Malawi needs almost US$1bln debt relief by 2027–IMF
Report by global news agency, Reuters quotes the International Monetary Fund (IMF) as saying Malawi needs almost US$1 billion in debt relief from its creditors by 2027 — as the country “battles severe medicine, fuel and fertiliser shortages due to chronic foreign currency shortages”.
Written from Johannesburg, South Africa by Rachel Savage — Reuters’ senior markets correspondent (covering finance and economics across sub-Saharan Africa) — the report further quotes the IMF saying Malawi needs US$887 million in debt relief from 2023 to 2027 from its commercial creditors and US$99 million from its bilateral creditors.
This follows an approval of the extended credit facility (ECF) that the IMF Executive Board granted Malawi of $175 million — a four-year loan with an immediate disbursement of US$35 million to support the country’s “macroeconomic adjustment and reform agenda aimed at restoring macroeconomic stability, building a foundation for inclusive and sustainable growth, and addressing weaknesses in governance”.
The Reuters report continued to say that getting a commitment from bilateral creditors, China and India, to restructuring their portion of its external debt, which was US$4 billion at the end of 2022, was a key requirement for the IMF board to sign off on the loan.
Before the approval of the ECF, Malawi devalued its currency by 44%, hiked fuel and electricity prices, while prices of essential commodities skyrocketed to unimaginable levels.
Malawi owed its main commercial creditors the African Export-Import Bank (Afreximbank) US$495 million and Trade & Development Bank US$395 million at the end of 2022, says Reuters — adding that of its bilateral creditors, most was owed to China and India at US$222 million to the Export-Import Bank of China and US$114 to Exim India.
“Malawi is still paying its bilateral creditors, but is in arrears to its commercial creditors”, Reuters quotes IMF mission chief, Mika Saito as saying earlier November.
“Malawi has a 2023-2027 financing gap — the difference between its export revenues and the cost of imports and servicing external debt — of US$1.6 billion, so most of that is slated to be filled by the debt restructuring, with the rest from grants, concessional loans and the IMF loan,” the IMF report said.
In its statement when announcing the approvals of the ECF, the IMF took cognizance that Malawi “continues to face a challenging macroeconomic environment” and that “years of unsustainable domestic and external borrowing and the adverse impact of multiple external shocks have resulted in the widening of macroeconomic imbalances, including protracted balance of payment needs”.
The statement continued to say that the country “has struggled to sustain growth for decades despite large inflows of official development assistance” and that in the past three years of President Lazarus Chakwera’s administration, there have been “particularly difficult with stagnating growth and widening macroeconomic imbalances due to unsustainable debt and the effects of multiple shocks — including an outbreak of cholera and Cyclone Freddy this year alone”.
“Malawi’s external debt is unsustainable and debt service needs are eroding limited fiscal space. Despite sizeable external emergency financing, the large fiscal budget deficit necessitated domestic financing.
“This has been addressed in large part through monetary financing, putting pressure on the exchange rate and increasing the rate of inflation. The ECF arrangement aims to support the authorities’ commitment to restore macroeconomic stability, build a foundation for inclusive and sustainable growth, including to strengthen resilience to climate-related shocks, and address weaknesses in governance and institutions.
The IMF further said the ECF arrangement is also expected to catalyze grant financing and capital inflows including foreign direct investment and trade credit, which Chakwera attested that this would pave the way for increased foreign direct investments, fostering productivity and economic stability.
In his presentation in Parliament on Monday of the 2023/24 revised national budget, Minister of Finance Simplex Chinthyola Banda said the ECF for Malawi will unlock more than US$240 million (almost MK404 billion).
And on the same day, the World Bank’s International Development Association (IDA) announced the approval of a US$60 million grant which will be accessed by commercial banks in Malawi for importation of fertilizers and pharmaceuticals.
A statement from Washington, USA said the grant is aimed at averting acute shortages of critical and lifesaving commodities, adding that the contingent financing to import fertilizers and pharmaceuticals will address critical shortages in the market which, if left unaddressed, have the potential to hinder Malawi’s economic recovery.
The project, ‘De-risking Importation of Strategic Commodities’ (DISC), will establish a foreign currency trade facility for Malawi’s commercial banks — and specifically, it provides backstopping support on the payment obligations of local issuing banks to their correspondent banks, targeting the import of fertilizers and pharmaceuticals.
Currently, said the statement, “correspondent banks lack confidence to extend letters of credit to banks in Malawi due to the high-risk profile of local banks”.
“The proposed facility will, therefore, provide correspondent banks with the assurance that the World Bank, standing behind the Reserve Bank of Malawi (RBM), will assume the payment obligations of the local issuing banks in the unlikely event that local banks default on their payment obligations for essential commodities.”
The statement quotes World Bank Country Manager for Malawi, Hugh Riddell saying: “The DISC project aims to support economic recovery in Malawi with a specific focus on the private sector.
“The project complements the government-led macro-fiscal reforms under implementation and aims to restore the long-term functioning of markets,” he said.
This three-year project builds upon existing World Bank, International Finance Corporation (IFC) and Government of Malawi programs on enhancing access to trade finance, including the Global Trade Finance Program (GTFP), and lessons learned from prior projects, including the Financial Inclusion & Entrepreneurship Scaling Project (FINES).
The project will also help local financial institutions establish working partnerships with correspondent banks and increase their credit lines and reduce cash collateral requirements, eventually enabling the continued flow of trade credit into the market at a time when imports are critical.
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