As Finance Minister Felix Mlusu is digesting contributions from stakeholders on the 2022-23 National Budget, the World Bank has said it expects the government to make tough decisions in the financial plan.
The bank says stronger economic management is needed to return the debt trajectory to a sustainable path and to support the macroeconomic stability that is needed for growth.
With fiscal deficits increasing and debt levels accelerating, the bank says the government needs to take bold steps to rein in on expenditure.
The bank says in its latest Malawi Economic Monitor that higher expenditure for wages, the Affordable Inputs Programme, debt service, and a surge in development spending as well as for pandemic response is contributing to higher deficits and increasingly problematic debt levels.
According to the bank, Malawi has critical spending needs across a range of sectors, and reducing fiscal deficits will require strengthening budget planning and focusing expenditure where it can achieve the most impact.
“This will call for prioritising expenditure in a sustainable medium-term fiscal framework, based on realistic revenue and grant assumptions. Difficult economic policy decisions have sometimes been delayed in the past but the government will need to make hard decisions already in the FY2022/23 budget.
“The country needs to strengthen momentum on reforming subsidy policies, by cutting blanket fertiliser subsidies and reallocating resources to support the most vulnerable through well-targeted social safety net programmes, which are more efficient and effective to achieve poverty reduction,” the bank says.
The Bretton Woods institution adds that wage increases need to be considered in light of fiscal sustainability.
It further notes that the high levels of development spending should undergo rigorous cost-benefit analysis to ensure projects justify high borrowing costs.
“Over the medium term, it will be important to balance strengthening revenue mobilisation with implementing policies to support private sector growth. Improving tax compliance is a key priority to strengthen revenue potential.
“It requires both improving government’s tax collection capacity as well as increasing the taxpayer’s inclination to comply through better communication and tax administration services,” the bank says.
The bank further says, over the medium term, the country needs to promote agricultural commercialisation, economic diversification and private sector-led growth.
For Malawi to become an upper-middle-income country by 2063 with the new vision “Malawi 2063”, it will need to accelerate economic growth to double digits, which would necessitate drastic structural shifts and private sector-led growth it says.
Speaking in Lilongwe during a pre-budget consultation meeting last week, Mlusu admitted that the extremely huge public debt at K5.5 trillion, or 59 per cent of the GDP, is proving to be a big burden to the implementation of some of the Tonse Administration’s promises.
Mlusu said the government is implementing a number of strategies, including operationalising the Debt Retirement Fund to reduce the debt burden.
He said to reduce the huge budget deficit, the government recently unveiled the Domestic Revenue Mobilisation Strategy which seeks to boost revenue mobilisation which will enable the government to cut reliance on domestic borrowing.