Malawi’s Age of Covid-19: No Goodbyes to Public Debt in Sight
Updated: Jan 5, 2021
Malawi’s economy is still heavily aid-reliant. In the last year alone, we received at least US$1 billion in development aid through grants and debt from foreign entities. The government budget alone, even as it inflates year after year, still relies on foreign aid to finance about 40% of its activities.
In 2021, the economic impact of the Covid-19 pandemic in Malawi, which seemed not so visible in 2020, is likely to unleash itself with unrelenting fervor. This will be the year, since the pandemic began, when shrunk 2020 government revenue collection – yet to be quantified – and donor reprioritization of budgets towards Covid-19 vaccinations at home will bring to life the pangs of a pandemic that lay hidden under a deceptive cloak of mitigated viral spread. Livelihoods will likely take another plunge for the deep end. The resultant gap in financing will need closure, as any discerning government would want to do so in order to keep its promise.
Malawi’s major donors saw their economies shrivel in 2020 as a result of lockdowns and stressed public services in a world where the IMF predicted GDP would fall by US$9 trillion between 2020 and 2021. Donor countries continue to struggle to keep up with own growing Covid-19 social implications and their central banks seeking the right permutations to finance unprecedented stimulus packages and social security programs geared towards alleviating the burden of the pandemic on their own citizens. The diversion of funds to nobility causes such as ODA now, more than ever, has repercussions on their political longevity. So, it comes as no surprise that Malawi’s foreign donors will focus on prevention in their own countries as a matter of priority and, more importantly, the funding of national vaccination programs as a desperate matter of survival.
Meanwhile, Malawi’s fiscal gap will need filling with something, if not with some miracle. That miracle usually has a name: more public debt.
But according to Jessica Mandanda’s article in October 2020, our country is already hard-pressed with debt amortization, which currently stands at 17% annually. Piling up more debt will eventually lead us to spending more money paying back loans that may not have made a difference on poverty and economic inequality that remain unforgivably high. The story of this MWK376 billion shortage on financing national development goes beyond Ms. Mandanda’s wish for better financing of youth and gender programs to affect health, education, agricultural development, infrastructure development, and so on. Because, at the end of the day, all Malawians need to be reached in all their diversity. In fact, it threatens the achievement of the 1 million jobs target of the Tonse Alliance government, which, we’re hopefully sure, weren’t promised on a foreigner’s generosity.
Now, the IMF has been busy fighting fires in countries hit hard by the pandemic. It is doing this the only way it knows how, i.e., lending for stabilization purposes as balance of payments and public accounts ran amok. Our already precarious foreign exchange position means courting the IMF will only perpetuate our indebtedness to foreign entities that must be amortized in US Dollar terms. Let’s anticipate that our foreign exchange reserves will take a hit. Ms. Mandanda will get even more furious.
How should President Chakwera’s government position itself to address this quandary?
Don’t close down the economy. The lessons from pandemic-stricken economies – mainly in the global North – strongly indicate the need to maintain high levels of economic activity, which become depressed with lockdowns. Another important lesson for a poor country like Malawi is that underdeveloped social security services and financing of social sectors (UNICEF reckons that in the 2019/20 budget, government allocated 38.4% of the national budget to social services like health and education) mean that the government will need to maintain, if not increase, revenue collection. The only way to accomplish this is to keep people on the streets and businesses buzzing. This must be done in spite of rising cases of Covid-19.
Engage Malawi’s informal sector. It’s important to recall that there are at least 5 million Malawians working and conducting business informally across the country. While there’s no real estimation of how much worth this sector is, it is no doubt a significant proportion of the economy that breaks a profit that will never buoy up public revenue beyond the standard market fee, usually a temptation for the collection agent to pocket. It’s businesses, mostly MSMEs, in the informal sector that need better access to credit and financial services, as these are potent money velocity-increasing engines. Providing MSMEs with the right financial and business incentives will make it easier for them to commit to Caesar what belongs to him. Coincidentally, it’s also in the informal sector where disease prevention would be most effective. Combined with proper disease-prevention (some highlighted below), activity should thrive.
Implement strict measures of prevention. Malawi has seen a fair share of Covid-19 prevention strategies being rolled out over the months since Peter Mutharika’s announcement of them in April 2020. But we believe we speak for everyone when we say that we seem to have quickly forgotten about the potential faster spread of a new strain that is reigning havoc to one of Malawi’s most-connected economies, South Africa. Malawi needs to enforce the simple rules of prevention: wear a mask, wash hands frequently (or rub them with hand sanitizer) and maintain a social distance of six feet or more. Simple as these rules are, our amnesia for internalizing them to second nature has caught up with us too quickly. As a matter of fact, prevention is not just the cheapest way to fight the pandemic, but one thing within our control that we can afford.
Manage development grants wisely. Unless donor funds are earmarked for a specific intention, Mr. Chakwera needs to first tell the difference between a loan and a grant. To rely on donor funding to support consumption expenditures on the government budget has been a perennial flaw of Malawian public accounting for a very long time. This website opines that both grants and debt that come by way of international financing must be invested in development and forex-earning projects while reorienting the mentality to spend it on food, which can be grown locally. These investments will have a return in the long-term, a time at which we can relax the rules. For example, as an agricultural country from the very beginning, Malawi should have by now been a fertilizer manufacturer. The fact that we aren’t shouldn’t be a big problem, for public financing to invest money into it today can have significant benefits in the short-term.
Knowing Malawi will be lonelier than usual in a 2021 global economy is a grim note to start on, but Malawi will have to live these realities while tightening her belt and looking to more prudent local revenue collection solutions in order to move forward.