In their respective front page stories on Tuesday, March 16th 2021, the country’s two daily newspapers The Nation and The Daily Times carried gloomy headlines that should worry us all as the developments have an implication of future wellbeing.
In its main story, The Nation screamed ‘Treasury borrows K630bn in 6 months: Public debt stock hits K4.8 trillion’ while The Daily Times said ‘Malawi in pension arrears crisis’.
So what? One may be tempted to ask. Well, the excessive borrowing, regardless of how the funds were used, is equal to burdening future generations. I appreciate that the borrowing was largely necessitated by declining domestic revenue collections due to the impact of the Covid-19 pandemic, but still we cannot take away the fact that as a country we are living a borrowed life.
The fresh borrowing, largely to finance the record budget deficit now pegged at K810 billion, is worrisome despite being within the recommended debt to gross domestic product (GDP) ratios. The public debt has increased from K4.13 trillion recorded in June 2020 and it is equivalent to two national budgets.
In case of pensions, it is supposed to be a retirement savings plan where one saves part of their income today to use on a rainy day, especially during the “sunset” years of life. Now, by having companies not remitting up to K26 billion, it is a huge loss for the pension policyholders as they won’t be able to reap bonuses and other interest that accrues on such savings.
Granted, most employers are reeling under the impact of the Covid-19 pandemic which has slowed down economic activity, but then the workers were “deducted”, at least on paper, their contributions. Perhaps it is time pension funds devised a mechanism to cover for the losses by the policyholders as the default is beyond their control.
I recall President Lazarus Chakwera’s maiden State of the Nation Address (Sona) delivered in Parliament on September 4 in which he expressed worry that within a year the country’s debt rose by a whopping K450 billion.
It is worth noting that borrowing is not bad as long as it adds value and the debt can be settled within the agreed period without driving the borrower into liquidation and utter ruin.
But for a country that in 2006 had 90 percent or $2.6 billion of its $3 billion foreign debt written off by international lenders under the Highly Indebted Poor Countries (Hipc) initiative, it is very worrying and alarming that we are drifting back to heavy indebtedness.
Every time one borrows, there is an interest charged to cover the risk of lending as the money borrowed belongs to other investors. The President indicated that interest charges for the debt are in the region of 36.6 percent of the gross domestic product (GDP) or the country’s total wealth. What is scary if this isn’t?
To paint a vivid picture of this debt situation, let me quote the President: “In other words, for every K100 we generate [as a country], K36.60 is used to pay interest on the debt that we have accumulated, excluding repayment of actual loan.”
On pensions, the trend of growing arrears is giving many employees a raw deal in as far as pensions are concerned as the direct effect of non-remittance of pension contributions by an employer is that it eats into potential savings for life in retirement. Put crudely, regardless of circumstances, non-remittance of pension deductions is like “stealing from employees”.
The Pension Act of 2010 mandates employers to deduct from gross salary five percent and remit to pension fund managers alongside the employer’s contribution of 10 percent. This makes it 15 percent.
The operating environment is harsh, but the sooner Plan Bs to move forward are devised the better.