By Benadetta Chiwanda Mia:
Public sector indebtedness to the banking system increased by K128.6 billion to K5.3 trillion in September, figures from the Reserve Bank of Malawi (RBM) show.
This is at the expense of the private sector quest for productive loans, whose credit decelerated by K8.1 billion to K1.5 trillion.
In its September 2024 Monthly Economic Review, RBM says commercial banks net claims on the central government rose by K75.3 billion to K2.7 trillion.
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This is primarily due to net issuances of Treasury notes and Treasury bills, amounting to K88.4 billion and K553.5 million, respectively.
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The banking system’s Net Domestic Assets (NDA) also expanded by K175.2 billion, reaching a total of K6.9 trillion.
This growth was primarily driven by an increase in domestic claims, which rose by K130.2 billion.
Notably, claims on the Central Government, other financial corporations and the public non-financial sector contributed significantly, registering growth of K124.3 billion, K9.7 billion and K4.3 billion, respectively.
However, this increase was partially offset by a rise in government deposits with commercial banks, which grew by K11.9 billion to K206.3 billion, and a decline in government advances by K1.8 billion to K131.5 billion.
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Additionally, the central bank’s net credit to the central government rose by K49.0 billion to K2.1 trillion during the review period, fuelled by increases in Ways and Means advances and RBM’s holdings of Treasury bills, which accounted for K82.4 billion and K56.2 million respectively.
RBM attributed the decline to reductions in foreign currency-denominated loans and mortgages, which fell by K20.4 billion and K5.5 billion, respectively.
Nonetheless, individual household loans and commercial and industrial loans increased by K7.4 billion and K3.8 billion, which helped to offset some of the contraction.
Sector-specific analysis revealed notable contractions in areas including wholesale and retail trade (K13.9 billion), agriculture, forestry, fishing and hunting (K6.4 billion), financial services (K3.7 billion), construction (K664.2 million), and transport, storage, and communications (K241.1 million).
In contrast, the community, social and personal services sector saw an expansion, with an increase of K8.7 billion.
Bankers Association of Malawi Chief Executive Officer Lyness Nkungula attributed increased government borrowing to the quest by the Treasury to finance budget deficits or public projects.
“In times of economic uncertainty, increased borrowing by the government can help support public spending and provide a stabilising effect on the economy,” Nkungula said.
She said the situation had potential implications on overall banking sector stability, as a surge in public sector credit can strain commercial banks’ liquidity if not managed appropriately, leading to potential challenges in meeting their obligations.
Nkungula said the banking sector is, however, implementing measures to address the decline in private sector credit.
“Excessive public sector borrowing can crowd out private sector credit, limiting funds available for private enterprises and potentially slowing economic growth.
“Enhancing financial literacy among private sector borrowers can improve their creditworthiness and ability to manage loans effectively,” Nkungula said.
