Unlocking long term growth requires bold reforms and strong governance to anchor stability while protecting the vulnerable population.
Malawi faces a severe macro-fiscal crisis marked by high fiscal deficits, unsustainable debt, and low economic growth. Debt service is consuming over half of domestic revenues, crowding out essential social and infrastructure spending. Exchange-rate distortions and quasi-fiscal activities stemming from below-cost tariffs, under-collection of revenues and excessive losses in public non-financial public corporations, exacerbate pressures on the budget and the financial sector.
The Malawi Public Finance Review (PFR), titled “Restoring Stability, Rebuilding Trust” sets out a sequenced reform agenda—centered on improved revenue mobilization, expenditure efficiency, stronger public finance management (PFM), improved State-Owned Enterprise (SOE) governance, and mining sector reforms—to restore stability, rebuild trust, and anchor sustained economic growth.
The report undertakes a comprehensive review of the following thematic areas:
- Fiscal Imbalances: Deep-seated fiscal imbalances are driving Malawi’s broader economic stress, creating a vicious cycle of high-cost borrowing, rising debt service, and constrained development spending. The fiscal deficit is among the highest in Sub-Saharan Africa and is financed by expensive domestic borrowing that crowds out private sector credit for investment to create jobs and spur growth.
- Spending Efficiency, Wage Bill, and PFM: Rigid recurrent spending and weak fiscal governance undermine allocative efficiency and crowd out much-needed investment in human capital and infrastructure. Rigid expenditures, including wages and interest payments, take up more than 90% of domestic revenue, leading to continued underinvestment and increasing social needs.
- Domestic Revenue Mobilization: Despite recent tax reforms, revenue performance remains below fiscal needs, with a fragile tax base undermined by policy instability and administrative gaps. The numerous exemptions and incentives cause distortions and result in large losses. Tax compliance is hampered by fragmented data, limited risk-based audits, and incomplete digitalization.
- SOEs, Governance and Fiscal Risks: Loss-making SOEs, especially in energy and water, pose mounting contingent liabilities due to weak governance, operational inefficiencies, and tariff misalignments. Persistent reliance on transfers, bailouts, guarantees increases fiscal exposure and diverts resources from government compounded by political interference and unclear mandates that blur commercial vs. social objectives.
- Mining—Harnessing Potential and Managing Risks: Mining revenues could provide a moderate boost to Malawi’s public finances but are unlikely to be transformative. If all current and prospective mines are developed, annual revenues are projected to reach $ 200 – 500 million by the early 2030s, depending on project completion and fiscal terms. This underscores the need to strengthen core sector institutions particularly in the areas of contract negotiation, fiscal modeling, and revenue administration and manage public expectations.
The PFR provides recommendations across key focus areas:
- Implement a multi-year fiscal consolidation plan to achieve a primary surplus within two years and place debt on a declining path. This is essential to restore sustainability, strengthen governance, rebuild trust, and achieve the goals of “Malawi Vision 2063”. Although this consolidation path is ambitious and will require difficult trade-offs, it is both feasible and necessary. Successful implementation will support the country’s long-term development objectives while cushioning the impact on the poor.
- Enhance expenditure efficiency by rationalizing the wage bill and allowances and strengthen PFM and PIM systems while protecting essential expenditure in social sectors and critical infrastructure.
- Rationalize tax incentives, reduce VAT exemptions, expand digital systems, tax wealth, adopt health‑related excise taxes, and improve the progressivity of PAYE and fringe benefits tax.
- Develop and implement modern corporate governance practice, institutionalize enterprise risk management and publish consolidated SOE fiscal risk reports, including shifting towards cost-reflective tariffs with targeted protection for the poor, while enforcing competitive neutrality and performance compacts.
- Optimize revenues by enhancing efficiency and transparency, reducing revenue leakages; and improving revenue management and administration.
“A comprehensive fiscal consolidation strategy is essential to restore sustainability, support inclusive growth, and achieve “Malawi Vision 2063”. This means boosting revenue through improvements in tax policy and administration, while rationalizing and enhancing the efficiency and effectiveness of public expenditure,” said Firas Raad, World Bank Group Country Manager for Malawi. “These measures are designed to support the path towards medium-term fiscal sustainability and reduce Malawi’s debt distress risk over the longer term.”
Stabilizing Malawi’s public finances requires decisive, sequenced reforms that deliver quick wins while advancing medium-term structural changes. Through the implementation of the reforms, measures must protect low-income households and essential services, ensuring consolidation is both credible and socially sustainable.
