Malawi Economic Monitor: Improving Malawi’s Fiscal Decentralization to Strengthen Local Service Delivery

LILONGWE, June 28, 2022-Malawi's ambitious goal of a fully functional, decentralized system remains unachieved, and is characterized by decades of fractured, uneven, and incomplete implementation.

The latest Malawi Economic Monitor (MEM), Strengthening Fiscal Resilience and Service Delivery, notes that while decentralization has been identified as key to strengthen local service delivery, the process has been complicated by both political leaders who have retained control of resources, and distrust among development partners. Since the 2013 Cashgate scandal involving the theft of millions of in public funds, development partners target financing of government services remains vertical. These off-budget projects are often fragmented at the local level, the memorandum says, leading to uncoordinated planning and decision-making over service delivery across levels of government. Sector and district processes continue to occur in parallel and sometimes overlapping.

The MEM highlights that low local government capacity has historically served as a justification for retaining funds at the central government level, and for significantly earmarking funds through deconcentrated, conditional transfers. This means that in many instances, local governments are demoted to acting as implementing organs of the central government, rather than governing agents in their own right.

The report also notes that there is often a misconception of poor governance or lack of capacity, which is sometimes a manifestation of coping mechanisms by local government officers. Faced with underfunded service delivery mandates and an unreliable fiscal transfer system, these local officers are sometimes required to bend the rules to carry out service delivery responsibilities.

According to the MEM, recurrent financing to district councils has failed to keep pace with the increased need in development funding. A systematic analysis of transfers across sectors reveals a consistent decrease in real, per-capita terms over the past six years, declining by between 25% and 45% in almost all local authorities from 2014 to 2021. This decline is most notable for the key decentralized sectors, such as health and education, which have declined in real terms by 24% and 17% respectively over the past four years.

Opportunities exist

There are several meaningful policy initiatives developed and approved by the government in favor of decentralization, which presents an opportunity to incentivize the improved delivery of services to citizens. These include:

• The 2014 re-introduction of elected local councilors, led to the creation of the district full council, a governance structure that presents a platform for the voice of the citizens at local level
• There is potential to improve efficiency and increase confidence by consolidating the development expenditure through local government systems where development projects under by Constituency Development Fund (CDF)-an amount allocated to each Member of Parliament for development projects and the District Development Fund (DDF) can also benefit from
• The Performance-Based Grants presents a new funding mechanism which gives district councils the opportunity to significantly increase their access to discretionary development resources based on results

Macroeconomic outlook

Malawi's economic growth is expected to decline further in 2022 due to chronic fiscal and external imbalances, compounded by severe weather events.

The war in Ukraine has added to a challenging global economic climate, as fertilizer and fuel prices continue to increase. The war is also deteriorating further Malawi's terms of trade and exerting upward pressure on inflation.

The MEM also shows that due to external and fiscal deficits for many years, financed by increased commercial borrowing, Malawi's debt has now become unsustainable and commercial banks are the highest holders of domestic debt.

Recommendations

Weather-related shocks and impacts of the Russia-Ukraine conflict mean that Malawi requires strengthening efforts that will help meet fiscal consolidation targets. Among them include

• Restoring macroeconomic stability through reforms that will enhance fiscal consolidation, flexible exchange rate management, debt sustainability, and improved governance
• Enhancing export competitiveness and market-oriented growth through the implementation the National Export Strategy, supporting the private sector development, and focusing on agricultural commercialization and productivity growth
• Protecting the poor and strengthening resilience through social protection programs to prevent deterioration in consumption and welfare

To deepen decentralization, the MEM recommends:

• Establishing a system that can increase confidence to consolidate development expenditure and local level.
• Simplifying the inter-governmental fiscal transfer system and increasing transparency
• Strengthening the equalization of transfers through the revision of formulas and inclusion of rational expenditure needs and fiscal capacity measures

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