Public debt surge worries economist

Public debt surge worries economist

Post was last updated: August 6, 2020

An economic expert has warned that the economy faces multiple risks that could have an enormous bearing going forward in the wake of combined effects of Covid-19 pandemic and a surge in government debt.

This comes as the Reserve Bank of Malawi (RBM) indicates in its May Monthly Economic Review that there was a rise in domestic borrowing by the government.

The report says credit to the public sector amounted to K77 billion to reach K935.4 billion while credit to the private sector amounted to K13.8 billion and reached a consolidated K566.8 billion in the month.

“Net credit to the government from RBM increased by K62.4 billion to K294.5 billion as at end May 2020. This outturn was on account of increases in RBM holding of Treasury Notes and Treasury Bills to the tune of K35.0 billion and K6.7 billion to K383.5 billion and K7.1 billion, respectively.

“Similarly, net credit to government from the commercial banks increased by K14.5 billion to K579.7 billion in May 2020. The development was entirely on account of an increase in commercial banks’ holding of Treasury Notes of K24.7 billion to K498.7 billion,” reads the report in part.

It further shows that credit to the private sector continued to expand, partly supported by lower interest rates.

The annual growth rate of private sector credit was recorded at 18.6 percent in May 2020 comparing favorably to 18.9 percent and 13.5 percent registered in April 2020 and May 2019, respectively.

On a monthly basis, private sector credit rose by 2.5 percent to K566.8 billion in the month of May 2020.

Commenting on the development economic expert who is also Dean of Commerce at the polytechnic, Betchani Tchereni, said there is need for the government to employ serious austerity measures to preserve the economy.

“The expectation is that public sector debt is going to increase given the expected decrease in tax revenues over the past few months due to effects of Covid-19 and the political uncertainty.

“Higher than necessary public debt can stifle private sector growth, and we know that the private sector is the engine roomfor economic activity and growth,” Tchereni said.

He added that rising debt may lead to rising interest rates leading to high and unstable inflation rates.

Tchereni said going forward the country should look into self-sufficiency in a more longer term perspective and also have the political will to exercise austerity in such a way that we are not spending unnecessarily.

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