‘Heavy borrowing not fueling development’
A study by the Economics Association of Malawi (Ecama), Lilongwe University of Agriculture and Natural Resources (Luanar) and Oxfam has revealed that the country’s huge public debt has translated into tangible development in the short term but attainment of goals remains problematic in the long term.
Results of the study, titled ‘The Nexus Between Public Debt and Economic Growth in Malawi: A Public Sectoral Analysis from 1995 to 2021’, were released in Lilongwe on Thursday.
Presenting findings of the study, Luanar Researcher Henry Kamowa said the study revealed that domestic debt, external debt and the reduction in corruption levels all positively affected the performance of the health sector in the long run but had no significant effect on the performance of other sectors.
Kamowa observed that, in the short run, it was noted that domestic borrowing positively affected the performance of the construction, health, mining and agricultural sectors.
On the other hand, external debt had no significant effect on the performance of any of those sectors, albeit negatively affecting the performance of the health sector.
“In the short run, sector performance improves due to immediate investments realised from the debt financing.
“However, in the long run, due to unsustainable high debt and huge servicing levels accumulation being financed through the national budget, sector performance deteriorates significantly,” Kamowa said.
The results further show that corruption significantly affects short-term growth and performance of several sectors in Malawi.
The study has since recommended the need for proper debt management techniques in the short run, especially when it comes to external debt, to avoid crippling the growth of key sectors.
The study recommends that the government should aim to have a zero-deficit budget to contain appetite for borrowing.
It also recommends “Borrowing for readily implementable projects to ease burden, to avoid misappropriation of funds leading to the debt burden”.
In the short run, the study has further recommended that the Malawi Government should aim at lowering debt accumulation to improve performance of sectors.
Furthermore, the study says efforts should be made to finance projects in the short run using locally generated resources to avoid derailing growth.
“Government should find proper and quick ways of fighting corruption in all the sectors as it is noted from the findings that combating corruption is found to significantly improve sector growth and performance in the short run,” the study says.
Malawi has seen its public debt rise since 2006, when the country had its debt cancelled under the Highly Indebted Poor Countries initiative.
Rising debt poses a risk to the country’s fiscal sustainability as debt servicing costs rise and reduce space for discretionary spending.
As at December 2022, Malawi’s public debt stood at K7.9 trillion.
In an interview yesterday, Finance Minister Sosten Gwengwe said Malawi needs to find ways of raising enough resources to meet its budget needs.
“Otherwise, the country will continue to borrow for Other Recurrent Transactions,” he said.
Gwengwe said Malawi is haunted by Afreximbank loans which were contracted in 2016 and matured in 2020.
“Significant progress has been made with bilateral and other creditors. More needs to be done with Afreximbank,” Gwengwe said.
