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Malawi 2014/15 Budget Statement

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Malawi 2014/15 Budget Statement

Malawi 2014/15 Budget Statement
Honourable Goodall E. Gondwe. Photo credit: AFP

Extracts from the 2014/15 Budget Statement, delivered in the National Assembly of the Republic of Malawi by Minister of Finance, Economic Planning and Development, Honourable Goodall E. Gondwe, on Tuesday, 2nd September, 2014

Introduction

Mr. Speaker, Sir, and honourable members, almost exactly half a century ago, our founding Parliament sat in Zomba as we are here in Lilongwe, pondering on a strategy for boosting the economic development of an independent Malawi and how to achieve a path of accelerated economic growth that would propel the economic welfare of its citizenry. From reading hansards of the time, it is inescapable to see that here were leaders oblivious of their own comforts but singularly devoted to their country.

The result, Mr. Speaker, Sir, is a transformed country. From one with barely a road system to speak of to a country that boasts of more than 1,000 kilometres of tarmacked road system. A country that produced less than 10 megawatts of electricity to one that produces power of almost 350 megawatts of electricity. A country that had less than 30 university graduates to one that has thousands of such people. From a country, honourable members, whose public service was exclusively led by expatriates, to one which is now entirely managed by a cadre led by Malawians educated at a university established during this very first half century of its independence. A country that had a rudimentary banking system, to a Malawi that has a sophisticated financial network. A country, Mr. Speaker, Sir, whose parliament building is the envy of most African countries.

Honourable members, one can go on and on to describe the achievements that we made within the last 50 years including the discernible transformation of our cities and the establishment of scores of primary, secondary and technical schools. These have been the results of an utmost dedication of our predecessors to the welfare of their countrymen.

Having said all this, Mr. Speaker, Sir, it is also a widely held view that despite these achievements, poverty continues to prevail in rural and in urban areas of Malawi. In general, although our Gross Domestic Product has more than tripled during this period, because of a huge population growth that has quadrupled to approximately 16 million people, our income per capita continues to be at the tail end of other African countries.

Honourable members, we do not need to be reminded that as a first group of political leaders of the next 50 years, we are also charged with the same responsibility as were our founding fathers; to mobilise and lead the country in its fight against poverty, disease and hunger that continue to afflict our people. Like our predecessors, we are expected to chart a path for a further transformation of Malawi. Our people demand that we put the enhancement of their welfare before our own.

This then, honourable members, is the challenge before us. We must lead the country even better than they did. Our aim must be to erase this constant and irritating cliché which repeatedly says that “Malawi is one of five poorest countries in the world”. As the first parliament of the coming half century, let us begin to address this challenge with the passion of patriotism.

The creation of institutions that are necessary in the governance of an independent country is one of the most important accomplishments that were made during that period. Institutions such as the University of Malawi, the Reserve Bank of Malawi, the Malawi Revenue Authority, the Roads Authority, ADMARC, the Anti-Corruption Bureau and othersare vital in a country. At the top and centre of these is the Civil Service. Although indeed this existed during the colonial era, it has had to be fine-tuned to serve independent Malawi. It is important, therefore, that from time to time, its place in society be reviewed and reformed so that its effectiveness continues.

Global Economy Developments

Mr. Speaker, Sir, on the global front it is mostly the sluggish recovery of world economies and the prospects for oil prices that have a high impact on the stability of our economy. Global real output is projected to grow by 3.6 percent in 2014 and strengthen to 3.9 percent in 2015 from 3.0 percent recorded in 2013. Thus although the recovery has strengthened, it is not yet robust. On one hand, there is a pick-up in growth for advanced economies but on the other, economic growth is slowing in emerging economies. Unemployment remains stubbornly high in many countries while the sustained growth momentum in low income countries has not seen reduction in poverty levels. Overall, the slow global growth dampens demand for Malawi’s traditional exports resulting in stagnation of export earnings.

Sub-Saharan Africa

Coming to our region, growth in Sub-Saharan Africa (SSA) remained strong in 2013 at 4.9 percent, virtually unchanged from 2012. This was underpinned by improved agricultural production and investment in natural resources and infrastructure. SSA growth is projected to accelerate to about 5.4 percent in 2014 and 5.5 percent in 2015, reflecting positive domestic supply side development and strengthening global recovery. Nearer home, growth in South Africa is projected to improve only modestly from 1.9 percent in 2013 to 2.3 percent in 2014 as a result of stronger external demand. Mr. Speaker, Sir, it is important to note that a strong growth in the South African economy will positively impact our economy as it is a major importer of our products.

The world's oil prices have been high since 2010, fluctuating around US$100 per barrel as demand for oil keeps rising, driven by emerging economies. Supply has also lagged behind demand due to geopolitical conflicts in some of the oil-producing countries such as Iraq, Libya, Syria and Nigeria. Since the start of the year, conflicts in the Middle East have escalated and, if sustained for longer periods, could have significant impact on the global economy through higher oil prices which could consequently lead to an increase in domestic pump prices.

Performance of the Malawi Economy in 2013

Mr. Speaker, Sir, performance of the Malawi economy in 2013 has been mixed and subdued by the “cashgate” scandal. In accounting for performance in 2013, let me begin by reminding honourable members that as a country we are for the period, 2011-2016, guided by the Malawi Growth and Development Strategy (MGDS) that the Bingu Administration pioneered. This is our overarching medium term development framework whose objective is to reduce poverty through sustainable economic growth and infrastructure development. In this context, we are pursuing an export led growth that is expected to significantly contribute to poverty reduction. In the same vein, while we have nine key priorities, we will pay special attention to the sectors that can quickly contribute to growth such as agriculture and those that constrain growth such as energy and transport. I will thus provide more detail pertaining to agriculture, energy, transport and manufacturing among others.

Mr. Speaker, Sir, during 2013/14 the economy registered an average GDP growth of 6.1 percent. This growth was as a result of good performance in the agriculture and manufacturing sectors. In particular, the 2013 growth in manufacturing was attributed to higher agricultural inputs and a more constant supply of fuel and other raw materials. The sector registered increased capacity utilization of above 73%. However, the contraction in fiscal expenditure in the last half of 2013 as a result of the ‘cashgate’ scandal exerted significant challenges to the economy particularly on inflation and the exchange rate.

Consequently, the annual average inflation rate for 2013 was at 27.3 percent. In order to contain inflationary pressures, the monetary authorities continued to pursue a tight monetary policy. In this regard, the policy rate was maintained at 25.0 percent until July 2014 when it was reduced to 22.5 percent. Mr. Speaker, Sir, with the reduction in the policy rate we should start registering growth in the private sector credit to support economic growth in the country. The pursuance of a tight monetary policy has successfully managed to contain growth in money supply from an annual growth of 34.3 percent in June 2013 to 24.8 percent in June 2014 which is in tandem with the nominal GDP growth projected at around 28.2 percent for 2014.

Mr. Speaker, Sir, as the House is aware, Government in 2012 liberalized the foreign exchange regime in order to support the build-up of foreign exchange reserves. The deregulation of the foreign exchange market and implementation of market determined exchange rate regime eliminated misalignments and distortions in the foreign exchange market. This policy stance is what has always been emphasized in all countries with an International Monetary Fund programme. And as is always the case in countries that have just adopted the flexible exchange rate regime, the resultant inflationary pressures take a long time to settle as has been the case in Malawi.

That notwithstanding, the official foreign exchange reserves have been maintained above 2 months of imports since July 2013 thereby enabling importation of essential commodities such fuel, fertilizer, pharmaceuticals and raw materials. The central bank will continue to implement policies that aim at accumulating reserves to around 3.0 months of imports. The implementation of a flexible exchange rate regime coupled with the national export strategy should expand and deepen the export base and help to improve the current account balance in the Balance of Payment (BOP).

As alluded to earlier, our situation was also fuelled by the ‘cashgate’ scandal which led Government to drastically cut funding to some sectors of the economy. At the same time, however, the Government borrowed heavily through ways and means advances leading to accumulation of the stock of domestic debt to around MK340 billion by end May 2014. I am, however, pleased to inform this August House that the situation has abated during the last three months.

The government wishes to emphasise that as part of the financial program with International Monetary Fund, it will continue to pursue macroeconomic reforms that were agreed under that programme, including the automatic pricing of fuel and the flexible exchange rate regime.

The 2014/15 Budget

Mr. Speaker, Sir, the resource envelope of this budget is severely constrained as predicted by many analysts. This is so because of the huge amount of arrears, a large stock of domestic debt and the more daunting task of making up for a severe cut back of donors’ financial support of the budget.

The total expenditure this year is projected at MK742.7 billion representing an increase of 16.3 percent over last year’s total budgeted expenditure. Of the total expenditure, MK535.1 billion is recurrent expenditure and MK194.6 billion will be the expenditure on development account. The recurrent budget includes an amount of K163.3 billion for wages and salaries. This is 24.4 percent higher than last financial year’s provision for wages and salaries. Honourable members will, therefore, note that this year’s average wage increase is proposed to be 24.4 percent.

Within such an environment, it is projected that total revenues and grants will amount to K635.6 billion compared to a budgeted amount of MK603.4 billion in 2013/14, an increase of only 5.3 percent. In this budget, domestic revenues are estimated at MK525.3 billion compared with a final revised estimate of MK441.6 billion in the 2013/14 financial year. Tax revenues are estimated to increase to MK470.1 billion from K388.4 billion that was registered in the 2013/14 financial year. Grants for the 2014/15 financial year are projected at K110.3 billion which is less than half of the amount of MK240.4 billion that was budgeted last year.

Tax revenues at MK470.1 billion have been estimated to grow by 21.1 percent over last financial year’s collection while non-tax revenues at MK55.2 billion have been estimated to grow by only 3.7 percent. These growth rates are conservative when compared with growth rates of more than 35 percent in domestic revenues for the previous two years. However, the Government will continue with efforts to improve revenue administration and collection and it is envisaged that actual collection will be far higher than projected in the budget.

On donor support, Mr. Speaker, Sir, the European Union, the World Bank and the African Development Bank have indicated that they could provide budget support amounting to over MK43.0 billion. Nevertheless, as the pledges are conditional on demonstrated progress in the implementation of the agreed public finance management reforms, we have assumed that none will be received. However, we believe that by mid-year we will have made sufficient progress in implementing the public finance management reforms enough to achieve the critical mass necessary to trigger disbursements of the budget support.

Mr. Speaker, Sir, honourable members should note that this financial year we have assumed that Malawi will not receive budgetary support.

At this point, I would like to remind the house that our understanding is that, in principle, only budgetary support is being withheld by donors. Therefore dedicated and project grants should not be part of withheld grants. In actual fact, however, even dedicated grants were severely curtailed from a commitment of MK93.6 billion to MK31.1 billion last financial year that was actually received. Therefore, this year Government has reduced its expected amount of dedicated grants to MK38.5 billion while project grants, that fund development projects, have remained at a high figure of MK71.8 billion. As honourable members will see, therefore, even the total amount of these two categories of grants is budgetted at less than half the 2013/14 budgeted amount of MK240.4 billion.

Amicable discussions are still continuing with donors and it is hoped that grants in excess of the budgeted amount could be received in the course of the year. We also expect far higher domestic revenue than projected in the budget.

Trade Agreements and International Taxation

Mr. Speaker, Sir, Malawi remains committed to the tariff offers made under the SADC Trade Protocol in order to facilitate regional integration within the SADC region. In this regard, Malawi now undertakes to further reduce the tariffs that are applicable to South Africa in line with the SADC Trade Protocol.

Mr. Speaker, Sir, to improve international taxation and encourage foreign direct investment, Malawi Government through its Diplomatic channels will continue to engage other Governments in the negotiation of new Double Taxation Agreements (DTAs). In addition, Government will continue to review the old DTAs especially those that negatively impact on our tax base through the loss of taxing rights.

Conclusion

In conclusion, if, Mr. Speaker, Sir, you were to ask me the theme of this year’s budget, without hesitation I would say “Restoration of Fiscal discipline as a Foundation for Poverty Reduction”.


National Speaker of Assembly, Richard Msowoya, adjourned Parliament to resume on Wednesday, 10 September 2014 to allow the Parliamentary Committee on Finance to thoroughly scrutinise the budget estimates for 2014/15 financial year.

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