AFRICAN DEVELOPMENT FUND Language: English

Original: English

PROGRAMME: RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION (RFSSP)

COUNTRY: MALAWI

PROGRAMME APPRAISAL REPORT

Appraisal Team

Team Leader Mothobi Matila, Principal Macroeconomist (OSGE/ZMFO)

Co-Team Leader Raymond Besong, Senior Rural Infrastructure Engineer, OSHD

Team Members Mr F. Kamanga, Senior Governance Expert, OSGE/MWFO

Mrs P. Ekoh, Senior Education Analyst, OSHD/ZMFO

Ms. A Zeleza, Economist, MWFO

D. Goyal, Regional Financial Management Specialist, ORPF.2/SARC

M. Mbo, Senior Financial Management Specialist, ORPF.2/SARC

Mrs, N. Alolo Alhassan, Senior Social Protection Specialist, ORPC

Mr. I. Budali, Principal Social Protection Specialist, OSHD/EARC

Mr. K. Banda, Social Development Specialist, MWFO

Ms. E. Fasika, Country Programme Officer, ORSB/MWFO

Mr Alieu Jeng, Consultant, OSGE. 2

Moses O. Ayiemba, Chief Regional Procurement Coordinator, SARC

X. Long, YPP, OHSD .1

Sector Manager J. Mukete, OSGE.2

M. Youssouf, OSHD.1

Sector Director I. Lobe Ndoumbe, OSGE

A. Soucat, OSHD

Regional Director C. Ojukwu, Director, ORSB

Resident Representative

A. Mwaba, MWFO

Peer

Reviewers

C. Do, Senior Macroeconomist, OSGE.1 R. Charo, Senior Social Development Specialist, OSHD T. Ngororano, Principal Governance Officer, OSGE.2

TABLE OF CONTENTS

CURRENCY EQUIVALENTS i

FISCAL YEAR i

WEIGHTS & MEASUREMENTS i

ACRONYMS & ABBREVIATIONS ii

GRANT INFORMATION iv

RESULTS-BASED LOGICAL FRAMEWORK v

PROGRAMME EXECUTIVE SUMMARY viii

I. THE PROPOSAL 1

II. COUNTRY AND PROGRAMME CONTEXT 2

2.1 Government Overall Development Strategy and Medium-Term Reform Priorities 2

2.2 Recent Economic and Social Development, Perspectives, Constraints and Challenges 2

2.3 Bank Group Portfolio Status 5

III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILTY 5

3.1 Link with CSP, Analytical Works Underpinnings and Country Readiness Assessment 5

3.2 Collaboration and Coordination with other Development Partners 8

3.3 Outcomes of Past and On-going Similar Operations and Lessons 8

3.4 Relationship to On-going Bank Group Operations 9

3.5 Bank’s Comparative Advantage 9

3.6 Application of Good Practice Principles on Conditionality 10

3.7 Application of Bank Group Non-concessional Borrowing Policy 10

IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS 10

4.1 Programme’s Goal and Purpose 10

4.2 Programme Components, Operational Objectives and Expected Results 11

4.3 Financing Needs and Arrangements 14

4.4 Beneficiaries of the Programme 14

4.5 Impact on Gender 15

4.6 Environmental Impact 15

V. IMPLEMENTATION, MONITORING AND EVALUATION 15

5.1 Implementation Arrangements 15

5.2 Monitoring and Evaluation Arrangements 16

VI. LEGAL DOCUMENTATION AND AUTHORITY 17

6.1 Legal Documentation 17

6.2 Conditions Associated with the Bank’s Intervention 17

6.3 Compliance with Bank Group Policies 17

VII. RISK MANAGEMENT 18

VIII. RECOMMENDATION 18

LIST of TABLES

Table I : Summary Assessment of the Pre-requisite Conditions for the Programme

Table II : Summary of Past Operations and Lessons Learnt

Table III : Mid-term Expenditure Framework (2009-2017) Projections

Table IV : Risks and Mitigation Measures

BOXES

Box I : GoM Reforms Since April 2012

Box II : Prior Actions for the programme

APPENDICES

Appendix I : Letter of Development Policy

Appendix II : IMF Country Relations Note: Letter of Assessment

Appendix III : Recent Evolution in Macroeconomic Key Indicators

Appendix IV : Programme Targets

i

Currency Equivalents

(As of June, 2012)

Currency Unit Malawi = Kwacha (MWK)

1 UA = MWK 407.319

1 UA = US$ 1.51

1 UA = Euro 1.22

1 US$ = MWK 269.748

Weights and Measures

Metric System

1 metric tonne = 2204 pounds (lbs)

1 kilogramme (kg) = 2.200 lbs

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inch (“)

1 kilometre (km) = 0.62 mile

1 hectare (ha) = 2.471 acres

Fiscal Year

01 July - 30 June

ii

ACRONYMS AND ABBREVIATIONS

AfDB African Development Bank

ADF African Development Fund

AGD Accountant General’s Department

AIDS Acquired Immuno-Deficiency Syndrome

ASYCUDA Automated System for Customs Data

CABS Common Approach to Budget Support

CIAU Central Internal Audit Unit

COMESA Common Market for Eastern and Southern Africa

CPIA Country Policy and Institutional Assessment

CPPR Country Portfolio Performance Review

CSP Country Strategy Paper

CSO Civil Society Organisation

DFID Department for International Development

DPs Development Partners

ECF Extended Credit Facility

EMIS Educational Management Information System

EPRCP Enhancing Procurement Reforms and Capacity Project

ETR Electronic Tax Register

EU European Union

Forex Foreign Exchange

FIMTAP Financial Management Transparency and Accountability Project

FRA Fiduciary Risk Assessment

FY Fiscal Year

GAP Governance Strategic Directions and Action Plan

GBS General Budget Support

GDP Gross Domestic Product

GFEM Group on Financial and Economic Management

GoM Government of Malawi

GPRSG Governance and Poverty Reduction Support Grant

HDI Human Development Index

HIV Human Immuno-Deficiency Virus

HoC Head of Cooperation

HoM Head of Mission

HRMIS Human Resources Management Information System

ICSP Interim Country Strategy Paper

IMF International Monetary Fund

IFMIS Integrated Financial Management Information System

ISP Institutional Support Project

JICA Japanese International Development Agency

KfW Kreditanstalt für Wiederaufbau

LA Loca Authority

MDTF Multi Donor Trust Fund

MGDS Malawi Growth and Development Strategy

MLGRD Ministry of Local Government and Rural Development

MRA Malawi Revenue Authority

MDGs Millennium Development Goals

MTEF Medium Term Expenditure Framework

MWK Malawi Kwacha

MWFO Malawi Field Office

iii

NAO National Audit Office

NSO National Statistics Office

NSSP National Social Sector Programme

ODPP Office of the Director of Public Procurement

PAF Performance Assessment Framework

PBO Policy Based Operation

PCR Project Completion Report

PFM Public Financial Management

PEFA Public Expenditure Financial Accountability

PER Public Expenditure Review

PETS Public Expenditure Tracking Survey

PFEMRP Public Financial and Economic Management Reform Programme

PI PEFA Indicator

PPA Public Procurement Act

PRSG Poverty Reduction Support Grant

PRSL Poverty Reduction Support Loan

PRSP Poverty Reduction Strategy Paper

RBCSP Results Based Country Strategy Paper

RBM Reserve Bank of Malawi

RFSSP Restoration of Fiscal Stability and Social Protection

RMC Regional Member Country

SAL Structural Adjustment Programme

SAP System Applications and Products

SGGL Support for Good Governance Loan

SWAP Sector-Wide Approach

SWG Sector Working Group

UA Unit of Account

UK United Kingdom

UNFPA United Nations Population Fund

UNICEF United Nations Children’s Fund

USAID United States Agency for International Development

UNDP United Nations Development Programme

US$ United States Dollar

WB World Bank

WFP World Food Programme

iv

GRANT INFORMATION

Client’s Information

GRANT RECIPIENT : Republic of Malawi

EXECUTING AGENCY : Ministry of Finance

Financing Plan (2012)

Source Amount Instrument

ADF UA 26 million Grant

World Bank US$ 50 million Grant

EU Euro 40 million Grant

DFID not yet indicated** Grant

Germany not yet indicated Grant

Norway Kroner 65 million Grant

Other Major Financing:

IMF ECF (under negotiations): US$ 157 million (Zero Interest Rate Loan)

ADF Financing Information

ADF Grant : UA 26 million

Time-frame: Main Milestones

Request from GoM for an ADF Grant May, 2012

Appraisal Mission May/June, 2012

Board consideration of Programme 11 July, 2012

Effectiveness Grant July, 2012

Disbursement Grant July, 2012

Programme Completion (PCR) October, 2013

__________________________________________________________________________________

** On 01 June, 2012, the UK released £33 million as emergency assistance to contribute to stabilising

the economy and purchasing medical supplies, as a show of support for the bold steps the new

government has taken in recent weeks.

v

VII. Results-Based Logical Framework

Country and project name: Malawi: Restoration of Fiscal Stability and Social Protection

Purpose of the programme: To restore public financial management and Social Protection systems

RESULTS CHAIN

PERFORMANCE INDICATORS MEANS OF

VERIFICATION

RISKS/MITIGATION

MEASURES Indicator (including CSI) Baseline Target

IMP

AC

T

Impact:

Stabilised Fiscal

Situation and

Protected Social

Spending

i. GDP growth rate

ii. National

reserves.

iii. Human

Development

Index (HDI)

i.4.3% (2011)

ii. National

reserves below

one month of

import cover

iii. HDI 0.400

in 2011

i. 5.7% in 2013

ii.National

reserves at one

month of import

cover

iii.HDI 0.425

by 2015

IMF

Reports

MDG

Reports

AfDB

Statistics

Risk: Lack of support

from Development

Partners could worsen

the foreign reserve

situation and increase

inflation following

devaluation of the

Kwacha by close to

50%, and impoverish

people. Mitigation:

DPs have pledged

support to alleviate

effects of the

devaluation.

OU

TC

OM

ES

Outcome 1: Credible,

transparent and

accountable budget

system

i.Budget out-turn –In

year expenditure

reallocation

between primary

expenditure votes

ii.Monthly revenue

data publication

.

i.In 2009/10, the

variance was at

6.7%

ii.No monthly

publication of

revenue data

i.Variance between

budgeted

expenditure and

outturn for 25 votes

in 2010/11 Fiscal

Year amount to

10% or less of the

2009/10 approved

budget’s primary

expenditure

ii.Monthly

publication of

revenue data by

July 2012

PEFA report

IMF Reports

AfDB

Statistics

CABS Reports

(PAF)

GoM

documents/poli

cies

Risk: Expenditure not

aligned to policies and

national priorities

Mitigation:

Implementation of the

Malawi Public

Financial Management

Reform Programme

supported by DPs

through the Multi-

Donor Trust Fund will

continue dialogue on

such issues.

Outcome 2: Enhanced Social

Protection System

Protecting priority

expenditures

(Government meets

budget allocation

requirements of

Health and

Education SWAps

in the approved

budget)

In 2010/11,

23.6% of

Voted

Recurrent

Expenditure

was spent on

Education.

Real increase

of 6% in GoM

contribution to

the Health

Sector.

Government meets

budget allocation

requirements of

Health and Education

SWAps in the

2011/12 approved

budget

CABS Review

Reports

Budget

books

Risk: Lack of funding

for the social sectors

could increase poverty.

Mitigation: CABS

reviews and dialogue

with GoM will mitigate

risks for reduced

funding to social

sectors.

vi

OU

TP

UT

S

Component 1:

Strengthened PFM

transparency &

accountability

Output 1.1

Accountability and

comprehensiveness

of the budget

Output 1.2

Strengthened

domestic revenue

Administration and

policy

Output 1.3:

Strengthened

external audit

system

1.1. IFMIS rolled-out

to 29 Local

Authorities (LAs).

1.2. Electronic Tax Register (ETR)

1.3.1 Timelines and

follow-up of audit

reports and

recommendations.

1.3.2 Timeliness and

quality of expenditure

reporting

1.1. IFMIS

rolled-out 18

LAs (2012)

1.2. ETR not

available ;

1.3.1 2003/04

Treasury

Minutes

available;

1.3. The

2008/09 and

2009/10 audit

reports were

submitted to

Parliament by

August 2010

and December

2010

respectively.

1.1.IFMIS rolled out

to 12 additional LAs

(2013)

1.2. ETR introduced

and functional(2013);

1.3 Treasury minutes

responding to audit

reports for years June

2005, 2006 and 2007

submitted to

Parliament by

December 2011.

1.3.2 The 2010/11

Auditor General’s

Annual Report be

submitted to and

tabled in Parliament

by December 2012.

PEFA report

CABS PAF

Reports

Budget

Reports

GFEM

Reports

Risk: Weak PFM can

lead to wastage of

public resources and

unplanned and non-

responsive expenditure.

Political will and

support is necessary for

reform implementation.

Mitigation: PFM

reform programme

supported by the DPs

and dialogue with GoM

will mitigate this.

Risk: Lack of

oversight may entrench

corruption and misuse

of public resources.

Mitigation: Timely

audit reports and

follow-up with action

on culprits

Component 2:

Strengthened Social

Protection System

Output 2.1:

National Social

Support Programme

approved

Output 2.2:

Efficiency of SP

interventions

improved.

2.1 Existence of the

National Social

Support Programme

(NSSP).

2.2 Existence of

National Social

Support Policy.

2.1 Preparation

and consultation

on the NSSP

2.2 Preparation

of the NSS

Policy on-going

2.1 The NSSP is

finalized and

approved by the

National Steering

Committee by

December 2012.

2.2 The draft Social

Support Policy is

approved by Cabinet

by December 2012.

Social sector

budgets

CABS PAF

NSSP

document

Risk: Implementation

capacity constraints.

Mitigation: Capacity-

building interventions

to support PFM

implementation

through the proposed

budget support

programme

KE

Y A

CT

IVIT

IES

COMPONENTS INPUTS

Component 1:

Introduction of Electronic Tax Register system &Awareness of oversight

institutions

Improving transparency, accountability , preparation and execution of the budget

Strengthening capacity of external audit office

Component 2:

Increasing coverage of social protection programmes

Improving the social protection delivery and monitoring systems

Implementation of the social protection programmes.

Budget support only

ADF Grant = UA 26 million; Other

donors = UA 174.02 million

Missions: supervision, policy dialogue,

and donor coordination

Complementary capacity building and

technical assistance projects financed by

other donors not included in the budget

vii

PROGRAMME EXECUTIVE SUMMARY

Programme

Name

MALAWI: RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION

( RFSSP )

Overall

Timeframe

1 July 2012 to 30 June 2013

Programme

Cost

ADF Grant UA 26.00 million

Programme

Context

The proposed RFSSP programme will be provided to Malawi in the context of a difficult

macroeconomic environment, characterised by depletion of foreign exchange reserves,

shortages of raw materials, fuel and essential imports and a slowing economy. As

indicated in Box 1, the new Government of Malawi (GoM) has so far implemented

commendable reforms to restore fiscal and macroeconomic stability, and establish good

governance. The support from the Bank will contribute significantly towards boosting

GoM’s momentum for implementing on-going initiatives to sustain the reforms. These

reforms will assist in returning the country to a strong growth trajectory through the

implementation of MGDS II, 2011-2016. The reform measures, though necessary, will

have short term costs, including socio-economic effects and negative impact on the

population. Urgent action to improve public finance management while providing social

protection to the poor and vulnerable is thus required to assist GoM address the crisis.

Programme

Overview

This Programme is the Bank’s fifth policy based operation in Malawi. Its distinguishing

feature is that it is the Bank’s first Crisis Response Budget Support (CRBS) in Malawi. It

focuses on strengthening Public Finance Management (PFM), with particular emphasis

on transparency and accountability, and supporting the Government’s Social Protection

programme and strategy in the context of far-reaching reforms in economic and financial

governance. These areas of focus are in the Performance Assessment Framework (PAF)

that has been agreed between GoM and the Common Approach to Budget Support

(CABS) Development Partners (DPs).

Program

Outcomes and

Beneficiaries

The CRBS will contribute to stabilizing the economy, in the wake of the massive

devaluation of May, 2012. It will thus lay the basis for resumption of the high economic

growth that the economy registered before the current crisis set in 2 years ago. It will

contribute to improving social protection coverage, contribute to restoring macro-

economic stability and fiscal balance, improve PFM and enhance the business enabling

environment. The beneficiaries will be the people of Malawi. The implementation of the

RFSSP is necessary condition for the achievement of objectives of the MGDS II.

Needs

Assessment

A sound PFM is key to successful implementation of poverty reduction measures and

prudent use of public resources for mitigating the impact of the current socio-economic

challenges facing Malawi. Due to the rigorous reforms undertaken in exchange rate

management, the country urgently requires financial resources for meeting the financing

requirements for the FY 2012/2013. GoM’s own resources will not be sufficient to meet

the requirements. In 2012, the overall fiscal deficit excluding grants is projected at 12.5%

of GDP and 2.9% when grants are included. Thus, Programme resources will help to close

the FY 2012/2013 financing gap, in collaboration with the other CABS DPs.

Institutional

Development

and Knowledge

Building

From this Programme, the Bank will further augment its knowledge in the use of the

CRBS instrument to support economic and governance reforms. In using the country

systems, in line with the Paris Declaration on Aid Effectiveness, the Programme will

contribute to fostering institutional capacity building. A complementary Institutional

Support Project is planned by the Bank in 2013, which will focus on tax reform and procurement, to reinforce institutional development for sound public sector management.

Bank’s Added

Value

The Bank brings into this operation considerable experience in budget support operations,

and expertise gained from implementing similar programmes in RMCs with strategic

focus on PFM. The Bank also adds value in terms of dialogue, as it is the current Chair of

the CABS DPs’ group in Malawi.

1

REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS

ON A PROPOSED GRANT TO THE REPUBLIC OF MALAWI

TO SUPPORT THE RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION

1 THE PROPOSAL

1.1 Management submits the following proposal and recommendation for an ADF Grant of

UA26.00 million to the Republic of Malawi to support the Restoration of Fiscal Stability and Social

Protection (RFSSP) programme. This is the Bank’s fifth policy based operation (PBO) in Malawi. It

will be implemented over the FY 2012/2013. It is a Crisis Response Budget Support (CRBS), following

an urgent request received in May, 2012 from the Government of Malawi (GoM) for assistance from the

Bank to help address the macro-economic instability, in particular fiscal distortions, and the social

protection challenges resulting from the massive 49% devaluation of the Kwacha in early May 2012. The

devaluation was a necessary measure for GoM to take in order to address severe macroeconomic

imbalances. Malawi’s development partners (DPs), as well as other major stakeholders including the

business community and the public in general, have welcomed the devaluation of the Kwacha. The GoM

has also implemented other commendable reforms to restore fiscal and macroeconomic stability, and

promote good governance (see Box 1). The devaluation has, however, engendered social hardships

among the population, particularly as it was followed by a 30% increase in fuel prices and a 63% increase

in electricity tariffs. These measures have necessitated urgent support from DPs to help offset the impact

of the crisis, help maintain core public expenditures (particularly in the social sectors) and provide scope

for additional poverty safety net spending to mitigate the impact of these reforms.

1.2 The proposed RFSSP programme would be disbursed in one tranche in July 2012, to

provide strong support to the GoM budget and the momentum for implementing on going

initiatives to sustain the reforms. Thereafter, it is envisaged that a complementary proposal will be

submitted to the Board in February 2013, subject to the availability of additional ADF grant resources for

Malawi and continued progress on implementation of the country’s reform agenda.

1.3 The urgency of the request from GoM led to the Programme being appraised on fast-track

basis, in May 2012. The appraisal mission coincided with an equally urgently-fielded IMF mission to

Lilongwe to resume consultations on a new Extended Credit Facility (ECF) arrangement, which will be

submitted to the IMF Board in July 2012 for an amount of US$ 157 million. At the same time, a World

Bank mission was also in the country to assist GoM with work on the 2012/13 Budget as well as to

finalise the preparation of their own emergency operation, a rapid-response development policy grant of

US$50 million, to be submitted to their Board in June 2012. Other donors have also disbursed, made

pledges or and are preparing operations for the 2012/13 FY (EU 40 million euros, DFID £ 33 million,

Norway 65 million Kroners). The Bank’s appraisal mission was thus able to hold detailed consultations

with the IMF and the World Bank, as well as other budget support partners, to co-ordinate our respective

crisis-response support to the country. The Programme is in line with the Malawi Growth and

Development Strategy (MGDS II) 2011-2016 and the Long Term Vision 2020. Furthermore, it is

consistent with (i) the Bank’s Governance Strategic Directions and Action Plan (GAP) 2008-2012; (ii) the

Bank’s Private Sector Development Strategy; (iii) the Bank Group Policy on Program-Based Operations;

and (iv) the Malawi Interim Country Strategy Paper 2011-2012.

1.4 The Programme’s operational policy objectives are focused on: Strengthening Public

Finance Management (PFM) Transparency and Accountability (Component 1) and Contributing to

Social Protection for the poor and vulnerable (Component 2). The expected outcomes of the

Programme therefore are (i) macroeconomic stability; (ii) improved PFM and economic governance; and

(iii) enhanced social protection for the poor and vulnerable. The expected impact of the programme is a

stabilised fiscal framework and protected social spending.

2

II COUNTRY AND PROGRAMME CONTEXT

2.1 Government Overall Development Strategy and Medium Term Reform Priorities

2.1.1 The GoM adopted in April 2011 the Malawi Growth and Development Strategy II (MGDS

II) as its development strategy for the medium-term (2011-16). The strategy's overall objective is

wealth creation through sustainable economic growth and infrastructure development. It is organized

around six thematic areas: (i) sustainable economic growth; (ii) social support and disaster risk

management; (iii) social development; (iv) infrastructure development; (v) good governance and (vi)

gender and capacity development. The long-term vision of MGDS II is to transform Malawi from a

predominantly importing and consuming country into a predominantly producing and exporting one

through agricultural production and industrialization. The MGDS II also acknowledges the important

roles of health, education, economic empowerment and social protection. The MGDS II is the successor

to MGDS I, both strategies predicated upon the Vision 2020: that by Year 2020, Malawi will be: “secure,

democratically mature, environmentally sustainable, self-reliant with equal opportunities for and active

participation by all, having social services, vibrant cultural and religious values and being a

technologically driven middle-income country’’.

2.1.2 In order to achieve the set objectives, the GoM has committed to undertake reforms in PFM,

social sectors, governance, the rule of law and human rights. The government intends to: (i) improve

the business enabling environment and promote private sector participation; (ii) improve electricity power

supply; (iii) enhance tax administration and efficiency, and (iv) streamline the processes for cross border

trade. In the social sectors, GoM is committed to increasing coverage of social support programmes to

address the risks and hardships affecting the vulnerable groups.

2.1.3 The principal challenges of MGDS II are scarce financial resources, limited institutional

capacity of line ministries, shortage of human resources, inadequate co-ordination among GoM

institutions as well as policy implementation limitations at both central and local government levels. There is also a need to improve GoM’s internal control systems and strengthen public finance

management. Meeting the objectives of MGDS II will require a substantial increase in external financing

to supplement Malawi’s low domestic savings. This includes a substantial scaling-up of DPs’ support to

finance public expenditures as well as private financial inflows for investments in key sectors, such as

energy. The continued support of development partners in the short to medium term will be critical as

Malawi remains vulnerable to a number of exogenous shocks, including weather conditions and a

deterioration in the terms of trade.

2.2 Recent Economic and Social Developments, Perspectives, Constraints and Challenges

2.2.1 During the period 2006-10, Malawi experienced stable economic growth averaging 7.1%,

moderate inflation of 6.8% (2006-10), and the level of its domestic debt stood at 1.4% of GDP in

2010/111. In 2011, the economy slowed down with estimated real growth standing at 4.3 %, from a

projected growth of 6.9%. Inflation remained at single digit despite rising commodity prices, shortage of

petroleum products and scarcity of foreign exchange. For 2012, GDP growth is estimated at 4.3%, while

average inflation is expected to rise sharply to 18.4% against the initial projection of 6.3%. The

slowdown in growth and rise in inflation reflect weakening fundamentals as a result of poor economic

management in the past year, with rising budget deficits financed by the central bank in a regime of an

overvalued exchange rate. Overall fiscal balance (excluding grants) is estimated at -10.5% of GDP in

2011 and projected at -12.5% in 2012. The policy distortions led to a severe shortage of foreign exchange,

which affected availability of basic goods, such as fuel, pharmaceuticals, foodstuff and other essential

imports. These shortages had an adverse impact, notably on the capacity of the private sector to engage in

production and contributed to the rise in inflation. The net effects on the population had been increased

1 Source: Malawi Annual Economic Report 2011

3

prices and reduced consumer purchasing power, which fuelled serious social unrest and anti-government

protests in July 2011.

2.2.2 Apart from slow growth in exports, the foreign exchange shortage has been exacerbated by

the suspension, during 2011, of budget support by DPs under the Common Approach to Budget

Support (CABS), on account of impasse on the IMF Extended Credit Facility (ECF). The GoM/IMF

impasse regarding the ECF since the government took a position against liberalizing the foreign exchange

market. The authorities were also reluctant to reverse tobacco dollars surrender requirement, i.e. to allow

tobacco proceeds to go to commercial banks and not through the Reserve Bank of Malawi (RBM).

2.2.3 Recent Reforms Undertaken Since April, 2012: Since the passing on of the late President Bingu

wa Mutharika in April 2012 and the swearing-in of Joyce Banda as the new President of Malawi, the

GoM has undertaken a number of important economic and governance reforms. The new government has

emphasized its commitment to the principles of sound macroeconomic management, effective anti-

corruption measures, the rule of law and respect for human rights. Some of the reforms undertaken thus

far are presented in box I below.

Box 1: GoM Reforms since April 2012

(1) In May 2012, the Kwacha was devalued by 49% (from MWK 167 to MWK 250 to the US Dollar). The exchange

rate reform measures included freeing up of the exchange rates determined by foreign exchange bureaus;

cancellation of the requirement for prior approval and pre-vetting of all imports in excess of $50,000; and the

reversal of surrender requirements on tobacco dollars so that all tobacco proceeds will now go to the commercial

banks. All these measures are in line with actions that were envisaged under the IMF ECF program which went off

track in June 2011, and was terminated in September, 2011;

(2) The Reserve Bank of Malawi (RBM) has been given increased independence in monetary policy operations and

decisions. This has already had the effect of tremendously boosting the credibility of the monetary policy

implementation process. Credibility is important in providing the correct signal to the market and anchoring

inflation expectations especially at a time when a pass-through of a significant currency adjustment has to be

contained to avoid prices spiralling out of control;

(3) As part of the measures aimed at strengthening monetary fundamentals in the context of a liberalized exchange

rate and in line with recent trends in rising non-food inflation, the authorities made an upward adjustment of the

bank rate from 13% (where it has been since 2010) to 16%;

(4) Revision of the policy on pricing and taxation of petroleum products and adoption of an automatic adjustment

mechanism to ensure that retail prices of these products reflect the true cost of importation. As a consequence, fuel

price was adjusted upwards by about 30% while electricity tariffs went up by 63.5%. GoM’s intention is to

establish a pricing structure that reflects the long-run average cost of producing electricity in order to attract

private sector investments in power generation;

(5) Some laws were repealed that impinged on civic, political and media freedoms and human rights. In conformity

with the law, the President also appointed Commissioners for the Malawi Electoral Commission in preparation for

the 2014 tri-partite elections;

(6) The GoM has restored normal relations with other countries and DPs, such as Mozambique, the United

Kingdom and the IMF. This has led other partners, such as the Millennium Challenge Corporation, to consider

lifting suspension of their support to Malawi.

(7) Following concerns on revenue data integrity by Parliament, CABS DPs and IMF, Government took

a decision that revenue data will now be published monthly to ensure transparency.

2.2.4. In addition to the above reforms, the new government has approved the MGDS II, which is

an overarching poverty reduction policy document for Malawi. A new PFM Reform Program has also

been approved; and a new ECF programme negotiated with the IMF. The new IMF programme is

expected to go to the IMF Board in early July, 2012. Devaluation of the currency, and having an IMF

program in place, were the key recommendations of the Bank’s July 2011 Country Dialogue Mission to

4

Malawi, as necessary measures for the Bank and other partners to provide financial support for the

implementation of reforms and poverty reduction programmes.

2.2.5 The challenges facing Malawi remain considerable. The following key development issues will

to be critically important in the medium to long term: (i) pursuit of macro-economic stability and growth;

(ii) fiscal consolidation to contain internal and external imbalances; (iii) containing expenditure while

increasing the revenue base to reduce the fiscal deficit and (iv) implementing growth-enhancing structural

reforms to preserve fiscal and external stability.

2.2.6 The required actions are: (i) credible reforms in PFM specifically on budget preparation

and execution, financial control and reporting, auditing and procurement; (ii) improving business

enabling environment to diversify the economy and create employment; (iii) improving the quality of,

and access to education and training to build human capacity; (iv) developing infrastructure, particularly

in the energy sector, to make economic opportunities accessible to the population and provide the basis

for industrialisation; (v) consolidating democracy, peace and stability and enhancing the oversight role of

Parliament in accountability and transparency; (vi) and promoting efficiency in the delivery of public

services through enhanced public financial management and audit.

2.2.7 The fiscal challenges include lower than projected revenue, with collections in FY 2011/12

showing a shortfall of MWK 41 billion (US$245.7 million), comprising a deficit of MWK 29.0

billion (US$173.8 million) in tax collections and MWK 12.0 billion (US$71.9 million) in non-tax

collections. The decline in tax collections reflects the slowdown in the economy. On the other hand, GoM

expenditures were running ahead of projection by about MWK 13.3 billion (US$79.7 million). The

ambitious budgetary objective of attaining zero primary deficit, by ensuring that domestic revenues

covered recurrent spending, was not attained as recurrent spending exceeded the budget by nearly

MWK43.0 billion (US$ 257.7 million). GoM has estimated arrears of about MWK 70 billion

(US$421.7million) during the 2011/12 Fiscal Year. Given this situation, the budget for 2012/2013

focuses on achieving zero net domestic financing of the budget. The World Bank assisted the government

in this exercise.

2.2.8 The import requirements of the economy are estimated at US$131 million per month, with

official reserves at US$132 million (i.e less than 1 month import cover!) at the end of April 2012.

Out of the official reserves, $38.4 million was encumbered, leaving only US$93.7 million as usable. Out of this usable amount only US$12.0 million was available as the rest was committed. In short, the

country is experiencing a severe shortage of foreign exchange with arrears in the banking system

estimated at over US$40 million. These led to scaling down of production, closures and retrenchment,

hence increased unemployment.

2.2.9 The recent significant devaluation has had severe negative impacts on spending and

individual incomes and could erode the gains registered in poverty reduction. People’s income has

been reduced by about 50% due to devaluation, which has led to a general increase in prices of imported

items, petrol, food and electricity. GoM took these rigorous measures since they are necessary for

restoring macroeconomic stability. However, urgent external support is needed to mitigate the social

impact. If no support is received, or support is delayed, the following could result: severe shortage of

foreign exchange in the short term, hence limited imports including shortages of essential drugs for the

population; lack of fuel and raw materials, disrupting productive activities with ripple effects throughout

the economy; high or galloping inflation further impoverishing people; and no protected financing for the

social sectors. There is also a political risk of social unrest occurring, if the negative effects of the

devaluation are not mitigated with the help of budget support. Thus, social protection (mitigation

measures) is critical in the short to medium term. In addition, the shortage of foreign exchange will result

5

in high costs of doing business, and significant infrastructure bottlenecks, especially in energy supply and

transportation services. This will limit Malawi’s competitiveness.

2.2.10 Poverty in Malawi remains high with a Human Development Index of 0.400 (in 2011),

placing it below the Sub-Saharan African average of 0.463. Although the country has made some

progress in achieving the Millennium Development Goals (MDGs), more improvements particularly in

maternal health, primary education and gender equality are required (see Annex II). According to the

World Bank/ADB Country Economic Memorandum of 2009, the primary constraint to growth is the

low quality of education. The education sector faces significant challenges, including: high pupil-trained

teacher ratio of 76:1, with large classroom sizes of up to 100 children, high repetition and drop-out rates

at 25%, with repetition at 20% in primary education, one of the highest in Sub Saharan Africa.

2.2.11 GoM has prepared a draft National Social Support Policy, which is expected to be adopted

by Cabinet by December 2012. The policy underpins the National Social Support Programme (NSSP),

which is a five-year plan of action with a strategy for coordination and linkages. The NSSP prioritises

five sub-programmes that are currently being implemented namely: the Social Cash Transfers, Micro

Finance, the Village Savings and Loans, the Public Works Programme, and the Targeted School Meals

Programme. The main challenge with these programmes is insufficient resources to extend coverage and

ensure sustainability.

2.3 Bank Group Portfolio Status

2.3.1 The Bank’s portfolio in Malawi consists of 10 operations for UA 181.4 million, as at 31 May

2012. One of the projects is a regional one, namelythe Naccala Road Corridor involving Malawi,

Mozambique and Zambia and supporting regional integration. In terms of sectoral distribution of the

portfolio, the social sector accounts for 46%, followed by transport sector with 21%, agriculture sector

17%, and water supply and sanitation 16%. The current average age of the portfolio is 3.8 years compared

to 3.5 years in 2010. During the same period, the portfolio was rated as “satisfactory” with an overall

portfolio rating of 2.2 (on a scale from 0 to 3) compared with 2.3 in 2010. It is expected that the average

age will decline when the Support to Health Sector Programme and Education V Projects exit the

portfolio by December 2012. The disbursement rate as at 31 May, 2012 is 31%. There are no problem or

potential-problem projects.

III RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY

3.2 Link with the CSP, Analytical Works Underpinnings and Country Readiness Assessment

3.2.1 Link with the CSP: The proposed Programme is linked to the Malawi 2011-2012 Interim

CSP pillars (i) Improving Infrastructure and (ii) Accelerating Private Sector Development. The

Bank’s Interim CSP proposes general budget support as an effective instrument for enhancing economic

competitiveness, private sector development, and for increasing the fiscal space in the budget for social

sector spending for more efficient and reliable service delivery. The first Component of this proposed

Programme is: Strengthening Public Financial Management (PFM) by improving budget preparation and

execution, improving tax regime and administration, as well as enhancing oversight through the audit

office. By improving the governance framework in Malawi, through supporting sound PFM, the proposed

Programme will contribute to creating an attractive fiduciary environment conducive to stimulating

foreign and local investments in infrastructure development and accelerating private sector development.

The second Component of the proposed Programme, the Enhancement of the Social Protection system,

will strengthen budget allocation to social services, protect the poor from the current adverse social

effects of the reforms, and contribute to achieving the fiscal stability and sound macroeconomic

environment that is conducive to private sector development.

6

3.1.2 Underpinning Analytical Works. There are important analytical works that have been used

to underpin the design of the proposed RFSSP operation. These include (i) the Malawi Growth and

Development Strategy (MGDS) II; (ii) the 2010 MGDS I Assessment Report; (iii) the Bank’s Interim

Malawi Country Strategy Paper 2011/12; (iv) the PFM Situation Analysis Report; (v) the World

Bank/AfDB 2009 Malawi Country Economic Memorandum; (vi) the March 2011 and May 2012 CABS

Reviews; (vii) the 2011 Public Expenditure Financial Accountability assessment; (viii) the 2010 Public

Expenditure Review of Travel; (ix) the Bank’s 2009 Malawi Skills for Private Sector Development; (x)

the Bank’s Project Completion Reports (on RBCSP, GPRSG II and the 2010 CPPR); and (xi) the

preliminary OPEV 2011 Joint Evaluation of PFM reform in Africa. There is also the April 2012 GoM

paper entitled: ‘Malawi Government Position on Macroeconomic and Social Support Package for

Malawi.” Some of the important conclusions and key recommendations from these analytical works are

as follows:

While progress has been made in improving Malawi’s public financial management and revenue

administration, there is a need to strengthen compliance mechanisms. The Malawi Revenue

Authority (MRA) and the Revenue Policy Division of the Ministry of Finance should intensify the

programme of modernizing their systems to enhance efficiency and accelerate tax administration

reforms. There is need to address the issue of a narrow tax base, which perpetuates the country’s

heavy reliance on development partners to finance the Budget.

IFMIS has contributed to improvements in expenditure control and accelerating accounting

processes, but challenges of coverage and integration limit its effectiveness. The system is

integrated at central level but not fully at the local level. There is no electronic integration between

the payroll systems, the Tax Payer Identification Number systems, tax administration systems

including the Automated System for Customs Data (ASYCUDA), debt management systems, and

the Reserve Bank of Malawi’s systems. There is need to fully roll out IFMIS and elaborate a

strategy for interconnection of the various systems to enhance expenditure control and reporting.

Capacity weaknesses are evident in the public service and must be tackled systematically. The

2011 PEFA noted that a balance has to be struck between academic and practical training, with

need to focus on professionalizing public financial management. Strong leadership and direction is

also required in PFM reforms, so that reforms are properly coordinated and monitored. Co-

ordination of PFM Action Plan activities remains weak, with no specific plan in place to

effectively guide preparation, planning and implementation of reforms. MRA also needs support

to implement its systems modernization, including adoption of SAP as a backbone Tax Enterprise

Resource Planning tool for improvement of Ministry of Finance liquidity management.

GoM’s Position on Macroeconomic and Social Package for Malawi recognizes that restoring

macroeconomic stability through exchange rate adjustment will have unintended socio-economic

impacts, which need to be urgently mitigated, particularly the impact on the poor and vulnerable

in both rural and urban areas. Thus, it concludes, “as Malawi implements a macroeconomic

restructuring programme it is imperative to scale-up interventions that will protect most

vulnerable Malawians from rising food and fuel prices, and rising transport and distributional

costs.”

3.1.3 Overall Fiduciary Environment: In accordance with the Bank’s Operational Guidance Note

to Fiduciary Risk Management Framework for Policy-Based Operations (PBOs), a fiduciary risk

assessment (FRA) was carried out to assess the adequacy or otherwise of the Malawi fiduciary

environment and the existing country systems for managing the proposed Restoration of Fiscal

Stability and Social Protection operation. The objective of the assessment was to determine: (i) the

extent to which the country’s PFM system could be relied upon for the efficient and economical

utilization of Programme funds; (ii) whether the system could generate accurate and reliable financial

7

reports in a timely manner; and (iii) whether effective procedures and processes exist to safeguard

Programme resources. (see Annex I)

3.1.4 The assessment concluded that, although progress continues to be made in improving the

PFM system in Malawi, numerous challenges still exist, particularly in accounting and reporting,

internal audit, external audit and scrutiny and procurement, areas where GoM is undertaking

various reforms to address the problems. The overall risk rating was assessed as substantial, but could

not preclude budget support for Malawi due to ongoing PFM reforms and risk mitigation measures

undertaken by both GoM and development partners.

3.1.5 Country Readiness Assessment: The country assessment found compliance with the Bank’s

safeguard policy. Malawi meets the pre-requisites for provision of both general and crisis response

budget support. Details of how the pre-requisites have been met are provided in table I.

Table I: Summary Assessment of the Pre-requisite Conditions for the Programme

Prerequisites Comments on the current situation

Government

commitment to

poverty

reduction

GoM is strongly committed to the country’s poverty reduction agenda. Indeed, this is clearly reflected in

Malawi Growth and Development Strategy (MGDS II), and evident from the progress in reforms under targets

set in the Performance Assessment Frameworks (PAF); as well as key strides recorded in the 2011 Public

Expenditure and Financial Accountability Review (PEFA). Preliminary findings of the review by the Common

Approach to Budget Support (CABS) Group indicate that the country has made significant improvements in

PFM systems, albeit challenges still remain. GoM has adopted MGDS-II, 2011-16, as successor to MGDS I.

GoM, in conjunction with DPs, jointly prepared the PAF 2011-2012, which contains a set of indicators, derived

mainly from MGDS II, that measure progress. GoM has put in place effective implementation mechanisms to

address the objectives of MGDS II through the three-year Medium Term Expenditure Framework (MTEF) and

the PAF.

Macroeconomi

c stability

Up until the 2011/12 crises, Malawi’s economy experienced rapid growth, largely driven by the agriculture

sector, which was supported by the Government’s Farm Input Subsidy Program and good weather conditions.

In recent years, however, macroeconomic imbalances (rising sovereign debts, inflation and foreign exchange

shortages) have threatened economic stability. Nonetheless, the new Government is committed to pursuing

sound macro-economic and financial policies and programmes to address the economic challenges. In fact, the

Government has re-engaged the IMF for resumption of key ECF reforms, which had gone off-track.

Satisfactory

fiduciary risk

assessment

As indicated in the Fiduciary Risk Assessment report (Annex I), the country’s PFM system is demonstrating a

positive trajectory of change, as both the PEFA and preliminary CABS reviews have shown improving PFM

systems. The Bank’s assessment of the PFM system also shows a positive trend although significant challenges

remain. The proposed program will therefore seek to address the areas of weakness, such as improving budget

planning and execution, strengthening revenue collection and tax reforms and strengthening external audit

system.

Political

stability

The political environment is generally stable, although there were initial fears that the ascension of President

Joyce Banda to the presidency - after the death of the former President – could lead to instability. Currently,

there are fears of unrest if the rising prices of food items and the forex situation are not contained swiftly.

Harmonization

There is strong partnership between GoM and DPs providing budget support through the CABS. The proposed

program is in line with CABS effort to provide emergency grants to address urgent liquidity needs and

moderate impact of devaluation on the poor. Seven DPs, World Bank, AfDB, EU, DFID, Ireland, Germany and

Norway will provide rapid support to GoM. In line with the Paris Declaration, CABS members agreed to draw

targets and triggers from a common PAF. There are joint reviews and GoM leads implementation of the

framework. Ministry of Finance is the lead, and CABS activities are coordinated by the Debt and Aid

Department.

8

3.2 Collaboration and Co-ordination with other Development Partners

3.2.1 A Heads of Co-operation (HoC), Heads of Mission (HoM) and Common Approach to Budget

Support (CABS) Group provide the platform for dialogue between DPs and GoM on economic,

financial and sectoral issues. The Government has a Development Assistance Strategy which promotes

the principles of the Paris Declaration (2005), the Accra Agenda for Action (2008) and Busan Aid

Effectiveness (2011) in Malawi, and contributes to improving the coherence of DPs’ engagement with the

Government through the CABS and the Group on Financial and Economic Management (GFEM). The

Bank is the chair of the CABS for the period January to June 2012. The other major DPs providing

budget support are the World Bank, European Union, Norway, DFID, Germany and Ireland. GoM and

these DPs signed in 2005 a Joint Framework of Agreement that sets out the conditions for providing

budget support. Under the CABS, two bi-annual reviews are held to assess progress in implementing

measures in the Performance Assessment Framework. With MWFO chairing the CABS (January to

June), the Bank participates actively in the review process and policy dialogue. During the May 2012

CABS Review, the DPs agreed that the new Government had registered significant progress in just 4

weeks, with bold measures to begin to address macroeconomic and political governance issues through

the liberalisation of the foreign exchange market and the planned review of laws deemed to be

unfavourable to political freedoms and human rights. At the sector level, in 2011 the Bank chaired the

DPs’ sector working groups in the agriculture and food security sectors (from June 2011– August 2011),

and water sector (from December 2009–March 2011). Currently, the HoC Group is undertaking a Joint

Country Analysis as a potential basis for a joint programming exercise in the future.

3.2.2 In the social sector, many DPs provide aid to Malawi. There are 14 DPs in the health sector,

comprising AfDB, Clinton Health Access Initiative, DFID, Flanders, Germany, the Global Fund, Japan

International Cooperation Agency (JICA), Norway, UN agencies, USAID and World Bank. In education,

there are 8 DPs: the AfDB, World Bank, DfID, Germany, USAID, UNICEF, JICA and World Food

Programme. China is also financing the construction of the University of Science and Technology. The

World Bank and AfDB are conducting studies on policy options for investing in higher education. Most

of the DPs focus their funding on basic education. In Gender, Youth Development and Social Protection

key partners include UNFPA, DfID, WFP, UNICEF, Norway, KFW, World Bank and EU.

3.2.3 The proposed RFSSP, in line with harmonisation and aid effectiveness under the Paris

Declaration, the Accra Agenda for Action and the Busan declaration, will use country systems for

implementation and monitoring. The triggers for disbursement have been co-ordinated with CABS

partners and are drawn from the common PAF. In particular, the programme is co-ordinated with the

World Bank’s Rapid Response Development Policy Grant, planned for disbursement in July, 2012, and

also designed to provide social protection for the poor and the vulnerable under the current difficult fiscal

and macroeconomic environment.

3.3 Outcomes of Past Similar Operations and Lessons

3.3.1 The Bank Group has approved five policy-based operations for Malawi, amounting to UA

63.45 million. Lessons from these operations and other DPs’ programmes, as well as lessons from the

2011 and 2012 CABS reviews, have been taken into account in the design of this proposed RFSSP. Major

lessons, and how they have informed design, are shown in table II.

9

Table II. Summary of Past Operations and Lessons Learnt

Past Operations Lessons Learnt Action taken into account Structural Adjustment Loan (SAL) of UA

15 million, approved in December 1998,

supported reforms for achieving fiscal

sustainability, improvement in the delivery of

social services, as well as privatization and

diversification of agricultural production and

export

The Bank and other DPs should

rely more on GoM budget

processes and PFM systems.

Using national systems

simplified design,

implementation, supervision

and monitoring of PRSG I and

GPRSG II operations.

National systems of budgeting, procurement,

monitoring and audit are being used by the

proposed RFSSP..

Support for Good Governance Loan (SGGL) of UA 12 million, approved in

December 2004, supported the

implementation of the country’s first poverty

reduction strategy (2001-2005) with a focus

on strengthening public sector governance.

Alignment with the budget

cycle was weak in former

operations and disbursements

did not occur in the first half of

the fiscal year as they should.

Processing of the proposed RFSSP is being

expedited to enable the Bank disburse in first

quarter of 2012/13 FY and help build foreign

exchange reserves, reduce domestic borrowing

and mitigate negative effects of devaluation on

the poor. To encourage GoM undertake

reforms, second operation will be disbursed in

third quarter of the same FY.

Poverty Reduction Support Loan (PRSL) of

UA 14.9 million, approved in April 2007, was

for one tranche supporting stimulation of

social sector and PFM reforms. PRSL suffered

significant delays of ratification by Malawi’s

Parliament, but eventually implemented and

achieved the intended objectives.

Where performance of PFM

institutions is critical, budget

support alone is insufficient to

ensure progress and should be

complemented by institutional

support.

The proposed RFSSP programme will be

complemented by a PFM Institutional Support

Project (PFM-ISP) in 2013. The design of the

ISP will be coordinated with other DPs.

Poverty Reduction Support Grant (PRSG I)

of UA 10 million, approved in March 2009,

supported increased economic growth by

augmenting budgetary resources. PRSG I was

a one-year single tranche operation due to

uncertainty surrounding the May 2009

elections and the potential negative

implications for future budget support;

The need for specificity in the

selection of disbursement

conditions so as to ease

program implementation;

hence the importance of joint

appraisal with other DPs and

use of the common PAF;

Appraisal of the proposed RFSSP included

consultations, on evidence required for

disbursement, with Government and CABS

partners. The disbursement conditions have

been derived from the PAF which was agreed

between CABS partners and Government

Second Governance and Poverty Reduction

Support Grant (GPRSG II) UA 11.54

million, approved in April 2010, as two

tranches for enhancing transparency and

accountability in use of resources and

increasing service delivery.

Shared fiduciary risk analysis

and macroeconomic analysis,

critical to success,

sustainability of budget support

in Malawi.

The macroeconomic, fiduciary risk and other

underlying analysis were done by the Bank and

other partners (such as IMF, DFID and

Germany).

3.4 Relationship to On-going Bank Group Operations

3.4.1 The proposed RFSSP will build on lessons learnt from past operations in Malawi. The

programme will consolidate the Bank’s support to improve the public financial management systems,

which is fundamental to all on-going Bank operations in terms of improving the quality and timeliness of

financial reporting and ensuring that procurement is done with efficiency, transparency and

accountability.

3.5 Bank’s Comparative Advantage and Value-addition

3.5.1 Comparative Advantage: The Bank, under the “Governance Strategic Directions, 2008-

2012”, has streamlined its approach to governance, focusing primarily on PFM and business

enabling environment. In so doing, it has scaled up its resources and re-oriented its policy and

institutional actions towards its RMCs so as to respond more effectively to the challenges they face in

implementing key PFM reforms, which are a central agency of good governance. In this context, the

Bank’s knowledge of governance challenges in Malawi is a comparative advantage. The Bank’s overall

10

support for the country’s various social sectors has provided firm base for the Bank to further engage in

social protection.

3.5.2 The RFSSP builds on the Bank’s experience and competence promoting PFM transparency

and accountability in RMCs. It will contribute to enhanced accountability, transparency in the budget

process, improved competitiveness and a stable macro-economic framework, which are pre-requisites for

sustained economic growth. The Bank, currently chairing the CABS, has been involved actively in

dialogue on governance and PFM in Malawi.

3.5.3 Value-addition: The Bank currently chairs the CABS group of DPs, thereby giving it a

vantage position for value-added in coordinating the policy dialogue between DPs and GoM.

Further, the presence of the Bank, through the Malawi Field Office (MWFO) ensures that there is a

regular country dialogue with GoM and facilitates quick and close supervision of the programme during

implementation.

3.6 Application of Good Practice Principles on Conditionality

3.6.1 Reinforce Ownership. The Programme is fully owned by GoM and reflects the orientations of

the reforms being implemented, the MGDS II, the budget for FYs 2011/12 and 2012/13 and the

GoM Social Protection Policy Framework. The Programme scope is covered in the Letter of

Development Policy (Appendix I) and consistent with the 2012/13 Budget Statement delivered on 8 June

2013 by the Minister of Finance.

3.6.2 Coordinate the Accountability Framework. There exists in Malawi an active formal DPs’

coordination mechanism (CABS), which meets regularly and has identified and agreed with the

authorities the key issues to be addressed as well as the reform measures to be implemented aimed

at strengthening the PFM and enhancing social protection systems.

3.6.3 Customize the Accountability Framework and Modalities of Bank Support to Country

Circumstances. The Bank’s support reflects GoM’s priorities and is appropriate for a country

facing the following major challenges: the social hardships and destabilizing effects of massive

exchange rate adjustment; restoring fiscal stability; restoring macro-economic stability and strengthening

good governance institutions. To assist GoM confront these challenges, the programme appropriately

focuses on improvement of the PFM system and social protection.

3.6.4 Select only actions that are critical for achieving results as Conditions for Disbursement. The

triggers for disbursement have been defined in the PAF and agreed with the authorities, and the

development partners providing budget support, based on a comprehensive analysis of the MGDS

II and priorities for reform. The actions selected are critical to restoring macroeconomic stability, fiscal

stability and sustainability, providing social protection, stimulating economic growth and enhancing

private sector development.

3.7 Application of Bank Group Non-concessional Borrowing Policy

3.7.1 The Programme is fully compliant with the Bank Group policy on non-concessional

borrowing. In addition, under IMF ECF arrangements, the government is fully committed to not

contracting any new non-concessional loan.

IV THE PROPOSED PROGRAMME AND EXPECTED RESULTS

4.1 Programme’s Goal and Purpose

4.1.1 The overall goal of the proposed Programme is to restore fiscal stability and contribute to

enhancing public finance management in Malawi, as well as support social protection measures

necessary to mitigate the adverse social impact of the devaluation of the Kwacha, and the massive

increases in fuel and electricity prices. The purpose is to contribute to improving public finance

11

management and providing social safety net. The programme is a follow-up to GPRSG II and will deepen

reforms achieved from the other past operations (Par 3.3.1 and Annexe VIII).

4.2 Programme Components, Operational Objectives and Expected Results

4.2.1 The proposed RFSSP programme will be implemented within the GoM PFM reform

programme and its focus areas are: (i) Strengthened PFM transparency & accountability and (ii)

Strengthened Social Protection System.

Component I : Strengthened PFM Transparency and Accountability

4.2.2 Results Achieved: GoM has been reforming Public Finance Management over the past ten

years. This has yielded significant improvements in the legal framework, ranging from the passing of the

PFM Act and Public Audits Act to continued implementation of modules of the EPICOR financial

management system, with roll out continuing into the districts. Thus, the findings of the 2011 PEFA and

2012 CABS Review are that Malawi’s PFM systems have improved, but important challenges remain.

GoM has committed to strengthening capacity of PFM institutions through the Public Finance and

Economic Management Reform Programme (PFEMRP, 2011-16). The PFEMRP has provided some

reliability and timely information on the elements of budget execution. In addition, the timeliness of the

preparation and audit of the annual appropriation accounts has improved.

4.2.3 The comprehensiveness and transparency of the budget has improved as reflected in the

2011 PEFA where the rating for PI-5 was A compared to B in 2008, highlighting the improvement

in the classification of budget. Furthermore, there has been improvement in PI-6 to A in 2011 from B in

2008, an indication of the comprehensive information included in the budget documentation presented to

Parliament. Meanwhile, the unreported budget operations (PEFA Indicator PI-7) are at levels of less than

5% in 2011, unchanged from 2008. The score for PI-10 was C, reflecting the lack of timely public access

to recent financial statements and audit reports. Regarding comprehensiveness of the audit, NAO has a

key role to play in monitoring the use of government funds. A major achievement of the NAO has been to

clear the backlog of audit of the national accounts up to 2010. The audit for 2011 has also been completed

and is awaiting submission to Parliament. According to the 2011 PEFA, PI-26 was scored D+ (relating to

the scope, nature and follow up of external audit), a score unchanged from the previous report. The

PEFA, however, also indicates that audit scope and coverage have increased due to the clearance of the

backlog of previous years’ audit. A Strategic Plan has been developed by NAO to address some of the

challenges, including giving it independence. The Plan is currently under implementation with

development partners’ support. As regards efficiency, the score for PI-13 remained unchanged at B,

reflecting the transparency of taxpayer obligations and liabilities. Reforms underway at the MRA are

expected to improve tax and revenue collection. The score for PI-16, relating to predictability in the

availability of funds for commitment of expenditures, remained unchanged from B, indicating some

reliability of the information from the Ministry of Finance on the availability of funds.

4.2.4 Outstanding Challenges: The challenge is to ensure a credible, comprehensive and

transparent budget as a precondition for a well-functioning PFM system. Proper management of

budgeted resources contributes to efficient service delivery and value for money. An effective audit is

essential for a well-functioning PFM system. A high quality external audit ensures transparency and

accountability in the use of public funds. The quality of regular information on actual budget performance

is important for monitoring of budget implementation. According to the 2011 PEFA, the scores for

indicators PI-22 (timeliness and regularity of accounts reconciliation) and PI-24 and PI-25 (quality and

timeliness of in-year budget reports and of annual financial statements respectively), are low-level scores,

highlighting the need for improvement in these areas. These challenges include lack of resources, and

shortage of auditors, as well as capacity especially in IT audits to facilitate the effective audit of the

IFMIS. The credibility of revenue forecasting has been low, as indicated by the 2011 PEFA score of D for

12

indicator PI-3; this affects expenditure levels. The PEFA also notes the problems of arrears, with the

absence of concrete information on their amounts. The continued rollout of IFMIS, that has an in-built

commitment control system, is expected to control this but it has yet to be rolled out to all cost centres. In

addition, there are other challenges indicated in the multi-year perspective in fiscal planning, expenditure

policy and budgeting, reflected in the C+ score for PI-12. This highlights the need to continue with the

MTEF reforms and to properly cost the sector strategies with an appropriate link to multi-year forecasts.

Overall, there is still need for further improvement in the time given to the legislature for scrutiny of the

budget and the quality of information presented to facilitate a proper review (see Annex V for the

comparative scores between the 2006, 2008 and 2011 PEFA).

4.2.5 Areas Supported by the proposed programme: Based upon the above challenges, the policy

reform measures supported by the proposed RFSSP programme will contribute to the following: (i)

Improving budget preparation and execution; (ii) Strengthening revenue collection and tax

reforms; and (iii) Strengthening external audit system. GoM has committed to strengthening capacity of

PFM institutions through the PFEMRP, and the proposed programme support these efforts. To monitor

the progress on the above policy measures, the Bank will use indicators and targets in the PAF. For

budget execution, the variance between the budget and budget outturn will be used to assess whether

there is budget discipline and control as well as capacity to spend. The comprehensiveness of the budget

transparency and preparation process will also be assessed. With regard to strengthening revenue

collection and tax reforms, the aim is to reduce aid dependence by increasing domestically financed

expenditure through tax administration reforms. Oversight institutions are crucial for effective PFM.

Thus, the performance on follow-up of the recommendations of the Auditor General is an important

milestone to ensure transparency, and value for money. It is also important to enhance the role of

oversight institutions like Parliament and the National Audit Office (see log-frame and Appendix IV).

The proposed RFSSP program will support these critically important reform efforts.

Component 2: Strengthening Social Protection Systems

4.2.6 This Component supports improvement of the policy environment for social protection in

Malawi. It will also provide urgent support to bridge the financing gap, protect social expenditure and

mitigate the negative social impact of the recent devaluation. GoM has prepared a National Social

Support Programme and is working towards adoption of the draft National Social Support Policy, whose

operationalization will significantly improve coordination and reduce the fragmentation of social support

programmes. It will also provide a framework for resource mobilization for social protection as well as

for its monitoring and evaluation. The Government has been implementing social support programmes in

the country since 2008. This demonstrated commitment has attracted substantial resources from

Development Partners, who have been supporting over 90% of the total cost of these programmes. The

massive 49% devaluation of the Kwacha has caused a significant reduction in average welfare, measured

in terms of household consumption, with the impact particularly severe on the ultra-poor and vulnerable

groups, such as women, youth, children, HIV/AIDS affected persons, the disabled and the elderly.

Current budgetary constraints faced by GoM pose a threat to spending in the education and health sectors,

particularly in provision of antiretroviral drugs, which are critical to the prevention of mother to child

HIV transmission. In addition, the potential for social unrest due to continued rise in prices and shortage

of essential commodities is high, if no social protection measures are undertaken urgently to support the

poor and vulnerable groups. The operation will contribute to the achievement of some MDGs, while

mitigating the risk of reversal of gains already registered. The new government, even with the

devaluation, is currently enjoying popular support and goodwill, but this might not be sustained if social

protection is not provided for the poor and vulnerable urgently.

4.2.7 Strengthening the Social Support Policy environment: The proposed RFSSP will support the

operationalization of the National Social Support Policy through the implementation of the

National Social Support Programme. Both the National Social Support Policy and its related

13

Programme are scheduled for adoption by the National Social Support Steering Committee and the

government before the end of 2012. The goal of this policy is to protect the poorest and reduce poverty,

exclusion and vulnerability. The policy includes Guidelines for the design and implementation of social

support interventions, coordination, resource mobilization, monitoring and evaluation of the impact of

social support instruments, as well as the design of graduation and exit strategies for the beneficiaries.

The approval of the Policy by the Cabinet will be a significant output of the RFSSP operation.

4.2.8 Improving the Coverage of Social Support Interventions: Social support interventions in

Malawi currently provide limited coverage to the target groups, with the Social Cash Transfer

Programme reaching only 35% of vulnerable groups in 7 districts out of 28, and full coverage in

only 3 of the districts. The School Meals Programme covers only 19% of vulnerable children, excluding

those below the age of 6; and the Labour-Intensive Public Works Programme is accessible to only 29% of

the ultra-poor with labour capacity. Resource and capacity constraints account for this limited coverage.

The support provided under the proposed RFSSP operation will enable GoM to maintain or increase its

counterpart contributions to social support programmes, and thereby induce increased resource flows

from development partners. This will help extend the coverage of social programmes to more vulnerable

groups and mitigate the negative impacts of the reform measures on these groups. The envisaged increase

in coverage will be an important outcome of the RFSSP operation.

4.2.9 Improving the efficiency of Social Protection Interventions: Social support interventions in

Malawi are inadequately coordinated. This fragmentation has resulted in increased transaction costs

arising from the running of several parallel institutional arrangements. The operationalization of the

National Social Support Policy will help address this issue. Inefficiencies in targeting have resulted in

errors in the selection of beneficiaries of existing social support programmes. This is largely due to

absence of a system for harmonized targeting of social support interventions. The absence of a central

registry (comprehensive national database) has also reduced the efficiency in beneficiary selection. Under

the proposed operation, the Bank will support GoM to continue dialogue with DPs on measures to

improve delivery of social support. These will include the setting up of a system for harmonized targeting

and a central registry for beneficiaries of social support instruments. For assessment and monitoring

purposes, the proposed RFSSP operation will use an indicator on protecting priority pro-poor

expenditures with a target for Government to meet budgetary allocations to health and education as

approved in the 2011/12 FY and 2012/13 FY (see log-frame and Appendix IV).

Operational Objectives and Expected Results

4.2.10 Operational Objectives: The operational objectives are to implement reforms focusing on

budget formulation and execution, transparency, enhancing financial controls for efficiency in

resource use, enhancing public accountability and strengthening social protection. The proposed

RFSSP will support policy measures that will maintain, or even increase, the levels of budgetary social

expenditure in line with MGDS II.

4.2.11 Expected Results: The RFSSP, by supporting increased pro-poor expenditures and

accountability in public resource utilization, would contribute to the emergence of a stable

macroeconomic environment and a strong policy framework for social protection. This would assist

in strengthening budget management. The resources of this programme will assist Government to

improve macroeconomic stability and protect pro-poor expenditure, in the context of the recent massive

devaluation of the currency by 49%, followed by high price adjustments for fuel (by 35%) and electricity

(by 63%), as well as the increased bank rate from 13% to 16%.

4.2.12 Prior Actions: All Prior Actions for the proposed programme, including actions on foreign

exchange liberalization (see 2.2.3), would have been met by the time of presentation of the RFSSP

to the Board (see Appendix IV Programme Targets). The Programme is a response to the recent

reforms implemented by GoM as stated in its Letter of Development Policy Appendix1).

14

Box 2: Prior Actions for the RFSSP

Strengthened PFM transparency & accountability

i. Ensure that variance between budgeted expenditure and outturn for 25 votes in FY 2010/11 amount to 10% or less of the

2009/10 approved budget’s primary expenditure.

ii. Submit to Parliament Treasury Minutes responding to Audit Reports for years ending June 2005, 2006 and 2007.

Strengthened Social Protection System

iii. In FY 2011/12, Government allocates budget to health and education sectors as agreed in the Health and Education

SWAPs

4.3. Financing Needs and Arrangements

Table III: Mid-term Expenditure Framework (2009-2017) Projections

Economic Indicator

2009

Est.

2010

Prel.

2011

Proj.

2012

Proj.

2013

Proj.

2014

Proj

2015

Proj.

2016

Proj

2017

Proj.

GDP at constant market prices

Percentage change

9.0 6.5 4.3 4.3 5.7 6.1 6.5 6.7 6.7

Consumer prices(end of period) 7.6 6.3 9.8 22.9 12.0 7.3 6.5 6.3 5.1

Revenue (% of GDP) 32.1 33.8 32.1 27.0 33.2 31.2 31.1 30.8 30.6

Expenditure (% of GDP) 37.8 33.8 35.0 34.0 34.3 32.2 32.0 31.6 31.2

Overall balance (excluding grants) -17.3 -10.3 -10.5 -12.5 -11.6 -8.9 -8.3 -7.6 -7.0

Overall balance (including grants) -5.7 0.1 -2.9 -7.0 -1.1 -1.1 -0.9 -0.8 -0.7

Foreign financing 2.0 0.9 1.3 1.6 1.1 1.1 0.9 0.8 0.7

Domestic financing 3.7 -0.9 1.7 5.6 0.0 0.0 0.0 0.0 0.0

Reserve (months of imports) 0.7 1.5 1.0 1.0 2.0 2.5 3.0 3.3 3.6

Source: GoM & IMF Authorities, June, 2012.

4.3.1 The expenditure framework is anchored on the principle that there will be zero net domestic

financing over the period and that expenditure will be based on the resource envelope. Overall

deficit will be financed by foreign inflows as well as domestic financing up to 2012, and zero domestic

financing thereafter with expected small foreign financing. Expenditure is projected to decline over the

period due to austerity measures to cut down on non-essential expenditure. Grants will play a significant

part in the resource envelope, especially budget support resources. This projection is based on pledges

already made by CABS donors and any failure to provide support will lead to budget deficit. It is

therefore important for all DPs to honor their pledges to enable Malawi build up reserves of up to three

months of imports by 2015.

4.3.2 In view of the foregoing and as part of enhancing policy dialogue, the program is designed as

a one off tranche to (i) provide strong support to contribute to covering the fiscal gap envisaged in

the FY 2012/13; (ii) provide resources for social protection to the poor and those affected by current

macroeconomic reforms; (iii) assist in addressing foreign exchange challenges facing the country; and

(iv) reward the government for its commitment to reform as demonstrated in the bold measures that have

been implemented recently. GoM has undertaken to effectively implement reforms in order to restore

fiscal and macro-economic stability, promote economic growth, adhere to human rights and the rule of

law, and create the conditions for efficient management of the public finances. In the process, GoM

would, of necessity, also cushion the poor and vulnerable groups against the devastating impact of the

recent economic reforms.

4.4. Beneficiaries of the Programme

4.4.1 The population of Malawi will benefit from the Programme. The resources provided by the

Bank will contribute to easing the fiscal burden, while supporting GoM efforts to protect pro-poor

spending and improve transparency and accountability. In addition, the fiscal space arising from tighter

expenditure control, and from favouring expenditure of quality, will result in greater spending on

activities related to meeting the MDGs, especially in education, health and growth-inducing

15

infrastructure. It is also expected that the institutional arrangements put in place by GoM and DPs to

implement and monitor this Programme will benefit GoM staff through interaction with skilled,

experienced staff of the development partners. GoM institutions, as well as development partners, will

benefit and learn from the assessment reviews, targets formulation process, and information-gathering

tasks that inform progress assessment on agreed targets. Since the CABS framework uses country

systems, this will foster GoM institutions. Policy dialogue, formulation of the PAF and annual

assessments are important processes that will build capacity among GoM officers. The Annual Progress

Review that provides an assessment of all Government programmes in a year will be sustained and

improved over the years.

4.5 Impact on Gender

4.5.1 The devaluation and associated price hikes for foodstuff, transport fares and utilities have

hit poor households severely, the worst affected being women particularly female headed

households. Their limited control over resources has left them more vulnerable and exposed to the

unintended adverse impacts of the recent macro-economic policies.

4.5.2 Malawi’s social protection programmes, especially the pilot Cash Transfer Programme,

targets the ultra-poor who constitute 15% of the population, over half of whom are women. So far,

28,000 households are benefiting from social cash transfers (about 28% being female headed). Evidence

from the social protection programmes suggests that direct cash to women, through social cash transfers,

public works or microfinance schemes, empowers them and enhances their social standing within the

household. They are also able to invest in critical household expenditures and micro enterprises thus

promoting their empowerment and family well-being. Under the National Social Support Programme,

GoM will implement measures to improve gender mainstreaming, targeting efficiency and collection of

sex-disaggregated data in the various social support programmes. GoM commitment to gender equality is

expressed in MGDS II. A National Gender Equality Action Plan is being prepared.

4.6. Environmental Impact and Climate Change

4.6.1 The Programme has been classified as category 3 in the Bank’s environmental classification.

It is not expected to generate any negative impacts on the environment and climate change, since it

focuses on strengthening public finance management and improving the social protection system.

V IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation Arrangements

5.1.1 The Ministry of Finance will be the recipient of the budget support and responsible for the

implementation of the reform agenda. The general budget support programme in Malawi is currently

assisted by six donors (including the Bank) through a Joint Framework for Budget Support co-operation

entered into between GoM and the Common Approach to Budget Support (CABS) Group. The policy

dialogue is based on this framework and the underlying principles defined therein which include

economic governance (PFM), Social Sector, Democratic Governance including stable economic

management. The monitoring and review is based on a common PAF, providing a jointly approved set of

indicators for measuring progress, derived mainly from the MGDS II. The National Social Support

Steering Committee shall support the implementation of the Social Protection aspects of the operation.

5.1.2 Disbursement: The proposed Bank grant of UA 26 million will be disbursed in one tranche

in July 2012. This is justified by the financing gap and the resource needs for scaling up social protection

programs in the budget to mitigate the impact of the devaluation on the welfare of the population. It is

also justified by the bold economic and social reform measures being implemented by the new

Government. Disbursement will be subject to the entry into force of the respective Agreement and

fulfillment of the conditions precedent to the first disbursement. The grant proceeds will be credited to a

designated foreign exchange account indicated by the GoM and held in the name of the Reserve Bank of

16

Malawi (RBM) in accordance with the Bank’s Disbursement procedures. The RBM will promptly credit

the counter value in Malawi Kwacha to the Treasury Account of Malawi’s Ministry of Finance calculated

on the basis of the ruling exchange rate on the date of transfer of funds by the Bank. GoM will be

required to acknowledge receipt of the funds and to provide confirmation to the Bank that an amount

equivalent to the grant proceeds from the Bank has been credited to the Treasury Account with an

indication of the exchange rate applied within seven days of the credit.

5.1.3 Procurement: There is no special procurement requirement for this operation. However, the

proceeds shall not finance expenditures in the “Negative List” as defined in the Schedule of the

Financing Agreements. If any portion of the Grant is used to finance ineligible expenditures, the Bank

shall require GoM, upon notice from the Bank, to refund the amount involved. Amounts refunded to the

Bank shall be cancelled from the Grant. The procurement will be done according to Malawi’s national

procurement procedures, subject to the Negative List of Non-Eligible Items. MWFO will play an active

role in strengthening the procurement and audit processes by monitoring the implementation of these

activities through the CABS framework. The fiduciary risk assessment on procurement for Malawi is

detailed in Annex I.

5.1.4 Financial Management and Auditing: In line with Bank Policy on Program-Based

Operations, and commitments on harmonisation and alignment under the Paris Declaration, the

implementation, monitoring and evaluation of the Programme will use the country’s systems,

including audit arrangements. Overall, the public financial management system is reasonably adequate

for this proposed assistance (see Annex I for Fiduciary Risk Assessment). The use of the country systems

is justified taking into account the risk mitigation factors and the positive trajectory towards improvement

through the new PFEMRP. The PFEMRP is a multi-year programme of reform covering the entire public

financial management cycle from planning and budgeting to resource mobilization. GoM leads the

implementation of this broad-based reform programme, with financial support from development partners

including the Bank. The annual audit of the GoM consolidated financial statements will be done by the

National Audit Office in accordance with its mandate and a copy of the audit report submitted to the

Bank. The Bank may require GoM to provide an audit of financial flows verifying receipt of resources by

the Reserve Bank and transfer of the equivalent amount in Kwacha into the treasury account.

5.2 Monitoring and Evaluation Arrangements

5.2.1 The country monitoring and evaluation systems will be used for this operation. The progress

in meeting the PAF indicators will be monitored bi-annually by the CABS group, using the targets

and means of verification. The CABS assessments will be the basis for monitoring and reviewing

progress and triggering disbursement. The sector Ministries, Agencies and Departments will have a role

in programme implementation and monitoring. In addition, the Bank will maintain dialogue to monitor

implementation of the programme by MWFO and two supervision missions will be conducted in the one-

year period, and will be planned to coincide with the CABS Reviews during which overall progress in

implementation and achievements of programme objectives are assessed. This will be complemented by

the GFEM quarterly reviews, annual joint analysis of the budget, the MDGS II Annual Progress Review,

and the IMF periodic reviews under the ECF. Some performance indicators are aligned to MGDS II

targets.

5.2.2 GoM and DPs have set up functioning Sector Working Groups (SWG) in Public Financial

Management, Transport, Education, Health, Private Sector, Youth Development and Sports,

Vulnerability, and Disaster Management. The SWGs hold regular dialogue through Technical

Working Groups meetings on quarterly basis and provide feedback to the CABS.

5.2.3 At the completion of the proposed programme, the Bank will prepare a joint PCR with

GoM, focusing on evaluation of the Operation and lessons learnt.

17

VI LEGAL DOCUMENTATION AND AUTHORITY

6.1 Legal Documentation

6.1.1 The Programme will be financed with a proposed ADF Grant of UA 26 million (“Grant”) in

one tranche expected to be disbursed in July 2012. For the purposes of providing the tranche, the Fund

will enter into a Grant Agreement (“Agreement”) with the Republic of Malawi (“Recipient”) of ADF UA

26 million from the Recipient’s ADF 12 allocation. The Grant Agreement shall be governed by the

General Conditions Applicable to Protocols of Agreement for Grants of the African Development Fund

(“General Conditions”), as amended.

6.2 Conditions Associated With the Bank’s Intervention

A Prior Actions for presentation of the programme to the ADF Board

6.2.1 Before the Grant proposal is presented to the Board for approval, the Government of Malawi shall

provide evidence to the Fund that the measures outlined in Box 2 have been implemented.

B Conditions precedent to entry into force of the Grant Agreement

6.2.2 The Agreement shall enter into force subject to fulfillment of the provisions of section 10.01 of

the General Conditions. Specifically, the Agreement shall enter into force on the date of its signature by

the Fund and the Recipient.

C Conditions precedent to the disbursement of the Grant

6.2.3 The Fund’s obligation to disburse the Grant of UA 26 million shall be conditional upon the

Recipient providing evidence in form and substance acceptable to the Fund of the opening of a foreign

currency special account for the receipt of the proceeds of the Grant.

6.3 Compliance with Bank Group Policies

6.3.1 The RFSSP programme complies with applicable Bank Group policies and guidelines including:

(i) the Policy on Program-Based Operations (PBOs); (ii) Guidelines on Development Budget Support

Lending; (iii) Guidelines for Policy-Based Lending on Governance; (iv) Governance Strategic Directions

and Action Plan 2008-2012; and (v) the Strategy Update for the Bank’s Private Sector Operations.

18

VII RISK MANAGEMENT

7.1 The risks and mitigation measures for the Programme are presented in Table IV below and

are also summarized in the logical framework.

Table IV: Risks and Mitigation Measures Risk Mitigation Measure

Macroeconomic risk: Lack of support from

Development Partners could worsen the foreign

reserves situation and increase inflation, following

liberalization of the exchange rate system and

devaluation of the currency to align it to market rates.

The Bank will continue to engage GoM and have close dialogue with

the IMF and CABS development partners with a view to advocating

support. The liberalized system is expected to respond positively to

needs of the country and stabilize the currency. DPs have pledged

support to alleviate effects of the liberalization.

Macroeconomic risk: Due to dependence on imported

fuel and farm inputs as well as primary exports, foreign

currency bottlenecks may derail implementation and

achievement of results. Slow or non-support by DPs to

ease foreign currency shortages may create economic

turmoil, especially when DPs have been advising GoM

to devalue the Kwacha, which has led to price

increases. Expenditure not aligned to policies and

national priorities.

The Crisis Response budget support helps to address this risk directly

by providing fungible resources which can help cover import costs

and improve reserves. DPs have expressed the will to support

government and some are already providing technical assistant to

work out the magnitude of the financing gap. Implementation of the

Malawi Public Financial Management Reform Programme supported

by DPs through the Multi-Donor Trust Fund will continue dialogue

on such issues.

Political and social risks: Unstable political climate

could arise if GoM does not arrest rising inflation from

devaluation and provide safety nets to the poor. The

opposition may frustrate GoM efforts in pursuing the

reform agenda. Lack of funding for social sectors could

increase poverty.

With support from DPs, GoM is putting in place social protection

measures. Social Protection Policy is expected to be in place by

December 2012. GoM has put in place a government of national unity

for stability to drive the reform agenda. CABS reviews and dialogue

with GoM will mitigate less funding to social sectors.

Implementation capacity constraints: Weak institutional

and human resources capacity could hamper

implementation of reforms. Weak PFM can lead to

wastage of public resources and unplanned and non-

responsive expenditure. Political will and support is

necessary for reform implementation. Lack of oversight

may entrench corruption and misuse of public resources.

Through this programme, and the complementary ISP, and other Bank

and DPs intervention, GoM is making efforts to increase spending on

capacity building in key PFM and social sector institutions. PFM reform

programme supported by the DPs and dialogue with GoM will mitigate

this. Timely audit reports and follow-up with action on culprits.

Implementation capacity constraints.

Capacity-building interventions to support PFM and social programmes

implementation through the proposed budget support programme

Fiduciary risk: Reliability of the PFM system and ability

to generate accurate financial reports timely as well as

existence of procedures and processes to safeguard

programme resources could be a risk.

Ongoing PFM reforms undertaken by GoM and supported by donors and

continuous dialogue and monitoring of the PFEMRP implemented

through a Multi-Donor Trust Fund will ensure continuous PFM

improvement.

VIII RECOMMENDATION

8.1 Management recommends that the Board of Directors approve the proposed Grant of UA

26 million from the resources of ADF 12 for the Republic of Malawi in the form of a crisis response

budget support for the purposes and subject to the conditions set out in this report. The Board is

also invited to note that, in 2013, management will return to the Board with a proposal for a

complementary Grant of UA 4 million for the same operation, subject to availability of additional ADF

grant resources for Malawi in 2013 and continued progress in implementation of the country’s reform

agenda.

I

APPENDIX I: Letter of Development Policy

II

III

IV

V

VI

VII

VIII

IX

APPENDIX II: IMF COUNTRY RELATIONS NOTE: LETTER OF ASSESSMENT

To: Members of the Executive Board June 20, 2012

From: The Secretary

Subject: Malawi—Assessment Letter for the World Bank and Other Development

Partners

Attached for the information of Executive Directors is the Fund’s assessment letter on the

macroeconomic conditions in Malawi, which was requested by the World Bank and other

development partners.

If the authorities of Malawi consent to the publication of this assessment, it may be published by

the World Bank.

Questions may be referred to Mr. Tsikata (ext. 39601), Mr. Adedeji (ext. 37363), and Mr.

Ghazanchyan (ext. 37689) in AFR.

This document will shortly be posted on the extranet, a secure website for Executive Directors

and member country authorities.

Att: (1)

Other Distribution:

Department Heads

FO/DIS/12/99

X

Assessment Letter for the World Bank and Other Development Partners

June 19, 2012

Measures implemented by the new government, including the elimination of foreign exchange

restrictions, devaluation of the kwacha, adoption of a floating exchange rate regime, and increases in

fuel prices, have transformed the policy environment and set the stage for resumption of IMF and

donor support. The authorities have committed to implement policies and structural reforms to contain

inflation, build international reserves and promote inclusive growth. The government’s FY2012/13

budget proposals include provisions for scaling up social protection programs to mitigate the adverse

impact of adjustment measures on the most vulnerable segments of the population.

Background

1. President Joyce Banda inherited a very difficult economic situation. Following the sudden death

of President Bingu wa Mutharika in early April 2012, Mrs. Joyce Banda (Vice President at the time)

was sworn into office as President to serve the remainder of the term of the late President, in

accordance with Malawi’s constitution. General elections are scheduled to be held in May 2014.

President Banda took over a country facing a severe shortage of foreign exchange which led to

shortages of critical imports including fuel, inputs for production and medicines. Delays in making

payments abroad led to the loss of credit lines for several businesses, resulting in scaled down

operations and the laying off of workers. Malawi’s long standing foreign exchange problems

intensified in 2011 because of lower tobacco export earnings and the interruption of the ECF-supported

program with the IMF which led several donors to cut their aid to the country. International reserves

fell to the equivalent of ½ a month of imports.

2. Within a month of taking office, the new administration implemented a set of bold measures to

address Malawi’s chronic balance of payments difficulties and to halt the slowdown in economic

activity. The measures implemented so far include all the commitments the government had made

under the current IMF-supported program to adjust the official exchange rate and liberalize the

exchange regime for current account transactions, which the previous administration had been resisting

since early 2011. Non-implementation of these measures led to the interruption of the program. The

specific measures implemented by the new administration include:

Devaluation of the exchange rate from K167 to K250 per U.S. dollar, and adoption of a floating

exchange rate regime.

Allowing banks and foreign exchange bureaus to set the rate at which they buy and sell foreign

exchange from/to their customers.

Removal of the requirement for foreign exchange earnings to be surrendered to the RBM; they now

flow directly to commercial banks.

Cancellation of the requirement for banks to submit to the RBM for review any application for

external payments exceeding US$50,000.

A substantial increase in fuel prices to bring them in line with import costs, and adoption of an

automatic adjustment mechanism to ensure pass through of changes in import costs to retail prices.

Substantial increases in electricity tariffs to ensure movement toward cost recovery.

A tightening of monetary policy to contain inflationary pressures, signaled by the RBM raising the

bank rate from 13 percent to 16 percent.

XI

3. The adjustment measures are beginning to show positive results. Sales of tobacco through

official channels have increased, suggesting a decline in smuggling of the crop to neighboring

countries; the parallel market for foreign exchange has almost collapsed, with premiums over the

official exchange rate falling from 60–80 percent before the devaluation to 5–10 percent, while rates

offered by banks and foreign exchange bureaus are converging; and the private sector’s access to

foreign exchange has eased considerably. The government is working with the World Bank and other

partners to scale up social protection programs to mitigate the adverse effects of the adjustment

measures on the welfare of the most vulnerable segments of the population.

Recent Developments and Near-Term Outlook

4. Economic growth slowed significantly in 2011. After averaging over 8 percent a year during 2007–

10, real GDP grew at 4.3 percent in 2011. Sectors that are heavily dependent on imports—

manufacturing, transportation, construction, and wholesale and retail trade sectors—slowed down the

most, reflecting the impact of the foreign exchange shortage.

Following the recent policy measures, the private sector has begun to clear the backlog of external

arrears which should help re-establish credit lines and improve the flow of imported inputs to allow

enterprises to gradually increase output from the current low levels of capacity utilization.

5. Inflation has been on a rising trend since early 2011, with the year-on-year headline rate

reaching 12.4 percent in April 2012. Rising import costs have been the principal factor behind the

upswing as a growing share of imports were being priced at the parallel market exchange rate before

the May devaluation. The devaluation triggered large adjustments in the retail prices of petroleum

products, which will have ripple effects to other prices. A spike in inflation is expected in the next few

months but should be reversed with implementation of restrained fiscal and monetary policies to

counter second round effects of domestic energy price increases.

6. Fiscal performance deteriorated after FY2009/10. Government expenditure remained steady

while external grants fell sharply and domestic revenue performance (in relation to GDP) deteriorated.

The government relied heavily on domestic borrowing to finance its growing deficit. The overall fiscal

deficit widened from nearly 3 percent of GDP in FY2010/11 to 7 percent in FY2011/12, with domestic

financing rising from 1.7 percent of GDP to 5.6 percent in the respective years. The government and

state owned enterprises have also accumulated about K70 billion (7 percent of GDP) in domestic

arrears over the last few years. The new administration has taken steps to restrain spending, including

by reducing the number of official trips abroad, cutting the number of vehicles available to senior

officials, and postponing new development projects which were to be funded entirely by domestic

resources.

7. Monetary developments in the last few years reflect a dominant influence of fiscal policy. The

RBM accommodated the government’s financing requirement, and cost considerations held it back

from conducting open market operations to mop up excess liquidity. The RBM began tightening its

policy stance in April 2012, including by removing excess liquidity using some of its holdings of

treasury bills. In May the RBM raised its policy rate and, after the devaluation, used foreign exchange

sales to further mop up excess liquidity. Kwacha liquidity conditions tightened significantly and several

banks resorted to the RBM discount window to meet their needs.

XII

Medium-Term Framework and Policies

8. The main objective of the government’s development strategy is poverty reduction through

sustained economic growth and infrastructure development.

In late-April 2012, the government formally approved the second Malawi Growth and Development

Strategy (MGDS II) covering 2011/12–2015/16; the first MGDS covered 2006– 11. A key element of

the strategy for achieving sustainable growth articulated in both documents is the pursuit of sound

economic policies with a view to maintaining inflation at single digit levels and increasing the level of

international reserves. An increase in national investment—with emphases in areas such as electricity

generation and supply, transportation and irrigation, and in selected priority sectors (agriculture,

manufacturing, mining, and tourism)—is expected to deliver high growth, while prudent fiscal and

monetary policies deliver low inflation.

9. The authorities are seeking support under a new ECF arrangement for a program with the

following main objectives:

Recovery in real GDP growth from 4.3 percent in 2012 to about 6½ percent per year in the medium

term.

Achieving and maintaining a stable macroeconomic environment with low inflation, founded on

sustainable fiscal and external balances.

Increasing foreign reserves coverage to three months of imports, to provide a buffer against

exogenous shocks (e.g., weather, terms of trade, and aid flows).

Enhancing the operational independence of the RBM.

Pursuing reforms to deepen the financial sector and promote greater financial inclusion.

Undertaking structural reforms to improve the investment climate and promote sustained and

inclusive growth, including through improvements in infrastructure and regulatory reforms.

10. Fiscal policy and related structural reforms. The FY2012/13 budget is anchored by a zero net

domestic borrowing target, which represents a reduction from 5.6 percent of GDP domestic borrowing

in FY2011/12. Substantially higher donor support in the form of grants and concessional loans reduce

the domestic financing need, but a sizeable revenue effort and tight control of spending will be needed

to ensure that expenditures are aligned with the government’s top priorities, including safeguarding

social safety net provisions. Key elements of the government’s program include:

Domestic revenue mobilization efforts include removal of implicit subsidies on fuel and an

associated boost in fuel tax revenues, and strengthening of revenue administration through increased

audits, adoption and use of electronic fiscal devices in the enforcement of VAT, and the use of

computerized cargo scanners.

The FY2012/13 budget increases the share of total expenditures allocated to social protection

programs, most notably the Farm Input Subsidy Program, as well as public works, school feeding,

school bursary, and cash transfer programs. The additional spending on these programs and on the

social sectors in general is made possible by increased assistance from donors.

Verification of K72 billion arrears by the Office of the Auditor General and formulation of a plan for

settlement of the verified amounts over several years. Implementation of the commitment module in

the IFMIS will be accelerated to help prevent accumulation of new arrears. The government will

inform the general public of its procurement rules through the media, including warnings that those

who provide goods or services outside of the established government system will not be paid.

The government has initiated steps to reduce the risks to the budget posed by contingent liabilities

and operational losses of state owned enterprises. The National Oil Company of Malawi will be limited

to its core activity of managing strategic reserves of fuel. The government will establish a clear

XIII

regulatory regime for the public utilities that covers operating costs and avoids the need for budgetary

transfers and that minimizes recourse to commercial bank borrowing.

11. Monetary policy. Monetary policy will be geared toward achieving price stability, while providing

room for sufficient credit to the private sector and supporting a buildup of international reserves. To

help manage domestic demand and contain inflation, broad money is programmed to grow at about the

pace of nominal GDP in the near term. Further financial deepening in the medium term would allow

broad money to grow faster than nominal GDP without fueling inflation.

12. Financial stability. Financial stability indicators suggest that the banking sector in Malawi remains

sound. Non-performing loans are at low levels, but the deterioration in the macroeconomic

environment in the last two years has elevated the risks to banks’ portfolios. The RBM has intensified

its monitoring and surveillance of the financial system with a view to detecting at an early stage

emerging threats to financial stability. The RBM is establishing Basel II governance structures and

committees, with full compliance with Basel II principles envisaged for January 2014.

13. International competitiveness. In view of the push toward greater regional integration (including

the Grand Tripartite Free Trade Area encompassing COMESA, EAC, and SADC), the government is

determined to enhance Malawi’s international competitiveness, including by removing structural

bottlenecks—e.g., reliable and adequate supply of energy—that are holding back growth and

diversification of the economy. The government is developing a National Export Strategy (NES) aimed

at transforming Malawi from being a predominantly importing and consuming nation to becoming a

producing and exporting nation. Investment incentives will focus on areas that contribute towards

inclusive growth and have extensive forward and backward linkages in the economy, especially

through potential for value addition. The NES is expected to be launched in the second half of 2012.

14. Data quality and transparency. The Minister of Finance recently acknowledged that, under the

previous administration, his ministry inflated revenue data for the first half of this fiscal year (July–

December 2011) that was reported to parliament in February 2012. In late-December 2011, the

Ministry of Finance (MoF) realized that revenues were unlikely to meet a target set by the late

President. Senior officials of MoF authorized the Malawi Revenue Authority (MRA) to obtain short-

term loans from several banks which were deposited into the MRA account at the RBM to “boost”

revenues. The loans were repaid in the first few days of January 2012. The MRA insists that the data it

reported to the MoF were accurate, and that it had nothing to do with the data reported to parliament. In

order to safeguard the integrity of revenue data, the government has decided that the MRA should

publish its monthly revenue collections in the local media with a lag of no more than a month.

Risks to the Medium-term Outlook

15. The main downside risks to the medium-term outlook are related to external shocks, adverse

weather conditions, and policy slippages in the lead up to the 2014 elections. External shocks could

include deterioration in the terms of trade and shortfalls in aid flows, which would adversely affect

growth and government finances. Adverse weather conditions would lower output in agriculture, which

has been the sector that has led growth over the last five years. The liberalization of the foreign

exchange regime will help remove distortions and encourage private investment and diversified

growth. More consistent implementation of prudent fiscal and monetary policies would sustain

increased aid flows and make them more predictable, providing room for the authorities to build up

XIV

international reserves to create a buffer against adverse external shocks. Quarterly monitoring of the

proposed new IMF-supported program would help mitigate the risk of policy slippages.

Toward a new ECF-supported program

16. The new administration has requested a new ECF arrangement to provide a fresh start. The

current ECF arrangement, which is due to expire in February 2013, will be cancelled. A mission that

visited Malawi during May 23–June 6, reached staff-level understandings with the authorities on a

program that could be supported by a new three-year ECF arrangement. The new arrangement is

subject to approval by the IMF’s Executive Board which is tentatively scheduled to consider the

authorities’ request on July 23, 2012. There is one prior action for Board consideration: passage by

parliament of a budget for FY2012/13 that is in line with the understandings reached with the mission

(i.e., zero net domestic financing, and total expenditures within the estimated resource envelope). The

budget submitted by the government to parliament on June 8 is in line with understandings reached

with IMF staff. Parliament is expected to pass the budget law by June 22.

17. IMF staff is proposing higher-than-usual access to Fund resources for Board consideration,

based on balance of payments needs, program strength, and scaled up donor support. If

approved, the amount of financial assistance from the IMF will be SDR104 million (about US$157

million) over three years, with half being disbursed in the first year. The total amount is equivalent to

150 percent of Malawi’s quota, twice the normal level of assistance under the ECF to countries that

have outstanding loans to the IMF in excess of 100 percent of their quota. The higher-than-usual level

of support reflects Malawi’s pressing and large balance of payments need (international reserves are

very low), the strength of the upfront policy measures the authorities have already implemented

(devaluation, floating exchange rate regime, adjustment in fuel prices and adoption of an automatic

adjustment mechanism, tightening of monetary policy), and the policy commitments they have made

under the proposed new arrangement (fiscal restraint underpinned by public financial management

reforms, monetary policy autonomy, transparency in data reporting).

APPENDIX III

XV

APPENDIX III: RECENT EVOLUTION IN MACROECONOMIC KEY INDICATORS

2009 2010 2011 2012 2013 2014 2015 2016 2017

Est. Prel. Proj. Proj. Proj. Proj. Proj. Proj. Proj.

National accounts and prices (percent change, unless otherwise indicated)

GDP at constant market prices 9.0 6.5 4.3 4.3 5.7 6.1 6.5 6.7 6.7 Nominal GDP (billions of kwacha) 1 710.2 812.4 879.8 1,068.1 1,289.0 1,467.9 1,657.7 1,884.0 2,123.8 GDP deflator 8.4 7.4 3.8 16.4 14.2 7.3 6.0 6.5 5.7 Consumer prices (end of period) 7.6 6.3 9.8 22.9 12.0 7.3 6.5 6.3 5.1 Consumer prices (annual average) 8.4 7.4 7.6 18.4 16.1 7.5 6.1 6.8 5.7

Investment and savings (percent of GDP) National savings 20.7 24.7 9.6 11.7 18.3 18.4 19.0 20.5 20.4 Net factor income -1.2 -2.0 -2.1 -3.0 -3.2 -3.2 -3.2 -3.2 -3.0 Net official transfers 9.4 15.7 5.9 11.5 11.0 9.5 9.0 8.4 7.7 Net private transfers 5.1 4.7 4.6 5.6 5.8 5.8 5.7 5.7 5.3 Domestic savings 7.5 6.3 1.1 -2.5 4.7 6.3 7.5 9.7 10.3

Government -7.1 -0.8 -2.3 -6.7 -3.2 -2.1 -1.9 -1.5 -1.1 Private 14.6 7.0 3.4 4.2 7.9 8.4 9.4 11.1 11.4

National investment 25.6 26.0 15.5 15.9 20.1 20.5 21.0 22.6 23.0 Government 6.5 9.6 6.9 7.2 6.4 6.4 6.3 6.0 5.5 Private 19.1 16.4 8.6 8.7 13.7 14.1 14.7 16.6 17.5

Saving-investment balance 2 -4.8 -1.3 -5.9 -4.3 -1.7 -2.2 -1.9 -2.1 -2.6 Government -5.0 1.5 -5.0 -4.8 -0.7 -0.9 -1.0 -0.8 -0.5 Private 0.1 -2.8 -0.9 0.5 -1.0 -1.3 -0.9 -1.2 -2.1

Central government (percent of GDP on a fiscal year basis) 3 Revenue 32.1 33.8 32.1 27.0 33.2 31.2 31.1 30.8 30.6

Tax and nontax revenue 20.5 23.5 24.5 21.5 22.8 23.4 23.7 23.9 24.2 Grants 11.6 10.3 7.6 5.5 10.4 7.8 7.4 6.9 6.3

Expenditure and net lending 37.8 33.8 35.0 34.0 34.3 32.2 32.0 31.6 31.2 Overall balance (excluding grants) -17.3 -10.3 -10.5 -12.5 -11.6 -8.9 -8.3 -7.6 -7.0 Overall balance -5.7 0.1 -2.9 -7.0 -1.1 -1.1 -0.9 -0.8 -0.7 Foreign financing 2.0 0.9 1.3 1.6 1.1 1.1 0.9 0.8 0.7 Domestic financing 3.7 -0.9 1.7 5.6 0.0 0.0 0.0 0.0 0.0 Privatization 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Discrepancy 4 -0.1 -0.1 -0.1 -0.2 0.0 0.0 0.0 0.0 0.0

Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)

Money and quasi money 23.9 33.9 35.7 18.2 24.5 16.7 19.7 18.4 17.2 Net foreign assets -15.5 13.3 -7.9 -1.2 11.1 8.6 10.5 10.0 8.1 Net domestic assets 39.5 20.6 43.6 19.5 13.4 8.1 9.2 8.5 9.1

Credit to the government 19.4 -9.2 19.7 11.0 1.7 -0.2 0.5 0.4 1.5 Credit to the rest of the economy (percent change) 36.5 47.6 30.1 17.5 19.0 13.2 12.8 12.8 12.8

External sector (US$ millions, unless otherwise indicated) Exports (goods and services) 1,050.2 1,360.4 1,408.7 1,386.1 1,604.1 1,730.4 1,868.2 2,017.4 2,179.1 Imports (goods and services) 1,961.1 2,425.4 2,214.5 2,257.6 2,347.0 2,470.7 2,616.2 2,792.8 3,009.9 Usable gross official reserves 140.5 279.6 190.2 204.5 402.9 540.4 687.8 830.2 961.9

(months of imports) 0.7 1.5 1.0 1.0 2.0 2.5 3.0 3.3 3.6 (percent of reserve money) 40.7 73.4 42.5 52.8 90.7 110.4 126.7 152.7 170.9

Current account (percent of GDP) -4.8 -1.3 -5.9 -4.3 -1.7 -2.2 -1.9 -2.1 -2.6 Current account, excl. official transfers (percent of GDP) -14.2 -17.0 -11.9 -15.7 -12.7 -11.7 -11.0 -10.4 -10.4 Real effective exchange rate (percent change) -8.2 -0.4 10.7 ... ... ... ... ... ... Overall balance (percent of GDP) -2.0 2.2 -1.9 -0.5 3.1 2.5 2.9 2.9 2.5 Terms of trade (percent change) 7.7 3.0 -17.6 20.5 1.1 3.1 2.9 2.3 2.6

Debt stock and service (percent of GDP, unless otherwise indicated)

External debt (public sector) 15.9 16.0 16.2 20.3 20.6 19.5 18.5 17.4 17.5 NPV of debt (percent of exports) 57.1 44.6 48.1 52.2 46.1 41.9 37.8 33.9 31.7 External debt service (percent of exports) 1.3 1.3 1.6 2.4 2.5 3.8 3.8 3.6 2.5 External debt service (percent of revenue excl. grants) 1.4 1.5 1.7 3.6 4.0 5.8 5.8 5.4 3.7 91-day treasury bill rate (end of period) 10.5 6.2 6.8 ... ... ... ... ... ...

1 Reflects substantial upward revisions to the historical national accounts data received in March 2011. 2 The government savings—investment balance is calculated adding foreign grants to government savings above. The private savings—investment balance is calculated adding the items in the balance of payments, net of foreign grants, to private savings above. 3 For example, 2009 refers to fiscal year 2008/09, which is from July 1, 2008, to June 30, 2009. 4 For 2011/12 fiscal year, reflects the outturns of the first three quarters and the projections for the fourth quarter.

Table 1. Malawi: Selected Economic Indicators, 2009–17

XVI

APPENDIX IV: PROGRAMME TARGETS

Targets for 2012

Indicators Policy objective Target Progress to date (May

2012)

(i)Budget out-turn

In year expenditure

reallocation between

primary expenditure

votes.

To ensure credibility of the

budget.

Variance between budgeted expenditure

and outturn for 25 votes in 2010/11

Fiscal Year amount to 10% or less of the

2009/10 approved budget’s primary

expenditure (for 2010/11 PAF).

2010/11 variance was

6%, ( less than 10%).

(ii)Timelines and follow-

up of audit reports and

recommendations.

To promote accountability of

those charged with

management of public

resources.

Treasury minutes responding to audit

reports for years ending June 2005, 2006

and 2007 are submitted to Parliament by

December 2011.

Treasury Minutes have

been submitted to

Parliament.

(iii)Protecting priority

expenditures

(Government maintains

budget commitments for

key public services).

To protect pro-poor

expenditures and ensure

allocation of resources in

accordance with strategic

priorities.

Government meets budget allocation

requirements of Health and Education

SWAPs in 2011/12 approved budget

(prior action) and for 2012/13 approved

budget.

GoM allocated 23.9% to

education against a 20%

SWAP target.

Targets for 2013

(i)Timeliness and quality

of expenditure reporting.

Strengthen accountability in

use of public resources.

The 2010/11 Auditor General’s Annual

Report be submitted to and tabled in

Parliament by December 2012.

To be assessed in

December 2012 for the

complementary

programme

(ii) Existence of the

National Social Support

Programme (NSSP).

To have a framework for a

costed programme and action

plans.

The NSSP is finalized and approved by

the National Steering Committee by

December 2012.

To be assessed in

December 2012 for

complementary

programme.

(iii) Existence of

National Social Support

Policy.

To have a social support

policy in place.

The draft Social Support Policy is

approved by Cabinet by December 2012.

To be assessed in

December 2012 for the

complementary

programme