Document of The World Bank FOR OFFICIAL USE ONLY · IFA Input for Assets IFAD International Fund for Agriculture Development IFMIS Integrated Financial Management Information System

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 68956-MW

RAPID RESPONSE PROGRAM

FOR THE

REPUBLIC OF MALAWI

CONSISTING OF

A PROPOSED IDA GRANT

IN THE AMOUNT OF SDR33.20 MILLION

(US$50 MILLION EQUIVALENT)

FOR THE

RAPID RESPONSE DEVELOPMENT POLICY GRANT (RRDPG)

AND

A PROPOSED SECOND ADDITIONAL IDA GRANT AND CREDIT



FOR THE

IRRIGATION, RURAL LIVELIHOODS AND AGRICULTURAL DEVELOPMENT

PROJECT (IRLADP)

AND

A PROPOSED SECOND ADDITIONAL IDA GRANT AND CREDIT



FOR THE

MALAWI THIRD SOCIAL ACTION FUND APL II (MASAF 3)

July 5, 2012

Poverty Reduction and Economic Management

Sustainable Development Department

Human Development

Southern Africa Country Department 3

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.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of May 31, 2012)

Currency Unit = Malawi Kwacha (MWK)

MWK 270.39 = US$1

US$ 1 = SDR 0.6639

MALAWIAN GOVERNMENT FISCAL YEAR

July 1 – June 30

ABBREVIATIONS AND ACRONYMS

ADD Agricultural Development Division

ADMARC Agriculture Development Marketing Corporation

AEZ Agro-ecological Zone

AF Additional Financing

AfDB African Development Bank

AFII Additional Financing II

AgPER Agriculture Public Expenditure Review

AIDS Acquired Immune Deficiency Syndrome

ALCO Assets and Liability Committee

APL Adaptable Program Lending

APR Annual Progress Report

ASWAp Agriculture Sector Wide Approach

ASWAp-SP

CAADP

Agriculture Sector Wide Approach – Support Project

Comprehensive Africa Agriculture Development Programme

CABS Common Approach to Budget Support

CAS Country Assistance Strategy

CBRLDP Community Based Rural Land Development Project

CE Capacity Enhancement

CEM

CIDA

Country Economic Memorandum

Canadian International Development Agency

CLS Community Livelihood Support

CMC Community Management Committees

COA Chart of Accounts

COMESA Common Market for Eastern and Southern Africa

COMSIP Community Savings Investment Promotion

CPAR Country Procurement Assessment Report

CPPR Country Portfolio Performance Review

CRW Crisis Response Window

DAD Debt and Aid Division

DADO District Agriculture Development Officer

DBS Doing Business Survey

iii

DEMPA Debt Management Performance Assessment

DFID Department for International Development

DHRMD Department of Human Resource Management and Development

DIASU District Irrigation Advisory Services Unit

DMC Debt Management Committee

DoI Department of Irrigation

DPs

DPL

Development Partners

Development Policy Loan

DPO Development Policy Operation

DPSM

DPTWG

Department of Public Service Management

Development Partners Technical Working Group

DSA Debt Sustainability Analysis

EC European Commission

ECF Extended Credit Facility

EIA Environmental Impact Assessment

ERR Economic Rate of Return

ESCOM Electricity Supply Corporation of Malawi

ESF Exogenous Shocks Facility

ESMF Environmental and Social Management Framework

ESMP Environmental and Social Management Plan

EU

FAO

European Union

Food and Agriculture Organization of the United Nations

FBO

FDI

Farmer Based Organization

Foreign Direct Investment

FIMTAP Financial Management, Transparency and Accountability Project

FISP

FM

Farm Input Subsidy Program

Financial Management

FMR Financial Management Report

FRR Financial Rate of Return

FSLF Farmer Services and Rural Livelihood Fund

FY Fiscal Year

GDP Gross Domestic Product

GFEM Group on Public Financial and Economic Management

GFS Government Financial Statistics

GIS Geographic Information System

GiZ Germany Agency for Technical Cooperation

GNI Gross National Income

GoM Government of Malawi

HA Hectare

HHs Households

HIPC Highly Indebted Poor Countries

HIPC-AAP HIPC Assessments and Action Plans

HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome

HRMIS Human Resources Management Information System

IACs Internal Audit Committees

IAD Internal Audit Department

iv

ICA Investment Climate Assessment

ICR Implementation Completion and Results Report

IDA International Development Association

IEC Information, Education and Communication

IFA Input for Assets

IFAD International Fund for Agriculture Development

IFMIS Integrated Financial Management Information System

IFR Interim Financial Report

IFRs International Financial Reporting Standards

IHS Integrated Household Surveys

IMF International Monetary Fund

IP Implementation Progress

IPC Internal Procurement Committee

IRLADP Irrigation Rural Livelihoods and Agricultural Development Project

IRM Immediate Response Mechanism

ISR

JICA

Implementation Status and Results Report

Japan International Cooperation Agency

IWMU Irrigation, Water Management Unit

JF Joint Framework

JSAN Joint Staff Advisory Note

LA

LAFD

Local Authority

Land Acquisition and Farm Development

LAMIS

LACE

LAF

Local Authority Management Information System

Local Authority Capacity Enhancement

Local Authority Fund

LDF Local Development Fund

LIPWP Labor Intensive Public Works

M&E Monitoring and Evaluation

MASAF Malawi Social Action Fund

MCC Millennium Challenge Corporation

MDAs Ministries, Departments and Agencies

MDPC

MDGs

Ministry of Development Planning and Cooperation

Millennium Development Goals

MDRI Multilateral Debt Relief Initiative

MEFMI Macroeconomic and Financial Management Institute

MG1 Malawi Government (Account Number) 1

MGDS Malawi Growth and Development Strategy

MGDS II Second Malawi Growth and Development Strategy

MIDP Medium Scale Irrigation Development Project (JICA-funded)

MLGRD Ministry of Local Government and Rural Development

MoAFS Ministry of Agriculture and Food Security

MoF Ministry of Finance

MoWDI Ministry of Water Development and Irrigation

MPVA Malawi Vulnerability and Poverty Assessment

MTDS Medium Term Debt Management Strategy

MTEF Medium Term Expenditure Framework

v

MTR Mid-Term Review

MVAC

MT

Malawi Vulnerability Assessment Committee

Metric Ton

MWK Malawi Kwacha

NAO National Audit Office

NGO Non-Government Organization

NIPDS

NIS

National Irrigation Policy and Development Strategy

National Institutional Strengthening

NLGFC National Local Government Finance Committee

NPV Net Present Value

NSC National Steering Committee

NSO National Statistical Office

NSSP National Social Support Programme

NTAC National Technical Advisory Committee

O&M Operation and Maintenance

OBI Open Budget Index

ODA Overseas Development Assistance

ODPP Office of the Director of Public Procurement

OPC Office of the President and Cabinet

ORAF Operational Risk Assessment Framework

PAA Public Audit Act

PAC Public Accounts Committee

PAF Performance Assessment Framework

PCU Project Coordination Unit

PDO Project Development Objective

PEC Project Executive Committee

PEFA Public Expenditure and Financial Accountability Framework

PER Public Expenditure Review

PFEM Public Finance and Economic Management

PFM Public Financial Management

PFMA Public Financial Management Act

PHC Primary Health Care

PIM Project Implementation Manual

PPA Public Procurement Act

PRSC Poverty Reduction Support Credit

PSF Price Stabilization Fund

PSIA Poverty and Social Impact Analysis

PVA Poverty and Vulnerability Assessment

PWP Public Works Program

PWSP Public Works Sub-Projects

QMBR Quarterly Monitoring Budget Implementation Report

RAP Resettlement Action Plan

RBM Reserve Bank of Malawi

PRGF Poverty Reduction and Growth Facility

RIDP Rural Infrastructure Development Project

RPF Resettlement Policy Framework

vi

RRDPG

RRP

Rapid Response Development Policy Grant

Rapic Response Program

SADC Southern African Development Community

SDR Special Drawing Rights

SET Sector Expert Teams

SFPDP Smallholder Food Plains Development Project

SIL Specific Investment Loan

SOE Statement of Expenditure

SRI System of Rice Intensification

ST Secretary to the Treasury

SVIP Shire Valley Irrigation Project

SWGS Sector Working Groups

TA Technical Assistance

TBs Treasury Bills

ToR Terms of Reference

TST Technical Support Team

UCSA

UNDP

UNICEF

USAID

Use of Country Systems Assessment

United Nations Development Program

United Nations Children's Fund

United States Agency for International Development

USD

VAT

United States Dollar

Value Added Tax

VAM

WDI

WFP

Vulnerability Assessment Mapping

World Development Indicators

World Food Programme

WUA Water User Association

WUASU Water User Association Support Unit

vii

REPUBLIC OF MALAWI


TABLE OF CONTENTS

OVERVIEW: RAPID RESPONSE PROGRAM ....................................................................... 1

A. Introduction ......................................................................................................................... 1 B. Country Context .................................................................................................................. 4

C. Macroeconomic Context ..................................................................................................... 6 D. Sector Context and Strategy .............................................................................................. 11 E. Rationale for the Proposed Program and Bank Strategy .................................................. 16

F. Financing Plan .................................................................................................................. 23 G. Coordination with Development Partners on Proposed Program ..................................... 24 H. Program Benefits, Risks and Mitigating Measures........................................................... 25

I. Terms and Conditions for Program Financing.................................................................. 27

ATTACHMENT A: RAPID RESPONSE DEVELOPMENT POLICY GRANT ................ 28

I. Introduction And Overview .............................................................................................. 28 II. Country Context ................................................................................................................ 30 III. Government‘s Program and Participatory Process ........................................................... 43

IV. Bank Support to the Government‘s Program .................................................................... 44 V. The Proposed Development Policy Grant (RRDPG)........................................................ 48

VI. Operation Implementation ................................................................................................ 60

Annex 1: Letter of Development Policy ...................................................................................... 68

Annex 2: Policy Matrix ................................................................................................................. 80 Annex 3: Fund‘s Assessment Letter ............................................................................................. 82

ATTACHMENT B: SECOND ADDITIONAL FINANCING FOR MALAWI

THIRD SOCIAL ACTION FUND (MASAF 3) APL II .......................................................... 89

I. Introduction ....................................................................................................................... 89 II. Background and Rationale for Additional Financing ....................................................... 90 III. Proposed Changes ............................................................................................................. 95 IV. Appraisal Summary ........................................................................................................ 100 Annex 1: Results Framework and Monitoring............................................................................ 107

Annex 2: Operational Risk Assessment Framework .................................................................. 124

Annex 3: Project Description ...................................................................................................... 128

Annex 4: Implementation Arrangements .................................................................................... 141

ATTACHMENT C: SECOND ADDITIONAL FINANCING FOR IRRIGATION

RURAL LIVELIHOODS AND AGRICULTURAL DEVELOPMENT PROJECT

(IRLADP)................................................................................................................................... 153

I. Introduction ..................................................................................................................... 153 II. Background and Rationale for Additional Financing ..................................................... 154

viii

III. Proposed Changes ........................................................................................................... 158

IV. Appraisal Summary ........................................................................................................ 169 Annex 1: Results Framework and Monitoring........................................................................... 175 Annex 2: Operational Risk Assessment Framework .................................................................. 182

ATTACHMENT D: COUNTRY AT A GLANCE ................................................................ 186

ATTACHMENT E: MAP OF THE REPUBLIC OF MALAWI ......................................... 189

LIST OF TABLES

Overview

Table 1: Proposed Rapid Response Program………..16

Table 2: Malawi - Key Macroeconomic Indicators, 2007-2011………..16

Table 3: Estimated Program costs………..16

Attachment A

Table 1: Malawi - Key Macroeconomic Indicators, 2007-2015……31

Table 2: Welfare Impact of Unification of the Exchange Rate and Monetary

Compensation Alternatives ……35

Table 3: Malawi – Central Government Operations, 2009/10-2014/15…..40

Table 4: Malawi Petrol/Diesel Price Build-Up………..53

Table 5: Mitigation via Tobacco Sales………..55

Attachment B

Table 1: Allocation of Additional Financing to the Original Project (US$ Million) ……98

Table 2: Disbursement Table for the AF II (US$ Million)………..99

Table 3: Vulnerable Groups in Malawi………..134

Table 4: Proportion That Are Poor and Ultra-poor by Vulnerable Group………..136

Table 5: Summary of Existing and Recent Programs………..137

Table 6: Safeguards Action Plan for Implementing Social and Environmental

Management………..145

Attachment C

Table 1: Revised PDO Indicators………..158

Table 2: Changes to Project components and subcomponents………..159

Table 3: Financing by component………..166

ix

The Rapid Response Program was prepared by an IDA team consisting of Appolenia

Mbowe (Sr. Economist, AFTP1 and TTL for the RRDPG); Ida Manjolo (Sr. Social

Protection Specialist, AFTSP and TTL for MASAF Additional Financing); Pieter

Waalewijn (Water Resource Management Specialist, AFTWR and TTL for IRLADP

Additional Financing); Yisgedu Amde (Sr. Operations Officer, AFCZM); Chrissie

Kamwendo (Sr. Operations Officer, AFMMW); Zeria Banda (Communication Officer,

AFRSC); Grace Ingrid Chilambo (Program Assistant, AFMMW); England Maasamba

(Program Assistant, AFCE1); Esther Lozo (Executive Assistant, AFMMW); Grace Soko

(Program Assistant, AFCMZ); Praveen Kumar (Lead Economist, AFTP1); Temwa

Gondwe (Economist, AFTP1); Steve Mhone (Procurement Specialist, AFTPC); Marjorie

Mpundu (Senior Counsel, LEGAF); Charles Boudry (Legal Associate, LEGAF); Luis M.

Schwarz (Sr. Finance Officer, CTRLA); Trust Chimaliro (Financial Management

Specialist, AFTFM); Ivan Velev (Country Program Coordinator, AFCMZ); Maniza

Naqvi (Sr. Social Protection Specialist, AFTSP); Muderis A. Mohammed (Sr. Social

Protection Specialist, AFTSP); Olivier Durand (Senior Agricultural Specialist, AFTAR);

Richard James (Consultant, Operations Officer, AFTWR); Hardwick Tchale (Senior

Agriculture Economist, AFTAR); Pauline McPherson (Operations Officer, AFTAR);

Mary Bitekerezo (Senior Social Development Specialist, AFTCS); Lungiswa Thandiwe

Gxaba (Senior Environmental Specialist, AFTEN); Hawanty Page (Senior Program

Assistant, AFTAR); Deliwe Ziyendammanja (Team Assistant, AFMMW), Pauline

Kayuni (Team Assistant, AFMMW); Frits Ohler (Senior Agriculture Officer, FAO/CP,

Rome).

Overall supervision and guidance was provided by Kundhavi Kadiresan (Country

Director, AFCS3); Marcelo Giugale (Sector Director, AFTPM); Jamal Saghir (Sector

Director, AFTSN); Ritva Reinikka (Sector Director, AFTHD); John Panzer (Sector

Manager, AFTP1); Martien van Nieuwkoop (Acting Sector Manager, AFTAR); Iain

Shuker (Program Coordinator, AFTAR); Lynne D. Sherburne-Benz (Sector Manager,

AFTSP) and Sandra Bloemenkamp (Country Manager, AFMMW).

x

REPUBLIC OF MALAWI

GRANT AND PROGRAM SUMMARY

A. RAPID RESPONSE DEVELOPMENT POLICY GRANT

(GRANT NUMBER H795- MW)

Recipient Republic of Malawi

Implementing

Agency

Ministry of Finance

Financing

Data

IDA Grant, standard IDA terms

Amount: SDR33.20 million (US$50 million equivalent)

Operation

Type

Stand-alone, single tranche Rapid Response Development Policy Grant (RRDPG)

Main Policy

Areas

Public expenditure, economic management and social protection

Key Outcome

Indicators

1. Reduction in the fiscal deficit from 7.0% of GDP in 2011/12, to less than 2.0%

of GDP by June 2013.

2. Systematic adjustment of pump prices to reflect import parity price movements

in international petroleum prices and exchange rate plus or minus 5% of the

actual cost of importation by June 2013 as evidenced by the increase in volume

of fuel imports from 160 million litres in 2011/12, to projected 300 million litres.

3. Smallholder farmers‘ earnings pegged to the US dollars are exchanged at market

determined exchange rate by June 2013 as evidenced by the increase in net

earnings to an average farmer from MWK160,483 to about MWK252,393 after

exchange rate liberalization.

4. An increase in ratio of total Labor Intensive Public Works (LIPW) related

expenditure to total recurrent expenditure from 1.5 percent in 2011/12, to 6.5

percent by June 2013, and expanded coverage of the beneficiaries from 311,807

households, to 700,000 households by June 2013.

5. An increase in ratio of total fertilizer and seeds subsidy related expenditure to

total recurrent expenditure from 7.5 percent in 2011/12, to over 12 percent by

June 2013, and expanded coverage of the beneficiaries from 1.4 million farming

households in 2011/12, to 1.5 million farming households by June 2013.

6. FISP procurement audit report submitted to Parliament by June 2013.

Program

Development

Objectives

and

Contributions

to CAS

The proposed operation aims to support: (i) achieving and maintaining

macroeconomic stability and restoring the functioning of a market-based economy

to ensure a quick growth rebound and (ii) protecting the poor and most vulnerable

groups in the short run while improving transparency of delivery systems.

The proposed RRDPG is consistent with the CAS FY07-11 and is also an integral

part of the Bank‘s assistance program to Malawi articulated in upcoming CAS

FY13-16, currently being finalized for Board presentation in the second quarter of

FY13. The operation is consistent with the CAS FY07-11 outcome on improved

public expenditure management, transparent budget formulation, execution and

reporting, and facilitation of the development of a more coherent National Social

Protection Policy.

xi

Risks and

Risks

Mitigation

Four main risks could influence the expected outcomes of the proposed operation:

(a) Shortfalls in donor support could have a deterring impact on economic growth, as

they could weaken the balance of payments and widen the external financing gap and

could force the authorities to borrow domestically, which is not in line with the fiscal

adjustment path currently being pursued. Given the low level of official reserves and

significant import needs, this would put enormous pressure on what already is a tough

fiscal adjustment process and could undermine fiscal sustainability and/or jeopardize

necessary social and capital expenditures. These risks are mitigated by a number of

factors. First, the authorities have already undertaken measures to repair relations with

development partners (DPs) and intend to address governance and human rights

concerns. Second, the authorities are committed to a prudent fiscal stance and a flexible

exchange rate policy, which provide key anchors for external and debt sustainability.

Third, predictable and timely budget support, backed by analytical support (i.e.

programmatic public expenditure reviews) and policy dialogue through the future DPO

series and good-will from DPs to aid GoM‘s ongoing medium-term fiscal consolidation

program, will also help mitigate the risks. A new 3-year Extended Credit Facility (ECF)

supported program for Malawi is expected to be presented to the IMF Board in July

2012. This should pave the way for resumption of budget support for most of the

Common Approach to Budget Support (CABS) DPs.

(b) Political risk. The current administration, in power since early April 2012, has

embarked on bold reforms to restore macroeconomic stability and is committed to

maintain prudent macroeconomic policies. However, the risk might arise from tensions

between political pressures to expand the GoM programs and the need to maintain a

prudent fiscal stance with a view to keeping inflation pressures at bay as well as

preserving debt sustainability. This is mitigated by the GoM‘s efforts to build support

for policy reforms supported by this operation.

(c) Social tensions. The consequences of some of the economic policies of the previous

administration and adjustments that are taking place in the economy could lead to

further upward pressure on consumer prices and could erode further consumer

purchasing power, which could raise social tensions. In addition, increases in fuel

prices could result in second round effects on prices of other products leading to further

tensions. Domestic tensions could affect investor and consumer confidence, which

would constrain further private investment. There will be a need for the GoM to engage

all key stakeholders to rally support for reforms and help stakeholders understand their

consequences and manage expectations. In addition, the GoM‘s efforts on enhancing

social inclusion through education, health and social protection programs is expected to

offset potential social tensions.

(d) Implementation capacity risks. The GoM‘s capacity to massively scale up social

safety net programs could be overstretched. This could delay the implementation of the

programs supported by this operation and lead to low utilization of available resources

and insufficient coverage of beneficiaries. Given the fact that DPs are financing a large

part of the social protection interventions and the fact that programs being scaled up

xii

have existing institutional structures and skilled personnel, especially for labor intensive

public works, this risk will be minimized.

Operation ID P126155

xiii

REPUBLIC OF MALAWI RAPID RESPONSE PROGRAM

B. SECOND ADDITIONAL FINANCING FOR MALAWI THIRD SOCIAL ACTION FUND

PROJECT APL II

AFTSP

AFRICA REGION Basic Information - Additional Financing (AF)

Country Director: Kundhavi Kadiresan

Sector Manager/Director: Lynne Sherburne-

Benz/Ritva Reinikka

Team Leader: Ida Manjolo

Project ID: P131648

Expected Effectiveness Date: August 1, 2012

Lending Instrument: Adaptable Program Loan

Additional Financing Type: Scale Up,

Restructuring

Sectors: Public Administration - Social Services

(100%)

Themes: Safety Nets (100%)

Environmental category: B -Partial Assessment

Expected Closing Date: June 30, 2014

Joint IFC: N/A

Joint Level: N/A

Basic Information - Original Project

Project ID: P110446 Environmental category: B- Partial Assessment

Project Name: MASAF 3 APL II Expected Closing Date: June 30, 2014

Lending Instrument: APL Joint IFC:

Joint Level:

Basic Information – First Additional Financing

Project ID: P121065 Environmental category: B- Partial Assessment

Project Name: Malawi Additional Financing for

Social Action Fund 3 APL II

Expected Closing Date: June 30, 2014

Lending Instrument: APL Joint IFC:

Joint Level:

AF Project Financing Data

[ ] Loan [ x] Credit [ x ] Grant [ ] Guarantee [ ] Other:

Proposed terms: The Additional Financing would be an IDA grant and an IDA Credit under standard

terms 40-year maturity including a 10 year grace period

AF Financing Plan (US$m)

Source Total Amount (US $m)

Total Project Cost:

Co financing:

Borrower:

Total Bank Financing:

IBRD

IDA

New

US$50 Million

0

0

US$50 Million

0

50

Client Information

xiv

Recipient: Ministry of Finance

Responsible Agency: Ministry of Finance through MASAF-TST

Contact Person: Mr. Randson P. Mwadiwa, Secretary to the Treasury

Telephone No.:+265 01 788 355

Fax No.: + 265 789 173

Responsible Agency:

MASAF - Local Development Fund, P/Bag 352, Lilongwe 3

Contact Person: Mr. Ted Kalebe, Executive Director

Phone: 265 1775666

Email: [email protected]

AF Estimated Disbursements (Bank FY/US$m)

FY FY 13 FY 14

Annual 45 5

Cumulative 45 50

Project Development Objective and Description

Current project development objective :

To improve livelihoods of poor and vulnerable households and to strengthen the capacity of

local authorities to manage local development.

Project description:

Community Livelihoods Support (CLS) Fund: This component has two sub-components to

finance: (a) Public Works Subprojects (PWSPs) under the Local Authority Fund (LAF), and (b)

investments for improving functionality of existing facilities and creation of opportunities for

community savers and entrepreneurs to increase their participation in Local Economic

Development under the Community Fund.

Local Authority Capacity Enhancement (LACE) Fund: This component focuses on support for

the development of a comprehensive framework for addressing capacity needs for Local

Authorities in the effective management of grants they are already receiving, performing the

functions allocated to them under this project, and preparing them to perform anticipated

responsibilities as devolution proceeds and more resources are available under the LDF or any

other longer-term GoM grant arrangement.

National Institutional Strengthening Fund: The component finances national-level cross-cutting

issues aimed at improving accountability and transparency in the use of project resources.

Safeguard and Exception to Policies

Safeguard policies triggered:

Environmental Assessment (OP/BP 4.01)

Natural Habitats (OP/BP 4.04)

Forests (OP/BP 4.36)

Pest Management (OP 4.09)

Physical Cultural Resources (OP/BP 4.11)

Indigenous Peoples (OP/BP 4.10)

Involuntary Resettlement (OP/BP 4.12)

Safety of Dams (OP/BP 4.37)

Projects on International Waterways (OP/BP 7.50)

Projects in Disputed Areas (OP/BP 7.60)

[x]Yes [ ] No

[ ]Yes [x ] No

[x ]Yes [] No

[ x ]Yes [] No

[ ]Yes [ x ] No

[ ]Yes [ x] No

[ x ]Yes [ ] No

[ ]Yes [ x ] No

[ ]Yes [ x] No

[ ]Yes [ x ] No

mailto:[email protected]

xv

Does the project require any waivers of Bank policies?

Have these been endorsed or approved by Bank management?

[ ]Yes [ x ] No

[ ]Yes [ x ] No

xvi

Conditions and Legal Covenants:

Financing Agreement Reference Description of

Condition/Covenant

Date Due

Schedule 2: Section IV: B 1 Notwithstanding the provisions

of Part A of this Section, no

withdrawal shall be made for

payments made:

(a) prior to the date of the

Original Financing

Agreement with respect to

the amounts of the Original

Credit;

(b) prior to the date of the First

Additional Financing


the amounts of the First

Additional Credit; and

(c) prior to the date of this


the amounts of the Second

Additional Credit.

Disbursement Condition

Schedule II: Setion I: E 1 The Recipient shall, by not later

than six months after Effective

Date, update and disclose the

ESMF to reflect the specific

guidelines and template for the

preparation of the Forest

Management Plans.

Six months from effective date

xiv

REPUBLIC OF MALAWI


SECOND ADDITIONAL FINANCING FOR IRRIGATION RURAL LIVELIHOODS AND

AGRICULTURAL DEVELOPMENT PROJECT

AFTAR

AFRICA REGION

Basic Information – Second Additional Financing (AF II)

Country Director: Kundhavi Kadiresan

Sector Manager/Director: Martien van Nieuwkoop

(acting)/Jamal Saghir

Team Leader: Pieter Waalewijn

Project ID: P131760

Expected Effectiveness Date: September 30, 2012

Lending Instrument: SIL

Additional Financing Type: Scale Up,

Restructuring

Sectors: Irrigation and Drainage 50%,

General Agriculture/Fisheries/Forestry

25%, Agricultural Extension and

Research 25%

Themes: Rural Services and

Infrastructure 40%, Other

Environmental and Natural Resources

Management 25%, Other Rural

Development 25%, Nutrition and Food

Security 10%

Environmental category: B, Partial

Assessment

Expected Closing Date: December 31,

2014

Joint IFC: N/A

Joint Level: N/A

Basic Information - Original Project

Project ID: P084148 (Original Project) and P121120

(First Additional Financing)

Environmental category: B, Partial

Assessment

Project Name: Irrigation Rural Livelihoods and

Agricultural Development Project (IRLADP)

Expected Closing Date: December 31,

2014

Lending Instrument: SIL Joint IFC: N/A

Joint Level:

xv

AF Project Financing Data

[ ] Loan [X ] Credit [X] Grant [ ] Guarantee [ ] Other:

Proposed terms: For the Credit: Standard IDA with 40 years maturity including a 10 year grace period.

AF Financing Plan (US$m)

Source Total Amount (US$m)

Total Project Cost: 50.0

Cofinancing: 0

Borrower 0

Beneficiary 0

Total Bank Financing: 50.0

IBRD 0

IDA 50.0

New

Client Information

Recipient: Republic of Malawi, Ministry of Finance

Responsible Agencies:

Ministry of Agriculture and Food Security (MOAFS)

Contact Person: Erica Maganga, Principal Secretary I

Telephone No.: +(265)-1789 033

Fax No.: +(265)-1789 216


Contact Person: Dr. Geoffrey Luhanga, Principal Secretary II

Telephone No.: +265)-1789 033

Fax No.: +(265)-1789 418


Ministry of Water Development and Irrigation (MoWDI)

Contact Person: Sandram Maweru, Principal Secretary

Telephone No.: +(265)-1770 344

Fax No.: + (265)-1 773 737


AF Estimated Disbursements (Bank FY/US$m)

FY 2013 2014 2015

Annual 15.0 15.0 20.0

Cumulative 15.0 30.0 50.0




xvi

Project Development Objective and Description

Current project development objective: (i) to increase agricultural productivity and incomes

of approximately 196,550 poor rural households in the 11 participating districts and (ii) to

strengthen Recipient institutional capacity for long-term irrigation development. Note: This is

the simplified version of the PDO from the first Additional Financing, mainly revised to be in

line with the Project Financing Agreement.

Revised project development objective: to: (i) increase agricultural productivity of poor rural

households in all districts; and (ii) strengthen institutional capacity for long-term irrigation

development.

The PDO has been changed to cover all districts in the country and allow for changes in the

number of targeted beneficiaries as captured in the Results Framework.

Original Project description: The original project has 4 components: (i) Irrigation

Rehabilitation and Development and Catchment Conservation; (ii) Farmer Services and

Livelihood Fund; (iii) Institutional Development and Community Mobilization; and (iv) Project

Coordination, Monitoring and Evaluation.

Revised Project description: The revised project will have 5 components: (i) Irrigation

Rehabilitation and Development and Catchment Conservation; (ii) Farmer Services and

Livelihood Fund; (iii) Institutional Development and Capacity Enhancement; (iv) Project

Coordination, Monitoring and Evaluation; and (v) Contingency for Disaster Risk Response.

The fifth component is a new component, which will allow for rapid response in future

emergencies. The title for component 3 is revised to reflect re-grouping of some activities.

Safeguard and Exception to Policies

Safeguard policies triggered:

Environmental Assessment (OP/BP 4.01)

Natural Habitats (OP/BP 4.04)

Forests (OP/BP 4.36)

Pest Management (OP 4.09)

Physical Cultural Resources (OP/BP 4.11)

Indigenous Peoples (OP/BP 4.10)

Involuntary Resettlement (OP/BP 4.12)

Safety of Dams (OP/BP 4.37)

Projects on International Waterways (OP/BP 7.50)

Projects in Disputed Areas (OP/BP 7.60)

[X] Yes [ ] No

[ ] Yes [X] No

[ ] Yes [X] No

[X] Yes [ ] No

[ ] Yes [X] No

[ ] Yes [X] No

[X] Yes [ ] No

[ ] Yes [X] No

[X] Yes [ ] No

[ ] Yes [X] No

Does the project require any waivers of Bank policies?

Have these been endorsed or approved by Bank

management?

[] Yes [X] No

[] Yes [] No

xvii

Conditions and Legal Covenants:

Financing

Agreement

Reference

Description of Condition/Covenant Date Due

Schedule 2,

Section I, Part

B, § 2

The Recipient shall ensure that, prior to carrying out any rehabilitation

of irrigation schemes under Part A.1 of the Project: (i) each respective

WUA has adopted a constitution to govern such WUA; and (ii) such

WUA has entered into an agreement with the Recipient providing for

the terms and conditions for the WUA to participate in the

rehabilitation of the said irrigation schemes, both in form and

substance satisfactory to the Association.

Ongoing

Schedule 2,

Section IV,

Part B, § 1

No withdrawal shall be made for payments under the Category for part

E of the project unless the Recipient has: (i) declared that an Eligible

Crisis or Emergency has occurred, and the Association has agreed

with such determination: (ii) prepared and disclosed all safeguards

instruments required for activities under said Part E of the Project, if

any, and the Recipient has implemented any actions which are

required to be taken under said instruments, all in accordance with the

provisions of Section I.F. of Schedule 2 to this Agreement; and (iii)

established adequate implementation arrangements, satisfactory to the

Association, including staff and resources for the purposes of said

activities.

Disbursement

Condition

Overview: Rapid Response Program

1

REPUBLIC OF MALAWI


OVERVIEW: RAPID RESPONSE PROGRAM

A. Introduction

1. This Rapid Response Program Paper seeks approval of the Executive

Directors to provide IDA Grant and Credit in the amount of SDR 99.6 million

(US$150 million equivalent) to the Republic of Malawi (Malawi) in support of its

reform program. The Program responds to an urgent request by the Government of

Malawi (GoM) to support the ongoing macroeconomic stabilization program as well as

measures which will mitigate the impacts of the wide range of reforms which are being

currently implemented. GoM has undertaken bold economic reforms since Mrs. Joyce

Mtila Banda took over as President on April 7, 2012, after the death of President Bingu

wa Mutharika. Some of the key economic reforms include liberalizing Malawi‘s foreign

exchange regime and significant fuel and power price adjustments to better cover costs of

these essential commodities.

2. Despite the soundness of the measures undertaken, the economy remains

fragile given Malawi‟s extremely weak reserve position, slow re-start of aid inflows,

and the need to undertake fiscal adjustment measures to reverse poor policies

carried out in the past year. The International Monetary Fund (IMF) estimates GoM‘s

external financing needs in the short term at about US$200 million to build reserves and

meet immediate external obligations. While the timing of the exchange rate liberalization

is benefiting a large number of small-scale tobacco farmers, there are large portions of

urban and rural poor who remain negatively impacted by the events of the past year. The

Bank analysis shows that an additional US$80-100 million per year is needed to partially

cover the loss of welfare of the poorest 60 percent of rural and urban population. Labor-

intensive public works programs and measures to protect livelihood through support to

agricultural productivity and income diversification have been identified as the most

suitable instruments to achieve partial coverage of welfare loses of the poorest. This will

help maintain the current popular support for the overall reform effort and inject

resources into the system to help the poorest, particularly before the new planting season.

3. Timing of the support is critical to maintain confidence in the reform effort. Since the liberalization of the exchange rate market and subsequent adjustment of the

official exchange rate (from MWK 167 to MWK 250 per USD), the official Kwacha rate

has depreciated by a further 8 percent to MWK270 as of June 21, 2012, as the exchange

rate seeks its equilibrium and the official rate remains in line with the market determined

rate. Given the thinness of the foreign exchange market, the authorities fear that the

system is at a high risk of excessive short run volatility (i.e., overshooting) if donor

financing is not injected promptly. Early disbursement of aid would help assuage these


2

and other risks. Thus, there is a need to urgently provide external resources to (i) help

stabilize the system and let the reform momentum continue to take hold, and (ii) scaleup

social protection programs to mitigate the effects of the measures on the most vulnerable

population.

4. Malawi‟s Development Partners (DPs) are reacting positively to the reforms.

DPs are in the process of accelerating their assistance to Malawi in response to the urgent

request from GoM to improve its foreign exchange position through general budget

support and emergency social support programs. The Bank is playing a constructive role

in this process and is working closely with DPs and the IMF in coordinating this urgent

support. An IMF mission was in Malawi in May/early June 2012, working on a new

Extended Credit Facility (ECF) Program, and has issued an assessment letter to DPs on

June 20, 2012. The Department for International Development (DfID), the US, Norway

and Ireland are also moving ahead quickly. Nevertheless, as of mid-June only DfID has

disbursed £30 million under its existing programs. A first tranche of the European Union

(EU) Sector Budget Support (13 million Euro) is expected to be transferred immediately.

The African Development Bank (AfDB), using accelerated procedures, plans to go with a

US$45 million budget support (with first tranche of US$30 million to be disbursed in

July). The IMF plans to present its program to its Board in July, following the

Parliamentary adoption of the Budget on June 27, 2012. In addition, a coalition of DPs

has been formed to support the implementation of the draft National Social Strategy

including the expansion of cash transfer programs – currently in place in seven districts -

for the next few years.

5. To allow the World Bank to respond more quickly and directly to the appeal

issued by GoM, the Bank has proposed a US$150 million IDA Rapid Response

Program (RRP), comprising:

A Rapid Response Development Policy Grant (RRDPG), in the amount of

US$50 million, prepared in tandem with the IMF program that will focus on: (i)

achieving and maintaining macroeconomic stability and restoring the

functioning of a market based economy to ensure a quick growth rebound, and

(ii) protecting the poor and most vulnerable groups in the short run while

improving transparency of delivery systems; and

Two Additional Financing (AF) Operations for US$50 million each (totaling

US$100 million) for ongoing operations – Malawi Third Social Action Fund

APL II (MASAF 3) and Irrigation Rural Livelihoods and Agricultural

Development Project (IRLADP) - to provide mitigation measures for the

vulnerable. The objective of MASAF 3 is ―to improve livelihoods of poor and

vulnerable households and to strengthen the capacity of local authorities to

manage local development‖ while IRLADP aims to ―increase agricultural

productivity of poor rural households in all districts, and strengthen recipient

institutional capacity for long-term irrigation development‖.


3

6. The objective of this RRP is to “support emergency recovery reforms aimed

at restoring macroeconomic stability, accelerate the resumption of growth, and

mitigate the impacts on vulnerable households from the legacy of inflationary

pressures and rebalancing of the economy”. The three operations comprising the

RRP are described in Table 1.

Table 1: Proposed Rapid Response Program

Activity IDA

US$m

Description

Rapid Response

Development Policy

Grant

50 The operation will focus on efforts to restore macroeconomic

stability, strengthen social protection interventions and the

resilience of the most vulnerable groups to shocks, improve

functioning of the petroleum market and incentives to exporters

(including smallholder tobacco farmers), and improve economic

management of the farm input subsidy program (FISP).

AF - Malawi Social

Action Fund

50 The project will help scale up the social safety net program

through labor intensive public works. The AF will have

nationwide coverage and reach both rural and urban areas. The

number of additional beneficiaries will be 586,000 households

or 2.9 million people, representing 20 percent of the population.

Beneficiaries will be identified using community based and self

targeting.

AF - Irrigation, Rural

Livelihoods and

Agricultural

Development Project

50 The project will scale up its social safety net function and

support productive rural livelihoods in irrigation, as well as

prepare for further investments that strengthen resilience in

agriculture. The project will reach an additional 230,000

households (about 1.25 million people) and scale up to all

districts in the country.

7. The proposed two additional financing operations are processed under

OP/BP 8.00, Rapid Response to Crises and Emergencies. These operations will help

restore the means of production and economic activities in both rural and urban areas

which have been affected by rising basic commodity prices as a result of the exchange

rate unification and the petroleum pricing reforms. The proposed additional financing

operations are consistent with OP/BP 13.20, Additional Financing as they will help

implement additional and expanded activities to scale up the two project‘s impact

throughout the country.

8. The program is aligned with the ongoing Country Assistance Strategy (CAS)

and is also consistent with new World Bank Group CAS for Malawi (FY13-16)

which is at an advanced stage of preparation. The last CAS was discussed by the

Board on February 13, 2007 and was intended to cover the period up to June 30, 2010.

However, implementation of the full CAS program suffered several delays, primarily due

to the political stalemate in Parliament in 2008-2009 which stalled the approval of

reforms and ratification of many operations; the full CAS program was delivered by

FY11 (June 30, 2011). The delay in the approval of the Second Malawi Growth and


4

Development Strategy (MGDS II), coupled with deteriorating governance and substantial

weakening of macroeconomic performance since 2010, precluded the development of a

new assistance strategy. In April 2012, the new Government adopted the MGDS II

(2011-2016). In view of the magnitude of the reform effort, the Bank agreed to slightly

postpone the finalization of the new CAS, and allow for an additional round of

consultations with the new GoM. This would allow some time to further prioritize the

MGDS II in light of the new macroeconomic realities, and help re-confirm the Bank‘s

contribution to investing in Malawi‘s medium and longer term development agenda. For

example, there are now opportunities to make significant progress on the regional

integration agenda especially in energy and regional trade. The new FY13-16 World

Bank CAS for Malawi will be presented to the Board in the second quarter of FY13, with

the Joint Staff Advisory Note of the MGDS II expected to be presented to the Board in

early August.

9. The proposed RRP is not co-financed by other development partners but has

been designed in close coordination with the IMF and all other partners in Malawi,

working together within a Common Approach of Budget Support (CABS) framework, as

well as in social protection and agriculture.

10. This document comprises an overview, which provides the context, rationale,

and description of the Program, and three attachments providing detailed

description for each of the three proposed operations.

B. COUNTRY CONTEXT

11. Landlocked Malawi has one of the lowest levels of per capita income (US$330

in 2009) in the world. With a population of 14.9 million (2010, World Development

Indication [WDI]), it ranks among the world‘s most densely populated countries. The

country is highly vulnerable to shocks, particularly given its undiversified production and

export structure, and is prone to droughts, floods, and frequent food shortages. Despite

strong growth performance during 2006-10, poverty levels remain high and the economy

faces key structural, capacity, and infrastructure constraints.

12. Malawi‟s record on governance had been deteriorating since 2010. Underlying governance challenges, such as lack of checks and balances in the political

process, affected the environment for growth, the investment climate, and servicedelivery

potential. Over 2010-2011, the Parliament passed a number of laws perceived as

weakening democratic institutions and abrogating the respect for human rights raising

serious concerns by domestic stakeholders. A fall-out between President Mutharika and

the Vice President Banda over succession strategies resulted in the Vice President taking

her own political course in early 2011, while formally maintaining her Vice President

position. As the main alternative voices, leaders of civil society and the press received

vehement criticism from some politicians, and some were subjected to intimidation.

Social unrest increased as well. A series of protests and strikes, most notably the


5

nationwide demonstrations in July 2011, demanded the resolution of economic and

democratic governance challenges. Relations with neighboring countries soured over

political level disagreements. DPs, while still providing sizeable support to Malawi,

increasingly expressed their concerns, and gradually adjusted their programs, both in size

and in content to respond to the deteriorated situation. This entailed utilization of

significant amounts of previously slated budget support programs to directly fund

fertilizer, fuel and emergency drugs imports to keep essential poverty-oriented programs

on track. Important investments, such as the US$350 million energy compact from

Millenium Challenge Corporation (MCC), were put on hold.

13. During the same period, Malawi‟s macroeconomic performance also

weakened substantially. The IMF‘s ECF was suspended in June 2011, and DPs halted

their budget support as well. The sudden drop in traditionally large amounts of budget

support (ranging between 6-13 percent of the budget) contributed to an already severely

imbalanced economy situation, rapidly resulting in acute foreign exchange and fuel

shortages. In response, GoM adopted a ―zero-deficit budget‖ attempting to fund all

recurrent government expenditures through local tax revenues, with significant tax

increases on an already overstressed private sector. Nevertheless, reserves dwindled

dramatically, and domestic borrowing soared, putting further pressure on the domestic

currency. The gap between the fixed official exchange rate and parallel market rate

reached over 80 percent, and prices increased to reflect parallel market prices for foreign

exchange and fuel. Shortages of critical imports (coupled with power outages) further

negatively affected economic performance and employment. Letters of credit dried up,

further squeezing the productive capacity of the Malawi economy. By March 2012,

economic forecasts indicated that in the absence of drastic reforms, economic growth in

2012 would have significantly contracted and the country would enter into a full blown

(policy-induced) recession in 2013.

14. The worsening situation threatened to reverse Malawi‟s major achievements

in macroeconomic stabilization, economic growth, food security, and laudable

progress towards a number of Millenium Development Goals (MDGs). During 2011

and early 2012, Malawi entered into a negative cycle of loss in confidence, investment

and support. Severe foreign exchange shortages and the growing gap between the official

and the parallel exchange rate contributed to accelerated capital flight, fuel shortages,

rising inflation, idle industrial capacity, and rising poverty. The ensuing increasing cost

of living and hardship on the population due to the deteriorating economic environment

further invigorated public discontent.

15. The new GoM immediately started to address overdue reforms in democratic

governance. Parliament has repealed some of the repressive laws passed by the previous

regime such as the Civil Procedure Amendment Act and Section 46 of the Penal Code

that was restricting press freedom. Others laws that GoM has prioritized to repeal are

Section 35 of the Police Act and the Local Courts Act. GoM has also instituted inquiries

into prominent human rights abuses. The official enquiry into the July 2011


6

demonstrations shall be brought to a conclusive end soon. As part of strengthening

freedom of speech, state-owned Malawi Broadcasting Corporation was announced to be

open as a true public broadcaster, to be used by all. GoM has also announced new

measures on public finance management, and is proposing to strengthen the management

of public procurement and controls, focused on strengthening key accountability

institutions such as the Anti-Corruption Bureau and the Auditor-General. Parastatal

reforms will be a priority as well. A long-awaited new Electoral Commission has been

appointed. The presidency has also been reaching out to a large audience, including civil

society, the church, the traditional authority, as well as to the private sector, the donor

community and to neighboring countries.

16. Government has already undertaken bold economic reforms. On May 7,

2012, ahead of a planned IMF program mission, GoM started implementing the long

overdue macroeconomic rebalancing program by liberalizing Malawi‘s foreign exchange

regime. In effect, prior to the adjustment of the official exchange rate, prices (including

food) were already adjusting to reflect the pass-through effect from a depreciated parallel

market rate as the official rate remained fixed. A few days later, significant fuel and

power price increases were announced to better cover costs of these essential

commodities. The much needed adjustment of fuel prices triggered a positive response

from the private sector leading to the critical normalization of fuel imports and supplies.

The Parliament also adopted the 2012/13 national budget on June 27, 2012, which fits

within a realistic IMF-agreed budget framework, with scaled-up resources for social

protection and a number of measures to encourage private sector investment. The budget

also includes a number of expenditure cuts, needed to restore economic balances and

foresees no net domestic financing on an annual basis. In this context, grants and

concessional financing are critical to help ease this fiscal adjustment process to help

finance social mitigation measures and critical growth enhancing investments.

C. MACROECONOMIC CONTEXT

Economic Overview

17. During the period 2006 to 2010, Malawi experienced solid growth averaging

around 7 percent, supported by a stable macroeconomic environment and large aid

inflows. The growth was largely driven by growing agricultural exports, rising foreign

direct investment (FDI) inflows related to mining, and fiscal expansion. The debt relief

from the Heavily Indebted Poor Countries (HIPC) initiative helped to create the fiscal

space needed to generate the momentum for growth. The agricultural sector contributed

about 28 percent of GDP between 2006-11, primarily driven by tobacco exports, while

service sector has recently increased its share to about 33.1 percent of GDP, driven by the

telecommunication, retail and wholesale trade, and financial services.

18. Macroeconomic indicators (Table 2) point to an economy that was

performing well with moderate inflation, manageable current account deficit and


7

sustainable levels of domestic debt. These indicators, however, also depict an economy

that was excessively dependent upon external grants to meet its current deficits on both

fiscal and external accounts and where levels of external reserves have been generally

low. Both of these latter two factors made Malawi economy susceptible to external

shocks. The 2010 Country Economic Memorandurm (CEM) identified the overvalued

exchange rate as the most binding constraint on the Malawi economy, in addition to

inadequate power supply, weak human capital, lack of trade facilitation, and weak

financial intermediation.

Table 2: Malawi - Key Macroeconomic Indicators, 2007-2011

2007 2008 2009 2010§ 2011

§

GDP Growth (%) 9.5 8.3 9.0 6.5 4.3

Inflation (%) average 7.9 8.7 8.4 7.4 7.6

Growth in M2 (%) 20.0 20.0 23.9 33.9 35.7

Exchange rate (average US/MWK) 140.0 140.6 141.2 150.8 157

Current account balance including transfers (% of GDP) -1.0 -9.7 -4.8 -1.3 -5.9

Fiscal balance, excluding grants (% of GDP) -13.9 -11.2 -17.3 -10.3 -10.5

Fiscal balance, including grants (% of GDP) -1.2 -0.6 -5.7 0.1 -2.9

External Debt, Public Sector (% of GDP) 15.0 16.8 15.9 16.0 16.2

NPV of public sector debt (% of average exports) 30.3 42.6 57.1 44.6 47.8

Domestic Debt, Central Government (% of GDP) 12.2 19.9 22.0 15.3 16

Gross reserves in months of import cover 1.3 1.5 0.7 1.5 1.0

Average interest rate (91days T-Bill Rate) 11.0 10.5 10.5 6.2 6.8 Source: Malawi authorities, IMF, and World Bank staff estimate Notes: (§) These figures are preliminary estimates.

19. Macroeconomic imbalances started to build up after 2008 in the context of

the global crisis, the 2009 Presidential elections, and deteriorating relations with

donors. These events led to fiscal and external imbalances that required adjustment by

containing domestic demand. Even as the external deficit was growing, GoM maintained

a policy of fixed exchange rate. The ECF-supported program for Malawi went off track

shortly after completion of the first review in December 2010, leading to the suspension

of budget support grants by CABS DPs. With no adjustments in the 2011/12 budget in

the absence of budget support grants, the authorities resorted to central bank financing.

20. By end-2011, Malawi was grappling with severe foreign exchange shortages

which started to choke the economy. The excess demand for foreign exchange led to

increasing shortages of some critical goods, most notably, fuel. The stricter

administrative controls in the foreign exchange market further drove all operations to the

parallel market and the gap between the official and the parallel exchange rate shot up.

Malawi's economy slowed down as firms could not access foreign exchange to secure

inputs for production, and fuel supply shortages intensified.

21. In early 2012, real GDP growth for 2011 was estimated to have slowed to

about 4.3 percent, and barring significant reforms, the outlook for 2012 and beyond


8

was extremely bleak. The IMF Article IV mission in March 2012 projected that lack of

policy action would result in the slowdown of the economy to around 2.5 percent at the

end of 2012. Further in 2013, the economy would have entered into a policy-induced

recession, with a collapse in trading - both on the supply and demand side.

Crisis Response: Preparing for Growth Rebound and Mitigation of Social Impacts

22. The new GoM took decisive policy measures to arrest the slowdown in the

economy and is already implementing a comprehensive package of economic

reforms. The GoM addressed the overvaluation of the exchange rate. The GoM began

with a one-step 50 percent liberalization of the official exchange rate and foreign

exchange market. This included allowing the official market rate to track the prevailing

rate and the removal of restrictions on the setting of exchange rates by banks and foreign

exchange bureaus for transactions with their customers. The GoM has also removed the

requirement to surrender tobacco export proceeds to the Reserve Bank of Malawi (RBM),

where now the US dollars earned at the tobacco auction floors are transferred directly to

seller‘s commercial banks. This action is expected to help cushion part of the smallholder

tobacco farmers‘ welfare loss from the exchange rate unification and facilitate the process

of developing a functioning interbank foreign exchange market.

23. In addition, the authorities have moved to tighten monetary policy. The

decision to adjust the policy rate upward from 13 percent to 16 percent signaled the

authorities‘ tightening monetary stance. RBM has also recently intervened in the foreign

exchange market with a twin aim to supply foreign exchange for the private sector and to

absorb excess Kwacha liquidity from the market.

24. The authorities have reinstated the automatic adjustment mechanism for

retail prices of petroleum products to reflect import parity prices as well as

movements in the international fuel prices and in the exchange rate. In addition GoM

has allowed an upward adjustment in the electricity tariffs by 77 percent so that revenues

in the sectors are closer to covering the costs of production. This measure is a first step

towards a more market determined tariff structure in the electricity sector, partly

addressing price movement rigidities that have been one of the main influences behind

low private capital inflows into the sector.

25. The measures so far are having their intended effect. Foreign exchange

availability has improved dramatically. The parallel market for foreign exchange has

shrunk with a premium of about 5-10 percent from 80 percent. Supply of petroleum

products has normalized, the excess liquidity in the market has been mopped up, and

smallholder tobacco farmers are being paid at market determined exchange rates. The

supply response is also on track as firms have begun to resume normal operations as the

foreign exchange situation has normalized, fuel is available and credit lines are returning.

26. The authorities have presented a realistic 2012/13 budget to realize the

benefits of policy reforms, to entrench macroeconomic stability and expand social


9

safety net expenditures. The 2012/13 budget attempts to achieve a large fiscal

adjustment to put government finances on a sustainable course while expanding

expenditure on social safety net programs. GoM plans to bring down net domestic

financing to zero as at end June 2013 (from 5.6 percent of GDP in 2011/12), aided in part

by the increase in external grants. Exchange rate liberalization is also expected to have a

net positive impact on the budget.1 On the expenditure side, fiscal adjustment will entail

cuts in wasteful recurrent expenditures and postponement of development projects which

are 100 percent government-financed.

27. The budget provides for scaled up social protection interventions, including

the expansion of a country-wide labor intensive public works, FISP and other social

safety net programs such as school feeding program, the school bursaries program and

the social cash transfer program. GoM has expanded FISP for 2012/13 agriculture year to

reach a large number of poor farmers affected by the dry spells in the South. The budget

also provides for a 30 percent increase in the nominal wage bill and the cost of hiring

more teachers and health workers. To reduce fiscal risks, efforts would be geared towards

strengthening fiscal discipline, particularly public financial management, and expenditure

control to avoid accumulation of domestic arrears and build-up of domestic debt.

28. The budget also proposes removal of some taxes imposed in the previous

budget, including the minimum tax based on turnover and capital gains tax from

the sale of shares. In addition, the authorities have increased the investment allowance

on new and unused industrial building, plant and machinery to 100 percent; international

transport allowance to 25 percent; and removed VAT on machinery and financial

services. Together, these measures are geared to providing a conducive environment for

private sector investment in the country.

Medium Term Economic Outlook

29. The new government‟s effort to adopt appropriate policy measures and to

repair relations with the DPs has put Malawi on a firm position to return to faster

growth path. Real GDP growth is expected to exceed 6.0 percent by 2014, anchored

mainly on the sectors that were hardest hit by the foreign exchange shortages, including

tourism, manufacturing, transportation services, construction, and trade. Other sectors,

including agriculture, will also benefit from the easing of fuel shortages.2 Inflationary

1 This is based on the fact that expected large increases in foreign grants (projected at over 10 percent of

GDP) and their kwacha values will more than offset the increase in kwacha value of government imports.

On average about 40 percent of government expenditures is foreign exchange sensitive.

2 With agriculture being the dominant sector, exchange rate unification should eliminate the implicit tax

and increase welfare, especially for smallholder farmers whose earnings are pegged to the US Dollar.


10

pressures are expected to remain strong in 2012 with a projected annual average inflation

of about 18.4 percent, but are expected to ease to pre-2010 levels of about 7.5 percent in

2014.

30. The overall balance in the medium term is projected to narrow from a deficit

of 7.0 percent in 2011/12 to an average deficit of 1.1 percent of GDP during 2013-

2015. The authorities‘ commitment to fiscal adjustment during 2012-14 provides an

important anchor for safeguarding sustainability in the medium term, but it faces risks

arising from possible spending pressures in the run-up to elections scheduled for mid-

2014. To support the low fiscal deficit goal, GoM will continue to implement a number

of tax policy measures and tax administration mechanisms introduced in the 2011/12

budget, to further boost its revenue (projected to average 23 percent of GDP during

2012/13-2014/15). Specifically, efforts have been intensified to broaden the tax base,

with increased efforts to mobilize both tax and non-tax revenues.

31. The current account deficit is projected to narrow from 5.9 percent of GDP

in 2011, to less than 2.5 percent during 2013-2015. Exports are expected to grow at a

faster rate than imports during 2013-2015 at an average of 10.8 percent compared with

4.2 percent for imports. The medium-term financing plan requires continued public sector

inflows, in addition to FDI and other private inflows. The recovery of private capital

inflows and accumulation of international reserves is expected to strengthen the country‘s

balance of payment position.

32. Agriculture, manufacturing, tourism, mining and construction sectors are

expected to rebound quickly. Specifically, agriculture is expected to grow by 5 percent

within the next 24 months as production diversifies. The manufacturing sector is

expected to rebound during the second half of 2012 as firms begin to use up idle capacity.

The mining sector‘s contribution to growth is projected to increase from 13 percent of

GDP in 2011 to over 16 percent of GDP over the next three years. The mining

contribution will also be boosted by a projected increase in coal production in 2013-14,

as well as the coming on stream of the niobium mining project at Kanyika by 2014.

33. Private investment is projected to recover from 8.6 percent of GDP in 2011 to

an average of 14.0 percent during 2013-2015, on the back of rapid improvements in

business environment. FDI is also projected to increase with the improvements in the

business climate and restored private sector confidence, as well as the move to a floating

exchange regime.

34. In view of the above analysis on the medium-term outlook, GoM‟s

reinvigorated macroeconomic policy framework is appropriate. However, the

medium-term prospects of the economy, especially its ability to sustain strong growth

that will be accompanied with a solid fiscal and external position, remain subject to

important risks. These risks, which could be mitigated by government policies, come

especially from fiscal loosening in the run-up to the general elections in 2014, softening


11

of financing in the event of an off-track IMF program, as well as from parastatal

performance issues leading to contingent liabilities.

D. SECTOR CONTEXT AND STRATEGY

Poverty, HIV/AIDS, Nutrition and Social Protection

35. Poverty in Malawi remains widespread and concentrated in rural areas3.

Income inequality also remains high (Gini 0.39), reflecting profound inequities in the

access to assets, services and opportunities across the population4. The 2007 Malawi

Poverty and Vulnerability Assessment (PVA) estimated that in 2004 about half of the

Malawian population (52.4 percent) lived below the poverty line (about 6.4 million) and

as many as 2.7 million Malawians (22 percent) lived in ultra-poverty, a level of total

income per capita below the minimum food expenditure needs.

36. The analysis also showed that poverty has been driven by limited access to

education, production assets, shocks affecting agricultural productivity, and lack of

diversification and access to markets. Poverty is also being exacerbated by a high

population growth rate (about 3 percent) and density, as well as HIV/AIDS prevalence.

Nationally, the poorest household heads have less schooling, are older and are more

likely to be female than those of better-off households. Moreover, female-headed

households have 14 percent less per capita consumption than their male counterparts.

37. The worst poverty is concentrated in rural areas in the most densely

populated South and in the North. Urban areas have much lower percentages of people

below the poverty line (25 percent), and also the lowest share of ultra-poor (8 percent).

Therefore, any strategy to reduce poverty in Malawi and make growth more inclusive

must include a leading role for rural growth and development, with focus on smallholder

agriculture, tourism development, infrastructure, and other non-farm employment

creation. The Third Integrated Household Survey (IHS-3) results are scheduled for

release within the third quarter of FY13.

38. Malnutrition remains a major concern in Malawi. Given that malnutrition is

the underlying cause of one-third to half of all child deaths, and impairs cognitive

development by 20 IQ points or more, the challenge is to address the lack of a coherent

and integrated approach to nutrition. GoM‘s National Nutrition Policy and Strategic Plan

3 A preliminary, unpublished analysis of the Third Integrated Households Survey (IHS3) data presents a

discouraging picture, with no major changes in poverty over the 2004/5 – 2010/11 period. These trends

will be confirmed and published once the temporal price adjustments needed to compare poverty figures

over time have been completed.

4 Findings from IHS3 indicate that consumption inequality in Malawi (Gini coefficient) has risen sharply

from 0.39 in 2004/5, to 0.44 in 2010/11 mostly in rural areas.


12

(2007-2012) is currently being reviewed in light of new developments and increased

donor support. DPs (Canadian International Development Agency [CIDA], Irish Aid,

United States USAID [ United States Agency for International Development], United

Nations Children‘s Fund [UNICEF], the European Union [EU], and Food and

Agriculture Organization of the United Nations [FAO] among others) have expressed

interest to support the nutrition policy agenda. In March 2012, the Bank approved a

US$80 million Nutrition and HIV/AIDS project. The Bank also participates in a Donor

Nutrition Security Support Group to leverage and harmonize support to the multi-sectoral

nutrition program.

39. A large number of households move in and out of extreme poverty and

occasionally are in need of safety nets. A significant portion of the ultra-poor is in need

of social transfers, while some have extra labor available to earn income. The recent

economic downturn and related price increases have eroded the consumption of the rural

and urban poor, leaving a number of them food insecure. Most firms that employed

unskilled labor have scaled back leaving many bread earners jobless. The number of

people living below the poverty line has most likely increased. It is estimated that about

1.72 million households in rural and urban areas (about 60% of the population) are in

need of social support interventions.

Agriculture Sector

40. Agriculture remains the main source of growth and exports in Malawi. With

85 percent of the population residing in the rural areas, the sector accounts for over 80

percent of the country‘s employment, over one-third of GDP, and about 80 percent of

merchandise exports. The primary staple for most of these households is maize. Over 70

percent of all farmers in the country cultivate less than one hectare (ha) and a significant

number of these farmers still struggle to produce enough food to meet their annual

consumption requirements. Agriculture remains dominantly rainfed and dependent on

one short and variable annual rainy season. The country continues to experience severe

dry spells, especially in the southern region, rendering a significant number of households

perpetually food insecure. The largest and most costly investment program in the

agriculture sector is the FISP, which is designed to attain food security and is targeted

towards the poorer households. The FISP has been in many ways successful, but is also

relatively costly and dependent on both imports and favorable weather conditions.

41. High population density and poverty have led to significant human pressure

on the environment and degradation of Malawi‟s natural resource base, notably

land and forests. Unsustainable land and water use and management practices have

resulted in deforestation, run-off, flash floods, soil erosion and sedimentation, posing

serious threats to the environment and natural resource base.

42. Maize harvest is currently estimated at 3.6 million metric tons (MT), 7

percent below the bumper harvest of 2011 and 5 percent above the 5-year average.

It is estimated that a half million MT surplus should be available but this result may


13

prove overly optimistic as many localized areas suffered from serious dry spells.

Following the 2011 crisis and very low prices, tobacco production has decreased to

151,000 MT from 231,000 MT last year but prices have risen from 0.8 US$/kg in 2011 to

US$1.2-US$1.5 on average so far this year.

43. The exchange rate liberalization offers good prospects of income increase in

Kwacha for export crop producers, but may have a negative impact on smallholder

farmers who are not self sufficient and may have to buy additional staple food. The

impact on input prices for next year is also an issue. The GoM is planning to protect

smallholders from increased cost of critical farm inputs by increasing the number of FISP

beneficiaries from 1.4 to 1.5 million farming households and by keeping the beneficiary

contribution steady at MWK500 subsidy which now translates to a 95 percent subsidy on

a 50kg bag of fertilizer.

Social Protection Strategy

44. The Government Strategy (MGDS II) has identified social protection as one

of the key pillars for bringing about shared growth. Government spending on social

protection is at 0.2 percent of total spending, with most of it being donor-funded. The

current national policy framework is laid out in a National Social Support Policy (NSSP)

as well as a National Social Support Program which is yet to be operationalized (see

Figure 1).

45. The objective of the draft NSSP is to provide a framework for prioritizing

targeting of support to reduce poverty and enable the poor to move out of poverty

and vulnerability. It consists of four main pillars: (i) provision of social support; (ii)

protection of assets; (iii) promotion of productivity enhancement; and (iv) policies to

reduce exclusion5.

46. The draft NSSP is meant to provide an overarching framework for all social

support activities undertaken by Government and donors. The GoM has identified

five social support programs that are to be included in the NSSP. These are: 1) public

works; 2) social cash transfers; 3) school meals; 4) micro-credit; and 5) village savings

and loan schemes. The figure 1 below illustrates how these are to be arranged in a

cascading web of support, from the poorest to the less poor6.

5 Draft World Bank Report: ―Effective and Inclusive Targeting of Social Support Programs in

Africa: Malawi Country Case Study - Synthesis Report‖ (December 22, 2011).

6 Ibid


14

47. Currently, many of the social support interventions in Malawi are

uncoordinated. The interventions include public works programs, social cash transfers,

school meals, and savings and loan schemes. Most of these interventions, except for the

public works, are not implemented nationwide and have limited ability to scale up in

times of crises. In addition, these interventions have different targeting mechanisms, and

it is possible to double target a needy household in the absence of a unified targeting

mechanism. Figure 1 below shows the categories of the poor living below the poverty

line and the kinds of needs and interventions that can be used to reach them.

Figure 1: Categories of the poor, their social support needs and proposed program

interventions

Source: National Social Support Program

48. The Bank is actively supporting the GoM in its effort to provide social

protection to the vulnerable. In this regard, the Bank has been providing financing

through the Malawi Social Action Fund (MASAF) in three phases. MASAF is now in its

seventeenth year. Under the RRP (MASAF 3 AF II), the Bank plans to further increase

support to the poor by scaling up the public works under the third phase of MASAF to

reach about 586,000 households with two cycles of public works within one year. The

support is geared towards assisting the poor households to smooth consumption and also

to protect their household assets and not engage in negative coping mechanisms. The


15

upcoming CAS will propose an intervention to transform the current public works

program into a comprehensive, predictable and productive social safety net program to

support the poor and vulnerable section of the Malawi population.

Agriculture Strategy

49. Under the Comprehensive Africa Agriculture Development Programme

(CAADP) process, GoM, in coordination with its development partners, formulated

the Agricultural Sector Wide Approach (ASWAp) as a strategy and investment

framework for improving the efficiency and effectiveness of the agricultural sector.

The ASWAP was approved in October 2011 and a roadmap has been developed to guide

ASWAp implementation. The ASWAp constitutes an investment framework to foster

donor harmonization and alignment in support to agricultural development and identifies

three priority areas for investments: (i) food security and risk management; (ii)

commercial agriculture, agro-processing and market development; and (iii) sustainable

agricultural land and water management. Its implementation will be supported by two

additional key support services: (i) technology generation and dissemination; and (ii)

institutional strengthening and capacity building. Beyond FISP, the GoM is strongly

committed to promote alternative crops (legumes, soybeans and cotton) and livestock to

diversify the maize and tobacco-based production system.

50. GoM also gives high priority to sustainable agricultural land and water

management, including irrigation development, which reduces dependence on

favorable weather conditions, while boosting productivity. The ASWAp aims to

increase the area under sustainable irrigation from 72,000 ha to 280,000 ha. Support to a

thriving irrigated agriculture sector is predicated on a demand-driven, service-oriented

approach with the full participation of farmers and commercial interests.

51. The Bank is actively supporting the agriculture sector. The Agricultural Sector

Wide Approach - Support Project (ASWAp-SP) aims to (i) strengthen institutional

capacities; (ii) improve the payoffs to the FISP by speeding the adoption of improved

technologies and promoting the adoption of complementary management practices

offering higher and more sustainable productivity gains; and (iii) increase the resilience

of the maize smallholder farming systems. An additional financing to ASWAp-SP

provides further support to the food security and agricultural diversification agenda and

includes rehabilitation of feeder roads to improve farmers access to input and output

markets. The Irrigation, Rural Livelihoods and Agricultural Development Project

(IRLADP) aims to increase productivity through the rehabilitation and construction of

irrigation infrastructure and the provision of an integrated package of technical and

advisory services for sustainable small-scale irrigation. IRLADP also includes an input-

for-assets program which aims at enhancing demand-driven rural public works programs

to create more community assets and build community resilience. In the upcoming CAS

(FY13-16), the Bank will put more emphasis on diversifying the maize-based smallholder

farming systems and help producers move beyond subsistence farming to more market-


16

oriented agriculture. Bank investments will thus promote stronger linkages between

agriculture research and extension, irrigation infrastructure and water management, land

administration and sustainable land management, with produce processing and marketing

and market access in rural areas.

E. RATIONALE FOR THE PROPOSED PROGRAM AND BANK STRATEGY

Rationale

52. There is an urgent need to support GoM‟s reform program. The proposed

RRP and its timing are key to maintain confidence in the reform effort and inject much

needed resources both for reserves and to provide mitigation for those adversely affected

by the reforms. The IMF estimates GoM‘s external financing needs in the short term at

about US$ 200 million. The Bank‘s assessment shows a need of an additional US$80-

100 million per year to partially mitigate the loss of welfare of the poorest. Failure to

address these urgent needs will not only result in economic hardship and loss of

confidence in the reforms, but will present additional long-term risks to the sustainability

of the reforms.

53. The proposed interventions under the RRP will contribute directly to the

short-term needs of Malawi. The RRDPG will help mitigate the impact of the economic

reforms on the most vulnerable and contribute to a quick growth rebound. RRDPG will

implement measures to improve the prioritization of social expenditure in the 2012/13

national budget, strengthen social sector resilience, improve the functioning of the fuel

market, improve incentives to exporters, including smallholder tobacco farmers, and

enhance economic management of the FISP. The two Additional Financing operations

(MASAF 3 and IRLADP) will provide resources to mitigate the effect of the reform,

especially the exchange rate liberalization which eroded poor people‘s incomes thereby

depriving them of adequate nutrition and access to basic necessities, further perpetrating

poverty. MASAF 3 AF will provide cash earning opportunities to the poorest people in

the first three quintiles, country-wide, in both rural and urban areas. These mitigation

measures would be implemented through various support mechanisms including public

works and cash transfers. AF of IRLADP enables a nationwide scale-up of diversified

agricultural livelihood and productivity support primarily under the Inputs for Assets

Program that would have a cushioning effect and enhance development impacts on the

rural poor in all 28 districts. These interventions will help the construction and

rehabilitation of critical community assets, such as mini-scale irrigation facilities, rural

feeder roads as well as increase access to a diversified demand-based menu of farm

inputs through the input-for-asset program (including fertilizers, variety of seeds, farm

equipment and small livestock).

54. These short-term interventions will be complemented by medium and long-

term interventions to ensure that Malawi is once again on an accelerated growth

path. All three proposed operations under the RRP will have a positive effect in the

medium term. Taken in combination, they will help support the creation of a solid


17

foundation for Malawi‘s economy to return on an inclusive growth path that contributes

to poverty alleviation. In addition, as discussed below, the upcoming CAS (FY13-16)

has identified various interventions which will help address medium- and long-term

development challenges. The interventions will also accelerate the implementation and

broaden the scope of ASWAp to ensure that complementary productivity-enhancing

interventions support food security over the long-term. These interventions will help in

the rehabilitation and sustainable and efficient management of small-scale irrigation

facilities, critically address catchment conservation, improve access to extension services

and support marketing and post harvest assets. Short-term interventions will be

complemented by medium- and long-term interventions to sustain growth in agricultural

productivity and diversification, consolidate achievements in agriculture and irrigation

development and prepare for future investments in the sector.

CAS Alignment

55. The RRP is consistent with the CAS FY07-11 and is also an integral part of

the Bank‟s assistance program to Malawi articulated in upcoming CAS FY13-16,

currently being finalized for Board presentation in the second quarter of FY13. The

FY07-11 CAS focused on improving agriculture productivity, decreasing vulnerability

and sustaining improvements in expenditure management, budget execution and

accountability which are also key aspects of the proposed RRP. The draft CAS (FY13-

16) draws on the Africa Strategy, contributes to the achievement of a selected subset of

Malawi‘s development goals as outlined in MGDS II, and supports the achievement of

the MDGs. In both strategies, there is a provision of programmatic development policy

lending (DPL) operation to support policy reforms especially in areas where investment

lending is being provided. A stand alone DPL has been accommodated to bridge the gap

created by the cancelled development policy lending operation for the fourth quarter of

FY11 due to weak economic governance. The proposed RRDPG will support policy

reforms that contribute towards restoring prudent fiscal policy and sound macroeconomic

management and reduce key fiduciary risks in the Public Financial Management (PFM)

system in line with the Africa Region Strategy‘s foundation of building governance and

public sector capacity through the public expenditure management systems. The two

additional financing projects will assist poor and vulnerable households through

decentralized mechanisms, to improve their livelihoods, income, and access to basic

social and economic infrastructure.

OP/BP 8.00 Alignment

56. The proposed RRP is well aligned with OP 8.00. The proposed RRP will

contribute to (i) prevention of further economic decline and help guide Malawi towards

long-term economic growth; (ii) facilitate the availability of essential commodities, for

example petroleum and medical products, as well as services which have been disrupted

by adverse economic policies; and (iii) protect vulnerable groups during this reform

period through scaled up public works and inputs-for-assets program to improve

vulnerable households‘ access to income and increase food security. As specified in the


18

OP/BP 8.00, the proposed interventions address economic and/or social impacts while

continuing the focus on the Bank‘s competencies and mandate. This approach is fully

incorporated into the proposed Program.

THE RAPID RESPONSE PROGRAM

Program Instruments, Linkages and Sustainability

57. This RRP is based on a series of economic and sector works as well as

extensive policy dialogue, both prior to and post government change in Malawi. Given the concern of the possible negative impact of exchange rate liberalization, the

Bank undertook various analyses in FY12, including a Comprehensive Exchange Rate

and Foreign Exchange study for Malawi and a Welfare Impacts and Mitigation of

Exchange Rate Unification in Malawi. Evidence on the impact of the crisis on welfare

clearly showed that the poor were heavily affected by the deteriorating economic

situation, especially since fall of 2011, when the laying off of workers and loss of income

and food consumption as a result of price changes induced by depreciation in the parallel

market started to emerge.

58. The Bank‟s analytical work formed the basis for a comprehensive program

for “Competitiveness, Growth and Poverty Reduction”. Further work was carried out

to design an affordable program to help sustain consumption and promote economic

growth and poverty reduction. Two compensation scenarios were considered to partially

cover the loss of welfare of the poorest 60 percent of the rural and urban population

through Labor Intensive Public Works Programs (LIPWP). In addition, it was estimated

that if the unification of the exchange rate was undertaken in time for tobacco farmers to

receive adjusted prices, the original losses due to foreign exchange liberalization induced

price increases could be ameliorated by as much as 32 percent on average, especially for

the poorest tobacco farmers. The analysis also concluded that in order to promote

economic growth and poverty reduction, additional measures would be needed to protect

livelihoods through support to agricultural productivity and income diversification. An

examination of the ongoing safety net interventions found that the LIPWP and the Social

Cash Transfer programs were ideal for reaching the vulnerable poor. However, in the

context of a crisis response context, LIPWPs were preferable, as they were immediately

scalable under MASAF and IRLADP. These two programs have systems in place and

also have successful experience and institutional set-up that can deliver LIPWP. Based on

these studies, a high level multi-sector mission in March 2012 engaged in dialogue with

the economic management cabinet of the previous administration presenting the Bank's

views on a comprehensive program for ―Competitiveness, Growth and Poverty

Reduction‖. 59. The RRP supports the implementation of this Comprehensive Program. It

represents an integrated and well-sequenced response to match the need for

macroeconomic stabilization with an expansion of social protection programs and

adequate support to encourage a quick economic rebound.


19

60. At the macro level, the RRDPG aims to support macroeconomic stability and

a quick growth rebound while mitigating negative impact on the most vulnerable

groups. The RRDPG is the right instrument to urgently respond to the request by the

authorities for a quick disbursing budget support operation to bridge the financing gap in

the national budget to help stabilize the economy and finance social mitigation measures.

The DPO also supports reforms geared towards improving incentives to exporters,

including the smallholder tobacco farmers, through the removal of an implicit tax on

exports following the unification of the exchange rate, as well as the reform that allows

tobacco proceeds to be transferred to the sellers‘ commercial banks at the prevailing

market exchange rate. Smallholder tobacco farmers have now seen their real income

increase and the potential welfare loss from the exchange rate liberalization minimized.

61. At the microlevel, the AF operations for MASAF 3 and IRLADP help

provide immediate support for income generating activities. They will enable

beneficiaries to earn income to meet their basic needs, as well as have sufficient

resources to buy subsidized farm inputs for the next season. Moreover, the interventions

are well sequenced to ensure that during the lean agricultural season beneficiaries are

able to earn income from public works and also engage in irrigation activities during the

winter period, which will help them increase agricultural production. Beneficiaries will

specifically be able to participate in the construction of small irrigation infrastructure in

exchange for farm inputs, which will in turn increase their income and their ability to

sustain themselves throughout the year. Interventions through LIPWP will help create

jobs during the off-agriculture season while at the same time help the country develop its

infrastructure. The beneficiaries will be able to utilize earnings for food and basic

household needs, as well as for accessing subsidized farm inputs during the later part of

the year, which will help increase production. Beneficiaries will also be able to save some

of their incomes and benefit from information that will be provided on investment and

finance management.

62. The Bank provided further assistance on the 2012/13 budget formulation.

After the new Government initiated its reform program, it requested the Bank to provide

assistance in expenditure prioritization for the preparation of the 2012/13 budget. The

exercise had a dual purpose: (i) to ensure that total expenditures fit with the IMF-agreed

fiscal framework; and (ii) to prioritize social spending to allow for scaled-up social

protection program. The budget serves as the linchpin for the Bank‘s proposed support.

Program Objective

63. The program will expedite the implementation of Malawi's comprehensive

economic recovery program to regain macro economic stability while protecting the

most vulnerable people from the effects of the recovery reforms. In this regard, the

overall objective for the RRP is to ―support emergency recovery reforms aimed at

restoring macroeconomic stability, accelerate the resumption of growth, and mitigate the


20

impacts on vulnerable households from the legacy of inflationary pressures and

rebalancing of the economy‖.

Program Description

64. A detailed description, appraisal, technical analysis and implementation

arrangements for each operation are contained in the respective project papers

(Attachments A, B, and C and their respective Annexes). A brief summary of each

proposed operation is presented here.

1. Rapid Response Development Policy Grant (US$50 million)

65. The objective of RRDPG is to support the authorities‟ efforts to achieve and

maintain macroeconomic stability and restore the functioning of a market-based

economy to ensure a quick growth rebound; and to protect the poor and most

vulnerable groups in the short run while improving transparency of delivery

systems. The reform program supported by the RRDPG focuses largely on the short-

term measures that aim to restore macroeconomic and social stability in response to

ongoing reforms through fiscal adjustments and efforts to protect the vulnerable.

Specifically, the operation recognizes and supports measures to entrench macroeconomic

stability through the national budget, improve functioning of the petroleum markets and

incentives to exporters, including smallholder tobacco farmers, strengthen social

protection interventions and the resilience of the most vulnerable groups to shocks, and

improve economic management of the farm input subsidy program (FISP). These

reforms are in line with the GoM‘s own Economic Recovery Plan aimed at getting the

economy back on the sustainable growth path and reducing the country‘s vulnerabilities.

66. Some of the outcomes of these reform areas will be achieved over a period

longer than one year. Monitoring of the results will therefore continue under future

DPOs envisaged in the FY13-16 CAS. In supporting the implementation of selected

reforms, the GoM is expected to make some budgetary savings through improved

controls in the use of public resources, which could be directed towards social sector

spending. The program is also supporting enhanced transparency and citizens‘ access to

information on government actions and policies. Ultimately, if fully implemented, these

policy reforms will contribute towards enhancing the credibility of the public sector

financial management in the country.

67. All prior actions reflect the reform priorities of the GoM which are

supported by the Bank in the CAS. The full program supported by the proposed

operation is set out in the Policy Matrix found in Annex 2 (Attachment A). The prior

actions support the GoM in its effort to implement its economic recovery program.

During implementation, maintenance of an appropriate macroeconomic policy

framework, as well as a satisfactory program performance would remain as underlying

conditions for this operation.


21

2. MASAF 3 Second Additional Financing (US$50 million)

68. The Government has proposed the implementation of short-term safety net

mitigation measures to cushion the vulnerable population from the adverse effect of

the reform program. These mitigation measures would be implemented through various

support mechanisms including public works, cash transfers, agriculture input subsidies,

and irrigation infrastructure supports. The MASAF project has been running for 17 years,

and over time has evolved and developed comprehensive methodologies for poverty and

vulnerability targeting, and designed systems for monitoring and evaluation of social

protection indicators.

69. The Third Malawi Social Action Fund APL II (MASAF 3) program has three

components: (i) Community Livelihood Support Fund (CLS); (ii) Local Authority

Capacity Enhancement Fund; and (iii) National Institutional Strengthening (NIS). The proposed Additional Financing will support the first CLS and the NIS and will scale

up the Public Works Sub-project Program (PWSP) nationwide in urban and rural areas

expanding its coverage from the normal 200,000 households in a cycle per year to about

586,000 households in two cycles in one year. In addition, the number of days will be

increased as well as the daily wage amount and the number of projects per community.

The PWSP would not only be available for the able-bodied people, it would also support

direct transfers to labor constrained households who will not be able to engage in public

work activities (up to 20 percent of the total beneficiaries). The original project design

allowed for up to 5 percent only for this beneficiary group. The labor constrained

households include those headed by children, elderly, and people with disabilities and/or

chronic illnesses. The proposed project will strengthen its linkages to the Community

Savings and Investment Program (COMSIP) to promote savings, as well as facilitate the

graduation process and engagement into economic activities. The Additonal Financing

will not support the Local Authority Component as capacity enhancement programs are

already in place under the original project.

70. The NIS component will address national-level cross-cutting issues aimed at

improving accountability and transparency in the use of project resources and

project management. It will help address weaknesses in the institutional system for

fiscal discipline, especially related to rules and regulations on fiscal controls, the

procurement regime, and personnel payroll management. It also seeks to strengthen the

operational links between the central and local governments through an improved fiscal

architecture. It supports the roll-out of the Integrated Financial Management Information

System (IFMIS) to Local Authorities through capacity building. MASAF will therefore

enable the Bank to provide technical assistance to the GoM to implement some of the

reform programs that are essential for delivery of services to poor and vulnerable

households, in addition to reforms supported by RRDPG.


22

71. The MASAF 3 AF II is classified as a Category B project and triggers OP

4.01, 4.09, 4.12 and now OP 4.36. The original MASAF project approved

Environmental and Social Management Framework (ESMF) and Resettlement Policy

Framework (RPF) will be applied for this AF. Since OP 4.36 is now triggered with the

AF II, the GoM will revise the ESMF within six months after project effectiveness in

order to ensure it includes guidance on how to prepare Forest Management Plans for the

community reforestation subprojects. The revised ESMF will be re-disclosed in country

and in the Bank‘s InfoShop. In order to address the requirements of the triggered policies,

potential impacts have been identified and mitigation measures elaborated, and costed in

readiness for implementation of AF II. The specific details are presented in Attachment

B.

3. IRLADP Second Additional Financing (US$50 million)

72. The proposed IRLADP additional financing is primarily intended to support

the rural poor, cushioning them from the current economic hardships, as well as

consolidate project achievements and prepare irrigation investments for longer

term development within the sector. Through this project, farmers will be supported to

increase irrigated crop yields, add value to their produce and improve marketing and farm

sales. The main project activities include provision of irrigation services including

infrastructure, technical and advisory services for sustainable small-scale irrigation as

well as diversified and demand-driven support to livelihoods diversification, access to

farm inputs and support to marketing and post harvest assets. The AF is also designed to

facilitate early emergency response through a newly introduced contingency window.

The general objectives of the AF are in line with those of the original project, and the AF

will scaleup from 11 districts to all the 28 districts in the country and reach a larger

number of beneficiaries.

73. The IRLADP AF has five components: (i) Irrigation rehabilitation and

development and catchment conservation which supports rehabilitation and development

of small scale irrigation schemes, and water use efficiency in existing schemes. This

component also has a new provision for a strategic study on the future of irrigation

development and management in Malawi; (ii) Farmer services and livelihood fund to

support beneficiary communities, particularly those covered under the irrigation schemes,

to obtain complementary services and goods for optimizing their returns from irrigated

farming, to add value through micro-processing, to improve the marketing of their

produce, and to build their technical and business capacities; (iii) Institutional

development and capacity enhancement which will focus on consolidation of the capacity

building gains and help ensure that capacity for irrigation development and management

is maintained; (iv) Project coordination, monitoring and evaluation; and (v) a new

component on contingency for disaster risk response that will support preparedness and

rapid response to disasters as needed.


23

74. The project will support growth-oriented agricultural development by

working with the economically active poor in the rural areas. A major higher level

objective is to raise smallholder productivity and food security, and to increase

smallholder share of GDP. The principal target group under the project will be the

economically active rural poor (those of working age and in good health but lacking

productive assets) and, to a lesser extent, the transient poor (those at a risk of becoming

poor due to periodic or transitory shocks). While this project is aimed at promoting

economic growth through development in irrigation and other activities by the capable

poor, the ongoing MASAF is focused on providing social protection and livelihood

enhancement activities. Hence, it is important that a district‘s or community‘s

participation in this project does not exclude it from other sources of safety net type

assistance.

75. IRLADP is classified as an environmental assessment category B project and

triggers OP 4.01, 4.09, 4.12, and 7.50. The original project approved ESMF and RPF

will be adopted for this AF: potential environmental and social adverse impacts have

been identified and mitigation measures have been elaborated and costed in readiness for

implementation under AF II. The ESMF and RPF have both been redisclosed in country

and in the Bank‘s InfoShop. Specific details relating to the AF‘s environmental and

social impacts and principle safeguard policy considerations are presented in Attachment

C.

F. FINANCING PLAN

76. The Program would be financed through International Development

Association (IDA) resources by front loading from the IDA16 envelope for Malawi.

Total IDA funding for the proposed Program amounts to US$ 150 million. Each of the

proposed operations will have financing of US$50 million.

Table 3: Estimated Program costs

Operation Total Cost (US$

m)

A. Rapid Response Development Policy Grant 50.00

B. Additional Financing for MASAF 3 APL II 50.00

Component 1: Community Livelihood Support fund

Local Authority Window for PWSP US$42.75 million

Community Window US$2.25 million for COMSIP

45.00

Component 3: National Institutional Strengthening 5.00

C. Additional Financing for IRLADP 50.00

Component 1: Irrigation Rehabilitation and Development and

Catchment Conservation

12.50

Component 2: Farmer Services and Livelihood Fund 30.90

Component 3: Institutional Development and Capacity

Enhancement

3.55


24

Operation Total Cost (US$

m)

Component 4: Project Coordination, Monitoring and Evaluation 3.05

Component 5: Contingency for Disaster Risk Response 0

Total 150.00

G. COORDINATION WITH DEVELOPMENT PARTNERS ON PROPOSED

PROGRAM

77. DPs in Malawi, who are increasingly becoming more harmonized in the

provision of their development assistance, have positively received the proposed

RRP.

78. The RRDPG operation will be implemented within the framework of the

Common Approach to Budget Support (CABS) which represents a group of

development partners that use a joint approach in the provision of budgetary

support to the GoM. As was the case with the previous PRSC I-III series, the Bank has

been collaborating very closely with Malawi‘s main development partners, in particular

the IMF and AfDB. Attainment and sustainability of sound macroeconomic management

will be a precondition for implementation of the RRDPG. Malawi has negotiated a new

ECF arrangement with the Fund expected to be presented to the IMF Board in July 2012,

and the coordination between the Bank and Fund teams is strong. A joint IMF/World

Bank Debt Sustainability Analysis (DSA) for low-income countries (LIC-DSA) was

undertaken in late March 2012 in the context of the IMF Article IV consultations.

79. MASAF team and the Development Partners Technical Working Group

(DPTWG) results on social protection mapping culminated into a decision to scale

up Public Works Program in order to cushion the poor from the inflationary effects

of exchange rate liberalization. DPTWG aims to provide a forum for effective

coordinated development partner support to the social protection agenda. DPTWG

comprises Irish Aid, World Bank, German Development Cooperation, DFID, EU,

Norway, USAID, WFP, UNDP, UNAIDS, & UNICEF. The social protection mapping

results praised MASAF Public Works Program for helping to create community assets

that would increase access to socioeconomic services, particularly the FISP. The

MASAF program also has the infrastructure in place to provide additional employment in

any period chosen, provided funding is available. Other programs assessed included

school meals, secondary school bursaries, Malawi Social Cash Transfer Program, and

provision of meals to Community Based Child Care. Some of the disadvantages of these

programs include limited coverage, high exclusion and inclusion errors, failure to be

scaled up rapidly, and seasonality of assistance.

80. In preparing IRLADP AF II the Bank discussed with the International Fund

for Agriculture Development (IFAD) and other Development Partners supporting


25

the irrigation and agriculture sectors, organized in the informal coordination group on

irrigation, most notably AfDB, EU, GIZ (Germany Agency for Technical Cooperation)

and Japan International Cooperation Agency (JICA). Collaboration with AfDB is closely

coordinated on the jointly agreed support to the roadmap for the Shire Valley Irrigation

Project preparation; and with all development partners on the development of a

harmonized investment framework for the irrigation sector along with financing and

monitoring and evaluation (M&E) arrangements that are supported by other development

partners. Specific arrangements have been reflected in the Attachment C. The original

IRLADP was co-financed with IFAD and used Bank implementation procedures.

H. PROGRAM BENEFITS, RISKS AND MITIGATING MEASURES

Benefits

81. The provision of timely support to Malawi will assist GoM in pushing

forward with its reform efforts. The Program‘s impact – as measured by economic

returns, social, poverty and environmental benefits - is expected to be positive. The RRP

aims to support GoM in its reforms to stabilize the economy through the RRDPG and

mitigate the impact of the reforms on the most vulnerable through additional financing

for MASAF and for IRLADP. The specific benefits of the program are:


26

The RRDPG support will help sustain the reform momentum by supporting

the macroeconomic stabilization effort through budget financing. Among

other key reforms, RRDPG will help improve the functioning of the petroleum

market, improve incentives for exporters (including smallholder tobacco farmers),

and improve economic management of the FISP.

MASAF AF will assist in cushioning vulnerable groups from the negative

effects of exchange rate liberalization through cash provision via a scaled-up

public works program and cash transfers. Vulnerable groups targeted include

the landless, female-headed households, child-headed households, and the elderly

and disabled, persons living with HIV/AIDS, and the underemployed and

unemployed in urban areas. It is expected that some of the MASAF earnings by

households will go towards purchase of food and subsidized farm inputs to

improve productivity and reduce food insecurity. The project is expected to

benefit about 586,000 households or 2.9 million people representing over 20

percent of Malawians.

IRLADP will help increase agricultural productivity of poor rural

households throughout the country. The program will help households diversify

beyond the staple maize to rice and other high value crops in irrigation schemes.

Productivity is expected to improve through increased cropping intensity and

more extension service support. Farmers are also expected to earn more incomes

through high value crops.

Risks and Mitigation

82. The reforms being implemented by GoM are expected to reduce some of the

risks that have been threatening Malawi in the past two years. In the context of these

reforms, the current major risks that the country faces relate to availability of funding,

government capacity to deliver, and political commitment to reforms. Project-specific

risks are outlined in respective Attachments.

83. Availability of additional resources to GoM. The first risk is whether donor

support will be delivered in required amounts and in a timely manner to ensure adequate

reserves for GoM, as well as increased provision of mitigation measures for those

adversely affected by the reforms. Several of the DPs have expressed their willingness to

provide support and are planning to accelerate disbursement of existing programs, as well

as preparation of new programs and as of June 30, DFID is the only DP to have

disbursed. .. To mitigate this risk, GoM has successfully negotiated a new 3-year ECF-

supported program, which is expected to be presented to the IMF Board in July. The

Bank is coordinating closely with DPs on additional support to social protection

programs, which should be forthcoming soon, as well as on budget support, with AfDB

also accelerating its budget support preparation.

84. Inflationary pressures and public support to reform. The consequences of

some of the reforms such as exchange rate liberalization could worsen in the coming


27

months because of inflation, leading to public discontent. The immediate reaction to the

exchange rate liberalization from some sectors such as tobacco farmers and car dealers

has been positive as it eased doing business and profit margins. However, prices of some

goods and services may further rise. Some relevant government ministries/agencies have

already started to discuss the consequences as part of change. There will be a need for

GoM to have an effective and comprehensive public information, education and

communication (IEC) program to help stakeholders understand the reforms and their

consequences in the short and medium term to manage expectations.

85. Sustaining reforms in the run-up to elections. This could be challenging

especially for politically sensitive reforms. Malawi will be gearing for campaigns in

preparation for presidential and parliamentary elections in 2014. Experience has shown

how leaders have deviated from economic reform plans and prudent macro-fiscal

management to satisfy political objectives in the run-up to elections. The capability of

this government to stay the course and sustain its economic recovery reforms would be

critical for a substantive economic turnaround within the first two years.

86. Inadequate capacity and coordination in government to steer reforms and

implement programs. Public sector capacity has always been an issue in Malawi, and

now, with the ongoing reforms and expected support from DPs, GoM needs to ensure that

there is adequate staff with the right technical background to plan and implement the

reforms and upcoming operations, and that the necessary coordination among relevant

line ministries is strengthened. Government realizes the weaknesses in management of

public procurement and controls, and also the need to strengthen key accountability

institutions. In this regard, it has pronounced a ―national austerity drive‖ to address some

of these issues. Several existing interventions such as the Public Finance and Economic

Management MDTF are expected to help address some capacity challenges.

87. Vulnerability to adverse weather conditions. Adverse weather continues to be

an exogenous shock. Good rains are critical for food security, given that irrigation is

limited in Malawi. Good weather will be critical for the success of some safety nets

intervention proposed in the RRP. IRLADP will help in mitigating some of the risks by

financing irrigation schemes to help facilitate food production all year round.

I. TERMS AND CONDITIONS FOR PROGRAM FINANCING

88. The financing will be provided in the form of IDA grants and credits. All Credits

will be provided on standard terms of 10 years‘ grace period and 40 years‘ maturity.

Attachment A: Rapid Response Development Policy Grant

28

ATTACHMENT A: RAPID RESPONSE DEVELOPMENT POLICY GRANT

I. INTRODUCTION AND OVERVIEW

1. This program document proposes a stand-alone single tranche Rapid

Response Development Policy Grant (RRDPG) to the Republic of Malawi for SDR

33.20 million (US$50 million equivalent), on standard IDA terms. This operation acts

as a bridge between the PRSC I-III series and the future DPO series planned to be

launched later in FY2012/13 in line with the GoM‘s own new poverty reduction and

growth strategy, the Second Malawi Growth and Development Strategy (MGDS II). The

RRDPG is part of the Rapid Response Program (RRP) together with two additional

financing operations (Malawi Social Action Fund and Irrigation, Rural Livelihoods, and

Agricultural Development projects).

2. The development objectives of the RRDPG are to support (i) achieving and

maintaining macroeconomic stability, and restoring the functioning of a market-

based economy to ensure a quick growth rebound; and (ii) protecting the poor and

most vulnerable groups in the short run while improving transparency of delivery

systems. Specifically, the operation recognizes and supports measures to entrench

macroeconomic stability through the national budget; improve functioning of the

petroleum market and improve incentives to exporters, including smallholder tobacco

farmers; strengthen social protection interventions and the resilience of the most

vulnerable groups to shocks; and improve economic management of the FISP.

3. The RRDPG comes at the time when the GoM has undertaken bold and swift

reform measures to address persistent imbalances in the economy and to put

Malawi back on a trajectory of stronger growth and poverty reduction. At its

inception in April 2012, the new administration faced a situation of severe foreign

exchange shortages with a thriving parallel exchange market, shortages of fuel and other

intermediate inputs, a large fiscal deficit, and a declining growth.

4. In response, the new administration took several important steps. It initially

devalued the Kwacha by 50 percent, liberalized the foreign exchange market, including

the adoption of a floating exchange rate regime, thereby almost eliminating the parallel

market. In addition, the administration reformed petroleum prices, whereby retail prices

were adjusted upward to fully reflect import costs and to also put in place an automatic

adjustment mechanism to ensure that retail prices track world prices and changes in the

exchange rate. Electricity tariffs have also been increased to make them more cost

reflective and to reduce fiscal burden.

5. This operation recognizes the reforms that the GoM has already

implemented, and provides support to the 2012/13 budget, towards achieving and

maintaining macroeconomic stability and mitigating the impact of reforms on the

poor. The budget support grant supports the GoM‘s efforts to undertake a large fiscal

adjustment at a time when its own tax resources are under stress and there is a need to


29

expand poverty-reducing public spending. The GoM‘s tax resources have suffered a

setback due to the slowing down of the economy. On the expenditure side, the GoM has

planned a large temporary increase in expenditure on social safety nets to partially offset

the impact of price increases, caused by the sharp loss of the Kwacha value in the past

few months, on the poor and the vulnerable. The GoM has also planned to hire new

teachers and health workers to strengthen and expand delivery of social services.

6. The financing provided by this operation will be complemented by other

financial support geared to finance the budget and to also close the external

financing gap at a critical time. The GoM has negotiated a new three-year arrangement

with the Fund under the Extended Credit Facility (ECF). The Development Partners have

also responded positively to the reforms being implemented by the new administration.

The United Kingdom has already disbursed about £30 million to Malawi. The authorities

have also received pledges from other development partners, including USAID and

Ireland. Support from the international community includes pledged general/sector

budget support from IDA, AfDB (US$ 45 million), Norway, and European Union. If all

of the pledged support materializes, grants will exceed 10 percent of GDP in 2012/13.7

7. This grant is an integral part of a package of comprehensive support that the

Bank has organized, in a proactive manner, to help Malawi regain macroeconomic

stability. This support has included timely analytical and advisory services from the

Bank and just-in-time technical assistance to support the authorities to develop their own

comprehensive economic recovery plan to arrest the economic decline and alleviate

poverty.

8. A high level multi sector mission in March 2012 engaged in dialogue with the

economic management cabinet team of the previous administration presenting the

Bank's views on a comprehensive program for “Competitiveness, Growth and

Poverty Reduction.” The Bank has also provided technical assistance to support the

preparation of the 2012/13 national budget. A multi-sectoral mission visited Malawi in

mid-May 2012 to help the GoM in prioritizing expenditure allocations, with special

attention to social protection interventions.

9. The Bank‟s response through the RRDPG has been coordinated with

responses from other DPs, including the Common Approach to Budget Support

(CABS) development partners (DPs). Budget support in Malawi is provided within the

harmonized framework for the provision of budget support in Malawi, the CABS,

comprising IDA and five other participating DPs.8 The proposed reform program

7 Grants stood at 7.6 percent of GDP in 2010/11 and less than 5 percent of GDP in 2011/12.

8 Other members of the Common Approach to Budget Support (CABS) are the European Commission,

United Kingdom (DFID), African Development Bank, Norway, and Germany (KfW). The UNDP, IMF and

Ireland have observer status.


30

associated with this operation has been guided by the recently approved Second Malawi

Growth and Development Strategy (2011-2016), the GoM‘s economic recovery plan and

related discussions for the new FY13-16 CAS.

II. COUNTRY CONTEXT

A. Economic Background

10. During the period 2006 to 2010, Malawi experienced solid growth averaging

around 7 percent, supported by a stable macroeconomic environment and large aid

inflows. The growth was largely driven by growing agricultural exports, rising foreign

direct investment (FDI) inflows related to mining, and fiscal expansion. The debt relief

from the Heavily Indebted Poor Countries (HIPC)/MDRI initiative helped to create the

fiscal space needed to generate the momentum for growth. The agricultural sector

contributed about 28 percent of GDP between 2006-11, primarily driven by tobacco

exports, while service sector has recently increased its share to about 33.1 percent of

GDP, driven by the telecommunication, retail and wholesale trade, and financial services.

11. Macroeconomic indicators (Table 1) point to an economy that was

performing well with moderate inflation, manageable current account deficit and

sustainable levels of domestic debt. These indicators, however, also depict an economy

that was excessively dependent upon external grants to meet its current deficits on both

fiscal and external accounts and where levels of external reserves have been generally

low. Both of these latter two factors made Malawi economy susceptible to external

shocks. The CEM (2010) identified the overvalued exchange rate as the most binding

constraint on the Malawi economy, in addition to inadequate power supply, weak human

capital, lack of trade facilitation, and weak financial intermediation.


31

Table 1: Malawi - Key Macroeconomic Indicators, 2007-2015

Source: Malawi authorities, IMF, and World Bank staff estimate

Notes: (§) These figures are preliminary estimates. (*) Projections


32

12. Macroeconomic imbalances started to build up after 2008 in the context of

the global crisis, the 2009 Presidential elections, and deteriorating relations with

donors. This combination of events led to fiscal and external imbalances that required

adjustment by containing domestic demand. This in turn would have likely required a

policy mix that would have included both a fiscal adjustment and a monetary restraint.

Even as the external deficit was growing, the GoM maintained a policy of fixed exchange

rate. The IMF program at that time recommended a flexible exchange rate regime and

liberalizing payments for current account transactions, but after completing the first

review in December 2010, the program went off-track in June 2011, when the GoM

failed to implement its commitments. Consequently, several donors suspended their

budget support grants. However, the GoM did not manage to adjust to the loss of budget

support grants and resorted to increased domestic financing including borrowing from the

RBM.

13. One main outcome of the overall inconsistent policy mix was that by end-

2011, Malawi was grappling with severe foreign exchange shortages which started to

choke the economy. The excess demand for foreign exchange led to increasing

shortages of some critical goods, most notably, fuel. Faced with rapidly falling

international reserves, the authorities devalued the kwacha by 10 percent in August 2011

and concurrently tightened restrictions on foreign exchange transactions, including

requiring foreign exchange bureaus to buy and sell foreign exchange within a small band

around the official exchange rate. The stricter administrative controls in the foreign

exchange market further drove all operations to the parallel market (Box 1) and the gap

between the official and the parallel exchange rate shot up, going from 20 percent in

August 2011 to about 80 percent in March 2012. Malawi's economy quickly started to

slide into a fast reduction in economic activities as firms could not access foreign

exchange to secure inputs for production and fuel supply shortages intensified.


33

source: Various GoM Documents and Bank staff.

14. In early 2012, real GDP growth for 2011 was estimated to have slowed to

about 4.3 percent, and more importantly barring significant reforms, the outlook

for 2012 and beyond was extremely bleak. The IMF Article IV mission in March 2012

projected on the basis of this growth trajectory that lack of policy action on the part of the

GoM would have resulted in the slowdown of the economy to around 2.5 percent at the

end of 2012. Further in 2013, the economy would have entered into a policy-induced

recession, with a collapse in trading - both on the supply and demand side.

15. Meanwhile prices in the economy had been adjusting to the parallel market

exchange rate. Figure 1 shows that between January 2008 and December 2011, all

prices were on an upward trend, particularly in recent months. This is more evident for

tradable foods and non-food items. Moreover, the non-tradable foods show a clear path

of ―within year seasonality‖ reflecting the cropping calendar of major domestically

produced foods. Figure 1 provides a clear correlation between the recent increase in the

parallel exchange rate and the steep increase in the prices of tradable foods. The same

kind of correlation is noted for non-food items. These results suggest that some

consumer prices, including food prices, were already adjusting to the steep change in the

parallel foreign exchange rate, i.e. some ―pass through‖ was already taking effect at the

time of the analysis.

Box 1: Foreign exchange market operations in Malawi 2008-Present

Prior to May 2012, Malawi had a hybrid foreign exchange system where foreign exchange was priced differently in different markets and sectors. The foreign exchange market was divided in three segments: commercial banks, foreign exchange bureaus and the parallel market. Due to scarcity of foreign exchange, interbank foreign exchange market did not exist. RBM used to set spot mid-rates prior to August 2011, where banks traded foreign exchange with a spread of 2 percent around the mid-rate. Foreign exchange bureaus were however free to set their own trading rates. In August 2011, however, more restrictions were imposed on the foreign exchange bureaus as they were from then required to operate within a fixed maximum spread of official rate like banks (significantly narrowing the gap between official and bureau rates). Limited access to foreign exchange from the banking system shifted demand for foreign exchange to the parallel market, increasing the pressure on the parallel exchange rate premium. This raised the volume of foreign exchange diverted from the official window, with bank traders becoming significant suppliers of foreign exchange to unofficial markets where they receive large premiums above the official rate. This increasingly eroded revenue collection as the shift to parallel market activities started to undercut the tax base.

Following the unification of the exchange rate in early May in the context of broader measures to liberalize the foreign exchange rate market, foreign exchange operations are gradually coming back to the formal sector away from the parallel market and the premium between official and parallel market rates has narrowed to about 5-10 percent. The depreciation of the Kwacha reflects forces of supply and demand and the fact that the market is not yet on stable equilibrium. The inter-bank transactions between banks are still non-existent with little or no extra foreign exchange to trade. With anticipated aid inflows, the market should stabilize.


34

Figure 1. Exchange Rates and Consumer Prices

January 2008 – December 2011

Source: Prices - NSO (2012) and Exchange Rates - GoM (2012)

16. Evidence of the impact of the crisis on welfare shows that the poor were

affected by the prevailing economic situation, with the laying off of workers and loss

of income and food consumption as a result of price changes induced by the

significant loss in value of the Kwacha in the parallel market. The Bank carried out a

simulation analysis of welfare implications of the unification of the exchange rate on

consumers, particularly the poor and the vulnerable, drawing upon the Third Integrated

Household Survey 2010/11 data.9 The analysis also described mitigating measures, to

sustain consumption and promote economic growth and poverty reduction, and their

monetary cost. The analysis found that in urban areas the poorest households were the

most severely affected in terms of loss of income in both aggregate consumption and in

terms of food consumption. While in rural areas there were no statistically significant

differences across income groups in terms of total consumption, the poorest groups

suffered the most in terms of lost food consumption as a result of devaluation-induced

price changes.

9 Welfare Impacts and Mitigation of Foreign Exchange Unification in Malawi, May 2012. This is a partial

equilibrium analysis that measures welfare impact in terms of the amount of money sufficient to

compensate households following price changes and enable the return to the initial levels of utility. Some

simplifying assumptions are made about the pass-through of depreciation to prices of consumption goods.

80

100

120

140

160

180

200

Jan 2008 Jan 2009 Jan 2010 Jan 2011 Dec 2011

Ind

ex:

Jan

uar

y 2

00

8=1

00

Tradable Foods Paralell Exchange Rate Official Exchange Rate Non-Foods


35

17. As mitigating measures, the analysis considered two compensation scenarios

(at 33 percent and 50 percent levels) through Labor Intensive Public Works (LIPW)

programs to partially cover the loss of welfare of the poorest 60 percent of the rural

and urban population. The estimated costs, including delivery and the actual transfers

are US$85 million and US$128 million per year (at a compensation of 33 percent and 50

percent, respectively). Finally, the analysis estimated that if the unification of the

exchange rate was undertaken in time for tobacco farmers to receive adjusted prices, the

original losses due to devaluation-induced price increases, could be ameliorated by as

much as 32 percent, on average, among tobacco farmers, with the largest effects

benefiting the poorest growers. In order to promote economic growth and poverty

reduction, additional measures would be needed to protect livelihoods through support to

agricultural productivity and income diversification.

Table 2: Welfare Impact of Unification of the Exchange Rate and Monetary

Compensation Alternatives

Area of Residence and Wealth Quintile Approximate Number of Households

Devaluation Scenario 1

50% Devaluation to 250 MKW/$

Compensation Scenarios

Full Impact

33%

50%

(USD Million)

(USD Millions)

(USD

Millions)

Urban

Poorest 91,060 12

4

6

Q2 91,060 18

6

9

Q3 91,060 23

8

12

All Urban 273,180 54 18 27

Rural

Poorest 481,472 24

8

12

Q2 481,472 35

12

18

Q3 481,472 41

14

21

All Rural 1,444,416 101

33

50

Malawi 1,717,596 154

51

77

Case of Labor Intensive Public Works (LIPW)

Compensation Costs 51 77

Costs of Delivery

34

51

Total Program Costs

85

128


36

B. Crisis Response: Preparing for Growth Rebound and Mitigation of Social

Impacts

18. The new administration has acted swiftly to arrest the economic crisis and

has implemented a number of critical economic reforms. To begin with, the GoM has

addressed the overvaluation of the exchange rate, which was identified as the foremost

binding constraint on the Malawi economy in the CEM (2010). In this regard, the GoM

began with a one-step 50 percent unification of the exchange rate and liberalized the

foreign exchange market. This included allowing the official market rate to track the

prevailing rate and the removal of restrictions on the setting of exchange rates by banks

and foreign exchange bureaus for transactions with their customers. The GoM has also

removed the requirement to surrender tobacco export proceeds to the Reserve Bank,

where now the US dollars earned at the tobacco auction floors are transferred directly to

seller‘s commercial banks.10

This action is expected to help cushion part of the

smallholder tobacco farmers‘ welfare loss from the unification of the exchange rate, as

well as facilitate the process of developing a functioning interbank foreign exchange

market.

19. In addition, the authorities have moved to tighten monetary policy. The

decision to adjust upward the policy rate from 13 percent to 16 percent signaled the

authorities‘ tightening monetary stance. In addition, the RBM has also recently

intervened in the foreign exchange market with a twin aim to supply foreign exchange for

private sector use and to absorb excess Kwacha liquidity from the market.

20. The authorities have reinstated the automatic adjustment mechanism for

retail prices of petroleum products to reflect import parity prices, as well as

movements in the international fuel prices and in the exchange rate. This policy

action is aimed at ensuring that importers are able to recover the rising costs of

importation of petroleum products and also improve transparency in price adjustments.

The GoM has also allowed for an upward adjustment in the electricity tariffs by 77

percent so that revenues in the sectors are closer to covering the costs of production. This

measure is a first step towards a more market determined tariff structure in the electricity

sector, partly addressing price movement rigidities that have been one of the main

influences behind low private capital inflows into the sector.

10 The RBM has over years maintained different surrender requirements for export revenues. The major reason of it

has been the fear of shortages of foreign exchange to finance essential imports such as petroleum and fertilizer.


37

21. The measures so far are having their intended effect. Foreign exchange

availability has improved significantly. Foreign exchange is now more readily available

in the commercial banks, bringing back into the formal sector transactions that had been

transferred to the parallel market. The parallel market for foreign exchange has shrunk

with a premium of about 5-10 percent from 80 percent - hence, the exchange rate

unification process has been implemented successfully. Supply of petroleum products

has normalized, the excess liquidity in the market has been mopped up, and smallholder

tobacco farmers are being paid at market determined exchange rates.

22. The supply response is on track as firms have begun to resume normal

operations as the foreign exchange situation has normalized, fuel is available, and

credit lines are returning. The Malawi Confederation of Chambers of Commerce and

Industry (MCCCI) is optimistic that its members will recover to pre-2010 production

levels by the end of 2012. The revised tax measures (e.g. removal of minimum tax based

on turnover) in 2012/13 budget are set to provide further financial space in firm budgets

to stimulate operational rebound and expansion in the short term.11

23. The authorities have put together a realistic 2012/13 budget to realize the

benefits of policy reforms implemented, to entrench macroeconomic stability and

expand social safety net expenditures. The 2012/13 budget attempts to achieve a large

fiscal adjustment to put the GoM‘s finances on a sustainable course while expanding

expenditure on social safety nets programs. There will be no net domestic financing of the

government budget on annual basis as the GoM plans to reduce net domestic finance to zero

(from 5.6 percent of GDP in 2011/12). This adjustment is aided in part by the increase in

external grants. Exchange rate liberalization is also expected to have a net positive impact

on the budget.12

On the expenditure side, fiscal adjustment will entail cuts in wasteful

recurrent expenditures and postponement of development projects which are 100 percent

GoM-financed.

24. The budget, however, provides for scaled-up social protection interventions,

including the expansion of a country-wide labor intensive public works, FISP and

other social safety net programs. About US$ 103 million has been provided in the

budget for the scaling up of four programs, including the labour intensive public works,

the school feeding program, the school bursaries program, and the social cash transfer

program. The GoM has also expanded FISP program for 2012/13 to reach a large

number of poor farmers affected by the dry spells in the Southern region. The budget

11 Trade taxes in Malawi are not inordinately high and are within regional trade regime. High share of trade

tax revenue reflects very high import composition of the economy. VAT tax is at 16.5 percent.

12 This is based on the fact that expected large increases in foreign grants (projected at over 10 percent of

GDP) and their kwacha values will more offset the increase in kwacha value of government imports. On

average about 40 percent of government expenditures is foreign exchange sensitive.


38

also provides for a 30 percent increase in nominal wage bill, including the cost of hiring

more teachers and health workers.13

To reduce fiscal risks, efforts would be geared

towards strengthening fiscal discipline, particularly public financial management, and

expenditure control to avoid accumulation of domestic arrears and the build-up of domestic

debt.14

25. The 2012/13 budget also proposes removal of some taxes imposed in the

previous budget, including the minimum tax based on turnover and capital gains

tax from the sale of shares. In addition, the authorities have increased the investment

allowance on new and unused industrial building, plant and machinery to 100 percent;

international transport allowance to 25 percent; and have removed VAT on machinery

and financial services. Together, these measures are geared to providing a conducive

environment for private sector investment in the country.

C. Medium Term Macroeconomic Outlook

26. The determined movement of President Banda‟s administration to adopt

right policy measures and to repair relations with donors and international financial

institutions has put Malawi on a firm position to return to a faster growth path.

Real GDP growth is expected to exceed 6.0 percent by 2014, anchored mainly on the

sectors that were hardest hit by the foreign exchange shortages, including tourism,

manufacturing, transportation services, construction, and trade. Other sectors, including

agriculture, will also benefit from the easing of fuel shortages.15

27. Inflationary pressures are expected to remain in 2012, with a projected

annual average inflation of about 18.4 percent, but expected to ease to pre-2010

levels of about 7.5 percent in 2014.16

There is a concern that an average increase of 21

percent in public wages could lead to a demand for higher wages in the private sector and

13 With the projected annual inflation of 18.4 percent for 2012, the real increase in civil servants‘ wages is

estimated at 2.6 percent. The Trade Union of Malawi has been calling for 67 percent hike in civil servants‘

salaries to help workers fight the rising cost of living, but the 2012/13 budget has accommodated a 21

percent average wage increase for civil servants.

14 The fiscal cost of all the proposed interventions is estimated at about 2.5 percent of GDP, which is

expected to be financed through fiscal savings from expenditure control, grants and revenue enhancing

measures.

15 With agriculture being dominant sector, exchange rate unification should eliminate the implicit tax and

increase welfare, especially for smallholder farmers whose earnings are pegged to the US Dollar.

16 The year-on-year headline rate jumped to 17.3 percent in May 2012, from 12.4 percent in April 2012.


39

exacerbate inflationary pressures. However, available evidence at this stage shows that

the private sector is not witnessing a demand for higher wages.17

Overall, the GoM‘s

policies geared towards ensuring fiscal adjustment and monetary restraint are likely to

contain the demand-side pressures on prices.

28. A tight fiscal stance is expected to be maintained over the medium term. The

overall balance in the medium term is projected to narrow from a deficit of 7.0

percent of GDP in 2011/12, to an average deficit of 1.1 percent of GDP during 2013-

2015. The authorities‘ commitment to fiscal prudence during 2012-14 provides an

important anchor to safeguard sustainability in the medium term. However, the fiscal

adjustment agenda faces risks arising from possible spending pressures in the run-up to

the tripartite elections scheduled in mid-2014. To support the low fiscal deficit goal, the

GoM will continue to implement a number of tax policy measures and tax administration

mechanisms introduced in the 2011/12 budget, to further boost its revenue (projected to

average 23 percent of GDP during 2012/13-2014/15). Specifically, efforts have been

intensified to broaden the tax base, with increased efforts to mobilize both tax and non-

tax revenues.

29. The current account deficit is projected to narrow from 5.9 percent of GDP

in 2011, to less than 2.0 percent of GDP during 2013-2015. Exports, expected to play

a key role in driving economic recovery, are projected to expand from 21.8 percent of

GDP in 2011 to an average of 30 percent of GDP between 2012- 2015. Still, export

expansion going forward is subject to uncertainty regarding both the external

environment and domestic supply constraints. Meanwhile, imports are also expected to

pick up from 33.4 percent of GDP in 2011, to an average of 40 percent of GDP during

2013-2015, partly to reflect the projected increase in economic activities. Despite the

projected recovery from the sharp deterioration in the terms of trade in 2011, the

undiversified nature of the country‘s exports will continue to make it vulnerable to terms

of trade shocks. The medium-term financing plan requires continued public sector

inflows, in addition to FDI and other private inflows. The recovery of private capital

inflows and accumulation of international reserves is expected to strengthen the country‘s

balance of payments position.

17 There is, however, a tendency for the private sector salaries to be adjusted whenever the public sector

salaries are adjusted, without due consideration of productivity increases.


40

Table 3: Malawi – Central Government Operations, 2009/10-2014/15

30. Agriculture is expected to rebound to 5 percent growth within the next 24

months as production diversifies. However, moderate decreases in prices forecast for

2012-14 may slightly dampen the revenues earned from exports, particularly for tobacco

2009/10 2012/13 2013/14 2014/15

Actual Actual Rev.

Budget

Proj. Budget Proj. Proj.

Revenue 33.8 32.1 26.8 27.0 33.2 31.1 30.9

Tax and nontax revenue 23.5 24.5 21.3 21.5 22.8 23.2 23.6

Tax revenue 18.6 20.8 18.5 18.8 19.9 20.4 20.7

Nontax revenue 4.9 3.8 2.8 2.8 2.9 2.9 2.9

Grants 10.3 7.6 5.5 5.5 10.4 7.8 7.4

Expenditure and net lending 33.8 35.0 33.2 34.0 34.3 32.2 31.9

Current expenditure 25.7 27.2 25.9 26.0 27.9 25.5 25.3

Of which:

Wages and salaries 5.9 6.9 7.1 7.2 7.3 7.3 7.3

Interest payments 2.8 2.7 2.1 2.1 2.4 2.4 1.8

Goods and services 11.0 11.2 10.8 10.7 10.3 7.8 8.4

Generic goods and services 5.8 4.8 6.0 6.3 4.6 2.2 2.7

Subsidies and other current transfers 6.0 6.4 5.9 6.0 7.0 7.1 7.1

Of which: Fertilizer and seed subsidy 2.9 2.6 2.5 2.6 3.4 3.5 3.5

Development expenditure 7.9 7.7 6.3 8.0 6.4 6.6 6.6

Part I (foreign financed) 4.5 3.7 2.8 3.7 3.2 3.6 3.3

Part II (domestically financed) 3.4 3.9 3.5 4.4 3.2 3.1 3.2

Net lending 0.2 0.1 0.0 0.0 0.0 0.0 0.0

Overall balance (excluding grants) -10.3 -10.5 0.0 -12.5 -11.6 -7.9 -7.0

Other financing needs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance (including grants) 0.1 -2.9 -5.4 -7.0 -1.1 -1.1 -0.9

Total financing (net) -0.1 2.9 6.3 7.0 1.1 1.1 0.9

Foreign financing (net) 0.9 1.3 1.6 1.6 1.1 1.1 0.9

Borrowing 1.1 1.5 1.9 1.9 1.6 1.6 1.5

Program 0.0 0.0 0.0 0.0 0.3 0.0 0.0

Project 1.1 1.5 1.9 1.9 1.3 1.6 1.5

Other concessional 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Amortization -0.2 -0.2 -0.3 -0.3 -0.5 -0.5 -0.6

Domestic financing (net) -0.9 1.7 4.7 5.6 0.0 0.0 0.0

Source: Malawi authorities, IMF, and World Bank staff estimate

2010/11 2011/12

(Percent of GDP)


41

and sugar, which are traditional exports for Malawi; and soybeans and cotton, which are

non-traditional exports recently targeted by the national export diversification strategy.18

31. Manufacturing is expected to rebound during the second half of 2012 as firms

begin to use up idle capacity with supply chains normalizing on account of returning lines

of credit and normal foreign exchange supply. In this regard, the production of dairy,

meat, flour, sugar, beer, biscuits, and rubber is expected to grow to above pre-2010

levels. Moreover, a large company like Illovo sugar is planning to expand their capacity

and cultivation of sugar.

32. The mining sector‟s contribution to growth is projected to increase from 13

percent of GDP in 2011, to over 16 percent of GDP over the next three years, with

the Kayelekera mine having reached its full operating capacity in 2011. The mining

contribution will also be boosted by projected increase in coal production in 2013-14, as

well as the coming on stream of the niobium mining project at Kanyika by 2014 with

construction beginning in 2013. The growing importance of minerals, mainly uranium

for export will help to diversify the export base of the economy.

33. Private investment is projected to recover from 8.6 percent of GDP in 2011,

to an average of 14 percent of GDP during 2013-2015, on the back of rapid

improvements in business environment. FDI inflows are also projected to rise from

1.1 percent of GDP in 2011 to an average of about 2.5 percent of GDP during 2013-2015.

Higher private domestic investment is also expected to benefit from a pick-up in bank

lending, with private sector credit projected to increase from 8.3 percent in 2011 to 17.0

percent in 2013 and moderate at 14 percent in 2015. The unification of the exchange rate

and the move to a floating exchange regime will help encourage private investment and

diversified growth. Investment is also expected to be driven by efforts by the private

sector to take advantage of trading opportunities arising in neighbouring countries, in

particular, Mozambique, in the Tete region.

34. The authorities are also making efforts to address some of the constraints to

growth, including those related to inadequate energy supply, weak human capital,

lack of access to finance and trade facilitation. Specifically, the GoM is leading

negotiations on an energy deal (regional electricity interconnector) with Mozambique and

is facilitating market access for Malawian products, in particular targeting the economic

boom in Tete. Other regional trade facilitation initiatives include moves to operate one-

border posts with Mozambique, Tanzania, and Zambia. The Bank is also supporting the

GoM‘s efforts to address these constraints through investment operations in energy and

education sectors, with support from other DPs, and is providing technical assistance in

the mining and financial sectors, as well as targeted support to enhance the overall

18 International commodity price forecast from the Development Prospects Group


42

business environment. All these efforts will contribute towards removing existing

constraints to growth and creating an environment for a robust supply side response

generated by the reforms supported by RRDPG.

35. The macroeconomic framework in the medium term is underpinned by a

constant flow of funding from the development partners, especially budget support.

However, there are downside risks associated with the weakening global economic

environment, which, if sustained, could subsequently affect the overall financing

framework. The new administration appears determined to address outstanding issues

that led to the suspension of budget support in FY12; however, risks remain if issues of

human rights and democratic principles are not adequately addressed. Given the

country‘s dependence on donor funding,19

a significant withdrawal or cuts in budget

support due to the GoM‘s non-compliance of the fundamental principles for budget

support and/or weakening political economy environment could make the program

unfinanceable.20

In the event of a shortfall, the GoM will be forced to make significant

spending cuts, as well as to increase domestic borrowing, which could compromise its

domestic debt position.

36. In view of the above analysis on the medium-term outlook, the new

administration‟s reinvigorated macroeconomic policy framework is appropriate.

However, the medium-term prospects of the economy, especially its ability to sustain

strong growth that will be accompanied with a solid fiscal and external position, remain

subject to important risks, i.e. persistent external payment imbalances. These risks,

which could be mitigated by GoM‘s policies, come especially from fiscal loosening in the

run-up to the general elections in 2014, softening of financing in the event of an off-track

IMF program, as well as from parastatal performance issues leading to contingent

liabilities. Meanwhile, the authorities have made a commitment to manage fiscal and

monetary policy in a manner that improves the efficiency of public expenditure, while

creating room for private sector activity and growth.

D. Debt Sustainability Analysis

37. Malawi is still at moderate risk of debt distress as the country‟s debt burden

indicators are projected to remain well below relevant prudential thresholds.

Malawi‘s external stock of debt has increased from US$683 million (19.4 percent of

GDP) in 2008 to about US$1,140 million in 2011 (23 percent of GDP). The stock of

19 Grants from DPs account for 7-10 percent of GDP.

20 The proportion of the budget funded by donors is on a downward trend, currently at 27 percent of total

budget for 2010/11 from 30 percent in 2009/10; after a dip in 2010/11 on account of suspension of budget

support in 2011/12, 2012/13 is expected to see a rebound as development partners (DFID, WB, EU, AFDB,

Norway) resume budget support operations.


43

external public and publicly guaranteed (PPG) debt is expected to gradually decline in the

longterm from about 31 percent of GDP in 2012 to about 16 percent of GDP in 2032.

Malawi‘s debt sustainability during the projected period is entirely based on prudent

macroeconomic policy environment. The present value (PV) of PPG debt-to-GDP

gradually declines to below 15 percent during the rest of the projected period. The PV of

debt-to-exports ratio falls gradually, remaining under 80 percent that is well below the

threshold of 150 percent. However, the PV of debt to export ratio is breached under stress

tests after an export shock, thus the need to diversify the country‘s exports to minimize

the country‘s vulnerability to shocks. The PV of PPG debt to revenue drops under an

average of 110 percent (well below the threshold of 250 percent) during the entire

projected period.

38. The ratio of public external debt service to exports is expected to decline

gradually from 73 percent in 2012 to 50 percent in 2015, before falling to 19 percent

in 2032. The debt service to revenue ratio is expected to decline to 13.5 percent in 2012,

picking up again to 15.5 percent in 2014, before falling to about 2.9 percent in 2032.

Recent policy slippages, including expansionary fiscal and accommodating monetary

policies, have also contributed to the build-up of the domestic debt in 2011 (to about 25

percent of GDP from 20 percent of GDP as of end-2008). Stress tests indicated a need to

for fiscal consolidation and reform of parastatal institutions to slowdown growth in the

domestic debt stock. III. GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESS

39. The Second Malawi Growth and Development Strategy (MGDS II) 2011-

2016, which is the country‟s second medium term plan, was approved by the

Cabinet in April 2012. The MGDS II is a medium-term strategy designed to attain

Malawi‘s long term aspirations as spelt out in its Vision 2020. It strives to foster a more

inclusive job creating growth to tackle the unemployment problem as well as reduce

poverty. The strategy reflects a general consensus on the country‘s broad goals for

growth, social equity, and governance. More specifically, the strategy recognizes that in

order for all Malawians to benefit equitably from economic growth, concerted efforts to

promote human and social development would need to be complemented by efforts to

improve labor productivity, structural transformation and economic diversification.

40. The MGDS II was developed in an all-inclusive process. All levels of society,

including women, youth, private sector, civil society and development partners were

involved in the MGDS II consultation process. The process of developing the MGDS II

was well integrated with the existing processes of the GoM led by the Sector Working

Groups (SWGs). The monitoring of the MGDS II implementation will also be conducted

with participation from representatives of the Civil Society Organizations and

Development Partners, through the various SWGs.

41. To respond to the negative impact of policies undertaken by the previous

administration, the GoM has come up with a short term economic recovery plan


44

approved by Cabinet in April 2012. This recovery plan is well aligned with MGDS II

and its focus is on short-term measures to restore macroeconomic stability while

mitigating the impact on the poor. In the immediate term, the focus will be on monetary

and fiscal policies, including liberalization of the foreign exchange rate and foreign

exchange markets, revenue enhancing measures, and expenditure control. In its proposed

recovery plan, the GoM recognizes that macroeconomic reforms that are being

implemented will have negative consequences on standards of living of its people due to

rising cost of living arising from pass-through from the initial exchange rate liberalization

into non-tradable prices and second round price increases due to increasing prices of fuel

and distribution costs.

42. Therefore, the GoM has proposed a social support package of US$200

million, which will be built on existing programs especially public works program to

mitigate the impact of these reforms on vulnerable groups of society. These programs

include: scaling up labor intensive public works program (LIPW); Farm Input Subsidy

Program (FISP); scaling up of legume seed multiplication, agro forestry and soil

conservation, multiplication of cassava cuttings and sweet potato vines, and extending

village savings club; scaling up of school meals program and vitamin A supplementation;

and scaling up of social cash transfer program.

43. The consultation process for the Economic Recovery Plan and specifically

for the reforms supported by this operation, has involved various stakeholders,

including Civil Society Organizations (CSOs), Academia and DPs in different foras.

Consultations on reforms related to the 2012/13 budget were carried out in national

budgetary consultative meetings in Lilongwe, Blantyre and Mzuzu in mid-May 2012,

whereas discussions on social protection reforms were conducted through the Malawi

Vulnerability Assessment Committee (MVAC) with various stakeholders, including

CSOs. Consultations on reforms related to FISP were carried in May through regional

workshops in main three regions. Consultations on issues of foreign exchange have been

held in various fora, including the national consultations held by the GoM in February

2012.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINKS TO THE COUNTRY ASSISTANCE STRATEGY

44. The RRDPG is an integral part of the Bank‟s assistance program to

Malawi in the new CAS currently being finalized and consistent with FY07-11 CAS. Specifically, the operation is consistent with the CAS FY07-11 outcome on improved

public expenditure management, transparent budget formulation, execution and reporting,

and facilitation of the development of a more coherent National Social Protection Policy.

To achieve these outcomes, the CAS envisages programmatic development policy

lending operation over the CAS period and this self-standing development policy

operation. In terms of policy areas, the RRDPG identifies important policy reforms that

seek to contribute towards restoring prudent fiscal policy and sound macroeconomic


45

management and protecting the most vulnerable through improved social safety net

programs.The draft FY13-16 CAS is fully aligned to the Africa Regional Strategy and the

MGDS II and is designed to help the GoM achieve three key outcomes: i) prudent fiscal

policy and sound macroeconomic management to restore internal and external balance;

ii) increased productivity and diversification in agriculture; and iii) improving social

safety net systems.

B. COORDINATION WITH THE IMF

45. As was the case with the previous PRSC I-III series, the Bank has been

collaborating very closely with the IMF. A joint IMF/World Bank Debt Sustainability

Analysis (DSA) for low-income countries (LIC-DSA) was undertaken in late March 2012

in the context of the IMF Article IV consultations. The Bank team also participated in

some of the IMF mission discussions with the authorities on the new ECF-supported

program in May 2012, and provided inputs into the development of the macroeconomic

policy framework. In the identification of prior actions for the RRDPG, attention has

been paid to the benchmarks under the new ECF arrangement to avoid cross-

conditionality.

46. The macroeconomic assessment underlying this operation is in line with the

conclusions of the recent IMF mission on the new ECF-supported program for

Malawi. The objectives of the program to be supported by the new ECF arrangement

include fiscal sustainability and a gradual build-up of international reserves to help

cushion the economy against external shocks. More broadly, the program will guide the

implementation of policies to create the stable macroeconomic environment needed to

achieve the main objective of the Second Malawi Growth and Development Strategy

(MGDS II) of reducing poverty through sustained private sector-led growth and wealth

creation.

C. COLLABORATION AND HARMONIZATION WITH OTHER DONORS

47. The Bank‟s response through the RRDPG has been coordinated with

responses from other DPs, including CABS DPs. The RRDPG will continue to be

implemented within the framework of the CABS.21

The CABS represents a group of

development partners that use a joint approach in the provision of budgetary support to

the GoM. In September 2005, the CABS group and the GoM agreed on a Joint

Framework (JF) agreement for budget support cooperation designed to formalize their

21 At the time the Bank joined the CABS in 2007, there were plans to revise the JF during fall of 2007, but

this process never took off until FY10. The agreement among CABS members was that the JF would be

revised and the Bank would sign up the JF at the completion of this process, with the inclusion of Bank‘s

reservations. But since the JF revision process was never completed, the Bank continued to provide the

budget support through the CABS framework without having signed the JF.


46

relationship. The JF represents a memorandum of understanding on principles governing

budget support cooperation in Malawi. Some of the principles governing this cooperation

include alignment to the country‘s poverty reduction strategy, joint reviews, and

predictability of funding. The DPO is IDA‘s instrument for the provision of budget

support under the CABS framework.

48. The CABS JF among other things provides for a Performance Assessment

Framework (PAF) as a basis for disbursement decisions. The PAF consists of a

jointly approved set of indicators and targets for assessing the GoM‘s performance and

progress in the use of budget support. Each indicator has an annual target which the GoM

is expected to meet. The CABS undertakes two annual reviews, one during February-

March and another during September-October. The February-March review takes place

just as the GoM starts to prepare its budget. The review focuses on assessing the GoM‘s

performance in achieving the targets for each indicator in the PAF.

D. RELATIONSHIP TO OTHER BANK OPERATIONS

49. The RRDPG is one of the three operations under Rapid Response

Program to support the country‟s fiscal and social needs. The other two are the

Additional Financing for Malawi Social Action Fund (MASAF 3) and Irrigation Rural

Livelihoods and Agricultural Development Project (IRLADP) - see Attachments B and

C.

E. LESSONS LEARNT

50. A number of important lessons relevant for the design of the proposed

RRDPG have emerged from the CAS Completion Report and PRSC I-III ICR and

have been taken into account in the development of this operation. They include:

GoM’s ownership, political will and commitment are key determinants in the

successful implementation of the institutional and structural reforms. In areas where

the GoM‘s ownership is less broad-based, likelihood of objectives being met is also

low. The Bank should invest more in terms of staff time and other resources at the

preparation stage to ensure adequate GoM‘s capacity and ownership of reforms is

built. In addition, the authorities should also be given the time and the space to

prepare credible and sustainable reforms in sensitive areas. This operation has

benefited from strong ownership by the GoM of the reforms being supported.

Progress tends to be slower in reform areas where the political economy context is

critical, yet not adequately understood. The pace of reforms tends to be much slower

when the reform actions involved political decisions (Cabinet/Parliament) for

implementation. Clearly, more rigorous political economy analysis is needed to

inform selection of program components, as well as the approach to policy dialogue

for politically sensitive reforms supported by DPOs. Evidence-based analysis and


47

engagement at a Cabinet level helped pave the way for reforms supported by this

operation.

Working within the harmonized framework for the provision of budget support, the

CABS, has enhanced the quality of policy dialogue across donors, notwithstanding

the inherent coordination challenges. Continuous dialogue with the GoM has been

critical in keeping up the momentum on reforms supported by this operation, and this

was enhanced by the CABS framework.

Flexibility in the CABS PAF should be encouraged to enable it to adapt to unforeseen

external shocks and changing of the GoM’s priorities and programs. Given the

urgent need to support the GoM‘s reforms, the operation has adopted some of the

policy actions from the GoM‘s own short-term recovery plan.

F. ANALYTICAL UNDERPINNINGS

51. This RRDPG has drawn on some key findings from a series of economic and

sector works. This includes the following analysis:

Welfare Impacts and Mitigation of Exchange Rate Unification in Malawi (2012):

The report identified a growing gap between the official and the parallel exchange rates,

with parallel rates significantly higher and with prices of tradable commodities, including

tradable foods, already adjusting to those higher parallel market rates. It proposed two

compensation scenarios through Labor Intensive Public Works (LIPW) Programs to

partially cover the loss of welfare of the poorest 60 percent of the rural and urban

population. The study also indicated that if exchange rate unification is undertaken in

time for farmers (especially smallholder tobacco farmers) to receive adjusted prices for

their crop, the original losses due to foreign exchange rate liberalization-induced price

increases could be ameliorated with the largest effects benefiting the poorest growers.

Comprehensive Exchange Rate and Foreign Exchange Study for Malawi: The report

provided the genesis of the foreign exchange imbalances - how the GoM got into this

situation, - identified the main causes of external imbalances and effects of the chronic

foreign exchange shortages and the associated real exchange rate appreciation in the

economy, and proposed possible policy responses, including the unification of the

exchange rate and fiscal and monetary restraint. The note also presented a brief analysis

of pass-through effect of exchange rate unification.

Joint Procurement Review of the 2010/11 Farm Input Subsidy Program: The report

identified the following weaknesses: the award criteria used in the bidding documents did

not ensure value for money; currency of the bid and payment provision was not

respected; the quantity allocation criteria based on unit prices, as well as contract award

process (e.g. roles of the Evaluation Committees and Internal Procurement Committees)

were not adhered to in line with Malawi‘s procurement procedures.


48

2010 Country Economic Memorandum: The report identified constraints to growth,

including an overvalued exchange rate, inadequate power supply, and lack of trade

facilitation among others. It also clearly identifies the public expenditure management as

a key reform area for containing the growth of GoM‘s spending and maintaining fiscal

stability. The CEM pointed to the fact that growth in aggregate demand needed to be

reduced through expenditure rationalization and effective expenditure targeting, so as to

bring about internal balance.

Public Expenditure Review: 2010 Public Expenditure Review on Travel, sponsored by

CABS, revealed that travel expenses were high, especially for domestic travel, and the

travel budget needed to be reduced. The high travel expenditure is partly because of

inefficiencies, malpractices and abuse. Many of the malpractices take advantage of the

poor, weak and inadequate internal controls system.

V. THE PROPOSED DEVELOPMENT POLICY GRANT (RRDPG)

A. OVERALL DESCRIPTION

141. Development objectives. The Rapid Response Development Policy Grant

(RRDPG) program recognizes and supports the authorities‘ efforts to address the

imbalances in the economy while mitigating the impact on the poor. The reform program

supported by this operation is built on two pillars: (i) achieving and maintaining

macroeconomic stability, and restoring the functioning of a market-based economy to

ensure a quick growth rebound; and (ii) protecting the poor and most vulnerable groups

in the short run while improving transparency of delivery systems. These reforms are in

line with the GoM‘s own Economic Recovery Plan aimed at getting the economy back on

the sustainable growth and poverty reduction path.

142. Prior actions. The program focuses largely on the short-term measures that aim

to restore macroeconomic and social stability in response to the crisis through a fiscal

adjustment process and focused interventions to protect the vulnerable. The specific

reforms supported in each area are described in the following sections; the GoM‘s Letter

of Development Policy (Annex 1); and the DPO policy matrix (Annex 2).

143. The GoM has implemented the following prior actions before the presentation

of the operation to the Bank‟s Board of Executive Directors:

Prior action 1: Adoption by Cabinet of the 2012/2013 national budget that is

consistent with fiscal sustainability and prioritization of social expenditure.

Prior action 2: Adoption by Cabinet of a fuel pricing policy that fully reflects fuel

import parity prices.

Prior action 3: Approval by Cabinet of an automatic price adjustment of petroleum

import prices.


49

Prior action 4: Directive from Reserve Bank of Malawi mandating exporters,

including tobacco farmers, to transfer earnings in US dollars obtained at the tobacco

auction floors to commercial banks at prevailing market determined exchange rate.

Prior action 5: Inclusion, through MoF, of a scaled up labor intensive public works

(LIPW) program, designed to enhance the Recipient‘s safety nets program, in the

2012/13 national budget.

Prior action 6: Inclusion, through MoF, of a scaled up Farm Input Subsidy Program

(FISP) in the 2012/13 national budget.

Prior action 7: Institutionalization of the policy to undertake procurement audits of

FISP as recommended in the Joint GoM/World Bank Fertilizer Procurement Review

Report on the 2010/11 FISP.

144. Good practice principles in conditionality. Box 2 provides information on how

good principles on conditionality have been applied in Malawi.

Box 2: How Good Practice Principles on Conditionality are being Applied to the Operation

Principle 1: Reinforce Ownership

The GoM has strong ownership of the proposed DPO, which supports several dimensions of the GoM‘s

economic recovery reform plan where the Bank has comparative advantage and complements the work

being supported by IMF and other development partners. The proposed DPO follows the PRSC 1-3 series,

which demonstrates Malawi‘s track record of significant GoM‘s ownership and strong commitment to the

reform process. The Bank‘s analytic work has contributed to the formulation and implementation of

selected aspects of the GoM‘s economic recovery reform plan. The Bank has had extensive discussions with

the authorities on the policy options and the GoM departments identified the critical reforms needed to accelerate

attainment of macroeconomic stability and growth rebound, while mitigating the impact on the most vulnerable

groups.

The prior actions selected have been extracted from the GoM‘s Economic Recovery Plan, which has been

informed by the Comprehensive Package for Competitiveness, Growth and Poverty Reduction. The prior

actions are linked to the pillar on regaining macro-balance, social impacts and their mitigation, and growth

rebound.

Principle 2: Agree up front with the GoM and other financial partners on a coordinated accountability framework

The CABS donors and the GoM have signed a Joint Framework (JF) of budget support cooperation. One of

the principles contained in the JF is that of carrying out joint reviews. Every year one of the reviews

focuses on assessing the GoM‘s performance in meeting the targets contained in the PAF.

The accountability framework (e.g. policy matrix) for measuring progress under the program has been prepared

and discussed with ministries and departments involved at technical levels.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

The DPO team works closely with the GoM‘s counterparts from various ministries in designing and monitoring

reform implementation. The agreed accountability framework is fully consistent with the GoM‘s expressed

policy intentions and internal accountability mechanisms. The CABS undertakes biannual reviews, one during

February-March and another during October-November. Both reviews are aligned to the country‘s budget cycle.

The February-March review takes place just before the GoM starts to prepare its budget. The review focuses on


50

assessing the GoM‘s performance in achieving the targets for each indicator in the PAF. Decisions on whether to

disburse budget support and how much to disburse are based on the outcome of this review. The September-

October review focuses on the annual budget that will have just been approved by Parliament, public financial

management issues, and a preliminary assessment of the fiscal performance during the previous fiscal year.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

The DPO program focuses on actions that are critical for the success of the reform aimed at restoring

macroeconomic stability, mitigating impact on the most vulnerable groups and supporting growth rebound.

There are 7 prior actions, which aim at mitigating the impact of the unification of the exchange rate on the most

vulnerable groups, improve functioning of fuel and commodity markets and improve the governance of FISP.

All prior actions reflect the reform priorities of the GoM which are supported by the Bank in the CAS. The

actions for the proposed RRDPG represent only those actions that will be critical for achieving the

program‘s development objectives and the expected outcomes.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial

support

The preparation of this operation follows the lessons learned from the PRSC I-III and one program review is

planned. All of the prior actions as well as the expected outcome indicators for this operation focus on the results

of implementation of the supported reforms. The RRDPG‘s financial support is expected to provide the much

needed resources to support the GoM‘s economic stabilization process through the national budget. The

support is fully consistent with the GoM‘s macroeconomic framework agreed with the IMF, including the

FY2012/13 budget framework.

B. POLICY AREAS 145. The RRDPG recognizes the importance of the reforms below aimed at ensuring that

macroeconomic stability and fiscal prudence is restored; the most vulnerable groups are well

cushioned from the impact of adjustments in the economy; the functioning of the fuel

markets and incentives to exporters, including smallholder tobacco farmers are improved;

and the economic management of FISP is strengthened.

1. Achieving and maintaining macroeconomic stability and restoring the

functioning of a market-based economy to ensure a quick growth rebound

1a. Restore macroeconomic stability and fiscal sustainability

146. The 2012/13 national budget presents a realistic budget anchored on zero net

domestic borrowing.22

A sizeable fiscal adjustment is planned whereby the net

domestic financing will be brought down from 5.6 percent of GDP in 2011/12, to zero

22 The 2012/13 national budget was adopted by the Parliament on June 27, 2012, based on the budget

framework agreed with the IMF.


51

(see paragraph 23).23

This will largely be achieved through the reduction in discretionary

expenditure that had ballooned in 2011/12 by about 3 percent of GDP. The 2012/13

budget has included a number of expenditure control and prioritization measures to

contain expenditures within the available resource envelope. These include reductions in

travel (both internal and external travel) and transfers to public entities, reductions in

development24

expenditures, and the review of allowances to make sure that they are not

abused. The authorities also intend to undertake more symbolic measures such as the

sale of the Presidential Jet and reduction in the number of vehicles available to senior

officials.

147. To support the low fiscal deficit goal, the GoM has also intensified efforts to

broaden the tax base. The GoM has refined some tax policy measures that were recently

introduced with a view to improve their application and encourage domestic production

through promotion of value addition and encouraging investment and exports through

various tax policy instruments. The largest contribution to increased revenues is

expected to come from fuel taxes. With the recent change in fuel pricing policy, the

implicit subsidies on pump prices (foregone revenues) have now been removed as pump

prices now reflect actual cost of imports and changes in international world petroleum

prices.25

Some of the recently introduced taxes, which were considered inhibitive, have

been removed.26

A range of items subject to VAT are also being expanded and excise

duties are being harmonized with regional partners.27

The GoM is also putting in place

measures to improve tax administration and tax collection through the implementation of

electrical fiscal devices in collection of VAT, automated self-assessment system for

management of tax returns, web-based ASYCUDA system, and the customs data

processing center. Efforts are also being made to improve the efficiency and

effectiveness of collecting non-tax revenues.

23 There will be no net domestic financing of the government budget on an annual basis; any borrowing in

the early part of the year would have to be repaid by the end of the year.

24 Postponement of new development projects which are fully funded by government. Only the ongoing

projects on existing contracts will be financed.

25 In 2010, the cost of fuel subsidies was about US$40 million (0.7 percent of GDP), US$67 million (1.2

percent of GDP) in 2011, and according to the authorities this cost would have increased to US$130 million

(2.8 percent of GDP) in 2012, if no fuel pricing policy reforms were undertaken.

26 These include the minimum tax based on turnover (2 percent); capital gain taxes from sales of shares

held for more than a year to encourage long-term investments; Value Added Tax (VAT) on machinery and

equipment, and others to help improve the overall investment climate.

27 The government has also eliminated VAT on basic items, including bread, and has introduced other tax

measures to protect the poor. The removal of taxes like VAT on financial services, newspapers and Internet

services are meant to promote financial inclusion and access to information.


52

148. The budget will be monitored closely through quarterly reviews to ensure

adherence to parameters laid out above. In this regard, the authorities have agreed to

quarterly monitoring of a cash budget during the first year of the new ECF-supported

program.28

Fiscal risks, such as those that arose from the fuel subsidy have been

addressed through the reinstatement of the automatic price mechanism, which has made

cost recovery for fuel possible. The Integrated Financial Management Information

System (IFMIS) is also going to be strengthened through the implementation of

commitment control module to prevent the build-up of new arrears. Procurement rules

and regulations will also be enforced to ensure that the public is familiar with them and

that no payment would be made for provision of goods and services outside the

established rules. The new ECF program will mitigate the risk of arrears through its

quarterly reviews, as the IMF will be working with the authorities on the clearance of the

stock of arrears while monitoring closely the performance of parastatals.29

RRDPG Prior Action 1: Adoption by Cabinet of the 2012/2013 national budget that

is consistent with fiscal sustainability and prioritization of social expenditure.

Expected Results: Reduction in the fiscal deficit from over 7.0 percent in 2011/12, to less

than 2.0 percent by June 2013.

1b. Improved functioning of the petroleum market.

149. As part of the GoM‟s attempt to improve the supply of petroleum, it has

liberalized the petroleum market.30

The objective was to re-establish a pricing policy

28 Authorities will establish and enforce quarterly spending limits on all MDAs, consistent with available

resources and quarterly reporting to the Cabinet on progress.

29 Parastatals pose a fiscal risk as they are among the main culprits responsible for accumulating arrears

over the past 4-5 years in excess of MWK72 billion (equivalent to US$ 268 million or 7 percent of GDP),

with almost half of the arrears attributed to them. In the 2012/13 budget, a provision of MWK10 billion has

been made for the settlement of some of the arrears. Verification of existing domestic arrears will be

carried out by the government and plan will be put in place to settle the verified claims. It is expected that

the clearance of arrears will take 3 to 4 years.

30 Malawi is a net importer of liquid fuel and its annual bill for fuel ranges between US$300 million and

US$400 million, with the estimated monthly import bill of about US$35 million. The demands of a

growing economy and persistent load shedding have contributed to the rising demand for fuel. Between

2006 and 2010, growth in fuel imports has averaged at about 5-6 percent per annum; closely tracking the

real growth of the economy. However, it is projected to slow down to less than 4.0 percent of its normal

annual growth in 2011.


53

that results in retail prices that are fully reflective of actual total cost of import. The main

element of the price adjustment was to increase the In-Bond Landed Cost (IBLC), which

includes landed costs, the GoM‘s taxes and oil industry costs and margins, to reflect

world fuel prices (Table 4). In the past, the FOB prices had remained fixed for a number

of years at the same level and the official exchange rate was also fixed. As the Kwacha

value of petroleum imports is now based on market exchange rates, the implicit subsidy

in providing foreign exchange for imports at an overvalued official exchange rate is being

saved.

150. The GoM has also adopted an automatic pricing mechanism (APM) that

allows adjustment of fuel prices at the pump on a regular basis in response to

movements in the world petroleum prices and exchange rate. This has triggered a

positive response from the private sector and the normalization of fuel imports and

supplies. While policies supported by this operation existed on paper following the

reforms in the petroleum importation in early 2000 that saw the establishment of

Petroleum Importers Limited (PIL), an association of main private importer of petroleum,

they were never effectively implemented. As a result, the petroleum market never

functioned well as administered prices31

were never adequate to ensure that all

procurement, transportation and distribution costs were covered; and price adjustments

were made on an ad-hoc basis and in a non-transparent way, most of the time making

huge adjustments reflecting accumulations over long periods of time. PIL therefore was

accumulating losses, which at end of October 2011 stood at about US$ 36 million.32

Table 4: Malawi Petrol/Diesel Price Build-Up

151. The GoM has also modified several levies included in the build-up of

petroleum prices. The safety net levy has been dropped and the excise duty on fuel has

31 In the survey conducted by the IMF on the average pass-through from international to domestic pump

price between 2003-06, it reveals that the pass-through for Malawi averaged at 1.4 for petrol, 1.1 for

paraffin/kerosene and 1.5 (full price through) for diesel. (Domestic Petroleum Product Prices and

Subsidies: Recent Developments and Reform Strategies: IMF Working Paper WP/07/71.

32 MERA regulates all the energy players (production and supply) in the country and has been the one

controlling petroleum prices.

Nov-11 May-12 Nov-11 May-12

INBOND LANDED COST 0.48 1.15 0.51 1.13

Levies 0.44 0.25 0.41 0.23

Price Stabilisation Fund 0.94 0.09 0.85 0.09

Duty Paid Price 2.06 1.73 1.98 1.69

PUMP PRICE 2.30 1.92 2.18 1.86

(*) 1US$= MK 165 in Nov 2011; 1 US$= MK 255 in May 2012

Source: MERA , Bank Staff calculations

(Given in US$*/litre )

Petrol Diesel


54

been reduced from 30 percent to around 10 percent of the pump price. In addition, the

contribution to Price Stabilization Fund (PSF) has now been reduced. The PSF now has

5 percent of IBLC to absorb movements on the FOB for petroleum products and

additional 3 percent of IBLC to deal with the accumulated arrears from unpaid fuel

import bill. This change will have positive impact on domestic revenues as fuel supplies

are normalized.33

The price adjustments effected in May 2012, did not affect the price of

kerosene for household use. This is a deliberate measure by the authorities to cushion the

impact on the poor.34

It is expected that users of commercial kerosene will cross-

subsidize users of household kerosene.

RRDPG Prior Action 2: Adoption by Cabinet of a fuel pricing policy that fully

reflects fuel import parity prices.

RRDPG Prior Action 3: Approval by Cabinet of an automatic price adjustment of

petroleum import prices.

Expected Results: Systematic adjustment of pump prices to reflect import parity price

movements in international petroleum prices and exchange rate plus or minus 5 percent

of the actual cost of fuel importation by June 2013 as evidenced by the increase in

volume of fuel imports from 160 million litres in 2011/12, to projected 300 million litres.

1c. Improved incentives to exporters, including smallholder tobacco farmers

152. With the unification of the exchange rate and the removal of the requirement

for foreign exchange earnings to be surrendered to the Reserve Bank of Malawi

(RBM), US dollars earned at the auction floors are now being transferred directly to

sellers‟ commercial banks and exchanged at prevailing market determined

exchange rate. This effectively means that tobacco exporters, including smallholder

farmers without foreign currency denominated accounts (FCDAs), surrender all their

export earnings directly to commercial banks at the prevailing market exchange rate.

Meanwhile, exporters with foreign currency denominated accounts (FCDAs) can retain

60 percent of earnings in these accounts. Other exporters of traditional products are

required to surrender 40 percent of earnings to commercial banks at the commercial bank

rate.

33 Fuel levies have averaged to about 13 percent of total domestic revenues in the past three years.

34 Paraffin consumption among the poor is now being substituted by cheaper alternatives for lighting

available in the market, i.e. cheap imports of lighting lamps and use of firewood for cooking.


55

153. The analysis on the impact of timely exchange rate unification on tobacco

farmers (Table 5) shows that in Malawi there are over 400,000 tobacco growing

households, out of which over 220,000 are among the poorest 60 percent. The

liberalization of the exchange rate has allowed tobacco growers to recover part of the

welfare loss associated with exchange rate liberalization, via the additional income in

Kwacha. In fact, as illustrated in Table 5, the amelioration of the loss in purchasing

power should be particularly strong among the poorest households. Specifically, the

timely exchange rate liberalization, have provided the poorest 20 percent of tobacco

growing households with an opportunity to recover about 68 percent of the welfare loss.

The share reduces gradually with wealth levels, and the average recovery rate is about 32

percent.

154. On average a smallholder tobacco farmer normally grows up to one hectare,

which produces 1,200 kgs translating to 12 bales with an average bale weight of 100

kgs. In 2012, the national selling average price for tobacco is estimated at an average of

US$2.12 per kg.35

In the absence of a liberalized exchange rate, the net earnings to

tobacco farmer would have been at about MWK160,483, but with the unification of the

exchange rate, the net earnings to a farmer are estimated at about MWK 252,393 after

deductions (i.e. levies for grower associations, auction fees, the GoM‘s withholding tax,

transport costs etc).

Table 5: Mitigation via Tobacco Sales

35 While the tobacco market has witnessed a 35 percent reduction in tobacco production from last year, the

average prices offered on the auction floors this season are much higher (US$0.80 per kg versus US$2 per

kg). The 2011 tobacco marketing season was characterized by low prices due to over production (237,000

MT produced versus market demand of 165,000 MT) and poor quality tobacco leaf leading to high

rejection rates.

Wealth

Quintile

Devaluation Scenario 1: 50% Devaluation FOREX to 250 MKW/$

Tobacco Growers

Impact (Welfare Loss)/Year

Recovery with Tobacco/Year Recovery in

Purchasing

Power

(%)

Percent

Growers

Approximate

Number of

Households

Total Impact Per Household

Total Per Household

(1000 USD) (USD)

(1000 USD) (USD)

Malawi

Poorest 10.3% 58,971 2,377 40

1,610 27 68%

Q2 13.3% 76,147 6,931 91

2,995 39 43%

Q3 14.9% 85,307 11,714 137

4,572 54 39%

Q4 16.3% 93,323 17,968 193

4,532 49 25%

Richest 16.3% 93,323 33,153 355

5,631 60 17%

All Country 14.2% 406,498 66,409 163

21,089 52 32%


56

155. The GoM also intends to review the Tobacco Act with a view to encourage a

more integrated development of the tobacco supply chain. The approach will rely on

promoting quality and tractability through contract farming where tobacco producers

received inputs, quality seeds and technical advice from the tobacco industry. While the

sector‘s dominance in the economy is expected to remain in the medium term, the GoM

is fully committed to encourage export diversification into other non-traditional crops. In

2011/2012, it launched an ambitious cotton development program that will be continued

next year along with further investments in other crop and livestock productions

(groundnuts, soybeans and dairy).

RRDPG Prior Action 4: Directive from Reserve Bank of Malawi mandating

exporters, including tobacco farmers, to transfer earnings in US dollars obtained at

the tobacco auction floors to commercial banks at prevailing market determined

exchange rate.

Expected Results: Smallholder farmers’ earnings pegged to the US dollars are

exchanged at market determined exchange rate by June 2013 as evidenced by the

increase in net earnings to an average farmer from MWK 160,483, to about MWK

252,393 after exchange rate liberalization.

2. Protecting the vulnerable groups while improving transparency of systems

156. The RRDPG will support the GoM‟s plans to scale up social safety net

interventions so as to cushion the most vulnerable groups from the negative effects of

the policies of the previous administration, including the loss of the value of the Kwacha.

This will be implemented through provision of cash via a scaled-up country-wide public

works program (including inputs for assets), provision of agriculture inputs and public

unconditional cash transfers.

2a. Labor Intensive Public Works Program

157. The 2012/13 national budget proposes to expand labour intensive public

works program (through MASAF, IRLADP and others), which will be implemented

country-wide, with the total coverage of about 700,000 households (see Attachments

B and C). Through MASAF, the beneficiaries would be able to work for twelve days in a

month for four months at a rate of MWK 300 per day up from the earlier daily rate of

MWK 200 per day. The project will cover about 2.9 million people representing over 20

percent of Malawians. Beneficiaries are expected to earn about MWK 14,400 each (or

MWK 3,600 per month equivalent to US$13.6) in 2012/13.

158. Through IRLADP, beneficiaries will be able to participate in more

productive „inputs for asset‟ initiative where they would be involved in the

construction of mini- and small scale irrigation schemes, as well as in rural roads


57

work. Upon completion, the new infrastructure will generate long lasting benefits to

farmers and resilience to variable weather, increase food security and agriculture growth,

which will in turn increase their income and their ability to sustain themselves throughout

the year.

RRDPG Prior Action 5: Inclusion, through MoF, of a scaled-up36

labor intensive

public works (LIPW) program, designed to enhance the Recipient‟s safety net

programs, in the 2012/13 national budget.

Expected Results: An increase in ratio of total LIPW related expenditure to total

recurrent expenditure from 1.5 percent in 2011/12 to 6.5 percent by June 2013, and

expanded coverage of beneficiaries from 311,807 households, to 700,000 households by

June 2013.

2b. Farm Input Subsidy Program

159. The RRDPG will support the GoM‟s efforts to cushion the most vulnerable

groups affected by the dry spells in the Southern Region. The objective of this reform

is to strengthen social protection interventions and the resilience of the most vulnerable

groups to shocks. The plan is to expand the FISP by additional 100,000 beneficiaries in

2012/13 from 1.4 million farming families covered in 2011/12. The budgetary allocations

for logistics have also been adjusted upwards to reflect the increase in coverage and fuel

price adjustments. This will ensure timely delivery of fertilizer to smallholders and in

turn contribute toward increased food production. This slight increase is seen by the GoM

as a way to help poor farmers recover from dry spells that occurred during last cropping

season in some areas and minimize the impact of currency exchange rate liberalization on

fertilizer prices. The expanded FISP will include more legumes which will also enhance

the nutritional status of households and increase incomes for households.

160. The support for the expansion of FISP under this operation is premised on

the fact that this is an established program that was easily scalable, with potential of

reaching more farming families, and that once the mitigation measures are

implemented in 2012/13, it will be evaluated for its impact. Stronger connection

between FISP and farm yields needs to be established and a good monitoring system

developed to evaluate the impact of FISP on yields.

36 Expanded program.


58

161. With FISP representing a significant expenditure of the GoM‟s budget at

over 3 percent of GDP and over 60 percent of Ministry of Agriculture‟s budget,

urgent action is needed to improve the management, the effectiveness and efficiency

of this program by ensuring that it does not crowd out other important interventions

such as extension services and research and development. In order to further improve the

transparency and targeting of the FISP, the GoM will continue to work with civil society

organizations, community leaders and Anti-Corruption clubs that have been established.

Policy dialogue with the GoM will continue on the future of the FISP and the need for

phased reduction of the program. The planned agriculture PER supported by the Bank to

be launched soon should also contribute to these discussions.

RRDPG Prior Action 6: Inclusion, through MoF, of a scaled up Farm Input Subsidy

Program (FISP) in the 2012/13 national budget.

Expected Results: An increase in ratio of total fertilizer and seeds subsidy related

expenditure to total recurrent expenditure from 7.5 percent in 2011/12, to over 12

percent by June 2013, and expanded coverage of beneficiaries from 1.4 million

households in 2011/12, to 1.5 million households by June 2013.

2c. Improve Economic Management of FISP

162. The RRDPG will provide support to the GoM‟s efforts to improve economy,

efficiency, and value for money in public procurement by institutionalizing annual

procurement audits for FISP in the GoM‟s systems. The objective is to improve

economic management of FISP and ensure efficiency of the FISP program, especially in

use of budgetary resources and transparency in the contract award process. This reform is

operationalizing the GoM‘s commitment to mainstream procurement review process into

annual audits, which would now be conducted by the National Audit Office (NAO) so as

to strengthen ownership and transparency in public procurement. It is expected that this

action will contribute to improved value for money and transparency in public

procurement processes, including FISP.

163. Until early last year, the Bank used to carry out joint procurement reviews

with the GoM with the last joint review covering the 2010/11 fertilizer procurement

under FISP. This action therefore represents a continuation of reforms that were

supported under the PRSC I-III series, which aimed at improving the efficiency of FISP

given the huge fiscal risks and the high visibility of the program. FISP has been a major

program in the agricultural sector covering over 60 percent of the total agriculture budget.

The fiscal cost for the FISP has been high averaging at 3 percent of GDP over the past

five years, with an overshoot of 6.1 percent of GDP in 2008/09, which reflected high

global fertilizer prices and a close to 40 percent increase in fertilizer quantity above the

approved level in the budget.


59

164. While progress continues to be made in the fertilizer procurement under

FISP, weaknesses still remain. These include the following weaknesses: the award

criteria used in the bidding documents do not ensure value for money; currency of the bid

and payment provision are not respected; and the quantity allocation criteria based on

unit prices as well as contract award process (e.g. roles of the Evaluation Committees and

Internal Procurement Committees) are not adhered to Malawi‘s procurement procedures..

165. To date, the focus of the GoM has been on financial audits for FISP, and

several financial audit reports have been presented to Parliament for discussions.

This operation will therefore support the first procurement audit for FISP, which should

help bring out some of the generic procurement management problems that need to be

addressed. For instance, some of the arrears accumulated by the GoM‘s ministries,

departments and agencies (see paragraph 146) over the past four to five years are related

to non-compliance of public procurement rules and procedures. It is expected that the

planned audit will help bring out in public some of the systemic procurement problems

pertaining to FISP.

RRDPG Prior Action 7: Institutionalization of the policy to undertake procurement

audits of FISP as recommended in the Joint GoM/World Bank Fertilizer

Procurement Review Report on the 2010/11 FISP.

Expected Results: FISP procurement audit report submitted to Parliament by June 2013.


60

VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT

166. The RRDPG has been designed to mitigate the impact of the policies of the

previous administration and the impact of exchange rate liberalization on the most

vulnerable groups. The overall macroeconomic and fiscal framework has included

significant reallocation of expenditures, which has created fiscal space for increased social

protection and agriculture expenditures. Reforms to scale up and strengthen the social

protection interventions while maintaining targeting efficiency have had the greatest effect on

supporting incomes of the poor over the course of the economic downturn (see paragraph 56,

41). Reforms to restore macroeconomic stability and growth rebound are expected to be the

driving force behind improved living standards in the medium term. However, the prior

actions on fuel pricing reforms are not expected to be neutral on income distribution.

167. The RRDPG builds on the recent analysis carried out by the Bank on the

impact of price changes between 2007 and 2011, which highlighted the fact that

prices have been on a rise, with urban areas standing out as the most affected

relative to rural areas. This is particularly due to high food price inflation that is notably

strong in urban areas since 2005. Housing/utilities have had relatively higher rates of

increase in rural areas, with a tendency towards some convergence in recent years.

Increases in transport prices have been quite similar although urban transport costs have

been steeply rising since 2008 likely due to increases in world fuel prices. While the

impact of exchange rate liberalization is expected to be muted by the fact that most

imports were already riced at the much more depreciated parallel market exchange rate,

the exchange rate liberalization has triggered adjustments in retail prices of petroleum

products, which will have ripple effects on other prices, including transport and food

prices. However, the expanded social protection interventions, such as public works,

input for assets program, and gains in real earnings to tobacco farmers should help

cushion some of the impacts.37

168. Welfare and distributional impact assessment of unification of the exchange rate

indicates that existing social protection programs play an important role in preventing

people from falling into poverty, in particular into extreme poverty. Simulations show

that in the absence of any social protection programs, moderate poverty would have been 65

percent higher than the actual figures reported in 2010. Moreover, extreme poverty would

37 Higher domestic prices for petroleum products will affect household real incomes through two channels.

First, there are direct effects from an increase in the prices by households for consumption of petroleum

products (e.g. paraffin or petrol for private transport), and second, there are indirect effects from increases

in prices of other goods and services (e.g. higher prices for food, transportation and electricity

consumption) consumed by households as producers pass on the higher costs of fuel inputs. (IMF

WP/07/71)


61

have been more than four times higher. The study pointed to social programs (e.g. cash

transfers) that could be scaled up, should the GoM take up the option of rolling out these

reforms immediately to take advantage of the positive social gains of unification at the onset

of the tobacco sales season. With approximately 420,000 households in Malawi growing and

selling tobacco the unification of the exchange rate has cushioned some of the impact on

incomes of these households.

169. The proposed social protection interventions take cognizant of the fact that in

rural Malawi around a quarter of households are headed by females, and these

households tend to be poorer than male-headed households. Interventions such as school

conditional cash transfer program currently implemented by the GoM, with support from

DPs, has resulted in closing gender gaps in primary education and improved gender parity for

the higher standards. Therefore, female-headed households, the elderly, child-headed

households and the destitute would be the main beneficiaries of the social protection

interventions supported by this operation. Farming families involved in tobacco farming,

including women, will also benefit.

170. Improvements in the procurement of fertilizer under the FISP, which has a

huge fiscal cost, will also help the GoM ensure value for money in the program. Since

the program targets poor and vulnerable farmers, it is expected that these improvements

would strengthen the national food security and reduce vulnerability to hunger. The other

policy measures supported by this operation, geared towards improving transparency and

accountability in the use of public resources, will also help reduce wastage of public

resources and maximize the impact of the MGDS –related pro-poor spending.

B. ENVIRONMENTAL ASPECTS

171. The policy actions supported by this DPO are not expected to cause significant

effects on the environment, forests, and other natural resources of Malawi. The reforms

under Inputs for Assets and LIPW programs are addressed in Attachments B and C. In

general, experts observe that while the regulatory framework on the environment in Malawi

is broadly aligned with international standards for the level of economic development of

Malawi, the implementation of this framework can be strengthened.

172. The conclusion of an environmental assessment of the proposed reforms,

undertaken as per the requirements of OP 8.60, is that the reforms are not likely to

have a significant environmental impact. Economic governance reforms should lead to

more efficient use of public resources, which may indirectly generate environmental benefits

in the form of better use of modern technologies. As part of the environmental assessment,

the Bank has also reviewed the possible impact of the RRDPG reforms on the procurement

of fertilizers, but found that the negative environmental impact of this reform is likely to be

minimal.


62

C. IMPLEMENTATION, MONITORING AND EVALUATION

173. Implementation entity. The Ministry of Finance (MoF) will be responsible for

overall implementation of RRDPG, as well as for reporting progress and coordinating actions

among other concerned ministries and agencies. The MoF has experience in coordinating and

implementing DPO-supported programs as evidenced by the implementation of the PRSC I-

III.

174. The institutional arrangements for the preparation and execution of the

RRDPG fall within the framework of the CABS. On the GoM‘s side, the CABS are

served by Secretariats which are situated in the Debt and Aid Division of the Ministry of

Finance. The Secretariats coordinate preparation of PAF Priority Action Plans,

implementation, assessment, and revision. For these activities, the Secretariats mobilize

sector experts in various ministries and departments (see paragraph 137).

175. There is a need to improve further the monitoring and evaluation (M&E)

system of the country. The general M&E system has improved in recent years with room

for further improvements. The MGDS II has provided more information on many of the

indicators, although the framework still needs to be improved in terms of the quality of

the indicators and its linkages to other sectoral M&E frameworks. Monitoring and

Evaluation of the MGDS II is coordinated by the M&E Division in the Ministry of

Economic Development and Planning. An M&E master plan and road map to its

implementation were approved in 2005. Implementation of the road map is being

supported by a joint program of support with basket funding from the European

Commission, DFID, and UNDP. Under the program, M&E officers have been recruited,

trained and deployed in all district councils of the country. This will improve collection

of data from the field for monitoring the MGDS II. M&E divisions have also been

established in most line ministries, and economists will also be deployed in all line

ministries to be responsible for monitoring of implementation of the MGDS II in their

respective ministries.

176. Program monitoring. Progress against RRDPG targets will be monitored by Bank

staff during the course of the year through biannual reviews within CABS framework and

staff mission, especially under the social safety net pillar. Following previous successful

budget operations, the review of the program objectives will be based on relevant and easy-

to-monitor indicators (Annex 2). In addition, the proposed operation will also benefit from

the monitoring system of the soon to be approved IMF ECF program, notably on the

macroeconomic performance. An Implementation Completion Results Report (ICR) will be

issued within six months from closing date of June 30, 2013.

D. FIDUCIARY ASPECTS

177. Public financial management system. Malawi‘s fiduciary framework is adequate

overall to receive the proceeds of the grant. The GoM, in close collaboration with


63

development partners, has developed a medium-term Public Finance and Economic

Management Reform Program (PFEM-RP) 2011/12-2013/14. The PFEM-RP is designed to

further advance the pace of public financial management reforms in Malawi. The PFEM-RP

covers a broad range of areas that include planning and policy analysis, resource

mobilization, budgeting, procurement, accounting and financial management, cash and debt

management, parastatal financing, reporting, auditing, and PFEMRP administration. A Multi-

Donor Trust Fund to operationalize the PFEM-RP is managed by the Bank.

Box 3: Public Financial Management Assessment, 2011 – Major Findings (extract from PEFA report)

Credibility of the budget: The period as a whole was characterized by persistent over-spending in comparison

to original budget which contrasts with the previous three years each of which reported under-spending. On the

revenue side actual revenue was consistently above budget, as it had been in the previous three years.

Therefore, the credibility of the budget is called into question - this time in terms of its ability to provide a

reliable indication of the GoM‘s resource envelope.

Comprehensiveness and transparency: Though Malawi scores well in a number of areas associated with

comprehensiveness and transparency, various issues remain - Treasury Funds are not reported in the Estimates

and only appear in the Annual Appropriation Accounts as net figures. There is significant room for

improvement in terms of public access to key fiscal information.

Policy-based budgeting: While the orderliness of the annual budget process has improved relative to the last

PEFA assessment, challenges lie ahead in terms of alignment of MTEF with the new priorities in the MGDS II.

Predictability and control in budget execution: Reforms are ongoing in the Malawi Revenue Authority. The

Ministry of Finance has improved the cash management process. Debt management and payroll system are

being operated efficiently. The Procurement system continues to be unable to provide statistics with regard to

the implementation and comprehensiveness of competitiveness in public procurement. The IFMIS rollout

process has been concluded to the central government and 22 Local Authorities. Although awareness seems to

be rising with regards to internal control, the evidence does not yet support the finding of improved control and

internal audit procedures and processes being implemented and taking effect.

Accounting, recording and reporting: Progress in the period under review has featured the improved

timeliness of the closure of the accounts and the production of the financial statement for audit. Also, in-year

budget execution reports are produced on a timely basis and with some improvements in quality. However,

management information at service delivery units stills needs to improve. A serious control concern identified

is the backlog in bank reconciliations since July 2010. Timely bank reconciliation is an essential discipline in

the ongoing checking and verification of accounting practices across the GoM and it also provides assurance as

to the integrity of data used for reporting.

External scrutiny and audit: The period covered by this assessment has seen a backlog of external audits and

Public Accounts Committee (PAC) scrutiny cleared. However, there are still weaknesses in the actions and

follow up based on the recommendations of the National Audit Office (NAO) and PAC. In summary, NAO and

PAC scrutiny has been characterized by periods when there has been no public scrutiny followed by intense

activity to clear backlogs. With respect to the Parliamentary Finance Committee, there is more opportunity for

scrutiny of the draft budget than of budget execution.

178. Four Public Expenditure and Financial Accountability (PEFA) assessments

have been conducted in recent years, i.e. in 2005, 2006, 2008 and 2011. The 2011


64

PEFA assessment, which found a number of improvements since 2008, was based on an

analysis of performance for the years from 2007-08 to 2009-11. Selected areas where

improvements have been made include cash management process, orderliness of the

annual budget process, debt management and payroll system, debt and guarantees,

effectiveness of internal audit, quality and timeliness of annual financial statements, and

legislative scrutiny of the annual budget law. The assessment reported that regardless of

progress made, weaknesses remain on the credibility of budget (in terms of its ability to

provide a reliable indication of the GoM resource envelope); internal control;

comprehensiveness and transparency-Treasury Funds are not reported in the Estimates

and only appear in the Annual Appropriation Accounts as net figures and public access to

key fiscal information; timeliness of follow-up on audit recommendations and backlog in

bank reconciliations. The PFEM-RP has taken into account the weaknesses identified in

the PEFA 2011 report in order to ensure overall strengthening of the PFM. The budget is

also publicly available as per guidance on budget transparency in 2011.

179. On audit follow up, all audit reports submitted to Parliament for years ended

in June 2006, 2007, 2008, 2009 and 2010 have been scrutinized and discussed by the

Public Accounts Committee (PAC). This implies that PAC is current in terms of

scrutinizing all the reports that were submitted including a Treasury Minute for the year

ended June 2004. However, the GoM is aware of the backlog of Treasury Minutes which

were mainly due to the absence of the Auditor General and irregular Public Accounts

Committee (PAC) meetings due to funding challenges. Since the appointment of the

Auditor General a backlog of audit reports has been cleared. With increased funding to

Parliament, PAC is able to meet more regularly to scrutinize audit reports. The GoM has

recently submitted a Treasury Minute for 2005 to 2007 financial years to Parliament. The

GoM will step up its efforts to work on more recent Treasury Minutes and make

necessary follow ups with controlling officers who have been identified to have issues.

180. The 2004 Country Procurement Assessment Report (CPAR) found that

public procurement accounted for 16.2 percent of GDP in 2002, that corruption in

procurement was widespread, capacity low and sanctions for corrupt practices were

not effective. The GoM has, in response, attempted to comprehensively address these

weaknesses. A new Public Procurement Act, based on international procurement

standards became operational in 2004 with the establishment of the Office of the Director

of Public Procurement (ODPP), headed by a Director and Deputy Director appointed by

the President and approved by the Public Appointments Committee of Parliament. ODPP

has policy, standards and monitoring functions and does not procure. It has supervisory

oversight of a decentralized procurement system that has been receiving intensive support

from the World Bank, UNDP and USAID since 2006. While challenges remain, there

have been significant advances in moving the public procurement system towards

acceptable standards.

181. Foreign exchange environment. Under the Fund‘s safeguards assessment policy,

the Central Bank of Malawi was subject to a full safeguards assessment with respect to the

ECF arrangement approved on February 19, 2010. From the assessment, which was


65

completed on May 28, 2010, the principal safeguard concern was on the lack of autonomy of

the RBM. Other areas of vulnerability included internal audit and internal controls. While the

RBM foreign reserves management functions have strengthened since the 2008 assessment

by updating Foreign Reserves Management Policy (RMP) and incorporating comprehensive

reserves management guidelines, oversight of the foreign reserves management remains

insufficient as analysis and evaluation of the in-house managed portfolio is not documented

and analytical reports are not provided to Assets and Liabilities Committee (ALCO) to

facilitate effective oversight. Measures to strengthen the legal and control framework and to

help safeguard Fund resources were agreed with the authorities. Priority action was for

ALCO to review monthly analytical reports regarding the in-house managed foreign reserves

portfolio and for the foreign currency reserves managed by the Treasury to be regularly and

independently verified with such reports to be provided to Internal Audit Department (IAD).

Some recommendations have been implemented, including submission of the RBM Bill to

Parliament in November 2010 addressing vulnerabilities identified in the 2008 safeguard

assessment. Implementation of these recommendations is being monitored by Fund staff.

Assurance Requirements

182. Due to the fiduciary risks associated with the program, additional fiduciary

arrangements shall apply to this operation. An audit of the flows in and out of the

dedicated Foreign Currency Account of the GoM held with the Central Bank of Malawi will

be carried out by independent auditors acceptable to IDA within 4 months after the end of

the fiscal year and the audit report shall be submitted to IDA within 6 months of the end of

the fiscal year. The Terms of Reference of the audit agreed at negotiation will include with

respect to the Foreign Currency Account held with the Central Bank of Malawi, a full

assurance that the withdrawals from the account were indeed (i) reflected in the budget

management and accounting records, and (ii) transferred in local currency to the

Consolidated Account of the GoM.

E. DISBURSEMENT AND AUDITING

183. A single-tranche of SDR 33.20 million (US$50 million equivalent) will be

disbursed upon grant effectiveness and following the Recipient‟s request for

withdrawal of proceeds of the grant. The proposed grant will follow the Bank‘s standard

disbursement procedures for development policy operations. The grant will be disbursed

against satisfactory implementation of the development policy program and not tied to any

specific purchases. Once the operation is approved by the Board and becomes effective, and

upon receipt of a withdrawal application signed by an authorized signatory, the proceeds of

the grant will be deposited by IDA in a US Dollar account designated by the GoM at the

Central Bank of Malawi and will form part of the official foreign exchange reserves of

Malawi. Within two working days, the Central Bank of Malawi will credit the Malawian

kwacha equivalent of the grant proceeds to the consolidated account maintained on behalf of

the GoM for budget execution. The conversion from the foreign currency to the local

currency will be based on the prevailing exchange rate on the date that the funds are credited

to the budget management system. The Central Bank of Malawi will not impose any charges


66

or commissions on the Recipient for these transactions. The Recipient will: (a) provide

confirmation to the Bank within 30 days that an amount equivalent to the grant proceeds

from the Bank has been credited in the Recipient‘s budget management system, with an

indication of the exchange rate applied; (b) provide evidence that the Malawian Kwacha

equivalent of the grant proceeds was recorded as financing the GoM budget; and (c) ensure

that the Malawian Kwacha equivalent of the grant proceeds are subject to effective controls

sufficient to ensure its use for eligible budgeted public expenditures only as per the Financing

Agreement.

184. If the proceeds of the grant are used for ineligible purposes as defined in the

Financing Agreement, IDA will require the Recipient to promptly upon notice from

IDA refund an amount equal to the amount of said payment to IDA. Amounts refunded

to the Bank upon such request shall be cancelled. The administration of this grant will be the

responsibility of the Ministry of Finance.

185. The use of the Malawian Kwacha equivalent of grant proceeds to support

budgetary expenditures will be subject to audit by the Auditor General as provided for

by the Malawian Constitution. The Bank will have access to these audit reports.

G. RISKS AND RISK MITIGATION

186. Shortfalls in donor support could have a deterring impact on economic growth, as they could weaken the balance of payments and widen the external financing gap and

could force the authorities to borrow domestically, which is not in line with the fiscal

adjustment path currently being pursued. Given the low level of official reserves and

significant import needs, this would put enormous pressure on what already is a tough

fiscal adjustment process and could undermine fiscal sustainability and/or jeopardize

necessary social and capital expenditures. These risks are mitigated by a number of

factors. First, the authorities have already undertaken measures to repair relations with

DPs and intend to address governance and human rights concerns. Second, the authorities

are committed to a prudent fiscal stance and a flexible exchange rate policy, which

provide key anchors for external and debt sustainability. Third, predictable and timely

budget support, backed by analytical support (i.e. programmatic public expenditure

reviews) and policy dialogue through the future DPO series and good-will from DPs to

aid the GoM‘s ongoing medium-term fiscal consolidation program, will also help

mitigate the risks. A new 3-year (ECF) supported program for Malawi is expected to be

presented to the IMF Board in July 2012. This should pave way for resumption of budget

support by most CABS DPs. 187. Political risk. The current administration, in power since early April 2012, has

embarked on bold reforms to restore macroeconomic stability and is committed to

maintain prudent macroeconomic policies. However, the risk might arise from tensions

between political pressures to expand the GoM programs and the need to maintain a

prudent fiscal stance with a view to keeping inflation pressures at bay as well as


67

preserving debt sustainability. This is mitigated by the GoM efforts to build support for

policy reforms supported by this operation. Other risk mitigation measures such as

change management, ‗just-in-time-reports‘ and in-depth political economy analysis could

be provided by the Bank on demand.

188. Social tensions. The consequences of some of the economic policies of the

previous administration and adjustments that are taking place in the economy could lead

to further upward pressure on consumer prices and erosion of consumer purchasing

power, which could raise social tensions. In addition, increases in fuel prices could result

in second round effects on prices of other products leading to further tensions. Domestic

tensions could affect investor and consumer confidence, which would constrain further

private investment. There will be a need for the GoM to engage all key stakeholders to

rally support for reforms and help stakeholders understand their consequences and

manage expectations. In addition, the GoM‘s efforts on enhancing social inclusion,

through education, health and social protection programs is expected to offset potential

social tensions.

189. Implementation capacity risks. The GoM‘s capacity to massively scale up social

safety net programs could be overstretched. This could delay the implementation of the

programs supported by this operation and lead to low utilization of available resources

and insufficient coverage of beneficiaries. Given the fact that DPs are financing a large

part of the social protection interventions and the fact that programs being scaled up have

existing institutional structures and skilled personnel, especially for labor intensive public

works, this risk will be minimized.


68

ANNEX 1: LETTER OF DEVELOPMENT POLICY

Telephone: 01 789 355

Telefax: 01 789 173

Telex: 44407

Email:finance@finance.

gov.mw

MINISTER OF FINANCE

MINISTRY OF FINANCE

P.O. BOX 30049,

CAPITAL CITY,

LILONGWE 3.

Ref: DAD/5/2/3/13 8th

June, 2012

Mr. Robert Zoellick

President

The World Bank Group

1818 H. Street N.W

Washington D.C 20433

United States of America

Dear Mr Zoellick,

MALAWI: LETTER OF DEVELOPMENT POLICY

1. On behalf of the Government of Malawi, I write to request for a Rapid Response

Development Policy Grant (RRDPG) of US$50 million from the International

Development Association (IDA). The RRDPG will help the Government to restore

macro-economic balance and implement an economic recovery program in the

forthcoming 2012/13 budget and the comprehensive response package of 2012.

2. Since the Government went off track an IMF sponsored ECF program in 2010,

the economy has experienced huge macro imbalances which have reduced the growth

prospects of the economy. The proposed RRDPG will help the Government among other

things to address the following issues: (i) restore macro-economic stability, (ii) improve

functioning of the petroleum market; (iii) improve functioning of export markets; (iv)

strengthen social protection intervention and the resilience of the most vulnerable groups

to shocks; and (v) improve economic governance of the Farm Input Subsidy Program. On

the macro-economic front the Government will continue with reforms aimed at regaining


69

macro-balance and return to a market based economy. Since April 2012, when the new

President assumed leadership of the country, Government has implemented some of the

most difficult macro-economic reforms including the liberalization of the foreign

exchange market which was considered as socially undesirable. Thus, the RRDPG being

sought from the Bank will help the Government to manage the effects of this policy

reform and restore macro-economic balance. Under social protection, the Government

will continue with reforms in the design, targeting, implementation and coordination of

social protection programs. In implementation of the Farm Input Subsidy Program (FISP)

the Government will continue with reforms that will enhance transparency of the program

beneficiaries as well as pursuing a transparent and economic system for procurement and

distribution of the inputs to minimize its impact on the fiscus. The Government will

conduct annual audit of the procurement system for the inputs and publish results of

tender and audit on its website and daily papers for public consumption. With regard to

Public Finance Management, the Government has developed a reform program which is

aimed at consolidating some of the PFM reforms that were initiated in the last three

years. More details on the proposed reforms to be supported under RRDPG are set out in

Part C of this letter.

A. Recent Macroeconomic Performance

3. Malawi experienced uninterrupted solid growth from 2006 – 2010 with real GDP

growth averaging 7.5 percent, compared to 2 percent for 1999 – 2004, amid a decline in

inflation to mid-single digits. This robust growth was supported by sound economic

policies. In addition to positive macroeconomic environment, good weather and the

fertilizer subsidy program made significant contributions to agriculture growth. However,

persistent external imbalances compounded by the reduced donor inflows, low tobacco

proceeds coupled with other supply side bottlenecks contributed to the weakening of

macroeconomic performance over the last two years. This in turn contributed to a

widening of balance of payment and budget gaps and slowdown in economic activity. An

off-track International Monetary Fund (IMF) Extended Credit Facility (ECF) program

and governance concerns adversely affected budget support.

4. There has been progress in the recent discussions with the IMF for a new ECF.

Negotiations with the IMF on the new ECF are ongoing, and it is expected that an

agreement will be reached by June 2012. Once an agreement is reached on a program, the

Fund will issue an assessment letter that will signal a credible macroeconomic framework

and provide comfort to Development Partners in order for them to unlock budget support.

5. Regaining macroeconomic balance will be anchored on fiscal consolidation,

restoration of external balances, and realignment of the exchange rate regime to one that

is credible to all market players. To this end, the Reserve Bank of Malawi (RBM) has

liberalized the exchange rate regime. The official exchange rate has been devalued from

K167 to K250 per United States Dollar; freeing of bureau market i.e. returning to pre-

August 2011 conditions whereby exchange bureaus determined their own mid-rate;

cancellation of the requirement to screen imports in excess of US$50,000 as commercial


70

banks have now been capacitated to screen import orders;. The RBM has also reversed

the requirements for tobacco dollars to be remitted to the Central Bank and henceforth

tobacco proceeds will go to commercial banks.

6. As the Government is embarking on these reforms it will be necessary to have a

reserve cushion for timely intervention in the foreign exchange market, the RRDPG will

be neccessary in this aspect. Furthermore, foreign exchange reserves are required to clear

outstanding foreign exchange bill arrears, for Malawi to jump-start its growth.

7. The fiscal anchor for the 2012/12 budget will be zero net domestic financing and

government is expected to pursue tight fiscal stance but at the same time ensure

prioritization of the social sectors. Due to the recent economic challenges that the country

was facing in terms of foreign exchange shortages, fuel scarcity and power disruptions,

growth in 2011 was revised downwards from 6 percent as earlier projected to 4.3 percent.

In 2012, the economy is estimated to grow by 4.9 percent down from an earlier projection

of 6.5 percent. The average inflation for 2011 was 7.6 percent but it is projected to 18.4

percent

8. Domestic debt has accumulated to 17 percent of GDP as at end of 2012,

increasing from 14 percent that was recorded in March 2011. The overall fiscal deficit,

including grants, is projected to increase from 2.9 percent of GDP in 2010/11 to 7.0

percent in 2011/12. The increase is primarily due to fiscal slippages and the freeze of

budget support due to the economic mismanagement which led to the suspension of our

Extended Credit Facility with the IMF. The deficit is expected to fall to approximately

1.1 percent of GDP in 2012. The ratio of the current account deficit to GDP worsened

from -1.3 percent in 2010 to -5.9 percent in 2011. As at 20th

April 2012, the Official

Reserves stood at US$132.2 million which is equivalent to one month of import cover. Of

these gross reserves US$ 38.4 million were encumbered, implying that only US$ 93.7

million would be freely usable.

9. Our forecast for 2012 point to a 4.9 percent growth in real GDP while inflation is

projected to average 15 percent reflecting the recent monetary policy reforms which

include the 49 percent devaluation of the kwacha. The slowdown in the expected real

GDP growth in 2012 is largely attributed to reduced agriculture output. Tobacco

production declined because of lower tobacco auction prices in the 2010/11 growing

season as well as s dry spells experienced in some parts of the country at the beginning of

the growing season. The overall fiscal deficit in 2012 is projected at 3 percent of GDP.

Inflation will be kept in check, supported by increased food production through

intensified agriculture, tight fiscal and monetary policies aimed at reducing aggregate

demand and controlled broad money growth. Domestic revenues are projected to average

22 percent of GDP in the medium term. The share of Government expenditure to GDP is

however projected to remain virtually unchanged at an average of 32 percent of GDP

between 2011 and 2015.


71

10. Government‘s macroeconomic management will however, face a number of

challenges, including the need for continued expenditure controls, intermittent power

supply, erratic weather conditions and the need to reduce public debt arising mostly from

non-performing state-owned enterprises. Government, therefore, remains committed to

sound macro-economic management and will continue with the current program of

structural and public sector reforms.

B. The Second Malawi Growth and Development Strategy (MGDS II)

11. The Government of Malawi finalized its third poverty reduction strategy, the

MGDS II, which covers the period 2011 to 2016 and it was prepared using participatory

processes. The strategy's overall objective is wealth creation through sustainable

economic growth and infrastructure development. It is organized around six thematic

areas as follows: (i) sustainable economic growth; (ii) social support and disaster risk

management; (iii) social development; (iv) infrastructure development; (v) good

governance and (vi) gender and capacity development.

12. From these thematic areas, the strategy has identified nine key focus areas that are

seen as central to achieving the strategy's overall objective of wealth creation. The focus

areas are agriculture and food security; energy, industrial development, mining and

tourism; transport infrastructure and Nsanje World inland port; education, science and

technology; public health, sanitation, malaria and HIV and AIDS management; integrated

rural development; green belt irrigation and water development; child development,

youth development and empowerment; climate change, natural resources and

environmental management.

13. The MGDS emphasizes the need for Malawi to register sustained private sector

and export-led growth in order to make a noticeable dent on poverty. The long-term

vision of the MGDS is to transform Malawi from a predominantly importing and

consuming country into a predominantly producing and exporting country. The strategy

concentrates on agriculture as the driver of growth. It focuses on increasing agricultural

productivity and integrating smallholder farmers into commercial activities. In the long

term, the Government has also identified four sectors with potential for high growth:

tourism, mining, manufacturing, and agro-processing. The MGDS also acknowledges the

role of health, education, economic empowerment and social protection among others. It

recognizes that a healthy and educated population is necessary if Malawi is to achieve

sustainable economic growth. The strategy further recognizes the importance of

increasing the assets of the poor and vulnerable so that they can contribute to and benefit

from economic growth.

14. The strategy has identified long-term goals, medium-term outcomes, and

constraints to achieving these outcomes. It then outlines the strategies and key actions

that will contribute towards achieving the defined outcomes. Implementation of the

strategies and actions will entail undertaking capital investments, maintenance of assets,

and implementation of policy and institutional reforms. However, in this endeavour,


72

Malawi is faced with the challenge of mobilizing resources to implement the MGDS II.

Although various strategies and actions have been prioritized, there exists a financing gap

for the Government to implement even the top priorities, and hence this request for

financing.

C. Specific Reforms to be implemented

15. In line with its macro-economic recovery program the Government in

consultation with its Development Partners has outlined its proposed medium-term

support to Malawi. In this context, I would like to highlight the various reforms that the

Government of MalawiGoM intends to undertake not just for purposes of the proposed

RRDPG to which this financing request directly relates, but also under subsequent DPG

so as to present a holistic picture of the Government's reform program. The first priority

will be to restore macro-economic stability, coming from a background of huge external

imbalances, shortage of foreign exchange which crippled the private sector, the

Government primary goal will be restore macro-economic stability.

Market reforms

16. In order to address the challenges that affected the tobacco prices in the 2009-

2011 period, the Government of Malawi from the 2011/12 growing season implemented

crop size management strategy whereby growers were allocated quota based on average

production for the previous three years‘ production to meet demand. Growers were

registered using biometrics system with the purpose of establishing legitimate farmers.

For example, clubs were allocated a minimum of 1,300 kgs of tobacco and a maximum of

10,000 kgs while estates were allocated a minimum of 1,500 kgs. This strategy has

started giving dividends since it has helped in improving quality of the tobacco leaf as

well as improved the prices offered at the auction floors.

17. The Government of Malawi has started the process of reviewing the Tobacco Act

with the aim of incorporating issues and other recent developments in the tobacco sector.

The process is at an advanced stage and is being done in collaboration with Tobacco

Control Commission and relevant stakeholders. Among other things being considered is

the inclusion of the Integrated Production System. With regard to contract farming which

is being seen as one way of addressing the supply side of the output markets, the

Government developed a Contract Farming Strategy for Malawi in 2007. Thereafter, a

consultancy was commissioned to assess the initial draft and based on the findings, it was

noted that the draft lacked comprehensive elements of a contract farming strategy

including contract provisions for other crops other than tobacco. The Ministry has so far

included contract provisions for other crops and it is in the process of incorporating the

other issues that were spelt out in the study.


73

Fuel Pricing Strategy

18. For the last three years the Government has been intervening on the fuel market

through the use of the fuel stabilisation fund whose primary aim was to smoothen effects

of sudden fuel increases on the world market. This policy worked very well in a regime

of managed foreign exchange market. Following the policy shift from a managed to a

liberalised foreign exchange market, the Government‘s ability to intervene on the fuel

market through use of the Fuel Stabilisation Fund is not feasible any more. Since the

foreign exchange market has been liberalised, the Government has now adopted an

automatic fuel pricing policies which will be informed movements of the oil prices on the

world market, the ruling exchange rate and inflation. This policy will help fuel importers

and retailers to recover their costs and ensure that they get good return on their capital.

Agriculture Output markets

19. Having well functioning output markets is the ultimate goal of the Government,

since they will ensure that farmers get appropriate return on their output. However the

Government realizes that issues of overproduction and incidences of non tobacco related

materials affected prices. With regard to maize exports, government move to stop export

licenses for maize is a disincentive to commercial farming. The Government will

however ensure that food security objectives are well balanced against commercial

interest. Given low literacy levels of most smallholder farmers the Government will

continue to issue minimum prices for agriculture prices which are there to simply guide

the farmers when negotiating for better prices with buyers.. Better market intelligence

will help farmers to improve their production and marketing decisions.. We also believe

the private sector has a critical role to play in development of the agriculture output

markets. Therefore the main policy thrust will be to encourage greater participation of the

private sector in the output markets. Increased private sector investment in trading will

improve availability of markets. Further, we believe that increased competition amongst

private traders should result in better prices for farmers and lower consumer prices for

food deficit households.

20. Following the Operationalisation of commodity risk management strategy the

Commodity Risk Management section of the Ministry of Agriculture and Food Security

is now fully operational. The Government will continue with the macro-weather

insurance program to cushion the country against drought. The Government is also

sensitizing local farmers to procure micro weather insurance from local insurance

companies so that they can be cushioned against weather variations.

Agriculture Input markets

21. Agricultural production in Malawi is rainfall dependent. Due to changes in

weather, agricultural production fluctuates between surpluses and deficits. Deficits have

arisen mainly due to droughts. Low production in drought periods is made worse due to

farmers‘ low access to improved inputs. On the other hand, surpluses have been achieved


74

due to government intervention in supply of agricultural input especially fertilizer and

seed, and also due to good weather. Considering that Malawi faces acute shortage of

land, increased use of modern inputs will remain a key strategy to improving agricultural

productivity. At the same time, most Malawian farmers are poor and rely on smallholder

farming. In the 2012/13 fiscal year the Government will continue with implementation of

the Farm Input Subsidy Program, which will provide smallholder farmers with subsidized

fertilizer, maize and legume seed. To minimize incidences of duplicate vouchers the

Government has developed coupons with more secure features which make it very

difficult for people to produce counterfeit one.

Private Sector Development reforms

22. Private sector development is constrained by several factors ranging from supply

side constraints and bureaucratic bottlenecks. Studies by the World Bank, the

Government and the Malawi Confederation of Chamber of Commerce and Industry have

amply documented these constraints. The Government is committed to implementing

reforms that will improve the business environment and promote private sector in the

country. Energy constraints, unpredictable government policy, lengthy business processes

and weak infrastructure have been cited as the major constraints to private sector

development. In the quest to improve the business environment the Government is

carrying out various reforms. The Government is strengthening institutions that will

strengthen private property as well as those that facilitate business. In this area the

Government has streamlined the regulatory environment for business in Malawi by

reviewing and consolidating various business laws. In order to accelerate access to

commercial justice the Government has operationalized commercial courts in the main

business district of Blantyre and the administrative centre of the Government in

Lilongwe. The Government is further improving services at the Registrar General

Department and at the Land Registries to facilitate quick business registration and land

transaction. Unlike in the past business registration and land transaction used to take

years to complete and were manually operated but currently these processes have all been

automated.

23. Another aspect of the business reform program is the strengthening of institutions

that facilitate private sector development. Following the enactment of the Malawi

Investment and Trade Centre bill in 2011, Malawi Investment Promotion Agency (MIPA)

and Malawi Export Promotion Council (MEPC) have merged into a one stop Malawi

Investment and Trade Centre. The Government has also institutionalised the Public

Private Dialogue forum within the Malawi Confederation of Chambers of Commerce and

Industry. The forum is there to facilitate regularly dialogue between the Government and

the private sector. With regard to processing of the business and work permits, the

Government has also automated the services at the Immigration Department. The

automation will reduce the waiting period for business to access the results of the

application in shorter period. Unlike in the past when applicants had to wait for ninety

days to know the results of their application.


75

24. Whilst the Government has done commendable work to address business

registration and facilitation bottlenecks, challenges remain in the areas of power and

water supply. Businesses are still experiencing frequent power loading shedding as well

as water rationing. With regard to energy supply the Government is re-engaging the

United States Government on the resumption of the MCC energy compact program. At

the same time the Government is implementing an Energy Sector Support Program

financing by the World Bank. This program will rehabilitate transmission lines, procure

equipment and spare parts for the ageing energy grid. The project will also facilitate

studies on new energy sources. With regard to water supply the Government is

rehabilitating various water supply schemes in the country to reduce unaccounted for

water. The Government is also developing new water sources in rural and urban areas.

Social Protection and Human Development

25. Social protection remains one of the priority areas of the Government. The

Government has finalising its Social Protection Policy and it awaits Cabinet approval.

With the new policy, Government will have a more coordinated approach in the

implementation of social protection programs. Protecting the vulnerable groups in the

wake of the recent economic policy reforms will be at the centre of the Government

policy during the recovery period. With the help of the International Development

Association the Government has prioritized its planned expenditures for health,

education, agriculture and other pro-poor sectors so as to protect them against adverse

cuts that would affect attainment of the e Millennium Development Goals in these areas.

Most of the people in the country are poor and are vulnerable to various shocks including

illness and loss of livelihoods in the wake of economic adjustment. The burden of coping

with these shocks invariably falls on women, children and the elderly. The Government

will therefore step in with program to mitigate negative effects of the economic

adjustment program. First on the menu of the interventions being planned by the

Government is the continuation of the Farm Input Subsidy Program which will be scaled

up to 1.5 million family farm beneficiaries in 2012/13 season. The expanded program

will ensure that more people who have been affected by the economic reforms do not lose

their livelihood. The expanded FISP will include more legumes which will also enhance

the nutritional status of households and increased incomes for households. In order to

further improve on the transparency and targeting the FISP the Government will continue

to work with civil society organisations, community leaders and Anti Corruption clubs

that have established.

26. The Government will expand its Public Works Support Program (PWSP) in the

2012/13 fiscal year to cushion poor households against the economic shocks. Public

works programs are expected to increase incomes and food security of poor households

who participate in the creation or rehabilitation of community assets. The Government

plans to reach an estimated 1.72 million people in 2012/13 through its PWSP, each

working twelve days per month for a period of four month. Thus beneficiaries will be

able to buy agricultural inputs and have some savings following participation in the

PWSP.


76

27. Improving quality and access to education is one of the Government objectives in

the education sector. Since the introduction of free primary education in 1994, the

education system has struggled to cope with the enrolment explosion that followed. The

excess number of pupils placed a strain on existing infrastructure, provision of teaching

and learning materials and qualified teachers in the system. The outcome has been

deteriorating quality of primary education, with the challenge being even greater in rural

schools where work stations are less attractive for qualified teachers compared to urban

schools. Government‘s strategy to improve the quality of primary education, particularly

in rural areas, is to increase the annual deployment of qualified primary school teachers

to rural areas. To promote girls access to education, Government is providing bursaries

to underprivileged girls in secondary schools to enable them buy clothes and basic

materials required at school. The Government is also procuring teaching and learning

materials for its secondary schools so that learners have access to references books. The

Government is currently expanding primary teacher training facilities in order to increase

the number of teachers being deployed. The Government also has a successful open and

distance learning program that trains teachers from rural areas and deploys them near

their homes. One additional teacher training college with a teacher output of 540 has just

been opened. This initiative alongside other supply side measures is expected to improve

the teacher/pupil ratio in rural areas in the next seven years.

28. The Government continues to make good progress in the fight against under-five

mortality, maternal mortality, strengthening staff capacity in the health sector and in

reducing the transmission of HIV and AIDS from mothers to children. With regard to

HIV/AIDS the Government is implementing its National Response strategy for 2011-

2016. The strategy is focusing on prevention and behavior change; treatment, care and

support; and impact mitigation. In the 2011/12 fiscal year the government will train an

additional 4,200 health workers in the provision of integrated ART/PMTCT services and

650 new sites will be providing ART/PMTCT services. Prevention and behavioral change

is a key part of the Government overall strategy in the fight against HIV/AIDS. In the

2011/12 the Government implemented various programs aimed at positively influencing

behavior. The Government imparted life skills to about 0.5 million out of school youth

which include the disabled youth. About 90 per cent of HIV positive pregnant women

were receiving ARV so as to reduce Mother to Child Transmission and 80 per cent of the

HTC sites had no stock out of test kits. The Government also managed to increase

television hours dedicated to HIV/AIDS message dissemination. This also included

printed materials and other audiovisuals shows in communities.

29. With regard to other health indicators like the national proportion of one-year olds

immunized against measles reached 88%, exceeding last year‘s proportion by 4%, and

surpassing the set target by 6%. Good progress was recorded in the fight against maternal

mortality. Compared to the previous year, more pregnant mothers in Malawi were

attended to by skilled birth attendants in 2011, with the proportion rising from 51% in

2010 to 59% in 2011, exceeding the target by 10%. Good progress was registered in

improving the quality of health services in Malawi through increase in the number of


77

qualified nurses. A total of 6700 nurses were in the health system during the period July

2010-2011.

Public finance management reforms

30. In order to consolidate the gains achieved in restoring macroeconomic stability,

the Government plans to undertake several policy reforms in the area of budget process,

external auditing, debt and aid management, and Public Finance Management.

Budget processes

31. The budget process is an important tool that translates the Government policies

and programs into implementable activities. As the Government implements its economic

recovery program in the 2012/13 fiscal year, it the Government will build its 2012/13

budget framework on previous reforms which include: the linkages between the budget

and the MGDS; have budgets that meet the internationally recognized classification of

the Government Financial Statistics (GFS); and having a changed budget structure.

Going forward the Government will build on these successful reforms to further improve

the budgeting process. Beginning in the 2011/12 the Government adopted the Medium

Term Expenditure budgeting framework which uses a three year rolling plan. To support

the economic recovery program the Government will implement a zero net domestic

financing policy. In coming up with the 2012/13 budget the Government has built on the

recommendation of the budgeting technical assistance by the World Bank and the IMF.

The technical assistance has helped the Government to re-examine certain budget lines so

that the vulnerable groups are protected as the Government implements its economic

recovery program.

External audit and scrutiny in the use of public resources

32. An evaluation of how well the budget has been executed is a critical element of

sound public financial management. In this connection, the Malawi Public Audit Act

2003, provides for external auditing and Parliamentary scrutiny of the audit reports.

Government will continue to focus on quality, timeliness, coverage of audits and the

independence of the National Audit Office (NAO). The Government will work with the

NAO to ensure that regular procurement audits are done for large procurement in public

sector. Initially the Government will carry out a procurement audit of the Farm Input

Subsidy Program. For a very longtime the Government has been reliant on external

expertise to undertake procurement audit. In order to institutionalize procurement audits

the Government is capacitating the NAO so that it is able to carry out such audits

regularly for all public procurements.

33. In terms of timeliness and coverage, it is pleasing to note that the audit backlogs

have been cleared and now we are up to date with Central Government audits. With

regards to local councils, accounts for the years 2005/06, 2006/07, and 2007/08 were

audited in 2010 and tabled in parliament in 2011. The 2009/10 accounts have also been


78

audited and awaits publication. It terms of coverage, auditing for councils is currently at

100%.

34. For the first time, the National Audit office conducted performance audit. Two

audits on Viphya plantation management and supply of teaching and learning materials

were submitted and tabled in Parliament while three audits on drug distribution, deceased

estate management and provision of driving licences and certificate of fitness were also

concluded awaiting publication. The NAO will continue to do financial audit for the

fertiliser subsidy program and other performance audits.

35. On audit follow up, all the audit reports submitted to Parliament for years ended

June 2006, 2007, 2008, 2009 and 2010 have been scrutinized and discussed by the Public

Accounts Committee (PAC). This implies that PAC is current in terms of scrutinizing all

the reports that were submitted including a Treasury Minute.

Procurement reforms

36. Since the enactment of the Public Procurement Act in 2003, the Government has

embraced modern procurement practices throughout the public sector. All public sector

institutions now have operational internal procurement committees that oversee

procurement. The Government is continuing with its professional development program

with a view of building a cadre of procurement professionals. With regard to

transparency in public procurement, the largest procuring entities are fully complying

with the legal requirement on procurement planning and publication of tender results in

the public domain. The Government has just completed a review of its procurement

systems with a view of finding weaknesses and strong points in the procurement systems.

Based on the review the Government will come up with an action plan which will guide

its procurement reforms in the medium term. In addition, Government also plans to pilot

use of Civil Society Organizations in the monitoring of procurement in the ten largest

entities in the public sector. To strengthen oversight over public procurement,

Government plans to build capacity of the Auditor General and internal audit units to

integrate procurement audits within their work.

Debt management

37. Malawi‘s external debt indicators have improved significantly after receiving debt

relief under the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief

Initiative (MDRI) in 2006. (According to a recent Debt Sustainability Analysis (DSA)

conducted by Government in June 2011, all the debt indicators are projected to remain

below the respective thresholds over the period 2009-2029 under the baseline

macroeconomic scenario. However, stress tests show that Malawi‘s external debt is

subject to moderate risks of debt distress, particularly arising from lower GDP and export

growth. In addition, the overall fiscal sustainability of the public debt is still fragile

mainly due to the high domestic debt burden. Domestic debt is unsustainable due to its


79

short term nature which requires frequent roll-over and will require significant resources

to redeem it.

38. Since reaching the historic Heavily Indebted Poor Countries (HIPC) completion

point in 2006, the Government has maintained its policy to access grants and borrow

concessional loans for all its budget and project financing needs. With the support of its

development partners the Government is implementing a multi-year debt management

reform program which has identified areas than need strengthening in all three areas of

debt management (front office, middle office and back office operations).

39. The Government has now fully operationalized its domestic debt unit. Since its

inception in 2011, the unit has taken over the responsibility of managing domestic debt

functions (determining the government domestic financing needs of the government,

assessing options/costs of financing domestically and any decisions to restructure it. In

this regard, Government has taken measures to lengthen the maturity profile of the

domestic debt stock through issuance of treasury notes (bonds) of 2 – 5 year maturity.

Public Financial and Economic Management Reform Program

40. Finally, the Government realizes that continued provision of general budget

support is contingent of having robust Public Finance and Economic Management

(PFEM) systems in place. PFM reforms have not moved with speed due lengthy

consultative processes which are necessary if they have to be domestically owned.

Secondly most of the reforms require resources to be implemented. The Government is

working with its development partners to develop a multi-donor trust fund to finance its

PFEM reform program. The reform agenda to be financed through the Trust Fund will

cover such areas as: (i) planning, (ii) resourcing the national development strategies, (iii)

budgeting, (iv) budget execution, (v) accounting and financial systems, (vi) reporting,

(vii) PFEM administration and programs. The Government is confident that

implementation of the action plan will improve and bring our systems in line with

international best practices as well assure our development partners that resources given

to Malawi will be properly used, accounted for and timely report.

41. I am confident that the outlined policies, programs and reforms will create a

conducive environment for rapid economic recovery and create a strong foundation for

growth to rebound.

Yours faithfully,


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ANNEX 2: POLICY MATRIX

Republic of Malawi – Rapid Response Development Policy Grant Pillar Pillar Objectives RRDPG

PRIOR ACTIONS

Expected Results

BASELINE TARGET

Achieving and

maintaining

macroeconomic

stability and

restoring the

functioning of a

market-based

economy to

ensure a quick

growth rebound

Restore macroeconomic

stability

Prior Action 1: Adoption by Cabinet of the 2012/2013

national budget that is consistent with fiscal

sustainability and prioritization of social expenditure.

Fiscal deficit of 7.0% of GDP

in 2011/12

Fiscal deficit reduced to less than 2

percent of GDP by June 2013.

Improve functioning of

the petroleum market.

Prior Action 2: Adoption by Cabinet of a fuel pricing

policy that fully reflects fuel import parity prices.

Ad hoc adjustment of pump

price not reflective of

movements in international

petroleum prices and actual

cost of importation.

Systematic adjustment of pump

prices to reflect import parity price

movements in international

petroleum prices and exchange rate

plus or minus 5 percent of the

actual cost of importation by June

2013 as evidenced by the increase

in volume of fuel imports from 160

million litres in 2011/12, to

projected 300 million litres.

Prior Action 3: Approval by Cabinet of an automatic

price adjustment of petroleum import prices.

Improve incentives to

exporters, including

smallholder tobacco

farmers.

Prior Action 4: Directive from Reserve Bank of Malawi

mandating exporters, including tobacco farmers, to

transfer earnings in US dollars obtained at the tobacco

auction floors to commercial banks at prevailing market

determined exchange rate.

Smallholder farmers‘ earnings

pegged to the US dollars are

exchanged at an official

exchange rate.

Smallholder farmers‘ earnings

pegged to the US dollars are

exchanged at market determined

exchange rate by June 2013 as

evidenced by the increase in net

earnings to an average farmer from

MWK 160,483, to about MWK

252,393 after exchange rate

liberalization.

Protecting the

vulnerable

groups while

improving

transparency of

delivery

systems

Strengthen social

protection interventions

and the resilience of the

most vulnerable groups

to shocks.

Prior Action 5: Inclusion, through MoF, of a scaled up

labor intensive public works (LIPW) program, designed

to enhance the Recipient‘s safety net programs, in the

2012/13 national budget adopted by Cabinet.

Ratio of total LIPW related

expenditure to total recurrent

expenditure at 1.5% and

311,807 of beneficiaries

covered in 2011/12.

An increase in ratio of total LIPW

related expenditure to total

recurrent expenditures to 6.5% and

expanded coverage of beneficiaries

to 700,000 beneficiaries covered

by June 2013.

Prior Action 6: Inclusion, through MoF, of a scaled up

Farm Input Subsidy Program (FISP) in the 2012/13

national budget adopted by Cabinet.

Ratio of total fertilizer and

seeds subsidy expenditure to

total recurrent expenditure at

7.5% and covered 1.4 million

households in 2011/12.

An increase in ratio of total

fertilizer and seeds subsidy

expenditure to total recurrent

expenditure to over 12% and

expanded coverage of beneficiaries


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to 1.5 million households by June

2013.

Improve economic

governance of FISP

Prior Action 7: Institutionalization of the policy to

undertake procurement audits of FISP as recommended

in the Joint Government/World Bank Fertilizer

Procurement Review Report on the 2010/11 FISP.

No procurement audit for FISP

undertaken to date.

Submission to Parliament of the

FISP procurement audit report by

June 2013.


82

Annex 3: Fund’s Assessment Letter


83

MALAWI

Assessment Letter for the World Bank and Other Development Partners

June 19, 2012

Measures implemented by the new government, including the elimination of foreign exchange

restrictions, devaluation of the kwacha, adoption of a floating exchange rate regime, and increases in fuel

prices, have transformed the policy environment and set the stage for resumption of IMF and donor

support. The authorities have committed to implement policies and structural reforms to contain inflation,

build international reserves and promote inclusive growth. The government’s FY2012/13 budget

proposals include provisions for scaling up social protection programs to mitigate the adverse impact of

adjustment measures on the most vulnerable segments of the population.

Background

1. President Joyce Banda inherited a very difficult economic situation. Following the sudden death of

President Bingu wa Mutharika in early April 2012, Mrs. Joyce Banda (Vice President at the time) was

sworn into office as President to serve the remainder of the term of the late President, in accordance with

Malawi‘s constitution. General elections are scheduled to be held in May 2014. President Banda took

over a country facing a severe shortage of foreign exchange which led to shortages of critical imports

including fuel, inputs for production and medicines. Delays in making payments abroad led to the loss of

credit lines for several businesses, resulting in scaled down operations and the laying off of workers.

Malawi‘s long standing foreign exchange problems intensified in 2011 because of lower tobacco export

earnings and the interruption of the ECF-supported program with the IMF which led several donors to cut

their aid to the country. International reserves fell to the equivalent of ½ a month of imports.

2. Within a month of taking office, the new administration implemented a set of bold measures to

address Malawi‟s chronic balance of payments difficulties and to halt the slowdown in economic

activity. The measures implemented so far include all the commitments the government had made under

the current IMF-supported program to adjust the official exchange rate and liberalize the exchange regime

for current account transactions, which the previous administration had been resisting since early 2011.

Non-implementation of these measures led to the interruption of the program. The specific measures

implemented by the new administration include:

Devaluation of the exchange rate from K167 to K250 per U.S. dollar, and adoption of a floating

exchange rate regime.

Allowing banks and foreign exchange bureaus to set the rate at which they buy and sell foreign

exchange from/to their customers.

Removal of the requirement for foreign exchange earnings to be surrendered to the RBM; they now

flow directly to commercial banks.


84

A substantial increase in fuel prices to bring them in line with import costs, and adoption of an

automatic adjustment mechanism to ensure pass through of changes in import costs to retail prices.

Substantial increases in electricity tariffs to ensure movement toward cost recovery.

A tightening of monetary policy to contain inflationary pressures, signaled by the RBM raising the

bank rate from 13 percent to 16 percent.

3. The adjustment measures are beginning to show positive results. Sales of tobacco through official

channels have increased, suggesting a decline in smuggling of the crop to neighboring countries; the

parallel market for foreign exchange has almost collapsed, with premiums over the official exchange rate

falling from 60–80 percent before the devaluation to 5–10 percent, while rates offered by banks and

foreign exchange bureaus are converging; and the private sector‘s access to foreign exchange has eased

considerably. The government is working with the World Bank and other partners to scale up social

protection programs to mitigate the adverse effects of the adjustment measures on the welfare of the most

vulnerable segments of the population.

Recent Developments and Near-Term Outlook

4. Economic growth slowed significantly in 2011. After averaging over 8 percent a year during 2007–

10, real GDP grew at 4.3 percent in 2011. Sectors that are heavily dependent on imports—manufacturing,

transportation, construction, and wholesale and retail trade sectors—slowed down the most, reflecting the

impact of the foreign exchange shortage. Following the recent policy measures, the private sector has

begun to clear the backlog of external arrears which should help re-establish credit lines and improve the

flow of imported inputs to allow enterprises to gradually increase output from the current low levels of

capacity utilization.

5. Inflation has been on a rising trend since early 2011, with the year-on-year headline rate

reaching 12.4 percent in April 2012. Rising import costs have been the principal factor behind the

upswing as a growing share of imports were being priced at the parallel market exchange rate before the

May devaluation. The devaluation triggered large adjustments in the retail prices of petroleum products,

which will have ripple effects to other prices. A spike in inflation is expected in the next few months but

should be reversed with implementation of restrained fiscal and monetary policies to counter second

round effects of domestic energy price increases.

6. Fiscal performance deteriorated after FY2009/10. Government expenditure remained steady while

external grants fell sharply and domestic revenue performance (in relation to GDP) deteriorated. The

government relied heavily on domestic borrowing to finance its growing deficit. The overall fiscal deficit

widened from nearly 3 percent of GDP in FY2010/11 to 7 percent in FY2011/12, with domestic financing

rising from 1.7 percent of GDP to 5.6 percent in the respective years. The government and state owned

enterprises have also accumulated about K70 billion (7 percent of GDP) in domestic arrears over the last

few years. The new administration has taken steps to restrain spending, including by reducing the number

of official trips abroad, cutting the number of vehicles available to senior officials, and postponing new

development projects which were to be funded entirely by domestic resources.


85

7. Monetary developments in the last few years reflect a dominant influence of fiscal policy. The

RBM accommodated the government‘s financing requirement, and cost considerations held it back from

conducting open market operations to mop up excess liquidity. The RBM began tightening its policy

stance in April 2012, including by removing excess liquidity using some of its holdings of treasury bills.

In May the RBM raised its policy rate and, after the devaluation, used foreign exchange sales to further

mop up excess liquidity. Kwacha liquidity conditions tightened significantly and several banks resorted to

the RBM discount window to meet their needs.

Medium-Term Framework and Policies

8. The main objective of the government‟s development strategy is poverty reduction through

sustained economic growth and infrastructure development. In late-April 2012, the government

formally approved the second Malawi Growth and Development Strategy (MGDS II) covering 2011/12–

2015/16; the first MGDS covered 2006–11. A key element of the strategy for achieving sustainable

growth articulated in both documents is the pursuit of sound economic policies with a view to

maintaining inflation at single digit levels and increasing the level of international reserves. An increase

in national investment—with emphases in areas such as electricity generation and supply, transportation

and irrigation, and in selected priority sectors (agriculture, manufacturing, mining, and tourism)—is

expected to deliver high growth, while prudent fiscal and monetary policies deliver low inflation.

9. The authorities are seeking support under a new ECF arrangement for a program with the

following main objectives:

Recovery in real GDP growth from 4.3 percent in 2012 to about 6½ percent per year in the medium

term.

Achieving and maintaining a stable macroeconomic environment with low inflation, founded on

sustainable fiscal and external balances.

Increasing foreign reserves coverage to three months of imports, to provide a buffer against

exogenous shocks (e.g., weather, terms of trade, and aid flows).

Enhancing the operational independence of the RBM.

Pursuing reforms to deepen the financial sector and promote greater financial inclusion.

Undertaking structural reforms to improve the investment climate and promote sustained and

inclusive growth, including through improvements in infrastructure and regulatory reforms.

10. Fiscal policy and related structural reforms. The FY2012/13 budget is anchored by a zero net

domestic borrowing target, which represents a reduction from 5.6 percent of GDP domestic borrowing in

FY2011/12. Substantially higher donor support in the form of grants and concessional loans reduce the

domestic financing need, but a sizeable revenue effort and tight control of spending will be needed to

ensure that expenditures are aligned with the government‘s top priorities, including safeguarding social

safety net provisions. Key elements of the government‘s program include:


86

Domestic revenue mobilization efforts include removal of implicit subsidies on fuel and an associated

boost in fuel tax revenues, and strengthening of revenue administration through increased audits,

adoption and use of electronic fiscal devices in the enforcement of VAT, and the use of computerized

cargo scanners.

The FY2012/13 budget increases the share of total expenditures allocated to social protection

programs, most notably the Farm Input Subsidy Program, as well as public works, school feeding,

school bursary, and cash transfer programs. The additional spending on these programs and on the

social sectors in general is made possible by increased assistance from donors.

Verification of K72 billion arrears by the Office of the Auditor General and formulation of a plan for

settlement of the verified amounts over several years. Implementation of the commitment module in

the IFMIS will be accelerated to help prevent accumulation of new arrears. The government will

inform the general public of its procurement rules through the media, including warnings that those

who provide goods or services outside of the established government system will not be paid.

The government has initiated steps to reduce the risks to the budget posed by contingent liabilities

and operational losses of state owned enterprises. The National Oil Company of Malawi will be

limited to its core activity of managing strategic reserves of fuel. The government will establish a

clear regulatory regime for the public utilities that covers operating costs and avoids the need for

budgetary transfers and that minimizes recourse to commercial bank borrowing.

11. Monetary policy. Monetary policy will be geared toward achieving price stability, while providing

room for sufficient credit to the private sector and supporting a buildup of international reserves. To help

manage domestic demand and contain inflation, broad money is programmed to grow at about the pace of

nominal GDP in the near term. Further financial deepening in the medium term would allow broad money

to grow faster than nominal GDP without fueling inflation.

12. Financial stability. Financial stability indicators suggest that the banking sector in Malawi remains

sound. Non-performing loans are at low levels, but the deterioration in the macroeconomic environment

in the last two years has elevated the risks to banks‘ portfolios. The RBM has intensified its monitoring

and surveillance of the financial system with a view to detecting at an early stage emerging threats to

financial stability. The RBM is establishing Basel II governance structures and committees, with full

compliance with Basel II principles envisaged for January 2014.

13. International competitiveness. In view of the push toward greater regional integration (including the

Grand Tripartite Free Trade Area encompassing COMESA, EAC, and SADC), the government is

determined to enhance Malawi‘s international competitiveness, including by removing structural

bottlenecks—e.g., reliable and adequate supply of energy—that are holding back growth and

diversification of the economy. The government is developing a National Export Strategy (NES) aimed at

transforming Malawi from being a predominantly importing and consuming nation to becoming a

producing and exporting nation. Investment incentives will focus on areas that contribute towards

inclusive growth and have extensive forward and backward linkages in the economy, especially through

potential for value addition. The NES is expected to be launched in the second half of 2012.


87

14. Data quality and transparency. The Minister of Finance recently acknowledged that, under the

previous administration, his ministry inflated revenue data for the first half of this fiscal year (July–

December 2011) that was reported to parliament in February 2012. In late-December 2011, the Ministry

of Finance (MoF) realized that revenues were unlikely to meet a target set by the late President. Senior

officials of MoF authorized the Malawi Revenue Authority (MRA) to obtain short-term loans from

several banks which were deposited into the MRA account at the RBM to ―boost‖ revenues. The loans

were repaid in the first few days of January 2012. The MRA insists that the data it reported to the MoF

were accurate, and that it had nothing to do with the data reported to parliament. In order to safeguard the

integrity of revenue data, the government has decided that the MRA should publish its monthly revenue

collections in the local media with a lag of no more than a month.

Risks to the Medium-term Outlook

15. The main downside risks to the medium-term outlook are related to external shocks, adverse

weather conditions, and policy slippages in the lead up to the 2014 elections. External shocks could

include deterioration in the terms of trade and shortfalls in aid flows, which would adversely affect

growth and government finances. Adverse weather conditions would lower output in agriculture, which

has been the sector that has led growth over the last five years. The liberalization of the foreign exchange

regime will help remove distortions and encourage private investment and diversified growth. More

consistent implementation of prudent fiscal and monetary policies would sustain increased aid flows and

make them more predictable, providing room for the authorities to build up international reserves to

create a buffer against adverse external shocks. Quarterly monitoring of the proposed new IMF-supported

program would help mitigate the risk of policy slippages.

Toward a new ECF-supported program

16. The new administration has requested a new ECF arrangement to provide a fresh start. The

current ECF arrangement, which is due to expire in February 2013, will be cancelled. A mission that

visited Malawi during May 23–June 6, reached staff-level understandings with the authorities on a

program that could be supported by a new three-year ECF arrangement. The new arrangement is subject

to approval by the IMF‘s Executive Board which is tentatively scheduled to consider the authorities‘

request on July 23, 2012. There is one prior action for Board consideration: passage by parliament of a

budget for FY2012/13 that is in line with the understandings reached with the mission (i.e., zero net

domestic financing, and total expenditures within the estimated resource envelope). The budget submitted

by the government to parliament on June 8 is in line with understandings reached with IMF staff.

Parliament is expected to pass the budget law by June 22.

17. IMF staff is proposing higher-than-usual access to Fund resources for Board consideration,

based on balance of payments needs, program strength, and scaled up donor support. If approved,

the amount of financial assistance from the IMF will be SDR104 million (about US$157 million) over

three years, with half being disbursed in the first year. The total amount is equivalent to 150 percent of

Malawi‘s quota, twice the normal level of assistance under the ECF to countries that have outstanding

loans to the IMF in excess of 100 percent of their quota. The higher-than-usual level of support reflects


88

Malawi‘s pressing and large balance of payments need (international reserves are very low), the strength

of the upfront policy measures the authorities have already implemented (devaluation, floating exchange

rate regime, adjustment in fuel prices and adoption of an automatic adjustment mechanism, tightening of

monetary policy), and the policy commitments they have made under the proposed new arrangement

(fiscal restraint underpinned by public financial management reforms, monetary policy autonomy,

transparency in data reporting).

Attachment B: Malawi Third Social Action Fund (MASAF 3) APL II

89

ATTACHMENT B: SECOND ADDITIONAL FINANCING FOR MALAWI THIRD

SOCIAL ACTION FUND (MASAF 3) APL II

I. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors for an Additional

Grant in the amount of SDR 16.6 million (US$ 25.0 million equivalent) and Credit in the

amount of SDR 16.6 (US$ 25.0 million equivalent) for the Third Social Action Fund

(MASAF 3) APL II (Local Development Fund (LDF) Mechanism) as part of a coordinated

Bank Emergency Rapid Response Package to the Republic of Malawi to address the crisis

currently facing Malawi following the exchange rate liberalization. At the same time, the project

is being restructured to reflect changes in the results framework and the closing date to be June

30, 2014.

2. In response to the crisis, the Government of Malawi (GoM) has proposed the

implementation of immediate short term safety net mitigation measures to cushion the

negative financial effects of the exchange rate liberalization and the food price increase on

the population by providing cash support to the poorest three quintiles of the population,

approximately 1.72 million rural and urban households or 8.6 million people representing 60

percent of the population. The support to the population would compensate loss of consumption

at 33 percent. These mitigation measures would be implemented through various support

mechanisms including public works cash transfers, direct cash transfers, and agriculture input

subsidies and irrigation infrastructure support.

3. The Second Additional Financing (AF II) would focus on a scale up of the targeted

cash transfers through MASAF 3 APL II to approximately 586,000 households of the ultra

poor urban and rural Malawians or 2.9 million people representing 20 percent of the

population38

,39

.

4. The Project would build on the positive impacts of the MASAF Community

Livelihoods Support Fund Component to scale up the Public Works Sub-project Program

38 Malawi: A comprehensive Package for Competitiveness, Growth and Poverty Reduction. 04, 20, 2012.

39 Draft Effective and Inclusive Targeting of Social Support Programs in Africa Malawi Country Case Study - Synthesis Report,

December 22, 2011, Human Development Department. Social Protection Unit, Africa Region.


90

(PWSP). MASAF is ideally positioned to immediately and efficiently target cash transfers to

smoothen incomes of the poorest Malawians through public works.

II. Background and Rationale for Additional Financing

Background

5. The Poor in Malawi. The current national policy framework is laid out in the draft

Social Support Policy and the draft National Social Support Programme (NSSP) which identify

three categories of poor to target for assistance: the moderately poor, the ultra-poor with labour

and the ultra-poor and incapacitated. According to Second Integrated Households Surveys

(IHS2), people living below the povertyline account for 52.4 percent of the population and of

these 30 percent are moderately poor, 8.4 percent are ultra-poor with labour and 14 percent are

ultra-poor and incapacitated.

6. The objective of the draft NSSP is to provide a framework for prioritizing

targeting of support to reduce poverty and enable the poor to move out of poverty and

vulnerability. It consists of four main pillars: (i) provision of social support; (ii) protection of

assets; (iii) promotion of productivity enhancement; and (iv) policies to reduce exclusion.

7. The following are the principal vulnerable groups identified in studies of poverty

in Malawi: the landless, those with very small landholdings, Child-headed households, elderly

and single parent-headed households (HHs), orphans, female-headed households, widowed and

divorced, the elderly and disabled, households affected by disasters, persons living with

HIV/AIDS and the unemployed/under-employed in urban areas (see Annex 3).

8. While the lack of employment results in substantial impoverishment for some urban

dwellers, it needs to be emphasized that deep poverty in Malawi is still overwhelmingly a

rural phenomenon where 87 percent of the total population and 96 percent of the 3.4 million

ultra-poor live. Of all of the risks and shocks affecting the poorest in Malawi, those associated

with agricultural productivity – drought and reduced yields, and higher food and input prices –

are cited in surveys as by far the most prevalent ones, and the ones which most concern the poor.

Rationale

9. Malawi has faced a number of exogenous shocks in the past few years arising from

volatility in international commodity prices, foreign aid, climate change and natural

disasters including an earthquake in 2010. These shocks have considerable ramifications

for macroeconomic indicators as well as at household level, where rising food and fuel prices

are placing a heavy burden on poor and vulnerable families, jeopardizing human capital gains

achieved in previous years. In order to effectively mitigate the adverse effects of exogenous

shocks at both levels, the Government has requested additional support, to address

macroeconomic imbalances as well as food and fuel price increases in the face of the recent

shocks to the economy. The Government therefore has proposed the implementation of

immediate short term safety net mitigation measures in 2012-13 to cushion the necessary


91

financial effects of the 50 percent exchange rate liberalization that has led to the price increase

on the population (in the bottom quintiles 1, 2, and 3) or approximately 1.72 million rural and

urban households or 8.6 million people. These mitigation measures would be implemented

through various support mechanisms including public works program (PWP) cash transfers,

direct cash transfers, agriculture input subsidies and irrigation infrastructure support. MASAF

is positioned and recognized for being able to quickly scale up the delivery mitigating cash

transfers to the poorest households through Public Works (Annex 3 has details).

Project Status and Performance

10. The MASAF 3 APL II project was approved by the Board on June 20, 2008. The

original Financing Agreement, which provided financing in an amount of SDR 30.7 million

(USD 50.0 million equivalent), was signed on November 25, 2008 and became effective on

March 24, 2009. On June 30, 2010, an additional financing was approved in the amount of

SDR 9.0 million (USD14.0 million). As of June 30, 2012, the original financing had been

disbursed to 100 percent and most of the Additional Financing credit has been disbursed, with

only US$3.0 million remaining to be disbursed. The remaining amount has been budgeted to

finance already identified and agreed-upon activities communicated to local councils in the

form of indicative planning figures. The undisbursed Credit proceeds for public works totaling

US$ 3.0 million are not sufficient to address the newly emerged need for additional safety nets.

As evidenced by the MASAF experience, demand for these temporary employment

opportunities is large and growing and more financing is needed to scale up the labor-intensive

public works to protect households from falling deeper into poverty and protect the gains

achieved through the program.

11. The Project Development Objective (PDO) of MASAF 3 APL II is to improve the

livelihoods of poor and vulnerable households and to strengthen the capacity of local

authorities to manage local development. The Project includes the following three

components: (i) Community Livelihoods Support Fund; (ii) Local Authority Capacity

Enhancement Fund; and (iii) National Institutional Strengthening Fund.

i. Community Livelihoods Support (CLS) Fund: The Community Livelihoods

Support Fund finances two sub-components:

a) A Local Authority Fund: Based on local councils‘ Annual Investments Plans

produced through Village Participatory Planning, this subcomponent finances labor-

intensive investments that create public assets benefiting poor households. The

Public Works Sub-projects Program targets poor households for twelve days as an

annual intervention to address food security related shocks that affect these

households around the time they need to purchase agricultural inputs, grains,

and other basic necessities.

b) A Community Fund: This sub-component supports participatory planning processes


92

and direct community financing to improve the functionality of existing

educational facilities as well as educational outcomes at the community level. This

sub-component also entails interventions to promote a culture of savings

and investments, in particular among participants of the public works program, to

enable them get on a pathway to graduating out of poverty.

ii. Local Authority Capacity Enhancement (LACE) Fund: This component supports

the development of a comprehensive framework for addressing capacity needs for

Local Councils to effectively manage the grants they receive, perform functions

allocated to them under this project, and prepare them to perform anticipated

responsibilities as devolution proceeds and more resources are available under

the LDF or any other longer-term Government grant arrangement.

iii. National Institutional Strengthening Fund: The component finances national-level

crosscutting issues aimed at improving accountability and transparency in the use of

project resources.

12. The Project is making progress towards achievement of Project Development

Objectives (PDO) as evidenced by the Results Framework (see Annex 1). A Mid Term

Review mission carried out in January 2012 rated the achievement as Moderately Satisfactory.

The current rating (ISR filed June, 2012) for the PDO is Moderately Satisfactory as there are

some shortcomings related to the results measurement of the improved livelihood aspects of the

PDO. The required improvements in the results framework constitute part of the restructuring

now. The preparation mission noted the following PDO outcome achievements: Out of a set

target of 900,000 beneficiaries under the Public Works Subproject Program (PWSP), a total of

1,362,444 beneficiaries of whom 48.5 percent are female had received cash transfers have been

reached, surpassing the target. The total number of beneficiaries represents 88.5 percent of the

target as of January 2012. The improved household income has enabled the beneficiaries to

enhance their livelihoods and enabled them to access basic household needs (such as education,

health, food security) as discussed below.

13. The Public Works Tracking Studies and the Beneficiary Assessment Survey (2012)

both found that the program has been effective in addressing food security, improving

households‘ access to health and education services and also contributed in formation and

protection of household assets. The improved household income has enabled the beneficiaries

to enhance their livelihoods by purchasing farm inputs (34.6 percent of PWSP wages were used

to procure farm inputs); buying food for their families (62 percent of the PWSP wages went

into buying food); meeting their health needs (10.6 percent of beneficiaries of PWSP spent

their wages on health related expenditure); and covering education needs (12.6 percent of

PWSP beneficiaries spent their wages on education). However, the studies also show that

duration is too short to offer significant insurance and provide predictable source of income to

poor households. Beneficiaries are proposing a longer PWP intervention of up to 3 months. The

MWK 200 per day wage rate has been in place since APL II started in 2008 and thus it has

been eroded by inflation over time, and coupled with the recent exchange rate liberalization, the


93

beneficiaries are getting less than a dollar a day. Coverage of the program is low such that up to

25 percent of the beneficiaries reported to be sharing both the work and the wages. This was

observed by the Beneficiary Assessment (2012) as a way of building social capital within the

community.

14. Experience under the Original Project, the AF I and in Tanzania, has shown that

the Community Savings and Investment Promotion (COMSIP) intervention puts the

beneficiaries on a pathway to getting out of poverty. In order to ensure the continuity of the

complementary community savings activities encouraged in the MASAF 3 APL II program the

AF II will continue to support the Community Fund sub component. This additional support

will strengthen the existing efforts and would ensure that the activities continue during the

scaled up PW implementation. Where the PWP beneficiaries have been linked to COMSIP

intervention, the increases in household income have been phenomenal up to US$ 13 per

person in their passbook against the US$3 at entry of the program (Beneficiary Assessment

2012). This component would continue to be implemented through existing arrangements by

the COMSIP Cooperative Union.

15. Implementation Progress. The preparation mission reviewed the Implementation

Progress and rated it Moderately Satisfactory. Project management has been rated Moderately

Satisfactory, with the Financial Management rated Moderately Satisfactory. Procurement was

Moderately Unsatisfactory in the December 2011 ISR due to several procurement delays which

include: delay in replacing a procurement manager and procurement officer, delay to

commission studies that were to feed into the MTR, which led to delaying the MTR. However

at MTR Procurement was Satisfactory and the AF preparation mission in May maintained the

Satisfactory rating as staff are in place and management of the procurement plan has been

found satisfactory. Safeguards have been rated Moderately Satisfactory as explained in the

section below.

16. Financial Management (FM): The financial management review was carried out in

January 2012 and was updated in May 2012. The findings show that the financial management

of MASAF 3 is generally adequate with the exception of manual processing of transactions and

reports that is error prone and consequently the FM is rated as moderately satisfactory. The

implementing entity is compliant with the Bank's financial management requirements; and there

are no overdue audit reports and interim financial reports.

17. At the Local Authority level, the Project will continue to use the IFMIS which now

has added modules for project management, whereas in Local Authorities (LAs) where the

IFMIS is not yet operational, the Local Authority Management Information System developed

under MASAF will also be used for the AF II. The Local Authority Management Information

System has the ability to track physical and financial information pertaining to community-level

investments.

18. The Audited Financial Reports have been prepared and submitted on time. All the

reports have carried a clean audit opinion. Overall, financial management and technical

supervision need to be improved in some of the local councils to be able to support


94

communities in a timely and effective manner as they implement their sub-projects.

19. Compliance with legal covenants and safeguard requirements. The Project is in

overall compliance with applicable legal covenants. Previous missions had noted that for

safeguards, there was inadequate facilitation, inadequate processing of documentation at some

subprojects‘ sites and inadequate monitoring of environmental and social issues resulting from

inadequate capacity of professional staff to spearhead environment and social issues at the

district level. At MTR, the rating for safeguards was Moderately Unsatisfactory. However, as

noted by the preparation mission, progress has been made and for safeguards it includes: (i)

most of the previously vacant Environmental District Officer positions have been filled; and (ii)

the Technical Support Team had carried out the orientation of the 27 Environmental District

Officers now in place and the district environmental subcommittee members to enhance their

understanding of environmental assessment and monitoring at all stages of the sub-project cycle

to ensure full compliance with the Original Project's covenants. All members of the District

Environmental Sub-committee were also orientated on safeguards. Following the May 2012 AF

preparation mission, the government has prepared a comprehensive status report showing

progress made on the Safeguard issues that were highlighted during the MTR mission (see

Annex 4) and has put into place clear action plans for addressing the remaining issues. As such

the safeguards work is considered to be Moderately Satisfactory at this time and presents a

minor to moderate risk to the proposed operation. The good efforts in enhancing safeguards

compliance will be further supported through continuous safeguards capacity building training

and workshops to all key stakeholders.

20. The AF II remains classified as a Category B operation triggering OP 4.01, 4.09

and 4.12 as per the original project. However, it is important to note that, while MASAF 1

and MASAF 2 focused primarily on the delivery of social and economic infrastructure in

support of the government‘s poverty reduction targets, the MASAF 3 program is distinguished

by its emphasis on: (i) improving the capacity of communities to effectively manage sub-

project cycle activities and participate in local development in a meaningful way; (ii) enhancing

the capacity of local authorities to deliver services; and (iii) acting as a catalyst for enhancing

local government systems as part of the country‘s decentralization agenda.

21. Under Component 1: Community Livelihood Support Fund, the menu of possible

investments includes reforestation and tree felling activities. Under MASAF 3, in the past

five years, reforestation activities have yielded a total of 1.44 million ha in reforested areas

across the country. The intention and practice, to date, is for communities to protect the

indigenous species by planting mostly fast growing tree species for fuelwood and construction

of houses in order to decrease deforestation and degradation of primary forests. Communities

with such sub projects are sensitized on propper harvesting to sustain their environment.

Indeed, in an effort to promote environmental sustainability, the project design mandates that a

minimum of 20 percent of the resources used by the communities from this Fund be applied to

environmental enhancement subprojects such as the aforementioned reforestation activities.

22. Under this AF II, since the current cumulative impact of the MASAF 3

reforestation activities are relatively large in scale with respect to tree planting and


95

harvesting, and since the focus of the Additional Financing is to significantly scale up

Component 1 activities, including reforestation and harvesting activities. Also OP 4.36 is

triggered. This OP was not previously triggered at preparation of MASAF 3 Program as it was

not envisioned to involve such a large area overall. Since OP 4.36 is now triggered, the GoM

will not later that six months after Project Effectiveness, update the previously approved project

ESMF to reflect the core considerations of this OP and include guidelines for preparation of

forest management plans for each community that uses this Fund for reforestation and

harvesting activities. The revised ESMF will be redisclosed in country and in the Bank‘s

InfoShop.

23. Specific details related to the project‟s safeguards work is presented in Annex 4 of

this Attachment.

24. In summary, the proposed AF II for MASAF 3 APL II is consistent with the

parameters of OP/BP 8.0 and OP/BP 13.20 related to emergency AF operations. Overall

project performance of MASAF 3 (original and AF) is currently rated as moderately

satisfactory for the achievement of project development objectives (PDO) and implementation

performance (IP). The project is in substantial compliance with loan covenants. The AF is

economically justified as discussed in the Economic and Financial Analysis section.

25. MASAF 3 APL II is funded by the IDA, however the MASAF - Local Development

Fund Mechanism as an institution of Government is now funded by donors including the

KFW, and the African Development Bank financing specific activities. The donors have

different missions which results in an overload on the TST and causes delays in program

implementation. The Government has called for joint missions to minimize on demands on the

management‘s time.

Consistency with Country Assistance Strategy

26. The proposed AF II for the MASAF 3 APL II project is directly related to the

Africa Strategy through the Pillar 2: Vulnerability and Resilience. The proposed Project is

also consistent with the Bank‘s CAS FY07-11 as well as the upcoming CAS FY13-16

objectives and is one of the Bank‘s portfolio instruments that aims to support the Malawi

Growth and Development Strategy (MGDSII) by assisting poor and vulnerable

households, through decentralized mechanisms, to improve their livelihoods, access basic

social and economic infrastructure and reduce household vulnerability. Consistent with the CAS

goals, the original project, the AF I and the proposed AF II serve the social protection needs of

households with limited access to and use of specified service packages, vulnerable individuals

needing assistance, and households with limited employment opportunities.

III. Proposed Changes

27. Project objectives and components. No change to the Project Development Objective

(PDO) is proposed, as the current objective remains relevant for scaling up MASAF 3 APL II


96

Project activities under the AF II. MASAF 3 will continue to track the PDO and intermediate

results specified in the revised Results Framework of the AF I ). A few PDO indicators have been

modified and the target values of several indicators adjusted to realistic levels based on progress

to date (see Annex 1 Results Framework).

28. APL Program Objective and Phases. MASAF 3 is an APL program with three

planned phases. The overall program objective is to achieve capacity building for improved

service delivery by communities, Local Governments and Sector Ministries within the MPRSP,

with decentralization as a key strategy so that Malawi can achieve its MDGs. Due to contined

lack of baseline data, the team is dropping some of the overall program results indicators. It has

been agreed that APL II will be the final phase of the series. Rather than continuing with the

third phase of the program, the upcoming CAS includes MASAF 4 which is proposed to be a

new productive social safety net operation. This will be an important operational vehicle for

moving forward the process of creating and consolidating a permanent social safety net. The

operation will simultaneously, establish appropriate social safety net delivery systems and

develop institutional and implementation capacity in the country.

29. Proposed Activities for the Additional Financing. The AF II would focus on scaling

up the component (1) the Community Livelihoods Support Fund Component in the Local

Authority Window to scale up the Public Works Sub-project Program (PWSP) nationwide in

urban and rural areas. Based on the recommendation of the Mid Term Review (January 2012),

in order to achieve sustainable environmental and poverty impact, the number of days of work

on subprojects per household (HH) for public works would be 12 days per month for each HH

for two cycles of 2 months each instead of the current 12 days per month per year. The daily

wage has been eroded and was therefore found to be inadequate to positively impact poverty

and would be increased from the current rate of MWK200 per day to MWK300 (US$1.2) for

both rural and urban areas, subject to review. The public works program which currently

consists of one subproject per community would involve the participation of the same

households in a community over two cycles and for multiple subprojects.

30. A maximum of 200 people will be employed on an individual sub-project. Works on a

subproject will not be undertaken during the agricultural season when the beneficiaries are

supposed to be engaed in own farm activities except for transplanting seedlings for a reforestation

subproject. This is particulary the case for the rural areas. The typology of assets to be created

under the AF II is in line with the National Social Support Program and remains as was in the

Original Project and include the following:

i. Forestry and Agro-forestry projects to increase area under forestry cover, agro-

forestry and fruit tree production (for which community forest management plans will

be prepared as per the guidance presented in the revised ESMF).

ii. Construction, rehabilitation and maintenance of rural feeder roads and market access

roads

iii. Drainage improvement including dykes

iv. Soil and water conservation activities and

v. Harnessing of water – construction and rehabilitation of reservoirs, and connections to


97

gravity fed water schemes and kiosks

The ratio of wage to inputs/ works/administration will be maintained at 80:20

31. The Community Fund sub-component under the proposed AF II would continue

to support the COMSIP intervention which is a response to closing the sustainability gap

that exists in the implementation of PWSP. For years the implementation of PWSP tended to

end at the disbursement of wages. The COMSIP provides information on savings and financial

management of own-resources (see annex 3 for details). The implementation process starts

during the beneficiary selection and continues all the way through the PWSP-12 day work

period during which members would have self selected to be in a group. Savings and

investment with capacity building for the self selected members will continue thereafter in the

cycle.

32. The World Bank proposes to contribute US$ 50.0 million through additional

financing by scaling up public works programs of MASAF/LDF which will be able to

cover cash transfers to 586,000 households and the associated capital costs and the costs

of administration and delivery. With the Additional Financing a financing gap of US$83.7

million would remain which would need to be met by Government own resources and/or other

Donor co-financing.

Component 1: Community Livelihoods Support Fund

1.1 Local Authority Window (AFII: US$42.75 million, total US$67.85 million).

33. The public works would benefit whole communities and a multiple number of

community works would be conducted per community over this period of time based on the

operations and implementation manual of MASAF/LDF.

34. The public work activities will be implemented during the slack season of major

livelihood/agriculture activities and when the beneficiaries have the most need for additional

income to cover their family needs including food and non-food expenditures and inputs for

agricultural activities. Following the existing implementation modality of MASAF, the public

works activities supported through this additional financing will be implemented in two cycles

i.e. July – December 2012 and April – June 2013.

1.2 Community Window (AFII: US$2.25 million; Total:US$28.65 million)

35. To ensure the continuity of the complementary community saving activities and

the culture of savings by communities encouraged in the MASAF program an additional

budget of US$2.25 million would be allocated for the COMSIP component. This additional

support will strengthen the existing efforts and would ensure that the activities continue during

the scaled up PW implementation. This component would continue to be implemented through

existing arrangements by the COMSIP Promotion Cooperative Union.


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Component 3: National Institutional Strengthening (NIS) Fund (AFII: US$5 million;

Total: US$12.2 million)

36. The component will finance national-level cross-cutting issues aimed at improving

accountability and transparency in the use of project resources. It will have two

subcomponents: (i) Technical Support Team to oversee project implementation, and (ii)

Knowledge Generation and Application to strengthen community participation in project

implementation and to document community experiences with service delivery. This

component will facilitate the dissemination of national guidelines for use by Local Authorities

and Community Organizations in project implementation, and strengthen community-level

fiduciary and accountability mechanisms.

Table 1: Allocation of Additional Financing to the Original Project (US$ Million)

Components Original

Project

Additional

Financing I

2010

Additional

Financing II

2012 Total

1 Community Livelihood

Support

1.1 Local Authority Fund 20 5.1 42.75 67.85.1

1.2 Community Funds 20 6.4 2.25 28.65

2 Local Authority Capacity

Enhancement 5 0.3 0.0 5.3

3 National Institutional

Strengthening 5 2.2 5 12.2

Total 50 14 50 114


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Table 2: Disbursement Table for the AF II (US$ Million)

Category

Amount of the

Original

Credit

Allocated

(expressed in

SDR)

Amount of

the First

Additional

Credit

Allocated

(expressed in

SDR)

Amount of

the Second

Additional

Credit

Allocated

(expressed in

SDR)

Amount of the

Second

Additional

Grant

Allocated

(expressed in

SDR

Percentage of

Expenditures

to be Financed

(inclusive of

Taxes)

(1) Goods, works and

services for

Subprojects under

Part A of the Project

and to be financed

out of the proceeds of

Grants

24,550,000 7,000,000 13,200,000 16,600,000 100 %

(2) Goods under Parts

B and C of the

Project

860,000 200,000 800,000 100%

(3) Consultants‘

services and Training

under Part C of the

Project

3,930,000 900,000 1,400,000 100%

(4) Operating Costs

under Part C of the

Project

1,360,000 1,400,000 1,200,000 100%

TOTAL AMOUNT 30,700,000 9,500,000 16,600,000 16,600,000

37. Implementation Arrangements. The institutional and implementation

arrangement for the AF II will remain the same as that of the Original project and the AF

I. The MASAF/LDF Technical Support Team (TST) has established a reputation for quality

implementation and satisfactory financial management and procurement capacity. Guidelines

developed over the years and the operational procedures currently in effect and duly

incorporated in the LDF operational manuals will apply.

38. At the national level, the AF II resources will be channeled through the national

Local Development Fund (LDF). The main management functions at the national level lie

with the: Steering Committee, National Technical Advisory Committee, Ministry of Finance,

Ministry of Local Government and Rural Development, National Local Government Finance


100

Committee, and Technical Support Team. The national LDF disburses funds directly to the

local councils‘ LDF accounts for the implementation of sub-projects. Technical oversight is

provided by the Ministry of Local Government and Rural Development and sector ministries.

39. At the local council level, the LDF is managed under the district commissioner

with an appropriate support system. Funds are received directly from the Ministry of

Finance in line with agreed formulae and conditions attached to each type of grant within the

national LDF budget lines, using methodologies and systems of MASAF 3 APL I. Each

local council receives investment requests from the Area Development Committees, which

obtain appropriate training from the local council and contracted trainers in order to

improve planning processes. At the village level, Village Development Committees, which

have acquired 17 years of community investment management experience under MASAF 1,

MASAF 2, and MASAF 3 APL I will continue to have the overall implementation oversight for

community-level investments.

40. Credit Closing Date. As per the request of the GoM, the closing date for the

Original Credit and the AF I will be extended from September 2013 to June 30, 2014.

41. Revision to the Results Framework . The performance indicators have been

updated to reflect the focus of the AF II on Public Works Subproject subcomponent and

COMSIP.

IV. Appraisal Summary

A. Economic and Financial Analyses

42. The economic and financial analysis that was carried out for MASAF 3

APL II fully applies to the AF II, which will continue to use the existing

implementation strategy to secure the economic and financial benefits discussed in the

MASAF 3 APL II Project Appraisal Document. The same resource allocation formula,

which is based on population, incidence of poverty, food insecurity, and vulnerability to

HIV/AIDS will be used to broaden and deepen the poverty reduction objective of the project

across the country. According to recent progress reports, 15,869 community assets for social

service provision have been created since MASAF‘s inception in 1995. The demand-driven

nature of the selected sub-projects has ensured that MASAF funds allocated for such

interventions flow to where they are most needed. The direct involvement of communities

has generated significant cost-savings when compared to the cost of similar interventions

executed by other public sector agencies.

B. Technical

43. The design of the AF II has the advantage of benefiting from the lessons learned and

the experience of implementing the three prior phases of MASAF and the first Additional

Financing. MASAF was selected as a vehicle for channeling critically required cash transfers to

the poorest Malawians because of the readiness of its ―implementation machinery.‖ The


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Operational Manual is updated and amended to reflect the additional activities financed earlier

by the Additional Financing as well as the new guidelines for construction activities in all zones

including earthquake fault zones. To ensure technical viability, communities will be advised to

undertake sub-projects over a period of four months that are simple, small in size, labor

intensive, economically and socially viable, and that can be maintained and operated by

communities in a sustainable way. An Impact Evaluation at the end of MASAF 3 APLI (March

2008) and the Technical Audit carried out at MTR (January 2012) both concluded that sub-

projects implemented by communities were technically sound and were done according to

prescribed designs.

C. Fiduciary Analysis

44. Financial Management. The most recent financial management review was carried out

in January 2012 and covered budgeting, staffing, account systems, internal and external audit,

flow of funds, and banking arrangements. The findings show that the financial management of

MASAF 3 is generally adequate with the exception of manual processing of transactions and

reports that is error prone and consequently the FM was rated as moderately satisfactory. The

implementing entity is compliant with the Bank's financial management requirements; and there

are no overdue audit reports and interim financial reports. For a longtime, MASAF used a

software system called the Sun System for its financial management. The system crashed in

May 2011. The Technical Support Team is in the process of replacing the Sun system with

TEMPRO System. The staff has undergoing training and the system is in place and operational.

In the absence of the Sun System, the Project has been using excel spreadsheet to process

transactions and prepare reports. As a back-up system, the project has IFMIS which is being

used for resources it receives from Government, which is also used in 17 districts.

45. While the project has generally been producing accurate Interim Financial Report (IFRs),

the reports for the quarters September 2011 and December 2011 have had some problems

because the details of the two loans (original financing and first additional finance) were not

separated. Coupled with the delay in replacement of the accounting package, it is has been

agreed that the project will use Statement of Expenditure (SOE) based disbursement and

documentation of expenditure. The improvement in reports and successful implementation of

the new package will be reviewed by the Bank and if satisfactory a recommendation will be

made to revert to a report based disbursement and documentation using IFRs. Historically,

annual audited financial statements have been received on a timely basis. This not withstanding,

the project is implemented at the subnational level where there is shortage of staff for financial

management and internal audit. The Government is making efforts to address the issue by

normalizing the recruitment of financial analysts that were employed on temporary terms, and

redeploying internal auditors from the center to support districts. Taking these factors into

consideration, the financial management risk associated with this project is rated substantial.

46. At the Local Authority level, the Project will continue to use the IFMIS which now

has added modules for project management, whereas in LAs where the IFMIS is not yet


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operational, the Local Authority Management Information System (LAMIS) will be used for the

AF II. 47. Monitoring and Evaluation (M&E). Local authorities, through their M&E officers,

will be the main implementing agency for this function and are expected to report to the

Ministry of Local Government and Rural Development. M&E will consist of the following

components; Computerized LAMIS customized into Project Management module of the

IFMIS, studies, surveys and evaluations, and participatory monitoring and evaluation.

48. Procurement. The implementation of procurement activities under MASAF 3 APL II

and APL II Additional Financing has been successful. However, the project will now use

streamlined procedures under OP 8.00 which is defined in the agreed procurement plan for

activities to be carried out at the national level by TST. Procurement capacity enhancement

activities at the council and community levels will continue to be broad ened and

strengthened. The MASAF/LDF Technical Support Team at the national level will provide

oversight while the local councils will support procurement management at the sub-project

level.

49. Given the demand-driven nature of the subprojects, community-level procurement

will not be planned up front. However, guidelines, rules, procedures, and process steps have

been agreed on and are incorporated in the Local Development Fund Procurement Handbook.

The procurement plan for the original project was updated at appraisal to reflect the

requirements for the Additional Financing to cover additional studies, equipment, and staff. A

Procurement Plan for the proposed AF II has been prepared.

50. A procurement post-review of the local councils‟ 2008-2009 public works cycles

was undertaken by the Technical Support Team in February 2010. The assessment

showed the existence of procurement capacity gaps at the local councils. The project will,

therefore, continue to provide support and guidance to ensure that the local councils have

adequate capacity to carry out procurement processes in a satisfactory manner.

51. Projects in countries and in sectors that are deemed to be vulnerable to

fraud and corruption as a result of the findings of previous INT investigations should

include Anti-Corruption action plans. There was no INT investigation in the Original Project

and the AF I. The overall risk to implement procurement is considered to be substantial due to

procurement capacity gaps in the local councils and staff attrition at the TST levels. In

order to mitigate the risks identified as a result of procurement capacity assessments, an

Action Plan is in place: The key actions are: (i) speed up the creation and filling of the post of

Procurement Officer for each assembly; (ii) basic procurement training for all procurement

designated staff and appointed procurement officers for each district: (iii) improve Procurement

Records Management by ensuring that complete procurement records are filed separately for

each contract to enable an auditor to follow the complete ―paper trail‖ of procurement; (iv)

undertake procurement and technical audits annually for at least 25 percent of the contracts

awarded at Headquarters and District level and 15 percent of community sub-projects; and (v) as

part of enhanced transparency, advertise contract awards in newspapers with national


103

circulation in addition to dgMarket and UNDB online. The procurement post-review of the

Technical Support Team by the World Bank on November 10, 2011 concluded that its

procurement capacity and performance are satisfactory and there was no indication of mis-

procurement. Procurement under the Project, including under AF II, will be carried out in

accordance with the World Bank‘s "Guidelines: Procurement of Goods, Works and Non

Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank

Borrowers, January 2011; and "Guidelines: Selection and Employment of Consultants

under IBRD Loans and IDA Credits & Grants by World Bank Borrowers", January 2011.

In addition, the ―Guidelines on Preventing and Combating Fraud and Corruption in

Projects Financed by IBRD Loans and IDA Credits and Grants", dated October 15, 2006,

revised January 2011, shall apply to the Project. National Competitive Bidding procedures

which were reviewed and found acceptable by the Bank with exceptions will also be used in the

procurement of goods, non consulting services, works and services.

D. Safeguards

52. Environment: The original project has an Environmental and Social Category B

classification and this remains the same for both the first and the second AF. The original

project triggered safeguard policies 4.01, 4.09 and 4.12. The same policies are triggered by the

AF II investments and will be addressed in a similar manner and with the same tools as those

prepared for the original project i.e., the Environmental and Social Management Framework

(ESMF). The ESMF was prepared and disclosed in country and in the Bank's InfoShop for

MASAF 3 APL II in April 2008. This ESMF was used for the AF I and had been re-disclosed

in-country on May 28, 2010 and in the Bank‘s InfoShop on May 27, 2010. The ESMF was re-

disclosed again at the InfoShop and in-country on May 22 and May 25, 2012, respectively. A

total of 21 Environmental and Social Management Plans (ESMPs) have been prepared for the

construction of teachers‘ houses in the following districts: Kasungu, Dowa, Mzimba, Karonga,

Ntchisi, Dedza, Ntcheu, Salima, Mangochi, Machinga, Blantyre, Chiradzulo, Neno, Chitipa,

Zomba, Nkhata Bay, Machinga, Thyolo, Likoma Island, Mwanza and Rumphi. The LDF-TST

has disclosed these ESMPs. The ESMPs are prepared in consultation with the Project

Management Committees at community level. The AF II allocated for public works will target

sub-projects that increase community assets and also those that enhance communities‘ natural

resource management awareness and skills. Nonetheless, the project also provides resources for

mitigating any identified social and environmental concerns in sub-project plans and budgets.

The project has set aside resources for further capacity enhancement at all levels.

53. However, it is important to note that while MASAF 1 and MASAF 2 focused primarily

on the delivery of social and economic infrastructure in support of the government‘s poverty

reduction targets, the MASAF 3 program is distinguished by its emphasis on: (i) improving the

capacity of communities to effectively manage sub-project cycle activities and participate in

local development in a meaningful way; (ii) enhancing the capacity of local authorities to

deliver services; and (iii) acting as a catalyst for enhancing local government systems as part of

the country‘s decentralization agenda.

54. Under Component 1: Community Livelihood Support Fund, the menu of possible


104

investments includes reforestation and tree felling activities. Under MASAF 3, in the past 5

years, reforestation activities have yielded a total of 1.44 million ha in reforested areas across

the country. The intention and practice, to date, is for communities to harvest the indigenous

species used in the reforestation activities for household use to decrease deforestation and

degradation of primary forests. Indeed, in an effort to promote environmental sustainability, the

project design mandates that a minimum of 20% of the resources used by the communities

from this Fund be applied to environmental enhancement subprojects such as the

aforementioned reforestation activities.

55. Under this Additional Financing, since the current cumulative impact of the MASAF 3

reforestation activities are relatively large in scale with respect to tree planting and harvesting,

and since the focus of the Additional Financing is to significantly scale up Component 1

activities, including reforestation and harvesting activities, OP 4.36 is triggered. Note, this OP

was not previously triggered at Preparation of MASAF 3 Program as it was not envisioned to

involve such a large area overall. Since OP 4.36 is now triggered, the GoM will not later than

six months after Project Effectiveness, update the previously approved project ESMF to reflect

the core considerations of this OP and include guidelines for preparation of forest management

plans for each community that uses this Fund for reforestation and harvesting activities. The

revised ESMF will be redisclosed in country and in the Bank‘s InfoShop.

56. Social Impacts. Social impacts are expected to be positive, with project

activities that would gradually lead to an improved quality of life for food-insecure and

vulnerable groups by enhancing their access to social and economic opportunities. In addition

to the advantages accruing to the target beneficiaries, there will be increased economic activity

in the area surrounding the sub-project and in the rural economy. The project ensures that

women are included to access the opportunities available. The vulnerable poor that cannot work

at the PWP interventions will be included in the direct cash transfers. Public works

beneficiaries will be selected through community-based participatory methods as in the case of

the original project, which have been found to reach the intended beneficiaries successfully, as

confirmed in the MASAF 3 APL II public works program baseline analysis and the Beneficiary

Assessment (2012). There will be increased individual participation in savings to support

beneficiaries asset building and prevent negative coping mechanisms when a shock occurs.

57. However, due to the fact that small works might be required under individual sub-

projects that may lead to loss of access to resources or livelihoods, OP 4.12 was triggered

by the original Project. Given that the Additional Financing would finance similar

investments that might require small works that that may lead to loss of access to resources or

livelihoods, OP 4.12 was also triggered by the Additional Financing. To attend to the

requirements of OP 4.12 under the original Project, the GoM prepared a comprehensive

Resettlement Policy Framework (RPF), which provides detailed social safeguards policies and

procedural guidance. This RPF will also be used to meet the requirements of OP 4.12 with

respect to small works that may impact community access to assets under subprojects

supported under the Second Additional Financing. To date no Resettlment Action Plans (RAPs)

have been prepared because there has been no land acquisition for the projects funded from the


105

credit proceeds. All social issues will also be reported accordingly. This instrument is to be

applied in tandem with the ESMF for the AF II investments. Ongoing support on the social

safeguards side will be provided during implementation of the AF II in close collaboration with

the Bank‘s social safeguards expert assigned to this Project.

58. Overall, the safeguards work presents a low to moderate risk to the proposed operation.

E. Benefits and Risks

59. The proposed project is expected to benefit about 586,000 households or 2.9

million people representing over 20 percent of Malawians who will be direct beneficiaries

of the public works program in the form of increased income and reduced food-insecurity.

60. The overall risk for the Project is rated as Substantial. The risks at the

macroeconomic level include vulnerability to exogenous shocks, such as weather, fiscal and

foreign exchange risks. At the sub-national level, the risks include limited capacity of the local

councils where interventions will be scaled up. To overcome these challenges, a strong linkage

will be created between communities, public sector agencies, civil society organizations, and

the private sector to augment capacity. Capacity enhancement efforts at the district are directly

supported by GIZ, Irish Aide and the DFID particularly on the issue of inadequate numbers of

financial management and internal audit staff. In line with this, the Government has instituted

changes at the district council level such that the councils are directly answerable to the Public

Accounts Committee where audit anomalies are detected; previously the Ministry of Local

Government would respond on all the audit issues on behalf of the councils. This has set

councils on a pathway to improving their performance. The Technical Support Team will

provide technical backstopping and ensure that the handbooks are simplified and copies of

implementation guidelines are available to communities. An intensive Information, Education

and Communication (IEC) will precede project rollout activities to ensure transparency and

accountability among others. However, MASAF - LDF TST have an effective monitoring and

supervision mechanism for tracking the districts that are lagging behind. In addition, the

sensitization process for the AF will include the participation of the Anti Corruption Bureau in

order to reinforce the understanding of whistle blowing and use of dedicated hotlines for

reporting on corrupt practices.

61. Sustainability. An analysis of the PWP interventions in Malawi shows that they are

wholly funded by donors. In order to build financial sustainability, the Government will start

and increase gradually the percentage share of the total PWP budget. This will take place after

an expenditure review scheduled for June 2013. However, the current PWP under the MASAF

3 have led to sustainability at household level in as far as the beneficiaries are linked to the

COMSIP which enables them to generate additional income which they use for household

enterprises and mitigating other risks they face (Beneficiary Assessment, 2012).


106


107

ANNEX 1: RESULTS FRAMEWORK AND MONITORING

MALAWI: SECOND ADDITIONAL FINANCING FOR MASAF 3 APL II PROJECT

Results Framework

Revisions to the Results Framework Comments/

Rationale for Change

Program Purpose

Current Proposed change

To achieve capacity building for

improved service delivery by

communities, Local Governments

and Sector Ministries within the

MPRSP, with decentralization as a

key strategy so that Malawi can

achieve its MDGs

End of Program indicators

Current Proposed change*

1. Cash transfers to reduce extreme poverty from 55% to 28% by 2015

55% Baseline in 2000; 52% in

2007

2. Grade 1 children completing Grade 5 increased from 20% to 90% in 2015

20% in 2000; 73% in 2007

3. Enrollment rates for girls in primary schools increased from 48% to 50% in 2015

48% in 2000; 50.4% in 2007

4. Under fives malnutrition rates reduced from 30% to 15% in 2015

30% in 2000; 22% in 2007

5. At least 60% (24) of LAs with direct community funding mechanisms in 2015

6. At least double the number of births supervised by traditional birth attendants by 2015

Dropped due to lack of

baseline

No baseline

7. At least double the number of households in anti-malaria, home- based-care and orphans care programs by 2015


baseline

No baseline

8. Households with improved sanitation and access to wood lots increased from 77% to 84% in 2015


108



9. At least double the number of households participating in Drug Revolving Funds in 2015


baseline

No baseline

PDO

Current (PAD) Proposed

To improve livelihoods of poor and

vulnerable households and to

strengthen the capacity of local

authorities to manage local

development

Continued The PDO was changed at first

Additional Financing, from original

PDO that read ―to improve

livelihoods of poor households

within the framework of improved

local governance at Community,

Local Authority and National

Levels”.

PDO indicators

Current (PAD) Proposed change*

1a. Beneficiaries of Safety Nets

programs - public works (number)

of which female (%)

(Core Indicator)

Continued

-

1b. Beneficiaries of Safety Nets

programs – Cash transfers (%)

(Core Indicator)

New Although people requiring direct

support were targeted under the

PWSP program the current data is

not disaggregated to measure

extent of achievement. This

indicator has been introduced as a

sub-indicator to enable the Project

compute % of people reached with

direct cash transfers through the

Public Works program.

2. PWSP beneficiaries with savings

of at least 50% of PWSP wage one

year after participation, of which

female (%)

Continued Indicator was introduced at AF I

3. PWSP beneficiaries that were able

to buy agricultural inputs following

participation in the PWSP

Continued The indicator was introduced at

first AF I

4. Person days provided in labor

intensive work in public works

Continued but moved to

intermediate level

-

5. Local Authorities able to set Continued


109



objectives to implement community

service packages (in annual

investment plan) and achieve at least

70% of their annual targets (% of

LAs (Trigger for APL III)

(Indicator number 5 in the original

Results Framework)

6. People with access to improved

learning environment


first Additional Financing

7. People with access to improved

sanitation under the Project40

Continued -

8. Project beneficiaries, of which

female (%). Core Indicator

Continued

-

Intermediate Result 1


1.Roads rehabilitated, rural (km)

Core Indicator

Continued

2.Area reforested Continued Indicator retained but reworded to

be in line with the upcoming core

indicator: Area or re/afforestated

(ha)-

3.Area provided with irrigation and

drainage services, new/rehabilitated

Core Indicator

Continued -

4.PWSP projects implemented for

-Irrigation improvement

-reforestation

-Road maintenance

Continued -

6.Primary School Staff houses

constructed :

-Primary Staff House Project

-Crisis Response program


first Additional Financing

7.Classroom /Student ratio in Dropped The indicator was introduced at

40 Calculated from pupils and teachers having access to 233 new VIP toilets constructed under the Project, assuming

one VIP toilet serving 2 classrooms at average size of 60 pupils.


110



intervention areas with school

construction

first Additional Financing.

8.Additional classrooms built or

rehabilitated at the primary level

resulting from the project

Core Indicator


first Additional Financing. It is

reworded: Indicator retained but

reworded to be in line with the

indicator : Number of additional

classrooms built or rehabilitated at

the primary level resulting from

project interventions

10.Ventilated Improved Pit latrines

built

Continued -

11. Sub-projects or investments for

which arrangements for community

engagement in post-project

sustainability and/or operations and

maintenance are established

(percentage)

New -

12. Community contributions in the

total project cost (percentage)

New -

13.Annual PWSP cycles completed

according to plan (Trigger APL III)

Continued -

14. Beneficiaries paid in timely

manner: wages paid within two

weeks of works (%)

Continued -

15. Active micro savings accounts, of

which female (%)

Core Indicator

Continued The indicator has been separated

into: Number of active micro-

savings accounts" and "Percentage

of active micro-savings accounts

held by women.

16. Community savings and

investment groups created that reach

stage 3

Continued -



1.Framework for Intergovernmental Continued -


111



Fiscal Transfer system to support

service delivery of LDF defined and

tested by MTR

2. Local Authority Performance Grant

System defined and tested under LDF

by MTR

Continued -

3.Appraised Community Action Plans

reflected in District Annual

Investment Plan by MTR

Continued -

4. Local Authorities meetings

specified criteria in Financial

Management: non qualified audited

accounts

Continued -

5. Local Authorities meeting specified

criteria in Procurement:

-Functional Internal Procurement

Committee

-Availability of Procurement plan

Continued -

6. Percent procurement of goods and

services at Local Authority level

based on competitive bidding

New



1.Communities satisfied with support

provided by LAs, ADCs and VDCs

Continued -

2. VDCs/ADCs actively involved in

overseeing subproject implementation

to address service gaps at community

level (%)

Continued -

3.Communities with community level

tracking system

Continued -

4. Community level tracking system

that delivers information on baselines,

targeting, utilization of PWSP wage

earnings on an annual basis defined

and implemented.

Continued -

5. LAs with reporting mechanism for

MDG indicator targets

(Trigger APL III)

Continued -

6.Funds lost to errors, fraud, and

corruption: identified through audit

Continued -


112



exercise

7. LAs publicly disclose revenues,

such as grants and expenditures by

MTR.

Continued -

8. Participants in consultation

activities during project

implementation (number)

New

9. Beneficiaries that feel project

investments reflected their needs

(percentage)

New

10. Community contributions in the

total project cost (percentage)

New

11. Grievances registered related to

delivery of project benefits that are

actually addressed (percentage)

New

12. Intended beneficiaries that are

aware of project information and

project supported investments

(percentage)

New

* Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in

the end of project target value


113

Revised Program Results Framework

Overall APL Program : To achieve capacity building for improved service delivery by

communities, Local Governments and Sector Ministries within the MPRSP, with

decentralization as a key strategy so that Malawi can achieve its MDGs

Program indicators

Co

re UOM

Baseline

Start

APL

program

(2000)

Progre

ss start

APL 2

(2007)

End of

Program

Target

2015

Comments

1. Cash transfers to reduce

extreme poverty from

55% to 28% by 2015

% 55 52 28

2. Grade 1 children

completing Grade % 20 73 90

3. Enrollment rates for girls

in primary schools % 48 50.4 50

4. Under fives malnutrition

rates % 30 22 15

5. Births supervised by

traditional birth attendants Numbe

r x x

Double from

baseline

No baseline

6. Households in anti-

malaria, home- based-care

and orphans care

programs by 2015

Numbe

r x x

Double from

baseline

No baseline

7. Households with

improved sanitation and

access to wood lots % 77 x 84

8. Households participating

in Drug Revolving Funds Numbe

r x x

Double from

baseline

No baseline

9. LAs with direct

community funding

mechanisms in 2015 % 0 x 60

114

REVISED PROJECT RESULTS FRAMEWORK

Project Development Objective (PDO): Project Development Objective: To improve livelihoods of poor and vulnerable households and to strengthen the capacity of local authorities to manage local development

PDO Level Results

Indicators

Co

re

UOM

Baseline

Original

Project

Start

(2009)

Progress

To Date

(March

2012)41

Target Values

Freque

ncy

Data Source/

Methodology

Responsibilit

y for Data

Collection

Comments

Dec 2012

Dec

2013

June

201442

1a. Beneficiaries of

Safety Nets

programs - Cash-for-

work, food-for-work

and public works

(number)

Number 565,557 1,362,444 900,000 1,400,000 1,475,125 Annual

Annual

completion

reports

Local

Authorities

TST

- The achievement

excludes

beneficiaries of

2011/2012 program

(data collection still

in progress)

- The project design

allows 5-20% of

beneficiaries to be

direct beneficiaries

Of which female % 47.8% 48.5% 40% 40% 40%

1b. Beneficiaries of

Safety Nets

programs -

Unconditional cash

transfers (number)

Number 28,277 68,122 45,000 70,000 115,000

41 For new indicators introduced as part of the additional financing, the progress to date column reflects the baseline value.

42 This is sum of targets for Original Financing; 1st Additional Financing and 2nd Additional Financing.


115

2. PWSP

beneficiaries with

savings of at least

50% of PWSP wage

one year after

participation

Number 0 13,748 33,750 40,750 48,750 Annual

Annual

Tracking

studies

Annual reports

Consulting

firm

TST

COMSIP

Indicator introduced

at first AF and no

target was set

Of which female % 0 61% 60% 60% 60%

3. PWSP

beneficiaries that

were able to buy

agricultural inputs

following

participation in the

PWSP

% 192,28943

463,23144

180,000 656,000 700,00045

Annual

Tracking

studies

Consulting

firm

TST


at first AF

Of which female % 47% 48.5% 40% 40% 40%

4. Local Authorities

able to set objectives

to implement

community service

packages (in annual

investment plan) and

achieve at least 70%

of their annual

targets

% 0 67% 70% 70% 70% Annual PAM

TST

5. People with

access to improved

learning

environment

Number 57,110 68,505 62,000 0 62,000 Annual

Beneficiary

Assessment

studies

Consulting

firms/TST

No interventions

under second AF

44 The tracking study showed that many beneficiaries prioritized food (62%) over purchase of farm inputs (34.6%)

45 Target set relative to the current achievement which is at 34.6%


116

6. People with

access to improved

sanitation under the

Project46

Number 110 110 27,75047

0 27,750 Quarter

ly

Quarterly

progress

reports

Local

Authorities

TST


at first AF

7. Beneficiaries

Project

beneficiaries48

Number 5,456,249 9,844,128 7,765,518 10,000,000 10,665,518 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

Of which female

(beneficiaries) % 40% 44.3% 40% 40% 40% Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

Achievement under

PWSP is 48.5%

while in other

components an

estimated 40%

achieved

Intermediate Results and Indicators

Intermediate

Results Indicators

Co

re

Unit of

Measur

ement

Baseline

Original

Project

Start

(2009)

Progress

To Date

(2012)

Target Values Frequ

ency

Data

Source/

Methodolog

y

Responsibility

for Data

Collection

Comments

2012 2013 2014

EOP

Targets

46 Calculated from pupils and teachers having access to 233 new VIP toilets constructed under the Project, assuming one VIP toilet serving 2 classrooms at average size of 60

pupils.

47 VIP latrines constructed under the Crisis response and will be used by beneficiaries

48 Project beneficiaries are from PWSP programs, training activities, primary school staff houses and classroom blocks under the Crisis Response Window. Beneficiaries under

savings and Investment are subsumed under the PWSP beneficiary group.


117

Intermediate Result 1: Community livelihood Support: communities and Local Authorities able to successfully manage (prepare, implement, evaluate) funded programs

1. Roads

rehabilitated, rural km 0 24,453 0 26,000 26,500 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

Targets may shift

from the

predetermined

ones because

actual number

and type of

projects are

identified by

beneficiary

communities

based on needs

during

implementation.

Actual

achievements

may shift

between the main

areas of roads,

forestation, and

irrigation

2. Area restored or

re/afforestated ha 0 1,442,400 3,499 1,100,300 1,500,000 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

3. Area provided

with irrigation and

drainage services,

new/rehabilitated

ha 0 999.6 250 1,000 1,250 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

4. PWSP projects

implemented for

Irrigation

improvement

Number 0 321 0 330 330 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

Reforestation Number 0 527 0 540 540

Road maintenance Number 0 1,440 0 2,000 2,020

6. Primary School

Staff houses

constructed :

-Primary Staff

Number 118 1,338 3,000 3,000 3,000 Quarter

ly

Quarterly

progress

reports

Local

Authorities

TST

1,000 staff houses

were expected to

be constructed

every year but


118

House Project due to limited

funds this has not

been possible -Crisis Response

Program Number 0 58 300 300 300

7. Additional

classrooms built or

rehabilitated at the

primary level

resulting from

project interventions

Number 0 172 244 244 244 Quarter

ly

Quarterly

progress

reports

Local

Authorities

TST

Indicator

introduced at first

AF

9.Ventilated

Improved Pit latrines

(toilets) built

Number 462 462 231 231 231 Quarter

ly

Quarterly

progress

reports

Local

Authorities

TST

Indicator

introduced at AF

I

11. Sub-projects or

investments for

which arrangements

for community

engagement in post-

project sustainability

and/or operations

and maintenance are

established

(percentage)

% 0 49% 75% 75% 75% Quarter

ly

Quarterly

Reports

Local

Authorities

Indicator

introduced at AF

II

12. Community

contributions in the

total project cost

(percentage)

% 20% 10% 20% 10% 10% Quarterly

Reports

Local

Authorities

10.Safety Net

programs (Public

Works subprojects)

implemented

Number 1,849 6,923 0 0 0 Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

Number of

subprojects to be

implemented is

based on Local

Authority specific

targets set during

implementation


119

11.Annual PWSP

cycles completed

according to plan

(Trigger APPL III)49

Number - 80% 70% 80% 80% Annual

Annual

reports,

Subproject

Completion

reports

Local

Authorities

TST

There will be two

cycles

implemented

within one year

under the second

AF

12. Beneficiaries

paid in timely

manner: wages paid

within two weeks of

works (%)

% 50% 43% 90% 90% 90% Annual

Community

Score cards

Tracking

studies

Local

Authorities

TST

Consulting

firm

13. Person days

provided in labor

intensive work in

public works

Number 6,500,400 22,798,864 18,000,000 22,000,000 26,700,000 Annual

Annual

Subproject

Completion

reports

Local

Authorities,

TST

14. Number of

active micro-

savings accounts

Number 0 72,403 Quarter

ly

Quarterly

Reports

Local

Authorities,

TST

15. Percentage of

active micro-

savings accounts

held by women

% 62% 65% Quarter

ly

Quarterly

Reports

Local

Authorities,

TST

Intermediate Result 2: Local Assembly Capacity Enhancement (LACE): Strengthening capacity for longer-term planning and financing of local development

49 PWSP cycles spans over one year and is defined as follows: (i) assessment of drought-affected or food insecure labor-surplus households vulnerability assessment (April-July of

each year), (ii)calculation of allocations to each of the Local Authorities (June of each year), (iii) disbursement of allocations to LAs (August of each year), (iv) execution of

PWSPs combined with community institutions support through IEC, savings and investments, etc. (September-December of each year), (v) execution of tracking studies

(December -May of subsequent year). Programming delays have affected implementation as per the planning calendar.


120

1.Framework for

Intergovernmental

Fiscal Transfer

system to support

service delivery of

LDF defined and

tested by MTR

system None

IGFTS

under

review

System

operational

System

operational

System

operational Once

System

review

report

MLG&RD IGFTS review process

still ongoing

2. Local Authority

Performance Grant

System defined and

tested under LDF by

MTR50

system None

System

under

developme

nt

System

revised and

operational

System

developed

System

developed Once

System

review

report

Consulting

firm

TST

New system under

development51

3.Appraised

Community Action

Plans reflected in

District Annual

Investment Plan by

MTR

% 75% 32% 100% 100% 100% Annual

Annual

Performanc

e

Assessment

MLG&RD

TST

Achievement low because

most councils do not have

updated District

Development Plans


meetings specified

criteria in Financial

Management: non

qualified audited

accounts.52

% 12.5% 62% 50% 60% 60% Annual

Annual

Performanc

e

Assessment

MLG&RD

TST

Achievement based on

actual % of 2010/2011

accounts audited

50 The system includes grants, rewards, capacity gap identification and capacity building.

51 There was confusion between already existing Capital Grants Transfers System and the grant design proposed under this component. The IDA mission of January 17 to

February 2nd

2011 clarified that this reflects performance based grant system.

52 100% with financial accounts to be maintained throughout


121


meeting specified

criteria in

Procurement

-Functional Internal

Procurement

Committee.

%

72.5% 79.4% 80% 80% 80%

Annual

Annual

Performanc

e

Assessment

MLG&RD

TST

-Availability of

Procurement plan % - 44.1% 80% 80% 80%

6. Percent

procurement of

goods and services

at Local Authority

level based on

competitive

bidding53

% 0

Data to be

collected

by

December

2012

0 70% 70% Annual

Annual

Performanc

e

Assessment

report

MLG&RD

TST

New Indicator introduced

at second AF

Intermediate Result 3: National Institutional Strengthening (NIS): Cross cutting function for programme support and Knowledge Management

1.Communities

satisfied with

support provided by

LAs, ADCs and

VDCs54

% 49%

70%

(PSSHP)

33%

(PWSP)

70% 70% 70% Annual

Observation

Community

Score Card

Citizen

Report

Cards

TST

MLG&RD

MoDPC

Low achievement

under the PWSP due to

LAs not providing

other working tools

such as hoes and lack

of structures e.g.

curvets

2. VDCs/ADCs

actively involved in % 39% 42% 70% 70% 70% Annual

PAM

Community

TST

MLG&RD

53 This is the second indicator proposed at the Mid-Term Review to replace indicator number 5 in the old results framework that read ―Local Authorities able to set objectives to

implement community service packages (in annual investment plan) and achieve at least 70% of their annual targets (% of LAs (Trigger for APL III)‖

54 To be assessed based on community score cards (CSC), which will be administered by community management committees, and participatory assessments


122

overseeing

subproject

implementation to

address service gaps

at community level

(%)

score cards

3.Communities with

community level

tracking system

Number 0 12 0 0 0 Annual Tracking

studies

Consulting

firm

TST

Based on communities

that participate in the

tracking studies

4. Community level

tracking system that

delivers information

on baselines,

targeting, utilization

of PWSP wage

earnings on an

annual basis defined

and implemented.

system 0

2011

Annual

tracking

study

implement

ed

Annual

tracking

studies

undertaken

Annual

tracking

studies

undertaken

Annual

tracking

studies

undertaken

Annual Tracking

studies

Consulting

firm

TST

5. LAs with

reporting mechanism

for MDG indicator

targets Trigger

APLIII)

Number 34 52 27 27 27 Annual

Annual

Performanc

e

Assessment

Consulting

firm

TST

Current achievement

based on preliminary

assessment undertaken

by TST

6.Funds lost to

errors, fraud, and

corruption:

identified through

audit exercise

% 0 0 5% 5% 5% Annual Annual

Audit

Auditing

firms

Central

Internal

Audit

Status based on

2008/2009 and

2009/2010 Audit

reports

7. LAs publicly

disclose revenues,

such as grants and

expenditures by

MTR.

% 12.5% 30% 50% 50% 50% Annual

Annual

Performanc

e

Assessment

MLG&RD

TST

8. Participants in

consultation

activities during

project

Number 565,557 6,000,000 0 0 7,000,000 Annually

Community

Score

Cards, BA,

Consulting

firms New Indicator


123

implementation

(number)

9. Beneficiaries that

feel project

investments

reflected their needs

(percentage)

% 50% 49% 95% 95% 95% Annually

Community

Score

Cards, BA,

Technical

Audits

Consulting

firms New Indicator.

10. Grievances

registered related to

delivery of project

benefits that are

actually addressed

(percentage)

% 0 0 0 0 75% Annually

Community

Score

Cards, BA

Consulting

firms

New Indicator. Data

will be captureded in

the next rounds of the

Community Score

Card, the MIS and the

work with the Anti

Corrurption Bureau

11. Intended

beneficiaries that are

aware of project

information and

project supported

investments

(percentage)

% 0 79% 80% 80% 80% Annually

Community

Score

Cards, BA

Consulting

firms New Indicator


124

ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK

REPUBLIC OF MALAWI: MALAWI: SECOND ADDITIONAL FINANCING FOR MASAF 3 APL II PROJECT

Project Stakeholder Risks Rating Substantial

Description: MASAF 3 APL II is popular amongst

communities. Possible wage rate revision under the PWP

to assist the beneficiaries could be resisted by estate

farms because the estate farms would like to make higher

profit margins by suppressing the daily wage rates. They

would not like to have the labor in their farms to shift to

the PWP.

Risk Management:

Resp: Client Stage:

Implementation

Due Date :

September 30, 2015 Status: Ongoing

Risk Management: The TST through the Ministry of Economic Planning and

Ministry of Finance facilitate advocacy to be carried out at high level

Resp: Client Stage:

Implementation

Due Date :

December 31, 2012 Status: Ongoing

Implementing Agency Risks (including fiduciary)

Capacity Rating: Substantial

Description : (a) low procurement capacity at the Technical Support

Unit and at the district might affect project

implementation.

(b) Operating without a functional Financial

Management System

(c) low resource absorption capacity of the urban

councils

Risk Management: - The Technical Support Unit will ensure that the Procurement

Specialist now in place has the requisite training and strategy to facilitate the

procurement capacity building at the district and community level. Government has

plans to recruit procurement staff for local councils in the areas of finance, audit and

procurement.

Resp:

LDF-TST Stage: Implementation

Due Date : June 30,

2012 Status: Ongoing

Risk Management: The TST will replace the Financial Management System and get it

functional by June 30, 2012. The critical staff have been trained but will ensure that

consultant trains all the FM and IT staff to support the system operation.

Resp: Client Stage: Implementation

Due Date :

December 31, 2012 Status:NYD

Risk Management: The TST in conjunction with the UNICEF have planned to build

capacity of the urban councils before the commencement of works. Social mobilization

process will be conducted in communities in the urban councils.


125

Resp: Client Stage:

Implementation

Due Date :

December 31, 2012 Status:NYD

Governance Rating: High

Description :

The local councils get inadequate funding and when they

do get, the funds are delayed which could lead to mis-

application of funds and corruption practices. This could

raise the negative behavior of staff embezzling project

funds. Politicians could influence the use of resources

and make the target population miss out on the

opportunities from the project

Enhanced social accountability measures are in place

through the use of community score cards, putting

financial management and resource utilization

information in the public domain (electronic and news

media); the TV and radio programs that come on air,

MASAF monitors through real time listening to those

programs in the office of the the Communications

officer. Grievance mechanism and a system of responses

are also in place. The project uses a community targeting

mechanism which is an open selection by the

community. The MASAF Project is working hand in

hand with the Anti Corruption Bureau on sensitizing the

local councils‘.

Due to the decentralized nature of the project, there is an

increased chance that the misuse of project funds occurs,

contractors perform poorly and compromise on

Risk Management: Apart from audits, and supervision mission by the LDF-TST, the

project also uses social accountability tools to enhance governance. The social

accountability tools which include naming and shaming of wrong-doers, and

publishing the names in the local papers, sentizing the communities on use of hotlines

or use of mobile phone text messages to the ACB.

Resp: Client Stage:

Implementation

Due Date :

June 30, 2014 Status: Ongoing

Risk Management: In addition to the existing Governance Framework and Financial

Regulations and Procedures currently utilized in the country, portfolio reviews are

conducted quarterly to identify implementation and solutions and Post Procurement

Reviews.

Resp: Client Stage:

Implementation

Due Date : June

2013 Status: On-going

Risk Management: The LDF – TST through the Ministry of Local Government will

facilitate revamping the consultative fora at city councils to facilitate participatory

processes.

Resp: Client Stage:

Implementation

Due Date : June

2013 Status: on-going


126

construction quality.

Project Risks

Design Rating: Moderate

Description: (a) MASAF LDF is not directly

responsible for the financial accounting once the funds

have been sent to the local councils; this is the mandate

of the National Local Government Finance Committee.

This arrangement makes the follow up process for

acocountability by the TST to be constrained.

(b) Possible staff attrition as the LDF is not yet endorsed

by Cabinet which would deplete the institutional memory

and render the LDF to always be in a fluid state in terms

of staff knowledge about operation.

Risk Management: (a) LDF – TST is now proactive in approach to following up the expenditure

justifications with the National Local Government Finance Committee; and conduct

joint missions with the National Local Government Finance Committee. The LDF-TST

working arrangement with the Anti Corruption Bureau (ACB) is also another aspect of

mitigating the risk as the ACB has set up hotline for use by whistle blowers at national,

district and community levels

Resp: Client Stage:

Implementation

Due Date :

December 31, 2012 Status: On-going

Risk Management: . (b) Government to formalize existence of the Local

Development Fund and staff conditions

Resp: Client Stage:

Implementation Due Date :

December 2012

Status: Not yet

due

Social & Environmental Rating: Moderate

Description : Inadequate facilitation, lack of process

documentation at some subprojects‘ sites and inadequate

monitoring of environmental and social issues resulting

from inadequate capacity of professional staff to

spearhead environment and social issues at the district

and community levels

Risk Management: An ESMF and RPF has been prepared, consulted upon, and

disclosed; ESMPs have been prepared during implementation. The ESMF will be

updated to reflect the main considerations of OP 4.36 that is now triggered with this

AF. The project requirement is that each subproject is screened for environmental and

social effects and mitigation measures put in place. Continue to build and nurture

capacity at the district and the community level for monitoring implementation of the

mitigation measures

Resp: Client Stage:

Implementation

Due Date : January

31, 2013 Status: NYD

Program & Donor Rating: Moderate

Description: There is parallel financing in MASAF

LDF for specific activities. The donors include the IDA,

Risk Management: Joint mission by donors would be mounted to reduce cost in time

for the Project as per request by the Secretary to the Treasury in January 2011 during

the Joint Implementation Review.


127

KFW, and the AfDB. The donors conduct different

implementation support missions which might result in

an overload on the TST and cause delays in program

implementation.

Resp: Donors Stage:

Implementation

Due Date :

December 31, 2012 Status: Ongoing

Delivery Monitoring & Sustainability Rating: Substantial

Description :

Local council staff are overloaded with work generated

by the many projects over and above their initial

mandates; they are poorly paid, and look for allowances

from projects for augmenting their income. This is one

source of technical capacity inadequacy that would result

in poor technical supervision and poor quality of

infrastructure assets created, poor service provision and

inadequate knowledge transfer to COMSIP beneficiaries,

which would negatively affect sustainability of the

project‘s benefits

Risk Management: The project design allows for engagement of the local service

providers to augment capacity at the district level in supporting communities.

Resp: Client Stage:

Implementation

Due Date :

September 30, 2013 Status: Ongoing

Overall Implementation Risk Rating: Substantial


128

ANNEX 3: PROJECT DESCRIPTION

A. SCALING UP OF PUBLIC WORKS PROGRAM

62. Malawi has faced a number of exogenous shocks in the past few years arising from

volatility in international commodity prices, foreign aid, climate change and natural

disasters including an earthquake in 2010. These shocks have considerable ramifications

for macroeconomic indicators as well as at household level, where rising food and fuel prices

are placing a heavy burden on poor and vulnerable families, jeopardizing human capital gains

achieved in previous years. In order to effectively mitigate the adverse effects of exogenous

shocks at both levels, the Government has requested additional support, to address

macroeconomic imbalances as well as food and fuel price increases in the face of the recent

shocks to the economy. The Government therefore has proposed the implementation of

immediate short term safety net mitigation measures in 2012-13 to cushion the necessary

financial effects of the 50 percent exchange rate liberalization that has led to the price increase

on the population (in the bottom quintiles 1, 2, and 3) or approximately 1.72 million rural and

urban households or 8.6 million people. These mitigation measures would be implemented

through various support mechanisms including PWP cash transfers, direct cash transfers,

agriculture input subsidies and irrigation infrastructure support. MASAF is positioned and

recognized for being able to quickly scale up the delivery mitigating cash transfers to the

poorest households through Public Works.

63. In order to compensate for 33% income loss as a result of the current of 50

percent exchange rate liberalization the Government would need to provide cash transfers

in the total amount of US$ 125.0 million. It was agreed that this would be done by scaling up

the safety net cash transfers through labor intensive public works using the existing

MASAF/LDF mechanism. This would mean a scale up of the existing MASAF Safety Net

activities by increasing the support for the existing clients in the households which are poor and

able to provide labor, and it would also expand coverage to reach an increased number of

households who would, without the intervention fall into a severe poverty trap. In addition, it

was agreed that AF II for MASAF would include provisions for Direct Support for up to 20% of

the total beneficiaries from labor constrained households who will not be able to engage in

Public Work activities. These include children and elderly heads of households and household

heads with disabilities and or chronic illnesses. The current design and implementation of the

MASAF already allows for the inclusion of HHs who are unable to work by requiring only that

the household member be present for attendance at the worksite and to carry out only light

activities. MASAF monitoring and evaluation estimates that this group under its current

implementation varies from community to community and can range from 5% to 15% of the

participants and transfers in a community. This group of direct support beneficiaries will be

identified through the existing community based targeting mechanism at the local level. The

direct support beneficiaries will also receive same wages like that of the rest of the PW

beneficiaries.


129

64. Food-insecure households are the main beneficiaries of public works programs

under the MASAF 3 APL II program AF II. This would specifically provide an

effective safety net mechanism for those who are poor and with limited

employment opportunities.

65. The objectives of targeting food and cash transfers to insecure households are

to increase their cash income and employment opportunities so they can access food and

other basic needs, and to prevent them from falling even deeper into poverty. The

interventions supporting the beneficiaries promote labor intensive activities that provide jobs

for the poor and, in the process, create or improve community assets.

66. The following principles will guide the interventions for this beneficiary group:

(a) Public works would be defined as multiple social and economically viable urban and

rural sub-projects per community to be undertaken over a period of two months per

cycle that are simple, small in size, labor intensive, which can easily be maintained and

operated by communities in a sustainable way. Public works in urban areas will be

conducted all year round while in rural areas they will follow the agriculture harvesting

and sowing cycle and only be conducted in lean months (except for home kitchen

gardens). Road works will not be constructed / rehabilitated during the rainy season.

(b) High Incidence of Poverty. The Integrated Household survey, which is a survey that is

undertaken periodically by the National Statistical Office, ranks different districts and

location across Malawi in terms of their relative poverty. The ranking gives weight to

communities with (i) low literacy rates and a high share of children who drop out

of school and (ii) a high percentage of female-headed households and a marked lack of

job opportunities.

(c) Food Insecurity. The Malawi Vulnerability Assessment Committee (MVAC), which

comprises the Ministry of Development Planning and Cooperation, Ministry

of Agriculture and Food Security, Food and Agricultural Organization, and civil society

organizations, undertakes an assessment of the food security situation in Malawi. The

MVAC report identifies households with missing food entitlements in each agricultural

planning area across the country. Data from this analysis is used to identify

beneficiaries for the public works program. Districts that have a larger number of

families with missing food entitlement have a higher weight in the resource allocation

formula.

(d) Vulnerability to HIV/AIDS. HIV/AIDS is one of the causes of vulnerability in Malawi.

It causes morbidity and mortality leading to withdrawal of productive labor from

the economy. In addition, it increases the dependency ratio through an increase in

orphans. Data about the incidence of HIV/AIDS is obtained through sentinel surveillance

sites. Areas with higher incidences of HIV/AIDS have a higher weight than those areas

with lower prevalence of HIV/AIDS.


130

(e) Population. Population is one of the factors that will be used to allocate resources for

public works program in districts. Urban and Rural Districts with higher population

will receive a higher weight in the formula for allocating resources than district councils

with a lower population.

(f) Food Insecurity. Maize is the major staple food in Malawi. Food security among rural

and urban households is generally stable nationwide, and a variety of food is available in

local markets. However, food insecurity and vulnerability are present in some pockets of

rural Malawi, but these problems vary by region. The southern region has the highest

proportion of food-insecure households. In districts such as Mwanza, Neno, Chikhwawa,

Nsanje, Balaka, Thyolo, Mulanje, Phalombe Machinga, and Blantyre production losses of

up to 50-70 percent were experience in the 2009/2010 growing season due to prolonged

dry spells, the same is expected in 2012 (WFP).

67. Rapid Vulnerability Assessment. Although the proposed AF II will have a nationwide

coverage responding to the effects of the emergence situation in the country, however, based on

a rapid assessment, 13 districts in the southern region of Malawi are projected to be food

insecure and will be deliberately targeted with more resources under the AF-II in the first cycle

of the Project implementation.

68. Targeting and Selection Criteria. Within a district, the target group consists of poor

households with able-bodied persons. These households share many characteristics. They have

high levels of illiteracy, are often headed by women, and lack job opportunities. The children

often drop out of school, and the household is affected by economic and manmade shocks,

natural disasters (droughts, earthquakes, and floods) and crop failure. The targeting of

resources within a local council will be guided by poverty and service coverage indicators as

well as by community demands in line with their capacities. An additional 586,000 households

will be targeted with public works program under the additional financing.

69. The community members targeted under public works investments will (in a

participatory process using the wealth-ranking tool), identify the food-insecure

households.Female-headed households will constitute at least 40 percent of the beneficiary

households.

70. Local Councils will target local areas for funding based on food insecurity,

incidence of poverty and other criteria in conformity with guiding principles. Subprojects

will be appraised by the local councils and approved by the District Consultative Forum,

subject to conformity with safeguard requirements.

71. Monitoring. The local councils and the Technical Support Team will conduct monitoring

to ensure that intended objectives are achieved within the set time frame in the sub-project

management cycles. A specific format provided in the Community Sub-project Management

Handbook requests specific information on physical progress and the corresponding expenditures

and compares them with the original plan. Additional information for monitoring includes:


131

i. Adherence to planned cash transfers to the beneficiaries with the set gender balance;

ii. Adherence to technical standards and work norms as per sector ministries‘ specifications;

iii. Impact assessment in regard to poverty alleviation;

iv. Value of the asset created (to assess whether the undertaking is cost-effective); and

before implementing subprojects, beneficiary socio economic data will be collected.

72. Synergies with Other Interventions. The GoM has other rural and urban programs

that are aimed at improving the livelihoods of the poor. These interventions are managed under

different sectors and institutions, but most make efforts to reach the vulnerable and food-

insecure groups. MASAF 3 APL II, through local councils, has a depth of experience in

working with these sector institutions and their programs, and at times manages

their interventions through fund management. In all these cases, an effort is made to combine

efforts with MASAF 3 APL II interventions so that benefits to the target beneficiaries are

maximized. Additional Financing will continue this tradition and make a special effort to

coordinate with other programs. This project aims to contribute to higher food production and

productivity by improving farmers‘ access to critical agricultural inputs. The food-insecure

farmers participating in the public works program activities will earn wages and they might

decide to use the income they get to access subsidized agricultural

73. The following are the principal vulnerable groups identified in studies of poverty in

Malawi:

a) The landless. Food insecure households are most dependent on agriculture, earning

almost three-quarters of their income from farming. Most Malawian families rely on their

own production of maize; half of all calories consumed are home-produced. Households

with little or no land are thus less able to produce enough food to eat during the year; and

suffer the double-problem of having to buy more maize to fill the gap, while at the same

time having lower cash incomes to buy grain. Households that own no land rely on ganyu

- providing informal agricultural labour to others – and tend to be among the very poorest.

The Draft ―Effective and Inclusive Targeting Study of Social Support programs In Africa:

Case of Malawi‖ (Dec 2012) indicates that the CFSVA survey found that 73 percent of

such households had inadequate or borderline food consumption, compared to only 48

percent in the rural population as a whole.

b) Those with very small landholdings. The land holdings tend to be small throughout

Malawi, due to high population density and repeated sub-division of plots55

. Many

households have some land, but the amount is so small that they are unable to produce

55 On average, excluding the landless, households own 1.2 ha. of land (Poverty Assessment, World Bank (2007)


132

sufficient food. In the poorest decile, landholdings average only 0.17 ha per capita. One

small sample study found that households had 63 percent higher vulnerability to poverty if

they owned less than the mean holding of 0.24 ha.

c) Female-headed households widowed and divorced. Female-headed households make up

about 23% of the population. They tend to own less land, make less from off-farm work,

and be more food-insecure; on average they have 14 percent lower consumption than

male-headed households. Widows and divorced women suffer particularly as the result of

lack of assets to assets.

d) Child-headed households, elderly and single-parent-headed HHs; orphans. There

were about 873,000 orphans in 2008, representing 12 percent of the child population.

However many of these are children with one parent alive, or who have been successfully

absorbed into non-poor families. Poverty is particularly acute among child-headed

households, and those in which grandparents are supporting orphans with no working

aged-adult in the household. Otherwise the data does not show that households with an

orphan in them tend to be much poorer than others on average (MPVA, fig3.7, p.71, and

Table 3, below).

e) The elderly and the disabled. About 4 percent of the population is aged 65 or older, and

another 3.8 percent are estimated to live with some form of disability (and clearly there is

a lot of overlap between these two groups). There is no definitive data on poverty rates

among the elderly or the disabled, since poverty is measured at the household level. The

elderly or disabled may very well be poorer than average, but at the same time many of

them are adequately absorbed within non-poor households, so identifying the ultra-poor

among them has to be done on a case-by-case basis.

f) Households affected by disasters. Households in Malawi are affected by both drought

and flooding; the major drought of 2005/06 put some 5 million people at risk of food

insecurity; in addition smaller numbers are regularly affected by flooding, with eight

significant floods affecting 200,000-500,000 people each between 2001 and 200756

. The

more prevalent problem, however, is that lower-than-average rainfall in any given year

results in low levels of household production of maize, and thus below-acceptable

consumption levels.

56 Background paper 1: Identification of Vulnerable Groups (Makoka (2011)


133

g) Persons living with HIV/AIDS. The HIV prevalence rate in Malawi was 11 percent in

2009, the eighth highest in the world. By this estimate some 0.9 million persons are living

with HIV/AIDS. While HIV/AIDS is a national disaster, and has dramatically reduced life

expectancy, households affected by HIV/AIDS do not appear to be poorer on average than

those who are not affected57

. This is likely because of support from extended family and

community, combined with the fact that AIDS tends to be primarily a disease of the less-

poor. This does not mean that there aren‘t people suffering from HIV/AIDS who are in

desperate situations, and need a safety net to support them. The issue from a targeting

point of view is that they need to be identified on a case-by-case basis, and that providing

transfers to all people who are HIV positive is not necessary, as a poverty-reduction

measure.

h) Unemployed/under-employed in urban areas. Wage employment opportunities are

scarce in Malawi, with less than 10 percent of the work force employed in the formal

sector. While the lack of employment results in substantial impoverishment for some

urban dwellers, it needs to be emphasized that deep poverty in Malawi is still

overwhelmingly a rural phenomenon, with 96 percent of the 3.4 million ultra-poor

(including those with labor) living in rural areas in 2005.

B. Project Components

i. Component 1: Community Livelihood Support Fund

a. Local Authority Fund: Public Works Subproject Program

74. Labor intensive public works are proposed as the main instrument for cushioning

the financial effects of the 50 percent exchange rate liberatization and the price increase on

the population. These works are expected to increase incomes and food security of poor

households who participate in the creation or rehabilitation of community assets. The public

works subproject program (PWSP) sub-component of the ongoing MASAF is proposed to be

expanded in 2012-13 with an additional financing of USD 50.0 million. The coverage of the

PWSP works is in all districts in the country. This includes both rural and peri-urban areas

(which include Lilongwe, Zomba, Mzuzu and Blantyre Cities). In peri-urban areas PWSP

supports road rehabilitation, drainage improvements and environmental projects.

75. The public works would benefit whole communities and a multiple number of

community works would be conducted per community over this period of time based on the

57 For example the AIDS incidence is higher in urban areas, and in the Central region, both of which have lower than

average poverty rates; see also MVPA (2007)


134

operations and implementation manual of MASAF-LDF. The implementation of this

additional support will use the modality of the existing MASAF 3 APL II Project. The total

budget to reach 1.72 million people based on an average work days of 12 days per month for 4

months is estimated by the Government to be US$ 125 million. Towards this objective the

Government proposed that the US$ 50.0 million from the World Bank through additional

financing be allocated for the scaling up public works programs of MASAF/LDF which will be

able to cover cash transfer to 586,000 households and the associated capital costs and the costs of

administration and delivery. With the Additional Financing a financing gap of US$83.7 million

would remain which would need to be met by Government own resources and or other Donor co-

financing. The IDA allocation includes PW payment budget of US$ 33.75 million (68% of total

budget; 15% of transfer budget for capital costs of PWs, equivalent to US$ 6.75 million, 5% of

transfer budget to cover administration cost for implementing districts, equivalent to US$ 2.2;

5% of the transfer budget equivalent to US$ 2.25 million to support the complementary COMSIP

activities. In addition 10% of the overall budget equivalent to US$ 5 million would be allocated

to cover the management and administration cost of the TST.

76. The public work activities will be implemented during the slack season of major

livelihood/agriculture activities and when the beneficiaries have the most need for additional

income to cover their family needs including food and non-food expenditures and in puts for

agricultural activities. Following the existing implementation modality of MASAF, the public

works activities supported through this additional financing will be implemented in two cycles

i.e. July – December 2012 and April – June 2013. Public Works would target the urban and rural

ultra poor and poor households.

Table 3: Vulnerable Groups in Malawi

58 Some categories might have double counting

Vulnerable Group Number Proportion of

Population

Source

Female-headed households* 58

680,267 23 percent of all

households

2007 Malawi Poverty and

Vulnerability Assessment Report

(MPVA)

Widows 120,310 2 percent (of persons

aged 18 and above)

Calculated from 2010 DHS

Preliminary Report and 2008

Population and Housing Census


135

Source: Effective and Inclusive Targeting of Social Support Programs in Africa Malawi Country Case Study – Synthesis Report

December 22, 2011

59 In 2010, the Ministry of Gender, Children and Community Development and UNICEF

undertook a mapping of all child-headed households in Malawi under the Child-Headed

Households Initiative.

60 In the 2008 Population and Housing Census, disability was defined as having difficulties or

problems in one or all of the following areas: seeing, hearing, speaking and walking/climbing.

Divorced women 294,546 9.3 percent (of females

aged 18 and above)

Calculated from 2010 DHS and 2008

Population and Housing Census

Children (under 5 Years of age) 2,876,975 22 percent 2008 Malawi Population and Housing

Census

Orphans 873,300 12 percent (of persons

aged below 18 years)

2008 Malawi Population and Housing

Census

Child-headed households 3,488 0.1 percent of all

households

2010 Ministry of Gender/UNICEF59

Persons with disability60

498,122 3.8 percent 2008 Malawi Population and Housing

Census

Elderly (65 years and above) 523,086 4 percent 2008 Malawi Population and Housing

Census

Households with low landholdings

(< 0.5ha)

887,305

households

30 percent of all

smallholders

2007 Malawi Poverty and

Vulnerability Assessment

Ultra-poor (labor constrained) 2,755,000 22.4 percent 2007 Malawi Poverty and

Vulnerability Assessment***


136

Table 4: Proportion That Are Poor and Ultra-poor by Vulnerable Group

Vulnerable

Group61

Number of

People

Percentage

Poor

Percentage

Ultra-poor**

Source of Data

Female-headed

households

680,267

households

58% /a 47% MPVA (2007) and CFSVA

(2010)

Children (under

18 Years of age)

7,066,320 49.2% n.a. Calculated from 2007 MPVA

Report and 2008 Population and

Housing Census

Orphans 873,300 46.0% 21% MPVA (2007) and CFSVA

(2010)

Child-headed

households

3,488

households

88.3% n.a. Malawi Government (2009b)

and 2010 Ministry of Gender/

UNICEF62

Persons with

disability63

498,122 n.a 10% 2008 PHC Report and CFSVA

(2010)

Elderly (65 years

and above)

523,086 n.a 29% of

households

headed by the

elderly

2008 PHC Report and CFSVA

(2010)

The Landless

(<0.5 ha)

887,305

households

26.4% n.a MPVA (2007) and 2008 PHC

Report

Malawi 13,066,320 52.4% 22.3% IHS2 Report (2005)

Source: draft Effective and Inclusive Targeting of Social Support Programs in Africa Malawi Country Case Study – Synthesis Report December

22, 2011

61There might be some double counting under some categories included in this table

62 In 2010, the Ministry of Gender, Children and Community Development and UNICEF undertook a mapping of

all child-headed households in Malawi under the Child-Headed Households Initiative. Under this Initiative, all

child-headed households received survival kits which included 2 insecticide-treated mosquito nets, 2 blankets, 2

mattresses, 1 plastic sheet, 1 bar of soap, 1 plastic bucket, 1 plastic cup, 1cooking pot and 2 bottles of water guard.

63 In the 2008 Population and Housing Census, disability was defined as having difficulties or problems in one or

all of the following areas: seeing, hearing, speaking and walking/climbing.


137

Table 5: Summary of Existing and Recent Programs

(Most recent annual data where available) Social Support

Program

Geographical

Distribution

Beneficiaries

number

Target group Benefits

Farm Input

Subsidy Program

All districts 8 million Poor farming

households

Fertilizer

vouchers, seeds

School Feeding

Program

13 districts 630,000

pupils;

114,300 OVC

Primary school-going

children.

School meals and

take-home rations

Social Cash

Transfer Scheme

7 districts 100,000

(26,000 HH)

Ultra poor and labor

constrained households

Monthly cash

transfer

FACT 3 districts 5,050

households

The vulnerable and

neediest.

Cash transfer

project-OXFAM

1 district 6,000

households

Most vulnerable Cash

Income Generating

Public Works

Program

All districts Poor with labor and

those keeping

vulnerable persons.

Wages

MASAF Public

Works Program

All districts

except

ILTPWP

For PWP-CCT

only; 483,582

beneficiaries

were reached

Vulnerable groups

capable of graduating

towards improved

livelihood

Wages

C-SAFE 23 districts Most vulnerable

households affected by

chronic illness

Cash-Food for

Livelihoods (WFP)

2 Districts 11,000 HHs

(2008/09)

Cash

Food-for-Work

and Cash-for-Work

(WFP)

550 HHs

(2010/11)

Wages in the form

of food and/or

cash

Source: Draft Effective and Inclusive Targeting of Social Support Programs in Africa Malawi Country Case Study

– Synthesis Report December 22, 2011


138

b. Community Fund: Community Savings and Investment Promotion

77. Savings and investment is a sub component under the Community Livelihoods

Support Component within the MASAF 3 APL II LDF Mechanism Project. Activities under

this sub component aim at creating opportunities for community savers and entrepreneurs

especially beneficiaries of Public Works Program to move into higher income trajectories hence

improve livelihoods and in the process graduate from safety nets and also become resilient to

shocks such as drought. The savings and investment interventions in the PWSP are a response to

closing the sustainability gap that exists in the implementation of PWSP. Over years the

implementation of PWSP tended to end at the disbursement of wages. This initiative brings in a

scope beyond the wage disbursement function. It has become a PWP Plus initiative that sustains

beneficiaries beyond the PWP implementation period.

78. Implementation of activities under this sub component follows a Graduation model

that entails these stages; Group formation: Institutional building: Financial Literacy:

Business Management: Cooperative/ Association management. At every stage of the

graduation model groups and members meet qualification criteria in order for them to move to a

higher level of services and receive capacity building support. As groups move to higher level of

services, their maturity improves and sustainability is ensured.

COMSIP Cooperative Union which evolved from a component under the Malawi Social Action

Fund (MASAF 3 APL I) is the implementing agency for the savings and investment activities.

The institution is a member-owned savings and Investment institution created to provide

financial services especially savings mobilization and investment promotion to the un-served and

underserved peri-urban and rural communities. The vision of COMSIP is to “create a culture of

vibrant, sustainable savings and investments amongst its cooperative societies in Malawi”. Its

mission is to “deliver flexible savings and investment products and services to economically

empower Malawians to improve their livelihoods through member owned savings and investment

cooperatives”.

79. Funds available for the savings and investment amounting to US$ 3.72 million have

so far been used to mobilize communities to form savings and investment groups; and to

build the capacities of communities and extension workers in financial literacy and business

management over a three year period. The beneficiaries of this initiative include communities

participating in Public Works program and other phased out community empowerment projects

such as the Skills and Income Generation Project funded by AfDB. A total of 3,298 groups have

been formed with 73,655 beneficiaries of whom 61% are female covering all the 28 Districts

Councils in Malawi. Over the three years, communities have mobilized MWK216, 703,999 in

savings. Average savings amount to MWK 2,942 per individual. These groups have opened their

bank accounts with commercial banks and this contributes towards their financial inclusion and

exposure to financial institutions for other financial services.

80. The savings mobilized have been invested by the groups for on lending to members

and in some cases for group investment such as bee keeping, piggery, irrigation farming


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among other group investments. The members in turn are using the savings to invest in small

scale enterprises. The types of enterprises include buying and selling of agricultural produce,

investment in livestock cash crop farming such as cotton, production such as bakery, winery, and

mushroom growing among others.

81. All the 3,298 groups which have been formed have gone through institutional

development to ensure group cohesiveness for sustainability of the groups. Further the group

members have been trained in Financial Literacy and Business Management and some have been

trained in cooperative member education and have been registered as cooperatives with the

registrar of Cooperatives in the Ministry of Trade and Industry. The training program in

Financial Literacy equips the groups with skills to enable them to manage group savings through

proper savings management procedures and record keeping, and also build individuals towards

money management and financial freedom, while the Business Management Training program

equips the groups with skills to enable them manage their businesses successfully. A total of

1,275 groups with 27,252 beneficiaries of which 65 percent are female have been trained in

financial literacy and business management. The skills gained have helped improve their

business performance and leverage more savings.

82. Results of the Beneficiary assessment study revealed that the savings and investment

initiatives has contributed greatly to the communities‟ access to savings and loans which has

resulted in employment generation through business ventures and has in turn led to improved

household welfare. The rural communities is poorly served by financial institutions and the

creation of the savings and investment groups has greatly improved access to financial services

provided by these groups. Through the COMSIP Union that provides support in products and

services suited to the community environment, banking alike services with associated

accountability tools have been embraced by various community members.

83. The perceived demand by communities to engage in savings and investment

activities is overwhelming. The AF II amounting to US$2.25million will be used to facilitate

the training of groups in financial literacy and business management to close the current gap

between groups that have been formed and those that require capacity building in this area which

currently stands at 32%. The funds will also be used to train the groups in higher enterprise

development initiatives such as value addition skills as such leveraging more savings and

improving their livelihoods. Additionally, the AF II will also be used to facilitate the formation

of more cooperatives from the PWP beneficiaries and affiliation of cooperatives to the COMSIP

Cooperatives Union for sustainability.

84. As more and more community members embrace the savings and investment

concept through the Public Works Program (PWP) Plus initiative and move into higher

income trajectories, their involvement will help create room for other community members to

enter into safety nets as they graduate from them. Thus the graduation model is geared to

nurturing community members understand their roles in moving out of their poverty through

activities initiated by them while getting initial support from government and donors.


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85. It has been observed that PWP assets once created during the period of

implementation, the maintenance of such structures is not considered and the creation of the

savings and investment groups cans be a source of community resource to take over the

maintenance as advocates of development in their respective villages. One of the tools that

COMSIP uses is the 8 Jobs that members of COMSIP need to adhere to and community

development is one such element in the 8 jobs. It will be encouraging bringing into practice this

type of intervention so that the created assets are sustainable as these are useful in conveying

products to markets; the very same products the members are producing.

ii. Component 3: National Institutional Strengthening (NIS) Fund (AFII: US$5

million; Total: US$12.2 million)

86. The component will finance national-level cross-cutting issues aimed at improving

accountability and transparency in the use of project resources. It will have two

subcomponents: (i) Technical Support Team to oversee project implementation, and (ii)

Knowledge Generation and Application to strengthen community participation in project

implementation and to document community experiences with service delivery. This

component will facilitate the dissemination of national guidelines for use by Local Authorities

and Community Organizations in project implementation, and strengthen community-level

fiduciary and accountability mechanisms.


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ANNEX 4: IMPLEMENTATION ARRANGEMENTS

A. Implementation of Environment and Social Safeguards under the MASAF 3 APL II

1. Introduction

87. Building upon the previous operations, the Malawi Social Action Fund III APL II

(MASAF 3 APL II) has in place both an Environmental and Social Management

Framework (ESMF) and a Resettlement Policy Framework (RPF) which were developed

and cleared by the World Bank to further guide the implementation of social and environmental

considerations and compliance with the triggered safeguards policies requirements.

88. The parent-project (MASAF) was assessed as an environmental and social category

B project due to likely sub-project activities such as the construction of teachers‟ houses

and rehabilitation of roads. It triggered three safeguards policies, namely OP/BP 4.01

(Environmental Assessment), OP/BP 4.09 (Pest Management) and OP/BP 4.12 (Involuntary

Resettlement) that led to (i) the preparation - in a participatory manner with various stakeholders

- of both an Environmental and Social Management Framework (ESMF) and a Resettlement

Policy Framework (RPF), and (ii) the public disclosure of the above, both in-country and at the

World Bank InfoShop prior to appraisal. Hence, since MASAF 3 APL II follows the same

footsteps, therefore the same triggered safeguards policies and instruments will be maintained.

89. However, it is important to note that while MASAF 1 and MASAF 2 focused

primarily on the delivery of social and economic infrastructure in support of the

government‟s poverty reduction targets, the MASAF 3 program is distinguished by its

emphasis on: (i) improving the capacity of communities to effectively manage sub-project

cycle activities and participate in local development in a meaningful way; (ii) enhancing the

capacity of local authorities to deliver services; and (iii) acting as a catalyst for enhancing

local government systems as part of the country‟s decentralization agenda. Under

Component 1: Community Livelihood Support Fund, the menu of possible investments includes

reforestation and tree felling activities. Under MASAF 3, in the past 5 years, reforestation

activities have yielded a total of 1.44 million ha in reforested areas across the country. The

intention and practice, to date, is for communities to harvest the indigenous species used in the

reforestation activities for household use to decrease deforestation and degradation of primary

forests. Indeed, in an effort to promote environmental sustainability, the project design mandates

that a minimum of 20% of the resources used by the communities from this Fund be applied to

environmental enhancement subprojects such as the aforementioned reforestation activities.

Under this Additional Financing, since the current cumulative impact of the MASAF 3

reforestation activities are relatively large in scale with respect to tree planting and harvesting,

and since the focus of the Additional Financing is to significantly scale up Component 1

activities, including reforestation and harvesting activities, OP 4.36 is triggered. Note, this OP

was not previously triggered at preparation of the MASAF 3 Program as it was not envisioned to

involve such a large area overall. Since OP 4.36 is now triggered, the GoM will, not later than

six months after Project Effectiveness, update the previously approved project ESMF to reflect


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the core considerations of this OP and include guidelines for preparation of forest management

plans for each community that uses this Fund for reforestation and harvesting activities. The

revised ESMF will be redisclosed in country and in the Bank‘s InfoShop.

90. These two project approved safeguard instruments (ESMF and RPF) will be

updated to address the core consideration of OP 4.36 and capture the new dynamic shift in

the targeted project areas along with the project‟s vision. Since this proposed project will be

operated as an Emergency response project, thus under the guidelines of OP 8.00, therefore, all

measures will be duly taken to ensure the above mentioned updates are done within the 6-month

―Grace Period‖ granted by the policy for emergency operations. Once updated, these will

ultimately be disclosed both in-country and at the InfoShop as prescribed by OP 8.00 policy

guidelines. Meanwhile, the project safeguards team will also ensure that based on the ground

context, the right updates are brought in the safeguards instruments prior to their public

disclosure.

91. Most of the envisaged environmental and social impacts that are being realized from

the implementation of the sub-projects under the MASAF 3 APL II are localized, site

specific, minimal, short term and can be mitigated. They include disturbance of soil from

digging of foundations and pits, localized air pollution resulting from site preparation for

construction, dust spray, especially during rehabilitation/construction, vegetation clearing during

site establishment, brick molding, and excavation of sand nearby river beds and quarrying for

quarry stone which leaves scars on the land that need rectifying.

92. The Malawi Social Action Fund 3 APL II LDF Mechanism is being implemented

through Local Development Fund Technical Support Team (LDF TST), a government inter

governmental fiscal transfer agency that has been established to coordinate financing and

implementation of Local development activities at Local levels. The implementation of

activities, including civil works under this project is done at district and community level.

Approach to Implementation of Environmental and Social management Activities

93. The implementation of Social and Environmental Management Activities under the

MASAF 3 APL II takes place at community level. The individual site specific ESMPs are

kept at the subproject level while the consolidated ESMPs for all the subprojects in each

district are kept at the district headquarters. As it has already been the case from the

beginning, the original project has an Environmental and Social Focal Point who works in

tandem with all the designated District Environmental and Social Officers whom facilitate the

screening of environmental and social effects of the project activities using a prescribed checklist

(See Annex 1 on page 39 of the MASAF Resettlement Policy Framework and Part D on page 40

of the MASAF 3 APL II Environmental and Social Management Framework) before the

commencement of the civil works. Through this assessment, the potential social and

environmental effects are identified, subprojects are categorized and appropriate additional

safeguards instruments prepared and disclosed accordingly. The District Environmental and

Social Officers in close consultation with both the beneficiary communities and project


143

management committees develop the Social and Environmental Management Plans (ESMPs) and

where necessary, the Abbreviated Resettlement Action Plans (ARAPs). As prescribed in the

World Bank operational safeguards policies and the ESMF, this screening is done systematically

for all subprojects that are to be funded in the recipient district/ Local Council. The District

Environmental and Social Officers then consolidate the respective individual subprojects ESMPs

into a blended district Social and Environmental Management Plan (ESMP).

94. Following is a table of the safeguards instruments that have been prepared,

consulted upon, and disclosed for the original project and the two Additional Financing

operations:

ESMF RPF EMPs

MASAF 3 APL II April 15, 2008 April 15, 2008 May 22, 2012

AF I May 27, 2010 May 27, 2010 July 3, 2012

AF II May 22, 2012 May 22, 2012 -

1.2 Outcomes of the Social and Environmental Screening

95. The outcomes of Environmental and Social Screening processes across districts have

revealed that there are a number of social and environmental impacts in sub project areas. As a result, the district authorities in consultation with the beneficiary communities have

developed ESMPs to adequately mitigate the negative effects while maximizing/mainstreaming

the positive ones. A number of mitigation measures are proposed in the ESMPs and implemented

by the communities themselves under the collaborative supervision of both the District

Environmental and Social Officer and the project Environmental and Social Focal Point. Some

of the identified social and environmental effects that have been identified include loss of top

soil, spread of dust, excavation of barrow pits, littering of soil rubble at the construction sites,

loss of vegetation, potential for spread of Sexually Transmitted Diseases and HIV/AIDS.

1.2.1 Implementation of Social and Environmental Management and Mitigation activities

96. Once the screening has been done and the potential social and environmental

impacts are identified, and an action plan developed, the District Council undertakes

training of the project management committees on how to deal with the identified impacts. The mitigation measures are implemented by the communities themselves. However, the project

management committees are also allocated resources equivalent to 2.5 percent of the total sub

project cost for administration and implementation of the social and environmental management

activities. A number of District Councils have submitted their ESMPs to the Local Development

Fund Technical Support Team for consideration. These include, among others, Karonga, Ntchisi,

Kasungu, and Dedza. A monitoring report for Karonga and ESMP for Kasungu districts are

attached to this report for further information.


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1.3 Outcomes of the Resettlement Screening

97. The outcome of the Resettlement Screening for all sub projects under the MASAF 3

APL II so far have indicated that there is no need to physically resettle people or restrict

access of any individuals to land. This has therefore not necessitated the preparation of any

Resettlement Action Plans by both the communities and the District Councils. The major

contributing factors to this is that MASAF supports the construction of teachers houses on pieces

of land that is already secured by and for existing schools. As such new pieces of land are not

required for construction of teachers‘ houses.

98. In addition, other works under the public works program involve the rehabilitation

of existing community roads. Under MASAF, no new roads, per se, are created due to the

short duration of the works (only 12 days). This means that no new road can be completed

within 12 days, especially so because only hand held tools such as holes and picks are used in the

rehabilitation of these roads. No heavy equipment is used in the proposed Public Works

Program. Owing to these two factors, no Involuntary Resettlement has taken place so far and

therefore no RAPs have been developed under the MASAF 3 APL II.

99. The Mid-Term Review Mission also noted that, no involuntary resettlement was

recorded by the subproject as: (i) most sub-projects, especially construction of teachers‘

houses and school blocks was being done on land that already belonged to schools; (ii) road

projects under the public works program involved very slight/minor rehabilitation of existing

roads hence issues of loss of assets, restriction to access to livelihood support means, or transfer

of land ownership did not arise. However, in projects like Sefu COMSIP group in Karonga

where the committee reported to have bought the land where they constructed a fish pond, the

mission recommended that compliance with RAP requirements would need to be followed up

and established as this was not completed during the MTR mission. The MTR team could not

review the relevant documents because they were not made available on the site at the time of

the MTR mission. The project safeguards team followed up on the matter and has received

formal evidence regarding the sale of land between the owner and the Sefu COMSIP Group.

2.0 Implementation Progress of Safeguards and measures for Improvement

100. The IDA‟s Implementation Support Missions to the MASAF 3 APL II identified a

relatively good capacity of Local authorities that needs to be further strengthened for

proper implementation of safeguard measures. In order to strengthen capacity on compliance

with environmental and social safeguards issues, various training workshop were organized

countrywide for all levels. By August 2011, eleven subject matter specialists per district had

been trained as trainers in social and environmental safeguards, to enable them to

cascade/replicate the training downwards to the extension workers who would then further train

the stakeholders including women, the poor and most vulnerable groups on the ground.


145

101. Specific points of training included (i) the relevance of the ESMF and the RPF; (ii)

public awareness raising, social and environmental inspections; (iii) audits and monitoring of

physical infrastructure; (iv) checking that the community activities are in line with District

Environmental Action Plans and (v) guidelines for appraisal and enforcement mechanisms. The

project management committees (PMCs) are also upraised on cross-cutting issues including

environmental and social issues prior to sub-project implementation.

102. The Midterm review of the MASAF 3 APL II confirmed the implementation of an

ESMF as required by the OP 4.01. However, environmental and social assessments were

implemented unevenly across sub-projects. The mission noted that the implementation of the

ESMF was not consistent and institutionalized in all projects and /or Local Councils across the

country. The Environmental and Social Screening Forms, the Environmental and Social

Management Plans (ESMPs), and reports, and Environmental Social Checklists were only

available in some council such as Karonga and Blantyre while evidence of the same could not be

found in Mzimba and Zomba. Generally environmental and social safeguards featured in the

quarterly progress reports unevenly and not in a systematic fashion. The preparation mission

rates the environmental risks to date as low to moderate.

103. As a result of the findings and recommendations of the MTR, the LDF TST noted

the challenges in the implementation of the Social and Environmental safeguards and has

developed a plan to improve the implementation of the same. The Additional Financing

preparation mission reviewed the plan and found it suitable for implementing and mitigating the

social and environmental issues. The rating for the safeguards at MTR was MU. Since

January 2012, a number of activities on the work plan have been implemented as detailed below.

The current rating is Moderately Satisfactory.

Table 6: Safeguards Action Plan for Implementing Social and Environmental Management

No. Action Responsible

institution

Time Frame Remarks

1 Communicate the findings

of the Mission to the

Implementing

agencies/Local Councils

LDF TST 31st January

2012

This was done in

all the four

regions and

completed by

May, 2012

through the face

to face meetings

held with the

districts

2 Train LDF TST staff in

Social and Environmental

safeguards

LDF TST February 2012 Done in March,

2012

3 Launch a Social and LDF TST September The Expressions


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Environmental Audit and if

any need for land is

identified under MASAF‘s

subprojects then the

guidance in the RPF will

suffice and RAPs will be

prepared accordingly.

2012 of interest for

potential

consultants have

been reviewed

and

recommendations

made to the

Internal

Procurement

Committee.

4 Train Frontline Staff in


Safeguards

LDF TST/ Local

Councils

June 2012 This is still under

plan- Local

Councils have

been requested

by the LDF-TST

to submit their

training budgets

by May 31, 2012.

5 Enforce use of

environmental and social

screening forms during sub

project appraisal

EDOs/ LDF TST Ongoing This activity is

underway for

new projects and

assessments are

underway for

previous

subprojects

6 Engage a consultant to

assess and document

compliance in environmental

and social safeguards in

existing projects

TST July 2012 Not yet due

7 Disseminate the Findings of


Audit study

LDF TST January 2013 This awaits

finalization of the

study

8 Develop a Safeguards

Action Plan for

implementing findings of the


audit report

LDF TST/ Local

Councils

January 2013 To be done after

the study is

completed

9 Monitor the Implementation

of the recommendations of

the Social and

Environmental Audit

LDF /TST Ongoing To be done after

the study

10 Allocate a separate Budget LDF TST June 2012 An average of


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line for implementing Social

and Environmental

Management Plans in the

BoQs

MWK50,000 has

been allocated in

the BoQs for

each sub project

to facilitate

monitoring and

reporting on

social and

environmental

activities by the

District

Environmental

and Social sub

Committees of

the District

Councils

11 Enforce Monitoring,

reporting and documentation

of Social and Environmental

Management issues

EDOs/ Local

Councils and LDF

TST

Ongoing This is ongoing

and it has been

made as a

conditionality for

release of

subsequent

funding tranches

to the district

Councils

12 Maintain a record of

implemented activities on

each sub project file

Local Councils Ongoing Ongoing and it

has become a

conditionality for

future funding

from the LDF

TST to the

Councils


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B. Financial Management Assessment

Summary

104. The MASAF Financial Management system has been rated as Moderately

Satisfactory. The financial management objective of the MASAF Midterm Review (MTR)

mission was to assess the continued adequacy of the financial management system. The project

has been submitting interim financial reports on time and in the agreed format and content except

for quarters ended Sept 30, 2011 and December 31, 2011 where the IFRs had some problems due

to lack of separation of two different loans. The Audited Financial Reports have been prepared

and submitted on time for all the years except for the year 2011 when reports were submitted two

months late. All the reports have carried a clean audit opinion.

105. There are a number of challenges that still need addressing:

i. At the design stage of the project it was recognized that FM capacity was weak in the

District Councils and one of the sub-component was targeted at the addressing this.

The FM staffing in the districts remains weak. The National Local Government

Finance Committee (NLGFC) and Ministry of Local Government should focus on

strengthening the FM staffing in all districts.

ii. While funds flow has generally worked well, a good number of councils and

communities face problems with some of the commercial banks which are failing to

provide timely bank statements.

iii. Another major issue requiring urgent action is replacement of an accounting system

at the TST. The Sun System package that was being used got corrupted when the

project was trying to upgrade the operating system. It is clear that the controls that

were employed during the upgrade were weak leading to corruption of both the

operating system and the Sun System. The problem was exacerbated by having only

one back up that was also corrupted during the same time. This problem occurred in

May 2011 and since then the LDF has been processing and producing reports

manually. The project has now bought TOMPRO accounting package and the system

is operational.

ISR FM Rating

106. The Financial Management system has been rated Moderately Satisfactory.

FM Risk Rating

107. There has been no change in the FM risk. The Project FM risk is still at Substantial.


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FM REVIEW: FINDINGS AND ACTION PLAN

Budgeting

108. The TST, working with the NLGFC takes the leading role in consolidating budgets

of the Project‟s implementing agencies. The TST has an established system for analyzing

variances from budget. This tool was included in the SUN system to ensure that Local

Authorities‘ budgets were closely monitored. It is important that this same tool is maintained in

the new package. It is only through this measure that Local Authorities can ensure that Projects

are completed within the allocated budget. The automation of accounting systems in the Local

Authorities would allow for faster and more reliable financial information; and proper

monitoring of budget execution of the entire Project.

Accounting

109. The TST was supposed to migrate to EPICOR system within the MoF used by

government for its disbursement and financial reporting. This move was meant to enable the

TST to use the government IFMIS system. To date this arrangement has not materialized and the

TST has been using the SUN system for accounting and financial reporting purposes up to May

2011. The SUN system had the functionality to capture and report transactions in a multi donor,

multi components and sub components and in a multi cost category environment. The new

package will incorporate these features.

110. A significant number of the District Councils are not yet on IFMIS. To date IFMIS

has been rolled out to 27 District Councils. Seven councils are yet to be considered for IFMIS.

The District councils which are not on IFMIS are either doing their accounting manually or using

other accounting software packages.

Staffing

111. Significant progress has been made to address capacity FM gaps at the District

Council level through recruitment of Financial Analyst under Irish Aid. The Financial

Analysts are working in support of Director of Finances. The Financial Analyst positions are

not permanent. It is important that steps are taken to ensure that there is continued capacity after

the expiry of Financial Analysts‘ contracts. Most of the District Councils have significantly

improved their staffing capacity after integration of sector ministries into the councils even

though the integration has not been formalized.

112. Staffing problems persist under internal auditing with only 10 out of twenty eight

district councils filled with the Internal Auditor position. The ten auditors are assisted by

Central Internal Audit Unit to cover all the district councils. The City/Municipal Councils have

their own internal audit functions and are all working well.


150

Internal Control and Internal Audit

113. The internal control systems of the District Councils and TST were reviewed and

assessed during the mission as adequate. However, it was noted that controls would be further

strengthened by filling Internal Audit vacancies. Currently the staffing constraint is partially

mitigated as explained above.

Funds Flow and Disbursements

114. The District Councils are operating LDF Bank Accounts which are running on a

Credit Ceiling Arrangement which is used for all Government bank accounts. There have

been delays in the flow of funds to the communities through this system due to lack of proper

knowledge of how the credit Ceiling arrangement works. It was expected that with time, the

system would work well and communities would have the funds at the right time. The flow of

funds takes a long route from MoF to communities passing through LDF, NLGFC and District

Councils. Most local councils are using MSB for operating bank accounts. MSB has problems in

producing timely bank statements and this affects verification of bank transactions and

reconciliations. The Accountant General has promised to discuss this issue with the concerned

bank and come up with a lasting solution.

115. Disbursement has been based on six months forecast reflected in the IFR. Due to

lack of a proper accounting system and errors experienced in recent submission of IFRs, it was

agreed that the project should revert to SOE based disbursement.


151

Funds Flow Diagram

Public works Suppliers

IDA CREDIT

DESIGNATERD Account in Dollars

LDF-Malawi Kwacha Holding Account at RBM

LGFC-Malawi Kwacha Holding Account at RBM

Local Authority Operating Bank accounts with

Commercial Banks

LDF Operating Accounts with Commercial Bank


152

Financial Reporting

116. The Project is up to date with IFRs. The IFRs have consistently been of good quality in

substance and form and are being submitted in a timely fashion. The quarters of September and

December had IFRs with problems due to lack of separation of reporting for two different loans.

This problem has now been addressed.

External Audit

117. The project has been producing audited accounts with a clean audit opinion. The

accounts have been submitted on time except for 2010 when the accounts were submitted after

December 31, 2011.

FM Action Plan

Issues Agreed Actions By who When

1.

Replace the crashed

accounting package

TST June 30, 2012

2.

Ensure bank statements

are received regularly

TST/NLGFC March 31, 2012

3.

Fill vacant positions NLGFC Sept 2012

C. PROCUREMENT

118. The implementation of procurement activities under MASAF 3 APL II and APL II

Additional Financing has been successful. However, the project will now use streamlined

procedures under OP 8.00 which is defined in the agreed procurement plan for activities to be

carried out at the national level by TST. Procurement capacity enhancement activities at the

council and community levels will continue to be broadened and strengthened. The

MASAF/LDF Technical Support Team at the national level will provide oversight while the

local councils will support procurement management at the sub-project level.

119. Given the demand-driven nature of the subprojects, community-level procurement

will not be planned up front. However, guidelines, rules, procedures, and process steps have

been agreed on and are incorporated in the Local Development Fund Procurement Handbook.

The procurement plan for the original project was updated at appraisal to reflect the

requirements for the Additional Financing to cover additional studies, equipment, and staff. A

Procurement Plan for the proposed AF II has been aggred upon with the Govenment.

Attachment C: Irrigation Rural Livelihoods And Agricultural Development Project

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ATTACHMENT C: SECOND ADDITIONAL FINANCING FOR IRRIGATION RURAL

LIVELIHOODS AND AGRICULTURAL DEVELOPMENT PROJECT (IRLADP)

I. Introduction

1. This Project Paper seeks the approval of the Executive Directors to provide an

additional financing, in an amount of SDR 33.20 million (US$50 million equivalent),

consisting of SDR 16.60 million additional grant (US$25 million equivalent) and SDR 16.60

million additional credit (US$25 million equivalent) to the Republic of Malawi for the

Irrigation Rural Livelihoods and Agricultural Development Project (IRLADP) (P084148) [Grant

No. H1900-MAI]. This will be the project‘s second additional financing (AF II).

2. The proposed AF II forms part of a rapid response package to the Government of

Malawi (GoM), which has embarked on difficult economic reforms. The AF II for IRLADP

responds to GoM‘s request dated April 26, 2012, to: (i) scale-up a number of its activities from

11 to 28 districts; (ii) consolidate project achievements and successes; (iii) prepare a future

irrigation investment framework; and (iv) extend project duration beyond its current closing date

of June 30, 2013. A contingency window is being added as part of the restructuring of the

package under AF II. The justification for inclusion of this AF II in the rapid response program

is the cushioning effect that the large scale up of the Inputs for Assets Program would have on

approximately 230,0000 additional poor rural households, providing them with much needed

inputs and community assets that increase their resilience. Non-emergency elements that are

included would enhance a strategic program to address climate resilience in rural livelihoods in

the mid- and long term. This scale-up complements other elements of the GoM‘s rapid response

program through a short-term increase in the budget allocation to the Farm Input Subsidy

Program (FISP) and the permission for tobacco farmers to exchange their foreign currency

earnings at the prevailing market exchange rate. The last measure is an immediate response

mechanism, the FISP and Inputs for Assets (IFA) increase will support rural livelihoods

throughout the first year and both IFA and irrigation support under IRLADP upscaling will

throughout the first few years and thereafter support more resilient, diversified and sustainable

livelihoods. . The proposed IRLADP AF II is consistent with the parameters of OP/BP 8.0 and

OP/BP 13.20 related to emergency AF operations. Overall project performance of IRLADP

(original and AF) is currently rated as satisfactory for the achievement of project development

objectives (PDO) and implementation performance (IP). The project is in substantial compliance

with loan covenants and the AF is economically justified.

3. Under the Comprehensive Africa Agriculture Development Programme (CAADP)

process, GoM has developed and adopted the Agricultural Sector Wide Approach

(ASWAp), which provides a framework for further investments across the agriculture sector.

The World Bank financed ASWAp-Support Project (ASWAp-SP) has played a crucial role in the

preparation of the ASWAp. IRLADP was designed and approved before the ASWAp was

developed, but has de facto become part of the ASWAp investment framework. The

restructuring and second additional financing of IRLADP will also be used to further align the

project with the ASWAp. The proposed AF also responds adequately to the objectives of the


154

World Bank‘s Africa Strategy, in particular the second pillar “Vulnerability and Resilience” by

helping Malawi to get better prepared to address dry spells and droughts, reduce food shortage

and mitigate climate change. To strengthen this aspect of the project, a rapid response financing

window will be introduced which can be used for future emergencies.

4. The project is being restructured to reflect changes in the project design, including

revised PDO, an additional component, a revised and updated results framework,

implementation arrangements, and fiduciary arrangements. The proposed AF II would

more than double the number of poor rural households benefiting from the project from an

originally targeted 196,550 to approximately 500,000. The project closing date has been

extended from June 30, 2012 to June 30, 2013. The closing date will be further extended under

the proposed AF II to December 31, 2014.

II. Background and Rationale for Additional Financing

5. Background. Persistent external imbalances compounded by reduced donor inflows, low

tobacco proceeds and other supply-side bottlenecks have contributed to the weakening of

macroeconomic performance over the past year. This has, in turn, contributed to a widening of

balance of payment and budget gaps and the slowdown in real economic activities resulting in

persistent fuel supply and foreign exchange availability constraints. However, with a recent

change in political leadership, Malawi has opened a new window of opportunity to implement

reforms to address serious and long-standing economic and governance challenges. The GoM

has already reached out to key stakeholders including civil society, Development Partners, and

countries in the region indicating that its top priories are to address economic, security and social

concerns. On the economic side, the GoM supports urgent steps to restore macro stability, and

would support flexible exchange rates, with full attention to its impact on the poor. Substantial

discussions have commenced with the International Monetary Fund (IMF) on addressing the

restoration of its program, and with the Millennium Challenge Corporation (MCC) to revive the

energy compact. This proposed AF II is part of the World Bank‘s support to the rapid response

economic package and primarily intended to support the rural poor, cushioning them from the

current economic hardships, as well as consolidate and prepare irrigation investments for longer

term sustainability of the sector.

6. Agriculture remains the main source of growth and exports in Malawi. With 85 percent

of the population residing in the rural areas, the sector accounts for over 80 percent of the

country‘s employment, over one-third of the Gross Domestic Product (GDP), and about 80

percent of merchandise exports. The primary staple for most of these households is maize. Over

70 percent of all farmers in the country cultivate less than one hectare (ha) and a significant

number of these farmers still struggle to produce enough food to meet their annual consumption

requirements. Agriculture remains dominantly rain fed and dependent on one short and variable

annual rainy season. The country continues to experience severe dry spells, especially in the

southern region, rendering a significant number of households perpetually food insecure. The


155

largest and most costly investment program in the agriculture sector is the FISP which is

designed to attain food security and is targeted towards the poorer households. The FISP has

been successful in many ways64

, but is also relatively costly and dependent on both imports and

favorable weather conditions, while rates of malnutrition and especially stunting levels among

children, remain high. In areas where production has been good, poor roads have often

prevented the marketing of surpluses.

7. High population density and poverty have led to significant human pressure on the

environment and degradation of Malawi‟s natural resource base, notably land and forests. The growing population increases the land area under cultivation and exploits forests and

woodlands for firewood and charcoal production. The resulting deforestation, run-off, flash

floods, soil erosion and sedimentation, are serious threats to the environment and natural

resource base. These problems are a direct result of unsustainable land use and management

practices, and insufficient soil and water conservation measures.

8. The GoM gives high priority to sustainable agricultural land and water

management, including irrigation development, which reduces dependence on favorable

weather conditions, while boosting productivity. The ASWAp aims to increase the area under

sustainable irrigation from 72,000 ha to 280,000 ha, through the Green Belt Initiative65

. Support

to a thriving irrigated agriculture sector is predicated on a demand-driven, service oriented

approach with the full participation of farmers and commercial interests, as spelled out in the

National Irrigation Policy and Development Strategy (NIPDS). This has to take place in the

context of ongoing economic and civil administrative reform and an over-arching need to shift

from a centralized (top-down, supply-driven) system to a de-centralized (bottom-up, demand-

driven) planning, development and management system in the irrigation sub-sector. The GoM

and Development Partners have started a number of initiatives for irrigation financing and

development, and while IRLADP has pioneered some of the reforms, irrigation development is

still haphazard.

9. Current Project. The original IRLADP was financed by an IDA Grant (US$40 million),

and was co-financed by an International Fund for Agricultural Development (IFAD) loan in the

amount of US$8 million and Government‘s and beneficiary counterpart funding in the amount of

US$4.5 million. The original PDO was to: (i) raise agricultural productivity and net incomes of

64 See recent DfID and AfDB evaluations of FISP. (i) Evaluation of the 2010/11 Farm Input Subsidy Programme –

School of Oriental and African Studies and Wadonda Consult for DfID – August 2011. (ii) The Agricultural Input

Subsidy Programme – Experiences and lessons- Economic and Sector Work - African Development Bank

(Department of Agriculture and Agro-Industry - Development Research Department - Regional Department South)

– October 2011.

65 The Green Belt Initiative is a Government‘s Programme which aims at using the available land and water

resources to increase agricultural production and productivity mainly through irrigation along Lake Malawi.


156

approximately 196,550 poor rural households in 11 target districts of Malawi in a sustainable

manner by providing an integrated package of support covering irrigation,

agricultural/irrigation advisory services, marketing and post-harvest support; and (ii) strengthen

recipient institutional capacity for long-term irrigation development. The main project activities

include rehabilitation of irrigation infrastructure and provision of a package of technical and

advisory services for sustainable small-scale irrigation. The original four IRLADP components

were:

(i) Irrigation Rehabilitation and Development and Catchment Conservation, which supports

rehabilitation and gradual management transfer of four Government-owned schemes to

farmers; development of new small-scale gravity and mini-scale schemes; rehabilitation

of small reservoirs; and construction of 400 group civil works for water harvesting and

catchment conservation on a demand-driven basis.

(ii) Farmer Services and Rural Livelihood Fund (FSLF), provides support to beneficiary

communities, especially those around the irrigation schemes to obtain complementary

services66

needed to optimize returns to irrigation farming and access markets for their

produce.

(iii)Institutional Development and Capacity Enhancement, supports restructuring,

strengthening and/or formation of smallholder farmer organizations or water user

associations for irrigation transfer, management and related activities aimed at ensuring

the sustainable operation and maintenance (O&M) of rehabilitated schemes, and also

supports limited policy and institutional capacity building measures in the MoAFS and

MoWDI aimed at strengthening irrigation planning, design and supervision capacity.

(iv) Project Coordination, Monitoring and Evaluation of project implementation and

ensuring that the project‘s funds are used for its intended purposes.

10. First Additional Financing (AF I). The first additional Credit in the amount of SDR 8.6

million (US$12.7 million equivalent) (Credit No. 48060) (First Additional Financing or AF I)

was approved by the Board of Executive Directors on September 20, 2010 and became effective

on June 17, 2011. With the AF I the percentages of co-financing were revised to reflect the

higher share of IDA financing. The IFAD loan is expected to be fully depleted by the original

project closing date of June 30, 2012. The additional IDA financing was accessed through the

Crisis Response Window (CRW). The AF was sought to cover cost overruns and to ensure

completion of planned rehabilitation of irrigation infrastructure and provision of a package of

technical and advisory services designed to build capacity for sustainable small-scale irrigation

development. The PDO was simplified (based on the version in the original Grant Agreement)

but in substance remains the same as the original. The revised PDO was to: (i) increase

agricultural productivity and incomes of approximately 196,550 poor rural households in the 11

participating districts and (ii) strengthen recipient institutional capacity for long-term irrigation

66 Such as extension/technology transfer, inputs and marketing including post-harvest assets.


157

development. No changes were made to the project‘s original design in terms of component

structure.

11. Performance of the current project. Implementation progress is satisfactory. Slow

progress related to incorporation (legal establishment) of Water User Associations (WUAs), and

delays in the completion of some irrigation works contracts contributed to downgrading the PDO

from satisfactory to moderately satisfactory in 2011. Many of the delays in disbursements in the

last year were due to the difficult economic circumstances that resulted in lack of forex, fuel and

critical building materials. During the April 2012 mission, it was noted that all the incorporation

documents were complete and had been processed by the Ministry of Justice, thereby meeting a

long outstanding covenant. Although most of the irrigation works contracts have been

completed and some are being launched and handed over to WUAs, there are 2 large irrigation

schemes and some small-scale schemes that are still lagging behind. These are likely to be

completed soon but beyond the scheduled contract period and beyond the original project period.

Most of the causes for delays have been addressed and availability of fuel and building materials

has improved. Given the good progress, implementation progress was again rated satisfactory.

The project has now reached 303,929 beneficiaries, higher than the original target.

Disbursement under the original IDA grant stands at 99.8 percent with SDR 27.5 million

disbursed from the SDR 27.6 million allocation67

. However, the IDA credit under the AF I

(SDR 8.6 million) has not yet disbursed due to a delayed project effectiveness. As a result, the

combined disbursement rate is lower at 76.1 percent.

12. Rationale for AF II. The key rationale for GoM‘s request for additional financing of

IRLADP under the rapid economic response package is that a nationwide scale up of project

activities can have a cushioning effect and enhance development impacts on the rural poor in all

28 districts while difficult economic reforms are undertaken. It would also consolidate the gains

by IRLADP to irrigated agriculture, and prepare for future investments in the irrigation sub-

sector, which is an implicit element of the PDO and a key recommendation on implementation

readiness from the 2010 Quality Assurance Group (QAG) review, but which has so far not

received financing. The proposed IRLADP AF II is aligned with the new Country Assistance

Strategy (CAS FY13-16) under preparation as it addresses the pillar of promoting sustainable,

diversified and inclusive growth, through the outcome of increased productivity and

diversification in agriculture. The project is also consistent with the principles of the ASWAp,

developed through the Bank financed ASWAp-SP.

13. Several financing alternatives were considered. Among them were: (i) possible

restructuring of ongoing agricultural projects; (ii) a no project option; and (iii) the option to

channel support through a new investment lending operation. The first option to restructure

ongoing agriculture projects was rejected as IRLADP was about to close and the ASWAp-SP has

a different set of objectives and implementation arrangements that does not lend itself to

67 Client Connections – May 16, 2012.


158

emergency assistance. The no project option was dropped as the potential impacts on the rural

poor were large and too acute to not justify an urgent scale up operation in support of rural social

safety nets. Finally, a new operation would not only require more preparation time but it would

not build on the well-performing IRLADP structures at national, regional and district levels to

enable the fastest response.

14. Additional financing to IRLADP has the benefit of using a well established project

mechanism that is geared towards diversified support to rural poor, has demonstrated its

efficacy and satisfactory progress as well as its management and fiduciary controls, and is

therefore considered the appropriate channel for rapid rural response.

III. Proposed Changes

15. The PDO will be revised to enable the scaling up of both, the number of beneficiaries and

the number of districts and to simplify the measurement of agricultural productivity as the key

objective rather than rural income. The original intent of the PDO remains therefore unchanged.

No changes are made to the project‘s original design in terms of component structure, except for

the addition of a fifth component on contingency disaster risk response. The revised PDOs are

to: (i) increase agricultural productivity of poor rural households in all districts; and (ii)

strengthen institutional capacity for long-term irrigation development.

16. Results Framework. The revised results framework has been expanded to reflect

additional activities and an additional component. The revised PDO indicators reflect the

different dimensions of the PDO (see Table 1 below as well as Annex 1).

Table 1: Revised PDO Indicators

PDO indicator Original target

AF I

Changes with

AFII

Crop yield for irrigated maize

Crop yield for irrigated rice

2.5 t/ha

1.5 t/ha

3.2 t/ha

2.0 t/ha

Increase in farm sales in targeted rural households for

irrigated maize and rice (% increase in LCU)

40% 40%

Adoption of harmonized investment framework for irrigation

sector by DoI, linked to ASWAp

N/A Y

Direct project beneficiaries (number), of which female

(percentage)

196,550

(40%)

500,000

(40%)

17. Changes to Project Components. The number of project components will increase from

four to five to accommodate the new component for disaster risk response. Other new activities

are accommodated through their inclusion under existing components. Table 2 below provides a

summary to component changes.


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Table 2: Changes to Project components and subcomponents

Original components and

activities

Modified or new components

and activities supported

through AF II

Comments

1. Irrigation rehabilitation and

development and catchment

conservation

1. Irrigation rehabilitation

and development and

catchment conservation

Continued

Selective rehabilitation and

development of small scale

irrigation schemes

Selective rehabilitation and

development of small scale

irrigation schemes

Continued

Rehabilitation of existing

small storage reservoirs

- Dropped at MTR

Small scale farmer demand-

driven rainwater harvesting

and catchment conservation

Small scale farmer demand-

driven rainwater harvesting

and catchment conservation

Continued

- Preparation for future

investments

New Activity

- Support to water use

efficiency in existing

schemes

New Activity

2. Farmer Services and

Livelihoods Fund

2. Farmer Services and

Livelihoods Fund

Continued

Support for extension Support for extension Continued, now also includes community

mobilization and sensitization

Support for Inputs for Assets

(IFA) Program

Support for Inputs for

Assets (IFA) Program

Continued

Support for marketing and

post-harvest assets

Support for marketing and

post-harvest assets

Continued, now also includes support to

Marketing Development Unit

3. Institutional development

and community mobilization 3. Institutional development

and Capacity Enhancement Continued, but new title reflects that

Community Mobilization is covered under

Component 2

Irrigation water management Irrigation water management Continued with specific sub-activities on

Capacity enhancement to public irrigation

service delivery; and Water User

Associations and Irrigation Management

Transfer

Capacity building for farmers

and community mobilization

and sensitization

Merged with activities under Component 2

Support to Ministry of

Agriculture Marketing

Development Unit

Merged with activities under Component 2

Support to Bunda College,

Natural Resources College

and other MOA Training

Merged with activities under Irrigation water

management within this component

4. Project Coordination,

Monitoring and Evaluation

4. Project Coordination,

Monitoring and Evaluation

Continued

5. Contingency for Disaster

Risk Response

New Component


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18. Below, the additional activities are presented as per the original and maintained

component structure, and have been justified on grounds of: (i) scaling up the social safety

net function (US$29.45 million); (ii) consolidating the project‘s gains (US$9.40 million); and

(iii) preparation for new investments in the sector (US$8.10 million). In addition, there is further

support to program management and M&E (US$3.05 million). The contingent financing window

(new fifth component) will be US$0, as it provides a reallocation draw-down facility.

19. Component 1: Irrigation Rehabilitation and Development and Catchment

Conservation (US$12.50 million), the AF II would support four types of activities:

(a) Preparation for future investments (US$8.10 million): Prominent will be a strategic study on

the future of irrigation development and management in Malawi. The strategic study will help to

inform a comprehensive investment framework and master plan for irrigation development68

.

Specifically, AF II would support a consultancy study on integrated investment planning, based

on (i) an assessment of irrigation potential (biophysical) in Malawi, disaggregated by Water

Resources Area, typology of irrigation and irrigation technology; (ii) an investment framework

based on an elaboration of a typology of irrigation categories, prioritization scorecards,

implementation arrangements and required capacities, general guidelines for investment planning

and environmental and social safeguards; (iii) an investment roadmap and pipeline with

(pre)feasibility studies, terms of references (ToRs), bidding documents and preliminary

participatory agreements, and (iv) a technical and financial assessment of the cost of irrigation,

and options to reduce costs, which are considered high as compared to regional benchmarks69

.

This support would further include a set of (pre)feasibility studies for different types of irrigation

and would also include support to a comprehensive set of feasibility and other studies

(environmental, financial, institutional, land tenure) for the proposed Shire Valley Irrigation

Project (SVIP)70

.

68 Malawi has considerable irrigation potential, but it is poorly identified and prioritized. There have been a number of studies,

but these have mainly supported disconnected irrigation development interventions, without addressing the breadth and width

necessary for a national irrigation planning and investment framework. The last comprehensive assessment dates back from the

1980s (National and Shire Irrigation Study). The absence of such planning in turn has led to a haphazard and isolated approach to

feasibility studies for specific investments which have both precluded a prioritization at national level and have caused delays in

project implementation.

69 The ToR for this study will be based partly on work already carried out under the Water Sector Investment Plan, and the water

resources analysis will be based on the recent Water Resources Investment Strategy, (MWDI, 2011) and other water resources

assessments. The analysis will also be carried out in close coordination with the planned Agriculture Public Expenditure Review

(AgPER), funded by the World Bank. The AgPER will analyze the alignment of the budget with the ASWAp which includes

irrigation as one of the priority areas for investments. These two exercises will constitute useful contributions to an overall

irrigation investment prioritization exercise.

70 Studies for the SVIP will follow the roadmap that was proposed in January 2011 and adopted by Government in a letter dated

January 20, 2012. Support to the roadmap will be closely coordinated with the support by the African Water Facility through the

African Development Bank (AfDB), and other potential stakeholders. Support to SVIP will be subject to a favorable assessment

of water resources availability, currently ongoing by MWDI under the Shire River Basin Management Program.


161

(b) Selective rehabilitation and development of small scale irrigation schemes (US$2.30

million): The AF II would support a modest scale up of support to Small Scale Irrigation,

funding construction of a limited number of schemes that have already been designed and for

which cost estimates, Environmental and Social Management Plans (ESMPs) and bidding

documents have already been prepared and are ready for tendering. This would cover about 250

ha of small scale schemes.

(c) Support to water use efficiency in existing rice schemes (US$0.60 million): Under this

activity there will be limited infrastructure development support to increase water use efficiency

in existing rice schemes beyond the 4 schemes supported under IRLADP. Investments will be

incremental in nature, and support interventions for improved water management as they would

be supported under Component 2, and institutional support under Component 3 with minor

infrastructure investments in flow measurement devices (flumes) and minor upgrading of flow

distribution infrastructure (gates, distribution boxes, etc).

(d) Small scale farmer demand-driven rainwater harvesting and catchment conservation

(US$1.50 million): AF II will support limited expansion of catchment conservation activities

beyond what was already planned in the critical hotspots upstream of the supported irrigation

areas. This means that more hotspots and catchments for new irrigation areas will be supported

by the project. The proposed scale up will further ensure the environmental sustainability of the

schemes, reduce inflow of silt and in time increase the base flow in rivers. The AF II will also

consolidate and follow-on support to the current activities under the rainwater harvesting and

catchment conservation programs in the targeted catchments, and especially support the

establishment of a geographic information system (GIS) based planning, M&E framework.

20. Component 2: Farmer Services and Livelihood Fund (US$30.90 million), will scale-up

support towards the IFA program to help farmers raise their productivity through increased

cropping intensity and diversification in their agricultural livelihoods, both in the wet and the dry

season, thereby helping them avert food shortage. It further supports beneficiary communities,

particularly those covered under the irrigation schemes, to obtain complementary services and

goods for optimizing their returns from irrigated farming, to add value through micro-processing,

to improve the marketing of their produce, and to build their technical and business capacities.

Support provided is demand-driven based on proposals elaborated by eligible beneficiary groups

and approved by District Councils. Implementation is organized in three windows:

(a) Support for extension (US$2.95 million): will provide additional agricultural technical

advice to beneficiary producers with a focus on consolidating results achieved so far on

irrigation infrastructure rehabilitation or construction. Particular attention will be given

to increasing rice productivity71

by supporting the implementation of farmer-led

71 Focusing on four critical agronomic performance elements: (i) cropping techniques in connection with water management and

promotion of the system of rice intensification (SRI) to improve productivity while reducing water consumption; (ii) testing and

introduction of improved and high performing rice varieties; (iii) development of locally-produced rice seeds; and (iv)

introduction of animal-drought equipment and power tillers for soil preparation and transportation and other small cropping


162

demonstrations and on-farm trials through the farmer field schools and farmer business

schools which are already functional. AF II will also scale up the lead farmer approach

by increasing the coverage of farmers reached through project extension activities. It will

continue providing basic support to community mobilization, beneficiary sensitization

and farmer group dynamic to ensure strong commitment to project objectives, ownership

of activities and sustainability of investments. Based on the ongoing experience of

ASWAp-SP, the AF II will finance budget programs designed by MoAFS departments

for implementation through Agricultural Development Divisions (ADDs) and District

Agricultural Development Officers (DADOs).

(b) Inputs for Assets (IFA) Voucher Program (US$25.65 million): will scale-up support

towards the IFA program to help farmers raise their productivity through increased

cropping intensity and diversification in their agricultural livelihoods, both in the wet and

the dry season, thereby helping them avert food shortage. So far, the project has reached

over 192,000 beneficiaries. The planned allocation for this component from AF II is to

cover for IFA programs in all districts in the country, reaching an additional 230,000

beneficiaries in the coming growing seasons72

. In order to accommodate this massive

scale up of the IFA component, as well as to incorporate lessons learnt from the

implementation of IFA over the past years the following changes are proposed to the IFA

component:

Be more selective and strategic in the selection of assets to be constructed or

rehabilitated. By and large, the focus will be on construction or rehabilitation of

feeder roads and mini-scale irrigation. This will enable higher quality and

oversight through streamlined procedures and guidelines, and also focus activities

on assets that present demonstrable returns on the investments73

.

For roads and irrigation works embark on a planning process ahead of site

selection, and identify parallel investments (beyond the labor intensive works

element) in terms of small scale infrastructure (culverts, river crossings, small

equipment to reduce drudgery in irrigations schemes. The Project will use technical expertise from DARS, DAES and Crops

Department to: (a) analyze current farmer practices and identify key constraints to rice productivity increase; (b) design

techniques and extension messages to be disseminated to farmers; (c) liaise with rice variety research programs in Malawi and in

the region, as well as seed companies, to identify high potential (yield/market demand) rice varieties to be tested on-farm and

demonstrated to farmers; (d) design and implement through DADOs on-farm trials, demonstrations and farmer try-outs based on

the approach developed under ASWAp-SP; and (e) elaborate a seed multiplication scheme in coordination with farmer

organizations and seed companies interested in rice seed production.

72 2012 rainy season, 2013 dry season, 2013 rainy season, 2014 dry season and the 2014 rainy season.

73 Construction of mini-schemes will follow guidelines developed under IRLADP and focus largely on the

upgrading of ‗self-help‘ mini scale irrigation schemes which have been developed across the country, which need

further investment and rationalization of their design to improve the efficiency and the impact of the schemes.


163

weirs, distribution and drop structures, pipeline sections) that are necessary to

complete a sustainable infrastructure intervention.

Spread the period of work so that not all supervision works needs to be done in

the same short period of time. The work period of 20 days will remain unchanged

for an individual activity and beneficiary, but the activities will be spread over the

year, while the voucher is still redeemed at the onset of the growing season.

To further support diversification the inputs package will be broadened, giving a

choice to beneficiaries between a maize input package (the traditional package

with seeds and fertilizer), a legumes package, a cotton package or a small

livestock package (ruminants or pigs), and potentially others.

Targeting of beneficiaries will be more closely coordinated with the FISP

secretariat within MoAFS to ensure widest possible impact. Quality assurance of

the IFA program will be enhanced by recruiting an IFA coordinator within the

Project Coordination Unit (PCU), and to establish close technical linkages with

Public Works programs and the Department of Irrigation (DoI). Asset

maintenance committees will be formed to enhance sustainability of the asset.

This program will fund the procurement and supply of the input packages

(fertilizers, seeds, livestock, equipment); the procurement of necessary tools and

equipment for labor intensive works on the assets, community based procurement

for works (by artisans, local contractors) to complement the labor intensive

unskilled IFA works; design, supervision and coordination of the program works

and voucher administration.

(c) Support for marketing and post-harvest assets (US$2.30 million): Through a matching

grant mechanism, the project has supported 75 farmer groups in developing income

generating activities through the acquisition of marketing and post-harvest equipment74

.

The AF II will: (i) provide additional managerial and technical assistance to these groups

to consolidate results achieved so far and ensure their sustainability beyond project

closure; (ii) extend the approach developed so far to reach out to more farmer groups and

cooperatives as a way to strengthen producer access to markets, to add more value into

production through agricultural produce processing, proper handling, storage and

packaging; (iii) support cooperatives in organizing proper input supply to access fertilizer

and seeds, as well as veterinarian medicines, fodder and feed for groups in livestock

production; (iv) closely monitor eight Market and Agribusiness Information Centers

established by the project to confirm farmer interest, check replicability and assess

74 Supported activities cover poultry and dairy production, post-harvest processing (rice milling mainly) and

transformation (bakery, cassava, juice).


164

sustainability beyond project closure 75

; and (v) fund the preparation and implementation

of Environmental and Social Management Plans (ESMPs) related to Farmer Based

Organization (FBO) activities. Based on the approach developed so far, AF II will

provide grants to FBOs on a demand-driven basis with a minimum expected beneficiary

contribution of percent (in cash, in kind or both)76

.

21. Component 3: Institutional Development and Capacity Enhancement (US$3.55

million), will focus on consolidation of the capacity building gains and help ensure that capacity

for irrigation development and management is maintained, through two sets of activities under

irrigation water management:

(a) Capacity enhancement to public irrigation service delivery (US$1.75 million), which will

support:

Elements of the DoI‘s training plan, and include short courses, three MSc degrees in

regional/international universities on integrated irrigation management and scheme

design.

The provision of a pilot short term course for fresh graduates from Bunda College,

Polytechnic and Natural Resources College on practical principles of irrigation design,

contract management and water management, addressing deficiencies in practical skills

to complement the theoretical knowledge from the colleges. In addition, student

internships in districts and DoI will be facilitated to provide hands-on experience related

to project activities.

The design and supervision roles of the Irrigation Services Divisions and the District

Irrigation Offices. AF II will support survey equipment to these offices, complementing

equipment already supported by the Medium Scale Irrigation Development Project

(MIDP - JICA funded) and Rural Infrastructure Development Project (RIDP - EU

funded).

The functions of the Irrigation Water Management Unit (IWMU) within DoI, which is

responsible for all operational and technical support to irrigation development, and which

75 Market information remains a critical service to farmers for timely and affordable access to agricultural inputs and

for rewarding marketing of produce.

76 To provide additional technical support to existing FBOs, the Project will assess requests from FBOs and will

liaise with technical MoAFS Departments to design extension programs to be implemented by DADOs or other

service providers for specialized technical, managerial and accounting advice. Market information activities will be

designed and implemented through annual work plans and budgets prepared with the Marketing Unit of the Ministry

of Agriculture.


165

is proposed to be transformed into an operational office supporting the National Irrigation

Fund77

.

During the project extension period IWMU will continue to be responsible for all

technical support to irrigation development, Water User Association (WUA) support as

well as catchment conservation and rainwater harvesting support, the latter in close

collaboration with the Department of Land Resources Conservation.

(b) Water User Associations and Irrigation Management Transfer (US$1.80 million): An

important element of support to institutional capacity building for irrigation concerns

consolidation and further support to WUAs and Water User Groups78

. In all the small scale and

large scale schemes supported by IRLADP these WUAs have been formally established and

trained. These are to be continued during the joint management phase of the next two years with

practical hands-on training on scheme management, budgeting and accounting, infrastructure

maintenance and catchment/water resources conservation. In order to scale up the processes of

WUAs and Irrigation Management Transfer this will be extended to ex-Smallholder Flood Plains

Development Project (SFPDP) schemes and other rice schemes where this process may not be

completed. This will complement support to improving water management, flow measurements

and in-field water management for rice irrigation that will be supported under Component 2 of

the project.

22. Component 4: Project Coordination, Monitoring and Evaluation (US$3.05 million),

will provide additional support to enable the project management functions to continue

throughout the project extension period. AF II will fund PCU staff salaries and incremental

office running costs, which would be required for the 30 month extension period. This

component will also finance consultation and training on safeguards instruments implementation,

especially for the scale up areas. Minor investments to maintain the ageing vehicle fleet

(replacing one vehicle) and office furniture are supported. The component will also continue to

provide incremental funding to Project Steering meetings and supervision/M&E visits during the

extension period.

77 The National Irrigation Fund (NIF) is proposed to be established under the provisions of the Irrigation Act for

financing irrigation and drainage development, planning and research. The specific functioning of the NIF

(governance, management and investment selection criteria) is currently developed by the Department of Irrigation

with support under the EU funded RIDP project and the development of the investment planning framework would

be closely aligned with this process.

78 The governing principle in irrigation management remains full management responsibility of irrigation schemes

by the water users through legally constituted organizations that oversee all matters related to operation and

maintenance and the financial sustainability of the schemes. A cost recovery approach is promoted through the

strict collection and proper management of water users fees.


166

23. Component 5: Contingency for Disaster Risk Response (US$0). A new component 5 is

being introduced (Contingency for Disaster Risk Response) that will support preparedness and

rapid response to disaster, emergency, and/or catastrophic event as needed. The provisional zero

cost for this component will allow for rapid reallocation of credit proceeds from other

components under streamlined procurement and disbursement procedures. This component could

also be used to channel additional funds should they become available as a result of the

emergency. This component would be triggered on request by GoM after declaring a national

emergency.

24. In the event this component is triggered, the Results Framework and the ORAF will

accordingly be revised.

25. Extension of closing date: The closing date of the overall project will be extended to

December 31, 2014.

Table 3: Financing by component

Component Original Cost

(IDA only)

US$m

Changes

with AF I

US$m

Changes

with AF II

US$m

Total Cost

(IDA Only)

US$m

Total including

IFAD, GoM and

beneficiaries US$m

1) Irrigation Rehabilitation and

Development and Catchment

Conservation

10.32 4.70 12.50 27.52 31.06

2) Farmer Services and Livelihood

Fund 19.26 2.80 30.90 52.96 58.77

3) Institutional Development and

Capacity Enhancement 8.52 4.30 3.55 16.37 18.94

4) Project Coordination,

Monitoring and Evaluation 1.90 0.90 3.05 5.85 6.43

5) Contingency for Disaster Risk

Response - - 0.00 0.00 0.00

Total 40.00 12.700 50.00 102.70 115.20

26. Changes to Implementation Arrangements. The number of project components will

increase from four to five to accommodate the new component that estabilishes a contingency for

disaster risk response. The implementation arrangements of the original project are satisfactory

and will remain largely unchanged. The PCU will continue to be responsible for day-to-day

project implementation. To further strengthen the linkage with the ASWAp investment

framework, the PCU will work in close coordination with the ASWAp Secretariat under the

policy guidance of the ASWAp Executive Management Committee (EMC), chaired by the

Principal Secretary, MoAFS. The EMC will replace the original project PSC. The project will

also contribute and receive advice from the Technical Working Groups established under

ASWAp to provide guidance on technical issues and methodologies for implementation of

activities and investments. The Project Executive Committee (PEC) provides technical oversight

and has the responsibility for approving sub-projects following recommendations from the

district authorities. Targeting of IFA beneficiaries will be closely coordinated with the FISP

Coordination Unit in MoAFS. The financing arrangements for community sub-projects will no

longer be undertaken by the MASAF/Local Development Fund (LDF), as the reorganization of


167

LDF has reduced the added value of this arrangement for the project. At project design MASAF

was proposed to manage demand driven activities under the project, given its strong experience

in community driven activities and following its implementation modalities – in collaboration

with the district councils. Since then, MASAF reformed and no longer has district based staff to

support the project, nor does it have a mechanism to oversee community level activities,

disbursements or verification for IRLADP. These roles have been taken over by the PCU, the

district councils and the National Local Government Finance Committee. The PCU carries out

all procurement, community disbursements and monitors funds flow to the Districts, following

manuals that were set-up between MASAF and IRLADP at the start of the project. To

streamline funds flow and improve implementation progress it is therefore proposed to only have

one Designated Account for AF II, under PCU.

27. The original IRLADP was funded collaboratively through an IDA Grant, an IFAD

loan and Government‟s and beneficiary counterpart funding. IDA and IFAD funds were

co-mingled to finance all the project activities. With the IDA AF I the percentages of co-

financing were revised to reflect the higher share of IDA financing. The IFAD loan is expected

to be fully disbursed by the original project closing date of June 30, 2012, and no future co-

financing is foreseen. In preparing for AF II the Task Team discussed with IFAD and other

Development Partners supporting the irrigation and agriculture sectors, organized in the informal

coordination group on irrigation, most notably AfDB, EU and JICA on the intended AF II to

ensure harmonization in the support. Collaboration with AfDB is closely coordinated on the

jointly agreed support to the roadmap for the Shire Valley Irrigation Project preparation, which is

included in the proposed AFII for the project; and with all development partners on the

development of a harmonized investment framework for the irrigation sector along with

financing and M&E arrangements that are supported by other development partners.

28. The Contingency component for Disaster Risk Response will only become active

when triggered by a declaration of national emergency following a natural disaster, by the

Head of State upon recommendation of the National Disaster Preparedness and Relief

Committee. The provisional zero cost for this component will allow for rapid reallocation of

credit proceeds from other components under streamlined procurement and disbursement

procedures. All expenditures under this component, should it be triggered, will be in accordance

with OP/BP 8.00 and will be appraised, reviewed and found to be acceptable to the Bank before

any disbursement is made. The Government will, depending on the type of emergency, establish

adequate implementation arrangements, in line with national policy on disaster response,

including staff and resources for carrying out the rapid response activities. The existing PIM will

be updated toclearly identify the responsible agency for specific activities, funds flow and

procurement. Disbursements would be made for goods, works, and consultant services required

to support the immediate response and recovery needs of the GoM. Type of assistance could

include construction materials, water, land and air transport equipment, including spare parts,

agricultural equipment and inputs (excluding pesticides), school supplies and equipment,

construction equipment and industrial machinery, communications equipment, seeds and

fertilizer, food and water containers and any other items which may be acceptable to the Bank

and agreed to by the GoM and the Bank.


168

29. Procurement and Financial Management Arrangements remain largely unchanged

from the original grant and AF. Procurement under the project, including under AF II, will be

carried out in accordance with the World Bank‘s "Guidelines: Procurement of Goods, Works and

Non Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank

Borrowers, January 2011; and "Guidelines: Selection and Employment of Consultants under

IBRD Loans and IDA Credits & Grants by World Bank Borrowers", January 2011. In addition,

the ―Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by

IBRD Loans and IDA Credits and Grants", dated October 15, 2006 and revised in January 2011

shall apply to AF II. Procurement under the project will use streamlined procedures under

OP/BP 8.00 which will be defined in the Procurement Plan for specific contracts. National

Competitive Bidding procedures which were reviewed and found acceptable by the Bank with

some exceptions will also be used in the procurement of goods, non consulting services, works

and services for which Bank prior review is not required. Specifically, in the event that the

contingency for Disaster Risk Response is triggered, procurement procedures allowed under OP

8.00 would apply, which would include flexibility in the use of emergency procurement

procedures, applying higher prior review thresholds, using simplified procurement methods and

drawing on prequalified procurement and project management agents through streamlined

selection methods.

30. The PCU has a satisfactorily performing accounting team. Outreach offices are manned

by assistant accountants. Out of the 11 original IRLADP districts, seven have justification

assistants who are responsible for checking utilization of funds by the districts and communities.

The remaining districts are assisted by neighboring outreach offices as well as trained district

staff. With the scaling up, the assignment of these officers would need to be re-assessed for

maximum support to district level accounting staff. The department of public service

management is formalizing the positions of Financial Analysts, present in all districts. In

addition, different sectors in the districts have accounting staff ranging from accountant position

to accounts clerks, who support the district Financial Analysts. District staff has been trained on

FM under the ASWAp-SP. However, for new districts, the district staff will be trained before

operations commence in the new districts on the project‘s financial management and accounting

procedures. The Bank team will continue working with the Ministry to update and further

operationalize the governance and anti-corruption guidelines – where possible building on

MASAF experience.

31. Changes are also proposed to the categories of expenditure in the disbursement

table in the legal documents. Existing categories are lumped into one all-inclusive category,

except for the sub-projects, which will maintain a separate category. An additional category has

been created for the Contingency Financing. Disbursement of the FSLF and the IFA program

will no longer be through the MASAF dedicated account, but directly through the one project

account for AF II.


169

IV. Appraisal Summary

32. The fiduciary, economic, technical, social and environmental analysis and justification

are based on an update and revision, where necessary, of the analysis undertaken at the appraisal

of the original grant.

33. Fiduciary Analysis: The Original Grant disbursed on the basis of Statement of

Expenditures (SOEs) into the Special Accounts. During the Mid-Term Review (MTR), a

recommendation was made to change to financial management reports (FMRs)-based

disbursement so as to improve the flow of funds to the implementing districts. This

recommendation has been implemented through an amendment to the Financing Agreement for

the AF I and the IFAD Financing Agreement, and will remain in force for AF II. The project‘s

regular financial reporting will continue to be provided through quarterly FMRs submitted to the

Bank no later than 45 days following the end of the quarter. Under AF II, the GoM will continue

to produce annual financial statements and submit annual audit reports to the Bank no later than

6 months following the end of the fiscal year. There have been problems in coordination

between the project unit and MASAF resulting in delays in disbursement and documentation of

MASAF incurred expenses. Flow of funds will be simplified under AF II since payments will no

longer be made through the MASAF-designated account, as all activities under AF II will be

financed through MOAFS-designated account instead. The IFR template will be updated to

reflect this change. The external audit TOR has been agreed with the Bank for the AF I and will

continue to be used. There are no outstanding audit reports for the project.

34. Economic Analysis: The project‘s financial and economic rates returns (FRR/ERR) were

recently revalidated (with the AF I which was to validate the analysis undertaken at appraisal of

the original project as the project faced cost overruns). These results indicated that with

complete rehabilitation of the schemes, the revised FRR and ERR are 34 percent and 29 percent

respectively. This is an improvement compared to the rates at appraisal which were 17 percent

and 15 percent, respectively. The difference is explained by the higher crop yields as a result of

the use of fertilizer and better seed provided through the project‘s IFA Voucher program as well

as the increased cropping intensity allowing farmers to harvest 2-3 crops in a year. These figures

have not been re-assessed for this AF II as the justification is to scale up the same types of

investments and to prepare for future investments rather than to change the financial and

economic parameters of the ongoing activities. It is assumed that the economic and financial

analysis for the last AF is still relevant as the results were robust with respect to cost increases,

benefit reductions as well as some considerable delays in realization of full benefits – the latter

of which occurred in the past year due to the difficult economic circumstances that led to lack of

availability of forex to import construction materials and lack of availability of fuel which led

most contractors to slow down construction progress.

35. To conclude, there continues to be a likelihood that the ERR of 15 percent, as calculated

at appraisal of the original project will be met or even surpassed, when planned scheme

rehabilitations are fully completed. Additional activities are also likely to be within the same

parameters. No attempts were made to calculate rates of return for preparatory studies and


170

investment planning, but these investments are justified on basis of anticipated improved

performance of future investments.

36. Technical Analysis: The proposed activities are focused on scaling up activities with

very similar technical parameters to the original project. Incremental activities are primarily

those that have been observed to be missing or where there was scope for further improvement.

Support to rice agronomy and in field water management are among the key new activities, as

well as the modifications to the IFA approach. Investment framework development and

preparatory studies for new irrigation schemes will follow international benchmarks for such

planning and include technical, environmental, social, economic and financial considerations,

and also explicitly include assessment of water resources availability. Implementation of

construction works will continue as before: to ensure the quality of the civil works in the

schemes, all construction works will be tendered out to private contractors or local artisans in

cases of small scale infrastructure. The project will continue to build the capacity of staff at all

levels, including the communities through the establishment and training of the WUAs to ensure

smooth transfer of scheme operations and maintenance once the rehabilitation is complete.

Differential and generally high costs for irrigation have been noted through project

implementation. These are partly due to exogenous factors, e.g., higher prices for construction

materials and fuel, but also at least partially due to management factors such as contract

management, supervision and contractor experience; technical design and contract packaging for

procurement; and type of irrigation supported. Lessons will be drawn up in the proposed

investment framework to inform a multi-pronged strategy to ensure long-term economic viability

of irrigation investments in Malawi.

37. Environmental Analysis: The proposed AF II will not change the environmental

category of the project, which is B (Partial Environmental Assessment) or trigger any new

safeguard policies. The environmental and social impacts of the project, for the most part, are

expected to be minimal, site specific and manageable to an accepted level. The original project

triggered safeguards policies OP 4.01 (Environmental Assessment), OP 4.09 (Pest Management),

OP 4.12 (Involuntary Resettlement) and OP 7.50 (Projects on International Waterways).

Safeguards instruments of the original IRLADP, namely an Environment and Social

Management Framework (ESMF), which included a Pest Management Plan (PMP), and a

Resettlement Policy Framework (RPF) (revised in 2011, disclosed in country in December 2011

and in InfoShop on May 27, 2012) remain valid. New activities do not trigger any additional

safeguards policies. Scaling up of the program refers mainly to the IFA program, under which

community assets like mini-scale irrigation and rural roads will be supported, for which the

project‘s safeguards instruments are well suited. The ESA/ESMP for the original project looked

in-depth into the direct and indirect impacts of the project, as they relate to irrigation and

drainage, water harvesting activities, water quality, access roads and other physical infrastructure

to be financed by the project and identified mitigation measures commensurate to those impacts.

These remain applicable for the activities financed under AF II. In order to further harmonize

safeguards implementation it has been recently agreed to adopt the PMP that was developed by

the ASWAp-SP for use by MoAFS will also be applied for IRLADP. The PMP has been

disclosed in country and in InfoShop for the IRLADP on May 27, 2012. Where the project is


171

scaling up to new districts, public consultations and trainings on implementation of safeguards

instruments will be conducted early on in the project extension period.

38. The original project obtained an exception under the Tobacco Policy (OP 4.76),

given the prominence of tobacco in the Malawi agricultural sector. For purposes of this AF

II, no new exception under OP 4.76 had to be obtained as per the recent guidance that there is no

explicit requirement for an exception to be obtained under paragraph 2 of OP 4.76 for operations

that do not support tobacco production directly or in a substantial way indirectly. No part of the

investment will be allocated for tobacco production, processing, exporting, or marketing, in

compliance with paragraph 1 of OP 4.76.

39. The original project also obtained an exception under the Bank‟s policy of Projects

on International Waterways (OP 7.50, Para 7) because this is primarily an irrigation scheme

rehabilitation project which is not expected to significantly alter water flows to other riparians.

With this AF II, GoM intends to concentrate on consolidating the mini-schemes already

established and increase support incrementally to already water managed areas with only minor

and scattered increases in irrigated area which will not have a negative impact on water quality

and flows for any riparian. Where the AF II supports studies to create an investment pipeline for

future irrigation investments in the country, the ToRs will explicitly include consideration of

riparian issues as well as environmental screening. The investments following such studies

would not be funded under this project. A renewed exception under OP 7.50 was requested, and

approved by the RVP on May 22, 2012.

40. The assessment undertaken during the MTR noted that there are capacity

challenges at the district level to implement the ESMPs that have been developed in

correspondence with the ESMF for the project. Since then, the project has implemented an

action plan including capacity needs assessment and training to ensure that the environmental

and social safeguards are complied with. All ESMPs79 created under the project have been

disclosed in-country and in the InfoShop on May 28, 2012. The capacity needs assessment was

undertaken and trainings were conducted for national and district level staff, and currently

documentation and compliance with Environmental Safeguards is Satisfactory. The safeguard

documents and the specific assessment for the AF II were reviewed by the Regional Safeguards

Unit, and cleared for disclosure in-country and at the Bank InfoShop.

41. Social Analysis: The original project built into its design the experiences from the

SFPDP which was funded by IFAD. This has led to the formation and capacity building of

WUAs which includes the development of clear rules for the sharing and management of the

79 24 ESMPs were developed for the following small scale and medium scale irrigation schemes under the Project:

Midule (Blantyre District), Nanzolo ―B‖, Nkhate (Chikwawa), Chibula, Kanthuwalya, Malawa (Chitipa District),

Windu (Dedza District), Nafumu (Lilongwe District), Limphasa (Nkhata Bay), Muona (Nsanje), Chakalamba

(Phalombe District), Chayina, Mahomero, Mphande, Tapukwa, Tchetchetche, Tiyese, Usowoya, Walutundu,

Zolokere (Rumphi District), Bikinani, Chikumbutso, Chombe, and Likangala Complex (Zomba District).


172

available water. The majority of project intervention is based on community driven development

mechanisms and group demands for project intervention to support their rural livelihoods.

Nevertheless, the MTR and subsequent assessments by land experts and social safeguards

specialists noted that documentation of voluntary land contributions was missing in cases. The

project already anticipated and developed a mitigation plan for the potential social issues that

might have arisen due to the implementation of the project. Among others, these include:

(i) possible conflicts among upstream and downstream users along irrigation schemes;

(ii) beneficiary participation in scheme design, operations and maintenance; (iii) the scope of the

irrigation management transfers; and (iv) counter-claims on land ownership within the schemes.

An assessment and subsequent action plan to regularize and document informal community

arrangements and train district level staff in safeguards screening and framework implementation

has been completed. Land and Water agreements have been drawn up between land owners and

irrigators organized in WUAs for irrigation schemes under the project. They have also been

drawn up for FBOs at district and community level to formalize previously informal voluntary

arrangements dealing with access to land and water for the irrigation schemes. There have not

been instances of involuntary resettlement and therefore no formal resettlement action plans

(RAPs) were developed as provided for under the RPF. A list of the Land and Water agreements

developed under the project has been being disclosed at the InfoShop as well as in-country. A

framework has also been developed for the GoM to offer land leases to WUAs and FBOs to

avoid future land conflicts and competing claims. Other relevant social issues such as gender

and HIV/AIDS have also been incorporated into the project to ensure equity and avoid social

exclusion. The efforts above have led to a satisfactory rating on environmental safeguards

compliance under the project.

42. The AF II does not require any other exceptions to Bank policies. It complies with

the regional criteria for readiness for implementation: all institutional, fiduciary arrangements

and implementation have been agreed on and incorporated in project design; project staff is

already in place; and the Project Implementation Manual (PIM) is already available from the

original project.

43. Procurement arrangements: These are expected to remain the same with the PCU taking

a leading role in procurement of goods, works and services. Implementation at district level is

still a challenge. However, the project has carried out a special needs assessment on

procurement for all districts involved, and has involved more and more the project‘s Outreach

office, improving procurement performance. The PCU has increased its monitoring of

procurement activities at district level. A revised procurement plan taking into account the

additional funds has been prepared by the project and agreed to by the Bank.

44. Sustainability: Key issues related to the institutional, technical, and financial

sustainability of the proposed AF II are summarized below.

45. Institutional sustainability: The project is building the institutional capacity of the

MoWDI at the national, district and local levels to be able to provide technical support required

for sustainable small-scale irrigation development. The project has established the IWMU and

the Water User Association Support Unit (WUASU) as well as the District Irrigation Advisory


173

Services Units (DIASU) in the DoI. These non-established positions are now being

mainstreamed nationwide into the establishment of the DoI, thereby ensuring institutional

sustainability at district level. At the local level, these technical units are facilitating the

establishment and capacity building of the WUAs. Training is also being provided to other

institutions that are involved in high level education (training of graduate and diploma-level

irrigation engineers) such as Bunda College and Natural Resources College. All this capacity

building is likely to improve the institutional sustainability and support the country‘s long-term

irrigation development agenda. Scheme level sustainability has been supported under the

original project and will be strengthened with AF II through the establishment and strengthening

of WUAs, including the development of WUA constitutions, management agreements between

WUAs and the Ministry of Water Development and Irrigation, legal incorporation of WUAs

under the Trustees Incorporation Act, and formalization of land and water rights through

facilitation of WUAs entering into land leases/agreements and water licenses80. Most

importantly, the project will provide support to WUAs to improve their financial sustainability

through budgeting and fee recovery from water users for irrigation services, to be specified in

constitutions and agreed annually. This supports MoWDI policy of irrigation management

transfer and cost recovery for scheme‘s operation and management costs.

46. Technical sustainability: Technical sustainability is likely to be affected by the capacity

challenges in the line and sector ministries. These challenges will remain for some time. The

capacity building implemented under the original project will continue during the proposed AF II

to ensure adequate capacity for eventual technical support, operations and maintenance after the

project period by technical staff and communities. For longer term capacity and quality of

design and contract management, hands on as well as academic training will be provided under

the project.

47. Financial sustainability: Financial sustainability of the activities supported under the

pilot project is likely to be achieved because beneficiary groups will be expected to improve their

productivity from the rehabilitated and newly developed medium, small and mini-scale schemes.

The project will also promote the integration of farmers into organized, high-value supply chains

so as to improve their profitability as a basis for sustained operations and maintenance of the

schemes. Finally, WUAs have received specific training and are being monitored for the

financial sustainability of their management of the irrigation schemes.

48. The implementation risk is seen as Moderate. The AF II was designed under the

parameters of OP/BP 8.0 and OP/BP 13.20 related to emergency AF operations, while difficult

economic reforms are undertaken by the GoM. There are three areas of moderate to substantial

operational risk:

80 The World Bank supported second National Water Development Program is supporting a licensing reform

campaign and water resources monitoring that will improve the framework for water rights allocation and

management, to go in parallel with the expansion of physical infrastructure in irrigation and other sector, thereby

enhancing sustainability from a resource management perspective.


174

(i) Capacity and governance. With the expansion of the project area from 11 to 28 districts,

institutional capacity strengthening will be required in some or all of the new districts, especially

at administrative and technical levels. To mitigate this risk, recruitment of district level assistant

accountants and irrigation staff is foreseen.

(ii) Safeguards, environmental and social safeguards issues, especially in relation to rural

infrastructure have been clarified and the existing instruments remain valid, but have been

updated.

(iii) Contingency financing for disaster risk response, which starts out with a zero budget, but

could become very substantial, has implementation risks since the implementation arrangements

are not fully tested.

Attachment C: Irrigation Rural Livelihoods and Agricultural Development Project

175

ANNEX 1: RESULTS FRAMEWORK AND MONITORING

REPUBLIC OF MALAWI: Irrigation, Rural Livelihoods and Agricultural Development

Project



PDO Current (PAD) Proposed

(i) To increase agricultural

productivity and incomes of

approximately 196,550 poor

rural households in the 11

participating districts; and (ii)

to strengthen the Recipient‘s

institutional capacity for long-

term irrigation development

(i) To increase agricultural productivity

of poor rural households in all districts;

and (ii) to strengthen institutional

capacity for long-term irrigation

development.

The PDO will be revised to enable

the scaling up of both the number of

beneficiaries and the number of

districts, to simplify the measurement

of agricultural productivity as the key

objective rather than rural income..

Incomes are difficult to properly

measure in rural areas and also

difficult to attribute to the project‘s

interventions. However the project‘s

impact on beneficiary incomes will

be estimated by the final impact

evaluation.

PDO indicators


Increase in crop yield for

maize - % increase and tons/ha

Increase in crop yield for rice -

% increase and tons/ha

Crop yield for irrigated maize - %

increase and tons/ha

Crop yield for irrigated rice - %


While the project is contributing

much to increase in general maize

yields through IFA, the attribution to

the project is difficult to measure

given the prominence of FISP and

ASWAP-SP supporting maize

farmers in addition to the IFA

program. Moreover, with the AF II

IFA will be diversified beyond

maize. While maize is not the only

crop on the small schemes it is still a

good proxy for yield increase in a

diversified irrigated agriculture

system – which will be specifically

monitored, rather than general yield

increase in maize.

Increase in farm sales in

targeted rural households (for

major crops: horticulture,

maize and rice) - % increase in

LCU.

Increase in farm sales in targeted rural

households for irrigated maize and rice

- % increase in local currency unit.

Refocused to core crops of the

targeted farming system as

horticulture is too broad to be

properly measured. While the project

supports diversification, rice and

maize increase can serve as proxy for

a wider crop mix. The project impact

on diversification will be estimated

by the final impact evaluation. End

of project target to be recalibrated to

take account of additional support

Area provided with irrigation Dropped as PDO indicator This is an Intermediate Outcome


176


Rationale for Change and drainage services (ha) –

new

Area provided with irrigation

and drainage services (ha) –

rehabilitated

Indicator and will move to

Component 1, where it is more

appropriate.

Number of operational WUAs Dropped as PDO indicator This indicator was originally a PDO

indicator, but it is more relevant as an

intermediate outcome indicator.

End of project target to be

recalibrated to take account of

additional support.

Adoption of harmonized investment

framework for irrigation sector by DoI,

linked to ASWAp

New indicator to measure second

part of the PDO.

Direct project beneficiaries

(number) of which female ( %)

Continued End of project target to be


additional support.

Intermediate Results indicators


Component 1: Irrigation Rehabilitation and Development and Catchment Conservation


and drainage services (ha) –

new


and drainage services (ha) -

rehabilitated

Introduced as Intermediate Results

Indicator

This indicator was originally a PDO

indicator, but it is more relevant as an

intermediate outcome indicator.



additional support.

Number of water users

provided with irrigation and

drainage services –

disaggregated by % female

Water users provided with

new/improved irrigation and drainage

services (number)

– disaggregated by % female

Formulation more closely aligned to

the Bank core indicators. End of

project target to be recalibrated to

take account of additional support

Farmers adopting technologies

demonstrated by the project

(% female) – disaggregated by

type of technology

Area under prioritized hotspots

conserved under catchment protection

technologies (ha)

Original indicator too broad and not

fully attributable to project‘s

interventions. Indicator refocused to

the core technologies promoted by

the project to protect catchment areas

and irrigation schemes.

Technologies demonstrated by

the project in the project areas

(Number)

Continued Target is to be significantly scaled

down to realistically reflect number

of technologies that the project is

actually intending to promote. The

original indicator was poorly

designed.

Component 2: Farmer Services and Livelihood Fund

Number of farmers benefiting

from operational community

assets – disaggregated by %

female

Dropped Indicator duplicates measurements of

PDO indicator


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Rationale for Change Number of FBOs supported under the

project, and % still functional and

generating benefits to members

New indicator measuring

intermediate outcome and success

rate of interventions as supported by

the Component. Targets to be

included.

Number of farmers directly

benefiting from the Inputs for

Assets Voucher Program (#

disaggregated by % female)



additional support

Rural roads

constructed/rehabilitated –

(km)



additional support

Component 3: Institutional Development and Capacity Enhancement

Number of operational WUAs Operational water user associations

created and/or strengthened (number)

Formulation aligned to the Bank core

indicators. This indicator was

originally a PDO indicator, but it is

more relevant as an intermediate

outcome indicator.



additional support

Number of people trained, of

which % female:

Extension services

O&M of schemes

Technical staff training

Marketing and

agribusiness training



additional support. Target on number

of people trained on O&M aligned

with target on water users provided

with new/improved irrigation and

drainage services.

Irrigation Master Plan and Investment

Framework Developed for use by

Department of Irrigation (Y/N)

New intermediate outcome indicator

to address new focus of project on

investment framework preparation.

Component 4: Project Coordination, Monitoring and Evaluation

Improved timeliness and

quality of reports generated by

the M&E system

Timely and acceptable reports

generated by the M&E system

Indicator made quantifiable; End of

project target to be recalibrated to

take account of additional support.

Procurement and Financial

Management Functions of the project

rated at least Satisfactory

New Indicator to assess performance

of critical fiduciary functions of

project management.

Timely and acceptable project

impact evaluation report

Continued

Component 5: Contingency for Disaster Risk Response

Funds available for emergency

response within 6 weeks of declaration

of emergency.

New Indicator that is contingent on

the triggering of an emergency

response.

* Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value


178

REVISED PROJECT RESULTS FRAMEWORK

Project Development Objective (PDO):

(i) To increase agricultural productivity of poor rural households in all districts; and (ii) to strengthen institutional capacity for long-term

irrigation development.

PDO Level Results Indicators C

ore

UOM81

Baseline

Original

Project

Start

(2006)

Progress

To Date

(March

2012)

Cumulative Target Values

Frequency Data Source/

Methodology

Responsibility

for Data

Collection

Comments 2012 2013 2014

Crop yield for irrigated maize - %


Crop yield for irrigated rice - %


Tons/ha

%

Tons/ha

%

1.6

(rainfed)

0

1.0

0

2.8

75

1.5

50

2.8

75

1.5

50

3.0

88

1.8

80

3.2

100

2.0

100

Annual

Annual

Annual M&E

reports/

annual

surveys

Project

Coordination

Unit

These yields

refer to irrigated

crops on

beneficiary

Increase in farm sales in targeted

rural households for irrigated

maize and rice - % increase in

local currency unit

%

0

18

30

35

40

Annual

Annual M&E

reports/

annual

surveys

Project

Coordination

Unit

Adoption of harmonized

investment framework for

irrigation sector by DoI, linked to

ASWAp

Y/N

N/A

N/A

N

N

Y

Annual

Annual M&E

reports

Project

Coordination

Unit

Beneficiaries

Direct project beneficiaries

(number),

Number

0

302,669

400,000

450,000

500,000

Annual

Annual M&E

reports/

annual

surveys

Project

Coordination

Unit

81 UOM = Unit of Measurement.


179

of which female (percentage)

%

-

40

40

40

40

Annual

Annual M&E

reports/

annual

surveys

Project

Coordination

Unit


Intermediate Results Indicators C

ore

Unit of

Measur

ement

Baseline

Original

Project

Start

(2006)

Progress

To Date

(March

2012)

Target Values


Methodology

Responsibility

for Data

Collection

Comments 2012 2013 2014

Intermediate Result 1: Irrigation Rehabilitation and Development and Catchment Conservation (component 1)

3. Area provided with irrigation

and drainage services– new

Area provided with irrigation and

drainage services – rehabilitated

ha

ha

0

0

2,053

1,385

2.200

1,820

2,500

1,820

3,000

1,820

MTR

End of

project

Annual M&E

reports/

annual

surveys

Project

Management

Unit

Water users provided with

new/improved irrigation and

drainage services (number)–

disaggregated by % female

Number

%

0

0

10,200

38

12,000

40

14,000

40

17,000

40

Annual

MTR

End of

Project

MIS

Project

Management

Unit

Area under prioritized hotspots

conserved under catchment

protection technologies

ha

0

1,000

2,000

3,000

Annual

MTR

End of

Project

MIS

Project

Management

Unit

Technologies demonstrated by the

project in the project areas

Number

0

12

16

16

16

Annual

MTR

End of

Project

MIS

Project

Management

Unit

Reflects actual

technologies in

rainwater

harvesting and

catchment

conservation

that the project

promotes

Intermediate Result 2: Farmer Services and Livelihood Fund (component 2)


180


Intermediate Results Indicators

Co

re

Unit of

Measur

ement

Baseline

Original

Project

Start

(2006)

Progress

To Date

(March

2012)

Target Values


Methodology

Responsibility

for Data

Collection

Comments 2012 2013 2014

Number of FBOs supported under

the project, and % still functional

and generating benefits to

members

Number

%

0

0

75

90

100

80

115

80

125

80

Annual

monitoring

end of

project

MIS Project

Management

Unit

% Target

already achieved

but could go

down as 50 new

FBOs will enter

the Project.

Number of farmers directly

benefiting from the Inputs for

Assets Voucher Program (#

disaggregated by % female)

Number

%

0

0

192,235

45

290,000

40

370,000

40

422,000

40

Annual

monitoring

end of

project

Land

Administratio

n Records

Project

Management

Unit

Rural roads

constructed/rehabilitated

km

0

2,356

2,800

4,000

5,000

Annual

monitoring

end of

project

MIS Project

Management

Unit

Intermediate Result 3: Institutional Development and Capacity Enhancement (component 3)

Operational water user associations

created and/or strengthened

Number

0

26

35

50

75

Annual

Staff training

reports

Project

Management

Unit/MOAFS/

MOIWD

Number of people trained, of

which % female: Extension services

O&M of schemes

Technical staff training

Marketing and agribusiness

training

Number

%

Number

%

Number

%

Number

%

0

0

0

0

0

0

0

0

23,610

35

737

38

-

-

7,291

38

24,000

40

6,000

40

60

30

15,000

40

24,800

40

12,000

40

500

40

23,000

40

25,500

40

17,000

40

1,500

40

30,000

40

Annual MIS Project

Management

Unit/MOAFS/

MoWDI


181


Intermediate Results Indicators

Co

re

Unit of

Measur

ement

Baseline

Original

Project

Start

(2006)

Progress

To Date

(March

2012)

Target Values


Methodology

Responsibility

for Data

Collection

Comments 2012 2013 2014

Irrigation Master Plan and

Investment Framework Developed

for use by Department of Irrigation

(Y/N)

Y/N

N/A

N/A

N

N

Y

Annual

Annual M&E

reports

Project

Coordination

Unit

Intermediate Result 4: Project Coordination, Monitoring and Evaluation (component 4)

Timely and acceptable reports

generated by the M&E system

Number

0

10

14

18

22

Quarterly

end of

project

MIS

Quarterly,

Annual and

End of project

reports

Project

Management

Unit

Procurement and Financial

Management Functions of the

project rated at least Satisfactory

Y/N

N/A

Y

Y

Y

Y

Bi-annual ISR Project

Coordination

Unit

Timely and acceptable project

impact evaluation report

Number

1

2

3

4

Final

Evaluation

Report

Impact

evaluation

Report

Project

Coordination

Unit

Intermediate Result 5: Contingency for Disaster Risk Response (Component 5)

Funds available for emergency

response within 6 weeks of

declaration of emergency.

Y/N - - Y Y Y If triggered Annual

Report

Project

Coordination

Unit

Only measured

if the component

is triggered.


182

ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK

REPUBLIC OF MALAWI:

Irrigation, Rural Livelihoods and Agricultural Development Project

Board

Project Stakeholder Risks Rating: Low

Description: The process of rolling-out the decentralization

policy has been slow and is likely to affect the capacity of

District Councils to support project implementation.

Risk Management: The 11 original IRLADP districts have established reasonable working

modalities to support project implementation. The outreach offices are designed to support the

Districts in implementation. Assistant Accountants have been hired under the Project, and this

number will be expanded with the increase in number of districts and the GoM is in the process of

hiring 40 additional District Irrigation Staff in the regular service.

Resp: Client Stage: Implementation Due Date : ongoing Status: Not yet

due

Implementing Agency Risks (including fiduciary)

Capacity Rating: Substantial

Description: (i) The MoAFS lacks field staff to implement

research-led trials and to provide extension services to farmers in

all the 28 Districts of the country.

(ii) Limited capacities of farmers or reluctance to innovations

may restrain adoption of proposed technologies and reduce

irrigation impact on productivity increase and production

diversification.

(iii) Limited staff and capacities to properly supervise

implementation, and to monitor and evaluate results and impact

on the ground.

(iv) Weak procurement and financial management capacity at the

district level.

Risk Management: (i) Through linkages with ASWAP-SP the Project has access to a number of

extension workers from the Ministry. MoAFS is also outsourcing on a pilot basis extension

services to NGOs to reach out to more farmers, and has identified and built capacity of lead

farmers.

(ii) Training and technical advice proposed by extension services will contribute to build farmers

ability to accept changes in their farming practices. On-farm demonstrations will raise their

awareness of the potential productivity increase the proposed technologies can bring to their

production system.

(iii) The Project PCU will continue to cater for the M&E and has demonstrated to be capable of

doing so. To ensure convergence with the ASWAP overall structure, closer institutional

collaboration with the Planning Department will be established.

(iv) The separate Project Coordination Unit with Procurement and Financial Management Support


183

will continue to support the implementing districts; in addition outreach offices and assistant

accountants will support fiduciary management. In collaboration with the Director of Finance at the

Ministry the project will support further training in priority areas and benefit from trainings already

provided under the ASWAp-SP to District staff.


due

Governance Rating: Low

Description: (i) Weaknesses in the governance mechanisms

especially for resources at the district and community levels,

given the lack of elected councilors.

(ii) The MoAFS does not properly involve all key stakeholders in

decision making. Overall project supervision and field

interventions are not adequately coordinated.

Risk Management: (i) So far the Project has developed transparent and efficient procedures: At

the district level, community sub-projects are appraised and approved through the District

Development Planning Framework involving assembly officials and local chiefs. At the

community level, each sub-project has a project management committee which is accountable to

both the community and the district assembly on project management issues.

(ii) Effective operationalization of ASWAp management committees, including the Sector

Working Group in particular to ensure regular consultations on policy decisions and key

implementation instructions with private sector, farmers‘ associations and civil society

organizations. MoAFS and MWDI have recently had a brief merged stint. There is generally good

interdepartmental collaboration on irrigation that has survived multiple reorganizations at

ministerial level. The implementation arrangements with two Ministries will now be renewed for

the current situation.


due

Project Risks

Design Rating: Moderate

Description: (i) Poor design of sub-projects leading to lack of

integration of project components and unsustainable outcomes.

Risk Management: (i) Design of the overall project ensures strong integration of project

components. Strong element of capacity building at all levels, particularly of Water User Associations. Emphasis on market oriented production to ensure that farmers are able to operate

and maintain the schemes. It is also integrated into the larger ASWAP framework.


due

Social & Environmental Rating: Moderate

Description: (i) Farmers‘ inability to operate and maintain schemes properly

once rehabilitated and handed over to them.

Risk Management: (i) Gradual transfer to beneficiaries of the management of the infrastructure is

promoted along the implementation of capacity building activities and regular technical advice

provided by extension services. The Project has invested heavily and is proposing continued

support to participatory training of WUAs on their roles and responsibilities in operating and

maintaining the schemes. This has led to the establishment of well prepared Water User

Associations with legal mandate to deal with all scheme management issues. The Project is also


184

(ii) Environmental risks in the upper and lower catchments of

the schemes.

(iii) Social risk associated with scheme transfer particularly

related to dealing with competing claims over the land and

infrastructure in the rehabilitated irrigation schemes.

(iv) Lack of social accountability and consultations with

beneficiaries

building an institutional framework that will continue the technical support to the farmers i.e.

District Irrigation Advisory Services Unit (DIASU).

(ii) The project has designed and has been implementing a sound catchment conservation program

while promoting good agricultural practices on irrigation schemes, both in terms of water

management and nutrient use efficiency. Most targeted farmers are also benefiting from extension

activities developed by ASWAp-SP on nutrient management, nitrogen management through

intercropping and agro-forestry. The Project pest management plan has been updated and training

will be implemented by MoAFS through ASWAp-SP for a full range of stakeholders.

The project ESMF and RPF remain valid to provide guidance on managing the environmental and

social impacts of the activities. 24 ESMPs have been prepared, consulted upon, and disclosed in-

country, and at the InfoShop.

(iii) Land and Water agreements on the irrigation schemes between land owners and irrigators

organized in WUAs, as well as for FBOs have been drawn up at district and community level to

formalize previously informal voluntary arrangements dealing with access to land and water for the

irrigation schemes. Therefore, there have not been instances of involuntary resettlement and

therefore no formal resettlement action plans (RAPs) were developed as provided for under the

resettlement policy framework (RPF).

(iv) Building capacities of WUAs and FBOs has contributed to moving away from a state-led

approach to a more bottom-up and participatory approach to irrigation development and post-

harvest income generating activities. Social accountability has thus been strengthened through

stronger responsibility given to producers and their organizations. WUAs and FBOs will participate

more and more in the CSOs movement and Projects such as IRLADP are now required to consult

on a more regular basis with such organizations on work plans and implementation modalities.


due

Program & Donor Rating: Low

Description: In the preparation of a harmonized investment

framework for irrigation development the buy in from other

donors may be limited, which in turn may result in difficulty to

come to harmonized implementation and adoption of the

framework.

Risk Management: The preparation of a harmonized investment framework for irrigation

development is long anticipated by development partners and Government alike. As irrigation is a

pillar of the ASWAp and has strong linkage with water resources, it will be guided by the ASWAp

institutional framework and involve both Ministries (MoWDI and MoAFS) as well as donors

supporting agriculture and specifically in irrigation development. The exercise will also be closely

linked to water resources development planning under the Water Sector Investment Planning

exercise. The ASWAp principles and procedures have already been approved by donors in October

2011. Irrigation development will be taken care of through a dedicated technical working group

where donors, the GoM, CSOs and other stakeholders will have to harmonize their strategies.

Donors in the water sectors are organized through the Sector Working Group and the National

Water Development Program. This process will facilitate the preparation of a harmonized

investment framework for irrigation development.


185

Resp: Client and Bank Stage: Implementation Due Date : ongoing Status: Not yet

due

Delivery Monitoring & Sustainability Rating: Moderate

Description: Institutional capacities are weak at the central level

to properly oversee implementation. Data flow and feedback

from the field have improved but remain limited due to weak

capacities and limited staff at the decentralized level.

Risk Management: Project includes Outreach Officers with M&E officers, as well as a training

program on district M&E. The project has an automated management information system.

Particular emphasis will be given on improving data collection methodology and data analysis.


due

Other Rating: Low

Description: HIV/AIDS may negatively impact agricultural

work-force and agricultural worker productivity, as well

extension officers‘ dynamism.

Risk Management: Continue ongoing social extension program to disseminate prevention

messages and raise awareness at all levels of the MAWDI and within rural communities. A gender

household approach as a measure of mitigating against HIV/AIDS is being implemented.


due

Overall Risk Rating: Moderate

186

ATTACHMENT D: COUNTRY AT A GLANCE

Sub-

Key D evelo pment Indicato rs Saharan Low

M alawi Africa income

(2010)

Population, mid-year (millions) 14.9 853 796

Surface area (thousand sq. km) 118 24,243 15,551

Population growth (%) 3.2 2.5 2.1

Urban population (% of to tal population) 20 37 28

GNI (Atlas method, US$ billions) 4.9 1,004 421

GNI per capita (Atlas method, US$) 330 1,176 528

GNI per capita (PPP, international $) 850 2,148 1,307

GDP growth (%) 7.1 4.8 5.9

GDP per capita growth (%) 3.8 2.3 3.7

(mo st recent est imate, 2004–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 74 48 ..

Poverty headcount ratio at $2.00 a day (PPP, %) 90 69 ..

Life expectancy at birth (years) 53 54 59

Infant mortality (per 1,000 live births) 58 76 70

Child malnutrition (% of children under 5) 14 22 23

Adult literacy, male (% of ages 15 and o lder) 81 71 69

Adult literacy, female (% of ages 15 and o lder) 67 54 54

Gross primary enro llment, male (% of age group) 133 104 108

Gross primary enro llment, female (% of age group) 138 95 101

Access to an improved water source (% of population) 83 61 65

Access to improved sanitation facilities (% of population) 51 31 37

N et A id F lo ws 1980 1990 2000 2010

(US$ millions)

Net ODA and official aid 141 500 446 1,027

Top 3 donors (in 2010):

European Union Institutions 21 45 49 208

United Kingdom 25 51 97 148

United States 3 21 59 126

Aid (% of GNI) 12.4 27.2 26.1 20.8

Aid per capita (US$) 23 53 40 69

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) 11.8 11.8 35.4 7.7

GDP implicit deflator (annual % change) 15.8 10.7 30.5 6.4

Exchange rate (annual average, local per US$) 0.8 2.7 59.5 150.5

Terms of trade index (2000 = 100) .. 145 100 111

1980–90 1990–2000 2000–10

Population, mid-year (millions) 6.2 9.4 11.2 14.9 4.1 1.8 2.8

GDP (US$ millions) 1,238 1,881 1,744 5,054 2.5 3.7 5.2

Agriculture 43.7 45.0 39.5 30.5 2.0 8.6 2.9

Industry 22.5 28.9 17.9 16.1 2.9 2.0 6.2

M anufacturing 13.7 19.5 12.9 10.0 3.6 0.5 5.7

Services 33.7 26.1 42.5 53.4 3.3 1.6 6.5

Household final consumption expenditure 69.9 71.5 81.6 71.7 2.2 6.5 ..

General gov't final consumption expenditure 19.3 15.1 14.6 20.2 6.3 -4.4 ..

Gross capital formation 24.7 23.0 13.6 24.8 -2.8 -8.4 ..

Exports o f goods and services 24.8 23.8 25.6 30.6 2.5 4.0 ..

Imports o f goods and services 38.8 33.4 35.3 47.2 -0.3 -1.1 ..

Gross savings .. 13.6 2.2 10.4

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

15 10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2010

Male Female

0

50

100

150

200

250

1990 1995 2000 2010

Malawi Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

-15

-10

-5

0

5

10

15

20

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

187

B alance o f P ayments and T rade 2000 2010

(US$ millions)

Total merchandise exports (fob) 392 1,201

Total merchandise imports (cif) 460 -1,411

Net trade in goods and services -88 -1,061

Current account balance -117 -256

as a % of GDP -6.7 -5.1

Workers' remittances and

compensation of employees (receipts) 1 ..

Reserves, including gold .. ..

C entral Go vernment F inance

(% of GDP)

Current revenue (including grants) 17.1 39.2

Tax revenue 15.7 15.2

Current expenditure 19.9 27.4

T echno lo gy and Infrastructure 2000 2010

Overall surplus/deficit -13.9 2.8

Paved roads (% of to tal) .. ..

Highest marginal tax rate (%) Fixed line and mobile phone

Individual 38 .. subscribers (per 100 people) 1 21

Corporate 38 .. High technology exports

(% of manufactured exports) 2.0 1.3

External D ebt and R eso urce F lo ws

Enviro nment

(US$ millions)

Total debt outstanding and disbursed 2,705 922 Agricultural land (% of land area) 50 59

Total debt service 63 19 Forest area (% of land area) 37.8 34.3

Debt relief (HIPC, M DRI) 1,375 914 Terrestrial protected areas (% of land area) 15.0 15.0

Total debt (% of GDP) 155.1 18.2 Freshwater resources per capita (cu. meters) 1,364 1,118

Total debt service (% of exports) 13.1 1.3 Freshwater withdrawal (% of internal resources) 6.0 5.6

Foreign direct investment (net inflows) 26 140 CO2 emissions per capita (mt) 0.08 0.09

Portfo lio equity (net inflows) 0 0

GDP per unit o f energy use

(2005 PPP $ per kg of o il equivalent) .. ..

Energy use per capita (kg of o il equivalent) .. ..

Wo rld B ank Gro up po rtfo lio 2000 2010

(US$ millions)

IBRD

Total debt outstanding and disbursed 9 0

Disbursements 0 0

Principal repayments 8 0

Interest payments 1 0

IDA

Total debt outstanding and disbursed 1,592 243

Disbursements 97 34

P rivate Secto r D evelo pment 2000 2011 Total debt service 27 1

Time required to start a business (days) – 39 IFC (fiscal year)

Cost to start a business (% of GNI per capita) – 90.9 Total disbursed and outstanding portfo lio 3 35

Time required to register property (days) – 69 o f which IFC own account 3 28

Disbursements for IFC own account 2 0

Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and

(% of managers surveyed who agreed) repayments for IFC own account 0 5

Access to /cost o f financing .. 27.6

Electricity .. 19.2 M IGA

Gross exposure – –

Stock market capitalization (% of GDP) .. 27.0 New guarantees – –

Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 4/5/12

.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability and absence of violence

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2010

2000

Governance indicators, 2000 and 2010

Source: Worldwide Governance Indicators (www.govindicators.org)

IBRD, 0

IDA, 243

IMF, 146Other

multilateral, 333

Bilateral, 139

Private, 0

Short-term, 61

Composition of total external debt, 2010

US$ millions

188

Millennium Development Goals Malawi

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2010

Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. 83.1 ..

Poverty headcount ratio at national poverty line (% of population) .. .. 65.3 ..

Share of income or consumption to the poorest qunitile (%) .. .. 4.8 ..

Prevalence of malnutrition (% of children under 5) 24.4 26.5 21.5 13.8

Go al 2: ensure that children are able to co mplete primary scho o ling

Primary school enro llment (net, %) .. .. 99 97

Primary completion rate (% of relevant age group) 28 52 65 67

Secondary school enro llment (gross, %) 17 22 32 32

Youth literacy rate (% of people ages 15-24) .. .. 76 86

Go al 3: e liminate gender disparity in educat io n and empo wer wo men

Ratio of girls to boys in primary and secondary education (%) 81 88 93 101

Women employed in the nonagricultural sector (% of nonagricultural employment) 11 11 .. ..

Proportion of seats held by women in national parliament (%) 10 6 8 21

Go al 4: reduce under-5 mo rtality by two -thirds

Under-5 mortality rate (per 1,000) 222 205 167 92

Infant mortality rate (per 1,000 live births) 131 121 99 58

M easles immunization (proportion of one-year o lds immunized, %) 81 90 73 93

Go al 5: reduce maternal mo rtality by three-fo urths

M aternal mortality ratio (modeled estimate, per 100,000 live births) 910 830 770 510

B irths attended by skilled health staff (% of to tal) 55 .. 56 54

Contraceptive prevalence (% of women ages 15-49) 13 22 31 41

Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases

Prevalence of HIV (% of population ages 15-49) 7.2 13.9 14.2 11.0

Incidence of tuberculosis (per 100,000 people) 326 462 467 219

Tuberculosis case detection rate (%, all forms) 41 42 45 65

Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs

Access to an improved water source (% of population) 41 52 62 83

Access to improved sanitation facilities (% of population) 39 42 46 51

Forest area (% of to tal land area) 41.3 .. 37.8 34.3

Terrestrial protected areas (% of land area) 15.0 15.0 15.0 15.0

CO2 emissions (metric tons per capita) 0.1 0.1 0.1 0.1

GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) .. .. .. ..

Go al 8: develo p a glo bal partnership fo r develo pment

Telephone mainlines (per 100 people) 0.3 0.3 0.4 1.1

M obile phone subscribers (per 100 people) 0.0 0.0 0.4 20.4

Internet users (per 100 people) 0.0 0.0 0.1 2.3

Computer users (per 100 people) .. .. .. ..

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/5/12


M alawi

0

25

50

75

100

125

2000 2005 2010

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

10

20

30

2000 2005 2010

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2010

Malawi Sub-Saharan Africa

Measles immunization (% of 1-year olds)

SapitwaSapitwa(3,002 m)(3,002 m)

NykiaNykia(2,606 m)(2,606 m)

Vip

hya

M

tns.

ChitipaChitipa

RumphiRumphi

MchinjiMchinjiSalimaSalima

DedzaDedza

NtcheuNtcheu

MangochiMangochi

MachingaMachinga

ZombaZomba

ChikwawaChikwawa

ThyoloThyolo

MulanjeMulanje

MwanzaMwanza

DowaDowa

KasunguKasungu

MzimbaMzimba

ChiradzuluChiradzulu

NtchisiNtchisi

LirangweLirangwe

N’gabuN’gabu

BalakaBalaka

NkhungaNkhunga

LuwawaLuwawa

ChintecheChinteche

ChisengaChisenga

KatumbeKatumbe

ChelindaChelinda

KafukuleKafukule

EuthiniEuthini

KalulumaKaluluma

NamiteteNamitete

BlantyreBlantyre

MzuzuMzuzu

LILONGWELILONGWE

Bua

PhalombePhalombe

NORTHERNNORTHERN

C E N T R A LC E N T R A L

S O U T H E R NS O U T H E R N

Z A M B I AZ A M B I A

M O Z A M B I Q U EM O Z A M B I Q U E

M O Z A M B I Q U EM O Z A M B I Q U E

TANZANIATANZANIA

NsanjeNsanje

Lirangwe

N’gabu

MonkeyBay

Makanjila

Nkhunga

Luwawa

Chinteche

Chilumba

Chisenga

Ruarwe

Mkondowe

LivingstoniaKatumbe

Chelinda

Kafukule

Euthini

Kaluluma

Namitete

Chitipa

Karonga

Rumphi

MchinjiSalima

Dedza

Ntcheu

Mangochi

Machinga

Zomba

Chikwawa

Nsanje

Thyolo

Mulanje

PhalombeMwanza

Neno

Dowa

NkhataBay

KasunguNkhotakota

Mzimba

Chiradzulu

Ntchisi

Balaka

Blantyre

Mzuzu

LILONGWE

NORTHERN

C E N T R A L

S O U T H E R N

Z A M B I A

M O Z A M B I Q U E

(MALAWI)

M O Z A M B I Q U E

TANZANIA

Bua

Songwe

LakeChilwa

Shire

Lake Malaw

i

To Muyombe

To Muyombe

To Lundazi

To Chipata

To Furancungo

To Ulongwe

To Tete

To Morire

To Liciro

To Vila de Sena

To Cuamba

To Cuamba

To Mbeya

To Tunduma

Vip

hya

M

tns.

Sapitwa(3,002 m)

Nykia(2,606 m)

36°E

34°E 36°E

32°E

32°E

10°S

12°S

14°S

12°S

14°S

16°S 16°S

10°S

MALAWI

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 20 6040 80

0 20 40 60 Miles

100 Kilometers

IBRD 33440R1

MAY 2012

MALAWICITIES AND TOWNS

DISTRICT CAPITALS*

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

DISTRICT BOUNDARIES

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES*District names are identical to the District Capitals.