Treasury faulted on domestic borrowing

Ministry of Finance has shifted the country’s domestic debt holdings from short-term Treasury bills (T-bills) to long-term but expensive Treasury notes (T-Notes), The Nation has established.

But analysts say the move will burden taxpayers with high interest payment for the instruments.

The move has also attracted criticism from the World Bank who observed that domestic debt stock has increased substantially in recent years through T-notes.

The Bretton Woods institution said the situation is crowding out private investment while exerting pressure on interest rates.

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

In an interview on Tuesday, market analyst Bond Mtembezeka, who is also research manager at Alliance Capital Limited, said the stock of debt has risen over the last three years, describing the situation as worrisome.

He suspected that such ‘debt re-profiling’ by Treasury through the issuance of debt instruments that mature in the longer term points to government’s lack of funds; hence, running away from issuing debt instruments that mature in the short-term.

Said Mtembezeka: “Longer term government debt has relatively more negative implications on the economy than shorter term. This is because the crowding out effect is extended and government has to pay hefty interest on repayments.

“The government has a huge task of bringing the economy into balance so that it collects more revenue and slowly re-profile back its debt to manageable levels.”

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

In its Malawi Economic Monitor (MEM) released last week, the World Bank said increasing domestic borrowing has contributed to substantial increase in interest rates on government borrowing.

Reads the report in part: “Given significantly higher and increasing interest rates on T-notes—which currently range from 16 percent to 22 percent compared to T-bills ranging from eight percent to 13 percent—this will contribute to higher interest expenditure, with the government having stopped borrowing from the Reserve Bank of Malawi since early 2018.”

 The bank said repeated high fiscal deficits in recent years have contributed to increased domestic debt stock.

 The consistent financing of such fiscal deficits by high cost domestic borrowing, said the World Bank, has led to a recent surge in domestic debt and this is expected to rise further.

The stock of domestic debt increased from 28.2 to 29.7 percent of gross domestic product (GDP) between 2018 and 2019, according to the World Bank figures.

However, Malawi’s stock of public debt remained at 59.4 percent of GDP over the same period due to a decline in the stock of external debt from 31.2 percent to 29.7 percent of GDP.

By December 2019, Capital Hill had paid interest on loans amounting to K118.5 billion, of which interest on external debt was only K7.7 billion with domestic debt at K110.8 billion.

In terms of nominal value, the country’s public debt stock is estimated to have climbed to over K3.7 trillion, a significant surge from K3.1 trillion recorded in 2018.

But in recent years, RBM has intensified the unwinding of its holdings of government securities in line with the Revised RBM Act of 2018.

This means that the central bank no longer converts ways and means cash advances to government into government securities—an arrangement prohibited by the new legislation—to stop financing of government’s budget deficit.

Ways and means advances is the temporary loan or overdraft facility provided by the central bank to government to enable the latter meet any temporary mismatch in the receipts and payments.

RBM’s share of total stock of T-notes fells from 76 percent to 39 percent between December 2017 and June 2019.

As it stands now, all net domestic financing by Treasury is being met by commercial banks and non-banks, with the International Monetary Fund three-year Extended Credit Facility arrangement with Malawi Government capping borrowing from RBM at zero.

Reacting to the concerns on Tuesday, Ministry of Finance spokesperson Williams Banda said government has an operational debt management strategy 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.

But a source at Treasury, who did not want to be named because he is not authorised to speak, described the shift to T-notes as a ‘deliberate move’, saying government had many short-term instruments such as T-bills in its portfolio; hence, opting for the long-term instrument as a way of balancing the portfolio.

“The proportion of T-bills to T-notes was higher and we had to issue more longer term instruments as a way of balancing the proportions of the two instruments in the portfolio,” said the source.