IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpif/0301006.html
   My bibliography  Save this paper

How Did Malawi Accumulate External Debt

Author

Listed:
  • P.Kalonga Stambuli

    (Surrey Institute of Global Economics Research)

Abstract

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.

Suggested Citation

  • P.Kalonga Stambuli, 2003. "How Did Malawi Accumulate External Debt," International Finance 0301006, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0301006
    Note: Type of Document - Tex/WordPerfect; prepared on IBM PC ; to print on HP; pages: 13 ; figures: included. published as SIGER working paper no 2002/101 and also as article in Malawi Business Monthly
    as

    Download full text from publisher

    File URL: http://econwpa.repec.org/eps/if/papers/0301/0301006.pdf
    Download Restriction: no

    File URL: http://econwpa.repec.org/eps/if/papers/0301/0301006.ps.gz
    Download Restriction: no

    File URL: http://econwpa.repec.org/eps/if/papers/0301/0301006.doc.gz
    Download Restriction: no

    More about this item

    Keywords

    external debt; malawi; balance of payments; debt relief; aid; african debt;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0301006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.