The shame that is our forecasting and modeling expertise

What exactly is Secretary to the Treasury Newby Kumwembe saying?

Was he making sense even to himself when he told the Budget and Finance Committee of Parliament on Wednesday that in view of the blatant thieving of public resources dubbed cash-gate, government has cut K32 billion from the national budget but somehow the overall annual fiscal plan has bloated by K4.5 billion to K640.3 billion?

How would that happen? Did the Ministry of Finance table a fake budget to Parliament, which dutifully but blindly approved it?

Kumwembe then explains the bizarre Arithmetic by attributing the budget increase from the approved K635.8 billion (the proposed budget was K638.2 billion) to interest payments that were supposedly underestimated by over K50 billion and have since been adjusted to K88 billion.

What that means is that interest payments were originally estimated at K38 billion. I know my calculating prowess is nothing to write home about, but I am arriving at an underestimation of roughly 130 percent.

I appreciate that projections are mere estimates and can never be exact, so surely a margin of error is inevitable, but more than double the original figure? Let’s be serious for once in our miserable lives!

What this tells me is that either someone did a lousy job on both the assumptions around which the budget was built and on the actual estimates or—given how cash-gate occurred—there was a deliberate effort to hide expected revenues so that it would be easy to siphon the billions out of our Public Finance and Economic Management System (PFEM).

In which case, the Budget and Finance Committee of Parliament must further interrogate the figures Treasury has given and get to the bottom of the matter otherwise someone, somewhere at Capital Hill, is playing chess inside our sleeping psyches.

The above suspicions notwithstanding, I would also like to state that our revenue forecasting and macroeconomic modeling skills suck.

These inadequacies might help explain some of the wild figures that are thrown into our faces by Treasury and why estimates are consistently wide off the mark.

Let me start with the Revenue Division in the Ministry of Finance. It is supposed to be an in-house policy think tank that assesses government revenue and implications on any tax reforms on the macro-economy.

Its mission of providing policy guidance through the designing of efficient and effective revenue systems that generates adequate public resources to meet government objectives is noble and impressive.

However, given the mediocre results so far, the mission sounds over the top, superfluous and may have to be scaled back to reflect the half-baked realities on the ground.

If the Revenue Division was to be brutally honest, it would admit that it suffers from acute capacity gaps.

Most of its officers have very limited skills required to measure up to modern ever-changing tax and non-tax revenue analytical tools.

Believe me, most folks there are well-educated officers, but have very rudimentary forecasting and costing expertise, well below what their job requires.

As such, they cannot competently come up with a comprehensive suite of revenue forecasting and costing models. And you don’t have to take my word for it. ASK THEM!

Is it any wonder that after forecasting back in May that domestic revenue will be K355.7 billion, Kumwembe is now telling us that the figure will climb to K429.2 billion by the end of the current fiscal year—21 percent more than budgeted—on account of “improved revenue performance” which apparently MoF’s revenue department was unable to foresee?

The same embarrassing problems that the Revenue Division faces can also be seen in the Ministry of Finance’s Economic Affairs Division (EAD).

This is the department that is responsible for economic policy analysis and research, the results of which help to come up with national budget assumptions and figures.

Yet, EAD’s most glaring capacity gap is in macroeconomic modeling and forecasting, an important research tool for them.

Financial programming expertise is also in short supply there, so how can these folks develop internally consistent forecasts of critical variables in the four macroeconomic areas of fiscal, external, monetary and real sectors that are important tributaries of the river that is the national budget?

Is it any wonder that we have fiscals that are so wide off the mark that they can destabilise the whole budget as they have obviously done so as we speak?

You mean it was not possible to project a near accurate estimation of the interests we would be paying on arrears? Come on people, how many times have interest rates jumped in this fiscal year?

By the way, unless reporters left out some information that Kumwembe gave to the parliamentary committee, I am curious that Treasury would reshuffle its figures, bring in forgotten debts into the budget equation without telling us what that means on the fiscal deficit, government borrowing levels and, why yes, interest rates and inflation outlook?

What about estimates of growth domestic product (GDP)? Are we still in dreamland—given what has happened in the current fiscal year so far—where we see the Malawi economy growing by five percent in 2013 and 6.1 percent in 2014?

All these are linked and we are entitled to a full picture.

Come on, don’t be shy, and please do tell bwana Kumwembe!