## _cr12221 ## Source details **Canonical URL:** [_cr12221](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12221.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12221.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12221.pdf.json) --- ### Executive Summary — context, actions, and early outcomes - President Joyce Banda assumed office in early April 2012 and implemented measures to address the foreign exchange shortage and repair relations with development partners. - Key policy actions: - Devaluation of the exchange rate from K167 to K250 per U.S. dollar (a 33 percent devaluation) and adoption of a floating exchange rate regime. - Banks and foreign exchange bureaus allowed to set buy/sell rates with customers. - Removal of requirement for foreign exchange earnings to be surrendered to the RBM; earnings now flow directly to commercial banks. - Cancellation of requirement for RBM review of external payments applications exceeding US$50,000. - Increases in petroleum product prices and adoption of an automatic adjustment mechanism. - Fiscal restraint: cuts in foreign travel, reductions in vehicles for senior officials, postponement of new domestically-financed development projects. - RBM tightened monetary policy: bank rate raised from 13 percent to 16 percent and mopped up excess liquidity. - Electricity tariff increases toward cost-recovery to reduce ESCOM losses. - Early outcomes and donor response: - Parallel market premium fell from 60–80 percent to less than 5 percent. - External grants projected to increase from US$282 million in FY2011/12 to US$481 million in FY2012/13; general budget support grants from less than US$2 million to US$208 million. - US Millennium Challenge Corporation reinstated a US$350 million grant for a Power Sector Revitalization Project. ### Program request and IMF engagement - Authorities requested cancellation of the ECF-supported arrangement approved February 2010 and a new three year ECF arrangement of SDR104.1 million (150 percent of quota). - Disbursement structure requested: - Half of the amount to be disbursed in four installments of SDR 13 million each in the first year—the first upon approval, followed by three disbursements subject to quarterly reviews. - Rationale for access level: - Requested access is twice the norm for a country with outstanding concessional credit from the Fund in excess of 100 percent of quota, justified by balance of payments need (very low international reserves), strength of policies (substantial upfront measures), strong donor support, and adequate capacity to repay the Fund. ### Recent economic developments and vulnerabilities - Growth and sector performance: - Real GDP growth slowed to 4.3 percent in 2011, from an average annual rate of 8.3 percent during 2007–10. - Sectors most affected by foreign exchange shortage: manufacturing, transportation, construction, wholesale and retail trade. - Agriculture supported by the Farm Input Subsidy Program (FISP) and favorable weather. - Inflation and monetary conditions: - Year-on-year headline inflation: 17.3 percent in May 2012; 20.1 percent in June 2012. - Inflation spike expected to persist for several months but dissipate by early 2013 with restrained fiscal and monetary policies. - Reserve money year-on-year growth at end-April 2012: 47 percent; broad money growth year-on-year: 31 percent. - RBM actions: tightened in April 2012, removed excess liquidity using treasury bills, raised policy rate from 13 percent to 16 percent in May and to 21 percent on July 11, 2012; used foreign exchange sales to mop up liquidity after devaluation. - Fiscal outcomes and public debt/arrears: - Overall fiscal deficit widened from nearly 3 percent of GDP in FY2010/11 to an estimated 7 percent of GDP in FY2011/12. - Domestic financing rose from 1.7 percent of GDP to 5.6 percent of GDP between those years. - Government and state-owned enterprises accumulated about K72 billion (7 percent of GDP) in domestic arrears. - External sector and reserves: - International reserves very low—around one month of imports for much of the last three years and about half a month of imports more recently. - Current account (including grants) has fluctuated widely driven by aid flows and terms of trade. - Private sector accumulated arrears estimated by authorities at more than US$300 million (equivalent to about 15 percent of projected imports in 2012). ### Policy framework and medium-term strategy (MGDS II and ECF objectives) - Government development strategy objective: poverty reduction through sustained economic growth and infrastructure development (MGDS II covers 2011/12–2015/16). - Program objectives and medium-term outcomes: - Rebound in growth from 4.3 percent in 2012 to 5.7 percent in 2013 and to at least 6½ percent per year from 2015. - Year-on-year inflation to rise to about 23 percent in December 2012, and decline to single-digit levels in 2014. - No net domestic financing of the government budget on an annual basis. - Usable international reserves to increase gradually from one month of import cover at end-2012 to 3 months of imports by end-2015. - Policy pillars: - Fiscal discipline: domestic revenue mobilization, alignment of expenditures to MGDS II priorities, commitment to zero net domestic borrowing annual target. - Monetary tightening and operational independence of RBM. - Structural reforms to improve investment climate, financial deepening, and competitiveness. ### Program design, ownership, and debt sustainability - Program design informed by an Ex Post Assessment (EPA) stressing need for “firm ownership.” - New administration demonstrated ownership via rapid implementation of exchange rate and fiscal measures. - Updated joint IMF–World Bank DSA: Malawi’s risk of external debt distress remains moderate. - Stress tests highlight vulnerability to an export shock and need for fiscal consolidation to slow growth in domestic debt stock. - Staff supports requested ECF three-year arrangement of SDR104.1 million (150 percent of quota). ### Exchange rate policy and REER assessment - Prior to May 2012: de facto peg to the U.S. dollar with episodic depreciations (about 13, 12, and 7 percent in key episodes; 10 percent in August 2011). - May 2012 changes: 33 percent devaluation and adoption of a floating regime. - Staff estimated REER misalignment of around 34 percent before May 2012 devaluation (model results range 26 to 34 percent). - Parallel market premium about 80 percent prior to reforms; reforms brought exchange rate broadly in line with fundamentals. ### Fiscal discipline, revenue, expenditure, and arrears treatment - Fiscal projections and allocations: - Fiscal deficit projected to fall from 7 percent of GDP in 2011/12 to about 1 percent in 2012/13, reflecting a large increase in grants. - Grants increase from 5.5 to 10.4 percent of GDP. - Domestic revenues projected to increase by about 1.3 percent of GDP in FY2012/13, mainly from petroleum pricing and taxation reform. - Increase in recurrent expenditures of about 2 percent of GDP; higher allocations to FISP, public works, school feeding, school bursary, and cash transfer programs. - Arrears management and procurement: - Domestic arrears to be verified by the Office of the Auditor General; verified amounts to be paid over several years; K10 billion provision in 2012/13 budget to settle some arrears. - Accelerate implementation of IFMIS commitment module; publicize procurement rules and warn suppliers outside system will not be paid. - Contingent liabilities and SOEs: - National Oil Company of Malawi limited to managing strategic fuel reserves. - Regulatory regime for electricity to allow tariff adjustments to cover ESCOM’s operating costs; similar regime for Water Boards. ### Enhancing monetary policy effectiveness and RBM independence - Monetary objectives: price stability, sufficient private sector credit, and accumulation of international reserves. - Broad money programmed to grow at about the pace of nominal GDP in the near term; reserve money as an intermediate target. - RBM to use instruments including open market operations and bank rate changes; RBM and Ministry of Finance to enhance coordination and liquidity forecasting. - Options under consideration to provide resources to RBM for monetary operations: - (i) issuance of new treasury bills for monetary operations with Ministry of Finance bearing interest costs; - (ii) issuance of an income generating security to the RBM with RBM bearing the cost. - Authorities agreed to amend the RBM Act to place a limit on total government borrowing from the RBM. ### Financial sector stability, deepening, and inclusion - Banking sector soundness: - Non-performing loans around 4 percent in 2011. - RBM intensifying monitoring, adopting risk-based supervision, stress testing, and establishing Basel II governance structures with full compliance envisaged for January 2014. - Financial deepening and inclusion initiatives: - Establishment of credit reference bureaus (two operating). - Development of a National Strategy for Financial Inclusion; Financial Sector Development Strategy targeted for cabinet approval by 31-Dec-12. - Establishment of the Malawi Financial Sector Deepening Trust (MFSDT). - FSAP-related progress: Banking Act and Banking Services Bill done (2010); lifting foreign exchange restrictions and implementing transparent exchange regime done (2012). ### External sector, balance of payments, and reserves (data highlights) - Selected balance of payments metrics (US$ millions, selected series): - Exports: 936.7; 1,237.7; 1,262.7; 1,273.8; 1,485.4; 1,604.4; 1,734.0; 1,874.1; 2,025.7. - Tobacco exports: 501.3; 687.6; 482.4; 458.0; 577.1; 606.0; 636.3; 668.1; 701.5. - Imports: -1,573.3; -1,981.3; -1,871.0; -1,905.7; -1,981.8; -2,099.4; -2,217.6; -2,368.3; -2,553.6. - Current account including grants (US$ millions): -244.1; -69.9; -332.9; -201.3; -81.3; -91.7; -91.3; -109.5; -159.5. - Gross official reserves (US$ millions, memorandum): 140.5; 279.6; 190.2; 204.5; 405.7; 564.9; 728.6; 885.2; 1,029.3. - Months of imports (memorandum): 0.7; 1.5; 1.0; 1.0; 2.0; 2.6; 3.1; 3.5; 3.8. - Financial account (US$ millions): 235.0; 280.3; 155.9; 177.8; 234.8; 241.7; 267.1; 298.6; 332.0. - External financing requirement (US$ millions): -625; -1,072; -572; -777; -841; -816; -819; -832; -871. - Total expected disbursements (official): 545; 954; 451; 652; 680; 666; 661; 663; 665. ### Program phasing, targets, safeguards, and conditionality - Disbursement schedule under the proposed ECF (SDR and % of Quota): - 13.0 (218.75% of Quota) — July 23, 2012 — Executive Board Approval. - Four early installments of SDR 13.0 each in first year tied to quarterly reviews; total ECF: 104.1 (150.00% of Quota). - Indicators of capacity to repay the Fund (Table 7 highlights): - Projected peak debt service to Fund: US$34.1 million in 2018 (1.5 percent of exports of goods and services). - Projected level of credit outstanding (SDR millions): 117.7; 151.4; 160.7; 156.4; 138.6; 122.8; 101.1; 84.1; 62.5; 41.6; 20.8. - Review schedule and conditionality: - Quarterly reviews in the first year; semi-annual thereafter. - Quantitative performance criteria on NDA of central bank, NIR, central government net domestic borrowing, limits on nonconcessional external borrowing, and limits on accumulation of external payments arrears. - Structural benchmarks centered on PFM and financial sector reforms (publish MRA monthly revenues; verify domestic arrears by 31-Dec-12; configure IFMIS PO module by 31-Dec-12; amend RBM Act by 30-Jun-13; others). - Safeguards: - An updated safeguards assessment of RBM initiated and to be completed by the first review; prior assessment (25-Jun-2010) noted strong financial safeguards in audits and reporting but lack of adequate autonomy. ### Debt sustainability, projections, and stress tests - DSA conclusions: - Malawi’s risk of external debt distress assessed as moderate. - Under baseline, external debt burden indicators fall and remain below indicative policy thresholds. - Key projections and indicators (selected): - PV of PPG external debt-to-GDP and PV debt-to-exports decline over projection period (selected series preserved in source). - Exports of goods and services (US$ millions, memorandum): 1,386.1; 1,604.1; 1,730.4; 1,868.2; 2,017.4; 2,178.4; 2,352.0; 2,533.5; 2,733.8; 2,955.0; 3,198.7. - Debt service (US$ millions): 20.2; 31.5; 54.5; 59.6; 66.3; 60.9; 70.2; 63.1; 70.0; 68.8; 68.8. - Stress tests and risks: - Downside risks: stagnation of euro area/world growth, fall in non-oil commodity prices, reduction in aid flows, adverse weather conditions. - Exports shock scenarios could breach PV debt-to-exports thresholds in stress cases (export shock identified as most severe in bound tests). - Importance of avoiding fiscal and monetary laxity, especially ahead of 2014 elections. ### Data quality, reporting, and capacity building - Data quality issues: - Ministry of Finance had inflated revenue data for July–December 2011 reported February 2012; MRA authorized short-term loans in late-December 2011 to “boost” revenues; loans repaid in early January 2012. - External sector statistics and national accounts require further work; NSO balance of payments unit understaffed since March 2008. - Reporting requirements (TMU highlights): - Program exchange rate set at MK260 = US$1 for valuation purposes. - NIR reported weekly and end-month by RBM. - Reporting templates and frequencies specified for gross international reserves, reserve money, RBM balance sheet, treasury bill auctions, central government domestic borrowing, full banking survey, fiscal tables, revenue data, external debt, and IMF program performance. ### Selected key numerical indicators (preserved exact values) - Exchange rate devaluation: from K167 to K250 per U.S. dollar (33 percent). - External grants projection: US$282 million in FY2011/12 to US$481 million in FY2012/13. - General budget support grants: less than US$2 million to US$208 million. - Millennium Challenge Corporation compact reinstatement: US$350 million. - ECF request: SDR104.1 million (150 percent of quota); first-year disbursements in four installments of SDR 13 million each for half of the amount. - Real GDP growth: average 8.3 percent during 2007–10; 4.3 percent in 2011. - Inflation: 17.3 percent in May 2012; 20.1 percent in June 2012. - RBM policy rate: raised from 13 percent to 16 percent (and later to 21 percent on July 11, 2012). - Domestic arrears: K72 billion (7 percent of GDP). - Fiscal deficit: nearly 3 percent of GDP in FY2010/11 to an estimated 7 percent of GDP in FY2011/12. - Domestic financing: 1.7 percent of GDP in FY2010/11 to 5.6 percent of GDP in FY2011/12. - International reserves: around one month of imports for much of last three years and about half a month more recently. - Program monetary targets (millions of kwacha): Ceiling on NDA of RBM — 119,709; 114,579; 109,417; 118,542; 106,256; 100,930. Ceiling on reserve money — 89,168; 76,178; 88,210; 97,809; 99,120; 105,830. - Program fiscal targets (millions of kwacha): Ceiling on central government's net domestic borrowing — -11,988; 18,500; 11,609; 0. Floor on social spending — 39,034; 94,044; 121,798; 151,899. - Proposed ECF disbursement total: 104.1 SDR (150.00% of Quota); initial tranche 13.0 SDR on July 23, 2012. _Italic: Source — Executive Summary and selected excerpts of IMF staff report (Malawi) contained in _cr12221._ ### Executive Summary ...................................................................................................... ### Executive Summary ### Context: New commitment to tackle macroeconomic challenges - President Joyce Banda assumed office in early April 2012 and implemented measures to address the foreign exchange shortage and repair relations with development partners. - Key policy actions taken by the authorities: - Devaluation of the exchange rate from K167 to K250 per U.S. dollar (a 33 percent devaluation), and adoption of a floating exchange rate regime. - Allowing banks and foreign exchange bureaus to set buy/sell rates with customers. - Removal of the requirement for foreign exchange earnings to be surrendered to the RBM; earnings now flow directly to commercial banks. - Cancellation of the requirement for banks to submit to the RBM for review any application for external payments exceeding US$50,000. - Increases in prices of petroleum products and adoption of an automatic adjustment mechanism to pass import cost changes to retail prices. - Fiscal restraint measures: reduction in foreign travel by government officials, cuts in vehicles for senior officials, postponement of new domestically-financed development projects. - RBM tightened monetary policy: raised the bank rate from 13 percent to 16 percent and acted to mop up excess liquidity. - Electricity tariff increases toward cost-recovery levels to reduce ESCOM operational losses. - Early outcomes and donor response: - Private sector access to foreign exchange, including for fuel imports, has eased; parallel market premium fell from 60–80 percent to less than 5 percent. - External grants to the government budget projected to increase from US$282 million in FY2011/12 to US$481 million in FY2012/13; general budget support grants from less than US$2 million to US$208 million. - The Board of the US Millennium Challenge Corporation announced reinstatement of the US$350 million grant for a Power Sector Revitalization Project. ### Program request and IMF engagement - Authorities request cancellation of the ECF-supported arrangement approved in February 2010 and seek a new three year ECF arrangement of SDR104.1 million (150 percent of quota). - Disbursement structure requested: - Half of the amount will be disbursed in four installments of SDR 13 million each in the first year—the first upon approval of the arrangement, followed by three disbursements subject to quarterly reviews. - Rationale for access level: - Requested access is twice the norm for a country with outstanding concessional credit from the Fund in excess of 100 percent of quota, justified by Malawi’s balance of payments need (very low international reserves), strength of policies (including substantial upfront measures), strong donor support, and adequate capacity to repay the Fund. ### Recent economic developments and vulnerabilities - Growth and sector performance: - Real GDP growth slowed to 4.3 percent in 2011, from an average annual rate of 8.3 percent during 2007–10. - Sectors heavily dependent on imports—manufacturing, transportation, construction, and wholesale and retail trade—were most affected by the foreign exchange shortage. - Agriculture has been a principal engine of growth since the mid-2000s, supported by the Farm Input Subsidy Program (FISP) and good weather conditions. - Inflation and monetary conditions: - Year-on-year headline inflation jumped to 17.3 percent in May 2012. - The spike in inflation is expected to persist for several months but should dissipate by early 2013 with restrained fiscal and monetary policies. - The RBM began tightening in April 2012, off-loading some holdings of treasury bills, raised the policy rate in May, and used foreign exchange sales to mop up liquidity. - Kwacha liquidity tightened significantly and several banks resorted to the RBM discount window. - Fiscal outcomes and public debt/arrears: - Overall fiscal deficit widened from nearly 3 percent of GDP in FY2010/11 to an estimated 7 percent of GDP in FY2011/12. - Domestic financing rose from 1.7 percent of GDP to 5.6 percent of GDP between those years. - The government and state-owned enterprises accumulated about K72 billion (7 percent of GDP) in domestic arrears. - External sector and reserves: - Current account balance (including transfers) has fluctuated widely driven by aid flows and terms of trade. - International reserves have been very low—hovering around one month of imports for much of the last three years and about half a month of imports more recently—providing little buffer against shocks. - Pronounced seasonality in foreign exchange inflows complicates monetary and reserve management. ### Policy framework and medium-term strategy - Government development strategy objective: poverty reduction through sustained economic growth and infrastructure development. - MGDS II (covering 2011/12–2015/16) is the approved strategy; key elements include: - Maintaining inflation at single digit levels and increasing international reserves. - Increasing national investment in electricity generation and supply, transportation, and irrigation; and in priority sectors: agriculture, manufacturing, mining, and tourism. - Prudent fiscal and monetary policies to deliver low inflation. - MDGS II is designed to help Malawi achieve the Millennium Development Goals. ### Implementation record and institutional issues - Performance under the 2010 ECF arrangement: - The arrangement went off-track shortly after the first review in December 2010; the first review was completed with one waiver related to net domestic borrowing for June 2010. - Discussions for the second review (initiated March 2011) were not completed due to disagreements on 2011 policy measures, including back-tracking on exchange rate liberalization commitments; June 2011 quantitative targets were missed by wide margins. - Prior weaknesses highlighted: - Fiscal policy loosened in run-up to May 2009 elections, with substantial recourse to domestic financing. - Inadequate policy response to adverse terms of trade and aid shocks fostered a parallel foreign exchange market. - Public Financial and Economic Management unit established in the Ministry of Finance; progress on budget process, accounting and fiscal reporting noted. - RBM constrained by cost considerations from conducting open market operations historically; renewed commitment to undertake open market operations in 2012. - Significant progress on strengthening supervision of financial institutions, including risk-based supervision and stress-testing techniques. ### Key numerical indicators and thresholds cited - Exchange rate devaluation: from K167 to K250 per U.S. dollar (33 percent). - External grants projection: US$282 million in FY2011/12 to US$481 million in FY2012/13. - General budget support grants: less than US$2 million to US$208 million. - Millennium Challenge Corporation compact reinstatement: US$350 million. - ECF request: SDR104.1 million (150 percent of quota); first-year disbursements in four installments of SDR 13 million each for half of the amount. - Real GDP growth: average 8.3 percent during 2007–10; 4.3 percent in 2011. - Inflation: 17.3 percent in May 2012. - RBM policy rate: raised from 13 percent to 16 percent. - Domestic arrears: K72 billion (7 percent of GDP). - Fiscal deficit: nearly 3 percent of GDP in FY2010/11 to an estimated 7 percent of GDP in FY2011/12. - Domestic financing: 1.7 percent of GDP in FY2010/11 to 5.6 percent of GDP in FY2011/12. - International reserves: around one month of imports for much of the last three years and about half a month of imports more recently. *Source: Executive Summary of the IMF staff report (Malawi) contained in _cr12221 - Executive Summary.* ### 13. Improvements in the business regulatory environment and investments to ### 13. Improvements in the business regulatory environment and investments to ### Overview - Improvements in the business regulatory environment and investments to address supply-side bottlenecks are expected to boost foreign direct investment in mining, manufacturing and tourism. - New mines in rare earth metals are expected to start operations beginning in 2013. - Significant interest in agro-processing activities from foreign and domestic investors in manufacturing. - Promotion of high-quality tourism facilities is a key goal of the MGDS. - The construction sector is an important source of medium-term growth as construction activities grow with increased public and private investment. ### Medium-term macroeconomic framework and program objectives - Program is based on MGDS II with objectives including: achievement and maintenance of a stable macroeconomic environment with low inflation, increasing foreign exchange reserves, and structural reforms to improve the investment climate and promote sustained and inclusive growth (MEFP ¶13). - Key features: - A rebound in growth from 4.3 percent in 2012 to 5.7 percent in 2013 and to at least 6½ percent per year from 2015. - Year-on-year inflation rises to about 23 percent in December 2012, and declines gradually thereafter to single-digit levels in 2014. - No net domestic financing of the government budget on an annual basis; any borrowing in the early part of the year would be repaid by the end of the year. - The level of useable international reserves increases gradually from one month of import cover at end-2012 to 3 months of imports by end-2015. ### Program design, ownership, and debt sustainability - Program design was informed by the Ex Post Assessment (EPA) of Malawi’s Longer-Term Program Engagement, which found Fund engagement helped maintain macroeconomic stability during 2004–11 but weak ownership led to setbacks in recent years; recommended continued engagement only if authorities have “firm ownership.” - The new administration has demonstrated strong ownership through rapid implementation of exchange rate measures and politically unpopular but fiscally sound measures (e.g., increases in petroleum products and electricity tariffs). - Staff encouraged authorities to proactively explain policy rationale and benefits; authorities began such outreach (two-page newspaper insert on FY2012/13 budget proposals). - Updated joint IMF–World Bank DSA: Malawi’s risk of external debt distress remains moderate; narrow export base, reliance on rain-fed agriculture and low international reserves increase susceptibility to shocks. Stress tests highlighted vulnerability to an export shock and the need for fiscal consolidation to slow growth in the domestic debt stock. ### Exchange rate policy and regime - Malawi had a de facto peg to the U.S. dollar for most of the period since 2004 with episodic depreciations: about 13, 12, and 7 percent in key episodes; a 10 percent devaluation in August 2011. - Prior practice sought to keep the kwacha virtually fixed against the U.S. dollar; expansionary fiscal and monetary policies and exchange restrictions fostered a parallel foreign exchange market. - Changes introduced in May 2012 established a floating exchange rate regime. - Staff estimates REER misalignment of around 34 percent before the May 2012 devaluation (CGER-type methodologies and time series approach; Appendix II). - Parallel market premium was about 80 percent prior to reforms. - The 33 percent devaluation and adoption of a floating regime in May 2012 brought the exchange rate broadly into line with fundamentals. - Authorities agreed to a Fund staff review to determine compliance with Article VIII obligations; staff is reviewing recent reforms. ### Fiscal discipline to support the exchange rate regime and priorities - Government measures to achieve fiscal sustainability: - Domestic revenue mobilization: removal of implicit subsidies on fuel and associated boost in fuel tax revenues; strengthening revenue administration via increased audits, adoption and use of electronic fiscal devices for VAT enforcement, and use of computerized cargo scanners. - Expenditure alignment to MGDS II priorities with increased allocations to Agriculture, Education, and Health. - Medium-term expenditure framework anchored by an annual target of zero net domestic borrowing to lower domestic debt to sustainable levels. - Fiscal projections and allocations: - Fiscal deficit projected to fall from 7 percent of GDP in 2011/12 to about 1 percent in 2012/13, reflecting a large increase in grants. - Grants increase from 5.5 to 10.4 percent of GDP, reducing domestic financing needs and allowing scale-up of social protection. - Increase in recurrent expenditures of about 2 percent of GDP. - Programs receiving higher allocations compared to FY2011/12 include FISP, public works, school feeding, school bursary, and cash transfer programs (MEFP ¶18). - Social sectors (education and health) receive a higher share to allow hiring more teachers and health workers. - Revenue and expenditure management: - Domestic revenues projected to increase by about 1.3 percent of GDP in FY2012/13, mainly reflecting reform of pricing and taxation of petroleum products (MEFP ¶16). - Quarterly spending ceilings will be established and enforced (MEFP ¶18). - Domestic arrears and procurement: - Domestic arrears to be verified by the Office of the Auditor General; verified amounts to be paid over several years. - Accelerate implementation of the commitment module in IFMIS to prevent new arrears. - Government will publicize procurement rules and warn that suppliers outside the established system will not be paid (MEFP ¶20). - Contingent liabilities and SOE losses: - National Oil Company of Malawi limited to managing strategic fuel reserves. - Regulatory regime established for electricity to allow tariff adjustments to cover ESCOM’s operating costs; similar regime to be established for Water Boards to eliminate budgetary transfers and minimize commercial bank borrowing (MEFP ¶21). ### Enhancing monetary policy effectiveness - Authorities emphasize price stability, sufficient credit to private sector and accumulation of international reserves. - Broad money programmed to grow at about the pace of nominal GDP in the near term to help manage domestic demand and contain inflation; further financial deepening would allow faster broad money growth without fueling inflation. - RBM will use available instruments including open market operations and bank rate changes; RBM and Ministry of Finance to enhance coordination and information sharing for RBM liquidity forecasts. - In the near term, RBM will mainly rely on its holdings of treasury bills for monetary operations. - Strengthening RBM operational independence: - Authorities requested Fund technical assistance on options to provide resources to the RBM for monetary operations (MEFP ¶25). - Two options under consideration: (i) issuance of new treasury bills for monetary operations with Ministry of Finance bearing interest costs; (ii) issuance of an income generating security to the RBM with RBM bearing the cost. - Authorities agreed to amend the RBM Act to place a limit on total government borrowing from the RBM (MEFP ¶26); current Act limits overdrafts but not other forms of RBM lending. ### Safeguarding financial sector stability - Banking sector remains sound; non-performing loans at low levels but macro deterioration in recent years elevated portfolio risks. - RBM intensified monitoring and surveillance and is establishing Basel II governance structures and committees with full compliance envisaged for January 2014. - Financial deepening indicators improving but still low by regional standards (Appendix III). - Government initiatives to deepen financial sector: - Establishment of credit reference bureaus (MEFP ¶28). - Development of a National Strategy for Financial Inclusion (MEFP ¶30). - Establishment of the Malawi Financial Sector Deepening Trust (MFSDT) (MEFP ¶30). - These initiatives align with 2008 FSAP recommendations (Box 2); status highlights include: - Financial sector legislation: Banking Act and Banking Services Bill done (2010). - Monetary operations: reduction of LRR penalty rates done; weekly deposit facility under consideration. - Foreign exchange market: lifting restrictions to enhance competition and implementing transparent exchange regime done (2012). - Bank regulation and supervision: Banking Act of 2010 done; stress testing done. - Banking system consolidation and other items: some done (Banking Act of 2010), some ongoing, some not yet (Box 2 specifics preserved). ### Improving international competitiveness - Malawi lags regional peers on external competitiveness: - Over 60 percent of total exports from tobacco; economy undiversified with few cash crops and maize for domestic consumption. - Export growth stymied relative to regional peers; imports have taken a larger and growing share of GDP, reflecting chronic exchange rate misalignment. - Malawi’s share of regional exports to the world has declined; ranks behind neighbors on business environment indicators (Appendix II). - Government response: - Adoption of a National Export Strategy (MEFP ¶¶32–33). - Efforts to address supply-side bottlenecks in energy (MCC compact and Interconnector Project with Mozambique). ### Data quality and dissemination issues - To safeguard revenue data integrity, MRA to publish monthly revenue collections in local media with a lag of no more than a month. - Minister of Finance acknowledged that under previous administration the ministry inflated revenue data for July–December 2011 reported to parliament in February 2012. - In late-December 2011 MoF authorized MRA to obtain short-term loans from several banks which were deposited into the MRA account at RBM to “boost” revenues; loans were repaid in the first few days of January 2012. ### Program access, reserves, and donor support - Authorities request access equivalent to 150 percent of quota for a new three-year ECF arrangement (higher than norm of 75 percent for comparable cases). - Malawi currently has outstanding obligations to the Fund equivalent to 135 percent of quota. - Case for higher-than-usual access based on balance of payments need, program strength (bold upfront measures implemented), strong donor support, and adequate capacity to repay: - International reserves precarious at only ½ a month of import cover. - Authorities estimate private sector accumulated arrears of more than US$300 million (equivalent to about 15 percent of projected imports in 2012). - Fund resources would enable RBM to rebuild gross reserves to 1 month of imports by end-2012 and to 3 months by end-2015 (Table 4a); net Fund resources account for one-quarter of reserve accumulation (Table 5). - One donor (DFID) brought forward planned disbursements to help RBM’s reserves. - Program expected to catalyze donor support; donors indicated funds withheld when prior ECF-supported program went off-track would be restored, and other donors signaled intention to increase support following repeal of laws seen as curtailing freedoms. *Source: _cr12221 - 13. Improvements in the business regulatory environment and investments to* ### 34. Malawi has adequate capacity to meet its financial obligations to the Fund ### _cr12221 - 34. Malawi has adequate capacity to meet its financial obligations to the Fund ### Capacity to meet Fund obligations - Current projected level of credit to the Fund would rise from 135 percent of quota at present to 225 percent of quota at end-2015 if the proposed level of access is fully disbursed (Table 7). - Peak in debt service to the Fund is projected in 2018 at US$34.1 million (or 1.5 percent of exports of goods and services). - Malawi has an established record of timely servicing of its obligations to the Fund; the DSA places Malawi at a moderate risk of debt distress. - Fund support is projected to be a relatively small part of overall 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. - More broadly, Malawi receives around US$500 million per annum in official grants, three-quarters of which goes through the budget. - The combination of strong donor support and prospects for development of Malawi’s export potential is expected to support Malawi’s capacity to repay the Fund. ### Phasing, program reviews, and conditionality - Disbursement phasing: - It is proposed to front load disbursements, with 75 percent of quota in the first year (Table 6), given low levels of international reserves and strong upfront actions by the authorities. - Disbursement sequencing: half of the requested SDR104.1 million (150 percent of quota) is to be disbursed in four installments in the first year. - Review schedule: - Quarterly reviews in the first year; if all goes well, reviews change to half-yearly in subsequent years. - Prior actions and performance criteria: - A prior action requiring parliamentary passage of a budget for FY2012/13 that is in line with program objectives has been met. - The program has quantitative performance criteria on NDA of the central bank, NIR, central government net domestic borrowing, limits on nonconcessional external borrowing, and limits on the accumulation of external payments arrears (Table 8). - Standard continuous performance criteria include the criterion on non-imposition or intensification of restrictions on the making of payments and transfers for current international transactions. - Indicative targets cover spending on the social sectors (including all the main social protection programs) and on reserve money. - Adjustors will allow for increased expenditure if additional budget support grants become available, but only limited and temporary substitution of domestic financing for shortfalls in budget support. - Structural benchmarks have been set mainly in the PFM and financial sector areas (Table 9). ### Safeguards assessment - An update safeguards assessment of the Reserve Bank of Malawi (RBM) with respect to the 2012 ECF arrangement has been initiated and will be completed by the first review. - The latest safeguards assessment was completed on June 25, 2010 and concluded: - RBM continued to have strong financial safeguards in external audit and financial reporting. - Main area of concern was lack of adequate autonomy for the RBM, which is being addressed by the program. - A key recommendation relates to strengthening foreign reserves management oversight. ### Risks to the program - Risks from global spillovers: - Downside risks include stagnation of euro area and world growth, a substantial fall in non-oil commodity prices, and a reduction in aid flows. - Slower world growth would adversely affect demand for Malawi’s exports (mainly tobacco); overall impact on Malawi’s growth is expected to be low because authorities are actively diversifying export markets (including to China). - A substantial fall in tobacco prices would adversely affect export proceeds and farmers’ incomes; given the size of tobacco in the economy (15 percent of GDP), the expected impact would be moderate. - Risk of lower aid flows is assessed as low: most major donors indicated readiness to scale up support if government continues appropriate economic policies and no deterioration in human rights and political governance. However, medium-term aid to Malawi might decline because of shrinking aid budgets in Europe, with the EU as one of the major donors. - Other risks: - Adverse weather conditions pose a significant risk due to reliance on rain-fed agriculture; agriculture is 30 percent of GDP, so lower agricultural output would significantly affect overall GDP growth. - Slippages in implementation of economic reforms could lead to cuts in aid flows. - Under the program, reductions in general budget support grants must be offset by expenditure cuts (mainly in goods and services). - It is important to avoid fiscal and monetary laxity in the run-up to the elections in 2014 to build credibility for Malawi’s commitment to prudent policies. - Continued failure to improve Malawi’s relatively poor track record in implementing structural reforms would dampen prospects for long-term growth and reduce resilience to shocks. ### Staff appraisal: policy actions and recommendations - Recent policy actions and impact: - Policy actions by the new administration led by President Banda have significantly improved the outlook. - Key measures taken: 33 percent devaluation of the kwacha, adoption of a floating exchange rate regime, and liberalization of current account transactions—these halted the economy’s slide toward export and output contraction. - Liberalization of the foreign exchange regime is expected to remove distortions and encourage private investment and diversified growth. - Fiscal and monetary policy recommendations: - Fiscal discipline and tight monetary policy are needed to ensure nominal depreciation translates into sustained real depreciation. - Authorities should strengthen commitment control and enforce procurement rules to keep total spending within domestic revenues and grants and align spending with priorities. - The increase in retail prices of petroleum products and re-introduction of an automatic adjustment mechanism provide a robust base for government tax revenues. - Authorities should avoid fiscal and monetary laxity in the run-up to the elections in 2014. - On grants, social protection, and RBM: - Substantially higher grants in FY2012/13 should allow boosting spending on social protection programs to mitigate adjustment impacts on vulnerable populations. - Over the medium term, government should consider ways to ensure sustainability of the Farm Input Subsidy Program. - Staff welcomes RBM tightening monetary policy, including increasing the policy rate and conducting open market operations to mop up excess liquidity. - Staff urges the government to strengthen the RBM balance sheet to enable it to meet its primary mandate of maintaining price stability. - Structural reforms and inclusive growth: - Authorities are commended for initiatives to deepen the financial system, promote financial inclusion, and address supply-side bottlenecks related to energy and transportation infrastructure. - Fund financing recommendation and follow-up: - Staff supports the authorities’ request for a new three-year arrangement under the ECF and supports the requested level of access of SDR104.1 million (150 percent of quota). - The unusually high access level addresses the balance of payments need while keeping Fund exposure manageable. - Staff recommends that the next Article IV Consultation with Malawi take place within 24 months, in accordance with the Decision on consultation cycles for program countries. *Source: IMF staff report excerpt.* ### Part I (foreign financed)4.94.53.73.73.23.63.33.12.9 ### _cr12221 - Part I (foreign financed)4.94.53.73.73.23.63.33.12.9 ### Fiscal accounts and public finances (selected lines) - Part I (foreign financed): 4.9 4.5 3.7 3.7 3.2 3.6 3.3 3.1 2.9 - Part II (domestically financed): 2.2 3.4 3.9 4.4 3.2 3.6 3.9 3.9 3.9 - Gross operating balance: 1.4 8.1 4.9 1.0 5.3 6.1 6.3 6.2 6.1 - Net lending/borrowing (overall balance): -5.7 0.2 -2.8 -7.0 -1.1 -1.1 -0.9 -0.8 -0.7 - Net financial transactions = Net lending/borrowing: -5.7 0.2 -2.8 -7.0 -1.1 -1.1 -0.9 -0.8 -0.7 - Net acquisition of financial assets: -0.1 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 - Loans (net lending): 0.0 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 - Equity other than shares (privatization): -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Net incurrence of liabilities: 5.7 0.0 2.9 7.3 1.1 1.1 0.9 0.8 0.7 - Domestic loans (borrowing): 3.7 -0.9 1.7 5.6 0.0 0.0 0.0 0.0 0.0 - Foreign loans (borrowing): 2.0 0.9 1.3 1.6 1.1 1.1 0.9 0.8 0.7 - Program: 1.1 0.0 0.0 0.0 0.3 0.0 0.0 0.0 0.0 - Project: 1.1 1.1 1.5 1.9 1.3 1.6 1.5 1.4 1.3 - Other concessional: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Amortization: -0.2 -0.2 -0.2 -0.3 -0.5 -0.5 -0.6 -0.6 -0.6 - Discrepancies: -0.1 -0.1 -0.1 -0.2 0.0 0.0 0.0 0.0 0.0 - Memorandum items: - Net lending/borrowing (excluding grants): -17.3 -10.3 -10.5 -12.5 -11.6 -10.0 -8.8 -7.8 0.6 - Primary balance: -3.0 3.0 -0.1 -4.9 1.3 1.3 0.9 0.7 0.6 - Net domestic debt: 17.8 14.5 16.3 19.9 16.2 14.0 12.3 10.9 9.7 - Nominal GDP in billions kwacha: 655.6 761.3 846.1 964.5 1,188.0 1,378.4 1,562.8 1,764.8 1,989.8 ### Monetary authorities' balance sheet (Table 3a, selected) - Reserve money (levels, Q1–Q4 and projections): 50,393; 57,417; 51,946; 60,671; 79,483; 73,220; 89,168; 76,178; 88,210; 97,809; 99,120; 105,830; 113,931; 118,657; 138,912; 167,537; 198,268; 233,068 - Currency outside banks: 27,493; 30,663; 26,428; 37,126; 41,452; 42,251; 37,333 - Cash in vault: 5,989; 8,875; 7,863; 8,044; 8,253; 11,251; 8,785 - Commercial bank deposits with RBM: 16,911; 17,879; 17,654; 15,501; 29,779; 19,717; 43,050 - Net foreign assets (NFA) (monetary authorities): -9,444; 8,076; -9,415; -5,566; 2,349; -8,840; -17,773; -37,110; -20,598; -20,138; -6,931; 4,759; 12,486; 19,673; 63,265; 122,020; 187,608; 251,574 - NFA (US$ millions): -69; 54; -62; -37; 4; -63; -117; -148; -82; -80; -27; 19; 47; 74; 224; 399; 589; 761 - Foreign assets (US$ millions): 167; 302; 193; 221; 266; 193; 141; 103; 187; 208; 277; 340; 365; 409; 568; 732; 888; 1,032 - Foreign liabilities (US$ millions): -235; -248; -256; -258; -262; -256; -258; -250; -269; -287; -304; -321; -318; -335; -344; -332; -300; -271 - Net domestic assets: 59,837; 49,341; 61,361; 66,237; 77,133; 82,060; 106,941; 113,289; 108,808; 117,946; 106,051; 101,071; 101,445; 98,984; 75,647; 45,518; 10,659; -18,506 - Credit to government (net): 85,745; 72,515; 91,085; 85,638; 109,651; 102,929; 124,776; 126,378; 117,876; 139,498; 134,611; 126,378; 142,664; 147,953; 144,169; 146,702; 142,976; 146,891 - Other items (net): -26,888; -23,884; -31,032; -19,872; -32,579; -20,870; -20,352; -15,607; -11,585; -24,069; -31,076; -27,824; -43,736; -51,486; -71,039; -103,701; -134,834; -167,914 - Memorandum items: - Money multiplier: 3.4; 4.0; 4.5; 4.4; 3.7; 4.3; 3.5; 4.2; 3.8; 3.8; 3.9; 3.8; 3.7; 3.9; 3.9; 3.9; 3.9; 3.9 - 91-day treasury bill rate: 10.5; 6.2; 6.3; 7.5; 5.3; 6.8; 6.8 ### Monetary survey (Table 3b, selected) - Money and quasi-money: 173,050; 231,711; 235,163; 265,590; 292,282; 314,331; 315,938; 319,948; 332,241; 371,674; 462,762; 541,758; 653,396; 773,244; 908,966 - Money: 81,900; 125,193; 121,715; 144,008; 158,812; 163,962; 155,518 - Quasi-money: 91,150; 106,517; 113,448; 121,583; 133,470; 150,369; 160,420 - Foreign currency deposits: 18,198; 21,423; 22,650; 25,105; 27,874; 26,356; 26,823 - Net foreign assets (NFA) (monetary survey): -2,043; 20,971; 332; 4,276; 20,220; 2,590; -3,877; -19,164; -2,561; -1,323; 40,701; 86,911; 149,222; 217,895; 285,073 - NFA (US$ millions): -14; 135; 0; 24; 118; 15; -22; -76; -10; -5; 152; 307; 488; 684; 862 - Gross foreign assets: 24,320; 45,543; 29,157; 33,358; 44,156; 31,651; 23,532; 25,770; 47,267; 52,421; 109,122; 160,648; 223,506; 283,167; 341,270 - Foreign liabilities: -33,764; -37,467; -38,572; -38,924; -41,806; -40,491; -41,305; -62,881; -67,865; -72,559; -89,449; -97,383; -101,487; -95,558; -89,696 - Net domestic assets: 175,093; 210,739; 234,831; 261,314; 272,063; 311,741; 319,815; 339,113; 334,802; 372,996; 422,061; 454,846; 504,174; 555,348; 623,893 - Credit to government (net): 110,998; 95,033; 117,048; 107,294; 137,061; 140,693; 156,545; 158,574; 147,806; 175,191; 185,900; 181,107; 184,315; 185,734; 198,220 - Credit to private sector: 95,044; 144,843; 152,108; 162,733; 165,208; 174,538; 178,982; 192,972; 199,611; 210,445; 248,596; 283,636; 321,543; 363,627; 410,722 - Memorandum items: - Velocity of money: 4.0; 3.5; 3.5; 3.2; 3.0; 2.8; 2.9; 3.0; 3.1; 2.9; 2.8; 2.7; 2.5; 2.4; 2.3 - Annual growth of broad money (percent): 23.9; 33.9; 21.7; 37.0; 26.1; 35.7; 34.3; 20.5; 13.7; 18.2; 24.5; 17.1; 20.6; 18.3; 17.6 - Annual growth of credit to the private sector (percent): 39.5; 52.4; 38.9; 28.1; 26.8; 20.5; 17.7; 18.6; 20.8; 20.6; 18.1; 14.1; 13.4; 13.1; 13.0 ### Balance of payments (Table 4a and 4b, selected) - Current account balance (including grants, US$ millions): -244.1; -69.9; -332.9; -201.3; -81.3; -91.7; -91.3; -109.5; -159.5 - Merchandise trade balance (US$ millions): -636.7; -743.7; -608.3; -631.9; -496.4; -495.0; -483.6; -494.2; -527.9 - Exports (US$ millions): 936.7; 1,237.7; 1,262.7; 1,273.8; 1,485.4; 1,604.4; 1,734.0; 1,874.1; 2,025.7 - Tobacco exports (US$ millions): 501.3; 687.6; 482.4; 458.0; 577.1; 606.0; 636.3; 668.1; 701.5 - Uranium (US$ millions): 8.5; 113.4; 120.4; 164.3; 180.8; 198.9; 218.7; 240.6; 264.7 - Imports (US$ millions): -1,573.3; -1,981.3; -1,871.0; -1,905.7; -1,981.8; -2,099.4; -2,217.6; -2,368.3; -2,553.6 - Petroleum imports (US$ millions): -166.4; -180.9; -168.8; -190.2; -187.5; -180.6; -176.3; -175.1; -176.3 - Services balance (US$ millions): -333.2; -429.8; -312.8; -379.7; -402.7; -432.5; -458.0; -488.8; -529.7 - Interest public sector (net) (US$ millions): -4.7; -3.5; -5.6; -8.5; -11.0; -12.3; -12.8; -12.7; -14.4 - Receipts: 0.4; 0.1; 0.4; 1.7; 1.7; 1.7; 1.7; 0.0; 0.0 - Payments: -5.1; -3.6; -6.0; -10.2; -12.7; -14.0; -14.5; -14.4; -14.4 - Unrequited transfers (net) (US$ millions): 725.8; 1,103.6; 588.2; 810.3; 817.8; 835.9; 850.4; 873.5; 898.1 - Private receipts/payments and official receipts detailed in source tables (see official and project components) - Financial account balance (US$ millions): 235.0; 280.3; 155.9; 177.8; 234.8; 241.7; 267.1; 298.6; 332.0 - Medium- and long-term flows (net): 151.3; 90.5; 104.6; 90.6; 121.6; 101.2; 97.1; 97.1; 97.1 - Disbursements (US$ millions): 73.4; 104.4; 118.9; 108.5; 144.8; 130.0; 130.0; 130.0; 130.0 - Amortization (US$ millions): -8.5; -14.0; -14.4; -17.8; -23.3; -28.8; -32.9; -32.9; -32.9 - SDR allocation: 86.5; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 - Foreign direct investment and other inflows (US$ millions): 55.5; 158.2; 60.8; 83.4; 108.2; 134.8; 163.6; 194.5; 227.5 - Errors and omissions (US$ millions): -91.8; -90.3; 68.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 - Overall balance (US$ millions): -100.9; 120.1; -108.1; -23.4; 153.4; 150.0; 175.8; 189.1; 172.5 - Financing and gross reserves (US$ millions): - Gross reserves (- increase): 98.5; -139.1; 107.7; -14.3; -201.2; -159.2; -163.7; -156.6; -144.0 - Gross official reserves (US$ millions, memorandum): 140.5; 279.6; 190.2; 204.5; 405.7; 564.9; 728.6; 885.2; 1,029.3 - Months of imports (memorandum): 0.7; 1.5; 1.0; 1.0; 2.0; 2.6; 3.1; 3.5; 3.8 - Current account balance (percent of GDP): - Excluding official transfers: -14.2; -17.0; -11.9; -15.7; -12.7; -12.1; -11.2; -10.7; -10.7 - Including official transfers: -4.8; -1.3; -5.9; -4.3; -1.7; -1.8; -1.6; -1.8; -2.5 ### External financing requirement and sources (Table 5) - Total requirement (US$ millions): -625; -1,072; -572; -777; -841; -816; -819; -832; -871 - Current account, excluding official transfers: -715; -919; -665; -745; -617; -628; -622; -642; -694 - Debt amortization: -9; -14; -14; -18; -23; -29; -33; -39; -37 - Gross reserves accumulation: 99; -139; 108; -14; -201; -159; -164; -151; -140 - Total sources (US$ millions): 625; 1,072; 572; 277; 784; 181; 681; 983; 287; 1 - Expected disbursements (official): 545; 954; 451; 652; 680; 666; 661; 663; 665 - Grants: 471; 850; 332; 543; 535; 536; 531; 533; 535 - Medium- and long-term loans: 73; 104; 119; 108; 145; 130; 130; 130; 130 - Private sector (net): -597; 121; 871; 109; 1,361; 651; 972; 31 - IMF: 8; 62; 103; 85; 21; 4; -7; -28; -25 ### Proposed schedule of disbursements under ECF arrangement, 2012–15 (Table 6) - Disbursement entries (millions of SDR and % of Quota; dates and conditions summarized): - 13.0 (218.75% of Quota) — July 23, 2012 — Executive Board Approval of Three Year ECF arrangement. - 13.0 (218.75) — December 15, 2012 — Observance of performance criteria for September 30, 2012 and completion of first review. - 13.0 (118.75) — March 15, 2013 — Observance of performance criteria for December 31, 2012 and completion of second review. - 13.0 (118.75) — June 15, 2013 — Observance of performance criteria for March 31, 2013 and completion of third review. - 13.0 (118.75) — December 15, 2013 — Observance of performance criteria for September 30, 2013 and completion of fourth review. - 13.0 (118.75) — June 15, 2014 — Observance of performance criteria for March 31, 2014 and completion of fifth review. - 13.0 (118.75) — December 15, 2014 — Observance of performance criteria for September 30, 2014 and completion of sixth review. - 13.0 (118.75) — June 15, 2015 — Observance of performance criteria for March 31, 2015 and completion of seventh review. - Total for the ECF arrangement: 104.1 (150.00% of Quota) ### Indicators of capacity to repay the Fund (Table 7, selected projections) - Projected payments based on existing drawings (SDR millions, 2012–2022): - Principal: 1.7; 5.4; 16.7; 17.4; 17.9; 15.7; 13.9; 2.8; 2.1; 0.0; 0.0 - Charges and interest: 0.1; 0.2; 0.3; 0.2; 0.2; 0.2; 0.1; 0.1; 0.1; 0.1; 0.1 - Total payments based on existing and prospective drawings (SDR millions): 1.7; 5.6; 17.1; 17.8; 18.3; 16.1; 22.1; 17.4; 21.9; 21.1; 21.0 - US$ Millions: 2.7; 8.6; 26.4; 27.5; 28.3; 24.9; 34.1; 26.9; 33.8; 32.5; 32.4 - Percent of exports of goods and services: 0.2; 0.5; 1.5; 1.5; 1.4; 1.1; 1.4; 1.1; 1.2; 1.1; 1.0 - Percent of debt service: 13.1; 27.2; 48.5; 46.2; 42.7; 40.8; 48.5; 42.6; 48.2; 47.2; 47.1 - Percent of quota: 2.5; 8.0; 24.7; 25.7; 26.4; 23.2; 31.8; 25.1; 31.5; 30.3; 30.3 - Percent of gross official reserves: 1.3; 2.1; 4.7; 3.8; 3.2; 2.4; 2.9; 2.1; 2.5; 2.0; 1.7 - Projected level of credit outstanding (SDR millions): 117.7; 151.4; 160.7; 156.4; 138.6; 122.8; 101.1; 84.1; 62.5; 41.6; 20.8 - US$ Millions: 181.7; 233.6; 248.1; 241.4; 213.8; 189.6; 156.1; 129.7; 96.4; 64.2; 32.1 - Percent of exports of goods and services: 13.1; 14.6; 14.3; 12.9; 10.6; 8.7; 6.6; 5.1; 3.5; 2.2; 1.0 - Percent of gross official reserves: 88.8; 57.6; 43.9; 33.1; 24.2; 18.4; 13.3; 10.1; 7.0; 4.0; 1.7 - Memorandum items: - Exports of goods and services (US$ millions): 1,386.1; 1,604.1; 1,730.4; 1,868.2; 2,017.4; 2,178.4; 2,352.0; 2,533.5; 2,733.8; 2,955.0; 3,198.7 - Debt service (US$ millions): 20.2; 31.5; 54.5; 59.6; 66.3; 60.9; 70.2; 63.1; 70.0; 68.8; 68.8 - Quota (SDR millions): 69.4 (constant) - Gross official reserves (US$ millions): 204.5; 405.7; 564.9; 728.6; 885.2; 1,029.3; 1,170.5; 1,284.8; 1,371.8; 1,622.8; 1,863.2 - GDP (US$ millions): 4,733.9; 4,838.1; 5,202.5; 5,554.8; 5,987.5; 6,482.6; 6,996.9; 7,839.6; 8,430.4; 9,013.9; 9,673.9 ### Program indicative targets (selected, end-2012 to end-2013) - I. Monetary targets (millions of kwacha) - 1. Ceiling on net domestic assets of the RBM (PC): Stock end-Mar 2012: 119,709; end-June 2012: 114,579; end-Dec. 2012 (Prel.): 109,417; end-Mar. 2013 (Proj.): 118,542; end-Jun. 2013 (Proj.): 106,256; end-Dec. 2013 (Proj.): 100,930 - 2. Ceiling on reserve money (IT): 89,168; 76,178; 88,210; 97,809; 99,120; 105,830 - II. Fiscal targets (millions of kwacha) - 3. Ceiling on central government's net domestic borrowing (PC): Stock end-Mar 2012: -11,988; end-June 2012: 18,500; end-Dec. 2012 (Prel.): 11,609; end-Mar. 2013 (Proj.): 0 *Sources: Malawi Ministry of Finance; Reserve Bank of Malawi; Malawian authorities; and IMF staff estimates and projections.* ### 4. Floor on social spending ### 4. Floor on social spending ### Quantitative targets and external sector targets - Performance criteria (PC) and Indicative Targets (IT) presented for external sector (US$ millions, unless otherwise indicated). - Selected items and reported values: - IT: 39,034; 94,044; 121,798; 151,899 - Floor on net international reserves of the RBM (PC): -7; -49; 17; 19; 71; 118 - Ceiling on the accumulation of external payments arrears (PC): 0000 - Ceiling on new nonconcessional external debt maturing in more than one year (PC): 0000 - Ceiling on new nonconcessional external debt maturing in one year or less (PC): 0000 - Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions (PC): (evaluated continuously) - Memorandum items (Net foreign assets of the RBM, US$ millions): -117; -148; -82; -80; -27; 19 - Budget support (US$ millions): 86; 86; 151; 208 - Budget support (millions of kwacha): 21,945; 21,945; 38,926; 53,864 - Debt service payments to the World Bank and African Development Bank / Health SWAp receipts (millions of kwacha): 5,248; 5,364; 7,771; 7,771 - Education SWAp receipts (millions of kwacha): 8,378; 13,221; 17,073; 19,049 - NAC receipts (millions of kwacha): 4,777; 7,315; 10,019; 12,220 - Program exchange rate (kwacha per US$): 260; 260; 260; 260; 260; 260 Notes and adjusters (as defined in the TMU): - 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. - "PC" means Performance Criterion, and "IT" means Indicative Target. - Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU). - 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 social sector expenditures consistent with the TMU. - Defined as a cumulative flow. - Priority social spending as defined and quantified in the TMU. - Evaluated on a continuous basis. - Other standard PCs include introducing or modifying MCPs, concluding bilateral payments agreements that are inconsistent with Article VIII, and imposing or intensifying import restrictions for balance of payments reasons. ### Structural benchmarks, prior actions, and fiscal management measures - Prior action: - Parliamentary passage of a budget for FY 2012/13 in line with program objectives — Toward fiscal sustainability — Done - Structural benchmarks and targets: - Fiscal transparency: - Publish monthly revenue collections of the Malawi Revenue Authority in newspapers within two weeks of the end of the month. Target date: 7/31/2012. Macro rationale: Build credibility after recent incidents of inflation of revenue data by the Ministry of Finance. - Public financial management: - Provide Ministries, Departments and Agencies with quarterly spending ceilings consistent with quarterly fiscal targets in the program, and enforce ceilings. Begin in Sept 2012 for FY2012/13 Q2 and quarterly thereafter. Rationale: Keep spending within available resource envelope. - Verify existing stock of government domestic arrears. Target date: 31-Dec-12. Rationale: Ascertain magnitude of government obligations and formulate a plan for settling verified claims. - Configure the IFMIS Purchase Order (PO) module to support commitment control. Target date: 31-Dec-12. Rationale: To restrain creation of arrears. - Progressively extend processes for capturing donor funded project transactions in IFMIS to all projects where bank accounts are controlled by the government of Malawi. Target date: 31-Mar-13. Rationale: Fuller accounting for impact of aid flows on the budget. - Monetary policy: - Amend RBM Act to limit the outstanding amount of RBM's total lending to government. Target date: 30-Jun-13. Rationale: Reduce fiscal dominance to enhance effectiveness of monetary policy. - Financial sector: - RBM to publish a financial stability report on a semi-annual basis, with a lag of no more than four months. Start with publication of report for quarter ending March 2012. Frequency: Semi-annual, starting in July 2012. Rationale: Promote financial stability. - Obtain approval and begin implementation of the Financial Sector Development Strategy. Target date: 31-Dec-12. Rationale: Financial deepening. ### Millennium Development Goals — selected indicators and levels - Goal 1: Eradicate extreme poverty and hunger / relevant indicators (selected years and values): - Employment to population ratio, 15+, total (%): 72; 72; 73; 76; 80; 77 - Employment to population ratio, ages 15-24, total (%): 47; 46; 51; 62; 66; 51 - Income share held by lowest 20%: 5.0; 7.0 - Malnutrition prevalence, weight for age (% of children under 5): 24.0; 27.0; 22.0; 18.0; 18.4; 14.0 - Poverty headcount ratio at $1.25 a day (PPP) (% of population): 83.0; 74.0 - Literacy rate, youth female (% of females ages 15-24): 71; 86 - Literacy rate, youth male (% of males ages 15-24): 82; 87 - Primary completion rate, total (% of relevant age group): 28; 52; 65; 58; 55; 67 - Total enrollment, primary (% net): 99; 98; 93; 97 - Proportion of seats held by women in national parliament (%): 10; 6; 8; 14; 14; 21 - Ratio of female to male enrollments in tertiary education: 34; 40; 38; 55; 62 - Immunization, measles (% of children ages 12-23 months): 81; 90; 73; 82; 85; 93 - Mortality rate, infant (per 1,000 live births): 131; 121; 99; 77; 76; 58 - Mortality rate, under-5 (per 1,000): 222; 205; 167; 128; 120; 92 - Maternal mortality ratio (modeled estimate, per 100,000 live births): 1,100; 1,000; 840; 630; 1,100; 460 - Prevalence of HIV, total (% of population ages 15-49): 7.2; 13.9; 14.2; 12.1; 11.9; 11 - GNI per capita, Atlas method (current US$): 180; 160; 160; 220; 250; 330 - Population, total (millions): 9.4; 10.1; 11.8; 13.7; 14.4; 16 - Life expectancy at birth, total (years): 47; 47; 46; 49; 48; 53 Source for MDG indicators: World Development Indicators database. ### Macroeconomic findings, projections, and sectoral developments - Growth and inflation: - Malawi's growth is expected to rebound after recent rapid decline. - Headline inflation has been on an upswing, driven by non food inflation. - Malawi: Real GDP growth (2006–17) example data points: 2.1; 9.5; 8.3; 9.0; 6.5; 4.3; 6.5; 6.7; 6.7 - Sectoral outlook: - Agriculture has been the traditional driver of growth in Malawi. - Manufacturing, trade and transportation services are projected to recover after recent sharp declines. - Contributions to Real GDP (average, 2006-11): Services (33.1); Wholesale and retail trade (20.1); Agriculture, forestry, and fishing (28.4); Manufacturing (10.6); Mining and quarrying (1.7); Electricity, gas, and water supply (1.6); Construction (3.1) - Fiscal developments (2007/08–2012/13, percent of GDP): - Overall balance improves in 2012/13 due to recovery in grants. - Budget support and grants increased: examples of grant shares and components show restoration of budget support grants. - Expenditure prioritization on agriculture, health and education is underway. - Tax revenue developments: - Increased tax revenues mainly from import duties and excise taxes. - Tax component examples (percent of GDP, selected): Import duties; Corporate taxes; Excise taxes; Personal taxes; VAT; Tax refunds (specific percent series shown in figure). - Monetary developments (2007–12): - Excess reserves have been increasing (actual reserves, required reserves, excess reserves shown in kwacha series). - Increases in broad money have been mainly due to increased credit to private and public sectors. - Reserve money increased owing to monetary accommodation of budget deficit. - Growth of credit to the private sector and state-owned enterprises remained fairly high despite recent declines. - External sector developments: - Current account balance contributed to a widening current account deficit. - Foreign direct investment has been very volatile (FDI percent of GDP series shown). - Gross foreign reserves have been chronically low (months of imports and gross official reserves series shown). - Tobacco exports and grants declined in 2011, while remittances remained stable (series in US$ millions). - Imports declined in 2011 after rapid growth in 2010 (components: Fertilizer, Petroleum products, Public sector imports). - A negative terms of trade shock occurred in 2011 (annual percentage change shown). Sources cited in figures and tables: Malawian authorities; Reserve Bank of Malawi; Malawi Ministry of Finance; IMF staff estimates; World Development Indicators database. ### Letter of Intent and program request — key program elements and objectives - Context: - Following President Bingu wa Mutharika's death, Joyce Banda became President on April 7, 2012; new cabinet appointed. - Earlier three-year Extended Credit Facility (ECF) approved in February 2010 (SDR 52.05 million, 75 percent of quota) went off-track after December 2010 due to lapses in policy implementation (flexible exchange rate regime and liberalization of current account transactions). - Request: - Government requests cancellation of the current ECF arrangement (due to expire February 2013) effective as of July 23, 2012. - Requests a new three-year ECF arrangement for July 2012–June 2015 with access of SDR 104.1 million (150 percent of quota), including a first disbursement of SDR13.02 million upon approval. - Requests quarterly reviews of program implementation in the first year. - Policy emphasis in the attached MEFP: - Rebuilding international reserves. - Improving public financial management and fiscal transparency. - Operational independence of the Reserve Bank of Malawi. - Improving the investment climate and international competitiveness. - Implementation and monitoring: - MEFP and Technical Memorandum of Understanding (TMU) present quantitative performance criteria, indicative targets, and structural benchmarks to monitor implementation. - Government will consult with IMF staff in advance of revisions to the MEFP policies and provide requested information on program progress. - Government authorizes IMF to make the letter, MEFP, and TMU public. ### Program objectives (from MEFP introduction) - Main objective: Achievement and maintenance of macroeconomic stability to provide a suitable environment for sustained growth, wealth creation and poverty reduction. - Program period covered: July 2012–June 2015 (FY2012/13–FY2014/15). - Shortcomings of prior program: Off-track status attributed to challenges implementing commitments on exchange rate flexibility and liberalization of current account payments; foreign exchange shortages in 2011 linked to lower tobacco export earnings and interruption of ECF-supported program with attendant reductions in donor budget support. *Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; IMF staff estimates; Letter of Intent and Memorandum of Economic and Financial Policies (attachments referenced).* ### 3. Within a month of taking office, the new administration implemented a set of bold ### 3. Within a month of taking office, the new administration implemented a set of bold measures to address Malawi’s chronic balance of payments difficulties and to halt the slowdown in economic activity arising from the shortages of foreign exchange and critical imports ### Implemented exchange, price, and monetary measures - Devaluation of the exchange rate from K167 to K250 per U.S. dollar, and adoption of a floating exchange rate regime. - Allowing banks and foreign exchange bureaus to set the rate at which they buy and sell foreign exchange from/to their customers. - Removal of requirement for foreign exchange earnings to be surrendered to the RBM; they now flow directly to commercial banks. - Cancellation of requirement for banks to submit to the RBM for review, any application for external payments exceeding US$50,000. - Substantial increase in fuel prices to bring them in line with true import costs, and restoration of an automatic adjustment mechanism to ensure that retail prices reflect changes in world prices. - Substantial increases in electricity tariffs to ensure movement toward cost recovery. - A tightening of monetary policy to contain inflationary pressures, signaled by the RBM raising its policy rate from 13 percent to 16 percent. ### Early impacts and partner engagement - Sales of tobacco through official channels have increased, suggesting a decline in smuggling. - The parallel market for foreign exchange has almost collapsed: premiums over the official exchange rate fell from 60–80 percent before the devaluation to 5–10 percent, while rates offered by banks and foreign exchange bureaus are converging. - The private sector’s access to foreign exchange has eased considerably. - Donor support is projected to increase from US$281.5 million in FY2011/12 to US$480.5 million in FY2012/13, with general budget support grants going from less than US$2 million to US$208 million. - A Memorandum of Understanding with Mozambique was signed to resuscitate the electricity Interconnector Project. - Government recovered its maize loan to Zimbabwe through an exchange with petroleum products. ### Recent developments and near-term outlook - Real GDP growth slowed to 4.3 percent in 2011, after averaging over 8 percent a year during 2007–10. - Sectors dependent on imports—manufacturing, transportation, construction, and wholesale and retail trade—slowed the most. - Inflation: year-on-year headline rate reached 12.4 percent in April 2012 and jumped to 17.3 percent in May 2012; the spike is expected to persist for a few months but should be reversed with implementation of restrained fiscal and monetary policies. - Fiscal outcomes: overall fiscal deficit widened from nearly 3 percent of GDP in FY2010/11 to 7 percent in FY2011/12; domestic financing rose from 1.7 percent of GDP to 5.6 percent in the respective years. - Accumulated domestic arrears of about K72 billion over the last few years. - Monetary aggregates at end-April 2012: reserve money grew at a year-on-year rate of 47 percent; broad money grew at a year-on-year rate of 31 percent. - RBM actions: began tightening policy in April 2012, removed excess liquidity using some holdings of treasury bills, raised policy rate from 13 percent to 16 percent in May, and after the devaluation used foreign exchange sales to further mop up excess liquidity. ### Medium-term framework and targets (MGDS II and ECF objectives) - MGDS II period: 2011/12–2015/16; main objective: poverty reduction through sustainable growth and infrastructure development. - Growth projection update: annual growth expected to rise gradually from 4.3 percent in 2012 to 6.7 percent in 2016 (updated from an expectation of averaging over 7 percent a year). - Inflation projection update: expected to reach 23 percent in December 2012 and then fall to 6 percent by the end of 2016 (updated from an original projection declining from 8.7 percent to 5.9 percent). - Key medium-term objectives of the ECF-supported program: - Recovery in real GDP growth from 4.3 percent in 2012 to about 6½ percent per year in the medium term. - Achieving and maintaining a stable macroeconomic environment with low inflation, founded on sustainable fiscal and external balances. - Increasing foreign reserves coverage to three months of imports. - Enhancing the operational independence of the RBM. - Pursuing reforms to deepen the financial sector and promote greater financial inclusion. - Undertaking structural reforms to improve the investment climate and promote sustained and inclusive growth, including through improvements in infrastructure and regulatory reforms. ### Fiscal policies and structural reforms (FY2012/13 and beyond) - FY2012/13 budget anchored by a zero net domestic borrowing target (sharp reduction from about 5.6 percent of GDP domestic borrowing in FY2011/12). - Higher donor support reduces domestic financing need; a sizeable revenue effort and tight control of spending required to align expenditures with top priorities, including social safety nets. - Revenue measures: largest contribution expected from fuel taxes via pricing and taxation change and adoption of an automatic adjustment mechanism; expansion of VAT coverage; harmonization of excise duties with regional partners. - Repeal of a number of punitive and regressive tax measures introduced the prior year to improve the business climate. - Strengthening enforcement: increased audits, modern ICT systems, electronic fiscal devices for VAT enforcement, computerized cargo scanners, and implementation of web-based ASYCUDA System for Customs. - Nontax revenue: enhanced oversight, monitoring, and auditing of revenue-collecting institutions. - Social spending: budget increases for social protection programs—FISP, public works, school feeding, school bursary, and cash transfers—with the Ministries of Agriculture, Education and Health receiving the largest resource increases. - Expenditure control: Ministry of Finance will establish and enforce quarterly spending limits on all ministries, departments and agencies (MDAs); limits announced for first quarter shortly after budget approval; subsequent quarter limits informed by revenue performance and grants and announced in the last month of the preceding quarter; quarterly reporting to cabinet on system performance. - Wages and interest: nominal wage bill increased by 30 percent over projected outturn for FY2011/12 to accommodate a 21 percent pay increase to government employees and allow additional hiring in education and health; interest costs projected to increase although no net domestic borrowing for the year as a whole. - Arrears: accumulated domestic arrears about K72 billion (7 percent of GDP); K10 billion provision in 2012/13 budget to settle some arrears; expected to take 3 to 4 years to clear arrears; alternatives include raising funds through long-term Treasury Bonds. - Commitment control: accelerate implementation of commitment module in IFMIS; publicize procurement rules and warn that those providing goods/services outside established system will not be paid. - Contingent liabilities and SOE losses: recognize risks from loans and payment arrears and from administratively set below-cost tariffs; limit NOCMA to core activity of managing strategic reserves of fuel and revert bulk fuel importation for regular use to private sector. - Regulatory changes: MERA established a clear regulatory regime for ESCOM covering operating costs and avoiding need for budgetary transfers; similar regime to be established for Regional Water Boards. ### Monetary policy in a floating exchange rate regime - Monetary policy objective: achieve price stability while providing room for sufficient credit to the private sector and supporting a buildup of international reserves. - Nominal anchor: broad money, with reserve money as an intermediate target. Broad money programmed to grow at about the pace of nominal GDP in the near term. - RBM operational developments: continued development of instruments of indirect monetary control; strengthen ability to implement monetary policy through changes in interest rates underpinned by open market operations; welcome IMF technical assistance focused on operational framework, open market operations of varying maturity profiles, reserve averaging, and standing facilities. - RBM liquidity framework: uses liquidity forecasting to guide operations; will review options for obtaining resources for open market operations without being constrained by cost considerations and has requested IMF technical assistance. Possible options under review include: - Issuance of treasury bills (over and above government financing needs) for monetary operations, with the Ministry of Finance carrying the interest costs. - Issuance of an income generating security to the RBM, with the RBM bearing the cost of its monetary operations. *Source: IMF country report content provided in the supplied PDF excerpt* ### 26. The RBM is also undertaking a review of the RBM Act with a view to recommending ### The RBM is also undertaking a review of the RBM Act with a view to recommending ### RBM Act review and operational independence - Proposed amendments will be ready for discussion with government by December 2012, and for submission to parliament by the government by June 2013. - Government agrees to include an amendment to limit the outstanding amount of the government’s total borrowing of all kinds from RBM. - Current RBM Act limits the amount of advances to the government but has no limits on other forms of RBM lending to the government (e.g., through holdings of treasury bills). ### Financial Sector Reforms - Banking sector soundness indicators: - Non-performing loans share of total loans was about 4 percent in 2011. - Deterioration in the macroeconomic environment in the last two years has elevated risks to banks’ portfolios. - RBM supervisory and stability actions: - Intensified monitoring and surveillance to detect emerging threats to financial stability. - Adopted a risk-based supervision approach to examining bank performance. - Working with banks to enhance stress-testing capacities and practices. - Compiles results of stress-testing on a semi-annual basis; will begin publishing the report of its analysis starting with the report for end-March 2012, which will be published by end-July 2012. - Establishing Basel II governance structures and committees, with full compliance with Basel II principles envisaged for January 2014. - Credit information infrastructure: - Two credit reference bureaus currently operating in Malawi. - Bureaus, underpinned by sound legal and regulatory framework for sharing credit information, expected to lower cost of lending by lowering credit risks. - Supervision of nonbank financial institutions: - Two departments established: one focusing on pension and insurance sectors and the other on microfinance. - Extending supervisory framework to non-bank institutions to ensure a level playing field and prevent risk build-up in the non-bank financial sector. - Financial inclusion and market development: - Government developed a financial sector strategy and launched a National Strategy for Financial Inclusion. - Financial sector strategy envisaged for cabinet approval by end-December 2012. - World Bank providing technical assistance to support inclusive finance for growth, financial deepening and competitiveness. - Increased access to finance for the population (including SMEs) framed as critical for expanding production and job creation and for inclusive growth. - Establishing the Malawi Financial Sector Deepening Trust (MFSDT) with development partner support to expand access to financial services among lower-income households and SMEs; Trust to operate independently under professional trustees with policy guidance from a program investment committee of donors and government representatives. - NES (National Export Strategy) to transform Malawi toward producing and exporting; NES has a 10–15 year horizon and is expected to be launched in the second half of 2012. ### Enhancing International Competitiveness - Competitiveness assessment: - Malawi lagging behind neighbors in regional exports share and business environment indicators such as transactions costs and infrastructure. - Recent liberalization of the exchange rate regime addressed overvaluation of the kwacha. - Government recognizes further steps required, especially removal of structural bottlenecks such as reliable and adequate supply of energy. - National Export Strategy (NES): - Developed through participatory process; prioritizes investment incentives to develop productive capacity, encourage foreign and domestic investment, and create sustainable export capacity. - Focus of incentives on areas contributing to inclusive growth with extensive forward and backward linkages and potential for value addition. - NES builds upon and synchronizes existing policies and has a 10–15 year horizon; expected launch in the second half of 2012. ### Information Sharing, Data Quality and Capacity Building - Improvements in information sharing: - Adopt processes and practices to improve real time information sharing among departments in the Ministry of Finance (Revenue, Expenditure, Debt and Aid Management, Economic Affairs), and between the Ministry of Finance and the RBM. - More effective use of the Integrated Financial Management Information System (IFMIS) to improve quality of public finance data. - Treasury will provide more timely information on government operations to the RBM to aid liquidity management and foreign exchange operations. - Revenue transparency: - Malawi Revenue Authority to publish its monthly revenue collections in the local media with a lag of no more than a month. - Statistical capacity needs: - Continued assistance needed to improve quality of national accounts, prices, and balance of payments statistics, and to build capacity for production of high frequency indicators of economic activity. ### Program Monitoring: reviews, targets, and safeguards - Review schedule: - Program implementation monitored with quantitative financial targets and structural benchmarks; quarterly reviews in the first year and semi-annual reviews thereafter. - First review scheduled to be completed by mid-December 2012 based on the end-September 2012 test date. - Second review by mid-March 2013 based on the end-December 2012 test date. - Performance criteria established for end-March 2013 and end-June 2013. - Performance criteria and indicative targets: - Performance criteria set on: (i) net domestic assets of the RBM; (ii) net international reserves of the RBM; (iii) net domestic borrowing by the central government; (iv) new non-concessional external loans contracted or guaranteed by the central government; and (v) accumulation of external arrears by the government or RBM. - Continuous performance criteria include non-imposition or intensification of exchange restrictions on payments and transfers for current international transactions (in line with Malawi’s obligations under Article VIII of the IMF’s Articles of agreement). - Indicative targets on reserve money and on government expenditure on the social sectors and social protection programs. - Structural benchmarks to underpin fiscal discipline and monitor reforms in public financial management, operational independence of the RBM, and financial system stability. - Safeguards: - RBM stands ready to undergo a safeguards assessment before the completion of the first review under the new ECF arrangement. ### TMU: key quantitative definitions and adjustment clauses - Program exchange rates and valuation: - Program exchange rate of the Malawi Kwacha to the U.S. dollar is set at MK260 = US$1. - Valuation for NIR, external debt and arrears targets will be in U.S. dollars using the program exchange rates. - NIR (Net International Reserves) of the RBM: - Defined as gross reserves minus IMF and other short-term liabilities. - Gross reserve assets include: (1) monetary gold holdings of the RBM; (2) holdings of SDRs; (3) the reserve position in the IMF; (4) foreign convertible currency holdings; (5) deposits held in foreign central banks, the Bank for International Settlements, and other banks; (6) loans to foreign banks redeemable upon demand; (7) foreign securities; and (8) other unpledged convertible liquid claims on nonresidents. - 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; (5) gross reserves encumbered or pledged, including assets blocked as collateral and assets lent by RBM to third parties not available before maturity and not marketable. - Gross reserve liabilities defined as sum of: (1) SDR allocations; (2) outstanding medium and short-term liabilities of the RBM to the IMF; and (3) all short-term foreign currency liabilities of the RBM to nonresidents with original maturity up to, and including, one year. - Adjustment clauses for the NIR floor: - Budget support: Floor adjusted upward by full amount if cumulative receipts from budget support are greater than US$30 million above program baseline; adjusted downward by full amount up to a maximum of US 10 million if cumulative receipts are less than the program baseline. - Donor accounts for the social sector (SWAps and NAC): Floor adjusted downward by amount donor inflows (in kwacha) held in RBM are smaller than program baseline; downward adjustment capped at US$ 30 million. - Debt service payments: Floor adjusted upward (downward) by full cumulative amount by which debt service payments to the World Bank and the ADB fall short of (exceed) the program baseline. - Total downward adjustment cap: US$40 million for combined shortfalls/excesses across budget support, donor inflows for social sector, and excess debt service payments. - NIR data reporting: Reported by RBM on a weekly and end-month basis. - NDA (Net Domestic Assets) and reserve money: - NDA defined in kwacha terms as end-quarter reserve money less NFA of the RBM. Reserve money = currency issued by RBM + balances of commercial banks’ accounts with RBM, includes required reserves for Malawi kwacha deposits and other reservable liabilities. - NFA of RBM defined as NIR plus other foreign assets of RBM (including capital subscriptions in international institutions; foreign assets in nonconvertible currencies; gross reserves encumbered or pledged), less any medium- and long-term foreign liabilities of the RBM. - Adjustment clauses for the NDA ceiling: - Budget support: Ceiling on NDA adjusted downward by full amount if cumulative receipts from budget support are greater than US$30 million above program baseline; adjusted upward by amount if cumulative receipts are less than baseline up to a maximum of $30 million. Kwacha value calculated at program exchange rate. - Donor pool accounts for social sector: Ceiling on NDA adjusted upward by amount donor inflows (in kwacha) from U.S. dollar–denominated donor accounts held in RBM fall short of baseline; upward adjustment capped at US$30 million. - Debt service payments: Ceiling on NDA adjusted downward (upward) by full cumulative amount by which debt service payments to World Bank and ADB fall short of (exceed) program baseline. - Total upward adjustment cap to NDA from combined shortfalls/excesses (budget support, donor inflows, excess debt service) capped at US$40 million; downward adjustment reflects full amount by which cumulative receipts from budget support are greater than US$30 million above baseline and full cumulative amount by which debt service payments to World Bank and ADB fall short of baseline. - Liquidity reserve requirement adjuster: Ceiling on NDA adjusted downward for a decrease in reserve requirement ratio on domestic deposits and upward for an increase; adjustment spread equally over two quarters starting in quarter of change. Adjuster = (one minus existing required percentage of reserve assets) × (program baseline required reserve ratio minus new required reserve ratio) × (amount of average reservable deposit liabilities in commercial banks during the last month before the change). - Reporting and coverage: - NIR data reported weekly and monthly by RBM. - Coverage: central government includes all units exercising authority over entire economic territory; nonprofit institutions controlled and financed by central government are excluded for purposes of TMU. Monetary aggregates based on twelve-bank monetary survey. *Source: Excerpt from IMF staff report text and Technical Memorandum of Understanding.* ### 21. Definition of CGDB: CGDB is computed as the sum of (1) net borrowing from the ### _cr12221 - 21. Definition of CGDB: CGDB is computed as the sum of (1) net borrowing from the ### Definition of CGDB - CGDB is computed as the sum of: - (1) 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); - (2) net borrowing from commercial banks (including advances, holdings of local registered stocks, and holdings of treasury bills minus deposits); - (3) net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and holdings of treasury bills); - (4) holdings of promissory notes. - Treasury bills and locally registered stocks are valued at cost rather than face value. - The ceiling on CGDB is measured as the change in the stock of CGDB since June 30, 2012, including promissory notes and securities transferred to the RBM from the treasury since the beginning of the fiscal year. - Transfers from extra-budgetary funds: - Will not be considered revenues for this performance criterion; - Will be treated as domestic borrowing (accounts are outside the definition of government). - Asset sales or privatization revenues: - Will be accounted for under financing as a separate category, separate from domestic or foreign financing when calculating CGDB. ### 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. - Arrears timing rules: - Wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when 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 in arrears if not 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 affecting the CGDB ceiling - Budget support adjuster (paragraph 23): - 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$30 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 calculated at the program exchange rate. - Budget support is measured as the cumulative flow from the beginning of the fiscal year. - Donor accounts for the social sector adjuster (paragraph 24): - 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 accounts for health, education, and other SWAps, and NAC held in RBM are smaller than donor inflows (in kwacha) in the program baseline. - The upward adjustment will be capped at US$30 million. - Donor inflows are measured as receipts received (in kwacha) by the budget, measured from the beginning of the fiscal year. - Debt service payments adjuster (paragraph 25): - The ceiling (floor) on CGDB will be adjusted downward (upward) by the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of (exceed) the program baseline. - The cumulative amount will be measured from the beginning of the fiscal year. - Aggregate cap on upward adjustments (paragraph 26): - The total upward adjustment to CGDB from a shortfall of (i) budget support (ii) donor inflows to the donor accounts for the social sector relative to the program assumptions and (iii) an excess of debt service payments to the World Bank and the African Development Bank (ADB) relative to the program assumptions will be capped at US$[40] million. - The downward adjustment to NDA will reflect the full amount by which the cumulative receipts from the budget support are greater than US$30 million above the program baseline and by the full cumulative amount by which debt service payments to the World Bank and the African Development Bank (ADB) fall short of the program baseline. ### External payment arrears and nonconcessional external debt - Definition of external payment arrears (paragraph 27): - External payment arrears consist of debt-service obligations (principal and interest) of the central government or the RBM to nonresidents that have not been paid at the time they are due, as specified in contractual agreements, except on external debt subject to rescheduling or restructuring. - This performance criterion will be monitored on a continuous basis. - Definition and scope of nonconcessional external debt (paragraph 28): - Debt definition as set out in Executive Board Decisions No. 6230-(79/140) August 3, 1979, and as amended by Decisions No. 11096-(95/100) October 25, 1995; 12274–(00/85) August 24, 2000; and 14416-(09/91) August 31, 2009. - For program purposes, short-, medium-, and long-term debt is nonconcessional if it includes a grant element of less than 35 percent, as indicated in Decision No. 11248-(96/38), April 15, 1996. - The ceiling on nonconcessional debt applies to contracting and guaranteeing of debt with nonresidents by the central government, the RBM, public enterprises, and other official sector entities, unless an explicit selective exclusion is made. - This performance criterion is monitored on a continuous basis. - The ceiling applies to debt and commitments contracted or guaranteed for which value has not been received and is measured cumulatively from the beginning of the fiscal year. - Maturity definitions: - Short-term debt (paragraph 29): outstanding stock of debt with an original maturity of one year or less. - Medium- and long-term debt (paragraph 30): outstanding stock of debt with a maturity of more than one year. - Exclusions from the nonconcessional limit (paragraph 31): - Use of IMF resources, any kwacha-denominated treasury bill and local registered stock holdings by nonresidents. - (i) debts classified as international reserve liabilities of the RBM; - (ii) new debt issued to restructure, refinance, or repay existing debt up to the amount actually used for these purposes; - (iii) normal import financing (considered “normal” when the credit is self-liquidating); - (iv) arrangements to pay overtime obligations arising from judicial awards to external creditors. ### Quantitative targets and definitions - Definition of reserve money (paragraph 32): - Sum of currency issued by the RBM, including the 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-September r 2012 to end-December 2013. - Definition of social spending (paragraph 33): - Using functional classification of expenditure, social spending = central government spending on health, education, the farm input subsidy program, and government social protection (comprising expenditures by the ministry of gender, children and social welfare, the ministry of disability and elderly affairs, and the local development fund). - The social spending allocations in the government budget will not be adjusted downward to meet fiscal targets of the program. ### Key numerical targets and statistics (selected from Table 1 and tables) - Monetary targets (millions of kwacha): - Ceiling on net domestic assets of the RBM (PC): 119,709; 114,579; 109,417; 118,542; 106,256; 100,930. - Ceiling on reserve money (IT): 89,168; 76,178; 88,210; 97,809; 99,120; 105,830. - Fiscal targets (millions of kwacha): - Ceiling on central government's net domestic borrowing (PC): -11,988; 18,500; 11,609; 0. - Floor on social spending (IT): 39,034; 94,044; 121,798; 151,899. - External sector targets (US$ millions): - Floor on net international reserves of the RBM (PC): -7; -49; 17; 19; 71; 118. - Memorandum items: - Net foreign assets of the RBM (US$ millions): -117; -148; -82; -80; -27; 19. - Budget support (US$ millions): 86; 86; 151; 208. - Budget support (millions of kwacha): 21,945; 21,945; 38,926; 53,864. - Debt service payments to the World Bank and African Development Bank (millions of kwacha): 5,248; 5,364; 7,771; 7,771. - Health SWAp receipts (millions of kwacha): 8,378; 13,221; 17,073; 19,049. - NAC receipts (millions of kwacha): 4,777; 7,315; 10,019; 12,220. - Program exchange rate (kwacha per US$): 260; 260; 260; 260; 260; 260. - Cross rates and gold price (March 31, 2012): - Gold bullion LBM US$/troy ounce: 1,668.350. - SDR to US$ exchange rate: 0.649. - Euro to US$ exchange rate: 0.758. - Yen to US$ exchange rate: 82.435. - Yuan to US$ exchange rate: 6.308. - Rand to US$ exchange rate: 7.611. - UK £ to US$ exchange rate: 0.632. - Breakdown of social expenditures in 2012/13 (Table 4, selected figures): - Total Health: 35,609.07 (Q1 8,210.43; Q2 8,902.27; Q3 8,902.27; Q4 9,594.10). - Total Education: 71,760.55 (Q1 16,307.81; Q2 17,940.14; Q3 17,940.14; Q4 19,572.46). - Farm Input Subsidy Program total: 40,884.00 (Q1 13,628.00; Q2 27,256.0000). - Total Social Expenditure: 151,785.78 (Q1 39,005.83; Q2 54,981.45; Q3 27,725.45; Q4 30,073.06). - Cumulative Quarterly Targets: 39,005.83; 93,987.28; 121,712.72; 151,785.78. ### Exchange regime and FX market policy - RBM will ensure ongoing assessment of the foreign exchange regime with IMF support to ensure consistency with Malawi’s obligations under Article VIII. - RBM will work to ensure the spread between the official exchange rate and other market determined rates (bureau and parallel market rates) fall within 2 percent. - RBM will abide by the continuous PC on non-introduction or intensification of exchange restrictions and multiple currency practices. ### Reporting requirements and data reporting frequencies (selected) - Reporting templates, frequencies, and lags are specified in Table 5. Selected items and frequencies include: - Gross international reserves, exchange rate, and foreign exchange purchases and sales: D (Daily), agency DRBM, mode FE. - Reserve money and its components, OMO transactions, RBM balance sheet: W (Weekly) / M (Monthly) depending on item; agency WRBM; lag 30. - Daily exchange rate: D, agency RBM, mode FE. - Treasury bill auction results: W, agency RBM, lag 2. - Spread between bureau midrate and the official exchange midrate: WRBM MM30 30E. - Central government domestic borrowing, holdings of local registered stocks and treasury bills, detailed issue and maturity profile for treasury bills: MRB MM3030E / MRBMM3030E. - Full banking survey (monthly): MRB MM45 15E. - Fiscal table (GFS) including revenue, expenditure, and financing: MM OFM3030E. - Revenue data (from MRA): MM OFM3030E. - New external loans contracted or guaranteed by the central government: QMOF Q30T30 E. - External debt services (actual and projections): QM OFQ30T30E. - Report on IMF program performance: QMOF Q45T15E. - Statement on new arrears: QAuGQ45T15E. - Reporting codes and legend include D = Daily, W = Weekly, M = Monthly, Q = Quarterly, BA = Bi-annual; delivery modes E = Electronic, H = Hard Copy, with specific lags indicated in Table 5. ### Structural benchmarks and prior actions (selected) - Prior action: Parliamentary passage of a budget for FY 2012/13 in line with program objectives — Status: Done. - Structural benchmarks include: - Publish monthly revenue collections of the Malawi Revenue Authority in newspapers within two weeks of the end of the month (7/31/2012). - Provide Ministries, Departments and Agencies with quarterly spending ceilings consistent with quarterly fiscal targets; begin Sept 2012 for FY2012/13 Q2 and quarterly thereafter. - Verify existing stock of government domestic arrears by 31-Dec-12. - Configure the IFMIS Purchase Order (PO) module to support commitment control by 31-Dec-12. - Progressively extend processes for capturing donor funded project transactions in IFMIS to all projects where bank accounts are controlled by the government of Malawi by 31-Mar-13. - Amend RBM Act to limit the outstanding amount of RBM's total lending to government by 30-Jun-13. - RBM to publish a financial stability report on a semi-annual basis, with a lag of no more than four months; start with report for quarter ending March 2012 (Semi-annual, starting in July 2012). - Obtain approval and begin implementation of the Financial Sector Development Strategy by 31-Dec-12. *Source: Excerpt from the IMF staff report technical memorandum of understanding (TMU) and associated tables provided in the source content.* ### APPENDIX II. MALAWI: REAL EXCHANGE RATE ASSESSMENT ### APPENDIX II. MALAWI: REAL EXCHANGE RATE ASSESSMENT ### Introduction and overall conclusion - Assessment period: until May 2012, based on April 2012 WEO data and prior to exchange rate regime changes. - Primary finding: All four approaches used point to real exchange rate overvaluation in Malawi prior to the change in the monetary regime. - Policy-relevant event: The 33 percent devaluation of the exchange rate and adoption of a floating regime in May 2012 brought the exchange rate broadly in line with fundamentals. - Preferred assessment method: Rely primarily on indicators that capture developments in the foreign exchange market, complemented by model-based approaches—especially the External Sustainability (ES) and Equilibrium Real Exchange Rate (ERER) techniques. - Estimated model-based overvaluation range reported: 26 to 34 percent. ### Macroeconomic indicators approach: external sector and foreign exchange market developments - Key observed relationships and risks: - REER evolution has been associated with changes in the terms of trade, but restrictive foreign exchange policies kept REER much more stable than terms of trade, causing measured and equilibrium REERs to diverge. - Persistent REER overvaluation contributed to current account deficits and complicated reserve accumulation; could lead to a balance of payments crisis if not offset by capital flows. - Indicators signaling disequilibrium: - Imbalance between growth of imports and exports due to rapid domestic income growth and broadly fixed Kwacha–US dollar rate. - Export growth showing a declining trend; current account deficits widened in 2011 after narrowing in 2010. - Medium-term projections indicate substantial import compression would be required to keep net foreign assets approximately stable. - Foreign exchange market tensions and policy actions: - Spread between official and bureau rates widened to about 25 percent by end-July 2011, indicating increasing official exchange rate overvaluation. - In August 2011, RBM required foreign exchange bureaus to operate around the official rate within a band of +/- three percent (after a devaluation of the official exchange rate by 10 percent). - Parallel market activity increased and the parallel rate rose to around 285 kwacha per dollar by early May, 2012. - Interbank foreign exchange market largely inactive; RBM prescreening of large FX purchases set at US$50,000 reported as intensifying controls. - Reserves and arrears: - Reserves among the lowest in Sub-Saharan Africa (benchmark rule of thumb: 3 months of imports). - Up to April 2012, foreign exchange shortages, rationing, and private import payment arrears persisted. - Arrears on fuel imports currently about US$50 million; backlog of foreign exchange requirements reported by banks. - Conclusion from indicators: Excess demand for foreign exchange persists; underlying external disequilibrium needs to be addressed. ### External Sustainability (ES) approach: methodology, parameters, and results - Approach summary: - ES analyzes the relationship between sustainability of external stock position and flow current account; relies on few assumptions about real GDP growth and inflation. - Three-step method: determine NFA-stabilizing current account; compare with underlying current account; compute REER adjustment to close the gap. - NFA stabilizing current account formula used: (1) CAs = [ (1+g*)/(1+g + π - π*) ] * b_ss (as presented in source). - Elasticity of the current account to REER (key parameter): - Assumptions: Malawi treated as small country (export demand and import supply elasticities = 0); complete pass-through for import and export prices. - Parameters used (Table A2.1): - Average ratio of exports to GDP (2007–11) (X/Y): 0.22 - Average ratio of imports to GDP (2007–11) (M/Y): 0.35 - Import demand elasticity (η_M): -0.52 - Export supply elasticity (η_X): 0.29 - Pass-through coefficient for exports (φ_X): 1 - Pass-through coefficient for imports (φ_M): 1 - Elasticity result (formula (2)): -0.25 - Note: This elasticity would be lower if less than complete pass-through were assumed. - ES approach key assumptions and quantitative results (Table A2.2): - Annual imports (without import compression), percent of GDP, average 2012–17 (A): 27.6 - Reserves needed to cover 3 months of imports, percent of GDP, average 2012–17 (B = A/4): 6.9 - External debt, percent of GDP (C): 15.8 - Net foreign assets of commercial banks, percent of GDP, average 2012–17 (D): 1.5 - Net Foreign Asset Target (E = B – C + D): -7.4 - Projected real GDP growth rate, percent, average 2012–17: 4.1 - Projected inflation (CPI, end of period, percent): 14.1 - NFA Stabilizing Current Account (by formula (1)): -1.2 - Projected Current Account (without import compression): -7.9 - Elasticity of Current Account to Real Exchange Rate changes: -0.25 - Misalignment Estimate: 26.8 - ES conclusion: External sustainability approach suggests an overvaluation of the real exchange rate of 26.8 percent. ### Macroeconomic Balance (MB) and Equilibrium Real Exchange Rate (ERER) approaches: framework and adjustments - Purpose: - MB determines the exchange rate adjustment required to bring the underlying current account to a level consistent with its norm. - ERER provides the gap between equilibrium and actual REER by estimating a cointegrating relationship between REER and commodity terms of trade and comparing predicted versus actual REER. - Adjustments and methodological choices for Malawi: - Use a homogeneous group of African countries with characteristics similar to Malawi to calculate current account norm and equilibrium REER misalignment, using data over 2002–11 to avoid structural breaks. - Augment determinants of the current account with terms of trade, aid flows, and remittances to reflect LIC-specific features. - Employ econometric technique that captures potential endogeneity and exploits panel nature of the data. - For ERER, estimate a cointegrating relationship between REER and commodity terms of trade for Malawi and compare actual REER with model-predicted REER to measure misalignment. - Findings overview: - MB and ERER approaches indicate real exchange rate overvaluation consistent with other methods; the note highlights ES and ERER as especially relevant complements to the macro indicators for Malawi. ### Implications and policy considerations (as stated in the text) - Evidence indicates excess demand for foreign exchange and real exchange rate overvaluation prior to May 2012. - Risks if unaddressed: - Continued external imbalances, depletion of reserves, intensification of rationing, and potential disorderly exchange rate depreciation. - Policy actions implied by the assessment: - Address underlying external disequilibrium rather than only administratively restricting foreign exchange markets. - Use market-based exchange rate adjustments (as implemented in May 2012: 33 percent devaluation and float) to bring exchange rate broadly in line with fundamentals. - Complement market adjustments with policies to strengthen exports, donor support stabilization, and measures to rebuild reserves (implicit from discussion of drivers). *Source: APPENDIX II. MALAWI: REAL EXCHANGE RATE ASSESSMENT (prepared by Mehdi Raissi (SPR), Olumuyiwa Adedeji (AFR), and Sergejs Saksonovs (SPR)).* ### 21. As Prati et al. (2010) and Lee et al. (2008) discuss, the effect of initial NFA on the ### _cr12221 - 21. As Prati et al. (2010) and Lee et al. (2008) discuss, the effect of initial NFA on the ### Determinants of the current account and real exchange rate - Initial net foreign assets (NFA) - Ambiguous theoretical effect: higher initial NFA can allow higher spending (worse current account) with an appreciated real exchange rate, or lead to increased net foreign income flows and a positive relationship between NFA and current account balances. - Demographics - Higher share of dependent population reduces national savings and the current account balance; higher population growth rate should have a negative effect on the current account balance and lead to a more appreciated equilibrium real exchange rate. - Stage of development and economic growth - Low-income countries (LICs) should import capital; fast-growing economies with higher expected productivity improvements should invest more, implying deterioration of the current account balance. - Real GDP per capita growth rate controls for relative development; higher growth (among peers) should be associated with a weaker current account balance. - Terms of trade - Ambiguous impact on real exchange rate depending on income vs substitution effects; terms of trade may have a significant effect on the current account balance of LICs. - Aid and remittances (ratios to GDP) - Aid can increase imports or build reserves; expected sign in trade balance equation is negative. - Impact depends on composition (grants vs concessional loans) and effects on exchange rate movements. - Remittances can have positive or negative impact on the current account depending on associated private consumption responses. - Expectation: some temporary real exchange rate appreciation from higher aid inflows and remittances, ceteris paribus. ### Macroeconomic Balance (MB) approach: data, sample, and estimation choices - Sample and data - Panel consists of 12 countries in Sub-Saharan Africa. - Annual data covering the period 2000–11. - Macroeconomic fundamentals include both aid inflows and remittances. - Aid inflows (grants and concessional loans) constituted about 28 percent of government expenditure in 2010. - Remittances were about US$50 million in 2010 (1 percent of GDP). - Estimation strategy - Variables expressed in relative terms compared to trading partners. - GMM used to correct for short sample bias and potential endogeneities. - Trade weights use IMF – INS facility with adjustments (Swaziland weight added to South Africa from 2005 onwards). - No minimum cut-off for trade-weight inclusion. ### GMM results (Macroeconomic Balance approach) - Key statistically significant determinants (restricted specification): - Terms of trade (log index): coefficient 0.143** (full specification 0.116) - Lagged net foreign assets (ratio of GDP): coefficient 0.058*** (full specification 0.043) - Relative real GDP per capita growth rate: coefficient -1.746*** (full specification -1.087) - Table A2.4 reported statistics: - R-squared (full specification) 0.237 - R-squared (restricted specification) 0.141 - Number of observations 108 108 - Significance notation: *** - significant at 1 percent, ** - significant at 5 percent, * - significant at 10 percent. - Standard errors robust to heteroskedasticity and autocorrelation; lagged values of all variables used as instruments. - Other findings from MB estimation: - Relative fiscal balance: coefficient 0.110 (not statistically significant; excluded from restricted specification). - Aid (ratio of GDP): coefficient -0.234 (negative as expected but not statistically significant). - Remittances (ratio of GDP): coefficient 0.014 (positive but not statistically significant). - Population growth rate: coefficient 0.817 (did not have expected sign and not statistically significant). ### MB approach: projected averages and misalignment metrics - Table A2.5 projections and coefficients: - Terms of trade (log index): coefficient 0.143; Projected Average (2012–17) -0.038 - Lagged net foreign assets (ratio of GDP): coefficient 0.058; Projected Average (2012–17) -0.262 - Relative real GDP per capita growth rate: coefficient -1.746; Projected Average (2012–17) -0.011 - Constant -0.012 - Derived MB metrics: - Current account norm -1.3 - Projected current account (in 2012–17, without import compression), percent of GDP -7.9 - Elasticity of Current Account to Real Exchange Rate changes -0.25 - Misalignment 26.4 - Projection assumptions: - Projections based on latest WEO data and assumption of constant real exchange rate in the medium term. - Underlying current account projected under assumption of no import compression to ascertain exchange rate misalignment magnitude. ### Equilibrium Real Exchange Rate (ERER) approach and high-frequency CTOT analysis - CTOT construction (1990M1–2012M2) - CTOT index constructed using commodity prices and fixed export/import shares (averaged between 1990 and 2011). - Commodities included: Tobacco, Uranium, Tea, Sugar, Cotton, Rice, Coffee, Maize, Petroleum Products, and Fertilizers. - Cointegration and ERER estimation - Cointegrating relationship between REER and CTOT established. - Estimated elasticity coefficient between REER and CTOT of 41.8 percent (statistically significant). - High-frequency ERER estimation suggests the kwacha was overvalued by around 34 percent in February 2012. ### Summary of cross-method results and robustness considerations - All four methods used indicate real exchange rate overvaluation and excess demand for foreign exchange. - Model-based overvaluation range: 26 percent to 34 percent. - Preferred methods for Malawi: - ES approach and high-frequency ERER method considered most plausible for Malawi due to simplicity, transparency, and fewer assumptions. - MB approach sensitivity: choice of instruments, variable selection strategy, and data revisions can substantially affect results. - Special circumstances: - Malawi is persistently off its demand curve for foreign exchange, making equilibrium identification difficult. - Developments in parallel market exchange rates are policy-relevant indicators and may provide a more accurate guide to nominal exchange rate overvaluation. ### Policy implications and benefits of a properly valued exchange rate for Malawi - Achieving an appropriate exchange rate could help with: - Reducing or eliminating underreporting of exports and over-invoicing of imports. - Increasing inflows of remittances through official channels, reducing deadweight loss from informal channels. - Reducing imports to ensure the current account position is sustainable. - Transitioning to increased exports. - Accumulating international reserves to withstand adverse exogenous shocks. - Removing adverse impact of exchange rate and foreign exchange regime uncertainty on investment and economic growth. *Source: IMF staff analysis as presented in the document.* ### APPENDIX III. MALAWI: STRATEGIES FOR FINANCIAL DEEPENING ### APPENDIX III. MALAWI: STRATEGIES FOR FINANCIAL DEEPENING ### Regulatory and legal reforms - The Malawian authorities have enacted the following pieces of legislation: Banking Act; Microfinance Act; Securities Act; Credit Reference Bureau Act; Microfinance Act; Securities Act; Financial Cooperatives Act; Pension Act; and Payment System Act. ### Financial deepening indicators and trends - Broad money as ratio of GDP and credit to the private sector as a ratio of GDP show an increasing trend during 2000–10 (Figures A3.1 and A3.2). - Despite improvement, financial development indicators in Malawi are still low by regional standards: - As at end-2010, the ratio of broad money to GDP in Malawi was less than the median for sub-Saharan Africa. - As at end-2010, the ratio of credit to the private sector was lower than the median for sub-Saharan countries. ### Access to financial services (FinScope, Malawi, 2008) - Adult population access breakdown: - 26 percent of adults are formally served (19% by banks and 7% by other formal financial institutions). - Informal sources capture another 19% of the adult population (borrowing from employers, obtaining credit from shops or receiving input as credit). - The share of those financially excluded from the financial sector is 55%. - Identified constraints responsible for limited access to finance in Malawi (2008 FSAP and FinScope, Malawi, 2008): - Low client income levels. - Low financial literacy. - Risks arising from rain-fed agriculture. - High cost of finance. ### Strategies with potential to increase access - Mobile banking (branchless banking) potential: - Transformational branchless banking models using technology and agents have lowered costs of intermediation and reached new areas and clients in other countries. - Example cited: Safaricom and M-payments service in Kenya [M-Pesa], which allows the transfer of money cheaply within Kenya via mobile phone without a bank account; the introduction of M-PESA has facilitated a rapid increase in financial intermediation. - Agency agreements (third-party agents): - Model favored in several Latin American countries: Banks offer financial services through third-party agents (stores or post offices). - Agency agreements offset several supply-and demand-side constraints simultaneously. - Kenya has recently put in place the necessary regulatory framework for agency models. - Brazil example: government routes most pension and social welfare payments through banks which use correspondents, providing a backbone of transactions that underpin the business model for branchless banking. ### Key observations and implications - Financial deepening is occurring but remains limited in absolute and regional terms. - A significant proportion of the population (55%) remains financially excluded, with formal coverage only 26 percent. - Low incomes, low financial literacy, agricultural risk, and high finance costs are central barriers to inclusion. - Technology-enabled branchless banking and agent banking are highlighted as promising strategies to lower intermediation costs, expand outreach, and build transaction volumes that can sustain expanded financial services. *Prepared by Olumuyiwa Adedeji.* ### 12. There was a divergence between Malawi’s sample-wide overall external ### _cr12221 - 12. There was a divergence between Malawi’s sample-wide overall external ### Trade competitiveness trends and scores - Malawi’s overall trade competitiveness score decreased significantly by the end of the period relative to the beginning of the period, while the average and median rankings for the comparative group rose over the review period. - Relative ranking movements within the comparator group during the review period: Mozambique and Zambia improved; Burundi and Malawi worsened. - Tabulated scores and ranks by sub-period (1980–84, 1985–89, 1990–94, 1995–99, 2000–04, 2005–08): - Malawi: Score 0.2585 Rank 14; 0.2371 Rank 14; 0.2630 Rank 12; 0.2949 Rank 10; 0.2301 Rank 16; 0.1944 Rank 20 - Median: 0.2047 21; 0.2164 19; 0.2229 17; 0.2476 17; 0.2277 11; 0.2223 14 - Average: 0.2191 Rank 19; 0.2157 Rank 19; 0.2349 Rank 18; 0.2625 Rank 15; 0.2414 Rank 16; 0.2296 Rank 16 - Burundi: 0.2108 Rank 18; 0.1856 Rank 23; 0.2241 Rank 16; 0.2476 Rank 17; 0.1886 Rank 23; 0.1576 Rank 25 - Kenya: 0.1960 Rank 23; 0.2164 Rank 19; 0.2432 Rank 14; 0.2251 Rank 21; 0.1950 Rank 22; 0.1927 Rank 21 - Mozambique: 0.1386 Rank 26; 0.2554 Rank 12; 0.2136 Rank 21; 0.2665 Rank 14; 0.2541 Rank 13; 0.2442 Rank 13 - Rwanda: 0.2047 Rank 21; 0.1794 Rank 24; 0.1954 Rank 26; 0.2320 Rank 20; 0.1952 Rank 21; 0.2019 Rank 18 - Tanzania: 0.2942 Rank 12; 0.2799 Rank 11; 0.3383 Rank 8; 0.3375 Rank 6; 0.3503 Rank 6; 0.3183 Rank 8 - Uganda: 0.2918 Rank 13; 0.2167 Rank 18; 0.2229 Rank 17; 0.3090 Rank 8; 0.2790 Rank 9; 0.2702 Rank 10 - Zambia: 0.1975 Rank 22; 0.1763 Rank 25; 0.2070 Rank 25; 0.2198 Rank 22; 0.2277 Rank 17; 0.2223 Rank 14 - Source for scores: IMF staff calculations using indicators in the World Bank's African Development Indicators. ### Export diversification and correlation with competitiveness - A statistically significant negative relationship was found between the TCI and the Herfindahl Concentration Index, indicating that higher competitiveness ratings are associated with more diversified export bases. - The three lowest-ranking countries in the subgroup in terms of overall trade competitiveness (Malawi, Burundi and Kenya) all experienced a decrease in their regional world export shares. - Correlation between TCI and H: - Correlation coefficient -0.571081 - t-Statistic -7.094589 - Probability 0.00000 ### Regression analysis: model, estimation, and key elasticities - Model specification: - Simple market equilibrium model of export performance estimated simultaneously in a log-linear specification; coefficients represent elasticities. - Estimation based on a pooled sample of 27 countries, including Malawi, for the period 1981–2008. - Focus on export supply equation (commodity-producer sample, price takers). - After adjusting for serial correlation, Equation (2) (Export Supply) shows the following significant determinants with elasticities: - Diversification index (Log_Div): 0.7153 (before correction) and 0.7589 (after correction). t-Statistic 3.7758 and 6.9848 respectively. - Gross fixed capital formation (Log_GFCF): 0.2844 (before correction) and 0.1307 (after correction). t-Statistic 3.6697 and 2.3280 respectively. - Trade enabling index (Log_Trade_Enab): 0.2485 (before correction) and 0.1717 (after correction). t-Statistic 2.7075 and 4.2081 respectively. - Specific notes on other variables: - Real effective exchange rate (Log_REER(-1)) and lagged price (Log_Price(-1)) were statistically significant before correction but lost significance for REER after AR(1) correction; Log_Price(-1) remained significant in some specifications. - Regression estimation details (selected): - Estimation Method: Systems Estimation, Weighted Least Squares - Sample: 1981–2008 - Export Demand Equation statistics: Observations 638 (or 608), R-squared 0.0032 (or 0.8900 for alternate), Adjusted R-squared 0.0000 (or 0.8893) - Export Supply Equation statistics: Observations 157 (or 171), R-squared 0.4046 (or 0.8970), Adjusted R-squared 0.3865 (or 0.8907) - Statistical significance markers: "*", "**", and "***" indicate statistically significant at the 1%, 5%, and 10% significance level, respectively. - Source: IMF staff estimates using data obtained from the World Bank's Africa Development Indicators Database. ### Competitiveness, capital flows, and taxes - External competitiveness is important for attracting and retaining portfolio capital inflows. - Prior to the 2008 global financial crisis, foreign holdings of Government of Malawi T-bills accounted for about eight percent of the total outstanding stock of T-bills. After resumption of global flows, foreign participation in the local T-bill market is non-existent, deterred by macroeconomic instability and investor concerns about sovereign and repatriation risk. - Malawi Stock Exchange (MSE) trading in 2011: 1,590,006,001 shares valued at over US$1.86 billion were traded, compared to 241,957,941 shares valued at US$53.3 million in 2010. - Taxation on stock exchange transactions: - Malawi has among the highest Capital Gains Tax and VAT rate on share commissions in SADC after the recent application of capital gains taxes of 30 percent to MSE transactions. - Comparative COSSE tax rates table excerpts (by exchange): Capital Gains Tax 30 (MSE) versus other exchanges; Dividend Tax 10 (MSE) etc. (table entries preserved as presented) - Specific concerns raised by private sector: Withholding Tax perceived hurtful to SMEs; turnover tax for transaction volumes under K50 million irrespective of profitability; the 30 percent capital gains tax; VAT payment schedule at mid-month compels businesses to borrow to pay VAT obligations. - Source for tax table: Malawi Stock Exchange, 2012. ### Key findings and policy implications - Observations: - External competitiveness is vital for achieving MGDS goals and increasingly important with enhanced regional integration. - Worrisome signs that Malawi has lost regional competitiveness along several dimensions during 1980–2008, supported by multiple indicators and methodologies. - Export supply considerations are of foremost importance for SSA commodity producers who are price takers. - Key determinants of overall export performance identified: GFCF, the degree of export diversification, and changes in the trade enabling environment index of competitiveness (which includes indicators that assess overall macroeconomic stability). - Policy recommendations (measures to enhance competitiveness): a. Prudent demand management: - Pursue appropriate fiscal, monetary and exchange rate policies to maintain price stability, mitigate pressure on international reserves, and allow a flexible response to exogenous shocks, including adopting an appropriate exchange rate policy. b. Foreign exchange market liberalization: - Liberalize restrictions on current account transactions as a confidence-building measure to attract additional foreign inflows and increase availability of foreign exchange at market-determined rates. c. Structural reforms to strengthen the business climate: - Strengthen institutions, enhance labor productivity, deepen access to finance, and reduce business transaction costs to enhance the attractiveness of doing business in Malawi. ### Formulas and indices used in the analysis - Export diversification: Herfindahl Index H defined using three-digit SITC sectors: - Xi = the ith export sector at the three-digit SITC - Si = the ith sector’s share of total exports - N = the maximum number of sectors appearing in the sample during the review period - Interpretation: Higher H indicates greater concentration; lower limit of H is 100/N; upper limit is 100. - Exports Concentration Index (ECI): Gives a bounded measure of degree of exports concentration (formula and context preserved). - Trade Competitiveness Index (TCI): - Each variable normalized so that each variable was bounded between [0,1]: - rit = normalized sub-index of country i at time t - xit = actual sub-index of country i at time t - x̄t (lower bar) = lowest value of sub-index x across Africa in year t - x̄t (upper bar) = highest value of sub-index x across Africa in year t _Italic: Source — IMF staff report content as presented in the supplied PDF content unit._ ### 6.7 percent in the previous DSA. The current projection is consistent with the historical ### _cr12221 - 6.7 percent in the previous DSA. The current projection is consistent with the historical ### Macroeconomic outlook and growth projections - Real GDP growth is projected to rise gradually from 4.3 percent in 2012 to about 6½ percent over the medium term. - The current projection is consistent with the historical average growth rate of 5.8 percent over the last ten years. - Near-term growth drivers: - Recovery in manufacturing, transportation service, construction, and trade as production levels increase toward capacity. - Agricultural sectors benefit from easing of fuel shortages. - Medium-term growth drivers: - Mining and non-traditional agricultural exports. - Floating of the kwacha and liberalization of the foreign exchange regime expected to redirect resources to exports and import-competing production, and contain import demand for consumption goods. - Inflation: - Following the recent devaluation of the Kwacha, consumer price inflation is expected to spike to about 20 percent by end-2012. - Box projection: Consumer price inflation is projected to increase to an annual average rate of 18.4 percent in 2012 after the devaluation in May 2012. - Inflation is projected to decelerate in the medium term after a short-lived spike, reaching single-digit levels. - Exchange rate assumption: - The nominal effective exchange rate is assumed to be determined by inflation differential between Malawi and its trading partners after 2014. ### Baseline macroeconomic assumptions (Box 1) - Long-term growth: - Real GDP is projected to grow by about 6 percent per year on average over the long term, conditional on timely adoption of a comprehensive policy package. - Sectoral drivers: - Main drivers: agriculture, manufacturing, trade, and mining. - Mining: production of rare earth metals (e.g., ferroniobium, tantalum fluorite, and zircon). - Revenues and fiscal stance: - Revenue (excluding grants) is projected to increase relative to GDP in FY2012/13 due to unified exchange rate regime and automatic fuel price adjustment mechanism. - Domestic financing of the budget is projected to stay at zero percent of GDP in the medium term but will increase to an average 0.5 percent of GDP after FY2017/18. - External financing and grants: - Highly concessional financing from multilaterals is assumed to be the major source of debt (two-thirds). - Grants are projected to increase to about 10.4 percent of GDP during FY 2012/13 and thereafter stabilize in U.S. dollar terms but decrease gradually as a ratio of GDP. - External sector: - Export growth is projected to average about 9 percent during 2012–32. - Imports are projected to grow at an annual average rate of about 8 percent during 2012–32 (historical: imports grew at an average annual rate of 10 percent during 2002–11). - Current account deficit, including official transfers, is projected to narrow over the medium term. ### External debt sustainability — baseline and projections - Under the baseline scenario over the projection period, external debt burden indicators fall and remain below the indicative policy thresholds. - World Bank CPIA context: - Malawi ranked as a medium performer (average CPIA in 2008–10 is 3.37). - External debt burden thresholds for Malawi: (i) PV of debt-to-GDP at: 40 percent; (ii) PV of debt-to-exports at: 150 percent; (iii) PV of debt-to-revenue at: 250 percent; (iv) debt service-to-exports at: 20 percent; and (v) debt service-to-revenue at: 30 percent. - Stock of PPG external debt: - Expected to decline from about 30 percent of GDP in 2012 to about 14 percent in 2032. - The present value (PV) of PPG external debt-to-GDP gradually declines to below 8.7 percent during the rest of the projection period. - PV of debt-to-exports: - Remains well below the threshold of 150 percent throughout the entire baseline period. - PV of PPG external debt to revenue: - Downward trend from a peak of 105 percent in 2012 and will remain well below the threshold of 250 percent during the entire period. ### Stress tests and downside risks - Main downside risks: - Deterioration in the terms of trade and adverse weather conditions lowering agricultural output. - Malawi’s narrow export base, reliance on rain-fed agriculture, and weak international reserves increase vulnerability to terms-of-trade and weather shocks. - External stress-test outcomes: - The PV of debt-to-exports ratio breaches its sustainability threshold under stress tests (exports shock in particular). - Standard sensitivity analysis indicates medium risk of debt distress: PV of debt-to-exports ratio breaches its threshold after the shock in 2014 reaching the value of 185 (in percent of GDP) and only coming down to 138 percent of GDP in 2021. - Bound tests: the most extreme stress for the PV of debt-to-exports ratio is a one-standard deviation shock to the export value growth in 2013–14. - Tobacco concentration risk: Tobacco still accounts for more than half of Malawi’s export earnings; Burley accounts for the majority of production, leaving Malawi vulnerable to changes in tastes and regulatory actions. - Debt service: - Debt service ratios are expected to remain below the threshold for the projection period in both baseline and shock scenarios. ### Public debt sustainability and fiscal risks - Public debt dynamics: - Public debt has risen substantially since the run-up to the May 2009 presidential and parliamentary elections. - The share of domestic debt in total public debt is about 52 percent of total public debt. - PV of public debt to GDP ratio is expected to reach about 45.5 percent in 2012, decline to levels below 32 percent in the medium term, and about 14 percent by 2032. - Public sector stress tests: - Maintaining the primary balance at the 2012 level leads to a slight decline in the PV debt-to-GDP ratio from 45 percent in 2012 to 41 percent at the end of the projection period (2032), compared to a decline to 14 percent under the baseline. - A permanently lower GDP growth rate than the baseline produces a less pronounced decline in the PV debt-to-GDP ratio to 34 percent, compared to 14 percent under the baseline. - Fiscal risks from parastatals: - Malawi faces fiscal risks from loss-making parastatal institutions. - Policy measures to mitigate risks include enhancing revenue performance, restraining expenditure growth, limiting the National Oil Company to its core mandate of managing strategic reserves of fuel, and establishing a robust regulatory regime for public utilities focused on cost recovery. ### Policy implications and conclusions - Key policy priorities: - Implement restrained fiscal and monetary policies to reverse the short-term spike in inflation. - Pursue fiscal consolidation while protecting critical social and infrastructure expenditures. - Encourage private investment and diversified growth through foreign exchange market liberalization and repair of donor relations. - Increase foreign exchange inflows and accumulation of international reserves through prudent policies and restored donor support. - Address contingent liabilities and operational losses of state-owned enterprises to reduce fiscal risks. - Assessment: - Malawi is assessed to be at medium risk of debt distress. - Stress tests to public sector debt dynamics underscore the need for effective fiscal consolidation combined with protection of critical social and infrastructure spending. *IMF staff report content as provided in the source document.* ### 32. The adoption of corrective policy measures in 2012 has significantly improved ### _cr12221 - 32. The adoption of corrective policy measures in 2012 has significantly improved ### Outlook and main findings - The adoption of corrective policy measures in 2012 has significantly improved the outlook for Malawi’s debt sustainability. - Risks remain, notably: - Heavy reliance on rain-fed agriculture and a narrow export base that make export earnings vulnerable to fluctuations in world prices of key exports. - Weather shocks and adverse terms-of-trade movements. - Policy and structural developments that support debt-carrying capacity: - Liberalization of the foreign exchange regime will help remove distortions, encourage private investment, and support diversified growth. - Implementation of sound macroeconomic policies, diversification of the export base, and sustained growth would help reduce the risk of debt distress. ### Key projections and indicators (selected) - PV of debt-to-GDP ratio (selected projection points): - 15.9 - 22.4 - 21.4 - 21.1 - 20.6 - 19.9 - 19.1 - 18.3 - 16.9 - 16.1 - 15.3 - 14.4 - 9.2 - 8.7 - PV of debt-to-exports ratio (selected projection points): - 61.0 - 76.6 - 64.4 - 63.4 - 61.4 - 59.0 - 56.9 - 54.4 - 52.4 - 49.6 - 46.6 - 43.6 - 25.5 - 23.7 - PV of PPG external debt (selected projection points): - 15.9 - 22.4 - 21.4 - 21.1 - 20.6 - 19.9 - 19.1 - 18.3 - 16.9 - 16.1 - 15.3 - 14.4 - 9.2 - 8.7 - PPG debt service-to-exports ratio (in percent) (selected projection points): - 15.2 - 4.3 - 1.9 - 2.4 - 2.5 - 3.6 - 3.6 - 3.6 - 3.2 - 3.7 - 3.5 - 3.8 - 3.8 - 3.6 - 1.7 - 1.6 - PPG debt service-to-revenue ratio (in percent) (selected projection points): - 14.9 - 4.1 - 1.8 - 3.3 - 3.8 - 5.1 - 5.1 - 5.1 - 4.3 - 4.9 - 4.5 - 4.6 - 4.6 - 4.3 - 1.7 - 1.6 - Total gross financing need (Billions of U.S. dollars) (selected projection points): - 0 - .2 - 0.1 - 0.3 - 0.1 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.1 - -0.1 - -0.1 - -0.2 - -0.3 - Non-interest current account deficit that stabilizes debt ratio (selected projection points): - 3.2 - 2.2 - 1.3 - -2.6 - 2.6 - 1.7 - 1.9 - 2.4 - 3.1 - 3.4 - 4.1 - 3.5 - 1.7 - 2.1 - 2.2 - 1.2 - Real GDP growth (in percent) (key projections and historical values): - 9.0 - 6.5 - 4.3 - 5.8 - 2.7 - 4.3 - 5.7 - 6.1 - 6.5 - 6.7 - 6.7 - 6.0 - 6.5 - 6.5 - 6.6 - 6.6 - 6.1 - 5.2 - 5.3 - 5.8 - GDP deflator in US dollar terms (change in percent) (selected values): - 7.9 - 0.6 - -0.4 - 2.9 - 7.2 - -19.1 - -3.3 - 1.3 - 0.2 - 1.0 - 1.5 - -3.0 - 1.3 - 5.2 - 0.9 - 0.3 - 1.1 - 6.1 - 2.6 - 2.4 - Effective interest rate (percent) (selected values): - 18.1 - 0.9 - 1.1 - 2.8 - 5.4 - 0.6 - 1.1 - 1.0 - 0.9 - 1.0 - 1.0 - 0.9 - 1.7 - 2.3 - 2.8 - 2.8 - 2.7 - 1.0 - 1.0 - 1.7 - Growth of exports of G&S (US dollar terms, in percent) (selected values): - 0.7 - 29.5 - 3.6 - 14.0 - 15.9 - -1.6 - 15.7 - 7.9 - 8.0 - 8.0 - 8.0 - 7.7 - 8.0 - 7.7 - 7.9 - 8.1 - 8.2 - 10.1 - 10.3 - 8.9 - Growth of imports of G&S (US dollar terms, in percent) (selected values): - -4.7 - 19.7 - -7.2 - 10.3 - 16.0 - 1.9 - 4.1 - 5.9 - 5.7 - 6.8 - 7.8 - 5.4 - 7.2 - 7.4 - 7.5 - 7.6 - 7.6 - 8.1 - 8.2 - 7.8 - Grant element of new public sector borrowing (in percent) (selected values): - 39.5 - 39.5 - 39.5 - 39.5 - 42.0 - 42.0 - 40.4 - 42.0 - 42.0 - 42.0 - 42.0 - 42.0 - 42.0 - 42.0 - Government revenues (excluding grants, in percent of GDP) (selected values): - 21.3 - 26.5 - 26.3 - 21.4 - 22.1 - 23.4 - 23.8 - 24.0 - 24.9 - 25.2 - 25.3 - 26.2 - 27.1 - 28.0 - 35.7 - 36.6 - 30.7 - Aid flows (in Billions of US dollars) (selected values and components): - Total aid flows: 0.4, 0.6, 0.2, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.6, 0.7, 0.6 - o/w Grants: 0.4, 0.6, 0.2, 0.4, 0.4, 0.4, 0.4, 0.4, 0.4, 0.4, 0.4, 0.4, 0.4, 0.5, 0.5, 0.5 - o/w Concessional loans: 0.0, 0.0, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1 - Grant-equivalent financing (in percent of GDP) (selected values): - 10.0 - 10.2 - 9.3 - 8.6 - 8.1 - 7.4 - 6.9 - 6.3 - 5.9 - 5.6 - 5.3 - 3.1 - 2.7 - 4.6 - Grant-equivalent financing (in percent of external financing) (selected values): - 87.8 - 84.9 - 86.1 - 85.9 - 86.5 - 86.5 - 86.5 - 86.5 - 86.4 - 86.4 - 86.4 - 85.7 - 84.9 - 86.1 - Memorandum items: - Nominal GDP (Billions of US dollars) (selected values): 4.3, 5.0, 5.4, 4.7, 4.8, 5.2, 5.6, 6.0, 6.5, 7.0, 7.8, 8.4, 9.0, 9.7, 19.8, 21.4 - Nominal dollar GDP growth (selected values): 17.3, 17.7, 7.2, -12.3, 2.2, 7.5, 6.8, 7.8, 8.3, 3.4, 7.9, 12.0, 7.5, 6.9, 7.3, 11.7, 8.0, 8.3 - PV of PPG external debt (in Billions of US dollars) (selected values): 0.9, 0.9, 1.0, 1.1, 1.1, 1.2, 1.2, 1.3, 1.3, 1.3, 1.3, 1.4, 1.8, 1.8 ### Stress tests and sensitivity analysis (high-level) - The most extreme stress test for 2022 corresponds to: - In figures b, c, d, e: an Exports shock. - In figure f: a One-time depreciation shock. - Sensitivity analysis scenarios include: - A1. Key variables at their historical averages in 2012-2032. - A2. New public sector loans on less favorable terms in 2012-2032. - B1–B6. Bound tests including lower real GDP growth, lower export value growth, lower US dollar GDP deflator, lower net non-debt creating flows, combinations of shocks, and a one-time 30 percent nominal depreciation relative to the baseline in 2013. - Stress assumptions and notes: - Exports values in some shocks are assumed to remain permanently at the lower level while the current account returns to baseline via import adjustments. - Some stress tests assume the interest rate on new borrowing is 2 percentage points higher than in the baseline. - Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. - Memorandum: Grant element assumed on residual financing (i.e., financing required above baseline) = 38 ### Policy recommendations (implied by analysis) - Maintain and fully implement the 2012 corrective policy measures to preserve the improved debt outlook. - Continue liberalization of the foreign exchange regime to reduce distortions and attract private investment. - Pursue export diversification to reduce vulnerability to terms-of-trade shocks. - Sustain sound macroeconomic policies to lower the risk of debt distress and enhance debt carrying capacity. *Sources: Country authorities; and staff estimates and projections.* ### ANNEX I. MALAWI—RELATIONS WITH THE FUND ### ANNEX I. MALAWI—RELATIONS WITH THE FUND ### Membership status and IMF resources - Joined: July 19, 1965; Article VIII. - Quota (General Resources Account): 69.40 SDR Million = 100.00 percent of quota. - Fund holdings of currency (exchange rate): 66.99 SDR Million = 96.52 percent of quota. - Reserve tranche position: 2.42 SDR Million = 3.49 percent of quota. - SDR Department net cumulative allocation: 66.37 SDR Million = 100.00 percent of allocation. - SDR holdings: 2.24 SDR Million = 3.38 percent of allocation. ### Outstanding purchases and loans; latest arrangements - Outstanding (SDR Million; %Quota): - ESF Arrangements: 34.70 SDR Million = 50.00 percent of quota. - ECF Arrangements: 58.65 SDR Million = 84.51 percent of quota. - Latest financial arrangements (Type — Date of Arrangement — Expiration Date — Amount Approved (SDR Million) — Amount Drawn (SDR Million)): - ECF — 02/19/2010 — 02/18/2013 — 52.05 — 13.88 - ESF — 12/03/2008 — 12/02/2009 — 52.05 — 34.70 - ECF — 08/05/2005 — 08/04/2008 — 48.58 — 48.58 - Note: Formerly PRGF. ### Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Forthcoming: - 2012 Principal: 1.65; Charges/Interest: 0.07; Total: 1.70 - 2013 Principal: 5.37; Charges/Interest: 0.17; Total: 5.54 - 2014 Principal: 16.66; Charges/Interest: 0.28; Total: 16.94 - 2015 Principal: 17.35; Charges/Interest: 0.24; Total: 17.59 - 2016 Principal: 17.86; Charges/Interest: 0.19; Total: 18.05 ### HIPC Initiative (Enhanced Framework) - Decision point date: December 2000. - Assistance committed by all creditors (US$ Million): 1057.00. - Of which IMF assistance (US$ million): 45.27. - IMF assistance (SDR equivalent in millions): 33.37. - Completion point date: Aug 2006. - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member: 33.37 - Interim assistance: 11.57 - Completion point balance: 21.80 - Additional disbursement of interest income: 3.82 - Total disbursements: 37.19 - Notes: - Assistance committed under original framework is in NPV terms at the completion point; under enhanced framework in NPV terms at the decision point. - Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period. ### Multilateral Debt Relief Initiative (MDRI) - MDRI-eligible debt (SDR Million): 37.87 - Financed by: - MDRI Trust: 14.53 - Remaining HIPC resources: 23.34 - Debt relief by facility (SDR Million): - Eligible Debt Delivery Date — GRAPRGF — Total - December 2006 — N/A — 7.91 — 7.91 - September 2006 — 10.84 — 19.12 — 29.96 - Note: MDRI provides 100 percent debt relief to eligible member countries for debt owed to the Fund as of end-2004 that remains outstanding when member qualifies. ### Post-Catastrophe Debt Relief (PCDR) - Not Applicable. ### Safeguards assessments - An update safeguards assessment of the Reserve Bank of Malawi (RBM) with respect to the 2012 ECF has been initiated and will be completed by the first review. - Latest safeguards assessment completed on June 25, 2010 concluded: - RBM continued to have strong financial safeguards in external audit and financial reporting. - Main area of concern: lack of adequate autonomy for the RBM, which is being addressed by the program. - Key recommendation: strengthen foreign reserves management oversight. ### Exchange arrangements - Multiple currency practice (MCP) under Article VIII emerged during second review of PRGF in August 2006 (significant spread between commercial bank and foreign exchange bureau rates). - Exchange rate history and changes: - Mid 2006 to late 2009: authorities kept exchange rate stable at 141 Malawi kwacha to the U.S. dollar. - November 2009 to mid January 2010: gradual devaluation about 8 percent to 151 kwacha to the U.S. dollar. - August 2011: devalued kwacha by another 10 percent to 166 kwacha to the U.S. dollar. - May 2012: government liberalized foreign exchange regime and devalued the kwacha by about 33 percent. - Capital account: Malawi maintains restrictions on the capital account. - Current exchange rate regime: reclassified as “floating”. ### Article IV consultation - Malawi is on a 24-month Article IV consultation cycle. - Current Article IV Consultation delayed due to extended discussions on second review of ECF-supported program and authorities’ request in April 2012 for a new ECF arrangement. - Executive Board concluded the last Article IV consultation with Malawi on February 10, 2010. ### FSAP, ROSCs, and related assessments - Joint World Bank–IMF FSAP team visited Malawi during missions in July and December 2007. - Financial System Stability Assessment (FSSA) issued in June 2008. - Corporate Governance and Accounting and Auditing ROSC missions: February and June 2007. - Update on FAD mission on fiscal transparency module: March 2007. - ROSC on the data module based on a September 2003 mission published in October, 2004. ### Technical assistance (selected entries; Date of Delivery — Department — Ministry/Recipient — Purpose — Modality) - 05/12 — STA — NSO — Consumer Price Indices — Mission. - 04/12 — STA — NSO — Balance of Payments Statistics follow up mission — Mission. - 04/12 — STA — NSO — Provide advice to improve the GDP methodology and assist with improving the data sources and indicators — Mission. - 04/12 — STA — NSO — Balance of Payments and International Investment Position Statistics — Mission. - 03/12 — FAD — Ministry of Finance — Strengthening the IFMIS control environment — Mission. - 03/12 — FAD — Ministry of Finance — Draft asset management manual — Report. - 03/12 — FAD — Ministry of Finance — Follow-up and Consolidating Headquarters functions and Customs Risk Management — Mission. - 01/12 — MCM — RBM — Review of Implementation of Risk Based Supervision — Report. - 01/12 — FAD — Ministry of Finance — Developing a Draft Budget Framework Document (BFP) — Mission. - 12/11 — FAD — Ministry of Finance — Reform Priorities and Next Steps — Mission. - 12/11 — FAD — Ministry of Finance — Development of asset management manual — Mission. - 12/11 — MCM — RBM — Review the Foreign Exchange Regime — Mission. - 11/11 — FAD — Ministry of Finance — Macro fiscal training — Mission. - 11/11 — MCM — RBM — Further Development of a Framework for Consolidated Supervision — Report. - 11/11 — FAD — Ministry of Finance — Improving capacity in Business process re-engineering and IT implementation — Mission. - 10/11 — FAD — Ministry of Finance — Program Budgeting and Developing the Medium-term Expenditure Framework Cycle — Mission. - 06/11 — FAD — Ministry of Finance — Measures for Tax Reform and Taxation of Mining — Mission. - 06/11 — FAD — Ministry of Finance — Enhancing taxpayer compliance and revenue performance — Mission. - 06/11 — STA — Ministry of Finance — Government Finance Statistics — Report. - 06/11 — FAD — Ministry of Finance — Macro-fiscal training, scoping and needs assessment — Mission. - 06/11 — MCM — RBM — Developing AML/CFT Offsite Supervisory Tools and Practices — Mission. - Additional technical assistance entries through 01/09 covering monetary operations, IFMIS, revenue administration, stress testing, balance of payments statistics, budget reform, tax procedure code, and other areas. *Source: ANNEX I. MALAWI—RELATIONS WITH THE FUND (As of May 31, 2012).* ### 7. The authorities have received significant technical assistance from the Fund and other ### _cr12221 - 7. The authorities have received significant technical assistance from the Fund and other ### Technical assistance and public financial management - The 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. - The government has pledged to strengthen public financial management and fiscal reporting. - Renewed efforts are being made to establish a work plan, including utilizing donor technical assistance more effectively. - The authorities are currently working with AFRITAC to modify its chart of accounts and output-based structures so that they could more easily be realigned to the national strategy and can be readily understood. ### Government finance statistics (GFS) and IFMIS - Government finance data are not reported for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS). - An August 2005 and August 2007 STA mission visiting Lilongwe emphasized continued efforts to implement the Integrated Financial Management Information System (IFMIS). - The mission encouraged the authorities to: - improve the coverage and sectorization of government financial operations; - correctly classify transactions according to international guidelines. - The mission proposed a migration plan and timetable to adopt the GFSM 2001 methodology. - A GFS TA mission in June 2011 (under the GFS Module of the Enhanced Data Dissemination Initiative funded by DFID) found: - annual and sub-annual data for budgetary central government are compiled in GFSM 1986 format of the Ministry of Finance, but are not disseminated; - a new chart of accounts aligned with the GFSM 2001 was introduced in the 2011–12 budget cycle and applies to all general government units; - source data issues were identified and recommendations made to address them; - bridge tables linking national classifications and GFSM 2001 classifications were prepared and should be revised and used to compile GFS in GFSM 2001 format. - A follow up mission is included in the RAP for FY 2013. ### Monetary and financial statistics (MFS) - Despite recent improvements, MFS continue to have shortcomings, including: - irregular reporting to STA; - lack of proper legislation to grant the RBM authority to require reporting from other institutions; - weaknesses in sectorization of the domestic economy; - issues in classification of financial instruments limiting adherence to the Monetary and Financial Statistics Manual methodology. - STA missions in 2004, 2008, 2009, and 2010 made recommendations to address these shortcomings. - The 2008, 2009, and 2010 STA missions assisted RBM staff in developing standardized report forms (SRFs) for: - central bank accounts (1SR); - other depository corporations (2SR); - monetary aggregates (5SR). ### External sector statistics - External sector statistics exhibit serious deficiencies. - Concepts and definitions used to compile balance of payments statistics are in broad conformity with BPM4, with some progress toward BPM5; the National Statistical Office of Malawi (NSO) should now adopt the BPM6 methodology and update Malawi balance of payments metadata accordingly. - Key weaknesses and data gaps: - NSO balance of payments section has been crucially understaffed since March 2008. - Important data sources ceased to be available during 2006–07 (for example, exchange control forms that could inform imports of goods, services, and current transfers). - Procedures for assessing the accuracy of trade data need improvement. - 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 is currently classified as current transfers rather than in the capital account. - Several large in-kind projects are not properly captured in balance of payments data. - No international investment position statement is prepared. - The RBM and Ministry of Finance’s Debt and Aid Department need to improve reporting of monetary and external debt data respectively. - The NSO compiled new balance of payments data and validated results from two key surveys (BOP Survey and NPISH) based on BPM5, and used additional information sources: - the 2009 Foreign Private Capital and Investor Perception Survey; - monetary statistics from the Reserve Bank of Malawi (RBM); - other financial data from the Ministry of Finance (MoF). - Much remains to be done to improve quality, coverage, and timeliness of balance of payments statistics. ### Data quality and surveillance indicators (selected points from tables) - Dates and frequency notes as presented: - Exchange Rates: Current; Date of latest observation: 5/2012; Date received: 06/2012; Frequency of Data/Reporting/Publication: M / M / M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 5/2012; 06/2012; M / M / M. - Reserve/Base Money: 5/2012; 06/2012; M / M / M. - Broad Money: 5/2012; 07/2012; M / M / M. - Central Bank Balance Sheet: 5/2012; 06/2012; M / M / M; methodological assessment: LO, LO, LNO, O; accuracy/reliability: LO, O, O, O, O. - Consumer Price Index: 5/2012; 06/2012; M / M / M; methodological assessment: O, LNO, O, O; accuracy/reliability: LNO, O, O, O, NA. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 5/2012; 05/2012; M / M / I. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 5/2012; 05/2012; M / M / I; methodological assessment: O, LO, O, O; accuracy/reliability: O, LO, O, O, LNO. - Stocks of Central Government and Central Government-Guaranteed Debt: 05/2012; 05/2012; M / M / M. - External Current Account Balance: 12/2011; 12/2011; A / A / A. - Exports and Imports of Goods and Services: 2011; 12/2011; A / A / A; methodological assessment: O, O, O, O; accuracy/reliability: LO, O, LO, O, O. - GDP/GNP: 2011; 12/2011; A / A / A; methodological assessment: LO, LNO, LNO, LO; accuracy/reliability: LNO, LNO, LO, LO, LNO. - Gross External Debt: 2011; 5/2011; M / I / I. - International Investment Position: NA across dates/frequencies/assessments. ### IMF Article IV consultation summary (selected findings) - Public Information Notice (PIN) No. 12/88 — FOR IMMEDIATE RELEASE July 26, 2012. - IMF Executive Board concluded the 2012 Article IV Consultation with Malawi on July 23, 2012. - Economic context and developments: - After averaging over 8 percent a year during 2007–10, real GDP growth in Malawi fell to 4.3 percent in 2011, reflecting the impact of severe foreign exchange shortages. - Foreign exchange problems intensified in 2011 because of lower tobacco export earnings and cuts in external aid as several donors reduced financial support when the authorities’ IMF-supported program went off track in the first half of 2011, and because of human rights and governance concerns. - Delays in making payments abroad led to the loss of credit lines for several businesses, resulting in scaled down operations. - Tightening of restrictions on foreign exchange transactions created distortions, fostering a parallel market in foreign exchange and boosting activity in the informal sector at the expense of the formal economy. - Fiscal performance deteriorated, with the deficit widening from nearly 3 percent of GDP in FY2010/11 to 7 percent in FY2011/12, with a commensurate increase in domestic financing. - The external current account deficit widened, reflecting slowing exports and the drop in external grants; the international reserve position weakened further. - Policy actions and early results: - In May 2012, the new administration which assumed office in April under the leadership of President Joyce Banda devalued the kwacha, adopted a floating exchange rate regime, and liberalized current account transactions. - Measures are beginning to show positive results: increased sales of tobacco through official channels, considerable easing of the private sector’s access to foreign exchange, and near collapse of the foreign exchange parallel market. - The policy environment has improved markedly, as have the prospects for reversing the slowdown in economic activity and exports. - Inflation trend note: - Inflation has been on an upswing since early 2011, with the year-on-year rate reaching (text ends). *Source: _cr12221 - 7. The authorities have received significant technical assistance from the Fund and other (IMF document).* ### 17.3 percent in May 2012. Rising import costs have been the main factor behind the upswing, ### _cr12221 - 17.3 percent in May 2012. Rising import costs have been the main factor behind the upswing, ### Inflation, exchange rate adjustment, and near-term outlook - Year-on-year headline inflation reached 17.3 percent in May 2012 and 20.1 percent in June 2012. - Rising import costs were the main factor behind the upswing in inflation, as a growing share of imports were being priced at the parallel market exchange rate before the May devaluation. - The May devaluation (49 percent) triggered large adjustments in the retail prices of petroleum products, with ripple effects to other prices. - Inflation is expected to rise for a few months but, with the implementation of restrained fiscal and monetary policies, should begin to fall by early 2013. - The Reserve Bank of Malawi tightened monetary policy in April 2012 by removing excess liquidity using treasury bills; policy rate was raised from 13 percent to 16 percent in May and to 21 percent on July 11, 2012. ### External sector, reserves, and balance of payments - The devaluation and adoption of a floating exchange rate regime, plus liberalization of current account transactions, increased private sector access to foreign exchange and have begun to show positive results. - Usable gross official reserves (US$ millions): 140.5 (2009), 279.6 (2010), 190.2 (2011), 204.5 (2012). - Months of imports (reserves): 0.7 (2009), 1.5 (2010), 1.0 (2011), 1.0 (2012). - Directors considered boosting international reserves from their current very low levels an immediate policy priority. - Current account (percent of GDP): -4.8 (2009), -1.3 (2010), -5.9 (2011), -4.3 (2012). - Current account, excl. official transfers (percent of GDP): -14.2 (2009), -17.0 (2010), -11.9 (2011), -15.7 (2012). - Exports (goods and services, US$ millions): 1,050.2 (2009), 1,360.4 (2010), 1,408.7 (2011), 1,386.1 (2012). - Imports (goods and services, US$ millions): 1,961.1 (2009), 2,425.4 (2010), 2,214.5 (2011), 2,257.6 (2012). - Directors noted the BoP remains under increasing risk and vulnerability, particularly if export growth subsides with slowdowns in major trading partners. ### Fiscal policy, aid, and public finances - Central government (percent of GDP, fiscal year basis) highlights: - Revenue: 32.1 (2009), 33.8 (2010), 32.1 (2011), 27.0 (2012). - Tax and nontax revenue: 20.5 (2009), 23.5 (2010), 24.5 (2011), 21.5 (2012). - Grants: 11.6 (2009), 10.3 (2010), 7.6 (2011), 5.5 (2012). - Expenditure and net lending: 37.8 (2009), 33.8 (2010), 35.0 (2011), 34.0 (2012). - Overall balance (excluding grants): -17.3 (2009), -10.3 (2010), -10.5 (2011), -12.5 (2012). - Overall balance: -5.7 (2009), 0.1 (2010), -2.9 (2011), -7.0 (2012). - Foreign financing: 2.0 (2009), 0.9 (2010), 1.3 (2011), 1.6 (2012). - Domestic financing: 3.7 (2009), -0.9 (2010), 1.7 (2011), 5.6 (2012). - Directors welcomed announcements of increased financial assistance by development partners and stressed the role of good economic management for attracting and sustaining aid inflows. - The government’s FY2012/13 budget was described as prudent; Directors urged spending plans to be in line with expected revenues and grants and to reflect growth and development priorities. - To achieve longer-term fiscal sustainability, Directors welcomed authorities’ intention to strengthen domestic revenue mobilization and public financial management to better control commitments and avoid the accumulation of expenditure arrears. ### Executive Board assessment and policy recommendations - Executive Directors commended the new government for swift implementation of bold measures to address chronic balance of payments problems and improve prospects for poverty reduction and growth. - Key welcomed measures: devaluation of the kwacha, adoption of a floating exchange rate regime, liberalization of current account transactions, increased access by the private sector to foreign exchange, movement toward cost-recovery tariffs for utilities, and adoption of an automatic adjustment mechanism for petroleum retail prices to reflect import costs. - Policy recommendations from Directors: - Boost international reserves from very low levels as an immediate priority. - Maintain fiscal discipline and tight monetary policy to ensure nominal depreciation translates into sustained real depreciation to improve external competitiveness. - Strengthen the operational independence of the Reserve Bank of Malawi (RBM) and introduce limits on government borrowing from the RBM. - Continue close monitoring of the banking system to preserve financial stability. - Carefully prioritize programs and projects under MGDS II given limited resources and institutional capacity. ### Risks, external shocks, and social protection - Risks to the medium-term outlook from global spillovers assessed as moderate-to-low. - Slower euro area and world growth would adversely affect Malawi’s exports (mainly tobacco), but overall impact on Malawi’s growth expected to be low due to authorities’ efforts to diversify exports and export markets. - A substantial fall in tobacco prices would adversely affect export proceeds and farmers’ incomes and dampen growth. - Directors welcomed scaling up of social protection programs to mitigate the impact of adjustment measures on the poor and encouraged tight control over non-priority spending to protect such programs. ### IMF Extended Credit Facility (ECF) arrangement and program objectives - IMF Executive Board approved a new three-year ECF arrangement for Malawi equivalent to SDR 104.1 million (about US$ 156.2 million) with an immediate disbursement equivalent to SDR 13.02 million (about US$ 19.5 million). - Program objectives included: - Achievement and maintenance of a stable macroeconomic environment with low inflation. - Increasing usable international reserves from about one month of imports at end-2012 to 3 months of imports by end-2015. - Boosting real GDP growth from 4.3 percent in 2012 to at least 6½ percent per year from 2015. - Scaling up social protection programs to mitigate adverse impacts on vulnerable populations. - Key elements of the strategy: - Fiscal policy to strengthen domestic revenue mobilization, keep government spending within available resources (domestic revenues, grants, and highly concessional external loans), and reduce domestic debt. - Enhanced operational independence of the RBM to pursue low inflation and build international reserves. - Structural reforms to deepen the financial system, enhance the investment climate and international competitiveness, and address supply-side bottlenecks in energy and transport infrastructure. ### Selected economic indicators (preserved values from the source) - Real GDP growth at constant market prices (percent change): 9.0 (2009), 6.5 (2010), 4.3 (2011), 4.3 (2012). - Nominal GDP (billions of kwacha): 710.2 (2009), 812.4 (2010), 879.8 (2011), 1,068.1 (2012). - GDP deflator (percent change): 8.4 (2009), 7.4 (2010), 3.8 (2011), 16.4 (2012). - Consumer prices (end of period): 7.6 (2009), 6.3 (2010), 9.8 (2011), 22.9 (2012). - Consumer prices (annual average): 8.4 (2009), 7.4 (2010), 7.6 (2011), 18.4 (2012). - National savings (percent of GDP): 20.7 (2009), 24.7 (2010), 9.6 (2011), 12.0 (2012). - Net official transfers (percent of GDP): 9.4 (2009), 15.7 (2010), 5.9 (2011), 11.5 (2012). - Money and quasi money (change in percent of broad money at beginning): 23.9 (2009), 33.9 (2010), 35.7 (2011), 18.2 (2012). - Net foreign assets (change in percent of broad money): -15.5 (2009), 13.3 (2010), -7.9 (2011), -1.2 (2012). - Credit to the rest of the economy (percent change): 36.5 (2009), 47.6 (2010), 30.1 (2011), 17.5 (2012). - Real effective exchange rate (percent change): -8.2 (2009), -0.4 (2010), 10.7 (2011). *Source: IMF staff report and Press Release materials contained in the provided PDF content.* ### 2012. The adjustments are part of the measures aimed at strengthening monetary policy in ### _cr12221 - 2012. The adjustments are part of the measures aimed at strengthening monetary policy in ### Policies to Address Imbalances - Authorities acknowledge serious macroeconomic imbalances manifested in rising inflation and low reserves. - Continued simultaneous actions to tackle the effect of the devaluation while undertaking broad fiscal and monetary policies to address vulnerabilities. - Priority commitments: address inflationary pressures and build up reserves while maintaining pro-growth policies and long-term structural transformation. ### Fiscal Policy - Budget stance: - FY2012/13 budget deficit set at 1.1 percent of GDP. - 2011/12 budget deficit was 7.3 percent of GDP. - Fuel subsidy and pricing: - Fuel subsidy program eliminated. - Policy of monthly adjustment of pump prices implemented. - Domestic fuel price mechanism to include a small margin to repay the accrued negative balance in the Petroleum Stabilization Fund. - For the month of July 2012, MERA revised downwards pump prices of three petroleum products by an average of about 7 percent, effective July 6, 2012, in line with the Automatic Pricing Mechanism (APM). - Tax and social protection measures: - Removal of taxes deemed punitive on businesses and regressive in nature. - Expansion of the range of items subject to VAT. - Increased social protection programs (FISP, public works, school feeding, and cash transfers) to mitigate high-price effects on the poor and ensure food security. - Public enterprise and expenditure management: - Resolve to rein in contingent liabilities and operational losses from public enterprises and intensify monitoring. - Willingness to cut lower priority expenditure and postpone some investment spending if not compromising commitments to the poor and achievement of the MDGs. - Expenditure controls and arrears: - Tighten control over expenditure commitments and accelerate implementation of the commitment module in the IFMIS. - Government has started clearing accumulated domestic arrears and is considering long-term Treasury bonds to settle some arrears. - Medium-term fiscal objectives: - Pursue prudent fiscal policy to safeguard medium to long-term debt sustainability while creating fiscal space for infrastructure and social sectors. - Priorities defined by MDGS II: increased budgetary allocations to basic infrastructure and efficient provision of social services within a stable macroeconomic environment. - Fiscal policy aimed at containing public debt and related interest payments to sustainable levels. ### Monetary and Exchange Rate Policies - Monetary policy stance: - In 2012/13 monetary policy will be consistent with the level of economic activities to curb inflation and anchor inflation expectations. - Policy supported by fiscal consolidation and reduced access by government to direct credit from the central bank. - Authorities intend to amend the RBM act to place a limit on total borrowing by the Government from RBM. - Reserve Bank will continue to pursue prudent monetary policies to strengthen recovery and consolidate gains. - Monetary policy geared towards accumulating foreign exchange reserves and creating an interest rate structure conducive to economic growth. - Exchange rate regime and interventions: - Central bank will continue to maintain the current floating exchange rate regime and intervene only to preserve orderly market conditions. - RBM will mostly abstain from the foreign exchange market but will carry out limited foreign exchange interventions to mop up liquidity generated by donor financed spending. ### Debt Management Policy - Debt distress assessment: - Authorities concur with staff’s assessment that Malawi remains at a moderate risk of debt distress. - Borrowing strategy and external resources: - Commitment to careful management of external and domestic debt to enhance external stability and increase fiscal savings. - New borrowing to be sourced from highly concessional windows and efforts to attract non-debt creating resource inflows. - Continued debt sustainability analysis on the basis of the Fund-Bank framework to ensure debt indicators fall and remain within thresholds. - Capacity and consolidation: - Enhance debt management capacity and carry on fiscal consolidation to slow growth in the domestic debt stock. ### Conclusion - Authorities emphasize prudent fiscal and monetary policies to ward off inflationary pressures due to devaluation and fuel price adjustment and to achieve macroeconomic stability. - Continued implementation of MDGS II to generate growth and reduce poverty; growth strategy focuses on developing agriculture and other productive sectors, building infrastructure, expanding the service sector, and developing human resources. - Authorities will consider staff advisory note risks and recommendations when preparing the first Annual Progress Report and expect development partner support to mitigate the impact of the devaluation. - Financing request and program commitments: - Request cancellation of the current ECF program and request access to Fund resources under an ECF in the amount of SDR 104.1 million (150 percent of quota) over a three-year period to meet in part the BOP financing needs and to provide a buffer against shocks. - Authorities confirm commitment to implement policies as outlined in the MEFP and to maintain close policy dialogue with the IMF and pursue technical assistance as necessary. - Expectation that an ECF-supported arrangement would better position Malawi to undertake broad long-term reforms and secure additional development partner support. *Source: IMF staff and Malawi authorities text contained in the referenced PDF chapter.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12221.pdf_