Malawi Government’s domestic debt stock has hit K115 billion, according to new Finance and Economic Planning Minister Goodall Gondwe, triggered largely by excessive borrowing that has been widespread during the Joyce Banda rule.
University of Malawi’s Chancellor College economics professor Ben Kaluwa, while observing that not every debt is bad, told Business Newsyesterday that such a huge domestic debt stock—about 18 percent of the total 2013/14 budget of K638 billion—meant that the private sector was denied money for investment and production.
“This means that the private sector was crowded out from using the money. The private sector could have better used the money for investment and production,” he suggested, stressing that the current level is not sustainable.
The new finance minister said this week, that the previous government engaged in heavy borrowing apparently to fund operations in the wake of donor aid freeze.
Analysts believe the domestic debt stock could have risen that high due to the freezing of $150 million in budgetary support by the Common Approach to Budget Support (Cabs) donors last November because of the looting of public funds at Capital Hill dubbed Cashgate.
Over the past few months, government has been heavily borrowing on the market through Treasury Bills (T-bills), pushing up the yields on all the three tenors, 91 days, 182 days and 364 days and in turn triggering an increase in commercial bank interest rates to above 40 percent.
In the minutes of the second Monetary Policy Committee (MPC) meeting in April, the Reserve Bank of Malawi (RBM) reported that in the quarter ended March 2014, government net domestic borrowing was reduced by K7 billion, representing a substantial turnaround in fiscal operations.
But the committee projected that this position would reverse because of uncertainty in donor funding and likely financing pressures associated with May 20 Tripartite Elections.
Secretary to Treasury Newby Kumwembe earlier admitted that in the first quarter (July—September) of this fiscal year, government over-borrowed by about K59 billion.
To limit domestic borrowing, plans are currently underway to lower the limit of RBM advances to government to 10 percent of budget revenue from the current 25 percent, in a desperate attempt to address central government’s over-borrowing.
Treasury sees the move as a show of commitment to prudent fiscal operations, and to also contain inflation and building reserves.
Authorities have taken steps to address fiscal malfeasance with the expected amendment of the RBM Act already submitted to Parliament to limit RBM advances to government, according to the International Monetary Fund (IMF) February 2014 Malawi Country Report.
Many countries in the world are using such legislation, commonly referred to as fiscal rules, which imposes long lasting constraint on fiscal policy through numerical limits on budgetary aggregates.