T-notes dominate debt

Treasury notes (T-notes) are currently dominating Malawi’s domestic debt portfolio, claiming 89 percent of Malawi’s total portfolio, a latest public debt report shows.

The report-compiled by the Debt and Aid Management Division in the Ministry of Finance, as a primary agent of government responsible for contracting and managing the country’s public debt shows that short-term Treasury Bills (T-Bills) come second at 11 percent while less than one percent consist of promissory notes.

While T-bills mature in a year or less, T-notes have maturities from two to 10 years.

However, T-notes, though long-term in nature, are expensive instruments on the market as compared to short-term T-bills, a move which experts warn will see taxpayers paying for high interest payments for the instruments.

Our comparative analysis shows that as of end June 2019, total domestic public debt (DPD) amounted K1.97 trillion and of this domestic debt stock, 79 percent were T-notes, 21 percent were Treasury Bills (T-bills) and 1 percent were Promissory Notes.

This means that between June 2019 and June 2020, Treasury has increased the use of T-notes for borrowing domestically by 10 percentage points.

In recent years, government has been implementing a deliberate strategy to lengthen the maturity profile of domestic debt hence resulting in the shift of domestic debt holdings from T-bills towards T-notes.

As at end-June 2020, total public debt (TPD) stock amounted to K4.1 trillion or 65 percent of gross domestic product (GDP), up from K3.7 trillion or 65 percent of GDP, in June 2019.

This means debt and GDP grew in unison over the period, while the nominal change in TPD translates into an increase of 12 percent between the the period June 2019-June 2020.

At the current K2.4 trillion represents 33 percent of GDP.

But in an interview yesterday, market analyst Bond Mtembezeka, who is also research manager for Alliance Capital Limited Malawi, observed that the stock of debt has risen tremendously over the last three years, describing the situation as worrisome. He warned that such continued use of expensive instruments like T-notes will continue exert pressure on government’s interest rate obligation.

He said: “The danger of using such expensive instruments firstly is that interest repayments become large and that takes away resources that would have otherwise been deployed to other productive projects.

Secondly if an economy is not doing really well and we have expensive debt like that and there is no proper strategy to bring down debt levels, it of creates a vicious circle where more debt is incurred to pay off older debt.”

Already, interest payments for the 2020/2021 financial year have been projected at K376 billion which is 5.3 percent of GDP, representing an increase of 43.8 percent from the 2019/2020 preliminary outturn.

Foreign interest payments have been projected at K11.9 billion while domestic interest payments have been projected at K364.2 billion.

In terms of domestic debt by holder, the report shows that commercial banks overtook the RBM as the largest holder of domestic debt with holdings at 34 percent of Malawi’s domestic debt, followed by the RBM at 26 percent.

On one hand, the foreign sector also saw a large increase in its holdings, which amounted to 24 percent of the total while insurance companies and pension funds continue to play a minor but increasing role, with holdings of 9 percent and 4 percent, respectively.

In its latest publication on Malawi, the 11th Malawi Economic Monitor (MEM), World Bank observed that increasing domestic borrowing has contributed to a substantial increase in interest rates on government borrowing.

“Given significantly higher and increasing interest rates on T-notes—which currently range from 16 to 22 percent, compared against T-bills ranging from 8 to 13 percent—this will contribute to higher interest expenditure, with the government having stopped borrowing from the Reserve Bank of Malawi (RBM) since early 2018,” the bank said.

Treasury spokesperson Williams Banda recently told Business News that government has an operational debt management strategy which he said intends to restructure the country’s debt from short term to long-term.

“The strategy focuses on borrowing externally as opposed to internally since it is concessional and cheaper,” he said.