By Alexander Nkosi
Government spending is good for the economy but in our case the debt crisis complicates everything. The past decade, government spending was not driven by increased revenue collection but by heavy borrowing.
How was this a problem? Ideally government’s role is to create an enabling environment for the private sector to flourish. Heavy borrowing over the past decade negatively affected the private sector and left us in a situation where revenue remained low while debt grew to unsustainable levels. Government borrowed heavily on the domestic market pushing total domestic debt to K189.7 billion as of 2021. Heavy domestic borrowing crowded out the private sector. What this means is that banks prefer lending to government than individuals, this results in high interest rates and the private sector finding it difficult to borrow to invest in expanding their businesses. This meant that while government was spending heavily on roads, bridges, airports, schools and health facilities- the private sector could not fully utilise these investments to grow their businesses because they could not borrow from banks as required. In the end since the private sector was not growing as required, government was also affected as it could not collect more revenue and create more jobs. Since revenue remained low, government struggled to pay private players that provided goods and services leading to domestic arrears growing to K46.9 billion as of 2021. Hence, the private sector did not only struggle to borrow from banks but some of those who provided goods and services to government were not paid. The end result was foreign debt, domestic debt and arrears were all increasing while government revenue remained low.
How do we resolve this? Heavy borrowing to finance increased government expenditure isn’t the solution. Having concluded our debt sustainability assessment which is essential in debt restructuring discussions with creditors commencing this week, it is important that we don’t go out of the way and borrow heavily to a level where the debt sustainability assessment report becomes useless. It is inevitable for government to manage spending during this period so that once our debt is restructured we can increase spending due to funds released from reduced debt service outlays. This will help us dismantle debt and put money back into the economy without borrowing heavily. Debt restructuring will also reduce government domestic borrowing and allow the private sector to borrow at reduced rates. Debt restructuring and subsequent IMF deal will attract capital inflow (more dollars into the economy) thereby strengthening the kwacha. A strong kwacha will reduce the cost of imported inputs needed for production like fertiliser, fuel and machinery. This will present three benefits to the private sector: (i) increased access to credit at lower rates needed to expand production, (ii) reduced cost of production as a result of strong kwacha (iii) increased government spending through dismantling of domestic arrears and implementation of projects. This is key in supporting private sector production.
In conclusion, low government spending is temporal but key in ensuring that we don’t worsen the economic challenges we are facing. Balance and sustainability are key.