Malawi is facing a significant macro-fiscal crisis characterized by high fiscal deficits, unsustainable debt levels, and sluggish economic growth. According to the newly released Malawi Public Finance Review (PFR) titled “Restoring Stability, Rebuilding Trust,” more than half of the country’s domestic revenues are being used for debt service. This situation is limiting spending on essential social programs and infrastructure.
The report outlines that exchange-rate distortions and quasi-fiscal activities—such as below-cost tariffs, inadequate revenue collection, and losses in public non-financial corporations—are putting additional strain on both the budget and the financial sector.
Key findings from the PFR include:
- Malawi’s fiscal deficit is among the highest in Sub-Saharan Africa. It is primarily financed through expensive domestic borrowing, which restricts private sector credit needed for investment and job creation.
- More than 90% of domestic revenue is spent on rigid expenditures like wages and interest payments. This has led to underinvestment in human capital and infrastructure.
- Despite recent tax reforms, Malawi’s revenue generation remains insufficient due to a fragile tax base, frequent policy changes, administrative weaknesses, numerous exemptions, and incentives that create market distortions.
- State-Owned Enterprises (SOEs), particularly those operating in energy and water sectors, continue to incur losses due to weak governance practices. Their reliance on government transfers increases fiscal risk while political interference further complicates their mandates.
- The mining sector could potentially provide annual revenues between $200 million and $500 million by the early 2030s if all current projects are completed as planned. However, this will require stronger institutions focused on contract negotiation and improved revenue administration.
The PFR offers several recommendations for addressing these challenges:
- Implementing a multi-year plan aimed at achieving a primary surplus within two years to put public debt on a downward path;
- Enhancing expenditure efficiency by rationalizing wage bills while safeguarding critical spending on social sectors;
- Reforming tax policies by reducing VAT exemptions, expanding digital systems for taxation purposes, taxing wealth more effectively, introducing health-related excise taxes where appropriate, and making income taxes more progressive;
- Strengthening SOE governance through modern corporate practices including enterprise risk management reporting;
- Improving transparency in revenue management to reduce leakages.
Firas Raad, World Bank Group Country Manager for Malawi stated: “A comprehensive fiscal consolidation strategy is essential to restore sustainability, support inclusive growth, and achieve ‘Malawi Vision 2063’. This means boosting revenue through improvements in tax policy and administration while rationalizing and enhancing the efficiency and effectiveness of public expenditure. These measures are designed to support the path towards medium-term fiscal sustainability and reduce Malawi’s debt distress risk over the longer term.”
The report concludes that stabilizing public finances will require decisive reforms implemented in sequence so that immediate results can be achieved alongside longer-term structural improvements. It also emphasizes that any reform process must protect low-income households as well as vital services to ensure credibility and social sustainability.