Malawi credit Status at risk

 The World Bank has warned that Malawi risks losing external debt opportunities unless it swiftly undertakes debt management, sustainability and transparency measures to avoid losing credit-worthiness.

The Bretton Woods institution expressed the concerns on unsustainable debt levels in its 15th edition of the Malawi Economic Monitor (MEM) launched yesterday in Lilongwe titled ‘Strengthening Fiscal Resilience and Service Delivery’.

Speaking in an interview on the sidelines of the launch, World Bank Malawi country manager Hugh Riddell said the country’s current state of debt has reached unsustainable levels which, if left unchecked, may prompt external lenders to think twice on lending decision. He said lenders look at the country’s ability to service debt amid big budget deficits.

He said: “As an economy, you want to show to the outside world that you can manage your fiscal situation sustainably so that you cannot endlessly end up into the deficits that build up and have to be financed by debt.

“So, largely, Malawi will lose out on any source of external financing over time if people stop trusting these basic fiscal and debt management systems.

“A lot of effort needs to be put on debt transparency. Yes, it’s about debt management and managing the fiscus, but it’s also being transparent about what amount of debt is coming in and what it is being used for and what is the plan to manage that debt over time.”

Malawi continues to witness a surge in public debt, now hovering around K5.8 trillion or about 55 percent of the gross domestic product (GDP).

The World Bank’s position comes three weeks after International Monetary Fund (IMF) urged Malawi to urgently address debt sustainability and resolve misreporting case to qualify for a new Extended Credit

 Facility (ECF).

IMF stated the pre-requisites for the new deal in a statement issued on June 6 after its Mika Saito-led team held discussions with Malawi Government officials from May 25 to June 3 2022 through hybrid and in-person meetings in Lilongwe.

In the MEM, the World Bank notes that Malawi’s debt has become unsustainable with indications that the country’s external and public debts are both at high risk of debt distress. The stock of public and public-guaranteed debt increased to 59 percent of GDP in 2021 alone, up from 55 percent in 2020.

 The World Bank further notes that Malawi’s debt was driven by increased uptake of both domestic and external borrowing, with a change in definition of external debt from a currency to a residency basis and the conversion of Reserve Bank of Malawi (RBM) short-term reserve liabilities to medium-term external debt that has seen total external debt increase by 32.9 percent of GDP in 2020.

The MEM says this is the highest level of debt since debt was written off under the Highly Indebted Poor Countries Initiative

 (Hipc) in 2006.

The debt forgiveness, achieved under the Hipc initiative, cut total public debt (TPD) from K426 billion in 2005 or 130 percent of GDP to K131 billion or 30 percent of output.

The World Bank notes

 that Malawi has resorted to shifting external debt towards non-concessional terms from regional development banks while locally, commercial banks remain the highest order of expensive domestic debt.

The share of debt held by multilaterals on concessional terms at the end of 2020 has been revised downwards to 58.9 percent from 80 percent while regional banks held 29.5 percent of the external debt in 2020 and the remaining 11.5 percent was held by official bilateral lenders.

Reads the MEM in part: “High interest rates associated with debt from regional development banks have resulted in increased external debt servicing burden.

To resolve the situation, Riddell urged government to embrace a private sector-led economy that largely produces for exports to create an economic buffer that responds to economic

 shocks than the current situation when any slight local and external crises plunges the economy into recession.

Reacting to the situation, experts said the country needs to do serious investments and implement structured markets for export oriented economic growth.

Economics Association of Malawi executive director Frank Chikuta, in an interview yesterday, faulted government for the economic policy inconsistencies. He said this is a serious issue that government must address to partly correct the mess.

He observed that as the country has been struggling with recession from the impact of Covid-19, Tropical Storm Ana and now the Russia-Ukraine war, government has not implemented strict policy responses.

Chikuta noted that any serious government would not have waited for over six months before rehabilitating the Tropical Storm

 Ana-damaged Kapichira Hydro Electric Power Station which is a catalyst for private sector production, saying blackouts are reversing what would have contributed to recovery through production.

He said: “How do you expect to recover without electricity that spurs production at all levels, including the private sector which is regarded as the engine for the economy?”

National Planning Commission director general Thomas Chataghalala Munthali said the big challenge is that the country does not have adequate foreign exchange buffer, therefore in times of crisis, the country is always vulnerable to immediate economic shocks.

Minister of Local Government Blessings Chinsinga, who officially launched the MEM, said it was timely as it offers solutions to addressing some emerging economic challenges.

On his part, Catholic University economics lecturer Hopkins Kawaye said the current debt stock, just as the World Bank has put it, is not sustainable.

He warned that it will lead to a “debt overhang”, a situation where debt burden is so large that a country cannot take on additional debt to finance future projects.

Last month, the Ministry of Finance and Economic Affairs attributed the country’s rising public debt to lack of scaling down on expenditures when development partners dumped Malawi after revelations of abuse of resources in 2013.

Secretary to the Treasury MacDonald Mafuta Mwale said the main cause of the country’s debt can be traced to the borrowing that was happening after donors stopped providing budget support.

He said: “At that time, we had 40 percent of the budget financed by donors. When we had the unfortunate incident of Cashgate, donors lost confidence in our systems and we lost the 40 percent support.”

In his 2022/23 National Budget Statement in February, Minister of Finance and Economic Affairs Sosten Gwengwe told Parliament that debt management will be at the centre of this fiscal year’s budget implementation.

For example, in the 2022/23 National Budget, interest payments alone on the nearly K6 trillion of public debt stock, stand at K524 billion and represent 4.6 percent of GDP or around 18 percent of total expenditure, which is the highest allocation in all sectors of the budget