The World Bank Report No: ISR11580 Implementation Status & Results Malawi Malawi Economic Recovery Development Policy Operation 1 (P133663) Public Disclosure Copy Project Name: Malawi Economic Recovery Development Policy Operation 1 Program Stage: Implementation Seq.No: 1 Status: ARCHIVED Archive Date: 11-Jun-2014 (P133663) Country: Malawi Approval FY: 2013 Product Line: IBRD/IDA Region: AFRICA Lending Instrument: Development Policy Lending Implementing Agency(ies): Key Dates Board Approval Date 28-May-2013 Original Closing Date 31-Dec-2013 Planned Mid Term Review Date 31-Mar-2014 Last Archived ISR Date Effectiveness Date 10-Jun-2013 Revised Closing Date 31-Dec-2013 Actual Mid Term Review Date 25-Mar-2014 Program Development Objectives Program Development Objective (from Program Document) The development objectives of the DPO series is to support reforms to strengthen macroeconomic and public finance management and lay foundations for stronger growth and protection of the poor. Has the Program Development Objective been changed since Board Approval of the Program? Yes No Overall Ratings Previous Rating Current Rating Progress towards achievement of PDO Moderately Unsatisfactory Overall Implementation Progress (IP) Moderately Unsatisfactory Implementation Status Overview Progress towards the development objectives of this operation: Progress to strengthen macroeconomic and public finance management and lay foundations for stronger growth and Public Disclosure Copy protection of the poor has suffered a series setback and places this operation at high risk. This lack of progress can be largely attributed to the negative fiscal impact of the large scale theft of public funds amounting to MWK 13.7 billion (equivalent to about US$34 million) during the period of April-September 2013, and the emergence of high fiduciary risks associated with a compromised Government payment system and control environment. Whilst remedial emergency control measures have been put in place, there has been a setback on macroeconomic and public finance management and none of the budget support envisioned for 2013/14 has been forthcoming. On the other hand, reforms that will help strengthen growth at the sectoral level have progressed adequately. Pillar 1: Strengthening macroeconomic and public finance management Prior to Board approval, all DPO-1 prior actions were fully implemented and the overall reform program was broadly on track. On the fiscal consolidation front, there was encouraging progress towards the clearance of domestic payment arrears and procurement reforms to improve the cost effectiveness of the Farm Input Subsidy Program. The fiscal deficit had narrowed and there was a slight reduction in net domestic debt in 2012/13. Page 1 of 4 The World Bank Report No: ISR11580 This progress was reversed at the start of FY2013/14, which was characterized by large overruns in expenditure partly reflecting fraudulent transactions (where total expenditure rose sharply to 49 percent of GDP during the first quarter of FY2013/14, from the program target of 41.8 percent of GDP). The subsequent suspension of budget support in 2013/14 has meant that fiscal consolidation is still taking place in a very difficult environment. Given the low levels of budgetary allocations to Government Ministries, Departments and Agencies, domestic payment arrears have started to build up, which goes against some of the objectives of the reform program supported by the series. Public Disclosure Copy To restore confidence in the public finance system and reduce the possibility of further fraud, the authorities have since late 2013 been implementing an Action Plan of remedial measures covering five areas (i) Investigations and Prosecution; (ii) Auditing; (iii) Accounting; (iv) Administrative measures; and (v) Reforms (governance, public sector and PFEM). While the immediate fiduciary risks have been mitigated through extraordinary arrangements put in place with support from development partners, these measures are not sustainable and remain a source of a high fiduciary risk over the medium term. Pillar II: Laying the foundation for stronger growth and protection of the poor: Progress continues to be made in the implementation of core elements of the government's reform agenda that will help lay the foundation for sustained growth. Energy Sector. To Government has maintained the monthly reviews of the Automatic Tariff Adjustment Formula since May 2012. This reform has helped the Electricity Supply Corporation of Malawi (ESCOM) improve its financial position to support its activities and the expectation is that the cost reflective tariffs will help attract the operations of independent power producers to expand public access to electricity and improve the reliability of supply. Seeds Market. Good progress has been made with the drafting of the Seed Bill, which has been prepared in a highly consultative manner with full endorsement from seed companies and producers in particular. In 2013, legumes production increased by about 10 percent from 949,454 metric tons produced in 2012. Once passed and enforced, the proposed Seed Bill will be critical to ensure that farmers can access quality seeds on the market that would effectively contribute to productivity increase. Statistics. The authorities passed the 2013 National Statistics Act in May 2013, which has enhanced National Statistical Office’s authority to coordinate and manage the National Statistical System (NSS). The authorities have also approved 2013-2017 NSS Strategic Plan, which seeks to promote the harmonization of statistics as well as oversee the development and implementation of a comprehensive and well-coordinated system of producing, processing and disseminating official statistics. This will in turn help reduce duplication and overlapping of activities and enhance consistency and comparability of statistical products. To date, only one quarterly MGDS II report has been provided against the end of program target of two reports. Results Results Indicators Indicator Name Core Unit of Measure Baseline Current End Target Clearing of outstanding stock of SOE arrears Percentage Value 0.00 100.00 100.00 Public Disclosure Copy Date 02-Jul-2012 30-Sep-2013 31-Dec-2014 Comments Arrears owed by SOEs were securitized. Reduction in variance in primary expenditure Percentage Value 12.00 10.00 10.00 between approved and outturn Date 30-Jun-2012 30-Jun-2013 31-Dec-2014 Comments Reduction in backlog of Treasury Minutes Months Value 60.00 40.00 36.00 Page 2 of 4 The World Bank Report No: ISR11580 Date 30-Jun-2012 30-Sep-2013 31-Dec-2014 Comments Percentage of all Government transactions Percentage Value 40.00 40.00 60.00 Public Disclosure Copy complying with internal controls Date 30-Jun-2013 31-Dec-2013 31-Dec-2014 Comments Reduction in Fertilizer share of Ministry of Percentage Value 85.00 53.00 65.00 Agriculture Budget Date 02-Jul-2012 30-Sep-2013 31-Dec-2014 Comments Percentage of Social Cash Transfer beneficiary Percentage Value 0.00 0.00 40.00 households being reached with the Innovative Date 31-Dec-2012 30-Sep-2013 31-Dec-2014 Approaches to Cash Delivery Systems in Comments Mchinji and Machinga Districts Reduction in backlog of bank reconciliation Months Value 15.00 2.00 1.00 Date 02-Jul-2012 31-Dec-2013 31-Dec-2014 Comments Increase in seeds production Percentage Value 0.00 10.00 10.00 Date 30-Jun-2012 30-Jun-2013 31-Dec-2014 Comments Percentage increase is from the base year production levels of 949,454 metric tons (2012). Pending audit queries from Treasury Minutes Percentage Value 100.00 100.00 75.00 Date 30-Jun-2012 30-Sep-2013 30-Jun-2016 Comments Number of quarterly MGDS progress reports Number Value 0.00 1.00 2.00 published Date 30-Jun-2012 30-Sep-2013 31-Dec-2014 Comments Public Disclosure Copy Percentage of Social Cash Transfer beneficiary Percentage Value 0.00 0.00 40.00 households reached with the Innovative Date 30-Jun-2012 30-Sep-2013 31-Dec-2014 Approaches to Cash Delivery Systems in Comments Mchinji and Machinga Districts Increase in the average electricity tariff to cost Amount(USD) Value 0.06 0.09 0.10 recovery levels Date 30-Sep-2012 30-Sep-2013 31-Dec-2014 Comments Data on Financial Performance (as of 06-Jan-2014) Page 3 of 4 The World Bank Report No: ISR11580 Financial Agreement(s) Key Dates Project Ln/Cr/Tf Status Approval Date Signing Date Effectiveness Date Original Closing Date Revised Closing Date P133663 IDA-H8490 Closed 28-May-2013 05-Jun-2013 10-Jun-2013 31-Dec-2013 31-Dec-2013 Public Disclosure Copy Disbursements (in Millions) Project Ln/Cr/Tf Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P133663 IDA-H8490 Closed XDR 33.40 33.40 0.00 33.40 0.00 100.00 Tranches Tranche 1 Amount (USD) Expected Release Date Actual Release Date Status 0 Pending Released Key Decisions Regarding Implementation a) Authorities should continue to secure a robust and strong payment system to reduce fiduciary risks and strengthen transparency and accountability; b) finalize a strategic 'Comprehensive PFEM Strengthening Action Plan', which will be linked to the Public Sector Reform Program to ensure complementary and maximize synergies; c) Accelerate progress of the reforms that have been lagging behind, including those related to the revisions to the energy sector policy, clearance of bank reconciliation backlog and the establishment of the M&E system for Social Protection Program; and, d) Authorities to establish a mechanism to monitor the stock of arrears on regular basis to prevent accumulation of new arrears. As a result of the cash-gate, the management has decided to terminate the DPO series (which was originally conceived as a three single tranche operations), at DPO-2 and the results framework has been adjusted accordingly. Restructuring History There has been no restructuring to date. Related Operations P133663-Malawi Economic Recovery Development Policy Operation 1, P145639-MALAWI SECOND ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION Public Disclosure Copy Page 4 of 4