BRIEF

Malawi Economic Monitor: Adjusting in Turbulent Times - Fact Sheet

October 19, 2015

What is the Malawi Economic Monitor (MEM)?

The Malawi Economic Monitor (MEM) series draws on international experience and best practice to provide up-to-date information and analysis on Malawi’s economy and to propose strategies to facilitate inclusive economic growth. The MEM is published regularly by the World Bank on a six monthly basis. The second MEM, Adjusting in Turbulent Times, was published in October 2015. This edition contains a review of recent economic developments and a macroeconomic outlook, with a special section focusing on the effectiveness of public spending on primary education and the means by which this could be improved.

What are Malawi’s short-term economic prospects?

Over the past year, Malawi’s short-term growth prospects have deteriorated markedly. The deterioration been largely due to weather shocks, increased instability in key macroeconomic variables, and a decline in business confidence. In 2015, Malawi’s estimated rate of gross domestic product (GDP) growth has been revised downwards to 2.8. This downward revision recognizes the impact of weather shocks on the production of maize and other key crops, as well as uncertainty to the economic outlook resulting from the resurgent rate of inflation, which reached 24.7% in October 2015; continued high base lending rates; and a generally weak fiscal environment.

What was the impact of the weather shocks on Malawi’s economy?

Adverse weather has affected agricultural production and is expected to constrain domestic demand and activities in the manufacturing sector in 2015. Weather-related shocks included flooding in the southern parts of Malawi, the late onset of rains in most parts of the country, dry spells in the central and northern regions, and the early cessation of rain for late planted crops. The third round of the Agriculture Production Estimates Survey estimates that levels of maize production will decline by 30.2% from 2014 to 2015, falling from 3,978,123 metric tons in 2014 to an estimated 2,776,277 metric tons in 2015.

What impact will this have on human development?

Maize is Malawi’s primary food staple, serving as the main source for the calorific intake of the majority of the population. The volume of maize required to meet Malawi’s current consumption needs is estimated at 3,000,000 metric tons. With the projected decline in levels of production, it is estimated that there will be a shortfall of 223,723 metric tons. As a result, the Malawi Vulnerability Assessment Committee estimates that some 2.8 million people, or 17% of Malawi’s population, will not be able to meet their requirements for food in 2015/16.

What are the main contributors to Malawi’s macroeconomic instability?

Weak fiscal discipline is the most significant contributor to Malawi’s macroeconomic instability, with the prospects for improvement remaining poor. The Government continues to run a large fiscal deficit, with expenditure under pressure due to the rising cost of servicing debt, increasing wage demands, the high cost of often inefficient subsidy schemes, and the need to settle outstanding arrears. With limited scope for on-budget foreign financing at levels previously available to the Government, the authorities continue to borrow heavily from domestic sources to close the gap. This creates the risk of pushing up inflation and lending rates, crowding out private sector investment and constraining economic growth.

What steps should the Government take to restore fiscal balances?

Restoring fiscal balances is critically important to efforts to reduce inflationary pressures and to control the Government’s domestic borrowing requirements. Restoring these balances is the only effective means by which bank lending rates will fall to levels that would make private sector borrowing for investment purposes feasible. To achieve this, the Government should consider implementing the following actions:

  • Tight management of public expenditure throughout the 2015/16 fiscal year: This will involve careful control of expenditure commitments and strict enforcement of budget ceilings across all ministries, departments and agencies to avoid expenditure overruns.

  • Appropriate prioritization of expenditure items if within-year reductions are necessary: Malawi faces a declining GDP growth rate and consequently lower levels of collected revenues in 2015/16, together with a higher-than-projected rate of inflation and a decline in the value of Kwacha. With these factors, there is a significant risk that there will be a larger-than-expected gap between available resources and spending commitments. In order to avoid damaging recourse to domestic borrowing, the Government may need to make within-year expenditure cuts. The need to protect key social services safety nets for vulnerable segments of the population will be an important factor in this prioritization process.

  • More intense efforts to improve the efficiency of budget execution, public finance and expenditure management: A tight fiscal environment reinforces the need to maximize the efficiency of existing government expenditure to achieve optimal results and service delivery. Improving efficiency, including through efforts to better manage the wage bill, to intensify reforms to subsidy programs, and to achieve progress with key public financial management and public service reforms, are critically important.

SPECIAL TOPIC: MAXIMIZING PRIMARY EDUCATION OUTCOMES UNDER FISCAL CONSTRAINTS

Why is expenditure on primary education in Malawi important?

Of Malawi’s population of 16 million, more than 8 million of its citizens are below the age of 18. As one of the few countries in the world with a population with a declining average age, Malawi has the opportunity to seize a demographic dividend. However, this will only be possible if young Malawians are equipped with the necessary literacy and numeracy skills to participate effectively in the labor market.

How much does Malawi spend on primary education? Does this expenditure generate good value for money?

Compared to other countries in the region, Malawi engages in higher than average public expenditure on education, with this expenditure amounting to an average figure equivalent to around 7% of GDP in recent years. Of this, the value of expenditure on primary education is equivalent to approximately 3.3% of GDP. This equates to around US$ 25 per pupil per year in on-budget public spending. However, despite this high level of expenditure, the return on the investment is poor. In particular, this is indicated by high average rates of repetition in the first six grades, with these rates in excess of 20%, significantly higher than the African average of 15%. The rate of grade repetition has remained persistently high, increasing slightly over the past decade, in spite of Government efforts to mandate automatic promotions for selected classes. The authorities recognizes that the high current repetition rate in primary education is not effective at improving students’ learning achievement, is wasteful and ultimately financially unsustainable.

Why is the return on investment poor?

Approximately 84% of government expenditure on primary education is allocated for the payment of teachers’ salaries. The high proportion spent on this item limits the fiscal space for capital expenditure and for procuring critical non-recurrent educational inputs for the delivery of quality education. In addition, the general absence of mechanisms to facilitate an accurate assessment of teacher performance results in poor linkages between teacher performance and levels of remuneration and promotion. This leads to a poor conversion of emoluments into teaching time and efforts in the classroom.

But doesn’t Malawi’s education system need more teachers?

The average pupil-teacher-ratio is very high, at 69:1. However, there is a high level of variation in this ratio between different school levels and, across all levels, between different schools. Significant opportunities exist to use the existing stock of primary teachers more efficiently. An analysis of the data shows that the most significant factor determining progression rates in primary schools is the value of non-wage expenditure per pupil. The availability of classrooms is also significant.

Given the current constraints on the Government, can it afford the costs associated with improving the system?

Despite significant resource constraints, Malawi could implement a number of measures to improve educational outcomes without excessive additional expenditure. To achieve improved efficiency and productivity gains using available resources and inputs, policymakers should consider the following measures:

  • To the fullest extent possible, teachers should be relocated from the upper grades, where there is on average a much lower PTR, to lower grades, with the ratio is much higher. Reallocating teachers within and between schools would be a cost-effective method of improving PTR that mitigates the need to hire additional teachers.

  • To improve school management, head teachers in primary schools should be given training to efficiently utilize school inputs. The implementation of a well-designed school leadership training program could improve the allocation and distribution of teachers across grades, the use of textbooks in schools, and the management of classroom space.

  • The construction and creation of additional classroom space needs to be targeted with a focus on creating additional space for classes at the lower grades, where classroom shortages are particularly severe. Schools should be encouraged to use school improvement grants to better manage available space. For example, this could be achieved through the use of partitions to convert one large classroom into two smaller ones.

  • To improve the distribution and use of textbooks, the Government could promote the development of domestic markets for such textbooks, enabling students to purchase them locally. This could be supplemented by a textbook grant for poor students who cannot afford textbooks. Over time, this system would lead to the development of a secondhand textbook market, reducing the net out-of-pocket expenditure at the household level.

  • School grants should be more effectively linked to school performance, particularly promotion rates in schools. The current practice of linking school grants to enrolment numbers generates distorted incentives for schools to retain pupils who have virtually dropped out of the system. Instead, schools should receive incentives to increase the number of students who complete a full cycle of primary education with the desired level of attainment in the area of reading and numeracy skills.