The World Bank Board of Executive Directors on Monday approved a $60 million (about K102 billion) grant which will help commercial banks in Malawi to have access to an import backstopping facility from the International Development Association.
In a statement on Tuesday, the World Bank said contingent financing to import fertilisers and pharmaceuticals will address critical shortages in the market which, if left unaddressed, have the potential to hinder Malawi’s economic recovery.
The Bretton Woods institution says the project, De-risking Importation of Strategic Commodities (Disc), will establish a foreign currency trade facility for Malawi’s commercial banks.
“Specifically, the project provides backstopping support on the payment obligations of local issuing banks to their correspondent banks, targeting the import of fertilisers and pharmaceuticals. Currently, correspondent banks lack confidence to extend letters of credit to banks in Malawi due to the high-risk profile of local banks.
“The proposed facility will therefore provide correspondent banks with the assurance that the World Bank, standing behind the Reserve Bank of Malawi, will assume the payment obligations of the local issuing banks in the unlikely event that local banks default on their payment obligations for essential commodities,” reads the statement in part.
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complements government led
macro-fiscal reforms
World Bank Country Manager Hugh Riddell said the Disc project aims to support economic recovery in Malawi with a specific focus on the private sector.
“The project complements the government-led macro-fiscal reforms under implementation and aims to restore the long-term functioning of markets,” Riddell said.
According to the bank, the three-year Disc project builds upon existing World Bank, International Finance Corporation and Government of Malawi programmes on enhancing access to trade finance, including the Global Trade Finance Program, and lessons learned from prior projects, including the Financial Inclusion and Entrepreneurship Scaling Project.
The project is also expected to help local financial institutions establish working partnerships with correspondent banks and increase their credit lines and reduce cash collateral requirements, eventually enabling the continued flow of trade credit into the market at a time when imports are critical.
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In an interview Tuesday, Finance Minister Simplex Chithyola Banda hailed the World Bank for the grant.
He said local authorities are trying to restore stability in the macro-economic situation with a view to revive the wider economy.
“The stable importation of strategic commodities is a critical element of our recovery.
“We have requested the World Bank for this project to boost confidence in our local commercial banks and we are therefore very optimistic this operation will create a timely mechanism, alongside the recently agreed Extended Credit Facility with the International Monetary Fund, to ensure continuous availability of life saving and agricultural commodities,” Chithyola Banda said.
Bankers Association of Malawi Executive Director Lyness Nkungula asked for more time before commenting on the matter.
But Scotland-based economist Velli Nyirongo Tuesday said the World Bank’s assistance has come at a critical juncture for the country.
Nyirongo said the grant would ensure that the country does not experience shortages of essential goods such as medicine and fertiliser in the short-term.
“However, this situation should serve as a wake-up call for the country to begin implementing medium- and long-term measures to prevent such crises from recurring.
“The government should intensify deliberate efforts to strengthen the country’s industrial base, with the goal of becoming an exporter and transforming the country from an import-reliant nation into an exporting powerhouse. Additionally, the government should eliminate all procurement loopholes and learn from past mistakes,” Nyirongo said.
