Malawi’s debt to Gross Domestic Product (GDP) ratio has more than doubled since 2011, seen at slightly higher than 60 percent in the last financial year.
Investment management and advisory firm, Nico Asset Managers, says in its July Monthly Economic Report that the government thus faces increasing exposure to high domestic debt.
In the report, the firm echoes concerns raised by the International Monetary Fund (IMF) that the situation is raising fears over the country’s financial position.
In the seven-year period to 2018, Malawi’s debt to GDP ratio has more than doubled to 62.5 percent of GDP from 28.9 percent in 2012.
Accumulation of public debt stems largely from fiscal deficits as the government has frequently spent over the budget in recent years.
“This presents a significant risk, as the deficit is expected to be largely financed by high-cost domestic borrowing,” Nico Asset Managers says in its report issued last week.
It says, while the stock of domestic debt is lower than external debt, the interest burden is substantially greater.
As at December 2018, external debt stood at $2.1 billion (about K1.6 trillion) with debt from multilateral creditors accounting for 80.3 percent of the total debt stock while the remaining share constituted debt from bilateral creditors.
Domestic debt, on the other hand, stood at $2.2 billion (about K1.7 trillion), with Treasury notes and Treasury bills dominating the domestic debt portfolio at 60.1 percent and 32.8 percent, respectively.
Nico Asset Managers says, since the 2013/14 financial year, the government has been making high interest payments on domestic debt, reaching 20 percent of its revenue.
In the last financial year, the government’s borrowing gradually transitioned, with a shift away from the Reserve Bank of Malawi and towards commercial banks and non-banks.
“With the fiscal deficit expected to widen, this will increase domestic public debt, undermining fiscal sustainability. Considering the elevated levels of domestic debt, Malawi needs to reduce fiscal deficits to support fiscal and debt sustainability, particularly during years of relative macroeconomic stability,” says Nico Asset Managers in its report.
Recently, the World Bank said, to address this, the government needs to strengthen fiscal discipline to spend within budget while also budgeting for reduced primary deficits over the medium term.
It said the treasury should also strengthen its public financial management systems, possibly enabling it to regain donor confidence, complemented by growth enhancing expenditures, strengthening expenditure controls and improving domestic revenue mobilisation.