Malawi banks on debt swaps
As pressure continues to mount on Capital Hill to pay back over $850 million it owes to international lenders, the government has said it is praying that some creditors may accept debt swaps.
Presidential Economic Advisor Chancellor Kaferapanjira disclosed this in Lilongwe on Tuesday during a panel discussion at the start of the 2023 Malawi Investment Summit.
A debt swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, namely, equity.
In a debt-for-adaptation swap, countries who borrowed money from other nations or multilateral development banks could have that debt forgiven, if the money that was to be spent on repayment was instead diverted to climate adaptation and resilience projects.
According to Kaferapanjira, in the debt restructuring that Capital Hill has had with some lenders, it has been advancing the narrative.
“The discussion which we have had is that some of the international financial institutions may accept a swap of the debts so that instead of us paying back the loans, we may have to pay some charities that are here so that they can finance the humanitarian needs of the country,” Kaferapanjira said.
According to Kaferapanjira, authorities believe that the negotiations that they are having with China, India, Trade and Development Bank and Afreximbank are pointing in the right direction.
Experts say debt swaps would reduce or alleviate the debt distress or burden on the government while financing some social or climate change initiatives.
Malawi University of Business and Applied Studies associate Professor of Economics Betchani Tchereni said the idea behind the debt swaps is to restructure the debt in such a way that it becomes affordable for the country.
According to Tchereni, the current debt levels are not affordable, especially the debt which has matured.
“That restructuring can take a number of ways. A swap is one of them. In the swaps, one may look at what the lender intends to do with or without the repayment of the debt.
“If it is about some charity work in Malawi, then the country, the government can channel some of that repaying directly to the charities in Malawi Kwacha,” Tchereni said.
Malawi remains among countries in the sub-Saharan Africa region at higher risk of debt distress as interest burden on public debt continue rising.
The rising debt poses a risk to the country’s fiscal sustainability as debt servicing costs rise, thereby reducing space for discretionary spending.
Bretton Woods’ institutions, International Monetary Fund (IMF) and the World Bank, say the soaring public debt increasingly reduce fiscal space for development while crowding out private sector investment.
Malawi’s total public debt stood at K7.9 trillion as at December 2022, an equivalent of 69.93 percent of the gross domestic product (GDP), which is pegged at K12 trillion.
Of the debt stock, K4.43 trillion, about 114 percent of this year’s national budget was secured domestically, while K3.47 trillion (an equivalent of 90 percent of the 2023-24 budget) is external debt.
Malawi would have service debt plus interest valued at K2.2 trillion in the five year period to this year.