Malawi - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15494-MAI MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MALAWI MARCH 19, 1996 Southern Africa Department Africa Region This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy was dated May 17, 1994 CURRENCY EQUIVALENTS US$1 =MK 15.3 MKI = US$ 0.65 MKI =100 Tambalas ABBREVIATIONS AND ACRONYMS ADMARC Agricultural Development and Marketing Corporation AEF African Enterprise Fund CAS Country Assistance Strategy CBI Cross Border Initiative COMESA Common Market for East and South Africa CPPR Country Portfolio Performance Review EDI Economic Development Institute ESAF Extended Structural Adjustment Facility EU European Union FAO Food and Agricultural Organization FIAS : Foreign Investment Advisory Service FRDAC Fiscal Restructuring and Deregulation Adjustment Credit GEF Global Environment Facility IDF Institutional Development Fund IFC International Finance Corporation MASAF Malawi Social Action Fund MIGA Multilateral Investment Guarantee Agency MOF Ministry of Finance MTEF Medium-Term Expenditure Framework NEAP National Environmental Action Plan NGO Non-Governmental Organization PAP Poverty Alleviation Program PFP Policy Framework Paper PSD Private Sector Development SADC Southern Africa Development Committee SCC Systematic Client Consultation UNDP United Nations Development Programme UNICEF United Nations Children's Fund WHO World Health Organization WID Women in Development FISCAL YEAR April 01 - March 31  FOR OFFICIAL USE ONLY MALAWI COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS A. Recent Economic and Social Performance .....................................................................I I. Political and Economic Legacy ....................................................................lI 2. The Economy and Adjustment .....................................................................2 3. Adjustmenit: The Remaining Agenda and Sustainability .................................................5 B. External Environment .....................................................................5 1. Debt Sustainability .....................................................................5 C. Government of Malawi's Development Objectives and Policies ...................................... 6 1. Growth ..................................................................... 6 2. Targeted Programs for the Poor ....................................................................1 I D. The Bank Group's Country Assistance Strategy . . ........................................................... I I 1. Increasinig the Effectiveness of Development Assistance .............................................. 15 2. Lending Program .................................................................... 17 3. IFC and MIGA Activities .................................................................... 20 4. EDI ..................................................................... 20 5. IMF and Donors .................................................................... 21 E. Agenda for Board Consideration .................................................................... 21 Boxes I Malawi Poverty Profile .2 2 Additional Features of Poverty in Malawi .3 3 Malawi: Selected Performance Indicators .7 4 Malawi: Higher Impact Adjustment Lending .13 5 Malawi: Lending Scenarios and Performance Indicators .18 6 The Proposed Lending Program, FY1996-2000 .18 Tables I Adjustment Lending .....................................................................4 2 Comparison of Paths of Nine Major Variables in High, Base and Low Case Scenarios ..... 19 Attachments I Lending Program FY96-2000 .23 2 ESW Program .24 3 Malawi - CAS Objectives and Actions .25 4 Malawi - Poverty Reduction Strategy and Actions .27 5 Malawi - Debt Sustainability Analysis for Country Assistance Strategy .28 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. l  ANNEXES Annex A I Selected Indicators of Portfolio Performance and Management ......................................... 32 2 Bank Group Fact Sheet FY93-99 ....................................................... 33 3 Summary of Economic and Sector Work ....................................................... 35 4 Poverty and Social Development Indicators ....................................................... 36 5 Key Economic Indicators ....................................................... 38 6 Key Exposure Indicators ....................................................... 41 7 Status of Bank Group Operations in Malawi ....................................................... 42 Technical Annexes Annex C Malawi - National Accounts ....................................................... 45 Malawi - Balance of Payments ....................................................... 49 Malawi - External Debt Stocks and Flows ....................................................... 51 Malawi - Public Finance ....................................................... 54 Malawi - Monetary Survey ....................................................... 56 Projected Arrears, Rescheduling and Reductions in Debt and Debt Service ....................... 58 MAP .60  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR MALAWI A. RECENT ECONOMIC AND SOCIAL PERFORMANCE Political and Economic Legacy I. Background. In May 1994, free multi-party elections in Malawi ended 30 years of authoritarian single party rule. A new Government was elected to power. In a symbolic and substantive decision, the new Government quickly proclaimed the goal of universal free primary education and abolished primary school fees and uniforms. In response, enrollment in primary schools nearly doubled, increasing by over one million. The efforts of the new Government to stabilize the economy, persist with much needed structural reforms, and deliver social services to the population have been impressive. But meeting the high expectations of a people suppressed for years poses enormous challenges given the country's deep-rooted economic and social problems. 2. With a nominal per-capita income of US$140 (1994), Malawi is one of the poorest countries in the world. The 1995 Poverty Profile provides striking data on how pervasive and deeply rooted poverty remains, some three decades after independence (Boxes I and 2). Thirty percent of the population have incomes which are unlikely to assure basic caloric needs. Life expectancy is only 45 years, 7 years less than in countries with similar income levels. As much as 59% of the population is illiterate. In the health sector, among other diseases, Malawi has one of the highest rates of HIV/AIDS prevalence. In urban areas, the HIV/AlDS prevalence rate among women visiting antenatal clinics is estimated at 30%; one estimation suggests that by the year 2000, 2 million people will be infected by HIV and about 35,000 children will be orphaned. Water and sanitation and rural infrastructure are severely inadequate -- over two-thirds of households use pit latrines, and almost half the population does not have access to safe water. Electricity reaches only 20% of urban households and is practically non-existent in rural areas. Income distribution is one of the most unequal worldwide, with a Gini coefficient of 0.62. Prospects for any material dent in the depth and breadth of poverty are severely constrained by the present high rate of population growth at almost 3% per annum. 3. Yet, even with a slower rate of population growth, Malawi would face a daunting challenge in bringing its people out of poverty. Malawi is geographically small (48,000 square miles); is landlocked, with the attendant implications of high transport costs; lacks mineral resources; and is among the most densely populated countries in Sub-Saharan Africa. The pressure of people on land has resulted in serious environmental degradation, which is threatening livelihoods, water supply and electricity. The country is highly vulnerable to drought, which has occurred in three of the last four years. The economy is also extremely concentrated, with 36% of GDP produced by the agriculture sector, focused on the production of maize (accounting for 70% of cropped land) and tobacco (accounting for two-thirds of export earnings). The manufacturing sector is small, accounting for only 13% of 1993 GDP, and itself is concentrated in a few hands. There is some potential for tourism development based on the attractions of Lake Malawi and game parks, but competition from attractions in neighboring countries is intense.  2 4. The low level of development also reflects policies followed over 30 years of one-party rule. These led to a Box 1: Malawi Poverty Profile Malawi SSA dualistic economy with the modern sector vertically Income per capita (US$) 140 520 integrated and dominated Life expectancy (years) 45 52 by a handful of public and Adult Illiteracy (%) private corporations and Total 59 50 banks. Sim y in Female 69 62 banks. Similarly, in Income Inequality (Gini coefficient) .62 agriculture, a few thousand Population per Physician (1984) 11,340 24,180 commercially oriented Access to safe water (%) 48 estates paid only a nominal Infant Mortality Rate 142 93 rent for their Child Mortality Rate 223 172 leaseholdings, while Maternal mortality rate 620 nearly 2 million household Stunting (%) 49 farmers engaged mainly in Rural Income (% below MK 241) 80 subsistence maize (1992) (% below MK 117) 40 production. The dualistic nature of the agriculture sector was manifested by inequitable distribution of land. Regulations restricted prices, production and entry in key sectors, created blocked markets and protected the economic power and profits of large firms and estates. The impact of these regulations were compounded by the close linkages between some of the large firms and the State, which enabled the large firms to wield extra-economic power. On the other hand, property rights were insecure for small and medium firms. Development of human resources and social sectors were neglected amid a deliberately skewed pattern of public expenditures that favored an elite at the expense of the majority. To give one stark example, while access to primary education was pitiful, and secondary school enrollment was only 4%, annual subsidies to one boarding school of 300 students exceeded US$I million. There was also intense ethnic discrimination, with Asians excluded by law from numerous activities and from operating outside a few urban centers. The Economy and Adjustment 5. Malawi enjoyed healthy growth in the first years of independence, with per capita income increasing between 1966 and 1980 at an average annual rate of 3%. In the late 1970s, the confluence of favorable factors that supported the growth of the economy ended. Over the following 15 years, Malawi has suffered periodically from economic shocks in the form of droughts, increases in oil prices and interest rates, decreases in tobacco prices, and civil war in Mozambique, which increased transport costs from 25% to 40% of the CIF value of imports and by 1990 brought an influx of more than one million refugees. These external shocks were compounded by internal weaknesses, particularly in expenditure control. 6. To cope with the resulting imbalances, the Government embarked on a series of adjustment programs that continue to the present, supported by a series of IMF and World Bank operations (Table 1). Malawi was considered a good performer through much of the 1980s: the exchange rate was prudently managed; external debt was successfully restructured; the corporate sector was restructured, with some divestiture, as firms and assets were swapped between the three large conglomerates; entry into the industrial and financial sectors was deregulated; trade and tax policies were reformed; directed credit and administratively set interest rates were replaced by the use of indirect monetary policy instruments; supervision and regulatory  3 capabilities of the Reserve Bank were strengthened; and, in the first pro-poor measure, in 1989 the ban on production by smaliholders of burley tobacco -- Malawi's most valuable export -- was replaced by a quota, which was progressively raised thereafter. Success in stabilizing the economy led to two periods of recovery in 1982-1985 and 1987-1991, interspersed between periods of instability and fiscal crisis. Box 2: Additional Features of Poverty in Malawi * Poverty is concentrated in the rural areas, where 94% of the poor live. * The Southern region contains 66% of Malawi's poor households, more than its share (51%) of total households. The share of poor households in the Central and Northern regions (27% and 7% respectively) is lower than their share of Malawi's households (39% and 10% respectively). * The chance of a rural female-headed household being among the poorest (below the 20th percentile) is almost one in two; for male-headed households the likelihood is about one in three. * There is a close relationship between the area of land cultivated by the smallholder household and its poverty status (63% of the poorest households cultivate less than 0.5 hectares, too small to support the household). There is little off-farm smallholder income. * There are significant regional variations in health outcomes. The Central Region has much higher child mortality rates and much lower matemal health care attendance rates than the other two regions. * A survey of 6000 households in 1995 indicates that immunization rates have declined since the previous 1992 survey. The survey shows that since 1992 there has been a small improvement in access to safe water and that the net primary enrollment rate has increased to 83%. * Social indicators in Malawi are poor because social sector spending, while high relative to other countries, has been skewed in favor of the better-off. 7. Significant shocks again confronted the economy between 1992 and 1994: two major droughts (1992 and 1994) and one minor drought; and falling tobacco prices. Altogether, losses resulting from these shocks cumulatively amounted to more than 25% of annual GDP. These shocks were compounded by the disruption in external assistance for an 18-month period in 1992-94, as donors reacted to poor governance and the continuing dictatorship. Fiscal and current account balances deteriorated. Finally, in 1994, a full-blown macroeconomic crisis developed in the face of the drought, runaway Government expenditures in the months preceding the election, steep depreciation in the exchange rate and falling public revenues. As a result, expenditures ballooned to 42% of GDP and the overall budget deficit (after grants) for 1994/95 reached the equivalent of 15% of GDP, well above the target that had been negotiated under the IMF's Stand-By program. The Government borrowed heavily from the Reserve Bank, the Malawi Kwacha depreciated by 250% against the dollar over the year and inflation soared. Annual inflation at December 1994 was running at 66%, while the quarterly inflation rate had reached over 125% on an annualized basis. In early 1995, the IMF extended its review of the eight-month Stand-By program that had been launched in mid-1994. 8. The Government adopted strong remedial measures and the macro-economic situation, though still fragile, has improved. A strict cash budget and improved expenditure control and monitoring have controlled 1995/96 expenditures at below programmed levels. Revenue measures and strengthened tax and customs administration have increased revenues in 1995/96 to 9% over programmed levels. The estimated deficit before grants was 13.7% of GDP as compared to a program target of 16%; the deficit after grants was 5.2%. Tight monetary policy has reinforced the fiscal restraint.  4 9. The exchange rate has stabilized at around MK15.3 to US$1. In 1995, the current account deficit after grants improved considerably to 3.5% of GDP, and official reserves at end 1995 had increased to more than three times the program target. The monthly rate of non-food inflation has declined to about 1.5%; however, as a result of pressure on food prices stemming from drought and maize marketing liberalization, overall inflation in 1995 remained at a high 83%. Maize imports, use of the strategic grain reserve and a good 1996 harvest in the wake of plentiful recent rainfall are expected to help reduce inflation in the coming months. Good harvests, recovery in the performance of the manufacturing and service sectors, and increased investment have also led to GDP growth of nearly 10% in 1995 and an expected 11% growth in 1996. Table 1: Adjustment Lending Board IDA Credit Name of Operation Approval (US$ M) SAL-I FY81 45 SAL-Il FY84 55 SAL-Ill FY86 30 SAL-III Supplement FY87 10 Industrial and Trade Policy Adjustment Credit FY88 79 Agricultural Sector Adjustment Credit FY90 79 Entrepreneurship Development and Drought Recovery Program FY92 120 Entrepreneurship Development and Drought Recovery Program - Supplement FY95 40 10. The Government has also demonstrated its commitment to structural reforms despite the difficult economic circumstances. It has increased petroleum prices to international parity, eliminated fertilizer subsidies, tightened customs administration and raised the surtax and excise tax on luxury goods. On the external side, the authorities have lifted the remaining restrictions on current account transactions and accepted the obligations under Article VIII of the IMF Articles of Agreement on convertibility. The Government has removed all quantitative restrictions on imports except for a few items, most of which affect health and national security, and has implemented measures under the Cross Border Initiative (CBI), a program for accelerated liberalization of trade, financial and investment markets in the region. In the agriculture sector, the Government has liberalized the Agricultural Development and Marketing Corporation's (ADMARC's) pricing of maize within a pre-announced band and curtailed its monopsony power by allowing private traders to act as intermediate purchasers of crops. Significantly, Malawi's new Constitution (May 1995) now overrides pre-existing laws limiting involvement in economic activities based on ethnic considerations. II. With the objective of increasing the effectiveness of public expenditures, the Government has developed the first phases of a Medium-Term Expenditure Framework (MTEF) and is developing a program for the comprehensive reform of the civil service. It has initiated the restructuring of the two troubled transport parastatals and licensed the entry of two new foreign banks to increase competition in the oligopolistic financial sector. 12. The favorable developments in stabilizing the economy and implementing structural reforms enabled the Government to successfully negotiate a medium-term policy framework on  5 the basis of which a Policy Framework Paper (PFP) and the IMF Enhanced Structural Adjustment Facility (ESAF) were approved in October 1995. Adjustment: The Remaining Agenda and Sustainability 13. Despite more than 10 years of adjustment and recent successes, the stabilization and adjustment process remains incomplete in significant ways. The Government faces a major challenge to reduce and re-orient expenditures to benefit the long neglected poor within a shallow resource base. The ability to maintain tight fiscal control has been tested by civil service strikes and more lengthy government decision-makinig processes. The sustainability of reforms and reduction of poverty in the short term can only be accomplished by growth in agriculture within the constraints of land shortage. In the longer termi, it will depend on a change in the structure of output and exports, thereby limiting vulnerability to exogenous shocks; increased private investment in the non-farm sectors; reduction of population growth; development of human resources and entrepreneurial talent; and effective strategies for targeted support to the poorest. Land reform is also a key issue if growth and reduced incomiie inequality are to be achieved. The Bank Country Assistance Strategy proposed below seeks to assist progress in each of these areas. However, there should be no iliisions; Malawi will remain poor for many years to come. B. EXTERNAL ENVIRONMENT 14. Malawi's economic performance is highly dependent on the prices of its exports and imports and on external financing prospects. Exports, concentrated in tobacco and to a lesser extent sugar and tea, account for some 30% of GDP; imports, on which Malawi is dependent for most intermediate and capital goods and raw materials, account for around 40%. Non-traditional exports account for less than 10% of total exports. The expected restoration of the trading routes through Mozambique over the coming years should significantly lower transport costs and lead to significant improvements on the terms of trade in the near term. Nevertheless, the problem of vulnerability to the external environment will remain for the foreseeable future, until ongoing efforts to diversify the economy succeed. 15. Malawi is an active partner in the Southern Africa Development Committee (SADC) and the Common Market for East and South Africa (COMESA). As a signatory of the Cross Border Initiative (CBI, para. 10), Malawi grants 70% preferences to imports from COMESA countries. Trade with regional partners has increased in recent years; however, regional preferences have created important distortions and negative protection for some of the tradable sectors in Malawi. The Government is seeking to promote harmonization of regional trade and tariff policies and to adjust tariffs on intermediate and capital goods as solutions to this problem. Debt Sustainability 16. Malawi's external public debt as of the end of 1994 was US$2,013 million, equivalent to 157% of 1994 GNP (in 1993, when GNP was 37% higher in US$ terms and before floatation of the Kwacha, the ratio was 100%). Multilateral debt accounted for 84% (and IDA alone for 58%), bilateral debt for 14% and private and short-term debt for 2%. More than 85% of the outstanding debt is on concessional terms. Malawi's debt service ratio in 1995 was 21%.  6 17. Malawi is not included among the group of severely indebted low-income countries (SILIC) as classified by the Bank. However, it is close to the threshold level for classification as a SILIC, and hence performance will merit careful watching in the coming years (Attachment 5). C. GOVERNMENT OF MALAWI'S DEVELOPMENT OBJECTIVES AND POLICIES 18. The new Government's commitment to poverty reduction as Malawi's central issue is striking in contrast to that of the earlier regime. In August 1994, the new President officially launched the Poverty Alleviation Program (PAP) and appointed a new Presidential Council on Poverty Alleviation to oversee development of an implementing strategy. Thle Policy Framework for Poverty Alleviation Program, the output of this process, was formally issued by the President in 1995. A poverty profile, based on data from surveys in the early 1990s, has been jointly developed by the Government and Bank (Malawi: Human Resources and Poverty, Profile and Priorities for Action). A summary of this profile has been circulated widely in the country and discussed in a Parliamentary seminar. Poverty was a core discussion topic at the December 1995 Consultative Group meeting, which welcomed the establishment of social and poverty indicators as a basis to measure development effectiveness. Updated information on the poverty situation has been compiled by GOM with the help of UNICEF, based on a 1995 survey of 6000 households. A Poverty Monitoring System has been established in the Ministry of Economic Planning and Development and will coordinate collection and analysis of poverty and social data on a national and geographical basis. 19. The Government's poverty reduction strategy has two broad facets: (a) growth, which is widely shared, and (b) targeted interventions for the poorest. The strategy recognizes that agriculture and the rural sector must be a cornerstone of the near-term strategy. It also recognizes the fragile balance in the country's ability to maintain fiscal stability, achieve growth and implement programs for the poor. Some performance indicators against which success in strategy implementation can be measured are provided in Box 3. Growth 20. Achieving sustained growth in per capita incomes hias several requisites: (a) first and foremost, achieving and maintaining macroeconomic stability; (b) second, reducing population growth and investing in human resource development, particularly in the rural areas; (c) third, spurring private initiative, first in the agricultural sector from which the majority of people gain their livelihoods, but also off the farm, given the grave limit in land resources; and (d) fourth, capacity building at various levels, absent which implementation of policies and programs to promote growth will not be feasible. In the short term, the response must come from improved agriculture performance in a stable macroeconomic environment; the other elements of the growth strategy will take longer to develop. 21. Macroeconomic Stabilization. The Government's aim is to lock in recent gains in expenditure planning, control and monitoring; tax and tariff policy and administration; and monetary policy. The Medium-Term Expenditure Framework (MTEF) has been implemented in four ministries and will be extended to all other ministries in 1996/97. The MTEF allocates priority to pro-poor investments (e.g., in health and education which together will receive at least 38% of recurrent expenditures in coming years), is consistent with recurrent expenditure capacities, and provides for an appropriate balance between wage and non-wage recurrent expenditure. At the same time, the Government will implement financial management  7 information, monitoring and account reconciliation systems to enable the Government to control expenditures at planned levels. The Government is taking measures to increase the tax revenue/GDP ratio from the low 15% in recent years to around 18% by expanding the revenue base, improving the efficiency of the tax system and rationalizing the import tariff structure. All of these measures (in conjunction with elimination of expenditures related to the 1994 elections and the 1994/95 drought), are expected to permit a reduction in the fiscal deficit after grants from 15.1% of GDP in FY94 to 4. 1% in FY97. 22. Peace In Mozambique BOX 3: MALAWI: SELECTED PERFORMANCE INDICATORS and the democratic transition in Indicator/Benchmark 95/96 96/97 97198 South Africa have eliminated one source of external shocks, Health but drought, with its important Total Recurrent Healthcare Expenditures / 12 16 14 fiscal implications, will be a Total Recurrent Expenditures recurrent event for which the Education country must plan, rather than Recurrent Education Expenditures/ 22 25 24 respond to in crisis mode. The Government is working towards Total Recurrent Expenditures a sustainable approach to Primary Education Spending / 61 63 65 manage the impact of drought, as Total Education Expenditures discussed at the 1995 Number of Classrooms Built 600 1200 1200 (Consultative Group meeting. Coneulpartio thisp statengy iStudent:Teacher Ratio 63:1 60:1 60:1 One part of this strategy Is promoting increased agricultural Macroeconomic cPI productivity for which the Inflation Rate (1) 48 15 8 Governmiient has established a Fiscal Deficit (before grants) /GDP 14 9 8 Maize Productivity Task Force. The Government's strategy Revenue /GDP 19 18 18 involves promoting drought- Agriculture tolerant crops, exploiting the Smallholder Burley Tobacco Production 30 50 75 untapped potential for irrigation (million kg) and developing water harvest technologies. The Government Civil Service Reform is considering further Civil Service Wage Bill /GDP 7 6 6 suggestions to: improve early Notes:l) Inflation numbers refer to average percentage change in the CPI overCY warning systems through new 1996,1997and 1998. pre-season climate forecasting technologies, develop effective information systems on these forecasts, and better manage the Strategic Grain Reserve. The Government will accelerate steps to develop and implement a drought mitigation action plan covering not only agriculture and macroeconomic strategy but also other affected sectors like water and electricity. 23. Population and Human Resource Development. If Malawi's popudlain continues to grow at the current rate of almost 3% per annum, it will double within 25 years. At this rate, there is little likelihood that GDP growth would be sufficiently rapid to enable a material improvement in living standards before the very long term. Particularly given the youth of the population (over 45% being less than 15 years old), the strain on health and education systems would be enormous and the ability to improve social indicators doubtful. While family planning has not traditionally received much attention, and the contraceptive prevalence rate is only 7%, the new Government has recognized population as an integral component of its poverty  8 reduction strategy. In 1994 the Government adopted a National Population Policy which has as its main objective reduction in fertility and in infant, child and maternal mortality rates. Education for girls and improved health services are key to a slowdown in population growth rates and are critical elements of the Government's development strategy (paras. 24-26). The Population Policy further espouses a goal to make family planning services available to all men and women of reproductive ages by increasing the number of service delivery points and launching a nationwide IEC campaign. A Population/Family Planning Sector Study (June 1995) was carried out by a Government Population Task Force and the Bank to define approaches. The main conclusions of this study have yet to be fully disseminated in Government and more broadly, but are expected to provide the basis for future policies and programs. 24. In education, the issues are poor and inadequate physical infrastructure, inadequate number of trained and experienced teachers, low enrollment levels (although much improved at the primary level under the new Government), high repetition and drop-out rates and gender inequality. The Governmenit's strategy is articulated in a draft sector policy and investment framework. The main goals of the strategy are to increase the net enrollment rates at the primary and secondary levels to 90% and 10% respectively by the end of the century; to promote greater participation by girls and other underprivileged groups at all levels; to improve the quality of education (by reducing the national pupil:teacher and pupil:classroom ratios, teacher training and appropriate curricula modification); to improve school facilities (currently, it is not uncommon to see large classes attending school under a tree); and to reduce the high level of inefficiency at the secondary and tertiary levels, inlter alia, by greater cost sharing. The Government is reviewing proposed targets in all of these areas to be compatible with fiscal sustainability. Consultations with a broader stakeholder group are planned as input to finalization of the framework. 25. In the health sector, the Government has also prepared a draft policy framework paper, which was discussed with donors in mid-1995. The paper outlines intentions to improve primary health care (PHC), particularly in underserved areas, and improve services for women. Disease control programs will focus on malaria, respiratory infections and AIDS/HIV, the leading causes of mortalities and morbidities. AIDS/HIV has been identified by the Government as a national crisis and is the subject of a sustained IEC campaign. Pharmaceutical services are to be strengthened by overcoming the severe underfunding for drugs, and through better management. The introduction of cost recovery at tertiary levels from private patients is expected to permit enhanced expenditure on public and rural health programs which are severely handicapped by underfunding. The strategy also includes strengthening capacities of the Ministry of Health and Population. Despite these stated intentions, the Ministry continues to support new or expanded expensive tertiary services, has been reluctant to move on cost recovery and has yet to develop specific targets for improving essential health indicators and monitoring mechanisms. Implementation capacities also remain weak. 26. The limited access to convenient and safe water and sanitation is recognized as a major cause of poor health outcomes and a particular burden on women, who play the key role in procuring water. The recently adopted National Water Management Policy and Resources Strategy provides for expansion and decentralization of potable water services; sanitation services would also be expanded. Plans to increase the supply of water and to mitigate the impact of drought include expansion of gravity-fed schemes, boreholes and wells and construction of additional small dams and reservoirs.  9 27. The poverty profile confirms the relatively poorer overall indicators for women and the importance of improving female education and health for overall economic development: children born to mothers with no education are twice as likely to die before their fifth birthday, compared to children born to mothers who have been educated at the secondary level. Women are given special focus in sector strategies. Through the National Commission on Women in Development (WID), an institutional framework is being developed to plan, coordinate and advocate for WID issues. Policy initiatives have been taken to raise awareness on the rights of women. The Government has also developed a WID Policy and Plan of Action. The Government encourages women's associations, such as the National Association of Businesswomen, for which it has requested an IDF grant. 28. Unleashing Private Initiative. The Government recognizes that future growth must be led by the private sector, which will require reducing existing constraints more than establishing new incentives. Growth in agriculture is critical. Much analysis and discussion has taken place in Malawi on the appropriate strategy for the agriculture sector, culminating in the May 1995 publication by the concerned Ministry (MOALD) of a strategy and action plan. The strategy has four major thrusts: (a) to increase productivity and the range of food crops grown; (b) to provide smaliholders, especially women, rights to grow previously restricted crops and to access markets; (c) to diversify activities of large farms away from burley tobacco; and (d) to expand livestock activities. This strategy is expected to enhance on-farm incomes which, in turn, will serve as a catalyst for non-farm growth. Several measures are planned to implement this strategy. First, the Government plans to foster more efficient use of scarce land resources, particularly since the poverty profile shows a strong relationship between size of cultivated land holdings and income. Towards this end, the Government has established a broad-based Presidential Commission of Inquiry on Land Policy to steer a comprehensive review of land titles, registration and policies. The Government expects to develop a new land policy within the next 18 monthis, based on the recommendations of the Commission. In the meantime, the Government has also gazetted an increase in land rents, effective April 1996, to better reflect opportunity costs, thereby creating incentives for estate owners to lease or subdivide idle land; put in place a process to repossess estate land from rent defaulters; and declared a moratorium on conversions of customary land to leasehold tenure. 29. Second, the Government plans to support better exploitation of the untapped potential for small scale irrigation. Third, the Government intends to increase smallholders' access to cash crops, inputs and markets. In 1995/96 any interested smallholder is being allowed to produce burley tobacco and the quota system will be replaced by a production registration system in 1996/97. Legal controls on access to high-value crop production and marketing have been removed, and licensing, registration and reporting requirements for fertilizers, feeds and seeds have been streamlined. The maize price band has been widened and a strategy for commercializing ADMARC and establishing an independently managed Strategic Grain Reserve is being formulated. Minimum tariff requirements, which resulted in trucking costs twice those in neighboring countries, have been removed. The Government expects that these measures will catalyze a more vibrant agricultural economy. 30. Natural resource degradation is a grave concern to the viability of the Government's strategy. The severe deterioration is partially a result of Malawi's poverty, while improved management of the resource base is necessary for alleviating the country's poverty. Pressure on limited land resources by a rapidly growing population, low productivity of existing agricultural technology and inadequate incomes have led to soil erosion, declining soil fertility, widespread  10 deforestation, water degradation and over fishing in Lake Malawi. The Government is strongly committed to implement the National Environmental Action Plan (NEAP), completed in 1994, and the Environmental Support Program elaborated thereafter. Key near-term measures include: (a) finalizing and enacting the draft national environmental policy and environmental framework law; (b) liberalizing pricing and marketing of fuelwood and promoting indigenous management of communal forests; (c) gradually raising land rents and maintaining water tariffs at levels reflecting opportunity costs; (d) strengthening institutional arrangements for environmental issues; (e) implementing measures for afforestation; and (g) providing support for priority investments at the communal level. 31. Notwithstanding the importance of growth in agriculture, the Government also perceives the need to develop non-farm activities to diversify the economy, provide an outlet for the rising urban population and reduce dependence on limited land. In the financial sector, the Government plans to increase efficiency and competition by separating interlocking ownership between key financial institutions and the three large non-financial conglomerates (the Malawi Development Corporation, ADMARC and the Press Corporation), attracting regional and international banks and broadening the ownership of the closely held commercial banking sector. Efforts to strengthen supervision and regulation activities of the Reserve Bank will continue with the assistance of the IMF. In the non-financial enterprise sector, one key goal will be to privatize public enterprises. Policy and legal frameworks for privatization have been prepared and the latter has been submitted to Parliament for approval. Other plans to foster private sector development include broadening the ownership base of the business sector, and, particularly, of the Press Corporation (which in 1993 accounted for 65% of the wholesale and distribution sector, 17% of manufacturing, 11% of agri-business and some 40% of the share capital of the two commercial banks, controlling 58% of private financial sector assets) without destroying the economic strength it brings to Malawi. With its parent Press Trust, Press Corporation has been the subject of delicate negotiations between the new Government and the former President, with the aim to depolitize an entity which, de facto, had been owned by the former head of state. Further, the Government's strategy focuses on simplifying the investment approval process; streamlining the approval process for serviced industrial sites; and reorganizing support services for small business. The Government is also considering opening up the power sector to private participation and corporatizing the power utility. In addition, the Government is developing a tourism policy towards better exploitation of the country's potential in this area. 32. Spurring private sector investment will also require strengthening infrastructure, particularly in rural areas. Malawi's national road network is adequate but suffers from poor maintenance and insufficient number and quality of feeder roads. There is also a dearth of public transport in rural areas. Rural roads, road maintenance and fostering public transport development will therefore be among the transport sector development priorities. The ongoing restructuring/privatization of the Malawi Railways and Lake Services and restructuring of Air Malawi are expected to better support international competitiveness through reducing transport costs and efficiency. Electricity penetration is very low and power outages in urban areas are not uncommon, partly due to problems of siltation, inter alia, resulting from deforestation along river banks. The Government is considering dredging and interconnections with Mozambique to help alleviate constraints, but significant penetration into the rural areas is unlikely to be economically feasible on a material scale for some time to come. However, encouraging greater use of renewable energy is a goal. The provision of telecommunication services is expected to be strengthened with the establishment and subsequent partial privatization of an autonomous corporation.  I1 33. Capacity Building and Decentralization. Capacities at all levels in Malawi are weak and a significant impediment to development potential. The previous regime gradually centralized governance and weakened elected local governments through withdrawal of funding and creation of competing structures representing central ministries. The new Government believes that decentralization to levels closer to the people is important for poverty reduction. It is currently evaluating, with help from donors, the best approach for achieving decentralization, the timetable over which this can be implemented, the training and capacity-building requirements, and the implications for intergovernmental fiscal relations. The Government agrees that decentralization must be pursued cautiously in line with build-up of capacity, the a priori clear definition of respective roles and responsibilities of each government tier and the identification of the required fiscal resources to make fulfillment of legitimate roles possible. At the central government level, administrative capacities are also extremely weak, due to lack of depth in qualified personnel, inadequate remuneration and incentives, overlap in responsibilities among and within ministries, overstaffing in some areas and frequent movement of staff. Civil service reform has been initiated with a recently completed census and the retrenchment of temporary workers. The comprehensive civil service reform program under development will go a long way to creating the conditions for strengthened capacities, but the capacity problem will not dissipate quickly. In the meantime, to compensate, the Government hopes to draw on the private sector to help implement programs. Over the longer term, general upgrading of the education level of the population is expected to contribute to a sustained improvement in government administrative capacities. Targeted Programs for the Poor 34. The Government recognizes that programs of special support are required for the poorest of the poor, but that careful targeting is necessary so as not to distort incentives. The Government has responded to the severe impact of drought through programs to provide food to the most needy and free inputs (seeds and fertilizers) to those in areas particularly affected by poor rains. Progress has been made in better targeting these programs, but further efforts are planned (one idea being self-targeting through the use of yellow maize rather than the preferred white maize). The use of public works programs to reach the poor has also attracted government attention, in that it also relies to some extent on self-targeting. Pilot public works programs are underway in several areas and will be extended under the Malawi Social Action Fund (MASAF). With external assistance, the Government plans to undertake further analysis of social safety net options, aware of their particular complexity in a country with pervasive poverty. D. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY 35. For the first time, the Bank is working in Malawi with a Government which seeks the participation of its people in determining development priorities. And for the first time, the Government is encouraging the Bank to seek inputs from various segments of society in formulating its assistance strategy. In line with the new dispensation, the Bank has undertaken a number of feedback exercises. These complement the increased country focus which new departmental structures and the establishment of a country manager have brought to the Bank's work. 36. Eleven Systematic Client Consultation (SCC) exercises have now been concluded for projects in various sectors. A Borrower Feedback Survey was undertaken in early 1995  12 involving some 30 participants. And, as preparation for the CAS, the Bank organized in September 1995 a series of meetings with 120 stakeholders organized into nine groups (government ministers and permanent secretaries, heads of government departments, project managers, donors, NGOs and religious leaders, civil society, private sector, district officials, and academics, journalists and parliamentarians). These meetings were organized around a series of targeted questions to elicit views on priorities for the country, priorities within various sectors, priorities for achieving poverty reduction and suggestions for a more responsive Bank. The results of all of the SCC, Borrower Feedback Survey and CAS sessions have been collated and were shared with 300 stakeholders in Malawi in early February 1996. 37. Results of the various exercises show that all stakeholders have similar ideas about the key issues (for example, on the importance of education and health), with the local population more focused on the tangible problems they face in their daily lives (water, transport, access to credit) rather thani the broad themes of poverty in general. Other themes from the consultations include the importance attached to improving training and vocational education, the need for greater rural focus in development efforts and the desire for more information on government vision and plans. In most groups, macroeconomic stability did not figure as a key issue. 38. Feedback was also received on the Bank's effectiveness. Concerns were raised that the Bank had not focused sufficiently on poverty and environment; Bank response time was too slow; the Bank needs to communicate more effectively in Malawi; and the Bank needs to better tailor the experience from other countries to Malawi's special circumstances. The above feedback has led to several decisions. First, the Resident Mission will begin to publish a quarterly newsletter whiich will inform on Bank activities in Malawi as well as disseminate best practice information from its worldwide experience. Second, the Bank will actively support the information and education campaign already initiated by the Minister of Finance through a program of ED] support and funding under the adjustment operation being presented with this GAS. Third, the Bank will increase its communication and cooperation with NGOs through continuing monthly meetings at the Resident Mission, contacts by visiting missions and drawing on NGOs to assist in project implementation. The forthcoming project in support of the Social Action Fund and the ongoing National Water Development Project will be important vehicles for such interaction. Fifth, ongoing projects are being reviewed to ascertain whether any restructuring is needed to enhance focus on the rural poor, and all new projects will be screened for their impact on poverty reduction. 39. The Bank's strategy, as outlined below, has been formulated drawing heavily on the inputs of the various feedback sessions and discussions with government officials in December 1995. As the main elements are fully in line with the prongs of the Government's strategy, the Bank's proposed program is outlined according to the same framework. Summary tables on the Bank's assistance strategy are provided in Attachments I to 4. 40. Macroeconomic Stability. Macroeconomic stability will be supported by the Bank through a series of adjustment programs within the agreed medium-term framework captured in the 1995 Policy Framework Paper and discussed above. The design of the programs will draw upon the lessons learned from a review of adjustment lending in Africa (Box 4). The structural adjustment programs will provide foreign exchange and budgetary finance to enable the Govemment to maintain macroeconomic stability while supporting measures with direct impact on fiscal sustainability (revenue and expenditure control, tariff and tax reform, civil service reform, privatization). Some of these efforts are being supported under the ongoing Institutional  13 Developmental Project (FY94), and economic work which underpins the policy reforms include a Budget Management Review (FY95 ), the Pay and Employment Study (FY94) and the informal Drought Mitigation Study prepared for discussion at the recent Consultative Group Meeting. A Growth Options Study (FY97), which will analyze the feasibility and strategies for attaining high growth rates and increases in per capita incomes, will underpin the future adjustment operations. Additional work conducted by the Department on a regional basis will provide input for further drought management strategies which, in turn, will mitigate the fiscal impact of drought. The current expectation is that structural adjustment credits will be justified and appropriate on a bi- yearly basis for the subject period of this CAS, both for reasons of resource flow requirements and also the remaining agenda of cross-sectoral reforms. However, the intention is to phase out structural adjustment credits when feasible and to support reforms increasingly through sector investment programs. Box 4: Malawi: Higher Impact Adjustment Lending The following lessons are being incorporated in the design of adjustment operations. First, the Bank will only pursue adjustment operations which have demonstrated borrower commitment as confirmed through active dialogue and implementation of critical up-front measures. The proposed Fiscal Restructuring and Deregulation Adjustment Credit (FRDAC) has been largely based on up-front actions. Second, one-tranche adjustment loans will be used to provide increased flexibility for operations covering a complex range of issues and where there is uncertainty at the outset as to which measures will be the most appropriate for a second or third tranche. The FRDAC was deemed suitable for a broad-based first tranche and a second tranche focused only on civil service reform. Third, all adjustment operations will be based on consultation with stakeholders; preparation of the FY96 operation was based on widespread discussions/workshops and will include support for an active campaign of information and education communication, with the help of the Economic Development Institute (EDI). Fourth, policy conditionality will be focused on a limited number of critical well-defined measures, with support for underpinning institutional measures provided through complementary technical assistance components or projects. Finally, fiscal issues will continue to figure prominently in the goals of adjustment operations, as they do in the Government's reform agenda. 41. Population and Human Resource Development. The poor social indicators in Malawi make progress in this area fundamental for poverty reduction. The Bank has two ongoing operations in education and health (para. 46). To help the Government accommodate the surge in primary enrollments following the abolition of school fees and uniforms, the Bank recently approved a Primary Education Project to construct new classrooms, train teachers (20,000 new teachers were hired since mid-1994, many without adequate qualifications and experience) and provide training materials. This operation would be followed in FY97 by an Education Sector Investment Project in line with the aforementioned education sector policy and investment framework, and taking into consideration stakeholder feedback on the demand for skills development. The importance of reducing population growth for progress in reducing poverty leads to the inclusion in the future program of a Population/Family Planning Project, which would catalyze more active support from other donors. Based on the current slow progress in implementing the ongoing PHN sector project (para. 48), which includes some support for population/family planning activities, the timing for this operation has been deferred until FY98. A follow-on Health and Nutrition Sector Investment Project is scheduled for FY99. While AIDS/HIV activities are currently adequately funded by other donors, the Bank would be responsive to a request for help, should this situation change. The planned Malawi Social Action Fund (MASAF) Project (FY96) will support community-based initiatives and a public works demonstration program, as well as the establishment of a poverty monitoring system. All of the  14 proposed projects will pay special attention to the needs of women: for example, to ensure that the views of women are taken into account, community committees formed to implement MASAF projects are required to have representation from both genders. A Health And Nutrition Sector Study is planned for FY97 as input for further sector policy and program development, and a Vocational/Technical Education Study will be undertaken in FY97, in likely collaboration with the German GTZ. 42. Private Sector Growth. The Bank is fully in accord with the Government's strategy in fostering private sector development and in emphasizing (a) growth, first and foremost, in agriculture and the rural areas; (b) the critical need to halt environmental degradation; and (c) the importance of removing disincentives as the key to spurring private initiative. The Fiscal Restructuring and Deregulation Adjustment Credit (FRDAC), presented along with this CAS. supports a number of important agricultural policy reforms, including deregulation of crops, markets and inputs and land policy review. Implementation of the recommendations of the land policy review would be pursued under the next adjustment operation. The Agricultural Services Project (FY94) includes complementary activities such as programs for diversifying production, strengthening agricultural extension and developing pilot small irrigation schemes. The Rural Financial Services Project (FY94) is helping to develop a sustainable rural credit mechanism. The Government's 1995 agricultural strategy/action plan would be further assisted by the Agricultural and Livestock Sector Investment Project (FY98) covering policy and institutional reforms (decentralization, human resource development, cost recovery), rural infrastructure and agricultural services. The proposed Environmental Support Project (FY97) will help implement legal and regulatory reforms, institutional strengthening and priority investment activities, particularly at the community level; this would be complemented by the ongoing GEF Lake Malawi operation and forthcoming GEF Mount Mulanje operation. The key analytical piece to underpin work in the rural sector would be an informal study on Rural Employment/Labor Markets and Enterprises (FY97) which would form part of the input for the growth options study. 43. The FRDAC also supports a number of measures crucial for enhanced private non-farm activity: simplifications in the investment approval process: removal of legal restrictions based on race, gender or religion; reform of tariff and tax regimes, inter alia, to provide a better incentive framework for exports; and development of the legal and institutional framework for privatization. A follow-up adjustment operation in FY98 will help with the next phase of reforms in these areas, including privatization of major commercial parastatals and implementation of the tariff reform plan; measures to foster a more competitive and diverse financial sector would also be supported. Complementary technical assistance from the IMF would continue to assist in strengthening customs and tax administration, smooth functioning of which are important for private activity. To gain a better understanding of the status of and problems affecting development of indigenous business and exports, a Private Sector Assessment/Prospects Study would be conducted as part of the preparation of the Growth Options Study (FY97). This would provide the underpinnings for a Private Sector Development Project (PSD) in FY98 to finance micro and small/medium enterprises, business support services and export development, with focus on women entrepreneurs. The project would be developed in coordination with TFC and would complement its SME support activities. While no other PSD operation is foreseen now in the lending program, should funding from other donors not materialize, the Bank may be asked for support of a Technical Assistance Operation to accelerate privatization, a request that would be considered favorably.  15 44. Stakeholder consultations and experience elsewhere have confirmed the importance for PSD of adequate infrastructure. In Malawi this means improving maintenance of existing infrastructure and expanding rural infrastructure, within the bounds of economic viability. The FY98 Rural Roads and Roads Maintenance Project will help establish a sustainable mechanism for roads maintenance and expand the rural road network. The ongoing Power V project will expand generation capacity at Kapichera and the ongoing Rukuru River study is examining the potential for hydropower generation from a tributary of the Shire River. An Emergency Operation (FY97) may be requested to support dredging and regulation of water flows from Lake Malawi, essential to avoid major water and power problems next year. A Power VI project in FY99 would facilitate further expansion at Kapichera and/or interconnection with Mozambique if Bank support is needed to catalyze private participation in the sector. Recognizing the economic limits to expansion of electricity into rural areas, the Bank, through ESMAP, is undertaking a Household Energy Study (FY97) which will examine the potential for increased energy from renewable sources. The National Water Development Project (FY95) includes provision of improved sustainable water supplies in the rural townships through the establishment of three commercially self-sufficient Regional Water Boards and, in collaboration with UNICEF, the provision of water and sanitation services in rural areas. In the housing area, the Bank will continue to provide policy advice. A Capacity Building Project in FY00 would support further local infrastructure development. The need for strengthening the telecommunications sector is expected to be supported by IFC (para. 59). 45. Capacity Building and Decentralization. Building capacity, through training and short-term technical assistance for developing sustainable systems and processes, will be a central aspect of all operations. Recognizing that capacity building will take time, the Bank will foster use of private sector implementation under projects whenever feasible and appropriate; the recently approved Primary Education Project is an example where this has been done. The mainstreaming of the capacity-building objective is currently being complemented by the Second Institutional Development Project (FY94), which is providing crucial support related to reforms under the adjustment operation. Capacity-building efforts will also focus on needs to strengthen local and district governments, on the basis of forthcoming governmental decisions on the nature and timing of decentralization and local government structures. A Capacity Building Operation (FY00) would integrate capacity-building needs at central and local government levels. Informal sector work would analyze options and provide guidance on the design of a decentralization strategy, identify key prerequisites for devolution of responsibilities and examine the critical intergovemmental fiscal issues which are an essential input to decentralization decisions (FY97). This exercise will be coordinated with related activities by other donors. Increasing the Effectiveness of Development Assistance 46. Portfolio Description. Malawi's IDA portfolio consists of 17 operations totaling US$703.4 million, of which US$336.80 million, or 48%, remains undisbursed. The portfolio includes one adjustment operation, three projects in agriculture and fisheries, two in education, two in energy and power, two in institutional development, one in local government development, and one each in PHN, infrastructure, financial and enterprise development, water, rural credit and railways. The diversity of Malawi's portfolio is a reflection of the extreme poverty and varied needs of the country. A relatively small part of the portfolio (three projects plus the adjustment operation supplement) has been approved since the country's movement to democracy in 1994. In addition to IDA credits, the Bank administers projects for IFAD, a GEF operation and IDF grants in support of accounting/procurement capacity building and the CBI.  16 47. Portfolio Performance. Implementation of IDA-supported projects has been substantially slower than anticipated. Problems have included delays in meeting effectiveness conditions, in some cases due to project approval earlier than in retrospect appropriate; weak procurement capabilities and procedures, at the level of projects and the Malawi Tender Board; weak accounting and disbursement/withdrawal capabilities; effectiveness delays and withdrawal of cofinanciers in the 18-month period in which donors suspended support; slow decision making with the transition to a new government; and, more recently, increased project costs, problems with counterpart funding and eroded project staff salaries, as a result of the difficult fiscal situation, devaluation and inflation. The decline in real civil service wages has contributed to morale problems and increased competition for certain skills with the better paying private sector. Further, some implementing agencies have deferred renewing contracts for locally recruited staff without remuneration packages above local market terms. The timeliness of audits has been maintained at a satisfactory level with 93% of all audits received on time; however, quality is less impressive with 20% of audits in FY95 being qualified. OED has evaluated 45 operations in Malawi, of which 82% as satisfactory, high compared to Bank averages. Of 23 rated operations, 93% were deemed as likely or possibly sustainable. 48. The Fisheries Project has recently been downgraded as a problem project, due to weak implementation management; a March 1996 mid-term review will recommend remedial measures. Notwithstanding the slower than anticipated disbursements, there are currently no other problem projects. During the 1995 ARPP, the Rural Financial Services Project was classified as a problem with respect to implementation progress but is now performing satisfactorily. Indeed, the progress achieved with the latter project is evidence of the benefits from intensive supervision. While the PHN project is still rated satisfactory, performance will need to improve rapidly for objectives to continue to be achieved (resolve to tackle issues of cost recovery at tertiary level and implement district primary health care plans has yet to be demonstrated). 49. Portfolio Strengthening Measures. Given the continuing validity of projects' development objectives, major project restructurings are not currently envisaged, except -- possibly -- in the case of the Fisheries Project. However, normal supervision and mid-term reviews are routinely used to evaluate progress and the need for adaptation to respond to changing circumstances. This draws on the recommendation from OED on the need for flexibility in project design to build on implementation experience. The Agricultural Services Project is being modified within its current project description to better support diversification to higher value crops; the forthcoming Local Government Project mid-term review will evaluate whether the project could better support pending decisions on decentralizing to lower government levels; and the National Water Development Project is responding to new environmental findings in gearing activities to water catchment areas particularly affected by erosion. Project lending has increasingly focused on capacity building in the various ministries and other implementing entities which should aid in future project implementation. The planned introduction of integrated sector investment operations (whereby the Bank and other donors will coordinate to finance timeslices of mutually agreed investment programs) in key sectors, along with the development of the MTEF, are expected to reduce problems associated with the provision of counterpart funding and recurrent cost financing. Headquarters and Resident Mission staff periodically sponsor workshops and walk-in clinics on procurement and disbursement. A study under an ongoing project will commence shortly to evaluate national procurement procedures, and an ongoing IDF grant has provided assistance in strengthening  17 accounting in the Ministry of Finance. A CPPR took place in early February 1996 and culminated in an action plan covering generic issues of procurement, accounting/audits, disbursement and staffing and staff salaries as well as outstanding project specific issues. 50. Systematic client consultation, which is being incorporated into some ongoing operations and into all new operations, is also fostering more effective implementation and improved initial project design. Piloting is being employed to give early lessons to influence full project design (for example, for the Primary Education and forthcoming Social Action Fund Projects). The Resident Mission plays a major role in supervising the portfolio and trouble shooting. Civil service reform should enable the Government to mitigate the salary erosion issue for civil service staff as a whole. At the Consultative Group meeting in December 1995, the Government undertook to establish a monitoring capability in the Ministry of Finance (MOF) to coordinate achievement of deadlines for project policy conditions and implementation targets. 51. Economic and Sector Work. Economic and sector work will continue to underpin lending operations, as discussed above. Short informal pieces, focused on topical issues of concern to the authorities and/or in the process of project preparation, will complement the planned more comprehensive formal studies. In both cases, the work will be subject to internal review and discussion/dissemination within the country. Examples of high impact ESW include the recent Agricultural Sector Strategy and Poverty Profile studies (FY94 and FY95 respectively) which are influencing the design of various Bank operations as well as policy in the country. Recent informal sector work includes the Population and Family Planning Study (FY95) and the study on restructuring of the David Whitehead textile company, executed in quick response to a government request. Significant technical assistance/policy advice is defacto being provided in such areas as budget management and communications strategy. Lending Program 52. Base Case Scenario and Indicators. The base case scenario, from which the detailed projection tables for this document have been derived, is based on a strong fiscal adjustment -- both through expenditure control and strengthened revenue collection; private savings and investment also improve significantly in response inter alia to deregulation (Table 2), which helps current account balances to improve. Monetary growth is restrained and inflation declines to single digits in the next few years. The inflation scenario here projects a more gradual decline in inflation (and hence higher nominal GDP) than that projected in the 1995 PFP. The more conservative inflation projection recognizes that inflation in 1995 and early 1996 was higher than what was projected in the PFP. 53. The base case scenario is also conservative on GDP as it projects a relatively low trend growth of 4% in order to incorporate the effects of possible droughts, albeit mild ones, on incomes and production. This effect is smoothened over the entire period by projecting a lower trend in growth. Overall fiscal expenditures and deficits (which stand on average at roughly 7% of GDP before grants) also incorporate some expenditures which may have to be incurred for drought relief operations. Box 5 highlights key performance areas and triggers for the base and low scenarios. 54. Base Lending Program. The base case lending program supports multi-sectoral operations corresponding to the objectives and strategy outlined above. Whenever appropriate,  18 operations would take the form of sectoral investment projects. The base lending program would amount to an average US$143 million per annum. However, this level of lending would be contingent on satisfactory implementation and disbursement of existing operations, failing which new operations in the laggard sector would be deferred. Box 6 summarizes the allocation of the program to adjustment lending and across sectors. Box 5: Malawi: Lending Scenarios and Performance Indicators BASE CASE Macroeconomic Stability Sound macroeconomic policies, indicated by adherence to IMF targets and requiring implementation of: (a) expenditure control processes; (b) revenue reform and administration; and (c) civil service reform. Poverty Focus Implementation of "pro-poor development strategy" as demonstrated by: (a) a MTEF which maintains appropriate balance between social sector and other expenditures, recurrent vs. development expenditures, and wage vs. non-wage recurrent expenditures; and (b) continued deregulation of production and markets in agriculture and other sectors. LOW CASE Macroeconomic Stability Persistent loss of fiscal and monetary control, with accelerated inflation; Evidenced by failure to implement agreed IMF targets; Caused. by failure to: (a) control expenditures; (b) implement revenue measures; and/or (c) maintain foreign exchange market reforms. Poverty Focus Major departure from pro-poor orientation, demonstrated by: (a) major reorientation of public expenditure; and/or (b) reversal of reforms deregulating agricultural production and marketing and other business activities. 55. Low Case Scenario and Indicators. The low case scenario is based principally on the failure of fiscal adjustment to take place in the next few years. Four exogenous policy variables cause this scenario to differ from the base case scenario: (a) higher Government consumption; (b) higher transfers to the parastatal sector (implying failure of the privatization program); (c) lower public investment (from crowding out by higher government consumption); and (d) monetary accommodation of Government deficits. Box 6: The Proposed Lending Program, FY 1996-2000 - --%------------- -------US$ millions------ Projects Low Base Low Base Adjustment 0 34 0 240 Social Sectors 70 34 183 243 AgricultureEinviron.. 19 9 50 65 Infrastructure/PSD 11 19 30 135 -(include water) Capacity Building 0 4 0 30 Total 100 100 263 713  19 56. The results of differences in only four policy variables, in the low case scenario, are quite stark (Table 2): inflation is considerably higher; investment and savings are significantly less; and GDP is lower by an average of 8% each year than in the base scenario. Table 2: Comparison of Paths of Ninc Major Variables in High, Base and Low Case Scenarios Sanano 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Awrag: 19205 Growth Rate ofGDP High -10.2% 9.9% 10.5% 5.3% 5.7% 5.8% 5.8% 5.9% 6.1% 6.3% 6.5% 6.7% 6.8% Base -10.2% 9.9% 10.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0'/. 5.1% Low -10.2