Blantyre-based Nico Asset Managers Limited has warned that Malawi’s fiscal deficit may widen further if donor aid is not disbursed by Malawi’s major donors in the 2013/14 budget that expires next month on June 30.
As such, the firm 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.
Fiscal deficit is simply a situation when a government’s total expenditures exceed the revenue that it generates, excluding resources from borrowings.
“The fiscal deficit may widen even further if donor aid is not disbursed as members from Cabs [Common Approach to Budget Support] have not confirmed how much they will disburse to government,” observes the investment management and advisory firm.
Cabs group of donors continue to withhold their budget support to Malawi, a decision announced on November 7, 2013, which was brought by the revelation of massive abuse of tax payers’ money at Capital Hill popularly called Cashgate.
Since such a decision was made, there has been a fiscal gap left which has left Treasury to cut back on some planned expenditure which many analysts including Cabs donors say has affected Malawi’s social sector spending.
“The fiscal deficit may increase as public spending, although declining, may be higher than revenues in the run up to elections but the government is expected to have received lower than expected revenues from grants as some donor countries withheld aid the second quarter of the fiscal year 2013/2014,” adds the firm.
Quoting the European Intelligence Unit (EIU), the firm says the fiscal deficit forecast has been revised upwards to 3.4 percent of Gross Domestic Product (GDP) from 2.8 percent in light of the IMF projections.
It says the EIU forecasts that the fiscal deficit will narrow gradually from 2014/15 onwards, reaching 2.2 percent of GDP in 2017/18.
Total expenditure for the 2013/14 Fiscal Year was set at K638 billion comprising K463.1 billion recurrent expenditure and K175.0 billion development expenditure, according to the budget statement.
On one hand, government projected to collect total domestic revenues of K363.1 billion.
But according to Nico Asset Managers Limited, there was an under expenditure in the second quarter of the 2013/14 fiscal year due underperformance on inflows adding that expenditure in the second quarter was K120.2 billion against revenues of K112.0 billion, K101.9 billion from domestic revenues and K10.1 billion from grants.
The firm says such a situation created a fiscal deficit of K50.9 billion for the second quarter.
“The disbursement of donor resources underperformed in the second quarter of the financial year on account of unfavorable inflows in dedicated and project grants.
“Due to its direct link to the development budget, this performance has had a negative impact on project implementation,” it says.