IMF projects huge revenue shortfalls

The International Monetary Fund (IMF) says Treasury’s 2020/21 fiscal year deficit will worsen due to expected larger revenue shortfalls and higher spending needs occasioned by the Covid-19 pandemic.

In its latest policy paper, the global lender has put the 2020/21 fiscal deficit at 3.4 percent of the country’s nominal gross domestic product (GDP) estimated at $7.8 billion (about K5.8 trillion).

The Bretton Woods institution also expects the pandemic to increase the country’s external financing needs projected at 4.8 percent and 2.7 percent of GDP in 2020 and 2021, respectively, which is 2.7 and 1.9 percentage points higher than in April 2020.

Reads the paper in part: “The FY [financial year] 2019/20 domestic primary deficit reached 2.5 percent of GDP—an improvement relative to April projections of 3.4 percent of GDP deficit due to stronger than expected revenues [largely non-tax revenues], which was substantially worse than pre-pandemic expectations of a 0.9 percent of GDP surplus due to revenue shortfalls and additional health and social spending to address the pandemic.”

The IMF said these effects will gain momentum in the 2020/21 fiscal year, with even larger revenue shortfalls and higher spending needs, resulting in a projected deficit of 3.4 percent of GDP (2.2 percentage points higher than April 2020 projections).

In the 2020/21 financial year, Treasury projects domestic revenues at K1.179 trillion or 16.5 percent of GDP with K1.116 trillion in tax revenue while K63.1 billion is other revenues.

Expenditure, on the other hand, is projected at K2.19 trillion or 30.6 percent of GDP, representing an increase of around 22.9 percent from the 2019/2020 preliminary expenditure outturn.

In the current fiscal year, Treasury projects a deficit at K754.8 billion, which will be financed by external borrowing amounting to K224.8 billion and K530.1 billion from domestic sources.

In an interview on Tuesday, tax expert Emmanuel Kaluluma said with more businesses scaling down and others shutting down as a result of reduced economic activities due to the global pandemic, revenue realisation would be difficult as the situation puts a strain on the already narrow tax base.

He said: “We have always complained of a narrow tax base, but now people who were in the tax net are not conducting businesses because of the pandemic.

“Even if Covid-19 stops today, the damage could have been done on business, more of which are yet to recover.”

Minister of Finance Felix Mlusu said in his 2020/21 Budget Statement presented in Parliament on September 11 2020 that government will implement tax administration reforms at Malawi Revenue Authority to ensure taxpayer compliance and enhanced tax revenue.

Speaking when he and his management appeared before the Budget and Finance Committee cluster of Parliament last month, MRA commissioner general John Biziwick said the public tax collector is optimistic of meeting its revenue target set in the budget.

But Budget and Finance Committee of Parliament chairperson Gladys Ganda said the targets are too ambitious and it will be difficult to meet them.