Malawi’s achievement last week of having an Extended Credit Facility (ECF) with the International Monetary Fund (IMF) comes with a raft of hard conditions some of whose impacts Malawians will have to brace for, we can report.
Among the implications of some of the conditions include that some items such as building materials and other business products could become more expensive.
But IMF has indicated that the objective of these tough reforms is to increase revenue generation by the government.
According to a report by IMF staff to the IMF Executive Board, IMF and Malawi have agreed to make strong reforms in five areas of fiscal, monetary and financial, external, governance, and climate.
No more VAT exemptions
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Among the conditions, Malawi will have to comprehensively remove VAT exemptions for business inputs.
For instance, when businesses are importing raw materials today, say, for cooking oil, there is no VAT.
Now it has to apply – which could mean cooking oil produced locally could cost more.
Government is also required to ensure that every supply of a motor vehicle is standard rated for VAT
purposes. Standardized motor vehicle duty means that no matter what year or engine size of the vehicle, the duty should be the same.
Government should also repeal VAT relief for building materials such that all supplies of building
materials, construction services and commercial property are standard rated.
Currently, when you are buying building materials for commercial construction, you don’t pay VAT.
No duty-free imports for officials Further, government should repeal VAT relief for current and former politicians, senior public officials, judges and other similar privileged individuals and groups.
In other words, government should remove the duty-free service on judges, politicians and others and put VAT on the importation of their motor vehicles.
Currently these officials import a certain amount of cars with no duty or VAT at all.
These reforms should be implemented by July next year.
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Transparency measures
In addition, government will have to be publishing the monthly unaudited Ifmis-generated comprehensive fiscal reports on the Ministry of Finance and Economic Affairs website within 5 days after end of each month.
It must also publish a performance report outlining the status of project execution and spending for all projects, with a total estimated cost of at least K25 billion in the Public Sector Investment Program (PSIP) on the Ministry of Finance website, within 6 months after the fiscal year.
IMF expects Malawi to prepare draft amendments to the RBM Act as recommended by a 2021 report and submit those amendments to public consultation by the end of next month.
It must also submit the RBM Act amendments to Parliament by end March next year.
Governance reforms
On governance reforms, the Ministry of Finance and Reserve Bank of Malawi will have to jointly design and implement a credible, comprehensive, and cost-effective resolution plan to address challenges identified in the audit of the Export Development Fund.
It must also improve transparency and management of EDF through improved organizational arrangements and should act on audit findings by end of June next year.
The National Statistical Office will have to start including reconciled data on imports of strategic commodities in the monthly Trade Bulletin by end of December this year.
Government will have to submit to Parliament the Disaster Risk Management (DRM) regulations and related policies to address gaps in disaster risk management by December next year.
However, the reform proposal have received mixed reactions as some quarters believe they may affect the country negatively.
‘Tread with caution’
President of the Institute of Chartered Accountants in Malawi (Icam), Noel Zigowa, for example, says Malawi should tread with caution on eliminating VAT exemptions and zero ratings for business inputs and repealing VAT relief for building materials.
According to him, if implemented, the reform will make locally made products more expensive as manufacturers would have to factor in the removed VAT.
In the end, he said, local consumers will shun local products for imported ones.
This would affect local companies and elevate Malawi’s status as an importing and consuming nation.
“The mathematics are simple, if people start opting for imported goods, local industries will go down and eventually Malawi Revenue Authority will collect less revenue. Therefore, some of these pieces of advice should be treated with care,” he said.
Countering business-as-usual approach
On the other hand, Economics Association of Malawi President Betchani Tchereni has applauded some of the reforms such as publication of progress on projects are necessary.
He added that the reforms come because the country has transacted with business-as-usual approach.
“They needed to remind us because what has been happening in the public sector is that for a very long time there has been too much laxity.
“These reforms will wake them up and remind them that it is the results that matter most than just the present,” Tchereni said.
‘Transparency key to corruption fight’
Centre for Social Accountability and Transparency Executive Director Willy Kambwandira said the reforms are crucial.
He said increased transparency and accountability is the only game changer to fighting of corruption and growth of the economy.
“We cannot talk of meaningful implementation of the public sector reforms when there is no transparency, government must therefore itself promote transparency and accountability in all aspects of state affairs,” Kambwandira said.
Delivering the 2023-24 Mid-Term Budget review statement in Parliament last week, Chithyola indicated that government will take tough and painful reforms that aim at rebuilding the economy.
“Better late than never, as they say,” he said.
Chithyola said Malawi has to make painful corrections that have long been neglected.
In his speech last week, President Lazarus Chakwera said ECF would help Malawi unlock foreign direct investments which would strengthen productivity.
He further said it was a signal to international investors that Malawi is back on track as an investment friendly economy, among others.
In his statement, Chakwera announced a range of cost cutting measures which include reduction by 50 percent of fuel allocation to cabinet ministers and other government officials.
Immediately the Tonse Alliance government came to power in 2020, it suspended the ECF citing a shift in government policy.
