Malawi's Heavy Reliance on Foreign Debt Shows Negative Impact on Economic Growth, Study Finds
Macroeconomic factors affecting economic growth, study finds.
Lilongwe, Malawi - A recent study presented at the 1st Malawi Annual National Conference of Debt and Development has revealed that the country's heavy reliance on foreign debt is having a negative impact on its economic growth, writes Winston Mwale.
Conducted by Prof. Betchani Tchereni, T.J. Sekhampu, and R.F. Ndovi from the Malawi Polytechnic and North-West University, the research analysed time series data from 1975 to 2003, suggesting that borrowing for growth inducement may not be an effective strategy for the nation's economic development.
The study focused on various macroeconomic factors, including the inflation rate, exchange rate, prime lending rate, private and public investment, and the level of foreign debt, as the main variables affecting economic growth.
While proponents of foreign debt argue that it can break bottlenecks in the economy and lead to continued development, research indicates that foreign debt may instead impede growth in recipient countries.
"The results show a statistically insignificant and negative relationship between foreign debt and economic growth for the case of Malawi," stated Prof. Tchereni, one of the lead researchers, and keynote speaker at the event in Lilongwe.
"The country should strive to provide incentives to local manufacturers who would want to export rather than rely on borrowing for growth inducement."
Previous country-specific studies have also failed to provide conclusive and consistent results on the effectiveness of foreign debt on economic growth.
Hameed et al.'s study on Pakistan showed that external debt servicing had an adverse effect on labour and capital productivity, hampering economic growth.
Similarly, Panth et al.'s analysis of Jamaica's experience found a significant negative relationship between total public debt and productivity growth.
The research highlights the importance of a stable macroeconomic environment, low inflation, limited government reliance on funds from the banking system, a competitive exchange rate, and an open trading regime to raise economic growth prospects and contribute to poverty reduction.
Malawi has been a member of the Heavily Indebted Poor Countries (HIPC) Initiative, aimed at reducing debt and promoting economic growth in severely indebted nations.
However, the study urges the government to reduce its reliance on external debt for developmental purposes and instead focus on promoting private sector-led development and increasing exports.
The researchers also emphasised the need for caution in interpreting the relationship between public and private investment and economic growth.
Contrary to traditional economic theories, the study found a positive relationship between public investment and economic growth in Malawi and a negative relationship between private investment and growth.
While these results may differ from conventional beliefs, they provide valuable insights into the economic dynamics of Malawi and offer policy implications for the government's foreign borrowing strategy and fiscal policy.
Further research is needed to explore the complex interactions between foreign debt, investments, and economic growth in developing economies like Malawi.
The study's findings encourage policymakers in Malawi to focus on promoting a more balanced economic approach that supports private sector growth, fosters export-oriented industries, and reduces reliance on foreign debt to pave the way for sustained economic development and poverty reduction in the nation.
*Download the study below:
Big question requiring big answers. But it is really gov foreign debt that is the problem.