Malawi - Entrepreneurship Development and Drought Recovery Program Project (EDDRP)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16161 IM1PLEMENTATION COMPLETION REPORT MALAWI ENTREPRENEURSHIP DEVELOPMENT AND DROUGHT RECOVERY PROGRAM (EDDRP) (CREDIT 2396-NAI) December 9, 1996 Country Operations Department III Southern Africa Africa Region 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 authorization.  CURRENCY EQUIVALENTS Currency Unit Malawi Kwacha (MK) US$1.00 MK 15.3 (March 1996) ABBREVIATIONS AND ACRONYMS ADMARC - Agricultural Development and Marketing Corporation ASAC - Agricultural Sector Adjustment Credit BMR - Budget Management Review BOP - Balance of Payments CAS - Country Assistance Strategy CBI - Cross Boarder Initiative for Eastern and Southern Africa CCFF - Compensatory Contingency Financing Facility CG - Consultative Group Meeting COMESA - Common Market for Eastem and Southem Africa CPPR - Country Portfolio Performance Review ECU - European Currency Unit EDDRP - Entrepreneurship Development and Drought Recovery Program EDI - Economic Development Institute EPZ - Export Processing Zone ESAF - Enhanced Structural Adjustment Facility FMIS - Financial Management Information System FRDP - Fiscal Restructuring and Deregulation Program FUA - African Development Fund GOM - Government of Malawi IBRD - International Bank of Reconstruction and Development ICR - Implementation Completion Report IDA - International Development Association IMF - International Monetary Fund ITPAC - Industry and Trade Policy Adjustment Credit MASAF - Malawi Social Action Fund MDC - Malawi Development Corporation MIPA - Malawi Investment Promotion Agency MK - Malawi Kwacha MSB Malawi Savings Bank MT - Metric Tons MTEF - Medium-Term Expenditure Framework PAR - Project Audit Report PCR Project Completion Report PFP -- Policy Framework Paper PSI Pre-Shipment Inspection PSIP Public Sector Investment Program RBM - Reserve Bank of Malawi SAR - Staff Appraisal Report SGR - Strategic Grain Reserve SME - Small and Micro-Enterprise SOE - State Owned Enterprise SPA - Special Program of Assistance to Low-Income Debt-Distressed Countries in Sub-Saharan Africa TCC - Tobacco Control Commission TEP - Temporary Employment Permit TOR - Terms of Reference VAT - Value Added Tax FISCAL YEAR (FY96/97) April 1,1996-March 31, 1997 Vice President C. Madavo Director B. Kafka Manager A. Aksoy Task Team Leader H. Schafer/A. Ahsan  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT MALAWI ENTREPRENEURSHIP DEVELOPMENT AND DROUGHT RECOVERY PROGRAM CREDIT 2396-MAI TABLE OF CONTENTS PREFACE ........................................................................................ i EVALUATION SUMMARY ......................................................................................... iii BACKGROUND .........................................................................................1 PROGRAM OBJECTIVES ........................................................................................ 3 ACHIEVEMENT OF PROGRAM OBJECTIVES . ........................................................................................ 3 Macroeconomic Performance ........................................................................................ 3 Structural Reforms ........................................................................................ 4 Drought Component ........................................................................................ 10 IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROGRAM ........... ............................. 11 PROGRAM SUSTAINABILITY .........................................................................................1.1 IDA PERFORMANCE ........................................................................................ 12 BORROWER PERFORMANCE ......................................................................................... 14 ASSESSMENT OF OUTCOME ........................................................................................ 14 FUTURE OPERATION ........................................................................................ 15 KEY LESsoNs LEARNED ........................................................................................ 15 TEXT, FIGURES AND BOXES Box 1: IMPORTANT EVENTS DURING EDDRP IMPLEMENTATION ..........................1................................... I FIGURE 1: TERMS OF TRADE EFFECT ........................................................................................ 2 TABLE 1: M ACROECONOM IC INDICATORS ........................................................................... .......... 3 FIGURE 2: NOMINAL EXCHANGE RATE . ........................................................................................ 6 FIGURE 3: EFFECTIVE NoMINAL AND REAL EXCHANGE RATE INDICES ............... ..................................... 7 STATISTICAL ANNEX TABLE 2: SUMMARY OF ASSESSMENTS . ........................................................................................ 18 TABLE 3: RELATED BANK LOANS/CREDITS ..................................................................................... ... 20 TABLE 4: PROJECT TIMETABLE ...................... .............................................................. . .. 21 TABLE 5: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL ............................... ........ 21 TABLE 6: KEY INDICATORS FOR PROJECT IMPLEMENTATION ........................ .................................. ........ 22 TABLE 7: KEY INDICATORS FOR PROJECT OPERATION . ............................................................................ 23 TABLE 8: STUDIES INCLUDED IN PROJECT ........................................................................................ 24 TABLE 9: IDA FINANCED PROJECT COSTS ....................................................................... 26 TABLE IO: PROJECT FiNANCING ....................................................................... 26 TABLE II: STATUSOFLEGALCOVENANTS ....................................................................... 27 TABLE12: BANK RESOURCES: STAFF INPUTS ....................................................................... 28 Table 13: BANK RESOURCES: MISSIONS ........................................................................ 28 ANNEX: COMMENTS BY AGENCIES OF GOVERNMENT OF MALAWI AND CO-FINANCIERS ................................................................. 29 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 authorization.   i Summary IMPLEMENTATION COMPLETION REPORT MALAWI ENTREPRENEURSHIP DEVELOPMENT AND DROUGHT RECOVERY PROGRAM CREDIT 2396-MAI PREFACE This is the Implementation Completion Report (ICR) for the Malawi Entrepreneurship Development and Drought Recovery Program (EDDRP), for which Credit 2396-MAI in the amount of SDR 85.4 million equivalent was approved on June 23, 1992 and made effective on July 7, 1992. The First Tranche of the Credit (SDR 57 million) was disbursed upon effectiveness. The release of the Second Tranche (SDR 28 million) was approved by IDA in September 1993. A Supplemental Financing Arrangement of SDR 27.6 million was approved by IDA in November 1994. IDA Reflows in the amounts of SDR 4.3 million, SDR 3.1 million and SDR 3.2 million were allocated to the Credit in 1993, 1994 and 1995, respectively. The Credit was closed on March 31, 1996, 18 months after the originally envisioned closing date to accommodate disbursement of the Supplemental Financing Arrangement. Cofinancing and parallel financing were provided by the Government of Japan (US$70.0 million equivalent), the European Union (US$39.3 million equivalent), the Government of Germany (US$10.5 million equivalent), the Government of Switzerland (US$1.7 million equivalent), and the African Development Fund (US$14.0 million equivalent). A satisfactory performance under the EDDRP led to the preparation of a follow-up adjustment operation, the Fiscal Restructuring and Deregulation Program (FRDP) which deepens and strengthens policy reforms that were initiated under the EDDRP. The ICR was prepared by a team led by Hart Schafer, Senior Country Economist, Macro, Industry, and Finance Division of the Southern Africa Department and comprised of Ashok Chakravarti (Consultant), and Horst Goemann (Summer Assistant). The draft ICR was reviewed by Barbara Kafka (Country Director) and Gene Tidrick (Lead Economist. Ahmad Ahsan (Country Economist) processed the ICR in the final stage. Different agencies of the Government of Malawi, the borrower, and a cofinancier (Government of Switzerland) provided comments that are included in the Annex to the ICR. Comments have been sent from Malawi by the Ministry of Finance, Ministry of Commerce and Industry, Ministry of Labor and Manpower, Malawi Investment Promotion Agency, and the Malawi Savings Bank. Preparation of the ICR was begun during the IDA's final supervision/completion mission, May 13-24, 1996, and is based on material in the project file and findings of the completion mission.  Summary ii The Task Managers for the EDDRP were Kathy Krumm during Preparation and through Board Presentation and Hart Schafer during Implementation. Ataman Aksoy is the Technical Manager in charge and Barbara Kafka is the Country Director for Malawi.  iii Summary IMPLEMENTATION COMPLETION REPORT MALAWI ENTREPRENEURSHIP DEVELOPMENT AND DROUGHT RECOVERY PROGRAM CREDIT 2396-MAI EVALUATION SUMMARY 1. Background. The implementation of the EDDRP, the 6th adjustment operation for Malawi, coincided with both the country's political transition from 30 years of one-party rule to a multiparty democracy and a series of external shocks (including three droughts in four years, substantial terms-of-trade losses, and suspension of non-humanitarian aid by bilateral donors and the European Union). The EDDRP effectively became a holding operation to keep the economy on track during a prolonged macroeconomic crisis which was, at least in part, the result of these exogenous shocks and Malawi's political transition. During fiscal 1995/96, the final year of the EDDRP's implementation, the first phase of macroeconomic stabilization was attained after the Government introduced a cash budget, stricter expenditure controls, and strengthened foreign reserve management in the context of a liberalized exchange rate. 2. Despite the Government's preoccupation with the political transition process and the macroeconomic crisis, the overall implementation of structural policies under the EDDRP was satisfactory. On balance, the program objectives have been achieved - albeit with substantial delay and only as a result of further strengthening and expanding the policy agenda after the new Government took office in May 1994. With the establishment of macroeconomic stability within the context of a much more open and liberalized environment, the beginning of a significant private sector supply response is emerging in the smallholder agricultural sector. A more pronounced supply response in the non- agricultural sector is expected to gain momentum as nominal interest rates and inflation rates decline further. 3. Program Objectives. The objectives of the EDDRP were to broaden economic participation, to enable a sustainable supply response, and to prevent widespread starvation as a result of severe drought through a set of mutually reinforcing policy measures in the following areas: * Improvement of the environment for entrepreneurial activity and investment in labor-intensive activities; * Expansion of access to financial capital and deepening of financial markets; * Reorientation of fiscal and labor policy towards human capital development; and * Procurement of commercial maize imports. 4. Implementation Experience and Results. The EDDRP helped establish the legal basis (1992 Investment Promotion Act) and the institutional capacity for a broad range of  Summary iv incentives to support investment activity, including establishment of the Malawi Investment Promotion Agency (MIPA). According to investors, MIPA's direct involvement on behalf of investors actually results in a speedier and more efficient investment process and therefore it is easier today to set up a business in Malawi than it was 5 years ago. However, despite the good progress, substantial work remains in the area of investment promotion to make the approval process more transparent and automatic. 5. Support to the small and micro-enterprise (SME) sector, one area of interest to the EDDRP, remains fragmented and insufficient. Although SEDOM and INDEFUND have moved to charge market related interest rates, credit to the informal sector and SMEs remains restricted. The supporting institutions (SEDOM, DEMATT, MEDI, MIPA, MEPC, INDEFUND) who provide training, or credit, or facilitate investment for SMEs (with some trying to provide all three support functions) are highly inefficient - lacking coordination and complementarity. The Government was unable to carry out a review of these institutions with a view to merge where appropriate and to close those that were not viable or not effective. Consequently, the proliferation of support institutions involved in the SME sector still needs review and steps will also need to be taken for consolidation and rationalization of these institutions in order to develop a comprehensive strategy for developing SMEs. 6. During implementation of the EDDRP, Malawi achieved a degree of economic openness that went beyond the targets set out under the program. Malawi's indirect tax system has been rationalized to a considerable extent. Surtax on domestic production and imports were harmonized in 1993 and maximum tariff rates were reduced from about 100% to 40%. A market determined foreign exchange system was implemented in February 1994 which is one the most significant achievements under the EDDRP. In the long run it will have an impact on external competitiveness and export diversification. 7. The RBM has achieved the objectives of more market-oriented monetary control and has broadened the range of monetary instruments. Under the EDDRP, the RBM switched from issuing RBM Bills to periodic 90-day T-Bill auctions in 1994. Subsequently the RBM improved its open market operations with the introduction of 30-, 61-, 182-, and 271-day T-Bills and more frequent auctions. 8. The RBM's strategy to foster competition in the banking sector has centered around promoting the entry of new banks. Three new retail banks entered the sector in Malawi over the past three years and have already had an important catalytic effect in unleashing banking competition. While the EDDRP conditions were met with regard to restructuring of the Post Office Savings Bank, further progress has been extremely slow. However, comments by the management of the Malawi Savings Bank on this ICR, presented in the annex, suggest that there has been some progress in recent months. 9. The GOM's pro-poor policies were significantly advanced under the EDDRP. The objective of increasing nominal and relative expenditure allocations to the social sectors such as education (in particular primary education), health, and rural infrastructure were all achieved. In order to benefit the rural population - who account for almost 90 percent of the poor - the EDDRP has helped remove binding constraints to smallholder agricultural  v Summary activities, including the removal of ADMARC's monopsonistic position, production constraints on smallholder burley tobacco, and entry barriers for private traders in the markets for agricultural produce and inputs. 10. The objective of the drought recovery component of the EDDRP was to help close the unanticipated drought-related external financing gaps in 1992/93 and 1994/95 and help ensure that external funding levels were adequate for drought-related imports to achieve food security, prevent cuts in priority social sector expenditures, and help stabilize commercial maize prices by augmenting the limited domestic supply through imports. IDA funds equivalent to about US$70 million were used to finance 148,000 MT and 100,000 MT of commercial maize imports in 1992/93 and 1994/95, respectively. The procurement of adequate quantities of commercial maize was a critical element in the Government's efforts to (a) stabilize consumer prices at affordable levels so that free maize distribution could be targeted only as a last resort for assisting the very poor, and (b) to remain on the adjustment track. 11. Summary of Findings, Future Operations, and Key Lessons Learned. Based on IDA's ex-post evaluation norms, the outcome of the EDDRP is classified as overall "satisfactory". This assessment is based on the following elements: (a) the GOM implemented its structural policy agenda - with very few exemptions - and stayed on the adjustment track despite experiencing a series of exogenous shocks and going through a period of major political transition; (b) in several areas implementation of policy reforms went beyond measures agreed to under the EDDRP, and the adjustment agenda was fitted to the evolving macroeconomic situation and the new political dispensation; (c) today Malawi's economy is more open than ever before; (d) the domestic markets have been liberalized; (e) the macroeconomic situation has been turned around and key macroeconomic fundamentals have been put in place; and (f) the policy agenda is being deepened under the follow-up FRDP. Achievements on the ground combined with further deepening of policies under the FRDP are likely to result in a substantial supply response and increased equity in the economy. * Lesson #1: With strong Government commitment a country can stay on the adjustment course despite large unanticipated external shocks. The fact that Malawi stayed on the adjustment course, recovered from continuous macroeconomic crises and exogenous shocks, and even accelerated structural reforms is almost exclusively attributable to strong Government commitment during the latter part of EDDRP implementation. By the same token, the EDDRP would have failed without the sea change in ownership and commitment under the new GOM. Moving ahead with this operation in 1992 was a risky undertaking in view of the previous regime's reluctance to commit to major structural reforms in the economy. * Lesson #2: Adjustment in countries with extremely low income levels - like Malawi - is a long-term process and will continue into the next decade. * Lesson #3: Cross-conditionality with other IDA projects resulted in "marginalizing" some objectives and created supervision problems. * Lesson #4: Flexibility in the design and implementation of the program to respond to new information or emerging problems during implementation is criticalfor success.  Summary vi * Lesson #5: Irreversible up-front actions enhance prospects for successful implementation. * Lesson #6: Timely BOP support to address natural disasters can be extremely important for keeping the overall adjustment program on track  I Main Report IMPLEMENTATION COMPLETION REPORT MALAWI ENTREPRENEURSHIP DEVELOPMENT AND DROUGHT RECOVERY PROGRAM CREDIT 2396-MAI BACKGROUND 1. The Government of Malawi Box 1: Important Events during EDDRP (GOM) implemented the policies Implementation supported under the EDDRP - the sixth Negotiations * February 1992 Bank supported adjustment operation CG Meeting C* May 1992 since 1981; under this operation a wide Board Presentation June 1992 range of structural reforms were Drought Crop of 1992 implemented. However, partly due to Multiparty Referendum * June 1993 the exogenous shocks that coincided Release of 2nd Tranche * September 1993 with the EDDRP (three droughts in Drought Crop of 1994 four years and terms-of-trade shocks Multiparty Elections May 1994 led to losses in income equivalent to EDDRP Supplement