Malawi will introduce austerity measures this year to deal with a hole in its budget left by the freezing of $550 million in British aid over the next four years, Finance minister Ken Kandodo said on Friday.
Britain was Malawi’s single largest bilateral donor, but relations have nosedived since a leaked diplomatic cable had Britain’s ambassador describing President Bingu wa Mutharika as “autocratic and intolerant of criticism”.
Malawi expelled the ambassador last month, then Britain responded by expelling its former colony’s acting ambassador to London, and earlier this week said it would freeze new aid.
Despite six years of 7% annual economic growth, the the southern African country remains heavily dependent on foreign donors, whose payments account for more than 40% of government income.
“Clearly the 2011/12 financial year resource envelope will fall short of our expectations in view of the British decision,” Kandodo said.
“But Malawi is ready to make tough decisions and choices on spending cuts in order to sustain growth and be able to deliver public services.”
Kandodo gave no details of how he would raise taxes or cut spending. The loss of the pledged British funds will hit the $1,9 billion annual budget hard.
Combined with a predicted fall in tobacco exports, which account for 70% of foreign exchange earnings, the aid squeeze will also intensify a dollar supply crunch and put pressure on the kwacha currency.
