IMF warns on debt revision

IMF warns on debt revision

The International Monetary Fund (IMF) has warned that the prolonged debt restructuring process poses a threat to Malawi’s economic development.

In a written response following the conclusion of a week-long IMF staff visit to Malawi on Friday, the Bretton Woods institution’s resident representative Nelnan Koumtingue observed that debt treatment is a key component of Malawian authorities’ strategy to bring external public debt to a moderate risk of debt distress in the medium-term.

He said: “A prolonged debt restructuring may delay the return to normal economic activity and prolong the loss of market access.

“It can also make trade finance unavailable and undermine foreign direct investment. These are all critical ingredients to economic development.”

However, Koumutingue hailed authorities for engaging in an early dialogue with creditors, following which, Malawi has received financing assurances from its largest official bilateral creditors and continues to pursue good faith negotiations with its commercial creditors.

Debt restructuring entails debt distressed borrowers negotiating with credit providers to review their debt commitments to a manageable monthly payment.

The Malawi Government has been engaging its creditors to restructure its ballooning external debt to ensure that it accesses funds under Enhanced Credit Facility (ECF) with IMF.

Treasury data shows that in view of the IMF ECF worth $175 million (about K297 billion) sealed last November, Malawi has secured more than $457 million (about K776 billion) worth of grants and loans from its multilateral and bilateral donors that will be disbursed over four years.

Of the project support that has been officially announced, Malawi got a $77 million (about K131 billion) grant from the German government and a combined $380 million (K646 billion) from the World Bank which also includes $60 million (K102 billion) specifically disbursed to de-risk the purchase of critical imports such as fuel and fertiliser.

Malawi also received financial support pledges from the European Union worth about 117 million euro (about 213.18 billion) of which, 60 million euro was planned to be frontloaded into the economy to cushion against the devaluation of the kwacha while 57 million euro will be channelled to the education sector as direct budget support.

Meanwhile, out of Malawi’s K6.62 trillion total external public debt, K4.4 trillion is owed to multilateral creditors.

The World Bank is the largest creditor, with K2.2 trillion or 33 percent of Malawi’s total external public debt owed to the bank.

This means that only about one-third of Malawi’s external public debt stock is under negotiation, with K1.7 trillion to commercial creditors mostly to African Export-Import Bank (Afreximbank) and Trade and Development Bank and K742 billion to bilateral creditors mostly China and Saudi Arabia.

Meanwhile, the IMF expects that between 2023 and 2027, Malawi will need $1.6 billion to close its external financing gap, of which $987 million should be financed by debt relief.

Malawi Economic Justice Network executive director Bertha Phiri earlier lamented slow progress towards the implementation of debt strategies, urging authorities to speed up the process.

She said while they appreciate the measures put in place by the Malawi Government, they want to see to it that the strategies are progressing.

Said Phiri: “Our interest is what has been the progress so far? Measures can be put in place, but what are the efforts towards the same?

“Going forward, we need to see to it that we are implementing these mechanisms.”

Minister of Finance and Economic Affairs Simplex Chithyola Banda and Secretary to the Treasury Betchani Tchereni were yet to respond to our questionnaire by press time at 7pm yesterday.

However, in his 2023/24 Mid-Year Budget Statement Review, Chithyola Banda indicated that the ongoing debt restructuring strategy will help to bring public debt levels to moderate risk in the medium-term.

He said: “Government will ensure that in the medium-term, public debt levels go down by containing the budget deficit.

“Specifically, Government will continue mobilising domestic resources to finance the budget and spending will be done according to available resources.”

In the 2023/24 financial year, Treasury projects a widening fiscal deficit of K1.28 billion or 8.3 percent of gross domestic product. The widening deficit is mainly on account of absorbing the impact of exchange rate correction.

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