Malawi government’s K72 billion unpaid bill to the private sector is one of the major causes of the current liquidity shortage hitting the country’s financial system, business leaders and captains have said.

Industry captains also say the arrears, mostly accumulated under the 2011/12 zero-deficit budget (ZDB) as government procured goods and services from the private sector on credit, are also hitting cash flows in businesses hard.

Small businesses—without the benefit of economies of scale that help big businesses to survive hostile environments—have especially been affected by the delays to get paid for services rendered to government.

The development has forced some small operations out of business, leading to job losses in an economy that is bleeding more jobs than creating them, according to Louis Chiwalo, executive director of Economic Empowerment Action Group (Eeag).

Those who are still in business, said Chiwalo, are mostly struggling to pay their workers and creditors as credit lines in banks dry up.

When presenting the 2012/13 national budget, Finance Minister Dr Ken Lipenga announced that the accumulated arrears were mainly on account of parastatal organisations taking loans and overdrafts of about K37 billion.

The arrears

Government departments owed private sector suppliers K28.6 billion whereas an estimated K6.1 billion are arrears accumulated on pension contributions, salaries, utilities and subscriptions.

Government asked the Auditor General (AG) to verify the K72 billion debt to establish how such huge arrears came about and verify their authenticity.

Before paying suppliers, the Secretary to the Treasury (ST) will be writing the AG, submitting documents such as invoices, contract agreements and local purchasing orders (LPOs) for verification.

Lipenga said the arrears from parastatals include Smallholder Farmers Fertiliser Revolving Fund of Malawi which has K16.2 billion, Air Malawi (K5 billion), Malawi Broadcasting Corporation (K5 billion), Agriculture Development and Marketing Corporation (K4.9 billion).

The National Food Reserve Agency, Malawi Rural Finance Company, Malawi Postal Corporation and Small and Medium Enterprise Development Board accounted for the balance in the parastatal debt.

Government departments include the Malawi Police Service (K10 billion), Road Sector Projects (K8.3 billion), Central Medical Stores (K2 billion), Malawi Housing Corporation (K2.1 billion), Malawi Defence Force (K1.3 billion), Malawi Prison Service (K1.3 billion), Immigration Department (K1.2 billion), Rentals (K1.4 billion), Office of the President and Cabinet (K590 million) and Malawi Electoral Commission (K407 million).

The balance of arrears is for pensions (K3.9 billion) Mzuzu University (K590 million), utilities arrears (K600 million), subscription Arrears (K620 million), Ministry of Education salary arrears (K612 Million) and Compensation Fund (K627 million).

Apart from the private sector arrears by government departments and agencies, the central government also racked up huge amounts of domestic debts from the local financial markets and foreign debts from international lenders, which squeezes the fiscal space to pay local suppliers.

Caution statement

In June this, FMB director Sean O’Neill cautioned government to contain its appetite for domestic borrowing, adding that it is disappointing that government ministries and parastatals accumulated such huge arrears.

He said then: “The extent to which the previous government had us living beyond our means is apparent in the growth in government debt from virtually zero immediately after the post Hipc [Highly Indebted Poor Countries] to today’s position of K200 billion of domestic debt and K250 billion of foreign debt.”

Local businesses started complaining of not being paid their money in July, just a month after the 2012/13 budget was presented.

They argued that government is taking too long to pay them because the National Audit Office (NAO) is taking time to finish debt verification.

Some of the suppliers are worried, but cannot speak openly for fear of repercussions in future dealings with government.

But they cry privately about the pressure from foreign suppliers, a problem worsened by exchange rate losses from the devaluation of the kwacha and its subsequent floatation on May 7 2012.

“We are in dire need of government to restructure this debt as soon as possible since the market forces have not stabilised yet.

“Further delays by NAO in auditing and verifying these debts in the shortest period possible will result in major losses by companies and massive lay-offs of staff because our capital is still locked up in debts since government is our major buyer of goods and services,” said one supplier, a member of the Indigenous Businesses Association of Malawi (Ibam), a grouping of local business operators.

Amid pressure from suppliers, NAO last month cleared five companies to access payment from Treasury.

‘Arrears sufficient liquidity’

Malawi Confederation of Chambers of Commerce and Industry (MCCCI) says, if cleared, the arrears are “sufficient liquidity” which could go a long way to ease the kwacha crisis currently crippling the banking system.

MCCCI chief executive officer Chancellor Kaferapanjira told Business Review this week that it is obvious government deficit is having an impact on businesses cash flows.

“We understand from our members across the board, but especially in construction that they are owed hefty amounts. If the deficit was not this large, for sure businesses’ lending needs may not have been as high as they are now. So, indeed, the deficit to a smaller extent may also explain the liquidity crisis situation,” he said.

The liquidity crunch is so serious that banks are failing to meet depositor demands and, are in some cases, rationing cash.

National Bank of Malawi (NBM), the Malawi Stock Exchange (MSE)-listed financial institution, in its newsletter for September 2012 has also weighed in on the same.

“This [K72 billion] is apparently sufficient liquidity which could otherwise have gone a long way to ease the current liquidity crisis,” said the largest bank by assets and market capitalisation.

Small businesses yelp in pain

Eeag’s Chiwalo, in an interview last Tuesday, said they had about 33 suppliers on their members’ list who dealt with government.

“After some of our members came to officially complain to us, we engaged in negotiations with government. And, by August 30, government had started paying some of them though not in full,” he said.

Chiwalo said the delay to pay them had caused some of the companies to start eating into their capital; hence, affecting their operations.

“Most of them have had their capital for buying raw materials eroded. Some could not fulfill the orders, causing them to collapse completely, thereby rendering their employees jobless,” he said.

The call for the arrears to be paid in the hope of easing liquidity challenges is based on the fact that commercial banks are facing a liquidity squeeze—a time when cash resources are in short supply and demand is high.

The liquidity problems in banks came when the 49 percent devaluation of the kwacha resulted in commercial banks clearing some backlog of external payment by most importers which resulted in wiping out excess liquidity in the financial market, according to the Reserve Bank of Malawi (RBM).

According to analysts, some banks may not have expected the availability of foreign exchange that quickly and may, therefore, have been caught ‘napping’.

Already, banks have borrowed close to K1 trillion from RBM through the non-collateralised discount window at 23.5 percent, but which expired on July 31 2012.

RBM blow

But effective August 1, RBM governor Charles Chuka indicated that continuance of the non-collaterised discount window, if considered necessary, will attract a charge of four percentage points above the banks’ prime lending rate of the particular bank and that additional charges may be imposed if access is considered excessive and/or prolonged.

Because banks are borrowing at a high rate from RBM, they have also raised their base lending rates to as high as 45 percent, making borrowing for both working capital and expansion prohibitive; forcing some businesses to close shop or down-size as access to capital takes a knock. This has left a trail of delinquent loans.

Lipenga has acknowledged the problem of liquidity in the financial system, attributing it to the recently implemented economic measures which the Joyce Banda administration has undertaken in an attempt to bring back the economy on track.

But for the businesspersons that government owes and whose life depends on that unpaid bill, the reforms do not mean much to them. And time is running out.

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ZIMENE MUMAKONDA

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