Approved by: Prepared jointly by the staff of the International Marcello Estevão and Asad Alam (IDA), Development Association (IDA)1 and the and Vivek Arora and Bjoern Rother (IMF) International Monetary Fund (IMF). MALAWI: JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS 2 Risk of external debt distress High Overall risk of debt distress High Granularity in the risk rating Unsustainable under current policies Application of judgment No In comparison to the previous Debt Sustainability Analysis (DSA), Malawi’s risk of external debt distress has been downgraded from moderate to high risk of debt distress and overall public debt has been maintained at high risk of debt distress. Granularity in risk rating has changed and staff now assess that the overall and external public debt are unsustainable under current policies. Large financing needs in the coming years and low level of international reserves suggest high risk of future distress. The change is due to significant debt vulnerabilities that emerged since the last DSA as reflected in large and protracted threshold breaches on one of two debt stock burden indicators and both of the debt service burden indicators. Debt burden indicators in this DSA (relative to the previous DSA) deteriorated due to: (i) a downgrade in the debt carrying capacity from medium to weak; (ii) a change in the definition that external debt is based on, from a currency to a residency basis, which accurately classifies and captures medium- term domestic bond held by nonresident as external debt; and (iii) the conversion of the Reserve Bank of Malawi’s (RBM) short-term reserve liabilities to medium-term external debt. Despite the challenging macroeconomic situation, the authorities remain committed to prioritizing debt service payments and Malawi remains current on all its debt obligations. Malawi has been severely affected by the pandemic. It is a fragile economy with elevated poverty rates, food insecurity and frequent weather- related shocks. Moreover, substantial development and social spending needs, a high debt burden from the past, and much lower budget support and grants financing are contributing to sustained fiscal and current account deficits in the near to medium term. Thus, total public debt is projected to increase over the near to medium term but at the same time, Malawi’s exposure to financing risks is significant. Staff assess the main risk to the baseline is a sudden stop of available financing especially from the regional 1 >>> development banks (RDBs).3 If this risk materializes, an abrupt forced adjustment becomes inevitable, with a significant impact on growth, financial stability and the most vulnerable segments of the population. 1. The DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government (Text Table 1).4 Public debt used for this DSA is public and publicly guaranteed (PPG) external and public domestic debt, covering debt contracted and guaranteed by the central government and the Reserve Bank of Malawi (RBM). Due to data limitations, it does not include debt held by state and local governments, other elements in the general government (such as the social security fund and extra budgetary funds), or non-guaranteed state-owned enterprise (SOE) debt.5 Subsectors of the public sector Check box 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt Public debt coverage and the magnitude of the contingent liability tailored stress test 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Default Used for the analysis Reasons for deviations from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 2 Limited coverage 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 2 4 PPP 35 percent of PPP stock 0.00 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5 Total (2+3+4+5) (in percent of GDP) 9.0 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 2. This DSA is being conducted in the context of the 2021 Article IV Consultation. The last Low- Income Country DSA (LIC-DSF) was considered by the Executive Board in October 2020 as part of the request for disbursement under the Rapid Credit Facility (RCF). 6 Malawi is subject to the IDA Sustainable Development Finance Policy (SDFP) which is the successor of Non-Concessional Borrowing Policy (NCBP).7 2 >>> 3. Malawi’s sources of fragility are driven by high poverty rates, food insecurity and frequent weather-related shocks, leaving per capita income stagnant. Malawi is one of the most vulnerable countries to climate change and has the third lowest GDP per capita in sub-Saharan Africa (Text Figure 1). Major droughts, floods, combined with the fallout from the COVID-19 pandemic weigh heavily on economic activity and incomes. These challenges are compounded by weak governance, and poor quality of public administration combined with limited fiscal space and high public debt. High public debt has, in turn, contributed to high real interest rates, which further weighs on lending to the private sector and growth. Thus, sustaining Malawi’s growth in the past decade has been challenging. As a result, GDP growth barely kept up with population growth, leaving real per capita growth in the negative region. Moreover, exiting from fragility is not expected in the medium term as debt levels are projected to increase and crowd out private sector investment and to hinder medium-term economic prospects. 4. Substantial development and social spending needs, a high debt burden from the past, and much lower budget support and grants are contributing to sustained fiscal and current account deficits in the near to medium term. Budget deficits have remained high, reflecting limited adjustment in spending and low domestic revenue mobilization. Deficits have been financed mainly by costly domestic borrowing, as external budget support and grants financing (that averaged 5.8 percent of GDP during 2005- 13) have been reduced significantly (1.8 percent of GDP) since the 2013 “Cashgate”.8 Rising domestic financing (since 2018) as well as borrowing from regional development banks (RDBs) on non-concessional basis has significantly increased Malawi’s public debt which stood at 55 percent of GDP in 2020. Non - concessional external debt outstanding of 10 percent of GDP in 2020, mostly financed fuel, fertilizer, and other strategic imports (Text Figure 2; Text Table 2). 3 >>> 1.0 Sub-Saharan Africa Rest of the world 0.9 0.8 Index 0.7 MWI 0.6 0.5 0.4 500 5,000 50,000 GDP per cpaita, PPP Source: Notre Dame Global Adaption Initiative; and IMF World Economic Outlook database. 5. Regional Development Banks’ (RDBs’) participation in the domestic bond market increased the share of commercial debt to 33 percent of total external PPG debt. The total external PPG debt stock reached $3.76 billion (33 percent of GDP) at end-2020, comprising two thirds of multilateral and bilateral concessional loans and the rest in commercial terms. Malawi had arrears to Spain and a non- official/commercial creditor at the end of 2020. The authorities have been engaged in good faith negotiations in 2021 with both creditors (Spain and TDB) and repayments have started based on agreed rescheduling: (i) repayments to Spain started in May 2021 and will continue to November 2023; and (ii) the authorities met their debt obligations to TBD up to April 2022. (Text Table 2). The WB and IMF staffs received confirmation from the authorities that Malawi is current on all its external and domestic debt obligations, while there is no pending debt restructuring. 6. Moreover, near-term debt service is highly concentrated on non-official / commercial creditors. The downward revision to growth outlook and new external borrowings during 2018-20 have put pressure on debt service, though some of this pressure was alleviated as the debt relief became available from the Catastrophe Containment and Relief Trust (CCRT) and the G20 Debt Service Suspension Initiative (DSSI). 9 Terms of borrowing from non-official sources are highly non-concessional (¶9). As a result, near-term debt service is majority to non-official creditors; 79 percent and 72 percent of total debt service in 2021 and 2022, respectively (Text Table 3). 4 >>> 5 >>> 7. External PPG debt has increased by a large margin in 2020, partly due to the conversion of the RBM’s short-term reserve liabilities to medium-term debt. External PPG debt increased from 27.7 percent of GDP in 2019 to 33 percent of GDP in 2020. In 2012, the RBM started using a three-year revolving trade credit facility with a cap of $250 million to meet foreign exchange needs for strategic imports such as fuel and fertilizers. As exports of tobacco continued to stagnate, however, the RBM began to face difficulties in staying within the US$250 million cap and began to use forex swaps with domestic and RDBs.10 As trade deficits continue to widen, the RBM faced difficulties in reversing currency swap open positions and staying within the cap of revolving trade credit facility. The RBM converted short-term currency swap open position to a medium-term forex facility of US$450 million at end June 2020, resulting in a sharp increase in external PPG debt. 8. The key macroeconomic assumptions have been updated from the DSA that accompanied the RCF request (the October 2020 DSA hereafter).11 In the absence of policy adjustment under the baseline scenario, it is assumed that the authorities’ fiscal and monetary policy stance will remain broadly statu s quo in the medium term, while mitigating the negative impact of COVID-19 predominantly in the near term: the fiscal domestic primary deficit will remain at about -3.2 percent of GDP; the reserve monetary growth will be anchored to achieve 6 percent by the end of the medium term; and the real effective exchange rate is projected to adjust by about 14 percent during the medium term. Changes to the underlying assumptions from the October 2020 DSA are as follows (Text Table 4): • The real GDP growth projection for 2021 remains unchanged from the October 2020 DSA at 2.2 percent.12 However, the real GDP growth path in the medium to long term has been revised down: by about 2 percentage points in the medium term and less in the long term. While improvements in agricultural productivity and the services sector will be important drivers of growth, this revised medium-term outlook depends critically on: (i) a sustained increase in public investment with strong fiscal multipliers of public investment; (ii) the maintenance of a fiscal deficit in the order 10 percent of GDP over the medium term (and external current account deficits of comparable size); and (iii) continued access to sizable and further growing RDBs financing as well as domestic borrowing to cover large financing gaps despite unsustainable debt (¶9). As a result, the debt burden will continue to grow, and it is projected to crowd out private investment and hinder medium- term economic prospects. The long-term outlook is predicated on the sustained increase in public investment leading to an increase in the economy’s potential output. Continuing to depend on non- concessional loans from the RDBs however comes with risks (¶18). 6 >>> • Pressure on inflation is emerging. Headline inflation has increased from 7.6 percent at end-2020 to 8.9 percent at end-September 2021 partly due to currency depreciation and its passthrough effect on non-food inflation; food inflation remains above 10 percent despite a good harvest. CPI inflation is projected at 10 percent at end-2021 and about 7 percent at the end of the medium term provided that the monetary policy stance will be well anchored. • The exchange rate is projected to gradually adjust in real term in the medium term. Unlike the current baseline, no REER adjustment was assumed under the second RCF. The nominal exchange rate has been kept stable since 2016 and has contributed to appreciating the currency by about 30 percent in real terms. The RBM has been allowing for greater flexibility in the nominal exchange rate since the summer 2020 but only gradually and it has continued to appreciate in real term. The baseline assumes that the real effective exchange rate (REER) will adjust by about half of the appreciation observed since 2016 in the next five years. • The fiscal primary deficit has been revised to reflect the expansionary fiscal stance in the near term which peaks to 6.5 percent of GDP in 2022 and an average of 5 percent in the medium term (2021-25), as the current government is committed to maintain a minimum level of capital expenditure to support its developmental needs. Beyond the medium term, the fiscal program is anchored around the debt stabilizing primary balance as informed by the DSA and expressed in the authority’s commitment to retore debt sustainability, as such the DSA assumes a fiscal primary surplus of 0.1 percent of GDP, on average over the period 2026-41. In the October 2020 DSA, however, primary balance was assumed to adjust under the 2018 ECF in place at the time. • The current account deficit has been revised to 15 percent in 2021 and is projected to decline in the medium term but only to about 10 percent of GDP as the fiscal deficits are projected to remain at about 10 percent of GDP. Staff projects a deterioration in service receipts (especially in hotel and transportation services). Over the medium term, the current account deficit is expected to remain high, which is consistent with the projection on fiscal. Exports are expected to increase by 2024 considering the resumption of tobacco exports to the United States, lifting the export ban on maize, and other export diversification efforts into other agricultural exports. The external sector assessment shows that Malawi’s external sector position is substantially weaker than implied by fundamentals and desirable policies (2021 Article IV Consultation Staff Report). • Gross official reserves were projected to increase from US$884 million (3.1 months of next year’s imports) in 2020 to US$974 million (3.4 months of next year’s imports) in 2021 in the October 2020 DSA. In this DSA, it is revised down from US$566 million (2.1 months of imports) in 2020 to US$394 million (1.4 months of next year’s imports) in 2021 despite of emergency RCF assistance in 2020 and SDR allocation in 2021. Gross official reserves are expected to remain at about US$400-500 million (1½ months of imports) through 2026 under the assumption that the financing gap of about 20 percent of GDP during the medium term (2021-26) will be met with external financing from the RDBs as in the past (see below). 7 >>> Real GDP growth Primary balance** Total public debt** Current account deficit FDI (percent) (percent of GDP) (percent of GDP) (percent of GDP) (percent of GDP) Year Previous Current Previous* Current Previous* Current Previous* Current Previous* Current 2017 4.0 4.0 -0.6 -0.3 41.4 41.5 16.1 15.5 1.5 1.1 2018 3.2 4.4 -4.3 -2.7 59.7 43.9 14.9 12.0 1.6 1.1 2019 4.5 5.4 -2.7 -2.0 59.5 45.3 12.4 12.6 1.4 1.0 2020 0.6 0.9 -3.9 -2.7 69.2 54.8 14 13.6 1.1 0.8 2021 2.2 2.2 -7.2 -3.7 78.2 58.3 14.5 15 1.4 0.8 2022 6.5 3.5 -6.0 -6.5 81.0 62.7 13.5 14.3 1.5 1.3 2023 6.5 4.5 -5.0 -4.8 82.5 66.9 13 12.6 1.5 1.3 2024 6.3 4 -3.8 -4.2 83.2 72.0 12.5 10.8 1.6 1.3 2025 6.3 4 -2.2 -4 82.4 78.0 12 10.7 1.8 1.4 2026 6.0 4.1 -2.0 -4.2 81.4 83.6 11.7 10.4 1.9 1.4 Avg 2026- 40 5.6 5.4 -0.1 0.1 75.1 81.5 10.5 3.8 2.3 1.8 Sources: Malawian authorities and IMF staff calculations and projections. * Previous is October 2020 DSA recalculated with rebased GDP. ** Fiscal data refers to fiscal year; e.g. 2021=FY2020/21 9. The assumption for the financing mix and borrowing terms are in line with the Malawi’s Medium-Term Debt Management Strategy (MTDS) which aims to gradually reduce short-term debt. The financing mix assumptions are as follows: • External borrowing. The baseline assumes: (i) all the project loans ratified but undisbursed (US$1.32 billion as of end-June 2021) will be disbursed during the medium term; and (ii) additional loans (US$2.6 billion) will be contracted from RDBs to fill the financing gaps during the medium term. The baseline also assumes that IDA19 disbursement for FY22 will remain in line with FY21 outturn. In total, new external borrowing of $3.9 billion in the medium term (2021-26) which is significantly higher than the October 2020 DSA ($1.27 billion). The average grant element of new borrowing is projected to become significantly low over the medium term (about 40 percent at the time of the October 2020 DSA). The main reason for the decline in the grant element is its dependency on RDBs which have been lending at annual percentage rate (APR) of about 7-8 percent and have been filling the financing gap in the absence of donor support. The APR of 8 percent is assumed for the new borrowing. • Domestic borrowing. The baseline assumes the remaining financing gap will be picked up by domestic bank and nonbank institutions. Given the size of fiscal deficits that the authorities are planning to maintain, domestic borrowing averages about 9 percent of GDP each year during the medium term (which is higher than the size of bond purchases by banks observed in the past). The interest rate for 3-year bond and 10-year bond are assumed at 11.5 percent and 17 percent respectively. New bond issuance will move gradually towards longer maturity bonds, the share of bonds with a maturity greater than 7 years is expected to increase from 5% of new issuance to 20% by 2032. 8 >>> 10. The realism tools suggest that the baseline scenario is credible compared to Malawi’s historical experience and cross-country experiences (Figures 3 and 4). • The left-hand side panels of Figure 3 show the evolution of projections of external and public debt to GDP ratios for the current DSA, the previous DSA (the October 2020 DSA), and the DSA from 5 years ago. The current DSA reflects the latest revisions to the medium-term outlook and policy direction of the authorities in presence of COVID-19 shock and the need of development spending to achieve the goals of the Malawi Vision 2063. The difference between the current DSA and the previous DSA is large for the reasons discussed above (¶5). • Debt-creating flows charts (middle panel) show that the important contribution of the nominal interest rate over the 5-year projected change, reflecting the compositional changes in the external debt (¶4). • The unexpected increases in PPG external debt and public debt (right-hand side panels of Figure 3) are about 14.7 and 28 percent of GDP, respectively, which are both above the median of the countries producing LIC DSF. The drivers of the unexpected public debt accumulation are unexpected increase in primary deficits and unexpected depreciation of the real exchange rate. 11. Modest improvements in the primary balance in the next three years is in the middle of historical data on LIC adjustment programs (Figure 4). The second DSF realism tool assesses the realism of the fiscal projection. The top-left panel of Figure 4 highlights that the anticipated adjustment in the primary balance of 0.5 percentage points of GDP is in line with other LICs. The top-right panel of Figure 4 shows that growth projection for 2021 and 2022 are optimistic relative to what is suggested by the fiscal multiplier realism tool. This is because of the economic rebound that is expected after the attenuation of the negative impact of COVID-19 shock. The bottom two panels reflect the authorities’ plan to ramp up public investment to generate growth. 12. Malawi’s debt-carrying capacity based on the Composite Indicator (CI) is assessed as weak (Text Table 5).13 The CI is determined by the World Bank’s CPIA and other variables informed by the macroeconomic framework, such as real GDP growth, import coverage of reserves, remittances as percent of GDP, and growth of the world economy. Malawi’s CI based on the current vintage (2021 CPIA) has been downgraded to ‘weak’ with a CI score of 2.56 compared to ‘medium’ CI score of 2.84 under the DSA presented in the context of Malawi’s request for RCF on October 2020. In addition, Malawi is classified as “weak quality of debt monitoring” in line with the country’s debt -recording capacity. The four external debt 9 >>> burden thresholds and the total public debt benchmark are determined by this classification of the debt carrying capacity (Text Figure 6). Debt Carrying Capacity Weak Classification based on Classification based on Classification based on the Final current vintage the previous vintage two previous vintage Weak Weak Weak Weak Calculation of the CI Index 2.56 2.57 2.51 Malawi : Request for Disbursement Under the Components Rapid Credit Facility-Press Coefficients (A) Release; 10-year Staff Report; and average CI Statement by the Executive Director Score components for Malawi Contribution of (imf.org) values (B) (A*B) = (C) components CPIA 0.385 3.196 1.23 48% Real growth rate (in percent) 2.719 3.772 0.10 4% Import coverage of reserves (in percent) 4.052 25.387 1.03 40% Import coverage of reserves^2 (in percent) -3.990 6.445 -0.26 -10% Remittances (in percent) 2.022 1.465 0.03 1% World economic growth (in percent) 13.520 3.137 0.42 17% CI Score 2.56 100% CI rating Weak EXTERNAL debt burden thresholds Weak Medium Strong PV of debt in % of Exports 140 180 240 GDP 30 40 55 Debt service in % of Exports 10 15 21 Revenue 14 18 23 EXTERNAL debt burden thresholds TOTAL public debt benchmark PV of debt in % of PV of total public debt in Exports 140 GDP 30 percent of GDP 35 Debt service in % of Exports 10 Revenue 14 10 >>> 13. Standard scenarios stress test and a contingent liability stress test are conducted (Text Table 7, and Tables 3 and 4). A stress test combined contingent liabilities of a one-time debt shock (equivalent to 9 percent of GDP) in 2021, to capture the potential impact of limited public debt coverage (2 percent of GDP, instead of the default level of zero) and contingent liabilities from SOEs 14 (equivalent to 2 percent of GDP) and the need to for bank recapitalization. 15 14. A second tailored scenario presented is a commodity price shock (Tables 3 and 4). Given the high share of Malawi’s tobacco exports in total exports (goods and services) of more than 50 percent over the previous three-year period, the DSA also conducts a stress test where commodity exports are shocked by a commodity price gap in the second year of projection, which converges to the baseline in 6 years. 16 A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the PV of debt-to-exports ratio and PV of debt-to-GDP to rise and remain elevated exceeding the baseline projections over the medium term. Public debt coverage and the magnitude of the contingent liability tailored stress test B. Please customize elements of the contingent liability tailored test, as applicable. 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Default Used for the analysis Reasons for deviations from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 2 Limited coverage 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 2 4 PPP 35 percent of PPP stock 0.00 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5 Total (2+3+4+5) (in percent of GDP) 9.0 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 11 >>> 15. Malawi’s external and public debt is assessed to be in high risk of debt distress and granularity in risk rating assess that public debt under current policies is unsustainable. The arrears to the TDB and Spain at the end of 2020 have been rescheduled and payments have started on an agreed scheduled. Under the baseline, the external DSA assesses that Malawi’s external debt is high because there are large and protracted threshold breaches on a number of external debt stock and external debt service burden indicators (both external debt-service to exports ratio and external debt-service to revenue ratios). One of the stock indicators, the PV debt to GDP ratio, stay below the threshold during the medium to long term, but the other indicator, the PV debt to export ratio, only become below the threshold after the medium term. These indicators all point to significant pressure on servicing the external debt in the medium to long term. 16. The stress scenarios highlight Malawi’s debt is vulnerable to any shocks in exports, the exchange rate and non-debt flows such as aid flows. The historical scenario, which assumes that real GDP growth, the primary balance-to-GDP ratio, the GDP deflator, the non-interest current account, and net FDI flows permanently remain at their historical averages, indicates that the baseline is in line with the historical pattern. Various stress test scenarios presented in Figure 1 show that Malawi’s debt is vulnerabl e to shocks in exports (see the PV debt to export ratio and the debt service to export ratio), those in the exchange rate (see the debt service to revenue ratio), and those in non-debt flows (see the PV debt to GDP ratio). 17. Malawi’s overall public debt is assessed to be high and unsustainable under current policies, as external debt is unsustainable and the PV of public debt-to-GDP ratio remains above the threshold and other indicators do not stabilize over time. Total public debt is projected to rise from medium to long term in the baseline scenario. Unlike the historical scenario under which public debt indicators gradually decline to threshold level in the long term, all three public debt burden indicators are above their indicative thresholds under the baseline (Figure 2). The PV of debt-to-GDP ratio reaches 80 percent by 2031 and the debt to revenue ratio and the debt service to revenue ratio grow to reach 500 percent and 135 percent, respectively. These numbers point to the severity of the debt burden on the economy. There are many factors contributing to the situation, Malawi’s inability to sustain growth, partly due to frequent weather-related shocks; high cost of sovereign borrowing (e.g., the most recent infrastructure bond issuances in August 2021 was priced at 23 percent); and the high level of existing debt with a large fraction being on non-concessional term. 12 >>> 18. Malawi’s external and public debt is at high risk of debt distress and granularity in risk r ating assesses that public debt under current policies is unsustainable. The assessment reflects the significant debt vulnerabilities emanating from the large and protracted threshold breaches on a number of debt stock and debt service burden indicators. Malawi’s exposure to financing risks is significant. The WB and IMF Staff assess the main risk to the baseline is a sudden stop of available financing especially from RDBs. If this risk materializes, an abrupt forced adjustment with a significant impact on growth, financial stability and the most vulnerable population becomes inevitable. Additional risks to the ratings assessment arise from weaker-than expected policy implementation, fiscal slippage, macroeconomic uncertainty (especially from weather shocks), tighter global financial conditions, increase of essential imports costs and a weak and diverging global economic recovery which could depress export growth. Authorities are continuing to implement improvements in tax administration, which will help with compliance and revenue collection going forward. 19. Containing Malawi’s debt vulnerabilities requires policy adjustment to address macroeconomic imbalances and upfront actions to return to moderate risk of debt distress with a sustainable path. Over the medium term, a strong fiscal adjustment program is needed to stabilize the public debt. Redoubling efforts on domestic revenue mobilization, reprioritizing expenditure through curtailing growth in wages while safeguarding capital spending, reforming the Affordable Input Program (AIP) and goods and services; and reducing non-critical spending would help in this regard. Realism in budget forecasts and public financial management (PFM) reforms would help containing fiscal deficits and debt. This needs to be supported by strengthening public sector governance and institutions to help safeguard scarce resources and strengthen policy effectiveness. In addition, given how Malawi’s external position is assessed to be substantially weaker than the level implied by economic fundamentals and desirable policies, allowing for greater flexibility in the exchange rate, containing external imbalances, and rebuilding reserves are critical in reducing Malawi’s vulnerabilities to external shocks . This should be supported by a well-functioning and transparent foreign exchange interbank market and a foreign exchange reserve management strategy. On the latter, the authorities need to promptly address data shortcoming related to reserves, especially the possible inclusion of encumbered assets that inflate reported reserves. 20. Malawi also needs significant structural reforms to support sustained inclusive growth in the medium to long term. Promoting diversification and commercialization in the agriculture sector will be key to increasing incomes and strengthening resilience. The government needs to rebalance spending in the agriculture sector away from fiscally unsustainable maize input subsidies and toward investments that promote diversification and growth. Subsidy programs need to be affordable, more cost-efficient, and should reduce fiscal risks. In addition, commercializing agriculture requires predictable and transparent trade policies. As such, a sound implementation and monitoring framework of trade measures under the Control of Goods Act would help safeguard food security and balance this with increasing export potential, as well as development of various value chains. As part of this, the rules for the implementation of export mandate regulations should be assessed in consultation with the private sector to avoid creating additional market distortions. A reliable, transparent trade policy would, in turn, stimulate investment and commercialization, which could increase production, food security, and exports in the medium term. The 13 >>> Agricultural Development and Marketing Corporation’s (ADMARC’s) market interventions also need to be transparent, timely, and predictable. 21. Policies to increase diversification outside of agriculture will also be critical to enhance productivity, value addition, and job creation. Key to this will be expanding reliable access to electricity, which calls for continued progress on energy investment projects and stronger governance at key sector utilities. In addition, the Government should reform tax policies and administration and business regulations, to increase transparency, reduce ad hoc changes, and support value addition. The government can harness growth in the mobile and Information Communication Technology (ICT) sectors by reviewing the tax regime, levies, and tariffs to enable greater customer access; and fostering competition in the broadband infrastructure development market. Finally, reducing Government domestic borrowing will ease pressures on interest rates, enabling broader access to finance for Small and Medium-Sized Enterprises (SMEs). 22. The authorities are in broad agreement with the WB’s and IMF’s staff assessments. They are undertaking policy action to address debt sustainability through engagement with creditors, including RDBs for rescheduling existing debt. Authorities are also engaging with traditional and nontraditional donors for possible voluntary debt buy back schemes to offset more expensive debt. 14 >>> PV of debt-to GDP ratio PV of debt-to-exports ratio 70 600 60 500 50 400 40 300 30 200 20 10 100 Most extreme shock: Exports Most extreme shock: Exports 0 0 2021 2023 2025 2027 2029 2031 2021 2023 2025 2027 2029 2031 Debt service-to-exports ratio Debt service-to-revenue ratio 80 60 70 50 60 40 50 40 30 30 20 20 10 10 Most extreme shock: Exports Most extreme shock: Exports 0 0 2021 2023 2025 2027 2029 2031 2021 2023 2025 2027 2029 2031 Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Stress Terms of marginal debt Combined CL Yes Avg. nominal interest rate on new borrowing in USD 5.8% 5.8% Natural disaster n.a. n.a. USD Discount rate 5.0% 5.0% Commodity price No No Avg. maturity (incl. grace period) 14 14 Market financing n.a. n.a. Avg. grace period 3 3 Note: "Yes" indicates any change to the size or interactions of * Note: All the additional financing needs generated by the shocks under the stress tests are the default settings for the stress tests. "n.a." indicates that the assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 15 >>> 16 >>> External debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 100 50 80 Residual Previous DSA proj. 70 DSA-2016 40 Interquartile range (25-75) Price and 50 60 exchange rate 30 50 Real GDP 20 0 Change in PPG growth debt 3/ 40 10 30 Nominal interest rate 0 -50 20 Median Current -10 10 account + FDI Change in -100 -20 0 PPG debt 3/ 5-year 5-year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Contribution of Distribution across LICs 2/ historical projected -30 unexpected change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual Current DSA 60 35 Previous DSA proj. DSA-2016 Interquartile 100 Other debt 30 range (25-75) creating flows 90 40 25 80 Real Exchange rate depreciation 70 20 60 Real GDP growth 20 15 Change in debt 50 Real interest rate 10 40 30 0 5 Primary deficit 20 0 10 Median Change in debt -20 0 -5 5-year 5-year Distribution across LICs 2/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Contribution of historical projected -10 unexpected change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 17 >>> 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 6 2 14 Distribution 1/ 5 12 Projected 3-yr adjustment 3-year PB adjustment greater In percentage points of GDP 1 than 2.5 percentage points of 4 10 GDP in approx. top quartile In percent 8 3 0 6 2 -1 4 1 2 0 -2 0 2015 2016 2017 2018 2019 2020 2021 2022 Baseline Multiplier = 0.2 Multiplier = 0.4 more -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (percent of GDP) (percent, 5-year average) 8 6 5 6 4 4 3 2 2 1 0 0 Historical Projected (Prev. DSA) Projected (Curr. DSA) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA Contribution of government capital 18 >>> Actual Projections Average 8/ 2018 2019 2020 2021 2022 2023 2024 2025 2026 2031 2041 Historical Projections External debt (nominal) 1/ 25.0 27.8 32.9 31.9 34.7 36.3 37.6 39.5 41.5 40.3 23.8 22.5 38.8 Definition of external/domestic debt Residency-based of which: public and publicly guaranteed (PPG) 25.0 27.8 32.9 31.9 34.7 36.3 37.6 39.5 41.5 40.3 23.8 22.5 38.8 Is there a material difference between the Yes two criteria? Change in external debt 0.8 2.9 5.1 -1.0 2.8 1.6 1.4 1.9 1.9 -0.9 -0.6 Identified net debt-creating flows 8.7 9.0 10.9 13.5 11.9 9.8 8.1 7.9 7.4 0.9 -1.9 8.6 6.7 Non-interest current account deficit 11.8 12.4 13.4 13.7 12.7 10.9 8.9 9.2 8.7 3.4 -0.9 10.2 8.2 Deficit in balance of goods and services 16.1 16.7 17.6 17.6 16.7 15.0 13.2 13.5 13.1 7.9 2.4 13.3 12.5 Exports 11.3 10.8 8.2 8.9 9.5 10.4 11.6 12.7 13.7 15.3 15.4 Debt Accumulation Imports 27.3 27.6 25.8 26.5 26.2 25.4 24.8 26.3 26.7 23.3 17.7 3.0 25 Net current transfers (negative = inflow) -5.7 -5.8 -5.6 -5.3 -5.4 -5.6 -5.7 -5.8 -5.8 -6.0 -3.1 -4.6 -5.7 of which: official 0.0 -0.4 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.5 Other current account flows (negative = net inflow) 1.4 1.5 1.3 1.4 1.4 1.4 1.4 1.5 1.5 1.5 -0.2 1.4 1.4 20 Net FDI (negative = inflow) -1.1 -1.0 -0.8 -0.8 -1.3 -1.3 -1.3 -1.4 -1.4 -1.8 -1.9 -1.2 -1.4 2.0 Endogenous debt dynamics 2/ -2.1 -2.5 -1.7 0.6 0.4 0.2 0.4 0.0 0.1 -0.7 0.9 Contribution from nominal interest rate 0.2 0.2 0.2 1.3 1.5 1.7 1.9 1.5 1.7 1.4 0.9 1.5 15 Contribution from real GDP growth -1.0 -1.2 -0.2 -0.7 -1.1 -1.5 -1.4 -1.5 -1.6 -2.1 0.0 1.0 Contribution from price and exchange rate changes -1.3 -1.4 -1.7 … … … … … … … … Residual 3/ -7.9 -6.1 -5.8 -14.5 -9.1 -8.2 -6.7 -6.0 -5.4 -1.8 1.3 -6.2 -6.1 10 0.5 of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5 Sustainability indicators -0.5 PV of PPG external debt-to-GDP ratio ... ... 21.9 20.7 22.4 23.8 25.0 26.5 27.9 28.1 16.9 PV of PPG external debt-to-exports ratio ... ... 269.1 232.7 235.7 229.7 215.1 208.4 203.8 183.4 109.9 -1.0 0 PPG debt service-to-exports ratio 5.7 5.5 7.2 47.2 44.1 40.8 35.7 28.1 33.3 33.7 24.2 2021 2023 2025 2027 2029 2031 PPG debt service-to-revenue ratio 4.5 4.6 4.6 31.1 31.8 31.9 31.0 26.3 33.1 34.4 28.8 Gross external financing need (Billion of U.S. dollars) 1.1 1.3 1.6 2.1 2.0 1.8 1.5 1.5 1.6 1.2 0.3 Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) 4.4 5.4 0.9 2.2 3.5 4.5 4.0 4.0 4.1 5.5 0.0 3.8 4.5 GDP deflator in US dollar terms (change in percent) 5.9 5.9 6.4 0.0 0.4 -2.2 -2.0 -1.6 -1.0 0.2 0.0 -0.9 -0.5 Effective interest rate (percent) 4/ 1.0 0.9 0.7 4.1 5.0 5.0 5.3 4.0 4.5 3.7 3.7 0.8 4.4 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) 5.6 7.6 -19.2 11.6 11.1 11.2 14.3 12.0 10.9 7.7 -2.3 -2.4 10.2 of which: Private Growth of imports of G&S (US dollar terms, in percent) -2.1 12.8 0.3 5.1 2.8 -1.1 -0.4 8.4 4.9 2.2 0.0 2.5 3.1 45 Grant element of new public sector borrowing (in percent) ... ... ... 20.0 12.8 15.6 17.2 18.1 14.7 10.9 0.0 ... 14.4 40 Government revenues (excluding grants, in percent of GDP) 14.1 13.1 12.8 13.5 13.2 13.2 13.4 13.6 13.8 15.0 12.9 12.9 13.9 Aid flows (in Billion of US dollars) 5/ 0.2 0.3 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.1 35 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 1.9 2.0 1.9 1.7 1.6 1.4 1.0 0.4 ... 1.5 30 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 43.6 26.5 30.1 31.5 28.2 22.1 17.7 15.8 ... 24.9 Nominal GDP (Billion of US dollars) 10 11 12 12 13 13 13 13 14 18 32 25 Nominal dollar GDP growth 10.5 11.6 7.4 2.2 3.9 2.2 1.9 2.3 3.0 5.7 0.0 2.9 4.0 20 Memorandum items: 15 PV of external debt 7/ ... ... 21.9 20.7 22.4 23.8 25.0 26.5 27.9 28.1 16.9 10 In percent of exports ... ... 269.1 232.7 235.7 229.7 215.1 208.4 203.8 183.4 109.9 Total external debt service-to-exports ratio 5.7 5.5 7.2 47.2 44.1 40.8 35.7 28.1 33.3 33.7 24.2 5 PV of PPG external debt (in Billion of US dollars) 2.6 2.5 2.8 3.1 3.3 3.6 3.9 5.1 5.4 0 (PVt-PVt-1)/GDPt-1 (in percent) -0.8 2.6 1.9 1.7 2.1 2.2 1.3 -0.3 2021 2023 2025 2027 2029 2031 Non-interest current account deficit that stabilizes debt ratio 11.1 9.5 8.3 14.7 9.9 9.3 7.6 7.4 6.7 4.3 -0.3 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 19 >>> Actual Projections Average 6/ 2018 2019 2020 2021 2022 2023 2024 2025 2026 2031 2041 Historical Projections Public sector debt 1/ 43.9 45.3 54.8 59.0 64.3 68.9 74.4 80.4 85.7 92.8 69.4 37.6 80.9 Definition of external/domestic Residency- of which: external debt 25.0 27.8 32.9 31.9 34.7 36.3 37.6 39.5 41.5 40.3 23.8 22.5 38.8 debt based of which: local-currency denominated Change in public sector debt 2.4 1.4 9.5 4.2 5.2 4.6 5.5 6.0 5.3 -0.4 2.6 Is there a material difference Identified debt-creating flows 0.6 0.0 7.1 3.0 2.6 1.9 2.9 3.7 3.2 -2.0 2.6 1.5 1.6 Yes between the two criteria? Primary deficit 1.6 1.5 5.0 4.0 5.0 4.2 3.9 4.3 3.2 -0.1 -2.2 1.7 2.6 Revenue and grants 15.0 14.8 14.5 14.7 14.4 14.3 14.3 14.3 14.3 15.4 13.3 15.4 14.6 of which: grants 0.9 1.7 1.8 1.3 1.2 1.1 1.0 0.7 0.6 0.4 0.4 Public sector debt 1/ Primary (noninterest) expenditure 16.6 16.3 19.5 18.7 19.4 18.5 18.3 18.5 17.5 15.3 11.1 17.1 17.2 Automatic debt dynamics -1.0 -1.5 2.1 -1.0 -2.4 -2.3 -1.1 -0.6 0.0 -1.8 4.8 of which: local-currency denominated Contribution from interest rate/growth differential -1.1 -1.7 1.3 -1.0 -2.4 -2.3 -1.1 -0.6 0.0 -1.8 4.8 of which: foreign-currency denominated of which: contribution from average real interest rate 0.7 0.5 1.7 0.2 -0.4 0.5 1.6 2.3 3.2 3.0 4.8 of which: contribution from real GDP growth -1.7 -2.3 -0.4 -1.2 -2.0 -2.8 -2.7 -2.9 -3.2 -4.9 0.0 100 Contribution from real exchange rate depreciation 0.0 0.2 0.8 ... ... ... ... ... ... ... ... 90 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 80 70 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Residual 1.8 1.4 2.4 1.3 2.6 2.8 2.6 2.3 2.1 1.6 0.0 2.1 1.9 20 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 44.6 48.6 53.3 57.6 62.8 68.3 73.1 81.1 62.8 2021 2023 2025 2027 2029 2031 PV of public debt-to-revenue and grants ratio … … 306.7 329.7 370.8 402.6 437.9 478.3 509.4 526.3 471.8 Debt service-to-revenue and grants ratio 3/ 26.7 26.7 24.9 45.9 60.2 74.5 89.9 98.8 121.1 138.3 127.9 Gross financing need 4/ 5.6 5.4 8.6 10.8 13.7 14.9 16.8 18.4 20.6 21.2 14.9 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 100 Real GDP growth (in percent) 4.4 5.4 0.9 2.2 3.5 4.5 4.0 4.0 4.1 5.5 0.0 3.8 4.5 90 Average nominal interest rate on external debt (in percent) 1.0 0.9 0.7 4.2 5.1 5.3 5.5 4.2 4.6 3.8 3.8 0.9 4.6 80 Average real interest rate on domestic debt (in percent) 9.5 8.7 11.5 3.4 2.7 4.8 6.8 8.6 9.3 6.6 9.1 4.7 7.3 70 Real exchange rate depreciation (in percent, + indicates depreciation) 0.2 1.0 4.0 … ... ... ... ... ... ... ... 20.7 ... 60 50 Inflation rate (GDP deflator, in percent) 6.1 7.7 6.3 7.8 10.6 9.0 7.5 6.4 6.0 4.4 0.0 15.5 6.4 40 Growth of real primary spending (deflated by GDP deflator, in percent) -4.7 3.1 21.2 -1.9 7.1 -0.4 2.8 5.4 -1.5 3.6 0.0 5.1 2.3 30 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -0.8 0.1 -4.5 -0.3 -0.2 -0.5 -1.6 -1.7 -2.1 0.2 -4.8 -1.7 -0.8 20 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10 0 2021 2023 2025 2027 2029 2031 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 20 >>> Projections 1/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 PV of debt-to GDP ratio Baseline 21 22 24 25 26 28 28 28 28 28 28 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 21 20 21 23 25 29 33 39 46 53 61 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 21 23 25 26 28 29 30 30 30 30 30 B2. Primary balance 21 23 25 26 28 29 29 29 30 30 29 B3. Exports 21 25 31 33 34 36 36 35 35 34 33 B4. Other flows 3/ 21 25 30 31 33 34 34 33 33 33 32 B5. Depreciation 21 27 22 23 25 26 27 28 29 29 30 B6. Combination of B1-B5 21 27 28 30 32 33 33 33 32 32 32 C. Tailored Tests C1. Combined contingent liabilities 21 25 27 28 30 32 32 32 33 33 33 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 21 24 26 27 29 30 30 29 29 29 28 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 233 236 230 215 208 204 196 188 190 189 183 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 233 212 200 198 200 210 231 260 306 354 401 0 233 188 138 87 49 22 -4 -26 -43 -58 -72 B. Bound Tests B1. Real GDP growth 233 236 230 215 208 204 196 188 190 189 183 B2. Primary balance 233 240 238 224 217 212 204 196 197 197 191 B3. Exports 233 344 518 484 466 451 426 403 399 392 374 B4. Other flows 3/ 233 265 286 267 258 249 236 223 222 218 209 B5. Depreciation 233 224 165 156 152 151 149 147 152 155 153 B6. Combination of B1-B5 233 332 263 369 357 345 328 312 312 308 296 C. Tailored Tests C1. Combined contingent liabilities 233 264 260 245 238 233 225 217 220 220 214 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 233 275 273 249 234 223 208 196 195 192 184 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 47 44 41 36 28 33 35 35 34 34 34 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 47 45 40 34 27 31 35 38 40 44 49 0 47 42 36 28 19 20 19 16 11 8 6 B. Bound Tests B1. Real GDP growth 47 44 41 36 28 33 35 35 34 34 34 B2. Primary balance 47 44 41 36 29 34 36 36 35 35 35 B3. Exports 47 58 74 69 55 66 74 73 70 69 68 B4. Other flows 3/ 47 44 42 39 31 38 41 40 39 39 38 B5. Depreciation 47 44 40 32 25 30 29 29 28 28 28 B6. Combination of B1-B5 47 54 64 56 45 55 58 57 55 55 55 C. Tailored Tests C1. Combined contingent liabilities 47 44 42 37 30 35 37 37 36 36 35 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 47 49 45 40 31 36 39 38 36 36 35 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 31 32 32 31 26 33 36 37 35 35 34 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 31 32 31 30 25 31 36 40 41 45 50 0 31 30 28 24 18 20 19 16 12 8 6 B. Bound Tests B1. Real GDP growth 31 33 34 33 28 35 38 39 37 36 36 B2. Primary balance 31 32 32 31 27 34 37 38 36 36 35 B3. Exports 31 32 34 35 30 38 44 44 42 41 41 B4. Other flows 3/ 31 32 33 33 29 37 42 43 40 40 39 B5. Depreciation 31 40 40 36 30 37 38 39 37 36 37 B6. Combination of B1-B5 31 33 35 34 29 38 42 42 40 39 39 C. Tailored Tests C1. Combined contingent liabilities 31 32 33 32 28 35 38 39 37 36 36 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 31 35 36 36 30 37 40 40 37 36 36 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 14 14 14 14 14 14 14 14 14 14 14 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 21 >>> Projections 1/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 PV of Debt-to-GDP Ratio Baseline 49 53 58 63 68 73 76 78 80 81 81 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 49 48 48 47 46 45 44 43 42 40 39 A2. Alternative Scenario :[Customize, enter title] 48 49 50 51 52 53 55 57 59 60 61 B. Bound Tests B1. Real GDP growth 49 55 62 68 74 80 84 87 89 91 92 B2. Primary balance 49 55 61 66 71 76 79 81 83 84 84 B3. Exports 49 56 65 70 76 81 83 85 86 86 86 B4. Other flows 3/ 49 56 64 69 75 79 82 84 85 85 85 B5. Depreciation 49 54 58 62 66 70 71 73 74 74 74 B6. Combination of B1-B5 49 53 57 62 67 72 75 78 80 80 81 C. Tailored Tests C1. Combined contingent liabilities 49 63 67 72 78 82 85 87 89 90 90 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 49 56 62 69 76 83 86 89 92 93 94 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. TOTAL public debt benchmark 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 330 371 403 438 478 509 527 535 537 535 526 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 330 335 334 331 325 317 308 296 284 270 256 A2. Alternative Scenario :[Customize, enter title] 46 37 44 53 56 66 74 78 78 77 76 B. Bound Tests B1. Real GDP growth 330 383 431 473 520 558 581 594 600 601 596 B2. Primary balance 330 382 423 458 499 530 546 554 556 553 544 B3. Exports 330 388 453 489 531 562 575 579 576 569 557 B4. Other flows 3/ 330 391 445 482 524 554 567 572 570 564 552 B5. Depreciation 330 380 404 432 463 487 497 500 498 492 482 B6. Combination of B1-B5 330 367 401 431 469 503 525 532 534 532 526 C. Tailored Tests C1. Combined contingent liabilities 330 435 467 503 543 575 590 597 597 593 583 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 330 420 470 524 569 600 611 611 616 617 611 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Debt Service-to-Revenue Ratio Baseline 46 60 75 90 99 121 136 144 143 141 138 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 46 58 64 74 75 84 87 85 77 70 64 A2. Alternative Scenario :[Customize, enter title] 46 37 44 53 56 66 74 78 78 77 76 B. Bound Tests B1. Real GDP growth 46 62 79 95 106 130 146 155 155 153 152 B2. Primary balance 46 60 76 93 102 124 139 147 146 144 142 B3. Exports 46 60 75 93 102 125 142 150 149 146 144 B4. Other flows 3/ 46 60 76 92 101 125 141 149 148 145 143 B5. Depreciation 46 60 76 90 98 120 134 142 141 139 137 B6. Combination of B1-B5 46 58 73 89 97 123 142 146 145 142 143 C. Tailored Tests C1. Combined contingent liabilities 46 60 86 99 108 130 145 153 152 149 147 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 46 66 83 102 111 135 149 155 155 153 152 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 22 >>>