Malawi Public Expenditure Review: Public Debt Sustainability

1
Malawi Public Expenditure Review Public Debt
Sustainability Management

• 21 November 2007

2
Background to the analysis

• Malawis 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 Malawis debt vulnerability
  
• Lower interest payments on debt will increase
  resources available for discretionally
  expenditure

3
Main Findings
4
(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

5
(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
  

6
(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

7
Recommendations
8
(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

9
(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

10
(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