The Reserve Bank of Malawi (RBM) says the supersonic speed at which the country’s external debt grew after April 2012 is a cause of concern.
In its Financial Stability Report for 2012, RBM said Malawi’s external debt as a percentage of GDP increased from 14.3 percent in March 2012 to 27.75 percent in September.
RBM said the significant jump was on account of both the country contracting new debt and a revaluation of debt on account of the depreciating exchange rate.
The 27.75 percent the external debt ratio, however, still remained below the threshold for debt sustainability ratio of 40 percent.
RBM said the developments in external debt did not indicate major cause for concern to financial stability.
“Nevertheless the pace at which indebtedness increased during the review six months period is a cause for concern. Stabilising the kwacha is key to averting a similar pace of indebtedness in the ensuing months,” the central bank said.
The kwacha has been nose-diving since May 7, 2012 when RBM devalued and floated the local unit, a development which has seen the kwacha sliding from K168 to above K360 to the dollar.
Analysts are keeping their fingers crossed that the country produces enough tobacco whose earnings may help stabilise the kwacha.
RBM further said domestic debt as a percentage of GDP stood at 15.5 percent in September 2012 compared to 16.1 percent in March 2012.
It said the maturity structure of Malawi’s public domestic debt remained short, with treasury bills making up 76.2 percent of total domestic debt.
“Government’s short term debt maturity structure does not only amplify repayment pressure but also discourages financial sector deepening. In addition, yields on the government securities market increased, following an increase in the Bank rate and inflation.
“The All Type Treasury Bills Yield increased to 21.34 percent in September 2012 from 7.51 percent in March 2012. Consequently, the yield curve for government securities shifted upwards indicating higher cost of borrowing for the government, hence increased domestic debt roll over risk,” said RBM.