Malawi - Smallholder Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY AZ- /,fs /MA - Report No. P-4614-MAI MEMORANDUM AND RECOMMENDATION OF T;IE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 4.6 MILLION TO THE REPUBLIC OF MALAWI FOR A SMALLHOLDER AGRICULTURAL CREDIT PROJECT OCTOBER 9, 1987 Southern Africa Department Agriculture Operations Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorindon  CURRENCY EQUIVALENTS Currency Unit - Malawian Kwe.cha (MK) US$ 1.00 - MK 2.30 ACRONYMS ADD = Area Development Division IDA = International Development Association IFAD International Fund for Agricultural Development MOA Ministry of Agriculture MOF Ministry of Finance NRDP - National Rural Development Program SACA Smallholder Agricultural Credit Administration SCF Smallholder Credit Fund GOVERNMENT FISCAL YEAR April ! - March 31  FOR OFFICL4AL USE ONLY MALAWI SMALLL,. BEI AGRICULTURAL CREDIT PROJECT Credit and Project Sum_ ry Borrower: The Republic of Malawi. Beneficiaries: Ministry of Agriculture and the Office of the President and Cabinet. Amount: SDR 4.6 million (US$5.9 million equivalent). Terms: Standard, with 40 years maturity. Financing Plan: (US$ million) Government 1.40 Participating Farmers 0.20 IFAD 6.90 IDA 5.90 Total 14.40 Economic Rate of Return: Not applicable. Staff Appraisal Report: No. 6886-MAI Maps: IBRD 20152 IBRD 20608 This document has a restricted distribution and may be used by recipients only it the pe _ac of their oMcial duties. Its contents may not otherwise be disclosed without World Pltm 1 ;i7orizaIion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF MALAWI FOR A SNALLHOLDER AGRICULTURAL CREDIT PROJECT 1. The following report on a proposed development credit to the Government of Malawi for SDR 4.6 million (US$5.9 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms and would assist in the financing of a project to improve the efficiency and viability of the national credit system for smallholders in Malawi. The Project will be cofinanced by IFAD to the extent of SDR 5.4 million (US$6.9 million equivalent). 2. Backround. Malawi is heavily dependent on agriculture which supports about 85% of the population of over 7 million people, and in 1986 accounted for 37% of total GDP and 91% of all exports. Major exports include tobacco, tea, and sugar. Over the years, the country has managed to maintain self-sufficiency in food production. Smallholders cultivating customary lands produce 80% of all agricultural output. The estates cultivating freehold or leasehold lands produce largely for export. In the 1970s, agricultural production growth rates were impressive but they have been more modest in the 1980s due to worsening terms of trade for Malawi's major exports, sharply higher transport costs, and poor weather. Because of limited arable land, most future increases in agricultural production will have to come from areas already cultivated throtngh intensification and ,.reater productivity. 3. The Government's agricultural policy is geared to: (a) maintaining food self-sufficiency; (b) diversifying production; (c) expanding agricultural exports; and (d) improving rural incomes. Since 1978, the National Rural Development Program (NRDP) has been the main Government channel for developing smallholder agriculture. NRDP is an area oriented program providing smallholders with extension, adaptive research, marketing, inputs and credit services. However, the production response from this program has been disappo_-ting, due to shortcomings in technology, research/extension linkages, credit allocations and marketing. In recent years there has been a shift in Government's strategy with full support from the Bank and other donors to improve basic services nationally, including agricultur^l research, extension, marketing, and credit systems which operate in conjunction with the NRDP. The Bank is supporting the new Government strategy through the nationally-oriented Agricultural Research and Agricultur-l Extension and Planning Projects (Cr. 1549--MAI and 1626-MAI). The proposed credit Project will provide a national focus to credit operations. The Bank is also assisting the Government to improve the agricultural policy environment facing smallholders through a series of structural adjustment operations under which there has been significant pricing and marketing reforms including privatization, a gradual reduction in fertilizer subsidies, inreased budgetary allocation to the Ministry of Agriculture (MOA) and streamlining of the state-owned Agricultural Development and Marketing Cooperation. 4. With the help of donors, Malawi has established a relatively successful smallholder agricultural credit operation. However, there is scope for making it more efficient. Managed by MOA, the scheme, which supplies mostly seasonal credit, is characterized by group lending and high recovery rates. The interest rates for seasonal credit were until recently 13.3% p.a., and for medium-term credit 10% p.a.; these were slightly below commercial rates (inflation in Malawi is estimated at 15% p.a.). Some deficiencies which need to  - 2 - be addressed, include: (a) the absence of a national framework for planning, coordinating, and monitoring credit operations, which has led to inefficiencies in the use of the financial resources; (b) resource constraints arising from restrictionu concerning where credit funds provided by various donors can be used; (c) unsatisfactory uptake and recovery of medium-term credit mainly due to administrative shortcomings; (d) lack of cost accounting for administrative expenditures; (e) low interest rates resulting in unsustainable credit programs; and (f) insufficient means of tapping savings in rural areas. These constraints would be addressed under the proposed Project. 5. Project Objectives. The Project aims to establish an efficient and financially viable national credit delivery system that would benefit a significantly greater number of smallholders than at present by: (a) consolidating area-based programs into a strengthened national credit system; (b) increasing flexibility in allocating credit resources; (c) meeting the demand fzr credit; (d) initiating measures to mobilize rural savings; and (e) exploring the possibility of providing group credit for non-land based economic activities for the rural poor. 6. Project Description. The Project would be implemeated over a seven-year period and would include funds for financing seasonal and medit'm-term credit. It would also provide for additional staff, training, technical assistance, vehicles, equipment, and other facilities to transform the existing credit unit of the Ministry of Agriculture into a Smallholder Agricultural Credit Administrat!on, with departmental status. The new Credit Administration would be responsible for managing -- at a national level -- the smallholder agricultural credit system and funds made available through various projects to individual Area Development Divisions (ADDs) of the NRDP. These funds would be consolidated into a Central Smallholder Credit Fund (SCF), an interest-bearing account. Moreover, the Project would include a pilot credit scheme for the rural poor, modelled on the IFAD-funded Grameen Bank in Bangladesh. The total cost of the Project is estimated at US$14.4 million with a foreign exchange component of US$10.4 million (72%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement are shown in Schedule B. The status of the Bank's operations and IFC's investments in Malawi and the timetable for key project processing events are given in Schedules C, D, and E, respectively. Map Nos. IBRD 20152 and IBRD 20608, and the Staff Appraisal Report No. 6886-MAI, dated October 9, 1987, are also attached. 7. Rationale for IDA Involvement. IDA's development strategy in Malawi has evolved in support of the Government's efforts to stimulate increased productivity, develop a more diversified agricultural base, promote crop exports, and improve rural incomes. IDA, through its lending operations and sector work, is supporting the Government's strategy of strengthening key national agricultural institutions, thereby improving the capacity for planning, policy analysis, program implementation, and provision of basic services efficiently. The proposed Project is consistent with this strategy and serves to complement several on-going projects supported by IDA. The proposed Prcject would help to consolidate agricultural credit activities now scattered among several projects and to establish the required institutional capability. IDA's involvement would also help facilitate policy changes including measures to ensure positive interest rates in real terms.  8. Actions Agreed Upon. Interest rates chargeable to smallholdera have been raised from 13.3% to 16.5% p.a. for seasonal credit and from 10% to 15% p-a. for medium-term credit and the Government has agreed to ensure that interest rates for smallholder credit are positive in real terms. The Smallholder Agricultural Credit Administration (SACA), responsible for managing the credit funds, has been established, and its senior staff ha.'e been appointed. A central Smallholder Credit Fund (S-F), an interest-bearing account, has also been created. SACA will pay interest of 2% per year on resources transferred by the Government to the SCF, -mpared to no interest currently. The Government has also agreed: (a) to omplete a study on the uptake of medium-term credit by June 30, 1988; (b) to review, by June 38, 1988, the recurrent administrative expenditures related to the credit system; and (c) to phase out budgetary support for credit administration by September 30, 1989. To initiate the pilot rural credit and savings scheme for the rural poor, a separate entity, satisfactory to IDA, would be established. 9. Ju3tification. A broad spectrum of farm families throughout the country would benefit from the use of improved farm technologies made available through the use of credit and extension. By utilizing improved technologies, smallholders can achieve yield increases ranging from about 10% for groundnuts to 40% for maize, thereby raising rural incomes and providing employment opportunities. Moreovet, the Project would create a viable and susts.inable institutional framework to better serve the smallholder subsector and establish a specialized credit system for the poorest sector of the population. Furthermore, the Project would lessen the recurrent budget allocations by the Guvernment by about US$0.6 million annually. At full development, it is expected that the number of borrowers benefitting from the credit would increase from the present 200,000 to 400,000 families. 10. Risks. Possible risks include: (a) delayed implementation; (b) inadequate producer prices; (c) unstable marketing arrangements; and (d) insufficient capacity of the research and extension services to develop and disseminate suitable technologies. Tnese risks would be minimized through technical assistance to strengthen project implementation capability; on-going project assistance to strengthen national research and extension services; and the existing policy agreements and dialogue between the Government and IDA in connection with the adjustment program on pricing, subsidies, and marketing. 11. Recommendation. l am satisfied that the prcoosed credit would comply with the Articles of Agreement of Lhe Association and recommend that the Executive Directors approve the proposed credit. Barber Conable President Attachments Washington, D.C. October 9, 1987  -4- Schedule A MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Estimated Cost atd Financing Plan Estimated Cost al Local Foreig! Total -------(us$ '000)----- Technical Assistance 52 468 520 Vehicles -- 336 336 Office Supplies and Equipment 17 70 87 Overseas (Neighboring Countries) Training -- 280 280 Local Training 541 142 682 Pilot Credit Scheme 432 449 881 Seasonal Credit 2,091 6,273 8,364 Medium-Term Credit 377 1,508 1,885 Recurrent Costs 239 62 301 Total Baseline Costs 3,749 9,588 13,336 Physical Contingencies 49 140 189 Price Contingencies 254 624 877 Total Project Costs 4,052 10,351 14,402 Financing Plan Local Foreign Total %