It is a no brainer. Malawi’s economy is very depressed right now. It is an economy suffering from long-drawn-out weak output, prolonged high unemployment and a macro-economic as well as macro-fiscal environment that is as stable as a yoyo.
The country’s economy has also suffered from the kind of unforgiving and unforgivable fiscal carelessness never seen before and which will take years to correct.
Frankly, the scope for stimulating the economy is quite narrow—and shallow. As Finance, Economic Planning and Development Minister Goodall Gondwe prepares to table the 2016/17 national budget next month, the question I suspect is troubling the minds of those professionals at Treasury is: How should the next budget use fiscal policy as a tool for stabilising and then jolting the economy into a positive trajectory in such a depressed environment?
The second layer involves the age old debate: Should the budget be coined around expansionary fiscal policies or built on austerity that tightens spending?
The danger with the first option, as always, is the potential debt burden that may be bequeathed to the future.
And with the International Monetary Fund (IMF)-supported programme called Extended Credit Facility (ECF) tethered to frugality, I doubt it would be helpful for the Peter Mutharika administration to pursue slack fiscal policies.
Suffice to say that with economic growth so low, extra spending could help limit future output losses.
On the other hand, austerity, given the lack of budgetary support and an underperforming Malawi Revenue Authority (MRA), sounds like good common sense at the moment.
Yet, austerity, as always, poses the risk of eating away at long-run fiscal balance.
In fact, given how this country’s idea of asceticism punishes everyone but leaders, it is the poor that would suffer greatly, what with our ineffective social protection approaches that are fraught with tainted beneficiary selection, questionable design, official theft of beneficiary resources and insufficient linkages to architecture that can empower the poor to sustainably protect themselves against policy shocks.
The third layer is about what to emphasise: Will Gondwe accentuate revenue mobilisation or expenditure?
Of course, whether the former IMF economist’s policies will focus on taxes or spending is really a matter of fiscal space and macroeconomic objectives.
But given how fiscally paralysed Capital Hill is at the moment, the 2016/17 national budget is likely to take a balanced, centrist approach: moderately higher taxes with mild expenditure restraints. Somewhere along the way, this combination will give us a zero sum I am afraid.
It is a juggling effort that can determine whether the economy emerges from the dungeon or gets buried for a long, long time.
I am just trying to frame a context around which to debate the tough budgeting task currently underway and which will climax in the National Assembly when Gondwe tables the fiscal plan.
Having said that, there are a few broad policy considerations that I thought I should put forward for the Minister’s reflection.
• I know that the macro-fiscal environment has left Gondwe with very little fiscal space for serious investment, especially with pressure on the social recurrent spending such as on drugs and education. But I hope he will fight hard to secure funding for carefully selected public sector investments with high growth impact.
• This country needs new and quality business players to enter the market. I hope the budget will have well thought out tax incentives to attract them. These should target both domestic and foreign direct investors.
• The budget should have a strategy for breaking the current rigid interest rates cycle to boost credit flows. While Gondwe’s strategy of ensuring food availability could be handy—buy a lot of maize and flood the market with the grain to drive down inflation, which could in turn pull down interest rates—this is hardly a sustainable plan. We need reforms in monetary policy management just as we are pushing in the fiscus.
• The budget should also boost confidence by signalling consistent policy making and implementation. Waffling as well as on-off decisions erode confidence.
• And the budget should demonstrate the improved quality of public finance management, assuming there is any, and signal that it will continue to aggressively do so.
These things are not easy and I am not naïve enough to think that Gondwe and his team have not thought about them.
I am positive they have, but I just want to ensure that they think about them more deeply.