The World Bank (WB) has cautioned on the rising domestic debt, which it says has been accumulating at an increasingly rapid rate in the past two decades.
Figures from the bank indicates that the total value of gross domestic borrowing stood at K30.3 billion, or 11.3 percent of the gross domestic product (GDP), in 2002 and increased to K865.3 billion, or 21.1 percent of GDP by December 2016.
Malawi’s domestic debt has soared, forcing government to spend about K149 billion this year to service it.
The appetite to borrow has not yet been whetted. During the first six months of this financial year, government borrowed K25.1 billion locally despite an improvement in fiscal deficits.
Government is also burdened by outstanding private sector arrears of K155 billion dating back to June 2014.
In its May 2017 Malawi Economic Monitor (MEM) paper titled Harnessing the Urban Economy, the bank notes although the stock of domestic debt is lower than that of external debt, its relative proportion has been increasing over time and that the cost of servicing domestic debt is high, due to the high interest rates and the short-term profile associated with government securities.
“With the high cost of borrowing, an increasingly heavy expenditure burden, the withdrawal of budget support since 2013 and unstable economic growth, a vicious cycle of domestic debt dependency has been created,” said World Bank Malawi senior economist Richard Record.
Record said that despite accounting for less than half of the total debt stock, payments on domestic borrowing constitute over 90 percent of total interest payments.
“The high cost of finance and the short-term maturity of domestic debt has meant that an increase in domestic borrowing following “cashgate” has been accompanied by a large increase in the cost of servicing such debt.
This high level of expenditure on domestic debt service has implications for Government expenditure on social and productive sectors. Interest repayments are eroding the national budget, thus measures to reduce domestic debt are key in making the budget sustainable,” he said.
Available statistics from the bank indicates that in the period from 2011/12 to 2013/14, interest payments on domestic debt increased by 223 percent, from 1.7 percent of GDP to 4.1 percent of GDP, and then subsided to 3.7 percent of GDP in 2014/15 and 2015/16. In addition, since 2013/14, planned expenditure on domestic interest has been consistently underestimated with actual expenditure being almost 45 percent higher on average than planned expenditure in the period from 2013/14 to 2015/16.
Finance, Economic Planning and Development Minister Goodall Gondwe is on record having acknowledged the pressures that domestic debt and arrears place on the budget and the threats it pose to the economy.
In his statement during a meeting with members of Parliament (MPs) and other stakeholders on the proposed K1.3 trillion 2017/18 National Budget in Lilongwe last month, Malawi Economic Justice Network executive director Dalitso Kubalasa observed that the country borrows a lot and with no particular focus, a development he said has consequences with the huge amount of debts choking it at the end. n