The Costs and Benefits of Government Services to Support MSMEs in Malawi

Malawi’s MSME sector contributes approximately 40% to national GDP. Yet several obstacles restrict the growth of the MSME sector, which in turn restrict the growth of the overall economy. These include: limited access to financial services such as credit and banking, limited business training, informality, high costs of complying with regulations and an overall poor environment for conducting business. High business registration and tax compliance costs mean that only 11% of MSMEs are registered and pay tax, cutting into the government’s revenue base. Additionally, the current predominantly paper based tax system poses a large cost on the Malawi Revenue Authority (MRA). The report recommends the government improve tax e-filing and provide ‘nudges’ for firms to pay their taxes across Malawi. The MRA has already begun planning for this intervention, and this report provides economic evidence that the benefits of implementation exceeds cost by a factor of 7. The intervention would reduce the tax compliance costs of MSMEs by 65% - saving compliant businesses a total of MWK 5,271 million per year in the long run. The MRA would also see savings of MWK 2,570 million annually. The intervention requires an upfront expense of MWK 1,082 million for the ICT improvements, and ongoing costs of MWK 840 million for operating the system and MWK 57 million for tax nudges. The report highlights the large value that could be generated from free micro, small and medium-sized enterprise (MSME) registration accompanied by bank information seminars. Based on a pilot program from Malawi, MSMEs are expected to see an increase in revenues by 20%, mostly due to the increased availability of banking services. If half of Malawi’s MSMEs take up the service, benefits start at MWK 73,000 million rising to MWK 725,000 million by 2031. Firms are expected to incur an additional MWK 413,000 million in operating expenses by 2031. The costs of the seminar and registration are relatively low at MWK 2,000 million by 2031. For every 1 kwacha spent, the intervention returns 1.7 kwacha. While the return on investment is only fair, the net benefits are large, equivalent to 2 to 3% of Malawi's GDP in the long run.