Malawi Public Expenditure Review: Public Debt Sustainability & Management 21 November 2007

Background to the analysis Malawi’s public debt burden has been reduced substantially following the HIPC completion point & MDRI But interest payments remain very high because of domestic debt This analysis examined public debt sustainability & the debt management framework to recommend options for reducing Malawi’s debt vulnerability Lower interest payments on debt will increase resources available for discretionally expenditure

Main Findings

(1) Domestic debt stock is still very high Although the stock of domestic debt has declined from 25% of GDP in 2004 to 15% in 2007, it is still very high. In 2001, total domestic debt was 8% of GDP The macroeconomic situation remains fragile, and therefore a relaxation of fiscal discipline could lead to a rapid resurgence in domestic debt

(2) The market for debt instruments remains underdeveloped, limiting options for reducing domestic debt using market based approaches There is lack of diversity of financing instruments Most of instruments are short-term in nature, and hence exposed to refinancing or rollover risks

(3) Institutional arrangements for the management of domestic debt are still weak There has been progress in strengthening the institutional framework of debt management e.g. Debt & Aid Division is now better organized into front, middle, & back office There is still scarcity of qualified staff in DAD There is still lack of coordination between RBM and MOF when it comes to contraction of domestic debt There is lack of appropriate cash and liquidity management by government

Recommendations

(1) There is need for continued fiscal discipline for sustained domestic debt reduction In particular, there is need to take steps to control potential sources of fiscal risk Examples of potential sources of fiscal risk include: pressures to increase wages & the fertilizer subsidy program, possible accumulation of arrears, financial performance of parastatals

(2) There is need to introduce reforms that will enhance domestic market development There is need to foster the development of the secondary market for securities e.g. through reduction of high withholding taxes on government securities trading Establish suitable clearing and settlement mechanisms. At the moment, there are no custody systems in Malawi as such securities are physically held by institutions

(3) There is need to improve institutional arrangements for managing public debt A formal structure for institutionalized information sharing between the budget unit, DAD, & the RBM should be established This will ensure improved cash and liquidity management, and hence alleviate sudden market issuances There is need to increase the levels of skilled staff in DAD