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Confidence over financial plan

Last Friday, Minister of Finance, Economic Planning and Development, Goodall Gondwe, presented to Parliament the Mid-Year Budget Statement with a K9.3 billion cut in the fiscal plan for the Financial Year 2017/18. The budget also had unbudgeted for expenditure of K45 billion, which was a bailout made to the Agricultural Development and Marketing Corporation (Admarc) and K5 billion added on wages of the Malawi Police Service and Malawi Defence Force personnel. GRACE THIPA engages IMF Resident Representative to Malawi, JACK REE, to get his reactions to the financial plan:

First of all, having analysed the budget review and amendments made, does this give hope for the economy to continue on a recovery path?

Yes I believe so. Our latest forecast of this year’s growth is a range of three to five percent and this is expected to be followed by a rise of between six and seven percent in the medium term. Growth will be supported by enhanced infrastructure investment and social services as well as an improved business environment.

However, for that to happen, we need to make sure that we stay the course of macroeconomic stabilisation. The Medium-term Budget Review examines how Malawi is doing on this front. I think its candid recognition of budgetary pressures brings quite a bit of credibility. It also reinforces the message that actions are needed now, and will be taken, to safeguard macroeconomic stability.

While I need more time for a proper analysis, my impression so far is that the revised budget is in line with our programme understanding. It is our understanding that the government will deploy strong remedial measures to address the widening of the budget deficit in the current fiscal year and shift to a slightly positive primary balance in the next fiscal year.

As said at our press conference last week, while control over the budget was regained during FY16/17, maintaining it proved challenging this fiscal year.

Revenue fell short of expectations as power shortages hit corporate profits. More and more duty free imports from the regional countries, including Sadc, weighed on customs revenue. Continuation of suppressed maize price forced the bailout of Admarc, which was stuck with a stockpile of maize: which was procured during the last year’s food crisis response.

Are there some matters arising that pose threats?

The political cycle prior to the election is a big risk as spending pressures will pent up and reforms may stall including in public financial management. There is also a significant uncertainly on how the revenue will perform in the second half—which will depend on growth, speed of the restoration of the power generation, and the trend of customs revenue, among other things.

A successor Extended Credit Facility programme, if it materialises, will provide a credible mechanism to contain budget deficits on a continuous basis.

While inflation has done extremely well, Malawi’s history of inflation volatility suggests that a relatively small shock can reverse the direction of inflation expectations. Recent pick up in maize price, in the absence of credible safeguards against inflation reversal, can potentially feed panic and speculation.

Any other suggestions to authorities?

We just reached a staff-level agreement on a new economic programme with the authorities. With this, we can turn around Malawi’s economic fortune. But that will require tough actions to deliver on reforms—based on the new economic programme. I am confident that the commitment to make this happen is there. I am also very optimistic that we can lock in a new trend, of low inflation and high growth, if we can successfully seal the agreed programme and consistently implement it.

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