Malawi’s debt to GDP ratio, the ratio between a country’s government debt to its gross domestic product (GDP), continues to rise, raising fears over the country’s financial position, the IMF has said.
Debt to GDP ratio is used by economists to determine an economy’s ability to properly service and handle the nation’s debt.
In the seven-year period to 2018, Malawi’s debt to GDP ratio has more than doubled from 28.9 percent in 2012 to 62.5 percent of GDP in 2018, figures from the Reserve Bank of Malawi (RBM) December 2018 Monthly Economic Report have shown.
According to Economics Association of Malawi (Ecama) statistics, debt to GDP ratio has a maximum threshold of 50 percent of GDP with 20 percent being domestic and 30 percent foreign debt.
Along with debt, the cost of debt service has been rising rapidly in low-income developing countries with Malawi spending K123 billion on debt service—cash that is required to cover the repayment of interest and principal on debt for 10 years up to 2017, out of which K52 billion was interest payments.
Public debt, on the other hand, has peaked at K3 trillion, which is double the K1.5 trillion 2018/19 National Budget.
In a written response to a questionnaire on Monday, IMF resident representative Jack Ree observed that high levels of domestic debt and the pace of increase in debt-to-GDP ratio have been a concern lately.
He observed that, for example, according to the RBM, Treasury note outstanding has increased by K87.7 billion (about 1.8 percent of GDP) during December alongside increases in domestic debt, which may well emanate from the authorities’ debt management strategy.
Ree said: “Thus, it may not reflect financing of larger budget deficits and; hence, indicate the worsened financial position of the government. For example, an issuance of longer-term Treasury notes to retire short-term debt can cause a transitory increase in debt level, which will dissipate over time.
“As such, the Extended Credit Facility [ECF] programme builds in a robust fiscal framework which envisages to bring down Malawi’s debt-to-GDP ratio by about 15 percentage points in the next 10 years.”
On his part, Ecama president Chikumbutso Kalilombe said the ratio is not sustainable as it is above the maximum threshold, observing that the outturn would potentially affect macroeconomic stability.
Economist Salim Mapila said in an interview that at 62 percent, the debt to GDP ratio raises concern that authorities may be over-borrowing in contrast to debt thresholds warranted by fiscal track records.
In a report presented to the Budget and Finance Committee of Parliament on the status of public debt as at June 30 2018 in September, former Secretary to the Treasury Ben Botolo said Treasury has devised measures to reduce debt levels by putting in place strategies to ensure that while government raises funding to keep sectors running, it is done at a minimum risk and costs.
He said the proposed strategies to ease the burden include lengthening maturity of domestic debt from the maximum of 271 days for Treasury bills to at least two to three years.