The $80 Million Tale We Should Be Telling

Updated: Jan 21, 2020

Pic by Voice of America

The World Bank Group has taken a significant step announcing resumption of aid to budget support in Malawi, after more than three years of a donor dry spell in Account #1. The International Monetary Fund (IMF) has announced resumption of the Extended Credit Facility. The rhetoric is one of redeemed confidence in the government’s strengthening of fiscal discipline. The reality on the ground is one that needs swallowing this grandiloquence with a pinch of salt.

The celebration on the government side rests in the ability to demonstrate that the Bretton Woods institutions could not be erroneous in resuming credit to the ravaged public accounts, and that Malawians should go festive about it. Members of Parliament from the Democratic Progressive Party (DPP) side, as expected, are up leading the fete, brandishing the strong leadership of their party as the genesis of such generosity on the part of our international fiscal referees and creditors. Hon. Kainja-Nangozo is quoted even being thankful to the World Bank for such generosity, while the youthful Mark Botomani sees no other recourse beyond the DPP’s strong fiscal prudence.

There are a few things to keep in mind before and when Hon. Gondwe starts writing the checks against the revamped budgetary support.

Perhaps most important remains that both the World Bank and the IMF are not promising grant facilities, and that the US$80 million in loans will need paying back over years to come. To give credit where it is due, Hon. Lazarus Chakwera made this an emphasis of one of his many statements. Malawians need to understand this will actualize through the implementation of subsequent budgets that need, again, to look at investing these resources in actions that will guarantee a return to the country, net of all liabilities. Again, as we have argued before, such resources need not be invested in a politically charged manifesto that directs loans to food procurement so our poor are given another lease of life. This has only been a habit that we have perfected since the President Muluzi days when we assured the people that it was the duty of the government to feed its people, in turn creating an obstinate dependency that has clung on.

The second comprises the signals hidden in the size of the budget support, which appears colossal in Kwacha terms but will, at US$1 = MWK725 (approximately, using May 2017 exchange rates), make only 4.5% of the 2017/18 national budget and an even smaller proportion of the country’s GDP, i.e, approximately 1.1% of an estimated US$7 billion. While the fiscal boost can provide important multiplier effects that government spending is well positioned to bring, these multiplier effects can only be felt if the priorities of government are pointed towards the investment sectors that would bring about employment so aggregate demand can shift outwards. Moving away from theoretical infatuation and highlight a realistic possibility, these resources could be directed to paying civil servants, already too many that usually go unpaid. This would make total sense. Nonetheless, the desired demand movements can be realized if only government were to honor such commitments.

Well, as stated above, the utility of the celebrated credit facility will, in part, depend on the substance of the 2017/18 national budget, which is already focused on construction of new facilities and schemes, including the rehabilitation of the rail system. These are noble ideas, and, unfortunately, that is where things will likely stagnate. Our rationale, in line with the preceding paragraph, anchors itself in the impression that new projects make on economic progress, which are usually mistaken for progress. Yet they overlook the dysfunctional old programs and projects, like the civil service salary system captioned, that need redress and on which the economy should build on. When new projects are built on numerous failing ones, their net effect becomes nullified, if not negative, as old-fashioned and unattended sectors pull society backwards.

The third aspect of the generosity our Account #1 is receiving in the coming year is the historical patterns of loans to developing countries, especially offered through the same condition-heavy facilities. This point aligns with the size-of-aid argument above in that trickles of aid, which cumulatively have summed up to enormous amounts of US dollar debts over the decades of independence, have meant nothing to developing nations when development is tied to strict conditions. Especially as we can access these resources only a drop at a time. Even worse is when development aid is squared up by even larger credit amounts that make it back to aid-giving countries from the same poor countries they are helping.

A better perspective is given by the state of what we term reverse aid. Developing countries are sending to developed countries at least twice the amount of aid and remittances they receive every year. To be more precise, developing countries coughed out US$3.3 trillion dollars in 2012 while receiving US$1.3 trillion in aid and remittances the same year, per a study by the Global Fiscal Integrity and the Centre for Applied Research of the Norwegian School of Economics. While this disproportionate reverse remittance does not come in exchange of goods and services going to aid recipients, they leave a double gaping hole in the sense of liabilities to debt requiring servicing.

In attempting to rationalize the aid debate, this website has argued several times before that the Malawi Government should have stuck to their zero-aid budget, and we will soon provide a detailed argument in the coming weeks about this.

So, the jubilation around the trickle of US$80 million, then, is a mere admission that government is not able to run the economy independently. The minute size of the loan amidst severe economic challenges means the gains to be made will largely reflect in keeping the government system afloat, with few – if any – movements in the economy that will subsist beyond the next Fiscal Year. And, the country needs to be aware to track how much of these resources will find their way back to developed countries in salaries, fees and other purchases that will necessitate change.

Finally, the mood that has surrounded State of the Nation Addresses (SONAs) by our Head of State, accompanied by the Minister of Finance’s budget speeches, have received a fresh coat of colorful hope for the future of the nation, yet the growth of the economy tanked from 5.7% in 2014 to 2.5% in 2016 amidst acclamations that only spelt excellence on the part of the leadership. This time, the government’s press statement of the budget is hopeful to make 6.1% growth of the economy during the 2017/18 FY and has dressed this hope with the stimulation of the economic engine that gratifies only US$80 million from a World Bank loan.

We are cautiously unexcited not to jump on the jubilation train, when our quick satisfaction embraces small ambitions, supremely driven by an insatiable appetite for political gain. Our disappointment in young leaders in the DPP government and their accomplices, the Muluzi wing of the United Democratic Front (UDF), cannot be hidden when they cling to facts that shortchange the nation, and which will eventually mislead the poor and uninformed. In turn, this will tear apart the hope that the nation needs to invest in them as future leaders. A resounding voice needs to emerge in the DPP beyond Hon. Goodall Gondwe and his fellow older minions of the party. And, of course, this need not be the platform of Rev. Chakwera, who comprehends only as far as the aspect of liability in the $80 million saga as the all-encompassing argument against DPP’s political mileage growing in the rhetoric around the World Bank’s thumbs-up.

It is curious that, after 2016, the overview of the World Bank on Malawi (link here) does not recognize corruption as one of the key impediments to Malawi’s growth, although the bulk of corruption money is almost never invested in goods and services that bear returns to the poor, after the government itself has admitted to the challenge. This must send signals to the compatriots who ought to reckon no creditor would put taxpayers’ resources in a system that smells of graft the levels of which we experience in this country.

The $80 million loan could never have been a vote of confidence in a government that is yet to resolve three very fresh corruption scandals.