[Civsoc-mw] MINISTERIAL STATEMENT ON THE STATUS OF PUBLIC DEBT

[Arnold Munthali]

MINISTERIAL STATEMENT ON THE STATUS OF PUBLIC DEBT DELIVERED IN THE
NATIONAL ASSEMBLY BY HON. GOODALL E. GONDWE MINISTER OF FINANCE, ECONOMIC
PLANNING AND DEVELOPMENT

1. Pre-amble
Mr. Speaker Sir, thank you for giving me this opportunity to brief the
Honourable Members of this August House on the evolution and current status
of the country’s public debt portfolio. It is a widely discussed matter by
the public and by honourable members. It is important therefore that the
Government should disseminate the facts of the matter and what they mean.

2. Total Public Debt
To begin with, Mr. Speaker Sir, total public debt amounts to K2.5 trillion
comprising K1.4 trillion (US$1.9 billion) external debt and K1.1 trillion
domestic debt. These figures are as of 30 June 2017. In terms of Gross
Domestic Product (GDP), total public debt, in Net Present Value (NPV)
terms, is 45.4 percent of GDP of which 19.8 percent is external debt and
25.6 percent is domestic debt.

Mr. Speaker Sir, allow me to discuss some terminologies that are important
in discussing this subject.

The first is the concept of “Net Present Value of debt”. Since long term or
medium term debt is repaid in future, it is important to calculate the
value of the total debt servicing (i.e. repayment instalments and interest)
for the entirety of its life (tenor). To convert these into the present
value, these total future values are discounted by the current interest
applicable to the servicing currency. The result minus the loan itself is
called Net Present Value (NPV) of debt. The sum of the NPVs for all loans
is calculated as a ratio of nominal GDP which is 45.4%. The threshold of
the danger point is 50%.

The second is the concept of “concessionality of a loan”. Concessionality
of a loan is assessed by calculating its “Grant Element” which is a
function of the rate of interest charged, length of grace period and the
repayment period among other terms. A bigger number represents high level
of concessionality (i.e. high degree of softness) and vice-versa. For
Malawi, a loan is considered to be concessional if its grant element is at
least 35 percent.

The third concept is “debt sustainability”. This concept addresses the
question of whether a country will be able to meet its debt servicing
obligations without problems or accumulating arrears over the medium to
long term. For external debt, the following ratios are applied:-
(i) Net Present Value of Debt Stock to Gross Domestic Product (NPV of Debt
/ GDP);
(ii) Net Present Value of Debt Stock to Exports (NPV of Debt / Exports);
(iii) Net Present Value of Debt Stock to Domestic Revenue (NPV of Debt /
Revenue);
(iv) Debt Service to Export (DS / Exports); and
(v) Debt Service to Domestic Revenue (DS / Revenue).
Each of these ratios has a recommended threshold.

For domestic debt, only one ratio – debt to GDP – is applied. The
recommended threshold is 20%.

Mr. Speaker Sir, I now discuss the external and domestic debt profiles
separately.

3. External Debt

The external debt portfolio has evolved over a long period of time since we
got our independence in 1964. Cumulatively, the country has borrowed over
US$6 billion from external sources to finance our development interventions
over the years. In between, there were episodes of unsustainable external
debt stock that peaked at US$3.0 billion (or 150% of GDP in Net Present
Value terms) between 1980 and 2006.  Fortunately, the debt stock fell
drastically to just under US$500 million (or 11% of GDP in Net Present
Value terms) courtesy of debt relief received in 2006 under the Heavily
Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief
Initiative (MDRI). Currently, the external debt to GDP ratio (in Net
Present Value terms) is about 20 percent against the recommended threshold
of 30 percent for Malawi, an indication that the external debt portfolio is
sustainable over the medium to long term albeit with a moderate risk of
debt distress.

Since the HIPC, the country is not allowed to borrow at commercial rates
and repayment periods have to be long. In fact, the majority of donors,
particularly bilateral (donor governments) apart from emerging market donor
countries such as China and India, aid is in form of grants. The result is
a very low ratio since that time.

Mr. Speaker Sir, it is worth noting that the amount of external debt
contracted in each era as presented in the Report on External Loans
Contracted from 1964 to 2017 (which has been circulated to all the
Honourable Members of Parliament) cannot be comparable across the five
political administrations we have had since independence in 1964. This is
on account of two reasons; one – each era had its own rate of US Dollar
inflation and two – both the operating environment and duration of the
political administrations varied across the five eras. On the basis of
these arguments, Mr. Speaker Sir, it would be inappropriate for us today to
be debating as to which administration contracted more external debt than
the other. Instead, we need to acknowledge the fact that each
administration faced some challenges that could be specific to their time.

Furthermore, Mr. Speaker Sir, I would like to inform the Honourable Members
in this House that Malawi mostly borrows from multilateral financial
institutions, key among them being the International Development
Association of the World Bank Group and the African Development Fund of the
African Development Bank Group. Financial support from the United Nations
and the European Union is largely received in form of grants. Honourable
Members may wish to note that borrowing from the World Bank and the African
Development Bank is relatively cheaper as I will explain later.

In terms of bilateral creditors in our external debt profile, the People’s
Republic of China and India top the list. Most of our bilateral development
partners provide their support in the form of grants. These include the
USA, UK, Norway, Germany, Japan and others.

Mr. Speaker Sir and Honourable Members, the amount of resources that the
country can access from multilateral institutions like the World Bank at
any point in time is, through the Country Assistance Strategy,
pre-determined and ear-marked for specific development interventions to be
implemented over a five year period. According to the World Bank’s policy
guidelines, the allocation to Malawi is 50 percent loans and 50 percent
grants based on our current rating of debt distress as a moderate risk
country. The implication of this is that the Government does not have an
upper hand in terms of determining the amount of loans that can be
contracted in a particular (financial) year during the lifespan of the
Country Assistance Strategy. In light of such lending policies and rules
that dictate borrowing by the Government from institutions of this nature,
some of the criticism and accusations that portray the Government as
borrowing irresponsibly should not arise.

On a more positive note, Mr. Speaker Sir and Honourable Members, your
analysis of the Report on External Borrowing will reveal that the borrowed
resources were largely directed towards the productive sectors of our
economy. This is why the Government is satisfied that, through external
borrowing, the country has achieved a significant level of infrastructural
development over the past five decades as can be attested in the various
sectors of the economy.
With your indulgence, Mr. Speaker Sir, I would like to invite the
Honourable Members to study and analyse the Report on External Borrowing
that I have alluded to above for more details on the effectiveness of
external borrowing and the medium to long-term sustainability of the
country’s external debt portfolio.

4. Domestic Debt
Turning to the domestic debt portfolio, Mr. Speaker Sir, I would like to
inform the Honourable Members that the current domestic debt stock of K1.1
trillion which is equivalent to 25.6 percent of GDP is high compared to the
recommended threshold of 20 percent of GDP. Honourable Members may wish to
appreciate that domestic borrowing by the Government took an upward trend
in 2013 – the year “Cashgate” was discovered. Before 2013 Mr. Speaker Sir,
the domestic debt stock levels had been kept within the recommended
threshold of 20 percent of GDP for over a decade.

It is common knowledge that after “Cashgate” some of our development
partners withdrew their direct budgetary support which in turn prompted the
Government to fill the ensuing fiscal gap through increased domestic
financing hence the surge in the domestic debt stock in the post 2013
period.

However, Mr. Speaker Sir and Honourable Members, the policy of the
Government is to gradually reduce domestic borrowing in order to bring down
the debt stock to a more sustainable level. In line with this policy
direction, the Government has consistently reduced net domestic borrowing
over the past three financial years from 2014/15, both in nominal amounts
as well as in proportion to GDP. Specifically, net domestic financing was
K82.7 billion (2.6% of GDP) in 2014/15 financial year; K65.2 billion (1.7%
of GDP) in 2015/16 and K37.2 billion (0.8% of GDP) in 2016/17 financial
year. The net domestic borrowing target for this financial year is K27.8
billion (0.6% of GDP).  Since nominal GDP is expected to grow, the
recommended domestic debt to GDP ratio of 20 percent should be attained
within the next two years.

5. Debt servicing
Mr. Speaker Sir and Honourable Members, external debt service, including
principal and interest payments, has been within the recommended threshold
of 18 percent of domestic revenues. Isolating interest payments, Honourable
Members might wish to note that although the external debt stock is higher
than the domestic debt stock, interest payments are much higher on domestic
debt than on external debt. This is on account of external debt being
contracted on softer (or concessional) terms that include lower interest
rates of up to 2 percent per annum, grace periods of up to 10 years and
long repayment periods of up to 30 years. On the other hand, domestic debt
is contracted at market prices (interest rates) that are significantly high
and may rise above 30 percent in extreme economic situations.

Mr. Speaker Sir and Honourable Members, interest payments on domestic debt
have been persistently above 20 percent of our domestic revenues since 2013
which is consistent with the high domestic debt stock accumulated over this
period as alluded to earlier on. (There is no recommended ratio for
domestic interest payments, but the interest/ domestic revenue ratio
provides a reasonable proxy for determining pressure that domestic debt
servicing exerts on the national budget.) Mr. Speaker Sir, the Honourable
Members may wish to refer to the attached spreadsheet labelled Annex 1 for
a summary of the domestic debt statistics covering the period since 2002.

6. Conclusion
In conclusion, Mr. Speaker Sir, I would like to underscore the point that
the current public debt stock is within the country’s carrying capacity and
therefore manageable. The debt ratios will be even better as Government
continues to be more prudent its borrowing going forward. In this regard,
sustained fiscal discipline anchored by the on-going public finance
management reforms will be critical. With growth in nominal GDP and
constrained domestic borrowing, the domestic debt to GDP ratio is expected
to decline to the recommended threshold within the next two years. On the
external front, loans will continue to be contracted largely on soft
(concessional) terms. However, less concessional loans from our bilateral
creditors will also be contracted for purposes of financing important
development interventions for the country’s sustainable economic
development.

Mr. Speaker Sir, I beg to move.

-- 
This message has been scanned for viruses and
dangerous content by MailScanner, and is
believed to be clean.

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://chambo3.sdnp.org.mw/pipermail/civsoc-mw/attachments/20171206/b8c5c2a1/attachment-0001.html>