PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE September 13, 2013 Report No.: AB7377 Operation Name MALAWI SECOND ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION Region AFRICA Country Malawi Sector General agriculture, fishing and forestry sector (7%);Other social services (16%);Central government administration (60%);Transmission and Distribution of Electricity (17%) Operation ID P145639 Lending Instrument Development Policy Lending Borrower(s) MINISTRY OF FINANCE Implementing Agency Ministry of Finance Date PID Prepared August 19, 2013 Estimated Date of Appraisal October 28, 2013 Estimated Date of Board December 19, 2013 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Other Decision {Optional} Teams can add more if they wish or delete this row if no other decisions are added Key development issues and rationale for Bank involvement Malawi’s economy is currently on a recovery path after being hit by a severe economic crisis in 2011/12, which manifested itself in significant fiscal and external imbalances. The macroeconomic and structural reforms instituted by the Government of Malawi (GoM) in May 2012, which have been sustained to date despite public pressures, have started to bear fruits. The reforms implemented, including the liberalization of the exchange rate, the tightening of the monetary policy stance, reduced reliance on domestic borrowing, the containment of recurrent expenditures and the removal of fuel subsidies, are contributing to the positive progress made towards economic stabilization. These have contributed to improved availability of foreign exchange, including FOREX from tobacco sales, the easing of inflationary pressures, stabilization of the Kwacha vis-à-vis the US dollar and other currencies, and rising capacity utilization in the manufacturing sector. Notwithstanding positive developments on macro stabilization, the recovery remains fragile. The undiversified nature of the economy, being largely a rain-fed agricultural economy locked in subsistence maize production, renders it vulnerable to shocks. The country is also facing numerous structural challenges, including inadequate energy and water supplies, lack of access to finance, an unskilled labor force, high transportation costs, weak regional connectivity and lack of trade facilitation, which dampens the speed of recovery and limits the country’s ability to reach its full growth potential. These economic vulnerabilities are being compounded by weaknesses in the management of the public finances. A lot of challenges facing the GoM are PFM related and they include the recurrent problem of accumulation of domestic payment arrears, low execution rates, overspending, weak internal controls and human resource capacity as well as serious weakness in the financial management and accounting systems. Through the Public Finance and Economic Management Reform Program (PFEMRP), the authorities are implementing critical PFM reforms to improve budget management (e.g. budget planning and execution), strengthen internal controls and internal audit functions, improve the timeliness of follow-up on audit recommendations and minimize wastage in the use of public resources (especially through public procurement), all of which are supported by the second Development Policy Operation (DPO-2). The authorities are also pushing forward reforms in the energy and the agriculture sectors. Currently, the GoM is undertaking reforms to improve the regulatory and legal environment for the energy sector with a view to create a conducive environment that would attract Independent Power Producers, while at the same time adjusting the electricity tariffs towards cost reflective levels. To support the agriculture modernization and transformation of smallholder subsistence farmers, the authorities are in the process of reviewing the important legislative and regulatory pieces, including the Seeds Act, to create conducive environment for smallholder farmer to be able to participate effectively in the growth and poverty reduction processes, as well as improve efficiency in the fertilizer market. In order to tackle poverty in a sustainable way, efforts are underway to improve efficiency in the provision of social safety nets, among others. Evidence from 2010/11 Third Integrated Household Survey clearly shows that despite high rates of economic growth registered during 2006-2010 and large state outlays targeting the rural communities (eg. Farm input Subsidy Program and extension services), little or no progress has been made in the reduction of poverty. According to the IHS3, absolute poverty has declined by less than 2 percent since 2004/05, to 50.7 percent. With the majority of the poor living in rural areas, rural growth through agricultural transformation and deliberate provision of productive social protection interventions are clearly critical as Malawi strives to reduce the number of its people who live in absolute poverty. Reforms to improve the efficiency in the coordination of social safety net programs through the harmonization of targeting system, maintaining a unified national registry of beneficiaries, among others, with increased focus on more productive social protection interventions, will also be supported by the DPO series. In addition, the DPO series is supporting the Government’s efforts to improve statistical capacity, which will contribute towards improving the demand for evidence based policy making as well as allow for monitoring of impact from GoM’s interventions. Proposed Objective(s) The proposed operation, which is the second in a series of three annual operations, is designed to assist the Government of Malawi (GoM) implement key policy actions identified in the Second Malawi Growth and Development Strategy 2011-2016 (MGDS II) and the 2012 Economic Recovery Plan. The development objective for the DPO series is to strengthen the macroeconomic and public finance management and lay the foundation for stronger growth and protection of the poor. Preliminary Description The Development Policy Operation series will focus on two policy areas below: i) Strengthening Macroeconomic and Public Finance Management: This policy area specifically covers two reform objectives, namely: i) Strengthening of the fiscal discipline to entrench macro-stability through strengthening budget management and the clearance of domestic payment arrears; and ii) enhancing efficiency and transparency of the public finance management through measures to strengthen internal controls and external oversight of public finances and enhance efficiency in the use of public resources through public procurement. Prior Action 1: The Recipient, through the Parliament, has adopted the 2013/14 national budget that is consistent with achieving fiscal sustainability. This will help support measures to support the fiscal consolidation process in an election year and beyond as well as help the government in improve the credibility of the budget over the medium term. Prior action 2: The Recipient, through the Ministry of Finance, has cleared 25 percent of the outstanding stock of domestic payment arrears owed by the State Owned Enterprises. This will help support the fiscal consolidation process and restore the credibility of the budget. Prior Action 3: The Recipient, through the Account General’s Office, has rolled out commitment control under Integrated Financial Management Information System to all Ministries, Departments and Agencies, and to local district councils. This will help strengthen internal controls as well as minimize overspending and the accumulation of arrears. Prior Action 4: The Recipient, through the Ministry of Finance, has submitted Treasury Minutes for fiscal years 2007/08, 2008/09, and 2009/10 to Parliament. This will help strengthen accountability in the use of public funds and improve the quality and timely follow-up on external audit reports and recommendations. Prior Action 5: The Recipient, through the Ministry of Finance, has created baseline data of pending audit queries from the Treasury Minutes by Ministries, Departments and Agencies. This will help monitor progress towards addressing the recurring audit queries and allow the authorities take necessary follow-up actions on a timely basis. Prior Action 6: Audit Committees in the ten largest spending ministries (Health, Education, Agriculture, Finance, Office of the President and Cabinet (OPC), Transport and Public Works, Gender, Defense, Local Government, and Mines) are functional. This will help strengthen both internal and external audit functions for the follow-up of audit recommendations and reduce incidences of unresolved audit queries. Prior Action 7: The Recipient, through the Accountant General’s Office, has created a baseline data of pending bank reconciliation per Ministries, Departments and Agencies. This will contribute towards strengthening of internal controls as well as prevent overspending and fraud. ii) Laying the Foundation for Stronger Growth and Protection of the Poor. Focus will be on supporting the recovery process and the drive towards a more broad based and inclusive growth through measures to enhance agriculture productivity and diversification; improve energy efficiency and the regulatory environment; improve efficiency in the provision of social safety nets and strengthen the country’s statistical capacity. Prior Action 8: The Recipient, through the Ministry of Agriculture and Food Security, has completed a review of the legal and regulatory framework for quality seed production. This will improve the legal and regulatory framework for seeds production, marketing and quality control. Prior Action 9: The Recipient, through the Malawi Energy Regulatory Authority, has undertaken monthly reviews of the Automatic Tariff Adjustment Formula for electricity. This will enable the Utility Company to meet its operational costs and more closer to the average regional rate to attract private sector players in the market. Prior Action 10: The Recipient, through the National Statistical Office, has developed the National Statistics System Strategic Plan 2013-2017. This will contribute towards improving the production of quality and timely statistics for planning, implementation, monitoring and evaluating the progress of Malawi Growth and Development Strategy and other critical statistics. Prior Action 11: The Recipient, through the Parliament, has enacted the revised Statistics Bill. This will contribute towards bringing about improvements in the country’s statistical and M&E system as well as cultivate the culture for evidence based policy making to sharpen the impact of GoM’s policies on poverty interventions. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts 1. Overall, the proposed policy actions supported by this operation are likely to have positive impacts on welfare and its distribution. Strengthening of macroeconomic and public finance management will enhance efficiency, transparency and accountability in public resource use; reduce the outstanding payment arrears (and non-accumulation of new ones) in the medium term, which are expected to improve the GoM’s capacity to more effectively manage its resources and the savings generated could be used for investment purposes, especially in social sectors. A sound system of internal control is necessary to provide reasonable assurance that public expenditure is executed in accordance with the approved budget and the established regulatory framework. Reforms under the proposed operation will also support efforts to enhance agriculture productivity as well as strengthen social safety net systems to help bring about quick gains for the poor and most vulnerable groups. The proposed measures will enhance productivity of smallholder farmers through use of quality seeds and modern ways of farming, whereas improvements in the procurement of fertilizer under the FISP will help improve transparency and accountability in the use of public resources. The improvements of statistical capacity and M&E systems will allow better targeting of social program in the future. However, measures to eliminate implicit subsidy in electricity will result to higher tariffs for consumers of electricity. A flat tariff increase would likely have a significant negative impact on electrified households, through a combination of an increased share of expenditures on electricity and a decrease in electricity consumption, and that impact would be notably greater for poorer electrified households. The tariff increases would also increase the prices of other household consumption goods, which would put additional pressure on all household budgets, even those poor without electricity connections. Environment Aspects The legal framework for the environment is in place, but capacity to implement and enforce it remains a challenge. The specific actions supported the DPO series are not expected to cause significant effects on the environment, forests, and other natural resources of Malawi. The economic management reforms will lead to more efficient use of public resources, which may indirectly generate environmental benefits in the form of better use of modern technologies. While the reforms in the energy sector are focusing on institutions (fiscal sustainability of provision of electricity) and the regulatory environment, there are potential indirect effects. Reforms related to agriculture also have a potential of indirect effects on environment but the related environmental issues have already been taken care through the on-going sector lending operation. Tentative financing Source: ($m.) BORROWER/RECIPIENT 0 IDA Credit 50 Borrower/Recipient IBRD Others (specifiy) Total Contact point World Bank Contact: Appolenia Mbowe Title: Senior Economist Tel: 5394+3203 Email: ambowe@worldbank.org Location: Lilongwe, Malawi (IBRD) Borrower Contact: Randson P. Mwadiwa Title: Secretary to the Treasury Tel: (265) 1 788 781 Email: stfinance@finance.gov.mw For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop