Malawi - Fiscal Restructuring & Deregulation Program

 ICRR 10869 Report Number : ICRR10869 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 03/12/2001 PROJ ID : P001648 Appraisal Actual Project Name : Fiscal Restructuring & Project Costs 193.5 193.5 Deregulation Program US$M ) (US$M) Country : Malawi Loan/ US$M ) 106.4 Loan /Credit (US$M) 108.7 Sector (s): Macro/Non-Trade Cofinancing 84.7 84.7 US$M ) (US$M) L/C Number : C2853 Board Approval 96 FY ) (FY) Partners involved : Denmark, Japan, Germany Closing Date 03/31/1998 03/15/2001 (KfW) Prepared by : Reviewed by : Group Manager : Group : 2. Project Objectives and Components a. Objectives The program aimed at two broad areas : 1. Fiscal restructuring -including (i) reorienting public spending to pro -poor areas (ii) restoring fiscal discipline including implementing a Medium Term Expenditure Framework; (iii) initiating comprehensive civil service reform; and (iv) furthering tax and tariff reforms. 2. Deregulation - including (a) removing remaining price, marketing and other constraints on small -holder agriculture; (b) removing binding constraints to broad -based private sector entry and development; and (c) initiating privatization of state-owned enterprises. b. Components The credit consisted of (i) a $74.4 million first tranche disbursed on effectiveness; (ii) a $30 million second tranche linked to civil service reforms; and (iii) a $2 million technical assistance component to finance studies and consultant services. c. Comments on Project Cost, Financing and Dates The first tranche was disbursed on schedule . The second tranche was delayed by nine months and required a Board waiver of conditions related to civil service reform . The credit has not yet been closed due to delays in implementing the $2 million technical assistance component . It is scheduled to close in March 2001, three years behind the original closing date . 3. Achievement of Relevant Objectives: 1. Fiscal restructuring: (i) Good progress was made on simplifying and reducing tariffs and enhancing export incentives. (ii) Expenditures on health and education were increased (although still remain inadequate to maintain service quality). (iii) Only moderate progress took place in institutionalizing the MTEF due to limited ownership and weaknesses in the underlying budget progress . (iv) Periodic bouts of loosened expenditure control adversely affected macroeconomic stability . (v) While civil service reforms reduced the number of ministries and contracted out some government functions, the size and functions of the civil service remain the same . 2. Deregulation: (i) Agricultural markets were further liberalized, although the dominant presence of the state -owned marketing corporation (ADMARC) continues. (ii) Resolution of some obstacles to private investment such as temporary employment permits and access to serviced land was commenced and completed under FRDP II . (iii) The legislative and regulatory framework for privatization was established and some 25 companies were privatized. However, the issue of the large public and quasi -public firms impeding the competitive environment and having interlocking ownership with the major banks was not resolved . 4. Significant Outcomes/Impacts: The liberalization and stabilization measures under the program helped the Malawian economy show significant improvements in 1995-97 - inflation was reduced, small-holder participation in the economy increased significantly, and a few promising manufactured exports emerged . However, after 1997, GDP growth slowed once again, following further bouts of weakened fiscal management, macroeconomic instability, and terms of trade losses . 5. Significant Shortcomings (including non-compliance with safeguard policies): Both the Bank and the Ministry of Finance underestimated the adverse political implications of some actions - these proved extensive and resulted in limited progress on civil service reform, maize pricing and marketing, and land policy. The implications of the pace and extent of economic reforms in major regional trading partners were not factored into the program. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately Satisfactory While good progress was made on several fronts, only limited progress took place in key areas, including civil service reform; privatization; agricultural pricing and land policy; and consistent control of public expenditures. Institutional Dev .: High Modest Several key institutional development components were implemented only modestly - i.e. MTEF, civil service reform, land policy. Sustainability : Highly Likely Likely Given continued dependence of the economy on a few commodity exports, there is a chance that external shocks or further episodes of fiscal slippage could upset stability and send the overall program off track. Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: (1) The project illustrates the synergy between adjustment and stabilization - reaping the benefits of structural reform depends heavily on fiscal discipline and avoiding inflation while reaping the benefits of austerity policies requires steady progress on the structural reform agenda; (2) attempting to introduce a new system of expenditure prioritization (i.e. MTEF) by superimposing it on an existing inadequate budgeting system is not likely to be successful; (3) due consideration must be given to short -term social and political implications to enhance the likelihood that complex policy reforms will be implemented . 8. Assessment Recommended? Yes No Why? (1) An audit will help identify the relative importance of those results achieved versus those that were not and thereby confirm or adjust the ratings; (2) an audit will help inform the Bank's decision to move away from this type of omnibus adjustment lending or not; (3) the audit can be part of a package of audits of FRDP I, FRDP II, and FRDP TA II, which will review the Bank's experience with adjustment lending in Malawi since the landmark 1994 change in government. 9. Comments on Quality of ICR: The ICR is of satisfactory quality .