In the age-old question of what is important: achieving low inflation or high growth rates? The former has once again prevailed over the latter, confirming a right-ward policy lurch that includes a hawkish monetary policy stance, which is characterising and consuming the Joyce Banda administration.
It is also the policy question that has underpinned the decision to pay the more than K72 billion arrears to the private sector over a three to four-year period and not this fiscal year as planned.
For a self-styled free-market leaning administration, defaulting loans to the executers of free market principles—businesses—is as contradictory as they come.
But it is clear that government is broke; that the current fiscal mess is mostly a result of the administration’s own policies—a free market agenda that has undermined the national budget as devaluation and eventual floatation of the kwacha; the automatic fuel pricing mechanism, a self-induced galloping inflation and the resultant interest rates—have eroded the value of government’s domestic revenue just as much as they have wreaked similar havoc on household incomes.
To cover the fiscal gap, I suspect that Treasury has been pushing the Reserve Bank of Malawi (RBM) to print money to pay public bills—a luxury that ordinary folks cannot afford.
This money printing has contributed to high money supply growth, thereby helping to fuel inflation. But RBM seems to have told Treasury: Enough is enough—you cannot print away your inflationary fiscal failures.
The inflation-obsessed RBM may also have figured that the K72 billion arrears could only be paid through more printing and that dumping all this cash into the economy within 12 months at a time headline inflation is above 30 percent could be further inflationary, even hyperinflationary; hence, the attempt to spread the risk over a three to four-year period.
But as some leading commentators have said—including Malawi Confederation of Chambers of Commerce and Industry, Economics Association of Malawi and some business owners—postponing the payments for so long could hit growth hard as operational and investment funds, which should have been used to sustain and even expand businesses respectively, take a painful jab because the money—currently losing its value by the day—is locked up at Capital Hill earning zero income.
This may lead to company closures, especially small-scale enterprises, and result in massive retrenchments in an already shrinking labour market, thereby piling pressure on the social sector.
Ultimately, because the so-called engine of growth and goose is too starved to lay more eggs to nourish government and the rest of the economy, the nation could further lose weight—what economists call negative economic growth.
This may render the so-called Economic Recovery Plan an embarrassing, time-wasting and the in-your-face failure that most analysts said it would be. What that means to the political fortunes of a back-door ruling party is everybody’s guess.
A good friend of mine who works for a respected finance and investment advisory firm in Blantyre summarised for me on Wednesday the implications of spreading arrears payment over a four-year period:
—Prevent liquidity flush in the market: Spreading the repayments over a longer period of time will prevent a flush of liquidity in the market; hence, controlling inflationary pressure, depreciation of the kwacha and rises in interest rates. When there is high liquidity in the market, demand for goods and services (local and foreign) increases and ideally results in inflation and depreciation of the local currency. When there is high inflation, investors demand a higher return on their investments; hence, driving interest rates upwards. Authorities also respond by increasing interest rates to mop up liquidity and control the rising inflation. High inflation results in increased operating costs for companies and deteriorating living standards as the local population digs deeper into their pockets to purchase necessities. Spreading the repayments over a longer period of time will, therefore, prevent deteriorating living standards and help control operating costs.
—Lower investment and business activity: Business performance will be affected negatively by the extended repayment period as businesses will have to scale down on planned investments due to fewer funds available for investment in new projects or for expansion and other business activities. This will slow down private sector performance hence result in lower GDP growth.
—Slow or no improvement in unemployment levels: The private sector employs a substantial portion of the Malawi population. Low performance of the private sector resulting from the extended loan repayment will, therefore, result in slow or no improvement in unemployment levels. This will put further pressure on government to provide social services.
–Slow economic recovery: The recovery of the economy to a large extent depends on the performance of the private sector. The repayment of the debt over an extended period will negatively affect business activity hence slow down economic recovery.