The African Development Bank (AfDB) and local economists have differed on the impact on debt relief to the socio-economic development of African countries, including Malawi.
While the AfDB says debt forgiveness from bilateral and official creditors can help economies to recover faster and better from the Covid-19 pandemic, local economists argue that debt relief has not worked for countries such as Malawi.
In 2006, Malawi had 90 percent or $2.6 billion of its $3 billion foreign debt witten off by international lenders under the Highly Indebted Poor Countries (Hipc) initiative, but economists argue this has not helped the country to grow its economy.
In a statement, AfDB president Akinwumi Adesina observed that significant debt forgiveness could be key to accelerating African economies’ recovery from the Covid-19-induced economic crisis.
He said: “To recover faster, Africa will need significant debt forgiveness from bilateral and official creditors. There is light at the end of the tunnel, it just happens to be a very long tunnel.”
But in separate interviews, economists argued that debt cancellation is not in itself a solution as its outcome is dependent on what beneficiary nations do with the money.
In a witten response, on Monday Ben Kaluwa, an economics professor at Chancellor college, a constituent college of the University of Malawi, said in a written response on Monday that debt forgiveness is like a cash transfer programme whose long-term success depends on what the beneficiary does with the proceeds and whether they learn lessons and reform.
In reference to the debt cancellation initiative by the World Bank and the International Monetary Fund under Hipc, he said Malawi did not learn a lesson on debt management as things have worsened.
Said Kaluwa: “Covid-19 should be dealt with in isolation of other debt issues so that prospective donors get the point that any isolated case of neglect will come back to bite everyone else and maybe with even more virulent mutants.”
Economist Milward Tobias, who is also executive director of Centre for Research and Consultancy, said he was not a proponent of debt relief as there is no empirical evidence that it results in improved development outcomes.
He said: “The huge debt burden in Malawi is domestic debt. I want to believe the AfDB president call for debt forgiveness refers to external debt which in our case is proportionally small compared to domestic debt.
“What must be advocated for is the good use of debt. Debt proceeds must be invested in areas that have proven to have high return on investment.”
MAlawi’s debt stands at K4.1 trillion and the debt stock keep rising as the country’s resource envelope remains thin as a result government keeps borrowing to ensure provision of social services.
Last year, Treasury officially wrote development partners and creditors for consideration of deferred debt repayment in light of Covid-19 pandemic, but the move did not work out.
Given the unsustainable debt burden, Minister of Finance Felix Mlusu in the 2020/21 National Budget Statement stated that to repay the huge public debt stock estimated at K4.1 trillion, Treasury is looking at the possibility of establishing a Debt Retirement Fund.
Overall, the country’s total public debt stands at K4.1 trillion, representing 65 percent of GDP as at end June 2020 and is an increase of K458 billion over the same statistic a year earlier.
Of the debt stock, K2.37 trillion is domestic debt while K1.8 trillion is external debt.