Why govt misses economic targets

There seems to be something wrong with Malawi Government’s projections of key macroeconomic indicators. They are always not met.

For the past five years, the country’s key macroeconomic variables such as inflation, exchange and interest rates as well as gross domestic product(GDP) growth rate have either missed their targets or been revised downwards.

In  2015 and 2016, for instance, growth projections pegged at five percent and 5.1 percent, respectively, were revised downwards from their initial projections.The actual growth was at 3.1 percent and 2.7 percent respectively, on account of poor agricultural output.

Ministry of Finance, Economic Planning and Development also revised downwards growth  projections for 2017 and 2018,  respectively from 6.4 percent and six percent due weather-related shocks.

The poor agricultural output largely resulted from dry spells and fall armyworms, which according to Agricultural Production Estimate Survey, affected maize production, which was estimated to have declined by 19.4 percent from 3.5 million metric tonnes (MT) in 2016/2017 growing season to 2.8 million MT in the 2017/18 season.

The story is the same with budget deficits, which have remained elevated and revised upwards a number of times in the past five years.

In the 2015/2016 financial year, deficit was estimated at K150 billion, but the actual outurn was K167 billion.

In the 2018/19 financial year, Treasury targeted to close the year with a deficit of K210 billion, but it closed the fiscal year with a K243 billion deficit.

However, government seems to be doing well on the exchange rate, inflation, foreign exchange reserves and interest rate.

Inflation has been anchored in single digit since August 2017 and is currently at the 9.6 percent as of October 2019 from 24 percent in 2015. Exchange rate has also balanced at its equilibrium position of K730 since August 2016.

Base lending rates, at 12.3 percent for November, are also at their lowest since 2015 coming down from above 30 percent in 2015. Gross official reserves have also been maintained at above 3.5 months of import cover within the international set standard for reserves.

University of Malawi’s Chancellor College economics lecturer Exley Silumbu while noting that it has become a norm for government projections to either be revised downwards or missed, said the implications are felt in the budget implementation, business activities and the economy in general.

He said government can move out of this cycle by investing in infrastructure and energy.

Said Silumbu: “Government has until recently not committed to improving the energy sector. Energy is crucial and is what government should be banking on for development.”

He said the main implication for missing targets is that most of the times revenue projections are done based on such estimated growth figures, which when not achieved, cause budget imbalances.

This leaves Treasury in a constant state of deficit.

Economist Edward Chilima said missing the targets over a long period of time may dilute credibility of national figures.

He noted that the projections are based on vulnerable assumptions such as good agricultural   season, donor aid , revenue collections, which  mostly  fail, thereby affecting the projections.

“We assume growth will come from certain sectors, but those sectors do not for various reasons. For instance,  growth in agricultureis weather -dependant and this also depends on efficiency of input distribution.

“We expect growth from tourism, but infrastructure is not up the level to attract meaningful tourism. We assume growth in manufacturing and yet support system remains challenged, for example, electricity, road network and land issues,” said Chilima.

National Working Group on Trade Policy chairperson Fredrick Changaya, who is also managing director of Candlex Malawi, said the country’s problem is structural and has relied on one sector to drive the economy.

“We have over the years relied on smallholder farming and rain-fed agriculture. Elsewhere in the world, farming, especially  rain-fed, is always faced with  shocks  and has certainly done the same for Malawi,” he said.

Changaya said businesses worry over missed projections, which tend to disrupt planning.

“Business strategies are formulated based on growth figures for specific sectors of the economy that contribute to the overall growth. When such is not real, businesses miss out with their strategic thrust.

“Unfortunately, business reaction can be that of taking a wait-and-see approach thus not investing into the economy which makes us stagnant,” he said.

The Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has also indicated that uncertainty in the country’s policy environment continues to be a thorn in the flesh of the private sector.

MCCCI latest quarterly economic review report for 2019 cited frequent changes in policies in industry and trade, which, remain a big challenge.

Reserve Bank of Malawi (RBM)  spokesperson Mbane Ngwira admitted that projections of macroeconomic variables,  in particular GDP,  have often been  missed, blaming weather-related shocks, which the country has experienced over the years.

“Indeed the volatility in GDP growth is due to adverse weather conditions. Our economy is agri-based; hence, shocks to weather impact us negatively,” he said.