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Home Columns Business Unpacked

Mortgaging the future of Malawi

by Aubrey Mchulu
21/06/2018
in Business Unpacked
3 min read
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Revelations that Malawi’s domestic debt is projected to rise by 473.6 percent because government plans to borrow about K176.1 billion in the new financial year starting on July 1 should worry many a patriotic citizen.

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From the onset, I must say that borrowing in itself is not bad. What matters most is the reason for borrowing. Financial analysts and economists recommend borrowing for investment rather than mere consumption.

In a January 12 2012 Business Unpacked article under the headline ‘Why are we borrowing more?’, I stated that the country was slowly drifting to back to heavy indebtedness then five years after international lenders wrote off 90 percent of its $3 billion foreign debt under the Highly Indebted Poor Countries (Hipc) initiative.

Borrowing is good if it adds value and the debt can be settled within the agreed time with the lender without driving the borrower into liquidation and utter ruin.

Interest rates or the price of money also matter when making decisions to borrow. Thus, it is worrisome when the government borrows heavily on the domestic scene as the development pushes up lending rates, making the cost of borrowing not affordable for the private sector and individuals alike.

Implications of the high cost of borrowing are visible for all to see in the country. One just has to check the newspapers which are awash with advertisements from commercial banks offering for sale houses, vehicles and other assets recovered from borrowers who ostensibly failed to meet their obligations to repay.

Reserve Bank of Malawi (RBM) figures show that as of December 2017, our country’s public debt stood at K2.4 trillion, representing K1.4 trillion external debt and K1.2 trillion domestic debt.

In the 10 years to December 2017, Malawi Government has spent K123 billion in servicing debt—money that is require to cover the repayment of interest and principal on debt for the period. Out of the amount, K52 billion covered interest payments.

Poor performance of revenues and grants and the K45 billion bailout of State produce trader Agricultural Development and Marketing Corporation (Admarc) have been cited as major contributing factors. In other words, Treasury resorted to borrowing on the domestic market to keep things moving amid continued donor support drought for the budget.

In the proposed K1.5 trillion National Budget for 2018/19, termed a ‘campaign budget’ with 2019 Tripartite Elections looming, government projects increased spending in areas seen largely as bent at wooing votes. These include the increase in the number of Farm Input Subsidy Programme (Fisp) beneficiaries, the stated youth tree planting programmes and internships, among others.

It smacks of gross irresponsibility for government to borrow simply to throw a bait to potential voters in an election year threw doubling of honoraria for chiefs and swelling the number of Fisp beneficiaries from 900 000 to between one million and 1.5 million. Ironically, many times, through Fisp, taxpayers have shouldered the burden of investing in both production and consumption as, in years of food shortages, it is usually the majority of same Fisp beneficiaries who are left in need of food aid.

Everytime eyebrows are raised about increased borrowing, Treasury counter-argues that the economy is “within the acceptable levels” to sustain the debt. But it is also worth accepting that before reaching the pre-2006 unsustainable debt levels, the country was also in the current position. The prevailing positive ratios are merely statistics worked out using a formula which can change any time.

I have asked this question before and will repeat it today: Why are we borrowing more? If we are not careful, we run the risk of mortgaging this country and its people to Shylocks who will one day demand their pound of flesh.

It is important that government learns to live within its means. Some say you should cut your cloth according to your size. This can be achieved through efficiency by reducing wastage and leakages rampant in the public sector expenditure chain.

Forget about one of the popular local sayings and tunes: “Musaope ngongole, mukaopa muzagona ndi njala! [Borrow or risk starving].” It helps to spend what you earn, not predominantly living a borrowed life for generations.

 

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