RBM amended Act to curb borrowing

Plans are underway to lower the limit of Reserve Bank of Malawi (RBM) advances to Malawi Government to 10 percent of budget revenue from the current 25 percent, in a desperate attempt to address central government’s over-borrowing.

Treasury, smarting from accusations of insatiable appetite for domestic borrowing, sees the move as a show of commitment to prudent fiscal operations, and to also contain inflation and building reserves.

Secretary to Treasury Newby Kumwembe earlier admitted that in the first quarter [July to September] of this fiscal year [2013/14], government over-borrowed by about K59 billion (about $147m)

However, the authorities have taken steps to address fiscal malfeasance with an 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.

“The authorities indicated that such a further change would need to be coordinated with changes to Public Finance Act which contains limits on total government borrowing,” said the report.

The IMF staff encouraged the Malawi authorities to carry the necessary coordination needed to achieve the objective of limiting RBM lending to government.

Meanwhile, government has since instructed the central bank to stop automatic conversion of overdrafts from the RBM and should facilitate more prompt corrective action.

But the amendment, which could probably be discussed in the next sitting of Parliament, does not cover other forms of RBM lending to government.

It also does not plug the loophole in the RBM Act that allows advances to be routinely converted to Treasury Bills (T-bills) when the limit is reached.

Treasury spokesperson Nations Msowoya could not be reached yesterday to comment if at all the amended Act will be discussed in the next sitting in April.

But he earlier told Business News that government h as put in place measures to control domestic borrowing.

“We agreed with the International Monetary Fund (IMF) that government should implement a tight fiscal stance. We have so far reduced domestic borrowing and we will only be retiring existing debt without incurring new,” he said.

The amendment legislation, according to Treasury officials, is a continuation of the process of harmonising legislation of the Sadc central banks and strengthening the RBM’s corporate governance.

The aims of the current amendments, the officials says, are therefore to give more independence to the central bank, ensuring that international account and auditing practices are used and reducing the amount of money that government can borrow from the central bank.

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.

The purpose of such rules, according to financial experts, is to correct distortive incentives in policy making and contain pressures to overspend, to ensure fiscal responsibility and debt sustainability.