“We expect light at the end of the tunnel, which means stabilisation of the economy. If the weather behaves as well as we want, we should be stable somewhere in May .”
That was Finance, Economic Planning and Development Minister Goodall Gondwe, speaking to journalists in Lilongwe on Tuesday this week.
My gut feeling is that good ol’ Gondwe is hoping that tobacco dollars—which usually start flowing in earnest in March—would help stabilise the now volatile Malawi kwacha two months later; food prices would have declined significantly by May to impact on general price levels and the fiscal space would have loosened up a bit although I don’t see how given the negative trend in budgetary support and domestic revenue mobilisation, with the Malawi Revenue Authority (MRA) consistently failing to meet targets.
I suspect these are the major factors that the minister believes will bring the macroeconomic stability he envisages.
Gondwe is dead wrong.
But before debunking Gondwe’s wishful thinking, let’s understand macroeconomic stability, or to be precise, macroeconomic instability, which really is the undesirable situation prevailing in the country at the moment.
Macroeconomic instability usually takes the form of volatility of key macroeconomic variables and the unsustainability of their behaviour.
In this case, to see whether Goodall is being honest with himself and the country in general, we have to look at the behaviour of at least four macroeconomic outcome variables, namely: the budget deficit, the rate of inflation; growth of real output as measured by gross domestic product (GDP) and the current account deficit.
At the moment, the country is running one of the highest fiscal deficits in its history. In the 2015/16 National Budget, the budget gap is projected at seven percent of GDP—much higher than the 5.4 percent ratio recorded in 2014/15.
Government’s huge appetite for borrowing and its attendant ridiculously expensive debt servicing spend is getting out of control what with the equally ridiculously high interest rates!
According to the World Bank, by the end of the 2014/15 fiscal year, Capital Hill had borrowed four times the amount approved in the budget estimates. How insatiable!
Other causes of over-expenditure include the huge wage bill on account of a bloated civil service that blackmails politicians to get salary increments not matched by their productivity; MRA’s failure to collect budgeted domestic revenue; suspension of budgetary support and, of course, theft of public money of as much as 30 percent of planned expenditure.
When Gondwe says there will be macroeconomic stability by May this year, does mean that the large deficit and its causative factors will be brought under control?
Make no mistake, the budget deficit is one of Malawi’s most significant sources of macroeconomic instability; and there are no signs that there will be improvements in that regard between January and May 2016.
Let’s look at the inflation rate. At the end of November 2015, year-on-year headline inflation stood at 24.6 percent following a marginal, insignificant decline of one basis point from 24.7 percent in October 2015, but still much higher than the 23.3 percent registered in November 2014.
According to the National Statistical Office (NSO), the decimal fall was largely due to lower prices of non-food items. And here is the underlining problem: food inflation increased to 28.9 percent from 28.3 percent while non-food inflation, according to NSO, retreated to 20.6 percent from 21.4 percent in October 2015. And agriculture experts throughout the country are predicting a bad crop this season on account of a botched up subsidy programme and prolonged dry spells.
In other words, food—which makes up at least 50 percent of the consumer price index (CPI)—remains a problem, what with some studies now saying maize prices have in the past few weeks surged by between 15 and 30 percent?
Now, if we do not have stable prices—which are critical to overall economic performance—where does Goodall hope to get the macroeconomic stability he is so optimistic he will get by May this year?
Is Gondwe telling us that he can predict today what the rate of inflation will be in May or how the kwacha will be trading—because stability is really about predictability.
I mean, Gondwe’s 2015/16 budget was framed on assumption that GDP growth would be 5.4 percent; that inflation would average 16.4 percent and the kwacha would trade at around K450 on average to the dollar.
All these variables are well off the mark today and Treasury as well as the market have long given up on them!
It is that unpredictability—critical for allocating resources such as where to invest—that Gondwe now says will be possible from May this year. I don’t believe him. Do you? No one should cheat you: By May, inflation will remain elevated, the kwacha will remain volatile, and the budget deficit will still be dangerously high and GDP growth maybe even lower than the 2.8 percent projected for the calendar year ending December 2015.
If that is Gondwe’s idea of stability then it is time the revered economist and my former boss at Treasury went into permanent retirement.