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Malawi risks huge fiscal deficit

Gondwe: Announced the K743 billion budget
Gondwe: Announced the K743 billion budget

Blantyre-based Nico Asset Managers Limited has warned that Malawi’s fiscal deficit in the 2014/15 national budget is set to widen to a record high, triggered by a large budget and continued withholding of budget aid.

The investment management and advisory firm, quoting the European Intelligence Unit (EIU), has also revised upwards Malawi’s fiscal deficit as a percentage of Gross Domestic Product (GDP) in 2014/15 budget to 4.1 percent of GDP from 3.4 percent of GDP.

The firm says fiscal deficit is projected to narrow gradually from 2014/15 onwards, reaching 3.5 percent of GDP in 2017/18 financial year.

Fiscal deficit is a situation when a government’s total expenditures exceed the revenue that it generates, excluding resources from borrowings.

“The large budget and the withholding of aid could lead to a significant fiscal deficit in the 2014/15 financial year,” warns the firm in its latest monthly economic report for the month of July, 2014.

The warning comes at a time when the new government has planned a K743 billion budget, which represents a 16.5 percent increase from the previous budget.

It also comes at a time when Malawi’s major donors under the Common Approach to Budgetary Support (Cabs)—who announced a budget aid freeze on November 7 last year following Cashgate—have not committed to budget support in the 2014/15 budget.

According to Nico Asset Managers, reports suggest that some donors may come if Malawi meets certain conditions but said it is not clear how much will be disbursed in that event.

Reviewing the 2013/14 budget, the firm says government projected resource inflows from grants amounting to K240 billion in the 2013/14 financial year but said in the third quarter, total grants received under-performed by K32.9 billion, an out-turn of K12.2 billion against a target of K45 billion.

“It is unlikely that the annual target will be met as the grants have consistently under-performed in the 2013/14 financial year, especially since the development partners have withheld their support following the revelations of fraud in the government,” adds the firm.

It says the 2014/15 budget may focus on reforms that will broaden the tax base in order to increase revenue or increased domestic borrowing to fund the shortfall.

Going forward, Nico Asset Managers has warned that an increasing fiscal deficit will likely lead to more borrowing by government which is a recipe for higher interest rates as the private sector is crowded out.

Ministry of Finance Spokesperson Nations Msowoya yesterday could not pick-up his phone when Business News sought his reaction on the observations and warnings by Nico Asset Managers Limited.

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