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 Banks IDA and the IMF, as Malawis debt sustainability outlook had deteriorated substantially since the decision point, primarily due to exogenous factors that have led to fundamental changes in the countrys economic circumstances. The largely unexpected decline in Malawis export prices and a fall in international interest rates were the main factors leading
to an unanticipated deterioration in Malawis debt sustainability outlook.
 
In reaching the HIPC completion point, Malawi also becomes eligible for further debt relief from the World Banks 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 toreceive the equivalentof 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. Malawis 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 Banks 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 IDAs 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 Malawis 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.