MALAWI. 2016/17 National Budget Brief. March 2017 KEY MESSAGES

Transcription

1 March 2017 MALAWI 2016/17 National Budget Brief KEY MESSAGES Although the Government of Malawi should be commended for ringfencing health and education budgets in the face of significant fiscal constraints, allocations to these and other child focused sectors and programmes remain significantly lower than what is required for all children to access essential services for their protection and development. In financial year , public spending on education and health sectors accounted for 17% and 9% of the national government budget, down from 19% and 12% in respectively. In , budget allocations to social protection and to early childhood development were 0.05% and 0.03% respectively. With improved fiscal space, the Government should increase allocations to child focused social sectors in-line with its commitment to implement children s rights. Meanwhile, we recommend that the Government maintain current levels of spending to avoid retrogression in service delivery to children, especially the poorest and most deprived. Public Debt in Malawi remains very high, estimated at approximately 302% of revenue in Domestic debt has soared in recent years, reaching an all-time high of 526MK billion in A heavy debt repayment burden, including interest rates, has, among other likely impacts, the potential to crowd out public expenditure from child focused sectors such as education and health. In line with recommendations from the International Monetary Fund the Government of Malawi should reduce domestic borrowing and undertake measures to ensure responsible borrowing in order to improve debt sustainability. The GoM has made significant progress to mobilize public resources, which could be invested in children, by increasing domestic revenues by 31.51% in real terms since financial year , but resources fall short of financial needs. In financial year 2016/2017 tax revenue as a percentage of total government revenue was estimated at 73%. Although Malawi raises more tax revenue as a percentage of GDP than its neighbours, estimated at 15.9% in 2014, the GoM still needs to do more to expand its tax base. The Government of Malawi, working closely with regional and international finance and development institutions should continue to undertake robust measures to improve its fiscal space, especially from progressive and efficient taxation, in order to finance social services to children. In financial year , domestic development expenditures only accounted for 3% of the national budget. The decline in development expenditure is a result of constrained fiscal space due to weak economic performance and withdrawal of budget support by development partners (DPs). As budget conditions normalise the Government must rebalance spending between personnel emoluments (PE), Other Recurrent Transactions (ORT) and development expenditures with the aim of enhancing effectiveness of government expenditures. 1

2 Although Programme Based Budgeting (PBB) started on a fairly good note, gaps still exist regarding articulation of performance targets, grouping of activities under one outcome area as well as engendering allocative efficiency, taking into consideration sectoral and national priorities. PBB, introduced in , which replaced Output Based Budgeting is a step in the right direction to enhance effectiveness of public expenditures and to improve the visibility of programs related to children in government budgets. In order to fully implement PBB, the Public Financial Management Act and accounting practices should be amended to reflect this change. Technical assistance should also be provided by Ministry of Finance to Ministries, Departments and Agencies (MDAs) when required, in order to effectively implement PBB. Most of the donor support to Malawi is currently off budget following a huge public finance management scandal in Recent reports however show that there is significant progress by the government to improve public finance management. The Government of Malawi should continue to work with international finance institutions (IFIs) and other DPs to strengthen its public finance management systems in order to attract budget support and increase public confidence in its operations. At the same time DPs are encouraged to fund the maintenance of capital assets and stalled projects, whose discontinuity may have significant impact on children. The Medium Term Expenditure Framework (MTEF) is disconnected from historical trends, especially other recurrent transactions (ORT) and foreign financed expenditure. This undermines the utility of medium term financial planning. The MTEF may need to be reviewed to reflect changing situations and priorities. At the same time, protracted budget negotiations have in the past delayed the release of budget ceilings, creating a public financial bottleneck impacting on the quality of budgeting. MTEF projections need to factor in forward commitments against every budget category. Ministry of Finance needs to prioritise updating MTEF projections to avoid undermining the usefulness of this hard fought reform. At the same time the Ministry of Finance (MoF) and Cabinet need to work together to ensure the release of budget ceilings follows the budget calendar. 1. What is the overall macro-economic context of Malawi? The per capita gross domestic product (GDP) of Malawi was estimated at US$381.4 in , which is the fourth lowest in the world after Burundi, Central African Republic and Niger. Malawi s economic prospects are driven by agriculture, which accounts for 32% of GDP. Industry makes up 17.5% while services and other activities make up 50.5% of GDP in In the past year, inflation decreased from 20% to 18.2%. Non-food inflation decreased from 24% to 21% and food inflation decreased from 15.4% to 15%. In February 2017, inflation went further down to 16%. Droughts have become more frequent, widespread and intense. The GoM however expect a bumper harvest in 2017, which will have positive ripple effects in the economy. Due to droughts, child malnutrition worsened, resulting in significant increase in severe and acute malnutrition (SAM) amongst children. An estimated 6.7 million Malawians could not meet their food requirements in the season without additional support. Malawi is the fourth youngest country in the world with a median age of 16.5 years. An estimated 46.5% of the population is below 14 years of age. 3 A national child 1 CD&id=af3ce82b&report_name=Popular_indicators&populartype=series&ispopular=y World Bank Databank 2015 data html#mi poverty study undertaken by Unicef in 2016 found that 63 percent of all children are deprived of two or more basic needs such as meals, basic education, water and sanitation. The depreciation of the local currency from official rate of 1USD:469MK in July 2015 to 1:725MK 4 in December 2016, which led to increased cost of living, hit hardest on poor children and their families. The ability of the Government of Malawi to provide essential public services to children and to respond to the humanitarian crisis, has, in recent years, been severely constrained by limited fiscal space evidenced by huge budget deficits (estimated at 4.3% of GDP in financial year ), increasing debt service costs and reduced budget support by donors. Fiscal challenges also reflect weak tax base compounded by slower projected GDP growth rate of 2.2% in 2016 compared to 6.2% registered in The IMF currently classifies Malawi as having a moderate risk of debt distress, having temporarily breached its recommended debt service to revenue ratio. Strikes and protests have also become a common feature in Malawi. This affects service delivery to children. Compared to its ranking in gross domestic product per capita, Malawi ranks higher in the Human Development Index at 170 of 188 countries in This can be attributed to Malawi being a stable and peaceful country and the long standing assistance of donors and NGOs. 4 Reserve Bank of Malawi data 2

3 Box 1: Key Statistics Budget Deficit 15% Life Expectancy Ultra-Poverty line $0.40 a day Youth Literacy Rate 76% Government Budget as a % GDP 25% Poverty Rate 39% poor 12% ultra-poor Infant Mortality Rate 60 per 1000 live births Secondary Net attendance 16% Net ODA received as a % of GNI 15.8% Poverty line $0.65 a day Primary Net attendance rate 94% Sources: Multiple Indicator Cluster Survey 2014; World Bank; Ministry of Finance Table 1 below shows how Malawi s GDP per capita compares to all countries. It is worth noting that of the countries in this list Malawi stands apart as peaceful, stable and democratic. Table 1 Ranking of Malawi GDP per capita in relation to other countries 6 Countries (Ranked Lowest to Highest) $US per capita (current 2015) Burundi 276 Central African Republic 307 Niger 359 Malawi 381 Madagascar 412 Liberia 456 Congo, Dem. Rep. 456 Mozambique 525 Guinea 531 Togo 548 Somalia 552 Source: World Bank (2015) 2. What is the public debt situation of Malawi? December One of the indicators which qualifies a country as a Heavily Indebted Poor Country is a debt to revenue ratio of 250%. 7 The most recent debt sustainability analysis by the IMF in June 2016, rated Malawi as having a moderate risk of debt distress. In terms of $US per person the Mid-year budget showed the Government was planning on spending $7.74 on health, $11.47 on education and $12.83 on debt per person. Domestic debt repayments consisted of 92% of total interest paid. Between June and December 2016, interest paid on domestic and foreign debt amounted to MK88.3 billion, of which interest on external debt was MK5.4 billion while that on domestic debt was MK82.8 billion. The interest payments were MK3.9 billion higher than their target. This was largely because of replacement of maturing zero coupon promissory notes with interest bearing securities. A heavy debt repayment burden, including interest rates, has, among other likely impacts, the potential to crowd out public expenditure from child focused sectors such as education and health. Currently, interest repayments on debt are eroding the national budget. In the Budget Estimates, the amount of money spent on interest payments is equal to more than half the total spending on all government wages and allowances. Additionally, interest payments are one and a half times greater than what is spent on health and close to what the GoM spends on Education. 7 Public Debt in Malawi remains very high, estimated at approximately 302% of revenue in December Rising domestic debt is the main challenge, which reached an alltime high of MK 526 billion in Reducing domestic debt is key to making the Government s budget sustainable and increasing allocations to child related social spending. The Financial Statement reported total public debt to be US$2.6 billion as of 31st 6 World Bank Databank,

4 3. How much of public revenues are mobilized from domestic sources? 4. What is the share of total government budget going to social sectors? Between financial years and , domestic revenues increased by 31.51% in real terms. In financial year tax revenue as a percentage of total government revenue was estimated at 73%. Malawi s revenue to GDP is close to the average for nearby countries. Given the poor outlook for the resumption of budget support the Government will need to continue to increase revenues to maintain the current level of spending. There is however more to be done to expand the revenue base and to improve efficiency of tax collection. The budget contained provisions to end VAT exemptions for certain goods as well as an increased budget for the Malawi Revenue Authority to computerize tax administration. 8 Total health expenditures account for approximately 9% of the national budget (down from 12% in ). This is significantly lower than the commitment by African Union States to allocate at least 15% of their budgets to health. Education received 17% of the total budget down from 18% in Although the GoM protected health and education sectors from budget cuts, in the face of huge fiscal constraints, these sectors make up a smaller share of government spending than they did in the financial year. Absolute allocations to Ministry of Gender, Children, Disability and Social Welfare declined in nominal terms by approximately 70% between financial year and Non-tax revenues have been performing below expectations. The performance of non-tax revenue could be strengthened by improving incentives for revenue collecting MDAs and by moving to competitive selection process for parastatal organisations. In an effort to improve control over Government finances, revenues which used to return to the revenue generating MDA are now returned to the Malawi Government s central bank account. This has affected the performance of non-tax revenues which have stagnated over the past 5 years. By returning a percentage of revenue growth to the MDAs operations budget, revenue generating activities will be better prioritised by MDAs. Reductions in budget allocations to health and education sectors are partly on account of an increase in interest on debt repayments, increased allocations to the transport sector and withdrawal of onbudget support. Figure 1 below shows proportions of the total government budget allocated to different sectors in Budget Statement presented by the Minister of Finance, Economic Planning and Development. Figure 1 Composition of to Budgets 100% Other share 80% 39% 36% 37% 34% Transport Interest on debt Budget Share % 60% 40% 7% 6% 19% 9% 11% 19% 8% 14% 15% 10% 12% 17% Agriculture share Education share Health budget 20% 18% 17% 18% 17% 0% 12% % % % Source: to Consolidated Detailed Approved Estimates of Expenditure, Ministry of Finance. 4

5 Included in the Other share in Figure 1 are: Ministry of Defence, Police and Home Affairs (a combined share of 4.6% in ); Pensions (4.4%); and Energy, Industrial Development, Mining and Tourism (a total combined share of 2.3%). Table 2 Health Spending per capita Total expenditure on health as a percentage of GDP Education Spending per Student (PPP) Total Government expenditure on education as a percentage of GDP Sources: WHO (2015); World Bank (2013) Regional Comparisons of Malawi Health and Education Expenditures in 2013 $39.2 (lowest in SADC) 11.1% (highest in SADC) $85.75 (Mozambique $163.15) 7.7% (highest in SADC, HIPC Average 4.45) from significant Government investment in recent years. However this has been increasingly scrutinized in the wake of fiscal shocks and heightened food insecurity. There are now serious reform efforts for FISP including objectives and targeting protocols. The budget estimates show the allocation to this program has been reduced to almost half the outturn. A huge travel budget has also been an issue of concern. A Public Expenditure Review conducted in 2013 made note of the same issue, citing the significant share of the national budget consumed by travel. In financial year travel consumed 12% of total expenditures. This was reduced to 3% in Figure 2 Proportion of Development and Recurrent Budgets ( ) As a percentage of total government budget and Gross Domestic Product (GDP), the Government of Malawi (GoM) allocates a higher proportion of health and education budgets than most countries in the region. However, Malawi s per capita spending on health and education is one of the lowest in the sub-sahara African region. This is mainly because of the low GDP of the country. 23% 28% Wages and Salari Other Recurrent Development 5. What is the Composition of Government Expenditures? 49% Wages and salaries currently consume 34% of domestic revenues. In an effort to reduce spending on wages the Government has carried out a comprehensive payroll audit. Further efforts to reduce the wage bill have been hindered by the postponement of the government pension scheme. The budget estimates also shows that the Government has made considerable headway in rationalising the very large Farm Input Subsidy Program (FISP). The FISP has benefited Source: Financial Statement, Ministry of Finance, Economic Planning and Development. In the face of budget constraints and increasing interest on debt repayments, spending on wages and salaries has been preserved at the expense of goods and services (10% reduction), subsidies and transfers (7% reduction) and domestic development spending (7% reduction). This is shown in Figure 3 below. Figure 3 Composition of to Budgets Budget Share % 100% Foreign development 10% expenditure 20% 20% 19% Domestic development 10% 25% expenditure 80% Subsidies and 8% 7% 6% transfers 21% 3% Goods and 18% 17% 14% services 21% 60% Interest on debt 19% 31% Wages and 22% 21% salaries 40% 20% 7% 22% 24% 6% 21% 11% 22% 14% 25% 13% 23% 0% 2012/ / / / /17 Source: Consolidated Financial Statements to , Ministry of Finance. 5

6 Figure 3 shows a significant reduction in Goods and Services, from 31% to 21% of expenditures. The budget for domestically funded development spending faced a severe cut from 10% of expenditures to only 3% of the national budget. The change in expenditure composition also shows the impacts of donors moving away from budget support. The Goods and Services budget category faced serious cuts in recent years. 6. What is the level of progress with Programme Based Budgeting? framework to a program approach. The Government s accounting practices still reflect Input Based Budgeting. Presently, an MDA is required to request a virement (a change to the approved budget) to move resources which had been budgeted against one particular item to another. If, for example, an MDA requires less fuel and more stationary than anticipated it must request a virement from the Ministry of Finance (MoF). This practice is out of step with the Public Finance Management (PFM) Act which dictates appropriations and virements should be made at the output level. Currently, the presentation and structure of the budget reflect a program approach while the legislation supports an output based approach to budgeting. Following the introduction of Program Based Budgeting (PBB) in 2016, the Government is yet to align accounting practices and the legal Box 2: Approaches to Public Budgeting Input Based Budgeting This was the first form of budgeting used in Malawi. Input based budgeting focused on inputs or items used by MDAs and their cost. This type of budgeting emphasises central control of state resources and costs. Some examples of items or inputs include fuel and lubricants, office consumables and wages and salaries. Output Based Budgeting Moving from Input to Output Based Budgeting (OBB) represented a desire by the Government to focus budgeting on performance. It also reflected a certain degree of trust of MDAs by the central government. Output based budgeting allows MDAs to decide on the best combination of inputs to produce a desired output. Examples of outputs include: the number of teachers trained, number of textbooks procured and the number of classrooms constructed. Program Based Budgeting PBB is an approach to budgeting whereby allocation of public resources is to specific programmes with clearly defined objectives. The first step in PBB is to come up with programme goals and objectives. This will be followed by development of performance targets and activities under each objective and, finally, allocation of resources to each programme area. In PBB, governments are expected to report on both finances and results achieved. In program based budgeting, MDAs group activities and outputs that contribute towards a similar goal or outcome. This begins to answer the question, what has a MDA achieved? Rather than what has an MDA produced. Examples of outcomes include: primary school enrolment and literacy rates. Appropriations are made to programs and MDAs choose both the best mix of inputs and the most important outputs to make an impact on targeted outcomes. Although MDAs have started to implement PBB, there is still room for improvement, including in ensuring that all outputs, performance indicators and baseline information are clearly articulated in their Program Based Budget. The Medium Term Expenditure Framework (MTEF) is disconnected from historical trends. Figure 4 shows budget allocation trends from the years 2012/13 to The outer year projections, 2017/18 and 2018/19, show a large deviation from forecasts based on historical trends. The projections for ORT and foreign financed development expenditures decreased in the outer years which does not appear to be realistic given historical trends. 6

7 Figure 4 Approved Budget Trend and Outer Years 600,000 Foreign development expenditure US$ Millions 500, , , ,000 Domestic development expenditure ORT PE 100, / / / / / / /19 Source: Consolidated Financial Statements to , Ministry of Finance. Communication between Ministry of Finance (MoF) and MDAs has not always been good, resulting in some MDAs lobbying the Government through the media. Some MDAs are often seen engaging in political action through statements to the press and by underfunding politically sensitive activities. In response to this, MoF has resorted to increasing the detail of appropriations to MDAs which decreases MDAs discretionary powers. The unfortunate side effect of MoF separately appropriating to individual activities is it limits MDAs flexibility. It is good budgeting practice to have budgets prepared by implementing agencies rather than being centrally dictated, as implementing agencies have the best knowledge of what activities should be prioritised. The late releasing of budget ceilings seems to be compromising the quality of budgeting. It is difficult for MDAs to begin budget formulation without ceilings. The delayed release of ceilings reportedly stems from a communication breakdown between MoF and Cabinet. The MoF is primarily concerned with the total resource envelope whilst cabinet, made up of ministers representing MDAs, are concerned with the budget available for them. This has led to protracted and stalled negotiations that extend well past the deadlines set out in the budget calendar. Annex 1 provides an overview of the budgeting calendar in Malawi. costs of debt repayment and withdrawal of budget support by donors following a major public finance management scandal in 2013 have resulted in drastic reduction in development expenditures. Deliberate efforts should be undertaken to avoid further increases in domestic debt, which may negatively affect future fiscal space for social spending. The introduction of PBB has the potential to improve the effectiveness of government budgets. In order to fully implement PBB, the Public Financial Management Act and accounting practices should be amended to reflect this change. The Ministry of Finance needs to continue to work with MDAs to ensure all activities are captured in the PBB and to better engage Cabinet in the budget formulation process to avoid problems such as delays in release of ceilings. The prospects of economic recovery in 2017 presents an opportunity for the GoM to increase its domestic revenue, especially from tax, which could be used to finance essential services required by children. At the same time, the GoM should continue with ongoing PFM reforms to ensure efficient, effective and transparent use of public resources. 7. Conclusion UNICEF congratulates the GoM for ring-fencing health and education budgets at a time when it is faced with fiscal constraints. Despite this, total allocations to social sectors remain significantly lower than what is required for all children to have access to essential services for their survival, protection and development. Fiscal constraints worsened by weak economic performance due to consecutive droughts, increasing 7

8 Glossary of Terms Annex 1: Key Events in the Budget Calendar Development expenditure - is defined by the Public Sector Investment Program as significant (over MK 100 million) project expenditure with a completion date. Development spending provides returns in lowering operating costs or generating revenue. Development spending is divided into Part I (project support from external aid) and Part II (project support from domestic resources). 9 Domestic Debt - Borrowing from banks or other private sector players within a country. Economic Classifications - presentation of the budget according to economic inputs such as wages, operations and capital. The production of goods and services requires a mix of inputs. Foreign debt - Borrowing from foreign banks, foreign governments and international financial institutions outlining expected revenues and expenditures. Medium Term Expenditure Framework - Three to five year financial plan of action for government. Nominal Increase in budgets Changes in allocations which are not adjusted for inflation Other Recurrent Transactions (ORT) - Refers to items such as office supplies, fuel, utilities, routine maintenance, meetings and other program costs as well as acquisition of fixed assets. Personnel Emoluments (PE) - spending on wages and allowances. Program Based Budgeting - An approach to budgeting whereby allocation of public resources is based on specific programmes with clearly defined objectives and outputs. Month Key Activities and Outputs May Budget Presentation Budget Approval Master cash flow development June Cluster Committees Public Sector Investment Program project monitoring 1st Quarterly financial report July Annual reconciliation of previous year funding figures. August Annual debt and Aid report produced September 1st quarterly cash-flow approved October Budget Policy Framework Paper (BPFP) (mid-year review) Donor s funding commitments for the financial year established. Implementing agencies send their Public Sector Investment Programs (PSIP) Project proposals for appraisal. Preliminary GDP and Revenue Forecast. November Medium term Economic and Fiscal Policy Statement prepared. December Medium term Economic and Fiscal Policy Statement presented to cabinet. National Audit results presented to parliament. BPFP reviewed by cabinet. January Debt and aid half yearly report. Indicative ceilings to MDAs. Revised sector ceilings. February Budget framework finalised. Mid-Year Budget Reviews. March Budget hearings. PSIP approved by the president. Aid commitments confirmed. MDAs submit budget estimates April Budget consolidation MDAs submit cash-flow forecasts Economic and Fiscal Statement presented to National assembly Source: Ministry of Finance, Budget Calendar Real Increases in budgets Changes in allocations which are adjusted for inflation. 9 Ministry of Finance, Budget Manual, UNICEF Malawi UNICEF House, Airtel Complex PO BOX Lilongwe Malawi. Tel: +265 (0) For more inforation, contact: earchibald@unicef.org or 8