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Proposed Debt relief

Malawi could save about K16 billion annually if bilateral creditors adhere to a call by the World Bank and International Monetary Fund (IMF) to suspend poorest countries’ debt payments to ease coronavirus (Covid-19) pandemic shocks.

The news has already excited Treasury and economic commentators, who say the move could help the country address immediate needs.

The two global multilateral lenders, in a joint statement issued on Wednesday, argue that the move could enable the world’s poorest countries resources to tackle the outbreak, while allowing enough time for an impact assessment of the crisis and financing needs for each country.

The proposed debt relief will save the country’s poor population from Covid-19

In the statement, issued on the eve of the G20 virtual summit on Covid-19, the two Bretton Woods institutions state that the global crisis will have “severe economic and social consequences” in International Development Association (IDA) countries like Malawi.

Reads the statement in part: “IDA countries, [are] home to a quarter of the world’s population and two-thirds of the world’s population living in extreme poverty.”

IDA countries, which are currently 76 in number, have a gross national income per capita under $1 175 (about K869 500).

“This [suspension of debt payments] will help with IDA countries’ immediate liquidity needs to tackle challenges posed by the coronavirus outbreak,” reads the statement.

The two institutions have since invited G20 leaders to task them [IMF and World Bank] to make assessments, including identifying the countries with unsustainable debt situations, and to prepare a proposal for comprehensive action by official bilateral creditors to address both the financing and debt relief needs of IDA countries.

If bilateral creditors respond positively to the call, the move could relieve Malawi of its annual obligation to repay its external debt—which has rapidly risen in recent years, putting the country at high risk of public debt distress.

For the 2019/20 fiscal budget, payment of interest on the country’s public debt is projected at K243.9 billion or 3.9 percent of gross domestic product (GDP), representing an 8.8 percent increase from the amount paid during the last financial year. Of this total, K15.5 billion is for foreign interest payment, while K228.5 billion is for domestic interest payment.

By December 2019, also a mid-year period for the 2019/20 Budget, Capital Hill had paid total interests on loans amounting to K118.5 billion, of which interest on external debt was K7.7 billion while that on domestic debt was K110.7 billion.

Again, by June the same year, total value of public debt stood at 62.8 percent of GDP, its highest level over the past decade, according to World Bank data.

The institutions say they will seek endorsement for the proposal at the Development Committee during the Spring Meetings slated for mid-April.

Treasury spokesperson Davis Sado has since described the proposal by the two institutions as a good call towards humanity.

He briefly said in an interview: “This could be a very big relief to our country as the money saved could assist in addressing immediate needs.”

Economics Association of Malawi (Ecama) executive director Kettie Nyasulu also described the proposal as good news to Malawi, considering how weak the country is in its current response towards the pandemic.

“Therefore, this will give room for the government to provide interventions in the health sector that will help contain the virus,” she said.

On his part, Lome-based policy specialist for the International Trade Union Confederation (Africa office) Alex Nkosi also said a debt repayment suspension could free more resources for Malawi to help mitigate the negative impact of Covid-19 and consequently save people’s lives.

According to a joint IMF/World Bank debt sustainability analysis conducted in September 2019, Malawi’s level of debt stock continues to constrain the country’s room for additional borrowing.

When presenting the 2019/20 budget in September 2019, Minister of Finance, Economic Planning and Development Joseph Mwanamvekha admitted that one of Capital Hill’s major concerns is the “astronomical” increase in public debt.

But the minister said with the policies that government has put in place, debt will soon be declining in the medium to long term.

He said: “The medium-term debt strategy outlines measures that will translate into a reduction in domestic debt to 20 percent of GDP by 2023.”

In 2006, Malawi benefited from a debt relief under the Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiatives, a situation which led to the country’s debt stock falling drastically.

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