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Malawi Reaches Completion Point

21 September 2006

Malawi has reached completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Malawi becomes the 20th country to reach completion point under the initiative. In reaching 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).

According to the World Bank and IMF, 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, say the Bank and Fund.

Malawi was also granted “topping-up” at completion point, i.e. it was granted extra debt relief than was originally planned for because the amount of cancellation originally proposed was not enough to bring debt the country’s debt ratios down to sustainable levels. According to the Bank and Fund, the deterioration in Malawi's debt sustainability outlook was largely due to an unexpected decline in Malawi's export prices and a fall in international interest rates. This indicates that despite considerable debt cancellation, Malawi’s economy still remains highly vulnerable to falls in commodity prices and factors beyond its control.

Malawi reached decision point under the HIPC Initiative in 2000. It has therefore been a long and bumpy road to reach the final destination and the golden prize of approx. 90% debt cancellation. The main reason the country has taken so long to reach completion point under the initiative is because the country – under the previous government – repeatedly went off—track with its IMF PRGF Programme. The IMF cited “public overspending” in 2002, 2003 and 2004 as one of the key concerns. ” However the then Malawian Government argued that these overruns in public expenditure were unavoidable and was due in large part to the actions and policy advice of its donors and creditors.

One of the key conditions under the HIPC Initiative was privatisation of ADMARC, the state owned agricultural board which provided farmers and citizens with agricultural subsidies and cut-price grain. The privatisation of ADMARC became one of the most contentious – and disastrous – conditions attached to the HIPC programme. Many civil society organisations in Malawi campaigned vigorously against privatisation of ADMARC. Organisations such as the Malawi Economic Justice Network argued that ADMARC provided a vital social function, such as subsidised fertilisers for small farmers. A World Bank conducted PSIA (Poverty and Social Impact Analysis) also agreed with this assessment although the findings were not made public until too late by the Bank. Ultimately, the IMF pushed the then Malawian Government to privatise ADMARC, end agricultural subsidies and sell grain stocks in order to contain fiscal deficits with disastrous consequences. The sale of grain reserves, coupled with increased prices of fertilisers provoked a food crisis in the country which forced the government to import maize at a cost much higher than the original agricultural subsidies would have been. Embarrassingly for the IMF, it was forced to back-track and admit its mistake and ADMARC remains in state-hands for the moment, although the new government has plans to “commercialise” its operations.

To reach the completion point, Malawi met all but two triggers out of twenty-five. “The IMF waived two conditions that were not attainable”, said Andrew Kumbatira of Malawi Economic Justice Network in Lilongwe. “One was teacher training. Malawi was required to train 6000 teachers every year but our capacity is around only 3000. The second was expenditures in health. The IMF stipulated that this should be 13% of GDP. However this did not take into account shocks which have led to food shortages. Dealing with this has bloated our budget so the 13% was not attainable,” he said.

Overall, he said that “people in Malawi feel happy that we have reached completion point and this has generated expectations. People are expecting a cheque from the World Bank and IMF”. However, the cash freed-up through HIPC and MDRI had already been factored into the government budget approved in July, he warned. This essentially meant that there would be no change in spending plans, as announced in July. “The government will now have to deal with people’s expectations,” he said. He also hoped that Malawi’s completion of the HIPC process would generate more interest from donors and that this would help generate additional resources for Malawi’s development.
Malawi is not out of hot water however. Within the Malawi Economic Justice Network, the debate is now shifting towards how the country can avoid future unsustainable debt burdens, as well as focusing on the country’s growing domestic debt burden. The country still faces huge obstacles towards meeting the internationally agreed MDGs: income per capita stands at just US$160 per year and has declined from its 1990 levels, the impact of HIV/AIDS (around 15% of the population) has dramatically reduced life expectancy levels and Malawi is heavily dependent on agriculture for its export earnings (Malawi derives around 90% of its export income from agricultural products). The challenge for the Malawian Government is to manage debt service savings well and for the international community to come forward with significantly increased aid resource which the country still desperately needs.

Gail Hurley, Eurodad

Links:
World Bank and IMF Support Malawi's Completion Point under the Enhanced HIPC Initiative and Approve Debt Relief under the Multilateral Debt Relief Initiative. Press Release No. 06/187
September 1, 2006

http://www.imf.org/external/np/sec/pr/2006/pr06187.htm