Treasury has for the past 18 months resorted to borrowing heavily from commercial banks and other non-bank institutions, shifting away from the Reserve Bank of Malawi (RBM), a latest World Bank report has said.
The Malawi Economic Monitor (MEM), a biannual publication of the World Bank that reviews Malawi’s recent economic developments and was launched in Lilongwe on Tuesday, observes that government net credit from banks has more than doubled to K403 million from K200 million in the first three quarters of the 2018/19 fiscal year ending June 30.
The report also reveals that net borrowing from non-bank sector has also increased by 62 percent over the same period from K418
million to K676 million.
Traditionally, as part of domestic borrowing, the central government has had insatiable appetite to borrow from RBM, a move economic analysts said has been fuelling inflation.
But presenting the findings of MEM, World Bank country economist Priscilla Kandoole observed that in recent months, government borrowing has continued to outpace private sector credit.
She said: “In the last 18 months, government’s borrowing has gradually transitioned a shift away from RBM towards commercial banks and non-banks,” she citing pension funds, insurance funds and discount houses.
Kandoole said while it was a good move for government to shift its focus from RBM as one key source of domestic financing, on the one hand, resorting to borrowing from non-banks could be inflationary through crowding out of the private sector.
The findings of the report show that while domestic debt stock is lower than external debt, interest burden is high.
The report shows that since 2013/14 financial year, government has been making high interest payments on domestic debt, reaching 20 percent of total government revenue.
It says government faces increasing exposure to high domestic debts which it says is as a result of high perpetual budget deficits.
“This presents a significant risk as deficit is expected to be largely financed by high cost domestic borrowing,” reads the report.
In his speech during the report’s launch, World Bank country manager Greg Toulmin said Treasury needs to enhance fiscal discipline to reduce high levels of borrowing to maintain fiscal and debt sustainability.
He said that Malawi has experienced a sharp increase in public debt since benefiting from the Heavily Indebted Poor Country (Hipc) and Multilateral debt relief initiatives in 2006.
“High fiscal deficits have increasingly been financed by high-cost domestic debt,” said Toulmin.
As a result, he said the situation has resulted into high debt servicing costs, leaving less room for growth-enhancing expenditures.
Former Reserve Bank of Malawi (RBM) governor Charles Chuka, who was one of the discussants during the launch, stressed the need for government to strengthen debt management approaches by putting limits on cumulative debts and not just current debt