Malawi Govt warned on zero domestic financing
Economics professor at Chancellor College Ben Kalua has cautioned government to tread carefully on its main fiscal anchor in the 2012/13 national budget dubbed No Net Domestic Financing (NNDF).
Kalua has argued that the viability of such a policy shift would depend on several aspects of expenditure side of the new financial plan.
Finance Minister Dr. Ken Lipenga when he presented the 2012/13 national budget last Friday announced the adoption of the plan to improve both domestic and foreign resource mobilisation at the same time containing expenditures.
Lipenga said the adoption of NNDF would imply that by the end of June, 2013, net domestic borrowing will be zero.
The minister’s announcement came in the wake of a weak fiscal performance of the central budgetary operations in the 2011/12 financial year which saw domestic revenue collections being lower than the initial projections.
As a consequence, this led to a worsening fiscal deficit of 7.1 percent of Gross Domestic Product (GDP), the largest in recent history-with a net domestic borrowing of 5.5 percent of GDP, thus
exceeding the initial target of 1.5 percent of GDP.
“Budget is budget. If you can reduce expenditure, you can reduce borrowing, but in this case [NNDF], it will depend on what aspects of expenditure government has planned. Because you cannot reduce
expenditure in critical sector such as health or education,†said Kalua in an interview on Tuesday.
He argued that domestic borrowing is not necessarily bad, but depends on whether government is borrowing for consumption or for investing in human resources or infrastructure.
But he said in most cases, government borrows to finance the recurrent component of the budget which, he said is for consumption and not investment.
“…And the rule of thumb is that a fiscal deficit should not exceed three percent of GDP,†added Kalua when commenting on a 7.3 percent of GDP deficit recorded in the 2011/12 fiscal year.
In the latest 2012 government annual economic report, government attributed the worsening fiscal deficit to a number of challenges last year notably low revenue levels due to suspension of budgetary support from development partners.
The suspension of donor funds was mainly due to a similar suspension of the International Monetary Fund (IMF) Extended Credit Facility (ECF) programme for the country in June 2011 which exerted pressure on domestic financing, causing most fiscal targets going off track.
