Press Release: Malawi to Receive US$1 Billion in Debt Service Relief: The IMF and World Bank Support Debt Relief for Malawi Under the Enhanced HIPC Initiative
December 21, 2000
The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt-reduction package for Malawi under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.
The enhanced HIPC Initiative will provide significant support for Malawi's poverty reduction efforts by releasing resources for expenditures on health, education, rural development and other priority areas. Total debt service relief from all of Malawi's creditors will be worth around $1 billion. This is equivalent to US$643 million in net present value1 (NPV) terms, or approximately 44 percent of the NPV of debt outstanding at end-1999 after the full use of traditional debt relief mechanisms. Malawi will save an average of US$50 million per year in debt service payments over the next 20 years, an amount equivalent to around 2.5 percent of annual GDP for the 2001-09 period and 1.2 percent of annual GDP for the 2010-20 period.
The assistance committed by IDA, of US$331 million in NPV terms, will be delivered over a 20 year period and will cover on average 55 percent of annual debt service due. The debt relief provided by the IMF, of US$30 million in NPV terms, will be spread over a period of 8 years, covering an average of 44 percent of annual debt service obligations.
Malawi will receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfies a number of conditions, including adoption and implementation of a participatory poverty reduction strategy (see Annex).
Track record and poverty
Malawi has in recent years taken significant steps to reduce macroeconomic imbalances, broaden market-oriented reforms and improve outcomes in the social sectors. Macroeconomic performance improved under the 1995-99 period of an ESAF program relative to the early 1990s, as a result of IDA-supported adjustment programs that helped stabilize the economy and liberalize the agricultural, trade, financial and petroleum-importing sectors. Measures were taken to address poverty directly, including launching the Malawi Social Action Fund, implementing various food-for-work programs, distributing farm inputs to rural households, and introducing universal free primary education. Nevertheless, sustained economic growth has been elusive and poverty remains widespread.
To achieve greater success in reducing poverty and accelerating growth, the government has begun a broad-based participatory process to formulate a prioritized and costed poverty reduction strategy by next year. An interim PRSP has already been produced by the Malawian authorities, in which they articulate their commitment to poverty reduction and outline a road map for the preparation of the full-fledged PRSP.
Measures to be Taken Before the Completion Point
The IMF and IDA will provide the full amount of assistance under the HIPC Initiative when the following conditions have been met:
- The adoption of a full Poverty Reduction Strategy Paper (PRSP) prepared through a participatory process, and satisfactory progress in implementing and monitoring the PRSP for at least one year;
- The satisfactory implementation of financial and economic policies supported by the IMF's Poverty Reduction and Growth Facility (PRGF);
- The improvement of public expenditure management and governance, through quarterly expenditure reporting on spending in high priority areas and through the separation of fiscal management and audit functions under new legislation;
- The strengthening of land and credit markets;
- The implementation of specific actions in the social sectors aimed at targeting safety net programs to protect the poorest, improving health care delivery, slowing the spread of HIV/AIDS, and raising the quality of education;
- The confirmation of the participation of other creditors in the debt relief operation.
The IMF and the World Bank launched the HIPC Initiative in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced Initiative aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).
Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA will grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to contribute to the debt relief on comparable terms.
Some three-dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 19 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea-Bissau, Guyana, Honduras, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia), with total committed assistance estimated at more than US$31 billion, representing an average NPV stock-of-debt reduction of some 47 percent on top of traditional debt relief mechanisms.
1Net Present Value (NPV) of debt is the discounted sum of all future debt-service obligations (interest and principal) on existing debt. The NPV of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted, under the HIPC Initiative, at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.