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Malawi

Debt statistics 2017

Overall international debt burden (% of GDP)40
Government payments on foreign debt (% of revenue)14.0
Government foreign debt (% of GDP)31
Private foreign debt (% of GDP)26
IMF and World Bank debt cancellation ($ billions)3
Country case studiesYes

Country case study

The IMF and World Bank set conditions on Malawi to receive debt relief including removing support and subsidies for farmers. As well as delaying debt relief, these conditions contributed to food crises in 2001/02 and 2004/05. Having qualified for debt relief, Malawi reintroduced much of the government support which had been removed, increasing harvests.

Malawi gained independence from Britain in 1964. In the 1970s western banks, government and institutions all lent large amounts to the country. At the start of the 1980s, the debt rapidly increased when interest rates rose, whilst the price of exports such as tobacco and tea fell. Food shortages caused by severe drought and the arrival of over one million refugees from the civil war in Mozambique meant further economic woes and accumulation of debt.

On average over $100 million of debt payments left Malawi every year through the 1980s and 1990s. Burdened by debt and austerity, the economy declined in per person terms between 1980 and 2000, whilst the country’s debt to the rest of the world doubled as a share of national income.

In the 1990s creditor governments through the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative with the promise of reducing debts. Malawi entered the HIPC initiative in 2000 but only had debts cancelled in 2006. In this time, the Southern African country paid $440 million in debt repayments. In 2005, the year before it had some debt cancelled, Malawi was spending 9.6% of national income on debt servicing and only 4.6% on public health care.

One reason Malawi took so long to get debt relief was due to the strict conditions for getting debt cancellation. Malawi was forced to privatise state owned enterprises. This included the agricultural marketing board, which had stored crops and provided subsidised fertiliser to small farmers.

The IMF and World Bank pushed the Malawian government to privatise, end agricultural subsidies and sell grain stocks in order to reduce government deficits and because they were seen as a ‘distortion of trade’. In 2001/02, and again in 2004/05, the removal of support for farmers and selling of grain stocks combined with drought to create serious food crises. Thousands of people died and millions suffered. Drought had also reduced the harvest in 1991/1992 but the resulting famine was much less severe, due to greater government intervention. In the early 2000s, food shortages forced the government to import maize at a cost much greater than the original agricultural subsidies.

Conditions of debt relief such as the ending of support for agriculture were opposed by Malawian civil society organisations such as the Malawi Economic Justice Network.

In the wake of the food crises, in the mid-2000s a new Malawian government stood-up to the IMF and World Bank and re-introduced fertiliser and seed subsidies. This helped to create bumper harvests, and Malawi became a net exporter of maize to other countries in southern Africa. However, the World Bank country director in Malawi criticised the policy as being “better for food security but worse for market development”. According to academic Arindam Banerjee the government saved almost twice the amount it spent on agricultural subsidies as a result of not having to import food.

In 2006 Malawi was finally judged to have met the IMF and World Bank conditions and got $2.3 billion of debt cancelled from the World Bank and IMF as well as rich country governments. Malawi’s annual debt repayments fell by around $40 million a year.

This has allowed the country to increase social spending significantly. Debt cancellation meant Malawi was able to abolish primary school fees, as were Tanzania and Uganda when they received debt relief through HIPC. This helped get well over a million more children into school in each of the countries. After receiving debt relief, Malawi also started training 3,600 new teachers annually.

Debt cancellation also created more willingness for lenders to give loans to Malawi again now that the debt was lower. Between 2011 and 2016 Malawi’s government external debt increased from $0.9 billion to $1.9 billion. As of 2016, three-quarters of this was owed to multilateral institutions – primarily the World Bank, African Development Bank and IMF – and one-quarter to other governments, primarily China and India.

From the start of 2015, Malawi once again began to be hit by a fall in the price of commodity exports, and an increasing value internationally of the US dollar. The Malawian Kwacha fell in value by 35% against the dollar between the start of 2015 and mid-2016, increasing the relative size of Malawi’s external debts. In 2016, Malawi’s external debt payments are expected to be $200 million, over 18% of government revenue. As a very impoverished country with few ways of earning money from the rest of the world, Malawi needed grants for poverty reduction and economic development, rather than loans from institutions such as the World Bank and African Development Bank, and governments such as China and India.

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