Centre for Social Concern. Analysis of Malawi s National Debt

Transcription

1 Centre for Social Concern Analysis of Malawi s National Debt 12/1/2012

2 The Debt cancellation we received some time ago should have made us more prudent in how we borrow money. This Mr. Speaker, Sir, is not in an effort to undermine government by borrowing like we doing this time, but we should be able to focus, if we borrow at this rate this point in time, what will happen in the next years, what will happen in the next ten years, what are our development goals Hon Dr. Chiwaya (UDF-Mangochi Central) (42 nd Session of National Assembly, January 2010-December 2011) I May wish to seek some clarification specifically on the details of the loan in terms of accessibility of the loan. May the minister shed some light as to the nature of access; is this $50 million going to be accessed at once or is it spread out in terms of installments; and how many installments are we talking about and how long is the period during which this loan will be full accessed. I think this is important. Hon Khwauli Msiska (AFORD-Karonga Nyungwe) (42 nd Session of National Assembly, January 2010-December 2011) We, would, also as our colleagues from the MCP have pointed out, want to request that this House be appraised as to some of the agreements which you as Minister has entered into on behalf of the Government of Malawi. Can we, for instance have those agreements presented to one of our Parliamentary Committees for example, Budget and Finance Committee? I am pointing this out, Mr. Speaker, because we have an interest to find out some of the possible interest repayments which will be factored in and any conditions which will be associated with any agreements which will be reached by the Minister of Finance and International Banks. Can we be assured, for instance, Mr. Speaker, through you that Malawian companies will be considered in the supply of the goods and services indicated in the bill? We would want this money to benefit our local businesses and of course in a fair and transparent manner. (Hon UDF Spokesperson on Finance (Hon Muluzi)) (42 nd Session of National Assembly, January 2010-December 2011) In practice, Parliament has never refused authorisation of a loan proposal. Although it grants authorisation, Parliament has no role in monitoring the implementation of loan-funded projects. (AFRODAD, The Loan Contraction Process in Africa-Making Loans work for the poor: the Case of Malawi) 2 P a g e

3 Contents Introduction... 5 Terms of Reference for the study... 5 Specific Study Objectives... 6 Study Methodology... 6 Study Findings... 7 Study Recommendations... 8 Study Limitations and challenges... 9 Malawi s Socio-economic and development indicators... 9 History of Malawi s National Debt Post Independence to Debt Relief Rationale for Contracting the Loans: 1964 to Debt Contraction and Oversight Mechanism: 1964 to Post Debt Relief to Composition of the Public Debt Composition of Malawi s Bilateral Debt Composition of external debt by currency Domestic Debt Portfolio The IMF Loans: The Extended Credit Facilities (ECF) What triggered Malawi to contract the IMF ECF Loans Importance of IMF ECF Loans to Malawi Loans Accrued The Loan Contraction process Legal and Policy framework for loan contraction and monitoring Alignment of the Loans contracted to the MGDS and Poverty Reduction Conclusion Table of Annexes Annex 1: Loans Approved by Parliament 2010 to Annex 2: Details and Purpose of External Loan Instruments contracted by Annex 3: List of active loans with the World Bank Annex 4: List of Active Loans with the IMF Bibliography and References P a g e

4 Table 1: Tobacco sales Table 2: Disbursement of Outstanding Debt by Use of Funds (% of DOD) Table 3: Loans approved by National Assembly 2010 to Figure 1: Total Public external debt stock Figure 2: Composition of Malawi's Public debt Figure 3: Multilateral Debt by Creditor by June Figure 4: Composition of Malawi's bilateral debt stock Figure 5: External Debt by Currency Figure 6: Composition of the domestic debt Figure 7: Allocation of loans per sector P a g e

5 Introduction This report is an analysis of Malawi s National Debt after Debt Relief granted in 2006 to date with emphasis on debts accumulated between 2008/2009 and 2012/2013 fiscal years. National debt in Malawi comprises public (Central Government, Local Government, Parastatal corporations, Reserve Bank) and private liabilities. National Debt is incurred and repaid by the Government of Malawi on behalf of the Malawian people. The study was commissioned by the Centre for Social Concern (CfSC), a faith-based organisation that was set up in 2001 as a project of the Missionaries of Africa (White Fathers) to promote research and action on social issues, linking the Christian faith and social justice. The CfSC aims at transforming the unjust structures in Malawian society through research and advocacy so as to ensure sustained change in policies for the betterment of all in line with their human dignity. CfSC is currently implementing its 2011/13 Strategic Plan which has three thematic areas, namely, Governance, Social Conditions, and Human and Social Capital and advocacy around Malawi s national debt forms part of the thematic areas. This need for study evolves from the acute need for analysis of and the need to understand a rights-based approach to public resource management monitoring. The end goal is to inform CfSC s advocacy call for more transparency and inclusiveness in the debt contraction process, management and monitoring of projects financed from public debt with the view of curbing corruption and improving accountability. The study provides information on the public debt stock by providing detailed debt data and profile. Terms of Reference for the study The Terms of Reference for the study included the following although not limited to: Identify, assemble and select all the available key reports and reference documents relevant for the desk review of key documents including government and donor policy on debt Collect and analyse data on debt for the after Debt Relief Examine the types of debt contracted and the projects for which the debt was contracted and the progress of the projects Examine resources, if any, that are lost through poor expenditure management in relation to the purpose of the debt contracted and to analyse what such funds would have done properly managed Assess current debt expenditure management and oversight mechanisms and make recommendation for improvement where necessary Analyse any poverty statistics caused by poor debt management by the government. 5 P a g e

6 Assess information on accountability and transparency of the debt contraction and management. Provide practical conclusions and recommendations that CFSC can use in its lobby work with key policy makers such as Cabinet, Parliament, Private Sector and Development Partners; Incorporate all comments made at the validation workshop into the report; Specific Study Objectives The specific study objectives included; although not limited to the following elements: 1. To determine the percentage of the debt in relation to the total national budget 2. To analyse the amount allocated to individual units/departments in relation to the amount of funds that the units actually require to achieve its implementation goals/strategies. 3. To assess the debt contraction process in Malawi 4. To assess the status of the presented debt in terms of project implementation monitoring and debt management. 5. To review the burden of debt for individual Malawians 6. To analyse if the stated funds that were actually given to the projects implementation to the amount that was contracted. 7. To analyse if the stated modalities of disbursement of the funds from national to projects, management of funds and its effect on development. 8. To assess the performance of the debts contracted in the past three years. Study Methodology The methodology used in this study included use of secondary data in which several literature pertaining to Malawi s National Debt were reviewed. There was also documentary analysis in which debt data including policy and legal framework was analyzed and synthesized. There was also some field study in which a few members from the Debt and Aid Department were interviewed to triangulate with the information gathered through literature review. Phone calls were also made to places where some of the loan funds are being utilized to check on progress of projects. 6 P a g e

7 Study Findings On External Debt Much as the Debt and Aid Department is doing good job to keep data and information on debt and aid, it is still difficult to come by the information as some of it is scattered around and at times figures do not tarry. As of June 2012 Malawi s public debt reached U$1.97 billion dollars of which US$1,108 billion is external, $818 million domestic and $9,080,000 commercial 57.3% of the external debt is owed to multilateral institutions, of which 37% is owed to IDA, 21% to ADF and 18% is to the IMF. The current external debt pattern has not changed much compared prior to debt relief in 2006 in which the biggest share of the debt (88.4%) was owed to multilateral, a smaller percentage (11.5%) to bilateral creditors and the least share was owed to commercial banks (0.1%). Out of the current 49 active loans, 16 of them representing 34% are allocated to infrastructure development; 8 representing 17% to agriculture development; 5 representing 11% are owed the IMF (ECF); 4 of them representing 8% are allocated to Balance of Payment & Line of credit; another 4 are allocated to Water development representing 8%; 3 each representing 6% are allocated to education, health and rural development and while parastals (Air Malawi and Escom) have 2 representing a 4% share. In line with the MGDS, 77% of the loans have been allocated to MGDS priorities-these are Health 6%), Education (6%), Water Development (8%), Rural Development (6%), Agriculture (17) and Infrastructure development (34%) 53% of bilateral debt is owed to the People s Republic of China, while 25% to India and 14% to Kuwait while 3% to France and 1% to Belgium. 3.7% of total external debt is due in 2012; the remaining 96.3% of the external debts are due in 2014 and Most of these are those owed to Mainland China, India and the IMF. Government plans to procure concessional loans to repay the maturing ones and then role them over for the next 40 years. According to the Malawi government, Malawi s external debt is sustainable in that there are fewer risks foreseen in servicing the debt. The only risks are that the maturing debt may be exposed to interest increases if resources are not available to redeem it and, thus, it has to be rolled over; the floatation of the kwacha may mean paying more Malawi Kwacha to the dollar then On Domestic Debt Domestic debt has accumulated as a result of government borrowing to finance recurrent costs after donor aid cuts and poor trade performance at the international markets resulting in negative current account balance especially during the stand-off period with both the IMF and CABS donors from 2009 to % of domestic debt is in the form of Treasury Bills with short term maturity period a thing that would force government to keep on borrowing more to service maturing loans Domestic debt servicing poses the biggest risk to debt management due to interest rate fluctuations especially on the 82% of the debt whose terms of contracting are unfixed 7 P a g e

8 meaning that they can change with changing domestic interest rates. Because the government will not be able to service most of the 82% domestic debt, it plans to roll over the debt to make the debt servicing manageable. Study Recommendations 8 P a g e As most of the loans (34%) are allocated to infrastructure development, government should see to it that the funds are used for the intended purpose and the projects are completed on time and also that only qualifying contractors are given the tender for the work. Civil society and NGOs should monitor progress, quality (standards) of projects and timeliness completion of these projects to hold both government and contractors accountable to the tax payers who service the debt. Civil Society as it did prior to 2006 should come up with a well thought monitoring mechanism to show both the Malawi government and the creditors that citizens are watching the government and creditor acts on accumulation of Malawi s public debt. Of particular interest are the Phalombe hospital (with $7,000,000 signed 1/7/2010) which has not taken off, and Zomba Jali Road ($7,000,000 signed 1/12/2005 Loan key ), Zomba Jali Phalombe Road (KWD 6,000,000 signed 8/12/2004), Zomba Jali Chitakale Road ($10,000,000 signed 4/13/2006) which remain incomplete. Particular attention should be given to the 5 IMF ECF loans; small though they are, they are key to Malawi accessing donor aid as they come with a policy programme agreed upon between the Malawi government and the IMF to support Malawi s economic recovery. Any slippage on programme sends negative signal to all other donors including the CABs donors, Malawi s traditional donors potentially leading to disruption of aid flows into Malawi. Much as the IMF ECF credit seem to provide quick fix solutions to Malawi s economic problems, the IMF should acknowledge its role in Malawi s current economic crisis when it subjected Malawi to its macro-economic reform programmes. The IMF ECF credits intended to solve economic crises of Least Developed Countries like Malawi emerging from exogenous shocks should not have any negative conditionalities except those that would help grow the economy such as standard fiduciary policies of accountability and transparency associated with loan transparency contraction. As required by loan contracting process, room should be given for wider consultation including members of the civil society prior to contracting including the ECF which have been closed exclusively to government and the IMF mission. This would give more legitimacy to the loans and also legitimize the loan contraction process. Government of Malawi should also tread carefully where some loans are being contracted as part of financial aid packages and also as part of trade investment packages agreements. This arrangement has the risk of indirect loan contraction but at the same time open up for resource flight from the country. Financial Aid from China has such strings attached. To reduce build up of public debt and dependency on foreign aid, the Malawi government should quickly strengthen laws and policies in the emerging mining sector which has the potential to generate more revenue to finance capital for development and also meet budgetary demands.

9 Study Limitations and challenges The study was not without challenges. Some of the major challenges experienced were as follows: 1. Accessing required debt information: accessing the required debt information as well as data proved very difficult as well as time consuming. The official website provides a lot of information on debt and aid on Malawi. However, the information is not detailed enough to enable a researcher conduct a comprehensive study on debt in Malawi. The last comprehensive Annual Debt and Aid Report posted on the website was the October 2006 for July 2005-June 2006 financial year. Subsequent reports do not provide similar comprehensive information and one has to request the information from the Debt and Aid Department. 2. Accessing public offices: Due to busy schedules of public officials at the Department of Debt and Aid, it was not so easy to access and have an audience with them. This could be a result of personnel issues but also the busy schedules that the department has to attend to and this delayed field work Malawi s Socio-economic and development indicators Malawi remains one of the poorest countries in Southern Africa and in the world at large with 80% of the population living below $2 per day and 20% living under $1 per day. This is irrespective of having its external debt cancelled from U$2.8 billion to US$400 million in 2006 and also having an average economic growth rate of 8.3 % per annum between 2007 and 2010 which dropped to 4.3% per annum by The inflation rate, which in the same period, was pegged at 7.4% dropped further down to 20.1% 2 by June 2012 from a projected average of 18.4 % 3 for the year The agriculture sector which continues to be the main driver of the country s economy with tobacco as the main forex earner has also been performing badly in the last three fiscal years with the tobacco fetching less and less each year as Table 1 below shows: Table 1: Tobacco sales Growing Season Volume sold 000 kg Amount in $ 000 Difference in $ / / / / Source: Annual Economic Outlook Reports, 2009 to 2012 The country has also faced many external shocks in the same period, for instance increase in cost of agriculture inputs from $750 per metric tonnes to $1,600 in February 2008 and also fuel increase 1 IMF Press Release No 12/273, IMF Executive Board Approves New US$156.2 million Extended Credit Facility Arrangement for Malawi, July 23, 2012, Washington D.C 2 Ibid page Annual Economic Outlook Report 2012 page 10 9 P a g e

10 from $8 million per month to $20 million in the same period. In May 2009, Malawi held the presidential and parliamentary elections in which the Democratic Progressive Party (DPP) won with a landslide victory but the elections forced the government to overspend and also to increase its domestic debt to enable it finance shortfalls in the electoral process 4. At the height of all these economic challenges instead of reducing public expenditure to build up foreign reserves to meet import cover demands, Malawi contracted a concessional loan to procure a presidential jet $22.1 million in In the course of 2009 to 2011, Malawi experienced heightened and sour relationship with most of its bilateral donors under the Common Approach to Budget Support (CABS) arrangement as well as the multilateral donors. As a result, donor aid inflows reduced and Extended Credit Facility ( ) which was key to unlocking aid financial flows, was suspended on account of Malawi s poor macro-economic performance. On the contrary, during the same period, Malawi s public debt grew tremendously the major reason being the quest by government to keep its machinery running (meeting recurrent costs) without donor support and also because of the failure of the budget to perform as expected in terms of revenue collection. History of Malawi s National Debt Post Independence to Debt Relief Malawi s debt history dates way back to the 1970s when the Malawi Congress Party led regime started to contract loans for development purposes and also to meet balance of payments due to the inability to compete on the international market to finance its current account. By 1978 the total debt stock reached US$586.1 million; in 1999 the debt stock stood at US$ 2.6 billion and by the time Malawi was benefiting from the Highly Indebted Poor Country (HIPC) Multilateral Debt Relief Initiative (MDRI) in 2005 the debt stock both public and publicly guaranteed debt (PPG) had reached US$2.97 billion 6. Out of this debt stock, 88.4% was owed to Multilateral Institutions (MI) (of which 73.6% was owed to IDA and 16.3% to the AfDB and the rest to various other MI institutions); another 11.5% was owed to Bilateral institutions (of which Japan was owed 56.7% followed by the UK 15.6 % and the rest to other bilateral creditors) while 0.1% was to commercial banks. BY the end of 2005, an analysis of the US$2.97 billion debt showed that close to 96.8% of the public debt was owed by the Central Government, while 2.6% was by the Reserve Bank of Malawi contracted to meet demands of the IMF Structural Adjustment Programmes (SAPs) and the 0.6% was owed by public corporations. 4 IMF Malawi Staff Report for the 2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility, Reference EBS/10/24, February IMF, Malawi Staff Report for the 2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility Debt Sustainability Analysis, February 2010, page 2 6 Ministry of Finance, Annual Debt and Aid Report, July 2005-June 2006, October 2006, Lilongwe page P a g e

11 Rationale for Contracting the Loans: 1964 to 2005 Most of the loans contracted by the Malawi Government from the early 70s were meant to overcome domestic shortages of savings and foreign exchange to meet some of Malawi s development needs especially in the areas of agriculture, health, education and infrastructure development. However, the fact that by 2005, Malawi was still underdeveloped in the aforementioned sectors raises the question as to whether the loans were indeed used for the intended purpose. As Table 2 below shows, most of the loans were contracted to meet balance of payments due to poor performance of export commodities on the international market following world price drops on raw agriculture products. Other loans were taken to meet increase in prices due to increase in commodities such as oil and also to service loans that were maturing. For instance, oil prices per barrel increased from $1.50 in 1950 to $2.70 in 1973 to $10 in 1974 and $32.50 in With poor performance of Malawi s export commodities, external borrowing for Malawi was the only option to meet the country s fuel demands. While world price commodities of imported goods were soaring, Malawi experienced other external shocks the worst being from 1992 to 1994 when there was a drought followed by flash floods which resulted in poor performance of the agriculture sector leading to severe food shortages which led to maize imports as the only alternative. Table 2: Disbursement of Outstanding Debt by Use of Funds (% of DOD) Use of Funds Balance of Payments Agriculture Transport Education & Training Health & Social Welfare Finance & Entrepreneurship Water & Irrigation Development Energy Industrial Development Rural & Urban Development Natural Resources Tourism & Hotel Management Other Total Source: Debt and Aid Division, Ministry of Finance Debt Contraction and Oversight Mechanism: 1964 to 2005 In their report, The Loan Contraction Process in Africa-Making Loans work for the poor: the Case of Malawi, AFRODAD report that 11 P a g e The causes of Africa s debt crisis are varied and complex. A lot of emphasis has been put on external factors to the negation or belittling of internal factors. Notwithstanding the external factors, it is clear that the causes of the debt crisis in many African countries are

12 also attributable to poor borrowing, debt policy and debt management factors. This problem is also a symptom of poor governance in which the underlying premises should be consensus oriented approval mechanisms, equity and inclusiveness in the use of scarce financial resources, effectiveness and efficiency in the use of financial resources, and accountability 7. The forgoing statement describes very well how the loans were contracted in the period after Independence to around 2003 before the Public Finance Act was enacted. During this period, the minister of Finance had the mandate to procure public loans on behalf of the government of Malawi while the National assembly s role was to approve the loan. The National assembly s approval did not entail debating the loan but rather giving it the go ahead only. There was no time in the history of Malawi that a loan was ever rejected on account of not being important. In fact the National Assembly even guaranteed loans taken by parastals such as ESCOM, Water Boards even some line ministries. This was made worse by the fact there was no time to consult the public at large on a particular loan since it was believed that Members of Parliament always spoke on behalf of the people and whatever they agreed would also be agreed by the public-this took away any accountability mechanisms to hold the MPs accountable on loan contraction. Post Debt Relief to 2012 In 2006, Malawi qualified for Debt Relief under the Highly Indebted Poor Country (HIPC) Multilateral Debt Relief Initiative (MDRI) in which Malawi s debt stock was reduced from US$ 2.97 billion to US$ million 8. Most of the debt cancelled, 88.4% was owed to the multilateral institutions, 11.5% to bilateral creditors while the 0.1% to commercial creditors was not cancelled. Out of the debt cancelled $1.9 billion owed IDA was reduced to $189 million while $429 million owed to AfDB was reduced to $52 million. Prior to the debt relief, the total debt stock had reached 150% of Malawi s GDP which entailed that the debt had reached unsustainable levels. After the debt relief, the Malawi government saved an average amount of $115 million annually from 2006 which they were to inject into national development programmes to grow the country s economy and reduce poverty especially to the three Protected Priority Expenditures (PPEs), Agriculture and Food Security, Health and Education. However, the results of the MDRI were short lived as the debt stock began to rise steadily from the year 2007 through to 2012 as Figure 1 below shows. As of June 2012, the total external debt external reached $ 1,108.0 billion. The major reason for the growth in debt stock was the inability of Malawi to compete at the international market, increase in transport and agriculture inputs.. 7 AFRODAD, The Loan Contraction Process in Africa-Making Loans work for the poor: the Case of Malawi, page 7 8 Annual Debt and Aid Report, (July 2005-June 2006), page P a g e

13 AMount, Million 3, , , , , , Debt Stock 2, , Figure 1: Total Public external debt stock Composition of the Public Debt As Figure 2 below shows, by June 2012, Malawi s total public debt reached $1,926 billion out of which $1,108 was external while $818 million was domestic debt as figure shows below. Extrnal Debt, $1, million, 58% Domestic Debt, $ million, 42% Figure 2: Composition of Malawi's Public debt Source: Ministry of Finance, Debt and Aid Management, Annual Debt Report 2012 The current external debt stock of $1,108 billion represents 381% increase from the $488 million remaining external debt stock after debt relief. Out of this debt stock $799 million is owed to multilateral creditors of which 37% is owed to IDA, 21% to ADF and 18% is to the IMF. This means that 56.7% of the external debt is owed to multilateral creditors while 42.3% is owed to bilateral creditors and less than 1% to commercial creditors. Compared to 2005, 88.4% of the total debt stock then was owed to multilateral creditors while, 11.5% to bilateral creditors and 0.1% to 13 P a g e

14 commercial banks. Malawi has maintained the same borrowing pattern but so far does not have any debts from commercial banks. PTA FUND <1% IMF 18% OPEC 4% NDF 3% SAUDI <1% IFAD 10% ADF 21% IDA 37% BADEA 4% EIB 3% Figure 3: Multilateral Debt by Creditor by June 2012 Composition of Malawi s Bilateral Debt As Figure 4 below shows, 53 % of Malawi s bilateral debt is owed to the People s Republic of China 25% is owed to India, 14% to Kuwait, 4% to Taiwan, 3% to France and the remaining 1% to Belgium. Unlike prior to Debt Cancellation in 2006, Malawi did not have any bilateral loans with the People s Republic of China but owed 4.5% of its Bilateral Debt then to Taiwan. Figure 4: Composition of Malawi's bilateral debt stock Source: Ministry of Finance, Annual Debt Report P a g e

15 Bilateral Debts with the People s Republic of China have increased mostly because of the large and fast disbursements that China makes to its partners. Loans from China have less conditionalities attached them in comparison to most other bilateral or multilateral donors. Most of these debts were taken in the period 2007 to 2011 when most of Malawi s bilateral donors had frozen financial support to the country. Composition of external debt by currency In terms of the currency composition, most of Malawi s external debt as given in Special Drawing Rights (SDR) which in itself is a composition of the United States Dollar, the British pound, the Euro and the Japanese Yen. But within the SDR, the US$ and the Euro dominate the share of the external debt the US$ with 40.4% share while the Euro has 26.6% share. See figure 5 for details Euro 26.6% KWD 3.8% Saudi riyal 0.1% USD 40.4% Yuan 14.8% JPY 8.5% GBP 5.8% Figure 5: External Debt by Currency Domestic Debt Portfolio Domestic Debt refers to loans that the government contracts from the local commercial banks or from the Central or Reserve Banks often times to meet its short to medium term needs like meeting recurrent costs or paying of another maturing loan. The government borrows this money by using Treasury Bills (TBs) most of the times, or it could use what is called Ways and Means Advances. The challenge with domestic loans compared to external loans is that domestic loans have shorter maturity period and often times carry very high interest rates above normal bank interest rates. As a result domestic borrowing creates problems for individuals and the private sector to access loans from the banks as they cannot manage to pay the interest rates charged to government. Despite that government has to pay high interest rates, it also reduces liquidity and ends up crowding out the private sector from the money market and affects productivity of the private sector. By June 2012, Malawi s domestic debt had reached MK billion ($818 million) due to the suspension of budget support by donors during the financial year which led to high borrowing by Government from the Reserve Bank of Malawi through the Ways and Means advances which were 15 P a g e

16 later on converted to Treasury bills 9. As Figure 6 below shows, Treasury Bills count for 80% of the total domestic debt followed by Reserve Bank Recapitalization. This implies government borrows most of the money it requires through that way as compared to all other forms. RBM Recapitalization 13% LRS 1% Promissory Note 1% Treasury Notes 5% Advances (Banks) 0% Ways and Means 0% Treasury Bills 80% Figure 6: Composition of the domestic debt Source: Debt and Aid Department, Annual Debt Report, 2012 Most of these loans went to oiling the government machinery to keep running after budgetary support and donor aid flows were reduced or cut completely. The bilateral donors under the CABS arrangement had agreed with the Malawi government to pursue a set of performance indicators under which the donors would disburse financial aid to the government. Some of these indicators are: Respect for human rights, democratic principles, sound macroeconomic management, good governance, including sound public financial management, accountability and effective anticorruption programmes, and the rule of law constitute the fundamental principles upon which budget support provision is anchored. Development Partners reminded the Government of Malawi (GoM) on the importance of adhering to the principles and expressed concern over infringement of some of the principles such as respect for minority rights and freedom of the press. Concerns regarding the rights of minorities, such as homosexuals, have also been raised by both Development Partners Parliaments and their citizenry 10. Because of the poor political governance and the perceived infringements of Human Rights, financial aid was suspended to Malawi except for those essential areas where the donors implemented direct support. 9 Annual Debt Report 2012, page Common Approach to Budget Support (CABS), March 2010 Review, page 3 16 P a g e

17 The IMF Loans: The Extended Credit Facilities (ECF) By July 2012, Malawi had accumulated $302 million in loans to the IMF under the ECF arrangement. The ECF credit facilities are short-term concessional loans, carrying zero per cent annual interest rate for any loan taken between 2008 until 2011 and thereafter the ECF loans attract a 0.25% interest rate per annum with repayments made semiannually, for maturity period varying between 5½ years up to 10 years after disbursement. 11 These are funded and managed by the Poverty Reduction and Growth Trust (PRGT). By 2008, the IMF had reserved $1.2 billion to support Low Income Countries (LICs) experiencing any exogenous shocks and require short term economic bailout while finding long lasting solutions to the external shocks by following IMF s macro-economic programme. The Trust Fund increased to $4.0 billion in 2010 and it is expected to rise to $17 billion by 2014, with the increasing demand for credit facility from poor countries. Most of the funds in the trust come from the IMF s internal resources 12, including repayments from older concessional loans. This Trust Fund will become the new tool that the IMF would use to provide loans to LICs to deal with economic shocks and therefore become a new interest area for policy makers, especially civil society, to investigate the new role that the IMF is assuming in the midst of global economic challenges and its continued imposition of neo liberal economic policies resisted in the Debt Campaign in the last two decades. Deducing from the build-up of the Trust fund, it could be deduced that the IMF foresees a scenario where many LICs would experience exogenous shocks that would disrupt their economic stability and growth and so the IMF is strategically positioning itself to provide short term loans to the already disadvantaged countries to cope with the external problems. The overall purpose of the ECF loans is to prevent Malawi and other LICs from slipping back from the IMF macro-economic policy programmes due to effects of the financial crisis and other related exogenous impacts. These ECF loans, are not holy, neither technically or necessarily intended as final definitive solutions to the financial crisis but as short term solutions while Malawi follows the ECF IMF recovery economic policy programme. The conditions in the ECF agreements and policy programme which the government of Malawi is expected to adhere to include the following elements: 1. To liberalize the foreign exchange regime as well as depreciating the local currency and the RBM having minimal intervention in matters of forex control by allowing commercial banks and reputable forex bureaus to operate without restraint in the sector 2. To pursue prudent fiscal and monetary policies, as reflected in the fiscal year 2009/10 budget and through restrained monetary aggregate growth, to contain aggregate demand and inflation pressures and shift demand toward domestic output 11 IMF, The Exogenous Shocks Facility-High Access Component (ESF-HAC), Fact Sheet March 2010 on page 12 Financing the Fund s concessional Lending to Low-Income Countries, International Monetary Fund Fact Sheet on page 17 P a g e

18 3. To create room in the budget for more social and pro-poor spending in line with the MGDS and improving the structure of the social safety net to protect poor households from shocks and policy adjustments, including exchange rate depreciation 4. Improve public financial management, tax administration, and the efficiency and solvency of public utilities, and enhance the business climate by expanding the capacity and quality of infrastructure, promoting investor access to finance, and reforming legal and regulatory frameworks governing financial supervision and the operation of other key economic activities On the other hand the conditions that the Malawi Government has committed itself to adhere to as part of the ECF agreement included the following elements: a. To provide a consistent and coherent macro-economic policy framework to underpin Malawi s development objectives more especially to preserve macro-economic stability while enhancing growth and poverty reduction. b. To move towards a market determined forex exchange rate by December 2011 and to rebuild international reserves c. To improve public financial management and monetary and fiscal transparency d. To support a private sector led growth 13. Malawi was IMF s ECF first beneficiary with the first loan of $77million (December December 2009) and a second more conventional three-year loan program worth $79.4 million under the Extended Credit Facility (formerly the Poverty Reduction & Growth Facility) for of which $52,050 million was disbursed and the rest withheld because Malawi went off track on the terms and conditionalities of the EFC during the Democratic Progressive Party led government. The latest one is $104 million for the period running 2012 to 2015 contracted under the People s Party led government. Full details of the active loans under the IMF ECF arrangement with the IMF are given in Table 3 below. Facility Table 3: Active Loans with the IMF Date of Arrangement Date of Expiration or Cancellation Amount Agreed XDR Extended Credit Facility 23-Jul Jul ,100 Extended Credit Facility 19-Feb Jul-12 52,050 Exogenous Shock Facility 3-Dec-08 2-Dec-09 52,050 Extended Credit Facility 5-Aug-05 4-Aug-08 48,580 Extended Credit Facility 21-Dec Dec-04 45, , Malawi: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, January 26, 2010, 18 P a g e

19 Source: Department of Debt and Aid, Ministry of Finance What triggered Malawi to contract the IMF ECF Loans The trigger of the IMF ECF is the effects and impact of the 2008 economic crises which began in the USA and spread through Europe and other parts of the world. The economic crisis was mostly caused by failures in market regulation in the United States, particularly in the banking and housing (mortgage) sectors. Although Malawi was not badly hit by the aftermath of the 2008 economic crisis because of abundant and cheaply priced food on the domestic market with exception of imported food stuffs, Malawi nevertheless experienced severe trade imbalance mostly because of poor tobacco sales and increased demand for imports but low foreign reserves. At the same time, Malawi experienced sharp increases its essential imports for instance, fuel costs shot from $8 million per month in 2007 to over $20 million per month in February 2008, fertilizer price increases from $750/metric to about $1,600 per metric tonne. As a result, Malawi was not able to meet its import covers, thereby disrupting trade in the private sector as business people were not able to access the required forex to procure or pay for services on time. It was during this time and after that the IMF started to implement the ECF facilities. Therefore the aftermath of the economic crisis and the need to address its effects once again motivated the G20 to legitimize the IMF s new role to save ailing economies of LICs such as Malawi just as it did during the Third World Debt Crises which ended in 2006 in which the IMF played a crucial role of a gate keeper to creditors and an advisor to debtor countries. Ironically, while the IMF was providing loans to Malawi and other LIC countries to mitigate the impacts of the aftermath of the 2008 Economic Crises, some rich countries such as the US and other European countries were providing bailout packages to their ailing economic sectors. Importance of IMF ECF Loans to Malawi The overall purpose of the ECF loans is to prevent Malawi and other LICs from slipping back from the IMF macro-economic policy programmes due to effects of the financial crisis and other related exogenous impacts. These ECF loans, are not holy, neither technically or necessarily intended as final definitive solutions to the financial crisis but as short term solutions while Malawi follows the ECF IMF recovery economic policy programme. The contraction of these loans is often times reached between the IMF mission and the government, in this case, the Malawi Government and there is limited consultation with the wider civil society 14. The IMF ECF loans to Malawi are a critical component to Malawi s economic well being and so worth the interest of stakeholders like civil society organizations and the private sector. Although the loans are in small amounts compared to other bilateral and multilateral loans and have 14 CSO, the National Assembly and private sector has been consulted on the ECF but it has not been to the required depth and often times at short notice. MEJN led CSO to meet the IMF mission on the ECF but the discussions were not rich as the meetings excluded government participation during such meetings. 19 P a g e

20 concessional interest arrangements, the policy package that comes with the loans is of vital importance and worth monitoring especially as regards to its effects on service provision and poverty reduction and also adherence by the Malawi government as tricking of foreign aid depends on much on the degree to which the government adheres to the terms of agreement. The package is neo-liberal, and the terms of agreement are felt to be generally pitched too high for a country like Malawi. For instance, due to the nature and fragility of the Malawi economy, the government of Malawi cannot do without domestic borrowing to meet some of its recurrent transactions and yet under the ECF, the government is expected to slow down on domestic borrowing. When this occurs, the government risks to be off track on the ECF agreements and risk sending panic signals that Malawi is not adhering to the IMF macro-economic policies. Disruption of the ECF arrangement makes the IMF to send panic signal that Malawi is not ready to adhere to macro-economic conditions and so not eligible to get funds from its partners. At any given moment, Malawi needs to have a running programme with the IMF for most of its bilateral and multilateral donors to give the required budgetary support and other forms of financial support which Malawi cannot do without due to its perennial budget deficit challenges. And without donor support Malawi cannot do without domestic borrowing as this is the only way to ensure smooth running of the government. It is therefore critical that the Malawi government adheres to good and sound macro-economic policies, economic and political governance and observance of human rights so that the government can still get the required financial resources to support budget deficit. It is also important that the Malawi government began to find concrete ways to begin to address its perennial trade deficit which creates shortfalls in balance of payment (BoP) in the current account for which Malawi contracts loans to finance the difference. One of such ways is to scale down on unnecessary public expenditure especially those that are politically motivated and outside the MGDS priorities. Government also needs to rationalize what it imports so that only commodities that Malawi needs to import that go towards production and export would have priority. Borrowing for consumption is not advisable, but Malawi has no choice under the circumstances it finds herself in. Chikavu Nyirenda, Economist, Daily Times, November 30 th 2012 Specifically on the ECF, there is need for Civil Society organizations to monitor Malawi s adherence levels to the credit facility as any disruption would also jeopardize aid flows on which most poor people in the country depend for their daily survival in health, agriculture and education. Loans Accrued Malawi s public debt increased tremendously between the years 2009 and 2012 as Annex 1 shows. The National Assembly approved 6 loans in 2010/11, 9 in 2011/2012 and 9 others in the 2012/2013 sittings. In the history of Malawi, this was only the time that the National Assembly ever approved such a number of financial bills in one sitting. 20 P a g e

21 The Loan Contraction process An analysis of the manner in which the loans were passed by the National Assembly indicates low levels of debate amongst the legislators, lack of detailed information on the actual loans and their purposes. Having talked to a few legislators, it was also pointed out that often times the financial bills are given to the legislators at very short notice so much so that the members of parliament hardly have time to consult and also understand the loan facility being presented to before them for approval. To some members of parliament, this was a clear example of politicization of the loans by the executive by keeping information and not following procedures such as providing adequate time to read and understand the Bill prior to the debate. This is against the spirit of the National Assembly Standing Order that stipulates that: The Member or Minister In Charge of a Bill shall publish the Bill in the Gazette and deliver to Clerk enough copies for all Members at least twenty-eight days before the Bill is First Read in the House 15. For instance, one legislator during discussion over a $52 million loan from IDA tabled in the National Assembly having no details on financial bill No 6/2011 said: Can we, for instance have those agreements presented to one of our Parliamentary Committees for example, Budget and Finance Committee? I am pointing this out, Mr. Speaker, because we have an interest to find out some of the possible interest repayments which will be factored in and any conditions which will be associated with any agreements which will be reached by the Minister of Finance and International Banks. Can we be assured, for instance, Mr. Speaker, through you that Malawian companies will be considered in the supply of the goods and services indicated in the bill? We would want this money to benefit our local businesses and of course in a fair and transparent manner. 16 Legal and Policy framework for loan contraction and monitoring Loan contraction process in Malawi is regulated by a legal and policy framework. Despite this, in general terms, the loan contraction process in Malawi remains weak, heavily driven by the executive and despite having a department for Debt and Aid with a clear Debt and Aid Policy ( ), the management of loans remains weak. Some of the major legal and policy instruments that regulate the process are as follows: The Republican Constitution stipulates that a loan may be raised by the government under the authority of an Act of Parliament and not otherwise National Assembly Standing Order, number 116 (1) 16 Hon UDF Spokesperson on Finance (Hon Muluzi)) (42 nd Session of National Assembly, January December Republican Constitution Section P a g e

22 And sub section 2 states that Parliament may, in the Act authorizing the raising of a loan or by any other Act, appropriate the proceeds of the loan for specific purposes and authorize the payment of such proceeds out if the Consolidated Fund for such purposes 18. The Public Finance Management Act (2003) stipulates that when an Act authorizes the borrowing of money and the Minister decides to raise a loan accordingly, the Cabinet shall determine the following matters (a) the price of the securities (if any); (b) the date or dates on which the money is to be repaid; (c) whether the Government will reserve the right to repay the loan before maturity, and if so, on what notice; (d) the rate or rates of interest to be paid on the amount borrowed; (e) the date or dates from which interest is to be computed and the half-yearly dates on which interest is to be paid; (f) the amount of the loan within the limit set by the authorizing Act; (g) whether or not the Minister may accept subscriptions in excess of the amount of the loan within the limit set by the authorizing Act; and (h) any other special conditions which shall apply to money borrowed in terms of the authorizing Act 19. The Public Audit Act (2003) gives powers to the Auditor General s Office created by the section 184 of the Republican Constitution to Undertake a programme of audits, and in accordance with section 7, 2 (of this Act), to examine transactions, books, and accounts and other public records of every Ministry statutory office, offices, agency, board, commission and bureau of Government, and public funds received by non-profit organizations including relevant international organizations 20. The Act further empowers the Auditor General to Monitor compliance, with requirements of any written law governing the management and control of public money and public resources 21, The three pieces of legislation give powers to the minister of finance to contract loans but at the same time they also control how such loans are to be contracted one of which is the role the legislature needs to play to make sure that only necessary loans are accrued. However in reality, the national assembly has never rejected any loan bill; worse still the national assembly through the Budget and Finance Committee, has never queried use of loan money on development projects despite that this is one its roles as an oversight mechanism clearly stipulated in Standing Order 159 (c) which states that: 18 Republican Constitution Section 180 subsection 2 19 Public Finance Management Act (2003), Part II, 2 20 Public Audit Act (2003), Section 6 21 Ibid Section 4 sub section (a) 22 P a g e

23 The functions of the Budget and Finance Committee shall include examining Government s domestic and International borrowing policies. Out of the loans approved this far there are several projects financed by the loans that have not been completed or have been abandoned and yet the people of Malawi will have to service the loans taken for these projects. The Budget and Finance Committee has never provided any report on the progress of some of these projects. Some of these are: Phalombe District Hospital Zomba Jali Road Zomba Jali Phalombe Road Zomba Jali Chitakale Road $7 million $7 million KWD 6 million $10 million Alignment of the Loans contracted to the MGDS and Poverty Reduction Out of the 49 loans active loans by July 2012, 34% of them were for the transport and infrastructure development, 17% for agriculture, 11% for the IMF-ECF policy programme, 8% to meet Balance of payment and Line of Credit, another 8% for Water Development, 6% for education, 6% for the health sector, another 6% for Rural Development and 2% guaranteed for the private sector (Air Malawi and ESCOM). In terms of alignment to meet and support MGDS priorities, 77% of the loans went to MGDS related priorities (Education, Health, Transport and Infrastructure Development, Rural Development, Agriculture and Water Development) while the remaining 23% were non MGDS activities or priorities. To a certain degree, it could be concluded that the loans contracted resonate with Malawi government s developmental and poverty reduction agenda. However, what is challenging is the implementation of the loans to meet the desired goal. For instance, some four loans as stipulated above have not gone to the intended purpose or have been abandoned for various reasons varying from corruption, soaring costs of meeting expenses to finalize the projects or political decisions made to divert the funds or project to other areas. Agriculture, 8, 17% IMF-ECF, 5, 11% Infrastructure dev, 16, 34% Health, 3, 6% Water Dev, 4, 8% BoP & Line of Credit, 4, 8% Parastatals, 2, 4% Education, 3, 6% Rural Dev, 3, 6% Figure 7: Allocation of loans per sector 23 P a g e