The World Bank has approved a $60 million grant to avert acute shortages of critical and lifesaving commodities in Malawi.
The grant will also enable commercial banks in Malawi to have access to an import backstopping facility through the International Development Association (IDA) approved by the World Bank’s Board of Executive Directors on Monday.
A statement from the Bretton Woods institution says the contingent financing to import fertilizers and pharmaceuticals will address critical shortages in the market which, if left unaddressed, have the potential to hinder Malawi’s economic recovery.
“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 fertilizers 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 (RBM), 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 part of the statement.
In his remarks, World Bank Country Manager for Malawi, 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 added that the three-year project builds upon existing World Bank, International Finance Corporation (IFC), and Government of Malawi programs on enhancing access to trade finance, including the Global Trade Finance Program (GTFP), and lessons learned from prior projects, including the Financial Inclusion and Entrepreneurship Scaling Project (FINES).
The project will also 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.
The Minister of Finance and Economic Affairs, Simplex Chithyola Banda, said the desire of President Dr. Lazarus McCarthy Chakwera and his government is 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 (IMF), to ensure continuous availability of life saving and agricultural commodities,” said Chithyola Banda.
Meanwhile, the statement from the World Bank indicates that the Ministry of Finance and Economic Affairs will represent the Government of Malawi in signing the financing agreement with a deferred drawdown option, while the Reserve Bank of Malawi (RBM), will be the main implementing agency for this operation.