Finance Minister Dr. Ken Lipenga delivered the 2011/12 Revised Budget Statement on Friday, February 10. Content has been edited for space

Prospects

LET me now turn to the prospects of the Budget to the end of the 2011/12 fiscal year.  Total Revenues and Grants are now projected at K287.5 billion down from K307.7 billion at the Approved Budget stage reflecting a decrease in the resource envelop of K20.2 billion. This represents a fiscal contraction of 6.5 percent from the approved budget estimates.

Domestic revenue targets are being maintained at their 2011/12 approved budget estimates level of K242.5 billion, comprising K203.5 billion tax revenues and K39.0 billion non tax revenues. This is largely on account of the impressive performance of these revenues to Mid Year on account of efficiencies in tax administration and enhanced monitoring and enforcement. To the end of the financial year, despite the downward revision in Gross Domestic Product (GDP) from 6.9 percent as at the Approved Budget stage to 6.0 percent now, domestic revenues are expected to perform on account of efficiency factors. Additional efficiency factors expected to be implemented by MRA to contribute towards the achievement of the budgeted targets include: the installation of Scanners at strategic Boarder posts, improvements in procedures for assessment and collection of duty from imported motor vehicles, increased enforcement, modernization of tax operations through automation and capacity building initiatives.  On the other hand, non tax revenues are expected to increase on account of measures such as: the automation of some revenue collecting Departments such as Immigration and Department of Civil Aviation; increased enforcement and monitoring of revenue collections; and the general improvements in the management and administration of Departmental fees and charges.

On Grants, projections to the end of the financial year are that they will be down by K20.2 billion.  From the Approved Budget estimate of K65.2 billion, total Grants are revised downwards to K44.99 billion to the end of the financial year. This is mainly on account of two factors. The first is the delayed conclusion of the ECF programme review. As at the Approved Budget stage, the forecast was that within the course of the first half of the financial year, the second review of the ECF programme would be successfully completed and that a sum of K19.8 billion in programme grants and European Union (EU) Road Sector budget support amounting to K2 billion would be released. However, now that the ECF programme has not yet been concluded, it is unlikely that we will get these resources in this Fiscal Year even if the ECF programme review were concluded within the second half of the Fiscal Year. It is on this account that for purposes of being prudent, these resources have been removed from the resource envelope

The other major factor that has led to the downward revision of grants is the reduction in Health SWAp resources from an earlier estimate of K10.1 billion to K2.1 billion. It would appear that Development Partners have directed most of these resources towards the direct purchases of drugs under the primary health care which are being distributed to various hospitals in the Country. On the other hand, projections on Food Security grants and Education SWAp have all been revised upwards by K4.97 billion and K4.87 billion, respectively, on account of new pledges and disbursements by selected donors to these programmes.

Mr. Speaker, it is important for me to assure this House that government remains engaged with our Development Partners, including the IMF and the World Bank. In addition to despatching Cabinet ministers to various capitals for talks, His Excellency the President himself has been personally involved in discussions with representatives of our development partners. These discussions are aimed at arriving at a solution to our challenges that does not just involve devaluation alone, which as His Excellency has pointed out cannot be panacea for all our problems, but takes into consideration our deep-seated concerns about the impact of certain policy measures on the poor, and also takes on board our own views about the way forward. We are encouraged by the willingness of the development partners to engage in  these discussions, and we hope we can reach consensus on a comprehensive programme that addresses the many structural aspects of our economy including supply side challenges.

Domestic Revenue Projection

Government remains optimistic that the revenue collecting Institutions such as the Malawi Revenue Authority, Government Ministries and Departments will sustain this increased trend in revenue collection. As these revenue collecting agencies continue to entrench these reforms and revenue enhancement measures to ensure that the budget is on course.

The Malawi Revenue Authority has also lined up a number of projects that are expected to make significant contribution toward the improvement in revenue enhancement and improve tax administration in the second half of the year. These projects include:

・    Implementation of the Customs Central Declaration Processing Centre which will improve valuation and classification of goods by Customs;

・    Interface between the Road Traffic Directorate and MRA motor vehicle clearing and registration systems expected to be implemented within the month of February, 2012;

1.    Installation of mobile container scanners at major border posts across the Country. Three scanners kindly donated to Malawi Government by the People’s Republic of China, have already arrived in the country and are expected to be operational in March, 2012.

Non tax revenues are expected to improve on account of measures such as: the automation of some revenue collecting Ministries and Departments; increased enforcement of revenue collections; and the general improvements in the management and administration of Departmental fees and charges.

Expenditure Projection

In line with the projected revenues and grants, total expenditure and net lending has been revised downwards from K303.7 billion to K299.9 billion. Total wages and salaries have slightly edged upwards from K66.2 billion to K67.9 billion to take into account arrears for rural teacher allowances as earlier-on alluded to. Goods and services have been revised downwards by K7.9 billion from K114.2 billion to K106.3 billion on account of the savings from the expenditure control measures such as the reduction in the size of Cabinet, strict control foreign and internal travel, ban on purchases of luxury goods and strict control on motor vehicle maintenance and use. Resources for the Farm Inputs Subsidy Programme (FISP) have been increased from K21.6 billion to K23.3 billion to incorporate the effects of the recent exchange rate adjustment while pensions and gratuities have been slightly  reduced by a billion from K12 billion to K11 billion due to the efficiencies made in disbursing these resources. Development budget expenditures have slightly increased from K69.9 billion to K70.2 billion reinforcing Government’s commitment towards improving the development architecture of the Country. The reduction in the resource envelop has generally reduced the surplus in the Approved Budget estimates which was intended to repay domestic debt. Government will only reduce its domestic debt by K400 million from K124 billion at the start of the Fiscal Year to K123.6 billion. Otherwise, all other adjustments in the Budget are being accommodated in the Budget using savings from the expenditure control measures.

Vote by vote adjustments

(i) Reduction in Expenditures Targeted by Expenditure Control Measures

In the first half of the fiscal year, Government implemented expenditure control measures which I have already referred to. As a result of these measures, Government made savings in excess of K11.7 billion on these expenditure lines. To avoid these resources being abused or used for other unintended activities, adjustments have been made in all the Votes to reallocate these resources.

(ii) Increase in Resources for the Education sector.

11.    The World Bank has given Malawi additional resources amounting to K5.6 billion for supporting the education sector in the Country. K2.1 billion of these resources have been given to the Ministry of Education, Science and Technology and Education Sector in the District Councils to implement various projects and programmemes in the sector while the balance of K3.5 billion has been given to the Local Development Fund (LDF) to construct primary school classroom blocks and teachers houses.

Resources for Subvented Organizations have also been increased by K680 million to carter for additional requirements for running the University of Malawi which increased intake of Government sponsored students from 925 to 2,377.

Government is providing at least between K1.0 and K1.5 million per annum per student. By all standards, regionally and globally, this is extremely high and it is therefore only logical that these students take their studies seriously considering the investment the nation is making through them for the development of this country.

A provision of K500 million has also been made for the Water Supply and Sanitation project at the Malawi University of Science and Technology (MUST). As the Honourable Members of the House are aware, the Malawi University of Science and Technology is being financed by a loan from the People’s Republic of China, but as part of the loan agreement, Malawi is supposed to finance the water supply and sanitation system. Considering that the project is progressing much faster than previously anticipated, it has become necessary that the water supply and sanitation project takes off earlier than previously planned. It is on this basis that this provision is being made to kick start this project in the second half of this fiscal year.

 (iii)    Farm Inputs Subsidy Programme (FISP)

The Budget for the Farm Inputs Subsidy Programme requires adjusting upwards to take into account the extra resources required to carter for the recent currency adjustment as well as global increases in fertilizer prices especially UREA. A provision of K1.7 billion has therefore been made for increasing the budget for the Farm Inputs Subsidy Programme.
 
Tax Revenue Measures

Since the various tax policy measures were approved by this House during the main Budget Session of Parliament in June last year, my Ministry has been receiving a lot of comments on various policy measures from the general public, development partners, private sector, civil society, faith based organizations and other stakeholders. My Ministry has been reviewing these comments with keen interest and we continue to do so. Government acknowledges and sincerely appreciate all those contributions.

We will continue with this process of consultation and come up with a comprehensive assessment and consolidation  of the tax policy measures in the subsequent months for consideration in the next annual Budget. It is customary for the Minister of Finance to make substantive pronouncements on new tax measures only during the main Budget Session of Parliament. Since this is only the Mid Year review, I will not announce any such policy measures now. However, given the nature of some of comments we have received, I would like to make clarifications on some of the tax policy measures that were announced in the 2011/12 budget statement in order to address implementation challenges that are currently being faced as follows:

(i)    Income Tax – Minimum Tax Based on Turnover

Minimum tax based on turnover was introduced in the 2011/12 Budget statement. However, some implementation challenges regarding this tax policy measure were identified and needed to be addressed. The spirit of the minimum tax, as stated in the 2011/12 budget statement, is to ensure that those companies that are perpetuary reporting tax losses contribute to Government coffers.  It;s Government’s intention, that this measure is implemented smoothly and fairly. In this regard, I want to emphasize the fact that implementation of the minimum tax on turnover will only apply to the companies perpetuary reporting tax losses. We are aware of tax planning activities and tax evading acrobatics that might arise as a result of this measure. I would like to assure this Honourable House that MRA is enhancing its capacity to conduct detailed risk based audits and other enforcement measures in order to seal revenue leakages.

(ii)    Export Duty on Timber

In the 2011/12 Budget statement, Government introduced export duty on timber at a rate of 50 percent. I wish to clarify to this Honourable House that the 50 percent export duty was meant to apply to exports of unprocessed timber in order to encourage value addition. To this end, Government remains committed to support timber millers who add value and export processed timber. In addition, new guidelines have been developed to ensure that our forests are harvested in a sustainable manner so that Malawi benefits from her precious timber export proceeds.

(iii)    VAT Exemptions

As was deliberated in the annual Budget statement for the 2011/12 fiscal year, the House agreed that VAT be removed on the following items; water supply, salt, meat and meat offal and other basic necessities. As stipulated in the budget statement, Government is determined to streamline and consolidate our VAT regime in tandem with international best practices. In this regard, the following items which were erroneously liable for VAT, will now be included under the VAT exemption schedule; natural honey, eggs, and milk.

Government is committed to continuing dialogue with various stakeholders with a view to discussing the possibility of further tax reforms. It is in this context that Government will undertake a comprehensive review of the various proposals to ensure that policies promote growth in line with the Malawi Growth and Strategy Paper II.

CONCLUSION

Mr. Speaker, Sir, despite the adverse economic conditions which have prevailed, this Government remains optimistic that economic problems being faced are transitory and life for Malawians will soon return to normal. I wish to invite members of this house and indeed all Malawians to join hands and put our heads together to ensure that Malawi sustain her economic gains and forges ahead in a manner that assures that we achieve the Malawi Growth and Development Strategy and Millennium Development Goals.