GANDA:CHAIRPERSON OF THE BUDGET COMMITTEE

1.    Madam Speaker, it is an honour and a special privilege for me to stand before this Honourable House to deliver my response to the Budget Statement ably delivered by the Minister of Finance on 2nd March, 2023.

2.    Firstly, I wish to thank all Members of the Committee for the commitment shown during the past two weeks. Let me also extend appreciation to you, Madam Speaker and the Parliament Secretariat for the support rendered to the Committee. It would be remiss of me if I do not salute all the honourable members for their participation in the various cluster committees as well as those who attended this year’s Public Budget Hearing. All these initiatives whose reports also partly informed our own.

3.    On the onset, Madam Speaker, let me acknowledge the fact that the 2023/24 National Budget will be implemented against a backdrop of adverse weather conditions caused by the now infamous and vicious Tropical Storm, Cyclone Freddy. As of Tuesday, the 21st March, 2023, when this report was adopted, the cyclone had claimed over 500 lives, displaced 183,159 people (which is equivalent to 40,702 households) and injured around 796 people. Madam Speaker, the number of the people that are missing due to the cyclone has also increased from 201 people to over 300 people. The Committee hereby wishes to send its heartfelt sympathies, thoughts and prayers to all the affected families.

4.    Madam Speaker, allow me to proceed to offer a few reflections on the National Budget as considered by your Committee on Budget and Finance. Madam Speaker, as you are aware, the country launched its Malawi Vision 2063 (MW2063). The current budget is the third budget since the implementation of the first 10-year plan (MIP-1). To attain the low middle-income status by 2030, Madam Speaker, this plan has set out targets on some parameters: eg

1.    REAL GDP GROWTH RATE OF 6%

2.    ANNUAL AVERAGE INFLATION OF LESS THAN 10%

3.    GROSS INTERNATIONAL RESERVES AT 3 MONTHS OF IMPORTS COVER

5.    Madam Speaker, my statement is structured along the three major sections of the Budget Statement with a special focus on the extent to which the Budget has been aligned with the MW2063 Vision.

6.    On the macroeconomic outlook, Madam Speaker, your committee notes global economic growth in 2023 will be dominated by downside risks emanating from the high risk of recession in Europe; weak growth in the United States of America (USA) as well as China; resurgence of global lockdowns due to potential spread of COVID-19 following the easing of travel restrictions in China; tight financial and monetary conditions; and adverse effects of the prolonged Russia-Ukraine war, among others. Taking into account these factors, global growth is expected to slow down to 2.9 percent in 2023 from 3.4 percent recorded in 2022. In the 2023/24 Budget, growth in Malawi has been projected to recover in 2023 at 2.7 percent from a previous projection of 1.2 percent at the 2022/23 mid-year.

7.    Madam Speaker, this growth is based on the assumption that there will be an improved supply of electricity and favourable weather conditions. However, the Committee has noted with deep concern that the restoration of Kapichila Hydro Power station missed its December deadline. This coupled with Malawi’s vulnerability from external shocks like the Russia-Ukraine war, cyclone Freddy and the resurgence of COVID-19, the Committee expected growth projections to be lower. This growth of 2.7 percent, although an improvement from 1.2 percent, is still falling short of the MIP-1 targeted growth of 6 percent.

8.    With regards to Price Developments, Madam Speaker, the 2023/24 Budget has been formulated under the assumption of an average inflation rate of 17.9 percent during the fiscal year. This inflation rate is high and way above the RBM target of an annual inflation of 5 percent and MIP-1 target of less than 10 percent per annum. The Committee remains pessimistic about prices ever stabilising in the single-digits in view of the continued uncertainties around crude oil prices, forex shortages and intermittent power supply.

9.    In terms of the exchange rate, the Committee has noted that the Malawi Kwacha continues to depreciate against most of its major trading partners. At the mid-year, the Committee applauded the Reserve Bank of Malawi for devaluing the local currency by 25 percent, a move which it deemed would stabilise the currency and make the forex readily available. However, the currency has remained unstable and forex remains unavailable. As at January 2023, the local currency was trading at MK1033.66 which was an MK209.99 increase from the rate recorded at the beginning of the 2022/23 financial year

10.  Under the external sector, Madam Speaker, the Committee observed that Malawi continues to register a negative trade balance and the gap continues to widen. At the mid-year, the Committee observed that the chronic trade deficit is on account of growth in imports outpacing growth in exports. According to estimates made by the MPC, the rise in imports in the 2022/23FY was mainly driven by the high demand for imported fertilisers in the farming season.

11.  Owing to the unfavourable trade performance highlighted above, gross official reserves remained low in the last quarter of 2022 and declined to US$304.7 million which is 1.2 months of import cover from 1.4 months import cover recorded in 2022Q3. This is against the recommended reserve adequacy that suggests that countries should hold reserves covering 100 percent of short-term debt or the equivalent of 3 months’ worth of imports. Furthermore, the MIP-1 recommended import cover was set at 3 months’ worth of imports.

12.  Madam Speaker, the Committee further remains concerned about the country’s undiversified export basket.  Malawi’s export basket continued to be highly dominated by agricultural products with tobacco alone claiming 53.26 percent (US$ 342.3 million) in 2022. In 2023, the percentage share of tobacco is projected to increase to 57.11 percent (US$ 410.4 million). Edible nuts and tea are projected to claim the second and third largest shares in 2023 at 19.04 and 10.7 percent respectively. The Committee once again calls for effective implementation of the National Export Strategy II (2021-2026) in diversifying the export basket by focusing on the other priority products.

13.  Now, Madam Speaker, allow me to provide an analysis of performance of the 2022/23 budget.

14.  Revenues: Madam, Speaker, the Committee would like to Commend the Government that unlike the preceding financial years, the outturn of overall revenue and grants exceeded the approved and revised estimates. The government collected MK2.036 trillion against a revised estimate of aMK2.036 trillion

15.  On expenditures, however, the Committee observed an increasing spending appetite. From the revised MK2.85 trillion, the government has spent MK3.043 trillion; this represents an over expenditure of K190,284 billion. This culminated into a budget deficit of MK1.007 trillion which was a 13.9 percent increase from the approved deficit of MK884 billion. Of this deficit, 74.1 percent was financed using domestic debt.  This, Madam Speaker, will definitely lead to more interest payments because domestic debt is expensive. Going forward, the government needs to contain expenditures and stick to appropriated budget allocations.

16.  Madam speaker, allow me to report the Committee’s analysis of the 2023/24 proposed budget. The Committee has noted that the Government has prepared the 2022/23 budget with the expectation that it will collect MK2.553 trillion during this period. Of the projected revenues 87.8 percent are domestic revenues while 12.2 percent are grants. Domestic revenues are projected at K2.24 trillion out of which K2.13 trillion (95.1 percent) will be revenue from taxes.

17.  This projected growth in revenue is anchored on a fiscalised real GDP growth of 2.8 percent premised on expected high yield in agriculture and stabilisation in energy supply. However, the nation has just recently been hit by cyclone Freddy which has had devastating effects that may persist for some time. The Committee, hence, casts doubts on achievement on these revenue targets in light of these new developments.  There is a need for increased support towards irrigation initiatives in order to ensure food production in the course of the year.

18.  The Committee has from time to time lamented about the decimal contribution of non-tax revenues to total revenues. This is a missed opportunity, Madam Speaker.  In the proposed budget, the non-tax revenue target stands at K114.34 billion which only represents 4.48 percent of total revenues. The issue of poor performance of state-owned enterprises is not new, Madam Speaker. It is, therefore, imperative that it be dealt with promptly and decisively. The Committee is aware of the initiative to review the Dividend and Surplus Policy as a way of ensuring effectiveness and efficiency by the SOEs. However, the Committee observes that besides the need for a review, implementation of the existing policy has not been satisfactory. The Committee, therefore, recommends a swift policy review and stringent implementation. Furthermore, the role of parliament in reviewing performance of SOEs needs to be enhanced in accordance with the spirit of the Public Finance Management Act of 2022.

19.  Madam Speaker, the Committee noted that total grants are projected to decrease by 17.88 percent from revised estimates of MK379,300 billion in 2022/23 to MK311,500 billion.  The drop in total grants should serve as a call to the government to scale up efforts to increase domestic resources as the country seeks to become self-reliant in the Vision 2063.

20.  Total budget expenditure: Madam Speaker, total expenditure has continued to increase in the 2023/24 proposed budget. It is projected at K3.872 trillion from the K2.840 trillion approved in 2022/23 representing a 36.3 percent increase. This rate of growth in expenditure has hence outpaced total revenue growth rate which is at 30.6 percent. This implies a widening deficit as has been the case in the previous years hence increased borrowing as the revenues only cover 66.0 percent of the proposed budget.

21.  Madam Speaker, Malawi’s revenue generation capacity remains subdued as a result of low economic productivity. With GDP growth rates of 1.2 percent in 2022 and 2.7 percent projected in 2023 against MIP-1 recommendation of 6.0 percent, revenue generation is bound to be challenged. This emphasizes the need for pragmatic solutions and increased investment into productive sectors to spur economic activity.

22.  Development expenditure: Madam Speaker, the Committee noted that while allocation towards Development Expenditure has increased, its share of the total budget has decreased. The 2023/24 proposed Budget has allocated K896.21 billion representing 23.1 percent of the total budget, from K818.87 billion which was 28.8 percent of the total budget. In absolute terms, the Development Budget has only increased by K77.33 billion (9.4 percent) while Recurrent Expenditure has increased by K954.73 billion (47.2 percent). This means that the increase in expenditure has been more towards consumption than development. This development signals decreased commitment towards development spending which is directly linked to the much-needed economic growth. The committee reiterates its standpoint that the government needs to increase commitment towards Development Expenditure in order to spur productivity and growth.

23.  Recurrent Expenditure continues to claim the largest share of the total budget comprising 76.9 percent and is dominated by mandatory expenses. Compensation of employees and debt interest payments claim the largest share as they have been slated at K923.5 billion and K914.9 billion respectively.

24.  Wages and salaries: Allocation towards wages and salaries has continued to increase to K897.0 billion from the K670.3 billion 2022/23 approved figure, representing a 33.8 percent increase and claims 23.2 percent of the proposed budget. The Committee is aware that this is on account of the impending civil servants’ salary increment, transport allowance for civil servants, doubling of Chiefs’ honorarium, recruitment of teachers and recruitments. The Committee commends the government’s effort to support civil servants in adjusting to the effects of devaluation and a general rise in cost of living. The Committee hopes that these have been carefully considered and will not result in significant revisions in the course of year as was the case at mid-year in the 2022/23 Budget.

25.  The Committee noted that interest payments continue to constrain fiscal space by claiming an increasingly large share of the National Budget. In the 2023/24 proposed Budget, interest payments have been allocated K914.86 billion from K520.74 billion 2022/23 approved estimate representing an increase implying an additional K394.13 billion. Currently, public debt charges are the largest vote claiming 23.6 percent of the proposed Budget. In fact, it is larger than the combined allocation towards the Ministries of Health and Population; Education; Agriculture; Mining; and Trade and Industry. Madam Speaker, This state of affairs gives a picture of how increasing debt, especially domestic debt, constrains fiscal space for social and development spending.

26.  Madam Speaker, the picture of debt remains grim in the 2023/24 budget as the overall deficit is expected to increase to K1.318 trillion in the 2023/24 proposed budget from K884.0 billion in 2022/23. The deficit of 8.7 percent of GDP is way above the recommended threshold of 3 percent of GDP. Of the total deficit, domestic debt is projected at K1.187 trillion representing 90.0 percent. With already bloated interest charges, this trend is very worrisome because domestic debt attracts high interest rates which eventually choke fiscal space and restrict private borrowing. Unsustainable domestic borrowing can therefore be very counterproductive and needs to be pragmatically checked.  

27.  In an effort to deal with the public debt problem, the Committee is aware that Section 85 of the new PFMA establishes a Debt Retirement Fund to serve as a reserve for servicing public debt. Section 86 in the PFMA further outlines sources of resources for this Fund including appropriation by the National Assembly. However, allocation towards the fund has not been included in the Budget. The Committee expected an update on the operationalization of the Fund. The need to manage public debt is eminent in Malawi and this cannot be emphasized enough.

28.  Madam Speaker, allow me to walk you through the Committee’s analysis of selected sectors with regards to MIP priorities. I will start with the Education Sector. Madam Speaker, the Education and Skills Development Sector has been allocated MK603 billion which is the largest sectoral allocations in the National Budget indicating continued commitment to education. Despite this sizable allocation, the sector is not without challenges, some of which include shortage of learning materials, high teacher to pupil ratio, high pupil textbook ratio and poor infrastructure. Since these challenges require resources to be addressed, the Committee continues to call for increased investment in productive sectors in order to grow the Nation’s resource envelope.

29.  Next is the Agriculture Sector, Madam Speaker. The Agriculture Sector is one of the highly funded sectors in Malawi. Despite the apparent evidence of investment in this sector, it is still highly subsistent with minimal industrialization and an undiversified export mix.  In the proposed Budget, the sector has received a total allocation of K455.10 billion representing 11.8 percent of the total Budget. Although it is highly funded, a large amount of funds goes to the Agriculture Input Subsidy Program (AIP) which is a social protection program and has been marred by serious mismanagement issues. In the current year K117.8 billion has been allocated towards this sector. The Committee recommends serious evaluation and adjustments in the delivery of the programme if the Nation is to get value for money out of the allocated funds. Furthermore, as the government supports subsistence farming, the Committee calls for increased investment towards large scale commercial agriculture and industrialization. Initiatives like Mega Farms will require adequate support and incentives.

30.  Still on Agriculture, Madam Speaker, the Committee is aware that 10,000 metric tons of maize, equivalent to about K3 billion, went bad in the 2022/23 FY. This is a waste of public resources especially at a time when food prices are high and Malawians need government support with the hard-hitting effects of the cyclone on their tail. The Committee strongly urges the government to seriously rethink management of grain reserves as K12 billion has been allocated towards maize purchases this year.

31.  Let me now turn your attention to the Health Sector: Madam Speaker, the health sector is the third most funded sector as it has been allocated K330.18 billion in 2023/2024 Fiscal Year. This represents a 16.4 percent increase from last year’s allocation of K283.57 billion. The Committee appreciates that the sector is under increased pressure from the cholera outbreak and the recent cyclone Freddy. This calls for concerted efforts to ensure that the sector is well equipped to serve Malawians. The Committee is also aware that a number of projects have been lined up in the 2023/24 FY including construction of a Cancer Center, construction of 55 Health Posts and construction of Mponela and Domasi Community Hospitals, among others. However, analysis of project implementation in the PSIP reveals implementation issues as some projects have stalled against their timelines. The Committee, therefore, encourages the government through the line Ministry to fast-track project implementation in the coming year. Recent health pressures have revealed a need for an efficient and resilient health sector.

32.  On project implementation, the Committee’s analysis of key projects in the Mining sector revealed slow progress against their timelines in MIP-1. For instance, these include:

a.    Establishment of the Mining Regulatory Authority was supposed to be finished in 2022 but has not been done;

b.    Development of mining of rare earth minerals in Phalombe Songwe Hills which was supposed to run from 2021 to 23. This project also has not taken off citing prolonged negotiations as the reason for the delay.

c.    Re-commissioning of Kayelekera Uranium was supposed to run between 2021 to 23 but is stalling reportedly on account of prolonged MDA negotiations.

33.  This only reveals a systemic problem in the project management processes in Malawi. Failure to address these issues, Madam Speaker, may affect realization of Malawi’s development aspirations.

34.  Finally, Madam Speaker, in Tourism and Energy, the Committee’s analysis has shown that allocation towards the Line Ministries have significantly decreased.  Allocated funds to the Ministry of Energy has decreased to K19.0 billion from K25.2 billion approved in 2022/23 and allocation towards the Ministry of Tourism has been reduced from K13.2 billion approved in 2022/23 to K6.0 billion. The Committee asks why there has been these cuts realizing that these sectors are key in facilitating growth and generating forex.

35.  Madam Speaker, having taken you Madam and the House thus far, what is the Committee’s message to the Honourable Minister of Finance? The message that he cannot afford to ignore at all costs? Well, we entreat the Minister to carry this message home.

1. Considering the devastating effects of the recent Cyclone Freddy in addition to the existing shocks, the Committee is sceptical that growth projection and revenue targets will be achieved. The Committee calls on the Honourable Minister to appraise the house on the anticipated impact of the cyclone on proposed budget and mitigating proposed mitigating measures.

2. The Committee invites the Honourable Minister to highlight deliberate actions being taken to take the economy to 6 percent annual growth rates as stipulated in MIP-1.  The current trend of low growth rates may negatively affect realisation of the national development agenda.

3. Similarly, The Committee calls for Monetary Authorities to work towards MIP-1 recommendation of less than 10 percent inflation rates.

4. The Committee once again calls for effective implementation of the National Export Strategy II (2021-2026) in order to realise its full benefits which include diversifying the narrow export basket. Government should take concerted and bold actions to address the challenges impeding export growth in the country.

5. To help mitigate the effects of the cyclone, the Committee recommends that irrigation farming should be strongly encouraged and supported to boost yield.

6. The Committee recommends that the government needs to report on the impact of tax measures introduced in a particular year. This will help Parliament to better provide oversight and counsel on new taxes.

7.The Committee sees a lot of potential in non-tax revenues that is not being maximized. There is a need to decisively consider management of parastatal organizations to improve efficiency and revenue generation. The Committee calls for a swift review of the said Dividend and Surplus Policy and a serious implementation of policy. 

8. In view of increasing expenditure and budget deficits, the Committee would like the Honorable Minister to highlight some cost-cutting measures adopted in this budget. The deviation of the likely outturn of 2022/2023 from the revised estimate, as well as a K1.318 trillion deficit in the 2023/24 year signal an unsustainably high expenditure trend.

9. The Committee sternly cautions the government against unsustainable domestic borrowing as it leads to significant increases in public debt charges. Debt charges are expected at K914.86 billion in 2023/24 with 96.1 percent of which is towards domestic debt. In the proposed budget, domestic borrowing covers 90.0 percent of the deficit at a projection of KK1.187 trillion. This means more debt charges in subsequent years since domestic debt accrues high interest rates. Government hence needs to seriously pursue more concessional debt options.

10. In accordance with Section 85 of the PFMA which establishes a debt retirement fund, the Committee would like the Honorable Minister of Finance to appraise the house on progress made in operationalizing the fund.

11. As one way of dealing with these persistent budget deficits, the Committee strongly recommends that the government intensifies its efforts towards facilitating economic growth. Expenditure demands continue to increase but revenue generation capacity remains subdued due to low economic activity.

12. The Committee reiterates its standpoint that the government needs to increase commitment towards development expenditure in order to spur productivity and growth.

13. On stalled project implementation, the project continues to ask the Government to resolve its procurement systems for increased efficiency. Parliament through its Committee should continue to work with the government in providing oversight.

14. The Committee urges the government to fast-track the establishment of the Mining Regulatory Authority which was supposed to have been established by 2022 according to MIP-1. Development in the mining sector will require an effective regulatory framework to avoid malpractice and exploitation.

15. In order to promote economic activity, the government needs to increase allocation towards the Ministry of Energy and Ministry of Tourism whose allocations have gone down. The role of reliable energy generation in the industrialization drive has been adequately highlighted in MIP-1. Furthermore, tourism is one of the key sectors that the nation can yield quick wins in terms of revenue and forex generation.

16. The Committee will keenly follow the restructuring of AIP. There is a need for a clear plan of procurement, targeting and graduation of beneficiaries.

17. On Mega Farms, the Committee recommends that the government needs to provide adequate support and incentives to ensure the programme is successful. The Committee will also keenly follow its implementation.

18. The Committee’s stand on these votes who are major beneficiaries of the allocations is a call for efficiency and effectiveness in project implementation. Resources directed towards infrastructure development should yield durable infrastructure as prevailing climatic conditions have revealed how substandard some infrastructure is.

36.  In conclusion, Madam Speaker, the Committee would like to reiterate the importance of responsible budgeting and fiscal discipline in these challenging times. As a Nation, we need to make difficult choices to ensure that resources are directed towards critical and productive sectors in line with our national development aspirations as outlined in MW2063. 

37.  Furthermore, Madam Speaker, the need to build the Nation’s resilience cannot be over-emphasized. In view of the recent crises, it is essential for our country to be able to withstand and adapt to unexpected challenges and threats, whether they come in the form of natural disasters, economic instability, or social unrest.

38.  Committee considers the Budget as a mixed bag.

39.  Madam Speaker, on this note, I wish to thank you and the House for your attention. I thank you.

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