Economists say while the growing public debt puts a burden on future generations, it is worrying that government continues to borrow mostly for consumption.
The continued appetite for borrowing comes against the backdrop of a report by United Nations Conference on Trade and Development (Unctad), which has placed the country, alongside other 21 Least Developed Countries (LDCs) on moderate risk on debt sustainability as at January 2018.
According to its Selected Sustainable Development Trends in the LDCs 2018 Report published on Monday, the categorisation of the country is in terms of debt stocks, relative to gross national income (GNI), and also on the burden of debt services, measured as interest payments relative to exports of goods and services.
Reads the report in part: “In the context of rising investment needs of the LDCs, however, moving away from debt-creating instruments and prolonged aid dependency is a more fundamental albeit longer-term imperative
Unctad report comes against the background of figures from the Reserve Bank of Malawi (RBM) showing that public debt is at K2.4 trillion, of which K1.4 trillion is external debt and K1.2 trillion domestic.
According to the International Monetary Fund (IMF), public debt is at 40 percent of gross domestic product (GDP).
Prior to the country being forgiven its debt under Heavily Indebted Poor Countries (Hipc) in 2006, external debt level was slashed from 90 percent of GDP to eight percent in (actual) present value.
Figures from Treasury show that prior to 2006, the country’s external debt stock was about $3 billion, an equivalent of 150 percent of GDP.
The debt stock fell drastically to just under $500 million, representing an 11 percent drop, thanks to Hipc initiative and the Multilateral Debt Relief Initiative (MDRI).
Currently, these ratios are 21 percent and 77 percent against the recommended thresholds of 30 percent and 100 percent, respectively.
In an interview on Tuesday, dean of social sciences at Catholic University Gilbert Kachamba said while the country’s public debt in terms of GDP is quite manageable, the challenge is that the country borrows largely borrows for consumption rather than investments.
“The impact of the debt is quite too minimal as compared to other investments with quick returns. So, I say yes that it is not benefiting the economy as much,” he said.
In a written response to a questionnaire on Tuesday, IMF country representative Jack Ree said while Malawi’s debt level is now more than one half of GDP, what matters most is the county’s ability to service the debt, which is determined by a number of factors.
“Fortunately, most of Malawi’s external debt comes at a steeply concessional terms, with low interest rates, long maturity and generous grace period. And that bring a lot of relief to the debt servicing burden.
“However, moderate risk means that we cannot be too sanguine about the risk of debt distress. The speed of rise in debt level in recent years also warrants a cautious monitoring and a lid to contain further increases,” he said.
Economics Association of Malawi (Ecama) president Chikumbutso Kalilombe said the main worry is that this seems to have taken a growing trend thus burdening future generations.
“What we should look at critically is whether we have invested the money we borrowed into productive sectors that will benefit the country going forward.
“Otherwise, if we have borrowed to finance budget deficits thus consumption then we are shooting ourselves in the foot,” he said. n