International Monetary Fund (IMF) outgoing resident representative Jack Ree has advised Treasury to commit new debt based on good cost-benefit analysis if the country is to reduce its debt-to-GDP ratio by 10 percentage points in eight years.
In an interview on Sunday ahead of his end of tour of duty next Tuesday, he said IMF analysis shows that about 80 to 90 percent of the recent rise of the domestic debt has been caused by deficit financing needs.
Ree said while external debt has been relatively stable, domestic debt stock rose from 20 to 30 percent of gross domestic product (GDP) over the last two years.
He said: “Our analysis shows that about 80 to 90 percent of the recent rise of Malawi’s domestic debt has been caused by deficit financing needs. Consequently, the problem cannot be fixed without fiscal consolidation.
“Going forward, we are projecting Malawi’s debt-to-GDP ratio to decrease by about 10 percentage points of GDP within the next seven to eight years, provided that the programmed path of fiscal consolidation is adhered to. Indeed, Malawi needs to bring down its overall level of indebtedness. And committing an individual new debt should be done within this aggregate constraint and based on good cost-benefit analyses.”
Ree said the macroeconomic situation looks favourable and that the focus of the Extended Credit Facility (ECF) discussion will likely be the 2019/20 National Budget and how to integrate the government’s post-election priorities into the macroeconomic reform and adjustment programme.
“Fiscal policy should focus more on domestic revenues as the budget needs to play more active roles in catalysing private sector-led growth, including good investments in infrastructures.
“These goals require an upgrade of public finance management reform away from the most basic layers of control like financial reporting and commitment control, to more sophisticated and complex ones like a single pipeline of scrutinised projects and ex-post reviews of key projects,” he said.
Ree’s advice comes on the back of figures showing public debt at $4.3 billion (K3.2 trillion) or 68 percent of GDP with domestic debt at $2.2 billion (K1.6 trillion) or 34.9 percent of GDP and external debt at $2.1 billion (K1.5 trillion) or 33 percent of GDP.
The figures are above the internationally accepted threshold of 20 percent of GDP for domestic debt and 30 percent of GDP for external debt.
Last month, Reserve Bank of Malawi (RBM) Governor Dalitso Kabambe advised Treasury to rein in on both domestic and external borrowing, warning that there is insufficient room for further borrowing.
He said his fiscal policy counterpart Minister of Finance, Economic Planning and Development Joseph Mwanamvekha had assured him that Treasury will tackle domestic borrowing in the 2019/20 financial year and other subsequent financial years.
Mwanamvekha is keeping his fingers crossed to ensure a reduction in domestic debt between July and October 2019 as outlined in the three months K511 billion provisional budget.
According to the World Bank, total government domestic borrowing has increased by 44 percent over the past year, but largely from the banking sources.