Domestic debt interest soars

Malawi is expected to pay huge interest totalling K177.3 billion on domestic debt, accounting for 85 percent of total interest for domestic and foreign debt in the 2017/18 fiscal year.

This is an increase from the previous financial year’s K143.5 billion, according to figures from the Ministry of Finance, Economic Planning and Development.

Reserve Bank of Malawi

The combined domestic and foreign debt is at K2 trillion, figures show.

The huge interest payments account for roughly 50 percent of the development expenditure pegged at K352.9 billion in the 2017/18 National Budget.

The interest payments are enough to finance district councils across the country.

In the 2017/18 fiscal plan, a total of K179.9 billion is projected to be transferred to councils to finance various sectors such as health, education, agriculture, city infrastructure roads, rehabilitation of city roads and also Constituency Development Fund (CDF).

Data from the Ministry of Finance, Economic Planning and Development released on Friday show that domestic debt interest is higher compared to foreign because the money is borrowed at a  high interest rate.

Economic analysts say extensive borrowing, especially domestically could have have severe implications on the economy.

Domestic interest payments consume a significant part of government revenue because in the case for Malawi, associated interest rates domestically are higher compared to those on external debt.

Reads the report in part: “The rise in the domestic interest rates is more pronounced if the investor base for domestic debt is relatively narrow as the government may be held hostage by a particular group of investors. In Malawi, the major participants are a few commercial banks who behave the same way.

“The overall portfolio in Malawi is dominated by short-term debt and  government is vulnerable to a sudden increase in interest rates due to frequent rollovers which leads to increased domestic interest payments.”

Reserve Bank of Malawi (RBM) statistics indicate that as at end December 2016, total public debt peaked at K2 trillion or 53.5 percent of gross domestic product (GDP), of which $1.78 billion (K1.2 trillion or 32.8 percent of GDP is foreign debt and K806.2 billion or 20.7 percent of GDP is domestic debt.

According to the World Bank, since 2013/14 fiscal year, 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.

In its May 2017 Malawi Economic Monitor (MEM), World Bank Malawi senior country economist Richard Record said 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.

Finance, Economic Planning and Development Minister Goodall Gondwe is on record as having acknowledged the pressures that domestic debt and arrears place on the budget and the threats it poses to the economy.

In an earlier interview, Malawi Economic Justice Network (Mejn) executive director, Dalitso Kubalasa said that the if a country borrows a lot and with no particular focus, huge amounts of debt has the potential to choke the economy.

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