Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: P 7273 MAI

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON

A PROPOSED CREDIT AND TECHNICAL ASSISTANCE PROJECT

iN THE A\MOUNT EQUIVALENT TO SDR 65.7 MILLION AND SDR 1.5 MILLION

TO

THE REPUBLIC OF MALAWI

FOR

THE SECOND FISCAL RESTRUCTURING AND DEREGULATION PROGRAM

AND THE

'.ECO\D FISCAL RESTRUCTURING AND DEREGULATION PROGRAM TECHNICALASSISTANCE PROJECT

NOVEMBER 10, 1998

Tlhis document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWVorld Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 1, 1998)

Currency Unit = Malawi Kwacha (MK)US$ I = MK42.875MK I = US$0.0233

SDR I US$1.369863

MEASURES

Metric System

FISCAL YEAR

July I to June 30(as of July 1998)

Vice President :C allisto E. MadavoCountry Director :Barbara KafkaSector Manager :Ataman Aksoy

Task Team Leader : Ahmad Ahsan

FOR OFFICIAL USE ONLY

GLOSSARY OF ACRONYMS

ADMARC Agricultural Development and MIarketing CorporationBOP Balance of PaymentsCAS Country Assistance StrategyCBM : Commercial Bank of MalawiCOMESA Common Market for Eastern and Southem AfricaESAF Enhanced Structural Adjustment FacilityESCOM Electricity Supply Corporation i(previously, Commission).GDP Gross Domestic ProductGOM Government of MalawiHIAL High Impact Adjustment LendingIBRD International Bank for Reconstruction and DevelopmentIDA International Development AgencyIDF Institutional Development FundlIMF International Monetary FundLDP Letter of Development PolicyMDC Malawi Development CorporationMK . Malawi KwachaMPTC Malawi Posts and Telecommunications CorporationMT : Metric TonsMTEF Medium-Term Expenditure FrameworkOED Operations Evaluation DepartmentPAR Project Audit ReportPCR Project Completion ReportPFP : Policy Framework PaperPRP . Permanent Residence PermitPSD Private Sector DevelopmentRBM Reserve Bank of MalawiSPA Special Program of Assistance to Low-income Debt Distressed

Countries in Sub-Saharan AfricaTA : Technical AssistanceTEP Temporary Employment PermiitTOR Terms of ReferenceVAT Value Added Tax

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may nol: otherwise be disclosed withoutWorld Ban}c authorization.

MALAWI

SECOND FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (FRDP)AND FRDP II TECHNICAL ASSISTANCE

Table of Contents

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

II. ECONOMIC DEVELOPMENTS AND PROSPECTS ........................................2Box 1: Policy Reforms Undertaken by the Government Since 1994 .................. 3

III. THE REFORM PROGRAM ...................................................... 6

A. Improving Public Sector Efficiency ....................................................... 6Improving Public Expenditures ....................................................... 6Rationalizing Government Functions ....................................................... 8Tax Policy Reforms ....................................................... 9

B. Supporting Growth Through Private Sector Development .............................. 9.... 9Box 2: Policy Reforms Supported by FRDP II ......................................... 10Privatization ...................................................... 11Infrastructure Policy Reforms ...................................................... 12Agriculture Markets and Storage ...................................................... 13Maize Price and Marketing Reforms ...................................................... 14Facilitating Temporary Employment Permits ...................................................... 14

IV. IMPACT OF REFORMS ...................................................... 5 SBox 3: Overview of FRDP II: Instruments, Intermediate Targetsand Outcomes ...................................................... 16

V. DESIGN OF CREDIT, IMPLEMENTATION AND DISBURSEMENT ....... 17Lessons from Operations Evaluation Department Reports andthe High Impact Adjustment Lending ........................................... 17Relationship with the Country Assistance Strategy .......................... 18Disbursement Procedures and Implementation Arrangements ............. 18

VI. BENEFITS, RISKS AND GOVERNMENT OWNERSIHIP ........................... 19

VII. CONCLUSION ...................................................... 20

Annexes

Annex I Matrix of Policy Reforms

Annex II Government of Malawi's Letter of Development Policy

Annex 1I- I Expenditure Prioritization Targets in the 1998/99 BudgetAnnex II-2 Expenditure Prioritization/Medium Term Expenditure Framework

Preparation Plan for 1998/99Annex II-3 Expenditure Monitoring and Control ProceduresAnnex 11-4 Rationalization of Government FunctionsAnnex 11-5 Divestiture Sequence PlanAnnex II-6 Implementation Plan for Telecommunication Sector Reforms

Annex III Previous IDA Adjustment Operations in Malawi

Annex IV : Status of Bank Group Operations in Malawi: IBRD Loans and IDACredits in the Operations Portfolio

Annex V Statement of IFC's Committed and Disbursed Portfolio

Annex VI : Malawi at a Glance

Annex VII : Malawi Social Indicators

Annex VIII : Key Economic Indicators and Key Exposure Indicators

Annex IX Balance of Payments

Annex X : Procurement and Disbursement Procedures for the FRDP II TAProject

Map IBRD No. 29374

The FRDP II credit and the FRDP II TA Project were prepared by an IDA team consisting ofAhmad Ahsan (Senior Country Economist and Task Team Leader, AFTMI), Peter Moll (CountryEconomist, AFTM 1), Tejaswi Raparla (Research Analyst, AFTM 1), Rose Thunyani (Senior TaskAssistant, AFTM1), Elizabeth Adu (Principal Counsel, LEGAL), Steve Gaginis (DisbursementOfficer, LOAAF), Jim Smith, Deputy Resident Representative (AFMMW), MaxwellMkwezalamba (Economist, AFMMW),. Stanley Hiwa (Agricultural Economist, AFMMW),Ahmet Soylemezoglu (PSD Specialist, AFTPI), Arnold Sowa (PSD Specialist, AFTPI), PaulBermingham (Principal Financial Analyst, IEN), Anna Bjerde (Economist) and Paivi Koljonen(Economist, AFTGI). Peter Miovic (Sector Manager, AFTM2), Gene Tidrick (Lead Specialist,AFTMI), and Shahid Yusuf (Economic Advisor, DECVP) were reviewers. Overall supervisionand guidance were provided by Robert Liebenthal (Resident Representative), Ataman Aksoy(Sector Manager) and Barbara Kafka (Country Director).

MALAWI

THE SECOND FISCAL RESTRUCTURING AND DEREGULATION PROGRAM CREDIT(FRDP II) AND THE SECOND FISCAL RESTRUCTURING AND DEREGULATION

PROGRAM TECHNICAL ASSISTANCE PROJECT (FRDP II TA)

SUMMARY

Borrower: Government of the Republic of Malawi

Guarantor: Not applicable

Beneficiary: Republic of Malawi

Amounts: SDR 65.7 Million (US$90 Million equivalent) and SDR 1.5Million (US$ 2 Million equivalent).

Terms andCommitment Charge: Standard IDA Terms, with 40 years maturity and I 0-year

grace period.

Co-financing: Co-financing discussions are taking place with the AfricanDevelopment Bank and the Overseas Economic CooperationFund of the Government of Japan. Staff from theseorganizations participated in the IDA Appraisal mission for thecredit.

Disbursement: The FRDP II Credit will follow the Bank's new simplifieddisbursement procedures for structural adjustment credits.Under the revised procedures the Credit will be disbursedagainst satisfactory implementation of the adjustment programand not tied to any specific purchases. Once the Credit isapproved by the Board, and becomes effective the proceeds ofthe first tranche of SDR 43.8 million will be deposited by IDA inan account at the Reserve Bank of Malawi at the request of theBorrower. The second tranche of SDR 21.9 million will bedisbursed after the second tranche conditions on expenditureprioritization, rationalization of Government functions andprivatization have been met. The disbursement and procurementprocedures for the FRDP II TA project are laid out in detail inAnnex X of the text.

Objectives: The proposed programs will support policy reforms to accelerateeconomic growth and poverty reduction and technical assistanceto help implement policy reforms. The adjustment credit aims tomaintain the momentum of policy reforms launched byGovernment of Malawi since 1994 by improving public

expenditure management and promoting private sectordevelopment. The credit will help to meet the balance ofpayments financing requirements that Malawi faces this year thathave increased due to a sharp fall in export earnings, and toimplement policy reforms by maintaining economic stability andmitigating the transitional costs of adjustment.

Objectives FRDP IITA Project: FRDP II Technical Assistance Project has been designed to

provide necessary technical support, training and equipment tomeet three objectives: (i) implement policy reforms, includingthe medium term expenditure framework, auditing andreviewing the development budget, reforrning expenditurecontrol procedures and systems, and implementing civil servicereforms; (ii) evaluate the impact of structural reforms onMalawi's economy, in particular by examining the effects ofliberalizing trade and exchange rate policy on manufacturing,and liberalizing agriculture production and trade on theagriculture sector; and (iii) develop the agenda for the next oundof macroeconomic and sectoral policy reforms through researchinto further constraints to growth. A separate proposedPrivatization Technical Assistance Project (US $ 10 million) willprovide assistance to implement the privatization program.

Government Commitment: The Government of Malawi has a credible track record ofimplementing policy reforms (see Box 1, pp. 3 of President'sReport). The FRDP II credit is primarily based on detailedreforms programs prepared by the Government in the areas ofexpenditure management, rationalization of Governmentfunctions and privatization. Following this, the basis of the legaldocuments, the Development Credit Agreements has been theGovernment's Letter of Development Policy which details, inthe text and in Annexes all these reforms. This ownership of thedesign of the program will be publicly affirmed by theGovernment issuing and disseminating a White Paper (inNovember 1998) presenting this reform program to the people ofMalawi. The Cabinet Committee on the Economy will overseethe implementation of the FRDP II as a key part of its overalleconomic reform program. This committee will be assisted by aTask Force of officials led by the Ministry of Finance tosupervise and to coordinate the implementation of the program.

Benefits: The reform program, supported by this credit, will benefit thepeople of Malawi by leading to accelerated reduction in povertyin two ways: (i) helping to create conditions -- macroeconomicstabilization, improvement in infrastructure and major advancesin privatization --for a broad based GDP growth of between 5% -6% p.a. in the 1999 - 2001 period; this high case scenario

ii

should, ceteris paribus, lead to a decline in the poverty headcount ratio from 43% to roughly 38% of the population in thenext five years; and (ii) by improving the targeting of publicexpenditures and Government s:rvices towards the poor.

Risks: The key risk arises from the possibility that the commitment topolicy reforms may be unsteady, especially in the face ofapproaching elections in May 11999. However, in early 1998, thepolitical economy changed mairkedly as a reconstructed cabinetcommittee on the economy has now the authority to make andimplement key decisions on the economy. Nevertheless, in therun up to the elections these ris:ks will persist: there will be, interalia, pressures to relax expendliture controls, provide subsidieson inputs and on credits to farmers, avoid difficult decisions inareas such as retrenchment of unqualified civil servants, and selllarge assets to non-indigenous persons.

However, these political risks are moderated by the GOM'sappreciation of the gains that can be obtained throughimplementing these reforms and by making the people aware ofthe benefits of these reforms. Government can get credit forwelfare improvements from directing public expenditures togoods and services that benelit the poor, and lead to a moreequitable distribution of income and opportunities, generatinggrowth and employment through deregulation and private sectordevelopment, implementing safety net programs to help the poorsuch as the starter packs program of 1998/99 that will distribute0.3% of GDP in input packages to smallholder households,expanding the public works program and the smallholder credit,and providing a temporary subsidy to Government sales ofmaize to ease the burden of a sharp increase in prices.

The second risk arises from the lack of capacity to implementthis multi-pronged operation. This risk is being addressed byproviding technical assistance and by setting up a high levelGovernment body to oversee the implementation of thesereforms and mobilize necessary resources for doing so.

The final set of risks are posecl by exogenous shocks such as theeffects of drought or large terms of trade losses, such as thosebetween 1992 and 1994, and 1998, on savings, investment andgrowth. The risks posed by these exogenous shocks are bestaddressed in the long run by economic growth, employment anddiversification through implenmenting structural reforms that aresupported by this credit. In the short run the disbursements fromthis credit will provide the economy a buffer against theseshocks and thereby help the Government maintain the course ofreforms.

...

REPORT AND RECOMMENDATION OF TH[E PRESIDENT OFTHE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 65.7 MILLION(US$ 90 MILLION EQUIVALENT) TO THE REPUBLIC OF MALAWI FOR

THE SECOND FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (FRDPII) AND SDR 1.5 MILLION (US$ 2 MILLION E]QUIVALENT) FOR

THE SECOND FISCAL RESTRUCTURING AND DEREGULATION PROGRAMTECHNICAL ASSISTANCE PROJECT (FRDP II TA)

I. Introduction

1. This memorandum seeks approval to extend a SDR 65.7 million (US$ 90 millionequivalent) structural adjustment credit to Malawi in support of policy reforms to accelerateeconomic growth and poverty reduction, and a Technical Assistance Project of SDR 1.5million (US$ 2 million equivalent) to help implement poliicy reforms.' The credit aims tomaintain the momentum of policy reforms launched by the (Government of Malawi since 1994by improving public expenditure management and promoting private sector development.The credit will help to meet the balance of payments financing requirements that Malawi facesthis year that have increased due to a large fall in export earnings, and to implement policyreforms by maintaining economic stability and mitigating the transitional costs of adjustmnent.

2. The proposed credit will support Government's policies to reduce poverty in threeways. First, by creating the policy environment for higher private sector investment andefficiency, leading to a sustained and diversified growth of GDP of around 5 to 6 % per annum-- without which there may be no reduction in poverty in Malawi.2 Second, by supportingGovernment policies to redirect expenditures into social sectors and programs that benefit thepoor. The targeted growth rate combined with a better targeting of public expenditures to thepoor -- i.e. a more equitable distribution -- should lead to an accelerated reduction of poverty.Third, the financing of the credit will help Government to maintain macroeconomic stability ina year affected by a large terms of trade shock (a 28% drop in tobacco prices) and a US$ 60million (over 3% of GDP) cut in export earnings.

3. This credit comes at a critical period, when Malawi is at a crossroads: it can deepenreforms launched in 1994 which led to economic stabil:ity, and liberalized the economy,especially in agriculture, with impressive results (see Box 1, pp. 3). Or Malawi can slip into acostly period of instability and lost growth, as it did in the second half of 1997 and early 1998.A broad range of key policy reforms undertaken by the Government in recent months (see Box2, pp. 10) underscores the Government's renewed commitment to deepen structural reformsand sustain growth and poverty reduction.

' The implementation of these policy reforms will also be supported by technical assistance provided from othersources such as the Institutional Development II credit ($22 million), and the proposed Privatization TA credit(US$ 10 million).2 The study, "Accelerating Malawi's Growth" (September 1997) showed that, with unchanged incomedistribution and population growth, Malawi needs an annual growth rate of GDP of 5.3% to reduce the absolutenumber of people living below the poverty level.

4. Malawi went off-track its macroeconomic program in December 1997, during a periodof uncertainty and large expenditure overruns. In March 1998, Government appointed a neweconomic management team with wide authority to design and implement stabilization andstructural reforms. Subsequently, in May 1998, the Government and the IMF agreed on a StaffMonitored macroeconomic program that, after satisfactory implementation, will now lead tothe renewal of the third year arrangement of the current Extended Structural AdjustmentFacility (ESAF). The staff papers recommending approval of this arrangement will be issuedto the IMF Board in early December 1998 for their Board meeting in mid-December 1998.Given that Malawi is implementing a satisfactory medium term macroeconomic frameworkand has started implementation of wide ranging structural reforms, and that there is a seriousforeign exchange shortage that can destabilize the economy over the medium term unlessquick balance of payments support is provided, this adjustment credit is being submitted forconsideration by the Bank's Board of Directors two weeks ahead of the Fund Board'sconsideration of the third year ESAF Arrangement.

II. Economic Developments and Prospects

5. In the first 15 years after independence in 1964, Malawi's GDP grew at an averageannual rate of nearly 6%. But the fruits of this growth were poorly distributed3, and growthitself was narrowly based on estate ownedagriculture, and large public and private Table 1: Some Economic and Social Indicatorsconglomerates protected by pervasive barriers Economic Indicators Malawi SSA

to entry. As a result, at the end of this period Per capita income (USS) 220 490

Malawi emerged with one of the worst sets of Population (millions) 10.3 583human welfare indicators in the world [See of which urban % 13 31

Table 1 and Annex VII for datal. Then, Agriculture as % of GDP 32 24

starting in the late 1970s, Malawi suffered from Social Indicators 13 30

a series of exogenous shocks -- high import Life expectancy (years) 43 52costs due to disruptions in trade routes, oil Adult illiteracy (%) 43 44

price shocks, the influx of refugees from Infant mortality rate (per 000) 133 91Mozambique, and droughts -- that disrupted Child mortality rate (per 000) 225 157

Access to safe water (%) 54 47even this pattern of growth. Since 1981, Primary enrollment (%) 81 75Malawi has been implementing policy reforms, Male 84 82supported by successive adjustment credits, to Female 77 67stabilize and restructure its economy, but with HIV prevalencelittle sustained success. These policy reforms among sexually active adults(%) 13 na

and .Iwomen in urban antenatal 3 1 namainly aimed to stabilize the economy, and care clinics(%)liberalize international trade, investmentlicensing and financial markets, whileneglecting important structural regulatory constraints and entry barriers in product and factormarkets. The results were poor, and the growth rate of GDP during the 1981 -1994 period was2.4% per annum, well below the annual population growth rate of 3 %.

3 Malawi's Gini coefficient of 0.62 makes its income distribution among the worst in the world

2

Box 1: Policy Reforms Undertaken by Government Since 1994

Fiscal, External Sector and Financial Policy Reforms* Implementation of stabilization policies that have brought down fiscal deficits (before grants) from 28 % of

GDP (1994/95) to 8% of GDP (1996/97), before increasing it again to 12% in 1997/98.* Reforms in tariff and surtax policies, that have reduced average weighted statutory tariffs from 19% 1994 to

around 14 % currently. Surtax refonns extended the base and rationalized rates.* In expenditures the share of education and health sectors increased lFrom around 14% of expenditures to 26%

in 1997/98. A medium term expenditure framework was introduced to manage expenditures.* The exchange rate was floated in 1994 and Malawi attained current account convertibility in 1995.* A treasury bill market was successfully launched avoiding inflationary borrowing from the Reserve Bank.* The stock exchange was opened in 1996.* Export processing zone (s) were introduced, while the processing oiF export duty drawbacks was improved to

increase incentives for exporters. There is now a fledgling export oriented manufacturing sector in garmentsand cut flowers.

Civil Service Reforms* The ci-il service structure has undergone significant changes as 20,1300 new teachers were appointed in place

of 20,000 other temporary employees who were laid off.* A Civil Service Reform Action Plan was adopted and is now being implemented. Under this, the common

services cadre was abolished enabling better accountability and management in professional services.- The completion of the first phase of the Functional Reviews of the Government and rationalization of

Government ministries was completed in 1996. Based on that the number of Ministries have been reducedfrom 27 (June 1997) to 19 (March 1998).

Agriculture- Restrictions on smallholder production of tobacco were removed by amending the Special Crops Act* Restrictions on private trading in fertilizer, seeds and burley tobacco were removed.- Subsidies on fertilizer were removed.* The agriculture financing system was revamped by introducing the Malawi Rural Finance Company on a

sound financial basis in place of the Smallholder Agriculture Credit Authority that went bankrupt.

Transport, and Private Sector Development* The Malawi Railways a parastatal, previously a big drain on Government finances, was restructured. A new

company was formed, and will be transferred to private management as a concession by end- 1998.* The minimum freight charges on domestic transport were eliminated (1996), and imports of second hand

transport and equipment were deregulated, leading to more competjition and services.* A Privatization Law was passed (1996) laying the legal foundations and the institutional framework for

privatization. Some 25 companies have been privatized.

Social Sectors* Primary education was made free in 1994. In response, enrollment increased by nearly a million.* Government has also launched a secondary education expansion program to accommodate the rising number

of primary school graduates (1997).* A Social Action Fund (MASAF) is being used to help organize and finance 988 (as of June 1998)

community demanded projects and support public works. The communities play a critical role in designingand funding these projects in building classroom, boreholes, clinics, roads and irrigation.

* A Poverty monitoring system has been launched to measure changes in the welfare of the people throughregular household surveys.

3

6. Since 1994, however, with the advent of new political leadership, the pace of reformsaccelerated significantly (See Box 1, previous, for details). Supported by IDA adjustment --the Fiscal Restructuring and Deregulation Credit approved in April 1996 -- and investmentcredits, the Government removed restrictions on small-holder production of burley tobacco andother cash crops, liberalized the trading of agriculture outputs and inputs, launched majorprograms of privatization, civil service reforms and expenditure prioritization, implementedsubstantial tariff and surtax reforms, and attained current account convertibility. At the sametime, large investments in education, health and community development took place.

7. The economy responded well to these reforms. Macroeconomic balances werestabilized as fiscal deficits (before grants) were reduced from 28% in 1994/95 and 15% in1995/96 to around 8% in 1996/97, mainly through expenditure adjustments. The averageannual inflation rate4 fell from 83% in 1995 to 9 % in 1997, interest rates declined and theexchange rate, floated in 1994, was stable as foreign exchange reserves rose to more than fourmonths of imports by end 1996. Growth averaged more than 10 % p.a. in the last three year(1995 - 1997), although around a third of this growth was based on recovery from the 1994drought. Equally significant, this recent growth has been more broad based and diversifiedthan anytime in the past, and is being led by the small-holder economy and the service sector.Smallholder production of burley tobacco -- the most valuable cash crop produced by Malawi -- has increased threefold since 1993. This has injected US$ 185 million in earnings in the lasttwo years into the smallholder economy, and generated growth of trading, markets and othersecondary activities in the countryside. A non-traditional exports sector has emerged,exporting garments and cut flowers and has grown by 80% in US Dollar terms between 1995and 1997, albeit starting from a small base.

8. But macroeconomic performance slipped again in the second half of 1997 mainly as aresult of loss in expenditure control. A higher than budgeted wage bill, excessive travelrelated expenditures, and a shortfall in income tax collections resulted in an increase in the1997/98 fiscal deficit to 12 % of GDP, while the primary deficit' -- targeted to be zero -- was4.6% of GDP. At the same time gross official foreign exchange reserves declined to 2.1months of imports of goods and non-factor services at end-1997 and the exchange ratedepreciated by nearly 60% in 1998. This large depreciation reflected the correction of thepreviously misaligned rate, terms of trade losses, depreciation in the currencies of majortrading partners as well as lack of confidence in the private sector on the Government'scommitment to stabilization and reforms.

9. In addition to continuing problems in expenditure management, Malawi's growthprospects confront deep-rooted structural problems, vulnerability to shocks and an overallinhospitable climate for the private sector. This is reflected in low private fixed investmentand gross domestic savings rates which have averaged around 4 % (gross private investmentincluding inventories was more than 3% of GDP) and 1.5% of GDP6 respectively, in the last

4 The change in the average annual CPI index over the previous year's average CPI index.5 Primary deficit is defined as overall deficit less interest payments and foreign financed developmentexpenditure: (All Expenditure - Revenues) - (Interest Payments + Foreign Financed Development Expenditures).6 This refers to only the measured investrnent which probably underestimates investment in smallholderdwellings, the purchase of transport (e.g. the large sale of bicycles in the countryside) and other such activities.

4

two years.' Crowding out by high Government consumption and domestic borrowing (5% ofGDP in 1997/98), a shallow and oligopolistic financial sector, deteriorating infrastructure, thedominance of inter-locking public sector ownership in production, trade and finance, andbureaucratic red tape all deter private investment and savings. Malawi's economy also remainshighly vulnerable to shocks: as in 1998, there were also large income losses between 1992-1994 (cumulatively 10% of GDP) due to deterioration in terms of trade. Poor rainfall in 1997led to a 23 % drop in maize production -- the main staple. Hence a key task clearly is toaccelerate the diversification of the economy to make it less vulnerable to such shocks.

10. As noted, Government launched wide ranging reforms in 1995 and 1996 supported bythe last IDA adjustment credit, the Fiscal Restructuring and Deregulation Program. This newcredit will complement the previous adjustment credit by focusing more on reforns to promoteprivate sector led growth in the non-agriculture sector, through accelerating privatization andinfrastructure development thereby diversifying the economy and making it less vulnerable toshocks. Alongside, public sector management reforms will increase the focus of Governmentfunctions and expenditures on public goods and services, and strengthen expendituremonitoring and control systems.

11. This program of policy reforms is also underpinned by a strong stabilization program thatis expected to be supported by the renewal of the IMF ESAkF program. Under this programGDP growth, expected to decline to 4% in 1998, is projected to increase to around 5% in 1999and even higher thereafter as the economy adjusts to exchange rate depreciation and the exportprice shock of 1998. The primary fiscal balance in 1998/99 is expected to improve by around4.5 % points of GDP, compared to 1997/98, even though the budget accommodatesGovernment expenditure for the May 1999 elections, an increase in development expendituresand provision for a temporary subsidy on maize sold from Government stocks as a socialsafety net measure 8. The program includes a large repayment of domestic Government debt(by over 6% of GDP in 1998/99), which will ease pressure on interest rates and the exchangerate, an increase of external reserves to more than 3 months of imports of goods and non factorservices by end of 1998 and to around 4 months by end-1999, and a tight monetary policy --with declining net domestic assets in 1998 -- which still accommodates a real increase of creditto the private sector. Inflation is expected to average around 30% in 1998 and then decline toaround 25% in 1999 as the effects of the 1998 exchange rate depreciation is expected to causehigh inflation in the first half of 1999. The program is also expected to supported through1999 by an increase of external assistance to around US $ 340 million in 1999 both throughlending and grants. Malawi's external debt burden is high vhich makes it a severely indebtedlow income country. However, debt sustainability anal,ysis carried out for the last CAS(August 1998) have confirmed previous findings that M:alawi's external debt position isexpected to improve over the medium term, thereby making it ineligible for the HIPCinitiative. Given Malawi's borderline situation, Malawi's debt position will be continuouslymonitored. The next debt sustainability analysis will be undertaken before end-1998.

7Private total investment has averaged around 8% in the past three years. However, this includes nearly 3% ofinventory changes.' The landed price of maize imports has increased by nearly 100% in 1998/99 mainly because of depreciation.The maize subsidy thus cushions maize buyers by allowing more graduail increase in the price of maize in oneyear.

5

III. The Reform Program

12. The proposed credit supports structural reforms in two main areas: (a) public sectorreforms to improve the quality and management of public expenditures, restructureGovernment functions and the civil service in line with priorities; and (b) private sectordevelopment reforms through privatization and improving infrastructure policies (Box 2, p. 10provides a full list of the policy reforms undertaken under this credit). A complementarypackage of investment operations and technical assistance is designed to help implement thesemeasures and longer term institutional reforms [See Annex I]. These reforms are based onconsultations with stakeholders during the preparation missions and discussions on the August1998 Country Assistance Strategy.

13. The main analytical underpinning of the credit has been provided by the study,"Accelerating Malawi's Growth" (September 1997). This study concluded, inter alia, that awide range of policy reforms was needed to promote high investment and growth ratesincluding (i) good fiscal management, i.e. keeping budget deficits low, avoiding domesticfinancing of deficits, and prioritizing expenditures to ensure adequate funding of key socialsector items; (ii) improving land policies to encourage higher utilization of estate lands throughfacilitating sale and sub-lease arrangements, streamlining land transfer and titlingrequirements; (iii) improving infrastructure services and inviting private sector participation ininfrastructure; and (iv) increasing the supply of industrial land sites and streamliningprocedures for the approval of employment of skilled expatriate workers. The proposedreform program focuses on some of these key recommendations: improving expendituremanagement, accelerating privatization and private sector development, and improvinginfrastructure.

A. Improving Public Sector Efficiency: Expenditure Policy Reforms,Rationalization of Government Functions and Tax Reforms.

14. Improving Public Expenditures: Improving the quality and management of publicexpenditures is among the most important challenges facing Malawi. A significant positiveshift in public expenditures has taken place in favor of the social sectors in Malawi as the shareof education and health increased from 14% of all aggregate expenditures in 1993/94 to aplanned 29% in 1998/99. As a result, the share of Malawi's expenditures in social sectorscompares favorably with many other countries. Hiowever, public expenditures have continuedto be a problem in three respects.

15. First, public expenditures and functions have been thinly spread over too manyactivities. Given existing trends, recurrent expenditures are expected to be 20% less thanrequirements in 2005 even after assuming that non-essential areas are excluded. Criticalexpenditures on public goods (such as road maintenance, which received only 40% of itsrequired expenditure in recent years) and key social sector programs where there are strongexternalities -- such as primary education, and primary health care programs -- have beeninadequately funded. The full implementation of the Government's secondary school

6

expansion program would require that education's share of the recurrent budget rise from 23%at present to nearly 40% in the next three years, if cost recovery is not improved.

16. Second, as there will be probably be a cut in the goods and service budget in real terms inthe 1998/99 fiscal year, compared to 1997/98, it becomes even more important to prioritizeexpenditures.9 Without prioritization, such expenditure cuts can become unsustainable anddamaging. Third, weaknesses in prioritizing the budget have been compounded by poorexpenditure monitoring and control procedures. As a result, actual expenditures deviatedsharply from budgets, as in 1997/98 when travel and travel related expenditures were 50%higher than budgeted in the first nine months of the fiscal year, while expenditures on teachingand learning materials were only 40% of what had been budgeted.

17. Government has used the Medium Term Expenditure Framework (MTEF) -- introducedunder the FRDP credit, to prioritize expenditures in the last three years. First introduced in theplanning for recurrent expenditures only in four ministries in 1996 and then gradually extendedto other Ministries, the MTEF introduced a process of strategic thinking under which key goalsof the Ministries were defined and mapped to programs and sub-programs. The costs of theseprograms were to be estimated and prioritized within the overall resource envelope dependingon their relevance to the objectives. This exercise was to provide the basis for activity basedbudgeting and prioritization of expenditures based on the importance of these activities. Allthese steps represent important advances.

18. However, the MTEF process was undermined in the past by some serious weaknesses inimplementation including: (i) lack of involvement of senior managers -- both Ministers andcivil servants; (ii) lack of clear decisions on inter-sectoral and intra-sectoral allocations basedon explicit choices and trade-offs under which expenditures in non-essential items are reducedsharply or completely cut providing room for more expenditures in priority areas; (iii) lack ofclearly defined and prioritized strategies, programs and outputs of Ministries and the costing ofsuch programs and outputs; (iv) delays in preparing and forecasting the sectoral allocations andindicative ceilings in a timely manner; and (v) failure to effectively integrate the developmentbudget and the programming of aid resources into the MTE,F budget. As a result, the MTEFturned into more of a pro forma accounting exercise than a strategic resource allocation plan.

19. The Government is now addressing these problems. The MTEF has been madecomprehensive and integrated with the budget process. Two rounds of expenditureprioritization for the 1998/99 budget increased allocations of expenditures on current non-wage expenditures for agriculture (by 22% over previows year), health (24%), education(49%), and police services (23%) sectors. The expenditure on road maintenance has beenincreased sharply by over 100% and is expected to meet around 75% of road maintenancerequirements. At the sub-sectoral level, allocations have been increased or maintained in realterms for high priority items such as provision of teaching and learning materials in primaryand secondary education, drugs, preventive medicine progrems, water and sanitation, and roadmaintenance; [Annex II. 1 of Letter of Development Policy (LDP) shows details of expenditure

This large cut arises from the need to accommodate expenditures on the national and local Governmentelections that will take place in May 1999, and an increase in the wage bill of more than 20%.

7

prioritization]. At the same time, non-essential public expenditures in all other sectors, andespecially in foreign affairs, works,. office of the Vice President, and other administrativedepartments have been reduced or eliminated. In addition, the Government has introducedclear procedures that engage both the Cabinet and senior civil servants in preparing the1999/2000 MTEF through prioritizing programs, costing them and allocating resources in linewith priorities and within indicative ceilings that are provided early, and integratingdevelopment and recurrent budgets in a consistent manner [See Annex 11.3 of LDP for detailsof the medium term expenditure framework implementation plan].

20. Alongside expenditure prioritization, new expenditure monitoring and controlprocedures have been introduced to ensure that actual expenditures are allocated as budgetedunless explicitly sanctioned by approved virement procedures [See Annex II.2 of Letter ofDevelopment Policy for details of new expenditure monitoring and control procedures].Under the new system, monthly expenditure data from Ministries, especially on core programsand major areas of deviation, are received and distributed to the Special Cabinet Committee onthe budget and the Finance and Audit Committee of Principal Secretaries by the 25th of thefollowing month to identify, correct or approve deviations (if expenditures are more than 10%above or 25% below pro-rated budgeted levels). There has also been agreement on reportingarrangements between the Government and the World Bank on key targets. In the area ofexpenditure controls, Government has issued clear instructions to enforce virement rules andpunitive measures against violators. Alongside, a circular has also been issued notifying thatall Government procurement will be done on a cash basis. Lastly, and most significantly, theSpecial Cabinet Committee on the Budget has been made responsible for reviewing allrequests for extra-budgetary expenditures -- the source of most expenditure overruns in the lastyear -- and approving them only after financing from expenditure cuts elsewhere or additionalresources have been explicitly identified.

21. Rationalizing Government Functions: Rationalizing government and civil servicefunctions in line with the new more focused definition of the role of the Government is anotherkey area in need of reform, and one directly related to expenditure prioritization andgovernment efficiency. The problem in Malawi is not so much with the size of the civilservice, but more with the breadth of its functions and its composition. There are 120,000civil servants in Malawi (population: 10.6 million) of which some 55,000 are teachers, healthworkers and police personnel. However, lack of focus in Government functions results inunderstaffing in priority areas (e.g. nurses, teachers and police), but overstaffing and wagecompression in general. Lack of clear job descriptions and accountability, inadequate linkagebetween performance and career path, inadequate salary levels and a compressed salarystructure, and the lack of adequate training of the civil service all lead to deterioratingefficiency and morale.

22. The Government has been undertaking civil service reforms since 1995, under whichthe composition of the civil service has changed significantly as 20,000 temporary employeesand industrial class workers were retrenched and replaced by school teachers. Under thepreceding adjustment program, the FRDP I, the Government prepared a Civil Service ReformAction Plan that is now being implemented. Accountability of civil servants has beenincreased by eliminating the common service cadre, and establishing clearer, specialized career

8

paths within Ministries. Some 3,300 civil servants have been discharged in the past two yearsas a part of the rationalization of the civil servants. A civil service salary and a job evaluationstudy is to be completed by December 1998 to prepare for clearer job definitions and civilservice salary reforms and wage decompression. The number of Ministries has beenconsolidated from 27 to 19, though without significantly adjiusting the size or composition ofthe civil service. Consequently, the effectiveness of this reduction has been limited.

23. Government is now undertaking a program of eliminating, privatizing and outsourcingfunctions, agencies and departments. Progress in this area has been held up by delays incompleting detailed functional reviews of Ministries (a condition of rationalizing fourGovernment services was waived before disbursing the second tranche of the previousadjustment credit). But now, based on recommendations from the detailed functional reviewsof five major ministries and the overall strategic review of all ministries undertaken in1996/97, the Government has taken the decision to eliminate, outsource or privatize 47functions [See Annex 11.4 of Letter of Development Policy] in five major ministries that nowemploy more than 60% of the civil service. The rationalization of 30 of these functions isexpected to be carried out by end-March 1999. The civil service composition and deploymentwill also change through a program for the separation and recruitment of civil servants in linewith priority functions. The budget includes provisions for separation benefits.

24. Tax Policy Reforms: Government has continued tariff and surtax policy reforms toincrease efficiency of the tax system while protecting revenues. Tax policy -- especially hightaxes on raw materials, intermediate and capital goods comb:ined with low taxes on final goodsfrom COMESA countries and other countries with which Malawi has bilateral agreements -- isroutinely cited by the private sector as among its top constraints. There has been steadyprogress in this area as average weighted tariffs have decreased from 19% to 14% while surtax(which credits taxes paid on inputs, like a VAT) rates halve been rationalized and the baseextended. In April 1998 the Government eliminated all taxes on exports which it firstintroduced in 1994 as a temporary fiscal measure.

25. In the 1998/99 budget, the maximum tariff rate on consumer goods was reduced from35% to 30%, while those on selected intermediate goods, raw materials and capital goods wasreduced from 10% to 5 %. Combined with the removal of the export taxes, this tariff reductionamounts to major gains in promoting Malawi's internationa]b trade. The revenue shortfall willbe partly offset by another extension of the base of the surtax that presently covers onlymanufacturing and imports. The planned introduction of a well staffed, properly funded andmotivated Malawi Revenue Authority is also expected to, improve revenue collection andefficiency of the tax system.

B. Supporting Growth through Private Sector Development

26. The 1997 study, "Accelerating Malawi's Growth" concluded that raising private fixedinvestment would be a decisive condition for increasing GDP growth rates to the targeted 5-6% range. Second, it also concluded, that while agriculture (:35% of GDP) would be the main

9

Box 2: Policy Reforms Supported by FRDP IIImplemented Before Board (December 1998, US$ 60 million equivalent)

A. Fiscal Restructuring and Public Sector Management* Established expenditure level targets (specified in amounts and shares of expenditures that have been increased) on

key sub-sectoral items in education, health, roads and agriculture sectors in the 1998/99 budget. Identifiedexpenditure cuts to finance expenditures on priority sectors.

* Introduced agreed system to monitor (wage, and current expenditure targets on a monthly basis) and controlexpenditures, including monitoring of priority expenditures by IDA.

* Established agreed procedures and timetable for expenditure prioritization under the MTEF in 1999.* Started implementing policy to eliminate, outsource and privatize 47 specifically identified functions (30 by end

March 1999) activities, and agencies in the 5 major Ministries, and re-deploy civil service based on the detailedfunctional reviews.

* Reduced tariffs on final goods from 35% to 30%, on selected intermediate goods, raw materials and capital goodsfrom 10% to 5%. Changed all zero rated surtaxes (except on exports) to exempt (in the case of unprocessedagriculture sector goods, and merit goods) or to 20%.

B. Privatization and Deregulation* Approved and publicized a National Communications Policy statement. This policy, among other things, specifies

the Govemment's intention to offer a stake in Malawi Telecoms to a strategic partner, through an internationalcompetitive tender; licensed a second cellular operator introducing competition.

* Published the bill laying the proposed legal framework for implementing the approved communication policy, inparticular, to create a separate telecommunications regulatory body, to split posts and telecommunications intoseparate legal entities, and to facilitate further liberalization and private participation in the sector.

* Approved a detailed time-bound program, and implementation plan, to bring to point of sale a list of assets (the"divestiture sequence list") including banks, held by MDC, ADMARC, ADMARC Investment Holdings andimplementation of the communications policy, in particular finding a strategic partner for Malawi telecoms;

* Enacted Electricity Act that establishes independent regulatory body, invites private sector entry into the sector,licenses all electricity producers (including ESCOM) and distributors; corporatized ESCOM under the CompaniesAct.

* Initiated debt restructuring and adjusted tariffs to make ESCOM viable; started reorganization of ESCOM.* Gazetted a clear temporary employment permit (TEP) policy for expatriates such that all TEP applications are

responded to within 40 working days.* Announced policies to widen the maize price band for 1998/99 and reforms of maize marketing arrangement.

Before Second Tranche (April 1999, $ 30 million equivalent)

A. Fiscal Restructuring and Public Sector Management* Implement agreements of the first tranche on meeting agreed public expenditure targets in the first two quarters of

the 1998/1999 fiscal year, on public expenditure monitoring and control procedures, and preparing the MTEF.* Implement the rationalization of 30 Government functions as per agreed timetable.

B. Privatization and Deregulation* Implement agreed action plan for bringing to the point of sale government's interests in at least 15 enterprises.* Prepare privatization/commercialization program for ADMARC.* Implement agreed plan to reform telecommunications sector, as per first tranche (i.e. enact communications law,

appoint investment bankers/consultants to secure strategic partner for Malawi Telecoms).* Review Electricity law, in line with agreement with IDA, to establish clear procedures for licensing, tariff rate

adjustment mechanisms that provides adequate incentives to private investors and establishes autonomy ofelectricity council from the Government.

* Finish review of financial sector regulatory framework to identify reforms to strengthen and unify regulatoryframework, restructure and privatize the financial sector, and issue guidelines for the privatization of the two maincommercial banks - on the basis of the study agreed to in the first tranche.

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source of growth in the near term, growth would have to be driven by manufacturing and othernon-agricultural activities in the medium term and beyond.

27. Achieving these objectives will be a significant challenge, as private sectorperformance, especially in the industrial sector, has been weak, and measured private sectorfixed investment has been virtually stagnant since 1992 due lo several factors, as noted earlier:(i) the continued macroeconomic instability of the last few years that has crowded out privateinvestment, created price and exchange rate instability and generally signaled an unstableeconomic management; (ii) the continued presence and dominance of public or semi-publicparastatals that control most of the economy through their size, inter-locking ownership inproduction, trade and financial sectors; (iii) inadequate and deteriorating public sectorinfrastructure, especially in telecommurnlcations and power; (iv) regulatory obstacles to thesupply of key factors of production such as skilled labor and serviced industrial land sites;(v)the inefficient utilization of land in estates and inadequate land husbandry due to inequitableand unclear landholding rights, and (vi) interventions in the maize markets through large scalepublic sales at below market prices, taxing producers and maize traders.

28. The reform program supported by this credit addresses some of these areas through: (i)reducing fiscal deficits and eliminating domestic deficit financing, such that it can "crowd in"the private sector; (ii) implementing a privatization program including the shares of majorcommercial banks; (iii) preparing reforms in the financial sector regulatory framework that canmeet the needs of a more diversified and privatized financial sector; (iv) improvinginfrastructure services through commercializing and corporatizing operations and invitingprivate sector investment; and (v) promoting agricultural production and trade through a moreliberalized maize pricing policy. Problems on the supply of industrial land sites and landreforms will be addressed separately by the proposed private sector development project andreforms currently being prepared by the Presidential Commission on Land Reforms.

29. Privatization: Private sector development in Malawi has been constrained in thegeneration of new markets, capital, technology, and management partly because of thedominance of parastatal companies. While public sector parastatals account for around 20%of GDP, their influence is greater because of the oligopolistic nature of the formal sector inMalawi and the integration of these firms in inter-lockiing ownership of other firms inmanufacturing, agriculture, trade, transport and finance. At present, some 100 wholly orpartly public sector owned banks, transport companies, utilities and industries (in grainprocessing, textiles, chemicals, tobacco, tea, leather, building, and packaging) maintain adominating presence in non-agriculture economic activity in Malawi. In the case of thefinancial sector, Government owns around 70% of all assets, directly or indirectly through itsownership of public holding companies such as ADMARC Holdings and MalawiDevelopment Corporation (MDC). Interlocking ownership structures have resulted in the twodominant commercial banks, the National Bank and the Commercial Bank, which account formore than 90% of all banking sector assets, being controlled by Government, ADMARC, theMDC and the quasi-private PRESS corporation. Predictably, the level of efficiency of thefinancial sector -- measured by interest rate spreads and the limited range of financialinstruments -- is relatively low, while profit margins are high.

II

30. In 1996, the Government embarked upon an ambitious privatization program, executedby a Privatization Commission, but with modest success so far. Some 25 companies havebeen partially or fully privatized in the last two years. Nevertheless, compared to some othercountries in the region -- such as Ghana, Uganda, and Mozambique -- the pace of privatizationhas been slow and halting. While the Privatization Act has laid a clear legal basis, there isneed to accelerate the implementation of the privatization program. Moreover, until recently,the utilities, agriculture and financial sectors activities have been excluded. In the case of thefinancial sector, privatization is further complicated by the need to review and reform, asrequired, the regulatory framework in order to ensure that prudential standards meet the needsof the changing landscape where four new private banks have entered and the two main banksare being wholly privatized.

31. Under the FRDP II program the Government has accelerated the pace of privatizationby approving (in August 1998) and starting to implement a privatization plan, the "DivestitureSequence List" of assets, held by Government directly and indirectly through MDC andADMARC HoIdings'°(See Annex 11.4 of LDP for the list of firms and the timetable forprivatization). Under this plan, another 15 to 20 firms (including the concessioning of MalawiRailways, the sale of shares of Banks) will be offered for sale between October 1998 andMarch 1999. In the financial sector the Government has sold 12 % of the total shares in theCommercial Bank of Malawi (CBM) through the stock exchange and is expected to sellanother 14% of public sector shares in the National Bank of Malawi through the stockexchange before March 1998. Government subsequently plans to offer for sale all remainingpublic shares (24% in the Commercial Bank and 40% in the National Bank) in both banks tostrategic partners or through the stock exchange. The specific guidelines for privatizing theseremaining shares will be finalized by March 1999. Government will also complete a study byMarch 1999 on the financial sector regulatory framework to undertake needed reforms. Theaim will be to issue, by June 1999, regulatory reforms that meet the needs of the new postprivatized financial sector where four private banks and the further privatization of the twomain commercial banks will have brought new demands on the regulatory framework.

32. Infrastructure Policy Reforms: A survey of the private sector, conducted for the 1997World Development Report, identified the deterioration of Malawi's infrastructure to be theprincipal constraint to private business. There is one telephone line for every 300 people, onepay phone for every 22,000, virtually no service in the rural areas, and the waiting time for atelephone connection can be as long as ten years. The sector is dominated by the Governmentowned Malawi Posts and Telecommunications Corporation (MPTC), which acts as regulatorand sole provider of basic voice telephony services. It suffers chronic operational and financialproblems. It relies entirely on public sources of financing, and has little commercialautonomy. These poor telecommunication indicators severely undercut Malawi'scompetitiveness in today's global economy. In the power sector, the main supplier, ESCOMhas had difficulties in providing reliable power services resulting in large losses to industryand the economy. ESCOM has faced serious financial difficulties, making it difficult for it tomeet its maintenance needs, invest in new capacity, and service its debts.

'° ADMARC Holdings is a subsidiary of ADMARC which focuses on activities in the agriculture sector.

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33. Resolving financial and institutional problems such as the presence of a large foreignexchange denominated debt (in the case of ESCOM), and the lack of managerial and pricingautonomy that results in weak commercial orientation requires fundamental restructuring ofthese utilities. At the same time, the interest of foreign capital to invest in utilities indeveloping countries also presents an opportunity to increase investment and productivity,while freeing valuable public resources for other important public goods. However, enablingthis to happen will require clear Government policy and legislation to commercialize and, asappropriate, privatize whole or parts of these utilities, and allow private sector entry andcompetition in these sectors.

34. To achieve this in the telecommunications sector, the Government has approved aCommunications policy which provides for opening up all non-basic telecommunicationsservices (mobile, data, internet, paging) to new private service providers; the splitting of postsand telecommunications into separate businesses; securing an established internationaltelecommunications operator as a strategic partner for Malawi Telecom through aninternational competitive tender; improving access to conmmunications in the rural areas,through a combination of Malawi Telecom's service obligations once the strategic partner hasbeen' secured, licensing small local operators, more effective use of the postal infrastructure,increased deployment of pay phones, and other mechanisnms yet to be developed; and thecreation of an independent regulatory body. A bill has been published, and expected to beapproved by March 1999, that will lay out the legal framework for the implementation of theapproved policy. Simultaneously the Government will use the proposed PrivatizationTechnical Assistance Project to assist the Government in implementing these policies.

35. In the power sector the Electricity Act has been enacted, establishing an independentregulatory body (the Electricity Council) that will license alil electricity producers (includingESCOM) on equal terms. In the next stage of reforms Government will review the electricitylaw by end-March 1998 further clarifying licensing and tariff' setting procedures to increase thetransparency of licensing and tariff setting rules so that they give investors necessaryincentives and assurance. These revisions will also establish the autonomy of the ElectricityCouncil. The Government has taken steps to corporatize and commercialize ESCOM (nowcalled the Electricity Supply Corporation instead of the Electricity Supply Commission) byincorporating it under the Companies Act to establish commercial and managerial autonomy.The Government has also initiated financial restructuring of' ESCOM by converting a sectionof ESCOM's debt to Government to equity, adjusting ESCOM's tariffs (by 35% in July 1,1998) and another 35% (due in November 1, 1998) all of which will enable ESCOM to makeits financial position viable. ESCOM is also implementing an organizational restructuringunder which seven distinct cost centers have been set up to cover generation, transmission anddistribution.

36. Agriculture Markets and Storage: At present ADMARC is dominant in most ofmarketing and storage capacity in agriculture. It operates 344 markets and depots, and has astorage capacity of 468,000 tons, much of which is currently unutilized. In the 1996/97season, the agency used only 132,000 tons of space, of which 54,000 tons of space was rented

13

out. In addition, ADMARC's crop operations include profitable activities such as tobacco andcotton, which can provide a good base for private sector ownership. Historically, ADMARChas used its profits from these activities to support its development-oriented role. However,the significance of this latter role has lessened sharply over recent years; in the last yearADMARC acted mainly as a channel for Government's maize procurement, imports and saleswhere the costs were borne by the budget. At the same time as ADMARC's development roleis becoming ambiguous, its dominance in marketing and storage, deters the growth ofcompetitive, private trading.

37. To address these issues Government is now preparing a program by March 1999 for theprivatization and commercialization of ADMARC that will clearly identify ADMARC's assets-- markets, depots and marketing activities, such as tobacco, cotton and fertilizer -- forprivatization and their recommended mode of privatization. This program will seek toidentify 20 to 30 markets that are profitable and which could be immediately offered forprivatization through the privatization commission. The program will also recommendmodalities for privatizing and commercializing the rest of ADMARC in a time bound planwhile giving consideration to Government's objectives of using ADMARC, with necessarybudgetary subventions, to serve outlying markets and vulnerable areas.

38. Maize Price and Marketing Reforms: Government will continue the process ofgradually reducing its interventions in the maize market. It currently intervenes in the maizemarket through the wholesaling operations of the Strategic Grain Reserve (SGR), sales throughADMARC and by implementing a maize price band. The principle is that maize fromGovernment stocks and imports will be sold at the ceiling price of the band to containexcessive increases in consumer prices and purchased at the lower price band to supportproducer prices. In practice maize market interventions in the past year have suffered from thelow ceiling price of the band that discourages the supply of maize, as it deters imports byprivate traders and taxes producers. Partly as a result of these adverse incentives, lowersupplies of maize resulted in very high open market prices at the end of the season. TheGovernment has addressed this problem in two ways by increasing the selling price ofGovernment maize from MK3.95 per kg. to MK 6.50 per kg. for sale of small quantities inrural areas and to MK. 8.50 for sale in larger quantities in urban areas. While it is clear that theMK 6.50 price is below import parity price, the Bank has supported this subsidized price as atransitional social safety net measure to cushion the shock of the doubling of the landed costprice of this basic staple. For the next season, 1999/00 the Government has decided to replacethe SGR with the National Food Reserve Agency and to make it the principal instrument formaize market interventions that will take place on clearly established price based rules insteadof discretionary practice. The trigger prices for intervention will be the floor and ceiling pricesof the band which will be based on the export parity price and the import parity pricesrespectively, and which will be adjusted periodically.

39. Facilitating Temporary Employment Permits. Difficulties and uncertainties inemploying skilled expatriate labor are another major constraint to private sector activity inMalawi, where the secondary school enrollment ratio is only 1 1%, and expertise andexperience are scarce. Obtaining employment permits (called temporary employment permits

14

or TEPs) for skilled expatriate workers in Malawi has taken as long as two years and can act asa critical constraint for private sector activity, especially foreign investment. The difficultiesin obtaining TEPs are evident in that as of late 1996 there were only 54 TEPs issued to firms inthe manufacturing sector.

40. To address this constraint Government has undertaken the following measures tosimplify and liberalize the TEP approval process: (i) gazetting a clear, well publicized liberalTEP policy; (ii) making the approval of the "key posts" automatic through a separateapplication process; (iii) making the number of "key posts" to be determined not only by themagnitude of the investment but also by its level of exports; (iv) allowing existing companies,both Malawian and foreign owned, to have the same rights to, acquire TEPs as new firms; (v)restoring the rights of Permanent Residence Permit (PRP) holders to work in Malawi; and (vi)making the approval process time-bound such that all TEP applicants are responded to within40 working days of application. Government has also introduced a monthly monitoringsystem to enforce the implementation of this newly liberalizecl policy.

IV. Impact of Reforms

41. The reform program, supported by this credit, should lead to an accelerated reductionin poverty in two ways: (i) helping to create conditions -- macroeconomic stabilization,infrastructure improvements and privatization -- for a broad based GDP growth of between 5% - 6 % p.a. in the 1999 - 2001 period; this high case scenario should, ceteris paribus, lead to adecline in the poverty head count ratio from roughly 43% to 38% of the population in the nextfive years; (ii) by improving the targeting of public expenditures and Government servicestowards the poor. A GDP growth target of between 5 % to 6 % represents a pragmaticmedium term target in that it reduces the number of poor living in poverty, and also representsan attainable and reasonably ambitious target, in the light of recent experience. An overviewof the design of the credit and its expected impact is presented in the flow chart in Box 3 in thenext page. However attaining such a target will depend on the continuation of normalweather. Furthermore, given increasing prospects of slowdown of the global economy and itsdeleterious effects on demand for Malawi's exports, it is possible that actual growth rates inthe medium term will be lower than targeted. Nevertheless lthe reform program supported bythis credit will lay the foundations for sustained, higher rates of growth and poverty reductionin the longer term.

42. The key question is, of course, how can the Governmeint create the environment for thenecessary rate of private investment to support such a growth performance ? Here again pastexperience shows that proper fiscal management -- running low fiscal deficits and avoidingdomestic financing of deficits -- will be critical, along with a functional public sector that canenforce law, security and contracts, provide priorities such as proper maintenance ofinfrastructure and investments in human capital. A private fixed investment rate of more 7%of GDP, one that could support the targeted growth rate, was attained between 1988 and 1991.In addition to providing the macroeconomic stabilization policies to reattain this investmentrate, the reform program supported by this credit will also help to attain this target byproviding a more hospitable and competitive climate for the private sector to operate throughimproving infrastructure services (which itself will lead to increase in investment rates),

15

BOX 3: OVERVIEW OF POLICY REFORMS UNDER THE SECOND FISCAL RESTRUCTURING ANDDEREGULATION PROGRAM: INSTRUMENTS AND TARGETS

PoliCY Instmments Intermediate Tareets Outcome Tarsets

Private Sector Development* PrivatizinglOOparastatals(15-20,byMarch 1999) l privaeF1 xCd

h/Investment Rtsfo\/Broad based * Financial sector regulatory reform and privatization 4% of GDP (1997) to 7% GDP Growth of

* Liberalizing employment of skilled expatriates improving efficiency of a to 6% p.a\1~~~~~~~~~ investment/\/

Improving Ifmstnwcture Efficienc>* Reforming regulatory framework to promote private sector

entry into power and telecom sectors

* Commercializing power and telecommunications utilities

* Securing a strategic partner for Malawi telecoms Macroeconomic

t / / ~~~~~~~~~~~ ~ ~ ~ ~ ~~Stabilization Reuto .o. f* Low inflation and Reducton of

interest rates in second poverty ratesFical Restruduring halfof 1999 from 43% of* Maintaining primary fiscal balance * Stability in real population to at

effective exchange rate least 38% in 5. Reducing domestic financing of deficits and retiring \ Increase in real credit /ars.

domestic debt flows to the puivate /\sector/

* ImFroving budgeting, monitoring and control of\/expenditures, and financial control over pars-statals

Implement na the Medium Tenn Expenditure Greaterefficiency in ImprovedFramework and Functional Rationalization public spending and distribution of. Costing and prioritizing sector programs and outputs services: more public goods

expenditure goods and pbi od* Preparing three year expenditure frameworks services for priorities and and services

\ the poor(SeeAnnex Il- and income* Auditing, evaluatimg and integrating the Development \ .fordetails)

Budget with the recurrent budget and sector programs

16

creating opportunities for the private sector through privati2ation, and finally by facilitatingavailability of skilled expatriate labor.

43. The program supported by this credit will also support poverty reduction by making thepattern of growth more broad based and equitable. In the short run growth will continue to bedriven by the smillholder sector (which now produces burley tobacco and thereby enjoys thebenefits of exchange rate adjustments),. the growth of small scale trading and services in therural economy and creating more scope for the private sector through the plannedprivatization of government trading and cropping activities. These measures will benefit thesmallholder sector and improve income distribution as indicaled by the evidence from the pastfew years. Containing inflation will help to maintain food security of the bottom one-third ofsmallholders who are net buyers of maize. Lastly, improvements in the business climate alongwith trade reforms should encourage the private sectcor to develop labor intensivemanufacturing, strengthening the recent trend of garments and other exports. The share oflaborin income should increase from this development. Directing public expenditures to goods andservices that benefit the poor -- teaching and learning mateaials in primary schools, a moreexpanded secondary education program that is less costly and elitist but includes greaternumbers of primary school leavers, preventive medicine, and immunization should also lead toa more equitable distribution of income. Lastly Government programs will help the poor byexpanding targeted poverty and food security programs such as the starter packs program of1998/99, that will distribute 0.3% of GDP in input packages to smallholder households. Theresult of all this will be to lead to a faster reduction in poverty, than could be achieved throughan increase of incomes alone.

V. Design of Credits, Disbursement Procedures and Implementation Arrangements

44. The FRDP II credit has been designed to focus on two main critical areas: publicexpenditure and civil service reforms and reforms to generate private sector development. Thecredit will be disbursed in two tranches of $ 60 million in (December 1998) and $ 30 million(April 1999). The first tranche (see Box 2 in page 10) supports the implementation of publicexpenditure management reforms and civil service reforms, wrhile at the same time it initiatesprivate sector and infrastructure reforms through key policy decisions. The second tranchewill follow implementation of policies in public expendilture management, civil servicereforms and private sector development reforms against specified benchmarks. This designwas adopted after consideration of an alternative: simultaneously processing two adjustmentcredits, one focusing on public sector and expenditure management and the other on privatesector development issues. However, processing two operations simultaneously would haveover-stretched capacity in a year when the Government was engaged in restoringmacroeconomic stability and responding to a large terms of trade shock. At the same time,leaving out any one part of the reform agenda, expenditure management or the private sectordevelopment reform, would have significantly undermined the beneficial impact of theprogram.

45. The FRDP II Technical Assistance Project has been designed to provide necessarytechnical support, training and equipment to meet three olbjectives: (i) implement policy

17

reforms, including the medium term expenditure framework, auditing and reviewing thedevelopment budget, reforming expenditure control procedures and systems, andimplementing civil service reforms; (ii) evaluate the impact of structural reforms on Malawi'seconomy, in particular by examining the effects of liberalizing trade and exchange rate policyon manufacturing, and liberalizing agriculture production and trade on the agriculture sector;and (iii) develop the agenda for the next round of macroeconomic and sectoral policy reformsthrough research into further constraints to growth.

46. Lessons from OED and Review of High Impact Adjustment Lending (HIAL): Thecredit's design draws on important lessons from OED's Performance Audit Report on the lastcompleted adjustment credit (the Entrepreneurship Development and Drought RecoveryProgram closed in 1997) and its recent Country Assistance Note. These lessons include: (i)stabilization without structural adjustment is unlikely to be sustained; (ii) coordinated andsustained implementation of a broad range of policy interventions is a prerequisite to a relevantinvestment response; (iii) deficiencies in the financial sector, competitive environment, andprovision of infrastructure and services can forestall investment response; (iv) protection ofsocial expenditures and ensuring quality of expenditures is critical; and (v) using relevantmonitorable indicators is important for ensuring progress and success. The credit also drawson recommendations from the review of high impact adjustment lending and other OEDreports " in (i) being grounded in a multi-sector economic work, "Accelerating Malawi'sGrowth, and other sector work; (ii) obtaining Government commitment and ownership (seeparas. 50-51 below); (iii) arranging for broad consultations with civil society; and (iv) beingwell embedded in the country assistance strategy and supported by complementary credits inthe areas of infrastructure investment and private sector development.

47. Relationship with the Country Assistance Strategy and Supporting Credits: Theobjectives of this operation are the central objectives of IDA's Country Assistance Strategy.The policy reforms supported by this credit are supported by several ongoing and plannedBank investment and technical assistance credits. Expenditure prioritization and therationalization of Government functions are supported by technical assistance provided underthe Institutional Development II credit, and sector work under projects such as SecondaryEducation, Population Health and Nutrition, Agricultural Services, and the proposed RoadsRehabilitation Project. Tax policy reforms are being supported by assistance provided by IDA,IMF and the U.K. Privatization and private sector development are being supported byinvestment and technical assistance under an IDF grant for privatization, and by a plannedPrivatization Technical Assistance Project, and a proposed Private Sector Development projectcurrently under preparation. An IDF grant and the Environmental Support Project aresupporting land policy reforms. In addition the Malawi Social Action Fund credit, whichincludes a public works program, will serve as a safety net for people adversely affected bymarket liberalization -- such as through fertilizer and food price increases.

"World Bank Structural and Sectoral Adjustment Operations, The Second OED Overview, 1992.

I8

48. Disbursement Procedures and Implementation Arrangements: The FRDP IICredit will follow the Bank's new simplified disbursement procedures for structuraladjustment credits. Under the revised procedures the Credit will be disbursed againstsatisfactory implementation of the adjustment program and not tied to any specific purchasesand no procur,ment requirements will be needed. Once the Credit is approved by the Board,and becomes effective the proceeds of the first tranche (and in due course, the second tranche)will be deposited by IDA in an account at the Reserve Bank of Malawi at the request of theBorrower. If, after deposit in this account, the proceeds of the Credit are used for ineligiblepurposes as defined in the Development Credit Agreement, IDA will require the Borrower toeither: (a) return the amount to the account for use for eligible purposes; or (b) refund theamount directly to IDA. The administration of this Credit will be the responsibility of theMinistry of Finance. Although an audit of the deposit account will not be required, the Bankreserves the right to require audits at any time. The disbursement procedures under the SecondFRDP Technical Assistance Project are described in detail in Annex X.

49. Implementation of the policy and actions under the program will be monitored by theCabinet Committee on the Economy, supported by an inter-ministerial committee of officialscoordinated by the Ministry of Finance. The impact of this program in implementation will bemonitored by tracking the indicators mentioned in Annex I (Policy and Processing Matrix).

VI. Benefits, Risks and Government Ownership

50. The substantial benefits of the credit have been discussed above (paras 41-43). The keyrisk arises from the possibility that the implementation of policy reforms may be unsteady,especially in the face of approaching elections in May 1999. T'his was reflected in the hiatus inimplementing policy reforms between late 1997 and early 1998 alongside general decline inmacroeconomic management and the economy going off-trackc the ESAF program. However,recently the political economy has undergone an important change as the reconstructed cabinetcommittee on the economy has been authorized to make and implement key decisions on theeconomy. Nevertheless, in the run up to the elections these risks will persist: there will be,inter alia, pressures to relax expenditure controls, provide subsidies on inputs and on credits tofarmers, avoid difficult decisions in areas such as retrenchment of unqualified civil servants,and sell large assets to non-indigenous persons.

51. To minimize the risk of derailing the reform program the credit includes severalfeatures to obtain the Government's ownership and commitment to the program. First, thecredit has been front loaded in initiating wide ranging, and in some cases irreversible, reformsin expenditure management, rationalizing the role of Govermnent functions and civil serviceand privatization. Second, the second tranche, complemented by co-financing, will bedisbursed following the implementation of well specified benchmarks. Further, Governmentwill have demonstrated commitment, by preparing and disseminating a White Paper (inNovember 1998) detailing its program of policy reforms for public information. Hence therewill be a publicly affirmed commitment to the program. The second risk arises from the lack

19

of capacity to implement this multi-pronged operation. This risk is being addressed byproviding technical assistance and by setting up a high level Government body to oversee theimplementation of these reforms and mobilize necessary resources and capacity for doing so.

52. The final set of risks are posed by exogenous shocks such as the effects of drought orlarge terms of trade losses, such as those between 1992 and 1994, and 1998, on savings,investment and growth. The effects of these risks are to some extent factored into the basecase trend growth rate [in Annex VIII] which presents a lower GDP growth scenario of lessthan 4.5%, as the trend growth rate, than the high case scenario of a growth rate of between 5%to 6% is the target of these forms supported by this credit. Ultimately, the risks posed by theseexogenous shocks are best addressed in the long run by generating private sector growth anddiversification through implementing structural reforms that are supported by this credit. Inthe short run the disbursements from this credit will provide the economy a buffer againstthese shocks and thereby help the Government maintain the course of reforms. In addition,IDA and the donor community will be ready to provide additional support in case furtherassistance is needed to weather exogenous shocks.

VII. Conclusion

53. Since the advent of democracy and the election of a new Government in 1994 a widerange of policy reforms have stabilized and deregulated the economy resulting in higher and amore evenly distributed growth, especially in agriculture. The challenge now is to sustain themomentum of these reforms by unlocking policy and regulatory constraints to greater publicsector efficiency and private sector growth, especially in non-traditional and off-farm sectors.The proposed credit aims to assist the Government in attaining these goals.

54. I am satisfied that the proposed Credit and Project (the Second FRDP Credit and theSecond FRDP TA Project) will be effective in this purpose and would satisfy the Articles ofAgreement of the Association and recommend that the Executive Directors approve them.

James D. WolfensohnPresident

by

Sven Sandstrom

Washington, D.C.November 10, 1998

20

ANNEX I: MATRIX OF POLICIES, PROGRESS BENCHMARKS AND SUPPORTING OPERATIONSDevelaot Diagnosis Policies Intermediate Outcome Other IDAObjeetives and Outcomes Progress Benchmarks Benchmarks InstrumentsA. Resrncturing of Fil * Overall: Macroeconomic instability Lower deficits, avoid domestic * Domestically financed * Lower inflation *MacrowPolicies caused by high deficits and domestic financing and repay domestic public primary deficits will be (to low teens by end economicAnd Civil Service financing of deficits have led to debt. reduced from an average of 1999, and to less dialogueReforms crowding out of private investment. 4-5% of GDP in the last than 10% by the through Policy

three years to a balance. following year) FrameworkDomestic financing of from the current rate Papers anddeficits will be stropped of above 28% Adjustmentand domestic debt stock average. Operation.will be reduced sharply * Lower interestduring the current fiscal rates to the highyear teens by late 1999

compared to aboveE* stablish expenditure level targets * Implement expenditure 40%/ rate now.

Expenditure Management (specified in amounts and shares of targets set in Letter of * Increase in *Dialogue and* Government expenditure * Share of expenditures in social expenditures) on key sub-sectoral Development Policy private fixed sector workmanagement to be sectors, education and health have items in education, health, roads and (Annex 11.1) investment rates to taking placeimproved through increased from 14% of all agricul ectors in the 1998/99 8% by 2000 from under FRDP ILprioritization, improvement expenditures in 1993/94 to 26 % in budget such that real expenditures (of 4% now. IDII, thein monitoring and control. 1997/98. But public expenditures and FY 1997/98). *a Mitn expenditure Ir i Secondary

functions are still thinly spread over * Make expenditure cuts on non- Maintoin expenditure Inease in hi School Project,too many activities. priority items and increase ost monitoring and control delivery of high Population

precoery itos fance expenditurest procedures. priority outputs and Health andrecovery to finance expenditures. services on the basis Nutrition

*Expenditure monitoring and controls * Introduce agreed system to monitor * Reduce deviations of of benchmarked Project,are weak leading to large deviations (wage, and current expenditure targets expenditures from budgeted outputs of social Agriculturalbetween actual and budgeted amounts. on a monthly basis) and control amounts goods and services. Services Project

expenditures. and MALSIP.* Establish procedures and timetable * Implement MTEF plan to

for expenditure prioritization under the prioritize expenditures on * Improvement inMTEF in 1999. the basis of costing of budgetary planning *TA provided* Strengthen the Medium Tern programs and outputs. and implementation. Under theExpenditure Framework by integrating it * Preparation of Institutionalwith the budget. Sector Programs Development II* Audit and evaluate the development fully integrated with Projectbudget and integrate it with the recurrent the MTEF.

_____ ____ _____ ____ _____ ____ budget. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Matix of Policy Reforms and Progress Benchmarks Annex I of Presidents ReportPage 1 of 4

Development Diagnosis Policies Intermediate Outcome Other IDAObjectives and Outcomes Progress Benchmarks Benchmarks Instruments

Civil Service Reforms * Thirty Govemment * A more focused* Improve imnplementation * Malawi's Government capacity is * Rationalize departments, agencies and functions to be abolished, role of *TA providedcapacity of the civil service overstretched with too many functions. Ministries by eliminating, outsourcing or or offered to the private Government Under theand Government, with The civil service staffing composition privatizing functions as appropriate. sector for outsourcing or increasing Institutionalgreater focus on priority needs to be improved to strengthen * Retrench, and redeploy Government privatizing by April 1, efficiency and Development IIareas. Build a more priority areas. Lack of focus in staff in line with priorities. 1999. laying the scope Projectqualified, better motivated Government functions results in *Conduct audit of civil service personnel * Implement redeployment for civil servicecivil service. understaffing in priority areas. to reconcile personnel and payroll files and retrenchment of civil pay reforms.

on a consistent basis. servants in line withestablished benchmarks.

Tax Policy Reforms* Malawi's tax structure underwent

*An efficient tax policy that policy reforms in the late 1980s. *Reduce tariffs on final goods from 35% * Reduce top tariff rates * Development of * Dialogue withwill raise revenues and These reforms introduced a VAT like to 30%/, and on selected intermediate from 35% to 30% and competitive and Bank staff.minimize distortions and surtax on manufacturing and imports. goods, raw materials and capital goods tariffs on intermediate and efficient economy. *TA provideddisincentives for the private But the tax base remains narrow, and from 10% to 5%. Change zero rated capital goods to 5% in FY * Higher export under currentsector. as a result tax rates are high. surtaxes (except on exports) to exempt 99 growth (of around Adjustment

Moreover, the current tariff structure (in the case of unprocessed agriculture 8s% pu a) and Operation andjuxtaposed with regional trade sector goods, and merit goods) or to 20% sustainng current IMFagreements lead to unduly low, and includs distribution sector. growth of exportssometimes negative, protection. of non-traditional

_goods.B. Deregulation and * Aside from macroeconomic and * Accelerate pace of privatization *GDP growth ratesPrivate Sector infrastructure problems, private sector Extend the program to include utilities * Bring to the point of sale of 5 to 6% (from a * IDF Grant forDevelopment development is hampered by the and the financial sector. by mid-1999 agreed list of GDP growth of PrivatizationPrivate Sector Development pervasive presence of parastatals. 15 to 20 firms (including 2.4% in 1981- Commission.* Raise private sector Some 25 firms, large and small were shares in Banks) held by 1994).investment that has been privatized in the last year and half. The ADMARC Holdings and * Private fixed * Proposedsluggish (less than 4% of privatization process has also helped to MDC. investment share Privatization TAGDP and attract foreign jump start the fledgling stock raised to 7% of Creditdirect investment through exchange by the successful listing of GDP by 2000,privatization, infrastructure shares of large assets such as banks from around 4%improvements, financial and sugar companies. However, the now.sector and regulatory pace of privatization remains slow and * Expansion ofreforms. its impact still marginal. stock exchange.

Matrix of Policy Reforms and Progress Benchmarks Annex I of President's ReportPage 2 of 4

D_ _lspmmt Diasosis Policies Intermediate Progress Outcome Other IDAObjecvtivels_ Benchmark Benchmarks Instruments* Inase Private * The financial sector is publicly * Review the financial sector * Complete study on the * A revised * ProposedInvestneat through owned, oligopolistic and regulatory framework to identify and regulatory framework regulatory Private Sectordeveloping a more conservative. Government owns implement reforms to strengthen and (March 1999). Issue new framework issued Developmentcompetitive financial sector. around 700% of all financial sector unify the framework, restructure and regulatory framework (July that maintains the Project (FY 99)

assets, directly or indirectly while the privatize the financial sector. 1999). relative soundnesstwo dominant commercial banks of Malawi'saccount for more than 900/o of all * Issue clear guidelines on the mode financial sector.banking sector assets. Efficiency - of privatization of the remaining shares * Issue specific guidelines * Privatization of * Proposedmeasured by interest rmte spreads and of the two main commercial banks on the mode of the two main Privatization TAlimited financial instruments -- isprivatization of the two banks by Projectrelatively low, while profits are high. main commercial banks 1999/2000.

(March 1999) * Reduced spread

Approve*and publicize a National (now 15% point)* Infrastructure services, dominated * uApprove and publicize a National t t Implement reforms between savings

Infrastructure Reforms by the public sector, is arnong the top Communications Policy statement that telecommunications and lending rates. .

constraints to private sector specifies the Government's intention to sector: set up andevelopment according to a recent offer a stake in Malawi Telecoms to a independent regulatory * Secure strategic * Proposed

*Promote private sector survey. There is one telephone line strategic partner, through an authority (1998), separate partner for Malawi Privatization TAdevelopment and for every 300 people, one pay phone international competitive tender; posts and telegraphs Telecoms. Projectprivatization by for every 22,000. In the power sector, * Promote new entry and competition appoint investment * Increase inrestructuring and regulatory the main supplier, ESCOM has had in the cellular phone sector. bankers and legal telephonereforms of the utilities difficulties in providing reliable power consultants to secure penetration ratesector inviting private services resulting in large losses to * Enact legislation laying the proposed strategic partner for from 0.33 to 0.5 bysector participation in industry, and the economy. legal framework for implementing the Malawi Telecoms (March * (i) ESCOM's netinfrastructure. ESCOM has faced serious financial approved communication policy. 9l i l

difficulties, making it difficult for it to * Ena_t t Act th199 9. 'Amed l d revenue to be atmeet its maintenance needs, investAmnd in an gaztte least 1.5 times debt

meet its maintenance needs, invest in independent regulatory body, invites regulations to implement requirements; (ii)new capacity, and service its debts. private sector entry into the sector, electricity bill to clarify ESCOM to

licenses all electricity producers procedures for licensing provide 30%/O of(including ESCOM) and distributors; * and tariff rate adjustment annual capital Power VCorporatizes ESCOM under the mechanisms and provides expenditures; (iii) ProjectCompanies Act; implement debt incentives and assurance private sector entryrestructuring and adjust tariffs to make to private investors. (iii) IncreasedESCOM financially viable; implement establishes autonomy of capacity to 240long-term reorganization of ESCOM. electricity council MW with 13%

(March1999) reserve.

Matrix of Policy Reforms and Progress Benchmarks Annex I of President(s ReportPage 3 of 4

D_vkpmt Diagnosis Policies Intermediate Outcome Other IDAObj0eti and Otmes_ Progress Benchmarks Benchmarks Instru_entsPuivlizutioi mAd Pwivate There has been considerableSor Develoq net in the growth of private sector activity inAarkuhme Sector agriculture following deregulation in * Prepare privatization and *Privatize specific assets * Sale of some 30 Proposed

the last two years. But there are still commercialization program for (markets, depots and to 40 markets and Privatization TA* Pmmoe growth and problems of inadequate incentives and ADMARC. Based on this Govemment cropping activities) of depots to the Project and theprivate sector activity in crowding out for private trade due to to take decisions to privatize specific ADMARC. private sector by proposed FRDPagriculture sector that large presence of ADMARC, and to assets (markets, depots and cropping June 2000. 11 TA projectaccounts for 40%/. of GDP. uncertainty stemming from activities) of ADMARC.

unpredictable interventions, especially * Maize Price Band *Agriculturein the maize market. In addition, widened in October 1998. * More supply of Services ProjectADMARC's considerable assets are *Widen the maize price band gradually. The band is eliminated or maize fromunderutilized, presenting opportunities In 1998/99 the maize sale price progressively widened to increasedfor the development efficiency and incorporates around a 20 to 25% subsidy gradually include import production, tradeprivate ownership through the (on import costs) to cushion the large and export parity prices and imports ofprivatization of these assets. increase in maize prices caused by large before the 1999/00 season. maize resulting

depreciation in August. from greater* The maize price band (as identified * The National Food incentives.by buying and selling prices) has been * Introduce a rules based maize market Reserve Agency to betoo narrow. Large sale of public maize intervention policy. given the sole authority toat considerably below import parity conduct intra-seasonalprices taxes maize production and operations based on clearlydiscourages development of maize defined rules to implementmarkets and trade. the maize price band.

Streamline Procedures for * Streamline TEP Policies by: (i)Employment of Skilled * Difficulties in employing skilled gazetting a clear, liberal TEP policy; (ii) *Government will respondExpatriates: expatriate labor are a critical make the approval of the "key posts" - to TEP applications within * Improvement in * Dialogue with

constraint, especially for foreign direct determined on the basis of investment 40 working days. the business Bank staff under* Improve investment investment in Malawi, where and exports -- automatic through a * Monitoring of processing climate that will IDA adjustmentclimate by streamlining secondary school enrollment ratio is separate application process; (iii) delays and approval data encourage private credit.procedures for the only I 1 0/o, and expertise is scarce. allowing existing companies, both will be done monthly to investment.employment of skilled Obtaining employment permits (called Malawian and foreign owned, to have the ensure implementation ofexpatriate employees by temporary employment permits or same rights to acquire TEPs as new policy.investors. TEPs) for skilled expatriate workers in firms; and (iv) restoring the rights of

Malawi can take as long as two years. Permanent Residence Permit (PRP)holders to work.

Matrix of Policy Reforms and Progress Benchmarks Annex I of President's ReportPage 4 of 4

ANNEX H

-L

LETTER OF DEVELOPMENT PIOLICY

TdVam: Pog. Iwauo"W NMINMa ora FDIAN3lWsshsm LgLws 782 I PA DM 30STId:44407 LUAWOW 3Pm: 78 1679 MALAt

Ref. No. C3211152 31 November 1998

Mr. James WolfensohnPresidentInternational Development Association1818 H Street. NWWashington D.C. 20433USA

Dear Mr. President

RE: SECOND FISCAL RESTRUCTURINGAND DEREGULATION PROGRAIM: LETTER

OF DEVELOPMENT POLICY

I am writing to request on behalf of Nlalawi Government aCredit of US$ 90 million from the International Development

Association (IDA) in support of the continuation of our structuralreform program under the proposetd Second FiscalRestructuring and Deregulation Program (FRDP 11). The Creditwill help to meet the balance of payments financingrequirements that Malawi faces in the interim that haveincreased due to a sharp reduction (by USS 60 million) in exportreceipts in 1998 because of declining prices for Malawi'sexports. The structural reforms anchored in a medium-termstrategy as reflected in the Government's White Paper on theStructural Reform Program (to be issued in November 1998),and the 7th Policy Framework Paper that will be supported bythe third year ESAF arrangement currently being negotiatedwith the IMF. FRDP lI is designed to consolidate gains arisingfrom structural reforms undertaken under FRDP I and furtherdeepen the reform process with a view to ensuringmacroeconomic stability and promote sustainable economicgrowth with poverty reduction.

2. The requested Credit will provide the needed financing tobroadly address the following areas: (i) raise the quality ofpublic expenditures and services through prioritization; (ii)increase private sector investment and development through anaccelerated pace of privatization and reforms of the power,communications and financial sectors; and (iii) - strengthen themacroeconomic framework. The reform program is describedbelow and more details are provided in Annexes, which areattached to this letter.

Background and Rationale

3. Since 1994, Malawi has implemented a wide range ofpolicy reforms with the overall objective of poverty alleviation forthe people in Malawi. The key to achieving this objective wasthe adoption of a set of prudent financial policies, designed torestore and maintain macroeconomic stability. Complementarystructural reforms were initiated to redirect public spending topriority areas such as health, education and the development ofinfrastructure. Specifically, the Government removedrestrictions on smallholder production of burley tobacco andother cash crops, liberalized the trading of agricultural inputsand outputs, launched a program of privatization, undertookcivil service reforms and expenditure prioritization, implementedwide ranging tariff and surtax reforms and attained currentaccount convertibility. It was expected that improvedmacroeconomic management, better infrastructure, andincreased role of market forces in resource allocation wouldinduce the higher saving and investment needed to achieve thehigh growth rates necessary for lowering poverty.

4. The economy responded well to these reforms asmacroeconomic balances were stabilized and the averageannual inflation rate fell from 83 percent in 1995 to 9 percent in1997. Growth averaged more than 10 percent during the three

2

year period between 1995 - 1997 with only a third of this growthbased on recovery from the 1994 droughit. Equally significant,this growth has been more broad based and diversified than inthe past and it was led by the smaliholder economy, thusreversing earlier patterns. In particular, the liberalization ofsmallholder burley tobacco production alone has generatedUS$ 185 million of revenues for the rural sector in the last threeyears and led to the growth of tradingl, markets and othersecondary activities in the country side. In addition, a non-traditional exports sector has emerged, ex(porting garments andcut flowers to Europe, North America and to South Africa.

5 Notwithstanding this performance, the economy stillremains fragile. First, there are continuing problems inexpenditure management and prioritization, which resulted in alarge fiscal deficit in the fiscal year 1997198. Second, deep-rooted structural problems have constrained private fixedinvestment which has remained low, averaging only 3 percentof GDP in 1992-1997. Third, the agricultural sector remainsvulnerable to price shocks and poor rainfall. Fourth, crowdingout by high government consumption; an underdevelopedfinancial sector; poor infrastructure; the dominance of inter-locking public sector ownership in production, trade andfinance; and regulatory obstacles in employing skilled expatriatelabor have all deterred private investment. Fifth, the continuedover dependence on tobacco as the main foreign exchangeearner has in recent times resulted in turnnoil and upheaval dueto reduced foreign exchange inflows resulting from poor pricesoffered at the auction floors. This situation together with theneed to align the Malawi Kwacha to the currencies of our majortrading partners compelled the Government to devalue theKwacha against the United States DolIlar by 49 percent inAugust 1998.

6. The Second Fiscal Restructuring and DeregulationProgram will therefore aim at addressing these structural

3

weaknesses and thereby sustain the momentum of the reformprogram. It will especially focus on private sector developmentin the non-agricultural sector and on public expenditureprioritization, monitoring and control. The program will aim toachieve an average growth rate of 5.3 percent in the next threeyear period (1999-2001). This growth shall be achieved mainlyby improving the business climate and efficiency and increasingprivate fixed investment rates to an average of 7 percent ofGross Domestic Product. The targeted growth rate could byitself lead to a decline in the poverty rate from 43 to 38 percentof Malawi's population in the next five years. Combined withbetter, more efficient targeting of public expenditures to thepoor, and the planned expansion of the safety nets, the share ofMalawians living below this poverty rate should decline evenfurther.

Medium Term Policy Framework

7. In the medium-term, the Government will continue topromote sustainable and effective economic management witha view to maintaining macroeconomic stability throughreduction of fiscal imbalances and the domestic financing ofdeficits. The medium-term strategy will place significantemphasis on policies and structural reforms necessary todeepen the past reforms and provide a lasting framework formacroeconomic stability. Greater efforts will be made toenhance domestic savings and investment; raise averageproductivity, especially in agro-processing, export oriented andlight industries; enhance domestic competition especially in thefinancial sector and improve the country's externalcompetitiveness. In the agricultural sector, the Governmentplans to consolidate gains arising from the deregulation andliberalization program which was aimed at removing distortionsin pricing and market structures that suppressed incentives andcompetition. In addition, the Government will intensify efforts totackle long-term structural constraints facing the agricultural

4

sector and the farming community. In this connection, theGovernment will undertake land reforms on the basis of therecommendations of report by Presidential Commission ofInquiry on Land Policy Reform which is expected to be issued inJanuary' 1999.

8. The overall macroeconomic objectives in the medium-term period are (i) a recovery in real Gross Domestic Product(GDP) growth to an average of over 5.2 percent per annum, (ii)a reduction in external imbalance beyond 1998/99 with a viewto attaining a more sustainable balance of payment position,and (iii) re-prioritizing Government expenditure in favor of thesocial sector within the context of Medium Term ExpenditureFramework and improving expenditure control and monitoring.Attainment of these objectives will require donor support in theform of external concessional resources over the medium term.

9. Government has identified two broad constraints to theachievement of its goals, namely: poor expendituremanagement and low quality of public expenditures; andexceedingly low private sector investmeint. To address theseconstraints, the proposed program will focus broadly on publicsector management and private sector dlevelopment. Publicsector management will constitute expenditure prioritization,strengthening and broadening of the Medium Term ExpenditureMonitoring (MTEF), expenditure control and monitoring, tariffand surtax reforms and civil service reforms through therationalization of Government functions. Private sectordevelopment will include: further privatizal:ion/commercializationof entities including those in the financial, telecommunications,and power sectors, instituting more effective policies onTemporary Employment Permits, and enhancement of privateinvestment in agriculture.

Public Sector Management

5

10. Expenditure Prioritization: Despite its success insharply reducing the fiscal deficit between 1995 and 1997, theGovemment has faced continued problems with the planning,quality and control of expenditures. To address these problemsGovernment is continuing with measures for improvingefficiency in expenditure management through the MTEF whichhas now been extended to all ministries and departments. The1998/99 budget reflects a prioritization in allocation of resourcesacross sectors and also within individual ministries, resulting incore programs and sub-programs being funded adequately andfunding in non-priority programs cut (see Annex 1 for thesetargets). Prior to the allocation of funds for the financial year,Government carried out prioritization exercises in Ministries witha view to identifying priority programs and activities where morefunding was required and areas of less priority for reducedallocation.

11. Some significant reallocations were made betweenministries in the 1998/99 budget. For example non-wagecurrent expenditures for health, education and agriculturesectors were increased by 24%, 49% and 22% respectively, inthe 1998/99 budget compared to the 1997/98 budget.Expenditures in key areas such as road maintenance (throughthe National Roads Authority's budget), water development,and law and order were also significantly increased in realterms. At the sub-item level, expenditures on water andsanitation, and purchase of drugs, teaching and learningmaterials have been considerably increased. On the otherhand, expenditures have been cut in areas such as externaltravel and general administration and in the Ministry of ForeignAffairs and Offices of the President and the Vice President.These expenditure targets are set out in Annex 1. The share ofthese priority expenditures will be maintained if expendituresincrease, while their levels will be protected in the event of cutsin the goods and services budget.

6

12. The Government, through the Ministry of Finance, hasissued guidelines, a timetable and institutional mechanisms ofthe budget and expenditure prioritization for the 1999/00 andfuture budgets that will establish the MTEF as the resourceallocati6n rnechanism. As part of this Government will conductan in-depth prioritization of expenditures within sectors for the1999/2000 budget and the medium term (1999/2000-2001/02)starting from September 1998 by a properly conducted MTEFexercise for ministries and departments. This exercise willinclude the following:

(1) prioritization of programs, sub-programs and ouputsin different sectors based on the sector strategies asdefined in the log frames;

(2) a review of the costing process followed anddetermination of cost co-efficients and costs ofthese programs;

(3) allocation of resources for the core programs, sub-programs and sub-items basied on the costing andwithin the indicative ceilings provided by the Cabinetin January.

(4) scaling down/eliminating low priority activities.

(5) Integrating the recurrent andl development budget:this will include a careful audit and review of thedevelopment budget to firmly establish the sourcesof financing of each projeclt, the type (capital orrecurrent) and the quality of these expenditures andtheir consistency with overall sectoral targets andthe recurrent budget.

(6) the development of coherent sectoral expenditureplans with a medium term perspective and bringing

7

in of the forward budgeting with a three year rollingbudget.

This expenditure prioritization exercise for the 1999/2000Budget will be carried out by the Finance and Audit Committeeof Principal Secretaries which will report its recommendations tothe Cabinet Committee on the Economy and the Cabinet fortheir endorsement. The organization and the timetable for thisexercise is given in detail in Annex 3 of the Letter ofDevelopment Policy.

13. Expenditure Monitoring: In July 1998 the Governmentintroduced the following measures to improve expendituremonitoring: (see Annex 2 for details of expenditure reports, theirfrequency and distribution): preparation of detailed expendituremonitoring procedures under which the Finance and AuditCommittee of Principal Secretaries (and co-opting other P.S.'sas necessary) and the Special Cabinet Committee onBudgetary Measures will review by the 25th of each monthactual expenditures, up to the previous month, on all sectors bymain votes, heads and sub-items. A special report will reviewexpenditures on priority programs, sub-programs, and sub-items, and items where expenditure controls have proven tobe difficult. The aim will be to correct deviations from thebudget and adjust expenditures against changes in resourceavailability. To enable control over salary payments,expenditure monitoring will also include monthly comparisonand reconciliation of payroll and personnel based on theongoing audit of civil servants (expected to be completed byDecember 1998). To further consolidate expendituremonitoring measures, the Government has strengthenedreporting mechanisms for the commercial parastatals with aview to taking timely measures at protecting the budget. In thisconnection all parastatals will submit to the Ministry of Financestatements on financial liabilities, and copies of quarterlyfinancial reports that are now submitted to the Department of

8

Statutory Corporations. The Government will also completebetween now and March 1999 a program of special audits forADMARC, PCC, and other major commercial parastatals whoall have Government-guaranteed external and domestic debt.

14. Expenditure Control Prociedures: Alongsideexpenditure monitoring the Government has also introduced thefollowing measures to strengthen expenditure control: (i)enforcement of existing virement procedures under which allreallocations within intra-sectoral sub-items will first have to beapproved by the Treasury; (ii) requiring a clear explanation bythe Controlling Officer of the Ministry concerned for alldeviations of expenditures from budgetary allocations (on a pro-rated basis) and their cash allocations; (iii) requiring that allrequests for extra-budgetary expenditures be pre-approved bySpecial Cabinet Committee on Budgetary Measures, and afterexpenditure cuts elsewhere and additional financing has beenexplicitly identified.

15. Civil Service Reforms: The Government has beenundertaking civil service reforms under its Civil Service ReformAction Plan that was approved in September 1997.Accountability of civil servants has been increased byeliminating the common service cadre and establishing clearer,specialized career paths within Ministries. A job evaluationstudy is to be completed by December 1998 to prepare forchanges in civil service and salary strucl:ures based on clearerjob definitions. The Government has cornpleted an audit of thecivil service and results of this survey will be published inDecember. Based on this audit, Governrnent has undertaken amonthly reconciliation of the personnel and payroll files. Thenumber of Ministries have been consolidated from 27 to 19government is now implementing a program of eliminating,privatizing and outsourcing, 30 agencies and functions [SeeAnnex 4 of Letter of Development Policy] in five major ministriesthat now employ more than 60% of the civil service. The

9

elimination, privatization and offer to outsource these functionsis expected to be implemented before end-March 1999.Alongside this all affected civil servants in the rationalizedagencies will be categorized in three groups: (i) forredeployment within Government; (ii) for private employment inthe contracted out or privatized service; and (iii) forretrenchment. The budget includes provisions for separationbenefits for those who may have to leave the service. In thepast two years over 3,300 civil servants have been discharged.

16. Tariff and Surtax Reforms : The Government iscontinuing with tariff and surtax policy reforms to increase theefficiency of the tax system while protecting revenues. There issteady progress in the reduction of weighted average tariffswhich have fallen from 19% to 14% while surtax rates havebeen rationalized and the base extended. During thesupplementary budget, in April 1998, the Governmenteliminated all taxes on exports, and during the 1998/99 budget,top tariff on consumer goods was reduced from 35% to 30%,while those on selected intermediate goods, raw materials andcapital goods were reduced by five percentage points.

17. In order to compensate for revenue loss arising from tariffrates reductions, Government will continue to review surtaxexempt goods and consider introducing positive rates as ameasure to expand the tax base. Through the IMF, a surtaxadvisor has been assigned to review the surtax legislation andstrengthen tax administration.. The long term objective is to relyon the domestic surtax which provides credits for tax paid onimports as the main revenue source as opposed to import traderevenues. In addition to the above measures, a Bill for theestablishment of the Malawi Revenue Authority (MRA) waspassed by Parliament in June 1998. It is expected that the MRAwill become operational in March 1999. The establishment ofthe MRA, aided by technical assistance from IDA and the IMF,is expected to improve revenue collection.

10

Private Sector Development

18. Privatization: Government has been implementing aprogram of privatization for two years. 'There has been goodprogress achieved with over 25 public enterprises privatized sofar. However, a number of public enterprises cutting acrossvarious sectors still maintain a dominaiting presence in theeconomy. Consequently, government has drawn up andapproved a divestiture sequence plan with a view to divestingall publicly owned assets in enterprises [See Annex 5 for thislist and timetable]. It is planned that between October 1998and March 1999, at least 15 of the 20 enterprises identified inAnnex 5, and employing approximately 6060 persons, will bebrought to the point of sale. In addition, the implementation ofthe country's privatization program which began in 1996 willalso include, the privatization of the country's financial sectorfocusing on the privatization of the couintry's two commercialbanks, namely, Commercial Bank of Malawi Ltd. and NationalBank of Malawi liberalization of the telecommunications sector,and the privatization and commercialization of ADMARC.

19. Financial Sector Policies: The Government of Malawihas committed itself to bringing more competition in thefinancial system and withdraw its direct and indirect interestsfrom the existing financial institutions. Thus the PrivatizationCommission has sold part of Government and MalawiDevelopment Corporation's shares in the Commercial Bank ofMalawi through a public offering. In order to preserve thefinancial soundness of parastatals, the Government has put afreeze on commercial borrowing. The government will appointconsultants to review the regulatory framework of the financialsector, to recommend new regulations tco provide an adequateregulatory framework in the post-privatized financial sector.Based on this work, the Government will also issue by March30, 1999 specific guidelines to the Privatization commission on

11

how the remaining public shares in the two main commercialbanks will be divested with the objective of improvingmanagement and efficiency in the financial sector.

20. Teledommunications Sector Policies: In the telecom-munications sector, the Government has adopted the ambitioustargets of more than doubling the telephone penetration rate by2000, and to more than three times the current rate by 2003.This shall be achieved through increased private sectorparticipation. To this end, the Government has approved andpublished new policy framework for the future development ofthe communications sector. A Bill providing for an independentregulatory body and the legal basis to implement the policy hasbeen approved by the Cabinet and published. The majorfeatures of the policy include: (i) opening up alltelecommunications services (mobile, data, Internet, pagingwith the exception of long distance and international voicetelephony) to new private service providers; (ii) the split of postsand telecommunications into separate businesses; and (iii)securing an established international telecommunicationsoperator as a strategic partner for Malawi Telecommunicationsthrough an international competitive tender (see Annex 6 fordetailed implementation plan).

21. Temporary Employment Permits: In order to improvethe business climate the Government approved a new TEPpolicy for processing and issuing TEPs. This new policy isaimed at ensuring all investors, both existing and prospective,can easily obtain TEPs for their key and necessary personnel.The most important feature of the new policy is the introductionof "key posts" which will entitle TEPs automatically. The newpolicy was gazetted on October 2, 1998 and has the followingfeatures: (i) the process of issuing key posts and non-key postswill be clearly separated; (ii) key-posts TEPs will not be subjectto review other than verification of the investment itself and willbe issued immediately; (iii) the key posts for existing investors

12

will not be subject to restructuring and/or expansion activitiesbut rather they will be issued their entitlecl number of key postsautomatically upon application by convertiing any existing TEPsto "key posts TEPs"; (iv) complete applications for TEP shall beprocessed and results communicated within 40 working days;and (v) permanent residents will not be required to apply forTEP to work. Government has agreed to monitor monthly theprocessing of TEP's and publicize such information. Inaddition, the Government will appoint independent assessors tomonitor the implementation of the new TEP policy. Theindependent assessors will submit their report to Governmentby March 31, 1999.

22. Power Sector Policies: In order to improve the financialposition of ESCOM, Government recently approved a financialrestructuring plan of ESCOM. Under the plan, Governmentloans to ESCOM were turned into equity and ESCOM wasallowed to increase its tariff by 35% with effect from 1st July,1998. And in view of the depreciation of the Kwacha in August1998, the Government has 'agreed that ESCOM further raisesits tariffs by another 35% in order for it to maintain financialviability. Furthermore, in order to open up all areas of thepower sector to private entry, two Acts namely: the ElectricityAct, 1998 and the Electricity Supply Commission of Malawi Act,1998 were passed during the July sitting of Parliament. ESCOMhas since been incorporated under the Companies Act asElectricity Supply Corporation of MAalawi Limited (theCorporation") and in order to commercialize its operations,Government has excluded the Corporation from the StatutoryBodies (Control of Contracts)Act. For the purposes of ensuringthat full financial disclosure obligations by the Corporation to theGovernment are maintained, the Governrnent has subjected theCorporation to the Finance and Audit Act. A new regulatorknown as the Electricity Council has been established and willstart operating in October 1998. The Council will provide thebasis for fair competition among ESCOM and other private

13

operators. However, Government will further clarify, with TAfrom IDA as needed, specific licensing, tariff setting procedures,and the autonomy of the Electricity Council, through subsidiarylegislation/amendment of this Act by March 1999.

23. Agriculture: The agricultural sector, which generates 36percent of Malawi's GDP and is the largest employer hasexperienced significant diversification in the past five years, andprivate agricultural trade has increased. However, manyproblems remain, particularly with declining soil fertility andfalling food production. The Government is addressing theseproblems, and is also developing programs in the areas of landtenure, household food security and safety nets, irrigationdevelopment and rural community organization. The decline offood production, particularly maize, is due to, among otherthings, the escalating cost of fertilizer. To increase incentives forproduction and trade, Government has increased the maizeprice from K3.75 to K6.50/kg, and this price will be graduallyraised towards the import parity price. The Government hasalso decided to replace the Strategic Grain Reserve with anautonomous National Food Reserve Agency (NFRA), and hasdecided to reformulate its mode of operation so that it becomesrules-based instead of discretion-based. It has also beendecided that the Government policy for the purchase and saleof maize by the NFRA in the 1999/2000 season should be inaccordance with the floor and ceiling prices of the maize priceband which will be adjusted periodically. The floor price shall bebased on the export parity price, and the ceiling price on theimport parity price.

24 The government has decided to privatize andcommercialize ADMARC, and to provide alternative channelsfor the social activity of enabling access to markets for farmersin remote areas. To this end, the Government will appointconsultants to design a program of commercialization andprivatization and to make recommendations concerning the

14

provision of markets in remote areas. 1The consultants will,among other things, consider the viability of identifying some 20to 30 markets which are profitable and wlhich could be turnedover for privatization by the Privatiization Commissionimmediately; and will examine the non-cereals branches ofADMARC's activity (cotton, tobacco, fertilizer) and makerecommendations as to whether these shiould be split off andsold as separate entities or be retained in a single firm. Theconsultants' report will be completed by the end of March 1999,and the Government will proceed to implemient the program.

Program ManagementManagement

25. Management of the Structural RelForm Program to beSupported by this Credit: The governmeint recognizes that theproposed adjustment program to be supported by this credit ismulti-sectoral in its coverage. The Cabinet Committee of theEconomy will oversee the implementation of this program as akey part of its overall economic reform program. Thiscommittee will be assisted by a Task Force of officials led bythe Ministry of Finance to supervise and to coordinate theimplementation of the program. The task force comprises theMinistry of Finance, the Ministry of Agriculture and Irrigation, theDepartment of Statutory Corporations, the National EconomicCouncil, the Privatization Secretariat, andl the Reserve Bank ofMalawi. The Government will also present this structuralreform program supported by this credit to the people of Malawiin a White Paper that will publicized by the end of November1998.

15

Conclu.ion

26. In conclusion it is important to note that in 1994, thisgovernment pledged to forge ahead with forward-lookingeconomic strategies to improve the lives of the people. TheGovernment promised to do so through steadfast adherence toa strategic program of prudent macroeconomic management,economic liberalization, structural reforms, and outward lookingpolicies and the Government is still committed to this path ofeconomic development. The Government, therefore, wishes tocontinue with the reform program through the Second FiscalRestructuring and Deregulation Program to deepen further thereform process for the betterment of the people of Malawi. It istherefore the Government's hope that it will grant the requestedIDA Credit to assist it with its proposed reform program.

Yours sincerely

MINISTER OF FINANCE

16

1997198 Share 1998199 Shareof ORT of ORT

Total Budget for Other Recurrent Transactions (ORT) 3.563 (in %) 3,600 (in %)

I. High Priority MinistriesNotes1. EducationA. Priority ItemsEducation, ORT 318.70 8.9% 475.30 13.2%

Sub-item: Teaching and Learning 35.00 1.0% 83.00 2.3%Program: Primary Education 140.00 3.9% 188.00 5.2%

Sub-item: PrimaryTeaching and Learning 34.70 1.0% 50.00 1.4%

B. Low Priority ItemsSub-program: External Travel 1.25 0.0% 1.41 0.0%Sub-program: External Travel Allowance 1.10 0.0% 1.70 0.0%

Program: Administration and Support: 41.10 1.2% 96.30 2.7%Sub-Program: Management and Support Services 29.90 0.8%

2. HealthA. Priority Items

Health Overall ORT 43:2.80 12.1% 535.30 14.9%Program: Preventive and Promotive Health Services 15.30 0.4% 29.50 0.8%

Sub-Program: Pharmaceutical Services 11:2.70 3.2% 200.40 5.6%Sub-items:

Drugs and Vaccines/Medical Stores 112.40 3.2% 200.00 5.6%Water and Sanitation 16.80 0.5% 22.10 0.6%Disease Outbreak Investigation and Management 0.30 0.0% 11.70 0.3%

3. AgricultureA. Priority Items

Agriculture: Overall ORT 103.30 2.9% 126.10 3.5%Program:Agriculture Extension 10.70 0.3%

Sub-Program: Extension Methodology and System 3.20 0.1%Sub-Program: Media Services 4.30 0.1%

Program: Irrigation Development 12.40 0.3% 13.20 0.4%Sub-Program: Irrigation Technologies and and Development 1.00 0.0%Sub-item: Purchase of Drugs and Medicine 0.50 0.0% 2.40 0.1%

B. Low PriorityProgram: Animal Production and Veterinary Services 16.40 0.5% 15.80 0.4%

Sub-item: External travel 3.90 0.1% 2.00 0.1%Sub-item: Extemal travelling allowance 3.90 0.1% 2.50 0.1%Sub-item: Hiring Costs 1.10 0.0% 0.20 0.0%

Letter of Development Policy Annex 11-1Expenditure Prioritization Results Page 1 of 2

Annex 11-1 of Letter of Development PolicyGovernment of Malawi's Expenditure Prioritization Targets and Ceilings

1997/98 Share 1998/99 Shareof ORT of ORT(in %) (in %)

4. Road Maintenance Expenditures 140.00 3.9% 245.00 6.8%Previously under Department of Works,and now under the National Roads Authority.

5. WaterA. High Priority Items

Water Overall ORT 38.10Program: Water Resource Management 0.10 0.0% 14.30 0.4%

Sub-Program: Water Resource Management 7.60 0.2%Program Piped Water Supply 18.70 0.5%

Sub-Program: Operations and Maintainance 18.40 0.5%Sub-Item: Maintenance of Water Supply 1.20 0.0% 5.00 0.1%

6. Police 89.30 2.5% 110.00 3.1%A. High Priority Item

Program: Crime Combating 4.20 0.1% 25.20 0.7%

II. Low Priority Ministries and Items

Program: Office of the Vice President 11.70 0.3% 10.70 0.3%

Program: Foreign Service 73.40 2.1% 49.10 1.4%

Program: Administration and Support for Foreign Service 42.30 1.2% 35.00 1.0%

Sub-Items:

External Travel 40.00 1.1% 34.00 0.9%External Travelling Allowance 56.00 1.6% 53.00 1.5%Fuel and Lubricants 155.00 4.4% 177.00 4.9%Transport Claims 29.00 0.8% 23.00 0.6%Motor Vehicles:Capital Expenditure on Purchas 92.00 2.6% 28.00 0.8%

Note: Following further adjustments and the exchange rate depreciation in September 1998, overallrecurrent expenditures are being increased. While allocations of the increase have not beenfinalized it is known that the share of primary education, drugs and vaccines and agriculturalextension will increase even more than shown here.

Letter of Development Policy Annex 11-1Expenditure Prioritization Results Page 2 of 2

Expenditure Monitoring Procedures

Introduction

I1. The Ministry of Finance has initiated several measures for improving the expendituremonitoring process. A proper expenditure monitoring system is crucial for expenditure control.The monitoring system has to ensure:-

a) timeless in submission of expenditure data by the PMinistries and Departments;

b) accuracy of expenditure data;

c) processing and consolidation of expenditure data and creating a good database forrevenue and expenditure;

d) regular analysis of expenditure and generation of detailed as well as summaryexpenditure reports with a regular feedback to the Ministries and Departments;

e) and timely distribution of reports along with graphs and tables toMinistries/Departments, Principal Secretaries, Cabinet Committee and Cabinet.

2. It has also been planned to improve the monitoring process by taking the following steps:

a) Timelines and Accuracy of data

- Improve the timeliness in submission of expenditure data and ensure that all thereports are received latest by the I 0th day of each month; Controlling Officers ofministries and departments failing to submit reports in time will be summoned bythe Cabinet Committee for explanation;

* Improve the accuracy of the expenditure data by a close scrutiny by monitoringsection. Errors and inconsistencies, if any, would get corrected by the concernedMinistry before the data is recorded on the database maintained by the Treasury;

* Software application is getting further enhanced to control the data input errorsand improve the data base as well as the production of reports.

* detailed monthly expenditure and revenue reports for each vote would be sent bythe Treasury to the respective Controlling Officers for verification andcertification so that errors, if any, in the database can be rectified in time.

b) Processing and analysis of data

* monthly revenue and expenditure data should get fully recorded, processed andconsolidated by the 20th of each month;

Expenditure Monitoring Letter of Development Policyand Controls Annex 11-2: Page 1

* all the reports should.get generated by the 22nd of each month. Accuracy ofthese reports would be chanced and ensured by responsible officers of themonitoring unit; the processing of data and generation of reports should not bedelayed due to non submission of reports by some of the ministries anddepartments;

* regular feedback between the treasury and ministries and departments would beinstituted; discussion of the expenditure performance with Controlling Officerson quarterly basis;

* detailed analysis of expenditure data with focus on core programs and sub-itemsof priority on monthly basis;

* Summary reports accompanied by tables, graphs and brief analysis would beready for distribution by the 24th day of every month.

* Summary Reports would cover Revenue, Recurrent and DevelopmentExpenditure and include:

3. Summary of monthly expenditure and expenditure to-date compared to the approvedbudget and cash funding by Vote and the percentage utilization of the approved Budget andFunding;

a) Summary of monthly expenditure and expenditure to-date by Sub-items compared tothe approved provisions at the aggregate level;

b) Summary of expenditure on core programs and Sub-items of expenditure vs.budgeted expenditure for the priority ministries like Health, Education, Agriculture,Police, and Transport;

c) Special reports and analysis highlighting the Votes, Programs and Sub-items wherethe expenditure has either exceeded the annual budget provision or the pro-ratabudget by 10% or there is under expenditure by 25%;

d) Summary report showing the amount of outstanding commitments including unpaidbills for each Vote;

e) Summary of revenue performance for Customs, Income Tax and Departmental Fees;and

f) A report on the fiscal performance vis-a-vis the Program Targets agreed with theIMF and the World Bank (which would receive items (iii), (v) and (vi) ofexpenditure reports mentioned in Lists B and C of Table at the end).

Distribution of Reports

4. Summary reports would be distributed by the 25th of every month to:

Expenditure Monitoring Letter of Development Policyand Controls AnnexI11-2: Page 2

a) Special Cabinet Committee on Budgetary Measures,

b) Finance and Audit Committee of Principal Secretairies,

c) Controlling Officers and respective Ministers

Appendix I shows the distribution of the reports and frequency of distribution. It should benoted that detailed expenditure reports for each vote would be distributed to the respectiveControlling Officers and Ministers. Special Cabinet Committee would be presenting selectedrevenue and expenditure reports to Cabinet at appropriate times.

5. Special Committee of the Cabinet would examine and discuss these reports in detail andrecommend necessary action for enforcing expenditure control.

Expenditure Control System

6. The Ministry of Finance has also introduced expenditure control measures. Expenditurecontrol is seen as a critical issue in public expenditure management.The primary objective ofexpenditure control is to ensure that:

a) expenditure is contained within the cash amounts released monthly by the Treasury;

b) expenditure does not exceed the sums approved annually by parliament as detailed inthe Budget Documents No. I and 2 under respective Votes/Heads; and

c) ministries and departments do not commit any expenditure exceeding the cashbalance as per cash book and the available approved provision under thecorresponding budget line, unless the approval for necessary virement has beenaccorded by the Treasury.

7. The Ministry of Finance has taken a number of steps and remedial measures to removethe above weaknesses and strengthen the expenditure control system. The measures include:

a) strengthening of the monitoring system: The humran resource capacity in themonitoring unit in the Treasury has been improved by increasing staff and intensiveproviding training. Timeliness in the submission of monthly reports and accuracy ofexpenditure data has been improved . Processing and analysis of expenditure data isgetting expedited. Summary reports accompanied by tables, graphs and briefanalysis have been distributed to the Special Cabinet Committee, and will also as,matter of routine, be distributed to a Committee of Principal Secretaries, ControllingOfficers and the Cabinet.

b) Virement in the approved estimates: A Treasury Circular dated 10 August, 1998,reiterating the Treasury instructions on the conditions and procedures for virementhas been issued. Controlling Officers have been informed that non-adherence to theinstructions could result into serious disciplinary action. PreviouslyMinistries/Departments were viring funds from one budget item to other budget line

Expenditure Monitoring Letter of Development Policyand Controls Annex 11-2: Page 3

without seeking the approval of Treasury. The Monitoring Unit will be producingReport indicating the budget lines where expenditure has exceeded provision withoutvirement authority. Action will be taken against the Controlling Officers and his/herofficers for non observance of virement instructions.

c) Extra Budgetary Requests: In the past extra budgetary requests were processed andapproved by the Treasury. However it has now been decided that all these requestswill be submitted to the Special Cabinet Committee on Budgetary Measures forconsideration and direction. It has also been agreed that requests should be acceptedonly after the necessary saving of resources have been identified in the budget.

d) Purchase of goods and services on credit basis: a gazette notice has been issuedinforming the general public and business community that they should supply goodsand services to Ministries and Departments only on payment. Through thisgovernment avoid overcommitment of expenditure and accumulation of unpaid bills.In addition to the Gazette Notice, the Ministry of Justice is processing theamendment of the Finance and Audit Act to give a legal sanctity to the Notice andprevent the possible suing of Government by suppliers who violet the instruction.

e) Enforcement of expenditure control: Special Committee of Cabinet would closelymonitor the monthly expenditure and recommend necessary action for enforcingexpenditure control.

f) Review of the Finance and Audit Act: The Finance and Audit Act is proposed to bereviewed to strengthen control systems, procedures and penalties to ensure legitimateuse of resources, transparency and accountability.

8. A Committee of Principal Secretaries to be chaired by the Deputy Secretary to thePresident and Cabinet or the Secretary to the Treasury will be formed to identify the problemsand issues in expenditure control and also design a set of measures to enforce expenditure controlin Ministries and Departnents. Other members of this Committee will be the AccountantGeneral, Auditor General, Principal Secretary (Finance) in OPC, and the Principal Secretary ofNational Economic Council. The Committee will work for a month and submit itsrecommendation to the Cabinet for approval by November 30. A Technical Assistance will besought to work with the Committee.

Expenditure Monitoring Letter of Development Policyand Controls Annex 11-2: Page 4

Table: Distribution of Expenditure Reports

By 10th of each month By 20th of each month By 25th of each month.A. Respective Controlling B. Committee of Principal C. Special Cabinet D. Cabinet

Officers and Ministers Secretaries CommitteeFrequency of Distribution: Frequency of Distribution: Frequency of Distribution: Frequency of Distribution:

Monthly Monthly Monthly Monthly

1. Vote Summary i. Salary Funding by Vote L Salary Funding by Vote i. Vote Summary

ii. Major sub-item summary ii. ORT Funding by Vote ii. ORT Funding by Vote ii. Major sub-item summary

iii. Program/sub-program iii. Vote Summary iii. Vote Summary iii. Program/Sub-program

summary summary

iv. Vote Summary (linking cash iv. Vote Summary (linking cash iv. Summary of Developmentfunding with expenditure) funding with expenditure) Expenditure by Head

v. Major Sub-item Summary v. Major Sub-item Summary

vi. Summary of expenditure on vi. Summary of expenditure oncore programs and sub- core programs and sub-programs of expenditure vs programs of expenditure vsbudget provision. budget provision.

vii. Special Reports and analysis vii. Special Reports and analysishighlighting the Votes, highlighting the Votes,Programs and Sub-items Programs and Sub-itemswhere the expenditure has where the expenditure hasexceeded the budget. exceeded the budget.

Expenditure Monitoring Letter of Development Policyand Controls Annex 11-2: Page 5

Annex 11-3: Plan of MTEF in 1998/99 for the Preparation of the 19912000 Budget and the MediumTerm Expenditure Framework

\t~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -,), \'' i I \I 14u, I)I.II, I I ) It I ) , (

* Formation of a Central Planning Committee Ministry of Finance Novemberor using the existing Finance and Audits 1998Committee (ST, PS Economic Affairs, PSNEC, Chief Economist, NEC, DSPC) toOversee Expenditure Prioritization. Thiscommittee will be responsible forrecomending allocations to priority sectors,and on intra-sectoral allocations when theControlling Officer's allocations do notreflect agreed national priorities.

* Formation of the Central Implementation Ministry of Finance November 1998Team (made of the Director of the Budget,Director of Debt and Aid, Head ofEconomic Services) to oversee the BudgetPreparation process.

* Formation of MTEF committees in Sector Ministries November 1998

Ministries with Controlling Officers in theChair of these Committees.

* Prioritisation of programmes, sub- Finance and Audits October 1998 toprogrammes and ouputs. in different sectors Committee/ Sector January 1999

based on the sector strategies as defined in Minstries.the log frames.

* A review of the costing process followed Finance and Audits November 1998and determination of cost co-efficients and Committee/CIT/Line to January 1999

costs of these programs. Ministries.

* Scaling down/eliminating low priority Finance/Expenditure November 1998

activities through a public expenditure Office/Line Ministries to January 1999

review.

* Establishing 1999/2000 preliminary ceilings Cabinet December-

and the three year (1999/2000 to 2001/02) Committee/Finance and January 1998

projections of sector resource envelopes Audits Comminee/CITusing macro model.

Expenditure Prioritization Letter of Development Policyand MTEF Plan for 1998/99 Annex 11-3: Page I

* Preparation of intra-sectoral allocations CIT/Sector Ministries January-Marchthrough hearings for Controlling Officers 1999and Sector Ministries.

* Allocation of resources for the core Cabinet March 1999programmes, sub-programmes and sub- CommitteelCommitteeitems based on the costing and within the of PSesindicative ceilings provided by the Cabinetin January.

* Integrating the recurrent and development Finance Arid Audits November 1998budget in the MTEF. CommitteefCIT January 1999

--this will include an audit and review ofthe development budget to firmly establishthe sources of financing of each project,

--the type (capital or recurrent) and thequality of these expenditures and

--their consistency with overall sectoraltargets and the recurrent budget.

* Preparation of Revised Ceilings and Core Cabinet Commitee April 1999Expenditures and Expenditure Cuts for Finance and Audits

Consideration and Decision by Cabinet. Committee/CIT

* Finalization of Budget Estimates. CIT/Sector Ministries April-May 1999

* Submission of Budget to Parliament. Early June 1999

Expenditure Prioritization Letter of Development Policy,and MTEF Plan for 1998/99 Annex 11-3: Page 2

Annex 11-4: Rationalizationi of Government FunctionsMINISTRY OF HEALTH AND POPULATION:RATIONALIZATION OF GOVERNMENT FUNCTIONS

Current No. of Type of ExpectedlActual DateNo. Name of Function Civil Servants Rationalization of Rationalization

I Regional Healfth Offices 70 Abolition of Offices December 31, 1998

2 Cleaning Services 2645 Contracting out April 1, 1999

3 Transport Services 415 Contracting out April 1, 1999

4 Building and Ground Mainte- . 1132 Contracting out December 31, 1998

nance

5 Laundry Services 159 Contracting out April 1, 1999

6 Security Services 740 Contracting out December 31, 1998

7 Catering Services 46 Contracting out April 1,1999

8 Audit Services 5 Contracting out April 1, 1999

9 Drama, Band Graphics 25 Contracting out and December 31, 1998

redeployment

10 Mortuary Services 29 Contracting out July 1, 1999

11 All establishment changes 5097 Creations, upgrading of posts April 1, 1999

especially field staff, e.g.

Nurses and Doctors, etc.

Total: 5,237

Letter of Development PolicyRaftonalization of Govemment Functions Annex 11-4: 1

MINISTRY OF EDUCATION: RATIONALIZATION OF GOVERNMENT FUNCTIONS

Current No. of Type of Expected/ActualNo. Name of Function Civil Servants Rationalization Date of Rationalization

1 Human Resource 13 Redeplyment if posits exist May 1, 1999

Management Registries elsewhere if no posts exist

HQ. discharge the officers

2 Supplies Unit

Security Services 8 Discharge April 1, 1999

3 Projects Implementation

Unit (PIU) 14 Redeploy or Discharge July 1,1999

a. Building and

Construction

4 b. Human Resource Section 14 Redeploy if posts exist elsewhe July 1,1999

if no posts exist, discharge the

Officers

5 PIUc. Procurement 9 Redeploy elsewhenr if posts exi July 1, 1999

if non exist, discharge the officers

6 d. Accounts 17 Redeploy elsewher if posts July 1, 1999exists, if none exist, discharge the

officers

7 Domasi College of

Education

a. Academic I Redeploy October 1, 1998

8 b. Human Resource 3 Redeploy October 1, 1998

9 Malawi College of

Distance Education

a. Schools Broadcasting 5 Abolish July 1, 1999

UnK

10 b. Print Services 80 Contracting Out June 30,1999

11 Teacher Training Colleges 27 Redeploy May 1, 1999

Administration

Letter of Development PolicyRationalization of Govemment Functions Annex 11-4: 2

Ministry of Education (Continued)

Current No. of Type of Expected/ActualNo. Name of Function Clvil Servants Rationalization Date of Rationalization

12 Secondary Schools

a. Maintenance I Discharge May 1, 1999

13 b. Laboratory 2 Discharge 31st December, 1998

14 c. Library 1 Discharge May 1, 1999

15 Secondary Schools

Industrial Class

Employees

a. Kitchen 225 Redeploy December31, 1998

16 b. Utility 5 Discharge May 1,1999

TOTALS 427

Letter of Development PolicyRationalization of Governmnt Functions Annex 11-4: 3

MINISTRY OF WORKS AND SUPPLIESRATIONALIZATION OF GOVERNMENT FUNCTIONS

Current Number Type of ExpectedlActual DateNo. Name of Function of Civil Servants Rationalization of Rationalization

I Building Maintenance 16 Contracting out April 1, 1999

2 Landscape Services 24 Contracting out April 1, 1999

3 Laboratory testing services 39 Contracting out April 1, 1999

4 Building Construction 166 Contracting out Contracting out is

Planning and Design underway

activities

5 Saloon care and Plant hire 12 Contracting out April 1, 1999

6 Security Services 23 Contracting out April 1, 1999

7 Works Training Centre 80 Privatization or transfer July 1, 1999

to National Con-

struction CoLncil

8 Vehicle Maintenance 115 Contracting Dut April 1, 1999

Letter of Development PolicyRationalization of Govemment Functions Annex 11-4:4

MINISTRY OF AGRICULTURE AND IRRIGATIONRATIONALIZATION OF GOVERNMENT FUNCTIONS

Current No. of Type of Expected/Actual DateNo. Name of Function CIviI Servants Rationalization of Rationalization

I Management of Depart- 16 Strengthening Management, December 31,1998ments at Ministry HQ. Policy and Decision Making

2 Administration and Finance 62 Upgrading and strengthe- December 31, 1998

ning of Finance and

Administration

3 Security Services 30 Contracting out services December 31, 1998

4 Support Services 5 Phasing out excess posts December 31, 1998

5 Agriculture Extension and 591 Phasing out excess posts December 31, 1998 -

Support Services in ADDs, December, 2001

RDPs, and EPAs

6 Agriculture Training 225 Restructuring NRC into December 31, 1998 -

Institutions (NRC) Semiatonomous Institute December 2001

7 Land Husbandry Training 9 Abolition of Training Centre December 31, 1998

Centre

8 Agriculture Experimental 20 Abolition of 5 Research December 31, 1998

Research Sub-stations sub-stations

9 Agriculture Research To be determined Contracting out December 31, 1998 -

Services i.e. Plant Protection by the Ministry of December 2001

Quarantine, Seed Inspection Agriculture and

and Certification, Multiplica- Irrigation

tion of plant materials and

seed for horticulture crops,

Farm mechanization,

Multiplication of agroforestry

seedlings Production of

cereal seeds, Production

of rhizobia, soil fertility

analysis, production of

legumes, fibres and oil

seeds

Letter of Development PolicyRationalization of Govemment Functions Annex 11-4: 5

Ministry of Agriculture (Continued)

Current No. of Type of Expected/Actual DateNo. Name of Function Civil Servants Rationalization of Rationalization

10 Agriculture Research Dept. 805 Delinking Department of Agr. July 1, 2001and Research Station and Research Station.

11 Agriculture Extension 33 Upgrading and Strengthening December 31, 1998

Services at RDP

12 Agriculture Extension 5 Upgrading and strengthening December 31, 1998

Services at ADD

13 Agriculture Extension 3068 Upgrading and strengthening December 31, 1998 to

Service at EPA December 2001

Note: i. These figures only reflect estimated expenditure on salaries and wages. Other related

costs have not been taken into account.

ii. Commercialization of Research services and the delinking of the Research Department

may not constitute actual savings because the feasility and cost of contracting out has

been assessed yet.

Letter of Development PolicyRationalization of Govemment Functions Annex 11-4: 6

MINISTRY OF TRANSPORT AND CIVIL AVIATION:RATIONALIZATION OF GOVERNMENT FUNCTIONS

Type of Actual/Expected DateNo. Function Current Staffing Rationalization of Rationalization

1 Stevedore Services 71 Contracting Out December 1, 1998

2 Weighbridge Operations 41 Contracting Out December 1, 1998

3 Vehicle Testing 18 Contracting Out December 1, 1998

4 General Security Services 90 Contracting Out December 1, 1998

5 Vehicle Provision 41 Contracting Out December 1, 1998

6 Maintenance of Airport 53 Tranferred to ADL Transferred already

Development

7 Grounds Maintenance and 179 Tranferred to ADL Transferred already

Cleaning

8 Security of Airport 80 Tranferred to ADL Transferred already

Premises and Equipment

Letter of Development PolicyRationalization of Government Functions Annex 11-4: 7

% of Shares Mode of Number ofPublic enterprise Holding body Date of divestiture to be Sold Sales Employees

I Encor Products Ltd. MDC - 0% Completed2 Auction Holdings Ltd. ADMARC - 48.9%3 David Whitehead & Sons ADMARC - 49% 1998 51 Strategic Partner 24004 National Bank of Malawi ADMARC - 39.16% 19985 Investment & Development Bank of. ADMARC - 27.56% 2000

Mw Ltd.6 Central Tobacco Properties . Ltd. ADMARC - 0% Completed7 Packaging Industries (MW) Ltd. MDC 1998 24.9 Public Offer 3808 The I&E Malawi Ltd. MDC 1998/99/00 86 Strategic Partner 2006

9 The Portland Cement Co. (1974) Ltd. MDC - 23%

10 Tourism Development & Investment. MDC - 76.5% 1999Co. of Mw Ltd. Indebank

11 Leopard Match Co. Ltd. MDC - 30% 199912 National Insurance Co. Ltd. MDC - 5% 1998 5 Public Offer 21513 Commercial Bank of Malawi Ltd. MDC 1999

14 Malawi Book Service GOVERNMENT Completed15 Limbe and Blantvre Rest Houses GOVERNMFNT Comnleted16 Viply Ltd. GOVERNMENT Under implementation17 Stagecoach (Malawi) Ltd. ADMARC - 70.75% 2001

20 Malawi Tea Factory Co. Ltd. ADMARC - 40% 1998/1999 100 Private Placement 230

21 Brick & Tile Co. Ltd. MDC - 0% Completed22 Mining & Investment Development GOVERNMENT

Corporation23 Kasungu Flue Cured Tobacco GOVERNMENT Under implementation

Authority Na Private Placement 15424 Smallholder Sugar Authority GOVERNMENT Under implementation Na Private Placement 258

Divestiture Sequence List: Enterprises Aimed to brought to the Point of Sale by end-March 1999 are in bold letters. Letter of Development PolicyANNEX 11-5: Page 1

% of Shares Mode of Number ofPublic enterprise Holding body Date of divestiture to be Sold Sales Employees

25 Smallholder Coffee Authority GOVERNMENT Under implementation NA Assets will be transferred to a Trurst 65726 Smallholder Tea Authority GOVERNMENT Under implementation Na Private Placement 18027 Lilongwe Smallholder Poultry Project GOVERNMENT 199828 Mzuzu Smallholder Poultry Project GOVERNMENT 1998

29 Malawi Railways (1994) Ltd. GOVERNMENT Under implementation 100 concessioning 99530 Charcoal Production Fund GOVERNMENT31 Malawi Catering Services GOVERNMENT 1998 100 Concessionaire 17232 VIPCOR GOVERNMENT 199933 Mpwepwe Boat Yard GOVERNMENT Under implementation 100 Strategic Partner 4034 National Seed Co. Ltd. ADMARC - 22.5% 200035 Malawi Posts& Telecoms. Corp GOVERNMENT 1999

36 Kuti Ranch GOVERNMENT 199837 Meru Ranch GOVERNMENT 199838 Ngapani Farm GOVERNMENT 199939 Mikolongwe Ranch GOVERNMENT40 Dzalanyama Ranch GOVERNMENT 1999

41 Lusangadzi Farm GOVERNMENT 199942 Nasomba Farm GOVERNMENT43 South Rukuru Farm GOVERNMENT 199944 Zomba Trout Farm GOVERNMENT Under implementation45 Bwemba Dairy Ranch GOVERNMENT 1998 100 Strategic partner 9646 Choma Ranch GOVERNMENT 1998 100 Strategic Partner 7347 Chipunga Farm GOVERNMENT 200048 Nasawa Farm GOVERNMENT 200049 Viphya Farm GOVERNMENT 200050 Dwambadzi Ranch GOVERNMENT 20005 1 Dept. of Fisheries Fish Farms GOVERNMENT 200052 Thuchila Farm GOVERNMENT 199853 Kaombe Farm GOVERNMENT Under implementation

Divestiture Sequence Ust: Enterprises Aimed to brought to the Point of Sale by end-March 1999 are in bold letters. Letter of Development PolicyANNEX 11-5: Page 2

% of Shares Mode of Number ofPublic enterprise Holding body Date of divestiture to be Sold Sales Employees

54 Lifidzi Farm GOVERNMENT Under implementation55 Kasikidzi Farrn GOVERNMENT Under implementation56 Kabumbu Farm GOVERNMENT Under implementation57 Cold Storage Co. Ltd. ADMARC - 100% 1999

58 Optichem (Malawi) Ltd. ADMARC - 0% Completed59 Grain & Milling Ltd. ADMARC - 25.64% 2000

60 Manica Freight Services Ltd. ADMARC - 50% 1998 25 Designated Investment Vehicle 350

61 Bain Hogg Insurance Brokers Ltd. MDC - 25% 1998 25 Designated Investment Vehicle 83

62 Plastic Products Ltd. MDC - 49% 1999

63 Bata Shoe Co. (Malawi) Ltd. MDC - 49% 1998 20 Designated Investment Vehicle 380

64 Malawi Finance Co. Ltd. ADMARC - 60% 1999

65 Finance Corporation Ltd. ADMARC - 100% Under implementation 75 Strategic Partner 39

66 Indefund Ltd. MDC - 35.2% 1999

67 Chillington Agrimal Ltd. MDC -43.59% Under implementation 44 Strategic Partner 103

68 MPICO Holdings Ltd. MDC 1999 25 Satisfaction of Preemption rights 32

69 Malawi Dairy Industries GOVERNMENT Under implementationBlantyre Dairy GOVERNMENT 1999 60 Public Offer 90

Ndata Farm GOVERNMENT 1998 100 Strategic Partner 11Mzuzu Dairy GOVERNMENT 1998 100 Strategic Partner 36

New Capital Dairy GOVERNMENT 1998 100 Strategic Partner 56Katete Farm GOVERNMENT 1998 100 Strategic Partner 37

Head Office GOVERNMENT 1998 100 Strategic Partner 69

70 Air Malawi Ltd. GOVERNMENT 2000

71 Air Cargo Ltd. GOVERNMENT 2000

72 Plast & Vehicle Hire. Organisation GOVERNMENT 2000

73 Government Press GOVERNMENT 2000

74 District Rest House Chain GOVERNMENT Completed75 UNDP Housing Fund GOVERNMENT 200075 Borehole Construction Fund GOVERNMENT Under implementation76 Capital City Development. Fund GOVERNMENT 2000

Divestiture Sequence List: Enterprises Aimed to brought to the Poirn of Sale by end-March 1999 are in bold letters. Letter of Development PolicyANNEX 11-5: Page 3

% of Shares Mode of Number ofPublic enterprise Holding body Date of divestiture to be Sold Sales Employees

77 Chemicals and Marketing Ltd. MDC - 20% 199978 Cory Mann George Ltd. ADMARC - 50% 199879 Malawi Savings Bank GOVERNMENT 2002

80 Central Medical Stores GOVERNMENT 200081 Government Hostel GOVERNMENT 2000

82 Central Government Stores GOVERNMENT 200083 Forestry Resthouses GOVERNMENT 199884 The New Building Society GOVERNMENT Under implementation 30 Strategic Partner 32085 Malawi Rural Finance Co. Ltd. GOVERNMENT 200286 Stockbrokers Malawi Ltd. MDC - 25% 199987 Malawi Lake Services Ltd. GOVERNMENT 1999 100 Concessionaire 21588 Petroleum Control. Commission GOVERNMENT To be decided (TBD)

89 MDC GOVERNMENT TBD

90 ADMARC GOVERNMENT TBD91 Malawi Housing Corporation GOVERNMENT TBD

92 ESCOM GOVERNMENT TBD93 Blantyre Water Board GOVERNMENT TBD

94 ADMARC Investments Holding Co. ADMARC 200395 Lilongwe Water Board GOVERNMENT TBD96 Lilongwe International Airport GOVERNMENT TBD

97 Dwangwa Sugar Corporation ADMARC -0% Completed98 SUCOMA ADMARC 37.3% 199899 Mchenga Coal Mine MDC -47.5% 1998/99 54 Strategic Partner - bidding 854

100 Malawi Int'l Transport Company ADMARC - 100% TBD

Divestiture Sequence List: Enterprises Aimed to brought to the Point of Sale by end-March 1999 are in bold letters. Letter of Development PolicyANNEX 11-5: Page 4

ANNEX 11-6: MALAWI TELECOMMUNICATIONS SECTOR REFORMS'IMPLEMENTATION PLAN

1. Approval and publication of Communication 31 July, 1998 Ministry of InformationPolicy Statement by Government

2. Passing of Communications Bill by Parliament. 4th Quarter, 1998 ParliamentThe Bill lays out the legal framework for theimplementation of the policy statement whichfacilitates further liberalization and privateparticipation in the sector.

3. Establishment of Malawi Communications Ist Quarter, [999 Ministry of InformationRegulatory Authority (MACRA).

4. Licence both cellular operators in a way which December 31, 1998 MPTCwill ensure fair competition between them inthe market place, and make public those termnsof the licence which are not confidential.

5. Licence to be issued to the existing Ist Quarter 1999 MACRAtelecommunications service providers under thenew regulatory regime on terms which ensure alevel playing field.

6. Appoint consultants (advisers) to assist in the Ist Quarter 1999 Privatization Commissiontransaction for private sector participation(strategic partner) in Malawi Telecom.

7. Prepare for the separation of posts from In progress (IFrom MPTCtelecommunications. Jan. 1998)

8. Establish Malawi Telecom as a Company 3rd Quarter 1999through the Company Act and create MalawiPosts as a new Corporation through the newCommunications Act 1998.

9. Implementation of the physical separation of 3rd Quarter 1999 MPTCPosts from Telecoms.

10. Secure Strategic Partner for Malawi Telecoms. 2nd Quarter 2000 Privatization Commission

Telecommunications Sector Letter of Development PolicyImplementation Plan

Annex III: Previous IDA Adjustment Operations in Malawi

Op era .I io II Boardil 11) k \1 xl:11)2V I 111m)1(1.1I 1I;Ide jld( I ;I\ I',,i,1,c ''litll llfidlil9llI'l I'm;lj:1'1;;\1)lUlil;ll I c( -'tit 16;tt Itts Vlil SSe,, ,l. Io(t I, Io, I.i

(t~~~~~~~R fo I In 1'l ;I 11 ( O I'1C1-1| \11:1112L"' IIICI) 1]t 11) I. In RvIo In(',,I

SAL-I FY 81 45 Exchange Interest Rates Tariffs, Tax rates Macroeconomic Maize price Financial reforms ofRate Adjusted and base and sectoral Adjustment MDC and PressAdjusted Adjusted. Planning Holdings

capacitySAL-I FY 84 55 Same Same Tariff and Tax Smallholder Some divestiture of

structure adjusted Price ADMARC's non-adjustment marketing

AssetsSAL-III FY 86 30 Same Same Tax increases and Preparation of 3 Same Reduction in Some divestiture of

tax system reforms. year PSIP and items subject non-market assets ofProgrammatic to price ADMARC;Budget controls MDC and PHL

______ ___ _ ______ ___ _ ______ _____ _____ _____ _____ Introduced RestructuredSAL-I11 Supplement FY 87 10 Same Samne Some of ADMARCts

non-marketingActivities divested

Industrial and Trade Policy FY 88 79 * Same Revision of *Introduction of Reduction Beef prices IndustrialAdjustment Credit Removal Reserve Bank credit based surtax of deficit decontrolled Licensing

of exchange Act system requirementrate * Export reducedallocation Licensing reducedrequirements and duty drawbackfor 65% of introduced

I_importsAgriculture Sector FY 90 70 Removal of *Price changesAdjustment exchange of cropsCredit rate *Limited entryCredit ~~~~~~~~~~~~~~~~allocation of smallholders

requirements in burleyfor 65% of tobaccoimports *Private entry

allowed infertilizer trade* Adjustmentof estate rents

Previous Adjustment Credits Annex IIIPage I of 2

Entrepreneurship FY 92 120 Exchange _* .Expenditure *Expand _lnve.stment ..

Development Rate targets set ffir smallholder rulesand Drought Recovery ~Adjustments .education. access to liberalized

burley tobacco * Investment

Program (EDDRP) * Budgeting Promotionreforms of Agency set up.district and *Minimumperipheral wage policyhealth care. introduced.

Fiscal Restructuring and FY 96 100 Tariff and Surtax * Introduction Deregulation of Deregulation Privatization

Deregulation Program Reforms of the Medium smallholder of transport programn launchedTenm burley tobacco tariffs and under the newlyFxpenditure production. imports. passed Privati2ationFramework At

Liberalization At*Civil Service of trade in

Reform Plan inputs andand tobacco.Implementation

Land reforms

Previous Adjustment Credits Annex III

Page 2 of 2

Annex IVGenerated: 11/10/9S

Status of Bank Group Operations in MalawiIBRD Loans and IDA Credits in the Operations Portfolio

DifferenceBetween expected

Original Amount in US$ Millions and actualFiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Undisbursed Orig Frm Rev' d

Number of Closed Projects: 57

Active Pro-jectsMW-PE-36038 1999 GOVERNMENT OF MALAWI POPULATION/FP 0.00 5.00 0.00 5.21 0.00 0.00

PROJECMW-PE-49599 1999 GOVERNMENT OF MALAWI MASAF II 0.00 66.00 0.00 66.00 0.00 0.00MW-PE-1670 199B GOVERNMENT OF MALAWI SECONDARY ED 0.00 48.20 0.00 48.63 .96 0.00

PROJECTMW-PE-1664 1997 GOVERNMENT OF MALAWI ENV. MANAGEMENT 0.00 12.40 0.00 10.70 .23 0.00MW-PE-1648 1996 GOVERNMET OF MALAWI FISCAL RESTR&DERE 0.00 112.20 0.00 3.84 .83 6.45MW-PE-1668 1996 GOVERNMENT OF MALAWI SOCIAL ACTION EUND 0.00 56.00 0.00 22.79 -3.91 0.00MW-PE-42305 1996 GOVERNMENT OF MALAWI PRIMARY EDUCATION 0.00 22.50 0.00 6.88 7.36 0.00

EMMW-PE-1667 1995 NAT WATER DEV 0.00 79.20 0.00 52.54 16.87 0.00MW-PE-34489 1995 GOVOVERNMENT OF MALAWI MALAWI RAILWAYS 0.00 16.16 0.00 13.49 14.30 1.74

RESTMW-PE-1657 1994 GOVERtMENT OF MALAWI INSTIT.DEV.II 0.00 22.60 0.00 10.73 9.39 0.00MW-PE-1660 1993 GOVERNMENT OF MALAWI AGRIC SERVICES 0.00 45.80 0.00 17.47 12.37 0.00MW-PE-1677 1993 Rural Finl Svcs 0.00 25.00 0.00 7.40 6.61 0.00MW-PE-1636 1992 GOVERNMENT OF MALAWI LOCAL GOVT. 0.00 24.00 0.00 10.24 6.43 0.00MW-PE-1662 1992 GOVERNMENT OF MALAWI POWER V 0.00 55.00 0.00 26.67 27.55 11.19MW-PE-1646 1991 GOVERNMENT OF MALAWI PHN SECTOR CREDIT 0.00 55.50 0.00 21.60 23.64 0.00MW-PE-1658 1991 GOVERNNMENT OF MALAWI FISHERIES DEV. 0.00 8.80 0.00 2.81 2.68 0.00

Total 0.00 654.36 0.00 327.00 125.31 19.38

Active Projects Closed Projects TotalTotal Disbursed (IBRD and IDA): 306.80 1,248.20 1,555.00

of which has been repaid: 0.00 146.09 146.09Total now held by IBRD and IDA: 654.36 1,066.50 1,720,86Amount sold : 0.00 .72 .72

Of which repaid : 0.00 .72 .72Total Undisbursed : 327.00 1.76 328.76

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

Note:Disbursement data is updated at the end of the first week of the month.

Generated by the Operations Information System (OIS) Page

Annex VPage I of 1

MalawiSTATEMENT OF IFC's

Committed and Disbursed PortfolioAs of 30-Sep-98

(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1986/90 LFCM 0.00 .19 0.00 0.00 0.00 .19 0.00 0.001995 AEF Mal Stkbrkrs 0.00 .11 0.00 0.00 0.00 .11 0.00 0.001996 AEF Mwaiwathu 0.00 .81 0.00 0.00 0.00 .81 0.00 0.001997 AEF Maravi .60 0.00 0.00 0.00 .60 0.00 0.00 0.001998 AEF Ufulu Garden .31 0.00 0.00 0.00 .15 0.00 0.00 0.00

Total Portfolio: .91 1.11 0.00 0.00 .75 1.11 0.00 0.00

Approvals Pending Commitment

Loan Equity Quasi Partic

1998 HOFICO 0.00 .30 0.00 0.001998 IDHM 0.00 .50 0.00 0.00

Total Pending Commitment: 0.00 .80 0.00 0.00

Generated by the Operations Information System (OIS) on 11/09/98

Annex VI

Malawi at a glance 10/27/98

Sub-POVERTY and SOCLAL Saharan Low-

Malawi Africa Income Development dlamond'1997Population, mid-year (millions) 10.3 614 2,048 Life expectancyGNP per capita (Atlas method, US$) 220 500 350GNP (Atlas method, US$ billions) 2.3 309 722

Average annual growth, 1991-97

Population (I) 2.7 2.7 2.1Labor force (%) 2.6 2.6 2.3 GNP Gross

per pnrmaryMost recent estimate (latest year available, 1991-97) capita enrollment

Poverty (% of population below national poverty line)Urban population (% of total population) 13 32 28Life expectancy at birth (years) 43 52 59Infant mortality (per 1,000 live births) 133 90 78Child malnutribon (% of children under 5) 27 27 .. Access to safe waterAccess to safe water (% of population) 54 44 71Illiteracy (% of population age 15+) 43 43 47Gross primary enrollment (% of school-age population) 81 75 91 Malawi

Male 84 82 100 -- Low-income groupFemale 77 67 81

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1996 1997IEconomic rstlos

GDP (USS billions) 0.67 1.2 2.3 2.5Gross domestic investment/GOP 26.3 12.3 12.4 12.3 TExports of goods and services/GDP 30.4 23.0 22.7 24.3 TradeGrossdomesOcsavings/GDP 17.8 10.1 0.8 2.1Gross national savings/GDP 14.9 6.3 -1.9 -0.3 TCurrent account balance/GDP .. -6.0 -12.0 -12.6 Do .s\Interest payments/GDP 1.3 3.1 1.2 1.2 Domestic InvestentTotal debVGDP 44.6 98.0 101.8 101.9 Savigs nTotal debt service/exports 9.1 47.4 22.9 14.5Present value of debVGDP .. .. 53.5 49.4Present value of debt/exports .. .. 274.0 242.0 i

Indebtedness1976-86 1987-97 1996 1997 1998-02

(average annual growth)GDP 2.5 3.4 10.7 5.1 4.5 MalawiGNP per capita -0.8 0.7 9.5 2.5 1.9 Low-income groupExports of goods and services 3.2 3.8 16.4 12.9 2.3 1

STRUCTURE of the ECONOMY

(% of GDP) 1976 1986 1996 1997 Growth rates of output and Investment (%)Agriculture 39.2 43.1 36.8 36.3 20 T

Industry 18.5 21.5 18.2 17.5 10 Manufacturing 11.9 14.8 14.2 13.6 0 °10

Services 42.3 35.4 45.0 46.1 -10 f 99 97.20

Private consumption 68.1 70.1 85.8 85.3 30o

General govemment consumption 14.1 19.7 13.3 12.7 - GDI -0--GDPImports of goods and services 38.9 25.1 34.2 34.5 I

(average annual growth) 1976-86 1987-97 1996 1997 Growth rates of exports and Imports l%)

Agriculture 1.1 5.5 35.0 3.9 So TIndustry 1.9 2.7 3.6 1.1 j40

Manufacturng 3.0 2.2 -1.4 0.6 30

Services 3.2 1.3 -5.3 8.7 20 +

Private consumption 1.4 6.6 25.2 4.9 0

General govemment consumption 7.0 -2.6 -14.8 1.6 -10 + 92 96 97

Gross domestic investment -7.1 4.2 5.0 7.1 .20 1Imports of goods and services -2.9 4.5 43.5 11.9 Im sGross nabonal product 2.4 3.6 12.4 5.2

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

Annex VI

Malawi

PRICES and GOVERNMENT FINANCE1976 1986 1996 1997 ifaton

Domestic prices(% change) 100 -

Consunfr prces 14.0 37.6 9.1 sOImrpi-it GDP deflator 10.0 13.2 40.3 13.4 i e0

40 tB

Government flnance 20(% of GDP, includes current grants) oCurrent revenue 22.4 17.1 16.1 92 93 4 95 s 97

Current budget balance -3.1 -3.0 -5. 1 -GD dPdator -- cPIOverall surplus/deflcit -13.8 -8.0 -12.3 |

TRADE

USmllin)1976 1986 1996 Export and Import lvals (US$ m1IlIons)(US$ m7illions) iTotal exports (fob) 248 483 567 32 -

Tobacco 135 300 331 14Tea .. 38 26 69Manufactures | I

Total imports (cif) 257 624 783 41r

Food 2 5 3 2Fuel and energy 32 59 79 139

Capital goods 74 277 340 o t1

Exportpriceindex(1995=100) 107 113 S1 92 93 94 96 e s7Import price index (1995=100) 99 93 1 Exports l ImporsTerms of trade (1995=100) 107 121

BALANCE of PAYMENTSm976 1986 1996 1997 r Cu ntraccountba lnetoGOP rato%)

(US$ Millions)Exports of goods and services 189 271 518 615 t -

Imports of goods and services 249 296 727 872 * 92 93 94 05 e I *Resource balance -60 -25 -209 -258 - T

Net income -10 -61 -39 -41 -10Net current transfers 44 72 65

-15.. I Current account balance -71 -272 -318

Financing items (net) 49 382 264 -20Changes in net reserves 36 22 -109 53 | 2$

Memo:Reserves including gold (US$ milons) 26 42 251 188Conversion rate (DEC, locaVUSS) 0.9 1.9 15.3 16.4

EXTERNAL DEBT and RESOURCE FLOWS1976 1986 1996 1997

(US$ millions) ComposIdon of total debt 1997 (USS milIlons)Total debt outstanding and disbursed 299 1,158 2.311 2,566

IBRD 0 85 42 34 F 22 Ck SOIDA 74 422 1,346 1,559 :E 312

Total debt service 18 130 120 91IBRD 0 11 13 11IDA 1 5 18 20

Composition of net resource flows D:437Official grants 97 83Officialcreditors 29 111 121 76 |Private creditors 20 -32 -4 -3Foreign direct investment 10 30 25 | C 102 '..

Portfolio equity 0

World Bank programCommitments A -IBRD E-8ibaaDisbursements 12 87 141 87 B-IDA D --Ottr multiata F-PrivatePrincipal repayments 0 5 17 17 j C-IMF G-Short-twmNetflows 12 82 124 70 1II

Interest payments 1 11 14 14Net transfers 12 72 110 56

Development Economics 10127t98

Annex VII

Malawi Social IndicatorsLatest single year Same regionrincome group

Sub-Saharan Low-

1970-75 19804t5 1990-96 Africa income

POPULATIONTotal population. mid-year (millions) 5.2 7.2 10.0 596.4 3,236.2

Growth rate (% annual average) 3.0 3.2 2.7 2.7 1.8Urban population (% of population) 7.7 10.4 13.9 31.7 29.1Total fertility rate (births per woman) 7.8 7.6 6.5 5.6 3.2

POVERTY(% of population)National headcount index .. .. 54.0

Urban headcount index .. ..

Rural headcount index

INCOMEGNP per capita (USS) 130 160 180 490 490Consumer rice index (1987=100) .. 70 945 266 275Food pnce index (1987=100) .. 68 1.226

INCOME/CONSUMPTION DISTRIBUTION(% of income or consumption)Lowest quintileHighest quintile

SOCIAL INDICATORSPublic expenditure

Health (% of GDP) .. .. 2.3 .. 1.5Education (% of GNP) .. 3.5 3.3 5.3 3.6Social security and welfare (% of GDP) ..

Not primary school enrollment rate(% of age group)

Total .. 43 100Male .. 46 100Female 41 100

Access to safe water(% of population)

Total 32 45 45 76Urban 70 52 63 80Rural 27 44 34 72

Immunization rate(% under 12 months)

Measles 49 99 56 80DPT 52 98 55 81

Child malnutrition (% under 5 years) 24 28Life expectancy at birth(years)

Total 41 42 43 52 63Male 40 41 43 51 62Female 42 42 43 54 64

MortalityInfant (per thousand live births) 191 147 133 91 68Under 5 (per thousand live births) 347 271 217 147 94Adult (15-59)

Male (per 1,000 population) 479 429 553 448 231Female (per 1,000 population) 388 349 487 376 206

Matemal (per 100.000 live births) .. 250 620

World Development Indicators 1998 CD-ROM, World Bank

Annex VIlPaep1 of 3

Malawi - Key Economic Indicators

Actual Estimate Projected

Indicato7 1993 1994 1995 1996 1997 1998 1999 2000 2001

National accounts(as % GDP at currentmarket prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture' 44.8 22.3 26.9 33.2 33.0 32.6 32.0 31.4 30.8

Industry' 22.1 19.3 17.4 16.5 15.9 16.1 16.2 16.3 16.4

Services' 24.7 47.4 44.2 40.6 41.9 38.3 38.8 38.7 39.1

Total Consumption 100.9 91.7 91.9 99.2 97.9 94.7 94.0 93.8 92.8Grossdomesticfixed 13.0 27.0 14.1 9.8 9.8 15.5 16.9 17.5 17.9investment

Govemment Investment' 5.1 8.9 6.7 4.9 5.2 14.0 14.2 14.6 14.7Private investment 10.1 20.4 9.9 7.5 7.1 4.3 6.0 5.9 6.2(includes increase instocks)

Exports (GNFS)b 16.1 29.8 29.0 22.7 24.3 30.4 33.3 33.4 33.8Imports (GNFS) 32.2 50.8 37.5 34.2 34.5 43.3 47.5 47.7 47.5

Gross domestic savings -0.9 8.3 8.1 0.8 2.1 5.3 6.0 6.2 7.2

Gross national savingse , -1.5 6.4 4.5 -1.9 -0.3 1.7 2.1 3.2 4.5

Memorandum itemsGross domestic product 2071 1173 1465 2270 2519 1804 1735 1860 1996(USS million at currentprices)Gross national product per 200 170 170 180 221) 210 190 170 170capita (USS, Atlas method)

Real annual growth rates(I/e, calculated from 1978prices)

Gross domestic product at 9.7% -10.2% 14.7% 10.7% 5.1'Xe 4.0% 4.5% 4.5% 4.5%market pricesGross Domestic Income 9.9% -13.9% 20.8% 11.1% 5.2% 3.9% 3.6% 3.8% 4.3%

Real annual per capitagrowth rates (Y, calculatedfrom 1978 prices)

Gross domestic product at 6.7% -12.7% 11.6% 7.8% 2.4% 1.4% 1.9% 1.9% 1.9%market prices

Total Consumptionh 9.6% -18.5% 14.1% 14.1% 1.8% 0.5% 0.8% 0.9% 1.0%Private consumption 15.6% -29.3% 37.6% 22.0% 2.2% 2.0% -0.1% 1.0% 0.9%

(Continued)

Annex VillPae2 o3

Malawi - Key Economic Indicators(Continued)

Actual Estimate Projected

Indicatcr 1993 1994 1995 1996 1997 1998 1999 2000 2001

Balanee of Payments(USSm)

Exports (GNFS)b 338 352 424 518 615 548 577 621 674Merchandise FOB 321 327 404 483 567 509 535 576 625

Imports (GNFS)b 667 600 548 727 872 781 824 887 947Merchandise FOB 627 536 474 624 783 689 727 784 837

Resource balance -329 -248 -125 -209 -258 -233 -247 -266 -274Netcurrenttansfers 150 131 147 72 65 -19 -18 -16 -18(including official currenttransfers)Cwurrnt account balance -222 -159 -25 -176 -234 -142 -176 -192 -199(after official capital grants)

Net private foreign direct .. 30 25 40 48 24 29investment

Long-tern loans (net)' 195 146 109 115 76 89 229 215 215Official 163 77 172 121 76 97 210 217 215Private 32 69 -63 -6 0 -8 19 -2 -1

Other capital i (net, including 34 .. .. 140 80 70 -21 -15 -15errors and omissions)

Change in reservesd -7 29 -87 -109 53 -57 -80 -32 -30

Memorandum items

Resource balance (% of -15.9% -21.1% -8.5% -9.2% -10.2% -12.9% -14.2% -14.3% -13.7%GDP at current marketprices)Real annual growth rates(1978 prices)

Merchandise expors -3.3% 5.0% 2.6% 12.3% 10.2% 2.3% 6.0% 6.0% 6.1%(FOB)

Primary -3.4% 1.7% 0.1% 5.6% 8.1% -1.8% 5.0% 5.0% 5.0%Manufactures .. .. .. .. .. ..

Merchandise imports -11.1% -17.6% -16.4% 32.7% 33.2% -1.9% 3.0% 3.7% 4.2%(CIF)

Public finance(as % of GDP at currentmarket prices)'Current revenues 17.9 21.8 19.8 17.1 16.1 23.5 19.7 20.3 20.9Currentexpenditures 21.5 49.3 27.8 20.1 21.1 25.0 19.0 17.7 16.8

(Continued)

Anne VIIIPae 3 of 3

Malawi - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000 2001

Current account surplus(+) -3.7 -27.6 -8.0 -3.0 -5.1 -1.6 0.7 2.6 4.1or deficit (-)

Capital Expenditure h 5.4 15.1 7.3 5.0 5.5 14.0 14.2 14.6 14.7Foreign financing 10.3 25.0 11.2 10.0 7.0 13.2 11.8 17.6 16.2

Monetary indicatorsM2/GDP(atcurrentmarket 19.0 26.4 17.4 15.6 13.4 13.5 13.7 13.9 14.!prices)Growth of M2 (/) 41.8 56.4 43.7 39.9 2.2 34.1 32.4 18.7 14.4Private sector credit growth -71.3 60.1 -95.3 45.1 53.2 92.1 92.1 92.1 92.1total credit growth (%/e)

Price indices( 1978 -100)Merchandise export price 92.3 90.6 109.2 116.3 123.7 108.6 107.7 109.4 111.9index

Merchandiseimportprice 119.7 124.0 131.2 130.0 122.6 109.9 112.7 117.1 119.9indexMerchandise temns of trade 77.1 73.1 83.2 89.4 100.9 98.8 95.6 93.4 93.3indexReal exchange rate 97.0 68.6 59.6 82.3 91.8 65.8 59.7 59.7 59.7

(USSILCU)

Real interest ratesConsumer price index 19.7% 34.7% 83.3% 37.6% 9.1% 28.0% 25.0% 12.0% 8.0%(% growth rate)

a. GDP components are estimated at factor cost, and exclude net indirect taxes (not listed), so that the sum is not 1000/o.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the govemment to which the data refer.C "LCU" denotes "local currency units." An increase in USSILCU denotes appreciation.g. Government investment raises in 1998 due to the inclusion, for the first time, of certain "development expenditures"

funded by donors in the budget.h. Consumption declines because it is calculated as a residual and in 1999, reflects the increase in measured

government investment in 1998 & 99.i. The increase in long-term loans in 1998 and 1999 is due to the inclusion in the budget, for the first time, of certain

donor-funded "development expenditures". These are partially reflected in calender year 1998 (which includeshalf of FY98/99) and are fully reflected in calender year 1999.

j. "Other capital" is the sum of errors and omissions, changes in commercial banks' reserves and the differencebetween central bank liabilities and net borrowing from the IMF.

Ann"x Vill 2popq I Of I

Malawi - Key Exposure Indicators

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000 2001

Total debtoutstanding and 1826 2025 2242 2311 2566 2291 2479 2685 2892

disbursed (TDO) (USSm)'

Net disbursements (USSm)' 217 115 340 125 66 136 227 207 208

Total debt service (TDS) 78 80 118 89 94 101 103 94 96

(USSm)'

Debt and debt service indicators

(%/-)

TDO/XGSb 337.2 569.1 525.7 440.2 409.0 399.2 409.3 408.1 406.3

TDOIGDP 88.2 172.6 153.1 101.8 101.9 127.0 142.9 144.4 144.9

TDS/XGS 23.0 22.4 27.8 16.9 14.9 17.6 16.9 14.3 13.5

ConcessionalVTDO 84.9 84.5 76.3 85.4 87.9 90.1 92.0 93.3 94.3

IBRD exposure indicators (%/6)

IBRDDS/publicDS 18.8 13.1 15.7 15.3 11.8 10.9 9.7 9.6 6.2

Preferred creditor DS/public 62.2 68.4 56.3 74.1 75.1 75.2 74.5 71.8 70.7

DS (%)'

IBRD DSIXGS 4.3 2.9 4.3 2.5 1.8 1.9 1.7 1.4 0.8

IBRD TDO (USSm)d 67 65 55 42 34 26 17 9 4

Of whic h present value of

guarantees (USSm)

Share of IBRD portfolio ('/') 0.06% 0.06% .. .. .. ..

IDA TDO (USSm)d 1062 1160 1251 1346 1559 1466 1589 1723 1831

IFC (USSm)

Loans

Equity and quasi-equity Ic

MIGA

MIGA guarantees (USSm)

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. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements.

d. Includes present value of guarantees.

e. Includes equity and quasi-equity types of both loan and equity instruments.

Anncx Vll3

Short Term Estimates Table

MalawiActual Estimate Projected

1992 1993 1994 1995 1996 1997 1998 1999 2000

GROWTH RATES('l0 change)

Population 2.8 2.8 2.8 2.8 2.7 2.6 2.6 2.6 2.6GDP (at market prices) -7.3 9.7 -10.2 :14.7 10.7 5.1 4.0 4.5 4.5Consumption per capita -2.0 9.6 -18.5 14.1 14.1 1.8 0.5 0.8 0.9Export of GNFS -2.9 -5.1 10.3 -0.4 16.4 12.9 1.0 5.9 6.0Import of GNFS 15.0 -7.8 -9.3 -111.2 43.5 11.9 -0.9 3.0 3.8Total investment -20.5 -16.3 -7.5 -24.2 5.0 7.1 8.8 6.3 8.1Agriculture value added -25.1 53.0 -29.3 38.2 35.0 3.9 2.7 2.5 2.5Non-traditional exportsMoney supply 21.8 41.8 56.4 43.7 39.9 2.2 34.1 32.4 18.7Consumer prices 22.7 19.7 34.7 83.3 37.6 9.1 25.6 25.5 12.9

KEY ECONOMIC RATIOS and LEVELS

Interest Rates and Elasticity

Nominal interest rate (end-year, %) 20.0 25.0 40.0 50.0 27.0 27.0Real discount interest rate (%) -2.7 5.3 5.3 -33.3 -10.6 17.9Import elasticity -2.0 -0.8 0.9 -0.8 4.1 2.3 -0.2 0.7 0.8

National Accounts(% of GDP)

Gross domestic investment 19.9 15.2 29.3 16.6 12.4 12.3 18.2 20.2 20.5Public investment 10.2 8.4 15.3 9.2 6.6 7.1 14.0 14.2 14.6Private investment 9.7 6.8 14.1 7.4 5.8 5.1 4.3 6.0 5.9

Gross domestic savings 0.7 -0.9 8.3 8.1 0.8 2.1 5.3 6.0 6.2Private savings 6.3 3.1 29.8 17.2 4.4 6.5 6.9 5.2 3.6

Gross national savings -0.7 -1.5 6.4 4.5 -1.9 -0.3 1.7 2.1 3.2

GNP current (millions US$) 1,761 2,029 1,130 1,417 2,231 2,478 1,757 1,685 1,820GNP constantl978 (millions USS) 466 512 451 520 585 615 635 663 697

Balance of Payments(C% of GDP)

Exports of goods, services, and income receipts 23.6 16.4 30.3 29.1 23.1 24.9 30.8 33.7 34.1Imports of goods, services, and income payments 44.9 34.3 55.1 40.9 34.1 36.8 46.3 50.8 50.6Current account balance before capital grants -20.6 -16.5 -23.1 -12.1 -12.0 -12.6 -16.6 -18.1 -17.3Official current transfers 3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current account balance before grants (mill. USS) -371.3 -341.4 -270.7 -176.6 -272.5 -317.8 -298.7 -314.8 -321.7Reserves including gold (mill. USS) 104.4 54.3 61.0 132.5 251.2 188.2 207.1 279.1 301.7Gross external reserves (months of imports) 1.5 0.9 1.1 2.7 3.9 2.4 3.0 3.8 3.9Gross external reserves

excluding gold (months of imports) 1.4 -0.1 0.2 *-1.8 -1.8 0.8 3.0 3.8 3.9

Key Indices and Exchange Rates

Export price index (index, 1987=100) 111.9 92.3 90.6 IC19.2 116.3 123.7 108.6 107.7 109.4Import price index (index, 1987=100) 120.8 119.7 124.0 131.2 130.0 122.6 109.9 112.7 117.1Extemal terms of trade (index, 1987=100) 92.6 77.1 73.1 83.2 89.4 100.9 98.8 95.6 93.4Implicit GDP deflator (1987=100) 227.1 291.1 364.7 694.4 974.1 1,105.0 1,414.3 1,767.9 1,980.1Real effective exchange rate (index, 1987=100) 106.7 108.6 76.9 66.8 92.2 102.8 73.7 66.9 66.9Exchange rate (locaVUSS) 3.6 4.4 8.7 15.3 15.3 16.4 30.6 41.5 45.3

Annex VWII 3

MalawiActual Estimate Projected

1992 1993 1994 1995 1996 1997 1998 1999 2000

Government Finance(% of GDP)

Government deficit/surplusexcluding capital grants (incl. current grants) -16.2 -9.1 -42.7 -15.3 -8.0 -10.6 -15.5 -13.5 -12.0excluding all grants -16.2 -9.1 -42.7 -15.3 -8.0 -10.6 -15.5 -13.5 -12.0including all grants -13.6 -6.0 -27.9 -6.5 -3.1 -6.9 -6.8 -6.8 -6.1excl. capital grants & privatization receipts /a -16.2 -9.1 -42.7 -15.3 -8.0 -10.6 -15.5 -13.5 -12.0

Total revenue, excluding all grants 21.8 17.9 21.8 19.8 17.1 16.1 23.5 19.7 20.3Total revenue, including all grants 24.5 21.0 36.5 28.7 22.0 19.8 32.1 26.4 26.2Grants, current and capital 2.6 3.1 14.8 8.9 4.9 3.7 8.7 6.7 5.9

Capital grants 2.6 3.1 14.8 8.9 4.9 3.7 8.7 6.7 5.9Current grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total expenditures 38.0 27.0 64.4 35.2 25.1 26.7 39.0 33.2 32.3Current expenditures 28.9 21.5 49.3 27.8 20.1 21.1 25.0 19.0 17.7Capital expenditures 9.1 5.4 15.1 7.3 5.0 5.5 14.0 14.2 14.6

Debt and Financial Indicators(millions of USS)

Total debt outstanding 1,709 1,826 2,025 2,242 2,311 2,566 2,291 2,480 2,685Total debt service paid 89 72 74 108 89 95 101 101 93Grossdisbursements/b 158 194 147 227 180 119 129 196 178

IDA 86 146 59 73 141 87 101 136 150IBRD 0 0 0 0 0 0 0 0 0

Net flows /b 106 151 100 161 124 55 50 118 106IDA 82 142 53 66 133 78 91 123 134IBRD -9 -9 -7 -12 -9 -8 -8 -8 -8

Net transfers /b 106 151 100 161 .. ..IDA 82 142 53 66 .. ..

IBRD -9 -9 -7 -12 ..Portfolio equity flows (from GDF) c .. .. .. .. 0 0 0 0 0Grants (excl. technical cooperation) (from GDF) /c .. .. .. .. 97 83 157 139 129Foreign direct investment (from GDF) /c .. .. .. .. 30 25 40 48 24

Debt and Financial Indicators

Domestic bank credit to public sector (% of total) 44.5 56.6 5 ) 47.2 48.1 48.0 38.8 111.8 142.6Debt outstanding/exports /d 403.2 537.2 569.1 525.7 440.2 409.0 399.2 409.5 408.1Debt outstanding/GDP 95.0 88.2 172.6 153.1 101.8 101.9 127.0 143.0 144.4Debt service paid/exports /d 21.0 21.3 20.7 25.4 17.0 15.1 17.6 16.7 14.2Arrears on external debt/DOD /e 0.0 0.0 0.0 0.0 0.9 0.8 1.2 1.1 1.0Present value of DOD/exports (%) .. .. .. .. .. ..Present value of debt service/exports /d .. .. .. .. 286.0 257.0 235.0 231.0 238.0Present value of debt servicelGNP .. .. .. .. .. 20.7 21.9 21.3 20.2

Social Indicators

Under 5 mortality rateFemale primary enrollment rate

(% of school age female population) .. 77.0 .. .. .. ..

a. Privatization receipts are equivalent to capital revenue.b. Includes long-term debt, use of IMF credit and net short-term capital.c. "GDF" denotes Global Development Finance.

Annex VIII 4

Alternative Scenarios | 1994 1991 204 20011 200 2003 2004 2001 2006 AR9-a

Growth Rate of GDPHIGH 4.0% 5.0°/. 5.5% 6. 0% 6.0%/c 6.0%/ 6.0%/ 6.0%/ 6.0% 5.6%BASE 4.0%/ 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.4%LOW 4.0%/o 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.7%

Real Per Capita Growth Rates:Gross Domestic Product (GDP)

HIGH 1.4% 2.3% 2.8% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 2.9%BASE 1.4% 1.9%/. 1.90/o 1.9% 1.9% 1.9°/e 1.9%/ 1.9%/e 1.9%/ L.8%LOW 1.4% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% 0.1%

As a Share of GDP in LCU:Investment

HIGH 18.2% 20.6% 20.9% 21.5% 22.00/% 23.0% 23.9%/ 24.8% 25.3% 22.2%BASE 18.2% 20.2% 20.5% 20.9% 21.3% 21.8% 22.2% 22.6% 23.0°/ 2l.2%LOW 18.2% 14.0% 14.0% 13.90/ 13.8% 13.8% 13.7% 13.6% 13.6% 14.3%

PrivateHIGH 4.8% 7.0% 9.0% 10.0% 11.0% 11.2% 11.4% 12.0% 12.0°/ 9.8%BASE 4.3% 6.0% 5.9% 6.2% 6.5% 6.6% 6.9% 7.1% 7.4% 63%

LOW 3.8% 3.7% 4.2% 3.5% 2.8% 1.9% 1.4% 1.0% 0.90/ 2.6%

Gross Domestic SavingsHIGH 5.3% 8.2% 11.8% 13.5% 15.3% 17.0%/a 18.3% 19.5% 20.7% 14.4%BASE 5.3% 6.0% 6.2% 7.2% 8.2% 9.4% 10.2% 10.90/ 11.70/ J.3%LOW 5.3% 1.7% 1.2% 1.5% 1.8% 2.2% 2.4% 2.6% 2.7% 24%

Govemment Defici(-YGDPHIGH -13.7% -10.8% -7.4% -5.6% -4.3% -3.8% -3.5% -3.2% -3.1% -62%BASE -15.5% .- 13.5% -12.0% -10.6% -10.2% -9.3% -8.8% -8.3% -7.8% -10.7%LOW -13.2% -14.1% -14.7% -14.1% -12.0% -11.3% -10.1% -9.1% -8.5% -11.9%

CABHIGH -16.5% -16.6% -12.2% -10.7% -9.2% -8.3% -7.7% -7.4% -6.9% -10.6%BASE -16.6% -18.1% -17.3% -16.5% -15.7% -14.8% -14.3% -14.0% -13.8% -15.7%LOW -16.5% -16.00/% -15.8% -15.2% -14.7% -14.1% -13.8% -13.6% -13.5% -14.8%

Export real growth rate (GNFS)HIGH 1.0% 8.9% 9.0% 9.00/% 9.0% 8.0% 8.1% 8.1% 8.1% 7Z7%BASE 1.0% 5.9% 6.0% 6.0% 6.0% 6.0% 6.1% 6.1% 6.1% 5.5%LOW 1.0% 2.9% 3.0% 3.0% 3.0% 3.00/o 3.1% 3.1% 3.1% 2.8%

Exports/GDPHIGH 30.4% 37.0% 37.8% 38.8% 39.8% 40.4% 41.1% 41.9% 42.7/o 38.9%BASE 30.4% 33.3% 33.4% 33.8% 34.1% 34.6% 35.00/% 35.5% 36.00/. 34.0%LOW 30.4% 30.5% 30.4% 30.4% 30.5% 30.6% 30.7% 30.8% 30.9% 30.6%

Inflation (average)HIGH 28.0% 15.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.00/. 9.0% I.8%BASE 28.0% 25.0% 12.00/% 8.0% 8 8.00/o 8.0% 8.0% 8.0% 8.00/ 12.6%LOW 28.00/% 35.00/o 25.0% 20.0% 20.0% 20.0% 20.00/. 20.00/ 20.00/ 23.1%

Annx IXPape 1 of 2

Malawi - Balance of Payments(USS millions at current prices)

Base-cave (most likely) projection

Actual Estimate Projection1993 1994 1995 1996 1997 1998 1999 20W 2001 2002 2007

TotalexportsofGNFS' 338 352 424 518 615 548 577 621 674 731 1102Merchandise (FOB) 321 327 404 483 567 509 535 576 625 678 1026Nonfactor services 17 25 19 35 48 40 42 45 49 53 76

Total ImportsofGNFS 667 600 548 727 872 781 824 887 947 1011 1432Merchandise (FOB) 627 536 474 624 783 689 727 784 837 892 1256Nonfactor services 40 64 74 103 89 92 96 103 III 119 176

Resource balance -329 -248 -125 .209 -258 -233 -247 -266 -274 -280 -329

Net factor income -42 -43 -47 -39 -41 -47 -50 -39 -37 44 -60Factor receipts 2 4 3 7 13 7 8 14 13 14 21Factor payments 44 47 50 46 54 55 58 53 50 58 8I

Interest (scheduled) 29 34 37 29 33 29 26 24 33 33 0Toa interest paid b 27 32 36 29 33 29 26 24 33 33 0Net adjustments to scheduled interest 2 2 1 0 0 0 0 0 0 0 0

Other factor payments 15 13 13 17 21 26 32 29 17 24 8 1

Net private current transfers 30 20 -4 -24 .19 -19 -18 -16 -18 -12 -12Current receipts, ofwhich 46 36 12 8 18 18 21 23 25 27 27

Workers' remittances 0 0 0 0 0 18 21 23 25 27 27Current payments 16 16 17 33 37 37 39 39 43 39 39

Net official current transfers 120 III 152 97 83 0 0 0 0 0 0

Current account balance -341 -271 -177 -272 -318 -299 -315 -322 -329 -336 -401

Officialcapitalgrants 120 III 152 97 83 157 139 129 130 119 99

Private investment (net) 0 .. .. 30 25 40 48 24 29 32 47Direct foreign investment 0 .. .. 30 25 40 48 24 29 32 47Portfolio investments 0 0 0 0 0 0 0 0 0 0 0

NetLT'borrowing 195 146 109 115 76 S9 229 215 215 235 311Disbursementsb 194 121 215 158 119 144 262 274 276 297 395Repayments(scheduled) - 47 47 78 41 43 44 54 62 56 0

Total principal repaid" .. 47 47 78 41 43 44 54 62 56 0Net adjustments to scheduled repayments 0 0 0 0 0 0 0 0 0 0 0

Net other LT inflows .. 72.0 -59.4 35.0 -2.0 -11.7 10.4 -5.0 0.5 6.3 -83.9(continued)

a. Goods and nonfactor services.b. Historical data from Debt Reporting System (DRS); other data projected by country operations division staff.c. "Lr denotes 'long-term."

Page 2 df 2Malawi - Balance of Payments (continued)

(USS millions at current prices)Bse-case (most likely) projection

Actutal Estmate Prjecion1993 1994 - 1995 I99 1997 1998 1999 2000 2W01 202 2-- r7

Adjustnents to scheduled debt service 2 2 1 0 0 0 0 0 0 0 0Debt service not paid 2 2 1 0 0 0 0 0 0 0 0Reduction in anarslprepayments(-) 0 0 0 0 0 0 0 0 0 0 0

Other capital flows 32 140 so 70 -21 -15 -15 -15 -15Net short-tert capital 72 21 189 0 0 45 2, 0 0 0 0Net capital flows n.e.i.d -34 -24 -3 -6 -6 25 46 -15 -15 -15 -15Errors and omissions -6 .. 146 86 0 0 0 0 0 0

Change in net intemnational reserves -7 29 -87 -109 53 -57 -80 -32 -30 -35 -41(- indicates increase in assets)

Memorandum itemsTotal grossreserves,ofwhich 54 61 133 251 188 207 279 302 324 352 504

Total reserves minus gold -8 9 -89 -117 60 207 279 302 324 352 504Gold (at year-end London price) 62 52 221 368

Total grossreserves(inmonths'importsG&S) 0.9 1.1 2.7 3.9 2.4 3.0 3.8 3.9 3.9 4.0 4.0

Exchange ratesAnnual average (LCU/USS) 4.4 8.7 15.3 15.3 16.4 30.6 41.5 45.3 47.7 50.2 65.2Atendyear(LCU/USS) 4.5 15.3 15.3 15.3 21.2 36.0 43.4 46.5 48.9 51.5 66.9Index real average exchange rate (1978=100) 97.0 68.6 59.6 82.3 91.S 65.8 59.7 59.7 59.7 59.7 59.7

Cufrent Account Balance as % GDP -16.5 -23.1 -12.1 -12.0 -12.6 -16.6 -18.1 -17.3 -16.5 -15.7 -13.3

d. "n,e." denotes "not elsewhere inhtded Pe. "G & S" denotes "goods and services."f. 'LCU" denotes "local currency units."g. The index of the real exchange rate reflects USSILCU, so an increase is an appreciation at the real exchange rate.

L L , .

For consideration onThursday, December 3, 1998

IDA/R98-1 64/1

FROM: The Secretary November 20, 1998

MALAWI: Fiscal Restructuring and Deregulation Plrogram II (FRDP) andFRDP II Technical Assistance Project

(Corrigendum)

1. Attached is Annex X (Pages 1 to 4) for the President's Report and Recommendation(P-7273-MAI) on a proposed credit to the Republic of Malawi f:or a Fiscal Restructuring andDeregulation Program II (FRDP) and FRDP II Technical Assistance Project, which wasinadvertently omitted from the Report distributed on November 11, 1998.

2. Questions on this document should be referred to Mr. Ahsan (x31672).

Distribution:

Executive Directors and AlternatesPresidentBank Group Senior ManagementVice Presidents, Bank, IFC and MIGADirectors and Department Heads, Bank, IFC, and MIGA

-, I4Pi d ay bm', usead, recpmit on 1.i

7~~71

AnnexXPage 1 of 4

Annex X: Procurement and Disbursement Arrangements

Malawi: Second Fiscal Restructuring and Deregulation Technical Assistance Project

The Second Fiscal Restructuring and Technical Assistance Project will provide necessaryconsultancy support, training and office equipment to meet three objectives: (i) implement policymeasures being implemented under the Government's reform program supported by the FRDP IIstructural adjustment credit from IDA; this will include providing consultancy support, training andhardware for implementing the medium term expenditure framework, auditing and reviewing thedevelopment budget, reforming expenditure control procedures and systems, and implementing civilservice reforms; (ii) evaluate the impact of structural reforms on Malawi's economy, in particular byexamining the effects of liberalizing trade and exchange rate policy on manufacturing, and liberalizingagriculture production and trade on the agriculture sector; and (iii) develop the agenda for the next roundof macroeconomic and sectoral policy reforms through research into further constraints to growth. Theestimated project costs and procurement arrangements are shown in Table 1 below.

Table 1: Total Project Cost by Procurement Arrangements (Million US $)Malawi: Second Fiscal Restructuring and Deregulation Technical Assistance Project

Categories Procurement Method Total

ICB Shopping Others(National and

Intemat'l)

1 Office Equipment 0.1 0.2 0 0.3

2. Training and IEC Activities 0 0 0.5 0.5

3. Consultant Services 0 0 1.0 1.0

4. Contingencies - - 0.2 0.2

TOTAL 0.1 0.2 1.7 2.0

Note: ICB = International competitive bidding.

Procurement

Procurement would be handled by the Ministry of Finance staff supervised by the Secretary to theTreasury. The Secretary of the Treasury will also be assisted by the Inter-Ministerial Task Force toImplement the Second Fiscal Restructuring and Deregulation Program.

The project would procure goods and services in accordance with the "Guidelines, Procurementunder IBRD Loans and IDA Credits", published in January 1995 and revised in January and August 1996and September 1997. Consultants providing services to the project, would be hired in accordance with theBank's "Selection and Employment of Consultants by World Bank Borrowers" dated January 1997 andrevised in September 1997.

Annex XPage 2 of 4

Equipment and Goods. The project will finance the purchase of office equipment (US $ 300,000equivalent). The equipment will be procured through ICB, NCB, Nati-onal Shopping and/or IAPSO. Theprocurement methods are described in Table 2 below.

Table 2: Threshold for Procurement Methods and Prior ReviewMalawi: Second Fiscal Restructuring and Deregulation Technical Assistance Project

Expenditure Category Contract Procurement ContractsValue Method Subject(Threshold) to Prior

Review

Office Equipment US$ 100,000 ICB Alland above

Below US $100,000 NCB Allto US$ 20,000

Below US$ 20,000 Nationaland below Shopping/lAPSO None

Consultant US$ 100,000 QCBS AllServices and above for

firms

US$ 50,000 Individuzds Alland above forindividuals

Below QCBS NoneUS$100,000 Single Source Allfor firms andbelow US$50,000 forindividuals

N.B All Terms of reference will be subject to prior review.

Consultant Services, Training and IEC.. The project will finance consultant services to a total amount ofUS$ 1 million equivalent and training and information and education campaign costs of US $ 500,000.Contracts with firms for assignments of US$ 100,000 equivalent and above will be awarded through theQuality and Cost-Based (QCBS) method of selection. Contracts with firms below US$ 100,000 or withindividuals below $ 50,000 will be awarded through the QCBS selection method or single sourcing.Services of technical consultants and contractual technical specialists employed to manage projectcomponents will be procured under individual contracts in accordance with the provision of paragraphs5.1-5.3 of the "Consultant Guidelines"

Prior Review. All contracts for goods under ICB will be submitted to IDA for prior review. Contracts forconsultant, training and IEC services of US$ 100,000 or more for finns and US$ 50,000 or more for

Annex XPage 3 of 4

individuals will be subject to prior review by IDA. Extensions to consulting contracts for firms andindividuals not originally subject to prior review will be subject to prior review when such extensions willraise the contract values above US$ 100,000 of firms and US$ 50,000 for individuals. All NCB andconsultant contracts with a value below the thresholds established for prior review will be subject toex-post review by IDA on a sample basis. All single sourcing of consultants and all terms of referencewill be subject to prior review. All contract documentation will be retained by the Ministry of Financeand made available to IDA for ex-post review upon request. Receipts and other supporting documents forSOEs will be maintained on file in the PIU and made available to IDA for review during supervisionmissions.

Disbursement

The project will be implemented over athree year period and will close on June 30, 2001. This IDAproject will finance 100% of foreign expenditures and 90% of local expenditures in the case of officeequipment, and 100% of all other expenditures. Government will also contribute further toward the projectthrough the time devoted to the project by public service staff, who will provide back-up support andexpertise.

Table 3: Allocation of IDA Credit ProceedsMalawi: Second Fiscal Restructuring and Deregulation Technical Assistance Project

Amount In Million US $ Financing Percentage

1. Office Equipment 0.3 100% of foreignexpenditures and90% of localexpenditures

2. Training and IEC Activities 0.5 100%

3. Consultant Services 1.0 100%

4. Contingencies 0.2

TOTAL 2.0

Note: ICB = International competitive bidding.

Use of Statements of Expenses (SOEs)

All applications to withdraw proceeds from the Credit will be fully documented, except for: (i)expenditures under contracts with a value of less than US$ 100,000 each for equipment, goods andconsultant services provided by firms; (ii) expenditures under contracts with a value of less than US$50,000 for individual consultants; (iii) expenditures under National Shopping procedures; (iv)expenditures on training and IEC activities; and (v) incremental operating costs. These may all be claimedon the basis of Certified Statements of Expenditures (SOEs). Documentation supporting expendituresclaimed against SOEs will be retained at the PIU and made available for review by IDA on request.Disbursement and withdrawal procedures are detailed in the World Bank Disbursement Handbook (1992edition).

Annex XPage 4 of 4

SpecialAccount

To facilitate disbursement of eligible expenditures, the Government of Malawi will open a SpecialAccount (SA) in a commercial bank to cover local and foreign currencies of IDA's share of eligibleexpenditures. The authorized allocation for the Special Account will be US$ 100,000. Upon crediteffectiveness or as needed, an amount of US$ 100,000 will be deposited in the SA. Replenishmentapplications should be submitted at monthly intervals, after monthly bank statements are received andreconciled, with appropriate supporting documents for local and foreign expenditures as required. To theextent possible, all of IDA's share of eligible expenditures will be paid through the SA, except wheredirect payment is the preferred option.

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