Debt relief signals failure to grow
Centre for Research and Consultancy executive director Milward Tobias says Malawi’s eligibility for debt relief under the Heavily Indebted Poor Countries (Hipc) initiative is an indication of accumulated debts that failed to grow the economy.
His sentiments follow the International Monetary Fund (IMF) announcement last week that Malawi, alongside 35 other economies, is eligible for debt relief under Hipc initiative.
Speaking in an interview on Thursday, Tobias said while external debt is a smaller part of the debt problem, debt has more than doubled, but the economy has continued to struggle.
He said: “What everyone must understand is that this is bad news to the economy because it is telling us that we have accumulated debts that did not grow the economy.
“Those in charge of managing the economy have failed us. While debt has failed to more than double to pre-Hipc levels, the economy is still struggling.”
Tobias observed that even if we get the relief now, the proportion of the debt burden is small compared to the domestic debt.
“The amount we pay back to creditors has never gone above five percent of the costs. The only large benefit is that it will save us foreign exchange,” he said.
As at September 2022, public debt had risen to K7.3 trillion and of this amount, external debt was recorded at K3.3 trillion or 45 percent of the total debt stock while domestic debt was recorded at K4 trillion or 55 percent of the total debt stock.
However, in recent years, external debt has been rising rapidly, with debt service costs increasing from K12.3 billion in 2018 to K33 billion in 2022.
Malawi University of Business and Applied Sciences associate professor of economics Betchani Tchereni said in an interview that the debt relief could help Malawi relieve some of the foreign exchange pressures being experienced at the moment.
He said: “This has come at the right time when Malawi is facing difficulties in its balance of payment.
“Let’s pray that we get a proper relief. Malawi now needs every penny that it can have.”
In an update on debt relief under the Hipc initiative last week, IMF said one of the challenges for the Hipc initiative is to ensure that eligible countries get full debt relief from all their creditors.
In November last year, IMF said Malawi’s foreign debt, which is at K3.3 trillion or 27 percent of the country’s nominal gross domestic product (GDP), was sustainable on a forward-looking basis following government’s commitments for debt restructuring strategy.
To be considered for Hipc initiative assistance, a country must be eligible to borrow from the World Bank’s International Development Agency, which provides interest-free loans and grants to the world’s poorest countries as well as from the IMF’s Poverty Reduction and Growth Trust, which provides loans to low-income countries at concessional rates.
Minister of Finance and Economic Affairs Sosten Gwengwe is quoted as having said that the IMF position reflected recognition of the efforts Treasury is putting in place to reform the economy.
“If we are able to restructure the debt, we will be able to create more resources allocated towards productive and development sectors,” he said. In 2006, Malawi secured a debt relief package under Hipc, which reduced the country’s total public debt by 90 percent.
