Treasury seeks cheaper debt financing model
Ministry of Finance and Economic Affairs says it wants to improve existing vulnerabilities of the country’s debt portfolio by diversifying its external sources of financing.
In its recently adopted five-year Medium-Term Debt Management Strategy, Treasury said this will help to achieve government’s primary debt management objective of meeting its financing needs at a minimal cost and subject to prudent degree of risk.
Treasury said the strategy vwill stimulate economic activity, enhance government’s revenue and help moderate the cost of borrowing as well as the ratio of debt service to revenue.
Reads the strategy in part: “Although the strategy has a relatively higher foreign exchange risk [59 percent], compared to the region, the ratio is relatively lower.
“Continued issuances of longer-dated domestic debt instruments and contraction of concessional foreign financing will help to moderate refinancing risk.
The strategy said government will only borrow from concessional external sources to secure necessary financing for its development objectives.
As at end December 2022, public debt reached K7.9 trillion, representing 69.93 percent of the gross domestic product (GDP) pegged at K12 trillion.
The increase is due to high deficit financing and debt refinancing requirements during the period.
Of this stock, K4.43 trillion is domestic debt, which is 114 percent of the total budget while K3.47 trillion is external debt, an equivalent of 90 percent of the total budget.
Treasury data shows that official creditors are the main source of external financing for the government.
As at September 2022, the World Bank, through the International Development Association, remained the largest creditor to the Government of Malawi, accounting for 47.61 percent of the country’s external debt stock.
The African Development Bank, through the African Development Fund, follows with a proportion of 16.10 percent and Export-Import Bank of China is the third largest external creditor with a share of 8.34 percent.
At least 80 percent of Malawi’s external debt is contracted on concessional
terms with multilateral creditors. The semi concessional loans account for 13 percent of total external debt whereas the commercial loans represent 5.67 percent of external debt stock.
Minister of Finance and Economic Affairs Sosten Gwengwe said through the strategy, government is committed to improving debt management and the country’s creditworthiness.
He said prudent debt management has taken centre stage because it is key to governments’ ability to achieve fiscal sustainability and build resilience to withstand external shocks and contribute to macroeconomic stability necessary for long-term economic growth.
Said Gwengwe: “The strategy outlines the government’s plans to achieve the optimal debt portfolio, grounded in a ranking of the cost and risk trade-offs of alternative debt management strategies.
“The government is committed to reducing funding requirements and the level of debt accumulation which will consequently bring debt back to a moderate risk of debt distress.”
The minister said that in line with the second enabler for Malawi 2063 First 10-Year Implementation Plan, government has placed emphasis on sound financial and economic management to strengthen sustainable public debt management.
The International Monetary Fund Malawi Staff Monitored Programme with Executive Board Involvement, among others, demands that the country restructure her debt.
Malawi has been seeking a new Extended Credit Facility after cancelling the previous arrangement in September 2020.
