The Economics Association of Malawi (Ecama) has cautioned that Malawi’s debt strategy could lead to a sovereign credit rating downgrade if the government does not implement structural economic reforms.
The remarks follow observations made in the latest edition of the Malawi Economic Monitor (MEM) released on January 29. In the report, titled ‘The Rising Cost of Inaction’, the World Bank observed that progress on macroeconomic fundamentals has stalled in recent years.
The lack of reforms, particularly on fiscal consolidation, has led to a worsening of the total public debt stock.
Malawi’s total public debt stock has risen from about K4.1 trillion in 2020 (about 62 percent of GDP) to a whopping K15.17 trillion (about 81 percent of GDP at the end of June last year. This is far above the 65 percent debt-to-GDP threshold recommended by global financial institutions.
In an interview, Ecama president Bertha Bangara-Chikadza noted that if Malawi’s debt position deteriorates further, it would have severe economic implications, including reduced investor confidence, limited access to the international capital markets and a “potential devaluation of the kwacha”.
“A downgrade would signal to investors that Malawi’s debt is becoming increasingly risky, potentially leading to a decline in investment inflows and exacerbating liquidity challenges,” she said in a WhatsApp response.
The Ecama head further expressed concerns that the country’s dependence on treasury notes and the lack of a robust secondary market for government securities would impact Malawi’s debt sustainability, liquidity management and the broader investment climate as it crowds out the private sector.
Officials from the Ministry of Finance and Economic Affairs were not readily available for comment.
But Reserve Bank of Malawi (RBM) director of financial markets Chakudza Linje allayed concerns that Malawi’s debt position is unsustainable.
“Our debt position is sustainable. The government has the capacity to pay off its domestic debt,” she said in a plenary discussion held on the sidelines of the Monetary Policy Technical Forum held at RBM’s club in Lilongwe.
She added: “However, international debt poses challenges due to the foreign exchange that would be required to service it.”
According to the quarterly debt bulletin for the first quarter of the 2024/25 released by the Ministry of Finance and Economic Affairs, Malawi’s domestic debt stock was K8.01 trillion and the external debt stock was $4.13 billion (about K7.16 trillion).
In the MEM, the World Bank projected that debt vulnerabilities will likely persist amid slow external debt restructuring and rising domestic debt levels, while interest payments and other statutory expenditures will continue crowding out the scope for productive investment.
The Bretton-Woods institution expected the debt to hit 85.4 percent at the end of 2024. Malawi’s external debt to GDP ratio is also currently at 47.2 percent, 7.2 percentage points higher than the recommended threshold of 40 percent.
