Opportunities in intellectual budget

Honarable Folks, what’s an intellectual budget? Finance minister Goodall Gondwe used the term at a pre-budget consultation meeting in Lilongwe two weeks ago to prepare us for the ugly looks of government’s next fiscal plan which comes out mid-year.

The minister hinted that the 2015/16 national budget will be extremely difficult to sell to Malawians, including their MPs.

Why? The IMF, which has recently resumed giving us aid in the name of Extended Credit Facility (ECF) wants to see a reduction in domestic debt and government spending, among other measures.

Domestic aid alone is currently at K350 billion, translating into 18 percent of the total national wealth as measured by Gross Domestic Product (GDP). This is nearly half of the 2014/15 national budget!

A former deputy minister of finance told me that the debt benchmark is supposed to be no more than 25 percent of the budget. In the case of Malawi, we ought to add to the huge domestic debt the over K100 billion arrears to suppliers to appreciate the burden the government has already shouldered.

If we add the run-away foreign debt which is getting nearer the 2006 levels when the world wiped off virtually all of it so government could channel the savings to education, health, agriculture and other pro-poor arrears, then the debt to budget ratio is almost 1:1.

Economists blame our current economic woes, especially the high interest rates which threaten the survival of small and medium businesses–the category where many Malawian entrepreneurs belong–on government’ sweet tooth for borrowing on the domestic market. They say it “crowds out” businesses.

Ironically, in a country that hardly attracts significant levels of foreign direct investments (FDIs), it’s these small and medium businesses that have the potential to generate wealth, pay taxes and create employment for the youth.

In short, what’s happening when government chooses to survive by borrowing heavily on the local market is the case of starving the goose that lay the egg. The so-called ‘engine for growth’–the private sector–is being choked by the negative effect of government’s debts on the cost of borrowing.

Needless to say, if sanity doesn’t come in now and put the debts under control, then the burden of poverty our children will inherit will be much bigger than anything we’ve ever experienced.

I guess this also explains why IMF wants government to check on its spending blue print currently at 35 percent of GDP. Common sense should tell us that provision of public goods and services–the core task of government–is simply a means to wealth generation and not an end in itself.

There is therefore the need to balance the shares of the national cake allocated to the public and private (including informal) sectors if our economy is to grow by over 6 percent a year on a sustainable basis so as to enable us get out of the poverty web we are currently entrapped in.

Why then must we expect the 2015/16 budget to be ugly. Obviously, it’s because compliance with IMF terms means having to strictly prioritise spending.

This comes at a time when the APM administration has vowed to stick to the farm input subsidy programme despite that its costs keep on rising while its impact on the interest of food security keeps on declining. If the truth be told, FISP is maintained in its current form more because of its political than economic benefits.

But politics being what it is, the APM administration also appeared determined (at least prior to Gondwe’s pre-budget warning shots) to continue with its self-inflicted burden of funding low cost housing project for the poor.

These expensive commitments were to be superimposed on the burden of sourcing extra-funding for the soaring demand for pay rise in the public sector which, we’ve now learned, may have to factor in the mswahara honoraria for traditional leaders.

If government chooses to cut further on education, security, health and agriculture budgets, not only shall the future of Malawi be destroyed but that may also come at a huge cost to our political leadership in government.

So what are the options in light of donor freeze of budgetary support? I think government has no choice but to abandon the housing project, reduce funding for FISP and put its foot down on salaries in the public sector.

At the same time, government has to do all it can to ensure that the 30 percent of its revenue which is lost to corruption and inefficiency is kept in a properly stitched bag  so it can be used for the intended purpose.

They say necessity is the mother of invention. The precarious situation we are in may just be what we need to start thinking and doing things differently for the survival and growth of our economy.