Malawi - Entrepreneurship Development and Drought Recovery Project

 Entrepreneurship development and drought recovery project Report No: ; Type: Report/Evaluation Memorandum ; Country: Malawi; Region: Africa; Sector: Business Environment; Major Sector: Private Sector Development; Project ID: P001640 The Malawi Entrepreneurship Development and Drought Recovery Program (EDDRP), supported by Credit 2396-MAI for US$120 million, was approved in FY92. IDA approved a Supplemental Financing Arrangement of SDR 27.6 million in November 1994 in response to the drought of 1994-95. In addition, IDA reflows of SDR 10.6 million were allocated to the credit in 1993-95. The credit was disbursed on schedule in two tranches. The European Union, the Governments of Japan, Germany and Switzerland, and the African Development Fund provided cofinancing and parallel financing of US$135.5 million. The Africa Regional Office prepared the Implementation Completion Report (ICR), which includes the Borrower’s comments as an annex. The EDDRP was designed to promote macroeconomic stabilization, broaden economic participation, and reduce the widespread starvation caused by prolonged droughts. The objectives were to be realized through a set of mutually reinforcing policy measures with several specific goals. These included improving the environment for entrepreneurial activity and investment in labor-intensive activities, increasing access to capital, deepening financial markets, reorienting fiscal and labor policy towards human capital development, and supplementing domestic maize supplies with commercial imports. Despite the Government’s preoccupation with a political transition and a macroeconomic crisis, the results of the EDDRP were in general satisfactory. The EDDRP coincided with the country’s transition to a multi-party system. The uncertainties of the political transition were exacerbated by a prolonged macroeconomic crisis precipitated by three droughts in four years, substantial terms of trade losses, and disruptions in aid flows from the donor community. When the project closed in early 1996, however, stringent fiscal and monetary measures had curtailed inflation. Growth had been restored, foreign reserves replenished, and the liberalized exchange rate system stabilized. To encourage private sector participation in economic activity, the Government implemented reforms aimed at improving the investment climate. These reforms overhauled tax and tariff structures, expedited the investment approval process, liberalized agricultural prices and markets, and provided smallholders with access to cash crops, such as burley tobacco, that had previously been available only to large farms. IDA funds were used to finance commercial grain imports in 1992-93 and 1994-95, enabling the Government to stabilize consumer prices and target emergency supplies to the most vulnerable groups. The ICR rates the outcome of the operation as satisfactory and sustainability as likely. It does not rate institutional development impact. The Operations Evaluation Department (OED) agrees with the outcome and sustainability ratings and rates the institutional development impact as modest. Bank performance is rated as satisfactory despite the fact that project design did not explicitly include any policy measures related to the liberalization of smallholder agriculture. This problem was resolved before the second tranche release based on sector work completed during the project. The EDDRP provides several lessons. First, a country can achieve satisfactory macroeconomic stabilization despite severe external shocks if the Government is fully committed to an adjustment program. Second, flexibility in project design and implementation allows for a quick response to new information or emerging problems. Sector work undertaken prior to second tranche release led to a revised reform agenda which addressed much needed liberalization of smallholder agriculture. And finally, broadening economic participation and promoting entrepreneurship requires the speedy removal of administrative constraints. Though the ICR does not include the completion mission’s Aide Memoire, it is adequate. Comments from the Borrower are incorporated in the report, but only one of the five cofinanciers provided comments a requested. No audit is planned.