LMC hints at 2020/21 budget pillars

The 2020/2021 National Budget has been formulated to promote fiscal discipline, maximise social and economic benefits, enhance operational efficiency to enable government to produce and deliver services in a timely and cost-effective manner, President Lazarus Chakwera hinted on Friday.

Making his maiden State of the Nation Address (Sona) at Parliament Building during the opening of the 49th Session of their Parliament in Lilongwe, Chakwera also bragged that the next financial plan will contribute to the achievement of the promises that the Tonse Alliance government dangled to Malawians.

Finance Minister Felix Mlusu is expected to unveil the first Tonse Alliance fiscal plan since taking over government and three months after presenting a K722 billion interim budget.

The interim budget made a serious attempt to meet Tonse Alliance’s campaign promises, but in certain key areas fell short of what was promised earlier due to lack of full budget—a legal binding document.

Chakwera, who admitted that the operating economic environment remains volatile and harsh in the face of Covid-19, said the coming budget will hinge on their promises such as investment in infrastructure, provision of loans to an increased number of beneficiaries through the Malawi Enterprise Development Fund (Medf), and revitalising farming through the Affordable Inputs Programme (AIP) that will give farmers access to fertiliser.

Said the President: “First, my administration will exercise strict fiscal discipline. This will require getting monthly expenditure reports from ministries, departments and agencies [MDAs] of government for the previous months as a basis for additional funding.”

Learning a bitter lesson from the previous Democratic Progressive Party (DPP), Chakwera said his government has learnt to do “much with less,” lamenting that the ousted Peter Mutharika administration left near-empty coffers, huge domestic and external debts, and an insurmountable budget deficit.

Echoing Mlusu’s headache, Chakwera is also worried that Covid-19 has worsened matters, stressing that the pandemic, with its containment measures, has hit taxpayers hard, leaving the country’s revenue levels so low “that we have to find creative ways to finance our planned activities”.

He also stated that his administration has allocated financial resources strategically by directing it’s spending according to its priorities and programmes with the highest net economic and social benefits.

Touching on macroeconomic framework, Chakwera said his administration will maintain macroeconomic, fiscal, and budget stability, promising that the government will spend for productivity improvements while also ensuring that the Boards of parastatals are held accountable for their actions and delivery on their performance contracts without government interference.

On economic performance, the President sounded optimistic, projecting that the growth of the economy as measured by the Gross Domestic Product (GDP) will fall to 1.9 percent in 2020 from an initial estimated growth rate of 5.5 percent for the year, compared to the 5.0 percent growth rate achieved in 2019.

However, at 1.9 percent projected growth, Chakwera appears to be overly optimistic and ambitious, at a time when international credible institutions such as the World Bank have painted a gloomy picture by projecting that the country’s economy is poised to shrink by 3.5 percent, thus automatically throwing the domestic economy into the abyss of a recession.

On inflation, he envisaged that annual inflation is projected to average 9.8 percent for the year 2020 on account of lower growth projections.

In recent months, inflation rate has been declining, with headline inflation decelerating to an average of 8.9 percent in the second quarter of 2020, mainly due to the decline in food inflation after the improved maize production in the 2019/2020 agricultural season.

In addition, subdued industrial demand for maize due to Covid-19 restrictions, declining domestic fuel pump prices, and stable exchange rates also assisted in bringing down the inflation rate, said the president.

Reflecting on the 2019/2020 fiscal year performance, Chakwera said the budget had a revenue of K1.527 trillion against a total expenditure of K1.841 trillion, implying that the year ended with an estimated deficit of K315 billion.

The deficit was financed in large part by domestic borrowing, which the President said crowded out private sector from accessing financial resources for productive purposes.

He lamented about the accumulation of arrears to K169.4 billion, originating from unpaid bills by MDAs in the form of water and electricity bills, compensations from court cases, unpaid road construction works, and various suppliers of goods and services to  government.

Our analysis shows that at K169.4 billion, government arrears are almost equal to wages and salaries in the four-month provisional budget which are projected at K166.7 billion or 23 percent of the entire K722 billion provisional budget.

In fact, a further analysis shows that at K169.4 billion in arrears, the amount is actually equal to the development expenditure in the same interim budget which got a total provision of K169.8 billion of which K119.8 billion is foreign financed while K50.0 billion is domestically financed.

 Meanwhile, Chakwera’s address has earned praise from most commentators and analysts, who said the speech has in effect pressed the re-set button for Malawi.

Economics Association of Malawi (Ecama) president Lauryn Nyasulu said the Sona has touched on a number of pertinent issues affecting the country.

“We applaud pursuance of stable macroeconomic and fiscal environment and strengthening of governance institutions,” she said, pointing out that the government has taken an optimistic GDP projection of 1.9 percent as the basic premise of the budget.

“This will require strategies to be put in place to support the productive base of the economy. What is worrisome is public debt which stands at 59 percent of GDP and domestic debt at 33 percent of GDP. This shows that more pressure will be exerted on the fiscus and domestic debt is likely to increase,” noted Nyasulu.

The Ecama president also said recently, commercial banks have seen their reference rate increasing by 0.2 percent due to an increase in Treasury Bill rates. She said this is an indication that there is already more demand for domestic debt and this crowds out private sector investment and growth.

“This has potential to erode the macroeconomic stability which we have had in the past few years,” she warned.

A Togo-based Malawian policy analyst Alex Nkosi, who works for the African Regional Organisation of the International Trade Union Confederation (ITUC-Africa) said Chakwera has set the tone for renewal, reconciliation.

“It is hope-inspiring at a time when Malawians are embattled with multiple challenges borne of Covid-19,” he said.