The Editor of The Daily Times BRIAN LIGOMEKA analyses the 2011/2012 Malawi National Budget and here is his analysis.
Since the attainment of Malawi’s independence way back in 1964 from Britain, this Southern Africa nation of 13 million people has, for many years, depended on donor handouts, part of it dubbed as budgetary support to run the economy. Over the past five years, in preparing its national budget, donor financial injection towards the national budget has been hovering between 30 to 45 percent.
It was amusing a fortnight ago when Finance Minister Ken Kandodo in part of his budget speech boldly declared: “In conclusion, Mr. Speaker, Sir, what I have presented before this August House this afternoon, is a Zero-Deficit Budget which has presented a radical paradigm shift in the manner we prepare and implement the National Budget in Malawi… Simply put, this Budget has it all: ‘Zero Deficit, Pro-Poor, Development-Oriented and Investment-friendly Budget.”
The zero-based budget is a concept which assumes that your total income minus your total expenditures will equal to zero. When implemented with strict fiscal discipline and prudence in a stable macro-economic environment, zero-deficit budget purposely means government will put every kwacha [revenue] generated to good use. In the event that during a certain period, government has spent less financial resources out of the revenue generated, those resources, can be allocated to where it is most needed instead of letting it dissipate through extravagance.
Is zero-deficit budget really practical? Surely, yes! Oil rich United Arab Emirates has for a number of years been running its economy based on zero-based budgeting.
Following the presentation of the budget in the National Assembly, some naïve Pan African-minded Malawians are hero-worshipping government for this bold move, charging that the zero-deficit budget will instantly put the country on the path to economic independence ending our historic record of being an aid dependent nation. The question they like to pose is: “For how long will we remain beggars?”
Such Pan Africanist thinkers are inspired by arguments advanced by anti-aid economists such as renowned African economist Dambisa Moyo who in her book ‘Dead Aid’ rubbishes western development policy for Africa as a sham.
Moyo contends strongly that over millions of dollars in development-related aid that has been transferred from rich countries to Africa has not improved the lives of Africans. In fact, according to her thesis, the recipients of this aid are much worse than had they not received a dime of free money. She peddles the view that over-reliance on aid has trapped developing nations in a vicious circle of aid dependency, corruption, market distortion and poverty, leaving the poor with nothing but the quest for more aid.
Moyo is not alone with such thinking. Malawi’s own Chiku Malunga in his book, Oblivion or Utopia: The Prospects for Africa (2010) has no kind words for donor handouts in whatever form. “Donors being smart people are not keen to support us in such a way that we will reach a stage where we will not need them. They may support us in such a way that they think may hurt them in the future. It is said, if you want your domestic worker to continue slaving for you, then control his poverty.”
Malunga in his book contends: “What this means simply is that we should not expect aid in its form to bring about economic development to Africa. Aid can bring what aid can bring – relief and not development. It is a rule of life that development is always endogenous. Development comes from within and not without.”
According to Malunga, “there is no continent or country in this world that was developed by aid. The best aid can do is to help the continent develop its capital so that the continent or country can become an equal player in the world.”
Concluding his book, Malunga reasons: “Africa is at a cross-roads. It is faced with oblivion or utopia as real possibilities. Fifty years of aid based development have failed. Close to US$2.3 trillion of aid has left many people worse off (van Gelder 2008:33). Continuing on this path is moving towards oblivion.”
With similar views expounded by President Bingu wa Mutharika in his book “The African Dream: From Poverty to Prosperity,” it is not surprising to see that there are some local economists and their disciples who believe that that time is ripe for Malawi to stand on its own feet by using local resources to run our recurrent budget instead of continuing being beggars or [budgetary support dependents] forever.
Arguments by Dambisa Moyo, Chiku Malunga and President Mutharika that aid does not spur development are in my view misplaced because aid when well utilised can lead to economic growth. Just after the second World War, economies of many European countries were in recession; but thanks to the massive programme of aid from the United States which started in 1948 and was officially known as the European Recovery Program, but is more commonly known as the Marshall Plan, after the man who announced it, US Secretary of State George C. Marshall, the nations were able to recover quickly.
The aid recipient nations included Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey and United Kingdom.
The effect of ‘Marshall Plan’ aid was positive and tremendous because the recipient nations experienced an economic growth of between 15 – 25 percent. In those European nations, aid stimulated industrial growth and agricultural production. The shortage of foreign currency was also addressed thereby allowing massive gains in international trade through exports and imports. While the aid beneficiaries of Europe are wealthy nations, the aid beneficiaries in Africa remain poor countries.
In Africa, aid fails to kindle economic growth and national development because it ends up in pockets of corrupt fat cats who before ascending to power were just mere minibus drivers and conductors. The moment they take the reigns of power, the former bus conductors become millionaires overnight and their huge appetite for opulence is mirrored in the huge mansions they built which if you check their payslips is beyond their means.
With some economists who mistakenly assume that aid never spurs development and economic growth in power at the moment, even the cautions that the implementation of zero-deficit budget will force government to resort to domestic borrowing to finance its spending does not budge their thinking because in their view the level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy.
Their argument is that in any economy even in developed nations, when the government is running a budget deficit, it has to borrow money through the issue of debt instruments such as Treasury Bills and long-term government bonds. Such borrowing in their myopic analysis is okey because the emergence of a rising budget deficit due to a weakening economy on one hand means government spending on priority areas such as health, education, transport and agriculture on the other hand.
Consequences
Despite the rosy picture painted by Kandodo and the arguments propounded by economists who bash western aid as shrewdly-packaged assistance that creates dependency syndrome because as Malunga points out in his book “a nation that cannot finance its own national budget but has to depend on others to finance it, is a beggar nation,” Malawians will face the pinch of this new paradigm shift.
Let’s face facts. With donors pulling out, government will resort to local borrowing defeating the same concept of zero-based budget. Local borrowing will result in inflation, high interest, thereby crowding out the private sector. In that scenario, the description that the budget is pro-development and pro-poor is a fallacy.
Our economy is still at the stage where the resource base is so narrow. The same simple argument remains, thus if you want to milk the cow, you need to feed it. In this case, the government is heavily taxing people and businesses which are the source of growth. The question is: How do you expect growth from a thin animal, which is being over-milked through numerous taxes?
The reduction in disposable income for both firms and individuals will result in the economy contracting defeating the same ambition of pro-development agenda. Hence, the consequences will be borrowing and taxing more. Certainly, you have to have miracles to achieve zero deficit in such circumstances.
Furthermore, despite Kandodo’s financial rhetoric, careful analysis shows that the current budget is both inflationary and contractionary, thanks to revised and new duties and taxes imposed on almost anything including shares, bread, meat and imported wheat flour.
The budget is inflationary in the sense that price increases are inevitable as manufacturers, importers and the business community will pass the new taxes to consumers through pricing and the multiplier effect will be at work which will see inflation affecting almost all the commodities and services in the economy.
The budget will lead to the contraction of the economy or decline in economic growth because in the absence of the budgetary support, government will mop all its revenue from the economy, [money will move from the economy to government coffers, leaving people with less disposable income].
Chancellor College senior economics lecturer Dr. Exley Silumbu was spot on when he told this paper recently that Malawi cannot achieve a “zero-deficit” budget this year because of anticipated decline in economic growth for the country as projected by both government and the International Monetary Fund (IMF).
According to Silumbu, most of the measures introduced in the budget are restrictive to production and consumption, hence will lead to further shrinking of the economy and decline in tax revenue. “Actually, I expect economic decline even further than estimated because of the budgetary measures as announced by the minister of finance,” he predicted.
The decline of the economy will continue in the next few years as the 2011 World Economic Outlook of the IMF projects Malawi’s economic growth for the year to be at 6.1 percent, a decline from 6.6 percent growth achieved in 2010. It also projects the country’s growth to further decline to 5.7 percent in 2012 and to a mere 5 percent in 2016. With some donors having frozen their aid, coupled with the poor tobacco prices and ever-increasing trade deficits, the economic decline might indeed be worse than the projected figures.
Contributing factors
Much as our balanced budget glitters on paper, we should recall that even when we were receiving budgetary support from our traditional donors, government was still having budget deficits. The question is: How will the same controlling officers who were fuelling deficits through expenditures in their various ministries and departments, all of a sudden perform miracles by using locally generated revenue prudently? Have we forgotten that we have controlling officers within the ministries who awarded themselves allowances for 1000 days in a single year, when in fact there are only 365 or 366 days in one calendar year?
Just in the next few months after the presentation of the zero-deficit budget, the harsh reality will catch up with us. Government will slip into deficits, which it will attempt to tame by resorting to domestic borrowing. The consequence of heavy domestic borrowing will be the crowding out of private sector in the debt capital market in short and medium term while in the long run, domestic borrowing would translate to even higher taxes as government will be hunting for money to repay that huge accumulated national debt.
The nerve-racking aspect of it all is that the subsequent implementation of the zero-deficit budget is coming under the backdrop of our sour relations with some donors. With some frozen donor aid, compounded by the anticipated rising oil prices due to political conflicts in the Arab world, it is wishful thinking to assume that Malawi will implement the current budget without facing impediments.
Forex shortages
Besides the new budget leading to the contraction of the economy and subjecting people to the consequences of inflation as a result of the numerous taxes that have been introduced, thereby inhibiting their purchasing power, our poor relations with the donor community will exacerbate the forex and fuel shortage situation.
Whether we like it or not, we need to accept that we virtually import everything from toothpicks, apples, tomatoes, drugs, fuel to automobiles. Much as our taxes which we pay in Malawi kwacha, can be used to meet some local expenditure items, as a nation, we need US dollars and Euros for paying for fuel, drugs and fertilizers. That forex will not come from tobacco which has been hit by a quad-epidemic of poor quality, oversupplying resulting in cheap prices, international conspiracy and anti-smoking campaigns. Neither can that forex be generated from uranium from Karonga whose income is not banked in our domestic banks. In as far as issues of forex availability are concerned, we are in for a rude awakening.
Kandodo’s assertion that resources have been shifted towards infrastructure developments of the country, hence, we have a Pro- Development Budget as opposed to a Consumption Budget is both empty and cosmetic because the allocation of resources to the fertiliser subsidy is still huge while the private sector which was supposed to be motivated with incentives to stimulate economic growth has been slapped with innumerable taxes. How can we prop up investment if government has all of a sudden declared that sales of shares regardless of the time of disposal would be subjected to capital gains tax? The move is actually spitting at the investors in the face who will disinvest from the local bourse.
Even the Malawi Confederation of Chambers and Commerce (MCCCI) has hinted that the new tax measures will hurt the local industries and just as they are likely to impact foreign direct investment. “The new tax measures will in the long run worsen the investment climate which is already on a decline because of unreliable power outages, water shortages and the high cost of service," Chancellor Kaferapanjira, chief executive officer of the MCCCI, told the media.
Supporting the same view is a think-tank of local economists, the Economics Association of Malawi (Ecama), which has branded the current budget as an act of “desperation” as the country’s economic environment does not allow for such ambitious budgeting.
“Unfortunately, the zero-deficit budget concept in Malawi is being implemented at a time when the global economy is just recovering. Added to this are the huge economic challenges facing the country’s productive sectors — largely bordering on forex shortages,” says Ecama in the statement.
In a macro-economic environment where tight fiscal discipline is part of the game and a nation’s relations with major cooperating partners are sound, zero-deficit budget is the way to go as a strategy for attaining economic independence, but in our current scenario, this budgeting system is poised to breed more miseries on Malawians in form of high inflation, which even if it will be officially manipulated so that it remains on single digit, in reality it will manifest itself in form of general rise of prices.
If you ask me, the way the term ‘zero deficit budget’ is being used in Malawi, is misleading: How can you have zero balance when you acknowledge in the same budget that development budget has factored in donor funding.
