Malawi - Second Shire Valley Agricultural Development Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use FiLr. Er" Y Repon No. P-1192-MAI REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO MALAWI FOR A SECOND AGRICULTURAL DEVELOPMENT PROJECT IN THE SHIRE VALLEY March 8, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responasbility for the accuracy or completeness of the report.  Currency Unit Malawi Kiacha (MK) US$ 1 NK 0.83 1 MK 1 US$ 1.2 1' 1/ The MHalawi kwacha is pegged to the pound sterling, Which has been floating since June 1972. The above rate reflects the situation before the dollar devaluation of February 12, 1973. As of end February 1973, the exchange rate was HKa = $1.24. Fiscal Year: April 1 - March 31  INTERNATIONAL DEVELOPNENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO MALAWI FOR A SECCND AGRICULTURAL DEVELOPMENT PROJECT IN THE SHIRE VALLEY 1. I submit the following report and recommendation on a proposed development credit to Malawi for the equivalent of US$10.5 million on standard IDA terms to help finance a second agricultural development project in the Lower Shire Valley. 1/ PART I - THE ECONOMY 2. A report, "The Current Economic Position and Prospects of Malawi" (AE-5a), was distributed to the Executive Directors on December 12, 1969 and an updating memorandum, "Recent Economic Developments - Malawi" (AE-17) on August 27, 1971. An economic mission visited Malawi in August 1972, and its report is expected to be distributed shortly. 3. Since independence in 1964, Malawi's economy has grown on the average by about 7% a year. The economy is highly dependent on agriculture and changes in weather lead to large annual fluctuations in production. For example, GDP decreased in real terms in 1968 but increased by 13 percent in 1971. M-th a per capita GNP of about $90, Malawi is a very poor country and is included in the United Nations list of least developed countries. A substantial savings and investment effort and generally efficient management of the economy have ccntributed to economic growth in the past. At independence, domestic savings were negligible and gross domestic investment was 8.7% of GDP. By 1971, domestic savings had increased to 8% of GDP and gross domestic investment to 19% of GDP, leaving a resource gap of US$43 rillion. 5. A significant improvement in the financial position of the Government has contributed to this overall improvement in savings performance. At independence, the Government was able to finance only about half of its recurrent expenditures from local resources. The deficit was met by grants and loans from the U.K. Between 1964 and 1971, however, improvements in tax administration and some changes in the tax system caused domestic revenue to rise by 15% a year, whereas the average annual increase in recurrent expenditure was only 7%. Consequently, the deficit in the recurrent budget diminished steadily, and the Government hopes to eliminate it altogether by 1974. In 1970, the Government introduced a three-year rolling program for the recurrent budget, which stipulates expenditure ceilings for the various Mnistries. 1/ The cost estimates and financing plan in this report and in the Appraisal Report have been calculated on the basis of exchange rates ruling prior to February 12, 1973. The possible effect of the recent parity changes on project costs expressed in US dollars does not appear at this time to be substantial and no increase in the amount of the credit is proposed.  6. The Government has increased its outlay for development at the average rate of 30% annually in recent years with heavy emphasis on agriculture and transportation. Since 19bc, a number of large agricultural schemes, incorporating inputs, marketing and some infrastructure, were started near Salima (with German aid) and near Lilongwe, Chikwawa and Karonga (with IDA credits). Investments in transportation included the construction and improvement of roads and emphasized the opening up of the central and northern regions of the country. The rail link to Nacala in Mozanbique, completed in 1970, has provided a second cutlet to the sea. Since 1969, the construction of a new capital at Lilongwe has taken up about 10% of the Government's development expenditures. 7. The Government sets out its planned expenditures on specific projects and the anticipated sources of finance in a three-year rolling program. The current program 1972/73 to 1974/75 envisages expenditures of about US$38 million per annum, which is close to the average level attained in the previous two years. 8. In order to guide its economic policies and objectives in the various sectors, the Government published at the end of 1971, a Statement of Development Policies. This contains projections for 1975 and 1980 for all important economic indicators and shows the direction in which the economy is likely to move in the 1970s. An average annual growth rate of the economy of 8% is projected. Whilst this is more than the growth achieved between 1964 and 1971 (7%), it is probably not too optimistic if account is taken of the Government's past investment in projects with a long gestation period, some of which are now beginning tc bear fruit. The Statement acknowledges that with the country' s resource endowment, development strategy should continue to concentrate on raising the productivity of small farmers, It envisages public sector investment during the decade of $4L0 million, L/ mostly for infrastructure, such as transport ($130 million), public utilities ($75 million) and the new capitaL city ($60 million0 $90 million is allocated to agriculture and $70 million to social services (education, health, housing). Private capital formation is estimated at about $4T0 million, of which about 10% would be in the non-monetary sector. 9. The large size of private capital formation envisaged shows that the private sector is expected to continue to play an important role in economic development. Outside agriculture, local private capital is now concentrated in small enterprises mainly in rural trade and transport. Because of lack of resources, the Government has until now not actively promoted small-scale business in manufacturiLng. Large-scale business is dominated by foreign-owned enterprises whicn have found a favorable investment climate in 10. The Statement of Development Policies envisages that tho improvement in the mobilization of domestic resources wi11 ccntinue and that by 1980, 60% 1/ In constant prices.  - 3 - of total investment would be financed from domestic savings as compared to 44% in 1971. This would imply a slight narrowing of the resource gap in absolute terms to about $40 mdllion by 1980. The Government expects that public savings which have been negative in the past, may amount to about 17% of total domestic savings in 1980; in this event, they would finance about 20% of public sector investment. In addition, borrowing from the local private sector would finance about 22% of public investment in 1980. The public sector's requirements of foreign capital would then amount to 58% of public investment in 1980, or about US$300 million during the decade, equivalent to about 65% of the public sector's investment program. This would considerably exceed the foreign exchange component of projects suitable for external financing. External aid should, therefore, also cover a substantial portion of local cost. 11. At the end of 1971, Malawi' s external public debt totalled $176 million of which $140 million was disbursed. Debt service in that year amounted to $6.3 mrillion or about 8% of export earnings. If we assume that the terms of new debt to be contracted during the next few years will be similar to those in the past (at a discount rate of 10% past lending terms represented a grant element of about 58%), the debt service ratio would reach about 15% by the end of the decade. The Government is aware of the need for careful management of its finances, and is determined to keep the borrowing on hard terms to a minimim. In view of its low per capita income Malawi should receive the bulk of its external finance on very soft terms. PART II - BANK GROUP OPERATIONS 12. Malawi has to date received seven IDA credits totalling $17 million. Four credits representing $24 million or slightly more than half of total lending have been for agriculture. The other three credits have been for highways ($11.5 million), education ($6.3 million) and power ($5.25 million). There have been no Bank loans or IFC investments. Annex II contains a summary statement of IDA credits as of January 31, 1973 and notes on the execution of on-going projects. Project execution is generally satisfactory. 13. The priority which the Bank Group in its lending is giving to agriculture conforms to Malawi's development requirements and objectives. In this respect, the basic approach followed since 1968 in the light of experience gained on pilot projects set up with assistance from the United Kingdom, has been to focus on integrated rural development with particular emphasis on small- holder agriculture. All IDA-financed projects for agriculture so far, as well as the proposed Second Shire Valley Project, have been in support of schemes of this kind. This approach has been particularly successful and the Government intends to continue to attach priority to raising the productivity of small farmers. IDA's  - i - program of assistance to Malawi would continue to emphasize assistance for increasing agricultural production and employment. 14. The other three IDA-financed projects reflect Malawi's need to develop its infrastructure. Projects for IDA financing are being prepared in power, education and transportation. A second power project to increase generating capacity and to expand the country's transmission and distribution network was appraised in February. In education, IDA is currently financing under Credit 102-MIA, a study of the country's education needs. Based on this, a project is expected to be ready for IDA financing towards the end olf the next fiscal year. In transportation, the Bank is acting as executing meency for a UNTDP-financed feasibility study of two roads in the central part of the country, ,while engineering of an additional road in the Shire area is included in the proposed project. Finally, the Bank is also acting as execu-ting agency for a UNDP-financed study of a forestry/papermill scheme, which might also lead to eventual Bank Group financing PART III - THE AGRICULTURAL SECTOR IN MATAWI 15. Agriculture is the principal sector in the economy of Malawi. It accounts for over half of total output and provides employment for practically all the population of the country. In addition, agricultural commiodities account for about 90E of the country's export earnings and provire raw materials for domestic industries. During 196h1-1.971, the growth rate of agricultural production has been 5.9%` annually. 16. W.hereas maize, cotton, pulses and groundnuts are grown throughout the country, cotton and tea are produced mainly in the south, tobacco, ground- nuts and pulses in the central region, and rice in the ncrth. Maize is the principal subsistence crop. Surplus quantities are marketed, some directly to shopkeepers and the rest to the Agricultural Development and Marketing Corporation (ADMARC), a parastatal body which has statutory monopoly rights to purchase all major crops grown on smellholdings at prices fixed by it. ADMARC purcha.ses farm inputs in bulk for smaliholders throughout the country and distributes them through its depots. 17. Prior to 1967, the growth of agricultural production had been achieved largely throunh expansion of acreage. Increasing scarcity of suitable land and the large investments required to open up new land led to a shift of emphasis towards achieving rapid increases in productivity on areas already lmder cultivation, and by rehabilitation of land that had been neglected in previous years. Increased production -was accompanied by a gradual monetization of the agricultural sector. This transition towards a cash economy has been particularly accelerated by the implementation of integ- rated rural development schemes.  18. Malawi's cattle, most of which are held in small privately owned herds, are estimated at only abou-b 500,000 head. The cattle population is increasing by about 3 percent per year. Beef fattening is carried out mainly in the southern and central regions which are near the main consumption centers. Consumption has more than doubled since 1965. It presently stands at about 60,000 head per annum. 19. There are shortages of staff in the agricultural services in Malawi, and existing training facilities will not be able to elininate the shortage within the near future. The Bunda College of Agriculture - a part of the University of Malawi - will produce shortly about twelve graduates per year, so that many of the professional posts will continue to be held by expatriates during the next few years. Technical assistants are trained in the Colby College of Agriculture which has an annual output of about 125. This is inadequate and Government is considering the creation of a national resources college to fill the need. PART IV - THE PROJECT 20. A report entitled "Malawi: Shire Valley Agricultural Development Project - Phase III', No. 33a-MAI dated February 15, 1973 is being circulated separately. A credit and project summary is provided in Annex III and the project area is shoun in detail in the second map (No. IBRD-l0ll4). 21. The project which was prepared as an extension of the scheme financed by Credit No. 114-MAI, was appraised in the field in June 1972. Negotiations were held in Washington fram January 29 to February 2, 1973. The Malawi Gavernment's delegation was headed by Mr. G.E. Gondwe, Permanent Secretary, Ministry of Finance. 22. The Shire Valley, a somewhat isolated area, is located in the southwestern corner of Malawi. at an altitude of 500 feet above sea level. It is inhabited by 300,000 people representing almost 6% of Mllawils total population. Population density at the Valley bottom, where most people live, is about 400 persons per square mile. The development of the Shire Valley had, until about the mid-1960s, been neglected because of adverse climatic and health factors. In 1968, an application was submitted to IDA which led to assistance in the financing of a US$4.6 million project principally aimed at increasing crop production, mainly cotton, on about 130,000 acres of farmland in the Valley. This project, executed over five years, also provided the essential infrastructure needed for this development. Progress has been very satisfactory and the project is expected to be canpleted ahead of schedule, with lower costs and greater benefits than projected at appraisal. 23. This first phase, however, was largely confined to the area of Ngabu (see maps), and its impact elsewhere in the Valley has been limited. The proposed project, which would also be executed over a period of five years, would consist of an extension and intensification of the Phase I project and would place primary emphasis on increasing crop yields on already cultivated land. The project is expected to enable about 16,000 farmers to adopt improved  methods of cultivation and would also include a livestock and fisheries component. The project would. consist of the following major elements: (a) Extension Services Extension services would be intensified through employ- ment of additional extension staff, the establishment of six area headquarters comprising offices, stores and training facilities, the expansion of existing facilities including the expansion of the training center at Ngabu project head- quarters to provide residential quarters for farmers undergoing training. The project would also include the provision of vehicles and teaching, demonstration and other related agricultural equipment. (b) Physical Infrastructure The project would include the drilling and equipping of about 140 boreholes to provide water for domestic use, crop spraying and livestock watering; the improvement of about 80 miles of main and secondary roads by constructing culverts and bridges; the construction of about 100 miles of feeder roads and the conversion of a railway bridge in the lower Valley to enable its use by road traffic as well; the construction of 17 markets and the renovation of three existing ones. (c) Livestock Development Two grazing schemes would be established and firelines, tracks, dipping tanks, weirs and dams would be constructed. Three oxen training centers would be established. (d) Fisheries A program would be designed to raise the productivity of about 1,000 fishermen, representing about 40% of the people deriving the major part of their livelihood from fishing in the rivers and marshes of the Valley. This program would be carried out mainly through extension services, improved fishing gear, the construction of 50 smoke-drying kilns, and of about 20 miles of all-weather access roads. Eatension staff would assist boat builders in constructing simple boat-yards. (e) Credit Credit would be provided to farmers and fishermen to cover the purchase of seasonal inputs such as  - 7 - insecticides, fertilizers and seeds and medium-term credit for cotton sprayers, fishing boats, inproved fishing gear and work oxen. Revolving funds would be set. up and requirements would be made available in kind. Mkdium-terrr credit would carry interest at a rate of 10% per annum while seasonal credit would bear a flat charge of 10% which is equivalent to about 12% per annum. (f) Research and Studies Existing research stations in the Lower Shire Valley would be strengthened through the provision of additional staff, building and equipment. Research would be conducted on irrigated and rainfed crops. Fish culture trials would also be conducted and a study would be carried out to determine the feasibility of establishing controlled lagoons for intensive low cost fish farming. (g) Health Services In accordance 4rith Malawils 15-year health program, additional services, mainly preventive, would be provided to bring the level of services in the project area to that of the rest of the country. This would include the establishment and equipping of four primary health centers, eleven sub- centers and sixteen health posts. In addition, insecticides and molluscicide,s would be provided to help combat malaria and bilharzia which are prevalent throughout the project area. (h) Land Registration Mbst land in Malawi is held under customary tenure. Project management would encourage project farmers to apply for title to the land they tend. The project would provide the necessary staff and equipment to assist in the preparation for land registration. (i) W[ldlife Protection Existing game parks in the area would continue to be reserved to help preserve wildlife, including a rare species of antelope. Facilities to effect greater control of poaching would be expanded by the provision of staff houses and the constructicn of roads and tracks. 24. The project would be managed by the Project Manager at present in charge of the first phase, under the general direction of the Permanent Secretary, Ministry of Agriculture & Natural Resources. A staff consisting, in addition to the Project Manager, of 11 professional and technical officers and 51 technical assistants is already in post under the first project. The project would be administered from the present headquarters at Ngabu in the center of the Shire Valley. Mlawi Railways, under the Ministry of Transport and Communications, would be responsible for the conversion of the railroad bridge  and ADMARC would carry out the construction of markets. As several Ministries have responsibilities concerning the project, a liaison committee would be established under the Chairmanship of the Permanent Secretary of the Ministry of Agriculture & Natural ResuLrces to ensure coordination between project staff and the organizations concerned. 25. Total project costs are estimated at US$13.5 million net of taxes with an estimated foreign exchange component of US$6.8 million. The proposed credit of US$10.5 million would finance 78% of the total cost of the projec-t. The balance of the project cost would be provided partly by the Malawi Government ($1.7 million) in the form of annual budgetary allocations over a period of 5 years and by ADMARC ($1.3 million) to finance the cost of markets and 60% of seasonal credit. The conclusion of an agreement between the Government and ADMARC to that effect would be a condition of effectiveness. 26. Procurement of vehicles, machinery, equipment and fertilizers amounting to about US$2.7 million would be by international competitive bidding in accordance with Bank/IDA guidelines. To facilitate this procedure, bulk orders for the items concerned would be prepared annually. All farm inpu-ts would be handled by ADMARC including those procured by international competitive bidding. Conversion of the railway bridge(US$0.5 million) would be executed under the supervision of the 2Mlawi Railways after international competitive bidding. Staff housing and building construction works estimated at about US$2.3 million are too small and dispersed to attract international bidders and competitive tenders would therefore be invited from local firms only. Bore- holes (US$0.3 million) would be constructed by the Water Development Department and earth works on the main and secondary roads and construction of feeder roads (uS$D.4; million) would be executed by the Ministry of Works & Sipplies with equipment to be financed from the credit. All tenders would be processed by the Yalawi Central Tenders Board, whose procedures are suitable. The credit, would be disbursed against (a) 33% of total expenditures for seasonal credit; (b) 100% of foreign expenditures for expatriate personnel and consultant services; and (c) 100% of foreign expenditures if directly imported or 85% of total expenditures. 27. The project is expected to affect directly about 16,000 farmers and about 1,000 fishermen. Most of the labor required for the implementation of the project would be provided by the farm families in the project area who live at subsistence level and are underemployed. 28. Based on the Bank's price forecasts for main agricultural commodities to be produced, the economic return of the Droject is estimated at about 22%. In terms of the cash income expected to accrue to the participants, the impact of the project will be considerable. Average annual net cash income per farm family is expected to increase from about US$11 to about US$120, while participating fishermen are expected to increase their annual net income from about US$300 to over US$700.  -9- PART V - LEGAL INSTRUMENTS AND AUTHORITY 29. The draft Credit Agreement between the Association and the Republic of MWlawi and the Reconmmndation of the Committee provided for in Article V. Section 1 (d) of the Articles of Agreement and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately. 30. The draft agreement conforms to the normal pattern for credits for agricultural development projects. 31. I am satisfied that the proposed credit would conply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 32. I recommend that zhe Executive Dixrectors approve the proposed credit. Robert S. McNamara President by J. Burke Knapp Attachments March 8, 1973   ANNE;X 1 COUThRY DATA - MALAWI Page 1 of 2 /At. A POPULATION DENSITY l/ lid,SOC sq. ko .7 million (de facto, mid-1972) 50 per sq. kan- 2/ Rate of Growth: 2.6 (from 1966 to 1972) 100 per sq. Ian of arable land- Po:0ULATION CHARACTERISTICS HEALTH (1972) Crude Birth Rate (per 1,000) .. Population per physician 4Q,000 Crude Death Rate (per 1,000) .. Population per hospital bed 700 Infant, Mortality (per 1,000 live births) INCO_ _ _ _ DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP - of nationial income, lowest quintile *. A owned by top 1% of owners highest quintile .. A owned by smallest 10%, of owners ACCESS TOI PIPED WATER ACCESS TO ELECTRICITY 8 of population - urban *. X_of population - urban - rural .. - rural NUTRITION EDUCATION (1972) Calorie intake as 8 of requirements .. Adult literacy rate Per capita protein intake Primary school enrollment 3hX GNP PER CAPITA in 1971: US $90 i GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (b, constant prices) US $ Mln. 1960-65 1965-71I 1971 GNP at Market Prices 399.24 100.0 .- 7.4 i5.4 Gross Domestic Investment 75.96 19.0 .. 21.0 1.6 Gross National Saving 44.4o 11.1 10.1 23.6 Gross Domestic Saving 33.36 8.4 52.0 22.5 Current Account Balance -31.56 -7.9 Exports of Goods, NFS 83.88 21.0 .. 9.8 13.9 Imports of Goods, NFS 126,48 31.7 12.6 9.9 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V. A. Per Worker US $ Mln. Mln. t uS $ A Agriculture 191.72 51.2 .. Industry 76.18 20.3 .. Services 106.85 28.5 .. UJnallocated - - Total/Average 374.75 100.0 .. GOVERNMI NT FINANCEI General Government Central Government (MK Mfln.) % of GDP K(M Mln.) 2 of GDP ~ 1971/72 1968/71 1971/72 1971/72 L/ 1969/71 Current Receipts 5.. .. *. 7.0 1h.7 13.9 Current Expenditure- 50.5 15.8 17.5 Current Surplus (Defi6't) .. *. *- ) T1.1) (3- Capital Expenditures - .. .. .. 31.2 9.8 9.0 External Assistance (net) .. *. *- 24.o 7.5 10.2 1/ Land area only 2/ Including land classified as "marginal't n/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. ./ Average compound growth rates, GDP deflator except for trade figures ;/ Includes debt service T/ Includes some recurrent expenditures of a developmental nature financed under foreign aid 7/ Financial year April to Ilarch not available not applicable  -2- ANNEX 1 COUNTRY DATA - IIALAWI Page 2 of 2 Sept. Sept. PONEY, CREDIT and PHICES 196f5 19Q69 19'0 1971 1971 1972 (Million Kwacha outstanding end of period) i'oney and Quasi Money 25.3 U1i.7 43.1 57.7 57 . 6L.5 Bank Credit to Public Sector (net) -2.2 -.5 2.7 3.2 7.1 9.0 Hank Credit to Private Sector 10.2 22.4 2f.9 36.7 36.6 39.3 (Percent,ages or Index Numbers) Iloney and Quasi Money as % of GDP 110.1 16.3 16.8 16.7 General Price Index (1961. = 100) 102.9 120.4 130.4 138.9 Annual percentage changes in: General Price Index +2.9 +2.1 4-3.3 +6.5 Bank Credit to Public Sector .. +22.2 -57.7 +15.4t +294.'4 1/ +26.8 Bank Credit to Private Sector *- +14.9 +20.0 +36.3 + 36.6 +8.2 DALhANC OF PAY24ENTS iL-RCHANDISE EXPORTS (AVERAGE 1969 - 1971) 1969 1970 1971 (Mill.ions of US $) US $ Mln % Exports of Goods, NFS 61.0 68.6 83.9 Tobacco 20.5 40.4 Imports of Goods, NFS 102.2 113.3 126.5 Tea 12.9 25.4 Resource Gap (deficit - -) -172 -142.6 Groundnuts 6.3 12.4 Cotton 2.8 5.5 Interest Payments (net) -2.3 ) Others 8.2 16.3 E'6orkers' Remittances 7.6 ) -7.2 -1.4 Total ;70 100.0 Other Factor Payrnents (net) -12.2 Net Transfers 19.7 15.2 12.4 EXTERNAL DEBT, DEC3MBER 31, 1971 Balance on Current Account -29. -36.7 -31.6 US .$ Mln Direct Foreign Investment (net) 5.0 Net 'LT Borrowing ) Public Debt, incl. guaranteed 11[0.4 Disbursements li.3 ) Ncn-Guaranteed Private Debt .. Amortization _ 31.7 28.6 Tctal Outstanding and Disbursed Suhtotal 4.0; ) Capital Grants - ) DEBT SiRVICE RATIO for 1971''-/ Other Capital (net) 1;3.7) Other items, n.e.i. 0. 5 13.1 4.2 Increase in Reserves (+) -0.h Public Debt, incl. guaranteed 7.9 Gross Reserves (end year) 21.6 30.0 31.6 Hon-Guaranteed Private Debt Net Reserves (end year) 1,3.n 20.2 27.3 Total Outstanding and Disbursed RATE OF EXCHANGE IERD/IDA LENDING, January 31, 1973 (Million US 9): Through December 1971 IBRD IDA US D 1.00 = ENI o.c3 O4K 1.00 = US P 1.20 Outstanding & Disbursed - 34.3 Uniisbursed - 14.6 *-rom December 1971 to June 1972 Outstanding incl. Undisbursed - 74.9 US .3 1.00 = 34K 0.77 i-lK 1 . no= US $ 1.30 From July 1972 Floating with