Malawi
- Total external debt:
The debt stock in 2006 was $850 million, down from $3.2 billion before multilateral debt cancellation - Total debt cancelled:
$3.2 billion was cancelled in 2006 - Total external debt payments:
Malawi still paid $90 million to rich countries in 2006 - Population:
13.6 million - Literacy rate:
64.1% - Average life expectancy:
46.3 years - HIV/AIDS infection rate:
14.1% - Public spending:
Malawi spent 9.6% of GDP on debt servicing and 4.6% of GDP on public health care in 2005 - Human Development Index ranking:
166 out of 177 countries in 2006
Where did debts come from?
Like many other highly indebted countries, Malawi accumulated much of its debts in the 1970s and early 1980s because of balance of payments problems caused by the first and second round of the oil crises, and export commodity price deflation starting in the 1970s. This period was also marked by a dramatic increase in interest rates, with interest on Malawi debt rising from 1.9% in 1976 to more than 9% in 1981. High-cost imports contributed to foreign exchange shortages that were resolved through more and more borrowing. Food shortages caused by severe drought and the arrival of over one million refugees from the Mozambique civil war meant further economic woes and accumulation of debt.
History
A former British colony, Malawi gained independence in 1964. The most influential political figure after independence was Hastings Kamuzu Banda, a doctor who had studied in the US and the UK. In 1971 he was elected “President for Life” and instituted an authoritarian one-party rule. He 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, boosted by trade with South Africa, was strong in the 1970s, large parts of the population did not profit from this growth. Banda himself owned 33 percent of all businesses.
In the early 1980s, the success of neighbouring socialist governments strengthened the Socialist League of Malawi, which created a guerrilla force, the Malawi Freedom Movement (MAFREMO). However, no change in the political structure of the country could be achieved until the 1990s. In 1992, news was received of the death of MAFREMO’s leader, who had been in prison since 1983 and allegedly died under torture. In order to keep popular indignation from turning violent, Banda held a referendum on the country’s political system, in which two thirds of the population voted for a multi-party system. In 1995, presidential elections were held. Bakili Muluzi, from the United Democratic Front, was elected President and Banda retired from political activity. Muluzi was re-elected as President in 1999 and was succeeded in 2004 by Bingu Wa Mutharika. Mutharika left the UDF in 2005 however, and continues as President and leader of the party he then established, the Democratic Progressive Party.
Challenges
Malawi faces allegations of corruption, a growing population, limited natural resources, and the challenges of resource management in the context of recurring droughts and environmental degradation. The country has also suffered from severe food shortages.
Malawi also faces a huge HIV/AIDS epidemic. According to the latest Human Development figures, and estimated 14.1% of the adult population is currently infected with HIV/AIDS. Besides the human tragedy that this represents, the economic effects of the spread of the disease are devastating. Malawi is not only losing a substantial part of its economically active population, but also has to divert scarce resources for the prevention and treatment of the disease.
Debt cancellation status
Malawi is officially classed as a low-income country by the World Bank. It became eligible for the Heavily Indebted Poor Countries (HIPC) initiative in December 2000. The World Bank predicted it would complete HIPC in 2002, but because of the many conditions it had to satisfy to receive debt relief, Malawi only completed in September 2006, having paid $473 million in debt repayments in the meantime. In completing the HIPC process Malawi also became eligible for further debt relief from the World Bank, the IMF and the African Development Fund under the Multilateral Debt Relief Initiative. In August 2006 there was an irrevocable cancellation of $3.19 billion of Malawi’s debts, which wiped out more than three-quarters of Malawi’s total debts. The World Bank’s preliminary figures suggest that Malawi’s debt service fell to $13.3 million in 2007, from $90 million in 2006.. This is freeing up a large amount of resources that can be invested in public services that would otherwise have been spent on debt repayments. It is scandalous that Malawi was forced to jump through so many hoops that it took some six years for this debt cancellation to be completed
Conditions
In order to complete the HIPC process and obtain debt relief, Malawi had to comply with certain conditions set by the IMF and the World Bank. These conditions included:
- The adoption of a full Poverty Reduction Strategy Paper (PRSP) prepared through a participatory process, and satisfactory progress in implementing and monitoring the PRSP for at least one year;
- Implementing of financial and economic policies supported by the IMF's Poverty Reduction and Growth Facility (PRGF);
- The improvement of public expenditure management and governance, through quarterly expenditure reporting on spending in high priority areas;
- The strengthening of land and credit markets;
- The implementation of specific reforms in the social sectors aimed at targeting safety net programs to protect the poorest, improving health care delivery, slowing the spread of HIV/AIDS, and raising the quality of education;
- The confirmation of the participation of other creditors in the debt relief operation.
Some of these conditions have been harmful, for example, when Malawi suffered a severe famine during 2003, exacerbated by the decision to sell grain reserves, it 'overspent' on its public spending targets - at least in part on importing grain to feed its people; the IMF punished Malawi by suspending the little debt relief it was receiving.
Other conditions may not have been harmful in themselves, but held up debt relief, and were not for the IMF to impose from Washington. It should be for countries themselves to determine their own policies and be accountable to their citizens, not to bureaucrats in international instiutions.
The single most pronounced condition attached to debt relief has been privatisation. This has caused agricultural markets to collapse due to the withdrawal of the state from commodity marketing, removal of farm subsidies and selling of pro-poor banks. The Malawi Commercial Bank was sold and closed many small accounts in the process, throwing hundreds of account holders out of the formal banking sector. The bank mainly used to service farmers and was specifically set up to provide easy access to loans for Malawian farmers.
What do campaigners say?
"Malawi wasn't given debt relief for reasons NGOs from Malawi thought were quite unfair. We missed out because donor countries did not meet their commitments to support the budget, so the IMF decided we were 'off-track'. That led to our government borrowing, to feed the people; it did not have a choice. That meant losing out. We are still waiting."
Collins Magalasi, Action Aid Malawi July 2006, before Malawi completed HIPC.
Last updated: August 2007
