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Finance Minister Goodall Gondwe’s maiden budget for the 2004/2005 financial year is expected to have a big hole that will beg to be filled. The question is, who will fill it and how?
If Economics Association of Malawi’s estimates that the coming budget is likely to be pegged at K80 billion are correct, it could be crucial for government to be sure of the source of this projected revenue.
It is no secret that government revenue and spending patterns have in the past suppressed investment, trade and consumption in Malawi, leading to low national output and ultimately decimal and negative economic growth.
Economic commentators say the economy dipped further after the suspension of donors’s budgetary aid to Malawi in 2000, lowering the country’s capital flows.
Donors—through grants and loans make up 40 percent of the country’s national budget—while the remainder is financed locally by tax and non tax revenues.
With Malawi’s narrow tax base and a small formal sector, government has found it hard to raise adequate revenues locally and help narrow the deficit created by the aid suspension.
Gondwe has not disclosed how much he expects to spend this year but said on Monday that K49 billion will be raised locally with K44 billion from taxes and K5 billion from non-tax revenue.
The minister also confirmed that some chunk of the total budget will have to come from donors but could not say how much.
“We do have an estimate of how much we require from the donors but I can’t tell you now because we are still discussing with them,” he said.
Asked on why government is banking on donor money when the IMF has not lifted the aid suspension yet, Gondwe said:
“The problem is not with the IMF, it all depends on us. The IMF told us that if we successfully implement the ongoing staff monitored programme, they can signal to our bilateral donors to release aid,” he said.
Asked again if the recent decision to raise salaries for civil servants and subsidise fertilizer prices could jeopardise the country’s chances of securing approvals from the IMF, the minister said government is still talking to the Fund on the issues.
The two Bretton Woods institutions (IMF) and World Bank are the strongest opposers of subsidies, arguing that they create distortions in the market.
The IMF has also in the past crushed government’s intentions to raise salaries for civil servants.
Kondwani Mlilima, Stanbic Bank economist, yesterday hoped that the Fund will understand Malawi’s need to subsidise fertilizer prices and boost the agriculture sector—the country’s economic main stay.
When contacted for comment on Monday, the IMF office in Lilongwe said it could not say more than what the Fund’s statement issued last week which said government was on course in meeting agreed targets.
The European Union told a local daily last week that it will consider its position after a meeting of the country’s donors in Malawi next month.
British High Commission spokesman Christopher Wraight said his government’s aid is tied to Malawi being on track with an IMF programme.
Wraight could not, however, commit himself to say whether Britain would release aid once the Fund gives a green light at the end of the three-month-staff monitored programme in September.
The British Department for International Development (DFID) says donors are still reluctant to release budgetary aid despite some positive steps by the Bingu wa Mutharika administration to bring fiscal discipline and curb corruption.
But if aid remains suspended—which is possible as it has been the case over the past four years—will Gondwe spend within his means?
“Domestic debt, at K55 billion is so high that even if [government] is highly disciplined from now on, it will be extremely difficult to stop further borrowing.
“After paying interest on the debt there is nothing left over to pay for the priorities of the new government,” argues Alan Whitworth, DIFD economic advisor in Malawi.
The Muluzi administration, known for ignoring budget constraints, filled budget gaps by borrowing from the private sector at high interest rates to spend on what economists and donors said were non priority areas.
Thus, the domestic debt rose from K12 billion in 2000 to K45 billion last year and K55 billion this year, according to the Ministry of Economic Planning and Development (EP&D;).
With the cost of servicing this debt rising sharply both as a proportion of government revenue and as a ratio of GDP, analysts say the debt is unsustainable.
For example, 16 percent of government revenue or three percent of the country’s GDP was used to repay the domestic debt in 2000.
In 2001, 22 percent of the budget or four percent of GDP went to debt servicing and the following year, 25 percent of the total income or about five percent of the GDP was used to retire the domestic debt.
But with the new administration’s tough talk to cut spending and slash domestic debt, bring down inflation to single digits and lower interest rates to 10 percent by December, can Gondwe afford to borrow further?
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