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2015 Budget Analysis: Malawi revenue shrinks in real terms

Public service delivery set to fall

Poor Malawians should be afraid—very afraid. Their livelihoods—which mostly depend on government welfare—could face a severe knock as Capital Hill’s financing power diminishes.
Even businesses—which count on government as its largest client—should brace for huge potential earnings losses because both public investment and consumption—probably the country’s most important economic activity that expands business opportunities and creates jobs—is set for a sharp scale back in the 2015/16 financial year.
That is because the roughly K901.6 billion or about $2.1 bn 2015/16 National Budget that Finance, Economic Planning and Development Minister Goodall Gondwe tabled in Parliament yesterday, shows that revenue, in real terms, is falling fast—leaving little fiscal space.

Finance Minister Goodall Gondwe
Finance Minister Goodall Gondwe
Let us start with total revenue and grants. At a projected K763.5 billion in 2015/16, these resources are just over 11 percent more than the 2014/15’s revised estimate of K683.3 billion. But that is at current prices.
As a ratio of gross domestic product (GDP)—which roughly represents real terms—the 2015/16 projection is 22.2 percent of the economy, lower than the 24.2 percent of GDP that the K683.3 billion revenue represented in 2014/15.
That means government will collect less money at constant prices this year than it did last year which, as Gondwe admits, will make it harder for government to serve its people better.
That service includes potable water, health, education, road network and other social activities that only government can provide for the poor.
“Mr Speaker, Sir, the design of the 2015/16 draft budget is characteristically reflective of the diminishing size of the resource envelope available to the government, as a percentage of GDP [hence, potentially, in real terms], against the pressure of growing needs to provide critical public goods and services,” he said.
Two things have contributed to the shrinking national cake. Gondwe explains the first obvious reason, but keeps silent on the second one, the one which is scarier: tax revenue that cannot keep up with inflation levels, currently at 18.3 percent.
He largely blames the decline in total revenue and grants as a share of GDP entirely on the continued decrease in donor grants, which amounted to K132.8 billion in 2014/15, but are projected to decline to K97.1 billion in 2015/16.
It is worth noting, added Gondwe, that even project grants, which remained buoyant in the past, are projected to decline from K71.5 billion in the budget ending this June to K52.9 billion in the new budget. The development budget in general is at its weakest, which means lower infrastructure spending that has huge multiplier effects on the economy.
Gondwe explained that tax revenues are projected to rise from K581 billion in 2014/15 to K592.4 billion in 2015/16, but neglected to mention that the increase is less than two percent—well below the 16.4 percent inflation rate envisaged in the budget.
That means when inflation—which gnaws at purchasing power—is factored in, the Malawi Revenue Authority (MRA) will collect far much less money in the new budget compared to the outgoing fiscal plan.
The fact that government has mostly kept existing taxes flat while slashing others and introducing few new ones such as those on mobile data is in itself a reflection of how precarious the country’s fiscal health is.
The story is the same on the expenditure side because while the new budget is estimated at K902 billion—which is higher than the 2014/15 revised total expenditure of K800.7 billion; it is, as Gondwe notes, “actually lower in real terms”.
The 2015/16 budget constitutes 26.2 percent of GDP, while the revised budget for 2014/15 accounted for 28.4 percent of GDP.
Goodall  presented the new fiscal plan at 2pm on Friday
Goodall presented the new fiscal plan at 2pm on Friday
“Therefore, the share of goods and services that will accrue to the public sector is projected to be lower in 2015/16 than that consumed in 2014/15,” mourned Gondwe.
That candid admission—given the impact of what he has conceded, to the economy, which points to a drawn out drag on economic growth—is in sharp contrast to the wildly optimistic seven percent economic growth projection that the minister announced for the year.
Another issue that should worry development practitioners and analysts is that government is signalling that with development partners rapidly moving to off-budget support, Capital Hill is not just losing control of the money that came as general budget support when donors contributed 40 percent of the national expenditure; government appears to worry that it is also losing its grip on the implementation of the Malawi Growth and Development Strategy (MGDS), its overarching blueprint.
The fear is that donors could start running a development architecture that is parallel to the MGDS—making harmonisation hard, duplication of efforts almost a done deal, sustainability of programmes after donors pull out problematic and accounting for results at national level difficult.
If this is what Gondwe meant when he said he would table an “Intellectual Budget”, then members of Parliament better intelligently scrutinise the fiscal plan.
It sounds scary for the poor and the country in general.

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