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by
Aubrey Mchulu, 13 July 2006
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07:13:10
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Securitising arrears, a reader’s view
Two weeks ago I commented on what Finance Minister Goodall Gondwe meant when he said in his 2006/07 budget statement that government has set aside K3 billion to clear outstanding arrears owed to companies and parastatals.
During the last fiscal year which ended on June 30, K2 billion would have been paid to clear arrears. In total, government still owes companies and utility parastatals about K8 billion in unpaid bills for goods and services rendered.
Then, Gondwe was quoted as saying the Bankers Association of Malawi and the Malawi Confederation of Chambers of Commerce and Industry had suggested that clearance of the arrears be in form of securities. These securities have nothing to do with security guards.
I said that the securities referred to are certificates like Treasury Bills (TBs) or bonds issued to guarantee payment at a later date. Turning the arrears into securities means that instead of cash being given to the creditors, government will give them a TB or bond promising that payment will be made over a specified period. It’s like keeping real money as the securities can be traded.
This article attracted mixed reactions from readers, mostly those in the financial market.
This week, I reproduce views of one of the readers namely George Partridge, President of the Bankers Association of Malawi and Deputy Chief Executive Officer for National Bank of Malawi who wrote:
“Dear Aubrey
I have just read your article on the above topic. The way you have put it is slightly misleading. Securities are tradable instruments and are very liquid, meaning they can be exchanged or discounted for cash in the market.
Those who are able to hold them-like all those who participate in the T-bill market can and do also buy from the market. So the deal is like this:
1. Government issues securities and maturity dates are matched with its own timetable. Therefore it does not disturb its programme for retiring and its budget targets.
2. Creditor needs working capital but its tied up in government. Therefore he accepts a security with the face value of what government owes him in its place with whatever maturity date suits the government.
3. Customer has a choice of whether to hand this security on maturity date indicated on the security or can sell it (discount it) on the market and get cash. Or might use this as collateral on a loan.
The issue therefore is not keeping it as a savings or PD (postdated cheque) but gives customer plenty of choices to get cash right away. The other advantage is that the creditor is now certain of getting some money rather than the silence that is there now.
I do not know whether I have cleared this or it has helped in the understanding of liquidity of government stocks or confused the issue even more...
Keep up with the informative articles
Best regards”
Thank you Mr. Partridge and everyone who gave their feedback. Please keep writing, it is encouraging.
—Feedback: amchulu@yahoo.co.uk |
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