Saturday, February 7, 2015



Delivered in the






Friday, 6th February, 2015

1. Mr. Speaker, Sir, it is our tradition in Malawi that before the expiry of the financial year, the Minister of Finance, on behalf of the Government, should provide a mid-year review of the performance of the budget to this honourable house.  The Public Finance Management Act of 2003 in Section 17 requires that as Minister responsible to the President and the house for the economy, I should also publish a report that updates the economic and financial policy for the coming financial year before the year expires.  I intend to carryout both these responsibilities at the same time.  For this reason, in the document that is being circulated to honourable members, we have included a summary relating to the highlights of our economy during 2014 and an outlook for 2015.  What follows in the document is a detailed mid-year review of the fiscal performance for the first half of this financial year and a projection of the financial needs of the budget for the coming second half of the year that will end on 30 June 2015.   This statement therefore, will be short and only give emphasis where this is required in the documentation.
2. The economy, as is well known by all Honourable Members, is still passing through turbulent times in that although there are encouraging signs that we are succeeding to stabilise it, we are yet to reach a sustainable macroeconomic environment.  Mr Speaker, Sir, it is important that we should have a common understanding of what economic normality means.  Economic normality refers to an economy where low inflation and interest rates prevail, exchange rate variability is narrow and predictable foreign exchange availability is permanently assured.  In such an economic environment; confidence is generated and economic activity becomes vibrant.  These are basic conditions for the attainment of high quality economic growth rates.  In rural areas, such an environment enables people to experience a comfortable livelihood, because food is plentiful, farmers stimulated to boost their crop production that generate adequate incomes.  The APM Government is determined to sound macroeconomic conditions as means of achieving high quality growth rates.
3. The house is aware that since the shock devaluation of 2012, when prices shot up, inflation has stubbornly remained high.  Despite reasonable expectations that in 2014 inflation would sufficiently decline for interests rates to fall, the rate has remained high at an average of 23 percent.  In fact in November of 2014, it picked to a high of 23.5 percent.   In the circumstances, interest rates have also remained high, with the policy interest rate at the Reserve Bank of Malawi remaining for a long time at 25 percent and in tandem prime lending interest rates at commercial banks have also remained painfully high. 

4. The exchange rate that was allowed to float freely in May 2012 has not stabilised ever since.  The rate, depreciated massively during the latter part of 2014, reaching at one time K520 per US$.  However, the  policy measures that the Reserve Bank of Malawi took and the “currency swap” that involved the purchasing of government debt denominated in Kwacha by the PTA Bank using dollars, have restored order in the foreign exchange market and the exchange rate has steadily appreciated to just about K450 per dollar (middle rate).  The “Swap” transaction also has helped to increase official foreign exchange reserves to more than US$620 million - the highest ever reached since independence. 

5. Prior to the disaster that has just engulfed the country, our forecast was that, although the rate of inflation has been crawling up during the past three months, it would steadily fall characteristically, as it does seasonally during the harvest season beginning in April/May.  But the after effects of the disaster has shattered all these expectations that would have seen the achievement of normality during the third quarter of 2015. 

6. Without the delude the country has experienced, it is likely that our objective of reaching orderly macroeconomic conditions would have been attained quite soon. What is still true, however, is that without the disaster the economy could have seen light at the end of the tunnel in April/May 2015.  We would then have confirmed the IMF forecast that the growth rate in 2015 will surpass that of 2014 which was 6.5 percent.  It is still true however that with such high reserves, there are still signs that Malawi could resume high economic growth rates soon after the effects of the disaster have cleared.

6. And now Mr. Speaker, Sir, to the main subject of this statement – the Mid-year Review of the budget.  The House will recall that it was indicated in the Budget Statement that there was a possibility that at mid-year some votes could be revised upwards in the context of the mid-year budget review if some budgetary support recommenced.  I would like Mr. Speaker, Sir, to inform the house that regrettably despite many meetings with the donors that are still being held alongside public finance management reforms; so far,  only the ADB has decided to release the sum of K8 billion as budgetary support, during the latter part of this financial year of 2014/15.  However, there are indications that both the World Bank and the EU could release their pledged budget support during the next financial year i.e. in 2015/16.  In the event therefore, it is only possible to provide extra resources to the few votes - about 5 votes that cannot operate up to the end of the financial year i.e. up to June 30, 2015 because they will have exhausted their resources long before that date.  These 5 are out of 53 votes.  As will be obvious later, this is proposed to be done by scaling down the 2014/15 development programme to these votes and transferring resources between votes as appears necessary.

7. There will be a number of people who will consider the continued drought of budgetary aid as a failure. However, equally there will still be others that will see the fact that we seem to be surviving the drought as a good sign that augurs well for the times when as an independent country we are bound to be left alone except for foreign loans which every economy – advanced or developing – universally needs to either develop or in the management of an economy. It is true that we need the support of our donors.  Our budget has been designed with the expectation that ten percent of it, at least should be covered by budgetary support.  The lack of it is, therefore, painful because it requires everybody to accept sacrifices in different forms.  I hope, therefore, as it has been indicated, that the multilaterals will resume budgetary support as they have indicated.  In this context, on behalf of the Government I wish to express to the ADB our thanks for having decided to resume budgetary support.

8. Mr. Speaker, Sir, the House will recall that it approved revenue and grants estimated at K641.0 billion for the financial 2014/15.  Of this amount K530 billion were domestic revenue while total grants were set at K110.0 billion.  For the mid-year, total revenue and grants were targeted at K313 billion comprising K244 billion as domestic revenue and K68.8 billion as grants.  The house will wish to note that at the end of December 2014, both domestic revenue and grants underperformed by K36.6 billion.  In fact the total actual inflow of budgetary resources was K276.7 billion during the period in question which is only 88.2 percent of the expected amount.   Of this amount of inflows K243.3 billion was domestic revenue and K36.5 billion were grants. 

9. Mr. Speaker, Sir, I would like to invite the house to review the document that is being circulated to them to see the details of our revenue and grant performance where each category of tax has been fully analysed and each class of grant has been subjected to the same analysis.  There it will be seen that although as a whole domestic Revenue underperformed, tax revenue overperformed somewhat but non-tax domestic revenues fell sharply below the expected target.  It will also be seen that all categories of grants underperformed considerably.  Thus although formally we did not expect any budgetary support, even dedicated grants  that are received for agreed designated activities and project grants that are received for agreed projects also were well below agreed targets.

10. Mr. Speaker, Sir, I would also like to invite Honourable Members to view the materials regarding expenditures in the document.  As Members will recall, total expenditure and lending was set at K748 billion of which K549.9 billion was recurrent expenditure and K196.1 billion was development expenditure.   Mid-year recurrent expenditure target was K365.7 billion in total.  Honourable Members should note that for the first time in years the Government slightly underspent this amount by 1.5 percent.  While the recurrent account was overspent by 3.7 percent, the development account was underspent by 23.0 percent.  The document provides a detailed discussion of how major expenditure categories performed such as wages and salaries, interest payment, pension and gratuities, other recurrent expenditures and the development account.  It will be noted Mr. Speaker, Sir, that there was a marked improvement in the use of financial resources by a majority of Ministries this year.

11. Incidentally Mr. Speaker, Sir, it should be noted in nearly all votes the personal emoluments budgetary line is higher than the approved amount in the budget, because an amount of K21 billion that was housed in the Human Resource Management vote has now been distributed to all the votes to take care of the salary increases after announcement of new salary scales.  In studying which votes have been overspent and which have not, personal emoluments should be excluded for the reason I have just given.  There are few notable Ministries whose excess expenditure is particularly notable.  The Malawi Defence Force for example spent (63 percent) of its annual vote by 31 December, 2014.  Others include: the National Assembly (63 percent), Accountant General’s Department (60 percent), Malawi Police Service (156 percent), Malawi Electoral Commission (99 percent), and Immigration (62 percent).  These, therefore, are among the votes that will require supplement resources to allow them to operate to the end of the financial year.  A few subverted public institutions will also require supplementary resources particularly the Malawi National Examination Board with spent (95 percent) of its annual budget allocation.  Public universities will also require slight increases of resources to take care of their intervening problems. 
12. The House will recall that out of the accumulated K157 billion arrears, K10 billion was programmed to be cleared during the 2014/15 financial year.  However, in order not to starve the small scale businesses and statutory bodies, the amount has been increased to K18 billion.   The rest has been paid in “zero coupon bonds”.  The bonds are being issued as the Auditor General audits and clears the outstanding arrears.

13. Returning to the expenditures, it will be seen from the document that painfully the implementation of the development programme has not progressed well as reflected in the amounts that have been spent under the development account of the budget.  The approved total development expenditure was K196.0 billion of which   K48.7 billion was for domestic financing (Part II) and K147.4 billion was for Foreign Financing (Part I).  The mid-year total expenditure projection was K72 billion.  From the document, it will be seen that only K14.5 billion was spent under Part II instead of K17.9 billion and  K41.7 billion was spent under Part I instead of K55.0 billion.   In the event, it is being proposed that some resources from the development account be transferred to some votes that require supplementary funding as it is highly unlikely that new projects that have not yet started will start in the remaining 5 months.  On the other hand, the Part I development programme is being adjusted upwards by K4.9 billion particularly on account of exchange rate depreciation that took place during the latter part of 2014.

14. All in all Mr. Speaker, Sir, therefore considering that this was a zero budgetary aid budget that even the grants that were pledged have not been received, it is noteworthy that through rigorous budgetary management, we have been able to pass through this turbulent half year quite well with a domestic borrowing that is less than what was projected.  This amount mirror images the shortfall in total revenue and grants which is K37 billion.

15. The document also provides Honourable Members with the performance of each vote and also the proposals for supplementary expenditures which amount to K32 billion so that the total budget is being revised from K748 billion to K780 billion an increase of K32  billion.  This requested extra expenditure is due to interest bill that increased by K26 billion (see attachment I) and FISP that increased by K10 billion.  Total “Other Recurrent transactions however will be K4 billion lower than expected, demonstrating a good amount of fiscal discipline during the half year.  The House is, therefore, being requested for a supplementary approval of this amount of K32 billion that will entail an equal amount of borrowing.
16. The house is therefore requested to consider and approve supplementary resources of K32 billion.

N.B.: Of this increase in resources:
(a) K13 billion will be pledged additional grants
(b) K8 billion will be excess tax revenue from existing approved taxes
(c) K10 billion will be borrowed locally.
17. Mr. Speaker, Sir, this is the end of the review, I hope very much that it could be fairly discussed after the detailed study of the document being circulated  Honourable Members,  I would like to thank you for listening.

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