Budget Crisis: Mounting debts complicate the budget

Faced with a fiscal crisis amid mounting debts, budget support freeze and the need to fulfill campaign promises, government says it will restructure local debts to avoid short-term repayments and will tap from existing resources to fund new initiatives.

Reacting, president of the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) Newton Kambala said yesterday it is apparent government will have difficulties to raise resources to fund the budget estimated at K734 billion in full without some services suffering.

“It will be a tough act to raise the resources in the current circumstances,” said Kambala.

In an e-mail interview last week, Treasury spokesperson Nations Msowoya said government will seek to roll over some of the domestic debt, estimated at K340 billion borrowed from the local financial market and explore the option of issuing a bond—a long-term borrowing instrument known for lower interest rates—to ease pressure.

When presenting the provisional budget of K240 billion in Parliament last month, Finance Minister Goodall Gondwe said the Democratic Progressive Party (DPP) administration inherited unpaid bills amounting to K173 billion and a domestic debt overhang of K340 billion while grappling with a gap caused by suspension of 40 percent donor budgetary support.

However, Msowoya said “it is important to distinguish between domestic debt stock and interest [as] not all the K340 billion is debt stock and interest”. He did not provide a breakdown.

While government is grappling with managing the domestic debt and servicing the external bill of $1.4 billion (about K560 billion) at a rate of K4 billion per annum, according to Msowoya, Malawi’s development partners are withholding their 40 percent contribution in direct budgetary support, squeezing the resource envelope even tighter.

–Engaging donors–

But the Treasury spokesperson played down the issue, saying government is currently engaging development partners so that they can channel the resources they are withholding to directly support social sectors.

“First, it is important to understand that despite the donors withholding budget support, these funds have not left Malawi and in fact they are being redirected in other sectors like health, education and community services,” he said.

According to Msowoya, government anticipates that some donors will still release their withheld budget support. He did not name these donors.

Even his minister agrees. When he conducted his first pre-budget consultations in Blantyre on Thursday, Gondwe said: “We hope that some of the donors will support us. We are also looking at donors providing some support to some of the activities without directly supporting the budget. If the resources are tight, we will have to select some activities that will not be carried out,” said Gondwe without singling out the activities that may suffer.

Meanwhile, Msowoya has hinted that the private sector is likely to wait further for their money because government has to ascertain the amount of arrears first.

Msowoya explained that the National Audit Office (NAO) is currently verifying the figures to ascertain the actual amount of the arrears before government can commit itself.

“In as far as we are concerned, arrears have to be audited and verified; otherwise, government risks paying out funds for non- delivery of goods and services,” he explained.

NAO corporate communications officer, Thomas Chafunya, confirmed on Tuesday that his institution was carrying out the audits, explaining that until the Auditor General issues a certificate, the current figures relating to the arrears stock are merely speculative.

“The figure may go up or go down once the verification is finished,” said Chafunya, failing to state when the exercise will be completed.

“This is an ongoing exercise because we are always getting requests from Treasury to verify the bills they receive from various ministries.”

Kambala said it will be tough for government to raise the resources to fund the K743 billion budget because the resource envelope is squeezed, sources for resource generation are few and overstretched, while the commitments are many.

“Consider this. The 40 percent that donors are withholding, in terms of the estimates of this year’s budget, amounts to about K300 billion. The donors have said they will provide support to targeted social sectors to the tune of K73 billion only. This means there will be a shortfall of about K227 billion to their normal contribution to the budget.

“Leave that alone, locally we contribute the remaining 60 percent which, in terms of this year’s budget, stands at around K437 billion. When you add to it the shortfall of K227 billion from the contribution of donors, it means the resources that we have to raise locally amount to about K664 billion.

“Now the challenge is that the said 60 percent is contributed by the private sector. And yet it is this sector that is owed about K173 billion by government in unpaid arrears, which would have been used to expand their businesses or increase their productivity to make profits and register turnovers.

“If the private sector is not able to make profits, how will it effectively contribute to income tax which is a big percentage of the taxes? If the sector can’t register turnovers, it means its contributions to Value Added Tax will be low,” said Kambala.

–DPP campaign promises–

He urged government to pay the arrears in full, instead of only K50 billion this year, saying a private sector that is operating at full mast will be advantageous.

“In ensuring that provision of service continues, government will still be engaging service providers from the private sector. But the problem will be that only a few will have the capacity and this may trigger over-pricing because demand for services will be high while supply will be low,” he explained.

Besides the existing challenges—debts and the flight of donors—the DPP administration faces the challenge of finding resources within the same squeezed envelope to fulfil its glittering campaign promises, which include provision of subsidies on building materials, a medical scheme to civil servants and construction of four universities and technical colleges.

Msowoya explained that the campaign promises will be fulfilled using resources that will be raised through savings resulting from elimination of waste in the use of the public resources.

“Campaign promises will be delivered within the available resources through elimination of waste in use of public resources, guard against theft of public resources and ensuring that there is value for money in every Government transaction,” said Msowoya.

Overstretching the government further is its own commitment to continue with the Farm Input Subsidy Programme (Fisp) whose resources at about K60.1 billion were 10 percent of the 2013/2014 budget.

Gondwe pointed out that the administration of Fisp will be moved to Smallholder Farmers Fertiliser Revolving Fund of Malawi (SFFRFM) which will lead into an expenditure of K50 billion, a cut from previous K60 billion.

Msowoya said in preparation for the Fisp season, government has introduced efficiency measures in the procurement and management of the scheme to save resources.

“The aim is to see to it that there is value for money in procurement of inputs and distribution of inputs. Government will introduce other mechanism of identifying beneficiaries,” he explained.

The DPP administration has also inherited a Fertiliser Loan Scheme, initiated by the People’s Party (PP) administration, which was appropriated in the 2013/14 budget, but which will have to be budgeted for in the 2014/2015 financial year.

On this, Msowoya said the expectation is that beneficiaries will fully pay to cover the cost of the programme as per the agreements which they signed with Mardef.

–Loan recovery–

If that fails, he said, Mardef will have recourse to the recovery mechanism in their agreements.

Msowoya could not say how government will ensure that the loans are recovered by September when the budget will be unveiled because although the money for the loan scheme was spent outside the authority of Parliament, it still has to be put in the budget.

Furthermore, the loan scheme already had problems of fraud as exposed by a Nation on Sunday investigation, which will make recovery difficult.

Government will also have to identify resources to fix the social sectors, a majority of which are in free fall.

In the health sector, for instance, the challenges include shortage of drugs, medical equipment, with cases of mortuary facilities breaking down; the recent examples being at Kamuzu Central Hospital and Salima District Hospital.

Msowoya said some of the problems facing the health sector are management-related, explaining that they can be solved through better planning, better management of the available resources and undertaking preventive maintenance of the facilities.

“With regard to the specific problems that you have raised, the Government is discussing with Health SWAp partners to consider funding maintenance of equipment, procurement of drugs and medical equipment. As we speak now partners like DfID, Norway, Germany and USAID have assisted in the procurement of drugs that are being made available in hospitals,” he said.

He had no explanation to how government will resolve resources in the security sector where, for instance, Blantyre Police Station, with three substations and units reported recently it was receiving monthly funding of K2 million only for its operations.

The education sector is also in dire straits. Most of public schools are not habitable. Others lack infrastructure, creating the need for lessons to take place under trees. They do not have learning and teaching materials. The ratio between teacher and pupils keep widening. Pay to teachers, like some civil servants, is erratic as in many cases it takes several months to be effected.

Msowoya said through the Education Sector Wide Approach, the government is rehabilitating classrooms and building new schools across the country, besides training teachers and in service training programme with the view of improving the teacher to pupil ratio to 1:60.

“With regard to delayed payment of teachers’ salaries, government is decentralising salary processing to be done at divisional level and by December 2014, salaries for teachers will be done at divisional level,” he said.

Civil servants are currently complaining that the current administration has not yet implemented a pay hike that the previous administration promised them to avert a strike that they threatened to undertake right on the eve of the May 20 Tripartite Elections.

Msowoya dismissed the complaints as premature, saying the new government is in the process of preparing its first budget.

“What we have now is a provisional budget which is reflective of the 2013/14 budget priorities. A provisional budget cannot contain new policy measures by its nature,” he said.