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

[Adamson S. Muula]

I do not think I would come to that conclusion.
Perhaps to clarify the difficulty I wanted to share, I would have said:

1. subsidized fertilisers= more debt
2. high salaries in the public sector; and we largely do not make money
from this sector = more debt
3. Free medicines= more debt
4. Of course two elections every five years= more debt
5. The Flames= more debt

These are important activities of the State in Malawi. But they raise the
debt. At many points there will be tensions. On day one of most Economics
classes, they say wants/needs are many but resources are few. So choices
needs to be made. Sometimes it may be seen as better to take a debt to fund
some of the things stated above.

On 6 December 2017 at 18:33, temwa malange <temwamalange at gmail.com> wrote:

> Adamson,
>
> Since you think elections are expensive, why dont we just stop having
> elections all together?
>
>
>
> On Dec 6, 2017 6:28 PM, "Adamson S. Muula" <amuula at medcol.mw> wrote:
>
> The more we ask government to fund this and that, including perhaps good
> things as multiple elections, the more this debt increases. Public
> universities debt in taxes (largely unpaid PAYE's) is in excess of MK 8
> billion. Thanks
>
> On 6 December 2017 at 14:23, Arnold Munthali <acmunthali at gmail.com> wrote:
>
>> 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.
>>
>> --
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>
>
> --
> Adamson S. Muula PhD, MPH, MBBS, CPH, PGDip (Public Health Ethics), PGDip
> (Global Health), PGD (Palliative Care)
> Professor of Epidemiology and Public Health
> University of Malawi, College of Medicine
> School of Public Health and Family Medicine
> Department of Public Health
> Chimutu Building Room 850
> Private Bag 360, Chichiri
> Blantyre 3
> Malawi
> Email: amuula at medcol.mw
> Cell: +265 884233486 <+265%20884%2023%2034%2086>
> Publications list: https://www.ncbi.nlm.nih.gov/pubmed/?term=Muula
> *orcid.org/0000-0003-4412-9773 <http://orcid.org/0000-0003-4412-9773>*
>
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-- 
Adamson S. Muula PhD, MPH, MBBS, CPH, PGDip (Public Health Ethics), PGDip
(Global Health), PGD (Palliative Care)
Professor of Epidemiology and Public Health
University of Malawi, College of Medicine
School of Public Health and Family Medicine
Department of Public Health
Chimutu Building Room 850
Private Bag 360, Chichiri
Blantyre 3
Malawi
Email: amuula at medcol.mw
Cell: +265 884233486
Publications list: https://www.ncbi.nlm.nih.gov/pubmed/?term=Muula
*orcid.org/0000-0003-4412-9773 <http://orcid.org/0000-0003-4412-9773>*
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