Malawi - Lilongwe Agricultural Development - Second Phase - Project

RESTRICTED FILE COPY Report No. P-90 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 The report may not be published nor may it be quoted as representing their views.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 PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWI FOR THE PHASE II LILONGWE AGRICULTURAL DEVELOPMENT PROJECT April 19, 1971  IIITERNATI2JAL DEVELOPMENT ASSOCIATION REPORT ATD RECOI4OqDATION OF THE PRESIDENT TO rH3 EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPNENT CRJDIT TO TIE REPUBLIC OF MALAWI FOR THE PHASE II LILONGW,E AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following repor-t and recommendation on a proposed credit in an amount in various currencies equivalent to US$7.25 million to the Republic of MIalawi. PART I - HISTORICAL 2. The I4alawi Government has requested an IDA credit to finance the second phase of the Lilongwe Land Development Program. The first phase was financed by a $6 million IDA credit (113-MAI) signed February 5, 1968. The Lilongwe Land Development Program is based on a plan prepared with the assistance of staff of the Permanent Mission in Eastern Africa and the FAO/IBRD Cooperative Program, drawing on the experience of a pilot scheme financed in 1965 by the United Kingdom. 3. Before the advent of the Land Development Program, farmers in Lilongwe district used traditional methods without even such simple soil conservation measures as ridging or bunding. They used hardly any fertilizer and there was no systematic selection of planting seed. Plots were irregular in shape and their boundaries poorly defined. Soil erosion was wsidespread and crop yields in the area were stagnant or even declining. A principal obstacle to farm improvement was that under the traditional system of matrilineal succession a male fairmer could not be sure from one year to the next which plots of ground he could cultivate. He was reluctant, therefore, to build ridges and bunds or to buy fertilizer, since the benefits might accrue to another family the following year from whom he could expect no compensation. 4. 2cperience at Lilongwe has demonstrated convincingly thet, by reorganizing the boundaries of the farmers' fields, creating the possibility for estaolishing title, and providing access roads and drainage ditches, farmers are induced to invest more time and money in the improvement of their farms, to plant their crops earlier and to purchase farm inputs such as improved seed and fertilizer. Even without any radical change in cropping patterns or methods of cultivation, the result in most cases has been a doubling of crop yields and a significant increase in the farmers' standard of' living. Once the feasibility of this kind of cihange has been demonstrated to the farmers, they have taken over and continued the improvements on their own, withi only supporting services and guidance from the auth3rities. The Shire Valley Agricultural Development Project for which the Association made a credit of $3.7 million in 1968, and the first phase of the Lilongwe Project are essentially similar. Both havre been successful and their progress corroborates the effectiveness of this integrated appronch to agricultural development in Malawi.  - 2 - 5. The proposed Phase II Lilongwe Project was appraised in September 1970 and recommends an extension and continuation of the program of agricultural development substantially on the lines of the first phase project. An appraisal mission is currently visiting Malawi to appraise the Karonga project, another regional package agricultural development program based on the Lilongwe approach, but .ncluding irrigated rice production. I expect to present the Karonga project to the Executive Directors in the coming fiscal year,. 6. Formal negotiations took place in Washington in March 1971. The Borrower wras represented by Messrs. Goodall E. Gondwe, Under Secretary, Treasury; Levson S. Mihowa, Administrative Officer, Treasury; E.T. Wilmot, Under Secretary, Agriculture; Andrew MIercer, Lilongwe Project Manager; Robert Reader, Economist, Lilongwe Project; and 14. Ian MacLennan, Assistant General Manager, Agricultural Development Marketing Corporation (ADMIARC). 7. Beginning in 1967, the Bank Group has made six IDA cre 'its to Malawi totalling $33.25 million. The following is a summary statement of IDA credits to Malawi as at March 31, 1971: Amount (US$ million) Credit No. Year Purpose IDA Undisbursed S-2 MAI 1967 Highway Engineering 0.49 - 102-MAI 1967 Education 6.30 1.92 112-MIAI 1968 Highways 11.50 2.39 113-MAI 1968 Agriculture (Lilongwe) 6.00 3.14 114-MAI 1968 Agriculture (Shire Valley) 3.70 2.24 178-1HAI 1970 Power 5.25 4.42 Total 33.24 of which has been refinanced 0.49 Total now outstanding 32.75 Total undisbursed 14.11 Disbursements under the existing credits were slow to begin with but the progress is now satisfactory. In the case of the two agricultura:l development projects the slow initial rate of disbursement reflected  only difficulties on the Malai side in furnishing adequate informnation to support withdrawal requests. 8. There have been no IFC investments in 1MalawJi. 9. The main priorities in developing Nlalawi's economy will remain in agriculture, infrastructure and training and they will be reflected, as in the pDst in Bank Group lending operations over the next few years. PART II - DESCRIPTIN OF THE PROPOSED CR-MIT 10. Borrower: Republic of Malawi Purpose: To help finance the four year (1972-75) second phase of the Lilongwe Land Development Program. Amount: US$7.25 million equivalent in various currencies. Amortization: In 50 years, including a ten-year period of grace, through semi-annual installments of half of 1% from July 15, 1981 thirough January 15, 1991 and of 11-2% from July 15, 1991 through January 15, 2021. Service Charge: 3/4 of 1%. Estimated Economic Return: 13% on Phases I and II combined. PART III - THE PROJECT 11. The appraisal report entitled "Phase II Lilongwe Agric-ultural Development Project" (PA-76a dated April 19, 1971) is attached. 12. The proposed project wiould be the Second Phase of the Lilongwe Land Development Program and would be carried out over the four financial years 1972 - 1975 (the financial year in Malawi ends in March). Progress of the on-going Lilongwe Land Development Project, Phase I, has been very good; physical targets will be completed almost a year ahead of schedule. With the approval of the Association, infrastructure development has been started on a further 100,000 acres, which is expected to be completed by October 1971. Under the proposed Phase II project, the Program Area will be further expanded to a total of about 1.1 million acres, and a ranch for livestock will he added. The Phase II project will include the construction of 540 rmiles of roads, 1,700 miles of drainage ditchies, 160 boreholes and 1 service centers, all of which vwould serve some 2it0,000 acres of arable land. Provision is also being made for the continuation of extension, credit and marketing services throughout the areas under the two phases.  13. The total cost of the project is estimated to be $8.59 million, of which the foreign exchange costs would be $3.35 million. The proposed IDA credit of $7.25 million would finance 84 percent of the total project costs and 74 percent of the local cost. The justification for local cost financing is discussed in paragraph 31. The Government's contribution and the project farmers' participation in the project wrill respectively amount to 11 percent and 5 percent of total project costs. The main items financed by the proposed credit would be buildings, roads, and land development; service center units; extension, training and marketing; and ranch development. 1. The existing Phase I project is being carried out by a section of the Ministry of Agriculture and Natural Resources (IMNR), headed by a Program Manager. Management at the project level has been good, but inter-ministerial coordination could be improved. It is proposed therefore to strengthen the project organization by providing for adequate supporting staff for the Program Manager and a project liaison committee under MANIR to coordinate the activities of all the authiorities concerned with both the existing and the proposed project. Provision Es also being made for training of project and extension staff. The Farmers Marketing Board, which is being reorganized and renamed the Agricultural Development Marketing Corporation (ADVMAC), will be responsible for the construction of markets and storage, and for purchasing the crops produced in the area. While project staff *will provide agricultural credit for farmers' inputs, credit repayments wrill be collected by ADIKARC when farmers sell their produce at its markets. To facilitate project management and farm development the program area has been divided into units of about 20,000 acres; fourteen have been established during Phase I and twelve more will constitute Phase II. Targets for physical development have been laid down for each unit for road construction, rainfall diversion channels, markets and storage. During the first two and a half years after establishing a unit, one extension wsorker would serve 200 farm families, the ratio being reduced to one worker for 400 families in the following two and a half years. Assurances have been obtained from the Malawi Government that adequate agricultural extension services would continue to be provided in the program area after the project is completed. 15. The Phase I project did not include development of the livestock potential in the Lilongwe area, which is considerable. The proposed Phase II project envisages the development of a ranch of about 161,000 acres in the Dzalanyama Forest Reserve Area to provide upgraded feeder stock for stall fattening by program area farmers. The ranch would be started initially with Zebu type animals purchased locally. 16. Procurement of vehicles, machinery, equipment, fuel and fertilizers would be subject to international competitive bidding,, except for individual tenders totalling less than $25,000. The Project's building program of housing and stores costing about $800,0C0 would be too small to attract international competition. These would be subject to local competitive tender and there are enough local contractors to ensure an adequate degree of competition. It has been  necessary to start development of the project ranch to prevent delays in livestock development to be included in Phase II. Satisfactory procurement procedures have been followed and it is recommended that past expenditure on ranch development from October 1970 and amounting to about $105,000 be financed. 17. Primary benefits from the IPhase I and Phase II projects would be the increased production of maize, groundnuts and beef with a resultant annual foreign exchange earnings or savings amounting to about $5 million at full development. The ecology of the developed areas would be substantially improved by the project. The slow wasting of soil by erosion would be halted by the construction of drainage ditches and contoured ridges. Timber planting on non-agricultural land would assist in soil and water conservation. Boreholes for potable water would help to improve the human environment by reducing water borne diseases. The average net income to the farmer of a 10 acre holding in the project area would increase from about $96 a year before develop- ment to about $170 at full development. As the experience of Phase I has shown, an increase in income of this order provides a satisfactory incentive to the farmers. 18. The calculation of economic rates of return has to take into account that the proposed project is part of a continuing development; the significant rate of return is that of Phase I and Phase II at full development taken together. That is estimated to be about 13 percent without charging for family labor. PART IV - LEGAL INSTRUMENTS MMD AUTHORITY 19. The draft Development Credit Agreement between the Republic of Malawi and the Association, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately. 20. The draft Development Credit Agreement specifies that Hvlalawi shall relend a part of the proceeds of the Credit to the Agricultural Development and Marketing Corporation (ADI11RC) on terms and conditions satisfactory to the Association (Section 3.03(a)). Provision has also been made to ensure that adequate agricultural extension and credit services will be maintained during and after completion of the Project (Sections 3.06 and 3.07). PART V - THE ECCIOMY 21. An economic report entitled "The Current Economic Situation and Prospects of N4almil' (AE-5a dated December 12, 1969) was distributed to the Executive Directors on January 7, 1970. A basic data slheet is annexed.  - 6 - 22. i4alawJi became independent with the brealc-up of the Federation of Rhodesia and Nyasaland in 1964. At that time, Halawi, known as Nyasaland, was the poorest of the three countries forming the "Federation" and received budgetary support from the United Kingdom amounting to Kwacha (K) 13 million or just over LO% of its current expenditures. 23. Since then, GDP at constant prices has risen by about 5.3% a year principally as a result of growing productivity in agriculture, the successful introduction of import substitution industries and a substantial rise in investment. In addition certain external factors had played a part, particularly in recent years, such as the boycott of Southern Rhodesia by a large number of countries wihich lead to higher tobacco exports from Malawi. Furthermore, the price index of Nilalawian exports rose by about 23% between 1967 and 1970, particularly because of price increases for tobacco, tea and groundnuts. 2h. Since independence, agricultural yields and production have risen. W1ith a rapid expansion of agricultural extension services, new techniques and improved inputs were introduced. There was a sharp rise in the application of fertilizers and insecticides, an increasing use of hybrid maize and an increase in early planting. Yields and quality therefore improved. 25. Industrial production rose by 22% a year on the average since independence and now accounts for 9% of GDP. The Government was successful in encouraging the establishment of a number of import substitution industries by providing industrial sites and services and by permitting drawbacks of custom duties paid on material used in the manufacturing of exported articles. It also introduced a generous system of initial depreciation allowances and, in certain cases, where it was felt that the investment was large in relation to the size of domestic market, it also granted an exclusive right of production in Malawi for a limited time to the new enterprise. The scope for further import substitution industries now seems almost exhausted. 26. Gross investment rose from 11% of GDP in 1964 and 1965 to 17% for the last two years. Part of this increase was financed by a rise in net capital inflow from K 6 million in 196h-1965 to K 14 million in 1969-1970 and part was covered by an increase in domestic savings. While in 1964 domestic consumption almost equalled GDP and gross domestic saving in the following year was only K 1 million, Malawi now saves about K 10 million annually which represents about 23%O of total investment. However, some of tlhe increased in-vestment is accounted for by projects which were undertacen earlier tihan the growth of demand would justify. These include a railway link to the port of Nacala in Nozambique, which is now completed, a new capital now under construction at Lilongwe and possibly some investments in roads. 27. Perhaps the clearest improvement in performance was in tha fiscal field. The overall public deficit declined from K 12 million in 1964 to K 3 million in 1970/71. There was a slight improvement in the position of the public entities, but the major improvement was in central government budgets. The current deficit was halved to reach  - 7 - K 7 million in 1970/71 and, British budgetary support was consistently reduced until, in the current year 1971/72, it is expected to finance only 10% of recurrent expenditures as compared with 40% in 1964. 28. Revenue increased by over 15% per year between 1964 and 1970/71 against a 7% expansion of recurrent expenditure. While the largest part of the rise in current revenue was a result of an increase in the rates of indirect taxation part of it was due to the process of monetization of the economy. The progressive income tax structure also played some role as did the gradual using up of the initial capital and special depreciation allowances for new industries, some of which were introduced shortly after independence. 29. Last year the Council of Iiinisters ap)roved certain overall rates of increase for the different types of recurrent expenditure for the next 3 years in order to contain the overall rise in recurrent expenditures to 6% a year. Furthermore, the Government's objective is to eliminate British budgetary support by 1974, except for the "topping up" of salaries of British expatriate civil servants in Nalawi. The chance tlat the Government will succeed in this objective seems reasonably good. 30. Population was thought to be increasing at 3% a year, but as a result of a new survey the rate is now believed to be between 1.9 to 2.5%. The structure of population and the high fertility ratios, in addition to the pressure of population on land, could create a serious der;iographic problem, particularly if there is some improvement in health services on which expenditure is at present very low. 31. The service on Malawi's external public debt as of December 1970 amounted to $5.7 million or about 9 percent of export earnings. According to an estimate prepared by the i4alawi authorities, if new borrowing amounts to K 24 million ($29 million) a year, which is not an unreasonable figure, the debt service will rise to 17 percent by 1978/79, even if only 10 percent of the borrowing is on hard terms and if exports grow by 7 percent a year. Moreover, since the Malawri Government has first to eliminate the need for external budget support before it can make any net contribution to financing investment, it will have to rely to a large extent on external aid for some considerablde time. Hence, H4alawi's need for aid on concessionary terms is clear. Because of the high proportion of investment which rnust be financed by external assistance, it is necessary for aid to cover a substantial portion of total project costs, including some local expenditure. PART VI - COTPLIANCE WITTH ARTTICIZS OF AGRM-04T 32. I am satisfied that the proposed development credit woulld comp'y with the Articles of Agreement of thle Association.  - 8 - PART VII - RECOMMENDATION 33. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachment Washington, D.C. April 19, 1971  BASIC DATA (K 1 = US $1.20) Area 119,000 square kilometers Population (estimate 1970) Total 4.4 million Rate of growth 1.9 to 2.5 percent per year Density 37 per square kilometer Political Status Independent Republic (Independence on July 6, 1964) Gross National Product (1970) at market price K 252 million per capita K 57 $ 68 average annual growth rate (1964-1970) at current prices 9.8 percent at constant prices 5.3 percent Gross Domestic Investment (1970) K 42.6 Industrial Origin of GD? (1970) in Percent of Total Agriculture, Forestry and Fishing 34.7 M4ining & Quarrying .2 Manufacturing 10.0 Building & Construction 5.9 Water & Electricity 1.2  - 2 - Industrial Origin of GDF (19'() in Percent of Total (continued) Transport and Communication 4.8 Distribution 8.7 Banking, Finance & Insurance .3 Community Services 10.0 Other Services 24.2 Gross Domestic Product 100.0 (non-monetary sector) (4h.0) Fin5ncinv of Public Development Expenditures (K million) 1964 1967 1970/71 Development Expenditures & Other Public Sector Investments 8.8 13.3 4h40 Public Savings -12.3 -10.2 -3.4 Current Budget Support 14.L 11.9 6.9 Development-Domestic Toans .1 2.8 5.2 Development-External Loans & Grants 3.6 6.o 33.5 Changes in Balances of Government F'unds -3.0 -2.8 -1.8 Balance of Paynents (K million) 1964 1967 1970 Exports 2[.L 40.4 4[.4 Imports 28.6 50.2 68.4 Trade Balance (-h.2) (-9.8) (-20.0) Services (net) -1h.o -20.8 -20.4 Transfers 17.4 17.8 14.6 Current Account Balance -.8 -12.8 -25.8  3 Balance of Payments (K million)(continued) 1964 1967 1970 Private Long-term Capital 1.4 5.2 1,0 Public Long-term Capital 2.8 8.8 26.4 Others including Errors & Omissions - -1.8 3.6 Capital Account Balance 4.2 12.2 31.0 SDR - - 1.6 Overall Balance +3.4 -.6 +6.8 Official Foreign Exchange Reserves, end of period ($ million) 22 22 30 IMF Position Quota $11.25 million Drawings as of Decem'er 31, 1970 nil Initial allocation of SDR's $1.89 million External Public Debt (1970) Total outstanding as of December 31, 1970: Disbursed $117.4 million Including undisbursed $152.1 million Debt Service Ratio (percentage) 9 Eastern Africa Department, April 19, 1971