Zero-deficit reality check

Opening his maiden revised budget statement in prose and closing it in poetry in the capital, Lilongwe, Malawi’s Finance and Development Planning Minister Dr Ken Lipenga on Friday cut K20.2 billion (about $120 million) from the 2011/12 revenue projections.

 

Lipenga also slashed annual expenditure by nearly K4 billion (about $24 million) from K304 billion (about $1.8 billion) to around K300 billion (about $1.7 billion).

The downward revisions, while realistic, are highly unusual, according to University of Malawi’s Chancellor College economics professor Ben Kaluwa who said in an interview yesterday he does not recall precedents of such adjustments in the country.

Of the foregone revenue, K19.8 billion (about $118 million) is budget support tied to the IMF-supported Extended Credit Facility (ECF) programme that went off-track last June.

The funds are also part of the K65.2 billion (about $390 million) budgeted grants for the current fiscal year, with the others being dedicated grants (K28.3 billion or about $164 million) and project grants (K17.1 billion or about $102 million).

Since dedicated and project grants are usually ring-fenced, targeted at the poor and, therefore, protected, donors are mostly confident about releasing them even without an IMF programme.

Lipenga said by mid-year, donors had released K26.6 billion (about $160 million) in dedicated and project grants and government is poised to get the rest—but not the IMF-linked programme or budget support—over the remaining half of the year.

Negotiations to return to the IMF programme have stuttered after President Bingu wa Mutharika put his foot down, declaring that he will not devalue the kwacha—the two parties’ key sticking point.

Mutharika’s public muscle-flexing and pre-emptive declaration of position must have boxed in Lipenga, leaving him with only one card to play: Follow the President’s policy road map even if it means losing the money that would have improved the country’s dire foreign currency situation.

“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,” Lipenga told Parliament in a speech that exuded refreshing candour and pragmatism.

The revision has plunged to K287.5 billion (close to $1.72 bn) bi revenue estimates that stood at K307.7 billion (about $1.8bn) at the beginning of the 2011/12 fiscal year, representing 6.5 percent shrinkage. It is also within the 2010/11 estimates of K287 billion.

This sharp downward revision is a mockery to the K4 billion surplus-totting approved estimates and vindicates critics who charged that the 2011/12 budget as passed was unrealistic and based on wrong assumptions, especially given the uncertainty in donor support at the outset.

The fiscal contraction means that expenditure levels in the current fiscal year must fall as they have, with the 2011/12 zero-deficit budget revised to around K300 billion from the approved K304 billion.

There is also a K12.5 billion gap between projected revenue and expenditure as revised, which Lipenga omitted to explain how it will be raised.

But if Treasury’s increased activities on the money market are anything to go by, there is enough anecdotal evidence to conclude that authorities plan to domestically borrow its way out of the spending yawn.

Four things are clear from the revised expenditure figures that are short of the K20.2 billion balance of payment support.

—Funding to key sectors such as health will fall, thereby worsening the already deteriorating social economic situation in the country.

—Considering that government is the major client for most businesses, reduced planned public spending will slow economic activities as the market for goods and services dwindles and potentially lead to negative growth.

—Heavy domestic borrowing could crowd out the private sector, raise interest rates and tighten the noose around businesses’ necks.

—The forex problems could worsen given that the scrapped budget support could have helped build reserves.

Commenting on the revisions, Kaluwa said revising national budgets at a time when, nominally, prices of goods and services are going up is curious policy.

He added: “The revenue shortfall implies borrowing, especially domestically. That will be problematic to the economy.

“It is also interesting that at a time when inflation is heading towards double digits, expenditure is being revised downwards. Of course, I understand their predicament. They are only trying to be realistic.”

But there is something to celebrate.

Domestic revenue beat expectations, closing the first half of the year at K120.1 billion against a target of K115.6 billion, representing a positive variance of K4.5 billion.

Notably, tax revenues over performed by K7.7 billion to hit K103.8 billion against a target of K96.1 billion.

Overall, government spent more than it collected, with total expenditure at K178.1 billion against K146.7 billion total revenue.

However, government balanced the current budget that follows the zero-budget deficit principle. Authorities spent K120.05 billion against total domestic revenue of K120.09 billion.

However, non-tax revenue collection was poor, missing its target by K3.2 billion, mainly due to revenue losses arising from erratic fuel supply from where the government collects billions of kwacha through various fuel levels.

According to Lipenga, government only managed to bring in 55 percent of national fuel requirements in the first half of the current fiscal year.

Another positive is the conciliatory and bipartisan tone that Lipenga has brought to budget discourse, vowing to listen to both sides of the aisle for ideas, especially criticism.

“Mr. Speaker, Sir, I now must thank you and the Honourable House for your kind attention, for listening to my brief presentation. But in thanking you all, I am also mindful of the need for me, as a Minister, to listen,” said Lipenga.

He was rewarded with standing ovation from both sides of the House.