Malawi: IMF programme approval delivers vital financial breathing space in the short term

Event

Malawi has been in debt default since 2022 and actively looking for debt restructuring in order to secure a new IMF support programme, which is vital to help address its immediate financing needs and recover debt sustainability by 2027. On 15 November, the IMF Executive Board approved a 4-year Extended Credit Facility (ECF) arrangement worth USD 178 million after getting financing assurances from China and India, Malawi’s main bilateral creditors, to restructure their portion of the debt. The approval led to an immediate disbursement of the first tranche (USD 35 million) under the programme, which should help boost Malawi’s detrimental liquidity position in the short term. Nevertheless, the Malawian government is still looking for comparable debt treatment from its external commercial creditors, who hold the lion share of the external debt, in order to actually restore macroeconomic stability and move out of debt distress.

Impact

Malawi is a small, fragile and agriculture-based economy, exposed to climate shocks and highly dependent on donor support. Due to structural current account deficits, liquidity levels are very low, with foreign exchange reserves below 1 month of import cover since 2020. The consequential deep financing gaps on the external balance of payments constitute a permanently high non-payment risk and explain Credendo’s short-term political risk classification in category 7/7. As a matter of fact, the foreign exchange squeeze has been leading to severe shortages of fuel, medicines and fertilisers in the country. If the new IMF support programme succeeds in strengthening the liquidity position, the outlook for the short-term risk will be positive.   

After a few years of terms-of-trade shocks and slowing donor aid inflows, the government was forced to rely on debt financing. With economic growth weakening, the imbalances started affecting the country’s foreign exchange reserves, leading to today’s distressing shortages. Even though Malawi’s total external debt merely reaches 35% of GDP (2022), debt services jumped from around 12% of export revenues in 2022 to 58% in 2023, explaining the current default situation. Accordingly, it appeared that Malawi’s debt carrying capacity was extremely limited. About USD 1 billion in external debt needs to be restructured (8% of GDP) by 2027 – USD 887 million from its commercial creditors (dominated by Afreximbank and Trade & Development Bank) and USD 99 million from its bilateral official creditors. The recent restructuring commitments made by China and India and the subsequent IMF Board’s approval of the financial support programme are important steps towards solving the country’s lingering debt crisis and liquidity shortages, yet a deal with commercial creditors will be pivotal. The discussions are being held bilaterally, not under the G20 Common Framework for debt relief even though Malawi is eligible to the Common Framework.

Already, IMF coordinated policy reforms are being implemented, such as the local currency devaluation of about 30% earlier this month and the hike in fuel and electricity prices. The painful impact of soaring inflation (projected at 30% by the end of 2023) on the cost of living, together with the devastating consequences of the 2023 cholera outbreak and cyclone Freddy are expected to raise social unrest across the country, while food insecurity has increased significantly. As a result of Malawi’s deep solvency issues, external shocks and weak fundamentals, Credendo will keep the country’s classification in the highest MLT political risk category 7/7.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com