The massive devaluation and subsequent depreciation of the kwacha has resulted in the country’s total debt stock swelling to 54 percent of the Gross Domestic Product (GDP), the Ministry of Finance has said.
According to Malawi’s Annual Debt Report released by the Debt and Aid Management Division of the Ministry of Finance, as of end June 2012, Malawi’s total public external and domestic debt stock amounted to K524.8 billion (US$1.926 billion), equivalent of 54 percent of GDP, compared to K313.5 billion (US$2091.3 million) or 33.6 percent of GDP in the corresponding period in 2011.
The report says total public debt grew by 67 percent in the year ending 30th June 2012 as compared to the previous year of 2011.
“This sharp increase in the proportion of public debt to GDP is mainly due to huge depreciation of the kwacha which significantly deflated the US$ value of the country’s GDP,” says the report.
It further said of the total outstanding public debt stock in June 2012, the external debt stock amounted to K301.8 billion (US$1108 million) while domestic debt was K222.97 billion (US$818 million), representing 58 percent and 42 percent of total debt stock respectively.
“The significant changes are attributed to devaluation which has led to a decline in the proportion of domestic debt in dollar terms. The external and domestic debt stock as a proportion of GDP was equivalent to 31 percent and 23 percent respectively in June 2012,” reads the report.
According to the Ministry of Finance, external debt stock increased by 12 percent from US$ 984.6 million in June 2011 to US$ 1,107.6 million in June 2012.
This, the ministry says, was due to more disbursements on existing and newly contracted loans compared to repayments during the period under review.
“Specifically, there were significant disbursements on loans from the Peoples Republic of China, India, International Development Association (IDA) of the World Bank Group, and the African Development Fund (ADF),” said Treasury.
The report says, however, the currency composition of Malawi’s external debt does not constitute a significant source of external vulnerability since the currency structure closely matches with foreign reserves or earnings.
“However, the external debt portfolio is exposed to exchange rate risks owing to adoption of free floating rate. Hence any significant depreciation of the Malawi kwacha against the foreign currencies can substantially contribute to higher debt service payments in local currency terms.
“As a result, there could be higher debt service payments in the budget than forecasted,” reads the report.