The International Monetary Fund (IMF) has said delays by government to settle arrears with the private sector is one of the key contributing factors to increased loan defaults by customers being experienced by commercial banks in the country.
Through a recent report titled ‘Tackling Inflation key to sustainable growth’ the IMF says credit risk has since emerged as a key threat to the country’s banking sector.
The Ministry of Finance says, however, that it has now cleared much of the arrears with the private sector through promissory notes and cash payments and that the contribution of government arrears on loan defaults by companies and traders is no longer significant.
“Those that accepted promissory notes have been paid but others are not comfortable and prefer cash. We told them to wait but we are now paying them as well,” said Ministry of Finance spokesperson Nations Msowoya in an interview on Wednesday.
Some companies have, however, complained that banks are charging exorbitantly up to 30 percent of total paper value to provide cash in exchange for the promissory notes.
The report says financing the deficit through increased recourse to domestic financing has also crowded out bank lending to the private sector.
The report found that while financial sector depth and inclusion increased steadily through 2012, they have since stagnated in the face of the persistently high inflation and multiple structural obstacles such as limited access to credit, unreliable electricity supply, and high transportation costs.
Consequently, the IMF says half of the people living in the rural areas in Malawi do not have access to financial services and that high inflation, higher interest rates and exchange rate volatility have increased the cost of servicing debt.
The fund says alleviating structural barriers to financial services would bring substantial benefits to the economy in terms of reducing poverty and attaining sustainable and inclusive growth.
The report emphasises the importance of restoring macroeconomic stability in the near term through the pursuit of tighter fiscal and monetary policies geared toward placing inflation on a declining trend.
The IMF has since reported that Malawi’s economy grey by an average of 4 percent between 2012 and 2015.