Malawi's economists press for fiscal discipline and forex reform as debt nears 91% of GDP

Malawi's economists are urging the government to rein in spending and overhaul its management of foreign exchange, as a severe dollar shortage collides with public debt of about K24tn, equivalent to roughly 91 per cent of gross domestic product.

The Economics Association of Malawi (Ecama) says fiscal discipline and foreign exchange reform are among the country's most stubborn policy problems.

Bertha Bangara-Chikadza, Ecama's president and an economics lecturer at the University of Malawi, listed the priorities: reducing the fiscal deficit, holding the line on expenditure, improving forex management and exchange-rate flexibility, and tackling distortions in the parallel market, where dollars trade at a premium to the official rate.

Her prescription for the public finances was a tight fiscal stance, with firmer control over spending, curbs on domestic borrowing and stronger accountability at parastatals and other state-owned enterprises.

Heavy domestic borrowing by the government tends to crowd out private-sector lending, and loss-making state entities are a recurring drain on the budget.

She was candid that the trade-offs are real.

"Contractionary fiscal policy, for example, could help the government reduce its deficit, but adversely affect businesses that depend heavily on public procurement," Ms Bangara-Chikadza said.

In an economy where government is a major customer for local firms, austerity risks deepening the very slowdown that the forex squeeze has already begun to cause.

The debt figure sharpens the dilemma. At about 91 per cent of GDP, Malawi has little room to borrow its way through the shortage of hard currency, while a more flexible exchange rate would narrow the gap with the parallel market but push up the cost of imported fuel, medicines and inputs.