The Ministry of Finance has said it will issue a K20 billion bond next month as part of the K1 trillion long-term development bond the government intends to generate from the local market within the next five years.
When presenting the 2021/22 National Budget in Parliament, Minister of Finance Felix Mlusu said the government has progressed with preparations to issue a 15-year development bond for some strategic and flagship projects.
He said relevant ministries had completed the selection of 15 projects that would be financed through the issuance of a local development bond.
Asked why opt for domestic borrowing which is deemed expensive and crowds out private sector, Treasury spokesperson Williams Banda Wednesday said borrowing being undertaken domestically has the potential to boost economic activity.
He said the funds would be invested in infrastructure development where such projects can employ Malawians and that with the pandemic where business is subdued, increased government expenditure was one of the ways to stimulate economic growth.
“Domestic borrowing is less risky compared to external borrowing in terms of fluctuations in the exchange rate. So, there is certainty in terms of expected repayments amounts in Kwacha terms on domestic debt than on external debt.
“Domestic debt, as you rightly put it, has its own shortfalls. First it’s slightly expensive and second, it can easily crowd out the private sector,” Banda said.
While acknowledging that the move by the government may be a fiscal stimulus, University of Malawi-based Economics Professor Ben Kalua said the domestic market is heavily influenced by inflationary trends which tend to be higher.
“We should expect double digit inflation. All these debt instruments must be above the inflation rate; so, if inflation remains high, then we are looking at a higher debt servicing cost,” Kalua said.
Economics Association of Malawi (Ecama) Executive Director Frank Chikuta said this will only be a good move if the borrowing money is channelled towards development projects and not for consumption.
“This will be a good move if the return on the projects to be financed is enough to cover the cost of borrowing. Since these are development projects there are benefits that will accrue such as job creation. Also they are not issuing the whole amount; they are starting with K20 billion—so we expect that how the market will react to the first issue will give an indication of whether the market is ready to absorb those securities or not,” Chikuta said.
In a separate interview, Malawi Stock Exchange Operations Manager Kelline Kanyangala said the market has demonstrated ability to absorb such amounts.
“If we look at the month of June, for instance, government, through RBM, has been able to raise K30.84 billion through Treasury notes only. What will be critical is the pricing of the bond itself and I am certain much consultation and research has been done on that,” Kanyangala said.