PARLIAMENT OF MALAWI

NATIONAL ASSEMBLY BUDGET OFFICE

BUDGET ANALYSIS MANUAL

FOR

MALAWI PARLIAMENTARY BUDGET OFFICE

TABLE OF CONTENTS 1. Table of Contents ...... 03 2. List of Figures ...... 05 3. List of Tables ...... 06 4. LIST OF ACRONYMS ...... 07 5. FOREWORD ...... 09 6. Preface ...... 10 7. Acknowledgements ...... 11

1.0 UNDERSTANDING THE BUDGET ...... 12 1.1 Introduction ...... 13 1.2 Government’s Role in the Economy ...... 13 1.3 Budgeting in Historical Context ...... 13 1.4 Objectives of the Public budget ...... 14 1.5 Importance of Government Budget ...... 14 1.6 Budget Classification ...... 15 1.7 Budgeting Methods ...... 15 1.8 Basis for Budgeting ...... 16 1.9 Principles of an open Budget system ...... 17 1.10 Parliament and the Budget ...... 17

2.0 THE BUDGET PROCESS IN MALAWI ...... 20 2.1 General Overview ...... 21 2.2 The Principles of Budgeting in Malawi ...... 21 2.3 The Budget Cycle in Malawi ...... 21 2.4 Parliamentary Budget and Financial Oversight ...... 27 2.5 Budget Modernization ...... 28 2.6 Medium Term Expenditure Framework (MTEF) ...... 29 2.7 Local Government Finance ...... 29

3.0 LEGAL BASIS FOR BUDGETING IN MALAWI ...... 30 3.1 Constitutional Basis for Budgeting ...... 31 3.2 Budgeting and the Public Finance Management Act ...... 31 3.3 Budgeting Principles underlying PFM Act ...... 32 3.4 PFMA and Stakeholder Roles ...... 33 3.5 The Public Audit Act ...... 34 3.6 Reserve Bank of Malawi Act ...... 35 3.7 Inter-Governmental Fiscal Relations ...... 35

4.0 BUDGET FRAMEWORK IN MALAWI ...... 36 4.1 General Overview ...... 37 4.2 Domestic Revenue ...... 39 4.3 Foreign Revenue ...... 43 4.4 Expenditures ...... 45

5.0 BUDGET ANALYSIS I: EXPENDITURE ANALYSIS ...... 49 5.1 General Overview ...... 50 5.2 Techniques of budget analysis ...... 50 6.0 BUDGET ANALYSIS II: REVENUE PROJECTIONS ...... 57 6.1 General Overview ...... 58 6.2 Rationale for Imposing Taxes ...... 58 6.3 Considerations for Revenue Policy and Economic Structure ...... 59 6.4 Conducting Tax Expenditure Analysis ...... 60 6.5 Forecasting of Future Tax Revenues ...... 61

7.0 BUDGET ANALYSIS III: DEBT & AID ANALYSIS ...... 64 7.1 General Overview ...... 65 7.2 Foreign Aid ...... 65 7.3 Debt Analysis ...... 69

8.0 BUDGET ANALYSIS: HUMAN RIGHTS PERSPECTIVE ...... 72 8.1 General Overview ...... 73 8.2 Framework for HRBA ...... 73 8.3 Qualitative Methods HRBA ...... 74 8.4 Quantitative Methods of HRBA ...... 74 8.5 A Rights-based Approach to Revenue Analysis ...... 76

9.0 BUDGET MONITORING AND CONTROL ...... 78 9.1 General Overview ...... 79 9.2 Generic Budget monitoring ...... 79 9.3 Monitoring Programme Based budget ...... 80 9.4 Budget Tracking ...... 80

10. REFERENCE ...... 83

11. APPENDICES ...... 85 APPENDIX 1: FORMAT FOR BUDGET ANALYSIS ...... 86 APPENDIX 2: LEGISLATIVE. IMPACT ANALYSIS OF BILLS ...... 89 APPENDIX 3: BUDGET CALENDAR & ROLE OF PARLIAMENT ...... 91 APPENDIX 4: THE PUBLIC ACCOUNTS COMMITTEE & AUDITS ...... 94 APPENDIX 5: GOVERNMENT ASSURANCE COMMITTEE ...... 96 LIST OF FIGURES Figure 1. Evolution of Functions of Parliamentary Budget Office ...... 19 Figure 2: Budget Cycle ...... 22 Figure 3: Elements of Budget Preparation ...... 22 Figure 4: Elements of Budget Approval and Appropriation ...... 23 Figure 5: Elements of Budget Execution and Implementation ...... 24 Figure 6: Schema of Budget Control and Monitoring ...... 26 Figure 7: Elements of Budget Modernization in Malawi ...... 28 Figure 9: Schema of Budget Framework ...... 37 Figure 10: Institutional Arrangement for Aid Coordination and Monitoring ...... 68 Figure 12: Phases in Monitoring Programme Based Budget ...... 80 LIST OF TABLES Table 1: Functional Classification of the Budget ...... 16 Table 2: Congruence of Malawi Constitution and PFM Act ...... 35 Table 3: Parts and Issues in the PFM Act ...... 36 Table 4: Malawi’s Budget Framework (Million MK) ...... 42 Table 5: Distribution of Domestic Revenues and Taxes ...... 46 Table 6: Domestic Revenues by Taxes and Non-tax Revenues ...... 47 Table 7: Trends in Grants Received by Malawi (In MK) ...... 48 Table 8: Trends in Public Expenditures ...... 51 Table 9: Development Expenditure to Selected Votes (MK Bn), FY2016/17 ...... 52 Table 10: Budget Allocation by MGDS Priority (Millions MK) ...... 56 Table 11: Sectoral Share Allocation by MGDS Priority ...... 57 Table 12: Growth Rates of MGDS Sectoral Allocations 2011/12-2014/15 ...... 58 Table 13: Real Value using Allocation to Health ...... 59 Table 14: Adjusting Using Exchange Rate ...... 59 Table 15: Fiscal Regime for Paladin’s Keyelekera Mine ...... 67 Table 16: Typology of Aid ...... 73 Table 17: Evolution of Aid ratios for Malawi (2000-2015) ...... 74 Table 18: Malawi Aid Dependence (Debt Per capita) ...... 74 Table 19: Threshold for Debt Sustainability ...... 77 Table 20: Malawi Sources of External Debt ...... 78 LIST OF ACRONYMS AfDB African Development Bank BADEA Arab Development Bank CAADP Common Approach to Agricultural Development Policy CABS Common Access to Budget Support CIAU Central Internal Audit Unit COMESA Common Market for Southern and Eastern Africa DCS Development Cooperation Strategy DfID Department for International Development (UK) DSA Debt Sustainability Analysis EFA Education for All (UNESCO) EIB European Investment Bank ESC Economic Social Cultural (Rights) EXIM Export and Import FIFO First In & First Out GBS General Budget Support GDP Gross Domestic Product GFEM Group on Finance Economic Management GoM Government of Malawi HIPC Highly Indebted Poor Countries HLF High Level Forum HRBA Human Rights-based Budget Analysis HRMIS Human Resources Management Information System ICESCR International Convention of Economic Social & Cultural Rights IDA International Development Association IFAD International Fund for Agricultural Development IFMIS Integrated Financial Management Information System IMF International Monetary Fund LDC Less Developed Countries LGA Local Government Act LIFO Last In First Out MAREP Malawi Rural Electrification Programme MBS Malawi Bureau of Standards MDA Ministries Departments & Agencies MERA Malawi Energy Regulatory Authority MGDS Malawi Growth and Development Strategy MLPSCTFA Money Laundering, Proceeds of Serious Crime and Terrorist Financing Act MoF Ministry of Finance MoFEPD Ministry of Finance, Economic Planning and Development MRA Malawi Revenue Authority MTEF Medium Term Expenditure Framework NAC National Aids Commission NAO National Audit Office NEPAD New Partnership for African Development NGO Non-Governmental Organization NLGFC National Local Government Finance Committee ODA Overseas Development Association ORT Other Recurrent Transactions PAC Public Accounts Committee PAYE Pay As You Earn PBB Programme Based Budget PBO Parliamentary Budget Office PFEM Public Financial and Economic Management PFM Public Finance Management PFMA Public Finance Management Act PODA Public Officers Declaration of Assets PPDAA Public Procurement and Disposal of Assets Act PPG Public and Publicly Guaranteed [Debt] PRSP Poverty Reduction Strategy Paper PSIP Public Sector Investment Program PTA Preferential Trade Area PVEHS Plant & Vehicle Hire Service RBM Reserve Bank of Malawi SADC Southern Africa Development Community sbs Sector Budget Support sps Sector Project Support SSA Sub-Sahara Africa UNESCO United Nation Education Scientific and Cultural Organization VAT Value Added Tax WHO World Health Organization ZBB Zero Based Budgeting FOREWORD One of the key objectives of the Parliament of Malawi as outlined in the Parliament of Malawi 2015 – 2020 Strategic Plan, is to increase the capability and capacity of the Parliament to legislate and hold the Government to account. This objective is fundamental to achieving the three functions of Parliament, which are to; legislate, oversee and represent. Through overseeing the National Budget, the Parliament is in a position to effectively hold the Government to account.

The role of Parliament in the budget process can be strengthened by increasing technical and institutional capacities. This manual was therefore developed to serve as a simple tool for Members of Parliament, the Parliamentary Budget Office, other Parliamentary staff, and stakeholders, in monitoring or tracking the National Budget and assessing its impact on Policy Implementation.

The manual outlines the budgeting process in Malawi, the budget cycle, the legal basis for budgeting, the budget framework and techniques of budget analysis. The manual has also dedicated a section to the emergence and evolution of Parliamentary Budget Offices. The creation of PBOs within Parliaments is emerging as an institutional innovation that can enable the Members of Parliament to engage in the budget process in a more objective, effective and responsible manner. With the PBO and this manual, the role of Parliament in the budgetary and fiscal process has the potential to go beyond the annual approval of the Appropriation Bill, to encompassing the complete budget cycle.

I hope that you will find this manual useful.

Fiona Kalemba Clerk of the Parliament of Malawi PREFACE Public budgets transform policies of Government and its political commitments into decisions on revenue generation and expenditure to meet the various competing needs of a nation. The development of any nation is significantly reliant on properly executed budget processes. Whereas the outcome of budgets can directly or indirectly affect all of its citizens, there is a tendency of budgets having outright implications on the well-being and prospects of certain groups of people, including the poor and marginalized.

The Government of Malawi uses public budgets as its key macroeconomic lever to achieving some of its strategic priorities such as economic growth, poverty alleviation, and improved living standards. Even though well-intentioned public policies are a necessary condition for achieving progressive development, such policies require adequate public resources to ensure effective implementation. Further to that, proper monitoring of allocated resources is required to ensure that funds reach intended beneficiaries such the poor and marginalized.

The poor and marginalized are typically devoid of political voices and as such are unable to advance their own interest and hold the Government accountable. The Parliament thus has the legal mandate to legislate, represent, and oversee the manner in which publically available resources are being efficiently and equitably distributed to all sectors of the economy and different groups of people. This duty of Parliament to represent the people of Malawi in holding the Government liable in all its public expenditure processes is embedded in the Constitution and the Public Finance Management Act.

It is in the spirit of this manual to uphold the Constitution and principles of the Public Finance Management Act in guiding the manner in which the Parliament can carry out its legislative, oversight, and representation roles on budgets. This manual is an amalgamation of several tools and principles drawn from various resources too numerous to mention. In no wise does the manual assume to be exhaustive on the subject matter, but it undeniably provides a holistic picture of understanding budget analysis process in Malawi.

Mrs. Catherine Gotani Hara Speaker of the Parliament of Malawi ACKNOWLEDGEMENTS The development of the Budget Analysis Manual has been made possible through the leadership of the Parliament of Malawi, in collaboration with various partners and stakeholders. The Parliament of Malawi would like to acknowledge the technical input of the heads of sections and staff that comprised the core team which supported the development of the manual. The list of people who contributed to the development of the manual is attached in the Annex.

The development of this Manual was made possible through Parliament’s collaboration with the Malawi Parliamentary Support Initiative (M-PSI), a year-long project implemented by the African Institute for Development Policy (AFIDEP). The Parliament of Malawi would like to thank AFIDEP for providing technical assistance in the development of the manual. The Parliament of Malawi would also like to extend its appreciation to all M-PSI partners who provided invaluable inputs into the development of the manual, including the Ministry of Finance and the Malawi National Auditor Office.

Finally, the development of this manual would not have been made possible without financial support from the United States Agency for Development (USAID) through the Counterpart International – Supporting the Efforts of Partners (STEPS) program. The Parliament of Malawi is greatly appreciative of the continued support in receives towards the actualization of its three core mandates – legislation, oversight, and representation. 12 Budget Analysis Manual Budget Analysis Manual 13

1. UNDERSTANDING THE BUDGET 1.1 Introduction

This chapter introduces the reader to the public budget. It sets the context by first looking at the role of government as an actor in the economy. It then considers the historical evolution of the budgeting before addressing objectives and importance of the public budget, methods for budgeting and how the budget is presented (or classified). Finally, it addresses the role of Parliament in budgeting and analyses, including the emergence of parliamentary budget offices as technical arms of the legislature in budget and fiscal analysis.

1.2 Government’s Role in the Economy

The traditional view of government is one where government is a neutral umpire in the economy, ensuring fair play by requiring that all economic agents adhere to the rules of the game. In reality, government is an active actor with broader mandates in the economy whose attainment is dependent on the budget. These government mandates include

• Promoting Economic Growth: In most developing and developed countries, the government is a powerful actor in the economy, being the single largest buyer of goods and services. Thus, how it spends the money is a large determinant of the pace of economic development and improvement in the living standards of the people. • Maximization of Social Welfare. Government’s functions affect everyday lives of every citizen by determining what services it provides to improve welfare, and what policies and incentives it offers for a buoyant economy, employment, and the provision of social benefits to all. • Improvement of Income Distribution. The government uses tools at its disposal to reallocate resources in a way that promotes a more egalitarian distribution of resources. The reallocation of resources is necessary in order to achieve social and economic objectives. Government may levy high rates of tax on rich people and lower rates among the poor and also provide the latter with subsidies and public amenities. • Provision of Public Goods: This is a core function of government. The government allocates resources into areas and activities where the market and private initiatives are absent such as public sanitation, education, health etc. • Price stability: To maintain price stability in times of and correct business cycles involving depression characterized by falling output, prices and increasing unemployment or overheating, characterized by rising rates of inflation, followed by excess production. • Management of public enterprises: to manage public enterprises and arms-length oversight of parastatal entities like railways, electricity etc.

1.3 Budgeting in Historical Context

This chapter introduces various dimension of the public budget. Whether by design or default, all economic agents (households, firms and governments) must develop and use some sort of a budget or financial plan as a guide to the mobilisation and allocation of their resources. A study of household budgeting is personal finance, while firms operate under corporate finance and government budget are understood in the context of public finance.

An understanding of the historical origin of the budget can give insight into institutional architecture and 14 Budget Analysis Manual stakeholder in modern public finance and budgeting. The word budget stems from the Middle English word for the king’s purse, ‘budjet’, which contained the public funds. Rather than representing a briefcase or purse, in today’s parlance, “budget” is narrowly defined as a financial statement forecasting government revenues and expenditure for a period of time. Broadly, the budget is a comprehensive plan of action designed to achieve policy objectives set by government for the coming year(s).

An effective budget pursues three (partially competing) objectives: maintaining fiscal discipline, allocating resources in accordance with policy priorities, and efficiently delivering services or value for money. Budgets should be comprehensive, transparent and realistic. In order to promote these objectives, a budget should

Text Box 1: Definition and Contents of Budget

Public Budget: Financial statement forecasting government revenues and expenditure for a period of time

Contents of a Budget. Generally a budget contains information on the following 1. Actual receipts and expenditures from the previous year 2. Prospective plans, programs, projects, schemes and activities. 3. Resource position and income from different sources contain the following elements: a macroeconomic framework and revenue forecast, a discussion of budget priorities, planned expenditure and past outturns, a medium-term outlook and details on budget financing, debt and the government’s financial position.

1.4 Objectives of the Public budget

Government budgets are enacted into law by the legislature, which authorises the executive to spend funds in accordance with a set of appropriations. A collection of Public Financial Management (PFM) laws regulate how the approved budget should be executed. Through the budgeting process and actual budget expenditure, Government seeks to achieve a number of objectives including the following

1. Accountability. Legislative control and executive accountability are primary functions of the budget. In addition, within the executive, the budget allows for subordinate authority to account to one above in hierarchy of delegation. 2. Control. Seeks to ensure that moneys appropriated by legislature are spent strictly in accordance with appropriations law. Control implies hierarchy of responsibility for resources collected within the framework of accountability to legislature. 3. Management. Budgeting is an executive and managerial function. In many respects, budgeting systems are also management oriented systems since they involve planning, coordination, control and evaluation. 4. Planning. Budgeting provides a plan for action for the coming year. It allows for determination of short and long term objectives; determination of targets; and fixation of priorities

1.5 Importance of Government Budget

The budget is perhaps the most important law passed by parliament because it “fulfills a fundamental role as a guide for public sector management. The budget not only organizes and regulates public expenditures, it is also a general utility tool at many levels, viz:

1. Budget as Political Tool. A budget is a reflection of a country’s priorities and political commitments to expenditure. The budget states the global and programmatic intentions of the government in terms of Budget Analysis Manual 15

what it hopes to achieve through the funding (or not funding) of policies, services, and programs. 2. Budget as Economic policy tool. The budget is a representation, in money terms, of the nation’s activity or preference in national policy. 3. Budget as Administrative Tool: The budget is understood as the resource plan that serves for the utilization of financial, human, material and other resources. 4. Budget as an Accounting tool. The budget can be seen as a ledger of income and expenditures. However, the budget is not a balance sheet (exhibiting total assets and liabilities of Government on a particular date). 5. Budget as tool to further Human Rights: A budget can also be viewed as a process through which resources are allocated in fulfillment of the state’s obligations to respect, protect and fulfill human rights as prescribed in the bill of rights.

1.6 Budget Classification

Information on the working of the budget is obtained from the system of classification. Transactions of the government can be classified in four ways: by object of expenditure, organisations and departments, functions, and economic characteristics.

• Object-wise Classification. The budget is divided into sections according to organisational units/ departments or divisions. Expenditure is detailed by each category e.g. salaries and wages, pensions etc. (See Budget Framework in Chapter 4) • Functional Classification. The presentation of the budgeted expenditures is in terms of functions, programs and activities and projects. Functional classification is most appropriate under performance or programme-based budgeting. Table 1 presents the nomenclature consistent with this classification.

Table 1: Functional Classification of the Budget Term Definition Example Function Major division of government effort which Education provides distinct service Program Segment of function usually having an end Primary education identifiable with major organization Technical education Activity / A division of the programme into homoge- Construction of school blocks Project nous types of work or schemes Upgrading of Workshop

• Economic Classification. This approach categorizes government’s total expenditure into meaningful economic heads e.g. government investment and consumption. It provides an analysis of the transactions of government bodies according to homogeneous economic categories of transactions with other sectors of the economy directly affected by them. In Malawi’s annual Economic Report the following economic classification is adopted (i) Gross consumption (ii) Grants, subventions and transfers (iii) Pensions and gratuities (iv) Interest on debt (v) Gross fixed capital formation, and (vi) Loans and transfers

1.7 Budgeting Methods

There are a number of budgeting methods but the four basic methods are: incremental budgeting, zero- based budgeting (ZBB), Programme-based budgeting (PBB) and activity-based budgeting (see Figure 1 for a summary of these methods). A method of more recent vintage is performance-based budgeting.

• Incremental Budgeting. This is the most common and traditional method of budgeting and is used in most institutions. It is based on historical information and involves an incremental approach. In simple 16 Budget Analysis Manual

terms, the managers take last year’s allocation and adjusts for growth and/or inflation, plus or minus any significant changes in expected results. • Zero-based budgeting (ZBB). Unlike the history-based budget methods, with zero-based budgeting, each new budget period starts from scratch. Ministries Department and Agencies (MDAs) must come up with an activity plan and create a detailed budget which is specific to the next budgeting period. A more rigorous form of ZBB is priority-based budgeting which is designed to produce a competitively ranked listing of high to low priority discrete bids for resources which are called “decision packages”. This approach has commonly been applied to ranking bids for capital expenditure, but has recently been applied to more routine expenditure.

Figure 1: Types of Budgeting Methods

• Activity-based budgeting. Activity-based budgeting differs from traditional budgeting in that it concentrates on the factors that drive cost, not just on historical expenditure. As such, activity-based budgeting justifies expenditure on the basis of activities performed in relation to the predetermined drivers and places responsibility for cost control on the officer or manager with responsibility for the control of the driver. This approach is more common in corporate than public budget.

• Programme-based Budgeting. Programme-based budgeting is a method of organizing and classifying the budget according to programmes with shared objectives, instead of along administrative and input lines. Programme-based budgeting has proponents who argue that a Programme approach correctly focuses attention on outcomes rather than inputs. Its opponents argue that it makes the process more complex and weakens accountability.

1.8 Basis for Budgeting

Budgets may be prepared on a cash or accrual basis. Currently, Malawi is using a cash system.

• Accrual-based Budgeting. Under accrual based budgeting methodology, transactions are recognized as the underlying economic events occur, regardless of the timing of the related cash receipts and payments. Budget Analysis Manual 17

• Following this methodology, revenues are recognized when income is earned, and expenses are recognized when liabilities are incurred or resources consumed. • Accrual accounting, therefore, provides a broader measure of the burden of government financial commitments than cash accounting does.

• Cash-based Budgeting. Under this approach revenues and expenditures are recognized only when cash is received and paid respectively. The cash budget system is based on the principle that no cash is released to line ministries and for other budget heads unless sufficient funds are available in the Treasury’s main bank accounts to cover payments.

1.9 Principles of an open Budget system

In an open era, a budget system needs to be governed by principles and ideals that create a basis for trust and broad-based ownership. These ideals include participation, transparency, accountability, equity and inclusiveness.

• Participation: Refers to the level of involvement of all stakeholders/actors in the budget process, directly or through legitimate intermediaries. Ideally, the whole budget cycle needs the participation of various stakeholders. It is through participation that people’s perspective can be brought to the attention of policy makers. Participation also allows citizens to hold the government accountable, to identify weaknesses in a budget, to build consensus and to mobilize the stakeholders effectively to meet a budget target. • Transparency: Refers to the provision of comprehensive, accurate, timely and frequent information in useful formats on the country’s economic conditions and its budget policies. The principle of transparency is crucial to the budget process, mandating that information affecting budget decisions (budgetary and fiscal information, information on development thrusts and programmes etc.) should be accurate, true and portray the genuine state of the economy. In addition, this information should be made available and accessible to the general public, open to public debate and scrutiny, written clearly and readily understood by the public.

• Accountability: Refers to answerability of decision makers and implementers with regard to budgetary process at the formulation, approval, and implementation and performance review stages to those whose interests are affected by their actions or inaction. Accountability in the national budget has several dimensions: accountability for objects of expenditure (what the state spends on), state performance and results (achieving results and meeting objectives for which public funds are spent), and achieving the best value, quality and service for public money. In general, accountability requires a robust financial management system, robust financial management legislation, an independent auditor general and a strong parliament, active civil society, strong media and an aware electorate.

• Equity and Inclusiveness. Budgets should be governed by the principles of equity and inclusiveness in the sense that government budget allocations should be fair and just and apply to all citizens equally without discrimination. If there is any discrimination, it should be affirmative and seek to level the playing field for hitherto disadvantaged groups. This raises the need to ensure that there are opportunities that will maintain and improve the well-being of diverse groups in any given social political setting in terms of budgetary allocation.

1.10 Parliament and the Budget

Evolution of Budgetary Oversight

Modern budget institutions stem from the rise of the modern state in Western Europe in the 16th and 17th 18 Budget Analysis Manual centuries when the rising costs of warfare were leading to an increase in taxation. A higher tax burden led to public demand for greater accountability as citizens wanted a way to ensure public funds served public interests. This oversight role has come to be performed by a parliament containing elected representatives with the responsibility to approve and review the government’s use of resources.

In countries with a Westminster tradition or legacy, parliamentary budget oversight has historically been weak, with Parliament allowed to discuss budget proposals but forbidden from reallocating funds across budget lines. The question now is how can Parliament’s budget oversight capacity be strengthened? While some have argued that the role of parliaments in the budget process can be strengthened by increasing Parliament’s budgetary powers, recent evidence suggests that parliaments can improve their effectiveness and influence with the budgetary powers they already have if they strengthen their technical and institutional capacities. It’s to the latter end that the creation of Parliamentary Budget Offices (PBOs) within parliaments is emerging as an institutional innovation to enable the legislature to engage in the budget process in a more objective, effective and responsible manner.

The Role of Parliamentary Budget Offices

Governments are establishing PBOs with the primary goal of being the “technical arm” for budgetary and fiscal matters, in the various steps of the budget-making process and the different realms of fiscal policies. It is hoped that with the PBO, the role of parliament in the budgetary and fiscal process can go beyond the annual approval of the budget bill to encompass the complete budget cycle and the critical questions of policy and fiscal reform. PBO are expected to assist legislative oversight role in at least three ways:

• Budget and Fiscal Analysis. The PBO can help to identify and reduce data discrepancies; systematise, process, and disseminate information about the budget; and analyse and evaluate the Executive’s proposals. • Institutional Memory. The PBO can become a permanent repository and source of information and analysis for parliamentary officials regarding the various aspects of fiscal policies, budget management, and the fiscal impact of public policies. This is especially important in view of the high degree of turnover of legislators and parliamentary committees in each electoral cycle. • Budget Accessibility. The PBO can help simplify budget and fiscal information which is usually presented in terms of governmental accounting codes, expenditure classifications, and other financial administration requirements.

The Future of Parliamentary Budget Offices

Functions of the PBO seem to have evolved over time reflecting the extent of institutional development and the demand for the PBOs services. PBO evolve over three levels, starting with ones that conduct of “basic” or “essential” functions (e.g. limited budget analysis of prior year performance) to “intermediate function” which now include fiscal analyses (e.g. monitoring fiscal impact of bills) and overtime take on more “advanced functions” including macroeconomics analysis - debt and aid analysis. Budget Analysis Manual 19

Figure 1. Evolution of Functions of Parliamentary Budget Office 20 Budget Analysis Manual Budget Analysis Manual 21

2. THE BUDGET PROCESS IN MALAWI 2.1 General Overview

In Malawi, the key players in the budget process belong to both the executive and legislative branches. From the executive branch, the key players include the Ministry of Finance and Economic Planning and Development; Line Ministries, Departments and Agencies that prepare departmental/ministerial budgets, programs and priorities. From the legislature, the key players in the budget process include, among others: Members of the Budget Committee who undertake the initial review of the budget and all members of the legislature who participate in cluster meetings, committee of supply and eventually vote on the budget. In addition, the Local Government Finance Committee intermediates budget process for sub-national governments.

Dual budgeting has long been characteristic of Malawi’s budgeting in that Malawi’s budgets distinguish between current and capital items. The Ministry of Finance (Treasury Department) prepares the current budget and the Department of Economic Planning and Development prepares the capital or development budget. History suggests that allocations to capital budgets are in reality a residual and the Ministry of Finance usually trims the capital budget submitted for funding by the Ministry of Economic Planning and Development.

2.2 The Principles of Budgeting in Malawi

Based broadly on the PFM Act and other requirements of the Constitution of Malawi, the essential guiding principles of budgeting for the Malawi budget are: • Annuality: Presentation of budget is in respect of the ensuing financial year only. The grants authorized by the Legislature are valid for one financial year and cannot be carried forward to the next year. Consequently, the unutilized funds lapse at the end of the financial year. • Comprehensiveness: Budget includes the estimates of all foreseeable items of receipts and expenditure, contains full information on current programs and activities and presents a correct picture of the financial position of the government. • Specificity and Clarity: All items of incomes and expenditure shall be specific to programs and activities and not lump-sum provisions. This facilitates proper scrutiny at all levels and helps all concerned parties to monitor the budget and exercise budgetary control. • Principle of Accuracy: Gross underestimation and overestimation are serious budgetary irregularities. Thus budgetary provisions should neither be more nor less. This is of course subject to variations resulting from unforeseen developments or circumstances. • Non-diversion of funds: It is not permitted to divert funds authorized under one activity/item to meet excess expenditure elsewhere. • Periodic Review and Corrective Action: Controlling Officers are expected to be watchful as regards progress on both receipts and expenditure side. There should be continuous assessment of program and financial performance to encourage progress toward achieving goals.

2.3 The Budget Cycle in Malawi

The budget process is a cycle of sequential and inter-related budget activities regularly recurring within a fiscal year; it has been described as a fairly complex process, since new fiscal objectives are established each year which require several fiscal years to work out. In general, there are three essential elements of the budget process: planning, management and control. However, instead of looking at the elements it is customary to concentrate on the four stages in the budget process/cycle: (i) Budget preparation (drafting /design process), 22 Budget Analysis Manual

(ii) Budget approval and appropriation (legislative process) (iii) Budget execution (implementation process) and (iv) Budget control (performance monitoring – audit and evaluation process).

Figure 2: Budget Cycle

Stage 1. Budget Preparation & Formulation

In Malawi, the budget process is guided by a directive known as the Financial Calendar issued by the Ministry of Finance (MoF) to all Ministries Departments and Agencies (MDAs). This directive has a schedule to ensure that plans and budgets are prepared, approved, appropriated and executed accordingly. This stage has four phases; budget planning, submission, hearings and summation.

Figure 3: Elements of Budget Preparation

• Budget Planning. In this phase all public bodies are required to perform all the budget preparation activities, including mid-year program review for the current year, prioritization of activities and the development of work plans for the upcoming fiscal year. • Budget Submission. This phase starts in earnest with a budget call letter issued by the MoF to all MDAs. The budget call letter includes recurrent and capital budget ceilings, priority or focal areas to be considered in preparing the budget, the submission date of the budget request by the MDAs to the respective finance and economic development institutions at all jurisdiction. MDAs are required to respond to the budget call by preparing their budget according to the guidelines in their action plan. If an MDA fails to submit its budget request within the time specified in the budget call letter, MoF recommends a budget based on past information that it has. • Budget Hearing. The MoF conducts budget hearing with MDAs where the latter defend their proposed activities and budgets. Based on this discussion and government policies and priorities, the total expenditure ceiling, and allocated ceiling for each MDA, the requested budget will be reviewed, adjusted and consolidated. Budget Analysis Manual 23

• Summation. This involves summation of the recommended budget by MoF to be presented to the executive body – cabinet. The cabinet reviews and recommends the budget.

Stage 2: Budget Approval and Appropriation

After the recommended budget is reviewed and adjusted by the Ministry of Finance and approved by Cabinet, it is then presented to the National Assembly for approval and annual appropriation. Parliament reviews, proposes amendment and approves the budget.

Figure 4: Elements of Budget Approval and Appropriation

• Budget Speech. The Constitution of the Republic of Malawi (§175 (1)) obligates the Minister of Finance to lay before the National Assembly a statement of the estimated receipts and expenditure of government in respect of that financial year. The budget speech (Budget Document # 1) is a summary document which emphasizes the broad policy objectives intended to be achieved in the ensuing fiscal period and the measures necessary to achieve them. It also provides an aggregate evaluation of fiscal performance of the government in the preceding year. The budget speech is read by the Minister of Finance to the Legislature before the beginning of a financial year. It provides the background to the deliberations in Parliament as it sets out the government development agenda. • Budget Documents. Countries tend to have legislation and regulations about how the budget documents should be prepared and what information they must contain. In Malawi, when the Minister moves budget motion he also submits to Parliament four other budget documents, namely:

• Budget Document No 2: Economic Report; • Budget Document No 3: Financial Statement; • Budget Document No 4: Detailed Estimates; and • Budget Document No 5: Programme Based Budget. 24 Budget Analysis Manual

• Budget Deliberation. As will be discussed in Chapter 3, the budget is a legal document that is enacted by Parliament in compliance with the Constitutional provision and the Public Finance Management Act. The Constitution allows for 21 days of debate before voting commences. However, under its standing orders Parliament split the three weeks into two weeks of cluster committee hearings and one week of discussion in plenary. Cluster committees consider in more detail budget estimates. Following the budget motion, Parliaments splits into cluster committees and holds hearings with line Ministries, Civil Society, and other stakeholders. After two weeks of hearings, Parliament reconvenes and receives reports from party representatives on finance, chairs of the cluster committee and thereafter individual observations and contributions.

• Committee of Supply. At the expiry of 21 days, the Minister of Finance responds to observations made on the budget, starting with observations from Party representatives on Finance and chairs of committees. After curtailing general budget deliberations, Parliament enters into Committee of Supply where members consider individual vote provisions. Parliament votes (up or down) on individual allocations to Ministries, Departments or Agencies. The provisions of personal emoluments, other recurrent transactions and development (both Part I and II) of each line ministry are analyzed prior to voting.

• Budget Approval & Appropriation Bill. Upon passage of the budget motion, Parliamentary authority for the provision of funds is given by means of an Appropriation Act which authorizes the Minister of Finance to draw from the consolidated Fund and provide funding required for each vote. The bill is divided into statutory and voted expenditures and presents the provisions in recurrent and development categories. The bill includes the aggregate sums to meet expenditures in a financial year. In addition, Parliament also passes amendment to tax legislation incorporating tax measures proposed by the Minister in the Budget Statement, if any.

Stage 3: Budget Execution/Implementation

The executive can decide which activities are to be funded among those initially approved by Parliament in the budget. Budget execution and implementation includes funding and commitment control, cash management and budget alteration.

Figure 5: Elements of Budget Execution and Implementation Budget Analysis Manual 25

1. Funding and Commitment Control.

Once funds have been appropriated, the Ministry releases funds to MDAs using warrants. The Malawi government issues three types of warrants.

• General Warrant. Once parliamentary authority is obtained, the Minister of Finance authorizes the withdrawal from the Consolidated Fund the sums required to meet both recurrent and development expenditures. The authority to spend given by the general warrant expires on June 30th of every year, being the last day of the financial year that the provisions relates to. • Provisional Warrant. This is issued by the Minister of Finance, subject to section 178 of the Constitution, which permits the withdrawal from the Consolidated Fund the sums required to meet expenditures necessary to carry out Government business to the time an Appropriation bill is passed and is in force. Usually, this is at the beginning of a financial year where no funds have been appropriated. The aggregate sum allowable is a third of the approved budget of the preceding year. The provisional warrant ceases to apply when an appropriation act comes into force

• Special Warrant is issued in unforeseen circumstances such as natural disasters, war and epidemics. The special warrant is issued authorizing expenditures to specific responsible votes.

2. Cash management

In general, Malawi spends in advance, i.e. the Budget Division of the Ministry of Finance funds expenditure on the expectation of revenue collection before those revenues materialize. A major challenge for the Treasury is how to manage the flow in order to ensure that funds are available in time to meet payment obligations, while preventing arrears accumulation, reducing the need for government borrowing and maximizing returns on cash balances.

• Consolidated Account. In order to ensure central control over cash, the Constitution (§172) and PFM Act mandates the Malawi government to operate a Treasury single account, the Consolidated Fund (or MG 1). This is a set of linked accounts where all government revenue is deposited before it is allocated for expenditure purposes. • Cash flow. Once Parliament has passed the Appropriations Act, the Budget Division in the Ministry of Finance requests MDAs to submit their cash flow, i.e. a table that breaks down the MDAs annual budget into monthly funding requirements. A master cash flow developed by MoF provides an insight into the overall resource flow (both domestic and external) and the requirements by line ministries and departments. • Funding Management. Malawi has used different methods of managing transactions linked to the Consolidated Account, including (i) centralizing all payment transactions through the Consolidated Account; (ii) centralizing cash balances only but channeling funds to spending agency accounts for payment purposes; and (iii) operating an imprest system, whereby spending agencies are given advances which they clear on a regular basis.

3. Budget Alterations

In Malawi, under-spending is frequently as much of a problem as overspending. A failure to spend funds in a timely manner and in accordance with the budget points to an MDAs failure to deliver planned services and raises the need for budget adjustment.

• Virements. Unforeseen circumstances or poor budgeting may make it necessary to adjust the budget. Treasury instructions govern the transfers of funds between budget categories (virement). • Budget Supplemental. Substantial changes to the budget may require a budget supplemental. Preparing 26 Budget Analysis Manual

a supplemental is essentially a mini-budgeting process whereby an amendment to the budget is prepared and submitted for legislative approval. This process has been formalized and the Malawi Parliament meets in February to consider budget performance up to the mid-year (June-December) and approve any proposed changes in what comes out as revised budget.

Stage 4: Budget Control & Performance Monitoring

This stage involves monitoring activities in terms of annual MDAs reports and audit reports to the Parliament, i.e. accounts for expenditure, evaluation and audit. This process allows the budget to follow the priorities in the development strategy for growth and poverty reduction. This is addressed extensively in full in Chapter 8 of this manual.

Figure 6: Schema of Budget Control and Monitoring

• Internal Control (Executive Oversight). The Malawi Government created the Internal Audit Common Service in July 2003 to improve the use of public resources and financial mismanagement. It consists of the Central Internal Audit Unit (CIAU), which is under the Office of the President and Cabinet, and internal audit units in Ministries and Departments.

• External Control. The National Audit Office is a creature of the Malawi Constitution (§ 184) and is mandated by the Public Audi Act (2003) as amended in 2016, as the designated supreme audit institution. It champions probity in fiscal affairs by undertaking a program of audits: examining transactions, books, accounts and other public records of every ministry, statutory office, agency and public funds received by non-profit organizations, including relevant international organizations.1The Auditor General is mandated to audit and report on the public accounts of the Republic of Malawi at least once a year to Parliament through the Minister responsible for Finance.

1 Malawi National Audit Office Mandate, http://www.nao.gov.mw Budget Analysis Manual 27

2.4 Parliamentary Budget and Financial Oversight

The Malawi Parliament has a number of committees which derive their mandate either from the Constitution (Constitutional Committees), an Act of Parliament, Resolutions or Standing Orders of the National Assembly (Standing Committees and Portfolio Committee). Three of these committees are variously charged with oversight over aspects of fiscal and financial stewardship, viz, the Budget Committee, the Public Accounts Committee and the Government Assurances Committee.

The Budget Committee

The Malawi Constitution (§56(8)) established the Budget Committee which derives its mandate from the Public Finance Management Act, and Parliamentary Standing Orders 151 and 158. Its terms of reference include a. Studying and scrutinizing government reports on financial and economic issues, domestic and international borrowing policies, and information relating to international financial agreements. b. Consideration of financial proposals for, or budgets of, public expenditure or proposals for making of a tax; c. Reviewing bills with financial and budgetary implications; d. Examining the estimates of revenue and expenditure presented to the assembly by the Minister of Finance and report to the Assembly.

The Budget Committee is involved in budget formulation (through budget consultations), and Parliamentary Appropriation as discussed in Stage 2 above. Appendix 1 presents a detailed presentation of the Committee’s role in budget process.

The Public Accounts Committee

The Public Accounts Committee (PAC) is a standing committee and derives its mandates from Sections 18 and 19 of the Public Audit Act (2003) as amended in 2016, and Parliamentary Standing Orders 151 and 161. Its two major terms of reference are to a. Consider and report on audited public account by the Auditor General; b. Examine any other document laid before the Assembly on financial controls, accounting and auditing in relation to public expenditures.

PAC can also institute inquiries on projects or expenditures. Appendix 2 presents the process and protocols used by the committee.

Government Assurances (& Public Sector Reforms) Committee

The Committee derives its mandate from Standing order 151 and 162. Standing Order 162 gives it its formal title as the Committee on Government Assurance. It appears that the Public Sector Reform dimension has come in as an addition in response to the current administration’s launch of a Public Sector Reform Program. Its terms of reference are a. Scrutinize the assurances, promises and undertaking given by the Ministers of Government in the Assembly and report on the extent to which those assurances, promises and undertakings have been implemented b. Make observations on delays in implementation and the adequacy of the actions taken; c. Perform such other functions as may be ordered by the Assembly from time to time.

In essence the Committee’s mandate is monitoring and evaluation as it seeks to ensure that the public gets “Value for Money” for public resources. 28 Budget Analysis Manual

2.5 Budget Modernization

In the past two decades Malawi has moved to modernize the budgeting process. This modernization has been characterized by two developments:

• Legislative Overhaul. Malawi introduced legislation that sought to modernize public financial management, to discipline fiscal policy, and to increase transparency and access to information. In 2003, Malawi passed the framework law on financial management which includes the Public Finance Management Act, the Public Audit Act and the Public Procurement Act.

Figure 7: Elements of Budget Modernization in Malawi

• Automation. The Government of Malawi also moved to strengthen and modernize institutional arrangements for managing the budget cycle with the introduction of Integrated Financial Management Information Systems (which Malawi instituted in 2005). IFMIS has also linked other system like payroll (HRMIS)

• Programme-based Budgeting. In the past two decades government has changed the way it formulates the budgets. For the longest time, Malawi used traditional budgeting methods of line item or incremental budgeting. Later, performance based budgeting was established with contracts for top level public managers. Then five year ago program based budgeting was piloted and was scaled up in 2016/17.

These legal and institutional changes have also created a setting in which fiscal responsibility laws have defined new mechanisms for both vertical relationships among the various levels of government (e.g., central and local government) and horizontal relationships among government bodies (e.g., relationship between MoF and sectoral ministries, constitutional bodies and state owned enterprises). Budget Analysis Manual 29

2.6 Medium Term Expenditure Framework (MTEF)

Rationale. Although budgets are usually approved on an annual basis, many projects and programmes take more than one year to implement or may have future financing implications. Such costs should be indicated in the budget and factored into the budget debate.

Under the MTEF, government publishes 3-year budgets, but only one year has definite budget figures. While the MTEF covers a period of three years; it is the first year of the specific MTEF that speaks to the next budget. The other two years represent estimates which are subject to changes through the tabling of the Medium Term Budget Policy Statement (MTBPS).

The interest in MTEFs grew out of a concern for the multi-year considerations of capital budgets, as they offered a comprehensive solution to this problem. MTEFs can take a variety of forms and be at different levels of sophistication. Some countries operate multi-year budgets where appropriations are locked in for several years; others provide indicative aggregate budget estimates for future years.

Introducing a medium-term budgeting horizon is intended to strengthen the link between expenditure projections and budget policy. In response to criticism that many poverty reduction strategy papers (PRSPs) were ‘wish lists’, during the 1990s donors supported the introduction of MTEFs in a number of developing countries to serve as financial constraints that would promote the prioritization of expenditures.

2.7 Local Government Finance

Malawi is a unitary state with a single-tier structure of decentralized governance. Malawi’s decentralization framework as provided for in Chapter XIV of the Constitution and elaborated upon in the Local Government Act (LGA) of 1998 sets the legal status, functions and competences of local (or sub-national) governments. The framework also outlines the structure of inter-governmental fiscal relations.

• Structure. The local government system comprises 28 district councils, 4 city councils, 2 municipal councils and one town-council. Local governments behave much like line ministries in that their budgets are incorporated into the national budget and their spending follows the same rules as other spending agencies. The only exception is that local government finances are vetted by a financial clearing house the National Local Government Finance Committee (NLGFC). • Grants and Subsidies. Since Local governments are in fact subordinate levels of the national government, grant transfers from central government account for the largest part of local government revenue (83 percent). The main grant consists in an unconditional grant based on a share of five percent of national net revenue. A second conditional grant can be allocated for specific projects in health and education. Actual distribution of grants to the local government assemblies is carried out by the Minister for Local Government on the recommendation of the National Local Government Finance Committee, based on a formula approved by the National Assembly. • Revenue Sources. Local governments’ tax revenues include property and ground taxes, fees and licenses, commercial undertakings and services charges. Due to low performance in local tax collection, local tax revenues represent a small share of municipal revenue. 30 Budget Analysis Manual Budget Analysis Manual 31

3. LEGAL BASIS FOR BUDGETING IN MALAWI This chapter summarizes legislative provisions that guide the budget and budgeting process. We first demonstrate how Constitutional provisions are mirrored and given life in different pieces of legislation – especially the 2003 Finance Framework laws - and then review the role of duty bearers in relation to the budget. The sub-section on inter-governmental fiscal relations considers legislative provisions in relation to local government finance.

3.1 Constitutional Basis for Budgeting

The Malawi Constitution sets out the legal and institutional basis for public financial management in Malawi. The Constitution of Malawi (§ XVIII) sets out Malawi’s fiscal architecture and enunciates provisions for appropriation and accounting of public funds. Sections 171 to 183 of the Constitution include some of the following budgetary issues: revenues, consolidated fund, withdrawal of money from the consolidated fund, expenditure charged on the consolidated fund, annual estimates, appropriation bills, supplementary appropriations, raising of loans by the government, development fund and protected expenditure. Specifically, section 178 states that no public money shall be expended unless the expenditure has been authorized by an Appropriation Act. This necessitates the presentation of the budget to Parliament by the Minister of Finance. The Constitution further creates certain offices and assigns fiduciary responsibilities which are expanded and elaborated upon in the subsidiary and enabling legislation especially the Public Finance Management Act (PFMA), the Public Audit Act, the Public Procurement Act and the Corrupt Practices Act of 1995, the Public Procurement and Disposal of Assets Act (PPDAA) of 2015. Additional laws that elaborate on the spirit of the Constitution include the Money Laundering, Proceeds of Serious Crime and Terrorist Financing Act (MLPSCTFA) of 2006, and the 2013 Public Officers Declaration of Assets, Liabilities and Business Interests Act (PODA).

3.2 Budgeting and the Public Finance Management Act

The PFM Act is the key piece of legislation that governs how public money and public revenue may (and may not) be used and sets out the detailed legal framework for the Government of Malawi’s public fiscal and financial management. There are clear and direct inter-linkages between the PFMA and Malawi Constitution. Table 2 shows how sections of the Constitution are mirrored, expanded and elaborated upon in the PFMA. As such, any action by the central government, a statutory corporation or legislative body and MDA in compliance with the PFMA will of necessity seek to uphold and protect the constitution as well. 32 Budget Analysis Manual

Table 2: Congruence of Malawi Constitution and PFM Act

ISSUE Section in the Section in Constitution the PFMA Revenue 171 21 Consolidated Fund 172 29 Withdrawal of Money from Consolidated Fund 173 23 Expenditure Charged on the Consolidated Fund 174 23 Annual Estimates 175 21 Appropriation Bills 176 26 Supplementary Appropriation 177 23 Authorization of Expenditure in advance of Appropriation 178 23 Contingency Fund 179 24 Raising of Loans by the Government 180 Part II Special Funds and Trust Money 181 Part VI The Development Fund 182 29

3.3 Budgeting Principles underlying PFM Act

The PFMA seeks to foster and enhance effective and responsible economic and financial management, and to ensure accountability and compliance in dealing with public money. The PFMA also sets out clearly the overall underlying principle of public stewardship that: “Public money is property of the State” (Part IV Sect 31). Other principles underlying public financial management are designed to ensure that

• Government makes decisions in line with principles of responsible fiscal management • Government borrowing should be in the public interest and sustainable; • Public debt should be held at prudent levels at all times; • Government must ensure that the net worth of the State is maintained; • Fiscal risks are managed prudently; and • Policies are consistent with stable and predictable taxes.

To these ends, the Act obligates Government to produce statements of proposed budget policy, confirmation of adherence to fiscal discipline, economic and fiscal policy statements including economic and fiscal forecast. Government is also required to provide an update and performance information involving comprehensive financial statements. The PFMA has 58 pages, 95 sections, 11 parts and 4 schedules. Table 2 below summarizes the coverage of the PFMA. Budget Analysis Manual 33

Table 3: Parts and Issues in the PFM Act

PART ISSUE Part I Preliminary Part II Responsibility for Financial Management Part III Economic, Fiscal and Financial Policy Part IV Parliamentary Appropriations and Budget Part V Public Money and the Consolidated Fund Part VI Trust Moneys and Unclaimed Moneys Part VII Borrowing, Loans and Guarantees Part VIII Statutory Bodies Part IX Financial Reporting Part X Offences and Discipline Part XI Miscellaneous Provisions

3.4 PFMA and Stakeholder Roles

Role of Minister of Finance

The PFMA also assigns roles and responsibilities to the Minister of Finance which include:

• Policy Formulation. The minister is charged with formulation of economic and fiscal policy of the Government of Malawi for the financial management of the ongoing operational activities, both annually and for such longer periods considered appropriate, specifying agreed policies, outcomes and outputs to be achieved and taking into account the views of prior policy consultations;

• Budget Preparation and execution. Includes the preparation of annual draft estimates and such estimates as may be necessary and overseeing their implementation on behalf of the Government of Malawi;

• Financial Accountability. Involves the supervision of finances, assets and liabilities of the State so as to ensure that a full accounting is made to the National Assembly of all transactions involving public moneys or disposal of public assets;

• Parastatal Oversight. Oversight of finances of Statutory Bodies;

• Information and Communication. The Minister is required to publish in the Gazette and other appropriate means of information on economic plans, projects approved by Parliament and progress of implementation; and

• Financial Control. Ensuring adequate procedures, internal controls and guidelines exist for the use of public money and public resources. 34 Budget Analysis Manual

Role of Ministers:

The PFM Act also assigns a fiduciary role to Ministers including ensuring: • Financial Oversight. Ensuring effective and efficient financial management of all public money and all public resources assigned to the Controlling Officer;

• Financial Prudence. Ensuring that all estimates of revenue and expenditure are realistic and consistent with the budget policy statement of the Government;

• Effectiveness. That all public money and public resources achieve the objectives and outputs approved for each vote; and

• Compliance. Ensure compliance with the reporting responsibilities relevant to their assigned area.

Role of Controlling Officer

Controlling officers (usually PSs and Chief Executives of Parastatals) are responsible for

• Advising the Minister. Controlling officers are required to provide advice on financial management to their responsible Ministers;

• Accounting. Controlling officers are required to maintain accounts and records for their Ministries;

• Financial Stewardship. Controlling officers are required to take precautions to safeguard public funds;

• Financial Control. Controlling officers are required to ensure that all expenditures and payments are authorized; and

• Commitment Control. Controlling officers are required to ensure that there are no over- expenditures or over commitment of funds;

Treasury Instructions

The PFM Act (§92) authorizes the Secretary to the Treasury to issue instructions to Ministries and Government agencies setting out procedures and requirements in respect of any topic covered by the Act, and in general for the better control and management of public moneys and public resources. All public service staff are obligated to comply with both the PFM Act and the contents of Treasury Instructions. The main parts of these instructions follow the structure adopted in the PFM Act, so that the parts align and make it easier to cross reference the instructions to the provisions of the Act.

3.5 The Public Audit Act

The Public Audit Act of 2003 designates the National Audit Office (NAO) as Malawi’s supreme audit institution. NAO champions probity in fiscal affairs by undertaking a programme of audits of every ministry, statutory office, agency and public funds received by non-profit organizations, including relevant international organizations.

NAO is headed by the Auditor General who is appointed under section 184 of the Constitution and is mandated by the Public Audit Act to audit and report on the public accounts of the Republic of Malawi at least once a year to Parliament through the Minister responsible for Finance. The Audit (Amendment) Act of 2016 provides Budget Analysis Manual 35 for the Auditor General to directly copy parliament as he reports to the Minister of Finance.

3.6 Reserve Bank of Malawi Act

The Reserve Bank of Malawi Act (Cap 44:02) establishes the Reserve Bank of Malawi and associated roles and responsibility. Division III of the Act elaborates the RBM’s role as banker and advisor to government and obligates the RBM with three areas of responsibility related to the budget.

• Advances to Government. The Act allows the RBM to make short-term advances to the Government in respect of temporary shortfalls in budget revenues (S40). The total amount of outstanding advances at any one time is capped at 20 percent of the annual budgeted (domestic) revenues of the Government. While the Government is obligated to repay any advances within four months of the end of the financial year, the RBM has freedom to securitize and use the same for monetary policy (open market operations). • Management of Government Securities. The RBM is allowed to buy and manage Government securities of maturities up to 25 years. Yet the value of securities of maturities exceeding two years is capped at 20 percent of the total development budget for the current fiscal year. • Debt management. When contracting any external debt on behalf of the Government, the Minister of Finance is obligated to consult the RBM on the terms and conditions of the debt especially in relation to interest rates, fees and maturity (§43).

3.7 Inter-Governmental Fiscal Relations

The Malawi Constitution (§149) establishes the National Local Government Finance Committee (NLGFC) as an institution to drive decentralization. Its roles include receipt of budget estimated from local authorities; examining and supervising accounts of Local Government Authorities subject to the recommendations of the Auditor General; making recommendations regarding the distribution of funds allocated to local governments; preparation of consolidated budget for all local Government Authorities, after consultations with Treasury, for submission to National Assembly; and making application for supplementary funds.

• The Local Government Act (LGA) of 1998 further regulates fiscal transfers from the Central government to local government. In addition to power under the constitution, the LGA empowers the NLGFC to approve or disallow estimates of the Councils and Local Government Authorities; receive final accounts of Local Authorities and forwards to the Auditor General for audit; and disallow and surcharge any item of expenditure irregularly drawn by an officer of the Authority.

• Intergovernmental Fiscal Rules. The LGA (§44(4)) regulates the distribution of central Government grants to local governments, suggesting inter-governmental transfers be done by the Central Government upon the recommendation of the LGFC and using a formula approved by the National Assembly. While the act allows local governments to benefit from external assistance, it prescribes that such assistance be routed through the Ministry of Finance.

• Budgeting. The LGA also regulates budgeting processes and creates budget structures that mirror those provided in the PFM Act for central government. Local assemblies are required to prepare budget and submit them for scrutiny by the Local Government Finance Committee at least 90 days before end of fiscal year (§51(1)). It also provides for creation of a General Fund (equivalent to Consolidated Fund) and special funds and further empowers local government to borrow and invest its funds; it provides procedures for budgetary reallocation and creation of supplementary budget estimates. 36 Budget Analysis Manual Budget Analysis Manual 37

4. BUDGET FRAMEWORK IN MALAWI This chapter presents the budget framework, highlighting different sources of revenue and expenditure. We categorize to foreign and domestic revenues, and conduct an in-depth analysis of the latter in terms of tax and non-tax revenue and their components. The last section address voted and non-voted expenditure and, in the case of the latter, analysis is done with respect to current and development expenditure.

4.0 General Overview

The Budget Framework is a snapshot of the budget that reflects in aggregate terms total revenues, total expenditures and net lending and how the deficit, if any, is going to be financed (see Figure 7). Usually the budget framework is presented in a fiscal table (see table 3 below). In this section we give a bird’s eye view of the budget framework. In the next section we consider the revenue and expenditure elements in more detail and also indicate using Malawian data how the components of the budget framework have evolved overtime.

Figure 8: Schema of Budget Framework

The first section, Total Revenue and Grants presents the total amount of financial resources that the government used (or intends to use) to carry out its activities. For developing countries, there are two principal sources of revenue: Domestic revenues and foreign Grants and loans. Domestic revenues are themselves of two types: Tax revenues and Non-Tax Revenues. On the other hand, Foreign Grants usually come in three modalities: budget support, projects support and dedicated grants. 38 Budget Analysis Manual

Table 4: Malawi’s Budget Framework (Million MK)

Budget Item 2010/11 2014/15 2017/18

Total Revenue and Grants 272,176.1 655,897.0 1,127,743 Revenue 207,847.1 538,683.6 980,157 Tax revenue 175,674.4 482,000.0 900,714 Non-tax revenue 32,172.7 56,683.6 79,444 Grants 64,329.1 117,213.4 147,586

Total Expenditure & Net lending 296,215.2 962,130.0 1,313,968 Total Expenditure 296,215.2 960,630.0 1,313,968 Current expenditure 230,244.6 767,865.0 998,146 Development expenditure 65,970.6 192,765.0 311,822

Overall balance (excl. grants) (88,368.1) (423,446.4) (331,207) Overall balance (incl. grants) (24,039.1) (306,233.0) (183,621)

Total financing 24,873.7 299,509.0 183,621 Foreign (Net) 10,836.65 80,596.00 152,921 Total domestic financing (net) 14,037.1 218,913.0 30,700

The Expenditure and Net Lending section presents expenses that the government intends to incur mostly on consumption related items like the provision of goods and services to the public and maintenance of capital items. In the framework, Total Expenditure is categorized into Recurrent and Development expenditure. Whereas Recurrent Expenditure covers the cost of running government and providing public goods Development Expenditure captures expenditure related to capital investment. Under the most ideal setting, it is prepared based on the Public Sector Investment Program (PSIP) compiled by the Ministry Finance, Economic Planning and Development (MoFEPD) and is typically categorized along the source of financing whether foreign or domestic (we discuss this in more detail below).

The overall balance reflects the difference between total revenues and grants and total expenditures. The budget balance is usually of two types: balance including grants and balance exclusive of foreign grants. The budget balance excluding foreign assistance shows the extent to which domestically generated resources were able to cover government operation and is given as

Budget Balance (Exc. Grants) = Domestic Revenues – Total Expenditure

While the budget balance inclusive of foreign grants shows to what extent all resources were able to cover government operations. It is usually represented by the following equation

Overall Budget Balance = Domestic Revenues + Grants – Total Expenditure

From the second equation we note that there are three possible budget balance outcomes. When total government revenues exceed government spending, the budget balance is positive and this is referred to as a budget surplus. In contrast, when government spending exceeds total revenues and grants, then the budget balance is negative and we get a budget deficit. Finally, in the unlikely event that government spends exactly Budget Analysis Manual 39 what it collected in revenues and grants, the budget balance will equal zero. In that case we have a balanced budget. The Financing section indicates the amount of resources required to finance any resource shortfall. That is, in the most ideal setting governments would operate a balanced budget. In reality, since governments spends in anticipation of revenue collections, expenditures usually exceed revenues. In fact in Malawi it is customary that ex-ante, government plans to spend more than is planned to be raised in revenues from domestic and foreign resources (deficit financing).

4.1 Domestic Revenue

As indicated above, domestic revenues comprise two major elements: tax revenues and non-tax revenues. In this section we present the elements of these budget lines as they apply to Malawi’s fiscal framework

Tax Revenue

Taxes can be categorized based on the nature of economic activity being taxed or based on the incidence (who pays). Based on the former categorization, Malawi has three main types of taxes: income tax, value added tax (VAT) and customs and excise tax, each of which is collected under a legislative provision passed by parliament. The law that empowers Government to collect income tax is the Taxation Act (Chapter 41.01 of the Laws of Malawi), while Value Added Tax (VAT) is collected under provisions of the VAT Act (No.2 of 2005) and Customs and Excise tax is levied under the provisions of the Customs and Excise Act (Chapter 42.01 of the laws of Malawi). When we consider taxes by incidence (i.e. who bears them), there are two broad categories of taxes: direct and indirect taxes. Direct taxes are those whose incidence is felt by the one that is obligated to pay while indirect taxes are those taxes whose incidence is not necessarily on the one that is paying the tax but on the one that is enjoying consumption of the good or services. In the analysis that follows for each of the taxes above we also analyze them in terms of incidence.

A1. TAX ON INCOME AND PROFITS

Income Tax is a direct tax that is levied on individual’s income. Across the world, laws governing income taxes are founded on two principles: the Sources Principles and the Residence Principle. Under the Source Principle income tax is levied on income that is accrued from a source that is deemed to be within the country or state. Currently, very few countries in the world use this principle because of the limitation to charge tax on the worldwide income of its residence. Under the Residence Rule income tax is charged on income accruing to the residents of a country or state from their worldwide income regardless of where that is generated.

Income tax in Malawi is based on the Source Principle in which all income that is deemed to be sourced in Malawi is subject to tax. The Taxation Act (§ 11) defines Income as the “Total amount of cash or otherwise including any capital gains received by or accrued to or in favour of the person in any years or period of assessment from a source within or deemed to be within Malawi”.

Income tax is charged on assessable income after deducting any tax expenses or exempt income. As such, under the Taxation Act the following are chargeable individuals, trusts, ecclesiastical, charitable or educational institutions, companies and life assurances. In addition, there are other forms of income tax that are levied for example tax on non-residents, fringe benefits tax and withholding tax on dividends. Worldwide income taxes have retained their reliability as they tend to grow with economic activity 40 Budget Analysis Manual

A1.1 Pay as You Earn (PAYE)

PAYE is a tax on payroll and is therefore applicable on individuals who derive income from employment. It is a method of collecting income tax in advance at source. In effect, employers are agents of the Malawi Revenue Authority and thus have the responsibility of deducting tax from emoluments paid to their employees at the time payments are being made and remit to MRA. Deduction is done at the time payments are made or anytime the payroll is produced be it weekly, monthly of fortnightly and hence the name PAYE. By law, PAYE is accorded priority over any other deduction upon the employee’s earning.

Employers are required to keep records which are subject to inspection at any reasonable time showing the emoluments and tax deducted. PAYE deducted by the employer is payable to the Malawi Revenue Authority within 14 days after the end of the calendar month in which it was deducted and the remittance is usually accompanied by Form P12. If no remittance is received within 14 days after the end of the month, an additional sum of 15% of the tax in question is charged in penalty and a further additional 5% is charged for any additional month or part thereof.

At the time of writing this chapter, the following incomes were exempt from income tax in Malawi: Office of the President and Vice President; Allowances made to members of the National Assembly as may from time to time be determined by the Minister of Finance; Diplomats and members of the diplomatic community who are not residents of the country; non-residents that stay in the country for a period less than 183 days in a year.

A1.2 Corporate Tax

This is a direct tax paid by corporate entities from their profit earnings. Ordinarily it paid in two ways: either as Provisional tax or Company Assessment (Final) tax. A Provisional tax is remitted on a quarterly basis (quarterly installments) based on a company’s forecast of profit earnings. Six months after the end of a year, the company is required to submit a provisional tax return and either remit the final tax or claim a refund based on its performance in that year.

In Malawi the standard company tax rate is 30 per cent, with a 35 per cent rate applied to foreign firms. The calculations for the financial services sector assume the latter rate applies. The law also provides for tax holidays especially for areas or sectors designated as priority sectors, where a zero tax rate for up to 10 years and a 15 per cent rate thereafter is applied to local companies and a 20 per cent for foreign companies. Similarly, sector specific incentives apply to manufacturing, tourism and farming. In these sectors a 10- year tax holiday. However, this is followed by a 20 per cent company tax rate for manufacturing and tourism while agriculture attracts a rate of 15 per cent.

A1.3 Withholding Tax

This is a method of collecting tax in advance on specified payments. The Withholding tax is deductible from specified payments by any person who makes such payment to any other person as specified in the Fourteenth Schedule of the Income Tax (Taxation) Act before making such payment. The rate of tax to be withheld depends on the nature of the payment. For example royalties are charged at 20 percent of the payment value, rents at 10 percent, payments for carriage and haulage at 10 percent. However, Withholding tax is not collected where a recipient of the payment produces a valid withholding tax exemption certificate issued by the Malawi Revenue Authority. No exemption certificate is issued in respect of bank interest, rental income, commission and fees, royalties and payment to contractors in the building and construction industry. Budget Analysis Manual 41

A1.4 Fringe Benefits Tax

This tax is levied on inducements allowances (additional benefits) other than a salary or wage such as house allowance, water and electricity allowances, transport or car allowance, telephone allowance, education allowance, domestic services. Every employer, other than the Government, who provides fringe benefits to any of their employees, shall be liable to pay fringe benefits tax on the total taxable value of such fringe benefits at the rate specified in the Eleventh Schedule of the Taxation Act. The rate currently is at 30 percent. Fringe benefits tax does not apply on benefits paid to an employee by the employer in cash since this forms part of the employee’s emoluments and is therefore taxed on the recipient.

A2. VALUE ADDED TAX (TAX ON GOODS AND SERVICES)

This is an indirect Tax that is levied on consumption on both locally produced as well as imported goods, and services. This tax is one which most countries have turned to rely upon due to its tendency to grow with the economy. It is normally levied using a standard rate across the board, thus goods and service, the rate differs across countries due to difference in levels of economic development.

Sometimes, for social protection and economic reasons, some goods are zero rated while others are exempt. Zero rating has the disadvantage in that it inflte governments expenditureon tax refunds. Exemption are bad because they inflate the final price that a consumer pays. VAT is chargeable on taxable supplies and registerred persons. Individuals and corporations are registered for in the VAT scheme when they meet minimum VAT threshold which currently stands at MK6 million.

A3 International Trade Taxes

These are taxes levied on consumption of goods imported into a country. These taxes serve different purposes as highlighted earlier. The examples are Customs duties, Excise duties and import VAT. In the framework, customs and excise are just reported as duties. Unfortunately, due to increased need for regional integration in trade, the significance of customs duties has declined in many countries in the world. To this end, Malawi has also phased out or reduced most of her tariffs in line with the SADC and COMESA regional integration protocols.

In Malawi, the application of international trade taxes is based on the compound principle. That is when imports come into Malawi; custom duty is assessed on the landed value (i.e. cost plus insurance and freight (c.i.f)). Then the duty is added onto the landed value so that excise duty is then assessed on the cif plus customs value. Finally, import VAT is assessed on the compound value of cif plus custom plus excise.

Trends in Taxes in Malawi

As argued above, the contribution of domestic revenues have recently grown, accounting for as high as 82 percent of all resources while the contribution of grants has declined to about 18 percent. Table 4 below shows that within domestic revenues, it is taxes that do the heavy lifting (accounting for about 90 percent of domestic revenue) while non-tax revenues averaged a mere 10 percent. 42 Budget Analysis Manual

Table 5: Distribution of Domestic Revenues and Taxes

Domestic Revenue Item 2010/11 2014/15 2017/18 Total Revenue and Grants 272,176.1 655,897.0 1,130,347

Domestic Revenue 207,847.1 538,683.6 953,120 Tax revenue 175,674.4 482,000.0 873,685 Taxes on income & profits 81,116.6 236,834.2 371,402 Taxes on goods & services 79,424.5 203,679.6 313,690 International trade taxes 17,487.1 49,862.7 274,221 Other (including refunds) (2,353.8) (8,376.4) (24,241)

Table 4 further shows that taxes on income and profits and taxes on goods and services (VAT) are the major sources of domestic revenue. Between 2010/11 and 2014/15, whereas the share of income tax grew from 46 per cent to 49 per cent in 2014/15, the share of VAT in taxes declined from 45 percent to 42 percent. In contrast, the share of international trade taxes (customs and exercise duty) has been steady, accounting for about 10 percent of tax revenues.

Non Tax Revenue

These form another source of domestic revenues for Government operations. The type and nature of Non Tax Revenues vary across countries, hence the differences in names from other to miscellaneous revenues. In Malawi, the Non Tax Revenues comprise Treasury funds, departmental receipts, fuel levies and parastatal dividends.

• Treasury fund receipts are revenues from government institutions such as Government Printer, PVEHS, Central Government Stores and other minor ones.

• Fees and departmental receipts are revenues arising from a variety of reasons and from numerous institutions such as license fees from Road Traffic Directorate, fees on passports, payment and dividend income from parastata1 organizations; audit fees generated by the National Audit Office; court fees and fines from the Judiciary; survey fees; landing fees; motor vehicle licensing fees and others.

• Rents, reimbursements and other revenues form a rather small portion of total revenue generated from normal sources.

• Fuel Levies. Following the creation of Malawi Energy Regulatory Authority (MERA), in 2007, a number of levies were created and included in the fuel price build-up. The two major levies in the price build-up are the Road levy which is earmarked for road maintenance and the MAREP levy which is earmarked for funding rural electrification under the Malawi Rural Electrification Program. Other levies have included the safety net levy (for poverty interventions), and the MBS Cess.

• Parastatal dividends represent payments to the shareholder (Government) that commercially-oriented State Owned Enterprises who have made a profit remit to Government.

In general non-tax revenues are small and difficult to project. The budget projections for non-tax revenues Budget Analysis Manual 43 depend on the forecast demand as well as price levels of the government services. The Projections of fuel levies depend on the projected import flows of fuel products, petrol, diesel and paraffin in a given year, all things being equal. The projections of parastatal dividends depend on the perceived economic growth in a given year as this affects the performance of parastatal companies, all things being equal.

Table 6 shows the evolution of non-tax revenues in the past decade. It shows that non-tax revenues are a very small component of domestic revenues (11 percent in 2014/15) and overall government revenues. However, within non-tax revenues, the road levy and MAREP levy are the main sources. Parastatal dividends have traditionally been negligible and less than a billion, except for 2014/15 when government received a sizeable dividend from the Reserve Bank of Malawi.

Table 6: Domestic Revenues by Taxes and Non-tax Revenues

Domestic Revenue Item 2010/11 2014/15 2017/18 Total Revenue and Grants 272,176.1 655,897.0 1,130,347

Domestic Revenue 207,847.1 538,683.6 953,120 Non-tax revenue 32,172.7 56,683.6 79,444 Departmental Receipts 12,959.2 13,459.8 25,233 Road levy 7,795.4 11,406.6 26,229 Rural electrification levy 3,546.6 11,073.0 Storage levy 601.6 1,350.7 1,850 Road Tax 3,340.7 Parastatal dividends 944.3 16,052.7 20,649 Other 203.3 -

4.2 Foreign Revenue

Grants

Grants are receipts that a country gets from foreign agencies (bilateral and multilateral) for which there is no expectation or requirement of repayment. In Malawi’s budget framework, there are three types of grants receivable from development partners: Budget Support, Dedicated Grants and Project Support.

• Budget support is the type of grants that are disbursed to support Malawi’s macroeconomic program or budget. These funds are fungible and Malawi is free to use them according to its priorities and needs. Under the Common Approach to Budget Support (CABS), the bilateral and multilateral donors that extend grants in terms of budget support to Malawi include the Department for International Development (DfID), the African Development Bank, European Union (EU) and Norway. The World Bank does provide budget support but in form of loans.

Since 2012, owing to the loss of public funds through the so-called cash gate, the CABS group of donors suspended budget support to Malawi. Although much of the money is current vired to Dedicated or Project grants, the Malawi government can no longer apply the money according to its priorities. 44 Budget Analysis Manual

• Dedicated grants are those given to Government but with restrictions regarding the sector in which the funds are spent. However, within the sector there are no restrictions on the activities. Examples in Malawi are funds for National Aids Commission (NAC) and funds for fertilizer purchases. Dedicated grants represent a small percentage of donor support to Malawi

• Projects grants: This type of grants forms a bigger proportion of development support. Project grants are meant to facilitate specific development programs in various sectors of the economy. Malawi receives project grants from both multilateral and bilateral donors. The multilateral donors include World Bank, European Union, African Development Bank (AfDB) and the United Nations Agencies. The bilateral donors include Japan through Japanese International Development Agency (JICA), the United Kingdom (UK) through DfID, Norway, and Germany through GTZ and KfW.

Trends in Foreign Grants in Malawi

Evidence in Table 6 shows that the Kwacha value of grants has grown significantly in recent years, increasing by MK15 billion between 2005/06 and 2010/11 and by MK 52 billion between 2010/11 and 2014/15. The large increase between 2010/11 and 2014/15 reflects the so-called exchange rate windfall. Since grants are denominated in foreign currencies, a depreciation or devaluation of the exchange rates results higher Malawi Kwacha equivalent.

Table 7: Trends in Grants Received by Malawi (In MK)

Grants Items 2010/11 2014/15 2017/18 Total Revenue and Grants 272,176.1 655,897.0 1,130347 64,329.1 Grants 117,213.4 177,227 BOP support 14,922.6 8,000.0 60,000 Dedicated support 30,530.2 37,654.0 30,531 Project support 18,876.3 71,559.4 87,696 HIPC - -

The evidence in Table 7 shows marked changes in the composition of grants in the past decade. Between 2005/06 and 2010/11 budget support increased by just MK987 million, dedicated support increased by MK13 billion and project support increased by MK8 billion. However, between 2010/11 and 2014/15 as Malawi’s relations with donors deteriorated, budget support declined by MK7 billion although it was offset by growth in dedicated support which increased by MK7 billion. The bulk of the resources were redirected to project support which grew by MK52 billion (equivalent to overall growth in grants). In relative terms, in 2005/06, budget support, dedicated support and project support accounted for 28 per cent, 34 per cent and 22 percent of total grants, respectively. By 2014/15 the share of dedicated remained steady, while budget support had declined to just six percent of all grants and project support increased to 61 percent of all grants received.

Loans

Malawi also receives development assistance from its cooperating partners through loans. The biggest proportion of the outstanding loans is from Multilateral Creditors that lend to the Government at concessional Budget Analysis Manual 45 interest rates. These multilateral creditors are World Bank through IDA, International Monetary Fund, the African Development Bank (AfDB), the European Investment Bank (EIB), the International Fund for Agriculture Development (IFAD), OPEC Fund, Nordic Development Fund, and Arab Bank for Economic Development in Africa (BADEA). Some of the loans are contracted from bilateral creditors.

4.3 Expenditures

The Budget framework presents expenditures in terms of Recurrent and Development. However, the Public Finance Management Act distinguishes between voted and non-voted expenditure (also called statutory or protected expenditure). As such before we discuss how the budget framework presents expenditures, it might be worth the readers’ while to shed some light on non-voted expenditures.

Non Voted Expenditure

Non-Voted Expenditures are statutory expenditures which are not submitted to the vote of the National Assembly. They nonetheless, form part of the budget estimates within proposed total expenditure for implementing Government’s programs or activities. Although they are not voted upon, non-voted expenditure still need to be approved by the National Assembly since Section 23 (1) of the Public Finance Management Act of 2003 stipulates that “no public money shall be expended unless the expenditure has been authorized by an Appropriation Act in accordance with subsection (2) or is statutory expenditure”. Further, Section 23 (3(e)) states that a separate appropriation shall be made for each item of statutory expenditure or any other payment on behalf of the state. When the Minister of Finance presents the appropriation bill, these expenditures appear as the first four items, which include:

• The Presidency - The Salaries of the President and the Vice President are drawn from this head.

• Compensation and Refunds - This head is used for statutory payments, such as general compensations, refunds and at times a provision for the capitalization of Malawi’s investments initiatives.

• Pensions and Gratuities – This head caters for pensions and gratuities, severance benefits, ex-gratia payments and death gratuities for public servants.

• Public Debt Charges – Public Debt servicing is a statutory obligation relating to both principal repayment and payment of interest on debt. Public debt charges cover both domestically and externally contracted loans. Whereas foreign debt is related to development projects or balance of payment imbalances, domestic borrowing arises as a result of a fiscal gap created by either temporary shortfalls in government revenues, unexpected drops in donor inflows or the need to finance unforeseen occurrences.

By convention, in the budget framework these are presented as part of recurrent expenditure although recurrent expenditures are mostly voted.

Voted Expenditure

These are expenditures that are deliberated upon by Members of Parliament and subsequently voted upon to approve or reject according to their conviction in the adequacy of the allocation. These expenditures consist of recurrent and development expenditures. 46 Budget Analysis Manual

Recurrent Expenditures

Recurrent expenditures principally represent allocations for government’s operational costs such as traveling, accommodation, telephone, electricity and water bills incurred by Government Ministries and Departments. In addition, recurrent expenditures also include:

• Personal emoluments (salaries and other allowances paid to public servants); • Maintenance costs incurred on equipment, government buildings and installations; • Consolidated Funds Services, which include expenditure incurred by the government in order to cover compulsory constitutional obligations such as interest on official debt of the government and remunerations and other services in respect of constitutional offices and officers; and Other miscellaneous costs

Personal Emoluments

This includes salaries, wages and allowances paid to the Mainstream Civil Service. The Main-stream Civil Service includes a number of common services (e.g. Human Resource Common Service, Accounting Common Service, Economic Common Service and Administration Common Service). Other Professionals like the Police, the Army, Teachers and Health personnel have separate service commission. In Malawi employees of any category can either be recruited at a substantive or non-established position depending on the demand for labor force in that particular field.

Other Recurrent Transactions (ORT)

This part of expenditure covers operational costs such as traveling, accommodation, telephone, electricity and water bills incurred by Government Ministries and Departments. These expenditures are reflected in two major lines, allocation for Goods and Services and transfers and subsidies.

Subsidies: Currently Malawi is implementing three major subsidy programs: the Fertilizer subsidy (covers payment for fertilizer purchase and logistics); the Maize seed subsidy which at times is directly funded by donors and the malate and cement subsidy. Malawi also makes contribution towards Social Support Programs e.g. Social Cash Transfers.

Transfers include, on the one part payments to Malawi Revenue Authority and on the other part, Subventions to non-commercial Parastatals or state-owned enterprises. Although Malawi has numerous Parastatals, a significant portion of this allocation goes to support operations of the five public Universities.

Trends in Public Expenditure

We will conduct a full expenditure analysis in Chapter 5. However, here we highlight trends in major expenditure lines. The table shows that since FY 2005/06 total expenditure and Net lending increased by MK843 billion from MK120 billion to nearly MK1 trillion by 2014/15. Much of this increase is on account of increase in recurrent expenditure which rose by MK674 billion from MK93 billion to MK768 billion. This increase notwithstanding, over the past decade, the share of recurrent expenditure in total budget has averaged around 80 per cent while development has averaged 20 percent.

The Table 7 also shows tremendous growth in personal emolument in the past decade. Between 2005/06 and 2010/11, the wage bill rose by MK38 billion to MK58 billion. Then, owing to the initial devaluation of 2012 and the subsequent depreciation that followed the floatation of the currency, the salary adjustments that ensued resulted in skyrocketing wage bill. Between 2010/11 and 2013/14 the wage bill increased by MK140 billion to Budget Analysis Manual 47

MK200 billion. In relative terms, the share of wagebill increased from 21 percent of the recurrent expenditure in 2005/06 to 26 percent in 2014/15.

Table 8: Trends in Public Expenditures

Expenditure Items 2010/11 2014/15 2017/18 Total Expenditure & Net lending 296,215.2 962,130.0 1,313,968 Total Expenditure 296,215.2 960,630.0 1,313,968 Recurrent expenditure 230,244.6 767,865.0 998,146 Wages and salaries 58,091.7 200,012.0 315,215 Pensions and gratuities 12,042.2 25,000.0 68,601 Interest payments 22,818.8 106,054.0 167,512 Domestic 22,208.7 90,971.0 153,632 Foreign 610.0 15,083.0 13,880 Other Recurrent Transactions Goods and Services 95,073.6 315,236.0 319,351 Generic Goods & Service 40,766.0 224,598.0 134,899 Other goods & services 54,307.5 90,638.0 Subsidies and Transfers 42,218.3 121,563.0 192,068 Subsidies 22,359.3 66,663.0 40,150 Transfers 19,859.1 54,900.0 151,918 Development expenditure 65,970.6 192,765.0 311,822 Foreign financed 31,687.0 154,978.0 208,139 Domestically financed 34,283.6 37,787.0 103,683

Net lending - 1,500.0

Interest payments have also grown in the past decade, initially rising modestly from MK18 billion in 2005/06 to MK22 billion in 2010/11 and then steeply to MK106 billion in 2014/15. However relative to all recurrent expenditure, between 2005/06 and 2014/15 the proportion of interest payments fell from 19 percent to 14 percent. Although commentators usually obsess about foreign debt, the table shows that Malawi’s problem is mainly to do with domestic debt service, which has grown from MK15 billion to MK90 billion in the past decade. At the time, domestic interest payments accounted for 85 percent of all interest payments but it had been as high as 97 percent in 2010/11. This is mostly on account of high domestic interest rates (close to 40 percent) in contrast to foreign debt which is contracted on concessional terms (interest of 0.5 percent).

Development Expenditure

These expenditures are costs incurred by Government to support the Public Sector Investment Program (PSIP). The Development Budget is structured in such a way to provide long term public goods and services through projects, such as infrastructure developments, capacity building and other investment programs. Development expenditures may be wholly financed from locally generated revenues in the consolidated fund or by donors through loans and grants. Sometimes Government is required to provide counter-part funds 48 Budget Analysis Manual depending on the project agreement with a donor. As such, development expenditures are categorized according to source of funds. Part I Projects are projects that are financed by donors through grants and loans while Part II Projects are projects that are financed by the Malawi Government through the budget and are thus subject to parliamentary approval.

In the 2016/17 budget, the evidence shows an increase in donor dependence. Development Expenditure was planned to rise from K224.137 billion in FY 2015/16 to K317.92 billion in FY 2016/17, of which only K37 billion (12 percent) would be domestically financed (Part II) while K280.34 billion, representing 88 percent, was to be financed by Development Partners (Part I). In fact, although the overall development budget increased by 42 percent, domestically resources declined by 25 percent while foreign resources rose by 61 percent.

Table 9: Development Expenditure to Selected Votes (MK Bn), FY2016/17

Sector Local Foreign Total % of Total (Part II) (Part I)

Total Development Budget 37.58 280.34 317.92 100 Agriculture, Irrigation & Water 1.6 115.5 117.5 37 Transport & Public Works 0 32.4 34.1 11 Education, Science & Technology 2.6 19.7 22.3 7 Subvented Organizations 3.9 10.1 13.9 4 Energy, Mining &Nat. Resources 0 13.1 13.1 4 Health 0 12.8 12.8 4 Others 29.5 76.8 104.3 33

Table 9 also shows that only six votes accounted for 67 percent of all development funding. The Ministry of Agriculture which accounts for 17 percent of recurrent expenditure was allocated 37 percent of development expenditure. In contrast, the Ministry of Education, Science and Technology which counts for 13 percent of the recurrent budget was allocated a mere 7 percent. Similarly the Ministry of Health which accounts for 8 percent of recurrent budget, accounted for 4 percent of the development budget. Budget Analysis Manual 49 50 Budget Analysis Manual

5. BUDGET ANALYSIS I: EXPENDITURE ANALYSIS 5.0 General Overview

This section aims to equip the reader with specific skills for analyzing a budget. Although these skills are presented for the analysis of expenditures they can be applied to different types of analyses, including revenue and grant analysis and even budget tracking from human rights-based perspective. The purpose of this part of the budget work is to introduce participants to some of the key calculations that are frequently used in the analysis of budgets. These include looking at the size of the component of the budget relative to the budget total or calculating nominal and real growth rates, both year-on –year and over the medium term. It also deals with per capita budgets, comparing allocations to actual expenditure and interpreting the results.

5.1 Techniques of budget analysis

Preparation work for budget analysis: before getting into the budget analysis one has to be clear on the budget process and the way the budget is presented (essentially the Budget processes in Chapter 2 and Budget Framework presented in Chapter 4). An analyst should look at the budget law and corresponding guidelines and learn the process by which the government’s budget is prepared and approved; familiarize one-self with the various terms in the budget and to know how to read the budget, especially how the budget is classified and what each classification entails; and how to read the figures in order to determine their implications and look at the government priorities and policies and understand what the Government is trying to achieve.

Quantitative Techniques

One way to analyze budget is to look at the allocations to different sectors or different regions. Sectoral or specific budget areas, for example education, can be analyzed to capture the priority given to that sector compared to other sectors in the economy; changes in the amount allocated to that sector overtime (also taking into account inflation); the amount allocated per person in that sector; and whether the money allocated in that sector was spent. As well as considering specific sectors the analysts could also look at regional or local assembly budgets and compare them to national averages or other regions and assemblies. Budget Analysis Manual 51

Table 10: Budget Allocation by MGDS Priority (Millions MK)

Sector 2011/12 2012/13 2013/14 2014/15

Agriculture & Food Security 41,041 66,509 67,259 62,575 Transport Infrastructure 30,387 35,031 40,406 31,278 Energy, Industrial Development, Mining & Tourism 9,046 9,227 4,570 4,570 Education, Science and Technology 61,187 76,407 74,564 75,827 Public Health, Sanitation, Malaria, HIV/AIDS mgt 37,425 49,145 34,446 33,228 Integrated Rural Development 16,661 15,314 7,423 5,043 Greenbelt Irrigation, and Water Development 7,940 4,748 4,537 2,139 Child Development, Youth Development 4,249 11,747 2,610 2,243 Empowerment Climate Change, Natural Resources and 2,917 1,857 2,650 2,616 Environment Management Other 99,075 53,340 78,014 100,062 TOTAL 309,928 323,325 316,479 319,581

In what follows we shall discuss some specific techniques/tools which can give you the information on the above. Exercises are included to complete these tools for which you need to the national budget for

Method 1: Percentage Share of the budget (indicates priority)

The term share refers to the size of the slice in the pie in relation to the entire pie. We use share to measure how much the government prioritises a certain item in the budget. We express it in terms of percentage of the total. For example if the total national budget is K300 billion and K75 billion is for agriculture, then agriculture’s share is 25 percent.

Sectoral Share = Sectoral Allocation x 100 ( Total Budget )

We often use a percentage to express:

• one sector (e.g. agriculture ) as a share of the country’s budget

• specific spending breakdowns as a share of total sector budget (e.g. what share of the agriculture budget goes to recurrent and capital budget and within recurrent budget what share goes to wages, salaries and the fertilizer and seed subsidy program? What share of the budget goes to education and within education what share goes primary, secondary and higher education?)

Looking at share over time can also tell us how government priorities have been evolving. Table 11 below shows percentage shares derived from Table 10 above. It shows the priority attached to education Science and Technology followed by Agriculture and Food Security and Transport Infrastructure 52 Budget Analysis Manual

Table 11: Sectoral Share Allocation by MGDS Priority

2011/12 2012/13 2013/14 2014/15 Sector Actual Estimate Projection Projection

Agriculture & Food Security 13.24 20.57 21.25 19.58 Transport Infrastructure 9.80 10.83 12.77 9.79 Energy, Industrial Development, Mining 2.92 2.85 1.44 1.43 & Tourism Education, Science and Technology 19.74 23.63 23.56 23.73 Public Health, Sanitation, Malaria, HIV/ 12.08 15.20 10.88 10.40 AIDS mgt Integrated Rural Development 5.38 4.74 2.35 1.58 Greenbelt Irrigation, and Water Devel- 2.56 1.47 1.43 0.67 opment Child Development, Youth Develop- 1.37 3.63 0.82 0.70 ment Empowerment Climate Change, Natural Resources and 0.94 0.57 0.84 0.82 Environment Management Other 31.97 16.50 24.65 31.31 TOTAL 100.00 100.00 100.00 100.00

Method 2: Calculating Growth rates (indicates progress)

The growth rate describes how much the size of an allocation changes from one year to the next. Comparing one year’s budget with the next year’s allocations may indicate changes in the state’s policies and priorities. It is expressed as the ratio of the change in allocation between the two years to the allocation in the first year.

Allocations - Allocations Growth Rate = 2019 2018 x 100 ( Allocations 2018 ) Budget Analysis Manual 53

Table 12 shows that following the Cashgate scandal, between 2013 and 2015, many MGDS II priority sectors were expected to experience negative growth. Major contractions were expected in Integrated Rural Development; Energy, Industrial Development and Tourism; and Greenbelt Irrigation and Water Development.

Table 12: Growth Rates of MGDS Sectoral Allocations 2011/12-2014/15

2011/12- 2012/13- 2013/14- Sector 2012/13 2013/14 2014/15 Estimate Projection Projection Agriculture & Food Security 62.06 1.13 -6.96 Transport Infrastructure 15.28 15.34 -22.59 Energy, Industrial Development, Mining & Tourism 2.00 -50.47 0.00 Education, Science and Technology 24.87 -2.41 1.69 Public Health, Sanitation, Malaria, HIV/AIDS Management 31.32 -29.91 -3.54 Integrated Rural Development -8.08 -51.53 -32.06 Greenbelt Irrigation, and Water Development -40.20 -4.44 -52.85 Child Development, Youth Development Empowerment 176.47 -77.78 -14.06 Climate Change, Natural Resources and Environment -36.34 42.70 -1.28 Management Other -46.16 46.26 28.26 TOTAL 4.32 -2.12 0.98

Method 3: Deflation (Converting nominal into real values)

Looking at budgets one will notice that almost all allocations to MDAs are growing. As such if one focused on shares of budget or growth rate in budget allocation, one may get the impression that the budget is growing when in actual fact the purchasing power of the budget (the amount of goods and services that can be bought from the allocation) may be decreasing over time. Budget from different years can give a distorted picture as inflation means that what money can buy across different years varies. Therefore we need to remove the impact of inflation to determine the real figures.

To understand this approach, we need to distinguish between the concepts. A nominal value is a value as given in the budget and not adjusted for inflation. In contrast a real value is one which has been adjusted for inflation to reflect purchasing power. Normally real values are benchmarked on some base year.

To take out the effects of inflation we use the “deflator”. This is a figure set by the Ministry of Economic Planning and Development that is based on the rate on inflation. If we want to convert everything to 2009/10 purchasing power, we make 2009/10 the base year. The deflator for the base year is 1 because we are using the base year as a benchmark and comparing everything to that year. As a result of this nominal and real values are equal in the base year. In order to get the real amount for each year, divide nominal value by the deflator for that year

Real Value = Nominal Value ( Deflator )

As may be observed from the table, inflation reduces purchasing power of the Kwacha over time i.e. K100 this year buys less than K100 last year because prices are increasing. This makes straight comparison of amounts between different years inappropriate. We convert nominal values to real values to adjust for inflation 54 Budget Analysis Manual

Table 13: Real Value using Allocation to Health

2008/9 2009/10 2010/11 2011/12

Nominal Value 100 120 140 180 Deflator 1 1.3 1.45 1.6 Real Value 100 92.3 96.55 112.5

Method 4: Converting Nominal Values into International Purchasing Power Parity

If a significant portion of a budget is used on imported goods and services, it may be important to determine if the allocation has maintained its real value in terms of import parity prices. As such it may be important to convert the foreign exchange sensitive elements of the budget into foreign currency equivalent to determine their purchasing power. This is especially pertinent when the local currency has experienced serious depreciation (in case of floating currency) or been devalued (in case of fixed exchange rate regime).

For instance, the fertilizer component of Malawi’s seed and fertilizer subsidy program is wholly imported. As such increases in nominal values will portray a distorted picture of how much fertilizer will actually be available to smallholder farmers. Similarly, the medicine budget in the Ministry of Health may need to be converted into international PPP to monitor if the purchasing power is not eroded by exchange rate changes.

Table 14 Adjusting Using Exchange Rate 2010/11 2012/13 2017/18 (Actual) (Estimate) Approved Fertilizer Subsidy MK 22,359 40,884 33,150 Exchange Rate (K/$) 150.70 330.50 725.00 Real Value 148.37 123.70 45.72

Table 14 shows that although the nominal value of the subsidy program has increased since 2010/11, the real value has continuously declined. MK33 billion in 2017/18 could only buy less than one third of what MK22 billion could buy eight years prior.

Method 5: Calculating Annual Average Growth Rate

While we can get year-on-year growth rates, over selected period of time it is also instructive to calculate average growth rate. This gives a broad picture of what is happening to the budget or expenditure over the medium term. For the above given data, the annual average growth rate is the average growth rate over the three years, i.e. you simply add the growth rates and divide by the number of years Growth Rate + Growth Rate + Growth Rate Avg Growth Rate = yr1 yr2 yr3 3 Budget Analysis Manual 55

Method 6: Checking Budget Equity and Adequacy

Per Capita Budgets: To check that there is equity across the population it is necessary to work out the amount of spending per person. To do this divide the budget by the total population in the area the budget refers to (i.e. per capita spending in education or per capita health expenditure etc.)

Budget Allocation Per Capita Budget = Population

Per capita budget are most useful for checking whether and how the national budget is both equitable and also meeting human rights obligations. In most international conventions and undertaking, commitments are expressed in terms of spending per person and it is easy to monitor compliance with those obligations by looking at per capita allocations.

Per capita allocations are even more important when we control for the affected population instead of national population. That is, education spending per capita is a less useful quantum since not the whole population attends school or stands to benefit from education. It is more informative to derive more focused per capita measures e.g. comparing per capita spending on primary education with secondary education or higher education actual shows that although the primary school budget is many time higher than the secondary and higher education budget, the government spends many times more per university student than on students at the lower levels of education. One can then ask if this trade-off is equitable and efficient.

Method 7: Checking Regional Equity

Percentage difference from Average: You may want to analyze whether an equitable amount is spent per person in different regions. To do this you could compare the per capita spending for that particular region to the national average.

• Take the per capita budget figure for a sub-budget(region or district) • Calculate the per capita spending nationally • Calculate the difference between the sub-budget per capita and the national per capita spending • Express the difference between this amount and the average per capita budget figure for the country-wide as percentage of the countrywide average.

A negative sign indicates a lower per capita budget than the country-wide average, while a positive sign shows a higher per capita budget than the countrywide average.

Method 8: Budget Variance Analysis: Comparing the Approved Budget to Actual Expenditure

What is in the budget may not be what is actually spent in reality. It is therefore necessary to look at actual expenditure as compared to approved budgets. The spending rate for recurrent budgets (recurrent expenditure to recurrent budget) is usually high because most of these expenditures are wages and salaries. The spending rate for capital expenditure is usually low in Malawi. This can be calculated for specific sector or sub-sector

To analyze utilization of the budgets you will need to compare reports to the budget proclamation. The rate of utilization can be found by dividing the actual expenditure by the approved budget. To express this as percentage of the approved budget divide the result by the approved budget and multiply by 100. 56 Budget Analysis Manual

Actual Amount Spent on X in the Approved Budget Rate of Utilisation = x 100 Approved Budget for X

Measures of Budget Analysis seek to check the following

• Adequacy: to check if the budgeted amount can provide for level of need identified • Nominal terms can tell us if the allocation is enough by looking at the per capita figure (method 4). • Real terms tell us if the allocation is keeping up with inflation (method 3)

• Priority: to see if the stated policy priorities are reflected in the budgets and to determine if the government is keeping its promises (policy commitment) • Percentage share calculation shows if priority is being put in the right place (method 1) • Real and nominal growth can show how a government is placing more or less priority on a sector.

• Progress: Answers the question - is the government’s response on an issue improving? • The rate of growth of allocation to a sector tells us if the government is putting more into a sector (method 2 and 3)

• Equity: Answers the question - Are resources being allocated fairly? • Per capita measure compared to the national measure shows whether the regional allocations are more or less than the national (method 6). Budget Analysis Manual 57 58 Budget Analysis Manual

6.0 BUDGET ANALYSIS II: REVENUE PROJECTIONS 6.1 General Overview

Governments customarily impose taxes to raise revenues to support Government operations and provision of public goods and social amenities including education, health, defence and law and order. In recent years, developing countries including Malawi have established specialized tax policy units or even fully fledge revenue division to help in projection of revenues and analyses the impact of different taxes on the economy and social welfare.

This chapter presents approaches to analyzing revenue. It first sets the context by assessing the rationale for imposing taxes, principles for imposing taxes before presenting how to conduct tax expenditure analysis. Finally we present methods for revenue forecasting.

6.2 Rationale for Imposing Taxes

Apart from the need to provide public goods, Governments also have non-economic reasons for imposing taxes including attempts to coerce actors to refrain from certain activities or to encourage agents to engage in activities/behaviours that Government deems desirable. Some reasons for Imposing taxes include the following a. Redistribution of income. Government disproportionately taxes the wealth and better off and uses the revenue either to subsidize the poor by increasing affordability of public services for those with lower income. b. Control of regulation of importation of goods and services. Government can impose taxes to discourage people from importing certain goods. The justification can include environmental reasons, where Government seeks to reduce dumping or, economic – where Government seeks to improve its balance of trade by reducing imports. c. Control or discouragement of consumption of certain good and services. By imposing what are termed Sin Taxes government seeks to discourage consumption of certain goods e.g. tobacco and beer. d. Protecting local industries from external and unfair competition. As part of infant industry or import substitution strategy, Government can import taxes to protect new and upcoming local manufacturers from competition with well-established foreign companies. e. Encouraging the establishment of local industries. Government can encourage people to engage in certain economic activities or industries by giving tax relief or holidays to certain industries. Creation of Economic Zones or Export Processing Zone fall in this category Budget Analysis Manual 59

6.3 Considerations for Revenue Policy and Economic Structure

Steps in the formulation of tax policy in Malawi.

1. Post budget consultations with various stakeholders 2. Evaluation of the efficacy of recently implemented and existing tax policy 3. Technical pre-budget consultations with stakeholders 4. Ministerial pre-budget consultations with stakeholders 5. Review of Existing Laws 6. Consultations with economic management team 7. Presentation of proposed tax measures to the executive 8. Formulation of tax revenue budget 9. Drafting of the Tax Policy measures for the budget statement 10. Drafting of supporting bills for presentation to Parliament 11. Drafting of subsidiary legislation to the tax laws 12. Gazetting of the newly introduced tax laws.

A country’s tax system reflects its evolutionary response to various social, economic, and political influences. The form of a tax system, therefore, has wide economic, political, and social implications. In the process of policy formulation, each tax or revenue policy unit has to weigh tax policies in terms of the following basic principles and criteria a. Equity and fairness: A tax system should be fair in that it treats individuals in equal or similar circumstances equally i.e. individuals having the same level of income should pay the same amount of tax. Fairness is also captured by the concept of Progressivity and Regressivity. A tax regime is considered regressive if it imposes the same rate or amount on people of different economic status, or even worse if it imposes a lower tax rate as income increases. In contrast a progressive tax regime, the rate of taxation increases with rate of taxation with income. In this case, whereas income tax is progressive, VAT is regressive since for all goods everyone pays the same rate and amount. b. Economic Efficiency: The Efficiency criterion for any tax system require that the tax be neutral, in that the tax should create neither major distortions in consumption and production behavior nor change private investment decisions by favoring one set of investments over the others. By definition, any tax on goods and services increases the price of a good by adding a percentage of the price (ad valorem tax) or a fixed amount of money (specific or unit tax) to the original price. As such taxes creates a gap between the value that the consumer pays for the good (demand price) and the economic resource cost of production (supply price). Such a distortion will have a cost attached to it that the economy has to bear, known as the deadweight loss. Formulating tax policy should seek to minimize the distortions c. Promotion of Economic Growth: Every good tax system should foster economic growth in its country. This can be achieved primarily through the expansion of savings and the direction of investment into high return activities. In order to stimulate higher economic growth, well-designed tax systems should encourage competitive growth across various sectors of the economy. d. Revenue Adequacy: Since Government imposes taxes in order to provide certain public goods, taxes introduced should be appropriate and sufficient to finance the expenditure needs of the government over time. If the tax revenues are insufficient to meet expenditure needs, the government will resort to borrowing, printing money, selling assets or slowing down the implementation of development programs. 60 Budget Analysis Manual

The tax system should be buoyant; that is, tax revenues should increase at a rate equal to or greater than the growth of the GDP. To ensure this, the government should adopt tax policies that include growing sectors of the economy in the tax base. e. Revenue Stability: Just as revenue adequacy is important to finance government needs, the stability of tax revenues over time is equally important in order to maintain the continuity of the fiscal policies of the government. If the tax revenue tends to fluctuate over time, it creates an air of uncertainty that adversely affects government programs. When revenues fall, expenditures must be curtailed. In order to offset the impact of an unstable tax system brought about by constant changes in rates and in the rules of taxation, the private sector tends to procrastinate over long-term investment decisions and plans. When the tax system is structurally unstable, it becomes a source of risk and imposes another element of economic inefficiency on the country. f. Simplicity: A tax system should be transparent, so that it is easy to administer and simple for the taxpayers to comprehend and comply with. Simplicity must apply to the administration of the law as well as its legal structure. A complex tax system may impose a disproportionately high level of compliance costs on taxpayers, as well as a high cost of tax administration on the government. Complexity in tax administration and opaqueness in tax laws helps to induce corrupt behavior on the part of both taxpayers and tax officials. In such an environment, much of the efforts of the taxpayers and tax officials, which otherwise could have been used constructively for economic development, is channeled into circumventing the system. g. Low Administration and Compliance Costs: The simpler and the more transparent a tax system is, the lower its administration and compliance costs. As tax revenue is collected mainly to finance government needs, a high cost of tax collection reduces the net tax revenue available to the government. By the same token, a high compliance cost by taxpayers should reduce the resources available to the private sector for productive activities. Therefore, one of the criteria of a good tax system is low administration and compliance costs. If these costs constitute a major portion of the tax revenue, the tax system needs to be restructured.

6.4 Conducting Tax Expenditure Analysis

When Government chooses not to impose or collect taxes from, or reduce taxes burden of, some groups in society the Government is in effect transferring funds to those groups people. The value of these transfers need to determined and charged upon the budget.

• The Tax Expenditure includes those provisions of the taxation law that effectively tax certain classes of taxpayers or particular types of activities differently from the chosen benchmark structure. Tax expenditures are generally identified through an analysis of incentives or subsidies created by governments through various rules under the tax code. Tax expenditures may appear in different forms such as exemptions, allowances, credits, rate relief and tax deferrals.

• Tax expenditure Analysis. The process of quantifying and evaluating the impact of tax policies brought about by exemptions and incentives so provided within the tax system.

Generally speaking, besides the deviation from the established norm, tax spending is said to be present if:

• The tax relief benefits a particular person, group, sector, or activity;

• It is a relief placed intentionally and, hence, can be removed later (e.g., removal of tariff exemptions once an industry has reached a certain stage of development; and

• The relief can be measured (i.e., revenue loss due to exemptions). Budget Analysis Manual 61

Steps in Determining Tax Expenditure

• Establish Benchmark. To quantify tax expenditure, one would needs to first establish the benchmark or norm of the tax system or code (e.g. general regime in column 2). The norm generally includes the tax base, rate structure, accounting conventions, deductibility of payments, etc.

• Determine Tax Expenditure. When a tax provision deviates from this norm (as in column 3), by definition, a tax expenditure is created. In other words, tax rules, which reflect a departure from those contained in the normative tax structure or are designed to help specific groups or favor certain activities, should be considered as tax expenditures.

• Determine Revenue Loss. Using the benchmark and departure one can calculate the revenue losses incurred to the government from these relief measures are essentially equivalent to spending programs and have very similar distributional effects on particular groups within the economy. This approach regards tax revenue codes not just as mere instruments for revenue mobilization, but also as spending mechanisms.

Case Study: Tax Expenditure on Paladin’s Kayelekera Mine

In an attempt to incentivize Paladin to open the Keyelekera uranium mine in Karonga Government offered them a fiscal regime with concession that included: reduction in Royalty rate, corporate tax rate, resources rent, and exemptions from custom duties on both capital equipment and input and VAT during stability period. Based on this an analyst can calculate how much revenue the Government of Malawi forewent.

Table 15: Fiscal Regime for Paladin’s Keyelekera Mine

Rate and Method ImpositionImposition or or Allowance Allowance Rate and Method General Regime Kyelekera General Regime Kayelekera Royalty 5 percent (on gross value minus Years 1-3: 1.5 percent, limited transport costs) or as set in a deductions. Then 3 percent with mining license deductions Corporate income tax 30 percent 27.5 percent Resource rent tax 10 percent, after 20 percent rate of Exempt return Customs duties, capital 0 – 5 percent Exempt during stability period equipment Customs duties, current 10 – 15 percent Exempt during stability period inputs Value added tax (inputs) 16.5 percent (refundable in full, Exempt during stability period effective rate 0 percent)

6.5 Forecasting of Future Tax Revenues

A major role for the Legislative Budget Office is to determine the degree of realism in revenue projection presented by the executive. When revenue forecasts are optimistic, expenditures exceed revenues and government resort to deficit financing through borrowing or raising taxes. Like any forecast, revenue forecasts 62 Budget Analysis Manual are done according to certain underlying methodologies and common assumptions. These assumptions are made for such economic variables as growth in the national income, the rate of inflation, interest rates and so forth, including the international environment. This framework relies on currently available information and on what is assumed at the time in the estimation process.

• Evaluation of Tax Elasticity: For any tax system to be able to provide stable revenues to its government, it is desirable that the tax revenue can respond automatically to increases in the national income which result from economic growth. The pace of such an increase in revenue would depend on the revenue elasticity of the tax system. Evaluation of such a correlation between revenue and national income gives the tax policy unit a valuable insight into the overall tax system. This understanding assists the tax policy unit in planning for necessary tax changes confidently and in seeking the inclusion of the more buoyant sectors of the economy into the tax base.

• Evaluation of Changes in Economic Conditions. Revenue forecasts are based on variables and parameters consistent with the macroeconomic environment Changes in economic conditions are expected to modify revenue forecasting assumptions in various ways. For instance, changes in the foreign trade sector as a share of the total production in the economy affect the taxable capacity of a country. This is especially true in the case of a developing country like Malawi, in which trade taxes constitute a significant proportion of tax revenues. Similarly, devaluation of the domestic currency will also affect the quantities of imports and exports, which in turn will affect the trade tax revenues from import duties. Changes in the economic conditions of major trading partners will also have a significant impact on the domestic economy and on tax revenues.

• Evaluation of the Effect of Inflation and Price Changes. Movements in price levels have different effects on the tax structure and real revenue collection by the government. For instance, inflation has an ambiguous effect on business income tax revenues, by affecting differently the components of taxable income, such as depreciation allowances, accounts receivable and payable, and costs of goods sold. Furthermore, the impact of inflation on indirect tax revenues will ultimately depend on whether the tax is imposed on a unit tax or ad valorem tax. Therefore, the tax policy units have to account for the impact of inflation on the tax bases, for the behavioral responses and for the expected changes in real revenue conditions.

• Changes in Different Tax Bases:The measurements of changes in tax bases are absolutely critical in assessing the overall impact on revenue collection as well as in determining revenue adequacy and economic efficiency. Tax bases respond to the relative magnitudes of the elasticities of demand and supply. Thus, in depth analysis of elasticities may become a prerequisite for understanding changes in the tax base brought about as a result of these elasticities and the tax revenue collection.

• Business Income: To develop a model for the forecasting of corporate income tax revenues, the concept of business income, as defined in national accounts, is the logical starting point. However, adjustments have to be made, depending upon the nature of the tax laws, in order to come up with a reliable tax base. For instance, the impacts of accelerated depreciation allowances, loss carry back or forward rules, inventory valuation methods (e.g., FIFO, LIFO) or the extent of repatriated foreign income, all have to be taken into account to form a reliable tax base.

• Domestic Transactions of Goods and Services: Considering the fact that revenues from indirect taxes depend on the consumption of goods and services, forecasting techniques focus on the nature of domestic transactions of such goods and services. Analytical frameworks used to simulate consumption behavior and assess potential revenue collections require the construction of tax bases by breaking down the various categories of expenditures incurred by different economic agents, such as households, firms and the government. Also, the forecasting techniques require the identification of transaction flows of commodities by intermediate levels of production of goods and services, because they are tax free under Budget Analysis Manual 63

the destination principle of the VAT jurisdictions. • Growth in Demand for Goods Subject to Excise Tax. Real increases in the demand for a certain commodity have strong implications for excise tax revenues. Tax policy units are able to assess the revenue, efficiency and incidence implications of a tax with the help of demand elasticities. These demand elasticities help to explain expected shifts in demand for the goods subject to tax. It is also important to assess the revenue impacts in the markets for complementary or substitute goods by using cross price elasticity. An increase in the demand for a taxable good will affect revenue collections not only from that good but also from other goods in the economy.

64 Budget Analysis Manual Budget Analysis Manual 65

7. BUDGET ANALYSIS III: DEBT & AID ANALYSIS 7.1 General Overview

Like most developing countries, Malawi cannot raise sufficient resources to even cover the recurrent budget in a way that guarantees a minimum standard of decent living, let alone set aside some resources for development. It thus has to rely on foreign aid which comes in the form of loans and grants. Whereas grants reflect the benevolence of foreigners and typically come with political and trade conditionality, loans imply a commitment by the current generation of future generations’ revenues.

This chapter presents methods that can be used in the economic analysis of foreign aid. The analysis of aid considers aid modalities, aid dependence, aid effectiveness and finally present institutional arrangement for aid delivery in Malawi. With respect to debt analysis, we consider measures of debt burden and their linkage to debt sustainability. We finally apply these measures to Malawi’s economy.

7.2 Foreign Aid

The rationale for aid is twofold: 1) promoting priority developmental activities which may not yield a sufficient financial return (or not sufficiently quickly) to attract commercial finance; or 2) when even attractive investments cannot attract commercial finance due to market failure in international capital markets.

Aid Modalities

The way aid is delivered affects achievement of development and humanitarian outcomes since some modalities are more effective than others. Aid modalities refers to aid instruments or aid forms depend on the conditionality imposed on the use of the aid, the channels used (whether though government system or parallel system) and the degree of earmarking. In terms of what, there are three aid modalities

• Project Support: refers to funds provided to implement a specific and predefined set of development activities over a specified period of time. Typically, Project support is characterised by the use of a separate management structure and detailed objectives, activities and expenditures. Two different project forms can be singled out: project aid using parallel systems and project aid using government systems.

• Budget Support. Refers to un-earmarked contributions to the government budget with the purpose to implement poverty reduction strategies, macroeconomic or structural reforms. The support, usually a lump-sum transfer of foreign exchange, is divided into general budget support (gbs) and sector budget support (sbs). While both are non-earmarked support to the partner government budget, the difference is that assessments, dialogue and conditionalities are linked either to overall economy or to sectoral issues.

• Sector Programme Support (sps) (Dedicated Support). Refers to aid that is earmarked to assist the development of specific sectors in the recipient country. Within sps different aid modalities are used: projects within the overall sector programme framework, pooling of resources with other partners in so called basket arrangements or sector budget support. In Malawi, the most common sector programme support financing is a basket arrangement where donors pool their resources using a special account either managed by one of 66 Budget Analysis Manual the participating donors or by the respective line ministries. These funds are targeted towards the sector or a programme as a whole but are accounted for separately

Another dimension of understanding aid modalities relates to how aid is disbursed. Aid can be disbursed through the government budget (on-budget) or through parallel mechanisms e.g. NGOs (i.e. off-budget). Table 10 presents a summary of the aid modalities [both the what and how] and associated conditionality, earmarking and accountability.

Box 1: The Swap Principle

Sector Wide Approaches (Swaps) are generally defined as mechanisms “by which Government and donors can support the development of a sector in an intergrated fashion through a single sector policy and expenditure program, under Government leadership, using common management and reporting procedures and progressing towards the use of Government procedures to disburse and account for all funds.” swaps can include a wide range of aid instruments such as coordinated projects, sbs and sector basket arrangements.

Table 16: Typology of Aid

Aid modality Conditionality Earmarking Accountability gbs Macro & Budget None or notional Govt Systems sbs Sectoral Notional Govt systems Basket Arrange- Sectoral Real within sector Blend of govt and donor systems ment Projects using (Sector &) Project Real to project Blend of govt and donor system govt systems Project using par- Limited (due to low govt Total (Real) Donor allel systems ownership) Projects through Limited (due to low govt Total (real) Donor/NGO NGOs ownership)

Aid Dependence

A country is aid dependent if it will not achieve objective X in the absence of aid for the foreseeable future2. More generally, a country is aid dependent if it cannot perform many of the core functions of government, such as delivering basic public services, without foreign aid3.

2 Lensik (1992) Aid Dependence: Issues and Indicators 3 ActionAid (2011) Budget Analysis Manual 67

Measurement of Aid Dependence. According to the World Bank (1995) aid dependence is primarily measured using aid dependency ratios, especially ratio of aid to gross nation income. This measures aid in relation to the size of the economy4.

Net ODA Aid Ratio = 1 Gross National Income

In terms of Public Financial Management, aid dependence can be measured at the level of the nation, by either calculating the share of national budget funded by grants or deriving grants as a share of the resource envelop (overall revenues).

Net ODA Aid Ratio = 2 Central Government Budget

Table 17 shows the evolution of Malawi’s debt rations. Prior to reaching the completion point of the Highly Indebted Poor Countries, Malawi was increasingly becoming more aid dependent, with aid accounting for two-fifth of the budget. Ironically, since 2013, measures of aid dependency have improved, due to reduction of aid receipt on account of the “cash gate” scandal in 2012.

Table 17: Evolution of Aid ratios for Malawi (2000-2015) 2000 2005 2010 2015

Aid as % of GDP 5.25 10.17 5.59 3.87 Aid as % of Budget 27.37 41.50 21.72 14.64

An alternative way of measuring aid dependence is for cross-country comparison of per capita aid dependence. In this case aid dependence is measured as follows

Net ODA Aid Ratio = 3 Population

Table 18 shows that Malawi is more aid dependent than her peers with about USD60 per capita and aid accounting for 17 percent of Gross National Income

Table 18: Malawi Aid Dependence (Debt Per capita) Country/Group USD per capita Proportion of GNI

Malawi 59.71 17% HIPC Average 51.38 6% LDC Average 44.94 5% SSA Average 45.62 3% Source: Authors compilation based on World Bank development indicators

4 Another measures is the which measure access to foreign capital markets 68 Budget Analysis Manual

However, in countries like Malawi, not all sectors receive aid so that the average measures of national aid dependence would mask sectoral dependence ratios. Although the on-budget aid component for Malawi budget ranges from 22 to 30 percent, the health sector is 75 percent dependent on aid.

Institutional Arrangements for Aid Delivery

In the spirit of principles for aid effectiveness, a number of engagement platforms have been created in Malawi. The 2014-2018 Development Cooperation Strategy (DCS) recognises the importance of inclusive dialogue by setting up various engagement platforms. As depicted in figure 3 below, these include: (1) High Level Forum on Development Effectiveness; (2) Sector Working Groups; (3) Common Approach to Budget Support Mechanism; (4) Intra-government Coordinating Group; (5) Development Partners Dialogue Groups, (6) PFEM Dialogue Structures, (7) Non-state Actors dialogue groupings; (8) Public Private Dialogue and (9) District Dialogue Mechanism. Evidence though indicates that structures that have mediated meaningful dialogue

Figure 9: Institutional Arrangement for Aid Coordination and Monitoring Budget Analysis Manual 69

Note: CABS: Common Access to Budget Support; DP: Development Partners; HLF: High Level Forum; PFEM: Public Finance and Economic Management; GFEM: Donor group on Finance and Economic Management;

7.3 Debt Analysis

The Malawi Constitution and the Public Finance Management Act empower the Minister of Finance to enter into negotiations for grants and sovereign borrowing. In general, sovereign borrowing arises from three sources: commercial, bilateral and multilateral. • Multilateral: borrowing from multilateral financial institutions (e.g. AfDB, IMF and WB). Multilateral lenders usually impose concessional conditions (i.e. loans have a grant element equivalent to 30 percent, and generous grace period). Multilaterals, especially IMF and World Bank conditionality that involve detailed participation in the state’s development plans and all aspects of the state’s economic policies. • Commercial: Whereas commercial banks impose primarily financial conditions (interest rates, spreads, periods of repayment, etc.). Under the conditionality for accessing IDA funding, Malawi is barred from contracting commercial loans. • Bilateral: Lending between national governments (e.g. from China EXIM bank or Indian line of credit). In general, bilateral lenders impose trade conditions (e.g. that Malawi should buy goods or use vendors from the lender country).

Understanding Debt Sustainability

Debt burden and sustainability are two sides of the same coin and basically rely on the same measure. To understand measures of debt burden and sustainability one needs to first understand the concept of debt stock and debt service.

• The debt stock refers to the accumulated debt comprising outstanding debts from fiscal deficits and borrowings and sometimes contingent liabilities from State owned enterprises.

• Debt Service. Refers to payment of interest plus amortization (principal payments on debt including short- term debt repayments).

Measurement of Debt Burden

The most common approach to measuring debt burden uses ratios of the debt stock or debt service to some measures of the country’s repayment capacity or its ability to service debt or its. Repayment capacity can be captured by size of the economy (GDP), size of the foreign sector (export proceeds), or size of government (fiscal revenue).

• Debt to GDP ratios allows the indicators to be adjusted by the size of the economy; • Debt to Export ratios indicate whether the country can be expected to generate sufficient foreign exchange to meet its external debt obligations in the future; • Debt to Revenue ratios measure the government’s ability to mobilise domestic resources to reimburse debt.

Debt Stock Debt Burden = 1 Payment Capacity 70 Budget Analysis Manual

Debt Service Debt Burden = 2 Payment Capacity

These measures suggest that what matters in practice is not the level of debt itself but the ratio of debt relative to a measure of capacity to repay.

Understanding Debt Sustainability: In practical terms, debt is said to be sustainable if projected debt ratios are stable, decline over time and are sufficiently low5. Debt is unsustainable if the projected debt ratios either increase or remain high.

The IMF and World Bank have a toolkit for debt sustainability analysis (DSA). The DSA framework consists of two complementary assessments of the sustainability of (i) total public sector debt and (ii) total external (i.e., public and private) debt. These assessments seek to obviate two types of Debt Crises.

• Sovereign debt crises, which consist of defaults, involuntary restructuring of sovereign debt, or just the belief that one of these events is about to occur.

• External debt crises: they are characterised by payment arrears on a substantial fraction of external debt and they tend to occur when countries experience cash flow problems or difficulties in obtaining foreign exchange.

Under the IMF/WB DSF, borrower countries are classified into three policy performance groups: strong, medium, and weak. Thresholds corresponding to the strongest policy performers are the highest, indicating that in countries with good policies debt accumulation is less risky and vice versa.

Table 19: Maximum Allowable Threshold for Debt Sustainability

Country is ratedrated Present Value PresentDebt Service Value of Debt in Debt Dervice as as having of Debt in as PercentPercent of of Percent of Percent of Exports GDP Revenue Exports Revenue Weak Policy 100 30 200 15 25 Medium Policy 150 40 250 20 30 Strong Policy 200 50 300 25 35

Application to Malawi

• Overall Debt. Recent IMF/WB DSA further observe that Malawi’s rate of debt accumulation has been one of the fastest amongst countries that benefited from the HIPC and MDRI debt relief. Malawi’s public debt has increased from 26.7% of GDP in 2007 (immediately after the HIPC and MDRI debt relief in 2006) to 54.6% of GDP in 2016.

• Foreign Debt. As of 2017, Malawi’s public and publicly guaranteed (PPG) external debt stood at about US$2 billion (32.6 percent of GDP) in 2017. Public external debt is held mainly by multilateral creditors (78 percent of total, Table 14). The main provider of loans to Malawi is the World Bank group (IDA) (43 percent), followed by the African Development Fund (AfDF) (14 percent) and the IMF (11 percent). Among bilateral lenders, China (12 percent) and India (7 percent) are the main holders of debt with China surpassing the

5 According to the IMF and World Bank debt is sustainable if the country, or its government, does not, in the future, need to default, or renegotiate, or restructure its debt, or recur to implausibly large policy adjustments. Budget Analysis Manual 71

IMF as Malawi’s third largest creditor.

• Domestic Debt. Gross domestic debt increased from MK206.6 billion (13.8 percent of GDP) at the end of 2012 to MK1,015 billion (22.6 percent of GDP) at the end-2017 . Much of this is held by the Reserve Bank of Malawi (RBM, the largest creditor), commercial banks, and the non-bank financial sector. The single largest category is Treasury notes whose relative burden grew from 1.3 percent of GDP in 2014 to 14.4 percent in 2017.

Table 20: Malawi Sources of External Debt

2015 20152016 2017 2016 2017 ActualActual ShareShare ActualActual ShareShare ActualActual Share Multilateral 1,343.1 75 1,362.3 76 1,584.3 78 IMF 162.8 9 206.1 12 223.8 11 IDA 589.9 33 642.2 36 860.1 43 AfDF 228.8 13 247.9 14 290.3 14 IFAD 71.8 4 72.5 4 77.5 4 Other Multilaterals & 289.8 16 193.7 11 132.6 7 PTA

Bilateral 439.5 25 426.2 24 436.7 22 Belgium 1.7 0 1.7 0 1.7 0 China 242.7 14 226.9 13 237.9 12 India 151.7 9 147.3 8 142.1 7 Others 43.3 2 50.4 3 55 3

Commercial 0.39 0 0 0 0 0 Total 1,783 100 1,789 100 2,021 100

72 Budget Analysis Manual Budget Analysis Manual 73

8. BUDGET ANALYSIS: HUMAN RIGHTS PERSPECTIVE 8.1 General Overview

The Government of Malawi (GoM) is party to a number of international human rights conventions, a number of which have been domesticated in the Bill of Rights in the Constitution and other laws. The GoM is, therefore, obligated to undertake all action and policies to promote, protect and enforce the rights it has committed to.

A right is an entitlement to something. A person has a right when that person is entitled to act in a certain way or entitled to have others act in a certain way towards them. Whereas some rights derive from formal laws of the country (de jure) other rights derive from practice, principles and moral standards (de facto). Rights are categorized into three broad categories: Civil and political rights, Socio-economic rights and Collective developmental human rights. In Malawi the Constitution embodies all fundamental rights and stipulates that all Malawians are entitled to equal rights before the law.

• Civil and Political Rights: focus on what the state should not do to interfere with people’s freedoms, such as freedom of speech, association and belief. Rights that protect a person from interferences include the right to life, liberty and security of person, the prohibition of slavery, torture and maltreatment.

• Socio-Economic and Cultural Rights: focus on what the state should do to promote people’s rights and they are very important for each and every one to live a life in dignity. They are concerned with ‘equality’ of condition and treatment, for instance that the state to guarantee the right to education, health etc.

• Collective Developmental Rights: focus on what the state should do in protecting rights of groups affiliated by similar interest e.g. religious groups. Collective developmental rights include the right to speak one’s native language and educate children in that language and the right to cultural preservation.

Human rights based budget analysis (HRBA) seeks to ensure that the state, through the budget, lives up to its obligation to protect, promote and fulfill the Economic, Social and Cultural rights.

8.2 Framework for HRBA

Human rights law provides principles that underpin protection, fulfillment and realisation of ESC rights. These principles are also relevant for framing the nexus between state obligation over ESC rights and budgets, and how HRBA can be conducted.

Progressive realisation: The State is obligated to take positive measures that “progressively realise” the full enjoyment of ESC (i.e. consolidating on what citizens already enjoy). In HRBA, progressive realisation, as a relative concept, places the burden of proof on the State to demonstrate that every effort has been made to progress ESC rights within the resources it has on hand.

• Immediate Realisation: The State has an immediate duty to take steps towards realising ESC rights that are not dependent on resources or the concept of progressive realisation. The right of non-discrimination may include obligating the State to ensure equality in terms of wages for work of equal value and equality between genders. 74 Budget Analysis Manual

• Protection of the minimum core of rights. The state has an obligation to ensure citizens’ access to a minimum essential level of ESC that safeguard a person’s right to an adequate standard of living. In HRBA, the test is whether resource allocation ensures that people in the State can live in dignity.

• Maximum Available Resources: Even in times of resource constraints, States are obligated to use their “maximum available resources” to progressively realise ESC rights in an effective manner. HRBA assesses relative allocation to sector which signify priority attached to particular right.

• Non-retrogression: A State cannot roll back on progress made on human rights realisation, except in very limited circumstances. The HRBA implications are that the state must explore revenue-raising alternatives before making cuts that would directly or indirectly affect the enjoyment of rights, such as cuts in the public sector, public services or social protection.

8.3 Qualitative Methods HRBA

a. Assessing Adequacy, Affordability and Accessibility

The State has a duty to use public finances as effectively as possible for the maximum benefit of society. To assess whether the State is meeting this obligation, HRBA requires one to ask, in relation to any measure taken or omitted to be taken in national budget, whether the measure gives people a fundamental right which is adequate, affordable and accessible.

• Adequacy: Each decision in the budget process should be interrogated on whether it is adequate enough to protect certain affected rights. To check on the adequacy of budgeting for a given right one needs to determine the budget allocation for the right in a particular year, comparing it with previous year’s budget and considering the increase/decrease in the number of beneficiaries.

• Affordability: HRBA test for affordability assesses whether a measure makes citizens access to an ESC right more possible. For instance, introduction of charges or user fees (e.g. school or hospital fees) may create a financial obstacle that obstructs the enjoyment of the right for some groups in society.

• Accessibility: A right is accessible if people are not restricted from realising it and are actively supported to do so; this might involve incentives, tailored schemes or programmes. The more people who have equal access to a human right, the more accessible it is. Budget decisions can make education, housing, or health either more or less accessible in terms of finances.

8.4 Quantitative Methods of HRBA

HRBA in State Priorities

HRBA is undertaken to identify the priorities the state has set for its public expenditures and to find out whether these priorities and public allocations can promote enjoyment of the right in question.

1. Identify expenditure mix by classifying the budgets of all MDAs by right and function. This step seeks to determine how much is allocated for the creation of conditions that facilitate the realisation of ESC rights, how much is allocated for policies, programs and projects that appear to obstruct the realisation of ESC rights, and how much is allocated for other functions of the state. 2. Determine State priorities in the budget. Compute the share of allocation for each right and function to total allocations (allocation to a right as percentage of total budgetary allocations, etc.). 3. Compute the per capita allocation. For each right and function add up all the amounts in each Budget Analysis Manual 75

classification and divide the total by the population

HRBA against National Standards.

In many cases, state and non-sate actors may establish standards or parameters that relate to ESC rights. In Malawi, government sets minimum wages while the center for Social Concern calculates what can be termed a living wage.

1. Determine per capita allocation for Social services (e.g. the right to education, health, housing, and social services)

2. Add the per capita allocations for the realisation of the rights to education, health, housing and social services and compare the total per capita rights allocations with the state’s poverty threshold.

3. Derive total per capita daily allocation and compare with daily minimum wage and daily cost of living. Divide the total per capita rights expenditure by 365 days to arrive at the rights expenditure per capita per day. Then compare the rights expenditure per capita per day with the officially mandated daily minimum wage and the estimated daily cost of living.

4. Determine whether ESC rights expenditures with the daily minimum wage and daily cost of living. Will these allocations result in the enjoyment or non-enjoyment of ESC rights?

HRBA Against International Standards

To determine whether state allocations for the realisation of ESC rights match international standards, one may compute the share of selected allocations as a percentage of the state’s Gross National Product and as a percentage of the budget and compare these figures with international standards.

1. Compute the share of selected allocations as a percentage of the state’s resource base. This may include computing the total allocation as a percentage of the budget or of the state’s Gross Domestic Product or per capita spending. 2. Compare the relative allocations for the rights against allocation of other countries with comparable Gross Domestic Products to determine the standing of the state vis-à-vis other with comparable income (preferably in states dollars). 3. Compare the share of allocation to a right with international standard or benchmarks for budget allocation e.g. those by WHO and UNESCO or African Union.

Text Box 2: Examples of International Benchmarks for Budgeting

Agriculture. The Common Approach to Africa’s Agricultural Development Policy (CAADP) Agenda puts the floor on agriculture allocation at 10 percent of the budget.

Right to Education. The UNESCO Education for All (EFA) Dakar Declaration and Framework for Action of 2000 puts the floor on spending on education at 20 percent of the budget.

Health Benchmarks. a. The Abuja Declaration committed African Union member countries to allocate at least 15 percent of their annual budgets to public health spending. b. The World Health Organization global target encourages states to spend at least five percent (5 %) of their Gross National Product on health expenditures. 76 Budget Analysis Manual c. The United Nations Development Programme recommended that states adhere to a Human Expenditure Ratio of 5 % of the Gross National Product and a Human Development Priority Ratio equivalent to 20 % of the national budget.

8.5 A Rights-based Approach to Revenue Analysis

Beyond an assessment of how the state allocates funds or spends resources, it is imperative for HRBA to interrogate how the State raises revenue since that may also affect the enjoyment of certain rights and result in the retrogression of some rights. HRBA towards revenue analysis seeks to determine how much financial resources are available for state use and how the state intends to raise these resources.

A simple way to determine the potential human rights impact of a tax revenue generation measure is to determine whether it is essentially a direct or indirect tax.

• Direct taxes. Tax where the burden falls on the one paying the tax. They are usually progressive and computed on the basis of the taxpayer’s income or personal assets such that those with greater income pay a larger tax.

• Indirect taxes. Taxes whose burden falls persons other than the one on whom the tax is legally imposed, e.g. Value Added Tax (VAT). They are usually regressive (everyone pays same amount)

In situations where domestic revenues are generated mainly through indirect taxes, the state may be said to be in breach of its obligation to respect ESC rights in three different ways.

• When the poor pay the same amount of taxes as the rich (e.g. VAT), the poor are actually paying proportionately more taxes than the rich are. In general, a flat or lump-sum tax represents a bigger share of the income of the poor than the rich.

• When imposition of a tax results in rising prices and effective reduction of purchasing power and capacity for the access, enjoyment and realisation of ESC rights.

• When the state introduces or raises fee on government services (e.g. license fees or hospital fees). Such a change affects the enjoyment of these rights by some or all vulnerable citizens.

Looking at taxation revenues, determine who bears and shoulders the tax burden

Compute the share of direct and indirect tax to total tax revenues (direct tax as percentage of total tax revenues and indirect tax as percentage of total tax revenues) and

• Compute the ratio of indirect tax to every 1.00 in domestic currency of direct tax collected (divide indirect tax by direct tax to arrive at the ratio of x indirect tax: 1.00 direct tax).

Budget Indicators Applicable to HRBA

A rights-based approach towards budget analysis may use the following budget indicators: (a) non-allocation of available financial resources; (b) budgetary allocations; (c) inappropriate expenditure mix; (d) imbalance in categories of current expenditures; (e) budget cuts; and (f) under-utilization of allocated financial resources. a. Non-allocation of available financial resources - absolutely no funds are allocated for a step which Budget Analysis Manual 77

the state is, by its treaty obligations under the ICESCR, required to take, or for benchmarks towards the progressive realisation of ESC rights which the state itself set. b. Budgetary allocations – capital expenditures (infrastructure, equipment, etc.), current expenditures (salaries and wages, etc.), subsidies and other amounts in the national budget for state use to finance its activities. c. Imbalance in categories of current expenditures - disproportionate or unequal spending on budgetary items which result in breaches of ESC rights such as, for example, declining share for medicines and other hospital supplies due to increasing staff salaries and allowances of the personnel of the Department or Ministry of Health. d. Inappropriate expenditure mix - distribution of expenditures (a) among different state functions (greater allocations for national defense or debt service and less allocations for health, food, education, or housing), (b) within levels of spending patterns (higher allocations for university education and lower allocations for primary education), and (c) by geographic location (greater allocations for urban centers and less allocations for rural areas) which result in the state’s nonobservance of its ESC rights obligations e. Budget cuts - reductions in public allocations that may be seen in state budgets that provide multi-year data. The UN Committee has implied that where there is no apparent justification for a reduction in public expenditure, the state might be considered to have violated its obligations under the ICESCR f. Under-utilization of allocated financial resources – funds already allocated for services, projects and programs necessary to the enjoyment and realization of ESC rights are improperly utilised resulting in breaches of state obligations 78 Budget Analysis Manual Budget Analysis Manual 79

9. BUDGET MONITORING AND CONTROL 9.1 General Overview

The budget that a government produces is only a plan for what government intends to implement over the coming year. It does not tell us what actually happened. It is therefore necessary to monitor and evaluate a budget to assess what has actually happened, whether it fit with the plan and whether what was spent achieved all it was supposed.

Monitoring is the routine collection and analysis of information on implementation/progress vis-à-vis original plan and its follow up. Budget monitoring is a continuous assessment of implementation of the budget in relation to originally agreed resources allocation.

Evaluation is concerned with budget outcomes (the direct change in quality of life in society that results from budget outputs). It is an assessment of whether intended objectives of the budget have been met.

Aim: The main aim of budget monitoring and control is to gather information on budget implementation to provide an assessment of how the budget is being implemented compared to plan. This can be used to

• Provide timely and frequent information on budgetary performance • Provide information on whether the budget is aligned with expenditure • Provide information as to whether expenditure is aligned with policies/priorities • Check the level of compliance by the government with its economic and social rights and obligations • Provide a view over time on the status of programmes supported by public resources • Identify potentially promising programs or practices • Identify and take action to correct weakness in budgetary allocation and implementation

Monitoring the budget capacitates legislators to provide oversight over the actual implementation of the budget thereby improving budget outputs and outcomes, and reducing the gap between approved budget, budget disbursement and actual expenditure

9.2 Generic Budget monitoring

In light of the mandate of the Parliamentary Government Assurance Committee, it is imperative for the Parliamentary Budget Office to design and put in place a monitoring and evaluation system. The following steps will be necessary to formalise the process

1. Undertake a systematic analysis of the Malawi budget process, objectives, policies and priorities and policies of the government. 2. Develop a log-frame which shows the logical relationship between the means and ends. 3. Develop a monitoring and evaluation plan that clearly defines what information will be collected. 4. Develop indicators that will be used to verify if the budget process have been aligned with budget principles and if the budget objectives have been achieved. 5. Carry out a baseline study to establish initial level of indicators to allow for comparison (trend analysis). 6. Develop instruments for collecting required information, plans for analysis a 80 Budget Analysis Manual

9.3 Monitoring Programme Based budget

In recent years Malawi has migrated from Classical budgeting to Programme (or Output) based budgeting (PBB). In Classical budgeting, monitoring is anchored on comparisons of actual budget metrics with approved and explaining identified variances. Under PBB, at the budgeting stage MDAs commit to deliver quantifiable and verifiable outputs which are linked to higher level outcomes and impacts. Monitoring a PBB involves tracking the causal chain from the budget process, input, output and outcomes.

Figure 10: Phases in Monitoring Programme Based Budget

Inputs. Input level monitoring principally tracks funds, material resources and human resources allocated to a program. Financial inputs are monitored through financial indicators and monitoring involves tracking how much resources were deployed to achieve planned outputs.

Outputs. Output level monitoring seeks to gauge the extent of efficient and effective use of inputs. Monitoring assesses immediate achievement through achievement or performance indicators – checking what was produced as compared to the planned outputs in relation to the budget

Outcomes level monitoring seeks to establish the effectiveness of the programs by gauging benefits from usage of outputs by looking at improvement indicators in the standard of living

Program level monitoring looks at how many resources were deployed at program level to achieve program results in relation to the budget.

9.4 Budget Tracking

A thorough and detailed review of the budget and actual expenditure is known as budget tracking. Budget tracking, as pointed out by Lav (1999) “involves the collection, study and interpretation of budget data, the correlation of budget data to other relevant information such as state policies and programs and the establishment of finding and results”. Its aim is to provide analysis and information that is credible and accessible to a wide range of audiences, and makes a timely contribution to policy debates, with the purpose of affecting the way budget issues are decided and the decisions that are made.

Budget tracking is the assessment of whether or not a state’s allocation in the budgets and their implementation are in compliance with its obligations or specific policy objectives. In what follows, important points to be considered in the budget tracking at each stage the budget process are identified. Budget Analysis Manual 81

Tracking budget Approval and Appropriation

Seeks to check the conformity of process with (i) laws and the constitution and/or (ii) criteria and process for allocating resources among regions

Budget Execution/implementation

• Seeks to establish operational efficiency by tracking

• How much of the budget is spent and tracking what happened to funds that are unspent.

• funding flows and bottlenecks, ensuring accountability and transparency (corruption, wastage)

• trends in actual expenditure and its adequacy – whether actual expenditure is in compliance with government’s policies and priorities.

• progress in actual expenditure (id government’s response for specific purposes improving)

Tracking budget control (performance monitoring – audit and evaluation)

Seeks to assess

• allocative efficiency (i.e. whether the right programmes are being funded and whether those programs are the most cost effective)

• output of the budget (is the budget meeting its target goals)

• Outcomes (what impact has the budget had on lives of the citizens and the economy? Is there transparency and inclusion of non-state actors in the monitoring and evaluation

Tracking budget from Human Rights Perspective

Budget tracking from a rights perspective tracks public allocations to determine their impact on ESC rights and concomitant state obligations in a variety of ways.

• Public allocations are scrutinised to find out whether the state has appropriated funds to protect particular rights.

• Public allocations may be further probed to determine whether the expenditure mix, levels and categories of re-current budget comply with state obligations to respect, protect and fulfill rights.

• Public allocations may be compared with status and conditions of ESC rights to determine whether state allocations are geared towards the satisfaction of these rights.

• Public allocations may be compared against international standards for rights expenditures and national standards related to the enjoyment and exercise of specific rights

• Public allocations may be compared against expenditure from a rights perspective 82 Budget Analysis Manual

Indicators of HRBA

In general budget tracking from a rights-based approach may use the following budget indicators

• Budgetary allocations: capital expenditures, current expenditures and subsidies from the Central government;

• Imbalances in categories of current expenditures – disproportionate or unequal spending on budgetary items which result in breaches of human rights

• Composition of expenditures among different state functions:for example priority may be given to national defence and security or debt service with less resources allocated for education and health

• Changes in public allocation observed in time series data, a multi-year comparison of the state’s budget. Budget Analysis Manual 83 84 Budget Analysis Manual

REFERENCE ActionAId (2011) Real Aid 3: Ending Aid Dependency, ActionAid London, UK. CSPR (2017) HRBA Budget Tracking and Service Delivery Training Manual, Civil Society for Poverty Reduction, CSPR, Zambia Diokno, M.S.I (1999) A Rights-Based Approach towards Budget Analysis, Quezon City, Philippines Golosov M., & J. King (2002) Tax Revenue Forecasts in IMF Supported Programs, International Monetary Fund, Fiscal Affairs Division, IMF Working Paper WP/02/236 Government of Malawi (1995), The Constitution of the Republic of Malawi, Government Printer. Government of Malawi (1998), Local Government Act (No of 1998), Government Printer. Government of Malawi (1998), Reserve Bank of Malawi Act, Government Printer Government of Malawi (2003) Public Audit Act (No 6 of 2003), Government Printer. Government of Malawi (2003) Public Finance Management Act (No 7 of 2003), Government Printer. Government of Malawi (2009), Budget Manual, Ministry of Finance, Lilongwe. Government of Malawi (2017), Integrated Planning and Budgeting Manual, Ministry of Finance and Economic Planning and Development, Lilongwe Government of Malawi (2018) Public Audit (Amendment) Act, No 10 of 2018, Government Printer IMF (2018) MALAWI: 2018 Article IV Consultation and Request for a Three-Year Arrangement under the Extended Credit Facility, International Monetary Fund, Washington DC Jenkins,G.P., Chun-Yan Kuo, G. P. Shukla (2000) Tax Analysis and Revenue Forecasting: Issues and Techniques, Harvard Institute for International Development, Harvard University John K. Johnson & Robert T. Nakamura (2006), Orientation Handbook for Members of Parliaments, World Bank Institute, Washington D.C. Malawi Country Profile, Local Government Service Commission – LGSC OECD (undated) Evaluating Budget Support Methodological Approach, OECD Development Assistance Committee, Network on Development Evaluation, Paris OHCHR (2010) Human Rights in Budget Monitoring, Analysis and Advocacy Training Guide, Office of the High Commissioner for Human Rights 2010 Geneva OHCHR training Parliament of Kenya (2017) Analysis of Finance Bill 2017, Parliamentary Budget Office, Nairobi, www.parliament. go.ke SADC (undated), MPs Orientation Handbook, SADC Parliamentary Forum, Professional Performance and Development for Parliamentarians, Gaborone. Santiso, C., & M. Varea (2003) Strengthening the Capacities of Parliaments in the Budget Process, Inter-American Development Bank - Institutional Capacity of State Division, Policy Brief No. IDB-PB-194 Schiavo-Campo, S. & D. Tommasi (1999) ‘Budget Execution (Part 2)’, in Schiavo-Campo, S. and Tommasi, D. (eds) Managing Government Expenditure. Manila: ADB. www.adb.org/documents/manuals/govt_expenditure/ Schiavo-Campo, S. & D. Tommasi (1999) Managing Government Expenditure. Manila: ADB. www.adb.org/ documents/manuals/govt_expenditure/ Shah, A. (ed.) (2007) Budgeting and Budgetary Institutions. Washington, DC: World Bank. http://siteresources. worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf Shah, A. and Shen, C. (2007) ‘A Primer on Performance Budgeting’, in Shah, A. (ed.) Budgeting and Budgetary Institutions. Washington, DC: World Bank. http://siteresources.worldbank.org/PSGLP/Resources/ BudgetingandBudgetaryInstitutions.pdf Simson, R., N. Sharma & I. Aziz (2011) A guide to public financial management literature for practitioners in developing countries, Overseas Development Institute (ODI), London Budget Analysis Manual 85 86 Budget Analysis Manual

APPENDIX 1: FORMAT FOR BUDGET ANALYSIS The format for budget analyses varies across jurisdictions, it is recommended that the Parliamentary Budget Office adopt a format with the following elements as a minimum.

1. Compliance of the budget to the legal provisions 2. Alignment of the 2018/19 budget with the policy agenda of government; 3. The realism of the Macro-Fiscal Framework underpinning the budget; 4. Analysis of the Budget.

Here below is a proposal on the minimum content for populating these sections

Legal Compliance (1 paragraph) In Malawi the budget process is governed by Section VIII of the Constitution and the Public Finance Manage- ment Act. The latter sets certain parameters and timeframes for budget-related activities. As such, every time Parliament receives the budget or money bills for discussion, it needs to confirm that the budget presentation has complied with requirements of the law, especially in terms of timing, form and documentation. Consider the following

PFM ACT, PART III S14 Obligates the Minister to submit to National Assembly an Economic and Fiscal Policy Statement by 1st April of every year.

S15 Obligates the Minister to prepare and present a Budget Policy Statement

S16 Obligates the Minister to have a Fiscal Strategy

S17 Obligates the Minister to present Economic and Fiscal updates no later than 30th June.

PFM ACT, PART IV S21 Obligates the Minister to obtain cabinet approval of budget Estimates at least 14 days before presentation to the National Assembly.

S22 Gives the form of the estimates

S23 Stipulates requirements for Appropriation

Alignment with Policy Agenda (1-2 pages)

Malawi has a long-term plan (Vision 2020) which is supposed to be implemented through medium term (5- year) development plans e.g. MGDS III. The annual budget represents an implementation plan for the medium term plans and needs to be analyzed in terms of its alignment with both the medium and long term agenda.

Are funding priorities in the budget the same as development priorities? If yes, are the development priorities adequately and equitably funded in the budget? If no, which priorities have been discarded and what’s the Budget Analysis Manual 87 likely effect?

Does the proposed budget introduce any major Policy Proposals or initiatives? If yes, to what extent is this likely to draw funds away from agreed development priorities?

Realism of the Macro-Fiscal Framework underpinning the Budget

Before discussing the budget, the Minister’s budget statement normally discusses the global and regional macro-economic outlook based on the World Economic Outlook (WEO) produced by the International Monetary Fund. Then it discusses prospects for the coming year, given the expected impact of agro-climatic conditions on agriculture, and other developments in real sector.

The budget analyst should interrogate the realism of the macro-fiscal framework based on the macroeconomic sectors – the real, monetary, foreign and fiscal sectors. This is crucial because domestic revenue assumptions for the fiscal sector depend on assumptions about growth of the real sector and while taxes on international trade are based on projected growth rates in imports.

Real Sector: (use Budget Document # 2 - Economic Report)

Analyse sectoral growth, especially outlook on agriculture and economic growth. Where will growth come from? - are the Executive’s claims about economic growth valid when you consider sectoral growth?

Is the growth rate consistent with growth required for poverty alleviation in MGDS?

Monetary Sector: (RBM Monthy/Quarterly Economic Review)

Comment on trends in inflation and how they reflect macro-economic health. Are forecasts of inflation consistent with prevailing economic fundamentals?

Has RBM’s and Commercial Bank’s interest setting correctly priced in risk from inflation? Are real interest rates (deposit and lending) positive or negative?

Foreign Sector:

Context: Global, regional developments (Based on World Economic Outlook - IMF)

Analyse trends in imports and exports and trade balance (RBM & NSO)

Link to trends exchange rate stability and foreign reserves and. (RBM and NSO)

Fiscal Sector: Just a brief paragraph since the rest of the analysis deals with fiscal performance

This analysis at most takes two pages - each of the sectoral analyses should at most be a paragraph (half- page).

Analysis of the Budget (use Budget Document # 3)

Budget Performance. Either last fiscal year’s budget or performance up to the mid-year in case of mid-year budget review.

Performance of revenues & Grants 88 Budget Analysis Manual

Performance of expenditures

Financing

Proposed budget (interrogate assumptions and projections on)

Proposed revenues and Grants

Proposed expenditures

Proposed Financing

Make observations on Development

Selected Votes Comment on votes (MDAs) that over/underperformed

Comment on Top ten votes in terms of absolute or relative allocation

Comment Top ten votes in terms of % growth/cuts in allocation

Proposed Tax Measures

Comment on tax measures proposed by the ministers in terms of revenue impact on macro-economy.

Analyse impact on private sector and household welfare in terms of incidence, equity and affordability.

If the measures include tax or duty waivers, conduct a tax expenditure analysis to determine revenue loss. Are tax giveaways compensated by other revenue measures?

Conclusion (Three paragraphs -no new numbers, just narrative summary))

Para 1. Summary observation on budget performance

Para 2. Summary observations on proposed budget – implications of revenue and expenditure projections on fiscal sustainability. And implications of the split between recurrent and national development.

Para 3. Evaluation and recommendation Budget Analysis Manual 89

APPENDIX 2: LEGISLATIVE IMPACT ANALYSIS OF BILLS Types of Bills Bills that come to Parliament for legislative approval may be classified on the basis of their content as Ordinary Bills, Money and Finance Bills, and Constitution Amendment Bills.

Constitution Amendment Bills: These bills seek to amend the Republican Constitution.

Money and Financial Bills: A Bill is considered to be a Money Bill if it contains only provisions dealing with all or any of the following matters listed below. A Financial Bill may contain other proposals in addition to these. For example, a Bill that contains a taxation clause, but does not deal solely with taxation is a Financial Bill. a. The imposition, abolition, remission, alteration or regulation of any tax; b. The regulation of money borrowed by the Government of Malawi or any guarantee given by the Government of Malawi. The Bill can also consider amendment of the law with respect to any financial obligations undertaken or to be undertaken by the Government of Malawi; c. The custody of the Consolidated Fund of Malawi or the Contingency Fund of Malawi , the payment of moneys into or the withdrawal of moneys from any such Fund; d. The appropriation of moneys out of the Consolidated Fund of Malawi; e. The declaring of a new item to be expenditure charged on the Consolidated Fund of Malawi. Also, if there is any increase in the amount of any such expenditure; f. The receipt of money on account of the Consolidated Fund of Malawi or the Public Account of Malawi; or g. Any matter incidental to any of the matters specified above.

Ordinary Bills: Any Bill which is not a Constitution Amendment Bill or a Money Bill is classified as an Ordinary Bill. Ordinary Bills include Original Bills (which embody new proposals, ideas or policies), Amending Bills (which modify, amend or revise existing Acts), Consolidating Bills (which consolidate existing law on a particular subject), Expiring Laws (Continuance) Bills (which authorise the continuation of an expiring Act), and Bills to replace Ordinances issued by the President.

Scope for Legislative Fiscal Impact Analysis In many jurisdictions, Public Finance laws require that when the Executive introduces any bill to cabinet and National Assembly the bill be accompanied by a Statement of Fiscal Impact. In those jurisdictions, the role of Parliamentary Budget office is to verify the fiscal impacts claimed by the Executive. In Malawi, since the law makes no such requirement, the PBO’s legislative impact analysis has to start from a scratch. Ordinary Bills. For most ordinary bills the fiscal impact may be negligible. However, if the Bill creates new offices or administrative structures, then it can have significant impact on public expenditures. In general PBO’s analysis of ordinary bills are presented in a Fiscal Policy Statement or Fiscal Policy Brief.

Money Bills, the PBO is supposed to undertake in-depth fiscal and economic impact analyses, including.

Approach Value for Money Analysis. Is this project the best use of the nation’s future revenue? Is this project or program 90 Budget Analysis Manual of such a high priority to justify contracting debt?

Socio-economic Impact Analysis. Since the loan will be repaid by all citizens, enumerate or quantify to the extent possible, the extent to which loan costs and benefits equitably accrue to stakeholders the nation? Impact on households Impact on Private Sector Impact on the Macro-economy

Debt Sustainability Analysis. Given Malawi current debt stock and debt service outlook, determine or verify whether the proposed borrowing violate liquidity and solvency conditions (use metrics for debt sustainability introduced in Section 7).

Other Fiscal Impact Analysis. Apart from the actual debt, borrowing proposed in a loan bill may impact future public revenues and expenditures. These need to be enumerated and if possible quantified.

Possible Source of Information Submission from the Executive. The ministerial statement on a loan authorization bill presents a description and justification of the project and its benefits. However, the picture is usually from bird’s-eye view and does not lend itself to in-depth analysis.

Project Appraisal Document. Bilateral and Multilateral loan agreements are preceded by consultations that culminate in a Project Appraisal Document (PAD). This is a recommended first source of information for any analysis since it comprehensively covers the background and history of the problem, and also enumerates beneficiaries and quantifies all potential impacts. Budget Analysis Manual 91 APPENDIX 3: BUDGET CALENDAR & ROLE OF PARLIAMENT & ROLE OF PARLIAMENT APPENDIX 3: BUDGET CALENDAR 92 Budget Analysis Manual Budget Analysis Manual 93 94 Budget Analysis Manual

APPENDIX 4: THE PUBLIC ACCOUNTS COMMITTEE & AUDITS Mandate

The Public Accounts Committee (PAC) derives its mandates from the Public Audit Act of 2003 as amended in 2018 (§18 and §19), and Parliamentary Standing Orders 151 and 161. Its two major terms of references are

• To consider and report on audited public accounts by the Auditor General, and • To examine any other document laid before the Assembly on financial controls, accounting and auditing in relation to public expenditures. PAC can also institute inquiries on projects or expenditures

Oversight Process

PAC operates on a schedule and in principle meets at least once every quarter.

Step 1: The NAO conducts an audit and issue a management letter detailing observations and queries and inviting management’s clarification. The MDA is given 30 days to respond.

Step 1b: If MDA does not respond, or the response is considered unsatisfactory, NAO issues another a green dossier highlighting isolated queries, which have to be addressed in 14 days. If there is no response or the response is unsatisfactory, the outstanding issues enter the Auditor General’s report.

Step 2: The Auditor General submits report to the National Assembly through the Minister of Finance, who in turn tables it in the National Assembly, which in turn refers it to the Committee. Due to volume of work and the public interest the Committee prioritizes audit reports to be scrutinized.

Step 2b: Upon Receipt of a report, Committee clerks consider it, isolate audit queries and formulate questions. The questions and queries are then adopted by the Committee

Step 3: An initial notification is sent to the Controlling Officer about a pending appearance.

Step 4: Technical Referral: Questions are referred to the Auditor General who acts as technical advisor to the committee for vetting. Once agreed, the Controlling officer is summoned

Step 5: Though not a requirement, controlling officers of MDAs are provided access to the draft question. The Committee secretariat requires that responses from Controlling Officer be submitted at least a week prior to the officers’ appearance before the Committee.

Step 6: Controlling officer appears before the Committee with NAO as technical advisor to PAC. For every response to a query/question, a verdict is pronounced. If NAO is convinced, it recommends to PAC that the matter be closed (labelled “noted”). If NAO (and PAC) is not satisfied, the matter is referred for further reporting.

Step 7: PAC Proceedings culminate in report with three attachments: Votes and Proceedings; Summaries by National Audit Office and Verbatim transcript of proceeding. Step 8: Prior to tabling of PAC’s report in the National Assembly, PAC briefs the Secretary to the Treasury and Budget Analysis Manual 95 the Chief Secretary to Government.

Step 9: Issuance of Treasury Minute. All outstanding queries and questions are referred to the Secretary to the Treasury for further follow up in a Treasury Minute. 96 Budget Analysis Manual

APPENDIX 5: GOVERNMENT ASSURANCE COMMITTEE A. Mandate

The Committee derives its mandate from Standing order 151 and 162. Standing Order 162 gives the formal title of the Committee as Committee on Government Assurance. It appears that the Public Sector Reform dimension has come in as an addition in response current administrations launch of a Public Sector Reform Program. Its terms of reference are a. Scrutinize the assurances, promises and undertaking given by the Ministers of Government in the Assembly and report on the extent to which those assurances, promises and undertakings have been implemented b. Make observations on delays in implementation and the adequacy of the actions taken; c. Perform such other functions as may be ordered by the Assembly from time to time.

In essence the Committee’s mandate is monitoring and evaluation as it seeks to ensure that the public gets “Value for Money” for public resources.

B. Processes

Currently the Committee does not have clearly specified framework or protocol. It’s characterized by flexibility of agenda but recently it has limited its work to issues related to the following a. President’s State of the Nation Address, b. Ministerial Statements delivered in the Assembly c. Undertakings in Public Documents e.g. Malawi Growth and Development Strategy d. Promises under the Public Sector Reform Programme. e. Public Sector Investment Programme f. The Committee chooses projects to visit and submits a report to the Assembly.

ANNEX 1 List of People who contributed to the development of the Budget Analysis Manual

Name Designation

Prof. Nyovani Madise Director of Research and Development Policy and Head of Malawi Office - AFIDEP Dr. Nurudeen Alhassan Senior Knowledge Translation Scientist - AFIDEP

Salim Ahmed Mapila Knowledge Translation Officer - AFIDEP

Dr. Winford Masanjala Consultant and Economics Professor - UNIMA Lovemore Nyongo Controller of Planning Services - Parliament Gibson Kanyerere Policy and Planning Officer - Parliament

Grace Mganga Chief Committee Clerk - Parliament Sangwani Phiri Principle Budget Analyst - Parliament Pilirani Mbedza Principal Budget Analyst - Parliament

Adam Chikapa Guys Budget Analysis and Financial Management Expert - AFIDEP Dhumisani Msowoya Budget Analyst - Parliament Fyness Mwafulirwa Budget Analyst - Parliament