Malawi’s Finance Minister speaks on State spending

Malawi Parliament reconvenes on February 8 for the 2012/2013 Mid-year Budget Review. The meeting comes after reports that most government departments are overspending. Albert Sharra talks to Minister of Finance Dr. Ken Lipenga on State expenditure and other issues.

Q: It is reported that some government departments and ministries have spent their allocations and are spending outside the budget. Why has this happened?

It is not true that government is spending outside the budget.  In June last year, Parliament approved a financial plan for the 2012/13 fiscal year that included total expenditures and net lending to the tune of K408.4 billion comprising K332.2 billion recurrent expenditure and K76.2 billion development budget expenditure.  In the first half of the financial year, the plan was to spend K257.9 billion of which K209.7 billion are recurrent expenditures and K50.4 billion are development budget expenditures.

As at December 31 2012, actual expenditures were to the tune of K246.6 billion comprising K188.4 billion recurrent expenditures and K53 billion development budget expenditures implying that overall, expenditures were within the approved estimates by Parliament.

As for the farm inputs subsidy programme (Fisp), it has not spent above its Approved estimates as at 31st December 2012.  The approved estimate for the Fisp is K42 billion and as at December 31 2012, the programme had spent K35 billion implying that it is well within its budget.  However, owing to the movement in the exchange rate, the programme will require additional resources and these will be presented in the mid year revised budget so that once approved, the programme can be implemented in full. 

We are half way into the annual budget. Do you see the budget achieving what it set out to achieve?

  As you are aware, Section 177 of the Constitution provides for a supplementary budget and each year government reviews the budget at mid-year and if necessary provides revised estimates to the National Assembly. As such, during the forthcoming midyear Budget session of Parliament, the Executive arm of the government will, as it has been traditionally done, be presenting a report of the performance of Budget implementation to mid year as well as present proposals for the revised budget estimates to the end of the financial year.

 Under this revised budget, government will present current projections on revenues, grants as well as expenditures to the end of the 2012/13 fiscal year. These projections will be based on the current developments in the economy, which include revised projections on local revenues, grants and loans from development partners and revised demands in other sectors.  As you are aware the law allows for a further revision at the end of the fiscal year. I am hopeful that the revisions will suffice to the end of the fiscal year, but should there be need to revise up or downwards on the budget, this will be done during the budget session.

The 2012/2013 budget was passed amidst serious economic challenges and commentators have said the budget has not helped in improving the welfare of Malawians. What is your comment on this?

 The 2012/13 budget was indeed passed amidst serious economic challenges. Companies were downsizing or closing down; people and companies could not find adequate foreign exchange to pay for imports; there were fuel queues because we had no forex with which to pay for fuel, and the cost of living was rising. However, as opposed to worsening the cost of living, the 2012/13 budget aimed to contain the rising cost of living. The budget sought to create an environment where people could access foreign exchange and trade freely while at the same time providing room for stabilisation of prices. These objectives are going to be achieved through a budget that limits fiscal deficit in order to reduce pressure on prices while at the same time helping to reduce demand for foreign goods and services to ease pressure on foreign exchange. If fuel is available now, it is not by accident: it is the result of measures that we are implementing now which are restoring Malawi’s credibility.

While we acknowledge that people have been negatively affected by the devaluation and the consequent rise in prices, the budget provided for social safety net programmes such as public works, social cash transfers and increased number of beneficiaries for the subsidy programme which were tailored specifically for the poor.

It is over six months the Economic Recovery Plan (ERP) has been under implementation. Would you explain when the country’s citizenry will start enjoying its benefits?

I don’t think the impression was ever given that there was to be some sort of deadline at which, as if by magic wand, problems would come to an end. The majority of Malawians do not understand the recovery plan in that simplistic way, in my view.

 The ERP is ultimately about improving our competitiveness and addressing our balance of payments challenges. That does not happen overnight and no one ever said it would. Improved availability of foreign exchange and fuel should, of course, catalyse the GDP growth process by facilitating the importation of raw materials and enabling increased access to markets. The business survey conducted in December 2012 shows the private sector appears to be improving production, and confidence in the economy, which is crucial in our circumstances, is improving.

Some companies which put their investment plans on the shelf waiting for a better time have started dusting those plans. Confidence is key. However, this is not to suggest that challenges do not remain. Unstable prices and a currency that is yet to find its long term path make business planning difficult, but we expect these challenges to peter out with time.

The Extended Credit Facility (ECF) with the IMF has unlocked significant donor support which is going to help us in the transition period to a production and export based economy.

 Consumers recently petitioned government to stop the floatation of kwacha which is also under government’s ERP. What is your stand on this request?

 The monetary and fiscal policies we are implementing now are a part of a whole package of measures whose purpose and intended consequences we have explained time and again. You cannot actually treat one part in isolation.

First of all, there appears to be a widespread misunderstanding of the current exchange rate regime in Malawi. The floatation of the kwacha simply means the exchange rate is now largely determined by market forces of supply and demand. This facilitates attainment of a competitive exchange rate which this country badly needs to balance the supply and demand for foreign exchange by encouraging export diversification. Without a competitive exchange rate, efforts aimed at diversifying the economy cannot be sustainable. 

The misunderstanding in the market is that by letting the kwacha exchange rate to market forces, the Reserve Bank of Malawi is not managing the kwacha at all. In actual fact, the kwacha exchange rate regime is technically described as a “managed float” in contrast to a “free float”.  It is a managed float because the central bank implements monetary policies that are aimed at containing inflation including through stabilising the exchange rate.