The IMF has said Malawi could spend 30 percent of its revenue to service debts in 2017, raising concerns that the interest payouts are snapping up resources for social and infrastructure investments crucial to boosting people’s living standards.
For a country that already loses around 30 percent of its budget to fraud and corruption—according to the Director of Public Prosecutions—the situation means that Malawi is left with even less revenue for meaningful spending.
For the International Monetary Fund (IMF)—at least based on its debt sustainability analysis for Malawi—the concern is the rapid pace at which the country is inching back to pre-debt cancellation unsustainable levels.
“Malawi has accumulated debt at a fast rate over the recent years, and the country’s debt level is high compared to its SSA [sub-Saharan Africa] peers,” says the fund in its June report.
Since the Highly Indebted Poor Countries (Hipc) initiative and the Multilateral Debt Relief Initiative (MDRI) in 2006, Malawi’s external debt has more than doubled as a ratio of gross domestic product (GDP).
It now stands at 54.3 percent of GDP against 26.7 percent in 2007 just after debt relief—an accumulation speed that the fund says is among the highest globally.
The country’s external debt decreased from $3.4 billion, which was 160 percent of gross domestic product (GDP) at the end of 2005, to only $0.8 billion or 20 percent of GDP by the end of 2006 thanks to debt cancellations.
That figure has now sneaked to $1.9 billion—and rising.
But for local analysts the problem is not how much the country is borrowing, rather how the money is applied.
Catholic University economics lecturer Gilbert Kachamba, in a telephone interview on Wednesday, said taxpayers are being burdened with the debt that will go down to generations without having their economic fortunes changing for the better.
He said: “The consequences are devastating in the sense that the poor people will remain rooted at the bottom of the social ladder.”
“This money [interest for servicing debts] would have meant a lot if it were invested into social sectors such as construction of health facilities and schools, buying drugs and school materials. The fact is that the government is over borrowing. We are quickly moving towards the same point we were in 2006.”
In a telephone interview on Thursday, Institute for Policy Interaction (IPI) executive director Rafik Hajat said public debt burden and corruption were two enemies that if not addressed quickly would condemn the country to the bottomless pit of poverty.
He said: “It is not the amount of money that a country borrows that matters. But the kind of investment that the borrowed money is used for is what counts at the end of the day.
“We have been made to believe that the money that we borrow would be used for infrastructure development including the development of irrigation. But everyone is a witness, the scale of irrigation in this country is less than 5 percent. However, we have borrowed billions of US dollars and the taxpayer will have to pay through the nose unfortunately.”
Hajat said the 30 percent earmarked for debt servicing would have saved the country if well invested.
“The government is to blame for misusing the funds it borrows. There are reports that a big percentage of the country’s revenue is lost through corruption. So if we managed to deal with the vice and saved the money, we would be settling our huge debt,” said Hajat.
According to The Ninth Review under the Extended Credit Facility (ECF) by the International Monetary Fund (IMF) dated June 7 2017 most of the information on Malawi’s external debt remains unavailable even to the Bretton Woods institutions.
Reads the document in part: “Data on private external debt remains unavailable… The external debt of Malawi is held mainly by multilateral creditors (76 percent of the total in 2016), and the remainder held by bilateral creditors.
“The main provider of loans to Malawi is the International Development Association (IDA) (35.9 percent), followed by the African Development Fund (ADF) (13 percent) and the IMF (11 percent). China and India are the main holders among bilateral creditors, with China accounting for about 12 percent of total debt.”
A report by the Centre for Social Concern titled an Analysis of Malawi’s National Debt recorded that by December 2017 three road projects and one in the health sector had been suspended.
But Ministry of Finance spokesperson Davis Sado said his ministry is preparing a statement on utilisation of funds obtained through external debts.
Sado said: “The Minister of Finance, Economic Planning and Development has committed to make a ministerial statement on the same which the ministry is currently working on. The statement will tackle some of the issues you have raised.”
The ministry’s response comes in the wake of inquiries the Weekend Nation made regarding how the government is addressing problematic money bills whose projects are currently in a shambles due to mismanagement.
A Malawi Congress Party (MCP) legislator also blamed the government this week in Parliament for what he called ‘borrowing too much’ which he said had less impact on the lives of poor Malawians.
In its May 2017 Malawi Economic Monitor (MEM), World Bank Malawi senior country economist Richard Record said the high level of expenditure on domestic debt service has implications for government expenditure on social and productive sectors.
“Interest repayments are eroding the national budget, thus measures to reduce domestic debt are key in making the budget sustainable,” he said.
Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa said the future generations will be born “with a huge burden hanging over their heads, whether they had anything to do with it or not. Their future is in a way already auctioned off; and in many cases with so little, or nothing to show for it, in terms of the returns on the investments.”
He said high debt has longer term implications for growth; with high indebtedness creating near-term vulnerabilities to both financial and real shocks, which also undermines growth and inclusiveness in the medium to long-term.
While finance and debt can obviously support economic activity and innovation, there are also potential trade-offs between growth and financial stability that need to be carefully nurtured and paid a closer and sober eye all the time.
“High levels of debt hampers and dampen the efficient allocation of capital; with too much debt relative to investments seriously undermining the allocative efficiency of productive capital.”
This rising debt (both foreign and particularly the domestic one) even after the historic multi-lateral debt relief initiative’s completion point in 2006, is already signalling a much. n