The Economic Contraction Implications Are Dire!

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Gov’t seems not to have thought through this debt exchange programme thoroughly

There will be a general slow down of the economy and we will either not grow as anticipated, and, perhaps, even not exceed 2% GDP growth this year.

This will be due to less demand, which means that there will be less production, fewer imports, and fewer services being given to the populace.

Now, what does this mean for government revenue?!?

Since the demand of goods and services will go down, it means people will be paying less taxes. Additionally, due to reduced demand – a result of less discretionary expenses – there be fewer imports and as such there will be less duty and other excise taxes collected at the ports.

So, government revenue will plummet and they may fall short of making the projected revenue in the approved budget.

The DebtExchange, if carried out in its current form, will result in many banks not getting any income from Government Treasury Bonds they hold for almost 1.5 years! In some cases, this forms up to 60% of their revenue and is a huge contributor to their profits! To be blunt most banks will be making losses when you combine this loss of income to the high default rate on loans to SMEs and corporates.

With lower than expected revenue, Government will have no other option than to cut down its expenditure.

The first to go will be discretionary expenditure and other non productive policy programmes.
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We also expect a reduction in the construction of new roads as well as a slow down in road maintenance, and a lot of non-essential govt workers’ salaries being delayed or not paid at all etc ie more expenditure accruals.

Furthermore, with the statutory payments, like pension contributions, the situation will be worse than it currently is i.e. gov’t backlog of unpaid pension contributions of gov’t workers.

Gov’t needs to re-visit this debt exchange program, and create policies that will bring back confidence in the economy, as well as attract investment to spur on the economy; resulting in more spending and increased savings.