When donor smiles are miles away

Eighty-two years old Mafuleka Potani from Kampini Village situated in the dusty part of Mitundu in Lilongwe might not be competent enough to talk about the technical language that Malawi’s donors and government officials at Capital Hill use in their daily business.

He is aged and frail, but to him that is his strength for he has seen the world unfolding.

Potani spoke at length with Business Review on his thought about Malawi’s continued reliance on development partners in financing the national budget, whose implementation is now in jeopardy after last year’s budget support delays.

“Ine nuona kuti kudalira anthu akunja pa chitukuko cha dziko lino nchimene chikupipangitsa kuti Dziko lino lizinkirankira mmbuyo.M’zaka zonse ndakhala ine ndi moyo, ndawona kuti a Malawi timataya nthawi kudikilira chitandizo cha kunja mmalo modzigwilira tokha mkumadzidyetsa [“My stand is that over-reliance on donors is what is pulling back the development of this country. All these years I have been alive, I have noted that we Malawians are spending precious time waiting for aid instead of working extra hard and fend for ourselves,”] said the wrinkled soya beans farmer and a grandfather of 19 children.

Despite Potani’s school of thought, today business seems to be usual but, yet on the ground the economic situation is getting worse.

On November 7, 2013 Malawi’s major donors sitting under the Common Approach to Budgetary Support (Cabs) made a bold decision and that decision still stands hitherto. The decision was to withhold budget support worth $150 million (over K60 billion).

Malawi receives a harmonised general budget support from a group of donors which consists of United Kingdom (UK), Norway, the African Development Bank (AfDB), and the European Union (EU), the World Bank and Germany.

The International Monetary Fund (IMF) and United Nations Development Programme (UNDP) participate as private observers.

Simply, the donors were vexed at the revelations of massive abuse of taxpayer’s money at Capital Hill which saw billions of money being swindled from the government’s payment system called the Integrated Financial Management Information Systems (Ifmis).

Cashgate merely forced a delay in approval of the third IMF programme review, as the suspended donor inflows had been programmed to finance a significant part of government expenditure.

Since the decision was made to delay budget support in November last year, one has an impression that there are miles away for Malawi to excite her donors full-throttle before they resume their aid.

Economic management in doubt

That government owes ordinary Malawians an explanation on the continued over-borrowing and its use a fact that even Finance Minister Maxwell Mkwezalamba should not dispute.

At the end of its recent review meeting of the Extended Credit Facility (ECF) in Washington DC, the IMF issues waivers on the both domestic and external borrowing by Malawi.

At the end of the mission, the IMF statement exposed serious discrepancies by the government from the agreement with the fund such as over-borrowing on which the fund had to issue waivers.

“Yes, it is good news that the IMF was able to consider Malawi for immediate disbursement of $20 million. But in the first place, we should not even have reached the stage where the international community is putting our economic management in doubt,” were words from the Malawi Confederation of Chambers of Commerce and Industry (MCCCI).

Government’s action as manifested by the over borrowing is widely interpreted that government is excessively borrowing to cover up the revenue gaps left by donors.

As it stands now, there is a risk to the implementation of the 2013/14 financial year as well as the ECF programme with the IMF unless government borrows within the agreed zones with the IMF.

The recent admission by Treasury to over-borrow by K58.7 billion in the first quarter of the 2013/14 should be a wakeup call that things are not that all rosy.

Not so long when Mkwezalamba assured Business Review that government does not intend to borrow heavily from the domestic market which often raises interest rates.

But only to see a few months banks washing the market with announcements about the raising of their respective rates to above percent. Life is now unbearable to ordinary borrowers

Kwacha misbehaviour versus donor aid freeze

The kwacha is misbehaving and its crumble is obviously a menace to the monetary policy authorities.

In Lilongwe, in some foreign exchange bureaus for instance, the local unit is selling at K468 to the dollar which is a massive depreciation from an average of K330 the currently was trading to a dollar mid last year.

It took the central bank, the Reserve Bank of Malawi (RBM) to admit that the weakening of the kwacha to other foreign reference is greatly attributed to the recent withholding of donor support by Malawi’s major donors.

“It was observed that despite the current level of official reserves being much higher than last year, the sharp kwacha depreciation reflected largely the loss of donor support which constrained the central bank’s ability to defend the kwacha,” said RBM boss Charles Chuka in i the latest Monetary Policy Minutes.

In a county where the issue of diversifying the economy’s base seems to be a song repeatedly sung by politicians, reliance on one crop, tobacco, is merely doing more harm than good.

Donor money, in form of foreign currency, is often viewed as one importance source of foreign currency to Malawi, which is grappling to promote other equally important export crops to earn foreign currency.

In the 2013/14 national budget, donors are financing the 41 percent of the 2013/14 national budget.

Such being the case, deep into the lean period, the prolonged uncertainty as to when will donor money towards the budget will trickle in, will simply fuel the depreciation of the currency up until tobacco market doors open somewhere in March this year.

Let’s not put into oblivion that a weak kwacha continuous to hurt importers hard as well as Malawian students who are obliged to pay their tuition and examination fees in foreign currency as they are forced to cough more kwacha to meet their demands.

Donor taps re-opening in Limbo

I asked the current chairperson for Cabs Alexander Baum who is also Head of European Union (EU) in Malawi on the future of budget support for Malawi in the wake of the recent IMF approval of $20 million.

“My sense is that we are not yet in a scenario of confidence, the IMF approval is not a big surprise. It does not tell us much about the systems,” he told me trough an email response.

Baum says donors believe the cashgate has revealed how deep seated and protracted the problems are, ‘they are systemic and not easy to root out.’

He adds: “Many hope that we will go now back to business as usual, but this is still premature. All depends on – not just whether the actions government announced are taken – but also whether this can be verified and the effectiveness of the measures be confirmed.”

Baum boldly says the recent IMF’s board approval of $20 million does not imply resumption of budget support, saying it is a necessary but not sufficient condition.

He says there is still the Cabs review in March, which will focus on public finance management and cashgate follow up.

“If this one is positively concluded, some development partners may resume budget support but this remains an autonomous decision of each one and the conclusions may differ between them.”

Baum’s sentiments resonate well with the thinking of head of the department for International Department (DFID) Sarah Sanyahumbi who also recently spelt doom and uncertainty over their delayed money towards budget support to Malawi.

Said Sanyahumbi: “Once you lose confidence, restoring confidence and strengthening the system takes time…yes the government is doing a good job so far but there is a far way to go and will take a bit of time simply to restore the confidence and take necessary steps to strengthen the [Ifmis] system.”

Summing up the words coming from Malawi donors, it should signal to all Malawians that cashgate would prolong anger among Malawi’s developing partners up until the mess would be deemed cleaned.

 

Budget support and soaring inflation

There is a positive correlation this time around between the withholding of budget support and the unbearable cost of living across the country.

This has been proven by the Center for Social Concern (CfSC) through its latest survey.

That a side, economic wisdom points out to a situation where a weak currency simply culminates into raising the cost of importing a unit of a foreign made item and this leads to importers passing on high costs of importing those goods to consumers. Cost push kind of inflation as opposed to demand pull inflation explains all this.

Cost-push inflation is a type of inflation caused by substantial increases in the cost of important goods or services which befits in this Malawi scenario.

A survey conducted by the Lilongwe-based CfSC, whose findings Business Review has seen, revealed that the cost of living for Malawians has tremendously risen in the past year of 2013 in all the four cities including sampled districts of Karonga and Mangochi.

The cost of living in Mzuzu as of December 2013, was at K99 073 compared to K82 254 in December 2012 while that of Lilongwe has risen from K91 632 to K112 619 same period. During the period under review, the cost of living for Blantyre went up from K87 756 to K119 555 while that of Zomba is at K108 004 from K76 209 in December 2012, according CfSC.

The basic needs baskets consists of food items and non- food items and is sampled based on a household size of six people.

“Rising cost of fuel, liberalisation of kwacha, withholding of donor support, negative effects of trade liberalisation and poor food governance especially maize are some of the major reasons that contribute to the rising cost of living,” said CfSC Social Conditions Research programme officer Alex Nkosi.

Aid dependence vs political independence

Encouragingly, Malawi’s current situation under President Joyce Banda appears to exhibit some of the characteristics of the Paris Declaration on Aid Effectiveness (2005).

Albeit the declaration’s primary concern was to regulate and increase the effectiveness of aid, it also sought to synchronise the development channels of national governments with bilateral and multilateral donors. The convictions of President Banda and the aims of international donors appear to be largely in alignment.

But it is generally accepted by many that donor dependency potentially inhibits political independence because aid is not secured in perpetuity.

And financial difficulties in donor countries have recently made it harder to justify aid, and the United Kingdom has already indicated its desire to see its relationship shift from aid to trade.

On May 18, Banda outlined her plan for economic development. He meted out three central points: austerity and rigour at the governmental level to curb corruption and an inefficient bureaucracy; increasing agricultural productivity, including plans for genetically modified crops and a water development programme; and a commitment to women’s rights that encompasses the economic and political empowerment of women in Malawi. Emphasis was also given to attracting foreign investment, particularly through the expansion of the tourism industry.

But alone, may not be enough, as Dominic Farrell wrote on Think Africa Press online publication. Malawi will also need to diversify its economy before it can be independent of aid and this has been turned out to be a song by politicians.

Strides by Mkwezalamba

Led by Mkwezalamba, it is worth noting that Malawi government is doing something to ensure normalising its relations with donors.

It is worth noting that if implementation of the Government Action Plan continues at the current pace, the suspended donor money could be unlocked by end June, 2014 and that it what the IMF expects as well.