Review Of Macroeconomic Projections And Construction Of The Flow Of Funds As A Consistency Framework And A Measure Of The Informal Sector In Malawi

By Ralph Tseka
April 2007
In Malawi, macroeconomic management is done by Ministry of Finance, Ministry of Economic Planning and Development, Reserve Bank of Malawi and National Statistical Office (NSO), with NSO being the main source of data and information. There are a number of instruments and models used for purposes of macroeconomic analysis and forecasting.

There are different forecasting methods of the four macroeconomic accounts, namely the national accounts, the Balance of Payments (BOP) accounts, the fiscal accounts and the monetary accounts were explored. In National Accounts and Balance of Payments, a tool known as Macroeconomic Solution (MACSOL) is used for forecasting. The estimation of GDP at factor cost in MACSOL uses the expenditure approach valued at 1994 prices. MACSOL also generates automatically the results of solutions in some tables that are of interest to policy planners. However, there a few problems with MACSOL because it only forecast short to medium term projections, and at times relies on the use of judgement. This has tended to be a source of data problems.

The Reserve Bank of Malawi uses the financial programming model to project short to medium-term macroeconomic targets, specifically the monetary sector. The model was built using the excel spreadsheet, and is essentially a numerical consistency framework built around four fundamental macroeconomic identities, which link monetary accounts (central bank), fiscal accounts (budget), foreign exchange accounts or BOP, national income accounts coupled with data on prices, exchange rates and interest rates. The model also provides a convenient tool for analysing the implications of various macroeconomic scenarios.

The Revenue Section in the Ministry of Finance uses Medium Term Expenditure Framework (MTEF) Revenue Forecasting Model (MRFM) to forecast revenue. The MRFM is basically a GDP based model because tax revenue responds automatically to increases in national income which results from economic growth. MRFM is used to project a three-year net resource envelop given a set of assumptions. The net resource envelop is equal to the sum of domestic revenues, foreign inflows and domestic financing less statutory expenditures. Total expenditure is target based on all resources available to the government (domestic revenue, foreign financing and domestic financing). The rest of major economic classification of the central Government’s recurrent and development expenditures are, therefore based on the net resource envelop. This implies that expenditures should not exceed the resource envelop but it is not always the case.
To ensure consistency in the four macroeconomic accounts, three flow of funds (FoF) tables for Malawi were constructed using data for 2003, 2004 and 2005. The FoF divided the economy into four sectors, namely the Government, the Financial Corporation, Non-Financial Corporation which was mixed with Non-profit Institution Serving Households (NPISH), and households. This was done because of data inadequacy. From the FOF, it was established that the data in internally inconsistent. Again disaggregating data in the institutional sectors has exposed Malawi’s data deficiencies and omissions.
The FoF was also used to estimate the size of the informal sector in Malawi. It was observed that there was a huge disposable income of the households compared to final consumption meaning that the households are involved in other income generating activities that go unrecorded. The large figure being portrayed by mixed income therefore suggests that there is a large and vibrant informal sector in Malawi which is not measured. NSO conceded that indeed the informal sector activity in Malawi is not captured in all their surveys.
An attempt was made to estimate of the size of the informal sector in Malawi using the households sector only. Based on the data available, the informal sector in Malawi is estimated to be about 59 percent of the households. Although this method does not correctly measure the actual size of the informal sector in Malawi because other sectors were ignored, it however provided a rough estimate and a starting point for further research depending on the availability of data