A series of external and internal shocks are placing acute pressure on Malawi’s macro-economy, increasing the urgency to protect essential services for vulnerable people, according to the World Bank’s latest Malawi Economic Monitor (MEM).
The 15th edition of the MEM highlights a significant deterioration in government finances, with the deficit reaching its highest level in more than a decade. For several years, expenses have exceeded revenues, while the country imports more than it exports. This was financed by increased commercial borrowing and Malawi’s debt has now become unsustainable. Malawi’s economic growth is expected to continue to decline due to these chronic imbalances, which have been exacerbated by severe weather events. The war between Ukraine and Russia added another crisis to what was already a difficult economic climate, with rising prices for fuel, fertilizers and other raw materials impacting foreign exchange reserves and exerting a pressure on inflation.
As risks to Malawi’s economy point to the downside according to the MEM, the government has started to implement key policy reforms aimed at addressing macroeconomic imbalances and securing a recovery. However, further action is needed in three areas: (i) a coordinated set of reforms to restore macroeconomic stability, (ii) strengthen export competitiveness and market-driven growth, and (iii) protect the poor and build resilience.
In the context of these budgetary constraints, the special theme of the 15th MEM highlights the importance of deepening fiscal decentralization, strengthening the intergovernmental fiscal transfer system and providing quality services that reach poor and vulnerable households. The MEM shows that Malawi’s decentralization journey to date has been characterized by a system where ‘finance has not followed function’. This has resulted in uncoordinated planning and decision-making on service delivery across levels of government, with sector and district processes often running in parallel and overlapping. The situation is further complicated by development partners who continue to focus their funding primarily on fragmented and off-budget projects. For meaningful deepening of decentralization to continue, the vicious cycle of low trust, low investment and low accountability in local government systems must be broken.
“In times of fiscal constraints, it becomes essential to maintain efficient services for citizens and to protect the poor from shocks,” said Hugh Riddell, World Bank country director for Malawi. “The acute economic context offers the government an opportunity to lock in difficult reforms to stabilize the macroeconomic situation while deepening decentralization. At the World Bank, we are very encouraged by the response of local governments – and citizens – to the new performance-based financing model that can be used to increase confidence in local government systems to channel more resources from development partners. budget development.
The 15th edition of the Malawi Economic Monitor offers policy actions to deepen short-term fiscal decentralization, recognizing that short-term measures must take into account the volatility of the economic environment. This can be achieved by promoting high-level leadership on the fiscal decentralization agenda, linking development funds to performance, simplifying the intergovernmental fiscal transfer system, increasing transparency and strengthening transfer equalization through the revision of formulas as well as the inclusion of rational measures. expenditure needs and measures of fiscal capacity.
The MEM provides bi-annual analysis of economic and structural development issues in Malawi.
Distributed by APO Group on behalf of the World Bank Group.
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