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Implementation Completion Report (ICR) Review - Malawi - Rapid Response Development Policy Grant


  
1. Project Data:   
ICR Review Date Posted:
04/24/2014   
Country:
Malawi
Is this review for a Programmatic Series?
 No
First Project ID:
P126155
Appraisal
Actual
Project Name:
Malawi - Rapid Response Development Policy Grant
Project Costs(US $M)
 50  50
L/C Number:
Loan/Credit (US $M)
   
Sector Board:
Economic Policy
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  07/17/2012
 
 
Closing Date
06/30/2013 06/29/2013
Sector(s):
Public administration- Other social services (30%), General agriculture fishing and forestry sector (25%), Central government administration (25%), General energy sector (20%)
Theme(s):
Other social protection and risk management (30%) Public expenditure financial management and procurement (30%) Other human development (20%) Rural markets (20%)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Robert Keyfitz
Clay Wescott Lourdes N. Pagaran IEGPS2

2. Project Objectives and Components:

a. Objectives:


    Apart from minor differences in wording, the Program Development Objectives (PDO) are identical in the Grant Program Summary, the overview of the Rapid Response Program (par. 20), and in the detailed presentation of the Rapid Response Development Policy Grant (RRDPG) (Attachment A). From Attachment A, Section V:

    “The reform program supported by this operation is built on two pillars: (i) achieving and maintaining macroeconomic stability, and restoring the functioning of a market-based economy to ensure a quick growth rebound; and (ii) protecting the poor and most vulnerable groups in the short run while improving transparency of delivery systems."

b. If this is a single DPL operation (not part of a series), were the project objectives/key associated outcome targets revised during implementation?
No

c. Policy Areas:

(1 ) Achieving and maintaining macroeconomic stability and restoring the functioning of a market-based economy to ensure a quick growth rebound: (a) Restore macroeconomic stability and fiscal sustainability. Reduce fiscal deficit through measures to prioritize and control expenditure, including travel costs and subsidies to public entities; broaden the tax base and strengthen tax administration by means of electronic monitoring of VAT and income tax collections, and customs management; implement quarterly monitoring of expenditures and Integrated Financial Management Information System, tighten procurement and controls over parastatals. Prior action: Cabinet to adopt 2012/13 budget consistent with fiscal sustainability and prioritization of social expenditure. (b) Improve functioning of the petroleum market: Bring domestic oil prices into line with world market prices at market exchange rate. Prior actions: cabinet to adopt fuel pricing policy reinstating automatic price adjustment mechanism that fully reflects fuel import parity prices. (c) Improve incentives to exporters, including smallholder tobacco farmers. Allow exporters to retain foreign currency receipts or convert them at the prevailing market exchange rate, offsetting welfare losses from the impact of exchange rate liberalization on import prices. Prior action: issue directive from Reserve Bank of Malawi mandating that exporters, including tobacco farmers, may transfer earnings in US dollars to commercial banks at prevailing market determined exchange rate.

(2) Protecting the vulnerable groups while improving transparency of systems: (a) Expand Labor-Intensive Public Works (LIPW) Program: Utilize Additional Funding for the Irrigation, Rural Livelihoods and Agricultural Development Project (IRLADP) and Malawi Third Social Action Fund Adaptable Program Loan II (MASAF 3) to scale up the Labor-intensive Public Works Program (LIPW) to enhance safety net programs. Prior action: Include scaled up LIPW in 2012/13 budget. (b) Expand the Farm Input Subsidy Program (FISP): Expand to an additional 100,000 beneficiaries, ensuring timely delivery of fertilizer to smallholders and contributing to increased food production. Prior action: Include provision for scaled up FISP in 2012/13 budget. (c) Improve economic management of FISP: Institutionalize annual procurement audits for FISP to improve economic management, efficiency and transparency of the FISP program. Prior action: Implement recommended FISP procurement audit procedure

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates

The Rapid Response Program for the Republic of Malawi had three components, each with its own financing, of which the Rapid Response Development Policy Grant (RRDPG) was one. The other components consisted of Additional Financing for two other Bank operations, the IRLADP and MASAF 3. Each component was in the amount of US$50 million. The ICR (and hence this review) covers only the RRDPG.

The RRDPG became effective 7/24/2012 and closed 6/30/2013. There was no cofinancing or borrower contribution.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:

In early 2012, Malawi was heading toward a severe macroeconomic crisis stemming from a massively overvalued exchange rate (by 80% according to the parallel exchange market) and a breakdown of relations with the donor community. Most aid had been suspended and foreign reserves had dwindled to less than two weeks of import cover. Oil and other imported goods were in short supply, and the export sector (mainly smallholder tobacco farmers) was badly squeezed. Growth was slowing and inflation rising. Following the sudden death of President Bingu wa Mutharika in April 2012, a new administration had taken office and sought urgent support from the Bank to avert an economic collapse. The objectives were thus highly relevant to addressing Malawi's short term stabilization needs and offsetting the social costs/poverty impacts of macroeconomic adjustment.

For the Bank, macro management and social protection were elements of the Country Assistance Strategy (CAS) at closing (FY 2013-17). Specifically, two CAS results areas were:

    • Improve macro management and reduce vulnerability to imbalances and shocks, including through better budget management; increase agricultural productivity.
    • Improve social safety nets and lower vulnerability to risks, including through better utilization of public works programs.
One reservation about the PDO stems from a blurring of short and long term time frames. Part 1 of the PDO refers to, “achieving and maintaining macroeconomic stability,” which is inconsistent with the inherently short term, rapid response nature of the operation. Maintaining macroeconomic stability may have been intended as a bridge to a follow-on DPO, but it was overambitious to include it in the RRDPG. Meanwhile, part 2 refers to "improving the transparency of systems" which, as the ICR notes, implies longer term institutional reform rather than rapid-response macro support. However, these were minor elements and overall the objectives were substantially relevant.

Relevance: Substantial

b. Relevance of Design:

The operation was well designed to address structural problems in the foreign exchange and oil markets that had brought Malawi to the brink of crisis, while the financing helped to bridge urgent fiscal and balance of payments shortfalls. Meanwhile, strengthening social safety nets addressed poverty impacts of the reforms. Policy areas and prior actions were appropriately targeted and clearly linked to the objectives. The results framework consisted of 6 PDO indicators and 2 intermediate indicators which broadly captured the outcomes, although "achieving macro stability" was poorly covered, which is surprising as a few additional measures such as import cover, and the parallel foreign exchange market premium could have easily been added.

Beyond the primary, "rapid response" focus, as noted the design also included a more structural measure to reform the FISP procurement audit process. While this was arguably misplaced in the RRDPG, a recent corruption scandal highlights the broader relevance of institutional reform as an area for Bank engagement.

Relevance: Substantial


4. Achievement of Objectives (Efficacy) :


(i) Achieving and maintaining macroeconomic stability, and restoring the functioning of a market-based economy to ensure a quick rebound: Deficit reduction and reform of the oil and foreign exchange markets contributed to a sharp macroeconomic recovery. After slowing to 1.9 percent in 2012, GDP growth accelerated to 5.0 percent in 2013, while inflation began trending lower, though more slowly than anticipated. Official reserves, which had fallen to below two weeks of imports in 2012, were estimated to have risen to two months of imports by 2013. In the results framework, the fiscal deficit (net of grants) was brought down from 7 percent of GDP to 0.8 percent, surpassing the target of 2 percent, while fuel imports and farm incomes both increased, substantially or fully achieving their targets.
    Policy measures directed toward restoring the functioning of a market-based economy were similarly appropriate and effective. Unification of the foreign exchange market virtually eliminated the black market premium. Tobacco exporters were allowed to convert foreign currency receipts at the market exchange rate, bringing incentives into line with world prices, while institutional reforms to the foreign exchange market, especially the establishment of an interbank market, enhanced the financial sector. The petroleum market moved toward international parity pricing and a price adjustment mechanism was restored, resulting in a sharp increase in supply. Two results indicators measuring incomes and output in the tobacco sector more than doubled and exceeded their targets, while a third, the volume of fuel imports, substantially met the target, missing by only a small amount.

    No doubt the RRDPG’s policy areas were relevant to averting an impending crisis, though it is difficult to say how much of the turnaround was attributable to the RRDPG itself. First, a new Extended Credit Facility (ECF) program agreed with the IMF at the same time as the RRDPG covered the same set of macro policy reforms. Second, other development partners quickly followed the Bank’s lead and resumed their support for Malawi’s new government. In fact, the RRDPG represented only around 5 percent of official inflows to Malawi in 2012-13. Third, the 2013 outturn benefited from buoyant tobacco exports. And finally, failure to observe the structural benchmark of zero domestic funding of the deficit plus the emergence of a major corruption scandal cast doubt about the depth and sustainability of Malawi’s turnaround.

    While attribution is difficult, coordination with the IMF conveyed a clear sense of policy priorities, and at a critical moment and the Bank’s credibility and leadership paved the way for a normalization of relations with the rest of the donor community. Moreover, the RRDP’s financing, though relatively small, was well timed to cover balance of payments and fiscal shortfalls. It seems clear the Bank’s quick response was pivotal in averting a crisis that would have imposed severe hardship, justifying a rating of substantial for achievement of this objective.

    Rating: Substantial

    (ii) Protecting the poor and most vulnerable groups in the short run while improving transparency of delivery systems: A twofold approach provided short term income support to poor households while simultaneously boosting potential output. (1) The Labor Intensive Public Works (LIPW) program was scaled up in the 2012 budget to create employment for 48 days for 590,000 poor households while investing in rural infrastructure such as small scale dams and irrigation infrastructure to improve future productivity. The results indicator -- the share of LIPW expenditure in the budget -- rose by 3.4 percentage points. While this fell short of the target of 5 percentage points, the expenditure took place as planned and the shortfall was explained by the unanticipated impact of currency devaluation on total expenditure (i.e. the denominator of the ratio in question). Thus, the target was substantially achieved;.(2) The expansion of the FISP delivered subsidized fertilizer to 1.5 million households at just 5% of the market price. The share of spending under the FISP rose from 7.5 percent to 14 percent of recurrent spending, exceeding the target of 12 percent.

    In addition, the second component of the PDO proposed to increase the transparency of delivery systems through a reform of the FISP procurement audit process (a prior action). Although the reform, which consisted of assigning the task to the National Audit Offfice, was implemented, capacity constraints prevented the completion of the 2010/11 audit as called for in the results framework. In any case, the ICR criticizes the inclusion of such a longer term, structural reform in a short term rapid response program. This is a valid point, although the implementation of the reform suggests a measure of progress was achieved and a recent corruption scandal highlights the importance of keeping public financial management on the agenda.

    Rating: Substantial


    5. Efficiency (not applicable to DPLs):

    6. Outcome:


    The objectives were consistent with the CAS and highly relevant to Malawi’s short term macro stabilization needs. The quick disbursing budget support helped to fill balance of payments and fiscal gaps and the timely preparation catalyzed a resumption of donor support at a critical moment. The design was substantially relevant, with policy measures narrowly focused on issues that had brought the economy to the brink of crisis. There is little doubt that the Bank, through the RRDPG, played a key leadership role in the resumption of donor support, thereby averting a serious disruption. While the FISP audit failed to achieve the intended outcome, it was peripheral in any case and arguably helped to maintain the dialogue about governance and institutional issues. Overall, the outcome was satisfactory.

    a. Outcome Rating: Satisfactory

    7. Rationale for Risk to Development Outcome Rating:

    A range of capacity, governance and structural constraints threatens Malawi’s fragile recovery. A massive fraud and corruption scandal has engulfed the Government, once again disrupting relations with the donor community and throwing the pending May 2014 election into doubt. Meanwhile, there has been slippage in the IMF program, and inflation, after easing somewhat, has remained stubbornly high. More broadly, the economy continues to face challenges of undiversified exports and financial underdevelopment. Many of the potential political and economic difficulties may be avoided, but in the near term there appears to be significant risks.

    a. Risk to Development Outcome Rating: Significant

    8. Assessment of Bank Performance:

    a. Quality at entry:

    The Bank’s performance at entry was satisfactory. In challenging circumstances, the operation was: (1) timely and well targeted on priority needs; (2) coordinated with the resumption of IMF lending; (3) relevant to the CAS; and (4) appropriately sought to mitigate poverty impacts. The program drew on extensive prior analytical work. The Bank was the only development partner to have maintained an active dialogue with the previous Government, and it played an important leadership role in the resumption of support from the donor community. The Bank's lead attracted substantial additional resources from the EU, African Development Bank, the UK and Germany.

    Quality-at-Entry Rating: Satisfactory

    b. Quality of supervision:

    Supervision was carried out as part of the donor community's Common Approach to Budget Support (CABS) and staff also participated in the IMF's quarterly ECF review missions. No Implementation Status and Results Reports (ISRs) or Aides Memoires were filed in the system making it difficult to get a sense of the dialogue with the authorities and communication with Bank management. However, according to the team, detailed, ongoing discussions were held with the authorities during preparation of a follow-on programmatic Economic Recovery Development Policy Operation (approved May 2013). Management was kept fully informed about the status of the FISP audit.

    Quality of Supervision Rating: Moderately Satisfactory

    Overall Bank Performance Rating: Satisfactory

    9. Assessment of Borrower Performance:

    a. Government Performance:

    The Government’s performance was broadly satisfactory. The program was ambitious and a strong commitment to it was expressed from the top. All prior actions were completed, and all intended results were substantially achieved, except for the FISP procurement audit.

    Government Performance Rating: Satisfactory

    b. Implementing Agency Performance:

    Implementing Agency Performance Rating: Satisfactory

    Overall Borrower Performance Rating: Satisfactory

    10. M&E Design, Implementation, & Utilization:

    a. M&E Design:

    The M&E framework comprised 6 PDO indicators and 2 intermediate indicators. These were well selected and relevant and adequately covered the outcomes, with the exception of macro performance where more detailed coverage would have been useful.

    b. M&E Implementation:

    Data were officially sourced from sector Ministries and Government departments. According to the ICR, the program was monitored during the biannual CABS review meetings in October 2012 and March 2013, as well as during quarterly reviews of the IMF's ECF program in which the Bank participated. However, no ISRs or Aides Memoires are available so it is impossible to verify the extent to which progress was monitored and incorporated into dialog with the authorities.

    a. M&E Utilization:

    Similarly, there is no information is available about utilization of M&E, especially follow up on the FISP audit.

    M&E Quality Rating: Substantial

    11. Other Issues:

    a. Safeguards:
    No issues raised.

    b. Fiduciary Compliance:
    No issues raised.

    c. Unintended Impacts (positive or negative):
    None identified.

    d. Other:



    12. Ratings:

    ICR
    IEG Review
    Reason for Disagreement/Comments
    Outcome:
    Satisfactory
    Satisfactory
     
    Risk to Development Outcome:
    Moderate
    Significant
    Recent developments suggest the ICR's rating is overly optimistic. 
    Bank Performance:
    Satisfactory
    Satisfactory
     
    Borrower Performance:
    Satisfactory
    Satisfactory
     
    Quality of ICR:
     
    Satisfactory
     
    NOTES:
    - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
    - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

    13. Lessons:

    The ICR draws a number of appropriate lessons: (1) Strong Government leadership and political will are essential ingredients to a successful operation; (2) A longer term partnership and alignment with the Government's priorities are instrumental in enabling a quick response to short term needs; (3) Coordination with other development partners and complementarity with other Bank activities facilitated the preparation of a coherent strategy. Perhaps the most important lesson is: (4) It is challenging for DPOs to address governance issues.


    14. Assessment Recommended?

    No

    15. Comments on Quality of ICR:

    The ICR was concise and to the point, and provided a good description of the context and design of the operation. Insightful lessons were drawn and the ratings were appropriate, except for an overly sanguine assessment of risks. One area that would have benefited from a more careful analysis was efficacy, as the attribution of outcomes to the operation wasn't entirely convincing, though the ratings appeared justified.

    a. Quality of ICR Rating: Satisfactory

    (ICRR-Rev6DPL-Jun-2011)
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