The rising external debt

 

Malawi’s external debt stock has risen to 20 percent of the gross domestic product (GDP) as at June 2017 from 11 percent after Indebted Poor Countries’ Initiative (Hipc) completion point in August, figures from the Ministry of Finance, Economic Planning and Development has shown.

Prior to Hipc, the external debt to GDP ratio was 150 percent. The external debt stock (as proportion of GDP) rose significantly in 2012 following the devaluation of the kwacha.

Figures courtesy of afdb

Although the current ratio of 20 percent of GDP falls below the recommended threshold of 30 percent of GDP in present value terms, analyst, say the rising external debts pose threats to the economy and could deny Malawians access to development.

Ministry of Finance, Economic Planning and Development has attributed the rise in external debt stock to new borrowing for financing large development projects key among them are transport, education, health, agriculture, water, energy and infrastructure.

The International Monetary Fund (IMF) argues that a rapid increase in debt is clearly not a good development as about 15 percent of the government budget is used for interest payment alone.

In the 2017/18 approved

financial statement, interest on debt is pegged at K177 319 billion of which, K13 880 billion, is for foreign debt.

“To begin with, a country cannot keep on borrowing money to consume more than what it can afford. That just cannot last. And time will come when you can borrow no more and need to tighten your belt drastically. Rise in debt levels also makes a country more vulnerable to external shocks

Borrowing for public investments may be more sustainable, but there is also a danger that it fails to bring the intended outcome. There are many reasons for this, including poor planning or governance,” said IMF resident representative Jack Ree.

Going forward, Ree said there is need for Malawi to closely monitor its debt dynamics given the rapid speed with which the debt is increasing and further strengthen the country’s debt management as a part of an overall public finance management reform.

Ministry of Finance, Economic Planning and Development spokesperson Davis Sado said in a written response to a questionnaire that given the limited size of the resource envelope, government will continue to borrow externally for development purposes, as long as the external debt portfolio is maintained within sustainable levels that is 30 percent of GDP in present value terms

.

“Some of the new loans are contracted from new creditors that are fast disbursing. Going forward, government has a duty and its committed to ensuring prudent and efficient utilisation of available financial resources, including external loans to support the country’s sustainable economic development.

In addition, the government will prioritise concessional loans over semi-concessional or commercial borrowing in order to maintain medium to long -term sustainability of the external debt portfolio,” he said.

According to the 2017/18 draft financial statement, as at December 2016, total public debt amounted to K2 trillion, accounting for 53.5 percent of the GDP of which $1.7896 was foreign debt and K806.2 billion or 20.7 percent of GDP was domestic debt. n

Share This Post