## _cr13131 ## Source details **Canonical URL:** [_cr13131](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13131.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13131.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13131.pdf.json) --- ### EXECUTIVE SUMMARY — Commitment, Objectives, Early Outcomes - Authorities committed to reforms implemented since May 2012, notably: - adoption of a flexible market-based exchange rate regime; and - re-introduction of an automatic adjustment mechanism for fuel prices. - ECF-supported program: - Three year ECF arrangement approved in July 2012 in the amount of SDR 104.1 million (150 percent of quota). - First review completed on December 19, 2012. - Fund-supported program catalyzed donor assistance to support the FY2012/13 budget, with emphasis on scaling up social protection. - Social protection and emergency relief: - Q4 2012 acceleration of farm input subsidy program, labor-intensive public works, school feeding, school bursary, and social cash transfer. - WFP-coordinated emergency relief assisted about 2 million people (October–March lean season). - Government released 72,000 metric tons of maize from the Strategic Grain Reserve. - Early positive outcomes: - Exchange rate adjustment and removal of FX transaction restrictions attracted FX inflows into the banking system. - Clearance of most private sector external payments arrears (estimated at over US$600 million) enabled re-establishment of international credit lines for critical imports. - Indications of expanded planting of export crops. ### RECENT DEVELOPMENTS AND OUTLOOK — Growth, Inflation, Exchange Rate, Reserves - Real GDP growth: - 4.3 percent in 2011 (estimated); 1.9 percent in 2012 (estimated). - Rebound expected: 5.5 percent (2013), 6.1 percent (2014), 6.5 percent (2015) (IMF staff projections). - Inflation: - Headline consumer inflation increased from 12.4 percent in April to 34.6 percent in December 2012. - CPI (eop) figures: 9.83 (2011), 31.7 (2012), 10.1 (2013), 5.8 (2014), 5.4 (2015) — Program vs staff differences noted in tables. - Inflation expected to start declining in Q2 2013 based on seasonal patterns and lagged impact of tighter policies. - Exchange rate and FX: - Kwacha depreciated by an additional 33 percent following initial 33 percent devaluation in May 2012; real depreciation sustained at about 30 percent since May 2012 devaluation. - Updated assessment: kwacha was undervalued by about 8 percent as at end-November 2012. - Exchange rate expected to stabilize with the tobacco purchase season in March/April 2013 as FX supply improves. - Current account and reserves: - Current account (including official transfers) narrowed from about 6 percent of GDP in 2011 to about 4½ percent in 2012 (staff estimate). - Gross international reserves: 190.2 (2011), 204.5 (2012), 405.7 (2013), 564.9 (2014), 728.6 (2015) — staff table; gross reserves in months of imports: 1.0 (2011), 1.0 (2012), 2.0 (2013), 2.6 (2014), 3.1 (2015). - International reserves improved slightly from exceptionally low levels in H1 2012 to just above 1 month of imports cover at end-December 2012. ### MEDIUM-TERM OUTLOOK AND KEY MACRO PROJECTIONS - Growth and trade: - Rebound in growth from 2013 based on greater availability of foreign exchange, strong recovery in food and tobacco production, and return to normal rainfall patterns. - Exports (goods and services, US$ millions): 2009: 1,050.2; 2010: 1,360.4; 2011: 1,408.7; 2012 (Prel.): 1,359.8; 2013 (Prog.): 1,603.6; 2015 (Proj.): 1,849.5. - Imports (goods and services, US$ millions): 2009: 1,961.1; 2010: 2,425.4; 2011: 2,236.2; 2012 (Prel.): 2,274.9; 2013 (Prog.): 2,329.6; 2015 (Proj.): 2,690.7. - Fiscal projections (percent of GDP): - Government domestic revenue: 24.5 (2011), 22.1 (2012), 23.3 (2013), 24.1 (2014), 24.5 (2015). - Grants: 7.6 (2011), 4.4 (2012), 14.5 (2013), 12.8 (2014), 11.3 (2015). - Expenditure and net lending: 35.0 (2011), 35.0 (2012), 39.7 (2013), 38.9 (2014), 37.5 (2015). - Overall balance including grants: -2.9 (2011), -8.5 (2012), -1.9 (2013), -1.9 (2014), -1.6 (2015). - External debt and reserves: - External debt (public sector, percent of GDP): 15.9 (2009), 16.0 (2010), 16.2 (2011), 22.7 (2012), 26.6 (2013). - NPV of debt (percent of exports): 57.1 (2009), 44.6 (2010), 48.1 (2011), 53.3 (2012), 46.1 (2013). ### FISCAL PERFORMANCE, BUDGET ADJUSTMENTS, AND WAGES - First half of FY2012/13 (July–December 2012) fiscal outturn (Text Table, billions of kwacha — Mid-Year Prog. / Mid-Year Act.): - Revenue: 243 / 238 - Tax and nontax revenue: 133 / 136 - Tax revenue: 119 / 121 - Nontax revenue: 14 / 15 - Grants: 110 / 102 - Expenditure and net lending: 250 / 243 - Current expenditure: 195 / 191 - Development expenditure: 55 / 51 - Part I (foreign financed): 32 / 28 - Part II (domestically financed): 22 / 23 - Discrepancy: 14 / 16 - Overall balance (including grants and discrepancy): 7 / 11 - Total financing (net): -7 / -11 - Foreign financing (net): 11 / 7 - Domestic financing (net): -18 / -18 - Revised fiscal stance (remainder FY2012/13): - Government’s net repayment to the banking system increases from 1.3 percent of GDP (ECF first review) to 1.6 percent of GDP. - Supplementary budget approved by parliament on March 8. - Wage increases: - February 2013 wage increases ranged from 60 percent for the lowest pay grades to 5 percent for the highest grade; this amounts to an increase in the average wage of about 19 percent. - MK4.2 billion for wage increases in the fiscal year sourced from cuts and savings; part of payment deferred to next year (payments for January and February increments deferred; this fiscal year payments limited to March–June). ### MONETARY DEVELOPMENTS — Reserve Money, Broad Money, Credit, Interest Rates - Reserve money growth (6-month growth, percent): - Dec.11–Jun.12: 37.3 - Jun.12–Dec.12: -1.2 - Broad money growth: - Dec.11–Jun.12: 13.4 percent - Jun.12–Dec.12: 8.4 percent - Components (6-month growth, percent) Dec.11–Jun.12 / Jun.12–Dec.12: - Net Foreign Assets (reserve money): -46.8 / 23.0 - Net Domestic Assets (reserve money): 84.1 / -24.2 - Credit to government: 45.6 / -25.7 - Credit to private sector (broad money): 10.6 / 3.1 - Interbank and policy rates: - Bank rate adjusted: 13 percent → 16 percent (May 2012) → 21 percent (July 2012) → 25 percent (December 2012). - Prime lending rate: 18.1 percent → 20.6 percent (May 2012) → 36.2 percent (December 2012). - Deposit rates: 4.2 percent → 5.7 percent (May 2012) → 8.9 percent (July 2012) → 10.2 percent (December 2012). - 91-day treasury bill rate (selected): 10.5 6.2 6.8 7.1 15.6 18.7 20.1. - Interest spreads widened from 14 percent in April 2012 to 26 percent in December 2012. - RBM operations and measures: - Closure of uncollateralized lending window end-November reduced RBM lending to banks sharply. - RBM used foreign exchange sales, reduced lending to banks, open market operations, and raising the policy rate; RBM committed to maintaining a tight monetary stance until inflation pressures recede. - For remainder of FY2012/13 authorities agreed to lower the ceiling on RBM’s net domestic assets by 5 percent compared to the target set under the first review. ### FINANCIAL SECTOR — Stability, Supervision, and Technical Assistance - Financial indicators end-December 2012: - Non-performing loans at 7 percent of outstanding loans. - Average return on assets of 17 percent. - Risks and weaknesses: - Widespread loan restructuring may understate non-performing loans; several banks reported increased default risks. - Some banks have weak liquidity positions; a few are close to breaching minimum capital requirements. - RBM supervisory measures: - Directive to external auditors to assess and report on non-performing loans and provisions. - Banks required to report more frequently on liquidity conditions and past due loans. - Dedicated senior examiners to monitor distressed banks daily. - RBM requested Fund technical assistance to strengthen legal framework for bank resolution; desk review completed and a mission scheduled for second half of March 2013. ### PROGRAM PERFORMANCE, STRUCTURAL BENCHMARKS, AND SAFEGUARDS - Program performance: - All quantitative performance criteria for end-December 2012 were met. - Indicative targets on reserve money and social spending were missed by small margins (reserve money missed by a small margin; total social spending fell short by MK1.9 billion in first half FY2012/13). - Structural benchmarks (selected): - Verified existing stock of domestic arrears; paid MK12 billion (17 percent of the total) in this fiscal year; converted about 40 percent of the total into promissory notes redeemable over several years beginning in FY2013/14. - IFMIS commitment control: pilot using purchase order module for day-to-day operating expenses implemented (excludes capital projects and payments with longer lead-in times) — partially met. - RBM published the second semi-annual financial stability report (covering March–October 2012) in January 2013 — met. - Prior action for second review: MOF to bear cost of using treasury bills for monetary operations (MOU signed). - Safeguards assessment: - RBM continues to publish financial statements prepared and audited in accordance with international standards. - Key concern: lack of operational autonomy; recommendation to expand envisaged amendments to the RBM Act to strengthen autonomy more broadly. - Other recommendations: enhance oversight of foreign reserves management; improve data compilation procedures including transparency of contingent liabilities from letters of credit. ### RISKS — Global, Commodity, Domestic, and Political - Downside global risks: - Stagnation of euro area and world growth; substantial fall in non-oil commodity prices; reduction in aid flows. - Tobacco-specific risk: tobacco accounts for 15 percent of GDP; substantial fall in tobacco prices would adversely affect export proceeds and farmers’ income. - Aid risk: - Risk of lower aid flows remains low if policies are maintained; medium-term aid to Malawi might decline because of shrinking aid budgets in Europe. - Domestic risks: - Adverse weather: agriculture accounts for 30 percent of GDP; reliance on rain-fed agriculture is a significant risk. - Political/policy risks: policy reversals in the lead up to the 2014 general elections could jeopardize recovery and sustained growth. - Program vulnerability: - Maintaining policy continuity (tight monetary policy and fiscal restraint) is critical to curb inflation and sustain recovery; staff urges readiness to tighten further if second-round wage effects emerge. ### STAFF RECOMMENDATIONS — Fiscal, Financial Sector, and Program Actions - FY2013/14 budget: - Re-prioritize spending and consider revenue measures. - Budget to reflect cost of tripartite elections (estimated at US$60 million), obligations from promissory notes, deferred wage awards, and full-year impact of wage increases. - Pursue a more ambitious fiscal consolidation effort focused on expenditure control rather than ad hoc measures; identify lower priority items to cut or postpone; consider measures to boost domestic revenues, such as reducing exemptions and duty waivers. - Banking sector oversight: - RBM should intensify oversight, act swiftly on audit reports, enforce capital requirements, and scrutinize bank reports on liquidity and past due loans. - Program review: - Staff recommends completion of the second review and approval of authorities’ request for modification of end-March 2013 and end-September 2013 performance criteria. ### QUANTITATIVE TARGETS, ADJUSTERS, AND MEMORANDA (selected exact figures preserved) - ECF arrangement and disbursements: - Total for the ECF arrangement: 104.10 (150.00% of Quota). - Disbursements of 13.0 (18.75% of Quota) on multiple dates; two disbursements marked "Disbursed" (July 23, 2012; December 15, 2012). - Selected monetary/fiscal targets and memoranda (preserve exact figures): - Ceiling on net domestic assets of the RBM (examples from tables): 115,345; 114,579; 141,672; 109,417; 117,737; 118,293; 122,965; 118,408; 132,082; 125,803; 114,444; 108,487; 94,132; 87,854; 94,741; 95,110. - Ceiling on reserve money (examples): 87,652; 76,178; 100,557; 88,210; 95,657; 96,615; 96,615; 99,351; 99,095; 98,488; 107,845; 106,902; 111,830; 110,017; 118,977; 116,146. - Ceiling on central government's net domestic borrowing (examples): 176,588; 178,847; -11,988; -42,149; -17,756; -13,084; -18,201; -18,201; 4,444; -3,396; -15,021; -18,605; -5,218; 25,205; 21,277. - Floor on social spending (IT) (examples): 39,034; 27,959; 95,156; 95,156; 87,295; 87,295; 144,922; 185,511; 200,841; 251,051. - Floor on net international reserves of the RBM (PC, US$ millions) (examples): -20; -63; -74; 17; 17; 32; 18; 34; 34; -3; -27; 79; 53; 155; 127; 134; 124. - Program exchange rate (kwacha per US$): 260; 320 (as specified in memoranda and TMU). - NDA and NIR adjustment clauses (selected): - Total upward adjustment to NDA from shortfalls in budget support, donor inflows, and excess debt service capped at US$15 million (Text under ¶19). - Total upward adjustment to CGDB from such shortfalls capped at US$10 million; downward adjustment reflects full amount by which cumulative receipts from budget support are greater than US$10 million above the program baseline. - Key country-level indicators (preserved exactly): - Population (millions): 16.20 - Per capita GDP ($US): 285.00 - Poverty rate (%): 52.00 ### DATA, STATISTICS, AND TECHNICAL ASSISTANCE PRIORITIES - Data quality and reporting: - No international investment position statement is prepared; RBM and Ministry of Finance need to improve reporting of monetary and external debt data. - Latest observations and reception dates for key series reported as of January 31, 2013 (exchange rates, reserves, monetary aggregates, fiscal data). - Statistical shortcomings and TA: - Weakest statistical areas: national accounts, balance of payments statistics, government finance statistics, and monetary and financial statistics. - STA and FAD missions listed; ongoing TA on PFM, monetary statistics, CPI, BoP, GDP methodology, IFMIS, and revenue administration. - Reporting requirements (selected): - Gross international reserves, exchange rate, and foreign exchange purchases and sales — RBM — Daily — Electronic. - Reserve money and components — RBM — Weekly/Monthly — Lag: 30 — Electronic. - Fiscal table (GFS) including revenue, expenditure, and financing — MOF — Monthly — Lag: 30 — Electronic. *Source: _cr13131 - IMF staff report excerpts, Malawi: Executive Summary, program documents, tables, and Technical Memorandum of Understanding, March–April 2013.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Commitment to policy reforms - Authorities remain committed to reforms implemented since May 2012, notably: - adoption of a flexible market-based exchange rate regime; and - re-introduction of an automatic adjustment mechanism for fuel prices. - Despite concessions (e.g., recent wage increase to striking civil servants), the cornerstones of the reforms have remained unchanged. - Managing Director of the Fund was reassured of authorities’ commitment during her visit to Malawi in early January 2013. ### Objectives of the ECF-supported program and donor response - Main objectives: achievement of macroeconomic stability, strengthening social protection programs, improving growth prospects, and reducing poverty. - Program alignment: based on MGDS II and the government’s Economic Recovery Plan. - Executive Board approved a three year ECF arrangement in July 2012 in the amount of SDR 104.1 million (150 percent of quota). - First review of the program completed on December 19, 2012. - Fund-supported program catalyzed donor assistance to support the FY2012/13 budget, with emphasis on scaling up social protection. ### Social protection and emergency relief - Social-protection programs in FY2012/13 accelerated in Q4 2012: farm input subsidy program, labor-intensive public works, school feeding, school bursary, and social cash transfer. - WFP-coordinated emergency relief provided assistance to about 2 million people facing food deficits during the lean season (October–March). - Government released 72,000 metric tons of maize from the Strategic Grain Reserve as part of relief efforts. ### Early positive outcomes of reforms - Adjustment of the exchange rate and removal of FX transaction restrictions attracted foreign exchange inflows into the banking system. - Clearance of most private sector external payments arrears accumulated over recent years enabled re-establishment of international credit lines for critical imports and enhanced capacity utilization. - Indications of expanded planting of export crops by farmers. ### Need for structural reforms - Structural reforms required to improve investment climate and boost exports: removing regulatory hurdles and investing in infrastructure to alleviate bottlenecks to growth and diversification. ### Recent economic developments and outlook - Real GDP growth: - estimated to have slowed from 4.3 percent in 2011 to 1.9 percent in 2012. - rebound in 2013 is expected, premised on improved price incentives for tobacco and other export products, increased availability of foreign exchange, and return to normal rainfall patterns. - Inflation: - headline consumer inflation increased from 12.4 percent in April to 34.6 percent in December 2012. - inflation expected to start declining in Q2 2013 based on seasonal patterns and lagged impact of tighter policies. - Exchange rate: - the kwacha depreciated by an additional 33 percent against the U.S. dollar following the initial 33 percent devaluation in May 2012. - principal source of FX demand shifted from clearance of private sector arrears (estimated at over US$600 million) to current imports. - exchange rate expected to stabilize with the tobacco purchase season in March/April 2013 as FX supply improves. - Current account: - estimated to have narrowed from about 6 percent of GDP in 2011 to about 4½ percent in 2012, largely from increased official transfers. - International reserves: - improved slightly from exceptionally low levels in H1 2012 to just above 1 month of imports cover at end-December 2012. - Export performance: - volume of tobacco sales on the auction floor in 2012 was about 67 percent of the amount sold in 2011. - sugar exports also declined due to drought in central and southern regions. ### Fiscal and monetary developments - Fiscal performance (first half of FY2012/13, July–December 2012): - domestic revenues slightly higher than projected; income tax and taxes on international trade performed better than expected. - total grants fell short by about MK8 billion (0.7 percent of GDP or over US$20 million) due to disbursement delays; conditions for disbursement have since been met and dedicated grants expected to be fully disbursed by year-end. - shortfalls translated into lower spending by National AIDS Commission and the education sector; external loan disbursements led to lower-than-projected development expenditure in education. - Text Table figures (billions of kwacha) — Mid-Year Prog. / Mid-Year Act.: - Revenue: 243 / 238 - Tax and nontax revenue: 133 / 136 - Tax revenue: 119 / 121 - Nontax revenue: 14 / 15 - Grants: 110 / 102 - Expenditure and net lending: 250 / 243 - Current expenditure: 195 / 191 - Development expenditure: 55 / 51 - Part I (foreign financed): 32 / 28 - Part II (domestically financed): 22 / 23 - Discrepancy: 14 / 16 - Overall balance (including grants and discrepancy): 7 / 11 - Total financing (net): -7 / -11 - Foreign financing (net): 11 / 7 - Domestic financing (net): -18 / -18 - Monetary developments: - reserve money growth slowed from 37.3 (Dec.11–Jun.12, 6-month growth, percent) to -1.2 (Jun.12–Dec.12). - components (6-month growth, percent) Dec.11–Jun.12 / Jun.12–Dec.12: - Net Foreign Assets: -46.8 / 23.0 - Net Domestic Assets: 84.1 / -24.2 - Credit to government: 45.6 / -25.7 - Credit to statutory bodies: 0.0 / 0.0 - Other Items Net: 38.5 / 1.5 - Lending to banks: 27.2 / -19.8 - Placement: 1.1 / 12.9 - broad money growth fell from 13.4 percent (Dec.11–Jun.12) to 8.4 percent (Jun.12–Dec.12). - broad money components (6-month growth, percent) Dec.11–Jun.12 / Jun.12–Dec.12: - Net Foreign Assets: -2.0 / 9.9 - Net Domestic Assets: 15.5 / -1.5 - Credit to government: 9.1 / -8.1 - Credit to statutory bodies: -0.9 / 0.6 - Credit to private sector: 10.6 / 3.1 - Other items net: -3.3 / 2.8 - RBM measures used: foreign exchange sales, reduced lending to banks, open market operations, raising the policy rate; closure of uncollateralized lending window end-November reduced RBM lending to banks sharply. ### Policy stance and risks - Policy continuity critical for curbing inflation and sustained recovery. - Staff and authorities emphasized: - maintaining a tight monetary policy until inflation pressures recede; and - fiscal restraint to contain aggregate demand, stabilize the exchange rate, and begin to accumulate international reserves. - Risks to the program: - adverse weather conditions; and - policy reversals in lead up to the 2014 general elections — policy reversals would jeopardize prospects for recovery and sustained growth. ### Program performance and structural reforms - Program performance: - all quantitative performance criteria for end-December 2012 were met. - indicative targets on reserve money and social spending were missed by small margins. - Structural benchmarks: - authorities verified existing stock of domestic arrears, paid MK12 billion (17 percent of the total) in this fiscal year, and converted about 40 percent of the total into promissory notes redeemable over several years beginning in FY2013/14. - benchmark on IFMIS commitment control partially met: pilot using purchase order module for day-to-day operating expenses implemented (excludes capital projects and payments with longer lead-in times). - RBM published the second semi-annual financial stability report (covering March–October 2012) in January 2013. - Staff recommendation: completion of the second review, based on performance to date and authorities’ policy commitments. *Source: _cr13131 - EXECUTIVE SUMMARY (Malawi), March 29, 2013* ### 14. The medium-term outlook that framed policy discussions has not changed materially since ### _cr13131 - 14. The medium-term outlook that framed policy discussions has not changed materially since ### Medium-term outlook and key macro projections - A rebound in growth from 2013, based on greater availability of foreign exchange and a strong recovery in food and tobacco production. - Rapid deceleration in inflation from mid-2013 with the onset of the harvest season and reflecting the lagged effect of tightened monetary policy. - A narrowing of the current account deficit over the medium term, reflecting a marked increase in export earnings. - Low external debt service burden (estimated to remain below 5 percent over the medium term). Selected indicators (Text Table 4; IMF staff estimates and projections) - Real GDP growth: 4.3 (Est. 2011), 1.9 (2012), 5.5 (2013), 6.1 (2014), 6.5 (2015); Program: 1.9 (2012), 5.5 (2013), 6.1 (2014), 6.5 (2015) - CPI inflation (eop): 9.83 (2011), 31.7 (2012), 10.1 (2013), 5.8 (2014), 5.4 (2015); Program: 34.6 (2012), 11.8 (2013), 5.8 (2014), 5.4 (2015) - CPI inflation (average): 7.6 (2011), 20.8 (2012), 18.0 (2013), 7.2 (2014), 5.7 (2015); Program: 21.3 (2012), 20.2 (2013), 8.1 (2014), 5.8 (2015) Fiscal indicators (% of GDP, fiscal year basis) - Government domestic revenue: 24.5 (2011), 22.1 (2012), 23.3 (2013), 24.1 (2014), 24.5 (2015); Program: 22.1 (2012), 23.9 (2013), 24.4 (2014), 24.8 (2015) - Grants: 7.6 (2011), 4.4 (2012), 14.5 (2013), 12.8 (2014), 11.3 (2015); Program: 4.4 (2012), 15.1 (2013), 13.0 (2014), 11.4 (2015) - Expenditure and net lending: 35.0 (2011), 35.0 (2012), 39.7 (2013), 38.9 (2014), 37.5 (2015); Program: 34.9 (2012), 40.2 (2013), 38.6 (2014), 37.2 (2015) - Overall balance including grants: -2.9 (2011), -8.5 (2012), -1.9 (2013), -1.9 (2014), -1.6 (2015); Program: -8.4 (2012), -1.2 (2013), -1.3 (2014), -1.0 (2015) - Domestic financing: 1.7 (2011), 6.6 (2012), -1.3 (2013), 0.0 (2014), 0.0 (2015); Program: 6.7 (2012), -1.6 (2013), -0.5 (2014), -0.5 (2015) External indicators (% of GDP, unless otherwise indicated) - Current account balance including official transfers: -5.9 (2011), -4.3 (2012), -1.7 (2013), -1.8 (2014), -1.6 (2015); Program: -4.7 (2012), -1.6 (2013), -1.8 (2014), -2.2 (2015) - Current account balance excluding official transfers: -12.3 (2011), -15.7 (2012), -12.7 (2013), -12.1 (2014), -11.2 (2015); Program: -18.8 (2012), -17.2 (2013), -16.1 (2014), -15.4 (2015) - Overall balance: -1.8 (2011), -0.5 (2012), 3.2 (2013), 2.9 (2014), 3.2 (2015); Program: 0.6 (2012), 3.5 (2013), 3.4 (2014), 3.3 (2015) - Gross international reserves in US$ millions: 190.2 (2011), 204.5 (2012), 405.7 (2013), 564.9 (2014), 728.6 (2015); Program: 215.4 (2012), 402.8 (2013), 555.5 (2014), 692.8 (2015) - Gross international reserves in months of imports: 1.0 (2011), 1.0 (2012), 2.0 (2013), 2.6 (2014), 3.1 (2015); Program: 1.1 (2012), 1.9 (2013), 2.5 (2014), 2.9 (2015) ### Exchange rate policy - Authorities maintain a flexible market-based exchange rate regime. - The real depreciation of the kwacha has been sustained at about 30 percent since the May 2012 devaluation. - An updated assessment indicates the kwacha was undervalued by about 8 percent as at end-November 2012, possibly reflecting overshooting of the exchange rate. ### Monetary policy and financial sector issues - Main challenge: how to prevent a depreciation-inflation spiral. - RBM tightened monetary policy in the fourth quarter of 2012 by reducing lending to banks and increasing the policy rate. - For the remainder of FY2012/13 (through end-June 2013) authorities agreed to lower the ceiling on the RBM’s net domestic assets by 5 percent compared to the target set under the first review. - Authorities regard the monetary policy stance as currently very tight and agreed additional fiscal restraint to contain aggregate demand and boost international reserves (MEFP ¶20). - RBM committed to maintaining a tight monetary policy stance until inflation pressures recede. - RBM instruments: open market operations and changes in the policy rate; increases translated quickly into higher banks’ lending rates which are now positive in real terms (MEFP ¶10). - Staff advice: give highest priority to lowering inflation; may require further tightening to address potential second round effects from recent increase in civil servants wages and salaries. - Memorandum of understanding (prior action for second review): MOF budget to bear cost of using treasury bills for monetary operations, to strengthen RBM liquidity management (Table 9). Monetary/foreign reserve operations - Authorities seeking additional external support (budget or balance of payments support) to help RBM boost international reserves. - Staff recommended RBM accumulate international reserves through foreign exchange purchases during the tobacco purchase season and sterilize interventions to contain inflation. Financial stability and supervision - Indicators end-December 2012: non-performing loans at 7 percent of outstanding loans; average return on assets of 17 percent. - Widespread loan restructuring may understate non-performing loans; several banks reported increased default risks in the high-interest and weakening kwacha environment. - Some banks have weak liquidity positions; a few are close to breaching minimum capital requirements. - RBM measures to intensify supervision: directive to external auditors to assess and report on non-performing loans and provisions; banks required to report more frequently on liquidity conditions and past due loans; dedicated senior examiners to monitor distressed banks daily. - RBM requested Fund technical assistance to strengthen legal framework for bank resolution; desk review completed and mission scheduled for second half of March 2013 to assist drafting legislation. ### Fiscal policy Outlook for remainder of FY2012/13 and revised fiscal stance - Authorities agreed additional fiscal restraint: government’s net repayment to the banking system increases from 1.3 percent of GDP (ECF first review) to 1.6 percent of GDP. - A supplementary budget reflecting this was approved by parliament on March 8. Key elements of the revised budget (MEFP ¶¶28–30) - Increased nontax domestic revenues (proceeds from sale of fuel donated by Zambia and South Africa, and collection of vehicle license fees introduced in January 2013). - Additional budget support and dedicated grants from Malawi’s development partners. - Increased allocations to the education sector (funded by increased dedicated grants). - An increase in the wage bill equivalent to 0.3 percent of GDP, reflecting the recent wage increase awarded to civil servants, with offsetting cuts in other current expenditures. Wage increases and fiscal impact - In February 2013, wage increases to civil servants ranged from 60 percent for the lowest pay grades to 5 percent for the highest grade; this amounts to an increase in the average wage of about 19 percent (Text Table 5). - Authorities stated impact on FY2012/13 budget is neutral because higher wage bill is funded by identified cuts and savings (mainly savings from the Farm Input Subsidy Program and other recurrent expenditures in the Ministry of Education) though payment of part of the settlement (pay increases for two months) has been deferred to next year. - Authorities tightened enforcement of December expenditure control measures: curtailment of government funded official travel, reduced spending on government vehicles, and postponement of some capital expenditures (MEFP ¶31). FY2013/14 budget considerations and medium-term fiscal - Budget commitments to reflect: cost of tripartite elections scheduled for May 2014 (estimated at US$60 million or about 1½ percent of GDP), obligations from conversion of government domestic arrears into promissory notes, deferred wage awards and full year impact of recent wage increases, and spending related to privatization of Air Malawi (MEFP ¶32). - Authorities seeking development partner assistance to cover at least half of the estimated election cost; some indications of support but no firm pledges. - Staff urged consideration of revenue measures; authorities prefer focus on strengthening revenue administration and enhancing expenditure efficiency and controls given recent changes and imminent general elections. Selected medium-term fiscal indicators (Text Table 6; Percent of GDP) - Revenue and Grants: 26.5 (2011/12), 37.8 (2012/13), 36.9 (2013/14), 35.8 (2014/15); Program: 39.0 (2012/13), 37.3 (2013/14), 36.2 (2014/15) - Domestic Revenue: 22.1 (2011/12), 23.3 (2012/13), 24.1 (2013/14), 24.5 (2014/15); Program: 23.9 (2012/13), 24.4 (2013/14), 24.8 (2014/15) - Grants: 4.4 (2011/12), 4.4 (2012/13), 14.5 (2013/14), 12.8 (2014/15); Program: 11.3 (2012/13), 13.0 (2013/14), 11.4 (2014/15) - Current Expenditures: 26.9 (2011/12), 31.4 (2012/13), 30.0 (2013/14), 29.1 (2014/15) - Wages and salaries: 7.2 (2011/12), 7.8 (2012/13), 7.8 (2013/14), 7.8 (2014/15); Program: 8.1 (2012/13), 8.6 (2013/14), 8.5 (2014/15) - Development Expenditures: 8.0 (2011/12), 8.4 (2012/13), 8.8 (2013/14), 8.4 (2014/15) Revenue mobilization and PFM - Malawi’s domestic revenue effort is high compared to other countries in sub-Saharan Africa; scope exists to increase revenue efficiencies. - Authorities progress in strengthening revenue administration and broadening tax base (MEFP ¶33): introduction of electronic fiscal devices to enhance VAT collection; deployment of computerized cargo scanners to improve customs administration; compilation of data on tax expenditures to tighten control over exemptions and waivers. - Government to identify lower priority expenditures to cut or postpone to make room for higher priority spending in FY2013/14 and over the medium term; public expenditure review ongoing with World Bank and partners. - Preliminary indications of scope for efficiency gains in the Farm Input Subsidy Program which accounts for about 80 percent of the budget for the Ministry of Agriculture. - Public financial management strategy being implemented; progress in commitment control to avoid accumulation of arrears (MEFP ¶34). - Fiscal risks from contingent liabilities and operational losses of state-owned enterprises addressed via issuance of promissory notes to clear verified arrears and allowing state enterprises to charge cost-recovery tariffs/prices (MEFP ¶35). ### Business climate and international competitiveness - Malawi lags neighbors on business environment indicators (Global Competitiveness Indices; World Bank’s doing business report). - Malawi Business Climate Surveys identify main obstacles: (i) lack of access to finance; (ii) inadequate infrastructure (especially electricity); (iii) inefficient government bureaucracy; (iv) policy instability; (v) inadequate educated and skilled workforce. - Ministry of Industry and Trade initiatives: program to create pro-business environment in consultation with stakeholders; establishment of a one-stop-shop to facilitate business setup and inform investors of incentives. - November 2012: parliament approved the Single License Bill to reduce procedures and time to start businesses (MEFP ¶37). - National Export Strategy (NES) launched December 2012: prioritised roadmap emphasizing (i) export-oriented clusters for diversification; (ii) conducive business environment; (iii) supportive economic institutions; (iv) development of competencies, skills and knowledge (see Appendix IV). ### Program issues, benchmarks, and safeguards - Authorities requested modifications to performance criteria for end-March 2013 and end-September 2013 regarding: (i) ceiling on the NDA of the RBM; (ii) ceiling on central government’s net domestic borrowing; (iii) floor on the NIR of the RBM. Modifications reflect tightened monetary stance, fiscal restraint, and updated aid phasing information. New criteria proposed for end-March 2014. - A prior action and two new structural benchmarks added (Table 9): - Prior action: signing of memorandum of understanding between RBM and MOF establishing MOF will pay interest on treasury bills used for monetary operations. - New benchmark 1: expand use of commitment control feature of the Integrated Financial Management Information System to cover all procurements by all ministries and departments. - New benchmark 2: diagnostic assessment of the true financial condition of banks that continue to face liquidity problems. - Updated safeguards assessment for the Reserve Bank of Malawi completed: - RBM continues to publish financial statements prepared and audited in accordance with international standards. - Key concern reiterated: lack of operational autonomy; recommendation that envisaged amendments to the RBM Act to limit lending to government be expanded to strengthen RBM autonomy more broadly. - Other recommendations: enhance oversight of foreign reserves management; improve data compilation procedures including transparency of contingent liabilities from letters of credit. - RBM committed to implementing assessment recommendations and requested technical assistance to strengthen compilation of monetary and financial statistics. *Source: IMF staff estimates, projections, and MEFP excerpts as presented in the supplied content.* ### 33. Risks from global spillovers. Downside risks to the program include potential spillovers ### _cr13131 - 33. Risks from global spillovers. Downside risks to the program include potential spillovers ### Risks from global spillovers and commodity-price shocks - 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 reduce demand for Malawi’s exports (mainly tobacco), but the overall impact on Malawi’s growth is expected to be low. - Tobacco-specific risk: - Tobacco accounts for 15 percent of GDP. - A substantial fall in tobacco prices would adversely affect export proceeds, farmers’ income, and dampen growth; the expected impact would be moderate. - Over the medium-to-long term, a reduction in world demand for tobacco (e.g., through a worldwide anti-smoking campaign led by WHO) would hurt Malawi substantially. - Aid risk: - The risk of lower aid flows remains low if the government continues appropriate economic policies and there is 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 a major donor. - Policy response: - Export diversification is a key objective of the government’s recently launched National Export Strategy (NES). ### Domestic and political risks - Adverse weather conditions: - Continued reliance on rain-fed agriculture poses significant risk. - Agriculture accounts for 30 percent of GDP; lower agricultural output would have a significant effect on overall GDP growth. - Political/policy risks: - Policy reversals in the lead up to the 2014 general elections could jeopardize recovery and sustained growth and may lead to another cut in aid flows. - It is important to avoid loose fiscal and monetary policies in the run-up to the elections in 2014 to build credibility. - Slippages in implementing structural reforms would dampen prospects for long-term growth and reduce resilience to shocks. ### Staff appraisal — commitments and macro policy posture - Authorities’ commitment: - Authorities remain committed to reforms implemented since May 2012. - Concessions were made in response to pressures (e.g., recent wage increase to striking civil servants), but cornerstones—market based exchange rate regime and automatic adjustment mechanism for fuel prices—have remained unchanged, and real effective exchange rate depreciation has been sustained. - Monetary and fiscal stance: - Policy continuity is critical for curbing inflation and for a sustained recovery. - Staff welcomes the authorities’ commitment to maintain a tight monetary policy stance until inflation pressures recede and to exercise fiscal restraint to curb aggregate demand and help accumulation of international reserves. - Authorities should be ready to tighten policies if second round effects from recent civil service wage increases emerge. - Maintaining a market based exchange rate regime is critical for boosting exports and international competitiveness. ### Staff recommendations — fiscal, financial sector, and program actions - FY2013/14 budget: - Re-prioritize spending and consider revenue measures. - Budget needs to reflect commitments including the cost of conducting tripartite elections, obligations from conversion of government domestic arrears into promissory notes, deferred wage awards, and the full year impact of recent wage increases. - Given high inflation and risk of second round wage effects, pursue a more ambitious fiscal consolidation effort focused on expenditure control rather than ad hoc measures. - Identify lower priority items to cut or postpone and consider measures to boost domestic revenues, such as reducing exemptions and duty waivers. - Banking sector oversight: - The Reserve Bank of Malawi (RBM) should intensify oversight of banks and enforce prudential regulation. - RBM should act swiftly on audit reports, enforce capital requirements, and scrutinize bank reports on liquidity and past due loans. - Program review and targets: - Staff recommends completion of the second review, based on satisfactory performance and authorities’ policy commitments. - Staff also recommends approval of the authorities’ request for modification of end-March 2013 and end-September 2013 performance criteria. ### Key macroeconomic and fiscal indicators (selected figures preserved exactly as in source) - Country-level indicators: - Population (millions): 16.20 - Per capita GDP ($US): 285.00 - Poverty rate (%): 52.00 - GDP and prices: - GDP at constant market prices (percent change): 2009: 9.0; 2010: 6.5; 2011: 4.3; 2012 (Prog.): 1.9; 2012 (Prel.): 1.9; 2013 (Prog.): 5.5; 2013 (Rev.): 5.5; 2014 (Prog.): 6.1; 2015 (Proj.): 6.5; 2016 (Proj.): 6.7 - Consumer prices (end of period): 2009: 7.6; 2010: 6.3; 2011: 9.8; 2012 (Prog.): 31.7; 2012 (Prel.): 34.6; 2013 (Prog.): 10.1; 2013 (Rev.): 11.8; 2014 (Prog.): 5.8; 2015 (Proj.): 5.4; 2016 (Proj.): 4.6 - Consumer prices (annual average): 2009: 8.4; 2010: 7.4; 2011: 7.6; 2012 (Prog.): 20.8; 2012 (Prel.): 21.3; 2013 (Prog.): 18.0; 2013 (Rev.): 20.2; 2014 (Prog.): 8.1; 2015 (Proj.): 5.8; 2016 (Proj.): 4.9 - External sector: - Exports (goods and services, US$ millions): 2009: 1,050.2; 2010: 1,360.4; 2011: 1,408.7; 2012 (Prog.): 1,357.5; 2012 (Prel.): 1,359.8; 2013 (Prog.): 1,603.6; 2013 (Rev.): 1,573.1; 2014 (Prog.): 1,718.3; 2015 (Proj.): 1,849.5; 2016 (Proj.): 1,988.5 - Imports (goods and services, US$ millions): 2009: 1,961.1; 2010: 2,425.4; 2011: 2,236.2; 2012 (Prog.): 2,259.6; 2012 (Prel.): 2,274.9; 2013 (Prog.): 2,329.6; 2013 (Rev.): 2,356.0; 2014 (Prog.): 2,520.7; 2015 (Proj.): 2,690.7; 2016 (Proj.): 2,890.9 - Usable gross official reserves (US$ millions): 2009: 140.5; 2010: 279.6; 2011: 190.2; 2012 (Prog.): 214.7; 2012 (Prel.): 215.4; 2013 (Prog.): 403.3; 2013 (Rev.): 402.8; 2014 (Prog.): 555.5; 2015 (Proj.): 692.8; 2016 (Proj.): 797.7 - Reserves (months of imports): 2009: 0.7; 2010: 1.5; 2011: 1.0; 2012 (Prog.): 1.1; 2012 (Prel.): 1.1; 2013 (Prog.): 1.9; 2013 (Rev.): 1.9; 2014 (Prog.): 2.5; 2015 (Proj.): 2.9; 2016 (Proj.): 3.1 - Fiscal indicators (percent of GDP): - Revenue: 2009/10: 33.8; 2010/11: 32.1; 2011/12: 27.0; 2012/13 (Prog.): 26.5; 2012/13 (Prel.): 26.5; 2013/14 (Prog.): 37.8; 2013/14 (Rev.): 39.0; 2014/15 (Prog.): 37.3; 2015/16 (Proj.): 36.2; 2016 (Proj.): 35.5 - Grants (percent of GDP): 2009/10: 10.3; 2010/11: 7.6; 2011/12: 5.5; 2012/13 (Prog.): 4.4; 2012/13 (Prel.): 4.4; 2013/14 (Prog.): 14.5; 2013/14 (Rev.): 15.1; 2014/15 (Prog.): 13.0; 2015/16 (Proj.): 11.4; 2016 (Proj.): 10.5 - Expenditure and net lending (percent of GDP): 2009/10: 33.8; 2010/11: 35.0; 2011/12: 34.0; 2012/13 (Prog.): 34.9; 2012/13 (Prel.): 39.7; 2013/14 (Prog.): 40.2; 2013/14 (Rev.): 38.6; 2014/15 (Prog.): 37.2; 2015/16 (Proj.): 36.3 - Overall balance (excluding grants, percent of GDP): 2009/10: -17.3; 2010/11: -10.3; 2011/12: -10.5; 2012/13 (Prog.): -13.0; 2012/13 (Prel.): -12.8; 2013/14 (Prog.): -16.5; 2013/14 (Rev.): -16.3; 2014/15 (Prog.): -14.3; 2015/16 (Proj.): -12.5; 2016 (Proj.): -11.3 - Overall balance (including grants, percent of GDP): 2009/10: -5.7; 2010/11: 0.1; 2011/12: -2.9; 2012/13 (Prog.): -8.5; 2012/13 (Prel.): -8.4; 2013/14 (Prog.): -1.9; 2013/14 (Rev.): -1.2; 2014/15 (Prog.): -1.3; 2015/16 (Proj.): -1.0; 2016 (Proj.): -0.8 - Debt and debt-service indicators: - External debt (public sector, percent of GDP): 2009: 15.9; 2010: 16.0; 2011: 16.2; 2012: 22.7; 2012 (Prel.): 22.8; 2013: 26.6; 2013 (Rev.): 26.2; 2014 (Prog.): 24.3; 2015 (Proj.): 22.6; 2016 (Proj.): 21.1 - NPV of debt (percent of exports): 2009: 57.1; 2010: 44.6; 2011: 48.1; 2012: 53.3; 2012 (Prel.): 53.2; 2013: 46.1; 2013 (Rev.): 47.0; 2014 (Prog.): 42.2; 2015 (Proj.): 38.2; 2016 (Proj.): 34.4 *Source: IMF staff report text and tables as provided.* ### Part II (domestically financed)111512117535 ### _cr13131 - Part II (domestically financed)111512117535 ### Fiscal balances and financing - Overall balance (excluding grants): 117-16-22-199-14 - Overall balance (including grants): 117-16-22-199-14 - Discrepancy: 290-13-10-5-110 - Overall balance (including grants and discrepancy): 407-29-32-248-4 - Total financing (net): -40-7293224-84 - Foreign financing (net): 255997 23 - Borrowing: 3671010929 - Program: 020232 5 - Project: 347977 24 - Other concessional: 000000 0 - Amortization: 0-1-2-2-1-2 -6 - Domestic financing (net): -42-12242315-15-19 - Note: "The discrepancy includes a carry-over of revenues from FY2011/12, which was used in 2012/13 to retire unbudgeted borrowing in the last quarter of FY2011/12." ### Monetary authorities’ survey (selected levels and memoranda) - Reserve money (selected sequence): 50 57 73 88 101 91 97 99 99 108 112 122 98 107 110 119 116 139 164 194 - Currency outside banks (selected): 27 31 42 37 62 54 - Commercial bank deposits with RBM (selected): 17 18 20 42 27 25 - Net foreign assets (NFA) (selected): 1 -9 8 -9 -18 -43 -25 -23 -20 -35 -7 19 26 -29 -2 24 27 23 80 137 193 - Foreign assets (selected): 2 24 46 32 24 23 54 74 73 68 103 130 144 72 107 133 142 137 203 258 306 - Foreign liabilities (selected): -34 -37 -40 -41 -66 -80 -96 -93 -103 -111 -111 -118 -101 -108 -109 -116 -107 -116 -122 -113 - Net domestic assets (selected): 60 49 82 105 144 116 119 119 134 115 92 96 127 109 86 92 93 60 27 454 - Credit to government (net) (selected): 86 73 103 125 136 92 109 110 125 111 107 127 121 110 106 128 125 121 111 105 - Open market operations (other items subset): -8 -16 -9 -7 -5 -6 -14 -17 -25 -44 -59 -55 -83 -103 -123 - Money multiplier (memorandum): 3.4 4.0 4.3 3.6 3.5 3.9 3.8 3.9 3.8 3.8 3.8 3.8 3.9 3.9 4.0 4.1 4.1 4.1 4.1 4.1 - 91-day treasury bill rate (selected): 10.5 6.2 6.8 7.1 15.6 18.7 20.1 - NFA (US$ millions) (selected): -65 54 -54 -107 -158 -85 -68 -60 -103 -21 55 73 -85 -5 69 76 66 219 368 505 - Foreign assets (US$ millions) (selected): 167 302 193 141 86 182 218 219 200 299 372 406 214 312 383 406 388 559 696 801 - Foreign liabilities (US$ millions) (selected): -231 -248 -247 -248 -244 -267 -285 -278 -303 -320 -317 -334 -299 -317 -314 -330 -322 -340 -328 -296 ### Monetary survey and broad money (selected) - Money and quasi-money (selected): 173 232 314 316 357 350 368 386 379 410 428 466 388 416 439 487 475 569 671 792 - Money (selected): 82 125 164 156 221 199 - Quasi-money (memorandum items): 91 107 150 160 135 151 164 - Net foreign assets (NFA) consolidated (selected): -1 -2 21 3 -4 -4 10 1 31 -11 18 45 52 24 52 79 83 81 142 204 268 - Net domestic assets (selected): 175 211 312 320 360 340 367 355 390 392 384 414 364 364 360 403 394 427 466 525 - Credit to government (net) (consolidated) (selected): 111 95 141 157 169 127 148 141 168 150 146 171 154 140 136 163 159 155 141 139 - Credit to private sector (selected): 95 145 175 179 208 209 215 219 217 237 233 237 215 227 227 243 236 271 319 373 - Annual growth of broad money (percent) (selected): 23.9 33.9 35.7 34.3 34.3 19.9 17.1 22.9 19.8 14.9 22.3 26.5 22.8 16.6 25.3 25.9 22.4 16.9 17.9 18.2 - Annual growth of credit to the private sector (percent) (selected): 39.5 52.4 20.5 17.7 27.8 26.6 23.0 25.4 21.3 14.0 11.3 10.6 19.9 9.2 8.5 10.8 9.9 11.6 17. 9 16.8 ### Balance of Payments — key aggregates (US$ millions) - Current account balance (including grants) (2009–2016 sequence): -244.1 -69.9 -330.0 -150.5 -198.8 -58.9 -60.7 -74.2 -100.1 -149.7 - Merchandise trade balance (2009–2016): -636.7 -743.7 -630.1 -658.2 -669.3 -490.1 -533.9 -535.7 -556.4 -596.1 - Exports (2009–2016): 936.7 1,237.7 1,262.7 1,253.7 1,256.1 1,479.2 1,458.6 1,596.9 1,720.2 1,850.5 - Of which: Tobacco (selected): 501.3 687.6 482.4 481.1 481.0 606.2 606.1 636.4 668.2 701.6 - Uranium (selected): 8.5 113.4 120.4 154.4 154.4 169.9 169.9 186.8 205.5 226.1 - Imports (2009–2016): -1,573.3 -1,981.3 -1,892.7 -1,911.9 -1,925.3 -1,969.3 -1,992.5 -2,132.6 -2,276.5 -2,446.6 - Of which: Petroleum (2009–2016): -166.4 -180.9 -168.8 -169.4 -173.7 -164.7 -174.5 -172.5 -171.3 -171.8 - Services balance (2009–2016): -333.2 -429.8 -312.8 -378.4 -380.5 -383.3 -396.5 -429.7 -459.2 -492.0 - Interest public sector (net) (2009–2016): -4.7 -3.5 -5.6 -9.6 -10.0 -12.0 -12.0 -14.5 -16.2 -17.8 - Other factor payments (net) (2009–2016): -54.2 -105.0 -109.7 -124.8 -124.8 -135.5 -135.5 -148.5 -158.1 -167.5 - Nonfactor (net) (2009–2016): -274.3 -321.4 -197.5 -244.0 -245.8 -235.8 -249.0 -266.8 -284.8 -306.3 - Unrequited transfers (net) (2009–2016): 725.8 1,103.6 612.9 886.0 851.0 814.5 869.7 891.2 915.4 938.3 - Private (net) receipts/payments (selected): Receipts 267.7 267.7 270.8 275.9 274.9 291.1 291.1 308.7 328.9 351.1; Payments -13.2 -13.6 -14.8 -15.1 -15.1 -15.9 -15.9 -16.9 -18.0 -19.2 - Official (net) receipts (selected): 472.0 850.2 357.7 625.9 592.0 540.1 595.3 600.2 605.3 607.3 - Budget support (selected): 81.6 321.7 0.0 171.5 181.5 162.6 164.9 180.7 185.9 185.9 - Project related (selected): 390.4 528.6 357.6 454.4 410.5 377.5 430.4 419.5 419.5 421.4 - Financial account balance (2009–2016): 235.0 280.3 157.4 145.7 224.0 199.3 196.0 217.5 249.3 286.9 - Medium- and long-term flows (net): 151.3 90.5 108.9 81.8 76.7 89.4 81.5 70.2 66.6 66.6 - Disbursements (selected): 73.4 104.4 123.3 100.3 94.1 112.7 105.9 100.0 100.0 100.0 - Amortization (selected): -8.5 -14.0 -14.4 -18.5 -17.4 -23.3 -24.4 -29.8 -33.4 -33.4 - SDR allocation: 86.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Foreign direct investment and other inflows (selected): 55.5 158.2 60.8 61.9 61.9 105.3 105.3 136.7 170.6 207.1 - Commercial banks net foreign assets (selected): 27.5 30.9 -13.0 1.3 84.7 3.8 8.4 9.8 11.2 12.3 - Errors and omissions (2009–2016): -91.8 -90.3 65.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Overall balance (2009–2016): -100.9 120.1 -106.9 -4.8 25.3 140.4 135.2 143.4 149.1 137.2 - Financing (2009–2016): 100.9 -120.1 106.9 4.8 -25.3 -140.4 -135.2 -143.4 -149.1 -137.2 - Gross reserves (- increase) (2009–2016): 98.5 -139.1 107.7 -32.1 -55.0 -188.7 -187.4 -152.7 -137.3 -105.0 - Memorandum — Gross official reserves (2009–2016): 140.5 279.6 190.2 214.7 215.4 403.3 402.8 555.5 692.8 797.7 - Months of imports (2009–2016): 0.7 1.5 1.0 1.1 1.1 1.9 1.9 2.5 2.9 3.1 - Current account balance (percent of GDP) (including official transfers) (2009–2016): -4.8 -1.3 -5.9 -3.6 -4.7 -1.6 -1.6 -1.8 -2.2 -3.0 - Nominal GDP (millions of U.S. dollars) (selected): 5,034.1 5,396.9 5,613.5 4,236.3 4,212.4 3,750.6 3,816.1 4,178.1 4,561.0 4,951.9 ### External financing requirement and sources (2009–2017) - Total requirement (2009–2017): -625 -1072 -593 -862 -867 -856 -875 -895 -940 - Current account, excluding official transfers: -715 -919 -687 -790 -655 -674 -705 -756 -816 - Debt amortization: -9 -14 -14 -17 -24 -30 -33 -33 -33 - Gross reserves accumulation (- increase): 99 -139 108 -55 -187 -153 -137 -105 -90 - Total sources (2009–2017): 625 1073 593 386 286 785 687 589 594 0 - Expected disbursements (official) (selected): 545 954 480 685 700 699 705 706 708 - Grants (selected): 471 850 357 591 595 599 605 606 608 - Medium- and long-term loans (selected): 73 104 123 94 106 100 100 100 100 - Private sector (net) (selected): -6 98 113 139 115 143 178 216 256 - IMF (selected): 86 210 37 52 14 -7 -28 -25 - Drawings (selected): 0 2 10 4 0 6 0 4 0 0 - Repayments (selected): 0 0 0 3 8 2 6 2 7 2 8 2 5 - SDR allocation: 86 0 0 0 0 0 0 0 0 0 - Gross international reserves (2009–2017): 141 280 190 215 403 556 693 798 888 - Months of imports (2009–2017): 0.7 1.5 1.0 1.1 1.9 2.5 2.9 3.1 3.2 ### IMF ECF disbursement schedule and capacity to repay (selected) - Proposed Schedule of Disbursements Under ECF Arrangement, 2012–15 (Millions of SDR): - Multiple disbursements of 13.0 (18.75% of Quota) dated July 23, 2012; December 15, 2012; April 15, 2013; June 15, 2013; December 15, 2013; June 15, 2014; December 15, 2014; June 15, 2015. - Total for the ECF arrangement: 104.10 (150.00% of Quota) - Status: Two disbursements marked "Disbursed" (July 23, 2012; December 15, 2012); subsequent installments conditioned on observance of performance criteria and completion of reviews. - Indicators of Capacity to Repay the Fund (2013–2022, selected): - Projected Payments based on Existing Drawings (SDR millions) — Principal (2013–2022): 4.0 16.7 17.4 17.9 15.7 19.1 8.0 7.3 5.2 5.2 - Total Payments based on Existing and Prospective Drawings (SDR millions) (2013–2022): 4.1 16.7 17.9 18.4 16.2 23.3 21.5 28.2 28.0 27.9 - Total Payments (US$ Millions) (2013–2022): 6.3 25.8 27.6 28.4 25.0 35.9 33.2 43.6 43.2 43.0 - Percent of exports of goods and services (selected): 0.4 1.5 1.5 1.4 1.2 1.6 1.3 1.6 1.5 1.4 - Projected Level of Credit Outstanding (SDR millions) (2013–2022): 168.6 189.5 190.9 173.0 157.3 134.4 113.3 85.4 57.7 30.0 - Projected Level of Credit Outstanding (US$ Millions) (2013–2022): 260.2 292.4 294.6 267.0 242.8 207.5 174.9 131.8 89.1 46.3 - Percent of exports of goods and services (credit outstanding) (selected): 16.5 17.0 15.9 13.4 11.4 9.0 7.1 5.0 3.1 1.5 - Memorandum items (selected): Exports of goods and services (US$ millions): 1,573.1 1,718.3 1,849.5 1,988.5 2,138.4 2,293.9 2,461.1 2,644.8 2,847.0 3,069.1 ### Quantitative targets (selected, 2012–2013) - Monetary targets (millions of kwacha) — End-Mar. 2012: - Ceiling on net domestic assets of the RBM (PC) — Stock Prog.: 115,345; Stock Adj. Prog.: 114,579; Act. Q1: 141,672; Act. Q2: 109,417; Act. Q3: 117,737; Act. Q4: 118,293; Proj. End-Mar Act.: 122,965; Act. Dec.2012: 118,408 - Ceiling on reserve money (IT) — Stock Prog.: 87,652; Stock Adj. Prog.: 76,178; Act. values: 100,557 88,210 95,657 96,615 96,615 99,351 - Fiscal targets (millions of kwacha) - Ceiling on central government's net domestic borrowing (PC) — Prog. 176,588; Adj. Prog. 178,847; Act. values include negative flows: -11,988 -42,149 -17,756 -13,084 -18,201 - Floor on social spending (IT) — 39,034 27,959 95,156 95,156 87,295 - External sector targets (US$ millions) - Floor on net international reserves of the RBM (PC) — Prog./Act. sequence includes: -20 -63 -74 17 17 32 18 34 - Ceiling on the accumulation of external payments arrears (PC): 0 0 0 0 0 - Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions (PC): Evaluated on a continuous basis. - Memorandum items (selected): - Net foreign assets of the RBM (US$ millions) (selected): -107 -148 -158 -82 -85 -68 -82 -60 - Budget support (US$ millions) (selected): 86 90 170 170 180 - Program exchange rate (kwacha per US$): 260 260 260 260 260 320 320 320 *Sources: Malawi Ministry of Finance; Reserve Bank of Malawi; Malawian authorities; IMF staff estimates and projections.* ### 1. Ceiling on net domestic assets of the RBM ### 1. Ceiling on net domestic assets of the RBM ### Monetary targets - 1. Ceiling on net domestic assets of the RBM (PC) - 3,4, 5, 6 - PC - 118,408 - 132,082 - 125,803 - 114,444 - 108,487 - 94,132 - 87,854 - 94,741 - 95,110 - 2. Ceiling on reserve money (IT) - 3 - IT - 99,351 - 99,095 - 98,488 - 107,845 - 106,902 - 111,830 - 110,017 - 118,977 - 116,146 Notes on definitions and adjusters: - Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks for all PCs except for the ceiling on the government's net domestic borrowing. - "PC" means Performance Criterion, and "IT" means Indicative Target. - Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU). - Target is subject to an adjuster for liquidity reserve requirement. - Targets are subject to an adjuster for budget support and debt service payments. - Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU. ### Fiscal targets (millions of kwacha) - 3. Ceiling on central government's net domestic borrowing - 5,6,7 - PC - -18,201 - 4,444 - -3,396 - -15,021 - -18,605 - -5,218 - -5,218 - 25,205 - 21,277 - 4. Floor on social spending - 8 - IT - 87,295 - 144,922 - 144,922 - 185,511 - 185,511 - 200,841 - 200,841 - 251,051 - 251,051 Notes: - Defined as a cumulative flow for the government net domestic borrowing. - Priority social spending as defined in the TMU and quantified in the authorities' budget. - Evaluated on a continuous basis. ### External sector targets (US$ millions, unless otherwise indicated) - 5. Floor on net international reserves of the RBM - 3, 5, 6 - PC - 34 - -3 - -27 - 79 - 53 - 155 - 127 - 134 - 124 - 6. Ceiling on the accumulation of external payments arrears - 7,9 - PC - 000000 0 0 0 - 8. Ceiling on new nonconcessional external debt maturing in more than one year - 7,9 - PC - 000000 0 0 0 - 9. Ceiling on new nonconcessional external debt maturing in one year or less - 7,9 - PC - 000000 0 0 0 - 10. Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions - PC - 9,10 ### Memorandum items (preserve exact figures) - Net foreign assets of the RBM (US$ millions) - -60 - -103 - -85 - -21 - -5 - 55 - 69 - 76 - 66 - Budget support (US$ millions) - 180 - 176 - 186 - 234 - 245 - 49 - 50 - 100 - 150 - Budget support (millions of kwacha) - 57,531 - 54,934 - 59,498 - 73,542 - 78,355 - 15,752 - 15,978 - 31,945 - 47,903 - Debt service payments to the World Bank and the African Development Bank (US$ millions) - 314367 1 4 - Debt service payments to the World Bank and African Development Bank (millions of kwacha) - 835 - 420 - 1,218 - 827 - 1,936 - 2,174 - 465 - 1,310 - Health SWAp receipts (millions of kwacha) - 8,612 - 10,778 - 11,290 - 11,173 - 11,290 - 3,224 - 3,194 - 6,531 - 9,721 - Education SWAp receipts (millions of kwacha) - 6,434 - 14,994 - 16,765 - 18,194 - 23,245 - 4,800 - 4,800 - 9,600 - 14,400 - NAC receipts (millions of kwacha) - 1,538 - 8,719 - 7,993 - 12,281 - 12,281 - 3,563 - 4,288 - 8,576 - 12,864 - Program exchange rate (kwacha per US$) - 320 - 320 - 320 - 320 - 320 - 320 - 320 - 320 - 320 Sources cited in the unit: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates. ### Key program definitions and standard PCs - Targets are defined in the TMU; presentation uses stocks for all PCs except government's net domestic borrowing. - 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 payment reasons. ### Performance and policy context (selected points from Letter of Intent and MEFP) - All performance criteria for December 2012—including those on the net international reserves and net domestic assets of the Reserve Bank of Malawi, and government domestic borrowing—were met. - The indicative target on reserve money was missed by a small margin. - Overall social spending fell slightly short of the target for the first half of FY2012/13 despite acceleration of the Farm Input Subsidy Program in Q4 2012. - Agreement in February 2013 with striking civil servants entailed wage increases ranging from 60 percent for the lowest paid to 5 percent for the highest pay grade; MK4.2 billion for wage increases in the fiscal year was sourced from cuts and savings in other current expenditures. - Government and RBM progress on structural benchmarks scheduled by December 2012 was steady. ### Recent economic developments (selected factual findings) - Real GDP growth: estimated to have fallen from 4.3 percent in 2011 to 1.9 percent in 2012, reflecting contractions in agriculture (-2.9 percent) and manufacturing (-6.4 percent). - Maize production in 2012: estimated at 3.6 million metric tons, a 7 percent drop from 2011. - Tobacco production in 2012: estimated about 80,000 metric tons (from 237,000 metric tons in 2011). - Inflation: headline consumer inflation increased from 12.4 percent in April 2012 to 34.6 percent in December 2012. - Exchange rate and FX pressures: price of foreign exchange had increased by an additional 50 percent by end-February 2013 since the approximately 50 percent devaluation in May 2012. - External arrears and FX scarcity contributed to depreciation; clearance of private sector external payments arrears estimated at about US$600 million. - Food insecurity: nearly 2 million people (about 12 percent of the total population) were food insecure and needed assistance during the lean season (October 2012–March 2013). ### Structural benchmarks and reform status (selected entries) - Parliamentary passage of a budget for FY 2012/13 in line with program objectives — Toward fiscal sustainability — Status: Met. - Shut down RBM's uncollateralized lending to banks; Maintain a tight monetary policy stance — Status: Met. - Publish monthly revenue collections of the Malawi Revenue Authority in newspapers within two weeks of the end of the month — Target Date: 31-Jul-12 — Build credibility — Status: Met. - Provide Ministries, Departments and Agencies with quarterly spending ceilings consistent with quarterly fiscal targets — Begin in Sept 2012 for FY2012/13 Q2 and quarterly thereafter — Keep spending within available resource envelope — Status: Met for Q2. - Verify existing stock of government domestic arrears — Target Date: 31-Dec-12 — Ascertain magnitude and convert verified claims into promissory notes redeemable over several years — Status: Partially Met. - Configure the IFMIS Purchase Order (PO) module to support commitment control — Target Date: 31-Dec-12 — To restrain creation of arrears — Status: Partially met. - Expand IFMIS PO module to cover all procurements and roll out to all Ministries and Departments — Target Date: 30-Jun-13 — To further restrain creation of arrears — Status: Progressing. - 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 — Fuller accounting for impact of aid flows on the budget — Status: Progressing. - Submit to parliament an amendment of the RBM Act to limit outstanding amount of RBM's total lending to government — Target Date: 30-Jun-13 — Reduce fiscal dominance — Status: In progress. - RBM to publish a financial stability report semi-annually, starting July 2012 — Promote financial stability — Status: Met; reports published in July 2012 and January 2013. - Obtain approval and begin implementation of the Financial Sector Development Strategy — Target Date: 31-Dec-12 — Financial deepening — Status: Not met; Now expected by end-June 2013. - Require vulnerable banks to undergo third-party diagnostic assessments by reputable audit firms — Target Date: 30-Jun-13 — Establish true financial conditions and ensure effective monitoring — Status: Pending. *Source: Excerpts from the IMF staff report, Malawi: Memorandum of Economic and Financial Policies and technical annexes as provided in the content unit.* ### 7. The year-on-year growth in broad money slowed down from an average of over 32 percent ### 7. The year-on-year growth in broad money slowed down from an average of over 32 percent ### Monetary developments and reserve money - Broad money growth: - Averaged over 32 percent in the first half of 2012. - Averaged 24 percent in the third quarter of 2012. - Averaged 21 percent in the fourth quarter of 2012. - The slowdown in monetary expansion was in line with nominal GDP growth in 2012 of about 20 percent. - Reserve money: - Expanded by 37 percent in the first half of 2012. - Contracted by about 1 percent in the second half of 2012. - Principal factor: reversal in the stance of fiscal policy—highly expansionary in the first half and restrained in the second half. ### Interbank market, liquidity, and interest rates - Interbank market: - Closure of the uncollateralized discount window at end-November 2012. - Volumes traded increased from K2.3 billion per day to K4.8 billion per day. - Average interbank market rate edged up to 26.4 percent in December 2012 from 21.8 percent in November 2012. - End-of-year liquidity tightened for most banks but overall reflected excess liquidity in a few banks. - Policy rate and pass-through: - Bank rate adjusted from 13 percent to 16 percent in May 2012, to 21 percent in July 2012, and to 25 percent in December 2012. - Prime lending rate moved from 18.1 percent to 20.6 percent in May 2012, and to 36.2 percent in December 2012. - Deposit rates moved from 4.2 percent to 5.7 percent in May 2012, to 8.9 percent in July 2012, and to 10.2 percent in December 2012. - Implied pass-through parameter: higher than 1 for loans and lower than 1 for deposits. - Interest spreads widened from 14 percent in April 2012 to 26 percent in December 2012. - Higher spreads reflected commercial banks’ profitability considerations despite improved economic sentiments and prospects. ### International reserves and foreign currency holdings - Gross official reserves: - US$215.4 million or 1.1 months of prospective imports in December 2012. - Up from US$178.5 million or 0.9 months of import cover in September 2012. - Reserves bolstered by budget support grants, placements by banks at RBM, and swaps with commercial banks. - Private sector and bank foreign currency positions: - Private sector reserves averaged around US$216 million or 1.15 months of imports. - Banks held US$212 million in foreign currency deposits, up from US$179 million in September 2012. ### Exchange rate movements and drivers - Kwacha depreciation: - Depreciated by 5.1 percent in October 2012 against the U.S. dollar. - Depreciated by 3.7 percent in November 2012 against the U.S. dollar. - Lost about 2.8 percent against the U.S. dollar in December 2012 as the foreign exchange position improved somewhat. - Initial triggers: seasonally strong demand for foreign exchange during a lean supply spell, creating challenges for anchoring expectations. ### Fiscal performance and budgetary developments - First half FY2012/13 fiscal performance: - Domestic revenues broadly in line with projections. - Budget support grants slightly higher than projected; dedicated grants short by about US$20 million due to disbursement delays. - Total expenditure and net lending stayed within the available resource envelope. - Revised external grants expectation for FY2012/13: - Now expect about US$675 million in external grants (including US$245 million in budget support). - Original budget estimate: US$598 million (of which US$208 in budget support). - Government deposits / net repayment objective: - FY2012/13 budget revised to reflect a net buildup in government deposits (or “net repayment” to the banking system) equivalent to about 1.6 percent of GDP. - Wage and expenditure adjustments: - Civil service wage increases ranging from 60 percent for lowest paid to 5 percent for most senior officials, effective January 2013. - Additional amount needed for the wage bill in FY2012/13: MK4.2 billion, funded by identified cuts and savings mainly from Ministries of Agriculture and Education. - Payments for January and February increments deferred to the next fiscal year; this fiscal year payments limited to March–June. ### Social protection, fuel pricing, and emergency assistance - Automatic Pricing Mechanism (APM) for fuel: - February 2013 retail price adjustments: diesel +14.4 percent, petrol +16.1 percent, kerosene +16 percent. - Resulting retail prices per liter: MK683.6 (diesel), MK704.3 (petrol), MK591.4 (kerosene). - Fuel supply improved since May 2012 but shortages and queues resurfaced in October 2012. - Government negotiated a PTA Bank credit facility including US$150 million for fuel procurement through NOCMA. - Main private sector importer secured lines of credit from Ecobank and other local banks. - Food security and emergency assistance: - World Food Program distributing emergency assistance to about 2 million people in southern and central Malawi affected by the 2011/12 drought. - Monthly food rations to about 1.8 million people during the lean season through March 2013. - Cash transfers delivered to over 100,000 people where market conditions allow. - Government contributed 72,000 metric tons of maize from the Strategic Grain Reserve (SGR). - Development partner contributions from Canada, European Union, Norway, South Africa, UK, USA; Ireland and Norway covering replenishment of SGR maize stocks. ### External sector and trade - Current account: - Estimated to have narrowed from about 6 percent of GDP in 2011 to about 4.7 percent in 2012, driven mainly by increased official transfers. - Tobacco exports: - Low production translated into lower auction sales in 2012 vs 2011: volume and value of sales fell by about 66 percent and 40 percent, respectively. - Exports of tobacco remained comparable to 2011 due to large stocks of inventories. - Imports: - Import bill increased in 2012 due to increased importation of petroleum products at higher international prices and increased volumes of fertilizer imports by the private sector. - Import coverage: - Import coverage of international reserves improved slightly from exceptionally low levels in the first half of 2012 due to increased donor assistance. ### Program performance and structural implementation - Quantitative targets (end-December 2012): - Most targets met: government net domestic borrowing, net international reserves, net domestic assets of RBM, and external borrowing were met. - Reserve money target missed by a small margin. - Total social spending in the first half of FY2012/13 fell short of the indicative target by MK1.9 billion, mainly reflecting lower than projected spending on fertilizer purchases. - Structural benchmarks and public financial management: - MRA continues to publish monthly revenue collections in newspapers. - Ministry of Finance provides quarterly ceilings to MDAs. - Auditor General verified nearly all identified government domestic arrears amounting to Mk72 billion; MK12 billion has been paid this year and promissory notes issued to settle about 40 percent of verified amounts. - Work proceeding to extend IFMIS purchase order module coverage and roll out to all MDAs. - RBM published a financial stability report covering March–October 2012, reporting significant improvement in bank liquidity but elevated credit risks from high interest rates and increased nonperforming loans. - Financial Sector Development Strategy expected to be submitted to cabinet by end-June 2013; some aspects already being implemented. ### Medium-term framework and projections - Growth: - Rebound in growth expected from 2013 based on: re-establishment of external credit lines and greater availability of foreign exchange, improved price incentives for tobacco production, and assuming a return to normal rainfall patterns and a good harvest. - Inflation: - Projected to decelerate rapidly from the second quarter of 2013 with the onset of the harvest season and reflecting lagged effects of tighter monetary and fiscal policies. - Current account: - Projected to narrow from 4.7 percent of GDP in 2012 to under 2 percent of GDP in 2013 and be sustained over the medium term, reflecting a marked recovery in export earnings. - Debt: - Little change in external debt and total public debt indicators; external debt service projected to remain low at less than 5 percent of exports for the foreseeable future. ### Policy commitments and reforms - Exchange rate policy: - Commitment to a flexible exchange rate regime to enhance external competitiveness. - RBM will intervene mainly to ensure orderly market conditions and to build up international reserves. - Monetary policy and RBM governance: - Maintain tight monetary policy stance and exercise fiscal restraint to stabilize the exchange rate and avoid a depreciation-inflation spiral. - RBM to enhance use of liquidity forecasting for monetary operations; use of treasury bills for monetary operations formalized in an MOU with the Ministry of Finance, which is responsible for interest costs on those treasury bills. - RBM reviewing the RBM Act to recommend amendments to enhance operational independence, including limiting the outstanding amount of government borrowing from RBM and strengthening governance, legal and financial autonomy. - RBM to submit proposed amendments to government by end-April 2013 for submission to the budget session of parliament in May/June 2013. - Financial sector oversight and stability measures: - RBM increasing oversight of banks with severe liquidity problems and requiring restructuring plans. - Measures include more frequent reporting on liquidity and asset quality (to fortnightly reporting on liquidity; past due loans reporting increased frequency), directing external auditors to assess non-performing loans and provisions, and dedicating senior examiners to monitor distressed banks daily. - RBM seeking assistance to strengthen legal framework for bank resolution and championing Basel II implementation effective January 2014. - Financial inclusion and sector development: - Financial Sector Development Strategy (FSDS) aims to deepen banking and non-bank financial institutions, capital markets, and increase access to financial services for SMEs, micro enterprises, rural and agricultural sectors. - FSDS implemented through FSTAP under a US$28.2 million World Bank loan; resources used for capacity building, research, diagnostics, and strengthening regulation and supervision for banking, capital markets, microfinance and pensions. - AML/CFT: - Following ML/TF regulation in 2011, RBM collaborating with FIU to enhance AML/CFT framework. - In 2012, workshops held on Money Laundering Guidelines, Penalties and Customer Due Diligence Directives; RBM developed a spreadsheet to enhance off-site AML/CFT surveillance. - AML/CFT National Risk Assessment process launched towards end of 2012. *cr13131 - 7. The year-on-year growth in broad money slowed down from an average of over 32 percent* ### 31. In order to restrain spending, the government is enforcing measures it announced in ### _cr13131 - 31. In order to restrain spending, the government is enforcing measures it announced in ### Fiscal restraint measures (announced December 2012) - Moratorium on government funded travel abroad, with exceptions to be approved by the office of the President and Cabinet. - Suspension of the procurement of motor vehicles, furniture and other capital assets. - Enforcement of the regulation that all procurements of goods and services require a Local Purchase Order generated through IFMIS. ### FY2013/14 budget preparations and election costs - Medium-Term Expenditure Framework will reflect commitments related to: - Clearance of domestic arrears. - The new wage settlement and deferred wage payments. - Various legal financial settlements (many referred to the office of the Attorney General for review and possible contesting in court). - Provision will be made for the government’s share of the cost of the 2014 tripartite elections (presidential, parliamentary and local councils). - The cost of conducting the elections is estimated at US$60 million. - The government is seeking assistance from development partners to cover at least half of the cost of running the elections. ### Revenue administration and tax base strengthening - Malawi Revenue Authority (MRA) will enhance enforcement through increased audits and use of modern information and communication technology (ICT) systems. - Tax revenue improvement measures include: - Adoption and use of electronic fiscal devices in the enforcement of VAT. - Use of computerized cargo scanners. - Implementation of web-based ASYCUDA System for Customs. ### IFMIS, commitment control, and cash management - Commitment Module in IFMIS is being piloted, having passed Acceptance Testing, and should be rolled out soon. - User training of relevant officers has been done. - A Press Statement to the general public on procurement rules will be released. - Under the Multi-Donor Funded Financial Reporting and Oversight Improvement Project (FROIP), IFMIS accounting business processes and functional requirements are being reviewed. - Reconfiguration of IFMIS aims to allow financial transactions to be processed with very little manual intervention. - Cash management improvements: - Data gathering started to improve forecasting of deficit financing and inform short-term borrowing requirements. - Aims to move away from automatic resort to Ways and Means Advances. ### Contingent liabilities, SOE operational losses, and arrears - Risks to the budget come from contingent liabilities and operational losses of state-owned enterprises (SOEs): - Contingent liabilities: mainly loans from banks and payment arrears. - Operational losses: administratively set prices and tariffs below cost-recovery levels generating implicit and explicit subsidies. - Virtually all SOE contingent liabilities were included in the exercise to verify outstanding government domestic arrears. - Mitigation measures: - Approval of realistic cost-covering tariffs and prices. - Automatic price adjustment mechanism for NOCMA; limited role of NOCMA in fuel importation (bulk remains with private sector). - Arrears verification and promissory notes: - Most of the MK72 billion stock of arrears indicated in previous MEFPs have been verified and certified by National Audit Office. - Promissory notes worth MK30 billion were issued in October 2012 to assist suppliers, contractors, and banks; notes are redeemable over a period of four years starting from FY 2013/14. - The reference rate for the notes is the 91 day treasury bill of the most recent auction immediately preceding the interest payment date. - Obligations arising from the notes and clearance of the remaining verified arrears will be incorporated into the medium-term fiscal framework for the FY2013/14 budget. ### Business climate and international competitiveness - Exchange rate liberalization addressed overvaluation of the kwacha, but further steps needed to enhance international competitiveness, including removal of structural bottlenecks (e.g., reliable and adequate supply of energy). - International rankings: - Malawi ranks 129th out of 144 countries in the 2012/13 Global Competitiveness Indices (GCI) of the World Economic Forum. - Malawi ranks 155th out of 183 countries in the World Bank’s 2013 Doing Business Report. - Major private-sector cited challenges: - (i) lack of access to finance; (ii) inadequate infrastructure; (iii) inefficient government bureaucracy; (iv) policy instability; (v) uncompetitive tax incentives and tax regime; and (vi) inadequate educated and skilled work force. - Government actions: - Removing regulatory hurdles in starting a business, obtaining permits, registering property, enforcing contracts, and trading across borders. - Ministry of Industry and Trade program to create a pro-business environment in consultation with stakeholders. - November 2012: parliament approved the Single Business License Bill to introduce a single license replacing multiple licenses. - Automation of the office of the Registrar General to enable instant searches of names of businesses and companies. - National Export Strategy (NES) launched December 2012: - Supports MGDS II and ERP. - Focus areas: (i) export-oriented clusters for diversification; (ii) conducive environment; (iii) supportive economic institutions; and (iv) competencies, skills and knowledge development. - Implementation mechanism: Trade, Industry and Private Sector Development Sector Wide Approach (SWAp), largely donor-funded and containing seven technical working groups. ### Information sharing, data quality, and capacity building - Strengthen processes for timely information sharing in: - (i) Reconciliation of fiscal and monetary accounts involving MRA, MOF and RBM to reduce statistical discrepancies between above-the-line fiscal data and below-the-line financing data from the RBM. - (ii) Provision of information on government operations by MOF to feed into RBM’s liquidity forecasting framework. - (iii) Provision of data on projected aid inflows by MOF to inform RBM’s foreign exchange cash flow projections. - Continued need for assistance to improve quality of statistics: national accounts, prices, and the balance of payments. - Need to build capacity for production of high frequency indicators of economic activity. ### Program monitoring and reviews - Program implementation monitored with quantitative financial targets and structural benchmarks (TMU Tables 1b and 2). - Proposed modifications to quantitative targets for March 2013, June 2013 and September 2013 to reflect updated fiscal outlook and policies. - Indicative targets for end-December 2013 and performance criteria for end-March 2014 are proposed. - Review timetable: - Third review expected by mid-June 2013 based on end-March 2013 test date. - Fourth review by mid-December 2013 based on end-September 2013 test date. - Fifth review by mid-June 2014 based on end-March 2014 test date. - In view of low international reserves and pressure on exchange rate, program adjustors modified to limit extent domestic financing will compensate for shortfalls in budget support and dedicated grants. ### Technical Memorandum of Understanding — Coverage and definitions (selected) - Coverage: - Central government includes all units exercising authority over the entire economic territory. - Nonprofit institutions controlled and financed by central government are excluded for purposes of this memorandum. - Accounts of the monetary authorities include those of the RBM. - Monetary aggregates under the program are based on the twelve-bank monetary survey. - Net International Reserves (NIR) of the RBM (definition and valuation): - NIR = gross reserve assets minus gross reserve liabilities (IMF, other short-term liabilities, including all foreign currency liabilities to residents). - All foreign assets and liabilities converted into U.S. dollars at each test date using the program cross exchange rates and then converted into kwacha using the program exchange rate for the U.S. dollar–kwacha exchange rate. - The program exchange rate of the Malawi Kwacha to the U.S. dollar is set at MK320 = US$1. - 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 BIS, and other banks; (6) loans to foreign banks redeemable upon demand; (7) foreign securities; and (8) other unpledged convertible liquid claims on nonresidents. - Exclusions from gross reserve assets include: (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, assets lent to third parties not available before maturity, and foreign reserves blocked for letters of credit). - Gross reserve liabilities include: (1) SDR allocations; (2) outstanding medium and short-term liabilities of the RBM to the IMF; (3) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year; and (4) all foreign currency liabilities to residents (including deposits of domestic banks with the RBM). - Budget support (definition): - Budget support includes all grants and foreign financing not directly linked to additional budgetary expenditure. - Excluded: external project financing to fund particular activities (including EU food security funding and IMF loan financing), and donor inflows (in kwacha) from the U.S. dollar–denominated donor pool accounts for the health SWAp, education SWAp, agricultural SWAps, and National AIDS Commission (NAC) held in the Malawi banking system. ### NIR adjustment clauses (selected) - Adjustment clause on NIR—budget support: - Floor on the NIR of the RBM will be adjusted upward by the full amount by which cumulative receipts from budget support are greater than US$10 million above the program baseline (see Table 1). - Floor on NIR will be adjusted downward by the full amount up to a maximum of US$ 5 million by which cumulative receipts from budget support are less than the program baseline. - Budget support measured as cumulative flow from the beginning of the fiscal year. - Adjustment clause on NIR—donor accounts for the social sector: - Floor on NIR will be adjusted downward by the amount by which donor inflows (in kwacha) from U.S. dollar–denominated donor accounts for SWAps and NAC held in the RBM are smaller than donor inflows (in kwacha) in the program baseline. - Downward adjustment capped at US$ 5 million. - Adjustment clause on NIR—debt service payments: - Floor on NIR will be adjusted upward (downward) by the full cumulative amount by which debt service payments to the World Bank and the African Development Bank (ADB) fall short of (exceed) the program baseline. - Total downward adjustment cap: - The total downward adjustment to NIR from shortfalls in (i) budget support, (ii) donor inflows to social sector donor accounts, and (iii) an excess of debt service payments to the World Bank and ADB relative to program assumptions will be capped at US$10 million. - Valuation: - For this target and those for external debt and arrears, valuation will be in U.S. dollars using the defined program exchange rates. - Reporting: - Data on NIR, including its components, will be reported by the RBM on a weekly and end-month basis. ### NDA and reserve money: definitions and adjustment clauses (selected) - Definition of Net Domestic Assets (NDA) of the RBM: - NDA defined in kwacha terms as end-quarter reserve money less NFA of the RBM at the program exchange rate. - Reserve money consists of currency issued by the RBM and balances of commercial banks’ accounts with the RBM, including required reserves held for Malawi kwacha deposits and any other domestic currency reservable liabilities and other demand and time deposits held with the RBM. - Definition of Net Foreign Assets (NFA) of the RBM: - NFA defined as the above-defined NIR plus other foreign assets of the RBM—including but not limited to: (1) capital subscriptions in international institutions; (2) foreign assets in nonconvertible currencies; and (3) gross reserves that are in any way encumbered or pledged, less any medium- and long-term foreign liabilities of the RBM. - Adjustment clause on NDA—budget support: - Ceiling on NDA of the RBM will be adjusted downward by the full amount by which cumulative receipts from budget support are greater than US$10 million above the program baseline. - Ceiling on NDA will be adjusted upward by the amount by which cumulative receipts from budget support are less than the program baseline, up to a maximum of US$5 million. - The kwacha value of the cumulative shortfall (excess) will be calculated at the program exchange rate. - Adjustment clause on NDA—donor pool accounts for the social sector: - Ceiling on NDA will be adjusted upward by the amount by which donor inflows to the budget (in kwacha) from U.S. dollar–denominated donor accounts for the SWAps and NAC held in the RBM fall short of the donor inflow (in kwacha) to those accounts in the program baseline. - Upward adjustment capped at US$5 million. - Adjustment clause on NDA—debt service payments: - Ceiling on NDA 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 measured from the beginning of the fiscal year. *International Monetary Fund — Malawi: selected sections from the program documents and Technical Memorandum of Understanding contained in the provided content.* ### 19. The total upward adjustment to NDA from a shortfall of (i) budget support; (ii) donor inflows ### _cr13131 - 19. The total upward adjustment to NDA from a shortfall of (i) budget support; (ii) donor inflows ### Adjustments to Net Domestic Assets (NDA) of the RBM - Total upward adjustment to NDA from: - a shortfall of budget support; - donor inflows to the donor accounts for the social sector relative to the program assumptions; and - 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$15 million. - Downward adjustment to NDA: - will reflect the full amount by which the cumulative receipts from budget support are greater than US$10 million above the program baseline; and - will reflect the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of the program baseline. ### Adjustment clause on NDA — liquidity reserve requirement - The ceiling on NDA of the RBM will be adjusted: - downward for a decrease in the reserve requirement ratio on domestic deposits; and - upward for an increase in the ratio. - Timing and spread: - The adjustment will be spread equally over two quarters, starting in the quarter in which the reserve requirement ratio is reduced. - Formula for the adjuster: - (one minus the existing required fraction of reserve assets) multiplied by (the program baseline required reserve ratio minus the new required reserve ratio) multiplied by (the amount of average reservable deposit liabilities in commercial banks during the last month before the change in regulation). ### Ceiling on Central Government Net Domestic Borrowing (CGDB) — definition and measurement - 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); and 4. holdings of promissory notes. - Valuation and measurement: - The treasury bills and locally registered stocks are valued at cost rather than face value. - The ceiling is measured as the change in the stock of CGDB since June 30, 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 and will be treated as domestic borrowing. - Asset sales or privatization revenues will be accounted for under financing as a separate category, separate from domestic or foreign financing in calculating CGDB. ### Definition of domestic arrears - Domestic arrears are overdue payment obligations of the central government other than external payment arrears, including: - wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, and tax refunds. - Arrears timing: - 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 within the contractually agreed grace period if one exists. ### Adjustment clauses on CGDB - Budget support: - The ceiling of CGDB will be adjusted downward (upward) by the full amount by which cumulative kwacha receipts from budget support are greater (less than) the program baseline. - The upward adjustment will be capped at US$5 million. - In the event of excess budget support, the ceiling on CGDB will be adjusted by the full amount less US$10 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 (health, education, other SWAps, and NAC): - The ceiling on CGDB will be adjusted upward by the full amount by which donor inflows to the budget (in kwacha) from the U.S. dollar–denominated donor accounts for health, education, other SWAps, and NAC held in RBM are smaller than the donor inflows (in kwacha) in the program baseline. - The upward adjustment will be capped at US$5 million. - Donor inflows are measured from the beginning of the fiscal year. - Debt service payments: - 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: - 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 ADB relative to the program assumptions will be capped at US$10 million. - The downward adjustment to CGDB will reflect the full amount by which the cumulative receipts from the budget support are greater than US$10 million above the program baseline and by the full cumulative amount by which debt service payments to the World Bank and the ADB fall short of the program baseline. ### External payment arrears and nonconcessional external debt - External payment arrears: - Defined as 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, except on external debt subject to rescheduling or restructuring. - This performance criterion will be monitored on a continuous basis. - Nonconcessional external debt: - Definition follows Executive Board Decisions; for program purposes, short-, medium- and long-term debt is nonconcessional if it includes a grant element of less than 35 percent. - The ceiling applies to contracting and guaranteeing of debt with nonresidents by the central government, the RBM, public enterprises, and other official sector entities, unless explicitly excluded. - 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. - Exclusions include IMF resources, kwacha-denominated treasury bill and local registered stock holdings by nonresidents, debts classified as international reserve liabilities of the RBM, new debt issued to restructure/refinance/repay existing debt up to the amount used for those purposes, normal import financing, and arrangements to pay overtime obligations arising from judicial awards to external creditors. ### Key quantitative indicative targets and definitions (selected figures from tables) - Reserve money definition: sum of currency issued by the RBM (including vault cash of commercial banks) and balances of commercial bank accounts with the RBM, including required reserves and other deposits. Reserve money targets are projected end-quarter values from end-September 2012 to end-March 2014. - Social spending definition: sum of central government spending on health, education, the farm input subsidy program, and government social protection (ministry of gender, children and social welfare; ministry of disability and elderly affairs; local development fund). - Selected numbers from Table 1a and 1b (preserved exactly as presented): - Ceiling on net domestic assets of the RBM (stock, PC): examples include 115,345; 114,579; 141,672; 109,417; 117,737; 118,293; 122,965; 118,408. - Ceiling on reserve money (IT): examples include 87,652; 76,178; 100,557; 88,210; 95,657; 96,615; 96,615; 99,351. - Ceiling on central government's net domestic borrowing (PC): examples include 176,588; 178,847; 188,853; -11,988; -42,149; -17,756; -13,084; -18,201. - Floor on social spending (IT): examples include 39,034; 27,959; 95,156; 95,156; 87,295. - Floor on net international reserves of the RBM (PC, US$ millions): examples include -20; -63; -74; 17; 17; 32; 18; 34. - Memorandum items: - Net foreign assets of the RBM (US$ millions): -107; -148; -158; -82; -85; -68; -82; -60. - Budget support (US$ millions): 86; 90; 170; 170; 180. - Budget support (millions of kwacha): 21,945; 23,210; 49,038; 49,038; 57,531. - Debt service payments to the World Bank and the African Development Bank (US$ millions): 22 3. - Debt service payments to the World Bank and African Development Bank (millions of kwacha): 684; 684; 835. - Health SWAp receipts (millions of kwacha): 5,248; 7,732; 7,876; 7,876; 8,612. - Education SWAp receipts (millions of kwacha): 8,378; 7,227; 9,614; 9,614; 6,434. - NAC receipts (millions of kwacha): 4,777; 1,538; 5,101; 5,101; 1,538. - Program exchange rate (kwacha per US$): 260; 260; 260; 260; 260; 320; 320; 320. - Table 1b (selected examples): - Ceiling on net domestic assets of the RBM (PC): 118,408; 132,082; 125,803; 114,444; 108,487; 94,132; 87,854; 94,741; 95,110. - Ceiling on reserve money (IT): 99,351; 99,095; 98,488; 107,845; 106,902; 111,830; 110,017; 118,977; 116,146. - Ceiling on central government's net domestic borrowing (PC): -18,201; 4,444; -3,396; -15,021; -18,605; -5,218; -5,218; 25,205; 21,277. - Floor on social spending (IT): 87,295; 144,922; 144,922; 185,511; 185,511; 200,841; 200,841; 251,051; 251,051. - Floor on net international reserves of the RBM (PC, US$ millions): 34; -3; -27; 79; 53; 155; 127; 134; 124. ### Reporting, program monitoring, and other operational provisions - Donor pool–funded expenditures in support of the SWAps: - Financial flows into and out of the donor pool account will be reported on a monthly basis from the beginning of the fiscal year. - Farm input subsidy program: - Spending on the farm input subsidy program will be reported quarterly from the beginning of the fiscal year. - Exchange regime commitments: - The RBM will ensure ongoing assessment of the foreign exchange regime with IMF support to ensure consistency with Malawi’s obligations under Article VIII. - The RBM will continue to work towards ensuring that the spread between the official exchange rate and other market determined rates (bureau and parallel market rates) fall within 2 percent. - The RBM will abide by the continuous performance criterion on non-introduction or intensification of exchange restrictions and multiple currency practices. - Monitoring and reporting: - Monitoring of the program requires the information listed in Table 5 to be reported to the IMF within the timeframe indicated. *Source: _cr13131 - 19. The total upward adjustment to NDA from a shortfall of (i) budget support; (ii) donor inflows (IMF country report content).* ### 10. Prohibition on the imposition or intensification of restrictions on the making ### 10. Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions ### Memorandum items and key fiscal/financial figures - Net foreign assets of the RBM (US$ millions): -60, -103, -85, -21, -5, 55, 69, 76, 66 - Budget support (US$ millions): 180, 176, 186, 234, 245, 49, 50, 100, 150 - Budget support (millions of kwacha): 57,531; 54,934; 59,498; 73,542; 78,355; 15,752; 15,978; 31,945; 47,903 - Debt service payments to the World Bank and the African Development Bank (US$ millions): 3, 1, 4, 3, 6, 7, 1, 4 - Debt service payments to the World Bank and African Development Bank (millions of kwacha): 835; 420; 1,218; 827; 1,936; 2,174; 465; 1,310 - Health SWAp receipts (millions of kwacha): 8,612; 10,778; 11,290; 11,173; 11,290; 3,224; 3,194; 6,531; 9,721 - Education SWAp receipts (millions of kwacha): 6,434; 14,994; 16,765; 18,194; 23,245; 4,800; 4,800; 9,600; 14,400 - NAC receipts (millions of kwacha): 1,538; 8,719; 7,993; 12,281; 12,281; 3,563; 4,288; 8,576; 12,864 - Program exchange rate (kwacha per US$): 320 (repeated for all periods) Sources: Reserve Bank of Malawi; Malawi Ministry of Finance; and IMF staff estimates. ### Program design, prior actions and structural benchmarks (2012–13) - Prior Actions achieved: - Parliamentary passage of a budget for FY 2012/13 in line with program objectives — Status: Met - Shut down RBM's uncollateralized lending to banks — Status: Met - Sign and begin implementation of memorandum of understanding between the Reserve Bank of Malawi and the Ministry of Finance indicating MoF responsibility for interest costs of treasury bills used for monetary operations — Status: Met - Select Structural Benchmarks, target dates, and status: - Publish monthly revenue collections of the Malawi Revenue Authority in newspapers within two weeks of the end of the month — Target Date: 31-Jul-12 — Rationale: Build credibility after recent incidents of inflation of revenue data by the Ministry of Finance — Status: Met - 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 — Status: Met for Q2 - Verify existing stock of government domestic arrears — Target Date: 31-Dec-12 — Rationale: Ascertain magnitude of government obligations and begin payment — Status: Partially Met - Configure the IFMIS Purchase Order (PO) module to support commitment control — Target Date: 31-Dec-12 — Rationale: To restrain creation of arrears — Status: Partially Met - Expand IFMIS PO module to cover all procurements and roll it out to all Ministries and Departments — Target Date: 30-Jun-13 — Rationale: To further restrain creation of arrears — Status: (Progress noted) - 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 — Status: (Progress noted) - Submit to parliament an amendment of the 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 — Status: (Progress noted) - RBM to publish a financial stability report on a semi-annual basis, with a lag of no more than four months — Semi-annual, starting in July 2012 — Rationale: Promote financial stability — Status: Met; reports published in July 2012 and January 2013 - Obtain approval and begin implementation of the Financial Sector Development Strategy — Target Date: 31-Dec-12 — Rationale: Financial deepening — Status: Not met; Now expected by end-June 2013 - Require vulnerable banks to undergo third-party diagnostic assessments by reputable audit firms — Target Date: 30-Jun-13 — Rationale: Establish true financial conditions of affected banks and ensure effective monitoring — Status: (Planned) ### Social expenditure projections and outturns (2012/13) - Health expenditure components (Q1 Act., Q2 Prog., Q2 Act., Q3 Proj., Q4 Proj., 2012/13 total): - Wages: 3,932.97; 3,364.00; 3,459.17; 3,574.83; 3,769.70; 14,736.67 - Ministry of Health ORT (Other Recurrent): 1,988.59; 2,510.00; 3,370.83; 4,396.00; 4,545.06; 14,300.48 - Local Assemblies ORT: 2,287.18; 2,100.00; 2,216.98; 1,619.89; 3,843.87; 9,967.92 - Subvented Organisations: 25.00; 25.00; 25.00; 25.00; 25.00; 100.00 - Development Part 2: 479.68; 993.00; 1,048.62; 800.00; 610.00; 2,938.29 - Total Health (quarterly sequence): 8,713.41; 8,992.00; 10,120.60; 10,415.72; 12,793.63; 42,043.36 - Education expenditure components and totals: - Wages: 8,531.71; 8,251.71; 8,161.62; 10,490.08; 10,703.07; 37,886.48 - Ministry of Education ORT: 2,657.99; 3,100.00; 2,572.53; 5,570.50; 5,477.57; 16,278.59 - Local Assemblies ORT: 1,778.59; 1,170.00; 1,423.00; 1,100.00; 1,468.40; 5,770.71 - Subvented Organisations: 4,567.73; 4,500.00; 4,600.00; 4,500.00; 4,329.00; 17,996.74 - Development Part 2: 1,128.63; 1,100.00; 634.39; 1,600.00; 1,763.43; 5,126.45 - Total Education (quarterly sequence): 18,664.65; 18,121.71; 17,391.54; 23,260.58; 23,741.47; 83,058.97 - Farm Input Subsidy Program (quarterly): 100.00; 34,742.00; 29,204.77; 19,858.00; 5,857.73; 55,020.50 (2012/13 total shown) - Total Gender, Children and Social Welfare (quarterly sequence): 240.83; 240.83; 236.89; 290.37; 277.72; 1,045.81 - Total Disability and Elderly Affairs (quarterly sequence): 104.97; 72.88; 60.81; 54.95; 54.35; 275.09 - Local Development Fund (quarterly sequence): 120.00; 5,000.00; 2,305.12; 8,731.00; 8,127.67; 19,283.79 - Total Social Expenditure Projections (quarterly sequence): 27,959.09; 67,196.87; 59,336.03; 62,659.21; 50,885.99; 200,841.05 - Cumulative Quarterly Targets: 39,034.00; 95,156.00; 144,922.00; 185,511.00 - Cumulative Quarterly Outturns: 27,959.09; 87,295.11; 149,954.33; 200,841.05 Source: Malawian authorities. ### Reporting requirements (selection of data, frequency and delivery mode) - Gross international reserves, exchange rate, and foreign exchange purchases and sales — Reporting agency: RBM — Frequency: Daily — Mode: Electronic - Reserve money and its components (NDA and NFA), OMO transactions, and RBM conversion of treasury bills; RBM balance sheet — Agency: RBM — Frequency: Weekly/Monthly — Lag: 30 — Mode: Electronic - Daily exchange rate — Agency: RBM — Frequency: Daily — Mode: Electronic - Treasury bill auction results — Agency: RBM — Frequency: Weekly/Monthly — Mode: Electronic - Financial soundness indicators by banks — Agency: RBM — Frequency: Quarterly — Lag: 45 — Mode: Electronic - Fiscal table (GFS) including revenue, expenditure, and financing — Agency: MOF — Frequency: Monthly — Lag: 30 — Mode: Electronic - New external loans contracted or guaranteed by the central government — Agency: MOF — Frequency: Quarterly — Lag: 30 — Mode: Electronic - External debt services (actual and projections) — Agency: MOF — Frequency: Quarterly — Lag: 30 — Mode: Electronic (Note: Reporting delivery codes include D-Daily, W-Weekly, M-Monthly, Q-Quarterly, BA-Bi-annual, F-Friday, 30-Every 30th, T 30-Every third 30th; Mode: E-Electronic, H-Hard Copy) ### Appendix II — Real exchange rate assessment (ERER) findings - Method: High frequency time-series equilibrium real exchange rate (ERER) approach using monthly data 1990M1–2012M11. - Commodities included in CTOT index: Tobacco, Uranium, Tea, Sugar, Cotton, Rice, Coffee, Maize, Petroleum Products, Fertilizers. - Key empirical findings: - The variables CTOT and monthly Real Effective Exchange Rate (REER) are cointegrated. - Estimated elasticity coefficient (statistically significant): 41.8 percent - Estimated misalignment: The kwacha is undervalued by 8 percent as at end-November 2012. - Noted behavior: Fluctuations in the REER in Malawi have been negatively associated with changes in the commodity terms of trade in the last decade; since 2000 REER moved opposite to CTOT due to restrictive foreign exchange policies, producing an overvalued exchange rate in the first half of 2012. Prepared by: Mehdi Raissi (SPR). ### Appendix III — Correlation and cluster analyses of monetary indicators, price indices and the exchange rate (May–December 2012) - Correlation matrix highlights (May–December, 2012): - Strong correlations among monetary aggregates: LC1 and LC2 correlation 0.981; LM1 with LC1 0.860 and with LC2 0.921. - Strong correlation between non-food CPI and the exchange rate; non-food CPI (LCPINF) correlation with exchange rate (LEXR) is 0.811. - Monetary aggregates are strongly correlated with the exchange rate: LC1–LEXR 0.740; LC2–LEXR 0.820; LM1–LEXR 0.820. - Headline CPI (LCPIA) correlations: with LC1 0.090; with LM3 0.92; with LCPINF 0.84. - Cluster analysis (Dendrogram) findings: - Monetary aggregates (LC1, LC2, LM1, LM2, LM3) form a tight cluster at a very small dissimilarity, implying interchangeability as indicators of monetary policy. - Headline CPI, non-food CPI and the exchange rate form a close cluster, suggesting exchange rate movements were a principal contributory factor to higher prices during May–December, 2012 (aside from supply shocks). - Monetary aggregates cluster onto prices and exchange rate at a higher dissimilarity level. Prepared by: O. Adedeji (AFR) and A. Mialou (STA). ### Appendix IV — Malawi’s National Export Strategy (NES) overview - Launch: NES officially launched in December 2012. - Role: Critical element in implementing the Malawi Growth and Development Strategy (MDGS II) and the Economic Recovery Plan; provides a prioritised road map for developing Malawi’s productive base and improving export competitiveness. - Emphasis areas: - Export clusters - Conducive business environment - Supportive economic institutions to build the productive base - Competencies, skills and knowledge development - Implementation arrangement: Support through pooling resources under the Trade, Industry and Private Sector Development Sector Wide Approach (TIPSD SWAp) to integrate government and donor resources and improve alignment, coherence and coordination. - Priority Area 1 — Export Clusters: - Three prioritized export-oriented clusters for diversification to compete in target markets and drive exports through value addition, mostly to neighboring and regional markets. - Three dedicated Technical Working Groups (TWGs) with appropriate stakeholder representation will be established to implement the cluster strategy. 1 Prepared by IMF staff. *Source: _cr13131 - 10. Prohibition on the imposition or intensification of restrictions on the making (IMF staff and Malawian authorities materials).* ### 1. Oil Seed Products — cooking oil, soaps, lubricants, paints, varnishes, meals and flours, bio- ### 1. Oil Seed Products — cooking oil, soaps, lubricants, paints, varnishes, meals and flours, bio- ### Priority Area 2 — Conducive Environment - Develop an environment conducive to economic competitiveness and economic empowerment of youth, women, farmers and MSMEs through: - Affordable access to reliable energy, cost-effective transport, finance, ICT, trade facilitation. - Addressing the disconnection between smallholder farmers and processors/markets for value addition. - Land reform, seed, irrigation, warehouse receipts, policy coherence, comprehensiveness and strategic focus. ### Priority Area 3 — Supportive Economic Institutions to Build the Productive Base of the Economy - Invest in supportive economic institutions and organizations, ensuring sufficient funding and staffing: - Commit to securing budgets for staff in Malawi Investment and Trade Centre (MITC), Small and Medium Enterprise Development Institute (SMEDI), Ministry of Labour, and Dept of Agriculture. - Improve communication through ongoing dialogue and devoting high-level attention to develop agencies central to Malawi’s productive base and export competitiveness. ### Priority Area 4 — Competencies, Skills and Knowledge - Invest significantly in competencies, skills and knowledge to lay the foundation of Malawi’s productive base and export capacity: - Develop a National Competencies & Skills Plan to link prioritised clusters and key sectors. - Maintain an effectively functioning Labour Market Information System by Ministry of Labour and Technical, Entrepreneurial and Vocational Education and Training (TEVET). ### Supporting exports of existing clusters - NES includes plans for supporting stakeholders in other major existing clusters: tobacco, mining, tourism, tea and services. ### Annex I — RELATIONS WITH THE FUND (As of January 31, 2013) - Membership Status: - Joined: July 19, 1965; Article VIII - General Resources Account (SDR Million and %Quota): - Quota 69.40 100.00 - Fund holdings of currency (exchange rate) 66.96 96.69 - Reserve tranche position 2.44 3.52 - SDR Department (SDR Million and %Allocation): - Net cumulative allocation 66.37 100.00 - Holdings 0.58 0.87 - Outstanding Purchases and Loans (SDR Million; %Quota): - ESF Arrangements 34.70 50.00 - ECF Arrangements 83.04 119.65 - Latest Financial Arrangements (Type, Date of Arrangement, Expiration Date, Amount Approved (SDR Million), Amount Drawn (SDR Million)): - ECF 07/23/2012 07/22/2015 104.10 26.04 - ECF 1/ 02/19/2010 02/18/2013 52.05 13.88 - ESF 12/03/2008 12/02/2009 52.05 34.70 - 1 Formerly PRGF. - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2013 2014 2015 2016 2017 - Principal 5.37 16.66 17.35 17.86 15.71 - Charges/Interest 0.05 0.05 0.27 0.23 0.19 - Total 5.42 16.71 17.62 18.08 15.90 - Implementation of 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 - (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 - Implementation of 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 / GR / PRGF / Total: - December 2006 N/A 7.91 7.91 - September 2006 10.84 19.12 29.96 - Safeguards Assessments: - Update safeguards assessment of the Reserve Bank of Malawi (RBM) conducted with respect to the current ECF arrangement. - RBM continues to publish financial statements prepared and audited in accordance with international standards. - Key safeguards concern: the lack of operational autonomy. - Recommendation: expand envisaged amendments to the RBM Act to limit lending to government and strengthen RBM autonomy more broadly. - Other recommendations: enhance oversight of foreign reserves management and improvements to data compilation procedures, including strengthening transparency of contingent liabilities arising from letters of credit. - RBM committed to implementing recommendations; recommendations do not require action in the context of the first review and will be closely monitored. - Exchange Arrangements: - In May 2012, the government liberalized the foreign exchange regime, devalued the kwacha by about 33 percent and adopted a floating exchange rate regime. - Staff is reviewing recent reforms to assess Malawi’s exchange rate system. - Malawi maintains restrictions on the capital account. - De jure exchange rate arrangement: floating; staff’s latest assessment classified the de facto arrangement as “other managed”. - During the second review of the PRGF arrangement in August 2006, a multiple currency practice (MCP) under Article VIII emerged (manifested by the significant spread between the commercial bank exchange rates and the rates at foreign exchange bureaus). - Article IV Consultation: - Malawi is on a 24-month Article IV consultation cycle. - The last Article IV Consultation mission was conducted in conjunction with discussions on the new ECF-supported program arrangement in May/June 2012. - The Executive Board concluded the last Article IV consultation with Malawi on July 23, 2012. - FSAP, ROSCs, and OFC Assessments: - Joint World Bank–IMF FSAP team visited Malawi during two missions in July and December 2007. - The Financial System Stability Assessment (FSSA) was issued in June 2008 (SM/08/198). - Corporate Governance and Accounting and Auditing ROSC missions visited Malawi in February and June 2007. - Update on the FAD mission on the fiscal transparency module issued in March 2007. - A ROSC on the data module, based on a September 2003 mission, was published in October, 2004. ### Technical Assistance (selected entries; Date of Delivery, Department, Ministry/Agency, Purpose/Topic, Modality) - 03/13 FAD Ministry of Finance Public Financial Management Mission - 02/13 STA RBM RBMS’ monetary statistics Mission - 02/13 FAD Ministry of Finance GFS 2001 Mission - 11/12 STA NSO Prices Statistics Mission - 10/12 MCM RBM Liquidity Management, Monetary Operations and Related Issues Mission - 10/12 FAD Ministry of Finance/MRA Revenue Administration Mission - 05/12 STA NSO Consumer Price Indices Mission - 04/12 STA NSO Balance of Payments Statistics 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 Public Financial Management (PFM) Reforms Report - 03/12 FAD Ministry of Finance/MRA 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 Public Financial Management (PFM) Reforms Mission - 12/11 MCM/LEG RBM Review the Foreign Exchange Regime Mission - (Full technical assistance listing continues in source.) ### ANNEX II — JOINT MANAGERIAL ACTION PLAN (As of January 31, 2013) - A. Mutual information on relevant work programs — Bank work program in the next 12 months (Analytical and Advisory Activities; Lending) with provisional timing and expected delivery dates: - Analytical and Advisory Activities include: - Public Expenditure Review (November 2012) - Agriculture PER (September 2012) - Diagnostic Trade Integration Study (November 2012) - Poverty Policy Note (On-going) - Higher Education and Skills Development Policy Note (On-going) - Decentralization Note (On-going) - PPP Pipeline Screening Assessment (Work being finalized) - Update of Malawi Transport Costs Study (TBA) - Lending includes: - First Programmatic Development Policy Operation (budget support) (November 2012) - Higher Education and Skills Development Project (February–March 2013) - Agricultural Productivity Program for Southern Africa (APPSA) (December 2013) - IMF work program in next 12 months: - Second review of ECF-supported program February, 2013 / April 2013 - Third review of ECF-supported program May 2013 / June 2013 - Fourth review of ECF-supported program November 2013 / December 2013 - B. Requests for work program inputs: - Fund request to Bank: - Information on budget support and costing of social safety net programs — February–March 2013. - Updates on Public Expenditure Review work — December 2012, January 2013, April 2013, August 2013. - Bank request to IMF: - Regular updates of medium-term macro projections — Continuous. - C. Agreement on joint products and missions: - Joint products in next 12 months (details and timing provided in source). *Source: IMF staff report content (as provided).* ### 1. Debt Sustainability Analysis (update) April/May 2013 May/June 2013 ### 1. Debt Sustainability Analysis (update) April/May 2013 May/June 2013 ### Relations with the African Development Bank Group (AfDB) — summary of operations and strategy - AfDB operations in Malawi date back to 1969; Malawi Field Office opened in 2007 and officially launched in July 2008 by AfDB President Dr. Donald Kaberuka. - As at January 31, 2013, cumulative AfDB commitments to Malawi: UA 775.6 million (about US$ 1.2 billion) to finance 95 operations including 11 studies and 2 lines of credit. - Interim Country Strategy Paper (ICSP, 2011-12) approved by the Bank’s Board of Directors on 11th May 2011. ICSP aligned with the Malawi Growth and Development Strategy (MGDS, 2006–11) and the Bank’s Medium-Term Strategy (2008–12). - ICSP identified two pillars: infrastructure development and private sector development. - ADF XII allocation for Malawi for 2011: UA 70 million (about USD 108 million), with 44 percent of the resources provided as grants. - AfDB Board approved a new Country Strategy Paper (CSP) on 30th January 2013 covering 2013–17; CSP aligned with MGDS II (2011–16), LTS (2013–22), and Southern African RISP (2011–15). - New CSP priorities: (i) addressing infrastructure bottlenecks to competitiveness and growth; (ii) supporting actions to expand private sector investment and trade. - More than 50 percent of the indicative lending operations are regional and will be financed with ADF XII, XIII and XIV resources. - Bank support to Public Private Partnerships (PPPs) in infrastructure development and scaling up regional infrastructure to mitigate Malawi’s landlocked constraints. ### AfDB ongoing operations — sectors, portfolio performance, and approved projects - Ongoing projects in agriculture: - Agriculture Infrastructure Support Project (AISP). - Small-holder Crop Production and Marketing Project (SCPMP). - Climate Adaptation for Rural Livelihoods and Agriculture Project (grant from Global Environment Facility). - Water and sanitation: - National Water Development Programme (NWDP) in collaboration with AusAID. - African Water Facility (AWF) grants financing Strengthening Water Sector Monitoring & Evaluation Project and Water and Sanitation Access project for the Urban Poor in Blantyre. - Social sector projects (four): - Health SWAp Programme constructing and rehabilitating 57 health facilities. - Local Economic Development project developing infrastructure in Jenda, Malomo, Monkey Bay and Chitekesa. - Competitiveness and Job Creation Project to improve private sector capabilities, export diversification, and job creation. - Support to Higher Education Science & Technology Project to increase access to TEVET and higher education, with emphasis on ICT. - Transport: - Trunk Roads Rehabilitation Project including Blantyre-Zomba road rehabilitation (60 km) and Lilongwe Bypass construction (13 km) as part of Multinational Nacala Road Corridor. - Portfolio performance: - Overall portfolio rated satisfactory with a cumulative disbursement rate of 44% as at end-January 2013. - New operations prepared and approved in March 2013: - Mzuzu-Nkhata Bay Road Rehabilitation Project (US$ 33.20). - Smallholder Irrigation and Value Addition Project (US$39.98 - Funded by Global Agriculture and Food Security Project and the African Development Fund). ### Crisis response and budget support (RFSSP) and recent approvals - Following government reengagement with the IMF and approval of a new US$ 157 million Extended Credit Facility (ECF) arrangement for Malawi in July 2012, AfDB approved a new ADF Grant for the Crisis Response Budget Support operation in July 2012: US$ 40 million. - Restoration of Fiscal Stability and Social Protection (RFSSP) program objectives: - Contribute to restoring fiscal stability and enhancing public finance management. - Support social protection measures to mitigate adverse social impact of the Kwacha devaluation and increases in fuel and electricity prices. - RFSSP components: - (i) strengthened PFM transparency and accountability. - (ii) strengthened social protection system. - RFSSP financing and programming: - Grant of US$ 40 million is the largest single tranche budget support provided by the ADF in Malawi. - Total programmed amount for RFSSP: UA 30 million. - Provision of UA 26 million (US$ 40 million equiv.) was on account of inadequate resources at time of program appraisal. - The Bank will make available the balance of UA 4 million (US$ 6 million equiv.) as supplementary budget support in the first half of 2013. - AfDB provided non-lending support: feasibility studies (Songwe River Basin, Shire Zambezi Water Development), Private Sector Profile for Malawi, and joint financing of a Public Expenditure Review expected for completion in August 2013. ### Statistical issues — overall assessment - Economic data provision: some shortcomings but broadly adequate for surveillance. - Data ROSC published February 17, 2005: institutional framework broadly adequate but shortcomings in scope, accuracy, and reliability. - Weakest statistical areas: national accounts, balance of payments statistics, government finance statistics, and monetary and financial statistics. - STA recommendation: formally assign responsibility for compilation of government finance statistics to the Ministry of Finance and monetary statistics to the RBM. - Malawi participates in the Fund’s General Data Dissemination System (GDDS) and GDDS Project for Anglophone African Countries; GDDS metadata posted on DSBB since February 2007. ### National accounts and real sector data - Real sector data accuracy and reliability affected by inadequate source data and timeliness. - STA recommended additional resources for the National Statistics Office (NSO). - Long-term TA in national accounts provided under a Norwegian-funded project. - NSO revised national accounts methodology to implement SNA93 and better account for informal sector activities. - New estimates for Real and Nominal GDP based on base year 2007 are submitted. ### Consumer price index (CPI) - CPI available on a timely basis. - CPI base: 2000, drawing on 1997/98 household survey. - Price data (urban and rural indices) collected monthly by regional price collectors. - CPI weights revised based on the 2010 planned Integrated Household Survey (IHS); new series will be available in March 2013. ### Government finance statistics — shortcomings and reform needs - Accuracy and reliability affected by inadequate source data and recording systems; serious quality problems and data inconsistencies that complicate program monitoring. - Specific issues identified: - Tax revenue data timely but not always reconcilable with deposits in the Malawi Government (MG) Account. - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in Ministry of Finance fiscal reports. - Recurrent expenditure data suffer from insufficient bank reconciliation between line ministry expense records and Ministry of Finance financing information; ministries submit spending reports based on recorded expenses, while the Ministry estimates expenses based on funding data (Credit Ceiling Authority), producing sizable discrepancies for wages and other recurrent transactions. - Domestically financed development expenditure estimated from funding released to line ministries; externally funded expenditure estimated from reported project grants and loans — timing and modality differences (e.g., prefinancing before donor reimbursement) produce substantial differences between flows of expenses and financing data. - Many donor projects not incorporated in the budget, so corresponding expenditure not captured in government finance statistics; some externally funded development expenditures may be recurrent and reported capital expenditure overstated. - Expenditure arrears data likely incomplete; Commitment Control System reporting partial and ministry-level data inconsistent across reports. - Current budget classification includes economic and program classification but lacks effective administrative/organizational classification; expenditure data loosely mapped to functional classification based on CoFoG. - Output-oriented activities-based budget classification (ABB) used for presentation, but pro-poor expenditures protected under PRSP are only identified in ABB; absence of a bridge table mapping ABB to program classification prevents monitoring of pro-poor expenditures. Under the ECF program, government expected to develop mechanism to properly monitor social expenditures. - Government nomenclature program/subprogram used for functional classification mixes functions, programs and administrative levels; review needed to align with CoFoG (GFSM2001). - Absence of a complete financial administrative structure with vertical hierarchy inhibits use of Government Finance Statistics (GFS); budget funds directed to cost centers; warrants and sub-warrants not yet introduced broadly despite sub-votes introduced in some ministries. - Financing estimates based on monetary and debt data rather than government records of financing; reporting on treasury bills directly issued to the RBM has been slow at times. - TA and reforms: - Authorities have received significant TA from Fund and donors to strengthen expenditure monitoring, accounting, and statistical reporting, but results have lagged. - Government pledged to strengthen PFM and fiscal reporting; working with East AFRITAC to modify chart of accounts and output-based structures to realign to national strategy. - Government finance data are not reported for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS). - August 2005 and August 2007 STA missions reiterated importance of implementing IFMIS, improving coverage and sectorization, and correctly classifying transactions; migration plan and timetable to adopt GFSM 2001 methodology proposed. - GFS TA mission in June 2011 found annual and sub-annual budgetary central government data compiled in GFSM 1986 format but not disseminated; new chart of accounts aligned with GFSM 2001 introduced in 2011–12 budget cycle applying to all general government units. - Bridge tables linking national classifications and GFSM 2001 were prepared and should be revised and used to compile GFS in GFSM 2001 format. A follow-up mission included in RAP for FY 2013. ### Monetary and financial statistics (MFS) - Improvements noted, but shortcomings remain: - Irregular reporting to STA. - Lack of proper legislation to grant RBM authority to require reporting from other institutions (some legislation recently approved; pending legislation would strengthen RBM authority). - Problems in sectorization of the domestic economy and classification of financial instruments to fully adhere to the Monetary and Financial Statistics Manual methodology. - STA missions in 2004, 2008, 2009, and 2010 made recommendations; 2008–2010 missions assisted RBM staff developing standardized report forms (SRFs) for central bank accounts (1SR), other depository corporations (2SR), and monetary aggregates (5SR). ### External sector statistics and balance of payments (BoP) - External sector statistics exhibit serious deficiencies. - Concepts and definitions broadly in conformity with BPM4; some progress toward BPM5; NSO should adopt BPM6 and update Malawi BoP metadata accordingly. - NSO balance of payments section critically understaffed since March 2008. - Important data sources ceased in 2006–07 (e.g., exchange control forms), reducing information on imports of goods, services, and current transfers. - Procedures to assess accuracy of trade data need improvement. - NSO actions taken: - Compiled new BoP data and validated results from two surveys: BOP Survey and NPISH survey, both based on BPM5. - Compiled information from 2009 Foreign Private Capital and Investor Perception Survey, RBM monetary statistics, and other financial data from Ministry of Finance. - Remaining weaknesses: - Data on remittances are non-existent despite anecdotal evidence of high remittances; recommendation: require money transfer services to report monthly data to RBM as a first step. - Data on foreign direct investment and portfolio flows are weak. - Project aid currently classified as current transfers rather than capital account; several large in-kind projects not properly captured in BoP data. *Source: ANNEX III–IV, Malawi staff report excerpts (as provided).* ### 14. No international investment position statement is prepared. The RBM and Ministry of ### _cr13131 - 14. No international investment position statement is prepared. The RBM and Ministry of ### Data reporting and quality - No international investment position statement is prepared (International Investment Position: NA, NA, NA, NA, NA in table). - Data table dated "As of January 31, 2013" lists latest observations and reception dates for key series, including: - Exchange Rates: 01/2013 (Date of latest observation), 01/2013 (Date received), Frequency: M (monthly). - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 01/2013 (latest), 01/2013 (received), Frequency: M. - Reserve/Base Money: 01/2013 (latest), 01/2013 (received), Frequency: M. - Broad Money: 01/2013 (latest), 01/2013 (received), Frequency: M. - Central Bank Balance Sheet: 01/2013 (latest), 01/2013 (received), Frequency: M. - Consolidated Balance Sheet of the Banking System: 01/2013 (latest), 01/2013 (received), Frequency: M. - Interest Rates: 01/2013 (latest), 01/2013 (received), Frequency: M. - Consumer Price Index: 01/2013 (latest), 01/2013 (received), Frequency: M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 12/2012 (latest), 12/2012 (received), Frequency: M. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 12/2012 (latest), 12/2012 (received), Frequency: M. - Stocks of Central Government and Central Government-Guaranteed Debt: 12/2012 (latest), 12/2012 (received), Frequency: M. - External Current Account Balance: 12/2012 (latest), 12/2012 (received), Frequency: A. - Exports and Imports of Goods and Services: 12/2012 (latest), 12/2012 (received), Frequency: A. - GDP/GNP: 12/2012 (latest), 12/2012 (received), Frequency: A. - Gross External Debt: 2011 (latest), 6/2012 (date received), Frequency: M (latest), I (reporting), I (publication). - Data quality and methodological soundness assessments reference a Data ROSC (published on March 10, 2004, mission May 8–21, 2003), with indicators using O, LO, LNO, NO, NA designations for methodological soundness and accuracy/reliability across datasets. - Recommendation in opening paragraph: "The RBM and Ministry of Finance’s Debt and Aid Department need to improve reporting of monetary and external debt data respectively." ### IMF Executive Board decision and disbursement - Press Release No. 13/108, FOR IMMEDIATE RELEASE, Washington, D.C. 20431, April 8, 2013, USA. - The Executive Board completed the second review under the Extended Credit Facility (ECF) arrangement for Malawi and approved a disbursement: - Immediate disbursement: amount equivalent to SDR 13.02 million (about US$19.6 million). - Total disbursements under the arrangement after this disbursement: amount equivalent to SDR39.06 million (about US$58.7 million). - The three-year ECF arrangement for Malawi: total amount SDR 104.1 million (about US$156.2 million), approved on July 23, 2012. - Statement issued by Mr. David Lipton, First Deputy Managing Director and Acting Chair, summarizing program assessment and policy guidance. ### Authorities’ assessment, policy measures, and commitments - Authorities’ view (Statement by Mr. Momodou Bamba Saho, Executive Director for Malawi, April 8, 2013): - Policy reforms have begun to yield positive results, including increased availability of foreign exchange and successful rollout of social protection programs. - Commitments: - Continued tight monetary policy and fiscal restraint to contain aggregate demand, stabilize the exchange rate and prices, and boost international reserves. - Reserve Bank of Malawi (RBM) committed to maintaining a tight monetary stance until inflation pressures recede. - Fiscal authorities committed to implementing prudent policies ahead of the 2014 general elections; FY2013/14 budget will include measures to offset the impact of recent wage increases on the budget. - Authorities pursuing reforms to broaden the tax base, improve revenue administration, and exercise greater control over expenditures. - RBM strengthening oversight of banks, assessing true financial condition of all banks to enforce prudential regulations, and enhanced monitoring of banks with liquidity difficulties. - Authorities committed to removing regulatory hurdles to doing business to enhance competitiveness and exports. - Structural reforms and administrative improvements cited: - Malawi Revenue Authority publishes monthly revenue collections. - Quarterly expenditure ceilings for line ministries. - Purchase order module of IFMIS progressively extended to all procurements. - Memorandum of understanding between RBM and Ministry of Finance clarifying Ministry responsibility for interest costs of T-bills used for monetary operations. ### Economic outcomes, shocks, and social impacts - Exchange rate and reserves: - Authorities devalued the currency by 33 percent and adopted a floating exchange rate regime. - The price of foreign exchange "has since increased further by more than 50 percent." - Official international reserves have declined, partly due to higher-than-estimated private sector external payments arrears. - Sector and trade performance: - Weak performance of tobacco and sugar has weakened Malawi’s current account balance. - Fuel and utility pricing: - Government implemented automatic pricing adjustment mechanism for fuel; fuel supply situation improved markedly despite higher costs to consumers. - Monetary and inflation dynamics: - Policy rate increase: "Monetary policy was tightened by increasing the policy rate by 12 percent to 25 percent." - Inflation: "inflation rate to edge up to 37.9 percent in February." - Authorities expect policy actions to moderate the inflation rate by May/June. - Financial sector and credit conditions: - Bank credit to the private sector has continued to weaken. - Commercial banks’ base lending rate currently at 40 percent. - Accumulation of public sector arrears hindering firm activity and entrepreneurship. - Social and political effects: - Reforms have had "far-reaching and painful" effects, causing public outcry and strikes by civil servants and other workers. - Authorities implemented a social protection program and granted civil servants a wage increase (mostly for the lowest pay grades), funded through cuts and savings elsewhere in the budget, which mitigated discontent and ended strikes. - Authorities note the risk that adverse developments could erode ownership of the adjustment program among significant sections of the population. - Despite austerity, authorities report continuing support for reforms and envisaged recovery in 2013, aided by communications and awareness campaigns. ### Conclusions and requests - Authorities express appreciation to the IMF Executive Board and Management for engagement and support and to the Fund Mission for policy advice and technical assistance. - Authorities requested Board approval for: - Completion of the second review of the ECF program. - Modification of performance criteria. - Closing confidence statement: authorities "are confident that Malawi is about to turn a new page on the long and arduous road towards growth and broad-based economic prosperity." *Source: IMF document content (Press Release No. 13/108 and Statements), April 8, 2013; data table "Malawi: Tables of Common Indicators Required for Surveillance (As of January 31, 2013)".* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13131.pdf_