Economists caution treasury on deficits

Economic commentators have cautioned Treasury on the continued fiscal deficits, which they say pose risks to economic gains the country has achieved in recent years.

Macroeconomist Lucius Cassim, who is based at the University of Malawi’s Chancellor College, pointed out that a reduced deficit is positive, but noted that fiscal deficits may push government to borrowing a move which may put upward pressure on inflation and stifle the private sector by reducing availability of funds for private sector investment.

“We have already noted the signs of inflation risks through the seemingly increasing food prices. Chances are if the deficits continue to increase this will put the pressure on prices even more.

“Ultimately,  if prices increase, other than affecting the welfare of Malawians, the central bank may be forced to revise its policy rate upwards and that will also result in interest rates rising destabilising the seemingly stable economy in the long-term. It is therefore crucial that government continues to reduce fiscal deficits,” he said.

Speaking separately, a senior lecturer in the department of economics also at Chancellor College, Exley Silumbu, feared that deficits could threaten the country’s financial stability.

He said fiscal deficits, if not carefully managed, may put pressure on government particularly on its efforts to maintain a sound financial system.

Said Silumbu: “Perhaps how much deficits add to the existing debt stock is what should come in the picture because obviously, the government would be borrowing to fill in the gap. This is a risky situation as it can undermine efforts to stabilise the economy.

“Already, debt is threatening financial stability which according to available figures is dangerously on high levels. What could also be more dangerous is if they

[government]

start monetising the deficits by printing money to finance the deficit as this will put pressure on the domestic financial sector.”

Malawi’s fiscal deficit—the difference between government expenditure and revenues took a knock from K41.1 billion in August to K17.7 billion in September, Reserve Bank of Malawi (RBM) figures have shown.

In the 2019/20 fiscal plan, domestic revenues are projected at K1.425 trillion or 22.7 percent of gross domestic product (GDP), comprising K1.369 trillion as tax revenue and K55.8 billion as non-tax revenue while total expenditure is projected at K1.731 trillion or 27.6 percent of GDP and an increase of 20.1 percent from the 2018/19 preliminary outcome of K1.441 trillion.

Overall, deficit is estimated at K155.9 billion or 2.5 percent of GDP and about 51.3 percent reduction from the 2018/19 preliminary actual budget deficit outturn of K320.2 billion.

Treasury spokesperson Davis Sado yesterday attributed huge deficits for July and August to political tension coupled with mass demonstrations that affected businesses and revenue collection.

He said: “In July and August period, businesses were affected which also affected tax revenue collection. This was the period when we experienced demonstrations, so most companies did not perform as expected as there was tension in the country, the doing business environment was affected which equally affected revenue collection. “Going forward, Treasury will stick to the conditions espoused in the budget that we will try as much as possible that our borrowing should significantly be low.”

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