Seed capital delays debt fund rollout

M

alawi Government’s dreams of managing its ballooning public debt are yet to materialise following Treasury’s delay to operationalise the Debt Retirement Fund, three years after its establishment.

This is despite the fund having been incorporated in the amended Public Finance Management Act.

Confirming the development in an interview on Monday, Minister of Finance and Economic Affairs Sosten Gwengwe said the Treasury is currently looking for seed capital for the fund.

He said the amount to be invested will depend on the contribution from “partners”.

Said Gwengwe: “Debt restructuring processes took precedence, but all legal formalities for the Debt Retirement Fund are complete.

“We need seed capital for the fund and those to help us are helping with the current restructuring process. Our fiscal space is too tight.”

The amendment and subsequent assenting to the Public Finance Management Act, among other things, entailed making operational the Debt Retirement Fund to be used to service the ballooning public debt.

The legislation for the establishment of the fund was embedded into the Public Finance Management Act which Parliament passed in the 2021/22 financial year and was recently  signed into law by President Lazarus Chakwera.

At the time the fund was being created, public debt stock stood at K5.5 trillion. But now, Malawi’s public debt has risen to K7 trillion, with K4.43 trillion being domestic debt and K3.47 trillion external debt.

At that time, Gwengwe said the Treasury intended to allocate some seed resources to the fund, which could be appropriated by Parliament during the mid-year budget review.

Among others, there were suggestions to start levying some goods people consume such as beer and cigarettes.

Meanwhile, Malawi Government is engaging its creditors to restructure the debt to ensure that it accesses funds under the International Monetary Fund (IMF) Extended Credit Facility.

Last week, the President engaged African Export and Import Bank (Afreximbank) to restructure $757 million debt owed to the Egypt-based bank.

In a written response yesterday, Economics Association of Malawi executive director Frank Chikuta said while the idea of establishing the  fund is good in principle, it is difficult to implement at present where the government is facing acute and persistent revenue shortfalls.

“The debt restructuring initiatives which the government is pursuing will provide interim relief while working on a comprehensive long-term debt reduction programme,” he said.

In an interview on Tuesday, former Finance minister Joseph Mwanamvekha said while the proposal to have a debt retirement fund is good, it is impossible to implement looking at the country’s fiscal challenges.

He said: “Government has debt and arrears to pay with a high likelihood of default due to the foreign exchange challenges. This works if you are saving your existing debt and have a surplus somewhere.

“Government should be finding resources to pay for its existing debt. This won’t work as much as the willingness is there.”

Earlier, the Budget and Finance Committee of Parliament said the delay to roll out the fund means that the government is not serious about dealing with the debt issue.

Local economists have warned that, if not managed now, the debt will reach unsustainable levels which, in turn, will heavily affect the overall economic performance.