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Mateso Helix Kazembe

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Debt Relief
by Mateso Helix Kazembe   
Not "rated" by the Author.
Last edited: Thursday, January 22, 2009
Posted: Thursday, January 22, 2009

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Malawi has been granted Debt Relief: Should it Stop borrowing...

The celebrations that followed the news that the Breton Woods institutions (World Bank and IMF) had written off 90 percent of Malawi’s debt have not yet receded. The current administration has been applauded and parted on the back for a job well done despite some quarters indicating that there is nothing to celebrate about.

If we are to call a spade by its name, Malawi has had a bitter experience with servicing its foreign debt. Huge budget deficits, unstable interest rates and exchange rates as well as outflow of foreign reserves to creditors had been some of the evils that came with debt servicing. On a sad note, it was not the government alone that felt the debt-burden; Malawians also bore the burden of the debt among other things through increased tax rates. Fortunately, the government has been relieved of the burden of debt service and to avoid undergoing the same experiences, the government should stop borrowing.
In all sincerity, I do agree that debt is not necessarily bad if it does not harm the country and its citizens. As a matter of fact, every country on earth, even the USA, carries a national debt. However, it should not become an illusion that salvation of an economy can come from borrowing alone. After all, if we are to take the experience of Malawi, debt servicing has had a debilitating burden on the country’s citizens and has also been the worst nightmare Malawi has ever had. After years and years of borrowing, poverty is still rampant. A handsome fraction of Malawians, as well as living in absolute poverty, are without access to safe drinking water and primary health care. The gulf between the country’s poor and rich is so wide than before.
Also, history indicates that there has been no developing country in Africa that has implemented the IMF and World Bank loan facilities and in turn benefited from them. The experience for all of them has been a misery. Despite their reason of borrowing being to break the cycle of underdevelopment that existed, the result has been the opposite. This is clear testimony that Malawi should stop borrowing.
Without equivocation, the impact of debt for Malawi has had disastrous effects. Instead of the country investing, it was forced to generate surplus savings to be used for servicing the debt that had accumulated. When the debt was being serviced, payments had to be in foreign currency such as the US dollar or the British Pound. Now considering our economy and its soft (unstable) currency that fluctuate drastically and frequently, it took the government much more local currency to repay these creditors and as such it ended up paying more than five times the loan it was given in the first place. This resulted in debt service being an increasing function of the country’s output level. Some of the returns from investing in the domestic economy were effectively taxed away by existing foreign creditors and investment by both the domestic and foreign investors was discouraged.
Foreign debt brought Malawi more harm than good indeed. The country has been experiencing increasing budget deficits ever since it started taking loans from the World Bank and IMF. These budget deficits as a consequence has had a negative impact on public savings, which in turn drove up interest rates in the banking sector or crowded out the credit that could have been available for investment. This simply put was due to the fact that government had to borrow domestically in order to finance its budget deficits. The problem was, the government borrowed so much and created an excess demand for borrowed funds in the financial sector, which forced interest rates to rise. At high interest rates as was the case in the period 1996 to 2004; no investor was willing to borrow from the banks. This also explains why within this period a lot of companies were closed.
In addition, the accumulated debt drove government into a position where it owed more money to its creditors than it was able to pay back-a condition referred to as debt overhang. Because of this, the government was forced to channel resources meant for development to creditors. Also money that was used to service this excess debt could be spent on among a myriad things on medicine, clinics and prevention methods to help combat the AIDS pandemic. Debt overhang depressed Malawi’s economic growth and investment by increasing investors’ uncertainty about the actions the government was to take to meet its onerous debt service obligations. Through frequent changes in tax rates and money supply, macroeconomic instability was created in the economy and as such investors were reluctant to invest for fear of losing and remained on the sidelines.
Surprisingly, despite the objective of the World Bank and the IMF being that of aiding development around the world to combat poverty, it has turned out that these two institutions do not understand the real socioeconomic problems rocking a country and as such they usually advance wrong policies and impose them on governments thereby causing further problems. There is numerous problems to support this point. The notion of privatizing ADMARC and selling of maize reserves that resulted in untold hunger for the country in 2002 policies came from them. It has turned out that mostly they give erroneous advice. They are highly theoretical institutions in that many of their policies and conditions are based on theories based on a very simplified world. They fail to take into account the real needs of the poor people in the recipient countries. They have a rigid tendency of prescribing a uniform economic structural adjustment programme for all countries as a condition for loans without due regard to the pertinent differences in social, political, historical and economic conditions of the different countries to which the loans are extended. Now taking this into account, there is no reason why Malawi should keep on borrowing. These loans do us more harm than good.
In closing, the question that ought to be asked now is that has Malawi benefited from World Bank and IMF funding? The answer without hesitation is a clear no. Since then government has been relieved of its debt, I feel its time it stops borrowing to avoid exposing the economy to the very same problems as before.

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