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The good, the bad, the ugly of budget

On Friday, Minister of Finance Goodall Gondwe performed his annual ritual of presenting the budget statement for the 2017/2018 financial year to Parliament. This is the fourth annual budget of the current Democratic Progressive Party (DPP) administration and there will only be one more budget before the country gets to the polls again in May 2019, exactly two years from now. It, therefore, makes sense to compare this budget from the previous budgets that have been presented since the DPP took over power from People’s Party in 2014.

The good news is that unlike the previous budget statements, this year’s statement comes on the back of a rather good year in comparison. The gods were very generous with the weather conditions and the availability of maize on the market created favourable economic condition to launch a perfect runway for a smooth economic take-off. Inflation is down from 24.3 percent in July 2016 when the budget was approved to 14.6 percent; the lowest in five years. The Malawi kwacha seems to have been cured from its chronic disease of “depreciation” since floatation in 2012. It depreciated by only two percentage points between June 2016 and May 2017. In addition, probably the best news of the last year was the reduction of the policy rate from 27 percent to 22 percent in March 2017. If inflation continues to go down, the Reserve Bank of Malawi has no excuse but to reduce the policy rate further and generate the subsequent fall in interest rates. This will have a two-fold benefit to the country. The Treasury bill rates will go down leading to a reduction in the interest payment bill of the government and simultaneously allow the entrepreneurs’ access to relatively cheaper capital for investment.

Despite all these good indicators, The Nutcracker does not understand the obsession that the Minister of Finance has with being over-optimistic on the assumption underpinning the budget formulation. In his budget statement of 2016/2017, the minister projected that the economy was going to grow by 5.1 percent and it grew by only 2.7 percent. The minister should have learnt by now that overestimating the country’s economic growth creates problems for the management and implementation of the budget.

This is because the estimates of the levels of domestic revenue expected to anchor the estimated expenditures in the budget are based on the estimated growth of the economy. In 2015/2016, the effect of overestimating the economic growth of the country had negative impacts on the budget to the extent that at mid-year, domestic revenues underperformed by 4.1 percent against the target of K312.4 billion. That is a shortfall of K12.8 billion. To put this in context, this is about half of this year’s health budget estimates and almost the same as what has been allocated for the energy sector in the statement presented to Parliament last Friday.

Similarly, the assumptions of the 5.1 percent economic growth which some of us kept reminding the minister several times that this was simply unrealistic negatively impacted the economy. The economy only grew by 2.7 percent (remember The Nutcracker arguing that the realistic economic growth was only around three percent and not more?). The consequence of such over-optimistic assumption weighed negatively on the budget estimates. The domestic revenues and grants were then reduced to from K999.0 billion to K977.8 billion. This is a reduction of about K21.2 billion, more than this year’s allocation to the Green Belt Authority that stands at K17.6 billion. In addition, since the estimated revenue was over-estimated, the deficit also increased from K130.2 billion to K169.5 billion, an increase of K39.3 billion which is more than the entire estimated budget for the health sector in this year’s budget.

Having said all this, this year’s budget still stands out as well thought out. The focus on roads (K69.9 billion), agriculture (K62.0 billion), education (K38.7 billion), health (K25.7 billion) and energy (K12.7 billion) is the good of the budget. The increase in the tax-free threshold from K20,000 to K30,000 per month is good news. The increase in the minimum wage from K19,000 to K25,000 is sweet melody to many employees who has suffered at the previous minimum wage.

Lilongwe and Blantyre indeed deserve district hospitals; this will improve the services at Kamuzu and Queen Elizabeth central hospitals as they can become truly referral hospitals. Phalombe District Hospital is long overdue and there will be no excuse this time around if it will not be constructed. The addition of an extra 300 Mw to the national grid will go a long way in solving the energy problems that crippled the match to industrialisation and productivity in Malawi. The 200 percent increase to pensioners who retired before 2004 is news worth celebrating.

If implemented properly and if the assumptions underlying the budget formulation are sound and stand the test of time, then indeed the potential for the budget to optimise the welfare of Malawians will be realised. If the authorities remain resolute in implementation and dealing with the ugly, then indeed the economy will move forward. The ugly include the lack of systematic reconciliations that according to the minister have resulted in inexplicable use of huge amounts of resources, political gamesmanship as we get closer to the 2019 elections, waste, corruption and incompetence in certain part of the government machinery; however, this budget could indeed generate the economic growth that could boost future financial resources and move the country in an upward trajectory.

Clearly, this is the most ambitious budget The Nutcracker has seen since President Peter Mutharika was sworn in. It is also clear that this is perhaps the best of the four budgets that the current administration has put in power.

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