Governing on promises

Cash-squeezed Capital Hill is increasingly relying on promissory notes to settle arrears with suppliers and bail out statutory bodies, a development economic and business captains warn could kill businesses and spark a price crisis.

The Nation has established, for example, that Treasury has issued promissory notes worth about K1 billion to clear controversial debts at Malawi Electoral Commission (MEC).

Treasury has done the same for some commercial, but underperforming parastatals, including those embroiled in grand-scale misprocurement.

Despite heaping the liabilities on the shoulders of citizens, government has not come out clear on a tool for ensuring accountability in the defaulting institutions and how the taxpayer will reclaim the money.

But the use of promissory notes—a signed paper promising to pay a stated sum to a bearer at a specified time that suppliers can present, say to a bank and get cash—means that companies lose out money in discounts as financial houses deduct between 25 percent and 30 percent of the promised amount.

To compensate for the anticipated loss on the promissory notes, sources in the private sector and in government say suppliers are now inflating prices, which further pushes up prices and could end up crowding out households and firms that cannot compete with government.

Economics professor Ben Kaluwa has since warned government on the use of promissory notes to settle arrears owed to suppliers, saying the system is punishing the private sector and driving up already high lending rates.

Responding to The Nation inquiry on the implications of increasing use of promissory notes—an instrument for paying with no ready cash presented to commercial banks for pay on behalf of the debtor—Kaluwa said in general terms, the arrangement is not good for the economy and the private sector.

Kaluwa, who teaches economics at the University of Malawi’s (Unima) Chancellor College, said the private sector is losing out as there is delayed payment, among other reasons.

He said: “This is not good for the private sector, which is regarded as the engine for growth. It will have negative impact on the growth of the economy.”

Kaluwa said the way out for government is to moderate its expenditure and scale back operations.

Government owes suppliers of goods and services about K155 billion, according to Malawi Confederation of Chambers of Commerce and Industry (MCCCI).

The Nation has also established that commercial banks forecast the value and rates of the promissory notes at the maturity time and discount 30 percent from the encashed value.

A banker said the maturity dates vary depending on the type of contract ranging from one to five years.

Said the banker: “Banks are in business, as such, they deduct 30 percent for taking the risk to make a payment at a later date when government, as the drawer of the notes, has some funds.”

Reacting to the new payment system, MCCCI president Karl Chokotho warned that the system will kill the private sector because promissory notes discounts are huge.

He described the system as an abuse of the private sector and unfair practice by government.

Said Chokotho: “How do you procure services when you do not have money to pay for them?”

He said the private sector arrears will likely increase as there are fresh figures of huge amounts of money dating back to 2013, making the private sector unhealthy.

“The private sector will die. It is losing 30 percent in promissory notes discounts. Thirty percent is huge amount of money. Unfortunately government does not share the concern,” said Chokotho.

On speculation that some players in the private sector were inflating costs in anticipation of bank deductions because of the new paying system, the MCCCI president said government uses a tender service procuring system to identify suppliers; hence, it is at its discretion to choose the best bidders.

He feared that a dead private sector would mean reduced revenue for government, leading to failure in implementation of development projects, among others.

Ministry of Finance, Economic Planning and Development spokesperson Nations Msowoya yesterday said government has started paying MEC suppliers using promissory notes.

Minister of Finance, Economic Planning and Development Goodall Gondwe is on record as having said that government did not pay the majority of the arrears because they lacked proper documentation.

In April last year, promissory notes hit headlines after government issued the instruments to bail out 12 individuals and private businesses who owed the then wholly State-owned Malawi Savings Bank (MSB) about K6.1 billion.

However, to date the special purpose recovery vehicle established to reclaim the toxic assets of MSB is yet to collect a penny because some of the cases are pending in court.