Treasury fast-tracks debt retirement fund-roll out

Minister of Finance Felix Mlusu says government is at an advanced stage in establishing the Debt Retirement Fund (DRF), a special fund that will be used only to retire debt as it matures, to ease public debt burden.

The DRF will ensure that matured domestic debt is not rolled over when it matures as is the current practice.

Malawi is grappling with a public debt stock of more than K4.1 trillion out of which K2.5 trillion or 30.8 percent of the country’s nomimal gross domestic product (GDP) pegged at K8.1 trillion is domestic debt.

In his Mid-Year Budget Review Statement delivered in Parliament in Lilongwe on Friday, Mlusu said Treasury has already completed the identification and quantification of the possible sources of funds.

However, the minister fell short of mentioning the sources of the finance for the initiative, but added that its implementation is expected to be approved by Cabinet for its operationalisation on July 1 this year.

But University of Malawi’s Chancellor College economics senior lecturer Exley Silumbu in an interview on Sunday commended government for the move, but said repaying debt will require a certain degree of discipline.

He argued that while the move reflects government’s willingness and efforts to tame the growing debt, commitment to repay the debt is what is paramount.

Said Silumbu: “For now ,we do not know where the resources to fill this fund will come from, but either way what remains critical is government’s commitment to honour its debt because we can have this fund, but the debt may not be repaid.”

Ministry of Finance spokesperson Williams Banda, in an interview on Sunday, backed the fund, saying the collected revenue will be ring-fenced and cannot be diverted to finance anything else other than debt.

“This, alongside deliberate efforts to reduce fiscal deficits and; hence, domestic borrowing has the potential to reduce domestic debt to sustainable levels. For example, below the internationally agreed benchmark of 60 percent of the GDP,” he said.

Banda said after reducing the debt, government will have a choice on whether to terminate the fund or maintain it to become a Sovereign Wealth Fund, which can be used to support the citizenry and businesses in times of natural shocks to the economy.

Projections by the International Monetary Fund indicate that Malawi’s debt stock will likely hit 78 percent of the country’s total wealth this year.

The projected proportion of the country’s debt stock to the total national income would probably be the highest ratio 14 years after Malawi had about $2.6 billion (about K2 trillion) or 90 percent of its external debt, written off under the Heavily Indebted Poor Countries initiative in 2006.