Economists have warned that Malawi’s rising domestic borrowing is distorting credit markets, driving up interest rates and pushing productive sectors out of the lending queue, even as government revenues climb.
The concerns follow the Reserve Bank of Malawi’s latest report, which shows the government began the 2025/26 financial year with a K130.4 billion fiscal deficit in April—despite a 26 percent jump in revenue to K435.1 billion. Expenditure rose by 13.5 percent to K565.5 billion.
To fund the shortfall, government turned heavily to domestic borrowing. While the central bank reduced its net claims on government by K139.0 billion, commercial banks stepped in, increasing their holdings of Treasury bills and notes by more than K150 billion.
Though private sector credit expanded by K45.8 billion to K1.6 trillion, this was driven largely by household and foreign currency loans. Lending to commercial and industrial sectors shrank by K102.1 billion, and mortgage lending fell by K3.1 billion.
Key sectors such as construction, transport, energy, trade and finance posted credit declines—raising red flags about the viability of private investment in the current fiscal environment.
An economic stastician, Alick Nyasulu said government is competing with the private sector, and this will always work against private enterprised.
“Interest rates will continue to rise because government can afford to pay more, but the private sector cannot grow under such expensive financing conditions.”
Nyasulu added that bank balance sheets and asset managers are now “heavily invested in government debt,” leaving little capital for private borrowers. “Private credit is generally diminishing, and industries are struggling to grow,” he said.
A Mzuzu University economics lecturer Christopher Mbukwa also voiced concern that domestic borrowing is crowding out enterprise finance, particularly in key sectors like construction, transport and energy that recorded credit contractions in April.
“In a thriving economy, the private sector should be the main driver of credit participation in strategic sectors—not development partners or the government,” the lecturer said.
He warned that excessive borrowing injects liquidity into the economy and often forces the central bank to tighten monetary policy, leading to higher interest rates.
“Commercial banks prefer the safety of lending to government through Treasury instruments, leaving less capital available for private businesses.”
Nyasulu said the government is “stuck in a spiral cycle of debt where we will continue to borrow to pay debt,” adding that the situation is inflationary and risks undermining financial stability.
He called for immediate fiscal restraint.
“We need the political will to drastically reduce government spending.”
The Mzuzu academic, meanwhile, proposed targeted tax incentives, loan guarantees and public-private financing models to redirect capital into productive sectors.
Both experts stressed that infrastructure projects should be evaluated for their crowding-out effects before funds are committed, warning that unchecked borrowing could erode Malawi’s growth prospects.
With the government projecting a full-year deficit of K2.49 trillion—of which K2.33 trillion is to be raised domestically—analysts say credit market pressures are likely to intensify unless spending priorities shift.
