Gwengwe must account for his fiscal consolidation drive

Since it is traditional to wish each other a Happy New Year, I have to abide by it and extend my compliments to you all and I fervently wish you to have a very fruitful year.

But the truth is that for many, the hard slog I predicted in May last year in this column under the headline ‘The economy will bite, hard’ is far from over.

There is no doubt that some of the causes of Malawi’s economic problems have been driven by global developments, including the Russia-Ukraine war and Covid-19—both of which have severely disrupted the international trading system, resulting in, among other things, soaring commodity and energy prices, food insecurity and supply chain commotions.

But ill-timed, ill-advised and clumsily implemented fiscal and monetary policies by the country’s current economic management team have worsened the situation for the local Malawian.

Even the fiscal consolidation strategy, which I warned about, has been disastrous.

For example, instead of helping to rein in burgeoning government debt and deficits, Finance and Economic Affairs Minister Sosten Gwengwe’s fiscal adjustments have ended in rising total public debt, soaring yields, high cost of living and probably a recession (we will know for sure in the next couple of months how badly the economy has fallen when the numbers are in).

These negative results are consistent with past studies, which show that 50 percent of fiscal adjustments fail to lower debt-to-GDP (gross domestic product) ratios, indicating how hard it would be for Gwengwe to pull this off.

Moreover, there has been a lack of harmony in fiscal and monetary policy as at the same tight the Reserve Bank of Malawi (RBM) was pursuing a tight monetary policy stance. Furthermore, there really haven’t been any supportive structural reforms to anchor the adjustments.

And when you add the mostly off-tangent assumptions that underpinned this year’s fiscal planning, you get the runaway train that the country is currently on.

For example, on February 18 2022, Gwengwe told Parliament that he has built this year’s national budget—whose fiscal year started on April 1—on, among others, the underlining assumption that during 2022-23 fiscal year, the policy rate will be stable at 12 percent.

Barely one month of implementing his maiden budget and roughly 10 weeks after issuing that statement; Gwengwe found himself dead wrong and his consolidation drive collapsed before it even took off.

By May, RBM’s Monetary Policy Committee had raised the policy rate by around 16.7 percent from 12 to 14 percent after noting that the fiscus’ other major underlining assumption—that the inflation rate would average 9.1 percent during the current fiscal year—is just not attainable. Inflation keeps soaring on the back of sharp rises in food and non-food inflation, standing at 25.8 percent in November 2022.

Imported inflation, in part triggered by the fall of the value of the Malawi kwacha and elevated energy costs, is sparking higher prices, further feeding into the accelerated inflationary trajectory.

I hope that as Gwengwe starts his preparations for his next budget, he will do well to have an in-depth review of his fiscal consolidation policy thus far, ask himself difficult questions and whose honest answers can guide him on how to navigate this delicate path of his.

For example, at a time when global economic growth is at one of its lowest, is fiscal consolidation the right path? How hard can it be? Right now, inflation is rising sharply in Malawi and the central bank is under pressure to raise interest rates to tame the general rise in prices, does fiscal adjustment help in such a context?

When even our own bond markets are so edgy and local credit conditions are becoming so tight, how effective can consolidation be?

I believe these questions are critical in determining the timing and structure of the adjustment.

More importantly, Parliament should demand a comprehensive report on the macroeconomic outcomes of fiscal adjustments that Gwengwe implemented in the last year relative to the pain and/or impact the consolidation programme has had on critical social sectors and Malawians in general.

That should include a detailed report on specific expenditure cuts and revenue measures that were in the fiscal consolidation package to look at what worked and what didn’t.