Malawi
Debt Relief at the Heavily Indebted Poor Countries Initiative Completion Point and Under the Multilateral Debt Relief Initiative

Malawi has made satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP) for at least one year, and maintained satisfactory macroeconomic policies as evidenced by its performance under a program supported by the Poverty Reduction and Growth Facility (PRGF) over the last fiscal year 2005/2006. The completion point analysis shows the actual outturn to be 245 percent of exports. After additional voluntary bilateral debt relief, this ratio declines to 229 percent of exports. The paper assesses the sensitivity of debt indicators to changes in key economic variables.

Abstract

Malawi has made satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP) for at least one year, and maintained satisfactory macroeconomic policies as evidenced by its performance under a program supported by the Poverty Reduction and Growth Facility (PRGF) over the last fiscal year 2005/2006. The completion point analysis shows the actual outturn to be 245 percent of exports. After additional voluntary bilateral debt relief, this ratio declines to 229 percent of exports. The paper assesses the sensitivity of debt indicators to changes in key economic variables.

I. Introduction

1. This paper presents an assessment of Malawi’s progress in meeting the completion point triggers determined at the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. It seeks approval from the Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF) of Malawi’s completion point under the Initiative, including waivers for two of the completion point triggers, revision and topping-up of HIPC assistance.

2. Malawi reached the enhanced HIPC Initiative decision point in December 2000.1 At the decision point, HIPC assistance required to lower Malawi’s net present value (NPV) of debt-to-exports ratio to the HIPC threshold of 150 percent was estimated at US$643 million in NPV terms based on end-1999 debt data. Employing the principle of equal burden sharing, all creditors were expected to reduce the NPV of their claims on Malawi by a common reduction factor of 43.7 percent, after full use of traditional debt-relief mechanisms. For the IDA and the IMF, the resulting commitments amounted to US$331 and US$30 million in NPV terms, respectively. During the interim period between the decision point and completion points, the IMF provided debt relief of US$14 million in NPV terms, while IDA provided relief of US$100 million. Malawi has also benefited from interim assistance granted by the African Development Bank, a number of other smaller multilateral creditors and Paris Club creditors. Total interim assistance to Malawi was about $151 million in NPV terms.2

3. The paper is organized as follows: Section II assesses Malawi’s performance in meeting the requirements for reaching the completion point under the enhanced HIPC initiative, as set out in the decision point document. Section III reviews the status of creditor participation and the delivery of debt relief to Malawi under the enhanced HIPC Initiative and presents the results of the debt sustainability analysis (DSA) based on end-2005 debt data and parameters. This section also assesses the sensitivity of debt indicators to changes in key economic variables. Section IV discusses the case for a topping-up of HIPC assistance. Sections V and VI present the conclusions and issues for discussion by the Boards, respectively.

II. ASSESSMENT OF COMPLIANCE WITH REQUIREMENTS FOR REACHING COMPLETION POINT

4. The decision point document sets out the conditions for reaching the completion point. These include: (i) preparation of a full Poverty Reduction Strategy Paper (PRSP) and its satisfactory implementation for one year; (ii) maintenance of macroeconomic stability and satisfactory implementation of a PRGF-supported program; and (iii) implementation of key structural and governance triggers aimed at strengthening public expenditure management, raising the quality of education, improving health outcomes, fighting HIV/AIDS, strengthening land and credit markets, and creating an effective safety net system. This section assesses the progress in the implementation of these completion point requirements. In addition, it also presents how Malawi has used the budgetary savings from interim relief.

5. In the view of the staffs of IDA and the IMF, Malawi has made satisfactory progress in meeting the conditions for the completion point. All but two of the completion point triggers have been implemented (Box 1). The first of these two triggers required the share of health expenditure to be at least 13 percent of the discretionary recurrent budget. The second trigger required ensuring a yearly enrolment of 6,000 students for teacher training. Based on progress in implementing a broader strategy for raising the quality of education and improving health outcomes, as discussed below, it is recommended that Executive Directors accept the government’s request for granting waivers for the non-observance of these two completion point triggers.

A. Implementation of Poverty Reduction Strategy

6. The preparation of Malawi’s first PRSP in 2001 reflected a highly participatory process that helped in identifying the key development challenges that faced the country and its implementation provided a good basis on which to improve poverty outcomes. The government is now in the process of finalizing its second-generation strategy - the Malawi Growth and Development Strategy (MGDS) which places much greater emphasis on growth as a basis for poverty reduction (Box 2).

Summary Assessment of Malawi’s Progress in Implementing the Completion Point Triggers3

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Enhancing Growth in the Malawi Growth and Development Strategy

Malawi Growth and Development Strategy (MGDS) reflects the authorities policy framework to reduce poverty through economic growth and empowerment of the poor. There are five strategic themes proposed: (i) achieving sustainable economic growth and economic empowerment, (ii) protection of the most vulnerable and enabling them to contribute to the economy, (iii) creating a healthy educated and well nourished productive population, (iv) infrastructure development as a pre-requisite for achieving the objectives of economic growth and social development, and (v) good governance including sound economic environment, high quality service delivery, effective institutions and rule of law, an efficient and effective public sector, and reduction in corruption.

The authorities plan to enhance growth by focusing on sectors that are identified as key for the medium and long term growth. In the medium term, the driving force behind growth is the agriculturally-based core sectors of the economy (tea, tobacco and sugar) by way of further integration of these sectors and smallholders into agro-processing to meet domestic and foreign demand. The authorities envision expanding and diversifying output and exports to meet demand in the region through irrigation, large scale farming, infrastructure expansion and rationalizing fees and tax policy toward cash crops and eliminating food insecurities. To enable private-sector led growth in these sectors, the authorities plan to improve access to financing (micro-finance schemes) and secure land registration.

In the long-term the strategy identifies tourism, mining, garment/cotton, and manufacturing as sources of high growth sectors and employment generators in the medium term. To enhance the tourism sector and attract FDI in the sector, the authorities plan to improve infrastructure and communication, enforce the regulatory framework for quality, standard and land access for tourism development. To increase mining output and value added the strategy aims at improving the technology and infrastructure to help create market outlet, and review of tax policy. While in the garment sector, the goal is to increase local content of production, develop local textile industry geared toward exports and negotiating trade opportunities. In manufacturing, the goal is to improve quality and productivity through training of workers, better infrastructure, investment incentives and build capacity to evaluate own standards.

7. Malawi’s full PRSP was adopted in April 2002 with implementation planned to cover the period 2002/03 – 2004/05. The Malawi Poverty Reduction Strategy (MPRS) was prepared by the government through a participatory process that involved a wide range of stakeholders including government officials, non-governmental organizations (NGOs), civil society, the private sector, development partners, and members of parliament. The MPRS was built around four strategic pillars as follows: (i) sustainable pro-poor growth; (ii) human capital development; (iii) improving the quality of life of the most vulnerable; and (iv) good governance and cross cutting issues. These pillars represented the main strategic grouping of the various policies and activities that are believed to provide a coherent framework for poverty reduction in Malawi.

8. The government has established an institutional framework for participatory monitoring and evaluation of the implementation of its poverty reduction strategy. An MPRS monitoring committee was established soon after the strategy was adopted. The committee was served by a broad-based Technical Working Committee (TWC) whose role was to co-ordinate monitoring and evaluation efforts. The committee has since produced and published three annual progress reports (APRs) and one comprehensive review report covering three years of MPRS implementation.

9. The first two APRs and accompanying Joint Staff Advisory Notes (JSAN) noted that implementation of the MPRS during the first two years was limited. The first APR (covering the period July 2002 – June 2003) and the accompanying JSA were submitted to the boards of IDA and the Fund in October 2003. The JSA concluded that despite initiating some of the reforms anticipated in the MPRS, progress had been limited. Performance was also poor with regard to maintaining macroeconomic stability. The second APR and JSAN (covering July 2003–June 2004) were submitted to the Boards in June-2005 and indicated that MPRS implementation was still limited.

10. Staffs consider implementation of the MPRS in its third year to have been broadly satisfactory. The third APR covers implementation of the MPRS from July 2004 to December 2005. As indicated earlier, macroeconomic performance during this period has been satisfactory. Further, as outlined in the APR (and noted in the JSAN), progress has been made in implementing the MPRS priority activities in agriculture, education, health, public expenditure management, public sector reform, and corruption prevention. Based on this performance, IDA and IMF staffs therefore conclude that the trigger on satisfactory implementation of the MPRS for at least one year has been fully met.

11. Even before the MPRS expired, the government started to prepare a successor strategy. The new strategy, the Malawi Growth and Development Strategy (MGDS) takes into account new information about poverty in Malawi from the poverty and vulnerability assessment (PVA)4 and incorporates improvements based on lessons drawn from the comprehensive review of the MPRS implementation.5 Covering the period 2006/07–2010/11, the MGDS, which includes an explicit results framework, has been prepared through a participatory process and was discussed at cabinet on May 30, 2006. Cabinet adopted the strategy in principle, subject to the finalization of a human resource and capital needs assessment. Government intends to formally adopt the strategy soon.

12. There has also been improved participation by various stakeholders in monitoring implementation of the MPRS, the preparation of its successor strategy, and in the budget process. Although the MPRS was prepared through a participatory process, there were concerns after the production of the first progress report that the monitoring of MPRS implementation did not involve all the relevant stakeholders, in particular, the private sector. The latter years of implementation have seen greater participation of civil society and the private sector in the monitoring of the MPRS. Similarly, there has been greater participation in the formulation of the successor strategy. A significant improvement over participation in the preparation and monitoring of the MPRS is that members of parliament have been more widely consulted in the preparation of the MGDS.

B. Macroeconomic Performance during 2001-05

13. After a period of uneven macroeconomic performance following the decision point in 2000, macroeconomic stability has been maintained since mid-2004, initially under an IMF SMP and then under a PRGF-supported program. In particular, all the quantitative targets under these programs have been met since mid-2004, and with the restoration of fiscal discipline, domestic debt has started to decline. Similarly, once the economy has fully recovered from the effects of last year’s drought induced food crisis, inflation is projected to decline to single digits.

14. The decision point in December 2000 coincided with the approval of a new PRGF arrangement. Policy implementation under the arrangement was poor and it expired in June 2004, with only the first review being successfully completed. This delayed the completion point being reached in late 2003 as originally envisaged.

15. Policy implementation deteriorated quickly under the PRGF-supported program following the decision point. During the two fiscal years 2000/01 and 2001/02, fiscal slippages occurred principally on account of repeated bailouts of public enterprises, a sharp increase in interest rates associated with rising domestic public borrowing, overruns on the wage bill, and overspending on other current expenditures. The policy slippages and consequent delay in completion of the first PRGF review resulted in shortfalls of external budgetary support. This set up a vicious cycle of greater recourse to domestic financing, crowding out of the private sector, rising interest rates, widening overall fiscal deficits, and worsening public debt dynamics. These trends were exacerbated in 2002 by a food crisis and the need for the importation of maize and fertilizers that added some 4½ percent of GDP to fiscal expenditures and halved external reserves. By the end of 2003/04, domestic debt approached 25 percent of GDP and domestic interest payments absorbed one quarter of the budget.

16. Performance improved significantly following the election of a new government in mid-2004. The new government demonstrated commitment to restoring macroeconomic stability by containing the spiral of domestic debt. This strategy was implemented through sharply reduced domestic borrowing in 2004/05 and a general restoration of fiscal discipline, such that by the end of 2005/06, the domestic debt is estimated to have declined to below 20 percent of GDP. Attaining this objective was helped by donor support, but was also the result of a fiscal effort that tightened the underlying balance (a barometer of the domestic fiscal effort) since 2003/04 by 1½ percent of GDP. This objective was accomplished despite a severe food crisis in 2005/06, which necessitated substantial government food security spending. Although donor support was significant, the net cost to the budget of the food security operations was 1.7 percent of GDP. Policy implementation in 2005, however, was marred by weak exchange rate management. The government pegged the exchange rate which, because of Malawi’s low reserves, resulted in the accumulation of private external payment arrears on delivered imports of goods and services. The exchange rate was allowed to depreciate in early 2006 and the backlog has been cleared end-July 2006.

17. Despite these challenges, Malawi met almost all the quantitative targets over the 18 months from mid-2004 to end-2005. These include all the quantitative performance criteria during the six months under the PRGF arrangement through end-December 2005. The outlook for performance through the end of 2005/06 is favorable. Under the program for 2006/07, a strong crop is expected to sustain a rebound in real GDP growth to 7 percent and will support a deceleration in inflation to single digits. The government remains committed to policy implementation and a strong fiscal effort that will further reduce domestic debt to about 16 percent of GDP.

18. The staffs of IDA and the IMF conclude that Malawi has met the trigger on the maintenance of macroeconomic stability and satisfactory implementation of the PRGF program. Though initially weak during the interim period, macroeconomic stability has improved significantly over the past two years, as evidenced by decelerating inflation and the falling domestic debt burden.

Performance under IMF Programs, 2001-05

PRGF-supported program, 2001/02-2003/04:

The IMF Executive Board approved a new three-year PRGF arrangement in December 2000. The program aimed to restore macroeconomic stability by strengthening fiscal discipline in order to reduce inflation from over 30 percent in 2000 to 10 percent in 2001 and to single digits thereafter. To reduce monetary expansion and make room for private sector growth, the program targeted domestic debt repayments. Inflation was successfully reduced, though by not as much as envisaged, and largely at the expense of credit to the private sector and by depleting official external reserves. The government was not able to meet the ambitious fiscal targets and domestic financing increased to over 7 percent of GDP in each of the first two years of the program. In 2002/03, the demands imposed on the budget by the food crisis raised domestic financing to over 12 percent of GDP and domestic debt to about 25 percent of GDP by the end of 2003/04. Poor program implementation delayed the first review to late 2003. Large fiscal slippages subsequently pushed the program irrevocably off track in early 2004 and the arrangement expired in late 2004.

Staff Monitored Program, 2004/05:

The newly elected government implemented its 2004/05 budget in the context of an IMF Staff-Monitored Program. The program aimed to maintain real GDP growth around 4 percent and reduce core (non-food) inflation to about 11 percent. The inflation target was met, but output growth was weaker than expected because of the drought that reduced agricultural production in 2005. The cornerstone of the fiscal program was to curtail domestic borrowing to reduce the stock of domestic debt by 2 percent of GDP. This was to be achieved through higher donor support as well as a domestic fiscal effort to improve the underlying balance by 2 percent of GDP. Virtually all the quantitative targets, including for domestic financing, were met. Further, as part of the Bank’s FIMAG credit, the government implemented a major civil service wage reform in October 2004 that realigned pay grades and monetized in-kind benefits.

PRGF-supported program, 2005/06:

The IMF Executive Board approved a new three-year PRGF arrangement in August 2005. The 2005/06 program objectives for real GDP growth and inflation were met. The cornerstone of the fiscal program was the repayment of domestic debt that would reduce the stock to below 20 percent of GDP. The program also provided for spending on maize and fertilizer on account of the emerging food crisis. The program included structural measures to strengthen public expenditure management and financial sector management. The program also included a ceiling on the civil service wage bill and a revision of the civil service pension formula to offset the sharp increase in benefits resulting from the wage reforms in late 2004.

Malawi met all the end-September 2005 performance criteria for the first program review, which was approved by the IMF Board in February 2006. However, performance was marred by weak management of the exchange system and the use of informal administrative restrictions to control the exchange rate, which resulted in a backlog of unpaid import invoices. As the food crisis deepened, the revised program incorporated additional food security spending that received significant donor support. In a companion staff report, IMF staff has determined that Malawi met all the end-December 2005 quantitative performance criteria for the second program review. The government has acted on its commitment to improve exchange rate management by allowing the Kwacha to depreciate since early 2006 and eliminating the stock of unpaid import invoices. The prospects for the end-June 2006 targets are favorable.

C. Implementation of Structural Triggers

Improving economic governance

19. Malawi has taken significant steps that will go a long way to ensuring that public resources are used for their intended purposes, and with greater efficiency. At decision point, Malawi’s legal framework for the management of public finances and for curbing corruption had a number of weaknesses. Similarly, the public expenditure management system was beset with problems of expenditure laxity and lack of fiscal transparency. During the interim period, the government made significant strides in improving the public expenditure management system and the governance framework in general. Boxes 4 and 5 provide additional details of specific measures the government has undertaken to improve the public expenditure management system and to fight corruption, respectively.

20. In order to strengthen the legal framework for managing public finances, in 2003, the Finance and Audit Act was separated into two separate pieces of legislation: the Public Finance Management Act (PFMA) and the Public Audit Act (PAA). The new Public Finance Management Act represented a change in emphasis from the previous, narrower notion of dealing with public money to the wider and more comprehensive notion of the economic, fiscal and financial management of public finances. Further, the two Acts were designed to update the existing public finance and public audit laws in order to meet Malawi’s present and future requirements and at the same time introduce finance management and audit provisions reflecting modern trends and international best practice.

21. The Government of Malawi is now more transparent in the usage of public resources by reporting expenditures to the public on a quarterly basis. The government has continued to submit the Quarterly Expenditure Reports (QERs) to the Cabinet Committee on the Economy and the Budget and Finance Committee of parliament within six weeks of the end of the quarter. Furthermore, it now posts on its internet website the budgeted and actual protected pro-poor expenditures (PPEs) within twelve weeks of the end of the quarter. PPE reports have also been published in the press on a quarterly basis. PPEs have been of particular interest to the public because they represent expenditure items for which the government has fully committed itself to make resources available, even when there is a cash flow problem.

22. Despite various hitches, IFMIS has been rolled out in all ministries. The government of Malawi dramatically altered its previous IFMIS course in May 2005, after numerous problems with previous implementation attempts. The authorities chose to adopt the IFMIS framework successfully implemented in Tanzania, including revision of the chart of accounts, centralization of government banking and of the government payment system. A review by the World Bank in late 2005 certified the robustness of the system. Therefore, instead of piloting the system, the government decided on a full roll out, which commenced in November 2005. The system is running on two platforms, an electronic and a manual one. The electronic system is being used in eight ministries: Finance, Health, Agriculture, Education, Office of the President and cabinet, the Malawi Defense Force, the Malawi Police Service, and State House, which account for over 40 percent of the budget. In January 2006, the electronic system was extended to four other spending agencies. There is an action plan to roll-out the electronic system in all the ministries within a two year period.

Improving Malawi’s Public Expenditure Management

Malawi has made progress in improving formulation of the budget. Firstly, as recommended by the HIPC Assessment and Action Plan (AAP), the government has taken steps to widen the coverage of donor support, thus improving the comprehensiveness of the budget. Secondly, the formulation process is also more participatory. In the past, pre-budget consultation meetings were seen as cosmetic. But civil society and the private sector have commended the new government for taking into account their representations in the formulation of the budget. Further, enough time is now allowed for the budget to be scrutinized before being passed. Amendments are made to the draft budget to take into account comments by legislators and other stakeholders. To ensure that the budget documents are easily understood by all stakeholders, the government (with assistance from the donors) is currently working on further simplification of the documents.

Significant progress has also been made in the execution of the budget. Firstly, the government has improved the credibility of the budget process by broadly remaining within the appropriated budget for the first time in over ten years. Secondly, several reforms have been undertaken in order to improve the execution of the budget as follows: (i) a policy for clearing arrears and preventing their recurrence was approved by cabinet in 2005. The policy is now being implemented, and the government has started clearing the backlog of arrears; (ii) the office of the Director of Public Procurement (ODPP) became operational in 2004 in line with the new Public Procurement Act that was passed in 2003. The provisions of the new Act conform to international standards and help ensure transparency and efficiency in public procurement; (iii) after many failed attempts in the past, the government introduced IFMIS in November 2005. There has also been a centralization of the government payment system, which has led to the closure of some 1,550 bank accounts that were susceptible to abuse; tightening of the internal controls in the execution of the budget, which has led to improved alignment of expenditures to the approved budget and reduction in the build up of arrears; and timely production of expenditure reports. The government is also currently working on a new Human Resource Management Information System (HRMIS) that will ensure effective management of the wage bill through improved payroll records.

There has also been progress in reducing the time it takes to evaluate the implementation of the budget. In particular, good progress has been made in shortening the length of time between the end of the fiscal year and the production of financial statements that are submitted to the auditor general. At the decision point, the lag was some 14 months after the end of the fiscal year. This has now been reduced to 6 months, and Malawi is on course to meet the benchmark of four months. Similarly, there has been significant improvement in the preparation and auditing of the final accounts. With assistance from development partners, the capacity of the National Audit Office has been strengthened. Until recently there was a 2–3 years time lag between the end of the fiscal year and the presentation of the audited accounts and report to the legislature, implying that the official accounting records were not very useful for fiscal management purposes. The time lag has now been reduced to 9 months. With the rolling out of IFMIS, the time it takes to fully evaluate the implementation of the budget will be reduced even further.

Malawi’s Fight Against Corruption

Perceived corruption in Malawi is relatively better than most low income countries in Africa. Malawi’s score on the Transparency International’s Corruption Perceptions Index (TICPI) in 2005 was 2.8 out of 10. This score is better than the average for other Low Income Countries in Africa (2.5), including those countries that have already reached completion point.

After a period of laxity under the previous administration, this score reflects stabilization since 2004, when the new government of President Mutharika adopted a zero tolerance policy on corruption. In his inaugural speech in May 2004, the President made a personal commitment to fight corruption at all levels in his government.

Specific measures that have been undertaken to fight corruption include the following:

  • In 2004, the government amended the Corrupt Practices Act of 1995. Among the many improvements, the new Act widens the definition of corruption (which in the original Act was restricted to bribery only); criminalizes abuse of office and possession of unexplained wealth by public officers; and provides for the protection of whistle blowers.

  • Since most of the corruption in the public sector takes place when awarding contracts, a new Public Procurement Act was passed in 2003. The Act creates a new Office of the Director of Public Procurement (ODPP) and strengthens controls and safeguards on public procurement. This ODPP was created in 2004 and is now fully operational.

  • In 2005, the government adopted a new public payment system as part of the IFMIS. This was out of a realization that that theft of public funds and corruption was taking place partly because it was difficult to keep track of the many government accounts that were held in various commercial banks. The introduction of the new payment system has led to the aforementioned closure of some 1,550 bank accounts that were susceptible to abuse.

  • A governance and corruption baseline survey has recently been conducted by the ACB. The survey has revealed the areas where corruption is still rampant, and the ACB is in the process of developing an action plan to help reduce corruption in those departments.

  • With assistance from Norway since 2002, the capacity of the National Audit Office has been strengthened.

  • In September 2005, a US$20.9 million Threshold Country Plan was approved by the Millennium Challenge Corporation to help Malawi fight corruption and improve fiscal management. Specifically, under the Plan, the financial assistance will help Malawi reduce by 75 percent the time it takes to process corruption cases, professionalize public procurement, build capacity in government auditing functions, and strengthen independent media coverage.

  • Malawi has also signed an agreement with the World Bank Institute for support in the fight against corruption.

These measures have started showing tangible results. Over the past two years, the Anti-Corruption Bureau (ACB) has launched several investigations of high profile persons in government as well as in the opposition. These have led to arrests and convictions, while some cases are still in the courts. Some of the notable corruption cases recently pursued include those of the former Minister of Education, Mayor of City of Blantyre, and the Secretary to the Treasury. The Minister of Education and the Mayor of City of Blantyre were convicted for theft, while the case of the Secretary to the Treasury is still in court. Corruption charges have also been filed against the former President. His recent arrest on these charges led to the suspension of the Director of the ACB (he has subsequently resigned) on the grounds that his actions in the case had been politically motivated and had led to the impression that the charges would be dropped. The government has since issued a public statement to the effect that the charges against the former President have not been dropped and his prosecution will resume as soon as a new Director of the ACB is appointed in the coming weeks.

Raising the quality of education

23. Several steps have been taken to improve the quality of education since the decision point, and the results are beginning to show. The introduction of free primary education in 1994 saw enrollment rates increase from 1.9 million to 3.2 million. This put a huge strain on the education sector as a whole. As a result, during the 1990s the quality of education deteriorated at various levels of Malawi’s education system. However, over the past four years, the authorities have undertaken policies that should soon translate into improved quality indicators (such as improved completion rates and reduced drop-out rates). Notably, as part of the HIPC completion point requirements, there has been a significant increase in resources allocated to the sector, which have gone into building more schools, teacher training, and teaching and learning materials. As a result, some of the intermediate indicators have already started improving. For example, the ratio of pupils per qualified teacher has declined from 123 in 2000 to 83 in 2005. Similarly, the number of pupils per permanent classroom has declined from 114 in 2000 to 99 in 2005.

24. The sector’s share of discretionary recurrent budget has on average been 29 percent for the period 2001/02 to 2004/05. This level is well above the required threshold of 23 percent agreed in the HIPC decision point document. However, based on the approved budget for 2005/06, the share has dropped to 21 percent. The drop in the share has been due to the fact that government had to budget for drought relief and recovery programs (maize purchase and an expanded fertilizer subsidy program).

25. The level of resources allocated to teaching and learning materials has increased in real terms, but the subsidy to boarding secondary schools has not substantially decreased. In 2000/01, government policy on the operations of conventional boarding secondary schools changed such that responsibility for running boarding services, including the school fees charged to cover boarding expenses, is now in the hands of local communities. However, evidence suggests that the level of the fees being charged per student in these schools is not high enough to cover boarding expenses, indicating that the central government is still partly subsiding boarding expenses. Although more progress is desirable in reallocating the funding from boarding facilities toward teaching and learning materials, on balance this trigger has been satisfactorily implemented.

26. Donor-supplied primary textbooks for each school are now pre-packed and directly distributed from the supplier to the schools. Since 2002, donor-supplied textbooks are pre-packed and directly supplied to schools. The ministry of education only provides enrolment figures per school and per district.

27. The government was not able to increase yearly enrolment of 6,000 students for teacher training on a sustained basis. Yearly enrolment was 3,000 in 2000 and climbed to 5,490 in 2005, nearly meeting the target. The latter was achieved since two cohorts were enrolled in one year under the crash course (the Malawi Integrated In-service Teacher Education Program (MIITEP). This program has now been discontinued because it leads to a reduction in the quality of trained teachers. Annual enrolment in TTCs has therefore reverted to the original 3,000. However, a two pronged approach to increasing the number of properly trained teachers in primary schools has now been adopted. Firstly, since September 2005, the Initial Primary Teacher Education (IPTE) also known as the one-plus-one teacher training program was introduced. Under this program, students will be in college for one year and then gain teaching experience for another year. Therefore, student teachers will be spending less time in college than under the previous two-year program, but more time than under the crash course. Although the new system does not increase annual enrolment in TTCs, the number of teachers deployed in primary schools after every two years will be twice (6,000) the number under the old two-year residential training program.

28. The second approach to increasing the number of properly trained teachers in primary schools is that the number of places in TTCs is also being increased, mostly with support from donors. GTZ is financing the expansion of five TTCs while construction of a new college funded by IDA is under way in Liwonde. It is expected that once the expansion program of the existing five colleges is complete in March 2008, enrolment will increase from the current level of 3,000 to 3,810. The new 500 capacity college that is being built in Liwonde will become operational in 2009, after which total enrolment in all the colleges will increase to 4,310. Given these efforts, staffs now believe that the original target of 6000 was overly ambitious.

29. In-service training for primary teachers was institutionalized in 2001 in the form of a continuous professional development program following the phasing out of the Malawi Schools Support Program (MSSP) funded by UK DfID. The Department of Teacher Education and Development (DTED) identifies teacher training needs with the Malawi Institute of Education (MIE) as the implementing agency. Most of the in-service training has been delivered at the 315 Teacher Development Centers in the country while some have taken place at MIE.

Improving health outcomes

30. At decision point, it was recognized that Malawi had some of the worst health indicators in Sub-Saharan Africa. The authorities have since demonstrated a strong commitment to undertaking measures that would help improve these outcomes. In 2002, the government started consultations with various partners on a prioritized program of work that could be supported through sector-wide approach (SWAp) financing arrangement. The agreement for a SWAp was signed in 2004 and provides the basis for a significant scaling up of resources allocated to the health sector. However, in parallel, the authorities have already been pursuing reforms to improve health outcomes. In particular, the government has increased the level of front line staff, drugs, and other basic medical supplies. Reforms are also underway to improve the efficiency of drug procurement and distribution.

31. Significant numbers of nurse technicians, medical assistants, and radiography technicians have been trained and deployed. The government set up a human resources emergency program that has also been supported by development partners. Since the decision point, Malawi has been training and deploying over 300 nurse technicians, over 60 medical assistants and 20 radiography technicians. The thresholds for these health cadres were 200, 50 and 20, respectively. Further, the government, with support from UK DfID, has embarked on a program of topping-up salaries for health workers in order to retain them in the public sector. This is in response to a recent trend where health sector workers, especially nurses, have left the public sector and joined the private sector or migrated in search of better opportunities.

32. The average budget for drugs and medical supplies has been above the Better Health for Africa (BHA) standard and phase one reforms of the Central Medical Stores were sufficiently completed. Over the period 2001/02 and 2005/06, the average budget for drugs and medical supplies has been US1.36 per capita, which is above the BHA threshold of US$1.25 per capita. In order to improve efficiency in the procurement and distribution of these drugs, several reforms were undertaken. First, the essential drugs list was reviewed in 2001 when the government defined the Essential Health Package. Secondly, an information system to monitor compliance with agreed policies and financial allocations was also developed with support from UK’s DfID. Lastly, after initial delays, preparations were started to transform the CMS into an autonomous body (a trust). More recently, the government, following advice from the Health SWAp partners, has changed the strategy for reforming the CMS. A management contractor has been engaged to run the CMS for two years. The contractor will review various options for reforming the institution (based on experiences elsewhere in the region), recommend the best option, and implement the adopted approach. Thus, while the new strategy is being designed for reforming the CMS, the institution is already operating with a very high level of autonomy since it is being run by an independent team of management consultants.

33. The health share of discretionary recurrent budget has been below the 13 percent threshold that had been committed to at the decision point. On average, it has been 12 percent during the period 2001/02 and 2004/05. This trigger was therefore not met. As mentioned above, the reason is that over this period, the government was preparing a six-year program of work outlining health sector priorities that would be financed through a SWAp. The strategy was therefore to increase health sector spending once all SWAp arrangements were in place. Indeed, buoyed by the contributions from the SWAp partners, the 2005/06 approved allocation to health increased markedly to 18 percent of the discretionary recurrent budget. Preliminary actual expenditures for FY2005/06, available as of July 2006, show that health sector expenditures were 18 percent of the discretionary recurrent budget.6

Fighting HIV/AIDS

34. At the decision point, Malawi’s HIV prevalence rate for the working age population (15–49 years) was 16 percent, one of the highest in sub-Saharan Africa. The five triggers were therefore aimed at strengthening the institutional framework for fighting HIV/AIDS, scaling up measures for prevention, and mitigating the impact of HIV. The government’s efforts in these areas have been well supported by donors through a specialized HIV/AIDS SWAp and the Global Fund. To date, Malawi has made good progress in the fight against HIV/AIDS, and some results have already started showing. The latest HIV/AIDS monitoring report shows that HIV infection rates have stabilized in the past two years.

35. The National AIDS Commission (NAC) Trust Deed was revised to make it operationally more autonomous and the secretariat is fully staffed. Previously, the NAC used to be a department in the Ministry of Health. However, in 2005, the Trust Deed was revised providing for the appointment of a more broad-based board of trustees (government, private sector, faith community, NGOs, and civil society). Operationally, the secretariat (which serves the NAC) is independent of the government. For example, it has its own procurement manual. In order to strengthen the legal status of the NAC, government plans to have the institution established under an Act of Parliament.

36. The availability of condoms in retail outlets and of testing kits at all blood transfusion sites has increased significantly. Through its monitoring system, the NAC certifies that there is over 75 percent condom availability in various retail outlets (groceries, shops, and night clubs). These are mainly supplied by the two main reproductive health service providers: Population Services International (PSI) and Banja la Mtsogolo. There is also 70 percent availability of condoms in public hospitals, and some private hospitals, which are supplied to clients free of charge. Most of these hospitals also have blood transfusion sites and the number of testing kits has increased from about 1,500 at decision point to 4,000 in 2005.7

37. A Behavior Change Communication Strategy was developed in 2003 and is now being implemented. The strategy outlines the desired behaviors that would help fight HIV/AIDS as well as the key interventions necessary to inculcate such behaviors in people. The results of implementation of the strategy have already started showing results. For example, according to the 2005 HIV/AIDS monitoring and evaluation report, condom usage amongst men, a key behavioral change, increased from 28.7 percent in 2003 to 30.1 percent in 2004.

38. Syndromic management of sexually transmitted diseases (STDs) is now routine practice in all central hospitals, district hospitals and major Christian Health Association of Malawi (CHAM) hospitals. The NAC has also extended this practice even to some health centers. This has helped improve the diagnosis and treatment of STDs, including HIV/AIDS without requiring sophisticated and time-consuming laboratory tests or advanced medical skills. Diagnosis and treatment is based on classification by groups of symptoms and signs to determine the nature of an infection. A combination of treatments is then prescribed that are effective against the most common organisms that cause the symptoms and signs. In 2004–05, 276,666 cases were managed in government, CHAM and BLM facilities. The NAC and stakeholders are now monitoring the training of staff on STD management on a quarterly basis.

Improving access to land and credit

39. Access to land and credit remain constrained in Malawi, but there has been progress. In line with the HIPC decision point requirements, the authorities have taken steps to ensure that land in Malawi is more equitably distributed and that land rights are secured, so that households can use land as collateral for accessing credit. To this end, the government has drafted legislation and introduced reforms to ensure that more rural households have access to land and credit.

40. The draft Land Bill has been submitted to parliament. Providing equitable and secure access to land has been the centerpiece of the government’s land reform policy. A new National Land Policy was prepared in 2000 and approved by cabinet on January 17, 2002. In January 2003, a special Law Commission was empanelled to review the existing land legislation and formulate a new legislative framework for land matters that would articulate the principles of the approved Malawi National Land Policy. Following consultations, a draft Land Bill was prepared and submitted to parliament on June 13, 2006. The Bill adequately captures the main principles of equitable and secure access to land. In particular, the Bill now provides for the conferment of individual title deeds to land previously owned under customary land tenure. This means that once registered, the title of the owner will have full legal status and the land may be leased or used as security for a loan. Further, consistent with the on-going decentralisation process, the bill confers greater responsibility in the administration of land issues from the central government to districts and traditional authorities.

41. A microfinance policy has been approved by cabinet. At the decision point, a draft microfinance policy had just been prepared. The policy aims to promote best practices amongst micro-finance institutions in order to expand client outreach, improve coordination and increase capacity. It also proposes a peer-regulatory structure for the industry and the establishment of a monitoring system that can track lending volumes, number of clients and areas covered with a view to improving coordination of micro-finance activities. The authorities committed themselves to having the policy approved by cabinet. This was done in October 2002.

42. Significant progress has been made to increase access by the poor to microcredit. At the decision point, it was envisaged that the implementation of a microfinance policy would spur the expansion of micro-credit services in Malawi. The target was to increase the number of clients by 20 percent. In 2000, there were 257,276 microfinance clients. By December 2005, the number had increased to 459,906, representing a 79 percent increase.

43. A monitoring system covering all micro-finance institutions has been established. The Reserve Bank of Malawi established a monitoring system covering all microfinance institutions in 2003 under the SADC microfinance observatory initiative. The system is run by the department responsible for the supervision of non-bank financial institutions in collaboration with the Malawi Microfinance Network (MAMN). Data is collected through the administration of a comprehensive questionnaire that aims at obtaining information on the institutional characteristics of the microfinance organization itself, its market characteristics, financial services and non-financial services rendered, and the balance sheet.

Creating an effective safety net system

44. There have been improvements in the efficiency and effectiveness of the safety nets system, but more remains to be done and the reform process is ongoing. As far back as 1999, the Government of Malawi started working towards the creation of an effective safety net system that would be affordable and effective. This was out of a realization that resources were limited and hence, Malawi could not afford a safety net system that was not properly coordinated and targeted. In collaboration with the World Bank, it produced a National Safety Net Strategy which outlined the government’s medium term objectives in terms of type and size of safety net programs. Although challenges still remain, several actions have been taken towards the creation of an effective safety net system.

45. The universal starter-pack was transformed into a Targeted Input Program (TIP) in the year 2000/01. This reduced the number of farmers targeted from 2.86 million to 1.5 million. The program was scaled down further in 2001/02 to only 1 million farmers but was subsequently scaled up again, and by 2004/05, the final year of TIP, the number of beneficiaries had climbed to 2 million. From the 2005/06 season, the TIP was transformed into a fertilizer price subsidy program designed to target 1.7 million poor smallholder maize and tobacco farmers, and taking up a slightly larger amount of government expenditures. As in the case of TIP, the beneficiaries are identified through village development committees. Unfortunately, the new program is somewhat regressive compared to the TIP because the farmers need to complement the voucher scheme with their own cash in order to purchase the fertilizer, which potentially discriminates against the poorest farmers. The government tried to address this problem by scaling up the Public Works Program (PWP) which enabled some of the poorest farmers to purchase fertilizer. Overall, although further reforms may be necessary to improve the operation of the new voucher scheme, the trigger has been satisfactorily implemented.

46. Some progress has been made to rationalize and prioritize existing and new programs under the National Safety Net Strategy (NSNS). In 2002, the government established a National Safety Nets Unit (NSU) to coordinate the rationalization and prioritization of safety nets through four technical sub-committees, one for each of the four types of safety nets—Public Works Program, Targeted Inputs Program, Targeted Nutrition Program and Direct Welfare Transfers. The sub-committees have been meeting to discuss the scaling up and down of various safety nets programs. For example, as recommended in the NSNS, the PWP has been scaled up in recent years. Further, a study to look at an appropriate wage rate for all PWPs was carried out although its recommendations are yet to be implemented. However, while the government has made some attempts to rationalize and prioritize the various donor-managed safety nets interventions, actual progress has been limited. There still exist many competing programs that need to be rationalized with respect to coverage and modalities. This is partly due to the poorly coordinated positions of donors, which are expressed in a broad array of relatively uncoordinated safety net instruments. The government is aware of the difficulties and the NSU is now coordinating the development of a Social Protection Policy which will provide a more definitive framework for the implementation of various safety net programs.

47. A monitoring and evaluation (M&E) system of the National Safety Net Strategy has been established. An M&E system has been set up in the NSU for monitoring and evaluating a large number of indicators (process, inputs, outputs, and outcomes) for the four priority programs, with provision to capture information on any other program being implemented in the country. A catalogue of safety net programs has also been defined, and several report formats have been designed to extract information from the data-base. The NSU has also been involved in in-depth monitoring of individual safety net programs through field visits.

D. Use of HIPC Initiative Interim Assistance

48. As part of the HIPC decision document, it was agreed that HIPC debt relief resources would allow the government, in the context of the normal budget prioritization process, to increase funding to poverty reducing areas, supplementing domestic revenues. According to information provided by the government, savings from interim HIPC assistance have been used broadly in line with the criteria set forth at the decision point. In order to ensure that these resources would be used well, a small sub-set of high-priority activities were identified from the interim PRSP8 (since the full MPRSP had not yet been completed) that would benefit from additional funding as a result of HIPC debt relief. This list was later expanded after the finalization of a full PRSP. To ensure that the resources freed up through HIPC assistance would be used in line with the criteria set forth under the HIPC initiative, the government decided to the ring-fence funding for these expenditures. This meant that in the event of shortfalls in revenues, funding for these priority activities would be protected to ensure uninterrupted service delivery. As a result, these expenditures have since been known as Protected Pro-poor Expenditures (PPEs). The level of expenditures on PPEs during fiscal years 2001/02 to 2004/05 is summarized in Table 2. To ensure transparency and accountability in the usage of HIPC resources, the funding allocations to PPEs and out-turns have been published on the Ministry of Finance website and in the press on a quarterly basis.

49. Beyond HIPC completion point, the government remains committed to protect funding for PPEs. Although the government is about to finalize its new policy strategy, the MGDS, it has indicated commitment to continue the ring-fencing of funding for PPEs. Since some of the activities may no longer be of highest priority, it plans to revise the list of activities categorized as PPEs. The revisions will be done in consultation with various stakeholders, especially civil society and parliament.

Table 1.

Malawi: Evolution of NPV of Debt to Exports Ratio From HIPC Decision Point to end-2005

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Source: WB Staff estimates

NPV of debt-to-exports ratio under assumption of full delivery of HIPC assistance in percent. See “Malawi: Enhanced HIPC Debt Initiative: Decision Point Document” IDA/R2000-234.

Exports are three-year backward looking moving average of exports of goods and services.

Changes are expressed in percentage points.

Other factors capture revision of debt data base and debt relief assumptions, as well as bilateral debt relief beyond HIPC assistance.

NPV of debt-to-exports-ratio after full delivery of HIPC assistance and bilateral debt relief beyond HIPC assistance.

Table 2:

Resources used on Protected Pro-poor Expenditures, FY2001/02–FY2004/05

(In millions of U.S. dollars)

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Source: Malawian authorities

III. DEBT RELIEF AND DEBT SUSTAINABILITY UPDATE

A. Updated Data Reconciliation for the Decision Point

50. The staffs of IDA and the IMF, together with the Malawian authorities, have reviewed the stock of debt at end-1999 against creditor statements. As a result of this review, estimates of the nominal stock and the NPV of debt after traditional debt relief as of end 1999 were reduced slightly from US$ 2,604 million and US$ 1,469 million to US$2,600 million and US$1,466 million, respectively (Table 6).

Table 3.

Malawi: Selected Economic Data, 2003-25

(In percent of GDP, unless otherwise specified)

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Sources: Malawian authorities and IMF staff estimates.
Table 4.

Malawi: Balance of Payments, 2000-09

(In millions of US dollars)

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Sources: Malawian authorities and IMF staff estimates.
Table 5

Malawi: Comparison of Discount Rate and Exchange Rate Assumptions at end-1999 and end-2005

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Sources: OECD; and IMF, International Financial Statistics.

The discount rates used are the average commercial interest reference rates (CIRRs) for the respective currencies over the six-month period ending in December 2005 for the completion point and in December 1999 for the decision point.

For all Euro area currencies, the Euro CIRR is used. For the Kuwaiti Dinar, the USD discount rate is used. For all other currencies for which the CIRRs are not available, the SDR discount rate is used.

Table 6.

Malawi: Nominal and Net Present Value of External Debt at Decision Point as of end End-December 1999 1/

(In millions of US dollars)

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Sources: Malawian authorities and Bank-Fund staff estimates.

Public and publicly guaranteed debt only.

Rescheduling assumes a Naples stock operation based on a cut-off date of January 1, 1982 from bilateral and commercial creditors.

Information based on latest data available at completion point.

Contrary to the decision point, IDA administered loans from the European Union are treated as loans from Paris Club creditors at completion point.

Debt owed to PTA bank was revised based on written correspondence between the Malawian authorities and the PTA Bank from December 1999 and early 2000 that was exchanged in the context of PTA’s law suit against the Government of Malawi+A3.

The increase in United Kingdom debt level is attributable to the inclusion of the Commonwealth Development Corporation loans that were initially classified as commercial loans at the time of the decision point. The United Kingdom have recently agreed to classify these loans as bilateral loans to be treated under the Paris Club umbrella.

At the time of the decision point South Africa was classified as a Paris Club creditor. But staff obtained recent information from the Paris Club confirming that although South Africa participated in previous Paris Club negotiations for Malawi (1983 and 1988), they decline the Paris Club invitation to participate in the 2001 Cologne flow agreement. At the time of the preparation of this completion point document, staff did not yet receive indication that South Africa was willing to participate in the Paris Club negotiations for the HIPC completion point of Malawi.

The decrease in commercial debt level is due to the reclassification of two creditors (Commonwealth Development Corporation and Banque Francaise pour le Commerce Exterieur) as Paris Club bilateral creditors. Staff received confirmation that these two creditors are treated under the Paris Club umbrella. Commercial creditors are Banco Bilbao, Chase Manhattan Bank, the Netherlands’ Development Finance Company (FMO), Skandinaviska Enskilda Banken, South Africa Investment Development Corporation, STD Bank and West Minster Bank.

51. Multilateral creditors: The NPV of debt of multilateral creditors as of end 1999 was reduced by US$3.7 million to US$1,094 million. This is largely because European Union loans administered by IDA are now treated as loans from Paris Club creditors. Estimates of the NPV of debt to IDA, IBRD, African Development Fund (AfDf) and African Development Bank (AfDB) were also reduced slightly, while the NPV of debt to the PTA Bank was raised by US$2 million.9

52. Bilateral and commercial creditors. The estimate of the NPV of debt owed to Paris Club creditors was increased from US$294 million to US$320 million. This was because of the reclassification of EU loans administered by IDA and because debt owed to the United Kingdom that had been classified as commercial debt at the time of the decision point is now treated as bilateral debt. Consequently, estimates of the NPV of debt owed to commercial creditors declined from US$43 million to US$17 million.

53. Estimates of exports of goods and services used to evaluate HIPC assistance at the decision point have also been revised from an average US$551 million per year over 1997–99 to US$547 million.10

B. Status of Creditor Participation and Revision of HIPC Assistance

54. As a result of these changes, the common reduction factor has climbed from 43.7 to 44.1 percent and total HIPC assistance in NPV terms has been revised upwards from US$643 million to US$646 million (Table 7).11 Malawi has received financing assurances of participation in the HIPC Initiative from creditors representing 97 percent of the NPV of HIPC assistance estimated at the decision point. All but one multilateral creditor, all Paris Club and all but one commercial creditor have confirmed their participation in the HIPC Initiative (Table 16).

Table 7.

Malawi: Estimated HIPC Assistance at Decision Point (Amended) 1/

(in millions of U.S. dollars in end-December 1999 NPV terms; unless otherwise indicated)

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Sources: Malawian authorities and Bank-Fund staff estimates.

The proportional burden sharing approach is described in “HIPC Initiative—Estimated Costs and Burden Sharing Approaches”

Applies a hypothetical stock-of-debt operation on Naples terms and appropriate comparable treatment by other official bilateral creditors at January 1, 1982. NPV of debt-to-exports target is 150 percent.

Each creditors’ NPV reduction at the decision point in percent of its exposure at the reference year (end 1999).

Based on latest data available at completion point after full application of traditional debt relief mechanisms.

Three-year average of exports of goods and nonfactor services from 1997 to 1999.

Uses three-year average of exports of goods and nonfactor services from 1997 to 1999 as denominator.