• Reference: P-MW-KA0-002
• Approval date: 11/07/2012
• Start date: 27/07/2012
• Appraisal Date: 23/05/2012
• Status: OngoingOnGo
• Implementing Agency: MINISTRY OF FINANCE
• Location: REPUBLIC OF MALAWI

Component I: Strengthened PFM Transparency and Accountability

GoM has been reforming Public Finance Management over the past ten years. This has yielded significant improvements in the legal framework, ranging from the passing of the PFM Act and Public Audits Act to continued implementation of modules of the EPICOR financial management system, with roll out continuing into the districts. Thus, the findings of the 2011 PEFA and 2012 CABS Review are that Malawi's PFM systems have improved, but important challenges remain (see Annex V for the comparative scores between the 2006, 2008 and 2011 PEFA). GoM has committed to strengthening capacity of PFM institutions through the Public Finance and Economic Management Reform Programme (PFEMRP, 2011 -16). The PFEMRP has provided some reliability and timely information on the elements of budget execution. In addition, the timeliness of the preparation and audit of the annual appropriation accounts improved. The proposed RFSSP program will support these critically important reform efforts.

Thecomprehensiveness and transparency of the budget has improved as reflected in the 2011 PEFA where the rating for PI-5 was A compared to B in 2008, highlighting the improvement in the classification of budget. Furthermore, there has been improvement in PI-6 to A in 2011 from B in 2008, an indication of the comprehensive information included in the budget documentation presented to Parliament. Meanwhile, the unreported budget operations (PEFA Indicator PI-7) are at levels of less than 5% in 2011, unchanged from 2008. The score for PI-10 was C, reflecting the lack of timely public access to recent financial statements and audit reports. Regarding comprehensiveness of the audit, NAO has a key role to play in monitoring the use of government funds. A major achievement of the NAO has been to clear the backlog of audit of the national accounts up to 2010. The audit for 2011 has also been completed and is awaiting submission to Parliament. According to the 2011 PEFA, PI-26 was scored D+ (relating to the scope, nature and follow up of external audit), a score unchanged from the previous report. This reflects persisting challenges relating to institutional and operational factors, which have adversely affected the effectiveness of the external audit function. These challenges include lack of resources, and shortage of auditors, including capacity especially in IT audits to facilitate the effective audit of the IFMIS. The PEFA, however, also indicates that audit scope and coverage have increased due to the clearance of the backlog of previous years' audit. A Strategic Plan has been developed by NAO to address some of the challenges, including giving it independence. The Plan is currently under implementation with development partners' support. As regards Efficiency, the score for PI-13 remained unchanged at B, reflecting the transparency of taxpayer obligations and liabilities. Reforms underway at the Malawi Revenue Authority are expected to improve tax and revenue collection. The score for PI-16, relating to predictability in the availability of funds for commitment of expenditures, remained unchanged from B, indicating some reliability of the information from the Ministry of Finance on the availability of funds.

The challenge is to ensure a credible, comprehensive and transparent budget as a precondition for a well-functioning PFM system. Proper management of budgeted resources contributes to efficient service delivery and value for money. An effective audit is essential for a well-functioning PFM system. The internal audit function is important as it provides regular feedback to management on the effectiveness and efficiency of operations and compliance with laws and regulation. Similarly a high quality external audit ensures transparency and accountability in the use of public funds. The quality of regular information on actual budget performance is important for monitoring of budget implementation. According to the 2011 PEFA, the scores for indicators PI-22 (timeliness and regularity of accounts reconciliation) and PI-24 and PI-25 (quality and timeliness of in-year budget reports and of annual financial statements respectively), are low-level scores, highlighting the need for improvement in these areas. The credibility of revenue forecasting has been low, as indicated by the 2011 PEFA score of D for indicator PI-3; this affects expenditure levels. The PEFA also notes the problems of arrears, with the absence of concrete information on their amounts. The continued rollout of IFMIS, that has an in-built commitment control system, is expected to control this but it has yet to be rolled out to all cost centres. In addition, there are challenges indicated in the multi-year perspective in fiscal planning, expenditure policy and budgeting, reflected in the C+ score for PI-12. This highlights the need to continue with the MTEF reforms and to properly cost the sector strategies with an appropriate link to multi-year forecasts. Overall, there is still need for further improvement in the time given to the legislature for scrutiny of the budget and the quality of information presented to facilitate a proper review.

Based upon of these weaknesses, the GOM's priorities and the role of other DPs, the policy reform measures supported by the proposed RFSSP programme will contribute to the following:

(i) Improving budget preparation and execution;

(ii) Strengthening revenue collection and tax reforms; and

(iii) Strengthening external audit system. GOM has committed to strengthening capacity of PFM institutions through the PFEMRP 2011 -16, and the proposed programme support these efforts. To monitor the progress on the above policy measures, the Bank will use indicators and targets in the PAF. For budget execution, the variance between the budget and budget outturn will be used to assess whether there is budget discipline and control as well as capacity to spend. The comprehensiveness of the budget transparency and preparation process will also be assessed. With regard to strengthening revenue collection and tax reforms, the aim is to reduce aid dependence by increasing domestically financed expenditure through tax administration reforms. Oversight institutions are crucial for effective PFM, and the performance on follow-up of the recommendations of the Auditor General is an important milestone to ensure transparency, and value for money, as well as enhance the role of oversight institutions like Parliament and the National Audit Office (see log-frame and Appendix VI on Programme Targets).

Component 2: Strengthening Social Protection Systems

This Component supports improvement of the policy environment for social protection in Malawi. It will also provide urgent support to bridge the financing gap, protect social expenditure and mitigate the negative social impact of the recent devaluation. GOM has prepared a National Social Support Programme and is working towards adoption of the draft National Social Support Policy, whose operationalization will significantly improve coordination and reduce the fragmentation of social support programmes. It will also provide a framework for resource mobilization for social protection as well as for its monitoring and evaluation. The Government has been implementing social support programmes in the country since 2008. This demonstrated commitment has attracted substantial resources from Development Partners, who have been supporting over 90% of the total cost of these programmes. The massive 49% devaluation of the Kwacha has caused a significant reduction in average welfare, measured in terms of household consumption, with the impact particularly severe on the ultra-poor and vulnerable groups, such as women, youth, children, HIV/AIDS affected persons, the disabled and the elderly. Current budgetary constraints faced by GOM pose a threat to spending in the education and health sectors, particularly in provision of antiretroviral drugs, which are critical to the prevention of mother to child HIV transmission. In addition, the potential for social unrest due to continued rise in prices and shortage of essential commodities is high, if no social protection measures are undertaken urgently to support the poor and vulnerable groups. The operation will contribute to the achievement of some MDGs, while mitigating the risk of reversal of gains already registered. The new government, even with the devaluation, is currently enjoying popular support and goodwill, but this might not be sustained if social protection is not provided for the poor and vulnerable urgently.

Strengthening the Social Support Policy environment: The proposed RFSSP will support the operationalization of the National Social Support Policy through the implementation of the National Social Support Programme. Both the National Social Support Policy and its related Programme are scheduled for adoption by the National Social Support Steering Committee and the government before the end of 2012. The goal of this policy is to protect the poorest and reduce poverty, exclusion and vulnerability. The policy includes Guidelines for the design and implementation of social support interventions, coordination, resource mobilization, monitoring and evaluation of the impact of social support instruments, as well as the design of graduation and exit strategies for the beneficiaries. The approval of the Policy by the Cabinet will be a significant output of the RFSSP operation.

Improving the Coverage of Social Support Interventions: Social support interventions in Malawi currently provide limited coverage to the target groups, with the Social Cash Transfer Programme reaching only 35% of vulnerable groups in 7 districts out of 28, and full coverage in only 3 of the districts. The School Meals Programme covers only 19% of vulnerable children, excluding those below the age of 6; and the Labour-Intensive Public Works Programme is accessible to only 29% of the ultra-poor with labour capacity. Resource and capacity constraints account for this limited coverage. The support provided under the proposed RFSSP operation will enable GoM to maintain or increase its counterpart contributions to social support programmes, and thereby induce increased resource flows from development partners. This will help extend the coverage of social programmes to more vulnerable groups and mitigate the negative impacts of the reform measures on these groups. The envisaged increase in coverage will be an important outcome of the RFSSP operation.

Improving the efficiency of Social Protection Interventions: Social support interventions in Malawi are inadequately coordinated. This fragmentation has resulted in increased transaction costs arising from the running of several parallel institutional arrangements (steering committees, advisory committees, and management committees at national and sub-national level). The operationalization of the National Social Support Policy will help address this issue. Inefficiencies in targeting have resulted in errors in the selection of beneficiaries of existing social support programmes. This is largely due to absence of a system for harmonized targeting of social support interventions. The absence of a central registry (comprehensive national database) has also reduced the efficiency in beneficiary selection. Under the proposed operation, the Bank will support GOM to continue dialogue with DPs on measures to improve delivery of social support. These will include: the setting up of a system for harmonized targeting and a central registry for beneficiaries of social support instruments. For assessment and monitoring purposes, the proposed RFSSP operation will use an indicator on protecting priority pro-poor expenditures with a target for Government to meet budgetary allocations to health and education as approved in the 2011/12 FY and 2012/13 FY (see log-frame and Appendix VI on Programme Targets). For the floating tranche the targets will be approval of both the social support programme and the policy by December 2012.

Policy objectives: To support implementation of PFM and business enabling environment reforms, with the aim of maintaining macroeconomic stability and inclusive growth. This will be achieved through three main programme components

(i) Strengthening PFM transparency and accountability;

(ii) Improving business enabling environment; and

(iii) Skills development for job creation and service delivery.

3.1.1 Link with the CSP: The proposed Programme is linked to the Malawi 2011 -2012 Interim CSP pillars

(i) Improving Infrastructure and

(ii) Accelerating Private Sector Development. The Bank's Interim CSP proposes budget support as an effective instrument for enhancing economic competitiveness, private sector development, and for increasing the fiscal space in the budget for social sector spending for more efficient and reliable service delivery. The first Component of this proposed Programme is: Strengthening Public Finance Management by improving budget preparation and execution, improving tax regime and administration, as well as enhancing oversight through the audit office. By improving the governance framework in Malawi, through supporting sound Public Finance Management, the proposed Programme will contribute to creating an attractive PFM environment conducive to stimulating foreign and local investments in infrastructure development and accelerating private sector development. The second Component of the proposed Programme, the Enhancement of the Social Protection system, will strengthen budget execution, protect the poor from the current adverse social effects of the reforms, and contribute to achieving the fiscal stability and sound macroeconomic environment that is conducive to private sector development.

Underpinning Analytical Works. There are important analytical works that have been used to underpin the design of the proposed RFSSP operation. These include

(i) the Malawi Growth and Development Strategy (MGDS) II;

(ii) the 2010 MGDS I Assessment Report;

(iii) the Bank's Interim Malawi Country Strategy Paper 2011/12;

(iv) the PFM Situation Analysis Report;

(v) the World Bank/ADB 2009 Malawi Country Economic Memorandum;

(vi) the March 2011 and May 2012 CABS Reviews; (vii) the 2011 Public Expenditure Financial Accountability assessment; (viii) the 2010 Public Expenditure Review of Travel; (ix) the Bank's 2009 Malawi Skills for Private Sector Development; and (x) the Bank's Project Completion Reports (on RBCSP, GPRSG II and the 2010 CPPR). There is also the April 2012 GOM paper on Malawi Government Position on Macroeconomic and Social Support Package for Malawi.

The Malawi people generally will benefit from the Programme. The resources provided by the Bank will contribute to easing the fiscal burden, while supporting GOM efforts to protect pro-poor spending and improve transparency and accountability. In addition, the fiscal space arising from tighter expenditure control, and from favouring expenditure of quality, will result in greater spending on activities related to meeting the MDGs, especially in education, health and growth-inducing infrastructure. It is also expected that the institutional arrangements put in place by GOM and DPs to implement and monitor this Programme will benefit GOM staff through interaction with skilled, experienced staff of the development partners. GOM institutions, as well as development partners, will benefit and learn from the assessment reviews, targets formulation process, and information-gathering tasks that inform progress assessment on agreed targets. Since the CABS framework uses country systems, this will foster GOM institutions. Policy dialogue, formulation of the PAF and annual assessments are important processes that will build capacity among GOM officers. The Annual Progress Review that provides an assessment of all Government programmes in a year will be sustained and improved over the years.

MATILA Mothobi P.S. - OSGE2

Finance source	Amount
ADF	UAC 26,000,000
Total	UAC 26,000,000