## MALAWI: STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION

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### Context and key issues
- Persistent macroeconomic problems from uneven policy implementation, high inflation, and a weak external position financed by volatile donor inflows.
- The “cashgate” scandal removed 4½ percent of GDP in budget support and contributed to fiscal imbalances.
- Program implementation under the Extended Credit Facility (ECF) was put off track by policy slippages and external financing shortfalls; all PFM-related structural benchmarks were missed while some financial-sector-related benchmarks made good progress.
- Policy reforms since mid-2012 included: devaluation, adoption of a floating exchange rate regime, liberalization of foreign exchange markets, and introduction of an automatic fuel price adjustment mechanism.

### Recent developments and macroeconomic indicators
- Weather shocks and food security:
  - Heavy floods in early 2015 followed by drought; estimated decline of about 30 percent in the maize harvest in 2015.
  - An estimated 2.8 million persons remain at risk of food insecurity (about 16 percent of the population).
- Growth:
  - Real GDP growth projected to fall by 2.7 percentage points to 3 percent in 2015.
  - Growth projected to rise gradually to about 5.5 percent over the medium term.
- Inflation:
  - Annual inflation declined by 6 percentage points from end-2014 to 18 percent in March 2015.
  - Inflation rose sharply to 24 percent at end-September 2015.
  - Inflation expected to rise to 25.4 percent at end-2015; estimated to ease in 2016 and reach single digits at end-2017 under tighter policies and low international food and petroleum prices.
- Exchange rate and reserves:
  - The kwacha depreciated 30 percent against the U.S. dollar.
  - Central bank used directives and foreign exchange sales to slow depreciation.
- Monetary policy and banking:
  - Policy rate raised by 250 basis points to 25 percent in November 2014.
  - Liquid reserve requirement of 15.5 percent applied to foreign currency deposit equivalent in local currency.
  - Growth in credit to the private sector—negative in real terms—continued downward.
- External sector:
  - External current account deficit estimated to have narrowed to about 8 percent of GDP in 2014 (from 8.7 percent in 2013).
  - External current account deficit expected to remain in the 8 percent range over the medium term.

### Executive Board assessment and downside risks
- Executive Directors concerned about policy slippages preventing sustained growth and low inflation.
- Downside risks include:
  - Continued weather-related supply shocks.
  - Interruption of donor budget support.
  - Weaker global demand hurting Malawi’s exports.
- Directors emphasized restoration of macroeconomic stability via fiscal consolidation and tighter monetary policy.

### Policy recommendations and priorities
- Near-term priorities:
  - Restore macroeconomic stability through fiscal consolidation and tighter monetary policy to place inflation on a declining trend.
  - Accelerate implementation of public financial management (PFM) reforms to re-establish trust and confidence and foster donor re-engagement.
  - Maintain the flexible exchange rate regime and the automatic fuel pricing mechanism as shock absorbers; ensure transparency and safeguards if the fuel import regime changes to involve a greater role for the state-owned company.
  - Intensify efforts to enhance financial sector resilience given credit and concentration risks to banking system stability.
- Medium-term priorities:
  - Safeguard macroeconomic stability while improving the quality of public spending and protecting social spending.
  - Improve revenue mobilization: broaden the tax base, strengthen tax compliance, and modernize tax administration to reduce aid dependence.
  - Improve allocation and targeting of public spending; avoid making public sector pensions fiscally untenable.
  - Implement structural reforms to remove supply bottlenecks, increase agricultural productivity, and improve the business environment.

### Fiscal slippages: causes, magnitude, and corrective measures
- Overall fiscal slippages: 2 percent of GDP in FY14/15.
- Main contributors:
  - Unplanned recruitment of 10,500 teachers and granting of unbudgeted wage increases (1¼ percent of GDP).
  - Revenue shortfalls (½ percent of GDP).
  - Shortfalls in external flows (1 percent of GDP).
- Selected IMF staff figures (as presented):
  - Tax revenue shortfalls 180.6 (Billions of MWK)
  - External financing shortfalls 270.9 (Billions of MWK)
  - Wage bill 341.2 (Billions of MWK)
  - Interest expense 100.4 (Billions of MWK)
  - Corrective measures: One-off revenues -10                -0.4; Subsidies and transfers -6                -0.2; Capital spending (domestic) -10                -0.4; Other -6                -0.2
  - Net domestic financing 572.0 (Billions of MWK)
- Character of corrective actions:
  - Inadequate and less than ideal: an equal mix of one-off revenue measures and expenditure cuts.
  - Potential adverse implications for medium-term growth and poverty reduction.
- Revised FY15/16 budget:
  - Addresses a financing gap of about one percent of GDP in FY15/16.
  - Limits net domestic financing (¾ percent of GDP) and safeguards social spending.

### Monetary developments and implications
- Reserve Bank of Malawi (RBM) actions and liquidity:
  - Cut in the liquid reserve ratio (LRR) from 15.5 percent to 7.5 percent in July 2015.
  - Excess banking system liquidity rose by about 1¼ percentage points of GDP as a result.
  - Policy rate initially remained unchanged; short-term market interest rates and returns on government securities fell sharply and became negative in real terms.
  - Sterilization efforts later absorbed excess liquidity.
  - RBM increased the policy rate by 200 basis points in early November (later reported as raising policy rate by 200 basis points in November 2015 to 27 percent by authorities).
- Consequences:
  - Relaxation of monetary stance added pressure on the kwacha.
  - Cut aimed to stimulate real economy by reducing nominal lending rates but created a large gap between policy rate and market rates.

### Financial sector effects, vulnerabilities, and stress-test findings
- Balance-sheet and credit risks:
  - 2012 devaluation impacted bank balance sheets.
  - Fiscal imbalances after “cashgate” transmitted to private sector via domestic payment arrears, higher interest rates, and exchange rate volatility.
  - Non-performing loans (NPLs) trebled to about 15 percent since mid-2012.
  - Net interest margins significantly higher than neighboring countries.
- Stress-test summary (IMF–RBM tests):
  - Credit risk: system resilient to a moderate shock increasing NPLs uniformly; a major shock would push four banks and the whole system below the tier 1 CAR of 10 percent.
  - Concentration risk: aggregate tier 1 CAR would fall below 10 percent following a default of the first largest borrower in each bank; ten out of eleven banks would fall below prudential capital requirement if their first two largest borrowers defaulted.
  - Liquidity risk: banks largely resilient, but survival period of all banks would be less than one week in case of a major deposit run.
  - Market risks: aggregate resilience to interest rate and foreign exchange risks, though a major FX shock would leave two banks below prudential standard.
  - Income risk: combined major shock to net interest and foreign exchange income would lower system tier 1 CAR below 10 percent.
- Authorities’ mitigation views:
  - Higher capital requirements, improving credit assessments, higher provisioning, and bank mergers identified as key mitigants.
- Policy implications:
  - Continued stress testing, enhanced supervision, enforcing compliance with prudential norms, strengthening creditor rights, reducing judicial delays in collateral recovery, and strengthening resolution framework and crisis contingency planning recommended.

### PFM reforms — achievements and priorities (Box 3)
- Operational and IT achievements:
  - 139 dormant bank accounts at RBM closed and balances transferred to main operating account (MG1); an additional 265 dormant accounts submitted for review.
  - Main government bank accounts incorporated into IFMIS and backlog of all transactional data for 2014/15 captured.
  - Procurement of additional servers and network upgrade; IFMIS security officer appointed.
  - Controlling Officers mandated to ensure commitments and payments do not exceed released funds; independent audit committees instituted; treasury inspectors introduced in ministries (in process).
- Medium-term fiscal priorities:
  - Fiscal anchor: primary fiscal balance to place domestic debt on a gradual declining path and limit non-concessional borrowing.
  - Overall deficit projected to decline from a peak of about 6 percent of GDP in FY14/15 to 2.5 percent of GDP in FY18/19.
  - FY14/15: wage bill, interest payments, pensions, and FISP account for about 75 percent of domestic revenues; wage bill equals 35 percent of revenues.
  - FISP reform: lower subsidy rate from 97 percent to 79 percent; staff model indicates reform yields about one percent of GDP in savings but reduces pro-poor spending; recommended partial use of savings to increase cash transfers with net savings in range of 0.3–0.5 percent of GDP.
  - Revenue mobilization: target increase domestic revenues by 1–1½ percent of GDP via VAT compliance, audits of large taxpayers, broaden tax base (telecoms, mining, property), and modernize tax administration.
  - Public sector pensions: fully funding current accrued liabilities would require assets exceeding 60 percent of GDP; recommended revisiting scheme and adjusting parameters per IMF technical assistance.
- Debt sustainability and monitoring:
  - External debt at moderate risk of distress; public and publicly guaranteed external debt-to-GDP NPV expected to follow declining trend.
  - A debt monitoring committee established to oversee debt management.

### Macroeconomic projections and selected statistics (values as presented)
- GDP and inflation (Text Table 2 / macro table):
  - Real GDP growth: 3.0 (2015); projected to rise to 4.5 (2016) and about 5.5 over the medium term.
  - Consumer prices (annual average): 23.8 (2014), 21.9 (2015 est.), 19.8 (2016 proj.), 11.8 (2017 proj.), 8.8 (2018 proj.).
  - Consumer prices (end of period): 24.2 (2014), 25.4 (2015 est.), 13.6 (2016 proj.), 9.3 (2017 proj.), 8.2 (2018 proj.).
- External and fiscal indicators (selected):
  - External current account deficit: -8.1 (2014), -7.9 (2015 est.), expected to remain near -7.8 to -7.7 over 2016–2018.
  - Total public debt (percent of GDP): 41.5 (2014), 48.0 (2015 est.), 45.1 (2016 proj.), 42.3 (2017 proj.), 41.4 (2018 proj.).
  - Gross official reserves (months of imports): 3.2 (2014), 3.6 (2015 est.), 3.6 (2016 proj.), 3.7 (2017 proj.), 3.7 (2018 proj.).
  - Policy rate and monetary aggregates: policy rate increased by 250 basis points to 25 percent in November 2014; RBM raised policy rate by 200 basis points in November 2015 to 27 percent (authorities’ statement).
- Detailed macro table entries (2014–2018 Est./Proj.) preserved as presented in the source (including nominal GDP, GDP deflator, reserve money, money and quasi-money, exports/imports in US$ millions, balance of payments items, external debt indicators, and banking system soundness metrics).

### Banking system soundness and ratios (selected)
- Regulatory Tier 1 capital to risk weighted assets (percent) time series includes: 16.5 (Dec-11), 16.2 (Jun-12), 16.4 (Dec-12), 16.1 (Jun-13), 16.2 (Dec-13), 14.8 (Mar-14), 14.9 (Jun-14), 14.2 (Sep-14), 13.5 (Dec-14), 16.1 (Mar-15), 15.0 (Jun-15).
- Non-performing loans to gross loans and advances (percent): 4.1 (Dec-11), 5.5 (Jun-12), 9.4 (Dec-12), 12.6 (Jun-13), 15.4 (Dec-13), 15.9 (Mar-14), 16.1 (Jun-14), 15.6 (Sep-14), 14.9 (Dec-14), 14.8 (Mar-15), 13.8 (Jun-15).
- Personnel expenses to non-interest expenses (series): 39.70; 46.51; 46.00; 46.79; 45.40; 46.9; 45.7; 47.4; 45.1; 49.8; 49.1.
- Liquidity — Liquid assets to deposits and short-term liabilities (series): 43.0; 42.5; 45.4; 48.6; 59.1; 57.1; 57.6; 58.4; 62.4; 64.5; 62.5.
- Total loans to total deposits (series): 70.9; 75.9; 72.4; 64.8; 56.6; 60.1; 62.0; 61.7; 58.3; 60.6; 61.4.
- Liquid assets to total assets (series): 33.4; 32.6; 34.5; 35.6; 43.7; 41.2; 41.4; 41.5; 48.8; 40.5; 43.5.
- Foreign exchange liabilities to total liabilities (series): 7.8; n.a.; 17.9; n.a.; 26.3; n.a.; n.a.; n.a.; ---; ---; 16.1.

### External competitiveness, reserves, and structural constraints
- External competitiveness:
  - Standard exchange rate assessments point to the kwacha roughly in line with fundamentals by end-2014; current account norm estimated at -10.7 percent of GDP for 2014; actual current account slightly below 10 percent implying a very slight undervaluation of about 2 percent.
  - Top three export products (tobacco, sugar, and tea) yielded US$ 763 million (18 percent of GDP) in 2013; manufactured goods exports were US$ 55 million (1.3 percent of GDP).
- Reserve adequacy:
  - Optimal level for precautionary motives estimated at 3.1–6.1 months of next year’s imports (assuming cost of holding reserves 3–5 percent).
  - Reserve coverage at end 2015 expected to improve and exceed 3 months of next year’s imports.
- Structural constraints:
  - Critical bottlenecks: electricity and water reliability, transportation costs, feeder road quality, cost and access to credit.
  - Agriculture vulnerable to climatic shocks and low productivity (low irrigation, high transport costs, insufficient extension services, limited access to credit).
  - Recently completed railway link to Mozambican coast expected to lower transportation costs for exports.

### Data adequacy and statistical issues
- Data provision has shortcomings but is broadly adequate for surveillance.
- NSO rebased nominal GDP from calendar year 2007 to 2010; 2010-based series revised nominal GDP upwards by 29 percent.
  - Revenue-to-GDP ratio in FY2010/11 declined from 24.5 percent to 15.6 percent after rebasing.
  - Public debt-to-GDP in 2011 fell by 12 percentage points to 28.1 after rebasing.
- Key data gaps and weaknesses:
  - Government finance statistics: sizeable statistical discrepancy between above and below the line data; tax revenue data not always reconcilable; nontax revenue not properly accounted for.
  - Monetary and financial statistics: irregular reporting, lack of reporting authority over other institutions, ODCs’ source data quality constraints.
  - External sector: need to adopt BPM6; balance of payments section understaffed; weaknesses in FDI and portfolio flow data.
- Participation in data standards:
  - Malawi participating in GDDS/PRSP; GDDS metadata posted on DSBB since February 2007.
  - Data ROSC published on February 17, 2005.

### Authorities’ views and statement highlights
- Authorities reiterated commitment to restoring macroeconomic stability, reducing poverty and attaining sustainable and inclusive growth.
- Fiscal and PFM actions:
  - Corrective measures and expenditure cuts in first half of 2015–16 to partly offset slippages; further cuts tabled for Mid-Term Budget Review in February 2016.
  - Comprehensive payroll audit underway to eliminate ghost workers; payment of salaries contingent on submission of documentation (Staff Returns).
  - PFM progress: rationalization of government bank accounts; incorporation of main accounts into IFMIS; plan to process backlog of bank reconciliations by private accountants and auditors.
  - From January 2016, monthly funding to MDAs contingent on submission of Expenditure Returns; Revenue Returns; Commitment Returns; Bank Reconciliation returns; and Staff Returns.
- Monetary and exchange rate policy:
  - RBM raised policy rate by 200 basis points in November 2015 to 27 percent to tame inflation and committed to exchange rate flexibility with limited interventions.
  - RBM views aligning policy rate with Treasury bill rates is not a daily operational objective given market structure.
- Financial sector and structural reforms:
  - Migration to Basel II in January 2014; two weak banks sold and recapitalized.
  - RBM introduced new provisioning directives; NPLs decreased from 16 percent in June 2014 to 14 percent in June 2015.
  - Reforms to guarantee security of fuel supply (NOCMA participation, dry port concept, fuel bulk procurement) while maintaining automatic fuel pricing mechanism.
  - Greenbelt Initiative and Shire Valley Irrigation Project noted as investment priorities.
  - One stop investment window at the Malawi Investment and Trade Centre (MITC) established.

### Staff appraisal — macrofinancial context and priorities
- Policy slippages and adverse shocks prevented Malawi from achieving sustained growth and low inflation; restoring macroeconomic stability is the most critical near-term priority.
- Recommendations:
  - Tighter fiscal policy to support monetary stance aimed at placing inflation on a downward trajectory.
  - Accelerated implementation of PFM reforms: greater commitment control, completion of bank reconciliations, restoration of basic fiscal reporting to foster donor re-engagement.
  - Greater revenue mobilization: collections from new revenue sources, strengthen compliance, modernize tax administration.
  - Improve expenditure efficiency to create fiscal space and protect social spending; revisit pension reforms to safeguard fiscal sustainability.
  - Preserve flexible exchange rate regime and automatic fuel pricing mechanism; ensure transparency and stakeholder consultation for any fuel import regime changes.
  - Continuous vigilance on financial sector given concentration risk as most important threat to stability.

*Source: MALAWI STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (IMF, November 30, 2015).*

### 24.5 percent, respectively.

### MALAWI: STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION

### Context and key issues
- Persistent macroeconomic problems stem from uneven policy implementation, high inflation, and a weak external position financed by volatile donor inflows.
- The “cashgate” scandal (large-scale theft of public funds in 2013) removed 4½ percent of GDP in budget support and contributed to fiscal imbalances.
- Program implementation under the Extended Credit Facility (ECF) was put off track by policy slippages and external financing shortfalls; all PFM-related structural benchmarks were missed while some financial-sector-related benchmarks made good progress.
- Recent policy reforms in mid-2012 included: devaluation, adoption of a floating exchange rate regime, liberalization of foreign exchange markets, and introduction of an automatic fuel price adjustment mechanism.

### Recent developments and macroeconomic indicators
- Weather shocks: Heavy floods in early 2015 followed by drought resulted in an estimated decline of about 30 percent in the maize harvest (the main staple).
- Growth: Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015. Growth is projected to rise gradually to about 5.5 percent over the medium term.
- Food insecurity: An estimated 2.8 million persons remain at risk of food insecurity (about 16 percent of the population).
- Inflation:
  - Annual inflation declined by 6 percentage points from end-2014 to 18 percent in March 2015 due to tight monetary policy, currency appreciation, and lower international fuel prices.
  - Inflation rose sharply to 24 percent at end-September 2015, led by rising food prices and a sharp depreciation of the kwacha.
  - Inflation is expected to rise to 25.4 percent at end-2015 and is estimated to ease in 2016 and reach single digits at end-2017 if fiscal and monetary policies tighten and international prices for food and petroleum products remain low.
- Exchange rate and reserves:
  - The kwacha depreciated 30 percent against the U.S. dollar (regionally similar behavior among commodity-dependent currencies).
  - The central bank responded with directives and foreign exchange sales to slow depreciation.
- Monetary policy and banking:
  - The policy rate was raised by 250 basis points to 25 percent in November 2014.
  - A directive required that the current liquid reserve requirement (15.5 percent) be imposed on the foreign currency deposit equivalent in local currency.
  - Growth in credit to the private sector—negative in real terms—continued its downward trend.
- External sector:
  - The external current account deficit is estimated to have narrowed to about 8 percent of GDP in 2014 (from 8.7 percent in 2013).
  - Over the medium term the external current account deficit is expected to remain in the 8 percent range reflecting demand for imports associated with developmental projects, rapid population growth, and slow export diversification.

### Executive Board assessment and risks
- Executive Directors expressed concern about policy slippages that prevented Malawi from achieving sustained growth and low inflation.
- Downside risks to the outlook include:
  - Continued weather-related supply shocks.
  - Interruption of donor budget support.
  - Weaker global demand which could hurt Malawi’s exports.
- Directors emphasized restoration of macroeconomic stability as a critical near-term priority, underscoring fiscal consolidation and tighter monetary policy.

### Policy recommendations and priorities
- Near-term priorities:
  - Restore macroeconomic stability through fiscal consolidation and tighter monetary policy to place inflation on a declining trend.
  - Accelerate implementation of public financial management (PFM) reforms to re-establish trust and confidence in the budget process and foster donor re-engagement.
  - Maintain the flexible exchange rate regime and the automatic fuel pricing mechanism as shock absorbers; ensure transparency and safeguards if the fuel import regime changes to involve a greater role for the state-owned company.
  - Intensify efforts to enhance financial sector resilience given credit and concentration risks to banking system stability.
- Medium-term priorities:
  - Safeguard macroeconomic stability while improving the quality of public spending and protecting social spending.
  - Improve revenue mobilization: broaden the tax base, strengthen tax compliance, and modernize tax administration to reduce aid dependence.
  - Improve allocation and targeting of public spending; avoid making public sector pensions fiscally untenable.
  - Implement structural reforms to remove supply bottlenecks, increase agricultural productivity, and improve the business environment.

### Projections and selected statistics (as reported)
- Real GDP growth: projected to fall to 3 percent in 2015; projected to rise gradually to about 5.5 percent over the medium term.
- GDP decline drivers: estimated decline of about 30 percent in the maize harvest in 2015.
- Food insecurity: an estimated 2.8 million persons at risk.
- Inflation: expected to rise to 25.4 percent at end-2015; estimated to reach single digits at end-2017 under tighter policies and low international food and petroleum prices.
- External current account deficit: expected to remain in the 8 percent range over the medium term.
- Exchange rate movement: kwacha depreciated 30 percent against the U.S. dollar.
- Monetary policy: policy rate increased by 250 basis points to 25 percent in November 2014; liquid reserve requirement at 15.5 percent applied to foreign currency deposit equivalents.

*Source: MALAWI STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (IMF, November 30, 2015).*

### 6.      Fiscal slippages (2 percent of GDP) emerged during FY14/15. These arose in large part

### 6. Fiscal slippages (2 percent of GDP) emerged during FY14/15. These arose in large part

### Fiscal slippages: causes and magnitude
- Overall fiscal slippages: 2 percent of GDP in FY14/15.
- Main contributors to the slippages:
  - Unplanned recruitment of 10,500 teachers and the granting of unbudgeted wage increases (1¼ percent of GDP).
  - Revenue shortfalls (½ percent of GDP).
  - Shortfalls in external flows (1 percent of GDP).
- Text Table 1 (IMF staff estimates) — selected figures (as presented):
  - Tax revenue shortfalls 180.6 (Billions of MWK)
  - External financing shortfalls 270.9 (Billions of MWK)
  - Wage bill 341.2 (Billions of MWK)
  - Interest expense 100.4 (Billions of MWK)
  - Corrective measures:
    - One-off revenues -10                -0.4
    - Subsidies and transfers -6                -0.2
    - Capital spending (domestic) -10                -0.4
    - Other -6                -0.2
  - Net domestic financing 572.0 (Billions of MWK)

- Character of corrective actions:
  - Inadequate and less than ideal: an equal mix of one-off revenue measures and expenditure cuts.
  - Potential adverse implications for medium-term growth and poverty reduction.

### Monetary developments and implications
- Reserve Bank of Malawi actions and liquidity effects:
  - Cut in the liquid reserve ratio (LRR) from 15.5 percent to 7.5 percent in July 2015.
  - Excess banking system liquidity rose by about 1¼ percentage points of GDP as a result.
  - Policy rate remained unchanged at that time.
  - Short-term market interest rates and returns on government securities fell sharply and became negative in real terms.
  - Sterilization efforts later absorbed the excess liquidity.
  - The RBM increased the policy rate by 200 basis points in early November.
- Consequences for the kwacha and credit:
  - Relaxation of monetary stance added to pressure on the kwacha.
  - The cut aimed to stimulate the real economy by reducing nominal lending rates, but created a large gap between the policy rate and market rates.

### Financial sector effects and vulnerabilities
- Balance-sheet and credit risks:
  - The 2012 devaluation of the kwacha impacted bank balance sheets.
  - Fiscal imbalances after the “cashgate” scandal transmitted to the private sector via domestic payment arrears, higher interest rates, and exchange rate volatility.
  - Non-performing loans (NPLs) trebled to about 15 percent since mid-2012.
  - Net interest margins are significantly higher than neighboring countries (Figures 3 and 4).
- Other financial-sector strains:
  - Weak economic activity contributed to pension contribution payment difficulties for some companies.
  - Some insurance companies reported arrears in collection of rental income from government.
  - Several banks face high concentration risk due to limited numbers of large creditworthy customers.
  - RBM reduced vulnerabilities by selling two weak banks with significant state-shareholding, which are being recapitalized.

### Rebasing of GDP and implications
- National Statistical Office (NSO) rebased nominal GDP from calendar year 2007 to 2010.
- The 2010-based national supply and use table produced a new GDP series, revised upwards by 29 percent.
- Key indicator changes:
  - Revenue-to-GDP ratio in FY2010/11 declined from 24.5 percent to 15.6 percent.
  - Public debt-to-GDP in 2011 fell by 12 percentage points of GDP to 28.1.
- Implications:
  - Lower debt ratios provide additional fiscal space.
  - Revised revenue ratios underline scope for increased revenue mobilization.

### Economic outlook and risks (selected excerpts and projections)
- Outlook caveats: projections assume policy actions to reduce inflation, limited budget support (½ percent of GDP in FY15/16) pending full donor re-engagement, normalization of weather conditions, and implementation of the structural reform agenda.
- Narrative projections:
  - Growth: expected to pick up to 4.5 percent in 2016, rising to about 5½ percent over the medium term (within the range of the average over the last 10 years), conditional on recovery in agriculture, construction, wholesale and retail sectors.
  - Credit to the private sector: projected to pick up over the medium term as inflation falls to single digits.
  - Inflation: projected to be higher than expected due to supply shock and lagged effects of looser-than-expected macroeconomic policies; expected to ease in 2016 as policy tightens and international food and petroleum prices fall.
  - External current account deficit: will remain in the 8 percent range over the medium term.
  - Short-term risks: tilted to the downside — looming food crisis (worst in last 10 years), El Niño (worst in last 35 years), lower global demand, continued slippages in macroeconomic policy implementation.
- Authorities’ view: flexible exchange rate and automatic fuel pricing mechanism should serve as shock absorbers.

- Text Table 2. Macroeconomic Outlook (as presented in the source — values preserved verbatim)
  - GDP at constant market prices5.73.04.55.25.5
  - Consumer prices (annual average)23.821.919.811.88.8
  - Overall balance (including grants), on a fiscal year basis-6.1-5.7-3.8-2.5-2.8
  - Credit to the private sector (percent change)20.015.116.518.619.5
  - Gross official reserves (months of imports)3.23.63.63.73.7
  - Current account (percent of GDP)-8.1-7.9-7.8-7.8-7.7
  - Total public debt (percent of GDP)41.548.045.142.341.4
  - (Row labels showing years: 2014 2015 2016 2017 2018 Est. Proj. appear in the source.)

### Policy discussions — priorities and recommended actions
- Near-term priorities:
  - Restore macroeconomic stability by implementing tight fiscal and monetary policies to place inflation on a declining trajectory.
  - Accelerate implementation of priority PFM reforms to re-establish trust and confidence in the budget process.
- Rationale for tight fiscal policy:
  - Sudden stop in donor budget support in 2013 opened a large financing gap; inadequate fiscal adjustment led to increased domestic financing (cumulative 7½ percent of GDP in FY13/14 and FY15/16).
  - Increases in the wage bill in FY14/15 without offsets strengthened private sector perceptions of persistent domestic financing, hurting growth and investment.
- Revised FY15/16 budget:
  - Pending adoption of a revised budget is critical given the changed macroeconomic outlook and carryover effects from fiscal slippages.
  - The revised budget addresses a financing gap of about one percent of GDP in FY15/16.
  - It is based on realistic revenue estimates, proposes cuts in domestically financed investment and goods and services, limits net domestic financing (¾ percent of GDP), takes into account donors’ financial assurances, and safeguards social spending.
- Monetary policy guidance:
  - An appropriately tight monetary policy is needed to achieve positive short-term real interest rates.
  - RBM has sufficient instruments for effective liquidity management provided fiscal policy is supportive.
  - Clear communication of monetary stance and close monitoring of all forms of lending to government are recommended.
  - RBM should remain within limits fixed by the recently enacted amendments to the Central Bank Act.

### Public financial management (PFM) reforms and actions
- Status and issues:
  - Progress on priority PFM reforms has been slow; bank reconciliations have not been successfully completed.
  - Weaknesses in cash management and financial reporting persist; a huge backlog of transactions remains.
  - Bank reconciliations are critical to identifying and preventing misappropriation of public funds and to reviving donor re-engagement.
  - Stronger commitment control is needed to mitigate domestic payment arrears and keep domestic financing within budgeted amounts.
- Actions under way:
  - Initiatives to improve the Integrated Financial Management System (IFMIS) and strengthen the budgetary process have been undertaken.
  - A taskforce comprising the accountant general and RBM staff meets weekly to validate and clear the backlog.
  - A high-level committee chaired jointly by the Secretary to the Treasury and the RBM Governor is scheduled to meet monthly to review progress and facilitate reconciliation.
- Governance and accountability:
  - Need for regular oversight, accountability, and application of sanctions on public sector officials in accordance with the PFM Act if they fail to carry out responsibilities.

_Italic: Source — IMF staff report content (Malawi)._

### Box 3. Recent Achievements in PFM Reforms

### Box 3. Recent Achievements in PFM Reforms

### Recent operational and IT achievements in PFM
- Rationalization of government bank accounts at the RBM:
  - 139 dormant bank accounts at RBM have been closed and their balances transferred to government’s main operating account (MG1).
  - An additional 265 dormant bank accounts at RBM have been submitted to the accountant general for review.
- IFMIS coverage and transactional data:
  - The main government bank accounts have been incorporated into the IFMIS and the backlog of all transactional data for 2014/15 has been captured.
  - Payments of budgeted expenditure that are generated outside of the IFMIS have been reduced.
  - Ultimate goal: integrate all bank accounts into the IFMIS to improve the accounting and control of public resources.
- Hardware, network, and security upgrades:
  - Procurement of additional servers and a network upgrade have increased processing speed and reduced downtime, which will help accelerate bank reconciliations.
  - An IFMIS security officer has been appointed to manage system security and provide security training.
- Strengthening financial discipline within spending units:
  - Controlling Officers mandated to ensure commitments and payments do not exceed released funds; provide cash flow forecasts; perform timely bank reconciliations; submit annual financial statements timely for audit; and certify monthly financial statements.
- Measures to foster budget control and transparency:
  - Independent audit committees instituted to review audit matters from internal and external auditors.
  - Introduction of treasury inspectors in ministries to oversee budget planning, monitoring and evaluation (in process).

### Key priorities over the medium term — Ensuring medium-term fiscal sustainability
- Fiscal anchor and deficit path:
  - Medium-term fiscal anchor comprises a primary fiscal balance that places domestic debt on a gradual declining path and limits non-concessional borrowing.
  - Overall deficit projected to decline from a peak of about 6 percent of GDP in FY14/15 to 2.5 percent of GDP in FY18/19.
- Allocation of public spending and expenditure rigidities:
  - In FY14/15, wage bill, interest payments, pensions, and outlays on the farm input subsidy program (FISP) account for about 75 percent of domestic revenues.
  - Wage bill equals 35 percent of revenues and has contributed to worsening expenditure rigidities and crowding out domestically financed capital spending.
  - Authorities conducting a comprehensive payroll audit to eliminate ghost workers.
  - Travel allowances cut by more than 25 percent in FY15/16 budget relative to the previous year.
- FISP review and expected savings:
  - Authorities intend to lower the subsidy rate from 97 percent to 79 percent and reduce procurement costs.
  - Staff model indicates the reform would yield about one percent of GDP in savings but would reduce pro-poor spending and adversely impact income inequality.
  - Staff recommended using part of savings to increase cash transfers to mitigate negative impacts on the poor; net savings would be in the range of 0.3–0.5 percent of GDP.
- Revenue mobilization target and measures:
  - Authorities should aim to increase domestic revenues (1–1½ percent of GDP) over the medium term to fully cover current spending.
  - Required measures: strengthen VAT compliance, increase audits of large taxpayers, broaden the tax base (telecoms, mining, and property taxes), and modernize tax administration through increased computerization.
- Public sector pension scheme sustainability:
  - Fully funding the public sector pension scheme is fiscally untenable and should be revisited.
  - Meeting accrued liabilities would require assets exceeding 60 percent of GDP and debt issuance of such magnitude could not be accommodated by Malawi’s capital markets.
  - Recommended focus: reduce liabilities of the current system by adjusting parameters in line with IMF technical assistance recommendations.

### Preserving debt sustainability
- External debt risk and outlook:
  - External debt remains at moderate risk of distress.
  - Staff update: public and publicly guaranteed external debt-to-GDP ratio in NPV terms expected to follow a declining trend, consistent with the previous WB/IMF DSA (March 2015).
  - GDP rebasing pushed some debt indicators (including the baseline scenario debt-to-GDP ratio) below thresholds.
- Institutional measure:
  - A debt monitoring committee has been established to oversee debt management and identify risks from rapid debt accumulation and external shocks.

### Improving monetary policy conduct and exchange rate framework
- Monetary policy objectives and instruments:
  - Price stability should be the primary objective of monetary policy over the medium term.
  - RBM currently operates a reserve money program and publicly announces the policy rate.
  - Staff recommendation: active use of open market operations to align short-term market rates with the policy rate to build credibility and strengthen the monetary transmission mechanism.
- Strengthening forecasting and liquidity management:
  - Need to strengthen RBM capacity to forecast economic activity and inflation to make policy more forward-looking.
  - Active management of short-term liquidity is needed to develop the interbank market and improve monetary transmission.
- Exchange rate assessment and recommendations:
  - Flexible exchange rate regime has helped address structural balance of payments problems.
  - Real appreciation in 2014 by 8 percent; staff assessment suggests the real exchange rate is broadly in line with fundamentals at end-2014.
  - Staff urged review and amendment of recent foreign currency directives, especially provisions that potentially impede price discovery and the functioning of the foreign exchange market.
- Authorities’ stance:
  - Authorities committed to allowing the exchange rate to be market determined and intend to conduct only limited foreign exchange interventions to dampen market volatility.
  - RBM view: treasury bill rates are determined by supply and demand; aligning the policy rate with treasury bill rates is not a daily operational objective given market structure. As inflation decelerates, RBM foresees potential movement toward greater alignment.

### Promoting higher and sustained growth
- Structural constraints to growth:
  - Critical supply-side bottlenecks: availability and reliability of electricity and water supply, transportation costs, quality of feeder roads, and cost and access to credit.
  - Agriculture is the engine of growth but remains vulnerable to climatic shocks and low productivity due to low irrigation, high transport costs along the value chain, insufficient extension services, and limited access to credit.
  - Recently completed railway linking Malawi to the Mozambican coast expected to lower transportation costs for exports.
- Fuel supply and pricing:
  - Reliability of fuel supply and the automatic fuel pricing mechanism are critical.
  - Need to clarify the fuel import regime among regulator, state, and private suppliers to avoid supply disruption.
  - If reform increases the role of the state-owned oil company, governance safeguards are needed to mitigate contingent liabilities.
- Business environment:
  - Non-price factors (access to financing, corruption, crime and theft, tax rates, and inflation) are major constraints to doing business.
  - Malawi’s rankings in the World Bank’s Doing Business Indicators and World Economic Forum’s Global Competitiveness Report have continuously deteriorated.
  - Authorities agree on need to improve efficiency of government spending, mobilize revenues, identify new revenue sources, strengthen compliance, and migrate to a computerized tax administration.

### Economic statistics
- Data adequacy and improvements needed:
  - Provision of economic data has shortcomings but is broadly adequate for surveillance.
  - Scope to improve coverage of financial accounts in the balance of payments and consistency of source data in government financial statistics.
  - More detailed monthly CPI data could serve as an important input to monetary policy formulation.

### Enhancing financial stability and the financial sector’s role in inclusion and growth
- Macro-financial spillovers and risks:
  - Policy slippages and inadequate fiscal adjustment can lead to accumulation of domestic payment arrears to private suppliers, increasing firms’ and banks’ nonperforming loans and creating feedback loops to fiscal and real sectors.
  - Volatile tobacco export receipts and erratic maize harvests are additional risk sources amplified by exchange rate volatility.
  - At end-2014 government securities comprised 24 percent of banks’ assets.
- Financial sector depth and inclusion trends:
  - Financial depth and inclusion increased steadily through 2012 but have since stagnated amid persistently high inflation.
  - Access to formal financial services increased from 26 percent of adults in 2008 to 40 percent in 2014, but remains concentrated in urban areas; 50 percent of adult population in rural areas remain un-served.
  - Malawi lags peers on standard metrics of financial sector depth, underscoring the need to restore macroeconomic stability, improve financial infrastructure, and foster greater financial literacy.

*Source: _cr15345 - Box 3. Recent Achievements in PFM Reforms*

### 37.      Stress tests confirmed that credit risk stemming from high exposure to large

### _cr15345 - 37.      Stress tests confirmed that credit risk stemming from high exposure to large

### Key stress-test findings
- Credit risk stemming from high exposure to large borrowers poses a significant threat to the banking system (Box 4; Selected Issues).
- Globally, the banking system would be resilient to an increase in NPLs as well as liquidity and market risks.
- Concentration risk arising from exposure to large borrowers represents the largest source of credit risk.
- The system is not robust to a combined major shock to net interest and foreign exchange income which would lower the tier 1 capital ratio below the norm of 10 percent.

Box 4. Banking Sector Stress Tests (summary of IMF–RBM stress tests)
- Framework:
  - RBM’s stress testing framework draws on the Cihak (2007) model and considers four categories of risks: credit, liquidity, market (interest and foreign exchange risks), and income risks.
  - Results are published semi-annually.
  - IMF staff in collaboration with RBM staff conducted stress tests modified by a stronger assumption on provisioning for new NPLs.
- On credit risk:
  - The banking system is resilient to a moderate shock that increases NPLs uniformly across banks.
  - A major shock would push four banks and the whole banking system below the tier 1 capital adequacy ratio (CAR).
  - The banking system is also resilient to differentiated sectoral increases in NPLs even in the case of a major shock doubling NPLs in the five key sectors.
  - Banks are highly exposed to concentration risk. The aggregate tier 1 CAR would fall below the benchmark of 10 percent following a default of the first largest borrower in each bank.
  - Ten out the eleven banks will fall below the prudential capital requirement in case of default by their first two largest borrowers.
- On liquidity risk:
  - Banks are largely resilient to liquidity risks.
  - The survival period of all banks would be less than one week in case of a major deposit run.
- On market risks:
  - In aggregate, banks are resilient to interest rate and foreign exchange risks.
  - A major foreign exchange shock, however, would leave two banks with a tier 1 CAR below the current prudential standard.
- On income risk:
  - Banks were found to be quite sensitive to a combined shift in net interest income and foreign currency income.
  - The system’s tier 1 CAR would fall below 10 percent norm in the event of a major shock and the tier 1 capital ratios of three banks would fall below the prudential norm in case of a minor shock.

### Authorities’ views
- The authorities agreed that a sound banking system and restoring macroeconomic stability were critical to fostering financial inclusion.
- The authorities recognized that credit risk and particularly concentration risk from exposure to large borrowers remain the largest threat to financial sector stability.
- They underscored that concentration risk will remain a feature of the financial system given the role of large conglomerates in the economy and limited access to both long-term external and domestic financing.
- Going forward, the authorities noted that higher capital requirements, improving credit assessments, higher provisioning, and bank mergers were key to mitigating these risks.

### Policy implications and recommended actions
- Continuous vigilance is warranted to ensure appropriate and timely responses to potential adverse developments in the financial sector and to minimize their economic and fiscal costs.
- Need for continued stress testing, enhancing supervision, and enforcing compliance with prudential norms.
- Strengthening creditor rights and reducing lengthy judicial processes in recovering collateral are critical to the reduction of NPLs.
- The introduction of new provisioning directives is a welcomed step in addressing low provisioning rates.
- Given the economy is prone to large shocks, concentration risk linked to exposure to large borrowers and its implications for liquidity requires:
  - Crisis contingency planning.
  - Strengthening the resolution framework for financial institutions in order to minimize costs in the event of insolvency.

### Staff appraisal — macrofinancial context and priorities
- Policy slippages and adverse shocks have prevented Malawi’s achievement of sustained growth and low inflation under the authorities’ growth and development strategy.
- Growth remained below that of sub-Saharan Africa, while inflation persisted in double digits.
- Restoring macroeconomic stability is the most critical near term priority.
  - Inflation has been stuck above 20 percent since 2012; tighter fiscal policy is needed to support a monetary policy stance aimed at placing inflation on a downward trajectory.
  - Reducing inflation will necessitate the implementation of a credible budget in line with sustainable financing and a reprioritization of expenditures whilst safeguarding social spending.
- Accelerated implementation of PFM reforms is indispensable to restoring trust and confidence in the budget process:
  - Greater commitment control to contain voted expenditures to available resources.
  - Completion of bank reconciliations and the restoration of basic fiscal reporting to foster donor re-engagement.
- Greater revenue mobilization is key:
  - Increase collections from new revenue sources, strengthen compliance, and modernize tax administration.
- Improving expenditure efficiency will create fiscal space and safeguard quick wins in health and education:
  - Authorities commended for initiating reforms to the farm input subsidy program and implementing a payroll audit to eliminate ghost workers.
  - Authorities should raise cash transfers to reduce adverse impacts of the subsidy reform on the poor.
- Pension reforms should be revisited to safeguard fiscal sustainability given sizable accrued liabilities and limited capital market absorption capacity.
- The flexible exchange rate regime and the automatic fuel pricing mechanism have served Malawi well; any changes to the fuel import regime should be fully transparent and include consultations with all stakeholders to avoid growth-damaging disruptions in supply.
- Mitigating policy slippages would reduce spillovers to the real and financial sectors; continuous vigilance is urged given recent shocks and concentration risk as the most important threat to financial sector stability.

*Source: _cr15345 - 37.*

### 48.      It is proposed that the next Article IV Consultation be held in accordance with

### _cr15345 - 48.      It is proposed that the next Article IV Consultation be held in accordance with

### Macroeconomic outlook and prices
- Real GDP growth (percent change): 1.9 (2012), 5.2 (2013), 5.7 (2014), 3.0 (2015 est.), 4.5 (2016 proj.), 5.2 (2017 proj.), 5.5 (2018 proj.).
- Nominal GDP (billions of Kwacha): 1,502 (2012), 2,011 (2013), 2,570 (2014), 3,198 (2015 est.), 3,933 (2016 proj.), 4,564 (2017 proj.), 5,190 (2018 proj.).
- GDP deflator (percent change): 17.7 (2012), 27.3 (2013), 20.9 (2014), 20.8 (2015 est.), 17.7 (2016 proj.), 10.3 (2017 proj.), 7.8 (2018 proj.).
- Consumer prices (end of period): 34.6 (2012), 23.5 (2013), 24.2 (2014), 25.4 (2015 est.), 13.6 (2016 proj.), 9.3 (2017 proj.), 8.2 (2018 proj.).
- Consumer prices (annual average): 21.3 (2012), 28.3 (2013), 23.8 (2014), 21.9 (2015 est.), 19.8 (2016 proj.), 11.8 (2017 proj.), 8.8 (2018 proj.).

### Investment, savings, and external sector
- National savings (percent of GDP): 2.8 (2012), 4.0 (2013), 3.9 (2014), 4.9 (2015 est.), 5.1 (2016 proj.), 5.2 (2017 proj.), 5.4 (2018 proj.).
- Gross investment (percent of GDP): 12.1 (2012), 12.7 (2013), 12.0 (2014), 12.8 (2015 est.), 12.9 (2016 proj.), 13.0 (2017 proj.), 13.1 (2018 proj.).
- Saving-investment balance (percent of GDP): -9.3 (2012), -8.7 (2013), -8.1 (2014), -7.9 (2015 est.), -7.8 (2016 proj.), -7.8 (2017 proj.), -7.7 (2018 proj.).
- Current account (percent of GDP): -9.3 (2012), -8.7 (2013), -8.1 (2014), -7.9 (2015 est.), -7.8 (2016 proj.), -7.8 (2017 proj.), -7.7 (2018 proj.).
- Current account excl. official transfers (percent of GDP): -12.3 (2012), -10.0 (2013), -8.1 (2014), -8.3 (2015 est.), -8.0 (2016 proj.), -7.8 (2017 proj.), -7.6 (2018 proj.).

### Central government fiscal position (fiscal year basis)
- Revenue (percent of GDP): 18.7 (2012/13), 27.5 (2013/14), 22.8 (2014/15), 21.4 (2015/16 est./budget), 22.4 (2016/17 proj.), 22.2 (2017/18 proj.), 22.5 (2018/19 proj.).
- Tax and nontax revenue (percent of GDP): 15.6 (2012/13), 17.3 (2013/14), 19.7 (2014/15), 18.6 (2015/16 est./budget), 18.5 (2016/17 proj.), 18.6 (2017/18 proj.), 18.9 (2018/19 proj.).
- Grants (percent of GDP): 3.1 (2012/13), 10.2 (2013/14), 3.1 (2014/15), 2.8 (2015/16 est./budget), 3.9 (2016/17 proj.), 3.5 (2017/18 proj.), 3.6 (2018/19 proj.).
- Expenditure and net lending (percent of GDP): 23.5 (2012/13), 28.5 (2013/14), 28.9 (2014/15), 27.1 (2015/16 est./budget), 26.2 (2016/17 proj.), 24.7 (2017/18 proj.), 25.3 (2018/19 proj.).
- Overall balance (excluding grants, percent of GDP): -7.9 (2012/13), -11.2 (2013/14), -9.2 (2014/15), -8.5 (2015/16 est./budget), -7.7 (2016/17 proj.), -6.1 (2017/18 proj.), -6.4 (2018/19 proj.).
- Overall balance (including grants, percent of GDP): -4.8 (2012/13), -1.0 (2013/14), -6.1 (2014/15), -5.7 (2015/16 est./budget), -3.8 (2016/17 proj.), -2.5 (2017/18 proj.), -2.8 (2018/19 proj.).
- Foreign financing (percent of GDP): 1.1 (2012/13), 1.9 (2013/14), 2.0 (2014/15), 2.5 (2015/16 est./budget), 3.1 (2016/17 proj.), 2.2 (2017/18 proj.), 2.8 (2018/19 proj.).
- Domestic financing (percent of GDP): 4.7 (2012/13), -0.1 (2013/14), 4.2 (2014/15), 3.3 (2015/16 est./budget), 0.7 (2016/17 proj.), 0.3 (2017/18 proj.), 0.1 (2018/19 proj.).

### Central government fiscal levels (billions of Kwacha, selected)
- Revenue (billions of Kwacha): 472 (2015/16 est.), 511 (2016/17 actual), 610 (2017/18 actual), 763 (2018/19 budget), 792 (2019 proj.), 936 (2020 proj.), 1,092 (2021 proj.), 1,244 (2022 proj.).
- Tax and nontax revenue (billions of Kwacha): 297 (2015/16 est.), 441 (2016/17 actual), 530 (2017/18 actual), 666 (2018/19 budget), 655 (2019 proj.), 787 (2020 proj.), 919 (2021 proj.), 1,049 (2022 proj.).
- Expenditure and net lending (billions of Kwacha): 489 (2015/16 est.), 647 (2016/17 actual), 773 (2017/18 actual), 930 (2018/19 budget), 928 (2019 proj.), 1,044 (2020 proj.), 1,230 (2021 proj.), 1,387 (2022 proj.).
- Overall balance (including grants, billions of Kwacha): -16 (2015/16 est.), -136 (2016/17 actual), -163 (2017/18 actual), -166 (2018/19 budget), -135 (2019 proj.), -107 (2020 proj.), -138 (2021 proj.), -142 (2022 proj.).

### Monetary aggregates and central bank positions
- Reserve money (billions of Kwacha): 113 (2012), 157 (2013), 212 (2014), 197 (2015), 213 (2016), 275 (2017), 334 (2018 proj.), 383 (2018 proj.), 446 (2018 proj.).
- Annual growth of reserve money (percent): 54.6 (2012), 38.6 (2013), 35.3 (2014), 16.5 (2015), 10.2 (2016), 29.6 (2017), 21.3 (2018 proj.), 14.8 (2018 proj.), 16.4 (2018 proj.).
- Money and quasi-money (billions of Kwacha): 386 (2012), 522 (2013), 630 (2014), 594 (2015), 642 (2016), 830 (2017), 1,007 (2018 proj.), 1,156 (2018 proj.), 1,346 (2018 proj.).
- Annual growth of broad money (percent): 22.9 (2012), 35.1 (2013), 20.7 (2014), 11.9 (2015), 13.8 (2016), 31.8 (2017), 21.3 (2018 proj.), 14.8 (2018 proj.), 16.4 (2018 proj.).
- Net foreign assets of monetary authorities (billions of Kwacha): -20 (2012), 42 (2013), 146 (2014), 174 (2015), 192 (2016), 251 (2017), 346 (2018 proj.), 381 (2018 proj.), 473 (2018 proj.).
- NFA (US$ millions, monetary authorities): -50 (2012), 99 (2013), 310 (2014), 399 (2015), 434 (2016), 433 (2017), 527 (2018 proj.), 540 (2018 proj.), 629 (2018 proj.).
- Gross foreign assets (US$ millions, monetary authorities): 247 (2012), 404 (2013), 588 (2014), 670 (2015), 705 (2016), 683 (2017), 745 (2018 proj.), 781 (2018 proj.), 895 (2018 proj.).
- Money multiplier (memorandum): 3.4 (2012), 3.3 (2013), 3.0 (2014), 3.0 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018 proj.), 3.0 (2018 proj.), 3.0 (2018 proj.).
- 91-day treasury bill rate (end of period): 20.0 (2012), 32.3 (2013), 26.9 (2014), 25.7 (2015), 26.9 (2016).

### Balance of payments and reserves (US$ millions)
- Exports (goods and services): 1,421 (2012), 1,657 (2013), 1,751 (2014), 1,558 (2015 est.), 1,698 (2016 proj.), 1,861 (2017 proj.), 1,943.2 (2018 proj.).
- Imports (goods and services): 2,282 (2012), 2,315 (2013), 2,388 (2014), 2,186 (2015 est.), 2,264 (2016 proj.), 2,452 (2017 proj.), 2,556.0 (2018 proj.).
- Gross official reserves (US$ millions): 236 (2012), 397 (2013), 588 (2014), 683 (2015 est.), 745 (2016 proj.), 772 (2017 proj.), 895.4 (2018 proj.).
- Months of imports (gross reserves, months): 1.2 (2012), 2.0 (2013), 3.2 (2014), 3.6 (2015 est.), 3.6 (2016 proj.), 3.7 (2017 proj.), 3.7 (2018 proj.).
- Balance of payments: Current account balance (US$ millions, including grants): -554.9 (2012), -471.2 (2013), -489.4 (2014), -510.9 (2015 est.), -501.2 (2016 proj.), -525.5 (2017 proj.), -543.9 (2018 proj.).
- Merchandise trade balance (US$ millions): -659.1 (2012), -442.8 (2013), -444.1 (2014), -431.2 (2015 est.), -327.5 (2016 proj.), -377.5 (2017 proj.), -382.4 (2018 proj.).
- Capital account balance (US$ millions): 409.8 (2012), 433.6 (2013), 261.1 (2014), 308.0 (2015 est.), 333.4 (2016 proj.), 353.6 (2017 proj.), 362.3 (2018 proj.).
- Financial account balance (US$ millions): 243.3 (2012), 238.7 (2013), 452.6 (2014), 245.7 (2015 est.), 172.5 (2016 proj.), 207.6 (2017 proj.), 296.2 (2018 proj.).
- Overall balance (US$ millions): 93.3 (2012), 168.6 (2013), 163.7 (2014), 67.7 (2015 est.), 30.9 (2016 proj.), 58.0 (2017 proj.), 140.3 (2018 proj.).

### External and public debt indicators
- External debt (public sector, percent of GDP): 20.1 (2012), 25.5 (2013), 26.6 (2014), 34.0 (2015 est.), 31.7 (2016 proj.), 30.0 (2017 proj.), 30.4 (2018 proj.).
- NPV of external debt (percent of exports): 53.3 (2012), 77.3 (2013), 102.7 (2014), 117.2 (2015 est.), 103.6 (2016 proj.), 89.2 (2017 proj.), 84.9 (2018 proj.).
- Domestic public debt (percent of GDP): 13.8 (2012), 19.8 (2013), 14.9 (2014), 14.0 (2015 est.), 13.4 (2016 proj.), 12.4 (2017 proj.), 11.1 (2018 proj.).
- Total public debt (percent of GDP): 33.8 (2012), 45.3 (2013), 41.5 (2014), 48.0 (2015 est.), 45.1 (2016 proj.), 42.3 (2017 proj.), 41.4 (2018 proj.).
- External debt service (percent of exports): 1.4 (2012), 1.7 (2013), 4.2 (2014), 9.5 (2015 est.), 11.4 (2016 proj.), 9.5 (2017 proj.), 4.9 (2018 proj.).
- External debt service (percent of revenue excl. grants): 2.1 (2012), 2.8 (2013), 6.6 (2014), 12.4 (2015 est.), 16.3 (2016 proj.), 13.6 (2017 proj.), 7.2 (2018 proj.).

### Banking system soundness (selected indicators)
- Regulatory Tier 1 capital to risk weighted assets (percent): 16.5 (Dec-11), 16.2 (Jun-12), 16.4 (Dec-12), 16.1 (Jun-13), 16.2 (Dec-13), 14.8 (Mar-14), 14.9 (Jun-14), 14.2 (Sep-14), 13.5 (Dec-14), 16.1 (Mar-15), 15.0 (Jun-15).
- Regulatory total capital to risk weighted assets (percent): 20.1 (Dec-11), 19.2 (Jun-12), 20.2 (Dec-12), 19.4 (Jun-13), 19.1 (Dec-13), 18.3 (Mar-14), 18.3 (Jun-14), 17.4 (Sep-14), 17.1 (Dec-14), 20.2 (Mar-15), 19.4 (Jun-15).
- Non-performing loans to gross loans and advances (percent): 4.1 (Dec-11), 5.5 (Jun-12), 9.4 (Dec-12), 12.6 (Jun-13), 15.4 (Dec-13), 15.9 (Mar-14), 16.1 (Jun-14), 15.6 (Sep-14), 14.9 (Dec-14), 14.8 (Mar-15), 13.8 (Jun-15).
- Provisions to non-performing loans (percent): 36.9 (Dec-11), 30.5 (Jun-12), 26.8 (Dec-12), 30.5 (Jun-13), 29.1 (Dec-13), 30.3 (Mar-14), 28.3 (Jun-14), 30.7 (Sep-14), 31.8 (Dec-14), 33.4 (Mar-15), 34.7 (Jun-15).
- Return on assets (ROA, percent): 3.5 (Dec-11), 5.1 (Jun-12), 5.0 (Dec-12), 4.7 (Jun-13), 4.8 (Dec-13), 4.5 (Mar-14), 4.9 (Jun-14), 4.6 (Sep-14), 4.0 (Dec-14), 4.2 (Mar-15), 4.2 (Jun-15).
- Return on equity (ROE, percent): 24.7 (Dec-11), 36.7 (Jun-12), 36.9 (Dec-12), 36.2 (Jun-13), 37.5 (Dec-13), 31.9 (Mar-14), 33.5 (Jun-14), 30.9 (Sep-14), 26.8 (Dec-14), 25.0 (Mar-15), 24.9 (Jun-15).

*Source: Malawi authorities and IMF staff projections as presented in the provided chapter/section.*

### 7. Personnel expenses to non-interest expenses

### 7. Personnel expenses to non-interest expenses

### Key Banking and Liquidity Ratios
- Personnel expenses to non-interest expenses:
  - 39.70
  - 46.51
  - 46.00
  - 46.79
  - 45.40
  - 46.9
  - 45.7
  - 47.4
  - 45.1
  - 49.8
  - 49.1

- Liquidity — Liquid assets to deposits and short-term liabilities:
  - 43.0
  - 42.5
  - 45.4
  - 48.6
  - 59.1
  - 57.1
  - 57.6
  - 58.4
  - 62.4
  - 64.5
  - 62.5

- 2. Total loans to total deposits:
  - 70.9
  - 75.9
  - 72.4
  - 64.8
  - 56.6
  - 60.1
  - 62.0
  - 61.7
  - 58.3
  - 60.6
  - 61.4

- 3. Liquid Assets to total assets:
  - 33.4
  - 32.6
  - 34.5
  - 35.6
  - 43.7
  - 41.2
  - 41.4
  - 41.5
  - 48.8
  - 40.5
  - 43.5

- 4. Foreign exchange liabilities to total liabilities:
  - 7.8
  - n.a.
  - 17.9
  - n.a.
  - 26.3
  - n.a.
  - n.a.
  - n.a.
  - ---
  - ---
  - 16.1

### Annex I — Responses to 2012 Article IV Consultation’s Key Recommendations
- Achieve macroeconomic stability and contain inflation:
  - The floating exchange regime and automatic oil pricing mechanism have helped in the adjustment to external shocks but large shocks and uneven policies prevented the attainment of low inflation.

- Increase international reserves:
  - Foreign reserves cover has gradually risen, reaching three months of imports towards end-2014.

- Improving social indicators:
  - Progress made in (i) reducing child mortality; (ii) gender parity in primary school enrollment; and (iii) access to water and electricity.

- Strengthen public financial management:
  - The “cash-gate” scandal exposed weakness in PFM systems and highlighted the urgency of reforms. Implementation of reforms has been slow.

- Ensure fiscal sustainability:
  - Malawi’s risk of debt distress is moderate but ongoing external financing shortfalls have led to increased recourse to domestic financing.

- Strengthen the operational independence of the RBM:
  - The RBM Act which limits credit to government to a 10 percent of the previous year’s revenue has been approved by parliament and enacted into law.

- Safeguard financial stability:
  - Good progress has been made in implementing monetary and financial benchmarks, including the submission of amendments to the Banking Act and Financial Services Act to parliament. Two weak banks were sold and are being recapitalized.

- Enhance growth sustainability and inclusiveness:
  - Progress has been made on access to finance and health although the business climate has deteriorated and key supply-side bottlenecks still constrain economic development.

- Scale up social protection programs:
  - Progress was made in: (i) increasing primary school enrollment including gender parity; (ii) improving access to potable water; and (iii) declining infant mortality rates.

### Annex II — Risk Assessment Matrix (Selected entries)
- Global Risks
  - A surge in global financial volatility and decompression of credit spreads following slow growth as well as protracted policy uncertainty in Euro area.
    - Relative Likelihood in next 1–3 years: High
    - Impact if Realized: Low
    - Policy advice: Keep fiscal discipline and make monetary policy consistent with growth and inflation objectives, maintain adequate foreign reserves and smooth short term exchange rate volatility.
  - Weak demand in key advanced economies.
    - Relative Likelihood: High
    - Impact if Realized: Medium
    - Policy advice: Adopt policies to increase fiscal space to respond to contingencies.
  - Increased volatility of energy price due to uncertainty about the oil supply shock.
    - Relative Likelihood: Medium
    - Impact if Realized: Medium
    - Policy advice: Tighten monetary policy to send a clear signal to market participants, and use the automatic price adjustment mechanism to smooth excessive price movement and ensure adequate fuel supplies.

- Regional and Domestic Risks
  - Expansionary fiscal policy.
    - Relative Likelihood: High
    - Impact if Realized: High
    - Policy advice: Adopt corrective measures to contain spending, exert better commitment control and increase revenue mobilization.
  - Delay in PFM reform.
    - Relative Likelihood: Medium
    - Impact if Realized: High
    - Policy advice: Accelerate the implementation of PFM reforms and regularly communicate progress to donors.
  - Deficiencies in the conduct of monetary policy.
    - Relative Likelihood: Medium
    - Impact if Realized: High
    - Policy advice: Improve the communication of monetary policy and adopt a clear and effective monetary operational framework.
  - Financial Stability.
    - Relative Likelihood: Medium
    - Impact if Realized: Medium
    - Policy advice: Strengthen banking supervision and inspection to contain emerging risks by developing early warning systems.

### Annex III — External Stability Assessment
- Summary finding:
  - Standard exchange rate assessment methods point to the kwacha being roughly in line with fundamentals in 2014. Non-price indicators suggest scope to improve Malawi’s external sector competitiveness.
  - Reserve adequacy assessment suggests a range of 3–6 months of import cover for precautionary motives.

A. External Competitiveness and Exchange Rate Assessment
- Structural drivers of current account deficit:
  - High external current account deficit reflects structural factors: large investment-related imports, narrow export base, and high population growth.
  - The deficit is mostly financed by foreign direct investment, public sector loans and aid flows (although direct budget support has been volatile and has declined substantially in recent years).
- Productivity and exports:
  - Malawi lags behind its trading partners in productivity growth.
  - Malawi’s exports are highly concentrated in agricultural commodities. The top three products account for about two-thirds of total exports.
  - In 2013, exports of tobacco, sugar, and tea yielded US$ 763 million (18 percent of GDP) while exports of manufactured goods were only US$ 55 million (1.3 percent of GDP).
  - Malawi has lagged behind SSA LICs in terms of export diversification and quality in recent years.
- Exchange rate assessment:
  - Estimates indicate the real exchange rate was roughly in line with fundamentals by the end of 2014.
  - Malawi’s current account norm is estimated at a deficit of -10.7 percent of GDP for 2014. The actual current account was slightly below 10 percent of GDP and the gap implies a very slight undervaluation of about 2 percent.
  - A commodity price movement regression (“the commodity currency approach”) suggests the Kwacha was roughly in equilibrium by 2014.
- Policy implication:
  - The high current account deficit warrants adjustment over the medium to long term through structural transformation to increase economic productivity and competitiveness, and improve the quality of domestic production to partly substitute imports. Volatile capital account flows also need to be addressed.

B. Adequacy of International Reserves
- Reserve adequacy assessment:
  - International reserves are within the range of desirable levels for precautionary purposes, but higher cover could be justified.
  - Reserve coverage at end 2015 is expected to continue to improve and exceed 3 months of the next year’s imports.
  - Reserve coverage was at a low one month of imports prior to the current ECF program.
  - Optimal level of reserves for precautionary motives is estimated at 3.1–6.1 months of the next year’s imports, assuming a cost of holding reserves in the range of 3–5 percent.
  - Additional motives for higher reserves include addressing volatile external flows, terms of trade shocks, and weather shocks impacting agricultural exports.

C. Non-Price Indicators
- Business environment and competitiveness:
  - Malawi’s business environment has been deteriorating in recent years.
  - In the 2015–16 Global Competitive Index (GCI) report, Malawi ranks 135th of 140 surveyed countries in 2015.
  - The five major competitive constraints are access to financing, corruption, crime and theft, tax rates, and inflation.

*Source: _cr15345 - 7. Personnel expenses to non-interest expenses (IMF).*

### Annex Figure 7. Global Competitive Index

### Annex Figure 7. Global Competitive Index

### Source
- Global Competitive Index report from the World Economic Forum.

### Overall GCI results (Malawi)
- GCI 2015–2016: Rank (Out of 140) 135; Score (1-7) 3.2 3.6
- GCI 2014–2015: (out of 144) 132; Score (1-7) 3.2 3.4
- GCI 2013–2014: (out of 148) 136; Score (1-7) 3.3 3.6
- GCI 2012–2013: (out of 144) 129; Score (1-7) 3.4 3.5
- GCI 2011–2012: (out of 142) 117; Score (1-7) 3.6 3.1

### Pillars and component scores (Malawi; GCI 2015–2016 unless otherwise indicated)
- Basic requirements (60%): Rank 138; Score 3.1 3.8
  - Institutions: Rank 92; Score 3.6 3.8
  - Infrastructure: Rank 135; Score 2.0 2.8
  - Macroeconomic environment: Rank 140; Score 2.4 4.3
  - Health and primary education: Rank 121; Score 4.4 4.3
- Efficiency enhancers (35%): Rank 127; Score 3.2 3.5
  - Higher education and training: Rank 133; Score 2.5 3.1
  - Goods market efficiency: Rank 117; Score 3.9 4.1
  - Labor market efficiency: Rank 29; Score 4.6 4.2
  - Financial market development: Rank 100; Score 3.5 3.5
  - Technological readiness: Rank 133; Score 2.4 2.9
  - Market size: Rank 127; Score 2.5 2.9
- Innovation and sophistication factors (5%): Rank 119; Score 3.1 3.3
  - Business sophistication: Rank 121; Score 3.4 3.6
  - Innovation: Rank 121; Score 2.7 3.1

### Comparative visualization elements (categories shown in the figure)
- Categories plotted for Malawi vs Sub-Saharan Africa, scale 1 to 7:
  - Institutions
  - Infrastructure
  - Macroeconomic environment
  - Health and primary education
  - Higher education and training
  - Goods market efficiency
  - Labor market efficiency
  - Financial market development
  - Technological readiness
  - Market size
  - Business sophistication
  - Innovation

### Key statistics and observations presented
- Malawi’s worst-ranked pillars (highest numerical rank values) include:
  - Macroeconomic environment: Rank 140
  - Infrastructure: Rank 135
  - Basic requirements aggregate: Rank 138
- Malawi’s relatively stronger pillar:
  - Labor market efficiency: Rank 29
- Pillars weighted by GCI subindexes:
  - Basic requirements carry 60% weight
  - Efficiency enhancers carry 35% weight
  - Innovation and sophistication factors carry 5% weight

*Source: Global Competitive Index report from the World Economic Forum (figure reproduced in IMF staff report).*

### 1. Updates on WB support to Malawi  Continuous

### 1. Updates on WB support to Malawi  Continuous

### Bank request to IMF / Coordination
- Regular updates and exchange of views on medium-term macroeconomic and fiscal projections, including sharing detailed excel tables on Real, Monetary, Fiscal and External Sectors — Continuous.
- C. Agreement on joint products and missions: Joint products in next 12 months:
  - Debt Sustainability Analysis (update) January, 2016 Feb/March, 2016

### Relations with the African Development Bank Group (AfDB)
- AfDB operations in Malawi date back to 1969. The Malawi Field Office was opened in 2007.
- As at 30th September, 2015, the Bank had provided cumulative commitments worth UA 873.7 million (about US$ 1.2 billion) to finance 102 operations including 12 studies and 2 lines of credit.
- The AfDB Board of Directors on 30th January 2013 approved a new Country Strategy Paper (CSP) for Malawi covering 2013–17.
- The Bank’s current CSP is aligned with MGDS II (2011–16), the Bank’s Long Term Strategy (LTS, 2013–22) and the Southern African RISP (2011–15). CSP focuses on two pillars:
  - (i) addressing infrastructure bottlenecks to competitiveness and growth;
  - (ii) supporting actions to expand private sector investment and trade.
- Regional infrastructure support highlighted:
  - 2014: approved the Nacala Road Corridor Phase IV Project.
  - Pipeline includes the Malawi-Mozambique Power Inter-connector Project.
  - Support for Public Private Partnerships (PPPs) in infrastructure development.
- CSP mid-term review undertaken in 2015; strategic priorities maintained.
- Public Financial Management (PFM) and capacity building:
  - September, 2015: approved a grant of US $ 2.61 million for Phase II of the on-going PFM Institutional Support (ISP).
    - ISP II components: (i) enhancing transparency, control and compliance in procurement; (ii) strengthening capacity in revenue administration.
  - 2013: US$ 4.2 million approved for PFMISP I.
- Quick disbursing budget support and programmatic assistance:
  - July 2012: following reengagement with IMF and approval of new US$ 157 million Extended Credit Facility (ECF), Bank approved ADF Grant for Crisis Response Budget Support for Malawi in July 2012, amount UA 26 million (US$ 36 million).
  - Restoration of Fiscal Stability and Social Protection (RFSSP) program:
    - Two components: (i) strengthened PFM transparency and accountability; (ii) strengthened social protection system.
    - Disbursed UA 4 million (US$ 5.6 million) as additional budgetary support in June 2013.
  - April, 2015: approved grant of US $ 30 million for the Protection of Basic Services Programme (ring fenced Sector Budget Support). The grant was disbursed in one tranche in July, 2015.

### AfDB Ongoing Operations (Box)
- Agriculture sector (2 projects):
  - Agriculture Infrastructure Support Project (AISP)
  - Climate Adaptation for Rural Livelihoods and Agriculture Project (grant from Global Environment Facility)
- Social sector and economic empowerment (3 projects):
  - Local Economic Development project: infrastructure in Jenda, Malomo, Monkey Bay and Chitekesa.
  - Competitiveness and Job Creation Project in Private sector: improve capabilities and competitiveness, increase export diversification and job creation.
  - Support to Higher Education Science & Technology Project: increase access to TEVET and higher education, emphasis on ICT.
- Transport sector:
  - Mzuzu-Nkhata Bay Road Rehabilitation Project.
  - Multinational Nacala Road Corridor Phase IV.
- Water sector:
  - Sustainable Rural Water and Sanitation for Improved Health and Livelihood Project.
- Portfolio and disbursement:
  - As at 30th September 2015, overall Bank portfolio rated satisfactory with an average disbursement rate of 30%.
- New operations approved in 2015:
  - Protection of Basic Services Programme (US $ 30 million)
  - Public Financial Management Institutional Support II (US $ 2.61 million)
  - Mzimba Urban Water Integrated Project (US$ 5.0 million) — co-financed with OPEC Fund for International Development.
- Non-lending activities and TA:
  - Feasibility studies and analytic work (including collaboration with World Bank on Public Expenditure Review, Public Expenditure Tracking Study).
  - Support for Private Public Partnership Commission (PPPC) capacity building and legislative/institutional framework assessment for PPPs.
  - Domestic Resource Mobilization Study for Malawi in 2013/2014.
  - TA to the Reserve Bank of Malawi to strengthen macro-economic forecasting capacity.

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of November 2, 2015)
- General: Data provision has some shortcomings, but it is broadly adequate for surveillance.
- National Accounts:
  - STA providing TA to NSO to strengthen national accounts.
  - NSO revised methodology to improve consistency with the 2008 SNA and developed preliminary quarterly GDP by activity.
  - Further TA to develop quarterly GDP by expenditure components.
  - Operational challenges: NSO budget constraints, lack of funds for data collections, low staffing in national accounts unit.
- Price Statistics:
  - Updated and revised CPI introduced in January 2013.
    - Weight reference period: 2010–11 (based on 2010–11 integrated household survey).
    - Index reference period: 2012 (2012=100).
  - April 2013: updated PPI for manufacturing released; need to expand PPI coverage.
  - NSO developing export-import price indexes.
- Government Finance Statistics:
  - Accuracy and reliability affected by source data weaknesses and inadequate system of recording source data.
  - Key shortcomings:
    - Published data for budgetary central government include a sizeable statistical discrepancy between above and below the line data due to differences in coverage.
    - Tax revenue data timely but not always reconcilable with deposits in the Malawi Government (MG) Account.
    - Finances and operations of Malawi Revenue Authority are unusually opaque.
    - Nontax revenue, including capital revenues collected by line ministries, not properly accounted for in fiscal reports prepared by the Ministry of Finance.
  - Authorities have received significant TA from the Fund and other donors but results have lagged.
  - Government working with East AFRITAC to modify chart of accounts and output-based structures.
  - Government finance data for Budgetary Central Government in GFSM 2001 presentation are reported for publication in GFSY and IFS but not disseminated domestically.
  - Missions in August 2005 and August 2007 emphasized IFMIS implementation, improved coverage and sectorization, correct classification per international guidelines, and proposed migration plan to GFSM 2001.
- Monetary and Financial Statistics (MFS):
  - Shortcomings remain despite improvements: irregular reporting to STA; lack of legislation to grant RBM authority to require reporting from other institutions; issues with sectorization and classification of financial instruments.
  - 2004, 2008, 2009, 2010 STA missions made recommendations and assisted RBM in developing Standardized Report Forms (SRFs) for central bank accounts (1SR), other depository corporations (2SR), and monetary aggregates (5SR).
  - RBM reports monetary data regularly; monthly data disseminated through IFS.
  - ODCs’ call report templates revamped to align with MFS Manual; underlying source data quality still a constraint (ODCs’ balance sheets and supporting schedules do not always match).
- Financial Sector Surveillance:
  - Malawi does not report FSIs to STA.
- External Sector Statistics:
  - Concepts and definitions broadly conform with BPM5; NSO should adopt BPM6 and update balance of payments metadata.
  - NSO balance of payments section critically understaffed since March 2008.
  - Important data sources ceased in 2006–07 (e.g., exchange control forms).
  - Procedures for assessing trade data accuracy need improvement.
  - Primary sources for BOP compilation: BOP survey, ITRS, exchange control record; other sources include Foreign Private Capital and Investor Perception Survey, RBM monetary statistics, Ministry of Finance financial data, and international organizations.
  - Weaknesses: data on FDI and portfolio flows weak; project aid often misclassified as current transfers rather than capital account; large in-kind projects not properly captured.
  - NSO receives substantial TA from Fund and others; need for adequate staffing and budget for NSO.
  - International Investment Position (IIP) not compiled due to capacity constraints; capacity building programs aim to enable future compilation.
  - RBM and Ministry of Finance’s Debt and Aid Department need to improve reporting of monetary and external debt data.

### Data Standards, Reporting, and Timeliness
- Participation:
  - Malawi is participating in the GDDS/PRSP and the monetary and financial statistics modules of the project.
  - GDDS metadata posted on DSBB since February 2007.
- Data ROSC published on February 17, 2005.
- Reporting to STA:
  - Authorities report Monetary and financial statistics, balance of payments and international investment position statistics, and government finance statistics to STA for publication in IFS; however timeliness is irregular.

### Malawi: Tables of Common Indicators Required for Surveillance (As of November 2, 2015) — Selected data and timeliness
- Exchange Rates: Current; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- Reserve/Base Money:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency: M / M / M.
- Broad Money:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency: M / M / M.
- Central Bank Balance Sheet:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency: M / M / M.
  - Data Quality — Methodological soundness: LO, LO, LNO, O
  - Data Quality — Accuracy and reliability: LO, O, O, O, O
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency: M / M / M.
- Interest Rates:
  - Date of latest observation: 8/2015; Date received: 10/2015; Frequency: M / M / M.
- Consumer Price Index:
  - Date of latest observation: 9/2015; Date received: 10/2015; Frequency: M / M / M.
  - Data Quality — Methodological soundness: O, LNO, O, O
  - Data Quality — Accuracy and reliability: LNO, O, O, O, NA
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest observation: 6/2015; Date received: 09/2015; Frequency: M / M / I.
  - Data Quality — Methodological soundness: O, LO, O, O
  - Data Quality — Accuracy and reliability: O, LO, O, O, LNO
- Stocks of Central Government and Central Government-Guaranteed Domestic Debt:
  - Date of latest observation: 6/2015; Date received: 9/2015; Frequency: M / M / M.
- External Current Account Balance:
  - Date of latest observation: 12/2014; Date received: 09/2015; Frequency: A / A / A.
- Exports and Imports of Goods and Services:
  - Date of latest observation: 12/2014; Date received: 09/2015; Frequency: A / A / A.
  - Data Quality — Methodological soundness: O, O, O, O
  - Data Quality — Accuracy and reliability: LO, O, LO, O, O
- GDP/GNP:
  - Date of latest observation: 12/2014; Date received: 09/2015; Frequency: A / A / A.
- Gross External Debt:
  - Date of latest observation: 12/2014; Date received: 09/2015; Frequency: A / I / I.
- International Investment Position:
  - Date of latest observation: 2013; Date received: 2014; Frequency: I / I / I.

*Statement by Mr. Mkwezalamba, Alternate Executive Director for Malawi, and Mr. Sitima-wina, Senior Advisor to the Executive Director for Malawi, December 11, 2015*

### 1.      We thank staff for the constructive engagement with the Malawian authorities during

### _cr15345 - 1.      We thank staff for the constructive engagement with the Malawian authorities during

### Recent economic developments, macroeconomic outlook and policies
- Floods followed by drought in early 2015 led to an overall decline in agricultural output; maize harvest declining by about 30 percent.
- An estimated 2.8 million persons from 25 of the 28 districts were put at risk of food insecurity.
- Food distribution response started in August 2015 for flood-affected districts and in October 2015 for drought-affected districts; response expected to continue till March 2016.
- Floods disrupted energy generation and damaged roads.
- Real GDP growth revised downwards to 3 percent from an earlier estimate of 5.7 percent.
- Inflation has remained above 20 percent since June 2015; year-on-year inflation reached 24.7 percent in October 2015, from 22.2 percent in July 2015.
- Growth in 2016 is estimated at 4.5 percent, assuming normal weather conditions; medium-term growth expected to pick up to about 6 percent.
- External current account deficit projected to be stable at around 8 percent.
- Resumption of uranium production in the medium term is expected to boost growth further.
- Inflation projected to moderate in 2016, supported in part by tight fiscal and monetary policy stance.
- Other sectors driving growth include construction, distribution, and the wholesale and retail sectors.

### Fiscal and public financial management
- Fiscal adjustment challenged by: addressing food security; recruitment of teachers and doctors; grant of a higher than budgeted for general salary increase leading to overspending on the wage bill.
- Corrective measures implemented, including expenditure cuts in the first half of the 2015–16 fiscal year to partly offset slippages.
- Further expenditure cuts have been effected and will be tabled in Parliament during the Mid-Term Budget Review Session to be held in February 2016.
- Cuts have affected domestically financed investment and goods and services and preclude any increases to net domestic financing and emergence of domestic payment arrears.
- Measures carefully effected to safeguard allocations to social spending.
- A comprehensive payroll audit underway, expected to result in elimination of ghost workers.
- Payment of salaries now contingent upon submission of required documentation, including Staff Returns.
- Authorities confident measures are sufficient to meet the end-December 2015 ECF program targets and to complement monetary policy actions in reducing inflation.
- PFM reforms progress noted: rationalization of government bank accounts at the Reserve Bank of Malawi (RBM); incorporation of main government bank accounts into IFMIS; development of a more comprehensive strategy for resolving bank reconciliations.
- Most of the backlog in bank reconciliations will be processed by private accountants and auditors hired by the Auditor General, and verified by the Accountant General’s Department (AGD).
- AGD closely monitoring reconciliations for the current financial year; submissions from the MDAs have significantly improved.
- A multi-stakeholder technical committee is in place to monitor progress.
- Controlling Officers explicitly charged with improving financial discipline within spending units; independent audit committees established.
- With effect from January 2016, monthly funding to MDAs will be contingent upon submission of: (a) Expenditure Returns; (b) Revenue Returns; (c) Commitment Returns; (d) Bank Reconciliation returns; and (e) Staff Returns.
- These requirements are within the provisions of the Public Finance Management Act (PFMA).

### Monetary and exchange rate policies
- RBM committed to continue using policy instruments to stabilize monetary conditions.
- In November 2015, RBM raised the policy rate by 200 basis points to 27 percent to tame inflation.
- RBM states aligning the policy rate with Treasury bill rates is not a daily operational objective given the oligopolistic structure of the interbank market; fiscal costs of aligning interbank rate with the policy rate outweigh monetary policy benefits and cannot, at the moment, be justified as a daily operational objective.
- The exchange rate against the United States dollar weakened from end-June 2015, temporarily stabilized at the beginning of September 2015, but continues to weaken.
- Developments reflect the strengthening of the dollar against most major currencies and excess demand for foreign exchange to finance imports.
- Authorities commit to maintaining exchange rate flexibility, with interventions limited to smoothening market volatility.

### Financial sector
- Malawi migrated to Basel II standards in January 2014 to strengthen financial sector stability.
- Banks unable to meet new capital requirements had to augment capital; two weak banks with significant state-shareholding were sold and are being recapitalized.
- Revision of the RBM Act further strengthened the monetary policy framework.
- RBM introduced new provisioning directives to address low provisioning rates on NPLs; NPLs decreased from 16 percent of total loans and advances in June 2014 to 14 percent in June 2015.
- Overall, the banking sector remains well capitalized, profitable and liquid.
- Recent stress tests confirmed credit risk from high exposure to large borrowers poses a significant threat to the banking system.
- Authorities recognize concentration risk from exposure to large borrowers remains the largest threat to financial sector stability.
- Concentration risk will remain a feature given the role of large conglomerates and limited access to long-term external and domestic financing.
- RBM committed to continued stress testing, enhancing supervision, enforcing compliance with prudential norms, deepening the financial sector and fostering financial inclusion.

### Structural Reforms
- Reforms to guarantee security of fuel supply include:
  - (i) allowing the state-owned National Oil Company of Malawi (NOCMA) to participate in the importation of petroleum;
  - (ii) introduction of the dry port concept for running the strategic fuel reserves, with an added advantage of easing tax collection;
  - (iii) introduction of the fuel bulk procurement system expected to lower procurement prices through economies of scale.
- The automatic fuel pricing mechanism will continue.
- Government with private sector partnership investing in commercial agriculture through the Greenbelt Initiative to produce sugar, ethanol and rice, involving small scale commercial farmers.
- Shire Valley Irrigation Project is an upcoming investment expected to reduce poverty and boost export volumes.
- Farm Inputs Subsidy Program (FISP) will be reformed to enhance efficiency of expenditure without compromising food security; consultations underway to explore options expected to create fiscal space for other investments.
- Efforts to improve the business environment continue, particularly in energy and transport infrastructure.
- Establishment of a one stop investment window at the Malawi Investment and Trade Centre (MITC) noted as a milestone reform.

### Conclusion
- Authorities reiterate commitment to restoring macroeconomic stability, reducing poverty and attaining sustainable and inclusive growth.
- Commitments include implementing tight fiscal and monetary policies to place inflation on a downward declining trajectory; continuing structural reforms including improving the business environment; accelerating the pace of PFM reforms; and broad public sector reforms to bring efficiency and improve public service delivery.
- In line with MGDS priorities, authorities will pursue infrastructure investments in energy, transport, water, tourism, agriculture and efforts in export diversification.
- Investments in social infrastructure and provision of related services are key priorities for the government.

*Source: _cr15345 - 1.      We thank staff for the constructive engagement with the Malawian authorities during*

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