What next after donor aid freeze?

It is official. Malawi’s major donors under the banner of the Common Approach to Budgetary Support (Cabs) have frozen their aid or budget support.

Traditionally, donors have been bankrolling between 30 percent and 40 percent of our national budget over the years, with ourselves putting in the remaining 60 or so percent.

Who makes up Cabs? Basically, this is a ‘rich boys/girls club’ comprising the United Kingdom (UK), Norway, Germany, the African Development Bank (AfDB), the European Union (EU) and the World Bank with the International Monetary Fund (IMF) and the United Nations Development Programme (UNDP) participating as private observers.

From this line-up, one can see that Cabs is a very influential club which calls the shots for the government.

Briefly, Cabs donors have withheld their budgetary support, money from taxpayers in their respective countries, following concerns about plunder of public funds in what has come to be called Capital Hill cash-gate.

It is not clear how long Malawi will take to clear the mess, but one thing is clear from the Cabs donors that they are bitter and may not release their funds, possibly until after the May 2014 Tripartite Elections. In the words of Cabs chairperson Sarah Sanyahumbi, Malawi has lost the trust and confidence it had from donors. Even in personal relationships, trust and confidence take time to build or reclaim once breached.

In her loaded statement, Sanyahumbi said: “As far as we [Cabs donors] are concerned, the line has been crossed, once that line has been crossed, you cannot go back to what you had before.”

We have been in the current situation before where donors withheld support. The consequences have previously been dire and, all things being equal, I foresee more trouble on poor Malawians this time around. Sadly, the looters will hardly feel the pinch as they still have their loot both in foreign currency and other channels.

Already, fuel pump prices went up on Tuesday this week with petrol rising from K737.60 to K760 per litre and diesel from K730.90 to K770.20 per litre. Fuel has a cost-push effect on all other goods and services such that soon everything will be going up.

The most immediate impact of the donor aid freeze is that our national budget is in disarray, almost non-existent as Minister of Finance Maxwell Mkwezalamba and his team have to go back to the drawing board to work out a budget without donor input. A forced zero-decit budget (ZDB), as it were.

A budget outlines a government’s expenditure plans and how it intends to raise revenue in a given financial year. It is also used as a tool to influence some policy changes and variables, including new taxes, inflation and interest rates.

Key to easing the burden of the donor aid freeze on poor Malawians will be fiscal management where the process of raising and spending public money will be transparent. There will also be need for fiscal discipline i.e. ensuring adherence to the budget to keep deficits as low as possible. We need to spend what we have, cutting our cloth according to our size.

These steps, if religiously undertaken, will reduce government’s domestic borrowing appetite, thereby containing interest rates and inflationary pressures. However, practically, things may not work out that way given that this is an election year and parties in government tend to overspend to enhance their chances of retaining power. This is where danger creeps in.

Currently, the country is sitting on substantial foreign exchange reserves estimated at over two-and-a-half months. Given the fact that most shops stocked up when the exchange rate was lower in April or thereabouts and that imports of farm inputs, including fertiliser, have mostly been paid for, the current import cover should help ease the burden. Consumers can also be spared vigils at filling stations by maintaining the automatic pricing mechanism for fuel to fully recover costs.

Ironically, the donor contribution of about 40 percent in the national budget is equivalent to a share of the budget that goes into people’s pockets.

To quote Sanyahumbi, we indeed “crossed the line”. This is a delicate situation. Let sanity prevail.