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Malawi: Debt relief at the HIPC completion point and under the Multilateral Debt Relief Initiative
IMF Country Report No. 06/420
November 2006
International Monetary Fund (IMF)

Acknowledgements: FANRPAN acknowledges the IMF website as the source of this report: www.imf.org


Executive summary

  • The staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) are of the view that Malawi has met the requirements for reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Malawi has made satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP) for at least one year, and maintained satisfactory macroeconomic policies as evidenced by its performance under a program supported by the Poverty Reduction and Growth Facility (PRGF) over the last fiscal year 2005/06 (July-June). Malawi has also met all the completion point targets in the area of economic governance and public expenditure management, safety nets, and microfinance. In the social sectors, it has met all but two of the completion point targets. As a result of implementing the completion point requirements, Malawi is now poised to accelerate its pace of growth and poverty reduction. The new strategy that is being prepared to succeed the Malawi Poverty Reduction Strategy (MPRS), will be implemented within the context of a stable macroeconomic environment, significantly improved public expenditure management system, and a conducive framework for improving health and education outcomes, as well as for protecting the most vulnerable in society.


  • The two triggers that were not met required government to ensure that the share of health expenditure reached at least 13 percent of discretionary recurrent budget and that at least 6,000 students enrolled annually for teacher training. Although these targets were not met during the interim period, the authorities made some efforts towards achieving them. With regard to the health expenditure share, the average between 2001/02 and 2004/05 was 12 percent. Following approval of a prioritized program of policies for the health sector that is supported through a Sector Wide Approach in 2004, preliminary actual figures show that the health sector’s share of discretionary recurrent spending for 2005/06 increased to 18 percent. With regard to annual enrolment of 6,000 students for teacher training, an attempt was made to increase enrolment through a crash course but this resulted in a deterioration of quality of trained teachers. A new program has now been introduced which should help increase the number of properly trained teachers deployed in schools. Further, with support from donors, the government is implementing construction projects that will increase the enrollment capacity in Teacher Training Colleges (TTCs). However, even with these efforts, the target of 6,000 is unlikely to be met in the near future and staffs now believe that this target was overly ambitious.


  • The progress made to-date in implementing a broader strategy for raising the quality of education and improving health outcomes justifies the government’s request for waivers for the non-observance of the two completion point conditions relating to the share of health sector expenditure and teacher training.


  • At the decision point in December 2000, the Executive Directors agreed that Malawi had met all the criteria to become eligible for debt relief under the enhanced HIPC Initiative. The analysis undertaken at the decision point indicated that HIPC assistance in the amount of US$643 million in 1999 NPV terms was required to lower Malawi’s NPV of debt-to-exports ratio to the HIPC threshold of 150 percent. IDA and IMF commitments to this debt relief were US$331 million and US$30 million, respectively, in NPV terms of which US$99.9 million and US$14.2 million, respectively were delivered as interim assistance as of August 2006. Information from creditors and a downward revision in exports lead to an upward revision of HIPC assistance at the completion point to US$646 million in 1999 NPV terms.


  • The completion point analysis of Malawi’s external debt shows a substantial worsening in debt burden indicators compared to the projections made at the decision point. At decision point, the NPV of debt-to-exports ratio at end-2005 was projected to amount to 169 percent assuming full delivery of the assistance committed under the HIPC Initiative at decision point. The completion point analysis shows the actual outturn to be 245 percent of exports. After additional voluntary bilateral debt relief, this ratio declines to 229 percent of exports.


  • The substantial deterioration in Malawi’s NPV of debt-to-exports ratio since the decision point is primarily attributable to exogenous factors, which have led to a fundamental change in the country’s economic circumstances. These exogenous factors include:

    • lower-than-projected export receipts, which explains a third of the higher NPV of debt-to-exports ratio; the price of Malawi’s main export commodity, tobacco, fell by 13.6 percent due to declining demand in international markets;
    • a lower discount rate, which explains about half of the unanticipated increase in Malawi’s NPV of debt-to-exports ratio; while international interest rates have declined since the decision point, the nominal debt service burden facing Malawi has remained broadly unchanged as interest rates on external debt are mostly fixed;
    • a depreciation of the US dollar against the Euro and SDR, although this was a relatively minor factor;
    • unanticipated new borrowing, which only lead to a small increase in Malawi’s NPV of debt to exports ratio of 3.8 percent.

    Finally, unanticipated increases in international oil prices since the decision point have also contributed to the deterioration in Malawi’s debt servicing capacity.


  • In circumstances where exogenous factors lead to a significant deterioration in debt ratios after the decision point, the enhanced HIPC framework allows for additional debt relief (topping-up) at the completion point beyond the relief already committed at the decision point. The staffs consider that Malawi’s case meets the requirements for topping-up at the completion point. Staffs therefore recommend that additional assistance under the enhanced HIPC Initiative of US$411 million be granted to bring Malawi’s NPV of debt-to-export ratio from 229 percent at end-2005, to the 150 percent HIPC threshold, after the application of bilateral debt relief beyond HIPC assistance.


  • Reaching the completion point under the enhanced HIPC Initiative, Malawi will also qualify for additional debt cancellation under the Multilateral Debt Relief Initiative (MDRI). As debt relief under the MDRI would cover all remaining debt service obligations on eligible credit balances to IDA, the IMF and the African Development Fund (AfDF) after any debt service relief available under the HIPC Initiative, the amount of relief under MDRI depends on the Executive Directors’ approval of topping-up. MDRI debt relief (net of HIPC assistance) would lead to debt service savings on debt owed to IDA, the IMF and the AfDF of US$1.9 billion without toppingup and of US$1.4 billion, if topping-up were to be approved.


  • After HIPC debt relief, topping-up of HIPC assistance, and MDRI debt relief, Malawi’s external debt burden indicators fall to levels significantly lower than the average of low-income countries. In the long-term, the NPV of debt-to-exports ratio is expected to increase gradually, but will remain below the HIPC threshold of 150 percent. This projection is based on the assumptions that government maintains prudent fiscal policies, implements measures to insulate the economy from the debilitating impact of periodic droughts and keeps new borrowing to modest levels and on concessional terms.


  • The staffs of IDA and the IMF recommend that the Executive Directors of IDA and the IMF approve that Malawi has reached the completion point under the enhanced HIPC Initiative and that Malawi be considered for topping-up under the enhanced HIPC Initiative.

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