EIU counters govt on fiscal deficit estimate

Forecasting and advisory services firm, Economist Intelligence Unit (EIU) has projected Malawi’s fiscal deficit to average 10.9 percent of gross domestic product (GDP)due to economic pressures facing the country.

In the 2022/23 financial year, Treasury projects the fiscal deficit to average seven percent of GDP.

But in its commentary contained in a country report for Malawi, EIU attributed the higher fiscal deficit, a situation when a government’s total expenditures exceed the revenue that it generates, excluding resources from borrowings, to the impact of weather shocks on agriculture, which will necessitate significant spending on food subsidies.

Said the EIU in the report: “Revenue underperformance, owing to slow economic growth and the expenditure on vaccine supplies, remain heavyweights on Malawi’s fiscal position.

“In light of limited fiscal revenue, which is expected to persist until 2023/24 financial year, the probability of another International Monetary Fund (IMF) programme will be necessary to meet the State’s financing requirements as the IMF pressurises the government into expenditure cuts.”

In the 2022/23 budget, overall fiscal balance is estimated at a deficit of K884 billion, which is equivalent to 7.7 percent of GDP to be financed through foreign borrowing amounting to K230.07 billion and K653.98 billion from the domestic market.

The EIU expects that beyond the current financial year, as agriculture and tourism recover, the tax base will expand, resulting in a modest recovery in government revenue and improvement in tax collection, as well as budgetary support that is likely to follow from an IMF programme.

According to the firm, expenditure will remain elevated, at more than 30 percent of GDP in fiscal years 2021/22 to 2025/26, in view of the government’s poverty reduction mandate and large public-sector wage bill.

Ministry of Finance and Economic Affairs spokesperson Taurai Banda was yet to respond to our questionnaire.

However, in an earlier interview, Minister of Finance and Economic Affairs Sosten Gwengwe, while admitting that the fiscal deficit is now a cause for concern and beyond the internationally acceptable level of three percent of GDP, indicated that the government will ensure implementation of fiscal consolidation measures to enhance revenue collection and manage expenditures.

He said in the 2022/23 budget statement: “To enhance revenue collection, the ministry will continue rolling out the implementation of the just launched Domestic Revenue Mobilisation Strategy (DRMS), which was developed under the theme “Building a Tax Compliant Culture for national development.”

“This budget will embark on a painful but necessary journey to start flattening the net lending line and in the short to medium-term put it on a sustainable downward trajectory.”

In Malawi, previous experience has shown that fiscal deficits have been financed mainly by costly domestic borrowing.