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Malawi: Government avoids new taxes amid zero-aid budget

Malawi’s Finance Minister, Goodall Gondwe, on Tuesday presented the delayed 2014-2015 national budget without increasing any consumer taxes amid the absence of donor injection into the government estimates.

Malawi’s financial year begins 1 July, but because of the 20 May elections and the subsequent change of government, the new administration of President Peter Mutharika asked Parliament for a three-month extension.

Donors suspended US$150m in budgetary support in the wake of ‘cashgate’, the worst financial scandal in Malawi’s 50 years existence as an independent country, where businessmen and politicians connived with civil servants to skim billions of dollars from the government in payments for goods and services not rendered to government.

Analysts predicted government would introduce or increase new taxes to cover for the shortfall. But in his one-and-a-half-hour budget statement he delivered in the capital, Lilongwe, Gondwe did not increase any tax.

Instead, he said: “We believe this is not a year for tax reviews but of studying tax reforms.”

Analysts, however, say government was cautious to introduce or increase taxes so soon after elections.

“Government doesn’t want to lose political goodwill so soon,” said economist Ephraim Munthali.

Munthali, however, warned that in the absence of budget support and increases in taxes, government will be forced to borrow massively.

“This will spur inflation and impact on interest rates,” he said.

Gondwe acknowledged that ‘cashgate’ has crippled government operations as allocations to government ministries and departments were substantially reduced.

“Mr. Speaker, Sir, performance of the Malawi economy in 2013 has been mixed and subdued by the ‘cashgate’,” Gondwe told parliament. “In the wake of the scandal I have just referred to, donors decided to withhold budget support. In consequence the ability of government to function was crippled and unbudgeted domestic borrowing was incurred.”

The former World Bank official said over and above that the large domestic borrowing led to the accumulation of unpaid bills.

“As a consequence of these events, and the loss of funds from the scandal, the government drastically reduced budget allocations to ministries and a number of them became dysfunctional,” he said.

Donors, who contribute up to 40 percent of Malawi’s budget, have since warned government that they will not resume aid until it restores confidence in its payment system, the Integrated Financial Management Information System (IFMIS.)

Perhaps in a direct answer to this, Gondwe said government will prioritise institutions which are directly dealing with ‘cashgate’.  

“The first is the desire that, as a country, we should get at the bottom of what really happened as regards the ‘cashgate’ scam,” he said, adding:

“Therefore, law-enforcement votes have been granted a more than usual expenditure increase that averages at more than 80 percent. In fact, the Anti-Corruption Bureau vote has a 167 percent increment which is the highest of all votes. The Director of Public Prosecutions, the Judiciary, the Police and others have also had large increments for the same reason.”

The 193-member opposition-dominated Parliament will deliberate on the budget for five weeks before adopting or rejecting it.

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