| Parliamentarians’ argument for allowance hike: A critique | Send to a friend |
| Saturday, 04 February 2012 10:06 |
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economics made simple This e-mail address is being protected from spambots. You need JavaScript enabled to view it , +255 754 653 740 The issue of the 185 per cent hiking of sitting allowances of the Tanzanian Members of Parliament (MPs) from Sh70,000 to Sh200,000 a day has been triggering new discussions from various points of view on a daily basis. The newest debate on the allowances is based on whether the President has approved them as reported by some media houses and arguably by the Speaker; or not as informed by the State House. One is likely to believe more the latter’s view – which is the horse’s mouth - than the former. The discussion in this article is on the arguments by the Prime Minister as reported in various media houses including The Citizen on Thursday 26th January 2012. PM’s argument The PM is reported to have supported the allowances hike partly by arguing that “These MPs secured bank loans ranging from Sh100 million, Sh150 million and Sh 200 million, and these loans have to be repaid...” (The Citizen, 26th January 2012, page 1). This argument raises a lot of questions. In this article a critique is given on this argument from the point of view of loans and credits economics text books as well as from practitioners and common sense point of view. The aim is to give intellectual leadership by educating and providing inputs to the powers-that-be so that we do not turn into a laughing stock of the world by approving the hike on the basis of the arguments put forward so far. Missing loan logic MPs’ borrowing should have taken place between late 2010 when they became MPs and just before the proposal to hike allowances came out in late 2011. Therefore the Sh200,000 allowance is not supposed to appear anywhere in the loans repayment agreements with the banks that issued the loans. This is because logically when one borrows, the banks make objective and criteria-based assessment of credit-worthiness of borrowers. Among other things, they look at the ability of borrowers to repay based on their sure incomes at the time of borrowing. Before the allowances have been actually approved and form part of MPs’ sure incomes, no sound bank in general and professional loan officers in their sobre minds in particular, would extend loans that would be paid by non-existing allowances. Therefore one finds oneself at pains in getting the logic of arguing that MPs’ loans have to be paid through the Sh200,000 allowances. Economics of the loans According to the PM, the loans range from Sh100 to Sh200 million. Assuming an average of Sh175 million, annual interest rate of 17 per cent and five years repayment period (this is MPs’ tenure), a number of interesting issues can be discussed. The figures above imply a monthly payment of the loan and interest to the tune of about Sh2,916,666 while MPs earn about Sh2.3 million monthly salary. MPs paying the loan through the salary, will have a monthly deficit of Sh616,666. Assuming that this is the case, one would struggle to find a bank and its loan officer who can extend loans that cannot be paid by the said salary. This implies that the MPs that have borrowed should have presented to the banks other means of repayment than just the salary. For sure, the Sh200,000 allowances were logically not part of this equation. This implies that MPs have other means of repaying their loans. Afterall, informed as they are, they should have made their trousers according to the size of their pieces of cloth. Loan for what? Loan taking by MPs is basically a private matter. However, now that it is about to be repaid by tax payers’ money which are public funds, one can correctly pose the loan for what question. A loan that requires about Sh2,900,000 monthly repayment against a monthly income of Sh2,300,000 needs closer scrutiny in the context of this article. If the loan is used for income generating or expenditure saving purposes, it would make sense. By extension then, it has to be repaid from the incomes so generated or expenditures so saved. Not by hiking allowances paid by tax payers. If it is a purely recurrent (consumption) loan, it is very bad economics to borrow such relatively collosal amounts just for consumption. It makes no point at all then to turn to tax payers to bail out such loan takers. If the loan was taken to enable MPs implement their duties in their constituents, why borrow privately to fund public causes? Is it individual social responsibility and act of philanthropy? If so, then why disturb tax payers then? If not, then what is the Constituent Development Fund for? Questions to banks Assuming that banks extended the loans expecting to be repaid by MPs’ Sh200,000 daily allowances that were not there by borrowing time – where is due dilligence? Where is risk analysis as per Basel III and other local requirements before issuing loans? Have we not learnt from the causes of the 2008 global financial and economic crisis which partly include extending loans to non-creditworth individuals? Will banks then conduct bank stress test with the purpose of determining how doubtful and bad the MPs’ loans will be if the requested allowances will not swim through? Boards of Directors and membe of Annual General Meetings (AGMs) for banks that would have issued loans to MPs in anticipation that the repayment would be made through the allowances that were not there would take the management of such banks to task. This is because no bank managesr in general and credit officers in particular in their sober minds are supposed to approve loans in expectation that such loans would be paid by allowances that were not there at the borrowing time – and indeed that were most likely not known. Banks can extend loans against debentures both current and forthcoming, but the type of alowance increases under discussion are not anywhere close to debantures. If the allowances are approved based on the arguments of high cost of living and the MPs’ bank loans, we will turn into a laughing stock of the world. Mature as we are supposed to be – 50 years after independence – we should avoid becoming a laughing stock over such a simple matter. The author is a senior lecturer, researcher and consultant in Economics and Business at Mzumbe University Dar es Salaam Business School Add this page to your favorite Social Bookmarking websites           |
