Malawi: Request for Disbursement Under the Rapid Credit Facility—Summary of Debt Sustainability Analysis1
Author: International Monetary Fund. African Dept.
Publication Date:
21 Oct 2020
eISBN:
9781513559612
Language:
English
Keywords:
ISCR; CR; emergency financing request; IMF lending tracker; RCF resource; RCF disbursement; IMF's emergency financing; banking supervision effort; disbursement of SDR; RCF II; Debt relief; COVID-19; Budget planning and preparation; Global; CI score; exports threshold; short-term debt; debt carrying capacity; Debt sustainability; Debt sustainability analysis; Stress testing
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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 2020 April WEO) is 2.72 and remains unchanged from the previous DSA (April 2020)—both above the threshold value of 2.69 for weak debt carrying capacity.

Abstract

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 2020 April WEO) is 2.72 and remains unchanged from the previous DSA (April 2020)—both above the threshold value of 2.69 for weak debt carrying capacity.

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 2020 April WEO) is 2.72 and remains unchanged from the previous DSA (April 2020)—both above the threshold value of 2.69 for weak debt carrying capacity.

Malawi is at moderate risk of external debt distress with limited space to absorb shocks and high risk of overall debt distress. Under the baseline scenario reflecting the negative macroeconomic impact and rise in fiscal 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. However, the present value of external debt-to-exports ratio is projected to deteriorate, reflecting a slower export recovery—as a result, the country’s capacity to absorb shocks is expected to narrow.

While debt remains sustainable, Malawi is at high overall risk of debt distress. The present value of total public debt-to-GDP is projected to remain above the benchmark over the projected period under the baseline scenario. This mainly reflects materially larger domestic primary deficits financed through domestic debt contracted at high interest rates, especially during FY 2020/21—FY 2021/22. The larger primary deficits during the projected period are mainly due to revenue shortfalls and higher health and social spending as a result of the intensification of COVID-19 across Malawi; and the doubling of the PIT threshold, a substantial increase in the public sector wage bill, and introduction of the Agricultural Input Program (replacing the Farm Input Subsidy Program)—all introduced in the FY 2020/21 draft budget that is currently under discussion in the Parliament—which increase risks to debt sustainability compared to the April 2020 DSA. While domestic liquidity is expected to be mainly channeled towards financing the government given waning private sector credit demand (resulting from the pandemic), recent increases in domestic debt yields, particularly on shorter maturities, warrant further strengthening of debt management such as gradually lengthening the maturity of the domestic debt portfolio (as market conditions allow) as well as fiscal consolidation efforts.

This DSA incorporates current projections of the impact from the COVID-19 pandemic: (i) GDP growth is expected to fall to 0.6 percent in 2020 and to 2.2 percent in 2021 as a considerably worsened global and regional economic situation, compared to the outlook under the April 2020 DSA, are intensifying already hefty pressures on exports, remittances, and foreign direct investment (FDI) and continued social distancing measures against a backdrop of rapidly accelerating cases since June substantially slows down domestic activity, especially in domestic manufacturing and wholesale and retail trade, and; (ii) the domestic primary balance is expected to deteriorate (relative to pre-pandemic projections) to -2.5 percent of GDP in FY 2019/20, -4.4 percent of GDP in FY 2020/21 and -3.5 percent of GDP in FY 2021/22; (iii) the current account deficit, excluding official transfers, is expected to widen to 20.5 percent of GDP in 2020 and 20.3 percent of GDP in 2021. However, the outlook remains highly uncertain as the impact of the COVID-19 pandemic and policy responses are rapidly evolving and subject to considerable downside risks, which could lead to a faster-than-expected deterioration in external and public debt indicators. The Malawian government continues implementing measures to mitigate the impact of the pandemic and preserve macroeconomic stability and are actively seeking support from development partners including the World Bank, AfDB and EU2. To strengthen medium-term public debt sustainability and ensure sufficient fiscal space for critical resilience building and social and development spending, the Malawian government plans to implement a comprehensive revenue mobilization strategy (including VAT reforms) in FY 2021/22 and continue to progress in reforms in tax administration, procurement, public financial management (including implementation of a new IFMIS), public investment management, oversight of state-owned enterprises, and debt management.

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 projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1 +g)]/(1 +g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ 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.
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, 288; 10.5089/9781513559612.002.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, 288; 10.5089/9781513559612.002.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, 288; 10.5089/9781513559612.002.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, a ppt 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, 288; 10.5089/9781513559612.002.A002

Figure 5.
Figure 5.

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

Citation: IMF Staff Country Reports 2020, 288; 10.5089/9781513559612.002.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 September 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 September 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.

2

The authorities welcome and are participating in the DSSI. They have requested assistance from bilateral creditors, and discussions are ongoing. This DSA assumes the full amount of the DSSI is received from all creditors in line with agreed term sheets. This assessment assumes debt relief from the IMF under the Catastrophe Containment window of the CCRT through April 2022.

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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 288
Publisher:
International Monetary Fund
ISBN:
9781513559612
ISSN:
1934-7685
Pages:
49
DOI:
https://doi.org/10.5089/9781513559612.002

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/