Economic experts have warned that headline inflation may swell back to a double digit band and interest rates may increase if the government continues to spend beyond its means.
UK-based Malawian expert, Sane Zuka and local economic think-tanks, Economics Association of Malawi (Ecama), said this when commenting on economic trends as reported by the Reserve Bank of Malawi’s (RBM) monthly economic review for February 2020.
Among other things, the review indicates that total revenues for the month amounted to K89.4 billion while expenditure stood at K151.3 billion. This resulted into a fiscal deficit of around 0.9 percent of Gross Domestic Product (GDP).
The development was also reflected on private sector credit having recorded a monthly contraction of 0.5 percent (about K2.7 billion) to K550.9 billion, following another decline of K527.0 million in the preceding month.
It further said the monthly decline in private sector credit was due to contractions in Financial services, Manufacturing, Electricity, gas and water sectors of K7.1 billion, K5.0 billion and K1.6 billion, respectively.
“Total revenue collections, at K89.4 billion for February 2020, represented a decrease of 19.1 percent compared to collections of K110.4 billion recorded in the previous month. The registered decrease in total revenue stemmed from domestic revenues which declined by 29.8 percent to K73.5 billion while foreign receipts registered a growth of 173.1 percent to K15.9 billion.
“Total government expenditures increased by 20.9 percent to K 151.3 billion from K125.2 billion incurred in the previous month on account of both recurrent and development expenditures. Recurrent expenditure increased by 10.9 percent to K124.6 billion mainly due to increased payments on salaries and generic goods and services,” reads the review in part.
In a response to an emailed questionnaire, Zuka said this is a worrisome trend as it shows a continuation of the decline of both domestic revenue (tax and non-tax revenue) and foreign receipts since January.
“This shows contraction in overall economic activities. The increased expenditure explains increased public sector demand including government funding to unplanned demands. The direct implication of this trend is increased government borrowing from monetary authorities and commercial banks, a trend which is not abating since January.
“This trend reduces money available for credit to the private sector, a trend which is likely to be experienced for some time considering contracting business activity. If not addressed this situation can trigger upward interest rates and inflation trends,” Zuka said.
In a separate interview, Ecama president, Laureen Nyasulu, said a decline in industrial and commercial loans imply a slowdown in economic activity.
She said there is an increase in loans of consumption nature such as wholesale and retail and a decline in loans to productive sectors such as energy and manufacturing.
“ In vi ew of Covid-19 pandemic, the trend is likely to continue and probably worsen. Credit to private sector is likely to contract even more. The restrictions aimed at containing the pandemic have unavoidable negative consequences on the business environment. This will lead to contraction of the economy in the next few months,” Nyasulu said.
Spokesperson in the Ministry of Finance Economic Planning and Development, Williams Banda, said with declining business operations, revenue collections are likely to continue going down.
“The figures reported in the review may be on a higher side than the actual deficit because they were recorded before other sources of funding were cleared.
“However, financing the gap was done through sell of government securities and bonds. We look at critical needs to finance, should we find that there is a shortfall on those that’s when we extend to sell the government securities,” Banda said.