How Did Malawi Accumulate External Debt

Further to investigation of how Malawi accumulated external debts amounting to $2.7 billion, without a corresponding growth in the economy, exports capability or poverty reduction this paper much of the borrowing contracted during 1973-82 was consumed by balance of payments deficits caused by the first and second round of the oil crises. The paper also finds that export commodity price deflation that started in the late 1970s and worsened during the 1980s also contributed to widening gaps in external liquidity and increasing demand for foreign borrowing. The paper also finds that Malawi suffered a heavy interest burden as a result of the policy of real interest rates adopted in the western world during the 1970 s to ensure that interest rates payable on loans sufficiently compensated lenders for the erosion to the real value of the original loan caused by inflation. The primary shock to world interest rates that had started with surging inflation in the US after 1976 was transmitted worldwide and as a result, the rate of interest on Malawi debt rose (by 373%) from only 1.9% in 1976 to more than 9% in 1981. To a significant degree, Malawi herself also takes a larger share of the blame. The government s policy of seeking comprehensive ownership of the means of production and also centralized management of the economy contributed to enhanced external debt accumulation to cover both heavy investment costs and persistent operating losses of public enterprises. The country s industrial policy favouring import substitution and a policy of overvalued exchange rates also raised appetite for importation and rapid depletion of foreign exchange. At the same time industrial and exchange policy suppressed expansion of manufactured exports which combined with restrictions on commodity exports to cause foreign exchange shortages. Exchange rate over-valuation also combined with interest rate repression to promote capital flight. The paper concludes that, while there is ample evidence to support the role of international prices of oil and macroeconomic policies of industrial countries as the precipitators of external debt, domestic economic policies in Malawi itself not only failed to minimize the debt problem, but contributed to its worsening. The fact that there is a fifty four-fold increase in debt stock while there has only been a less than tenfold expansion in national output exemplifies the fact that a large proportion of the resources were also not deployed towards productive uses.