional loans. Expected large donor support would allow government to reduce average external borrowing from 4 percent of GDP during 2005-14 to 3 percent of GDP per year thereafter. - Loans are expected to jump to US$210 million during 2015-25. - Malawi is assumed to reach the HIPC completion point in mid-2006. - DSA results and sensitivities: - Baseline scenario suggests fragility of Malawi’s external debt to less concessional borrowing terms. - Under the baseline: - NPV of debt-to-export ratio (current-year exports) projected to decline from about 215 percent in 2004 to about 192 percent by 2015, then continue to decline thereafter. - External debt service as percent of exports expected to decline from 21 percent in 2004 to 8 percent in 2006 (after reaching the completion point), but increases to about 14 percent in 2015. - Bound tests show sensitivity to “export shocks”: - NPV of debt-to-export ratio peaks at 296 percent in 2010 from 209 percent in 2005 in the baseline scenario. - Debt service ratio jumps to 14 in 2015 after reaching 7 percent in 2006. - Policy threshold: - Based on World Bank CPIA indicators, Malawi is considered a medium performer. - Policy-dependent indicative upper threshold for a country like Malawi is 150 percent of NPV to exports; Malawi will reach this threshold only after 2024. - This underscores the importance of borrowing on highly concessional terms and actively seeking grant financing. *Source: _cr05285 - 24. Malawi is confronted with a number of macroeconomic challenges, including a* ### Conclusions: ### Conclusions ### External debt sustainability: outlook and concern - "The external debt sustainability should remain a serious concern over the medium term, even after reaching HIPC completion point." - "The significance of donors support and authorities commitment to prudent macroeconomic policies cannot be overstated and are critical for Malawi’s external debt sustainability." ### Borrowing strategy and financing terms - "The stress tests show that Malawi’s government should follow a prudent borrowing strategy, borrowing under high concessional terms only and increasing its reliance on grants." - Memorandum item: "Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 53 53 53 53 53 53 53 53 53 53 53 53" (as presented in the source table). ### Export dependence and structural reform - "Lowering dependence on tobacco and increasing diversification of exports would be key to Malawi’s debt sustainability. In this context, intensification of structural reforms is vital." ### Stress tests and indicators (selected results and sensitivity analysis) - Figure caption: "Malawi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2025 (In percent). Source: Staff projections and simulations." - Debt service-to-exports ratio (selected values shown in table): 17.1, 20.0, 21.2, 13.3, 7.7, 7.0, 7.0, 7.1, 7.3, 10.3, 10.9 (series as presented). - NPV of external debt (selected values shown): 55.7, 54.6, 56.2, 55.7, 54.8, 53.4, 52.1, 43.2, 28.6 (series as presented). - NPV of debt-to-exports ratio (selected values shown): 214.7, 209.1, 206.7, 205.6, 208.6, 210.9, 211.4, 192.2, 152.8 (series as presented). ### Key numerical decomposition of increase in NPV debt-to-exports ratio - "NPV of debt-to-exports ratio (as projected at decision point) 172.6" - "NPV of debt-to-exports ratio (actual) 231.0" - "Total increase 58.4 100%" - Components of the total increase: - "1. Due to changes in the parameters 55.7 95%" - "o/w due to changes in the discount rates 38.6 66%" - "o/w due to changes in the exchange rates 17.1 29%" - "2. Due to unanticipated new borrowing 0.9 1%" - "o/w due to higher than expected disbursements (1.6) -3%" - "o/w due to lower concessionality of the loans 2.4 4%" - "3. Due to changes in exports 22.5 39%" ### Selected macroeconomic and debt-related projections and assumptions (as presented) - External debt (nominal) series (selected values): 148.1, 165.7, 159.0, 153.2, 151.8, 145.2, 138.3, 130.8, 124.2, 93.5, 57.5 - Change in external debt (selected values): -15.2, 17.5, -6.7, -5.8, -1.4, -6.5, -7.0, -7.5, -6.6, -5.4, -2.7 - Identified net debt-creating flows (selected values): -9.6, 18.9, -3.5, 16.6, 9.0, 4.5, 3.4, 2.7, 2.8, 0.7, 0.0 - Non-interest current account deficit (selected values): 10.0, 6.0, 6.4, 5.0, 4.4, 4.9, 2.5, 4.2, 5.0, 4.7, 4.8, 3.1, 1.6, 2.8 - Endogenous debt dynamics (selected values): -17.7, 15.3, -7.6, 13.0, 7.9, 1.7, -0.2, -0.7, -0.7, -1.2, -0.7 - Effective interest rate (percent) (selected values): 0.8, 0.9, 1.0, 1.3, 0.3, 0.7, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.6, 0.7, 0.6 - Growth of exports of G&S (US dollar terms, in percent) (selected values): -1.9, 2.4, 2.1, 3.1, 8.5, 7.3, 8.5, 7.2, 4.6, 4.3, 4.9, 6.2, 5.7, 6.6, 6.0 - Growth of imports of G&S (US dollar terms, in percent) (selected values): 24.3, 8.9, 9.4, 6.7, 19.7, 13.6, -1.5, 6.8, 4.7, 7.0, 4.2, 5.8, 5.4, 5.4, 5.4 - Total gross financing need (billions of U.S. dollars) (selected values): 235.8, 159.5, 180.3, 142.3, 66.0, 105.3, 132.3, 135.9, 149.2, 176.9, 246.4 - Non-interest current account deficit that stabilizes debt ratio (selected values): 25.2, -11.5, 13.1, 10.7, 3.9, 10.8, 12.0, 12.2, 11.4, 8.5, 4.3 *Source: _cr05285 - Conclusions* ### 5. Other factors 2/(20.7) -35.4% ### 5. Other factors 2/(20.7) -35.4% ### HIPC debt relief and delivery - Total amount of debt relief assistance to Malawi is equivalent to around $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. - 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 cannot exceed one third of the total assistance to be provided by IDA (in NPV terms); Malawi will likely cease to benefit from interim debt relief by 2006/07 at the latest. - Debt relief will become irrevocable only after Malawi reaches the completion point. ### Completion point conditions and timing - Completion point prerequisites: - (i) Satisfactory macroeconomic performance: minimum 6-months track-record under a new PRGF arrangement. Good performance under the SMP started in June 2004; a new PRGF may begin in July 2005. A track-record could be established by January 2006 at the earliest. - (ii) One-year satisfactory MPRSP implementation: full MPRSP completed in April 2002 and endorsed in August 2002. First APR approved October 2003 indicated limited implementation. Second APR and JSAN (July 2003–June 2004) to be submitted mid-2005 and will again indicate limited implementation. Third APR (July 2004–June 2005) expected in late 2005. Satisfactory one-year implementation could be met at the earliest in late 2005. - (iii) Satisfactory implementation of outstanding completion point triggers. Substantial progress has been made, but several important triggers remain outstanding and some require well in excess of 12 months of sustained work. ### Completion point triggers — Specific outstanding items and status - Public expenditure: Implement IFMIS in four pilot ministries. - Status: Unclear. IFMIS was piloted in four ministries but never became operational. Government has decided to change the software and will restart IFMIS piloting and roll out to all ministries. - Safety nets: - Trigger: Rationalization and prioritization under the National Safety Net Strategy; establishment of monitoring and evaluation; transform universal starter-pack distribution into a Targeted Input Program (TIP) for 2001/02. - Status: 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. Monitoring and evaluation of some individual projects carried out, but evaluation of overall policy not started. TIP decision unclear—reverted to almost universal TIP in 2002/03 and 2003/04 due to food crisis; TIP abolished and government planning a generalized fertilizer price subsidy in 2005/06. - Health: - Triggers: Completion of ‘phase one’ reforms of the Central Medical Stores (CMS); a share of health expenditure of at least 13% of discretionary recurrent budget. - Status: Work on CMS reforms has proceeded slowly; reforms being discussed in context of Health SWAp. Health share: 15.2% for 2001/02 (revised budget) and 18.4% for 2002/03 (budget), but has decreased in recent years — status: Unclear. - Education: - Triggers: Yearly enrolment of 6000 students for teacher training and in-service training at least once each year; reallocate budgetary resources from secondary school boarding to teaching and learning materials (except for special needs); share of education sector expenditure in discretionary recurrent budget of at least 23%. - Status: Not met on enrolment—about 2850 teachers graduated in 2001/02, 3150 in 2002/03, approximately 3000 in 2003/04. Secondary schools still operating as boarding—Not met. Share of education: 29.1% for 2001/02 (revised budget) and 29.1% for 2002/03 (budget), but has decreased in recent years — Unclear. - Land policy: - Trigger: Submission of draft Land Law to parliament. - Status: Not met. Land policy adopted by cabinet in January 2003; submission of Land Law to Parliament expected in 2005. - Micro finance: - Trigger: Establishment of a monitoring system covering all micro-finance institutions. - Status: Not met. ### Completion point triggers — Items already met - Public expenditure: - Quarterly expenditure reporting as per format jointly developed by MOF/IDA. - Status: Met. Format agreed. Pro-poor expenditures are published on the government web site. - Micro finance: - Approval by Cabinet of the ‘Micro-finance Policy’. - Status: Met. Policy approved at end-October 2002. - Increase number of micro-finance clients by 20%. - Status: Probably met. (Difficult to verify). - Governance: - Separation of fiscal management and audit functions under new legislation. - Status: Met. New Audit Act and Financial Management Act approved by Parliament in May 2003. Procurement Act passed in May 2003. - Health: - Recruitment, training and deployment of at least 200 nurse technicians, 50 new medical assistants and 20 radiography technicians per annum. - Status: Met. Currently training over 500 nurse technicians; 130 medical assistants and 20 radiography technicians, respectively. - Budget for drugs and medical supplies in line with BHA standard (US$1.25 per capita). - Status: 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. - Status: Met. National AIDS Secretariat operational since end-2001. Need additional staffing to enhance NAC coordination effectiveness. - 75% of all condom outlet points with condoms in stock at any given time. - Status: Met. 80% availability in grocery shops, and 65 percent availability in public hospitals. (Difficult to verify) - Continuous availability of testing kits at all blood transfusion sites by increasing blood testing kits from 1500 to 2500. - Status: Met. More than 3000 testing kits have been supplied by end-2003. - Implementation of an effective Behavior Change Communication Strategy. - Status: Met. Implementation of communication strategy has started. - Syndromic Management of sexually transmitted infections (STI) in all Central, District and major CHAM hospitals. - Status: Met. - Education: - Pre-packaging of donor-supplied primary textbooks for each school and direct supply from the supplier to the schools. - Status: Met. Donor-supplied textbooks are pre-packed and directly supplied. ### IMF actions, approvals, and program support (Press Release No. 05/188 — August 5, 2005) - IMF Executive Board approved a three-year PRGF arrangement for Malawi in an amount equivalent to SDR 38.17 million (about US$55.9 million). - First disbursement under the program will amount to SDR 5.4 million (about US$7.9 million). - Executive Board also approved additional interim assistance under HIPC equivalent to SDR 4.628 million (about US$6.8 million) to be applied in broadly equal amounts in the remainder of 2005 and the first half of 2006. - The last PRGF arrangement was approved in December 2000 and expired in December 2004 after only one review; authorities requested an SMP covering July 2004 to June 2005 to build a performance track record. Performance under the SMP to date has been satisfactory. - World Bank emergency assistance: up to US$30 million likely to be disbursed—US$20 million was reported in the staff report. Authorities indicated additional funds will be used to reduce domestic debt, strengthening the macroeconomic objective of lowering domestic debt to less than 15 percent in the medium term. ### Staff statement developments and actions (Statement by IMF Staff Representative — August 5, 2005) - Two prior actions completed: parliamentary approval of the budget and implementation of a new pension formula. - 2005/06 budget approved by parliament on July 15 is consistent with the program and staff report. - Cabinet approved new pension formula on July 25: base salary for pension payments calculated as the average of the last five years. Circular issued to ministries on July 26 with immediate effect. - Recent estimates indicate a larger decline in the food crop than previously anticipated. Donors provided assurances of additional resources to cover the higher food shortfall without recourse to government resources. Staff will explore implications and aid modalities at the time of the first review. ### Recent economic developments and outlook (Annex) - Poverty and health context: - Two-thirds of the population live in poverty. - Incidence of malaria is very high. - Approximately 15 percent of the adult population is infected with HIV. - Growth and drought impact: - Real GDP growth rose from less then 4 percent in 2003 to 4.5 percent in 2004 due to a rebound in tobacco production. - Early 2005 drought estimated to have cut the maize harvest by about 25 percent, dampening overall economic growth prospects to about 2 percent in 2005. - Inflation: - Core (nonfood) inflation fell to 13.25 percent at the end of 2004, from more than 20 percent at the end of 2003. - Food price inflation rose over the period, increasing overall consumer price inflation. Early 2005 drought expected to push up food prices temporarily; depreciation of the kwacha expected to be partially passed through to nonfood prices. - Policy objectives over the next three years: - Raise economic growth to near 6 percent a year. - Increase health services and educational opportunities. - Reduce core inflation to the 5–8 percent range. - Run a fiscal surplus to reduce government domestic debt to less than 15 percent of GDP from over 24 percent. - Build international reserves to at least two months of imports. - Policy stance: - Fiscal policies aim to reduce government absorption of domestic resources while allowing increases in pro-poor and pro-growth spending to ease pressures on real interest rates and maintain a competitive exchange rate. - Structural reforms include repair/expansion of road network, completion of an interconnector from the Cahorra Bassa hydroelectric dam, and sale of Malawi Telecom. - Authorities committed to obtain/guarantee only concessional loans and to make every effort to secure grants due to critical external debt sustainability even after HIPC completion. - IMF membership and PRGF terms: - Malawi became a member of the IMF on July 19, 1965; quota is SDR 69.4 million (about US$101.7 million); outstanding use of IMF credit totals SDR 54.4 million (about US$79.8 million). - PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments. ### Key economic indicators (selected, as reported) - Real GDP growth: - 2002: 2.1 - 2003: 3.9 - 2004: 3.9 - 2005 (SMP Est.): 4.6 - 2006 (Proj.): 2.1 - 2007 (Proj.): 8.2 5.6 - Nominal GDP per capita (in U.S. dollars): - 2002: 163.0 - 2003: 145.8 - 2004: ... - 2005: 152.2 - 2006: 158.2 - 2007: 162.4 171.2 - Consumer prices (end of period): - 2002: 7.6 - 2003: 9.8 - 2004: 20.0 - 2005: 13.7 - 2006: 16.9 - 2007: 3.9 7.0 - Core (nonfood) inflation at end-2004: 13.25 percent - Maize harvest shock: cut by about 25 percent in early 2005 - External debt (public sector) as percent of GDP: - 2002: 143.3 - 2003: 158.9 - 2004: 160.7 - 2005: 150.0 - 2006: 143.7 - 2007: 139.3 131.0 - NPV of debt (percent of avg. exports): - 2002: 299.3 - 2003: 295.0 - 2004: ... - 2005: 291.0 - 2006: 274.4 - 2007: 255.8 240.9 - External debt service (percent of exports): - 2002: 18.3 - 2003: 21.8 - 2004: 21.1 - 2005: 22.9 - 2006: 18.9 - 2007: 21.8 20.3 - Net domestic debt (central government) as percent of GDP: - 2002: 17.4 - 2003: 22.3 - 2004: 27.3 - 2005: 22.9 - 2006: 22.0 - 2007: 18.0 15.0 - Domestic interest payment: - 2002: 4.0 - 2003: 7.9 - 2004: ... - 2005: 8.5 - 2006: 6.2 - 2007: 5.0 3.7 *Source: IMF staff report and associated statements and press release (August 5, 2005).* ### Introduction ### Introduction ### Overview - Malawian authorities request Executive Directors' support for a new PRGF-supported program and additional interim assistance under the HIPC Initiative. - Authorities agree with the staff assessment of recent economic developments and the challenges ahead. - Authorities report strong performance under the staff-monitored program (SMP), attributing success to prudent fiscal and monetary policies and renewed commitment to macroeconomic stability. ### Recent Economic Developments - Economic growth accelerated in 2004, following a rebound in tobacco production. - An early drought in 2005 led to a decline of about 25 percent in maize harvest, creating a potential humanitarian crisis. - Core inflation fell to 13¼ percent at end-2004 from over 20 percent at end of the previous year. - Early drought in 2005 is expected to push food prices up temporarily later in the year. - Real effective exchange rate remained stable since August 2003. - External current account deficit widened during 2004 despite a large increase in tobacco production due to lower-than-anticipated auction floor prices and slowed deliveries. - Imports increased strongly, influenced by strong economic expansion and higher world petroleum and fertilizer prices. - Foreign reserve cover was maintained at 1.4 months of imports, with recognition that this needs to be increased. ### The Medium-Term Reform Strategy - Overarching objective: reduce poverty by fostering an environment conducive to private-sector-led growth. - Program alignment: Malawi Poverty Reduction Strategy (MPRSP), Ex-Post Assessment recommendations, and lessons from SMP implementation. - Approval of a new PRGF arrangement is intended to help unlock donor support, including under the HIPC Initiative, to enable Malawi reach the MDGs by 2015. ### Fiscal Policy - Primary objective during the program period: domestic debt reduction and improved fiscal management. - Net domestic debt has risen to more than one-quarter of GDP due to borrowing over recent years. - Target: reduce domestic debt to 15 percent of GDP or less by 2008. - Domestic debt service expected to fall to near 5 percent of GDP in 2005/06 from over 7 percent of GDP in 2004/05. - External debt service currently about 1½ percent of GDP; expected to decline moderately upon reaching the HIPC completion point next year. - Policy aims to lengthen the maturity structure of debt stock and make the budget more stable and predictable. - Authorities request development partner assistance to reduce domestic debt, citing its heavy fiscal burden. ### Public Expenditure Management and Tax Policy - Near-term actions: restore management systems including accurate monthly expenditure returns, respect for funding ceilings, and application of approved accounting standards. - Medium-term action: implement an integrated financial management system. - Tax review completed aiming to make the system more competitive and business-friendly. - Authorities would like to reduce the overall tax burden but see little room now given current spending and determination to lower the debt burden. - Medium-term objective: rationalize and restructure government activities to create space for private sector growth. ### Monetary and Exchange Policy - Intend to further strengthen the independence of the Reserve Bank of Malawi to enhance credibility of monetary policy. - Monetary policy objective: bring inflation to 5-8 percent range over the medium-term. - Reserve Bank will target broad money stock as the nominal anchor to control inflation and will use a combination of open market operations and foreign exchange sales to influence liquidity conditions. - Exchange rate policy: commitment to a fully market-determined exchange rate, with smoothing of seasonal fluctuations and refraining from influencing its underlying value. - Authorities recognize that sound economic policies, especially prudent fiscal policy, are key to exchange rate stability. - Reserve target: strive to increase international reserves to above three months of import cover. ### Structural Reforms and Privatization - Commitment to create an environment for private sector development and privatize some remaining state enterprises to bolster efficiency, improve services, and potentially provide revenue. - Revised divestiture master-plan includes: - out-right sale of a number of state-owned enterprises; - closure of some enterprises; - promotion of public-private partnerships and mergers; - commercialization of enterprises where full privatization would lead to social concerns. ### External Policies - Heavy reliance on tobacco as the main export commodity leaves Malawi vulnerable to external shocks and local weather conditions. - Growth strategy includes initiatives to bolster non-tobacco exports, a liberal trade regime, and regional integration. - A revised Trade Agreement was signed with Zimbabwe in March 2005; negotiations with COMESA and SADC to further trade liberalization are at an advanced stage. - Authorities are studying the impact of the proposed COMESA Common External Tariff on industry competitiveness, revenue and employment. - Authorities concerned about erosion of trade preferences, noting that the pending elimination of the EU sugar regime in 2008 could adversely impact the second largest export. - Monitored expiration of global quota restrictions on textiles and clothing in December 2004. ### Food Security - Objective: ensure that all Malawians have sufficient food for a healthy and active life. - Vulnerabilities: dependency on rain-fed agriculture, changing weather patterns, growing population, and increased incidence of HIV/AIDS. - Medium-term agricultural policies will be market-based, including: - improve functioning of markets by removing practices restricting free competition in produce, food and input markets; - improve availability of fertilizer and other inputs at reasonable market prices and on time; - promote agricultural irrigation involving the private sector and local communities; - enhance agricultural research and extension services, transport and other infrastructure. - Commitment to provide public resources to support the agricultural sector based on fiscal sustainability in the long term. ### HIPC Completion Point - Malawi had an unsustainable external debt burden that, in NPV terms at end-2004, exceeded 200 percent of exports. - Authorities aim to reach completion point under the HIPC Initiative to lock in debt relief from creditors. - Authorities anticipate being in a position to reach the completion point mid-2006. ### Conclusion - Authorities reiterate strong commitment to reforms and addressing economic challenges. - Authorities seek stronger engagement with the Fund and international community under a PRGF-supported program and look forward to favorable consideration by the Executive Board. *Source: _cr05285 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05285.pdf_