The International Monetary Fund (IMF) has encouraged developing economies, including Malawi, to consider adopting market reforms as a strategy to stabilize their debts and foster economic growth. The advice was given on Thursday, following the IMF's observation of the increasing public debt in these countries over the past decade.
The IMF suggested specific measures such as lowering barriers to entry in utility markets, establishing financial supervision and regulatory frameworks, and reducing restrictions on foreign exchange transactions and cross-border capital flows. These steps, according to IMF senior economists Gabriela Cugat and Carlo Pizzinelli, are associated with a three-percentage point reduction in the ratio of debt to GDP.
The IMF's recommendation comes at a time when Malawi's debt level is considered unsustainable, standing at K7.9 trillion ($7.2 billion) at the end of December 2022, representing 69.9% of the country's GDP. Secretary to Treasury Macdonald Mafuta Mwale stated that the government has initiated measures to manage the debt, including debt restructuring and tax base expansion.
On Wednesday, the IMF had noted that developing countries' total public debt had increased from 35% of GDP in 2010 to 60% in 2021. Similarly, external public debt rose from 19% of GDP to 29% during the same period. The organization highlighted that regulatory changes and market reforms could alleviate this challenge.
In a blog released earlier in the week, the IMF pointed out that stabilizing debt often begins by reducing new borrowing through fiscal consolidation or decreasing the total outstanding through debt restructurings. However, it also emphasized that improving market functioning can help reduce debt-to-GDP ratios by increasing economic output.
The blog further noted that while some market-oriented policies could initially have adverse effects on fiscal accounts, such as reducing tax revenue by scrapping tariffs, these could be offset in the long term by increased economic activity. The IMF's analysis also revealed that the effectiveness of reforms could vary depending on factors such as initial debt levels, tax collection efficiency, and the timing of reform implementation.
The IMF is currently assessing Malawi's performance on a staff-monitored programme initiated last year. The country is seeking a possible Extended Credit Facility programme with the Bretton Woods’ institution following the cancellation of the last programme in 2020.
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