Economic experts have asked the government to desist from taking expensive loans and employ strategies of retiring existing loans if the economy is to develop.
The Economics Association of Malawi (Ecama) observed that the government has been facing challenges to manage debt owing to continued mismatches in revenue and expenditure and refinancing of existing loans through borrowing.
This comes against the background that the country’s public debt stock amounted to K5.5 trillion at the end of June 2021.
The development follows the issuance of a two-year Treasury note by the government to raise K48.61 billion for debt refinancing.
Ecama Executive Director Frank Chikuta said while debt refinancing is good, borrowing to finance debt is just postponing the debt as opposed to dealing with it.
“Government needs to have a debt management strategy where the debt is within manageable levels and should be paid in time. It must concentrate on borrowing from lenders with soft conditions,” Chikuta said.
University of Malawi-based Professor of Economics Ben Kalua agreed with Chikuta, saying delays in servicing debt is a problem that must be checked with haste.
“Using the two-year Treasury note to refinance debt is just trying to buy time but, going forward, there should be a provision where debt to the private sector is repaid in time, which will grow the economy and ease debt on government,” he said.
In an earlier interview, economist Donasius Pathera projected that the country’s debt to gross domestic product (GDP) ratio would rise to 75.1 percent this year due to continued macroeconomic imbalances.
Pathera said before the Covid pandemic, debt to GDP ratio in the country was already high at 63 percent above the 60 percent threshold.
“Lower government revenues due to lower economic output and increased expenditure due to higher compensation of employees and social benefits will negatively impact debt levels. The debt to GDP ratio is expected to widen to 70.7 percent in 2020 and to peak at 75.1 percent by 2022. The debt to GDP ratio is expected to decline thereafter as GDP expands to pre-Covid levels,” Pathera said.
He added that there was risk that the rainfall pattern may cause food shortages reflecting on trends in 2019, when floods are estimated to have cost a 2 percent contraction in GDP at approximately $452 million.
Minister of Finance Felix Mlusu, while presenting the 2020-21 national budget, hinted of plans to establish a debt retirement fund where proceeds will be ring-fenced and entirely used to retire public debt until debt levels subside to within sustainable levels.
He said such a Fund could be turned into a Malawi Sovereign Wealthy Fund which could be used to support economic activities and the citizenry in times of pandemics and other forms of natural disasters through bail outs and fiscal stimulus packages.
In a recent interview, Ministry of Finance spokesperson Williams Banda said all structures necessary to the establishment of the Debt Retirement Fund have been set but it would only be operational once amendments to the Public Finance Management Act are complete.
“All the processes have been finalised and we await the finalisation of the public finance management Act. The Act is currently with the Ministry of Justice and we hope it will be presented to Parliament during the next meeting. It will be clear on where the money will come from and how it will be used,” Banda said.
A Nico Asset Managers November economic report indicates that the government has banked hopes in revenue mobilisation strategies that will guide implementation of tax and non-tax policy as well as tax administration for the next five years.
The Ministry of Finance’s Debt and Aid Division report of 2021 shows that, between June 2020 and June 2021, Malawi’s total public debt stock surged up by 34 percent from K4.10 trillion.
The government’s total debt stock comprises of $3.60 billion external debt representing 31 percent of GDP and K2.60 trillion domestic debt, representing 28 percent of GDP.
The domestic debt stock has crossed the International Monetary Fund (IMF) recommended 20 percent domestic public debt as percentage of GDP and IMF currently categorises Malawi as a debt distressed economy.
Justin Mkweu is a fast growing reporter who currently works with Times Group on the business desk.
He is however flexible as he also writes about current affairs and national issues.