Fiscal Space for Children: An Analysis of Options in Malawi · 7 Fiscal Space for Children: An...

Fiscal Space for Children:

An Analysis of Options in

Malawi

July 2018

Table of contents

2

Fiscal Space for Children: An Analysis of Options in Malawi

List of abbreviations 4

Preface 6

Executive Summary 7

1 Introduction and methodology 9

The objective of the Fiscal Space Analysis (FSA) 9

Methodology 10

1.2.1 The model and key concepts 10

1.2.2 Approach 12

The structure of the FSA 14

2 Malawi’s macroeconomic and fiscal context 15

2.1 Longer-term national economic trends 15

2.1.1 Real GDP growth 15

2.1.2 Demographic trends 15

2.1.3 Structure and characteristics of the national economy 16

2.1.4 Poverty and Inequality 17

2.2 Recent macroeconomic developments 18

2.2.1 Real GDP growth 18

2.2.2 International trade (and its consequences for the fiscal accounts) 19

2.2.3 Inflation and exchange rate 20

2.3 Recent fiscal performance 21

2.3.1 Government financial performance 22

2.3.2 Revenue performance 23

2.3.3 Expenditure performance 24

2.3.4 External support 26

2.3.5 Government debt 27

2.4 Concluding Remarks 28

3 Child-focused expenditure trends and policy challenges 30

3.1 Child-focused-expenditure composition and recent evolution 30

3.1.1 Composition of child-focused expenditure 30

3.1.2 Evolution of child-focused expenditure 32

3.2 Sector-specific profiles 34

3.2.1 Education 34

3.2.2 Health 36

3.2.3 Social protection 38

3.2.4 External support for child-focused sectors 41

Education 42

Health 42

Social Protection 43

3.3 Concluding Remarks 43

4 The base scenario 45

Table of contents

3


4.1 Base scenario assumptions 45

4.2 Base scenario projection results 45

Base-scenario and fiscal-space “mapping” 46

5 Alternative scenarios 48

5.1 Options to increase the fiscal space 48

5.2 Alternative scenarios and projections compared with the base scenario 49

5.2.1 Alternative Scenario 1: Improved domestic revenue collection 49

5.2.2 Alternative Scenario 2: Change in composition and efficiency of spending 52

5.2.3 Alternative Scenario 3: Increased External Grants 54

5.2.4 Alternative Scenario 4: Increase in Deficit Financing 57

5.2.5 Summary of Scenario Alternatives 58

6 Conclusions 62

7 References 64

Appendix 1: Fiscal space projections 66

Programming assumptions base scenario 66

Projection results alternative scenarios 74

4


List of abbreviations

AfDB African Development Bank

AU African Union

CFOA Common Fiduciary Oversight Arrangement

CIDA Canadian International Development Agency

CPI Consumer price index

DAC Development Assistance Committee

DAHSP Decent and Affordable Housing Subsidy Program

DFID Department for International Development

DSA Debt sustainability analysis

ECD Early Childhood Development

ECF Extended Credit Facility

ESJF Education Services Joint Fund

EU European Union

FISP Farm Input Subsidy Program

FSA Fiscal space analysis

FY Fiscal year

GDP Gross domestic product

GFATM Global Fund to Fight AIDS, Tuberculosis and Malaria

GFI Global Financial Integrity

GFS Government Finance Statistics

GIZ German Development Agency

GNI Gross National Income

HIPC Heavily Indebted Poor Countries

HSJF Health Services Joint Fund

IBRD International Bank for Reconstruction and Development

IFF Illicit Financial Flows

IFS International Financial Statistics

ILO International Labour Organization

IMF International Monetary Fund

ISEM Improving Secondary Education in Malawi

JICA Japan International Cooperation Agency

KfW German Development Bank

LDF Local Development Fund

MDA Ministry, Department or Agency

MDRI Multilateral Debt Relief Initiative

MEPD Ministry of Economic Planning and Development

MESIP Malawi Education Sector Improvement Project

MGDS Malawi Growth and Development Strategy

MoF Ministry of Finance

MoGCDSW Ministry of Gender, Children, Disability & Social Welfare

MoH Ministry of Health

MIT Massachusetts Institute of Technology

MRA Malawi Revenue Authority

MWK Malawian Kwacha

NES National Export Strategy

5


NESP National Education Sector Plan

NLGFC National Local Government Finance Committee

NIP National Industrial Policy

ODA Official Development Assistance

OEC Observatory of Economic Complexity

OECD Organisation for Economic Co-operation and Development

ORT Other Recurrent Transactions

PFM Public Finance Management

PPP Public-private partnership

RBM Reserve Bank of Malawi

SCTP Social Cash Transfer Programme

STEP Skills and Technical Education Programme

TFP Total Factor Productivity

TVET Technical and Vocational Education and Training

UN/DESA United Nations Department of Economic and Social Affairs

UNDP United Nations Development Programme

UNESCO United Nations Educational, Scientific and Cultural Organization

UNFPA United Nations Population Fund

UNICEF United Nations Children’s Fund

US United States

USAID United States Agency for International Development

VAT Value-added tax

WASH Water, sanitation and hygiene (WASH)

WDI World Development Indicators

WEO World Economic Outlook

WFP World Food Programme

WTO World Trade Organization

6


Preface

This report is part of a series of country studies carried out by Ecorys and Associates for UNICEF in

Eastern and Southern Africa. The project aims to strengthen UNICEF’s advocacy efforts through a

better understanding of the role of political economy factors in processes and decisions around the

creation and use of fiscal space for investments in children.

This report was written by Paul Beckerman, Gabriele Pinto, Corrado Minardi, Tobias Broich and

Andrea Dijkstra.

The writers of this report wish to thank the staff from UNICEF Malawi for their support and

guidance. They also express gratitude to the various government officials and other stakeholders

who provided inputs.

The findings, interpretations and conclusions expressed in this report are those of the authors and

do not necessarily reflect the policies or views of UNICEF or of the United Nations. The text has not

been edited to official publication standards, and UNICEF accepts no responsibility for errors. The

designations in this publication do not imply an opinion on legal status of any country or territory, or

of its authorities, or the delimitation of frontiers.

7


Executive Summary

Given Malawi’s limited resource envelope from both domestic and foreign revenue and the

large financing needs across all sectors – including education, health and social welfare –

future policy discussions around expenditures priorities may be challenging. The

government of Malawi faces three interrelated challenges: (i) Enhancing and sustaining macro-

economic stability which includes a robust fiscal policy framework, (ii) strengthen domestic resource

mobilization and (iii) free up both additional revenues and savings on expenditure from improved

efficiency. Frequent fiscal slippages and governance problems have severely hampered

macroeconomic stability, undermining economic growth and private sector development. It is crucial

that the government bring its fiscal deficit and public debt under control. In order to achieve these

aims, the government has and will need to increase revenue collection1 and allocate its scarce

financial resources more strategically, namely to sectors that offer the largest development

potential.

Spending on “child-focused” sectors has been uneven over the past years. In this study,

“child-focused” expenditure refers to recurrent and capital expenditure considered essential for the

survival, development and protection of children namely education, health and social protection.

The average growth rates of the education, health and social welfare budgets (measured in

constant US dollars) between 2012/2013 and 2016/2017 was 3.4 per cent, 0.5 per cent and -2.7

per cent, respectively.

Despite the government’s intention to allocate more financial resources to child-focused

sectors over the 2017-2022 time period, declining foreign aid may make this challenging. In

2014-2015, almost 60 per cent of foreign aid by the DAC donors was channelled into education,

health and other social infrastructure. However, following the ‘Cashgate’ corruption scandal that

came to light in September 2013, development partners suspended their direct aid contributions to

Malawi’s national budget and shifted a significant share of donor aid to off-budget mechanisms. As

a result, while foreign aid accounted for 10 per cent of Malawi’s GDP, it amounted to less than 4 per

cent of GDP as of fiscal year 2016/17. After Cashgate, the share of budget support as a percentage

of total development assistance declined while the share of off-budget support grew. Budget

support grants were only provided in FY 2015-16 and FY2017-18 (17 billion MWK and 16 billion

MWK, respectively).

In a baseline status-quo scenario where real GDP growth rate is assumed to modestly rise

while inflation and population growth slightly taper, child-focused expenditure on a per child

basis will grow slightly. The base scenario suggests that Malawi can sustain a small increase in

“child-focused” expenditure from US$70.8 per child to US$76.3 per child by FY 2023/24. “Child-

focused” expenditure would be stable around one third of total government expenditure. As the

growth rate would remain high, the fiscal deficit (as a percentage of GDP) would also fall from 4.1 to

2.9 per cent over the modelling period. Accordingly, the fiscal gap would improve, both as a

percentage of total expenditure and as a percentage of GDP. The government debt-to-GDP ratio

would reach 45.60 per cent in FY2023/24.

In this modelling exercise, four alternative scenarios assess the capacity of the government

to boost investment in children. In the first scenario, we model an increase in domestic

revenue mobilization through improved tax collection over the projection period FY2017-18

to FY2023-24 (Scenario 1). This scenario considers a gradual increase in five different types of

1 IMF, 2017, Malawi: Economic Development Document. IMF Country Report No. 17/184, p. 4

8


taxes (domestic VAT, import VAT, personal income tax, corporate tax and excise tax) by 50 per

cent over the entire projection period. The improved domestic revenue collection would increase

the average child-focused expenditures as percentage of GDP from 7.8 to 8.8 percent and the

average child-focused expenditure per child from US$73.0 to US$ 82.7.

The same increase in child-focused expenditures as projected in the first scenario could be

achieved with a change in the allocation of expenditures and improving the efficiency of

“child-focused” expenditures (Scenario 2). This scenario is based on the assumptions that the

government can improve the composition of overall spending the government, improve the

efficiency of child-focused budgeting and strengthen program-based budgeting. Here, non-“child-

focused” recurrent expenditure decreases by 20 per cent over the projection period and non-“child-

focused” non-recurrent expenditure decreases by 34 per cent over the projection period. The fiscal

implications of this scenario are also promising. Malawi’s fiscal deficit would decrease from 3.8 per

cent to 0.4 per cent and the debt stock would be reduced by 8 percentage points over the

FY2017/18-FY 2023/24 period.

External grants offer another potential channel for the government to scale up investments

in child-focused sectors (Scenario 3). The scenario of resumption of on-budget support is based

on (i) the fact that Malawi remains one of the most aid dependent countries in the world, (ii) the

assumption that the Malawi government can convince its development partners to produce value

for money (in terms of where and how new funds will be spent), and (iii) the possibility that the

Malawi government could also leverage other international financial resources such as the Global

Partnership for Education Fund, the Global Financing Facility (GFF) for Reproductive, Maternal,

Newborn, Child and. Adolescent Health (RMNCAH) or the Green Climate Fund. Under this

scenario, a gradual increase in external grants for current expenditures to 2 percent of GDP in

FY2023-24 (compared to 1.5 per cent in the base scenario) and for capital expenditures to 4

percent of GDP in FY2023-24 (compared to 1.5 per cent in the base scenario) can fund the 13 per

cent increase in average child-focused expenditures per child from US$73.0 to US$ 82.7 without

endangering Malawi’s fiscal position. The fiscal deficit would be reduced to 0.9 per cent in

FY2023/24 compared to 3.9 per cent in the base scenario. The total government debt would decline

from 44.6 per cent in the base scenario to 38.5 per cent in FY2023/24.

Another possible option to boost “child-focused” spending is to increase debt with the

proceeds directed toward “child-focused” sectors (Scenario 4). This scenario is based on the

IMF’s assessment that Malawi’s risk of external debt distress is moderate and external

sustainability is expected to improve as the current account deficit narrows and the economy

becomes more resilient. Under a scenario whereby external debt disbursements as a percentage of

GDP remain stable at 3 per cent over the projection period (in the base scenario they decrease to

2.5 per cent) and external debt repayments increase from 0.6 per cent of GDP to 0.7 per cent (in

the base scenario they decrease to 0.5 per cent), the same increase in child-focused expenditures

from US$73 to US$82.7 can be achieved. In contrast to Scenarios 1-3, however, this scenario is

not fiscally neutral. Malawi’s fiscal deficit would rise from 4.3 per cent to 5.7 per cent, and Malawi’s

debt stock would reach 53.5 per cent of GDP by FY2023/24 compared to 45.6 per cent in the base

scenario.

Increased domestic revenue mobilization through improved tax collections (Scenario 1) has

the biggest potential to boost investments in children in a fiscally neutral way out of all

scenarios discussed. In this analysis, we model four individual scenarios of how fiscal space can

be increased in Malawi. A combination of individual scenarios is also possible which can free up

even more financial resources for child-focused expenditures. Even though Malawi’s fiscal situation

is challenging, this analysis provides several illustrative scenarios ways of how “child-focused”

spending can be increased without compromising the country’s fiscal sustainability.

9


1 Introduction and methodology

Like most countries in the Eastern and Southern Africa region, Malawi has been experiencing a

demographic boom, which implies that the number of children will grow rapidly in coming decades.

This implies that the need for children’s services in health, education, sanitation, nutrition and

protection will significantly increase. Malawi remains one of the poorest countries in the world and

the fiscal space by the government is severely constrained, partially due to the withdrawal of on-

budget foreign aid money by Malawi’s major development partners since the Cashgate corruption

scandal which was made public in September 2013.2 By that time, development assistance

constituted around 40 percent of the government budget. While official development assistance

(ODA) remains an important source of funds for development, most of it is channelled off-budget to

the intended beneficiaries. Due to the changing demographic landscape, however, foreign aid alone

cannot promote development in the children-related sectors. Future progress in children’s

development will also have to increasingly rely on funding from domestic sources.

In view of this reality, UNICEF has commissioned a study to estimate “fiscal space” for expenditure

on child-focused child focused sectors based on selected scenario. For this study, fiscal-space

refers to revenues and grants that can potentially be made available for spending on child-focused

child focused sectors.

The objective of the Fiscal Space Analysis (FSA)

This Fiscal Space Analysis (FSA) aims to assess the budgetary room in which the Malawian

government can provide resources for selected child focused sectors without undermining its fiscal

sustainability. It does this through a fiscal-space accounting framework, centred on the government

budget and the identification of “child-focused” sectors considered most relevant for children’s

welfare.

The analysis also examines and evaluates options to increase the overall fiscal space available in

the Malawian economy. The fiscal space accounting framework makes it possible to examine the

consequences of sets of assumptions - “scenarios” - describing future macroeconomic conditions

for the fiscal space. Different scenarios produce different outcomes for the fiscal space and have

different implications for the government’s capacity to fund its child-relevant expenditure. The

scenarios described below are illustrative, in the sense that they are intended to show how UNICEF

could apply the exercise to inform its discussions. Nevertheless, the options, which are selected for

the scenarios, are based on discussions with the UNICEF country office and key stakeholders.

A projection exercise of this kind is intended to inform UNICEF’s technical engagement with

policymakers and other stakeholders about ways to expand the space for improving investments in

children.

2 The Capital Hill Cashgate scandal refers to a systematic looting of public money that may have cost the public

approximately 24bn kwacha (£35m) with some of the money siphoned off for politicians' election campaigns.

10


Methodology

The analysis is carried out using an Excel-based projection exercise (MwFS.xlsm). Section 1.2.1

outlines the structure of the fiscal space model; section 1.2.2 describes the approach used to

populate the model, formulate alternative scenarios and run projections.

1.2.1 The model and key concepts

The model is a multiannual fiscal-programming exercise, structured to indicate the evolution of the

fiscal space under specified macroeconomic programming assumptions. This exercise produces

multiannual fiscal-accounts projections based on (1) historical data and (2) programming

assumptions regarding macroeconomic conditions.

This report refers to expenditures considered beneficial to children as “child-focused” expenditure.

Making use of the government budget accounting “identity”3, the analysis examines the effective

financing and the potential for enhanced future growth of “child-focused expenditure”, given the

recent and projected revenue and financial constraints as well as the evolution of non-child-focused

expenditure. The projections can be analysed to compare, on the one hand, the evolution of real

expenditure in sectors relevant to children and, on the other hand, the evolution of the rest of the

fiscal accounts. The idea would be to determine whether any given set of assumptions, taken

together, would produce projections in which the child-focused expenditure program could be

financed in a feasible way or, if not, how large the financing gap would be.

In this way, the analysis addresses the question of whether Malawi’s government possesses and

will continue to possess adequate “fiscal space” to fund its “child-focused” expenditure flow.

The fiscal identity

The analysis of the evolution of fiscal space in the recent past and over coming years centres on

the government budget accounting “identity.” Over any accounting period, total priority expenditure

(in this case “child-focused” expenditure) must precisely equal the sum of all revenue and net

financing flows less total non-child-focused expenditure. The net internal financing flows are a

residual category. This required net internal financing flow is the “fiscal gap”.

For present purposes, the basic structure of the identity is as follows:

Total priority or child-focused non-interest expenditure

- Tax and non-tax, non-interest revenue (excluding external grants)

+ External and internal interest receipts

+ External grants

- Total non-child-focused, non-interest expenditure

+ External debt disbursements

- External debt service (repayment and interest)

- Domestic interests payments

+ Net internal financing flows (= fiscal gap)

Examination of the account structure above makes it clear that this structure is a simple

rearrangement of the accounts that constitute any government budget, and so, for recent years, this

table can be readily constructed from government budget results. The aim is to show how the

various fiscal-space components could fund the projected child-focused-expenditure flow. The size

of the net internal financing flows or the fiscal gap indicate the financial feasibility of the projections.

3 This identity states that total priority expenditure (comprising current, noninterest, interest, and capital expenditure) must

be precisely equal to the sum of all revenue and net financing flows less total non-priority expenditure.

11


”Child-focused” expenditure

For purposes of this study, three child focused sectors – education, health and social protection –

were chosen. “Child focused ” expenditure is defined as the recurrent and capital expenditure

considered essential for children’s welfare in the three sectors of education, health and social

protection. The three sectors were only chosen for analytical ease. There are several other sectors

such as WASH, child protection and nutrition that also deserve further analytical attention. This,

however, would have gone beyond the scope of this study. The expression “child-focused” should

not be taken to mean that such expenditure always be “prioritized” over other expenditure. Nor

does it mean that this is how the Government of Malawi defines “child-focused”. The point is simply

to categorize expenditures of child-focused interest to children in general and UNICEF. As such,

the composition of “child-focused” expenditure is chosen by UNICEF and the consultants. The

categorization of sectoral expenditure has been extrapolated by UNICEF using data from official

government documents, e.g. the Financial Statements (Budget Document No. 3) and Detailed

Budget Estimates (Budget Document No. 4) for the respective items included in Table 1. The “child-

focused” expenditure categories for children comprise the expenditure categories as shown in

Table 1. A more elaborate justification for the selection of the specific “child-focused” expenditures

is given in section 3.1. All government expenditures not categorized as “child-focused” would be

“non-child-focused”.

Table 1: Composition of “child-focused” expenditure based on the functional budget classification

Social

sector

Budget categories identified as ‘child-

focused expenditure’

Remarks Source:

Education Education affairs and services;

- Ministry of Education, Science &

Technology (MoEST)

- Education allocations to district councils

- “Subvented” education institutions (such

as University of Malawi, Technical

Vocational Education Training, etc.)

- Early Childhood Development

(channelled through MoGCDSW)

The entire

education

sector was

selected as

child-focused

expenditure.

Financial Statement (2013/14-

2014/15) and MoF

Appropriation Bills

Health Health affairs and services;

- Ministry of Health (MoH)

- Health allocations to district councils

- Health subvented institutions such as

Kachere Rehabilitation Centre

The entire

health sector

was selected

as child-

focused

expenditure.

Financial Statement (2013/14-

2014/15) and MoF

Appropriation Bills

12


Social

Protection

Social and Community services

- Ministry of Gender, Children, Disability

and Social Welfare (MoGCDSW)

Social security and welfare affairs

services

- LDF Social protection

The entire

budget for

MoGCDSW

was considered

plus additional

social

protection

programs

Approved Budget Document

No 4 (2013/14 - 2017/18);

MoF Appropriation Bills;

Appropriation

(supplementary/Amendment

from 2013/14 - 2016/17) and

Appropriation Act 2017

It is important to recognize that there is a measure of arbitrariness in the child-focused/non-child-

focused distinction. Some expenditure classified as child-focused for Malawi may in fact not be

directly beneficial for children (e.g. health expenditure specifically intended to benefit older people,

or university funding), while some expenditure classified as non-child-focused may in fact be highly

beneficial to children (e.g. local road expenditure).4

In addition, it should be noted that while this report focuses on the fiscal space for government

expenditure, there is also non-government expenditure. This includes off-budget expenditure

executed by international agencies and non-government entities (including faith-based

organizations). This study is focusing on fiscal space for government expenditure, but expenditure

relevant to children may also be funded outside the government.

1.2.2 Approach

The first phase of the present FSA analysis consists of data compilation and a broad review of the

recent evolution of the government budget generally and child-focused expenditure in particular.

The second phase consists of the formulation and implementation of an exercise in Excel to project

the evolution of child-focused expenditure and its revenue and financing constraints. A base

scenario is prepared, and this is then used as a base of comparison with alternative scenarios

based on different policy approaches.

Phase 1: data collection

The first phase consists mainly of the compilation of historical data and analysis of the recent data.

The model, structured along the fiscal identity mentioned above, is fed with this data. Fiscal

accounts data are divided into (i) main revenue flows, ODA flows, overall expenditure flows and net

financing flows and (ii) detailed sectoral expenditure flows. The former comes from the Government

Finance Statistics (GFS) which are listed in the IMF Country Report No. 17/183 for Malawi,

published in July 2017.

The latter are UNICEF estimations, based on data by the Ministry of Finance and Appropriation

Bills. An important limitation in the analysis is the lack of actual expenditure data. UNICEF has

estimated expenditures in the child-focused sectors based on revised budgeted amounts. The

calculations were carried out based on the premise that the execution rates from previous years

were not significantly different from approved estimates. However, in reality – actual expenditures

may be in fact lower or higher than budgeted. A detailed economic breakdown of government

expenditure was not available at the sector level. Therefore, the model assumes that child-focused

4 Analysts may prefer tighter or broader priority-expenditure definitions, but the methodological approach described above

would still be applicable.

13


expenditure has the same economic breakdown (recurrent and non-recurrent) of the overall

expenditure. Another important limitation is the usage of the entire health sector and the entire

education sector. As a result, child-focused expenditure does not only capture children-related

expenditures. One could, however, argue that investments in tertiary education, for example, will be

highly beneficial for Malawi’s children in the future.

The revenue breakdown has been estimated using the latest Malawi Revenue Authority (MRA)

performance from FY 2016-2017. Demographic data such as population growth comes from

UN/DESA. The macroeconomic aggregates such as consumer prices, exchange rates, balance of

payments come from the International Financial Statistics (IFS) database of the IMF. International

trade data is obtained from both the IFS database and from the Observatory of Economic

Complexity (OEC) at the Massachusetts Institute of Technology (MIT) Media Lab. External and

internal government debt data also comes from the IMF Country Report No. 17/183. Table 2 gives

an overall overview of the quantitative framework and the indicators that are used for the subject

area.

Table 2: Data for the quantitative framework

Area Indicators Source

Fiscal accounts (1) Budget results from recent years

(including main revenue flows, ODA flows,

overall expenditure flows, and net

financing flows);

(2) Sectoral expenditure flows in recent

years (in sufficient detail to set out child-

focused and non-child-focused flows).

1) GFS (Government finance

statistics). Based on latest IMF

Country report No. 17/183, July

2017.

2) UNICEF estimations, based on

data from budget books

(Appropriations Bill, Program

Based Budgets and Detailed

Estimates.

Demography (3) Population growth and prospects per

age categories.

UN DESA.

Consumer prices,

exchange rate

(4) Monthly consumer price index values,

(5) Monthly average exchange rates.

IMF International Financial

Statistics.

External sector:

Balance of payments

and International

investment position

(6) Balance of payments accounts (current,

capital, financial, errors-and-omissions,

and international reserve accounts);

(7) National-expenditure accounts


Statistics.

International trade (8) Merchandise exports by principal

commodity and (9) imports by economic

classification.


Statistics (download) & ATLAS

MIT.

External and internal

government debt

Year-end (10) external and (11)

government internal debt stocks;

External and government internal debt

flows.

Based on latest IMF Country report

No.17/183, July 2017.

Classification Status

Sector Available

Economic function at sector level Unavailable (set equal to aggregated share reported in GFS)

Phase 2: the projection exercise

The second phase of the analysis entails the formulation of a medium-term projection exercise

describing possibilities for the evolution of child-focused expenditure over the coming seven years.

The Malawi fiscal-space analysis sets out from a set of projection assumptions, together

14


constituting a “base scenario.” The base scenario consists of a straightforward and non-

controversial set of assumptions, to project fiscal space assuming “business as usual”. Chapter 4

(section 4.1) describes the assumptions that make up this scenario and the projection results.

Subsequently, the study will look at various alternative scenarios that would presumably enhance

fiscal space. A comparison of each alternative scenario with the base scenario would indicate the

order-of-magnitude consequences for the fiscal accounts as a consequence of changing specific

assumptions, given the underlying – unchanged – assumptions. Determination of these scenarios

has been based upon literature review and conducting interviews with key stakeholders, such as

the Ministry of Finance (MoF), the Ministry of Economic Planning and Development (MEPD), the

Reserve Bank of Malawi (RBM), IMF and the World Bank. The selected scenarios, or fiscal space

enhancement strategies, have then been expressed quantitatively as programming assumptions for

the projection model. The model then describes their consequences: first, for the evolution of the

child-focused expenditure, and, second, for the overall financing requirement. Evolution of the child-

focused expenditure can then be evaluated for its adequacy and the required financing requirement

can be evaluated for its feasibility. Chapter 4 (section 4.2) discusses the rationale behind the

selected options and describes projection results for the alternative scenarios, each of which is

almost the same as the base scenario but with one or more specific assumptions altered, to

examine the consequences for the fiscal gap. The projection exercise helps evaluate their potential

in quantitative terms.

The structure of the FSA

The remainder of the FSA report is organized as follows:

• Chapter 2 presents a review of Malawi’s macroeconomic and fiscal context. The purpose of this

chapter is to provide context to the Fiscal Space Analysis and the selection of options and

alternative scenarios in chapter 4 and 5;

• Chapter 3 provides a discussion of the recent evolution of Malawi’s child-focused expenditure

and policy challenges. The purpose of this chapter is to provide a detailed account of the

spending profiles of the child-focused sectors, to provide context to the Fiscal Space Analysis

and the evolution of child-focused spending in the future;

• Chapter 4 presents the base scenario. Section 4.1 presents the assumptions. Section 4.2

presents the projections of the baseline scenario;

• Chapter 5 presents the analysis of the alternative scenarios. Section 5.1 presents the base

scenario and 5.2 presents the selected policy options to enhance fiscal space and the projection

results for alternative scenarios.

• Chapter 6 offers conclusions from the discussion of the preceding chapters.

15


2 Malawi’s macroeconomic and fiscal context

The first part of this chapter looks at long-term macroeconomic trends in Malawi, as well as the

structural challenges within the Malawian economy. The second part assesses recent economic

performance, whereas the third part describes recent fiscal performance. The third part also looks

ahead, and reflects on the possibilities to increase Malawi’s fiscal space by increasing (tax and non-

tax) revenue, debt and grants. The purpose of this chapter is to provide the context for the fiscal

space analysis and inform the selection of potential scenarios.

2.1 Longer-term national economic trends

2.1.1 Real GDP growth

When Malawi became independent in 1964, Malawi’s per capita gross domestic product (GDP)

stood at US$ 242 (in constant 2010 terms), making the country the poorest of the three territories in

the Central African Federation and one of the poorest countries in the world. The largely agrarian

country lacked both natural resources and a strong physical infrastructure and was vulnerable to

weather shocks. Figure 1 shows the evolution of GDP per capita (in constant 2010 US$) for Malawi

and Sub-Saharan Africa over the 2000-2016 period. Malawi remains one of the world’s poorest

countries (ranking 164th among 186 countries) and with a GDP per capita of $300 (in constant

2010 terms) in 2016, the country finds itself significantly below the Sub-Saharan African average.

The trend in GDP per capita reflects Malawi average growth performance, and the gap between

Malawi’s GDP per capita and that of Sub-Saharan Africa has even widened since the early 2000s.

Figure 1: Malawi’s GDP per capita (constant 2010 US$), 2000-2016

Source: World Bank

2.1.2 Demographic trends

At the time of writing, Malawi’s population was estimated at 18.9 million. According to United

Nations projections, Malawi’s population is expected to grow to 41.2 million by 2050, a more than

twofold increase, primarily driven by a high fertility rate, which is slightly over 4 children per woman,

combined with a projected decline in infant mortality. The country has one of the most rapid

population growth rates in the world, estimated at 2.9 per cent in 2016.5 This means that Malawi will

continue to have a large proportion of young people, which requires a gradual increase in child-

friendly spending if the Government is to maintain its child-focused expenditure per child.

5 World Bank, World Development Indicators.

0

200

400

600

800

1000

1200

1400

1600

1800

Malawi Sub-Saharan Africa

16


Figure 2 displays Malawi’s population evolution since 2000 until today including forecasts for 2020.

In 2015, 44.7 per cent of the total population was under 15 years old. The share of the population

under 15 years old is expected to remain at around 45 per cent over the next few years, although

with population still growing at a relatively high rate the number of children will continue to grow.

Figure 2: Population by Age Group, 1980-2020

Source: World Bank, United Nations

2.1.3 Structure and characteristics of the national economy

Malawi’s economy is largely agriculture based. Since Malawi’s independence, the structure and

characteristics of the national economy virtually remained unchanged. The economy is

characterized by a highly dualistic agriculture sector, with tight controls and a wide gap between the

capital-intensive estate sector and the subsistence smallholder sector. The main products in the

agricultural sector are raw tobacco, raw sugar, coffee and tea. The country is also endowed with

natural resources (such as limestone, coal, bauxite, uranium and rare earth potential). Although the

primary sector still employs about 70 percent of Malawi’s economically active population, its

contribution to GDP has diminished from 45 per cent in 1990 to 30 per cent in 2015 (Figure 3).

Meanwhile, the contribution of the service sector to GDP has increased from 26 per cent in 1980 to

54 per cent in 2015. Growth in the service sector has been driven primarily by tourism, retail,

transport, telecommunication and the banking sector. There exists a large government involvement

in the service sector ranging from banking, retail, telecommunication to transport.

Figure 3: GDP composition by sector, 1990-2015

Source: World Bank, World Development Indicators Database

0

5

10

15

20

25

2000 2005 2010 2015 2020

Mil

lio

ns

0-14 15-24 25-49 50+

0

10

20

30

40

50

60

70

80

90

100

1990 1995 2000 2005 2010 2015

Agriculture, value added (% of GDP) Industry, value added (% of GDP)

Services, etc., value added (% of GDP)

17


2.1.4 Poverty and Inequality

Poverty and inequality remains very high in Malawi. Malawi’s poverty headcount ratio lies

significantly above the Sub-Saharan average (Table 3).

Table 3: Malawi Poverty Level, 2013

Malawi SSA

Poverty headcount ratio at national poverty lines (% of population) 50.7

51.5 (year 2017)

Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population) 70.9 41.0

Poverty headcount ratio at 3.10 a day (2011 PPP) (% of population) 87.6 65.0

Source: IMF estimates, World Bank World Development Indicators Database, Integrated Household Surveys

and Malawi authorities

One major reason why poverty has remained stubbornly high is due to the large urban-rural divide

(Figure 4). The poverty incidence is much higher in rural areas if compared to urban areas. Based

on IHS4, about one fifth (20.1%) of the population in Malawi is ultra poor. Figure 4 shows that

majority of the ultra and chronically poor live in rural areas and in the South and Central regions.

The chronically poor account for 2.6 million people of Malawi’s total population with 2.4 million of

them living in rural areas and 200,000 living in urban areas.

Figure 4: Malawi’s Poverty by Rural-Urban Location

Source: World Bank, 2016, Republic of Malawi Poverty Assessment. Calculations based on IHS3 panel and

IHPS.

0

5

10

15

20

25

30

Malawi Urban Rural North Centre South

Inc

iden

ce (

%)

0

10

20

30

40

50

60

70

80

90

100

Malawi Urban Rural North Centre South

Dis

trib

uti

on

of

ch

ron

icall

y p

oo

r (%

)

18


2.2 Recent macroeconomic developments

Table 4 presents selected macroeconomic indicators for Malawi. Most of the selected economic

indicators will be discussed in more detail in the next few sub-sections. The rest of this section

discusses the recent trend and projections of real GDP growth and inflation, central government

revenue and expenditure, the main features of Malawi’s international trade profile and the

composition and development of Malawi’s debt.

Table 4: Malawi Selected Economic Indicators

Estimates Projections (2018-2023)

2016 2017 2018 2019 2020 2021 2022 2023

National accounts/prices

GDP at constant market prices

(percent change) 2.3 4.0 3.5 4.5 5.0 5.5 6.0 6.5

Nominal GDP (billions of

Kwacha) 3,910 4,503 5,068 5,654 6,300 6,993 7,752 8,623

GDP deflator 19.5 10.7 8.8 6.8 6.1 5.2 4.6 4.4

Consumer prices

(annual average) 21.7 11.5 10.4 7.6 6.9 5.9 5.2 5.0

Central government

(% of GDP)

Central Government revenue 21.7 23.6 22.4 22.6 22.1 22.4 22.5 22.5

Central government tax and

non-tax revenue 18.0 20.1 19.5 19.5 19.5 19.5 19.6 19.6

Central government grants

revenue 3.7 3.5 2.8 3.1 2.7 2.9 2.9 2.9

Central government

expenditure and net lending 28.5 28.7 29.7 26.0 24.7 24.8 24.6 24.3

Overall balance

(excluding grants) -10.5 -8.6 -10.1 -6.5 -5.3 -5.3 -5.0 -4.7

Overall balance

(including grants) -6.8 -5.1 -7.3 -3.4 -2.6 -2.3 -2.0 -1.8

External sector (US$ millions)

Exports (goods and services) 1,603 1,695 1,857 1,975 2,100 2,234 2,386 2,562

Imports (goods and services) 2,520 2,547 2,747 2,769 2,927 3,110 3,326 3,572

Current account balance

(% of GDP) -13.6 -10.0 -8.9 -8.1 -7.9 -7.7 -7.7 -7.6

Debt stock (% of GDP)

External debt (public sector) 33.2 32.6 32.1 32.2 32.2 32.0 31.6 31.2

Domestic public debt 21.2 22.6 22.2 22.2 20.3 18.5 16.7 14.6

Total public debt 54.4 55.1 54.3 54.4 52.6 50.5 48.2 45.7

Source: IMF, 2018, Article IV Malawi

2.2.1 Real GDP growth

In 2016, Malawi witnessed a low real GDP growth rate of merely 2.3 percent which can primarily be

attributed to floods and droughts in 2015 and 2016. The economy, however, rebounded in 2017

with real GDP growth reaching more than 4 percent (Figure 5).6 Since Malawi’s economy is largely

based on agricultural production, with about 85 per cent of the population living in rural areas,

6 World Bank, 2018, Malawi Economic Monitor.

19


adverse weather shocks have a large impact on Malawi’s economic growth. Moreover, frequent

power cuts and water rationing adversely impacted the productive sectors. Both higher production

costs and reduced agricultural productivity decelerated growth in the industry and service sectors.

Figure 5: Real GDP Growth, 2000-2022

Note: Figures for the years 2018, 2019, 2020, 2021 and 2022 are estimates

Source: IMF, World Economic Outlook

2.2.2 International trade (and its consequences for the fiscal accounts)

One of Malawi’s several macroeconomic challenges is its chronic current account deficit (Figure 6),

which is primarily driven by its large dependence on imported goods, narrow export base, declining

agricultural prices, adverse weather conditions and external debt accumulation. While the current

account balance has decreased from 13.5 per cent in 2016 to 10.0 per cent in 2017, the deficits

become unsustainable over the long run.

Figure 6: Malawi’s Current Account Balance, 2000-2017

Source: IMF, International Finance Statistics

Agriculture accounts for approximately 80 per cent of export revenue (Table 5). Being a largely

agricultural economy, it is not surprising that Malawi’s main exports are foodstuff and vegetable

products. The bulk of Malawi’s exports are primary or semi-processed products such as raw

tobacco (accounting for around 50-60 per cent of Malawi’s total exports), raw sugar (9 per cent),

0.8

-4.1

1.8

5.7 5.4

3.3

4.7

9.6

7.68.3

6.9

4.9

1.9

5.25.7

2.92.3

4.55

5.5 5.5 5.5 5.5

-6

-4

-2

0

2

4

6

8

10

12R

ea

l G

DP

gro

wth

(%

)

-2000.00

-1000.00

0.00

1000.00

2000.00

3000.00

4000.00

US

$ M

illi

on

s

Exports Imports Current account balance

20


coffee (8 per cent) and tea (8 per cent). Raw tobacco, raw sugar, coffee and tea alone therefore

account for almost 90 per cent of Malawi’s export revenue. Malawi’s top export destinations are

Belgium, Germany, United Kingdom, United States, Zimbabwe, Mozambique and South Africa.

Malawi’s highly concentrated export base contributes to a high export volatility. In particular, the

heavy reliance on tobacco puts a heavy burden on the economy as world tobacco prices have

declined over the last few years and the international community has scaled up its efforts to reduce

tobacco production.

Table 5: Malawi’s main export and import products, 2015

Exports Amount

(Million US$)

% of total

exports

Imports Amount

(Million US$)

% of total

imports

Foodstuff 812.8 64.0 Chemical products 549.6 24.0

Vegetable

products

254.0 20.0 Machines 320.6 14.0

Textiles 47.0 3.7 Mineral products 274.8 12.0

Machines 35.6 2.8 Transportation 176.3 7.7

Plastics and

rubbers

25.4 2.0 Textiles 164.9 7.2

Chemical products 20.3 1.6 Plastics and Rubbers 126.0 5.5

Transportation 15.2 1.2 Metals 121.4 5.3

Wood Products 11.0 0.9 Paper Goods 116.8 5.1

Metals 9.7 0.8 Vegetable Products 114.5 5.0

Animal Hides 8.4 0.7 Foodstuffs 112.2 4.9

Others 29.2 2.3 Others 206.1 9.0

TOTAL 1270.0 100.0 TOTAL 2290.0 100.0

Source: OEC, 2018

International trade has fundamentally shaped Malawi’s economy. Even though Malawi is a

landlocked developing country, its export to GDP ratio of 30 per cent is relatively high. As a

landlocked country, Malawi’s economy heavily depends on efficient transit corridors and well-

developed ports in neighbouring countries. According to the World Trade Organization (WTO),

some of the corridors still lack efficiency. Transport time to the nearest maritime port is usually still

several days. This increases the cost of trading and also limits the range of exportable products,

effectively excluding most types of perishables. The trade deficit that has developed over the last

years is unsustainable without strengthening the Malawi’s export base. According to projections by

the IMF, Malawi’s current account deficit will decline further.

2.2.3 Inflation and exchange rate

Between 2012 and 2016, average inflation levels were around 23.5 per cent (Figure 7). With the

massive Kwacha devaluation in 2012, the macroeconomic situation deteriorated further, primarily

due to the Cashgate corruption scandal that came to light in September 2013. As a result, most

development partners removed on-budget support leading to a large fiscal gap in the government

budget. In 2012, development assistance constituted 40 per cent of the government budget. The

removal of on-budget support did not only adversely affect fiscal policy but also monetary policy.

While the government had make gradual fiscal adjustments with regard to the fiscal envelope, the

Reserve Bank of Malawi (RBM) printed money and issued government securities to the private

sector in order to close the gap, leading to high inflation levels. Over the last two years, the

government has aimed at restoring macroeconomic stability. The current government policy mix

consists of tighter fiscal and monetary policies to keep inflation on a declining trend.

21


Inflationary pressure eased in the latter half of 2017, with the year-on-year headline rate falling to

7.1 percent in December. The decline was largely due to a fall in food inflation, from a high of 20

percent in December 2016 to 4.3 percent in December 2017. Non-food inflation, on the other hand,

remained sticky, slowing down only marginally from a peak of 15.4 percent in December 2016 to 10

percent a year later. The medium-term inflation objective by the RBM is 5 percent by 2019.

Figure 7: Inflation Rate in Malawi, 2002-2022

Source: IMF WEO 2017

The government is also committed to maintaining a flexible exchange rate.7 A devaluation of the

Kwacha took place in 2012 and a further depreciation of 33 per cent between July and December

2015. Very recently, however, the Kwacha has stabilized (Figure 5). For resilience purposes, the

RBM makes sure that it holds enough foreign-exchange reserves partly to protect itself against

external crises. In terms of its monetary policy target for 2018, the RBM aims to have a 6 per cent

import cover in terms of foreign reserves.

Figure 8: Real Exchange Rate in Malawi (2010=100), 2000-2017

Source: World Bank, World Development Indicators (2018)

2.3 Recent fiscal performance

This section analyses recent fiscal performance by looking at the overall government financial

performance (section 2.3.1.), revenue performance (section 2.3.2), expenditure performance

(section 2.3.3 and 2.3.4), external support (section 2.3.5) and government debt (section 2.3.6).

7 World Bank, 2018, Malawi Economic Monitor.

0

5

10

15

20

25

30

Per

cen

t ch

an

ge Y

oY

projections Inflation, average consumer prices

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

22


2.3.1 Government financial performance

According to the Economic and Fiscal Statement by MEPD in 2018, the government’s “fiscal policy

stance will support disinflation and help maintain debt sustainability. To this end, spending will be

contained within available resources, accumulation of domestic and external arrears will be

avoided, limit on non-concessional borrowing will be observed, and recourse to domestic borrowing

will be limited. Continued implementation of prudent fiscal policies in the near to medium terms is

necessary to keep the public debt to GDP ratio on a downward trajectory and prevent both

crowding out of the private sector as well as debt service costs replacing productive government

expenditure”.8

The government also aims to slow down the growth in statutory expenditures such as wages and

salaries, interest payments and amortization, pensions and gratuities and compensations to further

increase fiscal space for investments in flagship projects. The government aims to keep the growth

in the wage bill within 10 to 15 per cent over the next five years by reducing recruitment and

managing annual salary adjustments.9

Figure 9 displays the evolution of Malawi’s general government revenue and expenditure since

2002 with projections for the period 2017-2022. The general government balance (or the public

fiscal balance), which is defined as the overall difference between government revenues and

expenditures, is highly negative. The difference between government spending and revenues over

significantly widened since the early 2010s and created a large fiscal deficit. According to the

projections, both the general government expenditures and the general government revenue as a

percentage of GDP are expected to decline, even though the latter is expected to decrease at a

much faster rate than the former. Overall, the public fiscal balance is expected to remain negative in

the near future though, which means that a fiscal deficit will remain.

Figure 9: Malawi’s general government revenue and expenditure

Source: IMF WEO 2017

Figure 10 portrays Malawi’s net lending (+)/net borrowing (-) position. It measures the extent to

which general government is providing resources to other sectors of the economy (net lending), or

utilizing the financial resources generated by other sectors and non-residents (net borrowing). The

primary balance is defined as government net borrowing or net lending, excluding interest

payments on consolidated government liabilities. The government’s net lending/borrowing moved

more or less in tandem with the primary net lending/borrowing. While Malawi was a net lender in

the early 2000s, it became a net borrower since the early 2010s.

8 Government of Malawi, 2018, Economic and Fiscal Policy Statement 2018, p. 9 9 Government of Malawi, 2017, MGDS III.

10

15

20

25

30

35

% o

f G

DP

Projections General government revenueGeneral government total expenditure

23


Figure 10: Malawi’s net lending (+)/net borrowing (-) position

Source: IMF World Economic Outlook

2.3.2 Revenue performance

Figure 11 displays the evolution of Malawi’s revenue composition excluding grants. Overall,

Malawi’s revenue has significantly increased over the last few years, partly due to the increased

performance by the Malawi Revenue Authority. Revenue collection in Malawi is well above the

median of SSA low-income countries. While Malawi’s revenue has risen, the individual shares of (i)

income and profit taxes, (ii) goods and service taxes, (iii) international trade taxes, and (iv) non-tax

revenue as a percentage of Malawi’s total revenue have stayed more or less constant. It is

therefore impossible to argue that Malawi’s improved revenue performance is driven by one

particular factor. The bulk of Malawi’s revenue comes from taxes on income and profits as well as

from taxes on goods and services.

Figure 11: Malawi’s revenue composition excluding grants, fiscal years 2014-19

Source: IMF Government Finance Statistics

In FY 2016-2017, the Malawi government regained control over budget execution as revenue

collection increased by approximately 2 percentage points of GDP compared to the previous year.

The result was primarily due to the expansion of VAT coverage, elimination of several exemptions,

0

5

10

15

20

25

30

35

40

45

-10

-8

-6

-4

-2

0

2

4

6

8

10

% o

f G

DP

ProjectionsGeneral government net lending/borrowingGeneral government primary net lending/borrowing

0

200

400

600

800

1000

1200

1400

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Bil

lio

n M

WK

Taxes on income and profits Taxes on goods and services

Taxes on international trade non tax

24


and a one-off revenue mobilization from capital gains tax. The fiscal position, however, worsened

significantly in the first half of FY 2017-18 due to power outages slowing economic activity and

weaker than anticipated customs collection. In the latter phase, the MRA underperformed by over

30 MWK billion.10

According to the IMF, the tax revenue to GDP ratio is “expected to edge down by 0.3 percentage

points in FY 2017-2018 from the previous fiscal year and return to a higher level of 17.8 percent by

FY 2022-2023. In the long run, tax revenue is projected to rise gradually to around 18.5 percent of

GDP in FY 2036-2037, thanks to progressive reforms to tax administration and policy”.11

2.3.3 Expenditure performance

Figure 12 gives an overview of Malawi’s government expenditure composition. The bulk of Malawi’s

government expenditure is consumed by current spending excluding interest payments. The

government has shifted even more towards current spending and away from development spending

over the recent years. Expenditure related to wages and interest has overshadowed much needed

capital expenditure. Thus, the low level of development expenditures (i.e. public investment) in

relation to the high recurrent expenditures (i.e. public consumption) provides further evidence for

the constraints faced by the government to invest in education, health and social protection. This

also affects the capacity of the government to react and the ability to tailor annual expenditures in

such a way that the most pressing national needs and priorities can be met. Reorientation of

government expenditure from current spending to development expenditure could lead to both

higher and more resilient economic growth.12 While interest payments already constituted 14.5 per

cent of Malawi’s government expenditures in FY 2014-2015, the figure is expected to rise to more

than 22 per cent by FY 2019-2020.

Figure 12: Decomposition of Malawi’s Government Expenditure fiscal years 2014-19


Note: Figures for 2014-2015 and 2015-2016 are actual expenditures. The data for the remaining years are

estimated/projected expenditures

Figure 13 analyses the composition of Malawi’s recurrent expenditures, i.e. all payments other than

for capital assets, including on goods and services. Half of Malawi’s recurrent expenditure goes to

public sector wages and debt servicing. Malawi’s recurrent expenditures will almost double between

FY 2014-2015 and FY 2019-2020, primarily driven by an increase in spending on wages, salaries

and pensions, the servicing of domestic debt and subsidy programs. This in turn will increase the

10 IMF, 2018, Malawi. Ninth Review Under the Extended Credit Facility Arrangement and Request for Waivers for

Nonobservance of Performance Criteria-Press Release; IMF Country Report No. 18/115. 11 Ibid. p. 73 12 IMF, 2017, Malawi. Ninth Review Under the Extended Credit Facility Arrangement and Request for Waivers for

Nonobservance of Performance Criteria-Press Release; IMF Country Report No. 17/183

0

200

400

600

800

1000

1200

1400

1600

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Bil

lio

n M

WK

current (non-interest) development interest

25


fiscal pressure faced by the government. According to the World Bank, Malawi’s higher than

anticipated level of recurrent expenditure, particularly expenditure on public sector wages, salaries

and pensions were the principal cause for the fiscal pressures experience during FY 2014-2015.13

Figure 13: Decomposition of Malawi’s Recurrent Expenditure fiscal years 2014-19




Wages and salaries consume more or less one third of Malawi’s total recurrent expenditures and

the share will not decrease over the next few years as the government struggles to accommodate

wage demands across the public sector. Malawi suffers from a high public sector wage bill which

has grown rapidly in recent years due to the increasing size of the public service sector. Between

2008 and 2016, the number of public servants has increased by more than 50 percent (from

110,000 people in 2008 to 186,000 people in 2016). In 2015, the Government “granted increases in

remuneration in excess of those provided for in the budget”14, which further increased the size of

the payroll. Another major factor for the large overall public sector wage bill is the large travel

budget which consumes almost 2 per cent of Malawi’s GDP. The travel budget acts as a

supplemental source of income for civil servants. Moreover, there are significant inefficiencies in the

administration of the public sector payroll which inflate total costs.

The government’s heavy recourse to domestic borrowing also resulted in a significant increase in

interest payable on government debt in recent years, even though interest payments as a share of

recurrent expenditures are expected to decrease from 19 per cent in FY 2014-2015 to 15 per cent

in FY 2019-2020.15 Since purchases of goods and service funded by Malawi’s development

partners were made increasingly off-budget after the Cashgate corruption scandal, expenditure on

goods and services declined in relative terms. Over the next few years, however, the goods and

service share of recurrent expenditures is expected to rise from 26 per cent in FY 2014-2015 to 31

per cent in FY 2019-2020. Last but not least, the share of transfers contributing to recurrent

expenditures will stay constant over the next few years (between 21-23 percent).

Figure 14 looks at the decomposition of Malawi’s development expenditures. Malawi’s development

expenditures are expected to increase more than twofold between FY 2014-2015 and FY 2019-

2020. As shortly mentioned before, the bulk of Malawi’s development expenditures is financed by

13 World Bank, 2015, Malawi Economic Monitor, October 2015 14 Idib. 15 Whereas foreign borrowing has declined by 56.3 percent from 2017-18, domestic borrowing is projected to increase by

473.6 percent from MWK30.7 billion in 2017-18 (revised estimate) to MWK176.1 billion in 2018-19. Interest on debt

payments is projected at MWK182.9 billion in the 2018-19 budget (of which MWK168 billion is interest on domestic debt).

Interest payments alone are absorbing 11 percent of the national budget.

0

200

400

600

800

1000

1200

1400

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Bil

lio

n M

WK

wages and salaries interest payments goods and services transfers

26


Malawi’s development partners. In FY 2014-2015, foreign financed development expenditures

accounted for 82 per cent of total development expenditures. By FY 2019-2020, the share is

expected to drop to 70 per cent (with 30 percent of development expenditures financed

domestically by that point). This trend notwithstanding, Malawi’s development expenditures remain

largely financed by external actors.

Figure 14: Decomposition of Malawi’s Development Expenditure fiscal years 2014-19




Overall, the evidence provided above suggests that the government continues to implement a

predominantly consumption-oriented budget, as Malawi’s scarce financial resources are primarily

allocated to preserve recurrent expenditure, at the cost of cuts to development expenditure.

2.3.4 External support

The country ranks as one of the most aid dependent countries in the world even though Malawi’s

aid dependence dropped by almost 15 percentage points between the 2000 and early 2010s. Since

then, ODA as a percentage of GNI has slightly risen again to more than 15 per cent. Overall,

Malawi’s aid dependence ranks considerably above the Sub-Saharan African average (3-4 percent)

in 2015 (Figure 15).

Figure 15: Net Official development assistance received, 2000-15

Source: OECD-DAC database

0

50

100

150

200

250

300

350

400

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Bil

lio

n M

WK

Foreign financed development expenditure Domestic financed development expenditure

0

5

10

15

20

25

30

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Per

cen

t o

f G

NI

Bil

lio

ns

US

$

Net official development assistance received (constant 2014 US$)

Net ODA received (% of GNI)

27


The amount of net official development assistance received by the Malawian government has risen

between 2000 and 2015. However, the data shows that while the trend is increasing over the long

run, aid allocations fluctuate to some extent since the late 2000s. After the Cashgate corruption

scandal came to light in September 2013, development partners withdrew their direct aid

contributions to Malawi’s national budget and shifted a significant share of donor aid to off-budget

mechanisms. Most of the donor support in Malawi is still largely off-budget as the Malawian

government has yet to win back the confidence of donors to channel more aid through the

government budget (Figure 16).

Figure 16: Grants received (by economic classification) fiscal years 2014-19


Note: Figures for FY 2014-2015 and FY 2015-2016 are actual expenditures. The data for the remaining years are

estimated/projected expenditures.

2.3.5 Government debt

One major result of the government’s persistent fiscal deficits is the large allocation of public

expenditure towards domestic debt service, which in turn reduces the fiscal space for both public

service delivery and public investment. As shown in Figure 17, Malawi’s debt has more than

doubled from 26.7 per cent of GDP to 54.3 per cent of GDP after the HIPC debt relief, one of the

fastest pace of accumulation of debt amongst countries which received HIPC and MDRI debt relief

according to the recent IMF Debt Sustainability analysis. Debt cancellation alone was inadequate to

address the country’s structurally rooted problems such as weak governance and embezzlement of

public funds. Domestic debt levels are very high due to the previous government's loose fiscal

policy that contributed to increased government borrowing. The deterioration of Malawi’s public

debt can largely be attributed to high fiscal deficits, and large gaps between interest rates (external

and domestic) and GDP growth, both in nominal and real terms.

Malawi’s rising external debt figures can largely be attributed to a chronic current account deficit, a

depreciation of Malawi’s real exchange rate (the Malawian Kwacha fell in value by 35 per cent

against the dollar between the start of 2015 and mid-2016), and low net foreign exchange earnings

in relation to its debt servicing requirements. Overall, the high degree of macroeconomic

uncertainty challenges the sustainability of Malawi’s public debt. According to estimations by the

Malawi Reserve Bank, debt from multilateral creditors accounted for almost 80 per cent of total

external debt, while bilateral debt constituted around 20 per cent. According to the IMF analysis,

“Malawi faces a moderate risk of debt distress based on an assessment of public external debt,

with heightened vulnerabilities related to domestic debt. All baseline external debt burden indicators

remain below their indicative thresholds, but public external debt remains vulnerable to exogenous

0

20

40

60

80

100

120

140

160

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Bil

lio

n M

WK

Budget support grants Project grants Dedicated grants

28


shocks, notably shocks to export revenues and exchange rate”16 Overall, Malawi’s growing burden

of debt servicing over the years not only made fiscal adjustment more difficult, but crowded out

private investment on the one hand and forced public sector investment to decline on the other.

Figure 17: Level of Debt in Malawi, 2004-2018

Source: World Bank, 2018, “From Falling Behind…”

2.4 Concluding Remarks

The government of Malawi faces several interrelated challenges: (i) Enhancing and sustaining

macro-economic stability which includes a robust fiscal policy framework, (ii) strengthen domestic

resource mobilization and (iii) free up both additional revenues and savings on expenditure from

improved efficiency.

Frequent fiscal slippages and governance problems have severely hampered macroeconomic

stability, undermining economic growth and private sector development. It is crucial that the

government can bring its fiscal deficit and public debt under control.

In order to achieve these aims, the government has and will need to undertake further actions to

reduce public spending and to increase revenue collection. Given Malawi’s limited resource

envelope both with regard to domestic and foreign finance and the large financing needs across all

sectors – including education, health and social welfare – future policy discussions around

expenditures priorities may be extremely challenging. Concerning revenue mobilization, the

government aims to strengthen tax compliance through “increased analysis of data, enhancing the

tax registry, stiff penalties on malpractice of the use of EFDs, and phased adoption of an integrated

tax administration system (ITAS).”17 Moreover, the tax policy initiatives will be guided by “a shift in

reliance on revenue from taxation of labour and investment (factors of production) to

consumption”.18 The government will also explore “tax policy measures such as such as progress in

repealing the industrial rebate scheme and discontinuing granting of tax holidays”.19

16 IMF, 2017, Malawi. Ninth Review Under the Extended Credit Facility Arrangement and Request for Waivers for

Nonobservance of Performance Criteria-Press Release; IMF Country Report No. 17/183, p. 1. 17 IMF, 2018, Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. IMF

Country Report No. 18/115 18 Ibid. 19 Ibid.

29


While the potential magnitude of efficiency gains will depend on many factors, a very crucial one is

the implementation of policies that reduce corruption and improve governance, particularly in the

sphere of public expenditure management internal controls on cash management and accounting.

This, in turn, could lead to increased fiscal space for the government. If successful, the policy

reforms may lead to a reduced fiduciary risk and eventually additional efficiency gains stemming

from the possible re-activation of the donors' Joint Framework to direct budget support.

30


3 Child-focused expenditure trends and policy challenges

This chapter describes in more detail which functional items of the budget were selected as “child-

focused” expenditure for the purposes of this exercise and analyses how this “child-focused”

expenditure has evolved over the past years. The chapter subsequently discusses briefly the policy

context to “child-focused” expenditure, and analyses for each of the selected child-focused sectors

budget allocations, spending profiles and sector-specific challenges.

3.1 Child-focused-expenditure composition and recent evolution

3.1.1 Composition of child-focused expenditure

As explained in Section 1.2 of Chapter 1, this analysis defines “child-focused” expenditure as

spending which is particularly relevant to children. The point is simply to categorize expenditures of

child-focused interest to children in general and UNICEF in particular, and as such, the composition

of “child-focused” expenditure is chosen by UNICEF and the consultants. This analysis focuses on

three “child-focused” sectors: (i) education, (ii) health and (iii) social protection (Table 6).

Table 6: Composition of “child-focused” expenditure

Social

sector

Budget categories identified as ‘child-

focused expenditure’

Remarks Source:

Education Education affairs and services;

- Ministry of Education, Science &

Technology (MoEST)

- Education allocations to district councils

- “Subvented” education institutions (such

as University of Malawi, Technical

Vocational Education Training, etc.)

- Early Childhood Development

(channelled through MoGCDSW)

The entire

education

sector was

selected as

child-focused

expenditure.

Financial Statement (FY

2013/14 – FY2014/15) and

MoF Appropriation Bills

Health Health affairs and services;

- Ministry of Health (MoH)

- Health allocations to district councils

- Subvented health institutions

The entire

health sector

was selected

as child-

focused

expenditure.

Financial Statement

(FY2013/14 – FY2014/15)

and MoF Appropriation Bills

Social

protection

Social and Community services

- Ministry of Gender, Children, Disability

and Social Welfare (MoGCDSW)

Social security and welfare affairs

services

- LDF Social protection

The entire

budget for

MoGCDSW

was considered

plus the

additional

social

protection

funds for the

LDF

Approved Budget Document

No 4 (FY 2013/14 – FY

2017/18); MoF Appropriation

Bills;

Appropriation

(supplementary/Amendment

from FY2013/14 –

FY2016/17) and Appropriation

Act 2017

31


A range of government resources in the education sector are included in the analysis. The largest

part consist of public resource allocations for the MoEST which supports the funding of personal

emoluments (PEs), other centrally funded recurrent transactions such as centrally procured

textbooks and other learning material, and the entire on-budget development expenditure (Part I

and Part II). Budgetary allocations to “subventions” or government grants to public universities

constitute another share of the education budget. The model also includes education expenditures

by Local Assemblies/Councils such as non-wage recurrent expenditures.20 The fourth item is Early

Childhood Education (ECD). ECD constitutes only a small part of the government’s overall financial

support to education. The financial resources for ECD are not transferred to MoEST but to the

MoGCDSW. Resource allocations to the Ministry of Civic Education, Culture and Community

Development are excluded from the analysis as the financial amounts are negligible in magnitude.21

Public resource allocation for health is mainly channelled through the Ministry of Health (MoH) (92

per cent in FY2016-17). Similar to education, MoH supports the funding of personal emoluments

(PEs), other centrally funded recurrent transactions such as centrally procured drugs and medical

supplies, and the entire on-budget development expenditure (Part I and Part II). The remaining

share (8 per cent in FY2016-17) is directed to Local Councils as block grants to cover district level

health activities, especially drugs. The bulk of district level financing focuses on primary care

making both pregnant women and children under five the main beneficiaries.22

Resource allocation for social protection is a lot more fragmented. Despite its huge mandate “to

promote social economic empowerment and the protection of women and children using community

and welfare approaches”23, the MoGCDSW is chronically underfunded. The LDF receives funds

from the World Bank to support Public Works in 28 districts and the SCTP in 11 districts (project is

MASAF 4). The Ministry of Gender implements the SCTP more directly in the other 17 districts.

Figure 18: Malawi’s estimated child-focused expenditure (constant 2015 US$), fiscal years 2012-16

Source: UNICEF Malawi Estimates based on MoF data

20 Ravishankar, V. et al., 2016, Primary Education in Malawi: Expenditures, Service Delivery, and Outcomes, World Bank

Report. 21 According to the Financial Statement 2017-2018 by the government, the MoCECCD only received 1 per cent of what the

MoEST received from the 2016/2017 revised budget. For more information, consult the following link:

http://www.finance.gov.mw/index.php?option=com_docman&Itemid=107 22 Borghi, J., S. Munthali, L. B. Million, and M. Martinez-Alvarez, 2018, Health financing at district level in Malawi: an analysis

of the distribution of funds at two points in time, Health Policy and Planning, 33(1), 59-69. 23 Government of Malawi, Mission Statement by Ministry of Gender, Children, Disability and Social Welfare. Lilongwe,

Malawi: Ministry of Gender, Children, Disability and Social Welfare. Available at: http://www.gender.gov.mw/

0

100

200

300

400

500

600

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17

US

$ m

illi

on

2015 p

rices

EDUCATION HEALTH SOCIAL PROTECTION

http://www.finance.gov.mw/index.php?option=com_docman&Itemid=107

http://www.gender.gov.mw/

32


As discussed in chapter 1, in the absence of actual expenditure data, UNICEF has estimated

expenditure data based on revised budget allocations. Figure 18 shows the composition of Malawi’s

estimated child-focused expenditures for the FYs 2012-2013 until 2016-2017. Child-focused

expenditure is expressed in constant prices (2015US$). Between FY 2012-2013 and FY 2016-

2017, child-focused expenditure did not increase but remained more or less constant.

The education sector absorbs the highest share of financial resources among the child-focused

sectors The share of child-focused expenditure devoted to the health sector is significantly smaller

if compared to the education sector. Similar to the education sector, the amount of health

expenditures have more or less remained the same over the years under investigation. The

expenditures allocated for social protection are significantly smaller compared to the education and

health sector.

3.1.2 Evolution of child-focused expenditure

Figure 19 shows the evolution of child-focused expenditure as a share of total government

expenditure over the past five years. The share of total child-focused expenditure declined from 32

per cent to 29 per cent between FY2012-13 and FY 2015-2016 but increased again for FY 2016-

2017.

Figure 19: Malawi’s Estimated Child Focused Expenditures as % of Total Government Expenditure


Figure 20 shows the expenditure developments in the three child-focused sectors expressed in

constant prices between FY 2012-2013 and FY 2016-2017. The education sector, health sector and

social protection sector spending have been relatively stable over time.

0

5

10

15

20

25

30

35

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17

Per

cen

t o

f to

tal g

ov

ern

men

t exp

en

dit

ure


33


Figure 20: Evolution of Malawi’s Estimated Child-focused Expenditures in Absolute Amounts


MGDS III covers the period 2017-2022 and puts strong emphasis on economic transformation. In

total, 36.6 per cent of the funding under MGDS III allocated to thematic areas and foundational

issues, is spent on education, health and social protection (Table 7). The sector ‘Agriculture, Water

Development and Climate Change’ consumes the largest share of the total five-year budget among

the five key child-focused areas. Social protection is part of this key child-focused, but only a tiny

fraction of the entire budget allocated to this child-focused is reserved for social protection.

‘Education and skills development’ is the second largest sector while, health and population

receives the lowest share of the total five-year budget among the five key child-focused areas.

Table 7: Costing of MGDS III in Million Kwachas (2016/17 constant prices).

MGDS III (draft) 2017/18 2018/19 2019/20 2020/21 2021/22 5 Year

Total

% Grand

Total

Key child-focused

areas 451,310 852,816 821,980 774,570 736,908 3,657,256 72.0%

Education and

skills development 128,033 133,280 156,327 190,835 226,695 834,814 16.4%

Health and

population 108,335 104,485 103,475 100,230 100,125 515,955 10.2%

Other

Development

areas

209,137 314,984 314,558 302,279 284,610 1,425,568 28.0%

Gender, youth

development and

Social welfare

14,388 58,389 54,023 50,695 50,737 228,232 4.5%

HIV/AIDS

management 18,470 20,250 21,170 20,055 20,055 100,000 2.0%

Nutrition 35,920 34,910 35,350 34,850 34,950 175,980 3.5%

Grand TOTAL 660,447 1,167,800 1,136,538 1,076,849 1,021,518 5,082,824 100%

Note: Flagships projects worth 3,536,122.42 Million Kwacha over the 5 years are excluded from the analysis.

Source: Government of Malawi, 2017, MGDS III

Other important sectors relevant for child development are included under ‘Other Development

areas’, such as (i) ‘Gender, youth development and social welfare’, (ii) ‘HIV/AIDS management’ and

(iii) ‘Nutrition’. The sectors, however, receive a significantly smaller share of money if compared to

the key child-focused areas.

0

50

100

150

200

250

300

350

400

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17

US

$ m

illi

on

2015 p

rices a

nd

es r

ate


34


According to the costing of MGDSIII the government is committed to gradually increase the budget

for the education sector over the next five years, the amount of resources allocated to health and

population but also to HIV/AIDS management will remain constant. Looking at the entire five-year

period, the budget share for gender, youth development and social welfare related issues is

expected to rise to 4.5 per cent of the total government budget. When compared to the trends of the

previous years, the MGDS III suggests a renewed prioritization of education. The MGDS III

foresees a gradual income increase in the education budget, which would break the uneven trend

of the past. However, MGDS III also suggests the uneven trend in allocations to health and social

sector welfare will continue.

3.2 Sector-specific profiles

This section discusses spending trends within the child-focused sectors: (i) education, (ii) health

and (iii) social protection.

3.2.1 Education

Education remains one of the top priorities for the Government of Malawi since it is listed as one of

the five key child-focused areas under MGDS III. The overall education budget has steadily

increased in nominal terms between FY 2012-2013 and FY 2017-2018 (Figure 21). However,

expressing the evolution of the education budget in nominal terms hides important fluctuations and

volatilities. When expressed in constant US dollars, the education budget witnessed a sharp decline

between FY 2014-2015 and FY 2015-2016 with a significant rebound in the following year. For the

FY 2017-2018, the overall education budget stands at US$367 million (2015 prices) or 235.4 billion

Malawian Kwacha (current prices). Through the Global Partnership for Education Malawi Education

Sector Improvement Plan project, the Malawi government committed itself to allocate 20 per cent of

its national budget to the education sector by the early 2020s which is largely consistent with the

costing of MGDS III (Table 7).

Figure 21: Total Estimated Expenditures to Education Sector


In FY 2016-2017, 56 per cent of the education budget was allocated to the primary sector. The

secondary and tertiary sector received 25 per cent and 19 per cent, respectively. Overall, the bulk

of the financial resources allocated to the education sector are spent by the Ministry of Education,

Science and Technology (MoEST) (Figure 22). Other institutions such as Public Universities and

Technical and Vocational Education and Training (TVET) institutions received 21 per cent while the

local councils received 5 per cent. The Ministry of Gender, Children, Disability & Social Welfare

(MoGCDSW) received 0.2 per cent of the total education sector budget which is geared towards

early childhood development (ECD) and adult education.

280

290

300

310

320

330

340

350

360

370

380

0

50

100

150

200

250

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

US

mil

lio

n (

co

ns

tan

t p

rices)

Bil

lio

n K

wach

a (

cu

rren

t p

rices)

Education Budget (Billion Kwacha, current prices) Education Budget (US million, 2015 prices)

35


Figure 22: Composition of Education Sector Budget Allocations

Source: MoF, Appropriation Bills 2013-14–2016-17; UNICEF 2016/2017 Education Budget Brief Malawi

The development expenditure by the government only account for less than 2 percent of the overall

budget (Figure 23). This shows that the budget composition for education is highly skewed towards

personal emoluments at the expense of development and other recurrent transactions (ORT). While

the government contribution to the development budget of the entire education budget

(Development Part II) accounted for 7 percent in FY 2013-2014, the share dropped to less than 3

percent in the following years. The rise in the Development Part I budget for the FY 2016-2017 can

largely be attributed to a large grant from the Global Partnership for Education, facilitated by the

World Bank. The grant is four times higher than the government’s own spending on education

infrastructure. Much of the grant is dedicated to supporting government secondary schools. If the

government does not continue to rebalance the budget by increasing the share of the development

II budget, the Ministry’s ability to deliver high quality education to all children in Malawi will be

significantly constrained in the future.

Figure 23: Ministry of Education Budget composition by economic classification (Budget Allocations)

Source: MoF, Appropriation Bills 2013/14–2016/17

65% 64% 67%74%

7% 7% 5%

5%5% 3%

23% 26% 28%21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013/2014 2014/2015 2015/2016 2016/2017

MoEST Local Councils Local Development Fund University and Subventions

0

20

40

60

80

100

120

2012/13 Revised 2013/14 Revised 2014/15 Revised 2015/16 Revised 2016/17 Revised

Bil

lio

n M

WK

(cu

rren

t p

rices)

Salaries (Personal Emoluments) Other recurrent transactions

Development Part 1 (DP funded projects) Development Part 2 (GoM funded projects)

36


3.2.2 Health

While the health budget has increased in nominal terms between FY 2012-2013 and FY 2017-

2018, the estimated health expenditures have stagnated in real terms over the same period

(US$199.5 million in FY 2012-2013 versus US$202.3 million in FY 2017-2018). The health budget

was significantly reduced between FY 2013-2014 and FY 2015-2016 by more than US$ 25 million

in constant terms. On the positive side, allocations to the health sector have risen again since then

– but the allocations have barely increased in real terms compared to five years ago (Figure 24).

With 9.5 per cent of the government budget allocated to health spending for FY 2017-2018, the

Malawi government fails to meet the 2001 Abuja Declaration which prescribes spending 15 per cent

of the total government budget on health, even though the government met the Abuja target in FY

2007-2008 (16.6 percent), FY 2009-2010 (15.1 percent) and FY 2010-2011 (15.8 percent). The

primary reason for the reduction in health sector allocations is the decreased funding to the

National AIDS Commission by the central government.

Figure 24: Total Expenditure Estimates to Health Sector


Like education, health and population remains one of the five key child-focused areas under MGDS

III. In the MGDS III, the government expresses the aim to raise the share of the government budget

allocated to health to 18 per cent for the year 2018, followed by a downward adjustment to 15

percent for the period 2019-2022. Regardless of these ambitious goals, there are several reasons

why an increase in health financing over the next few years is very unlikely. First, compared to its

peers, domestic financing for health as share of GDP is relatively high in Malawi. Second, the

health sector is regarded as a key child-focused sector among Malawi’s development partners

which puts less pressure on the government to increase expenditures in this sector. And third, the

health budget under the MGDS III will only average around 10 per cent which largely contradicts

with the government’s aim to raise the health share.

The Ministry of Health (MoH) receives by far the largest share of government resources targeting

the health sector (Figure 25).24 The MoH received MWK 95 billion for FY 2016-2017 of which 39

per cent of the MoH funds are expected to flow to the district health offices. In FY 2016-2017, Local

Councils received 8 per cent (MWK 8 billion) of the Health Budget directly. How much funding Local

Councils receive depends on the health resource allocation formula used by the National Local

24 The Nutrition, HIV/AIDS and National Aids Commission was subsumed by the MoH in 2015-16.

160

165

170

175

180

185

190

195

200

205

210

0

20

40

60

80

100

120

140

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

US

mil

lio

n (

co

ns

tan

t p

rices)

Bil

lio

n K

wach

a (

cu

rren

t p

rices)

Health Budget (Billion Kwacha, current prices) Health Budget (US million, 2015 prices)

37


Government Finance Committee (NLGFC).25 Almost 90 per cent of the funding is earmarked for

drug purchases.

Figure 25: Composition of Health Sector Budget Allocations

Source: MoF, Financial Statements

Planned development expenditures on health by the government have fallen to a historic low of 3

per cent in FY 2016-2017. The planned development expenditures by donors on health, in turn,

have risen from 1 per cent in FY 2012-2013 to 14 per cent in FY 2016-2017 (Figure 26). Personnel

costs have traditionally accounted for more than 50 per cent of the MoH’s health budget, while

ORTs made up almost one third.

Figure 26: MoH Budget by Economic Classification (Budget Allocations)

Source: MoF, Appropriation Bills FY 2013/14–2016/17

25 The formula, established in 2008, allocates funds according to a weighted population index. Weighted Population =

(population) * (index for need) * (index for difference in costs) * (index for supply) The weights used to determine allocations

are as follows: (i) 50% population weighted by stunting; (ii) 15% population weighted by infant mortality rate; (iii) 15%

population weighted by outpatient utilization rates; (iv) 5% geographical size; (v) 15% bed capacity.

66%79%

95% 92%

29%12%

5% 8%5% 8%

1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013/2014 2014/2015 2015/2016 2016/2017

Health Service Regulatory Authority

Local Councils

Nutrition, HIV/AIDS & National AIDS Commission

Ministry of Health

0

10

20

30

40

50

60

70

80

90

100

2012/13Revised

2013/14Revised

2014/15Revised

2015/16Revised

2016/17Revsed

2017/18Estimates

Bil

lio

n M

WK

(cu

rren

t p

rices)



38


3.2.3 Social protection

Figure 27 shows the recent developments regarding the social welfare budget for the MGCDSW

(both in constant US$ and current MWK). It is highly evident that, in absolute numbers, the

estimated social protection expenditures for the MGCDSW have declined considerably between

FY2012-13 and FY2017-18.

Figure 27: Estimated Expenditures to Social Protection allocated to MGCDSW


The discrepancy between the ministry’s huge mandate in driving social inclusion and alleviating

child poverty and the budget it receives is large. In FY 2016-2017, the MoGCDSW only received

MWK 3.1 billion of the total government budget, which was less than 0.3 per cent. It is therefore

important to recognize that the MoGCDSW budget is relatively small in absolute terms.

The government also supports the implementation of the Malawi Social Cash Transfer Programme

(SCTP), which was initiated in 2006. The primarily donor-funded unconditional cash transfer

program targets ultra-poor and labour-constrained households with a monthly cash transfer, which

aims to reduce poverty and increase school enrolment. In comparison to Farm Input Subsidy

Program (FISP), the costs for SCTP only constitute less than 0.5 percent of GDP. Recent

evaluations suggest that SCTP has had a positive impact while FISP has largely failed to achieve

its objectives.26

Figure 28 displays the composition of the budget available for the MoGCDSW between FY 2012-

2013 and FY 2017-2018. The proportion of personnel emoluments (PE) for the Ministry increased

from 4 per cent in FY 2012-13 to almost 45 percent in FY 2016-2017 (but decreased to 33 percent

in FY 2017-2018). With 62.8 percent ORTs have consumed the largest part of the MoGCDSW

budget in FY 2017-2018. MoGCDSW is one of the MDAs hardest hit by the shift from on-budget

support to off-budget support by Malawi’s development partners following the 2013 public finance

management scandal. Planned development I expenditures sharply declined from an all-time high

of 91 per cent in FY 2012-2013 to 28 per cent in FY 2015-16 and disappeared altogether for FY

2016-2017 and FY 2017-2018. The very high recurrent expenditures (97 per cent) stand in stark

contrast to the very low development expenditures (3 per cent) within the MoGCDSW which creates

an imbalance in operations that is likely to result in less effective public spending. In order to

26 For a recent evaluation of the SCTP, see World Bank, 2016, Malawi Economic Monitor: Emerging Stronger, Lilongwe:

World Bank. For a recent evaluation of FISP, see Covarrubias, K., B. Davis and P. Winters, 2012, From Protection to

Production: Productive Impacts of the Malawi Social Cash Transfer Scheme, Journal of Development Effectiveness, vol. 4,

No. 1, pp. 50–77.

0

5

10

15

20

25

30

35

40

0

2

4

6

8

10

12

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17 FY2017-18

US

mil

lio

n (

co

ns

tan

t p

rices)

Bil

lio

n M

WK

(cu

rren

t p

rices)

Social Welfare Budget (Billion Malawian Kwacha, current prices)

Social Welfare Budget (US$ 2015 costant million)

39


effectively deliver on its mandate the MoGCDSW requires an appropriate balance of development

and recurrent expenditures.

Figure 28: MoGCDSW Budget by Economic Classification (Budget Allocations)

Source: MoF, Appropriation Bills 2012/13–2017/18

Of the total MoGDCSW budget, 40 per cent flows into Community and Child development, 19 per

cent to Management and Administration Services and 13 per cent to Gender and Equality and

Women Empowerment. The remaining 27 per cent flows to social protection and development

(Figure 29).

Figure 29: Composition of the 2016-17 MoGCDSW by Program

Source: MoF

With the launch of the Early Childhood Development Strategic Plan (2009-2014), the government

has introduced an ECD programme as part of the Community and Child Development Program

under the MoGDCSW. Almost 13 per cent of the MoGCDSW budget flows into early childhood

development (Figure 29). The bulk of the money allocated to social protection and development, 64

per cent of the social protection and development budget or 17 per cent of the total MoGCDSW

budget (Figure 30), is targeted for the Social Cash Transfer Program, a largely donor-funded

program that has been operational for a decade targeting around 750,000 ultra-poor and labour-

constrained Malawians. The program started as a pilot in 2006 and has grown ever since. The

SCTP is administered by MoGCDSW with additional policy oversight provided by the Ministry of

0

2

4

6

8

10

12

2012/13Revised

2013/14Revised

2014/15Revised

2015/16Revised

2016/17Revised

2017/18Estimates

Bil

lio

n M

WK

(cu

rren

t p

rices)



19%

41%

13%

27% Management andAdministration services

Community and childDevelopment

Gender Equality and WomanEmpowerment

Social Proteciton anddevelopment

40


Finance, Economic Planning and Development (MoFEPD). UNICEF Malawi provides technical

support and guidance.

Figure 30: Proportion of the MoGCDSW Budget allocated to specific functions

Source: MoF

As mentioned above this analysis includes social protection expenditures for Ministry of Gender,

Children, Disability and Social Welfare (MGCDSW) and for social cash transfers for the Local

Development Fund. Figures 31 and 32 show the relative shares of these items as a percentage of

Malawi’s total government expenditure and as a percentage of Malawi’s GDP, respectively. Over

time planned social protection expenditures witnessed a significant decline. The social cash

transfers for the LDF have in turn become an important source for overall social protection

expenditures.

Figure 31: Estimated Social Protection Expenditure as a Percentage of Total Government Expenditure


Overall, Malawi's social protection system relies to a significant extent on poverty targeting and, as

shown in the Malawi National Social Support Programme (2012-2016) and its successor

programme launched last year, focuses primarily on economic development aspects of social

protection with limited emphasis on social and human development. Furthermore, a recent study by

the ILO states that “there is a serious mismatch in the levels of spending on children and elderly

programme on the one hand, and working age programmes on the other. The total amount of

spending on social protection for children and the elderly is low compared to spending on

programmes for the working ages. In particular for children: constituting more than half of the

25%

4%

9%

13%13%

17%

19%

Other

Adult Literacy

Probation and RehabilitationServices

Department of disability andEderly

Early Childhood Development

Social Cash Transfer

Administration

0

0.5

1

1.5

2

2.5

3

3.5

4

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17

Per

cen

t o

f to

tal g

ov

. exp

en

dit

ure

SOCIAL PROTECTION SOCIAL PROTECTION - LDF

41


population, but receiving less than 25 per cent of resources compared to working ages. Moreover,

for children there are no other specific programmes than school feeding and even these do not

have nationwide coverage.”27

Figure 32: Estimated Social Protection Expenditure as a Percentage of GDP


3.2.4 External support for child-focused sectors

One major reason why the government may be reluctant to increase the budget share for health

and education over the next years, is directly related to the spending patterns by Malawi’s

development partners. In FY 2014-2015, almost 60 per cent of foreign aid by the DAC donors is

channelled into education, health and other social infrastructure (Figure 33).

Figure 33: Bilateral ODA by Sector for Malawi, 2014-15 average;

Source: OECD-DAC Database

After the Cashgate scandal in 2013, development partners withdrew their direct aid contributions to

Malawi’s national budget and shifted a significant share of donor aid to off-budget mechanisms.

Most of the donor support in Malawi is still largely off-budget as the Malawian government has yet

to win back the confidence of donors to channel more aid through the government budget. Before

the Cashgate scandal, foreign aid provided by Malawi’s development partners traditionally accounts

27 Van den Meerendonk, A. et al., 2016, Towards a Malawian Social Protection Floor: Assessment of Social Protection

Programmes in Malawi, Full Report; http://www.ilo.org/wcmsp5/groups/public/---africa/---ro-addis_ababa/---ilo-

lusaka/documents/publication/wcms_524928.pdf

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

FY2012-13 FY2013-14 FY2014-15 FY2015-16 FY2016-17

Per

cen

t o

f G

DP

SOCIAL PROTECTION - MGCSW SOCIAL PROTECTION - LDF

13%

36%

10%

9%

17%

4%

3%7% 1%

Education

Health and Population

Other social infrastructure

Economic infrastructure

Production

Multisector

Programme assistance

Humanitarian aid

Unallocated

http://www.ilo.org/wcmsp5/groups/public/---africa/---ro-addis_ababa/---ilo-lusaka/documents/publication/wcms_524928.pdf

http://www.ilo.org/wcmsp5/groups/public/---africa/---ro-addis_ababa/---ilo-lusaka/documents/publication/wcms_524928.pdf

42


for around 40 per cent of the annual national budget. Since the government is well aware that

foreign aid money provided by donors will continue to primarily target the social sector, it has fairly

low incentives to significantly raise the allocations for education, health and the social sector in

general in the upcoming years.

Education

The education sector in Malawi is another important sector for Malawi’s main development

partners. The biggest donors in the health sector are USAID, the UK (DFID), KfW, the Norwegian

Embassy and GiZ. Important multilateral partners are UNICEF, and the Global Partnership for

education.

In April 2017, the Norwegian Embassy, Germany, the World Bank, UNICEF and DFID and the

Government of Malawi signed the Common Financing Mechanism for the Education Sector in

Malawi consisting of the Education Services Joint Fund (ESJF), and the Common Fiduciary

Oversight Arrangement (CFOA). Strongly linked to National Education Sector Plan (NESP), ESFJ

provides crucial support to key government priorities and education sector activities. The CFOA

expresses the desire by development partners and the government to cooperatively strengthen the

Government’s fiduciary systems through such activities as joint technical assistance, sector audits,

procurement oversight, and stronger financial reporting. The Common Financing Mechanism

includes externally contracted oversight and control in the form of a Fiduciary Agent. It provides

control and oversight to the planning and exercising of financial, accounting and procurement

activities. The main objectives of the ESJF during the first year were improved promotion and

retention in primary grades, improved equitable opportunities in primary school, for the most

disadvantaged learners and with a special focus on girls’ education and support to target teenage

girls’ retention and strengthened effects on improved learning outcomes, accountability, and cost-

effectiveness at school level.

Malawi’s National Education Sector Plan 2008-2018, which was developed in collaboration

between (MoEST) and Malawi’s development partners (DfID CIDA, GTZ, JICA, UNICEF,

USAID, WFP, UNESCO, World Bank and others), is still ongoing. Its three main objectives are the

improvement of access and equity of schooling, quality of schooling and governance and

management of schooling in Malawi. A successor arrangement does not yet exist.

With the financial support from the Global Partnership for Education - approved a US$ 44.9 million

grant – the MoEST is implementing the Malawi education sector improvement project (MESIP). The

goal of MESIP is to improve the equity and quality of primary education service delivery in early

grade levels with an emphasis on improved accountability and functioning at the school level and

to support implementation of Malawi's second education sector implementation plan (2014-2018).

The four year grant by the Global Partnership for Education focuses on improving the quality of

early education in Malawi and enabling more girls to remain in school.

Health

The Malawi health sector is one of the most donor supported in the world. External resources

constitute almost 80 per cent of Malawi’s development expenditures in the health sector. The

biggest donors in the health sector are the UK’s Department for International Development (DFID),

the United States Agency for International Development (USAID), the German Development Bank

(KfW), the German development agency (GIZ), and the Norwegian Embassy. Important multilateral

partners are UNICEF, the United Nations Population Fund (UNFPA) and the World Health

Organization (WHO). Global initiatives such as the Vaccine Alliance GAVI and the Global Fund to

Fight AIDS, Tuberculosis and Malaria (GFATM) also provide substantial funds to the sector.

43


The establishment of the Health Services Joint Fund (HSJF) in December 2015 by the Norwegian

embassy, DFID and KfW in cooperation with the Malawi’s Ministry of Health (MoH) can be regarded

as first step towards resumption of on-budget funding. The HSJF aims to pool and better coordinate

donor resources. The funds will be channelled to commercial accounts with externally contracted

oversight and control. It is a funding mechanism in support of the government’s child-focused

budget lines, for the implementation of Malawi’s Health Sector Strategic Plan. Through the HSJF,

Norway and other development partners, have, among other things, paid for the procurement of

vaccines as well as for water and electricity at health facilities. The funds are channelled through

commercial banks with fiduciary and procurement oversight provided by the donors. The current

HSJF agreement runs through 2017 and amounts to 100 million NOK (roughly US$ 12 million)

which translates into 3 percent of Malawi’s annual health budget.

The development partners are planning to renew the agreement when it expires in 2019, supporting

the implementation of the Health Sector Strategic Plan II (2017-2022) through the HSJF for three

more years. Due to its weak absorptive capacity, however, the government struggles to spend all

the aid disbursements from the HSJF in a timely manner without pronounced inefficiency of public

spending. Around 60 per cent of external funding only focuses on three diseases (HIV/AIDS,

Malaria, and Reproductive Health) which leads to a chronic underfunding of other components of

Malawi’s health system.

Social Protection

Social Protection Programs in Malawi are largely funded by grants from Malawi’s development

partners and are often implemented off-budget. For the FY 2017-2018, the Malawi government

contributed a total of K1.5 billion, while Malawi’s development partners allocated K16 billion.

Malawi’s development partners therefore covered approximately 90 per cent of the total SCTP

budget.28 The bulk of money came for the SCTP originated from the World Bank, the German

government , the European Union (EU) (and Irish Aid .

In FY 2012-2013, development expenditures by Malawi’s development partners constituted 91 per

cent but declined sharply after the 2013 Cashgate scandal to 28 per cent in 2015/2016 (Figure 16).

These numbers testify that the MoGCDSW was one of the MDAs which was most severely affected

by the development partners’ decision to withdraw on-budget support. The government, however,

has not increased budget allocations as a response which highlights that government prioritization

may not fundamentally change as result of re-prioritizations by development partners.

The World Bank is committed to expand its activities in Malawi’s social protection sector. While

FISP at its peak years served as a social protection program, it largely failed to meet all its

objectives simply because the program had too many objectives. FISP should primarily target

agricultural productivity and Malawi’s social protection system should directly address its poor

people. The strong rationale behind the World Bank’s commitment to emphasize social protection in

the upcoming years is the following: strong social security systems can stabilize income and can

make substantive contributions towards social and human development objectives, such as

education, health, social inclusion, reduction in vulnerabilities, and increases in wellbeing and

provide a long-term benefit for Malawi’s economy.

3.3 Concluding Remarks

Past spending has been very uneven with regard to the child-focused sectors. The average growth

rate of the education, health and social welfare budgets (measured in constant US dollars) between

28 http://www.manaonline.gov.mw/index.php/component/k2/item/9028-over-15-million-people-to-benefit-from-sctp

44


FY 2012-2013 and FY 2016-2017 are 3.4 per cent, 0.5 per cent and -2.7 per cent, respectively. The

development expenditures are very low for all three child-focused sectors, but in particular for the

social welfare sector under the Ministry of Gender, Children, Disability and Social Welfare

(MGCDSW). Personnel costs and ORTs traditionally account for a large share of the education,

health and social welfare budget. Malawi’s development partners have played an important role in

providing financial resources to the child-focused sectors. Almost 60 per cent of foreign aid by the

DAC donors is channelled into education, health and other social infrastructure. Their significant

funding to the child-focused sectors (which is often not captured in the budget) affects child-focused

setting by the Malawian Government as the government seems to willingly rely on external funding

for these child-focused sectors.

According to the MGDS III, the government is committed to increase the education share of the

total government budget to at least 20 per cent by the FY 2020-2021. Even though the government

aims to increase the health share to 15 per cent, it is not visible in the MGDS costing where the

health budget remains at around 10 per cent. Moreover, raising the health share is not very likely as

the strong focus on health by Malawi’s development partners decreases the immediate need for the

government to raise the share. Social protection is not considered a real child-focused by the

government. Despite its huge mandate, the MoGCDSW is chronically underfunded. The World

Bank plans to expand its activities in the social protection sector in the near future. From a child-

policy perspective, reductions in FISP subsidies could be welcomed as it can in theory increase

fiscal space available for other key child-focused sectors. It remains, however, doubtful to what

extent the reductions in FISP subsidies will be directly invested in child-focused social sectors.

45


4 The base scenario

This chapter constitutes the first part of the projection exercise – it sets out the base scenario. It

discusses the assumptions used to set the base scenario, and the projection results of running the

model based on these assumptions.

4.1 Base scenario assumptions

The first step of the projection analysis is the development of a “base scenario”, a straightforward

and non-controversial set of assumptions covering the years FY17-18/FY23-24. This scenario is

based on some key assumptions such as the GDP growth rates, the exchange rate, and the

population growth rates (Table 8). Further assumptions are made based on these parameters.29

Table 20 in Appendix 1 lists the base-scenario assumptions and provides brief explanations for

each of them. Key assumptions30 in the base scenario include the following:

Table 8: Key assumptions in the base scenario

Growth rates FY17-18 FY18-19 FY19-20 FY20-21 FY21-22 FY22-23 FY23-24

Real GDP 3.7 4.0 4.3 4.6 4.9 5.2 5.5

Consumer price

index (CPI) 10.8 10.4 9.9 9.4 8.9 8.5 8.0

Population

growth 3.0 2.9 2.8 2.9 2.9 2.8 2.7

The growth rate of the exchange rate (national currency per US$) would be equal to the differential

of the Malawi and international (US$) inflation rates. Table 21 in Appendix 1 lists the numerical

values of the base scenario assumptions. These assumptions reflect the following view of Malawi’s

future economic performance. The real-GDP growth rate is assumed to rise gradually to a 5.5 per

cent annual rate in the final projection year (FY2023/2024). Consumer-price inflation is assumed to

gradually decline to 8 per cent. After six years of double-digit inflation rates, the year-on-year

headline inflation rate has receded towards single digit levels and is converging with that of other

countries in the region. The continued easing of inflation has paved the way for the Reserve Bank

of Malawi to further reduce interest rates. This is expected to encourage borrowing for investment

and to reduce the cost of servicing Malawi’s large domestic debt stock. The population growth rate

is assumed to decline gradually to 2.7 per cent.

4.2 Base scenario projection results

Table 9 shows some of the key projection results for the fiscal years 2017/18-2023/24, based on

the base scenario assumptions:

29 Thus, for example, certain variables are assumed to grow at the same rate as the nominal GDP – that is, they are

assumed to grow at the “combined” rates of real GDP and the GDP deflator. 30 The key assumptions are based on secondary data from the IMF Government Financial Statistics.

46


Table 9: Key projection results for the base scenario

FY17-18

FY18-19

FY19-20

FY20-21

FY21-22

FY22-23

FY23-24

Child-focused expenditure

Per cent of total expenditure 29.7 29.6 29.6 29.7 29.8 29.9 30.0

Per cent of GDP 8.1 8.0 7.9 7.8 7.7 7.6 7.5

Per child in USD at 2016 exchange rate and

prices 70.8 71.2 71.8 72.6 73.6 74.8 76.3

Net internal financing gap (fiscal gap)


Per cent of GDP 1.8 1.6 1.4 1.1 1.0 0.9 0.9

Fiscal Deficit (surplus/deficit)

Per cent of GDP -4.1 -3.9 -3.6 -3.2 -3.1 -3.0 -2.9

Taken together, the programming assumptions would imply stability in the evolution of the

economy’s key indicators. “Child-focused” expenditure would be stable at around one third of total

government expenditure. As the growth rate would remain high, the fiscal deficit would narrow from

4.1 per cent of GDP to 2.9 per cent because revenues would rise faster than expenditure. The net

internal financing flow (fiscal gap) would improve accordingly, both as a percentage of total

expenditure and as a percentage of GDP.

The base scenario suggests that Malawi can sustain a small increase in child-focused expenditure

(from US$70.8 per child to US$76.3 per child). The government debt-to-GDP ratio would reach

45.60 per cent in FY2023/24.

Table 10 Results for the other elements of the fiscal account

Results Scenario 0

Average tax and non-tax revenue/GDP, FY2017-2024 18.5

Average child-focused expenditure/GDP, FY2017-2024 7.8

Average child-focused expenditure per child (USD at 2015 prices & exchange rate),

FY2017-2024 73.0

Net internal debt flow/GDP, FY2017-2024 1.3

Total government debt/GDP, FY2023-24 45.6

Average fiscal deficit/GDP, FY2017-2024 -3.4

Table 22 in Appendix 1 shows the full projection results, based on the base-scenario assumptions.

Base-scenario and fiscal-space “mapping”

The “mapping” of the government’s funding sources to its expenditure programs, and its child-

focused expenditure, can be characterized in a straightforward way by the government’s overall

funding flows. As explained in chapter 1, the funding flows (i.e. how the government funds its

expenditure) broadly consist of the following:

1. tax and non-tax revenue;

2. external grants; and

3. the net (external and internal) financing of the fiscal deficit.

Over any time interval, total funding flows are equal to the total expenditure flows, which comprise

the three broad categories of:

1. “child-focused” expenditure (as defined in chapter 3);

2. “non-child-focused” expenditure (expenditure on all other sectors, excluding interest);

47


3. interest expenditure.

With only a few exceptions, no category of expenditure can be said to be directly linked with any

specific funding source, and no funding source can be said to be linked with any specific

expenditure. The exceptions are that certain grants and loan disbursements are provided to fund

specific project expenditures, and these would be in specific sectors. Apart from these exceptions,

all expenditures can be funded by all types of funding flows (e.g. expenditure in the child-focused

sectors can be financed by taxation, but also by external grants or loans).

Figure 34 is a fiscal-mapping chart, with FY2017/24 projections according to the base scenario. The

projections are shown as percentages of GDP. In the “stacked-bar” presentation, funding sources

are above and expenditure flows below the horizontal axis. The sum of everything shown above the

horizontal axis effectively funds everything shown below. By definition, the sum of the net external

and internal financing flows is the same as the overall fiscal deficit.

Figure 34 Fiscal map chart Malawi

Source: Excel model MwFS

Under the base scenario, the government deficit would decrease from 4.1 per cent of GDP in

FY2017/18 to 2.9 per cent in FY2023/24, while the fiscal gap would decrease from 1.8 per cent of

GDP in FY2017/18 to 0.9 per cent in FY2023/24.

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Pe

r ce

nt

of

GD

P

Internal interestsexpenditure (-)

Net Internal financing (+)

External-debtdisbursements (+)

External grants (+)

Tax and non-tax revenue(excl. external grants) (+)

Total non-priority non-interest expenditure (-)

External debt service (-)

Total priorityexpenditure (-)

FUNDING (+)

SPENDING (-)

48


5 Alternative scenarios

In this chapter, Section 5.1 describes possible approaches to increase the fiscal space. Section 5.2

describes some illustrative alternative scenarios, and describes how their results compare with

those of the base scenario.

5.1 Options to increase the fiscal space

In principle, policy-makers have the following general options for enhancing fiscal space for child-

focused expenditure: (1) increasing tax and non-tax revenue, and possibly earmarking some of this

for child-focused expenditure; (2) additional revenue generated through efficiency gains;

(3) adjusting and reallocating budgets, including reducing non-child-focused expenditure;

(4) reducing external debt service, presumably through agreements with creditors; (5) increasing

external debt disbursements; (6) increasing net internal borrowing flows; and 7) leveraging other

domestic and international resources, including aid. Apart from government policy choices, changes

in the macroeconomic context can affect fiscal space. For example, increased GDP growth would

increase fiscal space by increasing tax revenue.

Based on the analysis in chapter 2, Malawi’s options to increase fiscal space within the next years

are severely constrained. The Government of Malawi aims to pursue prudent macroeconomic

policies by limiting the amount of external borrowing and consolidating its fiscal position to limit

domestic financing needs which are crucial for Malawi’s total debt sustainability. The resumption of

on budget support by Malawi’s major development partners remains doubtful. Furthermore, Malawi

is not an attractive place for foreign investment and private capital. Although the options to increase

fiscal space are not as evident as in other countries, Malawi may find some room to manoeuver as

the alternative scenarios below testify. In all four scenarios described below, the increase in child

focused expenditure rises by the same amount but the fiscal implications (government debt and

fiscal gap) differ.

One possibility would be to increase revenue from taxation and from external sources. The first

four alternative scenarios attempt to project changes in revenue collection and grant financing, in

order for Malawi to increase fiscal space:

• Alternative scenario 1 calculates how child-focused expenditure can increase as a result of

increased domestic revenue through improved tax collection, natural resource development

and reducing illicit financial flows (IFIs). This scenario is primarily based on recent amendments

to the Taxation Act, the Value‑Added Tax Act and the Customs and Excise Act.

• Alternative scenario 2 models a reduction of non-child focused expenditure and increased

child-focused expenditure. This scenario is based on the possibility to change the

composition of overall spending and to enhance the efficiency of child-focused spending.

• Alternative scenario 3 analyses to what extent an increase in external grants for the social

sectors could fund an increase in “child-focused” expenditure. This scenario is based on the fact

that Malawi is still heavily donor dependent and on the premise that the Malawi government can

restore donor confidence, which would encourage global lenders to unlock budget support.

Moreover, the scenario assumes that the government can also leverage other international

financial resources.

• Alternative scenario 4 considers how a slight increase in deficit financing to a certain level

by the government could finance the increase in “child-focused” expenditure. Deficit financing

could only be used to a certain level.

49


5.2 Alternative scenarios and projections compared with the base scenario

5.2.1 Alternative Scenario 1: Improved domestic revenue collection

Alternative scenario 1 shows how improved domestic revenue collection can fund “child-focused”

expenditure. Approximately 50 per cent of the additional revenue will be allocated to “child-focused”

sectors. More specifically, in this model we consider a gradual increase in five different types of

taxes by 50% over the entire projection period

- Domestic VAT collection efficiency gradually increases by 50 per cent over the projection

period (FY2017/18-FY2023/24)

- Import VAT collection efficiency gradually increases by 50 per cent over the projection

period (FY2017/18-FY2023/24)

- Personal income tax collection as a percentage of GPD gradually increases by 50 per cent

over the projection period (FY2017/18-FY2023/24)

- Corporate tax collection as a percentage of GPD gradually increases by 50 per cent over the

projection period (FY2017/18-FY2023/24)

- Excise tax collection as a percentage of GPD gradually increases by 50 per cent over the

projection period (FY2017/18-FY2023/24)

These assumptions are based on the following policy context in Malawi.

Improved tax collection

On 25 July 2017, the Taxation (Amendment) Act 2017, the Value‑Added Tax (Amendment) Act

2017, and the Customs and Excise (Amendment) Act 2017 (the amendment acts) were published.

The amendment acts gave effect to the tax measures contained in the 2017/18 Budget. Among

others, the Taxation (Amendment) Act 2017 has led to an increase in the tax rate for ecclesiastical,

charitable, educational institutions and trusts from 25 per cent to 30 per cent. In August 2017, the

Malawi Revenue Authority (MRA) embarked on awareness campaigns across the country to equip

people with information about the newly government approved tax measures. In January 2018, the

MRA missed its tax revenue target by MWK41 billion, partly due to weak provisional tax, domestic

excise and trade tax collection, but also due to chronic power outages that adversely affected the

business environment and slowed down economic growth.

Furthermore, Malawi does not have a proper tax registry. In the FY 2017-18 budget, the

government aims at continuing macroeconomic stabilization, improving tax compliance through

increased analysis of data and enhancing the integrity of the tax registry. The government also

aims to increase the efficiency of collections through investment in an integrated tax administration

system (ITAS) and to implement broad based tax reforms that consists of streamlining tax

incentives, eliminating unproductive tax measures and broadening the tax base. The tax policy

initiatives will be guided by a shift in reliance on revenue from taxation of labour and investment

(factors of production) to consumption

The government should also find ways to increase local revenues. While local governments have

great potential to increase own revenues, this would be mainly achieved via general economic

development and not necessarily via changes in taxation. The fiscal capacity of Local Councils is

extremely limited. Since tax policy is set at central level, taxes collected at local level are a relatively

small part of the total amount of taxation. In terms of expenditure efficiency, several interview

respondents suggested that local districts have low rates of budget execution. This means that

there are opportunities in generating more revenue at local level and that expenditures could be

50


spent more efficiently (i.e. improving the quality of spending), but that based on the nature of the

projection exercise as well as the available data no appropriate scenario could be run.

Natural Resource Development

As mentioned above, Malawi is one of several southern and eastern African countries that offers

great potential for rare earth production, as Malawi’s rare earth markets has been largely

unexplored. As China and Canada, one of the very few rare earth producers outside China, plan to

start their large mining activities in Malawi over the next few years, Malawi could become a major

producer of rare earth elements. By tapping into the natural resource potential, rare earth

production can unlock fiscal space in Malawi through economic growth and large revenue earnings

for the government. To what extent these natural resources can increase fiscal space available for

public goods and services, including those for the child-focused sectors, however, depends

ultimately on whether the government effectively addresses the political and institutional challenges

that come with sound natural resource management.

Reducing illicit financing flows

While not included in the model, another (unquantifiable) option to free up resources is to improve

capturing illicit financial flows (IFFs). IFFs are illegal movements of money or capital from one

country to another. The latest report of Global Financial Integrity (GFI) has investigated these IFFs,

using two sources: (1) deliberate misinvoicing in merchandise trade (the source of GFI’s low and

high estimates), and (2) leakages in the balance of payments (also known as “hot money flows”).

Although IFF estimates range widely, they are potentially quite large, especially when compared to

the size of Malawi’s economy. Overall, the GFI provides low estimates, which are based on trade

between Malawi and advanced economies only, and high estimates, which also take into account

trade between developing countries. Naturally, measurements of illicit financial flows are identified

indirectly and hence data on IFFs is imprecise. When taking into account IFFs between Malawi and

all countries, the estimates suggest a steady increase up to 2011, a sudden decline in 2012,

followed by an increase over the remaining years (Figure 35). In a slightly different trend, the IFFs

between Malawi and advanced economies rose until 2010, declined afterwards until 2013, and then

rose again in 2014.

Figure 35: Malawi Illicit Financial Flows, 2005-2014 (in US$ millions)

Source: Global Financial Integrity, http://www.gfintegrity.org.

0.00

5.00

10.00

15.00

20.00

25.00

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% o

f G

DP

Mil

lio

ns

US

do

llar

Axis TitleTotal Illicit Financial Flows (low)Total Illicit Financial Flows (high)Total Illicit Financial Flows (low) as % of GDPTotal Illicit Financial Flows (high) as % of GDP

http://www.gfintegrity.org/

51


Taking into account this policy context, scenario 1 considers a gradual increase in five different

types of taxes by 50% over the entire projection period. The improved domestic revenue collection

would increase average “child-focused” expenditure as percentage of GDP and average child-

focused expenditure per child. With these assumptions, the total (external and internal) government

debt stock would decrease from 45.6 per cent in the base scenario to 36.1 per cent of GDP in FY

2023/24.

Table 11: Key assumptions for Scenario 1

Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Real GDP 3.7 4.0 4.3 4.6 4.9 5.2 5.5

Consumer price index 10.8 10.4 9.9 9.4 8.9 8.5 8.0

Population growth 3.0 2.9 2.8 2.9 2.9 2.8 2.7

Alternative assumptions

Domestic VAT collection efficiency (%) 19.9 21.2 22.5 23.9 25.2 26.6 27.9

Import VAT collection efficiency (%) 49.1 52.3 55.5 58.8 62.1 65.6 69.1

Personal income tax collection (% of GDP) 5.0 5.1 5.3 5.6 6.0 6.7 7.5

Corporate tax collection (% of GDP) 2.2 2.2 2.3 2.4 2.6 2.9 3.2

Excise tax collection (% of GDP) 0.6 0.6 0.6 0.7 0.7 0.8 0.9

Total child-focused expenditure (% of GDP) 8.4 8.5 8.6 8.7 8.9 9.1 9.4

Table 12: Key projection results for scenario 1

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24



Per cent of GDP 8.4 8.5 8.6 8.7 8.9 9.1 9.4

Per child in USD at 2016 exchange rate

and prices 72.7 75.1 77.8 81.2 85.2 90.3 96.5


Per cent of total expenditure 6.5 5.5 3.7 0.7 -2.8 -7.6 -14.4

Per cent of GDP 1.8 1.5 1.0 0.2 -0.7 -2.0 -3.7


Per cent of GDP -4.1 -3.8 -3.2 -2.3 -1.3 0.0 1.7

Box A: Improved domestic revenue mobilization to fund “child-focused” expenditures

Results Scenario 0 Scenario 1 Variation

Average tax and non-tax revenue/GDP, 2017-2024 18.5 20.8 2.2

Average child-focused expenditure/GDP, 2017-2024 7.8 8.8 1.0

Average child-focused expenditure per child

(USD at 2015 prices and exchange rate), 2017-2024 73.0 82.7 9.7

Net internal debt flow/GDP, 2017-2024 1.3 -0.3 -1.5

Total government debt/GDP, FY2023-24 45.6 36.1 -9.4

52


5.2.2 Alternative Scenario 2: Change in composition and efficiency of spending

Alternative scenario 2 shows how a change in the allocation of expenditures can fund an increase

in “child-focused” expenditures. This model is based on the following assumptions:

• Non child-focused recurrent expenditure decreases by 20 per cent over the projection period

• Non child-focused non-recurrent expenditure decreases by 34 per cent over the projection

period

• All of this serves to increase child-focused expenditure by 13 per cent and pay back debt

These assumptions are based on the following policy context in Malawi.

Improving the composition of overall spending

As mentioned in chapter 3, the context of the child-focused sectors indeed calls for an increase in

government expenditure in those sectors. Public spending in child focused sectors as a percentage

of GDP has stagnated in recent years with interest spending crowding out child-focused spending.

Meanwhile, for the period 2010-16, public spending has been increasingly dominated by current

spending (which increased by almost 10 percentage points) at the detriment of capital spending.

As a result, the government aims to have a better control over the soaring wage bill and other

current spending. Similarly, improving public investment management and spending efficiency can

also lead to higher “child-focused” spending.31 In particular, the government aims to introduce

measures that limit non-essential recurrent expenditure and allowances. For example, wage

increases are supposed to be limited to the inflation. Meanwhile, the government aims to increase

domestically-financed development spending through the reduction of the Farm Input Subsidy

Programme (FISP) and maize purchases.

Improving the efficiency of child-focused spending

According to the recent data envelopment analysis (DEA) approach32, Malawi’s spending efficiency

score is far below the sample average (near the bottom 90th percentile) in social sectors such as

health. The major sources for inefficiencies in the social sectors are

- (i) lack of appropriate human technical and financial resources: Between 2013 and

2018, Malawi’s social spending per capita is among the lowest in Sub-Saharan Africa. For

example, the Malawian government spends less than US$30 per capita on health, which is

much lower than the SSA average (US$98). This, in turn, leads to “critical shortages of

skilled personnel, drugs, hospital equipment and other supplies. There is one surgeon per

100,000 people, one physician per 5200 people and one nurse per 3500 people. (…) Thus,

staff motivation and morale is often low – breeding absenteeism, corruption and

underperformance.”33

- (ii) misallocation of scarce resources: As mentioned above, the bulk of financial

resources in the social sectors are allocated to recurrent expenditures, in particular salaries

and wages. Limited resources are sometimes spent on high cost and low impact programs.

In the health sector, for example, there is an emphasis on allocating scare financial

resources to usually curative interventions, at the expense of low cost and probably more

effective preventative interventions.

- (iii) delays in disbursement of funds: Delays in the disbursement of funds to departments

and education/health facilities have caused large inefficiencies as well. According to

31 IMF, 2018, Article IV 32 The DEA allows to measure a country’s spending efficiency relative to a frontier. The DEA efficiency of public spending is

measured by comparing actual spending with the minimum spending theoretically sufficient to produce the same actual

outcome. 33 IMF, 2018, Article IV

53


UNICEF Malawi, in some districts, fund transfers from the national government level to the

district level are delayed between two to five months.

- (iv) waste and corruption: Waste of public resources and corruption are yet another

obstacle to efficient social sector spending. According to the IMF, leakages arise for various

reasons, including “inadequate inventory control, poor record keeping, weak public supply

management system and inaccurate reporting of receipts, stock levels and other supplies”.34

- (v) poorly utilized budgets: Since the bulk of the education and health budget is consumed

by salaries and wages, very few resources are available for essential supplies in both the

health sector (such as drugs and other hospital equipment) and the education sector (such

as books, desks, and other teaching and learning materials). In FY 2017-18, approximately

80 (85) percent of the total resources for the health (education) sector were recurrent

expenditures.

Strengthening Program-Based Budgeting

Malawi currently finds itself in the transition from output based budgeting towards program-based

budgeting (PBB). According to the IMF, strengthening PBB holds great potential to improve

efficiency, “but stronger links are required between PBB and sector plans, and the monitoring and

evaluation of PBB requires significant attention. Performance and incentive systems for frontline

staff should be enhanced. Efficiency of frontline staff could be improved through incentive schemes

such as performance-based financing, and encouragement of cost-containment measures by

MDAs in addition to reconfiguration and integration of service delivery. MDAs should be supported

to use appropriate technology and strengthen their monitoring, evaluation and audit functions, and

to periodically publish performance information. The rollout of the national identity registration

system is an opportunity for improving data and information systems, including understanding how

and whether frontline service delivery is impacting citizens.”35

Table 13 provides the key assumptions for Scenario 2. Based on these assumptions, average child-

focused expenditures per child will rise from US$73 to US$82.7 compared to the base scenario.

The fiscal implications of this scenario are also promising. Malawi’s fiscal deficit would decrease

from 3.8 per cent to 0.4 per cent over the projected period. Furthermore, the fiscal gap as a

percentage of GDP would improve significantly from 1.4 per cent in FY2017/2018 to -1.6 per cent in

FY2023/2024. The debt stock would also be reduced by 8 percentage points over the FY2017/18-

FY 2023/24 period.


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Real GDP growth 3.7 4.0 4.3 4.6 4.9 5.2 5.5




Central government non-

child-focused non-recurrent

expenditure (% of GDP)

3.8 3.6 3.3 3.1 2.9 2.7 2.5

Central Government non-

child-focused recurrent

expenditure (% of GDP)

10.5 10.0 9.6 9.2 8.9 8.6 8.3

34 Idem. 35 Idem.

54


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Total Child-focused non-

interest expenditure (% of

GDP)

8.4 8.5 8.6 8.7 8.9 9.1 9.4

Table 14: Key projection results for Scenario 2

FY

17-18 FY

18-19 FY

19-20 FY

20-21 FY

21-22 FY

22-23 FY

23-24



Per cent of GDP 8.4 8.5 8.6 8.7 8.9 9.1 9.4

Per child in USD at 2016 exchange rate and prices 72.7 75.1 77.8 81.2 85.2 90.3 96.5


Per cent of total expenditure 5.3 3.5 1.3 -1.5 -3.6 -5.6 -7.2

Per cent of GDP 1.4 0.9 0.3 -0.4 -0.9 -1.3 -1.6


Per cent of GDP -3.8 -3.2 -2.5 -1.7 -1.2 -0.7 -0.4

Box B: Expenditure re-allocations and efficiency gains to fund “child-focused” expenditures


Average tax and non-tax revenue/GDP, FY2017-2024 18.5 18.5 =

Average child-focused expenditure/GDP, FY2017-2024 7.8 8.8 1.0

Average child-focused expenditure per child (USD at 2015 prices

& exchange rate), FY2017-2024 73.0 82.7 9.7

Net internal debt flow/GDP, FY2017-2024 1.3 -0.2 -1.5

Total government debt/GDP, FY2023-24 45.6 37.5 -8.0

5.2.3 Alternative Scenario 3: Increased External Grants

Alternative scenario 3 shows how an increase in external grants can fund an increase in “child-

focused” expenditures. This model is based on the following assumptions:

• External grants for current expenditures increase from 1.5 per cent of GDP in FY2017-18 to 2.0

percent of GDP in FY2023-24

• External grants for capital expenditures increase from 1.9 per cent of GDP in FY2017-18 to 2.0

percent of GDP in FY2023-24

• All of this serves to increase child-focused expenditure by 13 per cent and pay back debt

Increased Budget Support

Malawi remains one of the most aid dependent countries in the world. The Addis Ababa 2015

Action Agenda highlighted the need for integrated national financing frameworks to support

nationally owned sustainable development plans. Moreover, according to the Action Agenda,

foreign aid should be allocated to the poorest countries. Malawi therefore remains a favourite

destination for foreign donors. In our scenario we assume that external flows can finance both

current expenditures and capital expenditures, even though donors tend to provide more funds for

development spending than for recurrent spending. Under general budget support, however, funds

are in principle not earmarked which makes an increase in current expenditure also theoretically

possible.

55


Total foreign aid to Malawi has not gone down but the amount of budget support has declined

significantly after the Cashgate scandal in 2013. Currently, Malawi receives limited budget support

in the form of grants and loans. There exists a large uncertainty with regard to external donor flows.

The Malawi government needs to win back the confidence of donors in order to realize an increase

of on-budget development aid. While there are small signs of improved macroeconomic conditions

going forward, this recovery is likely to be slow paced.

Thus, while the option of increasing grants is indeed a potential source through which fiscal space

can be enhanced, it remains to be seen how fast and to what extent Malawi’s development partners

will resume budget support in the near future. Foreign aid by Malawi’s development partners has

increasingly been monitored to produce value for money (in terms of where and how new funds will

be spent). It is not a secret that corruption in Malawi's public sector remains endemic which limits

the prospect of burgeoning donor funds in the foreseeable future. The government has to

demonstrate that it is willing to improve fiscal transparency and financial accountability including

comprehensive financial reporting on allocated budgets at the central and local level. Additionally,

the government has to strengthen enforcement mechanisms and sanctions for non-compliance.

Leveraging other international resources

The Malawi government could also leverage other international financial resources such as the

Global Partnership for Education Fund, the Global Financing Facility (GFF) for Reproductive,

Maternal, Newborn, Child and. Adolescent Health (RMNCAH) or the Green Climate Fund.

The Green Climate Fund aims at unlocking private sector finance in developing countries. The

Malawi government needs to develop a strategy on how to improve the capabilities of firms, such

as the Electricity Supply Commission of Malawi and the Malawi Rural Electrification Programme to

utilise the GCF funding opportunities. For example, with the support of UNDP, the government has

received funding from the GCF to scale up the use of modernized early warning systems (EWS)

and climate information in the country.36

(Limited) scope for innovative financing mechanisms

In theory, other innovative financing instruments (IFIs) that complement official sources of aid can

also help attract new financial resources. IFIs are financing schemes that generate and mobilise

funds such as vaccine bonds or an international solidarity levy on air tickets. It remains to be seen,

however, to what extent these IFIs can provide a reliable and continuous source of funding for

child-focused expenditures.

Scenario 3 considers a gradual increase in external grants for current expenditures by 38 per cent

(from 1.5 per cent of GDP in FY2017/18 to 2 per cent in FY2023/24) and for capital expenditures by

4 per cent (from 1.9 per cent in FY2017/18 to 2 per cent in FY2023/24). The increase in external

grants would be allocated to “child-focused” expenditures without restrictions.


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Real GDP growth 3.7 4.0 4.3 4.6 4.9 5.2 5.5




36 http://www.mw.undp.org/content/malawi/en/home/presscenter/articles/2018/06/malawi-s-farmers-watch-climate-

change.html

56


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Total Child-focused non-interest

expenditure

(% of GDP)

8.4 8.5 8.6 8.7 8.9 9.1 9.4

Central-government external

grants for current expenditure

(% of GDP)

1.2 1.1 1.0 0.9 0.7 0.6 0.5

Central-government external

grants for capital expenditure

(projects) (% of GDP)

1.7 1.5 1.3 1.1 0.9 0.7 0.5

The increase in child-focused expenditure would be the increase projected in scenario 1 and 2, e.g.

average child-focused expenditure per child would increase from $73 to $82.7 (in constant prices)

over the time period under investigation. The fiscal implications under this scenario are also

promising, however less so compared to scenario 1 and scenario 2. The fiscal deficit would be

reduced from 3.9 per cent of GDP in FY 2017-18 to 0.9 percent by FY 2023-24. Moreover, the total

(internal and external) government debt as a percentage of GDP would decrease from 44.6 per

cent in the base scenario to 38.46 per cent in FY2023/2024. Based on the premise that the

government of Malawi is able to attract more grants in the future, this scenario shows that

resources can be freed up to fund expenditures in key child-focused sectors without compromising

fiscal sustainability.


FY

17-18 FY

18-19 FY

19-20 FY

20-21 FY

21-22 FY

22-23 FY

23-24



Per cent of GDP 8.4 8.5 8.6 8.7 8.9 9.1 9.4

Per child in USD at 2016

exchange rate and prices 72.7 75.1 77.8 81.2 85.2 90.3 96.5


Per cent of total expenditure 5.7 4.2 2.4 0.2 -1.5 -3.0 -4.3

Per cent of GDP 1.6 1.2 0.7 0.0 -0.4 -0.8 -1.1


Per cent of GDP -3.9 -3.4 -2.8 -2.2 -1.7 -1.2 -0.9

Box C: Increasing External grants to fund “child-focused” expenditures


Average tax and non-tax

revenue/GDP, FY2017-

2024

18.54 18.54 =

Average child-focused

expenditure/GDP,

FY2017-2024

7.8 8.8 1.0

Average child-focused

expenditure per child

(USD at 2015 prices &

exchange rate),

FY2017-2024

73.0 82.7 9.7

57



Net internal debt

flow/GDP, FY2017-2024 1.3 0.2 -1.1

Total government

debt/GDP, FY2023-24 45.6 39.5 -6.1

5.2.4 Alternative Scenario 4: Increase in Deficit Financing

Scenario 4 shows how debt/deficit financing can fund “children-focused” expenditures. This model

is based on the following assumptions:

- External debt disbursements as a percentage of GDP remain stable at 3 per cent over the

projection period (in the base scenario they decrease to 2.5 per cent)

- External debt repayments increase from 0.6 per cent of GDP to 0.7 per cent (in the base

scenario they decrease to 0.5 per cent)

- All of this serves to increase child-focused expenditure by 13 per cent at the cost of

increasing debt by 6.7 per cent over the projection period.37

(Limited) scope for domestic borrowing

The IMF notes that the “risk of debt distress is heightened significantly when adding domestic public

debt to external debt.”38 In contrast to external debt, domestic debt has risen very sharply and

suffers from increased vulnerabilities. Since the HPIC and MDRI debt relief in 2006, however,

Malawi’s debt-to-GDP ratio more than doubled between 2007 and 2018 leading to a significantly

higher debt level vis-à-vis its regional peers. Domestic financing increased sharply after withdrawal

of donor budget support, securitization of arrears, and recapitalization of the RBM and two public

banks. Total debt is projected to reach 55 per cent of GDP in 2018.

External debt

Through the implementation of HPIC and the Multilateral Debt Relief Initiative (MDRI) in 2006,

Malawi could reduce its external debt-to-GDP ratio from 88.7 per cent in 2002 to 13.5 per cent by

the end of 2006. Malawi's external debt stock has risen to 20 per cent of GDP in 2017. Malawi

faces a moderate risk of external debt distress. The government currently spends around 4 per cent

of its GDP on interest payments, but only a small part (0.2 per cent of GDP) is related to external

interest payments, while the rest is paid to domestic creditors. According to the IMF, Malawi’s risk

of external debt distress is moderate and “external sustainability is expected to improve as

the current account deficit narrows and the economy becomes more resilient.”39 With these

assumptions, the average FY2017/18-FY 23/24 child-focused expenditure per child would also

increase from US$73 to US$82.7. However, the fiscal deficit would increase from 4.3 per cent of

GDP in FY2017-18 to 5.7 per cent in FY2023-24. The total (external and internal) government debt

stock would reach 53.3 per cent of GDP in FY 23/24 (compared with 45.6 per cent in Scenario 0).40


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Real GDP growth 3.7 4.0 4.3 4.6 4.9 5.2 5.5

Consumer price

index 10.8 10.4 9.9 9.4 8.9 8.5 8.0


37 It must be acknowledged, however, that governments often borrow to finance huge infrastructure projects. It may not be

very accurate to expect that all funds to be borrowed will be earmarked for education, health and social protection. 38 IMF, 2018, Article IV, p. 75 39 IMF, 2018, Article IV. 40 In the latest IMF Country Report for Malawi, the IMF projected total grants to 2 per cent of GDP in FY 2020-2021. The

model in this analysis uses 4 per cent which is not an unreasonable number for developing countries like Malawi.

58


Growth rates FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24


External-debt

disbursements (% of

GDP)

3.0 3.0 3.0 3.0 3.0 3.0 3.0

External-debt

repayments (% of

GDP)

-0.6 -0.6 -0.6 -0.6 -0.7 -0.7 -0.7


FY

17-18 FY

18-19 FY

19-20 FY

20-21 FY

21-22 FY

22-23 FY

23-24



Per cent of GDP 8.4 8.5 8.6 8.7 8.9 9.1 9.4

Per child in USD at 2016 exchange rate and prices 72.7 75.1 77.8 81.2 85.2 90.3 96.5



Per cent of GDP 1.9 1.9 2.0 2.0 2.2 2.6 3.8


Per cent of GDP -4.3 -4.3 -4.4 -4.4 -4.6 -5.1 -5.7

Box D: Increase in deficit financing to fund “child-focused” expenditures


Average tax and non-tax revenue/GDP, FY2017-2024 18.5 18.5 =

Average child-focused expenditure/GDP, FY2017-2024 7.8 8.8 1.0

Average child-focused expenditure per child (USD at 2015 prices

& exchange rate), FY2017-2024 73.0 82.7 9.7

Net internal debt flow/GDP, FY2017-2024 1.3 2.3 1.1

Total government debt/GDP, FY2023-24 45.6 53.3 7.7

5.2.5 Summary of Scenario Alternatives

The impact of all the different scenarios on the government’s fiscal space is summarized in Table

19, in particular the government debt situation by FY2023/2024 and the average child-focused

spending per child over the FY2017/18-FY2023/2024 period.

Table 19: Summary results of scenario analysis

Gov. debt FY23-24

Child-focused Spending per child (in US$,

average FY17-24)

Child-focused spending per

child, Percentage points change

compared to the base scenario

0 Base scenario 45.56 73.02 =

ALTERNATIVE SCENARIOS

1 Increased

domestic revenue

mobilization

through improved

tax collection

36.14 82.68 13%

59


Gov. debt FY23-24

Child-focused Spending per child (in US$,

average FY17-24)

Child-focused spending per

child, Percentage points change

compared to the base scenario

2 Reduction of non-

child focused

expenditure plus

increased and

more efficient

child-focused

expenditure

37.55 82.68 13%

3 Increased external

grants for social

sectors

39.48 82.68 13%

4 Increasing deficit

financing 53.26 82.68 13%

The projection exercise has produced illustrative results that show alternative means of creating

enhanced fiscal space, which can be used to finance child-focused spending. These scenarios

show that the modelled increase in child-focused spending – a 12-13 per cent increase in real child-

focused spending per child between FY2017-2018 and FY2023-2024 – could be financed in a

number of different fiscally neutral ways. In this exercise, “fiscally neutral” would mean that the debt

stock at the end of the projection period is not higher than in the base scenario. These scenarios

are:

• Increased domestic revenue mobilization through improved tax collection (Scenario 2)

• Reduction of non-child focused expenditure plus increased and more efficient child-focused

expenditure (Scenario 3);

• Increased external grants for social sectors (Scenario 4);

Out of all scenarios considered above, the scenario that assumes an increase in domestic revenue

mobilization would fund a 13 per cent increase in child-focused expenditure and contribute to the

largest reduction in debt stock (from 45.6 per cent of GDP to 36.1 per cent). Increased deficit

financing, in turn, can also fund an increase in “child-focused” expenditure but the debt stock would

be almost 8 percentage points higher by FY2023-24 compared to FY 2017-18. Figures 36-38 once

again summarize the effects of the different scenarios on Malawi’s fiscal surplus/deficit, total

government debt as a percentage of GDP and child child-focused expenditure in constant US

dollars. Figures 39-40 show the government debt and fiscal gap at the end of the projection period

for each scenario.

60


Figure 36: Evolution of government fiscal surplus/deficit, as percentage of GDP, 2014/2015-2023/2024

Figure 37: Evolution of total government debt as percentage of GDP, 2014/2015-2023/2024

Base Scenario

Scenario 1

Scenario 2

Scenario 3

Scenario 4

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 4

Base Scenario

Scenario 1 Scenario 2

Scenario 3

Scenario 4

25%

30%

35%

40%

45%

50%

55%

60%

Scenario 0 Scenario 1 Scenario 2


61


Figure 38: Evolution of child child-focused expenditures in constant dollars, 2014/2015-2023/2024

Note: It seems as if a few scenarios are missing in the figure. However, scenario 0 and scenario 1 overlap.

Scenario 2, scenario 4 and scenario 5 overlap as well.

Figure 39: Government debt by the end of the projection period for each scenario

Figure 40: Government debt by the end of the projection period for each scenario

Base Scenario

Scenario 1

Scenario 2

Scenario 3

Scenario 4

50

55

60

65

70

75

80

85

Scenario 0 Scenario 1 Scenario 2


0

10

20

30

40

50

60

Base Scenario Scenario 1 Scenario 2 Scenario 3 Scenario 4

% o

f G

DP

-0.5

0

0.5

1

1.5

2

2.5

Base Scenario Scenario 1 Scenario 2 Scenario 3 Scenario 4

% o

f G

DP

62


6 Conclusions

One major challenge faced by the Government of Malawi is its macroeconomic instability

which can be attributed to several factors such as fiscal slippages, exchange rate instability,

governance failures, and the vulnerability of the country to climatic and economic shocks.

Lack of prudent macroeconomic policies and governance problems have severely hampered

macroeconomic stability, undermining economic growth and private sector development. It is crucial

that the government brings its fiscal deficit and public debt under control.

The second major challenge for the Government of Malawi is to strengthen domestic

resource mobilization. In order to achieve this aim, the government has and will need to

undertake further actions to increase revenue collection through improved tax collection (increasing

the efficiency of collections through investment in an integrated tax administration system (ITAS),

implementing broad based tax reforms that consists of streamlining tax incentives, eliminating

unproductive tax measures and broadening the tax base) and reducing illicit financial flows.

The third major challenge for the Government of Malawi is to free up additional revenues

and savings on expenditure from improved efficiency. Given Malawi’s limited resource

envelope both with regard to domestic and foreign finance and the large financing needs across all

sectors – including education, health and social welfare – future policy discussions around

expenditures priorities may be extremely challenging. While the potential magnitude of efficiency

gains will depend on many factors, a very crucial one is the implementation of policies that reduce

corruption and improve governance, particularly in the sphere of public expenditure management,

internal controls, cash management and accounting. This, in turn, could lead to increased fiscal

space for the government. If successful, the policy reforms may lead to a reduced fiduciary risk and

eventually additional efficiency gains stemming from the possible re-activation of the donors' Joint

Framework to direct budget support.

Public resource allocations for the child-focused sectors have fluctuated a lot in recent

years. More financial resources out of the total government budget are devoted to the education

sector (16-18 per cent) than to the health sector (9-11 per cent). In contrast to education and

health, social protection is not explicitly mentioned as one of the five key child-focused areas under

MGDS III. Overall, the estimated child-focused expenditures as a share of the total government

budget have barely increased in real terms between FY2012/13 and FY2016/17. This is largely due

to the declining social protection budget (in real terms) since FY2015/16. Even though the

estimated expenditures for the education and health budget have slightly increased between

FY2012/13 and FY2016/17, both budgets were characterized by large fluctuations.

Despite its official intention to allocate more financial resources to the child-focused sectors

over the time period 2017-2022, in practice, the government may be reluctant to devote a

higher share of its budget to the child-focused sectors. Among others, the government intends

to devote 20 percent of its government budget to the education sector and 15 percent to the health

sector. One major reason why the government may be reluctant to increase the budget share for

the child-focused sectors over the next years is directly related to the spending patterns of Malawi’s

development partners. DAC donors channel almost 60 per cent of their foreign aid into education,

health and other social infrastructure. Since the government is well aware that foreign aid money

provided by donors will continue to primarily target the social sectors (as modelled in Scenario 3), it

has little incentives to raise the allocations for education and health in the upcoming years.

63


Despite the limited resource envelope faced by the government, the government could

increase its fiscal space in several ways which would allow for an increase in expenditures

for the key child-focused sectors. This projection exercise has highlighted four major possibilities

for increased fiscal space: (i) strengthening domestic resource mobilization through improved tax

collection, (ii) reduction of non-child focused expenditure plus increased and more efficient child-

focused expenditure, (iii) increase of external grants and (iv) deficit financing.

The projection exercise has shown four scenarios in which a modelled increase in child-

focused spending – a 12-13 per cent increase in real child-focused spending per child

between FY2017-2018 and FY2023-2024 – could be financed in a number of different fiscally

neutral ways:

• An gradual increase in (i) domestic VAT collection efficiency, (ii) import VAT collection

efficiency, (iii) personal income tax collection as a percentage of GDP, (iv) corporate tax

collection as a percentage of GDP and (v) excise tax collection as a percentage of GDP by 50

per cent between FY2017/18 and FY2023/24 (Scenario 1);

• A gradual decrease of non-“child-focused” recurrent expenditure by 20 per cent over the

projection period and a gradual decrease of non-“child-focused” non-recurrent expenditure by

34 per cent over the projection period (Scenario 2);

• A gradual increase in external grants for current expenditures by 38 per cent (from 1.5 per cent

in FY2017/18 to 2 per cent in FY2023/24) and for capital expenditures by 4 per cent (from 1.9

per cent in FY2017/18 to 2 per cent in FY2023/24) (Scenario 3).

The main takeaway from this projection exercise is that there is a lot of potential to ramp up

investments in “child-focused” sectors. All the scenarios highlighted above allow for an

increased budgetary room in which a government can provide resources for public purposes

without undermining fiscal sustainability (except for Scenario 4). A combination of different

scenarios can expand the fiscal space available for the government even further in fiscally neutral

ways. The feasibility of each combination of scenarios, however, depends to a large extent on the

ambition and commitment of the government to devote a significant part of its financial resources to

child-focused sectors. This, in turn, depends significantly on complex political economy factors

which are discussed in the complementary Political Economy Analysis (PEA).

64


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https://www.ft.com/content/88abbe52-0261-11e7-aa5b-6bb07f5c8e12

http://www.gfintegrity.org/wp-content/uploads/2017/05/GFI-IFF-Report-%20%092017_final.pdf

http://www.gfintegrity.org/wp-content/uploads/2017/05/GFI-IFF-Report-%20%092017_final.pdf

http://www.sdnp.org.mw/Education2010/FinalNesp.pdf


http://www.health.gov.mw/index.php/policies-strategies?download=47:hssp-ii-final

https://cepa.rmportal.net/Library/government-publications/the-malawi-growth-and-%20%09development-strategy-mgds-iii/view

https://cepa.rmportal.net/Library/government-publications/the-malawi-growth-and-%20%09development-strategy-mgds-iii/view

http://www.gender.gov.mw/

https://opendocs.ids.ac.uk/opendocs/bitstream/handle/123456789/13133/48.4_10.190881%20%09968-2017.155.pdf?sequence=328

https://opendocs.ids.ac.uk/opendocs/bitstream/handle/123456789/13133/48.4_10.190881%20%09968-2017.155.pdf?sequence=328

65


Mussa, R. 2017, Poverty in Malawi: Policy Analysis with Distributional Changes. MPRA Working

Paper, 4 January 2017, Online at https://mpra.ub.uni-muenchen.de/76080/

Pauw, K., P. Dorosh and J. Mazunda, 2013, Exchange Rate Policy and Devaluation in Malawi. IFPRI

Discussion Paper 01253. Washington, D.C: International Food Policy Research Institute

Ravishankar, V., S. El-Tayeb El-Kogali, D. Sankar, N. Tanaka and N. Rakoto-Tiana, 2016, Primary

Education in Malawi: Expenditures, Service Delivery, and Outcomes, Washington, D.C.:

International Bank for Reconstruction and Development/The World Bank. Available at:

https://openknowledge.worldbank.org/bitstream/handle/10986/23737/9781464807947.pdf?

sequence=3&isAllowed=y

Tostensen, A. (2017). Malawi: A Political Economy Analysis. Oslo, Norway: Chr. Michelsen Institute

Van den Meerendonk, A. et al., 2016, Towards a Malawian Social Protection Floor: Assessment of

Social Protection Programmes in Malawi, Full Report;

http://www.ilo.org/wcmsp5/groups/public/---africa/---ro-addis_ababa/---ilo-

lusaka/documents/publication/wcms_524928.pdf

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Malawi. Washington, DC: The World Bank Group

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http://www.ilo.org/wcmsp5/groups/public/---africa/---ro-addis_ababa/---ilo-%20%09lusaka/documents/publication/wcms_524928.pdf

66


Appendix 1: Fiscal space projections

Programming assumptions base scenario

The base-scenario programming assumptions are intended to be relatively simplified, to make the

calculation relatively easy to carry out and to understand. The following general explanatory points

are noted:

1. The assumptions are “programming” assumptions. They are not intended, and should not be

understood, as forecasts, but rather as plausible possibilities for planning purposes. In

particular, the growth rates of government expenditure are intended as plausible policy

settings;

2. In general, the aim for Scenario 0 is to set programming assumptions that are “neutral” in

character. For example, Malawi`s merchandise export volumes are assumed to grow at the

same rates as the world trade volume, so Malawi’s exports maintain the same share of the

world trade volume. The volume of Malawi’s merchandise imports is assumed to grow at the

same rates as real GDP, so merchandise imports would tend to maintain the same

percentage of GDP. For recurrent expenditure, the assumption that staff sizes will grow at the

same rate as the population would be neutral in a similar sense. So is the assumption that

government wage rates would grow at the same rate as per-capita nominal GDP;

3. The elasticities that help determine the government’s revenue performance are taken to be

unitary for Scenario 0. This is also a “neutral” assumption. (In general, it is inadvisable to

apply econometric point estimates based on historical data for these values, for at least two

reasons. The first is that future elasticities of tax revenue with respect to their underlying

determinants are likely to differ from historical elasticities. The second is that, say, if the

elasticity of a given revenue line with respect to nominal GDP is assumed to exceed (be less

than) one, the projected revenue flow would rise (diminish) indefinitely as a percentage of

GDP;

4. It is straightforward to set programming assumptions that adjust gradually over the projection

period, using (“geometric”) adjustment formulas. This is useful for several different assumption

lines. For example, a large proportion of the assumptions are set as growth rates. These can

be assumed to rise or diminish gradually from their initial projection values toward their final

projection values. Another way to use a gradual adjustment would be for the elasticity of a

given revenue line with respect to nominal GDP to take on an initial value somewhat different

from one, but then gradually adjust toward a long-term value of one.

Table 20: Assumptions notes for the Base Scenario

(A) World economic conditions (1‑3):

(1) The growth rate of the world trade volume decreases gradually from its estimated FY16-17 value of 5,9 per cent

to FY23-24 value of 5 per cent.

(2) The growth rate of the U.S.-dollar world price level declines gradually from its estimated FY16-17 value of 3,7 per

cent to a FY23-24 value of 2 per cent.

(3) The London Interbank Offer Rate rises gradually from its FY16-17 value of 2,4 per cent to a FY23-24 value of

3 per cent.

(B) Basic Malawi macroeconomic variables (4‑10):

(4) The growth rate of real GDP gradually increases from 3.4 per cent in FY16-17 to 5.5 per cent in FY23-24

(5) The GDP deflator grows at the same rate as the year-average consumer price index.

67


(6) The December-December growth rate of the consumer price index (CPI) declines gradually from 11.3 per cent in

FY16-17 to 8 per cent in FY23-24.

(7) The December-December growth rate of the U.S. dollar exchange rate grows at a rate (approximately) equal to

the differential of the Rwanda and the world U.S.-dollar inflation rates.

(8) The overall population growth rate slowly decrease from 3 in FY16-17 to 2,7 per cent inFY23-24

(9) The population under fifteen growth rate slowly decrease from 2,2 in FY16-17 to 1,8 per cent inFY23-24

(10) The headcount poverty incidence declines gradually from 56,2 per cent in FY16-17 to 50 per cent in FY23-24.

Exports and imports of goods and non-factor services (11‑17):

(11) The export volume grows at the same rate as the world trade volume.

(12) Export prices grow at the same rate as the world U.S.-dollar price level.

(13) The import volume grows at the same rate as real GDP.

(14) Import prices grow at the same rate as the world U.S.-dollar price level.

(15) Non-factor service exports grow at a rate equal to the combined growth rates of world trade volume and the

world US$ price level.

(16) Non-factor service imports excluding insurance and freight charges for merchandise imports grow at a rate

equal to the combined growth rates of world trade volume and the world US$ price level.

(17) Insurance and freight charges for decline gradually from 12 per cent of the value of merchandise imports in

FY16-17 to 12 per cent in FY23-24.

National-expenditure accounts (18‑20):

(18) Consumption expenditure by government entities outside the central government remains at 10599 per cent of

GDP over the projection period.

(19) Gross fixed capital formation remains at 162 per cent of GDP.

(20) The net increase in inventory stocks remains at 0 per cent over the projection period.

(C) Tax and non-tax revenue (21‑31):

(21) The elasticity of personal income tax with respect to nominal GDP declines from 1.1 in FY17-18 to 1 in FY23-

24.

(22) The elasticity of company-tax revenue with respect to nominal GDP declines from 1.1 in FY17-18 to 1 in FY23-

24.

(23) The elasticity of other income-tax revenue with respect to nominal GDP declines from 1.1 in FY17-18 to 1 in

FY23-24.

(24) The elasticity of customs revenue with respect to merchandise-imports value will remain at the value of 1 over

the projection years

(25) The elasticity of excise revenue with respect to nominal GDP declines from 1.1 in FY17-18 to 1 in FY23-24.

(26) The elasticity of export-duty revenue with respect to export value increases from 1.1 in FY17-18 to 1 in FY23-

24.

(27) The internal value-added tax rate remains unchanged at 16.5 per cent.

(28) The internal value-added tax collection efficiency increases gradually from 19.2 per cent in FY17-18 to 22.4 per

cent in FY23-24

(29) The import-based value-added tax rate remains at 16.5 per cent.

68


(30) The import-based value-added tax collection efficiency increases gradually from 47.3 per cent in FY17-18 to

55.3 per cent in FY23-24

(31) The elasticity of central-government non-tax revenue with respect to nominal GDP remains at 1 over the

projected years.

(D) External grants to the government (32‑33):

(32) Central-government external grants for current expenditure slowly decline from 1.4 per cent of GDP in FY16-17

to 0.5 per cent of GDP in FY23-24

(33) Central-government external grants for capital expenditure slowly decline from 1.9 per cent of GDP in FY16-17

to 0.5 per cent of GDP in FY23-24

(E) Government expenditure in the child-focused and non-child-focused categories (34‑55):

(E.1) For non-interest recurrent expenditure,

(E.1.a) In the education sector,

(34) The staff size grows at the same rate as the number of children.

(35) Staff salaries grow at a rate equal to the growth rate of per-capita nominal GDP.

(36) Expenditure on current goods and services grows at a rate equal to the combined growth rates of the year-

average CPI and the sectoral staff size.

(37) Expenditure on non-staff recurrent expenditure excluding current goods and services grows at a rate equal to

the combined growth rates of the year-average CPI and the number of children.

(E.1.b) In the health sector,

(38) The staff size grows at the same rate as the population.

(39) Staff salaries grow at a rate equal to the growth rate of per-capita nominal GDP.




the combined growth rates of the year-average CPI and the population growth rate.

(E.1.c) In the social-protection sector,

(42) Central-government recurrent expenditure grows at a rate equal to the combined growth rates of the year-

average CPI and the population.

(E.1.f) In the non-child-focused expenditure sectors,

(47) The staff size grow at the same rate as the population.

(48) Staff salaries grow at a rate equal to the growth rate of per-capita nominal GDP




the combined growth rates of the year-average CPI and the population growth rate.

(E.2) For non-recurrent expenditure, over the projection years,

(51) Education non-recurrent central-government expenditure remain at the FY16-17 value of 1.3 over the projection

years.

(52) Health non-recurrent central-government expenditure remain at the FY16-17 value of 0.8 per cent of GDP over

the projection years.

(53) Social-protection non-recurrent central-government expenditure remain at the FY16-17 value of 0.1 per cent of

GDP over the projection years.

69


(55) Non-child-focused non-recurrent central government expenditure increases gradually from the FY16-17 value

of 4 per cent of GDP to a FY23-24 value of 5.5 per cent of GDP.

(F) For external and internal debt (56‑60):

(56) Average interest rates on the previous year’s year-end external debt stock increase (decrease) with LIBOR.

(57) Average interest rates on the previous year’s year-end internal debt stock increases gradually from 22,9 per

cent in FY16-17 to 24,3 per cent in FY23-24.

(58) External-debt repayments remain at 2.1 per cent of the preceding year’s year-end external-debt stock over the

projection period

(59) External-debt repayments gradually decreases from 3 per cent of GDP in FY16-17 to 2.5 per cent of GDP in

FY23-24

(60) External-debt disbursements in each projection year amount to 48.9 per cent of total non-recurrent expenditure.

Table 21: Assumptions for the base scenario

FY

16-17

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

(A) EXTERNAL'STATE-OF-THE-WORLD' VARIABLES:

Growth rates:

*World trade volume 0.06 0.06 0.06 0.06 0.05 0.05 0.05 0.05

**World U.S.-dollar price level 0.04 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Average world U.S.-dollar oil price

(US$/bbl.)

-0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Average world U.S.-dollar copper price

(US$/MT)

0.00 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Interest rates:

London Interbank Offer Rate (LIBOR) 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03

(B) BASIC MACROECONOMIC VARIABLES:

Growth rates:

Gross domestic product (national

currency - millions)

0.21 0.09 0.14 0.15 0.15 0.15 0.15 0.14

Gross domestic product at 216 prices

and exchange rate (US$ million)

0.03 0.04 0.04 0.04 0.05 0.05 0.05 0.06

GDP deflator 0.17 0.05 0.10 0.10 0.10 0.09 0.09 0.08

Consumer prices (year-average) 0.18 0.05 0.10 0.10 0.10 0.09 0.09 0.08

Consumer prices (December) 0.11 0.11 0.10 0.10 0.09 0.09 0.08 0.08

Exchange rate (year-average) 0.16 0.02 0.06 0.07 0.07 0.00 0.00 0.00

Exchange rate (December) 0.02 0.07 0.07 0.07 0.07 0.05 0.05 0.05

Population (millions) 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Population under fifteen (millions) 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02

Population in poverty -0.02 0.03 0.03 0.03 0.07 0.05 0.05 0.05

Headcount poverty incidence 0.56 0.54 0.52 0.50 0.50 0.50 0.50 0.50

Growth rates (US$ million):

Merchandise exports: -0.09 0.09 0.09 0.08 0.08 0.08 0.08 0.08

Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05

Copper exports: -0.09 0.09 0.09 0.08 0.08 0.08 0.08 0.08

70


FY

16-17

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05

Non-copper exports: 0.10 0.09 0.09 0.08 0.07 0.10 0.10 0.08

Unit value 0.04 0.03 0.03 0.03 0.02 0.04 0.04 0.03

Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05

Merchandise imports: -0.19 0.07 0.07 0.07 0.07 0.07 0.05 0.06

Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Volume 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.05

Oil imports: -0.11 0.07 0.07 0.07 0.07 0.07 0.08 0.08

Unit value -0.14 0.03 0.03 0.03 0.03 0.02 0.02 0.02

Volume 0.03 0.04 0.04 0.04 0.05 0.05 0.05 0.06

Non-oil imports: 0.07 0.07 0.07 0.07 0.07 0.09 0.09 0.08

Unit value 0.04 0.03 0.03 0.03 0.02 0.04 0.04 0.03

Volume 0.03 0.04 0.04 0.04 0.05 0.05 0.05 0.06

Growth rates:

Non-factor services receipts 0.10 0.09 0.09 0.08 0.08 0.07 0.07 0.07

Non-factor services payments,

excluding merchandise-imports

insurance and freight

0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.08

Ratios:

Ratio, insurance and freight

costs/merchandise imports value

0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12

Incremental capital-output ratio 4371.6

4

4047.9

6

3768.

17

3523.9

0

3308.7

9

3117.9

3

2947.4

2

2947.4

2

Per cent of GDP:

Consumption expenditure by

governments excl. central government

105.99 105.99 105.9

9

105.99 105.99 105.99 105.99 105.99

Gross fixed capital formation 162.11 162.11 162.1

1

162.11 162.11 162.11 162.11 162.11

Net increase in inventory stocks

GENERAL-GOVERNMENT FINANCIAL ACCOUNTS:

Tax and non-tax revenue (excl. external grants) (+):

(C) TAX REVENUE:

Central government:

Elasticities of...

personal income tax with respect to

nominal GDP

1.99 1.10 1.08 1.07 1.05 1.03 1.02 1.00

company-tax revenue with respect to

nominal GDP

1.99 1.10 1.08 1.07 1.05 1.03 1.02 1.00

other income-tax revenue with respect

to nominal GDP

1.99 1.10 1.08 1.07 1.05 1.03 1.02 1.00

customs revenue with respect to

merchandise-imports value

1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

excise revenue with respect to nominal

GDP

0.90 1.10 1.08 1.07 1.05 1.03 1.02 1.00

export-duty revenue with respect to

export value

1.48 1.10 1.08 1.07 1.05 1.03 1.02 1.00

71


FY

16-17

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

internal value-added tax revenue with

respect to nominal GDP

1.33 1.00 1.22 1.21 1.20 1.20 1.20 1.20

value-added tax revenue from imports

with respect to the value of

merchandise imports

1.48 1.10 14.05 128.54 -56.32 1.32 1.31 1.32

Value-added tax:

Internal value-added tax:

Internal value-added tax rate 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17

Internal value-added tax collection

efficiency

0.19 0.19 0.20 0.20 0.21 0.21 0.22 0.22

Value-added tax revenue from imports:

External value-added tax rate 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17

External value-added tax collection

efficiency

0.46 0.47 0.49 0.50 0.51 0.53 0.54 0.55

NON-TAX REVENUE:

Elasticities of...

central-government non-tax revenue

with respect to nominal GDP

1 1 1 1 1 1 1 1

(D)External grants (+):

Per cent of GDP:

Central-government external grants for

current expenditure

0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Central-government external grants for

capital expenditure (projects)

0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01

(E) CENTRAL-GOVERNMENT EXPENDITURE:

Growth rates:

Recurrent education expenditure: 0.12 0.07 0.13 0.13 0.13 0.12 0.12 0.12

Central-government recurrent education expenditure:

Education staff 0.32 0.02 0.02 0.02 0.02 0.02 0.02 0.02

Education remuneration rates 0.17 0.06 0.11 0.12 0.12 0.12 0.11 0.11

Non-staff recurrent education

expenditure:

0.02 0.07 0.12 0.13 0.12 0.11 0.11 0.10

Recurrent education expenditure on

goods and services

0.55 0.07 0.12 0.13 0.12 0.11 0.11 0.10

Other non-staff recurrent education

expenditure

0.20 0.07 0.12 0.13 0.12 0.11 0.11 0.10

Recurrent health expenditure: 0.16 0.08 0.13 0.14 0.14 0.13 0.13 0.13

Central-government recurrent health

expenditure:

0.16 0.08 0.13 0.14 0.14 0.13 0.13 0.13

Health staff 0.00 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Health remuneration rates 0.17 0.06 0.11 0.12 0.12 0.12 0.11 0.11

Non-staff recurrent health expenditure: 0.06 0.08 0.13 0.13 0.13 0.13 0.12 0.11

Recurrent health expenditure on

goods and services

0.17 0.08 0.13 0.13 0.13 0.13 0.12 0.11

Other non-staff recurrent health

expenditure

0.21 0.08 0.13 0.13 0.13 0.13 0.12 0.11

72


FY

16-17

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Recurrent social development

expenditure:

-0.43 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Central government recurrent social

development expenditure:

0.00 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Non-child-focused recurrent

expenditure:

0.17 0.05 0.10 0.10 0.10 0.09 0.09 0.08

Central-government non-child-focused

recurrent expenditure:

0.73 0.09 0.14 0.15 0.15 0.15 0.15 0.14

Non-child-focused staff 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Remuneration rates in non-child-

focused sectors

0.17 0.06 0.11 0.12 0.12 0.12 0.11 0.11

Non-staff recurrent non-child-focused

expenditure:

0.00 0.05 0.07 0.08 0.08 0.08 0.07 0.07

Recurrent non-child-focused

expenditure on goods and services

0.48 0.04 0.04 0.03 0.03 0.03 0.03 0.03

Other non-staff recurrent non-child-

focused expenditure

-0.34 0.08 0.13 0.13 0.13 0.13 0.12 0.11

Per cent of GDP:

Non-recurrent education expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Central government non-recurrent

education expenditure:

0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Non-recurrent health expenditure: 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01


health expenditure:

0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Non-recurrent social development

expenditure

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00


social development expenditure:

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Non-child-focused non-recurrent

expenditure:

0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.06

Central-government non-child-focused

non-recurrent expenditure

0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.06

(F) EXTERNAL AND INTERNAL DEBT:

Average interest rates (applied to preceding year-end debt stock):

Average interest rates on external debt 0.01 0.01 0.01 0.02 0.02 0.02 0.02 0.02

Average interest rates on internal debt 0.23 0.23 0.24 0.24 0.24 0.24 0.24 0.24

Per cent of preceding year-end debt stock:

External-debt repayments (-) -0.02 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02

Per cent of GDP:

External-debt disbursements (+): 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03

External-debt disbursements/total non-

recurrent expenditure

0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49

External-debt repayments (-) -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01

Net internal-debt flow (+): 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01

73


Table 22: Projections for the base scenario (per cent of GDP)

FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

(A) Total child-focused non-interest expenditure 8.14 8.04 7.93 7.82 7.70 7.58 7.45

Total education expenditure 4.84 4.79 4.74 4.68 4.60 4.53 4.45

Total health expenditure 2.81 2.80 2.78 2.76 2.74 2.71 2.68

Total social development expenditure 0.48 0.45 0.41 0.39 0.36 0.34 0.32

Child-focused recurrent expenditure: 6.01 5.91 5.79 5.67 5.54 5.41 5.28

Recurrent education expenditure: 3.53 3.48 3.42 3.36 3.29 3.21 3.13

Central government recurrent education expenditure: 3.53 3.48 3.42 3.36 3.29 3.21 3.13

Expenditure on education staff 1.34 1.33 1.32 1.31 1.30 1.29 1.27

Non-staff recurrent education expenditure: 2.19 2.15 2.10 2.05 1.99 1.93 1.86

Recurrent education expenditure on goods and services 1.36 1.33 1.30 1.27 1.23 1.19 1.15

Other non-staff recurrent education expenditure 0.83 0.82 0.80 0.78 0.76 0.73 0.71

Recurrent health expenditure: 2.05 2.04 2.02 2.00 1.98 1.95 1.92

Central government recurrent health expenditure: 2.05 2.04 2.02 2.00 1.98 1.95 1.92

Expenditure on health staff 0.78 0.78 0.78 0.78 0.78 0.78 0.78

Non-staff recurrent health expenditure: 1.27 1.26 1.24 1.22 1.20 1.17 1.14

Recurrent health expenditure on goods and services 0.79 0.78 0.77 0.76 0.74 0.73 0.71

Other non-staff recurrent health expenditure 0.48 0.48 0.47 0.46 0.45 0.44 0.43

Recurrent social development expenditure: 0.43 0.39 0.35 0.31 0.28 0.25 0.22

Central government recurrent social development expenditure: 0.43 0.39 0.35 0.31 0.28 0.25 0.22

Child-focused non-recurrent expenditure: 2.12 2.13 2.14 2.15 2.16 2.17 2.18

Non-recurrent education expenditure: 1.32 1.32 1.32 1.32 1.32 1.32 1.32

Central government non-recurrent education expenditure: 1.32 1.32 1.32 1.32 1.32 1.32 1.32

Non-recurrent health expenditure: 0.76 0.76 0.76 0.76 0.76 0.76 0.76

Central government non-recurrent health expenditure: 0.76 0.76 0.76 0.76 0.76 0.76 0.76

Non-recurrent social development expenditure 0.05 0.06 0.07 0.07 0.08 0.09 0.10

Central government non-recurrent social development expenditure: 0.05 0.06 0.07 0.07 0.08 0.09 0.10

(B) Tax and non-tax revenue (excl. external grants) (+): 20.35 20.63 20.89 21.12 21.09 21.04 20.97

Tax revenue: 18.03 18.30 18.56 18.79 18.76 18.72 18.65

Central government tax revenue: 18.03 18.30 18.56 18.79 18.76 18.72 18.65

Income tax: 9.71 9.81 9.90 9.96 10.00 10.02 10.02

Personal income tax 5.05 5.10 5.15 5.18 5.20 5.21 5.21

Company tax: 2.17 2.20 2.22 2.23 2.24 2.24 2.24

Other income tax 2.49 2.51 2.53 2.55 2.56 2.56 2.56

Value-added tax: 6.97 7.15 7.33 7.49 7.47 7.46 7.44

Value-added tax on internal transactions 3.16 3.25 3.34 3.42 3.51 3.60 3.69

Value-added tax on imports 3.81 3.90 3.99 4.07 3.96 3.86 3.75

Customs and excise duties: 1.49 1.49 1.49 1.50 1.44 1.37 1.32

Customs duties 0.89 0.89 0.89 0.88 0.82 0.76 0.70

Excises 0.60 0.60 0.61 0.61 0.61 0.62 0.62

Export duties -0.15 -0.15 -0.15 -0.15 -0.15 -0.14 -0.13

Non-tax revenue (excl. external grants) (+): 2.33 2.33 2.33 2.33 2.33 2.33 2.33

Central government non-tax revenue: 2.33 2.33 2.33 2.33 2.33 2.33 2.33

(C) External grants (+): 2.94 2.62 2.29 1.97 1.64 1.32 1.00

External grants for current expenditure: 1.24 1.12 0.99 0.87 0.75 0.62 0.50

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FY

17-18

FY

18-19

FY

19-20

FY

20-21

FY

21-22

FY

22-23

FY

23-24

Central government external grants for current expenditure: 1.24 1.12 0.99 0.87 0.75 0.62 0.50

External grants for capital expenditure (projects): 1.70 1.50 1.30 1.10 0.90 0.70 0.50

Central government external grants for capital expenditure (projects): 1.70 1.50 1.30 1.10 0.90 0.70 0.50

(D) Total non-child-focused non-interest expenditure (-): -14.83 -14.65 -14.46 -14.31 -14.19 -14.09 -14.00

Non-child-focused recurrent expenditure: -10.54 -10.16 -9.77 -9.42 -9.09 -8.79 -8.50

Central government non-child-focused recurrent expenditure: -10.54 -10.16 -9.77 -9.42 -9.09 -8.79 -8.50

Non-child-focused expenditure on staff -4.24 -4.24 -4.24 -4.24 -4.24 -4.24 -4.24

Non-staff recurrent non-child-focused expenditure: -6.30 -5.92 -5.54 -5.18 -4.86 -4.55 -4.26

Recurrent non-child-focused expenditure on goods and services -3.85 -3.50 -3.14 -2.83 -2.55 -2.30 -2.07

Other non-staff recurrent non-child-focused expenditure -2.45 -2.43 -2.39 -2.35 -2.31 -2.25 -2.20

Non-child-focused non-recurrent expenditure: -4.29 -4.49 -4.69 -4.89 -5.09 -5.30 -5.50

Central government non-child-focused non-recurrent expenditure: -4.29 -4.49 -4.69 -4.89 -5.09 -5.30 -5.50

(E) External-debt disbursements (+): 2.95 2.88 2.80 2.73 2.65 2.58 2.50

External-debt disbursements (+) (US$ millions): 0.18 0.19 0.20 0.21 0.24 0.26 0.29

(F) External debt service (-): -0.97 -1.04 -1.10 -1.10 -1.03 -0.97 -0.89

External interest expenditure (-) -0.35 -0.42 -0.48 -0.48 -0.45 -0.42 -0.37

External interest expenditure (-) (US$ million) -0.02 -0.03 -0.03 -0.04 -0.04 -0.04 -0.04

External debt repayments (-) -0.62 -0.62 -0.62 -0.62 -0.58 -0.55 -0.52

External debt repayments (-) (US$ million) -0.04 -0.04 -0.05 -0.05 -0.05 -0.06 -0.06

(G) Net internal financial flows (incl. internal interest) (+): -2.31 -2.40 -2.49 -2.58 -2.46 -2.31 -2.13

Net internal-debt flow (+): 1.78 1.63 1.43 1.13 1.01 0.93 0.90

Internal-debt disbursements (+) 0.00

Internal debt repayments (-) 0.00

Internal interest expenditure (-) -4.09 -4.03 -3.91 -3.71 -3.47 -3.24 -3.03

Discrepancy (+) 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Projection results alternative scenarios

Scenario 1 considers a gradual increase in domestic and import VAT collection efficiency from 21

per cent and 48 per cent respectively, to 40 and 60 per cent in FY23-24. With these assumptions,

the average FY 17/18-FY 23/24 net internal debt flow would be -0.3 per cent of GDP (compared

with 1.3 per cent of GDP in Scenario 0). The total (external and internal) government debt stock

would conclude in FY 23/24 at 36.1 per cent of GDP (compared with 45.6 per cent in Scenario 0).

The share of child-focused expenditures as per cent of total expenditures would rise from 30.2 per

cent to 36.7 per cent over the next six years. Child-focused expenditures per child would increase

from $72.7 to $96.5 (in constant prices) over the time period under investigation. The fiscal

implications under this scenario are much more promising as the government could ‘afford’ the

increase in child-focused expenditures. The fiscal gap – both as a percentage of total expenditures

and as a percentage of GDP – would be closed between FY2017/2018 and FY2023/2024.

Moreover, average FY 17/18-FY 23/24 net internal debt flow would be -0.3 per cent of GDP

(compared with 1.3 per cent of GDP in Scenario 0).

Scenario 2 considers the case in which the government would reduce the rate of growth of

expenditures allocated to non-child-focused sectors by approximately one fourth. The feasibility of

this scenario depends to a large extent on whether the government acknowledges the high

potential of inclusive economic growth through the shift of resources away from non-child-focused

sectors to child-focused sectors. Child-focused expenditures as a percentage of total expenditures

would rise from 30.9 per cent in FY2017/2018 to 42.2 per cent in FY2023/2024. The fiscal

75


implications of the government’s reprioritization of resources away from non-child-focused sectors

to child-focused sectors has positive fiscal implications as the fiscal gap would decrease from 1.4

per cent to minus 7.2 per cent between FY2017/2018 and FY2023/24 when measured as a

percentage of total expenditures, and from 1.4 per cent to -1.6 per cent over the same time period

when measured as a percentage of GDP. Malawi’s fiscal deficit would also be reduced from almost

-3.8 percent to -0.4 per cent. The average FY 17/18-FY 23/24 net internal debt flow amounts to -0.2

per cent of GDP which is 1.5 percentage points lower compared to the base scenario. The total

(external and internal) government debt stock would reach 37.5 per cent of GDP in FY 23/24 which

is significantly lower than the total debt stock in the base scenario (44.6 per cent).

Scenario 3 considers a gradual increase in external grants to a total of 4 per cent of GDP

(compared to 2 per cent in the base scenario) in FY2023-2024. With these assumptions, the

average FY 17/18-FY 23/24 net internal debt flow would be 0.2 per cent of GDP (compared with 1.3

per cent of GDP in Scenario 0). The total (external and internal) government debt stock would

conclude in FY 23/24 at 39.5 per cent of GDP (compared with 45.6 per cent in Scenario 0). Based

on the premise that the government of Malawi is able to attract more grants in the future, this

scenario shows that resources can be freed up to fund expenditures in key child-focused sectors

without compromising fiscal sustainability.

Scenario 4 models the future increase of child-focused expenditures that are financed by

concessional debt. In this scenario, the average FY 17/18-FY 23/24 net internal debt flow would be

2.3 per cent of GDP (compared with 1.3 per cent of GDP in Scenario 0). The total (external and

internal) government debt stock would conclude in FY 23/24 at 53.3 per cent of GDP (compared

with 45.6 per cent in Scenario 0). This scenario shows that resources to fund expenditures in child-

focused sectors can be obtained through debt financing, but this would put pressure on the

country’s fiscal sustainability as debt levels would increase significantly.

Table 23: Scenario results comparison table

Scenario 0 1 2 3 4

Average over projected years

US$ per child child-focused expenditures at 2016 prices and exchange rate

Total child-focused non-interest expenditure: 73.02 82.68 82.68 82.68 82.68

Total education expenditure 43.59 44.16 44.16 44.16 44.16

Total health expenditure 25.77 33.17 33.17 33.17 33.17

Total social development expenditure 3.66 5.35 5.35 5.35 5.35

Per cent of GDP

Central government surplus: -3.39 -1.86 -1.93 -2.30 -4.69

Central government primary surplus 0.67 1.89 1.60 1.39 -0.33

Tax revenue 18.54 20.76 18.54 18.54 18.54

Other revenue 2.33 2.33 2.33 2.33 2.33

External grants 1.97 1.97 1.97 3.69 1.97

Total non-interest expenditure (-) -22.17 -23.17 -21.24 -23.17 -23.17

Central government external and internal interest -4.06 -3.75 -3.53 -3.69 -4.37

Total child-focused non-interest expenditure: 7.81 8.81 8.81 8.81 8.81

Total education expenditure 4.66 4.72 4.72 4.72 4.72

Total health expenditure 2.75 3.52 3.52 3.52 3.52

Total social development expenditure 0.39 0.57 0.57 0.57 0.57

Net financing (gross of interest): 3.39 1.86 1.93 2.30 4.69

Net external financing 2.14 2.14 2.14 2.14 2.35

Net internal financing 1.26 -0.28 -0.21 0.16 2.34

Final-year central-government debt stock: 45.56 36.14 37.55 39.48 53.26

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Scenario 0 1 2 3 4

Final-year central-government external-debt stock 32.16 32.16 32.16 32.16 33.51

Final-year central-government internal-debt stock 13.40 3.98 5.39 7.32 19.75

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