On February 18, 2022, Finance Minister Sosten Gwengwe (MP) tabled his maiden national budget for 2022/23 FY of MWK2.84 Trillion. In its first reaction to the budget, Standard Bank Plc says the budget has set the tone for further recovery of the economy and reasserted the authorities’ commitment towards making cost of funds to the private sector cheaper. Chief Executive Phillip Madinga (PM) weighs in on the budget. Excerpts:
Q1: The 2022/23 budget has not covered much on the impact of the COVID-19 pandemic over the last two consecutive years. In your opinion how has Covid affected our economy?
PM: Much of the impact on the economy was felt in 2020, and the GDP estimate of 0.9 percent for that year supports this. Hence, we expect the impact of COVID to have been more of an issue in the just ended 2020/21 fiscus.
Globally economies were hit as a result of health restrictions imposed by most countries and regions, and Malawi is no exception. Effects of the pandemic on the economy included restrictions in trade, which reduced supplies of goods resulting in some price spikes leading to inflationary pressures on some import-reliant economies. In the first to second year of the pandemic, the fiscus experienced increased demand for financial resources to support the health sector which were material and, in a way, derailed achievement of some of the economic targets.
Q2: The economy grew from 0.8% in 2020 to 3.9% in 2021, driven by Mining, Quarrying, Manufacturing and the Hospitality sector. What was the bank’s role in those sectors?
PM: Growth in these sectors reflects an attempt to returning to normalcy, but it is not extraordinary growth. The bank continues to support these sectors through financing, banking and digital solutions to enhance their operations and efficiencies.
Q3: The 2022/23 budget sets a GDP growth projection of 4% on the basis of an anticipated increase economic activities in selected sectors. Do you think this growth is achievable?
PM: It can be achieved however, recent damage from the Tropic Cyclone Anna may adversely affect the projections. Another key assumption to this growth forecast being that the trajectory of the pandemic in months ahead will not be too disruptive to the economy.
Q4: The budget has underlined mining and quarrying as some of the contributors to the projected GDP growth. Are these sectors the new economic frontiers? What opportunities does the bank see in those sectors.
PM: We see an opportunity to diversify export proceeds and bolster the foreign exchange reserves position. Recently we have seen some positive strides with regards to improving the country’s capacity to better manage its natural endowments. For instance, the Reserve Bank of Malawi has started buying gold through its subsidiary, the Export Development Fund. We also note that a new owner has stepped in to restore affairs of Kayekera Uranium mine in Karonga. Malawi has long suffered trade deficits due to lack of productive capacities. What we are seeing in the mining sector is an encouraging indicator that there is an opportunity to create jobs and partner with the investors for the benefit of Malawi.
Q5: The budget has an estimated deficit of K884 billion or 7.7% of GDP, which is seen to be relatively lower than last fiscal year as government seeks to reduce on borrowing and control expenditures. How will this approach affect private sector?
PM: We expect that this should increase funds available to lend to the private sector and over time it may reduce cost of funds, though that may take material reduction in domestic borrowing. Where the market fully dictates prices, level of interest rates should reflect the status of determinants of interest rates. As much as the economic goals we have set around infrastructure development, food security and others would be best delivered in a low interest rate environment, it is detrimental to force the market to ‘give’ low interest rates whilst the determinants are off track.
Q6: The 2022/23 budget sets a domestic revenue target of MWK1.636 Trillion to be raised. How will this affect people’s livelihoods?
PM: Key here is what is the return on investments made out of these resources, the more transformative they are, the more they may compensate for the cost and price that Malawians will pay. The budget intends to improve rural livelihoods through the Constituency Development Fund-CDF line which has been increased, it is expected to create special economic zones which should support the small businesses and we feel these are some of the ways it will improve livelihoods. I believe this increase would or may complement very well the planned activities and establishment of secondary cities as espoused in the MW2063 by the National Planning Commission.
Q7: In what way will Standard Bank’s assist government achieve its revenue ambitions?
PM: Our digital banking platforms, namely 247 Online, Enterprise Online and Business Online for large business and corporates now make it easier for our customers to pay tax and for MRA to collect the revenue. Our digital banking is helping promote tax compliance as taxpayers experience flexibility, efficiency and convenience. Our channels are all inclusive cutting across different layers of client portfolios and ensuring seamless transactions for tax settlements and other statutory payments.
Q8: The Finance Minister, Sosten Gwengwe recognized foreign currency shortages and the country’s low forex reserves position as a key pressure point in budget implementation. In the 2020/21 fiscal year, the Malawi Kwacha lost value by about 7%. What do you think needs to be done to stabilize the local currency and restock forex reserves?
PM: The budget recognizes foreign exchange supply constraints that are affecting the country and improving that is key to getting to the desired outcome. It intends to encourage import substitution partly through establishment of special economic zones. It is also encouraging speedy implementation of donor funded projects to realize the foreign exchange flows attached to that. We need urgent and impactful actions to address current shortages and we believe the budget is setting that tone. Further to the provisions in the budget, we can do more to diversify export base through production of high value export crops, supporting production of goods for export. Restoring donor confidence and getting an IMF program fully back on track will be critical in obtaining stability in the markets.