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Elections threaten economic stability

As the country slowly inches towards May 21 Tripartite Elections, the African Development Bank (AfDB) fears that Malawi might lose economic gains due to government’s appetite for spending to woo votes.

Despite facing several challenges, the country’s economy registered an average growth of 3 percent in 2018 with inflation largely remaining low while the kwacha remained stable for a long period, gains the AfDB worry can be eroded in the election period.

The subsidy programme is feared to be one of the biggest drainers

The AfDB’s worries expressed in the Malawi Country Strategy Paper somewhat echo remarks by International Monetary Fund (IMF) resident representative Jaack Ree, who in a questionnaire to our sister paper The Nation, warned that 2019 would be challenging as the election cycle usually ushers in waves of inflation.

But Minister of Finance Goodall Gondwe has said AfDB fears for Malawi were not founded as the country was planning to spend within the budget.

Gondwe: Fears for Malawi unfounded

AfDB secretary general Vincent O. Nmehielle in a memorandum to the The Boards of Directors on Malawi Country Strategy Paper 2018-2022, which was presented in September 2018, said the bank observed that following a period of low growth, high inflation, and food insecurity, Malawi was entering a period of increased economic stability.

In the memorandum, AfDB observed that the upcoming elections in 2019 pose a risk for the economy with the possibility of increased government spending to attract votes that could derail recent gains.

“[The] 2019 elections could lead to fiscal slippages: Presidential elections may see a looser fiscal stance to attract voters, causing a reversal of the recent macro-fiscal stabilisation gains,” reads the memorandum.

The bank also said because of the dependence on agriculture for growth, the country continues to face significant risks associated with climate volatility.

It observed that the high population growth rates will increase pressures on the economy, youth unemployment and the environment require an expansion of the business sector to create more jobs.

“In order for government to expand services, such as education, health and social benefits for the vulnerable, there is a need to expand the tax base by expanding formal employment opportunities by enticing the private sector to invest in Malawi,” reads the memorandum.

It also noted that limited government funding may lead to poor service delivery affecting living standards, especially for the vulnerable.

“Protecting social services expenditure will ensure continued provision of social transfers, health, education and water and sanitation. Country dialogue and the IMF programme will help maintain annual budget allocations,” reads the memorandum.

University of Malawi economist Ben Kalua said he agreed with the AfDB report that there was a lot of populist driven social expenditure in most countries, including Malawi during the election time.

“So the AfDB are right for Malawi. The budget will be typically framed in favour of social expenditure,” he said.

Kalua said social expenditure orientation, in most cases, hurt countries because they target poor people who do not contribute to government coffers—they do not pay taxes—but they demand a lot in terms of government provided services.

“Those expectations are widespread even in Europe, they have what is called an election budget,” he said.

Kalua said Malawi exceeds its targeted expenditure through populist projects such as Farm Input Subsidy Programme (Fisp) and Malata Subsidy Programme.

“Fisp is a populist agenda; so that is why you find that the government is very adamant that they will not do away with it because it is an election year even though signs were there that Fisp was a misdirected programme.

“Government also has this Malata Subsidy Programme which is a very inefficient subsidy. Those things if they were directed well we could have said well may be people might have benefited,” he said.

But Kalua said the most contentious issue is to do with electioneering process.

“You will find that there is a lot of questionable expenditure like presidential travel funded by the taxpayers. To me it is not economically productive. That is not economic in terms of Malawi,” he said.

Gondwe, however, said it was wrong for AfDB as a bank for many countries, to use its experience that during elections countries spend more than they budgeted for to conclude that Malawi will do the same.

“I do not know what that risk is all about. We have a budget for 2019. We have not done that [overspending] and I don’t see us doing that either,” he said.

MCP spokesperson on finance Alexander Kusamba Dzonzi also said he expected government to spend within the budget they were given.

“Being the election year it means government will spend more and that means increase in economic activities, which also means people getting employment,” he said.

Dzonzi also said MCP disagrees with AfDB’s projection that there have been economic gains in the country as indications are that the economy has been going down.

“What risks are there? The truth is, poverty is increasing. The economy has been going down,” he said.

But IMF’s Ree told The Nation of January 5 that Malawi has to break away “from the traumatic inertia” that slows growth during elections.

“Since transition to multiparty system in 1994, there were five elections—-and all but one of these ushered in major inflation. Can we also break away from this traumatic inertia this year despite the elections,” he said.

In the 2018/19 budget, dubbed campaign budget of K1.5 trillion, Gondwe raised chiefs’ honoraria by 100 percent as they became the biggest beneficiaries of the budget.

The Malata and Cement Subsidy saw a windfall of K10 billion from K7 billion in the last budget. Fisp which should, in essence, have been scrapped off, was raised to K41.5 billion from around K31 billion in the previous year.

One demographic that was also a key beneficiary of the budget are youths who have been allocated a whopping K10 billion. Some 10 000 youths will be employed in afforestation programmes.

Government promised to employ 10 500 primary teachers, 500 secondary school teachers and 1 000 medical personnel were. Senior civil servants got 10 percent salary hike while junior civil servants got 20 percent.

The pay as you earn (paye) tax free threshold was increased from K30 000 to K35 000 and K20 billion was allocated for maize purchases.

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