Mlusu in tight spot on budget

Minister of Finance Felix Mlusu is in a tight spot to save his K2.2 trillion 2020/21 National Budget which has gone off-track amid overexpenditure and declining revenues.

The minister is set to deliver the Mid-Year Budget Review Statement in Parliament today, outlining the performance of both his and the Tonse Alliance administration’s maiden financial plan which is largely consumptive against a background of a K340 billion in deficit and a K9.7 billion overexpenditure during the first six months of implementation, according to figures The Nation sourced from Treasury.

Mlusu will not be the first ifinance minister to dismantle a budget through adjustments in allocations at mid-year. Several others before him have done it.

In the realignment of the budget, the main loser has been the development budget which has faced cuts as resources are channelled to recurrent expenditure.

In an interview yesterday on how Mlusu can save his derailed budget, Chancellor College economics professor Ben Kaluwa said Treasury faces a tough balancing act in balancing development and recurrent expenditures due to limited resources.

He said austerity measures and self-restraint from tampering with developmental budget is critical, but was quick to add that this can only be achieved with adequate revenues.

Kaluwa noted that recurrent expenditures are mostly statutory in nature; hence, cannot be foregone. But he also proposed diversification to widen sources of revenue.

He said: “To strike a balance between development and recurrent expenditures, government needs to borrow externally in the medium term to finance infrastructure development and support huge agricultural investments to diversify exports.

“In such a way, government will be able to generate more revenue domestically and externally through exports.

“Currently, [industrial] cannabis production and marketing is lucrative with ready markets in billions of dollars globally which Malawi can seriously take advantage of to boost its economy.”

Concurring with Kaluwa on balancing the budget, Betchani Tchereni, an associate professor of economics at University of Malawi’s The Polytechnic said domestic taxes—the main source of financing for the budget—will not quickly develop the country because the resources will always be inadequate.

He also advised Mlusu and team to explore external borrowing for landmark infrastructure development projects that provide quick wins in the economy through their multiplier effect.

“If the Tonse government wants to leave a legacy of wealth creation and self- reliance, it can achieve it through landmark development projects. We are talking about schools, roads and industries, among others, that can change the economic growth path of the country,” Tchereni said.

Besides declining tax and non-tax revenues, the prevalence of Covid-19 pandemic has also hampered economic activity. The situation is worsened by lack of direct budget support from donors who withdrew their assistance in October 2013 amid concerns of poor public finance management in the wake of revelations of plunder at Capital Hill called Cashgate.

Economists have cautioned against upward revision of the budget and have instead recommended a downward adjustment with cuts from some votes to those critical in nature.

In an interview, Budget and Finance Committee of Parliament chairperson Gladys Ganda expressed concern with the K340 billion deficit in the first half of implementation.

She described the financial plan as off-track and in need of going back to the drawing board.

Ganda, who is also Nsanje Lalanje legislator affiliated to Democratic Progressive Party, said: “I see the 2020/21 National Budget failing to bring out the deliverables in meeting the intended purposes. A lot has to be done for Malawi to witness the difference, for now. We have a long way to go.”

Records show that between July and December 2020, Treasury spent K984.7 billion against revenue of K643.8 billion. Mlusu had projected to spend K975 billion, meaning there was a K9.7 billion overexpenditure.

The overall projected budget deficit is K754.8 billion, the highest in history. Treasury planned to finance the deficit by borrowing K224.8 billion internationally and K530.1 billion locally.

On a positive note, total revenue—a combination of domestic resources and grants—outperformed the mid-year target at K643.8 billion against the projected K626.3 billion. The grants were mostly for Covid-19 responses.

Domestic revenue target for the first half was K608.3 billion, but actual outcome by December 2020 was K571.8 billion, representing a six-percent under-performance. From the amount, K550.6 billion is tax revenue target while K57.7 billion is non-tax revenue target.

During the six months under review, Treasury only received K16.2 billion ($21.4 million) in August from African Development Bank to support Malawi’s Covid-19 response in terms of cushioning the economy from negative impacts on fiscal and current account balances.

When contacted yesterday, Ministry of Finance spokesperson Williams Banda said he will reserve his comment on the budget matters until the minister presents the statement in Parliament.

But in an earlier interview, Mlusu admitted that he was banking on development partners’ support to keep the budget buoyant given huge demand for emergency expenditure in the management of Covid-19 pandemic whose cases have been spiking.

However, Tchereni said that given the inadequate support from development partners, Treasury has no choice but to revise the budget downwards significantly and cutting down on some less important allocations.

He said: “Right now Covid-19 needs to be dealt with so that economic activity can resume properly. Over and above, the economic activities are relatively slower such that we are not collecting as much revenue as we should have been”.

Kaluwa also said Mlusu has little room to manouvre given revenue collection decline. He said that with Covid-19 pandemic, Treasury should work on having realistic and attainable figures in the budget.

He said: “There has been a tendency in the national budget to be more optimistic in projecting the bloated figures and economic growth than what really comes out on the ground.

“The development budget has historically been lower than optimal because of the obvious resource-constrained situation which unfortunately will not vanish unless and until we sort our poverty problem”.

Recently, International Monetary Fund resident representative Farai Gwenhamo said development assistance in form of direct budget support is an important part of financing for Malawi, but poor public finance management in 2013 forced development partners to close their aid taps.

Before suspension of direct budget support, donors were putting in up to 30 percent in Malawi’s recurrent budget and 85 percent of the development budget.