The International Monetary Fund (IMF) says a major shift in development financing that began in 2025 is unlikely to be temporary, warning that it signals tougher times ahead for aid-dependent countries, such as Malawi.

In a blog titled ‘Aid is falling fast. What can African countries do?’, IMF economists argued that the decline in aid reflects a broader reconfiguration of development finance, shaped by tighter donor budgets, uncertain external aid and changing priorities.

Aid cut could worsen poverty for people such as these. | Nation

The blog, written by IMF’s African Department economists Chie Aoyagi, Maurizio Leonardi and Athene Laws and research analyst Hamza Mighri, noted that while the impact will vary across countries, domestic policy will matter more.

They argue: “The immediate task is to manage the decline in aid without backsliding on the significant human development achievements of the past decades.

“The longer-term challenge is to adapt to a world where aid is less abundant and less predictable. How countries navigate both will shape growth and development outcomes for years to come.”

An IMF survey shows that as foreign aid declines, African governments are being forced to make difficult choices, including allowing programmes to lapse, cutting public investment, borrowing more or raising domestic revenue while grappling with limited fiscal space, rising debt and low reserves.

The IMF warns that while replacing lost aid can protect services and growth but worsen deficits and debt, failing to do so may safeguard fiscal stability at the cost of long-term development and human capital gains.

Published United Nations Children’s Fund (Unicef) data show that between 2017 and 2023, official development assistance (ODA) has remained the largest, averaging $1.6 billion (about K2.8 trillion) compared to other external inflows such as foreign direct investment, averaging $144 million (about K252 billion) and remittances at an average of $219 million (K383 billion).

In relative terms, ODA flows to Malawi constituted 82 percent of total external inflows in 2023, compared to foreign direct investment at 10 percent and remittances at eight percent, according to the United Nations.

At K23.9 trillion, the public debt is equivalent to 90.9 percent of gross domestic product (GDP) while interest payments alone consume K2.793 trillion this year.

Ironically, nearly 79 percent of domestic revenue in the K11 trillion 2026/27 National Budget is absorbed by statutory obligations, including wages and debt servicing.

Unicef data shows that 75 percent of ODA is financing expenditures in social sectors such as health, education, humanitarian and social infrastructure.

Already, the government has cut the social protection budget, which has over the past five years relied on foreign donors to finance 95 percent, in the 2026/2027 financial year from K217 billion in the last fiscal calendar to K123 billion in the current one, affecting one million beneficiaries.

Approximately 75.4 percent of the population are estimated to live below the new international poverty line of $3 per day by the end of 2025.

In essence, the Social Cash Transfer Programme funding has fallen by 14 percent, Climate Smart Enhanced Public Works Programme, also known as Mtukula pa Khomo, has lost 57 percent while Urban Public Works Programme financing is down 35 percent, according to government.

Scotland-based Malawian economist Velli Nyirongo observed that in the face of declining donor support, the sustainability of Malawi’s social protection programmes will depend less on whether the country needs them and more on how they are designed and financed.

“Limited coverage, low transfer values and unpredictable financing reduce the programme’s ability to lift households out of poverty or build resilience,” he said.

Ministry of Finance, Economic Planning and Decentralisation poverty reduction and social protection senior deputy director Dalitso Kalimba, speaking at a national dialogue on inclusive social protection on advancing sustainable finance, human rights and progressive legal framework recently, said the decline in the allocation by K93 billion is driven by falling International donor contributions.

The ministry has since developed a Malawi National Recovery Plan, which is a subset of the Malawi 2063 First 10-Year Implementation Plan.

The recovery plan has consolidated reforms on revenue, expenditure, monetary side and all the other policy interventions.

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