Govt’s covid budget test

 As President Lazarus Chakwera drafts his broad policy speech to herald the opening of the 2021/22 Budget Meeting of Parliament, pressure is on him to demonstrate how his administration will revive   the Covid-19 ravaged economy.

The meeting—set to start on Wednesday, May 12—comes on the back of job losses in hundreds of thousands, dwindling government revenue, shrinkages in public and private investment and falling individual incomes resulting from rising cost of living.

C h a k w e r a ’ s To n s e administration also faces a credibility crisis in the fight against graft in the public service amid evidence of abuse seen in the K6.2 billion Covid-19 funds investigative audit that has exposed unbridled plunder while dubious procurement decisions have raised corruption and governance concerns.

Also being watched are signals the upcoming major policy address will emit on how the national budgets will be aligned to the country’s long-term national development plan, the Malawi 2063 (MW2063)—a test of the government’s commitment to the vision.

The vision, which the President launched on January 19 2021, aims to transform Malawi into a self-reliant industrialised upper middle-income country by 2063.

According to economists, governance commentators and policy experts The Nation has talked to this week, the pro-poor oriented budgets implemented over the years have failed to transform the economy; hence, the need to adopt radical developmental decisions with multiplier effects robust enough to revive the economy.

Economist Milward Tobias, who is executive director of Centre for Research and Consultancy, said in a written response on Wednesday the new budget will be the first to implement MW2063 and must, therefore, send the right signals.

He said Chakwera’s speech during the opening of this year’s tobacco marketing season and on the address on mining indicates his commitment to have a diversified economy.

Said Tobias: “The President has given clear directives to responsible institutions, so we do not expect anything other than action.

“The budget should respond to this new thinking. I also expect that within the agriculture sector, we will begin to implement interventions that help us have increased productivity and commercialisation.”

He called for increased budgetary allocation to the agriculture sector towards developing irrigation infrastructure, mechanisation and research and development.

In terms of tax policy, Tobias said he would advocate for removal of value added tax (VAT) exemption and a reduction of VAT rate.

“Exemptions are meant to cushion the poor, but poor people do not shop in places where some goods are exempted from tax. Government should rate VAT on all goods and services and then reduce the tax rate,” he said.

Since 1962, Malawi has had 11 development plans whose key objective was to grow the country’s gross domestic product (GDP) at an average of six percent and tame inflation rate to six percent by 2016.

The other 10 were Nyasaland Development Plan (1962-65), Malawi Development Plan (1965- 1969), Statement of Development Policies (Devpol I 1971-1980), Devpol II (1987-1996), Poverty Alleviation Programme/Policy Framework Papers (1995-2000), Vision 2020 (1998-2020), Malawi Poverty Reduction Strategy Paper (2002-2005), Malawi Economic Growth Strategy (2006-2011), Economic Recovery Plan (2012- 2014) and MGDS II (2011-2016).

However, despite all such

blueprints and other efforts,  available data show that in recent years, poverty rates have worsened and still remain pervasive in Malawi; hence, experts believe development-oriented budgets could be the panacea.

In a written response on Wednesday, National Planning Commission director general Thomas Chataghalala Munthali said while striking a balance between social and economic sectors in the MW2063 10-year plan being developed, emphasis will be on creating wealth through sectors such as mining and commercial agriculture.

He said: “The plan is to graduate Malawi into a middle income economy by 2030,” he said.

Malawi University of Business and Applied Sciences associate professor of economics Betchani Tchereni said government has a huge opportunity to start financing MW2063 and recovery of the economy in general.

For purposes of recovery, he advised government to focus on few, but huge national projects.

“It is when the projects are fragmented that we are failing to see the effect of the budget on the ground. When we have few, but huge projects, we will see the effect of the budget,” said Tchereni.

On taxation policy, he said the budget should consider incentives for those who will be working in the recovery business.

On his part, University of Malawi economics professor Ben Kaluwa said the diversification being sought is not just out of agriculture, but within agriculture as well.

He argued that out of agricultural diversification, government should look into a strengthened micro, small and medium enterprises sector activities, including hospitality.

Policy and governance commentator Rafik Hajat, who is executive director of Institute for Policy Interaction, urged government to abolish the payment of allowances in the public sector, arguing that they are a major pandemic that keeps pulling Malawi backwards.

He said: “We have seen that allowances are used to siphon public funds into personal pockets. We have seen this through several scandals, including the latest K6.2 billion.

“Secondly, government should strengthen the fight against corruption; make the Anti-Corruption Bureau more independent and adequately financed.”

Mining expert Grain Malunga said pro-poor budgets have failed to develop the country; hence, called on authorities to balance pro-poor and development policies.

“Our budget must be a growth budget not 100 percent pro-poor because we will not grow. Government should inject resources in development projects, from there more jobs will be created and more taxes collected from pay as you earn,” he said.

Malunga applauded Chakwera for calling for economic diversification through mining and other sectors, saying the call was long overdue.

The MW2063 acknowledges that the domestic economy has not sustained high economic growth rates above the rates of population growth a fertility rate of 4.2 births per woman in 2018 and an age dependency ratio as a proportion of working age reported at 85.6 percent in 2019.

The tax saga

Tax expert Emmanuel Kaluluma of Blantyre-based EK Tax Consultants said Malawi is in hot soup with little room to mobilise tax revenue for development, adding that given the current status of the economy being hampered by Covid-19, it will be the same story of failed progress.

He faulted Treasury for pending tax measures last year during the provisional budget as measures only commenced in November when the full budget implementation started.

“Government is in a fix to raise resources as the economy is not doing well. Therefore, they cannot raise taxes. It will be out of question, it will be both political and physical death because it means people will not afford,” said Kaluluma.

He said government may continue with the current tax measures because raising taxes will not make sense to the citizenry as they are already struggling financially and looking forward to reduced taxes.

While governance and economic experts blame it on corruption and failure to align plans to the growing population, other institutions such as Oxfam suggest progressive tax systems and investment in social spending can be a panacea for curbing inequality.

Other players such as the Institute of Chartered Accountants in Malawi (Icam), Institute of Marketers in Malawi, Malawi Confederation of Chambers of Commerce Industry (MCCCI), Employers Consultative Association of Malawi (Ecam) and Economics Association of Malawi acknowledge the need to have a serious look at tax policy.

This, according to Icam, is especially pertinent because businesses have not fully recovered from the adverse impact of Covid-19 first and second waves, hence; likely to struggle in the foreseeable period.

To cushion them and keep some tax liabilities in check such as pay as you earn, Icam suggests that Treasury should extend the voluntary tax compliance window (VCW) to December 31 2021, adding that with the current situation, companies may be forced to retrench staff to remain afloat.

Malawi Revenue Authority closed the VCW on November 30, having collected K4.6 billion in tax revenue.

The window opened on April 8 last year for six months up to October and was extended up to the end of November to allow businesses heavily affected by the Covid-19 pandemic to pay their tax dues without penalty, interest or any charge.

Treasury had in the first half of the 2020/21 fiscal year, collected K564.2 billion in domestic revenue, six percent shy of its target while expenditure stood at K974.6 billion, which is 2.5 percent above the target.

MCCCI, however, observes that domestic tax and non-tax reforms have been registered as a challenge because of uncertainty that surrounds implementation of tax reforms, which are introduced during budget session.

In their submission, the private sector lobby group calls for deliberate efforts to grow the country’s processing and manufacturing sector by, among others, reviewing the tax policy and reducing some taxes to enable local industries to be competitive.

MCCCI wants Treasury to remove VAT on wheat flour and soap noodles (raw materials for manufacturing soap) while moving locally printed educational materials, including text books from VAT exempt to zero-rated category and withholding tax rate for all small and medium enterprises (SMEs) and excise duty from 20 percent to 10 percent and from 30 percent to 20 percent respectively.

Reads the MCCCI submission in part: “Deliberate efforts should be made to grow our processing and manufacturing sector otherwise we will be stuck as an import-dependent economy.”

Meanwhile, production output for manufacturing firms continues to decline following global containment measures instituted to curb the spread of Covid-19.