this is very enthusiastic statement:let’s us see if it will take its course
2012/13 BUDGET STATEMENT
Delivered in the
NATIONAL ASSEMBLY OF THE REPUBLIC OF MALAWI
THE MINISTER OF FINANCE
HONOURABLE DR. KEN LIPENGA, MP
THE PARLIAMENT BUILDING
Friday, 8th June, 2012Mr. Speaker, Sir, I beg to move that the Estimates on Recurrent and Development Accounts for the 2012/13 Budget be referred to the Committee of the Whole House, be considered Vote by Vote, and that thereafter, be adopted.
Mr. Speaker, Sir, I am honoured to stand here as part of history to deliver the first Budget Statement of the Peoples Party Administration led by Her Excellency, Mrs. Joyce Banda.
It is with utmost humility that I want to register my sincere gratitude to Her Excellency the President for her belief in me to lead the Ministry of Finance at a time when we are facing serious economic challenges.
Mr. Speaker, Sir, I recognise the importance of consultations to improve the quality of the Budget. The Deputy Minister of Finance and I consulted a wide range of stakeholders across the country in May in order to reflect the priorities and concerns of Malawians in the National Budget.
Mr. Speaker, Sir, we face serious economic challenges. These were articulated by Her Excellency the President, Mrs. Joyce Banda, in the State of the Nation Address delivered in this August House on 18th May, 2012 when she officially opened this Budget Session. This Budget is designed to address these challenges and put the economy onto a path of sustained recovery.
The 2012/13 Budget aims to provide a consistent and coherent economic policy framework to underpin our development objectives. The emphasis will be on enhancing the sustainability of growth and development through policies that consolidate macro-economic stability, reinforce resilience to shocks, improve governance in public financial management, strengthen financial oversight, and support private-sector led growth and export diversification.
Mr. Speaker, Sir, the key objective of this budget is to restore macro-economic balance and a market based economy that will provide the foundation for sustainable economic growth in future. The Budget will consolidate the bold economic reforms that Government has implemented since Her Excellency the President took over leadership of this country on April 7, 2012. Some of the key economic reforms have included liberalizing Malawi’s foreign exchange regime and the removal of price controls on fuel and utilities. The removal of price controls is necessary to move to a market based economy and to reduce the burden of subsidies on the Budget. Other key anchors include No Net Domestic Financing, careful expenditure control and prioritization together with the implementation of reforms to strengthen governance systems for public financial management. Mr. Speaker, Sir, this is an austerity Budget.
Some of the reforms will be painful. But we have been living beyond our means and have to take the difficult decisions that are necessary to stabilize the economy. This will lay the foundation for sustainable economic growth in future.
Mr. Speaker, Sir, and Honourable Members, it is clear that the economic reforms which have already been implemented are beginning to bear fruit. For instance, the devaluation of the Malawi Kwacha by the Reserve Bank of Malawi and the implementation of a market determined exchange rate have restored credibility to our monetary policy environment. It has also provided the policy environment to ensure that foreign exchange transactions return to the formal financial system from the parallel market.
Mr. Speaker, Sir, before I move to the substantive proposals for the 2012/13 Budget, it is important to take stock of the progress that has been made since April, 2012. It is equally important to outline the challenges we face and how we intend to address them.
Mr. Speaker, Sir, as soon as she assumed office, Her Excellency expressed her strong commitment to the Rule of Law and Human Rights and started work immediately to restore confidence with the Malawian population, our development partners and our neighbours. She has also demonstrated commitment to transparency and accountability and to fiscal austerity so that her dream of sustained improvements in the lives of Malawians can be realised.
Mr. Speaker, Sir, Her Excellency also directed me to work towards restoring the programme with the International Monetary Fund so that our valued Development Partners could release Budget Support to the 2012/13 Budget. I am pleased to report that substantial progress has been made. We have concluded negotiations with the IMF which will lead to the resumption of the Extended Credit Facility. We have also worked with the World Bank to develop a Comprehensive Programme for Competitiveness, Growth and Poverty Reduction. This proposal is for an additional US$50 million which will focus on i) regaining macro-balance and a market based economy to help accelerate the normalization of the economy and growth rebound, ii) and protect the poor and vulnerable in the short term while improving the transparency of economic management systems. This programme will be complemented by an extension of two existing grants: US$50 million for MASAF to improve the livelihoods of the poor and US$50 million for the Irrigation, Rural Livelihoods and Agricultural Development Programme to increase agricultural productivity of poor households.
I invite this honourable house to join me in expressing our profound appreciation to the International Monetary Fund, the World Bank and indeed all our Development Partners for their pledges of increased support to this year’s Budget. I appeal to Development Partners to release additional resources as early as possible because we have limited reserves and additional external resources are required in order to build reserves and help stabilize the system and allow the momentum of reform to continue.
Mr. Speaker, Sir, we have also made significant progress in terms of restoring normal relations with the United Kingdom. This culminated in the visit of the Secretary of State for International Development, The Right Honourable Andrew Mitchell to Malawi last week. During his discussions with Her Excellency the State President, he announced an immediate aid package of over 30 million pounds for the 2012/13 Budget.
We have restarted negotiations with the Millennium Challenge Corporation to release the US$350 million for the power sector that was suspended due to economic and human rights concerns.
Mr. Speaker, Sir, I am committed to the implementation of substantive reforms to strengthen the accuracy of data that is presented to Parliament and to promote a culture of enhanced transparency and accountability in the management and reporting of public finances in order to ensure that such failures are not repeated. These include strengthened oversight to prevent over-expenditure and the build-up of arrears, strengthened audit function across Government, and the requirement to publish key economic data to Parliament on a quarterly basis and in the public media.
CHALLENGES DURING THE IMPLEMENTATION OF THE 2011/12 BUDGET
The Real Sector
Depressed Economic Growth
Mr. Speaker, Sir, our economy faced challenges last year due to the shortage of foreign exchange leading to the shortage of fuel, pharmaceuticals and fertilizer. Economic growth was also constrained by dry spells which led to below average crop production in the South. These challenges, both macroeconomic and structural in nature, caused a contraction in real output to the extent that GDP growth in 2012 was revised downwards from the initially projected 6.9 percent to 4.3 percent.
Inter-linkages with and effects on the real sector
International Reserves and Shortages
Mr. Speaker Sir, allow me to provide context for the subdued growth in 2012 by highlighting some of the causes of the contraction and lay the foundation for our new policy framework in the 2012/13 Budget.
Over the past three years, we have persistently had a severe shortage of foreign exchange in the context of an overvalued exchange rate and tight administrative regulations that forced economic agents to trade at excessively devalued rates in the parallel market, while the few that had access to the limited hard currency in the official market traded at heavily subsidized rates.
Overvaluation of the exchange rate was very costly as the country’s international reserves remained consistently at frighteningly low levels, thereby crippling the country’s ability to deal with major external shocks and emergencies. Moreover, fuel queues became the order of the day and the country ran short of a number of basic necessities. Companies too suffered as foreign currency unavailability affected their ability to import raw materials and pay import suppliers.
Supply Mr. Speaker, Sir, power supply remained erratic and inadequate to support industry. We have long recognised that increased investment in the power sector is essential to promote economic development in Malawi. Inadequate power is consistently identified as a key constraint and barrier to economic growth in Malawi. The lack of reliable power significantly lowers social returns and deters new investment in manufacturing, mining and other productive sectors. The lack of rural power additionally accelerates deforestation which has an impact on the availability and quality of water resources.
Malawi’s total installed generated capacity is less than 300 Megawatts with formal demand closer to 400 Megawatts today and a projected demand of around 700 Megawatts by 2020. Most of our power comes from hydro-electric power generation with 98 percent generated in the Lower Shire Valley. These statistics demonstrate the need to make progress on interconnecting to the Mozambique Grid and the need to conclude negotiations with the Millennium Challenge Corporation. There has been limited private sector investment in power because electricity tariffs have been set too low. The adjustment of electricity tariffs to full cost-recovery levels will generate the resources to pay for inter-connection with the Mozambique grid and also create incentives for private sector investment in power generation and distribution.
The External Sector
Mr. Speaker, Sir, from a Balance of Payments (BOP) perspective, it will also be important for me to highlight why our exchange rate regime negatively affected the external sector. As most of us now know, an overvalued currency has implications on our propensity to import and export.
In our particular case, overvaluation of the Kwacha against major currencies especially the US Dollar meant that imports including those of non-essential items were cheaper and excessively subsidized than would have been the case if the exchange rate was market determined. This caused an upsurge in import demand. With a shallow export base and declining volumes and price for our tobacco over the years, among others, realizations from exports have progressively worsened and consistently been lower than our import bill thus increasing our trade deficit and threatening the sustainability of our current account. That is why our current account sharply deteriorated between 2009 and 2012 from negative $548.6 million to negative $845.5 million and had we continued on that path, the country was heading towards a BOP crisis more severe than has hitherto been experienced.
Mr. Speaker, Sir, in the medium to long term, the deterioration in the balance of payments must be addressed by clear policies to promote export diversification and import substitution by addressing other structural constraints. This will require a comprehensive set of reforms to create the enabling environment for investment and export diversification. The Ministry of Industry and Trade through the National Export Strategy have addressed other structural constraints and I want to commend them for the excellent work.
Mr. Speaker Sir, this Budget is designed to start addressing the context for Doing Business to promote private sector investment and export diversification in order to stabilize the Balance of Payments. The Fiscal and Monetary Sectors Mr. Speaker, Sir, and Honourable Members, from a fiscal perspective, not only did the Zero Deficit Budget fail to realize revenues as planned, but there was also substantial slippage in terms of expenditures, and as a result, the projected fiscal deficit was missed by a wide margin.
Instead of taking corrective measures, what was then chosen was the soft option of funding the widening fiscal gap by printing money and sharply increasing domestic borrowing. To allow us to do that, interest rates on government borrowing were kept artificially low.
This loose fiscal situation coupled with an accommodating monetary policy stance created an optical illusion for cheaper monetization of our deficit. These factors, plus an insatiable spending appetite contributed to significant growth of the domestic debt stock to 5.75 percent from an initial planned repayment equivalent of 1.5 percent of GDP.
2011/12 BUDGET PERFORMANCE
Revenues and Grants
Mr. Speaker, Sir, the 2011/12 Budget did not perform as anticipated. It left us with major challenges that have to be addressed in this Year’s Budget. As we may recall, the Budget had originally forecasted an overall resource envelope of K307.71 billion consisting of K242.48 billion from domestic sources and K65.23 billion in grants. This provision was revised at mid-year to K287.47 billion of which revenues from domestic sources and grants were estimated at K242.48 billion and K44.99 billion, respectively.
We now project that Total Revenues and Grants at the end of this fiscal year will amount to approximately K260.20 billion consisting of K207.53 billion in domestic revenues and K52.68 billion in grants. This underperformance is largely on account of non-tax revenues which we now estimate to be at K26.62 billion against the originally approved amount of K38.97 billion, and taxes on goods and services and international trade taxes which were, among others, subdued due to foreign exchange shortages and intermittent fuel supply, and are now expected to underperform by K23 billion and K4.3 billion, respectively, in comparison to approved estimates.
Mr. Speaker, Sir, the poor performance particularly of indirect tax revenue was caused by the decline in economic activity and reduction in economic growth due to the causes outlined earlier. It is also clear that the Budget Framework was over-reliant on generating domestic resources to finance all recurrent transactions. The Budget required significant tax increases on an already overstressed private sector. Several of these taxes proved counter-productive. We have learned that attempts to over-tax the private sector and consumers are ultimately self-defeating as they reduce overall tax revenue. As I will announce later in my statement, tax and non-tax policy measures in the 2012/13 Budget will focus on promoting domestic production through value addition and encouraging investment in the economy.
Total Expenditure and Net Lending
In terms of expenditures, Mr. Speaker, Sir, we now project that Total Expenditure and Net Lending at the end of the 2011/12 fiscal year will be around K328.11 billion, an upward adjustment of K24.40 billion over the approved amount. Of the total expenditure, K 250.679 billion is for recurrent costs and K77.42 billion is for development expenditure.
Chief among the culprits that contributed to over-expenditure and accumulation of arrears are State Residences and Malawi Police Service, who accumulated arrears of over K 10 billion. I have provided these details in Documents number 4 and 5.
Mr. Speaker, Sir, we now estimate the Overall Balance to post a substantial fiscal deficit of about K70.05 billion, a nominal deviation of about K74 billion from the initially planned repayment of K3.97 billion which is equivalent to 1.5 percent of GDP. At 7.3 percent of GDP, this deficit, which was largely financed from domestic sources, is the largest in recent history.
Domestic Debt and Arrears
Mr. Speaker, Sir, subject to further audit and verification which I have already asked the Auditor General to conduct, we estimate that we have accumulated arrears in excess of K72 billion. The arrears are mainly on account of Parastatal Organizations where loans and overdrafts accounted for about K37 billion; Government Departments have accumulated arrears of around K28.6 billion and arrears accumulated on pension contributions, salaries, utilities and subscriptions are estimated at K6.1 billion.
I believe that in the interest of transparency, it is important to elaborate further on these arrears. Arrears from Parastatals include SFFRFM (K16.2 billion), Air Malawi (K5 billion), Malawi Broadcasting Corporation (K5 billion), ADMARC (K4.9 billion) with the National Food Reserve Agency, Mal