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| Business |
| Local debt to hit K80 bn by June |
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by
Ephraim Munthali, 19 October 2004
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08:13:17
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The National Bank of Malawi (NBM) said last week it expects the domestic debt [minus interest obligations) to hit K80 billion by June end from the present K60 billion.
This projection is likely to throw off balance the 2004/2005 budget’s main objective of reducing interest rates and portrays a fiscal year haunted by rising inflation and a depreciating kwacha.
“[This increase in domestic debt] will exert a lot of pressure on interest rates and worsen the crowding out effects on the private sector,” said the bank in its economic newsletter released on Friday.
NBM said while the new government has vowed to implement expenditure controls that are vital to narrow the fiscal gap, the budget has failed to match the words with action as spending rose 15.6 percent from K77 billion last year to K89 billion this year.
Initially, Finance Minister Goodall Gondwe pegged the budget at K85 billion before adding K4 billion but did not say the source of the extra money.
NBM argued that while the bloated budget could be in line with inflation and growth targets under normal circumstances, it comes after the new government’s own admission that billions of kwachas were wasted through carelessness and fraud in the past budget.
Director of Public Prosecutions Ishmael Wadi said recently that the Bakili Muluzi cabinet embezzled K10 billion in the last fiscal year through fraud and corruption while his predecessor Fahad Assani said a third of the budget is lost through similar ways annually.
In his budget statement, Gondwe said spending rose last year due to interest payments which went up from the estimated K8 billion to K18 billion.
With inflation estimated at 18-20 percent during the current fiscal year coupled with the present negative interest rates on deposits, it would be surprising to see interest rates going down further, said NBM. Inflation now stands at 11.3 percent.
The bank said talk of interest rates plummeting further get even less certain if fuel prices and possible exchange movements are factored in.
“There is always the possibility, however, that politics could supersede economics. Our advice is at best to assume that the current bank rate would prevail,” said the bank.
Reserve Bank of Malawi governor Elias Ngalande last reduced the bank rate in June this year by 10 percentage points from 35 percent after a similar cut towards the end of 2003 from 45 percent.
Economic commentators were not impressed on both occasions, arguing that Ngalande’s decisions were cosmetic because they were not supported by favourable macroeconomic indicators.
The budget deficit and inflation, argued the analysts, were still too high to support the decisions.
The central bank is expected to maintain a tight monetary policy stance by leaving the Liquidity Reserve Requirement stuck at 27.5 percent and by intensifying open market operations through Net Domestic Assets (NDA) to mop up excess cash.
“Ironically, part of the massive cash injections are self inflicted through direct purchasing of foreign exchange [by RBM] at the tobacco auction floors.
“Mopping up operations will still be a difficult exercise judged by the additional spill over effects of a bigger than expected budget,” said NBM.
Government wants to bring down inflation to around 10 percent by December next year and further drop it to a 5-8 percent range in the medium term.
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