Increased government borrowing on the domestic market has triggered a rise in commercial banks’ reference rate for April, the Bankers Association of Malawi (BAM) has said.
BAM chief executive officer Lyness Nkungula said this on Tuesday in the context of published statements from commercial banks showing that they have raised the reference rate from 11.9 percent in March to 12.1 percent in April.
She said banks experienced a greater demand for loans from the government in the past month relative to its supply of deposits, triggering a rise in reference rate.
“The government has borrowed from the domestic market during the past months; hence, the slight reaction in upward increase for the reference rate as both the Treasury bills and interbank borrowing rates also reacted to the same,” said Nkungula.
She said the interplay between borrowers’ demand for money and lenders’ supply of money has had an impact on reference rates.
Treasury’s excessive borrowing from the domestic market has been an issue of concern from the various stakeholders with some projecting the borrowing could crowd out private borrowers and trigger interest rate rise.
Currently, Malawi’s debt stock has been on the rise, hitting a record K4.76 trillion by December last year, which is double the value of the revised 2020/21 fiscal plan pegged at K2.3 trillion.
The increase in debt stock from the K4.13 trillion recorded in June last year means that public debt rose by K630 billion on a monthly basis.
Out of the K4.76 trillion public debt stock, domestic stock alone accounts for K2.72 trillion or 31 percent of the country’s nominal gross domestic product.
Financial Market Dealers Association of Malawi president Mclewen Sikwese in an interview said that this kind of borrowing will lead to high interest payments and rates which continue to be a huge burden for Malawi.
He said: “The increased borrowing and its consequent rise in interest rates makes crowding out of private sector a real phenomenon in this country and that will continue to challenge private sector access to resources to further spur growth.
“The borrowing, which comes in at a time when the domestic market is facing liquidity challenges will also continue to exert pressure on interest rates to rise thus challenging the monetary policy transmission from actions such as the recent rate cuts.”
Meanwhile, Treasury through debt securities, is set to borrow K344.48 billion domestically between March and June, a development analysts say risks the country landing in serious debt distress and hampering private investment.