Malawi at a Crossroads: Tackling Economic Fragility in a Shrinking Aid Landscape

Photo by WFP/Giulio d'Adamo

Watching our economy navigate the most severe crisis in a generation, one believes we have reached a point where the choices we make over the next two to three years will determine whether Malawi stabilizes and grows or slides into prolonged stagnation. The comforting era of generous, predictable aid is fading. Donor budget support has become episodic and largely off-budget since the 2013 Cashgate scandal, and while grants spiked during COVID‑19 and subsequent shocks, the World Bank shows they are volatile and structurally lower than a decade ago. In the same period, our fiscal deficits have widened, public debt has escalated, and the combination of monetary financing and a misaligned foreign exchange regime has entrenched inflation and undermined confidence (World Bank, Malawi Public Finance Review, 2025). The IMF’s joint Debt Sustainability Analysis with the World Bank classifies Malawi as in debt distress, with the public debt ratio rising to about 87 percent of GDP in 2024, and debt service absorbing more than half of domestic revenues (World Bank/IMF DSA, 2025). In short, easy money is gone, buffers are thin, and the old development model will no longer carry us.

What this shrinking aid environment exposes is a deeper structural problem: we have allowed recurrent spending to outrun our revenue capacity and have financed the gap with expensive domestic borrowing. Between FY2011/12 and FY2024/25, total expenditure doubled from 16 percent to roughly 31 percent of GDP, but the composition tells the real story. Rigid items like wages, interest, pensions and statutory transfers, now absorb roughly 80 percent of domestic revenues, leaving very little room for development spending that would lift productivity and growth. The wage bill has more than doubled as a share of GDP since the early 2000s and sits above 6 percent, accompanied by a public sector wage premium of around 49 percent - one of the highest in Sub‑Saharan Africa - while interest payments alone exceeded 7 percent of GDP in FY2024/25 (World Bank, 2025). The 2024 OECD’s Revenue Statistics in Africa and African Development Bank’s (AfDB) recent outlook (also 2024) both underline the same constraint from a comparative perspective: countries that spend at these levels without commensurate domestic revenue mobilization invariably face crowding out of priority investments and heightened debt vulnerability.

The financing of our deficits has compounded these pressures. Domestic borrowing at double‑digit nominal rates has raised costs and choked private credit. The Reserve Bank of Malawi, pressured by fiscal dominance, has intermittently resorted to monetary financing, which has fueled inflation and complicated exchange‑rate management. The official exchange rate has been kept overvalued through rationing and surrender requirements on exporters, effectively taxing export proceeds while subsidizing importers fortunate enough to secure official forex. Reserves have fallen to less than one month of import cover; the parallel market premium has repeatedly exceeded 150 percent throughout 2024–25. Losses from the RBM’s forex operations were so substantial, hitting MWK 200.4 billion in 2022 and MWK 708.7 billion in 2023 such that recapitalization through promissory notes became necessary, with downstream fiscal consequences according to the World Bank (2025). These losses are not abstract accounting entries; they represent foregone fiscal space that could have funded classrooms, clinics, feeder roads and water systems.

The distortions spill beyond the Reserve Bank. Fuel subsidies, driven primarily by the exchange‑rate misalignment and the inconsistent application of the Automatic Price Adjustment Formula, created arrears for oil marketing companies and depleted the Price Stabilization Fund. The World Bank’s distributional analysis shows that the richest quintile captures the bulk of the benefits, making these implicit subsidies both expensive and regressive. Quasi‑fiscal activities (QFAs) in utilities have piled on further liabilities. For instance, ESCOM’s under‑recovery of costs, arrears and technical losses alone represent sustained fiscal risks of the order of 1–2 percent of GDP. Together, these dynamics mean scarce foreign exchange is misallocated as too much is allocated to fuel and emergency generation, while tradables, agriculture value chains and industry struggle to access inputs.

Against that backdrop, there are three structural fault lines we must tackle with urgency and discipline. The first is expenditure rigidity and inefficiency. Malawi will not regain fiscal space unless we contain the wage bill in real terms, institute targeted hiring freezes outside frontline education and health, and integrate payroll, HR and pensions through IFMIS to eliminate ghost workers and enforce audit trails. That is if politically appointed school teachers and low-ranking public workers, hired in their thousands, can be tamed. Malawi’s own audits and payroll diagnostics point to non‑trivial savings from cleaning the payroll and rationalizing allowances, which have grown to roughly one‑fifth of the wage bill when facilitative allowances are included.

In parallel, we should complete the e‑procurement (e‑GP) rollout, standardize supplier performance evaluation, and end sole reliance on “lowest evaluated bid” when it demonstrably produces non‑delivery or inflated final costs. The World Bank estimates that full e‑GP adoption and PIM discipline, comprising rigorous appraisal, pruning idle projects, and prioritizing maintenance, can yield savings approaching 2–3 percent of GDP. These are not cosmetic reforms; they are the difference between keeping development spending afloat and allowing it to drown under recurrent pressures.

The second fault line is revenue underperformance. Malawi’s tax‑to‑GDP ratio has climbed to nearly 15 percent but remains short of the 17 percent target in the Domestic Resource Mobilization Strategy. The structure is progressive as PIT collections are comparatively strong, yet VAT efficiency is low due to extensive exemptions and zero‑rating. The IMF and World Bank both conclude we can raise between 1.4 and 2.0 percent of GDP by removing exemptions for privileged persons and non‑food items and a further 0.2–0.4 percent of GDP by applying the standard VAT rate to petroleum products, with appropriate safeguards for poor households who are affected indirectly via transport and food prices. Digitalization is a force multiplier. The planned Electronic Invoicing System with real‑time data, stock tracking and analytics, properly enforced, is projected to lift VAT revenue by up to 30 percent, about 1 percentage point of GDP, if integrated with Msonkho Online and IFMIS. We should also narrow policy discretion by publishing annual tax expenditure statements and rationalizing corporate incentives in SEZs and EPZs, which currently cost around 1.4 percent of GDP with uncertain investment benefits, according to the World Bank and the OECD. Finally, the World Bank reckons that councils need a reset in property rating and land revenues; mass valuation under the 2024 Valuation Act, digital billing, arrears recovery, and systematic land registration can add 0.5–1.0 percent of GDP while reinforcing fiscal decentralization.

The third fault line is SOE governance and fiscal risk management. The energy and water portfolios illustrate the problem: tariffs below cost recovery, arrears to suppliers, commercial losses, and liquidity constraints have turned essential utilities into persistent fiscal risks. ESCOM’s experience with unbundling and the now‑reversed single‑buyer experiment underscores a larger truth: governance, cost‑reflective pricing and disciplined collections matter more than organograms. The remedy is straightforward in principle, with simply professional, skills‑based boards with clear mandates and performance contracts needed; competitive neutrality so SOEs do not enjoy regulatory or tax advantages over private competitors; separation of commercial and social mandates with transparent budget compensation for the latter; and publication of timely, audited financial statements and consolidated fiscal‑risk reports.

Where markets are genuinely competitive, privatization or PPPs should be considered to reduce fiscal exposure; where natural monopolies persist, tariff regulation must be credible and independent. As the AfDB has noted across the region, portfolio‑wide governance improvements are strongly correlated with reductions in contingent liabilities and improvements in service metrics. We have proof at home that turnaround is possible: Lilongwe Water Board’s sequence of tariff reform, arrears cleanup and operational modernization produced measurable gains in continuity of supply, customer satisfaction and cost recovery.

Much has been said about mining as a potential game changer. We should welcome the sector’s emergence while tempering expectations and sequence reforms carefully. Even under an unconstrained scenario where high‑risk projects proceed, the World Bank estimates government revenues exceeding US$500 million per year only in the 2030s. Under a business‑as‑usual path limited to lower‑risk projects, annual revenues may surpass US$200 million or roughly 2 percent of current GDP. The resource curse is real: inflated expectations can spur premature borrowing and spending long before revenues materialize. Our priority should be to tighten the fiscal regime by defining equity stakes in law, adopting sliding‑scale royalties to capture price windfalls transparently, simplifying or redesigning an RRT that has yielded little, and hardening anti‑avoidance rules around permanent establishment, thin‑capitalization and earnings stripping.

We will also need a specialized mining tax unit within MRA, better data‑sharing and robust valuation capacity to manage transfer pricing. The IMF’s experience across resource‑rich Low-Income Countries is unambiguous: institutions and legal clarity matter more than headline rates if you want durable revenues and investor interest.

The political economy cannot be ignored. Since the 1990s, our deficits during election years have been, on average, 74 percent higher than in the preceding four years. Credible fiscal rules, strengthened parliamentary scrutiny, and monthly execution reporting aligned to international standards would help, but they must be accompanied by a disciplined communications strategy that treats Malawians as partners in reform. Targeting matters: maintain VAT exemptions on basic staples such as maize and cooking oil; pair VAT base broadening with cash transfers (or equivalent) to vulnerable households; and frame excise increases on sugary beverages as both a health measure and a modest revenue tool. The OECD’s work on progressive tax systems and the AfDB’s analysis of social protection targeting supply convenient lessons for design and implementation that preserve equity while raising collections.

If we act decisively, the macro payoff is tangible. The World Bank’s model suggests that a “big push” package of full implementation of spending rationalization and domestic resource mobilization would reduce the fiscal deficit towards 2½ percent of GDP by 2035, cut public debt to the mid‑30s as a share of GDP, and lift growth towards 6 percent, with one‑third of fiscal savings reinvested in health, education and electricity access. The IMF’s DSA reaches the complementary conclusion that debt sustainability is achievable within the medium term with consistent primary surpluses and disciplined financing, especially if Malawi completes external restructuring and restrains domestic borrowing costs. Conversely, the “do nothing” path leads to average fiscal deficits above 20 percent of GDP, public debt well above 100 percent by 2030, and negative growth. These are outcomes that would further erode living standards and jeopardize social cohesion.

The end of easy money is not the end of Malawi’s development story. It is a call to maturity and true statesmanship. We must build the state’s credibility through realistic budgets and strict execution, reallocate from consumption to investment, and ask more from our own tax system while protecting the poorest. We must insist on professional governance in our public enterprises and a rules‑based approach to natural resources that serves Malawians over the long term. And we must align our macro‑choices, especially exchange rate, monetary stance, and fiscal consolidation, so they reinforce export growth, rebuild reserves and cool inflation.

The path is narrow, but it is there. If we walk it now, guided by evidence from the World Bank’s Public Finance Review, the IMF’s debt diagnostics, and comparative lessons from AfDB and OECD analyses, we can restore stability and lay foundations for inclusive growth in an era when aid can no longer be our default answer.