Economics Association of Malawi (Ecama) says Malawians have not realised the maximum benefits of debt relief as the country is now worse off than it was before its earlier loans were written off by international lenders in 2006.
However, Minister of Finance Ken Lipenga believes the country has realised some ‘significant benefits’ from the initiative.
The World Bank and the International Monetary Fund in August 2006 cancelled Malawi’s US$3.1billion debt after the country completed some of the Heavily Indebted Poor Country Initiative (HIPC) agreements, saving the country US$70 million in would-be annual loan repayments.
As of last financial year, the Malawi government’s debt stood at K570 billion (US$2 billion) of which K255 billion (US$900 million) was external debt.
Ecama Executive Director Nelson Mkandawire said Malawians need to appreciate that debt cancellation was not a direct cash transfer to Malawi government but rather a waiver of repayments
“In such a way, the amount budgeted to service the loans is given back so that it can be used to invest in projects of choice,” said Mkandawire.
“Soon after the debt cancellation, Malawi saw some tremendous development especially on road infrastructure, some of which were fully funded by the government through its revenue,” said Mkandawire.
However, Mkandawire said the benefits were short-lived as the country started falling out of grace with donors due to poor macro-economic policies which saw the kwacha being over-valued for almost five years.
He said reckless public spending, poor governance and dwindling tobacco sales also worsened economic conditions in the country, taking away the gains from debt cancellation.
He said one would have expected that by today, medical supplies in hospitals should have improved, school infrastructure would have improved and that rural electrification, water harvesting projects like building of dams across the country should have accelerated to improve rural development in the country.
The Ecama boss said Malawians are yet to see how the current government proceeds with recovery strategies put in place since April 2012.
“There are a lot of things that Malawi may need to do in order to reverse the situation and it is good that other strides are already being made to that effect. It should be noted that when a country accumulates debts, its reserve base lessens, making it unable to finance recurrent and development needs,” said Mkandawire.
He suggests that government should reduce borrowing to avoid re-accumulation of unsustainable debts for the country.
He said borrowing decisions should be based on critical analysis of the projects for which funds are sought.
“Priority should be given to projects that are expected to improve the economy through job creation and forex generation,” said Mkandawire , adding :
“Government should pursue prudent fiscal policy measures in order to intensify revenue collection and also reduce spending.”
He said fiscal and monetary policy management should be left in the hands of the central bank without political influence.
He said prudent financial management is required in order to reduce borrowing and that bank lending rates need to be reduced in order to allow small scale farmers to invest more in agribusiness activities.
However, Lipenga said government is borrowing wisely and that it will cease all borrowing opportunities that avail themselves as the country’s debt level is still way below the recommended threshold.
He said although it might be difficult to quantify the benefits to the population at large, one can only point at the many roads, schools blocks, and teachers’ houses that have been constructed with government funds.
“In addition, one would also like to look at the large quantities of drugs, the note books, and the Farm Inputs subsidy Programme, which have been procured and implemented within the government budget which, for sure, would not have been possible if government was still continuing to have the burden of debt repayment,” said Lipenga.
He said Malawians need to understand that the debt relief that Malawi was granted did not mean the country receiving a huge sack of money but rather the breathing space in terms of debt repayment to spur the economy through the use of the resources that would have otherwise been used for debt repayment.
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