Malawi Government says it can only pay all suppliers their arrears, in excess of K72 billion (about $200 million), over a three to four-year period and not in the current fiscal year as most businesses expected.
But the move has distressed the private sector and some economists who have warned that government is shooting itself in the foot by suffocating the goose that lays golden eggs—businesses, which generate wealth, jobs and taxes that feed the nation. This comes at a time the rapidly depreciating kwacha, double digit inflation and interest rates are hurting enterprises by pushing up production costs and dampening consumer spending whose disposable income has been eroded.
By kicking the cane down the road, government may have eased its immediate budget pressures and spread inflation risks resulting from releasing these billions into the economy, but businesses say with their eye on the time value of money, they would rather be paid now than four years later when their money will have lost some of its potential earning capacity.
In an e-mailed response to a questionnaire, Ministry of Finance spokesperson Nations Msowoya confirmed the decision to spread the payment period.
He said: “Some [arrears] have indeed been settled, especially those that were denominated in foreign currency in their contracts so that they could be cleared to avoid them going up further in Malawi kwacha terms owing to the further movements in the exchange rate.
“Otherwise, as for the rest of arrears, once the audits are completed, a retirement plan will be developed to settle them over a three to four-year period owing to their magnitude.”
Msowoya said during the verification exercise, some arrears have been rejected due to lack of supporting documents.
For example, Msowoya said, auditing of arrears in the Malawi Police Service (MPS), which initially was said to owe suppliers about K10 billion (about $27.8 million), has only verified K8.4 billion (about $23.3 million) as deserving payment so far.
But the final overall arrears figure, Msowoya said, would be known at the end of the exercise.
National Audit Office (NAO) corporate communications officer Thomas Chafunya confirmed that the Auditor General was in the process of compiling the verification report.
In a follow-up interview on Wednesday, Msowoya said while the full-scale verification exercise was completed in January 2013 as planned, there are a few areas that are still being followed up to examine documents of some of the transactions.
‘Govt should be exemplary’
But Treasury’s move to spread the arrears payment has attracted sharp criticism from the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira.
In an interview on Monday, Kaferapanjira said government should be exemplary in honouring its commitments to suppliers as stipulated in the terms of sale.
He said: “MCCCI’s knee-jerk reaction to the news that government will pay its outstanding liabilities to local suppliers over a period of four years is one of indignation.
“This decision is, therefore, made at a wrong time when businesses need injection of cash to start ticking again. As an apex body of businesses, we would like to urge government to reconsider such a decision and ensure that businesses get paid earlier than undertaken.”
Kaferapanjira said the spreading of the payment to four years has significant impact on businesses, especially small-scale enterprises at a time of serious liquidity challenges on the market.
He also said businesses owed by government would be forced to pay high interest rates to commercial banks both on old loans and on new credit lines that they may have to get to fill the gap created by the unpaid arrears.
“In inflationary times such as we are going through, postponement of debt settlement also means reduction of the value of money when they will eventually be received in due course. The businesses will, therefore, end the losers since government is not going to compensate them for the loss of value of the money,” said Kaferapanjira.
He has since advised businesses to be careful in their dealings with government, especially when supplying services and products that would not help government generate resources from which to pay for such deals.
Economics Association of Malawi (Ecama) executive director Nelson Mkandawire said government was in a tight corner financially and that the decision to spread the payment of arrears over the four-year period signifies how difficult the situation was economically.
Said Mkandawire: “The coffers are not enough to cater for such unbudgeted bills. These bills have accumulated over time and cannot be paid at once. Government needs funds willy-nilly to sort out other pertinent issues such as shortage of drugs and food. However, four years could be too long.”
In December last year, Weekend Nation revealed that since the Joyce Banda administration’s free-market reforms kicked in—austerity budget, devaluation and floatation of the kwacha, reintroduction of the automatic pricing mechanism on fuel, higher interest rates and deregulation of water and electricity tariffs—at least 70 companies laid off workers over a seven-month period.
In notices filed with the Ministry of Labour informing them of retrenchments that were estimated to be in thousands, the firms cited the reforms as the major reason for their failure to cope with the policies which have resulted in increasing cost of doing business in Malawi.
Employers Consultative Association of Malawi (Ecam) executive director Beyani Munthali advised government to pay businesses to enable them to comply with regulations and contribute to the growth of the economy.
He said companies need money to cover costs of human resources, rentals, utilities and transport, among others.
Said Munthali: “Most of these businesses already struggle to cover costs [over the past two years]. Some of the downsizing that happened in industry, happened because companies could not meet their bottom lines.”
This week, some suppliers who did not want to be named because of their close business links with government cried foul over the payment mode, saying businesses were struggling to maintain workforce.
‘Govt in difficult position’
In an interview on Wednesday, Minister of Finance Dr Ken Lipenga admitted that the decision was likely to hurt some businesses, but said government was caught in a difficult situation.
He said the four-year payment plan was not permanent; that in the course of the recovery, if things improve as anticipated, it could be modified.
“If these policies that we are putting in place start bearing fruits, there will be changes. We are implementing a recovery budget and the beginning is always difficult. We needed to have a gradual plan and we should be able to make changes when things improve,” said Lipenga.
He also hinted that inflation fears also influenced the decision.
When presenting the National Budget last year, Lipenga estimated that government had accumulated arrears in excess of K72 billion.
“The arrears are mainly on account of parastatal organisations where loans and overdrafts accounted for about K37 billion; government departments have accumulated arrears of around K28.6 billion and arrears accumulated on pension contributions, salaries, utilities and subscriptions are estimated at K6.1 billion,” said Lipenga.
In his breakdown of the arrears, Lipenga said Smallholder Farmers Fertiliser Revolving Fund of Malawi (SFFRFM) has K16.2 billion, Air Malawi has K5 billion, Malawi Broadcasting Corporation has K5 billion and Admarc has K4.9 billion.
On government departments debts, Lipenga said the Malawi Police Service has K10 billion, Road Sector Projects has K8.3 billion, Central Medical Stores has K2 billion, Malawi Housing Corporation has K2.1 billion, Malawi Defence Force has K1.3 billion, Malawi Prison Service has K1.3 billion and Immigration Department has K1.2 billion.
Lipenga further said government arrears include rentals at K1.4 billion, the Office of the President and Cabinet has K590 million and the Electoral Commission has K407 million whereas the Ministry of Education salary arrears are K612 million and Compensation Fund has K627 million.
“The stock of our domestic debt is, therefore, expected to reach K192.37 billion at year end, representing 16 percent of GDP, just nine percentage points below the prudentially accepted limit,” said Lipenga.
This week, sources within the Ministry of Finance said another reason for the postponement is that government wants to ascertain that it got value for the money from the goods and services it procured.
To achieve this, said the source, there would be need for the Auditor General to conduct an investigative audit to verify the quantities supplied and prices quoted given that certain prices could have been inflated.