Ever since Finance Minister Maxwell Mkwezalamba hinted that he intends to frame the next budget without foreign budget support, there has been a chorus of protests from some sections of the civil society, private sector and other stakeholders.
Most are worried that excluding aid would squeeze government finances and devastatingly hit public service delivery, especially in critical social sectors such as health, education, water and sanitation.
These are genuine concerns, but they are not very realistic. During the recent Common Approach to Budget Support (Cabs) review meeting, development partners made it clear that chances of them releasing the more than $150 million in withheld aid since Cashgate exposed how porous the country’s public finance management (PFM) system is, are almost zero in the current fiscal calendar and even the next one.
This is despite a positive review of the Extended Credit Facility (ECF) by the International Monetary Fund (IMF).
Moreover, in the just-ended ECF review concluded this week, the fund did not seem impressed with the government’s implementation of the economic programme either.
In other words, we need to face facts that Capital Hill will not get General Budget Support (GBS), which makes up between 30 and 40 percent of the National Budget.
The countries that provide GBS are full members of Cabs— the United Kingdom through the Department for International Development (DfID), the European Union, Norway, African Development Bank and the World Bank.
There are other influential donors such as IMF, Germany, United Nations Development Programme and Ireland, but these only participate as observers and do not give GBS. Their aid is channelled through other aid modalities such as the ring-fenced sectoral funding of projects and, therefore, does not go directly into the government budget.
Understandably, GBS is an important part of the National Budget largely because of its flexibility in terms of usage by government.
Capital Hill can use GBS just as it uses domestic revenue collected through taxes by the Malawi Revenue Authority (MRA) or fees and levies by other government departments. Thus, general budget support is not earmarked or ring-fenced for specific use.
Given this nature of GBS, government prefers this aid modality on the basis that aid can only be effective if it is disbursed and accounted for through national PFM systems in support of national priorities.
This government policy is also in line with the Paris Declaration of 2005 and the Accra Agenda for Action of 2008 on aid effectiveness.
But given the collapse of the country’s PFM systems as evidenced by Cashgate and the subsequent loss of confidence in it by donors, development partners have now decided to indefinitely suspend disbursing their money through GBS.
If we are lucky, some donors could re-channel these resources through projects or dedicated grants. If not, then these funds could be gone for a long time with the possibility that it may never return given the donors’ own fiscal pressures at home.
This is why I agree with Mkwezalamba that we must plan our expenditure on the assumption that GBS will not come. In fact, there is nothing new here.
I recall that ever since Britain suspended aid during the Bingu wa Mutharika administration in 2010 or thereabouts in anger after government bought a presidential jet, the Ministry of Finance has not been including DfID money into the National Budget. This makes sense.
I mean, if you know that you will not be getting certain sums of money, why include it in your plans? This only creates false hopes that may only end up forcing government to borrow too much from the domestic market to fill the gap that everybody knows would not be filled using normal revenue.
There is also an ironic familiar ring to Mkwezalamba’s fiscal stance. Ken Lipenga, as Finance Minister during the Mutharika administration said something similar that culminated into the so-called zero-deficit budget (ZBS).
Said Lipenga in Parliament at the time: “Now that the ECF programme has not yet been concluded, it is unlikely that we will get these resources in this fiscal year even if the ECF programme review were concluded within the second half of the fiscal year. It is on this account that for purposes of being prudent, these resources have been removed from the resource envelope.”
Immediately, Lipenga sharply cut expenditure estimates. Indeed, revenue projections that stood at K307.7 billion at the beginning of the 2011/12 fiscal year; were revised downwards to K287.5 billion, representing 6.5 percent shrinkage. Mind you, this was in the middle of a financial year!
In fact, this sharp downward revision was a mockery to the K4 billion surplus-totting approved estimates for the 2011/12 budget as passed.
Of course—as it happened in the Mutharika regime—Mkwezalamba’s reduced budget will hit economic growth hard. Considering that government is the major client for most businesses, pared planned public spending could slow economic activities as the market for goods and services dwindles and potentially lead to negative growth. Funding to social sectors will also be seriously affected and the poor—in the absence of a robust social protection plan—will feel the pinch most. But as much as this is painful, it is a better pill to swallow than borrow more than 40 percent of our expenditure. Such heavy domestic borrowing could crowd out the private sector, raise interest rates and tighten the noose around businesses’ necks.
The fundamental question at this stage is: What will government do to ensure that it collects enough revenue to avoid the severity of the public expenditure cuts? The first option is to bite the bullet and raise taxes, which is likely, but could draw sharp resistance nationally. It could also further derail the economy as disposable income for both investment and consumption could dwindle. The most palatable route is expanding the tax base. But we know that this song has been sung for decades. The tax field has remained narrow. It is a tough situation that calls for tough decisions.
And Mkwezalamba’s zero-aid budget is one of those tough, but very prudent decisions.