2015/2016 MID-YEAR BUDGET REVIEW STATEMENT

Delivered in the

NATIONAL ASSEMBLY OF MALAWI

By

HONOURABLE GOODALL E. GONDWE, MINISTER OF FINANCE, ECONOMIC PLANNING

AND DEVELOPMENT

At

THE NEW PARLIAMENT BUILDING LILONGWE

Friday, 26th February, 2016

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MID-YEAR BUDGET REVIEW STATEMENT

1. Mr. Speaker, Sir, it is our tradition that before the expiry of a

financial year, the Minister of Finance, on behalf of the Government,

should provide a mid-year review of the performance of the budget

to this honourable house. In this context, His Excellency the

President, Professor Arthur Peter Mutharika has directed me to

follow this tradition and through you, Mr. Speaker Sir, let me thank

the house for giving me the opportunity to do so.

2. What follows in this document is a short review of the

economic environment that is prevailing and what is being done to

resolve the challenges we are facing. This is followed by a

commentary on the mid-year review of the budgetary performance

for the first half of this financial year and a revised budget in

response to the reduction of available budgetary resources and the

need to be in line with the IMF financial programme. This statement

therefore, will be short and will only be an amplification of the

detailed mid-year data which is being presented to the house in the

document that will be submitted to the honourable members shortly

after I conclude this Statement.

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3. Mr. Speaker, Sir, I wish to emphasise to the Honourable

Members that our economy is still passing through turbulent times. I

regret that we have not yet established a stable macroeconomic

environment in which low inflation and interest rates prevail, and

where the variability of the exchange rate is narrow and predictable.

In such a stable economic environment; investments that generate

robust economic activity should be feasible. A stable

macroeconomic environment also provides conditions for the

attainment of high quality economic growth rates that create the

needed high levels of employment and which lead to discernible

poverty reduction among both rural and urban populations.

4. The house is aware that since the shock devaluation of 2012,

when prices shot up from 11 percent to 23 percent, inflation has

stubbornly remained high; apart from a short period between May

2014 to April 2015 when inflation decelerated to 18.2 percent.

Thereafter it has kept on crawling up to 24.9 per cent in December

2015 to be the highest in SADC. Last months decline of the rate of

inflation to 23.5 percent is a welcome sign of light at the end of the

tunnel. In general however, the rate has remained high at an

average of 23 percent during the period in question. In the

circumstances, interest rates have also remained high, with the

policy interest rate at the Reserve Bank of Malawi remaining for a

long time at 25 percent, and lately increased further back to 27

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percent. In tandem, prime lending interest rates at commercial

banks have also remained painfully high.

5. The exchange rate policy that adopted a free floating exchange

rate in May 2012, at the behest of the IMF, meant that thereafter the

exchange rate would be left to the market forces to determine its

level. It was known and many said so, that a diminishing foreign

exchange supply against a persistent high demand for forex, would

lead to a continued depreciation of the Kwacha until a point of

equilibrium is reached. Therefore in our case, the consequence of a

loss of forex subsequent to donor withdrawal of budget support and

the dwindling of tobacco export earnings, has been a continuous

depreciating exchange rate. Between May 2012 and May 2014, the

rate depreciated by 215 percent from K165 to K520 per US$ and 52

percent between June 2015 and December 2015.

6. The Government feels that the point of equilibrium has been

reached already and as also implied by the Reserve Bank in its

statement on the exchange rate. It is therefore expected that the

rate should stabilise soon and those speculations that are

perpetuating the depreciation should take note of this.

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7. The house will recall that we had an intervening period of

currency stability between October 2014 and June 2015 when the

policy measures that the Reserve Bank of Malawi took and the

currency swap that involved the purchasing of government debt

denominated in Kwacha by the PTA Bank using dollars, briefly

restored order in the foreign exchange market and the exchange rate

steadily appreciated to just about K450 per dollar (middle rate). The

Swap transaction also helped to increase official foreign exchange

reserves to more than US$620 million - the highest ever reached

since independence. However the market forces emerged again to

subject the rate to an almost daily depreciation.

8. Prior to the flood and subsequent drought that engulfed the

country, our forecast was that, the progressive fall of the rate of

inflation that coincided with the currency stabilisation, would

steadily continue to fall and characteristically reach an acceptable

low level so that thereafter interests rates would also begin to fall

and herald a resumption of economic growth and a stable

macroeconomic environment.

9. Without the delude that afflicted Malawi in January 2015 and

subsequent drought up to April 2015 the country experienced, it is

likely that our objective of re-establishing orderly macroeconomic

conditions would have been attained in the latter part of 2015. We

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would then have confirmed the IMF forecast that the growth rate in

2015 would surpass that of 2014 which was 6.5 percent.

10. The Government is determined that the macroeconomic

stability must be achieved, in particular, that interest rates should be

low enough for Malawi to resume economic optimal growth rates

and achieve food sufficiency. The Government is confident that the

measures it has instituted are strong enough for us to attain our

objective of normalising the economy within this year.

11. Mr. Speaker, Sir, let me digress a little to address a matter that

continues to trouble some honourable members. Indeed Mr.

Speaker, Sir, there has been concern that the Government is devoid

of solutions to the current economic challenges that include a

destabilised economy as symbolised particularly by a depreciating

currency as well as the prevalence of food shortages. Despite the

repeated statements that members of the Government including His

Excellency the President himself have time and again elaborately

stated doubts still persist. I know that there will still be some who,

for political reasons, will continue expressing such doubts. This is

expected. I, however, appeal to the public that we can differ on

what should be done, but that does not mean that the Government

does not have plans and policies of what to do. In the debates on

the economy that are coming, His Excellency the President has

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emphasised to us in the Government that we should listen to views

from all Malawians on what should be done to reactivate economic

developments. My colleagues and I therefore, will be attentive to

what Honourable Members will say on what should be done.

However, in case there are some who genuinely require to be

informed on what we are set out to do, I would like to take this

opportunity to enumerate the measures that Government is and will

be taking to counter the economic challenges of the moment.

12. We intend to publish the Government's economic programme

of action in the short-term as well as in the medium-term shortly.

Here I am only concerned with the short-term measures aimed at

stabilising the economy and the prevention of a recurrence of food

shortage in the near term.

13. We have four main points of action but the Government is

prepared to take extraordinary measures if what we have set out to

do is not achieving results. However, let me underscore that His

Excellency the President is determined to take action to resume

normal economic activities as regards the exchange rate and interest

rates and will require that responsible people and institutions in his

administration must focus on achieving his goals.

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14. The following are our plans that are being implemented:

(i) The Government is cautiously optimistic that the massive

response to its call for smallholder farmers to produce

leguminous crops will be rewarded with good prices of these

crops. It is also expected that the concomitant increase of

foreign exchange that will result from the exportation of these

crops can supplement the dwindling tobacco exports. If this

were to be the case as it should be, our balance of payments

position should improve and the exchange rate that is now

continuously depreciating could be stabilised. In the medium

term we expect that the possible exploitation and exportation

of our mineral resources can increase our exports even more.

(ii) As regards this years food shortage, I would like to agree with

the Minister of Agriculture that Government has the matter

under control. Just yesterday some 44 large trucks full of maize

crossed our borders into Malawi. ADMARC was there to

welcome them. I must add however that over and above what

the Minister said, the Treasury has empowered ADMARC to

procure another large consignment of 50,000 metric tons of

maize from Tanzania. As we see it, we have and will have

enough maize in stock that will be more than enough to satisfy

ADMARC markets in the coming days. Over and above what we

ourselves are doing, the resources that have been so

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generously donated lately in response to the call by His

Excellency the President, Professor Arthur Peter Mutharika; will

greatly supplement what ADMARC is and will do. I know that

Honourable Members are aware of the donations from the

USA, China, Japan, the UK and Egypt. These will augment the

supply of humanitarian food for those who are unable to buy

maize. As opposed to the food that is being sold at ADMARC

markets, humanitarian food is being distributed by WFP and

other agencies on behalf of the Government.

(iii) As regards possibilities of food shortage during the coming

harvest season, the Governments plans of rehabilitating

irrigation schemes to enable farmers to double food production

is a serious and practical solution to unfavourable climatic

conditions. It has also been designed that over and above the

rehabilitation of irrigation schemes that provide large tracks of

irrigable land, the Greenbelt irrigation infrastructure

particularly in Salima, should be used by smallholder farmers to

produce crops twice a year regardless of whether conditions

permit or not. It is intended that this programme should be

supplemented by large estates that have agreed to produce

irrigated food crops which the Government could buy and

ADMARC could sell at subsidised prices. The 2016/17 budget

will carry the needed funds for this programme. These

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Initiatives are intended to obviate the necessity of importing

food or to go begging for resources to buy food in response to

poor weather conditions.

These initiatives should be enough to improve Malawis

capacity to address the problem of food shortages in the short

and medium term. The measures will also improve prospects

of our balance of payments position and to bring about low

inflation and interest rates and to stabilise the exchange rate

even in the face of poor weather conditions should they recur

in Malawi during the coming seasons.

(iv) Government has also embarked on a radical fiscal adjustment

that aims at ultimately covering recurrent expenditure of the

budget with domestic resources leaving only the bulk of the

development part of the budget to be covered by external

resources. The aim is to progressively eliminate Government

domestic borrowing that fuels inflationary pressures. As Annex

2 in the document that is being circulated to members shows;

the Government has succeeded to reduce domestic borrowing

from a high domestic borrowing of K78 billion at the end of the

last half of the 2014/15 fiscal year to K4.3 billion at the end of

the first half of 2015/16 financial year. This is an encouraging

result that shows that the planned fiscal consolidation can

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succeed and that the non-food inflation that is fuelled by

Government domestic borrowing concomitantly could be

reduced considerably.

A sustained reduction of domestic borrowing could also

resuscitate private sector confidence in the economy and could

be a factor in the quest for the resumption of acceptable and

robust growth rates and our ability to create high employment

levels.

15. And now to the main subject of the mid-term review which is

amply described in the document that will be circulated to members

shortly. There, Honourable Members will find that in annex I on

budgetary performance, total revenue and grants that were targeted

at K386.1 billion at the end of the first half of the 2015/16 financial

year were under-collected by K50.8 billion. Domestic revenues that

were targeted at K312.4 billion fell short of this amount by K12.7

billion down to K299.7 billion. Although a number of taxes

performed well, the VAT underperformed considerably by an

amount of K5.6 billion. In parallel, grants performed even worse

where the target of K75.3 billion was under performed by K36.5

billion, less than half this targeted amount.

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16. I would like to underscore here Mr. Speaker, Sir, that in our

view, although the bilateral donors only formally withdrew from

budgetary support (programme grants), in fact the disbursement of

other types of grants (dedicated and project grants) is progressively

diminishing also. In parallel, donors are increasing their off budget

support massively. There is therefore need to strengthen our effort

at raising domestic revenues and to down play all donor grants in

general and only expect to focus more on development loans from

donors as a reliable mode of donor aid delivery.

17. In short Mr. Speaker, Sir, we have to invigorate policies that

aim at becoming progressively, more self-sufficient in budgetary

matters than has been the case so far. This said, it should be

underscored that multilateral institutions such as the EU, the World

Bank and Export and Import Bank of China are increasing their

dedicated grants.

18. Honourable Members should lead the effort to attain self-

sufficiency by deflecting public attitudes that regard foreign aid as a

permanent feature of our budget. We must progressively increase

efforts to maximise the domestic coverage of recurrent budget. As

an independent country this must be our goal. In fact such a policy is

long overdue.

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19. Mr. Speaker, Sir, let me continue with my narration of

budgetary performances. The recurrent expenditure that was

targeted at K358 billion, under performed by K20.9 billion down to

K337.2 billion. Although this reduction is explained by the fact that

half of the targeted expenditure on FISP of K35.7 billion was not paid

for, a sizeable amount of just under K3.0 billion was in fact saved due

to fiscal measures that were taken to ensure the needed fiscal

prudence.

20. The house is being requested that the needed adjustment be

continued even more stringently in the last half of 2015/16 financial

year as part of the need to establish budgetary self-sufficiency.

21. On the basis that the house will agree to embark on the policy

of fiscal consolidation, in view of dwindling available resources; it is

suggested that the 2015/16 approved budget be revised downwards

as provided for in annex 2 where it will be seen that it is being

proposed to reduce the budget by K23.7 billion from an approved

figure of K929.7 billion to K906.0 billion. The house will see that we

propose to reduce the Recurrent budget by just over K17.1 billion

and the Development Budget by sum of K5.6 billion.

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22. This will entail that for the coming months, the Treasury will

withhold resources that are intended for filling vacancies. During the

coming discussions with ministries; in consultation with the Public

Service Reform administration as well as the Department of Human

Resource and Management, proposals for reducing the size of the

public service will be discussed with a view to reducing the so called

bloated Civil Service.

23. In order to reduce the amount of ORT, the Cabinet has decided

that the Treasury and the OPC should review the various perks

including travel, vehicle and fuel entitlements that could be scaled

down. Therefore, the funding of ORT to ministries, will not be

against the original approved budgetary allocations but against the

revised budgetary allocations which the house will have approved.

Table 3 presents vote by vote revisions where applicable.

24. The reduction of the development budget will be made through

a suspension of a few projects that can be removed without major

impact on economic growth. It is expected that this will mostly

include small projects that dominate our (Public Sector Investment

Programme). A list of the projects that could be suspended without

an impact of the economy will be circulated in the house next week,

Monday, 29th February, 2016.

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25. I would like to emphasise Mr. Speaker, Sir, that this is not a

Zero Aid budget nor was the original of 2015/16 budget as has been

popularly termed. We will expect a sizable amount of dedicated and

project grants as can be seen in Annexes I and II.

26. For the coming year, it is expected that a more inclusive tax

system could emerge that could increase tax revenues but at the

same time it is intended to subject the fiscal system to yet another

adjustment of public expenditure. Such a policy must be pursued in

parallel with public finance management reforms that are being

pursued now.

27. Mr. Speaker, Sir, the house will wish me to report on these

measures. The first is to assure the house that some major changes

have been made as regards the needed reconciliation of cashbook

transactions, and their mirror images the bank statements. Lack of

this necessary task is one of the major financial management laxity

that made cashgate possible. I am happy to report that for the past

5 months all ministries have been submitting their reports of their

monthly reconciliations to the Accountant General who sorts out

unreconciled items. We have brought to a minimum extra-

budgetary expenditures and over commitment of resources and

arrears. The required improvements to the IFMIS have been taken

and the system is now more secure and faster. A new software of

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IFMIS has been identified and ordered to replace Epicor which is felt

to be inadequate for proper expenditure controls. It is expected that

this new system can commence to operate within the next 3 years.

28. As part of these reforms, and in order to improve the

compliance of ministries with financial rules and regulations, we are

about to place internal auditors (financial inspectors) who will ensure

that prior to payments, transactions comply with rules and

regulations of the Government. The Treasury has kept up its

insistence for monthly financial returns before funding that shows

how funding for previous months has been utilised and it is

publishing monthly expenditures vote by vote on its website for the

public to see how expenditures are progressing. I invite Honourable

Members to visit our website. What is required now is that these

reforms become a routine part of financial management throughout

the public service as any financial infractions will be punished as

stipulated in the Public Finance Management Act 2003.

29. As regards vote by vote budgetary performance particularly the

expenditure side of the budget it will be seen that this year, there

has been no significant over expenditures to speak of. The five votes

that gave problems last year including the Police and the Malawi

Defence Force in fact also spent within their limits. The Treasury has

strengthened its oversight function over these votes intensively.

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30. Questions will be asked how if funding has gone as planned in

almost all ministries, it is that there have been complaints against

underfunding of functions. We have studied this quite closely and

find that in a number of cases ministries compare monthly funding

with their original requirements that were submitted to the Treasury

prior to Parliamentary approval of vote allocations whereas Treasury

allocates funds according to the approved budget by Parliament. In

some cases the reason has been that certain Ministries have

reprioritised functions according to the wishes of managers. We

found that Ministries tend to prioritise expenditure on travel at the

expense of other important items like fuel for ambulances in

hospitals, in the case of Ministry of Health.

31. All in all, the performance of the budget this year has been

better than before except for the projected expenditure on FISP. As

the house is aware the bulk of expenditure on FISP relates to the

imports of fertilizers and in view of the deep depreciation of the

currency, the cost of procuring fertilizers has escalated. However,

this year, instead of shouldering all the escalated costs, the suppliers

of fertilizers have had to shoulder some of the costs and the

Government as shown in table 2 has accepted only K14.9 billion of

the total escalated costs of approximately K30 billion.

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32. It will also be recalled that donors declined to contribute to the

seed subsidy of (maize and leguminous seeds) whose total cost is

estimated at K9 billion. In view of the importance of seeds in the

FISP programme, it was decided that the Government should assume

these costs and that the farmers themselves would contribute a sum

of K1.5 billion leaving K7.5 billion to be assumed by the Government.

33. The total increase in cost of FISP including seeds is K22.6 billion.

Table II shows that without these escalated costs, the domestic

borrowing would have amounted to zero but in view of the escalated

costs of fertilizers and the seed subsidy under FISP, total borrowing is

estimated at just under K23 billion which is below the targeted

domestic borrowing as at the end of the financial year on 30th June,

2016. The IMF target under the ECF programme is K25 billion. In

view of the recurring escalating of FISP, the house will wish to see a

redesign of FISP and its management next year.

34. Mr. Speaker, Sir, lastly, I would like to request for a thorough

review of the budgetary outturn and views on how we should

approach the fiscal problems that have been posed in light of the

changed financial circumstances.

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34. I thank you Mr. Speaker, Sir, for the houses attention to this

matter and I beg to move that the house approve the revised

2015/16 budget as presented in detail in Annexes II and III.