Economic and social consequences of aid suspension

Several agents of the electronic media have asked me what will be the consequences of aid suspension by donors and how can we get them to resume assisting us. Meanwhile, what can we do for ourselves?

The aim of this article is to try to give answers to these questions and to suggest solutions in the face of difficulties.

The money the donors have been giving us has been making it possible for us to live beyond our means. Perhaps with the donors’ money we have been purchasing extra drugs, hiring extra civil services, training our police officer and so on. With the donors’ money held back, some of the services will have to be suspended or curtailed until we have found alternative sources of funding them.

There are three alternative sources of funding the services which were formerly funded by donors’ money. The government raises extra taxes by increasing existing rates or widening the taxable base. If corporate taxes are raised, Malawi might scare off foreign direct investment. Raising incomes taxes on salaries, we may expect civil servant and private employees to press their employers for salary hike or engaging in other activities instead of concentrating on official duties.

Widening the tax base might mean taxing services which currently are not subject to taxes. These might include products or goods normally consumed by poor people. The question of equity would arise, you may expect protests from those who speak for the silent majority and other do-gooders.

When austerity measures are imposed, Malawians do not readily offer their cooperative. As soon as there was freedom of expression under the multiparty era, you would hear people complaining aloud that those they had elected had been making false promises.

In order to placate the public, the government might resort to borrowing money from the commercial banks as we as Reserve Bank. It would borrow from commercial banks by issuing bonds. This might crowd out corporate borrowings by both making the loanable fund scarce and raising interest rates. This could lead to the slowing down of business activities, even to recession.

The government borrowing from the central bank is mere euphemism for instructing the bank to print extra bank notes so as to fund government programmes. If too many notes enter the economy while production of goods remains unchanged, we face the bogey of too much money chasing too few goods, resulting in galloping or double-digit inflation.

The newly-appointed Minister of Finance, Economic Planning and Development Goodall Gondwe has made promises to push down the inflation to single digit. We will welcome success in this noble goal but difficulties cannot be wished away.

He has welcomed the decline in the price of a bag of maize from K10 000 to K3 000. No doubt consumers are happy to buy the essential commodity at the price they can afford.

But are the producers equally delighted with the lower prices? Possibly some if not many will tell you it does not cover the costs of the fertilisers and other inputs they used. Instead of complaining verbally, some farmers might just turn their hectares of land to the production of commodities other than maize thereby causing shortage of food and the resumption of inflationary prices. About the lowering of inflation, let us be optimistic without being unrealistic.

The third alternative source would be countries that are currently not part of the charmed circle that jointly support us. But who are they?

What can we do so as to induce donors, the International Monetary Fund and World Bank to resume the aid? We must meet their standards of probity and performance.

The Cashgate scandals must be tackled relentlessly. Time and time again in the past we have heard the term “zero tolerance”. Let us hope that this time action will speak louder than words, louder enough for all stakeholders to hear them.

The economic reforms that Joyce Banda introduced may have contributed to her election defeat just as they did in countries such as Greece and Italy. All the same the donors insist that the reforms must continue or else no turning on the aid taps.

The authorities must be good at public relations and educate civil servants and other that there is no gain without pain. For some civil servants to threaten the government with strike when their colleagues have stolen billions of kwacha from State coffers is not a jolly good behaviour.