A series of external and domestic shocks are putting acute pressure on Malawi’s macro-economy, increasing the urgency to protect essential services for the vulnerable says the latest World Bank’s Malawi Economic Monitor (MEM).
The 15th Edition of the MEM underscores significant deterioration in the government’s finances, with the deficit reaching its highest level in over a decade. For several years, spending has exceeded revenues while the country has imported more than it exports. This has been financed by increased commercial borrowing and Malawi’s debt has now become unsustainable. Malawi’s economic growth is expected to decline further due to these chronic imbalances, which have been heightened by severe weather events. The Ukraine-Russia war has added a new crisis to what was already a challenging economic climate, with rising prices for fuel, fertilizer and other commodities impacting foreign reserves and exerting pressure on inflation.
While risks to the Malawian economy are tilted to the downside according to the MEM, the government has begun implementing critical policy reforms that are aimed to address macroeconomic imbalances and secure a recovery. However, further action is needed in three areas: i) a coordinated package of reforms to restore macroeconomic stability, ii) enhancing export competitiveness and market-oriented growth, and iii) protecting the poor and strengthening resilience.
In the context of these fiscal constraints, the Special Theme of the 15th MEM highlights the importance of deepening fiscal decentralization, strengthening the intergovernmental fiscal transfer system, and delivering 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 over service delivery across levels of government, with sector and district processes often occurring in parallel and overlapping. This is further complicated by development partners that continue to primarily concentrate funding through fragmented, off-budget projects. For a meaningful deepening of decentralization to continue, the vicious cycle of low trust, low investment and low accountability in local government systems needs to be broken.
“At times of fiscal constraint, it becomes critical to maintain effective services for citizens and protect the poor from shocks,” said Hugh Riddell, World Bank Country Manager for Malawi. “The acute economic context provides the Government an opportunity to lock in difficult reforms to stabilize the macro while also deepening decentralization. We at the World Bank are very encouraged by the response of local governments – and citizens – to the new performance-based financing model which can serve to increase confidence in local government systems to bring more development partner resources on-budget.”