Malawi - Second Power Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1306-MAI REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO MALAWI FOR A SECOND POWER PROJECT August 22, 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 It may not be published, quoted or cited without Bank Group authorization.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 responsibility for the accuracy or completeness of the report.  Currency Unit Malaiwi Kwacha (MK) US &% MK 0.82 L1 MK1 US t.22 Li 1/ The Yalawi Kwacha is pegged to the pound sterling which is floating. Above rates reflect the situation as of February 1973, the time of appraisal of the project. Fiscal year: April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECONMMDATION OF THE PRESIDENT TO THE EXECUTTVE DIRECTORS ON A PROPOSED DEVELOPMNT CREDIT TO MALAWI FOR A SECOND POWER PROJECT 1. I submit the following report and recommendation on a proposed development credit to I+hlawi of US$7.5 million on standard IDA terms to help finance a power project. The proceeds of the credit would be relent to the ELectricity Supply Cormassion of Malawi for a term of 24 years, including four years of grace at an interest rate of 7.5 percent per year. PART I - THE ECONOMY 2. A report, "'Recent Economic Developments and Prospects of Nhlawil (67a-YiAI), was distributed to the Executive Directors on April 17, 1973 (R73-77). Country data are provided in Annex I. 3. Since independence in 1964, Y.lawi Ts economy has grcim an average by just aver 7 percent a year in real terms, though with a per capita income of about $90, Nalawi remains one of the poorest countries in the world, and is included in the United Nations List of least developed countries. Natural resources are limited to moderately fertile soils, substantial -water resources and a climate favorable to crop production. The economr is dependent on agriculture, and subject to annual fluctuations in output. For example, GDP decreased in real terms in 1968, but increased by 13 percent in 1971. 4. A substantial savings and investment effort and generally efficient management of the economy have contributed to econoimic growth in the past. At independence, domestic savings were negligible and gross domestic investment wa, 8.7 percent of GDP. By 1972, domestic savings had increased to 9 percent of- G-Di and gross domestic investment to 20 percent of GDP, leaving a resource gap of US$48 million, 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 1972, however, improvements in tax administration and some changes in the tax system caused domestic revenue to rise by 16 percent a year, while the average annual increase in recurrent expenditure was only 8 percent. Consequently, the deficit in the recurrent budget di:ini shed steadily and the financial position of the Government is expected to continue to improve. The Government has increased its outlay for development at the average rate of 25 percent annually in the last five years with heavy emphasis on infrastrncture and agriculture. Infrastructure investments included the construction and improvement of roads and emphasized the operning up of the central and northern regions of the country. The rail link to Nacala in Nbzambique, completed in 1970, has provided a second outlet to the sea, additional to the already existing railway to Baira. Since 1969, the construction of a new capital at Lilongwe has taken up about 10 percent of the Goveruwent s development expenditures. After 1968, a nurnber of large agricultu-ral schemes, incorporating  inputs, miarketing and some rnfrastrncttre, were started near Salina (with GermaTln aid) and near Lilongwe, Chikwa-wa and Karonga (with IDA credits)0 ir>P oximately one--' fth of the Government's investment program has been spent on agr c-.Ltural projects ln the past, th.ough more recently greater emphasis is being placed or this sector. f a total p-blic investment program of US$38 million per arnualm for 1972/73 to 1974l/75 kclose to the average level fo, the two previous years), mne-third is to be spen-t on investment in agriculture. The Goverment's Statement of Development Policies emphasizes that with tle couriCryS 1 liiated enao-ment of resources, development strategy should concentrate on raising the produactivity of small farmers. 6. In the future, private investments are expected to b6 equal to those of tne ou!zl1ic sector, with approx-iimately one-tenth of private sector `i`_nvestie.n.t i-!^ thae non-monekarir sector, 'The Large size of private capilal foroaticno envi.sage-d sho-,ws that the private sector is ex-pectedi to continue to play az. impov'tu-r-rL in econadnc development, Oatside agriculture, domestic private capital s nc concentrated in s,lrl' enterprises mairly in raral trade and transport, Large- scale business is doriminatd 'by foreigni-o-wned enterprises which have foLnd a favo-able investment clim,rate In Mlawi. 7, As a result of the &overnyerrb ts present invest-ment pilicy ar>.-ne -,-.,he ing of past investment- projects, an amrnual growth of 1the economy of Percen':- in th'e 1970s seems _likely. Ma-ch oF' this groowth ll OccCur in t._ ag7,riC..'al sector, -wdhich will probably continue to increase its s-Urc..u- for- expo Despite the high anticipa-ted growth of exports, it is ILhely that tr,e com.u`y<sS impor>t requirements wll, as in. recent years, grow more rapidly n 19'729 the deficit on goods and se-vices -was US$4`, million equiL-nalent., a',int . i nez tharn in7 1971. Capital infl, ow has been adequa-te, ho7,evei-, to finane