Analysis: Chakwera’s austerity measures in the 2024/25 Mid-Year Budget are a step in the right direction
The 2024-25 Mid-Year Budget Review Statement, presented by Minister of Finance Simplex Chithyola, outlines austerity measures that, while challenging, are necessary to stabilize Malawi’s struggling economy. By focusing on fiscal discipline, revenue enhancement, and strategic expenditure, the government is making difficult but prudent decisions to address the fiscal deficit and promote long-term economic resilience.
Here’s why these measures are both timely and appropriate:
1. Tackling Revenue Underperformance with Bold Measures
Problem:
The mid-year domestic revenue underperformed by 8.2%, with tax revenue at K1.44 trillion, falling short of the K1.56 trillion target. Non-tax revenue also lagged behind by 18%. These figures underline persistent challenges in revenue collection.
Response:
VAT Waivers Elimination: Removing VAT waivers for high-profile individuals targets a demographic that can absorb additional costs, avoiding further burdening middle- and lower-income earners.
Electronic Tax Stamps: This system directly addresses tax evasion and smuggling, ensuring excisable goods contribute their fair share.
Expanding Digital Payment Systems: Leveraging digitalization is an efficient, scalable, and transparent approach to revenue enhancement. Ministries like Lands and the Registrar General have already demonstrated its success by increasing collections in the first half of the fiscal year.
Impact:
By expanding and enforcing tax compliance, these measures aim to broaden the tax base, ensuring a consistent revenue stream critical for funding essential services.
2. Fiscal Tightening: A Balanced Approach to Spending
Problem:
Malawi’s expenditure at mid-year stood at K2.68 trillion, exceeding revenue and grants by a significant margin, thereby deepening the fiscal deficit. However, most overrun costs were unavoidable, such as a 24.9% increase in compensation of employees due to salary adjustments.
Response:
The government maintained a 0.2% variance on recurrent expenditures, showing discipline in keeping operating costs within planned limits.
Cuts in development expenditure (25.1% domestically financed, 57.4% foreign financed) reflect an attempt to focus resources on priority areas without compromising critical infrastructure projects.
Impact:
This strategy ensures that resources are conserved while safeguarding key areas such as health worker recruitment, which directly affects service delivery.
3. Strategic Investment in Food Security and Agriculture
Problem:
Persistent inflation (averaging 33.8%) has been driven largely by food prices, exacerbated by drought and low agricultural output.
Response:
Food Security Interventions: The government increased maize purchase allocations from K22 billion to K124.9 billion, a 468% hike, funded by the World Bank.
Mega Farms: Mobilization of large-scale farmers on 40,000 hectares boosts local production of staple and export crops.
Farm Input Loans: Through the National Economic Empowerment Fund (NEEF), K30 billion has been disbursed to ensure farmers have access to critical inputs.
Impact:
These interventions are critical not only for mitigating hunger but also for stabilizing inflation, reducing reliance on imports, and promoting export diversification.
4. Export Diversification: A Path to Long-Term Growth
Problem:
Malawi remains heavily reliant on a narrow range of exports, making the economy vulnerable to external shocks.
Response:
Labour Export Programs: Sending workers abroad is expected to increase remittance inflows, boosting foreign exchange reserves.
Carbon Credits: With $10.3 million generated under the Kulera REDD+ program, the government is finalizing a carbon trading framework to unlock even greater revenue from environmental conservation efforts.
Mining and Cannabis Biomass Projects: These initiatives aim to introduce high-value export commodities into the economic mix.
Impact:
By diversifying income streams, Malawi can reduce its dependence on volatile agricultural exports while creating new revenue sources.
5. Restoring Public Trust and Building Credibility
Problem:
Public trust in fiscal management has been eroded by years of perceived privilege and inequity, with high-ranking officials exempt from paying taxes and development projects often delayed or abandoned.
Response:
Symbolic Leadership: Removing VAT waivers for top officials demonstrates that no one is above contributing to the nation’s recovery.
Accountability in Development: The government’s assurance to prioritize completed works and key projects signals a commitment to tangible progress.
Debt Transparency: By restructuring loans and engaging bilateral creditors, the government is showing responsibility in addressing unsustainable debt levels.
Impact:
These actions send a strong signal to citizens and international partners that Malawi is serious about equitable reform and sustainable governance.
6. Addressing Inflation Through Monetary and Fiscal Synergy
Problem:
Food inflation averaged 41.6%, with overall inflation expected to end the year at 35.4%, up from 34.5% in 2023.
Response:
Rebuilding Foreign Reserves: Policies aimed at facilitating a market-determined exchange rate are intended to stabilize the currency, a key driver of inflation.
Food Security Measures: Increased maize procurement and farm input loans will help stabilize supply and dampen price pressures.
Impact:
While immediate relief from inflation may be limited, these measures address its root causes and lay the foundation for price stability in the medium term.
Conclusion: A Prudent Path Toward Recovery
Malawi’s 2024-25 mid-year budget adjustments represent a balanced approach to fiscal austerity, combining necessary spending cuts with targeted investments in food security, export diversification, and modernization of revenue systems. By ensuring that all sectors of society contribute fairly and prioritizing measures that address the root causes of economic instability, the government is taking decisive steps toward sustainable recovery.
While the road ahead will be challenging, these measures provide a clear, disciplined framework for navigating the current economic turbulence and building a more resilient future. As Minister Chithyola aptly stated, “Sacrificing today for a better tomorrow” is not just a strategy but a necessity for Malawi’s survival and growth.
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