Statement by chair of Malawi’s donors – Common Approach to Budget Support (CABS

I am honoured this morning to make a statement, on behalf of the budget support partners, to mark the opening of this joint semi-annual review of the Common Approach to Budget Support to Malawi.  Let me take this opportunity up front to thank my fellow CABS partners, and above all you, Honourable Minister, and the Government team, for making this review a reality following our initial agreement in May 2012.

According to the Joint Framework for Budget Support, which dates back to 2005, the review is to focus on the 2012/13 annual budget and its impact on poverty reduction, public financial management, as well as doing a preliminary assessment of fiscal performance of the previous financial year.  However, due to approved changes to the review calendar, this review will also discuss the Performance Assessment Framework (PAF).

Allow me, Minister, to start by congratulating you and the entire Government of Malawi for a successful budget session in June 2012. You took a bold step to formulate what has been termed “an austere and transitory budget” that still takes into consideration our joint agreement’s tenet of poverty reduction. Just a month later, in July 2012, a new Extended Credit Facility (ECF) program was approved by the IMF Board. Together with the economic reforms initiated by your government, the positive measures taken so far are contributing to restoring confidence in the economy.

Norwegian Ambassador speaks during the CABS meeting a- Pic By Solister Mogha/Mana

Since Her Excellency President Banda took the reins of power, there have been substantial improvements in political, economic and democratic governance, coupled with openness to discuss, with the political opposition and other stakeholders, difficult issues affecting Malawi and its society. As a result, there is also new trust between development partners and the Government, and this will help us to move forward in the work we do together, in fighting poverty. It is now important to continue on this path and resolve issues as they appear, with a view to improving conditions for an economic growth that benefits all, and to strengthen democratic and economic governance, on which provision of budget support is based.

Let me re-iterate the commitment of the development partners to Malawi and our efforts to help and work with the country in improving living conditions and reducing poverty. As you know, when budget support was put on hold, we continued our support to Malawi in other areas and reallocated grants to areas facing special challenges, such as the subsidy program for agricultureand the procurement of essential drugs. During the review in May this year we committed ourselves to reconsider our budget support and indicated a plan for disbursements based on our different procedures.

So far, we are well aligned with this plan, and the African Development Bank and the World Bank have already disbursed about US$ 90 million in budget support. We have also all made efforts to come forward with support in other areas, such as the reinstatement of pooled funding to the health sector program and increased funding to social protection programs. Since this July the development partners have contributed with at least 270 million USD, through different programs and projects including the budget support.

By the end of this year development partners are likely to have supported the new government and the people with more than half a billion dollars. We are continuously preparing new projects and support, either through the government or civil society. For instance are several donors now in the final preparations for agreeing on the support to the Farm Input Subsidy Program for this year. No one should doubt, therefore, that we as development partners have responded positively to the reforms undertaken by Government and the needs of the country. In short, we are fast-tracking support to specific sectors as well as keeping what was agreed on disbursement of budget support.

We are all aware that Malawi is going through some very difficult times, with the inflation eating into the standard of living of most Malawians. This is, unfortunately, part of the necessary economic adjustment. It should be made abundantly clear, however, that the responsibility for the difficulties we are facing today, lies with the previous administration that over a lengthy period mismanaged the country’s economy, brought shortages of goods and foreign currency, and whose lack of action threatened to bring the economic and business activities to a standstill. Part of this was the ill-advised so-called “zero deficit budget”, which, ironically, increased the budget deficit enormously. It has been and is the bitter task of the new president and her team to take the necessary action to put the country on the road to recovery and to sustainable growth once again. In those efforts, Her Excellency has the full support of the development partners. And one would be well advised not to blame the doctor for the disease, even if the treatment is harsh.

As we all know, budget support was put on hold in 2011, due to lack of progress in addressing  concerns on a number of underlying principles required for the support, as they are laid down in the Joint Framework Agreement.  These principles include commitment to sound macroeconomic management, commitment to good governance – including sound public financial management, accountability and effective anti-corruption programs – as well as respect for human rights, democratic principles, and the rule of law.

We have seen commendable progress in many of these areas over the last months. In terms of governance, there has been general improved relationship and trust with non-governmental organizations, the political opposition, media, and the international community. Media freedom has improved with the repealing of Section 46 of the Penal Code, deemed restrictive on media freedoms. Together with approval and issuing of television and radio licenses, this action provides a good platform for further building Malawi’s already independent media institutions. A Commission of Inquiry was set up and a report produced on the deaths related to the demonstrations and riots of the 20th and 21st July last year. These will contribute to restore confidence between the police and the people. The second Malawi Growth and Development Strategy (MGDS II) and the Social Support Policy have been approved, providing a good foundation for the fight against poverty. In addition, women and children’srights are now put higher on the agenda, and the Disability Act was passed, giving better protection to vulnerable groups. The laws regarding the rights of sexual minorities were referred to the Malawi Law Commission, and a national dialogue on these issues is to take place. These examples are some of the important achievements Government has made so far.

We trust that the governance reforms will continue and that outstanding issues will be addressed. Good preparations for the upcoming tripartite elections in 2014 are important to secure democratic rights. The support to women’s rights and fight against gender based violence need to be backed by enactment of laws, such as the Gender Equality and Marriage, Divorce and Family Relations Bills. Strategies as well as policies need to be implemented consistently to see results. Media freedom needs to be protected even in times when situations get tough. An Access to Information Policy and Access to Information Bill will contribute to promote media freedom.

We also continue to see challenges in the area of public financial and economic management. As we all know, sound systems for such management are the basis for budget support. We therefore call upon Government to ensure smooth and sustained implementation of the Public Financial and Economic Reform Program, to secure a well-coordinated approach and long term solutions, and in this way, build confidence in such systems. And we welcome the indication that this work now will have higher priority in the Ministry of Finance.

The president is committed to a new drive against corruption. To achieve results in this area, a strong and independent Anti-Corruption Bureau and the restoration of the full functionality and credibility of the National Audit Office (NAO) is important. Revelations of abuse of public resources at the National Audit Office is a concern and is affecting the perception of accountability in use of public resources. We commend the Government for taking action to improve the situation and appreciate that these are difficult issues. However, we urge the Government to finalise the new management arrangements as soon as possible so as to enable the proper functioning of these important institutions.

As part of the preparations for this review we have together looked atresults on the targets set in the Performance Assessment Framework. An overview of the performance indicators showsthatprogress continues to be registered in public financial management. Significant challenges still remain in this area and we expect to see increased efforts the next years with the implementation of the Public Financial and Economic Management Reform Program.We also note that economic growth registered significant achievement this time, up from almost no achievement in May this year. However, social sectors continue to struggle and we need to put our effort together in this area. On governance it has been difficult to identify targets that are not backwards looking, and the reported performance is not a reflection of the new government’s actions only. We expect that the performance will improve to next October, when the target will measure progress over the whole year.

 

Coming back to the Malawi economy, the development partners in CABSs recognize the bold steps Government has taken to address the macroeconomic imbalances brought about by both international and internal economic factors. Government devalued the kwacha to address the exchange rate overvaluation, adopted a flexible exchange rate regime, and eliminated foreign exchange restrictions on private transactions. Domestic petroleum prices were adjusted to reflect international costs and an automatic fuel price adjustment mechanism was designed and adopted to ensure that  changes in in the costs of petroleum import were passed on to retail prices. These necessary decisions were made against a background of an over-valued exchange rate that had crippled Malawi’seconomy, leading to widespread shortages. Many businesses had been pushed to the edge of bankruptcy, and the artificial exchange rate acted like a tax on exports.

This change in policy has given fruits: Foreign exchange is now available on the market and fuel shortages have also eased. Together with the new budget policy, these reforms made it possible to reach an agreement with the IMF in July 2012 for a new Extended Credit Facility program. These are major achievements. And we should keep in mind that the aim of these policy reforms is to help restore and consolidate macroeconomic stability, enhance productivity in the private sector and strengthen Malawi’s external competitiveness.

It is vital that reforms are sustained for Malawi to achieve the long term growth that benefits all. A market based exchange rate is essential to keep foreign exchange markets working and allow Malawian firms to take advantage of their export earnings and create jobs. And continued prudent fiscal and monetary policy is necessary to contain inflation.

It is true, however, that the reforms have had negative impacts. Growing inflation brings hardship for the common man and woman. Unfortunately, all this is part of the economic adjustment process necessary to reduce payment imbalances. The fuel prices have increased drastically. Let us remind ourselves, then, of the calculation you, Honourable Minister, made in your budget speech, that a continued fuel subsidy for 2012 would be at a cost of 36 billion kwacha. Government’s savings from removal of the fuel subsidy are making more resources available for pro-poor programmes.

Measures to meet the challenges are and will be important for some time, and it is essential that we succeed with the social protection and food security programmes that are being implementedby Government and donors.  We commend the Government for releasing 25,000 MT of grain from the Strategic Grain Reserve for the food security programme and are encouraged to hear you are considering releasing more. A number of donors are also increasing their contributions to these important safety net programmes to try to help the hardest hit of the population through this difficult time. The World Bank expects to disburse over 60 million USD for social protection programs before the end of this fiscal year, DFID, Irish Aid and Norway are preparing support for the FISP program, and EU, Germany and Irish Aid are contributing the scaling up of the Social Cash Transfer program, to mentions some of the on-going efforts.

The need for the policy measures mentioned above, but also for longer-term efforts to boost growth that benefits all, has been brought into sharp focus with the recent release of the Integrated Household Survey from National Statistical Office. The survey showed that poverty has not declined as much as we hoped for over the last years, despite strong economic growth, significant aid inflows and various large-scale Government programmes targeted at the poor, such as the agricultural subsidy program. With only a marginal and statistically non-significant decline in the poverty rate from 52.7 per cent in 2004/05 to 50.7 per cent in 2010/11, it is evident that Malawi will have problems reaching the Millennium Development Goals concerning poverty by the 2015 target date. This means that both we as donors and the Government have to reconsider our strategies to find out where we failed and where we can see results, and from this improve our efforts, ways of working, coordination and prioritization of key issues.

The CABS development partners,  are therefore pleased to note that the Government of Malawi has reviewed the priorities in the Malawi Growth and Development Strategy II (MGDS II) by coming up with the Economic Recovery Plan. Together we have to ensure that thepriority areas of the Economic Recovery plans are reflected in the annual budgets as well as in donors’ support.

Finally, Honourable Minister, let me once again emphasize our appreciation for the continued open and frank dialogue we have enjoyed with your Government. This Review had a tight preparation lead time, which you and the officials in your Ministry have met. On behalf of the CABS development partners, I extend my heartfelt thanks to you and the Ministry of Finance for taking the lead. I trust that dialogue and understanding will continue up to the next review in March 2013.

 

  • Asbjørn Eidhammer, Ambassador, Royal Norwegian Embassy:  CABS Review 2 October, 2012
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