EXPERT WARNS AGAINST DOMESTIC DEBT TRAP
Malawi Government will likely be caught up in a debt burden trap and further destabilise the financial market if it continues to borrow to service existing debt, a financial expert has warned.
The caution by the analyst comes against the backdrop of a Reserve Bank of Malawi (RBM) monthly economic review for March 2015, which indicates government net borrowing from the commercial banks rose to K123.9 billion (US$278.4 million) during the first quarter (January to March) of 2015 from K76.6 billion (US$172.1 million) recorded in the preceding quarter.
The outturn, according to the report, was mainly explained by issuance of K47.2 billion (US$106.1 million) treasury bills (T-bills) and a depletion of K159.2 million (US$357 753) government deposits held in commercial banks.
NBM Capital Markets Limited assistant investment analyst Paul Mojoo said this in response to an e-mailed questionnaire in view of the report which indicates that government is still borrowing heavily from the domestic market.
He said increased government borrowing crowds out private borrowers from the credit market, a market that is already not borrower friendly, adding that consistent government borrowing depress credit to private sector.
“The cost of servicing public debt is already high and the 3.6 times from K2.7 billion (US$6.1 million) to K9.9 billion (US$22.2 million) increase of interest payments in March 2015 alone is one of the reasons that the government ran a deficit that required further borrowing to cover,” he said.
In contrast, gross credit to the private sector from the banking system declined by K2.2 billion to K298.3 billion at the end of the first quarter of 2015.
“Notable repayments were made by the individuals and households sector as well as the real estate sector amounting to K4.4 billion and K2.3 billion, respectively,” said the report.
Meanwhile, the banking system’s outstanding claims on the commercial and industrial sector and the foreign sector, according to the report, increased by respective amounts of K3.1 billion and K2.5 billion during the quarter under review, partly due to borrowing for working capital.
In terms of sectoral distribution of the outstanding stock of private sector credit, the wholesale and retail sector accounted for 23.7 percent followed by the agriculture sector at 23.3 percent, and the manufacturing sector at 13.5 percent.
In the 2015/16 budget statement, Minister of Finance, Economic Planning and Development Goodall Gondwe said in the fiscal year, interest payments on domestic debt rose from the approved amount of K80.4 billion to K105.9 billion, largely because of a higher level of domestic borrowing.
But he said the domestic debt stock was drastically reduced as a percentage of gross domestic product (GDP) from the 2013/14 figure of 19.5 percent to 15.9 percent in 2014/15 fiscal year.
