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Tight Public Expenditure Management Key to Reversing Malawi’s Deteriorating Growth Prospects

November 18, 2015

LILONGWE, November 18, 2015 – The World Bank projects that Malawi’s economic growth rate for 2015 will slow down to 2.8 percent due to a combination of factors such as weak fiscal discipline and a now clearer impact of weather shocks on agricultural production. The rate of inflation is also projected to continue in double digits, reaching an estimated average of 21.5 percent in 2015, the second highest in Africa.

In the second edition of the Malawi Economic Monitor (MEM-2) report released in Lilongwe titled Adjusting in Turbulent Times, the Bank said Malawi’s growth prospects have deteriorated in the last few months resulting in a reversal of earlier projections of continued recovery in 2015 after a strong performance in 2014. While the impact of the January floods on economic growth was fairly limited, the impact of the late arrival and early cessation of rains on the agriculture sector has been significant, resulting in a 30.2 percent drop in maize output. In addition while the tobacco crop proved to be more resilient in the face of weather shocks, global price declines saw tobacco earnings drop by 6.7 percent at the close of the season.

“Malawi is facing twin pressures arising from vulnerability to climate shocks, made worse by fiscal management challenges,” said Richard Record, lead author of the report and Malawi’s Senior Country Economist.  Weak fiscal discipline is the most significant contributor to Malawi’s macroeconomic instability, with Government running a large fiscal deficit and borrowing heavily on the domestic market to close the gap. By the end of the 2014/15 fiscal year, Government’s annual domestic borrowing was four times the amount approved in the budget estimates. “Government expenditure continues to be under pressure due to the rising cost of servicing increased debt, increasing wage demands, and the high cost of subsidy schemes,” added Record. 

In the face of these challenges, the Bank said Malawi could set itself on a path of better economic growth if it restored its fiscal balance to reduce inflationary pressures and control Government’s domestic borrowing requirements. The MEM-2 recommends tight management of public expenditure throughout the 2015/16 fiscal year, appropriate prioritization of expenditures, and more efficiency in budget execution, public finance and expenditure management.

The second edition of the MEM also includes a special topic focusing on primary education under fiscal constraints. Compared to regional comparators, Malawi spends a higher than average proportion of public resources on education but educational outcomes still remain poor. The MEM-2 therefore recommends a number of measures that Malawi could implement to improve outcomes in a constrained fiscal environment. These include relocating teachers from upper to lower classes to improve teacher-pupil ratios, training school heads on efficient utilization of inputs; reducing classroom shortages in the lower classes through better management of existing classroom space; and improving distribution and use of textbooks.

This second edition of the MEM provides an update on economic issues discussed in the first edition released in April 2015 which was titled Managing Fiscal Pressures. Overall, the aim of the MEM report series is to foster better informed policy analysis and debate regarding key challenges that Malawi needs to address in order to achieve high rates of stable, inclusive and sustainable economic growth through an in-depth analysis of economic trends and macroeconomic outlook.

The report is available at: https://documents.worldbank.org/curated/en/2015/10/25169507/malawi-economic-monitor-adjusting-turbulent-times

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