The World Bank has said Malawi is in a fiscal crisis which requires an urgent move away from business as usual to address the precarious state of public finances.
World Bank Senior Country Economist for Malawi Jakob Engel said this in a response to an emailed questionnaire on public finance management and fiscal space performance.
His sentiments come amid yawning budget deficits due to prevailing mismatches between government revenue and expenditure requirements.
For instance, the 2024-25 financial year’s overall budget deficit was projected at K1.43 trillion, which is 7.6 percent of gross domestic product (GDP). It was earmarked to be financed largely through domestic borrowing.
Figures Engel provided show that debt-to-GDP ratio is over 90 percent and debt servicing is projected at 42 percent of total revenue this financial year.
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Together with the wage bill and other statutory expenditures, Engel said, this makes up almost 80 percent of domestic revenues, crowding out the many other priority projects necessary for the country to develop.
He said the country has had Africa’s highest fiscal deficit for two years in a row, with unsustainable levels, and that debt servicing is crowding out most critical spending priorities.
In turn, the government faces increasing difficulties financing its operations, often requiring exceptional measures, according to Engel.
“These are all features of a fiscal crisis,” he said.
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He said while public debt has been increasing in recent years, it did not serve to strengthen the country’s growth potential as many loans were not efficiently used.
Engel said fiscal policy has become increasingly constrained by low tax revenues and declining development partner grants.
“Low revenues and sustained overspending over time has resulted in unsustainable debt. Unsustainable debt in turn further constraints fiscal space through high debt servicing costs.
“This situation has been exacerbated by a series of external shocks over the past years,” he said.
In an interview on the sidelines of this year’s Economics Association of Malawi annual economic conference in Mangochi, Minister of Finance Simplex Chithyola Banda, however, affirmed the government’s commitment to controlling expenditure.
“We have overwhelming demand that is exerting pressure on the fiscal space because of the social obligations that are more like mandatory for us to do.
“But we have committed to control expenditure, and that is our serious commitment,” he said.
Meanwhile, the Bretton Woods institution is undertaking the Malawi Public Finance Review (PFR), a project that intends to help authorities identify and address critical fiscal policy challenges.
According to Engel, the PFR provides an in-depth and data-driven assessment of expenditure and revenue dynamics and should serve as a comprehensive resource to reform public finances.
