Malawi: Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
15 May 2020
eISBN:
9781513544472
Language:
English
Keywords:
ISCR; CR; financing; pandemic; emergency financing request; IMF lending tracker; revenue shortfall; development spending; banking system liquidity constraint; financial support; current account; debt relief; Imports; Debt service; Global; exports threshold; CI score; debt carrying capacity; one-off breach; dynamics equation; Debt sustainability analysis; Debt sustainability; Stress testing
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi

Malawi: Joint Bank-Fund Debt Sustainability Analysis

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Malawi’s debt carrying capacity is classified as “medium” according to the composite indicator (CI) score. Malawi’s CI score based on the current vintage (2019 CPIA and 2019 October WEO) is 2.84 and was 2.72 in the previous vintage (2018 CPIA and 2019 April WEO)—both above the threshold value of 2.69—resulting in an upgrade of the debt carrying capacity as the CI score has been above the threshold for two consecutive vintages.

Malawi is at moderate risk of external debt distress with some space to absorb shocks and high risk of overall debt distress. Under the baseline scenario reflecting the macroeconomic impact and rise in external borrowing in 2020 related to the COVID-19 pandemic and a gradual increase in project loans over the medium term, a moderate rating is maintained for external debt distress with debt carrying capacity upgraded to “medium”—revision in October 2019. The present value of total public debt to GDP is projected to exceed the benchmark for the near and medium terms and then gradually decline under the baseline scenario. This mainly reflects larger primary deficits during FY 2019/20–20/21 resulting in increasing amounts of domestic debt.

This DSA incorporates current projections of the impact from the COVID-19 pandemic: (i) GDP growth is expected to fall to 1 percent in 2020 and to 2.5 percent in 2021 as a lockdown substantially slows domestic activity, especially in domestic manufacturing and wholesale and retail trade, and the global and resultant regional economic slowdown is weighing on exports, remittances, and foreign direct investment (FDI); (ii) the domestic primary balance is expected to deteriorate (relative to pre-pandemic projections) to -3.4 percent of GDP in FY 2019/20 and -1.3 percent of GDP in FY 2020/21; (iii) the current account deficit is expected to widen to 18.1 percent of GDP in 2020 and remain broadly unchanged in 2021. However, the economic impact of the COVID-19 pandemic and policy responses are rapidly evolving and risks are heavily tilted to the downside, which could lead to a faster-than-expected deterioration in external and public debt indicators.

Table 1.

Malawi: External Debt Sustainability Framework, Baseline Scenario, 2017–2040

(in percent of GDP, unless otherwise indicated)

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Sources Country authorities and staff estimates and projections1/ Includes both pubic and private vector external debt.2/ Derived as[r gρ(1 -g)]/|1 -g-ρ-gρ: times previous period debt ratio with r – nominal interest rate, g – real GDP growth rate and p – growth rate of G DP deflator in US. dollar term*.3/ Includes exception] I financing lie, change*, in arrears and debt relief t change*, in gross foreign assets; and valuation adjustments For projection*, also include*, contribution from price and exchange rate changes4/ Current year interest payments divided by previous period debt stock5/ Defined as grants. concessional loans, and debt relief.6/ Grant equivalent financing includes grants provided directly to the government and through new borrowing Idrffcrcrvc between the fa;e vaL-c ard the PV of new debt I7/ Assumes that PV of private sector debt is equivalent to its tier value8/ Historical averages are generally derived over the past 10 years, subject to data availability whereas projections averages a re over the first year of projection and the next 10 years.9/ The suspension of debt service to Malawi’s official bilateral creditors under the G20 Initiative is not incorporated due to a lack of sufficient informational this time
Table 2.

Malawi: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–2040

(in percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Figure 1.
Figure 1.

Malawi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Malawi: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Malawi: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–2030

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Malawi: Sensitivity Analysis for Key Indicators of Public Debt, 2020–2030

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Malawi: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, appt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Malawi: Realism Tools

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A002

Figure 5.
Figure 5.

Malawi: Qualification of the Moderate Category, 2020–2030 1/

Citation: IMF Staff Country Reports 2020, 168; 10.5089/9781513544472.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
1

The analysis presented in this document is based on the debt sustainability framework for low-income countries approved by the Boards of both the International Monetary Fund and the International Development Association. It has been prepared in the context of the 2020 request for emergency financing under the IMF’s Rapid Credit Facility. The macroeconomic framework underlying this DSA update is the same as that included in the staff report of the 2020 RCF request which reflects currently available information, including recent global and domestic developments. However, updates with respect to the economic impact and policy response to the COVID-19 pandemic are rapidly evolving and risks are heavily tilted to the downside.

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Cover IMF Staff Country Reports
Malawi: Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 168
Publisher:
International Monetary Fund
ISBN:
9781513544472
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781513544472.002

Malawi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–2030

Malawi: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Malawi: Drivers of Debt Dynamics—Baseline Scenario

Malawi: Realism Tools

Malawi: Qualification of the Moderate Category, 2020–2030 1/