Malawi - Shire Valley Agricultural Development Project

RESTRICTED FiLtE t Report No. P-584 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRES IDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWI FOR THE SHIRE VALLEY AGRICULTURAL DEVELOPMENT PROJECT January 22, 1968   INTERNATIONAL DEVELOPI-ENT ASSOCIATION REPORT AND RECO bENTATION OF TBE PRESIDENT TO TBE EXECUTIVE DIRECTORS ON A TROPOSED DEVELOPMENT CREDIT TO TXE REPUBLIC OF MALAWI FOR THE SHIRE VALIEY AGRICULTURAL DEVELOPIENT PROJECT 1. I submit the following report and recommendation on a proposed Shire Valley agricultural development credit in an amount in various currencies equivalent to US $3.7 million to the Republic of Malawi. PART I - HISTORICAL 2. In January 1967, the Government applied for an IDA credit to help finance a program whose principal objectives were to induce farmers in the lower Shire Valley (Southern I4alawi) to adopt improved agricultural practices and to settle others on as yet uncleared land. The immediate impact of the project submitted would be to increase yields of cotton pro- duction and some improvement in the production of maize, the local staple food. The project submission was prepared for the Government by the FAO/IBRD Cooperative Program under the auspices of the United Nations Development Program (UNDP). The project was appraised by an IDA mission in N4ay 1967. 3. The presence in Wiashington during the second half of November 1967 of the Honorable John Tembo, Minister of Finance, Messrs. K. J. Barnes, Secretary to the, Treasury, R. J. Dewar, Secretary to the newly created Ministry of Economic Affairs, R. Katengeza, General lanager of the Farmers Marketing Board and C.P.R. Nottidge, Chief Agricultural Development Officer for the purpose of negotiating a proposed credit for the Lilongwe Agricultural Development Project was used to have preliminary negotiations on the proposed Shire Valley project. Formal negotiations were completed by the end of December 1967, when the Government indicated its agreement with the draft credit documents. 4. Previous IDA lending in Halawi consisted of a US $490,000 equivalent highway engineering credit (S2-MAI, signed October 4, 1966) of which $169,000 was undisbursed as of December 31, 1967, and a US $6.3 million equivalent credit for an education project (102-MAI, signed May h, 1967), which is in the design stage and for which disbursements are not scheduled until later this year. 5. I am submitting this project simultaneously with separate proposals for a US $11.5 million equivalent highway credit, which includes the proposed refunding of the $490,000 equivalent engineering credit S2-MAI mentioned above, and a US $6 million equivalent credit for an agricultural development project situated near Lilongwe in the Central Region of Malawi. No further credit propoea1s are expected to be submitted to the Executive Directors in the near future; a power project might be next in line, possibly in the second half of 1968.  6. There have been no IFC investments in M4alawi. PART II DESCRIPTION OF THE PROPOSED CREDIT 7. BORROWER: Republic of Yalawi PURPOSE: To help finance a 5-year integrated agricultural development project designed to increase cotton production in an area covering 130,000 acres. AM4OUNT: Various currencies equivalent to US $3.7 million. AMERTIZATION: 50 years, including a 10-year period of grace, in semi-annual installments beginning on April 1, 1978 and ending on October 1, 2017. SERVICE CHARGE: 3/4 of 1 percent per annum. PART III - THE PROJECT 8. A report on the proposed project entitled "Shire Valley Agricultural Development Project" (TO-612a, dated January 5, 1968) is attached. 9. In order not to lose the considerable momentum recently achieved in agriculture, the Government is now anxious to expand, with IDA assistance, some of the more successful improvement schemes begun on a pilot scale with United Kingdom funds. Encouraging as it may be, recent growth in agricultural production has been primarily the result of expanded acreage rather than increased yields. IWith increasing pressure of population there is a limited possibility of achieving further long-run growth in this way, so that the Government's program for agricultural development is concentrated on raising the yields of the existing smallholder crops. In the project area itself yield take-off depends principally on the introduction of pest control and improved cultural practices. The greatly increased extension effort necessary to achieve these aims will be facilitated to some extent by the recent expan- sion of facilities for training Nalalwian agricultural staff, but expatriate services, which the country readily accepts, will continue to be necessary in the short run. The measures proposed in this project have been tested among I4alawits cotton growers in a cotton improvement scheme financed by the United Kingdom Government. The results appear quite promising and have en- couraged the Government to initiate, in addition to the Shire Valley project, a similar project in the vicinity of Salima in the Central Region. This project is being partially financed by a loan from the Government of the Federal Republic of Germany.  10. The proposed credit consists of the partial financing of a five- year project, which is designed to increase cotton production in an area covering about 130,000 acres in the lower Shire Valley. Production increases would result partly from the development of nearly 20,000 acres of presently unused arable land, but to a more significant extent from the adoption by farmers of improved cultural practices of which the use of sprayers and in- secticides for pest control are the most important. The necessary techniques would have to be demonstrated to the farmers by the extension services. The project would be complemented by an integrated package of infrastructural improvements (water supply, access roads, markets) and the provision of credit facilities. The project has been limited to the introduction of essential in-puts and techliques (pest control) since the present level of agricultural development in this region of Ihlawi does not at this stage provide an economic basis for introduction of more complex innovations or the use of fertilizers. The project will also achieve some improvement in local maize production. 11. The purchase of sprayers and insecticides by farmers will be facili- tated by a credit scheme, which will be administered by the Farmers Marketing Board (F1oB). The FIB is a semi-autonomous public corporation which is charged with buying and selling of smallholder crops for which it maintains and oper- ates organized imarkets. Farmers in the project area are obliged to sell their cotton at these markets which will enable the FIMB to collect farmerst credit repayments by deducting them from the proceeds of crop sales. 12. About one fourth of the proposed credit would be directed towards the financing of extension staff. A massive extension effort and a fairly high degree of supervision of farmers' practices are essential for successful project implementation. Specific provision has been made for in-service training of local staff to replace gradually the non-aIlawian extension staff needed initially. 13. Overall responsibility for the implementation of the project would be assumed by a newly created Agricultural Development Branch set up within the Department of Agriculture of the M^inistry of Economc Affairs. The Branch is headed by a Chief Agricultural Development Officer recruited from the Agricultural Development Service (ADS) in Nairobi. 14. The cost of the project is estinated at US $4.6 million equivalent. The estimate includes contingencies which allow also for cost variations as a possible result of the recent devaluation of the Malawi pound. The foreign exchange component is estimated at US $2.6 million equivalent or 56%. The proposed credit would finance about 8O0P of the estimated total cost. This would be somewhat below the proportion of external finance that could be considered justifiable for development projects in 24alawi considering its -ooverty and performance (see also Part V - The Economy), but would take into account the Government's recovering, over the five-year period, of a V large part of its financial contribution from repayments by farmers on credits received for the purchase of sprayers and insecticides.  '.14- 15. The construction of housing and the purchase of sprayers, insecticides, vehicles and other major goods will be made under contracts awarded on the basis of international competitive bidding. Imports made specifically for the project will be exempt from import duties, The project is expected to be completed by January 1973. 16. The economic evaluation of the project is based on the addit- ional productionL mainly of cotton and also of maize directly attributable to the project MIalawits cotton production is small in terms of the world market. However, it-is the country's fourth largest earner of foreign currency after tea, tobacco and groundnuts, For the project area, it is expected that increased cotton production will contribute to the economy more than US $0.6 million in foreign exchange in the fifth year of the project, gradually rising to over US $1e. million in the tenth year. Maize production is expected to increase by some 35% by the end of the project; the increase will contribute to improving the nutritional stand- ards of the populace in this area which is a net food importer. Overall costs and benefits relating to this project would result in a rate of return to the economy of about 21%, apart from the equally important indirect and unquantifiable benefits. Among the latter, the most signif- icant is the training of local extenision personnel who would be able, after project implementation, to demonstrate improved agricultural growing practices in other parts of the country. PART IV - IEGAL INSTRU1ICNTS AND AUTHORITY 17* The draft Development Credit Agraement between the Republic Of M1alai and the Association, and the R;-znmendation of the Committee prov-lcded for in Article V Section 1(d) of Ohe Articles of Agreement are being dis..ributed to the Executive Direc-&ors separately. The draft legal documents follow closely the pattern used in the proposed Lilongwe Agricultural Development Project. PART V - TIE ECONOMY 18. A report entitled "Current Economic Position and Prospects of Malawi' (No.AF-68a) was distrib-tted to the Executive Directors on 1Novei,er 22 1967. Brief conrments on the econmy and the- justification for lending by the Asaociation are contairned in mr report, dated January 22, 1968, on a proposed development credit for a highway project,  - JR - PART VI - COIMPLZUICE WITH ARTICLES OF AGREEIENT 19