First Merchant Bank

The Minister of Finance, Honourable Goodall Gondwe M.P., presented his 2008 budget statement in the National Assembly on 23 May 2008. As might be expected, in the last budget speech before the forthcoming 2009 General Election, the Minister dwelt at some length on the current government’s achievements on the economic front since taking office in 2004. These include:

Programmes of the IMF and other donors which had been suspended were resumed and HIPC completion point was reached resulting in the cancellation of the lion’s share of the country’s external debt.
A real economic growth rate of over 7% per annum has been achieved for the past three years.
The inflation rate has been reduced from 17% per annum to 7% per annum.
Government’ domestic debt has been reduced from the equivalent of 25% of GDP to 11.5% of GDP
The bank rate has come down to 15% from 35% per annum
In 2007 export earnings reached US$700 million, considerably the highest achieved since independence.
The level of the external trade deficit is showing a declining trend to approximately 15% of GDP in 2007.
A stable exchange rate has been maintained for the past three years.
The ratio of investment to GDP has risen from 14.4% pre 2004 to 28.1% in 2007.

Another satisfactory fiscal outturn is forecast for 2007/08 with the overall anticipated deficit of K8.9 billion, equivalent to 1.9% of GDP being marginally lower than the original budgeted deficit of K9.7 billion.

Both domestic revenues and grants exceed budget by K4.9 billion and K6.2 billion respectively which has allowed some expenditure over-runs to be accommodated. Recurrent expenditure is K4.9 billion over budget, almost entirely attributable to an over expenditure on fertiliser and seed subsidy of K4.2 billion which cost a total of K15.7 billion against budget of K11.5 billion. The K5.3 billion development expenditure budget over-run is attributed largely to an acceleration of the road development programme.

Although the relatively modest size of the overall deficit is evidence of government’s continuing commitment to living within its means, the level of donor dependence remains worrisome. Grants accounted for K71.8 billion (45%) of total inflows of K174.9 billion in 2007.

World economic conditions, in particular global commodity prices, will have a significant impact on 2008/09 economic performance. Malawi may stand to benefit from increased prices for its agricultural exports but the escalation in oil and fertiliser prices will affect its terms of trade, inhibit the accumulation of foreign reserves and introduce inflationary pressures. In addition, the increased cost of the provision of subsidised fertiliser will place a strain on the budget envelope which already has to accommodate the one-off costs of the general election and a population census (together estimated at K10 billion).

The major economic assumptions underlying the budget are bullish with GDP growth forecast at 7.5%, projected inflation of 6.5%, money supply growth of 12.2% and average interest rates of 12.5%. In a predominantly agricultural economy GDP growth remains at the mercy of prevailing weather conditions. Indeed, the precise 2007/08 carry over national food security position remains somewhat uncertain even at present.

Furthermore, world market conditions may make the inflation targets difficult to achieve and historically, it has proved difficult to control money supply and inflation in a pre- election period. Further reductions in interest rates would be unlikely in the absence of a continuing downward trend in inflation and money supply growth.

The 2008/09 budget anticipates an increase in the fiscal deficit from the current 1.9% of GDP to 3.7% of GDP. Major contributors to the increased deficit are the increase in the cost of provision of subsidised fertiliser and inputs and the cost of the elections and census but there is also a proposed 20% general civil servant salary increase.

On the revenue side, domestic revenue is anticipated to rise by 15% to K118.2 billion (which may be an ambitious target in light of the tax reduction impact of the fiscal measures discussed below). Pledged grants of K89.9 billion are 24% higher than 2007/08. Expenditure of K229.2 billion is budgeted, an increase of 25% on the prior year. The overall budget deficit of K21.1 billion will be financed by draw down of external loan facilities and no increase in domestic borrowing is planned. However government may look to restructure its domestic debt portfolio by introducing longer term treasury bonds, which would in turn help to deepen the country’s financial markets.

Budgeted expenditure remains aligned with the Malawi Growth and Development Strategy (MGDS) with 34% of the budget or K80.9 million allocated to pro-poor expenditure (PPE’s). The three largest votes are agriculture K32.2 billion, health K31.4 billion and education K26.1 million.

The budget continues the Government’s emphasis on agricultural productivity and maintaining food security. In addition to the increased allocation to subsidization of fertiliser and seeds, a subsidy on pesticides will be introduced to reduced the pre and post harvest loss of maize to weevils (estimated at a staggering 40%). Food storage facilitates will also be improved with the construction of 2 substantive grain silos and some 600 metal storage facilities spread throughout the country. There is also a large allocation to irrigation development which includes a planned 16 earth dams and 290 boreholes to improve food security.

Malawi has also been chosen to pilot a World Bank weather insurance scheme whereby, if crop production is impaired due to weather, government will receive funds to purchase food.

A variety of new fiscal measures are proposed including a couple of ‘crowd-pleasers’ in the form of a reduction in the VAT rate from 17.5% to 16.5% and modest increases in the tax free and lower rate tax bands for individuals. Other proposed changes include:

elimination of duty on insecticides, fungicides, herbicides and pesticides
elimination of duty on telephone handsets but introduction of a new 10% excise duty on sales of mobile airtime
Zero rating for VAT purposes of machinery used in manufacturing and construction
new customs codes to allow duty free importation of capital equipment by electricity, telecommunication and other utility providers, mining companies, dairy farmers, fish farmers and petroleum storage facilities
duty and VAT exemption for commercial fishing trawlers
introduction of 10% excise tax on gaming and lotteries
reversion to an ad rem duty on cigarettes from the previous ad valorem tax, lower rates to encourage local production of cigarettes and introduction of a system of revenue stamps to curb cigarette smuggling.