Off the Shelf 5 years on
Today marks exactly five years since this column started. I was pleasantly surprised that the maiden entry of the column in March 2016 tackled a subject that is also current today. This is the budget deficit and the pressure placed on the Malawi Revenue Authority (MRA) to collect as much as it can to reduce the budget deficit. MRA is always under extreme pressure to collect more than its previous target. But from where? The organisation can only collect so much. What MRA collects reflects the state of the economy. And the Mid-Year Budget Review Statement Minister of Finance Felix Mlusu presented last week has just underscored the tax collecting body’s gargantuan job—to collect more and reduce the over K850 billion funding gap. But from where? With your indulgence l reproduce the March 2016 article.
‘Excuse me that I have to start with a disclaimer. This is not meant to be an apologia for the MRA. The organisation may have its own weaknesses which I am not very competent to talk about. But there is always a feeling among Malawians—unfortunately including those who are supposed to be in the know—that when MRA collects less than its set targets then it has underperformed. That is wrong. One does not have to be an economist to know that revenue collection by the tax collector grows or shrinks in tandem with the performance of the economy.
Apart from revenue streams from Pay As You Earn (PAYE), which is supposed to be constant more or less for the greater part of the year as long as firms do not downsize—because salaries don’t change overnight—a considerable amount of the revenue that MRA collects is from the manufacturing sector and corporate tax. So when companies underperform, it goes without saying that the tax collector will also collect less. And that is not underperformance. To me underperformance implies inefficiency.
There are many reasons why MRA collects less than its set targets. In the case of our country now, I would say the power outages contribute a big percentage of the drop in revenue collection. If you look at the most recent MRA’s performance report you find there is a strong correlation between the increasing power outages and shrinking tax collections. We are told in October MRA missed its target by five percent. It collected K53.03 billion against its target of K55.97. About 40 percent of these revenue streams were from goods and services. During the same period the Electricity Supply Corporation of Malawi (Escom) announced a similar reduction in power generation due to the lowering of the water levels in Lake Malawi. MRA also said company assessment tax also fell by a jaw-dropping 11.76 percent (K72.76 million) after collecting K661.15 million. When there are power outages, the manufacturing sector and provision of services are equally affected.
The targets that the International Monetary Fund (IMF) have asked government to revise downwards were properly set but on the assumption that there would be no power outages.
Of course, government’s failure to pay firms that provide it with goods and services is another factor that depresses industry as the manufacturing sector is deprived of its much needed working capital to manufacture goods and provide services from which government collects taxes. When this happens firms postpone capital expenses while people spend less. And that means less Value Added Tax.
Some companies’ or people’s failure to remit taxes is an age-old problem. The small tax base is also not a new phenomenon. So these do not contribute much to the current problem.
The negative impact of the floods has undeniably also contributed drastically to the matrix of problems as some commentators have rightly stated. But to a large extent, we find that these are just opportunistic problems that would not dent revenue streams much if Escom was not operating at half mast as has been the case since four months ago when the corporation started its massive load shedding.
It is for this problem—power outages—that, however, much we may woo investors in the country, they will not come if they know that their investments will not bear the fruits they anticipate. No serious investor will pour their money in an economy that is comatose for the greater part of the year. They will always compare Malawi with other countries that promise better investment opportunities. That is why even at regional level, Malawi will continue to get crumbs where foreign direct investment is concerned.
Thank God our American friends favoured us with a windfall of $350 million through the Millennium Challenge Account. The programme is aimed at revamping power generation and distribution in the country. But this programme will not change the situation overnight. And until rains come and water levels in the lake rise—hopefully there will be no floods to wreak havoc to Escom infrastructure—Malawians will for the unforeseeable future, have to bear with MRA’s dwindling revenue collections.’
