ECF programme at the mercy of rising debt

The International Monetary Fund (IMF) says Malawi’s high and rising domestic debt is clearly a concern for the Extended Credit Facility (ECF) programme as it negatively affects confidence and therefore success of the programme.

Reducing the gross domestic debt to GDP ratio was key in approving the new three-year $112.5 million ECF programme for the country.

Through the programme, IMF envisages to see the gross domestic debt to GDP ratio decline to around 15 percent of GDP at the end of 2023 from the current 35 percent.

However, in response to a questionnaire on Tuesday, IMF resident representative Jack Ree observed that if authorities don’t stabilise and consolidate the rising debt, Malawi’s risk of debt distress is likely to increase.

Ree, while observing that the consolidation of debt will mainly hinge on economic growth, which generates surplus after paying the interest, said the experience since the inception of the ECF programme shows that interest cost in the future may be higher than envisaged.

“Exogenous shocks that destabilise the debt dynamics should be tackled with a sound and credible macroeconomic policy framework—which should also continue to be bolstered under the ECF programme.  If the ECF programme remains on track, then the chance gets higher that the envisaged debt consolidation will materialize. That is because debt dynamics are very much determined by primary fiscal balance, which is anchored by the programme’s macro framework.

“However, the link between fiscal and monetary targets under the ECF programme and the debt dynamics is not mechanic. For example, exogenous shocks to growth can significantly deteriorate the debt dynamics despite the maintenance of perfectly prudent fiscal positions,” said Ree.

Among others, Ree said there is need to ensure that previous gains made in governance reform, particularly in the area of public finance management, get entrenched and stepped up.

“We also need to significantly strengthen the management framework for public investment and parastatals—in order to get the ‘bang for the buck’, or the money’s value, especially to step up our infrastructure and address the utility woes,” he said.

Malawi’s public debt has increased rapidly since the country got a massive relief of its external debt in 2006, a development analysts say consumes about 15 percent of the National Budget in interest payment alone.

As of end 2006, Malawi’s public debt stood at 27 percent of GDP. The ratio has now doubled up to 54.3 percent, according to figures from the IMF.

While Malawi is not among the 18 African countries classified as at high risk of debt distress, concerns have been raised about rising public debt which continues to increase, currently paged at K3 trillion.

In the 10 years to 2017, Malawi has spent K123 billion on debt service-cash that is required to cover the repayment of interest and principal on debt for the period, out of which K52 billion was interest payments.

The original ECF programme framework envisaged to reduce Malawi’s debt-to-GDP ratio by an average of 1.6 percentage point during the next 5 years. A consolidation of this pace was expected to bring down the overall public debt ratio from 56 to 46 percent until 2023. In line with this, the domestic debt-to-GDP ratio was also envisaged to decline from 23 percent to 15 percent.

Economics Association of Malawi (Ecama) president Chikumbutso Kalilombe said this is achievable if government exercises fiscal restraint by beginning to implement a balanced budget in the initial years before graduating into a budget surplus in later years.

“We can only hope that it is possible to reduce the country’s debt as this is one of the benchmarks for the country to be on the IMF programme. Malawi met almost all fiscal and monetary IMF targets for the September 2018 test date, implying that debt-to-GDP ratio of 15 percent is possibly attainable by 2023,” he said.

According to the 2018 Economic and Fiscal Policy Statement issued by the Ministry of Finance, Economic Planning and Development, in the medium term, government intends to restructure the domestic debt to ensure that there is more long-term debt than short term one while on foreign borrowing; government strategy will involve contracting more concessional loans from multilateral sources.