Malawi in debt stress

Malawi Government is caught up in a tough balancing act as debt stress continues to exert pressure, forcing it to fail to meet debt obligations in a bid to keep moving.

The Nation analysis based on a presentation Secretary to the Treasury McDonald Mafuta Mwale made to civil society leaders in Salima last week shows that if government was to religiously pay the debts, it would not have resources to fund development, pay civil servants and finance ministries, departments and agencies (MDAs).

He cited high fiscal deficits due to low revenues, high number of non-discretionally expenditure (statutory expenditures) and interest rates and currency movements as major drivers of domestic debt.

Said Mwale: “Others are carry-over arrears which had to be securitised through promissory notes, but also high interest rates [due to changes in central bank policy rate].”

On the other hand, drivers of external debt are “contraction of non-concessional commercial debt and the exchange rate alignment of April 2023”.

Situation stressful

In August, the government collected K241.09 billion in revenue, but spent K280 billion, translating to an over-expenditure of K39 billion. In September, government spent K196 billion against K186.3 billion revenue, a deficit of K10 billion.

The government was in August supposed to pay its creditors K147 billion, comprising K84.7 billion as principal and K62.5 billion as interest. However, full payment of the debt would have left Treasury with about K49 billion, an amount not enough to pay even salaries pegged at K75.1 billion.

In October, K133.6 billion was due to the creditors. The amount was made up of K86 billion as principal loan and K47 billion as interest while this November, government is due to spend K292 billion in debt servicing, comprising K195.5 billion as principal loan and K96.4 billion as interest.

To deal with the situation, Mwale said government is, among others, restructuring bilateral and commercial debt to extend maturities. He said it was also only contracting concessional external loans.

He said: “Other measures include maximising mobilisation of grants as opposed to loans; Issuance of longer dated domestic securities [two years etc].

“Enforcement of the Public Finance Management Act provisions; Consider prioritising spending based on actual revenue collected i.e. cash budgeting.

“Enhance implementation of the Domestic Revenue Mobilisation Strategy, measures to boost revenue collection and export diversification.”

Meanwhile, the United Nations Conference on Trade and Development, in its 2023 Least Developed Countries (LCDs) report, has said these fiscal constraints pose a threat to the country’s ability to implement crucial development policies, potentially derailing progress towards Sustainable Development Goals (SDGs).

Ministry of Finance and Economic Affairs data shows that by March this year, Malawi’s debt stood at K9.41 trillion, out of which K5.36 trillion is domestic debt. The total debt or $9.17 billion represents 75 percent of the country’s gross domestic product (GDP) out of which $3.95 billion is external debt, representing  32 percent of GDP while domestic debt is K5.36 trillion or $5.22 billion which is 43 percent of GDP.

Economist Gilbert Kachamba believes debt restructuring and reduced appetite for borrowing could be a panacea. He said borrowing should only be done for investment.

In an interview yesterday, former minister of Finance Joseph Mwanamvekha said external travels by government officials continue to drain foreign exchange and are worsening the situation.

He said: “When the kwacha is depreciating or being devalued, automatically, you are increasing foreign debt because it is in foreign currency; interest rates also go up, so too Treasury Bills.

“Costs for most projects are also being revised upwards, that is because prices of raw materials are increasing. There is also no forex for companies to buy raw materials for production and generate revenue, yet government officials continue travelling abroad using the same little forex.”

Capital Hill believes that unlocking the Extended Credit Facility (ECF) from the International Monetay Fund (IMF) will help improve forex availability.

But Economics Association of Malawi (Ecama) last week said the ECF can potentially unlock about $80 million (about K94 billion) in foreign aid inflows if it gets an IMF deal contrary to projections of $600 million.

In the 2023/24 budget, interest on public debt has been estimated at K914.86 billion, representing six percent of GDP, which is an increase of K269.66 billion, from K645.20 billion for 2022/23 revised provision.