Malawi

Malawi, one of the world’s poorest countries, has benefited enormously from debt relief but its experience has shown that the existing official debt relief scheme led by the IMF and World Bank takes too long. Additionally the Southern African state was plunged into famine by policy conditions undemocratically imposed on the country in order to get debt relief. Malawi’s experience demonstrates how creditor’s control of debt relief schemes damages development. An independent international debt court is needed to decide the amount, timing and details of debt relief, rather than creditors using it to impose conditions.


Malawi’s accumulation of debt

Malawi gained independence from Britain in 1964. Malawi’s first president, Hastings Kamuzu Banda, was the only African ruler to establish diplomatic relations with the apartheid government of South Africa and was also a close ally of Western governments during the Cold War. Although the economy was boosted by trade with South Africa, large parts of the population did not profit from this growth.

Like many other highly indebted countries, Malawi accumulated much of its debts in the debt crisis of the 1970s and early 1980s. In the 1970s western banks and governments lent large amounts to developing countries due to low returns at home and to support allies during the cold war. Also, the price of Malawi’s imports such as oil rose whilst the value of crops like tobacco and tea, Malawi’s main exports, fell. Malawi’s debt rapidly increased when interest rates rose; from 1.9% in 1976 to more than 9% in 1981. 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.

The hard road to debt relief
On average over $100 million of debt repayments left Malawi every year through the 1980s and 1990s. However, Malawi’s debt to the rest of the world increased from 70 per cent of national income in 1980 to 150 per cent by 2000. Malawi’s economy stagnated, declining in per person terms between 1980 and 2000.

Despite being burdened by external debt, the debt relief Malawi sorely needed was not attained easily. 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 December 2000 but only had debts cancelled in 2006. In this time, the Southern African country paid $440 million in debt repayments, money which could have been spent on development. 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. This was scandalous for a country like Malawi, where 74% of the population were living on under $1 dollar a day.

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 ADMARC, 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 ADMARC, end agricultural subsidies and sell grain stocks in order to reduce fiscal 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.

To get debt relief the IMF also required Malawi to cut back on public spending. In situations when the Malawian government overspent, the IMF punished it by suspending further debt relief even when it had to borrow to import grain to feed its people during the most recent famine. The IMF even blamed Malawi for “overspending” in the years 2002 to 2004 although the Malawian government argued that this in large part was due to policy advice from its donors. Withholding debt relief just added to the Malawian government’s financial problems.

Malawi’s debt situation after HIPC
In 2006 Malawi was 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 3600 new teachers annually. There were many flaws in the HIPC process but debt relief has allowed Malawi to invest its own money in public services.

However, not all Malawi’s debt was cancelled; its debt to the rest of the world is now 25 per cent of national income and it still spends $30 million a year in debt repayments.

Debt cancellation has helped Malawi’s economy to grow by an average of 8.5 per cent a year between 2006 and 2009, compared to 2.5 per cent a year from 2002-2005. Malawi weathered the global recession relatively well. However loss of remittances and lower aid levels were a problem, so Malawi’s debt has increased since 2006; it is expected to reach 30 per cent of national income by 2011. The IMF defines this as a sustainable debt burden on the basis that it predicts Malawi will be able to keep up with repayments. However, they do not consider other factors such as the legitimacy of the debt and the government’s ability to provide for their citizens basic needs.