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

[vuto at lwanda.biz]

High debt in malawi is due to poor revenue collection. malawi is 
probably the only country in SADC where taaxpayers do not file tax 
returns. I can bet my last cent, tax collection is below 30 % and how do 
you expect a country to function with such a collection rate

HOn 2017-12-06 18:50, Adamson S. Muula wrote:
> 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
> 
> Thse 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 [1]
>> Publications list: https://www.ncbi.nlm.nih.gov/pubmed/?term=Muula
>> [2]
>> 
>> _orcid.org/0000-0003-4412-9773 [3]_
>> 
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> 
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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 [3]_
> 
> 
> 
> Links:
> ------
> [1] tel:+265%20884%2023%2034%2086
> [2] https://www.ncbi.nlm.nih.gov/pubmed/?term=Muula
> [3] http://orcid.org/0000-0003-4412-9773
> [4] http://chambo3.sdnp.org.mw/mailman/listinfo/civsoc-mw
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