Abstract

There has been a persisitent increase in the stock of Malawi government’s total public debt, rising from MK177.3 billion (28.6 % of nominal GDP) in 2007 to MK4,538.3 billion (69.7 percent of GDP) as at end of 2020. This raises concerns over both sustainability and possible crowding-out of the country’s private investment given a corresponding rise in government domestic debt. Fear over a possible crowding-out effect of domestic financing has been one of the guiding factors in the formulation of the country’s development strategies (such as the MGDS III, and the Malawi 2063). This paper sets out to investigate the extent to which this concern is justified in Malawi to promote evidence-based policy. The study also sets out to appreciate interest rates’ responsiveness to government domestic borrowing in Malawi. Employing the 1975-2019 time series in an Auto-Regressive Distributed Lag framework, this paper establishes evidence of the quantity channel of the crowding-out effect. This finding suggests adherence to strict fiscal discipline to prevent stifling of private investment from government domestic borrowing. The paper, however, fails to gather evidence for the indirect channel of the crowding-out effect, a finding that is being attributed to the imperfect structure of the country’s financial market, characterised by consumer (government) dominance.

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School	: School of Law, Economics and Government
Issued Date	: 2022

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