Malawi’s fiscal deficit worst in Africa—report

Malawi’s fiscal deficit—the difference between government expenditure and revenues—was the worst in Africa in 2013, according  to World Bank publication Africa’s Pulse for April, apparently  due to over-expenditure and aid freeze.

Africa’s Pulse, a publication that analyses issues shaping Africa’s economic future, explains that the largest deterioration of fiscal balances occurred among oil exporters and low-income countries in the region.

Graph showing Malawi's fiscal deficit over the past 5 years
Graph showing Malawi’s fiscal deficit over the past 5 years

“In Malawi, the overall fiscal deficit widened to about 15 percent of gross domestic product (GDP) after rising to 11.3 percent of GDP in 2012.

“Among middle-income countries, Ghana’s fiscal deficit remained high at around 11 percent of GDP in 2013, in Zambia, the fiscal deficit widened sharply in 2013 and in South Africa, the fiscal deficit is forecast to remain unchanged at 4.2 percent of GDP in 2013/14,” reads the publication in part.

In the current budget, government maintained its fiscal anchor of no net domestic financing, whose spirit is to prompt private sector credit and growth.

However, the fiscal plan projected a fiscal deficit of K34.8 billion about five percent of the K640 billion 2013/14 budget.

During the implementation of the financial plan, the government was caught up in heavy borrowing and over expenditure, particularly in the first quarter, prompting a sharp increase in fiscal deficit.

But Ministry of Finance spokesperson Nations Msowoya told Business News yesterday that the government has two scenarios—the Zero Budget Support (ZBS) and a budget with donor support—for the next fiscal year.

He said according to preliminary figures, under ZBS, the deficit is projected at K76 billion while with donor support, the overall budget deficit is projected at K102 billion.

In August 2013, Reserve Bank of Malawi (RBM) said the fiscal deficit worsened to K40.4 billion, prompting government to borrow heavily from both bank and non-bank sectors while the Ministry of Finance blamed it on an increase in government expenditure.

In August 2013, total government expenditures increased by 28.9 percent to K72.3 billion following another monthly increase of 44.7 percent in July 2013.

During the year, donors also announced the withholding of budgetary supporting amounting to $150 million due to the looting of public funds at Capital Hill dubbed Cashgate that has seen the government grapple with its operations.

In the wake of the aid freeze, the Centre for Social Concern (CfSC) warned that this posed a challenge which could lead to a growing fiscal deficit, rising inflation and the depletion of foreign exchange reserves which would impact the lives of poor Malawians.

Last week, at the end of its mission to Malawi, the International Monetary Fund (IMF) warned that overall fiscal conditions will remain tight for the remainder year, but noted that strong revenue performance and the release of some external financing will allow some relaxation of the stringent constraints observed over the past two quarters.

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  1. Avatar
    Nyani wa ku Mwananyani · Edit

    Only PP partisans would deny that this is an indictment of the current government. Bingu and his DPP also faced sanctions, arguably harsher ones, from donors, so the comparison between his government and the present one is fair. We are dealing with the current situation, and the economic hardships are palpable, for the average citizen: the government and their party surely deserve the public opprobrium that’s heaped on them. And we take umbrage when the current government and their party functionaries say the economic climate was worse during Bingu’s era. NOT TRUE! If only for the reason that theft plays a big role now!
    In modern countries, the choice between governments is based on the economy, economy and the economy. Barring some serious human rights abuses, governments fall because of the economy, and not other sentiments, as this government tries to say while dodging the main issue.
    When is this government going to listen to the “cri de Coeur” of it’s citizens? It’s probably too late, anyways!

  2. Avatar

    @Nyani, unfortunately this is not an economic indicator. The USA for instance has a fiscal deficit of over 11%, and during the war years most Europen Governments did run fiscal deficits of over 40%. The Greek government run a fiscal deficit of over 30% last year. Are any of these governments worse off than us. A fiscal deficit may in most cases contribute to inflationary pressure, but in the long run may create conditions for faster growth of the economy. This does not mean that it is a good indicator, no it only reflects the imbalances between macroeconomic forces in the economy. During Bingu’s last years, the level of economic hardship created forced this deficit to be lower, and when these forces were released last year, they created the imbalance. I am not PP, but only telling you as it is.

  3. Avatar

    I totally agree with Guest, please find the following from Investopedia:Definition of ‘Fiscal Deficit’

    When a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

    Investopedia explains ‘Fiscal Deficit’

    A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

  4. Avatar
    Thomas Ngoma, Berlin · Edit

    The argument that a fiscal deficit is not an economic indicator (@ Guest and @Mphaka) must be challenged outright. That school of thought lies at the heart of Malawi govt fiscal policy wrongs and is at loggerhead with sound monetary policy. A fiscal policy is the central strategic thrust for any govt to influence the national economy in terms of pursuing “expansionary” macroeconomic policies or “ “contractionary” policies. Malawi is battling with high inflation levels (over 20%), expansionary policy that results from large fiscal deficits is outright wrong and misguided. It all makes mockery of RBM attempt at tight monetary policy. If the govt will support or operate in tandem with RBM tight monetary policy to reign in inflation then it must aim for fiscal balance or even a fiscal surplus budget objective.

    Unfortunately, the govt is incentivised to pursue these inflationary and expansionary budget deficits partly because of donor unrequited influx of funds support – a support I regard as a “rope of sand”! It is very unreliable at the expense of sound macroeconomic critical success factors for the economy of Malawi. What is the best way forward?…if I had anything to do with this, here are my 5 point plan.

    1. Malawi Govt must balance the budget both primary deficit balance as well as current account balance.
    Divorce donor funds from the national budget of Malawi. Completely eliminated the so called 40% budget support and CABS. That will bring back national sense of fiscal responsibility on the part of the govt.

    2. If donors need to spend money in Malawi call it something else not “budget support”. I do not know, call it “donor pleasure fund to spend in Malawi” maybe, which they can optionally withdraw at their pleasure without fundamental impacting on the all important national economic progress goals!

    3. Spend majority of donor or externally borrowed funds on govt external govt activities to minimise impact on national economic stability.

    4. Initiate an ambitious nationwide investment led development program to make Malawi manufacture everything here in Malawi – zero import.
    Industrial revolution of epic proportion from Nsanje to Chitipa and everything in between!

    5.Point number 4 will broaden the national tax base and improve national competitiveness for exports. Splash the increased income revenue on social welfare, education, health and infrastructure within the limits of expanded govt income revenue. Trying to do these items on borrowed funds with high fiscal deficit is what is fundamentally holding the economy back. Food for thought!

    1. Avatar

      All Malawians know that the country has been in a recession for the past 5 years, traditionally there is only one way out of recession. The whole world has done it, The US for instance has only had a balanced budget surplus only once in 2000 -2001, during the period 1920 to 2014, They are not stupid, fiscal deficit does pull an economy out of a recession. Between 1993 and 2005, the UK Governemt had only a postive fiscal balance in 4 years, most othe years they had fiscal deficits of upto 50%. Unfortunately, Thomas you are not an economist and do not understand these things. Give me an example of an economy anywhere in the world that has balanced its books continually for 10 years.

      The problem with Malawi is that Government plays a very large role in the economy, and as such will always end up with fiscal deficits. Deficit financing is provided by the Treasury Bills that are always on offer in the national media. If the TBs were stopped today, all the banks in Malawi will achieve loses, and so will insurance companies. Most projects and disbursements will not carried out, etc,
      Maybe, Thomas you need to economic class. China last year had 2% fiscal deficit, despite being the fastest growing economy in the world. Germany one of the most stable countries in the world had a 4% fiscal deficit in 2010, yes they will have a fiscal surplus this year of 0.1%, but check their 10 year average -10%. But then the role of Government in the German economy is less than 1%, because they have a strong private economy. Unless Malawi develops a very strong private sector with very little Government role in it can we achieve fiscal surpluses. THIS NEVER HAPPENS IN A DEVELOPING COUNTRY, because the infrastructure is not yet complete. Providing for infrastructural development creates these deficits. USA are due to have large fiscal deficits soon because they are renewing the aged infrastructure.

      1. Avatar
        Thomas Ngoma, Berlin · Edit

        If I were stating these things with basis, I would not do so. What do you mean I am not an economist? What do you know about my economic credentials? News flash.. I am doing PhD in Economics and about to publish a book on the subject! Australia has been running a balance economy for yonks. In any case a fiscal budget outcome is a flexible goal that must be exercised depending on the state of the economy and how it must be steered. The options being a) deficit when govt intends to stimulate expansionary economic activities but that is inflationary. Surplus for contractionary anti inflationary to drive down inflation and balance outcome; for maintaining status quo. This is important to grasp. These are tools at the govt disposal to use to steer the economy accordingly not just put ‘foot on the accelerator’ towards deficit regardless of whether there are potholes on the road. Malawi must drive towards private sector expansion, it is the only way to move forward and to expand the tax base. It is implementing sound strategies that will stimulate private sector growth and national competitiveness that has eluded Malawi over the years. You are quoting to me all these experiences of how German or US govt are varying deficits over the years; I live in these economies, I analyse them first hand, I feel these effects. Your example of the Germany economy just agrees with what I am saying that a deficit is a flexible budget outcome, down one budget and up the next. Malawi economy must ease off on this mono strategy of deficit obsession. Don’t you agree, Guest? Another point you are wrong on is this obsession with infrastructure that is based on imported equipment. Malawi first needs industrial revolution to boost private sector to boost manufacturing so that all infrastructure tools and equipment will be “Made in Malawi” to avoid current account deficit. That is the real solution I offer for Malawi! Let there be wealth, jobs for all, health care, decent education for all and social protection net for the aged! Finance by Malawi not by borrowed funds. Let us talk about that not theories.

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