Malawi: Ganda Punches Holes in Mid-Year Budget, Spells Doom for Malawi Economy

Chairperson of the Parliamentary Budget and Finance Committee, Gladys Ganda, has said the economic growth projections at 3.5 percent as contained in the mid-term budget statement presented on Friday February 26, 2021 by Minister of Finance Felix Mlusu have been "overstated".

Speaking in Parliament on Thursday, March 4, 2021 "to offer a few reflections as considered by Committee on Budget and Finance", the Nsanje Lalanje legislator noted that despite the good rains in most parts of the country, the dry spell and the reported fall armyworm destruction of more than 860,000 hectares of the maize crop in some parts of the country coupled with the continued surge in Covid-19 would put this estimate in big doubt.

"It is noteworthy that both the IMF and World Bank also agree with us as their forecasts and projections are much lower than the Hon Minister's overly optimistic projections," she said.

Mlusu lowered Malawi's economic growth forecast for this year to 3.5 percent, from 4.5 percent seen previously. He also revised upwards the projected budget deficit in the current 2020/21 fiscal year from MK755.1 billion to MK810.7 billion (US$1.04 billion), or 8.8 percent of gross domestic product.

In her statement, which was structured along the three major sections of the mid-year budget statement - the macroeconomic outlook for the global; regional and domestic economies; the Fiscal performance in the first half of the 2020/21 financial Year; and the fiscal outlook to the end of the 2020/21 financial year, Ganda said while her committee notes that the rebound in global economy from a recession of minus 3.5 percent in 2020 to 5.5 percent in 2021 and 4.2 percent in 2022, as reported by the IMF in the World Economic Outlook (WEO) Report, its view is that the jump is justified and feasible as the global economy will be recovering from the worst ever recession since the second world war.

Ganda said that during her response to the national budget last year, she said that the growth projections were highly ambitious for 2020 at 1.9 percent "but the recommendations were not taken into account".

"The actual one has now turned out to be 0.9 percent. The growth projections at 3.5 percent continue to appear to have been overstated," Ganda said, adding that the best thing the finance minister should have done was to remain conservative with his projections.

She noted that the high growth rates are exaggerating domestic revenues especially taxes which may not be realized anyway as companies may not produce that much taxable output.

"This may result in our domestic revenues getting off track as was the case in the first half of the financial year. It is also delightful to learn that the rebasing exercise of the Gross Domestic Product (GDP) by the National Statistical Office (NSO) from a base year of 2010 to 2017 has revealed a jump in the country's real GDP by 72 percent.

"According to the NSO, rebasing of the economy has increased the size of GDP from US$6.4 billion (or MK4.6 trillion) in 2010 to US$10.9 billion (MK8.1trillion) in that same year.

"This speaks volumes of the economic gains the country made during the reign of previous governments, which were previously being under-reported and never taken into account and attributed to due to statistical challenges," said the chairperson.

She encouraged the government to regularly comply with the United Nations Statistical Commission recommendation to rebase the national accounts every five years.

Ganda said her committee takes a view that the estimates may not have taken into account the full effect of developments in the global and domestic prices of petroleum products and exchange rate movements, which would impact significantly on the non-food inflation.

"These developments are likely to push both non-food and headline inflation. With regard to worsening Trade Balance between end 2019 and end 2020 from US$352.8 million to US$566.7 million, the committee does not see this as a surprise as Gross Official Reserves have also sharply contracted over the same period from US$846.6 million to US$574.3 million and the Malawi Kwacha has also depreciated by 5 percent from July to December 2020.

"Considering that the country will continue to import more due to Covid-19 and export less due to contraction of economic activities in the country, negative trade variance will persist to the end of the year thereby widening further balance of payments which will fuel further depletion of gross foreign reserves and depreciation of the Kwacha exchange rate," said the parliamentarian.

She noted that under these circumstances, further upward movements in both non-food and headline inflation is forecasted, which will negatively affect the revised budget revenues and expenditures.

"On budget performance to bid-Year, the Budget and Finance Committee considers the non-performance on domestic revenues in the magnitude of K35.9 billion as expected. The country, region and global economies are going through economic hardships due to Covid-19.

"It is, therefore, not surprising that both taxes and non-tax revenues underperformed because many companies in the country are struggling as a result of the slowdown in economic activities.

"With regard to the positive outturn on grants from K26.3 billion to K83.4 billion, while the development partners are commended for providing these resources, the hope is that the government would use these resources properly and not abuse them.

"On expenditures to mid-year, while the Committee welcomes increased absorption in donor funded projects as the main reason for the over expenditure to mid-year, we would like to raise serious concerns on the rise in Generic Goods and Services from MK120 billion to MK126 billion on account of non Covid-19 core budget lines such as the State Residences which overspent its ORT by MK120 million from a projected MK3.46 billion to MK3.58 billion; Office of the President and Cabinet (OPC) which overspent its ORT by MK256 million from a projected Mid-Year spending 6 of MK4.241 billion to MK4.4797; and the Ministry of Youth and Sports, which overspent its ORT budget by MK25 million from MK240.8 million to MK265.8 million.

"With regard to the outlook to year-end, the Committee views prospects for an increase in Domestic Revenues from MK1.179 trillion to MK1.186 trillion as overly optimistic and ambitious bearing in mind that both tax and non-tax revenues underperformed at mid-year. In view of the prevailing economic slowdown domestically, regionally and globally, the most prudent thing should have been to revise these revenue projections downwards as opposed to raising them.

"As for expenditures to year-end, the Committee reiterates its position at the time of the main budget that the government should have been prudent to live within our means," she said.

Ganda said as domestic revenues are flat or declining, the most prudent thing for the government to do was to cut on excesses in the budget rather than increasing spending.

"In particular, the committee expresses serious reservations and concerns on increases on non-core Covid-19 budget lines such as ORT increases for State Residences by MK1.1 billion; OPC ORT increase by MK1.5 billion; MDF ORT increase by MK1.8 billion; Office of the Vice President ORT increase by K888 million; Ministry of Foreign Affairs ORT increase by MK960 million; the Ministry of Homeland Security ORT increase by MK5.6 billion and Judiciary ORT by MK1.5 billion.

"The committee has observed that some priority MDAs such as Ministries of Mining; Trade; and Ministry of Tourism, Culture and Wildlife have received downward revisions at mid-year. As the nation seeks avenues for increased revenues, the committee feels that the cut may likely counter efforts to expand economic activity.

"The committee is also concerned with proposed reductions in ORT for critical Votes such as Asset Declaration ORT reduction by MK43 million; Councils ORT reduction by MK140 million; Ministry of Education ORT reduction by MK840 million; Financial Intelligence Authority (FIA) ORT reduction by MK40 million and Ministry of Health ORT reduction by MK520 million, the National Assembly ORT which has been revised downwards by MK1 billion. Whilst the two arms of government, Executive and Judiciary have had increases in their ORT. The MK1 billion reduction in ORT for the National Assembly may have serious consequences. It may cripple operations of the Assembly.

"The minister may consider increasing the budget as opposed to reduction to ensure that operations of the Assembly are not negatively affected due to funding," she said, arguing that the action by the minister calls for financial independence of Parliament for smooth operations of its activities.

Spokesperson on finance matters in Parliament for the main opposition Democratic Progressive Party (DPP) Joseph Mwanamvekha also said the budget is "off track", saying there is a deficit of over K810 billion from K755 billion.

"The budget has not spelt out how the government will fulfil its promises, which means there is nothing for a common man," said Mwanamvekha.

Mlusu in his statement said during the second half, government will continue to enhance domestic revenue collection in order to achieve set targets for smooth budget implementation.

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