2018/19 Proposed Budget Analysis Workshop

2018/19 Proposed Budget Analysis Workshop 28 MaY 2018

Outline • Introduction • Overview of the economy • Budget Performance over past 4 years • The 2018/19 Budget Draft • Assessment of topical programs in the budget • Mapping 2018/19 Draft Budget into MGDS III • Tax Policy and Administrative Measures for the 2018/19 Budget • Opportunities arising from this Budget • Key risks and threats to the budget implementation • Conclusion

Introduction • The main objective is to brainstorm on the key takeaways from the 2018/19 draft budget • How the proposed budget will translate aspirations of Malawians as outlined in MGDS III into implementable activities. • At the end, we make objective and informed opinion on the opportunities and risks embedded in the proposed budget.

Overview of the economy 1. Domestic Economic Activity • The country registered positive economic growth during the reviewed period • weather-related shocks of floods, dry-spells and fall of army worms have negatively impacted the agriculture sector hence growth • The country’s economic performance compared favourably within Sub-Saharan Africa • Malawi economy is projected to grow by 6.0 percent in 2019, a rebound from 4.0 percent in 2018 Table 1: GDP Growth for Malawi and selected SSA countries Source: Ministry of Finance, Economic Planning and Development

Overview of the economy 1. Domestic Economic Activity…contd. • Going forward, developments in domestic economic activity will depend on how weather related shocks to agriculture and power outages are managed.

Overview of the economy…Cont. 2. Inflation and interest rates developments • Monetary authorities embarked on tight monetary stance to bring down inflation. • Inflation decelerated from about 30.0 percent in 2014 to single digit by August 2017, at 9.7% in April 2018,

Overview of the Economy…Cont. 3. Foreign Exchange developments • Tight monetary policy has been key in achieving stable exchange rate. • Improved supply and demand conditions of foreign exchange in the market also explained stability in the kwacha • Foreign exchange reserves improved with official import coverage increasing from around 2 months in 2014 to above 3 months in 2017. • This will be key in boosting confidence in FX market

Budget Performance 2013/14-2017/18 1. Revenue and Grants vs Expenditure and Net Lending Performance • Govt’s fiscal operations have resulted into persistent deficits between 2013/14 and 2017/18 financial years • Revenue and grants (%GDP) remained stable • Govt expenditure and net lending as %GDP has remained relatively stable, but in nominal terms the expenditure has almost doubled • This means growth gains have been used to support govt expenditure over yrs

Budget Performance 2013/14-2017/18 2. Revenue and Grants Performance • Domestic revenue was the major source of government financing and averaged about 19.0 % GDP during the past 4 financial years. • tax revenue averaged 17.0 %GDP between 2014/15 and 2017/18 (stable over the period). • Stability in tax could reflect unchanged tax measures in face of relatively unchanged economic conditions • Grants were relatively higher than non tax revenue.

Budget Performance 2013/14-2017/18 3. Approved vs Actual outturns of the budget • There have been disparities between approved and actual tax revenue outturn in 2014/15 and 2015/16 financial years • initial projected tax revenue targets were not met at the end of the financial year, could mean general economic performance was lower than initial projections • Subsequently, approved and actual government expenditure and net lending outturn exhibited some variances

Budget Performance 2013/14-2017/18 4. Recurrent Expenditure vs Development Budget • Bulk of govt spending was recurrent expenditure averaging 22.0 as %GDP during the past 4 years • Devt expenditure averaged 5.5 %GDP, only 1 %GDP was govt own financing • Excluding wages and salaries, interest payments and other statutory obligations, other recurrent expenditures remained between 10.0 percent and 15.0 %GDP during the reviewed period • Ironically, an average of 1.5 %GDP was spent on FISP during the period

The 2018/19 Budget a) Assumptions • The budget assumes sustained macroeconomic stability to achieve robust, inclusive and sustainable growth. • In other words, the budget assumes continued stability of the kwacha, single digit and stable inflation, relatively low interest rates as well as favourable domestic growth which is expected to rebound to 6.0 percent in 2019 from 4.0 percent in 2018. • The draft budget assumes donor support, with IMF recently approving the new ECF program amounting to K83.1 billion (US$112.3 million) and World Bank committed to provide budget support.

The 2018/19 Budget b) Overview • The 2018/19 budget has been estimated at K1,504 billion (28.2 % GDP), up by 13.8 % from 2017/18 budget and projected to decrease by 5.0% to K1,429 billion in 2019/20 • Successful implementation, will depend on realizing the projected domestic growth, which will have a bearing on tax revenue; sustained macroeconomic stability and improved electricity power supply. • However, projected budget for 2019/20, is rather conservative and could be reflective of projected decline in grants despite a more positive economic outlook for 2019 with a projected growth of 6.0 percent Chart 6: Budget Composition

The 2018/19 Budget b) Overview….cont. • Revenue and Grants projected at K1,261 billion (23.6 %GDP) • Domestic revenue set at K1,052 billion (19.7 % GDP), representing 10.4 % upward revision from 2017/18 revised estimates. • In 2017/18 grants were at K177 billion, estimated to improve to K209 billion (3.9 percent of GDP) in 2018/19, to decline to K27 billion in 2019/20. • The 2018/19 budget estimates tax revenue to increase by 7.6 % to K940.0 billion. • Given the continued power outages, the estimated growth in tax revenue seems somewhat unrealistic. • Tax revenue is also expected to be affected by overall economic growth prospects for 12 months ahead, currently unclear.

The 2018/19 Budget b) Overview….cont. • Recurrent expenditure has been increased by about 16.0 % to K1,104.5 billion (20.7 %GDP) for 2018/19 from preceding year. • The increase implies that the country will continue to implement a deficit budget and in turn increase borrowing to meet the financing gap. • Devt budget up by 25.6 % to K391.7 billion (26.0 % of total budget) in 2018/19, representing 7.3 %GDP. • Despite the increase, the allocation remains lower than a minimum threshold of 8% of GDP required to drive robust and sustainable growth. • Need for reprioritization of expenditure • redirecting its discretionary expenditure from social and consumption expenditure to devt

The 2018/19 Budget b) Overview….cont. • The overall balance (budgetary deficit) is estimated at K242 billion (4.5 %GDP) from K182.6 billion) in 2017/18 financial year, projected to further increase to K275.7billion in 2019/20 financial year. • This outturn has potential of reversing the hard earned macroeconomic stability as this is expected to increase borrowing and may affect inflation and interest rates developments in the country. • At the current debt stock of K1.3 trillion (26.0 %GDP), Malawi is above the minimum domestic debt ratio of 20.0 percent of GDP. • The 2018/19 domestic borrowing estimated at K176 billion (3.8 %GDP) and projected to increase to K235.1 billion in 2019/20, is a worrisome development as is expected to exert pressure on the country’s debt sustainability prospects. • Increased domestic borrowing is more likely to drive interest rates up and in the end crowd out domestic private investment.

The 2018/19 Budget b) Overview….cont. How to create more fiscal space for Development programs? • Issue debt (domestic and external) • revatalise revenue collection, • improve PFM and reprioritization of expenditures, • external grants, • Public Private Partnerships (PPP), • And use of seignorage .

Assessment of topical programs in the budget 1. Farm Input Subsidy Program has been allocated K41.5 billion an increase from the 2017/18 revised figure of K33.2 billion. • FISP is an area of big concern. • Issues that stand out are failure of the program to help the beneficiaries graduate from being vulnerable to food insecurity as well as failure of government to put in place clear FISP graduation strategy. • As a result, FISP is seen to be unstainable therefore the program needs reconsideration such as channeling the funds to irrigation or energy sector.

Assessment of topical programs in the budget 2. Government has allocated K20 billion towards maize purchases and distribution. This has been the trend over the years to counter effects of weather shocks on agricultural output. • Government’s expenses on maize purchases underscores the failure or misallocation of funds to FISP program because FISP was meant to promote food security even for the less privileged. • However, it is on record that the less privileged that are usually the beneficiaries of FISP are worst hit by the shocks of bad weather patterns- signaling inefficiency . • The suggestion would be to reconsider both FISP and allocation towards maize purchases, as these have presented huge financial slippages or inefficiencies over years. • In the medium to long term, such funds, for instance, would be more efficient if they could be redirected towards medium and large scale commercial farmers and irrigation farming.

Assessment of topical programs in the budget 3. About K4.8 billion and K5.0 billion have been allocated to a newly created Youth Internship program and tree planting and care program, respectively. • This program is indeed “ambitious” and begs the question of sustainability beyond 2019. • If the program will be continued post 2019 elections, then the program will be an impetus for growth as the country can have a chance to ride on the benefits of youth demographic dividends. 4. Around K11.4 billion in 2018/19 budget from K15.6 billion in 2017/18 budget has been allocated to the new Pension scheme for the newly recruited officers and Civil Servants who were 35 years in 2017 and below. • More important is the fact that such huge inflows to financial sector could help in enhancing financial sector development especially for long term financing. • It remains for the authorities to create rules, regulations and enabling environment that will support long term financing to reap necessary benefits from such huge funds.

Assessment of topical programs in the budget 5. Decent and Affordable Rural Housing Project (Iron Sheet Subsidy) • An allocation of K10 billion has been made to the project in 2018/19, this is equivalent to an increase of 14.3 percent from the 2017/18, targeting about construction and rehabilitation of 8,000 houses. • If this allocation was channeled towards productive sectors such as energy sector or agriculture would be more meaningful than the allocation to social sector projects with lower economic outturns.

Assessment of topical programs in the budget 7. Funding for Malawi Electoral Commission and other key institutions • An amount of K33.4 billion has been allocated to MEC in the 2018/19. • Our hope is that the allocated budget is adequate for the commission to conduct free and fair Tripartite Elections • Other depts. and govt institutions that require enough funding to ensure smooth running of the economy include but not limited to: Judiciary, ACB, National Assembly, Ministry of Justice and Economic Planning and National Statistics institutions.

Mapping 2018/19 Draft Budget Into MGDS III • The 2018/19 stipulates that the sectoral allocation of development budget was done in line with MGDS III priority areas. • It is on record that total expected cost to translate MDGS III aspirations into tangible development projects in the next 5 years is K8.6 trillion . • The 2018/19 development budget allocation at K391.7 billion, represents 4.6 percent of the total financing required to implement MGDS III in 5 years’ period. • Everything else remaining equal, only about 22.8 percent of aspirations of the MGDS III will be translated into implementable development projects if the current development budget allocation trend persists.

Mapping 2018/19 Draft Budget Into MGDS III 1. Transport and ICT infrastructure • Transport sector estimated to receive highest development budget allocation amounting to K89.2 billion. • Within transport sector, the bulk of the funds to the tune of K69.0 billion have been earmarked for road construction. • While information and communication technology (ICT) has been allocated K8.0 billion, thus transport and ICT priority area has been allocated a total of K97.2 billion in 2018/19 financial year. • This means that about 24.8 percent of the whole development budget has been allocated to one priority area. • This outturn could be both a cause of concern and celebration

Mapping 2018/19 Draft Budget Into MGDS III 2. Agriculture, Irrigation and Climate Change Management • The sector has received second highest development budget allocation amounting to K80.6 billion in 2018/19 budget from K58.2 billion in the previous financial year. • However, out of this amount, 83 percent (K65.7 billion) is donor support and the rest (K12.7 billion) is government own financing. • Most projects being financed focus on irrigation agriculture and this is expected to reduce the country’s reliance on rain fed farming thereby promoting resilient economic growth. • A concern is the amount of development funds contributed by government towards agricultural is insignificant given that billions of the kwachas are spent on programs that are less productive activities. • Ironically, Green Belt Initiative (GBI) has not received any funding, this is a huge concern because the project is long believed to have so much potential in as far as weaning the economy away from the effects of recurring bad weather patterns is concerned. • It could be more effective if the allocation for maize purchase and 50.0 percent of FISP budget could be channeled to GDI to be utilized for maize commercial farmers. • This would more likely to improve maize yield and result into low maize prices.

Mapping 2018/19 Draft Budget Into MGDS III 3. Education and Skills Development • Devt allocation to education sector was the third largest at K44.9 billion in 2018/19 against the revised estimate of K38.7 billion in 2017/18. • The most important observation is that domestic financing contributed about K21.4 billion to the sector, representing about 49.0 percent of total education sector development budget. • This development shows the government’s commitment towards prioritising education as outlined in the MGDS III. Despite this commitment, the allocation remains low to make meaningful impact on education sector, as most key education indicators remain poor. • Major infrastructure projects prioritized include construction of three teachers training colleges for primary school teachers; rehabilitation of infrastructure for most institutions of higher learning; provision of desks for primary as well as secondary schools and construction of girls hostels in a number of secondary schools across the country.

Mapping 2018/19 Draft Budget Into MGDS III 4. Energy, Industry and tourism Development • Energy sector allocated K9.5 billion in the 2018/19 development budget, (2.0 % total development budget). However, the whole allocation was World Bank donor support. • Industry and Tourism sector allocated K2.1 billion, meaning that the whole priority area has been allocated only K11.6 billion. • No allocation for 300 megawatts Kam’mwamba Coal Fired Power Plant Project that is expected to be run by a private investor. • This projected is expected to be financed by a loan from Export and Import (EXIM) Bank of China amounting to K493.6 billion (US$7.0million).

Mapping 2018/19 Draft Budget Into MGDS III 4. Energy, Industry and tourism Development • Out of which, the government of Malawi is expected to pay commitment fee of K91.8 billion (US$124.0 million). If this project is undertaken, Malawi is expected to almost double its installed capacity of electricity power generation currently around 350 MW. • Should Malawi undertake to implement this project on its own, Malawi could be investing K98.7 billion each year for 5 years, meaning that the problems of power shortages could become a forgone conclusion. • These funds could be reproritised even in the existing proposed budget such as redirecting funds from other recurrent expenditures, government transfers and social expenditures.

Mapping 2018/19 Draft Budget Into MGDS III 4. Energy, Industry and tourism Development • Other energy investment opportunities that can be pursued (IPP and PPP) • Mpatamanga Hydropower project (300MW) and Government would like to develop it as a PPP. • Fufu Hydropower project: Feasibility studies completed and has a potential of 200 MW. • Kholombidzo: Feasibility studies were completed and has a potential of 200 MW and the Government would like to develop it as a PPP. • Renewable Energy: Resource mapping for solar has been completed; Geothermal and Wind resource mapping and prefeasibility for two sites will be finalized in May 2018. • Songwe Hydropower project: Feasibility studies and detailed designs for the 150MW capacity project were completed. The project is being implemented at the border in partnership with the Tanzania Government.

Mapping 2018/19 Draft Budget Into MGDS III 5. Health and Population Management • The sector has been allocated K25.4 billion in 2018/19 financial year from a revised estimate of K26.0 billion in the preceding financial year. • Most of the development expenditure is intended for the construction of Phalombe District hospital, Domasi Community Hospital and the Cancer centre in Lilongwe. • The commitment to recruit 1,000 medical personnel will go a long way in addressing staffing shortages in hospitals and clinics. • Total health expenditure estimated at K75.1 billion for 2018/19 falls short of the Abuja Declaration (2001) of a minimum of 15%of the annual budget.

Tax Policy and Administrative Measures for the 2018/19 Budget • The Budget Statement announced a number of Tax Policy and Administrative Measures. • Tax Policy and Administrative Measures outlined in the 2018/19 draft budget to a large extent aim at improving efficiency in tax collection as well as tax compliance. • No significant tax reforms have been proposed to support the Private Sector investment and development. • The concerns about high tax rates on corporate as well as high and discriminatory personal tax rates remain unattended to.

What are the opportunities arising from this budget? • Favourable macroeconomic conditions characterized by single digit stable inflation, stable exchange rate and declining interest rates may support business activities to thrive. • Domestic economic activity is projected to rebound to around 6.0 % in 2019, this will be key for both private and public sector growth • Resumption of IMF supported ECF program will boost donor confidence and also enhance public finance management • Youth program will reduce youth unemployment and help the country in benefiting from demographic dividend • Govt compliance with new pension act represents huge potential for long-term financial inflows to financial sector, need to come up with long term financial products to support long term investment

What are the opportunities arising from this budget? • Recent reforms in energy sector have allowed participation of private sector in once controlled sector. • Given the current electricity shortages, these reforms present huge opportunities for private sector to participate given the government commitment. • There is also great opportunity for the private sector to invest in irrigation commercial farming with thousands of hectares available under GBI • This will also give opportunity to both investors and even financing institutions

What are the key risks and threats to the budget implementation? • Continued power outages to affect economic prospects thereby tax revenue. • No allocation to deal with the continued intermittent power supply • Bad weather patterns will continue to weigh negatively on agricultural output in the short to medium term • In 2017 about 1.0 percentage point of GDP was lost and in 2018, about 2.0 percentage points are expected to be lost due to combined effects of power outages, negative weather shock and fall of army worms

What are the key risks and threats to the budget implementation? • Increased domestic borrowing to exert pressure on inflation and interest rates, thus increasing the chances of disturbing macroeconomic stability • Election effect more likely to weigh negatively on the fiscus as elections are associated with increased unplanned expenditures • Unpredictability in disbursement of donor funds • Inclusivity and resilience strategies of the budget have not been clearly outlined

Conclusion • The 2018/19 budget proposed budget has a huge potential of achieving robust growth given favourable basic macroeconomic fundamentals. However, issues of resilience and inclusivity are not clearly outlined. • Strict monitoring by the authorities to remain within the fiscal limits will be key in successful implementation of the budget. • Recent approved ECF program will help government in enhancing its fiscal restraint to meet program targets. • However, in the short to medium term, the major threats remain impending elections, power outages and shocks to agricultural production.

Thank You

2018/19 Proposed Budget Analysis Workshop