Malawi Government’s public spending is expected to grow in the 2013/14 financial year as donor-government relations continue to improve, according to a forecast from the Economist Intelligence Unit (EIU).
The EIU—the world’s foremost provider of country, industry and management analysis—has attributed this to expected rise in grants, partly due to new commitments by donors and currency depreciation, which boosts their value in local currency terms.
“Fiscal constraints are expected to ease slightly from 2013/2014 as the effects of the currency adjustment moderate, arrears are cleared and subsidies are scaled down further.
“Domestic revenue is forecast to grow as tax and customs administrations are strengthened and economic activity picks up,” says the EIU in November outlook for Malawi.
Government is this year implementing an austerity budget to control unnecessary public expenditure at a time the economy is tanking in an environment of galloping inflation at 33.3 percent and interest rates, rising cost of living and an anticipated slowdown in gross domestic product (GDP) growth of 1.9 percent from an initial 4.3 percent.
Early this month, the Office of the President and Cabinet (OPC) announced nine expenditure control measures to rein in on public spending to be in line with an 18-months economic recovery plan (ERP).
Chief Secretary Bright Msaka called on all controlling officers and heads of departments to adhere to the instituted measures and that disciplinary action shall be taken against controlling officers for any financial impropriety taking place in their ministries.
The EIU says grants will continue to increase in the year ahead, though at a slower pace, as donors continue to support the government’s economic reform programme.
But the think-tank says current spending will, however, also rise in 2013/2014 in the run-up to the elections, and will then moderate as inflation declines.
It says development spending is expected to pick up from 2013/2014 and this will strengthen the economy’s long-term growth, although continued weaknesses in the efficiency of public spending will hinder spending execution and constrain its impact.
Finance Minister Dr. Ken Lipenga, in the 2012/13 budget, said they estimate the overall balance to post a substantial fiscal deficit of about K70 billion (about $206 million), a nominal deviation of about K74 billion (about $217 million) from the initially planned repayment of K3.97 billion (about $11.6 million) which is equivalent to 1.5 percent of GDP.
The EIU, however, said the deficit is forecast to peak at 3.4 percent of GDP in 2013/2014, before moderating to 1.2 percent of GDP in 2015/16 financial year.
“The deficits will be financed primarily with external concessional borrowing,” says the EIU.
In its monthly economic review for November 2012, Nico Asset Managers Limited said improved inflow of donor funds may help government resume most of its development projects that were on hold and; hence, result in improved economic activity which might effectively improve private sector activity.
“Better donor inflows will enable funds for the development budget to improve and we could see government’s developmental projects getting back on track,” said the investment advisory firm.
Economic commentators have advised government to balance between cutting unnecessary expenditure and ensuring that delivery of public goods and services does not suffer.