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

Thu Dec 7 22:08:26 CAT 2017

Poverty in Malawi is self imposed

On 7 Dec. 2017 21:37, <vuto at lwanda.biz> wrote:

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> 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]_
>>>
>>> _______________________________________________
>>> Civsoc-mw mailing list
>>> Civsoc-mw at sdnp.org.mw
>>> http://chambo3.sdnp.org.mw/mailman/listinfo/civsoc-mw [4]
>>>
>>
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>> Civsoc-mw at sdnp.org.mw
>> http://chambo3.sdnp.org.mw/mailman/listinfo/civsoc-mw [4]
>>
>> --
>>
>> 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
>> _______________________________________________
>> Civsoc-mw mailing list
>> Civsoc-mw at sdnp.org.mw
>> http://chambo3.sdnp.org.mw/mailman/listinfo/civsoc-mw
>>
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