Malawians should brace for more hard times following the World Bank’s downward revision of growth prospects, economists have warned.
In its Global Economic Prospects Report for June 2021, the bank has revised downwards to 2.8 percent Malawi’s growth rate against the Malawi Government’s 3.8 percent projection made last month.
The bank has further cut to three percent Malawi’s projected growth of 5.2 percent in 2022, stating that such growth is dependent on the impact of the Covid-19 vaccination and management of sovereign borrowing.
With Malawi’s sovereign debt standing at K4.8 trillion, the bank warns that a sudden rise in borrowing costs could trigger financial pressures and high debt burdens leading to acute fiscal pressure.
Reacting to the World Bank projections in interviews yesterday, economists predicted doom, saying any growth rate of below three percent will only send more people to poverty. They accused authorities of failing to make tough economic decisions, especially spending within means; hence, the big appetite for borrowing.
In the K2.3 trillion 2020/21 National Budget expiring on June 30, there is a record budget deficit of K811.7 billion financed by both domestic and foreign borrowing. The deficit is also high for the 2021/22 fiscal year at K718 billion.
University of Malawi economics professor Ben Kaluwa said growth of less than three percent is not meaningful because it results in negative gross domestic product (GDP) per capita growth with the population growing at an alarming rate.
He said: “We need to have a growth that is well over three percent for us even to start talking about moving out of poverty. We have a poverty problem which will not be helped by any economic slowdown.
“The way out of this situation is by being responsive. There is nothing impossible. We just need to be responsive to opportunities as well as danger. If you find that you are in danger, get out as quickly as possible, but for us we took so long to get out of tobacco.”
Kaluwa also bemoaned delays to begin industrial cannabis production, saying Zimbabwe this year reaped an estimated $2 billion from cannabis products while Malawi was still procrastinating.
On his part, Catholic University of Malawi head of economics Hopkins Kawaye said Malawi was failing to live within its means; hence, government’s heavy borrowing to satisfy election campaign promises.
He noted that politicians were bent on winning the next election without necessarily looking at the practicality of their promises based on the economic situation.
Kawaye said: “We are all aware that Covid-19 has disrupted a lot of economic activities and that has forced government to collect less revenue for funding various activities. This has resulted in government borrowing a lot from the private sector and international corporations.
“In the end, if you have huge debts, there is no way you can pay back without interests. With huge debts for Malawi, it means a lot has to be paid back and that means no money to be spent on infrastructure and other projects that can lead to higher economic growth.”
He proposed increasing taxes and expanding the tax base, but said government cannot do this because it is under pressure to fulfil campaign promises.
“It is the electoral pressure that stops them from making tough economic decisions,” Kawaye said.
In his official response to the proposed K1.9 trillion 2021/22 National Budget in Parliament yesterday, Democratic Progressive Party spokesperson on finance Joseph Mwanamvekha said the performance of the economy will depend on how government will manage public debt.
He said growth will also depend on the performance of the exchange and inflation rate.
Mwanamvekha, a former minister of Finance himself, said: “This budget is also debt-ridden and unfriendly to business because of the huge and unprecedented deficit of K811.7 billion in the just ending fiscal year and K718.3 billion projected in 2021/22.
“These levels are too high to the extent that the private sector will be crowded out; hence, leading to high interest rates.”
In its report, the World Bank highlighted that with the pandemic and limited vaccination in many emerging markets and developing economies, including Malawi, contributing to downward revisions to growth, per capita income is expected to remain below pre-pandemic peaks for an extended period.
Reads the report: “Growth [sub-Sahara Africa] is forecast to resume to 2.8 percent this year and firm to 3.3 percent in 2022, underpinned by stronger external demand, mainly from China and the United States, higher commodity prices and containment of Covid-19.
The report indicates that the Covid-19 pandemic has contributed to wider budget deficits and a spike in government debt, heightening the risk of debt distress in some countries.
Malawi’s breakdown of the total public debt which stood at K4.8 trillion in December 2020 comprised external or foreign debt at K2.04 trillion or 23 percent of GDP and domestic debt of K2.72 trillion or 31 percent of GDP.
Warns the World Bank: “A sudden rise in sovereign borrowing costs could instigate financial pressures in some countries and high debt burdens and fiscal pressures could become more acute.
“At the same time, the pace of vaccinations could surpass expectations, restoring consumer and business confidence and strengthening the recovery.”
World Bank president David Malpass has said in the report that effective domestic revenue mobilisation and robust medium-term fiscal frameworks are essential to widen fiscal space, foster policy credibility, and bolster debt sustainability.
Government has been largely banking hopes on the roll out of the Covid-19 vaccine expected to boost economic confidence and the bumper harvest following good rains.
Minister of Finance Felix Mlusu did not pick up his phones yesterday while Treasury spokesperson Williams Banda said he was attending a meeting.
But in his Budget Statement presented in Parliament, Mlusu projected the 2021 economic growth at 3.8 percent and 5.2 percent for 2022.
He said the projections were based on the gradual lifting of Covid-19 containment measures and that business will slowly return to normality during the second half of 2021.
Mlusu’s projection was above the 3.3 percent growth projected by African Development Bank African Economic Outlook in March.
On debt management, the minister said public debt interest is projected at K299.7 billion or 2.9 percent of the rebased GDP.
He said of this amount, K14.5 billion, is payable to non-residents while K285.3 billion is payable to residents and that the projected public debt interest represents 27.2 percent of the country’s projected domestic revenues.
Projections by the International Monetary Fund indicate that Malawi’s debt stock will likely hit 78 percent of the country’s total wealth this year.