Treasury has cited high stock of domestic debt, debt refinancing and exposure to exchange rate as risks to the sustainability of the country’s public debt.
This is contained in the 2019/20 Financial Year Annual Public Debt Report produced by the Ministry of Finance.
The report said that the average time to maturity (ATM), an indicator of refinancing risk, decreased from 9.7 years to 8.3 years in the course of the financial year due to the increased share of domestic debt, which has a lower ATM of 2.7 years.
Reads the report in part: “According to the latest debt sustainability analyses, Malawi is at moderate risk of external debt distress, but high overall risk of debt distress due to large amounts of high interest domestic debt being owed.
“About 40 percent of the present value of debt was denominated in foreign currency, introducing significant exchange rate risk.”
Treasury figures indicate that the dollar accounted for the largest proportion of total external public debt at 46 percent followed by the euro and yuan at 24 percent and 15 percent, respectively.
“This implies that fluctuations of the US dollar will enormously affect Malawi’s external public debt,” said Treasury in the report.
Loans and debt securities in Malawi’s public debt portfolio are on fixed rates. However, Treasury bills rates reset when rolled over.
Treasury figures show that in terms of implied interest rates, external loans registered a maximum of 1.98 percent and securities rates ranged between 9.77 and 19.01 percent.
With 0.6 percent inflation on the US dollar and 9.8 percent on the kwacha, this translates to real interest rates of 0.14 to 1.38 percent on external debt and -0.03 and 9.21 percent on domestic debt, according to the report.
Figures show that domestic debt stands at K2.37 trillion, or 57 percent of the total debt stock recorded at K4.1 trillion as at June 30 2020.
In an interview yesterday, Betchani Tchererni, an economics professor at The Polytechnic—a constituency college of the University of Malawi, observed that rising debt poses challenges for the country when sourcing developmental funds.
“It will also be difficult for us to get resources for other activities. Really, it is a challenge because the country does not have much to do about them,” he said.
Minister of Finance Felix Mlusu indicated in his 2020/21 National Budget Statement that to repay the huge public debt stock, the ministry is looking at thepossibility of establishing a Debt Recovery Fund, whose proceeds will be ring-fenced and entirely used to retire public debt until debt levels subside to within sustainable levels.
He said the fund could be turned into a Malawi Sovereign Wealthy Fund to support economic activities and the citizenry in times of pandemics and other forms of natural disasters through bailouts and fiscal stimulus packages.