The Institute of Chartered Accountants in Malawi (Icam) says there is need to negotiate with the International Monetary Fund (IMF) tax reforms to avoid promoting imports.

The calls follow Treasury’s move to comprehensively eliminate value added tax (VAT) exemptions and zero-ratings for business inputs business (all goods imported by businesses specifically for their operations), and repeal VAT relief for building material such that all supplies of building materials, construction services and commercial property are standard rated by July 2024.

The measures, expected to enhance revenue and improve tax and customs compliance culture, are part of Government of Malawi’s Structural Benchmarks under the Extended Credit Facility (ECF) arrangement.

In his reaction to the measures, Icam chief executive officer Noel Zigowa observed that the policy is contradictory in a sense that if devaluation was meant to make imports expensive and that locally produced products become affordable, then the products that were VAT-free will now attract VAT and become further far-reaching for consumers.

He said: “This will create a vicious cycle where imports shall become cheaper again and encourage their consumption than locally produced products. The end result is that we will continue creating imports and exports gap and find ourselves in the same situation where there shall be a need to realign our currency again.

Construction could become more expensive if Treasury repeal VAT relief for building materials

“We may not take the IMF prescription as it is, but have to negotiate if we are able to, though we have a weak bargaining position.”

Zigowa observed that building materials support infrastructure development and removing VAT exemptions shall slow down the development again, yet most of them have already gone up due to the devaluation.

“All in all, there should be a sober approach to these proposed reforms,” he said.

Recently, Malawi got the nod of the International Monetary Fund (IMF) Executive Board for a four-year ECF worth $175 million expected to stabilise an ailing economy by unlocking directory budget support.

Prior to the approval, Malawi implemented a series of reforms that Capital Hill said were tough, but necessary to convince development partners that policymakers were committed to reforms to revitalise the ailing economy.

Since the government signed the PMB in November 2021, the Reserve Bank of Malawi has raised the policy rate three times from 12 percent to 24 percent.

The central bank has also devalued the kwacha twice, first by 25 percent in May last year followed by the recent 44 percent weeks ago.

There will be seven reviews under the ECF-supported arrangement to assess implementation progress and reach understandings on additional measures needed to achieve the programme objectives, scheduled to be completed on a semi-annual basis until July 2027.

In a  Letter of Intent to IMF managing director Kristalina Georgieva, Minister of Finance and Economic Affairs Simplex Chithyola Banda and Reserve Bank of Malawi Governor Wilson Banda said they stood ready to take additional measures that may be needed over and above those articulated in the Memorandum on Economic and Financial Policies in consultation with IMF staff in accordance with the fund’s policy.

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