Malawi’s economy: Zero-sum game?

Malawi is facing a very tough financial year as aid donors have decided to maintain their suspension of the country’s budgetary support. Aid forms 40% of the national budget. In response, the government is drawing up what it calls the ‘zero-aid’ budget. But will it work? Lameck Masina, in the capital Lilongwe, has been talking to the business community to sound out their opinions.

The uncertainty over whether Malawi’s development partners will resume budgetary support to this southern African country has forced government authorities to start working on a ‘zero-aid budget’ for 2014/2015 fiscal year. 

Economists say this means that the government, which depends on donors for 40% of its national budget, will draw up a budget to finance recurrent expenditure from domestically generated resources in the form of tax and non-tax revenues. 

The decision comes after several donor partners, including those forming the Common Approach to Budgetary Support (CABS), suspended $150m of aid in November last year. 

They said they “lacked confidence in the country’s financial management system” following the exposure of a financial scam known as Cashgate, in which millions of dollars were looted from government coffers. CABS has maintained this decision during its budget support review meeting in March. The forensic audit report into the scandal by the British firm, Baker Tilly, hired to examine government departments, indicated that $32m of government money was looted from government coffers within three months (from April to September 2013). 

The International Monetary Fund is also withholding its $20m in Extended Credit Facility to Malawi. Adding salt to the fresh wound, Germany announced in May that it has withdrawn from the CABS and will only channel its assistance to Malawi through projects.

Finance Minister Maxwell Mkwezalamba told reporters in the capital Lilongwe that the zero-aid budget is being prepared on the assumption that government will fail to receive donor grants for recurrent expenditure. He was, however, confident that Malawi will be able to meet its revenue targets for the next financial year even without international budgetary support. 

He said he expects increased collection of taxes, such as Value Added Tax (VAT), following the introduction of electronic fiscal devices by the Malawi Revenue Authority (MRA). The MRA is implementing the Electronic Fiscal Device (EFD) Project, which will make it mandatory for every VAT payer to procure, install and use EFD machines.

It is hoped the EFDs will help curb tax evasion as sales transactions will now be monitored electronically, through a GPRS modem to the authority’s central server. To further ensure compliance, customers will be encouraged to demand a tax invoice that will be generated by the EFDs. Government expects to collect about $3bn (MK617bn) in revenue in the 2014/15 fiscal year. 

“The electronic fiscal devices and the container scanner will surely increase tax compliance and we are hoping that this will result in increased revenue collection by MRA, and the tax base is expected to widen in the coming financial year. All these factors are giving us hope on domestic revenue performance,” said Mkwezalamba.

Decision under fire

But the move has come under intense criticism and ignited hot debate among economics experts and social commentators, saying a similar initiative failed during the administration of the late President Bingu wa Mutharika, when donors withheld aid from 2010 to April 2012, citing corruption and poor governance.

A local economist and columnist, Chikavu Nyirenda, described the zero-aid budget as “a recipe for disaster”. He writes: “We experimented with this newfangled concept under [the former president] Bingu wa Mutharika administration with the inappropriately named zero-deficit budget. And the results were, to say the least, disastrous! Notably, there was an increase in taxes, duties and unethical operations and ‘cooking’ of figures to ‘support’ the budget and present a rosy façade when the bases was rotting and threatening to collapse”. Nyirenda adds that the “zero-aid budget” is in effect a misnomer – as the development component of the master total budget will still require the assistance of cooperating partners.