Malawi - Third Fiscal Restructuring and Deregulation Program Project (FRDP III)

Report No. PID8406 Project Information Document Project Name: Malawi-Fiscal Restructuring and Deregulation Program III Region Africa Sector Finance Project ID MW-PE-50294 Borrower: Government of MALAWI Implementing Agency: Ministry of Finance PO Box 30049 Lilongwe 3 Malawi Phone: 265-782199 Fax: 265-783109 Date this PID prepared: November, 1999 Projected Appraisal Date: February, 2000 Board Date: March, 2000 Background Since the mid-1990s Malawi has been implementing wide ranging reforms supported by two Bank adjustment credits, an IMF ESAF and bilateral donor supported adjustment programs. The last IDA adjustment credit, the Second Fiscal Restructuring and Deregulation Program (FRDP II), approved in 1998 advanced the adjustment agenda by reducing tariffs, prioritizing Government expenditures, improving expenditure monitoring, undertaking rationalization of Government functions, implementing privatization programs and introducing regulatory reforms in the electricity and telecommunications sectors. Under these programs, public expenditures on the social sectors (health, education and community based development projects) increased from 16t of overall expenditures in 1993/94 to 289 of expenditures in 1998/99. There has been a positive impact of these reforms on fiscal management and growth. Despite the pressures of the general election of May 1999, the Government implemented a budget with a domestic primary balance of 0.3w of GDP, compared to a deficit of -4.4w in 1997/98. Consequently, while domestic public debt increased by 3.5w of GDP in 1997/98, it fell by 4.2w of GDP in 1998/99. It is now expected to be reduced by more than 5t of GDP during the current fiscal year, leading to a lowering of interest rates and increasing private sector investment and activity. GDP has grown by just over 5.5w annually in the last three years (1996 to 1998), despite the poor crop and mediocre performance of GDP in 1998 (3.1w growth only). Recent GDP growth, thus, reflects the more diversified and broad based economy especially in the smallholder sector, and the growth of trade and services. Burley tobacco production by the small holder economy has increased by five times between 1993 and 1999, implying a large infusion of cash and incomes into the rural economy, and generating growth in the service sector through raising demand. A non-traditional export industry has emerged, with some 15 factories engaged in the exports of ready-made  garments, and employing around 7000 workers in peak periods, thereby making it the largest manufacturing sector employer. The share of manufactured exports in all exports has increased three-fold in the last seven years. However, Malawi's growth and poverty reduction prospects remains fragile with poor rates of domestic savings and private investment, which has been shy in the wake of wide fluctuations in inflation and interest rates and exchange rate instability of 1998. Recent data indicates that inflation and interest rates are coming down as the Government implements its stabilization policies. Sustained poverty reduction will require steady economic growth rate of around 6t p.a. in the medium to long run. This, in turn, will need consolidation of stabilization policies and persistence with structural reforms that increases economic growth and efficiency. Objectives Against this background, the proposed credit, the Fiscal Restructuring and Deregulation Program III, will support the Government's next phase of structural reforms. This credit will, thereby, maintain the momentum of policy reforms launched in 1994. As in previous credits, the proposed credit will support reforms in two areas: (i) public sector management through improving fiscal management and civil service efficiency; and (ii) private sector development through implementing a major privatization program and improving public sector and private sector coordination. The proposed credit is expected to lead to poverty reduction in three ways: (i) by creating the conditions for faster poverty reducing growth (of around 6%); (ii) by increasing pro-poor orientation of public expenditure allocation based on the findings from a 1999/2000 public expenditure review; (iii) in the short term, through explicitly supporting the adoption and implementation of a lean-season/vulnerable group targeted safety nets strategy. Description In the area of public sector management, the credit will support the following Government activities: (i) A joint Government of Malawi/IDA public expenditure review that will analyze current expenditure allocation and build Government capacity to do so in future. This review will cost social sector programs aimed to reduce poverty, identify funding gaps between resource availability and requirements, the financing of these gaps through expenditure prioritization; the review will give priority to public goods and services, pro-poor goods (as identified through an expenditure incidence analysis) and the need to obtain private sector financing as feasible; (ii) the formal adoption and implementation of a detailed Safety Nets Strategy that will identify the various safety nets and transfer instruments used by the Government to support the chronically poor and vulnerable groups in Malawi; (iii) introduce transparency and accountability in fiscal management by making quarterly budget implementation reports publicly available; (iv) improve public financial management by improving auditing and procurement practices; and (v) improve civil service efficiency through rationalizing of staffing and salaries. In the area of private sector development, the credit will support the following activities: (i) development of private ownership, efficiency and competition by privatization and securing of strategic partners for Malawi telecoms, commercial banks; and implementing the 12 month privatization plan -2 -  for ADMARC; (ii) improving private sector and infrastructure performance by identifying and clearing all arrears owed to the private sector and utilities; improving surtax administration that enables prompt reimbursement of surtax rebates owed to the private sector; and (iii) enhancing public and private sector coordination, and policy implementation through the formation of a small, implementation oriented public-private body that meets regularly and with the highest authority to formulate and implement private sector development policies. Environmental Aspects The recommended environmental assessment category is C. The proposed operation does not have a direct environmental impact. Implementation The credit will be disbursed through the Reserve Bank of Malawi, in four tranches to be disbursed between March 2000 and December 2000 upon compliance of specific benchmarks. Simplified disbursement procedures under adjustment credits will apply. The Ministry of Finance will be responsible for coordinating the implementation of the reform program agreed under the credit. Financing: The amount of the proposed credit is US$ 70 million. As a balance of payments operation, the proposed credit will finance 100t of the foreign exchange costs of eligible imports. Benefits and Risks: The credit will assist in meeting Malawi's financing requirements during FY 1999/00 and FY 2000/01. In addition, it will support the implementation of key structural reforms needed to consolidate macroeconomic stabilization and growth. The main risks are posed by Malawi's capacity constraints, and the shocks from droughts and terms of trade losses. A simultaneous technical assistance project will help to assist the Government to implement policy measures supported by this credit. Contact Point : Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Task manager: Ahmad Ahsan, Tel: 202 473-1672, Fax: 202 473-8179 Note: This is information on an evolving project. Certain components may not necessarily be included in the final operation. - 3 -