Overhaul debt management architecture

At the rate Malawi’s public debt levels are rising, the country could find itself sliding back into real trouble unless it overhauls its debt management architecture and come up with strategies that make debt contraction more sustainable both fiscally and in terms of balance of payment obligations.

Government—through the Ministry of Finance, Economic Planning and Development—also needs a deeper understanding of various macro-risk circumstances to better inform decision-making when it comes to borrowing, especially external loans.

When I look at what has happened post-Heavily Indebted Poor Countries (Hipc) debt cancellation initiative, I cannot help but wonder whether Malawi has a macro-programming model that is robust enough to ensure that financing requirements are in tandem with the country’s macroeconomic objectives.

Sometimes the mismatch is just too glaring as politics increasingly dwarf sound economic development policy decisions.

Just picture this: Thanks to the Hipc initiative and the Multilateral Debt Relief Initiatives (MDRI), Malawi’s external debt stock plunged from US$2.97 billion as of end-2005 before debt relief to US$0.49 billion as of December 2006 and was calculated to be US$0.68 billion as of end-2008.

As a ratio of gross domestic product (GDP), the external debt stock was reduced from 104 percent before debt relief to 14.2 percent in 2006 after the cancellation of the loans.

That time, Stan Nkhata—who was once a colleague of mine at Treasury while he worked in the Debt and Aid Division—was so upbeat about Malawi’s debt position that he declared in his 2009 paper that Malawi’s external debt is projected to “remain highly sustainable in the period 2009-2029 under the baseline macroeconomic scenario.”

Nkhata envisaged that the ratio of the present value (PV) of external debt to exports—which stood at 56 percent in 2009—would remain below the sustainability threshold of 150 percent in the period 2009-2029.

He also estimated ratios of the present value of external debt to GDP and domestic budget revenue to remain below the sustainability thresholds of 40 percent and 250 percent, respectively, through to 2029. We are 10 years away and the situation does not look good.

Nkhata had put caveats to that rosy picture, warning that public debt could spiral out of control again if Capitol Hill gets tempted to acquire new external financing that is not sufficiently concessional, thereby leading to future external repayment problems. Well, we know how much easy, but very expensive loans we love to get from exports-imports banks of China and India these days that have shark-teethed repayment conditions.

These loans from India and China have sharply pushed up Malawi’s foreign debt. Today, at US$2.1 billion, external debt stands at 33 percent of the country’s nominal GDP. That is more double the 14.2 percent GDP-external debt ratio that weighed on the country in 2006 after debt relief.

Malawi’s nominal GDP is estimated at $6.3 billion. Total public debt—both foreign and domestic—now stands at $4.3 billion or 68 percent of GDP, of which $2.2 billion or 34.9 percent of GDP is domestic.

Of course, the low GDP growth rates in the three-four percent range—coupled with a lack of growth in exports—have not helped matters. But surely it is irresponsible borrowing—and reckless spending of that borrowed money and other government revenue—that is suffocating the country with debts.

That is why there is need for a robust and enforceable debt management strategy that can look at all aspects of public debt and streamline decision-making.

But do we still have the Debt and Aid Management Division (DAD) at Treasury to manage the various aspects of public debts? Do we still have a DAD boasting an agile information management system that ensures timely and effective decision-making? Do we have a DAD with the skills, expertise and independence to conduct cold, hard analyses that show current and future costs of debts as well as its attendant risks and come up with debt mixes that bring more value to government while being risk tolerant?

Frankly we really need a debt management strategy that cross-pollinates debt management blueprints with the broader macroeconomic policy goals and objectives. Otherwise, this country will slide back into debt dungeon and get trapped there. Only next time, there won’t be globalists of the early 2000s to forgive our debts as isolationist figures such as Donald Trump and other nationalist leaders emerge in the West with no qualms about helping the global community. Then China and India will pick up the pieces, confiscating power plants and other infrastructure you built with their expensive money.

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