Treasury outlines public debt risks
Ministry of Finance and Economic Affairs says the current composition of the country’s public debt, which stood at K7.9 trillion as at December 2022, is prone to a number of risk factors.
In its 2023/24 draft financial statement, Treasury said the redemption profile shows that K1.18 trillion, representing 18.3 percent of public debt (equivalent to 10.3 percent of gross domestic debt -GDP) is maturing in the 2022/23 financial year.
Said Treasury in the statement: “With such magnitudes of debt maturing in one financial year, Malawi’s refinancing and interest rate risks are relatively high.
“Beyond the 2022/23 financial year, the redemption profile also indicates maturity spikes on domestic debt, manifesting high debt service payments in the years up to 2027.”
These amounts, the ministry said, will grow with the expected additional issuance of relatively short and medium-term securities, namely Treasury bills and two-year and three-year Treasury notes.
In terms of the cost and risk indicators of the existing portfolio, Treasury said the average time to maturity and average time to refinancing debt stood at 2.5 years for domestic debt and 13.6 years for external debt.
In an interview on Saturday, market analyst Cosmas Chigwe said the interest rate risk arises because government debt is very rarely paid off.
He said: “Usually, Treasury will just issue new securities to finance the payments. The fact that there is a large percentage of government debt maturing in one year exposes the government to interest rate risk as the maturing debt will likely be refinanced at higher interest rates, since rates have relatively gone up.
“If rates end up even going higher as largely expected, it means interest rates on the new securities will be even higher. Therefore, in the future, the government will pay a lot more interest, thereby further limiting fiscal capacity.”
Chigwe said government paying higher interest is also inflationary as it is basically pumping more money into the system.
In his 2023/24 Budget Statement presented on Thursday in Parliament, Minister of Finance and Economic Affairs Sosten Gwengwe said while the pace of borrowing is unsustainable and needs to be curtailed, government will continue its debt restructuring strategy to bring public debt levels to moderate risk in the medium-term.
He announced that government already engaged its external commercial creditors and is currently now engaging its bilateral creditors such as China and India for a possible debt treatment.
Going forward, he said to institutionalise debt management in line with the Public Finance Management Act 2022, Cabinet approved a five-year Medium-Term Debt Management Strategy that runs up to 2026, which outlines plans to achieve the optimal debt portfolio, grounded in a ranking of the cost and risktrade-offs of alternative debt management instruments.
