## _cr1087 - Executive Summary ## Source details **Canonical URL:** [_cr1087 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1087.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1087.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1087.pdf.json) --- ### Executive findings and headline indicators - Real GDP growth: 9.8 percent in 2008; estimated 7.6 percent in 2009; staff estimate 7.7 percent in 2009. - Consumer price inflation: 7.6 percent in the 12 months ending December 2009. - RBM policy rate: 15 percent in 2008 and 2009. - Broad money growth: 33.1 percent (end-December 2008) and 19.4 percent (12-month basis at end-October 2009). - Financial sector: well-capitalized and profitable with low nonperforming loans; bank spreads remain high. - ESF arrangement: one-year ESF expired on December 2, 2009; first tranche SDR34.7 million (US$51.4 million) drawn after approval on December 3, 2008. - Staff recommendation: support for a three-year ECF arrangement with access of 75 percent of quota. ### Fiscal and program performance under the ESF - Fiscal loosening ahead of May 2009 elections led to high government domestic borrowing in fiscal year 2008/09 and rapid money and credit growth. - Major budget overruns in fiscal year 2008/09 on fertilizer and goods and services caused missed end-June 2009 ESF program targets on: - net domestic repayment of the central government, - net domestic assets and net international reserves of the RBM. - FY 2009/10 budget described as returning to a prudent fiscal stance targeting repayment of net domestic borrowing in line with medium-term objectives. - Decision: pursue a three-year ECF arrangement rather than extend the ESF. ### External position, reserves, and foreign exchange market - External position: weak; higher-than-programmed external current account deficit in 2009 driven by rapid import growth despite high tobacco prices in 2008. - Official reserves: fell to less than one month of prospective imports at end-December 2009. - Consequences of FX shortages: private import payment arrears, sizeable spreads between official and bureau/parallel rates, and queues at commercial banks for foreign exchange. - Policy actions: RBM modified and later reverted surrender directives for export earnings in late 2008 and late 2009/early 2010, affecting routing of export foreign exchange. ### Exchange rate assessment and competitiveness - Staff estimate: REER overvalued within a broad range of about 5 to 28 percent. - Nominal exchange rate: de facto pegged to the U.S. dollar at about 141 kwacha per U.S. dollar from 2006 to early November 2009. - CGER methodologies indicate overvaluation: - Macroeconomic Balance: current account norm around 1 percent of GDP vs. projected 5.6 percent deficit. - External Sustainability: required REER depreciation ranging from 13.2 to 27.5 percent to achieve three months of imports. - Equilibrium Real Exchange Rate: overvaluation of about 5.3 percent. - Conclusion: sizeable gap between REER and equilibrium real exchange rate remains. ### Policy actions, risks, and required adjustments - Authorities have begun: - initial foreign exchange market liberalization steps, - gradual depreciation of the exchange rate, - strengthened budgetary spending controls. - Continued policy adjustment and external support are critical to restore external sustainability and reserve buffers. - Sustained FX queues and parallel market premiums damage growth by constraining import financing, increasing uncertainty, encouraging informality, and encouraging trade invoicing distortions. --- ### Box 3 — Economic Performance under Recent Fund Arrangements ### Recent Fund arrangements and performance - Arrangements since September 2004: PRGF (August 2005–August 2008) and ESF (December 2008–December 2009). - PRGF performance: largely successful; domestic borrowing exceeded initial fiscal targets but domestic debt share fell; HIPC relief in 2006 lowered overall debt burden; monetary restraint lowered inflation and interest rates; key weakness was lower-than-expected reserve build-up. - ESF performance: less successful; initial disbursement helped weather 2008 shocks but slippages in first half of 2009—especially public spending—led to much higher domestic borrowing and lower reserve accumulation; no program reviews completed. ### Poverty, MDGs, and MGDS - Gross national income per capita: around US$250 in 2007. - MGDS emphasizes sustainable growth, social protection and development, infrastructure development, and improved governance. - Third annual review of the MGDS to be finalized in February 2010. ### ECF-supported program objectives - Restore external equilibrium by: - liberalizing the foreign exchange regime for current account transactions and eliminating measures inconsistent with Article VIII by end-2011; - attaining international reserve coverage of a minimum of three months of imports by end-2012. - Maintain internal equilibrium by: - prudent fiscal and monetary policies in FY 2009/10 and restrained monetary aggregate growth. - Sustain poverty reduction by: - creating room for more social and pro-poor spending and improving social safety nets. - Build competitiveness by: - improving public financial management and tax administration, enhancing business climate and infrastructure, and reforming legal and regulatory frameworks. ### Return to fiscal and monetary discipline (selected commitments) - Programmed overall central government deficit equals the legislated budget. - Target: repayment of net domestic borrowing of 1.2 percent of GDP in FY 2009/10 (compared to 0.8 percent in the legislated budget). - Commitments: cut lower priority expenditures or shore up revenues while protecting social spending if execution falls short. - Memorandum items: presidential jet first-year payment US$4.4 million or 0.08 percent of GDP; support to cotton producers 0.07 percent of GDP—both to be offset within existing budget ceilings. - Parastatals: announced tariff adjustments for electricity and water; no central government absorption of Air Malawi’s debts in FY 2009/10. - Monetary policy: reserve money programmed to grow by about 16 percent in 2010 (about the same as projected nominal GDP growth); tools include open market operations and treasury bills. ### Anchoring external sustainability and FX liberalization - Prior actions: RBM reversed surrender requirements in late 2009/early 2010; exchange rate managed with some flexibility; by early-February 2010 exchange rate at about 151 kwacha per U.S. dollar. - Staff assessment: 141 peg unsustainable; need balance between demand management and exchange rate adjustment to restore external equilibrium. - Program commitments: re-establish active interbank FX market; reduce RBM market role; improve transparency; reduce queues and exchange rate premiums substantially in 2010 and remove current account restrictions by 2011. ### Building reserves and external adjustment - Strategy: narrow current account deficit by reducing non-aid financed domestic demand through fiscal and monetary consolidation and exchange rate adjustment and liberalization. - Program envisages improvement in savings-investment balance of 6.8 percent of GDP between 2009 and 2010. ### Text Table: Savings-Investment Balance and Reserve Accumulation, 2008–14 (percent of GDP / US$ millions) - National savings: 18.2 15.2 24.6 21.9 21.3 20.4 21.1 - Government savings: 4.0 1.4 11.3 9.0 10.0 9.2 9.6 - Private savings: 14.1 13.7 13.3 12.9 11.3 11.2 11.4 - National investment: 24.5 23.8 26.4 22.4 22.8 22.7 23.7 - Saving-investment balance: -6.4 -8.6 -1.8 -2.2 -1.5 -2.3 -2.7 - Usable gross official reserves (US$ millions): 239.0 114.0 276.9 407.3 611.5 750.0 845.0 - Reserves (months of imports): 1.3 0.6 1.4 2.1 3.0 3.4 3.8 - Current account (percent of GDP): -6.4 -8.6 -1.8 -2.2 -1.5 -2.3 -2.7 ### Structural reforms and benchmarks - Prior action: transparent accounting of fertilizer subsidy execution in FY 2008/09 and FY 2009/10 budgeted figures. - First-year structural measures: operationalize PFEM unit; time-bound plan to restart and liberalize interbank FX market; continue financial sector reforms and improve policy transparency. - Final two years: continue improving transparency and solvency of public utilities. ### Economic outlook and risks - Medium-term outlook favorable conditional on successful ECF implementation; growth expected to remain buoyant but more moderate than recent past. - Growth drivers: Kayelekera uranium mine expansion; possible exploitation of niobium; sugar sector investments; SADC market access. - Inflation expected to remain moderate, below 10 percent; depreciation pressures in 2010 manageable with solid maize harvest, stable fuel prices, and restrained policies. --- ### Reserve Position, Projections, and Debt Sustainability ### Reserve position and projections - Reserves projected to rise from: - 114.0 (US$ millions) in 2009 to 276.9 in 2010, 407.3 in 2011, 611.5 in 2012, 750.0 in 2013, and 845.0 in 2014. - Reserves (months of prospective imports): 0.6 in 2009; 1.4 in 2010; 2.1 in 2011; 3.0 in 2012; 3.4 in 2013; 3.8 in 2014. - Program projection: international reserves to rise to 1.4 months by end-December 2010 and to three months by end-December 2012. - Selected macro projections (growth / inflation / current account / reserves): - Growth (percent change): 7.7, 6.0, 6.3, 6.6, 6.8, 7.1 - Inflation (eop, percent change): 7.6, 9.2, 8.5, 7.2, 6.8, 6.0 - Current account (percent of GDP): -8.6, -1.8, -2.2, -1.5, -2.3, -2.7 - Reserves (US$ millions): 114.0, 276.9, 407.3, 611.5, 750.0, 845.0 - Reserves (months of prospective imports): 0.6, 1.4, 2.1, 3.0, 3.4, 3.8 ### Debt sustainability and financing - Updated LIC DSA: no immediate concerns; overall risk of debt distress: moderate. - Foreign debt modest after HIPC; domestic debt low but projected to rise with increased infrastructure investment financed with concessional debt. - Debt service peak to Fund if purchases made as scheduled: US$32.1 million in 2018 (1.7 percent of exports). - Projected donor and official financing: average US$200 million per year in budget support (seven-eighths grants); Malawi receives around US$800 million per annum in official aid, three-quarters channeled through the budget. ### Key downside risks (listed) - Lack of a market-based exchange rate. - Changes in international environment for tobacco consumption. - Reliance on rain-fed agriculture and drought risk. - Business policies that discourage investment. - Poor infrastructure (electricity and water). - Uncertainties in the external environment (slower global recovery). ### Program access, disbursement schedule (SDR amounts) - February 19, 2010: 6.94 — Executive Board approval of three-year ECF. - November 1, 2010: 6.94 — Completion of first review and observance of end-June 2010 PCs. - May 1, 2011: 6.94 — Completion of second review and observance of end-December 2010 PCs. - November 1, 2011: 6.94 — Completion of third review and observance of end-June 2011 PCs. - May 1, 2012: 8.10 — Completion of fourth review and observance of end-December 2011 PCs. - November 1, 2012: 8.10 — Completion of fifth review and observance of end-June 2012 PCs. - February 1, 2013: 8.09 — Completion of sixth review and observance of end-October 2012 PCs. --- ### Fiscal, Monetary, and Structural Program Details ### Central government operations (levels and percent of GDP highlights) - Total revenue and grants (levels): 32,167 44,082 48,752 45,292 67,189 68,423 74,168 81,146 - Part II (domestically financed) levels: 14,573 13,137 28,695 21,295 32,232 37,043 47,406 58,943 - Overall balance (including grants) levels: -36,722 -21,453 -12,861 -12,576 -19,936 -15,663 -17,915 -19,507 - Total revenue and grants (percent of GDP): 4.9 6.8 6.4 6.0 7.6 6.8 6.4 6.2 - Overall balance (including grants) (percent of GDP): -5.7 -3.3 -1.6 -1.7 -2.3 -1.5 -1.5 -1.5 ### Monetary authorities and monetary survey (selected levels) - Reserve money: 36,047 42,180 52,309 55,326 46,128 53,597 - Net foreign assets (NFA) (kwacha terms): 16,402 -5,804 1,369 -1,251 -14,867 6,488 - Money and quasi-money: 139,643 140,614 155,365 175,510 166,781 194,578 - Credit to private sector: 68,143 72,658 83,201 87,489 88,510 114,430 - Six-month t-bill rate (memorandum): 13.3 11.4 13.3 12.7 ...... ### Financial soundness indicators (selected) - Gross assets: 128,522.6 173,266.1 201,546.3 219,654.1 - Gross loans: 54,722.6 73,448.0 79,599.1 98,256.5 - Non-performing loans: 2,246.1 2,113.5 2,599.4 3,139.2 - Deposits: 92,301.4 105,651.1 128,176.3 138,971.4 - Capital: 15,159.7 15,448.1 18,308.2 22,786.1 - Key ratios: - NPLs to gross loans: 4.1 2.9 3.3 3.2 - Net performing loans to gross loans: 95.0 96.4 96.2 96.3 - Return on assets: 4.7 2.1 4.2 2.4 - Return on equity: 39.6 23.9 46.2 22.8 ### Balance of payments (selected) - Current account balance (including grants) (US$ millions): -271.3 -426.9 -95.6 -125.3 -93.9 -152.8 -196.9 - Merchandise trade balance: -753.6 -804.8 -619.9 -613.3 -561.8 -602.7 -677.4 - Exports (US$ millions): 969.2 1,004.8 1,119.9 1,229.7 1,340.3 1,407.4 1,473.1 - Tobacco: 586.5 569.8 512.8 528.2 544.0 560.3 577.2 - Uranium: ... 24.0 182.0 203.0 200.0 198.0 176.0 - Imports (US$ millions): -1,722.8 -1,809.6 -1,739.8 -1,843.0 -1,902.1 -2,010.2 -2,150.5 - Usable gross official reserves (US$ millions) (memorandum): ... 114.0 276.9 407.3 611.5 750.0 845.0 - Months of imports (memorandum): 1.3 0.6 1.4 2.1 3.0 3.4 3.7 ### Program indicative targets and criteria (Sept. 2009–Dec. 2010) — selected - Monetary targets (millions of kwacha): - Ceiling on net domestic assets of the RBM (PC): 56,577 (Sept. 2009); Actual end-Mar 2010: 53,549; End-Jun 2010: 52,411; End-Sept 2010: 49,674; End-Dec 2010: 47,577. - Ceiling on reserve money (IT): 55,326 (Sept. 2009); Actual end-Mar 2010: 44,479; End-Jun 2010: 52,599; End-Sept 2010: 60,806; End-Dec 2010: 53,597. - Fiscal targets (millions of kwacha): - Ceiling on central government's net domestic borrowing (PC): 139,251 (Sept. 2009); Actual end-Mar 2010: 9,104; End-Jun 2010: -11,730; End-Sept 2010: -10,713; End-Dec 2010: -1,179. - External targets (US$ millions unless indicated): - Floor on net international reserves of the RBM (PC): 77 (Sept. 2009); Actual end-Mar 2010: 17; End-Jun 2010: 76; End-Sept 2010: 147; End-Dec 2010: 131. - Ceilings on accumulation of external payment arrears and new nonconcessional external debt: 0 across dates. - Foreign exchange queues: reduction targets of 25 (end-Jun 2010) and 50 (end-Dec 2010) percent relative to starting stock US$127.6 million. - Spread between bank bureau midrate and official midrate: reduction targets of 25 (end-Jun 2010) and 50 (end-Dec 2010) percent vis-à-vis spread of 20.7 percent as of Nov. 30, 2009. ### Prior actions and structural benchmarks (2009–10) - Prior actions met: - Reversal of 20 percent surrender requirement on all exports except tobacco; reversal of tobacco surrender requirement to RBM; enhanced nominal exchange rate flexibility; transparent accounting of fertilizer spending. - Structural benchmarks and target dates: - Make PFEM unit fully operational by 31-Dec-10. - Develop time-bound action plan to restart interbank market by 30-Jun-10. - Publish weekly RBM auction amounts and results by 30-Jun-10. - Cabinet approval of Financial Sector Development Strategy by 31-Dec-10. --- ### Debt Sustainability, Stress Tests, and Scenarios ### LIC DSA key findings and baseline assumptions - Risk assessment: medium risk of external debt distress. - External public debt end-2008: US$683.1 million (90 percent multilateral). - Baseline assumptions include robust real growth, gradual external current account reduction, continued concessional financing, and mining projects (Kayelekera uranium) operating. ### Baseline and stress-test outcomes (selected) - PV debt-to-exports: 64 percent in 2009; 79 in 2014; peaks at 128 percent in 2024. - PV external debt to GDP: around 14 percent after HIPC; stabilizes around 22 percent. - PV debt-to-revenues: remains under 100 percent throughout projection. - Debt-service-to-exports: expected to remain under 10 percent. - Country-specific tobacco shock: permanent one-third fall in tobacco prices would raise debt-to-export ratio by almost 30 percentage points over medium term and marginally exceed 150 percent threshold after 2022 for a short period. - Depreciation scenario: 21 percent depreciation start-2010 assumed to raise export growth by 3 percentage points p.a. in 2010–13; short-term PV external debt-to-GDP 2 percentage points higher in 2010; medium/long-run debt-to-export ratios could peak about 20 percentage points lower than baseline conditional on appropriate policy. ### Public debt sustainability - Public sector PV debt-to-GDP: just under 35 percent in 2009; projected to decline to under 25 percent by end of projection period. - Public sector debt-to-revenue: expected to decline from 115 percent to just under 90 percent. - Debt service-to-revenue: expected to remain under 10 percent. --- ### Monitoring, Conditionality, and Data Issues ### Program monitoring and conditionality - Performance criteria and indicative targets on: - net domestic assets and net international reserves of RBM, - net domestic borrowing of central government, - reserve money (indicative), - floor on social spending (indicative). - Continuous performance criteria: non-accumulation of government external payment arrears; no new contracting/guaranteeing of nonconcessional external debt. - Supplemental monitoring for FX market pressures: - Monthly RBM/Fund measurement of commercial banks’ queues for FX, gaps between bank bureau and official rates, and reserve accumulation. - Semi-annual reviews: first review by November 20, 2010; second review by May 20, 2011. ### TMU definitions, adjustment clauses, and reporting - NIR definition: gross reserves minus IMF and other short-term liabilities; valuation in U.S. dollars using program cross exchange rates. - NDA definition and adjusters: NDA ceilings adjust for budget support, SWAp donor inflows, debt service payments, and liquidity reserve requirement changes with specified caps (e.g., US$10 million, US$20 million depending on clause). - CGDB definition: comprehensive definition including net borrowing from RBM, commercial banks, nonbanks, and promissory notes; ceilings measured as change since June 30, 2009. - External payment arrears and nonconcessional external debt: monitored continuously; nonconcessional if grant element < 35 percent. - Reporting requirements: extensive timetable of weekly, monthly, quarterly, and annual data submissions by RBM, MOF, NSO and others with specified lags and modes. ### Data issues and capacity building - Data provision: broadly adequate for surveillance and monitoring but shortcomings in quality and timeliness remain. - Weak areas: national accounts, government finance statistics, monetary and financial statistics, external sector statistics. - STA recommendations: assign responsibilities to Ministry of Finance and RBM; implement IFMIS; improve coverage, classifications, and reporting; strengthen NSO staffing and source data. - Technical assistance priorities: public financial management, tax and customs administration, monetary and exchange rate management, statistics, and legal drafting. --- ### Conclusions and IMF Staff Appraisal (selected judgments and recommendations) ### Key staff judgments - Malawi weathered global downturn well with continued high growth and moderate inflation. - Post-election period provides opportunity to restore external equilibrium while sustaining growth and poverty reduction. - Fiscal overruns in FY 2008/09 are being addressed in FY 2009/10 with improved control of discretionary spending. - Monetary policy tightened after earlier easing; RBM actively absorbing liquidity overhang; control of credit growth essential. - Financial system resilient, well-capitalized, and profitable. - Recent FX liberalization measures and modest nominal depreciation are encouraging but further adjustment and external support are critical. ### IMF staff recommendations - Support a three-year ECF arrangement with access of 75 percent of quota to: - liberalize the foreign exchange regime, - build reserves, - strengthen fiscal sustainability and anti-poverty activities. - Eliminate Malawi’s breach of commitments under Article VIII. - Next Article IV consultation recommended within 24 months, subject to program-country consultation cycle decisions. *Source: Executive Summary, _cr1087 - Executive Summary.* ### Executive Summary ...................................................................................................... ### _cr1087 - Executive Summary ### Executive findings and headline indicators - Malawi’s agricultural-based economy recorded growth of 9.8 percent in 2008 and an estimated 7.6 percent in 2009. - Staff estimates cite real GDP growth of 7.7 percent in 2009 (Tables 1a and 1b; text figure). - Consumer price inflation decreased to 7.6 percent in the 12 months ending December 2009. - The financial sector remains well-capitalized and profitable, with low nonperforming loans (Table 3c), though bank spreads remain high. - The RBM’s policy rate remained at 15 percent in 2008 and 2009; the six-month t-bill rate fell slightly during the year. - Broad money growth: 33.1 percent (end-December 2008) and 19.4 percent (12-month basis at end-October 2009). ### Fiscal and program performance under the ESF - Fiscal loosening in the run-up to the May 2009 elections led to high government domestic borrowing in fiscal year 2008/09 and rapid money and credit growth. - Sizeable budget overruns on fertilizer and goods and services in fiscal year 2008/09 caused high domestic borrowing; end-June 2009 ESF program targets on net domestic repayment of the central government and on net domestic assets and net international reserves of the RBM were missed by wide margins. - The fiscal year 2009/10 budget is described as returning to a prudent fiscal stance, targeting repayment of net domestic borrowing in line with medium-term objectives. - The one-year ESF arrangement expired on December 2, 2009, without completion of any reviews. A first tranche of SDR34.7 million (US$51.4 million) was drawn after Executive Board approval on December 3, 2008. - Given the medium-term nature of Malawi’s difficulties, staff and the authorities agreed to pursue a three-year ECF arrangement rather than extend the ESF. ### External position, reserves, and foreign exchange market - Malawi’s external position is weak; high tobacco prices buoyed exports in 2008 while fertilizer and fuel prices and rising incomes and public spending drove rapid import growth, producing a higher-than-programmed external current account deficit in 2009. - Official reserves fell to less than one month of prospective imports at end December 2009, well below a prudential three months or more of import cover. - Persistent foreign exchange shortages have produced private import payment arrears, sizeable spreads between the official exchange rate and bureau/parallel rates, and queues at commercial banks for foreign exchange (Box 1). - As of late 2009, authorities indicated that all private import payment arrears had been cleared, though the banking sector continued to face difficulties meeting foreign exchange demands for current account purposes. - The RBM modified and later reverted directives on surrender requirements for export earnings in late 2008 and in late 2009/early 2010, affecting the routing of export foreign exchange between the RBM and commercial banks. ### Exchange rate assessment and competitiveness - Staff estimate that the real effective exchange rate (REER) is overvalued within a broad range of about 5 to 28 percent, impairing Malawi’s competitiveness. - The official nominal exchange rate was de facto pegged to the U.S. dollar at about 141 Malawi kwacha per U.S. dollar from 2006 to early November 2009. - The REER appreciated strongly in 2008 and early 2009 due to a strengthening U.S. dollar and inflation differentials; since then the REER has depreciated as the kwacha and the U.S. dollar weakened against many of Malawi’s trading partners, with some nominal depreciation of the kwacha. - Three CGER methodologies consistently indicate REER overvaluation: - Macroeconomic Balance approach suggests a current account norm around 1 percent of GDP versus a 5.6 percent projected deficit and implies a significant depreciation need. - External Sustainability approach implies a required REER depreciation ranging from 13.2 to 27.5 percent to achieve reserves of three months of imports, depending on assumed current account elasticity. - Equilibrium Real Exchange Rate approach suggests a smaller overvaluation of about 5.3 percent. - Staff conclude there remains a sizeable gap between the REER and the equilibrium real exchange rate (Box 2). ### Policy actions, risks, and required adjustments - Authorities have begun measures to address the external imbalance, including initial steps at foreign exchange market liberalization, gradual depreciation of the exchange rate, and strengthened budgetary spending controls. - Continued policy adjustment and external support are described as critical to restoring external sustainability and reserve buffers. - Foreign exchange queues and parallel market premiums, if sustained, are noted to be damaging to growth by constraining import financing, increasing business uncertainty, encouraging informality, and encouraging trade invoicing distortions. ### IMF engagement and recommended program - Staff support the authorities’ request for a three-year arrangement under the ECF with access of 75 percent of quota to support Malawi’s efforts to sustain high growth and poverty reduction underpinned by sound macroeconomic and exchange rate policies consistent with the Malawi Growth and Development Strategy. _Italic: Source: Executive Summary, _cr1087 - Executive Summary._ ### Box 3. Economic Performance under Recent Fund Arrangements ### Box 3. Economic Performance under Recent Fund Arrangements ### Recent Fund Arrangements and Performance - Malawi had two arrangements since September 2004: a PRGF arrangement (August 2005 to August 2008), and an ESF arrangement (December 2008 to December 2009). - Performance under the PRGF arrangement: - Largely successful. - Domestic borrowing exceeded initial fiscal targets, but domestic debt as a share of GDP sharply declined. - HIPC debt relief in 2006 lowered the overall debt burden. - Monetary restraint led to much lower inflation and interest rates. - Key weakness: lower-than-expected build-up in international reserves due to much higher imports than projected, large cumulative terms of trade declines, lower-than-expected budget support, over-borrowing relative to initial targets, and lack of exchange rate flexibility. - Performance under the ESF arrangement: - Less successful. - Initial disbursement helped weather 2008 shocks from high international fuel and food prices and catalyzed additional donor support. - Important program slippages in the first half of 2009—especially in public spending—led to much higher domestic borrowing than expected and lower reserve accumulation. - No program reviews were completed as a result of these slippages. ### Poverty, MDGs, and Development Strategy - With gross national income per capita at around US$250 in 2007, Malawi remains one of the poorest countries in the world. - HIV/AIDS is prevalent; electricity and running water availability are limited. - Malawi Growth and Development Strategy (MGDS) emphasizes: sustainable growth, social protection and development, infrastructure development, and improved governance. - The third annual review of the MGDS (Malawi’s PRSP) will be finalized in February 2010. ### Program Objectives (ECF-supported program) - Restoring external equilibrium by: - Liberalizing the foreign exchange regime for current account transactions to allow a market-clearing exchange rate and eliminating measures inconsistent with Article VIII by end-2011. - Attaining international reserve coverage of a minimum of three months of imports by end-2012. - Maintaining internal equilibrium by: - Pursuing prudent fiscal and monetary policies as reflected in the fiscal year 2009/10 budget and through restrained monetary aggregate growth to contain aggregate demand and inflation pressures and shift demand toward domestic output. - Sustaining poverty reduction efforts by: - Creating room in the budget for more social and pro-poor spending. - Improving the structure of the social safety net to protect poor households from shocks and policy adjustments, including exchange rate depreciation. - Building competitiveness by: - Improving public financial management, tax administration, and the efficiency and solvency of public utilities. - Enhancing the business climate by expanding infrastructure capacity and quality, promoting investor access to finance, and reforming legal and regulatory frameworks governing financial supervision and other key economic activities. ### A Return to Fiscal and Monetary Discipline - The programmed overall central government deficit equals the legislated budget. - Target: repayment of net domestic borrowing of 1.2 percent of GDP in fiscal year 2009/10, compared to 0.8 percent of GDP in the legislated budget. - Fiscal year 2009/10 budget addresses last year’s overspending through improved control of discretionary spending, including on goods and services and fertilizer. - Commitments and contingent measures: - Authorities committed to cutting lower priority expenditures or shoring up revenues while protecting social spending if budget execution falls short of the domestic repayment target. - Indicative target included for a floor on social spending. - Costs associated with the newly purchased presidential jet: first-year payment of US$4.4 million or 0.08 percent of GDP out of a total cost of US$22 million; support to cotton producers: 0.07 percent of GDP — both to be incorporated into existing budget ceilings through offsets of lower priority expenditures. - Parastatals: - Announced adjustments to electricity and water tariffs to cover a higher percentage of operating costs. - Committed not to absorb any costs for restructuring or paying off Air Malawi’s debts in this fiscal year’s central government budget; to devise a cost-effective plan for Air Malawi over the medium term. - Medium-term fiscal framework: - Fiscal year 2010/11 and medium-term budgets to be formulated with a similar domestic repayment target and adherence to a modest overall deficit under 3 percent of GDP. - Importance of strengthening tax and customs administration; broaden key tax bases to allow the value-added tax rate to be reduced to regional norms and offset impacts of further tariff reforms. - Authorities intend to reform the social safety net and consider expansion of a donor-financed pilot income transfer program that currently covers 7 of 26 districts and would cost US$68 million when scaled up to all districts. - Public financial management: - Continued reforms needed; make fully operational the Public Financial and Economic Management (PFEM) unit in the Ministry of Finance and produce timely, consolidated, and reconciled accounts. - Monetary policy orientation: - Oriented toward price stability, adequate credit to the private sector, supporting reserve accumulation and a properly valued exchange rate. - Monetary policy anchored in a target for reserve money programmed to grow by about 16 percent in 2010 (about the same as projected nominal GDP growth). - Tools: active use of open market operations with RBM and treasury bills to control growth of monetary aggregates. - Agreed need to rely more on interest rate adjustments over time to control inflation, though potential is limited because broader considerations are at times taken into account in setting rates. ### Anchoring External Sustainability and Foreign Exchange Market Liberalization - Prior actions and commitments: - RBM directives in late 2009 and early 2010 reversed earlier foreign exchange surrender requirements to RBM, increasing the role of commercial banks. - In November 2009, RBM announced exchange rate would be managed with some flexibility; by early-February 2010, the exchange rate had depreciated to about 151 kwacha to the U.S. dollar. - Staff assessment: - The kwacha 141 peg was not sustainable given low reserves; fundamental exchange rate imbalance had intensified. - Without exchange rate depreciation and liberalization, fiscal and monetary policies would have to be tighter to reduce excess demand for foreign exchange. - Need to strike a balance between demand management and exchange rate adjustment to restore external equilibrium without undesirable effects on growth and poverty reduction. - Program commitments for liberalization and market functioning: - Re-establish an active interbank market for foreign exchange. - Reduce the role of the RBM in the market. - Improve monetary and exchange policy transparency. - By end-2010: combination of more flexible exchange rate, liberalization, and supporting policies should significantly reduce foreign exchange queues and exchange rate premiums. - By 2011: foreign exchange regime that operates without restriction on current account transactions, with a unified, market-clearing exchange rate, in adherence to Article VIII. - Monitoring measures for foreign exchange market pressures (focus of first review): - International reserve accumulation (quantitative performance criterion). - Size of commercial banks’ reported queues for foreign exchange. - Gaps in exchange rates between the bank bureau midrate and the official midrate (indicative targets set). - Downside risks from liberalization and depreciation: - Appear moderate. - Central government budget should benefit from currency depreciation given relatively large trade and trade-related taxes and foreign aid compared to import content of public expenditures and external debt service. - 2008 joint IMF and World Bank Financial System Stability Assessment found banking system’s net foreign exchange exposure limited through prudential regulations. - Nonbank private sector believed to have relatively little foreign-denominated debt. - Depreciation will increase income of smallholder tobacco and other farmers; fertilizer subsidy and pilot income transfer program, if continued, would protect the poorest households from higher costs of imported inputs. Box 4 — Foreign Exchange Market Liberalization Measures, 2010–12 (key measures) - Introducing flexibility in the exchange rate; authorities committed to adjusting the exchange rate to reach and maintain a market-clearing rate (MEFP ¶20). - Re-activating the interbank market for foreign exchange and reducing RBM’s market-making role in 2010 (MEFP ¶21). - Allowing all foreign exchange bureaus that meet fit and proper tests to operate (MEFP ¶21). - Enhancing transparency by increasing and disseminating market information (MEFP ¶22). - Revising and updating laws and regulations pertaining to the foreign exchange market and removing foreign exchange restrictions that impede access to foreign exchange for current account transactions against appropriate documentation (MEFP ¶22). - Encouraging market participants to build capacity to manage exchange rate risks, with RBM monitoring (MEFP ¶22). - Introducing reliable and efficient settlement systems to increase effectiveness of market intermediaries (MEFP ¶22). - Eliminating current account restrictions under Article VIII by end-2011, while making a significant reduction in queues and exchange rate premiums in 2010 (MEFP ¶26–27). ### Building Reserves and External Adjustment - Strategy: sizeable narrowing of the current account deficit (inclusive of grants) by reducing non-aid financed domestic demand relative to output through fiscal and monetary consolidation and exchange rate adjustment and liberalization. - Real exchange rate depreciation considered essential to avoid excessively contractionary fiscal and monetary stance and to shift demand toward domestic output. - Program envisages an ambitious improvement in the savings-investment balance of 6.8 percent of GDP between 2009 and 2010. - Tightening of fiscal stance and higher private saving expected to contribute to this improvement. - Text Table. Malawi: Savings-Investment Balance and Reserve Accumulation, 2008–14 - (Percent of GDP, unless otherwise indicated) (millions of U.S. dollars, unless otherwise indicated) - Investment and savings - National savings: 18.2 15.2 24.6 21.9 21.3 20.4 21.1 - Government: 4.0 1.4 11.3 9.0 10.0 9.2 9.6 - Private: 14.1 13.7 13.3 12.9 11.3 11.2 11.4 - National investment: 24.5 23.8 26.4 22.4 22.8 22.7 23.7 - Government: 9.0 7.3 12.1 10.7 10.5 10.5 10.6 - Private: 15.5 16.5 14.3 13.4 12.3 12.2 13.1 - Saving-investment balance: -6.4 -8.6 -1.8 -2.2 -1.5 -2.3 -2.7 - Government: -5.0 -5.8 -0.8 -1.8 -0.5 -1.3 -1.0 - Private: -1.4 -2.8 -1.0 -0.5 -1.0 -1.0 -1.7 - External sector - Usable gross official reserves (millions of U.S. dollars): 239.0 114.0 276.9 407.3 611.5 750.0 845.0 - (months of imports): 1.3 0.6 1.4 2.1 3.0 3.4 3.8 - (percent of reserve money): 93.2 35.0 81.3 126.6 176.9 202.4 212.2 - Current account (percent of GDP): -6.4 -8.6 -1.8 -2.2 -1.5 -2.3 -2.7 - Sources: Malawian authorities; and IMF staff estimates and projections. ### Structural Reforms - Prior action: transparent accounting of execution of the fertilizer subsidy program in fiscal year 2008/09 budget and of budgeted figures in fiscal year 2009/10. - Structural measures during first year of program: - Make fully operational the PFEM unit (improve public financial management). - Develop a time-bound plan to restart and liberalize the interbank foreign exchange market. - Continue implementation of financial sector reforms and improve monetary and exchange rate policy transparency. - Over final two years of the program: continue improving transparency and solvency of public utilities. ### Economic Outlook and Risks - Medium-term outlook is favorable conditional on successful implementation of the ECF-supported program. - Growth expected to remain buoyant, though more moderate compared to the recent past. - Considerable scope for raising agricultural productivity. - Medium-term growth drivers include: - Expansion of productive capacity at the Kayelekera uranium mine. - Possible exploitation of niobium. - Development of other sectors such as sugar with significant new investments. - Southern African Free Trade Agreement opening regional markets to basic manufactures. - Inflation: - Expected to remain moderate, below 10 percent. - Depreciation would exert pressure on tradable prices in 2010, but solid maize harvest, relatively stable international fuel prices, and restrained fiscal and monetary policies should contain inflationary pressures. *Source: _cr1087 - Box 3. Economic Performance under Recent Fund Arrangements* ### 29. The weak reserve position is expected to improve. International reserves should ### 29. The weak reserve position is expected to improve. International reserves should ### Reserve position and projections - International reserves are expected to rise as a result of a substantial expected inflow of donor assistance; seasonal inflows once the new harvest season begins; and a reduction of import growth followed by some greater export growth. - Selected projections (2010–2014) from the Medium-Term Macroeconomic Framework (percent/levels as shown): - Growth (percent change): 7.7, 6.0, 6.3, 6.6, 6.8, 7.1 - Inflation (eop, percent change): 7.6, 9.2, 8.5, 7.2, 6.8, 6.0 - Current account (percent of GDP): -8.6, -1.8, -2.2, -1.5, -2.3, -2.7 - Reserves (US$ millions): 114.0, 276.9, 407.3, 611.5, 750.0, 845.0 - Reserves (months of prospective imports): 0.6, 1.4, 2.1, 3.0, 3.4, 3.8 - Under the program, international reserves are projected to rise to 1.4 months of prospective imports by end-December 2010 and to three months by end-December 2012. ### Debt sustainability and financing - Updated debt sustainability analysis: no immediate concerns. - Foreign debt is modest as a consequence of the Heavily Indebted Poor Countries (HIPC) initiative and domestic debt is low. - Indebtedness is projected to rise with the increase in infrastructure investment financed with concessional debt; the debt-to-exports ratio is expected to rise towards its threshold during the projection period but without exceeding it. - Debt service indicators are projected to remain below their indicative thresholds in the medium term in both the baseline and under a variety of shocks. - Overall risk of debt distress: moderate. - Fund access and debt service: - Envisaged Fund disbursements would total 75 percent of quota. - Malawi’s purchases from the PRGF Trust Fund total 116.64 percent of quota. - If purchases are made as scheduled, there will be a peak in debt service to the Fund in 2018 at US$32.1 million (or 1.7 percent of exports). - Donor and official financing: - Malawi is projected to receive an average of US$200 million per year in budget support, seven-eighths of which is in the form of grants, and the rest in the form of highly concessional loans. - Malawi receives around US$800 million per annum in official aid, three-quarters of which goes through the budget. ### Key downside risks (as listed) - Lack of a market-based exchange rate. A lack of flexibility on the exchange rate could contribute to shortages of foreign currency, which would threaten macrostability, and dampen investment and growth. - Changes in the international environment for tobacco consumption. The medium-term prospects for burley tobacco, the largest export commodity, are currently uncertain in light of recent Canadian legislation to ban additives that are typically combined with burley tobacco in cigarettes. - Reliance on rain-fed agriculture. Malawi’s reliance on unirrigated agriculture leaves it vulnerable to drought. So far, it has largely escaped the devastating drought that has afflicted large parts of eastern and southern Africa, but this risk remains central. - Business policies that discourage investment and production. Another key risk is that business policies could be adopted that discourage investors, especially foreign investors, and reduce incentives for domestic producers to shift resources into the most productive activities. Minimum pricing policies should be designed with both sellers and buyers of farm produce in mind. - Poor infrastructure. The quality and availability of electricity and water supply already impede growth. Malawi will need to adopt a comprehensive strategy for reforming the parastatals that deliver utilities’ services, and to develop an innovative program for expanding access to underserved areas. - Uncertainties in the external environment. A slower global recovery could dampen export demand, investor interest, remittances, and access to foreign capital. ### Program monitoring and conditionality - Performance criteria and benchmarks (as in authorities’ MEFP and TMU): - Performance criteria on net domestic assets and net international reserves of the RBM and on net domestic borrowing of the central government. - Indicative target on reserve money. - Indicative target floor on social spending to ensure spending does not fall below budgeted levels. - Performance criteria set for end-June and end-December, indicative targets for end-quarters. - Continuous performance criteria on non-accumulation of government external payment arrears and on no new contracting and guaranteeing of short-term and medium-term nonconcessional external debt. - Supplemental monitoring for excess demand for foreign exchange (MEFP ¶27): - Monthly RBM/Fund measurement of three indicators: (i) reduction in the size of commercial banks’ reported queues for foreign exchange (indicative target); (ii) reduction in gaps in exchange rates between the bank bureau midrate and the official midrate (indicative target); and (iii) reserve levels (performance criterion). Covered by semi-annual reviews. - Structural benchmarks for year 1 and medium term (MEFP ¶28): - Make fully operational a PFEM unit to enhance public sector efficiency. - Formulate a plan to re-activate the interbank foreign exchange market to support liberalization. - Seek Cabinet approval of the Financial Sector Development Strategy and increase monetary policy transparency. - Over the medium term: work toward improving the transparency and solvency of public utilities. ### Capacity to repay and safeguards - Capacity to repay: - Malawi would have reasonable assurances of capacity to repay the Fund. - Fund support is a relatively small part of overall financing given expected donor support and prospects for agricultural and natural resource development. - Safeguards assessment: - The ECF-supported program will require an update of the December 2008 safeguards assessment; this assessment has commenced and will be completed no later than the first review of the proposed arrangement. ### Data issues, technical assistance, and capacity building - Data: Provided data are adequate for surveillance and program monitoring, though shortcomings in quality and timeliness remain. - Authorities are committed to building technical capacity within government and the RBM. - Fund technical assistance areas include: public financial management, tax reform and tax and customs administration, monetary and exchange rate management, statistics, and legal drafting. ### Staff appraisal (key judgments) - Malawi has weathered the global downturn well, with continued high growth and moderate inflation. - Post-election period seen as opportunity to restore external equilibrium while sustaining high growth and poverty reduction. - Fiscal developments: - Expenditure overruns in FY 2008/09 are being addressed with a more prudent fiscal stance in FY 2009/10 budget and execution. - FY 2009/10 budget scaled back lower-priority spending and set ambitious revenue collection targets; execution through end-December 2009 was in line with the budget. - Donor funding remains critical; commitments to public financial management and tax/customs reforms are important. - Monetary policy: - Monetary policy has tightened after significant easing in 2008 and early 2009; authorities are actively absorbing the liquidity overhang. - Good control of credit growth is essential to support balance of payments strengthening and contain inflationary pressures from exchange rate adjustments. - Financial system described as resilient, well-capitalized, and profitable. - Policy support: - Recent measures to liberalize the foreign exchange market (reversion of surrender requirements to commercial banks, move to greater exchange rate flexibility, modest nominal depreciation) will supplement measures to reduce aggregate demand and address external imbalance. - Continued policy adjustment, including further potential exchange rate adjustments, and external support are critical to restore external equilibrium. - IMF staff recommendation: - Support for a three-year arrangement under the ECF with access of 75 percent of quota to support liberalization of the foreign exchange regime, build reserves, and strengthen fiscal sustainability and anti-poverty activities. - Malawi’s breach of commitments under Article VIII of the Fund’s Articles of Agreement should be eliminated. - Recommendation that the next Article IV consultation take place within 24 months, subject to the decision on consultation cycles in program countries. *Sources: Malawian authorities and IMF staff estimates.* ### Part I (foreign financed)32,16744,08248,75245,29267,18968,42374,16881,146 ### _cr1087 - Part I (foreign financed)32,16744,08248,75245,29267,18968,42374,16881,146 ### Central Government Operations: levels (Table 2a) - Total revenue and grants: 32,167 44,082 48,752 45,292 67,189 68,423 74,168 81,146 - Part I (foreign financed): 32,167 44,082 48,752 45,292 67,189 68,423 74,168 81,146 - Part II (domestically financed): 14,573 13,137 28,695 21,295 32,232 37,043 47,406 58,943 - Net lending: 0 0 1,000 2,000 0 0 0 0 - Overall balance (including grants): -36,722 -21,453 -12,861 -12,576 -19,936 -15,663 -17,915 -19,507 - Total financing (net): 36,722 21,453 12,861 12,576 19,936 15,663 17,915 19,507 - Foreign financing (net): 13,338 22,863 21,713 18,975 32,914 28,782 33,188 33,754 - Borrowing: 14,550 24,503 23,213 20,443 35,640 32,363 37,552 40,235 - Program: 7,298 7,193 6,232 4,650 2,490 2,595 5,379 5,628 - Project: 7,252 13,165 16,981 15,793 33,150 29,768 32,173 34,607 - Other concessional: 0 4,145 0 0 0 0 0 0 - Amortization: -1,213 -1,640 -1,500 -1,468 -2,726 -3,581 -4,364 -6,481 - Domestic financing (net): 24,528 -1,410 -9,274 -6,399 -12,979 -13,120 -15,273 -14,247 - Domestic borrowing (net): 24,076 -1,410 -11,730 -6,399 -12,979 -13,120 -15,273 -14,247 - Other financing: 453 0 2,456 0 0 0 0 0 - Asset related financing: 4; 453 0 2,456 0 0 0 0 0 - Discrepancy: 0 0 -53 ............... - Memorandum items: - Nominal GDP: 37,866 ... 760,842 ... 881,120 1,159,254 1,319,111 1,447,395 - Net domestic debt: 117,295 ... 104,430 ... 91,451 103,434 77,285 58,622 ### Central Government Operations: percent of GDP (Table 2b) - Total revenue and grants: 4.9 6.8 6.4 6.0 7.6 6.8 6.4 6.2 - Revenue: 3.1 3.1 3.3 3.2 3.3 3.1 3.7 3.7 - Tax revenue: 1.9 1.8 2.2 1.4 2.2 2.6 2.9 3.3 - Grants: 1.7 1.3 1.4 1.7 1.0 0.8 0.5 0.5 - Total expenditure and net lending: 5.7 4.6 5.5 5.3 5.3 3.0 3.2 3.3 - Current expenditure: 4.6 3.5 4.7 4.7 4.2 2.5 2.8 2.6 - Wages and salaries: 0.9 0.8 0.9 0.9 0.9 0.8 0.9 1.0 - Interest payments: 0.3 0.2 0.3 0.3 0.2 0.1 0.1 0.1 - Goods and services: 2.0 1.9 1.0 1.0 1.0 0.9 1.0 1.0 - Subsidies and other current transfers: 1.4 0.9 0.6 0.6 0.6 0.6 0.6 0.6 - Development expenditure: 1.1 0.9 1.0 0.8 1.1 0.4 0.5 0.5 - Part I (foreign financed): 0.5 0.6 0.8 0.6 0.7 0.6 0.6 0.6 - Part II (domestically financed): 0.2 0.2 0.4 0.3 0.3 0.3 0.4 0.5 - Net lending: 0.0 0.0 0.0 0.1 0.3 0.0 0.0 0.0 - Overall balance (including grants): -5.7 -3.3 -1.6 -1.7 -2.3 -1.5 -1.5 -1.5 - Total financing (net): 5.7 3.3 1.6 1.7 2.3 1.5 1.5 1.5 - Foreign financing (net): 2.0 3.5 2.9 2.5 3.7 2.8 2.9 2.6 - Borrowing: 2.2 3.8 3.1 2.7 4.0 3.2 3.2 3.1 - Program: 1.1 1.1 0.8 0.6 0.3 0.3 0.5 0.4 - Project: 1.1 2.0 2.2 2.1 3.8 2.9 2.8 2.6 - Other concessional: 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 - Amortization: -0.2 -0.3 -0.2 -0.2 -0.3 -0.4 -0.4 -0.5 - Domestic financing (net): 3.8 -0.2 -1.2 -0.8 -1.5 -1.3 -1.3 -1.1 - Domestic borrowing (net): 3.7 -0.2 -1.5 -0.8 -1.5 -1.3 -1.3 -1.1 - Other financing: 0.1 0.0 0.3 0.0 0.0 0.0 0.0 0.0 - Asset related financing: 0.1 0.0 0.3 0.0 0.0 0.0 0.0 0.0 - Discrepancy: 0.0 0.0 0.0 ............... - Memorandum items: - Nominal GDP (millions of kwacha): 651,301 ... 760,842 ... 881,120 1,012,635 1,159,254 1,319,111 - Net domestic debt (millions of kwacha): 117,295 ... 104,430 ... 91,451 103,434 106,848 78,332 ### Monetary Authorities' Balance Sheet and Monetary Survey (Tables 3a, 3b) - Reserve money: 36,047 42,180 52,309 55,326 46,128 53,597 - Currency outside banks: 25,261 21,863 29,277 32,385 ...... - Cash in vault: 4,980 4,466 4,581 5,364 ...... - Commercial bank deposits with RBM: 5,806 15,852 18,450 17,577 ...... - Net foreign assets (NFA): 16,402 -5,804 1,369 -1,251 -14,867 6,488 - NFA (US$ millions): 117 -411 0 -9 -98 40 - Foreign assets (US$ millions): 258 961 532 251 142 77 - Foreign liabilities (US$ millions): -142 -138 -143 -233 -212 -237 - Net domestic assets: 19,646 47,984 50,940 56,577 60,995 47,109 - Credit to government (net): 56,705 68,255 58,714 76,892 82,978 77,289 - Other items (net): -39,034 -24,861 -16,133 -22,034 -23,739 -32,220 - Open market operations: -26,126 -8,596 -4,742 -4,607 -5,271 -5,279 - Others: -12,908 -16,613 -11,444 -17,800 -18,467 -26,942 - Of which: excluding recapitalization bonds: 16,740 13,035 18,204 11,848 11,181 2,706 Monetary Survey highlights: - Money and quasi-money: 139,643 140,614 155,365 175,510 166,781 194,578 - Money: 70,597 69,771 79,843 84,081 ...... - Quasi money: 69,047 70,843 75,522 91,429 ...... - Of which: foreign currency deposits: 14,143 16,524 18,450 21,076 ...... - Net foreign assets (NFA): 19,667 -1,202 4,736 9,951 -5,999 16,616 - NFA (US$ millions): 140 -93 471 -40 102 - Net domestic assets: 119,976 141,816 150,628 165,559 172,780 177,961 - Credit to government (net): 83,856 98,751 87,220 105,044 112,635 99,324 - Credit to private sector: 68,143 72,658 83,201 87,489 88,510 114,430 - Other items (net): -38,066 -34,216 -24,347 -33,292 -34,730 -43,218 - Memorandum items: - Money multiplier: 3.9 3.3 3.0 3.2 3.6 3.6 - Six-month t-bill rate: 13.3 11.4 13.3 12.7 ...... ### Financial Soundness Indicators (Table 3c) - Gross assets: 128,522.6 173,266.1 201,546.3 219,654.1 - Net assets: 126,971.7 170,886.9 199,473.0 217,432.5 - Gross loans: 54,722.6 73,448.0 79,599.1 98,256.5 - Net loans: 53,171.7 71,068.8 77,525.8 96,034.9 - Non-performing loans: 2,246.1 2,113.5 2,599.4 3,139.2 - Deposits: 92,301.4 105,651.1 128,176.3 138,971.4 - Capital: 15,159.7 15,448.1 18,308.2 22,786.1 - Liquid assets: 55,413.1 60,642.0 73,168.3 74,150.9 - Net income after tax: 6,000.7 3,685.5 8,455.6 5,187.5 - Number of branches: 53 67 62 65 - Key ratios (percent): - Net performing loans to gross loans: 95.0 96.4 96.2 96.3 - NPLs to gross loans: 4.1 2.9 3.3 3.2 - Return on assets: 4.7 2.1 4.2 2.4 - Return on equity: 39.6 23.9 46.2 22.8 - Liquid assets to deposits: 60.0 57.4 57.1 ... - Net loans to deposits: 57.6 67.3 60.5 69.1 ### Balance of Payments (Table 4) - Current account balance (including grants): -271.3 -426.9 -95.6 -125.3 -93.9 -152.8 -196.9 - Current account balance (excluding grants): -933.6 -1,091.9 -978.4 -897.5 -882.3 -954.5 -1,017.2 - Merchandise trade balance: -753.6 -804.8 -619.9 -613.3 -561.8 -602.7 -677.4 - Exports: 969.2 1,004.8 1,119.9 1,229.7 1,340.3 1,407.4 1,473.1 - Tobacco: 586.5 569.8 512.8 528.2 544.0 560.3 577.2 - Uranium: ... 24.0 182.0 203.0 200.0 198.0 176.0 - Imports: -1,722.8 -1,809.6 -1,739.8 -1,843.0 -1,902.1 -2,010.2 -2,150.5 - Petroleum: -212.9 -184.1 -231.3 -255.3 -277.1 -298.8 -323.6 - Services balance: -311.2 -427.5 -568.4 -510.5 -557.4 -595.4 -591.8 - Unrequited transfers (net): 793.5 805.4 1,092.6 998.4 1,025.4 1,045.4 1,072.3 - Private (net): 131.9 141.2 210.6 227.0 237.7 244.4 252.7 - Official (net): 661.6 664.3 882.0 771.5 787.7 801.0 819.5 - Budget support: 86.3 102.9 255.0 163.4 152.2 156.8 161.5 - Project related: 576.1 562.2 627.8 608.8 636.2 644.9 658.8 - Capital account balance (incl. errors and omissions): 227.6 338.0 325.7 331.0 369.6 384.5 381.3 - Medium- and long-term flows: 138.1 189.9 185.7 175.8 182.9 187.2 172.8 - Disbursements: 190.2 112.0 197.4 187.5 205.6 213.2 215.8 - Budget support: 22.5 34.0 40.0 15.0 30.0 30.0 30.0 - Project support: 167.7 56.0 157.4 172.5 175.6 183.2 185.8 - Amortization: -7.1 -8.5 -11.7 -11.7 -22.7 -25.9 -43.0 - Foreign direct investment and other inflows: 215.0 110.0 140.0 150.2 176.7 187.3 198.5 - Short-term capital and errors and omissions: -125.5 38.1 0.0 5.0 10.0 10.0 10.0 - Overall balance: -43.6 -88.9 230.1 205.7 275.7 231.7 184.4 - Financing (- increase in reserves): 43.6 88.9 -230.1 -205.7 -275.7 -231.7 -184.4 - Central bank: 68.6 124.4 -226.6 -201.8 -271.4 -226.9 -179.0 - Gross reserves (- increase): -21.9 125.0 -162.8 -134.5 -204.2 -138.5 -95.0 - Liabilities: 90.5 -0.6 -63.7 -67.3 -67.2 -88.4 -84.0 - Of which: IMF (net): 93.9 0.0 22.0 21.2 21.6 4.4 -26.6 - Purchases/drawings: 93.9 0.0 22.0 22.0 25.8 12.9 0.0 - Repurchases/repayments: 0.0 0.0 0.0 -0.8 -4.2 -8.5 -26.6 - Memorandum items: - Gross official reserves (excluding crown agents): ... 114.0 276.9 407.3 611.5 750.0 845.0 - Months of imports: 1.3 0.6 1.4 2.1 3.0 3.4 3.7 - Current account balance (percent of GDP): - Excluding official transfers: -21.9 -22.0 -18.8 -15.9 -14.2 -14.1 -13.9 - Including official transfers: -6.4 -8.6 -1.8 -2.2 -1.5 -2.3 -2.7 - Nominal GDP (millions of US dollars): 427 1,456 647.2 619.2 674.7 733.5 978.9 68407.0 ### Millennium Development Goals and Social Indicators (Table 5) - Employment to population ratio, 15+, total (%): 80 79 79 80 - Employment to population ratio, ages 15-24, total (%): 66 64 64 66 - Malnutrition prevalence, weight for age (% of children under 5): 24.4 .. 21.5 18.4 - Poverty headcount ratio at national poverty line (% of population): 54.0 .. 65.3 .. - Primary completion rate, total (% of relevant age group): 29 53 66 55 - Total enrollment, primary (% net): .... 99 93 - Immunization, measles (% of children ages 12-23 months): 81 90 73 85 - Mortality rate, infant (per 1,000 live births): 131 115 95 76 - Mortality rate, under-5 (per 1,000): 221 193 155 120 - Maternal mortality ratio (modeled estimate, per 100,000 live births): ...... 1,100 - Prevalence of HIV, total (% of population ages 15-49): .... 13.3 11.9 - GNI per capita, Atlas method (current US$): 180 160 150 250 - Population, total (millions): 9.4 10.1 11.6 13.9 - Trade (% of GDP): 57.2 78.5 60.9 40.6 - Aid per capita (current US$): 53 43 38 49 - Internet users (per 100 people): 0.0 0.0 0.1 1.0 - Mobile phone subscribers (per 100 people): 0.0 0.0 0.4 7.5 ### Program Indicative Targets and Criteria (Sept. 2009–Dec. 2010) - I. Monetary targets (millions of kwacha) - Ceiling on net domestic assets of the RBM (PC): Indicative stock 56,577; Actual end-Mar 2010: 53,549; End-Jun 2010: 52,411; End-Sept 2010: 49,674; End-Dec 2010: 47,577 - Ceiling on reserve money (IT): Indicative target 55,326; Actual end-Mar 2010: 44,479; End-Jun 2010: 52,599; End-Sept 2010: 60,806; End-Dec 2010: 53,597 - II. Fiscal targets (millions of kwacha) - Ceiling on central government's net domestic borrowing (PC): Indicative stock 139,251; Actual end-Mar 2010: 9,104; End-Jun 2010: -11,730; End-Sept 2010: -10,713; End-Dec 2010: -1,179 - Floor on social spending (IT): [... ] (not specified in source excerpt) - III. External targets (US$ millions, unless otherwise indicated) - Floor on net international reserves of the RBM (PC): Indicative stock 77; Actual end-Mar 2010: 17; End-Jun 2010: 76; End-Sept 2010: 147; End-Dec 2010: 131 - Ceiling on the accumulation of external payments arrears (PC): 0; Actuals: 0 0 0 0 0 - Ceilings on new nonconcessional external debt (PC): 0 (for maturities >=1 year and <1 year); Actuals: 0 0 0 0 0 - Foreign exchange queues (percent reduction relative to US$127.6 million as of Nov. 30, 2009) (IT): ... 25 [...] 50 *Sources: Malawi Ministry of Finance and IMF staff estimates.* ### 10. Spread between the bank bureau midrate and the official midrate (percent reduction vis-à-vis the spread of 20.7 perc ### _cr1087 - 10. Spread between the bank bureau midrate and the official midrate (percent reduction vis-à-vis the spread of 20.7 perc ### Quantitative targets, memorandum items, and program mechanics - Memorandum items (selected stocks and flows; units as shown): - Net foreign assets of the RBM (US$ millions): -9, -60, 1, 74, 40 - Budget support (US$ millions): 35, 180, 242, 313, 365 - Budget support (millions of kwacha): 4,932, 27,150, 36,567, 47,305, 55,157 - Debt service payments to the World Bank and the African Development Bank (US$ millions): 2, 3, 4, 4, 5 - Debt service payments to the World Bank and African Development Bank (millions of kwacha): 318, 470, 562, 652, 746 - Sector-Wide Approach (SWAp) receipts (millions of kwacha): 2,028, 13,096, 15,757, 19,004, 22,694 - Securitization of domestic arrears: 0000, 0 - Liquidity reserve requirement (percent): 15.5, 15.5, 15.5, 15.5, 15.5 - Program exchange rate: 151, 151, 151, 151 - Notes and definitional clarifications: - Targets are defined in the technical memorandum of understanding (TMU). - "PC" means Performance Criterion, and "IT" means Indicative Target. - Several targets are subject to adjusters for liquidity reserve requirement, budget support, debt service payments, donor-funded health expenditures, and securitization of domestic arrears. - The queue is defined as the amounts of foreign exchange that businesses have applied for—but not yet received—at commercial banks, for legitimate current account transactions. - Sources cited: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates. ### Prior actions and structural benchmarks (2009–10) - Prior actions (status and macro rationale): - Issuance of a directive reversing the 20 percent surrender requirement on all exports except tobacco to the RBM and redirecting this foreign exchange to the commercial banks, where it will be converted at the commercial bank rate. — Met. Rationale: To liberalize the foreign exchange market by increasing the role of commercial banks in the foreign exchange market. - Reversal of the requirement to surrender tobacco proceeds to the RBM at the official rate, and to revert to surrendering to the commercial banks to be converted at the commercial bank rate. — Met. Rationale: To liberalize the foreign exchange market by increasing the role of commercial banks in the foreign exchange market. - Enhanced nominal exchange rate flexibility, in the form of an upfront, but gradual adjustment of the exchange rate, coupled with tight fiscal and monetary policies. — Met. Rationale: To move closer to a market-clearing exchange rate and effect a real depreciation of the exchange rate. - Transparent accounting of fertilizer spending in the last two fiscal years. — Met. Rationale: To enhance fiscal transparency and accountability. - Structural benchmarks (measure, target date, macro rationale): - Public finance management: Make fully operational a Public Financial and Economic Management (PFEM) Unit. Target date: 31-Dec-10. Rationale: To strengthen budget monitoring, and allow rapid reaction to potential expenditure overruns. - Foreign exchange regime: Develop a time-bound action plan to restart the interbank market in line with TA recommendations from the Norges Bank and the IMF. Target date: 30-Jun-10. Rationale: To improve foreign exchange market efficiency and strengthen growth potential. - Financial sector: Publish, on a weekly basis, the amount of securities auctioned by the RBM and the results of auctions of securities on the RBM web-page. Target date: 30-Jun-10. Rationale: To enhance the transparency of the domestic financial market. - Financial sector: Cabinet approval of the Financial Sector Development Strategy. Target date: 31-Dec-10. Rationale: To achieve greater financial inclusiveness and improve competitiveness. ### Indicators of capacity to repay the Fund and Fund obligations (2009–18 projections) - Fund obligations based on existing credit (SDR millions) — Principal: 0.0, 0.5, 2.6, 5.4, 16.7, 16.7, 15.1, 12.9, 11.1, 0.0 - Charges and interest (annual series shown): 0.2 0.2 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 (as labeled "Charges and interest 1") - Fund obligations based on existing and prospective credit (SDR millions) — Principal: 0.0, 0.5, 2.6, 5.4, 16.7, 17.4, 18.6, 19.3, 20.7, 10.4 - Charges and interest (corresponding series): 0.2 0.2 0.4 0.5 0.5 0.4 0.4 0.3 0.3 0.2 - Total obligations based on existing and prospective credit: - SDR millions: 0.2, 0.7, 3.1, 5.9, 17.1, 17.8, 18.9, 19.6, 21.0, 10.6 - US$ millions: 0.2, 1.0, 4.7, 8.9, 26.2, 27.2, 28.9, 30.0, 32.1, 16.3 - Percent of exports of goods and services: 0.0, 0.1, 0.3, 0.6, 1.7, 1.6, 1.7, 1.7, 1.7, 0.8 - Percent of debt service: 0.8, 2.9, 12.1, 15.6, 44.1, 46.2, 41.7, 31.5, 29.5, 11.8 - Percent of quota: 0.2, 0.9, 4.4, 8.4, 24.7, 25.6, 27.2, 28.3, 30.2, 15.3 - Percent of gross international reserves: 0.1, 0.2, 0.8, 1.2, 3.1, 2.9, 2.8, 2.7, 2.7, 1.3 - Outstanding Fund credit: - SDR millions: 94.8, 108.2, 121.8, 124.5, 107.8, 90.5, 71.9, 52.7, 31.9, 21.5 - US$ Millions: 145.3, 165.4, 186.2, 190.3, 164.9, 138.4, 110.1, 80.6, 48.9, 32.9 - Percent of exports of goods and services: 12.2, 12.6, 12.9, 12.6, 10.4, 8.2, 6.4, 4.5, 2.6, 1.7 - Percent of debt service: 494.3, 484.8, 479.8, 332.5, 278.2, 235.2, 158.5, 84.4, 44.9, 23.8 - Percent of quota: 136.6, 155.9, 175.5, 179.4, 155.4, 130.4, 103.7, 75.9, 46.0, 31.0 - Percent of gross international reserves: 52.5, 40.6, 30.4, 25.4, 19.5, 14.6, 10.7, 7.3, 4.1, 2.6 - Memorandum items (selected macro aggregates; US$ millions unless shown): - Exports of goods and services: 1,195; 1,318; 1,441; 1,512; 1,582; 1,684; 1,727; 1,795; 1,878; 1,987 - Debt service: 29; 34; 39; 57; 59; 59; 69; 95; 109; 138 - Quota (SDR millions): 69.4 repeated across period - Gross international reserves: 277; 407; 612; 750; 845; 945; 1,025; 1,105; 1,185; 1,265 - GDP: 5,212; 5,647; 6,192; 6,747; 7,336; 7,915; 8,541; 9,215; 9,943; 10,729 - Footnotes: - Reflects exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011. - Assumes disbursements as per schedule in Table 9. ### Schedule of disbursements under the ECF arrangement (dates and SDR amounts) - February 19, 2010: 6.94 — Executive Board approval of three-year ECF - November 1, 2010: 6.94 — Completion of first review and observance of end-June 2010 PCs - May 1, 2011: 6.94 — Completion of second review and observance of end-December 2010 PCs - November 1, 2011: 6.94 — Completion of third review and observance of end-June 2011 PCs - May 1, 2012: 8.10 — Completion of fourth review and observance of end-December 2011 PCs - November 1, 2012: 8.10 — Completion of fifth review and observance of end-June 2012 PCs - February 1, 2013: 8.09 — Completion of sixth review and observance of end-October 2012 PCs ### Fiscal developments (2005/06–2009/10) — patterns and expectations - Revenue composition and expected performance: - Revenue categories shown include: Income, profits, and capital gains taxes; International trade taxes; Goods and services taxes; Grants. - Text: "Revenue performance is expected to remain robust..." - Expenditure composition and containment: - Current expenditure and capital expenditure series shown; text: "... and spending is expected to be contained in 2009/10, reversing last year's significant expenditure slippages..." - Net domestic borrowing and debt dynamics: - Text indicates expected net domestic repayments: "...which is expected to lead to net domestic repayments..." - Net domestic debt and overall balance series presented; text: "... and to a decline in net domestic debt." ### Monetary developments (2002–09) - Key series and indicators: - 91 days treasury bill rate - Average Interbank rates - Excess reserves to average deposit base (right scale) - Growth of private sector credit (12-month growth rate - percent) - Reserve money and broad money (12-month growth rates - percent): Reserve money; Broad money - Observations: - Reserve money growth moderated in 2009 after earlier rapid expansion (text: "reserve money growth has since moderated, with the 12-month change in reserve money declining significantly from the beginning to end of 2009.") - Series highlight liquidity and interest rate dynamics over 2002–09. ### External developments (2005–09) - Trade flows and current account: - Exports and imports annual percent change series; text: "... leading to a widening of the current account deficit..." - Capital flows and reserves: - Capital account balance series (including errors and omissions); text: "...Although aggregate capital inflows were buoyed by the SDR allocation ... the country experienced a decline in reserves and reserve coverage." - Transfers and terms of trade: - Official and private transfers relatively flat. - Text: "The fall in import prices helped to improve the terms of trade ..." - Text: "... but import growth tended to outstrip export growth in recent years..." ### Letter of Intent and Memorandum on Economic and Financial Policies (MEFP): objectives and recent reforms - Program request and scope: - Government requests a three-year arrangement under the Extended Credit Facility (ECF) and requests access of 75 percent of quota (SDR 52.05 million). - Program aims: address balance of payments weaknesses, sustain growth and poverty reduction, move toward a market-determined exchange rate, rebuild international reserves, improve public financial management, and support private-sector-led growth. - Recent macro performance (paragraphs with numeric and qualitative statements preserved): - Growth: "Growth has been impressive, averaging 6.8 percent for 2004–08." - Output in 2008 estimated at "9.8 percent." - Inflation: "inflation has come down to below 10 percent." - Reserves: "at about one month of prospective imports, international reserves remain low." - Fiscal developments and corrective actions: - Fiscal year 2008/09 budget targets were missed due to overspending on the fertilizer subsidy program and goods and services; root causes include high fertilizer prices in mid-2008 and an additional unbudgeted purchase later in the year. - Efforts underway to strengthen budget control and improve targeting of the fertilizer program. - With expected donor inflows, the government expects a repayment of domestic borrowing in fiscal year 2009/10. - Structural and institutional reforms undertaken or planned: - Public Financial and Economic Management (PFEM) unit established in the Ministry of Finance to coordinate public financial management reforms and update the public financial management action plan. - Strengthened control over the wage bill and utility payments; implementation of the Integrated Financial Management Information System (IFMIS). - Improvements in statistical classification and presentation of the budget, including on a functional basis. - Formation of a cash management unit at the Accountant General’s Office. - Debt management strategy issued and 2004 stock of arrears cleared. - Capacity enhancements in the offices of the Accountant General and Auditor General; progress in reducing backlog in submission of annual accounts. - Credit reporting and lending reforms: credit reference bureaus being established; Information disclosure clauses introduced in commercial bank lending contracts; Credit Reference Bureau Bill finalized and awaiting Parliamentary approval. - Banking supervision: RBM adopted a risk-based supervision approach (January 2009); establishing Basel II governance structures; parallel use of CAMEL and risk-based assessment; revising Asset Classification Directive to reflect International Accounting Standards. - Program transparency: - Government authorizes IMF to make the Letter of Intent, MEFP, TMU, and IMF staff report available to the public. *Source: IMF staff report and attachments as provided in the content unit.* ### 11. The amendments to the Banking Act and the Insurance Act were recently ### _cr1087 - 11. The amendments to the Banking Act and the Insurance Act were recently ### Financial sector legislation and supervision - Recent approvals and pending legislation: - Amendments to the Banking Act and the Insurance Act were recently approved. - The Financial Services Bill will be tabled during the next sitting of Parliament in February 2010. - Key powers and requirements introduced by the Banking Act and the Financial Services Bill: - Extend fit and proper requirements beyond the board and executive management to include shareholders. - Enhance enforcement powers of the RBM and outline corrective actions and remedial measures to resolve problems in banks. - Empower the RBM to prescribe higher ongoing capital than the required minimum depending on an individual bank’s risk profile. - Empower the RBM to require external auditors to present their findings prior to publishing the annual accounts. - Empower the RBM to carry out consolidated supervision of the financial sector. - Financial sector capacity building: - RBM has taken steps to improve its capacity to examine transactions related to anti-money-laundering and combating of financing of terrorism. ### AML-CFT and Financial Intelligence Unit - Legal framework and institutions: - The Money Laundering and Proceeds of Serious Crimes Terrorist Financing Law was enacted in 2006 and took effect in 2007. - A Financial Intelligence Unit (FIU) was established in 2007 and is working closely with the RBM and law enforcement agencies on AML-CFT matters. - Supervisory focus: - RBM has introduced anti-money laundering examinations with a key focus on compliance with Know Your Customer (KYC) principles. ### Liquidity forecasting and market operations - Liquidity forecasting: - The liquidity forecasting framework, designed with assistance from the Norges Bank and the Fund, is now fully operational and is used daily by the Treasury Department to assess liquidity conditions and prospects and smooth liquidity management on an ongoing basis. - Market operations: - RBM has replaced bilateral repos with repos sold through auctions to enhance transparency and support financial market development. ### Medium-term strategy and program objectives - Strategy framework: - Medium-term strategy set out in the MGDS focuses on private sector-led development, diversification, empowerment of the poor, sound economic environment, high-quality public service, effective institutions and the rule of law, and zero tolerance for corruption. - Objectives of the ECF-supported medium-term program: - Increase and maintain sustainable growth and reduce poverty within a stable macroeconomic environment and consistent with Malawi’s MGDS and MDGs. - Increase foreign reserves coverage to three months of imports. - Reduce government net domestic debt to support reserve accumulation and lower the share of public expenditures devoted to debt service. - Establish, by end-2011, a liberalized foreign exchange regime for current account transactions consistent with Article VIII of the IMF’s Articles of Agreement, making substantial progress during 2010. - Re-activate the interbank foreign exchange market. - Make progress toward and achieve a market-clearing exchange rate that supports reserve accumulation and a stable macroeconomic environment. - Promote internal equilibrium by pursuing prudent fiscal and monetary policies to contain aggregate demand pressures and limit pass-through of exchange rate changes to prices of nontradeables. - Continue public financial management and tax administration reforms to enhance capacity, expenditure control, and revenue performance. - Pursue reforms to deepen the financial sector and promote greater financial inclusion. - Improve the business climate through infrastructure improvements and regulatory reform. ### Outlook for growth and inflation - Growth and inflation projections: - Growth expected to average 8 percent during the ECF-supported program. - Inflation expected to stabilize at 6-7 percent over the medium term. ### Medium-term fiscal policies - Fiscal stance and revenue objectives: - Maintain prudent fiscal policy with modest overall budget deficits financed by foreign borrowing. - Strengthen the tax revenue to GDP ratio by around ½ percent of GDP per year until fiscal year 2014/15, mainly by broadening the base of value added and income taxes (including through improved compliance), while leaving room to lower the value added tax rate and international trade taxes to regional norms. - Domestic borrowing and budget management: - Target a domestic borrowing repayment of around 1 to 1.5 percent of GDP and a modest overall deficit in the fiscal year 2010/11 budget. - Incorporate measures to strengthen public services in education and health care through hiring qualified personnel and improving targeting of the social safety net. - Government stands ready to undertake budgetary adjustments this year through reductions in lower priority expenditures or shoring up revenues while preserving budgeted social and poverty-reducing spending to meet the domestic repayment target. - Parastatals and utility reform: - Aim to reduce budget risks from implicit and explicit contingent liabilities of parastatals and rationalize expenditures. - Seek to establish a clear regulatory regime for public utilities (ESCOM and Malawi regional Water Boards) that covers operating costs, avoids budgetary transfers, and minimizes recourse to commercial bank borrowing. - Tariff changes announced: - Electricity tariffs increased by 36 percent as of December 1, 2009. - Electricity tariffs will increase by a further 20 percent in December 2010, with additional adjustments expected over the subsequent two years. - Water tariffs will increase by 12.5 percent. - Government will seek to restructure Air Malawi’s debts and absorb costs of the presidential jet and any transfers to parastatals or productive sectors without crowding out social and other priorities. ### Monetary policy - Objectives and nominal anchor: - Monetary policy geared toward achieving price stability, while providing room for sufficient credit to the private sector, supporting reserve accumulation, and a properly valued exchange rate. - Reserve money will be the nominal anchor. - Reserve money and instruments: - Reserve money is programmed to grow at about the pace of GDP to help contain inflation and limit pass-through effects. - Reserve money is targeted to grow by about 16 percent in 2010 (about the same as projected nominal GDP growth). - RBM will continue to develop instruments of indirect monetary control and strengthen its ability to implement monetary policy through changes in interest rates. ### Exchange rate policies and foreign exchange reforms - Policy stance: - Policies geared toward liberalizing the foreign exchange regime and achieving a market-based exchange rate. - Committed to further policy adjustments, including of the exchange rate, to support market liberalization, eliminate excess demand for foreign exchange, and achieve a market-based competitive exchange rate. - Recent reforms and operational changes: - RBM implemented the Foreign Exchange Statistical Database System (FESDS) to improve mobilization and tracking of foreign exchange proceeds from exports. - RBM reversed measures requiring tobacco farmers without FCDAs to surrender export earnings directly to the RBM at the official exchange rate, and the prior requirement for certain exporters to surrender 20 percent to RBM and 20 percent to commercial banks at differing rates. - Current requirement: tobacco and traditional exporters surrender foreign exchange receipts from exports to commercial banks for conversion at the bank rate. - Government will allow foreign exchange bureaus to operate when they meet specified fit and proper tests. - Medium-term modernization: - RBM will modernize exchange rate and monetary policy frameworks, strengthen domestic credit, foreign exchange, and interbank markets, and enhance transparency. - Aim to establish market-oriented monetary and foreign exchange instruments and operations; technical assistance from the Fund, the Norges Bank, and other partners will support these reforms. ### Other structural policies and financial sector development - Public expenditure and governance reforms: - Accelerate structural reforms in public expenditure management to produce timely, consolidated, and reconciled accounts with continued technical assistance from the Fund. - Strengthen external audit and procurement capabilities to bolster accountability and governance. - Private sector environment: - Continue efforts to create an enabling environment for private investment by focusing public investments on education, health care, utilities, transportation, and communications; strengthen regulatory environment; cut cumbersome business regulations; and roll back public sector roles where private sector should dominate. - Financial Sector Development Strategy: - Draft strategy presented to stakeholders and to be presented to Cabinet after consultation. - Two stages: - Attainment of inclusive finance for growth with three pillars: - (a) alignment of the domestic financial system with key growth sectors, - (b) financial inclusion, including expanding provision of financial services to the rural economy and minimizing market distortions, - (c) creating a conducive business environment including upgrading legal and regulatory framework in line with FSAP recommendations and strengthening financial sector oversight through RBM modernization (supported by Parliamentary approval of the Banking Act and impending Financial Services Bill). - Financial deepening and competitiveness through capital market development, creation of domestic infrastructure/project finance funds, development of housing finance products, regulatory framework for the bond market, and organizational strengthening of the Malawi Stock Exchange. ### Program monitoring and performance criteria - Monitoring framework and targets: - Program implementation monitored via performance criteria and benchmarks with definitions in the Technical Memorandum of Understanding (TMU). - Over the three years of the ECF-supported program, semi-annual performance criteria set on net domestic assets and net international reserves of the Reserve Bank, net domestic borrowing of the central government, and an indicative target on reserve money. - Indicative target: a floor on social spending so spending does not fall below budgeted levels. - Continuous performance criteria: nonaccumulation of government external payment arrears and no new contracting and guaranteeing of short-term and medium-term nonconcessional external debt. - Semi-annual reviews scheduled: first review by November 20, 2010 and second review by May 20, 2011. - Foreign exchange monitoring: - Continuous performance criterion on no intensification of restrictions under Article VIII of the Fund’s Articles of Agreement. - Monthly RBM–Fund measurement of three indicators to gauge elimination of multiple exchange rates and FX queues: - (i) reduction in the size of commercial banks’ reported queues for foreign exchange (indicative target), - (ii) reduction in the gaps in exchange rates between the official and foreign exchange bureau rates (indicative target), - (iii) reserve levels (performance criterion), to be covered by semi-annual program reviews. - Structural benchmarks for year 1 and longer term: - Make fully operational a PFEM unit. - Develop a time-bound action plan to restart the interbank foreign exchange market. - Secure Cabinet approval of the Financial Sector Development Strategy and increase monetary policy transparency. - Targets set for end-June and end-December 2010. - Over the longer term, improve transparency and solvency of public utilities. ### Technical Memorandum of Understanding (TMU) — coverage and definitions (selected) - Coverage: - Central government includes all units of government that exercise authority over the entire economic territory, excluding nonprofit institutions controlled and financed by the central government for purposes of this memorandum. - Accounts of the monetary authorities include those of the Reserve Bank of Malawi (RBM) and the central government’s holdings of international reserves. - Monetary aggregates under the program are based on the eight-bank monetary survey. - Reform of the foreign exchange regime — export surrender requirements: - Current regulations require all exporters to surrender 40 percent of proceeds to the banking system. - Tobacco exporters may retain 60 percent of export proceeds in Foreign Currency Deposit Accounts (FCDAs) and surrender 40 percent of proceeds to commercial banks at the commercial bank rate. - Tobacco exporters without FCDAs must surrender 100 percent of proceeds to the commercial banks at the commercial bank rate. - RBM will refrain from rationing foreign exchange and has certified that all private external payment arrears are cleared as of January 25, 2010 and will avoid interfering in foreign exchange markets that result in private sector external arrears on a continuous basis during the program period. - Definition of net international reserves (NIR) of the RBM: - NIR of the RBM is defined as gross reserves minus IMF and other short-term liabilities. - Values of foreign assets and liabilities converted into U.S. dollars at each test date using program cross exchange rates and then into kwacha using the program exchange rate for the U.S. dollar–kwacha exchange rate. - Gross reserve assets: - Defined per the International Reserve and Foreign Currency Liquidity Guidelines for a Data Template as external assets immediately available and controlled by RBM for direct financing of payments imbalances, for indirectly regulating magnitudes of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes (BPM5, para. 424). *Source: _cr1087 - 11. The amendments to the Banking Act and the Insurance Act were recently* ### 6. This concept includes the following: (1) monetary gold holdings of the RBM; ### _cr1087 - 6. This concept includes the following: (1) monetary gold holdings of the RBM; ### A. Definition and composition of Net International Reserves (NIR) and gross reserves - NIR concept includes: - (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) foreign convertible currency holdings; - (6) deposits held in foreign central banks, the Bank for International Settlements, and other banks; - (7) loans to foreign banks redeemable upon demand; - (8) foreign securities; and - (9) other unpledged convertible liquid claims on nonresidents. - NIR excludes: - (1) any foreign currency claims on residents; - (2) capital subscriptions in international institutions; - (3) foreign assets in nonconvertible currencies; - (4) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals of such transfers soon after those dates; - (5) gross reserves that are in any way encumbered or pledged, including, but not limited to: - (i) assets blocked when used as collateral for third party loans and third-party payments, pledged to investors as a condition for investing in domestic securities; and - (ii) assets lent by RBM to third parties which are not available prior to maturity, and are not marketable (including the outstanding balance of the loan to Zimbabwe). ### B. Gross reserve liabilities of the RBM - Gross reserve liabilities are the sum of: - (1) SDR allocations; - (2) outstanding medium and short-term liabilities of the RBM to the IMF; - (2) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year. ### C. Accounting treatment and SDR allocation - Under BPM6, NIR increased with the 2009 allocation of SDRs. - The 2009 SDR allocation is treated as a long-term foreign exchange liability of Malawi to the SDR Department of the IMF, instead of a debt liability or shares and equity as in the MFSM. - The SDR allocation does not affect net foreign assets (NFA), because it increases both gross foreign assets and long-term liabilities. ### D. Adjustment clauses on the NIR of the RBM (performance criterion) - Budget support adjustments: - The floor on the NIR of the RBM will be adjusted upward by the full amount by which cumulative receipts from budget support are greater than US$30 million above the program baseline (see Table 1). - The floor on NIR will be adjusted downward by the full amount up to a maximum of US$10 million by which cumulative receipts from budget support are less than the program baseline. - Budget support is measured as the cumulative flow from the beginning of the fiscal year. - Definition of budget support: - Includes all grants and foreign financing that is not directly linked to additional budgetary expenditure. - Excludes external project financing to fund particular activities (including food security funding from the European Union and loan financing from the IMF), and donor inflows (in kwacha) from the U.S. dollar–denominated donor pool account for the health SWAp and National AIDS Commission held in the Malawi banking system. - Donor pool account for health SWAp adjustments: - The floor on NIR will be adjusted downward by the full amount by which donor inflows (in kwacha) from the U.S. dollar–denominated donor pool account for the health SWAp held in the Malawi banking system are smaller than donor inflow (in kwacha) to those accounts in the program baseline. - The downward adjustment will be capped at US$10 million. - Donor inflows for the SWAp account are measured as the receipts received (in kwacha) by the budget from the SWAp account; measured from the beginning of the fiscal year. - Debt service payments adjustments: - The floor on NIR will be adjusted upward (downward) by the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of (exceed) the program baseline (Table 1). - The cumulative amount will be measured from the beginning of the fiscal year. - Aggregate cap on downward adjustments: - The total downward adjustment to NIR from a shortfall of (1) budget support and (2) donor inflows to the donor pool account for the health SWAp account relative to program assumptions and (3) an excess of debt service payments relative to the program assumption will be capped at $10 million. - Valuation: - For this target, and those for external debt and arrears, valuation will be in U.S. dollars using the above defined program exchange rates. - Reporting: - Data on NIR, including its components, will be reported by the RBM on a weekly and end-month basis. ### E. Net Domestic Assets (NDA) of the RBM — definition and related NFA - Definition of NDA: - NDA of the RBM are defined in kwacha terms as end quarter reserve money less NFA of the RBM at the program exchange rate. - Reserve money consists of currency issued by the RBM and balances of commercial banks’ accounts with the RBM; includes required reserves held for Malawi kwacha deposits and any other domestic currency reservable liabilities and other demand and time deposits held with the RBM. - The NDA program ceilings are the indicative money targets defined below less the NFA of the RBM. - Definition of NFA of the RBM: - NFA are defined as the above defined NIR plus other foreign assets of the RBM—including but not limited to: - (1) capital subscriptions in international institutions; - (2) foreign assets in nonconvertible currencies; and - (3) gross reserves that are in any way encumbered or pledged, - less any medium- and long-term foreign liabilities of the RBM. ### F. Adjustment clauses on NDA - Budget support adjustments: - The ceiling on NDA will be adjusted downward by the full amount by which cumulative flow of receipts from budget support are greater than US$30 million above the program baseline. - The ceiling on NDA will be adjusted upward by the full amount up to a maximum of US$10 million by which cumulative receipts from budget support are less than the program baseline. - The kwacha value of the cumulative shortfall/excess will be calculated at the program exchange rate. - Budget support is measured as the cumulative flow from the beginning of the fiscal year. - Donor pool account for health SWAp adjustments: - The ceiling on NDA will be adjusted upward by the full amount by which donor inflows (in kwacha) from the U.S. dollar–denominated donor pool account for the health SWAp held in the Malawi banking system are smaller than the donor inflow (in kwacha) to those accounts in the program baseline. - The upward adjustment will be capped at US$10 million. - Donor inflows are measured as receipts received (in kwacha) by the budget from the SWAp account; measured from the beginning of the fiscal year. - Debt service payments adjustments: - The ceiling on NDA will be adjusted downward (upward) by the full cumulative amount by which debt service payments to the World Bank and the African Development Bank falls short of (exceed) the program baseline (Table 1). - The cumulative amount will be measured from the beginning of the fiscal year. - Aggregate cap on upward adjustments: - The total upward adjustment to NDA from a shortfall of (1) donor inflows to the donor pool account for the health SWAp account relative to the program assumptions and (2) an excess of debt service payments relative to the program assumption will be capped at US$10 million. - Liquidity reserve requirement adjustments: - The ceiling on NDA will be adjusted downward for a decrease in the reserve requirement ratio, and adjusted upward for an increase in the ratio. - The adjustment will be spread equally over two quarters, starting in the quarter in which the reserve requirement ratio is reduced. - The adjuster formula: (one minus the existing required percentage of reserve assets held at the discount houses) multiplied by (the program baseline required reserve ratio minus the new required reserve ratio) multiplied by (the amount of average reservable deposit liabilities in commercial banks during the last month prior to the change in regulation). ### G. Central Government Net Domestic Borrowing (CGDB) - Definition of CGDB: - Computed as the sum of: - (i) net borrowing from the RBM (including ways and means advances, loans, holdings of local registered stocks, government bonds, and holdings of treasury bills minus deposits); - (ii) net borrowing from commercial banks (including advances, holdings of local registered stocks, and holdings of treasury bills minus deposits); - (iii) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and holdings of treasury bills); and - (iv) holdings of promissory notes. - Treasury bills and local registered stocks are valued at cost rather than face value. - The ceiling is measured as the change in the stock of CGDB since June 30, 2009, including promissory notes and securities transferred to the RBM from the Treasury since the beginning of the fiscal year. - Definition of domestic arrears: - Domestic arrears are overdue payment obligations of the central government other than external payment arrears, including on wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, and tax refunds. - Payments on wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when they remain unpaid for more than 30 days beyond their due date. - Domestic interest payments are in arrears when the payment is not made on the due date. - Payments for goods and services are deemed to be in arrears if they have not been made within 90 days of the date of invoice, or—if a grace period has been agreed—within the contractually agreed grace period. - Adjustment clauses on CGDB: - Budget support: - The ceiling of CGDB will be adjusted downward (upward) by the full amount by which cumulative kwacha receipts from budget support are greater (less) than the program baseline. - The upward adjustment will be capped at US$20 million. - In the event of excess budget support, the ceiling on CGDB will be adjusted by the full amount less US$30 million. - The kwacha value of the cumulative shortfall/excess will be converted at the corresponding monthly average of the RBM mid rate. - Cumulative receipts will be measured from the beginning of the fiscal year. - Donor pool account for health SWAp: - The ceiling on CGDB will be adjusted upward by the full amount by which donor inflows (in kwacha) from the U.S. dollar–denominated donor pool account for the health SWAp held in the Malawi banking system are smaller than donor inflows (in kwacha) to those accounts in the program baseline. - The upward adjustment will be capped at US$20 million. - Donor inflows are measured as receipts received (in kwacha) by the budget from the SWAp account; measured from the beginning of the fiscal year. - Debt service payments: - The ceiling on CGDB will be adjusted downward (upward) by the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of (exceed) the program baseline (Table 1). - The cumulative amount will be measured from the beginning of the fiscal year. - Aggregate cap for permanent shortfalls: - The total upward adjustment to CGDB from a shortfall of (1) budget support and (2) donor inflows to the donor pool account for the health SWAp account relative to the program assumptions and (3) an excess of debt service payments relative to the program assumption will be capped at US$30 million for permanent shortfalls. - Securitization of arrears: - The ceiling on CGDB will be adjusted upward by the full cumulative amount by which pre-2005 domestic arrears are securitized from the beginning of the fiscal year. - Note: - Commercial banks include all commercial banks in Malawi—and in particular the Malawi Savings Bank—not just the banks covered by the eight-bank monetary survey. ### H. External payment arrears and nonconcessional external debt - External payment arrears: - Defined as debt-service obligations (principal and interest) of the government or the RBM to nonresidents that have not been paid at the time they are due, except on external debt subject to rescheduling or restructuring. - This performance criterion will be monitored on a continuous basis. - Nonconcessional external debt: - Debt definition follows Executive Board Decisions No. 6230-(79/140) August 3, 1979, and amendments detailed in the text. - For program purposes, short-, medium-, and long-term debt is nonconcessional if it includes a grant element of less than 35 percent, per Decision No. 11248-(96/38), April 15, 1996. - The ceiling 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. - The performance criterion is monitored on a continuous basis and applies to debt and commitments contracted or guaranteed for which value has not been received; measured cumulatively from the beginning of the fiscal year. - Short-term debt: outstanding stock of debt with an original maturity of one year or less. - Medium- and long-term debt: outstanding stock of debt with a maturity of more than one year. - Exclusions from the limit: - Use of IMF resources; - Any kwacha-denominated treasury bill and local registered stock holdings by nonresidents; - Debts classified as international reserve liabilities of the RBM; - New debt issued to restructure, refinance, or repay existing debt up to the amount actually used for those purposes; - Normal import financing (self-liquidating credit); - Arrangements to pay over time obligations arising from judicial awards to external creditors. ### I. Quantitative indicative targets and other monitoring metrics - Reserve money: - Defined as the sum of currency issued by the RBM (including vault cash of commercial banks) and balances of commercial bank accounts with the RBM. - Includes required reserves held for kwacha deposits, other domestic currency liabilities, and other demand and time deposits held with the RBM. - Reserve money targets are the projected end-quarter values starting with end-March 2010 to end-December 2012. - Foreign exchange queue: - Defined as the value of foreign exchange applications filed with commercial banks that have not yet been satisfied for bona fide current account transactions. - Will be assessed as a percentage reduction from its end-November 2009 level of US$127.6 million. - Measurement draws on commercial banks’ reporting to the RBM on effective foreign exchange demands they face, excluding demands met, lapsed, or not matched by kwacha available at transaction time. - The initial stock comprises unmet foreign exchange demands placed with banks from August 1, 2009 to end-November 2009. - Stock includes applications for current but not capital transactions by corporate and noncorporate entities. - Queues measured on the last day of the month, based on demands up to the third to last day of each month. - Spread between bank bureau midrate and official midrate: - Defined as the difference between the bank bureau mid-rate for U.S. dollar cash-based buying and selling transactions and the official midrate at the day’s fixing, expressed as a percentage of the official midrate. - Reduction assessed against the end-November 2009 measure of the spread of 22.2 percent. ### J. Social spending floor and fiscal reporting - Floor on social spending: - Social spending is computed as the sum of central government spending on health, education and the fertilizer subsidy as articulated in the central government budget for a particular fiscal year. - Social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program. - Reporting of certain fiscal transactions: - Donor pool–funded expenditures in support of the health SWAp: - A U.S. dollar-denominated account has been set up at the RBM to hold donor pool resources until expenditures need to be financed. - Financial flows into and out of this account will be reported on a monthly basis from the beginning of the fiscal year. - Fertilizer subsidy program: - Spending on the fertilizer subsidy program will be reported quarterly from the beginning of the fiscal year. - A prior action for the ECF-supported program was a transparent accounting on execution of the budget for fiscal year 2008/09 and of the budgeted figures for fiscal year 2009/10, which was met. *Source: IMF staff report text provided.* ### 41. Monitoring of the program requires that the information listed in Tables 1-4 below ### Monitoring of the program requires that the information listed in Tables 1-4 below ### I. Quantitative targets — Monetary, Fiscal, External (Table 1) - Monitoring timeframe: Sept. 2009; End-Mar 2010; End-Jun 2010; End-Sept 2010; End-Dec 2010. - I. Monetary targets (millions of kwacha) - 1. Ceiling on net domestic assets of the RBM (PC) - Sept. 2009: 56,577 - End-Mar 2010: 53,549 - End-Jun 2010: 52,411 - End-Sept 2010: 49,674 - End-Dec 2010: 47,577 - 2. Ceiling on reserve money (IT) - Sept. 2009: 55,326 - End-Mar 2010: 44,479 - End-Jun 2010: 52,599 - End-Sept 2010: 60,806 - End-Dec 2010: 53,597 - II. Fiscal targets (millions of kwacha) - 3. Ceiling on central government's net domestic borrowing (PC) - Sept. 2009: 139,251 - End-Mar 2010: 9,104 - End-Jun 2010: -11,730 - End-Sept 2010: -10,713 - End-Dec 2010: -1,179 - 4. Floor on social spending (IT) - Values omitted in source extract: "[...]" entries present. - III. External targets (US$ millions, unless otherwise indicated) - 5. Floor on net international reserves of the RBM (PC) - Sept. 2009: 77 - End-Mar 2010: 17 - End-Jun 2010: 76 - End-Sept 2010: 147 - End-Dec 2010: 131 - 6. Ceiling on the accumulation of external payments arrears (PC) - All dates: 0, 0, 0, 0, 0 - 7. Ceiling on new nonconcessional external debt maturing in one year or more (PC) - All dates: 0, 0, 0, 0, 0 - 8. Ceiling on new nonconcessional external debt maturing in less than one year (PC) - All dates: 0, 0, 0, 0, 0 - 9. Foreign exchange queues (percent reduction in stock relative to a starting stock of US$127.6 million as of Nov. 30, 2009) (IT) - Sept. 2009: "..." - End-Mar 2010: "[...]" - End-Jun 2010: 25 - End-Sept 2010: "[...]" - End-Dec 2010: 50 - 10. Spread between the bank bureau midrate and the official midrate (percent reduction vis-à-vis the spread of 20.7 percent as of Nov. 30, 2009) (IT) - Sept. 2009: "..." - End-Mar 2010: "[...]" - End-Jun 2010: 25 - End-Sept 2010: "[...]" - End-Dec 2010: 50 - Memorandum items (exact values preserved) - Net foreign assets of the RBM (US$ millions): -9; -60; 1; 74; 40 - Budget support (US$ millions): 35; 180; 242; 313; 365 - Budget support (millions of kwacha): 4,932; 27,150; 36,567; 47,305; 55,157 - Debt service payments to the World Bank and the African Development Bank (US$ millions): 2; 3; 4; 4; 5 - Debt service payments to the World Bank and African Development Bank (millions of kwacha): 318; 470; 562; 652; 746 - Sector-Wide Approach (SWAp) receipts (millions of kwacha): 2,028; 13,096; 15,757; 19,004; 22,694 - Securitization of domestic arrears: 0000; 0 - Liquidity reserve requirement (percent): 15.5; 15.5; 15.5; 15.5; 15.5 - Program exchange rate: "..." ; 151; 151; 151; 151 - Notes and definitional points (verbatim items preserved) - "PC" means Performance Criterion, and "IT" means Indicative Target. - Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government's net domestic borrowing. - Defined as stocks. - Target is subject to an adjuster for liquidity reserve requirement. - Targets are subject to an adjuster for budget support and debt service payments. - Targets are subject to an adjuster for donor-funded health expenditures. - Defined as a cumulative flow. - Targets are subject to an adjuster for securization of domestic arrears. - Priority social spending as defined and quantified in the authorities' budget. - Evaluated on a continuous basis. - The queue is defined as the amounts of foreign exchange that businesses have applied for—but not yet received—at commercial banks, for legitimate current account transactions. - Sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates. ### II. Prior Actions and Structural Benchmarks (Table 2) - Prior actions (status and rationale) - Issuance of a directive reversing the 20 percent surrender requirement on all exports except tobacco to the RBM and redirecting this foreign exchange to the commercial banks, where it will be converted at the commercial bank rate. - Status: Met - Rationale: To liberalize the foreign exchange market by increasing the role of commercial banks in the foreign exchange market. - Reversal of the requirement to surrender tobacco proceeds to the RBM at the official rate, and to revert to surrendering to the commercial banks to be converted at the commercial bank rate. - Status: Met - Rationale: To liberalize the foreign exchange market by increasing the role of commercial banks in the foreign exchange market. - Enhanced nominal exchange rate flexibility, in the form of an upfront, but gradual adjustment of the exchange rate, coupled with tight fiscal and monetary policies. - Status: Met - Rationale: To move closer to a market-clearing exchange rate and effect a real depreciation of the exchange rate. - Transparent accounting of fertilizer spending in the last two fiscal years. - Status: Met - Rationale: To enhance fiscal transparency and accountability. - Structural benchmarks (measure, target date, macro rationale) - Public finance management - Make fully operational a Public Financial and Economic Management (PFEM) Unit. - Target date: 31-Dec-10 - Rationale: To strengthen budget monitoring, and allow rapid reaction to potential expenditure overruns. - Foreign exchange regime - Develop a time-bound action plan to restart the interbank market in line with TA recommendations from the Norges Bank and the IMF. - Target date: 30-Jun-10 - Rationale: To improve foreign exchange market efficiency and strengthen growth potential. - Financial sector - Publish, on a weekly basis, the amount of securities auctioned by the RBM and the results of auctions of securities on the RBM web-page. - Target date: 30-Jun-10 - Rationale: To enhance the transparency of the domestic financial market. - Cabinet approval of the Financial Sector Development Strategy. - Target date: 31-Dec-10 - Rationale: To achieve greater financial inclusiveness and improve competitiveness. ### III. Reporting requirements (Table 3) - Data frequency, agency, lag, and mode examples (verbatim headings and entries preserved) - Gross international reserves, exchange rate, and foreign exchange purchases and sales: D RBM W2 FE - Reserve money and its components (NDA and NFA), OMO transactions, and RBM conversion of treasury bills: W RBM M30 30 E - Daily exchange rate: DRBM W1 FE - Treasury bill and RBM auction results: W RBM W2 FE - RBM balance sheet and broad money estimate: W RBM W7 FE - Import payment arrears: M RB MM30 30 E - Spread between bank bureau midrate and the official exchange midrate: W RB MM30 30 E - Value of queues for foreign exchange: M RB MM30 30 E - International Reserve and Foreign Currency Liquidity Data Template: MRB MM30 30 E - Central government domestic borrowing: MRB MM30 30 E - Interest rates: MRB MM30 30 E - Holdings of local registered stocks, treasury bills, and RBM bills: MRB MM30 30 E - Detailed issue and maturity profile for treasury bills and RBM bills: MRB MM30 30 E - Excess reserves by bank: W RB MM30 30 E - Details of project and balance of payment support: MRB MM30 30 E - FCDA Holdings: MRB MM30 30 E - RBM foreign exchange cash flow: MRB MM30 30 E - Foreign exchange exposure limits by bank: MRB MM30 30 E - Bank statements of the Health SWAp account held at RBM: MRB MM30 30 E - Eight bank monetary survey and full banking survey (on monthly average basis): MRB MM45 15 E - Financial soundness indicators by banks: Q RB MQ45 T15 E - Insurance company survey: Q RB MQ45 T15 E - NAC consolidated statement of sources and uses of funds (cashflow statement): MM OFM30 30 E - Health SWAp statement of sources and uses of funds (as per attached table 2): MM OFM30 30 E - Fiscal table (GFS) including revenue, expenditure, and financing: MM OFM30 30 E - Revenue data (from MRA): MM OFM30 30 E - Monthly expenditure for domestically financed capital projects: MM OFM30 30 E - New external loans contracted or guaranteed by the central government: Q MOF Q30 T30 E - Quarterly external debt services (actual and projections): Q MOF Q30 T30 E - Borrowing of the ten (8) major parastatals: Q MOF Q45 T15 E - Annual Financial reports of the ten (10) major parastatals and MSB: AM OFQ90 30 H - Report on IMF program performance: Q MOF Q45 T15 E - Statement on new arrears: Q AuG Q45 T15 E - Consumer price index and monthly statistical bulletin: M NSO M30 30 E - Import and export data: M NSO M45 T15 E - Balance of payments, and quarterly statistical bulletin: Q NSO Q45 T15 E - National accounts, balance of payments, and quarterly statistical bulletin: ANSO BA45 T15 E - Reporting periodicity key preserved: D - Daily, W - Weekly, M - Monthly, Q - Quarterly, BA - Bi-annual, F - Friday, 30 - Every 30th, T30 - Every third 30th, E - Electronic, H - Hard Copy. - Footnotes preserved (verbatim): - 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. - 2 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. ### IV. SWAp Statement of Sources and Uses of Funds (Table 4) - Monthly data (Millions of US$) — items listed (values redacted or marked in source) - Opening balance in SWAp forex account: x - Inflows in foreign exchange from donors: x - DFID: x - Norway: x - UNDP: x - Global Funds: x - UNFPA: x - UNICEF: x - Other: x - Closing balance in SWAp forex account: x - Memorandum items (listed, values indicated as x in source) - Donor funds received through RBM: x - Donor funds received through commercial banks: x - Donor funds spent offshore: x - Government contribution in MwK: x - SWAp expenditure: x - Of which: Wages: x - Other goods and services: x - Development expenditure: x ### V. Joint IMF/World Bank Debt Sustainability Analysis (LIC DSA) — Key findings and assumptions - Risk assessment and context - Staff’s LIC DSA shows that Malawi is at medium risk of external debt distress. - By 2006, external debt was under 15 percent of GDP following HIPC and MDRI relief. - Malawi’s stock of public external debt as of end-2008 is estimated at US$683 million; 90 percent multilateral, remainder official bilateral. - Reliable figures on private external debt are not available; amounts are not believed to be large. - Structure of external public debt (as of end-2008; US$ millions) - Total: 683.1 - Multilateral: 611.5 - Of which: IDA: 187.7 - Of which: IMF: 124.3 - Of which: AfDB: 132,1 - Other multilateral: 167.4 - Official bilateral debt: 71.6 - Of which: Paris Club: 0 - Of which: non-Paris Club: 71.6 - Commercial debt: 0 - Source: Malawi Ministry of Finance - Developments in fiscal year 2008/9 (verbatim highlights) - Real GDP growth strong; much growth in maize production (accounting for over 60 percent of calories consumed), largely non-exportable and thus not improving debt servicing capacity. - Increase in fuel and fertilizer prices in 2008 impacted the balance of payments; loose fiscal and monetary policies contributed to loss of official reserves. - Declining fuel and fertilizer prices in 2009 and a strong tobacco season provided relief, but reserves remained precarious as donors delayed disbursements pending clarification of government steps to address macroeconomic weaknesses. - Government resorted to extraordinary external financing: sold 2009 special allocation of SDRs in November 2009; Petroleum Importers Limited contracted a $50 million nonconcessional external loan to purchase petrol; government contracted a $22 million nonconcessional loan in late 2009 to purchase a new presidential jet. - After mid year, government tightened fiscal and monetary policies and gradually depreciated the exchange rate. - Medium-term macro and DSA assumptions (verbatim highlights) - Growth prospects remain solid despite shocks; Malawi’s growth and development strategy to 2011 aims to transform the economy toward manufacturing and exporting. - In last 5 years growth averaged about 7 percent. - Baseline assumes robust real growth supported by sound macroeconomic policies and increased investment, gradual reduction in external current account deficit through export diversification, prudent fiscal and monetary policies, and reliance on grants and concessional financing in the medium term. - Assumes current mining projects continue and additional projects in uranium and niobium prove viable; assumes no contingent risks from parastatals fall due. - Key projection comparisons and values (verbatim) - As of end-2009 estimates vs. December 2007 DSA projections: - PV debt-to-export ratio: 64 percent (actual) vs. 59 percent (projected) - Debt-to-GDP ratio: 14 percent (actual) vs. 12 percent (projected) - Debt-to-revenue ratio: 85 percent (actual) vs. 74 percent (projected) - Debt service ratios: less than 2 percent of exports and revenues (actual) vs. projections of 3 and 4 percent respectively - Import growth assumptions: - Current DSA assumes import growth down to five percent a year (5 percent) compared with 13 percent over the past decade. - Growth assumptions: - Current DSA assumes longer-term growth rates at 5.4 percent vs. previous DSA assumption of 3.9 percent. - Box 1: Key Macroeconomic Assumptions in the Baseline Scenario (verbatim points and figures) - Kayelekera uranium mine expected to operate for ten years starting in 2009; at its peak could add 10 percent to GDP and 25 percent to exports. - Real GDP growth projected to average 6.7 percent over 2009–14, thereafter averaging 5.4 percent. - Growth is slightly higher than the 4.5 percent average over the past decade. - Inflation expected to remain in single digits, declining moderately from current rates of around 7.7 percent to around 7 percent over the long run. - Real exchange rate assumed to remain stable. - External current account (including aid transfers but excluding interest payments) assumed to improve over the medium term; FDI assumed on average 1 percent higher over the forecast period than the historical period. - Imports expected to rise 5 percent each year compared to 13 percent over the past decade. - Export growth expected to remain strong, averaging 6.9 percent over the medium term to 2014. *Sources: Reserve Bank of Malawi, Malawi Ministry of Finance, and IMF staff estimates.* ### 6.2 percent thereafter, lower than the 9.5 percent over the past decade. Strong growth in non- ### _cr1087 - 6.2 percent thereafter, lower than the 9.5 percent over the past decade. Strong growth in non- ### Revenues, aid, and financing composition - Domestic revenues (excluding grants) are projected to average 22 percent over the projection period. - Revenues improve from 16.8 percent in 2010 (the historical average for the last 10 years) to stabilize at just over 23 percent in the outer years. - Aid is projected to average 14.5 percent of GDP over 2009–14, and decline gradually thereafter, averaging 8 percent over the projection period. - Grant equivalent financing (loans and grants) is expected to decline from about 85 percent of total external financing over the medium term to 67 percent by 2029. - Highly concessional financing from multilaterals is assumed to account for two-thirds of debt; somewhat less concessional financing from non-Paris Club creditors provides the balance. - A small but increasing amount of borrowing on commercial terms is assumed for the outer years. - Tobacco exports are projected to grow at 1 percent per annum in nominal terms; non-traditional exports show strong growth. ### IV. External debt sustainability — baseline outcomes - All external debt indicators remain below the indicative, policy-dependent debt burden thresholds in the baseline, though some approach thresholds. - Present value (PV) of external debt to exports: - 64 percent in 2009 - 79 in 2014 - peaks at 128 percent in 2024 - declines to 124 percent at the end of the projection period - PV external debt to GDP increases from around 14 percent of GDP after HIPC relief to stabilize at around 22 percent of GDP. - PV debt-to-revenues ratio remains under 100 percent throughout the projection period. - Debt-service to-exports ratio is expected to remain under 10 percent throughout the projection period. - Debt-service-to-revenue ratio remains under 7 percent. ### Stress tests and vulnerability scenarios - Historical scenario: - Debt ratios would increase rapidly and breach PV debt-to-GDP and PV debt-to-exports thresholds; trajectory remains below the relevant debt-to-revenue threshold (A1 in Table 3). - Country-specific tobacco shock: - Tobacco accounts for more than half of Malawi’s export earnings initially, declining to less than one-fifth by the end of the projection period. - A permanent one-third fall in tobacco prices would increase Malawi’s debt-to-export ratio by almost 30 percentage points over the medium term, leading Malawi to exceed the 150 percent threshold marginally and for a short period after 2022 (A3 in Table 3); Malawi falls back under the threshold by the end of the projection period. - Less favorable financing terms: - If the interest rate on new borrowing were 2 percentage points higher than in the baseline, Malawi would breach the debt-to-exports ratio by 2018, though the other two PV ratios would stay below their thresholds. - Combination shock (lower GDP, exports, inflation, and non-debt creating flows using one-half standard deviation shocks) would result in breach of debt-to-exports and debt-to-revenue ratios (additional bounds tests B1–5 in Table 3). ### V. Country-specific depreciation scenario - Scenario assumption: a depreciation of 21 percent at the start of 2010. - Projected impacts: - Depreciation assumed to raise export growth by 3 percentage points per annum in 2010–13 over the baseline. - Short-term deterioration: PV external debt-to-GDP would be 2 percentage points higher in 2010 than under the baseline; PV debt-to-revenue ratios would also rise. - Medium-to-long run: faster export growth projected to lead to debt-to-export ratios peaking around 20 percentage points lower than in the baseline, conditional on appropriate monetary and fiscal policy to limit pass through into inflation. ### VI. Public debt sustainability - Public sector PV debt-to-GDP ratio: - 2009 level: just under 35 percent - projected to decline to under 25 percent by the end of the projection period - Public sector debt-to-revenue ratio: - expected to decline from 115 percent to just under 90 percent - Debt service-to-revenue ratio expected to remain under 10 percent throughout the projection period. - Stress-test outcomes and contingent risks: - An unchanged primary balance from 2009 could lead to a PV debt-to-GDP ratio of 59 percent at the end of the projection period. - Permanently lower GDP growth than the baseline could see the debt-to-GDP ratio reach 49 percent by 2029. - Contingent fiscal risks arise from loss-making parastatal institutions (Air Malawi operates at a loss; parastatal agricultural operations have nontransparent finances). - Policy intentions to mitigate risks: - Government intends to establish a clear regulatory regime for public utilities infrastructure to cover operating costs and avoid budgetary transfers. - Measures recently taken to increase tariffs on electricity and water. *Source: _cr1087 PDF chapter/section content.* ### CONCLUSIONS ### CONCLUSIONS ### Overall assessment - Malawi is assessed to be at moderate risk of external debt stress despite its current relatively low debt ratios. - The baseline scenario reflects a positive outlook for macroeconomic developments in Malawi, with strong GDP growth and improvements in the external current account. - Malawi remains vulnerable to price fluctuations for key imports and exports, heavily reliant on rain-fed agriculture and the narrow export base. ### Drivers of risk and vulnerability - Vulnerabilities cited: - Price fluctuations for key imports and exports. - Heavy reliance on rain-fed agriculture. - Narrow export base. - Stress-test framework notes: - The most extreme stress test is the test that yields the highest ratio in 2019. - In figure b. it corresponds to a Devaluation shock; in c., d., and e. to a Combination shock; and in figure f. to a Tobacco shock. - Sensitivity and bound tests are carried out over the 2009–29 projection period. ### Scenarios and key simulation design elements - Baseline: staff projection for 2009–29. - Historical scenario: assumes key variables remain at their historical values. - “Fix primary balance” scenario: assumes the primary balance remains as it was last year. - Alternative and bound tests include: - A1. Key variables at their historical averages in 2009-2029. - A2. New public sector loans on less favorable terms in 2009-2029. - A3. Lower tobacco prices (assumes tobacco exports 25 percent lower than in baseline scenario). - A4. Equilibrium real exchange rate (assumes an upfront nominal depreciation of 21 percent at start of 2010). - B1–B4. Single-variable bound tests (e.g., real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows) using historical average minus one standard deviation in 2010–2011. - B5. Combination of B1–B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2010. ### Policy implications and recommendations - Reducing the risk of debt distress will depend on: - Maintaining sound macroeconomic policies. - Diversifying the export base. - Sustaining a sound fiscal position. - Strengthening the foundations for growth. ### Projection horizon and analytic coverage - Debt sustainability analysis and stress testing are conducted over 2009–29. - The analysis covers public sector external debt only, since insufficient information is available on private sector external debt. - Endpoints and reference years frequently cited include 2019 (peak stress-test year) and the 2009–29 projection period. *Source: _cr1087 - CONCLUSIONS (IMF staff estimates and projections, figures and notes covering 2009–29).* ### ANNEX III ### ANNEX III MALAWI: STATISTICAL ISSUES ### Data provision — overall assessment - Data provision has some shortcomings, but is broadly adequate for surveillance and program monitoring purposes. - The data module of the Report on the Observance of Standards and Codes (data ROSC), published February 17, 2005, found the institutional framework broadly adequate but identified shortcomings in scope, accuracy, and reliability. - Weakest areas identified: national accounts, government finances statistics, and monetary and financial statistics. - STA recommendation: formally assign responsibility for compilation of government finance statistics to the Ministry of Finance and responsibility for compilation of monetary statistics to the RBM. - Malawi participates in the Fund’s General Data Dissemination System (GDDS) and the GDDS Project for Anglophone African Countries; GDDS metadata posted on the DSBB since February 2007. ### Real sector statistics - Key constraint: inadequate source data and timeliness affecting national accounts, prices, and trade. - STA recommended remedial actions, including additional resources for the National Statistics Office (NSO). - Long-term technical assistance in national accounts provided under a project by Statistics Norway. National accounts - NSO revised national accounts methodology to implement SNA93 and better account for informal sector activities. - The estimate of 2006 nominal GDP was revised upward by some 40 percent. - Revisions include a lower estimated output share of the agricultural sector, resulting in lower estimates of output growth for 2006 and 2007. Prices - A consumer price index (CPI) is available on a timely basis. - CPI base is 2000, drawing on the 1997/98 household survey; data collected monthly by regional price collectors. - Plans to revise CPI weights based on the 2010 planned Integrated Household Survey (IHS). Trade - Preliminary trade estimates available with a lag of two to three months. - Trade data received electronically from six major ports. - Adjustment of imports from c.i.f. to f.o.b. prices is not appropriate; no reconciliation with data from neighboring countries. - Quality control is inadequate; figures are not cross-checked with other sources (e.g., customs receipts). ### Government finance statistics — weaknesses and issues - Accuracy and reliability affected by inadequate source data and inadequate system of recording source data. - Serious quality problems and data inconsistencies complicate program monitoring. Specific issues - Tax revenue data timely, but not always reconcilable with deposits in the Malawi Government (MG) Account. - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in fiscal reports prepared by the Ministry of Finance. - Recurrent expenditure data suffer from serious shortcomings partly related to insufficient bank reconciliation between line ministries’ expense records and Ministry of Finance financing information; line ministries submit spending reports based on recorded expenses, while the Ministry of Finance estimates expenses based on funding data (from the Credit Ceiling Authority). - Sizable discrepancies at times between the two sources for wages and other recurrent transactions; reallocation across budget lines contributes to discrepancies. - Domestically financed development expenditure estimates based on funding released to line ministries; externally funded expenditure based on reported project grants and loans. Timing and financing modality differences (e.g., donor prefinancing and reimbursement) cause substantial differences between flows of expenses and corresponding financing data. - Many donor projects not incorporated in the budget; corresponding expenditure not captured in government finance statistics. - Some externally funded development expenditures are likely recurrent and reported capital expenditure therefore overstated. - Expenditure arrears data likely incomplete; reporting from the Commitment Control System appears partial and ministry-level data are not consistent across reports. - Current budget classification includes economic and program classification and program, but does not include an effective administrative/organizational classification. - Expenditure data loosely mapped to functional classification based on CoFoG classification. - Output-oriented activities-based budget classification (ABB) is used for budget presentation; pro-poor expenditures protected under the PRSP are only identified in ABB. No bridge table exists to map ABB into the program classification used for expenditure reporting and accounting; pro-poor expenditures cannot be monitored. Under the ECF program, government expected to develop mechanism for properly monitoring social expenditures. - Government nomenclature program/subprogram used for functional classification includes functions, programs, and administrative levels; review recommended to verify alignment with CoFoG (GFSM2001). - Absence of a financial administrative structure with vertical hierarchy of responsibilities inhibits use of Government Finance Statistics (GFS). Budget funds directed to cost centers; system of warrants and sub-warrants not introduced despite sub-votes being introduced to a number of ministries. - Financing estimates based on monetary and debt data rather than government records of financing. Reporting on treasury bills directly issued to the RBM at times slow. Technical assistance and reform efforts - Authorities have received significant technical assistance from the Fund and other donors to strengthen expenditure monitoring and reporting, accounting, and statistical reporting, but results have lagged. - Government pledged to strengthen public financial management and fiscal reporting; renewed efforts to establish a work plan and utilize donor technical assistance more effectively. - Authorities working with AFRITAC to modify chart of accounts and output-based structures for realignment to national strategy. Reporting and classifications - Government finance data are not reported for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS). - August 2005 and August 2007 STA missions reiterated importance of implementing the Integrated Financial Management Information System (IFMIS), improving coverage and sectorization of government financial operations, and correctly classifying transactions according to international guidelines. - Mission proposed a migration plan and timetable to adopt the GFSM 2001 methodology. ### Monetary and financial statistics (MFS) - Despite recent improvements, MFS continue to have shortcomings: - Irregular reporting to STA (latest monetary data reported in November 2009 include observations for October 2009). - Lack of proper legislation to grant RBM authority to require reporting from other institutions; some legislation designed to address this issue recently approved, with pending legislation to strengthen RBM authority. - Issues with sectorization of the domestic economy and classification of financial instruments to adhere fully to the Monetary and Financial Statistics Manual methodology. - 2004 and 2008 missions noted recommendations for addressing shortcomings. - May 2008 STA mission: - Assisted RBM staff in developing standardized report forms (SRFs) for central bank accounts and monetary aggregates and initiated work on SRF for other depository corporations (ODCs). - Updated SRF on monetary aggregates with national definitions of money. - Initiated development of an integrated monetary database (IMD) dependent on RBM reporting of SRFs for ODCs and other financial corporations. - Revised coverage of interest rates in International Financial Statistics to ensure most representative rates published. ### External sector statistics - External sector statistics exhibit serious deficiencies. - Concepts and definitions broadly conform with BPM4 guidelines; some progress toward BPM5 methodology transition. - NSO should adopt BPM6 methodology and update Malawi balance of payments metadata accordingly. - NSO balance of payments section critically understaffed since March 2008. - Important data sources ceased to be available during 2006–07 (e.g., exchange control forms that supplied information on imports of goods, services, and current transfers). - Procedures for assessing accuracy of trade data need improvement. Specific gaps and classification issues - Data on remittances are non-existent despite anecdotal evidence of high remittances; recommended first step: require money transfer services to report monthly data to the RBM. - Data on foreign direct investment and portfolio flows are weak. - Project aid currently classified as current transfers rather than in the capital account; several large in-kind projects not captured properly in the balance of payments. - No international investment position statement prepared. - No foreign private capital survey (FPC) conducted between 2006–07; results of the 2009 survey not yet available (as of report). - RBM and Ministry of Finance’s Debt and Aid Department need to improve reporting of monetary and external debt data. ### Malawi: Tables of Common Indicators Required for Surveillance (as of December 31, 2009) — selected metadata and data-frequency notes - Exchange Rates: Date of latest observation 11/2009; Date received 12/2009; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 11/2009 (latest observation); 12/2009 (date received); M frequency. - Reserve/Base Money, Broad Money: 11/2009 (latest observation); 12/2009 (date received); M frequency. - Central Bank Balance Sheet: 11/2009 (latest observation); 12/2009 (date received); M frequency; Data Quality – Methodological soundness: LO, LO, LNO, O; Data Quality – Accuracy and reliability: LO, O, O, O, O. - Interest Rates: 11/2009 (latest observation); 12/2009 (date received); M frequency. - Consumer Price Index: 11/2009 (latest observation); 12/2009 (date received); M frequency; Data Quality – Methodological soundness: O, LNO, O, O; Data Quality – Accuracy and reliability: LNO, O, O, O, NA. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 09/2009 (latest observation); 10/2009 (date received); M frequency; Frequency of Reporting M; Frequency of Publication I; Data Quality – Methodological soundness: O, LO, O, O; Data Quality – Accuracy and reliability: O, LO, O, O, LNO. - Stocks of Central Government and Central Government-Guaranteed Debt: 09/2008 (latest observation); 10/2009 (date received); M frequency. - External Current Account Balance, Exports and Imports of Goods and Services, GDP/GNP: latest observations 2008; Date received 10/2009; A frequency; Data quality assessments provided in table. ### Statement by the IMF Staff Representative on Malawi (February 19, 2010) — new information since staff report - New information does not alter thrust of staff appraisal. - First half of fiscal year (July–December 2009) characterized by stronger than projected revenue performance, donor disbursement delays, and higher domestic borrowing. - Total revenues overperformed by around 0.5 percent of GDP, mainly due to improvements in tax administration and strong performance from nontax revenues, which were higher by around 0.3 percent of GDP. - Grants were lower than budgeted, with the shortfall amounting to around 2.7 percent of GDP (MK 20.4 billion); delays in donor disbursements led to higher than projected domestic borrowing. - Total expenditures roughly in line with the budget; expenditures on wages and salaries higher than budgeted by 0.06 percent of GDP (reflecting additional wages paid to teachers, nurses, and doctors), along with spending on domestic interest payments (reflecting higher domestic debt). These outlays were largely offset by reduced spending on the fertilizer subsidy program due mainly to lower than projected fertilizer import prices. - Second half of fiscal year expectations and policy intentions: - Domestic revenues expected to continue to overperform; overdue donor funds expected to be disbursed. - Government intends to tighten control of wages and salaries and goods and services expenditures, and reduce domestic debt. - Government intends to use some added budgetary inflows to increase social and development spending by about 0.7 percent of GDP compared to the budget, while meeting the domestic debt repayment target of 1.5 percent of GDP. - Monetary developments and targets: - Growth in reserve money and broad money was higher than projected in Q4, reflecting increased government borrowing to compensate for delayed donor disbursements. - Broad money grew by 24.4 percent at end-December 2009 on a twelve-month basis against projected growth of 17 percent. - Reserve money grew by 39 percent against projected increase of 28.4 percent. - Central bank intensified mop-up operations, resulting in an increase in the interbank rate and other key interest rates. - Program’s monetary targets are expected to be achieved, given expected reduction in domestic debt in the second half of the fiscal year. *Source: _cr1087 - ANNEX III (IMF staff report text provided).* ### 4. This year's tobacco crop is estimated at 177,500 metric tons (MT), including ### 4. This year's tobacco crop is estimated at 177,500 metric tons (MT), including ### Tobacco production and market conditions - This year's tobacco crop is estimated at 177,500 metric tons (MT), including 153,000 MT of burley, which is slightly lower than last year’s total production. - The reduced production stems from less favorable weather conditions and a smaller number of producers. - Prices are expected to be fairly resilient because of concerns about supply shortages in Mozambique and Zambia. - The industry is still in negotiation with the government over this year's minimum price schedule, which tobacco producers hope will reflect prevailing market conditions. ### Maize production and food security - The rains have been erratic in the southern region of the country, which has hurt maize production. - The maize crop is unaffected in other regions of the country. - Food security requires about 2.2 million MT of maize production per annum, which could still be met, despite reduced production in the south. ### Reserves and exchange rate developments - Official unencumbered reserve assets were slightly higher than projected at US$130 million at end-December 2009, equivalent to around 0.7 months of prospective imports. - Market reaction to the recent depreciation of the kwacha has been favorable, resulting in a gradual narrowing of the exchange rate spread from 22.2 percent at end-November 2009 to 20.6 percent. ### External budget support - The Department for International Development (DFID) and European Union (EU) have now confirmed their provision of budget support for fiscal year 2009/10. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1087.pdf* ### 9. The Millennium Challenge Account (MCA) board has recently re-certified Malawi as ### 9. The Millennium Challenge Account (MCA) board has recently re-certified Malawi as ### MCA re-certification and planned MCA-funded program - The Millennium Challenge Account (MCA) board has recently re-certified Malawi as eligible for compact funding. - A compact could be signed later this year, and the five-year window within which these funds must be drawn could start six to twelve months from that point after the plans and institutional arrangements to support the program are put in place. - The MCA-funded program would focus on: - improving the reliability and quality of the country’s electricity supply, - expanding electricity access to peri-urban and rural areas, - supporting institutional reforms to the Electricity Supply Corporation (ESCOM) and the state regulator. ### Recent macroeconomic performance (findings) - Malawi’s macroeconomic performance improved significantly over the past two years, with the agricultural-based economy weathering the global economic storm relatively well. - Real GDP growth: - 2008: 9.8 percent - 2009: estimated 7.6 percent (buoyed by increased agricultural production and expansion of the service sector) - Inflation: - Consumer price inflation decreased steadily to 7.5 percent in the 12 months to October 2009 after rising in late 2008. - Fiscal policy and public finances: - Fiscal policy loosened significantly in the run-up to the 2009 presidential and parliamentary elections, with sizeable budget overruns on fertilizer and goods and services spending during fiscal year 2008/09. - The fiscal year 2009/10 budget is a return to a prudent fiscal stance; preliminary execution through the first half of the fiscal year to December 2009 is in line with the budget, adjusted for delays in donor support. - Balance of payments and exchange rate: - De facto pegging of the Malawi kwacha to the U.S. dollar from 2006 to late 2009 contributed to moderation of inflation but led to some appreciation of Malawi’s real effective exchange rate and widened external current account and balance of payments deficits. - A weak balance of payments threatens exchange rate and price stability and medium-term growth. ### Medium-term outlook and downside risks - Medium-term growth drivers: - Expansion of productive capacity at the Kayelekera uranium mine, - Exploitation of niobium, - Development of the sugar sector. - Inflation outlook: - Expected to remain moderate; depreciation could exert pressure on prices, but solid maize harvest, stable fuel prices, and restrained fiscal and monetary policies should contain inflationary pressures. - Reserves and external financing: - International reserves should rise due to a substantial expected inflow of donor assistance; seasonal inflows once the new harvest season begins; and a reduction of import growth followed by some greater export growth as exchange rate adjustments and liberalization bring a market-based price. - Key downside risks: - foreign exchange shortages, - uncertainties in the external environment, - changes in the international environment for tobacco consumption, - delays in relieving the foreign exchange shortage that could threaten growth, fiscal revenues and investor confidence, - slower global recovery that could dampen export demand, investor interest, remittances, and access to foreign capital. ### Executive Board assessment and recommended policies - Directors observed resilience through high growth and moderate inflation; the financial sector remains well-capitalized and sound; food security was enhanced through increased agricultural output; progress toward Millennium Development Goals noted. - Concerns and calls to action: - Malawi’s external position remains weak; official reserves have fallen to well below prudential levels; Directors regretted last year’s policy slippages. - Authorities urged to restore internal and external equilibrium and address key structural constraints while supporting strong growth and poverty reduction. - Fiscal policy recommendations: - Adhere to the deficit target by containing nonpriority spending. - Minimize budgetary impact of deficits in key parastatals by announcing tariff adjustments to enhance cost recovery and devising a plan for Air Malawi’s debt. - Make the Public Financial and Economic Management unit in the Ministry of Finance fully operational. - Strengthen public spending management and develop a strong debt management policy. - Improve tax administration and broaden the tax base. - Monetary and exchange rate recommendations: - Control growth of monetary aggregates by ensuring fiscal discipline and prudent credit expansion. - Develop financial markets over the medium term to allow greater reliance on interest rate adjustments. - Build international reserves, achieve a properly valued exchange rate, and liberalize the foreign exchange market. - Reversion of foreign exchange surrender requirement and gradual depreciation of the nominal exchange rate seen as encouraging steps. - Full adherence to Article VIII obligations by end-2011 expected. - Maintain exchange rate flexibility to avoid an overly contractionary fiscal and monetary stance. - Financial sector and structural reforms: - Strengthen financial regulation and supervision; implement amendments to the Banking and Insurance Acts. - Approve and implement the Financial Sector Development Strategy to enhance financial inclusiveness, deepening, and competitiveness. - Create an enabling environment for private investment and growth by reforming utility companies and expanding access to utility services. - Adopt market-friendly agricultural sector policies. - Close cooperation with development partners to build capacity in these areas encouraged. ### ECF-supported program objectives and structural measures - ECF arrangement approved: three-year arrangement in the amount of SDR 52.05 million (75 percent of quota). - Program aims: - Restore external equilibrium by liberalizing the foreign exchange regime for current account transactions to allow a market-clearing exchange rate and eliminate measures inconsistent with the IMF’s Articles of Agreement by end-2011; attain international reserve coverage of a minimum of three months of imports by end-2012. - Maintain internal equilibrium by pursuing prudent fiscal and monetary policies (fiscal year 2009/10 budget; restrained monetary aggregate growth). - Sustain poverty reduction by creating room for more social and pro-poor spending and improving the social safety net. - Build competitiveness by improving public financial management, tax administration, efficiency and solvency of public utilities, and enhancing the business climate (infrastructure, access to finance, legal/regulatory reforms). - Prior actions and structural commitments: - Prior action: transparent accounting of the execution of the fertilizer subsidy program in fiscal year 2008/09 and budgeted figures in fiscal year 2009/10. - First-year structural measures: - (i) make fully operational the PFEM (Public Finance and Economic Management) unit; - (ii) develop a time-bound plan to restart and liberalize the interbank foreign exchange market; - (iii) continue implementation of financial sector reforms and improve monetary and exchange rate policy transparency. - Over the final two years: continue improving transparency and solvency of the public utilities. ### Key statistics (selected from Table 1 and text) - GDP growth (percent): - 2007 Act.: 8.6 - 2008 Act.: 9.8 - 2009 Prel.: 7.6 - 2010 Proj.: 6.0 - 2011 Proj.: 6.3 - Consumer prices (end of period): 2007: 7.5; 2008: 9.9; 2009: 7.7; 2010 Proj.: 9.2; 2011 Proj.: 8.5 - Consumer prices (annual average): 2007: 7.9; 2008: 8.7; 2009: 8.5; 2010 Proj.: 10.1; 2011 Proj.: 8.3 - Central government (percent of GDP): - Revenue and grants: 2007: 31.6; 2008: 31.2; 2009: 30.1; 2010 Proj.: 35.2; 2011 Proj.: 32.2 - Tax and non tax revenue: 2007: 18.7; 2008: 19.9; 2009: 21.4; 2010 Proj.: 22.6; 2011 Proj.: 22.8 - Grants: 2007: 12.9; 2008: 11.3; 2009: 8.8; 2010 Proj.: 12.7; 2011 Proj.: 9.4 - Expenditure and net lending: 2007: 36.0; 2008: 36.2; 2009: 36.1; 2010 Proj.: 36.0; 2011 Proj.: 33.9 - Overall balance (excluding grants): 2007: -17.2; 2008: -16.5; 2009: -14.6; 2010 Proj.: -13.5; 2011 Proj.: -11.2 - Overall balance: 2007: -4.3; 2008: -5.0; 2009: -5.8; 2010 Proj.: -0.8; 2011 Proj.: -1.8 - Money and credit: - Money and quasi money (change in percent of broad money at beginning): 2007: 36.9; 2008: 33.1; 2009: 19.4; 2010 Proj.: 16.7; 2011 Proj.: 13.9 - Net foreign assets: 2007: 41.9; 2008: -10.1; 2009: -18.4; 2010 Proj.: 13.6; 2011 Proj.: 10.4 - Credit to the rest of the economy (percent change): 2007: 32.8; 2008: 45.5; 2009: 27.9; 2010 Proj.: 28.4; 2011 Proj.: 19.4 - External sector (US$ millions): - Exports, f.o.b.: 2007: 731.7; 2008: 969.2; 2009: 1,004.8; 2010 Proj.: 1,119.9; 2011 Proj.: 1,229.7 - Imports, c.i.f.: 2007: -1,182.3; 2008: -1,722.8; 2009: -1,809.6; 2010 Proj.: -1,739.8; 2011 Proj.: -1,843.0 - Usable gross official reserves: 2007: 217.1; 2008: 239.0; 2009: 114.0; 2010 Proj.: 276.9; 2011 Proj.: 407.3 - (months of imports): 2007: 1.2; 2008: 1.3; 2009: 0.6; 2010 Proj.: 1.4; 2011 Proj.: 2.1 - (percent of reserve money): 2007: 93.2; 2008: 35.0; 2009: 81.3; 2010 Proj.: 126.6 - Current account (percent of GDP): 2007: -1.5; 2008: -6.4; 2009: -8.6; 2010 Proj.: -1.8; 2011 Proj.: -2.2 - Current account, excl. official transfers (percent of GDP): 2007: -15.5; 2008: -21.8; 2009: -21.9; 2010 Proj.: -18.7; 2011 Proj.: -15.9 - Overall balance (percent of GDP): 2007: 0.5; 2008: -1.0; 2009: -1.8; 2010 Proj.: 4.4; 2011 Proj.: 3.6 - Terms of trade (percent change): 2007: -1.7; 2008: 5.9; 2009: 13.7; 2010 Proj.: -3.1; 2011 Proj.: -2.9 - Debt and rates: - External debt (public sector) (percent of GDP): 2007: 14.4; 2008: 16.0; 2009: 19.1; 2010 Proj.: 21.8; 2011 Proj.: 23.3 - NPV of debt (percent of avg. exports): 2007: 0.0; 2008: 42.1; 2009: 64.3; 2010 Proj.: 62.1; 2011 Proj.: 65.4 - NPV of debt (percent of avg. exports) [alternate row]: 2007: 41.9; 2008: 51.5; 2009: 58.7; 2010 Proj.: 66.4; 2011 Proj.: 72.3 - External debt service (percent of exports): 2007: 3.2; 2008: 6.7; 2009: 1.3; 2010 Proj.: 1.8; 2011 Proj.: 2.2 - Net domestic debt (central government): 2007: 11.8; 2008: 19.0; 2009: 20.3; 2010 Proj.: 14.0; 2011 Proj.: 11.0 - Treasury bill rate (period average): 2007: 13.9; 2008: 10.9; 2009: 11.9 *Source: IMF Public Information Notice (PIN) No. 10/38 and Press Release No. 10/52, February 19, 2010.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1087.pdf_