BUDGET PROCESSES AND PRIORITIZATION OF PUBLIC EXPENDITURE

By Anne Conroy, Ministry of Finance and Development Planning

Introduction

• The Farm Inputs Subsidy Programme (FISP) has been successful in terms of achieving food security at the national level. So Government remains committed to the FISP.

• This is despite high population growth, declining soil fertility and rapid rates of environmental degradation.

• Despite these successes, transient food insecurity affects a significant proportion of the population each year. Last year two million Malawians needed food aid. Imported food aid is very expensive. The cost of the humanitarian operation was around US$100 million last year.

• Although Government is committed to the FISP, financing the programme is a major challenge in the face of budgetary constraints and competing needs for resources.

Introduction cont.

This paper focuses on Budget Process and Prioritization of Public Expenditure and addresses:

a) Budget Prioritization Process.

b) Budgetary allocations to FISP over time.

c) Specific challenges related to the FISP Budget.

d) The need to improve efficiency and sustainability in the FISP.

e) The need for ownership of the Budget by all stakeholders.

Budget Prioritization Process and Allocations to FISP over time.

• The first step is to determine the total resource envelope for the three year Medium Term Expenditure Framework – estimating growth, revenue, resources from DPs.

• The Fiscal Framework is updated twice a year in consultation with the IMF.• There is currently limited “fiscal space” for the FISP. Fiscal space is defined as the

room in the Government’s Budget to provide resources for desired purposes without jeopardizing the overall macro-economic framework.

• A significant proportion of the Budget is non-discretionary – this includes salaries, transfers, pensions, and statutory and debt service obligations.

• Funds for Other Recurrent Transactions have been squeezed. Travel costs and personnel emoluments have increased as a proportion of the budget. This has reduced resources for generic goods and services – funding agricultural inputs, drugs and Education materials.

• For example, in 2011/12 Budget, generic goods and services were 9.8 percent of GDP or 28 percent of total expenditure.

• A significant proportion of aid resources are non-discretionary – tied to specific purposes.

Budget Process and allocation to the FISP over time

• Efforts by Government to restore macro-economic balance were compromised by the cash-gate scandal in September 2013.

• This resulted in the suspension of General and Sector Budget Support by several Development Partners with devastating impacts (Mangani 2013)

• As a consequence, Domestic debt has increased to MK340 Billion and reported arrears are very high – these are being verified by the Auditor General.

• The 2014/15 Budget should reflect the priorities of the new Government and accommodate debt service obligations.

• This is why the Minister of Finance used the Appropriation Bill to roll-over the current Budget for four months.

• An IMF Mission is currently working with Government to finalize the macro-economic framework for the new Budget.

Budgetary allocations to Agriculture and FISP

• Malawi is committed to agricultural development – agriculture accounted for 18-21 percent of total expenditure from 2008 -2012.

• Agricultural expenditures are financed by local resources (55 percent) and external resources (45 percent).

• Donor funding for agriculture is extremely fragmented – 50 percent is financed off-budget.

• The FISP absorbs 69 percent of MoAFS resources and 51 percent of total sector spending.

• Non-FISP spending (agricultural research and technology development, soil and water management and agricultural commercialization are crowded out.

• The FISP also is very demanding of senior management time in MoAFS, this limits their ability to follow up on other programmes and may lead to reduced donor inflows . This is a significant opportunity cost.

Problems related to the FISP Budget

• The FISP Budget is always a difficult line item, subject to cost overruns. This is because all fertilizer is imported. Costs increase if the exchange rate depreciates.

• In early years of the programme, the amount of fertilizer distributed exceed the planned amount – leading to significant budgetary overruns.

• It is often difficult for fertilizer importers to access foreign exchange and open Letters of Credit.

• In 2011/12, the Kwacha was overvalued and importers could not access foreign exchange. The Minister of Finance Minister had to request DPs to reprogramme GBS to cover fertilizer imports. There were few problems in 2012/13. But in that year, aid doubled and GBS was MK100 Billion.

• This year, the cash-gate scandal and suspension of GBS has led to significant unpaid bills on the FISP Programme – which will have to be accommodated in this year’s budget.

Problems related to the FISP Budget

• Budgetary problems were compounded in 2013/14 due to the introduction of the Farm Inputs Loan Scheme outside the Budget and IMF Framework.

• Despite the suspension of aid, the Ministry of Finance attempted to maintain allocations to core Ministries (Agriculture, Education and Health).

• However, maintaining the overall Budget Framework requires strict adherence to the Budget Approved by Parliament and no approval of expenditure outside the agreed Budget Framework.

• The FISP has always over-run the Budgetary provision, this contributes to delayed payment of suppliers and has an adverse impact on overall Budgetary Implementation.

• Budgetary over-runs on the FISP generate arrears and also have major opportunity costs.

The need to promote efficiency and sustainability in the FISP

Sustaining returns to investment in FISP requires continued efforts to promote efficiency. The conference has highlighted many of the issues:

a) Ensuring productivity gains from high yielding maize and legume seed . There is need to reassess the optimal balance between seed and fertilizer. – given that hybrid maize has higher fertilizer use efficiency than local, and that legumes and other fertility enhancing interventions increase fertilizer use efficiency.

b) There is need to ensure that fertilizer is procured in as cost-effective a manner as possible. Options include i) launching tenders earlier in the year and ii) adopting the same process for fertilizer as seed – negotiating a voucher price and allowing private sector distribute inputs – this works with rather than against incentive structures.

c) Increase fertilizer use efficiency by i) getting it to farmers on time, ii) targeting appropriate combinations of nutrients for different soils iii) focus on restoring soil fertility and organic matter in the soil iv) scale up legumes and agro-forestry v) complement investments in the FISP with programmes of soil conservation .

The need to promote efficiency and sustainability in the FISP

• Reducing displacement of commercial sales of fertilizer and seed by better targeting and reducing corruption. The FISP should not be targeted at ultra-poor land and labour constrained households, or the wealthiest third of households who could purchase fertilizer on their own.

• Increasing the level of farmers’ contribution. The level of farmer contribution has declined and is now less than 5 percent. To promote sustainability, there is need to progressively increase the amount of farmers’ contribution to one third of the cost of fertilizer – as envisaged in the original programme design.

• The suggestion that flexible input vouchers should be piloted is also constructive. This would give farmers more choice of inputs – more seed, Urea rather than basal dressing fertilizer, investment in crops other than maize if this is what farmers prefer.

The need for ownership of the Budget by all stakeholders

• A budget is a plan. Successful implementation requires commitment by all stakeholders to cost –effectiveness ,to adhere to budgetary ceilings and not build arrears , be vigilant about fraud.

• There is also need for greater realism about what Government can provide . This is a very resource constrained environment where a minority of the population pays tax.

• We also need to be clear about opportunity costs – an extra MK10 Billion on FISP could pay the salaries of 20,000 teachers or reduce the shortage of Essential Drugs in our health centers.

• Sustaining expenditure on the FISP , Social Protection or education and health will require efforts in the following areas:

a) Domestic Resources Mobilization : we need to finance a higher proportion of expenditure from revenue. In 2012/13, revenue is estimated at around 24 percent GDP while expenditure was 40 percent GDP. There is need to promote efficiencies in revenue collection and to reduce tax evasion.

The need for ownership of the Budget by all stakeholders

b) Improve Public Financial Management – this is essential to restore confidence by tax payers and donors and ensure that public finances are managed in a transparent and accountable manner. PFEM reforms must be implemented by all Ministries, Agencies, Departments and Parastatals.

c) There is need to strive for a better balance between investments in the productive base of the economy and welfare. We have a gap of US$1 Billion in the Balance of Payments – this puts pressure on the Exchange Rate. There is need to prioritize and fully finance the National Export Strategy to generate the growth that is required to finance our welfare requirements.

d) Strengthen prioritization within the Budget. Ensure that procurement is as cost-effective as possible. Reduce travel costs and allowances. Reduce extravagant expenditure. Release resources for critical services for the population. This is the responsibility of us all.

The need for ownership of the Budget by all stakeholders

e) Strengthen aid effectiveness. This is with a view to reducing fragmentation and duplication and bringing more resources on-budget. In Agriculture alone there are more than 150 projects.

f) Continue to promote inclusive dialogue between all stakeholders in development to improve programme design. Include the Executive, the legislature, citizens, tax-payers, Development Partners, researchers, farmers organizations the private sector, civil society and vulnerable populations. This conference has highlighted issues – few of them are new, many are known. We need to think about how to use existing information more effectively.

As the Honourable Minister suggested, there is need to move beyond analysis towards implementing recommendations. Thank you to LUARNAR and IFPRI for organizing the conference. I hope the outcome will be a restructured FISP to promote efficiency and sustainability – to serve the Nation better.

Thank you and God Bless