Malawi to default domestic debt

What the Eurozone and the IMF have frantically tried to avoid in Greece and other debt-ridden EU members, is about to happen in Malawi if Parliament approves the revised budget.

 

Government is proposing to defer the repayment of K15 billion (about $90m) or 1.5 percent of gross domestic product (GDP) in domestic debts to the next fiscal year—a virtual default on sovereign debt.

According to Wikipedia, in finance, default occurs when a debtor has not met his or her legal obligations as per the debt contract; for example, if he or she has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. This can occur with all debt obligations including bonds, mortgages, loans and promissory notes.

The default, said Chancellor College economics professor Ben Kaluwa in an interview on Wednesday, signals that the Malawi economy is sailing in troubled waters.

According to the 2011/12 Mid-Year Budget Review statement, government, reeling from budget support freeze, initially planned to use programme grants to repay domestic debt.

The budgetary support drought, said Finance and Development Planning Minister Dr Ken Lipenga in his maiden Mid-year Budget Review statement two weeks ago, has drilled a K20.2 billion hole in the 2011/12 revenue projections.

This prompted Lipenga to slash annual expenditure targets by nearly K4 billion from K304 billion (about $1.8bn) to around K300 billion (about $1.7bn).

Of the foregone revenue, K19.8 billion is budget support tied to the IMF-supported Extended Credit Facility (ECF) programme that went off-track last June.

The funds are also part of the K65.2 billion budgeted grants for the current fiscal year, with the others being dedicated grants (K28.3 billion) and project grants (K17.1 billion).

Government has all but given up on the money, affecting planned outlays, including those on public debt servicing.

“Hence, now that these grants are no longer forthcoming, the proposal is to forego domestic debt repayment to the next fiscal year,” reads in part the Mid-Year Review Report.

Debt servicing, alongside allocations to the Presidency, Compensations and Refunds, as well as Pensions and Gratuities fall under what is called statutory expenditure.

These are expenditures provided for in the budget which receive their authority from the constitution. They are regarded as statutory obligations and, therefore, do not require prior approval of Parliament.

Kaluwa said the default on repayment of sovereign debt will have serious implications on the economy.

“It [the default] is going to affect the cash flow of the private sector. This clearly shows that government is sailing in troubled waters…this is a very dicey situation, which was not supposed to happen,” he said.

Kaluwa said next time government wants to borrow, those who lend will not be interested to do so because, he said, creditors expect borrowers to repay the debt at the agreed time.

Business News could not get a comment from Lipenga as he was reportedly in a meeting when called on Wednesday. He, thereafter, could not pick subsequent calls on his two mobile numbers.

But the Budget Review Report states that the deferment’s implication is that the debt level that the country started with at the beginning of the fiscal year will be the same debt level at the end of the fiscal year, a claim observers have trashed.

Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa, in an e-mailed response to a Business News questionnaire on Wednesday, described the situation as worrisome.

He said this is particularly worrying because government is already not doing enough to get the grants expected through programme support.

“This is pushing our economy further in between a rock and a hard place, as we are starving off the private sector through what would have been enough capital for more productivity in the economy this fiscal year,” said Kubalasa.

He did not buy government’s claim that the debt levels now will be the same at the end of the fiscal year, describing the assertion as a fallacy.

Kubalasa argued that the accrued debt will continue to attract interest over and above the new additional domestic borrowing being accumulated in this fiscal year for consumption and not necessarily production.

“It is also apparent that we are now ‘heavily’ borrowing more [both from the domestic and foreign sources], further crowding out the private sector in an increasingly hostile business environment,” he worried.

Domestically, government borrows from the public by issuing Treasury Bills (TBs) and bonds.

Late last year, the Reserve Bank of Malawi (RBM) issued a K30 billion bond, with the intention of restructuring government’s domestic debt and developing a benchmark yield curve.

But in January, the RBM suspended trading of TBs in an apparent attempt to shift attention to the longest ever bond in Malawi. The suspension was lifted last week.

But since the K30 billion bond was opened last year, the response from investors has been lukewarm, only attracting subscriptions worth slightly over K7 billion because of the country’s severe foreign currency shortages, fears of an imminent kwacha devaluation and an erosion of disposable incomes as inflation towers above 10 percent for the first time in three years.

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