Malawi's Finance Minister Unveils Austerity Budget Amidst Soaring Deficit
Malawi's Finance Minister unveiled an austerity budget Wednesday, slashing development spending and introducing revenue-boosting measures in response to a widening fiscal deficit.
LILONGWE, Malawi -- Malawi's Finance Minister, Simplex Chithyola Banda, delivered the 2024-25 Mid-Year Budget Review Statement to the National Assembly on Wednesday, outlining a series of austerity measures designed to tackle the country's burgeoning fiscal deficit. The revised budget projects a deficit of K1.41 trillion, representing 7.5% of GDP, reflecting the significant strain on Malawi's public finances, writes Winston Mwale.
The revised budget estimates a deficit of K1.41 trillion, equivalent to 7.5% of GDP1.
This revised figure is marginally lower than the initial projection of K1.45 trillion (7.7% of GDP)
"Let me mention from the onset, Madam Speaker that this Midyear Budget is in itself an austerity budget," Banda stated.
"As such, considering the macroeconomic environment that we are in, we need to do things differently to allow our economy to recover by sacrificing today for a better tomorrow."
●Initial Projection: The original budget, presented earlier in the year, envisioned a total budget of K5.99 trillion.
●Revised Total: Following a reassessment of economic conditions and performance in the first half of the fiscal year, the total budget has been revised upwards to K6.04 trillion. This represents a modest increase of K41.5 billion, or 0.7%.12
Development Spending Cut, Key Projects Prioritised
In a bid to contain the deficit, the government has reduced the development budget to K1.58 trillion, down from the approved provision of K1.77 trillion.
This represents a significant cut of K187 billion, affecting both domestically and foreign-financed projects.
Banda assured lawmakers that the cuts did not signify a scaling down of project implementation but rather reflected "contractual bottlenecks."
He emphasised that ongoing projects would continue, with priority given to payments for completed work.
Several infrastructure projects are on track for completion in the next financial year, including the construction of the Mzuzu Civic Office, Mzuzu University Library, University of Malawi Administration Block, Thyolo District Office, Mwanza Stadium, and the New Blantyre Police Station. Other projects nearing completion include the construction of a Cancer Centre, Domasi Community Hospital, a Purpose Built Science Laboratory Complex at the Malawi University of Science and Technology, the Likoma Jetty, and selected roads.
Revenue Enhancement Measures Target Privileged and Non-Compliant
Banda announced a series of revenue enhancement measures designed to bolster the government's coffers. These measures include:
Removal of VAT Waiver for Privileged Individuals: The government will scrap the Value Added Tax (VAT) exemption on motor vehicle imports for privileged individuals and organisations. This measure will affect individuals such as the president, vice president, cabinet ministers, members of parliament, senior judicial figures, and high-ranking government and military officials. Banda emphasised the need for collective sacrifice, stating, "His Excellency the State President has guided that we all make our fair contribution towards revenue that the Government needs at the moment."
Full Enforcement of Electronic Excise Tax Stamps: To curb smuggling and tax evasion on excisable goods, the government will fully implement electronic excise tax stamps. This system will apply to products such as alcoholic beverages, cigarettes, soft drinks, and bottled water, ensuring excise tax is paid. Banda encouraged all traders dealing in excisable goods to register with the Malawi Revenue Authority (MRA) and use the tax stamps, warning of potential confiscation for non-compliance.
Voluntary Tax Compliance Window for Unregistered Motorcycles: To address the issue of unregistered motorcycles, often operating without insurance, the government will open a voluntary tax compliance window. Motorcycle owners will be able to register their vehicles for a nominal fee at designated registration sites. Banda lauded the collaboration between the MRA, Road Traffic Directorate, and Police in facilitating this initiative, which is expected to enhance road safety and generate revenue.
Expansion of Electronic Payments: The government is committed to modernising revenue collection by expanding the use of electronic payment systems. This follows successful implementation in the Ministry of Lands and the Department of the Registrar General, which resulted in increased revenue collection and reduced leakages.
Economic Outlook Remains Challenging
Banda painted a stark picture of Malawi's economic situation.
The country's growth prospects have been hampered by various factors, including weather-related shocks that have impacted agricultural productivity.
Inflationary pressures persist, fuelled by rising food prices and a scarcity of foreign currency.
Global economic conditions have also played a role, with the IMF's October 2024 World Economic Outlook report indicating subdued growth and persistent inflationary pressures in some countries.
The report also highlights downside risks, including potential escalation of regional conflicts and prolonged tightening of monetary policy.
Banda acknowledged the economic challenges facing Malawi but stressed the government's commitment to economic recovery.
He pointed to ongoing reforms aimed at strengthening public debt management, fiscal discipline, state-owned enterprise performance, and public procurement processes.
External Support and Government Initiatives
Banda highlighted the role of international partners in supporting Malawi's economic recovery efforts.
The country secured support from the International Monetary Fund through a four-year Extended Credit Facility, unlocking foreign assistance from various development partners.
Banda also expressed gratitude for the support provided by development partners in response to the State of National Disaster declared in March 2024, which affected 23 out of 28 districts.
He specifically mentioned the World Bank, African Development Bank, Chinese Government, Japanese Government, Indian Government, and the Government of Ukraine for their financial and humanitarian assistance.
In addition to external support, the government has implemented various initiatives to address challenges related to foreign exchange, fuel, food, and fertiliser, including:
Mega Farms: The government has mobilised over 931 medium and large-scale farmers to produce maize, rice, soya, groundnuts, tobacco, and cotton.
Labour Export: An agreement with the State of Israel will see the recruitment of Malawian agricultural workers, potentially boosting remittances and improving the foreign exchange position.
Carbon Credits Trading: The government is developing a framework to regulate carbon trading initiatives, aiming to generate additional revenue.
Collective Effort Needed for Economic Recovery
Banda concluded by urging members of the National Assembly to support the proposed budget revisions and revenue enhancement measures.
He emphasised the need for collective effort in navigating the economic challenges and achieving recovery.
"Madam Speaker, there is need for collective will for us to make our economy recover," he stated.
The revised budget represents a balancing act between fiscal consolidation and investment in essential services and development projects.
The success of these measures will depend on their effective implementation, continued support from international partners, and the government's ability to navigate a complex and uncertain economic landscape.