Prepare for sharp economic down turn

On average, they said Malawi’s economic growth as measured by gross domestic product (GDP) will expand by 5.4 percent.

The estimate was arrived at by averaging growth projections from five authorities— the Economist Intelligence Unit (4.2 percent), the International Monetary Fund (6.12 percent), the World Bank (4.8 percent), the Reserve Bank of Malawi (6.10 percent) and the Malawi Government—probably a combination of the Treasury and the Ministry of Economic Planning and Development (6.10 percent).

Most of them got it wrong if the assumptions that underpinned their computations are anything to go by—all the things they thought would remain equal appear to have minds of their own.

The estimators also never envisaged that we could end up with a prolonged electoral process that could see any incoming government without a national budget several months into a financial year that starts on July 1.

Even if a new government is ushered in earlier than we fear, chances of any administration passing an expenditure plan in Parliament that will be as divided as this one and in which the ruling benches are likely not to have control of even half the chamber, let alone a two-thirds majority, means that government will sweat blood to pass anything in the new National Assembly.

Returning to the assumptions that informed the GDP projections from the five authorities—that it will be supported by an increase in tobacco proceeds and aid resumption—both were torn up months ago and its pieces scattered nationwide.

Donors—under their operating umbrella called Common Approach to Budgetary Support (Cabs)—resolved during their last review meeting in March to continue withholding the more than $150 million (K60 billion) for the current financial year frozen in the last quarter of 2013 in the face of the Cashgate scandal that eroded confidence in the country’s Public Finance and Economic Management (PFEM) system. In fact, they also indicated that the 2014/15 financial year may also experience donor aid drought, which prompted the Ministry of Finance to consider the possibility of a so-called zero-aid budget.

As seen from the current aid squeeze, lack of budgetary support has resulted in drastic cuts to public spending on goods as well as services and that is set to continue in the next fiscal year.

For a country where businesses look at government as their biggest client with more than half their products taken up by Capital Hill, that will hit firms hard.

In addition, it also means that the country’s national savings and public investment ratios will fall sharply and drag the economy with it.

And if, as unofficial figures show, the Democratic Progressive Party (DPP) does indeed return to power, our budget support position will be even more precarious.

Remember that budget support was first suspended under the DPP regime in 2009/10.

President Joyce Banda restored it to a large extent for roughly a year, only to squander it through Cashgate.

And, of course, donors know that the DPP administration also allegedly stole over K92 billion in similar Ifmis fashion and they cannot, therefore, be trusted—at least until they prove otherwise—with development partners’ taxpayers’ money.

So, yes, the chances of donor aid recovery and its subsequent fertilisation of the Malawi economy are as opaque as the conclusion of the ongoing electoral process.

On tobacco, while the prices have been better this year than, say, the past four seasons, proceeds from the green gold will not be enough to sustain us in the absence of predictable balance of payment support.

Sure, I agree with the likes of Nico Asset Managers—a respected local macroeconomic think-tank and business advisory firm—that “the exchange rate is expected to continue appreciating due to proceeds from the tobacco season pouring into the country in the short-term.” The question is: For how much longer?

Like me, Nico Asset Managers acknowledge that in the medium to long-term, “the currency may depreciate due to trade imbalances and current account deficits”.

In fact, I can add that the local currency’s depreciation will start far much earlier this year than in 2013.

As Nico Asset Managers point out, foreign exchange reserves as at April 30 2014 decreased to $751 million or 3.99 months worth of import cover, which is less than the $759 million an equivalent of 4.04 months worth of import cover around the same period last year—and that was before Cashgate, when we were bathing in donor glory. To worsen our problems, Paladin Africa Limited (PAL), operators of Kayelekera Uranium Mining (KUM) in Karonga have now completely shut down their operations as heavily depressed prices of the product put the giant firm in an unsustainable financial position.

As I said on this space soon after KUM’s partial shutdown,until 2009, mining only contributed around three percent to GDP. But with the opening of KUM in Karonga, the sector’s share of GDP has since 2009 jumped to around 10 percent. That is a big deal—it is statistically very significant.

Finally, there is the election outcome impasse that has left investors holding onto their cash they would otherwise have spent on investments in the country, preferring to play a wait-and-see game.

It is a sad case given that we had returned to growth after the last two years of DPP’s slow down and, it must be said, negative growth. They say democracy has a price, but this is a needless price to pay.