The central government and State-owned enterprises indebtedness to the banking sector in Malawi has increased by K120.9 billion to K2.9 trillion as at end July 2023.
This is according to a Monthly Economic Review for July released by the Reserve Bank of Malawi (RBM).
The amount is 36.7 percent of the K7.9 trillion total public debt as seen at the end of December 2022.
The review says at the monetary authority level, net claims on central government increased by K105.3 billion to K1.2 trillion on account of an increase in the stock of Treasury notes of K74.2 billion and drawdown of government deposits at the RBM amounting to K35 billion.
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However, the review notes that RBM holding of Treasury bills declined by K4.5 billion to K29.5 billion in July 2023 while commercial banks’ net claims on government increased by K9.2 billion to K1.5 trillion in the same month following increases in Treasury notes, held by the commercial banks, of K20.9 billion to K800.2 billion.
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“This was partially offset by drawdown of government deposits at the commercial banks amounting to K32.4 billion and net maturities of Treasury bills amounting to K44.2 billion during the month,” the review reads.
Commenting on the development, economist Exley Silumbu said the increase is not good as it means that, with increasing interest rates, government will cough more to repay the loans.
He added that being a country whose debt is being described as unsustainable, Malawi needs to work fast on debt restructuring strategies so that it lifts itself out of bad debt and concentrate on productive debt.
“We just hope that this money is being used for the right purposes to develop and grow the State-owned enterprises and government at large and not borrowing such huge sums of money for consumption,” Silumbu said.
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Minister of Finance Sosten Gwengwe admitted, in an earlier interview, that government is borrowing more to finance existing debt, among others.
He said, for example, during the second quarter of the fiscal year, government borrowed K628 billion out of which K500 billion will be used to finance old debt.
“If we were not in this trap, the K500 billion would have been used more productively,” Gwengwe said.
Malawi’s debt is now at 69.9 percent of the country’s gross domestic product (GDP) which has thrown the country into a debt distress category with different organisations predicting that debt to GDP ratio may reach 81 percent by 2027.
A recent publication by the International Monetary Fund (IMF) tipped Malawi and other developing economies to consider lowering barriers to entry in utility markets, establish financial supervision and regulatory frameworks in order to stabilise debt and foster growth.
It further highlighted lowering restrictions on foreign exchange transactions and cross-border capital flows as critical to the course.
The publication, a blog by Gabriela Cugat and Carlo Pizzinelli of the IMF, holds that major changes in regulations are associated with a 3-percentage point reduction in the ratio of debt to GDP.
It also notes that the decline takes place not only by increasing GDP, but also by improving public finances through higher tax revenues and lower borrowing costs.
“The typical first step toward stabilising debt is to reduce new borrowing through fiscal consolidation or to decrease the total outstanding through debt restructurings. However, debt-to-GDP ratios can also be cut by increasing the denominator: economic output. One way to accomplish this is with improved market functioning.
“There is considerable scope for governments to use market reforms as a policy lever to revitalise growth and reduce debt burdens in developing economies. Enacting changes in regulations that aim at improving how markets work, for example by increasing competition or establishing appropriate regulatory frameworks, can boost economic output,” the blog post reads.
