Malawi: Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement, Request for Waivers for Non-Observance of Performance Criteria, Extensions of the Arrangement, Modification of Performance Criterion, and Rephasing of Disbursements-Staff Repo

KEY ISSUES The IMF has been supporting Malawi under an Extended Credit Facility (ECF) arrangement. A 36 month, SDR 104.1 million (150 percent of quota) Extended Arrangement under the ECF was approved by the Executive Board on July 23, 2012 and the Third and Fourth reviews were concluded on January 17, 2014. A total of SDR 52.06 million has been disbursed to date. The sixth and seventh tranches totaling SDR13.02 million will be available upon the completion of the Fifth and Sixth review. The "cashgate" scandal that came to light in October 2013 has had major political and economic consequences. While President Banda's government initially responded with strong actions, allowing the third and fourth ECF program reviews to be completed in January 2014, these efforts were not sustained. In the run up to the presidential and parliamentary elections in May 2014, further governance concerns emerged and macroeconomic policies drifted off track. As a result, donor budget support remained suspended, resulting in increased recourse to domestic financing, monetization of the deficit, and the emergence of domestic payment arrears. As confidence waned, the exchange rate depreciated further and inflation became entrenched in the range 20–25 percent. Reflecting these developments, program implementation was uneven given external financing shortfalls with several performance criteria not being observed. Three out of seven performance criteria for the fifth review were not met, including the continuous performance criterion on the contracting of non-concessional external loans. For the sixth review, while the end-June 2014 target for international reserves was met, several other quantitative targets were not observed and implementation of a few structural benchmarks set at the time of the third and fourth reviews was delayed.