Interview: Budget will be litmus test for Malawi–Kachaje

Last Friday, Minister of Finance, Economic Planning and Development Goodall Gondwe presented a national budget statement in Parliament that has left tongues wagging.I caught up with Economics Association of Malawi (Ecama) president Henry Kachaje to give views of the budget.

Kachaje: It is a challenging budget
Kachaje: It is a challenging budget

Q:
How do you describe the 2015/2016 National Budget the minister presented in Parliament on Friday?
A:
It is a challenging budget, based on optimistic assumptions that are made within a framework of uncertainties. The budget will be a litmus test for Malawi as we brave a second year with no donor budgetary support except for the contribution from African Development Bank [AfDB]. In my view, the budget has fallen short of supporting the transformational agenda that this country desperately needs to pursue.
Q:
This is the second budget without major donors’ support. What do you think is in store for Malawi?
A:
The difference between the two is that, this year, there is one multilateral donor, the AfDB that has come on board to support the budget. The minister remains optimistic that other multilateral donors–World Bank and European Union—might follow. However, I commend the minister for boldly declaring that as a nation, we must start restructuring our fiscal framework without expecting the budgetary support that we have been accustomed to receiving from abroad since independence.
Q:
There are a number of changes on allocations. One of the major changes is on the Farm Input Subsidy Programme (Fisp), whose allocation has dropped from K59.7 billion to K40 billion. What is your take on this?
A:
The drop in the allocation to Fisp is not a challenge, but a positive response to the various inputs from many institutions that were consulted in the budget formulation process. Government has restructured the Fisp, making it cost-effective while still maintaining the same number of beneficiaries. This is a very progressive move as the contribution from the beneficiaries that had dropped from 45 percent to three percent will be slightly adjusted upwards, hence reducing the burden on the already constrained government resources.
Q:
The minister admits that government is still struggling to increase the tax base. What is your take on the new tax measures, which include a 10 percent excise duty on text messages and data transfers on the Internet and reduction of other excise duty on car importers and dry cell batteries?
A:
It is imperative that with the reality that bilateral donors are in the process of withdrawing budgetary support in other countries worldwide as well, we must focus on means and ways of broadening our tax base. The new tax measures introduced in the 2015/2016 National Budget might not adequately address the revenue deficit created by the withdraw of donor budgetary support.
The introduction of the 10 percent excise duty on text messages and Internet data might actually be retrogressive. Government might successfully increase revenue in the short term while making communication and access to information more expensive.

Q:
The new budget also indicates that there will be a less than two percent tax revenue increase and this meets a 16.4 percent inflation rate envisaged in the budget. How do you react to this?
A:
My understanding is that the projected deceleration in inflation is not directly linked to the expected revenue increase. Rather, it is due to the relative strengthening of the kwacha, supported by declining pump prices for fuel. The minister is optimistic that inflation might drop further, subsequently, giving an annual average inflation rate of 16.5 percent in 2015, compared to 23.8 percent in 2014, and an annual average rate projected at 12 percent in 2016. However, the prevailing macroeconomic conditions in my view do not seem to support this optimistic view. It might be a challenge to see inflation rate drop to 12 percent if we factor in the adverse effects of the floods and the drought that followed.

Finance Minister Goodall Gondwe
Finance Minister Goodall Gondwe

Q:
Another serious development is that the 2015/2016 National Budget shows a drop in both recurrent and developmental budget allocations. Was this expected?
A:
It will remain a challenge for government to prudently allocate the limited resources, especially to developmental initiatives. However, if we do not invest, we will not grow our economy at the rate that is desirable to support our growing social needs. I am particularly concerned that only K50 billion (US$111 million) has been allocated to development expenditure, although there is an expectation that some K173 billion (US$384.4 million) might be funded by external resources.
Q:
The minister says the domestic economy will grow by an average of seven percent. Is this realistic?
A:
The seven percent economic growth, though desirable, sounds unrealistic when we consider the state of the economy. Activities in both private sector and the agriculture sector have been negatively affected by adverse weather conditions that will see an estimated drop of 30 percent in food production. Households will allocate more resources to securing food which will be at a higher cost than normal, and this might lead to a drop in consumption of other goods and services in the economy. Coupled with a slow recovery from the effects of the floods and drought, it might, therefore, seem to be overly ambitious to project a seven percent growth in the economy

Q:
On which allocations have you given thumbs up and thumbs down?
A:
The restructuring of Fisp, abolishment of allowances for new public university students, the K5 billion (US$11 million) set aside for rural development, the K3 billion (US$6.7 million) set aside to capitalise the higher education Students Loan and Grant scheme, the funding from the World Bank through the International Development Association amounting to $50.9 million (K22.9 billion) for the Skills Development Project are among some of the positives noted in this budget.
The tax on short messages [SMS] and Internet data, the growing civil service wage bill [which does not seem to reflect the expected civil service reforms], the failure to adequately fund the Green Belt Initiative are some of the lows of this year’s budget. The reduction of duties on imports of vehicles with engine capacity exceeding 3 000cc does not seem to have convincing reasons, especially that this will result in more importation of not only expensive vehicles but also with high fuel consumption, which might put more pressure on our fuel importation bill.

Q:
If you were asked to advise the minister on the implementation of this national budget, what key message would you give him?
A:
Fiscal discipline is the key. Controlling officers must be held accountable for over-expenditure. In the 2014/2015 National Budget, we saw that some ministries and departments exhausted their budget allocations within six months and had to request for supplementary budgets. This will be a tight budget with very little room for maneuvring and therefore fiscal discipline will be absolutely necessary.

Q:
Any last comment?

A:
The writing is on the wall that we can no longer depend on donor support. It is necessary that government holds an honest discussion with the general population. There is need for government to accept that certain social services can no longer be offered for free. There is need for a paradigm shift and more promises of a rosy life without resources will remain a political fallacy and suicide.

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