Malawi - Fiscal Restructuring and Deregulation Program Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 21549 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (Credit 2853-MAI) December 21, 2000 Macroeconomics 1 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective December, 2000) Currency Unit = Malawi Kwacha (MK) US$1.0 = MK 80.0 FISCAL YEAR OF BORROWER July 1 to June 30 (as of July 1998) WEIGHT AND MEASURES I foot (ft) = 0.305 meters (m) I mile (mi) = 1.609 kilometers (km) 1 square mile (mi2) = 2.590 square kilometers (kM2) I ton (t) = 0.907 metric tons (m ton) ABBREVIATIONS AND ACRONYMS ADMARC = Agricultural Development and Marketing Corporation BMR = Budget Management Review CAS = Country Assistance Strategy EDI = Economic Development Institute EPZ = Export Processing Zones ESAF = Enhanced Structural Adjustment Facility FRDP = Fiscal Restructuring and Deregulation Program IB = Intermediate Buyers ICR = Implementation Completion Report IDA = International Development Association IMF = International Monetary Fund MDC = Malawi Development Corporation MK = Malawi Kwacha MOF = Ministry of Finance MOP = Memorandum of the President MTEF = Medium Term Expenditure Framework PFP = Policy Framework Paper SGR = Strategic Grain Reserve TA = Technical Assistance TEP = Temporary Employment Permit VAT = Value Added Tax Vice President: Mr. Callisto E. Madavo Country Director: Mr. Darius Mans Sector Manager: Mr. Philippe Le Houerou Task Leader: Mr. Sudhir Chitale  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (CREDIT 2853-MAI) TABLE OF CONTENTS Page No. PREFACE ..........................................................................1I EVALUATION SUMMARY ...........................................................................I INTRODUCTION ................................................................ .......... I PROJECT OBJECTIVES ...........................................................................I IMPLEMENTATION EXPERIENCE AND RESULTS ...........................................................................1 SUMMARY OF FINDINGS, FUTURE OPERATIONS AND KEY LESSONS LEARNED ........................................... III MAIN REPORT ..........................................................................1I STATEMENT/EVALUATION OF OBJECTIVES ...........................................................................I ACHIEVEMENT OF OBJECTIVES ..........................................................................3 MAJOR FACTORS AFFECTING THE PROJECT ............................. .............................................4 PROJECT SUSTAINABILITY ..........................................................................4 BANK PERFORMANCE ...........................................................................5 BORROWER PERFORMANCE ...........................................................................6 ASSESSMENT OF OUTCOME ...........................................................................6 PROMOTING DEVELOPMENT OF AGRICULTURAL MARKETS ...................................................................... 10 FUTURE OPERATIONS .......................................................................... 13 KEY LESSONS LEARNED .......................................................................... 13 APPENDIX: BORROWER'S ASSESSMENT .......................................................................... 15 STATISTICAL ANNEX .......................................................................... 19 TABLE 1: SUMMARY OF ASSESSMENTS . .......................................................................... 9 TABLE 2: RELATED BANK LOANS/CREDITS .............................................................................. 20 TABLE 3: PROJECT TIMETABLE ........................................................................ 21 TABLE 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ THOUSANDS) ........... 22 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION: MACROECONOMIC .............. ..................... 22 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION: STRUCTURAL ......................... ............................ 23 TABLE 7: STUDIES INCLUDED IN PROJECT ....................... ................................................. 24 TABLE 8: IDA FINANCED PROJECT COSTS ......................... ............................................... 25 TABLE 9: PROJECT FINANCING ........................................................................ 25 TABLE 10: STATUS OF LEGAL COVENANTS ........................................................................ 26 TABLE 11: BANK RESOURCES: STAFF INPUTS ..................................... ................................... 27 TABLE 12: BANK RESOURCES: MISSIONS ................................................. ................................ 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM CREDIT NO. 28530-MAI Preface This is the Implementation Completion Report (ICR) for the Fiscal Restructuring and Deregulation project (FRDP) in Malawi, for which credit in the amount SDR 73.2 million including IDA reflows equivalent to SDR 2.9 million was approved on April 30 1996 and made effective May 24, 1996. The project provided SDR 71.9 million to support economic reform and adjustment policies. An initial tranche of SDR 50.9 million was released on effectiveness and fully disbursed by June 1996; a second tranche of SDR 21 million was released on September 15, 1997. The project also provided a component of SDR 1.3 million for technical assistance. The credit was supplemented by a credit of Danish Guilders equivalent to US$ 30.4 million, a credit from the OECF (Japan) equivalent to US$ 48.0 million, a KfW credit equivalent to US$ 6.3 million and three supplemental IDA Reflows amounting to SDR 2.9 million. The ICR was prepared by David G. Greene, Consultant, and Sudhir Chitale, Senior Economist, and reviewed by the Country Director. The Borrower provided comments that are included as an appendix to the ICR. Preparation of this ICR begun during the Bank's completion mission of April- May 2000. It is based on material in the project file. The borrower's contribution to the preparation is included.   IMPLEMENTATION COMPLETION REPORT MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM CREDIT NO. 2853-MAI Evaluation Summary Introduction 1. The FRDP supported the first economic reform program designed and implemented by the democratically elected Government of Malawi that came to office in May 1994. FRDP was designed to assist the Government's efforts at fiscal restructuring and deregulation in order to promote broad-based development, sustained growth and alleviation of poverty. It focused on fiscal restructuring to prioritize, protect, and, where necessary, expand pro-poor budgetary allocations, within the fiscal framework of an IMP program. It also supported measures to broaden economic growth by deregulating and liberalizing product and factor markets, including removal of pricing and marketing constraints on smallholder agriculture. Project Objectives 2. The operation provided balance of payments and budgetary support and technical assistance to undergird and encourage policy reform and institutional strengthening. The policy framework for fiscal restructuring included expenditure prioritization, improvements in the structure of taxation, rationalization and privatization of government functions, streamlining of the civil service and strengthening of expenditure monitoring and control systems. Deregulation policies were aimed at promoting broader based private sector development. They included agricultural policies to promote smallholder development by increasing access to cash crops (especially burley tobacco), increasing access to inputs (by liberalizing seed and fertilizer marketing), improving access to markets (by eliminating the state agricultural marketing company's maize purchase monopoly and moving toward market based pricing), and improving access to economic transport (by removing restrictions on imports of used equipment). Nonagricultural development was to be stimulated through privatization of state owned enterprises, through encouragement of investment by improving access to temporary employment permits, through providing increased access to industrial sites, and through repealing discriminatory legislation against Asians. Implementation Experience and Results 3. Performance of both the Bank and the Government was generally satisfactory. The Bank's performance in identifying, appraising and assisting in implementation of the  ii project was satisfactory. The Bank economic and sector work was extensive and used effectively. The Bank maintained a close and continuous dialogue with the Government and was responsive to its concerns. It encouraged broad consultation with civil society and stakeholders and maintained close relations with the IMF and the donor community. The Government implemented the project to the greatest extent permitted by its technical and managerial capacity and its sense of social and political support for the program. It has maintained its commitment to both the objectives and instruments of policy reform. However, both the Government and the Bank underestimated the complexity of the program and possible sources of opposition and therefore overestimated the Government's capacity to carry out the reforms. 4. The performance of the Malawian economy improved significantly during 1995- 97, when improvements in macroeconomic management and structural reforms led to reduced inflation and contributed to higher GDP growth. However, progress on macroeconomic stabilization proved difficult to sustain, as problems in controlling government expenditures recurred. As a result, inflation has not been definitively brought under control. Fiscal management weakened beginning in 1997, inflation accelerated, and GDP growth slowed to below 4% per annum as a result of high real interest rates and unstable effective exchange rates. 5. The implementation of structural reforms presents a mixed picture. On the positive side, landmark actions such as the abolition of limitations on smallholder production of burley tobacco' marked a definitive shift in economic and social policy to favor the poor, improving income distribution and setting the stage for future growth. The liberalization of burley tobacco production and trade also had an important impact on the growth of non-agricultural activity and services in rural areas. Significant improvements have been made in the tax and tariff regime and in export incentives, but their effects will probably not be seen until the improvements in the macroeconomic situation can be sustained. The privatization program is supported by a privatization law, passed in 1996, that guarantees transparency and limits political interference; the program is being administered competently and is moving ahead at a moderate pace. Some of the second order problems of the private sector, temporary employment permits and availability of land for industry have been resolved. 6. Less progress was made on institutionalization of the medium term expenditure framework (MTEF) as a tool for prioritizing expenditures, largely on account of "ownership" issues and weaknesses in the underlying budgetary processes. Shares of recurrent expenditures budgeted for pro-poor outlays, especially health and education, were increased, but the impact was entirely eroded by inflation and increases in the client base. Progress of civil service reform has been marginal. Although the number of Ministries has been reduced and some government services have been outsourced, the size and functions of the civil service remain basically unchanged and the problem of salary compression has not been resolved. Agricultural markets have been liberalized, but progress in addressing land tenure issues has been negligible, partly due to delays in The elimination of fees at the primary schooling level also demonstrated this new orientation. This had been done in 1994, however, prior to the discussions over the structural adjustment operation.  iii production of key reports by Government, and movement toward changing the maize pricing regime and privatizing ADMARC seems to be losing its momentum. Summary of Findings, future Operations and Key Lessons Learned 7. Lessons learned include: i. The project demonstrates once again the synergy between macroeconomic stabilization and structural reforms. Reaping the full benefits of structural reform depends heavily on fiscal discipline and the avoidance of inflationary pressures. ii. Careful and extensive preparation, including a strong background of economic and sector work, extensive collaboration with government, consultation with stakeholders and coordination with other suppliers of external assistance is a necessary but not sufficient condition for execution of complex adjustment. In the final analysis it is the government that must implement the program. iii. Fiscal restructuring and civil service reform cannot be a bottom-up exercise but should begin with a fundamental reconsideration of the role of government undertaken at the political level. Restructuring of the government, the civil service and the budget must have political leadership and be based on decisions about the future role of the public sector. iv. Attempting to introduce a new system of expenditure prioritization (MTEF) and budget allocation by superimposing it on an existing, inadequate budgeting system is not likely to be successful. v. Inclusion of technical assistance components in adjustment operations invariably results in closing well after disbursement of performance- related tranches, and delays preparation of ICRs, in this case by more than two years. This reduces the possible influence of the ICR on the shaping of future operations. This may be remedied by making the technical assistance component a separate credit, as was done with the subsequent operation, the FRDP II. 8. Because most of the policy actions supported by the FRDP had already been implemented by Board presentation, supervision was focused on identification of policy measures that could be supported under a follow-on, quick-disbursing operation to include medium-term measures for expenditure rationalization and control, civil service reform, land policy, maize pricing policy, and privatization. The follow on operation, FRDP II, approved in December 1998, was a similar omnibus adjustment credit, continuing supporting the same mechanisms to improve the quality and management of public expenditures and restructure Government functions and the civil service. It complemented FRDP by increasing the focus on accelerating privatization, including telecommunications and electric power and on financial sector reform.   IMPLEMENTATION COMPLETION REPORT MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM CREDIT NO. 2853-MAI Main Report Statement/Evaluation of Objectives 1. The FRDP supported the first economic reform program designed and implemented by the new Government that came to office in May 1994 through multiparty elections, following 30 years of single-party rule. That Government, unlike its predecessor, was and remains committed to policy changes designed to promote broad- based development and alleviation of poverty. The operation supported the new Government's medium-term strategy by providing balance of payments and budgetary support and technical assistance to undergird and encourage the process of policy reform and institutional strengthening. A core component of the CAS presented to the Board in conjunction with the FRDP operation, it focused on fiscal restructuring to prioritize, protect, and, where necessary, expand budgetary allocations to the social sectors targeted to benefit the poor, such as primary education and primary health care, within the fiscal framework of the ivIF's ESAF program. It also supported measures to broaden economic growth by deregulating and liberalizing product and factor markets, including removal of pricing and marketing constraints on smallholder agriculture. The Government's program was also supported by a three-year ESAF approved by the IMP's Board on October 18, 1995. 2. Before the present Government took office, Malawi had a less than satisfactory record of structural adjustment and poverty alleviation. During the 1980s and the first half of the 1990s, the Government launched several stabilization/adjustment programs. These were supported by six IDA adjustment credits and two supplemental credits. The previous Government was not, however, fully committed to liberalizing agriculture, promoting broad-based private sector development, or expanding services to the poor. Sustained growth thus remained elusive and poverty continued to be widespread, affecting half the population, and pervasive among smallholder farmers. The country's economic base remained narrow and vulnerable to external shocks and the income distribution remained highly skewed (the Gini coefficient for household expenditure, 0.62, was among the most unequal in the world). The formal sector continued to be dominated by a few public and private conglomerates, such as ADMARC, Malawi Development Corporation (MDC) and Press Holdings. The latter, controlled by ex- President Banda, accounted for over half of Malawi's small formal sector.  2 3. The stabilization components of past adjustment programs were executed more effectively than structural reform. However, macroeconomic stability continued to be upset by external shocks and the costs of successive stabilization programs were largely borne by the poorest segments of the population, as expenditure cuts contributed to the imbalance between spending on primary social services, which can benefit the poor, and tertiary level social expenditures, which benefited a small elite. 4. The political change in Malawi in 1994 improved the prospects for genuine structural reform. However, when the new Government took office, it faced a large and complex agenda of policy reforms and institutional changes and an economy that was deteriorating because of external shocks and poor economic management. Nevertheless, the platform of the new Government had focused on the poverty issue and within weeks of the 1994 elections, it demonstrated its commitment to pro-poor policy reform by acting on a campaign promise to eliminate primary school fees. The Government also began to bring the economic situation under control. It introduced a cash budget, and floated the exchange rate. The fiscal deficit (before grants) was reduced from about 42% of GDP in FY 1994/95 to 9% in FY 1996/97. Reflecting improved macroeconomic management, the IMF approved an ESAF arrangement in October 1995 and the Bank moved ahead with preparation of FRDP. 5. The FRDP was designed to assist the Government's efforts at fiscal restructuring and deregulation. Major changes were needed in fiscal management to enable prioritization of budgetary outlays to permit increased expenditures for programs likely to benefit the poor, including primary education and health care, within the context of a fiscally sound macroeconomic framework. Fiscal restructuring was broadly defined to include expenditure prioritization, improving the structure of taxation, rationalizing and privatizing government functions, streamlining the civil service and strengthening expenditure monitoring and control systems. Deregulation policies were intended to promote broader based private sector development. Agricultural policies were aimed specifically at promoting smallholder development by increasing access to cash crops (especially burley tobacco), increasing access to inputs (by liberalizing seed and fertilizer marketing), improving access to markets (by eliminating ADMARC's maize purchase monopoly and moving toward market based maize pricing), and improving access to economic transport (by removing restrictions on imports of used equipment). Nonagricultural development was to be stimulated through a program of privatization of state owned enterprises, encouragement of investment by improving access to temporary employment permits, providing increased access to land for industrial sites, and removing discriminatory legislation against Asians. 6. The complexity of the operation is evidenced by the fact that it encompassed 42 policy actions (as recorded in the Memorandum of the President, Annex E: Matrix of Policy Actions). All but one of these was accomplished before Board presentation. The key actions taken before effectiveness involved ending restrictions on smallholder production of burley tobacco (the most important cash crop), improving budgetary performance by introducing a cash budget, introducing a medium term expenditure framework (MTEF) to prioritize outlays, retrenching 20,000 temporary government workers to permit hiring of additional teachers, improvements in the tariff structure and  3 export incentives, and the adoption of a privatization bill. Many of the other actions, however, involved processes (e.g. preparation of terms of reference, commissioning reports, reviews, development of plans, and appointment of committees and commissions), rather than actions with meaningful near-term impacts. 7. In recognition of government commitment and the measures taken before Board presentation, an initial tranche of US$ 74.4 million was disbursed on effectiveness in May 1996. Disbursement of a second tranche of US$ 30 million was conditioned on continued satisfactory implementation and deepening of the adjustment program, continuation of satisfactory macroeconomic policies and agreement on and beginning implementation of a plan for comprehensive civil service reform. It was expected to disburse about six months after the initial tranche, but actually disbursed in August 1997, after a Board waiver of some conditions related to civil service reform. Achievement of Objectives 8. Implementation of the program supported by FRDP presents a mixed, but on balance satisfactory picture. The performance of the Malawian economy improved significantly during 1995-97, as improvements in macroeconomic management, coupled with structural reforms, led to reduced inflation and contributed to higher GDP growth. However progress on macroeconomic stabilization proved difficult to sustain, as problems in controlling government expenditures recurred. Fiscal management weakened beginning in 1997, inflation accelerated, and GDP growth slowed to below 4% per annum partly as a result of high real interest rates and unstable effective exchange rates. 9. Implementation of structural adjustment policies also presents a mixed picture. On the positive side, the abolition of the limitations on smallholder production of burley tobacco was a landmark action, important in improving income distribution, and also marking a shift in economic and social policy to favor the poor. The liberalization of burley tobacco production and trade also had an important impact on the growth of non- agricultural activity and services in rural areas. Significant improvements were made in the tax and tariff regime and in export incentives, but their positive effects will probably not be evident until the improvements in the macroeconomic situation can be sustained. The privatization program is supported by a privatization law, passed in 1996, that guarantees transparency and limits political interference; the program is being administered competently and is moving ahead at a moderate pace. Some of the second order problems of the private sector, temporary employment permits and availability of land for industry have been resolved. 10. Slower progress has been made in institutionalization of the MTEF as a tool for prioritizing expenditures, largely because of "ownership" issues and weaknesses in the underlying budgetary processes. Shares of recurrent expenditures budgeted for pro-poor outlays, especially health and education, have been increased, but the gains have been eroded by inflation and increases in the client base. This approach has proven not to be successful in palliating the fundamental problems in these key sectors. Progress of civil service reform has been marginal: although the number of Ministries has been reduced  4 and some government services have been outsourced, the size and functions of the civil service remain basically unchanged and the problem of salary compression has not been resolved. Agricultural markets have been liberalized, but progress in addressing land tenure issues has been negligible, partly due to delays in production of key reports by government, and movement toward changing the maize pricing regime and privatizing ADMARC seems to be losing its momentum. Major Factors Affecting the Project 11. The setting for adjustment lending in Malawi is complicated by the fact that the country is extremely aid dependent. External assistance was equivalent to about 15.3% of GDP in FY 98/99 (net foreign borrowing, 8.9% and grants 6.4% of GDP) and financed 52.5% of the budget in that year (85% of the development budget). Delays in disbursements therefore can have strong negative repercussions for meeting macroeconomic targets and carrying out vital programs. The Government and the Bank are both aware of this. This can lead to the Government agreeing to take actions it has not thoroughly considered and to the Bank to rushing development of the adjustment program, adding conditions to the policy mix and compromising on some less than satisfactory performance to ensure the flow of disbursements. In addition, the scope and complexity of the FRDP program proved to be beyond the Government's technical and managerial expertise and its weak institutional structure. Project Sustainability 12. There are no indications that the Government has reconsidered its commitment to the types of reform supported by FRDP. The issue is whether the pace and scope of reform and the lending instrument are appropriate and consistent with Malawi's capacity. Although some important actions were taken in connection with the project, in many areas these represented initial steps that required intense follow up activities and/or further action. It is clear that the reform agenda is too broad relative to implementation capacity and that the scope and sequencing of reform should be reconsidered. It is also clear that Malawi will continue to need quick disbursing assistance for some time, but that omnibus adjustment operations may not be the best way to deliver it. Consideration could be given to the trade-offs involved: sector-based reforms might be better promoted by sector specific operations, but on the other hand omnibus operations led by the Ministry of Finance permit a degree of coordination and accountability, thereby helping to accelerate the execution of sector-level reforms. 13. Maintaining macroeconomic stability is the key element to sustaining the momentum of reform. Large fiscal deficits, high rates of inflation and low GDP growth can erode the social and political support for reform. However, the macroeconomic situation remains fragile. Despite increasingly tight budgetary controls, deficits have recurred periodically. Inflation continues to be a severe problem, and real and nominal interest rates continue high and volatile.  5 Bank Performance 14. The Bank's performance in developing and assisting in implementation of the program was satisfactory. It used economic and sector work effectively, maintained a close and continuous dialogue with the Government and was responsive to its concerns, encouraged broad consultation with civil society and stakeholders and maintained close relations with the IMF and the donor community. 15. The Bank's preparation activities involved civil society in policy planning and implementation. Meetings between policymakers and representatives of the private sector helped increase and broaden understanding of and appreciation of the need for prudent macroeconomic management. The operation took into account the findings of the 1995 Borrower Feedback Survey, which highlighted the need to ensure smallholder access to the full range of economic activities, and to target expenditures for primary social services. Two Bank EDI missions visited Malawi to assist the Government in establishing a systematic communications strategy. 16. The programs of the Bank and IMF in Malawi were well coordinated. Bank proposals on trade and taxation policy, privatization, civil service reforms, investment incentives, expenditure targets were consistent with the fiscal targets under IMF supported programs, and the IMFs structural policy benchmarks were developed in consultation with the Bank. Joint Bank/IMF missions prepared the Sixth PFP and reviewed macroeconomic developments in early March 1996, when the IMF reached understanding with the authorities on a program for 1996/97. 17. The FRDP benefited from substantial economic and sector work. The 1994 Agricultural Sector Memorandum and Government's Agricultural Strategy Paper identified options for promoting broad-based agricultural growth. Background papers of 1993 on the transport sector and a manufacturing sector survey provided insights into policy and institutional constraints to private sector development. Analyses carried out jointly by IDA and the Government provided the basis for recommendations on tax and tariff policy reforms. The 1995 Budget Management Review (BMR) provided a basis for expenditure control measures and modifications of the budget making process. Civil service pay issues were discussed in the 1994 Pay and Employment Study. The Poverty Profile of 1995 highlighted the dimensions and main variables of poverty in Malawi and established the basis for reforms in land policy and deregulation of agricultural markets and domestic transport. 18. The Initiating Memoranda and the Pre-appraisal and Appraisal Aide Memoirs provided detailed justifications and explanations of the policies to supported by the operation and step by step recommendations on the nature and sequencing of actions to be undertaken under the FRDP. Supervision was almost continuous and well documented.  6 Borrower Performance 19. The Borrower's performance was satisfactory, given its managerial and technical constraints. Although some aspects of the FRDP program and its commitment to it had not been carefully thought through, probably because the pressing need to obtain external assistance, the Government exercised its best efforts to implement the program. Primary school fees were removed in 1994, and there was a period of accelerated reform in 1995- 96 highlighted by significant progress in macroeconomic stabilization and the elimination of constraints on production and input supply. However, the pace of reform slowed in 1997, as the Government began to confront the more technically and politically complex problems of streamlining of government, reform of the civil service, improvement in expenditure management, reform of maize pricing and marketing, and privatization. 20. The Government deserves high marks for its prompt action in ending restrictions on smallholder production of burley tobacco, as this has significant positive equity implications and long-term benefits. Assessment of Outcome 21. Both the Government and the Bank overestimated the Government's capacity to carry out the reforms and underestimated their complexity. Although the operation was justified by the Government's taking numerous steps before appraisal and Board presentation, many of these involved process (e.g. studies, commissioning consultants' reports, reviews and appointment of committees and commissions), rather than actions with meaningful near term effects. The second tranche release conditions also included a number of process activities. The timing of such processes is difficult to predict, especially when they involve technical assistance and extensive stakeholder involvement and consensus building and require political decisions. Some decisions that were taken proved politically or technically difficult to implement. As a result, despite the best efforts of the Bank and Malawi's implementing agency, progress in macroeconomic policy and public expenditure prioritization was not as much as had been expected, and progress in some key areas -- civil service reform, maize pricing and marketing and land policy -- has been limited. 22. Macroeconomic Stabilization and Growth: The Government has found maintenance of macroeconomic stability a series of measures designed to tighten budgetary management. Initial implementation of stabilization measures, especially the adoption of a cash budget, resulted in a rapid reduction in the fiscal deficit from 28% of GDP (excluding grants) in 1994/95 to about 8 % in 1996/97. As a result, the 12-month rate of inflation declined from 83% at the end of 1995 to under 7% at end-1996, the three-month T-bill rate fell from over 50% to about 15%, and foreign exchange reserves rebounded to 3.5 months of imports by the end of 1966. Reflecting the effects stabilization and improved climatic conditions for agriculture, GDP growth rebounded to 12% over 1995-96. In 1997, however, the Government's grip on expenditures slipped and the macroeconomic program went seriously off track. The budget deficit climbed to about 11.5% of GDP 1997/98. The rising deficit led to a re-acceleration of inflation to 20% by the end of the fiscal year. The IMF ESAF program was put in abeyance and a  7 six-month staff monitored program was put in place as the government began to take corrective action toward the end of 1997. (A third annual arrangement under the ESAF was approved in December 1998). 23. Although progress was again made in reducing the fiscal deficit, damage could not be completely avoided. Inflation climbed to 15% by the end of 1997 and about 50% at the end of 1998. The three-month T-bill rate rose to the 40-50% range. The effect on high real interest rates and a cycle of depreciation and appreciation of the real effective exchange rate on economic activity has been negative: manufacturing activity is in the doldrums and private fixed investment continues in the range of 2.5% of GDP. Manufacturers are reportedly shifting to trading activities. GDP growth had varied from year to year reflecting the effects of climatic conditions on agriculture, but over the last two years has been below the 4.5% rate targeted by the adjustment operations. 24. Reforming Taxes and Tariffs: A comprehensive reform of taxes and surtaxes was launched in 1996/97 with the aim of reducing anti-export bias in the tariff regime, increasing external competitiveness, and gradually shifting the revenue function from tariffs to a VAT. The reform has resulted in a simplification of the tariff structure, reducing the number of tariff categories to four and reducing the maximum tariff in steps to 25% on final goods and to zero or 5% for most intermediate and capital goods. As a result the weighted average tariff declined from 19% to 14%. The surtax was to be transformed into a VAT. It has been made uniform across goods and rates on items taxed below the standard rate of 20% were increased. The process of converting the surtax to a real VAT is still underway as the credit mechanism of the surtax has yet to be extended to the retail level. 25. In December 1995, legislation was enacted for establishment of Export Processing Zones (EPZ). The Act covers all sectors and permits establishment of factory sites and horticulture farms as EPZs. In February 1996 export duty drawback regulations were simplified and streamlined and the Ministry expanded the initial refund from 75% to 100% of duty paid. A revolving fund was set up with the Customs and Excise Department, which is to effect refund payments within five working days. Nevertheless, export incentives have been clouded by erratic movements of the effective exchange rates resulting from variation in the pace of inflation and changes in the nominal exchange rate. The positive effects of these improvements will not be felt until the macroeconomic situation stabilizes. Although an embryonic ready made garments export industry has recently emerged, employing around 7000 workers in peak periods, in the aggregate there has not been significant export diversification: the share of non-traditional exports in total exports rose from 12.1% in 1994 to 12.6% in 1999. Export performance continues to be dominated by variations in tobacco production and prices. 26. Reforming the Civil Service: The Government embarked on a civil service reform in 1995 to increase the efficiency and effectiveness of public service delivery. The major actions were: (i) hiring 20,000 new (untrained) primary school teachers, offsetting this by dismissing 20,000 temporary employees; (ii) undertaking a census of the civil service; (iii) freezing new recruitment, unless specific high level clearance is granted; (iv) preparing a draft plan for civil service reform; and (v) establishing a Public  8 Service Change Management Unit led by manager from the private sector. Since there were overlaps between ministries, the number of ministries was reduced from 27 to 24 to ultimately to 19. A job evaluation study was undertaken in 1998. The common services cadre was abolished enabling better accountability and management in professional services. However, a series of functional reviews of 16 ministries undertaken between 1997 and 1999 did not indicate that there was overstaffing in the civil service and, therefore, no further actions have been taken on streamlining. The salary decompression to be financed by savings from reduction of the number of civil servants has not occurred. 27. Implementation of key parts of civil service reform was to trigger the release of the Second Tranche of the FRDP. The Government was to have: stopped paying civil servants not listed on the civil service census file; begun eliminating or merging duplicating and overlapping government functions; started to outsource, privatize, or eliminate functions some generic low level services, reduce the number of industrial workers and absorbed the rest into the civil service; and started to increase the authority of line managers to deploy, retaining and evaluate performance of common services staff. 28. Most of the conditions for the release of the second tranche were met. A job evaluation exercise was initiated to provide the basis for civil service salary restructuring to be carried out over the next 18 months. A plan acceptable to IDA for comprehensive reform to enhance the efficiency and effectiveness of the civil service was prepared specifying the procedures, timing and targets of reform over the next two years and showing that implementation had begun. Evidence was presented to IDA that the civil service payroll conformed to the civil service census file and that payment of individuals not listed in the file had ceased. A Payroll Audit Unit had been established for continuous surveillance. A staffing plan for the health and education sectors was adopted that provided for training teachers to attain a student teacher ration of 60:1 in primary schools and ensuring that staff all health clinics include at least one general nurse and one maternity nurse. A study of civil service remuneration was completed with the assistance of Price Waterhouse. However, a waiver was granted respecting the condition that required the Government to eliminate, privatize or contract out at least four of the services or functions identified in a review of the public sector which was under way in 1996. The waiver was granted on the grounds that the Government was committed to carrying out this task but that there had been delays on account of inadequate private sector interest. 29. Prioritizing Expenditures using the MTEF: FRDP supported the adoption and expanded utilization of a medium term expenditure framework (MNEF) as a tool for prioritizing Govemment outlays. The MTEF was designed to ensure that the expansion of social services did not compromise reduction of the fiscal deficit. The MTEF was introduced in stages. It was first tested for the high priority Ministries of Health, Education, Public Works and Agriculture in 1995/96. In FY97/98 the MTEF was extended to cover all ministries. Partly as a result of use of the MTEF the shares of the Ministries of Education and Health in total recurrent budget were increased each year. 30. The introduction of the MTEF had a number of beneficial effects in clarifying the missions and priorities of individual ministries. In the context of a subsequent operation,  9 the FRDP II, a number of crucial items such as primary schooling teaching materials and medicinal drugs were identified by the Government and tracked so as to ensure that even in the event of an overall budget cut these items would be protected. In general these objectives were attained. However, despite five years of gradual implementation, the MTEF has not evolved into the useful prioritization tool it was intended to be. The effort to institutionalize the MTEF and make it an integral part of the budgetary process has not yet succeeded. At the outset, establishment of the MTEF was discussed and agreed between the Bank and MOF technical staff. There was little or no participation by sector ministries or by higher levels of Government. As a result, MTEF was seen as a MOF/Bank initiative, not related to the work of the ministries. It was, and still is, carried on parallel to and not integrated with the regular budgetary processes. It is seen as an add-on activity owned by the Ministry of Finance and donors, rather than as an essential tool for public expenditure management. For the MTEF to be successful Cabinet must be part of the process and the budget must be a reflection of the political intentions of the Government. In general, there is weak parliamentary scrutiny of the budget document and monitoring of actual expenditures. There is a lack of an institutional framework to plan and monitor the MVTEF. The Budget division of the MOF does not provide clear leadership and guidance. 31. Weak existing budgetary information and control systems provided a poor base for introduction of the MTEF. The existing budget framework centered on operational budgets that provided detailed information for accounting purposes but none on the nature of the programs. The actual size of the civil service was unknown so there was no basis for balancing wage and non-wage costs, the existing budget system did not provide ready access to information on budget implementation (either compliance with ceilings or distribution between programs), the unclear role of accounting and audit personnel did not encourage accountability of controlling officers. 32. The process of preparing the MTEF thus remains weak and uneven across ministries. Lack of political ownership of the process by Permanent Secretaries led to lack of integration of the MTEF into the main work of the ministries, turning it into an allocation exercise rather than a tool for strategic planning. Lack of clearly defined Ministry programs and priorities have hindered preparation of MTEF. Development budget preparation and aid resources have not been effectively integrated into the MTEF budget. Processes for forecasting sectoral allocations and ceilings have been weak. There was a lack of clear decisions on inter-sectoral allocations based on explicit choices and tradeoffs, though it should be stressed that most of the emphasis in the MTEF was on intra-sectoral allocations. Non-essential outlays were not always cut. Budgetary performance has been weak in the sense that actual expenditures often varied widely from budgeted amounts. There is a need to improve the forecasting of domestic resources to increase predictability and transparency in funding process, to increase political commitment and involvement to augment policy clarity and consistency, to ensure effective management and coordination of budget reforms, and to ensure accountability for actual budgetary performance. 33. Increasing Pro-Poor Government Expenditures. In addition to installing the MTEF as a tool for prioritizing government expenditures, FRDP set target shares of the  10 Ministries of Health, Education, Agriculture and Works in the total recurrent budget and shares for certain key categories of expenditures within each of these ministries' recurrent budget. It also gave increasing attention to expanding the non-wage components of the health and education budgets to help ensure increased availability of medical supplies and teaching materials. The budgetary shares for health and education were, in fact, increased. 34. Even though there have been increases in budget allocations for recurrent health outlays, including pharmaceuticals and other supplies, per capita health spending has been eroded by inflation, leading to stagnation of per capita outlays since the mid 1990s. Meanwhile, the combination of malaria, respiratory infections, diarrhea and ailments associated with childbearing and childhood and a worsening HIV/AlDs epidemic have reduced life expectancy at birth to 44 years. Public sector primary health services have continued to deteriorate, partly because heavy loss of clinical staff and patients continue to bypass primary and secondary facilities, clogging tertiary hospitals. A reconsideration of the Government's health strategy is under way; this would ideally start with an analysis of the burden of various diseases and the cost effectiveness of interventions. Decisions would have to be made about which interventions are handled most effectively in the public sector and which in the private sector. The staff requirements of the public health system, both numbers and levels of training should grow out of this analysis, and help reshape the health sector. 35. Elimination of fees for primary school led to an increase in enrollment from 1.8 million in 1994 to 3.1 million in mid 1996 (probably falling back to 2.8 million at present). Gross enrollment of girls increased from 75% to 96% and gross enrollment of children from the poorest income quintile increased from 58% to 74%. This required the hiring of some 20,000 untrained teachers and, increased the burden on an already understaffed and under funded sector. The share of education in the overall recurrent budget increased from 20% to 27% between 1993/94 and 1999/00. However, per capita outlays have been eroded by increases in enrollment and inflation. In fact, the real value of primary education spending per student in 1997/98 prices declined from MK 608 in 1994/95 to MK 336 in 1997. On the other hand, real spending per secondary school student has increased over time and is nearly ten times that per primary pupil. Teachers' salaries still absorb 86% of primary expenditures, while the pupil: trained teacher ratio is 120:1. A system in which only 30% of students achieve standard 8 within the minimum number of years and that sends 10% of its primary school students to secondary school, as does Malawi's, is inadequate and there is undoubtedly a need for a major increase in primary education outlays. Sector management and teacher allocation need to be addressed, as does the issue of user charges for secondary and higher education. Promoting Development of Agricultural Markets 36. Ending Restrictions on Production of Burley Tobacco: Deregulation of burley tobacco production has removed a historic inequity and has led to a shift in production from estates to smallholders while overall production has been sustained. An intermediate buyers (IB) program was introduced in 1994 to alleviate marketing constraints experienced by smallholder farmers in processing and presenting their  11 tobacco on the auction floor. However, auction prices of EB sales have been below the national average, leading to concerns about declining quality and presentation. Further action appears necessary to encourage and develop producer and marketing associations, promote competition in the auctioning of tobacco, strengthening marketing and regulation institutions, and strengthen licensing requirements for intermediate buyers. 37. Liberalizing Maize Pricing and Rederiming the Role of ADMARC: The Government has liberalized all produce and input prices except for maize. A price band was to be established as an intermediate step towards the full liberalization of maize price. The lower and upper limits of the maize price band would be defended by Government to avoid a producer price collapse or escalation of the maize consumer prices. The band would be progressively widened to export and import parity to make Government intervention unnecessary. The implementation and operation of the price band implied allowing the Strategic Grain Reserve (SGR) to stabilize maize prices by buying or selling at when the limits of the price band had been reached. The strategy entailed ending ADMARC's role as buyer of last resort and commercializing and privatizing it, and eventually allowing free cross border trade so that the import and export parity prices define the upper and lower limits of the price band. In fact the role of ADMARC has declined, partly due to competition from new entrants into trading. At the time when ADMARC held a monopoly in the mid-1980s, it purchased some 18% of the national maize crop; this figure had fallen to between 4% and 7% in the latter half of the 1990s. Little progress has been made in installing the price band system or in privatizing ADMARC. The concept of a maize price band was formally accepted and was first applied in the 1994/95 season. However, the Government has set only a floor since 1996 because it did not have a conceptual basis or procedure for estimating a ceiling price. 38. A report on a Commercialization and Privatization Program for ADMARC was prepared with TA funds from FRDP and was issued in October 1999. The Report recognized that despite evidence to the contrary, the majority of stakeholders still believe that ADMARC is critical in Malawi's agricultural marketing system because there is a lack of capacity in the private sector. Government now appears unwilling to consider privatization as an option. Privatization proposals for ADMARC have been restricted to selling off components of the parastatal while maintaining its mandate and core functions. ADMARC has proposed retaining its functions and installations, dividing them into commercial and non-commercial (social) and operating the latter with a budgetary subsidy. 39. Liberalized Access to Inputs: The Acts setting forth licensing requirement for trade in seeds, fertilizers and feeds have been amended to streamline licensing, registration and reporting procedures for importing, selling and distributing these farm inputs. Fertilizers will no longer have to be registered nor importers and sellers licensed and government control over introduction of new seed varieties will be limited to ensuring truth in labeling and control of phytosanitary standard. As a result, there have been significant new entrants into the fertilizer trade, increasing competition and stabilizing prices. The private sector accounts for half of fertilizer sales at prices lower than ADMARC's.  12 40. Land Policy: FRDP supported government efforts to bring about a more efficient, environmentally sustainable and equitable land tenure system. The Government took a first step toward market-based land reform by increasing land rents from MK35 per hectare to MK50 per hectare effective April 1996. However, real land rents have been eroded to insignificance by inflation since 1996 (at the current exchange rate the rent is equivalent to a trivial US$ 1.33 per hectare). The Government planned to increase land rents in real terms and revised the Lands Act to allow for annual increases. Although the Government had revised the Lands Act in a way it thought would permit this, the law turned out to be ambiguous and an attempt by Government to raise land rents was overturned by the courts. A further problem is that the Government has not developed systems and procedures for assessing land rents on an ongoing basis as required by the amended act and land rents and their adjustment remain unclear. 41. Encouraging Development of Private Enterprises: An IDA-supported manufacturing sector survey in 1993 identified several constraints on private sector development including: (a) limited access to industrial land caused by complicated bureaucratic process and by inadequate public resources for servicing industrial land; (b) long delays and arbitrary rejection by government of applications for employment permits for non-Malawians and (c) the discouraging effect of the market power of large conglomerates and parastatals. The last point refers to the interests of Press Holdings, the Malawi Development Corporation and other institutions in industrial, agricultural and financial enterprises. The Government's program supported by FRDP included actions to relieve the first two constraints. Accordingly, the Government made additional land available for industrial use in Lilongwe and Blantyre and in October 1995 new guidelines were agreed for processing TEPs that provided for routine approval within 40 working days, automatic approval for new investments, transparent requirements for training Malawian nationals, and granting of permanent resident status for long-term expatriates. As a result, the months long backlog of applications has been removed. However, with respect to Press, the Government has decided to use its limited influence on the constitution of the trusteeship of the organization so as to broaden its directorship and divest its holdings in the financial sector, but otherwise leave it intact. In the event, the importance of Press in the national economy has declined sharply due to new entry (particularly in trading) and to a decline in the fortunes of some of its lines of business (e.g. large-scale tobacco). The revenue of Press was some 18% of GDP in the early 1990s, falling to about 5% in the late 1990s. 42. Privatizing State Owned Enterprises: Modest but consistent progress has been made in privatization of state enterprises. In late 1994 the President appointed a Privatization Commission charged with developing a strategy and legal framework for privatization. The Privatization Bill was approved by Parliament in spring of 1996, and detailed operational procedures for privatization were prepared drawing on international best practice. The resultant law ensures transparent processes and clarifies the decision- making process in such a way as to limit political interference. Implementation of privatization has been delegated to the Privatization Commission, which is orchestrating individual transactions. FRDP did not set targets for the number of enterprises to be privatized or brought to the point of sale. However, the tentative timetable for privatization in Annex D of the MOP for FRDP lists 54 enterprises to be privatized in  13 1996-97. Over these two years 25 companies were partially or fully privatized. This should be considered reasonable progress given the start up time required in getting a privatization agency staffed and operational. 43. Studies Financed by the FRDP: The credit included SDR 1.3 million (US$ 2 million) of IDA funds for studies and consultancies. Inclusion of TA funds in the project meant it had to remain open for more than two years after the second tranche was disbursed, effectively ending the adjustment phase of the operation. Nevertheless, the studies and consultant services financed under FRDP seem to be relevant and useful. Six studies or consultancies have been completed or are ongoing; the largest of these (US$ 800,000) is technical assistance for the Integrated Household Survey, the keystone of poverty monitoring and analysis. Fieldwork was completed in October 1998 and some basic statistical tables were available in October 1999. FRDP funds were also used for developing an Information Systems Strategy for the Ministry of Finance ($42,000), carrying out a Tobacco Export Marketing study (GBP 50,000) which explores the merits of the effective statutory monopoly position enjoyed by the tobacco auction floors, an analysis of and recommendations for Privatization and Commercialization of ADMARC (US$ 184,540), a Survey of Industrial Land (US$ 6,100) designed to make recommendation for addressing this constraint, and support for the National Revenue Authority (US$ 259,200) to help ensure its smooth start up. Future Operations 44. Because most policy actions supported by the FRDP were already implemented, supervision was focused on identification of policy measures that could be supported under a follow-on, quick-disbursing operation to include medium-term measures for expenditure rationalization and control, civil service reform, land policy, maize pricing policy, and privatization. The MOP for FRDP presented a timetable for medium term policy implementation in the areas of expenditure reform, civil service reform, land policy, maize pricing policy and privatization (Annex F). A follow on operation, FRDP lI, was approved in December 1998. This credit continued support for measures to improve the quality and management of public expenditures, restructure Government functions and the civil service; and privatization of state owned enterprises. It complemented FRDP I by focusing on the promotion of private sector led growth in the non-agriculture sector by accelerating privatization, financial sector reform and infrastructure development (telecommunications and electric power). 45. Key Lessons Learned i. The project demonstrates once again the synergy between macroeconomic stabilization and structural reforms. Reaping the full benefits of structural reform depends heavily on fiscal discipline and avoidance of inflationary pressures. ii. Careful and extensive preparation, including a strong background of economic and sector work, extensive collaboration with government, consultation with stakeholders and coordination with other suppliers of  14 external assistance and is a necessary but not sufficient condition for execution of complex adjustment. In the final analysis it is the government that must implement the program. iii. Fiscal restructuring and civil service reform cannot be a bottom-up exercise but should begin with a fundamental reconsideration of the role of government undertaken at the political level. Restructuring of the government, the civil service and the budget must have political leadership and be based on decisions about the future role of the public sector. iv. Attempting to introduce a new system of expenditure prioritization (MTEF) and budget allocation by superimposing it on an existing, inadequate budgeting system is not likely to be successful. v. Inclusion of technical assistance components in adjustment operations invariably results in closing well after disbursement of performance- related tranches, and delays preparation of ICRs, in this case by more than two years. This reduces the possible influence of the ICR on the shaping of future operations. This may be remedied by making the technical assistance a separate credit, as was done in the subsequent operation, the FRDP II.  DEC-20-00 04:48 FROM:TRERSURY 15 Appendix: Borrower's Assessment Tciegram: FwaNcE. Lilongwe MnISTRY O1F FENANCE 'Tkoion: Lilongwe 719 355 P.O. BOx 30au9 Telex: 44407 LILONGWE 3 FAX: 7*9 173 MAlrAWI E-mail:fihMceQfisnMn.mjdnwi.ne i Ref No: 32/1/6 18th December, 2000 The Executive Director African Department World Bank Washington D.C. 20431 United States of America Dear Sir COMPLETION REPORT: MALAW1 FISCAL RESTRUCTURING AND DEREGULATION PROGRAMME (FRDP) I wish to acknowledge receipt of the Fiscal Restructuring and Deregulation Programme (FRDP) completion report submitted for our comments. At the time we received the report, Government was also in the process of evaluating the impact of the two FRDP credits on the Malawi economy. The completlon report did, therefore, contribute to the evaluation of the credits. We, however, had some comments on the completion report itself. The implementation performance of both FRDP I and FRDP II credits was generally satisfactory. As indicated in the report, except for activities relating to civil service reform, commercialisation and privatisation of ADMARC, telecommunications privatisation, and the separation of the Finance and Audit Act Into two separate Acts on Finance and on Audit, all activities-supported by the credits were finalised In good time. The good performance of the economy during the period 1995- 1998 was a result of the reforms supported by the two credits. Of course, certaln other factors could also have contributed to this performance. In particular, the Civil Service Reform helped to detect overlaps between ministries, which prompted a reduction in the number of ministries from 27 to 19. However, streamlining of the service has yet to take place and consultancy work on the rationalisation of the Civil Service is expected to be completed by April 2001.  DEC-20-00 04:48 FROM:TRERSURY 16 Appendix: Borrower's Assessment In the agricultural sector, reforms have necessitated tremendous change in the characteristcs of production systems as well as In input and output markets. Competition now flourishes more than was previously the case when markets were of a monopolistic and monopsonostic nature. There also has been an increase in total agricultural output of both food and cash crops. On the other hand, however, reforms In the agricultural sector have meant an increase In the cost of production and thereby negatively affecting the smaliholder farmer. Also, lack of proper training for smaliholder farmers in tobacco production has compromised qualify leading to lower prices of the crop. Privatisation has led to increased Malawian participation in all sectors and ownership de-concentration in listed companies. Further, It has promoted Malawian participation In rare sectors like formal manufacturing sector and promoted partnerships and share-ownership. The most far-reaching Innovation In the tax system was the introduction of the Malawi Revenue Authority, which among other things, was to strengthen tax administration, expand the tax base and allow Government to increase revenue. In expenditures, the Medium Term Expenditure Framework (MTFF) was introduced to Improve allocations to higher priority programs. Reforms in the financial sector resulted, among other things, on the size of the Treasury bill stock growing from less than 0.1 percent of gross domestic product (GDP) to 9 percent of GDP by 1998. The liberallsation of the financial sector has resulted in Increased number of banks and hence competition within the financial sector. However, the improvement of regulatory and promotional services by the Reserve Bank of Malawl Is necessary, as identified by the Bank funded consultancy on the Regulatory Framework for the Financial Sector. The introduction of free primary education In 1994 has led to enrolment inceases by nearly a million. Community-driven projects have helped organise and enhance community- demanded projects In school- building, water supply, heath cinics, roads and irrigatlon. The Poverty Monitoring System (PMS) has helped to measure changes in the welfare of the people through regular household surveys. Inflation has, however, eroded the gains In the poverty reduction area while macroeconomic  DEC-20-00 04:48 FROM:TRERSURY - 17 Appendix: Borrower's Assessment stability has remained elusive. On the other hand, the HIV/AIDS pandemic continues to take away Malawi's productive labour force and to raise the number of orphans in the country. In addition to implementation problems highlighted in the completion report, lessons from the FRDP II have also shown the need for simpler design of programmes and less cross conditionalities if the objectives of the programmes are to be attained. The timing of targets should be reviewed wlth a view to limiting benchmarks to those within the control of the authorities and not the legislature. The short and long- term benchmarks should also be clearly designated and a balance needs to be achieved In accessing the importance of attaining each one of them. Procurement delays also contributed extensively to the slippage of programmes under FRDP II. For instance, the process to appoint a consultant took nine months. This was a result of the requirement for a "no objection" to come from Washington despite the presence of a procurement expert within the Malawi World Bank Field Office. It also took some time for the Malawi Government and the World Bank to agree on key issues in the programmes. This took up time originally budgeted for such consultations. In most cases of non-compliance, the problem has been largely In the design of the programmes, with ownership lying in the bureaucrats and not the people to benefit from the reforms. The paper exercises have therefore suffered from lack of consultation and participation by the wider community in Malawi. For the successor credits to be successful, Government will need to increase its consultations with key stakeholders including the members of the civil society. Despite a series of earlier adjustment operations, there remalns a backlog of policy constraints which the Government is committed to removing rapidly. To this end, the Government will continue with the pursuit of prudent financial policies and additional efforts to deepen structural reforms geared at creating an environment conductive to private sector development, promotlon of domestic savings and Investment, acceleration of production and export diversification, further development of human resources, and Improvement In physical  DEC-20-00 04:49 FROM:TRERSURY 18 Appendix: Borrower's Assessment infrastructure. The Government will, therefore, continue with measures to further liberallse agricultural production and marketing arrangements; restructure Government establishments and the civil service to improve efficiency and effectiveness in providing public goods and services, Improve public expenditure management, continue with the privatisation programme, and implement further tax and tarlff reforms, among other measures. We trust that you will find our comments useful. But should you need further clarifications, please do not hesitate to contact us. Finally, we wish to thank the Bank for the continued support It gives to the Malawi Govemment. Yours sincerely R.P limodzi SECRETARY TO THETRMUY Cc: Mr David G. Greene Consultant World Bank Washington D.C.  19 STATISTICAL ANNEX Table 1: Summary of Assessments A. Achievement of obiectives Substantial Partial NediJible Not aDolicable Macro policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues X Other social objectives X Public sector management X Private sector development X Other X B. Sustainabilitv Likelv nlikely Unceirtain x iiuhl Satisfactory Untisafactor satisfactory C. Bank Performance Identification X Preparation Assistance X Appraisal X Supervision X D. Borrower Performance Preparation X Implementation X Covenant compliance X Operation X E. Assessment of Outcome X  20 Table 2: Related Bank Loans/Credits Loans/Credit title Purpose Year of Status approval Preceding operations 1. Industrial and Improve policy environment for the FY 1988 Closed Trade Policy manufacturing sector to increase Adjustment Credit efficiency of resource use including imports and expand exports 2. Agriculture Sector Increase efficiency and improve FY 1990 Closed Adjustment Credit incomes of smallholders, and improve macroeconomic environment through import liberalization and public expenditure and restructuring 3. Entrepreneurship Support an improved environment for FY 1992 Closed Development and entrepreneurial activity and investment, Drought Recovery support adoption of policies aimed at Program deepening financial markets, help alleviate the impact of drought Following operations _ 1. Second Fiscal Expenditure prioritization, labor market 1998 Fully Restructuring and reform, civil service reform, disbursed, Deregulation Program continuation of the privatization not closed (FRDP II) program, tariff and surtax reforms, liberalization of telecoms, plan of privatization of ADMARC 2. Second Fiscal Provide funding for technical 1998 Continuing Restructuring and assistance, consultancies, studies and Deregulation Program training to support the FRDP II. Technical Assistance Project (FRDP II TA) ______ _ 3. Third Fiscal Auditing and procurement reform, tele- Expected for Not yet Restructuring and coms privatization, banking and agricul- 2000 appraised Deregulation Program tural marketing privatization (FRDP m) 4. Privatization Assistance for the privatization Expected for Approved Technical Assistance elements of the FRDP II, particularly 2000 June 2000 telecoms, the airline  21 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/Latest Estimate Identification (Executive Project Summary) tMay5,1995 Preparaion t .... _ ~~~~~~~~.. _. .. ... .... ... . . . ... ............ .. ....... .... ....... .... ................ .. . .... .. .... .. _...... . .. .......... Appraisal.Nov. 15, 1995 Nov. 15, 1995 _ _~~~~~~~~~~~~~~~.__.. ..__. _... .... . ......... __ _ . _ _ . __ ......... ... Negotiations I Feb. 27, 1996 Feb. 27, 1996 Letter of Development/Sector Policy (if applicable) N/A March 1, 1996 Board Presentation April 30, 1996 1Apri 30, 1996 ___ ___ _ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. _. ____._ ___ ."__._._____._.._._. Signing May 15, 1996 May 15,1996 Effectiveness 1May 24, 1996 May 24, 1996 First Tranche Release (if applicable) June 1996 June 1996 Midterm review (if applicable) N/A N/A Second (and Third) Tranche Release (if applicable) Sept. 15, 1997 Sept. 15, 1997 Project Completion March 16,1998 March 15, 2001 | Credit Closing March 16, 2000 March 15,2001  22 Table 4: Credit Disbursements: Cumulative Estimated and Actual2 (US$ thousands) FY96 FY97 FY98 FY99 FY00 Appraisal estimate 74,400 32,000 0 0 0 Actual 73,348 0 31,921 11,159 5,428 Actual as % of Estimate 99% 0 - - - Date of Final Disbursement - - - - Ongoing Table 5: Key Indicators for Project Implementation: Macroeconomic Macroeconomic Estimated Actual Indicators - 1994 1995 | 1996 199 1998 1994 199 1996 1997 1998 1999 .= ====.=.__ _ . _ ? 7 5 __ RealGDP Growth % -10.2 9.9 10.5 4.0 4.0 -1.2 15A 9.4 4.9 3.1 4.2 CPI inflation % 34.7 82.9 48.0 15.0 8.0 8.0 34.7 83.3 37.6 9.1 27A 46.5 %ofGDP ....- - -. I___ ____ ___ Gross investment r 13.2 15.8 16.0 16.4 17.1 17.8 29.1 11.4 12.4 12.3 13.7 15.2 Private investment 7.0 9.4 9.6 9.5 10.1 1.5 14.0 7.3 5.8 5.2 4.7 4.2 G=ross domestic saving -0.5 4.1 9.0 10.8 12.2 12.8 8.0 0.0 5.7 201 0.4 2.4 Fiscal deficit before grants 25.8 15.9 9.9 6.6 5.9 6.0 31.6 15.5 7.7 10.8 11.1 12.8 Current acct balance -18.0 -15.0 -10.1 -8.2 -7.7 606 - -11.9 -12.0 -12.6 -17.4 -16.3 ____________ ____ _____ _____~~ ~~~~ 22.9 , I__ _ Exports GNFS 30.3 32.6 26.2 26.0 25.5 25.1 30.1 28.7 23.2 25.0 31.1 28.7 2 Note that these figures include the FRDP proper (both adjustment and TA), as well as reflows and Danish cofinancing which was arranged as Trust Funds administered by the Bank.  23 Table 6: Key Indicators for Project Operation: Structural Structural indicators 1995 1999 Trade and exchange regime Maximum tariff on consumer goods 45% 25% Weighted average tariff rate 19% 14% Export tax rate 8% 0 Size of inter-bank foreign exchange market (US$ mn) 526 725 Private sector development Number of cellular phone operators 1 2 Number of cellular telephones 5,000 24,000 Number of internet service providers 1 12 Number of commercial banks 2 4 Valuation of stock exchange (US$ millions) l 0 154 Employees of privatized state owned enterprises i 0 9,000 Agriculture Number of registered tobacco clubs 2,400 24,119 Smallholder burley tobacco production (kg million) 21 90 Contribution of root crops to national calorie 10% 35% consumption  Table 7: Studies Included in Project Study i Purpose as defined at appraisal/redefined Status Impact of study 1. | Integrated Household Survey Produce ongoing and reliable poverty Report of Preliminary Results - Nov. 1999 Report of Nov 1999 provides basic I information to be used in monitoring and data on population by age, sex, informing programs | region, household characteristics, ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~edcto,1 helt and nutrition. 2. J Local Area Network Develop information strategy or MOF. Underway Consists of needs assessment, design of local and area wide network and user I tra~~~~~~~bining progrgn. 3.i Tobacco Exporting and Marketing Analyze benefits and costs of effective Completed May 1998 Concludes system be retained as l Stuldy statutory monopoly position of tobacco most efficient and transparent auction floors. method for tobacco sales. l Recommendations for improvement .. _ _ _ _ _ ________________________ _________________________ __________________________ [under consideration 4. Commercialization and Privatization Prepare govemment program for Draft Final Report - July 1999 Future of ADSMARC still under Plan for Agricultural Development and privatization and commercialization of consideration by govemment. Marketing Corporation (ADMARC) ADMARC and recommend measures for _ ___________________________ }servicing remote areas _ _._ ___ 5. l Survey of Industrial Lands Reviews problems of apparent shortage of Completed in October 1999 Leads to govesment making serviced industrial sites and leasing additional sites available and procedures _ streamlining procedures. 6. Malawi Revenue Authority Asserble and finance project Completed in January 2000 Revenue authority in start up phase implementation team to develop plans and procedures for recruitment of senior management, transfer and terms of reference of new staff, preparation of financial and personnel manuals, design of master file, accounting, management and statistical reports. 7. Value Added Tax Study Review major policy issues for introduction Seminar done Conversion of surtax into VAT of VAT underway 8. Public Sector Procurement and Supplies Being implemented Management Reform in Malawi Phase II: Legal Drafting .. . . . I...._.. 9. White Paper on Malawi Structural Review rationale and measures for Undertaken Reform Program govemment program and discuss with stakeholders  25 Table 8: IDA Financed Project Costs Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs . .---. . -.-..-.------..~~~~~~~~~~~~~~~~~~~~~