Emerging risks threaten budget

Economists say the Covid-19 pandemic and mounting pressure on wages threaten the successful implementation of the K2.2 trillion 2020/21 National Budget as the issues do not support the assumptions in the fiscal plan.

In a written response to a questionnaire on Wednesday, Economics Association of Malawi (Ecama) president Lauryn Nyasulu observed that while the Covid-19 pandemic is a shock to the economy, plans to purchase and roll out the Covid-19 vaccines and strikes by different sectors could lead to unplanned recurrent expenditures.

These factors, she said, would be worsened by lack of donor support.

Nyasulu said in the circumstances fiscal authorities would be forced to reprioritise expenditures, a development that may see dropping of other essential projects intended to contribute towards development.

She said: “The assumptions were made with the expectation that Covid-19 would not prolong as much as it has, therefore, some of the assumptions do not hold.

“Covid-19 is a shock to the economy, affecting both revenue and expenditure sides of the budget and it will result into extended budget deficits and increased public debt as government seeks to finance these deficits. We have already seen government debt rising in the past months.”

The 2020/21 National Budget was developed under the assumptions that real gross domestic product (GDP) would register a growth rate of 1.9 percent in 2020 and 4.5 percent in 2021. Inflation was projected to average 9.9 percent and that the policy rate would remain at 13.5 percent during the fiscal year.

In reality, inflation has generally remained stable and in single digits largely on account of a good harvest in 2020. Agricultural production for 2021 also looks promising and, therefore, stability is expected in the year.

The Reserve Bank of Malawi (RBM) projects the 2021 inflation at 7.8 percent, a target which is 0.8 percentages points lower than the 2020 inflation of 8.6 percent.

The current inflation projections are also in line with the bank’s medium-term objective of five percent inflation, with a symmetric band of two percentage points.

The country has also seen the policy rate being revised downwards to 12 percent in view of the prevailing conditions which analysts say was necessary to stimulate aggregate demand and maintain macroeconomic stability.

RBM, however, has indicated that domestic economic growth prospects remain uncertain in 2021 owing to the rising Covid-19 cases which have necessitated restrictions and new measures to contain the spread.

Various local and international institutions have also revised their projections for the Malawian economy to grow by an average of 3.3 percent in 2021 and 5.3 percent in 2022.

RBM Governor Wilson Banda in this year’s first Monetary Policy Statement noted that since the beginning of 2021, the Covid-19 infections and fatalities had increased sharply, compelling the government to re-impose strict containment measures.

He said: “Economic growth for 2021 will, therefore, depend on how fast the second wave of the pandemic dissipates. In general, domestic economic growth could remain subdued in 2021.”

But revising the GDP downward, as Nyasulu observed, could imply increased unemployment despite the already high unemployment levels.

University of Malawi’s The Polytechnic associate professor of economics Betchani Tchereni observed on Wednesday that there is more demand for accountability around the country which should free-up some resources for the execution of the budget.

However, he observed that demands for Covid-19 risk allowances, recruitment of more teachers and health workers could also exert pressure on the budget.

Said Tchereni: “We also note that the functionality of government may not be business as usual after the reforms work being undertaken by the task force. These may either freeing up more resources or making it expensive, but as usual government contracts are expensive at the top mostly.”

He advised Mlusu to consider tax incentives to industries which have been affected severely, including tourism, manufacturing and other service sectors.

On her part, Nyasulu said the minister should reprioritise expenditures, work on revamping donor confidence, strengthen governance institutions and deal with corruption decisively.

“Treasury should also improve efficiency in tax collection and administration to increase revenue as well as seek grants and concessional loans from donors,” she said.