De-risking Importation of Strategic Commodities

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This project, De-risking Importation of Strategic Commodities (DISC), aims to establish a foreign currency (FX) trade facility to Malawi in the amount of US$60 million. The objective of this facility is to de-risk importation of strategic commodities, particularly fertilizer and pharmaceuticals, by providing guarantee on payment obligations of local issuing banks to their correspondent confirming banks. Currently, correspondent banks lack confidence to extend letter of credit (LC) lines to banks in Malawi due to the high-risk profile of local banks, which largely emanates from the country risk. The proposed facility will provide correspondent banks with the assurance that the World Bank, standing behind the GoM will finance the payment obligations of the local issuing banks in the unlikely event that local banks default on their payment obligations on their LC commitments for essential commodities, thereby increasing correspondent banks’ confidence to extend LC lines to local issuing banks. This project will provide a bridging solution to respond to the acute shortage of critical and lifesaving commodities in the local market which, if left unaddressed, has the potential to trigger a huge food insecurity and health crisis. The Project sought and received a waiver from the Regional Vice President (RVP) to use condensed procedures for this urgent needs' operation, per Paragraph 12 under Section III of the IPF Policy. In terms of financing instrument, the project will use an Investment Project Financing with a Deferred Drawdown Option (IPF-DDO). IPF-DDO is an optimal financing instrument for this operation as it addresses the underlying issue of credibility by backstopping LC transactions through a contingent financing, against pre-defined triggers.