Financial market analysts say while domestic borrowing for transport investments raises additional pressure on debt sustainability, it can help stimulate the economy and strengthen financial markets.
The analysts said this in the context of a recent World Bank report which indicates that funding infrastructure development projects using domestic borrowing raises concerns over debt sustainability.
The bank described the Malawi Covid-19 Socio-Economic Recovery Plan (2021/23) recommendation for a K1 trillion Local Currency Bond Programme (LCIB) to kick-start 15 large-scale infrastructure development projects as ambitious.
Speaking in an interview on Tuesday, Brigdepath Capital Limited chief executive officer Emmanuel Chokani argued that the issuance of LCIB can contribute to the development and deepening of the domestic financial markets.
He said: “It provides an avenue for investors to invest in infrastructure projects within the country, potentially expanding the investor base and improving market liquidity.
“Financing transport infrastructure with domestic borrowing offers increased control, reduced dependency on external sources, economic stimulation and strengthened financial markets.
Chokani said domestic financing also creates opportunities for local contractors, suppliers, and labour, promoting job creation and economic growth, with circulation of funds within the country having a positive multiplier effect on various sectors.
But he noted that this too has risks, including debt sustainability, crowding out private investment, interest rate risk and limited access to capital.
“Malawi’s domestic capital market may have limitations in terms of the size and depth of available funds.
“Relying solely on domestic borrowing for large-scale transport investments may restrict the government’s ability to raise sufficient capital, potentially constraining the implementation of vital projects,” he said.
Economist Bond Mtembezeka said that while foreign debt is cheap, the country has to consider issue of repayment vis-a-vis availability of foreign exchange.
He said: “It’s not a problem per se to finance projects with domestic borrowing. The most important element to consider is how that borrowing is going to be repaid.
“I think the issue of toll gates becomes necessary at this point.”
To accelerate key infrastructure development in the country, Treasury launched LCIB in August 2021 through issuances that seek to raise K1 trillion.
The first two auctions raised K13.35 billion each at 23.25 percent interest. On the other hand, the Public Sector Investment Programme identifies 15 projects to be financed by the LCIB, nine of which are in transport, including the 201- kilometre (km)Bangula Marka Railway Rehabilitation Project.
Currently, Malawi has a financing gap of K1.57 trillion of the K2.3 trillion needed to fully implement the Comprehensive Medium-term Investment Framework, according to World Bank data.
The framework identifies a requirement of K2.3 trillion (about $2.24 billion) for the road sector, including planned or committed donor funding for 355.7 km of road preservation works.
Of this amount, K1.3 trillion ($1.27 billion) is required for main roads; K620.7 billion ($605.6 million) for secondary roads; K256.7 billion ($250.4 million) for tertiary roads; K19.5 billion ($19.02 million) for districts roads; and K64.5 billion ($62.9 million) for urban road projects.
Currently, K703.1 billion in funding is available for all road projects, equivalent to 30 percent, leaving a financing gap of K1.57 trillion or 70 percent to meet the total investment envisaged for both paved and unpaved road projects.
The low turnover capacity of the construction industry is likely to be a hurdle to meeting Malawi 2063 targets as the road industry would need to provide approximately 200km of new or upgraded sealed roads annually.
Said World Bank in its May 2023 Malawi Transport Infrastructure Sector Assessment Programme: “In recent years, the average annual budgets for both paved and unpaved road works was approximately K74.1 billion [$95 million], achieving a total of 287 km between 2015-2020 [against a target of 490 km], with an equivalent turnover of nearly 60 km per annum at a cost of $600 000 per km.”