Malawi Government has since January 2013 borrowed over K30.24 billion (about $75.6m) locally through Treasury Bills (T-bills), choking the money market and causing a rise in commercial bank interest rates.
The government raises a major chunk of its finance through taxes, but it has opted to borrow locally postponing a possible rise in taxes and crowding out the private sector.
An analysis of T-bills issued between January and March, shows that government borrowed K2.71 billion (about $6.7m) in January, K17.75billion in February and K9.79 billion (about $44.3m) in March.
Due to the huge appetite for local borrowing, T-bills rates have risen from about 25 percent in January to 43 percent in March. This has also worsened the market liquidity and has driven commercial bank lending rates to over 40 percent causing more pain to borrowers.
The heavy government local borrowing is against government’s fiscal policy as outlined in the current budget which hinges on no-net domestic financing.
In an interview recently, a market analyst, James Chikavu Nyirenda, said government’s heavy borrowing is choking the already illiquid market, but argued there should be an underlying reason that is forcing government to borrow at such a prohibitive rate.
“Borrowing at that high rate means that government has a big appetite for borrowing. This certainly means that government has a financing gap which it is trying to bridge. Whatever the reason, government is certainly crowding out the private sector, thereby driving up interest rates,” said Nyirenda, adding that T-bills rates at 43 percent are lucrative to investors than bank deposits.
Ministry of Finance spokesperson Nations Msowoya said on Thursday government is heavily borrowing because it has less discretion on its expenditure.
“Most of the T-bills that have been issued are to settle previous debts that were incurred through ways and means a precursor to the T-bills. There are few options for sources of revenue such as donors and tax and government is currently struggling to balance revenue and expenditure and the only option is to borrow locally. We cannot cut some of the expenditure lines because some of them are contractual,” he said.
He, however, argued that government is still implementing an austerity budget, highlighting that ministries have cut some expenditure lines such as travel.
Msowoya further backed government’s recent decision to spend K1.6 billion (about $4m) on a new fleet of minister’s vehicle arguing they are more efficient than the current. He however noted that the timing of the expenditure might be wrong.