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The nut cracker: When trillions are less than billions!

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This is the time of the year I would never want to be Goodall Gondwe, the Minister of Finance. This is the time that the Budget is being debated and all attention is on this gentleman.

The expectations of the nation are beyond comprehension since the country is in need of an economic revival and yet the global economic performance is not encouraging. It is always hoped that the Budget is the one instrument that provides the most important signal to revive the economy and the investment climate.

The Budget this year is indeed a tight rope that in which the Minister of Finance tried to balance the conflicting demands of returning to fiscal consolidation, increasing public investment and moving away from the austerity slogans of last year. While there has been an increase in the Budget estimates, there are some essential issues on the budget that need to be debated beyond allocations to various ministries and departments.

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Therefore the Minister on May 27 2016 presented his K1.1364 trillion budget!

It is being said that this is the first time the trillion kwacha mark has been surpassed. This figure represents a 26 percent increment over the K901.6 Billion Budget he presented in Parliament on May 22, 2015 during the 2015/16 budget speech. Quite a huge increment on paper and worth the praise it is getting in the papers. However, some of us do not think it is time yet to celebrate the increment. There are several reasons that should worry Malawians when it comes to these figures.

This column has argued time and again that Malawi cannot afford to be an importing nation. Part of the reasons for that argument has been vindicated by this Budget Statement. As an importing nation Malawi’s most of its products from abroad and it would therefore make sense to start thinking of this Budget in those terms. On May 27 2016 when the budget was presented, the official exchange rate for the United States dollar according to the Reserve Bank of Malawi was K708.1642 meaning that this year’s estimated budget translated into $1.6 Billion. Compared to the estimates for the Budget presented on 22 May 2015 for the 2015/16 financial year, one would have to consider that on that day the kwacha was trading at K439.4818 thereby equating last year’s estimates to $2.05 Billion. So in United States dollar terms this is a reduction in the budget of 21.8 percent. In other words my fellow Malawians, with the increased Malawi kwacha’s cannot afford the same level of imported medicines or fertilisers. In fact the available amount has just gone down by 21 percent.

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The other issues that Malawi needs to address are the assumption we make on the budgets. Take the case of the 2015/16 Budget estimates where the assumptions that underpinned the Budget were proven to be off the mark for various reasons. Take the first assumption that claimed that the economy would grow by 7.0 percent when in reality it only grew by 3.1 percent, less than half of the estimated growth. This might not have been an issue in the past. However, in the era in which the whole Budget is anchored on domestic resource, this level of variance should worry the Minister of Finance. This is because the projections of the domestic revenues are dependent on the size of the economy. Once the economic growth targets are missed, then the revenue targets are missed and so are the expenditure estimates. This might be one of the reasons to explain the continuous under performance of tax revenues by 4.1 percent.

The second issue is on the inflation assumptions made last year. The Minister claimed in his 2015/16 statement that inflation was going to decelerate to 16.4 percent and yet in reality by April 2016, the inflation rate was 20.9 percent. This is a substantial 27 percent off the mark.

That is why I am very worried when I read in this statement that the economy is expected to grow at 5.1 percent in 2016. And that inflation will be 17.4 percent by the end of the year. The figure of 5.1 percent was also mentioned by the Reserve Bank of Malawi but it had a caution which categorically said that this will be revised downwards because it had not taken into account the effect of El Nino. I am at pains to understand why the Minister still used this figure. In this Budget it is agreed that over 80 percent of the funds will come from domestic resources of which tax revenue is a big contributor. Surely, the economy will not grow by 5.1 percent and surely the tax revenues which are estimated as a percentage of the economy (GDP) will not match the estimates and as such the trillion kwacha will surely be billions!

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