The International Monetary Fund (IMF) has offered a pragmatic solution to address the mounting debt crisis in developing economies, particularly Malawi. The IMF’s recommendation comes after observing a concerning trend of escalating public debt in these nations over the last decade.
In response to this growing crisis, the IMF has proposed a set of targeted measures aimed at curbing rising debt levels and stimulating economic growth. These measures include reducing barriers to entry in utility markets, establishing robust financial supervision and regulatory frameworks, and easing restrictions on foreign exchange transactions and cross-border capital flows. Notably, IMF senior economists Gabriela Cugat and Carlo Pizzinelli stress that these steps could potentially lead to a substantial three-percentage point reduction in the debt-to-GDP ratio.
The urgency of this recommendation is underscored by Malawi’s precarious debt situation. As of December 2022, Malawi’s debt has surged to K7.9 trillion ($7.2 billion), equivalent to a staggering 69.9% of the nation’s GDP. To address this pressing issue, Macdonald Mafuta Mwale, the Secretary to Treasury, has announced government measures, including debt restructuring and expanding the tax base.
Recent data disclosed by the IMF reveals a worrying trajectory of public debt in developing countries. From 2010 to 2021, total public debt in these nations has risen from 35% of GDP to 60%, while external public debt has increased from 19% of GDP to 29%. These figures emphasize the immediate need for regulatory adjustments and market reforms to mitigate this growing challenge.
In a recent blog post released earlier this week, the IMF emphasized the critical role that improving market functioning can play in reducing debt-to-GDP ratios by stimulating economic output. While certain market-oriented policies may initially impact fiscal accounts negatively, such as reduced tax revenue due to tariff elimination, these effects can be offset over the long term through increased economic activity. Furthermore, the IMF’s analysis highlighted that the effectiveness of these reforms could be influenced by factors such as initial debt levels, tax collection efficiency, and the timing of their implementation.
Currently, the IMF is diligently evaluating Malawi’s performance under a staff-monitored program initiated last year. Malawi is actively seeking a possible Extended Credit Facility program with the Bretton Woods institution, following the cancellation of the previous program in 2020.
The IMF’s recommendation underscores the critical need for proactive market reforms in developing economies, including Malawi, to effectively address the growing debt crisis and lay the foundation for sustainable economic growth.
Photo Source: Google
By: Montel Kamau
Serrari Financial Analyst
14th September, 2023
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