The International Monetary Fund (IMF) says prudent fiscal management is needed to maintain macroeconomic sustainability.
IMF resident representative Farayi Gwenhamo told Business News in an interview that already, Malawi is at a high risk of debt distress for overall public debt.
She said: “One of the immediate implications of higher debt is a higher interest bill which limits fiscal space and can crowd out private investment.
“Prudent fiscal management is needed to maintain macroeconomic and debt sustainability.”
In the 2020/21 financial year, Treasury projects fiscal balance to swell to K651.5 billion, an equivalent of 9.1 percent of the gross domestic product (GDP) or simply a third of the K2.02 trillion budget.
The deficit will be financed by foreign borrowing amounting to K161.5 billion and domestic borrowing amounting to K490 billion.
In April, the IMF also projected the country’s debt to GDP ratio—the ratio between a country’s government debt and its gross domestic product—to increase from 63 percent of GDP in 2019 to 68 percent of GDP this year and rise again to 69.1 percent in 2021 due to, among others, pressure from the Covid-19 pandemic.
Minister of Finance, Economic Planning and Development Joseph Mwanamvekha told Parliament last week that the rising public debt is a major worry for the Malawi Government and government is fully committed to tame the accumulation of domestic debt by prioritising spending and strengthening its debt management function.
He said government will ensure prudent borrowing and seek to contract external loans on concessional terms where possible.
Earlier this month, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) urged government to improve planning and execution of the development budget (public investment) as this is what will be key in implementing the fiscal stimulus.
Said MCCCI in its business brief Building Stable Recovery Plan for Malawi’s Economy and the Role of Fiscal Policy: “Many times when revenue collection has performed badly, it has been the trend that during mid-term budget reviews development expenditure usually takes the hit and is revised downwards while recurrent expenditure usually goes up.
“Such developments undermine the growth prospects for the country as public investment plays a crucial role in determining the long-run productive capacity of every economy and it is what triggers domestic private investment as well as foreign direct investment.”
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.
Public debt stock on the other hand jumped to K3.7 trillion or 65 percent of GDP during the 2018/19 financial year from K3.1 trillion recorded at the end of the previous year. n