THE EFFECT OF FOREIGN DEBT SERVICE ON PUBLIC INVESTMENT IN MALAWI
Date
2020-09-23
Authors
BOTHA, ROSEMARY
Journal Title
Journal ISSN
Volume Title
Publisher
UNIVERSITY OF 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.
Description
Public Finance