Press Release No. 06/187

Press Release: World Bank and IMF Support Malawi's Completion Point under the Enhanced HIPC Initiative and Approve Debt Relief under the Multilateral Debt Relief Initiative.

September 1, 2006

The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed that Malawi has made sufficient progress to reach the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Malawi becomes the 20th country to reach the completion point under the Initiative.

Debt relief under the enhanced HIPC Initiative from all of Malawi's creditors amounts to US$646 million in net present value (NPV) terms as of the decision point plus a topping-up of this assistance in an amount equivalent to US$411 million in NPV terms as of the completion point.¹ This assistance is estimated to correspond to approximately US$1.6 billion in nominal terms.²

The additional assistance under the topping-up framework has been approved by the Boards of the World Bank's IDA and the IMF, as Malawi's debt sustainability outlook had deteriorated substantially since the decision point, primarily due to exogenous factors that have led to fundamental changes in the country's economic circumstances. The largely unexpected decline in Malawi's export prices and a fall in international interest rates were the main factors leading to an unanticipated deterioration in Malawi's debt sustainability outlook.

In reaching the HIPC completion point, Malawi also becomes eligible for further debt relief from the World Bank's IDA, the IMF and the African Development Fund (AfDF) under the Multilateral Debt Relief Initiative (MDRI). Debt service savings under the MDRI would amount to US$1.4 billion.

As a result of reaching the HIPC completion point, Malawi is expected to receive the equivalent of US$3.1 billion in total nominal debt relief under the HIPC Initiative and the MDRI on principal as well as interest payments. Average annual debt service savings are expected to increase from US$39 million between 2001 to 2005 to about US$110 million between 2006 and 2025. Malawi's annual debt service payments on outstanding debt are now expected to average US$5 million between 2006 and 2025.

The IMF committed itself to provide HIPC assistance of US$30 million in NPV terms, of which half has already been disbursed. Topping-up of HIPC assistance from the IMF would amount to US$15 million. Under the MDRI, the IMF would provide 100 percent debt relief on US$56 million in obligations incurred before end-2004 and still outstanding at the completion point, implying additional debt relief of US$22 million after assistance under the HIPC Initiative.

The World Bank's IDA committed itself to provide HIPC assistance of US$333 million in NPV terms, of which US$100 million has already been delivered. Moreover, topping-up of IDA's HIPC assistance would amount to US$289 million in NPV terms. Under the MDRI, the World Bank's IDA would cancel a debt stock of US$1.8 billion of debt disbursed before end-2003 and still outstanding on September 30, 2006, of which a reduction of US$1.1 billion would be due to the implementation of MDRI, corresponding to US$1.2 billion in debt service savings.

To reach the completion point, Malawi met all but two triggers that were aimed at maintaining macroeconomic stability, ensuring commitment to a poverty strategy, strengthening public expenditure management, raising the quality of education, improving health outcomes, fighting HIV/AIDS, strengthening land and credit markets, and creating an effective safety net system. In addition, Malawi took steps to improve governance and fight official corruption.

"The debt relief to be provided as a result of reaching completion point will provide a great push to Malawi's poverty reduction efforts. The timing could not have been better, with Malawi just about to start implementing its new poverty reduction strategy, the Malawi Growth and Development Strategy (MGDS)," said Michael Baxter, World Bank Country Director for Malawi. "To achieve optimum results, however, Malawi must continue on a path of improved governance through greater transparency, fighting corruption, and strengthened accountability."

"Over the last two years, Malawi has established a solid track record of good policy implementation. This has resulted in strengthened public finances, and improved macroeconomic performance overall," said Calvin McDonald, IMF Mission chief for Malawi. "The key challenge is to sustain strong policies going forward. Domestic debt reduction should continue to be the cornerstone of fiscal policy, exchange rate policy should continue to be flexible, and monetary policy should guard against resurgent inflation. Medium-term prospects in Malawi will hinge on implementing broader structural reforms to mitigate against domestic and external shocks, and removing bottlenecks to investment and growth in order to reduce poverty. Debt relief under the enhanced HIPC Initiative and MDRI will assist Malawi in achieving these objectives."

ANNEX

1) The HIPC Initiative

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:

Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;

Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster; and

Stronger Link Between Debt Relief and Poverty Reduction.  Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 29 HIPC countries have reached their decision points, of which 20 (including Malawi) have reached completion point.

2) The MDRI

At the July 2005 G8 Summit in Gleneagles, Scotland, G8 leaders pledged to cancel the debt of the world's most indebted countries, most of which are located in Africa. The aim of this Multilateral Debt Relief Initiative (MDRI) was to reduce further the debt of HIPCs and provide additional resource to help them reach the Millennium Development Goals (MDGs)

The MDRI is separate from the HIPC Initiative but linked to it operationally. Under the MDRI, three multilateral institutions - the World Bank's International Development Association, the International Monetary Fund and the African Development Fund provide 100 percent debt relief on eligible debts to countries having reached the HIPC completion point.³ Unlike the HIPC Initiative, the MDRI is not comprehensive in its creditor coverage. It does not involve participation of official bilateral or commercial creditors, or of multilateral institutions other than the above mentioned three.

¹ The net present value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal).

² Nominal terms refers to the actual dollar value of debt service forgiven over a period of time.

³ The IMF also provided MDRI debt relief to non-HIPCs whose income per capita is below US$380 in order to ensure uniformity of treatment in the use of IMF resources.