According to the most recent Malawi Economic Monitor from the World Bank, a number of foreign and local shocks are exerting severe strain on Malawi’s macroeconomic situation and making it even more urgent to safeguard crucial services for the disadvantaged (MEM).
The government’s financial situation has significantly worsened, as shown by the 15th Edition of the MEM, with the deficit hitting a record high.
Spending has consistently outpaced income while imports have outpaced exports for a number of years.
Due to the increasing commercial borrowing required to pay for this, Malawi’s debt is now unmanageable.
Due to these persistent imbalances, which have been made worse by extreme weather events, Malawi’s economic growth is predicted to continue to slow down.
With fuel, fertilizer, and other commodity prices on the rise and an already difficult economic environment, the Ukraine-Russian war has introduced a new crisis and put pressure on inflation.
Despite the MEM’s assessment that risks to the Malawian economy are biased to the downside, the government has started undertaking crucial policy changes designed to resolve macroeconomic imbalances and ensure a recovery.
However, additional effort is required in three areas: I) a coordinated set of measures to reestablish macroeconomic stability,
II) boosting export competitiveness and market-oriented growth, and
III) safeguarding the underprivileged and boosting resilience.
In view of these financial limitations, the Special Theme of the 15th MEM emphasizes the significance of improving intergovernmental fiscal transfer mechanisms, extending fiscal decentralization, and providing high-quality services to low-income and vulnerable people.
The MEM demonstrates that the system where “money has not followed function” has been Malawi’s decentralization journey to yet.
This has led to an incoherent planning and decision-making process for the provision of services across levels of government, with frequent parallel and overlap between sector and district processes.
Development partners who continue to focus funding primarily through dispersed, overbudget projects make matters more difficult.
The vicious circle of low trust, low investment, and low accountability in local government institutions needs to be stopped if effective decentralization is to continue.
“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.”
In the 15th edition of the Malawi Economic Monitor, policy recommendations are made to further fiscal decentralization in the short term, acknowledging the necessity for short-term initiatives to take the unstable nature of the economic climate into account.
This can be done by encouraging high-level leadership of the fiscal decentralization agenda, linking development funds to performance, streamlining the intergovernmental fiscal transfer system, boosting transparency, and strengthening the equalization of transfers through formula revision as well as the inclusion of reasonable expenditure needs and fiscal capacity measures.
The MEM conducts a biannual analysis of Malawi’s structural and economic development challenges.