Malawi’s appetite for borrowing: what’s at stake?

Almost every Parliament meeting, legislators approve loan authorisation bills to allow government to borrow money for various projects.

However, the speed at which domestic and foreign debt is rising is of huge concern.

For example, a recent World Bank report shows that Malawi is one of the six countries in sub-Saharan Africa whose debt to gross domestic product (GDP) ratio has more than doubled in the past nine years.

Debt to GDP ratio is the ratio between a country’s government debt to its nominal, currently at $6.3 billion (about K4.6 trillion) for Malawi.

The Reserve Bank of Malawi (RBM) figures put public debt at K3.3 trillion, which is more than double the K1.3 trillion 2018/19 National Budget, which ended on June 30.

As at December 2018, external debt stood at $2.1 billion (about K1.6 trillion) with debt from multilateral creditors accounting for 80.3 percent of the total debt stock while the remaining share constituted debt from bilateral creditors.

Domestic debt, on the other hand, stood at $2.2 billion (about K1.7 trillion) with Treasury notes and Treasury bills dominating the domestic debt portfolio at 60.1 percent and 32.8 percent, respectively.

This is a huge climb considering that in 2010, external debt stood at $846.2 million (K643 billion) while domestic debt was at K154.7 billion.

As if this is not enough, a few weeks ago, Parliament passed a loan authorisation Bill number 14 of 2019 to allow government borrow money amounting to K68 billion from International Development Agency, which is under the World Bank, to finance what it calls Equity with Quality and Learning at Secondary Project. The loan service period is 38 years.

Minister of Finance, Economic Planning and Development Joseph Mwanamvekha said the programme seeks to improve quality of science and mathematics institutions in community day secondary schools and increase access to secondary education in remote areas.

While this may sound sweet and promising and although borrowing can be highly beneficial in providing the resources necessary to promote economic growth and development, it has its costs. The main cost associated with the accumulation of a large external debt being debt service.

Economists have acknowledged that adding domestic debt to external debts heightens Malawi’s risk of debt distress.

Debts are inevitable in a country’s pursuit for development, but it is undisputable fact that too much dependence on borrowed money to run government or carry out development activities is disastrous and a huge blow to the economy.

AHL Group head of risk and compliance Henry Kamowa agrees that debt is not as bad as others present it.

He said while it is common knowledge that people, organisations or nations who have gotten into trouble because of debt, it is important to remember that most people use debt regularly without it becoming a problem; hence, debt management is of paramount importance.

There is seemingly consensus that debt management and human rights issues are related since excessive debt is a significant obstacle to sustainable human development and the realisation of human rights in many developing countries.

Sustainable sovereign debt burdens are achievable when human rights impact assessments are integrated into debt management.

A country has to have ability to respect, protect and fulfill universal human rights, but this is abrogated when the country has no ability to repay its debts properly.

“There is, therefore, a need for human rights- based framework on debt management.

“World over, it has been observed that scarce resources for essential social services are already increasingly being absorbed to service sovereign debts,” said Kamowa.

He said it has been realised that without efforts to systematically integrate human rights impact assessments into debt management policies, work to realise the 2030 Development Agenda would be fatally jeopardised.

That is to say, the United Nations (UN) Sustainable Development Goals, which are aimed at ending poverty, fight inequality and tackle climate change by 2030 while leaving no one behind.

Having this in mind, the UN has provided guiding principles on foreign debt and human rights which is a guiding document endorsed by UN resolution to ensure that fundamental economic, social and cultural rights are always safeguarded when countries are procuring debt.

Integrating human rights in debt management will ensure that countries take calculated risks in procuring debts as well as restructuring them not to harm the current and future generations.

But while agreeing that Malawi’s external debt is at moderate risk of debt distress with limited room to absorb shocks, deputy director for Debt and Aid Management in the Ministry of Finance, Economic Planning and Development, Twaibu Ali said there is nothing much that his office can do to stop government from borrowing, citing political pressure.

He recommended the need for the country to have an independent observer in terms of debt management.

“Cashgate is still haunting Malawi as the increase in domestic debt is Cashgate-induced. Because of Cashgate, many international organisations pulled out their finance assistance, but government business had to continue,” said Ali.

He said foreign debt is more complex than domestic debt because despite taking long to be approved, it takes a process for government to negotiate a loan from foreign institutions due to attached policies while domestic loans are a bit easier to obtain and mostly do not pass through Parliament.

Centre for Social Concern (CfSC) economic governance programmes officer Lucky Mfungwe said Malawi’s public debt is exposed to re-financing, interest and exchange rate risks.

This means that the money spent on debt servicing would have been used for investment in productive and social sectors.

However, studies have revealed that significant amount of resources over the past few years went to servicing debt both external and domestic.

“A significant amount of domestic debt that is short-term is contracted and gives tremendous pressure on the budget. Therefore, the burden of debt on individual Malawians is felt through the pressure on taxes and opportunity cost of financing social sectors.

“This reduces the productivity of the economy and GDP. It pains to be spending taxpayers’ money to service toxic loans which are solely being used for consumption,” said Mfungwe.

He explained that a classical monetarist argument is that high levels of government borrowing causes crowding out effect, which means that government borrows from the private sector by selling bonds.

Therefore, because the private sector lends money to the government, they have less money to spend and invest. Thus, although government spending increases, private sector spending falls and there is no overall boost to the economy.

That aside, Mfungwe said government borrowing can also cause inflation and devaluation of the national currency if there are temptations to deal with high levels of debt by printing more money.

“Therefore, because excessive borrowing whether internally or externally affects everyone, it is imperative that the decision-making for borrowing by authorities should be pro-poor,” he said.

Mfungwe suggested that authorities should strive towards obtaining concessional loans by ensuring that pre-conditions for cheap funds are achieved.

Technical advice on contracting loans must also be respected by senior authority and government should continue to ensure that both external and domestic debt levels are sustainable in the long-term.

Authorities also need to continue to monitor Malawi’s debt sustainability thresholds against the international and domestic agreed thresholds.

Said Mfungwe: “There is also need for training of parliamentarians and key civil society organisations on loan interpretation and the entire public debt management concept.

“There must be regular schedules for monitoring and it must be a requirement that regular detailed and project specific [not aggregate as the present case] reports be produced and be presented to Parliament.”

On his part, Tirivangani Mutazu, senior policy analyst for debt management economy at African Forum and Network on Debt and Development (Afrodad) called on Malawi to improve on governance, fight corruption and fiscal indiscipline.

He said: “Private companies, governments and multilateral institutions are all significant lenders to governments and all need to take action to make lending more transparent.”

Mutazu said debt information on loans to governments, or with a government guarantee, needs to be disclosed in one publicly accessible registry.

“The disclosure on the borrower, any guarantor, the amount, the currency the loan is in, the repayment profile, use of proceeds, interest rate within a set of ranges, fees, governing law, dispute resolution mechanisms and collateral should be within 30/60/90 days of contracts having been signed,” he said.

Mutazu explained that this is important in debt management as secret loans have triggered an economic and political crisis in different countries.

All in all, it is important to always remember that whatever decision is made today determines the future and shapes the perception of the future generation.

Malawi’s successful future requires intelligent decisions, particularly when it comes to borrowing and debt management.