EU ponders budget aid

European Union (EU) Ambassador Rune Skinnebach has hinted at the possibility of the bloc resuming direct budget support to Malawi from the 2024/25 financial year almost a decade after suspending the assistance in 2013.

The EU’s sentiments come a week after the International Monetary Fund (IMF) Executive Board on November 15 2023 approved a $175 million four-year Extended Credit Facility for Malawi under the Staff Monitored Programme.

The support could be a huge boost for the economy currently in debt stress with total public debt hovering around K14 trillion in local currency.

Briefing journalists in Mzuzu on Saturday, Skinnebach said he has held a series of conversations with EU authorities in Brussels, Belgium in a bid to convince them to resume direct budget support to Malawi.

He said: “My latest contact with our headquarters in Brussels suggests that I am succeeding in convincing them that it is right to support Malawi with direct budgetary support. Through this, I am optimistic that we will be able to support Malawi in the next fiscal year.

“The coming in of the Extended Credit Facility by the International Monetary Fund is a ‘tick box’ signalling that Malawi needs to be supported. We supported Malawi with 21 million euro in 2021-24 and we will continue doing the same.”

EU and other donors such as the World Bank and the United Kingdom under the banner of what was called the Common Approach to Budget Support stopped providing direct budget support to Malawi in September 2013 following revelations of Cashgate, the plunder of public resources at Capital Hill through inflated invoices, payment for goods and services not rendered or delivered and fraud.

The move left Malawi with a 40 percent hole in the recurrent budget and about 80 percent in the development budget as the donors opted to channel resources in form of off-budget support through international non-governmental organisations.

Since the donor flight, Malawi has relied on high and unsustainable borrowing to finance its ballooning fiscal deficit amid dwindling domestic revenues that are too low to meet its planned expenditure.

Domestic revenue collection has also suffered largely due to the economic impact of the Covid-19 pandemic that slowed down economic activity as industries scaled down production on the back of travel restrictions and supply chain disruptions.

But Skinnebach said the EU is already front loading some of its aid and programmes that can temporarily address challenges faced by people in the country.

He said: “The EU and other development partners are working tirelessly to front load some of our aid and other programmes such as social cash transfer so that we address some of the challenges faced by people in Malawi.

“We think this is the critical time for providing such aid because prices of basic commodities are extensively rising including prices of maize as we are approaching the lean season.”

Currently, the EU has a financial envelope for the period 2021 to 2024 amounting to 352 million euro targeting three focal sectors of green resilient growth, human development and economic and democratic governance.

In November 2022, the EU deployed a team of experts to assess progress in Malawi’s implementation of public finance management reforms in a move that was seen as a step towards resuming direct budget support.

While backing the recent 44 percent kwacha devaluation by the Reserve Bank of Malawi (RBM) to pave the way for the ECF, Skinnebach said the country needs solutions to ease the shocks created by the decision and create a business-friendly environment.

He said: “We need a framework that creates room for businesses and an attractive environment for Foreign Direct Investment because foreign direct investors would help in growing the country’s production and export rates and thus, acquiring the much needed forex.”

In an interview yesterday, economist Gilbert Kachamba said the decision by the EU could help Malawi salvage the situation and resuscitate the economy.

“This is a good development that the EU is considering budgetary support. It’s a sign that Malawi as a nation we are gaining back the donor confidence which we lost some time back. However we need to make sure that there is prudence in the management of these resources so that we reap long term benefits,” he said.

Lately, off-budget support has been declining as in a space of one year, it has dropped from K217 billion in the 2022/23 fiscal year to K40.4 billion this fiscal year.