Treasury borrowing faces fresh scrutiny
Malawi’s public sector debt to the banking system has risen by K154.7 billion to K4.8 trillion or 25 percent of the national gross domestic product year-on-year from June 2023 to June 2024, published Reserve Bank of Malawi (RBM) data shows.
According to the June 2024 Monthly Economic Report, commercial banks’ holding of Treasury notes rose by K355.4 billion to K1.8 trillion, a development that potentially increases their exposure to government debt.
Additionally, direct advances to government departments have jumped by K26.5 billion to K103.9 billion. While the banks have reduced their holdings of Treasury bills by K244.6 billion to K540.8 billion, the overall trend is one of increased lending to the government.
The central bank has also contributed to the government’s debt burden with data showing that net credit to the central government has surged by K137.3 billion to K2.5 trillion due to a drawdown of government deposits and an increase in RBM’s holdings of Treasury bills.
In an interview, Scotland-based Malawian economist Velli Nyirongo cautioned that borrowing increases demand for credit and pushes up interest rates.
“Additionally, financing through increased money supply has been fuelling inflation, necessitating tighter monetary policy from RBM,” he said in a WhatsApp response.
“This scenario leads to higher borrowing costs for the private sector, potentially crowding out private investment and dampening economic growth.”
Nyirongo further cautioned that the dependence on sovereign debt threatens the liquidity of commercial banks, making them more vulnerable to fiscal shocks and potentially reducing their lending to the private sector.
On his part, market analyst Bond Mtembezeka said banks may prioritise government debt over private sector lending, thereby stifling economic growth.
“Banks may also face liquidity challenges if they hold large amounts of government debt, making it difficult to meet private sector credit demands.”
To rectify the situation, Mtembezeka, who is also Malawi country manager for Business Partners International, urged the government to diversify its financing sources to ease pressure on the commercial banks and the central bank, noting that Malawi’s current debt trajectory is “unsustainable”.
