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Press Corporation Limited chief executive Mathews Chikaonda says the country’s economy risks becoming more unstable because the 2003/04 budget, which seeks to bring macroeconomic stability, faces four challenges.
Speaking in an interview after attending the post-budget consultative forum in Lilongwe, Chikaonda said apart from a likely rise in the domestic debt stock there is the uncertainty of donor inflows, problems of controlling the amount of money in circulation and the fact that the country is in an election year.
On the debt stock, he said it is very difficult for government to realise its goal of not borrowing more from the domestic market because the assumptions on which this was based may be unrealistic..
“The assumptions that are made in the budget are not tenable given what we know now. It is unrealistic to use an interest rate of 33 percent in computing the domestic component of public debt charges. The interest figure of K8.3 billion [which is in the budget] is much lower and inconsistent with the K50 billion domestic debt stock [also in the budget],” he said.
The former minister of Finance said using the current levels of interest rates at 45 percent the interest charges should be approximately K23 billion, meaning that the underestimation is in the order of K15 billion.
“All in all, this means that the budget has a much bigger hole than the declared deficit of K5 billion. The deficit should in fact be K20 billion. This needs to be financed from the domestic market with more disastrous consequences. It is unrealistic therefore to expect interest rates to come down when in fact government needs to increase its presence in the domestic financial market to finance the deficit,” he said.
Chikaonda said unless donor inflows started early, it will be difficult to achieve macroeconomic stability.
“The resumption of donor flows will be very crucial, otherwise government will again be forced to into the market. Consequently there will be a further crowding out of the private sector with interest rates and inflation rising further. Higher interest rates will bring more instability,” he said.
The PCL boss said from Reserve Bank of Malawi Elias Ngalande’s remarks chances are that the excess liquidity (the amount of money in circulation) situation in the country would get worse.
“According to the statement by the Governor of the Reserve Bank, the RBM will continue with tight monetary policy to deal with the present situation but also to build up foreign reserves to the level of three months of import cover,” he said.
He added: “The Reserve Bank will have to print more money making the excess liquidity situation worse. RBM will, therefore, have to intensify its open market operations to mop up the excess liquidity. This can only mean higher inflation, higher interest rates and more instability in the exchange rate punctuated by increasing depreciation.”
Chikaonda further said the situation is complicated by the fact that Malawi is going towards general elections.
“That we are in an election year complicates matters because government wants to be seen to be doing things and that adds fuel to the fire,” he said.
In his reaction to Chikaonda’s query on domestic debt concerns, Finance minister Friday Jumbe said economists always work on certain assumptions and in making those projections government was hoping that certain factors would hold.
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