Tough test for Gwengwe

New Finance and Economic Affairs Minister Sosten Gwengwe should brace himself for a tough year while implementing his maiden K2.84 trillion national budget that covers the April 1 2022-March 31 2023 financial year.

Gwengwe starts his journey as the country’s purse-keeper at a perilous time. His budget is surrounded by nearly unmitigated risks that could append whatever macroeconomic assumptions he has built his fiscal plan on and, if not carefully watched, no amount of fiscal consolidation could save the budget, the economy in general and the resultant heart-breaking poverty that remains pervasive.

First is the coronavirus pandemic which, while seemingly under control, remains the greatest threat at the moment.

Government still has to spend a fortune on the disease for medical supplies and enforcement measures to prevent rapid spread and even prepare for any new variants that might emerge.

Despite the re-opening of borders, relaxed social distancing measures and improving global supply chains, the fact remains that business operations are still far from normalising, which means that domestic economic activity will continue to be subdued at a time internal trade within Malawi has slacked and the global slowdown has spilled into the country and its major regional trading partners, especially South Africa.

Moreover, Covid-19 has hit the Malawi labour market hard, leading to shrinking disposable incomes.

This position is well expounded by Chimwemwe Magalasi who, in his study published under Euromod Working Paper Series on November 2021 and which looked at “the distributional impacts and government responses to mitigate the welfare consequences of the pandemic on households and individuals in Sub-Saharan Africa” found that the impacts of jobs in Malawi were dire.

Using face-to-face household surveys and from the novel phone surveys implemented during the pandemic, the paper found that 15.1 percent of the people who were employed in 2019 in Malawi lost their jobs in 2020.

This, according to the study, resulted in a decrease of 3.0 percent in disposable income under a worst-case scenario, which is terrible for a population reeling under double digit inflation numbers.

The impact of Covid-19 on inequalities should also not be underestimated.

As Magalasi writes, employment losses and the subsequent decrease in disposable income have made some sections of the Malawi population poorer and have widened income inequalities.

“Poverty as measured by the headcount ratio rose under our three scenarios. Similarly, the poverty gap rose due to the pandemic. Inequality as measured by the Gini coefficient and the Theil index increased. The increase in both inequality and poverty was on account of ‘other effect’ or factors not related to government policy i.e., Covid-19 related,” he writes.

My point here is that while coronavirus infections have sharply dropped in recent months, the full impact of their peak is yet to be fully felt in the country and the economy at large. At the time Malawi was shedding jobs, its annual gross domestic product growth rate for 2020 collapsed from a projected 5.5 percent to 1.9 percent, a far cry from the 5.7 percent chalked in 2019.

In 2021, growth is estimated to have inched up to 3.3 percent and is projected at 4.4 percent this year which, if attained, would represent some sort of a turnaround, although the preferable rate of economic expansion for Malawi is six percent that development economists say is needed for the country to start reducing poverty levels.

But even if the country gets past the coronavirus induced economic slowdown, there are still huge risks emanating from high and seemingly unsustainable government debt levels; the stubbornly weak export base; the adverse effects of climate change that has already annexed a large part of the Southern Region, especially the Lower Shire following this year’s cyclones that have devastated infrastructure, swept away livelihoods and crippled agricultural production.

These do not make the economic recovery efforts any easier. And if you add the energy crisis caused by floods, the uncertainties in global oil prices and the likely drop in agricultural output due to impacts of floods, droughts and a botched inputs subsidy scheme; the outlook, while not as depressing as in 2020, is still gloomy.

This financial will test Gwengwe’ mettle more than we think.