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Malawi in K700 billion debt trap

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Almost 10 years after Malawi had some of its foreign debt wiped off under the Highly Indebted Poor Countries (HIPC) initiative, the country has already accumulated more than half of that debt in dollar terms, raising the spectre of yet another heavily indebted generation.

This is while sectors that the debt relief was expected to service continue to grapple such that Malawi is not in a position to meet some of the critical targets in the Millenium Development Goals (MDGs).

But while experts fear that that Malawi is as good as back to square one in terms of external debts, government says the size of Malawi’s debt stock at the moment “is not worrisome”.

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In September 2006, Malawi had US$3.1 billion of its foreign debt cancelled under the HIPC initiative.

The move was seen to herald a new era of development in areas such as education, health and agriculture as it was believed that savings made from repayments of the cancelled debts would be invested in growing these sectors.

But while those sectors are still struggling, Malawi’s foreign debts are steadily rising.

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The Reserve Bank of Malawi reported last month that Malawi’s external debt was at US$1.8 billion (about K774 billion at current exchange rate) as of December 2014.

“External debt at the end of the fourth quarter of 2014 increased by 17.4 percent to US$1,802 million (about 34.8 percent of GDP) from US$1,535.2 million in the preceding quarter,” said the Central Back.

It said the increase was mainly on account of the Treasury note which government sold to the PTA bank.

According to the Reserve Bank, debt from multilateral creditors accounted for 78.2 percent of the total external debt, while bilateral debt constituted 21.8 percent.

The external debt accumulated thus far is 58 percent of what was wiped off in 2006.

And analysts have since warned that Malawi is well on its way to heavy indebtedness again just a decade after it had some of its debt cancelled.

“We are definitely going back to that era of indebtedness and the prospect is scary,” said University of Malawi economist Professor Ben Kalua.

Kalua said Malawi finds itself courting the debt crisis because there is still a lot of mismanagement of public funds.

He added that 10 years on, the country still relies heavily on imports and has so far failed to diversify, let alone strengthen, its export base.

“There is also a lot of tampering with the exchange rate. So we end up borrowing huge sums of money just to prop up our currency effectively putting our necks in the noose of debt again. That scares me a lot,” he said.

On his part, Lilongwe-based public policy analyst, Alex Nkosi, said Malawi is inching towards heavy indebtedness again because debt cancellation alone was inadequate to deal with the country’s problems, which he said are structurally-rooted.

“By the time debt was being cancelled most of the economies including Malawi’s were already on life support and required the same debt, sadly, to be resuscitated.

“As for Malawi, we seem to be back to square one. Malawi still needed to borrow anyway for it to embark on huge developmental projects,” Nkosi said.

But he added that weak governance and maladministration and corruption and embezzlement of public funds are other causes that make debt to become a burden.

“The funds that are received from both bilateral and multilateral partners are not efficiently used for the purpose for which they were borrowed. Therein lays the genesis of the cancer called the debt burden,” he said.

And Nkosi feared for Malawians:

“Given that the composition of debt is heavily tilted to the public domain, responsibility for debt service also falls heavily on the public sector. To put it plainly, all the debt that the government contracts, is done on behalf of Malawians.

“Through debt, we are in effect mortgaging poor Malawians and those yet to be born because they are the ones that will face the brutal pressure of servicing debts.”

However, government insists that the size of Malawi’s external debt stock relative to what it was before HIPC is not worrisome as some would want to make it.

Spokesperson for the Ministry of Finance, Nations Msowoya, said Malawi’s current debt level is still sustainable.

“Our debt service ratio to GDP is still below the internationally established thresholds which are considered risky. Our debt service ratio to exports is also very healthy,” he said.

Msowoya argued that not all debt is considered bad for any country.

“As Malawi we borrow to make investments in energy generation, water supply, human development, agriculture production etc and we don’t think these are bad decisions,” he said.

On views that the debt relief has so far failed to address challenges in the other sectors such as health, education and agriculture, Msowoya dismissed the argument.

He said while debt relief was an important thing to happen to Malawi, it was not designed to be “a silver bullet that would cure all the development challenges that Malawi was facing”.

He said since the debt cancellation, government has invested heavily in HIV and Aids, agriculture and training of doctors.

“All these investments are possible because HIPC created fiscal space. That is, instead of repaying debt, money is being channeled into education, health, agriculture, social protection etc. But as we have said it wasn’t meant to solve all problems,” he said.

In a statement released last week, the London-based Jubilee Debt Campaign, which advocated for the cancellation of debts for highly indebted poor countries, said 10 years after the cancellation, a new crisis of debt threatens the developing countries.

It said lending levels to these countries has tripled, “potentially setting a new debt trap for the countries that benefitted from the deal.”

Malawi was one of the 36 poor countries that benefited from the cancellation.

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