Treasury says the 2018/19 National Budget could be trimmed by up to K60 billion if outcomes from meetings with the visiting International Monetary Fund (IMF) mission do not inspire the World Bank to release budgetary support.
In an interview in Lilongwe yesterday ahead of the IMF mission visit that started yesterday and will close on October 6, Minister of Finance, Economic Planning and Development Goodall Gondwe pointed out that the IMF would be happy with the positive macroeconomic situation prevailing in the country as evidenced by a stable and low inflation and exchange rates.
But the minister admitted that he is losing sleep over the possibility that the World Bank and the European Union (EU) might not disburse the budgetary support as earlier anticipated.
He said if the World Bank does not provide the budgetary support, projected at K60 billion, the K1.3 trillion budget would have to be ‘drastically’ scaled down.
Said the minister: “We have done the sums and we think that we may have to cut from the ORT [other recurrent transactions] of a number of ministries apart from the ones of Education, Health and Agriculture as well as the Army and Police.
“We could cut something like K32 billion from recurrent expenditure which is about 3.4 percent [of the budget]. We will do the same on the development account so that we cut something like K60 billion [in total].”
Gondwe said the IMF expected Treasury to cut down much less and the gist of the discussions in the next two weeks will be the possible cuts assuming that the World Bank will stick to its position not to disburse.
He said the IMF would be interested to know the performance of the reforms, in particular structural conditionalities some ministries were expected to meet in the period under review.
Gondwe said: “IMF will be checking if there has been compliance of rules and regulations such as bank reconciliations. As at June 30 2018, we have done quite well although we have overspent by a point three percent of GDP [gross domestic product], which is not much.”
The planned budget cuts—K32 billion from the recurrent expenditure and about K28 billion from the development budget—will be the third in as many years following non-disbursement of expected budgetary support. The development begs the question on why Treasury continues to plan expenditure based on funding not fully committed.
In reacting to the development, the Economics Association of Malawi (Ecama) has advised government to be realistic on the expected revenue to guide the expenditure and avoid large deficits that would necessitate heavy borrowing.
Ecama, which is expected to take part in the consultations with IMF on Friday, has also advised government to prioritise expenditure appropriately by spending on sectors that matter in the short and long-term.
In an interview yesterday, Ecama president Chiku Kalilombe said: “The biggest concern is the energy sector where things appear to move slowly. The ripple effect is that the economy can’t grow as quickly as such the environment is hostile to industries. In the end, we can’t collect the revenue we need.”
On the planned budget revisions, the Ecama president said it would be brave of the government to cut expenditure by up to K60 billion considering that this is an election year.
He said: “Note that some of these cuts will mean suppliers of services or goods will not be paid, thereby grinding the economy to a halt.”
During the Mid-year Budget Review, the 2017/18 budget that expired on June 30 this year was revised downwards by K9.3 billion from K1.323 trillion with revisions expected to the recurrent budget in particular travel.
The setbacks to the budget of the last financial year included the K45 billion government bailout of Agricultural Development and Marketing Corporation (Admarc) and an unbudgeted increase of wages and salaries of K5.7 billion for the Malawi Police Service and the Malawi Defence Force.
The third, according to Gondwe, was the withdrawal of a sizeable grant expected from the EU.
In the current budget which rolled out on July 1, Gondwe has highlighted the non-disbursement of the K60 billion as the biggest pressure point, but remains cautious that the positive outlook on domestic revenue collection could turn negative.
Public tax collector Malawi Revenue Authority (MRA), the major source of government revenue, has beat its revenue collection target for the months of July and August by K11 billion and anticipates a further improvement in this first quarter owing to administrative changes which the revenue body has carried out.
In 2017/18, MRA missed its mid-year target by K41 billion, prompting Gondwe to revise the budget downwards.
Recently, with the country’s fiscal standing under pressure from rising debt levels, Treasury has moved to extend the maturity of domestic debt to over three years and giving parastatals tight control of guaranteed debt to reduce the burden.
In the past four years, the Malawi Government has had to borrow from the domestic market to finance the national budget following poor performance of grants, including direct budget support, as development partners continue to withhold their support over concerns of poor public finance management.
Malawi’s public debt as of June 2018 stood at K2.9 trillion. Out of the debt stock, about K1.5 trillion is domestic debt comprising 62.2 percent in treasury notes, 32.8 percent in treasury bills, 4.4 percent in zero-coupon notes and the rest are advances from commercial banks and promissory notes.
In a report the Secretary to the Treasury Ben Botolo presented to the Budget and Finance Committee of Parliament on the status of public debt as at June 30 2018, the Ministry of Finance, Economic Planning and Development stated that the country’s debt—particularly external—remains sustainable and does not breach international thresholds.
At the time that Malawi’s debt was wiped off under the Highly Indebted Poor Countries initiative in 2006, public debt stood at K131 billion of which K62 billion ($450 million) was external debt.
But by 2013, public debt had risen again 78.8 percent of the GDP and in the five years since then, total public debt has gone up from K913 billion to K2.9 trillion. n