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Market Report Fortnight ending 25th July 2003 Report
14/03
Economic Implications of the 2003/04 Financial
Year Central Government Budget.
The Minister of Finance presented the 2003/04 Budget
Statement for deliberation by parliament on Friday,
4thJuly 2003. The theme of this budget statement is
“Macroeconomic Stability: A precondition For Economic
Growth and Poverty Reduction in Malawi. This comes at
a time when Malawi is experiencing subdued economic
performance due to several factors including poor performance
of the private sector due to high costs of financial
resources and lack of budgetary support from the donor
community.
In order to reverse this trend, the budget
for the 2003/04 financial year is therefore aimed at
achieving a real GDP growth of 3.4% in 2003 and 4.5%
in 2004; containing inflation at 7.5% by December 2003
from the June 2003 rate of 8.5%; and improving the level
of the country’s foreign exchange reserves to
at least 3 months of import cover.
And to improve on macroeconomic stability, the budget
aims at attaining a domestic fiscal deficit of 3% of
GDP from a high of 9.7% registered during 2002.This
will help to substantially reduce government borrowing
on the domestic market, and hopefully creating some
breathing space for the private sector.
According to the Budget Speech, the 2003/04
budget has been formulated in such a way that total
expenditures will amount to K58.07 billion, with recurrent
expenditures accounting for K41.69 billion (72% of total
expenditures) and expenditures earmarked for development
estimated at K14.84 billion (26% of total expenditures),
while K1.54 billion (2 % of total expenditures) has
been set aside for general elections.
On the other hand, total revenues and grants are estimated
at K59.95 billion, with domestic resources projected
at K36.01 billion, representing 60% of the resource
envelope while total grants, at K23.45 billion and K480
million from the donors for the general elections, will
account for the remaining 40%.
The 2003/04 Budget has made very few tax policy changes
due to the tight financial position government is going
through.
On Income Tax measures, with effect from midnight of
4thJuly 2003, withholding tax rate on supplies of goods
and services has been reduced from 10% to 4%. On the
other hand, government has stopped issuing exemption
tax certificates.
On Customs Duty measures, import duty and excise duty
on importation of Hessian sacks imported by TAMA for
packaging tobacco for export was reduced to zero percent
from 5% and 20%, respectively, with the aim of increasing
tobacco farmers income. And with effect from 1stJanuary,
2004, import duty on bovine, animals, textiles, raw
skins, sacks, bags and cartons will be eliminated under
the SADC trading arrangement commonly referred to as
the MMTZ-BLNS trading arrangement.
On the surtax which was extended to wholesale and retail
levels on 1stNovember 2002, the rate has been reduced
from 20% to 17.5% with the aim of giving relief to consumers
by reducing the cost of goods and services. A similar
gesture has been extended to importation of Hessian
sacks meant for packing tobacco for export, which will
now be exempted from surtax.
On Administrative Tax measures, processing fees charged
on customs and excise documentation has been increased
from K200 to K600 with a view to meet the high cost
of production and processing.
And with a view to promote tourism the government service
charge on hotel, motel and lodge accommodation has been
reduced from 10% to 5%.
This notwithstanding, the measures put in place in
the present budget statement are not adequate enough
to meet the objective of the budget, which is to achieve
macroeconomic stability so that Malawi registers substantial
economic growth with a view to make a dent on the prevailing
alarming poverty levels.
The 2.5% reduction of surtax from 20% to 17.5% is not
in line with the real situation on the ground where
government needs a lot of tax revenue due to uncertainty
surrounding remittance of budgetary support. This will
create a fertile ground for persistent budget deficits
in the next 12 months, which will automatically translate
into rising domestic debt and interest rates. The reduction
in the surtax rate will do very little to trickle-down
to the poor because of unscrupulous business individuals
who are reluctant to reduce their prices. What the economic
managers were supposed to do was to be determined and
remain focused on the reasons this type of tax was extended
or introduced than succumbing to pressures from other
stakeholders. This is the case because economies respond
to reform measures with lags. The gains realized from
the initial 20% rate of surtax could in the long run
out-way the marginal relief the 2.5% cut may bring.
Malawi will have tripartite general elections in 2004.
There are strong indications that this may result into
unprecedented increases in government expenditures such
that it will be very difficult for the treasury to honor
the performance benchmarks agreed with the IMF and other
donors. This scenario is a clear indication that the
current budget, where 40% of the expenditures is expected
to be met through foreign aid which has strings attached
may therefore likely lead to severe fiscal sector budgetary
imbalances during the current fiscal year.
The current budget, by not including measures to deliberately
promote the activities of the stock market, also falls
short of creating an environment that could initiate
and speed up economic growth through the much needed
change in the investment culture whereby all the stakeholders
in the economy see the need for broadening share ownership
on the stock market than just concentrating on treasury
bills. This could be done by significantly reducing
government dependency on this monetary instrument in
financing its cash shortfalls. Increased participation
on the stock market could ensure that listed companies
get their required capital at competitive rates that
could in the process boost production and profitability.
This being the case, the indication by government to
retire most of its domestic debt, although difficult
to achieve under the prevailing circumstances, is a
step in the right direction.
The Malawi Kwacha Exchange Rate
The scarcity of foreign exchange on the market has witnessed
the MWK/USD rate make a U-turn and start depreciating
in July 2003 after gaining strength substantially in
June 2003. Currently the Kwacha is trading at a market
average of MWK92.70 to one USD after recording a low
of MWK89.80 two weeks before. This outturn reflects
to some extent the disturbances surrounding the auctioning
of tobacco, the major forex earner. Of late, the marketing
of tobacco has been characterized by boycotts by growers
as a result of dissatisfaction with low prices. There
are strong indications that the forex situation is likely
to be unfavorable in the immediate short term due to
the slowly approaching closing time for tobacco sales.
There are indications that Limbe Auction Floors might
close by the end of the current fortnight. The MWK/USD
rate is therefore likely to depreciate further and average
at least MWK94.00 by the close of the next fortnight.
Financial Markets and Interest
Rates
The market for short-term financial instruments has
stabilized from the shock it experienced from the adjustment
of the RBM Bank Rate to 45% on 9thJune 2003 from the
rate of 40% since October 2002.
According to auction results for treasury bills held
on 11thJuly 2003, the yield rate for the 91 days bill
increased marginally to 43.67% from 43.59% registered
on 4thJuly 2003. The rate for the 182 days bill crossed
the 44% mark and increased to 44.02% from 43.87%. The
rate for the 273 days bill increased to 44.50% from
44.38%.
Indications from the current budget statement that
government is determined to retire its domestic debt
might help to check further increases in yield rates
in the short and medium term.
The market for RBM bills also registered
increases in yield rates during the auction held on
15thJuly 2003 when the yield rate for the 63 days bill
increased to 43.68% from 43.59% recorded on 8thJuly
2003. The rate for the 91 days bill continued its upward
trend and recorded 43.97% from 43.77%.
Increased tight monetary policy stance
by the monetary authorities with a view to arrest excessive
growth in money supply will likely see the rates maintain
the upward trend during future auctions.
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