Let’s start with first things first.
Every credible debt sustainability analysis for Malawi—including those done by the World Bank and the International Monetary Fund (IMF)—shows that the present value of the country’s total public debt to gross domestic product (GDP) is expected to exceed the benchmark for the near and medium terms.
Those analyses will also tell you that this depressing scenario is largely because of the crazy borrow-and-spend spree by Peter Mutharika’s Democratic Progressive Party who contracted huge amounts of domestic debt at high interest rates during the financial years 2019/20 and 2020/21.
There really should not be any surprises there—there were two successive presidential elections during these fiscal years that the DPP and Mutharika were desperate to win—apparently at any cost.
In fact, during the Mutharika administration’s regime between 2014 and 2020, Malawi’s total public debt levels doubled to 69 percent.
At this ratio, it means Malawi has gone past the Southern Africa Development Community (Sadc) regional benchmark on public debt within the macroeconomic convergence criteria, which requires that public debt as a ratio of the value of the economy should not exceed 60 percent.
Because of the Mutharika administration’s recklessness, things are likely to get worse before they get better.
Treasury and IMF project that by the end of this year the ratio of public debt to GDP could hit 78.2 percent, climb further to 81.3 percent of GDP in 2022 before reaching 83 percent and 83.8 percent in 2023 and 2024, respectively.
Clearly, President Chakwera and his Tonse administration inherited a huge mess of high public debt overhang.
The glimpse of good news is that despite the depressing numbers, Malawi remains at moderate risk of external debt distress and retains reasonable resilience and ability to absorb shocks.
The country’s debt carrying capacity—while not so great—can still endure.
This is why I believe that the Chakwera administration’s recent fiscal consolidation plan—including enhanced external resource mobilization, public expenditure efficiency, domestic revenue mobilization and the push for debt relief (although on the last one, there is a huge mountain to climb)—has a chance to bring the country’s debt levels under control and start to decline at baseline scenario in the medium term.
But for this consolidation drive to work, the administration must slow down on domestic debt, which is not only expensive with its high interest rates, but largely short-term and once accumulated unsustainably piles fiscal pressures on the budget. The administration should also bear in mind the tight space for additional borrowing and must thus be wary of questionable financing terms for huge infrastructure investments that have the likes of Bank of Baroda and other predatory lenders dangling carrots while hiding sticks in fine print bludgeoned through the system.
I guess what I am saying is that the Chakwera administration should avoid the not-so- concessionary loans from India and China, which, while they also have grace periods, attract higher interest rates than multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank (EIB).
As I have said before, government must stick to its well-spelt out policy of only borrowing concessionally and mostly for investment or production to ensure that borrowed finances generate resources either directly or indirectly through multiplier effects to enable the country to repay the loans from returns on investment.
There have been too many times that government has borrowed purely for consumption, thereby adding unproductive burdens on the taxpayers and future generations.
Where we have borrowed for investment such as road construction, water supply, the Greenbelt Initiative and others, we have mismanaged everything—in the end; we have paid dearly in penalties, including commitment fees, price adjustments and repayment costs.
So, apart from ensuring that external public debt is mostly sought from multilateral lenders whose concessionality is much more favourable, Chakwera must concentrate on growing the economy; bring down the inflation rate, boosting export earnings while working hard to attract foreign direct investment and stabilising the Malawi kwacha.
And, yes, the Chakwera administration’s strategic path for improving the debt service to export ratio as well as the debt service to revenue ratios, if fully applied, would also go a long way to bring down the country’s debt burdens and avoid the people’s enslavement.