Portfolio management and advisory firm Nico Asset Managers has said it expects demands on the public purse to remain high, against the backdrop of high living costs and food insecurity.
In its 2023 Annual Economic Report released on Wednesday, the firm says spending on social transfers and the reconstruction of infrastructure damaged by Cyclone Freddy will likely lead to policy slippages on the Extended Credit Facility (ECF) programme.
According to the report, in addition, the protracted negative net foreign asset position of the Reserve Bank of Malawi (RBM) is a potential source of increased capital transfer from the government to recapitalise the central bank, as required by law.
“Nevertheless, the public expenditure/GDP ratio is expected to fall between 2024 and 2028, owing to fiscal austerity measures required under the ECF, including the removal of subsidies and improvements in spending efficiency.
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“Malawi’s narrow revenue base means that it looks to aid for budget support. The ECF now in place will likely unlock disbursements from the IMF and will also facilitate other multilateral and bilateral inflows,” the report says.
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It further notes that the government will attempt to improve the efficiency of domestic revenue collection and widen the tax base to complement external grants.
“The government faces significant risks to its target of reducing the fiscal deficit, including greater than expected expenditures to rehabilitate infrastructure damage and social spending on families affected by Cyclone Freddy.
“The fiscal deficit is likely to increase in the short to medium term, putting further upward pressure on interest rates due to increased borrowing to finance the budget,” the report says.
On economic growth, the firm says based on various institutions’ projections, the local economy is expected to rebound to around 3 percent in 2024.
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“The growth estimates are on account of growth in agriculture, mining and quarrying, manufacturing, accommodation and food services, wholesale and retail trade, as well as information and communication sectors.
“The first-round crop production estimates produced by the Ministry of Agriculture which will most likely be released at the end of the first quarter are expected to give a better picture of the country’s growth trajectory for 2024,” Nico Asset Managers says.
It says major challenges to growth persist, including weather shocks that affect the country’s rain-fed agriculture sector, limited concessional financing, a poor business environment, acute foreign exchange shortages and high inflation.
Finance Minister Simplex Chithyola Banda was not immediately available for a comment.
But in a recent interview, Chithyola Banda said the government would make sure it strengthens fiscal spending to ensure that it stays on course on the ECF programme.
He added that authorities are putting in place a number of measures to help accelerate growth.
