World Bank’s budget fears

The World Bank yesterday expressed concern over Malawi’s weak governance, rampant corruption and fiscal indiscipline and asked the new administration to turnaround the situation to restore confidence in the economy.

The Bretton Woods institution has also expressed fear that government will likely miss its targets in the 2018/19 National Budget expiring on June 30 largely because of spending pressure linked to the impact of Cyclone Idai and other expenditure overruns.

The bank said this in Lilongwe yesterday during the launch of its ninth edition of the Malawi Economic Monitor (MEM) under the theme Charting A New Course which outlines four inter-related policy directions that the World Bank encourages Malawi to focus on in the short to medium -term.

In his statement, World Bank Malawi country manager Greg Toulmin reminded authorities that weak governance and corruption remain areas of concern to the bank.

He said the fresh governance mandate given to President Peter Mutharika and his Democratic Progressive Party (DPP) following their triumph in the May 21 Tripartite Elections presents a window of opportunity for authorities to strengthen government commitment to the implementation of reforms.

Said Toulmin: “Building a reform momentum to address weak governance and corruption is critically important to strengthen economic outcomes and bolster broader confidence in Malawi’s economic prospects. For government, it is not about talking, but doing it.”

He also said government should ensure exercising stronger fiscal discipline to reduce high levels of borrowing to maintain fiscal and debt sustainability as well as to increase investment needed to reduce the country’s vulnerability to shocks.

But Toulmin said the bank was worried about persistent recurrent expenditure overrun on the budget and the corresponding debt build up.

He said: “Malawi has, thus, experienced a sharp increase in public debt since benefitting under the Heavily Indebted Poor Country [Hipc] and the Multilateral Debt Relief Initiatives [MDRI] in 2016. High fiscal deficits have increasingly been financed by high cost domestic borrowing.”

The launched report indicates that Malawi’s domestic debt to gross domestic product (GDP) ratio has more than doubled since 2011 to about 60 percent in 2018. Such an accumulation of debt, the report says, stems largely from fiscal deficits as the government has frequently over-spent in recent years.

“This presents a significant risk as the deficit is expected to be largely financed by high-cost domestic borrowing,” reads the report.

In the 2018/19 National Budget, net domestic borrowing, which was estimated at 4.7 percent of GDP, has been revised upwards to 6 percent of GDP, signalling Treasury’s huge appetite for cheap financing from the domestic market following the reduction of the policy rate from 16 percent to 13.5 percent.

On government expenditure, the report shows that in the second half of the 2018/19 fiscal year covering the period January to June 2019, fiscal pressure on the budget has been on account of expenditure on wages and salaries.

The report highlights that expenditure on wages and salaries is expected to rise to 7.2 percent of GDP in the 2018/19 financial year from 6.5 percent in the 2017/18 financial, “the highest level in recent years”.

Further reads the report: “This is mainly attributed to recruitment in the education and health sectors. Additionally, the government has revised expenditure on goods and services upwards, particularly for transfers to public entities, election-related expenditures, generic goods and services and other statutory expenditures.”

Former minister of Finance, Economic Planning and Development Goodall Gondwe told The Nation last month that Treasury had used the unforeseen expenditures vote in the 2018/19 National Budget to cater for recent promotions in the public service. He dismissed fears that such a move would culminate into a burgeoning wage bill, currently estimated at K396 billion.

As part of Malawi’s agreement with the International Monetary Fund (IMF) under the Extended Credit Facility (ECF), the government wage bill is not supposed to exceed nine percent of nominal GDP.

Presenting the report, World Bank Malawi country economist Priscilla Kandoole advised that going forward, accelerated fiscal consolidation will be key to restore fiscal and debt sustainability for the country.

On recurrence of weather-related shocks, she said there is need for the country to build resilience to shocks which will help reduce Malawi’s vulnerability to weather shocks and also contain fiscal risks.

Reacting to the report, director for Policy Research and Social Empowerment, Henry Chingaipe, who was also a discussant during the launch, said in most cases, Malawians are usually obsessed with retaining political incumbency; hence, what he called a ‘half-hearted approach’ to implementation of key policies and strategies for the country.

He said: “My reading of the situation is that over the past 25 years, we have had good government policies, but we are doing badly in terms of development outcomes. We are also spending on things with less potential.”

On his part, Charles Chuka, another discussant and a former Reserve Bank of Malawi (RBM) governor, stressed the need for government to

strengthen debt management approaches by putting limits on cumulative debts and not just current debt.

He also said much as the country has a myriad of policy documents and strategies, the challenge has been that many Malawians do not know how the world economy operates in terms of competing on the global market.

In his contribution, Economics Association of Malawi (Ecama) executive director Maleka Thula said much as the domestic economy is touted to be stable, the country’s main focus should be to implement the development plans handy to realise meaningful development.

The World Bank report has recommended four policy inter-related directions, including building strong economic and institutional foundation, unlocking the potential for private sector to create jobs, investing in human capital by improving education, and also investing in resilience and better systems for managing external shocks.

Mutharika is presiding over timid economic growth rates too low to make a dent on poverty levels, a shrinking labour market in a population dominated by youths, an unstable energy environment that is speeding up the country’s de-industrialisation, institutionalised fraud and corruption that deprives taxpayers 30 percent of the national budget and a collapsing social service delivery architecture torturing citizens in crucial sectors such as health, education and agriculture.

While IMF in March revised upwards Malawi’s growth rate for 2019 to five percent from its earlier forecast of 4.1 percent on account of unexpected boost in agricultural output and electricity, that expansion is well below the seven percent target that the Mutharika administration has been dangling.

If the fund’s GDP forecast holds as it has mostly done in the past, then it means Mutharika’s promises to more than double the country’s GDP per capita to $1 105 and increasing employment by 22.5 percent is a near impossible task.