A Zero Deficit Budget for Malawi?

The Government of Malawi has announced its intention to have a “zero deficit budget” for its 2011/2012 financial year. Analysts have pointed out that this will be the first ever attempt at achieving a “zero deficit budget” in the 47 year post-independence economic history of the country. Malawi has traditionally relied on external assistance from multi-lateral and bilateral donors to finance around 40% of its annual budget. A “zero deficit budget” will not necessarily mean that the country will not rely on support from its development partners for budgetary support. However, with strained relations between the country and some of its traditional bilateral donors such as the United Kingdom, the country’s objective in the short and long run might be to strive for less reliance on external assistance for its development agenda. One starting point for achieving financial and economic independence might be a “zero deficit budgeting” strategy.

Under the “zero deficit budgeting” Malawi has said that it intends to finance all its recurrent expenditure from local resources. However, the country still expects external assistance for its development expenditure.

The ensuing debate on a "zero deficit budget" has caught a lot of interest and definitely my interest. I just want to give a few pointers:

Firstly, I would like to state this premise: ‘a "zero deficit budget" is feasible for any country including Malawi’. There are three possibilities to achieving a "zero deficit budget" (a) the simplest is that a country cuts on its spending to match its prevailing local resource base; (b) the most difficult is to maintain or increase spending pattern but this will call for increased resourcing and therefore widening the local resource base, and (c) the other option is to have a bit of both (a) and (b) - cut spending but also broaden the local resource base.

Both budgeting options (a) and (b) suggested above have implications, viz:

(a) if Malawi decides to cut its spending, particularly on basic social services such health, agriculture and education, which constitute the largest share of budgetary expenditure, these cuts might have serious repercussions on future economic growth. While the situation might be manageable in the short run, it can curtail current and potential economic gains in the long run.

(b) if Malawi decides to maintain its current budgetary expenditures or spending levels or even increase them but broaden its resource base, particularly by financing them from its internal sources, this could prove painful to tax payers in the short run but potentially make economic growth sustainable. The immediate difficulties will arise from increases in tax rates and a broadened tax base, and increases in interest rates.

In the long run, Malawi might be embarking on a painful but necessary path for real and sustainable economic growth for the country. For how long shall the country continue to depend on external assistance for its economic growth? Eventually, Malawi has to attain economic independence.

Kennedy Lweya, PhD
Nairobi, 24 May 2011