Fiscal consolidation is the right step forward

The Malawi government, through the Ministry of Finance, has made some commitments to the International Monetary Fund (IMF) to convince the multilateral lender to grant it a new Extended Credit Facility (ECF) programme.

The Tonse Alliance cancelled the previous ECF because they allegedly wanted a programme that “aligned with its new development agenda”.

In literal terms, the Alliance felt the programme would have undermined the implementation of some of its campaign promises, such as the Affordable Inputs Programme and the drive to create one million jobs in one year.

In the previous agreement, the former administration, led by the Democratic Progressive Party, had committed to reducing the Farm Input Subsidy Programme (Fisp) and putting a cap on the government’s wage bill.

The Tonse Alliance was so committed to its political aspirations that it ignored all economic fundamentals and advice from financial institutions to launch the AIP, an expensive programme with little economic gain.

As expected, the excessive expenditure from the nine-party coalition led to a record deficit. The deficits led to debt, which has grown to an unsustainable level. Malawi’s total public debt rose 14 percent from K6.8 trillion in March to K7.3 trillion at the end of September 2022.

As a percentage of gross domestic product (GDP) the total debt in nominal terms stands at 64 percent, 4 percentage points higher than the 60 percent threshold recommended by the IMF.

To reign in public debt, the government committed in its Memorandum of Economic and Fiscal Policies presented to the IMF to implement a fiscal plan that focuses on stepping up the implementation of the country’s domestic revenue mobilisation strategy as well as rationalising and prioritising government expenditures.

As part of the measures to boost revenue generation, the Malawi government plans to introduce a presumptive tax on small businesses with a turnover of below K12.5 million, broaden the Value-Added Tax Base and remove tax exemptions on special economic zones.

On the expenditure side, the decision to place a cap on the Affordable Inputs Programme (AIP) is a good move. Governments can sometimes improve their fiscal position by transitioning from broad-based support, such as university subsidy programmes, to targeted cash transfers.

The Ministry of Finance’s decision to redirect more spending to Social Cash Transfer programmes is commendable. After all, the AIP, and the Fisp that preceded it show that subsidies are costly to the government but are not always effective.

It was discouraging to see the government spend hundreds of billions of kwacha on farmers to produce food for their families only to spend tens of billions more to provide relief food to the same farmers.

There is a caveat to the transition to social cash transfers, though. Several families have failed to graduate from similar programmes in the past. Gwengwe’s plan does not show what the government will do to improve efficiency this time around. Hopefully, the minister has a plan.

Overall, kudos to the government for its commitment to reducing expenditure in the budget. If the transition from the AIP is implemented correctly and sustained in the long term, the perennial budget deficits will go down, the debts will go down and the country’s fiscal position will improve.

However, the plan to introduce new taxes is questionable, considering that tax revenue in the first half exceeded government targets. If the mid-year budget statement is anything to go by, the government collected K766.5 billion, K16 billion more than its target of K750.5 billion.

The data would suggest that the performance on tax revenue is ok. As such, seems unfair to introduce new taxes on products on producers and their businesses, particularly when the businesses will just push on the additional cost to the consumer.

It does not make sense to impose more taxes when consumers are already reeling from inflation, which is hovering at around 26 percent and eroding their disposable incomes.

A more appropriate course of action for the government would have been to improve its austerity measures and direct the resources saved to creating stimulus packages to revitalise the economy.

Financing a budget when a government is in debt distress is a challenge, but the government should implement their fiscal consolidation plan in a way that does not stifle the economy further.