Can Malawi survive on zero-aid Budget?

Finance Minister Goodall Gondwe last week presented a zero-aid national budget that has attracted both positive and negative reactions. ALBERT SHARRA caught up with economist Thomas Munthali to discuss the budget and other issues.

Q

: We have a zero-aid budget this year, what should government do to ensure that the budget is feasible?

A

: Just to clarify, this is not necessarily a zero-aid budget because there still is K110.3 billion of dedicated and project grants in this budget. Specifically, dedicated grants account for K38.5 billion while the project grants are amounting to K71.8 billion. So, in principle, only budgetary support (programme grants) is being withheld by donors. That said, having no budgetary support (that component that government can use with relatively less restrictions) poses challenges as it entails government has to find resources to cover for any shortfalls that were initially to be covered by donors under this component. The feasibility of getting this budget right then, as the Minister of Finance rightly pointed out, is fiscal discipline-ensuring that they live within the means to minimise any deficits that will already be there. This entails holding controlling officers to account for any resources under their charge and limiting any borrowing to necessity only (getting more external than domestic).

Q

: If it were not for a zero-aid budget, would government have any option?

A

: You see, when the donors decided not to outrightly provide budget support towards the 2014/15 budget until they see significant improvements in the public finance management systems, then government is left with no choice, but to work out a budget that assumes that donors would not be forthcoming with budgetary support in this financial year. It is the only prudent thing to do while cajoling the donors to come over the course of the year. There simply was no other option.

Q

: Who are the winners and losers in this year’s budget?

A

: It has been one of the most cleverly crafted budgets of recent times. The 2014/15 National Budget will please the private sector – there has been no increase in corporate taxes (if anything a number of tax exemptions have been effected). This sends a clear message that government wants to stimulate the economy by getting the private sector to produce more and in the process have more to tax on. Regarding the common Malawian, while there has been no increase on the zero-rated income, the VAT and many other common goods and services for the common man have remain untaxed. The budget is also politically correct—it has made sure that it maintained the subsidy at K500 because that was the promise (not taking people for granted), but sends a clear message that come next year, this amount will be reviewed.

The same with the building materials subsidy. DPP government made the promise during its campaign (not necessarily in the manifesto) that this will start this year. They have made good on the promise, but they have started off with a pilot so they can learn before scaling up, implying it can be subject to review in the coming year. A lot of support towards the Cashgate handling institutions is a clear message to Malawians and donors that government is serious with sealing loopholes in public finance management. So it is a national budget that creates a solid springboard for a better future—a win-win to all if implemented as designed.

Q

: The zero-aid budget comes after a zero-deficit budget which brought a lot of economic challenges. What advice can you give to government this time around on how to implement this budget?

A

: The 2014/15 zero-aid budget is not a choice. In other words, even if government wanted budget support and the donors continued to say no, we would cry blood on the doors of donors, the money would not have come anyway. So it is borne out of having no choice. The question should be, should we not have been doing this even if the donors said they are giving us the money? The answer is a strong YES. This is a lesson to us as a country to begin an agenda of gradually graduating donors from supporting the recurrent budget. We need donors in the short to medium term (and they should be engaged to support us in the graduation agenda). As a country, we need to deliberately be planning to be increasing our support to the national budget with domestic resources by a defined percentage each year, thereby reducing aid over the years until we have zero donor support towards the recurrent budget. Donors should only be in the development budget.

Q

: Some have argued that government could have done away with subsidies considering it is tight on resources without donor aid. Are subsidies critical at this point in time or Malawi can do without them?

A

: Doing away with subsidies now? This is where most of us, economists especially, miss it—the political economy. To begin with, agricultural subsidies have been very instrumental in ensuring the country’s food security (of course, there will always be pockets of hunger in parts of the country-this is recognised with or without subsidy). With these subsidies, there has been sustained sound macroeconomic performance—low inflation and stable exchange rates because of abundance of food. You see, the issue for Malawi is not that the smallholder farmers (who form over 85 percent of the population) do not know what improved seeds and fertiliser does towards improving productivity and harvest. They know very well. The challenge is for them to access the fertilisers at commercial prices, this is true given that more than half of the population lives below the poverty line.

So government coming in to support such smallholder farmers not only saves lives but also supports the economy’s stability and eventual growth.

What the DPP government has done this year is simply to make even of its promises while ensuring that it makes a clear statement that these would be reviewed in the coming year.

If you ask me as a macro economist, I would say this is not the year to start this building material subsidy especially given no budgetary support from donors and the huge arrears and domestic debt hanging. But as a political economist, I would not want to take people for granted by promising and not delivering.

So, piloting the building materials subsidy on a small-scale as done in the 2014/15 budget is the way to go before scaling-up so as to learn lessons. However, the review should subsequently happen based on evidence of what works or not.

Q

: Is there a chance that Malawi will have a subsidy-free budget in the near future?

A

: I don’t see this coming soon-especially given the persistence in the levels of poverty—only 2 people out of 100 graduating every five years. But agreeably, there is need to be graduating slowly out of these subsidies—if the market works well over time to offer and recover loans for smallholder farmers, this could be a graduating avenue. Research done by our organisation, Innovations for Poverty Action, in countries like Kenya has shown that commitment savings accounts offered to farmers so they can buy fertiliser at harvest time can help moderately poor farmers graduate out of subsidies and remain very productive.