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Malawi Public Expenditure Review:
Public Debt Sustainability &
Management
21 November 2007
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Background to the analysis
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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
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(1) Domestic debt stock is still very high
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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
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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
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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
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(1) There is need for continued fiscal
discipline for sustained domestic debt
reduction
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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
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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
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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