Figure 1: Real GDP Growth and Inflation in Malawi (2015-2023)
Sources: IMF 2018, Malawi First Review Under the Three-Year Extended Credit Facility; IMF 2017, Malawi Ninth Review under the Extended Credit Facility. Notes (*) Figures from 2018 onwards are projections from the IMF, 2018.
The GoM has had a mixed response to real GDP growth performance. For example, when real GDP increased to 5.7% in 2014 (2013: 5.2%), in 2015/16 the GoM increased its recurrent expenditure by 30.9% through spending on wages and salaries, goods and services, maize purchases, subsidies to bailout the Agricultural Development and Marketing Corporation (ADMARC) and servicing public debt[5]. This is a typical response to declining real GDP based on the rationale that the government would support aggregate demand by increasing public expenditure during economic downturn. In 2016/17, the GoM responded to the 2015 decline in real GDP by increasing capital expenditure by 64.1%. This is a typical response to recovering or high real GDP growth based on the rationale that the government would be saving or accumulating fiscal buffers for the next period of economic downturn. During this period the GoM financed most of the increased spending through public debt. Hence, the fiscal deficit increased from -6.1% of GDP in 2015/16 to -6.4% of GDP in 2016/17[6]. This has been financed mainly through a mix of external and domestic debt, which increased respectively from 33.1% and 14.9% of GDP in 2015/16 to 37.3% and 17.3% of GDP in 2016/17[7].
Figure 2: Sources of Government Revenue in Malawi (2015/16-2021/22)
Sources: IMF 2018, Malawi First Review Under the Three-Year Extended Credit Facility; IMF 2017, Malawi Ninth Review under the Extended Credit Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.
However, when real GDP growth continued declining to 2.3% in 2016, the GoM increased its recurrent spending by 24.7% and cut capital expenditure by -17.2% in 2017/18[8]. This time recurrent expenditure was mainly spent on reducing the GoM’s liabilities and the deficit was financed from domestic public debt. Hence, external public debt was reduced to 32.1% of GDP and domestic debt increased to 23.5% of GDP[9]. When real GDP recovered in 2017, the GoM increased capital expenditure by 18.9% in 2018/19[10]. The increased capital expenditure was largely financed from government grant income which is projected to have increased by 75.7%[11]. Therefore, the GoM has had a mixed response to economic developments but in more recent years the GoM started maintaining counter-cyclical fiscal policy as illustrated by the spending increased in response to declining real GDP; and in response to recovering real GDP growth the GoM increased its capital expenditure which is prudent. This is fiscal stance continues in the forward-looking medium term.
Figure 3: Government Revenue and Expenditure in Malawi (2015/16-2021/22)
Sources: IMF 2018, Malawi First Review Under the Three-Year Extended Credit Facility; IMF 2017, Malawi Ninth Review under the Extended Credit Facility. Note: () Figures from 2018 onwards are projections from the IMF, 2018.
Real GDP growth is expected to continue recovering from 3.2% in 2018 to an annual average of 5.4% from 2019 to 2023[12]. From 2019/20 to 2021/22 the GoM is expected to continue increasing capital expenditure by an annual average of 20.2% compared to the 10.5% average annual increase in recurrent expenditure. The increase in capital expenditure is expected to be financed from a mixture of government funding and public debt which will allow the GoM to improve its fiscal position. The fiscal deficit is projected to narrow from -7.9% in 2018/19 to an annual average of -3.2% from 2019/20 to 2021/22[13]. During this period public debt is projected to decline from 57.3% of GDP in 2018 to an average of 53.5% of GDP from 2019 to 2023[14]. The government of Malawi is responding to the recovery in GDP growth by reducing its liabilities and increasing capital spending or investing in order to build fiscal buffers.
Historically the government of Malawi’s policy has been prudent with the exception of a few years. Currently, as noted earlier, the fiscal policy has been countercyclical because the GoM increased recurrent spending when the real GDP growth had declined or projected to be declining and vice versa. Fiscal policy has also been prudent because the GoM increased savings and financed investment through domestic public debt when real GDP recovered. The future trend also projects that the GoM’s policy will be prudent as fiscal policy is expected to continue increasing capital expenditure and reducing liabilities. This kind of policy certainty and positive outlook is a direct result of fiscal and budget reforms implemented by the GoM since 2011/12 when the government started implementing multi-year expenditure ceilings based on a medium-term budget framework.
Figure 4: Government Expenditure Composition in Malawi (2015/16-2021/22)
Sources: IMF 2018, Malawi First Review Under the Three-Year Extended Credit Facility; IMF 2017, Malawi Ninth Review under the Extended Credit Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.
The GoM remains committed to fiscal consolidation while protecting social expenditure[15]. In order to avoid accumulating new arrears the GoM instituted regular monitoring and reporting on its arrears and strengthened fiscal controls[16]. The budget framework in Malawi is implemented through the medium-term expenditure framework (MTEF) which aligns spending with development planning[17]. Furthermore, the GoM has improved its forecasting of its revenue mobilisation in order to guide predictability of the budget. The GoM has also instituted the budget policy framework (BPF) to help align policies that will be implemented in the medium-term with the available resources[18]. Some of the structural and economic reforms that the GoM is aiming at with these fiscal and budget reforms include; dealing with the severe energy constraints and dealing with the adverse impacts of climate change[19].
Figure 5: Gross Government Debt in Malawi (2015-2023)
Sources: IMF 2018, Malawi First Review Under the Three-Year Extended Credit Facility; IMF 2017, Malawi Ninth Review under the Extended Credit Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.
The GoM has had a mixed response to real GDP growth performance. As earlier noted, fiscal policy has been cyclical because the GoM increased recurrent spending when real GDP growth was recovering. In the historic period from 2015/16 to 2017/18 the GoM responded to declining real GDP growth with cyclical fiscal policy using an imprudent fiscal stance, which changed in 2018. Therefore, as real GDP growth recovered slightly from an annual average of 3.1% from 2015 to 2017 to 3.2% in 2018, the GoM maintained its capital expenditure growth at the medium-term average of 18.9% compared to the reduction of -2.3% on its recurrent expenditure in 2018/19[20]. During this time domestic public debt has increased from an average of 18.6% of GDP from 2015 to 2017, to 24.5% of GDP in 2018; which is prudent fiscal policy given that the GoM has reduced its external debt slightly to 33.2% of GDP in 2018 (2015-2017: 34.2% of GDP)[21]. In the forward looking medium-term, as real GDP growth continues improving to an annual average of 4.8% from 2019 to 2021, the GoM is expected to continue increasing its capital expenditure at an annual average of 20.2% compared to its recurrent expenditure which is projected to grow at an average of 10.5% from 2019/20 to 2021/22[22]. Domestic public debt is projected to increase slightly to an annual average of 24.9% of GDP from 2019 to 2021, meanwhile external public debt is projected to also decline to an average of 31.4% of GDP[23]. Thus, the GoM is expected to continue its countercyclical fiscal policy taking its prudent approach in the forward-looking medium-term.
[1] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, International Monetary Fund: Washington, D.C. Available at https://www.imf.org/ [Last Accessed: 18 August 2019].
[2] MoFEPD 2016. Annual Economic Report 2016, Ministry of Finance, Economic Planning and Development: Lilongwe. Available at http://www.finance.gov.mw/ [Last Accessed: 20 August 2019].
[3] IMF 2017. Malawi Ninth Review Under the Extended Credit Facility, International Monetary Fund: Washington, D.C. Available at https://www.imf.org/ [Last Accessed: 26 June 2019].
[4] MoFEPD 2016. Annual Economic Report 2016, ibid.
[5] IMF 2017. Malawi Ninth Review Under the Extended Credit Facility, ibid.
6 IMF 2017. Malawi Ninth Review Under the Extended Credit Facility, ibid.
[7] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[8] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
9 IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[10] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[11] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[12] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[13] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[14] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[15] MoFEPD 2016. Annual Economic Report 2016, ibid.
[16] MoFEPD 2016. Annual Economic Report 2016, ibid.
[17] MoFEPD 2016. Annual Economic Report 2016, ibid.
[18] MoFEPD 2016. Annual Economic Report 2016, ibid.
[19] MoFEPD 2016. Annual Economic Report 2016, ibid.
[20] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[21] IMF 2017. Malawi Ninth Review Under the Extended Credit Facility, ibid.
[22] IMF 2018. Malawi First Review Under the Three-Year Extended Credit Facility, ibid.
[23] IMF 2017. Malawi Ninth Review Under the Extended Credit Facility, ibid.
