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Home Business Business News

Treasury to issue Development bond

by Steve Chilundu
10/12/2020
in Business News
5 min read
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Ministry of Finance has unveiled plans to issue the first-ever development bond with a maturity of 15 years in the first quarter (January to March) of next year.

The move, according to the ministry’s director of pension and financial sector policy Alfred Kutengule, is part of a continuous quest to improve its medium-term debt management strategy by ensuring that it is based on a sound analysis of cost and risk, taking into account macroeconomic and market constraints.

A development bond is a financial instrument issued by a government to provide an investment outlet for surplus resources available in the economy and also finance the capital expenditure of various developmental projects.

Over the years, Treasury has been facilitating the growth of the debt market by issuing government securities with a wider maturity range from 91 days to 10 years.

The development bond could be listed on the Malawi Stock Exchange

But analysts have argued that bonds and notes are a burden on taxpayers as government pays more from domestic borrowing to finance the budget.

In an interview on Monday in Lilongwe, Kutengule said Treasury wants to develop the domestic debt market by bringing in the development bond to allow people to invest their money.

He said: “We are about to issue a 15-year bond and we are in the planning phase with the Reserve Bank of Malawi. Probably in the next quarter, you should see something coming up.

“Crowding out the private sector comes in when government borrows more and it is an area where, as government, we want to reduce.”

Kutengule said people sometimes have idle money saved in banks because there are no lucrative investment opportunities; hence, government needs to broaden the market, for instance, for tobacco farmers and other players in the economy.

Speaking two weeks ago in Mangochi when he officially opened the Economics Association of Malawi (Ecama) Annual Lakeshore Conference, Vice-President Saulos Chilima hinted that government is exploring the scope for issuing a foreign currency denominated development bond or Euro-bond.

He observed that a favourable rating will enable the country and its companies to raise cheaper capital on the international financial market and send positive signals to foreign direct investors.

In an interview on Tuesday, financial market analyst Bond Mtembezeka, who is also research manager at Alliance Capital Limited, said issuance of a development bond will provide government with triple wins.

The wins, he said, include allowing the government to raise funds specifically for development projects allowing government to reorganise and restructure its debt as well as deepen the capital market should it be listed on the Malawi Stock Exchange (MSE).

Mtembezeka said countries world over have relied on development bonds for their projects be it agriculture, infrastructure and road projects,among others.

He emphasised that development bonds are  there to efficiently raise money specifically for development and not for consumption.

He said: “The critical issue is that the government should make sure that the proceeds really be used on development projects. In terms of risk, it is minimal as the government will always pay its debt.

“However, should it be listed, a cause for concern is that drawing from how most of the listed bonds have performed on the secondary market, there has been little movement in terms of trades.”

Mtembezeka said the challenges have made bonds illiquid and that the same should be seen on the new bond being equal.

Countries such as Zambia, Tanzania, Kenya and South Africa have been issuing long-term development bonds to raise funds for national developments, which have been largely oversubscribed.

For instance, early last year, Kenya government issued a development bond worth $2.1 billion in new Eurobond to be repaid in two tranches of seven-year and 12-year tenors that was oversubscribed 4.5 times, resulting in $9.5 billion.

Commenting on the issue, Ben Kaluwa, professor of economics at Chancellor college—a constituent college of the University of Malawi, on Tuesday said it was encouraging that government now wants to a try new direction with regard to the long-term development bond.

He noted, however, that being a new development on the financial market, after issuing short-term and expensive bonds, it will be interesting to see how the market will react.

Said Kaluwa: “Given the public resource constraints, it is a way of raising capital for the government just like what banks do on the stock market to raise capital.

“It would be important for the capital that will be realised to be spent on high-impact development projects to bring meaningful dividends in the economy.”

As at end June 2020, Malawi’s total public debt was recorded at K4.1 trillion, the majority of which, at 57.3 percent is domestic debt.

Experts have been expressing concern over domestic borrowing, which is said to be crowding out the private sector.

In the 2020/21 National Budget Statement, Minister of Finance Felix Mlusu said in order to repay the huge debt, Ministry of Finance is looking at a possibility of establishing a Debt Retirement Fund.

He said proceeds of the fund will be ring-fenced and entirely used to retire public debt until debt levels subside to within sustainable levels.

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