World Bank Document€¦ · CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) USSI = MK 15.3...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6799-MAI

REPORT AND RECOKENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

: THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 73.2 MILLION

OF WHICH SDR 2.9 MILLION

HAVE BEEN ALLOCATED FROM IDA REFLOWS

TO THE

REPUBLIC OF MALAWI

FOR A

FISCAL RESTRUCTURING AND DEREGULATION PROGRAM

APRIL 3, 1996

This document has a restricted distribution and may be sed by recipients only in the performance oftheir official duties. Its contents may not otherwise be discosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Malawi Kwacha (MK)

USSI = MK 15.3 (March 1996)

FISCAL YEAR (FY96/97)

April 1, 1996 to March 31, 1997

FOR OFFICIAL USE ONLYABBREVIATIONS AND ACRONYMS

ADMARC Agricultural Development and Marketing CorporationASAC Agricultural Sector Adjustment CreditBMR Budget Management ReviewBOP Balance of PaymentsCAS Country Assistance StrategyCBI Cross Border Initiative for Eastern and Southern AfricaCCFF Compensatory Contingency Financing FacilityCOMESA Common Market for Eastern and Southern AfricaCPPR Country Portfolio Performance ReviewEDDRP Entrepreneurship Development and Drought Recovery

ProgramEDI Economic Development InstituteEPZ Export Processing ZonesESAF Enhanced Structural Adjustment FacilityFMIS Financial Management Information SystemFRDP Fiscal Restructuring and Deregulation ProgramGOM Government of MalawiIBRD International Bank for Reconstruction and DevelopmentIDA International Development AssociationIMF International Monetary FundITPAC Industrial and Trade Policy Adjustment CreditLDP Letter of Development PolicyMASAF Malawi Social Action FundMDC Malawi Development CorporationMIPA Malawi Investment Promotion AgencyMK Malawi KwachaMT Metric TonsMTEF Medium-Term Expenditure FrameworkPAR Project Audit ReportPCR Project Completion ReportPFP Policy Framework PaperPHL Press Holdings Ltd.PSI Pre-Shipment InspectionPSIP Public Sector Investment ProgramRBM Reserve Bank of MalawiSAR Staff Appraisal ReportSGR Strategic Grain ReserveSPA Special Program of Assistance to Low-Income Debt-

Distressed Countries in Sub-Saharan AfricaSOE State Owned EnterpriseTCC Tobacco Control CommissionTEP Temporary Employment PermitTOR Terms of ReferenceVAT Value Added Tax

This docutment has a restricted distribution and may be used by recipients only in the performance of their|official duties. Its contents may not otherwise be disclosed wiihout World Bank authorization.

Contents

SUURY .............................................................. i

1. INTRODUCTION ............................................................ I

2. BACKGROUND AND RATIONALE ............................................................ 2

Overview ........................................................... 2Experience Under Previous Adjustment Operations ............................................................ 3Environment Conducive to Higher Impact Adjustment ........................................................ 5

Commitment to Poverty Alleviation ........................ .................................... 6Commitment to Broad-Based Private Sector Development .......................................... 7Govemment-driven Preparation Process and Broad Consultation ................................ 8

3. WORLD BANK GROUP ASSISTANCE STRATEGY ........................................................ 8

Links Between the Proposed Program and the CAS ............................................................ 8Stakeholder Involvement During Preparation of the Program ........................... ...................9Internal Consultation Process in the World Bank ........................................................... 10Collaboration with IMF ........................................................... 10

4. MACROECONOMIC FRAMEWORK ........................................................... 11

Recent Turn-around in Macroeconomic Situation ........................................................... IIObjectives and Policies ........................................................... 12Extemal Financing Requirements ........................................................... 14

5. THE FISCAL RESTRUCTURING AND DEREGULATION PROGRAM ..................... 15

Objectives ........................................................... 15Actions Supported by the Operation ................. .......................................... 16

Fiscal Restructuring ........................................................... 16Deregulation of Agricultural Policies ........................................................... 25Deregulation of Private Sector Development Policies ................................................ 30

6. THE PROPOSED CREDIT ........................................................... 34

Conditionalities: Borrower-IDA Contract ........................................................... 34Supervision Plan ........................................................... 35

Supervision Focus ........................................................... 35Organization and Timing of Supervision Activities ............................................. ...... 36Performance Indicators ........................................................... 37Borrower's Contribution to Supervision ........................................................... 37

Credit Administration ........................................................... 37Coordinating Agency ........................................................... 37Financing Plan ........................................................... 38Disbursement and Audit ........................................................... 39Procurement Procedures ........................................................... 40

Benefits ........................................................... 40Risks ........................................................... 40

Implementation Risks ........................................................... 40Outcome Risks ........................................................... 42

7. RECOMMENDATION ........................................................... 43

AnnexesAnnex A: Previous Adjustment Operatios ............................................................. 44Annex B: Environment for Higher Impact Adjustment Lending in Malawi ..................... 52Annex C: Supplementary Information ............................................................. 53Annex D: Privatization Program ............................................................. 54Annex E: Matrix of Policy Actions ............................................................. 57Annex F: Supervision Chart ............................................................. 60Annex G: Disbursement Performance ............................................................. 64Annex H: Letter Of Development Policy ............................................................. 67Annex 1: Statistical Data ............................................................. 91

TablesTABLE 2.1: MALAWI - PREVIOUS ADJUSTMENT OPERATIONS ...................................... 3TABLE 2.2: MALAWI - POVERTY INDICATORS .................................................................. 5TABLE 2.3: MALAWI - MAJOR POLICIES IMPLEMENTED SINCE MAY 1994 ................. 6TABLE 4.1: MALAWI - SELECTED MACROECONOMIC INDICATORS .......................... 12TABLE 4.2: MALAWI - EXTERNAL FINANCING REQUIREMENTS ................................ 14TABLE 5.1: MALAWI - TARGET SHARES IN RECURRENT EXPENDITURES (%) ......... I 8TABLE 5.2: MALAWI MTEF - SECTORAL EXPENDITURE SHARES ............................... 19TABLE 6.1: FRDP - SUMMARY OF COMPLETED ACTIONS ............................................. 35TABLE 6.2: FRDP - FOCUS OF SUPERVISION ................................................................. 36TABLE 6.3: FRDP - SELECTED PERFORMANCE INDICATORS ....................................... 38TABLE 6.4: SENSITIVITY ANALYSIS - MACROECONOMIC SCENARIOS ..................... 43

FiguresFIGURE 2.1: MALAWI - REAL GDP GROWTH .................................................................. 4

BoxesBOX 2.1: LESSONS LEARNED FROM PREVIOUS ADJUSTMENT OPERATIONS ........... 7BOX 5.1: QUOTES FROM SECTORAL MTEF REPORTS .................................................... 20

This operation was prepared by a team comprising of Hartwig Schafer (Senior CountryEconomist and Task Manager, AFIMI); Alexine Frank-Cooper (Task Assistant, AFIMI); GeneTidrick (Lead Economist, AF1DR); Peter Harrold (Economic Advisor, AFTPS); LadipoAdamolekun (Principal Public Sector Management Specialist); Lloyd McKay (SeniorEconomist, AFIMI); Jim Smith (Senior Economist, AFIML); Shem Migot-Adholla (SeniorRural Sociologist, AGRPW); Paul Siegel (Rural Poverty Specialist, AFIAE); Ahmad Ahsan(Country Economist, AFIMI); Andrew Stone (Private Sector Development Specialist, PSD);Hakan Wilson (Private Sector Development Specialist, PSD); Stanley Hiwa (AgriculturalEconomist, AFIMW); Noel Kulemeka (Program Officer, AFIML); and Teja Raparla (AFIMI).Aberra Zerabruk is the Senior Counsel (LEGAF) and Steve Gaginis is the Disbursement Officer(LOAAF). Peter Miovic (Lead Economist, EDI) is the Peer Reviewer. Barbara Kafka (AFIC3)is the Country Operations Manager, Ataman Aksoy (AFIMI) is Chief of the Macro, Industryand Finance Division, and Katherine Marshall (AFIDR) is Director of the Southern AfricaDepartment.

MALAWIFISCAL RESTRUCTURING

AND DEREGULATION PROGRAM

SUMMARY

Beneficiary: Republic of Malawi

Project Task ID: 3MAL-PA-1648

ImplementingAgency: Government of Malawi

IDA Amount: SDR 73.2 million (US$106.4 million equivalent) of whichSDR2.9 million (US$4.4 million) have been allocatedfrom IDA Reflows.

Terms: Standard IDA Terms: 40 years maturity with a 10-yeargrace period.

Co-financing: Co-financing and parallel financing is expected from theGovernment of Germany (US$7 million equivalent) andthe Government of Japan. The Governments of Denmarkand Sweden have expressed interest in supporting theoperation through quick-disbursing grants.

Disbursement: The proposed Credit will be disbursed through theReserve Bank of Malawi. The initial tranche of SDR50.9 million (US$74.4 million equivalent) including theallocation from IDA Reflows, will be available uponCredit effectiveness and the Second Tranche ofSDR 21 million (US$30 million equivalent) will bedisbursed when the conditions relating to civil servicereform are met. SDR 1.3 million (US$2 millionequivalent) is available for consultant services.

Background: The Fiscal Restructuring and Deregulation Program(FRDP) will be the first economic reform program

Summary

designed and implemented by the new Government ofMalawi (GOM). The operation (a) is anchored in theGOM's medium-term strategy as reflected in the6th Policy Framework Paper (PFP, issued onOctober 10, 1995) and the attached Letter of DevelopmentPolicy (LDP); and (b) is a core component of the WorldBank Group's Country Assistance Strategy (CAS), whichis being presented to the Board in conjunction with theproposed operation. The FRDP is supported under theSpecial Program of Assistance to Low-Income Debt-Distressed Countries in Sub-Saharan Africa (SPA) and theCross Border Initiative for Eastern and Southern Africa(CBI).

Description: The FRDP is designed to support a critical new phase inMalawi's emerging macroeconomic reform program,aimed at the dual strategy of ensuring the macroeconomicessentials to allow growth, and a fundamentalrestructuring of programs that address the country'spervasive poverty. The cornerstone of this phase of theprogram is a far-ranging overhaul of publicexpenditure planning and management, with a view toraising allocations in pro-poor expenditure categorieswithin agreed macroeconomic targets. Specifically, theoperation supports development of a Medium-TermExpenditure Framework (MTEF), comprehensive civilservice reform, and tax and tariff reform. In addition, theFRDP focuses on policy measures that will allow thepoor to participate in the full range of economicactivities. This includes complete removal of remainingpricing and marketing constraints on smallholderagriculture, and removal of the binding constraints tobroad-based private sector entry and development.

Rationale forIDA Involvement: The proposed Credit represents the logical continuation of

IDA involvement in Malawi's adjustment to a difficultexternal environment. Despite a series of earlieradjustment operations, there remains a backlog of policyconstraints which the new Government--with technicaland financial support from IDA and other donors--iscommitted to removing rapidly. The proposed FRDPsupports a time-slice of Malawi's economic reformprogram starting with a wide range of credible policymeasures that have been implemented over the past

Summary iii

12 months (including education sector policy, expenditurereform, and agricultural liberalization). In other areas theGOM has expressed its commitment to reform andlaunched medium term initiatives--but further analyticalwork needs to be carried out before specific measures areidentified. In those areas, IDA will remain engaged inproviding guidance and advice during supervision andexpects to narrow down the scope and timing of specificmeasures within the next 12 to 18 months (including landpolicy reform, drought proofing, and privatization).

GovernmentCommitment: Critical components of the FRDP--such as the civil

service census, the privatization strategy, the measuresunder the CBI, and the MTEF--were prepared byGovernment. The GOM has firmly demonstrated itscommitment to policy reforms, economic growth, andpoverty alleviation and has unequivocally stated itscommitment to involving broad segments of civil societyin the planning and implementation of its developmentprograms. The proposed Credit will provide funds forconsultants' services to carry out stakeholder meetings togauge the impact of policy measures on vulnerable groupsand support a communications strategy for the proposedmeasures.

Benefits: The policy package will directly benefit the poor throughredirection of public resources towards their needs (suchas primary services in education and health) and throughreduced inflation resulting from macroeconomicstabilization. Improved access to cash crops andalternative marketing channels should increasesmallholder household incomes. Exporters will gainthrough increased incentives for agriculturaldiversification, helping the economy to reduce itsdependency on tobacco (from currently 66% of exportrevenues to about 50% by 2005) and creating additionalemployment opportunities.

Risks: The FRDP faces implementation and outcome risks. Therisk of failing in macroeconomic stabilization because of,for instance, excessive civil service wage increases, willbe managed through continuation of bilateral negotiationsbetween the GOM and the Civil Servants Union. Theresolution of the August 1995 civil service strike is

iv Summary

indicative of the GOM's determination to offset highercivil service salaries only with parallel reduction andrestructuring of the size of the civil service in the contextof civil service reform.

It is probable that civil service reform and privatizationwill encounter political pressures by civil servants andparastatal employees who will object to retrenchmentplans. Although extensive stakeholder involvement willhelp reduce resistance from special interest groups (andthe GOM's communication strategy will help build broad-based consensus), residual risks remain. These will bemanaged by reaching agreement on end-of-service andseverance benefits packages. The recently completedstaff retrenchment of Malawi Railways has set a precedentby which future retrenchment packages in the public andparastatal sector might be measured.

Accelerated agricultural liberalization could result infurther increases in maize prices (main staple). Thiswould adversely affect food deficit households andreceive significant attention from civil society and criticsof adjustment programs--and could eventually lead toreversal of the GOM's liberalization policy under popularpressure. This risk will be managed through a mix ofstakeholder consultations, targeted pro-poor activities(such as public works under the Malawi Social ActionFund (MASAF), targeted input distribution programs, andsupplemental food programs) and sales from the StrategicGrain Reserve (SGR).

Although the GOM's political willpower will continue tobe tested, actions taken so far clearly signal the GOM'scommitment to poverty reduction and macroeconomicstabilization. In all policy areas, preparatory work wascarried out by the GOM and implementation of criticalmeasures is on track, thus reducing the risk of back-pedalling on key issues. The aforementioned residualimplementation risks can be reduced to a level similar tothose associated with many of IDA's successful programs.

But even if Malawi does all the right things, vulnerabilityto external shocks--outcome risks--will persist. The riskof drought is by far the highest and least controllable ofsuch risks. In the short term, the impact of a major

Summary v

drought cannot be offset alone by shifting resources or byrelying on substantial donor grants; additional aggregatedemand management would be necessary to stay withinthe agreed fiscal framework. In that case, some measuresare necessary to reduce the burden on the poor; theMTEF will help to protect expenditure allocations in thesocial sectors and will identify low-priority areas fromwhich to reallocate expenditures to drought-relatedoperations. Over the medium term--and for a limitednumber of households--the agreed expansion ofsmallholder tobacco production is a measure to improvedrought vulnerability. Over the longer term, the GOMand IDA intend to address drought vulnerability through amore systematic and integrated effort to promotealternative crops, disseminate alternative technologies andfoster increased non-farm activities.

INTERNATIONAL DEVELOPMENT ASSOCIATIONREPORT AND RECOMMENDATION OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT TO SUPPORT A

FISCAL RESTRUCTURING AND DEREGULATION PROGRAMTO THE REPUBLIC OF MALAWI

1. INTRODUCTION

1.1 I submit the following report and recommendation on a proposedInternational Development Association (IDA) Credit of SDR 73.2 million(US$106.4 million equivalent) of which SDR 2.9 million have been allocatedfrom IDA Reflows to the Republic of Malawi in support of its economic reformand structural adjustment program. The Credit would be on standard IDA ternswith 40 years maturity and a 10-year grace period. Co-financing is expectedfrom the Governments of Germany and Japan. The Governments of Denmarkand Sweden have expressed their interest to support the prograrn through quick-disbursing grants.

1.2 This will be the first economic reform program designed andimplemented by Malawi's democratically-elected government, following30 years of one-party rule. The operation is (a) anchored in the GOM'smedium-term strategy as reflected in the 6th Policy Framework Paper (PFP,issued on October 10, 1995); and (b) a core component of the World BankGroup's Country Assistance Strategy (CAS), that is being presented to theBoard in conjunction with the proposed operation. The GOM's program is alsosupported by a three-year arrangement under the IMF's Enhanced StructuralAdjustment Facility (ESAF approved by the IMF's Board on October 18, 1995).

2 Chapter 2

2. BACKGROUND AND RATIONALE

OVERVIEW

2.1 The Fiscal Restructuring and Deregulation Program (FRDP) is designedto support a critical new phase in Malawi's continuing macroeconomic reformprogram, aimed at the dual strategy of ensuring the macroeconomic essentials toallow growth, and a fundamental restructuring of programs to ensure that thesebetter address the country's pervasive poverty. The Poverty Profile (prepared bythe GOM and the Bank) shows that Malawi's per capita spending in the socialsectors compares favorably with other low-income countries. However, socialsector spending is highly biased against primary level services and thereforefails to reach broad segments of the poor. The GOM has launched a far-reachingprocess to reorient public spending to pro-poor areas in line with its commitmentto expand the provision of social services to the majority of the population.Further, the GOM has embarked on the accelerated liberalization of the economyto achieve broader-based development and sharing in the country's wealth bythose segments of the population that were largely excluded in the past.Consequently the proposed operation focuses on the following two policy areasin the GOM's medium-term program:

(a) Fiscal restructuring in favor of social sectors.

(b) Deregulation to integrate smallholder farmers (who account for85% of the poor) and a nascent private sector in the mainstreamof development.

2.2 Proceeds from the proposed Credit will (a) help fill Malawi's projectedexternal financing gap through FY96/97; (b) provide budgetary support forcritical expenditures in the social sectors and a substantial net repayment to thedomestic banking system; and (c) smooth consumption to lessen the costs ofstabilization and help prevent undue hardship to the poor.

2.3 Initially we planned to present a larger Credit with two tranches plus afloating tranche linked to implementation of specific actions under an agreedcivil service reform program. However, in view of the breadth and complexityof the overall reform agenda, we decided that the operation should be geared to ashorter timeframe. An initial tranche (US$74.4 million equivalent) willsupport a wide range of far-reaching policy measures which the GOM hasalready taken during the past months. A smaller Second Tranche (Civil

Background and Rationale 3

Service Reform Tranche equivalent to US$30 million) will be linked tospecific actions under civil service reform (to follow about 6 months after theinitial tranche). We expect continued strong commitment by the GOM and planto pursue specifics under the medium-term policy agenda in conjunction withsupervision of the proposed program and during preparation of a follow-onoperation which we plan to present for Board approval in FY98.

EXPERIENCE UNDER PREVIOUS ADJUSTMENT OPERATIONS

2.4 Since 1981 Malawi has undertaken six adjustment operations, includingtwo supplemental Credits (Table 2.1: Malawi - Previous AdjustmentOperations), reflecting a pattern of recurrent periods of short-lived economicrecovery and growth (as in 1983-85 and 1988-91), which were halted or reversedby external shocks followed by economic recessions. Details on previousAdjustment Operations are presented in Annex A. Although these repeatedperiods of economic recovery earned Malawi the reputation as a "strongadjuster", sustainable and broad-based growth has remained elusive (Figure 2.1:Malawi - Real GDP Growth). During the early 1980s structural reforms werepursued and designed primarily for their impact on fiscal stability, for instance,restructuring loss-making parastatals and removing fertilizer subsidies. WhileMalawi succeeded in the short run, the costs of successive stabilizations weresignificant. Much of the burden of fiscal tightening was borne by the poorestsegments of the population because expenditure cuts perpetuated the imbalancebetween spending on primary social services (which can benefit the poor) andtertiary level social expenditures (which benefited a small elite). Malawi'spoverty indicators fell behind other countries that started from similar low levelsat Independence.

Table 2.1: Malawi - Previous Adjustment Operations

Name of Operation Board Approval IDA Credit(USS M)

SAL-I FY81 45SAL-Il FY84 55SAL-Ill FY86 30SAL-IlI Supplement FY87 10Industrial and Trade Policy Adjustment Credit (ITPAC) FY88 79Agricultural Sector Adjustment Credit (ASAC) FY90 79Entrepreneurship Development and Drought Recovery Program (EDDRP) FY92 120Entrepreneurship Development and Drought Recovery Program - Supplement FY95 40

2.5 The pre-1994 Government's lack of commitment to poverty alleviation--combined with Malawi's vulnerability to recurrent external shocks--forestalledany sustained and comprehensive transformation of the economy. Until a fewyears ago, Malawi's economy--in particular the smaliholder agricultural sector--

4 Chapter 2

was among the most regulated private sectors in Africa. Marketing andproduction restrictions excluded smallholders from growing profitable cashcrops (especially burley tobacco), from getting prices that corresponded to worldmarket prices, and from competing with the privileged estate sector. Until 1987the marketing monopsony of ADMARC (Agricultural Development andMarketing Corporation) effectively taxed the smallholder sub-sector andprevented entry by private traders. Expanding tobacco exports provided a thinveneer of growth (almost exclusively in the estate sector) that concealed a fragileand narrow macroeconomic base, highly skewed income distribution, and lackof economic diversification.

SALI SALII SALIII ITPAC ASAC EDDRP1100 . ..... ... . . .. . .. j . . ...- .. ,

9.7

8.3

600 5.44.4 4.6

3.7

.-.00 I.4-4.00

-10.2

-14.00 - - - - - - ---- -

1975 1991 193 1985 1987 19S 1991 1993 1il

Figure 2.1: Malawi - Real GDP Growth

2.6 The formal sector became increasingly dominated by a few public andprivate conglomerates (such as Press Corporation, ADMARC, and MalawiDevelopment Corporation (MDC)). Concentration of property ownership in theeconomy reinforced the increasingly domineering political regime. PresidentBanda personally owned Press Corporation, a "private" company controllingover half of Malawi's small formal sector, including banks, manufacturing andagricultural estates. A small number of Malawians benefitted, while the lives ofthe majority became worse. Malawi's Gini coefficient for householdexpenditures (.62) may be the highest recorded in the World (Table 2.2: Malawi- Poverty Indicators).


Table 2.2: Malawi - Poverty Indicators

Malawi SSAIncome per Capita (US$) 140 520Life Expectancy (years) 45 52Adult Illiteracy (%)

Total 59 50Female 69 62

Income Inequality (Gini coefficient) .62Population per Physician (1984) 11,340 24,180Access to Safe Water (%) 48 ...Infant Mortality Rate 142 93Child Mortality Rate 223 172

2.7 By 1987 it was clear that business as usual was not going to lead tosustained recovery. The Bank launched analytical work which pointed to themagnitude of rural poverty, the deeply engrained economic inequalities, and theGovernment's weak commitment to poverty alleviation. The first explicitly pro-poor operation in Malawi (the 1989 Agricultural Sector Adjustment Credit -ASAC) led--after significant resistance by the past Government--to the gradualremoval of several restrictions on smallholder agriculture (including barriers toparticipation by private traders, and limited smallholder access to burley).Preparation of the 1992 adjustment operation--the EntrepreneurshipDevelopment and Drought Recovery Program (EDDRP)--coincided with theonset of political transition and mounting internal opposition to the previousgovernment. The operation deepened a number of structural reforms (such astariff reform, further liberalization in the agricultural sector, and investmentderegulation) but became effectively a holding operation to keep the economyon track during the severe drought of 1992 and through the process of politicaltransition.

ENVIRONMENT CONDUCIVE TO HIGHER IMPACT ADJUSTMENT

2.8 Since the 1994 political transition in Malawi, the odds for successfulstructural reforms have substantially improved, especially in those areas whereMalawi compares unfavorably with other countries in the region (such as fiscalmanagement and pro-poor policies). In contrast to the previous regime, the newGOM has firmly demonstrated its commitment to policy reformn and hasradically improved the approach to dealing with the country's pervasive poverty.Major policies implemented by the new GOM are listed in Table 2.3. Thedesign of the proposed program takes into account the lessons learned from

6 Chapter 2

previous operations (Box 2.1: Malawi - Lessons Learned from PreviousAdjustment Operations). The variables that contribute to an environmentconducive to Higher Impact Adjustment Lending in Malawi are summarized inAnnex B: Environment for Higher Impact Adjustment Lending in Malawi.

Table 2.3: Malawi - Major Policies Implemented Since May 1994

Policy Measure Impact* Removal of all primary I lncrease in primary school enrollment from 1.9 million

school fees students to 3 million students; increase in girls' grossenrollment rate from 75% to 96% (overall enrollment ratefrom 81% to 108%)

* Increase in smaliholder > Annual cash injection of between US$50 million and USS75burley tobacco quota from million into smallholder sector15,000 tons to over 50,000tons

* Removal of ADMARC = Smaliholder farmers get producer prices paid by privatemonopsony on all traders that are higher than ADMARC's announced pricesmallholder crops > Increasing share of smallholder tobacco marketed directly or

through intermediate buyers who pay higher prices thanADMARC

* Retrenchment of about => Budgetary savings in FY95/9620,000 temporary workersin the civil service

* Enforcement of Customs => For FY95/96 cumulative tax revenues are running about 9%and Tax Laws above projections

* Implementation of cash > Fiscal stabilization has resulted in decline of quarterlybudget inflation rate from 34% to about 20% between January and

December 1995

* Strengthening of foreign > Stabilization of exchange rate at MK 15.3 per I US$;exchange interbank market accumulation of total foreign reserves equivalent to 4

months of imports by end-1995 of which 2.0 monthsequivalent are gross official reserves; seasonal smoothingof divergent foreign exchange demand and supply flows

Commitment to Poverty Alleviation

2.9 The new GOM had run on a poverty-focused platform, and since takingoffice has followed through in both word and deed. Within weeks of the 1994elections, the new GOM acted on a campaign promise and announced theremoval of all primary school fees. This resulted in a dramatic, and largelyunexpected, increase in the number of primary students from 1.9 million to over3 million, with more equitable enrollment across gender, regions, and household


income levels. Girls gross enrollment increased from 75% to 96%, grossenrollment of the poorest quintile increased from 58% to 74%. The GOM'sseriousness about putting poverty alleviation at the center of its developmentagenda was translated into a Poverty Alleviation Program. A PovertyMonitoring Unit was set up to track Malawi's social indicators and coordinateperiodic household surveys. The GOM has embarked on a comprehensiverevision of the budgeting process (Medium-Term Expenditure Framework,MTEF) and intends to direct more expenditures into pro-poor areas.

Box 2.1: Malawi - Lessons Learned from Previous Adjustment Operations

The following six lessons--drawn from Performance Audit Reports prepared by OED--point tothe reasons why Malawi still ranks among the poorest countries in Sub-Saharan Africa despitesignificant efforts and large resource flows under previous programs:

* The most important obstacle to sustainable growth and reforms has been the lack of clearand unequivocal political commitment to poverty alleviation, liberalization in thesmallholder sector, and broad-based private sector development.

* Delays in acting on agreed measures underscore the weak administrative andinstitutional base which constrained many policy reforns.

* Recurrent and serious external shocks--including terms-of-trade shocks, high interestrates, oil crises, and closure of Malawi's shortest external transport links through war-tomMozambique--repeatedly diverted policymakers' attention from medium-term and long-term issues.

* The domineering leadership style of the former Head of State combined with pragmaticeconomic policies had some success--particularly in areas where vested interests of thepolitical elite were not compromised--but failed to achieve broad-based transformation ofthe economy.

* Tangible results with regard to poverty alleviation which have only started to emerge overthe past two years, attest to an unfinished agenda within the broader scheme ofmacroeconomic stabilization and broad-based private sector development.

* Greater rigor in economic and sector analyses might have pointed to actions that couldhave enhanced the impact of adjustment operations, particularly in poverty alleviation.

Commitment to Broad-Based Private Sector Development

2.10 Through the preparation of a Privatization Policy Framework, the GOMhas launched a privatization program to help attract foreign and domesticinvestment and facilitate broad-based private sector development. In addition,new agricultural strategy comnmits Malawi to far-reaching deregulation and thepromotion of smallholder development. In early 1995 marketing restrictions onsmallholder tobacco growers were lifted, and smallholder tobacco quotas werede facto removed to benefit the poor. Fixed producer and consumer prices formaize were replaced by a market-oriented price band; this should improve

8 Chapter 2

efficiency in production and marketing of maize and other food crops and helppromote crop diversification and food security.

Government-driven Preparation Process and Broad Consultation

2.11 In addition to initiating the policies that are supported by the proposedoperation. the GOM has moved effectively in preparing critical programcomponents. such as the civil service census, the privatization framework, andthe MTEF (ref. attached GOM's Letter of Development Policy - LDP). TheGOM is building political commitment to the reforms, for instance, throughCabinet-level discussions of both the PFP and the pre-appraisal mission's AideMemoire. Furthermore, the GOM has vowed to involve civil society in theplanning and implementation of development programs. Meetings betweenpolicymakers, private sector representatives and the churches have helped toincrease and widen understanding of and appreciation for the tight fiscal andmacroeconomic measures which are often perceived as anti-poor. TwoEconomic Development Institute (EDI) missions visited Malawi sinceNovember 1995 to assist the GOM in working out a systematic communicationsstrategy, held meetings with a cross section of civil society, and providedtraining to Information Officers and the press.

3. WORLD BANK GROUP ASSISTANCESTRATEGY

LINKS BETWEEN THE PROPOSED PROGRAM AND THE CAS

3.1 The World Bank Group's work in Malawi--policy dialogue, economicand sector work, and lending--is all intended to bring about sustainable povertyreduction (details are presented in the CAS) by supporting macroeconomicstabilization, investing in physical infrastructure and human capital formnation.assisting broad-based private sector development, and implementing targetedprograms to protect the poorest segments of the population from undue hardship.

3.2 The FRDP represents the logical continuation of IDA involvement inMalawi's adjustment to a difficult external environment. It removes a largebacklog of policy distortions and supports several planks of a comprehensiveand medium to long-term reform program that is anchored in the 6th PFP. Manypolicy measures from this agenda have been implemented (including educationsector policy, agricultural pricing, fiscal stabilization). In other areas credible

Bank Group Assistance Strategy 9

processes have been launched and specific performance benchmarks have beenagreed (including expenditure reform, civil service reform, and privatization).Lastly, there is a range of policy issues where GOM has expressed itscommitment to reform, but where further analytical work needs to be carried outbefore specific measures are identified. In those areas we are actively engagedin providing guidance and advice to the GOM and expect to narrow down thescope and timing of specific measures within the next 12 to 18 months(including land policy reform and drought-proofing).

3.3 The proposed program draws on the successful components of previousadjustment programs and is linked to several ongoing IDA projects. First,policies initiated under the two previous adjustment operations (such as tariffreform and agricultural liberalization) will be accelerated and completed underthe proposed program. Second, policies supported under the proposed operationcomplement the technical assistance provided under the Second InstitutionalDevelopment Project; in particular civil service reform, privatization, andbudget management. Third, the proposed program aims at increasing recurrentexpenditures to the social sectors and, above all, enhancing their effectiveness.This will be critical for sustaining ongoing and forthcoming IDA projects; forinstance, the Integrated Education Sector Project, the community-based MalawiSocial Action Fund (MASAF), and the Population, Health and Nutrition Credit.Finally, a wide range of activities (including tax and tariff reform) is beingpromoted in Malawi under the Cross Border Initiative for Eastern and SouthernAfrica (CBI); the proposed Credit will support these measures.

STAKEHOLDER INVOLVEMENT DURING PREPARATION OF THE PROGRAM

3.4 The FRDP has been prepared with an explicit consensus regarding theneed to broaden the understanding of (and commitment to) reform within andoutside government. This continues the close collaboration established at theoperational level during preparation of the program and launching of the CASwith stakeholder meetings in the field. Important areas for policy actionsidentified by various stakeholder groups overlap with the measures to besupported by the adjustment operation (for example, agricultural marketing andrestrictions on private sector entry). The findings of the 1993 manufacturingsector survey were discussed in a joint workshop with GOM and the privatesector. The ensuing policy recommendations for increasing access to industrialland and streamlining the investment process will be supported by the proposedoperation. Joint GOM/Bank meetings with the private sector and NGOs wereheld during appraisal to solicit feedback on the envisaged policy measures;there was broad support and understanding of the FRDP policies. The proposedoperation takes into account the findings from the 1995 Borrower FeedbackSurvey and focuses directly on poverty alleviation; for instance, policies thatwill give smallholders access to the full range of economic activities, and thetargeting of expenditure allocations in primary social services. The Credit will

10 Chapter 3

provide funds to carry out stakeholder meetings to gauge the impact of policymeasures on vulnerable groups and support the GOM's communicationsstrategy.

INTERNAL CONSULTATION PROCESS IN THE WORLD BANK

3.5 The proposed operation is based on extensive empirical and analyticalwork carried out by IDA with the GOM. Staff from the Southern AfricaDepartment, the Technical Department, the Agricultural Research Department,and the Private Sector Development Department were full team membersthroughout the preparation of the operation. The 1994 Agricultural SectorMemorandum (and GOM's Agricultural Strategy Paper) identified strategyoptions to help trigger broad-based agricultural growth. Background papers onthe transport sector and a manufacturing sector survey (both in 1993) provideinsights into policy and institutional constraints to private sector development.Quantitative analyses--carried out jointly by IDA and the GOM over the past9 months--provide the basis for recommendations on tax and tariff policyreforrns. The 1995 Budget Management Review (BMR) provides a basis forexpenditure control measures and modifications of the budget-making process.Civil service pay issues are discussed in the 1994 Pay and Employment Study.The 1995 Malawi Poverty Profile identifies the dimensions and main variablesof poverty in Malawi and lays the groundwork for promoting reforms in landpolicy and deregulation of agricultural markets and domestic transport. Theoperation will be complemented by ongoing work on strategies to mitigate theimpact of drought-related shocks. Key processing steps and a list of supportingdocuments for the operation are presented in Annex C: SupplementaryInformation.

COLLABORATION WITH IMF

3.6 The programs of the Bank and IMF in Malawi are coordinated closelyand there are no outstanding differences of opinion. Balance of payment needsare jointly agreed among the Bank, the IMF, and the GOM as part of the PFPand the Consultative Group processes. Bank proposals on trade and taxationpolicy, privatization, civil service reforms, investment incentives, expendituretargets are kept consistent with the fiscal targets under IMF supported programs,and the IMF's structural policy benchmarks are developed in close consultationwith the Bank. Joint Bank/IMF missions prepared the 6th PFP in July 1995 andreviewed macroeconomic developments in early March 1996 when the IMFreached understanding with the authorities on a program for 1996/97.

Macroeconomic Framework /l

4. MACROECONOMIC FRAMEWORK

RECENT TURN-AROUND IN MACROECONOMIC SITUATION

4.1 Over the past 12 months, the GOM has made good progress in achievingmacroeconomic stabilization; it assumed power in May 1994 when the economywas rapidly deteriorating. In 1991-94 Malawi suffered from a series of externalshocks (equivalent to a 25% loss in GDP) including three droughts, a substantialdecline in the terms-of-trade and suspension of bilateral non-humanitarian aidfor 18 months before the elections. Immediately after taking office, the newGOM's macroeconomic management was challenged by (a) a series of civilservice strikes; (b) the deterioration of fiscal management during the monthsleading up to the elections; and (c) the financing requirements to hire more than20,000 additional teachers and provide textbooks to accommodate the"overnight" increase in enrollment after removal of primary school fees. Thenew GOM acted quickly and--despite initial difficulties in effectively controllingexpenditures--is gradually achieving fiscal stabilization. Since April 1995public expenditures are controlled under a cash budgeting system. The GOMhas let market forces determine the exchange rate and has resisted popularpressures to reverse the floatation of the kwacha (February 1994)--even whenthe kwacha depreciated by 100 % in October 1994. The exchange rate has beenstable in the last 15 months. The Reserve Bank has been successful insmoothing seasonal fluctuations in foreign exchange demand and supply and,aided by tobacco earnings, accumulated official reserves equivalent to 2 monthsof imports by end-1995. Quarterly inflation rates decreased from 34% to 7%between January and August 1995; since then rates have picked up (toaround 20%) because of sharp price increases in food stuffs as a result of the1994/95 shortfall in maize production. These improvements in economicperformance led to agreement on (i) a three-year program under the IMF'sEnhanced Structural Adjustment Facility (ESAF, presented to the IMF's Boardon October 18, 1995); (ii) the 6th PFP (issued on October 10, 1995); and(iii) recent agreement with Bank and IMF missions on a program for 1996/97.The proposed operation would complement the IMF-supported stabilizationprogram by adding the medium and long-term elements needed for sustainedstability and growth.

12 Chapter 4

OBJECTIVES AND POLICIES

4.2 The macroeconomic situation remains precarious, and economicmanagement in the near term will focus on stabilization to further reduce fiscalimbalances and lower the inflation rate. The medium-term strategy placesgreater emphasis on policies and structural measures to promote domesticsavings and investment and improve external competitiveness. Agriculture willcontinue to be a major source of growth--providing employment and subsistencefor some 80 % of the population. Growth in the manufacturing sector isexpected to be supported by a liberalized exchange system, the rationalization ofexternal tariffs, and the reduction in external transport costs as direct routes toMozambican ports will become fully operational.

4.3 Against this background, the overall medium-term macroeconomicobjectives (Table 4.1: Malawi - Selected Macroeconomic Indicators) are:(a) recovery in real GDP in 1995 and medium-term real growth of 1.5% percapita; (b) a sharp, early deceleration in the rate of inflation, with a decline to anaverage annual rate of less than 10%; (c) a gradual decline in externalimbalances over the medium term; and (d) the accommodation of pressing socialneeds within the constraint of fiscal sustainability by prioritizing governmentexpenditures in the context of a MTEF.

Table 4.1: Malawi - Selected Macroeconomic Indicators1994 1995 1996 1997 1998 1999 2000

Real GDP Growth -10.2 9.9 10.5 4.0 4.0 4.0 4.0Real GDP Growth per capda (%) -12.9 7.0 7.7 1.4 1.4 1.4 1.4Annual Inflation Rate 34.7 82.9 48.0 15.0 8.0 8.0 8.0

As Share (%) in GOPGross Investment 13.2 15.8 16.0 16.4 17.1 17.8 18.0Private Investment 7.0 9.4 9.6 9.5 10.1 10.5 11.0Gross Domestic Savings -0.5 4.1 9.0 10.8 12.2 12.8 14.9Fiscal Deficit (before Grants) 25.8 15.9 9.9 6.6 5.9 6.0 6.0Current Account Balance -18.0 -15.0 -10.1 -8.4 -7.7 -6.6 -5.8Exports GNFS 30.3 32.6 26.2 26.0 25.5 25.1 25.0

4.4 The attainment of the growth objectives requires an increase in the rateof investment, particularly of private investment, as well as a substantialimprovement in investment quality. The revised medium-term projectionsindicate that the investment/GDP ratio would rise from 13% in 1994 to about17% in 1998. Over the medium term, domestic savings are expected to financean increasing share of total investment as a result of the improvement in thepublic financial position and higher private savings. Most of the projectedincrease in domestic savings will come from fiscal savings (in the order of5% GDP), leaving a 3% increase to be created by private savings. The

Macroeconomic Framework 13

assumption is that Malawi will recover from three droughts in the past fouryears, and income levels--and hence savings ratios--will be slightly above pre-drought levels (of around 12%). Additional savings will be realized from(a) reduction in external transport costs after the shortest routes to the seathrough Mozambique become fully operational; (b) higher rural incomes in linewith liberalization in the smallholder sector; and (c) improved investmentclimate.

4.5 The fiscal policy strategy will emphasize discipline and the consolidationand extension of structural policy reforms. On this basis, after rising from8.4% of GDP in 1993 to 25.8% of GDP in 1994, the overall deficit (beforegrants) is targeted to decline to 9.9% by 1996 (about 4% after grants). Currentexpenditure is targetted to decline from 29% of GDP in 1994 to 18% of GDP in1996; mainly through reduced interest payments and a smaller wage bill, butalso through eliminating the costs related to the political transition in 1994(equivalent to 2% of GDP) and drought (6% of GDP in 1994). This will restorerecurrent expenditure levels for goods and services to historical levels (10% ofGDP) and implies an increase in real terms of 5% against 1995. Prioritization ofcurrent expenditure will ensure adequate provision for basic education andhealth services, extension services in agriculture, and operation and maintenanceof the road system. Development spending is projected to remain at between6% to 7% of GDP. Reduction in the fiscal deficit will also be supported throughrevenue enhancing measures, improved administrative capacity of Customs andbroadening the tax base, to sustain a revenue/GDP ratio of 18%.

4.6 The medium-term projections indicate that the prospects for Malawi'smajor exports will improve moderately because of the protracted stagnation ofworld market prices for tobacco, and the generally weak demand outlook forsugar, tea, and other agricultural exports. Nevertheless, exports are expected tobe boosted by continued trade liberalization, including the removal of exportlicensing. Given this, the volume of exports is projected to increase at anaverage annual rate of 7.6% over 1995-98, reflecting increases in the volume ofnontraditional agricultural exports and manufactured goods in response to theaccelerated removal of the remaining barriers to competition in production andmarketing. Import volume is projected to grow broadly in line with the increasein real GDP, with the impact of further import liberalization and tariff reformbeing roughly offset by tightened demand management and depreciation of thekwacha. The external current account deficit (excluding grants) is expected todecline from 18% of GDP in 1994 to 7.7% in 1998. Malawi's debt service ratiois projected to decline modestly from 23% in 1995 to an average of about20% of exports of goods and non-factor services over the medium term,reflecting the continuation of current policies, which largely limit externalborrowing to concessional long-term loans. With the assumed levels of externalassistance, gross official reserves would increase from the equivalent of0.8 months of imports at the end of 1994 to 5 months equivalent by end-1998.

14 Chapter 4

EXTERNAL FINANCING REQUIREMENTS

4.7 Malawi's continued progress in structural reforrns significantly enhanceslong-run growth prospects. However continued donor support in the form ofexternal concessional resources is needed in the short and medium term tosupport the adjustment agenda. For 1996 expected aid flows are sufficient toclose Malawi's external financing gap (Table 4.2: Malawi - Extemal FinancingRequirements); comprising of US$131 million in project support,US$128 million in balance of payment support (including US$74.4 millionunder the initial tranche of the proposed operation, anticipated support under theFRDP from the Governments of Japan, Germany, Denmark, and Sweden andUS$24 million expected under the IMF's ESAF), and US$9 million for drought-related support. For 1997-98, external financing requirements to be met by aidflows are estimated at US$539 million of which approximately US$480 millionhas tentatively been identified. A financing gap of US$60 million remains for1997-98 which could be filled in part from resources under a follow-on IDAoperation. On average over the next three years, IDA's contribution ofapproximately one-third of total import support would be in line with averageIDA contributions over the past years.

Table 4.2: Malawi - External Financing Requirements

(IN MILLION US$) 1996 1997 1998 1997-98IMPORTS OF GOODS AND SERVICES 625 653 690 1343PRIVATE SECTOR TRANSFER PAYMENTS 13 13 13 26DEBT SERVICE 96 99 100 199RESERVES ACCUMULATION 56 57 38 94

TOTAL FOREX NEEDS 790 821 840 1661

EXPORTS OF GOODS AND SERVICES 490 536 576 1112PRIVATE SECTOR TRANSFER RECEIPTS 8 8 8 16PRIVATE CAPITAL OUTFLOWS (NET) -2 -2 -3 -6

TOTAL FOREX EARNINGS 496 542 580 1122

IDENTIFIED PLANNED AID FLOWS 294 250 230 480

-as .* S S I, -s ,_

The Fiscal Restructuring and Deregulation Program 15

5. THE FISCAL RESTRUCTURING ANDDEREGULATION PROGRAM

OBJECTIVES

5.1 Two constraints have consistently been identified in stakeholdermeetings, our dialogue with the GOM, and our analytical work, as most bindingto poverty alleviation and to achieving Malawi's economic objectives ofsignificant medium-ternn real growth per capita, single-digit inflation, and aviable external balance:

* Anti-poor bias and low quality of social sector expendituresThe Poverty Profile shows that public expenditures on socialservices such as education and health have been consistentlyhigher in Malawi (US$58 per capita in 1993) than in countrieswith similarly low GDP per capita (US$41 per capita). Theseaggregate numbers, however, are misleading because theyconceal a highly unequal subsectoral composition of socialspending. Proportional allocations to primary level services,which is the level most likely to be needed by the poor, areamong the lowest in Malawi. In 1990/91 the poorest incomequintile received only 10% of all public education spending,while the share going to the richest income quintile was 38%.Although the removal of all primary school fees in 1994/95 hassubstantially reduced this inequality (to 16% and 25%,respectively), additional restructuring is needed to reach a largershare of the population.

* Restrictions and regulations that prevent the poor fromparticipating in the full range of economic activities

Both the Agricultural Sector Memorandum and the PovertyProfile concluded that deregulation of smallholder marketing,pricing, and production (especially profitable cash crops likeburley tobacco) will be critical for unleashing the economicpotential of rural areas. Through forward and backward linkages,incremental smallholder income has an income multiplier effectof approximately 1.5 which makes the agricultural sector--specifically smallholder production--a potential engine of broad-based growth.

16 Chapter 5

5.2 To assist Malawi to attain its economic objectives and succeed inalleviating the country's pervasive poverty problem, the proposed operationfocuses on two broad policy areas:

* Fiscal restructuring aims to prioritize, protect, and, wherenecessary, expand inter-sectoral and intra-sectoral allocations to thesocial sectors on a sustainable basis while staying within the overallfiscal framework now being monitored under the IMF's ESAFprogram. The operation supports development of a MTEF,comprehensive civil service reform, and tax and tariff reform.

* Deregulation will accelerate the consolidation of structuralmeasures already initiated by the GOM under previous adjustmentoperations. This includes complete removal of remaining pricingand marketing constraints on smallholder agriculture, and removalof the binding constraints to broad-based private sector entry anddevelopment.

5.3 In both areas, Government has implemented significant policy measuresand has launched several initiatives that put the program on track towardyielding results on the ground. In fact, before Board presentation, (Governmentimplemented 41 out of 42 actions and policy measures that are supported underthe FRDP and were identified in the Initiating Memorandum. As envisaged inthe Initiating Memorandum the remaining civil service reform measures willtrigger release of the Second Tranche.

ACTIONS SUPPORTED BY THE OPERATION

Fiscal Restructuring

5.4 Fiscal restructuring has four dimensions:

(a) The main challenge is to reorient public spending to pro-poorareas in line with the GOM's commitment to expand theprovision of social services to the majority of the population.

(b) To this challenge must be added the task of restoring fiscaldiscipline and reversing the collapse in expenditure control andlack of accountability in the wake of unbudgeted expendituresduring the political transition and the precipitous andunanticipated depreciation of the kwacha (250 %) in the10 months following floatation in February 1994.


(c) Civil service reform will be crucial for reversing the increasingimbalance between wage and non-wage recurrent expenditures.

(d) Tax and tariff reforms are essential for improving fiscalrevenue performance.

Expenditure Reorientation

5.5 The BMR shows that Malawi typifies the pattern of developmentfinancing based on numerous and fragmented donor-funded projects, slowimplementation because of insufficient counterpart funding, and chronic tensionbetween the recurrent and development budgets with recurrent expendituresinadequate to sustain investment projects beyond the donor-supportedimplementation phase. The required expenditure restructuring cannot beaccomplished within the traditional public expenditure planning process; theproject-driven planning and budgeting process needs to be changed to link therecurrent and development budgets.

5.6 Under the FRDP, a MTEF is being developed to help ministriesprioritize inter-sectoral and intra-sectoral expenditures within the agreed overallmacroeconomic expenditure envelope. Instead of setting a priori globalexpenditure shares for education or health--which are ineffective indicatorsbecause of a high wage component in sectoral budgets--the proposed programwill support a bottom-up process whereby sectoral program priorities (such asallocations for district level health services, goods and services for primaryschools, medical supplies for rural health clinics) be reconciled with varyingfunding levels in a MTEF. The program will help to ensure that both thetargeted fiscal deficit reduction and the concurrent expansion of social servicesare achieved rationally without compromising the GOM's pro-poor policy focus.Since the MTEF was launched in May, during Preappraisal, we have beenmonitoring progress closely and are providing technical assistance tosupplement GOM's capacity in this area under the Second InstitutionalDevelopment Project. At this time, the MTEF pilot includes four sectoralworking groups: Ministry of Health, Ministry of Education, Ministry ofAgriculture and Livestock Development, and Ministry of Works and Supplies.The MTEF progressed well in preparation for the FY96/97 budget. Politicalcommitment at the Cabinet level for a more rationale expenditure allocation wassecured, and the benchmarks for the FY96/97 budget were agreed with IDAduring Appraisal in December 1995 (Table 5.1).

18 Chapter 5

Table 5.1: Malawi - Target Shares in Recurrent Expenditures (%)

SECTOR FY95/96 FY96/97 FY97/98 FY98/99EDUCATION 22 25 24 24HEALTH 12 16 14 15AGRICULTURE 4 5 5 5WORKS 2 3 4 4TOTAL 40 49 47 49

5.7 The FY96/97 budget conforms to the macroeconomic targets agreed tounder the ESAF for total expenditures and domestic borrowing. To provideadequate funds for priority areas and essential items, the Government reviewedexpenditures in non-priority sectors and cut/reduced these expenditure categories(such as fuel and lubricants, travel, and replacement of motor vehicles). Detailedsectoral expenditure plans for the four MTEF pilot ministries were completed inFebruary 1996, agreed with IDA, and are reflected in the FY96/97 budget (Table5.2: Malawi MTEF - Sectoral Expenditure Shares). In nominal terms, allocationof recurrent spending to the four primary sectors will increase by 33% while theincrease in recurrent spending to the remaining ministries will be limited to 5%in nominal terms. Further, the Government reviewed and rationalized the PSIPin the context of the MTEF to ensure that the selection of investment projects isconsistent with pro-poor development priorities and recurrent expenditurecapacities. For FY96/97 60% of the PSIP has been allocated to social sectors,this compares favorably with 55% in FY95/96. The bulk of resources has beenallocated to those projects which are rural in nature and have a more positiveimpact in alleviating poverty. For instance, new primary road projects werecanceled in favor of village access roads and maintenance of district roads.

5.8 More specifically, with the FY96/97 budget, the GOM is aiming toprotect the recent increase in the Ministry of Education's share (22% inFY95/96) in total recurrent expenditures and even increased it to the medium-term target level of 25%. The share of primary education within recurrentexpenditures of the Ministry of Education was increased from 47% in FY95/96to about 66% in FY96/97. Similarly, the expenditure share on primary healthcare was increased from 8% in FY94/95 to about 14% in FY96/97 of recurrenthealth care spending. The GOM aims to reach an allocation for medical suppliesand medicines equivalent to US$1.25 per capita by FY97/98. Within totalrecurrent expenditures for health care services 7% has been allocated to FamilyPlanning Services in FY96/97. The share of the Ministry of Agriculture andLivestock Development in total recurrent expenditures has been maintained ataround 5% of total recurrent expenditures with about 40% of this being allocatedto extension services to ensure that an increasing share of smallholder farmers isbeing reached. Within the recurrent expenditures allocation to the Ministry ofWorks (about 5% of total recurrent expenditures) emphasis is given to roadmaintenance and rural roads (50% of the Ministry's recurrent budget).


Table 5.2: Malawi MTEF - Sectoral Expenditure SharesES 1 Pla n1S Ean 16s/3 I Plan'190697

Shwe.h TowM Shwe. In SedtoraExpenditure Category Rcxrnt Eiqd:es R.curmrt Expmrthtures

Total Expenditures (excluding statutory expenditures) 100.0% 100.0%Recurent 100.0% 100.0% 817% e8 0%

SalIs 27 9% 31 3%Ow 33 8% 34 7%

D 28 7% 29 1%Drought RStd 98% 4 8%

Total Recurrent Education Expenditures 21.8% 25.1% 100.0% 100.0%P/mary 47 9% 88 3%

Salanes 36 8% 58 5%Goods ad Service. 11 1% 98%

Seconry 10 0% 15 5%othe 42.1% 18 2%

Total Recurrent Health Car Expenditures 12.3% 1 6.8% 100.0% 100.0%Ca-nat Hosls 23 D% 17 7%District Hoapdse 5e.8% 42 6%Ote 20 5% 39 7%

ohv Mod Suppea & Mdonrs ra 23 3%Tota Recurrent SpNng on P//mary Healt Cae nrl 14 5%

Salaries rWs 10 4%Goods and Swvic W 4 1%

Tot Recunsn Espendure on Fanill4 Phannh SgrLeMon r 7 5%Total Recurrent Budget for Mn. of Agriculture 4.3% 4.7% 100.0% 100.0%

Exttwon 401% 39.2%Rseach 38 3% 23 9%oate 21 8% 38.9%

Total Recurrent Budget for Min. of Works and Supplies 3.0% 5.3% 100.0% 100.0%Road /tennce 3 7% 34 9%AfIn Roads 13 3% 106%Seconary Roads 11 2% 93%Rural and Obuer Roads 112% 15.1%Other 28 7% 30 1%

5.9 The MTEF will be rolled out over the next six months to all ministries inpreparation for the FY97/98 budget. In this context, lessons learned from thepilot phase of the MTEF will be applied (Box 5. 1):

(a) First, the Audit and Finance Committee of Permanent Secretarieswill provide guidance to the MTEF Task Force. Tentativesectoral expenditure envelopes for the next three years will bediscussed by the Cabinet Committee on the Economy inJune 1996.

(b) Second, increased focus will be put on the medium-term aspectswhereby tentative expenditure needs and shares will be developedfor a three-year rolling period. In this regard, by October 1996,ministries will carry out a line-by-line review of functions andidentify those programs that will be phased out, functions thatwill be outsourced to the private sector, and those priorityfunctions for which funding levels would be increased.

(c) Third, line ministries will take into account changes in civilservice staffing levels that will allow a reallocation of (i) civil

20 Chapter 5

servants from low priority areas to high priority areas and(ii) resources from the wages and salaries category to goods andservices.

(d) Fourth, the links between the PSIP and the MTEF will bestrengthened to ensure that the selection of investment projects isconsistent with pro-poor development priorities and recurrentexpenditure capacities.

(e) Fifth, the GOM intends to integrate the recurrent and capitalbudgets. For the FY97/98 budget, this integration is envisaged tobe completed for the four MTEF pilot ministries.

(f) Sixth, the program costing exercise will be improved , inter alia,through preparation of a MTEF manual.

Box 5.1: Malawi - Quotes from Sectoral MTEF Reports

"one of the main achievements of the process was the wide participation of officials in the costing ofprograms and activities."

"Each of the sectors had developed well-articulated sector policies and strategies, and used these todevelop sectoral programs."

"... the costing exercise was one of the weaker elements in the process.... Improving the programmecosting exercise will be the main focus of refining the MTEF methodology to line ministries in 1996."

"The four pilot ministries have concentrated their efforts on the 1996/97 estimates and made little progressin refining the details of forward estimates for 1997/98 and 1998/89."

"...most ministries have high proportions of the budget allocated to personal emoluments which leaveslittle room for reductions in other recurrent expenditures. ...significant reductions in personal emolumentswill only come about through medium-term restructuring of ministries' functions and establishments."

"Two of the key activities for the second round of the MTEF preparation will be a review of the functionsand activities of ministries, so as to determine those activities to be contracted out or stopped altogether."

"The MTEF exercise has enabled the Ministry to identify and cost in detail its activities and thisinformation will be used to determine which specific activities need to be given higher priority than thosethat will be scaled back."

'The required expenditure cuts imply that certain activities will have to be foregone by the Ministry andthe implications of these cuts were identified and described

"Secondary school utilization is inefficient as many schools are not used in the afternoons."

Expenditure StabUization

5.10 The essential short-term measure to effectively control expenditures--acash budget system--has been put in place. It is being supported by additionalmedium-term measures, including: (a) a monitoring system to ensure that cash


books are kept up-to-date and reconciled with bank statements; (b) developmentof a Financial Management Information System (FMIS) to permit continuousmonitoring of commitments; and (c) periodic reconciliation of GOM's accountswith parastatals (electricity, water, telecommunications) to prevent accumulationof arrears. These measures are working satisfactorily and will help ensure areduction in the fiscal deficit. Until comprehensive expenditure prioritization isachieved through the expansion of the MTEF, the cash budget system willremain in place.

Civil Service Reform

5.11 Civil service reform is critical for containing the overall wage bill toachieve fiscal stabilization and restructure expenditures to increase the efficiencyof public service delivery. Over the past eight months, several short-termmeasures to contain the civil service wage bill and reverse the explosion in thesize of the civil service have been taken. Funded vacancies that had remainedunfilled for more than five years were frozen. In August 1995 the GOMremoved a number of vacancies for which line ministries had drawn funding("ghost workers") from the establishment. Between February and September1995, under the FRDP, the GOM retrenched approximately 20,000 civil servantsin non-established and temporary positions in non-priority areas (for instance,unskilled laborers, cooks, gardeners, bricklayers, plumbers, drivers, messengersand janitors).

5.12 With a medium-term perspective, the GOM has embarked on a civilservice reform process to increase the efficiency and effectiveness of publicservice delivery. A Civil Service Census was carried out during October 1995 tohelp generate reliable benchmark data for an effective personnel managementand control system. Technical assistance for the Civil Service Census exercisewas provided under the ongoing Second Institutional Development Project. TheFRDP would support the policy measures under civil service reform and providebudgetary support--through the Second Tranche (Civil Service ReformTranche)--on a "just-in-time basis" to reduce the fiscal implications ofseparation packages and civil service retrenchment plans that might otherwisesqueeze recurrent expenditures in priority social sectors.

5.13 To this end the GOM has also embarked on analytical work that willbroaden and deepen the scope of civil service reform; including a systematicreview of government functions and a review of civil service pay andremuneration. The latter study has been completed and is currently beingdiscussed by Government. The functional review is at an interim stage and isexpected to be finalized by end April 1996. It is apparent that some ministriesand departments are overstaffed, with considerable duplication of functions,while critical personnel categories such as health--i.e. doctors--remainunderstaffed. An Interministerial Commission has been appointed to oversee the

22 Chapter 5

implementation of the results of the Civil Service Census and prepare an actionplan for the next steps in civil service reform.

5.14 Completion of the Civil Service Reform Action plan--acceptable to theBank--is expected by September 30, 1996 and will draw on the findings andconclusions of the civil service census, the functional review, the remunerationstudy and the ongoing MTEF exercise. Civil service reform will go beyonddownsizing of the civil service; it is expected that part of the savings resultingfrom reducing the size of the civil service would be plowed back to raise civilservice remuneration levels and reduce wage compression. It is the GOM'sobjective to achieve a civil service size and remuneration structure that isconsistent with a sustainable civil service wage bill of not more than 6.5% ofGDP. The Action Plan will include, inter alia, timing and scope of:

(a) A retrenchment program including transparent retrenchmentcriteria, appropriate safety net measures, and quantitative targetsfor the size of the civil service as well as cost and financingestimates thereof.

(b) The restructuring of civil service salaries with improvedincentives and levels of remuneration for a smaller civil servicewithin a sustainable overall wage bill.

(c) The arrangements for implementing decentralization, includingintergovernmental fiscal relations.

(d) The completion of job evaluation exercise with a view toimproving the present recruitment, posting, and promotionpractices.

(e) The realignment of civil service staffing levels in line withgovernment's pro-poor focus and a reduction in both low prioritygovernment programs and functions, including (i) focus ontraining of qualified teachers to achieve a student: teacher ratio of60:1 for primary education and (ii) adequate staffing of all healthclinics with at least one general nurse and one maternity nurse.

5.15 In addition, implementation of the following measures from theaforementioned Action Plan would trigger release of the Second Tranche:

(a) The GOM will have stopped paying salaries or wages to civilservants who are not listed on the civil service census file.

(b) The GOM will start to eliminate or merge duplicating andoverlapping government functions that are currently being carriedout by different agencies.


(c) Within the context of the functional review, the GOM will havestarted to outsource, privatize, or eliminate functions such assecurity guard services, management of rest houses and inns,office cleaning services, etc.

(d) The number of industrial workers will be reduced and thecategory absorbed into the civil service.

(e) To improve the efficiency and effectiveness of common servicescadres, Government will have started to put in place provisionsfor adequate authority of line managers in deploying, retaining,and evaluating performance of common services staff.

Tax and Tariff Policies

5.16 Malawi has established a good record in tax and tariff reform. In manyways, Malawi's tariff system is more efficient than in neighboring countries:(a) the surtax rates (effectively a value-added tax collected at the productionstage) on domestic production and imports were harmonized in 1993; and(b) ad valorem excise taxes on luxury goods (imports and domestic goods) wereintroduced in 1994. The current tariff structure comprises seven rates rangingfrom 0% to 45%. In FY95/96, the GOM introduced a temporary 10% export taxon tobacco, tea, and sugar and special drought levies (3%) on personal andcorporate taxes to redress revenue shortages. These taxes will be phased out asrevenue collection is strengthened; with the FY96/97 budget, the GOM reducedthe export tax to 8%.

5.17 Tariff Reform: However additional tax policy reforms are needed toencourage the growth and diversification of non-traditional exports which havebeen virtually stagnant during the last five years. Under the FRDP, priority isgiven to reducing anti-export bias, increasing external competitiveness, andgradually shifting the revenue function from tariffs to surtax. To attain thesevital objectives, Malawi is undertaking tariff reduction in line with theagreements under the CBI and the Uruguay Round with the ultimate goal ofachieving a 4-tier tariff structure with maximum and average rates of 25% and15%, respectively, by FY98/99. We have agreed with the GOM on a phasedplan to achieve these targets; with the FY96/97 budget, the maximum tariffswere reduced from 45% to 40% and average statutory rates were lowered from18% to about 15%. Further, average statutory tariff rates for capital goods andintermediate goods were reduced from 17% to 12%. This will provide effectiveborder tax relief for Malawian exporters and producers who were competingagainst consumer goods imported from neighboring countries at preferentialtariff rates agreed under bilateral treaties and the Common Market for Easternand Southern Africa (COMESA).

24 Chapter S

5.18 Surtax Reform. Lowering tariff rates could have adverse revenueconsequences for Malawi in the middle of fiscal stabilization efforts. To protectrevenues, tariff reductions are accompanied by surtax reform; making the surtaxrate uniforn across goods and increasing surtax rates on items which are taxedbelow the standard rate of 20%. With the FY96/97 budget, the GOM simplifiedthe surtax structure on goods and services to a four tier system: 20%, 10%, 0%,and exempt. This involves increases in the surtax rate from 10% to 20% for(i) hotel and restaurant services, and (ii) a number of intermediate and finalgoods (thus bringing imports and domestic production to an equal footing). Thezero and exempt surtax rates for the agricultural, food processing, andpharmaceutical sectors where maintained in the interest of equity and povertyalleviation. Finally, during FY96/97, the GOM will review discretionaryexemptions and phase-out those that are not based on or linked to diplomaticstatus or treaties with international organizations.

5.19 Administrative Strengthening. Good progress has been made over thepast six months in strengthening customs administration and tax collection; atend FY95/96, cumulative tax revenues were running about 9% above agreedtargets. With regard to strengthening tax and customs administration, the GOMhas expanded the Pre-Shipment Inspection System (PSI) to cover all importshipments in excess of US$3,000 in conjunction with improvements in customsclearance and valuation. The GOM is receiving substantial technical assistancein support of these policy measures from the IMF and the British Government.

5.20 Additional steps to boost tax and tariff collection efficiency are desirable.The GOM intends to establish a performance-related remuneration system forrevenue agencies in FY97/98 and is currently evaluating the feasibility and costeffectiveness of establishing an autonomous revenue authority outside the civilservice by FY98/99. Over the medium term, the GOM plans to expand thesurtax credit mechanism for inputs to the retail level with a view to convertingthe present system to a full-fledged VAT.

5.21 Export Promotion: Concurrently with the preceding reforms, additionalspecific tax incentives are needed to promote non-traditional exports and reducethe inherent anti-export bias of border taxes. Bonded manufacturing provisionshave existed in Malawi for several years, but have mainly been utilized by theready-made garment industry. In practice, the procedures for obtaining in-bondmanufacturing status have been cumbersome and have excluded importantindustries, for example horticulture and agroprocesssing, both areas whereMalawi has shown good growth potential and significant investor interest overthe past three years. To address these shortcomings, in December 1995, theGOM implemented new legislation for Export Processing Zones (EPZ). TheAct is comprehensive in its coverage of all sectors and portable, in that specificfactory sites and horticulture farms can be established as EPZs. Furthermore, tosimplify and streamline export duty drawback regulations, in February 1996, the


Ministry of Finance has expanded the initial refund to bona fide exporters from75% to 100% of duty paid, and a revolving fund has been set up with theCustoms and Excise Department to effect refund payments within 5 workingdays. Over the medium term, Malawi plans to replace the administrativelyintensive case-by-case drawback program with simple rate coefficients oraverage duty drawback rates for a limited number of commonly-exportedproducts.

Deregulation of Agricultural Policies

5.22 Agriculture accounts for 40% of GDP and 90% of the export earnings ofMalawi, and will remain the mainstay of growth for the foreseeable future.Given that 85% of the population lives in the rural areas, the performance of thissector directly affects the welfare of most Malawians, including the mostvulnerable. In December 1994 the GOM adopted a comprehensive sectoralstrategy to help transform the agricultural sector from a subsistence/dualisticstructure (over-dependent on maize and tobacco) to a more diversified andviable one that also functions as a catalyst for growth in the non-farm sector.The main objective of the GOM's strategy is to attain broad-based sustainableagricultural growth of at least 3% p.a. (which is the four-year average of threenormal years with 4.5% growth each followed by a moderate drought year with -1% agricultural growth). This can be achieved by removing the most bindingconstraints (access to land, cash crops, inputs, and markets) to the integration ofsmallholders into the mainstream of development.

Access to Land

5.23 Since Independence, agricultural land-use policy has remained stronglydivided between freehold or leasehold and customary tenure, that is, betweenmostly export crop production by estates and mostly subsistence farming bysmallholders. Privileges to grow burley tobacco (allocated exclusively toestates through a license and quota system) fueled large-scale reclassificationof land from customary tenure (smallholder land) to leasehold; the number ofleasehold estates soared from 1,200 in 1979, to 30,000 in 1994, and averagesize dropped from 250 ha to less than 20 ha. Much of the tenure conversionhas taken place in an uncoordinated way and many plots are claimed by morethan one leaseholder. In addition, there is a large backlog of unregisteredlease applications.

5.24 Recent economic and political liberalization has resulted in increasedassertiveness among the land-poor, who challenge the integrity of leaseholdtitles and call for a comprehensive reform of land policies. The increasingincidence of encroachments by smallholders on estates and public lands isevidence of mounting problems of land availability (about 40% of all

26 Chapter 5

smallholder households cultivate less than 0.5 ha) which is compounded byweak capacity in land administration. With high population growth andconflicting interests between estates and smallholders, more serious upheavalscan be expected, with high social, political, economic, and environmental costs.Thus, there is an urgent need for a thorough examination of land titles and leaseregistration and for the formulation of new policies. This task requireswidespread national consultation and consensus building to find acceptablesolutions in a democratic environment. Forced land redistribution is neitherpolitically viable nor economically desirable.

5.25 In line with the overall political liberalization, the new GOM is open todiscussions and actions on land policy issues which were virtually taboo in thepast. However, in view of the GOM's limited administrative capacities in thisarea the dialogue is at an early stage. We expect detailed measures of a newland policy to be agreed upon by 1997 after substantial analytical work iscompleted. In preparation of the proposed program the GOM has undertakenactions that demonstrate its commitment to land policy reform at the highestpolitical levels. In March 1996 the GOM appointed a Presidential Commissionof Inquiry to undertake a broad review of land problems throughout the countryand to recommend the main principles of a new land policy which would foster amore efficient, environmentally sustainable and socially equitable land tenuresystem. The Presidential Commission (representing a wide cross-section ofMalawi society and economic interests, such as smallholders, traditionalauthorities, estate owners, tenants and workers, urban business owners, NGOs,and representatives of major parties) will adopt transparent and participatorymethods in reviewing land problems and considering their solutions. TheCommission's recommendations--combined with the analytical work that isbeing carried out by the newly-created Policy Planning Unit of the Ministry ofLand and Valuation--will define the new land policy principles and institutionalstructures aimed at secure land tenure arrangements and sound land leaseprocedures, along with market clearing land rents, and an active land market.

5.26 While the Presidential Commission is carrying out its work, the Ministryof Lands and Valuation has suspended all conversions from customary toleasehold tenure--country-wide--to allow government agencies to review thevalidity of existing leaseholds, resolve pending lease disputes, update landregistries, and prevent environmentally harmful encroachment along the lakeshore. To immediately raise incentives for more efficient use of existing estateland and facilitate the development of a more active land market, the GOM hasincreased land rents, effective April 1996, from MK35 per hectare to MK50 perhectare. Significant areas (estimated to be as much as 20%) under leasehold areidle and higher opportunity costs (higher land rents) will create incentives forestate owners to sublease and subdivide land. In line with this objective, theGOM plans to increase land rents in real terms--if necessary--and has revised the


Lands Act to allow for annual land rent updates (previously, land rent updatescould take place only every three years).

Access to Cash Crops

5.27 Over the past four years important progress has been made with regard togranting smallholders gradual access to profitable cash crop production andmarketing (growing burley tobacco and eliminating the monopsony power ofADMARC). The Agricultural Sector Memorandum illustrates how smallholderaccess to burley tobacco production has (a) improved household income levelsfor about 66,000 smallholder households which had burley quotas (average of250kg) in 1994; (b) enabled diversification in other agricultural and non-agricultural activities through forward and backward linkages (multiplier of1.5 for smallholder income from burley tobacco); and (c) reduced householdvulnerability to the effects of drought.

5.28 Convinced by the success of the smallholder burley program, the GOMhas announced plans to remove the quota system within a year.

* For the 1995/96 season the GOM expanded the smallholder burleytobacco quota system and the intermediate buyers program. About100,000 smallholders registered to produce about 50 million kg,which is twice the planned ceiling of 25 million kg. The GOMcontinued to accept all applications for intermediate buyers licenses(introduced in 1994/95)--to purchase about 8 million kg of non-quota tobacco from smallholders--which has evolved as anotherattractive marketing outlet for smallholder burley.

* For the 1996/97 season the Tobacco Control Commission (TCC)will take over responsibility for administering and allocatingnational burley tobacco quotas and the registration of smallholders.The GOM has announced that the TCC will allocate sufficient newor unused national quota to meet all smallholder productionregistrations. There will be no planned ceiling on burley quota forsmallholders. Smallholders belonging to producer clubs willregister their production with TCC to gain direct access to auctionfloors. Smallholders not registering with TCC can sell through oneof 750 intermediate buyers.

* For the 1997/98 season the GOM has announced replacement of thenational production quota system with a production registrationsystem with TCC. The registration system is for statistical purposesand will allow TCC to schedule delivery to the auction floors andwill provide all estates and smallholders with equal opportunities toproduce and market tobacco.

28 Chapter 5

5.29 The number of burley-producing smallholder households could increaseto 200,000--300,000 by the year 2000. Over the next two years this action isexpected to inject US$100 million p.a. into the smallholder sector.Nevertheless, the burley policy will not reach all smallholders--especially thosewith less than 0.5 ha land and no cash to purchase inputs--and will need to beaugmented by other pro-poor policies and programs, for instance: (a) publicworks under the coming IDA-supported MASAF; or the IFAD-financedsmallholder food security project (implemented by IDA) that is providing apackage of hybrid maize (for 0.2 ha) and minute tobacco quotas (100 kg for0.1 ha) to resource-poor farmers with land holdings below 0.5 ha.

Access to Inputs

5.30 A key part of the GOM's strategy to enhance agricultural productivityand diversification is to increase the access of farmers to improved and suitabletechnologies and inputs (such as seeds, fertilizers and feeds). Since 1994 privatetraders have been allowed to participate in the import and distribution ofsmallholder inputs. However cumbersome licensing and compulsory approvalprocedures continued to inhibit smallholders' access to fertilizer, agrochemicalsand improved seeds. This kept transaction costs high, discouraged private traderparticipation, and limited crop and livestock options for smallholders. Incontrast, estates have had unrestricted access to inputs.

5.31 In line with the Agricultural Strategy the GOM has approved(January 1996) amendments to both the Fertilizer, Farm Feeds, and RemediesAct and the Seeds Act to streamline the licensing, registration and reportingprocedures for the importing, selling and distribution of fertilizers and seeds.The amendments, among other things, (a) remove the requirements thatfertilizers be registered and importers and sellers be licensed; and (b) removegovernment control over introduction of new seed varieties. Entrepreneurs willbe free to multiply and trade in all seeds, including hybrid maize and tobacco.In both markets, the GOM will now only set and monitor truthful labeling andphytosanitary standards. Private sector entry regulations have been harmonizedwith general business practices and are covered under the Business Licensing Actwhich is functioning well. The approved changes will improve dissemination oftechnology and enhance farmers' access to the best seed varieties and fertilizersat competitive prices while protecting farmers from unscrupulous traders.

Access to Markets

5.32 Important progress was made during the early 1990s with theliberalization of virtually all agricultural producer prices and export controls,leaving maize as the only regulated market. Even in the maize market, privatetraders are now allowed to participate and ADMARC has moved from sole


buyer and seller to buyer/seller of last resort. In April 1995 the system of fixedproducer and consumer prices (linked to production costs) was replaced by aprice band in which the actual price can fluctuate and ADMARC defends theannounced floor and ceiling prices. However, the current system could proveunsustainable and in excess of GOM's financial capabilities if ADMARC wereasked to defend floor and ceiling prices set too far from import or export parityprices.

5.33 The FRDP will support operationalization of the new maize pricing andmarketing policies in a phased manner with the aim of gradually separatingADMARC's commercial and developmental functions to become morecommercially-oriented and ready for privatization within the next five years.The proposed policy measures are supported through technical assistance underthe Agricultural Services Project. Terms of Reference for studies on "TheFuture of ADMARC" and "Expanding Private Sector Participation in MaizeMarketing" were agreed with IDA and the studies will be commissioned by end-May 1996. Specific policy measures would be agreed upon over the next12 months and implementation could be supported under a follow-on operation.

5.34 The GOM's intention to liberalize agricultural marketing, promoteprivate sector participation, and enhance smallholder access to competitiveprices was reaffirmed with (a) the repeal (January 1996) of the Agricultural andLivestock Marketing Act which eliminates ADMARC's monopsony to purchasesmallholder cotton and other crops; and (b) the revision of those provisions ofthe Special Crops Act that designated several crops as "special" because of aperceived need to control production and marketing of these crops. The Act wasalso used to exclude smallholders from producing and marketing certain high-value cash crops, including burley and flue-cured tobacco.

Access to Economic Transport

5.35 In addition to Malawi's high costs of external transport, manufacturersand consumers alike suffer from inefficient and costly domestic road transport.Under the protective mantle of government regulations and statutory minimumfreight rates, Malawi's domestic road transport industry has grown over the lastseven years from nearly nothing to almost 500 companies varying in size fromone truck to over 200 trucks. However, while the objective of developing asubstantial domestic trucking industry has been achieved, the objective ofdeveloping efficient domestic road transport service has not; many operationsare poorly managed and inefficient. In early 1995 the statutory rates fordomestic freight exceeded average costs-plus-normal profits by 50% to 70%resulting in an economic transfer from users of road freight to the trucking sectorequivalent to US$10 million p.a. At times, domestic trucking costs in Malawiwere twice those in neighboring countries and transport for hire (for instance, tohaul smallholder produce from farms to markets) was three times as much as

30 Chapter 5

owner-provided transport. High transport costs make cash crop productionunprofitable for many smallholders, exacerbating poverty levels, preventinghigher land and labour productivity, and constraining agricultural diversification.

5.36 The GOM realizes that Malawi's trucking sector is no longer an infantindustry and that it is necessary to increase efficiency and lower costs in thetransport sector. In line with this objective, in 1995, the GOM lifted allrestrictions on importing second-hand vehicles and spare parts to makeMalawian truckers competitive with foreign-owned trucking companies whohave long benefited from access to lower-cost second-hand equipment. InJanuary 1996 the GOM revised the Road Traffic Act including the removal ofthe statutory domestic freight rates. Liberalized domestic road transport willreduce transport costs, and thus, bring a direct benefit to the rural poor andfacilitate higher agricultural productivity and agricultural diversification.

Deregulation of Private Sector Development Policies

5.37 The GOM supports the development of a broad-based private sector. Anintensive investment promotion campaign to attract investors is underway and aprivatization campaign is gaining momentum.

Investment Promotion

5.38 IDA supported a manufacturing sector survey in 1993 which identified--in addition to high inflation and (at the time) lack of foreign exchange--thefollowing main constraints to broad-based private sector development: (a) theaccess to industrial land is narrowly constrained, both by an unnecessarilycomplicated bureaucratic process and by limited public resources for servicingpotential industrial land; (b) the process of planning and implementing newinvestment in Malawi could easily take three years, two of which could be spentgaining or awaiting various government approvals; and (c) the high level ofeconomic concentration and considerable market power of large conglomeratesand parastatals discourages entry by potentially more efficient small-scaleprivate firms. The findings of the survey were discussed in a joint workshopwith the GOM and the private sector and the following policy measures wereidentified as priorities to assist the private sector:

* Accelerated Processing of Temporary Employment Permits:Starting in 1994, the approval and renewal of TemporaryEmployment Permits (TEPs) slowed because of public concernsover observed abuses of TEPs for remitting foreign exchange andperceived inadequate skill transfers from expatriates to local staff.The long delays and rejections in processing TEPs left many skilledexpatriate workers and managers in limbo. The resulting partialexodus of expatriates was impeding the normal operation of many


firms and clouding future investment decisions. In October 1995,following the first meeting of a consultative forum between theGOM, the Malawi Investment Promotion Agency (MIPA) andprivate sector representatives, clear guidelines were agreed forprocessing TEPs, including: routine approval within 30 days,automatic approval for new investments, transparent requirementsfor training and skills transfers to Malawian nationals, and grantingof permanent resident status for long-term expatriates. As a result,the months-long backlog of applications has been removed.

* Enhanced Access to Industrial Land: For years the lack ofserviced and unserviced industrial sites was a significant obstacle toprivate investment. A combination of recent public and privateactivities should remove the shortage of industrial land. InLilongwe, the Ministry of Lands and Valuations is making availableto investors an area of some 80 hectares (200 serviced plots) onpublic lands. The plots can be grouped for larger developments, andwill be available under an accelerated lease procedure that shouldtake only a week from application to preliminary approval. Inaddition, the GOM is making available to investors over 300unserviced plots in two areas near Lilongwe. In Blantyre, twoindustrial sites (90 ha and 150 ha) have been rezoned and surveyedfor serviced and unserviced industrial sites. A private industrialestate (110 serviced plots on 100 ha) has recently opened inBlantyre.

- Removal of Discriminatory Laws and Practices against Asians:The GOM realizes that a number of practices and laws thatdiscriminate against race, gender, and religion, conflict withMalawi's new Constitution and are significant barriers toinvestments. The GOM has reviewed existing laws and removeddiscriminatory references; most notably the GOM approved therepeal of Article 3a of the Business Licensing Act, which limitedMalawian citizens of Asian origin to trading only within designatedbusiness districts in the four major towns. The relevant AmendmentBill to the Act has been forwarded to Parliament for approval.

Deconcentration

5.39 Following the May 1994 elections, the issue of control over the PressTrust (de facto owned by the former President) assumed great politicalsignificance. For the first time, the question of whether the Press Trust shouldbe seen as essentially a parastatal or a private institution became a real issuesince the private control of the Press Trust had formerly been indistinguishablefrom the State itself. The challenge is to change this distorted and opaque

32 Chapter 5

arrangement without undermining the real economic strength which Pressrepresents. On balance, subject to rigorous divestiture in specific sectors (suchas the financial sector) and to changes which broaden the membership of theBoard of Directors, the GOM has concluded (and we agree) that it is in theinterest of Malawi to leave Press largely intact to focus on its core operatingbusinesses. It is generally recognized that Press's economic success represents avaluable source of momentum for the development of the Malawi economy andthat, once refocussed on its core activities, it can become an engine poweringMalawi's economic development.

5.40 Progress between January and October 1995 was encouraging with amediator trying to move the two sides (the new GOM and the former President)close to an agreement which would have depoliticized the parent Trust.However, negotiations stalled over a final issue: the former President sought ahigher compensation than the GOM was willing to consider. Subsequently, theGOM obtained Parliament's approval of the Press Trust Reconstruction Billunder an emergency procedure (presentation of the Bill and approval on thesame day) to put in place the arrangements that had tentatively been agreedbefore negotiations stalled. Because approval was obtained without allowing thecustomary time (21 days) for a bill to be tabled, the now opposition and formerPresident's party walked out of Parliament. The GOM justified the emergencyprocedure as necessary to avoid siphoning of funds by the former President'sparty, but has been criticized widely, including by donors, for not havingfollowed democratic procedures. This is an area we will keep monitoringclosely while--jointly with other donors--we try to convince the GOM as well asthe opposition to return to the negotiating table.

5.41 Notwithstanding the deadlock in negotiations, Press and the GOM havealready started to reduce Press's interlinking ownership with the financial sector.Over the past year Press has reduced its ownership in the two commercial banksfrom over 40% each to less than 25% each and 6% of Press' shares were sold toa foreign-owned insurance company. This will pave the way for restructuringPress, offering of Press stock on the newly created stockmarket, and focusing thebusiness on its core strengths and towards a pattern of substantial externalgrowth in the sub-regional economy. A new--more balanced--Board ofDirectors and a new Board of Trustees have been appointed.

Privatization

5.42 Compared to many other developing countries the parastatal sector inMalawi--comprising 12 major commercial parastatals and over 200 small andvery small developmental statutory entities, state-owned investments, farms,guesthouses, etc. accounting for 20% of GDP--has been well managed and forthe most part profitable. However large losses have been incurred by MalawiRailways, and to a lesser extent by Air Malawi and Viphya Timber Plantations.


Some privatization of both ownership and management has taken place over thepast few years. Examples of this are the divestiture of some of ADMARC'sinvestments, and of some of MDC's portfolio, and, most recently, therestructuring and future privatization of Malawi Railways which is supported byan IDA project.

5.43 The new GOM started a rigorous privatization effort in late 1994, whenthe newly-elected President appointed a Privatization Commission chaired bythe First Vice President (cum Minister of Statutory Corporations). TheCommission, which has 19 members representing all political parties inParliament, the private sector, and relevant government departments, wascharged with developing the strategy for privatization in Malawi. Supported bythe GOM and IDA, the Commission has made considerable progress along threemain directions: (a) a legal framework for privatization; (b) an institutional setup to deliver privatization; (c) and an inventory of State Owned Enterprises(SOEs) and a preliminary action plan for privatization.

5.44 The legal framework consists of the GOM's policy paper, a PrivatizationBill to be submitted to Parliament in Spring of 1996, and detailed operationalprocedures for privatization currently being prepared. The framework providesa fair, transparent, competitive and yet efficient fundament for privatization inMalawi, and has drawn on best practice examples from the region, the entirecontinent, Latin America and Asia.

5.45 The institutional setup draws upon maximum use of the private sector.Implementation of privatization will be delegated from Cabinet to theCommission, which will delegate implementation to a Privatization TransactionUnit, consisting of about 4 high quality professionals on 2-3 year contracts andwith performance-related compensation. The Unit's Executive Director hasbeen recruited locally and has been appointed. The Unit will orchestrateindividual transactions by using consultants for preparation, for studies ofregulatory concentration or monopoly issues (where necessary), and forimplementing the actual transaction. This Unit can manage privatization inMalawi such that the program progresses quickly without compromising qualityor the interest of Malawi.

5.46 The potential benefits from privatization are considerable. Ofapproximately 230 SOEs in Malawi, about 40 are non-commercial and will beintegrated in the appropriate line ministry for reporting and financing or will beliquidated. The remaining assets include many small inns, farms, Telecom, AirMalawi and the portfolios of ADMARC and MDC. The preliminary plan is toprepare for privatization virtually all of MDC's and ADMARC's investmentsover 3-5 years, and to divest (to farmers and smallholders) the crop authorities,farms and ranches over 2-3 years. In parallel, it is envisaged to study thecompetitive and regulatory situation for utilities and the largest corporations

34 Chapter 5

such that privatization (or concessions and management contracts) can begin in1997/98 and be concluded within 5 years.

6. THE PROPOSED CREDIT

CONDITIONALITIES: BORROWER-IDA CONTRACT

6.1 There have been no significant changes in the design of the FRDP sinceapproval of the Initiating Memorandum by the Loan Committee on November13, 1995. The GOM has met all actions required for Board Presentation. Themain actions taken in preparation of the FRDP are presented in the followingTable (details on policy measures are presented in Annex E: Matrix of PolicyActions). The macroeconomic developments in FY95/96 were broadly on targetand consistent with the framework agreed under the 6th PFP. In addition, theGOM has reached agreement with the Bank and IMF on a macroeconomicframework for FY96/97.

6.2 Disbursement against the Second Tranche (Civil Service ReformTranche) would be triggered by:

(a) satisfactory implementation and deepening of the overalladjustment program;

(b) continuation of macroeconomic policies conducive toadjustment and in line with fiscal and monetary targetsagreed under the 6th PFP;

(c) implementation of an Action Plan agreed with IDA forcomprehensive civil service reform as presented in the Letterof Development Policy.

The Proposed Credit 35

Table 6.1: FRDP - Summary of Completed Actions

Fiscal RestructuringExpenditure * introduced cash budgetRationalization . completed MTEF for four pilot sectors

. approved substantial increase in social sector expenditure allocations

Civil Service Reform * completed civil service census. retrenched about 20,000 temporary workersa started analytical work to feed into civil service reform

Tariff and Tax Policies . strengthened Pre-Shipment Inspection* improved duty drawback system. implemented Export Processing Zones Act* rationalized tariff structures and reduced average tariff rates. expanded surtax base and rationalized surtax structure

Agricultural PoliciesAccess to Land * increased land rents

* amended Land Act* appointed Presidential Commission of Inquiry on Land Policy

Access to Cash Crops * lifted all constraints on smallholder access to burley

Access to Markets * replaced fixed producer/consumer price system for maize with a price band

Access to Inputs . approved removal of licensing and registration procedures for private tradersin seed and fertilizer marketing

Access to Transport . removed all restrictions on imports of second-hand trucks and spare parts* removed minimum freight tariff

Privatization * approved Privatization Bill. adopted transparent Privatization Policy

Investment Promotion * made available suitable industrial land* approved repeal of laws that discriminate against race

SUPERVISION PLAN

Supervision Focus

6.3 IDA will review implementation of the overall program as well asspecific actions outlined in the GOM's LDP. Because most policy actionssupported by the FRDP have already been implemented, the focus of supervisionwill be on deepening the impact of adjustment and identification of policymeasures that could possibly be supported under a follow-on quick-disbursingoperation (Table 6.2: FRDP - Focus of Supervision). The envisaged timetablefor medium-term policy implementation in the areas of expenditure reform, civilservice reform, land policy, maize pricing policy, and privatization is presentedin Annex F: Supervision Chart.

36 Chapter 6

Table 6.2: FRDP - Focus of Supervision

Policy Area Monitoring of...Macroeconomic * Achievement of fiscal and monetary targets agreedPerformance under PFP

Expenditure * Roll-out of MTEFRationalization

Civil Service Reform * Implementation of agreed Action Plan

Land Policy Reform * Translation of recommendations made by thePresidential Commission of Inquiry on Land Policy

Maize Pricing Policies * Translation of recommendations from maize marketingstudies into policy measures

Private Sector * Private sector response to streamlined investmentDevelopment procedures

* Implementation of export promotion measures

Privatization * Transparency of divestiture process* Number, type, and size of SOE's divested

Social Impact of * Perforrnance of safety net measuresAdjustment * Performance of smallholder agriculture

Organization and Timing of Supervision Activities

6.4 Supervision of the FRDP will involve 40 staff weeks (30 staff weeks inFY97, and 10 staff weeks in FY98). The responsibility for supervising theFRDP will be coordinated by the Task Manager (from the Macro, Industry andFinance Division in the Southern Africa Department) in close collaboration with(a) the coordinator of the Malawi Agricultural Program in AFl's Agricultureand Environment Division, and (b) the Economist in the Resident Mission, whohas been involved in the preparation of the FRDP. Regarding themacroeconomic framework, restoring fiscal balance while improving theeffectiveness of government spending will be critical for the success of theoverall stabilization effort. As the MTEF will be extended to other ministries,monitoring of expenditure allocations will be possible. Close collaboration willbe maintained with IMF staff on monitoring macroeconomic developments andsequencing of structural measures in the PFP. Contact with the private sector,other stakeholder groups, and donors will be the responsibility of the TaskManager. The first supervision mission is planned for May 1996 to launch theprogram. The next supervision mission will be approximately six months later.It is likely that that mission will be combined with a performance review, beforerelease of the Second Tranche.


Performance Indicators

6.5 Performance indicators have been identified during Appraisal, and willbe monitored during supervision to assess whether the program's potentialdevelopment impact is being achieved or whether policy corrections areindicated. This is in line with the GOM's commitment to monitor the impact ofpolicies on economic performance, poverty reduction and social conditions.Trends in the selected indicators would also feed into the preparation of possiblefollow-on operations. The GOM, in collaboration with supervision missions,will collect periodic information on the indicators and track developments overtime. The performance indicators in Table 6.3 will serve as proxies to gauge theimpact of the FRDP. Policy indicators monitor the policy and institutionalactions required to implement the adjustment program. Intermediateindicators track the impact on stabilization, structural change and the provisionof social services. Outcome indicators monitor progress towards the ultimateobjectives of growth, poverty reduction and better social conditions.

Borrower's Contribution to Supervision

6.6 The Ministry of Finance will have overall responsibility for managingthe program, and for monitoring and reporting responsibilities as described inthis report. Administrative arrangements for IDA supervision missions, as wellas discussion of the results of supervision will be managed by the Ministry. Thesocial impact of the adjustment program will be monitored in conjunction withthe Ministry of Economic Planning and Development, specifically with thePoverty Monitoring Unit. As part of supervision and implementation, the GOMwill meet frequently with beneficiary groups, including exporters, privatesectors, and smallholder farmers.

CREDIT ADMINISTRATION

Coordinating Agency

6.7 The coordinating agency is the Reserve Bank of Malawi (RBM) whichwould administer the Credit on behalf of the GOM and disburse funds throughthe interbank market. The RBM has extensive previous experience incoordinating import programs and will assure compliance with the agreeddisbursement arrangements. RBM is adequately staffed to undertake theseduties which it has discharged effectively under previous adjustment operations.

38 Chapter 6

Table 6.3: FRDP - Selected Performance Indicators

Policy Indicators | Intermediate Indicators Outcome IndicatorsExpenditure Rationalization

Fiscal Deficit Domestic Inflation Share of public sector in GDP

Expenditure share of Primary Number of classrooms built Literacy levelsEducation in Total EducationExpenditures Student/teacher ratio Infant mortality rate

Maternal mortality rateExpenditure share of Primary NetepimamoenrolmenrratHealth in Total Health Net prmary enrollment rateExpenditures. Immunization rate

Civil Service ReformCivil service wage bill as share of Number of civil servants Vacancy ratio in civil servicerecurrent spending establishment

Wage compression ratioComparator ratios

Tariff and Trade Policies

Average and maximum tariff Revenues as share in GDP Growth of non-traditional exportsrates Ratio of tariff revenues/surtax Share of non-traditional exports

revenues

Agricultural Policies

Smallholder burley production Number of registered private traders in Poverty ratesagricultural produce and input markets

Floor and ceiling maize price in Consumption per capitarelation to border prices

Gini coefficientLevel of land rent

Private Sector Development PoliciesNumber of serviced and Tum-around time for industrial lease Industrial sector share in GDPunserviced sites available in applicationBlantyre and Lilongwe Private sector investment as share in

Tum-around time for foreign GDPNumber and (asset) size of SOEs investment applicationsprepared and offered for Level of direct foreign investment.privatization GOM subsidy to parastatal sector

Employment growth in industrialNumber and (asset) size of SOEs sectordivested

Financing Plan

6.8 A total of SDR 73.2 million (US$106.4 million equivalent) is expectedto be provided under the proposed IDA Credit of which SDR 2.9 million havebeen allocated from IDA Reflows. Substantial co-financing and parallelfinancing is expected under the Special Program of Assistance from theGovernments of Germany, Japan, and possibly, Denmark and Sweden.

6.9 Except for consultancy services, the proposed IDA Credit would bedisbursed as follows: an initial tranche of SDR 50.9 million (US$74.4 millionequivalent) including the allocation from IDA Reflows would be made availableupon Credit effectiveness and the remaining amount of SDR 21 million


(US$30 million equivalent) would be disbursed upon meeting the conditionsrelated to civil service reforms (Second Tranche Conditions). SDR 1.3 million(US$2 million equivalent) would be available for consultancy services inconnection with implementation of agricultural pricing and marketing, tax andtariff reform, introduction of a VAT and National Revenue Authority, andfacilitation of beneficiaries consultations to discuss the impact of policymeasures and increase understanding of the GOM's economic program. Theamount allocated from IDA Reflows would be used within 12 months of the dateof signing the legal documents of the Credit.

Disbursement and Audit

6.10 Simplified Disbursement Procedures under Adjustment Credits willapply. The Borrower will open an account in the Central Bank. Upon IDAnotification of tranche release for each tranche, proceeds of the credit will bedeposited by IDA in this account at the request of the Borrower. If after depositin this account, the proceeds of the credit are used for ineligible purposes (tofinance items imported from non-member countries, or goods or services in thestandard negative list) IDA will require the Borrower to either (a) return thatamount to the account for use for eligible purposes; or (b) refund the amountdirectly to IDA, in which case IDA will cancel an equivalent undisbursedamount of the credit. Although routine audit of the account will not be required,IDA reserves the right to require it. A summary on the disbursement status ofthe IDA portfolio is attached (Annex G: Disbursement Performance).

6.11 The Borrower shall open a Special Account with a commercial bank ofits choice under terms and conditions satisfactory to IDA, in which US$500,000for consultant services will be deposited. All applications to withdraw proceedsfor consultants services will be fully documented, except for expenditures ofcontracts with an estimated value of US$100,000 or less for consulting firms,and US$50,000 or less for individual consultants which may be claimed on thebasis of certified Statements of Expenditures. Documentation supportingexpenditures claimed against Statements of Expenditures would be retained bythe Reserve Bank and will be available for review as requested by IDAsupervision missions. Upon IDA's request, the Borrower shall have the depositaccount and the Special Account audited, in accordance with appropriateauditing principles consistently applied, by independent auditors acceptable toIDA. The Borrower shall furnish to IDA as soon as available, but in any casenot later than nine months after the date of IDA's request for such audit, acertified copy of the report of such audit of such scope and in such detail as IDAshall reasonably request.

40 Chapter 6

Procurement Procedures

6.12 Selection of consultants shall be carried out in accordance with"Guidelines for the use of Consultants by World Bank Borrowers and by theWorld Bank as Executing Agency" (dated August 1981). Selection ofconsultants shall be subject to IDA prior review as follows: (a) contracts withconsulting firms or individuals to be awarded on the basis of competitiveselection respectively valued at $100,000 and $50,000 or higher; (b) all sole-sourced contracts; (c) all TOR; and (d) amendments to contracts resulting infinal values higher than $100,000 with consulting firms, and $50,000 withindividuals.

BENEFITS

6.13 The poor will benefit from the redirection of public resources towardstheir needs and from reduced inflation. With regard to gender-specific benefits.the removal of all primary school fees has had a favorable impact on girls'enrollment rate (increasing gross enrollment from 75% to 96%), laying thefoundation for higher literacy rates among women and having long-runimplications such as increased female-business ownership or lower fertilityrates. Improved access to cash crops and alternative marketing channels shouldincrease smallholder household income. Small businesses and the informalsector will gain through incremental cash injected in the rural economy as aresult of expanded smallholder cash crop production. Exporters will gainthrough increased incentives for agricultural diversification, helping theeconomy to reduce its dependency on tobacco (from currently 66% of exportrevenues to about 50% by the year 2005) and creating additional employmentopportunities. Credible action in investment promotion and privatization willattract foreign investment beyond the actual program period, thus creatingemployment, helping diversify the economy, and improving fiscal revenues. Arestructured and smaller civil service will allow GOM to increase civil servicesalaries in line with private sector comparators, thus retaining qualified staff andincreasing motivation and public sector efficiency.

RISKS

Implementation Risks

6.14 The GOM faces a weighty agenda and its political willpower will becontinuously tested. Actions taken so far clearly signal the GOM's commitmentto poverty reduction and macroeconomic stabilization. In all policy areas,preparatory work was carried out by the GOM and implementation of criticalmeasures is on track, thus reducing the risk of back-pedalling on key issues. The


following residual implementation risks can be reduced to levels similar to thoseassociated with many of IDA's successful programs.

Failure to Contain the Civil Service Wage Bill

6.15 In a country where three civil service strikes were called within one year,continued pressure by civil servants for higher wages is likely. If the nominalincrease in the aggregate wage bill was 30% instead of the projected19% between 1996 and 1997 (Low Case Scenario I) the budgetary financinggap would increase by the equivalent of US$20 million. The fiscal deficit wouldincrease by approximately 2% of GDP in 1996, though real growth would beslightly higher in 1997 compared to the base case (Table 6.4: SensitivityAnalysis - Macroeconomic Scenarios). The risk will be managed throughbilateral negotiations between the GOM and the Civil Servants Union. Theresolution of the August 1995 civil service strike is indicative of GOM'sdetermination to offset higher civil service salaries only with parallel reductionand restructuring of the civil service size. This risk is further mitigated by theagreement between the GOM and the Civil Servant Union to postpone wagenegotiations and implementation of the recommendations of the report on civilservice pay (Chatsika Report) until the results of the Civil Service Census areavailable.

Political Resistance and Vested Interests

6.16 Notwithstanding the GOM's commitment across the full spectrum ofstructural reforms, there is always the risk of political pressure by specialinterest groups. Civil servants and parastatal employees are likely to object toretrenchment programs under civil service reform or privatization. Althoughextensive stakeholder involvement will help reduce resistance from specialinterest groups (and the GOM's communication strategy will help build broad-based consensus), residual risks remain. These will be managed by reachingagreement on end-of-service and severance benefits packages. The recentlycompleted staff retrenchment program of Malawi Railways has set a precedentby which future retrenchment packages in the public and parastatal sector mightbe measured. For civil service retrenchment, the proposed Credit will providethe necessary resources on a "just-in-time" basis through the Second Tranchewhich will be triggered by an acceptable civil service reform package, thus,preventing a situation in which expenditures for civil servant retrenchmentimpinge on the implementation of social sector programs.

Impact of Food Price Increase on the Poor

6.17 After the initial round of maize price increases (following the 1995 moveto a maize price band) it is possible that further liberalization will result in future

42 Chapter 6

jumps in maize prices. This would adversely affect food deficit households andreceive significant attention from civil society and critics of adjustmentprograms--and could eventually lead to the reversal of liberalization policyunder popular pressure. This risk will be managed through a mix of stakeholderconsultations, targeted pro-poor activities (such as public works, targeted inputdistribution programs, and supplemental food programs), and drawdown fromthe Strategic Grain Reserve (SGR). In years with production shortages, priceincreases would be buffered by sales from the SGR. If excess demand remains,the consumer price would be maintained at or below import parity level throughliberalized private sector imports. In extreme drought years, undue hardship tothe poor can only be prevented through public food distribution programs--transparently funded through the budget and in part or in total financed bydonors.

Outcome Risks

6.18 Even if Malawi does all the right things, vulnerability to external shockswill persist. The risk of drought is by far the highest and the least controllable ofsuch shocks. The Base Case scenario projects a relatively low growth rate of4% as it incorporates the effects of possible droughts, albeit mild ones, onincome and production (on average one moderate drought in four years).

6.19 In the short term, the impact of a major drought cannot be offset byshifting external resources alone or by relying on substantial donor grants;additional aggregate demand management would be necessary to stay within theagreed fiscal framework. Some mitigating measures are being taken to reducethe burden on the poor; the MTEF will help to protect expenditure allocations inthe social sectors and will identify low-priority areas from which to reallocateexpenditures to drought-related operations. Over the medium term--and for alimited number of households--the proposed expansion of the smallholdertobacco quota is a measure to improve drought vulnerability. Over the longerterm, the GOM and IDA intend to address drought vulnerability through a moresystematic and integrated effort to promote alternative crops, disseminatealternative technologies and foster increased non-farm activities.

6.20 Although Malawi's terms-of-trade are expected to remain broadly stable,there is always the risk that world market prices may shift unexpectedlyparticularly in the tobacco market (Low Case Scenario 2). As long as thedecline in export prices is moderate (10%) Malawi will be able to compensatefor the shock through reduced accumulation of foreign reserves and if need bethrough the IMF's Compensatory Contingency Financing Facility (CCFF).However, lower tobacco revenues to the private sector would negatively affectprivate sector investment in 1996 and would somewhat reduce real growth in1997 compared to the base case (Table 6.4: Sensitivity Analysis -Macroeconomic Scenarios).


Table 6.4: Sensitivity Analysis - Macroeconomic Scenarios

Calendar Year Basis | 1995 1996 1997 1998

Growth (real GDP at Market Prices - %) 9. 9 10.5 4.0 4.0Fiscal Deficit (cxcl. Grants - % of GDP) | 15.9 9.9 6.6 5.9Current Account Deficit (excl. Transfers - % of GDP) 15.0 10.1 8.4 7.7

Growth (real GDP at Market Prices - %) 9.9 10 5 4.5 41Fiscal Deficit (excl. Grants - % of GDP) 15.9 12.0 9.8 93Current Account Deficit (excl. Transfers - % of GDP) I 15.0 10.6 8.6 8.0

Growth (real GDP at Market Prices -%) 9 9. 10.5 3.8 3.8Fiscal Deficit (excl. Grants - % of GDP) 15.9 10.4 6.9 6.1Current Account Deficit (excl. Transfers - % of GDP) 15.0 10.7 9.2 8.2

7. RECOMMENDATION

7.1 I arn satisfied that the proposed Credit would comply with the Articles ofAgreement of the Association, and I recommend that the Executive Directorsapprove it.

James D. WolfensohnPresident

April 3, 1996

44 Previous Adjustment Operations

ANNEX A: PREVIOUS ADJUSTMENT OPERATIOS

SAL 1 (FY81)

Financing (USSM): IDA 45.0

Main Objectives* Diversify export base.* Encourage efficient import substitution.* Ensure appropriate price and income policy.* Improve public sector's financial performance.* Strengthen GOM's economic planning and monitoring

capability.

Main Actions Taken

Exchange Rate Adjusted periodically.

Agriculture Smaliholder producer prices increased annually, notably formaize, using methodology designed by IDA.

Resources MobUizatlonand Management Expansion of the tax base and increasing tax rates.

Strengthening GOM capability for macroeconomic andsectoral planning, and public debt monitoring andmanagement.

Increased recurrent budget allocation for agriculture andother key economic and social sectors.

Parastatal Effickncy Improved financial structure of Malawi DevelopmentCorporation (MDC); and Press Holdings Ltd. (PHL).

Increased tariffs for public facilities, for Malawi Airwaysand Malawi Housing Corp.

Monetary Management Interest rates adjusted periodically.

Annex A 45

SAL II (FY84)

Financing (USSM): IDA 55.0

Main Objectives* Diversify export base.* Encourage efficient import substitution.* Ensure adequate incentives.* Improve public sector's financial performance.* Strengthen policy-making capabilities.

Main Actions Taken

Exchange Rate Continued to be adjusted periodically, and Kwacha was tiedto a basket of currencies.

Agriculture Smaliholder producer prices increased, using IDAmethodology.

ADMARC's financial management capability strengthened.

Industry Reduction (by 41) of items subject to price control.

Resources Mobilizationand Management Improved buoyancy of tax system.

Increased non-tax revenues from higher fees and levies.

Preparation of 3-year Public Sector Investment Program.

Further strengthening of the GOM planning capability withemphasis on formulation of medium-term strategy, projectidentification, evaluation and monitoring.

Increasing of recurrent budget to key economic and socialsectors.

Parastatal EfflilencyADMARC (see above under Agriculture).

Further financial restructuring of MDC and PHL.

Further adjustment tariffs for public utilities.

Monetary ManagementInterest rates adjusted periodically.


SAL III (FY86)

Financing (USSM) IDA 30.0African Facility 40.0Financing 22.

99.0

Main Objectives* Diversify export base.* Promote exports.* Strengthen GOM's policy-making capabilities.* Improve performance of Development Institutions.

Main Actions Taken

Exchange Rate Continued to be adjusted.

Agriculture Smaliholder prices continued to be adjusted using IDAmethodology.

Agreement reached with IDA to postpone elimination offertilizer subsidies to 1989/90.

Divestiture of ADMARC's investments unrelated tomarketing activities was initiated.

Industry Elimination of items subject to price control, except petrol,low-grade beef, fertilizers, sugar, and vehicle spare parts.

Export Promotion Preparation of an export promotion strategy.

Establishment of export financing facility.

Resources Mobilizationand Management Further tax increases on selected items.

Adjustment of the tax system to improve efficiency andincentives.

Preparation of 3-year Public Sector Investment Program.

Strengthening policy-making capacity and economicanalyses capability.

Introduction of a programmatic budget system.

Parastatal Efflckncy ADMARC (see above under Agriculture).

Further restructuring of MDC and PHL.


Annex A 47

SAL III Supplement (FY87)

Financing (USSM) IDA 10.0Special JointFinancing 30.0USAID 10

55.0

Main Objectives* Expand role of private sector in marketing of

smaliholder crops.* Improve financial performance and operational

efficiency of ADMARC.* Strengthen GOM's policy-making capability.

Main Actions Taken

Exchange Rate Further adjusted.

Agricuiture Intra-regional differentiated producer and consumer maizeprices implemented to expand the role of private sector inmarketing smallholder crops except tobacco and cotton.

The GOM took over, from ADMARC, the financing ofstrategic grain reserves.

Divestiture of ADMARC's investments unrelated tomarketing activities was accelerated.

Parastastal Effickncy ADMARC (see above under Agriculture).



Industrial and Trade Policy Adjustment Credit (FY88)

Financing (USSM) IDA 79.0Japan 25.0EEC 15.0ADF 17.2USAID 35.2Germany 10.2Netherlands 12

186.5

Main ObjectivesImprove policy environment for the manufacturingsector to increase efficiency of resource use includingimports and expand exports.

Main Actions Taken

Exchange Rate Further adjusted.

Agriculture Beef prices decontrolled.

Industry Reduction of scopes of industrial licensing requirements,and elimination of authority to grant exclusive productrights.

Export Promotion Reduction of the scope of export licensing.

Revision of duty drew back.

Introduction of surtax credit system.

Resources Mobilizationand Management Reduction of financial deficit.

Preparation of a 3-year rolling Public Sector.

Expansion of excise tax base and move to ad valorem rate.

Introduction of current payment system for corporateincome tax.

Import Liberalization Removal of requirement for prior allocation by the ReserveBank for 65% of all imports.

Monetary Management Revision of Reserve Bank Act.

Revision of Banking Act.

Annex A 49

Agriculture Sector Adjustment Credit (FY90)

Financing (USSM) IDA 79.0UK 25.0Netherlands 10.6Germany 2

123.6

Main Objectives* Increase efficiency and improve incomes of

smaliholders, particularly smaliholder ones.* Increase efficiency of land use and protect environment.* Improve macroeconomic environment through further

import liberalization and public expenditure andrestructuring.

Main Actions Taken

Exchange Rate Continued monitoring.

Agriculture Smallholder prices continued adjustment. Two-paymentprice system for smallholder tobacco introduced.

Other agents allowed to market fertilizer. Improved cashflow management for FFRFM. Fertilizer economic subsidyreduced.

Rationalization and GOM financing of ADMARCdevelopment functions.

Smallholders allowed to grow burley tobacco.

Maize research shifted to develop high-yielding flintvarieties.

Estate land rents adjusted more frequently. Rent raised in1990/91 and again in 1992/93 to real 1985 level. Transferof land from customary areas to estates halted except in lowpopulation density areas. Enforcement of woodlotenvironmental convenants strengthened.

Resources Mobilzationand Management Preparation of 3-year rolling PSIP, and maintenance of

satisfactory fiscal deficit.

Parastatal Efficiency ADMARC (see above under Agriculture).

Monetary Management Final removal of prior foreign exchange control except forsmall negative list.


Entrepreneurship Development and Drought Recovery Program (FY92)

Financing (USSM) IDA 120.0Japan 70.0ADF 20.0

Main Objectives* Support an improved environment for entrepreneurial

activity and investment in labor-intensive activities.

* Support adoption of policies aimed at deepeningfinancial markets.

* Support reorientation of fiscal and labor policy towardhuman capital development.

* Help alleviate impact of drought.

Main Actions Taken

Exchange Rate Maintaining exchange rate at level consistent with externalcompetitiveness in line with trade liberalization.

Agriculture Expand smallholder access to burley tobacco production.

Industry Issuance of Investment Policy Statement acceptable to IDA,with wide distribution and high visibility.

Legislation for the establishment of investment promotioncenter.

Revision of policy directives so that business registrationand incorporation of companies consist of only one stepwith the Registrar General.

Replacement of Industrial Development Act with IndustrialLicensing Act so as to eliminate industrial licensing processfor investments, with the exception of a short list.

Review of labor market imperfections and policy optionsincluding minimum wage policy, and formulation of actionplan agreed with IDA.

Resources Mobilizationand Management Budgetary allocation to education of at least 15 percent of

total expenditures in 1992/93.

Budgetary allocation to education of at least 15.5 percent oftotal expenditures in 1993/94.

Introduction of budgetary system for separating allocationand control of individual district and peripheral health care

Annex A

services in Ministry of Health Revenue Budget. Increase inperipheral services' share of health Revenue Budget.

Expansion of the surtax base to electricity and telephone aswell as certain other services.

Increase in the surtax rate on electricity and telephoneservices to not less than 10 percent.

Identification of target base surtax rate, review of increase insurtax rate on services already taxed to that rate, and reviewof expansion of surtax base to further services.

Reduction of base surtax rate to 30 percent.

Review of further decreases in corporate and personalincome tax rates.

Import Liberalzation Elimination of surtax exemption for domestically producedgoods; consolidation of protective effect of domestic surtaxexemption into existing tariff system; and limiting resultingconsolidated tariff rates to maximum of 75 percent.

Implementation of major tariff schedule revisions.

Monetary Management Establishment of a Capital Market Department at theReserve Bank of Malawi (RBM), to conduct periodicauctions for the issuance of RBM bills.

Elimination of direct bank credit controls.

Maintenance of free determination of interest rates.

Continuing to actively seek applications from soundinternational and regional banks.

Preparation of a restructuring program.

Supplement to Entrepreneurship Development and Drought RecoveryProgram (FY95)

Financing (USSM) IDA 40.0

Main Objectives* Help reduce Balance of Payments (BOP) pressure due

to drought related imports.

Main Actions TakenN/A for emergency operation

52 Annex B.: Environmentfor Higher Impact Adjustment Lending in Malawi

ANNEX B: ENVIRONMENT FOR HIGHER IMPACT ADJUSTMENT LENDING INMALAWI

Major Actions/Evidence1: Demonstrated Government Commitment:Track Record => removed all primary school fees

=> lifted all marketing restrictions on smallholder tobacco: replaced fixed producer/consumer prices for maize with market determined prices within a band

=> achieved macroeconomic stabilization (cash budget, market-based exchange system)=. retrenched 20,000 temporary civil servants in non-priority areas

Broad regular briefings and workshops with private sectorConsultation frequent communications with civil society and churches

=, request for ED] assistance on systematic communications strategy=. Cabinet retreat to discuss medium-term development strategy, draft PFP. and Pre-appraisal Aide

Memoire=> Presidential Commission of Inquiry on Land Policy

Self Design of r Agricultural StrategyProgram =, Poverty Alleviation Program

=> Privatization Policy Framework=, Civil Service Census/Civil Service Reform=> Medium-Term Expenditure Framework

2. Country-specific evidential basis for the proposed structural reforms:Agric. Sector =, smallholder growth strategy is inseparably linked to access in burley productionMemo/ Ag =, access to land, inputs, and low-cost transport are main constraints to smaliholder growthStrategy Paper

Poverty Profile = low quality and level of primary social services despite relatively high per capita spendiig=. need for improving effectiveness and quality of public social servicesn need to combine investment in human resources and deregulation of smaliholder sector with short-term

income transfer scheme (such as public works) to protect food deficit households from undue hardship

Manufacturing => access to industrial land is a major structural constraintSector Survey _> some constraints (access to credit, license approval) are more binding for ethnic minorities

Budget Managm. => reverse project-driven planning and budgeting sequence to link recurrent and development budgetsReview =, reconcile program priorities and funding levels in a Medium-Term Expenditure Framework

Civil Service Pay n effective control of the civil service wage bill requires linking establishment control to the budgetand Employment process, developing departmental manpower plans and targets, abolishing the industrial class and allStudy non-filled vacancies

= rationalization of the pay structure is needed in conjunction with better personnel management toreverse the drift to non-transparent and inequitable remuneration through fringe benefits andallowances.

3 Simultaneous technical assistance and investment operations:Second => Civil Service Census/Civil Service ReformInstitutional =, Preparation of Privatization Policy FrameworkDevelopment =* Financial Management Information SystemProject => Technical support for Medium-Term Expenditure Framework

Agricultural => Maize marketing and pricing reformService Project

Cross Border =, Tariff and tax analysisInitiative4. Explicit measures on the level and composition of fiscal balance:Monitoring and > joint monitoring of overall fiscal targets with the IMF under the ESAF.control > annual update of quantitative inter-sectoral and intra-sectoral expenditure targets and quarterly

monitoring of actual expenditure allocations

Social expenditure : Agreement on quantitative allocations for critical social sector expenditure categories (such as primarytargets health care, medical supplies and medication)

Annex C. Supplementary Information S3

ANNEX C: SUPPLEMENTARY INFORMATION

Time taken to 12 Monthsprepare 93 staff weeksKey Processing Identification: February 1995Steps Preappraisal: May 1995

Appraisal: November 1995Negotiations: Feb 27- Mar 1, 1996Board: April 30. 1996Effectiveness: May 1996Closing Date March 31, 1998

Processing Cost US$342,000Supporting Bank 6th PFP SecM95-1070Documents Civil Service Pay and Employment Study Report # 13071 -MAI

Agricultural Sector Memorandum Report # 12805-MAIBudget Management Review Green Cover DraftPCR: Agricultural Sector Adjustment Credit Report #: 13603SAR: 2nd Institutional Development Project Report # 12668-MAIMalawi Poverty Profile Green Cover DraftPAR: Industrial and Trade Policy Adjustment Report # 12156-MAIProgram

54 Privatization Program

ANNEX D: PRIVATIZATION PROGRAM

Malawi - Tentative Timetable for Privatization of SOEs

1996 1997 1998 1999-2005Farms and Ranches Fwrms And Ranches Farms And Ranches Farms And Randt

Kuti Ranch Mikonbngwe Ranch Bwemba Ranch Dwnmbadriz RanchMeru Ranch Dzalanyama Rarnch Choma Ranch Gov Ftsh FarmsNgapamni Farm Lusangazi Farm Chipunga Farm . Stock Brokers Ltd

National Bank of Malawi . Nasomba Farm Nataw Farm . Lake Servces Ltd.INDEBANK * South Rukuru Farm V Farm * PCC

* Central Tobacco Properties . Zomba Trout Farm . Chemicals and . MDCLtd Marketing Ltd.

Packaging Industries . Cold Storage Co Ltd. * Cory Mann George Ltd . ADMARC(Malawi) LtdThe I & E Malawi Ltd. Opbchem (Malawi) Ltd. * Malawi Savins Bank * Malawi Housing

CorporationThe Portland Cement Co . Grain & Milling Ltd * Central Medical Stores * ESCOM(1974) Ltd.

* Tourism Development and . Manica Freight Services * Goverrnent Hostel . Blantyre Water BoardInvestment Co of Malawi LtdLtd

* Leopard Match Co. Ltd . Bain Hogg Insurance Cntral Government * ADMARC HoldingsBrokers Ltd. Stores Ltd

National Insurance Co. Ltd . Plstic Products Ltd * Forestry Resthouses L Llongwe Water Board* Commercial Bank of Malawi * Bats Shoe Co (Malawi) * The Nw Building Liknwe lnternational

Ltd Ltd. Socity AirportMalawi Book Service . Maltew Finance Co. Ltd . Malawi Rural Finance . Dwangwe Sugar

Co Ltd. Corporation* Limbe and Blantyre Rest . Finance Corporation Ltd . SUCOMA

HousesViply Ltd * Indefund Ltd.

* Stagecoach (Malawi) Ltd. * Chillington Agrimal Ltd.* Malawi Tea Factory Co. * Mpico Holdings Ltd.

LtdB Brick STil Co Ltd * Malawi Dairy Industries

* Mining & Investment * Air Malawi LtdDevelop Corp

* Kasungu Flue-Cured * Air Cargo Ltd.Tobacco AuthoritySmallholder Sugar Plant & Vehicle HireAuthordy Organzation

* Smallholder Coffee * Governmend PressAuthoritySmallholder Tea ALthority . Dnstnct Rest Houtse Chain

* Lilongwe Smaltholder * Borehold ConstructionPoultry Project FundiMzuzu Smaltholder Poultry * UNDP Housing FundProject

* Malawi Railways (1994) * Capital City DevelopmentLtd FundCharcoal Production Fund

- Malawi Catenng Servces* VIPCOR* Mpwepwa Boat Yard* National Seed Co Ltd

Malawi Posts&Telecom.Corp

Annex D 55

Public Enterprises for Liquidation

1. Council for Social and Welfare Services2. Secondary Centres Development Programme Fund3. Primary School Fees Fund4. Government Loans Board Fund5. Manufacturing and Production Fund6. National Celebrations Council7. Fisheries Training Project8. Salima Boatyard Fund9. Central Lake Fish/Marketing10. Blantyre Egg MarketingII. Lilongwe Egg Marketing12. Mzuzu Egg Marketing13. Salima Cultural Assistance Fund14. Rural Housing Project Fund15. Chichewa Board16. District Water Supply

56 Prrvatization Program

Public Enterprises for Integration into Line Ministries

Public Enterprise Proposed Line MinistryTree Nut Authority Agriculture & Livestock DevelopmentTobacco Control Commission Agriculture & Livestock DevelopmentAgricultural Research and Extension Trust Agriculture & Livestock DevelopmentMalawi Export Promotion Council Commerce & IndustryMalawi Bureau of Standards Commerce & IndustryMalawi Industrial Research & Technology Commerce & IndustryDevelopment CentreDevelopment of Malawian Traders Trust Commerce & IndustrySEDOM Commerce & IndustryMalawi Investment Promotion Agency (MIPA) Commerce & IndustryCopyright Society of Malawi CultureMalawi National Examinations EducationMalawi Institute Of Education EducationMalawi National Commission for UNESCO EducationDesignated Schools Board EducationUniversity of Malawi EducationPolytechnic Board of Governors EducationNational Library Service EducationMalawi College of Accountancy EducationExcluded Vehicles Fund FinanceChristian Hospital Fund HealthPolice Rewards/Fines Home AffairsScholarship Fund Human Resource Management &

DevelopmentMalawi Broadcasting Corporation InformationPrisons Rewards/Fines JusticeIndustrial Training Fund Labor & Manpower DevelopmentMEDI Labor & Manpower DevelopmentNational Parks & Wildlife Fund Natural ResourcesChiefs Advances Fund OPCMalawi Institute of Management OPCNational Disaster Fund (Statutory Body) Relief and Rehabilitation AffairsNational Disaster Fund (Treasury Fund) Relief and Rehabilitation AffairsNational Herbarium Research & Environmental AffairsTourism and Hotel Marketing Fund TourismHotel Staff Training Fund TourismKwacha Conference Centre TourismNational Road Safety Council Transport & Civil AviationNational Family Welfare Council Women, Children Affairs, Community

Development & Social WelfareMACOHA Women, Children Affairs, Community

Development & Social WelfareNational Sports Council Youth, Sports & Culture

Annex E 57

ANNEX E: MATRIX OF POLICY ACTIONS

EXPENDITURE RATIONALIZATION......................................... .......................................................................................................................................................................................

Objectives * Improve expenditure control.* Improve budgetary allocation process and ensure consistency of recurrent and

capital budget with resource availability and development priorities.Actions I Timing/Status

7. Implement Cash Budget and complementary expenditure control and monitor measures. Completed before Appraisal................................................................................................................................................................. ...........................................................

2. I Form four sectoral Working Groups to develop Medium-Term Expenditure Framework Completed before Appraisal(MTEF).

.J............ ...... 3. Prepare Interim Report of sectoral working groups comprising standard cost analysis for Completed before Appraisal

each program and altemative sectoral spending programs.

4 Complete MTEF for four sectoral working groups, submit sectoral reports and roll-out Completed before Negotiationsplan for MTEF acceptable to IDA.

5 . Obtain Cabinet approval of sectoral budgets under the MTEF. Completed before Negotiations

6 . Conduct review of Development Budget and provide summary report acceptable to IDA Completed before Negotiat

7. . Announce sectoral envelopes and expenditure targets for critical categories in social Completed before Negotiationssector in the FY96/97 Budget Circular.

CIVIL SERVICE REFORMObjectives . * Restructure the civil service to improve efficiency and control the growth of civil

service wages and salaries#1 |Actions Timing/Status

I . . Finalize TOR and nominate Intefministerial Task Force on civil service reform. Completed before Appraisal

2. Complete Civil Service Census exercise for October 1995. Completed before Appraisal

............. .1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . .. . . .. . . . .. . . . .. . . . .. . . . .. . . . .. . . .3. . Prepare retrenchment plan for temporary workers in non-priority areas . Completed before Appraisal

4. Implement retrenchment plan for about 20,000 temporary/non-established civil servants Completed during Negotiationsand provide summary report to IDA.

5. Prepare and start implementation of Civil Service Reform Action acceptable to Second Tranche TriggerIDA. Action

TARIFF AND TAX POLICY REFORM......................................... .................... ........................ I.................................................................................................... I......................................

Objectives * Rationalize tariff and surtax and improve tax administration to increase efficiencyand protect revenue collection.

a Improve the administration of export promotion instruments.#] JActions J Timing/Status

I . . Issue tender to expand pre-shipment inspection (PSI) to cover customs reconciliation. Completed before Appraisal

2 . Execute agreement with selected PSI company. Completed before Negotiations

3. . Finalize TOR for feasibility study to set up a National Revenue Authority. Completed before Negotiations.................................................................................... I..........................................................................................................................................

4. , Approve expansion of surtax base to all services and submit draft legislation to Completed before NegotiationsParliament for FY96 budget.

S Complete analytical work (on tariffs and surtax) and implementation plan to reduce Completed during Negotiationsmaximum tariff rates to 25% and average tariffs to 15% by FY98, revenues permitting.

6 Gazette extension of initial refund of 75% under duty drawback system to i00%. Completed before Negotiations

...........................................................................................I...............................................................7__Gzteetnino oddfcoypoiint oriutr n gpoesn C..o..mp Ieted . '"'b''"fe..gotiat' . ' ..

58 Matrix of Policy Actions

AGRICULTURAL POLICIES.......................... ......................................................................................................................................................................................

Objectives * Access To Land: Develop a comprehensive land policy to improve the efficiencyof land use and develop a land market.

# r Actions Timing/StatusI . . Draft amendment to Land Act to allow annual increases in land rent and present to Completed before Appraisal

Parliament.

2 . Gazette increase in land rents to MK 50 per hectare with effect from April 1996 and Completed before Negotiationscompile list of estates and identify defaulters on land rents payments.

............. ...........................................................3. . Issue administrative orders so that no new conversions are made from customary to . Completed before Negotiations

estate tenure.

4 .Announce appointment of Presidential Commission on Land Policy Reform. Completed before Negotiations........................................................................................................................................................... ..... ..............................

5. Appoint Presidential Commission of Inquiry on Land Policy and issue TOR. Completed before BoardPresentation

Objectives * Access to Cash Crops: Raise smallholder productivity and income by removing|quotas based on land title status.

l_________________________________________ _ Actions Timing/StatusI Increase 1995/96 smallholder burley quota from 22 million kg to 30 million kg. Completed before Appraisal

2. . Amend Special Crops Act. Completed before Negotiations

3. . Announce phase-out of smallholder burley tobacco quotas for 1996/97 crop season. and Completed before Negotiationsswitch from production quota to production registration system with 1997/98 cropseason.

Objectives * Access to Markets: Encourage efficient smallholder production and

diversification through appropriate producer prices.___ Timing/Status| # | ~~~~~~Actions TingSau

I . Replace fixed pricing system with price band. Completed before Appraisal

2. Prepare TOR and short-list of consultants to design operationalization of maize price Completed during Negotiationsband, commercialization of ADMARC, and role of an independently managed SGR.

Objectives * Access to Inputs: Improve input availability by removing regulatory restrictions.#1 |Actions I Timing/Status

1. Review licensing and registration requirements in seeds and fertilizer markets. Completed before Appraisal.p......................................................................................................................................................................................................................

2. . Submit Amendment to Seeds Act to replace licensing and registration requirements on Completed before Negotiationsseeds trade, provide breeders rights, and allow quality declared seed.

3. . Submit Amendment to Fertilizer, Farn Feeds, and Remedies Act to replace licensing Completed before Negotiationsand registration requirements on fertilizer trade and sale with general business licenses.

Objectives * Access to Transport: Improve competition and cost effectiveness in transport7sector.

Actions | Timing/StatusI. Remove all restrictions on imports of second-hand trucks and spares. Completed before Appraisal

...................................................................................................................................................................... ...........................................2. Review Road Traffic Act (RTA) and remove minimum tariff on domestic road Completed before Negotiations

transport.

Annex E 59

PRIVATE SECTOR DEVELOPMENT POLICIES......... 4 ..... I........ .......................................................................................................... e

Objectives 1 * Improve operational and financial efficiency of the sector and support broad-based private sector development. Timing/Status

Actions | Timing/Status1. Prepare Privatization Policy Framework and discuss with stakeholder groups. Completed before Appraisal

2. Submit draft legislation on privatization for Parliament's approval. Completed before Negotiations

3 . Select SOEs to be reintegrated into parent ministries, those to be considered for-. Completed before Negotiationsprivatization, and those to be liquidated.

4. Estabis Privaiization Transaction Unit, recruit professional staff and secure funding . Completed before Negotiations

Objectives * Liberalize investment regulations and increase competition in the private sector.

l1 Actions T Timing/StatusI. Identify steps to ease investment approval process. Completed before Appraisal

2. Identify suitable land to be rezoned for industrial development by private investors. Completed before Negotiations

3. Rezone and advertise suitable land for industrial development by private investors Completed before Negotiations

4. . Submit draft Bill to Parliament to repeal all laws containing restrictions on ethnic Completed before Negotiationsgrounds (e.g., Amendment to Business Licensing Act of 1978).

60 Supervision Chart

ANNEX F: SUPERVISION CHART

Maail - Fiscal ResuuclurIh and DsfeghdaUon PiogramSupevion Plan

.94 1995 1996 1997 1998Task Nane O3t 43 i 10i1 2ptr 3p 1r 4pi 1r2 I rir 2r 3p i 2 3plr 4pt4 Ip 2 3EXPENDITURE RATIONAUZATION _

AGREE ON MTEF i!

PILOT MTEF (4 SECTORS) -_

SUBEMSSION Of PILOT MTEF BUDGETS FOR FY96197 TO IDA

CABINET ENDORSEMENT OF FY96I97 SECTORAL ENVELOPES .l

FINALIZE FY96197 BUDGET PLAN .

ROLL-OUT MTEF PROCESS TO ALL MINISTRIES

CABINET APPROVAL OF FY97/98 BUDGET ENVELOPES -FINALIZE BUDGET PLAN FOR FY971986

COMBINE RECURRENT AND DEVELOPMENT BUDGET .

CIVIL SERVICE REFORI t M I

RETRENCH 20.000 TEMPORARY WORKERS -CIVIL SERVICE CENSUS

ANALYTICAL STUDIES IN PREPARATION OF CSR

PREPARATION OF CSR ACTION PLAN

AGREEMENT WITH IDA ON CSR ACTION PLAN

IMPLEMENTATION OF CSR ACTION PLAN j -

Task Sumimary RoNed Up Progress

Date: Wed 3212196 Progress Rotled Up TaskMilsuloneo Rolled Up Milesblne

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64 Disbursement Performance

ANNEX G: DISBURSEMENT PERFORMANCE

The Bank/IDA portfolio in Malawi currently contains 17 projects. Thedisbursement factor (disbursements divided by the approved amount net ofcancellations and previous years' disbursements) has fallen from 36% in FY93to 32% in FY95 and only 15% for the first seven months of FY96. Genericissues affecting project implementation have included: i) procurementdifficulties stemming from a shortage of qualified staff and frequent turnover ofexisting staff, weakness in the Tender Board, and delays in reaching agreementon clauses of standard bidding contracts; ii) problems with counterpart fundingas a result of fiscal pressures; iii) slow or incomplete preparation ofreimbursement documentation, especially where implementing agencies haveaccess to up-front budgetary financing; and, iv) a pattern of very slow projectstart ups reflecting a tendency on the part of the Government and the Bank tooverestimate local implementation capacity.

At the February 1996 Country Portfolio Performance Review (CPPR), theGovermment and the Bank agreed on a number of initiatives to improve projectperformance and disbursements. A Public Procurement Reform Study will beexecuted under an ongoing operation. Agreement was reached on a schedule ofprocurement seminars and workshops and updated procurement plans will beprepared for ongoing operations. The prioritization of activities under theMTEF is expected to assist in rectifying the counterpart funding problem.Finally, Government intends to strengthen disbursement practices byinstitutional strengthening of the Ministry of Finance Claims Unit, while theBank will strengthen the role of the Resident Mission in project supervision.Projects with disbursement lags of over 50% or other disbursement-relatedissues are described in more detail below.

Power V.Donors withdrew support for the project shortly after project approval, inprotest against human rights abuses under the Banda regime and in support ofpressure for democracy. Implementation was delayed 18 months. The projectis now proceeding satisfactorily, although an extension of the closing date islikely to be necessary to compensate for the 18 month delay.

Rural Financial Services:Project effectiveness was delayed by 15 months as a result of a breakdown incredit discipline following the 1994 elections and difficulties in completing therecruitment of staff and legal documentation for the newly established MalawiRural Finance Corporation. During the 1994-95 season, lending was limitedby the large number of ineligible borrowers and a shortage of fertilizersupplies. The project closing date may need to be extended to compensate forthe initial delays and permit steps to privatize MRFC. Still, lending hasaccelerated and the project is proceeding satisfactorily.

Annex G 65

Fisheries Development Project:The single greatest constraint limiting performance is the lack of an effectiveproject management and administration system. Disbursement problems aredirectly linked to poor procurement planning (no major civil works have beencompleted during the first four years), though improvements have been madeduring the last year. The earlier restructuring was never really effected. Thisproject is a problem project; a mid-term review in March will proposeremedial measures.

PHN Sector Credit.Project implementation was originally delayed at the Bank's instigation asdiscussions continued on the issue of rural focus. The project suffered from aseries of personnel issues, including: (i) numerous shifts at the PermanentSecretary level; (ii) very slow recruitment of project staff; (iii) the lack of aProject Coordinator for several months; (iv) the death of Project Accountant,which resulted in a backlog of outstanding invoices; and, (v) staff salary issuesaffecting the Project Implementation Unit, which were resolved only recently.A number of procurement and disbursement issues have also caused delays.These issues have now been largely resolved and project implementation isexpected to improve.

Institutional Development II.The Malawi Institute of Management (MIM) component of the project, whichconstitutes 33% of all project funding, was not effective until June, 1995 (sixmonths behind schedule). The slow start was caused by delays in the hiring ofa professionally qualified accountant. The project was further delayed by theneed for resequencing of some consultancies and procurement, as a result ofslippage. After the initial delays, the project is proceeding satisfactorily.

Ag Services.'The move to a cash budget which caused the closing or combination of anumber of Government accounts also slowed allocations to implementingparties. In addition, a significant percentage of project expenditures arekwacha denominated local costs. With the devaluation of the currency, theactual amount of US dollars being disbursed fell dramatically, even though thekwacha expenditures remained the same. However, the situation has improvedsignificantly, with the disbursement lag falling from over 60% to 38% betweenJuly and December, 1995. Disbursements are on track according to the reviseddisbursement schedule (updated each mission) and no need for restructuring isforecast.

66 Disbursement Performance

Local Government:This project got off to a slow start as a result of a combination of projectconditions and market forces. A central condition of the project was thatonlending rates to local governments be linked to market rates. However,early in the project interest rates increased significantly to levels beyond whatlocal governments were willing to bear. This issue has been resolved andproject implementation is improving. A mid-term review is scheduled forMay, 1996.

Annex H: Letter of Development Policy 67

ANNEX H: LETTER OF DEVELOPMENT POLICY

Tvlegrams: Fi,.%NcE. Lilongwe MINISTER OF FINANCETelephone: Lilongwe 731 311 O XTelex: 44407 P.O. BOX 30049

LILONGWE 3MALAWI

Ref. No. C, 32/l/52 14th March, 1996

Mr. James WolfensohnPresidentInternational Development Association1818H Street, NWWashington D.C. 20433USA

Dear Mr. President,

RE: FISCAL RESTRUCTURING AND DEREGULATION PROGRAM

1. I am writing to request on behalf of the Malawi Govemment a Credit of

US$106.4 million from the International Development Association (IDA) in support

of our program of Structural Adjustment. This will be the first adjustment program

designed and implemented by the democratically-elected Govemment, after 30 years

of one-party rule. The structural reforms anchored in a medium-term strategy as

reflected in the 6th Policy Framework Paper are supported by a three-year

arrangement under the IMF's Enhanced Structural Adjustment Facility. The program

is designed to support a critical new phase in Malawi's continuing macroeconomic

reform program, aimed at the dual strategy of ensuring stability in the macro-economic

fundamentals to allow economic growth with poverty reduction. The cornerstone of

this phase of the program is a far-ranging overhaul of public expenditure planning and

management, with a view to raising allocations in pro-poor expenditure categories

while reducing the absolute level of public spending. In addition, the proposed

program supports policy measures that will allow the poor to participate in the full

range of economic activities especially in the agricultural sector.

2. The requested Credit will provide the needed financing to: (i) help fill

Malawi's projected external financing gap through 1996/97; (ii) provide budgetary

support for critical expenditures in the social sectors and a substantial net repayment

to the domestic banking system; and (iii) smooth consumption to lessen the cost of

stabilization and prevent undue hardship to the poor.

BACKGROUND AND RATIONALE

3. Since 1981, Malawi has undertaken six adjustment operations, reflecting a

pattem of recurrent periods of short-lived economic recovery and growth which were

halted or reversed by external shocks followed by economic recessions. Although

these repeated periods of economic recovery earned Malawi the reputation as a "strong

adjuster", sustainable and broad-based growth has remained elusive.

4. The pre-1994 Government's lack of comrnitment to poverty alleviation,

combined with Malawi's vulnerability to recurrent external shocks, forestalled any

sustained and comprehensive transformation of the economy. Until a few years ago,

Malawi's economy, and in particular the smallholder agricultural sector, was among

the most regulated private sectors in Africa. Marketing and production restrictions

excluded smallholders from growing profitable cash crops (especially burley tobacco)

and from competing with the privileged estate sector. Until 1987, the marketing

monopsony of Agricultural Development and Marketing Corporation (ADMARC)

effectively taxed the smallholder sub-sector and prevented entry by private traders.

Expanding tobacco exports provided a thin veneer of growth (almost exclusively in

the estate sector) that concealed a fragile and narrow macroeconomic base, highly

skewed income distribution, and lack of economic diversification.

5. The formal sector became increasingly dominated by a few public and private

conglomerates, such as Press Corporation, Lonrho, ADMARC, and Malawi

Development Corporation (MDC). Concentration of property ownership in the

economy reinforced the increasingly autocratic political regime. A small number of

Malawians became rich and powerful, while the lives of the vast majority became

worse.

6. With the political transition in Malawi the odds for successful structural

reforms, compared to previous programs, have substantially improved. In contrast

to the previous regime, the new Government has firmly demonstrated its commitment

to policy reform and has followed through in both word and deed to reduce the

country's pervasive poverty levels. Within weeks of the 1994 elections, the new

Govemment acted on a campaign promise and announced the removal of all primary

school fees. This resulted in a dramatic, and largely unexpected, increase in the

number of primary students from 1.9 million to over 3 million, with more equitable

enrollment across gender, regions and household income levels. The Government's

seriousness about putting poverty alleviation in the center of its development agenda

was translated into a Poverty Alleviation Program.

7. In addition, the new Government of Malawi has begun to address a wide range

of structural, economic, and social issues that have impeded progress toward self-

sustained growth and poverty alleviation. Through the preparation of a Privatization

Policy Framework, the Government has launched a broad-based private sector

development. The new agricultural strategy commits Malawi to far-reaching

deregulation and the promotion of smallholder development. In early 1995, marketing

restrictions on smallholder tobacco growers were lifted and smallholder tobacco quotas

were de facto replaced by a registration system to benefit the poor. Fixed producer

and consumer prices for maize were replaced by a market-oriented price band; this

should improve efficiency in production and mark-eting of maize and other food crops

and help promote crop diversification and food security.

8. I wish to higlhlight here that the aforementioned structural reform process and

the new Government's macroeconomic management was challenged from the first day

in office by: (i) a series of civil service strikes; (ii) the deterioration of fiscal

management during the months leading up to the elections; and (iii) the additional

financing requirements to hire 22,000 additional teachers and provide textbooks to

accommodate the "overnight" increase in enrollment after removal of primary school

fees. The new Government acted accordingly and began to implement a series of

corrective measures in the latter part of 1994 and in the context of the 1995/96 budget.

I am happy to report that over the past year, we have made good progress in achieving

macroeconomic stabilization. Since April 1995, public expenditures are being

controlled under a cash budgeting system. The Government has let market forces

determine the exchange rate and has resisted popular pressures to reverse the floatation

of the Kwacha (February 1994), even when the Kwacha depreciated by 100% in

October 1994. The exchange rate has been stable in the last 12 months. The Reserve

Bank- of Malawi has been successful in smoothening seasonal fluctuations in foreign

exchange demand and supply and, aided by tobacco earnings, had accumulated official

reserves equivalent to more than 4 months of imports by end December 1995 which

was well above the target of 0.7 months of imports stipulated under the ESAF

program. Reflecting the Government's continued commitment to further liberalize the

payments and exchange system, Malawi, on December 7, 1995, acceded to Article

VIE of the Articles of Agreement of the International Monetary Fund. Thus, effective

this date, Malawi no longer applies restrictions on current account transactions.

Additionally the rate of inflation has continued to decelerate from a monthly average

of 11.0 percent in the fourth quarter, 1994, down to 6.3 percent per month during, the

last three months to end January, 1996. We are confident that the macroeconomic

improvement will be sustained and are ready to embark on an even more ambitious

effort of structural reforms.

GOVYERNNIENT'S MIEDMNI-TERMI POLICY FRA NIEWORK

9. Economic management in the near term wvill continue to focus on

macroeconomic stabilization to reduce fiscal imbalances and lower the inflation rate.

The medium-term strategy places greater emphasis on policies and structural reforms

to consolidate past reforms and provide a lasting framework for macroeconomic

stability. Greater efforts will be made to promote domestic savings and investment,

accelerate economic diversification, raise average productivity across all sectors,

enhance domestic competition, and improve external competitiveness. The

Government program aims to strengthen performance in the productive sectors through

the removal of remaining distortions in pricing and market structures that suppress

incentives and competition. Agriculture will continue to be a major source of growth,

providing employment and subsistence for some 80% of the population and

comprising the main source of primary inputs for the manufacturing sector. In the

agricultural sector farmers will have incentives to take advantage of opportunities

brought about by more efficient use of fertilizer and the adoption of high-yielding

maize varieties, the removal of restrictions on the production of lucrative cash crops,

including burley, agricultural diversification and more efficient use of currently

underutilized lands; as well as addressing the Govemment's institutional weaknesses

that constrain the supply and deliverv of inputs, credit and extension services. Growth

ir. the manufacturing sector is expected to be supported by a liberalized exchange

system, the rationalization of external tariffs, the reduction in external transport costs

as direct routes to Nlozambican ports will become fully operational, and an expansion

of the agriculture sector. The investment required for the diversification of

manufacturing output and increased exports of manufactured goods will also depend

on the success of efforts to broaden the ownership base and remove barriers to ently.

The Government realizes that industrial supply response will be accelerated only if

efficiency and competition are increased by promoting free and competitive markets

and by addressing the highly concentrated and inter-locking ownership structure that

characterizes the trade, distribution, manufacturing, and finance sectors. The

continued development of human resources and investments in the social and physical

infrastmicture will constitute critical elements of the development strategy.

10. The overall macroeconomic objectives for the period 1996-1998 are: (i) a

recovery in real Gross Domestic Product (GDP) growth to an average of over 4.5

percent per annum; (ii) a sharp, early deceleration in the rate of inflation, with a

decline to an average annual rate of less than 10% from 1998 onward; (iii) a reduction

in external imbalances beyond 1996 with a view to attaining a more sustainable

balance of payments position over the medium term; and (iv) the accommodation of

pressing social needs within the constraint of fiscal sustainability by prioritizing

Government expenditures in the context of a medium-term expenditure framework

(MTEF). Expected substantial improvement in domestic savings and continued

progress in structural reforms will significantly enhance long-run growth prospects.

However, continued progress will require donor support in the form of external

concessional resources over the medium term.

11. Expenditure policies will be guided by the dual objective of achieving the

targeted improvement in the Government's financial position and the necessary

reorientation of current expenditures towards a greater emphasis on outlays in key

social sectors and the efficient delivery of services. To achieve this, the Government

will expand the work already begun in several Ministries and, from 1996/97 onward,

prepare a Medium-Term Expenditure Framework. The central Government investment

program will be rationalized to ensure that the selection of investment projects is

consistent with Malawi's development priorities. To complement these efforts, wage

policy will be strengthened by the ongoing reforms aiming at rationalizing the civil

service and establishing an adequate remuneration structure. Additionally, having

phased out fertilizer subsidies, Government will maintain its policy of giving no

subsidies to commercial public enterprises. On the revenue side Government's overall

goal is to increase the revenue/GDP ratio from 16.2 percent in 1994/95 to 18.0 percent

in 1997/98. To achieve this objective, Government intends to undertake

comprehensive reform of indirect taxes coupled with improvements in tax

administration. External sector policies will aim at maintaining competitiveness and

moving towards medium term balance of pavments viability. Monetary policy will

aim at achieving and sustaining a low rate of inflation, consistent with the overall

growth and balance of payments objectives. In order to strengthen Malawi's capacity

to implement macroeconomic and related structural reform, the Government has

developed the National Capacity Building Program for Economic and Financial

Management.

THE FISCAL RESTRUCTURING AND DEREGULATION PROGRAM

12. Government has identified two binding constraints to the achievement of these

goals: (i) the past anti-poor bias and low quality of social sector expenditures; and

(ii) restrictions and regulations that prevent the poor from participating in the full

range of economic activities. In order to achieve our set objectives and succeed in

alleviating the country's pervasive poverty problem, the proposed program focuses on

fiscal restructuring and deregulation.

FISCAL RESTRUCTURING

13. Expenditure Reoiientation. Under the program, a MIedium Term Expenditure

Framework is being developed with support from IDA to help Ministries prioritize

inter-sectoral and intra-sectoral expenditures within the agreed overall macro-economic

expenditure envelope. The program will help ensure that both the targeted fiscal

deficit reduction and the concurrent expansion of social services are achieved

rationally without compromising Govemment's pro-poor policy focus. The

Govemment is aiming to protect the recent increase in the Ministry of Education's

share (22% in 1995196) in total recurrent expenditures and subsequently increase it to

25% with the 1996/97 budget, and broadly maintain this level in the future. The share

of primary education within recurrent expenditures of the NMinistry of Education will

be increased from 47% in 1995/96 to at least 66% in 1996/97. Similarly, the

expenditure share on primary health care is expected to increase from 8% in 1994/95

to not less than 14% in 1996/97 and reach an allocation for medical supplies and

medicines equivalent to US$1.25 per capita by 1997/98. Within total recurrent

expenditures for health care services 7% will be allocated to Family Planning Services

in 1996/97. The share of the Ministry of Agriculture and Livestock Development in

total recurrent expenditures will be maintained at around 4% - 5% of total recurrent

expenditures with about 40% of this being allocated to extension services to ensure

that an increasing share of smallholder farmers is being reached. Within the recurrent

expenditures allocation to the Ministry of Works (about 5% of total recurrent

expenditures) emphasis will be given to road maintenance and rural roads (50% of the

Ministry's recurrent budget).

14. The Medium Term Expenditure Framework will be rolled out over the next six

months to all ministries in preparation for the 1997/1998 budget. In this context,

lessons learned from the pilot phase of the MTEF will be applied.

(a) First, the Audit and Finance Committee of Permanent Secretaries will

provide guidance to the MTEF Task Force. Tentative sectoral

expenditure envelopes will be discussed by the Cabinet Committee on

the Economy in early June 1996. Indicative sectoral expenditure

ceilings will be given to line ministries for the next three fiscal years

by June 30, 1996.

(b) Second, increased focus will be put on the medium-term aspects

whereby tentative expenditure needs and shares will be developed for

a three-year rolling period. In this regard, by October 1996, ministries

will carry out a line-by-line review of functions and identify those

programs that will be phased out, functions that will be outsourced to

the private sector, and those priority functions for which funding levels

would be increased.

(c) Third, line ministries will take into account changes in civil service

staffing levels that will allow a reallocation of: (i) civil servants from

low priority areas to high priority areas; and (ii) resources from the

wages and salaries category to goods and services.

(d) Fourth, the links between the Public Sector Investment Program (PSIP)

and the MTEF will be strengthened. In particular, the PSIP will be

rationalized in the context of the MTEF to ensure that the selection of

investment projects is consistent with pro-poor development priorities

and recurrent expenditure capacities. Government investment as share

in GDP is targeted to be maintained between 7% and 8% over the

medium-term.

(e) Fifth, the Government intends to integrate the recurrent and capital

budgets. For the 1997/98 budget, this integration is envisaged to be

completed for the four MTEF pilot ministries.

(f) Sixth, the program costing exercise will be improved , inter alia,

through preparation of a MTEF manual.

15. Expenditure stabilization. In the short-term Govemment will continue with the

cash budget system in order to effectively control expenditures. This is being

supported by: (i) a monitoring system to ensure that cash books are kept up to date

and reconcilcd with bank statements; (ii) the developmenc of a financial management

information system (FMIS) to permit continuous monitoring of commitments; and (iii)

periodic reconciliation of Government's accounts wvith parastatals to prevent

accumulation of arrears.

16. Civil Service Refonn. In recent years, the size of the civil service has grown

considerably, adding to the growth in the wage bill and fiscal pressures. Civil service

productivitv has not kept pace, as is reflected in the weak public sector management

and implementation capacity. Government considers a comprehensive civil service

reform of major importance for the purpose of fiscal stabilization and restructuring

expenditures so as to increase the efficiency of public service delivery. Under the

Second Institutional Development Project supported by the Bank, Government is

addressing some critical civil service reform issues, aiming at the strengthening of the

personnel function, pay reform and training and skills development. A civil service

census has been carried out to provide reliable benchmark data for an effective

personnel management and control system. Government expects that the analysis of

the census results will be completed by mid-April 1996 and that the payroll will be

harmonized with the civil service census file from April 1996 onward. The overall

objective of these reform measures is the enhancement of the efficiency and

effectiveness of the civil service to ensure improved service delivery to the public.

It is Government's objective to achieve a civil service size and remuneration structure

that is consistent with a sustainable civil service wage bill of about 7% of GDP.

17. Because of the burden of the wage bill on the budget and Government's

commitment to attain fiscal stabilization, several short-term measures were introduced

during the past eight months to contain civil service wages. In July 1995, the

Govemment reviewed the cost-effectiveness of its overseas representations and is now

starting to reduce the number of diplomatic staff posted abroad. Funded vacancies

that have remained unfilled for more than five years have been frozen and in August,

1995. Government started to remove these vacancies from the establishment. Between

Februaxy and September 1995, the Government retrenched about 20,000 civil servants

in non-established and temporary positions in non-priority areas, for instance, unskilled

laborers, cooks, gardeners, bricklayers, plumbers, drivers, messengers, janitors.

18. The Government is also carrying out analytical work that will broaden and

deepen the scope of civil service reform, including a systematic review of Government

functions and a review of civil service pay and remuneration. The latter study has

been completed and is currently being discussed by Government. The functional

review is at an interim stage and is expected to be finalized by end April 1996. It is

apparent that some ministries and departments are overstaffed, with considerable

duplication of functions, while critical personnel categories such as health (i.e.

doctors) remain understaffed. An Interministerial Commission has been appointed to

oversee the implementation of the results of the Civil Service Census and prepare the

plan for the next steps in civil service reform taking into account the findings and

conclusions of the functional reviews, relevant recommendations from the Medium

Term Expenditure Framework process and the analytical work relating to pay reform.

19. We expect to complete the Civil Service Reform Action Plan by September 30,

1996 drawing on the findings and conclusions of the civil service census, the

functional review, the remuneration study and the ongoing MTEF exercise. The

Action Plan will include, inter alia, the following timing and scope of:

(a) establishment of a personnel information and control system that links

the personnel data to the payroll data based on the census results;

(b) identification of duplicating and overlapping Government functions that

are currently being carried out by different agencies and

will be eliminated or merged in the future;

(c) identification of those Government functions that will be privatized or

contracted out to the private sector;

(d) realignment of civil service staffing levels in line with Government's

pro-poor focus and a reduction in both Government

programs and functions;

(e) retrenchment program including transparent retrenchment criteria,

appropriate safety net measures and quantitative targets for the size of

the civil service;

(f) identification of cost and source of financing of the civil service

restructuring, retrenchment program, staff separation packages and

safety nets;

(g) restructuring of the civil service salary structure with improved

incentives and levels of remuneration for a smaller civil service within

a sustainable overall wage bill;

(h) arrangements for implementing decentralization, including

interGovernmental fiscal relations; and

(i) completion of job evaluation exercise with a view to improving the

present recruitment, posting and promotion practices.

20. The Government will start implementation of the aforementioned Action Plan

and will have completed the following measures before we request release of the

Second Tranche. Starting April 1996, Government shall not pay salaries or wages to

civil servants who are not listed on the civil service census file. By September 30,

1996, we will have completed a detailed review of functions being carried out by

Government departments and ministries and we will have identified those functions

that will be eliminated, contracted out to the private sector or privatized, such as (i)

car and vehicle hire services; (ii) security guard services; (iii) printing services; (iv)

office cleaning services; (v) laundry services in major hospitals; (vi) the operation of

medical stores; (vii) the management of the hotel training school; and (viii) the

management of rest houses and inns. Within the context of the functional review, we

plan to reduce the number of industrial workers and absorb this category into the civil

service. Further, Government plans to adopt a civil service staffing plan which

reflects our poverty alleviation policy in the education and health sectors and which

will (i) focus on training of qualified teachers and lead to a student teacher ratio of

60:1 for primary education; and (ii) achieve adequate staffing of all health clinics with

at least one general nurse and one maternity nurse. By September 30, 1996,

Government will complete the Civil Service Remuneration Study and will adopt a plan

for revising the civil service salary structure which will include, among other things,

the integration of housing allowances into the wages and salaries. To improve the

efficiency and effectiveness of common services cadres, we will put in place

provisions for adequate authority of line managers in deploying, retaining, and

evaluating performance of common services staff. In particular, we will have

implemented such measures in respect of two common services cadres by end 1996.

21. Tax and Tariff Policy. Trade and indirect tax reforms in Malawi have two

objectives: first, to increase the efficiency and competitiveness of the economy, and

particularly of non-traditional exports sectors, and second, protect revenues collected

from indirect taxes as part of restoring tax revenues to the level of around 17% of

GDP over the next two years. GovernmenE appreciates that despite several rounds of

tariff reforms in the past, the tariff levels on many important items continue to be

high, and, equally significant, the tariff structure has become complicated by Common

Market for Eastern and Southern Africa (COMESA) and bilateral trade agreements.

The Government intends to carry out further tariff reforms to (i) increase

competitiveness of local industry and agriculture by lowering tariffs on capital goods,

intermediate inputs and raw materials; (ii) reduce the anti-export bias inherent in the

some rates in the tariff structure; and (iii) ensure that exporters receive effective relief

from border taxes and have access to necessary inputs at competitive world market

prices. The Government appreciates that tax relief to exporters and tariff reductions

have to take place within tax revenue and administrative constraints. Hence

Government will also undeitake surtax refomis to compensate for losses in revenues

that may take place as both maximum and average import tariffs are lowered as part

of the Government's medium term macroeconomic program and its commitments

under the Cross Border Initiative (CBI).

22. The Government's target is to reduce tariff rates to a weighted average of 15%

with a maximum rate of 25%. In line with the agreement under the CBI and Uruguay

Round, the number of tariff rates are to be confined to only four rates, including the

zero rate. With the 1996/97 budget, the maximum tariff will be reduced from 45%

to 40%, while average statutory tariff rates will be lowered to around 15%. In

particular, average tariff rates for capital goods, and intermediate goods will be

reduced to less than 15%.

23. At the same time reforms of tariffs have to be carefully integrated with surtax

reform, including both adjustment of rates and expansion of base, so that Government

revenues can be protected. The goal will be to shift to a base rate of 20% while

allowing for zero rates and exemptions on exports and basic necessities. Increased

reliance on surtaxes, as opposed to tariffs, help in leveling the incentives between

Malawian producers and their external competitors both groups are equally affected

by the surtax. With the forthcoming budget for 1996/97, Government will increase

the surtax to the base rate to service sectors such as the main hotels, restaurants and

other such establishments. The single most important

option for broadening surtax is to extend it to wholesale and retail activities. The aim

of the Government is to implement this measure in the 1997/98 fiscal year with a

move to a full-fledged Value Added Tax (VAT) system.

24. Government has already made good progress in these policy areas. With a

view to promoting exports the Government has implemented the Export Processing

Zone Act, 1995. Duty drawback administration has been simplified in response to

private sector complaints about delays in the reimbursement process. Now exporters

are provided with 100% refund of duties after submission of appropriate documents

within five working days of application. Government has also ensured that the

Department of Customs and Excise has adequate resources to provide the needed

refunds through providing for a revolving fund from which the Department can pay

the duty drawbacks.

25. Limitations on the capacity of tax administration and an erosion of pay scales

due to inflation have led to a lowering of revenue collection rates in recent years.

Hence, improving administrative capacity should be part of an integrated strategy for

strengthening revenue collections over the next few years otherwise tax collections

will continue to deteriorate. The Government is currently reviewing proposals to

increase salaries and introduce performance based incentives within the existing tax

administration. As a further step, the Govemment has prepared the terms-of-reference

to carry out a study to examine the costs and benefits of creating a national revenue

authority with sufficient authority and resources to provide adequate incentives for its

staff. The Government has finalized and improved arrangements for pre-shipment

inspection of imports to strengthen the tax administration and revenue collection.

DEREGULATION

26. AgicuWtume Policies: Agriculture is the source of 40% of GDP and 90% of the

export earnings of Malawi, and will remain the mainstay of growth for the foreseeable

future. Given that 85% of the population lives in the rural areas, the performance of

this sector directly affects the welfare of most Malawians, including the most

vulnerable people. In December 1994, the Government adopted a comprehensive

sectoral strategy, "The Agriculture and Livestock Development Strategy and Action

Plan" to help transform the agricultural sector from a subsistence/dualistic structure

(over-dependent on maize and tobacco) to a more diversified and viable one that also

functions as a catalyst for growth in the non-farm sector. The main objective of

Government's strategy is to attain broad-based sustainable agricultural growth of at

least 4.5% per annum in real terms by removing the most binding constraints (access

to land, cash crops, inputs, and markets) to the integration of smallholders into the

mainstream of development.

27. Access to Land. Malawi urgently needs a thorough re-examination of rules

governing access and use of land, and comprehensive restructuring of public

institutions involved in land administration in order to improve security of tenure to

all categories of producers. Since independence, agricultural land-use policy for the

private sector has remained strongly divided between freehold or leasehold and

customary tenure, that is, between mostly export crop production by estates and

mostly subsistence farming by smallholders. The gap between rich and poor has

widened and subsistence farmers have been largely ignored. Privileges to grow burley

tobacco (allocated exclusively to estates through a license and quota) fueled wide-

spread reclassification of customary tenure to leasehold; the number of leasehold

estates soared from 1,200 in 1979, to 30,000 in 1994, and average size dropped from

250 ha to less than 20 ha. The distinction between small estates (with areas between

10 ha to 20 ha) and smallholders has become blurred. Many small estates have all the

characteristics of smallholder farms. Much of the conversion has taken place in an

uncoordinated way and many small "'raduated" estates are claimed by more than one

leaseholder. In addition, there is a large back log of unregistered lease applications.

28. The Govemment is open to discussions and is prepared to take action on these

issues which were virtually taboo in the past. However, in view of Government's

limited administrative capacities in this area dialogue is still at an early stage. We

expect detailed principles of a new land policy to evolve within the next 18 months

after substantial analytical work will have been carried out. Government has

announced the establishment of a Presidential Commission of Inquiry on Land Policy

in support of a participatory process (including, but not limited to, smallholders,

traditional authorities, local government authorities, estate owners) for the complete

review and reform of Malawi's land policies aiming at promotion of equitable access

to land. security of titles and, improved procedures for land administration. The

members of the Presidential Commission , its TOR and duration, will be gazetted

shortly. The broad-based membership of the Presidential Commission and its

exclusive reporting responsibility to the President will ensure that the investigation is

carried out in a transparent manner at arms length from Government or any

Government agency or ministry. As this review continues, the Government has

declared a country-wide moratorium on conversions of customary land to leasehold

tenure. This will allow a coherent review of existing leases to discover and revoke

defective leases, resolve lease disputes, catch up with registration of the backlog of

lease applications and establish efficient mechanisms for preventing harmful

encroachment and development along the lake shore. To immediately raise incentives

for more efficient use of existing estate land and facilitate the development of a more

active land market, Government has increased land rents, effective April 1996, from

MK35 per hectare to MK50 per hectare and improved efficiency of collection.

Significant areas under leasehold are idle and it is expected that higher opportunity

costs will create incentives for estate owners to sublease and subdivide land. In line

with this objective, Government amended the legal framework, the Land Act, to allow

for annual review of increases of land rents and three months notice before

effectiveness. Government has put in place a process to repossess estate land from

rent defaulters. In March 1996, a list of the 30 most severe cases of rent arrears for

each of 24 districts was submitted to the Minister of Lands and Valuation for approval

to register re-entry. We expect to start with actual repossessing of land by May 1996.

We will continue this exercise until all defaulters have been prosecuted. Over the

medium-term Government intends to classify estate land into three to four categories

according to soil fertility and yield potential and then introduce a differentiated land

rent structure. Government plans to develop an implementation plan to better enforce

the environmental covenants on estate land requiring 10% of estate land to be kept

under forest. As an added incentive Government is considering a discount on land

rents for those estates who comply with these environmental covenants.

29. Access to Cash Crops. Over the past 4 years, important progress has been

made with regard to granting smallholders gradual access to profitable cash crop

production and marketing, including lifting the restriction of smallholder access to

burley tobacco and eliminating the monopsony power of ADMARC. Smallholder

access to burley tobacco production has (i) directly improved household income levels

for over 60,000 smallholder households; (ii) enabled diversification in other

agricultural and non-agricultural activities through forward and backward linkages; and

(iii) reduced household vulnerability to drought effects. The amount of burley quota

allocated to smallholders has gradually increased from 3 million kg in 1991/92 to 15

million kg in 1994/95. In 1995/96 the smallholder burley quota system was de facto

lifted and all smallholders in tobacco clubs who wanted to grow burley were

registered as growers. In addition alternative marketing outlets have been created for

smallholders through the intermediate buyers program. The repeal of the Agricultural

Crop and Livestock MIarketing Act has been approved and will be presented to

Parliament in March/April 1996. Relevant sections in the Special Crops Act that

excluded smallholders from growing high-value cash crops have been removed from

the Act. In addition the Ministry of Agriculture and Livestock Development and

Ministry of Statutory Corporations are currently designing an action plan to privatize

those crop authorities that were formed under the Special Crops Act, convert them into

voluntary grower associations, and consider abrogation of the Act.

30. The Government will eliminate the burlev tobacco quota system. An

announcement of Government's policy made in January 1996 commits the Government

to formally replace the smallholder quota system with a registration system.

Specifically, for 1996/97 new and or existing production quota will be allocated to

meet all production registrations by smallholder tobacco clubs (who will have access

to auction floors). Individual smallholders will not be required to register and can sell

to intermediate buyers. For 1997/98 the existing production quota system will be

replaced by a production registration system.

31. The proposed changes in burley tobacco production and marketing for 1996/97

and 1997/98 are quite monumental and will require a concerted effort on the part of

the tobacco industry to ensure a smooth transition. There are many logistical issues

that need to be considered as soon as possible. A consultative group with

representatives from Govemment and the tobacco industry will be forned to deal

with these issues. Technical assistance miaht also be needed to plan this transition.

32. It is expected that the number of burley-producing smallholder households will

increase to 200,000 -- 300,000 by the year 2000. Over the next two years this action

is expected to inject an additional US$60 million into the smallholder sector.

Nevertheless, the burley policy will not reach all smallholders, for instance many of

those with less than 0.5ha land and no cash to purchase inputs, and will need to be

augmented by other pro-poor policies and programs, for instance public works under

the forthcoming IDA supported Social Action Fund.

33. Access to Inputs. A key part of Government's strategy to enhance agricultural

productivity and diversification is to increase the access of farmers to improved and

suitable technologies and inputs, such as fertilizers, farm feeds and seeds. Since

1994, private traders have been allowed to participate in the import and distribution

of smallholder inputs. However, cumbersome licensing and compulsory approval

procedures continued involving both the Ministry of Agriculture and Livestock

Development and Ministry of Commerce and Industry in inhibiting smallholders'

access to fcrtilizer, agrochemicals and improved seeds. This kept transaction costs

high, discouraged private trader participation, and thus limited crop and Jivestock

options for smallholders.

34. To accelerate agricultural diversification, Government has approved the

streamlining of licensing, registration, and reporting procedures for the importing,

selling and distribution of fertilizers, farm feeds and seeds. By requiring only a

general business licence issued by the Ministry of Commerce and Industry and no

additional reporting to the Ministry of Agriculture and Livestock Development, trade

in fertilizers, farm feeds and seeds have been liberalized. The Ministry of Agriculture

and Livestock Development will continue to monitor the labeling and composition of

fertilizers, farm feeds and seeds. In addition, the Ministry of Commerce and Industry

will help monitor and enforce standard business practices, including licensing and

reporting, associated with the importation, selling and distribution of fertilizers, farm

feeds and seeds. Technical assistance will be needed to evaluate our system of

monitoring and enforcement and suggest how to make them more effective as we

move towards greater market liberalization.

35. Access to Markets. Important progress was made over the past 2 years with

the liberalization of virtually all agricultural producer prices and export controls. In

May 1995, the system of fixed producer and consumer prices was replaced by a price

band in which the actual price is determined by market conditions, and ADMARC has

been mandated to defend the gazetted floor and ceiling prices. In practice, this year,

ADMARC encountered numerous problems with implementing the maize price band,

including: (i) its conflicting role as defender of the band and commercial operator; (ii)

lack of liquidity at maize harvest and into the selling season; and (iii) reluctance to

operate a flexible price system within the band. As we strive toward market

liberalization and increased private sector participation, we feel that it is important to

protect vulnerable producers and consumers from the potential harm caused by

unstable maize prices. We believe that the price band is a sensible transitional phase

toward fully liberalized maize markets. In the meantime we need to widen the price

band and limit the amount of locations where it is defended, promote private sector

market activity within the band, and design appropriate roles for ADMARC and the

Strategic Grain Reserve (SGR). For example, we recently decided to establish a

separate SGR account as a means for funding maize purchases in the future. We have

also agreed to tender for maize purchases for the SGR and have a competitive bidding

process for future management of the SGR.

36. The ultimate objective is to move toward border price parity,

commercialization of all ADMARC's agricultural trading activities and establish an

independently managed SGR. The independently managed SGR would receive its

overall policy directive from the Government To carry out these changes efficiently

we have commissioned a series of studies and requested technical assistance (under

the Agricultural Sector Assistance Proaram and the IDA supported Agricultural

Services Project) to provide support on implementation issues of the maize price band.

It has been agreed that studies on "The Future of ADMARC" and "Expanding Private

Sector Participation in Maize Marketing" be carried out, and technical assistance on

"Implementation of the Mlaize Price Band", especially management of the SGR as a

price stabilization facility. In addition, Government will undertake a study to design

a comprehensive food security and drought management strategy to deal with a wide

range of food production and consumption issues.

37. Access to Transport. In addition to the high costs of external transport,

manufacturers and consumers alike suffer from inefficient and costly domestic road

transport. Under the protective mantle of Government regulations and statutory

minimum freight tariffs, the domestic road transport industry has grown over the last

seven years from nearly nothing to almost 500 companies varying in size from one

truck to over 200 trucks. However, while the objective of developing a substantial

domestic trucking industry has been achieved, the objective of developing efficient

domestic road transport service has not; many operations are poorly managed and

inefficient.

38. Government is committed to facilitating competitiveness and cost efficiency

in the transport sector so that smallholders can benefit from efficient road transport

for produce and inputs. As a first step, Government has removed regulations and

practices (including foreign exchange controls) that prohibited Malawian operators

from importing second hand vehicles and spare parts, thus lowering the cost of fleet

expansion and vehicle maintenance. Furthermore, Government plans to revise the

Road Traffic Act. In this context, the Government has already removed the minimum

tariffs on domestic freight transport to help ensure higher levels of competition in the

sector. Recognizing that transport costs are a function of many factors, Govemment

will carry out a comprehensive evaluation of transport policies under the IDA

supported Railways Restructuring Project. Such a review would include a thorough

examination of transit pricing and user fees (including permits, tolls and fuel taxes);

road construction, maintenance and financing; and competition issues in transport

supply. The elimination of the minimum tariff and the other reforms expected from

the transport policy review should bring a direct benefit to the rural poor and facilitate

agricultural diversification as it cuts transport costs and increases profit margins.

39. Private Sector Development Policies: The Government supports the

development of a broad-based private sector. An active investment promotion

campaign to attract investors is underway and a privatization campaign is gaining

momentum. To create a more favorable environment for investors, Government has

identified a number of measures to simplify the approvals required to launch new

investments. In 1993, institutional constraints identified bv MIPA, the private sector,

and a manufacturing sector survey carried out by IDA include: (i) discriminatory laws

and practices; (ii) lack of serviced and unserviced sites for potential investors; (iii)

slow approval and uncertain renewal of temporary employment permits (TEPs) for

expatriate workers; and (iv) inconsistent and uncertain application of existing

incentives. In addition the survey identified economic constraints and a lack of

foreign exchange and high interest costs.

40. The institutional constraints are being addressed, starting with the

Government's approval to repeal laws that discriminate against non-indigenous Malawi

citizens. Specifically, Government has approved the repeal of Part IIA of the

Businesses Licensing Act (the Bill will be presented to Parliament in March/April

1996), which limited citizens of Asian descent to doing business in prescribed

"business districts". In addition, the Govemment has made enormous progress on the

availability of industrial land. First, it has identified public lands in proximity to

existing industrial estates in Lilongwe and Blantyre to be zoned as unserviced

industrial plots and to be offered to private investors under long-term lease

arrangements. In Lilongwe, this includes two areas with close to 300 unserviced plots

in total. Some 110 serviced plots on privately owned freehold land are currently

available in Blantyre and Ministry of Lands and Valuation is developing some 200

new serviced plots. This should address the immediate shortage of industrial land, but

Government also intends to continue its efforts to streamline the process of supplying

land for industrial development. Third, action has been taken on the rationalization

of the TEP system, to eliminate the backlog and make it more transparent and

automatic. Government is committed to a target of processing all TEP renewals

within 30 days, with an absolute maximum processing time of 45 days.

41. Privatization. Compared to many other developing countries the parastatal

sector in Malawi, comprising 12 major commercial parastatals and over 100 statutory

entities accounting for 20% of GDP, has been well managed and for the most part

profitable. However, large fiscal losses have been incurred by Malawi Railways, and

to a lesser extent by Air Malawi and Viphya Timber Plantations. Some privatization

of both ownership and management has taken place over the past few years.

Examples of this are the divestiture of some of ADMARC's investments, and of some

of MDC's portfolio, and, most recently, the restructuring and future privatization of

Malawi Railways which is supported by an IDA project.

42. Government has embarked on a far-reaching privatization program to avoid a

large potential drain on the budget, increase the efficiency of scarce capital

investments, boost private sector development, and attract foreign investors. In

October 1994, a Privatization Commission under the chairmanship of the First Vice-

President was put in charge of developing a comprehensive privatization program. A

Technical Committee prepared a draft Policy Framework for Privatization which has

been finalized after several rounds of consultations and discussions between

Government and the private sector. The Policy Framework was endorsed by Cabinet

and issued as a Policy Statement in December 1995. The appropriate legal framework

was agreed with IDA and approved by Government; the draft Bill has been forwarded

to Parliament for consideration in the March/April session 1996. The institutional set-

up for privatization has been finalized; a Privatization Transactions Unit located

outside the civil service will be in charge of the actual divestiture process. The

authorities have identified those State Owned Enterprises (SOEs) that will be offered

for privatization during the forthcoming 5 year period (including the portfolios of

ADMARC and MDC, Air Malawi, and Viphya Plantations). Further, subvented

parastatals that will be liquidated and purely developmental statutory corporations that

can be integrated into parent ministries have been identified. Government has already

carried out a preliminary study to collect key data such as financial performance,

employment, and legal status on selected SOEs. This study will be expanded into a

divestiture prospectus for the most important SOEs which would be offered for

privatization over the next 18 months.

CONCLUSION

43. Since taking office in May 1994, the new Government of Malawi has initiated

and implemented far reaching macroeconomic and structural reforms with the aim to

attain sustainable growth and poverty reduction. We are strongly committed to

continue and accelerate this reformn process under the Fiscal Restructuring and

Deregulation Program. It is our intention to expedite the program and take whatever

other complementary measures necessary to ensure its success. The Govemment

views IDA support as an important input to this effort.

Yours sincerely,

Aleke K. Ban ablinister of Finance

Annex 91

ANNEX I: STATISTICAL DATA

H. Sdcafer: aftC5WINWORD6OAR:A CHANGES.1CApril 3, 1996 3:52 AM

Malawi at a glanceSub-

POVERTY and SOCIAL Saharan Low-- Malawi Africa Income Development dlamond

Population mid-1994 (millions) 10.8 575 3,178 Life expectancyGNP per-capita 1994 (US$) 140 500 390

Average annual growth, 1990-U4

Population (%) 2 7 2.9 1.9Laborforce (%) 2 6 2 6 18 GNP Gros

Most recent estimate (latest yearavailable since 1988) per - , pnmarcaptpa \/enrollme

Poverty: headcount index (% ofpopulabon) 19 =' eUrban population (% of totat population) 14 30 28Lde expectancy at birh (years) 45 52 62 iInfant mortality (per1O XoIs Jimbirths) 134 93 63Child malnutrition (% of children under 5) 27 36 40Access to safe water (% ofpopulation) 53 64 67 Access to safe waterIlliteracy (% ofpopulation age 15+) 59 50 41Gnoss primary enroltment (% of school-ge populaeon) 66 67 108 Ma/awi

Male 72 74 16

Female 60 60 -- ~~~~~~~~~~~~~ Low-income groupFemale 60 60 101

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985 1994 1995 EconomIc rtios

Gross domestic investment/GDP 33.7 18 6 13 2 15.8 Openness of economyExports of goods and non-factor services/GOP 29.1 24 2 30 3 32 6Gross domestic savingaiGOP 17.0 12.9 -0 5 4 1Gross national savings/GOP 18.9 9 1 -2.7 08 |

Cuwent account balance/GDP -14.1 -8 5 -18.0 -15 0Interest payments/GDP 1.4 2.8 2.9 2.8 Savings , Investment

Total debVGDP 42.4 90.0 156.9 160 1Total debt service/exports 8.0 38.9 22.2 21 3Present value of debtGDP 6. . 68.1Present value of debliexports 231 8

i ~~~Indebtedness1975-44 1965-95 1994 1995 1996-04

(average annual growth)GDP 2.9 2.4 -10 2 9.9 4 -7MalawiGNP per capita -1.1 -2.0 -14 0 8 4 2 4 Low-income groupExports of goods and nfs 2.3 1.5 10.8 7 1 6 6

STRUCTURE of the ECONOMY

(% ol GOP) i97S 1S86 19S4 199S Growth rates of output and investment (Agncullure 37 2 36 8 33.9 40 5 eaIndustry 20.3 18.7 25.6 26 5 0 \

Manufacturing 13.1 12.3 16.7 17.5 20 .Services 42.4 44.7 30.5 22 4 o

.20-Pnvate consumption S8 9 69 4 77 6 73 7 Jo -General govemmentconsumption 14 1 17 7 22 9 22 2Imports of goods and non-factor servicea 45.9 29.9 44 0 443 3GI -. GDP

(average annual growth) 197544 1965-95 1994 1995 Growth rates of exports and imports M%D

Agriculture 1 7 1.0 -29 3 28.3 30-Industry 20 36 24 S 20

Manufactunng 2.7 3.4 3 2 6 3Services 3.1 3 5 -1 3 -16 1

Pnvate consumption 2 3 -0a -28.2 33 .10General government consumption 8 3 11 3 -0.8 5 9 .20

Gross domestic investment -5 3 2 4 -21 7 14 7 .30

Imports of goods and non-factor services -3 2 3.3 -28 3 7 8Gross national product 2.2 2.5 -11 7 11 4 -Ejioi9 - Imr

Note: 1995 dat are preliminary estimates. Figurs in italics re for yeas other than tmose specifedThe diamonds show four key indicaors in the country (in bold) compared with ds ncorne-group average. If data are missing, the diamond will

be incomplete.

Malawi

PRICES and GOVERNMENT FINANCE

Done*tk plco 1975 193 1p" Ing InflatIon I%)

(% change) 1w0-

Consumer pnces 11.8 10.5 34.7 82.9 ° -Implicit GDP deflator 8.1 8.9 39.6 67.8 go -

Govemetnt fnnsnce '° (% of GDP) 20

Currentrevenue 21.6 18.6 19.0 ° 9Cune1 budget belance -0.7 -11.2 -6.1Overll surplus/defcit -8.7 -25.8 15.9 -GDPdef e-CPt

TRADE

1975 19J5 1994 1199115 Eprad evemi.US

(millions USS) 1a t leve tmill. US$1Total expors (fob) 250 372 421 w00

Tobacco 112Tea .. 54 0

SugarTotal imports (cif) 287 565 554

Food .2 diLliFuel and energy .. 34Capital goods .. 77

Export price index (1987-100)Impor prica index (1987-100) la go Vi *293 9Terms of trade (1 967- 100) -Exvonsa nim srt

BALANCE of PAYMENTS1075 ISSI 1884 1006 -

(millions USS) Current account balance to GDP rtio (%)Exports of goods and non-factor ervices 174 275 389 432 - - -_ _ _ _Imports of goods and non-facor tvlces 284 331 591 567 91 92 93 _9 95

Resource batance -110 -54 -202 -155

Net fector income 21 -53 -46 -40 s

Not current tansfer 3 10 18 -4 o

Current occount balne before offical transfres -88 -97 -230 -198

Financing items (net) 68 57 -201 -269Changes in net reserves 18 40 29 -71

Me~mo: _ _ __ _ _

Reserves including gold (mi. USS) 61 88 23 106Conversion rate (localJSS) 0.9 1.7 8 7 15.6

EXTERNAL DEST and RESOURCE FLOWS

1975 1908 1193 1904(millions USS)

Total debtoutstandingsaiddisbursed 260 1,018 1.816 2.013 Biler p,a5tIBRD 0 69 67 64 . m*- 273 29

IDA 62 322 1,062 1,160 ms 7ron

Total debt service 17 110 84 87 3t2 t1rm 13IBRD

IBRD 0 7 15 I 64

IDA 0 3 12 14

Composition of net resource fowso IMFOffictalgrants 5 24 120 111 112Official crditors 44 54 214 151Private creditors 8 -31 -9 -2Foreign direct inveetment 9 1 0 0Portfolio quity 0 0 0 0

World Bank programCommitmenUt 20 125 77 67 IDADisbursemnts 11 34 146 59 i11oPrincipal reparmet 0 2 13 13

Net fows 11 32 133 47Interest psyments 0 8 14 12

Net transfesr 11 24 120 34

AF 1 Ml 3/31/96

ii

CAS Annex A I

Run Date: 4/3/96

Data as of 4/1/96

Malawi - Selected Indicators ofBank Portfolio Performance and Management

loIdicator FY93 FY94 FY95 FY96

Ii,,rrfei)lni Pe.rformiance'

Number of projects under implementalion 23.00 38.00 18.00 17.00

Average implementation period (years) 4.22 4.10 4.13 4.41

Percent of problem projects rated U or HU'

(for past years. rated 3 or 4)

Development objectives' 0.00 0o00 0.00 0 00Implementation progress (or overall 21.74 11.11 5.56 0.00

status for past years)'Canceled during FY in USSm 2.38 4.55 0.86 0.53

Disbursement ratio(. 17.61 11.51 33.03 1277

Disbursement lag (%)' 11.43 17.51 2441 24.93Memorandum item- % completed projects 0.00 0 00 34.00 0.00

rated unsatisfactory by OEDV

l'oirfifliai l-i.rncugeante

Supervision resources (total USS thousands) 969.46 1097 71 965.71 696.35

Average supervision (USS thousands/project) 42.15 60.98 53.65 40.96Supervision resources by location (in %)

Percent headquaners 77.45 77.72 77.57 69.84Percent resident mission 22.55 22.28 22.43 30.16

Supervision resources by rating category

(USS thousands'project)

Projects rated HiS or S 39.85 65.73 56.71 42 59

Projects rated U or HU 50.44 55 87 57.81 0 00

Memorandum item date of lastvnext CPPR

a Average age of projects in the Bank's country portfolio.b Rating scale. "HS" denotes "Highly Satisfactory". 'S" denotes "Satisfactory". "U" denotes "Unsatisfactory", and "HU"

denotes "Highly Unsatisfactory".* Extent to which the project will meet its development objectives (see OD 13.05. Annex D2. I'r'paratiein ,f

J/JrpeeninimfoSn Swn -i-rs' /Iori SW1/).d Assessment of overall pertormance of the project based on the ratings given to indiv idual aspects of project implementation

(c g. management. availability of funds. compliance with legal covenanu) and to development objectives (see OD 13.05.Annex D2. I'reporitnion iflmiplemnination SummituarY /flirmi 39/). The overall status is not given a better rating than thatgiven to project development objectives.

e Ratio of disbursemcnts during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year:investment projects only.

f For all projects compnsing the Bank's country pontfolio, the percentage difference between actual cumulative disbursementsand the cumulative disbursement estimates as given in the "Original SAR/PR Forecast" or. if the loan amounts have beenmodified, in the "Revised Forecast." The country portfolio disbursement lag is effectiv ely the weighted average ofdisbursement lags for projects comprising the Bank's country portfolio, where the steights used are the respective projectshares in the total cumulative disbursement estimates.

g OED data, available in the statistical appendix to the most recent ARPP reports.

Note:Disbursement data is updated at the end of the first week of the month.Supervision resources include Salaries. Benefits, and Travel for "BE" source of funds but excludes FAO staffand PCR taskcosts.

CAS Annex A2Run Date: 4!1S6

Data as o. 4N/'16

Malawi - Bank Group Fact Sheet FY 1993-1999IBRD/IDA Lending Program, FY 1993-1999

Current l'lannedi'

f zI u jrv FY93 FY 94 FY95 FY96 FY97 FY98 FY99

Commitments LSSmj 767 6 9 1400 12.5 20.0 140 0 1650

Sector (,,. I

Agnculture 97 3 00 00 0.0 100.0 00 0.0

Educanon 0 0 0 0 0 0 12 3 00 28.6 0.0

Human Resources 00 00 00 32.9 00 00 12.1

Industrv 00 00 00 0.0 00 00 21 2

Non-sector 77 160 319 54S 00 500 00

OtherFinance 00 00 00 00 00 00 27.3

Pop/elalth/nuintion 00 00 00 0.0 00 00 39 4

Public Sector Manage 00 94 0 0 0 0.0 0.0 0.0 0.0

Transportanon 0 0 0 0 11 6 0.0 0 0 21.4 0 0

Water Supplv & Sewag 0 0 0 0 56 6 0.0 0.0 0 0 0 0

TOTAL 1000 1000 10 0 100.0 1000 100I 1000

Lendung nstrument (%)

Adjustment loans' 7.7 160 31 9 54.8 0.0 500 0.0

Specific insesonent loans and others 92.3 S40 6S 1 45.2 100.0 50.0 100.0

TOTAL 1000 1000 [Do0 100.0 100.0 100.0 100.0

Disbursements (USSm\

Adjusoment loans 2.7 .1 a 42.3 0.3 0.0 0 0 0.0

Specific investment loan and otien 53.7 36 3 40 4 45.7 47 2 36.3 23.8

Repayments (USSm) 126 140 134 137 00 0.0 0.0

InterenstUSSm) 13.6 139 12.9 9.0 0.0 00 1.0

a. Ranges that reflect the bue-case (i.e., most likely) scenario. For IDA countries planned comnmitments are not presented by FY but as athree-year-total range; the figures re shown i brackets. A footnote indicates if the pattern of IDA lending has unusual charcteeistacs(e S-. a high degree of fronstoading. backloading. or lumpiness). For blend counotnes pianned IBLD and IDA commitmetu we preeentdfor each year as a combined total.

b For fumre lending, rounded to nearest 0 or 5%. To convey the thrust of country sotategy more clearly. staff may aggrate sectrc.

c. Structural adjusoment loas. aector adjustment loans, and debt seevice reduction loans

NoteDisbursement data is updated at the end of the first week of the month.

CAS Annex A2

Run Date: 43196

Malawi - IFC and MIGA Program, FY93-95Past

Category FY93 FY94 FY95IFC approvals (USSm) 0.0 0.5 0.1

Sector (%)Financial Services 0.0 100.0

TOTAL 0.0 0.5 0.1

Investment instrument (%)Loans 0.0 0.0 0.0Equity 0.0 100.0 0.0

Quasi-equitya 0.0 0.0 0.0

Other 0.0 0.0 0.0

TOTAL 0.0 100.0 0.0

MIGA guarantees (USSm) 0.0 0.0

MIGA commitments (USSm) 0.0 0.0

a Includes quasi-equity types of both loan and equity instrunents.

CAS Annex A3

Run Due: 4/1/96

Datau of- 4/1/96

Malawi - Summary of Economic and Sector WorkUSS thousands

LastFY FY96 FY97 FY98

Category .4cual

Agriculture 93.6 0.0

Multi Scctor 150.1 12.7

Oil & Gas 0.0 10.8Other 145.6 23.2Pop/healtWnutrition 142.4 16.9

Public Sector Mgmt 22.0 9.2

Social Sector 12.4 0.0Telecomm.infornatics 12.4 0.0

Total 573.5 77.3 0.0 0.0

Annex A-4Page I of2

MalawiMost Sam region/income group Vext

Latest single yer mrcnt Suov- highlerUnit of esimate Sern Lowv- income

Indicator measure 1970.75 1980.85 1988.93 Africa income group

Priority Poverty IndicatorsPOVERTYUpper poverty line local curr. .. .. ..Headcount index % of pop. . . .. .. 19

Lower poveny line local cuf. .. .. ..Headcount index % of pop. .. ..

GNP per capita USS 130 160 200 520 380 1.590

SHORT TERIU INCOME INDICATORSUnskilled urban wages local curr.Unskilled rural wagesRural terms of trade

Consumer price index 1987=100 .. 70 278Lower income . 70 233Food' 15 6 2..Urban 68 250Rural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP . .. .0Gross enrollment ratiosPrimary % school age pop. . 59 66 67 laS 104Male n. 67 72 74 116Female ' 51 60 60 101

MortalityInfantmortality perthou.livebirths 191.0 163.0 141.6 93.1 63.1 39.0Under 5 mortality .. .. 223.0 172.3 101.4 61.5

ImmunizationMeasles % age group . 49.0 78.0 49.9 87.3 77.6DPT " 52.0 81.0 51.9 89.9 82.2

Child malnutrition (under-5) " 23.9 27.0 .. 40.3Life expectancyTotal yeaus 41 45 45 52 62 67Fdeale advantage 1.4 1.4 1.2 3.3 2.1 5.9

Total fertility raze births per woman 7.4 7.6 7.1 6.2 3.6 2.9Maternal mortality rate per 100,000 live births .. 250 380

Supplementary Poverty IndicatorsExpendirures on social security % of total gov't exp. 2.2 0.8 0.0Social security coverage % econ. active pop. .. .. ..

Access to safe water: total % of pop. .. 53.2 .. 67.0Urban 8 32.0 .. - 78.7Rural . 50.0 49.0 .. 62.0

Access to health care .. 54.0 30.0

Population growth rate GNP per capita growth rate Development diamond'6t (annual average, pereent) (manual avespu. pr ULfe expwcy

4 -- 5 --

GNP G/ ro"2 0 - per I Per prIy

o .1,1 1,1 1, 5 F cap \ e5olhTAo

.02 -10wsae o1970-75 1980-85 19S8-93 1970-75 19S0-85 1938-93 t osevr

z Malawi Malawi- Low-income - Low-income

a. The development diamond. based on four key indicators, shows the avsp level of devepmm stin tie couy coiipised with its income roup.

Annex A-4Page 2 of 2

MalawiMost Same_regionlincome group Next

Latest single year recent - Sit. higherUnit of estimate Saharan Low- income

Indicator measure 1970-75 1980-85 1988-93 Africa i.ncome group

Resources and ExpendituresHUNIAN PRESOURCESPopulation (mre=1993) thousands 5.244 7.247 10.520 558.978 1.091.764 1.096,665Age dependencv ratio ratio 0.98 0.98 0.98 0.94 0.67 0.69Urban % of pop. 7.7 10.4 12.8 29.8 27.6 54.7Population growth rate annual % 3.0 3.2 ,~t.7 2.9 1.9 1.6Urban '7.5 5.7 7.4 5.0 3.9 2.9Labor force (15-64) thousands 2,382 3.074 3.778 229.480 1.442.452 459.196Agriculture % of labor force 87 83Industry 6 7Female 45 43 40 36 33 3 1Females per I 00 malesUrban numberRural

NATURAL RESOURCESArea thou. sq. km 118.48 118.48 118.48 24,273.63 39,09 1.96 40.682.67Density pop. per sq. km 44.26 61.17 84.70 22.37 77.60 26.52Agricultural land % of land area 33.06 35.18 37.63 52.54 52.82 39.61Change in agricultural land annual % 0.32 0.76 0.28 0.06 0.03 -0.13Agricultural land under irrgation % 0.42 0.54 0.62 0.83 18.02 12.66Forests and woodland thou. sq. km .. 40.11 34.86 5.32314 7,154.40 5,953.78Deforestation (net) annual % . .1.39

INCOMEHousehold incomieShare of top 20% of households % of income...Share of bottom 40% of households' ..

Share of bottom 20% of households ..

EXPENDITUREFood % of GDP 42.2 22.9 .

Staples 20.1 6.8 .

MeaL fish. milk,.cheese,.eggs 6.8 8.5 .

Cereal imports thou.mffetric tonnes 41 29 514 13.157 34,420 66,281Food aid in cereals 0 5 635 5.079 8,334 5.477Food production per capita 1987=100 127 106 89 101 113 101Fert.ilizer consumption kg/ha 4.8 10.3 20.9 4.6 59.9 48.0Share of agficulture in GDP % of GDP 34.8 32.5 36.0 16.3 26.3 15.7Housing % of GDP 4.9 6.8 .

Average household size persons per household 3.1...Urban 3.5 ..

Fixed investment: housing % of GDP 3.6 1.1 .

Fuel and power % of GDP 2.1 3.6 .

Energy consumption per capita kg of oil equiv. 46 42 35 257 364 1,595Households with electricityUrban % of householdsRural

Transport and communication % of GDP 6.0 7.8 .

Fixed investment: transport equipment 6.7 2.2Total road length thou. ku II 1I 13

I[NVESTMENT LN HUMAN CAPITALHealthPopulation per physician person 76,576 11,453 50,360 ... 3.277Population per nurse 5.332 3,149 1,982Population per hospital bed "650 .. 710 1.269 1,016 604Oral rehydyraion therapy (under-5) % of cases. . 50 37 38EducationGross enrollment ratioSecondary % of school-age pop. .. 4 4 18 41 53Female .. 2 3 .. 34

Pupil-teacherratio: prnway pupils per teacher 61 61 68 40 39Pupil-teacher mfoo. secondary 19 22 27 .. 20Pupils reaching grade 4 % of cohort 67 53 71Repeater rate: primary % oftotalenrol .16 is 21Illiteracy %oftpop. (age 15 +) .. 59 .. 50 41 19Female % of fm. (age 15+) .. 69 .. 62 53

New r crc~ulaton per thou. pop. .. 2 2 12 .. 74World Bank Intemational Economiics Depatment. April 1995

Annex A5Page 1 of4

Malawi - Key Economic Indicators

Actual Estimate ProjectedIndicator 1990 1991 1992 1993 1994 1995 1996 1997 1998

National accounts(as °/ GDP at currentmarket prices)

Gross domest!c product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0'.griculture' 40.8 39.5 29.7 44.7 33.9 40.5 36.2 35.5 34.8

Industrr' 25.0 24.7 27.5 22.5 25.6 26.5 20.8 21.6 21.9

Services' 23.7 26.4 33.1 24.2 30.5 22.4 32.5 33.4 33.7

Total Consumption 90.6 92.1 98.3 103.3 100.5 95.9 91.0 89.2 87.8Gross domestic fixed 16.2 16.9 16.1 10.0 11.1 13.6 13.8 14.2 14.9investment

Govemrnment investment 4.8 4.8 5.9 4.0 6.2 6.4 6.4 6.9 7.0Private investment 14.3 15.3 12.9 8.1 7.0 9.4 9.6 9.5 10.1(includes increase instocks)

Exports (GNFS)b 24.1 23.5 22.5 16.4 30.3 32.6 26.2 26.0 25.5Imports (GNFS) 33.8 35.8 39.6 31.9 44.0 44.3 33.2 31.5 30.5

Gross domestic savings 9.4 7.9 1.7 -3.3 -0.5 4.1 9.0 10.8 12.2Gross national savings' 11.3 8.2 0.3 -3.9 -2.7 0.8 5.9 8.0 9.5

Memorandum itemsGross domestic product 1858 2178 1858 2003 1283 1324 1850 2036 2226(USS million at currentprices)Gross national product per .. .. .. 144.5 154.2 159.4 174.6 199.9 215.5capita (USS. Atlas method)

Real annual growth rates(%/o. calculated from 1978prices)Gross domestic product at 8.3% 6.1% -7.3% 9.7% -10.2% 9.9% 10.5% 4.0% 4.0%market prices

Real annual per capitagrowth rates (%. calculatedfrom 1978 prices)

Gross domestic product at 5.6% 3.4% -10.0% 7.0%/a -12.90/o 7.2% 7.90/o 1.4% 1.4%market pricesTotal consumption 1.0% 6.0% -9.5% 11.8% -22.6% 3.5% 3.6% -1.2% 0.4%Private consumption 1.9% 8.6% *12.0O/o 17.9%/D -28.5% 3.5% 13.5% -4.9% 0.5%

(continued

Annex A5Page 2 of 4

Malawi - Key Econo;l:; Indicators(Continued)


Balance of Payments(USSm)

Exports (GNFS)b 447.3 512.7 417.5 337.8 388.5 431.8 485.1 529.2 567.7Merchanciise rIOB 411.6 475.5 397.3 32r.0 372.4 421.2 473.4 517.1 554.7

Imports (GNFS)b 537.5 682.9 763.5 667.2 590.7 586.6 614.8 642.2 678.4Merchandise FOB 490.6 615.4 712.4 627.5 554.8 554.0 579.6 606.4 642.1

Resource balance -90.2 -170.3 -346.0 -329.5 -202.2 -154.8 -129.7 -112.9 -110.7Netcurrent transfers -11.1 -33.3 13.7 29.8 18.1 -3.9 -4.7 -4.8 -49(including official currenttransfers)

Current acccunt balance -63.5 -190.7 -224.3 -221.5 -119.2 -46.4 -76.5 -76.8 -75.3(after official capital grants)

Long-term loans (net) 87.0 108.7 92.2 194.8 144.0 94.7 130.6 131.2 109.4OfEicial 90.1 118.4 103.9 203.8 146.0 110.8 134.6 134.7 111.2Private -3.1 -9.7 -11.7 -9.0 -2.0 -16.1 -4.0 -3.5 -1.8

Other capital (net, including .. .. .. .. .. ..

errors and omissions and FDI)

of which adjustments to scheduled DS 21.2 4.1 3.6 4.9 0.0 -16.5 0.0 0.0 0.0

Change in net reservesd 25.2 20.4 0.0 0.0 29.1 -70.8 -56.4 -56.7 -37.5

Memorandum itemsResource balance (% of -4.9% -7.8% -18.6% -16.4% -15.8% -11.7% -7.0% -5.5% -5.0%GDP at current marketprices)Real annual growth rates(1978 prices)Merchandise exports .. .. .. .. . ..

(FOB)PrimarvManufactures .. .. .. .. .. ..

Merchandise imports .. .. .. .. .. ..

(CIF)

Public finance(as % of GDP at currentmarket prices)'Current revenues 20.3 18.8 19.3 17.4 18.6 19.0 17.5 18.0 18.2Currentexpenditures 21.1 20.0 21.1 19.5 29.8 25.1 20.6 17.0 16.4

(Continued)

Armex ASPage 3 of 4

Malawi - Key Economic Indicators(Continued)


Current account surplus (+) or deficit(-) .0.7 -1.2 -1.7 -2.1 -11.2 -6.1 -3.1 1.0 1.9Development expenditure 6.1 5.1 6.4 5.2 8.2 7.0 5.6 6.4 6.5Drought-related expenditure 0.0 0.0 5.0 2.3 6.4 2.8 1.2 1.2 1.2

Foreign financing 7.3 6.6 7.5 9.4 19.2 10.7 9.9 9.8 8.0Monetary indicatorsN1M2GDP (at current market 16.2 16.4 18.2 19.3 24.1 18.8 15.9 15.7 16.1prices)Grow,th ofN18 (2 ) .. 21.6 21.8 41.8 56.4 43.7 26.5 15.0 15.0

Price indices( 1978 =100)Merchandise export price .. .. .. .. .. ..

indexNMerchandise import price .. .. .. .. .. ..

indexMerchandise terms of tradende\Real exchange rate .. .. .. .. .. ..

USSSILCU)fReal interest ratesConsumer price index 11.8% 12.6% 22.7°o 19.7%° 34.7% 82.9% 45.0% 15.0% 8.5%(% growth rate)GDP deflator 11.5% 13.5% 18.3% 21.85° 39.6% 67.6% 35.4% 12.0% 8.0%(% growth rate)

a. If GDP components are estimated at factor cos: a footnoote indicating this fact should be added.b. GNFS" denotes "goods and nonfactor services."c Includes net unrequited transfers excluding ofticial capital grants.d Includes use of INIF (net) resources.e Should indicate the level of the governtment to wshich the data refer.f "LCU" denotes "local currency units." An increase in USSILCU denotes appreciarion.

Annex A6

Page 4 of 4

Malawi - Key Exposure Indicators


Total debt outstanding and 1584.2 1675.5 1703.8 1816.0 2013.0 2118.7 2246.4 2386.2 2479.3disbursed (TDO) (USSm)'

Net disbursements (USSm)' 93.0 108.2 73.1 188.8 122.8 146.9 158.3 158.3 124.4

Total debt service (TDS) 108.2 131.4 105.6 83.7 86.5 92.7 95.6 98.8 101.2

(USSm )'

Debt and debt service indicators

(%)TDO,N\GSb 23.7 322.2 402.0 534.2 515.6 486.5 458.3 445.1 430.6

TDO,GDP 85.3 76.9 91.7 90.7 156.9 160.1 121.4 117.2 111.4

rDS.NCiS 23.7 25.3 24.9 24.6 22.2 21.3 19.5 18.4 17.6

ConctssionalfDO .. .. .. .. 85.0 87.1 88.3 89.4 91.0

IBRD exposure indicators (%)IBRD DS/public DS 15.1 12.4 15.7 18.1 12.9 15.1 14.7 13.2 11.9Preferred creditor DS/public 60.5 49.8 60.9 64.9 76.6 60.1 72.6 75.1 78.2DS

IBRD) DS,XGS 3.4 3.0 3.7 4.4 2.8 3.2 2.9 2.4 2.1

Share of IBRD portfolio 0.09 0.09 0.08 0.07 0.06 0.05 0.00 0.00 0.00

IFC (USSm)

Loans 0.7 0.0 0.0 0.0 0.0 0.0Equiry and quasi-equity /c 0.2 0.0 0.0 0.0 0.0 0.1

MIGAMIGA guarantees (USSm) 0.0 0.0 0.0 0.0 0.0 0.0

a. Includes public and publicly guaranteed debt, private nonguaranteed. use of IMF credits and net short-term capital.

b. "XGS' denotes exports of goods and services, including workers' remittances.

c. Includes equity and quasi-equity types of both loan and equity instruments.

w ~ ~~. . . . . . . . . . . . . .

I 0 a .

.2 1~~~~~~~~~~~~~ I i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i

o-RS-3a ARRsagS a ; 1 2 - aZ

t1~ } lf 1I

fi § tItN r SW'!{§||| 1}3 ii 0

CAS A,, A1

Malawi - Statement of IFC InvestmentsAs or 2lw1

(Us$ 161m1m

1It' ilr Ikidbh Ikidh, V.oj Ad

Y- 06ho- - r *. h w 7.sd. /i.b r PonP r 4

n976 i OM iW0di ni um,lrm)Lid T 6.n 6.00

4917 D%w1 qCu9uun Foo di _AwbldMm 11.31 11.31

1979 v3 I.~.oumm ~ D00d~mm 3~ d lkr1_v l F i _ S 0.61 .611191A4 .3 MdaOi 44.tek L1.6"W H4.4k ndTO 2.09 2.4491911 w E1i6 C_pLy * Cb _ _i _ 171 1.23 Iff

1912 DidWIII1k.i l5amu(M.1 'Ld T4M. 4171 4 71192 v Ed. C..ray LkWW Ci_M_k _ _ as4 1[si

196 The Lm_Lyi Pi. Cowo _.4 Lms Fi_d - 43.74 0.oe alU 044u1937 VIpYM PI .. Allied Li= Ti_W "NW piw 3.93 11 S 4 43 2 24199I Tlei Laiwg ni Fi_ ComSlmyd&4*- Lim" "m. 1 n c ll OIl n lI

IW3 Sbokbke MlvwlLheUuii PildSw.1cm 0.11 0.11 011

Told w W h1.06 I." Ulm 32.72

L- -. dim. I-h .M.7.00 A k__. 21.32 1.36 14.3 144 Is

Toul ,lkmnus w, h_ d 224 n 30 44104 2.54 254 441 41.00

P44 C _

AEF-PCIL 14 53 t 133

INDEF-I4NANCE 4451 4131

T1I04 pK g o.y u; 14.53 14151 0.001 1 4

foudl.iam ha -d p _ _omm 2771 o0l 4400 s s

Tftld _ _d.hd _ .on 0 I'm -4

. l99mu tkb hill ha _ _ buy 6Lr Iuw1 S -*mof. _ mmi or ,q

V r Go.. a.-Mm 1=0 oI md psi pa*M

d Hdd c _laom o.m afi m ad _ _in r amm_.

Annex CI

Malawi - National Accouints Page 1 of 15

Part A: Current Price Data(in millions of local currency units)

mase-c, e (na' fi1kel) projrcIionu

Atlas GNP per capita: S 140 ( 1994)

Midyear population. 9.554 millions

Actual Fstibnare Projeclion

Ir99 l'YII l'Y12 I'9. 1W4 1995 I6 I'17 '991 1M.) 2ttt4

iit.I 41i1ctIcintmliLk. at ltl;ikci INcc Mtlt.').9 tWlOI 669'1 # 91 I.. 1 I!trt 1 11.1 .ItlK').1 .3591)9.9 K0112.i los1.11 e SIINCt indired taxes 530.5 575.6 64t.8 768.3 1126.2 2185.9 3243.3 3418.9 3550.6 4404.1 8197.7GUI)ata fastorcoo 4539.1 5529.9 6045.0 8173.9 10083.1 15453.2 27653.3 32570.0 36542.2 40995.8 72967.3

Agriculture 2069.3 2413.1 1987.6 3995.4 3801.5 5362.2 11174.7 12776.0 14080.5 1551t.1 25231.5Industry, ofwhich 126t.0 1507.2 1839.7 2012.S 2865.3 5470.4 6425.9 7765.0 SS44.7 10074.6 19317.1

Manufaduring 854.5 1006.5 1235.2 1307.5 1876.8 3609.8 4252.7 5139.0 5853.5 6667.5 12754.3Snrvicet 1201.8 1609.6 2217.7 2165.7 3413.3 4620.6 10052.7 12029.0 13617.0 15406.1 28418.8

Resource balance -494.7 -747.6 -1144.5 -1385.2 -15-12.6 -2413.5 -2165.5 -1996.2 -2009.8 -2268.9 -2625.9Fxpotts(GNFS) 1220.6 1437.2 1504.3 1470.7 3394.3 6733.8 8101.7 9356.1 10310.8 11352.6 18941.6Impotts(GNFS) 1715.3 2184.8 264S.5 2555.9 4936.9 9147.3 10267.1 11352.3 12320.6 13651.5 21567.5

Total expenditure 5564.6 6853.1 7538.3 10327.4 12751.9 23052.6 33062.6 37985.1 42432.6 47671.8 83790.9

Contsumpeionexpenditurcs 4594.6 5623.1 6581.3 9237.4 11268.9 19797.7 28114.9 32085.5 35501.4 39577.9 67904.2eovernmmtit 772.9 852.4 1240.9 1529.0 2565.3 4581.9 5111.5 6552.1 7296.1 7869.1 13396.1

I'nvage 3521.7 4770.7 5340.4 7708.4 8703.6 15215.7 22996.4 25506.4 25205.4 31708.8 5450W.1

Cross domestic invetament 970.0 1230.0 1257.0 1090.0 14S30 3254.9 4947.6 5196.6 6931.2 5093.9 15956.5lIual govaement invensaenlib 245.0 294.0 394.1 361.9 7000 1320.9 1978.4 2454.5 2535.5 3311.2 6140.6Total private investmeil,t 725.0 936.0 962.9 728.1 7K3.0. 1934.0 2969.3 3412.1 40923 4752.5 9746.2

Total fixedinvesmnent 520.0 1030.0 1077.0 890.0 12430 2500.8 4267.6 5120.5 60095 7072.0 14159.9loltal investmcnw in stocks 150.0 2000 180.0 2W.0 240.0 454.1 650.0 776.2 921.7 1022.0 1726e.

lhnwtc-.t savinfv 47S.1 4K?-4 II?S -29 ? -*59. #11-1 27522 390.4 4921.1 S25.1 13260.tI N,ti ladqx itWImIC -111.1 -1.1 *1 *l9Itl S - IK.t1.0 *. I1 41 .9.11 .')6.6 -'.12.2 -41101.7 418.9 -'19I.eNut currenti ransfers 218.2 140.8 49.4 131.2 158.7 -60.5 .78.5 -54.9 -89.0 -93.1 -116.5

= Natioal;l savings 575.3 492.8 21.4 -348.0 -306.3 163.9 136.1 25t3.4 3525.7 5093.6 12225.6

(kons miati,nal prnlsut 4951.7 5975.1 6553.3 8758.2 I0511.9 20022.3 30029.5 35056.7 39419.1 44764.6 50246.2(Grossnationamdispossbleincomc 5169.9 6115.9 6602.7 5tt9.4 10962.6 19961.5 29951.0 34971.9 39330.1 44671.5 50129.5

a. CGNFS denotes 'poods md mafactor srvices.-b. Gtoss domestic fixed capital f ation oniy.c. Derived as a residual; includes increase in stocks.d. Total net uirequil transfers excluding official capital Vts

Annex C I

Malnavi - National Accotints (contintied) Page 2 of 15

Part B: Shares of Gross Domestic Product(pcrcentsges catculated using current price 4lata)

lk,ew-c iiw fino like/li prnJ rcIios

AtOnal Esfionaie Projctlion

1990 1)91 1992 1993 1994 1995 1996 1997 1998 1999 2004

Gaussdomestiroduct 1000 I0.0 I0W.0 100.0 10..0 100.0 100.0 100.0 100.0 MO.0 100.0Netindirec taxes 10.5 9.4 9.7 S.6 10.0 10.6 10.5 9.5 9.6 9.7 10.1Agriculturevalueadded 40.8 39.5 29.7 44.7 33.9 40.5 36.2 35.5 34.8 34.2 31.1Industryvalueaddcd ofwlnicla 25.0 24.7 27.5 22.5 25.6 26.5 20.8 21.6 21.9 22.2 23.8

Manufacturing 16.9 16.5 18.5 14.6 16.7 17.5 13.8 14.3 14.5 14.7 15.tServices value addcd 23.7 26.4 33.1 24.2 30.5 22.4 32.5 33.4 33.7 33.9 35.0

Resosrce halance (X-M) -9.t -12.2 .17.1 -15.5 -13.S -I1.7 .7.0 -5.5 -5.0 -5.0 -3.2l;xpil%(UNFS)' 2.11 21.S 2?.S 1(A Ml 3!2.6 26.2 2611 25. 2S.1 2.13

hilk is ((iNl:FS) 33.8 .15.8 .19.0 .11.9 41.1.0 44.3 33.2 31.5 30.5 30.1 26.6

Total expenditure 109.S 112.2 117.1 115.5 113.8 111.7 107.0 105.5 105.0 105.0 103.2Govwnnem consumption 15.2 14.0 18.5 17.1 22.9 22.2 16.6 18.3 18.0 17.3 16.5Private consumption 75.4 78.1 79.8 86.2 77.6 73.7 74.4 70.9 69.5 69.8 67.2Govenuneni investment 4.8 4.8 3.9 4.0 6.2 6.4 6.4 6.9 7.0 7.3 7.6Privalc investment 14.3 15.3 12.9 S.1 7.0 9.4 9.6 9.5 10.1 10.5 12.0

Gross domestic savings 9.4 7.9 1.7 -3.3 -0.5 4.1 9.0 10.8 12.2 12.8 16.3Grwsnalionslsavings 11.3 S.1 0.3 -3.9 -2.7 0.5 5.9 8.0 9.5 11.2 15.1

Memerandum itemsGDIPdeflalor 474.4 538.2 636.7 775.4 1082.6 1814.3 2457.0 2751.9 2972.0 3209.5 4716.2Consaunerpaice index 444.4 500.4 614.0 734.7 989.3 1809.6 2678.2 3080.0 3341.7 3625.8 4631.2rotaliDl'(nmillioncurrenl US$) 1857.9 2178.0 1857.7 2003.1 1283.1 1323.5 1850.0 2035.7 2225.7 2438.0 3844.8

Conversion factorused(LCU/US$) 2.7 2.8 3.6 4.5 8.7 15.6 16.7 17.7 18.2 18.6 21.1IPcrcapita gross national product .. .. .. .. 144.S 154.2 159.4 174.6 199.9 215.5 305.1

(Alias method: in 1987 USS)

a. 'GNFS' denotes 'goods and nonfaclor services.'

Annex CI

Malawi - Nalional Accotints (continiued) Page 3 of 15

Part C: Constant Price Data(in local cuirrency, constant 1978 p'rrrs)

ArctualnI Eniflte lrojecuon

1990 1991 It92 1993 :994 1995 1996 1997 IY9) 1999 2004

DI)l' a llaikLi priccs 106s.8 1134.5 1t51.3 1153.3 1035.4 1137.6 1257.5 11078 1360.1 1414.5 1721.0

(i,) al f;ctor cost 979.4 1055.7 972.1 1077 1 952.; 1040.0 1145.5 1210.2 1257.2 13060 1581.9

Agnicul/aere 325.8 367.5 275.2 421 0 297 u 31 8 458 7 472.5 486.6 501.2 5J1 Ildat.s1ry dwhich 198.1 2059 210.9 1')52 199.9 2108 2197 2129 243.4 254.3 3169

Manufacturing 131.5 1375 141.6 126.8 II( 8 119 1 145.4 154 1 161.1 1683 209.7Sevices 455.5 482.3 486.0 460.9 454 8 447.4 467.1 504 8 527.2 550.5 633.9

Resorce balance 22.2 -19.1 1.2 5.9 121.1 161.0 193.3 219.7 229.7 237.3 346.2I:xponh(GNI-S) 308.2 324.6 315.2 299.2 331.5 355 1 396.4 42t.3 445.1 464.2 627.9I,iipons(GNFS) 286.0 343.7 314.0 293.3 210.4 194.1 203.1 209.1 215.4 226.9 281.7

Total expaenditure 1046.6 1153.6 1050.1 1147.4 914.3 976 6 1064.2 1088.1 1130.4 1177.2 1374.1

t;"t.tugwihm 8I93.1 977.5 9106 104111 Xi? 3 Ul1.l 936.8 9496 978.1 1010.6 1119.3

(liw tncla 147.3 251.9 ' 5.4. I 2.19.2 2417.1 2b.1.1 214.3 244.6 251.2 250.9 281.9

lrrivale 650.3 725.6 657.0 794.1 585.6 621.3 722.4 705.0 727.1 759.7 357.4

rams domewaic inoveat 14J.5 176.1 139.5 104. ! 1.5 93.4 127.4 138.5 152.1 166.6 235.5

Total governmentinvestment 36.S 41.7 43.0 34.2 33.7 33.2 44.6 51.1 54.6 59.7 79.7Total prgivaeitvestnent 63.3 76.0 48.9 21.7 9.6 12.4 17.1 17.9 20.0 22.0 32.2

ToKal fixed investment 123.2 146.0 117.5 84.2 59.8 70.4 96.2 105.3 115.5 127.5 133.3

T'alchangesin socks 25.3 30.1 22.0 19.9 21.7 23.1 31.2 33.2 36.7 39.2 51.7

Tenns-of-trade (TT) effefc -104.7 -93.5 .136.9 -134.2 -136.8 -212.2 -236.2 -256.5 -264.3 -275.0 -330.S

(Gossdurneslic income 964.1 1036.0 914.4 1005.1 8486 925.4 1021.3 1051.3 1095.3 1139.5 1340.5

Imunestic saving (ITr adjusted) 66.0 53.5 3.8 .38.2 3 58 42.2 84.6 101.7 117.0 128.9 201.2

N.d factor inccnne -24.9 -24.2 -22.1 -23 7 -37.4 -26.1 -27.9 -26.7 -26.7 -35.3 -IS.I(iNPI a iaketuprices 1043.9 1110.3 1029.2 1129.6 998X0 1111.5 1229.6 1281.1 1333.4 13985 1705.9

a. 'CNFS' denotes goods and nonfaclor services."

Annex Cl

Malawi - National Accouints (continuie(l) Page 4 of 15

Part D: Annuial G rowthi Ralte(calculated from d;ata in, constant 1971t prices)

)3aire-caezs (inow likell,) piroecion

. I, tllI I *tlO,,uib*'g/,ftlp

199)0 1993 992 1993 1994 1'95 1996 1997 199118 999 2004

01P al iiaakel piices 8.3% 6.1% -7.3% 9.7% -10.2% 9.9% 10.5% 4.0% 4.0% 4.0% 4.0%

Agnicllutire -0.2% 12.8% -25.1% 53.0% -29.3% 28.3% 20.1% 3.0% 3.0% 3.0% 3.0%

InllIistry. of which 9.3% 3.9-S 2.4% -7.4% 2.4% 5.5% 4.2% 6.0ON 4.5% 4.5% 4.5%

Malidiiacitiri.ig 113% 3.0% 3.0% -10.5% 3.2% 6.3% 4.5% 6.0% 4.5% 4.5% 4.5%

Services 6.7% 5.9% 0.8% -5.2% -1.3% -1.6% 4.4% 8.1% 4.4% 4.4% 4.5%

IExports(GNFS)' 24.9% 5.3% -2.9% -5.3% 10.8%/ 7.1% 11.6% 8.2% 3.8% 4.3% 6.8%

Inmports (GNFS) 3.0% 20.2% -8.6% -6.6% -28.3% -7.8% 4.6% 3.0% 3.0% 5.3% 4.7%

Tot0a c5xlcIIditiure 2.8% 10.2% -9.0% 9.3% -20.3% 6.8% 9.0% 2.2% 3.9% 4.1% 2.9%

Consumrplion 3.6% 8.8% -6.8% 14.6% -20.2% 6.0% 6.1% 1.4% 3.0% 3.3% 2.1%

liivestineiit -1.8% 18.6% -20.8% -25.4% -21.7% 14.7% 36.4% 8.7% 9.8% 9.5% 6.8%

Gross domnesticincomne 8.1% 7.5% -11.7% 9.9% -15.6% 9.1% 10.4% 2.9% 4.2% 4.0% 3.0%

Gross domiestic saving 42.1% -8.0% -10.4% -21.8% 84.2%' 25.6% 26.0% 11.7% 6.6% 5.8% 7.8%

Per capita growvth rateslerccatpitaGDl-l (alp)b 5.4% 3.4% -9.8% 6.8% -12.6% 7.0% 7.7% 1.4% 1.4% 1.4% 1.8%

l'ercapita(NIP(nitp) 6.4% 3.6% -9.7% 6.9% -140% t.4% 7.8% 1.5% 1.4% 2.2% 1.9%

l'er capita total consitinption 0.8% 6.0% -9.3% 11.6% -22.3%. 3.3% 3.4% -1.2% 0.4% 0.7-,. -0.1%

I'ercapila private ctmisiiiiption 1.7% 8.6% -11.8% 17.7% -28.2% 3.3% 13.3% -4.9% 0.5% 1.8% 0.0%

b .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ~ ~~ ~ ~ ~~ ~ ~ ~~ ~ ~ ~~ ~ ~ ~~ ~ ~ ~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~ ~~~ ~~~~ ~~~~ ~~a. "( ;NI:S" .ICmtiiHCS 'gu4sIls ttule s1,ptgl.ltl,ll sci lcb. ttlp' dettotes 'm atkct price:s"

Annex C IMalawi - Balance of Payments Page 5 of 15

(UlSS millions al current l.rices)/lIut-t sase (muni sikelA) ne) i n lstst

Actunl (l.'stinnte Proection1995 1 991 199 1993 1994 1995 1996 1997 199K 1979 I5U4

lotalexportsoi'(;NlS' 447.3 5127 417.5 3378 388t5 431.8 485.1 529.2 567.7 611.2 897.3Merchamlise(FOII) 411.6 475.5 397.3 321.0 372.4 421.2 473.4 517.1 554.7 597.2 873.6NM.wuici,wiviccs IS.7 17.2 210.2 16.X l, I 10.7 11.7 12.2 11.1 1.10 21.6

Total Iliipcrts of GNFS 5317.5 682.9 763.5 667.2 50 7 586.6 614.8 642.2 673.4 733.0 1021.6Merchuidise (FOD) 490.6 615.4 712.4 627.5 554.1 554.0 579.6 606.4 642.1 694.0 967.6Nonractorservices 46.9 67.5 51.1 39.2 35.9 32.6 35.1 35.7 36.3 39.0 54.0

Resource balance -90.2 -170.3 -346.0 -329.5 -202.2 -154.8 -129.7 -112.9 -110.7 -121.1 -124.4

Net rscttw mncmne -43.3 -46 5 -39.0 -41.S -46.3 -39.6 -51.9 -52.7 -55.3 -34.3 -43.5Faclor receipts 9.3 7.4 6.3 2 2 1.9 3.7 5.0 6.3 3.1 10.1 14.6Faclor paymnats 52.7 53.9 45.3 44.0 48.2 43.3 57.0 59.6 63.3 44.4 51.1

Interest (scheduled) 43.6 492 36.2 36.7 37.5 36.7 46.6 41.8 52.0 29.4 33.1Total interest paid" 43.9 49.2 36.2 36.7 37.5 36.7 46.6 48.3 52.0 29.4 33.1Nd adjustments to scheduled interest -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Otherfaclorpaymenis 9.1 4.7 9.1 7.3 10.7 6.6 10.4 10.3 11.3 15.0 25.0

Netpuivalecuffentiransfen -11.1 -33.3 13.7 29.8 1.1 -3.9 4.7 4.3 4.9 -5.0 5.5Cunent receipts. o(fwbieh 18.4 12.9 54.6 45.7 36.6 7.5 S.1 3.0 3.0 8.0 1.0

Woriers' remittiances 0 0 0.0 0.0 0.0 0.0 0.0 00 0.0 0.0 0.0 0.0Cufniepayments 29.5 46.2 40.9 15.9 18.5 11.4 12.8 12.8 12.9 13.0 13.5

Nd ofricial cunren iransfers 0 0 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0

Current accotini balance -144.6 -250.1 -371.3 -341.4 -210 4 -198 2 -186.3 -170.4 -170.8 -161.1 -173.4

Official capital nrts S1.1 59.4 146.9 119.9 111.2 151.1 109.8 93.6 95.5 100.0 110.0

Net i l NliuiswiIir 370 107 '1? 2 191-l 1.110) 917 1 0n6 111.2 10").1 93 9 ins15

Disbursemeillts" 132.3 1700 142.5 235 8 193.0 150.7 1'9.6 131.2 157.4 151.9 173.5Repayments(scheduled) 45.3 61.3 50.3 41.0 490 56.0 49.0 50.0 43.0 53.0 68.6

l'otal principal repaid" 23.1 57.2 46.7 36 1 49.0 72.5 49.0 50.0 43 0 53.0 68.6Net adjustments to scheduled repayments 21.5 4.1 3.6 4.9 00 -16.5 0.0 0.0 0.0 0.0 0.0

Net other LT inflows 00 0.0 0.0 0.0 00 0.0 00 0.0 0.0 0.0 0.0

(continued)a. Goods and nonfactor services.b. I listorical data front Debt Reporting System (DRS); oilier data projected by country operations division staff.c. '1.1- denotes 'long-4enn.'

Annex C IMaaIIwi - Bl;11ince of Paymeints (contiiiiiel) Page 6 of 15

(I IS$ r illiuw. aIt (rrrmt pri, c j

/l,.r .. ,S. fNI.'* Iif It { I 1p.l, **I. 1U

,IrIung Etlimnfie Prujecrlin1991I 1V1J' 191.! IVV 1994 I9 9 N I 996 1997 199'l 19WVI IKW4

Adjus..umecn t schIlu.dukd d.tio wivice 21.2 4.1 3.It 4.9 0.0 -16.5 0.0 0 U U.U 00 0.0D1rv1cc mintM paid 21 5 4.1 3.6 4.9 0(1 0.0 0.0 OIl 00 0.0 0.0

Ked.uiI in miaiis/5lrqlayllcuIls() -u3 01o 0.0 0.0 0.0 -16 5 0.0 0.0 00 00 0.0

OC(;lIIcjI;aI fo1ms -6499 57. 12115 21.K -51' 31)0 2.3 2 4 t4 -10 -10No s i4m-Ierul ;qllal 21.2 *1 3 360 4.9 .21.1 24.0 3.9 3.4 4.4 U.0 0.0

Nd cqli;id flows 8.c.a. 5.4 -13.7 27.7 -104.5 -24.2 -I 5 -1.6 -10 -1.0 -1.0 -1.0

lJIinus and imnmisuis -99.5 67.1 97 2 121.4 -K.5 16.5 0.0 0.0 0.0 0.0 0.0

Chanpe un i rinic,mional ,es:rves 25.2 20 4 0.0 0.0 29.1 -70.8 -56.4 -56.7 -37.5 -36.8 -40.6

1- indwates iacrcaise in asset)

Iltei pusse mCsL-V.S urwIimcl 269.5 2*54 104.-I 45.3 21.4 105.9 16.0 266.4 314.5 346.6 490.4

TwalI ,sesves ninmws gWd 269.t 2853.4 104.4 45.3 23.4 105.9 156.0 266.4 314.5 346.6 490.4

Cinud (ai y)r-ctkUi IAnisi lwiec) 0.0 0.0 0.0 0.0 0.0 W0 0.0 00 uu.0 0.0 0.0Twlu It;,l I..aCrvcs filnl ,uil. s illaspnts C.S 5.5 4.t- 1.5 0.K 1).1 2.0 3 3 4.6 5.1 5.4 5.5

Cxchanpe ramesAnimal averuage (ICl/JSS) 2.7 2.5 3.6 4.5 8.7 15.6 16.7 17.7 15.1 1t.6 21.1

Al l Vye.ali .(ll/IS$) 2.6 27 -1.A *li IlI I 6.11 17.2 1719 IS I 1.9 21.4

(urrceil Acc4mw,i Rlalmccis % GD)1 -7.8 -I 1.5 -20.0 -17.U -1.0 -15.0 -10.1 -t.4 -7.7 -6.6 *4.5

d 'e, ci. dcnrs n" elsezwlere au,elu.Jcd"e. (i & S deitkis 'gods ii scrvices."f I.C I 11dXmies iitai CUFw ICey UIliIS.'g Ih iufis .d Ihc cel esclunge m31e mellecis US/l I, so im iiKrease a. all IlIlsecialmon at Iic real exulinge rie.

Anncx CI

Mialawi - External Debt Stocks snd l1ows Page 7 of 15(USS milihns at current prices)

jik,w-cise (uuia Ii&efr pnlrctlM

Actina' FhPjuf. r'oe'I9U 1991 1997 I Y9J 1994 195 IY96 1971 I91 1777 AW4

A. Gea disburscuus

Pubic & puMidy gwariced 132.3 170.0 142.5 235.8 193.0 150.7 179.6 11.2 157.4 151.9 173.5O(r,al ukLi2uul adaorb s.owu 114.7 131.7 136.0 234.1 IS5.0 145.3 159.6 158.7 137.2 117.4 136.7

IDA 98.6 98.2 S5.6 146.0 59.0 102.0 100.0 100.0 95.0 75.0 !09.0IUlRD 2.3 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

OEIKial b ad 16.1 38.3 4.2 0.0 1.0 5.0 20.0 22.0 20.0 34.0 35.0PFI,IecCwdtors. owbc 1.5 0.0 2.3 1.0 7.0 40.1 0.0 0.S 0.2 0.5 1.9

Boms 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0o0 0.0

Prvsue aalta mc pmeed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Tot0l L Tb _d.Iwo uioMet 132.3 170.0 142.5 235.8 193.0 150.7 179.6 181.2 157.4 151.9 173.5

Nct Si, crede 0.0 0.0 0.0 0.0 -21.2 40.5 3.9 3.4 4.4 0.0 0.0DIrwip fiamIMF 25.3 20.4 0.0 0.0 0.0 11.7 23.3 23.7 11.S 0.0 0.0Totaldishm,Ts(LT+ST+MF) 157.6 190.4 142.5 235.8 171.3 202.9 207.3 208.3 173.6 151.9 173.5

11. AUIUin msPaMic & pdbidy r.ekd 44.1 61.3 47.3 41.0 49.0 M6.0 49.0 50.0 43.0 53.0 63.6

UIT.makdd.il adu ms.ufwki6b 1S.9 19.1 20.5 21.0 34.0 23.0 30.0 32.0 32.0 35.0 49.4IDA 2.5 3.1 3.6 4.0 6.0 7.0 1.0 9.0 11.0 14.0 31.01RD 7.J 3.2 3.6 9.0 7.0 9.0 9.0 9.0 9.0 9.0 0.0

OEMlKdbild s 21.3 32.5 15.3 10.0 6.0 12.0 15.0 14.0 14.0 16.0 19.2Pliuvueuediema tofwwc 3.4 9.7 11.5 10.0 9.0 16.0 4.0 4.0 2.0 2.0 0.0

Dandk 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Peivae editeon _aIed 1.2 0.0 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total LT b_m.ctonaiom 45.3 61.3 50.3 41.0 49.0 56.0 49.0 50.0 43.0 53.0 68.6

Reyesto IMF 19.3 20.9 19.1 6.0 0.0 0.0 0.0 0.0 1.2 4.7 9.5TotalI. a Tnsugi(I.T*IMF) 64.6 82.2 69.4 47.0 49.0 56.0 49.0 50.0 49.2 57.7 73.0

C. Net mesuent_sI%Sbic & p4idy pwateed U.2 108.7 94.7 194.3 144.0 94.7 130.6 131.2 109.4 ".9 105.0

OtTrcia m.iiIa.caeditor.odfiwlih 95.S 112.6 115.5 213.3 151.0 117.3 129.6 126.7 105.2 32.4 37.3IDA 96.1 95.1 32.0 142.0 53.0 95.0 92.0 91.0 U4.0 61.0 73.0IIIRD -5.5 -6.3 -3.6 -9.0 -7.0 -9.0 -9.0 .9.0 -9.0 -9.0 0.0

ofnicil bilaAl creditors -5.7 5.3 -11.6 .10.0 -5.0 -7.0 5.0 3.0 6.0 13.0 15.3Private creditors, od whih -1.9 -9.7 .9.2 -9.0 -2.0 -16.1 -4.0 -3.5 -1.S -1.5 1.9

l udh 0.0 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0

1ouldJa. Hksical dat fn Debt Reporting Sym (DRS); aduer do. projected by ctty opiasmons division staff.b. Lr dents 'iongtcan.' STr denotas 'slt4e m.'

Annex C1

Malawi - External Debt Stocks and Flows (continued) Page 8 of 15(USS miNian aI current prices)

14#%e. uue fm.,.g I'IAe( j P-rdihI.a

Aejtul' vionse NOJ)eYIe'

19W 1991 1991 5993 1994 1995 199 199I7 I99 1s 1W4

I%lvlc .cdiflors m skaraiccd -1.2 O.tl -2.5 l.0 0.11 0.0 0.0 0. 0 0 0.0 0.0

I .nl1 1.1 I" J 1 "I du.u nucuut. t/,t IOIK./ ).'! I 91.1 1.1.1 I 9-1./ 10U.h1 131.2 I 09.4 9K.9 105.0

Net S' cedil 0.0 0.0 0.0 0.0 .21.2 40.5 3.9 3.4 4.4 0.0 0.0

Nledardit f IMF 6.0 -0.5 -19.1 -6.0 0.0 11.7 23.8 23.7 10.6 4.7 -9.5

Total nea disbmusments (LT+ST+IMF) 93.0 108.2 73.1 188.8 122.8 146.9 153.3 153.3 124.4 94.2 95.5

D. Interest and charges

Public & publicly gupueed 33.0 40.7 30.5 34.7 35.5 35.6 45.4 47.5 50.7 29.0 33.1

Ofricial multilmeral eredilors, of whicl. 17.t 1.9 18.9 25.7 30.5 26.6 33.3 40.9 44.7 22.3 23.2

IDA 5.0 5.6 6.3 X.0 S.0 9.0 10.1 10.3 11.6 12.0 14.3

IIIRD 7.7 7.6 7.0 6.0 4 0 5.0 5.0 4.0 3.0 2.0 0.0

Ofrwcial bibleraI crediiors 10.5 15.7 8.7 7.0 4 0 7.0 6.2 5.6 6.0 6.7 9.8

Privatecrediko f,owhich 4.7 6.1 2.9 2.0 1.0 2.0 10 1.0 0.0 0.0 0.1

Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privale creditors onpgunleed 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total inlerest on LT los 33.3 40.7 30.5 34.7 35.5 35.6 45.4 47.5 50.7 29.0 33.1

Interes on ST credit 4.3 4.0 3.5 1.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0

Intefa on IMF diwings 6.0 4.5 2.2 1.0 1.0 1.0 1.1 1.2 1.3 0.3 0.1

Totalinseresl(LT+ST+IMF) 43.6 49.2 36.2 36.7 37.5 36.7 46.6 48.3 52.0 29.4 33.1

E. Exlmal debt (DO0)c

lPublic & publicly guwranted 1405.0 1527.5 1562.1 1718.0 1K88.0 1991.0 2109.9 2244.0 2353.4 2451.3 2964.9

Iokial uwltilacii alcri ctciit.,.rvorlich 1076.2 1199.0 120A.5 1416(0 15X7 0 171.1 1 1812.0 19(.0.7 2064.9 2146.1 2574.3

II)A /6.1. S B(,..tI ll) I9.9 1161I 11(116 l O 1.1.-1.0 1'.1l.0 15-2.0 1511.0 I996 0

II1RD 90.7 35.4 74.4 67.0 6-10 55.0 46.0 37.0 2K.0 19.0 0.0

Ofricial bilteral crediors 267.1 277.6 253.6 252.0 272.0 264.0 269.0 277.0 234.0 302.0 385.3

Irivac credilors.orwhidl 61.7 50.9 40.0 30.0 29.0 12.9 3.9 6.3 4.6 3.0 4.3

Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privl creditors nonguaranleed 2.5 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

lolal Lr M)I) 1407.5 1530.0 1562.1 171K.0 18K.0 1991.0 2109.9 2244.0 2353.4 2451.3 2964.9

STdebi 61.7 30.4 49.3 12.0 130 13.0 13.0 13.0 13.0 13.0 13.0

UseoflMFcredit 115.0 115.1 91.9 86.0 112.0 114.7 123.5 129.2 112.8 t4.1 5.9

Total t)Of(LT+STiIMF),ofwhtich: 15M4.2 1675.5 1703.8 1816.0 2013.0 2118.7 2246.4 2386.2 2479.3 2543.4 29t3.3

Irl.rciiicl arr.us 0.0 0.0 0.0 0.0 1(1 3.0 8.0 3.0 8.0 3.0 3.0

lsicrest affs 0.3 0.0 0.0 0.0 0.0 3.0 3.0 3.0 3.0 3.0 3.0(conlmnued)

a. Ilistorical dais from Debt Reportin3 System (DRS); other data projecled by Countlry operalions division staff.

b. LF denotes 'long-lefnnh, Sr denotes 'shoru.erem.c. 'M)D' denoes 'debt outsanding and disbursed'

Annex C1

Malawi - External Debt Stocks and Flows (continued) Page 9 of 15(uSS millions at current prices)

kef-ainrl (au like/) pnrjeciMe

IWU 199 IYY9 19Y3 14 ISIi 197 I99- E, Z,a

F. Dbe d debtwdm sb_ i n(baud m de in pwls A-F)

I{4:del c,discvie(tl% iIall.s) 101.2 111.4 105.6 £1.7 36 S 92.7 95.6 91.3 101.2 *7.1 111.2ului(LT SI-* N J,4F)i 43.6 491 36.2 36.7 37.5 36.7 46.6 43.3 52.0 29.4 33.1

P' i (LT+ IMF) 64.6 3.2 69.4 47.0 49.0 56.0 49.0 50.0 49.2 57.7 72.0

Tot FXO. mW TDSdDOD/eLports(XGS*) uo 346.9 322.2 402.0 5342 515.6 436.5 458.3 445.1 430.6 4101 327.2DOD/C aatrio J5-3 76.9 91.7 90.7 156.9 160.1 121.4 117.2 111.4 104.5 77ATDS e/- I (XGS)hingo 23.7 25.3 24.9 24.6 22.2 21.3 19.5 11.4 17.6 14.0 12.2

IRRD espm iictors:IBIDDSelp.Mlic lon,DS 15.1 12.A 15.7 13.1 12.9 15.1 14.7 13.2 11.9 12.6 00

pft'vnDSi~~3XIplk DS 60.5 49.1 60.9 64.9 76.6 60.1 726 75.1 73.2 71.6 73iIIIMRD US I _ (XGS) 3.4 3.0 3.7 4.4 2.3 3.2 2.9 2.4 2.1 1.t 0.0

C3d r m IB i D pude", 0.09 0.9 0.06 0.07 0.06 0.05 0.00 0.00 0.00 0.00 0.00

G. Demd &M b_ d- hziems- -o an pe-DMS dma fwor coma wit

p-oa -* uaksfteab had a4moof&ftaMm A C7)

TDS E saw .staS =am) 95.1 109.2 95.6 95.3 101.2 37.1 111.2bo (LT. +ST + W 37.5 16.7 46.6 41.3 52.0 29.4 33.1pf.. (LT + AF) 57.6 72.5 49.0 50.0 49.2 57.7 73.0

Mmd hemFesr Ia) eraI -pub (XGS) raios

likied I I s eps 9' 1.4 9.5 9.1 90 4.7 3.6sid4l factohsr ut %I Ce%puI 1. 99 11.6 11.1 11.11 7.1 6.4

s. Ililabau &u fim Det4 RSqnio g Sypm (DS. odher dba pted by ouamiry opeios division saff.b. 'Lr demotes lo. '-m Sr dec4mes 'sh*rn.'c. 'DV demoes 'debt otsandig sd jumrd. d"6 demoes toa sdenice.'e. XGS dameos expents of gods ad s,'vices. wiA comprs expors of goods. moofxer sacs, fador receipts, and woricrsc remiitancesf. 'DS' denoes 'deh service.'

Annex CI

Malawi - Public Finance Page 10 of 15(at current prices and tesclange rales)

1'1n.-u-,'e foufnt. /hk. 113 Irmeuid"

A1"ud1 V.;iimae l r*dox

1l 99i 1991 It9 199J 1974 1995 19W6 1991 199J Im9

Gkyvmmoncnt bud#cI (usillmu"ms ICUs) /a

loal ctutebl m-eenues 1O31.0 1147.2 1294.0 1554.1 2080.4 3919.3 5412, W493.8 7171.7 R3X7.0

Direct laxes 346.4 412.8 451.4 569.1 749.4 1318.2 1634.7 2312.5 2631.0 074.9

Ildirect taxes 530.K 575.6 64S.8 768.3 1126.2 2185.9 3243.1 3411.9 3180.6 4404.1

NonLax receilts 153.R 158.8 19.1.7 216.9 204.9 415.1 534.3 762.3 1(80.1 90S.1

(or which euenlp gams)

utnl,Current Expendilures 1067.6 1219.4 1410.6 1741.2 3340.4 51S6.5 6363.5 6119.0 661S.5 74900

W.Lgs aMwl; %alaics .? I.1) .7b.6 *uP).9 S4.1.7 ')117. 1649.2 lIXII 9 2159.3 !4!1S.I V72.1.!

IIItcmlLl pyllculs I pl. S If-X.. ?455.1 2xgl.o (m 1 2.7 Ill).S I $X".9 I1. Iot i I Xl'.1X

lire slrenolexeal detr K5.1 81.4 104.6 11l1.5 236.7 454.1 350.1 5.11.8 5K2.2 Mm 10

Inikwe on domneUic deiN 108.4 87.4 100.7 165.5 375.9 885.4 1539.5 829.7 453.1" 2Rt.8

Oihlerreccinculcxpenditure 639.8 773.9 795.4 919.5 1819.9 2177.8 2661.7 2591.2 315S.0 3173.0

Developea expendilure 307.5 314.0 430.7 465.6 915.R 1440.3 1737.5 2304.6 2636.7 3084.1

Drouglu-prcparednessexpekliture 0.0 0.0 337.5 206.0 721.6 570.4 370.K 431.9 485.1 544.8

Capital Revenlucs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 ° 0 0.0

Ovaall balasce (- = deficil) -.144.1 -316.2 .-S4.9 -861.5 -2897.4 -3271.0 -3059.0 -2361.7 -2U.5.6 -2731.9

Sourcesoflinmmcing(+) 344.1 386.2 834.9 861.5 2197.4 3273.0 3059.0 2361.7 2368.6 2731.9

Ollciad capilal grants 137.0 184.2 12.2 256.6 1207.6 152.6 1767.0 1654.7 1734.5 162.3

Net external borrving 232.5 213.2 317.8 5S2.6 943.7 364.1 1277.0 1873.9 1507.5 11695

Net Domeslic Financing -25.3 -161 384.9 22.4 741.1 1061.2 15.1 -1166.9 -R71.A -300.0

a. I .CtI daenccs local cWTCIKy nuni."b. Nl:l S&ROI deCS nonfrmia.wial pmblic sector.'

Annex C I

Malawi - Public Finance (continued) Page 11 of 15(at current prices and exctiange rates)

1....... .... (ti,1 it hBAchA / profe lum/ {(/

ActuIal ls'fi,,wWtr Irojecfion

199) 1991 5992 I993 )994 1995 1996 1997 59sI

Sharcs or GDI (D)

(linC ent re enles 20.3 18.8 193 174 186 19.0 175 I80 182 185Cureint expenidituires 21 1 20.0 21.1 19.5 29.8 25.1 206 17.0 164 16 5B3adgetary sivinigs -0 7 -1.2 -1.7 -2 1 -11 2 -6.1 -3 1 1 0 1 9 2.0Capital revellucs 0 n 00 0o0 0 0 0.0 0o0 0 0 0.0 00 00

DIevelopment cxpendistirc 6 I 5.1 6 4 5 2 8 2 7 0 5.6 6 4 6 5 6.8D)tought-prepareduess expenitliltirc 0 ( 0 0 5 0 2 3 6.4 2 8 1 2 1.2 1 2 1 2O%era5l BalanceI- -deicilt) -6 8 -6.3 -13.2 -9 6 -25 8 -15.9 -99 -6.6 -5 9 -60

otficial capilal grants 2 7 3.0 2 7 2 9 10 8 9.0 5.7 4 6 4 3 4.1Net cxternal borrowing 4 6 3 6 4 7 6.5 8.5 1.8 4.1 5.2 3.7 2 6Net dometic liatinaaciniy -0.5 -0.3 58 0 1 6.6 5. 0 1 -3.2 -2 1 -0.6

(o vctltltcnllt I Iet (IX )It/c .1t fle ciud of tIlc yenl. III (IIillSSilis I ( Is. ludilc% note'll5

External debt .. .. 21223 24931 28304 31241 33495 35564

External debt (in US$ imillions) 1.. . 387 1544 1647 1743 1821 1886Debt to monetary systemii 223.2 213.0 739.0 941.0 1345 1070 1094 396 258 205(5ter domestic debt .. .. .. 1155 2491 2482 2013 1278 1031

lotual govenuletit det .. . . 23723 28492 31880 33650 35031 36800

Total goveumntar debt as perceit of GDP 2 11.6 138.0 103.2 93.5 86.7 81 1

'I ax burdent itdicatms (% l

D)irect taxes / 61)' 6 8 6.8 6 7 6.4 6.7 6.4 5.3 6.4 6.5 6.8Isidircct taxes ott uidtucstic Ci&S / GDI 0 0 0.0 0.0 0 0 0 0 0.0 0.0 0.0 0.0 0 0iidiFeCt taxes ott domestic (G&S / private comisiuiniptioni 0 0 0.0 0.0 0 0 0.0 0.0 0.0 0 0 0.0 00

'laxes ott i,.sematihassl trade. /I ercha12dise imports 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00 0.0

c. "IX)D' deatotes "debt ouistandiig atid disbursed."b. U&S denotes goods atid sc.vices.

Annex C IMalawi - Monetary Slilvey Page 12 of 15

IuiI .fiullanIIiu .if lacal canrertCy ,Iih)I,i.., ,,,, 'IC ,, (n.IlAI'/IJ 1 W,9,,IUm lil

,I rE no) FVimnl )fnj'rj. fron

1111111 19')'11 1')') 1')').1 l')')4 I 9'1): 1')')(, I' 97 II9ftI 1')'1')

A. Animal Fl ms:

Nei loirc:!n asws 47 7 11.1 .5(2 7 171.1 -205.0 1260.2Nc milcillalilNlaI ieseives -68.9 -57.1 110 0.0 -254.2 1103.4¶)li.ci Im llreigal atssels 116.6 682 -502.7 171.1 49.2 1S6.8

I)lincsli1 ciCdil 17.0 151 8 706 ') 167 5 687.6 -78 1i rovut iiticill -121.3 -1(.2 5260 2(12. 274.4 -152.6

t nViiiIcil liidgel -121 3 -1(1.2 526.0 2112 ( 4011.1 -275.2HIlicli NI I'S' (1.1) 1.I0 t1.0 tIl - Ž9.7 1?2.6

N- I. .'- A lde coinilialy I(8 .1 15.1 8 I0.9 -11 5 11 !.2 71.0

I" ivale s.nlol 1339 141.5 225.9 -119 5 413.2 74.6'hu finalalcal. iislilaliolus 4.4 23.5 -45.0 85 0 0.( 0.0

NH;II alsseas - li;abililics 64.7 165.9 2041.2 338.6 482.6 1182 1

Moncy ald qplasilmlalicy 90.4 178.0 218.2 509.7 975.4 1182.1

Nei *icala liaabilitics -25.7 -12.1 -14 t -171.1 -492.8 0 0

It. F1aild e YcAr sti,xks:

Nei foieiL aIssels -? 2 8 9 -493.8 -322.7 -11739 195.0

I (.nauc-hi;c cacalil 73.21 .I 8X7.2 I 3. I1 /,11 (I 21 19.2 2371.1"i iviiiieiCnt (NI:ITS) 223 2 213.0 719.0 9-11 0 1871.1 1118.5

Giiavcliiaaem I abudgct 223.2 213.0 7 39.10 1 11 134 5.1 1069 9)O(lici Nl:I'S 0.0 0 (1.0 0 0 -71.0 48.6

itcsle , ilc 11CeOinally 509 2 67.1.2 8551 2(S.6 117. I 252.7I 'I ale seciol 5(70 65X 5 8X.1 4 7(41' 1178.1 12i2 7Oilier fillalcial ilslui(lliolls -7.8 1 i.7 -29 3 5S 7 (1 0 ((.0

loal iisel l;Iiabilities 71(0 X9J( II I 1(11 11 (5 4 ) 1(27 1 66 I

N lm e. *.0 g;.lil.. .1343 I ' I IIIX 5 I Mit i I ( I('J 9

(ciliililed)

N "Nl l'S"Idei,les Imi.liaai.cal plblIlit sclhil

Annex CIMalawi - Monelary Sui-vey (coitimiuedl) Page 13 of 15

-N(i milliuns uf local currency ullii)

Alctual Eviiii,Dtaf I'rllject iorn

1991) 1)9I 1992 19' 1994 199S 199)7 1 998 19

( -l|SacLomiltlt;l l,m co*i{4ctio,13 "pju%jurjI (its '% MQM")

Nc Iffeirit assets -01 0.9 -40 5 -18.7 -414 5 0

,Cidi Ito lg-tluaffi-l (NIlTS I Ž7 1 291 (tl 6 i l. 9 .17 () Ž1.X

I ledol ). *I l ife er.onfal- Ef 'I (i" ( 1 / 1 Il ' 91 I1to .!

Net etghel liaNlilies (-) -11.2 -104 -9.7 -16 7 -52.8 -34 0

'ILutal itwrfasGsin MQM 10(0 1U000 1000 10(1.0 I(tO/I 100.0

I) Morcy. crcdil anld in ices

M2/GIDIW 16.2 16.4 IN 2 19 3 24.1 I9.8

Ai|mualt ross1h rale MQM 216 21 K 11 K 564 43 7

Amufal gilvtiii iade 9wIvate c-dit 150E 27.4 34.1 -11 5 54.0 6.3

Increma: il private crcdi as of iiuicase mn dlwncestic credit 717.6 91.4 12 0 -71.3 o0 I -93.5

inlerest rates (historical wily)Nisimiiii;uI CiIU-9Nl kil *li,c,ziil *lateReall clkl-Jiclu.J l lsCewil l fate

b 'MQM tkno-oites 1ui,ney asth quasi it mcy

Projected Arrcears, Rcscliedtiling, and Reductionis in Debt aind Debt Service Ainex CI(Sutpilementary anncs to be used for cuuntries requiriig debt workouts) Page 14 of 15

(US$ millions at cuirrent prices)

flaw-case (Inoa Nikell) plro/iectiot

Fstimate Projection

1994 1995 1996 1997 1998 1999 2004

A liitcmcsl pamymtcnis

I. Interest due per DRS- pipeline 35.5 35.7 45.4 46.6 48.4 25.0 17.0

2. Adjiustments to DRS pipeline (if any) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

3. Less interest saved lterouigh debt reduction 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4. Pltis interest on arrears/restructurin/DDSR1 0.0 0.0 0.0 0.0 0.0 0.0 0 0

5. I'lus interest due on new Lrdebt 0.0 -0.l 0.0 0.9 2.3 4.0 16.1

6. Plis interest on ST' debt 1.0 0.0 0.0 0.0 0.0 0.0 0.0

7. I'Pis IMF service clharges I 0 1 0 1.1 1.2 1.3 0.3 0.1

K Slbtntall ilttcICst tIIIC (scliculilcml basis) 17.5 16 7 I6 6 4 R.8 52.0 29.1 33.1

'). Adjitslittetiis to sclidulcd ittterest 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10. a. Interest not paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0

It. Arrears aceuntulation 0.0 0.0 0.0 0.0 0.0 0.0 0.0

12. Interest rescheduled 0.0 0.0 0.0 0.0 0.0 0.0 0.0

13. Interest forgiven 0.0 0.0 0.0 0.0 0.0 0.0 0.0

14. b. Arrears rediuction (-) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

IS. Total interest paid (A8-A9) (cash basis) 37.5 36.7 466 48.8 52.0 29.4 33.1

a. Disbursetnerts

1. Disbursements per DRS pipeline 193.0 155.7 156.7 104.0 71.0 39.0 00

2. Adjustments to DIRS pipeline (if any) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

3. Plus disbtirsetitents on new LT debt. of wltich 0.0 -5.0 22.9 77.2 86.4 112.9 173.5

4. Disbtirsetnents for debt reduiction 0.0 0.0 0.0 0.0 0.0 0.0 0.0

5. Sitbiotal LT disbursements 193.0 150.7 1796 181.2 157.4 151.9 173.5

6. Pltis net ST capital -21.2 40.5 3.9 3.4 4.4 0.0 0.0

7. Plus IMF purchases 0.0 11.7 23.8 23.7 11.8 0.0 0.0

8. Total disbursemenis 171.8 202.9 207.3 208.3 173.6 1519 173.5

C. Principal repaytncnts

I. Priticipal die peer DRS pipeline 49.0 56.0 419.0 50.0 48 0 53.0 65 0

2. Adjsit,cnits lit DRlS pliclinic (il azwty) {} .1 11.0 }{} (J. { 1 )

3. Less principal saved itrosgit debt rediuction 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4. Plus prinicipal on arrears/restrutcttring/DDSR 0.0 0.0 0.0 0.0 0.0 0.0 0.0

5. Pllis principal on new LT debt 0.0 0.0 0.0 0.0 0.0 0.0 3.6

6. Subtotal 1'1 rctpsyttnents dtie (scheduiled basis) 49.0 56 0 49 0 50.0 48.0 53.0 68.6

(cotitinued)

a. "DRS" denotes "Debt Reporting System.'

Annex C Ib `DD)SK deniotes 'debt and debt service reduiction Page 15 of 15

"I. 'I " denotes 'long-term," 'ST denioles "shoit-tenn

Projected Arrears, Rescheduling, and Reductions in Debt and Debt Service (continued)

(Supplementary annex to be used for countries requiring debt workouts)

(USS mnillions at current prices)

ltuose-ruis (uiov likely) purj(yortuon

E:stit,nufe Projecrion

1994 1995 1996 1997 1998 1999 2004

7. Plus IM: repurchases 0.0 0.0 0.0 0.0 1.2 4.7 9.5

8 Sibtolal repayments duie (scheduled basis) 49 0 56.0 49.0 50.0 49.2 57 7 7S.0

9 Adjuistments to scheduiled pnncipal repayments -8 6 -16 5 0 0 0.0 0.0 0.0 0 0

10 a. P'rinicipal not paid 0 0 0.0 0 0 0.0 0.0 0.0 0.0

It. Arrears accuintmlatioat 0 0 0 0 0 0 0 0 0.0 0.0 0.0

12. Principal reschedualed 0.0 0.0 0.0 00 0.0 0.0 0.0

13 Pmincipal forgiven 00 00 0.0 0.0 0.0 0.0 0.0

14. Ii. Arrears rcductio/prep1 aynicnits 8.6 16 5 00 00 00 0.0 00

15.Total principal repayments made (C8-C9) (cash basis) 57.6 72 5 490 50.0 49.2 57.7 78.0

1). Debt okistanding (end of period)

I. Long-term DOD' per DRS' pipeline .of whictl 1888.0 1996.0 2092.0 2149.0 2172.0 2157.0 18680

2. Existing principal arrears 8 0 8.0 80 8 0 8.0 8.0 8 0

3. Adjtstments to DRS pipeline (if any) 0 0 0.0 0.0 0.0 0.0 0 0 0.0

4. Less reduiction from forgivenesslDDSR' 0.0 0.0 0 0 0.0 0.0 0 0 0 0

5. Plus consolidation from restnucturing/DDSR 0.0 00 0.0 0°0 0.0 0.0 00

6. Plus new principal arrears (+increase/-reduc(ion) 0 0 0 0 0.0 0.0 0.0 0 0 0.0

7. Plus new LT debt 0.0 -5.0 17.9 95.0 181.4 294.3 1096.9

8. Plis sr debt of wlticih 13 0 13.0 13 0 13.0 13.0 13.0 13.0

9. liiterest arrears not yet capitalized 3.0 30 10 3.0 3.0 3 0 3.0

10 Plus tse oflIMFcredit 112.0 114.7 1235 129.2 112.8 84.1 59

11. Exchange rate impacts on DOD 0 0 0.0 0.0 0.0 0.0 0.0 0.0

12. Total DOD. of which 2013.0 2118.7 2246.4 23862 2479.3 2548.4 2983.8

13. Total arrears (interest + principal) 11.0 110 11.0 11.0 11.0 11.0 11.0

Memnoraandism itein Adjnstnsent duie to debt write-offs 0.0 0.0 0 0 0.0 0.0 0.0 0.0

a. "DRS' deinotes l)bD Reportliiig Systemn."

b. `DDI)SR deinotes "'trbl atid dcbt seivice reduction."

c. "Ll" denotes "Iong-ternm" -sr denotes 'short-term.'

d. DOD denotes "debt outstanding and disbursed."

IMAGING

Report No: P- 6799 MAIType: PR

World Bank Document€¦ · CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) USSI = MK 15.3...

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Transcript of World Bank Document€¦ · CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) USSI = MK 15.3...