The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 09-Jun-2022| Report No: PIDC34357 Page 1 of 6 The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Malawi P175072 Malawi Growth and Resilience Development Policy Financing (P175072) Region Estimated Board Date Practice Area (Lead) Financing Instrument EASTERN AND SOUTHERN Sep 14, 2022 Macroeconomics, Trade Development Policy AFRICA and Investment Financing Borrower(s) Implementing Agency Ministry of Finance and Ministry of Finance and Economic Affairs Economic Affairs Proposed Development Objective(s) The program development objective is to support reforms aimed at 1) strengthening public financial management and 2) supporting agricultural commercialization and strengthening the resilience of the poor against shocks. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 80.00 DETAILS -NewFin3 Total World Bank Group Financing 80.00 World Bank Lending 80.00 Decision The review did authorize the preparation to continue B. Introduction and Context Country Context Malawi has experienced numerous exogenous shocks in the past decade, resulting in limited economic development and poverty reduction. The growing frequency and severity of exogenous shocks, paired with significant structural economic weaknesses and policy distortions have kept Malawi in a low-growth equilibrium. A lack of diversification and competitiveness has also made the country susceptible to terms of trade shocks. This has been compounded by trade Page 2 of 6 The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) restrictions, which impede investment and commercialization. The country was hit hard by the COVID-19 pandemic, contributing to a rise in poverty and a deterioration in macro-fiscal outcomes. The war in Ukraine has added a new crisis to what was already a challenging environment. Commodity market impacts have affected Malawians directly, in terms of higher costs to fuel, food and fertilizer. Weak public financial management has tended to transmit recurring shocks into fiscal indiscipline, in turn exacerbating macroeconomic instability. To address longstanding macroeconomic imbalances, the Government is pursuing a reform program that prioritizes fiscal adjustment, improved exchange rate management, debt restructuring, and growth-enhancing structural reforms. The FY2022/23 budget takes important initial steps towards reducing overall financing needs and restoring debt sustainability. Reduced allocations for agriculture subsidies through the Affordable Inputs Program (AIP) are a key driver of expenditure consolidation with the budget. To address a persistent exchange rate misalignment and a growing spread between the official and market exchange rate, the Reserve Bank of Malawi (RBM) furthermore announced a 25 percent devaluation of the Kwacha in late May 2022. This has been accompanied by the submission to Parliament of a new Public Financial Management Act in March 2022, which seeks to address longstanding weaknesses in fiscal governance and particularly the divergence between fiscal outturns and approved budgets. Longstanding bans on maize exports were also removed, with the Control of Goods Act (COGA) (amended in 2018) providing greater predictability and clear procedures to regulate agricultural trade. An assessment of the adequacy of the macroeconomic framework is deferred until the details of the government’s macroeconomic stabilization program and debt resolution are fully clarified within the context of discussions on the IMF program and this proposed operation. Relationship to CPF The proposed operation directly supports the core objectives of the WBG CPF (FY2021-2025) for Malawi. Strengthening fiscal and debt management, fostering transparency, and strengthening intergovernmental financial arrangements are part of the CPF’s objectives towards bolstering foundations for growth and accountability. As such, the DPO’s reforms towards strengthening PFM are critical. Similarly, the DPO’s steps towards improving agricultural productivity and market access, and resilience of the private sector align closely with the CPF’s focus area of promoting private sector-led jobs and livelihoods, which includes supporting micro, small, and medium enterprises’ access to finance and services . The DPO’s reforms focused on enhancing agricultural commercialization and access to markets and reducing risks in fiscal policy implementation constitute steps towards the WBG’s mission in Malawi. This proposed operation furthermore complements several other ongoing projects by the World Bank that support the Government’s development agenda, as well as a new IMF Extended Credit Facility (ECF) currently under negotiation. This includes in particular support provided to strengthen the agriculture sector, including recently scaled up social protection support to facilitate the reform of the Affordable Input Program through a national public works program and shock-sensitive safety net measures (Social Support for Resilient Livelihoods, P177813), large-scale agriculture support including the Shire Valley Transformation Project (P158805) and the Agriculture Commercialization Project (P158434) as well as support on fiscal governance targeted at all 28 districts (Governance to Enable Service Delivery; P164961). The implementation of the reform program is being carried out in parallel with a broad set of fiscal, monetary and governance reforms under a new ECF. C. Proposed Development Objective(s) The program development objective is to support reforms aimed at 1) strengthening public financial management and 2) supporting agricultural commercialization and strengthening the resilience of the poor against shocks. Page 3 of 6 The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) Key Results The proposed Development Policy Operation (DPO) supports Malawi in addressing longstanding weaknesses in public financial management, strengthening its fiscal position, promoting agricultural growth, and improving resilience against shocks. The proposed operation, the first in a programmatic series of two DPOs, aims to support the Government of Malawi in implementing reforms that are critical for strengthening the country’s fiscal position and lay the foundations for a more resilient economy. Overall the operation is intended to contribute to the following results: i) a strengthened legal framework for public financial management and attracting private finance; ii) bolstering the PFM system to improve fiscal risk management and transparent, accountable expenditure; iii) improvements in overall fiscal transparency and accountability; iv) strengthening SOE oversight and management of fiscal risks; v) improved access to agricultural export markets; vi) improved farmer input support to increase efficiency of expenditure and boost agricultural productivity and vii) protecting poor households’ livelihoods through effective shock sensitive social safety nets. D. Concept Description The proposed operation includes seven prior actions that are grouped into two policy pillars. The first pillar (“Strengthening Fiscal Management and Governance�) includes a prior action to strengthen the legal framework for PFM through the passage of a new PFM Act, which improves the legal and regulatory framework for public expenditure and investment. A second prior action focuses on improving PFM systems through the adoption and implementation of a framework for cash management and commitment control. This seeks to provide a fundamental shift in how PFM systems operate across the Malawian Government. Further prior actions under this pillar focus on improving expenditure and fiscal transparency through the publication of several key sources of data and analysis related to budget and outturn data, the public sector investment program, and on SOE finances and operations. The second pillar focuses on supporting agricultural markets and strengthening resilience against shocks. The first prior action under this pillar entails removing the ban on maize exports following a review in line with the Control of Goods Act. This is expected to support the commercialization of agriculture by moving away from a system of ad-hoc discretionary export bans and towards a more open approach to agricultural trade policy. A second prior action supports approval of revisions to the government input subsidy program (AIP) to ensure the medium-term sustainability of the program, and specifically to lower fiscal costs and increase productivity. A third prior action entails the implementation and formal activation of a scalable mechanism linked to the Social Cash Transfer Programme to provide emergency cash transfers in response to drought. This will significantly increase the number of potential poor beneficiary households with shock responsive safety nets through pre-positioned disaster risk financial instruments under the scalability mechanism. The program responds both to the current crisis, and supports the government’s medium-term priorities, as articulated in Malawi 2063. Overall these reforms under this operation support the Government’s efforts to move towards higher levels of sustained growth through a rebalancing of the economy away from high fiscal and current account deficits, and towards agricultural commercialization and export-led industrialization. The government has prioritized fiscal consolidation and debt sustainability with the aim of addressing the medium-term structural challenges in the economy. The proposed DPO series will address some of the existing policy challenges that have negatively impacted growth, resulted in persistent fiscal deficits and an unsustainable debt burden, and contributed to high and stagnant poverty levels in recent years. The proposed operation also benefits from strong government engagement and builds on Page 4 of 6 The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) experience from previous DPOs. E. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The overall poverty and social impacts of the policy and institutional reforms under this DPO are expected to be positive. The main direct poverty-reducing effects from this DPO come from the support to the expansion of social protection cash transfer to poor and vulnerable households, and to a lesser extent, the AIP, which support enhancing productivity and income growth of relatively vulnerable populations. The expanded social protection program is also expected to help protect the vulnerable during the AIP reform transition. Shock sensitive cash transfers and Enhanced Public Works Programme (EPWP) interventions have significant potential to narrow gender gaps related to the economic and social inclusion of women in the community. Other reforms supported under the DPO, such as PFM/fiscal governance reforms, are also expected to have positive impacts on the poor. Improved fiscal management and governance are expected to create fiscal space, which can be directed towards additional welfare- and growth-enhancing expenditures. Improved trade competitiveness and agricultural productivity will benefit the poor. In the medium term, the COGA-related reform seeks to create better markets especially for grains, encourage private sector investment for exports, and incentivize farmers to increase production. The poverty and social impact analysis draws in particular on a forthcoming WB Poverty Assessment and will further be bolstered through targeted distributional analysis. Environmental, Forests, and Other Natural Resource Aspects Scaling down AIP will have some indirect positive impacts from an environmental perspective. The monocropping of maize renders Malawi’s food system highly vulnerable to environmental shocks. It deteriorates soils and ecosystems, creates high risks of pest attacks, and increases the chance of losses by drought and dry spells. More positive impacts will be achieved by making the use of fertilizers more efficient. The fertilizer policy and bill (trigger under DPO-2) promotes the use of fertilizer blends that match the quality of the diverse soils in Malawi. The implementation of this improvement will lead to applying lesser fertilizer, for instance nitrogen, in those areas with a higher content of the mineral. In the long term, a reduction of emissions and pollution of water bodies is expected. The prior action on protecting people through effective shock sensitive social safety nets is expected to contribute to climate co-benefits. Adaptation co-benefits have been preliminarily assigned for financing shock sensitive cash transfers, scale-up of adaptation measures through the EPWP to address climate change and for shock sensitive response to potential food insecurity crises resulting from climate change . CONTACT POINT World Bank Jakob Engel, Patrick Shawn Hettinger Senior Economist Borrower/Client/Recipient Page 5 of 6 The World Bank Malawi Growth and Resilience Development Policy Financing (P175072) Ministry of Finance and Economic Affairs Implementing Agencies Ministry of Finance and Economic Affairs MacDonald Mwale Secretary to the Treasuary mmwale@rbm.mw FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Jakob Engel, Patrick Shawn Hettinger Approved By APPROVALTBL Country Director: Mara K. Warwick 29-Jun-2022 Page 6 of 6