How Public Debt, Corruption, and Sectoral Performance Impact Malawi's Economic Growth - Key Findings from Groundbreaking Study

LILONGWE, Malawi-A study, titled "A Nexus Between Public Debt and Economic Growth in Malawi: A Public Sectoral Analysis from 1995 to 2021," has uncovered key findings on the relationship between public debt and sectoral performance in the country, writes Winston Mwale.

The study, presented during a public financial management symposium on Thursday, April 13, 2023, in Lilongwe, found that domestic debt, external debt, and a reduction in corruption levels had a positive impact on the health sector in the long run but had no significant effect on the performance of other sectors.

In the short run, domestic borrowing was noted to positively affect the performance of the construction, health, mining, and agricultural sectors.

However, the external debt had no significant effect on sectoral performance and actually negatively affected the health sector, according to the study.

Furthermore, the study revealed that in the short run, sector performance improved due to immediate investments realized from debt financing.

However, in the long run, due to unsustainable high debt and the accumulation of servicing levels financed through the national budget, sector performance deteriorated significantly.

The study also highlighted that corruption significantly affected the short-term growth and performance of several sectors in Malawi.

An increase in the corruption index, implying lower corruption levels, had a significant positive effect on the performance of the construction, health, education, and mining sectors in the country.

Looking at sectoral performance forecasts, the study found that the country is expected to experience oscillations in debt between 2030 and 2040, with upward and downward swings.

This is attributed to the fact that as the country repays some of its debt, it continues to borrow for new investments. However, the trends suggest that domestic borrowing will decrease by 2040, while external borrowing will increase significantly as the government continues to borrow externally to finance large-scale projects.

In terms of sectoral performance forecasts, the study projected growth in the education, energy, mining, agriculture, and construction sectors by 2040, despite the upward and downward movements in sectoral performance.

However, the health sector is expected to decline by 2040, exacerbating the challenges already faced in the sector, such as limited skilled personnel, unavailability of drugs and equipment, and insufficient infrastructure.

On a positive note, the study also revealed that the corruption perception index is expected to improve by 2040, indicating an improved corruption status for the country.

With various initiatives in place to address corruption in Malawi, it is anticipated that the country may make strides in combating corruption by 2040.

These findings provide valuable insights into the complex relationship between public debt, corruption, and sectoral performance in Malawi.

Policymakers and stakeholders can utilize these findings to inform decision-making and develop strategies aimed at fostering sustainable economic growth and addressing challenges in key sectors, particularly the health sector, to achieve long-term development goals.

The study recommends proper debt management techniques in the short run, especially when it comes to external debt in Malawi, to avoid crippling the growth of sectors.

The following mechanisms are suggested to manage debt: aiming for a zero-deficit budget to address persistent borrowing needs, borrowing for readily implementable projects to ease the burden and avoid misappropriation of funds, eliminating financing the resource pool with debt financing (borrowing for specific projects or agendas), and eliminating inefficiencies to reduce the cost of borrowing, such as laxity in terms of revenue collection and compliance with banking covenants.

In the short run, the Malawian government should aim at lowering debt accumulation to improve the performance of sectors.

Furthermore, efforts should be made to finance projects in the short run using domestically available resources to avoid derailing growth.

Efforts should also be made to fight corruption in all sectors, as it is noted from the findings that combating corruption significantly improves sector growth and performance in the short run.

The government should consider adopting financial technology for revenue collection, reinforcing the ethical code of conduct, and enforcing the provisions of the PFM Act.

The study acknowledges the collaboration and dedication of research teams from LUANAR, the Ministry of Finance, the Reserve Bank of Malawi, ECAMA, and OXFAM in producing the paper. Special appreciation is also given to the European Union delegation.