Saturday, 6 September 2008

Malawi Economic Performance Analysis

OF UDF and II Thessalonians 3:10-12
Overview This note looks at the performance of UDF Government during their second term from 1999 to 2004. Whereas there was reasonable discipline and commitment in the first 3 years of UDF rule, evidenced by increased investment, donor flows and some stability in the economy (between 1994- 97) the second term was a disaster. UDF throughout this period made rosy policy pronouncements, and these were also contained in the UDF manifesto and re-enforced by Presidential statements during official and political meetings. These included pledges to introduce tight budgetary controls, improve fiscal discipline and eliminate corruption and abuse of state resources etc. The country experienced fiscal instability throughout this period to the extent that donors suspended donor aid and Malawi failed to attain the HIPC Completion Point under the Fund/World Bank programme.

What happened: Deceit, Public Relations, Incompetence or Ignorance?

By 2004, the following was the scenario in the Malawi economy

-An economic economic basket case with a staggering domestic debt burden, perilously low foreign reserves and no donor assistance.
- A historic inability of government to live within its means, with the budget deficit before grants ballooning to 10.5%, 18.6% and 14.7% of GDP in 2001, 2002 and 2003 respectively;
- Within the overall budget envelope, sectoral allocations of resources were re-shuffled to the detriment of key sectors such as education, health and agriculture;
- Donor displeasure with the lack of fiscal discipline and poor governance manifested itself in a virtual absence of balance of payments support from 2002;
- Government failure to control expenditure with domestic debt by 2004 in excess of K50 billion or 150% of annual domestic government revenues;
- Government borrowing drove money supply growth on annual basis to over 30%.

Throughout this period, UDF made noble statements, which included pronouncements and predictions on the direction of the economy. The statements ended frustrating stakeholders as they were not being translated into appropriate government policies. During this period, briefcase business-persons who ventured in procurement of goods and services on behalf of government prospered. It was normal for contracts for procurement of drugs, construction services and even procurement of large equipment such as “transformers” to be given to individuals, and at times Government are said to have advanced the businesspersons funds to enable them provide the goods or services. The result was shady work or indeed non- delivery of the said goods. By early 2004, for example, it was quite obvious that high interest rates and currency depreciation were symptom of economic malaise rather than the cause thereof. By May 2004, foreign exchange reserves were a low 1.2 months of import cover and total banking reserves were only 2.76 months. The UDF appetite to luxury consumption and reward to cronies (especially in public procurement) led to drain on foreign exchange which became unavailable on the market as soon it came on the market. With no donor support forthcoming, the business sector was being squeezed making the economy unable to grow.

One cannot doubt competence and economic knowledge of those in charge of the economy at that time. Following Dr Chikaonda’s departure, Hon. Friday Jumbe became Minister of Finance. Both Minister of Finance and Governor of Reserve Bank and those involved in the Cabinet Committee on the Economy (charged with managing the economy) understood basic economics and this was demonstrated in their statements, pronouncements and of course academic background. One can only conclude that the 3rd Republic (1999-2004) was full of deceit and were masters at propaganda.

UDF were masters of deceitful public pronouncements and a good example is statement by former Minister of Finance, Hon. Friday Jumbe when he presented his second budget Statement in June 2003. UDF was very good and admitting failure and placing blame on controlling officers and promising a new direction every year: and I quote;
“In the case of Malawi, high interest rates have mainly been attributed to the Government’s appetite to spend more than available resources. The resulting high interest rates have made it impossible to nurture meaningful economic activity. As a nation, we now are faced with an economy that is failing to grow, people whose abject poverty has unbelievably become part of their life. It is for this reason Mr. Speaker, Sir that the theme of this Budget Statement is Macroeconomic Stability: A Precondition For Economic Growth Poverty Reduction in Malawi.” “98. Mr. Speaker, Sir, I emphasised the need to leave within our means by only spending the resources that are available so that fiscal deficit which is a key source of our difficulties is brought to check. This is the reason the theme of this statement is Macroeconomic Stability: A Precondition for Growth and Poverty Reduction in Malawi. Government borrowing to meet ballooning expenditures has resulted in unfriendly interest rates and taxing inflation. Walking in Shoprite with a thousand Kwacha today will see one walk out almost as empty handed as one walked in. Let us desist spending more than we have in order to improve the macroeconomic environment of this country”. {Hon. Friday Jumbe, June 2003, Budget Statement}

All the promises, despite his famous Thessalonians quote, seem to have been an agreed UDF PR strategy to excite stakeholders, but in truth, no machinery was in place to implement the beautiful pronouncements.

Hon Jumbe during his 2002/03 budget presentation said, and I quote:
“ 11. Mr. Speaker, Sir, as we interface with and try to economically empower our people, we should impart the philosophy that they have the right to live and the right to feed themselves. This is also in the wisdom of Saint Paul in his second letter to the Thessalonians in which he wrote: “For while we were with you, we gave you this charge, ‘If anyone does not want to work then he should not eat either.’ For we are hearing that some of you are living in idleness, not working but busy in other people’s affairs. Such persons we direct and charge in the Lord Jesus Christ that, by doing their work quietly, they earn their own living” (II Thessalonians 3:10-12)). This means that everyone, led by the highest political leader, should think, dream and talk of prosperity and do the best they can to achieve the country's goal of poverty reduction.” {Hon. Friday Jumbe, June 2002, Budget Statement}

What Happened after the Pronouncements?

It was business as usual. The annual average inflation was 30%, 28% and 21% in 2000, 2001 and 2002 respectively The base-lending rate for the commercial banks, for example, had remained at around 46 percent since July 2001, resulting in lending rates of around 54 percent in the early 2000s making it impossible for business take-off.

Government having no source of financing after the freezing of donor support continued the consumption upsurge by borrowing on the local market using Treasury Bills. For example, between April 2003 and November 2003, total stock of TBs increased from K31 billion to K42 billion of which K32 billion were held by Banks, Discount Houses and Non-Banks, with an average yield of about 40%.

In layman’s language, what did this mean? The government’s appetite to consume denied private sector the opportunity to access resources as banks felt comfortable with risk-free lending to Government through TBs and a high yield. The 2000 -2004 period saw a major increase in net credit to government from commercial banks mainly in uptake of Treasury bills. The result was increase in Domestic Debt from 3.4% of GDP in 1998/99 to 25% of GDP by 2004 and correspondingly domestic interest rate increased from 2.1% of GDP to 9.2% o partly right. But, the question is, with pronouncements and capable Ministers, why did the economy fail to respond? Why did UDF fail to deliver? Maybe the answer is in (II Thessalonians 3:10-12)).

Watipaso (April 2007)

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