The Reserve Bank of Malawi (RBM) has projected that the 2020/21 fiscal deficit will worsen further to an equivalent of 11.3 percent or about K900 billion, of the gross domestic product (GDP).
The central bank said there is, however, a possibility of the deficit—shortfall in revenue compared to expenditure—widening further to 12.3 percent or about K990 billion of GDP this fiscal year.
In its January-June 2021 Monetary Policy Report, RBM said the widening fiscal deficit reflects revenue shortfalls due to the pandemic. During last fiscal year, revenue dropped by about 13 percent, according to Treasury figures.
Reads the RBM report: “As expected, the fiscal sector has also been hugely impacted by the Covid-191 pandemic as the required fiscal interventions have resulted in a larger increase in government expenditures at the time tax revenues are underperforming due to reduced economic activity.”
In the 2020/21 fiscal year, Treasury projected the fiscal deficit at 8.8 percent of GDP or K810.7 billion, on account of developments in both revenues and expenditures.
In his Mid-Year Budget Statement in Parliament on February 26, Minister of Finance Felix Mlusu explained that the deficit is expected to be covered through foreign financing of K246.3 billion while the balance of K564.4 billion will be financed through domestic borrowing.
In an interview on Sunday, Betchani Tchereni, an economics professor at The Polytechnic, a constituent college of the University of Malawi, observed that to ensure economic recovery in the face of the Covid-19 pandemic, Treasury should consider tax incentives to industries which have been affected severely, including tourism and manufacturing sectors.
“There may be financial interventions too to boost these industries and create more jobs,” he said.
In its March 2021 African Economic Outlook, the African Development Bank projected Malawi’s fiscal deficit to widen to 10.2 percent or about K820 billion of GDP in 2021, raising the debt-to-GDP ratio to 66 percent in 2021.