Document of The World Bank FOR OFFICIAL USE ONLY Report No. 73110-MW INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED GRANT IN THE AMOUNT OF SDR 33.4 MILLION (US$50 MILLION EQUIVALENT) TO THE REPUBLIC OF MALAWI FORA MALAWI ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION 1 April 29, 2013 Poverty Reduction and Economic Management AFTP1 Country Department AFCS3 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MALAWI - GOVERNMENT FISCAL YEAR JULY 1 - JUNE 30 CURRENCY EQUIVALENTS (EXCHANGE RATE EFFECTIVE AS OF APRIL 17, 2013) Currency Unit = Malawi Kwacha (MWK) MWK 398.5 = US$1 US$1.0 = SDR0.667022 WEIGHTS AND MEASURES METRIC SYSTEM ABBREVIATION AND ACRONYMS AAA Analytical and Advisory Services AfDB African Development Bank ALCO Assets and Liability Committee APM Automatic Pricing Mechanism APR Annual Progress Report ATAF Automatic Tariff Adjustment Formula BPFP Budget Policy Framework Paper CABS Common Approach to Budget Support CAS Country Assistance Strategy CEM Country Economic Memorandum COMESA Common Market for Eastern and Southern Africa CPAR Country Procurement Assessment Report CSOs Civil Society Organizations DAD Debt and Aid Division DBS Doing Business Survey DCAFS Donor Committee on Agriculture and Food Security DEMPA Debt Management Performance Assessment DFID Department for International Development DPO Development Policy Operation DSA Debt Sustainability Analysis EC European Commission ECF Extended Credit Facility EU European Union FDI Foreign Direct Investment FIMTAP Financial Management, Transparency, and Accountability Project FISP Farm Input Subsidy Program FROIP Financial Reporting and Oversight Project FSAP Financial Sector Assessment Program FSTAP Financial Sector Technical Assistance Project FY Fiscal Year GCI Global Competitiveness Index GDP Gross Domestic Product GFEM Group on Public Financial and Economic Management GFS Government Financial Statistics 11 GiZ German Agency for Technical Cooperation GNI Gross National Income GoM Government of Malawi HIPC Highly Indebted Poor Countries ICR Implementation Completion and Results Report IDF Institutional Development Fund IDA International Development Association IHS3 Third Integrated Household Survey IFMIS Integrated Financial Management Information System IMF International Monetary Fund IFRS International Financial Reporting Standards IPC Internal Procurement Unit IPPs Independent Power Producer IT Information Technology LICs Low Income Countries LIPWs Labour Intensive Public Works LSMS-ISA Living Standards Measurement Survey-Integrated Surveys on Agriculture JF Joint Framework MCC Millennium Challenge Corporation MRA Malawi Revenue Authority MDAs Ministries, Departments and Agencies MDRI Multilateral Debt Relief Initiative MDTF Multi-Donor Trust Fund MEPD Ministry of Economic Planning and Development MoEST Ministry of Education Science and Technology MERA Malawi Energy Regulatory Authority M&E Monitoring and Evaluation MGDS Malawi Growth and Development Strategy MG1 Malawi Government [Account Number] 1 MWK Malawi Kwacha MSB Malawi Savings Bank MTDS Medium Term Debt Management Strategy MTEF Medium Term Expenditure Framework MTFF Medium Term Fiscal Framework MoAFS Ministry of Agriculture and Food Security MoF Ministry of Finance MoE Ministry of Energy NAO National Audit Office NGO Non-governmental Organization NOCMA National Oil Company of Malawi NPV Net Present Value NSO National Statistical Office NSSP National Social Support Program NSSSP National Statistics System Strategic Plan SMEs Small and Medium Size Enterprises SSP Social Support Policy ODA Overseas Development Assistance ODPP Office of the Director of Public Procurement OPC Office of the President and Cabinet PAA Public Audit Act 111 PAC Public Accounts Committee PAF Performance Assessment Framework PDO Project Development Objective PEFA Public Expenditure and Financial Accountability Framework Assessment PER Public Expenditure Review PFEM Public Finance and Economic Management PFEM-PR Public Finance and Economic Management Reform Program PFM Public Financial Management PFMA Public Financial Management Act PPA Public Procurement Act PRSC Poverty Reduction Support Credit PSIA Poverty and Social Impact Analysis PV Present Value RBM Reserve Bank of Malawi RRDPG Rapid Response Development Policy Grant RRP Rapid Response Program SADC Southern African Development Community SAPP Southern African Power Pool SDR Special Drawing Rights SOAS School of Oriental and African Studies SOEs State Owned Enterprises ST Secretary to the Treasury SWGs Sector Working Groups TA Technical Assistance TBs Treasury Bills USD United States Dollar VAT Value Added Tax Vice President Makhtar Diop Country Director Kundhavi Kadiresan Sector Director Marcelo Giugale Sector Manager John Panzer Task Team Leader Appolenia Mbowe iv THE REPUBLIC OF MALAWI ECONOMIC RECOVERY DEVELOPMENT POLICY GRANT (DPO-1) TABLE OF CONTENTS I. INTRODUCTION AND OVERVIEW ................................................................ 1 H. COUNTRY CONTEXT ......................................................................................... 2 IHI. GOVERNMENT'S PROGRAM AND PARTICIPATORY PROCESS ....... 12 IV. BANK SUPPORT TO THE GOVERNMENT'S PROGRAM........................... 13 A. Links to the Country Assistance Strategy. ........................ ..... 13 B. Coordination With the IMF and other Development Partners. ....... ......... 14 C. Relationship to other Bank Operations..............5..........15 D. Lessons Leamt .................. ........................ ..... 16 E. Analytical Underpinnings ................................... ..... 16 V. THE PROPOSED ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION (DPO-1)................................................................................................. 19 A. Overall Description ................................... .......... 19 B. Policy Areas........................................ ........ 21 VI. OPERATION IMPLEMENTATION ....................... .......37 A. Poverty and Social Impact ............................................. 37 B. Environmental Aspects .................................. ........40 C. Implementation, Monitoring And Evaluation. ................. .......... 41 D. Fiduciary Aspects ......................................... ..... 42 E. Disbursement and auditing ................................... ..... 45 F. Risks and Risk Mitigation.................................... ..... 46 LIST OF FIGURES Figure 1: Price and Interest Rates Trends...............................6 Figure 2: Fiscal Trends and Projections...............O.............10 Figure 3: Extemal Sector, Trends and Projections......... ...............11 Figure 4: Average Effective Tariff under Various Scenarios. .................38 LIST OF TABLES Table 1: Key Macroeconomic Indicators, 2008-2016............ ...........5 Table 2: Central Govemment Operations, 2013-2016......................9 Table 3: Links between DPO and Analytical Work............. .......... 17 Table 4: Summary of the potential impacts of the flat and lifeline tariff scenarios.. .38 Table 5: Poverty and Social Impact............................. 39 LIST OF BOXES Box 1: How Good Practice Principles on Conditionality are being Applied to the Operation.............. ................................. ..... 19 Box 2: Public Finance Management Assessment. ..........................43 v ANNEXES Annex 1: Letter of Development Policy ......................... 49 Annex 2: Operation Policy and M&E Matrix. .......... ................ 57 Annex 1: Letter of Development Policy .................... ..............49 Annex 2: Operation Policy and M&E Matrix................. ..............57 Annex 3: Fund Relations Note.........................................60 Annex 4: Country Context............................................61 Annex 5: Malawi At A Glance....................... ..................78 Annex 6: Map of Malawi ............................................... 84 The Economic Recovery Development Policy Operation (DPO-1) was prepared by a multi-sector team led by Appolenia Mbowe (Task Team Leader & Sr. Economist, AFTPI) and comprising Praveen Kumar (Lead Economist, AFTPI), Pazhayannur K. Subramanian (Lead Financial Management Specialist, AFTFM), Olivier Durand (Sr. Agricultural Specialist, AFTAR), Ida Manjolo (Sr. Social Protection Specialist, AFTSP), Rob Mills (Sr. Economist, AFTGl), Temwa Gondwe (Economist, AFTPI), Steve Mhone (Procurement Specialist, AFTPC), Nneoma Veronica Nwogu (Counsel, LEGAM), Luis M. Schwarz (Sr. Finance Officer, CTRLA), Trust Chimaliro (Financial Management Specialist, AFTFM) and Deliwe Ziyendammanja (Team Assistant AFMMW). The IDA team also collaborated very closely with representatives of four other donor agencies that make up the Common Approach to Budget Support (CABS) group. The Peer Reviewer for this operation is Jos Verbeek (Lead Economist, DECPG) and William Battaile (Sr. Economist, PRMED).Overall guidance was provided by Marcelo Giugale (Sector Director, PREM), Kundhavi Kadiresan (Country Director, AFCS3), John Panzer (Sector Manager, AFTPI) and Sandra Bloemenkamp (Country Manager, AFMMW). vi GRANT AND PROGRAM SUMMARY REPUBLIC OF MALAWI ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION (GRANT H849-MW) Recipient Republic of Malawi Implementing Ministry of Finance Agency Financing IDA Grant, standard IDA terms Data Amount: SDR 33.4 million (US$50 million equivalent); Closing date: December 31, 2013. Operation First of a programmatic series of three single tranche Development Policy Operation of Type SDR 33.4 million (US$50 million equivalent) Main Policy Macroeconomic management, public financial management, agriculture, energy, social Areas protection and statistics. Key Outcome Outcome Indicators Baseline (2012) Target (2016) Indicators Percentage of the stock of domestic 0 50 payment arrears cleared (State Owned Enterprises) (%) Variance in primary expenditure between 12 8 or less approved and outturn (%) Reduction in the rate of recurrent audit 90 50 findings (%) Number of power generation licensed for 0 at least One Independent Power Producers Number of beneficiaries with savings of at 13,000 49,000 least 50% of Public Works wage one year after participation Development The development objectives of the Economic Recovery Development Policy Objectives Operation series are to strengthen macroeconomic and public finance management and lay the foundation for stronger growth and protection of the poor. The program is geared towards consolidating macroeconomic policy reforms implemented under the stabilization effort undertaken since May 2012, as well as prepare the ground for longer term structural reforms for the post-election era. Links to CAS: The proposed DPO series is fully consistent with and closely linked to the objectives of the FY13-16 Country Assistance Strategy approved by the Board in January 2013. The CAS seeks to contribute to Malawi's efforts toward a more diversified, competitive, shock-resilient socioeconomic growth. The DPO is also linked to the main pillars of the Africa Regional Strategy. Risks and Three main risks could influence the expected outcomes of the proposed operation: Risks (a) External shocks: The country remains vulnerable to weather-related and other Mitigation external shocks, which could have an impact on the overall GDP growth, consumer prices, and external balance. A shortfall in maize output was partly responsible for the acceleration of inflation during 2012-13. A weather-related sharp decline in tobacco production could have consequences for foreign exchange balance and hence exchange rates in the short-term. There remains a potential risk of spillovers from the global economy, including a decline in prices of Malawi's exports, and a reduction in aid flows. All of these vulnerabilities pose significant risk to nascent vii macro-economic stability. Mitigation: The authorities are regularly monitoring macroeconomic developments, including as part of the program with the IMF. A continuation of the policy reforms instituted in 2012 such as automatic price adjustment mechanism for fuel and flexible exchange rate would allow the economy to adjust to shocks with minimum policy response. Where needed, the government is expected to respond through appropriate policy measures. The Bank team will help the Government of Malawi (GoM) to formulate and implement such responses. In 2012, the Government responded to the decline in maize output by fiscal tightening which is being supported by the Bank through advice on public expenditure policy. (b) Political risk: Political risk remains high in the context of Presidential elections planned for May 2014. Policy reforms instituted in 2012 have been followed by considerable depreciation of Kwacha and annual inflation in excess of 30 percent. These developments are putting pressure on the Government's resolve to stay the course. Pressures on the budget are likely to increase during fiscal year 2013-14 posing further risks to macroeconomic stability. Mitigation: These risks will partly be mitigated by a better communication by the government on how the policy reforms are having some positive impacts and the time needed to let these reforms work. This could be complemented by more informed public debates based on emerging evidence from the on-going Public Expenditure Review and poverty policy notes, which includes analysis on the FISP. (c) Implementation capacity risks. The systemic problem of capacity in GoM continues to pose a risk to the reform program and may cause delays in implementation of some of the reform measures supported by this operation. Weak management of public finances and reports of widespread corruption and extortion by public officials in procurement and fraudulent activities within the PFM systems represent a significant risk. Mitigation: To address this risk in the short term, the Bank intends to increase its engagement at the technical level to ensure the reforms under this operation are implemented and sustained. In addition, the DPs are supporting the GOM through a combination of capacity building and technical support, including support for statistics and monitoring and evaluation. Specifically, the risks can be mitigated by the pace of reforms supported by the implementation of a more harmonized PFM program under the Multi-Donor Trust Fund. Operation ID P133663 viii REPUBLIC OF MALAWI ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION (DPO 1) I. INTRODUCTION AND OVERVIEW 1. This program document proposes the Economic Recovery Development Policy Operation to the Republic of Malawi for SDR 33.4 million (US$50 million equivalent), on standard IDA terms. The proposed operation is the first in a programmatic series of three single tranche operations, which intends to support the implementation of the Government of Malawi's (GoM) new medium term development strategy, the Second Malawi Growth and Development Strategy (MGDS II) 2011-16, approved in April 2012, and the Economic Recovery Plan.' The rationale behind the decision to start a new DPO series is based on the need to help the GoM implement its medium term reform agenda while at the same time ensure predictability in the financing of the reforms through the series. 2. The DPO series is designed to assist the GoM consolidate reform measures undertaken since May 2012 aimed at stabilizing the economy, supporting quick growth rebound and protecting the poor and the most vulnerable while setting the stage for longer term structural reforms. Specifically, the operation will support two key pillars: (i) strengthening the macroeconomic and public finance management through measures aimed at strengthening fiscal discipline to entrench macro-stability as well as improving efficiency and the transparency of the public finance management; and, ii) laying the foundation for stronger growth and protection of the poor through reform measures aimed at enhancing agriculture productivity and diversification; improving energy efficiency and the regulatory environment; improving efficiency in the provision of social safety nets; and, strengthening the country's statistical capacity. 3. The choice of the reform areas is based on the outstanding reform agenda currently being pursued by the GoM on strengthening PFM and efficiency in government expenditure, addressing constraints to growth and economic diversification as well as advancing the inclusive growth agenda through productive social safety nets. The operation also represents a continuation of an on-going policy dialogue with the authorities and builds upon reforms implemented under the Rapid Response Development Policy Grant (2012 RRDPG). The operation also builds on reforms supported under the Poverty Reduction Support Grant 1-3 (2007-2010 PRSG series) as well as consolidates the reforms supported by the three-year arrangement for Malawi under the Extended Credit Facility (ECF) approved in July 2012. 4. This Program comes at the time when the economy is going through a difficult recovery process in the wake of a severe economic and governance crisis of 2011, which had threatened to push the economy into a policy-induced recession. The timely implementation of adjustment measures to address the long standing internal and external imbalances in the economy by the new Administration under President Mrs. Joyce Banda, which came into office in April 2012, averted a full blown economic and social crisis. The manifestation of the macroeconomic imbalances included the accumulation of an estimated MK72 billion in government domestic payment arrears, severe shortages of foreign ERP lays out action plans over the short to medium term to accelerate progress towards poverty reduction through sustainable and inclusive growth. It also proposed a social support package, which will be built on existing programs to mitigate the impact of the reforms on vulnerable sections of society. 1 exchange and accumulation of external payment arrears by the private sector, estimated at about US$600 million. These reforms have facilitated, among others, the removal of market distortions (especially in the petroleum sub-sector and foreign exchange markets), the strengthening of the macroeconomic management and the clamping down on some of the loopholes in the public finance management, while scaling up social safety net programs to cushion the poor and the most vulnerable groups from unintended effects of the economic adjustment process. 5. While the reforms have laid the foundation for the country's recovery, a harsher external environment than earlier anticipated has weakened the pace of the economic recovery. The significantly reduced tobacco and sugar proceeds in 2012 and higher than anticipated foreign exchange demand for clearance of the backlog of external payment arrears as well as to meet the current import needs and external obligations have exerted significant pressures on the exchange rate. Continued depreciation of the exchange rate2 and drought induced increases in local food prices has contributed to the surge in inflation above its envisaged path.3 The rising cost of living, on the back of high inflation rate and continued depreciation of the Kwacha has also intensified demands for wage increases, especially in the public sector, as evidenced by the recent industrial actions. Therefore, achieving fiscal sustainability going forward and preventing an inflation- depreciation spiral would be critical. 6. The proposed operation will provide US$50 million equivalent in budget support needed to ease the emerging fiscal pressures and sustain the current economic reforms while setting the stage for longer term objectives of improving efficiency in government expenditure, reducing poverty and achieving a sustainable and inclusive growth. The Program will be informed by Analytical and Advisory services (AAAs) and Technical support, including the 2013 Public Expenditure Review4 and the Diagnostic Trade Integration Study update, and will be provided within the harmonized framework for the provision of budget support in Malawi, the Common Approach to Budget Support (CABS), comprising IDA and five other participating Development Partners (DPs).5 The program is also anchored on the new FY13-16 Country Assistance Strategy and will provide a platform from which the Bank will engage in policy dialogue with the authorities on key policy areas supported by this operation. II. COUNTRY CONTEXT6 A. Political Context 7. Following the death of the late President Bingu wa Mutharika, who ruled the country from 2004 until his death in April 2012, the former Vice President Mrs. Joyce Banda, took office as the first female President of Malawi. The new Administration had to implement critical macroeconomic and structural reforms immediately after getting into 2 Traditionally, the months of September to March are known as the lean season for foreign exchange as the supplies tend to be the lowest, due to seasonality of agriculture. The drought conditions in the southern part of the country in 2012 left close to 2 million people under threat of being food insecure. But the crisis was averted by the GoM's timely release of the emergency food assistance with support from the DPs. 4 The sectors covered by the 2013 PER, include Agriculture, Transport, Health, Education and social protection and is scheduled for delivery in late September 2013. Other members of the CABS are the European Commission, United Kingdom (DFID), African Development Bank, Norway, and Germany (KfW). The UNDP, Ireland and IMF have observer status. 6 Details on Political, Social and Economic context and background provided in Annex 4-A-C. 2 office to avoid economic collapse, with some encouraging early signs of a recovery. The GoM's resolve to address governance issues, including the normalization of relations with its neighboring countries and the international community, has yielded positive results as evidenced by the resumption of budget support and the recent signing of the Memorandum of Understanding (MOU) between the Governments of Malawi and Mozambique on the stalled interconnector energy project. 8. Malawi is now preparing for its fifth Presidential and Parliamentary elections scheduled for May 2014. President Banda's administration faces the challenge of maintaining support for its economic policy reforms with calls for policy reversals, especially the flexible exchange rate regime and the automatic price adjustment for petroleum products. So far, none of the opposition parties have provided alternative policy options. For the first time since she took office in April 2012, President Joyce Banda has a minority in Parliament after one of the main opposition parties, the United Democratic Front, relocated from the GoM's side. All political parties are focused on the upcoming elections. B. Social Context 9. Malawi is ranked 170 out of 186 countries surveyed in the United Nations Human Development Index of 2012. According to the recent report of Malawi's Third Integrated Household Survey (IHS3 2010/11), absolute poverty has declined by less than 2 percent since 2004/05, to 50.7 percent. Although poverty in urban areas reduced from 25.4 percent in 2005 to 17.3 percent in 2011, this gain was counterbalanced by a worsening in rural poverty from 55.9 percent to 56.6 percent. Stagnant poverty levels raise questions on the effectiveness of the Malawi's Farm Input Subsidy Program (FISP), in alleviating poverty and food insecurity in a sustainable manner. With the majority of the poor living in rural areas, rural growth through agricultural transformation is clearly critical as Malawi strives to reduce the number of its people who live in absolute poverty. 10. While the human development indicators represent a mixed picture, Malawi is likely to meet four of the eight MDGs - which is a noteworthy achievement in the Sub- Saharan Africa context. Health is being improved by reductions in chronic malnutrition, measles immunization for children less than a year old and life expectancy has surged, from 38 in 2005 to 53 in 2012. Trends in under-5 and infant mortality have been improving steadily for two decades. Unfortunately, the HIV prevalence rate in Malawi is still one of the highest in the world: 10.6 percent for adults aged 15-49 in 2010 (12.9 percent for women and 8.1 percent for men), slightly down from 11.8 percent in 2004. AIDS is the leading cause of adult deaths in Malawi and is a drain on public resources. As for the education MDGs, though Malawi has made progress, the quality of education is still low by regional standards. In general, Malawi is likely to meet the goals related to reducing child mortality; combating HIV/AIDS, malaria, and other diseases; ensuring environmental sustainability and developing a global partnership for development. To strengthen the demand for evidence based policy making and to improve the monitoring of social outcomes as well as the impact of the interventions, more efforts are needed to improve the country's statistical capacity and the reliability of its data. FISP account for over 60 percent of the total budget allocated to the Ministry of Agriculture and Food Security. 3 C. Economic Context 11. Malawi, a landlocked agrarian economy, continues to rely on a few primary commodities, which makes it vulnerable to weather and terms of trade shocks. The country is also highly aid-dependent. Agriculture, the main stay of the economic and the main source of growth and exports, is central to reducing poverty. Expanding and diversifying agricultural exports and expanding commercial agriculture is high priority. With support from DPs, the GoM is promoting production of legumes and has introduced a pilot program to promote cotton production. However, the success of agricultural diversification will inter alia depend on availability of quality seeds and seeds varieties, investments in irrigation infrastructure, adequate rural roads access and marketing infrastructure. Currently, there are no seeds available in the market for new crops like cotton, and even for traditional crops, which limits the country's ability to increase productivity and support crop diversification. This DPO series seeks to improve the legal framework for an efficient seeds market. 12. Improving economic infrastructure is essential to increase competitiveness and attract potential investors. Unreliable power and water supplies and excessive transport costs need urgent attention. The 2010 Country Economic Memorandum (CEM) identified the unreliability of power supply as one of the primary constraints to growth. The energy sector needs both public and private investments to eliminate energy shortages, by upgrading transmission and distribution systems to reduce energy losses and improving both energy efficiency and transmission interconnections to the Southern African Power Pool (SAPP). Therefore, the reinstatement of the Millennium Challenge Corporation (MCC) Energy Compact in June 2012, the recent signing of the MOU by Governments of Malawi and Mozambique for the interconnector project and the Kapichira II (the hydro power plant) soon to come on stream reflect positive developments. Low electricity tariffs remain a major impediment to investments by Independent Power Producers (IPPs). But raising tariffs alone cannot resolve the country's investment blockages; there is need to also review the regulatory framework. The proposed reforms under this operation therefore seek to improve energy efficiency and the regulatory environment. 13. Having a functioning Public Finance Management system is an essential foundation for fiscal discipline. Malawi has been implementing PFM reforms for over a decade but progress towards fiscal discipline has been slow with lack of ownership and non-adherence to the country's own PFM rules and regulations. While the capacity to carry out more timely audits, both external and internal audits, has improved, the quality and the follow-up on internal and external audits are still uncertain; regulation and operational guidelines for internal auditing are not yet well embedded. The proposed operation, which is being complemented by the Financial Reporting and Oversight Improvement Project, seeks to address the outstanding PFM gaps in a harmonized approach to ensure that they are sustained. D. Recent Economic Developments 14. After registering high rates of economic growth averaging 7 percent during 2006-10, the pace of Malawi's growth started to slow down in 2011, where the economy is estimated to have grown by 4.3 percent. This was on a back of a difficult macroeconomic and governance environment in 2011/12, which was adversely affected by a combination of events, including significantly reduced donor inflows and tobacco 4 proceeds, higher fuel/fertilizer prices, and the overvaluation of the kwacha, leading to fiscal and external imbalances. Despite improvements in the supply of foreign exchange and fuel during the second half of 2012, the slowdown in the real sector activities in 2011/12 and the contraction in the agriculture and manufacturing sectors led to low real GDP growth rate of 1.9 percent in 2012. Table 1: Malawi- Key Macroeconomic Indicators, 2008-2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Prel proi. Proj. Proj. Proj. National accounts and prices (percent change, unless otherwise indicated) GDP at constant market prices 8.3 9.0 6.5 4.3 1.9 5.5 6.1 6.5 6.7 Consumer prices (end of period) 9.9 7.6 6.3 9.8 34.6 11.8 5.8 5.4 4.6 Consumer prices (annual average) 8.7 8.4 7.4 7.6 21.3 20.2 8.1 5.8 4.9 Central government (percent of GDP on a fiscal year basis) Revenue 29.4 32.1 33.8 32.1 26.5 39.0 37.3 36.1 35.5 Grants 10.5 11.6 10.3 7.6 4.4 15.1 13.0 11.4 10.5 Expenditure and net lending 30.0 37.8 33.8 35.0 34.9 40.2 39.1 37.6 36.8 Overall balance (excluding grants) -11.2 -17.3 -10.3 -10.5 -12.8 -16.3 -14.8 -13.0 -11.8 Overall balance -0.6 -5.7 0.1 -2.9 -8.4 -1.2 -1.8 -1.5 -1.3 Primary balance 1.6 -3.0 2.9 -0.2 -5.9 1.6 0.5 0.3 0.3 Foreign financing 2.5 2.0 0.9 1.3 1.6 1.9 1.8 1.5 1.3 Domestic financing 0.5 3.7 -0.9 1.7 6.7 -1.6 0.0 0.0 0.5 External sector (US$ millions, unless otherwise indicated) Current account (percent of GDP) -9.7 -4.8 -1.3 -5.9 -4.7 -1.6 -1.8 -2.2 -3.0 Current account, excl. official transfers (percent of GDP) -20.8 -14.2 -17.0 -12.2 -18.8 -17.2 -16.1 -15.4 -15.3 Overall balance (percent of GDP) -1.6 -2.0 2.2 -1.9 0.6 3.5 3.4 3.3 2.8 Usable gross official reseres 239.0 140.5 279.6 190.2 215.4 402.8 555.5 692.8 797.7 (months of imports) 1.5 0.7 1.5 1.0 1.1 1.9 2.5 2.9 3.1 Debt stock and service (percent of GDP, unless otherwise indicated) External debt (public sector) 15.8 16.6 15.9 16.2 22.7 26.2 24.3 22.6 21.1 NPV of debt (percent of exports) 57.1 44.6 48.1 53.2 47.0 42.2 38.2 34.4 Sources: Malawian authorities, IMF and World Bank staffestmates. 15. Specifically, the agriculture sector is estimated to have registered a negative growth of 2.9 percent in 2012, on account of underperformance in the production of tobacco,8 cotton and maize. The decline in maize was largely attributed to poor and erratic rains in the southern part of the country. The manufacturing sector, being the hardest hit during the economic crisis in 2011, is estimated to have contracted by 6.4 percent on the back of difficulties in accessing foreign exchange and intermittent power and water supplies. 16. Inflation has been on an upward swing since early 2011 after being in single digits for the past five years. Headline inflation spiked to 37.9 percent (y-o-y) in February 2013, up from 10.9 percent (y-o-y) in February 2012. This was driven largely by the rise in food prices, especially maize (related to the impact of drought in the southern region) and in non-food prices, triggered by the adjustments in the fuel, water and electricity prices, and the feed-through effects of Kwacha depreciation (figure 1). As such, the annual average inflation for 2012 stood at 21.3 percent. gReflecting the effect of price disincentives associated with the previous tobacco season. 5 Figure 1: Price Trends Kwacha depreciating but expected to stabilize with the opening of tobacco 4r market 30500 S25So 200 ~15 ..... 0 ,; 10 300 6.00 Real interest rates back to negative Treasury Bills rate on an upward path... territory ... 40.00 12.00 30.00 10.00 St 20.00 8.00 10.00 .. .... oo.o o T-Bill rate (91 days) .00 T-Bill rate (364 days) Sources: Government ofMalawi and IMFStaffestimates 17. Economic performance during 2011 and early part of 2012 was also marred by loose fiscal stance characterized by heavy reliance on domestic financing, which crowded out credit to the private sector (figure 2). The implementation of the 'zero- deficit budget' in 2011/12 created large fiscal imbalances as the GoM was not able to generate enough revenues. Domestic tax and non-tax revenues declined to 22.1 percent of GDP and grants fell to 4.4 percent of GDP in 2011/12, from 24.5 percent and 7.6 percent of GDP, respectively, in 2010/11 (Table 1). The loose fiscal stance resulted in a sharp deterioration in the fiscal balance to -8.4 percent of GDP in 2011/12, compared with a balance of -2.9 percent of GDP in 20 10/11. This large slippage reflected unrestrained primary spending of - 6.0 percent of GDP, which led to a sharp increase in domestic borrowing from 1.7 percent of GDP to 6.7 percent of GDP. 18. Fiscal performance during the first half of 2012/13 was satisfactory as the GoM met most of the performance targets and the structural benchmarks under the ECF program. The GoM has been able to eliminate the fuel subsidy9 with the reinstatement of the automatic price adjustment, and has also repaid about MWK 12 billion of existing stock of domestic payment arrears (out of total arrears of MWK 72 billion) in 2012/13. While the impact of the unification of the exchange rate (and the subsequent floatation) on foreign exchange revenue has been positive,to its impact on foreign exchange sensitive expenditures, especially fertilizer imports, was more pronounced." The immediate impact of recent wage increases to civil servants following the industrial actions in February 2013 was a 6 percent increase in the GoM wage bill for 2012/13 budget (0.3 percent of GDP), which was largely funded by cuts in the Other Recurrent Transactions (ORT) from various 9The cost of fuel subsidies was about US$67 million (1.2 percent of GDP) in 2011, but it must be noted that fuel was hardly available at the subsidized price in 2012. 10 About MWK7 billion exchange rate gains from grants. . The Kwacha depreciation saw a jump in the FISP budget line from 3.4 percent of GDP at approval in June 2012, to 4.4 percent of GDP in December 2013. 6 votes and other budgetary savings. While the impact of wage increase on the 2012/13 budget is neutral, it has a signaling effect to the market. 19. Malawi's balance of payments suffered a significant weakening in 2011 from a surplus of 2.2 percent of GDP in 2010 to a deficit of -1.9 percent of GDP in 2011. The strong deficit in the current account was the main factor behind the worsening of the balance of payments, as it widened from -1.3 percent of GDP in 2010 to -5.9 percent in GDP in 2011. The deterioration was largely due to high levels of imports (33.4 percent of GDP) vis-i-vis exports (22.5 percent of GDP) and very low levels of international reserves. The current account deficit narrowed to -4.7 percent of GDP in 2012, mainly on account of significantly higher official transfers. FDI slowed in 2011 to 1.1 percent of GDP from 2.9 percent of GDP in 2010, partly due to worsening governance and macroeconomic environment. 20. Malawi's exchange rate supply has significantly improved following the recent liberalization of the exchange rate regime, which has addressed the overvaluation of the kwacha. While the impact of the changes in the exchange rate regime on the economy is yet to be fully realized, it is expected to be positive as evidenced by improved supply of foreign exchange and fuel, improved earnings for smallholder tobacco farmers and exporters and the gradual elimination of external imbalances (Annex 4-C Box 1). The Kwacha is yet to stabilize and has depreciated by additional 66 percent against the US dollar since May 2012 after losing about 50 percent of its value. The continuous depreciation of the Kwacha is partly explained by the increase in demand for foreign exchange, especially following the clearance of private sector external payment arrears (estimated at over US$600 million), uncertainty in the market as well as insufficient supply of foreign exchange from the export side. Further tightening of the fiscal and monetary policy stance may be needed to eliminate the risk of a Kwacha depreciation-inflation spiral. 21. To contain the growth in credit and money supply, the Reserve Bank of Malawi (RBM) has hiked the bank policy rate in a phased manner to 25 percent in December 2012, from 13 percent prior to the reforms in May 2012. In response, the banks have increased both their lending and deposit rates, with the prime lending rates increasing from about 18 percent to above 40 percent, making borrowing for both working capital and production expansion more expensive. On the back of these developments, the spread between lending and fixed-deposit rates has slightly narrowed. The increases in bank policy rates have also been accompanied by the surge in the Treasury bill rates in excess of 35 percent for 91-days T-bills in March 2013. 22. Risks to bank's portfolios has been elevated over the last 18 months and the RBM has intensified its monitoring and surveillance over the financial system, with special attention being paid to the distressed banks. The tight Kwacha liquidity conditions in the banking sector in the aftermath of the May 2012 exchange rate liberalization exposed some weaknesses in the banking system. This saw the increase in the number of banks seeking accommodation from the RBM through the discount window, which prompted the RBM to introduce a temporary non-collateralized window to provide relief to stressed banks at a rate above the policy rate. 12 Nevertheless, a number of the banks still have difficulties in meeting their liquidity needs and the RBM is working with them to ensure that their portfolios are restructured and balance sheets are adjusted. While the Non-Performing Loans (NPL) are at low levels, with their share as a ratio to total loans at 7.0 percent as at end 12 The non-collateralized window was closed end November 2012. 7 December 2012, the magnitude of the on-going loan restructuring and the higher than expected increase in interest rates have made loan servicing expensive, implying rising NPLs. 23. The GoM is undertaking measures to reduce the contingent liabilities and operational loss risks posed by the State-Owned Enterprises (SOEs).13 Currently, the GoM is proactively monitoring/supervising the activities of the SOEs on quarterly basis, with specific attention being paid to procurement activities. The GoM has also issued promissory notes to clear the stock of outstanding payment arrears owed by SOEs accumulated over the past three years. Moreover, the recent adjustments in electricity tariffs have contributed to the improvements in ESCOM's financial position as the tariffs are now cost reflective. Meanwhile, the on-going restructuring of Air Malawi14 will, in the medium term, help reduce fiscal pressures and the move towards the automatic price adjustment mechanism for petroleum has also reduced the contingent liability risks associated with the National Oil Company of Malawi (NOCMA)." Others like the water utilities remain a problem as their tariffs are not fully cost reflective and ADMARC continues to make losses. E. Macroeconomic Outlook and Debt Sustainability 24. The Malawi's medium term economic outlook has improved but remains with significant downside risks related to weather and terms of trade shocks and potential fiscal slippages in a contested political environment. This notwithstanding, economic growth is projected to rebound to the pre-2010 levels in the medium term, with real GDP growth for 2013 projected at about 5.0 percent in 2013, on the back of production rebound in agriculture. The outlook for the current agriculture season is positive based on the expected recovery in tobacco production and production expansion in other cash crops including cotton and legumes. The GoM has also embarked on a two crop a year initiative, which is part of the Greenbelt irrigation program to increase crop production for the domestic and international markets. 25. The manufacturing, the sector is expected to start showing signs of a rebound during the second half of 2013 as supply chains begin to normalize. Mining and quarrying is projected to grow at an average 6 percent during 2013-2016, to be boosted by projected increase in coal production in 2013-14 as well as the coming on stream of the niobium mining project at Kanyika by 2014 with construction beginning in 2013. Overall, real GDP growth is projected to average 6.4 percent during 2014-2016 (Table 1), based on the assumption of good weather, favourable commodity prices, FDI and aid inflows. 26. Inflation is also projected to start slowing down and to remain on a stable path in the medium term owing to the implementation of tight fiscal and monetary policies, expected stabilization of the exchange rate and good agriculture production. Further depreciation of the Kwacha even at the on-set of the tobacco auction season, could affect the inflation projections for 2013, considering the lagged effects of depreciation on non- food inflation. Food inflation is however expected to start decelerating with the onset of the harvest season. 3The contingent liabilities are mainly loans /overdrafts from banks and payment arrears while the operational losses arise from administratively set prices and tariffs that are below cost-recovery levels. 14 The Ethiopian Airlines has been announced as a new strategic investor to take over the Air Malawi (2012) Limited with the equity share of 49 percent 15 The government guaranteed loans for fuel imports pose risk to the budget, but currently this risk is being mitigated by the automatic price adjustment mechanism and the limited role played by NOCMA in fuel importation. 8 Table 2: Malawi - Central Government Operations, 2013-2016 2013 2014 2015 2016 Change Proj. Proj. Proj. Proj. 2013-2016 Revenue 39.0 37.3 36.1 35.5 3.5 Tax and nontax revenue 23.9 24.1 24.5 25.0 -1.1 Grants 15.1 13.0 11.4 10.5 4.6 o/w Budget support 6.5 5.0 4.3 3.9 2.6 Expenditure and net lending 40.2 39.1 37.6 36.8 3.4 0.0 Current expenditure 32.2 30.5 29.4 28.9 3.3 Wages and salaries 8.1 8.6 8.5 8.5 -0.4 Interest payments 2.8 2.3 1.8 1.6 1.2 Development expenditure 8.0 8.7 8.3 7.8 0.2 Part I (foreign financed) 5.0 5.5 5.0 4.6 0.4 Part II (domestically financed) 3.0 3.2 3.2 3.2 -0.2 Overall balance (including grants) -1.2 -1.8 -1.5 -1.3 0.1 Total financing (net) 0.4 1.8 1.5 1.3 -0.9 Foreign financing (net) 1.9 1.8 1.5 1.3 0.6 Domestic financing (net) -1.6 0.0 0.0 0.0 -1.6 Sources: Malawi Ministry of Finance and IMF staff estimates. 27. The short to medium term fiscal outlook presents risks, especially fiscal slippages. The medium term macroeconomic-fiscal framework shows that GoM faces a shrinking resource envelope over the medium term. It projects a reduction in grants of nearly five percentage points of GDP from a high of 15.1 percent in 2012/13, to 10.5 percent of GDP by 2015/16. Consequently the overall expenditure will have to be reduced by about 3.4 percent of GDP, which will be a challenging task. Given that the projections target a reduction in interest payments of about 1.2 percent of GDP, the outlay on goods and services in the recurrent and development budgets will have to be reduced by about 2.0 percent of GDP over the next three years. But the achievement of the fiscal targets could be affected by possible decline in revenues and the increase in social protection expenditure. Additional fiscal risks to be monitored stem from the February 2013 minimum wage increases, the emerging borrowing pressures and election related spending. 28. Given limited fiscal space and the fact that a large proportion of the budget in non-discretionary, the GoM will have to focus on measures for expenditure prioritization and controls while also seeking to improve efficiency of public expenditures. A decline in net domestic debt would entail containment of spending, buoyant tax revenues and a sizeable increase in concessional borrowing. As such, the GoM will continue to implement a number of tax policy measures and tax administration mechanisms to further boost its domestic revenue (projected to average at 24.4 percent of GDP during 2013-2016). 16 The authorities' efforts to strengthen the monitoring and supervision of SOEs and measures to reduce the contingent liability risks through reforms supported by this operation will go a long way towards achieving fiscal sustainability. The GoM will need to properly manage the fiscal risks, especially the wage demand pressures, pressure to expand social protection expenditures, and election related spending.17 16 The GoM is also putting in place measures to improve tax administration and tax collection through increased audits and use of modern ICT systems to improve revenue collection. Efforts are also being made to improve the efficiency and effectiveness of collecting non-tax revenues. 17At 8.1 percent of GDP in 2012/13, the wage bill is the single largest item of expenditure. Control of the wage bill is therefore a crucial element of the overall control of expenditures. Wages bill is projected to peak to 8.6 percent of GDP in 9 Figure 2: Fiscal Trends and Projections, 2009-2016 Fiscal Balance Financing In 2011/12, thefiscal deficit Fiscal balance (%of GDP) deterioriated and financed primarily (in percentof GDP) 10 by domestic resources... 2 2 - O 2102 12 proj 2proj proj proj 2009 2010 2011 2012 2013 2014 2015 2016 -6 - -5 prel proj proj proj. proj. N domestic finacing foreign financing -10 10 wage bill as percentage of GDP rising... Credit to the Private Sector slowing 8 . . 8.5 down... 6 .9 50 4 40 2 30 02 0t1 2009 2010 2011 2012 2013 2014 2015 2016 10 __________________ prel proj proj proj. proj. 0 2009 2010 2011 2012 2013 2014 2015 2016 - Wages and Salaries prel proj proj proj. proj. Sources: Government of Malawi and IMF Staff estimates 29. Malawi's balance of payment remains vulnerable to terms of trade shocks. The current account deficit is projected to narrow further from -4.7 percent of GDP in 2012, to about -1.6 percent of GDP in 2013, on account of significantly higher official transfers (Table 1). 18 The current account is projected to average at about 2.1 percent of GDP during 2013-2016 (figure 3) financed by aid inflows and FDI. Exports, expected to play a key role in driving economic recovery, are projected to expand from 22.5 percent of GDP in 2011 to an average of 36 percent of GDP during 2012- 2016, on the back of the projected increase in value added exports and diversified export crops, improved tourism receipts, favorable tobacco prices and strengthening of global uranium prices. Meanwhile, imports are also expected to pick up from 33.7 percent of GDP in 2011, to an average of 49 percent of GDP during 2012-2016, partly to reflect the resumption of economic activities in support of the ERP/MGDSII, including private sector investment operations in sector such as mining and tourism. FDI is also projected to rise from 1.1 percent of GDP in 2011, to an average of about 3.0 percent of GDP during 2013-2016, mainly on account of planned investments in the mining and energy sectors. 2013/14, partly reflecting the deferred salary adjustments agreed in 2012/13 and projected to stabilize at 8.5 percent of GDP. The total wage bill has been on an increasing trend increasing from about 5.4 percent of GDP in 2005/06. Over the next three years, wage bill growth is expected to average 13 percent. " About US$ 200 million has been provided in the form of budget support between July-February 2012/13. Overall, Development Partners have supported Malawi with more than $ 600 million from the time when the President came into office until the end of2012. 10 Figure 3: External Sector-trends and projections, 2009-2016 40.0 % change 0 10.0 / ..-10 20 2010 2 1 2012 2013 2014 2015 2016 I -10.0 prel proj proj proj. proj. 20 -20.0 Import Sharpdterioratinin tWeiitrfaI accountin 2012... Building up gross official reserves---- FDI and other inflows trending (In US$ millions) upwards... 800 goo 150$. 00 200 400E 200 -s-- 50 2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 prel proj proj proj. proj. prel proj proj proj. Sources: Goocrnment of Malawiand lMFStaffestimates 30. Malawi's risk of external debt distress remains moderate. The 2012 Debt Sustainability Analysis (DSA) projects that the country's debt burden indicators are likely to remain below relevant prudential thresholds under the baseline assumption of favorable macroeconomic conditions. Malawi's stock of external debt has increased from US$683 million in 2008 to about US$1,140 million in 2011. The stock of external public and publicly guaranteed (PPG) debt is expected to gradually decline in the long-term from about 30 percent of GDP in 2012 to about 13 percent of GDP in 2032. This outlook is based on prudent macroeconomic policies and a favorable external environment, but there are significant down side risks associated with a prevailing volatile political environment. The country's narrow export base, reliance on rain-fed agriculture, and weak international reserves also leaves it vulnerable to terms-of-trade and weather shocks. In particular, the external sector debt burden indicator (Present Value of debt-to-exports) breaches the sustainability threshold after an export shock. 31. Fiscal dominance has contributed to the increase in domestic debt burden indicators, whereby the PV of public debt to GDP ratio reaches about 45.5 percent in 2012 and gradually comes down to about 13.9 percent by 2032. Stress tests to public sector debt dynamics reveal the need for significant fiscal consolidation and reform of parastatal institutions. With projected lower levels of grants and limited fiscal space, the GoM will have to make more informed expenditure cuts and/or postponement of some investment spending. While the domestic borrowing risks are limited, the cost is high and both the terms and the maturity structure work against the GoM.19 32. Malawi's macroeconomic framework for 2013-2016 is deemed adequate for this operation, although with downside risks. The adequacy of the macroeconomic framework for this operation is premised on the authorities continued commitment to sound macroeconomic management and progress on structural reforms to support measures to improve controls and efficiency of government expenditure, while creating room for private " The recent spike in Treasury Bills rates and the increase uptake in the 91-days, 165 days and 365-days T-Bills reflect the uncertainly in the market and investor's preference for shorter maturities. 11 sector activity and growth. Prudent fiscal stance and the maintenance of a flexible exchange rate policy will provide key anchors for external sustainability and adequate budget support would be essential. In the medium term, Malawi will need to tackle the structural challenges to enhance the country's chances of reaching its long-term growth potential. The GoM will have to improve the efficiency of expenditures whereby similar or improved public services could be delivered with contracting expenditures. The new ECF program will also help instill fiscal discipline and ensure timely corrective actions. Notwithstanding the risks in the near term economic outlook, the macroeconomic policy framework is deemed adequate for this operation. III. GOVERNMENT'S PROGRAM AND PARTICIPATORY PROCESS 33. The Second Malawi Growth and Development (MGDS II) 2011-2016, which is the country's second medium term plan, was approved by the Cabinet in April 2012 and was launched in September 2012. The MGDS II is a medium term strategy designed to attain Malawi's long term aspirations as spelt out in its Vision 2020 and strives to foster a more inclusive job-creating growth to tackle the unemployment problem as well as reduce poverty. The strategy reflects a general consensus on the country's broad goals for growth, social equity, and governance. More specifically, the strategy recognizes that in order for all Malawians to benefit equitably from economic growth, concerted efforts to promote human and social development would need to be complemented by efforts to improve labour productivity, structural transformation and economic diversification. The MGDS II covers six thematic areas: Sustainable Economic Growth; Social Development; Social Support and Disaster Risk Management; Infrastructure Development; Improved Governance; and Cross-Cutting Issues-covering issues of gender, capacity development, population, decent employment, productive activities, economic and democratic governance. 34. The MGDS II was developed in an all-inclusive process. All levels of society, including women, the youth, private sector, civil society and development partners were all involved in the MGDS II consultation process. The process of developing the MGDS II was well integrated with the existing processes of the GoM led by the Sector Working Groups (SWGs). The monitoring of the MGDSII will also be conducted with participation from representatives of the Civil Society Organizations and Development Partners, through the various SWGs. 35. To accelerate the recovery process while mitigating the impact of the reforms on the poor and most vulnerable, the GoM also launched the Economic Recovery Plan in September 2012. This ERP is well aligned with MGDS II and its focus is on short term measures to restore macroeconomic stability while mitigating the impact on the poor and cushioning the poor and most vulnerable as well as the medium term structural reforms- agriculture, mining, tourism, infrastructure and energy to support the growth agenda. In the immediate term, the focus is on monetary, fiscal and exchange rate policies, revenue enhancing measures and expenditure control. In its proposed recovery plan, the GoM has proposed a social support package, which will be built on existing programs especially public works program to mitigate the impact of these reforms on vulnerable section of society. These programs include: Scaling up labor intensive public works programme (LIPW); Up-scaling of legume seed multiplication, agro forestry and soil conservation, multiplication of cassava cuttings and sweet potato vines and extending village savings 12 club; Up-scaling of school meals programme and vitamin A supplementation; and Up- scaling of Social Cash Transfer Programme. 36. The program supported by the DPO series has been discussed with major stakeholders, including civil society organizations (CSOs), Academia and Development Partners in the context of the MGDS II and ERP consultations. In addition, the Bank staff held a session with CSOs on the proposed reforms during the program identification mission. IV. BANK SUPPORT TO THE GOVERNMENT'S PROGRAM A. LINKS TO THE COUNTRY ASSISTANCE STRATEGY 37. The new DPO programmatic series is an integral part of the Bank's assistance 20 program to Malawi in the FY13-16 Country Assistance Strategy, which is fully aligned to the Africa Regional Strategy, the MGDS II and the ERP. The proposed operation supports progress toward the strategic objectives articulated in the FY13-FY16 CAS, which seek to contribute to Malawi's efforts toward a more diversified, competitive, shock-resilient socioeconomic growth. The CAS aims to: i) Promote Sustainable, Diversified, and Inclusive Growth; ii) Enhance Human Capital and Reducing Vulnerabilities; and, iii) Mainstreaming Governance for Enhanced Development Effectiveness. The proposed DPO series, envisaged in the CAS, seeks to bridge the short term reforms aimed at consolidating macroeconomic stabilization, and the longer term reforms that seek to improve efficiency in public expenditure, remove constraints to growth and economic diversification and improve efficiency in the provision of social safety nets. 38. This DPO series will also contribute to the implementation of the Africa Regional Strategy of the Bank. Two pillars of the DPO series aim at building the country's resilience to exogenous shocks. The policy areas under the macroeconomic and public finance management will help contribute towards the strengthening fiscal discipline to entrench macro-stability as well as improving efficiency and the transparency of the public finance management. Specifically, the focus will be strengthening budget policy framework and improving its medium-term orientation; strengthening external oversight of public finances; strengthening internal controls on public finances; enhancing efficiency in the use of public resources. These measures will help improve efficiency in the management of public finance, setting up a buffer against future exogenous external and domestic shocks, as well as improving system controls and oversight to address, among others, the accumulation of domestic payment arrears. Whereas under the pillar on laying the foundation for stronger growth and protection of the poor, the focus is on measures to enhance agricultural productivity and diversification, addressing energy constraints, improve social safety nets and build the country's statistical capacity. 39. The DPO series is also in response to the authorities' commitment to implement the macroeconomic and structural reforms as well as provide a platform for continuity of the reforms in the medium term, ensure predictability of the much needed financing as well as stability in the GoM's reform program. The choice of a programmatic DPO series is based on the fact that it supports a multi-sectoral and multi-year approach, which complements the on-going investment lending operations (see diagraph below), and 20 The new CAS FY13-16 discussed by the Board in January 2013. 13 also serves as an effective policy dialogue tool in the reform areas supported by this operation, which are also priority areas for the GoM. The links between the DPO series and the Malawi Country Program FY13-16 CAS Theme 1: Promoting Theme 2: Enhancing Theme 3: Mainstreaming Sustainable, Diversified, Human Capital and Governance for Enhanced and Inclusive Growth Reducing Vulnerabilities Development Effectiveness DPO series-Policy & Institutional reforms Pillar 1: Strengthening Pillar 2: Laying the foundation for Macroeconomic and Finance stronger growth and protection of the Mangement > 700 *Quintiles constructed among only the population of electrified households. 26. Malawi's overall electricity access rate was 7.1 percent in FY 2011 (Figure 2). This very low electricity access rate is likely a primary driver of the high consumption, as the households that would be most likely to be low consumers instead simply do not have electricity access. The poorest two income quintiles had close to zero households with electricity access, and the middle quintile only a one percent access rate. The access rate in the second- richest quintile was still only 6 percent and in the richest quintile 28 percent. Given the extremely low access rates in the poorest two quintiles, few observations were available to analyze electricity usage and expenditures (only one household in the survey from the poorest quintile and only 11 from the second-poorest quintile had electricity access), and statistics reported for those two quintiles should be taken with that in mind. Figure 2: Electricity Access Rates by Income Quintile 30% - 28% Households that have access but do not pay for 20% electricity 10% 6% 7% 0% 0% 10% 11% 0% Poorest 2nd 3rd 4th Richest All Malawi Quintile Quintile 27. A notable share of households with electricity access (approximately 12 percent) report not actually paying for their electricity. Given this, their electricity usage data is not captured in the household survey used for this analysis, and they are therefore excluded from all statistics other than access rates. 71 28. In line with the high electricity usage, electricity expenditures are also a relatively high percentage of households' overall expenditures. On average, households with electricity access devote 16 percent of their total monthly expenditures to electricity. This ranges from 27 percent in the poorest income quintile to eight percent in the richest income quintile. Figure 3: Electricity Share of Total Expenditures 40% - 30% - 27% 20% - 17% 16% 16% 11% 10% 8% 0% Poorest 2nd 3rd 4th Richest All Malawi Quintile Quintile *Quintiles constructed among only the population of electrified households. 29. The share of electricity expenditures in total expenditures likely increased somewhat from FY11 to the end of 2012, as tariffs increased faster than inflation (Figure 3). In November 2012, the average electricity share of total expenditures would have risen to 34 percent, assuming that total expenditures rose at the same pace as inflation and that electricity usage remained constant. That figure would range from an average share of 58 percent among the poorest quintile to 17 percent among the richest quintile. Electricity Subsidies: Cost and Targeting 30. Together, the tariff, cost of supply, and electricity consumption data allow an examination of the magnitude and distribution of household electricity subsidies. A household electricity subsidy is defined as the difference between the utilities' cost of supplying electricity and the amount a household paid for that electricity. As illustrated previously, per-unit subsidies were large in 2010, and persisted, albeit at slightly lower levels, through the end of 2012. 31. In FY11, ESCOM spent over 5.2 billion MWK on electricity subsidies to 52 households. This was equivalent to over half a percent of Malawi's GDP at the time. The Government of Malawi has committed to cease supporting ESCOM in order to enable it to operate on a commercial basis. Therefore, the cost of these subsidies were likely shouldered entirely by ESCOM, though it may have offset some of the cost by obtaining cross-subsidies from industrial and/or commercial customers. 32. By the end of 2012, the net cost of annual subsidies had likely increased somewhat to 5.9 billion MWK, assuming electricity consumption remained unchanged from FY11 levels. The total amount of subsidies payments would actually be somewhat larger than this, but it 52 The fiscal burden analysis assumes each domestic utility customer received a subsidy equivalent to that received by the average household with electricity access 72 would be offset by a small amount of cross-subsidy payments made by low-consuming households with postpaid meters whose average tariff is above the cost of supply. If households instead decreased their electricity usage to keep expenditures a constant share of their budgets, the net cost of subsidies would instead have decreased substantially to 1.7 billion MWK. Figure 7: Cost of Domestic Electricity Subsidies Million MWK 7 - 6 5.2 =5.2 5.9 =5.9 5 4 3 2 1 -0 -0.05 0 11 1 1 1 1 Subsidy Cross- Net Subsidy Cross- Net Subsidy Subsidy FY11 Nov. 2012 33. These subsidies are highly untargeted: 57 percent of FY11 electricity subsidies went to households in the two highest income quintiles (among households with electricity access) (Figure 8). The poorest quintile, among electrified households, received only 12 percent of total subsidy payments and the second-poorest quintile only 15 percent. Notably, essentially 100 percent of the subsidies are going to the top three income quintiles among the population as a whole, as there are almost no households in the poorest two quintiles with electricity access. Figure 8: Benefits Incidence of Electricity Subsidies 40% - 36% 30% - 21% 20% - 12% 13% 10% - 0% Poorest 2nd 3rd 4th Richest Quintile Quintile *Quintiles constructed among only the population of electrified households. 34. This highly unequal subsidy distribution is due to a combination of Malawi's flat tariff structure and the positive relationship between consumption and income. Given that all electricity units were subsidized at approximately the same rate, households that consume more electricity receive a greater total subsidy. As illustrated previously, the richer quintiles consume more electricity, on average, so those households accrued more subsidies receipts. 35. The subsidy incidence likely worsened from FY11 to November 2012, regardless of if households compensated through increased expenditures or decreased usage. If households compensated through increased expenditures, the incidence would only worsen 73 slightly: the richest two quintiles would receive 59 percent rather than 57 percent of subsidies. If households compensated through decreased usage, the incidence would worsen dramatically, largely because poorer households would have to decrease usage by more than richer households to keep their expenditure shares constant. Figure 9: Benefits Incidence of Subsidies under Various Scenarios 50% - 40% 30% 20% - 10% 0% - Poorest 2nd 3rd 4th Richest Quintile Quintile m FY11 m Nov. 2012- Constant Usage a Nov. 2012- Constant Expenditure Share *Quintiles constructed among only the population of electrified households. Options for Future Tariff Increases 36. Considering Malawi's continuing inflation and exchange rate increases and the persistent large gap between tariffs and the cost of electricity supply, ESCOM should consider increasing tariffs further. Assuming that inflation for 2013 comes in at the projected 20 percent (just over half of its 2012 value) and that the exchange rate also increases by about half of tis 2012 increase (i.e., about 60 percent), the cost of supply will rise by another 50 percent by the end of 2012. Given that tariffs are already well below the cost of supply, an additional 50 percent increase in the cost means tariffs would have to be increased by almost 230 percent to meet the cost of supply. Such an increase is unlikely to be feasible, for a variety of reasons, so the following analysis considers more likely increases. 37. There are two broad options for the tariff adjustment: a flat increase or a differentiated increase that allows lower tariffs for lower consumption levels (Figure 10). The flat increase would increase all tariffs by the same rate, as in the previous three tariff changes. The scenario illustrated here increases tariffs by 70 percent. The differentiated increase could come in several forms; the one illustrated here increases tariffs more for higher-consuming households than for lower-consuming households, thus creating a "lifeline" tariff structure that charges less per unit to households that consume less electricity. Specifically, the scenario considered increases tariffs by 40 percent for households consuming under 200 kWh per month, raises them by 70 percent for households consuming between 200 and 500 kWh per month, and raises them by 90 percent for households consuming over 500 kWh per month. 74 Figure 10: Average Effective Tariff under Various Scenarios MWK/kWh 40- 40 -------------------------------------- 35 30 25 20 15 10 5 0 0 100 200 300 400 500 600 700 800 kWh per Month - Flat Increase - Lifeline ---Cost of Supply (2013) 38. The latter "lifeline" option would likely have several benefits over the "flat" option. It would mitigate the impact of the tariff increase on the lower-consuming households (who tend to be poorer), as they would face a smaller increase than under the "flat" scenario. It would improve the distribution of subsidies by income, as lower-consuming (generally poorer) households would receive a greater subsidy per unit of consumption than the higher-consuming households (whereas, with the "flat" option, all households would continue to receive approximately the same subsidy per unit). It may also increase energy efficiency and reduce the strain of peak electricity demand on the electricity system, as the differentiated structure would incent all households to consume less. 39. It would, however, have two primary downsides, though they are likely outweighed by the benefits. First, to achieve the same average tariff with the differentiated increase as with the flat increase, tariffs would have to be raised even more for the highest-consuming households than under the flat increase. In the examples considered here, all households experience 70 percent increase under the "flat" option, and households consuming over 500 kWh per month would experience a 90 percent increase under the "lifeline" option. Second, it is more complicated to design a cost-recovery tariff under a differentiated structure than under a flat structure. Under a flat structure, all households pay roughly the same tariff, so that tariff can simply be set equal to the long-term marginal cost of electricity supply. Under a differentiated structure, the utility must ensure the weighted average tariff equals the long-run cost of supply, which can require detailed knowledge of consumer consumption patterns. Impact of Potential Future Tariff Changes 40. As tariffs under either scenario would increase more than expected 2013 inflation, the increases would have a notable impact on the share of electricity in total household expenditures and/or households' electricity consumption, though the lifeline tariff would slightly cushion that impact for the poorest households (Figures 11 and 12).sa If total expenditures rise with inflation, and electricity consumption remains constant, the average electricity share in total expenditures would rise to 47 or 48 percent under the flat or lifeline 5 In the period between the tariff increase and the end of 2013, the impact would likely be even greater, as household budgets likely will not fully inflate to the levels assumed here until then. 75 scenario, respectively. Under the flat increase, expenditure shares would range from an average of 82 percent in the poorest quintile to 24 percent in the richest. Under the lifeline increase, those shares would be 78 and 26. If households instead chose to reduce electricity consumption to keep the electricity share of their expenditures constant, they would have to reduce consumption from an average of 140 kWh per month in November 2011 to 83 kWh under the flat increase or 100 kWh under the lifeline increase. Figures 11 and 12: Expenditure Share of Electricity and Electricity Usage under Various Scenarios 100% kWh/Month 280 80% 240 200 60% 160 40% 120 80 20% 40 0% 0 - Poorest 2nd 3rd 4th Richest Malawi Poorest 2nd 3rd 4th Richest Malawi Quintile Quintile Average Quintile Quintile Average o Nov. 2012 Share E Share under 25% increase E Share under Lifeline a Nov. 2012 Share a Usage under 25% increase E Usage under Lifeline *Quintiles constructed among only the population of electrified households. 41. The increase in electricity priceS54 beyond inflation would also pass through to other household consumption goods, which would put additional pressure on household budgets. This impact would be felt by both households with and without electricity access - though households without electricity access are likely consuming fewer of the goods whose prices depend significantly on electricity prices (e.g., manufactured goods) than households with electricity access. A study in Australia found that, if producers passed on the full electricity price increase to consumers, prices in other sectors (e.g., food, alcohol, tobacco, clothing, furnishings, transport, etc.) would rise by about 1/33th as much as electricity prices.55 This is a very high upper-bound, as (a) it is unlikely that there would be full pass-through to consumers in most sectors and (b) electricity may be a greater input to consumer goods in a developed country such as Australia than in Malawi. The degree to which this impacts household budgets would also depend on the share of these other goods in their total expenditures. 42. Although both proposed increases increase tariffs by a greater percentage than that expected for costs, only the increases modeled under the lifeline scenario would lessen the gap between tariffs and the cost of supply and thereby ease the cost of subsidies for ESCOM. If households maintain their consumption levels, the annual net fiscal cost of subsidies would fall from 5.9 billion MWK to 5.7 billion MWK under the modeled lifeline increase and would rise to 6.3 billion MWK under the modeled flat increase. If consumers kept expenditure shares constant and reduced consumption, both increases would significantly lessen ESCOM's subsidy burden. 54 Assuming ESCOM increases industrial and commercial tariffs at the same time at it increases household tariffs 5 CSIRO and AECOM (2011) 76 43. The distribution of subsidies would improve under the lifeline increase to better than both the November 2012 and FY11 distributions; under the flat increase, however, it is regressive 2012 (Figure 13). Because the lifeline increase targets subsidies to lower- consuming households who also tend to be the poorer households, it would improve the benefits incidence notably. The poorest two income quintiles would receive 26 percent of total subsidies, an increase from the 22 percent of November 2012. In contrast, under the flat increase, the poorest two quintiles would receive only 21 percent of subsidy payments. The richer quintiles still receive the bulk of subsidy payments, however, as will continue to be the case as long as higher levels of electricity consumption continue to be subsidized. Figure 13: Distribution of Subsidy Benefits under Various Scenarios 50% 40% 30% 20% 10% - 0% - Poorest 2nd 3rd 4th Richest Quintile Quintile N Nov. 2012 U Flat Increase Lifeline Increase *Quintiles constructed among only the population of electrified households. The table below summarizes the potential impacts of the two scenarios. Nov. 2012 "Flat" Increase "Lifeline" Increase If consume 1-200 kWh, increase by 40/o Tariff Change If consume 201-500, increase by 70% over Nov. 2012 tariffs All increase by 70% If consume 701+, increase by 90% Avg. Expenditure Share of Total Budget assuming HHs keep kWh constant 34% 48% 47% Avg. Monthly kWh assuming HHs keep expenditure share constant 140 89 101 Total Cost of Subsidies (billion MWK) assuming HHs keep kWh constant 5.87 6.29 5.73 Share of Subsidies Given to Poorest 40 Percent of electrfied households 22% 21% 26% 77 Annex 5: Malawi At A Glance Sub- Key Development Indicators Saharan Low Malawi Africa income Age distribution, 2010 P(2011) Male (..) Fenale (..) Population, mid-year(millions) 14A 812 764 7 Surface area (thousand sq. km) 118 24,243 15,551 Populationgrowth(%) 3.1 2.5 2.1 Urban po pulation (%of total population) 15 36 27 45-49 30-34 GNI (Atlas method, US$ billions) 4.7 897 338 GNI per capita (Atlas method, US$) 330 1,104 442 GN I per capita (P P P,international $) 830 2,033 1,173 0-4 _ b6. 15 10 5 0 5 10 GDP growth (%) 9.0 5.0 5.6 percent of total population GDP per capita growth (%) 5.7 2.4 3.5 (most recent estimate, 2005-2011) Poverty headcount ratio at $1.25aday(PPP,%) 74 48 Povertyheadcount ratio at $2.00aday(PPP,%) 90 69 Under-5 mortality rate (per 1,000) Life expectancy at birth (years) 53 53 58 Infant mortality(per 1,000 live births) 60 80 73 25 Child malnutrition (%of children under5) 12 .. 20D0 F Adult literacy,male (%of ages 15andolder) 81 67 66 1w0 Adult literacy, female (%of ages 15andolder) 67 48 49 Gross primaryenrollment,male(%of agegroup) 130 154 107 100 Gross primaryenrollment, female (%of age group) 134 94 99 50 Access to an improved water source (%of population) 80 58 62 1 80 58 6 O 199 1995 2000 2010 Access to improved sanitation facilities (%of population) 51 29 34 DMalawi O#N/A Net Aid Flows 1980 1990 2000 2011 a (US$ millions) Net ODA and official aid 141 500 446 924 Growth of GDP and GDP per capita (%) Top 3 donors (in 2010): n.a. 21 45 49 140 20 n.a. 25 51 97 147 15 n.a. 3 21 59 88 10 5 Aid(%ofGNI) 12.4 27.2 26.1 21.7 o Aid per capita (US$) 23 53 40 66 -5 -10 Long-Term Economic Trends -15 95 05 Consumer prices (annual %change) 11.8 118 -93.9 8.4 GDP implicit deflator(annual%change) 15.8 10.7 30.5 8.4 GDP - GDP per cpita Exchange rate (annual average, local per US$) 0.8 2.7 59.5 1412 Terms of trade index (2000 = 100) .. 145 100 111 1980-90 1990-2000 2000-11 (average annual growth %) Population, mid-year(millions) 6.2 9A 11.2 14.4 4.1 1.8 2.8 GDP (US$ millions) 1238 1,881 1744 5,031 2.5 3.7 4.5 (%ofGDP) Agriculture 43.7 45.0 39.5 32.1 2.0 8.6 2.3 Industry 22.5 28.9 17.9 18.5 2.9 2.0 6.7 Manufacturing 13.7 19.5 12.9 12.3 3.6 0.5 3.9 Services 33.7 26.1 42.5 49.4 3.3 1.6 3.5 Household final consumption expenditure 69.9 71.5 81.6 69.1 - 2.8 General gov't final consumption expenditure 19.3 15.1 14.6 19.6 16.8 Gross capital formation 24.7 23.0 13.6 25.6 .. .. 23.6 Exports of goods and services 24.8 23.8 25.6 24.6 .. .. 12.4 Imports of goods and services 38.8 334 35.3 39.0 .. .. 14.5 Gross savings .. . Note: Figures in italics are for years otherthan those specified. 2011data are preliminary. ..indicates data are not available. 'a. Aid data are for 2010. Development Economics, Development Data Group (DECDG). 78 V Malawi Balance of Payments and Trade 2000 2011 (US$millons)Governance indicators, 2000 and 2010 (US$ millions) Total merchandise exports (fob) 392 934 Total merchandise imports (cif) 460 -1,411 Voiceand accountablity Net trade in goods and services -243 -911 Politicai stability Current account balance -165 -257 as a %ofGDP -9.5 -5.1 Regulatory quality Workers' remittances and Rule of hw compensation of employees (receipts) 1 .Contro of corrupton Central Government Finance G 2010 Coutrys Percentile rank(0-100) 02000 higher salb inply bltitr yatigs (%l of GaP) Current revenue (including grants) 17.1 29.8 Soume: Kaufrann-Kraay-Wubstruzi, World Bank Tax revenue 15.7 14.3 Current expenditure 19.9 28.3 Technology and Infrastructure 2000 2010 Overall surplus/deficit -13.9 -5.1 Paved roads (%of total) .. 45.0 Highest marginal tax rate (%) Fixed line and mobile phone Individual 38 30 subscribers (per 100 people) 1 12 Corporate 38 35 High technologyexports (%of manufactured exports) 2.0 1.9 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 2,719 1,144 Agricultural land (%of land area) 50 58 Total debt service 64 39 Forest area (%of land area) 37.8 36.1 Debt relief (HIPC, M DRI) 1,375 914 Terrestrial protected areas (%of land area) 15.0 15.0 Total debt (%of GDP) 156.0 22.7 Freshwater resources percapita (cu. meters) 1,364 1,188 Total debt service (%of exports) 13.2 2.7 Freshwater withdrawal (billion cubic meters) Foreign direct investment (net inflows) 26 16 C02 emissions per capita (mt) 0.08 0.09 Portfolio equity(net inflows) 0 0 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) Composition of total external debt, 2010 Energy use per capita (kg of oil equivalent) Pr ,61 IBRD, 0 IDA, 243 Bilateral, 138 World Bank Group portfolio 2000 2010 (US$ millions) IBRD Other Iti- I 248 Total debt outstanding and disbursed 9 0 Inter,3 Disbursements 0 0 Principal repayments 8 0 Interest payments 1 0 US$ millions IDA Total debt outstanding and disbursed 1,592 138 Disbursements 97 12 Private Sector Development 2000 2010 Total debt service 27 1 Time required to start a business (days) - 39 IFC (fiscalyear) Cost to start a business (%of GNI per capita) - 108.0 Total disbursed and outstanding portfolio 3 11 Time requiredto registerproperty(days) - 88 ofwhichlFCownaccount 3 13 Disbursements for IFC own account 2 12 Ranked as a majorconstraint to business 2000 2010 Portfolio sales, prepayments and (%of managers surveyed who agreed) repayments for IFC own account 0 0 n.a. .. 27.6 n.a. .. 19.2 M IGA Gross exposure - - Stock market capitalization(%ofGDP) 41.4 Newguarantees - - Bank capital to asset ratio (%) .. -. Note: Figures in italics are for years other than those specified. 2011ldata are preliminary. 4/10/13 .. indicates data are not available. - indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 79 r Millennium Development Goals Malawi With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, -'- 2 years) M alawi Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2010 Poverty headcount ratio at $1.25 a day (PPP,%ofpopulation) .. .. 83.1 73.9 Poverty headcount ratio at national poverty line (%of population) .. .. 65.3 52.4 Share of income or consumption to the poorest qunitile (%) .. .. 4.8 7.0 Prevalence of malnutrition (%of children under 5) 24.4 26.5 21.5 15.5 Goal 2: ensure that children are able to complete primary schooling Primaryschool enrollment (net, %) 99 96 Primarycompletion rate (%of relevant agegroup) 28 52 65 64 Secondaryschool enrollment (gross, %) 17 22 32 31 Youth literacy rate (%of people ages 15-24) 76. Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primaryand secondary education (%) 81 89 93 99 Women employed inthe nonagricultural sector (%of nonagricultural employment) 11 11 Proportion of seats held bywomen in national parliament (%) 10 6 9 13 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortalityrate (per 1,000) 227 204 164 102 Infant mortality rate (per 1,000 live births) 134 120 98 63 Measles immunization (proportion of one-year olds immunized,%) 81 90 73 88 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 1,100 1000 840 630 Births attended by skilled health staff (%of total) 55 .. 56 54 Contraceptive prevalence (%of women ages 15-49) 13 22 31 41 Goal 6: halt and begin to reverse the spread of HIVIAIDS and other major diseases Prevalence of HIV (%of population ages 15-49) 7.2 13.9 14.2 11.2 Incidence of tuberculosis (per 100,000 people) 326 462 467 273 Tuberculosis case detection rate ('/ allforms) r # N/A F' # N/A P #N/A ' # N/A Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (%of population) 41 52 62 79 Access to improved sanitation facilities (%of population) 39 42 46 50 Forest area (%of land area) 41.3 .. 37.8 36.1 Terrestrial protected areas (%of land area) 15.0 15.0 15.0 15.0 C02 emissions (metric tons per capita) 0.1 0.1 0.1 0.1 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) .. Goal 8: develop a global partnership for development Telephone mainlines (per 130 people) 0.3 0.3 0.4 0.8 Mobile phone subscribers (per 130 people) 0.0 0.0 0.4 10.8 Internet users (per 100 people) 0.0 0.0 0.1 0.7 Computerusers (perV0people) r #N/A ' #N/A P #N/A ' #N/A Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 20 100 -75- 75 25f 2000 2002 2005 2 E O , rL 1990 15 2000 2010 2000 20D5 - Primary net enrolknent ratio OFixed + mobile subscribers - e-- Ratio ofgirds to boys in primary & secondary OMalawi 0 #N/A mInternet uets education 0Itre sr Note: Figures in italics are for years other than those specified. ..indicates data are not available. 4/10/13 Development Economics, Development Data Group (DECDG). 80 Table 1: Selected Economic Indicators, 2007-16 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Prel proj. Proj. Proj. Proj. National accounts and prices (percent change, unless otherwise indicated) GDP at constant market prices 9.5 8.3 9.0 6.5 4.3 1.9 5.5 6.1 6.5 6.7 Nominal GDP (billions of kwacha) 510.5 601.0 710.2 812.4 880.9 1,056.3 1,310.5 1,492.4 1,675.5 1,857.6 Nominal GDP per capita (US$) 252.5 288.1 329.6 343.5 346.8 254.7 219.2 231.9 245.5 258.9 Consumer prices (end of period) 7.5 9.9 7.6 6.3 9.8 34.6 11.8 5.8 5.4 4.6 Consumer prices (annual average) 8.0 8.7 8.4 7.4 7.6 21.3 20.2 8.1 5.8 4.9 Central government (percent of GDP on a fiscal year basis) Revenue 30.7 29.4 32.1 33.8 32.1 26.5 39.0 37.3 36.1 35.5 Tax and nontax revenue 18.0 18.9 20.5 23.5 24.5 22.1 23.9 24.4 24.7 25.0 Grants 12.7 10.5 11.6 10.3 7.6 4.4 15.1 13.0 11.4 10.5 Expenditure and net lending 31.9 30.0 37.8 33.8 35.0 34.9 40.2 39.1 37.6 36.8 Overall balance (excluding grants) -13.9 -11.2 -17.3 -10.3 -10.5 -12.8 -16.3 -14.8 -13.0 -11.8 Overall balance -1.2 -0.6 -5.7 0.1 -2.9 -8.4 -1.2 -1.8 -1.5 -1.3 Primary balance 2.3 1.6 -3.0 2.9 -0.2 -5.9 1.6 0.5 0.3 0.3 Foreign financing 1.0 2.5 2.0 0.9 1.3 1.6 1.9 1.8 1.5 1.3 Domestic financing -0.3 0.5 3.7 -0.9 1.7 6.7 -1.6 0.0 0.0 0.5 External sector (US$ millions, unless otherwise indicated) Exports (goods and services) 893.2 1,043.2 1,050.2 1,360.4 1,408.7 1,359.8 1,573.1 1,718.3 1,849.5 1,988.5 Imports (goods and services) 1,468.3 2,091.7 1,961.1 2,425.4 2,236.2 2,274.9 2,356.0 2,520.7 2,690.7 2,890.9 Usable gross official reserves 216.5 239.0 140.5 279.6 190.2 215.4 402.8 555.5 692.8 797.7 (months of imports) 1.2 1.5 0.7 1.5 1.0 1.1 1.9 2.5 2.9 3.1 Current account (percent of GDP) 1.0 -9.7 -4.8 -1.3 -5.9 -4.7 -1.6 -1.8 -2.2 -3.0 Current account, excl. official transfers (percent of GDP) -12.8 -20.8 -14.2 -17.0 -12.2 -18.8 -17.2 -16.1 -15.4 -15.3 Real effective exchange rate (percent change) -3.0 20.4 9.5 -6.0 -3.3 ... ... ... ... ... Overall balance (percent of GDP) 2.0 -1.6 -2.0 2.2 -1.9 0.6 3.5 3.4 3.3 2.8 Terms of trade (percent change) -0.2 21.5 7.7 3.0 -17.1 -2.4 2.5 3.0 2.7 2.2 Usable gross official reserves 216.5 239.0 140.5 279.6 190.2 215.4 402.8 555.5 692.8 797.7 (months of imports) 1.2 1.5 0.7 1.5 1.0 1.1 1.9 2.5 2.9 3.1 Debt stock and service (percent of GDP, unless otherwise indicated) External debt (public sector) 15.8 15.8 16.6 15.9 16.2 22.7 26.2 24.3 22.6 21.1 NPV of debt (percent of exports) 0.0 57.1 44.6 48.1 53.2 47.0 42.2 38.2 34.4 Sources: Malawian authorities, IMFand World Bankstaff estimates. 81 Table 2: Central Government Operations, 2007-2016 (Percent of GDP) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Prel. Proj. Proj. Proj. Proj. Revenue 30.6 29.4 32.1 33.8 32.1 26.5 39.0 37.3 36.1 35.5 Tax and nontax revenue 18.0 18.9 20.5 23.5 24.5 22.1 23.9 24.1 24.5 25.0 Tax revenue 16.5 17.3 18.2 18.6 20.8 19.4 20.6 21.3 21.7 22.2 Nontax revenue 1.5 1.5 2.3 4.9 3.8 2.7 3.3 2.8 2.8 2.8 o/w maize sales receipts 0.0 0.2 0.0 0.4 0.0 0.0 0.0 0.1 0.1 0.1 Grants 12.5 10.5 11.6 10.3 7.6 4.4 15.1 13.0 11.4 10.5 o/w Budget support 1.9 2.3 3.0 4.5 1.8 0.0 6.5 5.0 4.3 3.9 Expenditure and net lending 31.9 30.0 37.8 33.8 35.0 34.9 40.2 39.1 37.6 36.8 Current expenditure 20.3 18.6 30.6 25.7 27.2 26.9 32.2 30.5 29.4 28.9 Wages and salaries 5.1 5.4 5.7 5.9 6.9 7.2 8.1 8.6 8.5 8.5 Interest payments 3.5 2.2 2.7 2.8 2.7 2.5 2.8 2.3 1.8 1.6 Goods and services 6.6 5.5 13.1 11.0 11.2 9.8 12.0 11.3 10.9 10.8 o/wGenericgoodsandservices 4.7 3.1 6.7 5.8 4.8 5.5 4.7 4.4 4.1 3.9 Subsidies and other current transfers 5.1 5.5 9.0 6.0 6.4 5.9 8.3 7.4 7.4 7.4 o/w Fertilizer and seed subsidy 2.0 2.7 5.8 2.9 2.6 2.5 4.4 3.5 3.5 3.5 Arrears adjustment 0.1 0.0 0.1 0.0 0.0 1.5 0.8 0.9 0.8 0.7 Development expenditure 11.5 11.5 7.1 7.9 7.7 8.0 8.0 8.7 8.3 7.8 Part I (foreign financed) 9.0 8.1 4.9 4.5 3.7 3.6 5.0 5.5 5.0 4.6 Part II (domestically financed) 2.4 3.4 2.2 3.4 3.9 4.4 3.0 3.2 3.2 3.2 Overall balance (excluding grants) -13.9 -11.2 -17.3 -10.3 -10.5 -13.0 -11.6 -14.7 -12.9 -12.2 Overall balance (including grants) -1.3 -0.6 -5.7 0.1 -2.9 -8.4 -1.2 -1.8 -1.5 -1.3 Total financing (net) 1.3 0.6 5.7 -0.1 2.9 8.4 0.4 1.8 1.5 1.3 Foreign financing (net) 1.0 2.5 2.0 0.9 1.3 1.6 1.9 1.8 1.5 1.3 Domesticfinancing (net) -0.3 3.3 3.7 -0.9 1.7 6.7 -1.6 0.0 0.0 0.0 Memorandum items: Nominal GDP 467.2 555.8 655.6 761.3 847.0 969.0 1,183.0 1,401.0 1,584.0 1,772.0 Net domesticdebt 56.6 92.9 116.9 110.2 138.0 188.0 166.0 166.0 170.0 163.0 Net domesticdebt, percent of GDP 0.0 0.0 17.8 14.5 16.0 20.0 14.0 12.0 11.0 9.0 Sources: Malawi Ministry of Finance and IMF staff estimates. 82 Table 3: Balance of Payment, 2009-2016 (Percent of GDP) 2009 2010 2011 2012 2013 2014 2015 2016 Prel. Prel. Proj. Proj. Proj. Proj. Current account balance (including grants) -4.8 -1.3 -5.9 -4.7 -1.6 -1.8 -2.2 -3.0 Merchandise trade balance -12.6 -13.8 -11.2 -15.9 -14.0 -12.8 -12.2 -12.0 Exports 18.6 22.9 22.5 29.6 38.2 38.2 37.7 37.4 Of Mich: Tobacco 10.0 12.7 8.6 11.4 15.9 15.2 14.7 14.2 Uranium 0.2 2.1 2.1 3.7 4.5 4.5 4.5 4.6 Imports -31.3 -36.7 -33.7 -45.7 -52.5 -52.2 -51.0 -49.9 Of Mich: Petroleum -3.3 -3.4 -3.0 -4.1 -4.6 -4.1 -3.8 -3.5 Serices balance -6.6 -8.0 -5.6 -9.0 -10.4 -10.3 -10.1 -9.9 Interest public sector (net) -0.1 -0.1 -0.1 -0.2 -0.3 -0.3 -0.4 -0.4 Receipts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Payments -0.1 -0.1 -0.1 -3.0 -0.3 -0.4 -0.4 -0.4 Other factor payments (net) -1.1 -1.9 -2.0 -3.0 -3.5 -3.6 -3.5 -3.4 Nonfactor (net) -5.4 -6.0 -3.5 -5.8 -6.5 -6.4 -6.2 -6.2 Receipts 2.3 2.3 2.6 2.5 3.0 2.9 2.8 2.8 Payments -7.7 -8.2 -6.1 -8.3 -9.5 -9.3 -9.1 -9.0 Unrequited transfers (net) 14.4 20.4 10.9 20.2 22.8 21.3 20.1 18.9 Private (net) 5.1 4.7 4.6 6.2 7.2 7.0 6.8 6.7 Receipts 5.3 5.0 4.8 6.5 7.6 7.4 7.2 7.1 Payments -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -0.4 Official (net) 9.4 15.7 6.4 14.0 15.6 14.3 13.3 12.2 Receipts 9.4 15.8 6.4 14.1 15.6 14.4 13.3 12.3 Budget support 1.6 6.0 0.0 4.3 4.3 4.3 4.1 3.8 Project related' 7.8 9.8 6.4 9.7 11.3 10.0 9.2 8.5 Payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Financial account balance 4.7 5.2 2.8 5.3 5.1 5.2 5.5 5.8 Medium- and long-term flows (net) 3.0 1.7 1.9 1.8 2.1 1.7 1.5 1.3 Disbursements 1.5 1.9 2.2 2.2 2.8 2.4 2.2 2.0 Budget support 0.6 0.0 0.0 0.0 0.4 0.0 0.0 0.0 Project support 0.4 1.9 0.9 1.8 2.4 2.4 2.2 2.0 Other medium-term loans 0.4 0.0 1.2 0.4 0.0 0.0 0.0 0.0 Amortization -0.2 -0.3 -0.3 -0.4 -0.6 -7.0 -0.7 -0.7 SDR allocation 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign direct investment and other inflows 1.1 2.9 1.1 1.5 2.8 3.3 3.7 4.2 Short-term capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Commercial banks net foreign assets 0.5 0.6 -0.2 2.0 0.2 0.2 0.2 0.2 Errors and omissions -1.8 -1.7 1.2 0.0 0.0 0.0 0.0 0.0 Overall balance -2.0 2.2 -1.9 0.6 3.5 3.4 3.3 2.8 Financing 2.0 -2.2 1.9 -0.6 -3.5 -3.4 -3.3 -2.8 Gross reserves (- increase) 2.0 -2.6 1.9 -1.3 -4.9 -3.7 -3.0 -2.1 LiabilitieS2 0.0 0.4 0.0 0.9 1.4 0.2 -0.3 -0.7 Of Mich: IMF (net) 0.0 0.4 0.0 0.9 1.4 0.3 -0.2 -0.6 Purchases/drawings 0.0 0.4 0.0 1.0 1.6 1.0 0.4 0.0 Repurchases/repayments 0.0 0.0 0.0 0.1 0.2 0.6 0.6 0.6 Memorandum items: Gross official reserveS3 2.8 5.2 3.4 5.1 10.6 13.3 15.2 16.1 Months of importS4 0.7 1.5 1.0 1.1 1.9 2.5 2.9 3.1 Current account balance (percent of GDP) Excluding official transfers -14.2 -17.0 -12.2 -18.8 -17.2 -16.1 -15.4 -15.3 Including official transfers -4.8 -1.3 -5.9 -4.7 -1.6 -1.8 -2.2 -3.0 Value of exports of goods and services (perce 0.7 29.5 3.6 -3.5 15.7 9.2 7.6 7.5 Value of imports of goods and services (perce -6.2 23.7 -7.8 1.7 3.6 7.0 6.7 7.4 REER (percent change) 9.5 -6.0 -3.3 ... ... ... ... ... Overall balance (percent of GDP) -2.0 2.2 -1.9 0.6 3.5 3.4 3.3 2.8 Terms of trade (percent change) 7.7 1.9 -17.1 -2.4 2.5 3.0 2.7 2.2 Sources: Malawian authorities; and IMF staff estimates and projections. 83 IBRD 33440R1 32 34°E 36° Mbeya TANZANIA Twnduma MALAWI Karonga 10°S Ghisenga 10°S To Muyombe 26 m)A 'Chilumba, Chelinda Mkondowe5 Muyombe L gstonia Katumbe Rumphi Ruarwe Kafule u EuthimizýN ht ZAMBIA 'NORTFHIN ata 1 Bay ZAMBIAMOZAM zim a D' Chinteche r---iLA 12°$ 12'S Nkhungaoh Kalulumna Nkhotakotaý Kasungu' TOZAMBI UE Ntchisi J DowaMak1 TO Mchinji41 ma Iii- chipata• SalIma° R DLILONGWE Namnitete Monk ./TO Cuamnbo . -. / Fuorcungo Dedza .---g - S \OU T HE RN MO Z A MBI Q U E . tcheu,Balaka .Cuamrba 32T ko, achinga--. Lake, M A~~T L, ' Lirangwe ob 10*e* /wanza Chiradz lu o CITIES AND TOWNS f' Blantyre• Phalombe DISTRICT CAPITELS* 16°024Chikwawa Mulan a wa 0°s 9 REGION CAPITALS Thyolo n \ S NATIONAL CAPITAL Um'rb '-t RIVERS .Tab MAIN ROADS . Monre RAILROADS . DISTRICT BOUNDARIES °Nlsanje 0 20 4061010 ionfr - REGION BOUNDARIES l l i |1 . This psap uce by heMap Design Unit of The World&Ba 0 20 40 60 Miles\ ---INTERNATIONAL BOUNDARIES °h i"°'"o"s an" an ote naoato T *District names are identical to the District Capitals. G ~ r judgm te leastats olanyk tory, or any 3° MAY 2012