Budget delicate balance on MDGS II, ERP, NES

The K630 billion ($1.5bn 2013/14 budget has endeavoured to strike a balance between poverty reduction and private sector growth, in line with the Economic Recovery Plan (ERP) and the second generation Malawi Growth and Development Strategy (MGDS II).

But economic experts have cautioned that as a ‘transitional and recovery-based budget’, it may be too soon to start celebrating the so-called gains witnessed recently, but there is need for more momentum to achieve measurable results.

The choice of ERP priority sectors—energy, tourism, mining, agriculture and transport—was good, realistic and consistent with Malawians’ aspirations for economic growth and transport.

But the Malawi Economic Justice Network (Mejn) argues that the absence of a clear financing arrangement in last year’s budget and coupled with the inconsistent consideration for funding during the mid-term review explains the decimal performance of the economy which grew by a tepid 1.8 percent.

The ERP focuses on immediate, short-term and medium-term policy reforms and last year’s budget focused on implementation of the immediate and short-term policy reforms that were meant to bring macroeconomic stability and cushion the vulnerable from the impact of policy reform such as the 49 percent devaluation of the kwacha and the subsequent adoption of market-based exchange rate regime.

Classifying expenditure

In the previous budget, at sector levels, ERP sectors had no financing arrangement and had inconsistent allocations. For example, mining received an almost threefold increase (288 percent), agriculture (32 percent) while transport had a paltry one percent.

Other ERP sectors had reduced allocations with industry and trade getting 25.3 percent and tourism 16.2 percent.

“Most social sectors, however, including health (21 percent) and education (12 percent) received increases. There was an attempt to cushion citizens from undesired effects of reforms as seen by the increased expenditure to the social sectors,” reads an analysis from Mejn.

In the previous budget, there was no significant analysis in classifying expenditure in line with ERP and MGDS.

For example, the economic services theme in MGDS got 38 percent of the budget, more than social and community services at 34 percent while at sector level, agriculture received 20 percent of the total budget, which was more than transport at 15.3 percent, social and welfare services 11.2 percent. The allocations were also more than education at 9.8 percent, health at 3.8 percent and tourism at 1.6 percent.

But Mejn says the expenditure line was in line with policy, but despite high expenditure in agriculture, there has been little progress in mechanisation as well as agriculture diversification coupled with weak extension services.

In terms, functional classification of recurrent expenditure in the 2013/14 budget, the general public administration got 39 percent, more than social and community services at 32 percent and higher than economic services at 29 percent.

“The decrease in economic service spending is inconsistence with ERP and MGDS and may threaten realisation of macro-economic targets such as inflation,” says Mejn.

Consistency with strategy

On the other hand, the analysis has found out that some allocations in this year’s budget are consistent with the ERP. Agriculture and food security, at K126.4 billion (about $316m), has got the largest share.

However, it notes that some key ERP and National Export Strategy (NES) sectors such as industry and trade, transport, tourism, mining and others have received insignificant shares in the budget.

In the budget, and in line with ERP, government exempted duty on agriculture equipment and machinery to encourage diversification and promote animal husbandry.

Government also removed taxes on importation of livestock meant for breeding, and this covers live bovines animals, live swine, sheep and goat in line with President Joyce Banda’s one cow per family initiative which aims at empowering households especially the poor.

In the tourism industry, government removed taxes on off-road game/scenery viewing motor vehicles (Safaris). This was aimed at easing the problem of transportation of guests in the country’s hotels and resorts.

Government has removed taxes on shuttle buses to allow hotels, lodges and inns with guest capacity of 50 rooms or more to import two shuttle buses every five years without payment of duties.

Again, government, in continuing with removal of taxes on most machinery, further removed taxes on crane lorries, concrete mixer lorries, mobile drilling derricks and track-laying tractors for the construction industry to boost the industry.

As a way of encouraging investment in the energy sector, government has extended the Custom Procedure Code for the Electricity Supply Corporation of Malawi (Escom) under the Customs and Excise Tariffs Order to allow all investors to import electricity generation and distributing equipment without payment of import duty.

“It is believed that this will encourage investment in the energy sector and also improve the electricity generation and distribution capacity for the country and support the industry that requires use of electricity for production,” said Finance Minister Ken Lipenga.

In the mining and exploration industry, another priority sector in the ERP, government reintroduced a provision under the Customs and Excise Tariffs Order to allow for exemption of taxes on importation of specialised mining and exploration machinery and equipment to encourage exploration and mining activities in the country.

Tax measures

On this, Mejn argues that the tax measures are consistent with and supportive of MGDS and ERP.

Apart from industry, individuals and society at large are likely to benefit from the tax measures in the 2013/14 budget.

Also the reduction of stamp duty from three percent to 1.5 percent and the reintroduction of a standard rate of 16.5 percent Value Added Tax (VAT) on raw materials imported by manufacturing will help to improve Malawi’s environment for doing business.

Mejn says removal of taxes on off-road game/scenery viewing motor vehicles (Safaris) and shuttle buses will encourage investment in the tourism sector.

The removal of taxes on crane lorries, concrete mixer lorries, mobile drilling derricks and track-laying tractors as well as removal of VAT charged on other lifting, handling, loading or unloading equipment such as conveyors, teleferics classified under the Customs and Excise Tariffs Order will increase investment in the construction industry, thereby improving Malawi’s infrastructure .

Government touted the 2013/14 budget for being aligned to the priorities of MGDS II and ERP.

The strategy aims at helping government on its effort to attain the country’s long-term development agenda and improve the socio-economic well-being of Malawians.

The MGDS II has isolated nine key priority areas that sets out government’s agenda for growth and investment to enable the country to achieve the United Nation’s eight Millennium Development Goals (MDGs) in the medium term and the vision and aspirations of Malawians as stipulated in the Vision 2020 in the long term.

The nine priority areas are agriculture and food security, transport infrastructure, energy, industrial development, mining and tourism, education, science and technology, public health, sanitation, malaria and HIV and Aids management.