Narrowing financing gap critical, says IMF
Financing debt and imports will remain a challenge for Malawi despite improvements in filling the gap unless the country’s unsustainable debt is addressed, the International Monetary Fund (IMF) has cautioned.
Published IMF data shows that as a percentage of gross domestic product (GDP), the country’s financing gap could improve from 4.6 percent in 2023 to 0.2 percent in 2026.
In an interview on Tuesday, economist Bond Mtembezeka observed that the improvement, which is based on assumptions, could come into fruition if Malawi performs well on the underpinning assumptions.
He said: “It is critical that the financing gap narrows down for not only debt sustainability, but also a narrower financing gap means the government’s resource envelope is improving.”
The improvement is premised on the $175 million (about K297 billion) Extended Credit Facility (ECF) which Malawi bagged last week.
Following the approval of the ECF, Treasury hopes the programme will unlock $240 million (about K408 billion) between now and end March 2024.
However, IMF first deputy managing director Gita Gopinath observed that debt relief is key to attaining greater financing gaps, which could then only be closed at an undesirably high cost to the population.
She said: “Successful external debt restructuring is vital as there is no reasonable mix of adjustment and financing alone that can deliver macroeconomic stability.
“The Malawian authorities are seeking comparable treatment from all official bilateral creditors and continue to pursue good faith negotiations with commercial creditors.”
As part of efforts to qualify for the ECF, the IMF set addressing unsustainable public debt and resolving a case of alleged misreporting of foreign exchange reserves as prerequisites for its support.
Following the 44 percent kwacha devaluation, total public debt stock has increased from K10.6 trillion to K12.56 trillion with external debt accounting for 53 percent of the revised total debt stock.
Prior to the devaluation, external debt accounted for 44 percent of the total public debt stock while 56 percent was for domestic debt.
Thus, the change in the public debt stock post-realignment is driven by an increase in external debt expressed in kwacha from K4.66 trillion to K6.62 trillion.
Minister of Finance and Economic Affairs Simplex Chithyola Banda stated in his 2023/24 Mid-Year Budget Review Statement on Monday that the ongoing debt restructuring strategy will assist to bring public debt levels to moderate risk in the medium-term.
“Government will ensure that in the medium-term, public debt levels go down by containing the budget deficit,” he said.
Malawi owes India about $136 million (about K231 billion), Afreximbank is owed about $757 million (about K1.3 trillion) in foreign debt and about $145 million (about K247 billion) is owed to Trade and Development Bank, along with millions of arrears.
China, through its Exim Bank, is the largest bilateral creditor to Malawi and the third among external financiers, accounting for roughly $218 million (about K371 billion) or 8.34 percent of the foreign loans that the Malawi Government has contracted.
The World Bank, through the International Development Association, remains the largest creditor, constituting nearly $1.3 billion (about K2.2 trillion) or 47.61 percent of the external debt stock followed by the African Development Bank through the African Development Fund with $420 million (about K714 billion) or equivalent to 16.10 percent of Malawi’s foreign loans.
