Malawi: The failure of the Zero Budget Deficit plan

Late Mutharika introduced a zero-budget deficit
Malawi’s overall budget deficit for the 2011/12 fiscal year settled at K84.1 billion as at end June this year against a program target of deficit of K67.9 billion.

The huge deficit sharply contradicts the core objective of the 2011/12 budget which sought to finance its recurrent expenditure by locally generated resources as envisioned by the late president Bingu wa Mutharika in a response to a donor aid freeze.

Total expenditure and net lending in the same fiscal year amounted to K341.1 billion against the June program target of  K328.1 billion — an expenditure overrun of K13 billion.

Finance Minister Ken Lipenga said a sharp economic slowdown led to serious borrowing and the printing of more money.

“Not only did the Zero Deficit Budget fail to realize revenues as planned, but there was also substantial slippage in terms of expenditures and as a result the projected fiscal deficit was missed by a wide margin,” Lipenga said.

“Instead of taking corrective measures, what was then chosen was the soft option of funding the widening fiscal gap by printing money and sharply increasing domestic borrowing.”

Malawi’s aid-dependent economy went into a tailspin a year ago when  Mutharika picked a fight with major donors who in turn froze budget support, especially after 20 people were killed on a crackdown on street protests in July.

Historically, donors have contributed about 40 percent of Malawi’s budget. The unexpected absence of outside funding caused an acute dollar shortage that put the kwacha under pressure and hit supplies of fuel and other imported goods.

Mutharika died of a heart attack in April and his successor, Joyce Banda, quickly embarked on economic reforms to open up the aid taps and has got a three-year IMF loan programme back on track.

She has also removed the kwacha’s peg against the dollar, leading to a depreciation of more than a third against the greenback.