Finance, Economic Planning and Development Minister Goodall Gondwe proposes to cut K23.7 billion from the 2015/16 National Budget amid falling revenue trends.
Of the reduction, K17.1 billion is from the recurrent budget while the development account has lost K5.6 billion.
If Parliament supports the plan contained in the Mid Year Budget Review Statement that Gondwe presented in the august House yesterday, the current fiscal package will settle at K906 billion from the approved K929.7 billion.
But with Weekend Nation’s rough calculations putting the cut at 2.5 percent of the approved estimates and less than one percent of gross domestic product (GDP), Gondwe’s slice may not be deep enough to achieve the fiscal consolidation needed to bring down spending to sustainable levels in the face of underperforming domestic revenue mobilization and a drastic slow-down in donor aid.
Moreover, the amount the Minister proposes to slash is less than half the mid-year K50 billion revenue gap—both domestic and grants—recorded in the first half of the fiscal year.
In the first half of 2015/16, government expected K386.1 billion in revenue and grants, but ended up with K335.3 billion.
Domestic revenue missed its target by K12.7 billion weighed down by value added tax, which was off-projection by K5.6 billion, reflecting a slowdown in economic activity and depressed consumption patterns as disposable incomes dwindled on the back of double digit inflation rates and the sharply depreciating Malawi kwacha.
Inflation closed the year in December at 24.9 percent while the kwacha had shed 52 percent of its value between June and December 2015.
On the other hand, grants—mostly dedicated and project support—underperformed by K36.5 billion as donors move away from government systems they do not trust with their money and embracing the off-budget platform that channels resources to sectors through non-State actors.
Thus, the timid budget cut relative to the revenue underperformance raises the question of how Treasury will fill the remaining income void.
This question is especially pertinent considering that historically, the Malawi Revenue Authority (MRA) struggles to collect taxes in the second half and given that government is pretty much giving up on most of the grants it had planned around.
And recourse to heavy domestic borrowing—which Gondwe boasted has dropped from a high of K78 billion at the end of the last half of the 2014/15 to K4.3 billion at the end of the first half of 2015/16 financial—could further trigger inflation and push interest rates even higher.
But borrowing is exactly how Gondwe plans to cover the remaining revenue gap, whose money, it seems, government wants to use to save the Farm Input Subsidy Programme (Fisp) that has overspent by K22.6 billion from a K41.5 billion budget.
Thus, government will borrow K23 billion from the domestic market to sustain a programme that has failed to contain food security, is dogged by inefficiencies, corruption and fraud and is a proven fiscal burden.
However, while Gondwe spent time to explain the plan for Fisp and the food security situation in the country, he neglected to directly address the drug crisis that even his colleague, Health Minister Peter Kumpalume warned is reaching alarming levels.
Gondwe’s revised fiscal plan, apart from trying to face fiscal realities, is also a last ditch attempt to fall in line with the International Monetary Fund (IMF), which has declared off-track Malawi’s economic programme it supports and advised Capital Hill revise the 2015/16 budget downwards and reduce domestic borrowing.
The fund’s next review of progress Malawi has made will be on March 7 this year.
Where the axe will fall
Gondwe said government will achieve the K23.7 billion saving by freezing hiring and cutting perks across the civil service.
He explained that in the coming months, Treasury will withhold resources for filling vacancies and work with ministries to find ways of reducing the size of the civil service.
“Cabinet has decided that Treasury and the OPC [Office of the President and Cabinet] should review the various perks, including travel, vehicle and fuel entitlements that could be scaled down,” he stated.
Meanwhile, Gondwe also announced a four-point plan for reviving the economy that mainly revolves around boosting and diversifying agricultural production, buying enough maize to reduce food shortages that have negative implications on macroeconomic stability and exploiting mineral resources.
As part of the plan, government is in the process of facilitating smallholder farmers to produce leguminous crops, whose exports should improve the balance of payments position and help stabilize the exchange rate.
“In the medium term, we expect that the possible exploitation and exploration of our mineral resources can increase our exports even more,” he further explained, adding that a radical fiscal adjustment aimed at reducing domestic borrowing is being pursued.
On this year’s food shortage, Gondwe said the situation is under control, as some 44 large trucks on Thursday brought maize to replenish depots for the Agricultural Development and Marketing Corporation (Admarc).
“Treasury has empowered Admarc to procure another large consignment of 50 000 metric tons of maize from Tanzania. As we see it, we have, and we will have, enough maize stock that will be more than enough to satisfy Admarc markets in the coming days,” he stated.
On how the government plans to tackle possible food shortages during the coming harvest season, he said it plans to rehabilitate irrigation schemes and secure more land for Greenbelt irrigation, to enable farmers to double food production. n