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Domestic Borrowing Raises Debate

Economists and commentators have given mixed views on Treasury plans to raise domestic borrowing limit to K47.1 billion from the current K27.8 billion, The Nation Newspaper has reported.

The move, according to a copy of proposed expenditure cuts circulated to heads of ministries, departments and agencies (MDAs) signed by Minister of Finance, Economic Planning and Development Goodall Gondwe, is aimed at offsetting poor performance of grants and domestic revenue.

In the current fiscal year, government plans to raise K980 billion in domestic revenue by June 30 2018, but this looks unattainable as Malawi Revenue Authority (MRA) is not performing to the expectations due to what commentators say is a challenging economic environment.

From a mid-year target of K451 billion, MRA has only collected K410 billion, which is nine percent below target.

Apart from missed domestic revenue targets, a K55 billion budget support that Treasury expected from European Union (EU) is unlikely to materialize at a time Gondwe is dealing with a loan repayment of K45 billion to commercial banks on behalf of Agricultural Development and Marketing Corporation (Admarc) which was not anticipated.

The increase in the borrowing limit is against what was projected in the 2017/18 National Budget to reduce domestic net borrowing from K63.6 billion or 1.5 percent of gross domestic product (GDP) to K27.5 billion or 0.6 percent of GDP.

Widening the domestic borrowing limit has its implications, according to finance and corporate governance expert professor James Kamwachale Khomba, who lectures at the University of Malawi’s the Polytechnic.

Khombo argued the move is symptomatic of financial distress that leads to technical insolvency or bankruptcy.

“The implication is huge, especially when the government is caught up in the debt trap and when the financing costs become unbearable to honour.

Economist Salim Mapila, who works at African Institute for Development Policy (Afidep), a pan-African policy think tank, yesterday said given failing grants and tax revenue, apart from domestic borrowing, the other source of financing would be printing money which is inflationary.

He said: “Bailing out a slowing economy using domestic borrowing is not such a bad idea, but the devil is in the details. If this action is frustrated by poor planning and the need to save political face, we might end up in more turmoil in the immediate future.”

Mapila said government is already struggling with domestic revenue collection; hence, the increase in domestic borrowing will translate into an increase in taxes in future to services the debts, placing a burden on taxpayers.