World bank warns on Rising domestic debt

The World Bank has warned that Malawi’s rising domestic debt will put more pressure on the national budget, stressing that the cost of servicing the debt is expected to reach 3.1 percent of gross domestic product (GDP).

Figures from the Bretton Wood institution indicate that at the end of 2015, the total value of domestic debt stood at K538.2 billion, about 16.8 percent of GDP, which is a significant increase from K206.6 billion, about 13.8 percent of GDP in 2013.

Malawi’s nominal GDP is expected to expand by 24 percent to K4.2 trillion in the 2016/17 fiscal year from the previous K3.4 trillion.

World Bank senior country economist Richard Record noted that while the stock of domestic debt is lower than that of external debt, the principal in the former case needs to be repaid over a much shorter period.

He said: “Typically, Treasury bills [T-bills] are issued for durations of up to one year, while most external debt is repayable over a period of 25 to 40 years.

“Similarly, the interest charged on domestic loans is on average significantly higher. Thus, in 2016/17 financial year, the cost of servicing domestic debt is expected to reach 3.1 percent of GDP compared to the figure of only 0.3 percent for servicing foreign debt.”

This means that the cost of servicing domestic debt puts considerable short-term pressure on the budget.

While acknowledging Malawi’s debt exposure which is due to slow growth in GDP, Treasury spokesperson Nations Msowoya said on Tuesday government is working on addressing the situation.

“We know that we are under the threat of increasing debt and what we have done is to restructure the domestic debt so that we go long-term so that in the end, debt service of domestic debt will go down.

“On the external debt side, our strategy is to look at the mixture of grants and loans. If we get more grants, it means no repayment problems and if we go concession, we will not have problems paying significant amounts as we will just be left with principal.

“Beyond that, we have to look at yielding the debts into investment project so that we solve immediate problems. We think that our external debt exposure is because our GDP hasn’t grown much; hence, focusing on the projects to grow our GDP,” he said.

Analysts say the increase in domestic debt has been driven by large fiscal deficits over the past three years and by the securitisation of arrears and the issuance of promissory notes.

In July, the United Nations Conference on Trade and Development (Unctad) warned that Malawi risk going back to pre-debt relief levels due to increasing external debt.

In 2006, Malawi had its debt forgiven under the Heavily Indebted Poor Countries (Hipc), Multi-lateral Debt Relief Initiative (MRDI) in which close to $2.8 billion external debt was cut to around $486 million.

Catholic University head of economics Gilbert Kachamba said yesterday continued increase in debt crowd out domestic resources to ordinary Malawians and foreign debt in the long-run, as interest rates will likely go up. n