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K2.4 trillion debt worries experts ahead of budget review

 

The Budget and Finance Committee Committee of Parliament says government should urgently tame the runaway borrowing  which has ballooned to about K2.4 trillion.

Budget and Finance Committee chairperson Rhino Chiphiko was commenting on the major red flags during the first six months of implementing the K1.3 trillion 2017/18 National Budget which Parliament is set to start reviewing in Lilongwe this afternoon.

Minister of Finance, Economic Planning and Development Goodall Gondwe is next week Friday expected to table a statement summarising observations on the economic trends and activities that prevailed during the first half of the budget implementation.

Parliament will then consider and adopt revised estimates on the recurrent and development accounts of the budget.

Chiphiko: It is draining resources

In his reaction, Chiphiko said: “My biggest worry is how the government is harbouring an unprecedented debt of around K2.4 trillion, which is almost double our national budget.”

He said the domestic debt has largely been fuelled by the government’s use of promissory notes that, apparently, attract some contractors to initially fund major projects, usually in the construction sector, on their own before they recoup their investments.

Chiphiko said when the contractors finally demand their payments, the interest and other add-ons tend to be exorbitant, saying a project that may have been estimated at K39 billion could later see the government paying as much as K80 billion.

He said: “This trend of issuing out-of-budget zero coupon bonds [the promissory notes] became popular some three years ago. Unfortunately, this is continuing and it is draining the country’s cash flow.

“This will kill this country economically. It means we will not have a balanced budget for a long time and it will mean us committing all our future revenue to only paying interest rates to our debts.”

Records seen by The Nation yesterday  indicate that by December last year, public debt stood at K2.4 trillion, whereby K1.4 trillion was external debt and K1.2 trillion was domestic debt.

Financial experts contend that when domestic debt reaches 21percent, it is above the sustainability threshold and the Malawi situation is ascribed to the government’s appetite to borrow for consumption purposes.

Chiphiko said commercial banks, insurance companies and others, who lend money to the government are currently holding back because it is becoming apparent that the government debt level is becoming unsustainable.

He said: “This is evident by the mere fact that on two occasions that government issued Treasury Bills recently, about 30 percent of the bills were not bought.”

Chiphiko said if better financial management discipline is not applied quickly, Malawi should not expect donors and the international community to look kindly at it, as was the case in 2006 when the country was forgiven its foreign debt under the enhanced Heavily Indebted Poor Countries (Hipc) initiative.

But the legislator was quick to pat the government on the back for major improvements in fiscal discipline in recent years, as reflected by inflation lowering to 7.1 percent, the bank rate reducing to 16 percent and Malawi having a remarkable import cover of three months.

In his comments, University of Malawi’s Chancellor College economics professor Ben Kaluwa agreed with Chiphiko that too much domestic borrowing is harming Malawi’s economy.

However, he said in most cases, the government needed to service long-standing debts it had with clients from the private sector. Clearing the debts is essential because, that way, the private sector service providers are now empowered to have a positive impact on the economy, he said.

But Kaluwa said the government has been driving itself in the financial mire by some questionable, politically-driven subsidies it has maintained but with poor targeting and impact results sometimes.

He mentioned the Decent and Affordable Housing Subsidy Programme—widely known as the Cement and Malata Subsidy, tertiary education and how government resources such as vehicle fleets are boarded off on give-away terms.

“But, going forward, the government should be more careful in casting clean and straight-forward budgets, where the revenue base is broadened. People who are willing to pay for the currently free services should be allowed to do so,” said Kaluwa. n

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