Economist Ben Kaluwa has described government’s gradual arrears settlement plan as another formula for bad debt, saying this will exert pressure on government on top of its expenditure requirement.
Kaluwa, who teaches economics at Chancellor College, a constituent college of the University of Malawi, was reacting to the 2016/17 Mid-Year Budget Review statement presented by Minister of Finance, Economic Planning and Develoopment Goodall Gondwe last Friday.
His reaction was based on the arrears settlement plan Gondwe outlined in the statement.
In the statement, Gondwe announced that high payments of interest on domestic debt is likely to continue for the next
three years as maturing zero coupon promissory notes are being converted into interest bearing securities due to market dynamics.
He explained that between the 2014/15 and 2015/16 financial years, it was possible to operate without relatively large interest payments, but since the promissory notes would be maturing over a period of three years, it is planned that on maturity, the promissory notes should be converted into interest bearing securities such as Treasury bills (T-bills).
Gondwe justified the action, saying if the payments of these were to be made from the budget that time, it would have paralysed government operations; hence, government agreed with creditors to accept payment in the form of promissory notes of one to three-year maturity.
But Kaluwa said this approach could only increase pressure on government, and as a result, lead to another pressure on taxes in which taxpayers will be forced to pay more to service the costs.
He said: “If you want to borrow more, you entice the people you are borrowing from to lend you the money. To entice them to lend you the money, you persuade them to release the amount you want by offering them higher yields.
“This is the scenario government is in and is a problem because the more it borrows the more interest is paid on the larger sums borrowed.”
Kaluwa said it likely that essential government expenditures will be forgone, adding that the situation has the potential to crowd out private sector, which is touted as the engine of economic growth.
Government arrears to private sector have since remained a huge concern to local businesses.Malawi Confederation of Chambers of Commerce and Industry (MCCCI)has argued that government’s failure to settle the arrears has hindered private sector growth.
In an earlier, MCCCI president Karl Chokhotho described government’s failure to settle the arrears, at about K103 billion, as ‘unfortunate’ and a blow to private sector development.
Government first announced its decision to pay arrears which were about K155 billion as of June 30 2014 through the issuance of zero coupons promissory notes in the 2015/16 fiscal years. n