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Covid worsens Malawi’s debt position—Report

The Covid-19 pandemic is worsening debt situation in sub-Saharan African (SSA) countries, including Malawi, and if left unchecked, the rate of debt accumulation could trigger macroeconomic instability, a latest report has warned.

Written by senior economist at the Common Market for Eastern and Southern Africa (Comesa) Monetary Institute Lucas Njoroge, the report has cautioned that unless measures are implemented to curtail growth in debt, the countries could face an implosion in the stock of external debt and servicing costs.

A medical practitioner conducts Covid-19 test

The report comes at a time Malawi’s debt stock keeps on rising, hitting a record K4.1 trillion by June last year, which is almost double the value of the 2020/21 National Budget pegged at K2.2 trillion.

Out of the K4.1 trillion total public debt stock, domestic stock alone accounts for K2.5 trillion or 30.8 percent of the country’s nomimal gross domestic product (GDP) pegged at K8.1 trillion.

Projections by the International Monetary Fund (IMF) indicate that Malawi’s debt stock will likely hit 78 percent of the country’s total wealth as measured by nominal GDP in 2021.

The projected proportion of the country’s debt stock to the total national income would probably be the highest ratio, 14 years after Malawi had about $2.6 billion (about K2 trillion) or 90 percent of its external debt written off under the Heavily Indebted Poor Countries (Hipc) Initiative in 2006.

Said Njoroge: “In some countries, the debt increase is more than twice their annual budget. The current expenditure to contain the spread of the coronavirus, dwindling revenues occasioned by lockdowns and general economic slowdown are exerting considerable pressures on government finances and forcing almost all the economies in the region to run widening fiscal deficits.”

At K755 billion, the projected current financial year fiscal deficit is 34 percent of the total value of the 2020/21 National Budget and is the highest budget deficit ever in nominal terms.

Njoroge said even with limited fiscal space, the choice between lives and livelihoods has forced some countries, including Malawi, to institute a number of fiscal policy response measures.

Such measures include providing tax waivers, cash transfers to the most vulnerable, direct support to sectors such as tourism and travel and consumer demand support.

But he warned that such massive fiscal costs could lead to vulnerability of the countries to debt default.

Njoroge said most of the countries within SSA are in worse position than they were in 2019, with higher debt levels and uncertain economic environment going forward.

“This is against the backdrop of deterioration in market conditions that are increasing the rollover risk and difficulties in meeting large foreign debt service payments,” he said.

World Bank senior country economist (Malawi office) Patrick Hettinger earlier said the country is at high risk of overall debt distress due to high levels of domestic debt contracted at high interest rates and moderate risk of external debt distress, with limited space to absorb shocks.

In a recent joint Letter of Intent to IMF co-signed by Minister of Finance Felix Mlusu and Reserve Bank of Malawi (RBM) Governor Wilson Banda, government admitted that Malawi’s fiscal situation was being affected by additional shortfalls in tax revenues due to the worsened economic outlook and significant critical spending needs, including in health care, social assistance to the most vulnerable, and to ensure future food security.

The two officials also informed IMF that Capital Hill was experiencing an additional urgent balance of payments need arising from the intensification of the Covid-19 pandemic’s economic impact in Malawi.

“Our capacity to repay the fund remains strong and Malawi’s external risk of debt distress remains moderate. In addition, we have requested the temporary debt service suspension from our official bilateral creditors, in line with the G-20 Debt Service Suspension Initiative (DSSI), and we are committed to adhere to its requirements,” read part of the letter to IMF.

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