## _cr16182

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### Recent economic developments (2011–16)
- Growth and agriculture:
  - Real GDP growth: 2014: 5.7 percent (implied); 2015: 3 percent (estimated); 2016: 2.7 percent (expected).
  - Heavy floods in early 2015 followed by drought led to an estimated 30 percent decline in the maize harvest; preliminary maize deficit about 1.1 million metric tons.
  - About 2.8 million people received relief in 2015; about half the population estimated at risk of food insecurity in 2016–17.
- Inflation and exchange rate:
  - Annual headline inflation: 18 percent in March 2015; 24.9 percent at end-December 2015; 20.9 percent at end-April 2016.
  - Kwacha depreciation: close to 36 percent from July 2015 to February 2016; began to stabilize since March 2016.
- External sector and reserves:
  - Current account: 2014: -8.5 percent of GDP; 2015: -8.2 percent of GDP (projected); 2016: -13.9 percent of GDP (projected, reflecting higher maize imports).
  - Gross official reserves (Months of imports): 2015 (Est.): 3.4; 2016 (Est./Proj.): 3.2; program aim: maintain at least three months of imports cover.
- Money, credit, banking:
  - Broad money and credit to the private sector (valuation-adjusted) grew by 14 percent and 18 percent respectively in 2015.
  - Growth in real credit remained negative since mid-2012.
  - Valuation effect reduced NPL ratio by 4 percentage points in 2015 (source table series preserved).

### Humanitarian needs and financing (April–June 2016)
- Authorities’ preliminary estimate of costs: US$450 million for humanitarian response, replenishing strategic grain reserves, and price stabilization.
  - Humanitarian component estimate: US$276 million for 790,000 metric tons of maize for food relief.
- Requested IMF augmentation: 25 percent of quota (SDR 34.7 million), reported IMF augmentation amount US$48.5 (0.8 percent of GDP).
- Maize/import financing and external financing (selected figures):
  - Maize imports and ex-ante financing gap: US$233.6 (4.1 percent of GDP).
  - Donor financing: US$185.1 (3.2 percent of GDP) — Multilateral: US$118 (2.0 percent of GDP); Bilateral: US$67.1 (1.2 percent of GDP).
  - Donor commitments noted: AfDB US$18 million and World Bank US$100 million.
- Government contribution and NDF adjustments:
  - NDF in FY15/16 increased by 0.4 percent of GDP for maize purchases; proposed increase of NDF by 0.5 percent of GDP in FY16/17.
  - Domestic spending adjustment in FY16/17 amounts to about one percentage point of GDP.

### Fiscal performance, arrears, and PFM reforms
- Fiscal outturns and budget execution:
  - Overall fiscal balance (percent of GDP, fiscal year basis): 2015 (Est.): -6.5; 2016 (Est./Proj.): -6.1; 2017 (Proj.): -5.0; 2018 (Proj.): -2.7; 2019 (Proj.): -2.6.
  - Revenue (percent of GDP): 2015 (Est.): 22.5; 2016 (Est./Proj.): 21.5; 2017 (Proj.): 21.7.
  - Total public debt (percent of GDP): 2015 (Est.): 53.8; 2016 (Est./Proj.): 52.1; 2017 (Proj.): 47.1; 2018 (Proj.): 44.7; 2019 (Proj.): 42.5.
  - Central government net domestic borrowing targets and performance: end-Dec 2015 Act.: 94,297 (millions of kwacha) — Not met; 2016 PC: 38,000 (millions of kwacha).
- Domestic payment arrears (pre-FY14/15): MK157 billion (~6 percent of GDP).
  - MK72 billion audited and securitized via zero-coupon promissory notes (1–3 year maturities); MK30 billion rejected; MK55 billion require documentation.
  - Incurrence of new arrears in first half FY15/16 limited to 0.2 percent of GDP.
- PFM reform progress:
  - Commitment controls: MDAs required to supply five fiscal reports before monthly funding; compliance reached almost 87 percent by Jan 2016.
  - Monthly budget execution reports published; government captured all expenditures in IFMIS by end-April 2016.
  - Reconciliations for MG1 and five operational accounts completed for first six months of FY15/16; wages account reconciliation delayed but set as end-June benchmark.
  - Structural benchmarks: most PFM-related SBs initially missed; prior actions on reporting arrears met; several 2016 SBs established (detailed timing preserved in source).

### Monetary policy and liquidity management
- RBM actions:
  - Liquid reserve ratio (LRR) halved to 7.5 percent in August 2015 to increase liquidity; sterilization operations from September 2015 and policy rate increased by 200 basis points to 27 percent in early November 2015 to reduce excess liquidity.
  - Introduced deposit facility 2 percentage points below policy rate and Lombard facility 2 percentage points above, creating an interest rate corridor of +/- two percent (25 to 29 percent at current values).
  - Short-term money market rates are positive in real terms; staff emphasized maintaining tight stance to ensure disinflation.
- Monetary targets (selected):
  - Ceiling on net domestic assets of RBM: PC -90,331 (2016 target, millions of kwacha).
  - Ceiling on reserve money: IT 176,413 (2016 target, millions of kwacha).
  - Program exchange rate used in adjusters: MK 700 = US$1 (TMU definitions).

### Financial sector stability and banking sector measures
- Supervisory and regulatory measures:
  - Prompt corrective action (PCA) framework and model resolution framework introduced (May 2014).
  - New asset classification directive based on ERAM imposes higher graduated provisioning rates; caused capital shortfalls in two banks — recapitalization and sale/restructuring actions underway (expected completion by December 2016).
  - Stress tests highlighted credit risk from loan concentration as the most significant threat; direct impact of large exchange rate depreciation and interest rate increases judged moderate.
  - RBM required remedial actions including improved loan documentation and AML/CFT follow-up; amendments to AML/CFT and related legislation planned/submitted per timetable.
- Banking indicators (selected series from source tables — sequence preserved):
  - Regulatory Tier 1 capital to risk weighted assets: 16.5 16.2 16.4 16.1 16.2 14.9 13.5 16.1 15.0
  - Non-performing loans to gross loans and advances: 4.1 5.5 9.4 12.6 15.4 16.1 14.9 14.8 13.8 11.6 10.7
  - Liquid assets to deposits and short-term liabilities: 43.0 42.5 45.4 48.6 59.1 57.6 62.4 64.5 62.5 61.8 59.0
  - Return on assets (ROA): 3.5 5.1 5.0 4.7 4.8 4.9 4.0 4.2 4.2 4.00 3.2

### Debt sustainability, borrowing plan, and risks
- Risk classification and DSA findings:
  - Malawi assessed at moderate risk of debt distress on external public debt; elevated vulnerabilities from domestic debt.
  - DSA: external debt indicators below policy-dependent thresholds except for a modest breach in 2016 in the debt service-to-revenue ratio (driven by PTA amortization).
- Public and external debt metrics (selected):
  - External debt (public sector, percent of GDP): 2015: 37.0 (nominal PPG external debt in US$), PPG external debt percent series preserved in DSA tables.
  - Domestic public debt (percent of GDP): 2016 projected increase to 18.9 percent (due largely to securitization of old domestic arrears) and decline to 13 percent by 2019 (projection).
  - Total public debt (percent of GDP): 2015 (Est.): 53.8; 2016 (Est./Proj.): 52.1; 2019 (Proj.): 42.5.
- Borrowing plan (2016–17):
  - Authorities’ 2016–17 borrowing plan foresees US$77.5 million (1.2 percent of GDP) in new nonconcessional borrowing:
    - US$55 million from the African Development Bank for a water project;
    - US$22.5 million from China for an e-government project.
  - FY2016/17 total borrowing planned: 379.5 (million USD), with concessional debt 302 (million USD) and non-concessional 77.5 (million USD) per source table.
- Policy implications:
  - Medium-term anchor: primary fiscal balance consistent with gradually declining net domestic financing to place domestic debt on a declining trend while safeguarding social spending and limiting nonconcessional borrowing.
  - Need to strengthen debt management framework and identify risks associated with rapid debt accumulation.
  - Staff cautions against domestic borrowing that could be inflationary; prefers donor grants and concessional financing for the humanitarian response where possible.

### Program status, performance criteria, and staff recommendations
- Program implementation and remedial actions:
  - Program went off track in 2015: end-June 2015 PC on net domestic borrowing missed by 2 percent of GDP; end-December 2015 PC on net international reserves missed.
  - Authorities undertook corrective measures: containment of net domestic borrowing, tighter monetary policy, strengthened commitment controls, and prioritized PFM/financial sector reforms.
- Prior actions and structural benchmarks:
  - Prior action on reporting on domestic payment arrears met; prior action on bank reconciliations pending (wages account reconciliation delayed for technical reasons).
  - Many PFM-related SBs were initially missed; progress resumed and several financial sector SBs met.
- Staff recommendations to the Executive Board:
  - Completion of the seventh and eighth reviews recommended.
  - Support for waivers on missed PCs for the seventh and eighth reviews based on remedial actions.
  - Support for extension of the arrangement to end-December 2016, rephasing of disbursements, and augmentation of access (25 percent of quota).
- IMF access and repayment capacity:
  - Authorities requesting augmentation of access of 25 percent of quota (SDR 34.7 million) — IMF augmentation reported as US$48.5 in source tables.
  - Malawi’s capacity to repay the Fund assessed as adequate; new disbursements under the ECF will have negligible impact on debt and debt service ratios; risk of debt distress would remain moderate.

### Quantitative targets, adjusters, and reporting (TMU highlights)
- Key program quantitative targets and adjusters (definitions preserved verbatim in TMU):
  - Ceiling on Net Domestic Assets (NDA) of RBM and on Central Government Net Domestic Borrowing (CGDB) defined with explicit adjusters for budget support shortfalls, donor pool inflows, debt service deviations, reserve requirement changes, and humanitarian spending; cumulative upward adjustments capped at the kwacha equivalent of US$15 million; humanitarian adjusters subject to limits including US$48.5 million equivalent.
  - Definition of NIR, NFA, reserve money, CGDB, concessionality (grant element at least 35 percent), and ceiling on non-concessional external debt (US$77.5 million) provided in detail.
  - Program exchange rate for adjusters and reporting: MK 700 = US$1 in TMU; other program cross rates and memorandum items also specified (e.g., program exchange rate earlier in 2015 targets: 402).
- Reporting requirements:
  - Regular reporting frequencies and agencies specified for reserves, reserve money, NIR, central government domestic borrowing, banking survey, financial soundness indicators, fiscal tables, BOP, CPI, national accounts and other data series (detailed timetable in TMU).

### Risks and policy recommendations
- Short-term risks:
  - Tilted to the downside owing to prolonged drought and humanitarian needs.
  - Additional downside risks: lower global demand for exports, continued slippages in macroeconomic policy implementation, slower-than-expected disinflation triggering wage demands, slow PFM reform implementation undermining budget credibility and donor re-engagement.
- Staff and authorities’ policy prescriptions (prioritized):
  - Maintain tight monetary stance to sustain disinflation and positive real short-term rates via open market operations.
  - Enforce fiscal discipline, contain net domestic financing, and prioritize revenue mobilization and expenditure efficiency.
  - Accelerate PFM reforms (commitment controls, bank reconciliations, monthly fiscal reporting) to re-establish trust and re-engage donors.
  - Use augmentation of access (if approved) primarily to finance maize imports and humanitarian needs, avoiding inflationary domestic purchases; RBM to mop up excess liquidity if needed.
  - Strengthen financial sector supervision, consider higher capital requirements, improve credit assessments and provisioning, and address loan concentration risks.
  - Strengthen debt management capacity and adhere to concessional borrowing limits consistent with DSA.

*Source: IMF staff and Malawian authorities (extract from “1. Recent Economic Developments, 2011–16” and associated TMU, MEFP, and staff report content in document _cr16182).*

### 1. Recent Economic Developments, 2011–16 ______________________________________________________8

### 1. Recent Economic Developments, 2011–16

### Context
- Malawi’s macroeconomic situation remains difficult, with the economy hit hard by drought for a second consecutive year and almost half of the population at risk of food insecurity.
- In 2015, donors and the authorities provided relief to 2.8 million people.
- Large policy slippages in 2015 contributed to the persistence of inflation, which has remained in double digits since 2012.
- Progress on prosecutions in the “cashgate scandal”: eleven convictions to date, including the main suspect charged with embezzling an estimated US$10 million; asset recovery has been slow.
- The program went off track in 2015: both end-June 2015 targets on net domestic assets (NDA) and net international reserves (RBM) were met, but net domestic financing (NDF) was missed by a large margin (2 percent of GDP), mainly due to unplanned recruitment of teachers, unbudgeted wage increases, and revenue shortfalls.
- All public financial management (PFM)-related structural benchmarks were missed; however, good progress was made on structural measures related to the financial sector.

### Recent growth and inflation developments
- Real GDP growth:
  - 2014: 5.7 percent (implied)
  - 2015: 3 percent (estimated)
  - 2016: 2.7 percent (expected)
- Cause: Heavy floods in early 2015 followed by drought led to an estimated 30 percent decline in the maize harvest.
- Inflation:
  - Annual headline inflation increased from 18 percent in March 2015 to 24.9 percent at end-December 2015, led by rising food prices and sharp depreciation of the kwacha.
  - Inflation fell to 20.9 percent at end-April 2016, owing to a trend decline in non-food inflation and adjustments in monetary and fiscal policies.

### Exchange rate and external sector
- The kwacha depreciated by close to 36 percent from July 2015 to February 2016; exchange rate began to stabilize since March 2016.
- The RBM intervened to dampen volatility and later absorbed excess liquidity while maintaining positive real interest rates.
- External current account:
  - 2014: current account deficit of 8.5 percent of GDP
  - 2015: projected current account deficit of 8.2 percent of GDP
  - Drivers: weaker aggregate demand reducing imports, decline in international oil prices, higher tobacco export revenues.

### Money, credit, and banking
- Broad money and credit to the private sector grew by 14 percent and 18 percent respectively after adjusting for valuation effects from the kwacha depreciation.
- Growth in real credit remained negative since mid-2012 due to persistently high inflation, economic uncertainties, and tighter bank lending conditions.
- The valuation effect reduced the ratio of non-performing loans (NPLs) to gross loans in 2015 by 4 percentage points (Table 5 reference in source).

### Fiscal performance (FY15/16 H1)
- Budget execution during first half of FY15/16 remained within program limits: revenues broadly in line with program and spending restrained.
- NDF at end-December was considerably below the program’s ceiling, including after accounting for logistical delays in distributing fertilizer subsidies.
- Prior actions and benchmarks:
  - Prior action on reporting on domestic payment arrears was met.
  - Prior action related to bank reconciliations is pending; the wages account reconciliation set as an end-June benchmark due to technical reasons.
  - Indicative target on pro-poor spending marginally missed owing to delays in distribution of fertilizer subsidies.

### Monetary policy actions
- RBM halved the liquid reserve ratio (LRR) to 7.5 percent in August 2015, increasing banking system liquidity.
- Sterilization efforts since September 2015 and an increase in the policy rate by 200 basis points to 27 percent in early November 2015 reduced excess liquidity and raised interbank and treasury bill rates closer to the policy rate.

### Key summary observations (from Figure captions)
- Headline inflation remains stubbornly high compared to neighboring countries.
- Fiscal adjustment has been insufficient since the cashgate and deficits have been largely covered by domestic financing.
- Economic activity continued to be affected by adverse weather since 2015.
- External budgetary assistance has not yet resumed since the public funds misappropriation scandal in 2013/14.
- The REER appreciated reflecting relatively higher inflation, with some correction in recent months.

### Selected data points (Text Table 1: Macroeconomic Outlook)
- 2015 (Est.):
  - GDP at constant market prices (percent change): 3.0
  - Consumer prices (% change, annual average): 21.9
  - Overall fiscal balance (percent of GDP, on a fiscal year basis): -6.5
  - Credit to the private sector (percent change): 29.9
  - Gross official reserves (Months of imports): 3.4
  - Current account (percent of GDP): -8.2
  - Total public debt (percent of GDP): 53.8
- 2016 (Est./Proj.):
  - GDP at constant market prices (percent change): 2.7
  - Consumer prices (% change, annual average): 19.7
  - Overall fiscal balance (percent of GDP): -6.1
  - Credit to the private sector (percent change): 20.3
  - Gross official reserves (Months of imports): 3.2
  - Current account (percent of GDP): -13.9
  - Total public debt (percent of GDP): 52.1
- 2017 (Proj.):
  - GDP at constant market prices (percent change): 4.5
  - Consumer prices (% change, annual average): 14.1
  - Overall fiscal balance (percent of GDP): -5.0
  - Credit to the private sector (percent change): 18.9
  - Gross official reserves (Months of imports): 3.3
  - Current account (percent of GDP): -8.8
  - Total public debt (percent of GDP): 47.1
- 2018 (Proj.):
  - GDP at constant market prices (percent change): 5.0
  - Consumer prices (% change, annual average): 9.4
  - Overall fiscal balance (percent of GDP): -2.7
  - Credit to the private sector (percent change): 20.3
  - Gross official reserves (Months of imports): 3.4
  - Current account (percent of GDP): -8.0
  - Total public debt (percent of GDP): 44.7
- 2019 (Proj.):
  - GDP at constant market prices (percent change): 5.5
  - Consumer prices (% change, annual average): 8.7
  - Overall fiscal balance (percent of GDP): -2.6
  - Credit to the private sector (percent change): 22.2
  - Gross official reserves (Months of imports): 3.6
  - Current account (percent of GDP): -7.7
  - Total public debt (percent of GDP): 42.5

### Other notable projections and figures
- External current account deficit in 2016 expected to rise substantially owing to higher maize imports (about 13.9 percent of GDP) for humanitarian relief.
- Over the medium term, current account projected to remain in the 7─9 percent of GDP range.
- Medium-term real GDP growth projected to reach rates in the range of 5─5½ percent, conditional on recovery in agriculture and policy actions.

### Risks
- Short-term risks tilted to the downside due to prolonged drought.
- Additional downside risks: lower global demand for Malawi’s exports, continued slippages in macroeconomic policy implementation, slower-than-expected disinflation triggering wage demands, slow implementation of PFM reforms undermining budget credibility and donor re-engagement.

### Humanitarian cost estimates (April 2016)
- Authorities requested additional donor support and IMF assistance through an augmentation of access (25 percent of quota).
- Authorities’ preliminary estimate of the costs of the humanitarian response, replenishing strategic grain reserves, and price stabilization: US$450 million.
- Humanitarian component estimate: US$276 million based on need for 790,000 metric tons of maize for food relief.

### Policy trade-offs and objectives
- Near-term macro framework anchored on tight monetary stance and domestic fiscal financing consistent with disinflation.
- Core reform agenda: implementation of PFM reforms to re-establish trust in the budget process and to re-engage donors.
- Authorities’ near-term goals:
  - Keep inflation on a declining trajectory.
  - Re-establish trust and confidence in the budget process.
  - Maintain reserves of at least three months of imports cover.
- Authorities view maintaining the flexible exchange rate regime and the automatic fuel pricing mechanism as central to achieving these objectives.

### Fiscal policy adjustments
- Revised budget for FY15/16 adopted in March 2016 broadly in line with program ceilings from fifth and sixth reviews (March 2015).
- By April 2016, drought impact was more severe than anticipated; previous donor-coordinated humanitarian relief contribution of 0.3 percent of GDP was already exhausted.

*Source: IMF staff and Malawian authorities (extract from “1. Recent Economic Developments, 2011–16”).*

### 19.      The humanitarian effort would cover both FY15/16 and FY16/17. In this regard, NDF in

### 19. The humanitarian effort would cover both FY15/16 and FY16/17.

### Humanitarian financing and program adjustments
- NDF in the FY15/16 fiscal framework would be increased by 0.4 percent of GDP to accommodate additional maize purchases.
- Under the proposed augmentation, increasing NDF by 0.5 percent of GDP in FY16/17 would facilitate additional maize purchases.
- The domestic spending adjustment in FY16/17 amounts to about one percentage point of GDP.
- The authorities committed to cut and change the composition of spending, including:
  - cut fertilizer subsidies;
  - contain the wage bill by limiting wage awards and removing ghost workers from the payroll (MEFP, ¶31).

### Key figures on maize/import financing and balance of payments needs
- Maize imports: US$233.6 (4.1 percent of GDP).
- Ex-ante financing gap: US$233.6 (4.1 percent of GDP).
- Donor financing: US$185.1 (3.2 percent of GDP).
  - Multilateral: US$118 (2.0 percent of GDP).
  - Bilateral: US$67.1 (1.2 percent of GDP).
- IMF augmentation: US$48.5 (0.8 percent of GDP).
- Donor commitments noted: AfDB US$18 million and the World Bank US$100 million.

### Arrears regularization and domestic payments
- Arrears incurred before FY14/15 estimated at MK157 billion (about 6 percent of GDP).
  - MK72 billion have been audited and securitized through zero-coupon promissory notes of maturities varying from one to three years.
  - MK30 billion claims have been rejected.
  - About MK55 billion require additional documentation.
- Incurrence of new arrears in the first half of FY15/16 was limited to 0.2 percent of GDP.
- Recent reforms to strengthen commitment controls: all MDAs now required to provide five detailed fiscal reports before receiving regular monthly funding.

### Revenue mobilization
- Authorities implementing IMF technical assistance recommendations on tax policy, including eliminating several tax exemptions.
- Agreed in principle to shift tax policy from taxes on factors of production to those on consumption.
- Potential yield of most measures in FY16/17 uncertain because many require changes in legislation.

### Medium-term fiscal anchor and policy
- Medium-term fiscal anchor: a primary fiscal balance consistent with a gradually declining net domestic financing (to place domestic debt on a declining trend while safeguarding social spending and limiting nonconcessional borrowing).
- Authorities committed to revisit proposed pension reforms to ensure long-term fiscal viability of the public pension scheme (MEFP ¶35 and ¶36).
- Wage bill increases over the medium term to reflect recruitment of additional teachers in line with poverty reduction strategy.

### Public financial management (PFM) reforms
- Implementation of PFM reforms initially slow but recently gained momentum with installation of a resident PFM advisor (MEFP ¶13, ¶33, ¶34).
- Strengthened budget control by enforcing monthly fiscal reporting by MDAs and plans to place Ministry of Finance inspectors in spending units.
- Publishing of monthly budget execution reports commenced.
- Cash management strengthened by closing dormant accounts and instituting regular cash management committee meetings.
- Increased coverage of government spending within the integrated financial management system to facilitate bank reconciliations and guard against fraud.
- Staff stressed need for regular oversight, accountability, and application of sanctions under the PFM Act for nonperformance.

### Monetary policy
- Staff emphasized maintaining a tight monetary policy stance to ensure inflation remains on a declining trajectory (MEFP, ¶20).
- Annual inflation at 21 percent through April; short-term money market rates are positive in real terms but need to be sustained via open market operations.
- RBM committed to achieve positive short-term real money market interest rates through open market operations and received IMF technical assistance to improve open market operations and liquidity forecasting.
- Recently introduced deposit facility, combined with existing Lombard facility, should keep interbank interest rates to within 200 basis points on either side of the policy rate and improve policy transmission.

### Financial sector stability
- Authorities implemented a prompt corrective action (PCA) framework and a model resolution framework for distressed banks (MEFP ¶23–¶25).
- New asset classification directive based on the estimated recoverable amount method (ERAM) imposes higher and graduated provisioning rates; remedial actions taken to recapitalize two banks affected by ERAM.
- Sale of government’s stake in two weak banks in June 2015 reduced vulnerabilities; restructuring/integration of the two banks proceeding and expected to be completed by December 2016.
- Recent stress tests: credit risk from loan concentration is the most significant threat; direct impact of large exchange rate depreciation and interest rate increases on banks’ balance sheets found to be moderate.
- Authorities required banks to address deficiencies in loan documentation and followed up on AML/CFT noncompliance incidents; amendments to anti-corruption and AML/CFT frameworks planned.

### Debt sustainability and borrowing
- Risk of external debt distress remains moderate; DSA finds external debt indicators below policy-dependent thresholds except for a very modest breach in 2016 in the debt service-to-revenue ratio.
- Authorities’ 2016–17 borrowing plan foresees US$77.5 million (1.2 percent of GDP) in new nonconcessional borrowing:
  - US$55 million from the African Development Bank for a water project;
  - US$22.5 million from China for an e-government project.
- Domestic public debt as percent of GDP projected to increase by 2 percentage points to 18.9 percent of GDP in 2016 (mostly due to securitization of old domestic arrears) and to decline to 13 percent of GDP in 2019.
- Staff and authorities agreed on need to strengthen debt management framework and identify risks associated with rapid debt accumulation.

### Program implementation, reviews, and waivers
- Completing the seventh and eighth reviews conditional on implementing two prior actions; reconciliation of all government accounts in MG1, five operational accounts and the ways and means account for the first half of FY15/16 is pending.
- Reconciliation of the salary account for the first half of FY15/16 excluded from the prior action due to technical complexities.
- Prior action of preparing a report on the flow and stock of arrears at end-2015 was met.
- Authorities requested waivers for nonobservance of two periodic performance criteria:
  - PC on net domestic borrowing missed at end-June 2015 due to unplanned recruitment of teachers, revenue shortfalls, and unbudgeted wage increases; waiver requested based on strong remedial actions since then.
  - PC on net international reserves missed at end-December 2015 because of lower-than-programmed exports due to weather-related shocks; RBM intervened more than programmed and allowed a very large depreciation of 36 percent in response to external shocks (in line with program understandings).

### IMF augmentation, access, and program extension
- Authorities requesting an augmentation of access of 25 percent of quota (SDR 34.7 million) to respond to humanitarian relief; this represents about 21 percent of the estimated balance of payments gap.
- An augmentation of 25 percent of quota will keep Malawi’s total annual access under the limit of 75 percent of quota for Poverty Reduction and Growth Trust financing.
- Government’s contribution would increase NDF for FY15/16 and FY16/17 by 0.4 and 0.5 percent, respectively.
- Staff noted that relaxation of the fiscal stance should not create undue inflationary pressures if additional NDF is used to finance maize imports or if the central bank mops up excess liquidity if part of additional NDF is used for domestic purchases.
- Authorities requesting an extension of the arrangement to end-December 2016 and a rephasing of disbursements.
  - A short extension from May 22, 2016 to June 30, 2016 was approved by the Board on May 13, 2016.
  - Requested extension to end-December 2016 to give more time to achieve original program objectives and complete PFM structural reforms and AML/CFT legislative amendments.

### Safeguards, safeguards monitoring, and repayment capacity
- Safeguards monitoring mission in February 2016 found steps taken to address control deficiencies in RBM’s banking operations.
- Mission recommended RBM’s internal audit conduct a special audit of current controls over government payments at the RBM and identify remaining weaknesses.
- Mission retained 2012 recommendation for RBM to draft additional amendments to the RBM law to strengthen the bank’s financial and institutional autonomy and advised RBM to review and revise its investment policy to avoid concentration with institutions below investment grade.
- Malawi’s capacity to repay the Fund is assessed as adequate; new disbursements under the ECF arrangement will have a negligible impact on debt and debt service ratios and the risk of debt distress would remain moderate.

### Staff appraisal summary
- Malawi’s macroeconomic situation remains difficult due to prolonged weather-related shocks and past policy slippages contributing to persistently high inflation.
- Near-term outlook challenging as maize harvest affected by drought for a second consecutive year and about half of the population placed at risk of food insecurity.

*Source: IMF staff and MEFP text as provided in the content unit.*

### 40.      The authorities undertook corrective measures to bring the program back on track.

### The authorities undertook corrective measures to bring the program back on track.

### Corrective measures and fiscal stance
- Policy slippages during the first half of 2015 were corrected during the second half of the year by containing net domestic borrowing and tightening monetary conditions.
- The revised budget for fiscal year 2015/16 that was approved by parliament in March is in line with the program.
- On the structural side, reforms in the financial sector were carried out as planned and the authorities made substantial progress on bank reconciliation and in strengthening commitment controls.

### Restoring macroeconomic stability and inflation
- Restoring macroeconomic stability is the most critical near term priority.
- Inflation has been stuck above 20 percent since 2012.
- Maintaining fiscal and monetary policies is needed to reduce inflation.
- Reducing inflation will necessitate the implementation of a credible budget in FY16/17 in line with sustainable financing.
- Low inflation is key to restoring private sector confidence, fostering growth, and building a solid foundation for reducing poverty.

### Public financial management (PFM) reforms
- Accelerating the implementation of PFM reforms is indispensable to building trust and confidence in the budget process and ensuring control over fiscal operations.
- Greater commitment control that contains voted expenditures to available resources will mitigate the emergence of domestic payment arrears and allow domestic financing to be limited to budgeted amounts.
- The restoration of routine bank reconciliation and regular fiscal reporting is critical to fostering donor re-engagement in light of Malawi’s structurally weak external position.

### Revenue mobilization
- Greater revenue mobilization is key to reducing aid dependency, mitigating policy slippages, and ensuring reliable financing of Malawi’s sustainable development goals.
- The authorities are encouraged to explore new tax policy measures, strengthen tax compliance, and modernize their tax administration.

### Expenditure efficiency and social priorities
- Improving expenditure efficiency will create fiscal space for social and other priority spending.
- The authorities are commended for initiating reforms to the farm input subsidy program, which is ill-targeted, and implementing a payroll audit and a headcount to eliminate ghost workers, and to strengthen control over the wage bill.

### Financial sector resilience
- The authorities are commended for improving the resilience of the banking system.
- Important measures implemented comprise the adoption of measures to intervene in distressed banks, the introduction of new asset classification directive, and regular stress testing of banks’ balance sheets.
- Given recent shocks, and the prevalence of concentration risk as the most important threat to financial sector stability, staff encourages the authorities to consider higher capital requirements, improving credit assessments, higher provisioning, and bank mergers in order to mitigate this risk.
- Strengthening creditor rights and reducing lengthy judicial processes in recovering collateral remain critical to the reduction of NPLs.

### Exchange rate regime and fuel pricing
- The flexible exchange rate regime and the automatic fuel pricing mechanism have served Malawi well as shock absorbers.
- Staff cautions that any changes to the fuel import regime, notably to improve fuel security, should be fully transparent and include consultations with all stakeholders to avoid growth-damaging disruptions in supply.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16182.pdf*

### 47.      Staff recommends the completion of the seventh and eighth reviews.

### Staff recommends the completion of the seventh and eighth reviews

### Recommendation and rationale
- Staff recommends the completion of the seventh and eighth reviews.
- Rationale:
  - Based on strong policy implementation during the second half of 2015 to bring the program back on track.
  - Based on completion of prior actions for the two reviews.
  - Based on the strength of the reform agenda articulated by the authorities in their memorandum of economic and financial policies.
- Staff supports the authorities’ request for waivers on missed PCs for the seventh and eighth reviews based on the strong corrective actions already taken.
- Staff further supports:
  - the extension of the arrangement,
  - rephasing of disbursements, and
  - the augmentation of access under the ECF arrangement.

### Macroeconomic outlook and key aggregates (selected indicators, 2012–19)
- GDP at constant market prices (percent change): 1.9, 5.2, 5.7, 3.0, 2.7, 4.5, 5.0, 5.5
- Nominal GDP (billions of Kwacha): 1,502, 2,011, 2,570, 3,203, 3,892, 4,601, 5,230, 5,932
- GDP deflator: 17.7, 27.3, 20.9, 21.0, 18.3, 13.1, 8.3, 7.5
- Consumer prices (end of period): 34.6, 23.5, 24.2, 24.9, 15.8, 9.9, 8.9, 8.6
- Consumer prices (annual average): 21.3, 28.3, 23.8, 21.9, 19.7, 14.1, 9.4, 8.7

### Savings, investment, and external position
- National savings (percent of GDP): 2.8, 4.0, 3.5, 3.2, -0.4, 4.5, 6.1, 6.4
- Gross investment (percent of GDP): 12.1, 12.7, 12.0, 11.4, 13.6, 13.2, 14.1, 14.0
- Saving-investment balance (percent of GDP): -9.3, -8.7, -8.5, -8.2, -13.9, -8.8, -8.0, -7.7
- Current account (percent of GDP, including official transfers): -9.3, -8.7, -8.5, -8.2, -13.9, -8.8, -8.0, -7.7
- Current account, excl. official transfers (percent of GDP): -12.3, -10.0, -8.5, -8.6, -13.9, -8.7, -7.9, -7.7
- Exports (goods and services, US$ millions): 1,421, 1,657, 1,737, 1,616, 1,670, 1,747, 1,871.7, 2,005.7
- Imports (goods and services, US$ millions): 2,281, 2,315, 2,399, 2,284, 2,604, 2,476, 2,590.5, 2,736.8
- Gross official reserves (US$ millions): 236, 397, 588, 670, 660, 705, 782.0, 889.9
- Reserves (months of imports): 1.2, 2.0, 3.1, 3.4, 3.2, 3.3, 3.4, 3.6

### Fiscal sector (central government, fiscal year basis)
- Revenue (percent of GDP): 18.7, 27.5, 22.8, 21.4, 22.5, 21.5, 21.7, 21.8
- Tax and nontax revenue (percent of GDP): 15.6, 17.3, 19.7, 18.6, 18.6, 18.6, 18.8, 18.8
- Grants (percent of GDP): 3.1, 10.2, 3.1, 2.8, 3.9, 2.9, 2.9, 2.9
- Expenditure and net lending (percent of GDP): 23.5, 28.5, 28.9, 27.9, 28.6, 26.4, 24.4, 24.4
- Overall balance (excluding grants, percent of GDP): -7.9, -11.2, -9.2, -9.3, -10.0, -7.9, -5.6, -5.6
- Overall balance (including grants, percent of GDP): -4.8, -1.0, -6.1, -6.5, -6.1, -5.0, -2.7, -2.6
- Foreign financing (percent of GDP): 1.1, 1.9, 2.0, 2.5, 3.1, 2.3, 2.1, 2.1
- Total domestic financing (percent of GDP): 4.7, -0.1, 4.2, 4.1, 2.6, 2.3, 0.6, 0.5

Fiscal tables (selected levels, Billions of Kwacha)
- Revenue (2015/16 Act.): 792.4; (2016/17 Prog.): 905.4; (2017/18 Budget): 1,062; (2018/19 Prelim. budget): 1,209
- Tax and nontax revenue (2015/16 Act.): 654.9; (2016/17 Prog.): 784.0; (2017/18 Budget): 920; (2018/19 Prelim. budget): 1,046
- Grants (2015/16 Act.): 137.5; (2016/17 Prog.): 22.8; (2017/18 Budget): 116; (2018/19 Prelim. budget): 163
- Expenditure and net lending (2015/16 Act.): 1,006.0; (2016/17 Prog.): 1,096; (2017/18 Budget): 1,116; (2018/19 Prelim. budget): 1,196
- Current expenditure (2015/16 Act.): 768.1; (2016/17 Prog.): 842; (2017/18 Budget): 862; (2018/19 Prelim. budget): 879
- Development expenditure (2015/16 Act.): 236.4; (2016/17 Prog.): 250; (2017/18 Budget): 312; (2018/19 Prelim. budget): 378
- Interest payments (2015/16 Act.): 36.7; (2016/17 Prog.): 28.5; (2017/18 Budget): 44.6; (2018/19 Prelim. budget): 44.6
- Overall balance (including grants, 2015/16 Act.): -213.7; (2016/17 Prog.): -67.1; (2017/18 Budget): -28.1; (2018/19 Prelim. budget): -65.5

### Monetary and financial sector (selected)
- Reserve money (end periods, Billions of Kwacha): 113, 157, 212, 213, 261, 206, 176, 226, 247, 300, 370, 458
- Money and quasi-money (Billions of Kwacha): 386, 522, 630, 642, 779, 909, 1,062, 1,292, 1,597
- Annual growth of reserve money (percent): 54.6, 38.6, 35.3, 10.2, 21.4, -3.0, -17.1, 14.2, 19.8, 21.5, 23.4, 23.6
- Annual growth of broad money (percent): 22.9, 35.1, 20.7, 13.8, 23.7, 16.7, 16.9, 21.7, 23.6
- Annual growth of credit to the private sector (percent): 25.4, 14.4, 20.0, 13.6, 29.9, 20.3, 18.9, 20.3, 22.2
- Net foreign assets (NFA, US$ millions, monetary authorities): -50, 99, 310, 434, 440, 416, 381, 387, 376, 443, 548, 673
- Money multiplier (memorandum): 3.4, 3.3, 3.0, 3.0, 2.8, 3.8, 4.0, 3.8, 3.7, 3.5, 3.5, 3.5
- 91-day treasury bill rate (end of period): 20.0, 32.3, 26.9, 26.9, 22.2

### Balance of payments and external financing (selected)
- Current account balance (US$ millions, including grants): -555.0, -470.8, -515.2, -526.1, -803.6, -597.8, -584.9, -600.5
- Merchandise trade balance (US$ millions): -659.1, -442.4, -468.5, -450.0, -678.4, -476.5, -472.2, -493.1
- Exports (US$ millions): 1,272.0, 1,500.2, 1,561.1, 1,484.9, 1,551.8, 1,625.7, 1,733.9, 1,855.3
  - Of which: Tobacco (US$ millions): 480.9, 432.8, 470.7, 517.4, 547.8, 569.4, 597.9, 631.8
  - Of which: Uranium (US$ millions): 154.4, 169.9, 40.4, 0.0, 0.0, 0.0, 0.0, 0.0
- Imports (US$ millions): -1,931.1, -1,942.6, -2,029.6, -1,934.9, -2,230.2, -2,102.2, -2,206.1, -2,348.4
  - Of which: Petroleum (US$ millions): -173.7, -176.6, -183.0, -101.4, -87.7, -116.2, -131.3, -143.7
- Unrequited transfers (net, US$ millions): 440.5, 346.6, 308.2, 313.6, 305.3, 307.0, 311.4, 318.0
  - Private (net): 259.8, 274.4, 309.0, 287.8, 306.1, 307.9, 312.3, 318.9
  - Official (net): 180.7, 72.2, -0.8, 25.8, -0.8, -0.8, -0.8, -0.8
- Capital account balance (US$ millions): 409.8, 433.6, 261.1, 263.1, 505.5, 359.9, 360.1, 374.6
- Financial account balance (US$ millions): 243.3, 120.6, 488.3, 322.4, 210.1, 262.3, 332.4, 352.1
- Medium- and long-term flows (net, US$ millions): 76.0, 86.0, 182.4, 99.1, 48.6, 67.9, 151.7, 164.2
  - Disbursements (US$ millions): 93.4, 96.7, 224.4, 148.5, 185.3, 189.5, 202.8, 215.3
  - Amortization (US$ millions): -17.4, -10.7, -42.0, -49.5, -136.7, -121.7, -51.1, -51.1
- Foreign direct investment and other inflows (US$ millions): 81.9, 92.9, 296.0, 114.3, 170.6, 188.6, 179.7, 186.9
- Commercial banks net foreign assets (US$ millions): 84.7, -59.1, 9.1, 108.2, -10.0, 5.0, 0.0, 0.0
- Overall balance (US$ millions): 93.3, 168.6, 163.7, 59.3, -88.1, 24.4, 107.6, 126.2
- Financing gap (US$ millions): 0.00, 0.00, 0.00, 0.0, 48.5, 42.4, 0.00, 0.0
- IMF augmentation of access reported as: 48.5

### Debt indicators (selected)
- External debt (public sector, percent of GDP): 26.5, 30.8, 33.1, 37.0, 33.2, 29.1, 29.2, 29.3
- NPV of external debt (percent of exports): 53.3, 77.3, 102.9, 110.9, 86.4, 83.0, 82.7, 82.0
- Domestic public debt (percent of GDP): 13.8, 19.8, 14.9, 16.8, 18.9, 18.0, 15.5, 13.3
- Total public debt (percent of GDP): 40.2, 50.6, 48.0, 53.8, 52.1, 47.1, 44.7, 42.5
- External debt service (percent of exports): 1.4, 1.7, 4.3, 5.2, 11.8, 9.6, 5.3, 4.5
- External debt service (percent of revenue excl. grants): 2.1, 2.8, 6.6, 7.2, 18.3, 12.7, 7.4, 6.1

### Key program support actions endorsed by staff
- Completion of seventh and eighth reviews recommended.
- Support for waivers on missed performance criteria (PCs) for the seventh and eighth reviews.
- Support for extension of the arrangement, rephasing of disbursements, and augmentation of access under the ECF arrangement.

*Source: IMF staff report content provided in the PDF chapter/section.*

### 1. Regulatory Tier 1 capital to risk weighted assets16.516.216.416.116.214.913.516.115.0

### _cr16182 - 1. Regulatory Tier 1 capital to risk weighted assets16.516.216.416.116.214.913.516.115.0

### Banking regulatory and capital ratios
- Regulatory Tier 1 capital to risk weighted assets: 16.5 16.2 16.4 16.1 16.2 14.9 13.5 16.1 15.0
- Regulatory total capital to risk weighted assets: 20.1 19.2 20.2 19.4 19.1 18.3 17.1 20.2 19.4
- Total capital to total assets: 14.6 13.9 14.3 15.1 15.4 17.9 17.6 20.3 16.6 18.2 16.9

### Asset composition and quality
- Non-performing loans to gross loans and advances: 4.1 5.5 9.4 12.6 15.4 16.1 14.9 14.8 13.8 11.6 10.7
- Provisions to non-performing loans: 36.9 30.5 26.8 30.5 29.1 28.3 31.8 33.4 34.7 30.5 28.3
- Total loans and advances to total assets: 52.7 53.3 50.8 45.4 40.5 42.1 40.3 43.3 41.0 40.1 39.3
- Foreign currency loans to total loans and advances: 6.1 9.4 7.9 10.5 13.5 18.1 19.1 21.4 16.1 24.1 28.7

### Earnings and profitability
- Return on assets (ROA): 3.5 5.1 5.0 4.7 4.8 4.9 4.0 4.2 4.2 4.00 3.2
- Return on equity (ROE): 24.7 36.7 36.9 36.2 37.5 33.5 26.8 25.0 24.9 24.6 20.1
- Non-interest expenses to gross income: 46.0 44.3 36.8 37.8 39.7 43.2 45.4 47.3 48.0 48.5 50.4
- Interest margin to gross income: 46.0 37.9 36.8 36.8 39.7 43.1 ------ 48.9 49.4 50.6
- Non-Interest Income to Revenue: ------ 31.8 36 37.8 32.5 32.0 30.5 32.2
- Net Interest Income to Assets: ------ 9.1 4.7 8.4 2.7 5.9 8.1 9.8
- Personnel expenses to non-interest expenses: 39.7 46.5 146.0 46.7 45.4 45.7 45.1 49.8 49.1 48.0 46.2

### Liquidity metrics
- Liquid assets to deposits and short-term liabilities: 43.0 42.5 45.4 48.6 59.1 57.6 62.4 64.5 62.5 61.8 59.0
- Total loans to total deposits: 70.9 75.9 72.4 64.8 56.6 62.0 58.3 60.6 61.4 58.9 58.4
- Liquid assets to total assets: 33.4 32.6 34.5 35.6 43.7 41.4 48.8 40.5 43.5 43.8 42.7
- Foreign exchange liabilities to total liabilities: 7.8 n.a. 17.9 n.a. 26.3 n.a. ------ 16.1 ---

### External financing requirement and sources (Table 6: 2012–19, Millions of USD)
- Total requirement: -799 -715 -747 -684 -929 -764 -714 -760
- Current account, excluding official transfer: -736 -543 -514 -552 -803 -597 -584 -600
- Debt amortization: -17 -11 -42 -49 -137 -122 -51 -51
- Gross reserves accumulation (- increase): -46 -161 -191 -8 10 -45 -79 -110
- Total sources: 799 715 747 684 881 721 715 760
- Expected disbursements (official): 684 603 485 437 690 549 562 589
  - Grants: 590 506 260 289 505 359 359 374
  - Medium- and long-term loans: 93 97 22 41 49 185 190 203 215 (note: entries appear concatenated in source)
- Private sector (net): 78 100 268 253 161 194 181 188
- IMF (net): 37 13 -5 -6 29 -22 -28 -17
  - Drawings: 40 20 18 18 5 4 00 0 (source formatting)
  - Repayments: 37 23 24 25 22 22 8 17
- Financing gap: 0 0 0 0 0 48 43 00
- Gross official reserves: 236 397 588 670 660 705 784 894
- Months of imports: 1.2 2.0 3.1 3.4 3.2 3.3 3.4 3.6

### Disbursements under ECF Arrangement (Tables 7a and 7b; Millions of SDR)
- Total for the ECF arrangement (Table 7a): 104.10 150.00
- Malawi's Quota (millions SDR) (Table 7a): 69.4
- Proposed new schedule total (Table 7b): 138.8 100
- Malawi's new Quota (millions SDR) (Table 7b): 138.8
- Selected tranche examples (Table 7a / 7b):
  - 13.02 (18.76) July 23, 2012 — Disbursed
  - 13.02 (18.76) December 15, 2012 — Disbursed
  - 13.01 (18.75) March 15, 2013 — Disbursed
  - 6.51 (9.38) June 15, 2013 — Disbursed
  - 6.50 (9.37) December 15, 2013 — Disbursed
  - 6.51 (9.38) March 15, 2014 — Disbursed
  - 6.51 (9.38) September 15, 2014 — Disbursed
  - 17.00 (24.50) September 15, 2015 — Observance of performance criteria for June 30, 2015 and completion of the seventh review.
  - 22.02 (31.73) March 15, 2016 — Observance of performance criteria for December 31, 2015 and completion of the eighth review.

### Indicators of capacity to repay the Fund (Table 8: 2016–27)
- Projected payments based on existing drawings (SDR millions) — Principal: 17.6 15.7 20.4 11.9 13.8 13.0 13.0 6.5 3.9 1.3 0.0 0.0
- Projected payments based on existing drawings (SDR millions) — Charges and interest: 0.04 0.03 0.01 0.14 0.11 0.08 0.04 0.02 0.01 0.00 0.00 0.00
- Projected payments based on prospective drawings (SDR millions) — Principal: 0.0 0.0 0.0 0.0 0.0 5.4 10.8 10.8 10.8 10.8 5.4 0.0
- Projected payments based on prospective drawings (SDR millions) — Charges and interest: 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0
- Projected payments based on existing and prospective drawings (SDR millions): 17.6 15.7 20.4 11.9 13.8 15.0 24.0 14.3 11.7 9.1 5.4 0.0
- Projected payments based on existing and prospective drawings (US$ Millions): 24.4 21.8 28.3 16.6 19.2 20.9 33.4 19.9 16.3 12.7 7.6 0.0
- Percent of exports of goods and services: 1.5 1.2 1.5 0.8 0.9 0.9 1.3 0.7 0.6 0.4 0.2 0.0
- Percent of debt service: 23.5 24.4 28.4 18.4 20.2 21.3 28.5 16.8 11.6 8.0 4.3 0.0
- Percent of quota: 12.7 11.3 14.7 8.6 9.9 10.8 17.3 10.3 8.4 6.6 3.9 0.0
- Percent of gross official reserves: 3.7 3.1 3.6 1.9 1.9 1.9 2.8 1.6 1.2 0.9 0.5 0.0
- Projected level of credit outstanding (SDR millions): 139.9 131.1 117.6 105.8 92.0 73.5 49.7 32.3 17.6 5.4 0.0 0.0
- Projected level of credit outstanding (US$ Millions): 195.6 183.5 164.9 148.7 129.5 103.4 69.9 45.4 24.7 7.6 0.0 0.0
- Percent of exports of goods and services (credit outstanding): 11.7 10.5 8.8 7.4 5.9 4.5 2.8 1.7 0.9 0.2 0.0 0.0
- Percent of debt service (credit outstanding): 188.6 205.0 165.3 165.4 135.7 105.6 59.4 38.3 17.6 4.8 0.0 0.0
- Percent of quota (credit outstanding): 100.8 94.5 84.8 76.2 66.3 53.0 35.8 23.3 12.7 3.9 0.0 0.0
- Percent of gross official reserves (credit outstanding): 29.6 26.0 21.0 16.6 13.0 9.5 5.9 3.6 1.8 0.5 0.0 0.0

Memorandum items (selected projections):
- Exports of goods and services (millions of U.S. dollars): 1670 1747 1872 2006 2177 2311 2497 2670 2856 3094 3352 3632
- Debt service (millions of U.S. dollars): 103.7 89.5 99.7 89.9 95.4 97.9 117.5 118.5 140.8 157.7 174.9 171.5
- Quota (SDR millions): 138.8 (each year 2016–2027)
- Gross official reserves (millions of U.S. dollars): 660.0 705.0 784.3 894.0 999.7 1093.2 1192.0 1276.6 1358.2 1392.8 1471.8 1607.8
- GDP (millions of U.S. dollars): 5767 6826 7355 7823 8354 8931 9557 10220 10950 11745 12581 13491

### Quantitative targets, 2015–2016 (Tables 9a and 9b)
- 2015 monetary targets (millions of kwacha):
  - Ceiling on net domestic assets of the RBM: PC 87,033 93,063 39,169 — Status: Met; 73,959 33,594 39,032 — Status: Not met; 83,792 30,139 -70,410 — Status: Met
  - Ceiling on reserve money: IT 243,828 243,828 213,046 — Met; 248,213 248,213 198,144 — Met; 260,545 260,545 198,144 — Met
- 2015 fiscal targets (millions of kwacha):
  - Ceiling on central government's net domestic borrowing: PC 37,030 43,060 94,297 — Not met; 40,407 32,850 7,329 — Met; 58,162 51,489 4,269 — Met
  - Floor on social spending (cumulative): IT 257,430 281,141 — Met; 54,725 65,132 — Met; 146,687 140,876 — Not met
- 2015 external sector targets (US$ millions):
  - Floor on net international reserves of the RBM: PC 487 472 536 — Met; 531 549 500 — Not met; 537 522 489 — Not met
  - Ceiling on the accumulation of external payments arrears: PC 0 0 — Met
  - Ceilings on new nonconcessional external debt maturing in more than one year and in one year or less: PC 0 0 — Met
  - Prohibition on imposition or intensification of restrictions on payments and transfers for current transactions: PC Met Met Met
- Memorandum items (selected):
  - Net foreign assets of the RBM (US$ millions): 390 433 433 396 440 416
  - Budget support (US$ millions): 18.070 026.6 7 26.6
  - Program exchange rate (kwacha per US$): 402 (2015 targets)

- 2016 targets (Table 9b):
  - Ceiling on net domestic assets of the RBM: PC -90,331
  - Ceiling on reserve money: IT 176,413
  - Ceiling on central government's net domestic borrowing: PC 38,000
  - Floor on social spending (cumulative): IT 292,675
  - Floor on net international reserves of the RBM: PC 473
  - Ceiling on the accumulation of external payments arrears: PC 0
  - Ceiling on non-concessional external debt: PC 77.5
  - Prohibition on imposition or intensification of restrictions on payments and transfers for current transactions: PC
  - Memorandum items:
    - Net foreign assets of the RBM (US$ millions, end of period): 381
    - Budget support (US$ millions): 7 26.60
    - Budget support (millions of kwacha): 20,528
    - Nominal external concessional borrowing (US$ millions): 11 150
    - Debt service payments to the World Bank and AfDB (US$ millions): 7 11.45
    - Program exchange rate (kwacha per US$): 700

### Structural benchmarks, prior actions, and financial sector measures (Tables 10a and 10b)
- Public financial management benchmarks and status (selected):
  - Publish detailed monthly budget execution data by vote on the Ministry of Finance's website no later than 6-weeks after execution. Target: End-March 2015. Macro rationale: To foster greater fiscal transparency and monitoring. Status: Met
  - Reconcile all government bank accounts MG1 and six operational accounts and ways and means for all FY2014/15 transactions signed by the Accountant General and Secretary of the Treasury. Target: End-Feb 2016. Status: Not met
  - Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General. Target: End-Dec 2015. Status: Not met
  - Prepare a report on the flow and stock of arrears at the end of each quarter starting with end-September 2014 and within two months of the end of each six months. Target: End-June 2015. Status: Not met
  - Produce and publish monthly summary bank account control reports. Target: End-September 2015. Status: Not met
  - Issue reports by international audit firms on bank reconciliations and summary bank account control reports. Target: End-September 2015. Status: Not met
  - Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain. Target: End-Feb 2016. Status: Not met
- Financial sector benchmarks and status (selected):
  - Prepare a strategy to address banking sector wide issues raised by the third-party diagnostics assessments, including the high loan concentration among banks. Target: End-March 2015. Status: Met
  - RBM to obtain from all undercapitalized banks detailed, quarterly monitorable recapitalization and restructuring plans showing how they will reach the minimum capital adequacy level within one year. Target: End-April 2015. Status: Met
  - RBM to obtain from all banks with significant deficiencies reported by diagnostic assessments to submit plans to address deficiencies within one year. Target: End-June 2015. Status: Met
  - RBM to develop contingency plans to intervene and resolve banks if they do not submit or comply with acceptable recapitalization plans. Target: End-June 2015. Status: Met
  - Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and UNCAC. Target: End-June 2015. Status: Not Met
  - RBM issue a detailed report on compliance with regulations on loan classification and provisioning and concentration limits in line with existing directives. Target: End-September 2015. Status: Met
  - RBM to follow-up on possible breaches of compliance with the AML legal framework by banks, applying supervisory actions mandated by the AML legal framework. Target: End-December 2015. Status: Met

- Prior actions for completion of the seventh and eighth reviews (Table 10b):
  - Reconcile all government bank accounts in MG1 and five operational accounts and ways and means for all FY2015/16 transactions (until end-December 2015). Have the completed reconciliations signed by the Accountant General and the Secretary of the Treasury. Status: Pending
  - Prepare a report on the flow and stock of arrears at end-2015. Status: Met

- Structural benchmarks for 2016 (selected):
  - Publish detailed monthly budget execution data by vote for the first nine months of FY2015/16 on the Ministry of Finance's website. Target date: End-June 2016.
  - Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General. Target date: End-June 2016.
  - Reconcile the wages account for the first six months of FY15/16. Target date: End-June 2016.
  - Reconcile all government bank accounts in MG1 and six operational accounts and ways and means for all FY2015/16 transactions (July 1, 2015 through June 30 2016). Have completed reconciliations signed by the Accountant General, the Auditor General, and the Secretary of the Treasury. Target date: End-August 2016.
  - Auditor General to produce and publish an interim audit report covering July 1, 2015 to December 31, 2015. Target date: End-Sept. 2016.
  - Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain including controls over bank reconciliations for MG1 and six operational accounts and ways and means for the first half of FY15/16 transactions. Target date: End-Sept. 2016.
  - Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and UNCAC. Target date: End-June 2016.

*Source: IMF staff estimates; IMF staff projections; IMF staff and Malawian authorities.*

### 1.      On March 23, 2015, the Executive Board of the International Monetary Fund (IMF) completed

### On March 23, 2015, the Executive Board of the International Monetary Fund (IMF) completed

### Program status, requests, and remedial actions
- The Executive Board completed the fifth and sixth reviews under the three year Extended Credit Facility (ECF) arrangement for Malawi and extended the arrangement to May 2016.
- The authorities request:
  - Waivers for nonobservance of two periodic performance criteria (PCs): the end-June 2015 PC on net domestic borrowing and the end-December 2015 PC on net international reserves (NIR).
  - Completion of the seventh and eighth reviews under the ECF arrangement and release of the eighth and ninth tranches totaling SDR 19.52 million.
  - An extension of the arrangement by 6 months to end-December 2016 to allow completion of the ninth review.
  - An augmentation of access of 25 percent of quota under the program to respond to the El-Niño-induced shock.
- Corrective and remedial actions taken:
  - Instituted commitment controls requiring spending units to submit detailed monthly fiscal reports as a condition for receiving regular funding; withheld funding for noncompliance.
  - Prepared a report on the stock and flows of domestic arrears at end-2015 as prior actions for completion of the seventh and eighth reviews.
  - Tightened monetary policy and better aligned the interbank rate with the policy rate.
  - Strengthened public financial management (PFM) with donor support and completed prior actions in the PFM area.

### Humanitarian shock and financing needs
- The prolonged El Niño-induced drought affected 2.8 million persons and placed an estimated 8.4 million people at risk of food insecurity.
- Preliminary estimates of the maize deficit: about 1.1 million metric tons.
  - About 790,000 metric tons allocated for relief to the affected population.
  - Remainder to replenish strategic grain reserves and stabilize prices.
- Total cost of humanitarian efforts estimated at about US$276 million.
- The government appealed to development partners and requested IMF assistance via augmentation of access equivalent to 25 percent of quota to facilitate additional maize purchases.

### Recent economic developments and near-term outlook
- Growth and agriculture:
  - Real GDP growth estimated to have declined by 2.7 percentage points to 3 percent in 2015.
  - Overall agricultural production decreased by 1.5 percent; the staple maize crop declined by 28 percent.
- Inflation:
  - Inflation declined by 6 percentage points from end-2014 to 18 percent in March 2015, then rose to 24.9 percent at end-December 2015.
  - Inflation was 23.4 percent up to February 2016.
  - Core inflation (non-food CPI component) declined for five consecutive months, indicating demand management policies beginning to take effect.
- Humanitarian food response:
  - World Food Program–coordinated operation cost initially US$111 million, later raised to US$127 million.
  - Government of Malawi provided about US$22 million in funding, in cash and maize from Strategic Grain Reserves (SGR); donors provided the remainder.
  - The operation met basic needs up to the start of the 2016 harvest at end-April.
  - SGR virtually exhausted; fiscal space limited; traditional import sources under pressure.
- Fiscal execution and arrears:
  - Unplanned recruitment of 10,500 teachers, tax and external financing shortfalls contributed to budget slippage before June 2015.
  - Corrective expenditure measures of about ¾ percentage points of GDP were taken; almost ½ percentage points of GDP of unanticipated one-off nontax revenues were recorded.
  - Total domestic borrowing by end-FY 2014/15 exceeded target by 2 percentage points of GDP.
  - By end-December 2015, net domestic financing (NDF) was held well below program target; however, missed end-December 2015 indicative target (IT) on social expenditure: outturn MK140.9 billion vs MK146.7 billion programmed (delay due to FISP logistics).
  - Auditing of old arrears: of MK157 billion (6 percent of GDP), MK72 billion verified as legitimate arrears, MK30 billion rejected, and MK55 billion require additional documentation by end-June, 2016.
  - For bone fide arrears, issued zero coupon bonds with one to three year maturities and implemented reporting procedures.
- Payroll and wage bill control:
  - Payroll audit revealed control weaknesses; measures taken: eliminating ghost workers, stopping illicit editing of salary schedule, ceasing overstating salary funding, eliminating employees beyond retirement age.
  - Headcount April 2016: estimated 10 percent of the labor force of 177,000 employees required further tracking; 2,300 were unquestionably physically non-existent.
  - Expected reduction in the wage bill by an estimated MK4.1 billion this fiscal year.
- Monetary policy and liquidity:
  - Liquid reserve ratio (LRR) was cut in half in July 2015; authorities later absorbed the liquidity expansion and tightened monetary policy.
  - Short-term interest rates have risen and are now positive in real terms; liquidity in the interbank market contained.
  - Interbank rates are close to the policy rate of 27 percent and positive in real terms.
  - Introduced a deposit facility at 2 percentage points below the policy rate and a Lombard facility at 2 percentage points above the policy rate, establishing an interest rate corridor of +/- two percent (25 to 29 percent at current values).
- Exchange rate and reserves:
  - Kwacha depreciated by more than 34 percent from July 2015 to early March 2016; then strengthened and up to May 2016 regained 5.7 percent of its value.
  - Purchased additional reserves; stock stands at 3.0 months of import cover as of May 2016.
  - Missed the end-December 2015 PC floor on NIR; waiver requested citing effects of the drought, weakening of regional currencies, and allowance of large depreciation in line with program understandings.

### Performance under the ECF program and structural reforms
- Program performance summary:
  - Setbacks occurred in the run-up to the seventh review due to fiscal overruns and delays in structural measures.
  - End-June 2015: net domestic assets (NDA) and NIR PCs met, but net domestic financing (NDF) missed by 2 percentage points of GDP.
  - Remaining quantitative PCs and indicative targets (ITs) were met.
  - Structural benchmarks (SBs) related to the financial sector showed good progress.
  - All public financial management (PFM)–related structural benchmarks were missed initially but prior actions in the PFM area have since been completed.
- Rationale for waiver requests:
  - Waiver for end-June 2015 NDF breach: remedial actions taken and compliance with end-December 2015 target.
  - Waiver for end-December 2015 NIR breach: effects of drought on exports and regional currency movements; tightening of policy stance and continued flexible exchange rate regime.

### Policy commitment and consultation
- Government commitments:
  - Remain committed to objectives of the original ECF arrangement: strong inclusive growth, single digit inflation, and increase of reserves to at least three months of import cover.
  - Preserve flexible exchange rate regime and automatic fuel pricing mechanism.
  - Keep monetary and fiscal policies tight to reduce inflation.
  - Revised fiscal program for FY2015/16 approved by parliament and in line with the program; agreements reached with IMF staff on broad contours of FY16/17 fiscal framework.
  - Will consult with the Fund on additional measures and provide requested information on program progress.
- Publication authorization:
  - Government authorizes the IMF to make this letter and the attached MEFP and Technical Memorandum of Understanding available to the public, including through the IMF internet website.

*Memorandum of Economic and Financial Policies, June 2016 (attached to the Letter of Intent).*

### 13.      The pace of implementation of PFM measures under the program faltered after the

### _cr16182 - 13.      The pace of implementation of PFM measures under the program faltered after the

### Pace of PFM implementation and bank reconciliation
- Implementation faltered after the fifth and sixth reviews but has since accelerated significantly.
- As a prior action (PA) for completion of the seventh and eight reviews:
  - Monthly reconciliations completed for the first six months of the 2015/16 fiscal year for the main government account (the MG1 account) and five of the six operational accounts.
  - Reconciliation of the remaining operational account—the wage and salary account—was delayed for technical reasons, expected to be completed by end-June 2016.
- Initial reconciliation difficulties arose from:
  - revenues received at the Bank but not captured in IFMIS in real time;
  - FY 2014/15 payments recorded in FY 2015/16;
  - un-presented checks;
  - system problems where processed transactions were not updating the cash book in IFMIS;
  - foreign payments made by the RBM on behalf of Government but not recorded in IFMIS, such as public debt transactions;
  - funding not done in both systems i.e. TIBCO and IFMIS;
  - human error and omissions.
- Resolutions found allowed full reconciliation; process assisted by a PFM resident advisor supplied by the Fund.
- Government progress:
  - capturing all expenditures of Government in the IFMIS system by end April 2016;
  - monthly reconciliations between book records and bank statements now produced with a lag of no more than four weeks (SB).
- The reconciliations for the first half of FY 2015/16 have been verified by the Secretary to Treasury and the Accountant General.
- The wages account reconciliation was set as a benchmark for end-June.
- Planned use of reconciled bank statements:
  - produce an interim audit report by the Auditor General of the first six months of FY 2015/16 and publish this report on the Ministry of Finance web site by end-September 2016 (SB).

### Domestic payment arrears and transparency
- As a PA, a report on the quarterly flow and stock of domestic payment arrears was issued for end-September 2015 and end-December 2015.
  - These reports indicate only a marginal accumulation of new domestic arrears.
  - Government is actively investigating each new arrear to normalize the entire stock quickly and efficiently.
- Going forward: produce quarterly reports on the flow and stock of domestic arrears with a lag of no more than two months (structural benchmark).
- Fiscal transparency measures:
  - Begun publishing detailed monthly budget execution data by vote on the Ministry of Finance web site; monthly data for July 2015 to February 2016 have been posted.
  - Finished reviewing all government bank accounts and closed over 282 redundant and dormant accounts.

### Accountability and prosecutions (Cashgate)
- Continued prosecution using evidence from forensic audit for 1 April 2013 to 30 September 2013, and investigations by the Directorate of Public Prosecutions and the Anti-Corruption Bureau.
  - To date, 9 cases have been prosecuted — all successfully — and 11 perpetrators have been convicted, receiving sentences of between 3 and 10 years.
- Plans to expand prosecutions based on existing case files and results of a new forensic audit.
  - New forensic audit (financed with assistance from the German Government) will examine fiscal records from January 1, 2009–December 2014 and prepare bank reconciliations for this period.
  - Government intends to evaluate prosecutable opportunities once this report is submitted.

### Financial sector measures and AML/CFT legislative changes
- Most structural benchmark measures for the financial sector were met, albeit with some delays.
- Actions taken:
  - Prepared a strategy to address banking sector-wide issues raised by third-party diagnostic assessments.
  - Obtained detailed remediation plans from all undercapitalized banks.
  - Developed plans for all banks to correct reporting deficiencies within one year.
  - RBM produced detailed report on compliance with regulations on loan classification and provisioning and concentration limits.
  - Developed contingency plans to intervene and resolve banks that do not submit or comply with acceptable recapitalization plans.
- AML/CFT legislative amendments:
  - Amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act were not submitted to Parliament in the current session; deadline missed after significant discussion and revision.
  - Government will submit them in the next session beginning in June 2016 and will ensure alignment with the FATF standard and the United Nations Convention against Corruption.

### Banking supervision, provisioning, and recapitalization
- Adopted in May 2014 a prompt corrective action (PCA) framework and a model resolution framework.
- New asset classification directive (May 2014) based on the estimated recoverable amount method (ERAM) imposes higher and graduated provisioning rates.
- Implementation of ERAM-based provisioning shifted capital adequacy positions of two additional banks below required standard.
  - One of the two banks expected to be recapitalized by shareholders by end-June 2016.
  - Discussions with a potential external buyer for the second bank are underway.
  - RBM is closely monitoring the recapitalization process.
- Steps to strengthen supervision:
  - enhancing on-site and off-site supervision;
  - enforcing compliance with prudential norms;
  - enhancing supervisory skills of RBM staff.
- Loan concentration remains a major risk factor; RBM will continue to closely monitor loan concentrations.

### Macroeconomic outlook, objectives, and risks
- Outlook drivers and assumptions:
  - Continued uncertainties related to weather conditions, uncertain financing possibilities, and persistence of high inflation.
  - Medium-term projections predicated on policy actions to reduce inflation, normalization of weather conditions, and progress in addressing supply-side bottlenecks.
  - Retention of the flexible exchange rate and automatic fuel pricing regimes expected to foster gradual increase in private sector confidence.
- Short-term objective: stabilize macroeconomic situation, regain control over fiscal systems, and safeguard external and financial sector stability.
- Policy intent: responsible fiscal and monetary policies and vigorous PFM reform to reduce inflation, reverse contraction of real incomes, and restore budget confidence.

### Growth, inflation, reserves projections
- 2016:
  - Growth: increase in real GDP is unlikely to exceed 4 percent in 2016.
  - Inflation: should decline to about 16 percent (year-on-year) by end 2016.
  - Foreign exchange reserves: expected to remain at 3 months of import cover.
- 2017 and medium term:
  - 2017 growth could reach 5.5 percent, before gradually increasing to around 6 percent in the medium term.
  - Inflation: will decline to single digits by the end of 2017.
  - Domestic debt: expected to be placed on a declining trend over the medium term, contingent on strengthening debt management capacity.
- Risks:
  - Short-term risks tilted to the downside due to looming food crisis aggravated by El Niño.
  - Additional downside risks from slippages in macroeconomic policy implementation which could pressure the kwacha and dampen financial inflows.
  - The requested augmentation of access under the ECF arrangement intended to help respond to the looming humanitarian crisis.
  - Active engagement with donors to mobilize urgent humanitarian assistance.

### Monetary and financial sector policy stance and objectives
- Monetary policy objective: keep inflation on a declining trajectory; attain an end-of-period inflation rate of 16 percent by December 2016; maintain a minimum of 3 months import cover in foreign exchange reserves.
- Tools and stance:
  - Tight monetary policy to keep central bank rate well above the rate of inflation.
  - Use liquidity operations in interbank and Treasury bill markets to maintain positive real interest rates.
  - Deposit facility introduced to contain overnight money market deviations from the policy rate to +/- 200 basis points.
  - Continued adherence to the flexible exchange rate regime.
- Framework development:
  - Maintain current monetary targeting framework (operational target on reserve money level and a floor on NIR stocks) for the remainder of the ECF arrangement.
  - Expand role of interest rates via an interest rate corridor in the interbank market and overnight deposit facility to gain greater control over interbank and longer-term rates.
  - Aim for eventual adoption of a full-fledged inflation targeting regime in the medium term.
  - Need for capacity building in liquidity forecasting and control, monetary transmission mechanisms understanding, and inflation forecasting capacity, including economic modeling.
  - IMF technical assistance sought in these areas.

### Fiscal policy stance, revenue, and tax reforms
- Fiscal policy to support monetary objective of reducing inflation: keep spending within available resources and strictly limit government recourse to domestic borrowing, particularly from the RBM.
- Mid-term budget review adjustments:
  - Revised FY2015/16 budget based on keeping NDF at MK25 billion (0.7 percent of GDP) but to be revised upwards by 0.4 percent of GDP to accommodate additional maize purchases for humanitarian relief.
  - Excessive domestic borrowing during second half of FY 2014/15 likely contributed to higher-than-projected inflation.
- Revenue mobilization:
  - Prioritize revenue mobilization as budget support is becoming less likely.
  - Develop more reliable resource mobilization via improved tax administration and tax policy changes.
  - Develop a Dividend and Surplus Policy to enhance financial management in statutory bodies and ensure transfers to the treasury.
- Tax reforms from FY2016/17:
  - Implement broad based tax reforms to create a simple, efficient, transparent and fair tax system.
  - Streamline tax incentives, eliminate unproductive tax measures, and broaden the tax base.
  - Shift reliance from taxation of labor and investment to consumption.
- Tax administration measures:
  - Malawi Revenue Authority undertaking initiatives to reduce tax compliance costs and enhance revenue collection in the 2016/17 Fiscal year.
  - Determined to implement recommendations of the 2015 TADAT assessment.
- FY 2016/17 budget and debt:
  - Continue fiscal and debt consolidation.
  - NDF under the program (one percent of GDP) will be revised upwards by 0.4 percent of GDP for additional maize purchases for humanitarian relief.
  - Wage policy: provide for annual wage creep and recruitment of frontline staff mainly in the Ministries of Education, Health and Natural Resources; general increase of the wage bill at a rate lower than inflation; wage bill to be contained.
  - FISP reforms under review; findings from the 2015/16 pilot phase expected to inform 2016/17 implementation.
  - Government will ensure austerity measures and domestic revenue measures keep end of the 2016/17 FY domestic borrowing target consistent with monetary policies to reduce inflation.
  - Ceiling on nonconcessional debt would be modified to accommodate two loans: US$55 million from the AfDB for a water project and US$22.5 million from China for an e-government project.

*Source: _cr16182 - 13.      The pace of implementation of PFM measures under the program faltered after the*

### 32.      The risks to the program have risen as the drought has continued for a second

### _cr16182 - 32.      The risks to the program have risen as the drought has continued for a second

### Drought, humanitarian needs, and fiscal implications
- A national disaster was announced on April 12, 2016 due to a sharp decline in maize production, which has already affected 2.8 million persons.
- The number of affected persons is likely to rise in the months ahead.
- Preliminary estimates of the maize deficit are about 1.1 million metric tons.
- Of the 1.1 million metric tons deficit, about 790,000 metric tons will be allocated to provide relief to the affected population and the remainder to replenish the strategic grain reserves and to stabilize prices.
- The Malawian government has appealed to development partners to assist with financing the humanitarian relief but the Malawian government will be expected to contribute to these efforts.

### Public financial management (PFM) reform progress and plans
- Recent success in achieving bank reconciliation provides a foundation to expand PFM reforms.
- Since January 2016, monthly funding to ministries, departments and agencies (MDAs) has become contingent upon submission of five reports: expenditure returns, revenue returns, commitment returns, bank reconciliation reports, and payroll returns.
- Compliance to the monthly-reporting condition by MDAs has reached almost 87 percent.
- Unaudited quarterly financial statements can now be produced within six weeks after the end of the quarter.
- The authorities are optimistic that the 2015/16 financial statements will be submitted to the Auditor General by 31st October 2016 as required under the Public Finance Management Act.
- Clearing the backlog will provide a base for implementation of the new IFMIS project to address control weaknesses including payroll management, project management, arrears and commitments.
- Operations of the Cash Management Committee have been strengthened and further cash management reforms are being initiated.
- After full piloting over the past two fiscal years, programme budgeting (PBB) is being introduced across all MDAs.
- Human capacity building and institutionalization of induction training are planned to sustain reforms.
- A review of the PFM Act has commenced to align laws and regulations with reforms, with emphasis on a rewards and sanctions regime.
- Strengthening oversight institutions—National Audit Office, Central Internal Audit Unit and the Public Accounts Committee—will continue under the medium term strategy.

### Pension reform stance and options
- Under the Pension Act of 2010, the Government was supposed to transform the defined benefit civil servant pension system into a defined contribution scheme.
- Investigations, including IMF technical assistance, determined that the size of the pension liability renders this transformation fiscally untenable.
- Furnishing the scheme with the necessary reserves for it to operate as a defined contribution scheme would require issuance of assets exceeding 60 percent of GDP.
- Such asset transfers are beyond the means of the government and could not be accommodated by nascent capital markets without severe disruption.
- The existing defined benefit public pension scheme is also not sustainable—without reserves commensurate to the scheme’s liabilities, servicing accrued benefits would require disproportionately high budget subsidies.
- The authorities will revisit pension reforms by concentrating on parameter adjustments to reduce liabilities, which may include:
  - raising the service retirement age;
  - lowering the generosity of benefit indexation;
  - reducing accrual rates;
  - introducing a phased-in approach of contribution to implementing public service public scheme contributions.
- Migration to a defined contribution scheme for more recent hires and employees 30 years old and below might be fiscally feasible if implemented gradually and with due consideration for fiscal and financial sector constraints.

### Debt management intentions
- Authorities note the IMF’s new debt limits policy and will limit unified external borrowing to projects in line with program objectives and ensure total contracted volumes are consistent with debt sustainability.
- Given Malawi is at medium risk of debt distress with low debt management capacity, authorities will adhere to limits on the nominal value of non-concessional (PC) and concessional borrowing (memo item) as indicated in the borrowing plan outlined in the Debt Sustainability Analysis.
- Strengthening the Debt Management framework is a priority. The Debt Management Committee has recently been fully operationalized.
- The operational Debt Management Committee will review each borrowing to ascertain concessionality and ensure debt sustainability within the borrowing plan.

### Fuel import regime and fuel security
- Historical fuel storage capacity was limited to 14 days of supply held in idle tanker trucks.
- New construction completed of three fuel storage depots capable of holding about 25 percent of annual consumption.
- The current fuel import regime is based on private sector importation with cost recovery guaranteed by the automatic fuel pricing mechanism; supply on demand has been available since 2012.
- Completion of new fuel storage tanks introduces the need to finance accumulation of reserves without introducing new risks.
- Over the next fiscal year the fuel import regime will remain unchanged while alternatives are evaluated.
- The authorities will examine ways to fill the new fuel tanks cost effectively and transparently, drawing on technical assistance from donors including the World Bank.
- Options under consideration include private sector and public sector–led solutions, including a government-run bulk procurement system.
- Any changes will be discussed openly with full participation of the private sector; a fully costed proposal will be produced, published, and discussed prior to implementation given possible macro-critical ramifications.

### Program issues, waivers, and requests
- Authorities are requesting waivers for non-attainment of two performance criteria: the breach of the end-June 2015 program ceiling on NDF and the end-December 2015 floor on NIR.
- Authorities request that the Executive Board extend the ECF arrangement until end-December 2016, establish a ninth review with test date of end-June 2016, and establish performance criteria for end-June 2016.
- The extension would allow the entire FY 2015/16 budget year to be included in the program and provide additional time to complete vital structural measures.
- Authorities request that performance criteria formerly governing external debt accumulation be replaced with the formulation in Table 2, which incorporates the Fund’s new debt limits policy.
- The ninth program review is expected to be completed on or after October 15, 2016.

### Technical Memorandum of Understanding — key definitions and program adjusters
- Coverage: central government excludes local governments, the Reserve Bank of Malawi (RBM), or any other public entity with autonomous legal personality unless otherwise indicated. Monetary aggregates under the program are based on the twelve-bank monetary survey.
- Definition of budget support: includes all grants and foreign financing not directly linked to additional budgetary expenditure; excludes external project financing to fund particular activities (including food security funding from the European Union), loan financing from the IMF, and donor inflows from the U.S. dollar–denominated donor pool accounts for the health SWAp, education SWAp, and National AIDS Commission (NAC) held in the Malawi banking system.
- Budget support is measured as a cumulative flow from the beginning of the 2015/16 fiscal year (on July 1, 2015) running to the end of the program period and recorded in original currency then converted to U.S. dollars using program cross exchange rates listed in Table 5.
- Definition of Net International Reserves (NIR) of the RBM: gross reserve assets minus gross reserve liabilities. Program exchange rate: MK 700 = US$1.
- Gross reserve assets include: (i) monetary gold holdings of the RBM; (ii) holdings of SDRs; (iii) the reserve position in the IMF; (iv) foreign convertible currency holdings; (v) foreign currency denominated deposits held in foreign central banks, the Bank for International Settlements, and other banks; (vi) loans to foreign banks redeemable upon demand; (vii) foreign securities; and (viii) other unpledged convertible liquid claims on nonresidents.
- Exclusions from gross reserve assets include: (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are encumbered or pledged, including assets blocked as collateral, assets lent that are not marketable, and foreign reserves blocked for letters of credit.
- Gross reserve liabilities of the RBM are defined as: (i) outstanding medium and short-term liabilities of the RBM to the IMF; (ii) all short-term foreign currency liabilities of the RBM to nonresidents with an original maturity of up to, and including, one year; and (iii) all foreign currency denominated liabilities to residents. SDR allocations are excluded.
- Adjusters applied to the program floor on NIR:
  - Program baseline projected budget support, March–June, 2016 (Millions of USD, cumulative from the beginning of the 2015/16 fiscal year): Mar-16 26.6, Jun-16 26.6.
  - Donor pool accounts for the social sectors (health and education SWAps, and NAC) are measured cumulatively; the NIR floor will be adjusted downward by the amount donor inflows from U.S. dollar–denominated donor accounts held in the RBM are smaller than the program baseline (Table B).
  - Program baseline projected inflows from donor accounts for the social sector, March–June, 2016 (Millions of USD, cumulative): Mar-16 15.3, Jun-16 16.0 (includes both loans and grants).
  - Debt service payments: the NIR floor will be adjusted upward (downward) by the full cumulative amount by which debt service payments to the World Bank and the African Development Bank fall short of (exceed) the program baseline (Table C).
  - Projected debt service payments to World Bank and AfDB, March–June, 2016 (Millions of USD, cumulative): Mar-16 7.3, Jun-16 10.5.
  - Cumulative adjustment limit: total downward adjustment to the NIR program target from combined impacts of budget support shortfalls, donor inflow shortfalls, and excess debt service payments will be subject to a cumulative limit of US$15 million.
  - Humanitarian spending adjuster: after other adjusters, the NIR program target will be adjusted downward by the amount of government spending above US$9 million used to purchase maize and other food items specifically to alleviate the current humanitarian crisis. Eligible spending includes: (i) cost to government of maize and other foodstuffs purchased and transferred to the World Food Program (WFP) in Malawi for use in WFP-administered food relief operations; and (ii) financial assets transferred to the WFP in Malawi for use in WFP-administered food relief operations, including cash transfers to relief recipients. This downward adjustment is subject to an overall limit of US$48.5 million.
- Definition of Net Foreign Assets (NFA) of the RBM: gross foreign assets (GFA) minus gross foreign liabilities. Gross foreign liabilities are equal to gross reserve liabilities as defined plus any other foreign liabilities not listed.
- Gross foreign assets (GFA) of the RBM are defined as gross reserve assets (paragraph 6) plus: (i) any foreign currency claims on residents; (ii) capital subscriptions in international institutions; (iii) foreign assets in nonconvertible currencies; (iv) transfers of foreign currency claims to RBM by other institutional units in Malawi just prior to reporting dates with accompanying reversals; (v) assets obtained through currency swaps of less than three months duration; (vi) gross reserves that are encumbered or pledged (including assets blocked as collateral, assets lent and not marketable, foreign reserves blocked for letters of credit).

*Source: IMF staff and Malawian authorities — Technical Memorandum of Understanding, June 2016.*

### 13.      Definition of reserve money of the RBM (RM): Reserve money is defined as the sum of

### _cr16182 - 13.      Definition of reserve money of the RBM (RM): Reserve money is defined as the sum of

### Definition of reserve money (RM)
- Reserve money is defined as the sum of:
  - currency issued by the RBM, including currency outside banks;
  - the vault cash of commercial banks;
  - balances of commercial banks’ accounts with the RBM.
- Commercial banks’ accounts with the RBM include:
  - required reserves held for local currency and foreign currency deposits;
  - other domestic currency liabilities; and
  - other demand and time deposits held with the RBM.

### Ceiling on Net Domestic Assets (NDA) of the RBM — definitions and adjusters
- For program purposes, NDA of the RBM are defined in kwacha terms as reserve money less NFA of the RBM at the program exchange rate.
- Adjustments to the NDA ceiling apply if budget support, inflows from donor accounts for the social sector, and external debt service to the World Bank and the African Development Bank (AfDB) deviate from programmed levels.
- Budget support adjustor:
  - Cumulative receipts from budget support measured in the foreign currency of disbursement and converted to Kwacha using the program exchange rates; measured cumulatively from the beginning of the 2015/16 fiscal year to end of program period.
  - Ceiling on NDA will be adjusted downward by the amount that cumulative receipts from budget support exceed the sum of the program baseline (Table D) and the kwacha equivalent of US$10 million.
  - Ceiling on NDA will be adjusted upward by the amount that cumulative receipts from budget support (in Kwacha) fall short of the program baseline, subject to limitations in paragraph 17.
  - Kwacha equivalent of US$10 million = US$10 million × program exchange rate.
- Donor pool accounts (social sectors, health and education SWAPs, NAC) adjustor:
  - Cumulative receipts measured in foreign currency and converted to kwacha using program exchange rates; measured cumulatively from the beginning of the 2015/16 fiscal year to end of program period.
  - Ceiling on NDA will be adjusted upward by the amount donor inflows to the budget (in kwacha) from the U.S. dollar–denominated donor accounts fall short of the program baseline (Table E), subject to limitations in paragraph 17.
  - Kwacha equivalent of the upward adjustment = US dollar value of the adjustment × program exchange rate.
- Debt service adjustor (World Bank and AfDB):
  - Cumulative debt service payments measured in foreign currency and converted to kwacha using program exchange rates; measured cumulatively from the beginning of the 2015/16 fiscal year to end of program period.
  - Ceiling on NDA will be adjusted downward (upward) by the full cumulative amount by which debt service payments fall short of (exceed) the program baseline (Table F). Upward adjustment subject to limitations in paragraph 17.
- Reserve requirement ratio adjustor:
  - Ceiling on NDA adjusted downward for a decrease in the reserve requirement ratio, adjusted upward for an increase.
  - Adjustment spread equally over two quarters, starting in the quarter in which the reserve requirement ratio is reduced.
  - Adjuster = (one minus the existing required fraction of reserve assets) × (program baseline required reserve ratio minus the new required reserve ratio) × (amount of average reservable deposit liabilities in commercial banks during the last month before the change).
  - The program baseline required reserve ratio is currently 7.5 percent.
- Caps and limits related to cumulative adjustments (paragraph 17):
  - Total upward adjustment to NDA from: (i) budget support shortfall, (ii) donor inflow shortfall, and (iii) excess debt service payments relative to program assumptions will be capped at the kwacha equivalent of US$15 million.
  - Kwacha equivalent of US$15 million = US$15 million × program exchange rate.
  - Adjustment for changes in the liquidity reserve requirement is independent and not subject to this limitation.
- Humanitarian spending adjustor (paragraph 18):
  - After other adjusters, the ceiling on NDA will be adjusted upward by government spending above MK13 billion used to purchase maize and other food items specifically to alleviate the humanitarian crisis.
  - Eligible spending defined as:
    - cost of maize and other foodstuffs purchased and transferred to the World Food Program (WFP) in Malawi for WFP-administered food relief operations; and
    - financial assets transferred to the WFP in Malawi for use in WFP-administered food relief operations, including cash transfers to relief recipients.
  - Additional upward adjustment subject to an overall limit equal to the kwacha equivalent of US$48.5 million.
  - Kwacha equivalent of US$48.5 million = US$48.5 million × program exchange rate.
  - Kwacha equivalent of additional spending = (cost of items purchased in kwacha converted to US dollars at the RBM mid rate on date of purchase) + (cost of items purchased in foreign currency converted if necessary to US dollars at market rate on date of purchase).

### Ceiling on Central Government Net Domestic Borrowing (CGDB) — definition and adjusters
- Definition of CGDB (paragraph 19):
  - CGDB is the sum of:
    - net borrowing from the RBM (including ways and means advances, loans, holdings of local registered stocks, government bonds, and holdings of treasury bills and treasury notes minus deposits);
    - net borrowing from commercial banks (including advances, holdings of local registered stocks, holdings of treasury bills and treasury notes minus deposits);
    - net borrowing from nonbanks (including, but not limited to, holdings of local registered stocks and holdings of treasury bills and treasury notes);
    - holdings of promissory notes.
  - Exclusions from CGDB ceiling:
    - stock of promissory notes issued to cover exchange rate valuation losses of RBM;
    - stock of government securities issued in 2015 and 2016 to clear government domestic arrears up to a maximum exclusion of MK157 billion;
    - any government net borrowing undertaken to redeem those securities issued in 2014 and 2015 to clear government domestic arrears.
  - Treasury bills and locally registered stocks valued at cost rather than face value.
  - Ceiling measured as the change in the stock of CGDB cumulative from the beginning of the fiscal year to end of the program period, including promissory notes and securities transferred to the RBM from the treasury since the beginning of the fiscal year.
  - Asset sales or privatization revenues accounted for under financing as a separate category.
- Adjusters to CGDB ceiling (paragraph 20):
  - Budget support adjustor:
    - Cumulative receipts from budget support measured and converted to kwacha using program exchange rates; measured cumulatively from the beginning of the 2015/16 fiscal year to end of program period.
    - Program ceiling on CGDB adjusted upward by the full amount cumulative receipts from budget support are less than the program baseline (Table D), subject to limitations described in paragraph 21.
    - In event of excess budget support, ceiling on CGDB adjusted downward by amount cumulative receipts exceed sum of program baseline and kwacha equivalent of US$10 million.
    - Kwacha equivalent of US$10 million = US$10 million × program exchange rate.
  - Donor pool accounts adjustor:
    - Cumulative receipts from donor pool accounts for social sector measured and converted as above; ceiling on CGDB adjusted upward by amount donor inflows fall short of program baseline (Table E), subject to limitations in paragraph 21.
  - Debt service adjustor:
    - Cumulative debt service payments measured and converted as above; ceiling (floor) on CGDB adjusted downward (upward) by full cumulative amount by which debt service payments fall short of (exceed) program baseline (Table F), upward adjustment subject to limitations in paragraph 21.
- Cumulative adjustment cap for CGDB (paragraph 21):
  - Total upward adjustment to CGDB from: (i) budget support shortfall; (ii) donor inflows shortfall; and (iii) excess actual debt service payments to World Bank and AfDB relative to program baseline will be capped at the kwacha equivalent of US$15 million.
  - Kwacha equivalent of US$15 million = US$15 million × program exchange rate.
- Humanitarian spending adjustor for CGDB (paragraph 22):
  - After other adjusters, ceiling on CGDB will be adjusted upward by government spending above MK9 billion used to purchase maize and other food items specifically to alleviate the humanitarian crisis.
  - Eligible spending defined as cost of maize and other foodstuffs purchased and transferred to the WFP in Malawi for WFP-administered food relief operations.
  - Additional upward adjustment subject to overall limit equal to the kwacha equivalent of US$48.5 million.
  - Kwacha equivalent of US$48.5 million = US$48.5 million × program exchange rate.
  - Kwacha equivalent of additional spending calculated as:
    - (cost of humanitarian relief items purchased in kwacha converted to US dollars at the RBM mid rate prevalent on the date of purchase) + (cost of items purchased in foreign currency converted if necessary to US dollars at the market rate prevalent on the date of the purchase).

### External arrears, non-concessional external debt, and related limits
- Definition of external payment arrears (paragraph 23):
  - External payment arrears consist of debt-service obligations (principal and interest) of the central government or the RBM to nonresidents that have not been paid at the time they are due, except on external debt subject to rescheduling or restructuring.
  - This performance criterion is monitored on a continuous basis.
- Definition of concessional debt (paragraph 24):
  - A debt is concessional if it includes a grant element of at least 35 percent.
  - Grant element = difference between nominal value of the loan and its present value, expressed as a percentage of nominal value.
  - Present value calculated on contract date by discounting future payments using a discount rate of five percent.
- Definition and ceiling for non-concessional external debt (paragraph 25–27):
  - For program purposes, debt is non-concessional if grant element is less than 35 percent (Decision No. 11248–(96/38), April 15, 1996); grant element calculated using a discount rate of 5 percent.
  - Ceiling applies to contracting and guaranteeing of debt with nonresidents by central government, RBM, public enterprises, and other official sector entities unless explicitly excluded per paragraph 26.
  - Ceiling monitored on a continuous basis; applies to debt and commitments contracted or guaranteed for which value has not been received; measured cumulatively from beginning of the 2015/16 fiscal year.
  - Exclusions from the limit on non-concessional external debt (paragraph 26) include:
    - use of IMF resources;
    - any Kwacha-denominated treasury bill and local registered stock holdings by nonresidents purchased from the secondary market;
    - debts classified as international reserve liabilities of the RBM;
    - new debt issued to restructure, refinance, or repay existing non-concessional external debt as of December 31, 2015, up to amount actually used for those purposes;
    - normal import financing (considered “normal” when credit is self-liquidating);
    - arrangements to pay overtime obligations arising from judicial awards to external creditors.
  - The ceiling on non-concessional external debt is US$77.5 million, tied to:
    - AfDB water project US$55 million; and
    - China project on e-government US$22.5 million.

### Quantitative indicative targets and specific program numbers
- Reserve money:
  - Reserve money of the RBM is defined in paragraph 13 above.
  - No adjusters are applicable to reserve money targets for program purposes.
  - Table G. Projected Stock of Reserve Money, March–June, 2016 (Billions of Kwacha, end-of-period stocks) — Reserve Money:
    - Mar-16: 207176.4
- Selected program baseline and related figures (presented in the source):
  - Table D. Program Baseline: Projected Budget Support, March–June, 2016 (Billions of Kwacha, cumulative from the beginning of the 2015/16 fiscal year):
    - Budget support, at the program exchange rate: Mar-16 18.6; Jun-16 18.6
    - Budget support plus kwacha equivalent of US$ 10 mil, at the program exchange rate: Mar-16 25.6; Jun-16 25.6
  - Donor inflows, at the program exchange rate: Mar-16 10.7; Jun-16 11.2
  - Debt service, at the program exchange rate: Mar-16 5.1; Jun-16 7.4
- Monetary targets excerpt (from Table 1: Malawi: Quantitative Targets, 2015):
  - Ceiling on net domestic assets of the RBM (PC):
    - 87,033; 93,063; 39,169; Met; 73,959; 33,594; 39,032 Not met; 83,792; 30,139; -70,410 Met
  - Ceiling on reserve money (IT):
    - 243,828; 243,828; 213,046 Met; 248,213; 248,213; 198,144 Met; 260,545; 260,545; 198,144 Met

### Social spending and structural/arrears definitions
- Social spending (paragraph 29):
  - Defined using functional classification as sum of central government spending on:
    - health;
    - education;
    - the farm input subsidy program;
    - the cement and iron sheet program;
    - government social protection (comprising government expenditures by the Ministry of Gender, Children, and Social Welfare, the Ministry of Disability and Elderly Affairs, the local development fund, and the Poverty and Disaster Management Cost Center under the Office of the Vice President).
  - Social spending allocations in the government budget will not be subject to downward adjusters under the program.
- Domestic arrears (paragraph 31):
  - Defined as overdue payment obligations of the central government to residents, including on wages and salaries, pensions, transfers, domestic interest, goods and services, obligations arising from court cases, legally established compensation claims, and tax refunds.
  - Wages and salaries, pensions, transfers, court-established obligations, and compensations are in arrears when unpaid for more than 30 days beyond due date.
  - Domestic interest payments are in arrears when not made on the due date.
  - Payments for goods and services are in arrears if not made within 90 days of invoice date, or within the contractually agreed grace period if a grace period has been agreed.

*Source: _cr16182 - 13.      Definition of reserve money of the RBM (RM): Reserve money is defined as the sum of (PDF chapter/section).*

### 3. Ceiling on central government's net domestic borrowing

### 3. Ceiling on central government's net domestic borrowing

### I. Monetary targets (selected from table)
- Ceiling on net domestic assets of the RBM (millions of kwacha): PC -90,331
- Ceiling on reserve money (millions of kwacha): IT 176,413

### II. Fiscal targets (millions of kwacha)
- Ceiling on central government's net domestic borrowing (performance criterion)
  - End-Dec 2015 Adjusted Prog.: 37,030
  - End-Dec 2015 Prog. (IT): 43,060
  - End-Dec 2015 Act.: 94,297 — Status: Not met
  - End-Sept Adjusted Prog.: 40,407
  - End-Sept Prog. Act.: 32,850
  - End-Sept Act. Status: 7,329 — Met
  - Additional rows:
    - 58,162; 51,489; 4,269 — Met

- Ceiling on central government's net domestic borrowing (2016 targets)
  - PC 38,000

- Floor on social spending (cumulative from beginning of fiscal year)
  - IT 257,430; 281,141 — Met
  - 54,725; 65,132 — Met
  - 146,687; 140,876 — Not met
  - 2016 target: IT 292,675

Notes on fiscal targets:
- 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.
- Priority social spending as defined in the TMU and quantified in the authorities' budget.

### III. External sector targets (US$ millions, unless otherwise indicated)
- Floor on net international reserves of the RBM (PC)
  - 487; 472; 536 — Met
  - 531; 549; 500 — Not met
  - 537; 522; 489 — Not met
  - 2016 target: PC 473

- Ceiling on the accumulation of external payments arrears (PC)
  - 0; 0 — Met (multiple reporting periods)

- Ceiling on new nonconcessional external debt maturing in more than one year (PC)
  - 0; 0 — Met (multiple reporting periods)

- Ceiling on new nonconcessional external debt maturing in one year or less (PC)
  - 0; 0 — Met (multiple reporting periods)

- Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions
  - Status: PC Met (evaluated on a continuous basis)

- Ceiling on non-concessional external debt (2016 target)
  - PC 77.5

### Memorandum items (selected)
- Net foreign assets of the RBM (US$ millions): 390; 433; 433; 396; 440; 416
- Budget support (US$ millions): 18.07; 0; 0; 26.6; 7; 26.6
- Budget support (millions of kwacha): 8000; 0; 0; 17,982; 3,224; 17,982
- Debt service payments to the World Bank and AfDB (US$ millions): 12.12; 12; 3.90; 1.7; 7.80; 3.0
- Debt service payments to the World Bank and AfDB (millions of kwacha): 4,872; 4872; 1,568; 683; 3,136; 1206
- Health SWAp receipts (millions of kwacha): 15,668; 11,939; 2,114; 0; 14,993; 0
- Education SWAp receipts (millions of kwacha): 3,384; 2,594; 0; 0; 0; 0
- NAC receipts (millions of kwacha): 0; 478; 164; 5,649; 332; 231
- Program exchange rate (kwacha per US$): 402; 402; 402; 402; 402; 402

### Technical and evaluation notes
- Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks unless otherwise specified.
- "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.
- Defined as a cumulative flow, starting from the beginning of the fiscal year.
- Evaluated on a continuous basis.

*Source: IMF staff projections.*

### 9. Prohibition on the imposition or intensification of restrictions on the making  PC

### 9. Prohibition on the imposition or intensification of restrictions on the making of payments and transfers for current transactions

### Memorandum items and key program numbers
- Net foreign assets of the RBM (US$ millions, end of period): 381
- Budget support (US$ millions): 7; 26.60
- Budget support (millions of kwacha): 20,528
- Nominal external concessional borrowing (US$ millions): 11; 150
- Debt service payments to the World Bank and AfDB (US$ millions): 7; 11.45
- Debt service payments to the World Bank and AfDB (millions of kwacha): 8,015
- Health SWAp receipts (millions of kwacha): 7; 14,993
- Education SWAp receipts (millions of kwacha): 7; 0
- NAC receipts (millions of kwacha): 7; 3,850
- Program exchange rate (kwacha per US$): 700
- Program source: IMF staff projections.

Notes and definitions included in the unit:
- "PC" means Performance Criterion, and "IT" means Indicative Target.
- Defined as stocks. All stocks of NDA adjusted for consistency with the program definition (specified in the TMU).
- Target is subject to an adjuster for liquidity reserve requirement.
- Targets are subject to an adjuster for budget support and debt service payments.
- Targets are subject to an adjuster for donor-funded social sector expenditures consistent with the TMU.
- Defined as a cumulative flow, starting from the beginning of the fiscal year.
- Evaluated on a continuous basis.
- Concessional borrowing during the first half of fiscal year 2016/17.
- The ceiling comprises US$55 million from the AfDB for a water project and US$22.5 million from China for an e-government project.
- Priority social spending as defined in the TMU and quantified in the authorities' budget.
- Targets are defined in the technical memorandum of understanding (TMU). Presentation uses stocks unless otherwise specified.

### Structural benchmarks (7th and 8th Reviews, 2015) — Public financial management and financial sector
- Public financial management benchmarks and status:
  - Publish detailed monthly budget execution data by vote on the Ministry of Finance's website no later than 6-weeks after execution. Target: End-March 2015. Rationale: To foster greater fiscal transparency and monitoring. Status: Met.
  - Reconcile all government bank accounts MG1 and six operational accounts and ways and means for all FY2014/15 transactions signed by the Accountant General and Secretary of the Treasury. Target: End-Feb 2016. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems. Status: Not met.
  - Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General. Target: End-Dec 2015. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems. Status: Not met.
  - Prepare a report on the flow and stock of arrears at the end of each quarter starting with end-September 2014 and within two months of the end of each six months. Target: End-June 2015. Rationale: To monitor emergence of arrears. Status: Not met.
  - Produce and publish monthly summary bank account control reports. Target: End-September 2015. Rationale: To improve transparency and control. Status: Not met.
  - Issue reports by international audit firms on bank reconciliations and summary bank account control reports. Target: End-September 2015. Rationale: To improve transparency and restore public confidence. Status: Not met.
  - Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain. Target: End-Feb 2016. Rationale: Foster greater transparency. Status: Not met.
- Financial sector benchmarks and status:
  - Prepare a strategy to address banking sector wide issues raised by the third-party diagnostics assessments, including the high loan concentration among banks. Target: End-March 2015. Rationale: To safeguard the stability of the financial system. Status: Met.
  - RBM to obtain from all undercapitalized banks detailed, quarterly monitorable recapitalization and restructuring plans showing how they will reach the minimum capital adequacy level within one year. Target: End-April 2015. Rationale: To safeguard the stability of the financial system. Status: Met.
  - RBM to obtain from all banks with significant deficiencies reported by the diagnostic assessments to submit plans to address the deficiencies within one year. Target: End-June 2015. Rationale: To safeguard the stability of the financial system. Status: Met.
  - RBM to develop contingency plans to intervene and resolve banks if they do not submit or comply with acceptable recapitalization plans. Target: End-June 2015. Rationale: To safeguard the stability of the financial system. Status: Met.
  - Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and UNCAC. Target: End-June 2015. Rationale: Ensure enhanced customer due diligence for domestic politically exposed persons; suspicious transactions reporting; transparency of legal persons and arrangements; adequate criminalization of corruption and predicate crimes to money laundering; criminalization of self-laundering; administrative sanctions for AML/CFT failures. Status: Not met.
  - RBM issue a detailed report on compliance with regulations on loan classification and provisioning and concentration limits in line with existing directives. Target: End-September 2015. Rationale: To safeguard the stability of the financial system. Status: Met.
  - RBM supervisory follow-up on possible breaches of compliance with the AML legal framework revealed by the audit report, applying supervisory actions including sanctions. Target: End-December 2015. Rationale: To ensure compliance with AML standards. Status: Met.

### Prior actions for the 7th and 8th Reviews and structural benchmarks for 2016
- Prior actions:
  - Reconcile all government bank accounts in MG1 and five operational accounts and ways and means for all FY2015/16 transactions (until end-December 2015). Have the completed reconciliations signed by the Accountant General and the Secretary of the Treasury. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems. Status: Pending.
  - Prepare a report on the flow and stock of arrears at end-2015. Rationale: To monitor emergence of arrears. Status: Met.
- Structural benchmarks (2016) — selected:
  - Publish detailed monthly budget execution data by vote for the first nine months of FY2015/16 on the Ministry of Finance's website. Target: End-June 2016. Rationale: To foster greater fiscal transparency and monitoring.
  - Review all bank accounts and close redundant and dormant accounts and provide an updated list from the central bank certified by the Accountant General. Target: End-June 2016. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
  - Reconcile the wages account for the first six months of FY15/16. Target: End-June 2016. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
  - Reconcile all government bank accounts in MG1 and six operational accounts and ways and means for all FY2015/16 transactions (July 1, 2015 through June 30 2016). Have the completed reconciliations signed by the Accountant General, the Auditor General, and the Secretary of the Treasury. Target: End-August 2016. Rationale: To strengthen cash planning, reconciliation of accounts, and improving the integrity of the accounting systems.
  - Auditor General to produce and publish an interim audit report covering July 1, 2015 to December 31, 2015. Target: End-Sept. 2016. Rationale: To improve transparency and control.
  - Issue a report by an International firm confirming the status of implementation of forensic audit recommendations in the PFM domain including controls over bank reconciliations for MG1 and six operational accounts and ways and means for the first half of FY15/16 transactions. Target: End-Sept. 2016. Rationale: Foster greater transparency.
  - Submit to parliament amendments to the AML/CFT Act, the Penal Code, and the Corrupt Practices Act in line with the FATF standard and UNCAC. Target: End-June 2016. Rationale: Ensure enhanced customer due diligence for domestic politically exposed persons; suspicious transactions reporting; transparency of legal persons and arrangements; adequate criminalization of corruption and predicate crimes to money laundering; criminalization of self-laundering; administrative sanctions for AML/CFT failures.

### Cross rates and gold price for the 2016 program
- Gold bullion LBM US$/troy ounce: 1,237.00
- SDR to US$ exchange rate: 0.710
- Euro to US$ exchange rate: 0.878
- Yen to US$ exchange rate: 112.630
- Yuan to US$ exchange rate: 6.467
- Rand to US$ exchange rate: 14.732
- UK £ to US$ exchange rate: 0.694
- Kwacha to US$ exchange rate: 684
- Kwacha to SDR exchange rate: 964
- Rates and prices as of end-March 2016.
- Note: LBM connotes London Bullion Market.

### Social spending: FY2015/16 (Millions of Kwacha) — selected quarterly projections and totals
- Total Social Expenditure (quarter projections and total): Q1 Proj.: 65,132; Q2 Proj.: 75,744; Q3 Proj.: 111,043; Q4 Proj.: 62,278; Total: 314,197
- Health Expenditure totals by quarter and total:
  - Q1 Proj.: 20,887; Q2 Proj.: 17,880; Q3 Proj.: 22,105; Q4 Proj.: 22,384; Total: 83,256
  - Wages (Health): Q1: 12,233; Q2: 12,383; Q3: 11,196; Q4: 11,267; Total: 47,080
  - Other Recurrent (Health): Q1: 7,904; Q2: 4,626; Q3: 9,419; Q4: 9,627; Total: 31,576
  - Ministry of Health ORT: Q1: 6,263; Q2: 3,030; Q3: 7,900; Q4: 8,048; Total: 25,241
  - Local Assemblies ORT (Health): Q1: 1,468; Q2: 1,424; Q3: 1,273; Q4: 1,275; Total: 5,440
  - Subvented Organisations (Health): Q1: 172; Q2: 172; Q3: 246; Q4: 304; Total: 895
  - Development expenditure (Health): Q1: 750; Q2: 870; Q3: 1,490; Q4: 1,490; Total: 4,600
- Education Expenditure totals by quarter and total:
  - Q1 Proj.: 40,882; Q2 Proj.: 39,585; Q3 Proj.: 38,147; Q4 Proj.: 36,666; Total: 155,280
  - Wages (Education): Q1: 22,867; Q2: 22,924; Q3: 22,416; Q4: 22,416; Total: 90,623
  - Other Recurrent (Education): Q1: 17,505; Q2: 15,991; Q3: 14,176; Q4: 12,695; Total: 60,367
  - Ministry of Education ORT: Q1: 3,810; Q2: 3,064; Q3: 3,768; Q4: 2,285; Total: 12,927
  - Local Assemblies ORT (Education): Q1: 3,987; Q2: 3,219; Q3: 246; Q4: 246; Total: 7,699
  - Subvented Organisations (Education): Q1: 9,708; Q2: 9,708; Q3: 10,162; Q4: 10,164; Total: 39,742
  - Development expenditure (Education): Q1: 510; Q2: 670; Q3: 1,555; Q4: 1,555; Total: 4,290
- Farm Input Subsidy Program (quarter projections and total): Q1 Proj.: -; Q2 Proj.: 16,500; Q3 Proj.: 47,429; Q4 Proj.: -; Total: 63,929
- Cement and Iron Sheets Subsidy (quarter projections and total): Q1 Proj.: 2000; Q2 Proj.: 1000; Q3 Proj.: 2000; Q4 Proj.: 2000; Total: 7,000
- Local Development Fund, Gender/Children/Disability and Social Welfare, Poverty and Disaster Management Cost Centre — quarterly and total figures reported in the source.

### Reporting requirements (selected items, frequencies, agency, delivery)
- Gross international reserves, exchange rate, and foreign exchange purchases and sales: D (Daily), RBM, mode: FE
- Reserve money and its components (NDA and NFA), OMO transactions, and RBM conversion of treasury bills; RBM balance sheet: W (Weekly), RBM, mode: M30 30 E
- Daily exchange rate: D, RBM, mode: FE
- Treasury bill auction results: W, RBM, mode: FE
- Spread between bureau midrate and the official exchange midrate: W, RBM, mode: M30 30 E
- International Reserve and Foreign Currency Liquidity Data Template: M, RBM, mode: M30 30 E
- NIR and its components: W, RBM, mode: BWM7 FE
- Central government domestic borrowing: M, MOF, mode: RBMM30 30 E
- Full banking survey (on monthly basis): M, RBM, mode: MRBMM45 15 E
- Financial soundness indicators by banks: Q, RBM, mode: QRBMQ45T15E
- NAC consolidated statement of sources of funds: M, MOF, mode: MMOFM3030E
- Fiscal table (GFS) including revenue, expenditure, and financing: M, MOF, mode: MMOFM3030E
- New external loans contracted or guaranteed by the central government: Q, MOF, mode: QMOFQ30T30 E
- External debt services (actual and projections): Q, MOF, mode: QMOFQ30T30E
- Consumer price index and monthly statistical bulletin: M, NSO, mode: MNSOM3030E
- Import and export data: M, NSO, mode: MNSOM45T15E
- National accounts, balance of payments, and quarterly statistical bulletin: A, NSO, mode: ANSOBA45T15E

Notes on reporting:
- D-Daily, W-Weekly, M-Monthly, Q-Quarterly, BA-Bi-annual, F-Friday; delivery modes include electronic (E) and hard copy (H). Agency listings include RBM, MOF, NSO, MOF on behalf of the central government. Footnotes identify major parastatals and required detailed debt information.

### Relations with the Fund, safeguards, and institutional context (as of March 31, 2016)
- Membership: Joined July 19, 1965; Article VIII.
- General Resources Account quota: 138.80 SDR Million (100.00 percent of quota).
  - Fund holdings of currency (exchange rate): 136.36 (98.24)
  - Reserve tranche position: 2.44 (1.76)
- SDR Department:
  - Net cumulative allocation: 66.37 (100.00)
  - Holdings: 3.65 (5.49)
- Outstanding Purchases and Loans:
  - ESF Arrangements: 20.82 (15.00 percent of quota)
  - ECF Arrangements: 91.57 (65.97 percent of quota)
- Latest financial arrangements (dates and amounts provided in source).
- Overdue obligations and projected payments to Fund (SDR Million, forthcoming by year):
  - 2016 Principal: 12.85; Charges/Interest: 0.03; Total: 12.87
  - 2017 Principal: 15.71; Charges/Interest: 0.06; Total: 15.77
  - 2018 Principal: 20.41; Charges/Interest: 0.04; Total: 20.45
  - 2019 Principal: 11.89; Charges/Interest: 0.18; Total: 12.06
  - 2020 Principal: 13.80; Charges/Interest: 0.14; Total: 13.94
- HIPC and MDRI implementation:
  - Commitment of HIPC assistance (Enhanced Framework): Assistance committed by all creditors (US$ Million): 1,057.00; IMF assistance (US$ million): 45.27 (SDR equivalent 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.
  - MDRI-eligible debt (SDR Million): 37.87; Financed by: MDRI Trust 14.53; Remaining HIPC resources 23.34.
- Safeguards assessments:
  - 2012 assessment identified need for legal reforms to address RBM lack of operational autonomy, enhance oversight of foreign reserves management, expand disclosures in financial statements, and strengthen data compilation.
  - Post-2012 actions: RBM ensured external audit and financial statements accord with international standards; internal audit improved via external quality review; legal amendments in 2015 limited direct advances to the government and strengthened audit and accountability requirements.
  - 2016 monitoring visit found all 2012 recommendations implemented except remaining weaknesses in the RBM Act that impede the bank’s autonomy. Recommendations: RBM internal audit to assess operating effectiveness of enhanced controls through special audits; revise investment policy to limit concentration of investments in institutions with credit rating below investment grade.
- Exchange arrangements:
  - May 2012 liberalization: devaluation of the kwacha by about 33 percent and adoption of a floating exchange rate regime.
  - Since May 2012 RBM has not set a target rate and has allowed substantial volatility; official moral suasion practices that created multiple currency practices have ceased.
  - Malawi maintains a system free from restrictions on the making of payments and transfers for current international transactions.
- Article IV consultation: Malawi on a 24-month cycle; last Executive Board conclusion on December 11, 2015.

### Technical assistance and missions (selected entries)
- 04/16 STA NSO: National accounts statistics (follow-up) — Mission
- 04/16 MCM RBM: Developing Capacity on the Supervisory Review in the context of Pillar 2 of the Basel Framework — Mission
- 03/16 MCM RBM: Developing IT Risk Management Guidelines and Examination Procedures for Banks — Mission
- 03/16 MCM RBM: Developing Capacity on Operational and Technology Risk — Mission
- 02/16 MCM RBM: Safeguards Assessment Mission — Mission
- 02/16 MCM RBM: Internal guideline for foreign exchange intervention — Mission
- 01/16 FAD MOF: General tax policy diagnostic including extractive industries — Mission
- Additional technical assistance missions and dates listed for 2015, 2014, 2013, 2012, and earlier in the source.

*Source: IMF staff and Malawian authorities (document content provided).*

### 1. Systematic Country Diagnostic

### 1. Systematic Country Diagnostic

### Planned Analytical and Advisory Activities
- Ongoing and scheduled diagnostic and analytical products:
  - Systematic Country Diagnostic
  - Country Economic Memorandum
  - Disaster Risk Management technical assistance (including a drought Post Disaster Needs Assessment)
  - Programmatic Poverty Assessment
  - Malawi Economic Monitor (two editions)
  - Public Services Improvement Binding Constraints Assessment
- Lending and investment projects listed:
  - Lilongwe Water Project
  - Fiscal Resilience Development Policy Operation
  - Additional Financing to the Nutrition, HIV and AIDS Project
  - Education Sector Improvement Project
  - Public Services Reform Project
  - Shire Valley Irrigation Project
  - Crisis/Emergency Response Operation(s)
- Timing of selected items (as presented):
  - June, 2016
  - May, 2016
  - July, 2016
  - December, 2016
  - September, 2016
  - October, 2016
  - May and October, 2016
  - March, 2017
  - April, 2017
  - November, 2016

### IMF Work Program in Next 12 Months
- Reviews of ECF-supported program:
  - Ninth review of ECF-supported program — September, 2016
  - Tenth review of ECF-supported program — March, 2017
  - Additional dates noted: November, 2016; May, 2017

### Requests and Coordination with the World Bank
- Fund request to Bank:
  - Updates on WB support to Malawi — Continuous
- Bank request to IMF:
  - 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
- Joint products and missions:
  - Debt Sustainability Analysis (update) — May, 2016; June, 2016

### Relations with the African Development Bank (AfDB)
- AfDB presence and support:
  - AfDB operations in Malawi date back to 1969.
  - AfDB Malawi Field Office opened in 2007.
  - As at 31st March, 2016, cumulative commitments worth UA852.8 million (about US$1.3 billion) to finance 102 operations including 12 studies and 2 lines of credit.
- Country Strategy Paper (CSP) 2013–17 aligned with MGDS II (2011–16) and LTS (2013–22); CSP focuses on:
  - (i) addressing infrastructure bottlenecks to competitiveness and growth; and
  - (ii) supporting actions to expand private sector investment and trade.
- Approved and pipeline projects and support:
  - Approved: projects in water, agriculture, roads, and Public Financial Management.
  - Regional infrastructure scaling-up to address landlocked position and competitiveness: Nacala Road Corridor Phase IV Project (US$64 million, approved 2014); private sector loan of US$300 million for the Nacala Port and Railway Project (approved January 2016) with a component for Malawi.
  - Pipeline regional projects: Malawi-Mozambique Power Inter-connector Project; Songwe River Basin Development Project.
  - Promotion of PPPs and capacity building support to the Malawi Public Private Partnership Commission on PPPs.
- PFM and budget support:
  - CSP mid-term review in 2015 maintained strategic priorities.
  - September, 2015: Board approved grant of US$2.61 million for Phase II of the on-going PFM Institutional Support (ISP) to enhance procurement transparency, control and compliance and strengthen capacity in revenue administration. Implementation of ISP I has commenced.
  - July 2012: ADF Grant for the Crisis Response Budget Support operation — US$40 million — following government reengagement with IMF and new US$157 million ECF arrangement (July 2012).
  - Restoration of Fiscal Stability and Social Protection (RFSSP) program objectives: (i) strengthened PFM transparency and accountability; and (ii) strengthened social protection system.
  - April, 2015: African Development Fund Board approved a grant of US$30 million for the Protection of Basic Services Programme; disbursed in one tranche in July, 2015.
- Operations programmed for approval in 2016:
  - Agricultural Sector Budget Support (US$17 million)
  - Agricultural Infrastructure and Youth in Agri-Business Project (US$22 million)
  - Lilongwe Water Distribution Network Project (US$56 million)
  - Economic Census and Macro-economic Modelling Project (US$1 million)
- Box: AfDB ongoing portfolio highlights:
  - Agriculture sector projects: Agriculture Infrastructure Support Project; Climate Adaptation for Rural Livelihoods; Small Holder Irrigation and Value Addition Project.
  - Social and economic empowerment: Local Economic Development project (infrastructure in Jenda, Malomo, Monkey Bay and Chitekesa); Competitiveness and Job Creation Project; Support to Higher Education Science & Technology Project (emphasis on TEVET, higher education, and ICT).
  - Transport: 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; Mzimba Integrated Urban Water Project of US$5 million (co-financed with OFID).
  - Institutional Support Projects: support for Public Financial Management Reform Programme.
  - Overall Bank portfolio rating: satisfactory.
  - Non-lending activities: feasibility studies, analytic work, Public Expenditure Review collaboration (2013), Expenditure Tracking Study, grant to PPPC for PPP capacity building, Domestic Resource Mobilization Study (2013/2014), TA to Reserve Bank of Malawi to strengthen macro-economic forecasting.

### Statistical Issues (As of May 20, 2016)
- Overall assessment:
  - General: Data provision has some shortcomings, but is broadly adequate for surveillance.
  - Shortcomings remain in the national accounts—mainly due to operational challenges—and government finance statistics.
- National Accounts:
  - Since 2010, STA providing TA to NSO on strengthening national accounts; most recent TA in April (year unspecified in excerpt).
  - NSO revised national accounts methodology to improve consistency with the 2008 SNA and develop preliminary quarterly estimates of GDP by economic activity.
  - Further TAs being provided to develop quarterly GDP estimates by expenditure components.
  - Main operational challenges: NSO continuing budget constraints, lack of funds to implement requisite data collections, and low staffing levels in the national accounts unit.
- Price Statistics:
  - Updated and revised consumer price index (CPI) introduced in January 2013 (new weights, items, improved index calculation methods, implementation of COICOP, improved compilation methods).
  - April 2013: updated PPI for manufacturing released with updated weights; need to expand PPI coverage to include additional economic activities.
  - NSO developing export-import price indexes.
- Government Finance Statistics (GFS):
  - Accuracy and reliability affected by source data weaknesses, especially inaccuracies in recording and consolidating data.
  - Published budgetary central government data include a sizeable statistical discrepancy between above and below the line data reported by the Reserve Bank of Malawi (RBM), due primarily to differences in coverage and recording of some subsidies on a funding basis.
  - Tax revenue data are received timely but not always reconcilable with deposits in the Malawi Government (MG) Account due to reporting methods and timing differences between receipt and cleared funds.
  - Nontax revenue, including capital revenues collected by line ministries, is not properly accounted for in fiscal reports prepared by the Ministry of Finance.
  - Authorities have received significant TA to strengthen expenditure monitoring and reporting, accounting, and statistical reporting, but results have lagged.
  - Government pledged to strengthen fiscal reporting and is working to establish a work plan, including utilizing donor TA more effectively.
  - Authorities are working with East AFRITAC to modify chart of accounts and output-based structures to align to national strategy.
  - Most recent STA mission in March 2015 proposed a migration plan and timetable to adopt the GFSM 2001 methodology.
- Monetary and Financial Statistics:
  - RBM revamped ODCs’ report templates for consistency with MFS Manual methodology.
  - Progress toward full adoption of SRF-based monetary statistics hindered by quality of underlying source data for ODCs; ODCs’ balance sheets and supporting data schedules do not always match.
  - Malawi does not report Financial Soundness Indicators (FSIs) to STA.
- External sector statistics:
  - Broad conformity with BPM5; NSO gradually implementing BPM6.
  - Insufficient resources for survey data collection and understaffed balance of payments section hamper improvements.
  - In absence of regular source data, some BOP and IIP components are imputed based on earlier surveys.
  - Procedures for assessing accuracy of trade data need improvement.
  - Project aid currently classified as current transfers rather than in the capital account; several large in-kind projects not properly captured in BOP data.
  - Data on foreign direct investment and portfolio flows remains weak.
  - Capacity building programs, including Fund-provided training and TA, seek to overcome constraints.
  - Updated BOP and IIP metadata should be made available on the NSO website.
- Data standards and reporting:
  - In FY2016, STA will conduct an Enhanced General Data Dissemination System (e-GDDS) mission to implement the e-GDDS framework, including a National Summary Data Page in Malawi.
  - Data ROSC published on February 17, 2005.
  - Reporting to STA:
    - Government finance data for the Budgetary Central Government in a GFSM 2001 presentation are reported for publication in the Government Finance Statistics Yearbook (GFSY) and International Financial Statistics (IFS) but are not disseminated domestically.
    - RBM reports monetary data regularly, with monthly data disseminated through IFS.
    - NSO reports BOP and IIP data to STA annually in BPM6 format.

### Tables of Common Indicators Required for Surveillance (As of May 20, 2016)
- Latest observation dates and reporting frequencies (selected):
  - Exchange Rates — Date of latest observation: 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: 12/2015; Date received: 03/2016; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Reserve/Base Money — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - Broad Money — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - Central Bank Balance Sheet — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - Consolidated Balance Sheet of the Banking System — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - Interest Rates — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - Consumer Price Index — Date of latest observation: 04/2016; Date received: 05/2016; Frequency: M; Reporting: M; Publication: M
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: I
  - Stocks of Central Government and Central Government-Guaranteed Domestic Debt — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: M; Reporting: M; Publication: M
  - External Current Account Balance — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: A; Reporting: A; Publication: A
  - Exports and Imports of Goods and Services — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: A; Reporting: A; Publication: A
  - GDP/GNP — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: A; Reporting: A; Publication: A
  - Gross External Debt — Date of latest observation: 12/2015; Date received: 03/2016; Frequency: A; Reporting: I; Publication: I
  - International Investment Position — Date of latest observation: 2014; Date received: 03/2016; Frequency: I; Reporting: I; Publication: I
- Frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Debt Sustainability Analysis (DSA) — Key Findings
- Prepared jointly by IMF and IDA staff using the debt sustainability framework for low-income countries.
- Overall risk assessment:
  - Malawi faces a moderate risk of debt distress based on an assessment of public external debt, with heightened vulnerabilities related to domestic debt.
- Changes since prior DSA:
  - Debt situation somewhat better than indicated in the last DSA mostly on account of recent rebasing of GDP.
  - Except for the debt service-to-revenue ratio — which displays a marginal and temporary breach in 2016 — baseline external debt burden indicators remain below their indicative thresholds.
  - Stress tests show that a weaker debt outcome is possible under the historical scenario.
  - The projected borrowing path and debt policies remain broadly unchanged since the last DSA.
- Background context:
  - Last DSA conducted in March 2015 concluded Malawi’s external public debt faced moderate risk of debt distress.
  - External debt situation improved slightly since the last DSA due to GDP rebasing and lower incremental external borrowing in 2015.
  - CPIA score developments:
    - CPIA score improved slightly in 2015.
    - CPIA peaked at 3.4 in 2007, deteriorated to 3.1 in 2013, and 2015 score was 3.2.
    - Malawi performs better than SSA average in social inclusion and equity (3.5 vs. 3.2 for SSA).
    - Public sector management and institutions: 3.1 vs. 3.0 for SSA.
    - Structural policies: 3.2 in line with SSA average.
    - Economic management: 3.0 compared to 3.3 for SSA.
  - Since 2014, Malawi subject to tighter debt thresholds for DSA analysis reflecting a weak policy and institutional framework; recent small CPIA improvement does not affect debt thresholds for Malawi.

*Source: _cr16182 - 1. Systematic Country Diagnostic (IMF), June 3, 2016*

### 3.      To improve the debt monitoring capacity and strengthen the debt management framework,

### _cr16182 - 3.      To improve the debt monitoring capacity and strengthen the debt management framework,

### Debt management committee and debt monitoring
- Malawi has fully operationalized the Debt Management Committee, whose membership is at senior level.
- Committee responsibilities:
  - Examine each external borrowing and ascertain its concessionality.
  - Ensure external debt remains sustainable and the right balance of cost and risks is achieved.

### GDP rebasing and implications
- The National Statistical Office rebased GDP by updating the base year from 2007 to 2010, resulting in nominal GDP revised upwards by 29 percent.
- The rebasing is based on an updated set of reference prices and better reflects current economic developments.
- Fundamental implications:
  - Decline in the actual revenue-to-GDP ratio.
  - Decline in the public debt-to-GDP ratio.
- Prior to GDP rebasing in 2014, the public and publicly guaranteed external debt to GDP ratio stood at 44.0 percent in 2013, revised down to 30.8 percent in 2013 after rebasing.

### Recent external debt developments (PPG external debt)
- PPG external debt levels:
  - About US$1.78 billion (37.0 percent of GDP) in 2015.
  - US$1.45 billion (30.8 percent of GDP) in 2013.
  - End-2014 nominal PPG external debt: US$1.8 billion; fell marginally to US$1.78 billion in 2015.
- Drivers:
  - Lower external borrowing by the central government.
  - Exchange rate depreciation reduced the face value of PTA debt outstanding.
- PTA debt restructuring loan:
  - Contracted in 2014 in US dollars with repayment to be done in Kwacha.
  - As the exchange rate depreciates, the dollar denominated face value of PTA debt declines.
- Despite fall in nominal value in 2015, debt-to-GDP ratio increased because of a sharp decline in the GDP deflator caused by recent exchange rate depreciation.
- Creditor composition (2015):
  - Multilaterals: 75 percent of total external debt.
  - Main providers: IDA (33 percent), ADF (13 percent), IMF (9 percent).
  - China accounted for about 14 percent of total debt among bilateral creditors.
- Data on private external debt: unavailable, but amounts are not believed to be large.

### Gross domestic debt and composition
- Gross domestic debt increased from MK206.6 billion (13.8 percent of the new rebased GDP) at end-2012 to MK538.2 billion (16.8 percent of GDP) at end-2015.
- Key contributors to the increase:
  - Rise in government net domestic financing (NDF) during FY13/14 and FY14/15; NDF averaged 3.7 percent of GDP during these two fiscal years and was covered by issuance of treasury bills and accumulation of ways and means advances from the RBM.
  - Issuance of promissory notes in 2013–14 amounting to MK58 billion (2.3 percent of the 2014 GDP) to recapitalize the central bank following losses from the 2012 exchange rate devaluation.
  - Securitization of domestic arrears:
    - March 2013: 2.2 percent of GDP (close to MK40 billion) via promissory notes maturing in 2017 at T-bill rates plus 200 basis points.
    - 2015 issuance related to domestic arrears uncovered in late 2014 (about MK157 billion); of that stock, MK31 billion had been verified, audited and paid by zero-coupon promissory notes at end-2015.
  - Issuance of substantial treasury notes (4.8 percent of GDP) with maturity from two to seven years in second half of 2015; about one-third issued via conversion of ways and means.

- Selected domestic debt instruments (percent of GDP by year shown in source):
  - Treasury bills at cost value: 2012: 9.0; 2013: 9.1; 2014: 6.9; 2015: 6.2
  - Treasury notes: 2012: 2.7; 2013: 1.8; 2014: 1.3; 2015: 6.1
  - Ways and means advances from RBM: 2012: 1.7; 2013: 5.2; 2014: 3.0; 2015: 0.9
  - Promissory notes for recapitalization of banks: 2012: 0.1; 2013: 1.5; 2014: 2.3; 2015: 2.0
  - Total gross domestic debt (% of GDP): 2012: 13.8; 2013: 19.8; 2014: 14.9; 2015: 16.8

### Underlying DSA assumptions and macroeconomic outlook
- Shocks in 2015:
  - Weather-related shocks (flooding then drought) and macroeconomic instability reduced growth by 2.7 percentage points and contributed to higher annual inflation (24.9 percent at end-2015).
  - Kwacha depreciated by around 36 percent from July 2015 to February 2016.
  - Exports dropped overall due to lower agricultural exports and closure of uranium mine despite robust tobacco exports.
- Baseline assumptions:
  - Gradual reduction in the external current account deficit beyond 2016 via export diversification and productivity improvements.
  - Gradual lowering of reliance on grants and concessional financing over the long-term.
  - End-of-period inflation programmed to drop to single digits by end-2017.
  - Current policy mix: tighter fiscal and monetary policies, PFM reforms, structural reforms to address supply-side bottlenecks.
- Box 1 macro assumptions (selected):
  - Real GDP growth: recover from 2.7 percent in 2016 to 5 percent in 2018 and remain close to 5.5 percent over the longer term.
  - Inflation (end-of-period): decline from 24.9 percent at end-2015 to 15.8 percent by December 2016 and reach single digits by 2017 in absence of other weather shocks.
  - Exchange rate: projected to remain constant in real terms in medium-long term.
  - Tax revenue to GDP: expected to increase in FY15/16 and FY16/17; long run increase from 16.8 percent of GDP in FY16/17 to 22 percent of GDP in FY35/36.
  - External debt composition: mainly multilateral on concessional terms; remainder bilateral on less concessional terms.
  - Budget support: assumed subdued for FY 2015/16 and into medium term.
  - New disbursements on external loans: capital spending covered by external loans projected at 3.8 percent of GDP in FY15/16 and 2.9 percent of GDP in FY16/17; external project loans assumed close to 2.7 percent of GDP in subsequent fiscal years.
  - Net domestic financing: limited to less than 1 percent of GDP in each fiscal year beyond FY16/17.

### Borrowing plan
- FY2015/16 and FY2016/17 planned borrowing:
  - Malawi expected to contract around US$170 million of concessional loans in FY2015/16.
  - Plans to contract about US$379.5 million in FY2016/17.
  - Malawi contracted about US$119.5 million in the first half of FY2015/16 on concessional terms.
- FY2016/17 composition:
  - Government expects to borrow US$379.5 million, 80 percent concessional, 20 percent non-concessional.
  - Loans primarily for health, education and agricultural sectors.
- DSA assumption for 2016–18: about 20 percent of new borrowing would be non-concessional, accommodating disbursements on two nonconcessional loans.
  - Major portion of nonconcessional borrowing would be from African Development Bank with a grant element slightly less than 35 percent.
- Authorities’ external borrowing plan (FY2016/17 detailed amounts from source):
  - Concessional debt: 302 (unit in source: million USD)
  - Multilateral debt: 279 (million USD)
  - Bilateral debt: 23 (million USD)
  - Non-concessional debt: 77.5 (million USD)
  - Total: 379.5 (million USD)
  - Use of debt financing (million USD): Health, Education, Water, Sanitation and Irrigation: 187.6; Agriculture, Trade, Industry and Private Sector Development: 170.9; ICT (E-government): 2.5

### External public debt sustainability and stress tests
- Overall assessment:
  - Except for a very modest breach in 2016 in the debt service to revenue ratio, all external debt indicators remain well below policy-dependent debt-burden thresholds.
  - Debt service is high in 2016 because of large amortization related to PTA restructuring, causing a temporary breach; ratio falls significantly once PTA amortization is completed.
  - Probability approach to the DSA yields an improved profile for debt dynamics and breaches under stress tests, supporting a moderate risk classification.
  - Nominal PPG external debt projected to fall in 2016 and 2017 due to large amortization repayment related to PTA loan.
  - GDP rebasing lowers overall debt profile compared to previous DSA.
- Stress test findings:
  - Historical scenario (average current account deficit around 10.1 percent of GDP and low FDI around 1.5 percent of GDP) causes PV of debt to GDP and PV of debt to exports to breach thresholds and remain elevated.
  - Shift to IMF BPM6 classification reclassified project and dedicated grants from current to capital account, increasing historical current account deficit values and explaining a more pronounced breach under the historical scenario.
  - Malawi is considered unlikely to run high and protracted current account deficits in medium-long term due to removal of an overvalued pegged exchange rate and expected increases in FDI as business environment improves.

### Public debt projections
- Gross domestic debt projected path:
  - Decline from 18.9 percent of GDP at end-2016 to about 14 percent of GDP at end-2036.
- Projections assume:
  - Cost value of maturing T-bills and face-value of maturing Treasury notes will be continuously rolled over.
  - Government net domestic financing limited to less than 1 percent of GDP each fiscal year after 2016.
  - Issuance of zero coupon promissory notes for payment of domestic arrears uncovered in late 2014 will be gradually completed by mid-2017 after verification and audit.
  - All maturing promissory and Treasury notes, including those sold to PTA bank, will be automatically converted into advances from the central bank and ultimately into marketable securities.
- Baseline scenario:
  - Projects a gradual decline in public debt to GDP.
  - Total public debt levels and paths are in line with March 2015 DSA, with debt-to-GDP indicators about 2 percentage points higher than desirable benchmarks despite substantial decline from rebasing.
  - Breach is caused by significant increase in domestic debt related to PTA amortization.
- Sensitivity:
  - Strongest deterioration under fixed primary balance scenario, where primary deficit remains constant at 2016 level (2.5 percent of GDP) for remainder of projection period.
  - Primary deficit expected to increase in 2016 due to additional maize procurement (around 1 percent of GDP) related to drought, but is unlikely to remain high beyond 2017.

### Policy implications and recommendations
- Main policy thrust:
  - Increased fiscal restraint to ensure growth in debt occurs at a sustainable pace.
  - Fiscal tightening expected response to unexpected negative financing shocks (delayed or lower donor support, lower tax revenue, or growth shocks).
- Risks of higher domestic borrowing:
  - Additional pressures on exchange rate and non-food inflation.
  - Crowding out private sector borrowing and investment.
  - Erosion of perceptions of government commitment to policy reforms and macroeconomic stability.
- Drought response and fiscal trade-offs for FY2016/17:
  - Authorities expected to rely primarily on additional grant financing for household maize consumption needs.
  - Explore additional cuts in domestically financed development expenditure and other goods and services to avoid unplanned domestic borrowing.
  - Need to balance macro stability with effective drought response and maintenance of core public services reaching poorest populations.
  - Strong case for confronting political challenges of reducing expenditure in politically sensitive areas, including subsidy programs (such as on fertilizer), and exercising restraint over management and growth of public sector compensation.

### Authorities’ views
- Malawian authorities concurred with the analysis and conclusion of the DSA.
- Agreed that prudent external borrowing and a consolidated fiscal position limiting domestic financing needs will be key to maintaining total debt sustainability.
- Agreed that achieving this objective will require strengthening debt management and relying on concessional debt to the extent possible.

*Source: IMF staff report excerpts in content unit _cr16182 - 3.      To improve the debt monitoring capacity and strengthen the debt management framework,*

### 18.      Malawi remains at moderate risk of debt distress, based on an assessment of external public

### 18.      Malawi remains at moderate risk of debt distress, based on an assessment of external public

### Risk assessment and overall message
- Malawi is assessed to remain at "moderate risk of debt distress" based on external public debt.
- Heightened overall risks remain due to vulnerabilities associated with domestic debt and external conditions.
- Risks of export-related and weather shocks remain and "have materialized since the last DSA."
- Absorbing weather shocks while maintaining macroeconomic stability and debt sustainability will require "careful macroeconomic management and difficult policy choices."

### Key vulnerabilities and channels of shock
- Dependency on a short and predominantly rain-fed agricultural season to meet food security needs.
- Increased frequency of climate-induced weather shocks.
- High aid dependency exposes Malawi to risks of negative financing shocks (delayed donor support or lower-than-expected revenue).
- Mitigation options cited: long-term investments in infrastructure and diversification of the economy.

### Policy implications and recommendations (textual)
- Further efforts needed to broaden the tax base.
- Strengthen public financial management.
- Undertake long-term investments in infrastructure and economic diversification to reduce weather and export shock vulnerability.
- Careful macroeconomic management and difficult policy choices needed to maintain debt sustainability under shocks.

### Selected DSA indicators and projections (external and public-sector debt)
- External debt (nominal) 1/: 34.8, 36.7, 40.4, 37.0, 32.3, 32.1, 32.1, 31.8, 31.6, 29.2, 23.5
- Of which: public and publicly guaranteed (PPG): 30.8, 33.1, 37.0, 33.2, 29.1, 29.2, 29.3, 29.2, 29.2, 27.5, 22.6
- Change in external debt: 4.5, 1.9, 3.7, -3.4, -4.7, -0.2, -0.1, -0.2, -0.2, -0.6, -0.5
- Identified net debt-creating flows: 10.1, 4.2, 4.4, 9.9, 4.6, 4.0, 3.6, 3.8, 4.0, 3.8, 3.6
- PV of external debt (selected years): 28.0, 25.0, 21.2, 21.1, 21.0, 20.9, 20.8, 19.2, 15.1
- PV of PPG external debt (selected years): 24.5, 21.2, 18.0, 18.1, 18.2, 18.3, 18.4, 17.4, 14.2
- PV of PPG external debt in percent of exports (selected years): 97.3, 73.2, 70.5, 71.0, 71.1, 70.1, 71.0, 65.4, 51.4
- PPG debt service-to-revenue ratio (in percent): 2.8, 6.6, 7.2, 18.3, 12.7, 7.4, 6.1, 6.0, 5.7, 7.0, 6.5
- Total gross financing need (Billions of U.S. dollars): 0.4, 0.6, 0.5, 0.8, 0.6, 0.5, 0.5, 0.5, 0.6, 0.8, 1.5

### Key macroeconomic assumptions used in the baseline
- Real GDP growth (in percent): 5.2, 5.7, 2.9, 5.8, 2.4, 2.7, 4.5, 5.0, 5.5, 5.5, 5.5
- GDP deflator in US dollar terms (change in percent): -13.7, 5.5, 2.8, 0.7, 11.8, -12.4, 13.3, 2.6, 0.8, 1.2, 1.3, 1.1, 1.5, 1.8, 1.6 (table spans projection years)
- Effective interest rate (percent) 5/: 0.7, 0.5, 0.5, 0.6, 0.1, 1.8, 1.1, 0.9, 1.0, 1.0, 1.0, 1.1, 1.1, 1.2, 1.1
- Growth of exports of G&S (US dollar terms, in percent): 16.6, 4.8, -7.0, 12.2, 16.4, 3.4, 4.6, 7.1, 7.2, 8.5, 6.2, 6.2, 8.3, 7.6, 7.7
- Growth of imports of G&S (US dollar terms, in percent): 1.5, 3.7, -4.8, 6.9, 15.8, 14.0, -4.9, 4.7, 5.6, 8.3, 6.8, 5.8, 7.4, 7.2, 7.3
- Grant element of new public sector borrowing (in percent): 39.8, 48.5, 42.5, 42.5, 42.5, 42.4, 42.3, 43.0, 42.0, 39.3, 41.3 (selected projection years)
- Government revenues (excluding grants, in percent of GDP): 18.2, 18.6, 18.4, 18.6, 19.3, 18.4, 18.9, 18.9, 19.1, 19.9, 20.0, 20.1
- Aid flows (in Billions of US dollars) 7/: 0.4, 0.4, 0.3, 0.3, 0.3, 0.3, 0.3, 0.3, 0.4, 0.4, 0.5
  - of which: Grants: 0.3, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2
  - of which: Concessional loans: 0.1, 0.2, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.2, 0.3
- Grant-equivalent financing (in percent of GDP) 8/: 5.2, 4.2, 4.3, 4.0, 3.9, 3.8, 2.9, 1.7, 2.6 (selected years)
- Grant-equivalent financing (in percent of external financing) 8/: 63.6, 74.6, 72.9, 71.9, 71.8, 71.2, 67.3, 57.1, 65.2 (selected years)

### Stress tests and sensitivity analysis (high-level)
- The DSA includes multiple alternative scenarios and bound tests; the "most extreme stress test" is identified as the test that yields the highest ratio on or before 2026 for each indicator.
- Examples of shocks referenced as most extreme in various panels: GDP deflator shock; Exports shock; Growth shock.
- Selected sensitivity outcomes (PV of debt and related indicators, percent):
  - PV of debt-to-GDP ratio (baseline 2016–2036): baseline and scenario ranges shown in table form (see DSA tables for detailed year-by-year values and scenarios).
  - PV of debt-to-exports ratio, PV of debt-to-revenue ratio, Debt service-to-exports ratio, Debt service-to-revenue ratio: scenario and bound-test results are provided in Table 2 and Table 4 (year-by-year scenario values preserved in the source tables).

### Public sector debt dynamics (baseline)
- Public sector debt (percent of GDP) 1/: 50.6, 48.0, 53.8, 52.1, 47.1, 44.7, 42.5, 41.6, 41.3, 40.3, 36.9 (selected years)
- Of which: foreign-currency denominated: 30.8, 33.1, 37.0, 33.2, 29.1, 29.2, 29.3, 29.2, 29.2, 27.5, 22.6
- Change in public sector debt: 10.4, -2.6, 5.8, -1.7, -5.0, -2.4, -2.1, -1.0, -0.3, -0.3, -2.0
- Identified debt-creating flows: 4.2, -3.9, 6.4, -2.9, -4.3, -0.9, -1.5, -1.0, -0.5, 0.0, -0.5
- Gross financing need 2/: 6.0, 5.7, 6.2, 9.1, 5.5, 4.0, 3.0, 3.3, 3.6, 4.3, 3.6
- PV of public sector debt (selected years): 41.3, 40.1, 36.0, 33.6, 31.5, 30.7, 30.5, 30.2, 28.5

### Notable memorandum and caveats noted in the source
- Residual for 2016 and 2017 is high on account of projected financing gap resulting from spending for humanitarian relief.
- Tables and figures identify specific shock types and quantify their impacts; full year-by-year values and scenario tables are contained in the source tables (Tables 1–4 and Figures 1–3).

*Sources: Malawian authorities and IMF staff estimates and projections.*

### Introduction

### _cr16182 - Introduction

### Program context and requests
- Authorities appreciate Fund advice and broadly concur with staff assessment and conclusions.
- Economic shocks: heavy floods and dry spells in 2015, followed by the El Niño-induced drought in 2016, led to declines in output (especially agriculture) and constrained meeting some Extended Credit Facility (ECF) performance criteria.
- Authorities remain committed to original ECF objectives: attaining strong inclusive growth, single digit inflation, and an increase of foreign reserves.
- Prior actions for completion of the seventh and eighth reviews in the fiscal area have been fully implemented.
- Authorities request Executive Directors’ support for:
  - Completion of the seventh and eighth reviews under the ECF arrangement.
  - Waivers for non-observance of performance criteria.
  - Extension of the arrangement to end-December 2016.
  - Modification of a performance criterion.
  - Re-phasing of disbursements.
- Specific waiver requests:
  - Waiver for nonobservance of the periodic performance criterion on net domestic borrowing missed at end-June 2015 (seventh review).
  - Waiver for nonobservance of the periodic performance criterion on net international reserves missed at end-December 2015 (eighth review).
- Authorities request augmentation of access under the ECF of 25 percent of quota (SDR 34.7 million) to respond to the drought.

### Recent economic developments and macroeconomic outlook
- GDP growth:
  - Estimated at 3 percent in 2015 (down from 5.7 percent in 2014).
  - Projected to drop to 2.7 percent in 2016.
  - Medium-term growth expected to pick up to about 5.5 percent.
- Agricultural sector:
  - Maize harvest shrunk by about 30 percent in 2015.
  - Additional decline in maize harvest of 12 percent in 2016 due to El Niño.
  - Estimated 2.8 million persons in 25 of the 28 districts were food insecure in 2015.
  - About half of the population estimated to be food insecure in the 2016-17 consumption year.
  - Authorities declared a state of a national disaster in April 2016 and requested humanitarian assistance.
- Inflation:
  - Reached 24.9 percent in December 2015.
  - Declined to 20.9 percent in April 2016.
  - Expected that single digit inflation will be attained by end-December 2017.
  - RBM aims for an end-of-period inflation rate of 16 percent by December 2016.
- External sector:
  - Current account deficit projected to have declined from 8.5 percent of GDP in 2014 to 8.2 percent in 2015.
  - Current account deficit projected to remain below 9 percent in the medium term.
  - Authorities aim to maintain a minimum of 3 months of import cover in foreign exchange reserves.
- Main drivers of medium-term growth: increased public investment in infrastructure, private investments following an enhanced business environment, and normalization of agricultural production.
- Short-term authorities’ priorities: enhancing macroeconomic stability through largely tight fiscal and monetary policies consistent with disinflation, reinforcing PFM systems, and preserving financial sector stability.

### Fiscal policy and public financial management
- Fiscal consolidation strategy:
  - Enhanced domestic revenue mobilization.
  - Reforming the fertilizer subsidy scheme.
  - Strengthening commitment controls to prevent reemergence of domestic payment arrears.
- Tax system review (with IMF and GIZ technical assistance) aims to:
  - Create a simple, efficient, transparent and fair system.
  - Broaden the tax base.
  - Rationalize taxation of international investments.
  - Integrate tax policy with the national development strategy.
  - Modernize and stabilize tax legislation and eliminate obsolete and contradictory provisions.
  - Shift from heavy reliance on taxes on factors of production to those on consumption.
- Budget proposals and expenditure measures:
  - Draft 2016-2017 budget proposes rationalization of the value added tax (VAT) by introducing a standard VAT on products that were either zero-rated or exempt.
  - Farm Inputs Subsidy Program (FISP) coverage to be scaled down from 1,500,000 beneficiaries to 900,000 beneficiaries.
  - Steps underway to further strengthen payroll management.
- Public finance management reforms progress:
  - Government bank accounts at the Reserve Bank of Malawi (RBM) rationalized and main accounts incorporated into IFMIS.
  - Monthly budget execution reports commenced to enhance fiscal transparency.
  - Commitment control system strengthened: all Ministries, Departments, and Agencies (MDAs) required to provide five detailed fiscal reports before receiving regular monthly funding.
  - Cash management strengthened by closing dormant accounts and instituting regular cash management committee meetings.
- Debt management:
  - Authorities committed to ensure total public debt remains sustainable.
  - Plans to further strengthen the debt management framework and identify and address risks associated with rapid debt accumulation.

### Monetary and exchange rate policies
- RBM policy stance:
  - Maintain tight monetary policy to reduce inflation.
  - Aim to attain an end-of-period inflation rate of 16 percent by December 2016.
  - Maintain a minimum of 3 months of import cover in foreign exchange reserves.
  - Improved communication to raise policy credibility, increase efficiency of policy transmission, and better anchor inflation expectations.
  - Expectation that current policy framework, coupled with greater fiscal discipline and PFM improvements, is sufficient to keep inflation on a downward trajectory.
- Interest rate and liquidity operations:
  - Aim to maintain positive short-term real money market interest rates through open market operations to increase demand for holding the kwacha and mitigate seasonal depreciation pressures.
  - Ongoing IMF technical assistance to improve open market operations and liquidity forecasting.
- Exchange rate and fuel pricing:
  - Continued adherence to a flexible exchange rate regime.
  - Maintenance of the automatic fuel pricing mechanism.

### Financial sector policies
- Banking system resilience:
  - Strengthened over the last two years following measures including migration to Basel II standards and amendments to the RBM Act.
  - Adoption of a prompt corrective action (PCA) framework to clarify triggers for early remedial action against distressed banks.
  - Improved prudential norms in asset classification and provisioning.
  - New asset classification directive based on the estimated recoverable amount method (ERAM) imposing higher and graduated provisioning rates.
  - Expected outcomes: strengthened banking sector resilience and improved ability to deal with adverse developments.
- Supervisory focus:
  - Continued efforts to strengthen supervision and resolution capacity.
  - Intensified monitoring and supervision to address credit risk from high exposure to large borrowers.
  - Authorities stand ready to take additional steps to ensure banking sector stability.

### Conclusion
- Authorities reiterate commitment to enhancing macroeconomic stability, reducing poverty, and attaining sustainable inclusive growth.
- Will implement an appropriate policy mix to place inflation on a downward trajectory and continue far-reaching structural reforms, including further strengthening public financial management.
- Authorities value Fund support and request Executive Directors’ support for:
  - Completion of the seventh and eighth reviews.
  - Waivers for non-observance of performance criteria.
  - Extension of the arrangement to December 2016.
  - Augmentation of access of 25 percent of quota.
  - Modification of a performance criterion.
  - Re-phasing of disbursements.

*Source: _cr16182 - Introduction*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16182.pdf_