Malawi gripped by unsustainable debt: To suck nation into low growth trap
There is still much cause for concern regarding Malawi economic prospects with reports that the Peter Mutharika led-government plans to borrow from bilateral and multilateral partners $917 million (about 687 billion) in the 2016/17 financial year to finance several projects.
Economic commentators argued that it would be disastrous for Malawi’s long-term growth prospects as government want to bridge the gap between the Treasury’s tax take and public services spending with the country’s indebtedness pegged at $2.6 billion, including $800 million domestic debt.
This year alone, government plans to borrow $467 million to finance the Kam’mwamba Coal Fired Power plant; $205 million to be jointly financed by International Development Association (IDA) of the World Bank.
According to the 2016/17 financial statement, government also proposes to borrow from the African Development Bank (AfDB) for the Shire Valley Irrigation project, $23.5 million from the government of India for the New Water Supply System project.
Further, according to the report, government also plans to borrow $152 million from the European Investment Bank (EIB), IDA and AfDB to finance the Lilongwe Water Resources Efficiency Programme under the Lilongwe Water Board (LWB) which is currently reeling under water shortages as a result of dry intake dams.
The average repayment period of the planned loans is 25 years.
But economists say if government saddle the economy with debt the country is not going to be able to get growth.
Economics Association of Malawi (Ecama) executive director Edward Chilima argued that debt was not bad if meant for development projects but observed that current debt levels were not sustainable.
“Given the level of development of our country, some uses of the debt are not in line with key government priorities. Our advice is that debt should only be incurred if it is to finance investments in key priority areas only. The rest can be postponed until the economy recovers,” he said as quoted in the local newspaper, The Nation.
Chilima said what was critical was to tighten financial management systems so that the debt proceeds should be put to maximum use and not to corruption.
“It is also prudent to work on stabilising the domestic economy so that it can reach a point where key projects could be financed using local revenue resource,” he said.
Economics professor Ben Kaluwa said government should only encourage sensible debts.
“If you use the money to improve productivity, then we will be ok. But any losses or mishandling of foreign exchange wherever it comes from pulls us down,” Kaluwa, who teaches economics at Chancellor College, a constituent college of the University of Malawi (Unima) is quoted by the paper.
Of the external debt, the country is heavily indebted to the World Bank (specifically the International Development Association) with 33 percent of the total external debt followed by China, which the country owed a mere $47 million in 2010 but has risen to $237 million within five years.
The third highest amount of debt is owed by the government to another multilateral AfDB with $228 million representing 12.8 percent of all the external debt.
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It would appear that the projects that are to be funded by the loans are, as reported, very sound: power generation; irrigation, water supply are all important.
All of them will contribute to economic growth.
The issue, though, is whether the money borrowed will indeed be spent as intended due to the epidemic of corruption and theft of public funds.
But if we don’t borrow money, how can the government continue Cashgate? They’ve emptied the treasury money box so they must find ways of refilling it!