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IMF warns Malawi on huge debt stock

The International Monetary Fund (IMF) has warned that the debt situation in Malawi should be of major concern to authorities, saying the country is at risk of debt distress.
Debt distress is simply a debt-burden indicator that tells a country’s debt stock has exceeded a minimum indicative threshold, prompting a country to breach its debt service obligations.

 Gondwe wants Malawi to cut on borrowing
Gondwe wants Malawi to cut on borrowing
“Malawi’s debt situation remains at a moderate risk of distress, based on an assessment of external public debt, but with a heightened overall risk of debt distress,reflecting significant vulnerabilities related to domestic debt,” says IMF in its Debt Sustainability Analysis (DSA) on Malawi, jointly conducted by the World Bank.
The country’s total public debt has increased substantially in recent years, climbing above internationally-recommended benchmarks, in percentage points terms above the country’s gross domestic product (GDP)—which in nominal value stands at K2.2 trillion.
Public and publicly guaranteed(PPG) gross debt changed from 57 percent of GDP in 2012 to 72.1 percent of GDP in 2013 and is expected to reach about 76 percent of GDP in 2014, reflecting continued increases in both domestic and external public debt.
Total public debt reached an estimated value of $2.59 billion by the end of 2014.
Economic analysts contend that the recent increase in public debt largely reflects government’s recourse to domestic financing external financing shortfalls arising from the suspension of external budget support by donors following Cashgate.
And they say the huge accumulation of domestic debt is mainly due to new uncovered arrears worth K157 billion, and in part due to issuance of securities at K29 billion to recapitalise the central bank.
National debt, also known as public debt, is the total amount of money the government has borrowed from any source and comprises domestic borrowing and foreign borrowing.
“Additional domestic borrowing would bring additional pressures on the exchange rate and erode perceptions of government commitment to policy reforms, ultimately damaging macro-economic performance and should be avoided,” says IMF.
According to the fund, in the context of a weak institutional environment, the recent rapid growth of public debt “poses a heightened overall risk of debt distress.”
IMF, however, advises authorities to look for additional cuts in domestically financed development expenditure and in goods and services to meet additional shortfalls in external financing.
Finance, Economic Planning and Development Minister Goodall Gondwe said when he presented the 2015/16 budget in Parliament that government intends to strengthen debt management practices, going forward.
The minister said planned domestic borrowing is projected at K25.0 billion, or 0.7 percent of GDP in the proposed budget.
“Building on the trend in 2014/15 financial year already described, it is planned to reduce the domestic debt stock further from 15.9 percent to 14.5 percent of GDP in 2015/16 financial year, thus, Honourable Members will see that we could be reaching the internationally accepted ratio of 12.5 percent quite soon,” he said.

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