The Economics Association of Malawi (Ecama) says government is facing a narrow choice of generating enough domestic resources to finance its expenditure, warning that the situation will likely result into domestic debt stock rising further.
“It is likely that domestic debt will rise as government may have to finance the recurrent budget deficit through domestic borrowing or government might fail to settle bills for services already consumed within the fiscal year,” said Ecama president Henry Kachaje, on Monday.
He was asked to comment on the recently-released World Bank assessment in its maiden report on Malawi called Malawi Economic Monitor which has highlighted that Malawi’s economy is currently characterised by macroeconomic instability and barriers to trade which government needs to act on to improve growth prospects.
The bank estimates the country will run a deficit of 5.9 percent of gross domestic product (GDP) during the 2014/15 fiscal year, compounded by the loss of budget support from donors.
The estimate is deemed high as in recent fiscal years, the deficit as a percentage of GDP has been around 1.5 percent.
Public debt as a percentage of GDP, according to the World Bank, is also rising sharply with annual debt service costs now being valued at an equivalent of 5.3 percent of GDP.
“Unfortunately, there is no easy and quick fix to the economy. There are some fundamentals that must be observed. High on the list is fiscal prudence and discipline. Government cannot afford to spend money it does not have,” said Kachaje.
He corroborated World Bank analysis on Malawi that the 2014/15 budget is under pressure due to a number of reasons that include the loss of budgetary support from developmental partners, “although this was envisaged.”
Kachaje explained that the challenge is that government is faced with a narrow domestic tax base, high inflation and interest rates that have constrained private sector growth and the recent floods and the impending hunger.
Going forward, Kachaje said hard decisions must be made to make the delivery of social services sustainable.
He suggested the need to reduce the contribution by government on services like Farm Inputs Subsidy Programme (Fisp) while increasing the contribution from beneficiaries.
“As the next budget is being formulated, there is need to balance up social services such as Fisp, and economic infrastructure development investments such as the Green Belt Initiative which if prioritised and resourced, will help make Malawi become not only food secure, but economically progressive with the potential to diversify the export base beyond heavy reliance on tobacco,” advised Kachaje.
In a recent interview with Business News, Finance, Economic Planning and Development Minister Goodall Gondwe shelved earlier projections that the domestic economy would stabilise in early 2015.
The minister said prior to the disaster that engulfed the country earlier this year, the forecast was that inflation-which averaged 23.8 percent in 2014 would steadily fall characteristically, as it does seasonally during the harvest season beginning in April or May.
“But the after effects of the disaster has shattered all these expectations that would have seen the achievement of normality during the third quarter of 2015,” he said.