Tough opportunity for ‘intellectual budget’

Finance, Economic Planning and Development Minister Goodall Gondwe has the momentum going into the approaching parliamentary budget deliberations that—according to unconfirmed reports—is scheduled for the first week of May this year. The momentum follows the March 23 decision by the Executive Board of the International Monetary Fund (IMF) that had good news for the cash-strapped Lilongwe after completing the fifth and sixth reviews of the country’s economic performance under the programme supported by an Extended Credit Facility (ECF) arrangement.

The board’s decision enables the immediate disbursement of Special Drawing Rights (SDR) 13.02 million (about $18.1 million or nearly K8 billion), bringing total disbursements under the arrangement to SDR 65.08 million (about $90.3 million or roughly K39 billion).

Even better for Gondwe and the Peter Mutharika administration, the Fund also approved a request for an extension of the current ECF arrangement by six months to May 22 2016 and the rephasing of disbursements associated with the seventh and eighth reviews.

For the record, the ECF is the IMF’s main tool for medium-term financial support to low-income countries.

According to the Fund, it provides for a higher level of access to financing, more concessional terms, enhanced flexibility in programme design, and more focused, streamlined conditionality.

Financing under ECF currently carries a zero interest rate, with a grace period of five and a half years, and a final maturity of 10 years.

Gondwe may also have been buoyed by the IMF board’s acting chair and deputy managing director Mitsuhiro Furusawa, who also made some soothing statements for the administration.

He said: “The new government is committed to rebuilding trust in public institutions and bringing the IMF-supported programme back on track, including through maintaining a flexible exchange rate regime and the automatic fuel pricing mechanism. Bringing inflation down to single digits and boosting official foreign exchange reserves remain key policy objectives.”

But so far, the Fund’s nice words and their accompanying foreign currency injection are the only good things going for Gondwe and the administration. The rest of the picture is not as attractive heading into the budget show down.

The Malawi Revenue Authority (MRA) is panting under the weight of revenue targets it is yet to figure out how to beat.

Civil servants still want huge salary increases and, in their own words, they don’t care where government will get the money even as the IMF and other stakeholders urge restraint on public spending.

Cashgate—the large-scale theft of public funds exposed in 2013—remains a cancer at the heart of Capital.

The budget deficit is still a big yawn, resulting in domestic arrears piling up and central bank financing—well, let’s call it printing of money—as the option.

Donors are yet to get over the breach of the public finance governance architecture and policy lapses that prompted them to suspend budgetary support.

Thus, there is still uncertainty regarding donor support. Of course, some multilateral aid is likely to come, most probably from the World Bank and the African Development Bank, but bilateral support into our expenditure plan maybe unlikely in the short to medium term.

That means there will still be a huge gap on the 40 percent traditional donor contribution into the national budget.

If the strategy is to opt for external borrowing to finance the deficit; that too could be problematic given that the levels of foreign debt are alarming.

The IMF thinks as much.

“Non-concessional external borrowing in October 2013 gave rise to non-complying disbursements following the completion of the third and fourth reviews of the Fund-supported programme in January 2014. The authorities have taken corrective actions to strengthen their monitoring of the concessionality of new external loans and to enhance communication with the Fund staff on this matter. In view of the corrective actions taken by the authorities, the board decided to waive the non-observance of the performance criteria that gave rise to the non-complying disbursements.”

The fiscal outlook is not reassuring and with the Reserve Bank of Malawi set on a tight monetary policy path in the face of inflation that could come with the 27 percent projected food gap and a possible kwacha depreciation in the last quarter of 2015, it seems the Malawi economy could be unstable for a while.

And that is what the 2015/16 National Budget should aim to achieve: provide a framework for macroeconomic stability and create a platform for growth.

The coming “intellectual” budget also has an opportunity operationalise the Public Reforms Agenda, including the Public Finance and Economic Management (PFEM) reforms launched recently. But it won’t be easy.n