THE EFFECT OF FOREIGN DEBT SERVICE ON PUBLIC INVESTMENT IN MALAWI

Abstract

Foreign debt has been one of the major ways through which Malawi has financed various development projects and fiscal deficits. Despite debt relief in 2006 through the HIPC and MDRI schemes, statistics show that the foreign debt stock has been on the increase, standing at 33% of GDP as of 2017 from 15% of GDP right after debt relief. High levels of debt stock subsequently imply high levels of debt service spread across the years to come. Various authors have argued that foreign debt service may have negative implications on an economy; however, their arguments were based on middle and high-income countries whose debt was not concessional. This study investigated if foreign debt service influenced the level of public investment in Malawi, a low-income country. The study used annual data from 1976 to 2015 and an ARDL model to estimate the relationship between public investment and foreign debt service along with other covariates. The results show that a statistically significant negative long-run relationship exists between foreign debt service and public investment in Malawi. This implies that, despite a large proportion of Malawi’s debt being concessional, its debt service crowds out initiatives to improve the country’s productive capacity through public investment.