The Economist Intelligence Unit (EIU) has warned that long delays in debt restructuring could impair government funding, leading to an abrupt rise in taxes.
This is according to portfolio management and advisory firm, Bridgepath’s November 2024 report released in December.
According to the economic report, an abrupt rise in taxes could contract the economy.
In its 2024-2025 First Quarter Debt Bulletin issued mid last year, the Ministry of Finance and Economic Affairs reported that as at end June 2024, Malawi’s total public debt reached K15.17 trillion (around $8.75 billion).
This debt includes K8.01 trillion ($4.62 billion) in domestic debt and $4.13 billion (K7.16 trillion) in external debt.
- Advertisement -
“With domestic debt making up 52.8 percent of the total and external debt 47.2 percent, this high level of indebtedness poses significant risks.
“Such a large debt burden can strain government finances, limit fiscal flexibility, and increase vulnerability to external shocks, potentially jeopardising economic stability and growth,” reads Bridgepath’s report.
In an interview, economist Velli Nyirongo said to address Malawi’s debt challenges, especially in an election year like 2025, a combination of strategies is essential.
“Strengthening fiscal discipline to resist the temptation of excessive public spending during political campaigns is critical. Structural reforms to enhance revenue mobilisation, reduce inefficiencies, and improve public financial management must be prioritised.
- Advertisement -
- Advertisement -
“Furthermore, sustained economic growth through investment in productive sectors could expand the GDP base, reducing the relative burden of debt. Lessons from 2004 highlight the importance of external factors, such as debt relief and concessional financing, which Malawi could pursue through international partnerships,” Nyirongo said.
In a recent interview, Economics Association of Malawi (Ecama) President Bertha Bangara- Chikadza recommended that government should address the gaps in revenue mobilization, reduce unnecessary spending to curb the rising debt, reduce external travelling and save the little forex we have as a country for the purchase of essential goods such as fuel and fertilizer.
“We have seen how the country’s economy has been crippled by shortage of fuel supply. In addition, the government should prioritize tax collection efficiency, reduce borrowing, and focus on stabilizing food prices, especially in agriculture.
“Adjustments to subsidies, a selective increase in public spending on high-growth sectors like tourism, and currency stabilization efforts could bring the economic outcomes closer to projections. Furthermore, strengthening trade partnerships and investing in renewable energy could provide more sustainable relief from import dependency and inflationary pressures in the longer term,” Chikadza said.
Responding to questions in Parliament on December 19, President Lazarus Chakwera said Malawi has registered remarkable progress in debt restructuring negotiations.
According to Chakwera, Malawi has already signed a debt restructuring agreement with China, and that the country is in the final stages of reaching a debt restructuring deal with India.
He added that the Saudi Fund for International Development has also approved Malawi’s debt restructuring proposal on top of the in-principle agreement that Malawi reached with Opec and Kuwait.
In its June 2024 Malawi Economic Monitor titled Reforming with Urgency – Malawi’s Path to Economic Stability, the World Bank noted that while the government continues to pursue external debt restructuring, margins for error are becoming smaller, and the country’s reliance on high-interest external debt has significantly worsened its debt profile.
The World Bank stated that delays in reaching agreements with external creditors and continued fiscal slippages could derail the needed fiscal adjustment.
“In this context, it will be critical for bilateral and commercial creditors to reach an agreement with the authorities that ensures Malawi’s medium-term debt sustainability.
“The recently signed supplemental loan agreement to restructure US$ 206 million of outstanding debt to China is an important step in this direction,” the bank said.
