Project: Malawi Priorities – Government Services to Support MSMEs in Malawi

The Malawi Vision 2063 aspires that Malawi will be a preferred destination for inward investment. Leveraging digital technologies to increase the private sector’s dynamism, broadening the tax base, increasing investment in infrastructure, and limiting unnecessary regulatory burdens are crucial to reaching that goal. Reducing the high degree of informality in the economy and expanding the narrow tax base are also critical components of achieving this goal.

To support this objective, the National Planning Commission of Malawi supported research and analysis to answer the following questions: 

1. What are the most effective ways to improve implementation in government?
2. How can the public sector be reformed to most effectively improve service delivery? How can technocratic and political incentives be aligned?
3. What are the context-relevant good practices in instituting and sustaining accountability mechanisms for the implementation of development plans and policies?

The Limestone team started this project by identifying twenty potential interventions. The team then narrowed the options into two interventions that spoke an aspect of the broader governance challenge: generating wealth through private sector dynamism. The team focused on the formalization of micro, small and medium-sized enterprises (MSMEs) and tax digitization challenges. Limestone used cost-benefit analysis (CBA) to measure the potential net impact of the following interventions:

1. Free MSME registration accompanied by a bank information seminar
2. E-filing (inc. payment) and tax nudges facilitating compliance

Limestone prepared a detailed technical report containing the literature review, applied methodology, CBA findings, and policy recommendations.

The CBA results show that both interventions are viable, meaning that their net benefits outweigh their net costs. Our study considers that the interventions would reduce informality and tax compliance costs, improve businesses’ financial inclusion, efficiency, and tax compliance, and increase tax revenues, contributing to the generation of the required resources for the GoM to reach its 2063 targets. Due to their impact on private sector dynamism, the interventions could also improve Malawi’s World Bank Doing Business report scores and attract more private investment. The chart below shows the benefit-cost ratio (BCR) for each intervention at three different discount rates.