Defiant Budget: No retreat on reforms

Malawi’s Finance Minister Ken Lipenga on Friday stared down critics and refused to blink as he tabled the K638.2 billion (about $1.5bn) 2013/14 budget that marches ahead with painful and unpopular economic reforms.

If anything, Lipenga wants to go several steps further with his free market crusade than any of his predecessors.

He has put on the table a bold case for a review of some subsidies—including those on agriculture, health and education—with the possibility of sharply cutting them or eliminating them altogether.

But in staying the course—tethering the budget to the austerity platform and charging forward with remaking the economy into a fully-fledged market-based one, Lipenga and his colleagues in the Joyce Banda administration know they are taking a high-stakes gamble 12 months to elections day.

Even harsh critics such as consumer rights activist John Kapito smell blood, saying in an interview yesterday when reacting to the new budget, that “I do not know how far they can run with the reforms before they realise they are wrong and before hurting voters [who] pass judgment at the polls.”

But government is betting—and holding its breath—that it has made the right call and that the recently mushrooming “green shoots” such as the strengthening kwacha and retreating inflation will hold and help slow down the bleeding in real incomes and spending power that have left most firms and households poorer.

Economic growth prospects

Inflation, which peaked at a high of 37.9 percent in February this year, has eased to 35.8 percent currently but interest rates, stuck at more than 40 percent, continue to crowd out the private sector—the so-called engine of economic growth—despite fuel and forex being readily available.

Lipenga—who derided skeptics for worrying that the improving macroeconomic variables are seasonal and the country would later in the year return to a depreciating kwacha and constant price increases—said inflation would further slacken to 14.2 percent by December this year and seven percent by the end of next year. The rate missed its budgeted 18 percent target for end last year.

The budget is also upbeat on economic growth prospects, estimating gross domestic product (GDP) to surge five percent this year from a tepid 1.8 percent in 2012—an outlook government hopes would vindicate its tough reform agenda and prove critics wrong.

Said Lipenga: “You will agree with me, Mr. Speaker, Sir, that at the beginning, the reforms that we instituted were not universally accepted. Skeptics pointed to an exchange rate that had overshot and inflation that had surged as reasons for abandoning our tough reforms. “However, convinced that the path we proposed was necessary under the circumstances we faced, we marched on, sometimes amidst some resistance and criticism.

“I am pleased to inform the august House that there are now signs that the great patience and resilience of the people of Malawi, for which we are profoundly grateful, is beginning to be rewarded. There is evidence that the economy is now starting to recover.”

But while the reforms are winning praise and money from donors, the fact that Malawi is sliding back into heavy donor dependence at a time of donor fatigue and when Capital Hill had made strides to sharply reduce foreign budget support poses long-term fiscal risks.

Revenue and grants

At 41 percent of the 2013/14 national budget, foreign aid as a percentage of the budget is at its highest in several years, especially when in the previous financial year, donors’ contribution to the local fiscus fell to 30 percent—never mind that it was the highly experimental zero-deficit budget under the aegis of the late Bingu wa Mutharika.

Just in the current budget expiring in July 2013, donors contributed 31.6 percent, which is over 30 percent or 9.4 percentage points less than in the just-presented budget.

In the new budget, out of the K603.4 billion total revenues and grants, domestic revenues are projected at K363.1 billion (about $907m)—nearly 60 percent of all revenue. The remainder, K240.3 billion (about $600m), is foreign aid.

Of the total domestic revenues, tax incomes are projected at K328.1 billion (about $820m) whereas non-tax revenues are estimated at K35 billion (about $87m).

Donor grants, on the other hand, are expected to increase by 36 percent from K177.4 billion (about $198m) estimated for 2012/13 to K240.3 billion (about $600m) in the new fiscal year.

Economics Association of Malawi (Ecama) executive director Nelson Mkandawire, who praised government for continuing with the reforms, said his body was concerned with the increasing dependence on donors.

But he was pleased that Lipenga recognises the growing clout of donor money as a percentage of the budget to be problematic.

In his budget statement, Lipenga acknowledged that while the resurgence in the donor funds’ ratio signals confidence in the country’s public finance and economic management, it threatens Malawi’s long-term fiscal sustainability and that it points to a government that overestimates its ability to provide most things freely to its citizens.

In fact, he built his subsidies argument around this point, saying while subsidies are justified in a number of cases—especially those targeting the poor—some are unnecessary.

Said Lipenga: “Mr. Speaker, Sir, the questions we should be asking ourselves as a nation are critical for our future. A few of these are: How do we move towards living within our means? How do we grow this economy fast enough to meet our consumption demands and population growth? How do we increase the contribution of domestic revenues to the budget?

“I have no doubt that this House will agree with me that the people of Malawi have no wish to turn into a nation of subsidies. We need to face the fact that almost every service that the government is providing is heavily subsidised.

“Mr. Speaker, Sir, as everyone knows, we subsidise agriculture by almost 75 percent, education by close to 90 percent, health by almost 100 percent. Until last year, we were subsidising fuel and electricity. We still heavily subsidise water.”

All this puts pressure on the expenditure side of the budget, forcing government to turn to donors for help as the economy fails to generate enough resources to support people’s needs.

Overall expenditure

In terms of overall expenditure, of the K638.2 billion total 2013/14 budget—which is a nominal increase of 57 percent over last year’s K406 billion—K463.1 billion (about $1.2bn) are recurrent expenditures and K175 billion (about $438m) development expenditure. Donors have accounted for 70 percent of the new capital budget.

With revenue at K603.4 billion—up from K461 billion (about $1.1bn) in 2012/13—the overall fiscal deficit for the new fiscal year is projected at K34.8 billion (about $87m) which, according to Lipenga, will be funded by borrowing K42 billion (about $105m) from foreign financiers. The K7.2 billion (about $18m) difference, according to the statement, will be used to finance domestic debt repayment.

Surprisingly, the budget statement lacked some of the key promises that the President made during her State of the Nation Address last Friday.

These include the pledge to increase salaries for civil servants and traditional leaders, government’s contribution to the 2014 tripartite elections although the minister mentioned that while elections funding would skew the overall budget outlook, Capital Hill remained committed to financing them.

The budget’s linkages to the Economic Recovery Plan are weak, with just a few tax measures aimed at boosting investment in the priority areas of agriculture, energy, tourism, transport infrastructure as well as information communication technology dotting the connections to the blue-print that is supposed to turn around the economy.