Revitalizing Malawi’s Economy: Driving Growth through Strategic SOE Reforms
Key Business Points
- Urgent reforms are needed to address the debt burdens of State-owned enterprises (SOEs) in Malawi, which pose a significant risk to the national budget and fiscal sustainability.
- The majority of SOEs rely on loans to cover operational costs, rather than investing in productive activities, indicating chronic cash flow problems and a need for strict guarantee criteria.
- To mitigate these risks, the government should implement profitability benchmarks, anti-corruption audits, and cost-cutting measures to reduce the reliance on state guarantees and promote commercial viability of SOEs.
The Economics Association of Malawi (Ecama) has warned that the debt burdens of State-owned enterprises (SOEs) in the country pose a significant risk to the national budget and fiscal sustainability. According to a credit risk assessment by the Ministry of Finance and Economic Affairs, the majority of SOEs that receive government guarantees and on-lending arrangements have limited debt payment capacity, exposing the government to higher fiscal costs and risks. Ecama president Bertha Bangara-Chikadza described the situation as a "fiscal timebomb" that requires urgent attention.
The assessment, which covered 10 SOEs between March 2022 and March 2024, revealed that most of these enterprises use loans to augment their working capital requirements, rather than investing in productive activities. This has led to chronic cash flow problems and a bailout culture, where the government is forced to absorb liabilities and divert funds from critical sectors. Bangara-Chikadza emphasized the need for strict guarantee criteria, profitability benchmarks, and anti-corruption audits to exclude high-risk SOEs and promote commercial viability.
The assessment identified Admarc Limited, Blantyre Water Board (BWB), Electricity Supply Corporation of Malawi (Escom), and Northern Region Water Board (NRWB) as high-risk entities, while Central Region Water Board (CRWB), National Oil Company of Malawi (Nocma), and Southern Region Water Board (SRWB) were classified as high-risk. On the other hand, Electricity Generation Company of Malawi (Egenco), Lilongwe Water Board (LWB), and Umodzi Holdings Company Limited (UHL) were deemed moderate-risk.
The present value of expected losses of the government from these entities, except UHL, was estimated at K222.9 billion as at March 2024, with challenges on debt repayment likely to continue in the coming years. Corporate governance expert Jimmy Lipunga attributed the dismal performance of some SOEs to a lack of clarity of mandate and emphasized the need for strong leadership that operates on a commercial basis. Secretary to the Treasury Betchani Tchereni conceded that the government remains exposed to potential fiscal shocks arising from poor financial performance of SOEs, particularly in sectors where service delivery is critical, but cost recovery is inadequate.
In Chichewa, this situation can be described as "kukwana kwa chipando", indicating a need for urgent action to prevent a crisis. Comptroller of Statutory Corporations Peter Simbani noted that while SOEs have been relying on government bailouts, this is not a sustainable solution in the long run, and the government has many other priorities requiring resources. As such, it is essential for the government to implement reforms that promote fiscal discipline and commercial viability of SOEs, ensuring that these entities contribute to the country’s economic growth and development, rather than posing a risk to national budget and fiscal sustainability. Zinthu zopusika, or things must change, to prevent a fiscal crisis and promote economic growth in Malawi.
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