by Mary Ongore
Photo: ILP's Mary Ongore addressing delegates at the national advocacy session in Lilongwe, Malawi
Executive Summary
The decision to take on debt for a country can have far reaching implications. While the monies received can assist in financing infrastructure projects, they also come with the corresponding obligation to repay the debt. These obligations become particularly onerous when countries take on unsustainable debt and are unable to repay the debt as it falls due. The result of taking on unsustainable debt is often the taking on of austerity measures and the reduction of expenditure on the provision of public services. Given the challenges that this poses to the lives of citizens of a country, it is critical that a robust legal and institutional framework exists that ensures that debt remains at a sustainable level. This blog looks at the legal and institutional framework of taking on and managing debt in Malawi, and highlights some of the gaps. Ultimately, it calls for more transparency, increased accountability and public participation.
Introduction
“Kukopa ni harusi, kulipa ni matanga!” (Kiswahili saying: borrowing is a wedding, repaying debt is a funeral!).
While the exact origin of this saying is unknown, it is evident from this wisdom that the forefathers of this Bantu language were aware of the challenges of unrestrained borrowing on debtors. Taking on an inordinate amount of debt has significant negative effects on citizens within the states that borrow. Although states often need to borrow money to finance public spending, this debt can become unsustainable when states are unable to meet their debt servicing obligations as they fall due. Various legislative safeguards exist when it comes to taking on new debt and managing existing debt. However, for these to be effective, they must be rigorously implemented.
As part of a project with AFRODAD, ILP worked with pro bono lawyers to conduct a study analysing the legal and institutional framework of taking on and managing sovereign debt in Malawi, together with the Malawi Economic Justice Network (MEJN).
ILP is a globally focused, UK-based NGO that promotes economic and environmental justice. We do so by mobilising pro bono legal experts to provide expertise to civil society, governments, and communities. We partner with some of the world's top law firms to provide expert legal and technical support, at no cost, to organisations working to advance economic and environmental justice.
ILP presented the findings of the Malawi study during a validation and national advocacy session held in Lilongwe, Malawi in July 2024, which I was delighted to lead. Participants included parliamentarians, academics, CSOs and lawyers based in Malawi. The validation session served as a final review of the study and allowed for the presentation of the findings with the aim of getting feedback from the participants.
Malawi was chosen as a case study country as it is in debt distress. With a debt-to-GDP ratio of 75%, it faces a huge debt service burden which erodes the limited fiscal space for the financing of public services. This is particularly challenging for the country given that as much as 70% of their population is living below the poverty line and 22% of the population faces hunger.
Due to corruption scandals in 2013, Malawi has faced dwindling external financing. This has forced the government to recourse to high-cost domestic borrowing to finance fiscal deficits. In addition, Malawi’s debt burdens have also increased due to external shocks such as the COVID-19 pandemic, flooding, cyclones, drought, and heightened costs of fertilizer due to the Ukraine war.
Given the challenges Malawi faces when taking on and managing debt, this study was conducted at an opportune time, since the findings of the study can be used to raise awareness among the public, to influence public policy and bring about positive change in Malawi.
Findings of the Study
The study highlighted the need for transparency when taking on debt and managing existing debt. In addition to ensuring public trust and good governance, this will also enhance relations with international partners and build the confidence necessary to attract foreign direct investment on a broader scale.
In addition, while Malawi’s Medium-Term Debt Management Strategy and Annual Borrowing Plan are published and available for all to see, they are highly summarised. Individual debts therefore are not fully visible to the public. In addition, both documents fail to identify the amount and nature of guarantees related to state owned enterprises. As a result, they fail to paint the full picture of the amount of debt that the Government is potentially liable to pay. Furthermore, although the Debt Management Strategy and Annual Borrowing Plan are required to be reviewed by the Cabinet, there is a lack of clarity on the process by which they should be reviewed, and there is no requirement for the publication of any Cabinet discussions. In addition, there are no metrics against which the reviewed documents should be measured. As such, there is no effective oversight at the Cabinet level and no opportunity for members of the public to participate in their evaluation.
Finally, there is no requirement for any type of independent audit of the information disclosed in the Debt Management Strategy and Annual Borrowing Plan, which means that there is no way to verify their accuracy. Thus, despite the existence of a mid-term and annual borrowing plan, these do not effectively paint a clear picture of the amount of existing debt.
Inputs from the Validation Session
One of the key conclusions from the validation session was that legislative requirements are not being met. For instance, participants fed back that the Reserve Bank of Malawi was not being consulted prior to the contraction of debt as required by law. In addition, public interest issues had not been considered when agreeing loans, and MPs often engage in a rubber-stamping exercise rather than properly interrogating the loans and their possible implications for the country and its citizens.
Participants also highlighted the lack of transparency in reaching loan agreements which gives opportunities for brokers and intermediaries to facilitate the loan acquisition. These people are often paid off to acquire “free money” which is siphoned off and unfortunately ends up forming part of Malawi’s public debt.
Representatives from CSOs highlighted that politicians often did not listen to their concerns and instead preferred to engage with people who do not challenge the status quo. There was also no public participation when taking on public debt.
Another concern raised was that Parliament is only involved when taking on new debt. However, it plays no role during the management of existing debt. This means that there are no effective checks and balances when it comes to the management of existing debt given that citizen representatives are not involved. Thus, there are weak safeguards to ensure debt is sustainable.
Recommendations
The validation session led to several very useful recommendations being made. These are set out below:
There is a need for sufficient public participation when taking on debt and CSOs must also be involved in the process;
Building capacity within the Budget & Finance (Parliamentary) Committee is crucial to ensure Parliament is not simply conducting a rubber-stamping exercise;
The Auditor General should take an active role in and robustly challenge money bills;
In order to prevent corruption and siphoning off of monies borrowed to private individuals, debt borrowed should be clearly linked to designated projects and their performance tracked to ensure accountability;
The Debt Management Strategy and Annual Borrowing Plan need to report the link between the money borrowed, who the specific creditors are and the underlying projects that the debt was incurred for;
The Debt Management Strategy and Annual Management Plan need to be independently verified and key criteria need to be introduced for the review and approval by the Cabinet;
Material departures from the debt taken on and to be serviced set out in the Debt Management Strategy and Annual Borrowing Plan need to be approved by Parliament;
Sanctions need to be introduced for non-compliance with relevant legislation especially where there are material departures from the Annual Borrowing Plan and/or Debt Management Strategy;
Clarity is needed around what debt contraction would be in the public interest and who should be responsible for evaluating this. It should also be linked to Malawi 2063 (Malawi’s development plan);
Loans should be contracted for specified purposes and there needs to be budget tracking to minimise misuse of funds;
There needs to be clarification on who is responsible for enforcing the Plan and CSOs need to be involved in enforcing it;
There also needs to be a clear outline of the amount of debt that lenders such as the IMF have given, as well as conditionalities imposed.
Conclusion
It is imperative that the existing legislative structures be used effectively to ensure that the process of taking on and managing sovereign debt is transparent. This will ensure that this debt benefits the citizens of Malawi. If the recommendations identified above are adopted, it is much more likely that the vision of the development agenda as set out in Malawi 2063 and the Sustainable Development Goals would be realised.
Mary Ongore is Legal Manager of our Sustainable Finance Programme. Mary is a Kenyan legal professional with extensive experience in taxation including research on international tax, fiscal policy, illicit financial flows and human rights aspects of tax policy. For more information or to support ILP’s work, visit our website or contact us.