Govt borrowing chokes businesses—World Bank
The World Bank has faulted government’s continued domestic borrowing, warning that it is crowding out the private sector and undermining job creation and economic growth prospects.
In its latest Malawi Economic Monitor released on Thursday in Lilongwe, the Bretton Woods institution said the Reserve Bank of Malawi’s tendency to finance fiscal deficits has weakened its role as a financial intermediary.
The report noted that government’s domestic borrowing has increased from 38 percent in 2016 to about 80 percent of total credit to the economy at the end of 2023.
This means that the private sector credit is hovering at around 20 percent, far below the 46 percent average for lower-income countries.
Reads the report in part: “Despite higher rates, there is limited scope to expand domestic financing and the share of outstanding debt held by the Reserve Bank of Malawi will likely increase.
“In this context, fiscal consolidation and successful external debt restructuring will be vital to restore fiscal and external sustainability.”
But the bank said credit to the agriculture sector, the country’s main driver of economic growth, increased by 51.7 percent from March 2023 to March 2024.
During the same period, community, social and personal services sector has also seen a significant increase in credit by 38.3 percent, according to the bank.
The World Bank has since warned that while this could support these sectors, it may be economically regressive if a large proportion of those resources are devoted to consumption.
In an interview yesterday, economic statistician Alick Nyasulu cautioned that if the government does not rein in its borrowing, the rising credit and the crowding out effect that follow will “stunt economic growth, increase tax burdens on the few businesses that are still operational and increase unemployment in the private sector as most events will be government-centred”.
In a separate interview, Mzuzu University economics lecturer Christopher Mbukwa warned that government’s extensive borrowing will likely raise the cost of borrowing, a development that could ultimately diminish the private sector’s demand for credit.
He said government can address the issue by tackling the problem at the source by addressing the underlying factors that create fiscal imbalances.
Mbukwa urged the government to reduce the number of parastatals that have duplicate functions and mandates and bring them under a single line ministry.
He said: “Second, oversight and governance institutions should be left to operate independently to decisively deal with fraud, corruption and overpricing of government procurement since this is one of the pathways in which most resources are lost.”
Economics Association of Malawi acting president Bertha Bangara-Chikadza said government should consider using tax adjustments to address existing fiscal challenges.
“The government can come up with interventions to tax the informal sector and cut public expenditure on non-essential projects to help reduce the fiscal deficit,” she said.
Urgent policy measures are needed to reduce government spending, increase revenue and create a favourable business climate to restore fiscal health and unleash private sector potential and failure to act could have severe economic repercussions, according to the World Bank.
Ministry of Finance and Economic Affairs figures show that out of K13.1 trillion debt as at December 31 2023, external debt accounted for about K7 trillion while domestic debt was recorded at K6.1 trillion.
This fiscal year, government plans to borrow K1.28 trillion domestically while K150 billion will be foreign borrowing.
