Treasury concedes pressure on debt
Ministry of Finance and Economic Affairs has conceded that public debt management in Malawi is currently facing ‘significant’ challenges, leading to increased borrowing and an unsustainable debt burden for the country.
In its recent debt analysis, Treasury says the challenges include the lingering effects of the Covid-19 pandemic, the ongoing war in Ukraine, the tightening global financial conditions which have resulted in financial sector instability and a funding squeeze that has increased debt burdens and put pressure on exchange rates.
Said Treasury in the analysis: “These challenges have led to a slowdown in economic activity. Real gross domestic product [GDP] growth fell from an estimated 4.6 percent in 2021 to an estimated 1.1 percent in 2022. In 2023, GDP is projected to grow at 1.9 percent.
“Increased pressure on the exchange rate and a shortage of reserves triggered the RBM to devalue the kwacha by 26 percent in May 2022. As well as contributing to inflation, the alignment worsened the debt position as it increased the Malawi kwacha value of debt denominated in foreign currency.”
Meanwhile, year-on-year inflation continues to rise, reaching 28.6 percent as at September 2023.
This increase is driven by high global fuel prices, fertiliser, food, prolonged supply chain disruptions and exchange rate pass-through from the kwacha alignment.
To rein in inflation, RBM increased the monetary policy rate to 24 percent in July 2023.
Following the policy adjustment, Treasury was left choking with interest charges on domestic borrowing.
The hike came at a time when Treasury’s projections had put the policy rate at 18 percent, 600 basis points above the current rate.
In the current financial year that rolled out on April 1, Treasury had estimated to spend 24 percent of its K3.87 trillion national budget on public debt interest, a rise from the previous year’s 18 percent.
During the year, Treasury projects to spend K878 991 towards domestic debt service and borrow K1 186.7 billion from the domestic market.
Economist Frederick Changaya, who is also a former RBM Monetary Policy Committee (MPC) member, described the policy hike rate as a blow to fiscal containment.
He said: “We do deficit financing for our economy. So, borrowing is a key embodiment of our budget and budget management. Application of such borrowed funds is something no one has really factored into the model or framework of monetary policy.
“This is the fidelity test. I am looking forward to a day when the policy framework will be able to challenge the fiscal controlling officers to implement economic recovery programmes and other fiscal policy initiatives in fidelity and assess impact on the policy stance taken in lieu of the fiscal plans for the period in question.”
Meanwhile, Treasury says it is drafting a debt management policy to guide debt management in Malawi.
The policy, according to Treasury, will conform to the legal provisions that govern public debt management as set out in Section 71 of the Public Finance Management Act (2022).
The Act specifies that the primary objective of debt management is to ensure that financing needs and debt service obligations of the government are met adequately, at the lowest possible cost and at a reasonable level of risk while the secondary objective is to support the development of a vibrant domestic debt market.
