More aid but no debt cancellation for Malawi

Only 10% of Malawi's budget revenue is spent on basic education, primary health, nutrition, water and sanitation combined, while debt (external and domestic) servicing consumes a quarter of government revenues. “The revenue that goes into debt servicing should be used for universal coverage of basic social services,” said the Malawi Reserve Bank Governor, Matthews Chikaonda.

But Malawi is not eligible for debt cancellation under the Heavily Indebted Poor Countries (HIPC) Initiative. The World Bank and International Monetary Fund judge its debt to be “sustainable” because its annual debt service payments are less than 25% of its exports. By contrast, the United Nations Development Programme (UNDP) Resident Representative in Malawi, Terence Jones, said the nearly $100 million in annual debt service payments undermines Malawi's efforts to achieve sustained growth and development.

Malawi, one of the world's severely indebted, low income countries, has an external public debt of $2.4 billion, more than 100% of its Gross National Product (GNP). Over 80% of the debt is owed to multilateral lenders, mainly the World Bank, the African Development Bank and the IMF, and it cannot be cancelled nor rescheduled.

Thus the donors meeting in the Malawian capital Lilongwe 10-11 December 1998 agreed to divert more of their aid to help to repay Malawi's debt.

The small Southern African landlocked country is one of the world's poorest. The World Bank estimates Malawi's gross national product per capita at $220, less than half the Sub-Saharan Africa average.

For 30 years the West backed the brutal dictatorship of Hastings Banda, because during the Cold War he was pro-Western and pro-apartheid. He was finally ousted in 1994, but his successors inherited a country with one of the most unequal distribution of incomes in Africa and in which the poorest had been systematically excluded from health services and education. These are the people now being asked to repay Banda's debts.

The UNDP's Human Development Report 1998 says 48% of Malawi's 12 million people have inadequate income to acquire basic needs. Less than six million Malawians have access to safe water and only two-fifths of the population can read and write.

According to the United Nations Fund for Population Activities (UNFPA), Malawi's infant and under-five mortality rates are exceptionally high, at 134 and 234 per 1000 live births, while the maternal mortality rate at 620 per 100,000 live births is among the highest in the world.

Setting up a multilateral debt fund

Hazwell Kanjaye of Inter-Press Service (IPS), 15 December 1998, reports from Lilongwe:

Donors have agreed to help Malawi set up a Multilateral Debt Trust Fund to assist with debt servicing, thereby allowing the government to allocate more resources to the delivery of social services.

The donors, which included the World Bank and the International Monetary Fund (IMF), expressed support for the Fund at a two-day Consultative Group Meeting held in Lilongwe on Dec. 10-11.

Malawi argued for the setting up of the Fund to enable the government to spare adequate budgetary funds for the provision of basic services and other anti-poverty activities. Similar funds exist in Tanzania, Uganda and Mozambique.

“The social costs of debt servicing are just enormous,” said Finance Minister Cassim Chilumpha. “Any kind of debt relief, concessional funding, grants and especially a Multilateral Debt Trust Fund, would enable us to get into basic social services faster.”

Grant mobilisation and the creation of the Fund remain the best options for debt relief at the moment, because Malawi does not qualify for the Heavily Indebted Poor Countries (HIPC).Initiative, according to Reserve Bank Governor, Matthews Chikaonda.

Introduced two years ago, HIPC has been described as “too slow and limited in scope” by many African governments and anti-debt campaigners like Oxfam and other members of the Jubilee 2000 Coalition. To date, only seven countries out of 41 potential candidates have qualified for HIPC debt relief, because, among other reasons, the initiative requires that debts be cancelled only after a minimum of a six-year qualification period.

“Unless access to basic social services of good quality becomes a practical reality for the majority of Malawians, the pursuit for economic growth and human development will remain elusive,” said the UNDP Representative, Terence Jones.

The opportunity cost of nearly $100 million in annual debt servicing is large in terms of human development and undermines the government's efforts to achieve sustained growth and development, he added.

Jan Vandemoortele, Chief of the Policy Analysis Division of the United Nations Children's Fund (UNICEF) said budget restructuring in favour of basic social services would enable Malawi to achieve some of the goals set at the Social Summit held in Copenhagen in 1995.

At that summit, governments agreed that universal access to basic social services like education, nutrition, reproductive health and sanitation would require, on average, 20 percent of the national budget and 20 percent of official development assistance.

Donors have pledged a total of $1.25 billion of external assistance to Malawi for the next three years (1998-2001). But they declined to guarantee an overall increase of funding levels once the Fund is established.

Japanese envoy Yoshihiro Nakamura, for example, said: “It is difficult to ascertain an increase in our levels of funding at this point. We are one of the few countries providing high levels of grant funding to Malawi, because of our concern about the country's debt burden.”

Besides Japan, the British, American and German governments are some of the donors who have converted much of their disbursements to Malawi into grants or concessional loans with an average interest rate of 1.3%, an average maturity of 38 years and approximately nine years of grace.

To ensure the desired outcomes, the donors called for transparency in allocating resources to the Fund and the right capacity to absorb and use the resources more efficiently and equitably. They also called for regular and rigorous evaluation and auditing exercises.

While the donors recognised that the Malawian government had managed to slash the overall fiscal deficit from 26% of GDP in 1994-95 to eight percent in 1996/97, and inflation from 83% at the end of 1995 to under 7% at the end of 1996, they noted with concern serious slippages in fiscal policy in the second quarter of 1997/98, accelerating the rate of inflation to 15%.

The Malawi economy registered a GDP growth of 5.2% in 1997. This year, real GDP is estimated to grow by 3.1%. This tapering, largely attributed to poor agricultural performance and a recent 48% depreciation of the Kwacha, is far below a required annual GDP growth of at least 6%, which is needed to avoid an increase in the number of the country's poor.