Malawi continues to enjoy uninterrupted solid growth the fifth year in a row backed by sound economic policies and a supportive donor environment. The strong stabilization policy since 2004 and the debt relief from the Heavily Indebted Poor Countries (HIPC) initiative brought about a rapid turnaround in government finances, better management of public spending, and created the fiscal space needed to generate the momentum for the resumption of growth. As such, real GDP growth has averaged about 7 percent in the last five years, with a peak of 9.7 percent in 2008, compared to an average of about 2 percent prior to 2005. This growth was supported by several bumper tobacco harvests (US$472 million in the 2007-2008 season), good weather and, availability of fertilizer and seeds through the government’s farm input subsidy program. Although growth is expected to slow down slightly to 6.5 percent in 2010 because of projected decline in agricultural production, it is expected to recover to 7.2 percent in 2011 due to increased uranium production and recovery in agriculture. Despite prudent fiscal and macroeconomic management and encouraging growth, Malawi continues to face numerous supply-side constraints such as persistent energy constraints and foreign exchange availability, and the economy remains vulnerable to terms of trade, weather and other exogenous shocks.
Agriculture is the main source of growth, and it can continue to be a significant driver of growth through regional exports and import substitution. Although it contributes 35 percent of GDP compared to 46 percent by services and 19 percent by industry, the sector accounts for more than 80 percent of Malawi’s export earnings, and supports 85 percent of the population. Smallholders contribute over 80% of Malawi’s agricultural production, with most farming production systems dominated by maize, the country’s staple food crop. The country's export trade is dominated by tobacco, tea, cotton, coffee, and sugar.
The role of the mineral sector in the economy has increased with the commissioning of the Kayelekera uranium mine in 2009. The mining operation is expected to generate about US$150 million or more in sales annually. In 2009, the World Bank assisted the Government review the mineral sector as a potential source of economic growth and development in Malawi. The Bank sees the value of minerals output reaching some US$250 million within three years, with potential to double that in ten years time. Minerals would become one of the main sources of FDI, provide up to 25 percent of export earnings and account for some 5 to 6 percent of projected GDP. Malawi’s GDP is forecast at $5.6 billion for 2010 (IMF). In order to further support the growth in Malawi’s mineral sector, the Bank is designing a Mineral Sector Growth and Governance Project for FY 11.
Political Context
Malawi has a multiparty system of government that was introduced in 1994, with presidential and parliamentary elections held every five years. Current president Bingu wa Mutharika is in his second term of office (2009-2014).The President’s Democratic Progressive Party (DPP) has about 60 percent majority in a 193-seat Parliament, giving it a leeway to approve reforms supportive of the President’s development agenda.
About 17 percent of the parliamentary seats are for independent candidates, most of whom tend to support the ruling party, leaving five political parties sharing the remaining 23 percent. The major opposition parties are the United Democratic Front (UDF) and the Malawi Congress Party (MCP). The MCP led the country to independence in 1964 and remained in power till 1994 when UDF took over in a multiparty system for ten years.
Malawi last held local government elections (LGE) in 2000. The country has operated without local councilors since 2005. Local councilors are important in the decentralized system that Malawi adopted in 1998. The Electoral Commission has since indicated that it might hold the LGE in April 2011. The specific date will be stated by the President.
In line with his political manifesto, President Bingu wa Mutharika has prioritized agriculture and food security, education, transport, energy generation, rural development, irrigation and water development, youth development and anti-corruption. These priorities are in the Malawi Growth and Development Strategy (MGDS) (2006-2011).
President wa Mutharika has also extended his agriculture and food security vision to the African Union which he is chairing from 2010 to 2011.
Development Challenges
Malawi’s population is 13.1 million (2008 census) with a poverty headcount of 40 percent (2008 Welfare Monitoring Survey). Social indicators show some improvements: Life expectancy has improved to 52.2 years in 2009 from less than 40 at the turn of the century; HIV prevalence is now at 12 percent down from 14 percent; Food security has significantly improved. Malawi is likely to achieve 5 out of 8 MDGS --with gender inequality, universal primary education and maternal mortality unlikely to be met.
Despite progress on social issues, Malawi’s development path has several challenges:
The lack of reliable power is a key constraint to development in Malawi. The current installed capacity of about 283 MW is far less than the estimated demand of 334 MW. Only seven percent of the population has access to electricity services. Unavailability of access to modern energy services contributes to low economic activity and productivity, lower quality of life and deters new investments across the economy, in particular affecting key sector such as manufacturing and mining.
Weak staff capacity in the public service affects Government delivery of development programs. This is manifesting itself through misallocation of professionals, unfilled vacancies, and attitudinal issues. High political levels have previously listed people’s mindset as a challenge, calling on Malawians to change and take responsibility for their development.
Malawi fares far worse than other countries in southern Africa on key measures of education quality and access. According to the Southern Africa Consortium on Monitoring Education Quality, fewer than 25 percent of eligible Malawian children remain in school by Standard 8. In addition, only nine percent of primary school students were found to have reached a minimum level of mastery in reading in English, and a mere two percent of pupils possessed skills beyond basic numeracy. These poor outcomes are a result of economic constraints at the household level and a severe lack of pedagogical resources and education infrastructure, as demonstrated by a pupil: teacher ratio (PTR) of 80:1, one of the highest in the world, and a pupil: classroom ratio of 100:1.
The growth of Malawi’s agricultural economy is complicated by land constraints, low productivity, and high marketing costs. Approximately 80 percent of smallholders are locked in a semi-subsistence based maize production system. Due to resource constraints, these farmers are more likely to be net buyers than sellers of food. The number of farmers pursuing commercial crop production is still limited and the major constraint is low productivity which is a major factor that reduces the competitiveness of Malawi's agricultural commodities on the regional and international markets.
The current country assistance strategy (CAS) is ending this year (2010), and the process of developing the 5th CAS (2011-14) for Malawi has commenced. The current CAS focuses on four areas that are key to building Malawi’s economy: agriculture; infrastructure and private sector development; HIV and AIDS; and public sector management. The 4th CAS has been supporting the government’s development program as set out in the MGDS.
The Bank delivers its support through various government-owned projects. As of Sept.1, 2010, the current Bank portfolio in Malawi has ten investment projects with US$456 million in commitments. Of this amount, 36 percent are credits and the rest grants. This support is distributed as follows: 46 percent for human development; 17 percent for infrastructure development; 23 percent for agriculture, rural development, and natural resources; 11 percent for poverty reduction and economic management, and three percent for private sector development. The Bank also supports two regional projects in telecommunications and trade insurance where Malawi is a participating country.
Other than financing investment projects, the Bank also provides direct budget support through a series of annual Poverty Reduction Support Grants. These grants support GoM’s efforts to undertake the policy and institutional reforms necessary for the successful implementation of the MGDS. The Bank has already provided two such grants in 2008 and 2009 totaling US$55 million and provided the third and last of the 2007-2010 CAS amounting to US$54 million in June 2010.
Beyond financial support, the Bank also provides technical assistance and advisory services on formulating sector investment strategies, economic assessments, and expenditure reviews. In 2009, the Bank in collaboration with other development partners delivered a Country Economic Memorandum analyzing how Malawi can grow its economy further through regional trade and integration. The Bank also delivered a mineral sector review report and a country status report on education. The Bank is also finalizing a nutrition study on Infant and Child Feeding.
Since 1966, the Bank Group has committed about US$2.6 billion to Malawi supporting over 120 operations. Of the five World Bank Group agencies, the International Development Association (IDA) has the most operations followed by the International Finance Corporation.
Midterm-Review of the Fourth CAS
In 2009, the Bank did a mid-tem review of its 4th CAS covering the period 2007-2009. The Bank ascribed as good progress towards its outcomes on HIV/AIDS and malnutrition, and macro-economic management issues. It described as a mix of poor to moderate progress on outcomes related to agricultural productivity and market development, and infrastructure and investment climate.
Improving small-holder agricultural productivity and development of agricultural markets is the Bank’s outcome in agriculture. Good progress was registered in improving irrigation farming with substantial increases in yields. However, there were delays in irrigation rehabilitation through projects such as the Irrigation, Rural Livelihoods and Development Project. The delayed approval of the Agricultural Development Program Support Project by Parliament also delayed the initiation of a more harmonised and growth oriented agricultural investment program. Ad-hoc price and trade controls by Government have increased uncertainty in the investment climate. Government monopoly in the redemption of fertiliser coupons and maize trading in 2008 also further weakened input and output markets.
In the energy sector, the Bank Board approved the Malawi-Mozambique Interconnector Project in 2007 but Malawi did not sign it. The Bank noted improvements in infrastructure planning and sector governance in energy, transport, and water.
On the investment climate, progress was weak with Malawi’s ranking deteriorating from 106 in 2006 to 131 in 2008. Major indicators of trading across borders and time to start a business have not improved to globally competitive levels. There was moderate progress in improving access to finance by Small and Medium Enterprises (SMEs). In order to improve Malawi’s investment climate and Doing Business ranking, the Government of Malawi and the World Bank Group developed and started implementing a Doing Business Reform Memorandum in 2009 which outlines a series of short to medium term measures, which when implemented, will lead to improvement in the country’s investment climate and ranking.
As part of applying the selectivity principle, the Bank withdrew from the health sector after the closure of its Health Sector Support Project in September 2008. The Bank is focusing resources on areas in which it has a comparative advantage.
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2005-2010
Major improvements in Public Sector Governance: The Bank has supported several activities to strengthen procurement in Malawi. An Institute of Procurement and Supply was established for national standards and accreditation system for the procurement and supply profession in Malawi. Further, a Bachelors Degree program in procurement and logistics at the Malawi Polytechnic has been introduced. All Ministries have also established Internal Procurement Committees. Management of the public service payroll was also addressed through supporting implementation of a new Human Resource Management Information System and auditing of the Public Service payroll, resulting in payroll discrepancies of <5 percent by March 2009. Development of the Medium Term Pay Policy for the Public Service. Capacity in terms of skills has also been built in the civil service. More than 1,600 officers have been trained in key governance areas including law, accounting, audit, procurement, human resource management, project management, information technology, gender, and M&E. ICT capacity has also been enhanced with implementation of a national Government Wide Area Network to connect government offices in Lilongwe with Blantyre, Zomba and Mzuzu.
Raising agricultural productivity and net incomes for poor land-deprived households:The Community Based Rural Land Development Project (CBRLDP) has enabled 14,144 land-poor rural households voluntarily relocate from the densely populated districts of Thyolo-Mulanje to other districts with arable land where they have realized improved food production and incomes. Another 1,012 households have already been appraised and verified for relocation this year. Maize productivity has increased from about 500kg/ha to over 1,500 kg/ha and tobacco productivity has improved from 519kg to about 1,390kg/ha, on average. As a result, food security has improved and income from cash crops has more than doubled among project beneficiaries. In addition to directly benefiting the households, the project successfully tested concepts which the government could use for scaling-up implementation of its land reform program, which include market assisted land redistribution, community driven land transfer, willing buyer-willing seller principle, and integrated development planning.
Sustainable economic empowerment of the poor:MASAF – a social protection project - has yielded good results in empowering the poor. Through a component called Community Savings Investment promotion (COMSIP) communities across the country have cultivated a culture of savings and are investing saved resources in economically viable initiatives as cooperative societies, and as individuals. Businesses such as retailing, piggery, and tailoring are helping individuals improve their livelihoods. Communities are learning from each and continuing to replicate savings groups. This is one initiative that communities have been able to sustain on their own and empowered them to take charge of the economic activities they would like to engage in. Since 2005, 8,300 community savings groups have been established in the country, and about 1,475 more are waiting to graduate into full savings groups.
Reduction in HIV prevalence and increased access to treatment: The Bank’s support to Malawi in HIV/AIDS focuses on infection prevention, treatment, and impact mitigation. Good progress was registered in improving HIV awareness and access to drugs and treatment. As of 2009 Malawi’s HIV prevalence rate reduced to 12 percent from about 14 percent three years earlier. The number of HIV testing and counseling sites increased from 283,462 in 2004 to 1,212,376 in 2008. The number of people ever started on anti-retroviral therapy also increased from 3,000 in 2003 to 196,368 in 2008 with a 75 percent survival rate. On impact mitigation there has been an increase in the number of orphans and vulnerable children supported with nutritional, psychosocial, financial, and educational support from 200,000 in 2004 to 2,651,700 in 2008.The Bank had granted Malawi US$35 million for HIV/AIDS in 2004 and in September 2009 approved additional financing of US$30 million till September 2012. The National AIDS Commission (NAC) is the implementing agency. The Global Fund also pools funds into NAC.
Construction of educational infrastructure: Through the Education Sector Support Project, a new primary teacher training college has been constructed at Liwonde to help meet the shortage of qualified teachers in Malawi. The college, with a capacity of 540, will open later in 2010. Constituent colleges of the University of Malawi – Chancellor, Polytechnic have had relevant learning centers and offices constructed. Twenty-three university lecturers have also been trained at Master’s and Doctoral levels in Education. At secondary school level, four national secondary schools – Blantyre, Dedza, Lilongwe and Mzuzu have been rehabilitated with other new infrastructure such as libraries and kitchens added. Through this project, both the Bank and the government learned a lot of lessons on the complexities and capacities in constructing educational infrastructure, which will inform new education projects. Improving doing business environment- commercial court reducing time to settle commercial disputes:Through BESTAP, the Bank has been addressingconstraints in the business environment in Malawi. One of the key areas of Bank support has been the establishment of a Commercial Court in 2007. With this court, as of March 2008, it took an average of 125 days to settle commercial disputes, significantly below the target of 290 days for 2008. The Bank also trained three judges as well as relevant support staff to operationalise the commercial court. It also funded a case audit of commercial cases and supported the setting up of an automated Case Management System to better manage commercial cases.
Facilitating global trade financing for local commercial banks: The capacity of Malawi’s First Merchant Bank (FMB) to deliver trade financing toits clients has been enhanced through IFC’s Global Trade Finance Program (GTFP) which has enabled FMB establish working relationships with new international banks, which were not willing to engage with local banks. The GTFP line provides risk mitigation to FMB’s correspondent banks. Staff of FMB have also been trained in trade finance.
Connecting the rural underserved to telephone services: Supported by IFC, the Village Phone Program delivers telephony services to underserved areas by partnering local entrepreneurs, CBOs/NGOs and individuals with Zain (Malawi) Ltd. Under the Program, local Village Phone Operators (VPOs) purchase starter kits (which consist of a mobile phone and SIM card, an antenna and a solar recharger) and establish businesses in underserved areas where they sell phone usage. To date, Malawi program has established 90 VPOs across the country and more are in the pipeline.
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Implementing the Paris Declaration in Malawi
Malawi’s main donors are DFID, EC, World Bank, African Development Bank, Norway, Germany, USAID, and China which established diplomatic ties with Malawi in 2007. These account for over 90 percent of Malawi’s development assistance. Other donors include the traditional UN institutions (notably UNDP, UNICEF, WHO, and WFP), Global Fund, JICA, ICEIDA, and Ireland.
Government is leading coordination of donor support through its Development Assistance Strategy (DAS) which is a coordination plan aimed at improving the effectiveness of aid inflows to Malawi and defining what Government and Development Partners (DPs) have to do to implement the Paris Declaration on Aid Effectiveness. The DAS sets out principles, roles, and structures, and has an action plan and a monitoring framework. In early 2010, in line with DAS, DPs and Government established sector working groups whose responsibilities include guiding prioritization of donor aid at sector level.
Donors in Malawi are increasingly implementing the Paris Declaration Principles in their development assistance. To date, there is pooled funding which accounted for 23 percent of Official Development Assistance (ODA) in FY2008/09. There is pooled funding in HIV/AIDS managed by the National AIDS Commission. The sector wide approach (SWAp) has been used in health as well. In education, the government signed an MoU with all Education DPs in January 2010 that outlines the collaboration among partners and between the DPs and the government. IDA, DfID, German Development Cooperation and UNICEF are the subset of Education DPs who intend to pool funds. These DPs also signed a Joint Financing Agreement in 2010. Eleven DPs are also collaborating in the Education For All – Fast Track Initiative. In agriculture, the World Bank is playing a leading role working with government to establish a SWAp.
General budget support is also provided in a harmonized way through the Common Approach to Budget Support (CABS) group. The CABS group currently consists of DFID, EC, Norway, Germany, the African Development Bank, and the World Bank. IMF and UNDP are observer members. Thirty percent of ODA from 2009 to 2010 was budget support, an increase from 22 percent reported in 2008/09. The fundamental principles of Malawi’s budget support cooperation are based on commitment to poverty reduction, good governance, and sound economic management. Together with Government, the CABS Group has developed a Performance Assessment Framework (PAF) which provides a jointly agreed set of indicators for measuring progress against those commitments, in line with the MGDS. Each Development Partner’s bilateral agreement outlines how the PAF will be used.
The Bank has collaborated with various donors in improving public sector management: For example: Implementation of an Integrated Financial Management Information System in collaboration with USAID and UNDP; Institutional strengthening and capacity development of the Central Internal Audit Unit in collaboration with the European Commission, including provision of training, equipment, software and work environment facilities; Construction of an Audit Training Centre in collaboration with the European Commission; and Introduction of a performance contracting system and annual performance reviews for all public servants, in collaboration with CIDA.
Development Partners are also collaborating in providing policy advice to Malawi based on joint analytic work. The Millennium Challenge Corporation, DFID, AfDB, and the World Bank recently collaborated in the 2009 Country Economic Memorandum (CEM) to advise and suggest policy options on how Malawi could build on its current growth through regional integration and trade. Some of the key messages are:
Agriculture will continue to be a significant driver of growth. Macro-economic and agricultural policy choices should therefore promote productivity and regional/international trade competitiveness.
Reliability of trade transport should receive more attention with policy focusing on maintenance and rehabilitation of infrastructure and regional trade facilitation.
Malawi needs to invest urgently in additional electricity generation.
Prioritisation of public investments in power, transport and trade logistics should take cognizance of the nature of industry in the main cities of Blantyre and Lilongwe.
Malawi should continue with macro-economic management that continues to support growth.
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