Economy still in turbulent times

Tom Sangala March 2, 2016

267 6 minutes read

State of economy

Mr. Speaker, Sir, I wish to emphasise to the Honourable Members that our economy is still passing through turbulent times. I regret that we have not yet established a stable macroeconomic environment in which low inflation and interest rates prevail, and where the variability of the exchange rate is narrow and predictable.

In such a stable economic environment; investments that generate robust economic activity should be feasible. A stable macroeconomic environment also provides conditions for the attainment of high quality economic growth rates that create the needed high levels of employment and which lead to discernible poverty reduction among both rural and urban populations.

The house is aware that since the shock devaluation of 2012, when prices shot up from 11 percent to 23 percent, inflation has stubbornly remained high; apart from a short period between May 2014 to April 2015 when inflation decelerated to 18.2 percent.

Thereafter it has kept on crawling up to 24.9 per cent in December 2015 to be the highest in Sadc. Last month’s decline of the rate of inflation to 23.5 percent is a welcome sign of light at the end of the tunnel. In general however, the rate has remained high at an average of 23 percent during the period in question.

In the circumstances, interest rates have also remained high, with the policy interest rate at the Reserve Bank of Malawi remaining for a long time at 25 percent, and lately increased further back to 27 percent. In tandem, prime lending interest rates at commercial banks have also remained painfully high.

The exchange rate policy that adopted a free floating exchange rate in May 2012, at the behest of the IMF, meant that thereafter the exchange rate would be left to the market forces to determine its level. It was known and many said so, that a diminishing foreign exchange supply against a persistent high demand for forex, would lead to a continued depreciation of the Kwacha until a point of equilibrium is reached.

The Government is determined that the macroeconomic stability must be achieved, in particular, that interest rates should be low enough for Malawi to resume economic optimal growth rates and achieve food sufficiency. The Government is confident that the measures it has instituted are strong enough for us to attain our objective of normalising the economy within this year.

Proposed solutions

We have four main points of action but the Government is prepared to take extraordinary measures if what we have set out to do is not achieving results. However, let me underscore that His Excellency the President is determined to take action to resume normal economic activities as regards the exchange rate and interest rates and will require that responsible people and institutions in his administration must focus on achieving his goals.

The following are our plans that are being implemented: (i) The Government is cautiously optimistic that the massive response to its call for smallholder farmers to produce leguminous crops will be rewarded with good prices of these crops. It is also expected that the concomitant increase of foreign exchange that will result from the exportation of these crops can supplement the dwindling tobacco exports.

If this were to be the case as it should be, our balance of payments position should improve and the exchange rate that is now continuously depreciating could be stabilised. In the medium term we expect that the possible exploitation and exportation of our mineral resources can increase our exports even more.

(ii) As regards this year’s food shortage, I would like to agree with the Minister of Agriculture that Government has the matter under control. Just yesterday some 44 large trucks full of maize crossed our borders into Malawi. Admarc was there to welcome them. I must add however that over and above what the Minister said, the Treasury has empowered Admarc to procure another large consignment of 50,000 metric tons of maize from Tanzania.

As we see it, we have and will have enough maize in stock that will be more than enough to satisfy Admarc markets in the coming days. Over and above what we ourselves are doing, the resources that have been so generously donated lately in response to the call by His Excellency the President, Professor Arthur Peter Mutharika; will greatly supplement what Admarc is and will do. I know that Honourable Members are aware of the donations from the USA, China, Japan, the UK and Egypt. These will augment the supply of humanitarian food for those who are unable to buy maize. As opposed to the food that is being sold at Admarc markets, humanitarian food is being distributed by WFP and other agencies on behalf of the Government.

(iii) As regards possibilities of food shortage during the coming harvest season, the Government’s plans of rehabilitating irrigation schemes to enable farmers to double food production is a serious and practical solution to unfavourable climatic conditions. It has also been designed that over and above the rehabilitation of irrigation schemes that provide large tracks of irrigable land, the Greenbelt irrigation infrastructure particularly in Salima, should be used by smallholder farmers to produce crops twice a year regardless of whether conditions permit or not. It is intended that this programme should be supplemented by large estates that have agreed to produce irrigated food crops which the Government could buy and Admarc could sell at subsidised prices. The 2016/17 budget will carry the needed funds for this programme. These initiatives are intended to obviate the necessity of importing food or to go begging for resources to buy food in response to poor weather conditions.

These initiatives should be enough to improve Malawi’s capacity to address the problem of food shortages in the short and medium term. The measures will also improve prospects of our balance of payments position and to bring about low inflation and interest rates and to stabilise the exchange rate even in the face of poor weather conditions should they recur in Malawi during the coming seasons.

(iv) Government has also embarked on a radical fiscal adjustment that aims at ultimately covering recurrent expenditure of the budget with domestic resources leaving only the bulk of the development part of the budget to be covered by external resources. The aim is to progressively eliminate Government domestic borrowing that fuels inflationary pressures.

A sustained reduction of domestic borrowing could also resuscitate private sector confidence in the economy and could be a factor in the quest for the resumption of acceptable and robust growth rates and our ability to create high employment levels.

Budget performance

Total revenue and grants that were targeted at K386.1 billion at the end of the first half of the 2015/16 financial year were under-collected by K50.8 billion. Domestic revenues that were targeted at K312.4 billion fell short of this amount by K12.7 billion down to K299.7 billion.

Although a number of taxes performed well, the VAT underperformed considerably by an amount of K5.6 billion. In parallel, grants performed even worse where the target of K75.3 billion was under performed by K36.5 billion, less than half this targeted amount.

The recurrent expenditure that was targeted at K358 billion, under performed by K20.9 billion down to K337.2 billion. Although this reduction is explained by the fact that half of the targeted expenditure on FISP of K35.7 billion was not paid for, a sizeable amount of just under K3.0 billion was in fact saved due to fiscal measures that were taken to ensure the needed fiscal prudence.

Adjustments

The house is being requested that the needed adjustment be continued even more stringently in the last half of 2015/16 financial year as part of the need to establish budgetary self-sufficiency.

On the basis that the house will agree to embark on the policy of fiscal consolidation, in view of dwindling available resources; it is suggested that the 2015/16 approved budget be revised downwards as provided for in annex 2 where it will be seen that it is being proposed to reduce the budget by K23.7 billion from an approved figure of K929.7 billion to K906.0 billion.

The house will see that we propose to reduce the recurrent budget by just over K17.1 billion and the Development Budget by sum of K5.6 billion.

This will entail that for the coming months, the Treasury will withhold resources that are intended for filling vacancies.

During the coming discussions with ministries; in consultation with the Public Service Reform administration as well as the Department of Human Resource and Management, proposals for reducing the size of the public service will be discussed with a view to reducing the so called “bloated” Civil Service.

In order to reduce the amount of ORT, the Cabinet has decided that the Treasury and the OPC should review the various perks including travel, vehicle and fuel entitlements that could be scaled down. Therefore, the funding of ORT to ministries, will not be against the original approved budgetary allocations but against the revised budgetary allocations which the house will have approved.

The reduction of the development budget will be made through a suspension of a few projects that can be removed without major impact on economic growth.

It is expected that this will mostly include small projects that dominate our (Public Sector Investment Programme). A list of the projects that could be suspended without an impact of the economy will be circulated in the house next week, Monday, 29th February, 2016.