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Is Malawi's fiscal crisis over? A donor perspective
Alan Whitworth1
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2007
Alan Whitworth

Acknowledgements: FANRPAN acknowledges the author as the source of this document.


Introduction

In August 2004 I presented a paper titled 'Malawi's Fiscal Crisis - a Donor Perspective' which looked at the fiscal situation inherited by the new government. The paper pointed out that the previous government's failure to control expenditure had led to the accumulation since 2001 of a dangerously large domestic debt and the loss of government control over its Budget. As a result, Malawi faced a fiscal crisis with disturbing implications for macro-economic stability, investment, financing of public services and poverty reduction. The crisis could only be overcome with substantial financial support from the international community. However, the Malawi Government's international reputation for economic mismanagement was so bad that it would be difficult persuading donors to assist.

Three years later the crisis appears to have been largely overcome, as illustrated by Malawi reaching HIPC Completion Point in August 2006. To illustrate the changes in fiscal management which have persuaded the IMF, DFID and other donors to resume and increase their support to Malawi, I have updated the previous paper (and a November 2005 update) to cover the period up to FY 2007/08. The paper goes on to consider the prospects for using the increased resources available to the Malawi Government (GoM) as a result of improved economic management to increase growth and poverty reduction.

As before, the analysis is based mainly on Table 1 and charts derived from it. Table 1, which now covers the period 2000/01 to 2007/08, has three sections:

  1. revenue and expenditure data in nominal Malawi Kwacha. Figures up to 2005/06 are from the IMF PRGF Third Review of February 2007, but originate in the Ministry of Finance. 2006/07 and 2007/08 figures are from the GoM Financial Statement for FY2007/08.
  2. the same figures expressed as percentages of Total GoM Domestic Expenditure (ie excluding donor funded projects, Part I of the Development Budget)
  3. the same figures expressed as percentages of Gross Domestic Product (GDP), ie Malawi's annual income
The nominal figures are essential input to the table, but are of little value when comparing changes over time. This is because inflation reduces the value of the Kwacha over time; comparing, say, 2000 and 2007 expenditure in nominal terms is 'comparing apples and oranges'. Analysis of trends in shares of total expenditure and of GDP is much more useful because the effect of inflation is neutralized. Such figures can also be compared with other countries.

In March 2007 the National Statistics Office launched a new National Accounts series for the years 2002, 2003 and 2004. These use an improved methodology based on the UN 1993 System of National Accounts. As a result, GDP for the three years has been revised upwards by an average of 37.5%. While the revised figures are more accurate they have not been incorporated here. This is because the paper looks at changes over time in GoM economic performance over the period 2000/01 to 2007/08. For such time series analysis it is important to have consistent data for the whole period, not just for three years.

Various key trends in Table 1 are illustrated in four charts:

  • Figure 1 shows total government expenditure as a share of GDP, along with government revenue and external grants. The Fiscal Deficit is the difference between expenditure on the one hand and the sum of revenue and grants on the other. While the coverage of external grants has varied over time, the deficit figures are accurate.
  • Figure 2 shows the Net Domestic Debt Stock and the government interest bill (domestic and foreign), as shares of GDP.
  • Figure 3 shows domestic expenditure broken down in percentage terms into various categories - explained below.
  • Figure 4 is the same as Figure 3, but presented as shares of GDP.

Footnote:
  1. Economic Adviser, Department for International Development (DFID) Malawi (2003 - 2007). Copies of the paper and accompanying tables are available electronically on request from the author at .

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