The government will from Thursday buy back securities worth K40.7 billion from individual and institutional investors as a public debt management strategy.
The move is, however, likely to fuel a sharp surge in money supply which could trigger inflation.
According to the Reserve Bank of Malawi, the reverse auction will take place in two tranches with the Thursday auction targeting K20.7 billion and another auction slated for December 5 targeting K20 billion worth of securities.
“Under instructions from the Ministry of Finance, the Reserve Bank of Malawi (RBM) wishes to notify the general public that it will repurchase securities with ISIN numbers TN05YR240920 and TN05YS240920 through a reverse auction amount of K40.7 billion.
“Auction for the securities will be held through a competitive price-based method using multiple price format,” a note from RBM reads.
Finance Minister, Joseph Mwanamvekha, Monday justified the buy-back, saying it was designed to retire expensive short-term debt and opt for cheaper long-term debts.
Mwanamvekha said the move would help ease pressure on the fiscal authorities.
He said most of the debt was obtained in a high interest rate regime, adding that with the recent fall in interest rates on the market, there was need to restructure government borrowing.
“We now want to borrow long term at cheaper interest. This will help ease pressure on us as we will have to repay long-term at cheaper rates,” Mwanamvekha said.
Malawi has in recent years struggled with the management of public debt which stood at 62 percent of the Gross Domestic Product mid this year.
The high debt levels resulted in interest repayment getting the lion’s share of the 2019/20 national budget at K243.9 billion or 3.9 percent of GDP.
Speaking when presenting the budget, Mwanamvekha said the government was putting in place policies that will help bring down public debt in the medium to long-term.
He observed that the Medium Term Debt Strategy outlines measures that will translate into a reduction in domestic debt to 20 percent of GDP by 2023.
“Government will endeavour to borrow in a prudent manner to ensure debt sustainability for the current and future generations. Government recognises that a reduction in domestic debt requires an increase in revenue and reduction in expenditure to create fiscal space for retiring debt.
“Given the macro-stability and low interest rates, government plans to reduce domestic borrowing from K264.6 billion in 2018/19 fiscal year to K45.9 billion in 2019/20 fiscal year. In addition, external borrowing will be contracted with careful consideration to ensure realisation of value for money. My Ministry is reviewing the terms and conditions of borrowing of all our external creditors to ensure that government borrowing is on concessional terms and for projects with high economic returns,” Mwanamvekha said.