Malawi government defaults on loan interest

The Malawi government has suspended payment of foreign loan interest—effectively defaulted—due to unavailability of funds according to the Reserve Bank of Malawi (RBM), consequently risking the country’s credit rating and its future ability to borrow.

RBM in the January 2014 economic report has said interest rate payments declined by K1.5 billion to K4.7 billion compared to the previous month and attributed the decline partly due to the suspension of foreign interest payments due to unavailability of funds.

Malawi’s main budget support partners suspended aid in November last year forcing the government to implement austerity measures and consequently cut its expenditures.

However, defaulting of loans has serious consequences including exclusion from further borrowing and the worsening of a country’s credit rating.

Credit rating agency Fitch rated Malawi as B minus—non investment highly speculative grade—in both long-term local and foreign currency.

With advice from the International Monetary Fund (IMF) economies may also be advised to restructure their debt, effect tax increases, and implement other austerity measures such as public job cuts.

Ministry of Finance spokesperson Nations Msowoya could not be reached on his phone to comment on the suspension.

But earlier while commenting on the debt interest paid during the second quarter—October to December 2013—Msowoya explained that the deviations from the budget were due to exchange rate differences especially on foreign debt.

On domestic debt interest, Msowoya explained that the government paid less interest because of a decline in interest on promissory notes.

According to the second quarter, budget performance report government budgeted to pay K2 billion interest on foreign debt but only managed to pay about K1.4 billion.

The report further indicates that government also projected to pay K21 billion on domestic debt but only managed to pay K14.9 billion.

In the first quarter, between July and September 2013,government paid over K33.1 billion—about five percent of the national budget—in interest on debt between way above the budgeted K8.2 billion, government documents have shown.

According to the 2013/2014 Budget Performance Quarterly Report released by the Ministry of Finance, government paid over K32 billion in domestic debt interest, K25 billion over its budget. However, government paid about K1 billion in foreign debt interest, K366 million below projection.

Earlier Treasury admitted that it over-borrowed domestically between July and September by about K59 billion.