When the DPP administration took back government in May 2014, the economy was bad. Apart from gross incompetence of Joyce Banda’s administration, a high currency devaluation of around 50% with an immediate flotation of the exchange rate regime and automatic fuel pricing mechanism in 2012 and the Cash-gate corruption scandal of 2013 bruised the economy really bad.
Among other indicators of an ailing economy in the ICU, inflation skyrocketed to about 30% and the currency was very unstable. And donors withdrew budgetary aid. This means that Mutharika inherited a hopelessly dysfunctional economy.
To resuscitate such an ailing economy into recovery and stability, Mutharika’s government needed to prescribe a proper dosage of fiscal and monetary policy mix.
The latter however, is more of the responsibility of the Reserve Bank of Malawi (RBM) than the central government. As a result, to give a proper and easy to understand assessment, I will analyze the fiscal policies more than the monetary policies.
FISCAL POLICY ANALYSIS
Fiscal policies are about the management of government spending and tax administration. Government decides how to spend and what to tax or not to tax and how much to tax in order to reduce unemployment, stabilize general prices and stimulate economic activity.
Government might adopt an expansionary fiscal approach to spend more and cut on taxes to inject more money into the economy or strict fiscal approach to cut on government spending and increase taxes. The expansionary approach stimulates economic activity because it puts more money in the pockets of the workers, business people and leaves companies with more money to reinvest or declare dividends to shareholders who in turn spend on the economy.
Though Mutharika’s administration showed some strict fiscal policy stance through Mutharika’s refusal to get salary increment for the presidency in 2015, and cutting on cost of running government through a lean Cabinet and reduced local and international travels for the president and cabinet, among other strict fiscal measures, Mutharika generally adopted an expansionary fiscal approach. He inherited an economy that upon diagnosis, showed no sign of life.
Therefore, he needed to induce activity to recover the economy back to life and stabilize it for growth. He therefore increased some government spending and cut back on some taxes on income, businesses and companies.
For example, in the very first budget of 2014/2015 financial year, the DPP administration increased budgetary spending by 16.3% for both the recurrent and development budgets. The administration also increased salaries and wages by 24.4 %. In the 2017/2018 budgets there were further increases in the total expenditure budget with an even higher percentage increase in the development budget.
This was a sign that Mutharika was more focused on spending especially on development than consumption in order to control unemployment and stimulate more economic activity for stability and growth of aggregate economy.
Furthermore, in the 2018/2019 budget, government again increased the development budget with 25.6% and made another increase of 24.3% in the recurrent budget on wages and salaries for the public service. Junior workers had a 20% salary increase, while senior workers got a 10% increment.
The government also increased spending through recruitment of close to 17,000 teachers and medical practitioners collectively, and injected about MK10 billion into the economy for youth internship program of more than 5000 youths, and the tree planting and care program for the employment of more than 10,000 youths.
Apart from increasing government spending, the Mutharika administration also introduced some tax cuts to stimulate aggregate demand and incentivize investment. For example, in the very first budget of 2014/2015, government reduced corporate tax from 33% to 30% in the communication industry, removed Valued Added Tax (VAT) on material for the production of strategic products like fertilizer and medicine, removed import duty, import excise and VAT on minibuses of less than 5 years from year of make and removed duty on goods imported by banks including ATM machines, point of sales devices and mobile banking vans.
In the 2017/2018 budget, government increased the tax free income bracket from MK20, 000 per month to MK30, 000 per month and increased minimum wage from 19,000 to 25, 0000 per month. This meant that everyone whose salary is at the minimum wage is exempted from PAYE tax which increases spending potential of workers at the bottom.
ECONOMIC RECOVERY AND STABILITY INDICATORS
Has Mutharika succeeded to recover the economy from dysfunctional and stabilize it for growth in his first term? We do not need to debate on this because understanding economic performance does not require guesswork or feelings. The economy speaks for itself through some indicators like inflation rate, unemployment rate, GDP growth rate and the like. Therefore, let us look at these indicators starting with the inflation rate.
In 2014, the inflation rate was 24% which was among the high rates in the world. But the Mutharika administration has managed to drop the inflation rate to a single digit rate of 8.9 % as of 2018. Apart from stabilizing general prices on the market, the DPP administration also managed to stabilize the unemployment rate. For the entire first term of Mutharika, unemployment rate did not rise.
It was stabilized at 5.9% despite economic challenges and the ever increasing supply on the labor market. This was the lowest unemployment rate that Malawi has ever reached in history and it was projected to drop further to 5.8% as at the end of this year.
Apart from successfully reducing inflation rate and controlling unemployment rate, Mutharika also managed to stimulate economic activity into growth. In 2017 the economy finally responded positively to Mutharika’s fiscal management and the GDP growth rate rose sharply to 5.1% from 2.9% in 2016 and 3.3% in 2015.
This growth was about 5 times higher than the average growth in the SADC region and it is expected to rise to more than 6% in 2019. This is a very impressive economic management because Malawi’s agro-based economy was hit hard by natural disasters and erratic rains and there was no budgetary aid.
These factors made the job of recovering, stabilizing and growing the economy of Malawi an impossible task. But Mutharika has clearly succeeded against odds and I am calling him “the economic miracle worker.”
MONETARY POLICY INDICATORS
Additionally, Mutharika’s excellent fiscal approach provided a good environment for sound monetary policy administration. For example, the exchange rate for the Kwacha has been stable and predictable throughout the first term of Mutharika’s presidency. In 2014 December, the Kwacha appreciated and continued to appreciate until the following year in March when it stabilized.
In other cases, the currency appreciated against the US Dollar and other currencies of advanced and emerging global economies. For instance, in June 2018, the Kwacha appreciated against the US Dollar, and also appreciated against major currencies of trading partners in Asia like the Japanese Yen, Indian Rupee and stood firm against the Chinese Yuan, as it appreciated against other African currencies too in SADC including the Zambian Kwacha.
The RBM has also been able for the first time in history, to have foreign exchange reserves that cover the country for importation of more than 3 months. In August 2018 for instance, the reserves amounted to more than US$746.1 million which covers for close to 4 months.
The RBM also dropped interest rates from 25% in 2014 to 16% as of the end of this year. This was very close to 13% which is the lowest that Malawi has ever reached in history and it was also reached only by the DPP administration in 2010.
Mutharika’s economic success is indisputable. That is why the World Bank, IMF and the international community have continuously given Mutharika votes of confidence is his economic leadership and resumed aid. The World Bank Board of Executive Directors resumed budgetary aid to Malawi in May 2017 with an approval of $80 million and the IMF said that Mutharika’s economic performance has been satisfactory and the Board approved a three-year arrangement of $108.2 million in April 2018 and approved disbursement of the ECF worth $15.4 million in November 2018.
Mutharika has performed well with the economy and in some cases he has performed better than any president since 1964. But why are some people claiming that Mutharika has failed the economy? There are two reasons: the first one is negative perception.
Their minds are just set on negativity against Mutharika and DPP which puts them in a state of denial against anything good and positive about the Mutharika administration. They can’t admit that they are seeing what they are seeing because it is positive about Mutharika.
The second one is ignorance. Most people claiming that Mutharika has failed the economy just don’t know what economy means. They also don’t know the indicators of an economy that has recovered, stabilized and is beginning to grow.
And worse still they think that because most Malawians remain poor and continue to suffer from poor public services delivery, poor public facilities, joblessness, and electricity blackouts among others, then Mutharika has failed the economy. Therefore, tomorrow I will prove that the poor people of Malawi have benefited from Mutharika’s successful economic management.