AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND

MALAWI

COUNTRY STRATEGY PAPER

2005–09

COUNTRY OPERATIONS DEPARTMENT NORTH, EAST & SOUTH (ONCF)

SEPTEMBER 2005

MALAWI 2005-09 COUNTRY STRATEGY PAPER

Table of Contents EXECUTIVE SUMMARY--------------------------------------------------------------------------- VI 1. INTRODUCTION -------------------------------------------------------------------------------- 1 2. COUNTRY CONTEXT ------------------------------------------------------------------------- 2

2.1 POLITICAL SITUATION ------------------------------------------------------------------------- 2 2.2 MACROECONOMIC AND STRUCTURAL ISSUES----------------------------------------------- 2 2.3 SECTORAL CONTEXT ISSUES ------------------------------------------------------------------ 5 2.4 PRIORITY CROSS-CUTTING ISSUES ----------------------------------------------------------- 6 2.5 POVERTY, SOCIAL CONTEXT AND ISSUES---------------------------------------------------- 8 2.6 MEDIUM-TERM ECONOMIC OUTLOOK AND EXTERNAL ENVIRONMENT ------------------ 10 2.7 PRIVATE SECTOR CLIMATE AND ISSUES ---------------------------------------------------- 11

3. NATIONAL DEVELOPMENT AGENDA AND MEDIUM-TERM PROSPECTS 13

3.1 KEY ELEMENTS OF THE GOVERNMENT DEVELOPMENT AGENDA ------------------------- 13 3.2 ASSESSMENT OF IMPLEMENTATION PROGRESS OF THE AGENDA ------------------------- 14 3.3 THE PARTNERSHIP FRAMEWORK ------------------------------------------------------------ 16 3.4 CHALLENGES AND RISKS--------------------------------------------------------------------- 18

4. BANK GROUP COUNTRY ASSISTANCE STRATEGY------------------------------- 18

4.1 COUNTRY CONTEXT AND STRATEGIC SELECTIVITY --------------------------------------- 18 4.2 PORTFOLIO MANAGEMENT AND LESSONS LEARNT FROM PREVIOUS CSP ---------------- 21 4.3 CSP AREAS OF FOCUS ------------------------------------------------------------------------- 22 4.4 REGIONAL DIMENSIONS OF BANK GROUP ASSISSTANCE ---------------------------------- 25 4.5 CSP RESULTS FRAMEWORK ------------------------------------------------------------------ 25 4.6 BANK GROUP ASSISTANCE: PERFORMANCE-BASED RESOURCE ALLOCATION,

PERFORMANCE BENCHMARKS, AND LENDING AND NON-LENDING ACTIVITIES--------- 27 4.7 PARTNERSHIP AND HARMONISATION ------------------------------------------------------- 29

5. RESULTS-BASED MONITORING AND EVALUATION ----------------------------- 31

5.1 MONITORING OF CSP OUTCOMES AND BANK GROUP PERFORMANCE -------------------- 31 5.2 MANAGING RISKS----------------------------------------------------------------------------- 32 5.3 COUNTRY DIALOGUE ISSUES----------------------------------------------------------------- 32

6. CONCLUSION AND RECOMMENDATION--------------------------------------------- 33

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CURRENCY EQUIVALENTS (end-August 2005)

UA 1 = US$ 1.460

UA 1 = MK 179.142 US$ 1 = MK 122.717

FISCAL YEAR 1 July to 30 June

WEIGHTS AND MEASURES

Metric System Boxes Box I: Key Features of Malawi ............................................................................................................... 2 Box II: Impact of Higher Oil Prices on Malawian Economy.................................................................. 4 Box III: Causes of Poverty and Vulnerability in Malawi........................................................................ 9 Box IV: Food Security Developments in Malawi ................................................................................. 10 Box V: Summary of Vision 2020.......................................................................................................... 13 Box VI: Donors’ Intervention by Sector ............................................................................................... 16 Box VII: Consultations on Bank Group Strategy.................................................................................. 19 Tables Table 1: Macroeconomic and Financial Indicators ................................................................................. 3 Table 2: MDGs-MGDS-CSP Linkages and Results Flow .................................................................... 20 Table 3: Summary of CSP Framework Matrix...................................................................................... 26 Table 4: ADF-IX & ADV-X Allocations.............................................................................................. 28 Table 5: Reforms and Benchmarks to Improve Country Performance ................................................. 30 Annexes Annex 1: Map of Malawi Annex 2: Malawi: Bank Group Operations Annex 3: 2005-09 CSP Framework Matrix Annex 4: 2005/06 CABS Performance Assessment Framework Annex 5: Malawi’s Millennium Development Goals Annex 6: Main Donor MPRSP Interventions by Sector Annex 7: Malawi: Comparative Socio-economic Indicators Annex 8: Malawi: GDP by Economic Activity at Constant 1994 Factor Cost, 1999-2003 Annex 9: Malawi: GDP by Expenditure at Constant 1994 Market Prices, 1999-2003 Annex 10: Malawi: GDP by Expenditure at Current Market Prices, 1999-2003 Annex 11: Malawi: National Composite Consumer Price Index, 1999-2004 (August) Annex 12: Malawi: Central Government Operations, FY 1998/99-2003/04 Annex 13: Malawi: Monetary Survey March 2001-June 2004 Annex 14: Malawi: Balance of Payments, 1999-2003

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ACRONYMS AND ABBREVIATIONS

ADB : African Development Bank ADF : African Development Fund ADMARC : Agricultural Development Marketing Corporation AGOA : African Growth and Opportunity Act APPR : Annual Portfolio Performance Review APR : Annual Progress Reports BWI : Bretton Woods Institutions CABS : Common Approach to Budget Support CAP : Country Assistance Paper CAS : Country Assistance Strategy CCA : Credit Ceiling Authority CCS : Commitment Control System CDSS : Community Day Secondary School CFAA : Country Financial Accountability Assessment CEDAW : Convention for the Eradication of Discrimination Against Women COMESA : Common Market for East and Southern Africa CPAR : Country Procurement Assessment Review CPIA : Country Policy and Institutional Assessment CPRR : Country Portfolio Review Report CSP : Country Strategy Paper CWIQ : Core Welfare Indicator Questionnaire DHS : Demographic Health Survey DfID : Department for International Development DHS : Demographic and Health Survey DPP : Democratic Progressive Party EBA : Everything But Arms Initiative ESP : Education Sector Plan EU : European Union FIMAG : Fiscal Management and Accelerating Growth GDP : Gross Domestic Product GFEM : Group on Financial and Economic Management GNI : Gross National Income GoM : Government of Malawi Ha : Hectare HDI : Human Development Index HDR : Human Development Report HIPC : Heavily Indebted Poor Countries Initiative HIV/AIDS : Human Immunodeficiency Virus/Acquired Immuno-Deficiency Syndrome HPI : Human Poverty Index IFMIS : Integrated Financial Management Information System IHS : Integrated Household Survey ILO : International Labour Organisation IMF : International Monetary Fund ISP : Institutional Support Project MARDEF : Malawi Rural Development Fund MASIP : Malawi Agriculture Sector Investment Programme MCGP : Malawi Country Gender Profile

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MDG : Millennium Development Goals M&E : Monitoring and Evaluation MFAAP : Malawi Financial Accountability Action Plan MGCWCS : Ministry of Gender, Child Welfare and Community Services MGDS : Malawi Growth and Development Strategy MIDC : Mining Investment and Development Corporation MIPA : Malawi Investment Promotion Agency MMR : Maternal Mortality Ratios MTEF : Medium-term Expenditure Framework MSE : Malawi Stock Exchange MSME : Micro, Small, and Medium-scale Enterprises MPRSP : Malawi Poverty Reduction Strategy Paper MRA : Malawi Revenue Authority NAC : National AIDS Commission NEAP : National Environmental Action Plan NEPAD : New Partnership for Africa’s Development NGO : Non-governmental Organisation NSO : National Statistical Office PAF : Performance Assessment Framework PBA : Performance-Based Allocation PCR : Project Completion Report PFM : Public Financial Management PHC : Population and Housing Census PIF : Policy and Investment Framework PIU : Project Implementation Unit POW : Plan of Work PP : Problematic Project PPE : Pro-poor Expenditure PPP : Potentially Problematic Project PR : Project at Risk PRGF : Poverty Reduction and Growth Facility PRS : Poverty Reduction Strategy RMB : Reserve Bank of Malawi RWSSI : Rural Water Supply and Sanitation Initiative SADC : Southern African Development Community SGR : Strategic Grain Reserve SMP : IMF Staff-Monitored Programme SPFS : Special Programme for Food Security SSIDS : Small-scale Irrigation Development Study STABEX : Stabilisation of Export Earnings SWAp : Sector-Wide Approach UA : Unit of Account UDF : United Democratic Front UNAIDS : United Nations AIDS Programme UNICEF : United Nations Children’s Fund UNDP : United Nations Development Programme UNFAO : United Nations Food and Agricultural Organisation UNWFP : United Nations World Food Programme USAID : US Agency for International Development

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EXECUTIVE SUMMARY 1. INTRODUCTION

The objective of the 2005-09 CSP is to provide the Bank Group with an assistance strategy in Malawi that contributes to poverty reduction and socio-economic development. The CSP is linked to the successor strategy of the Malawi Poverty Reduction Strategy Paper (MPRSP), the Malawi Growth and Development Strategy (MGDS), which will run from 2006 to 2011. The Bank’s strategy, with its focus on rural poverty, aims to assist government to promote rural development, especially by addressing the problem of food insecurity, investing in human capital, institutional capacity, infrastructure and governance. Bank Group contributions are intended to complement government and development partners’ activities. Furthermore, the Bank Group aims (especially through the planned country office), to continue dialogue and monitoring within the MGDS framework, especially focusing on governance, institutional capacity building, private sector development, sector policies, and portfolio management. 2. COUNTRY CONTEXT With 10 years of national multiparty democracy, Malawi remains relatively stable. But the democratic dividend has yet to translate into improved livelihoods and reduced levels of poverty. The new political team that has evolved following the 2004 elections has set out a strong economic growth and anti-corruption agenda. Economic growth is an essential element of poverty reduction efforts in Malawi. The prerequisites for growth are macroeconomic stability and the removal of infrastructure, institutional and policy constraints. Efforts to address these constraints are being made by government by pursuing appropriate fiscal and monetary policies, which have been supported by the IMF resuming its financial support under a new three-year Poverty Reduction and Growth Facility (PRGF) in August 2005. Malawi’s recent real GDP growth rate has been highly variable because of the economy’s continued dependence on the agricultural sector, which in turn is highly susceptible to changes in weather (drought and flooding). With little noticeable diversification of the economy, the agricultural sector remains the dominant economic sector. Macroeconomic instability is also a recurring problem, characterised by high inflation rates, large fiscal deficits, large increases in money supply growth, and high real interest rates. Weak public financial management is one of the main reasons why macroeconomic stability has not been achieved, which has hampered efforts to reduce poverty. Poverty reduction efforts also face many other challenges that need to be overcome, such as diversifying the economy, improving the quality and quantity of infrastructure, enhancing governance and reducing corruption, improving gender equality, increasing regional integration, reducing HIV/AIDS infection rates, protecting the environment, and developing the labour market.

Poverty is widespread, and Malawi’s social indicators are among the lowest in the world (some 64% of Malawians live below the poverty line). Reinforcing the view of entrenched poverty are human development indicators that point to insufficient and extremely poor quality education and health care. While data are lacking for a quantified assessment, little progress is likely to have been made in reducing poverty over the last decade. Linked to the pervasiveness of poverty is the issue of food insecurity, which is yet to be resolved.

Regarding the medium-term outlook, Malawi needs to generate real GDP growth of 6% per year or more to make an impact on reducing poverty. This is attainable only if macroeconomic stability is restored, governance is improved, business confidence is nurtured,

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an enabling environment is created which helps expand the country’s production and export capacity, and the country’s vulnerability to external shocks is reduced. Although Malawi is turning the corner after years of slow growth, an unsustainable level of domestic debt, high real interest rates, weak private sector confidence, a recurrence of drought (Malawi is currently, again, facing food shortages due to recent drought), a reliance upon the agricultural sector and recent high oil prices are just some of the challenges that must be addressed in the new poverty reduction strategy for sustained, positive change to be made. 3. NATIONAL DEVELOPMENT AGENDA AND MEDIUM-TERM PROSPECTS Malawi’s long-run development goals focus on the priorities identified in the government’s Vision 2020 document and the MDGs. These long-term aims are closely related to the goals articulated in the new MGDS, a “home grown” development agenda, which has been designed by government, in partnership with all stakeholders, which are:

(i) Sustainable Economic Growth (ii) Social Protection (iii) Social Development (iv) Infrastructure (v) Improving Governance

As the new MGDS will be introduced in early-2006, the focus of assessing

implementation is on the recently concluded MPRSP. Progress to date of what the MPRSP has achieved has been carried out by government in two Annual Progress Reports (APR). In summary, the progress achieved has been below expectations and the analysis of progress has been weak. MGDS aid coordination is undertaken at the sector, national and international levels, which provide a framework for all donors’ interventions in the country over the medium-term. The Bank Group is also keen that under the 2005-09 CSP, further efforts are made to increase the level of coordination with other donors, which will help deliver better results from its support. The new government faces several challenges over the forthcoming years in implementing the new MGDS. Along with these challenges, there are also risks that may prevent parts of the MGDS being implemented. These risks fall into two broad categories, those that are within (institutional capacity, political will, and resource allocation), and those that are outside the government’s control (weather, HIV/AIDS, and terms of trade). 4. BANK GROUP COUNTRY ASSISTANCE STRATEGY The CSP is based on the MGDS, and it is driven by considerations such as: (i) the Bank Group’s experience and lessons learned from the implementation of previous interventions; (ii) discussions with other donors relating to their current activities and likely future activities; and (iii) the ADF-X policy guidelines; and (iv) a focus on selectivity. The 2005-09 CSP will be financed partly by the ADF-X (2005-07) allocation of UA47 million (100% grant), and partly by the ADF-XI (2008-10) allocation, which has yet to be conformed.

The CSP has three core principles: (i) support the implementation of the new MGDS to achieve its goals and help eventually lead to the attainment of Malawi’s Vision 2020 goals and MDGs; (ii) provide a clear focus on results and outcomes, to improve the rate of return on the Bank Group’s interventions; and (iii) improve the coordination of Bank Group activities with government and other donors. The Bank Group’s interventions will continue by providing project and policy-based support.

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In general, the CSP is formed around the idea of increased selectivity (which limits the spread of the Bank Group’s activity), and larger-sized projects. Based on the above analysis, the proposed CSP strategy revolves around interventions in two pillars:

Pillar I – Expanding Rural Infrastructure Pillar II – Developing Human Capital and Institutional Capacity

CSP Pillar I interventions seek to help increase the level of irrigation infrastructure

and electricity supply, to support agricultural/rural and private sector development. CSP Pillar II interventions seek to enhance skills and knowledge through better education, improve health service delivery to the population, and strengthen institutional capacity. The CSP interventions are, therefore, directly linked to the strategic priorities of the MGDS and aligned with Vision 2020 and the MDGs. In addition, on-going Bank Group projects, ESW and other non-investment activity carry on previous Bank Group efforts that seek to support poverty reduction in Malawi and help deliver the government’s long-term development goals. Continuing to support some of the sectors that were identified in the 2002-04 CSP helps demonstrate continuity of Bank Group thinking in the context that Malawi’s long-term development objectives remain the same. Portfolio performance of on-going projects also has an influence on the new CSP, as lessons learnt and project improvements will be taken into consideration in designing and implementing new CSP interventions.

The CSP results expected from the Bank Group’s interventions are presented in the CSP Results Framework Matrix in Annex III, which links Bank Group interventions, intermediate indicators, outputs and outcomes to be achieved under the CSP. To enhance resource flow predictability and planning, the Performance-Based Allocation system will be used to determine Malawi’s maximum allocation during ADF-X (and ADF-XI), along with the proportion of grants, with a firm amount for year one and indicative amounts for years two and three of ADF-X. Benchmarks are linked to portfolio rating, macroeconomic policy, governance/anti-corruption, and core poverty expenditure. 5. RESULTS-BASED MONITORING AND EVALUATION The government is expected to produce several analyses to monitor and evaluate poverty reduction efforts. The CSP also provides monitoring and evaluation analysis of the implementation of the Bank Group’s strategy by assessing performance of relevant medium-term indicators. There are a number of risks that prevent the MGDS being fully implemented, which require managing to lessen their potential effect on MGDS targets being met. To ensure the successful CSP implementation and performance, the Bank Group will maintain dialogue with the government and other stakeholders on several policy, reform and institutional issues. 6. CONCLUSION AND RECOMMENDATION The Bank Group, in consultation with the government and stakeholders, has chosen to support interventions based on the two pillars mentioned above. The Boards of Directors are requested to consider the programme of activities and the interventions proposed for Malawi for 2005-09 on the basis of a resource allocation of UA47 million (100% grant) under ADF-X (the ADF-XI allocation has yet to be determined), and approve the proposed strategy.

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MALAWI 2005-09 COUNTRY STRATEGY PAPER 1. INTRODUCTION

1.1 The 2002-04 Malawi Country Strategy Paper (CSP), ADF/BD/WP/2003/33, approved by the Boards of Directors on 18 June 2003, guided the African Development Bank Group’s operations in the country, especially under ADF-IX. The CSP was based on the Malawi Poverty Reduction Strategy Paper (MPRSP) adopted by the Government of Malawi (GoM) in April 2002. In conformity with the MPRSP, the Bank Group supported programmes and projects that helped meet the four key pillars of the MPRSP: (i) sustainable pro-poor economic growth; (ii) human capital development; (iii) improved quality of life for the most vulnerable; and (iv) good governance. Specifically, the CSP aimed to support the government’s efforts to reduce poverty through a three-pronged strategy by: (i) increasing economic growth; (ii) strengthening the responsiveness of public institutions and policies to the needs of the poor; and (iii) reducing the vulnerability of the poor to shocks by implementing effective safety nets. Cross-cutting issues of gender, environment, and governance were also considered in implementing the strategy. Overall, the Bank Group’s 2002-04 CSP priority sectors were agriculture, transport, social, public utilities and multisector. The strategy considered private sector development, but no activity took place.

1.2 The objective of the 2005-09 CSP is to provide the Bank Group with an assistance strategy in Malawi that contributes to poverty reduction and socio-economic development. The CSP is linked to the successor strategy of the MPRSP, the Malawi Growth and Development Strategy (MGDS), which will run from 2006 to 2011. The explicit messages highlighted in the CSP revolve around the enormity of the challenges facing the country in view of the high incidence and depth of poverty, prevalence of the HIV/AIDS, vulnerability, food insecurity, gender disparities, and unfavourable demographic trends. Furthermore, the constraints to development are formidable, reflected in uncertain macroeconomic environment (both due to risks of external shocks and financial management), unsatisfactory public sector performance and governance, limited and un-diversified production and export capacities, inadequate physical infrastructure, and dismally undeveloped human and social capital.

1.3 The CSP is organised in six chapters, describing the socio-economic and political contexts (in chapter two), discussing government’s poverty reduction agenda (in chapter three), proposing Bank Group’s role (in chapter four), assessing the monitoring arrangements and proposing areas for dialogue (in chapter five), prior to concluding and recommending (in chapter six). The underlying analytical framework is that not only is economic growth vital for poverty reduction, but also it has to be rapid, sustainable, broad based and be complemented by building the capabilities, enhancing the security, and facilitating the empowerment of the poor people. The proposed strategy, therefore, aims to contribute to expanding the country’s physical infrastructure and capital, investing in human resources and institutional capacity and promoting good governance. The planned field presence of the ADB Group will contribute to strengthening partnership with government and other donors and closely monitor the Bank Group’s portfolio with a focus on outcomes and results.

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Box I: Key Features of Malawi Malawi is a landlocked country situated in South/Central Africa, bordered by Tanzania to the north and north east, Mozambique to the south east and south west, and Zambia to the west. Lilongwe (population c.450,000) is the capital and administrative centre. Blantyre (population c.550,000) is the commercial centre, which is located in the south of the country. National languages are English and Chichewa. Malawi has a land area of 118,484 km2, of which about a third is made up of Lake Malawi. Real GDP per capita in Malawi has fallen to around US$160 in 2004. Poverty is widespread; social indicators are among the worst in the world and the country has to go along way in meeting the MDGs. HIV/AIDS, malaria and tuberculosis are widely spread. Malawi’s infrastructure remains weak, with low levels of electrification, tarred roads and clean water supply/sanitation. Malawi, which has a young population, is densely populated, with about 50% living in the south, 39% in the centre and 11% in the north. The economy is highly dependant on agriculture (particularly tobacco), which supports the majority of the population (who farm small plots of land). Agricultural output and productivity are low, mostly rain-fed and lacks diversification. As a result, most smallholders generate very low levels of income, which contributes to widespread poverty. In addition to limited economic growth, economic insecurity resulting from frequent droughts and floods are also major causes of poverty.

2. COUNTRY CONTEXT 2.1 POLITICAL SITUATION

After 30 years of one-party rule under Dr Hastings Banda, multi-party democracy was ushered in Malawi with the adoption of a new constitution and elections in 1994. The presidential election was won by Bakili Muluzi, representing the United Democratic Front (UDF). The ten-year era of the UDF was characterised by political competition and wrangling. The subsequent May 2004 presidential election was won by the UDF candidate, Bingu wa Mutharika, securing 36% of votes cast on a turnout of 54%. In the concurrent legislative election, the UDF came second to the Malawi Congress Party (MCP). In February 2005, President Mutharika established the Democratic Progressive Party, to gain a political base and a governing majority in Parliament. Mr Mutharika has initiated measures to reduce corruption and fraud. However, his government faces great challenges in developing a democratic culture, political institutions, policy decision-making and implementation capacities, efficient delivery of public services, and in coping with exogenous shocks. The government is addressing some of these constraints by working with donors to overcome the challenges it faces in attaining the Millennium Development Goals (MDGs).

2.2 MACROECONOMIC AND STRUCTURAL ISSUES 2.2.1 Overview: The macroeconomic environment has been characterized by high inflation rates, large fiscal deficits, rapid money supply growth, and high real interest rates. Poor public financial management (PFM) has led to the rapid growth in money supply, thereby stoking inflation and adding pressure on the kwacha to depreciate. As a result, the IMF suspended disbursements twice-in early 2001 and again in early 2004. The new government appears committed to pursuing appropriate fiscal and monetary policies. Consequently, the IMF resumed its financial support under a new three-year, US$56 million Poverty Reduction and Growth Facility (PRGF) on 5 August 2005 (following a successful Staff-Monitored Programme—SMP—implemented since July 2004). However, the recent rise in oil prices and the drought that reduced the 2004/05 harvest (which the Bank Group is responding to) have added destabilizing pressures on the macroeconomic position, reflected in cost-push inflation, increased fiscal and external imbalances, and a likely reduced rate of real GDP growth. The oil price rise has already increased the fuel import bill, which is projected to jump from US$ 95 million to US$ 157 million during 2004-2005 (assuming an oil price of US$ 62 dollar per barrel and inelastic demand). In addition, a significant pressure will be put on the budget. Initially, government was confident about its ability to contain the impact of the drought on the budget. However, in view of the added impact of the higher oil prices, government and its partners are discussing the effects on the overall macroeconomic framework (agreed with the IMF under the PRGF) and the appropriate responses needed.

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2.2.2 Economic Growth: Table 1 shows that Malawi’s real GDP growth has been highly variable during 2001-04 and much below the targeted rate of 6% per year. Drought, combined with poor government policy and the suspension of donor assistance, retarded real GDP growth to 1.9% in 2002. The recovery in maize production pushed real GDP growth to 4.4% in 2003. However, low rainfall levels in the 2004/05 growing season reduced the harvest, and slowed real GDP growth to an estimated 4.2% in 2004. Overall, fluctuation in GDP is a result of the high dependence on rain-fed agriculture. There has been little noticeable diversification of the economy—the industrial sector remains basic and constrained by an unfavourable investment environment, weak entrepreneur class, undeveloped human capital, and high transport and power costs. Inflationary pressures cause uncertainty among businesses, which reinforces low real GDP growth. And as tobacco exports are the main source of foreign exchange for the economy, a poor tobacco harvest (either in quality or quantity of output) creates downward pressure on the kwacha. Higher oil prices also weaken real GDP growth—as oil prices rise, an increase in consumption-related expenditure is diverted to pay for rising petroleum price at the expense of other goods.

Table 1: Macroeconomic and Financial Indicators 2001a 2002a 2003a 2004b

GDP (US$ bn) 1.7 1.6 1.5 1.6Real GDP growth (%) -4.1 1.9 4.4 4.2Consumer price inflation (av; %) 27.2 14.9 9.6 11.2a

Fiscal balance (% of GDP)c -7.9 -12.1 -7.3b -4.3Current-account balance (US$ m) -117 -221 -150 -146Foreign-exchange reserves (US$ m) 203 162 121 145Total external debt (US$ bn) 2.6 2.9 3.1 3.2Exchange rate (year-end) MK:US$ 72.2 76.7 97.4 108.9a

a Actual. b Estimates. c Fiscal year July-June. Source: Government and IMF.

2.2.3 Fiscal Policy: Weak fiscal management is a recurring problem. In 2003/04, as in each year since 1997/98, expenditure has exceeded both original budget estimates and revised estimates. And in December 2004, the IMF advised that the budget process remained extremely weak. Total revenue and grants has fluctuated over recent years, influenced heavily by the effect of weather on agricultural output. Given these changes in expenditure and revenue, the overall fiscal balance, including grants, has remained in deficit in recent years, which is of concern given that such a large level of government revenue is provided by donor inflows. Despite the government projecting the fiscal deficit in 2003/04 would narrow to 3.4% of GDP, it widened to an estimated 7.3% of GDP (from 12.1% of GDP in 2002/03), in large part due to the former government’s election-related spending (which by mid-2004 had resulted in a fiscal crisis). The fiscal policy advice that the new government has been implementing under the IMF’s SMP and PRGF has focussed on reforms to improve capacity to meet macroeconomic stabilisation targets, protection of pro-poor expenditures (PPE), and improvements in the delivery of social services. (One reform success is the rise of PPE in the 2004/05 fiscal budget to 23% of total expenditure and net lending from 15% in 2003/04.) 2.2.4 Money and Inflation: Fiscal laxity has been the main cause of rapid growth in money supply, which has fed through into high inflation throughout much of the past decade. Money supply growth has increased rapidly from late 2002: combined narrow money (M1) and broad money (M2) supply growth rose by 25% at end-2004 from end-2003, due to a combination of delayed donor disbursements, election-related spending and public sector wage overruns. This growth, along with high oil prices, has helped keep prices high, lifting average inflation to 11.2% in 2004 (as of September 2005, the most recent annual rate was 15.5% in May). In

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order to reduce inflation, the Reserve Bank of Malawi (RBM, the central bank) will need to contain broad money supply growth and mop up the liquidity overhang that built up at the end of the 2003/04. 2.2.5 External Sector: Malawi has a structural deficit on its current account. This is mainly the result of a high deficit on the services account, due to being landlocked and the resultant high transport costs required for importing goods. Excluding official transfers, the current-account deficit has been over 15% of GDP during the last four years (including official transfers it has remained above 8% of GDP over the same period), which is unsustainable in the medium-term. This is of concern given recent oil price increases (see Box II for the impact of these rises) and that movements in the current account are heavily influenced by changes in tobacco exports and food crop production, both of which are strongly effected by weather patterns. Donor transfers (now that relations have improved), produce a regular surplus on the current-transfers account, although interest payments on external debt keep the income account in deficit. Foreign direct investment has been a relatively important inflow over this period, but is approximately half the value in any given year compared to debt amortisation. Foreign exchange reserve levels have also fluctuated over 2000-04, and have rarely risen above an equivalent of three months of import cover. With one crop per year, foreign exchange reserve levels follow an annual cyclical pattern: during tobacco auctions (March/April to September/October), tobacco sales generate most domestically generated foreign exchange. In the other period, foreign exchange reserves dwindle through usage and are mainly topped-up by donor disbursals.

Box II: Impact of Higher Oil Prices on Malawian Economy The recent increase in oil prices is adversely affecting the Malawian economy through a variety of ways: • The import bill has been raised (petrol import bill is likely to have increased by over 60%), which has adversely affected the current-account balance

(through a worsening of the trade balance). This has led to an increase in the financing gap that will need to be met. Therefore, Malawi will need additional financial assistance to meet this growing burden.

• There has been an increase in cost-push inflationary pressure, as the high oil price is passed on through all levels of the economic chain, from importers, to distributors, to consumers.

• Malawi’s international competitiveness has been eroded as a result of increased costs for inputs (particularly those that are imported due to transport cost rises, which are high due to Malawi being landlocked).

• Real GDP growth will be lowered—as oil prices rise. • On the fiscal side, if government fails to pass the price rise on to users, while pro-poor expenditure is protected in Malawi, spending on other goods and

services will be reduced. • In the medium-term, households, business and government will adjust to a new relative price structure, through substitution and policy changes.

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2.2.6 Debt Sustainability: Malawi’s total external debt rose to US$3.13 billion at end-2003 from US$2.91 billion at end-2002 (equivalent to 188% of GNI in 2003 from 158% of GNI in 2002). The debt-service ratio rose to 7.7% in 2003 from 6.3% in 2002, reflecting a drop in total exports and a rise in debt service repayments. In recognition of Malawi’s unsustainable external debt position, the IMF, World Bank and the Bank Group approved Malawi’s participation in the Enhanced Highly Indebted Poor Countries’ (HIPC) debt relief initiative. Although HIPC Decision Point was reached in December 2000, arriving at the HIPC Completion Point is dependent on the government having achieved at least six months of successful PRGF implementation and concurrently one year of a donor-supported Poverty Reduction Strategy in place. The new August 2005 PRGF means that HIPC Completion Point will only be reached by early 2006 at the earliest. (Further Paris Club debt relief is also based on progress being achieved with PRGF reforms.) Domestic debt levels are very high due to the previous government’s loose fiscal policy. By end-June 2004, outstanding domestic debt had risen to MK38.3 billion (21% of GDP), from MK25 billion at end-June 2003. The government, with IMF advice, is reducing domestic debt via a responsible fiscal policy.

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2.2.7 Progress in Policy Reforms: Recent policy reforms have been driven by advice contained in the IMF’s SMP and the new PRGF. However, the country’s performance has generally fallen short of expectations because of a lack of ownership, weak planning, insufficient monitoring, limited implementation capacity, and governance issues. The government is facing a wide ranging agenda of reforms aimed at enhancing the functioning of markets, improving public sector management, restructuring public enterprises, promoting good governance and developing appropriate social and sector policies. 2.3 SECTORAL CONTEXT ISSUES 2.3.1 The Agricultural Sector: The agricultural sector contributes on average around 40% of GDP, accounts for about 75% of total export earnings, and generates income for 84% of the population. Smallholder agriculture provides a livelihood to 2.4 million people and contributes around 80% of agricultural GDP (commercial farmers produce the rest). Agricultural production, however, has been erratic. In 2005, early dry weather resulted in substantial food shortage estimated at nearly 1 million tonnes; in 2001 there was a food shortage of 1.5m tonnes. These frequent food shortages occur despite the country’s large natural resource base and potential water resources. Low agricultural productivity and limited investment in the sector compounded with problems of land tenure, reliance on rain, lack of rural credit, inadequate physical infrastructure and poor marketing institutions keep the country’s capacity for food production and exports at a low level. More than 2.1 million ha has been estimated to have high potential for irrigation, located largely in the south. At present, the area of irrigated sugar estates and rice schemes is approximately 48,000 ha with another 8,000 ha of smallholder irrigated land, equivalent to around just 3% of the total. 2.3.2 The Industrial and Service Sectors: The manufacturing sector, which accounts for around 10% of GDP, is constrained by small market size, quality issues, high dependence on imported inputs, and a lack of competitiveness. It consists mainly of agricultural processing, textiles, and the production of clothing and footwear. The highly concentrated ownership of Malawian manufacturing is the economic legacy of the pre-democracy regime. Non-manufacturing industries account for an average of 5% of GDP, which reflects the low level of mining. The services sector, which is dominated by government spending, accounts for around 45% of GDP, although this fluctuates given the uncertainties of fiscal revenue in drought years. Financial services remain concentrated in the main urban areas and serve mainly government, businesses, donors, NGOs and some private individuals. Most of the population do not have access to mainstream financial services on offer. 2.3.3 Infrastructure: Malawi is deficient in many forms of infrastructure. The transport sector is dominated by roads, which accounts for over 85% of total transport operations. As a landlocked country, Malawi depends greatly on connections to neighbouring countries for the overland movement of exports and imports. Since independence, the road system has expanded to around 15,000 km, of which around 3,000 km are tarred. But this low number of tarred roads hampers the free movement of goods in and around Malawi. Dirt roads abound through the country, but many become impassable in the rainy season. Rail infrastructure is in a relatively poor state, which constrains import and export activity. Marine transport is similarly relatively dilapidated and port facilities and onward road networks fail to provide the necessary ability to handle large quantities of goods. Poor infrastructure conditions have increased transport costs, which are up to three times higher compared to some neighbouring countries. In 2001 the government initiated some transport policy reforms that saw the creation of the National Roads Authority and the privatisation of Malawi Railways.

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2.3.4 Energy: Fuel wood is Malawi’s main source of energy. Current demand of around 40,000 ha per year is estimated to be growing by around 6% per year, an unsustainable rate that has already deforested large tracts of Malawi (increasing soil erosion and river siltation). Malawi’s electricity supply is unreliable; power cuts and fluctuating power levels are a major problem for manufacturers and act as a disincentive to new investment. Although four hydroelectric stations have opened on the Shire River since 1989, low water flow—owing to drought—high siltation levels and weed blockages have hindered their operation. Despite the increase in installed capacity to around 300MW, supply does not meet domestic demand. Furthermore, because of the low price charged by the state-owned Electricity Supply Commission (Escom), resources generated are insufficient for investment and development. Progress has been made to link the electricity grid with its Mozambican counterpart to access Cahora Bassa power station via an Inter-connector. Full link-up is expected in 2007, which will add initially around 50MW of power supply, which could rise to around 100MW. This will be consistent with the MGDS, which recognises the key requirement of a solid electricity supply network as a major contributor to increased economic activity and poverty reduction. 2.3.5 Water & Sanitation: The water and sanitation sector is characterised by an uneven distribution of resources, poor coordination and fragmented institutional arrangements. Widespread donor funding has introduced broad reforms and built capacity by: (i) establishing Regional Water Boards; (ii) developing a district-based, community-managed approach to rural water supply and sanitation; and (iii) establishing a Water Resources Management Board. It is estimated that 51% of the rural population and 69% of the urban population have access to clean water. The MPRSP aimed to construct 7,500 new water points by 2005 representing 55% of the new water point requirement for the MDGs. With regard to sanitation, it is estimated that 4% of the rural population and 22% of the urban population have access to improved sanitation (around 77% of the population have access to basic sanitation). While sanitation and hygiene promotion are complementary activities, they require different strategies, objectives and activities. Whilst Malawi has a comprehensive water policy, it does not have a separate sanitation policy. 2.4 PRIORITY CROSS-CUTTING ISSUES 2.4.1 Governance: There is considerable scope for improving accountability, transparency, democracy, participation, and the judicial system (for further details, see the 2004 Country Governance Profile—ADB/BD/IF/2004/84). The quality of PFM systems remain weak: the coverage of fiscal reporting is incomplete, compliance with regulations is limited, internal fiscal reporting is inadequate, budget planning is ineffective, audit backlogs are numerous, and procurement continues to suffer from several problems, particularly corruption. In response to these inadequacies, in May 2004 government adopted the Financial Accountability Action Plan (MFAAP), which is intended to address some of these PFM weaknesses and help improve the enabling environment for private sector activities. With regard to the fight against corruption, the new government declared a policy of zero tolerance and strengthened the Anti-Corruption Bureau in early 2004 through an amendment to the Corrupt Practices Act. In addition to setting up the Office of the Ombudsman, the Human Rights Commission, and the Law Commission, government also introduced a law governing the participation of civil society and NGOs in the public policy making process. In addition, ambitious plans to decentralise major policy responsibilities to local government were made. 2.4.2 Regional Integration: Malawi's largest trading partner is South Africa. Malawi’s physical and trade integration to the region remains weak, but it is involved in two regional

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integration initiatives, through its membership of the Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA). In September 2000 the SADC trade protocol came into effect aiming to achieve a Free Trade Area by 2008. COMESA, which now has 19 member states, aims to liberalise trade and in time achieve monetary union. The creation of a free trade area in late-2000 was to be a major step towards achieving them, but by mid-2005 only 11 of the 19 members had agreed to participate. Malawi is also a supporter of the continent-wide NEPAD initiative, which is seen as important for improving the quality of regional infrastructure. 2.4.3 Population: At end-2004 the population is estimated to have risen to 12.5 million, growing at 2% per year (over 7% in urban areas). Population density is high (and rising), as is the dependency ratio of 0.906 (every 10 working persons are supporting over 9 dependents). High population density in rural areas generates pressure on the best lands and, in the long run, results in poor agricultural practices. Ongoing rural out migration adds to already congested urban areas bringing additional strain on urban facilities and services. The population is youthful: around 47% of the population are aged between 0-14 years, 52% are aged between 15-64, with only around 4% over 65 years. Recent data suggests that the sex ratio is: (i) at birth 1.03 male/female; (ii) under 15 years 1.00 male/female; (iii) 15-64 years 0.97 male/female; and (iv) 65 years and over 0.69 male/female. The National Statistical Office (NSO) forecasts that the fertility rate will fall to 5.1 by 2025 from 6.0 in 2003. Large family sizes reduce savings and stretch existing services but also affect the health of women and their effective participation in social and economic development. There is, therefore, a need for sustaining and reinforcing government’s actions to assist in family planning and reproduction health. 2.4.4 Gender Equality: Disparities between men and women are widespread in terms of opportunities, access to services and means of production, and decision-making structures. Malawi’s Gender-related Development Index (GDI) position is 134 out of 144 (there is no data to create the Gender Empowerment Measure). It is not certain that Malawi will meet the MDG of gender equality by 2015. Malawi is characterised by low political empowerment of women, despite women’s large contribution to the economy. Early motherhood curtails women’s educational and employment opportunities, further aggravating their social and economic vulnerability and exposing them to HIV/AIDS. The adult illiteracy rate among women stood at 50.3% in 2003, compared to 24.5% for men. To redress gender imbalances, the Ministry of Gender, Child Welfare and Community Services (MGCWCS) formulated the Malawi National Gender Policy and Plan of Action in March 2000. It sought to tackle a wide range of gender issues, including reducing the gender education gap, enhancing women’s participation in decision-making processes, ensuring nutrition needs of children, and developing gender sensitive information, education and communication programmes on health. The recently finalised Malawi Country Gender Profile (MCGP) has revealed that the MGCWCS is currently under staffed and under resourced, resulting in insufficient outreach to sectors and local administration for gender mainstreaming and support. 2.4.5 HIV/AIDS, Communicable and Other Diseases: UNAIDS estimate that at end-2003 (the most recent data), the infection rate in adults (aged between 15 and 49) averaged 14.2%, while the urban HIV infection rate in adults is estimated to average 23%, compared to 12.4% in rural areas. However, there is evidence indicating that HIV prevalence has stabilised over recent years at around 15%. In response to the epidemic, the government launched a National HIV/AIDS Strategic Framework (2000–04) and established the National AIDS Commission (NAC) in 2001 to coordinate the national response, provide support to implementing agencies, mobilise resources, and monitor progress. The social and economic effect of the pandemic is

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huge: family structures are dissolving, and children being orphaned. At the economic level, AIDS-related illnesses are removing large numbers of otherwise active workers from the labour pool. In addition to HIV/AIDS, Malaria and Tuberculosis are the other main killer diseases in Malawi. But malnutrition, Sleeping Sickness, Bilharzias, Hepatitis and Typhoid are also long-standing major health problems. In combination, these diseases have debilitated the population’s efforts to engage in economic activity. 2.4.6 Environment: High population density, high illiteracy rates and poverty have led to environmental degradation of all resources. A large portion of Malawi’s biomass is burned each year, due to the clearance of crop residue, bush clearance (for farm land), forest fires, use of fire for hunting, and for fuel wood. This has resulted in large areas of land becoming deforested and degraded, which has led to soil erosion, which in turn has increased siltation of waterways, and depleted and reduced the quality of water resources. In addition, there is evidence that aquatic chemical changes in Lake Malawi can be attributed to the atmospheric fall out from fires and crop fertiliser run off. There is a downward spiral evident in Malawi where high environmental degradation rates have exacerbated poverty, as the poor depend on the environment and natural resources for survival, increasing environmental pressure. Recognising these problems, government launched in December 1994 a National Environmental Action Plan (NEAP). NEAP outlines environmental strategies, measures and programmes necessary for promoting the conservation, management and sustainable utilisation of the natural resource base. However, little progress has been achieved.

2.4.7 Labour Market: It is estimated that less than 15% of the labour force is employed in the formal sector of the economy. More than three quarters of the labour force are small-scale subsistence farmers, who face a variety of constraints, including a single rainy season/lack of irrigation, the small size of landholdings and increasing pressures on the available land due to population growth. Agricultural labour input is concentrated in just four months, resulting in high seasonal unemployment. Working conditions for low-level farm workers remain harsh and difficult. This is closely related to the pressure from large numbers of unemployed, which prevents wage increases and better working conditions. Informal non-agricultural employment, especially in urban areas, has traditionally been underdeveloped in Malawi. Linked to the high levels of poverty are substantial levels of child labour, both paid and unpaid. Despite having ratified all of the eight International Labour Organisation (ILO) conventions on core labour standards (five of them were ratified between 1998-2000), and the ILO Convention 182 on the Worst Forms of Child Labour, the situation for child labourers remains dire. Child trafficking remains relatively rare. 2.5 POVERTY, SOCIAL CONTEXT AND ISSUES

2.5.1 The Incidence of Poverty: Poverty is widespread, and Malawi’s social indicators are among the lowest in the world. According to poverty analysis undertaken in 2000, based on 1997/98 Integrated Household Survey (IHS) data, around 64% of Malawians live below the poverty line. Around 66% of the rural population live below the poverty line, compared to around 55% in urban areas. Regional- and gender-based variations in the incidence of poverty do not appear to be significant: the incidence of poverty in the Southern Region is 68% compared to 63% in Central Region and 63% in the Northern Region. Also, the incidence of poverty among female-headed households is 29% while it is 26% amongst male-headed households. The poverty gap index (the level of income required to lift the poor to the poverty line), is estimated at 20%. Income distribution is highly unequal. Recent Gini coefficient data for income per capita is 0.89 for urban areas and 0.72 for rural areas. The Gini coefficient for expenditure is 0.57 for urban areas and 0.44 for rural areas. The wealthiest 20% of households

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account for around 50% of goods and services while the poorest 20% consume around 6% of goods and services. In urban areas, the richest 20% consume around 60% while the poorest 20% consume less than 5%. Nationally, women earn less than men per annum, make up 67% of the population below the poverty line, and constitute almost 92% of the population with no formal literacy skills. Little progress has been made in reducing poverty over the last decade. While data remain weak, and projections subject to a high degree of uncertainty, current extrapolations of MPRSP targets for 2005 suggest that Malawi will not meet most MDGs.

2.5.2 Comparative Perspective of Human Development: The UNDP’s 2004 Human Development Report (HDR) ranks Malawi 165 out of 177 countries, little change from previous years. The HDR gives data on the yearly changes in the human poverty index (HPI), which focuses on the proportion of people below a threshold level in basic dimensions of human development (living a long and healthy life, having access to education, and a decent standard of living). In the 2004 HDR, Malawi’s HPI remained relatively unchanged, at nearly 47% of the population. This HPI score placed Malawi 83rd out of 95 countries. The 2004 HDR puts combined primary, secondary and tertiary enrolment ratio in Malawi at 74% (largely due to the universal free primary school education policy introduced in October 1994, and given about 40% of all government employees are teachers) and well above the bottom country, Mali at 19%. With a 73% youth literacy rate in 2002 as given in the 2004 HDR, up from 63% in 1990, Malawi’s education indicators are improving, but remain weak.

Box III: Causes of Poverty and Vulnerability in Malawi Poverty in Malawi is caused by various factors, mainly constraints on the economic productivity of land, labour, capital, and technology. Constraints on the productivity of land include rapid environmental degradation and limited access to land. Constraints on labour include generally low levels of education, poor health status, HIV/AIDS, lack of off-farm employment, population growth, gender inequalities and environmental degradation. The key constraint on capital is lack of access to credit, which in turn reduces the scope to upgrade technology. All of these factors are exacerbated by weak institutional capacity, distorted policy environment, a weak incentive structure and low economic infrastructure and social capital. Another problem is to reduce household’s vulnerability to external shocks. Many households live in absolute poverty and are prone to food shortages (and include the landless rural population, AIDS orphans, female-headed households, the infirm and elderly). To address these issues, government has experimented with a variety of safety nets. These have included agricultural starter packs, public sector work, nutrition programmes, and cash transfers. A recent initiative is an agricultural input subsidy scheme for smallholders.

2.5.3 Access to Education: It is estimated that almost all primary school age children are attending primary education, but the quality of the education provided is very poor (due to a large number of poorly trained teachers and inadequate teaching resources). The school drop-out rate for girls has increased from 10.9% in 2003 to 12.6% in 2004, while the rate for boys has been reduced from 11% in 2003 to 8.2% in 2004. Only 30% of those who start school complete the final year of the primary cycle, and overall repetition rate at this level is very high, making the attainment of the MDG of universal primary education difficult. At the secondary level, access and quality remain major concerns. In 2004, only 18% of the relevant secondary age group were enrolled in secondary schools, one of the lowest secondary enrolment ratios in sub-Saharan Africa. Secondary education quality is also low, especially at the Community Day Secondary Schools (CDSSs), which 46% of secondary school pupils attend. Most CDSS teachers are under-qualified, and teaching materials and infrastructure facilities are inadequate. The government’s education sector policies are set out in the 2002-12 Policy and Investment Framework (PIF), which was developed through an extensive participation and led to the creation of an Education Sector Plan (ESP). The ESP is designed to translate PIF strategies into an implementation plan over 2005-15. 2.5.4 Access to Health Services: The 2004 HDR gives life expectancy at birth in Malawi at nearly 38 years, down from 50 years in 1985 and 40 years in 1998, partly due to the effect of HIV/AIDS. The infant mortality rate has fallen, to 113 per live 1,000 births in 2003, from 189 per live 1,000 births in 1970, but this still remains high regionally. Performance for the

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Maternal Mortality Ratios (MMR) is equally poor, reported at 1,120 deaths per 100,000 live births in 2000 and has since worsened, currently reported at 1,800 deaths per 100,000 live births, making Malawi the third most affected country worldwide. In 2001 it was estimated that 49% of children under the age of five years were malnourished or stunted, up from 30% in 1995. The major causes of mortality and morbidity in Malawi are mostly preventable. Constant macroeconomic instability, increasing levels of poverty, the HIV/AIDS pandemic, and a huge shortage of skilled health professionals and adequate health centres have contributed to the increased pressure on the health system. Recent health-related expenditure remains low, at an average below 10% of total fiscal expenditure; expenditure per capita is just US$39 (in purchasing power parity terms). Efforts aimed at addressing these problems have recently been coordinated in a Sector-Wide Approach (SWAp).

Box IV: Food Security Developments in Malawi The causes of food shortages in Malawi are complex: low productivity in the agricultural sector, unfavourable weather conditions, a number of structural impediments to the sustainable growth of the agricultural sector, and over-reliance on maize for food are some of the root causes of recurrent food crises. But in addition, lapses in the government's early warning systems, unfavourable incentive structure, distortions in domestic markets, and mismanagement of food reserves are other important factors that have also exacerbated food security problems (the IMF has produced background information on these issues, which can be found at: http://www.imf.org/external/np/exr/facts/malawi.htm). The latest development in Malawi’s on-going food security issue is that the UN launched a US$88 million appeal on 30 August 2005 to cover both immediate food aid needs and help provide agricultural inputs for this coming agricultural season (starting in October). The Bank Group is responding to this appeal by mobilising the maximum amount of UA0.5 million in humanitarian relief.

2.6 MEDIUM-TERM ECONOMIC OUTLOOK AND EXTERNAL ENVIRONMENT 2.6.1 Constraints: The ambitious real GDP growth target of 6% expected in the MGDS is attainable only if macroeconomic stability is restored, governance is improved, business confidence is nurtured, an enabling environment is created that helps expand the country’s production and export capacity, and the country’s vulnerability to external shocks is reduced. Although Malawi is turning the corner after years of slow growth, numerous macroeconomic and other constraints remain. Important among these are: poor public sector performance, low domestic resource mobilisation and investment, undeveloped financial intermediation, unsatisfactory performance on some governance indicators, limited entrepreneur class, food insecurity, inadequate human capital development, a high prevalence of HIV/AIDS, high population growth resulting in pressures on the natural resources base and social services, poor quality and low levels of infrastructure, un-diversified economic structure, low agricultural productivity and inequity in land distribution. 2.6.2 Economic Prospects: Real GDP growth is forecast to be around 2% in 2005, and based on a recovery in agriculture is expected to rise by around 4% in 2006. Over the medium-term, real GDP growth will continue to be strongly influenced by the performance of the agricultural sector (where Malawi’s comparative advantage lies), especially if efforts to diversify from tobacco production are successful. Agricultural production could be increased and diversified if policies are implemented to enhance irrigation infrastructure, improve land tenure, expand access to credit or inputs, and develop research and extension capacity. 2.6.3 Manufacturing will continue to be tied to agricultural sector performance (which it relies heavily on for inputs), and be affected by high real interest rates, a heavy tax burden and regional competition. The manufacturing sector’s reliance upon agriculture means that it is hit badly in drought years. The sector is also dependent on some key imported inputs, which means that successive depreciations of the currency have eroded gains in competitiveness. In addition, high utility and transport costs, and macroeconomic instability will continue to act as disincentives for new domestic start-ups. Despite low labour costs, labour productivity is poor and production techniques are dated. Malawi’s workforce also does not have all the necessary

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skills and expertise, and the HIV/AIDS epidemic is reducing the limited skill base. Finally, power supply is erratic and expensive. These constraints prevent Malawian industry from taking full advantage of the duty-free access to the US market under African Growth and Opportunity Act (AGOA), and from the benefits provided by the European Union’s (EU) Everything But Arms (EBA) initiative. They will also reduce the competitiveness of Malawian firms within COMESA and SADC. 2.6.4 Malawi has never developed large-scale mining activity. The government hopes that the mining sub-sector will become an additional source of economic growth, as numerous exploitable mineral deposits exist. Growth in mining output is expected to pick up significantly following the opening of several mines, but as this rise will be from a very low base it will have little impact on headline growth. Currently, this sector provides only around 1% of GDP. But government has realised the potential importance of this sector and the Mining Investment and Development Corporation (MIDC) was recently created to help exploit (with public or private funds), known mineral deposits. With regard to the services sector, Malawi’s financial services, although developing, are basic and unsophisticated. Growth of this sub-sector (and the retail sub-sector) is restricted by the limited purchasing power of Malawians. Government has for some time wanted to develop tourism to generate foreign exchange and employment. Malawi’s attractions include a tropical climate, mountain scenery and a vast inland lake. But poor quality infrastructure, poaching and expense in comparison to regional competitors, amongst other problems, will continue to hamper efforts. 2.6.5 External Environment: Malawi’s external prospects are very much tied to developments in two areas: exogenous shocks, and relations with donors, which influence the level of expected financial inflows. Due to the high dependency of agriculture on rainfall, droughts (or floods) can reduce strongly agricultural output. This in turn can reduce the export earning potential of tobacco, sugar and tea from year to year. A lack of economic diversification means that export revenue is also reliant largely upon a small basket of agricultural products. Import levels are also affected largely by weather. When harvests are below normal levels, food imports are required to offset shortfalls. The current high price of oil is another factor that can drive the import bill up, given the need for Malawi to import all its petroleum requirements. The ability of government to remedy the effects of exogenous shocks is very limited. And government’s response to such shocks is slow and insufficient, in part due to a lack of institutional capacity. The level of donor disbursals each year is the other key driver in determining Malawi’s external position. Disbursements over recent years have been lower than the levels committed because of the previous government’s failure to adhere to and implement key economic policy reforms. This has meant that the financing gap has had to be bridged partly by generating domestic funds through debt raised on the local market (which has had a strong negative effect of domestic debt sustainability). 2.7 PRIVATE SECTOR CLIMATE AND ISSUES 2.7.1 Private Sector Climate: The business environment is generally poor, with weak levels of private sector investment and activity. The role of the private sector as an engine of economic growth has been limited by a number of obstacles such as: macroeconomic instability, high interest rates, and high transport costs. The participation of private investors in the economy has also remained limited due to the dominance of PressCorp, poor investor confidence and, the small size of the domestic market. To help improve the private sector environment, the Malawi Investment Promotion Agency (MIPA) was recently been set up, to promote, attract and facilitate private investment into Malawi. But its successes have been limited, with recent FDI averaging below US$5 million per year. But there is scope for private

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sector activity in micro, small, and medium-scale enterprises (MSMEs), agro-processing industries, and in privatised public enterprises. The tourism sector also has potential for income and employment generation. Malawi does not impose restrictions on current account transactions as it has accepted the obligations under Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement. Information on the informal sector is limited, but it is estimated that only around 15% of employment is generated in the formal sector (out of a total employed level of around four million workers). Most women who are economically active work in the informal sector. 2.7.2 Private Sector Issues: The main challenges to the legal and institutional framework, are how to: (i) improve the business environment and strengthen the underpinnings of markets; (ii) build business capacity; (iii) expand physical infrastructure; and (iii) develop robust financial systems to support private investment growth. Some of these challenges are expected to be surmounted in the MGDS, which has a strong focus on promoting private sector activity. Additional general problems are: (i) a dysfunctional labour market, which is characterised by a high pool of unskilled labour, labour laws that have failed to keep pace with changing business practices, poor work conditions and regulation, and weak management ethos; (ii) corruption, which is partly a result of weak governance and institutional capacity; (iii) lack of clarity in tax regulation and payment; (iv) high real interest rates, skewed by government’s weak fiscal policy; (v) constant exchange rate depreciation; (vi) insufficient legal protection of corporate property; and (vii) high custom tariffs for imported goods (outside of COMESA and SADC). 2.7.3 Financial Sector: The financial sector is dominated by the banking sector, which in 2004 consisted of 10 commercial banks. All banks and insurance companies, as well as the Malawi Stock Exchange (MSE), are regulated and supervised by the Reserve Bank of Malawi. Non-bank financial institutions are represented by 10 local insurance companies, one foreign insurance company and one reinsurance company. Eight of the insurers are non-life insurance companies. The MSE is the country's only exchange, is extremely small (nine firms were listed in 2004) and is highly illiquid. The majority of financial sector technical assistance in Malawi has been devoted to the micro-finance sector (see below). Financial services supply in rural areas is limited, which in part is due to the cost of providing such services. And a constraint to developing such services is the relatively limited monetisation of the rural economy, a result of low agricultural output and trade. 2.7.4 Micro-finance: The sector is coordinated by the Malawi Micro-finance Network. Serious legal and regulatory framework problems affect organisational capacity and loan repayments. The law in Malawi does not clearly define what micro-finance is, neither does it clearly stipulate who can deliver it and how. Micro-finance activities can be registered under any of the five acts of parliament: the Cooperative Societies Act, the Companies Act, the NGO Act, the Banking Act, or the Trustees Incorporation Act. And no particular authority is vested with the authority to regulate and supervise micro-finance activities. As micro-finance institutions are not licensed, they are legally prohibited from accepting deposits. Credit unions fail to bridge the gap as they suffer from weak capacity and a poor regulatory environment. Government efforts to address these problems revolve around establishing a rural credit scheme, the Malawi Rural Development Fund (MARDEF, launched in January 2005), using the Malawi Savings Bank and existing micro credit institutions. 2.7.5 Privatisation: Despite initial progress following Parliament’s approval of the Public Enterprises (Privatisation) Act in 1996, privatisation and demonopsonisation has slowed markedly. However, some recent progress has been made by the government: (i) by selling

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the Commercial Bank of Malawi (the second largest bank in Malawi in terms of assets); (ii) privatising a textile subsidiary of ADMARC; and (iii) repealing of the ADMARC Law, thereby removing the legal impediments to restructuring ADMARC and separating its social and commercial activities. There have also been some improvements in the utilities sector, including competition in the provision of cellular telephone services. However, the Privatisation Commission still has a large volume of work to undertake as monopolies and oligopolies continue to dominate many economic activities, including banking, cement, petroleum, retailing, tobacco auctioning, and transportation. 3. NATIONAL DEVELOPMENT AGENDA AND MEDIUM-TERM PROSPECTS 3.1 KEY ELEMENTS OF THE GOVERNMENT DEVELOPMENT AGENDA 3.1.1 Poverty Reduction Strategy: Malawi’s higher development goals to be attained in the long-term centre on the priorities identified in the government’s Vision 2020 document (see Box V) and the Millennium Development Goals (MDGs). The goals highlighted in both sets of long-term development strategies are closely related to the aims of the new PRS, the 2006-11 Malawi Growth and Development Strategy (MGDS). In addition to this commonality, the issues and policies prescribed in the MGDS are consistent with the analysis, findings and recommendations contained in the MGDS’s poverty diagnostics. And the MGDS targets are supported by the MGDS’s macroeconomic, structural and social policies, which will help realise the intermediate outcomes. The MGDS has been designed with a wide participatory approach, which reinforces ownership and sustainability.

Box V: Summary of Vision 2020 Produced in March 1998 by the National Economic Council, Vision 2020 was a culmination of a national exercise that started in January 1996. The document serves as a base for the preparation of short- and medium-term plans that will lead to the hoped for developmental outcomes by 2020. Following nationwide consultations, network activities and national workshops, development of the following nine key areas were identified as helping lead to the attainment of the expected outcomes of the Vision:

(1) Good Governance; (2) Sustainable Economic Growth and Development, (3) Vibrant Culture; (4) Economic Infrastructure; (5) Social Sector Development; (6) Science and Technology-led Development; (7) Fair and Equitable Distribution of Income and Wealth; (8) Food Security and Nutrition; and (9) Sustainable Natural Resource and Environmental Management.

3.1.2 Poverty Reduction Strategy Pillars: The MGDS sets out the government’s poverty reduction policies within five pillars, along with the expected outcomes, which are designed to help achieve the longer term goals contained in Vision 2020 and the MDGs. A summary of the five pillars of the MGDS and their constituent elements follows. Pillar I – Sustainable Economic Growth: Sustainable economic growth is central to efforts to reduce poverty, achieve the MDGs and gain self-sufficiency. Without this growth, it will be difficult to deliver on the government’s vision of creating wealth and employment for all Malawians. Government expects that efforts in the medium-term will contribute to:

• real economic growth of at least 6% per year and increased diversification; • increased on and off farm incomes, employment opportunities, and food security; • increased integration and access to regional and international markets; • protection of natural resources and the environment for sustainable growth; and • establishment of an enabling environment to increase foreign & domestic investment.

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Pillar II – Social Protection: The most vulnerable who may not be able to benefit from growth will need protection with the provision of targeted safety net programmes as a way of providing alternative sources of income and food for the poorest and/or benefits to the community through socio-economic infrastructure. Government expects that efforts in this strategy area will contribute to the following:

• increased equity for all Malawians and creation of new wealth; reduced poverty; • increased number of firms owned by Malawians and increased employment; • improved socio-economic indicators for the most vulnerable; and reduced negative

socio-economic impact of disasters. Pillar III – Social Development: A healthy, educated, productive population is not only desirable, but is necessary to achieve poverty reduction. In addition to contributing to economic growth, efforts over the medium-term are expected to help:

• reverse the negative trend in maternal mortality rates, and decrease child mortality; • decrease cases of chronic diseases such as malaria; • reduce the negative impact of HIV/AIDS; • improve access to, and quality and management of, education; and • improve nutrition by sustaining a reduction in stunting and wasting.

Pillar IV – Infrastructure: Infrastructure plays an important cross-cutting role in facilitating growth, reducing poverty and increasing access to social services. Government expects that developing infrastructure will help support the following aims:

• improve transportation infrastructure to reduce the cost of doing business in Malawi; • increase access to markets, clinics and schools, especially in rural areas; • improve the attractiveness of Malawi as an investment opportunity; • increase access to and use of electricity, and replace biomass energy source use; and • increase clean water and sanitation supplies to help reduce the incidence of water

borne diseases and environmental degradation from poor water usage and sanitation. Pillar V – Good Governance: The good governance strategy requires action on six fronts:

• ensure macroeconomic stability; • strengthen public policy formulation and implementation in a transparent manner; • improve service delivery and accountability at the local level through decentralisation; • develop a strong justice system and rule of law; • ensure personal security; and • establish an institutional setting for good corporate governance.

3.2 ASSESSMENT OF IMPLEMENTATION PROGRESS OF THE AGENDA 3.2.1 MPRSP Implementation: The MPRSP contained adequate poverty reduction targets, sector strategies, policies and actions, diagnosis of developmental problems, and poverty issues. And the MPRSP analysis of poverty was comprehensive and provided an appropriate framework to guide actions and poverty reduction interventions. There is, however, a need to increase efforts to ensure that the budget projections earmarked for pro-poor expenditure (which are ring-fenced and can not be reduced), are actually spent each year on the allocated area and not rolled over into following years. And in general, the macroeconomic forecasts of the MPRSP, such as real GDP growth and fiscal revenue generation, have been optimistic and have not been met. A lack of capacity has constrained the implementation of the MPRSP, which is a concern facing the MGDS. Due to the constraints mentioned above (and in previous sections) that have hampered the implementation of the MPRSP, ongoing poverty

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analysis has suggested that achieving the goals of the MPRSP has not been possible and raises questions over whether all the MDGs will be met. 3.2.2 MPRSP Progress: Progress to date of what the MPRSP has achieved has been carried out by government in two Annual Progress Reports (APR), one for the period 2002/2003 and one for 2003/2004. The third and final APR report is scheduled to be finished in late-2005. The World Bank and IMF have reported their findings of the government’s first APR, in their MPRSP-Progress Report and Joint Staff Assessment (JSA), published in October 2003. The 2003/04 APR published by the government in late-June 2005, concluded that almost all the macroeconomic targets, including those for pro-poor expenditure, that were set both in the MPRS and the 2003/04 budget were not achieved. The IMF-World Bank’s JSA concluded that little progress was made in implementing the MPRSP during the first period under review due in part to the reduced level of budgetary resources, caused by fiscal mismanagement. The progress review, which was not highly consultative nor done in a timely manner, did not provide any insights with respect to specific policies and or sectors that would help accelerate growth to achieve poverty reduction. In summary, the progress achieved was below hoped for expectations and the analysis of it was weak. 3.2.3 MGDS Methodology: As with the MPRSP, the MGDS has been created in a participatory manner with all stakeholders. The quality of poverty analysis remains relatively good, despite a weak statistical database and lack of ministerial capacity. However, shortcomings (to date) are a lack of gender disaggregated data collection and reporting, insufficient gender analysis and mainstreaming strategies, plus overall weak data on many economic and social indicators. Nonetheless, the poverty analysis of the strategy has been strengthened by data and information contained in: (i) the government’s recent Integrated Household Survey (IHS) and Demographic Health Survey (DHS); and (ii) supplemented with data and information from donors. MGDS targets, indicators and monitoring have been developed partly from lessons learned in creating the MPRSP. These improvements have led to a coherent set of poverty-reduction priorities. Therefore, the MGDS is comprehensive, clearly prioritised, and focused on the key issues relating to poverty reduction. In addition, the government, given the constraints it faces, has made good effort in linking the MGDS to viable official structural and stabilisation measures, to address all constraints. As under the MPRSP, the government treats the allocation of MGDS resources to targeted poverty alleviation expenditures clearly by using the existing three-year medium-term expenditure framework (MTEF). However, while the MTEF provides a nominal framework for MGDS spending activity, in practice, the MTEF continues to be a weak planning tool. Budgetary revenue and expenditure remain open to change in year one, which disrupts the framework for years two and three; this leads to a situation where actual outturns can differ strongly from projections. For this reason, the use of the MTEF for planning three-year fiscal cycles remains constrained. Therefore, fiscal planning and management need to be improved, with a concomitant reduction of political interference in the implementation of fiscal policy. 3.2.4 Constraints to Implementing MGDS: While the MGDS has been created in a participatory manner and has taken onboard lessons learned in the formulation and implementation of the MPRSP, implementation of the MGDS (and in turn the CSP), will depend on the quality, coherence and reliability of in-country systems, which in Malawi are not strong or particularly well developed. In general, Malawi displays serious shortcomings in policy management, weak service delivery, and a lack of institutional capacity. Successful implementation of the MGDS requires a viable monitoring and evaluation (M&E) system, which still needs to be developed and put in place to explain what progress is being made. Remaining implementation hurdles include: (i) the need to identify and protect high priority

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pro-poor and gender sensitive expenditure, and to link it to clear output and outcome indicators (in relation to this, further work is needed to articulate the MTEF and translate the MGDS into a detailed funding plan for the early stages of implementation); (ii) the need to improve the quality of poverty analysis, especially with regards to women’s inclusion strategies; (iii) further gender analysis and more emphasis on vulnerability and insecurity; (iv) further clarification on the role of NGOs in service provision, especially the private sector; and (v) the need at district level for greater consultations with poor people, and for their greater involvement in analysis of and planning solutions to poverty. 3.3 THE PARTNERSHIP FRAMEWORK 3.3.1 Aid Coordination: MGDS aid coordination is undertaken at the sector, national and international levels, and the MGDS provides a framework for all donors’ interventions in the country over the medium-term. The MGDS provides a similar framework to that of the MPRSP and harmonisation of donors’ interventions under the MPRSP and the MGDS has been assisted by the participatory approach that both strategies have been created under. In addition to the frameworks of the MPRSP and the MGDS, other major donor coordination bodies include ad hoc meetings of the Consultative Group and the Paris Club (the last Consultative Group meeting was held in Malawi in May 2000). Round Tables and National Workshops are also frequently organised to discuss sectoral and thematic policy issues, in addition to regular meetings held by donors resident in Malawi, such as those organised by the Common Approach to Budgetary Support (CABS, which the EU, DfID, Norway, and Sweden are full members of—the Bank Group is an observer), and the Group on Financial and Economic Management (GFEM, a sub-group of CABS). There is also a framework for donor coordination with regular meetings chaired by selected missions taking the lead role in each of the key sectors, but due to capacity constraints government struggles to manage and lead these groups). Donor coordination also takes place to support the macroeconomic policy reform programme. 3.3.2 Increased Coordination Expected: The Bank Group is keen that under the 2005-09 CSP, further efforts are made to increase the level of coordination with other donors, as envisaged under the High Level Forum on Aid Effectiveness that took place in Paris on 28 February-2 March 2005 (the “Paris Declaration on Aid Effectiveness”), which will help deliver better results from its support. Given Malawi’s broad MGDS agenda, it is highly necessary that the Bank Group’s interventions are made within a framework involving other donors. To support this aim, the Bank Group has informed other donors in Malawi what the CSP contains, to help improve alignment of strategies and increase harmonisation, which in time should lead to Sector Wide Approach (SWAp), investments or non-lending, co-financing and/or parallel interventions. Bank Group staff will remain engaged in consulting with donors on improving coordination and harmonisation, particularly once the Country Office opens.

Box VI: Donors’ Intervention by Sector Agriculture & Rural Development: The EU is the lead donor in this sector and the Malawi Agriculture Sector Investment Programme (MASIP) provides a nominal framework for donors’ agricultural sector interventions. However, most donors have not engaged fully in supporting the MASIP, partly due to its weak performance. The Bank Group currently has a portfolio amounting to UA44.6 million, which complements partly the work of the other main donors active in this sector, grouped in the Donor Coordination Group on Agriculture and Food Security (which compromises the World Bank, EU, FAO, IFAD, CIDA, DfID, JICA, Norway, and USAID). Given the prominence of agriculture to most of the population, interventions in this sector will remain a priority under the MGDS. Health & Education: The health and education sub-sectors are led by DfID. The Bank Group currently has a portfolio amounting to UA43.6 million. Other donors active in this sector include the World Bank, UNICEF, WFP, WHO, CIDA, DfID, Germany, JICA, Norway, Sweden, and USAID. Donors play an important role in the financing of the health and education sub-sectors. Currently, the ADF is a major donor to secondary education, which is experiencing pressure to increase supply after years of primary school expansion. The health system is severely constrained by shortages of drugs and other essential supplies, a critical shortage of skilled staff and the impact of HIV/AIDS. A health SWAp has been created to address these numerous problems. Transport, Water & Sanitation Sector: The EU takes the lead in infrastructure activities (with most efforts focussed on road construction). The Bank Group currently

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has a portfolio amounting to UA36.8 million. Of this, approximately UA27.2 million is allocated to the two Karonga-Chitipa road projects. While the EU is the lead donor in the transport sector, the World Bank, Germany, JICA, and the OPEC Fund have also supported road and transport projects. The water and sanitation sector, funded by donors including the World Bank, CIDA, the Development Bank of South Africa, the European Investment Bank, JICA, Norway, Sweden, USAID, several NGOs (such as Water Aid), as well as the ADB Group, has introduced over the last few years broad reforms and built capacity by establishing Regional Water Boards and Water Resources Management Boards. Bank Group activity is focussed on an integrated water and sanitation project in Central and Northern regions. Economic Policy Reform: The IMF and World Bank are the lead donors for this activity (with the IMF’s recently agreed PRGF the main policy advice vehicle), but there is scope for the CABS group of donors to provide leadership in the PFM arena. Economic policy is weak in Malawi, despite years of donor support, in part because of the very limited capacity of the government, the effects of corruption, and macroeconomic instability. The CABS Group (which includes the EU, DfID, Norway, and Sweden) is also engaged in providing policy reform advice through a sub-group of CABS, the Group on Financial and Economic Management, which aims to identify the priority areas in most need of assistance and designing interventions to achieve reform aims. Typical areas of GFEM interest are in supporting the Auditor General, Accountant General, and Ministry of Finance (budget formation). Cross-Cutting Issues: Cross-cutting issues, by their nature, permeate life and livelihoods and are major challenges to overcome if poverty is to be reduced. Several donors are providing support in respect of decentralisation, environmental protection, gender, governance, and HIV/AIDS. These include the World Bank, UNDP, FAO, WHO, DfID, Germany, JICA, Norway, Sweden, and USAID. Recent Bank Group activity centred on the disbursement in May 2005 of the UA12 million Support for Good Governance loan.

3.3.3 World Bank: The World Bank is the largest donor in Malawi and works closely with other donors in helping to formulate with government: (i) the MGDS; (ii) debt sustainability and HIPC debt relief; (iii) fiscal planning and public expenditure reform; (iv) civil service and wage reform; and (v) humanitarian assistance. Current World Bank lending activity, articulated in its 2004-06 Country Assistance Strategy (CAS), revolves around three pillars: (i) strengthen economic management and accountability; (ii) establish platform for long-term sustainable growth; and (iii) improve service delivery and strengthen safety nets. One major intervention under the CAS is a structural adjustment operation, the Fiscal Management and Accelerating Growth (FIMAG) programme of US$50 million, which was approved in April 2004. A US$30 million balance-of-payments support operation, the Malawi Emergency Recovery Project, was approved by the World Bank Board in mid-September 2005. 3.3.4 EU: The EU is a major donor to Malawi, providing over €1,051 million since 1976. The main sectors of concentration under the 8th European Development Fund are transport infrastructure, health and conservation of natural resources, including agriculture. Since the early 1990s Malawi has also received €120 million from the EU’s Structural Adjustment Facility, €189 million from the EC’s food security budget line (during 1991-2001), and Stabilisation of Export Earnings (STABEX) funds. The EU’s 2002-07 Country Strategy Paper agreed that future cooperation efforts in reducing poverty should be focused on two sectors: (i) agriculture/food security/natural resources; (ii) and transport and infrastructure. Macroeconomic support is provided, focusing on health and education, along with the support provided through the CABS group. 3.3.5 UK Government: The UK government, through DfID, is another of the largest donors in Malawi. DfID’s Country Assistance Plan (CAP, 2003/04 to 2005/06), proposes to provide UK£47 million per fiscal year for project and programme work (including the provision of technical assistance). The areas supported include: pro-poor governance (including economic and fiscal management); education; health and population; and livelihoods (an allocation is also made each year for plans under consideration). An additional UK£15 million per year (over the three-year period) is allowed for budget support, but this is not guaranteed and depends on government’s performance in reforms. 3.3.6 Other Donors: There are a number of other donors active in Malawi that the Bank Group has worked with in the recent past or has coordinated efforts within various sectors. Most donor efforts have been focussed on providing resources to the social sector in terms of providing support for education and health (especially in tackling HIV/AIDS), and the agricultural sector. A number of donors have expressed willingness to participate in developing the agricultural sector (for example through a country-wide irrigation development

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project) and are looking to the Bank Group and/or the World Bank to take the lead. There is an expectation by government and donors that coordination efforts need to improve under the MGDS, of which the Bank Group will play its part. 3.4 CHALLENGES AND RISKS 3.4.1 Challenges: The new government faces several challenges over the forthcoming years: (i) consolidating the democratic process and improving governance; (ii) implementing satisfactorily the MGDS, (iii) removing the structural barriers to successful implementation of the MGDS; (iv) designing and implementing reforms efficiently; (v) attaining and sustaining macroeconomic stability; and (vi) overcoming weak government capacity, which has a negative effect on implementing and coordinating MGDS policies. 3.4.2 Risks: There are a number of risks, split into two groups, that will influence the implementation of the CSP over the forecast period. Major risks within government’s control: (i) if institutional weakness persists at a strong level, (ii) if there is a lack of political will for reforms; (iii) if conflicting group interests in implementing the MGDS arise; and (iv) if lower-than-expected resources are available. Also, fiscal revenue may fall, due to exogenous factors, such as bad weather reducing tobacco output. Major risks outside government’s control (exogenous): (i) if bad weather recurs; (ii) if the effect of HIV/AIDS continues unabated; and (iii) if terms-of-trade shocks, such as recent high oil prices (see Box II), are forced upon the economy, scarce resources will be diverted from poverty reduction. 4. BANK GROUP COUNTRY ASSISTANCE STRATEGY 4.1 COUNTRY CONTEXT AND STRATEGIC SELECTIVITY 4.1.1 The MGDS is a “home grown” development agenda, which has been designed by the government, in partnership with all relevant stakeholders (civil society, private sector and donors). The preparation of the CSP, which also involved stakeholders’ consultations (see Box VII), is based largely upon the analysis and strategy of the MGDS, but at the same time the CSP has noted the longer-term objectives of Vision 2020 and the MDGs, all of which are complimentary and supportive of the goals contained in the MGDS. The aim of the Bank Group’s CSP is to support Malawi’s development objectives, as given in the MGDS (along with Vision 2020 and the MDGs), by backing key development and poverty reducing activities. Proposed Bank Group’s interventions are driven by other considerations such as Bank Group’s experience and lessons learned, discussions with other donors, the ADF-X policy guidelines and funding allocation including a focus on selectivity. Based on the above, the proposed CSP strategy revolves around interventions in two pillars:

1. Pillar I – Expanding Rural Infrastructure 2. Pillar II – Developing Human Capital and Institutional Capacity

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Box VII: Consultations on Bank Group Strategy The CSP was prepared on the basis of the government’s findings as presented in the MGDS. The MGDS was created following civil society, donor and other stakeholder discussions, consultations, workshops and guidance from Cabinet, along with adherence to the findings of the MPRSP annual reviews. From these talks, the resulting MGDS can be seen to be a consensual strategy that brings together different views and experiences, to promote poverty reduction. The CSP has taken note of these efforts and has been party to MGDS formulation discussions. In addition, a CSP pre-preparation mission was fielded in February 2005, which was followed by a CSP preparation mission in April 2005 and a CSP dialogue mission in August 2005. During all missions, Bank Group members met a wide variety of stakeholders to discuss the MGDS and the possible areas of Bank Group intervention. These discussions helped form the CSP, which is considered by stakeholders to be a balanced and satisfactory strategy that has noted all stakeholder views, that seeks to reduce poverty in Malawi by supporting key interventions, with a relatively limited amount of financial resources. Notably, donor representatives based in Malawi, as well as civil society representatives that attended the Bank Group’s CSP dialogue workshop, agreed that the proposed strategy was well-balanced as the areas of intervention aim to lessen the scope of duplicating current donor activities, and support government’s MGDS priorities.

4.1.2 Pillar I – Expanding Rural Infrastructure: Infrastructure, including transport, energy, water, and telecommunications, is of key importance in helping Malawi develop economically, and reduce poverty levels and vulnerability to the risks of shocks. The link between the provision of infrastructure and poverty reduction is made through enhancing economic opportunities, increasing access to markets, services, and natural resources, reducing food insecurity and risks to shocks, and promoting capabilities. Removing the infrastructure constraint will help unleash the economic potential of the rural population and expand the opportunities for engaging in productive activities. Planned Bank Group interventions under this pillar seek to help expand the level of irrigation infrastructure, and electricity supply, to support agricultural/rural, and private sector development. These interventions aim to help support elements of MGDS Pillars I, II and IV, the purpose of which is to sustain competitive private sector growth, provide social protection, and improve the quality and quantity of Malawi’s infrastructure. Bank Group operations to enhance irrigation infrastructure will ensure partnership and synergy with other donor’s operations, particularly with regard to the lead agricultural sector donor, the EU, in addition to DfID. Donors active in the sub-sector of irrigation development specifically are the EU, FAO, IFAD, and JICA, It should be noted that the Bank Group is leading other donors in this sub-sector, and much interest has been shown by other donors in the Bank Group-financed Small-scale Irrigation Development Study (SSIDS—see section 4.3.3 for details). 4.1.3 Bank Group interventions to enhance electricity supply and access are planned to be co-financed with the World Bank, which has an on-going interest in the Mozambique-Malawi Inter-connector project. Bank Group interventions geared towards the improvement of electricity supply are focussed on constructing an electricity transmission line from Cahora Bassa hydroelectric power station in Mozambique to the Malawi border, followed by a strengthening of the transmission distribution system in Malawi to enhance the existing distribution network, which will help to broaden reliable electricity supplies countrywide. Specifically, it is hoped that the provision of an increased and reliable level of electricity supply will help power some of the irrigation supply installations provided within the framework of the Bank Group’s interventions to improve irrigation infrastructure. Overall, the Bank Group’s interventions under Pillar I aim to foster increased agricultural activity and output (which helps strengthen food safety nets for the most vulnerable), and private sector activity reliant on electricity provision as an input. On-going and future agricultural/rural development projects carried out by other donors in parts of Malawi that have a requirement for electricity (such as some types of irrigation systems), should also benefit from the expected outcome of the Bank Group’s electricity intervention. This should help support efforts to increase agricultural production, and employment, and complement government’s overall aim to reduce poverty and promote sustainable development. 4.1.4 Pillar II – Developing Human Capital and Institutional Capacity: Lack of (good quality) education, ill health and malnutrition are major determinants of poverty, as recognised by MGDS Pillar III – Social Development. And weak institutional capacity to

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utilise limited resources efficiently to promote development adds to the difficulties that exist that prevents poverty from being reduced. Expanding education and health facilities will contribute to achieving the MGDs related to education, child mortality, maternal health, health, gender and the environment. An imbalance is also evident between the level and quality of existing institutional capacity and what is necessary to help reduce poverty. Bank Group interventions under this pillar will be drawn from the social development needs identified under MGDS Pillar III. 4.1.5 CSP Pillar II proposes interventions in support of the country’s human resource base and institutional capacity building. The planned secondary education interventions cover a niche, as no other donor is active in this area. They are complementary to the basic education projects supported by the World Bank, DfID, JICA, along with other basic education projects supported by other donors, all of which aim to improve primary educational infrastructure, teaching quality and ultimately improve pupils’ educational levels. CSP Pillar II also focuses on strengthening efforts to tackle Malawi’s major health problems, such as weak health care delivery systems, along with the main killer diseases such as Tuberculosis, Malaria and HIV/AIDS. Bank Group interventions in this area will build on the on-going health sector SWAp, which is co-financed by the World Bank, DfID, NORAD, SIDA, and UNFPA, which aims to tackle Malawi’s major health problems. Bank Group support will be driven by the inclusiveness of the SWAp, which rules out duplication and weak coordination. 4.1.6 Under MGDS Pillar V – Governance, government recognises the importance of improved governance in producing a transparent public sector, reducing corruption, supporting macroeconomic stability, providing access to equitable justice and, therefore, facilitating economic growth and poverty reduction. Bank Group interventions under this pillar will be drawn from the needs identified under MGDS Pillar V. The governance intervention, is extremely well coordinated. Improved harmonisation of support to government by the Common Approach to Budget Support (CABS) group of donors is automatic and serves two key purposes: (i) Bank Group funding will be agreed within the CABS group’s framework; and (ii) the intervention will also help directly improve the policy and institutional framework for good governance. 4.1.7 Link to Previous Interventions: In addition to the rationale for the Bank Group’s interventions under the 2005-09 CSP, as presented above, a link to the strategy of the 2002-04 CSP is also important. Proposed irrigation infrastructure interventions will tie-in with the efforts and progress achieved in several on-going rural infrastructure and agricultural projects. Similarly, education sector interventions over 2005-09 continue and enhance the support provided under the past CSP for the ongoing secondary education project, Support to Community Day Secondary Schools. Health sector interventions via the SWAp continue health sector support provided by the on-going Rural Health Care Project III. And the proposed governance intervention provides a link to the Support for Good Governance loan, which was disbursed in one single tranche in mid May 2005. In deciding the 2005-09 strategy, the Bank Group has considered the level of un-disbursed funds in each sector and what impact this has on new interventions. In the transport sector, the Karonga to Chitipa road project has been delayed due to the withdrawal of a co-donor, which left the project unviable through no fault of the Bank Group. Efforts have been made to re-tender the two sections and construction is expected to start before end-2005. The Bank Group will continue to support both the transport sector and water/sanitation through on-going operations.

Table 2: MDGs-MGDS-CSP Linkages and Results Flow

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MDGs MGDS CSP Expected CSP Outcomes Goal 1: Eradicate extreme poverty and hunger

Pillar II: Social Protection Pillar I, Pillar II Increased food security and crop production. Expand livelihood opportunities

Goal 2: Achieve universal primary education

Pillar III: Social Development Pillar II: Developing Human Capital and Institutional Capacity

Increased secondary school enrolment. Improved secondary school teaching and quality

Goal 3: Promote gender equality and empower women

Pillar II: Social Protection Pillar II: Developing Human Capital and Institutional Capacity

Increased girls’ participation in secondary school education

Goal 4: Reduce child mortality Pillar II: Social Protection Pillar I: Expanding Rural Infrastructure Pillar II: Developing Human Capital and Institutional Capacity

Increased food security raises child nutritional levels. Support to health SWAp helps reduce child mortality levels

Goal 5: Improve maternal health Pillar III: Social Development Pillar I: Expanding Rural Infrastructure Pillar II: Developing Human Capital and Institutional Capacity

Increased food output raises incomes that boosts health spending. Support to health SWAp helps improve maternal health levels

Goal 6: Reduce HIV/AIDS, Malaria and other diseases

Pillar III: Social Development Pillar II: Developing Human Capital and Institutional Capacity

Support to health SWAp helps improve efforts to reduce main killer diseases

Goal 7: Ensure environmental sustainability

Pillar I: Sustainable Economic Growth Pillar IV: Infrastructure

Pillar I: Expanding Rural Infrastructure

Increased supply of sustainable water resources increases environmental protection. Increased supply of sustainable power reduces biomass fuel use

Goal 8: Develop a global partnership for development

Pillars I to V CSP’s guiding principles of donor coordination and harmonisation

Improved donor coordination, harmonisation, and results

4.2 PORTFOLIO MANAGEMENT AND LESSONS LEARNT FROM PREVIOUS CSP 4.2.1 Bank Group’s Portfolio: All projects undertaken in Malawi since lending began in 1969 have been in the public sector. As of September 2005, a total of 87 loan approvals have been made by the Boards of Directors. This amounts to UA516 million of net-signed loans, of which UA404 million has been disbursed (a 78% disbursement rate), and UA106.2 million is yet to be disbursed (which includes funds relating to projects now closed). Six loan approvals (amounting to UA6.1 million) have been cancelled before any disbursements were made, which leaves 81 loan/grant operations. With regard to total project commitments, the top three sectors that have been funded are: Agriculture (28%), Transport (20%) and Social (16%). Some 61 approved operations have been completed, leaving 20 operations on-going, of which the top three sectors that are receiving funding are: Agriculture (33%), Social (32%), and, Transport (20%). Since the start of 2002, there has been UA43.8 million approved by the Boards of Directors for four projects, two studies and one humanitarian relief operation (un-disbursed), of which UA14.8 million has been disbursed (34%). Excluding the Multisector UA12 million up-front, single disbursement of the Support for Good Governance loan (in May 2005), the remaining projects’ disbursement rate is 6%. 4.2.2 Implementation Performance: The preliminary results of the 2004 Annual Portfolio Performance Review (APPR) and the results of the December 2002 Country Portfolio Review Report (CPPR—ADB/BD/WP/2003/08) show mixed Bank Group portfolio performance. According to the 2004 APPR, the average age of the Malawi Project Portfolio in January 2005 was 5.0 years, compared to 5.3 years in January 2004. This is above the average for all countries of 4.2 years (compared to 4.5 years in January 2004). As shown in the 2004 APPR, out of 17 projects in 2004, there were three Problem Projects and five Potential Problematic Projects. This translates into UA58.9 million (compared to UA76.3 million in 2003), or 47% (no change from 2003), of on-going commitments at risk. By comparison, the December 2002 CPRR showed three Problematic Projects (PP): one in the agricultural sector; one in the financial sector; and one in the transport sector. There were also two Potentially Problematic Projects (PPPs) in the agricultural sector. This brought the proportion of Projects-at-risk (PAR) to 21%, which was within the PAR range of satisfactory portfolio performance.

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4.2.3 The main problems of Malawi’s portfolio are reflected in: (i) delays in fulfilment of conditions for loan effectiveness; (ii) slow process in procurement; and (iii) poor communication within government and executing agencies, and between them and the Bank Group. In addition, there are several outstanding audit reports and Project Completion Reports that the government is expected to prepare. The Bank continues to undertake supervision missions, though the skill mix of the missions needs further improvement. Furthermore, over the past two years, the Bank has organised workshops to acquaint executing agency staff with Bank Group procurement and disbursement procedures. The Bank Group has insisted that government clear all outstanding audits. A number of steps have also been taken to address agricultural sector portfolio problems. As part of efforts to consolidate the portfolio and address these problems, no agricultural investment activity took place during ADF-IX, so that efforts could be directed at remedying existing problems. Specific measures undertaken during the ADF-IX period were the Sector Portfolio Improvement Plan (SPIP, completed in April 2005) and various Mid-term Review missions. Both efforts have led to modifications in the design of some of the ageing projects, including addressing difficulties arising from the implementation of the micro-finance credit components. In addition, implementation action plans have been agreed upon, which aim to enhance project performance. Despite constraints within the government, some progress is being made to address generic and project specific problems. Recently, UNDP has agreed to finance a US$2.5 million project to help strengthen the agriculture and irrigation ministries’ capacity. 4.2.4 Lessons Learnt: Portfolio reviews reveal the need for: (i) new Bank Group interventions to give special attention to strengthening project and programme implementation capacities; (ii) increasing the size of operations in order to reduce transaction costs and improve development effectiveness; (iii) streamlining conditions for effectiveness with government’s capacity and plans; and (iv) improving entry-level quality through better project design, adequate time for appraisal and consultations. More generally, the success of new interventions will depend on government’s ownership, and stakeholders’ participation. Given the renewed political commitment of government to poverty reduction and the on-going reforms in the areas of governance (including PFM, tackling corruption and capacity building), it is hoped that portfolio management will improve. Furthermore, the better environment for donor harmonisation and the refocus of government’s efforts on the MDGs will contribute to development effectiveness, despite the risks involved. On the area of gender, the recently conducted Malawi Multi-sector Country Gender Profile (MMCGP) has highlighted several constraints and recommended strategies for promoting gender sensitive development in Malawi (in the areas of inheritance, and prevention of domestic violence). 4.3 CSP AREAS OF FOCUS 4.3.1 The CSP has three core principles: (i) support the implementation of the new MGDS to achieve its goals and help eventually lead to the attainment of Malawi’s Vision 2020 goals and MDGs; (ii) provide a clear focus on results and outcomes (elaborated upon in section 4.5), to improve the rate of return on the Bank Group’s interventions; and (iii) improve the coordination of Bank Group activities with government and other donors. The Bank Group’s interventions will be in the form of project and policy and institutional-based support involving investments in irrigation, energy, education, health, and governance, all made through the ADF-X country allocation and Multinational funds. Where there is scope to develop coordinated support through additional SWAps (following the health sector SWAp) or other basket funding arrangements, the Bank Group will seek to participate, in accordance with its own regulations and guidelines. All Bank Group operations will continue to try and transfer skills and build capacity. The Bank Group will continue to support policy research

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and engage in dialogue to strengthen government’s spending and policy priorities in pursuit of the MGDS and MDGs. INFRASTRUCTURE 4.3.2 Government recognises that agriculture remains the mainstay of Malawi’s economy and a main policy thrust is to increase output to attain food security. In addition, other major aims are to create more agricultural and rural employment opportunities and generate exports that have had value added through processing. Increasing and improving the level of irrigation infrastructure is particularly important for achieving these objectives. Bad weather has resulted increasingly in widespread food shortages, particularly for the poorest households, over large parts of each year. As the size of land holding for the majority of rural households is small (about 0.2 ha), any increases in productivity and farm income will have to be achieved through intensification and diversification of smallholders’ food production systems, which can be achieved through irrigation. The results expected from Bank Group interventions are provided in the CSP Framework Matrix (Table 3 and Annex III), and are linked to the expected outcomes contained in the MGDS (and to some of the MDGs). In supporting irrigation infrastructure, the Bank Group is aware of several factors that influence how this intervention will be provided successfully, such as the roles that land tenure, re-settlement, rural credit, road transport and physical market places all play. 4.3.3 It is to be noted that the Bank Group’s track record in supporting irrigation infrastructure-related interventions is demonstrated by 10 projects, five of which are on-going, that have an irrigation component or main focus. The Bank Group has recently funded successful projects and studies with positive outcomes, which will directly inform the new proposal for irrigation infrastructure development. A case in point is the Special Programme for Food Security (SPFS) where the Bank Group provided UA0.73 million for a three-year SPFS pilot project that was implemented by the FAO on behalf of the Bank Group (which was concluded in December 2004). The programme identified and test-applied: (i) appropriate technologies for improving agricultural productivity and production through irrigation and water harvesting; and (ii) defined strategies for enabling the food insecure to access these technologies and to apply them on a sustainable basis. 4.3.4 The government is now ready to scale-up the SPFS into a national food security programme, the National Action Plan for Food Security, which will be based on positive experiences of the SPFS. The other success story is the Small-scale Irrigation Development Study (SSIDS) financed by the Bank Group through a grant of UA1.12 million, which was completed in 2004. The SSIDS identified five small-scale irrigation projects that can harness seasonal floodwaters, especially in the Southern districts where flooding has been a recurrent feature since 2000. The SSIDS produced a proposal for five small-scale irrigation projects, complete with detailed engineering designs and bidding documents for about 28 schemes covering around 1,000 ha. In addition, a scoping study carried out under the SSIDS also surveyed an additional 6,000 ha which would be considered within the current proposal for irrigation infrastructure development, depending on project design size. SOCIAL 4.3.5 Education is of key importance in helping to develop Malawi and reduce poverty levels. But due to the government’ free primary school education policy, bottlenecks have been created in supplying sufficient good quality secondary education. This has had a negative impact on vocational skill-based learning, which requires a supply of suitably

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educated secondary school leavers to train. This helps partly explain the low level of labour skills in Malawi. Interventions aim to support and promote the secondary education sub-sector will be carried out to help improve the quality and equity of the education system in general, while they are designed specifically to help improve the quality and equity of secondary education, especially in Community Day Secondary Schools (CDSSs) throughout the country. The results expected from Bank Group interventions are provided in the CSP Framework Matrix, are linked to the expected outcomes contained in the MGDS (and to the MDGs), and are linked to four earlier Bank Group education projects. Bank Group coordination and harmonisation with other donors is demonstrated by the synergies that exist between proposed Bank Group education interventions and other donors’ activities, which has been managed by government through its Policy and Investment Framework (PIF), and Education Sector Plan (ESP). The development of the ESP is an important process that strengthens donors’ coordination. The Bank Group, government and other donors have discussed and agreed on geographical areas and types of intervention. 4.3.6 Another main objective of government is to improve the health status of Malawians. But a great many differing health sector interventions are required. With a desire to remain focussed and selective, the Bank Group’s interventions during ADF-X aim specifically to assist the sector through participation in the health SWAp, to achieve health-related goals in the MGDS and MDGs. The SWAp was created by the Ministry of Health, in collaboration with donors and some NGOs, and developed through a participatory and consultative process a Joint Programme of Work covering the period 2004-10. The Programme of Work (POW) outlines a shared and preferred future for the health sector and proposes strategic options for bringing this about by implementing with the assistance of its partners the Essential Health Package over a period of six years. The Programme consists of six priority components in the areas of human resources, pharmaceutical and medical supplies, essential basic equipments, infrastructure facilities, routine operations at service delivery level, and policy and systems development. The implementation of the programme is expected to (i) expand the range and quality of health services focused on maternal health and children under five years old; (ii) improve the general status of the population by strengthening, expanding and integrating relevant health services; (iii) increase access to health care services; (iv) increase, retain and improve quality of trained human resources and distribute them efficiently and equitably; (v) provide better quality health care in all facilities; (vi) improve efficiency and equity in resource allocation; and (vii) strengthen collaboration. The results expected from Bank Group interventions are provided in the CSP Framework Matrix. The Bank Group’s track record in supporting health-related interventions is demonstrated by five project approvals made by the Boards of Directors since lending began that have a health component or main focus. GOVERNANCE 4.3.7 A further element of Bank Group interventions during ADF-X and part of ADF XI seeks to improve the level of governance in Malawi, especially in the area of public financial management (PFM), accountability, budget comprehensiveness, procurement regulations, anti-corruption, and poor financial performance of parastatals. The Bank Group’s support of the CABS group aims to help improve the policy and institutional framework for good governance, first, through institutional-based support, and later, provided there exist fiduciary assurances, through budget support. The Bank Group will join the CABS group, which provides budget support. Improving public expenditure management is expected to help reduce poverty levels by: (i) improving the management of public funds to allow an increase in the provision of basic services; and (ii) improving the private sector’s confidence in government’s ability to manage public resources responsibly, which is expected to raise

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economic activity. The results expected from Bank Group interventions are provided in the CSP Framework Matrix, and are linked to the expected outcomes contained in the MGDS. Coordination and harmonisation with government and other donors’ governance and capacity-building activities is demonstrated by the synergies that exist between the Bank Group’s proposed interventions and those of other donors involved in the CABS group. The Bank Group’s governance intervention track record shows three Multisector project approvals made by the Boards of Directors that have a governance component, which run from 1998 to the present. 4.4 REGIONAL DIMENSIONS OF BANK GROUP ASSISSTANCE

Government has requested Bank Group funding to assist in realising the Mozambique-Malawi Power Inter-connector Project. This electricity project will help stimulate economic growth by providing reliable energy at lower cost to the agriculture, manufacturing, industry and service sectors. The objective of Bank Group power supply interventions using ADF-X Multinational funds is to improve electricity transmission infrastructure, by linking it to electricity supplies from Cahora Bassa via the Mozambique Inter-connector, in order to contribute to an efficient and reliable transfer of an increased amount of electricity from generating stations to much of the country. The power interconnection involves construction of 200km 220kV double circuit transmission line (124km in Mozambique and 76km in Malawi), and a 220kV substation at Phombeya (in Malawi) and a similar one at Matambo (in Mozambique). The total project estimated cost is US$59 million. The cost will be apportioned to Malawi and Mozambique in accordance with the project components relevant for each country. Previously, the Bank Group has supported five projects approved by the Boards of Directors, which run from 1969 to 1993, in the areas of hydroelectricity to rural electrification (however, there are no ongoing power-related projects). The Bank Group’s harmonisation with other donors’ power-related activities is demonstrated by the synergies that exist: Bank Group interventions focus on supporting the Mozambique Power Inter-connector initiative, which the World Bank is the only other donor involved (Norway is considering its support). 4.5 CSP RESULTS FRAMEWORK 4.5.1 Focus on Outcomes: The results framework is based on a logical relationship between inputs, outputs, outcomes and strategic development goals, all of which are based on the government’s development goals contained in the MGDS and Vision 2020, as well as the MDGs. The focus on the results to be achieved during the CSP period demonstrates that Bank Group interventions are aligned with the MGDS’s results. The results expected from the Bank Group’s interventions during the 2005-09 CSP are presented in the CSP Results Framework Matrix in Annex III. The matrix provides an overview of the link between the CSP pillars, the MGDS pillars and the national development objectives. The matrix establishes a results-chain between Bank Group interventions, intermediate indicators, outputs and outcomes to be achieved under the CSP in order to contribute to the attainment of Malawi’s longer-term development objectives. In most cases these indicators are quantified with expected targets, in some cases, more qualitative information needs to be derived. Where there are gaps in information, the Bank Group will work with government to identify specific measurements during the first year of CSP implementation, including the establishment of baseline data. 4.5.2 Under CSP Pillar I, the general results expected are that for irrigation infrastructure there is: (i) an increase in smallholders’ share of GDP; (ii) an increase in the amount of land that has functional irrigation facilities; (iii) an increase in smallholder maize output and tobacco exports; and (v) an increase in management capacity of irrigation systems. For power

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interventions the general results expected are: (i) a functioning link to the Mozambique Inter-connector is established; and (ii) there is an increase in electricity supplied and distributed. Under CSP Pillar II, the general results expected for education are that: (i) project schools’ physical infrastructure is upgraded; (ii) teacher quality is improved; and (iii) higher school leaving exam pass rates are achieved. For health, the general results expected are that maternal and child health levels improve. For governance the general results expected are that: (i) PFM and accountability within government improves; and (ii) the government remains on-track with the IMF’s PRGF reforms. The Bank Group’s interventions are limited to these specific areas, and are expected to focus resources on delivering change, which will be demonstrated by expected results. Table 3 provides a summary of the main issues facing Malawi in the chosen sectors and the main results that are expected from Bank Group interventions in these sectors. Annex III referred to earlier is a detailed version of this table. 4.5.3 As with the MPRSP, the government-led annual MGDS implementation review will help measure progress toward the MGDS outcomes. Success will be measured in terms of achieving MGDS results, which will include those related to Bank Group interventions. Annex VI shows the main donors’ support during 2002-05 under each of the MPRSP pillars and associated thematic areas. It shows that overall all four pillars received widespread donor attention and funding. However, the tendency for donors was to focus on sectors such as agriculture, health, education, and livelihoods, where the linkages to poverty reduction are most explicit and results can be achieved more directly. Several donors have also supported efforts to help improve specific governance issues, such as strengthening the Anti-corruption Bureau. Efforts by donors to increase harmonisation will rationalise their sector engagements to work in areas of comparative advantage, reduce duplication and lower transaction costs. The annual MGDS implementation review is expected to make a key contribution to this exercise, allowing donors to understand and learn from current harmonisation practices.

Table 3: Summary of CSP Framework Matrix

Expected Results Pillar I – Expanding Rural Infrastructure

Main Issues

MGDS

CSP

Other donors

MDGs CSP MGDS

IRRIGATION: High dependence on rain Food insecurity Insufficient irrigation systems Weak capacity ---------------------- ELECTRICTY: Inadequate, unreliable and expensive electricity supply Little progress on regional power integration Very high dependence on biomass for energy use

IRRIGATION: Increase sustainable agricultural production Increase smallholders’ incomes Increase rural employment ---------------------- ELECTRICTY: Increase electricity supply and access Reduce use of biomass as energy Reduce power cuts

IRRIGATION: Project designed and implemented to include: • Provision of new

and rehabilitation of existing irrigation and dam facilities

• Ministry, decentralised institutions, capacity building

----------------------------- ELECTRICTY: Establish Mozambique Inter-connector that will promote/improve: • Power-related

infrastructure • Reliable and

sustainable power supplies

• Help reduce use of biomass as energy source

IRRIGATION: WB CIDA DBSA EIB Germany Japan Norway Sweden USAID NGOs ------------------- ELECTRICTY: WB Norway (undecided)

IRRIGATION: Goal 1: Eradicate extreme poverty and hunger Goal 7: Ensure environmental sustainability -------------------- ELECTRICTY: Goal 7: Ensure environmental sustainability

IRRIGATION: Smallholder share of GDP increases Smallholder maize output increased Tobacco exports increased institutional capacity increased ----------------------ELECTRICTY: Functioning link to Mozambique Power Inter-connector Domestic power distribution increased to around 350MW

IRRIGATION: Smallholder share of GDP increases to Increased smallholder productivity Improved tenure, security and equitable access to land ------------------------- ELECTRICTY: Reduction in power shortages to zero Increased access to electricity Biomass-commercial energy mix target reduced

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Table 3: Summary of CSP Framework Matrix (continued)

Expected Results Pillar II – Developing Human Capital and Institutional Capacity

Country Issues

MGDS

CSP

Other donors

MDGs CSP MGDS

EDUCATION: Poor access to, equity and quality of education Inadequate teaching and learning materials Few and poorly trained teachers Weak management of schools -------------------------- HEALTH: Lack of access to quality health care Shortage of skilled staff Weak health system management -------------------------- GOVERNANCE: Macroeconomic instability Low level of good governance Slow progress in decentralisation Ineffective justice system and weak implementation of rule of law

EDUCATION: Secondary education: adequately equipped schools Adequate supply of qualified teachers Improved school management ------------------------ HEALTH: Provide maintained and functioning health centres Provide adequate staff in primary health care clinics Provide effective management of district health systems ------------------------ GOVERNANCE: Stabilise macroeconomic position Increase transparency of central and local government decision making Reduce level and incidence of corruption Improve fairness and effectiveness of legal system

EDUCATION: Support to Community Day Secondary Schools: • Infrastructure

development • Provision of education

materials • Teacher education

development • Capacity building and

policy development

----------------------------------- HEALTH: Support to health sector through SWAp for: • Human resources • Pharmaceutical and

medical supplies • Essential basic

equipment • Facilities development • Routine operations at

service delivery level • Central operations,

policy and systems development programme

------------------------------------GOVERNANCE: Support to CABS group, to focus on: • Macroeconomic

stability • Budget implementation,

execution and comprehensiveness

• PFM reforms • Accounting, auditing

and reporting of government accounts

• Tackling corruption

EDUCATION: WB EU DFID Germany Japan Norway Sweden USAID -------------------- HEALTH: WB DFID NORAD SIDA UNFPA ---------------------GOVERNANCE:Members of CABS group: EU DfID Norway Sweden

EDUCATION: Goal 3: Promote gender equality and promote women

----------------------HEALTH: Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria and other diseases ---------------------GOVERNANCE:Goal 8: Develop aglobal partnership for development

Through its cross-cutting nature, provision of budget support is associated with the remainder of all MDGs

EDUCATION: Schools physically upgraded Increase in qualified teachers Pupils passing MSCE increased ------------------------- HEALTH: Increased number of deliveries attended to by skilled health workers Reduced maternal mortality ratio Reduced child mortality rate Increased ability of clinics to treat ailments ------------------------- GOVERNANCE: Being on track with IMF quarterly PRGF reviews Proportion of national budget spent on pro-poor expenditure increases Improved compliance of expenditure outcomes with original objectives National Audit Office report on 2004/05 to parliament by Feb 2006

EDUCATION: All secondary school pupils (including girls) have access to good quality education by 2012 All children with special needs are being attended to in all schools by 2015 ----------------------------- HEALTH: Number of children fully immunised by 2 years old increased Increased per capita health allocation (govt + donor) to health sector Increased number of health facilities with functioning water systems Childhood malnutrition in under fives reduced ----------------------------- GOVERNANCE: Stable macroeconomic position Increased transparency of government decision making Reduced level and incidence of corruption Improved community participation in local government Improved effectiveness and fairness of legal system

4.6 BANK GROUP ASSISTANCE: PERFORMANCE-BASED RESOURCE ALLOCATION, PERFORMANCE BENCHMARKS, AND LENDING AND NON-LENDING ACTIVITIES

4.6.1 Assistance: The Bank Group’s assistance to Malawi under the 2005-09 CSP is based on project investments and policy and institutional-based support funded by the ADF-X allocation to Malawi (for 2005-09), which is made on the provision of 100% grants, and a yet to be determined ADF-XI allocation (for 2008-10). All Bank Group resources will be used to finance activities that are consistent with the strategic orientation of the MGDS, which reflect the focus outlined in the CSP Framework Matrix and pillars as noted in section 4.3. Therefore,

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support will be given to help: (i) expand rural infrastructure; and (ii) develop human capital and institutional/governance capacity. These proposed interventions are complementary to, and continue in a similar way, most of the interventions funded under the 2002-04 CSP, which included funding and support for agriculture, infrastructure, social services, and governance projects. 4.6.2 Assistance Scenarios: The focus of ADF resources in Malawi continues to be on reducing poverty. The total indicative ADF-X allocation for Malawi is UA47 million (a 16.5% increase from the ADF-IX allocation of UA40.35 million, see Table 4 for details). The existing enhanced Performance-Based Allocation (PBA) system (which derives from the score Malawi generates in the annual Country Policy and Institutional Assessment–CPIA–rating exercise), constitutes the basis for allocating resources to Malawi as an ADF country, on an annual basis. Actual allocations will also depend on Malawi’s: (i) overall performance; (ii) performance relative to that of other ADF countries; (iii) the amount of overall resources available to ADF; (iv) changes in the list of active ADF-eligible countries; and (iv) the terms of financial assistance provided (currently all grants). To enhance predictability of resource flows and planning at the country level, the PBA system will be used to determine Malawi’s maximum allocation during the three-year replenishment cycle, along with the proportion of grants, with a firm amount for the first year and indicative amounts for years two and three. Under ADF-XI, the cycle will start afresh.

Table 4:ADF-IX & ADV-X Allocations

ADF Grant Loan Policy-based Lending Total (% change)

ADF-IX 7.65 20.69 12.00 40.35 (-42.8) ADF-X 47.00 0.00 Included in total allocation 47.00 (+16.5)

4.6.3 Performance Benchmarks: Malawi’s performance in the annual CPIA exercise will determine its year-to-year resource allocation. The level of resources depend on the government’s ability to meet performance benchmarks, such as those, for example, linked to portfolio rating, macroeconomic policy, governance/anti-corruption, and core poverty expenditure, which aim to address weaknesses identified in the CPIA and CPRR. Performance benchmarks, with measurable performance indicators, serve as a basis for addressing Malawi’s policy and institutional weaknesses—see Table 5. The benchmarks relate to the analysis of Malawi’s 2004 CPIA overall rating, which places it in the third quintile, and the 2002 CPRR, which rated Malawi’s on-going projects as satisfactory with a rating in the third quintile. The 2004 CPIA rating for economic management policies is in the fourth quintile, while structural policies, social inclusion and equity policies, and public sector management and institutions are all in the third quintile. However, given macroeconomic and governance fragility, and concerns relating to public financial management (PFM), special attention should continue to be given to policies relating to these issues so as to build on the limited results achieved to date. The measures that the government is undertaking, or intends to undertake, to tackle these weaknesses include, among other things: (i) implementation of PFM reforms; (ii) strengthening the capacity of the public sector (at central and local levels) to improve performance, service delivery, and transparency; (iii) reducing corruption; and (iv) enhancing the quality and performance of the legal system. Performance weaknesses have also been identified in managing the Bank Group’s portfolio in Malawi. In order to improve the Bank Group’s portfolio performance, meeting certain benchmarks (as derived from the forthcoming CPRR) will also influence Malawi’s year-to-year resource allocation.

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4.6.4 Performance Improvement Measures: The choice and specification of Malawi’s performance benchmarks as presented in Table 5 are formed from the outcome of Malawi’s CPIA rating, and related policy dialogue with government on the identified weaknesses and the remedial policy and institutional reforms required to improve performance. The agreed reforms are time-sensitive. Failures to implement the reforms will likely result in a lower annual allocation, while success in meeting the reforms will likely result in a higher annual allocation. Bank Group assessment, monitoring and evaluation of the performance benchmarks will be made using the targets contained in Table 5, which are derived from the CABS Group’s annual Performance Assessment Framework (PAF) and government’s actual progress achieved in meeting the PAF goals. The PAF is jointly agreed between the CABS donors and government each year and contains realistic performance targets in a wide variety of sectors (see Annex IV for details of the 2005/06 CABS PFA). Monitoring the government’s progress in implementing the Bank Group’s portfolio will also form a performance benchmark. The forthcoming CPRR (and subsequent updates during the 2005-09 CSP period) and the annual APPR will form the basis of what progress has been achieved, with regard to addressing common weaknesses such as: (i) delayed project start-ups; (ii) inadequate accounting procedures; (iii) long delays to resolving audit issues; and (iv) slow Bank Group disbursements to project accounts. 4.6.5 Dialogue and ESW Activity: In addition to the investment activity that will be provided by the ADF-X 100% grant allowance (and expected 100% grant allowance under ADF-XI), other activity will consider undertaking various initiatives, such as capacity building, sector reviews (such as the Agricultural Sector Review prepared in April 2005), economic studies, Economic and Sector Work (ESW), a Multi-sector Country Gender Profile update, preparation of a Governance Profile, technical assistance, advisory services and training of civil servants and important stakeholders, all assessed on an on-going basis. Sector reviews and ESW will seek to enhance the success of future Bank Group operations as well as improve the quality at entry of project design, appraisal and implementation. The Bank Group is also expected to participate in various review and monitoring processes in conjunction with other donors in Malawi (such as annual reviews of MGDS implementation). The opening of the Malawi Country Office, scheduled for 2006, will help in maintaining an open and detailed level of discussion with government. 4.7 PARTNERSHIP AND HARMONISATION 4.7.1 Improving Donor Coordination and Harmonisation: The MGDS mechanisms for coordinating donors’ interventions are considered sound and viable as they are based on the findings of a participatory approach to poverty analysis and reduction. The reliability of the mechanisms as a process for enhancing the implementation of the MGDS and for measuring the performance of intermediate indicators, are similarly considered to be robust. On both issues, the MGDS is strengthened by the fact that key donors, including the Bank Group, have aligned (or are in the process of aligning) their strategies to the MGDS, and that key donors are in the process of harmonising (or plan to) their intended interventions with each other—the Bank Group has discussed with all donors active in Malawi the CSP, and how efforts can be made to better harmonise and coordinate activities amongst each other. This effort has produced a tighter focus on key poverty reducing areas in the CSP, increased synergies, and reduced the prospect of duplication. As highlighted in Section 3.3 (The Partnership Framework), and Annex VI (Main Donor Interventions by Sector), the Bank Group has noted other donors’ on-going activities in rural infrastructure development, health, education and institutional support, as well as what likely future activities will entail. In addition, the Bank

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Group is fully aware of its commitments under the Paris Declaration on Aid Effectiveness (agreed in early March 2005), to harmonise its efforts with other donors. 4.7.2 Areas of Likely Coordination: The CSP aims to make better use of Bank Group resources by the coordination of proposed: (i) irrigation interventions through the existing donor agriculture coordination group led by the EU and DfID (a donor and government irrigation coordinating group chaired by the Ministry of Irrigation and Water Resources may be created in time to enhance coordination efforts in this area); (ii) electricity interventions through Ministry of Finance-led discussions with NEPAD and Mozambique government and donors; (iii) education interventions in the secondary sub-sector through the government’s education PIF; (iv) health interventions through the health SWAp; and (v) governance interventions through the CABS group, and also through information shared by USAID with regard to the US government’s Millennium Challenge Corporation, which Malawi’s membership of at a threshold level was announced on 23 September 2005.

Table 5: Reforms and Benchmarks to Improve Country Performance

2004 CPIA & 2002 CPRR: Weaknesses identified

Structural reforms and actions envisaged

Performance indicators and benchmarks 2006-07 Notes

Macroeconomic management

Being on track with IMF PRGF programme

n/a Quarterly IMF PRGF reviews

Fiscal policy Progress in implementing the Malawi Financial Accountability Action Plan (MFAAP)

Baseline = Limited implementation of MFAAP Target = Five activities from MFAAP Secretariat Work Plan Activity Matrix implemented by Feb 2006 (see Notes), with 2006-07 follow-ups established by CABS in due course

1 Hold stakeholders’ awareness workshop 2 Maintain a Database of PFM projects 3 Develop and maintain a database of all MFAAP initiatives 4 Categorise implementation status of all MFAAP activities 5 Produce monthly progress reports

Debt policy Reduce interest payment as % of total GoM expenditure

Baseline = FY 2003/04 = 25% Target = 22.5% or less for FY 2004/05

2006-07 targets created by CABS following each annual review

Gender Equality

Women in decision making positions (in government sector, from Ass Dir to Principal Secretary, and in Parastatals (Dep General Manager, Director or Chief Executive)

Baseline = 12.8% = 2004 Target = ≥13% by Sep 2005

SADC target is 30% in 2005 2006-07 targets created by CABS following each annual review

Equity of public resource use

Proportion of national budget spent on protected pro-poor expenditures (PPPEs)

Baseline = FY 2002/03 =9.6% Target = FY 2004/05=18.9% (outturn)

Quarterly MoF Expenditure Reports and Quarterly IMF PRGF reviews Poverty-reducing expenditures are clearly defined, and good-quality classification of such spending is reflected in the in-year budget reports 2006-07 targets created by CABS following each annual review

Building human resources

Pupil per qualified teacher ratio in primary school in rural areas Primary school net enrolment rate (male and female) Under 1 year immunisation by each antigen (BCG, Pentavalent III, Polio III, Measles) Out Patient Department (OPD) Utilisation Rate (per 1000 pop) in rural areas

Baseline = 1: 118 ( 2001) Target = 1: <104 (2005) Baseline = 81% – 2001/2 Target = 90% or more year 2005 Baseline = 56% (2002) Target = Dec 2005: 80 % Baseline = 960 2003 Target = 980 or more Sep/Dec 2005

Net primary enrolment ratio is the ratio of the number of children of official school age (as defined by the national education system) who are enrolled in school to the population of the corresponding official school ageNumber of children fully immunized by their first birthday during the reporting period divided by the estimated under one population for the same year 2006-07 targets created by CABS following each annual review

Quality of budgetary & financial management

Improved compliance of expenditure outcomes with original objectives

Baseline = Weak internal control environment has contributed to poor expenditure management Target = Internal Audit Policy approved by Cabinet by Sep 2005

World Bank’s FIMAG- Structural Adjustment Credit is facilitating the finalisation of this policy 2006-07 targets created by CABS following each annual review

Efficiency of revenue mobilisation

An audited record of the financial outturn is presented to the legislature within six months of the end of the fiscal year

Baseline = Audit reports not produced within 6 months of each financial year Target = NAO report on FY04/05 to Parliament by 02/06

In line with Public Audit Act passed in Aug 2003. The process of public account scrutiny has suffered important delays in the past. The target is identical with IMF SMP structural benchmark no 2.3 2006-07 targets created by CABS following each annual review

Transparency, accountability & corruption in public sector

More effective prosecution and prevention of corruption cases with more emphasis on grand corruption

Baseline = Few Management Accountability workshops and institutional audits are currently carried out Target = 75% of Management Accountability Workshops (MAWs) and Institutional Audits are with organisations prioritised as being at high risk of corruption. 60% of ACB recommendations following MAWs/Audits implemented by public/private firms. 12 MAWs and Audits conducted/year

Indicators have been extracted from the Anti Corruption Bureau Strategic Framework Annex A 2006-07 targets created by CABS following each annual review

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2004 CPIA & 2002 CPRR: Weaknesses identified

Structural reforms and actions envisaged

Performance indicators and benchmarks 2006-07 Notes

Delays in fulfilment of loan conditions and lack of compliance with Bank procedures

Ensure timely fulfilment of loan conditions and respect of Bank procedures

Implementation by implementing ministries of advice contained in quarterly reviews/mid-term reviews/supervision mission reports Loan conditions for all on-going projects are fulfilled in less than one year Implementation of annual workshops on Bank procedures and of recommendations made during the workshops

Low disbursement rates

Improve disbursement rates of ongoing projects with particularly low disbursement ratios

Undertake sector review missions and implement advice contained in reports

Existence of problem projects

Eliminate problem projects in the on-going portfolio

Reduction of problem projects as % of overall portfolio, eventually to zero (based on aged projects being closed)

5. RESULTS-BASED MONITORING AND EVALUATION 5.1 MONITORING OF CSP OUTCOMES AND BANK GROUP PERFORMANCE 5.1.1 Government Monitoring and Evaluation: Achievement of the MGDS targets will be monitored and evaluated partly through: (i) the government’s annual MGDS progress reports and the World Bank and IMF’s Joint Staff Appraisals of these reports; (ii) the Core Welfare Indicator Questionnaire (CWIQ), (iii) a new Integrated Household Survey (IHS), which provides more data, on a five-year basis. (While the data for the second IHS has been collected during 2004/05, the presentation of the results is not expected until late-2005); and (iv) an update to the most recent Demographic and Health Survey (the most recent DHS was completed in 2000). Noting the limited availability and reliability of some data, indicators to judge progress will also be aligned with those of the MDGs, the IMF’s PRGF reviews, and various World Bank analytical reports. In addition, fiscal budget expenditure data will be used to assess whether pro-poor poverty expenditure targets, as presented in budget outturns, have been met. However, despite these monitoring and evaluation tools and diagnostic studies, Malawi has problems in analysing fully what changes have taken and will take place, largely due to weak institutional capacity. Therefore, corrective measures such as capacity building initiatives, as demanded by the government, will be developed. But the scale of institutional deficiencies is large and concerted efforts to address them will be required, partly through the work of the CABS group. 5.1.2 Bank Group Monitoring and Evaluation: Monitoring and evaluating the Bank Group’s effectiveness will take place at the project level (by Supervision and Mid-term Review Reports), and at two overall levels: (i) through a CSP mid-term review; and (ii) by a CPRR (which is scheduled to be completed in the fourth quarter of 2005, with updates produced in 2007 and 2009). An APPR will also be undertaken to assess Malawi’s performance. A mid-term review of the CSP’s implementation will provide analysis of the progress made towards achieving expected outcomes. The key CSP results identified in section 4.5 are drawn directly from the MGDS that is discussed in section 3.1. These benchmarks reflect the selective areas of Bank Group involvement under the CSP, cover some of the key challenges that Malawi must address that the Bank Group will assist with, and are considered achievable within the CSP timeframe. It is expected that the successful implementation of the Bank Group’s strategy will help in achieving the government’s development objectives, and the MDGs. The CSP review will provide the opportunity to re-evaluate and adjust the ADF-X and ADF-XI resource envelopes for Malawi, in conjunction with annual CPIA evaluations. A CSP completion report will provide new opportunities to assess lessons learned that feed back into the preparation of the next CSP post-2009. The CPRR will measure progress in achieving the

31

CSP outputs and outcomes, address the risks and problems that might hinder achievement of the outcomes, and identify issues that hamper portfolio performance. 5.2 MANAGING RISKS

The brief risk analysis presented in section 3.4 shows that there are a number of factors that may prevent the MGDS being fully implemented, ranging from risks that are within the government’s control, to those that are outside its control. There are a variety of mitigating measures that can help reduce the impact of risks under the government’s control, such as improving the form of political and economic governance, and implementing macroeconomic and sector reforms during the CSP cycle. The government is also expected to communicate on a regular basis the benefits of reform and change to groups that perceive change as weakening their position. Strengthening institutions and improving the level of governance will both help to manage and reduce risk to the CSP. As will implementing the findings of each CPRR. And the Bank Group will act to enhance the quality of new operations at point of entry by enhancing project assessments. Efforts to mitigate exogenous risks, such as natural disasters, or deterioration in the terms-of-trade that worsen the balance-of-payments position, are less easy to forecast or manage. But some measures can be taken by the Bank Group, such as providing emergency/disaster relief, helping implement policies to promote domestic market enlargement through regional integration, support for pragmatic fiscal and monetary management to reduce a terms of trade shock to the economy, and helping implement a general policy flexibility to deal with situations as and when they arise. Overall, it is government’s role to demonstrate that it is committed to implement desired reforms, which in turn will reduce the effect of exogenous and unforeseen risks. 5.3 COUNTRY DIALOGUE ISSUES

The Bank Group will maintain open dialogue with the government and other stakeholders on a number of policy, reform and institutional issues: I. MGDS Implementation: The Bank Group will participate on the assessment of the evaluation of the implementation of the MGDS (Bank Group efforts will be strengthened once the proposed Country Office opens, thereby providing a local presence). II. Macroeconomic and Structural Policy Issues: The Bank Group will coordinate with the IMF and CABS on the monitoring of the implementation of macroeconomic policy and structural reforms, as well as the measures intended to promote private sector development. Dialogue will also include discussions regarding the impact of the oil price increase on the macroeconomic framework and poverty reduction efforts. III. Social and Sector Policies: The Bank Group will continue to discuss with government the progress achieved in tackling HIV/AIDS, improving and expanding health and education services, gender, the environment, safety nets and food security. Dialogue will take place under the framework of the education PIF, health SWAp, and irrigation and electricity infrastructure projects supported by the Bank Group. IV. Institutional Capacity and Good Governance: The Bank Group will maintain close dialogue with government on progress achieved in capacity building and governance The Country Governance Profile, which will be prepared in 2006, and the progress made in attaining the CABS performance benchmarks will provide a basis for dialogue.

32

V. Gender Equality: The attainment of gender equality is a challenge that needs to be discussed on an on-going basis with government. The dialogue will be based on the findings of the Bank Group’s most recent Gender Profile. VI. Portfolio Performance: The Bank Group and the government will continue to discuss ways in which to improve the implementation of the existing portfolio as well as on new operations. Areas of focus will be supported by the analyses of the forthcoming CPRR and APPR, and sector reviews. The weak capacity of PIUs will be addressed by phasing them out as institutional capacity increases. 6. CONCLUSION AND RECOMMENDATION 6.1 The MGDS sets out the priority areas that are expected to help increase real GDP growth and reduce poverty by focussing on: (i) sustainable economic growth; (ii) social protection; (iii) social development; (iv) infrastructure; and (v) good governance. While there are several constraints that stand in the way of achieving the MGDS goals, government is committed to tackling them. The Bank Group’s 2005-09 CSP is designed to tie-in with the MGDS and help reduce poverty by selectively focussing on key areas. The Bank Group, in consultation with government, donors and stakeholders, has chosen to support interventions in the infrastructure, social sectors and governance based on: (i) CSP Pillar I –Expanding Rural Infrastructure; and (ii) CSP Pillar II – Developing Human Capital and Institutional Capacity. 6.2 The Boards of Directors are requested to consider and approve the proposed strategy of activities contained in the 2005-09 CSP, and the proposed three-year level of assistance under Malawi’s ADF-X allocation of UA47 million, which is based completely on grants for the first three years of the CSP. Activities falling under the remaining two years of the CSP will be funded by the yet-to-be confirmed ADF-XI allocation.

33

ANNEX I 1/1

MAP OF MALAWI

This map was provided by the African Development Bank exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgement concerning the legal status of a territory nor any approval or acceptance of these borders. The scale is for illustrative purposes only and should not be considered completely accurate.

ANNEX II 1/2

MALAWI BANK GROUP OPERATIONS (UA) September 2005

Project title Approval

date Signature

date Net Signed

Loans Disbursed Undisbursed Balance

Disbursement rate (%) Status

Agriculture

Namwera Rural Develoment (ADF) 26-Oct-76 10-Dec-76 4,600,642.19 4,600,642.19 0.0 100 Completed

Blantyre-Shire Highland Rural Development (ADF) 16-Dec-83 09-May-84 9,616,837.12 9,616,837.12 0.0 100 Completed

Zomba Rural Development (ADF) 25-Nov-87 22-Feb-88 5,697,206.36 5,697,206.36 0.0 100 Completed

National Livestock Development (ADF) 18-Jan-88 22-Feb-88 6,709,743.46 6,709,743.46 0.0 100 Completed

Institutional Support to SDA (ADF) 28-Aug-90 31-Jan-91 538,567.08 538,567.08 0.0 100 Completed

Macadamia Nuts Study (ADF, Grant) 18-Dec-90 31-Jan-91 458,006.81 458,006.81 0.0 100 Completed

Smallholder Sugar cane Study(ADF, Grant) 18-Dec-90 31-Jan-91 200,943.76 200,943.76 0.0 100 Completed

Agricultural Sector Study(ADF, Grant) 18-Mar-91 31-Jan-92 1,410,468.59 1,410,468.59 0.0 100 Completed

Mwanza Rural Development Programme (ADF) 27-Aug-91 13-May-92 8,013,152.00 5,447,804.00 2,565,348.00 68.0 Completed

Lilongwe Rural Forestry Project (ADF) 29-Oct-92 05-Mar-93 3,868,418.00 3,644,131.25 224,286.75 94.2 Completed

Lower Shire Irrigation Study (ADF) 12-Dec-92 15-Jan-93 675,214.99 675,214.99 0.0 100 Completed

Agricultural Services Project (ADF) 03-Sep-93 01-Oct-93 9,210,520.00 8,179,753.47 1,030,766.53 88.8 Completed

Agricultural Sector Adjustment Programme (ADF) 03-Sep-93 01-Oct-93 15,290,643.50 15,290,643.50 0.0 100 Completed

Rural Income Enhancement Project (ADF) 10-Dec-97 27-May-98 7,060,000.00 4,682,348.30 2,377,651.70 66.3 On-going

Macadamia Smallholder Development Project (ADF) 15-Jul-98 13-Jan-99 6,850,000.00 1,662,434.12 5,187,565.88 24.3 On-going

Smallholder Irrigation Project (ADF) 26-Nov-98 24-May-99 5,020,000.00 704,918.25 4,315,081.75 14.0 On-going

Smallscale Irrigation Study (ADF) 26-Nov-98 13-Jan-99 1,119,234.00 563,202.62 556,031.38 50.3 On-going

Horticulture and Food Crops Development (ADF) 15-Dec-98 24-May-99 6,650,000.00 1,099,569.60 5,550,430.40 16.5 On-going Horticulture and Food Crops Development Study(ADF, Grant) 15-Dec-98 24-May-99 840,000.00 19,650.13 644,349.87 23.3 On-going

Smallholder Outgrower Sugar-cane Production Project (ADF) 15-Dec-99 10-Feb-00 8,930,000.00 1,534,157.22 7,395,842.78 17.2 On-going

Special Programme For Food Security - Phase 1 (ADF) 19-Jun-00 21-Dec-00 730,000.00 730,000.00 0.0 100 Completed

Lake Malawi Artisanal Fisheries Development (ADF) 29-Jan-03 05-May-03 6,930,000.00 806,469.19 6,123,530.81 11.6 On-going

Lake Malawi Artisanal Fisheries Development (Grant, ADF) 29-Jan-03 05-May-03 840,000.00 195,588.35 644,411.65 23.3 On-going Customary land Reform & Sustainable Livelihoods PPF (ADF) 16-Sep-03 13-May-04 394,640.00 184,247.06 210,392.94 46.7 On-going

Total Agricultural Sector 111,654,237.86 74,828,547.42 36,825,690.44 67.0

Communications Sector

Telecommunications (ADB) 08-Nov-83 09-May-84 7,933,197.81 7,933,197.81 0.0 100.0 Completed

Telecommunications Project II (ADB) 21-May-91 02-Aug-91 14,999,922.91 14,999,922.91 0.0 100.0 Completed

Telecommunications Project II (ADF) 21-May-91 13-May-92 11,052,954.82 11,052,954.82 0.0 100.0 Completed

Total Communications Sector 33,986,075.54 33,986,075.54 0.0 100.0

Financial Sector

Line of credit to MDC (ADB) 22-Nov-72 11-Dec-72 1,485,997.20 1,485,997.20 0.0 100.0 Completed

Line of credit to Indebank (ADF) 12-Dec-96 08-Jan-98 1,346,291.02 1,346,291.02 0.0 100.0 Completed

Total Financial Sector 2,832,288.22 2,832,288.22 0.0 100.0

Industrial Sector

Industry - Trade policy Adjustment (ADF) 23-Feb-89 22-Sep-89 13,854,303.38 13,854,303.38 0.0 100.0 Completed

Industrial Sector Opportunities (ADF, Grant) 19-Nov-90 31-Jan-91 690,789.00 525,861.17 164,927.83 76.1 Completed

Mulanje Bauxite Production Study (ADF) 25-Nov-92 15-Jan-93 636,929.14 636,929.14 0.0 100.0 Completed

Total Industrial Sector 15,182,021.52 15,017,093.69 164,927.83 98.9

Multisector

Entrepreneurship - Capital Market Adjustment (ADF) 30-Oct-91 31-Jan-92 9,210,520.00 9,210,520.00 0.0 100.0 Completed

Structural Adjustment Loan (ADF) 15-Dec-98 13-Jan-99 10,000,000.00 10,000,000.00 0.0 100.0 Completed Inst. Support for Aid & Debt management & Governance Project (ADF Grant) 18-Oct-00 26-Mar-01 1,000,000.00 547,751.71 452,248.29 54.8 Completed

Support for Good Governance Loan (ADF) 08-Dec-04 04-Mar-05 12,000,000.00 12,000,00.00 0.0 100.0 Completed

Total Multisector 32,210,520.00 31,758,271.71 452,248.29 96.3

ANNEX II 2/2

Project title Approval

date Signature

date Net Signed

Loans Disbursed Undisbursed Balance

Disbursement rate (%) Status

Power Sector

Tedzane Fall Hydroelectric Power (ADB) 15-Dec-69 09-Mar-70 3,113,141.41 3,113,141.41 0.0 100.0 Completed

Nkula-Lilongwe Electric Lines (ADB) 24-Jun-75 08-Aug-75 5,000,000.00 5,000,000.00 0.0 100.0 Completed

Nkula Falls (ADB) 07-Jun-77 16-Jul-77 4,229,137.41 4,229,137.41 0.0 100.0 Completed

Rural Electrification (ADF) 17-Jun-80 24-Jun-80 5,485,817.15 5,485,817.15 0.0 100.0 Completed

Total Power Sector 17,828,095.97 17,828,095.97 0.0 100.0 Completed

Social Sector

Primary -Tertiary Education Project (ADF) 24-Apr-80 24-Jun-80 7,315,309.21 7,315,309.21 0.0 100.0 Completed

Rural Health (ADF) 04-Dec-81 12-Feb-82 7,350,124.54 7,350,124.54 0.0 100.0 Completed

Second Rural health Project (ADF) 17-Dec-84 01-Jul-85 7,997,105.43 7,997,105.43 0.0 100.0 Completed

Primary and Secondary Education Project (ADF) 23-Sep-86 17-Mar-87 15,588,056.49 15,588,056.49 0.0 100.0 Completed

Women in Development Project (ADF) 29-Oct-92 05-Mar-93 4,996,859.38 4,996,859.38 0.0 100.0 Completed

Education III (ADF) 06-May-97 29-May-97 12,000,000.00 11,677,688.40 322,311.60 97.3 Completed

Health Study (ADF) 20-Nov-97 27-May-98 727,323.70 727,323.70 0.0 100.0 Completed

Poverty Reduction and Institutional Support Project (ADF) 10-Dec-98 24-May-99 7,000,000.00 4,003,461.11 2,996,538.89 46.9 On-going

Poverty Reduction and Institutional Support Project (ADF) 10-Dec-98 24-May-99 2,000,000.00 1,828,484.41 171,515.59 91.4 On-going

Support to National Aids Control Programme (ADF) 15-Dec-99 10-Feb-00 1,000,000.00 859,498.35 140,501.65 85.9 Completed

Rural Health Care Project III (ADF) 08-Nov-00 26-Mar-01 10,000,000.00 4,059,601.92 5,940,398.08 39.7 On-going

Education IV (ADF) 21-Nov-01 05-Aug-02 15,000,000.00 727,662.92 14,272,337.08 2.4 On-going

Skills Development and Income Generation Project (ADF) 16-Jan-02 05-Aug-02 9,590,000.00 1,617,110.10 7,972,889.90 16.9 On-going

Total Social Sector 100,564,778.75 68,748,285.96 31,816,492.79 68.1

Transport Sector

Engineering Services Lilongwe Airport (ADB) 08-May-74 01-Jul-74 500,000.00 500,000.00 0.0 100.0 Completed

Mzuzu-Mhuju Road Studies (ADF) 30-Apr-75 19-Aug-75 275,998.12 275,998.12 0.0 100.0 Completed

Lilongwe International Airport Phase I (ADB) 23-Feb-77 22-Mar-77 4,982,802.15 4,982,802.15 0.0 100.0 Completed

Lilongwe International Airport Phase II (ADB) 28-Dec-77 25-Jan-78 4,956,286.93 4,956,286.93 0.0 100.0 Completed

John-Mzumara-Ekwendeni Road Construction (ADF) 28-Feb-79 17-May-79 7,368,415.95 7,368,415.95 0.0 100.0 Completed

Kamuzu International Airport Phase III (ADB) 09-Nov-82 31-Jan-83 14,783,392.80 14,783,392.80 0.0 100.0 Completed

Road Construction and Maintenance (ADB) 25-Jan-84 09-May-84 11,238,755.61 11,238,755.61 0.0 100.0 Completed

Champhoyo-Mbowe Road -the Mzimba Spur (ADF) 24-Oct-85 24-Mar-86 11,793,131.37 11,793,131.37 0.0 100.0 Completed

Mchinji-Kasungu-Nkhotakota Road Studies (ADF) 23-Sep-86 17-Mar-87 1,311,338.76 1,311,338.76 0.0 100.0 Completed

Road Maintenance and Construction Project II (ADF/TAF) 15-Feb-90 30-Nov-90 11,997,546.11 11,997,546.11 0.0 100.0 Completed

Institutional Strengthening under Road Maintenance (ADF) 15-Feb-90 29-May-90 1,966,998.06 1,966,998.06 0.0 100.0 Completed

Mchinji-Msulira-Nkhotakota Road (ADF) 18-Dec-90 31-Jan-91 14,751,376.32 14,751,376.32 0.0 100.0 Completed

Mchinji-Msulira-Nkhotakota Road (ADF) 25-Nov-91 13-May-92 12,058,498.24 12,058,498.24 0.0 100.0 Completed Mchinja-Kasungu-Msulira Road Project (Supplementary Loan) (ADF) 02-Oct-97 25-Mar-98 4,657,919.74 4,657,919.74 0.0 100.0 Completed

Karonga-Chitipa Road Lufilya to Chitipa Section (ADF) 15-Dec-99 10-Feb-00 13,540,000.00 198,338.34 13,341,661.66 1.5 On-going Roads rehabilitation & Upgrading in Karonga and Chitipa Districts (ADF) 29-Oct-03 23-Jan-04 13,670,000.00 0 13,670,000.00 0.0 On-going

Total Transport Sector 129,852,460.16 102,840,798.50 27,011,661.66 79.2

Water Supply and Sanitation Sector

Water Supply System in Malawi Districts (ADF) 14-Dec-76 07-Feb-77 4,605,259.75 4,605,259.75 0.0 100.0 Completed

Blantyre Water Supply (ADF) 19-Sep-77 07-Oct-77 4,602,004.72 4,602,004.72 0.0 100.0 Completed

Study of the District Water Supply Phase II (ADF) 25-Aug-83 09-May-84 477,332.08 477,332.08 0.0 100.0 Completed

Maira Balaka water Supply (ADF) 19-Nov-84 01-Jul-85 11,587,112.87 11,587,112.87 0.0 100.0 Completed

District Water Supply (ADF) 12-Jun-90 31-Jan-91 13,307,038.63 13,307,038.63 0.0 100.0 Completed

District Water Supply II Sanitation Study (ADF) 12-Jun-90 31-Jan-91 842,520.25 842,520.25 0.0 100.0 Completed

Blantyre Water Supply Project Phase VII (ADF) 21-Apr-92 05-Mar-93 7,199,677.21 7,199,677.21 0.0 100.0 Completed

Blantyre Sanitation Master Plan Study (Grant) (ADF) 21-Apr-92 05-Mar-93 677,453.69 677,453.69 0.0 100.0 Completed

District Centres Sanitation Study (ADF) 18-Nov-98 13-Jan-99 944,242.81 944,242.81 0.0 100.0 Completed

District Water Supply (ADF) 03-Dec-97 27-May-98 12,420,000.00 11,216,353.55 1,203,646.45 90.3 Completed

Integrated Water Supply and Sanitation Project (ADF) 05-Dec-01 05-Aug-02 8,490,000.00 384,082.33 8,105,917.67 4.5 On-going

Integrated Water Supply and Sanitation Project (Grant, ADF) 05-Dec-01 05-Aug-02 1,100,000.00 446,027.19 653,972.81 40.6 On-going

Total Water and Sanitation Sector 66,252,642.01 56,031,187.84 10,221,454.17 85.0

Grand Total 516,463,120.03 404,128,562.09 106,234,557.94 78.3

(Cancelled approvals) 6,100,000.00

ANNEX III 2005-09 CSP FRAMEWORK MATRIX 1/3

Bank Group Strategy/Activity Expected Results Country Issues MGDS CSP Ongoing Proposed Other donors MDGs CSP MGDS

CSP Pillar I – Expanding Rural Infrastructure IRRIGATION: High dependence on rain for crop growth Food insecurity Insufficient irrigation systems and supply Weak capacity of Ministry of Irrigation and Water Development Weak community irrigation systems management Vandalism and theft of irrigation facilities High import duties on irrigation equipment Inadequate electricity to power electric irrigation pumps ELECTRICTY: Inadequate, unreliable and expensive electricity supply Inability to generate sufficient energy Little progress on regional power integration Low levels of access to electricity supply Very high dependence on biomass (93%) for energy use

IRRIGATION: Achieve sustainable and integrated irrigation resource management and development through more efficient and effective practices Achieve sustainable agricultural production Achieve increased smallholders’ incomes Achieve increased rural employment ELECTRICTY: Increase supply of and access to electricity Reduce use of biomass as energy source Reduce power cuts

IRRIGATION: Project designed and implemented to include: • Provision of new and rehabilitation of

existing irrigation and dam facilities • Capacity building and institutional

strengthening of Ministry of Irrigation and Water Development, and of decentralised institutions, villages and district administrations

ELECTRICTY: Support to power sector designed and implemented in conjunction with ADB Multinational funds. Specific attention devoted to support for government’s power sector policy framework to establish Mozambique Inter-connector that will promote/improve: • Power-related infrastructure • Reliable and sustainable power

supplies • Increase access to electricity • Help reduce use of biomass as energy

source

Related projects in: Agriculture:

Smallholder Irrigation Project Horticulture and Food Crops Development Project ELECTRICTY: None

Related projects in: Agriculture:

Irrigation Initiative Project ELECTRICTY: ADB Multinational funded regional integration project: Mozambique Inter-connector

IRRIGATION: WB CIDA DBSA EIB Germany Japan Norway Sweden USAID NGOs ELECTRICTY: WB Norway (undecided)

IRRIGATION: Goal 1: Eradicate extreme poverty and hunger Goal 7: Ensure environmental sustainability ELECTRICTY: Goal 7: Ensure environmental sustainability

IRRIGATION: Smallholder share of GDP increases by 0.5 percentage points per year from around 23% in 2005 over project life (approx 36 months) From 2006 to project end (approx 36 months), 1,000 hectares of functional irrigation systems in project sites Quantity of smallholder maize output increased to 2.23 million tonnes by 2007 from 1.98 million tonnes in 2003 Volume of total tobacco (estate & smallholder) exports increased to 125 million kgs by 2007 from 100 million kgs in 2003 Capacity of Ministry of Irrigation and Water Development increased ELECTRICTY: By 2007 a functioning link made to Mozambique Power Inter-connector Inter-connector will supply 50MW Minimum domestic power distribution increased to around 350MW when Inter-connector link is established

IRRIGATION: Smallholder share of GDP increases to 34.9% in 2011from 23.6% in 2004 Increased smallholder productivity Expand and diversify agricultural output and exports Improved tenure, security and equitable access to land with an optimal and ecologically balanced use of land and land-based resources ELECTRICTY: Reduction in power shortages to zero by 2007 from average of five per week in dry period Increased access by population to power supply to 10% by 2010 from 6% in 2004 Biomass-commercial energy mix target reduced to 75:25 by 2010 from around 95:5 in 2004

ANNEX III 2/3

Bank Group Strategy/Activity Expected Results Country Issues MGDS CSP Ongoing Proposed Other donors MDGs CSP MGDS

CSP Pillar II – Developing Human Capital and Institutional Capacity EDUCATION: Poor access to, equity and quality of education Inadequate teaching and learning materials Low number of, and poorly trained teachers Lack of capacity to treat educational special needs Weak supervision, monitoring and management of schools Weak gender equality in schools negatively affecting girls HEALTH: Lack of access to quality health care Shortage of skilled staff Insufficient clinic power and water supplies Weak health system management

EDUCATION: Secondary education: Provide secondary schools that are adequately equipped for educational needs of pupils, including special needs Ensure an adequate supply of qualified teachers to secondary level to ensure appropriate supply of academically and professionally qualified secondary school teaching force Strengthen school supervision, inspection and management HEALTH: Provide well maintained and fully functioning health centres Provide adequate staff in primary health care clinics Provide effective management of district health systems, coordinated with Ministry of Health Provide sufficient power and water supplied to all health care centres

EDUCATION: Support to secondary education sector designed and implemented, with general support for government’s 2005-15 Education Sector Plan, and specific support to improve quality of secondary education, especially at the Community Day Secondary Schools, to include: • Infrastructure development • Provision of education materials • Teacher education development • Capacity building and policy

development HEALTH: Support to health sector implemented through SWAp, to include: • Human resources • Pharmaceutical and medical

supplies • essential basic equipment • facilities development • routine operations at service

delivery level • central operations, policy and

systems development programme

Related projects in: Education: Education IV Project Related projects in: Health: Rural Health Care Project III

Related projects in: Education: Secondary Education CDSS (Education V) Project Related projects in: Health: Health SWAp

EDUCATION: WB EU DFID Germany Japan Norway Sweden USAID HEALTH: WB DFID NORAD SIDA UNFPA

EDUCATION: Goal 3: Promote gender equality and promote women HEALTH: Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria and other diseases

EDUCATION: By year 2010: All project schools upgraded to project’s minimum physical standards Unqualified teachers in project schools reduced to 24% 2010 from 63% in 2004 Pupils passing MSCE in project schools increased to 70% 2010 from 32% in 2004 Girls passing MSCE in project schools increased to 70% in 2010 from 21% in 2004 HEALTH: By 2010: Increase the number of deliveries attended to by skilled health workers from current 55% to 75% Reduce maternal mortality ratio (reported) from current 1,120:100,000 (live births) to 700:100,000 Reduce child mortality rate from current 112:1,000 (live births) to 70:1,000 Increase in health facilities able to provide Essential Health Services from current 10% to 80%

EDUCATION: All secondary school pupils (including girls) have access to good quality education by 2012 All children with special needs are being attended to in all schools by 2015 HEALTH: By 2010: Children fully immunised by 2 years increased from current 70% to >80% Increase total per capita health allocation (govt + donor) to health sector from current US$7.9 to US$11 Increase number of health facilities with functioning water systems from current 71% to 90% Childhood malnutrition in under fives reduced from current 49% to 25%

ANNEX III 3/3

Bank Group Strategy/Activity Expected Results Country Issues MGDS CSP Ongoing Proposed Other donors MDGs CSP MGDS

CSP Pillar II – Developing Human Capital and Institutional Capacity (Continued) GOVERNANCE: Macroeconomic instability Low level of good governance Slow progress in decentralisation Ineffective justice system and weak implementation of rule of law

GOVERNANCE: Stabilise macroeconomic position Increase transparency of civil service decision making Reduce level and incidence of corruption Improve community participation in local government More transparent, accountable and effective local government Improve response and effectiveness of judiciary Increase fairness of legal system

GOVERNANCE: Support to governance implemented through CABS group, to focus on: • Macroeconomic stability • Budget implementation, execution

and comprehensiveness • PFM reforms • Accounting, auditing and reporting

of government accounts • Tackling corruption

Related projects in: Governance: Support for Good Governance loan

Related projects in: Governance: Institutional/budget support provided through CABS group

GOVERNANCE: Members of CABS group: EU DfID Norway Sweden

GOVERNANCE: Goal 8: Develop a global partnership for development Through its cross-cutting nature, provision of budget support is associated with the remainder of all MDGs: Goal 1: Eradicate extreme poverty and hunger Goal 2: Achieve universal primary education Goal 3: Promote gender equality and empower women Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria and other diseases Goal 7: Ensure environmental sustainability

GOVERNANCE: Primary: Being on track with IMF quarterly PRGF reviews 2006/07 budget documents presented to parliament cover donor funds to government Proportion of national budget spent on pro-poor expenditure increases to 18.9% (outturn) in 2004/05 from 9.6% in 2002/03 Improved compliance of expenditure outcomes with original objectives – internal audit policy approved by cabinet by Sep 2005 Five key Malawi Financial Accountability Action Plan activities implemented by Dec 2005 National Audit Office report on 2004/05 to parliament by Feb 2006 Secondary: See CABS Performance Assessment Framework 2005/06 (Annex IV) for further details

GOVERNANCE: Stable macroeconomic position with inflation rate below average of 11% in 2004; interest rates below average of 37% in 2004; and stable exchange rate with steady and limited depreciation from average of MK109:US$1 in 2004 Increased transparency of civil service decision making – decisions made based on facts Reduce level and incidence of corruption – free flow of information and increased investor and donor confidence in government Improved community participation in local government and more transparent, accountable and effective local government Improved responsiveness and effectiveness of judiciary Increased fairness of legal system

ANNEX IV 1/3

2005/06 CABS PERFORMANCE ASSESSMENT FRAMEWORK

No Issue Indicator Baseline Targets Notes 1 Macro-economic

stability Macroeconomic and Fiscal Performance

NA Being on track with IMF programme

Source: Quarterly IMF review

2 Budget comprehensiveness

Budget documents presented to Parliament cover donor funds to the Government

FY 2004/05: Lending agencies covered. Grant projects partly covered

FY 2006/07: Support from key donor agencies covered (see notes)

Source: MoF and Donors confirm that all their programme and project agreements signed with GoM are listed in the Annual Budget and that expenditures reflect donors’ figures Assumption: Donors provide all the necessary information before budget preparation Definition: for FY 2006/07: World Bank (IBRD), AfDB and from HIPC, DFID, EU, Norway, Sweden, Germany, USAID, Global Funds. Possible agencies for FY 2007/08: All above covered + UN-system, JICA and CIDA

3 Budget implementation Proportion of national budget spent on protected pro-poor expenditures (PPPEs)

FY 2002/03 =9.6% FY 2004/05=18.9% (outturn)

Source: MoF Expenditure Report on quarterly basis. Quarterly IMF review MPRS Indicator no 23 The Funding for Corresponding HIPC AAP indicators are “Poverty-reducing expenditures are clearly defined” and “”Good-quality classification of poverty reducing spending is reflected in the in-year budget reports” PPPEs comprise of personal emoluments, other recurrent transactions and development.

4 Budget implementation – Debt management

Interest payment as % of total GoM expenditure

FY 2003/04 = 25% 22.5% or less for FY 2004/05

Source: Consolidated accounts for FY 2004/05 – MoF MPRS Indicator no 20 Interest payment remains very high (25% of total expenditures). GoM is committed toward reducing interest rate payment through reduced borrowing, repayment of domestic debt and restructuring of debt. Definition: Government Interest payment on foreign and domestic debt as a % of total budget expenditures.

5 Primary Education Pupil per qualified teacher ratio in primary school in rural areas

1: 118 ( 2001) 1: <104 (2005)

Source: Ministry of Education Annual Statistics Cf. MPRS Indicator no 35 (which is not specified for rural areas) MPRS M&E Master Plan target for end 2005 is 85 (for both rural and urban areas) Definition: number of pupil divided by number of teacher.

6 Education - Gender Primary School Net Enrolment Rate (Male)

81% – 2001/2 90% or (+) year 2005

Source: MoF to provide data. Original statistics from MoE – EMIS related to school year 2005 staring January 2005. MPRS Indicator no 32 Definition: Net primary enrolment ratio is the ratio of the number of children of official school age (as defined by the national education system) who are enrolled in school to the population of the corresponding official school age. Based on the International Standard Classification of Education, 1997 (ISCED97). (UNESCO Institute for Statistics).

7 Education - Gender Primary School Net Enrolment Rate (Female)

81% - 2001/2 90% or (+) year 2005

Source: MoF to provide data. Original statistics from MoE – EMIS related to school year 2005 staring January 2005. Definition: see no 6 – for female. MPRS Indicator no 32

8 Education - Gender Primary School Drop Out Rate for up to Standard Five (Male)

20.68% – 2004

18.50% or (-) year 2005

Source: MoF to provide data. Original statistics from MoE – EMIS related to school year 2005 staring January 2005. Definition: % of pupils who withdrew from school before reaching standard 5 (for male) MPRS Indicator no 33

9 Education - Gender Primary School Drop Out Rate for up to Standard Five (Female)

23.05% – 2004 21.50% or (-) year 2005

Source: MoF to provide data. Original statistics from MoE – EMIS related to school year 2005 staring January 2005. Definition: see no 8 - for female. MPRS Indicator no 33

10 Budget implementation - Education

(a) Education ORT outturn as % of total discretionary outturn: in relation to: (b) education approved ORT as % of total approved discretionary expenditure

N/A (a) ≥ (b) Source: MoF - Consolidated accounts for FY 2004/05 Definition: Protection of Educ ORTs should fiscal constraints be experienced during the FY. ORTs will not be reduced by a higher % than the average reduction on discretionary expenditure. If discretionary disbursements in general are below budget, Educ. ORTs could be lower than the budget allocation but should not be lower as a share than the discretionary disbursement. If discretionary disbursements are above budget, Educ. ORTs should move along, thus expansion should not be at the cost of Educ. ORTs. Total discretionary outturn is total outturn less total statutory outturn less total development budget part 1 outturn Total approved discretionary expenditure is total approved expenditure less total statutory approved expenditure less total development budget part 1

11 Budget Implementation - Health

(a) Health ORT outturn as % of total discretionary outturn: in relation to: (b) health approved ORT as % of total approved discretionary expenditure

N/A (a) ≥ (b)

Source: MoF - Consolidated accounts for FY 2004/05 Definition: Protection of Health ORTs should fiscal constraints be experienced during the FY.ORTs will not be reduced by a higher % than the average reduction on discretionary expenditure. See definition for indicator 11, applied to health ORTs.

ANNEX IV 2/3

No Issue Indicator Baseline Targets Notes 12 Health Services Under 1 year immunisation by

each antigen (BCG, Pentavalent III, Polio III, Measles)

56% (2002) Dec 2005: 80 %

Source: HMIS. All data as of end of Sept or Dec 05 to be provided by MoF. Original statistics from MoH through HMIS, NAC and DHS. Definition: Number of children fully immunized by their first birthday during the reporting period divided by the estimated under one population for the same year MPRS Indicator no 29

13 Health – Maternal Deliveries attended by skilled health staff

58% - 2003 59% or ( +) Sept/Dec 05

Source: HMIS. All data as of end of Sept or Dec 05 to be provided by MoF. Original statistics from MoH through HMIS, NAC and DHS. MPRS Indicator no 30 MPRS indicator excludes Traditional Birth Attendance. Definition: Births attended by skilled health staff are the percentage of deliveries attended by personnel trained to give the necessary supervision, care, and advice to women during pregnancy, labour, and the postpartum period, to conduct deliveries on their own, and to care for the newborns. (World Health Organization)

14 Health – Access to Out Patient Department (OPD) Utilisation Rate (per 1000 pop) in rural areas.

960 2003

980 or (+) Sept/Dec 05

Source: All data as of end of Sept or Dec 05 to be provided by MoF. Original statistics from MoH through HMIS. MPRS Indicator no 31 Definition: Out Patient Department (OPD) Utilization Rate (HMIS) with following definition: Number of OPD attendance divided by total population of the catchment area. OPD utilization rate is the total number of OPD attendance and measure the patient load in a health center and hospital OPD.

15 Health/food security –Children

Prevalence of under 5 child malnutrition

25% 1995-02

23% or (–) Sept/Dec 2005

Source: All data as of end of Sept or Dec 05 to be provided by MoF. Original statistics from MoH through HMIS, NAC and DHS. MPRS Indicator no 5 Definition: percentage of children under five years old whose weight for age is less than minus two standard deviations from the median for the international reference population ages 0–59 months.

16 HIV/AIDS HIV prevalence among adults 15-49 age group

2003: 14.4% for age group 15-49

2004: 14.4% 2005: 14.2% 2006: 14 %

Source: HIV Sentinel Surveillance Survey MPRS Indicator no 13 Definition: Estimated number of HIV positive people divided by mid-year population among people aged 15 to 49 years expressed as a percentage.

17 Gender Women in decision making positions

12.8% = 2004 ≥13% by September 2005 Source: MoF with Ministry of Gender and Community Services data. Women in decision making positions target is 30% in 2005 (SADC target), and baseline in 2004 is 12.8 % according to Ministry of Gender and Community Services. MPRS Indicator no 12 Definition: Women in decision making positions in government sector, i.e. from P5 (Asst. Dir) to P2 (Principal Secretary) and in Parastatals (Deputy General Manager, Director or Chief Executive, Executive Secretary

18 Budget execution Improved compliance of expenditure outcomes with original objectives

Weak internal control environment has contributed to poor expenditure management

Internal Audit Policy approved by Cabinet by September 2005

Source: FIMAG- Structural Adjustment Credit is facilitating the finalisation of this policy

19 Public FinancialManagement Reforms

Progress in implementing the Malawi Financial Accountability Action Plan

Limited implementation of MFAAP

Five key activities in the action plan implemented by February 2006

Source: MoF/ MFAAP Secretariat Report(s) Follow up of the MFAAP related general condition. 5 Activities from MFAAP Secretariat Work Plan Activity Matrix: 1.(a.vii): Hold stakeholders awareness workshop 2.(5ii) : Maintain a Database of PFM projects 3. (6.i) : Develop and maintain a database of all MFAAP initiatives 4. (6iv): Categorise implementation status of all MFAAP activities. 5.(6vi) : Produce monthly progress reports

20 Audited PublicAccount.

An audited record of the financial outturn is presented to the legislature within six months of the end of the fiscal year

Audit reports not produced within 6 months of each financial year

NAO report on FY04/05 to Parliament by 02/06

Source: Consolidated accounts for FY 2004/05 – MoF In line with Public Audit Act passed in August 2003. The process of public account scrutiny has suffered important delays in the past. The target is identical with IMF SMP structural benchmark no 2.3 (8 month from end of FY is a realistic target for FY04/05 given background (as opposed to 6 months in PFM act).

21 Accounting &Reporting

Share of GM bank accounts supported by bank reconciliation on a monthly basis

2002/03: 21% 40% for 2003/04, 57% for 2004/05 85% for 2005/06

Source: MoF/Accountant General’s Department on a monthly basis. The corresponding HIPC AAP indicator is “Satisfactory reconciliation of fiscal and banking records is undertaken routinely”

ANNEX IV 3/3

No Issue Indicator Baseline Targets Notes 22 Governance More effective prosecution and

prevention of corruption cases with more emphasis on grand corruption

Few Management Accountability workshops and institutional audits are currently carried out

75% of Management Accountability Workshops (MAWs) and Institutional Audits are with organisations prioritised as being at high risk of corruption. 60% of ACB recommendations following MAWs/Audits implemented by public/private. 12 MAWs and Audits conducted annually

Source: Anti- Corruption Bureau (Periodic Monitoring and Evaluation Reports, Workshop Reports, Feedback from Institutions, Audit Reports). These indicators have been extracted from the Anti Corruption Bureau Strategic Framework Annex A.

23 Investigations Specialised teams formed Investigations completed

Specialised teams operational 80 % of investigations dockets completed within 90 days of file being allocated to an officer

5 specialised teams complete 520 investigations conducted within 12 months

5 Specialised teams formed 400 investigations completed in 12 months

24 Prosecutions and Legal Department

Prosecutions conducted 50 per cent of all cases completed and taken to court within 30 days of completing investigations

200 cases recommended for prosecutions in 12 months

140 cases brought to court for trial and completed in 12 months

ANNEX V 1/1

MALAWI’S MILLENNIUM DEVELOPMENT GOALS

1990 1994 1997 2000 2003 Goal 1: Eradicate extreme poverty and hunger Percentage share of income or consumption held by poorest 20% .. .. 4.9 .. .. Population below $1 a day (%) .. .. 41.7 .. .. Population below minimum level of dietary energy consumption (%) .. .. 40 .. 33

Poverty gap ratio at $1 a day (incidence x depth of poverty) .. .. 14.8 .. .. Poverty headcount, national (% of population) 54 .. 65.3 .. .. Prevalence of underweight in children (under five years of age) .. 29.9 .. 25.4 ..

Goal 2: Achieve universal primary education Net primary enrolment ratio (% of relevant age group) 49.8 .. .. .. .. Primary completion rate, total (% of relevant age group) 36 56 68 72 71 Proportion of pupils starting grade 1 who reach grade 5 64.4 .. 44.1 49 .. Youth literacy rate (% ages 15-24) 63.2 66.5 68.9 71.1 72.5

Goal 3: Promote gender equality and empower women Proportion of seats held by women in national parliament (%) 10 .. 6 8 9 Ratio of girls to boys in primary and secondary education (%) 80.6 .. 89.6 91.5 92.5

Ratio of young literate females to males (% ages 15-24) 67.6 70.7 73 75.2 76.7

Share of women employed in the non agricultural sector (%) 10.5 10.8 11.4 11.9 12.2

Goal 4: Reduce child mortality Immunization, measles (% of children ages 12-23 months) 81 83 87 73 77 Infant mortality rate (per 1,000 live births) 146 133 .. 117 112 Under 5 mortality rate (per 1,000) 241 216 .. 188 178

Goal 5: Improve maternal health Births attended by skilled health staff (% of total) .. .. .. 55.6 61

Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 1800 ..

Goal 6: Combat HIV/AIDS, malaria, and other diseases Contraceptive prevalence rate (% of women ages 15-49) .. .. 22 30.6 .. Incidence of tuberculosis (per 100,000 people) 262.7 380.7 413 442.7 442 Number of children orphaned by HIV/AIDS .. .. .. 390,000 500,000 Prevalence of HIV, total (% of population aged 15-49) .. .. .. 14.3 14.2 Tuberculosis cases detected under DOTS (%) .. 37.9 42.4 39.7 34.9

Goal 7: Ensure environmental sustainability Access to an improved water source (% of population) 41 .. .. .. 67

Access to improved sanitation (% of population) 36 .. .. .. 46

CO2 emissions (metric tons per capita) 0.1 0.1 0.1 0.1 .. Forest area (% of total land area) 34.7 .. .. 27.2 .. Nationally protected areas (% of total land area) .. .. .. .. 11.2

Goal 8: Develop a global partnership for development Aid per capita (current US$) 59.2 51.9 35.6 43.3 45.4 Fixed line and mobile phone subscribers (per 1,000 people) 3.1 3.6 4.5 9.1 21 Internet users (per 1,000 people) .. .. 0.1 1.5 3.4 Personal computers (per 1,000 people) .. .. 0.8 1.2 1.5

Other GNI per capita, Atlas method (current US$) 200 170 220 170 160 Life expectancy at birth, total (years) 44.6 .. 40.7 .. 37.5 Literacy rate, adult total (% of people ages 15 and above) 51.8 55 57.6 60.1 61.8

Source: World Development Indicators database, April 2005

ANNEX VI 1/1

MAIN DONOR MPRSP INTERVENTIONS BY SECTOR

Main Donor Support by MPRSP Pillar and Themes (lending approved in 2002-05) US$ million

Bud

get

/ B

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ce

of

Pay

men

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t 02-

05

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port

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&

P

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ct

supp

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Pi

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1: S

usta

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Gro

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Sou

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of G

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Agr

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Nat

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Res

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MS

ME

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Man

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Tour

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Sm

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Cap

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mpr

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y of

Life

of M

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Net

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Dis

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agem

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Pilla

r 4: G

ood

Gov

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nce

Pol

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l Will

and

Min

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Sec

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& J

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e

Res

pons

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Pub

lic In

stitu

tions

Cro

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sues

HIV

/AID

S

Gen

der

Env

ironm

ent

Sci

ence

& T

echn

olog

y

Donor

ADB 18 43 61 X X X X X X X X X

Canada 28 28 X X X X X X X X X

EU 44 236 280 X X X X X X X X X

IMF 37 37

FAO 17 17 X X X X X X X

Germany 36 36 X X X X X X X X

Japan 58 58 X X X X X X X X X X X X

Norway 19 93 112 X X X X X X X X

Sweden 8 41 49 X X X X X X

UK 87 330 417 X X X X X X X X X X X X X X

UNICEF 65 65 X X X X

UNDP 41 41 X X X X X X X X X

USA 64 64 X X X X X X X X X X X X X X X

WFP X X

WHO X X

World Bank 300 300 X X X X X X X X X X

TOTAL 213 1,352 1,565 Level of Support 6 10 8 2 3 2 8 10 3 12 4 4 6 7 5 11 11 6 5 1

Note: Exchange rate equivalents have been converted using an end-2004 US dollar exchange rate. ADB data is based on UA currency. Canada data is for 2002-04. EU data is based on Euro currency. IMF data is based on SDR currency. German data is based on Euro currency and relates only to GTZ grants. Japan data is for 2002-03. UK data is based on UK pounds currency.

ANNEX VII 1/1

Year Malawi AfricaDevelo-

pingCountries

Develo-ped

CountriesBasic Indicators Area ( '000 Km²) 118 30 061 80 976 54 658Total Population (millions) 2003 12.1 849.5 5,024.6 1,200.3Urban Population (% of Total) 2003 28.4 39.2 43.1 78.0Population Density (per Km²) 2003 102.2 28.3 60.6 22.9GNI per Capita (US $) 2003 160 704 1 154 26 214Labor Force Participation - Total (%) 2003 47.8 43.3 45.6 54.6Labor Force Participation - Female (%) 2003 48.7 41.0 39.7 44.9Gender -Related Development Index Value 2002 0.374 0.476 0.655 0.905Human Develop. Index (Rank among 174 countries) 2002 165 n.a. n.a. n.a.Popul. Living Below $ 1 a Day (% of Population) 1995 … 46.7 23.0 20.0

Demographic IndicatorsPopulation Growth Rate - Total (%) 2003 2.0 2.2 1.7 0.6Population Growth Rate - Urban (%) 2003 7.4 3.8 2.9 0.5Population < 15 years (%) 2003 47.2 42.0 32.4 18.0Population >= 65 years (%) 2003 3.6 3.3 5.1 14.3Dependency Ratio (%) 2003 99.0 86.1 61.1 48.3Sex Ratio (per 100 female) 2003 97.5 99.0 103.3 94.7Female Population 15-49 years (% of total population) 2003 22.3 24.0 26.9 25.4Life Expectancy at Birth - Total (years) 2003 37.6 50.7 62.0 78.0Life Expectancy at Birth - Female (years) 2003 37.6 51.7 66.3 79.3Crude Birth Rate (per 1,000) 2003 44.1 37.0 24.0 12.0Crude Death Rate (per 1,000) 2003 23.9 15.2 8.4 10.3Infant Mortality Rate (per 1,000) 2003 113.3 80.6 60.9 7.5Child Mortality Rate (per 1,000) 2003 182.6 133.3 79.8 10.2Maternal Mortality Rate (per 100,000) 1994 620 661 440 13Total Fertility Rate (per woman) 2003 6.0 4.9 2.8 1.7Women Using Contraception (%) 1996 22.0 40.0 59.0 74.0

Health & Nutrition IndicatorsPhysicians (per 100,000 people) 1993 2.8 57.6 78.0 287.0Nurses (per 100,000 people) 1989 3.1 105.8 98.0 782.0Births attended by Trained Health Personnel (%) 1996 55.0 44.0 56.0 99.0Access to Safe Water (% of Population) 2002 67.0 64.4 78.0 100.0Access to Health Services (% of Population) 1988 80.0 61.7 80.0 100.0Access to Sanitation (% of Population) 2000 77.0 42.6 52.0 100.0Percent. of Adults (aged 15-49) Living with HIV/AIDS 2003 17.0 6.4 1.3 0.3Incidence of Tuberculosis (per 100,000) 2000 208.7 109.7 144.0 11.0Child Immunization Against Tuberculosis (%) 2003 91.0 81.0 82.0 93.0Child Immunization Against Measles (%) 2003 77.0 71.7 73.0 90.0Underweight Children (% of children under 5 years) 1995 29.9 25.9 31.0 …Daily Calorie Supply per Capita 2002 2 155 2 444 2 675 3 285Public Expenditure on Health (as % of GDP) 1998 2.8 3.3 1.8 6.3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 2001 146.0 88.7 91.0 102.3 Primary School - Female 2001 143.0 80.3 105.0 102.0 Secondary School - Total 2001 34.0 42.9 88.0 99.5 Secondary School - Female 2001 29.0 41.3 45.8 100.8Primary School Female Teaching Staff (% of Total) 1996 39.0 46.3 51.0 82.0Adult Illiteracy Rate - Total (%) 2003 37.3 36.9 26.6 1.2Adult Illiteracy Rate - Male (%) 2002 24.5 28.4 19.0 0.8Adult Illiteracy Rate - Female (%) 2003 50.3 45.2 34.2 1.6Percentage of GDP Spent on Education 1998 4.6 5.7 3.9 5.9

Environmental IndicatorsLand Use (Arable Land as % of Total Land Area) 2003 19.9 6.2 9.9 11.6Annual Rate of Deforestation (%) 1995 1.6 0.7 0.4 -0.2Annual Rate of Reforestation (%) 1990 8.0 10.9 … …Per Capita CO2 Emissions (metric tons) 1998 0.1 1.2 1.9 12.3

Source : Compiled by the Statistics Division from ADB databases; UNAIDS; World Bank Live Database and United Nations Population Division.Notes: n.a. Not Applicable ; … Data Not Available.

COMPARATIVE SOCIO-ECONOMIC INDICATORSMalawi

Infant Mortality Rate ( Per 1000 )

0

20

40

60

80

100

120

140

1995

1996

1997

1998

1999

2000

2001

2002

2003

malawi Africa

GNI per capita US $

0100200300400500600700800

1995

1996

1997

1998

1999

2000

2001

2002

2003

malawi Africa

Population Growth Rate (%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

malawi Africa

111213141516171

1995

1996

1997

1998

1999

2000

2001

2002

2003

malawi Africa

Life Expectancy at Birth (Years)

ANNEX VIII 1/1

MALAWI: GDP BY ECONOMIC ACTIVITY AT CONSTANT 1994 FACTOR COST,

1999-20031

1999 2000 2001 2002 2003 (In millions of Malawi kwacha)

Agriculture 4,944 5,206 4,894 5,026 5,395

Smallholders 3,992 4,055 3,862 3,846 4,358 Estates 951 1,151 1,033 1,180 1,037

Mining and quarrying 170 188 202 124 153 Manufacturing 1,749 1,696 1,583 1,475 1,491 Electricity and water 171 189 176 186 188 Construction 292 286 273 311 324 Distribution 2,760 2,752 2,782 2,826 2,891 Transport and communication 573 549 546 619 632 Financial and professional services 1,031 1,052 1,020 1,085 1,151 Ownership of dwellings 180 185 190 195 200 Private community services 264 271 279 287 295 Government services 1,309 1,180 1,189 1,183 1,199 Unallocable financial charges -378 -387 -386 -437 -463 GDP at constant 1994 factor cost 13,065 13,166 12,748 12,880 13,456

(Annual percentage change, unless otherwise indicated)

Agriculture 10.1 5.3 -6.0 2.7 7.3 Smallholders 13.4 1.6 - 4.8 - 0.4 13.3 Estates -1.9 21.0 -10.3 14.2 -12.1

Mining and quarrying 3.4 10.8 7.5 -38.7 23.5 Manufacturing 1.8 -3.0 -6.6 -6.9 1.1 Electricity and water -0.4 10.2 -7.0 5.8 0.9 Construction 15.5 -2.2 - 4.7 14.1 4.0 Distribution -1.8 -0.3 1.1 1.6 2.3 Transport and communication 4.8 -4.2 -0.6 13.4 2.2 Financial and professional services -0.3 2.0 -3.0 6.4 6.0 Ownership of dwellings 2.1 2.6 2.8 2.8 2.8 Private community services 0.7 2.7 2.9 2.9 2.9 Government services -1.8 -9.9 0.8 -0.5 1.4 GDP at constant 1994 factor cost 3.5 0.8 -3.2 1.0 4.5 Memorandum items:

GDP at current factor cost (in millions of Malawi kwacha 76,990 102,383 121,828 141,543 164,314 GDP at current factor cost (percentage change) 46.3 33.0 19.0 16.2 16.1 GDP deflator at factor cost (1994=100) 589 778 956 1,099 1,221 GDP deflator at factor cost (percentage change) 41.3 32.0 22.9 15.0 11.1

Sources: Malawian authorities; IMF estimates. 1 Figures for 2003 are provisional

ANNEX IX 1/1

MALAWI: GDP BY EXPENDITURE AT CONSTANT 1994 MARKET PRICES, 1999-20031

1999 2000 2001 2002 2003 (In millions of Malawi kwacha)

GDP at constant 1994 market prices 14,371 14,598 13,999 14,265 14,893 Net exports or imports (-) of goods and services -3,185 -2,287 -2,195 -3,261 -1,979

Exports of goods and services 3,862 3,601 4,002 4,064 3,607 Exports and reexports of goods 3,430.5 3,205.0 3,510.7 3,644.4 3,252.6 Exports of nonfactor services 431.1 395.8 491.1 419.4 354.4

Imports of good and services -7,047 -5,888 -6,197 -7,325 -5,586 Imports of goods, f.o.b. -5,247 -4,289 -4,579 -5,549 -4,183 Imports of nonfactor services -1,800 -1,599 -1,618 -1,775 -1,403

Gross domestic expenditure 17,556.4 16,884.6 16,194.4 17,526.4 16,871.9

Consumption 15,252 14,977 14,300 15,951 15,314 Government 1,989 2,051 2,214 2,161 2,508

Compensation of employees 904 904 904 904 904 Goods and services 939 939 939 939 939

Private 13,263 12,926 12,087 13,790 12,806 Fixed capital formation 1,994 1,715 1,726 1,418 1,412

Government and statutory bodies 1,621 1,551 1,578 1,276 1,326 Private 373 164 148 142 86

Stock building 310 192 168 158 145

(Annual percentage change, unless otherwise indicated) GDP at constant 1994 market prices 3.0 1.6 -4.1 1.9 4.4

Exports of goods and services -16.6 6.8 11.1 1.5 -11.2 Exports and reexports of goods -20.6 -6.6 9.5 3.8 -10.7 Exports of nonfactor services 41.1 -8.2 24.1 -14.6 -15.5

Imports of good and services 14.3 -16.4 5.3 18.2 -23.7 Imports of goods, f.o.b. 15.3 -18.3 6.8 21.2 -24.6 Imports of nonfactor services 11.5 -11.2 1.2 9.7 -21.0

Gross domestic expenditure 13.4 -3.8 -4.1 8.2 -3.7

Consumption 13.7 -1.8 -4.5 11.5 -4.0 Government -4.8 3.1 7.9 -2.4 16.1

Compensation of employees 0.0 0.0 -1.2 1.4 -2.5 Goods and services 0.0 0.0 -1.3 5.8 -2.0

Private 17.1 -2.5 -6.5 14.1 -7.1 Fixed capital formation 16.9 -14.0 0.6 -17.9 -0.4

Government and statutory bodies 18.9 -4.3 1.7 -19.1 4.0 Private 8.9 -56.0 -9.6 -4.4 -39.3

Stock building -13.9 -38.0 -12.9 -6.0 -7.9 Memorandum items:

GDP at current factor cost (in millions of Malawi kwacha 78,297 103,815 123,080 142,928 165,751 GDP at current factor cost (percentage change) 45.1 32.6 18.6 16.1 16.0 GDP deflator at factor cost (1994=100) 545 711 887 1,003 1,116 GDP deflator at factor cost (percentage change) 40.8 30.5 24.8 13.1 11.2

Sources: Malawian authorities; IMF staff estimates. 1 Figures for 2003 are provisional.

ANNEX X 1/1

MALAWI: GDP BY EXPENDITURE AT CURRENT MARKET PRICES, 1999-20031

1999 2000 2001 2002 2003 (In millions of Malawi kwacha)

GDP at current market prices 78,297 103,815 123,080 142,928 165,751

Net exports or imports(-) of goods and services -11,957 -12,552 -13,794 -26,355 -26,833 Exports of goods and services 21,941 26,580 34,753 36,171 42,753

Exports and reexports of goods 19,712 23,928 30,797 32,289 39,158 Exports of nonfactor services 2,229 2,653 3,956 3,883 3,596

Imports of good and services -33,898 -39,133 -48,547 -62,527 -69,587 Imports of goods, f.o.b. -25,240 -28,508 -35,869 -47,371 -52,111 Imports of nonfactor services -8,657 -10,625 -12,678 -15,155 -17,475

Gross domestic expenditure 90,254 116,367 136,874 169,283 192,584

Consumption 78,784 102,285 119,774 153,756 173,968

Government 10,528 15,134 19,591 21,858 28,025 Compensation of employees 4,678.6 4,678.6 4,678.6 4,678.6 4,678.6 Goods and services 4,920.2 4,920.2 4,920.2 4,920.2 4,920.2

Private 68,256 87,151 100,182 131,898 145,942

Fixed capital formation 9,871 12,792 15,741 14,110 17,058 Government and statutory bodies 8,026 10,401 12,799 11,473 16,019 Private 1,845 2,391 2,942 2,637 1,039

Stock building 1,600 1,290 1,360 1,417 1,559 GDP at market prices 100.0 100.0 100.0 100.0 100.0

Exports of goods and services 28.0 25.6 28.2 25.3 25.8 Exports and reexports of goods 25.2 23.0 25.0 22.6 22.6 Exports of nonfactor services 2.8 2.6 3.2 2.7 2.2

Imports of good and services -43.3 -37.7 -39.4 -43.7 -42.0 Imports of goods, f.o.b. -32.2 -27.5 -29.1 -33.1 -31.4 Imports of nonfactor services -11.1 -10.2 -10.3 -10.6 -10.5

Gross domestic expenditure 115.3 112.1 111.2 118.4 116.2

Consumption 100.6 98.5 97.3 107.6 105.0 Government 13.4 14.6 15.9 15.3 16.9

Compensation of employees 6.0 … 3.8 3.3 2.8 Goods and services 6.3 … 4.0 3.4 3.0

Private 87.2 83.9 81.4 92.3 88.0 Fixed capital formation 12.6 12.3 12.8 9.9 10.3

Government and statutory bodies 10.3 10.0 10.4 8.0 9.7 Private 2.4 2.3 2.4 1.8 0.6

Stock building 2.0 1.2 1.1 1.0 0.9 Memorandum items:

Indirect taxes (in millions of Malawi kwacha) 1,307 1,432 1,252 1,385 1,437 Indirect taxes 1.7 1.4 1.0 1.0 0.9

Sources: Malawian authorities; IMF staff estimates. 1 Figures for 2003 are provisional.

ANNEX XI 1/1

MALAWI: NATIONAL COMPOSITE CONSUMER PRICE INDEX, 1999-2004 (AUGUST)

All Items Food Nonfood All Items Food Nonfood All Items Weights (In percent) 100.0 55.5 44.5 100.0 55.5 44.5 100.0

(Average (Base 1990 = 100) (12-month inflation) 1 inflation)2

1999 1,264 1,418 1,072 28.2 21.9 40.3 44.8 2000 1,712 1,735 1,684 35.4 22.4 57.0 29.6 2001 2,091 2,301 1,829 22.1 32.6 8.6 27.2 2002 2,250 2,405 2,034 7.6 4.5 11.2 14.9

All Items Food Nonfood All Items Food Nonfood All Items Weights (In percent) 100.0 58.1 41.9 100.0 58.1 41.9 100.0

(Average (Base 1990 = 100) (12-month inflation) 1 inflation)2

2002 147.6 143.3 153.6 2003 Jan. 154.7 153.7 156.1 10.7 8.7 13.4 14.3

Feb. 159.1 158.9 159.4 10.6 8.4 13.7 13.8 Mar. 158.1 155.2 161.9 10.3 7.7 13.7 13.2 Apr. 154.5 148.9 162.3 9.8 7.8 12.4 12.7 May 151.7 142.7 164.1 9.0 5.7 13.3 12.1 Jun 146.4 132.7 165.4 8.5 4.0 13.9 11.6 Jul 146.3 130.4 168.3 8.7 5.3 12.5 11.1 Aug 147.3 130.8 170.1 9.0 5.1 11.8 10.6 Sep 155.8 139.5 178.4 9.2 2.0 18.2 10.2 Oct 155.8 139.6 178.2 9.5 2.8 17.8 9.9 Nov 159.4 143.8 181.2 9.6 2.8 18.3 9.7 Dec 162.1 147.6 182.2 9.8 3.0 18.6 9.6

2004 Jan. 170.3 158.9 186.1 10.1 3.4 19.2 9.5

Feb. 175.4 165.1 189.6 10.2 3.9 19.0 9.5 Mar. 175.0 163.3 191.3 10.7 5.2 18.2 9.6 Apr. 171.7 157.6 191.3 11.1 5.8 17.8 9.7 May 168.9 151.2 193.3 11.3 6.0 17.8 9.9 Jun 163.4 141.1 194.3 11.6 6.3 17.5 10.1 Jul 163.0 138.6 196.8 11.4 6.3 16.9 10.3 Aug 163.9 139.1 198.3 11.3 6.3 16.5 10.5

Source: Malawian authorities; IMF staff estimates. 1 Annual data refer to 12-month inflation rate at end-December. 2 Monthly data refer to percentage change of the average index for the 12-month period ending in that month over the corresponding index for the previous year.

ANNEX XII 1/4

MALAWI: CENTRAL GOVERNMENT OPERATIONS, FY 1998/99-2003/04

1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 Est. Est.

(In millions of Malawi kwacha)

Total revenue and grants 16,316 22,104 31,233 31,997 42,685 65,365 Revenue 12,075 15,808 20,880 22,853 32,009 42,754

Tax revenue 10,301 14,353 19,285 20,382 27,251 36,902 Taxes on income and profits 4,816 6,590 8,740 9,458 12,146 15,839

Individual 2,136 3,104 3,816 4,174 5,708 7,954 Corporate 2,002 2,570 3,140 2,914 3,678 4,589 Withholding tax 679 916 1,785 2,371 2,760 3,295

Taxes on goods and services 4,012 5,834 8,169 8,935 12,379 16,634 Surtax 3,577 5,189 6,091 6,684 9,322 11,778

Domestic 1,265 1,626 2,429 2,850 4,007 5,546 Import 2,312 3,563 3,663 3,834 5,316 6,231

Excise duties 435 644 2,078 2,251 3,056 4,856 Domestic 0 0 476 483 638 927 Import 0 0 1,602 1,768 2,419 3,930

Taxes on international trade 1,721 2,201 2,385 2,423 3,136 5,082 Other -248 -271 -10 -435 -410 -653

Misc. duties 29 41 520 -79 243 167 Tax refunds -277 -432 -460 -320 -652 -820 Tax adjustment (RD) 0 0 -69 -45 0 0 cheques Collection of arrears 0 120 0 9 0 0

Nontax revenue 1,773 1,455 1,595 2,471 4,758 5,852

Departmental receipts 450 1,050 1,036 1,141 1,614 2,237 Petroleum levy for NRA 248 400 559 1,113 1,222 1,285 Petroleum levy for safety nets 0 0 0 169 464 884 Sale receipts from maize 1,042 0 0 0 591 1,351 (from NFRA) Dividends 0 0 0 49 868 95 Transfer of RBM profits 33 5 0 0 0 0

Grants 4,242 6,296 10,353 9,144 10,675 22,611

Program 2,733 3,725 6,209 2,544 1,220 4,580 Food security program 0 0 0 581 188 0 Partially tied grants 903 EDRC 1,090 Project 1,508 2,571 3,565 3,479 4,604 9,635 Financing of elections 0 0 0 0 0 653 HIPC Initiative debt relief 0 0 579 1,718 3,588 5,261 Japanese debt relief 0 0 0 821 1,075 490

Total expenditure and net lending 19,736 27,229 37,850.8 42,490 61,322 78,598 Total expenditure 19,475 27,221 37,266 42,490 61,260 78,598

Current expenditure 13,952 17,638 25,736.0 32,675 49,473 58,086 Wages and salaries 3,209 4,296 5,954 9,201 10,930 12,302 Interest payments 2,535 3,400 5,267 6,820 10,985 20,024

Domestic 1,409 2,081 3,426 5,242 8,871 17,253 Foreign 1,126 1,319 1,841 1,578 2,114 2,771

Other current expenditure 8,207 9,942 14,515 16,654 27,559 25,761 Goods and services 5,315 7,043 7,659 10,731 20,127 16,902

Of which: maize purchase 6,078 0 Subsidies and other current 2,525 2,624 6,239 5,543 7,431 7,510 transfers

Transfer to NRA and 351 542 884 1,844 1,912 2,293 MRA

Transfer to Nationa l 346 400 552 1,113 1,222 1,285 Roads Authority Transfer to Malawi 5 141 332 732 690 1,007 Revenue Authority

Pension and gratuities 667 1,206 1,273 1,376 1,431 1,950 Separation benefits 0 4 79 0 0 0 Discretionary exemptions 12 0 0 0 0 0 Transfer to NFRA/ADMARC 0 0 2,141 858 1,940 353 Other 1,495 872 1,863 1,466 2,148 2,914

Expenditure in arrears(non-cash) 368 276 616 380 0 0 Expenditure for arrears 0 0 0 0 0 1,349

ANNEX XII 2/4

MALAWI: CENTRAL GOVERNMENT OPERATIONS, FY 1998/99-2003/04 (Cont)

1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 Est. Est.

(In millions of Malawi kwacha)

Development expenditure 5,524 9,583 11,530 9,816 11,787 20,512

Foreign-financed 4,333 7,651 9,789 7,761 9,521 17,231 Domestically financed 1,190 1,932 1,741 2,055 2,266 3,281

Net lending 261 8 584 0 61 0 Overall balance (including grants) -3,420 -5,125 -6,618 -10,493 -18,637 -13,233 Total financing 1,908 6,258 6,945 9,148 18,099 14,938

Foreign (net) 4,563 4,373 5,544 -268 -730 425 Borrowing 5,616 6,473 10,456 4,282 4,917 7,185

Program 2,791 1,393 4,521 0 0 0 EDRC 0 0 0 0 0 1,386 Project 2,825 5,080 5,936 4,282 4,917 5,799

Amortization -1,527 -2,137 -5,129 -3,510 -5,448 -7,577 Special loans (net) 475 37 217 -332 -323 0 Japanese debt relief account 0 0 0 -708 125 759 WB EDRC accounts (NY) 58

Domestic (net) -2,655 1,886 1,401 9,416 18,829 14,512 Banking system -2,774 -1,253 -201 7,402 13,922 7,562 Nonbanks -40 3,449 1,083 1,797 5,213 6,888 Domestic supplier credits (net) 0 0 573 -277 0 0 Change in arrears 23 -310 -168 332 -307 0 Privatization proceeds 136 0 114 161 0 62

Statistical discrepancy 1,513 -1,133 -327 1,346 538 -1,704

ANNEX XII 3/4

MALAWI: CENTRAL GOVERNMENT OPERATIONS, FY 1998/99-2003/04 (Cont)

1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 Est. Est.

(% of GDP)

Total revenue and grants 24.4 24.1 27.5 24.1 27.7 36.0 Revenue 18.1 17.2 18.4 17.2 20.7 23.5

Tax revenue 15.4 15.6 17.0 15.3 17.7 20.3 Taxes on income and profits 7.2 7.2 7.7 7.1 7.9 8.7

Individual 3.2 3.4 3.4 3.1 3.7 4.4 Corporate 3.0 2.8 2.8 2.2 2.4 2.5 Withholding tax 1.0 1.0 1.6 1.8 1.8 1.8

Taxes on goods and services 6.0 6.4 7.2 6.7 8.0 9.2 Surtax 5.3 5.7 5.4 5.0 6.0 6.5

Domestic 1.9 1.8 2.1 2.1 2.6 3.1 Import 3.5 3.9 3.2 2.9 3.4 3.4

Excise duties 0.6 0.7 1.8 1.7 2.0 2.7 Domestic 0.0 0.0 0.4 0.4 0.4 0.5 Import 0.0 0.0 1.4 1.3 1.6 2.2

Taxes on international trade 2.6 2.4 2.1 1.8 2.0 2.8 Other -0.4 -0.3 0.0 -0.3 -0.3 -0.4

Misc. duties 0.0 0.0 0.5 -0.1 0.2 0.1 Tax refunds -0.4 -0.5 -0.4 -0.2 -0.4 -0.5 Tax adjustment (RD) 0.0 0.0 -0.1 0.0 0.0 0.0 cheques Collection of arrears 0.0 0.1 0.0 0.0 0.0 0.0

Nontax revenue 2.7 1.6 1.4 1.9 3.1 3.2 Departmental receipts 0.7 1.1 0.9 0.9 1.0 1.2 Petroleum levy for NRA 0.4 0.4 0.5 0.8 0.8 0.7 Petroleum levy for safety nets 0.0 0.0 0.0 0.1 0.3 0.5 Sale receipts from maize 1.6 0.0 0.0 0.0 0.4 0.7 (from NFRA) Dividends 0.0 0.0 0.0 0.0 0.6 0.1 Transfer of RBM profits 0.0 0.0 0.0 0.0 0.0 0.0

Grants 6.3 6.9 9.1 6.9 6.9 12.5 Program 4.1 4.1 5.5 1.9 0.8 2.5 Food security program 0.0 0.0 0.0 0.4 0.1 0.0 Partially tied grants 0.5 EDRC 0.6 Project 2.3 2.8 3.1 2.6 3.0 5.3 Financing of Elections 0.0 0.0 0.0 0.0 0.0 0.4 HIPC Initiative debt relief 0.0 0.0 0.5 1.3 2.3 2.9 Japanese debt relief 0.0 0.0 0.0 0.6 0.7 0.3

Total expenditure and net lending 29.5 29.7 33.4 31.9 39.7 43.3 Total expenditure 29.1 29.6 32.8 31.9 3 9.7 43.3

Current expenditure 20.9 19.2 22.7 24.6 32.1 32.0 Wages and salaries 4.8 4.7 5.2 6.9 7.1 6.8 Interest payments 3.8 3.7 4.6 5.1 7.1 11.0

Domestic 2.1 2.3 3.0 3.9 5.7 9.5 Foreign 1.7 1.4 1.6 1.2 1.4 1.5

Other current expenditure 12.3 10.8 12.8 12.5 17.9 14.2 Goods and services 7.9 7.7 6.8 8.1 13.0 9.3

Of which: maize purchase 3.9 0.0 Subsidies and other 3.8 2.9 5.5 4.2 4.8 4.1 current transfers

Transfer to NRA and MRA 0.5 0.6 0.8 1.4 1.2 1.3 Transfer to National 0.5 0.4 0.5 0.8 0.8 0.7 Roads Authority Transfer to Malawi 0.0 0.2 0.3 0.6 0.4 0.6 Revenue Authority

Pension and gratuities 1.0 1.3 1.1 1.0 0.9 1.1 Separation benefits 0.0 0.0 0.1 0.0 0.0 0.0 Discretionary exemptions 0.0 0.0 0.0 0.0 0.0 0.0 Transfer to NFRA/ADMARC 0.0 0.0 1.9 0.6 1.3 0.2 Other 2.2 0.9 1.6 1.1 1.4 1.6

Expenditure in arrears (non-cash) 0.5 0.3 0.5 0.3 0.0 0.0 Expenditure for arrears 0.0 0.0 0.0 0.0 0.0 0.7

ANNEX XII 4/4

MALAWI: CENTRAL GOVERNMENT OPERATIONS, FY 1998/99-2003/04 (Cont)

1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 Est. Est.

(% of GDP

Development expenditure 8.3 10.4 10.2 7.4 7.6 11.3 Foreign-financed 6.5 8.3 8.6 5.8 6.2 9.5 Domestically financed 1.8 2.1 1.5 1.5 1.5 1.8

Net lending 0.4 0.0 0.5 0.0 0.0 0.0 Overall balance (including grants) -5.1 -5.6 -5.8 -7.9 -12.1 -7.3 Total financing 2.9 6.8 6.1 6.9 11.7 8.2

Foreign (net) 6.8 4.8 4.9 -0.2 -0.5 0.2 Borrowing 8.4 7.1 9.2 3.2 3.2 4.0

Programme 4.2 1.5 4.0 0.0 0.0 0.0 EDRC 0.0 0.8 Project 4.2 5.5 5.2 3.2 3.2 3.2

Amortization -2.3 -2.3 -4.5 -2.6 -3.5 -4.2 Special loans (net) 0.7 0.0 0.2 -0.2 -0.2 0.0 EU food security account … … … … … … WB EDRC accounts (NY) 0.0

Domestic (net) -4.0 2.1 1.2 7.1 12.2 8.0 Banking system -4.1 -1.4 -0.2 5.6 9.0 4.2 Non-banks -0.1 3.8 1.0 1.4 3.4 3.8 Domestic supplier credits (net) 0.0 0.0 0.5 -0.2 0.0 0.0 Change in arrears 0.0 -0.3 -0.1 0.2 -0.2 0.0 Privatisation proceeds 0.2 0.0 0.1 0.1 0.0 0.0

Statistical discrepancy 2.3 -1.2 -0.3 1.0 0.3 -0.9 Memorandum items: Primary balance (inc grants) -1.3 -1.9 -1.2 -2.8 -5.0 3.7 Nominal GDP 66,881 91,809 113,447 133,004 154,340 181,560 Source: Malawian authorities; and IMF staff calculations.

ANNEX XIII 1/1

MALAWI: MONETARY SURVEY MARCH 2001 - JUNE 20041

2001 2002 2003 2004

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Money and quasi-money 16,951 22,081 20,974 21,725 20,058 23,983 25,402 27,210 26,641 31,521 33,869 35,183 35,776 42,741

Money 8,877 11,755 11,014 10,34 9,712 12,791 13,213 13,440 13,421 17,154 18,008 17,464 17,012 23,503 Quasi-money 8,075 10,327 9,960 11,382 10,346 11,192 12,189 13,770 13,220 14,367 15,861 17,718 18,764 19,238

Of which: foreign currency deposits 2,541 3,235 2,289 3,149 3,091 3,560 3,655 4,505 4,549 4,772 5,886 5,362 7,234 7,719 Net foreign assets (NFA)2 16,729 18,693 15,218 11,652 7,208 11,391 5,222 -380 -489 3,883 3,322 5,466 6,128 6,585

NFA (In millions of U.S. dollars) 212 247 239 156 94 149 65 -4 -5 43 31 50 56 60 Gross foreign assets 321 336 329 244 180 237 171 153 138 148 141 167 170 175 Foreign liabilities -109 -89 -90 -89 -86 -88 -106 -157 -143 -105 -110 -117 -113 -114

Monetary authorities 14,158 14,632 12,739 7,546 3,998 7,194 1,531 -3,558 -4,467 -330 -1,210 1,455 698 -8 NFA of the monetary authorities 183 197 206 111 51 94 19 -41 -49 -4 -11 13 6 0 (In millions of U.S. dollars)

Gross foreign assets 280 273 283 185 125 167 114 103 85 90 81 116 106 94 Foreign liabilities -98 -75 -77 -74 -74 -73 -95 -144 -134 -93 -92 -102 -100 -94

Commercial banks 2,570 4,061 2,479 4,106 3,210 4,197 3,691 3,178 3,978 4,213 4,532 4,011 5,429 6,593 NFA of the commercial banks 30 49 33 45 43 55 46 36 43 47 42 37 50 61 In millions of U.S. dollars)

Gross foreign assets 41 63 46 60 55 70 57 49 53 59 60 52 63 81 Foreign liabilities -11 -14 -13 -15 -12 -15 -11 -13 -9 -12 -18 -15 -14 -21

Net domestic assets (NDA) 223 3,388 5,756 10,073 12,851 12,592 20,180 27,590 27,130 27,638 30,547 29,717 29,649 36,156 Credit to government (net) -3,838 -1,862 892 5,829 7,372 5,520 9,218 15,626 17,995 19,458 20,410 18,694 19,068 27,023 Credit to statutory bodies (net) 683 738 113 -109 367 482 152 -120 -588 -698 -266 -352 -222 -720 Credit to private sector 5,478 5,289 6,016 6,454 6,998 6,838 6,916 7,363 7,541 9,665 8,888 9,809 9,544 10,459 Other items (net) -2,100 -777 -1,263 -2,100 -1,886 -247 3,894 4,721 2,182 -787 1,515 1,566 1,259 -607

RBM's revaluation accounts -38 -185 -325 -49 198 254 451 -4 170 -337 -119 0 10 0 Open market operations -826 -1,375 -4,015 -6,312 -4,961 -5,746 -5,991 -4,508 -5,395 -8,056 -4,080 -2,574 -4,565 -5,039 Encumbered reserves 1,522 1,300 1,169 1,229 1,306 2,001 6,513 5,105 2,998 1,784 1,989 759 761 305 Others -2,757 -518 1,908 3,032 1,571 3,243 2,921 4,128 4,409 5,822 3,725 3,381 5,053 4,127

Memorandum items: (12-month change; in percent of beginning of period broad money stock)

Money and quasi money 39.2 52.8 21.4 21.2 18.3 8.6 21.1 25.2 32.8 31.4 33.3 29.3 34.3 35.6 Net foreign assets 68.2 61.0 21.0 -8.0 -56.2 -33.1 -47.7 -55.4 -38.4 -31.3 -7.5 21.5 24.8 8.6 Net domestic assets -28.7 -8.2 0.3 29.2 74.5 41.7 68.8 80.6 71.2 62.7 40.8 7.8 9.5 27.0

Credit to the government -28.9 -1.4 -1.4 29.4 66.1 33.4 39.7 45.1 53.0 58.1 44.1 11.3 4.0 24.0 Credit to statutory bodies -2.2 -2.0 -4.6 -6.4 -1.9 -1.2 0.2 -0.1 -4.8 -4.9 -1.6 -0.9 1.4 -0.1 Credit to the private sector 5.4 -1.2 3.8 3.6 9.0 7.0 4.3 4.2 2.7 11.8 7.8 9.0 7.5 2.5 Other assets (net) -3.1 -3.6 2.5 2.7 1.3 2.4 24.6 31.4 20.3 -2.3 -9.4 11.6 -3.5 0.6

Source: Reserve Bank of Malawi; and IMF staff estimates. 1 Includes 4 commercial banks ( NBM, Stanbic, FBM, and FMB) and the RBM 2 Excluding encumbered reserves

ANNEX IVX 1/1

MALAWI: BALANCE OF PAYMENTS, 1999-2003

(In millions of US dollars, unless otherwise indicated)

1999 2000 2001 2002 2003

Current account balance (incl. grants) -147.5 -91.5 -116.5 -221.2 -149.8

Trade balance -226.4 -161.4 -157.9 -305.7 -227.5 Exports 447.1 401.8 426.6 421.1 402.1

Of which : tobacco 274.6 246.8 254.5 232.7 211.9 Imports -673.5 -563.2 -584.5 -726.8 -629.6

Services balance -86.5 -85.8 -66.3 -165.1 -88.7 Interest public sector (net) -21.3 -20.6 -17.8 -20.2 -25.5

Receipts 8.8 12.1 8.7 2.5 1.5 Payments -30.2 -32.7 -26.5 -22.7 -27.0

Other factor payments -20.4 -15.8 -15.3 -24.5 -15.1 Nonfactor (net) -44.8 -49.4 -33.1 -120.4 -48.1

Receipts 50.6 44.5 54.8 50.6 36.9 Payments -95.3 -93.9 -87.9 -171.1 -85.0

Unrequited transfers (net) 165.4 155.6 107.7 249.6 166.4 Private (net) 8.9 7.8 9.9 14.3 12.4

Receipts 21.8 21.8 21.8 27.7 27.7 Payments -12.9 -13.9 -11.8 -13.4 -15.3

Official 156.5 147.8 97.7 235.3 154.0 Receipts 157.9 148.4 98.3 235.3 154.0 Payments -1.3 -0.6 -0.6 0.0 0.0

Capital account balance (incl. errors and omissions) 163.3 80.7 85.0 64.7 102.0

Medium- and long-term flows 89.9 65.0 59.8 23.8 29.5 Disbursements 128.9 124.9 127.0 81.0 98.1 Amortization (public sector) -39.0 -59.9 -67.2 -57.2 -68.6

Foreign direct investment and other inflows 39.4 27.0 28.0 37.6 43.2 Short-term capital and errors and omissions 34.0 -11.3 -2.8 3.3 29.3

Overall balance 15.8 -10.8 -31.5 -156.5 -47.7 Financing -15.8 10.8 31.5 156.5 47.8

Central bank -30.8 16.6 11.8 111.4 7.0 Reserves (-increase) 13.6 1.7 40.7 40.8 41.4 Liabilities -44.4 14.9 -28.9 70.6 -34.4

Of which: IMF (net) -12.8 -1.8 -7.8 15.6 -1.0 Purchases/drawings 10.6 8.4 0.0 23.0 9.3 Repurchases/repayments -23.5 -10.2 -7.8 -7.4 -10.2

Commercial banks 15.0 -5.7 -7.7 14.5 -6.7 Arrears 0.0 0.0 0.0 0.0 0.0 Debt relief 0.0 0.0 27.4 30.6 47.5

Memorandum items:

Gross official reserves In millions of U.S. dollars 246.0 243.6 202.9 162.1 120.7 In months of imports1 4.5 4.3 3.0 2.7 1.8

Current account balance (percent of GDP) Excluding official transfers -16.9 -14.1 -12.6 -24.5 -17.8 Including official transfers -8.2 -5.4 -6.8 -11.9 -8.8

Malawi kwacha per U.S. dollar (end year) 44.1 59.5 72.2 76.7 97.4 Terms of trade -13.4 1.1 -0.3 -7.5 -7.9

Sources: Malawian authorities; and IMF staff estimates. 1 In months of following year's imports of goods and non-factor services