THE 2012 MALAWI ECONOMIC RECOVERY PLAN: a rather bad prescription

Beating about the bush

"for a critically ill patient a large bunch of medicines at the same time can in fact kill him/her much quicker than no medicine at all"

This is what is happening to the Malawi’s economy now. The two chief doctors of the economy (ministers of finance and economic planning) seem not to have a clue of the right treatment. As a result they are swashed with lots of proposals for treatment but they cannot isolate the wrong from right advice. I am not here to blame them, but perhaps add my opinion to their many proposals.

In times of recession or low economic activity, the government is left with two key choices: 1)  take broad-based austerity measures aimed at reducing the overall government expenditures by prioritizing funding to only essential and vital services to match with revenues collections. This option, however, can keep the economy at standstill hence make it vulnerable to further shocks; 2) raise extra revenues from borrowing from ‘donors’ to cushion the economy, that is, cover the deficits in current account and budget.

Mostly due to bitter relations with the donors and that the donors themselves were running deficit governments, Bingu (may his soul rest in peace) knew that borrowing was not an option. He instead focused on his ‘unpopular’ austerity zero-deficit budget. Foreign exchange resources were the most scarce, fuel, drugs and other imported commodities were almost not available. I guess if Bingu had managed to borrow substantial amount of foreign exchange, the fuel queues and medical drug shortages in hospitals could not have been as worse. For example in March 2012, while office pump price of petrol was MK390 per litre, but due to scarcity people were buying on the black market for as high as MK550. We all blamed Bingu especially his diplomatic style for the suffering, and chanted on streets all bad names on earth for him and his government. His departure (may his soul rest in peace), was to some people seen as a solution to the Malawi economy, as donors said they are withholding assistance to Malawi because of Bingu’s poor governance record.

Donors should be explicit of their commitment and commercial interests

With taking over of Government by H.E. Mrs Joyce Banda, people’s hopes were high, that donors would now release the much need foreign exchange to import the fuel, drugs and other importables. However, the experience is different from the expectations. The IMF and other donors instead of assisting our leader with the foreign exchange resources, they tell her to go on open market and raise her own foreign exchange resources by discounting the Malawi Kwacha (massive devaluation), a thing that Bingu preached a very evil to the poor. They go on to advise her to maintain austerity measures introduced by Bingu, and give her meagre resources (some even in single digit million US dollars or less) as if they are supporting a local NGO. These small money comes with hefty conditionalities, most of which are highly counter-productive and punitive to the poor such as the tax raises, Malawi Kwacha devaluation and its floatation.

The current combination of policies (austerity measures and floatation of Malawi Kwacha) are disastrous. Fuel is now available in most filling stations but at a price more than it was freely supplied on black-market earlier in the year. Inflation rate has more than doubled within a space of less than 8 months. The light at the end of tunnel is very dim, despite her H.E.’s numerous visits to the donor capitals, she comes back with only promises. Most gravely, the economy (GDP) is almost in recession (projected growth rate 1.6%).

The issue here is clear, austerity measures aimed at transferring the burden to the citizens has just pushed the poor to death as the little they earn is worthless as inflation soars; kill effective demand on the market hence both sales volumes and profits dwindle; business shut down, people lose jobs due to low profits or losses; government tax revenue collection base is weakened as VAT on sales, income taxes on profits reduces, and PAYE on devalued salaries mean nothing.

Borrow and fill the import gap now! Malawi needs a big push and not just austerity

"when a patient is severely anemic either due to malaria or loss of blood in an accident, direct transmission of donated blood is more appropriate to save the life of the patient than just a better diet"

This is not the time to worry about debt levels, that is, debt:GDP ratio, but rather time to rescue the ailing economy headed for recession. In these hard times, government should (as most countries do, including the donor countries) slow down on austerity measures as it is shooting is own foot, but instead it should borrow adequate foreign exchange resources, at least in the short term, to cover the current account deficit, that will cover up for wanton depreciations of the local currency, maintain a manageable inflation rate, maintain households’ purchasing power, maintain effective demand on the market, maintain business sales volumes and profits, maintain jobs, maintain government revenue collection levels, maintain public provisioning of essential commodities and services (health, education, security, etc). The borrowed and locally generated resources should be invested in short-term demand creation, development of exportables in the medium to long term.

Leadership short-termism: a critical hurdle for African Development

Short-termism is a business term that refers to the excessive focus of some corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation. An excessive short-term focus combined with insufficient regard for long-term strategy can tip the balance in value-destructive ways for market participants, undermine the market’s credibility, and discourage long-term value creation and investment. The short-termism tendency has plagued African political leadership. In fragile states, uncertainty regarding the longevity of their tenure lures leaders to opt for quick mining deals to finance their extended stay in power, budget is prioritized on national security and even to the complete abandonment of vital public infrastructure and social services (drinking water, bridges, schools, hospitals, civilian security) that have less dramatic or immediate political benefits. In the newly democratizing states leaders have panic for elections calendar. As such, seeking assurance of re-election is their main pre-occupation. They opt for policies and programmes that bring palpable and conspicuously visible immediate benefits for their strongholds even if it is to the detriment of future national fortunes. Therefore, efforts to re-start real development in Africa will need a re-dress of leadership security.

Bingu to Joyce transition: for better or worse?

When Malawi’s third president Ngwazi Professor Bingu wa Mutharika pioneered the openly declared fertilizer subsidy programme to support poor farmers despite aggression and disenchantment of her major donors in 2005, few people believed it could be a reality for such a poor country to implement, let alone that the programme would be a success with such contagious spread across the continent. Public support to farmers, in fact, poor farmers is rather a noble than not an evil to be condemned upon. What was wrong with the late Malawi president (may his soul rest in peace) was his style of doing business. Rather than consulting the donors before announcing policy or at least before actual implementation, he ignored them and their advice or threats.

With good rains, the programme managed to pull maize yields from a national average of 870 kg per hectare in 2004/05 season to 2,660 kg per hectare in the 2006/07 season. What that means is that land and labour productivity were improved by the fertilizers. Importers made a killing on increased volume of fertilizer business, so did the truckers who move the fertilizer bags across the country. Increased production was more than enough to excite Malawi’s predominantly poor subsistence farming population. This earned Mutharika extra political credits at home, and more so abroad. On the 27^th of November 2008, the Food and Agriculture Organization of the United Nations (FAO) decorated Mr Mutharika with an Agricola Medal in recognition of his efforts to support agricultural development in Malawi, In January 2010. Mr Mutharika was voted by fellow African heads of state and government to chair the African Union.

While the nation was basking in maize, a grain that makes up to 90 percent of dietary energy supply (DES) for the Malawian population, perhaps, what Mutharika was enjoying most is the political breakthrough. He went on to declare and implement the fertilizer subsidy programme, a policy that was looked at as evil in the global polity. In fact, there was a growing dissatisfaction among donors of Mutharika being a “good leader”. His pan-Africanist ideologies were feared could potentially get entrenched in African politics hence ruining a lot of foreign political and economic interests on the continent. Both at home and abroad, Mutharika repeatedly said “Africa is not a poor continent but rather its people are”. This was to some extent blowing some mist of policy influence in development and aid debates, considering level of international media interest and coverage for Malawi since the recent past.

Trained as an economist backed by many years of international practice at the UN, World Bank, COMESA, Governments of Zambia and Malawi, Mutharika’s pan-Africanist campaign might have been influenced by his long and diverse experience. His ideas were at times poorly followed, sometimes even misunderstood, by many of his colleagues, ministers, and country folks.

By and large, the rage among the donor community grew with the climax being the deportation of the British High Commissioner to Malawi in 2010 due to a leaked communication cable by the Wikileaks where the British diplomat is alleged to have said that Mr Mutharika is becoming intolerant to donor advice and does not respect the rule of law. As revenge, the British Government also expelled the Malawian High Commissioner to London, immediately cut the bilateral British aid flow, and possibly enticed its allies to do the same. The cutting of lending and aid deprived Malawi of the much needed foreign currency to finance her importation of drugs, fuel, fertilizers, etc.

The cutting of aid was a big blow for a poor country Malawi that depends on borrowing and donations to cover up to 60 percent of her national budget. The donors made it clear that the cutting of aid was not meant to punish the poor Malawian population but rather aimed at putting indirect pressure on Mutharika to change his way of doing business. Contrary to the expectation, Mutharika again took another step away. In June 2011, Mr Mutharika introduced what he called a “zero deficit budget” in the 2011/12 national budget. In brief, a zero deficit budget is an austerity budget that aimed at cutting government expenditure and increasing income so as to match the two without revert to borrowing or begging. This was another scoff at the donors who often leverage their political influence on poor countries with promises of donations.

The Zero-deficit Budget (ZDB) Project sounded a great sovereignty ambition that any country would wish to attain if and only if the world order was right. Mutharika has at several times attempted to explain how weird the world order is but failed to realize that it is not him who can correct it. He had no kind words for IMF, World Bank and WTO which he accused of coercive exploitation in today’s global economy. He accused IMF of imposing austerity on debtor countries, shrinking their investment and production, resulting in rising unemployment and domestic fiscal crises, while making debtor countries more dependent on foreign suppliers. A widening trade deficit that ensue is financed by further borrowing whose interest charges aggravate the overall payments deficit in a deteriorating spiral.  As for World Bank, Mutharika often narrated that the Bank’s demands on debtor countries to raise money by privatizing their public domain, despite the notorious underpricing of the assets under the same public domain, exorbitant underwriting fees, insider dealings, and falling post-privatization service standards. He also attacked the WTO for its neo-liberal agenda that aims at turning control over markets to the multinational corporations, while promoting tax codes that enable companies to deduct from taxable profits all interests and insurance charges, management fees, and intra-company transfer pricing through offshore tax havens. This starves governments fiscally, forcing them to increase domestic taxes, mostly the value added taxes (VAT), borrow more even as they slash public services deeper.

Mutharika might have counted less on the nominal figures of pounds, dollars, euros that Malawi borrows or begs from these donors who themselves also accumulate much debt, in fact, some of them have highest debt/GDP ratios in the world. He might have counted more on the revenues of tobacco export sales for foreign currency. Little did he know that the world trade is also politically controlled? For the first time in Malawian history, in season 2010/11 Malawi realized the lowest earnings from tobacco with the selling season extended to the next season. Sales of Malawi's main foreign exchange earner tobacco slumped 35 per cent in the 2010/11 season dropping the total earnings to $267 million from the $363 million earned the previous year.

 It was a typical economic isolation. As the rift between Lilongwe and world capitals increased, Mutharika could feel the heat of political isolation, even from his neighbours. Mozambique, unexpectedly overturned the deal to allow Malawi proceed with her ambitious Shire-Zambezi Waterway Project that was aimed at opening out the landlocked state of Malawi and other central African countries. Just when Mr Mutharika in presence of his fellow presidents Mugabe of Zimbabwe, Lupiah Banda of Zambia and other senior diplomats were to officially launch the Nsanje Port for the waterway project, the Mozambican Government could not allow the two boats (barges) pass through Mozambique to Malawi. The Mozambicans are demanding a comprehensive environmental impact assessment (EIA) report first. This was depite earlier (in 2005) agreement to the project. The Malawi side suspected some foreign influence in the sudden change of tune on the Mozambican side.

While many African and indeed some Eurozone countries were//are being carefully and silently treated by short term loans from the IMF, the Fund refused Malawi for not qualifying due to failure of meeting its criteria part of which was to devalue the local currency. Mutharika defiantly declared that he will not devalue the Malawi Kwacha because Malawi does not does not have competitive magnitude on exports that would rise as a result of devaluation as there is virtually no value addition industries in the country.

Since the unfortunate death of Mutharika, his vice Her Excellency the State President Mrs Joyce Banda took to the driving seat. Many Malawians who were tired of the noxious effects of economic and political isolation the country was subjected to felt she was a rescuer and indeed the first Malawian female president’s priority was to bring peace in the Malawian family. Unlike Mutharika who was strongly linked to his ethnic Lhomwe tribe and that his tribal colours were greatly reflected in his appointments to higher positions in government, business and politics, Mrs Banda adopted a government of national unity. To that effect the whole opposition is now dismantled.

Again, while Mutharika was in most cases arrogant at the donors, Mrs Banda is carefully tolerant to both bilateral and multilateral donor demands. The land mark of which is the devaluation of the local currency by about 37%. Mrs Banda has already visited capitals of several African and overseas countries in a bid to salvage the diplomatic ties that were shaken during Mutharika’s administration. She has realigned public appointments to bring about natural balance. While Mutharika spoke tough in defence of fellow African leaders including President Mugabe of Zimbabwe, and President Omar Al Bashir of Sudan who has been indicted by the International Criminal Court to answer charges of war crimes in his country’s Darfur Region, Mrs Banda does not tolerate them. The July 2012 AU Heads of State and Government Summit was shifted from Lilongwe to Addis Ababa, because Mrs Banda barred Al Bashir from entering Malawi.

The big question is: is the leadership change taking Malawi to glory or misery?