Malawi - Structural Adjustment Loan Project

Document of The World Bank E IOr l FOR OFFICIAL USE ONLY Report No. P-3024a-MAI REPORT AND RECOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF MALAWI June 4, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) US$1.00 MK 0.812 MK 1.00 US$1.232 SDR 1.00 US$1.275 (As the Malawi Kwacha is officially valued at a fixed rate of MK 1.00 to SDR 0.9487, the US$/MK exchange rate is subject to change. Conversions in this report were made at US$1.00 to MK 0.812, which is close to the recent exchange rate.) ABBREVIATIONS ADMARC - Agricultural Development and Marketing Corporation CCDC - Capital City Development Corporation DSB - Department of Statutory Bodies EPD - Economic Planning Division ESCOM - Electricity Supply Commission ICC - Investmen-t Coordinating Committee MOA - Ministry of Agriculture MDC - Malawi Development Corporation NRDP - National Rural Development Program OPC - Office of the President and Cabinet UNDP - United Nations Development Programme FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY MALAWI STRUCTURAL ADJUSTMENT LOAN LOAN SUMMARY 1/ Borrower Republic of Malawi Loan Amount: US$45 million equivalent Terms Repayment in 20 years, including 5 years of grace, at 9.6 percent interest per annum. Loan Description: The proposed loan would provide support for the Govern- ment's program of economic recovery outlined in a Letter of Development Policies from the Government to the Bank. This program is designed to diversify the export base, encourage efficient import substitution, adjust incen- tives and incomes policies, improve the public sector's financial performance and strengthen the Government's economic planning and monitoring capability. Foreign exchange would be used for essential imports. Counter- part funds would be used for development purposes in the Government budget. The principal risk relates to the capacity of the Government to implement the program within the agreed time framework. Estimated Disbursements: The loan would be disbursed in two tranches. US$25 mil- lion would be available for disbursement after effective- ness. The remaining US$20 million would be disbursed after a review of progress in October 1981. 1/ There is no Staff Appraisal Report. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF MALAWI 1. I submit the following report and recommendation on a proposed structural adjustment loan to the Republic of Malawi for the equivalent of US$45 million. The loan would have a term of 20 years, including 5 years of grace, with interest at 9.6 percent per annum. I. THE ECONOMY 2. A report entitled Memorandum on the Economy of Malawi (Report No. 1677-MAI), dated September 30, 1977, was circulated to the Executive Directors on October 10, 1977. A Basic Economic Mission visited Malawi in May/June 1979 and the reports that resulted from the mission will be distributed to the Executive Directors in early June 1981. Annex I contains the basic country data. Background and Development Strategy 3. When Malawi gained independence in 1964, its economy was charac- terized by surplus labor and few natural resources other than a favorable climate and moderately fertile agricultural land. It lacked capital, tech- nology, entrepreneurship, skilled labor and managerial talent. Being land- locked, it had to depend on other countries for access to the sea. 4. Despite these constraints, the Government was determined to achieve rapid, sustained economic development. It has opted for an outward-looking, export-oriented growth based on agriculture and agro-based manufacturing. This strategy has been reflected in the Government's policies toward the agricultural and manufacturing sectors, toward prices and wages, and toward the roles of domestic and foreign investment. In order to attract foreign capital and managerial skills, Government policy has encouraged the establish- ment of an open, market-oriented economy with the private sector as the * primary engine of economic growth. Relatively low tariffs and limited use of quantitative restrictions on imports have prevented the emergence of highly inefficient local import substitution industries so characteristic of many other developing countries. The Government has deliberately restrained those forces which would raise wages above market-determined levels (e.g., trade unions, excessive decreed wage increases), thus encouraging the establishment of labor-intensive manufacturing firms and agricultural estates. Moderate wage expansion, coupled with growing labor productivity in most sectors of the economy, has helped to keep Malawian goods competitive in international trade. Wage moderation has also kept the demand for labor high and the resultant rapid expansion of employment opportunities has helped control the rural-urban income gap and hence rate of internal migration.  2- 5. Public investment has been intended primarily to support private efforts in the directly productive sectors through provision of essential infrastructure, public utilities and supporting services. The Government has opted for a two pronged approach to agriculture, involving the traditional smallholder and estate sectors. Attaching high priority to public invest- ment in the traditional sector, the Government has undertaken, in the past, a number of regional integrated rural development projects involving provision of infrastructure and agricultural inputs and services. More recently, it embarked on the National Rural Development Program (NRDP), an ambitious 20-year program designed to extend agricultural services to smallholders countrywide. The estate sector has been left largely in private hands (except for public enterprise participation in sugar and in some tobacco estates) and the Government has limited its role to that of providing a favorable investment climate. The Government's decision to emphasize directly productive sectors and related economic infrastructure has resulted in relatively slower develop- ment of the social services such as health and education until recent years. Evaluation of Past Performance 6. In terms of its stated objectives, Malawi has an impressive record of accomplishments. Aggregate and per capita real incomes have grown rapidly. Real GDP grew at an average rate of 5.5 percent per annum over 1967-79 and per capita income at about 3.0 percent per annum. Growth in all sectors (except in subsistence production) exceeded 5.0 percent per annum. By 1979, GNP per capita in current prices reached IJS$290. Over the same period, inflation averaged 9.0 percent per annum. 7. At independence, investment constituted only 8.6 percent of GDP and domestic savings were virtually nil (0.5 percent of GDP). What little capital formation that took place had to be financed from foreign sources. But since then, the picture has changed dramatically. Between 1967 and 1979, gross domestic investment grew at an average annual rate of 12.5 percent per annum, raising investment's share in GDP from 16 to 29 percent. The domestic resource mobilization effort has been even more impressive. Domestic savings rose from 4 percent of GDP in 1967 to 17 percent in 1979, increasing the share of investment financed from domestic sources to about 60 percent. Owing mainly to government mobilization of foreign assistance but with increasing contributions for private and public enterprise ventures, net foreign long- term capital flows have increased from a total of US$66 million over 1967-69 to US$328 million over 1977-79. 8. Over the 1967-79 period, export volumes grew at an annual average rate of 4.5 percent while real imports grew at 3.5 percent. Agriculture accounts for some 90 percent of export earnings. Since 1967, agricultural estate production has been growing much faster than smallholder output and this has been reflected in export performance. During 1967-79, agricultural exports from estates expanded at 15.0 percent per annum while smallholder exports recorded no growth. Thus, the estates share of agricultural exports increased from 32 percent in 1967 to 65 percent in 1979. Since the bulk of estate exports is in tobacco and tea, the concentration of Malawi's exports has increased significantly.  9. The country's favorable export performance can be partly attributed to the policy of moderate wage increases and to growing labor productivity which has kept Malawi's products competitive in the international market. Over the same period, wage employment expanded almost as rapidly as the modern sector as a whole (over 8 percent per annum) suggesting a labor- intensive pattern of growth. Recent Economic Crisis 10. Notwithstanding these impressive achievements, the Malawian economy, increasingly dependent on two primary commodity exports, tea and tobacco (para. 8) has remained highly vulnerable to international price fluctuations. Since 1974 the country has experienced periodic balance of payments disequilib- ria of increasing severity due primarily to (a) rapid escalation in import prices, particularly of fuel and intermediate and capital goods; (b) cyclical swings in export prices of tobacco and tea; and (c) significantly higher costs of transport for both exports and imports owing to rising ocean freight charges, port congestion in Mozambique, and disruptions of the overland route. 11. While the Government managed to successfully steer the economy through balance of payments crises in the past, the deterioration in the balance of payments since 1978 has been less tractable (Table 1). Malawi's worsening external position during the past three years was due mainly to an estimated 35 percent fall in the terms of trade between 1977 and 1980. Export prices fell 8 percent (due mainly to declines in tobacco prices) while import prices were rising by about 41 percent. The fuel import bill more than doubled between 1977 and 1980. The effects of the growing trade deficit were compounded by a doubling of the non-factor service payments due mainly to rising transport costs arising from rapid increases in sea and air freight charges, the closure of the Zimbabwe-Mozambique border in 1976, intermittent fighting in Mozambique delaying or severing transit and adding to port con- gestion. In 1978 and 1979, transport charges accounted for as much as 28 percent of the value of imports, f.o.b. In fact, during 1978-80, the deficit in non-factor services was considerably larger than the deficit in trade.  - 4 - Table 1: BALANCE OF PAYMENTS, 1977-80 (US$ million) 1977 1978 1979 1980 (Actual) (Actual) (Revised (Estimate) Estimate) Merchandise Trade Exports, f.o.b. 226.9 198.0 238.8 294.6 Imports, f.o.b. -207.8 -279.2 -319.9 -341.4, Balance 19.1 -81.2 -81.1 -46.8 Services (net) Non-factor Services -64.4 -94.4 -124.5 -119.4 Factor Services -28.9 -5.0 -43.8 -39.2 Balance -90.3 -99.4 -168.3 -158.6 Balance of Goods and Services -71.2 -180.6 -249.4 -205.4 Private Transfers (net) 6.3 6.3 -0.4 -0.9 Current Account Balance before Official Grants -64.9 -174.3 -249.8 -206.3 Official Grants (net) 22.6 41.3 47.9 66.7 Other Long-Term Capital Movement (net) Private 12.6 20.8 15.3 38.7 Official a/ 72.2 74.3 94.6 64.2 Total 84.8 95.1 109.9 102.9 Use of IMF Facilities 8.5 1.0 34.0 31.3 Short-term Capital plus Errors and Omissions b/ 14.0 12.6 46.5 14.6 Official Reserves (Increase = - -65.0 +24.3 +11.5 -9.2 Decrease = +) a/ Includes net capital inflow to Government and public enterprises and officially intermediated private capital. b/ Includes commercial bank short-term borrowing. Source: Ministry of Finance.  -5 - 12. While Malawi's current account deficits have averaged 8-9 percent of GDP since independence, the deficit reached 17 percent of GDP in 1978, 19 percent in 1979, and 14 percent in 1980. Part of these deficits was covered by inflows of foreign capital (and increased use of IMF facilities). In contrast to past experience, however, whereby the bulk of capital inflows were grants and soft loans, over 35 percent of the 1978-80 capital flows were on commercia:L terms. Such commercial borrowing will have a pronounced effect on debt servi- cing in the next few years. On the basis of loans committed by the end of 1980, Malawi's debt service ratio is projected to increase to over 20 percent in the early 1980s (as compared with 7 percent in 1977 and 12 percent in 1979). Because capital inflows have not been sufficient to cover the current account deficits, Malawi has also experienced a sharp drop in foreign exchange reserves. Between the ends of 1977 and 1980 gross official reserves fell from US$84 million to US$74 million (from the equivalent of four months to two months of imports). Over the same period, net official reserves fell from US$41 million to minus US$40 million. 13. Malawi's budgetary position has also seriously deteriorated over the past several years (table 2). From independence through 1974/75, government expenditures and revenues expanded roughly in line with the increases in GDP; while deficits grew larger, they still did not exceed 8-9 percent of GDP. In the past five years, however, expenditure growth outstripped the increase in revenue and the share of government deficits in GDP rose to an average of 12 percent in 1978/79 - 1980/81. Government Stabilization Program Under IMF Standby Arrangement 14. Faced with these problems, the Government in 1979 initiated a number of short-term demand management measures culminating in a two and one half year standby arrangement with the IMF covering the period through December 31, 1981. The economic dislocations at the end of 1979, however, led. to replacement of this arrangement with a new two-year standby arrangement covering the period April 1, 1980 through March 31, 1982 (drawing on the second through fourth credit tranches and the supplementary financing facility for US$64.8 million equivalent). As part of the financial program, the 1980/81 budget provided for increases in excise taxes on cigarettes, spirits and beer, in import duties including those on capital goods, and in the airport tax. These measures followed increases during the previous fiscal year in the rate of surtax on imported and domestically produced goods (from 15 to 20 percent), and in the levy on imported fuel to a rate equivalent to over 60 percent of the value of imported fuel. Together, these tax measures were expected to raise additional revenue equivalent to about 3.5 percent of 1980 monetary GDP. 15. Government recurrent expenditures in the 1980/81 budget were limited to an increase of eight percent over the 1979/80 level (given projected inflation, a decline in real terms) and increases in development expenditures limited to what could be financed from additional foreign aid. In agreement with the IMF, the Government set quarterly ceilings on the expansion of net bank credit to Government (an increase of 15 percent in 1980/81 as compared with 51 percent in 1979/80). To limit external borrowing on commercial terms, a ceiling of MK 25 million (US$31.5 million) of new government or government guaranteed borrowing of 1 to 12 years maturity was set for the first year of the program.  - 6 - Table 2: MALAWI CENTRAL GOVERNMENT BUDGETARY OPERATIONS 1974/75 - 1980/81 (K Million) 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 Total Revenue 80.0 90.0 95.8 116.4 148.6 186.9 204.9 Total Expenditures 107.2 147.9 142.5 178.5 248.0 305.8 364.2 Recurrent Expenditure 66.4 77.9 86.6 101.9 134.5 177.9 198.6 Development Expenditure 40.8 70.0 55.9 76.6 113.5 127.9 165.6 Overall Deficit -27.2 -57.9 -46.7 -62.1 -99.4 -118.9 -159.3 Financing External Grants 1.3 11.0 9.4 16.0 26.1 34.6 61.3 Foreign Loans (net) 20.8 32.4 23.9 42.5 61.8 71.0 55.1 Domestic Borrowing (net) 9.4 22.9 15.8 -3.9 11.6 13.3 42.9 Other .1/ -4.3 -8.4 -2.7 7.5 - - - Memorandum Items (as percentage of GDP) Revenues 16.4 15.9 14.7 15.1 17.4 17.8 16.5 Total Expenditures 22.0 26.1 21.8 23,2 29.1 29.1 U9.3 Overall Deficit 5.6 10.2 7.1 8.0 11.6 11.3 12.8 l/ Consists of changes in extra budgetary and residual items. Source: Ministry of Finance.  - 7 - 16. The Government has also raised the lending and borrowing rates charged by financial institutions twice over the past two years. The Bank discount rate was increased from 7 to 8 percent in August 1979 and to 10 percent in March 1980. Major lending and borrowing rates were adjusted upwards on both occasions, by amounts totalling more than three percentage points in all cases. Presently, lending rates range between 11.5-16.5 percent for agriculture and 13.5-18.5 percent for all other sectors. Deposit rates range between 8.75 and 11.75 percent. The domestic inflation rate has averaged 13 percent over the past two years. In addition, the minimum liquidity ratio was raised from 25 to 30 percent. In agreement with the IMF, the Government set quarterly ceilings on total domestic credit expansion for 1980/81, limiting the increase to 11 percent compared with 30 percent in the previous 12 months. 17. The fiscal position weakened considerably in 1980/81. Revenue growth was much less than expected because of stagnant economic activity. Moreover, a number of public enterprises experienced serious financial diffi- culties. Substantial recourse to domestic credit sources to finance extra- budgetary demands meant that the ceilings on net bank credit to Government for December 1980 and March 1981 were exceeded, the latter by a substantial margin. The IMF ceiling on total domestic credit was also exceeded in March 1981, even though private sector credit was kept well within the target implicit in the financial program. For this reason, the Government became ineligible for further drawing in December 1980. Further drawing on IMF resources will recommence now that the financial program for the second year has been approved by the Executive Board of the Fund on May 13, 1981. 18. The program covering the second year of the standby arrangement with the IMF focusses mainly on redressing the fiscal imbalance. The 1981/82 budget provided for a reduction in real government expenditures, and introduces increases of 15 percent in specific excise and customs duties, an across-the- board tariff increase of 3 percentage points and a 10 percent tax on hotel and restaurant services; these measures are expected to increase government revenue by 5 percent. In light of these actions, and the proposed price increases for certain statutory corporations (para. 50) the program for 1981/82 provides fora zero increase in net bank credit to Government, and a 12 percent increase in total domestic credit. The ceiling on external public borrowing on commercial terms was set at MK 30 million (US$37.7 million) for the second program year. Emerging Structural Problems 19. While the primary cause of the present crisis is the sharp deteriora- tion in the country's international terms of trade, it has revealed several underlying structural weaknesses in the Malawian economy: the slow growth of smallholder exports and the narrowness of the export base; the modern sector"s dependence on imported oil, and the progressive depletion of domestic fuelwood resources; the deteriorating financial position of the public enterprise sector; growing budgetary deficits owing to a rapid expansion of expenditures combined with a relatively slow growth of revenues; a growing imbalance between government recurrent and capital expenditures; and increasing economic adjustment difficulties caused by the rigidities in the system of administered prices and wages.  - 8 - 20. Lack of Diversification of Estate Exports. Agriculture accounts for 90 percent of Malawi's export earnings with estate agriculture contributing 62 percent and smallholder exports 28 percent of total merchandise exports during 1979. Estate exports are heavily concentrated on tobacco and tea, and several factors will constrain future growth of these two crops. Fuelwood is in increasingly short supply in Malawi, presenting a problem for the production of flue-cured tobacco. Under prevailing technology, it is estimated that a sustained yield from two to four acres of timber are needed for every acre of flue-cured tobacco. Most large estates have reforestation programs included in their investment plans but smaller estates which now rely on available bush timber would soon have to start planting their own woodlots. In addition, shortage of credit and scarcity of managerial talent in the country are expected to become a serious constraint to further rapid expansion of both burley and flue-cured tobacco. Growth of tea production will also be hampered by the lack of suitable new land and the shortage of fuelwood. If the estate sector is to maintain its role as the country's principal foreign exchange earner, it must diversify into other crops. Moreover, the economy will have to look increasingly to smallholder agriculture to broaden the export base beyond tobacco and tea. 21. Slow Growth of Smallholder Production. Despite sizeable public investment in smallholder agriculture, smallholder exports have stagnated over the past ten years following a decade of rapid growth. While such performance can partly be attributed to limited coverage of past agricultural projects, low producer prices have almost certainly played an important role. An analysis of prices by the Government and the Bank has shown that, on balance, pricing has treated the smallholder sector less favorably than the estates, and within the smallholder sector, it has subsidized the production of maize and rice, while taxing production of export crops such as cotton, groundnuts, and smallholder tobacco. A price incentive problem also applies to meat, poultry and dairy products which are mostly produced by smallholders. Here, pricing decisions have been more ad hoc and arbitrary than in the case of crops, with price increases occurring infrequeptly and in quantum jumps, making adjustments difficult for both consumers and producers. 22. Rising Cost of Energy Resources. Energy issues, as elsewhere, are becoming increasingly important in Malawi. Fuelwood represents some 80 percent of the total energy consumed in Malawi. In the rural areas, wood is used for cooking and for curing tobacco and tea. As a result of population growth and expansion in tobacco and tea production, the demand for fuelwood is outstripping available supplies, leading to deforestation and environmental problems. With respect to petroleum, Malawi is totally dependent on imported resources. While volume only increased by 8 percent between 1977 and 1980, the value of imported petroleum doubled and the share of imported petroleum in total imports, c.i.f., rose from 10 to 15 percent. Thus, the Government's difficult task in the sector is to provide for the energy needs of the rural areas while reducing the modern sector's dependence on imported oil. 23. Deteriorating Finances of the Public Enterprises. As a group, Malawi's statutory boards and public enterprises have functioned well both by providing essential services with reasonable efficiency and by making a reasonable contribution to their own investment requirements. However, the  - 9 - financial situation of several of these entities has deteriorated during the past two years. The Agricultural Development and Marketing Corporation (ADMARC--a monopoly marketing institution for smallholder crops) which has operated as a relatively efficient marketing institution suffered a substantial loss in 1980 as a result of higher fuel costs, losses from improper crop handling and poor transport planning. Air Malawi suffered large losses on its international service which had to be discontinued at the end of 1979. Domestic tariffs were increased by 60 percent in early 1980 and international charter rates were raised later that year. To reduce losses further, additional tariff increases of domestic and cargo service may be necessary. Malawi Railways finances have been adversely affected by rising fuel costs and transport problems at the ports and on lines through Mozambique. Despite a 1979 tariff increase of 17 percent, the company suffered an operating loss for the first time since 1972 and its overall cash deficit, after debt service and renewal investments, rose substantially. Hitherto financially sound Electricity Supply Commission (ESCOM) also began to experience large cost overruns on its Nkula project, primarily as a result of transport difficulties. While tariff increases of 10 percent in 1979 and 5 percent in 1980 helped to alleviate the cash deficit, the company is still experiencing cash flow difficulties. The Malawi Housing Corporation and Capital City Development Corporation (CCDC) have been channeling Government funds and external loans into housing and construction of the new capital at Lilongwe, and are now experiencing difficul- ties meeting their mounting debt service obligations out of their low income from rents. MHC increased rents for low cost housing by 40 percent but it is not generating sufficient funds even to provide for maintenance. The Malawi Development Corporation (MDC) is a wholly government-owned holding company with interests in agriculture and agroindustry, manufacturing and commerce. Its financial position has steadily deteriorated in recent years, as the liquidity position of its subsidiaries declined with the onset of recent economic crises, and MDC has had to provide more guarantees for its subsidiaries' borrowings. It has also accumulated medium-term debt, borrowed mainly on hard, terms to finance equity investments. Given the large projected interest payments, MDC is expected to run at a loss during 1980 and 1981. The deteriora- tion in the performance of these public enterprises is having an adverse impact on the Central Government's budget by increasing the requirements for subsidies or for deferment of debt service owed to Government. In addition, the demand by the public enterprises for new medium-term external credit or for additional domestic borrowing has increased. 24. While Press Holdings, Ltd. is a private enterprise, its operations are so large that they have a profound impact on the country's economic life. Press is a holding company with wholly-owned subsidiaries and associate companies in most sectors of the economy, including agriculture, industry, wholesale and retail trade, building and construction, transportation, banking and insurance. Until 1979, Press and its subsidiaries had been consistently profitable, but thereafter, the group's financial position deteriorated rapidly. Press' enormous cash needs have placed severe strains on Malawi's two commercial banks and this led to restricted domestic credit expansion to the rest of the private sector. Unless Press' financial and operational problems can be resolved rapidly, they will have an adverse impact on the country's output, employment and exports.  - 10 - 25. Budgetary Deficits and Underfunding of Recurrent Activities. The Government has generally managed its finances prudently. Revenue has increased as rapidly as GDP, the recurrent account (since 1972/73) has con- sistently generated surpluses to contribute to development finance, and budget deficits have been relatively modest. Since 1978/79, however, the Government's fiscal position has deteriorated. While revenues have increased slightly faster than GDP, recurrent and development account expenditures have grown even more rapidly owing to a rapid expansion of development projects. In addition, there is growing evidence of underfunding of recurrent budget requirements. Control over recurrent expenditures has been tight because of domestic revenue constraints and the need to expand government savings to finance development. On the other hand, because of the availability of foreign finance on concessionary terms, capital projects have been relatively easy and inexpensive to finance. As a consequence, the expansion of government exployment and expenditures for goods and services has not kept pace with the growth of capital expenditures. The problem has become particularly acute in agriculture (and to a lesser extent in road maintenance and in health). The lack of adequate provision for recurrent operations has reduced the benefits originally expected from project investments. 26. Rigidity of Price Controls and Wage Policy. A system of formal and informal price controls has evolved for most domestically manufactured goods in Malawi over the past decade. Administered by the Ministry of Trade, Industry and Tourism, formal controls are exercised over a set of fairly homogeneous products such as cement, fertilizers, and sugar; they also cover commodities that figure predominantly in the consumption of low income groups, such as maize meal, vegetable oils, bread, milk, matches and fish. In addition, the requirement that manufacturers notify the Ministry of Trade, Industry and Tourism in advance of price increases and wait for a letter of 'no objection" is in effect an informal price control to cover practically all goods in the formal manufacturing sector not subject to the above formal price controls. With increased inflationary pressure, the system has begun to create serious disincentives for producers. Long delays between price increase applications and approval have adversely affected the financial position of many businesses. Similar delays have characterized granting of tariff increases for the country's principal statutory bodies. 27. The Government has also adopted a system of wage controls designed to restrain real wage increases. However, administration of wage controls has been destabilizing with the Government holding down wages for as long as possible and then granting large wage increases to make up for several years of real decline. This has resulted in serious adjustment problems for the economy. For example, the minimum wage for urban unskilled workers, which had remained unchanged since 1973, was increased by 12.5 percent in 1980 and by additional 56 percent in January 1981. (Even with these quantum jumps the minimum wage in 1981 is only three-quarters of its 1973 level in real terms). The civil service wage structure has not been adjusted since 1978.  - 11 - II. THE GOVERNMENT'S MEDIUM-TERM PROGRAM 1/ Government's Medium-Term Objectives 28. Recognizing these problems, the Government has formulated a medium- term program covering 1981/82 - 1985/86 in consultation with the Bank and the IMF to reduce the balance of payments current account deficit to manageable proportions while ensuring moderate growth of per capita income. The Ministry of Finance, the Economic Planning Division (EPD), the IMF and the Bank's appraisal mission have worked together to design the overall policy and macroeconomic framework and conferred on sectoral strategies and targets. The projections and targets contained in the program are conservative, based on realistic assessment of external resource availability and international terms of trade movements. The Government's major objectives for the next five years are the following: - a real GDP growth rate of 4.8 percent (comprising average growth rates for smallholders of 5.0 percent per annum, estates of 2.9 percent, manufacturing 7.5 percent and 4.1 percent for the remainder of the economy); - increased diversification of sources of foreign exchange earnings or savings through the development of new smallholder and estate crops, faster smallholder export crop growth and the development of livestock and forestry industries and agro- businesses; and - improvement in internal and external balance through measures which improve the financial performance of public enterprises and public budget thus reducing dependence on external resources and domestic borrowing to manageable levels and providing for an improvement in foreign exchange reserves. Balance of Payments Prospects 29. Malawi is expected to experience continuing balance of payments problems over the next five years. On the basis of present IBRD commodity price projections, Malawi's 1985 terms of trade will only be 2.5 percent higher than the relatively poor 1980 year, a level still some 20 percent below the average of the mid-1970s. While export prices are expected to improve, most of the improvement will be absorbed by rising import costs, especially for fuels and fertilizers; the real prices for the important tea and sugar crops are projected to decline over the period. Since there is little prospect for a significant improvement in port conditions or in the rail lines in Mozambique, transport costs will continue to constitute a significant drain on foreign exchange. Due to heavy borrowing on commercial terms by the Government and public enterprises in the late 1970s, debt service 1/ The section is substantially the same as Part II of the President's Report on the Structural Adjustment Loan (Report No. P-3024a-MAI).  - 12 - will rise dramatically in the early 1980s. Moreover, since by the end of 1980 gross official reserves stood at a level equivalent to 1.5 month's worth of imports, the Governmnt is establishing priority to the buildup of reserves to more prudent levels. 30. Table 3 shows balance of payments projections over the 1980-85 period. Since the growth of traditional estate crops is expected to be slow (in tea and tobacco), export expansion will depend upon the growth of existing smallholder crops, and the development of new crops and agro-industrial exports. Traditional smallholder exports (groundnuts, cotton, rice, and tobacco) are projected to grow at just over 7 percent per annum 1980-85. From a low initial base, "other exports" (including new crops and agro- industrial exports) are projected to grow at almost 20 percent per annum over the same period. Projections for imports of various types have been related to the growth of certain sectors of the economy through elasticities; the overall elasticity of real imports with respect to real GDP is about 0.6, roughly what it has been in the past. On the basis of the foregoing assump- tions, Malawi's current account deficit is expected to average over US$260 million per annum over the five-year period. In nominal terms, it would climb from US$227 million in 1981 to US$287 million in 1985. As a share of GDP, the deficit would fall from 12.4 percent in 1981 to 8.6 percent in 1985. In the absence of increased flow of foreign resources, Malawi's economic situation will deteriorate further during 1981 and 1982. Without additional Bank assistance and increases in aid flows from other donors over and above those likely from firm sources for those two years, the financing gap would amount to US$50 million in 1981 and US$30 million in 1982. Monetary and fiscal stringency would have to be even more severe. Import volumes would decline still further leading to growing shortages of essential intermediate and capital goods and stifling economic activity, and real GDP growth would fall below the 3.5 percent growth rate now projected for the next two years. 31. Malawi will be able to service a moderate amount of external debt on relatively hard terms. Assuming that the public and private enterprise sectors borrow about US$30 million per year on average from foreign sources on commercial terms (12 percent interest and repayment in 7 years including 2 years of grace) and the Government borrows the remainder on average terms of 6 percent interest, 6 years grace and 25 years repayment, Malawi's debt service ratio for public debt would rise from 12 percent in 1979 to a peak of about 24 percent in 1982, declining thereafter to 16 percent in 1985. This projection also assumes that grant aid will grow at 5 percent per annum in real terms (a conservative estimate compared to the 30 percent real growth per annum between 1977 and 1980) and that the Government will build up its official reserve holdings to equivalency of 3 months of imports by 1985. In 1985, the Bank Group's share in Malawi's public indebtedness would be 18 percent, and its share in debt service, 5 percent. Government's Program for Structural Adjustment 32. The policies for obtaining these objectives have been incorporated in a comprehensive structural adjustment program which is designed to address each of the economy's structural problems discussed above (paras. 19-27). The elements of this program, which is described in detail in the Government's Letter of Development Policies (Annex IV), fall under four main categories: (a) Improvement in balance of payments;  - 13 - Table 3: MALAWI - BALANCE OF PAYMENTS (US$ million) 1980 1981 1982 1983 1984 1985 Exports, f.o.b. 294.6 318.7 368.4 444.0 515.2 607.1 Imports, f.o.b. 341.4 366.7 413.3 476.7 543.3 619.8 Trade Balance -46.8 -48.0 -44.9 -32.7 -28.1 -12.7 Services -158.6 -177.2 -207.0 -228.3 -246.8 -271.9 Non factor services -119.4 -123.0 -135.3 -155.5 -176.1 -202.1 Factor services -39.2 -54.2 -71.7 -72.8 -70.1 -69.8 Balance on Goods and Services 205.4 -225.2 -251.9 -261.0 -274.9 -284.6 Private Transfers -0.9 -2.2 -2.1 -2.5 -2.7 -2.8 Current Account Balance before Officials Grants -206.8 -227.4 -254.0 -263.5 -277.6 -287.4 Official Grants 66.7 87.8 107.1 119.4 138.5 160.7 Other Long-Term Capital (Net) Government 64.2 123.0 126.8 135.3 143.4 144.4 Public Enterprises, Private & Private Officially intermediated 38.7 8.0 1.6 -0.6 2.7 10.0 Use of IMF Facilities 31.3 20.9 34.5 29.1 16.4 - Short-Term, Errors and Omissi-on 14.6 - - - - - Change in Reserves -9.2 -12.3 -16.0 -19.7 -23.4 -27.7 Source: Ministry of Finance and Mission Estimates  - 14 - (b) Improvements in price incentives and income policies; (c) Resource management; and (d) Institutional improvements. Measures to improve balance of payments relate to development of smallholder and estate agriculture, energy resource development and agroindustrial investments and are designed to expand exports and to bring about efficient import substitution. Improvements in price incentives and income policies would be achieved by granting more frequent and more gradual price tariff and wage increases which would make adjustments easier. A comprehensive review of the existing price control system will be carried out with a view toward introducing greater flexibility. Measures in the resource management category aim at improved financial performance of the Government and the statutory corporations, reduced domestic borrowing and ensuring adequate budgetary allocations to key economic and social sectors. Finally, the institutional improvements include measures to strengthen the Government's planning, economic monitoring and debt management capacities, and institutional reform packages for MDC and Press Holdings, Ltd. Improvement in Balance of Payments 33. Promotion of Smallholder Exports. Expansion and diversification of Malawi's exports is central to the structural adjustment process. The Government's program includes several measures designed to promote smallholder exports. These include an expansion of recurrent budgetary support for agricultural extension and research services, an increase of investment in smallholder development projects, and a strengthening of Malawi's principal agricultural marketing organization, ADMARC. In addition, action is being taken to improve the mechanism for determining producer prices for smallholders. Recognizing that low producer prices provide inadequate incentives for farmers to produce and market cash crops, the Government established an interministerial Price Advisory Committee in 1978. The Committee completed one comprehensive price review in 1980; the Government will further institutionalize this practice by carrying out annual crop price reviews in advance of each growing season. To facilitate the working of this committee the Government, in consultation with the Bank, has formalized the methodology to be used in these reviews and has distributed it to the Ministry of Finance, the Ministry of Agriculture (MOA), EPD, and ADMARC. This methodology takes into account three criteria: export parity prices of crops, growers' crop margins and ADMARC's financial requirements. Final price decisions will depend critially on the relative weights attached to these criteria. During negotiations agreement was reached that by October 31, 1981, the crop price decisions made by the Government for the 1981/82 growing season, based on the methodology, would be reviewed with the Bank (para. 68). Incentives for cotton production have deteriorated and its market output has stagnated because cotton prices have not been changed since 1977 while input (pesticide) prices have gone up. During negotiations the Government agreed to increase by September 1, 1981, the producer price of cotton to a level acceptable to the Bank prior to the start of the 1981/82 growing season (Section 3.05 of the Draft Loan  - 15 - Agreement). The Government also intends to begin annual price reviews for wholesale and retail prices of livestock and livestock products. However, since it does not have reliable data on the costs of production or on supply and demand, the Government will carry out a study designed to consolidate its knowledge of livestock products industries and has requested Bank financing under the proposed Technical Assistance Loan. Its terms of reference were agreed upon by the Government and the Bank during negotiations. The study is scheduled for completion by March 31, 1982, with the Government exchanging views with the Bank on its findings and recommendations not later than June 30, 1982 (Section 3.03(a) of the Technical Assistance Loan Agreement). 34. ADMARC provides valuable crop and input marketing and distribution services to smallholders and operates the country's grain silos. Hence, increasing the efficiency of ADMARC's operations (para. 23) would greatly benefit smallholder agriculture and promote agricultural exports. The Government has requested the FAO to conduct a study of ADMARC's marketing and distribution system. The study would focus on the potential for reducing marketing, transport and storage costs and improvements in crop quality through grading, insect/pest control, and training of ADMARC personnel. 35. Expansion of Estate Exports. The performance of Malawi's tobacco industry will remain critical to the economy from the standpoint of generating foreign exchange and employment. Malawi grows several types of tobacco each having its own unique problems. For example, growing scarcity of fuelwood and stagnant world demand will place a constraint on the expansion of dark- fired tobacco. Moreover, flue-cured tobacco will also be adversely affected by rising fuel costs and the shortage of management talent. The Government will examine the mix of varieties which would maximize tobacco earnings. At Government request, using resources provided under the NRDP (Phase I Project, 857-MAI), and Shire Valley Agricultural Consolidation Project (Phase III, 823-MAI) the Bank Group will finance studies which would (a) examine the long-term world outlook for dark-fired, oriental, burley and flue-cured tobacco; (b) identify measures to improve the efficiency of existing tobacco estates and smallholder farms (taking into account the energy requirements for different varieties); and (c) explore the possibility for future tobacco production and diversification. The terms of reference for these studies have been agreed upon by the Government and the Bank, and the findings of the studies will be reviewed with the Bank by June 30, 1982. 36. Energy Development. The Government has attempted to cope with the country's energy problems through price/tax policies to limit the consumption of petroleum and through investments aimed at developing new energy sources. Oil imports have been subject to tax at rates equivalent to 30-60 percent and domestic prices regularly adjusted to reflect the full c.i.f. value of fuel plus tax. This policy has played an important role in holding the rate of increase in domestic consumption of petroleum to 1.7 percent per annum 1973-79 (about one-quarter of the growth rate of the modern sector of the economy). The Government has also launched investments in wood energy and ethanol. The IDA-financed Wood Energy Project (992-MAI) includes (a) a pilot program for the establishments of a national network of 88 nurseries operated by the Forestry Department for the production of seedlings for sale to the public who would be encouraged to grow their own woodlots; (b) establishment of 13,000 ha.  - 16 - of fuelwood and pole plantations for commercial and industrial use; and (c) the establishment of an energy unit to investigate more efficient use of wood energy and alternative sources of energy. In connection with this project, the Government is committed to increasing wood prices gradually to levels which reflect full production costs. By the end of 1981, based on a general review of pricing policies affecting forestry products, the Govern- ment would reach ageement with the Bank on the 1982/83 increase in the price of fuelwood. The ethanol project (with IFC loan and equity participation) involves the conversion of the molasses by-product from sugar production and would replace some 8-10 percent of Malawi's current petrol consumption result- ing in substantial foreign exchange savings. 37. The Government recognizes that a comprehensive energy sector study is needed to assess available resources, project future demand and supply, and examine alternative sources of energy and the possibilities for intrasectoral substitution. The Government has asked the Bank to carry out such a study in collaboration with USAID. The study would emphasize development of fuelwood but would also examine the possibilities for coal and for further investments in hydro power and in the production of energy from biomass. During negotia- tions, the general scope of work, composition of the mission and timetable for completing the sector study were agreed on by the Bank, USAID and the Government. The energy sector mission is expected to visit Malawi in August 1981. Price Incentives and Incomes Policy 38. Wages and Prices. The Government recognizes that administration of its wage and price policies destabilizes the economy and has adverse effects on the profitability of public corporations and businesses. In its Letter of Development Policies, the Government has expressed acceptance of the principle of more frequent and more moderate increases in prices and wages. By October 1981, the Government will conduct a review of its incomes policies, with a view toward introducing greater flexibility to the system, and discuss the findings with the Bank. 39. Exchange Rate. Since June 9, 1975, the currency of Malawi, the Kwacha, has been pegged to the SDR at MK 1 = SDR 0.9487. The exchange rate for the US dollar is determined on the basis of IMF's daily calculations of the US dollar/SDR rate. Consequently, over the past three years, the value of the Kwacha has appreciated relative to the US dollar by some 10 percent. However, Bank missions have found little evidence to suggest that the exchange rate has had much negative impact on export production. Under IMP standby, the exchange rate will be subject to periodic reviews, and the Government and the Bank will continue to study its impact on Malawi's export industries. 40. Interest Rates. The Government has raised lending and borrowing rates twice over the past two years (para. 16). These were significant increases and helped to ration scarce credit to more important uses and provide better incentives for savings. The increases in lending rates were an important factor in reducing the demand for imports. Many of the lending rates are positive in real terms but in the present inflationary environment, additional adjustment may become necessary. In consultation with the IMF, the Government will continue to monitor its interest rates policy to ensure that appropriate incentives are maintained.  - 17 - Resource Management 41. Public Expenditure Program. To contribute to the achievement of targets for growth and structural changes in a highly constrained financial environment, public resources must be used as efficiently as possible. The Government in consultation with the Bank has produced a five-year (1981/82- 1985/86) public expenditure program covering the Central Government recurrent and capital expenditure and those public enterprise investments externally financed through the Government's budget. This program, in our view, reflects the Government's commitment to an improved allocation of public resources: low priority expenditures have been reduced or eliminated; the past imbalance between recurrent and capital expenditures has been largely corrected; and the proportions of total expenditures directed towards key economic and social sectors have been increased. 42. Public Investment. The overall size and sectoral composition of the five-year public investment program (1981/82-1985/86) appear to be satis- factory. The size of the investment program represents a very modest increase over the efforts of recent years and is consistent with the expected avail- ability of foreign loan and grant resources. In the aggregate, the projected public investment expenditures total about MK 710 million at constant (1980/81) prices. Average annual investment expenditures of MK 140 million would be somewhat lower than the preliminary estimates of actual expenditures for 1980/81. 43. In view of Malawi's difficult financial position (especially during 1981 and 1982) the Government has given priority to the completion of ongoing projects over the undertaking of new investments; more than 60 percent of development expenditures in 1981/82 will go to ongoing projects. Resources allocated to new projects will be concentrated on sectors that are likely to contribute most directly to increased production or to the development of skilled manpower. Investments in sectors that are not directly productive will be reduced drastically to economize on scarce funds. During the five year period, the Government will continue to review the composition of the investment program as part of its regular budgetary process. During negotia- tions, agreement was reached that the Government would by March 31, 1982 provide the Bank for comment with an up-dated, detailed three-year public investment program covering FY82/83-84/85 (Section 3.04 of the draft Loan Agreement). 44. The sectoral allocations for the five-year program reflect the Government's emphasis on smallholder agriculture, transport and manpower designed to support its strategy for diversification of agricultural produc- tion and exports (table 4). The program calls for a significant increase in the share of total outlays going to agriculture (22 percent versus the 18 percent reached over the previous five years) and to the social services-- education (10 percent versus 4 percent), health (4 percent versus 2 percent). The share of water supply and sanitation also more than doubled (8 percent versus 3 percent). A moderate reduction is called for in the share going to transport (36 percent from 42 percent). In addition, the Government is com- mitted to reducing appropriations for "government buildings", (expenditures on government buildings and facilities and equipment for the army and police) both absolutely and proportionately; in all, the share of government build- ings will be about one-third of the levels reached in recent years. During  - 18 - Table 4: SUMMARY OF PUBLIC INVESTMENT PROGRAM BY SECTOR 1981/82 - 1985/86 (Percentage) Actual Public Investment Budget Public Investment Program 1975/76 - 1979/80 1980t81 1981/82 - 1985/86 General Services Government Buildings 14.4 16.8 5.6 Social Services Education 4.2 4.9 10.0 Health 1.8 3.3 3.5 Housing & Community Development 1.8 1.3 4.1 Economic Services Agriculture & Natural Resources 17.9 18.8 22.1 Agrieulture (13.6) (11.1) (14.3) Forestry & Game (2.7) (3.8) (3.9) Veterinary Services (1.0) (3.3) (3.2) Fisheries & Surveys (0.6) (0.6) (0.7) Transport 41.5 38.0 35.8 Post & Telecommunication 3.5 0.8 3.0 Finance, Industry & Commerce 3.3 0.3 3.3 Water Supply & Sanitation 3.2 5.9 7.6 Power 5.9 2.5 2.8 Other Economic Services 2.5 7.4 2.2 Total 100.0 100.0 100.0 Source: Ministry of Finance  - 19 - negotiations, discussions were held with the Government on how its increased allocations to the social sectors could best be geared to redressing Malawi's urgent manpower needs and to improving the effectiveness, efficiency and coverage of its programs in health, water supply and education. General agreement was reached that the Government could, over the next five years, make considerable progress in alleviating its immediate skilled manpower constraints while establishing a cost-effective means of providing social services consistent with available financial resources. 45. The bulk of agricultural investment is directed toward implementa- tion of the NRDP (para. 5). Over the next five years, the Government will concentrate investments on completing existing projects and on projects in existing cultivated areas where manpower and infrastructure are most developed and therefore immediate production increases are likely to be greatest. Increased allocations to forestry projects such as the Wood Energy Project, Timber Plantations, and Community Forestry reflect the Government's commitment to the development of forest resources to strengthen the country energy resource base. A larger share going to the veterinary services is designed to support the Government's goal of supporting a dynamic livestock sector that can play a key role in the overall diversification strategy. 46. Expenditures in the transport sector are directed toward improving the administrative and socioeconomic integration of the country, increasing access to rural areas to support agricultural development, and maintaining efficient external transport links. The main thrust of road investments will be on improvement of regional road links and the lakeshore road, and extension of the feeder road network to handle a larger volume of agricultural output. Investments in the railways will give priority to maintaining and increasing rolling stock. Investments in rolling stock are urgent because of Malawi's need to return wagons to Zimbabwe and because of the long turnaround time arising from port congestion in Mozambique. 47. While financial circumstances constrain spending in socioeconomic sectors, reduced expenditures on government buildings and transport has released resources for additional investments in some key areas. The Government recognizes the critical role of education, health and water supply in develop- ing skilled manpower and in improving the health and productivity of the labor force. In education, the Government's objectives are to relieve the skilled manpower constraint through the expansion of secondary school and technical school enrollment through the expansion of the Polytechnic Institute. A senior-level program of post-basic training in management and public adminis- tration will also be implemented. Malawi's Primary Health Care program is designed to provide widespread services for the population through a system of central hospital, district hospital and primary health care centers. During the next five years, the investment program in health will center upon expand- ing rural health facilities consistent with the availability of trained manpower. Investments in water supply and sanitation will provide support for the Government's goal of safe water and sanitary waste disposal for the entire population by the year 1990. The five-year investment program emphasizes improving urban access to water (especially in Lilongwe where rapid expansion has overtaxed the system) and an extension of the rural program of community shallow wells, gravity-fed piped systems and boreholes.  - 20 - 48. Recurrent Expenditure. The Government has undertaken to rectify the underfunding of agricultural operations in 1981/82 by providing an additional MK 4.4 million (US$5.5 million) over that provided in the 1980/81 budget to the key departments of agriculture and research, fisheries, and veterinary services. To date, they have allocated MK 1.6 million to agriculture and they will provide an additional MK 2.8 million in a supplementary allocation. According to our estimates, these allocations would be sufficient to cover existing operations while making an adequate provision for recurrent activi- ties scheduled to be transferred from development to revenue account during the year. The supplementary allocation is consistent with the Government's objective of emphasizing smallholder output and exports as a key element in the structural adjustment process. During negotiations, agreement was reached that by October 31, 1981 the Government would have appropriated an additional MK 2.8 million (see para. 68). 49. For the remainder of the five-year development program period, the Government has committed itself to providing funds for an expansion of recur- rent operations consistent with the requirements implied by its investment program. According to Bank projections, a Government commitment to improved revenue performance raising the share of revenue in GDP from the 14.5 percent to 16.5 percent over the Plan period; would allow recurrent expenditures in the key economic and social sectors to grow at 4 to 5 percent per annum in real terms (table 5). Such growth should be adequate to provide for expanding recurrent operations implied by the Government's past and planned investment program (see para. 50). During negotiations, agreement was reached that the Government would by October 31, 1981 provide the Bank for discussion, its updated five year budget, balance of payments and national accounts projections (see para. 68). 50. Resource Mobilization. The Government's objective is to mobilize additional revenues to provide for a real expansion of recurrent expenditures (as well as for needed local resources on development account) while reducing its reliance on domestic borrowing. In its letter of Development Policies, the Government has stated its objective to expand revenues through more frequent adjustments of specific taxes and departmental charges to compensate for inflation, the introduction of new taxes, and improved administration. Such revenue measures would allow the Government to meet its commitment to provide for real growth in recurrent expenditures in the key economic and social sectors and gradually reducing overall deficit from 9.5 percent of GDP in 1981/82 to 5.5 percent in 1985/86. In addition to the large increases in taxes introduced over the last two years (para. 14), the Government has introduced the following measures in its 1981/82 budget: (a) an increase of 15 percent in all specific import and excise duties; (b) an introduction of 10 percent tax on hotel and restaurant services; and (c) across-the-board tariff increase of 3 percentage points. There will, however, be reductions in non-tax receipts, especially from statutory bodies, so that in 1981/82, total revenue is expected to grow by only 5 percent. The Government has also requested technical assistance from the IMF to help the Ministry of Finance build up capabilities in budget management and fiscal forecasting. 51. Government Borrowing. In its 1981/82 budget, the Government will attempt to reduce its net domestic borrowing from the banking sector to zero through restraints on recurrent expenditure, cutbacks in development  - 21 - Table 5- MALAWI CENTRAL GOVERNMENT BUDGETARY OPERATIONS 1979/80 - 1985/86 (K Million) 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 Total Revenue 186.9 204.9 216.0 256.1 308.6 372 2 448 Total Expenditures 305.8 364.2 357.1 414.7 459.8 524.6 599.0 Recurrent Expenditure (Net) 177.9 198.6 201.1 238.8 256.5 290 0 329.2 Development Expenditure 127.9 165.6 156.0 176.6 203.3 234.6 269.8 Overall Deficit -118.9 -159.3 -141.1 -158 6 -151.2 -152.4 -150 1 Financing External Grants 34.6 61.3 52.0 89.8 100.8 116.9 125.b3 Foreign Borrowing (Net) 71.0 55.1 89.1 68.8 50.4 35.5 25 L Domestic Borrowing (Net) 13.3 42.9 0.0 0.0 0.0 0.0 0.0 Memorandum Items (as percentage of GDP) Revenues 17.8 16.5 14.5 15.0 15.5 16 0 16.5 Expenditures 29.1 29.3 24.1 24.3 23.1 22.6 22.0 Overall Deficit 11.3 12.8 9.5 9.3 7.6 6.6 5.5 Source: Ministry of Finance for 1979/80 through 1981/82 and mission estimates thereafter.  - 22 - expenditure and revenue increasing measures mentioned above. Moreover, under IMF Standby, external debt ceiling remains on the government and government guaranteed external borrowing of 1-12 years maturity. The ceiling for 1981/82 is K 30 million (para. 18). 52. Finances of Statutory Bodies. A series of measures has already taken to help improve the financial position of the statutory bodies and further actions are planned. In the fall of 1980 a Department of Statutory Bodies (DSB) was established in the Office of the President and Cabinet to monitor the activities of all public enterprises. The DSB, in cooperation with the Treasury, has just completed a review of the recent performance and FY81-82 outlook for these enterprises. The DSB has also started to provide assistance to various enterprises in their medium-term financial planning. Its staff will soon be strengthened by experts recruited under U.K. technical assistance. 53. The Government plans to grant more frequent, moderate public utility tariff increases in line with increased costs, in order to ensure that they can make contributions to their investment requirements. On March 1, 1981 Government increased the Electricity supply Commission's tariff by 10 percent. During negotiations, agreement was reachedt that by October 31, 1981, the Government would increase the Blantyre Water Board's tariff to a level accept- able to the Bank (see para. 68). Moreover, by October 31, 1981, the Government plans to review with the Bank its proposed measures to improve the financial performance and economic management of Air Malawi and Malawi Railways (see para. 68). To date the Government has asked the UK and UNDP to send consultancY teams to review the financial and management plans of Air Malawi and Malawi Railways. Preliminary studies have already been completed and further in depth reviews are planned. 54. Two other statutory bodies of a somewhat different nature have also experienced financial problems in the past few years, i.e., ADMARC MDC. As noted earlier (para. 34), a study of ADMARC's administration and marketing operations to be undertaken in the coming year, is designed in large part to identify ways to reduce unit costs of transport and handling. MDC's financial problems stem from a very unfavorable debt structure, and losses incurred by several subsidiaries. Two of MDC's loss unprofitable subsidiaries have recently been closed down, and new management for MDC has been appointed. The MDC has also requested Bank financing of two management consulting studies to improve budgetary controls over production, working capital and investment decisions. In addition, by October 1981, MDC in conjunction with the Ministry of Finance and DSB will complete a review of MDC's present and projected financial position and discuss the findings with the Bank. Institutional Improvements 55. In line with its commitment to better economic management, the Government has recently instituted new procedures to improve monitoring of its investments and management of its debts. It will also reinforce its planning capacity and ensure improvements in the management and financial practices of MDC and Press Holdings.  - 23 - 56. Monitoring of Investments. The Government has created an Investment Coordinating Committee (ICC) to monitor investments by all public institutions and major private corporations to ensure that they are economically justified and financially feasible and that their financing arrangements do not place undue burden upon the institution or on the country. The Committee, which includes high-level representation from the public and private sectors, would review and recommend project submissions to the Malawi Cabinet. It applies standard economic and financial rate of return analysis to projects costing more than MK 0.5 million. All large projects would also be subject to detailed technical review by independent consultants. To provide a basis for monitoring the investment program, agreement was reached that the ICC would apply specific criteria for screening major projects based on generally accepted principles of project analysis (see para. 68). 57. Economic Planning. Present government planning capacity is being severely strained by the increasing demands of day-to-day economic management in a period of economic crisis. The Government has, therefore, requested UNDP financing for higher-level training in economics and planning, shorter-term planning courses and consultancy services for in-house training. However, the Government feels an immediate need for experienced external personnel to assist the Ministry of Finance, EPD and MOA. Terms of reference for these personnel will be drawn up through consultation among UNDP, the Bank and the relevant Government officials; upon acceptance, the UNDP will fund the project and the United Nations Department of Technical Cooperation for Development will act as executing agency. 58. To provide a better basis for economic management and planning, it is also essential to augment the capabilities of the National Statistical Office. The UNDP currently is considering a project aimed at strengthening the system of national accounts (and supporting statistical requirements such as national household survey capability, input-output work, agricultural surveys, etc). The project would: (a) create a comprehensive plan for the development of statistical resources; (b) finance expatriate service staff for the major statistical areas; and (c) provide for the training of young Malawians. Government has accepted the UNDP's proposal to fund the preparation of a project document. Upon completion of the document by the UNDP, the Govern- ment, UNDP and Bank would agree to consider responsibilities for finance and staffing. 59. Institutional Reforms Aimed at Promoting Agro-industrial Investment. MDC and Press Holdings, Ltd. are expected to participate in the development of agro- and forest-based industries which can make a substantial contribution to  - 24 - Malawi's structural adjustment. Because of financial difficulties, neither MDC nor Press is in a position to make substantial new investments in the near future. For this reason, the Government's medium-term program includes a reform package designed to strengthen these two organizations. Those measures relating to MDC have already been mentioned in para. 54, under statutory corporation finance. Though Press is a private holding company, because of its size and its impact on the economy, the Government and the company have agreed to make Press group's financial restructuring a part of the Government's medium-term program. 60. Press has already taken a number of measures designed to improve the performance of its subsidiaries and the management of its financial resources. It has suspended payments of dividends since 1979, has closed down some of its unprofitable operations and trimmed its labor force by over 20 percent. Furthermore, it has employed the services of an international management consulting firm to conduct studies of each of Press' subsidiaries and to make recommendations about changes in management and financial practices and possibly closing down unprofitable operations. The study will be conducted in two phases: Phase I, completed in March 1981, covers overall corporate structure and development strategy and an investigation of the subsidiaries with the most serious problems; Phase II, to be completed by the end of 1981, covers the remaining subsidiaries. Some of the consulting firm's recommenda- tions are already being implemented while others will follow the completion of reports. The ICC will in the future review the economic viability and financial arrangements of all of Press' proposed investments. 61. The above measures taken by Press and the Government are important and, if properly implemented, will improve the profitability of Press and facilitate its financial restructuring. Such a financial restructuring, however, is unlikely to precede the completion of the consulting firm's study and the implementation of many of its recommendations. During the tranche review, the Bank would examine Press' progress in implementing measures to improve its profitability and management practices and in developing a long- term program of financial restructuring (para. 68). 62. Institutional Reforms Aimed at Strengthening Malawi's Debt Management. Although Malawi's debt reporting and management performance have been satis- factory in the past, there is a need to strengthen debt management capability and to monitor external borrowing more closely. During negotiations, agreement was reached that by October 31, 1981, the Government would submit for Bank review its proposals to improve its capacity to monitor and manage its public and government-guaranteed private debt, as well as establish a target range for future public debt service ratios (para. 68). III. THE STRUCTURAL ADJUSTMENT LOAN 63. The Government made a formal request to the Bank for a structural adjustment loan in April 1980. The loan was appraised in September 1980,  - 25 - and a post appraisal mission visited Malawi in January 1981. During this time a program of action has been developed through a close dialogue between the Government of Malawi and the Bank. There has also been close coordination with the IMF. The agreements reached by the Government with both institutions combine to make up the elements of the SAL program. 64. The proposed Structural Adjustment Loan is designed to respond to Malawi's serious financial crisis which threatens the country's economic prospects. The loan supports the program described in the Government's Letter of Development Policies (Annex IV) and provides foreign exchange to finance critically needed imports (para. 66). Chart 1 provides a summary matrix of the Government's action program. The adjustment process is expected to take several years to implement. The five-year public sector investment plan and supporting macro-economic and sectoral policy reforms to restore economic growth and financial stability are complex undertakings which the Government intends to address as part of a phased program over the next five years. The proposed loan is the first of what can be expected to be a series of structural adjustment loans to help Malawi through the difficult transition period. A second SAL operation is programmed for FY 1983. In addition, a related technical assistance loan (No. P-3025a-MAI) is being submitted separately. It provides funding for management consultant studies of MDC and a livestock study as well as consultant support to help MDC's export marketing capabilities and to study currently unidentified aspects of the structural adjustment process. Malawi's longer-term development objectives are to broaden its economic base for exports and to meet the growing needs of its domestic market efficiently substituting local production for imports. Specifically, it plans to diversify its investments in the agro-industrial, agricultural and energy sectors in order to protect Malawi from external shocks (oil prices, fluctuating commodity prices) while continuing to emphasize programs which will raise smallholder productivity and develop the full potential of its most important development resource, its people. In this regard, Malawi is seeking to strike a sensible balance between investments in human resource development and productive endeavors to revitalize its economy. 65. The loan negotiations were held in May 1981 with a delegation headed by Mr. G. Kalinga, Senior Deputy Secretary, Ministry of Finance. A supplementary loan data sheet is attached as Annex III. In our discussions with the Government on the different aspects of the adjustment program, we have reached an understanding on the specific steps which will lead to the implementing of the Government's intentions and the proposed time frame for those measures. There will be regular exchanges of views, the first of which will take place no later than October 31, 1981 (Schedule 3 of the Draft Loan Agreement). Allocation of the Structural Adjustment Loan 66. All of the US$45 million under the loan would be used to help finance all imports other than a short list of excluded items as specified in Schedule 1 of the draft Loan Agreement. It is estimated that eligible imports in 1981 will total about US$250 million. The proposed loan would finance about 18 percent of this, thus resulting in rapid disbursement.  -26- Chart I: MATRIX OF MEASURES REGARDING STRUCTURAL ADJUSTMENT IN MALAWI Economic Issues Government Measures Proposed Policy Actions Taken to Date Measures Bank Monitoring Key Date 1. IMPROVEMENT IN BALANCE OF PAYMENTS A. SmalIholder Production Establishment of Annual review of small- Annual review of slow growth of recorded interminTsterlal holder prices In accordance progress. output and stagnation producer price with methodology agreed In exports. advisory committee upon with Bank, and sub- Review of price By 10.31.81 mission of results and decision based on recommendations to Bank recommendations of Price Advisory Com- mittee for FY81/82 Substantial Increase in cotton pro- Implementation 9.1.81 increases in pro- ducer price for 1981/82 ducer prices for growing season to a level groundnuts (1978) acceptable to Bank and maize (1980). Review of efficiency of Review of progress ADMARC's marketing and through special storage operations by Interest procedure F.A.O. Substantial- Prospects and price Bank to finance study 10.31.81 - increases in pro- incentives in livestock through technical Review of ducer prices for sector assistance loan. progress. livestock meat and Findings to be 3.31.82 - com- dairy products reviewed by Bank. pletion of shtdy. Review of findings not later than 6.30.82 B. Estate Production - Induced cutback in Studies on prospects for Bank to finance two Completion and Excessive reliance on tobacco acreage In tobacco industry and for studies, one on review of tobacco and tea for 1980/81 growing future diversification of smailholder tobacco studies by exports. Slower growth season estate production under and world tobacco 6.30.82 prospects owing to rising rainfed and irrigated market prospects, costs of fuel/fertilizer conditions through National and shortage of manage- Rural Development ment talent and land Program I (857-MAI) resource. and another on tobacco estate diversification through Shire IIl (823-MAI)  -27- Economic Issues Government Measures Proposed Policy Actions Taken-to Date Measures Bank Monitoring Key Date C. Energy - Rapid rise of Government has fol- Energy Sector Survey by Bank mission to Camp let In petroleum import bill lowed policy of Bank to review sector visit Malawi In of report by and depletion of domes- passing full costs prospects, possible August 1981 12.81 tic fuelwood resources of Imported petro- Investments (blomass, leum (and taxes hydropower, coal) and thereon) to final energy price policy consumption Increase in taxes on petroleum in Decem- ber 1979. Government commit- Based on careful review, Review of general By 12.81 ment to raise fuel- Government to propose pricing policies wood prices gradually price increases for affecting forestry to reflect full pro- FY82/83. products and agree- duction costs under ment on price NRDP 11 (857-MAI) Increase for FY82/83 Investments -in ethanol and wood energy projects 0. Agro-industrial Invest- Government has Development of agro- Review of progress ments - Need to exploit reviewed Bank pre- Industrial activities In in implementing Investment opportunities feasibillity study Malawi Is contingent upon institutional reform in agro-industrial acti- of agro-tndustrial successful implementation programs for MDC and vitles which will earn enterprises aid Is of institutional reform Press Examination of or save foreign exchange encouraging private package for MDC and Press Incentives and public enter- two organizations best prises to undertake suited to undertake agro- Investments Industrial Investments (See Section IV C and D). It Is also contingent upon adoptlon of appro- priate price incentives and incomes policy by the Government (See Section 11 below)  -28- Economic Issues Government Measures Proposed Policy Actions Taken to Date Measures Bank Monitoring Key Date 11. PRICE INCENTIVES AND INCOME POLICIES A. Wages and Prices - Need Under iMF standby. Government review of price for smooth, more frequent Government agreed control system with a view adjustments in prices and to liberalize price toward improving flexibility wages to maintain incen- controls and mini- tives and prevent dis- mize administrative tortions. delays in granting price increases Under IMF standby Government agreed to restrain public sector wage increases to 5 % during 1981/82 budget year. Recent tariff Government commitment to Review of progress Discussion of Increases for public more frequent tariff progress by enterprises (See increases in line with 10.31.81 Sec.lIIB) cost escalation (I) Air Malawi (Increase in domestic fares and international charter during 1980) (ii) Malawi Railways: (increase in domestic and international fare averaging 23% effective 1.81) (iii) ESCOM (tariff in- Rate Increase for BWB in Implementation By 10.31.81 creases of not less 1981 to level acceptable than 10% 1979, 5% in to Bank. 1 980 and 10% in 1 981. (iv) Blantyre Water Board Development of an invest- Review of progress Discussion of tariff increases of ment program and financial progress by 13% in 1979 and 25% plan to make Air Malawi and 10.31.81 In 1980 Malawi Railways financlally (v) Malawi Housing Corp. viable wlth assistance (tariff increase of from UNDP and UK. 40% on low cost tra- ditional housing in Preparation of the detailed Bank to explore pos- By 10.31.81 1980. plan for implementing eco- sibility of assist- nomic rentals for housing ing Govt. in deve- (Sec IIIB) lopment of invest ment program and financial plan. Joint Review of B. Exchange Rate: Under IMF standby, exchange Need for periodic rate will be subject to review periodic review  - 29 Government Measures Proposed Policy Actions Economic Issues Taken to Date Measure Bank Monitoring Key Dates 111. RESOURCE MANAGEMENT A. Interest Rates - Need - Significant in- Under IMF standby interest to maintain Incentives crease in tend- rates wilJ be subject to for credit allocation ing and borrow- periodic reviews and savings ing rates over past two years B. Public Enterprises - - Creation of Dept. Need to improve of Statutory profitability and Bodies (DSB) to efficiency of opera- monitor activities tion of public enter- prises and provide assistance in for- ward planning Treasury and DSB conducted review of public enter- prises financial position and in- vestment programs - Recent tariff in- Government commitment to creases for pub- increase rates for BWB and (See IIA) lic enterprises prepare detailed plan for (See section IIA) implementing economic ren- tals for housing (See sec- tion IIA) C. Government Revenue - - Significant Commitment in 1981/82 bud- Need to improve revenue measures get to take new revenue revenue performance during 1979/80 measures including a 15 per- to provide finance and 1980/81 in- cent increase In all speci- for recurrent expendi- cluding increases fic excise and import duties; tures and local com- in imports and on introduction of 10 ponents of develop- duties; surtax on percent tax on hotel and res- ment expenditures domestically pro- taurant services; and an while reducing govern- duced and imported across-the-board tariff in- ment reliance on goods; excises on crease of 3 percent domestic borrowing cigarettes, tobacco and beer and airport tax - Requested IF to provide technical assistance on budget management and fiscal fore- casting  - 30 - Government Measures Proposed Policy Actions Economic Issues Taken to Date Measure Bank Monitoring Key Dates D. Government Borrowing - - Under IWF Standby Under IW Standby Govern- Need to reduce domes- Government set ment's net cbmestic Bank tic government borrow- ceiling of 14 borrowing will be zero dur- ing to decrease in- percent on total ing FY81/82 flationary pressures net credit expan- and release funds for sion and net Commitment to: private sector credit borrowing by (a) Strengthen Government's Bank to review By 10/31/81 expansion while pro- government institutional capa- Government's propo- viding scope for build bility to monitor, re- sals with respect to up of foreign exchange cord and manage public debt management and holdings; need to debt and government reporting limit foreign borrow- guaranteed private debt Ing on commercial (b) Establish a target range Government to set By 10/31/81 terms by Government of for future public debt target by private/public service ratio enterprise with govern- ment guarantee - Under IW Standby Under IMF Standby, external ceiling on govern- debt ceiling on government ment and govern- and government guaranteed ment guaranteed external borrowing of 1-12 external borrow- years maturity will be Ing of 1-12 years K 30 million during 1981/82 maturity was budget year K 25 million for 1980/81 budget year IV. GOVERNMENT INVESTMENT PROGRAM A. Recurrent Expenditures Commitment of additional Review of Implementa- By 10/31/81 Need to correct under- K 2.8 million In 1981/82 tion of supplementary funding in agriculture budget over amount al- appropriations and and to provide for ex- located to agricultural effects of Increase pansion In recurrent departments In 1981/82 operations In key economic and social sec- Commitment in 1981/82- Annual implementation tors In line with on- 1985/86 development program reviews going investment program to real growth of recurrent expenditure in key economic and social sectors B. Development Expendi- - Increases In Development program 1981/82- Review composition of By 03/31/82 ture - Need to main- shares allocated 1985/86 allocates increasing investment program tain and/or increase to agriculture, shares to agriculture, share of investment educatlon, water, education, health and allocated to key health in housing while maintaining economic and social Development Ex- slightly lower but still sectors and to reduce penditure for sizeable share of transport  - 31 - Government Measures Proposed Policy Actions Economic Issues Taken to Date Measure Bank Monitoring Key Dates shares of low priority FY79/80-80/81 expenditures; government investments while maintain- buildings are reduced to Ing share to less than one-third level transport of recent years. Government to provide Bank with up-dated, detailed three-year public Investment program covering FY82/83-84/85 V. INSTITUTIONAL IMPROVEMENTS A. Economic Monitoring - - Creation of In- After preliminary review by Periodic review of 10/31/81 Need to monitor all vestment Coor- ICC all large projects progress Including Investments and to dinating Commit- would be subject to detailed application of ensure the economic tee to monitor technical review by Indepen- specific criteria viability of projects investments over dent consultants for assessing and soundness of K 500,000 by all viability of projects financial arrangements private and public Institutions using standard economic and financtal rates of return criterla B. Government Planning - Request to UNDP to fund United Nations De- 8/81 Need to Improve technical assistance partment of Techni- government planning services of five experts cal Cooperation for capacity and the to be attached to Treasury, Development (DTCD) to associated statistical EPD and MANR act as executing base agency. Bank to ex- (a) Two experts In Treasury press special in- to help with financial terest. Bank to re- analysis of government's view scope of work/ commercial activities terms of reference and with public debt and consultant selec- reporting tions with Govern- (b) One macroeconomic ment and UN planner and one educa- tion/manpowe specialist to be attached to EPD (c) Agricultural planner to be attached to plan- ning unit of MANR Project (to be supported by UNDP and also possibly the Bank) designed to create a comprehensive plan  - 32 - Government Measures Proposed Policy Actions Economic Issues Taken to Date Measures Bank Monitoring Key Dates for development of statisti- cal resources; finance ex- patrlate service staff for supporting major statisti- cal work and to provide training to Malawian counterparts C. Malawi Development Improvement In MDC in conjunction with Bank to review Corporation - Need to staffing of MDC Treasury and OSB, will progress with MDC improve MDC's manage- undertake review of MDC's and government ment/budgeting practices Cessation of ope- present and projected and its profitabtility rations In 3 out financial position and make and financtal position of 4 of loss-making recommendations about In crder that it can subsidiaries and requirements for debt and undertake Investments curtailment in acti- equity finance. in agro-industrial vities of fourth enterprises subsidiary MDC will undertake manage- Bank will finanoe Completion of ment consulting studies the studies through by 6.30.82 anid almed at Improving the com- technical assistanoe review of pany's management of project findings by inventory and working 9.30.82 capital, designing a system of coordinated forward budgeting for Itself and its substdiaries and for- mulating alternative long- term strategies D. Press Holdings Ltd - Press Holdings Commitment of Government Bank to examine By 10.31.81 Need to Improve commissioned an and Press to complete and progress in imple- Press: management/ international con- review funding of Manage- menting measures budgeting practices and sulting firm to ment Consulting Study recommended by the its profitability and review corporate currently undertaken by study and In deve- financial position in structure management International Consulting loping the long-term order that It can and financtal prac- firm and to develop a long- program undertake investments tices and develop- term program of financial In agro-industrial ment strategy and restructuring enterprises to make recommen- dations  - 33 - Counterpart Funds 67. The Malawian Kwacha equivalent generated by the foreign currency withdrawal from the loan account would be credited to a special account in the Reserve Bank of Malawi and used for development purposes in the Central Government Budget. The Government has stated that it intends to use them to finance essential recurrent and capital expenditures in the key economic and social sectors (Section 3.01(a) of the Draft Loan Agreement). Disbursement and Procurement 68. The loan would be disbursed in two tranches in accordance with progress in the execution of the economic program. US$25 million would be available for disbursement after the loan is declared effective. The remain- ing US$20 million would be available for disbursement after a review of performance in October 1981. The conditions for the release of the second tranche will be: (a) supplementary appropriation of MK 2.8 million over the amount already budgeted in 1981/82 to rectify underfunding of agricultural recurrent activities (para. 48); (b) submission of crop pricing decisions by the Government based on the recommendations of the Price Advisory Committee (para. 33); (c) submission of proposals to strengthen debt management and establishment of a target range for future public debt service ratios (para. 62); (d) application by the ICC of generally accepted principles of project analysis in screening major public and private sector investments (para. 56); (e) Government provision of updated balance of payments and public finance projections (para. 49); (f) Government plans for rehabilitation of major enterprises in the private and public sectors (paras. 53 and 61); and (g) increases in the Blantyre Water Board tariff to a level acceptable to the Bank (para. 53). 69. The proposed loan would reimburse the foreign exchange costs of eligible imports on the basis of evidence provided by the Reserve Bank. The Reserve Bank would be responsible for the collection of the necessary documentation, the preparation and submission of withdrawal applications and the maintenance of necessary accounts for the loan fund. Withdrawal appli- cations submitted to the Bank will be prepared by the Reserve Bank which is to conolidate invoices so as to provide for withdrawal applications of at least US$10,000 (Section 2.09 (b) of the Draft Loan Agreement). The Foreign Exchange Control Department of the Reserve Bank would administer and process the foreign exchange applications for imports to be financed out of the loan. It has around 40 professional/clerical staff and is capable of handling these additional responsibilities. During negotiations, agreement was reached thai: Government would ensure that this Department would be adequately staffed throughout the project life and that public and private importers alike shall have adequate assistance in preparing tender documents (Section 3.03 of the Draft Loan Agreement.) 70. Because of the country's urgent need, it is proposed to permit retroactive financing of eligible imports paid for on or after a date three months prior to Board Presentation up to an amount not exceeding US$4.5  - 34 - million equivalent or 10 percent of the loan amount. No reimbursement would be made for imports for which other sources of financing have been secured. Disbursements should be completed within 9 months from effectiveness. 71. All imports would be processed from Bank member countries, Switzer- land and Taiwan. All procurement would be through normal commercial channels, except in the case of contracts costing over US$3 million which would be procured through broad international tendering among suppliers from the Bank's member countries, Switzerland and Taiwan with contracts awarded to the lowest responsive bidder. The contracts would be subject to ex post review, that is, a brief report containing evidence that each was let in a manner satisfactory to the Bank, would be submitted prior to or with withdrawal requests. We expect that over 75 percent of the transactions will be for smaller items procured through normal commercial channels. Only a very few individual transactions would be likely to exceed US$3 million and to attract international interest. They are likely to be for commodity procurement, principally, fertilizer fuel, and pharmaceuticals. Regarding fertilizer and pharmaceuticals, Malawi already has well established tendering procedures which are overseen by either the Medical Buying Board or by OPTICHEM, res- pectively. Transactions are widely advertised and bidding is highly competi- tive. Regarding fuel, supplies are obtained several months in advance through limited competitive shopping among various suppliers. Benefits and Risks 72. The principal benefit of the loan is that it provides support and encouragement to a program of medium-term structural adjustment aimed at restoring economic growth and financial stability. This program, as outlined earlier, is based on the Government-s strategy for agricultural diversifica- tion, promotion of agro-industrial exports and efficient import substitution (fuel as well as manufactured goods). The direct support comes through provision of additional foreign exchange resources which will allow the Government more room to maneuver in implementing the needed policy and insti- tutional changes. Equally important, however, is the fact that the loan has provided an effective vehicle for an ongoing dialogue on economic policy and for the provision of technical assistance, that is, the funding of studies under a separate technical assistance project. 73. The principal risk of the loan relates to the capacity of the Government to implement the program in its entirety. Shortages of trained personnel in the civil service jeopardizes not only the timely implementation of the Government-s new public investment program but also of policy and institutional reforms envisaged in the program. Moreover, the pricing and incomes policies and proposed tariff increases may meet with resistance from affected parties. IV. BANK GROUP OPERATIONS IN MALAWI 74. Over the past 15 years Malawi has received 23 IDA credits totalling US$257.2 million and four Bank loans totalling US$29.2 million, of which two  - 35 - were on Third Window terms. Of the total Bank Group assistance, US$98.2 million (34 percent) was for agriculture, US$37.8 million (13 percent) for power development, US$73.4 million (26 percent) for education, US$65 million (23 percent) for roads, US$3 million (1 percent) for a development finance company (INDEBANK) and the balance of US$9 million (3 percent) for water supply and to finance feasibility studies for a pulp mill at Viphya. The first Bank loan to Malawi was made on Third Window terms in June 1976 and the first standard Bank loan in April 1977. The most recent IDA credit, SDR 32.2 million (US$41.0 million equivalent) for a fourth education project to develop secondary education was approved on March 26, 1981 and is expected to become effective in August 1981. IFC's investments in Malawi consist of a loan of US$6 million made in 1976 for a textile mill, another of US$9.5 million for sugar development in 1977, a US$0.6 million equity investment in INDEBANK in 1979, and a US$2.0 million loan to Malawi Hotels Limited for tourism in 1979. A US$262,000 equity investment and a loan of US$1.7 million for the production of ethanol from molasses were approved on July 29, 1980. A summary statement of Bank Group operations and notes on the execution of ongoing projects are provided in Annex II. Project implementation has been fully satisfactory. 75. During the next five years, Bank Group assistance to Malawi will be closely tailored to Malawi's structural adjustment needs and to increasing agricultural productivity. The third phase of the NRDP, to help raise agricul- tural production in the north, has already been appraised and the fourth phase of NRDP is under preparation. A second equity investment to INDEBANK is planned and possible investments in energy, health, agro-industry and water supply (phase II) are being investigated. Additional assistance for education and for structural adjustment are also expected to figure prominently over the next several years. The Bank Groups economic and sector work will continue to provide support to the lending program by focusing on key sectoral issues affecting the economy: agricultural financing and production; assessing the most cost-effective approaches to providing social services; investigating energy investment opportunities; and public sector management. V. LEGAL INSTRUMENTS AND AUTHORITY 76. The draft Loan Agreement between the Republic of Malawi and the Bank and the Recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. Special conditions of the loan are listed in Annex III. The condition of disbursement of the second tranche is that the Government shall be making satisfactory progress in carrying out commitments undertaken in its Letter of Development Policy and in executing iLts structural adjustment program (paragraph B of Preamble, and Schedule 3 of draft Loan Agreement). 77. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 36 - VI. RECOMMENDATION 78. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 4, 1980 Washington, D.C.  - 37 - ANNEX I TABLE 3A MALAWI - SOCIAL INDICATORS DATA SHEET MAIAWI REFERENCE GROUPS (WEIGHTED AVE GES LAND AREA (THOUSAND SO. KM.) - MDST RECENT ESTIMATE)- TOTAL 118.5 AGRICULTURAL 41.2 MOST RECENT LOW INCOME MIDDLE INCOMF 1960 lb 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHAPA AFRICA SOUTH OF SAHARA GNP PER CAPITA (USO) 50.0 80.0 200.0 260.0 868.0 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) .. 46.0 52.0 80.0 699.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 3.4 4.5 5.7 URBAN pOPULATION (PERCENT OF TOTAL) 4.4 6.4 8.9 17.3 28.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 11.0 STATIONARY POPULATION (MILLIONS) 32.0 YEAR STATIONARY POPULATION IS REACHED 2165 POPULATION DENSITY PER SQ. EM. 29.0 38.0 49.0 27.4 61.7 PER SQ. KM. AGRICULTURAL LAND 89.0 113.0 141.0 82.6 126.0 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 43.6 43.9 47.5 44.9 45.5 15-64 YRS. 52.0 52.1 50.0 52.2 51.6 65 YRS. AND ABOVE 4. 4 4. 0 2.5 2.8 2. 8 FOPULATION GROWTH RATE (PERCENT) TOTAL 2.4 2.8 2.9 2.7 2.7 URBAN 4.8 6.6 7.3 6.8 4.9 CRUDE BIRTH RATE (PER THOUSAND) 53.0 52.0 52.0 47.4 46.8 CRUDE DEATH RATE (PER THOUSAND) 27.0 22.0 20.0 1.6 16.4 GROSS REPRODUCTION RATE 3.2 3.2 3.5 3.2 3. 2 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71b100) 90.0 91.0 101.0 91.8 94.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OP REQUIREMENTS) 86.0 98.0 90.0 90.2 92.7 PROTEINS (GRAMS PER DAY) 55.0 67.0 59.0 53.0 53.0 OF WHICH ANliAL AND PULSE 5.0 11.0 10.0 18.4 15.6 CHILD (AGES 1-4) MORTALITY RATE 41.0 32.0 2 7. 0 27.7 21.3 NEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 37.0 42.0 46.0 45.3 50.1 INFANT MORTALITY RATE (PER THOUSAND) .. 149.0 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. 33.0 23.2 31.0 URBAN .. .. 70.0 58.0 66.8 RURAL .. .. 29.0 16.8 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 28.9 URBAN .. .. 15.0 67.0 RURAL .. .. POPULATION PER PHYSICIAN 42400.0/c 38430.0 48198.0 30910.4 14508.2 POPULATION PER NURSING PERSON 12918.0 16344.0 3291.0 5793.2 3279.5 POPULATION PER HOSPITAL BED TOTAL 927.0/d 649.0 546.0 1198.9 1141.5 URBAN 115.0 110.0 RURAL 1312.0 802.0 ADMISSIONS PER HOSPITAL BED .. 36. 3/e HOUSING AVFRAGE SIZE OF HOUSEHOLD TOTAL .. .. URBAN .. 3.4/f . RURAL .. .. 5.0 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. URBAN ., 1.9/f 1.7 RURAL .. .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. .. URBAN .. 16.0/f .. RURAL .. .. ..  - 38 - ANNEX I TABLE 3A MALAWI - SOCIAL INDICATORS DATA SHEET MALAWI REFERENCE GROUPS (WEIGHTED AVEIGES - MlST RECENT ESTIMATE) MOST RECENT LOW INCOME MIDDLE INCtOE 1960 1b 1970 Lb ESTIMATE Lb AFRICA SOUTH OP SARARA AFRICA SOUTH OF SAHARA EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 63.0 40.0 057.7 61. 7 MALE 81.0 50.0 * 74.2 69.2 FEMALE 45.0 29.0 73.0* 54.1 51.4 SECONDARY: TOTAL 1.0 2.0 51z9 10.0 20.6 MALE 1.0 3.0. 6.0 13.7 29.2 FEMALE 0.3 1.0 2.0 7.1 14.7 VOCATIONAL ENROL. (D OF SECONDARY) .. 3.0 7.2 6.8 7.0 PUPIL-TEACHER RATIO PRIMARY 41.0 43.0 2.*0 45.0 36.6 SECONDARY 14.0 16.0 20.0 25.2 24.3 ADULT LITERACY RATE (PERCENT) .. 22. O/g 25.0 25.5 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 1.8 2.0 1.9 3.6 38.8 RADIO RECEIVERS PER THOUSAND POPULATION 1.0 24.0 26.0 31.5 83.5 TV RECEIVERS PER THOUSAND POPULATION 0. 7 .. .. 1.8 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. .. 1.8 4.6 24.2 CINEMA ANNUAL ATTENDANCE PER CAPITA 0.3 .. 0.9 .. 0.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1570.5 1980.8 2404.2 FEMALE (PERCENT) 38.3 37.8 38.0 33.5 38.1 AGRICULTURE (PERCENT) 92.0 89. 1 86.0 80. 7 54.3 INDUSTRY (PERCENT) 2.7 3.7 5.0 8.1 17.8 PARTICIPATION RATE (PERCENT) TOTAL 48.2 46.9 45.8 42.2 38.8 MALE 60.3 59.2 58.1 55.1 48.4 FThEALE 36.4 35.0 33.9 29.5 29.4 ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 1.2 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. 29.5 HICHEST 20 PERCENT OF HOUSEHOLDS .. 52.9 LOWEST 20 PERCENT OF HOUSEHOLDS .. 5.7 LOWEST 40 PERCENT OF HOUSEHOLDS .. 15.0 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US PER CAPITA) URBAN .. .. 123.0 138.2 RURAL .. .. 99.0 86.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 65.0 107.0 RURAL .. .. 52.0 65.0 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 25.0 RURAL .. .. 85.0 66.9 Not available Not applicable. NOTES /a The group averages for each indicator are populatior-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c 1962; Ld 1963; /e 1965; /f 1967; IA 1966. Most recent estimate of GNP per capita is for 1979, all other data are as of April, 1980. * Data supplied by EAPED December 1980 October, 1980  -39 - ANNEX I Noe:Although r'om dots are drw fro souce generally judged tha semi muteetetive Ied rel"Iable it should also he ted that they may no be inter- nationally omperahle because. of the tact of stnadised daf.ttio anId oi.r used hydifferent co. rt_tt "I lisitiugthe doom. The data are... 5 theles,usful to d...rthe orer ot magnitude, usuctet trend.,an oharr. ie etain maj- dtff.terenve hmt cutria The rtereue. trooPs nre (I ) tte ss conty rop of the auhbleot -toutry and (2) A...uItry troopslb ithmo-eharhigher averag i.to that the -untry group ofth eh_t iotry (sucet for "Catre hurpla, Oito fPooters grou ober 'Muddle Ittom-tot Afrc u tddis East 0 ech.see Amosus of strnge soctocuitual eftnutis(. t the rs.tt... grA pdta the aveage are populartot weighted arttha_tiu er for each indicator and show olp sheua Iu.a.t half of ths coun.t. t oa.I.Igroup h.e dmt. for thet tuditanor. Siioenhsov...rmge oftoorigamn the irditotora deperd on the avilahility to dat and is to oto,cuit mathtartsit eaie averge of one todurtu toaobr Tet vrgsar tycefliomafe h au of on.. iafraeb mn the% coutr sod refermet..sfgroups. LO AE (thou.aud tqR. oaattetPytia-Popultios uti-dad by ubru rrligpy Total - Total aurfacs area -oprfeug an creaed--- Inlai. aes lcueqaloed frm-asadosiauh-t1t oitasinph,s- giunrl - ftimate of agriculturl araue prripy or permnetly Puouatti_ oar N_ria PAro -diPopuolut dt ide hr. ithy of rati for cropa. pasues taket and ktt-han garden or to lie follow; 1977 data. amOs sad finalst. reucserss prr-ai ues,sdasatn nse GNP PER CAPITA (US$ - GNP I--- -pi~~. ..tioPtenlatie, per,ksettai .tad ..totsl. urban, and tur-d - Po - nlption-f total ..If aIa(ii)-lPprcpt etmtsa uro mahidatpriWet,cal- abs, and rura) divided by their repectiv stehe of hosPital bada oulatd by o conerhormaho eRndtuAamf977-79 basi): tMO, available in puhil and privote gestetssd spattaisied bh pital eAdfre- 1970, aed l979datu. bab~~~~~~~~~~~~~~~~~~~~~~~ihiratios o-ters. fteapttsiaar sabhiabsr peos-etly staffed ENERGoY CONSgKTtION Pit CAPITA - Aunual c-oaptioo of -oemrcia enegy (coal tar are non teohlude Rra hospiralba.t however pnoite hs11t and dim and inite, perlu,ntalgee end hydro-. . tolea mod s-ohsema eIe- c_nror no permanentl staffe hy apitl sitsa (but by ahsiem seisessl tricty)iehlogams f cal quuvalen Perto cpita; 1960. 1970, moo iN78 nare, mIdwfe, et. hioh off.r in-patien- ord wAnd provide A data, l~~~~~~~~~~~~~~~~~~~~~~~~~~~~imited ruege of sediral farilitihe. Poe tatmir purposes aebse hepi- POPULfATIONf ADO VITAL, STATISTICSE-l hsi-tIe d t HOta or urathopinl admdca1n hatetitytenees I Toa oulio.sid-tea (illium .. Am of July 1; 1960, 1970. sad 1978f h.dpiasIln far -lsia tad - hTeptal em di o a odmsln -tot orduoar dare.- --) t--ftb t1po i. from hospitals ivided by theTos,ber f-bade. diffrmu deittlu of rha areas may affet coePsbilitY of dote goStnGc amon o-utriea; 1960, 1970,..ad 1979 data..AveaeSe fRosbl oroe e oshld ua,uba,adoel Puoulanir It yer 2000 Curreotpopulatot prujctiun afe hId or 1" A ho..hod oniss f A drooP of iedividoale h.e hbr living qusotera P1111:t", ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~a thei sit Peal. h.adeeto-odgr my er may not he siuldid iu toalppuato by age and ace mi tnal Carlity aid fetiiyh at the hb.ua.hold for trtistoa1 purp..e.. Projecionprntf o etlt ratstumrih o tre levals nI.-- Aveae.. hro ene prro-ttl ra.an ua vrg os le lf eptfu..0.Ichicaing vith couty's par. topia ntn he b of pesn per coot. lo., aluho - ua cuidtoet level mod famale lufe IneI--cy staililoig At 77.5 Yer. Th. pars-f -.. delnsrnPe,oholy olelogc-'dto-rotarAtraa meesfrh etlt rtaIsthaeobe leve.,f_ls naigdciei u.Otcupled par-.._ = bAo fetiiy coriglitnonYeclan ps-fmlypatunderomac. coeroteorciv vitn o celio1y, -tta, ran ndrra_ ..o.outnrY in then atig.ed one of these uioe ctsbtoatliog o-f-mraIf ovttoa wlig lcriIyI iIgqatr apratg anrd f-cillity tredu forpojci pt. P.,uriptses.t.lt, A of. eto el-`oha, td rural- dwel dngI revat_ive- Sta -uer oooulaoiot-lTosanoA rypopultitthr ig..noigronth sInce th h _nrte ia rq-lh o the death rate, -td also the aE. strutur a VC manscnsat.T is_nahievd only afoer feritIty rate .de .on to. f. edtr setatt estimtd oc the hesia of the projected tha...tacteiatMIcso h ouahr piaysho-g ouain;ueal nldso da gd6l Is theea 2000, and the rate of decline of fertIlity rate ocpae er u dutdfrdffrn egh fpiayeua n o tea statinay rPuPluitc ie teatbed - Tbe veer oRes stati_nary population sneto ppl are belowt upsho.9the off Picay school ag .Y hlw a beau reac.hed. Se.ua..hel- .otl Ida a female - -Ypae ne. ahve ea-o.dary Porulatbew leetty edouio rqires at -ss four thnr ofiappove priarh_ etooto Per u. a. sricltual lud CoPute as above ur egri_uturat lan eutlude only. hncationnl etroil-- lD h.t-.)ofllq eroc 1.. f fer Yent o f aecady - . Voatoalistt tion larion; 1960,1970, and 099 data. purulteether ruci - primary, ad outondery Tutud -enden..enrolled i petppoatn o it -tI, C960-0,ad cipt-ft. corvei_dlntleels Ponulaton Growh hots)oercen) - ursa - dououl gvwnb raes of rbor pua- Adul litercy rare.rrroet) --Lierate dults (ble toread aa ovire poultuo, ; 1960, 1970, and 197 data. cog-tootrtdoo-nt.1t.-t i poplation;1990,1 1970, aid 19760data, tars.78C" -ete este ihtptoa uldsa-uac ere a 'P.it rates; 170 uselyfuederovrge7 ndn8i 96.190 ad197 bndcaacgneCOpbiNprSUugMPoTopltInIONuds ni rahy lnnn -t Accetors.. Anna (haae - - Id b Panua nhomber of uccety r anaad receIvers Itht..imad nyaswenrgeotno ai a 1all Panig hr 1(rerceci97 of mrrie wumep.- Prcenage f-maried counrIesabolshedlceatt- all. maridutien Rtsae - oge9 u.to grou uggeeralpublc-peltbbsss pthlaton;encdes unli.cwan TV.receivers fuel ff510 .tJTtIflIt ~ ~ ~ ~ ~ ~ ~ ... . ft- R.in otre n i n( yeu.... ede rehtrro ofl oy. ofotaa -tooefe te. of 'i ....~~~~~~~~~~~~~~~~ta of"alieerlitr. gwpeee,.dfinda oidrlpb iw tet tfoua)elhaeeil n otirtina(..cfe n ieaAna tednepoCno ter er-tae oni.thetnmbe of .i teaareentode). ggrgd- ..pi.du.. of each coantry ftlbase On g tiLt sold durin the year, incldin -adaisbt ova on l dciv -ntia enpoo_a, ad chge to otok. nteple engd nmlfe,e t arme -o1 e anti unemploye..d barep ladifep bouel dca, -edena of o, mood sen ditrhdtn fpnoltoof n allo.i.g 0.percn foeata trclture (recely -o .. oroc tootM farm ing fcr Lt. buetro and hou- hod evl tOll-ct.1970,..odd190 data. fdlibntian puyocacag of-tl total .ebo forte; 0960 91 a- d197 i= danad nei upl of41 foo pep dayi, Ned t sppyoffodi def" Inedanabve te- o and electicIy,i wave ap. adgmuAec eo toa- hrfot; 90 q _r.eo frat 1-countiesetblleed by ilA provid too fnfumi 1970 au 91eu Rt roen f hc 1 gram shold I be ht..a. prteIn. These sadctivIty canes err1 c~th d as, itotl,d male,an foml labor. foteas Oct:ld -tod hurtey 191-1 1970 nod 1~S,1, , 0.7ddta 196,dk 1970, an 195dt.Teeaei0tprtcpto gs oliio PeP" laroenmrl rmaua n us-eti upyo odde aetnercuen h oolcu,adbo ieted e si - y -Mf tbl. i~~~~~~~ -Y "' c11 L~~~mRe aORCEirnatl ltres trIos date derIved fron loft tables; 1960, 0970 and 0977 dots, D i~. i... - -boloy1ni97y oo orbith 160 197an 1, 97t data d. ofi.higbureh160o170lda.78d. fiai loaucRt rvnoaad nuldah flfat ie n er pp o oA.e ogP--g i 11 of ogPie per Pbr ofn lv births. - feti-mofp-tedt Auute Povert feo-e leve i(Ots ue capita -. ur. an.. ue wae uo u bo rooroete or197"spigs9adsniaywel)dsteiatdesaivdovrvfans enmlit nrc eia - orbti ga rural ocodfde-ed .a he ...ial coanoa75 a9e- of that1 housei. in rua23 a ee niojutetfrbge oto glPP..iviog i urban area.. t_ rtannb1 arrant Aool -ep . that the houme.P-If .. nomeber FOfi the hoseol ttiad Pofuaio halo -.thalut Pori iom ItlAoC10,,2r do vvt ave icperd alinyvoprtlonae. par v1te9a6i0etbngte n 19ra - Percent . tf pplTi... (uba m-od rua)P hoap haltpo" rura -PNmeift ope(ttl rbn v rurell served byp a ffdncreta.,PI.i. o -9I -d.Af-.t pslnyIvc-ude tie onle...u and diposl with91-5,170. or9withoutorsatmoto fonuic .nle i Pcren n lepermed Cfhmldaoeocce)K.tuatnate R.aa by mter-htcv eyeo1 or the us of thOccdohrrh IWO1lb, ... pit prtvies sod sonclar tI-vadekdml-leiolbyoue...  - 40Q - 00 44444400.0. _ 44D0eaCN0 00 . 4. 40 Vi .0400 C 494'Z o1 a o o ^ 5. C e Z s I ~ ~~ ~ ~~~~ ~ 04,0 1oo s r o o o r _ o - ^ o> o o I~~~~~~~~~~~~~~~~~~~~~~~~~4 0 .0400>=<< .04 0.. ^o@@_ I = S < n < N vl < _ - 0 4 < e 4 > a - r 0 0 .0040 0 s 440O _O - 40|444-44.0 .0_404G4_00_4_._ | t E .0 .004-04.-. 04 0 sN4 - h~s<<