1 Fiscal slippages, which may lead to increased domestic borrowing, are likely unless the Government enhances fiscal discipline by ministries, departments and agencies (MDAs).

Recommendation: Strengthen internal controls by requiring expenditure reports before authorizing new funding so that MDAs, including parastatals, spend according to allocated budgets.

2 Fiscal space to finance investments in human capital and children is constrained, with tax and non-tax revenues performing below expectations.

Recommendation: Given restricted fiscal space, the Government is encouraged to focus on improving quality of spending alongside efforts to strengthen efficiency and transparency in domestic resource mobilization.

3 Even though transfers to District Councils have increased in Fiscal Year (FY) 2018/19 compared to the previous year, the allocations are insufficient to meet financial demands for other recurrent transactions (ORT) such as maintenance of assets, especially for water, sanitation and hygiene (WASH), primary and secondary education and health sectors.

Recommendation: The Government should revise the formula used to decide on ORT transfers to District Councils, with a view to increase the share of the national budget transferred to District Councils for ORT budgets, to meet growing financial demands in social sectors.

4 Malawi’s current budget transparency score (26/100), based on the 2017 Open Budget Survey (OBS), is a significant drop from 65/100 in 2015.

Recommendation: The Government should consistently publish the Pre-Budget Statement, an Enacted Budget, In-Year Reports, Audit Report and a Year-End Report online and also come up with a Citizens’ Budget in order to improve public access to budget information.

5 Huge variances between allocations and expenditures for development projects persist in several sectors which could be suggestive of challenges with regards to procurement, project management and absorption capacity.

Recommendation: The Government is requested to investigate and address any possible inefficiencies, absorption capacity challenges, and red-tape in procurement and management of capital projects.

6 Malawi is experiencing a demographic boom, with the population growing at an average rate of 2.9% since 2008, which requires urgent investments to develop the country’s human capital.

Recommendation: The Government should reorient its investments to give greater focus on children and young people, if the country intends to benefit from the demographic boom.

MALAWI

2018/19 National Budget Brief

© UNICEF/Schermbrucker

Making Government Budgets Work for Children in Malawi

January 2019

Key messages and recommendations

The analysis in this brief is based on the review of several budget documents including Financial Statements, Appropriation Bills, Detailed Budget Estimates, and Program Based Budgets (PBBs). The analysis also made use of data from the World Bank, International Monetary Fund (IMF), Reserve Bank of Malawi (RBM) and the International Budget Partnership (IBP). Reports from several stakeholders including MDAs and donors also augmented the analysis.

2

PART 1 INTRODUCTION

This Brief is one of several that explore the extent to which the national Government budget framework has created a conducive environment for the realization of children’s rights in Malawi. The brief starts by analyzing the extent to which the macro-economic environment contributes to the progressive realization of children’s rights. It also analyses the size and composition of social sector budget allocations for fiscal year 2018/19. The main objective of the brief is to offer insights into the efficiency, effectiveness, equity, and adequacy of Government spending.

N AT I O N A L

PART 2 MACRO-ECONOMIC CONTEXT

The 2018-19 National Budget was developed in a context with multiple factors at play. First, the 2018/19 budget is the fifth and final budget before tripartite elections in 2019. Second, the budget was drafted at a time when the economy was experiencing a modest rebound. The Government intends to sustain and entrench macroeconomic stability in the current year. Lastly, considering that substantial donor contributions are now off-budget, the Government is committed to creating an enabling environment for the resumption of budget support by enhancing fiscal transparency and accountability in public spending.

The Government expects the economy to grow by 4.1% in 2018. The IMF estimated an economic growth rate in the range of 3% to 5% in 2018, followed by an increase of 6% to 7% over the medium term.1 In the past two years, the Government has, to some degree, successfully stabilized macro-economic performance. Inflation decreased from 18.2% in January 2017 to 9.9% in December 2018. The exchange rate of Malawi Kwacha has remained relatively stable at around MK725 against the US dollar over the past 12 months.

Despite the rebound, the economy of Malawi is vulnerable to climatic and economic shocks. Due to climate change, droughts and floods have become more frequent, widespread, and intense. Erratic weather conditions and natural disasters have resulted in reduced maize production by 19.4%, from 3.5 million metric tons in the 2016/17 growing season to 2.8 million metric tons in the 2017/18 growing season.2 Due to low agriculture produce, the Malawi Vulnerability Assessment

1 http://www.imf.org/en/News/Articles/2018/02/14/pr1851-imf-staff-reaches-staff-level-agreement-on-malawi?cid=em-COM-123-36626

2 Ministry of Finance, Annual Economic Report, 2018.

Figure 1 GDP Growth in Malawi

Perc

enta

ge %

0

2

4

6

8

10

4.4%4.7%

9.6%

7.6%

8.3%

6.8%

4.8%

1.8%

5.2% 5.7%

2.8%

2.4%

3.2%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

GDP Growth

Source: World Bank, World Development Indicators, 2018

The IMF estimated an economic growth rate in the range of 3% to 5% in 2018, followed by an increase of 6% to 7% over the medium term.

3B U D G E T B R I E F 2 018 / 19

Committee estimates that 3.3 million people will require food assistance during the October 2018 to March 2019 lean season, when food stocks are typically at their lowest. Recurring energy and water crises are also expected to continue, with the potential to adversely affect private sector productivity and consequently Government revenue generation.

Malawi’s economy is less diversified, largely dependent on rain fed agriculture, which accounts for approximately 30.0% of GDP. Services and manufacturing contribute 26% and 10% respectively. Construction industry contribute 2.9%, mining and quarrying 0.8%, forestry and logging 6.7%, and accomodation and food services 2.0%.3 The export base for the economy is very narrow. Economic growth is also affected by slow development infrastructure creation, less developed financial markets and weak but also less diversified investments.

Corruption continues to pose significant risk to national development. In 2017, Malawi scored 31.0% on the Corruption Perception Index, with 0 being highly corrupt and 100 very clean.4 In recent times, post the public finance management scandal, commonly known as cash-gate discovered in 2013, several cases have been brought to the attention of the Anti-Corruption Bureau. These include corruption allegations in the procurement of maize and the MK2.8 billion food rations’ procurement by Malawi Police Service.5

3 World Bank, World Development Indicators, 2018, and Ministry of Finance, Annual Eco-nomic Report, 2018

4 www.transparency.org/malawi5 The Daily Times Newspaper, Thursday, September 13th 2018.

Figure 2 Budget Deficit as a Percentage of GDP in SADC Countries (2017)

4%

2%

0

-2%

-4%

-6%

-8%

Mau

ritiu

s

Mad

agas

car

AngolaDRC

Zombab

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Seych

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Botswan

a

Leso

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Mala

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Eswat

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Moza

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South A

frica

Namib

ia

Zambia

Tanza

nia

Recommended SADC threshold (4%)Country average

Perc

enta

ge (

%)

Source: World Bank, World Development Indicators, 2018

© UNICEF/Noorani

4 N AT I O N A L

poverty line (MK137,428 per year), which is approximately US$0.5 per person per day, based on data from the Integrated Household Survey 4 (IHS4) of 2016/17. However, and partly as a result of social protection programs, ultra-poverty has reduced from 24.5% in 2010/11 to 20.1% in 2016/17, especially in rural areas (from 28.1% to 23.8%).8

8 NSO, IHS4 report.

The Government appears to be pursuing a cautious fiscal policy with regards to public spending on both social and economic sectors. In FY2018/19, the budget (total expenditure and net lending) has been set at MK1.45 trillion, up from MK1.3 trillion in 2017/18. A total of MK335.2 billion has been allocated for the development budget, which is equivalent to 6.5% of GDP. Recurrent expenditure is estimated at MK1.1 trillion, which is 21.7% of GDP. Budget deficit is expected to be 4.7% of GDP in FY2018/19, compared to 3.9% in 2017/18. Despite collecting relatively less in taxes, Malawi has managed to contain its deficit within 4% of GDP as recommended by the Southern African Development Community (SADC). At 3.9% of GDP in 2017, Malawi performed better than Mozambique which registered a deficit to GDP ratio of 4.4% and Tanzania with a deficit to GDP ratio of 6.2% as shown in Figure 2.

Although significant progress has been made in recent years, Malawi continues to face human development challenges. The country was ranked 171 out of 188 countries on the 2018 Human Development Index (HDI), with a value of 0.477. In terms of Human Capital Index (HCI) for 2018, the country ranked 125 out of 157 countries with a value of 0.416. Approximately 70% of employed people work in the agriculture sector.7 About 51.5% of the population live below the national

6 https://www.worldbank.org/en/data/interactive/2018/10/18/human-capital-index-and-com-ponents-2018

7 World Bank, World Development Indicators, 2018

Key Takeaways

Consolidation of policy and public reforms for the sustenance of macroeconomic stability, building on gains made in the two previous years, is crucial for poverty eradication and human capital development.

Unless disaster-risk reduction and shock-responsive policies and plans are implemented, Malawi will continue to be vulnerable to climatic and economic shocks such as recurring energy crisis, floods and dry spells, which worsen volatilities in domestic revenue.

PART 3 SOCIO-ECONOMIC CONTEXT - SITUATION OF CHILDREN IN MALAWI

Since adoption of the Convention on the Rights of the Child (CRC) in 1990, Malawi has made significant progress in improving child wellbeing. Progress has been observed in various areas including child health, nutrition, early childhood development and primary education. Infant mortality went down from 83.5 deaths per 1,000 live births in 2010 to 42 deaths per 1,000 live births in 2017. Under-five mortality also decreased from 104 deaths per 1,000 live births to 63 during the same period. The percentage of women who gave birth in a facility significantly increased from 55% in 2000 to 91% in 2016. Stunting went down from 55% to 37% during the same period.9 Enrolment in early childhood education (ECE) has increased by 13 percentage points from 34% in 2010 to 47% in 2017, which is above most African countries.10 Data from the Education Management Information System (EMIS, 2017) shows that the net enrollment rate for primary school is currently at 88% (87 for boys, 89 for girls), which is one of the highest in the region.

9 Multi-indicator Cluster Survey10 Ministry of Gender, Children, Disability and Social Welfare, ECE Annual Report, 2016.

© UNICEF/Pirozzi

5B U D G E T B R I E F 2 018 / 19

Figure 3 Projected Population Growth in Malawi

Source: UNICEF ESARO calculations based on UNDESA World Population Prospects Key Takeaways

Despite the progress, the majority of children in Malawi live in poverty and their rights are not realized. An estimated 60.5% of children in Malawi are multidimensionally poor (NSO, 2018). Only 38.4% of children transition from primary to secondary school (40.9% for boys and 35.8% for girls), and of these, only 8% move on to tertiary education. Net enrolment rate for secondary school is very low, estimated at 16% in 2017 for both boys and girls (EMIS, 2017). The 2015 Violence against Children Survey reveals striking levels of violence against children, from which they need to be protected, with 20% of females and 15% of males reporting to have experienced one incident of sexual abuse prior to the age of 18. Nearly 25% of all children in Malawi experience multiple forms of violence. Malawi has one of the highest child marriage rates in Southern Africa. By age 18, about one in every two girls are married. Early pregnancies are also rife. About one in three girls will have borne a child by the age of 18.11

Malawi is experiencing a demographic boom, which is likely to affect social service delivery but can be the country’s greatest resource if properly supported through national budgets. On average, one woman bears about five children in her life time. Nearly half (48%) of the Malawian population is under age of 1512 , with 51% under the age of 18, and 60% below the age of 24. The national population has grown at an average rate of 2.9% since 2008. By 2030, Malawi’s child population is projected to increase to about 15 million from approximately 9.6 million in 2018 as shown in Figure 3.13 This demographic boom requires improvements in investments in human capital development especially in the area of health, nutrition and education.

11 Child marriage 47%; child-bearing 29 percent. 2016 Malawi Demographic Health Survey.12 National Statistical Office (NSO) [Malawi] and ICF. 2017. 2015-16 Malawi Demographic and

Health Survey Key Findings. Zomba, Malawi, and Rockville, Maryland, USA. NSO and ICF.13 Source: UNICEF ESARO calculations based on UNDESA World Population Prospects:

2017 Revision (medium variant)

BOX 1 Key Statistics

UNDER-FIVE MORTALITY RATE

42 deaths per 1,000 live births

INFANT MORTALITY RATE

43 deaths per 1,000 live births

PRIMARY NET ENROLLMENT RATE

88%SECONDARY NET

ENROLLMENT

16%YOUTH LITERACY RATE

76%ENROLMENT IN

EARLY CHILDHOOD EDUCATION

47%TRANSITION

FROM PRIMARY TO SECONDARY SCHOOL

37%

MULTIPLE FORMS OF VIOLENCE AGAINST

CHILDREN

25%STUNTING RATE

37.10%UNDERWEIGHT RATE

11.70%HUMAN DEVELOPMENT

INDEX

0.476HUMAN CAPITAL INDEX

0.41INEQUALITY (GINI

COEFICIENT)

0.45 NATIONAL POVERTY

51.5%ULTRA POVERTY

20.1%

80,000,000

70,000,000

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0

0-17 18 and over

Pop

ula

tio

n

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

6 N AT I O N A L

Malawi spends a relatively higher share of its budget on social sectors than its neighbours. Between FY2012/13 and FY2017/18, Malawi spent an average of 9.8% of its total budget on health. This is higher than average spending in two of its neighbours, Mozambique (9.3%) and Tanzania (8.2%). As of 2018, Malawi allocated 9.8% of its total budget to health, which is one percentage point higher than 8.8% allocated by Mozambique. Education spending in Malawi in 2017/18 (19.4%) was higher than spending by Mozambique (18.6%) and Tanzania (17.2%). Latest available data for 2018 shows that Malawi allocated 23.7% of its state budget to education, which is six percentage points higher than 17.3% by Mozambique. The current financial commitment to the WASH sector in Malawi stands at 1.6% of Malawi’s total budget, higher than 1.5% in Mozambique.

PART 4 AGGREGATE SOCIAL SECTOR SPENDING TRENDS

Although, altogether, social spending14 has stagnated in real terms and as a share of total Government budget, budget allocations to education have steadily increased. The Education sector is the top priority of the Government of Malawi, having received the highest budget allocation of 23.7% (MK345 billion). At 23.7% in FY2018/19, the allocation to education has surpassed the 20% minimum set by the Global Partnership for Education (GPE). The education sector allocation grew by 6.26% in real terms from 2017/18 allocation. The Agricultural sector has been receiving the second largest budget share, averaging 14.7% between FY2012/13 and FY2018/19. Debt repayment charges consumes the third largest share at 13.4%. The Health sector has been the fourth top priority for Government. The sector has accounted for an average of 10% of the total budget, which is five percentage points below the 15% Abuja target. Allocations to social welfare15 have averaged 5% of total budget. The WASH sector has been the least funded among the social sectors, receiving an average of 2.1% of the total budget (FY2016/17 to FY2018/19). On average, the aggregated social sector16 has been receiving approximately 36% of the total budget over the period FY2012/13 to FY2018/19.

14 The total social sector is defined as the total of allocations to Education, Health, Social Welfare and WASH sectors.

15 Social Welfare is the sum total of budget allocations to all votes which fall under the Social and Community Affairs Committee in the Parliament of Malawi. These are Ministry of Gender, Children, Disability and Social Welfare (MoGCDSW) (Vote 320) and the Local Development Fund (LDF), Vote 272. Budget allocations to the Ministry of Civic Education and Community Development (MoCECD) -Vote 170, Ministry of Local Government and Rural Development (MoLGRD) – Vote 120, Ministry of Labour, Youth and Sports Develop-ment (MoLYSD)-(Vote 370), and three subvented organisations (Vote 275) namely Kachere Rehabilitation Centre, Malawi Council for the Handicapped (MACOHA) and National Youth Council (NYC).

16 The total social sector is defined as the total of allocations to Education, Health, Social Welfare and WASH sectors.

Key Takeaways

Addressing multi-dimensional child poverty requires deliberate and sustained investments in social sectors such as health, education, nutrition, early childhood development and child protection.

The demographic dividend which may result from a youthful population will be impossible to reap unless the Government improves the quality of its investment in key sectors that matter for children.

© UNICEF/Pirozzi

Figure 4 Social Sector Spending as a Share of Total Budget

Perc

enta

ge (

%)

25

20

15

10

5

0

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Health Education Social WelfareDebt Agriculture

Source: Government Budget Estimates (FY2012/13 to 2018/19)

7B U D G E T B R I E F 2 018 / 19

Although social sector spending (especially education) has modestly increased, the allocation mix within sectors continues to be inequitable. For example, there was a disproportionate increase in budgets for higher education at the expense of ECE and secondary education. In FY2018/19, ECE and secondary education received the lowest share of the education budget at 0.2% and 11% respectively, compared to 48% for basic education.

Figure 5 Health Spending to Total Budget (%) in Malawi vs. Neighbours

Perc

enta

ge (

%)

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0

Mozambique Tanzania Malawi

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Source: Malawi, Mozambique and Tanzania UNICEF Budget Briefs

Figure 6 Education Spending to Total Budget (%) in Malawi vs. Neighbours

Perc

enta

ge (

%)

25

20

15

10

5

0

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Mozambique Tanzania Malawi

Source: Malawi, Mozambique and Tanzania UNICEF Budget Briefs

Key Takeaways

Education and health are top spending priorities of Government.

Given limited fiscal space to increase social sector spending, the focus of Government should be to improve efficiency and effectiveness in expenditures.

© UNICEF/Pirozzi

Total education budget in Malawi in 2017/18 (19.4%) was higher than spending by Mozambique (18.6%) and Tanzania (17.2%).

8 N AT I O N A L

school alone in 2018. There are also plans to increase salaries and wages of civil servants by 25%17. International Finance Institutions such as the IMF and the World Bank have however encouraged the Government to put in place measures to contain the wage bill.18 As a share of GDP, the budget for wages and salaries has increased from 6.5% in FY2017/18 to 7.1% in FY2018/19.

17 2018/19 Budget Statement by the Minister of Finance. 18 The Daily Times Newspaper, Thursday, September 13th 2018

PART 5 COMPOSITION OF GOVERNMENT SPENDING

In FY2018/19, 77% of the national budget has been allocated to recurrent costs. MDAs with a significant share of the development budget include Ministry of Agriculture (20.7%), Road Funds Administration (13.4%) and Ministry of Education (13%). The pie chart in Figure 7 shows composition of Government budget by economic classification.

Over the past five years, wages and salaries have consumed an average of 24.5% of the total Government budget. Out of this, education and health account for the largest share of the budget for wages and salaries. In FY2018/19 MK392 billion has been allocated for wages and salaries, of which MK173 billion will be transfered to Councils. In the current year, the Government has plans to recruit 10,500 teachers and 1,000 medical personnel. The projected number of teachers for recruitment, however, is even lower than 29,676 required to achieve the benchmark for teacher pupil ratio for secondary

Figure 7 Composition of the Government Budget by Economic Classification

Source: Ministry of Finance, Financial Statement, 2018/19

Total Personal Emoluments 22%

41%

19%

17%

Total Other Recurrent Transaction

Total Development

Total Goods and Services

41%

22%

19%

17%

The share of total Government spending going to goods and services marginally increased from 10.2% in FY2016/17 to 10.3% in FY2017/18. Variations were however observed amongst social sectors with regards to expenditures on goods and services. Goods and services accounted for 16.6% of the total health sector allocation in FY2017/18, and 46.5% of the education budget during the same period. As a percentage of GDP, total expenditure on goods and services declined from 5.1% in FY2017/18 to 4.7% in FY2018/19. Allocation to acquisition of fixed assets nominally increased by 11.5% from

Figure 8 Trends in Composition of Government Budget as a% of GDP

Source: Ministry of Finance, Financial Statement (2018/19)

Perc

enta

ge (

%)

0

5

10

15

20

25

2018/192017/182016/17

6.3%

4.8%

4.4%

6.5%

6.5%

5.1%

3.9%

6%

7.1%

4.7%

3.3%

7.4%

Wages and Salaries

Interest on Debt Fixed Assets

Good and Services

9B U D G E T B R I E F 2 018 / 19

PART 6 BUDGET CREDIBILITY AND EXECUTION

Whilst most MDAs fully utilize their ORT budgets, considerable variances between budget estimates and actual outturns have been observed since 2014/15 with regards to development spending. In addition, expenditure overruns on wages and salaries and on interest on debt have been observed. Overruns were particularly high in debt expenditure as shown in Table 1. In FY2017/18 interest on debt witnessed a budget variance of 13.69%. Planned domestic borrowing was exceeded by nearly 15%.

revised figure of MK199.9 billion to MK222.8 billion. Overall, the Government has demonstrated commitment to improving supply of basic services through infrastructure creation.

In FY2018/19, it is forecasted that donors will contribute approximately 16% (about US$318 million) of the national budget. This figure however, only includes contributions which are reported in the national budget and not off-budget expenditures. Majority of donor resources are going to development expenditures in health, WASH, nutrition and livelihoods programs. From FY2014/15 to FY2018/19 the share of development budget by donors averaged 17%. Key sectors for children remain heavily dependent on donors. In the health sector for example, MK19 billion (75%) of the 2018/19 development budget is expected to come from donors, with the remainder (MK6.4 billion) expected to come from Government. Donors are funding 93% of the social cash transfer budget.

Key Takeaways

The decrease in allocations to goods and services may affect delivery of essential services in health, education and other social sectors.

In the short term, due to fiscal space challenges, donor support will be critical in Malawi.

Key sectors concerned with children continue to be heavily dependent on donor support, especially for development costs.

Table 1 Variance Analysis of Planned vs Actual Expenditures (%)19

Budget Line 2014/15 2015/16 2016/17 2017/18

Total expenditure and net lending -4.54 -2.32 -1.13 0.56

Recurrent expenditure 0.84 4.26 -4.16 3.05

Wages and salaries -1.32 1.75 0.09 0.32

Interest on debt 8.39 14.12 -6.06 13.69

Foreign interest on debt -51.28 11.58 -12.25 2.41

Domestic interest on debt 18.28 14.38 -5.58 14.71

Development expenditure -21.42 -23.38 9.57 -7.41

Domestically financed projects (Part II) -27.24 -53.16 -12.63 -22.27

Foreign financed projects (Part I) -19.99 -15.65 12.84 0.00

Education Sector 0.24 -5.68 -0.08 -

Health Sector -26.66 -8.85 4.20 -

Agriculture Sector - -5.39 -1.58 -

Maize Purchase -39.02 203.04 4.25 -

Fertilizer Input Subsidy Program 2.48 -14.08 -10.91 -

Source: MOF, 2018/19 Financial Statement

19 This was computed by dividing the deviation (the difference) of current allocation from previous allocation, by previous allocation figure, expressed as a percentage (multiplied by 100).

© UNICEF/Pirozzi

10 N AT I O N A L

PART 7 DECENTRALIZATION AND SUB-NATIONAL SPENDING

Since FY2017/18, all District Councils have started rolling out program based budgeting (PBB). PBB is an opportunity for District Councils to improve comprehensiveness of local budgets, ensuring program, economic, functional and administrative classification, as required by international practices. It also contributes to improved visibility of budget lines on critical social sector program areas such as early childhood development and child protection, as seen in the 2018/19 PBB for Nsanje District Council. In the past, most social sector budgets were allocated and spent at the central level, with very little going to sub-national levels.

In FY2018/19, MK219 billion will be transferred to local authorities. Out of this amount, MK173 billion is for PE. Approximately 7% (MK16 billion) of the total transfer to local authorities will be for capital projects. As a percentage of the total budget, total transfers to local authorities are about 15%, with ORT taking about 2% of total budget. Out of MK29 billion to be transferred for ORT in FY2018/19, health will get MK8.4 billion, agriculture MK1.5 billion and education MK9.5 billion.

Budget utilization rates and fiscal slippages are not uniform across sectors and ministries. In FY2015/16 and 2016/17 the agriculture sector underspent by nearly 5.4% and 1.6% respectively, compared to 8.9% and 4.2% for health during the same period. All planned resources for health, education and agriculture were however spent in FY2017/18. Variances and spending dynamics within sectors may need further examination. Within the agriculture sector, for example, the Farm Input Subsidy Program was underspent by 10.9% in FY2016/17, with maize purchases being underspent by 4.5%.

Key Takeaways

Variances between planned and actual expenditures are mainly driven by development budgets. The Government may need to examine this trend in order to identify procurement related bottlenecks, inefficiencies and absorption capacity challenges.

If not contained, fiscal slippages may contribute to increased domestic borrowing.

© UNICEF/Pirozzi

The amount to be transferred to the health sector will exclude allocations for procurement of drugs, budgeted at MK14.3 billion in FY2018/19. It is important to note, however, that per-capita budget allocations vary by district. As shown in Figure 9, Likoma followed by Blantyre Rural District Council received the highest per-capita allocations, with Blantyre City Council and Lilongwe City Council getting the lowest.

The Government is moving ahead with devolution of payroll in line with the decentralization drive. In FY2018/19 the Government plans to transfer MK173.5 billion for personnel emoluments up from MK134.4 billion in 2017/18. Total PE transfers amount to 79% of total expected transfers to District Councils, as shown in Figure 10.

Key Takeaways

Transfers to District Councils are mainly for PE and ORT, with majority of development expenditures being centrally allocated.

The introduction of PBB at District level will potentially help improve comprehensiveness of local Government budgets as well as visibility of child focused programs.

11B U D G E T B R I E F 2 018 / 19

30,000

25,000

20,000

15,000

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Figure 9 Per Capita Total District Transfers in FY2018/19

Source: Appropriation Bill 2018/19

Figure 10 Composition of Total Transfers to District Councils

Source: Ministry of Finance (Financial Statement, PBB, Detailed Estimates 2018/19)

Total Personal Emoluments 79%

14%

7%

Total Other Recurrent Transaction

Total Capital

79%

14%

7%

© UNICEF/Pirozzi

12 N AT I O N A L

which will be published in the Government Gazette22. The share of non-tax revenue to total revenue (excluding grants) declined from 13% in FY2014/15 to 8% in FY2017/18. Figure 11 shows trends in tax and non-tax revenue.

Approximately 84% of the National Budget will be financed from domestic resources. Donors are expected to contribute about 16% of the 2018/19 budget. Since FY2013/14, donor support to Malawi is increasingly off-budget, following a huge public finance management scandal discovered in 2013. Donor dependency, especially for development costs, in key sectors supporting the survival, development and protection of children, remains unsustainably high. This threatens long term survival of some interventions.

Although donor support is increasingly off-budget, compared to the period before 2013, the Government expects grants to increase by 18% from a revised estimate of MK177.2 billion in FY2017/18 to MK209.1 billion in FY2018/19. Out of this, dedicated grants are expected to be MK62.7 billion, program grants MK60 billion and project grants MK86.4 billion23. The total amount expected from donors in FY2018/19 includes MK60 billion expected to come from the World Bank, which was not disbursed by September 2018.24

22 Ministry of Finance, Budget Statement, 201823 Dedicated grants are earmarked for specific programs or projects, program grant are for

financing any programs, while project grants are for financing capital projects.24 The Nations Newspaper, Page 2 of September 13th 2018.

PART 8 FINANCING OF THE NATIONAL BUDGET

Fiscal space for Government to increase social sector spending in FY2018/19 is constrained.20 Total revenues and grants for FY2018/19 are estimated at MK1.261 trillion which is only 0.54% real term growth from FY2017/18. This is 12% higher than the revised estimate of MK1.130 trillion for FY2017/18. Tax revenue which is the major source of finance for the Government, is projected to grow by only 7.59%, from MK874 billion in 2017/18 to MK940 billion in FY2018/19. The growth in revenue is however being outpaced by growth in expenditure.

Tax revenue in Malawi is projected to be 18% of GDP in FY2018/19. However, from 2010 to 2016 tax-GDP ratio averaged 15%. This is lower than the sub-Saharan average of 20.3% for the period 2010 to 2016. Malawi’s tax to GDP ratio is the fifth lowest in SADC. It is also lower than the Mozambique’s average between 2010 and 2016 (20.8%) although higher than that of Tanzania (12.3%).

Non-tax revenue 21is projected to grow by 41% from revised estimate of MK79.4 billion in 2017/18 to MK112.2 billion in FY2018/19. The projected rise is attributed to the review of user fees and charges by MDAs. The upward revision is meant to be in line with general increases in prices of goods and services

20 UNICEF, (2018), Fiscal Space for Children: An Analysis of Options in Malawi, Lilongwe, UNICEF Malawi.

21 Comprise of Departmental Receipts, Receipts from parastatals, Storage Levy, and Road Tax

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0

Perc

enta

ges

(%)

Mad

agas

car

Tanza

niaDRC

Angola

Zambia

Mau

ritiu

s

Moza

mbiq

ue

Eswat

ini

Botswan

a

South A

frica

Zimbab

we

Seych

elles

Namib

ia

Leso

tho

Mala

wi

10.012.3 13.0

15.0 15.0 15.8 16.9

20.8 21.324.3

26.127.8

29.9 30.7

40.8

SADC Average

Figure 11 Average Tax to GDP Ratio of SADC Countries (2010 – 2016)

Source: World Bank (2018), World Development Indicators

13B U D G E T B R I E F 2 018 / 19

In the past, the Government included pledges from donors in the budget before conditionalities for disbursement were met. The result is that many of the pledges were not honored. Given the foregoing, the Government is encouraged to include only firmly committed grants in its annual budget to reduce risk of underperformance of grants.

Considering that Malawi is amongst least developed countries in the world, in the short-to medium term, donor support, whether pooled or discrete, will be required. The Government is therefore encouraged to ramp up support from donors in order to increase investments in critical social sectors. The Government can 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.25

25 UNICEF, (2018), Fiscal Space for Children: An Analysis of Options in Malawi, Lilongwe, UNICEF Malawi.

Figure 12 Trends in Domestic Revenue (2014-2018)

Source: Annual Economic Report, 2017; 2018/19 Financial Statement

MK

bill

ion

s

0

200

400

600

800

1,000

Non-tax revenue Tax revenue

2018/192017/18 2016/172015/16

79

564

940

1128470

755874

Figure 13 Composition of Government Income (FY2018/19)

Tax Revenue 75%

9%

5%

5%

Non-Tax Revenue

Program Grants

Dedicated Grants

7%Project Grants

41%

7%

9%

5%

5%

Source: MOF, Financial Statement, 2018/19

Since FY2013/14 donor support to Malawi is increasingly off-budget, following a huge public finance management scandal discovered in 2013.

© UNICEF/Pirozzi

14 N AT I O N A L

Although the stock of Malawi’s current debt situation is sustainable (according to the IMF), there is risk that rising domestic borrowing will crowd out private borrowing and social sector spending. By December 2017, the total public debt (TPD) amounted to MK2.7 trillion, which is equivalent to 55% of GDP. External debt account for 29% (MK1.466 trillion) of GDP. Government borrowing is expected to increase by 32.3% from the MK183.6 billion in FY2017/18 to MK242.9 billion in FY2018/19. Whereas foreign borrowing declined by 56.3% from the revised estimate of 2017/18, domestic borrowing is expected to increase by 473.6% from MK30.7 billion in the revised 2017/18 to MK176.1 billion in FY2018/19. The share of public debt charges alone (MK182.9 billion) is equivalent to 12.6% of the authorized budget, up from 12.1% in FY2017/18. The amount of money spent on interest payments on debt is 486% of the total spending on secondary education.

Key Takeaways

Recognizing fiscal space constraints, in the short-term, the Government should ramp up support from donors to finance crucial social sector expenditures such as education, health, WASH and child protection.

Although the debt situation in Malawi is sustainable, the Government should take measures to contain domestic borrowing, which has remarkably increased in the past year.

Non-tax revenue share of total revenue continues to decline, an issue that Government should investigate.

Improving efficiency of collection of tax and non-tax revenue is critical for Government to increase domestic resources. For example, the Government should ensure that MDAs collect and transmit all possible revenues.

© UNICEF/Noorani

The Government is encouraged to ramp up support from donors in order to increase investments in critical social sectors.

15B U D G E T B R I E F 2 018 / 19

challenges were found to be relevant in the health sector, in addition to procurement related bottlenecks as well as weak financial reporting and accountability for health expenditures. To address these inefficiencies, the IMF has recommended improvements in budget transparency, review of allocation mix within sectors, strengthening of program based budgets as well as front-line service delivery systems, among other measures.27

c) Performance of Parastatals

The performance of parastatals and subvented organizations, with regards to revenue generation, is an issue that requires the attention of Government. If not carefully addressed, parastatals may end up draining much needed public resources without corresponding returns. In FY2017/18 the Government bailed out ARDMAC to the tune of MK45 billion. Such bailouts, given limited fiscal space, may increase the budget deficit. They may also crowd out social sector spending.

d) Fiscal Oversight

The legislature in Malawi plays a crucial role in public finance management. Accordingly, the establishment of the Parliamentary Budget Office is a welcome development to improve the capacity of Parliament to analyze and interpret Government budgets. If this structure is to add value, there is need for the Parliament to allocate adequate human, financial and technical resources towards its implementation.

27 IMF, (2018), Selected Issues Paper- Eefficiency of public spending on health and educa-tion in Malawi, IMF & UNICEF Malawi.

PART 9 PUBLIC FINANCE MANAGEMENT ISSUES

a) Budget Transparency

Malawi’s current budget transparency score (26/100) based on the 2017 Open Budget Survey (OBS) is a significant drop from 65/100 in 2015. To improve its budget transparency score, the International Budget Partnership has recommended that the Government should consistently publish a Pre-Budget Statement, an Enacted Budget, In-Year Reports, Audit Report, Year-End Report and a Citizens’ Budget online. It is encouraging to note, however, that by end of October 2018, the Government had published most of the above documents on the Ministry of Finance website. Public participation in public budgeting is however still significantly low, rated 15/100 in the same year.26

b) Efficiency and Effectiveness of Expenditures

A key challenge for the Government is to improve the efficiency of spending. A selected issues paper produced by the IMF jointly with UNICEF in 2018, showed that there is room for the Government to improve efficiency of education and health spending. The paper observed that inefficiencies in the education sector arise from poor allocation mix, insufficient inputs across multiple indicators (trained teachers, text books, classrooms etc), low teacher morale, absenteeism, and limited professional development of teachers. Many of the above

26 See Malawi, Summary Open Budget Survey Report (2017).

Figure 14 Budget Transparency in Malawi in Relation to Neighbors

Source: International Budget Partnership, Open Budget Survey, 2017

Transparency

Global Average

South Africa Zambia

Mozambique

Malawi

0

20

40

60

80

100Participation

© UNICEF/Noorani

16 N AT I O N A L

ANNEX 1 MALAWI BUDGET CALENDAR

Month Key Activities and Outputs

May • Budget Presentation• Budget Approval• Master cash flow development

June • Cluster Committees • Public Sector Investment Program project monitoring• 1st Quarterly financial report

July • Annual reconciliation of previous year funding figures.

August • Annual debt and Aid report produced

September • 1st quarterly cash-flow approved

October • Budget Policy Framework Paper (BPFP) (mid-year review)• Donor’s funding commitments for the financial year established.• Implementing agencies send their Public Sector Investment Programs (PSIP) Project proposals for appraisal.• Preliminary GDP and Revenue Forecast.

November • Medium term Economic and Fiscal Policy Statement prepared.

December • Medium term Economic and Fiscal Policy Statement presented to cabinet.• National Audit results presented to parliament.• BPFP reviewed by cabinet.

January • Debt and aid half yearly report.• Indicative ceilings to MDAs.• Revised sector ceilings.

February • Budget framework finalised.• Mid-Year Budget Reviews.

March • Budget hearings.• PSIP approved by the president.• Aid commitments confirmed.• MDAs submit budget estimates

April • Budget consolidation • MDAs submit cash-flow forecasts• Economic and Fiscal Statement presented to National assembly

Source: Ministry of Finance, Budget Calendar

17B U D G E T B R I E F 2 018 / 19

ANNEX 2 DEFINITION OF KEY TERMS

Fiscal Policy Broad guidelines by the Government on revenue generation and expenditure in order to influence development processes and macroeconomic outcomes such as economic growth.

Fiscal Space The budgetary room that a Government has to increase spending on a specific program without affecting existing commitments or compromising its financial sustainability.

Gross Domestic Product The total value of goods and services produced within a country in a given period, usually a year.

Nominal Increase in budget Positive change in budgets which do not take inflation into consideration.

Off budget Expenditure Expenditures undertaken by the Government that are not routed through consolidated fund of the state and which are not accounted for in the budget documents.

Other Recurrent Transactions Items such as office supplies, fuel, utilities, routine maintenance and the acquisition of equipment required repeatedly.

Part I Development Budget Development Budget financed by external sources.

Part II Development Budget Development Budget financed by domestic resources.

Per Capita Expenditure Expenditure per person, if the total amount spent was evenly distributed to the entire population.

Personnel Emoluments (PE) Spending on wages and allowances.

Programme Based Budget Is a budget formulated based on program goals and expected results to be achieved over a given period.

Real Increase in budgets Positive change in budgets that takes inflation into consideration.

ACKNOWLEDGEMENTSThis budget brief was produced by Mphatso Elias Ackim, Bob Libert Muchabaiwa and Kelvin Mutambirwa with guidance from Beatrice Targa. Valuable comments were received from Matthew Cummins and Jean Dupraz from the East and Southern African Regional Office.

For more information, contact:

Beatrice TargaChief of Social Policy

btarga@unicef.org

@MalawiUNICEF

www.unicef.org/malawi

UNICEF MalawiPO Box 30375Lilongwe, Malawi.Tel: +265 (0)1 770 770Email: lilongwe@unicef.org