Document of

The World Bank

FOR OFFICIAL USE ONLY

Repot N.. P-4156-}I

REPORT AND RECOMNENDATION

OF TME

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEIOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROFOSED LOAN

IN AN AMOUNT EQUIVALENT TO USt7.8 MILLION

TO THE

GOVERNMENT OF MALAWI

FOR AN

INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT

December 2, 1985

This dooatnet L-s a restioFtd distribudon and may be used by renpiemts OdY in the ped see of0 ~~their Lfcmd duSe; Its rontents ass not owerwise be dsSosed wit.1twit World Bank uoiza*fiwon

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CURRENCY EQUIVALENTS

(August 1985)

Currency Unit - ILawian Kwacba (MK)US$1 - MK 1.80MK 1 - US$0.56

GLOSSARY OF ABBREVIATIONS

ADB - African Development BankADMARC = Agricultural Development and Marketing CorporationCBM - Commercial Bank of MalawiCDC - Comonwealth Development CorporationDEG - Deutsche Entwicklungsgesellschaft (German Finance Company for

Investments in Developing Countries)EIB = European Investment BankFM = Nederlandse Financierings Maatschappi Voor - Outwickeling Sladen

(Netherlands Finance Company for Developing Countries)IFC - International Finance CorporationINDEBANK = Investment and Development Bank of Malawi LimitedMDC - Nalawi Development Corporation.EPC = Malavi Export Promotion CouncilNEK = National Bank of MalawiNBS - New Building SocietyPGL - Press Group LimitedPOSB = Postal Savings BankSEDOM = Small Enterprise Development Organization of Malawi

FISCAL YEAR

Government of Malawi: April 1 - March 31INDEBANK: January 1 - December 31

FOR OFFICIAL USE ONLY

MALAWI

INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT

Loan and Project Summary

Borrower: Republic of Halawi

Beneficiaries: Investment and Development Bank of Malawi (INDEBANK), NationalBank of Malawi (NBM) and the Commercial Bank of Malawi (CBM).

Terms: Repayable in 15 years, including four years of grace, at thestandard variable interest rate.

Amount: US$7.8 million equivalent

RelendingTerms: INDEBANK Line of Credit. The Government would onlend

US$3.0 million to INDEBANK to finance industrial, and commercialprojects at the variable interest rate to be paid by Governmenton the proposed loan. Repayment would be in accordance with theaggregate of the amortization schedules applicable to subloans.The maximum repayment period is 15 years including four years ofgrace. INDEBANK would on-lend loan proceeds at a variable ratethat would be positive in real terms and adequate to coverreasonable administrative expenses. INDEBANK's current lendingrate for industrial credit is 13% p.a. Sub-borrowers would bearthe exchange rate risk.

Agricultural Credit. The Government, through the Reserve Bankof Malawi, would onlend US$4.5 million to INDEBANK, the NationalBank of Malawi and the Commercial Bank of Malawi at a rateinitially set at 10.5% p.a. These institutions would onlend atrates initially ranging from 11.5 to 15% p.a. The Governmentwould bear the exchange rate and variable interest rate risks.

Technical Assistance Component. US$.3 million would be aGovernment grant to INDEBANK.

ProjectDescription: The project's objectives are to: (i) build upon and further

* strengthen INDEBANK's institutional capabilities, assist indiversification of its role in productive sectors, and expandits activities in the agricultural sector-the mainstay ofMalawi's economy; and (ii) fulfill the need for term financingfor agricultural estates to increase productivity therebyimproving the potential for diversification. The proposedproject consists of (i) a US$3.0 million credit line to financeviable industrial, commercial, transport and tourisminvestments; (ii) a US$4.5 million agricultural credit componentto Provide investment credit to agricultural estates; and (iii)US$.3 million in technical assistance to INDEBANK to strengthenits capability to promote, appraise and monitor agriculturalprojects.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contenst may not otherwise be disclosed without World Bank aumiorization.

(ii)

Benefitsand Risks: The proposed project would strengthen INDEBANK's capabilities to

promote the development of productive activities and therebyenable it to create new investment and employment opportunitiesin Malawi. Benefits would accrue from the agriculturalcomponent by (i) satisfying existing unfulfilled demand for termfinance for agricultural estates thus filling a void in thefinancial sector; and (ii) financing productivity improvinginvestments which would free up land and thereby increasepotential for diversification. The pilot nature of thiscomponent - partly to be channeled through the commercial banks

would permit evaluation of-the suitability of theseinstitutions to effectively administer term credit to the estatesubsector. -

The main project risk is that the estate crops are produced forexport and a substantial drop in the international prices forthese crops would result in liquidity problems for sub-borrowersand in defaults on loan repayments. Bank forecasts indicatesome stability in these commodity prices. Further, investmentsto be financed are expected to develop lower cost producersbetter able to withstand price falls. Gradual diversificationwould further reduce farmers' vulnerability to this risk.Finally, participating financial intermediaries' careful reviewprocedures would screen out marginal investments.

Estimated Cost: Local Foreign Total-C USS million)

INDEBANK Line of Credit Component 3.42 6.13 9.55Agricultural Credit Component 1.80 2.70 4.50Technical Assistance Component .10 .20 .30

5.32 9.03 14.35

Financing Plan: a/ Local Foreign Total(US$ million)-

Internal cash generation 2.22 - 2.22IBRD loan 1.90 5.90 7.80Other borrowings (from ADB, 1.20 3.13 4.33EIB, CDC and FNO) 5.32 9.03 14.35

EstimatedDisbursements:

Bank FY 1986 1987 1988 1989 1990 1991 1992 1993%,USS million)

Annual 1.0 2.0 1.5 1.4 1.0 .3 .3 .3Cumulative 1.0 3.0 4.5 5 9 6.9 7.2 7.5 7.8

Rate of Return: NA

Staff AppraisalReport: No. 5815-HAI, dated December 2, 1985

a/ Commercial banks would provide short term financing to the agriculturalestates to supplement term financing provided under the proposed project.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TO THE REPUBLIC OF MALAWIFOR AN INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT

1. I submit the following report and recommendation on a proposedcredit to the Republic of Malawi for the equivalent of US$7.8 millionto help finance an Industrial and Agricultural Credit Project. The loanwould have a term of 15 years, including 4 years of grace, with a variableinterest rate.

PART I - THE ECONOMY

2. A Country Economic Memorandum dated October 4, 1985, wascirculated to the Executive Directors on October 15, 1985. The followingparagraphs summarize the principal findings of that report. Annex Icontains the basic country data.

3. Malawi is a small (118,500 sq km), densely-populated (about 6.6million people in 1983) landlocked country in southeastern Africa. Itsmain assets are moderately fertile soils, good water resources and aclimate favorable to crop production. Unlike its neighbors, Malawi has noknown substantial mineral resources.

4. With a GNP per capita of US$210, Malawi has been identified bythe United Nations as one of the world's poorest countries. Nevertheless,since independence in 1964 until 1979, Malawi had steady economic growth,averaging six percent per annum in real terms (three percent per capita).The leading sectors were agriculture and manufacturing. Investment rosefrom 9 percent of GDP at independence to 33 percent in I979, financed byincreased domestic savings (from nil to 14 percent of GDP in 1979), andofficial and private capital inflows. In 1980 and 1981, Malawi met withserious difficulties due to world economic conditions, and GDP contractedby six percent over these two years. Consumption fell somewhat, butsavings and investment were reduced drastically. S'nce 1982, recovery hasbeen underway, with annual GDP growth averaging 4.6 percent through 1984.

5. With the exception of the 1980-81 recession, Malawi has enjoyedsteady economic growth, due in large part to the pragmatic policies of theGovernment. Malawi has adopted an outward looking strategy based onagriculture, consistent with the country's resource endowment. Governmentinvestment has concentrated on provision of infrastructure, utilities andsupport services to encourage private initiative. The Government has alsoemphasized smallholder agriculture, a sound policy given that 90 percent ofthe population lives in rural areas and depends on agriculture for itslivelihood. Traditionally, three quarters of the development budget hasbeen directed towards agriculture and transport, the rest foradministrative and social functions.

6. Malawi's economy is heavily dependent on three primary commodityexports (tobacco, tea, and sugar) and is highly vulnerable to internationalprice fluctuations. Since 1974, there have been periodic balance of

payments problems of increasing severity due primarily to (a) rapidescalation in import prices, particularly of fuel and intermediate andcapital goods; (b) cyclical swings in export prices of tobacco, sugar andtea; (c) significantly higher costs of transport for exports and importsowing to rising ocean freight charges, port congestion in Mozambique, and,more recently, severe disruptions of overland transport routes throughMozambique; and (d) an increasing debt service burden.

7. Beginning in 1978, Malawi's chronic balance of payments problemsbecame less manageable. The current account deficit rose from a level of8-9 percent of GDP in the mid-1970s to 18 percent in 1978 and 23 percent in1979. This balance of payments crisis was due to declining terms of trade,which fell 40 percent between 1977-80, increased transport difficulties anddrought. Import prices rose by 39 percent over this period, primarily dueto petroleum price hikes. Conversely, export prices declined by 16 percent(due mainly to falling tea and tobacco prices). In 1980 and 1981, adrought led to reduced agricultural exports and necessitated increasedimports of subsistence crops (maize). Nevertheless, by 1981 Malawi enjoyeda surplus on the merchandise trade balance thanks mainly to a contractionin imports and has increased this surplus steadily since 1981. Continuingcurrent account deficits were due to a large deficit on the serviceaccounts. Transport costs for imports and exports were greatly increaseddue to continuing problems with traditional export routes throughMozambique. Debt servicing also contributed to the deficit on theinvisibles account. These current account deficits were initially financedby sharply increased private capital inflows. These were still notsufficient to finance the current account deficit and the country drew downits foreign reserves to less than one month of imports by end 1983. In1984, the current account deficit was greatly reduced to three percent ofGDP and reserves were increased by US$65 million. This was due toimprovements in the terms of trade, led by record tea prices, and a sharpincrease in exports, as previous stocks of tobacco and sugar were moved outof the country, resulting in a large trade surplus, nearly matching thedeficit on the services account. The outlook for 1985 is for a largerdeficit as export prices have declined and carryover stocks are not aslarge.

8. The economic difficulties of 1980-81, as well as problems withpublic corporations led to an increase in the Government budget deficitreaching 16.5 percent of GDP in 1981, double historic levels. This was dueprimarily to a rapid increase in government expenditures, attaining 35percent of GDP in that same year. Much of this was made up of recurrentexpenditures, especially interest payments. Revenues did not increasecommensurately, given the recession, hence the large fiscal deficit. Thesedeficits were financed by government borrowing, primarily domestic. Publicsector credit represented 60% of the total in 1984 and as a percentage ofGDP it increased to 13% in 1984 as compared to 9% in 1974. The fiscalposition has improved since, with increased revenues and restrainedspending so that the deficit has been reduced to 8.2 percent of GDP byFY85, an improvement, though still above target levels. Improvingexpenditure control is a key element to continuing Malawi's economicrecovery. Inflation has been steady at approximately ten percent since1981.

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9. Given Malawi's early stage of development, foreign capitalinflows, especially of a public nature, have been important in developmentfinancing. In the pre-recessionary period (1969-79), foreign savingsfinanced approximately half of domestic investment. During the recession(1980-81), public and private capital inflows were used to maintainconsumption levels, and domestic savings fell. Since 1981, domesticsavings have been increasing, while private inflows have virtually ceased.Public transfers continue, financing approximately 50 percent of allinvestment, much of this from World Bank Group loans and credits. Grantsand bilateral transfers have declined from past levels, and have not keptpace with Malawi's needs.

10. Initially, the country attempted to ameliorate the economicdownturn of 1979-1980, by increased external borrowing, mostly oncommercial terms, in order to maintain import levels and thus production,employment and consumption. Investment in the economy declined sharply,while consumption declined only slightly. It soon became evident that withincreasing inflationary'pressures and fiscal and balance of paymentsdisequilibria, more stringent adjustment efforts were needed. TheGovernment, therefore, launched a stabilization effort designed to reduceshort-term fiscal and balance of payments disequilibria and a structuraladjustment program designed to improve efficiency of resource use andensure that positive growth of per capita income can be reestablished andsustained over the medium and longer-term within the context of amanageable balance of payments current account deficit. The structuraladjustment program is broad-based; aimed at encouraging diversification ofproduction and exports, improving performance of productive sectors,rehabilitating, restructuring and otherwise strengthening key developmentinstitutions, and improving resource mobilization and allocation in thepublic sector.

11. The Government and the EMF agreed to a standby program for SDR 22million in August 1982. A first phase of a multi-year stabilizationeffort, the program aimed at reducing both the balance of payments currentaccount deficit and the budgetary deficit. As part of the program, theGovernment devalued the kwacha against the SDR by 15 percent in April1982. The other performance criteria involved phased ceilings on netdomestic assets of the banking system and on net credit to the Governmentand a limit on government external commercial borrowing. The standby wasimplemented satisfactorily, and the Government and the IMF concluded a newmulti-year program, and a three year Extended Fund Facility was approved inSeptember 1983 and, except for a six-month interruption in late 1984-early1985, it has been implemented successfully so far. As part of the ExtendedFund Facility, the Government devalued the kwacha against the SDR by 12percent in September 1983 and switched to a basket of currencies in January1984. Since January of 1984, the kwacha has depreciated more than 30percent against the dollar, including a 15% devaluation in March 1985.

12. The Bank's first Structural Adjustment Loan in support of theGovernment's program was made in June 1981, for US$45 million. Afterinitial difficulties, good progress was made in implementing theGovernment's adjustment program. Additional funds were allocated to theagricultural sector, certain agricultural prices were adjusted, publicutility tariffs were increased and the budget for 1982-83 was trimmed, withsufficient resources provided for major development sectors. The second

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tranche was released in April 1982. However, during 1982 the country'sefforts were set back by increased disruption of the traditional transportroutes and continued depressed demand for Malawi's export products.Nevertheless, the country was ahle to hold its current account deficit to11.3 percent of GDP in 1983, reduce the budgetary deficit for FY1983 to 9percent of GDP, and meet its IMF standby borrowing ceilings.

13. The second phase of the structural adjustment program wassupported by SAL II and approved by the Board in December 1983. Theprogram builds upon the reforms of SAL I, focussing on measures to improvethe mobilization and management of resources, to strengthen keyinstitutions, and to upgrade the performance of the public sector. Theprogram has been successful in achieving most of its objectives. Among theachievements of the program have been (a) increased smallholder exportproduction following an increase in price incentives; (b) increasedindustrial production and investment incentives resulting from a program ofprice decontrols; (c) increased domestic energy production; (d) astrengthening of the financial position of key public and privateenterprises; and (e) a reduction in the budgetary and balance of paymentsdeficits. Efforts to improve the control and allocation of publicexpenditures and to reduce the overall size of Government have been slow,but steps in the right direction have been taken. While the economy hasgrown well in 1983 and 1984, prospects are for continued economicdifficulties and the need for continued adjustment to balance of payments,fiscal and transport constraints. Government remains committed to theadjustment process and is preparing to continue its program with the helpof a Third Structural Adjustment Operation (paras. 15 and 16).

14. By the end of 1984, Malawi's external public debt outstanding anddisbursed totalled US$741 million. In late 1982, Malawi rescheduled bothits official and commercial debts. Otherwise its debt servicing, includingrepayments to the IMF, would have amounted to over US$130 million,equivalent to over 40 percent of exports of goods and services. Thiscompares to a level of about 10 percent in the mid-1970s. A second year ofrescheduling was agreed to in October of 1983, keeping the debt serviceratio to 26.7 percent in 1983. The Government has indicated that it willnot be asking for any further rescheduling, and the debt service ratio isexpected to remain at about 40 percent in 1985 and 1986 before falling toless than 25% in 1990. Because of this high debt service ratio, commercialbank borrowing will have to remain sharply curtailed and the balance ofpayments gap should be closed by concessionary financing. Similarly,constraints on local borrowing would indicate the need for local costfinancing to be provided by donors.

PART II - BANK GROUP OPERATIONS IN MALAWI

15. Over the past 19 years, Malawi has received 34 IDA credits andone Special Fund credit totalling about US$463 million and 8 Bank loanstotalling US$99 million, of which 2 were on third window terms. The firstBank loan to Malawi was made on third window terms in June 1976 and thefirst standard Bank loan in April 1977. Of the Bank Group assistance, someUS$165 million (29 percent) was for agriculture, USS108 million (19percent) for education, TJSS114 million (20 percent) for roads, USS98million (18 percent) for structural adjustment, USS39 million (7 percent)for power, USSII million (2 percent) for water, and the balance of US$27

million (5 percent) for health, development finance, technical assistance,and urban housing. For FY86, a credit of US$11.6 million equivalent for anAgricultural Extension and Planning Support Project has so far beenapproved. Documents for a US$30.0 million equivalent IDA Credit and US$40million equivalent African Facility Credit for the Third StructuralAdjustment Operation are being submitted to the Executive Directors atabout the same time as this project. A Forestry/Wood Energy Project isalso scheduled to be presented to the Executive Directors during FY86.IFC's equity participations and lending commitments in Malawi total aboutUS$25.8 million and include investments in textiles, sugar, a DFC(INDEBANK), tourism, and the manufacture of alcohol from molasses. Inaddition, a US$0.5 million equity subscription and US$1.8 million loaninvestment in the Viphya Plywoods and Allied Industries United wereapproved in August 1984, but are not yet signed. On September 23, 1985, anIFC investment to finance the first leasing and finance company wasapproved. Annex II contains a Summary Statement of Bank Group Operationsas of September 30, 19B5.

Bank Lending Strategy

16. During the next five years, Bank group assistance will focus onhelping Malawi restructure its economy, especially in the areas of improvedagricultural productivity and dealing with the transport problem. Focuswill also be given to strengthening the effectiveness and efficiency ofGovernment and other development institutions. Bank group assistance willalso address Malawi's pressing needs in the area of human resourcedevelopment, including the issues associated with a population growth rateof 3.2%, among the highest in the world. The objectives of key reformsunder the Third Structural Adjustment Operation (para. 15) are to furtherimprove incentives and productive efficiency in the economy, includingimproved export promotion incentives and support for diversification. Thecredit will also support strengthening the planning and policy formulationprocess and public investment progra-uming. Project lending will complementGovernment's structural adjustment program by providing necessarytechnical, financial and institutional support. Future lending will be inhealth and population, water supply, transportation, education andagricultural credit.

17. The Bank Group's economic and sector work will continue to buildan analytical base for discussions with the Government on key developmentissues. In agriculture we have concluded a study on diversification andthe steps needed to help broaden the export base of the economy; a study ofthe question of land utilization and what can be done to improve theproductivity of this scarce resource is underway, as are project fundedstudies on livestock, smallholder irrigation and management and training inthe Agriculture Ministry. In FY87, we will prepare an updated AgriculturalSector Memorandum, looking at progress made as a result of structuralchanges in the sector and also analyzing sub-sectoral policies pertainingto agricultural manpower training, production of perennial crops, etc. Thetransport sector report which deals with external transport constraints hasbeen completed. In the social sectors, we will complete in FY86 a study ofthe dynamics of population growth, its implications for the economy and therecommended development assistance strategy for the sector. In educationwe will study the training needs in the economy with special emphasis onthe agriculture, health and transport sectors. A Public Sector Investment

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Review has recently been carried out. These studies will provide the basisfor helping Malawi develop appropriate sectoral strategies and investmentprograms. Further studies expected to be carried out in the near futureinclude a special study on the institutional aspects of development whichwill look at shortcomings in the Government's institutions and bureaucraticsystem which have led to some of the structural weaknesses in the economy.A study of the financial slystem will also be carried out.

18. A Consultative Group meeting is planned for January 1986 toimprove donor coordination and increase the level of resources needed tosupport MalawiTs adjustment process. The Country Economic Memorandumplanned for FY87 will concentrate on the long term constraints to Malawi'sdevelopment (porulation, agricultural land pressure, etc.).

Disbursements-

19. The levels of disbursements for Malawi, including program lendingwere as follows: in 1982, US$70.1 million; in 1983, US$33.2 million; in1984, US$58.2 million; and in 1985, USS46.4 million. Disbursements of theBank Group loans and credits in Malawi have generally been good and comparefavorably witb other countries in the region and even on a Bank-widebasis. During the period FYBO-85, the disbursement rate on loans andcredits to Malawi (excluding the effect of non-project lending) averagedabout 26 percent per annum, significantly higher than the Eastern AfricaRegional average of 19 percent and the Bank-wide average of about 21percent.

Project Implementation

20. Overall, implementation of Bank projects continues to be good.The Audit and Project Completion Reports underscore Malawi's sounddevelopment record and progress in extending nationwide the benefits of itsinvestments. However, the third National Rural Development Program (NRDP)-project and the Fifth Highways project have experienced moderate problemsdue to inadequate budget provision and management shortcomings. Effortsare being made to allocate sufficient budgetary resources for theseprojects.

PART III - THE MANUFACTURING, AGRICULTURAL ESTATES AND FINANCIAL SECTORS

A. Manufacturing Sector

Performance and Structure

21. Malawian industry is still embryonic although it accounted for12.4% of GDP in 1984, up from 5% two decades earlier. The sector isdominated by the production of food and beverages, textiles and footwearfor domestic consumption, and tobacco and tea processing for export.Between 1964 and 1975 the sector was characterized by rapid growthaveraging 12% in real terms, approximately twice the growth rate of thenational economy. Between 1976 and 1981 manufacturing export growth slowedto an annual average rate of only 3.3% in line with the overall economicrecession in Malawi. After 1982, growth in the sector began to recover andhas grown in line with the rest of the economy in both 1983 and 1984. Thisimprovement is due in part to price liberalization as part of the

structural adjustment program. Malawian industry in general is one of themost labor-intensive in Africa, consistent with Government's policy tosupport employment generation. However, the sector's overall share of thetotal labor force declined from approximately 162 in 1968 to 9% in 1982 dueto the faster growth of employment in the estate subsector.

22. Manufacturing activity is concentrated around Blantyre, thecommercial center of Malawi. The sector is dominated by large scale firmswhich generally reflect appropriate economies of scale given the limiteddomestic market and special transportation constraints posed to exportoriented enterprises. Fourteen large firms (tea, sugar and tobaccoagroindustries) each with more than 500 employees account for more than 51%of total manufacturing employment while firms with between 10 and 100employees account for less than 10% of sector employment.

23. Because of poverty and a low level of savings in the country,only a few local enterprises, often in collaboration with foreign partners,can mobilize the investments required in medium- and large-scale industry.Statutory corporations, notably Malawi Development Corporation (MDC), PressGroup Limited (PGL) and the Agricultural Development and MarketingCorporation (ADMARC) were formed with the objective of catalyzing thesector's growth and development of a strong indigenous private sector inMalawi. The profitability of these three bodies has, in the past,permitted their investments in and management of many subsidiary companieswhich together contributed more than 70% of the sector's value added andmore than 40% of its GDP in 1979. Each of these enterprises has undertakenextensive reorganization and divestment programs under the Government'sStructural Adjustment Program.

24. Results of these reorganization efforts have for the most partbeen successful. MDC, whose corporate objective is to catalyze newinvestments and generate funds for new industrial project development, hasreduced its subsidiary and associated companies from 32 to 21 throughmergers, divestment and new management. After making losses in both 1983and 1984, the company is expected to make a modest profit in 1985. Effortsto strengthen ADMARC's institutional and financial structure have focusedon divestment of non-agricultural enterprises and measures to improveoperational efficiency. The objective has been to allow the company tocarry out more effectively its mandate to promote development of Malawi'sagricultural exports, provide an efficient marketing system for smallholderproduce and develop agroindustrial enterprises. In the past the companyhas been quite profitable. However, it has recently begun to experienceserious financial strains due in particular to poor export prices, weakenedmarkets for maize and tobacco, and growing financial obligations incurredas a result of the Government's Food Security Policy. The Bank is workingwith the Government in dealing with these issues and with issues ofADMARC's restructuring and operational efficiency. PGL's financialrestructuring has made substantial progress. A set of corporate guidelineswere adopted and a sound strategy for rationalization of the company'sassets have been adopted by its Board. Assets have been swapped with MDCand ADMARC and convertible preferred stock was issued to Government tosatisfy the company's debt to the two commercial banks which as a resultwere set on a sound financial footing.

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Policy Framework

25. The (overnment is committed to maintaining a mixed economy systemwith incentives and a policy framework which fosters the development of astrong private sector. Government has pursued a well-publicized, liberalpolicy of full repatriation of profits. Tax incentives, available equaUlyto foreign and indigenous entrepreneurs, take the form of allowances foraccelerated depreciation with special allowances of up to 10% ofexpenditures on industrial buildings, and write-offs over an indefiniteperiod of expenditures incurred before and during start-up (up to lBmonths). In January 1984, the Malawi kwacha was tied to a basket ofcurrencies. The Government is committed to maintaining a flexible exchangepolicy. Currency adjustments are made as needed to realign the kwacha withthe basket for equalizing the supply and demand for foreign exc.hange.

26. Malawi's sectoral policies are generally sound. However, theeconomic crisis of the early 1980's has highlighted the following sectorrelated issues which are being addressed in the Government's StructuralAdjustment Program.

(a) Price Controls. By the early 1980's with increased inflationarypressures the system was creating serious disincentives forproducers by failing to signal shortages, surpluses, costinefficiencies and imposing a financial burden on firmsexperiencing large input price increases. Under SAL II,Government reduced the number of controlled items from 56 inDecember 1983 to 9 items in August 1985 and is committed tocompleting the liberalization program by December 1985.

(b) Foreign Exchange Allocations. In the early 1980's the system wasstrained at times on account of heavier than usual debt repaymentrequirements, the stagnation in certain categories of exportearnings and increased external transport costs. This resultedat times in delays of foreign exchange allocations. Under SALIII, the Government intends to pursue an active exchange ratemanagement policy which should virtually eliminate the need for aformal allocation system. Also, it will actively facilitateimportation of competing products to encourage efficiency inproduction.

(c) Export Incentives. A duty drawback system, under which exporterscan claim the duties paid on imported inputs used in exportedproduction has been ineffective. Under SAL III, the Governmentwould take specific measures to stimulate exports by developingand adopting an export promotion scheme and setting up an exportfinancing facility. Institutional strengthening, with externaltechnical assistance would be part of the overall exportpromotion effort.

Manufacturing Sector Prospects

27. Assuming a stable international economic environment, themanufacturing sector is expected to grow in line with overall growth in theeconomy at an average of 4.02 annually, with growth in exports averaging4.9%, during 1985-89.

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Bank Group Experience and Strategy in the Sector

28. The Bank has completed one DFC operation in Malawi, aUS$3.0 million loan to support INDEBANK's assistance to medium- andlarge-scale enterprises (Loan 1610-MAI). The Project Completion Reportconcluded that project objectives to strengthen INDEBANK's capabilitieswith the development of adequate procedures and policies had been met, andthe loan proceeds were being profitably utilized. Overall, INDEBANK wasreceptive to Bank advice which played an important role in buildingINDEBANR into a sound and efficient institution. The recently approvedWood Industries Restructuring Project (Loan 2486-MAI) has as its objectiverationalizing and privatizing sawmills and other Malawian wood industries.IFC has played an active role in the sector and has to date financed sixoperations (para. 15).

29. Bank strategy in the industrial sector is to encourage efficientmanufacturing expansion based on Malawi's agricultural, forestry andlivestock resources. The strategy is to support export-oriented industriesgiven the small size of Malawi's market. Prospects for agro-industrialexpansion are good and several promising projects with considerable exportpotential have been identified with the assistance of a Bank-funded study.The Bank's main lending in the sector in the medium term will be toINDEBANK because of its position as the main source of long-term financefor productive enterprises. The proposed project would supportstrengthening INDEBANK's role and resource base as part of the Government'sefforts under its structural adjustment program to (a) provide a healthyindustrial policy and institutional environment; (b) support efficientsector development; and (c) increase investment opportunities andemployment.

B. Agricultural Estate Subsector

30. Agriculture is the most important sector of the Malawian economyand in 1983/84 employed 85% of the labor force, provided about 40% of GDPand accounted for 85 to 90% of the country's foreign exchange earnings.The sector is divided into the smallholder and estate subsectors. Whilegrowth in the smallholder sector averaged about 3% p.a. in the 70's,performance of the estate subsector has been spectacular, with outputexpanding bv around 17% p.a. in real terms since 1968 and providing about80% of all foreign exchange earnings in 1984, principally through exportsof tobacco, sugar and tea. Despite a threefold increase in tobaccoproduction, productivity has been virtually static as production increasescame mainly from increased area brought under cultivation. In recentyears, the expansion of estates has outstripped the availability of goodmanagement. Although the sector includes many large, well-establishedtobacco estates with hired professional management, many estates have 1 to100 hectares and are run by relatively inexperienced farmers who managetheir own farms. During the late 70's and early 80's, the financialposition of many estates seriously deteriorated and many went intoreceivership due to management and financial problems combined with weaktobacco prices and problems of international transportation.

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Development Strategy

31. Because of the potential of the estate sub-sector in exportgrowth and in stabilizing export earnings, the Government's structuraladjustment program includes measures to encourage diversification and toimprove estates' financial and technical management. Two key elements ofGovernment's strategy to improve the sub-sector's performance are: a)provision of credit for medium and long term investments; and b) formationof an extension and management training service. Government has perceivedthe lack of access of estates to term finance as a major impediment toestate development and diversification. To remedy this, under SAL II, theGovernment carried out a feasibility study financed from the SecondTechnical Assistance Project which showed that under existing conditionsestablishment of a separate agricultural credit institution would not befinancially viable due to high overhead costs and a low level of demand.Consequently, the Government has decided to channel credit funds to estatesthrough established financial institutions-the two commercial banks andINDEBANK. This is intended to be a pilot arrangement to allow assessmentof potential demand and the performance of participating institutions.

32. Credit to the less well established estates must be supported bymanagement and extension services. Government has decided to establish anautonomous authority initially to be funded with some R700,000 (US$388,900)in earmarked funds, raised through fines paid by the tobacco industry foroverproduction. ODA has firm plans to provide technical and financialassistance to support this initiative. The proposed service is expected tobe self-financing in the long-run, with fees and charges to be paid byusers. An ODA appraisal team is expected to visit Malawi before the end of1985 -to define the new institution's scope of activities, itsorganizational structure, and a detailed annual work program. Initi-aly itis expected that the majority of project credit funds would be provided toestates which have experienced management and which need term finance toimprove the efficiency of their tobacco production and curing and todiversify into other crops.

33. A feasible diversification strategy which would address keyconstraints related to marketing and processing infrastructure is in theprocess of being developed. An agricultural diversification study wasproduced in November 1984. A subsequent Bank review which focussed on theestate sub-sector indicated that the principle elements of adiversification strategy could be as follows: a) an increase in theproductivity of tobacco estates through improved management, bettercropping patterns and increased efficiency of input use; b) a move toproduction of higher value import substitution crops (eg. wheat) or tocrops with significant local value added (eg. cotton and vegetable oil); c)increased utilization of cultivable land through better crop rotation,irrigation and soil conservation; and d) expanded cultivation of existingplantation crops such as coffee, rubber and macademia and cashew nuts. Theproposed agricultural credit component would be a first step in the overallstrategy and would finance productivity improving investments, particularlyon tobacco estates, thus providing the potential for increased profits andfreeing land for diversification.

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C. Financial Environment

34. The financial sector is comprised of the Reserve Bank of Malawi,two commercial banks, the Postal Savings Bank, the New Building Society,the Financial Corporation of Malawi, two insurance companies and threedevelopment finance institutions - INDEBANK, its subsidiary INDEFUND whichfinances Malawian-owned medium-scale enterprises, and SEDOM which promotesand finances small-scale industries.

35. The Reserve Bank plays the customary role of a central bank as aregulator of commercial banks and administrator of national monetary andcredit policies. The two commercial banks-the National Bank of Malawi(NBM) and the Commercial Bank of Malawi (CBM) -account for the bulk ofdomestic credit and domestic resource mobilization mainly throughshort-term deposits and lending for equally short periods, primarily toagriculture. In the late 1970's, the Government encouraged the twocommercial banks to finance tobacco estates to take advantage of theembargo on Rhodesia's production. During the boom period, total loans totobacco estates went up from about K9 million (US$10.4 million) in 1975 toabout K90 million (US$110.8 million) in 1980 and represented 51% of thebanks' total advances, compared with a mere 15% in 1975. These loans werecharacterized by negligible borrower contributions and short repaymentperiods. When commodity prices fell the banks suffered substantial losses;however, they have since recovered and almost all the bad loans have beenwritten off.

36. The Reserve Bank's interest rate policy is to maintain rates atlevels conducive to the growth of savings while fostering the efficient useof investment resources. Accordingly, interest rates have been revisedfairly regularly over the past five years. The Reserve Bank discount ratewas increased from 8% to 10% in 1980 and recently to 11%. Deposit rateshave been recently increased to a minimum of 11.75% on demand deposits andto a minimum of 12.25Z for time deposits. Commercial banks' lending ratescurrently range from 11.5% to 15% p.a. on loans to the agricultural sectorto a maximum of 19% p.a. for loans in other sectors. The current interestrates are in line with Government's objectives and are generally positivein relation to recent experience of average price increases of 10% p.a.since 1981.

PART IV - THE PROJECT

37. INDEBANK expressed interest in the proposed follow-on industrialline of credit in September 1983 during supervision of the first project.In February 1985, the Government of Halawi requested the Bank to provide asecond line of credit to INDEBANK, to assist in the establishment of aninstitution for providing medium- and long-term credit to the agriculturalestate subsector, and to provide a line of credit to the agrictulturalcredit institution. During appraisal, however, it was found that such aninstitution would not be financially viable in the immediate future. Onthe Bank's recommendation, the Government agreed to channel Bank assistanceto the subsector through INDEBANK and the two commercial banks on a pilotbasis (para. 31).

38. *The proposed project was appraised in March and May 1985 andnegotiations were held in Washington from October 18 to 23, 1985. TheMalawian delegation was led by Mr. J. R. Phiri, Deputy Secretary for the

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Ministry of Finance. A Staff Appraisal Report (No. 5815-MAI) of December2, 1985 is being circulated separately. A loan and project summary isgiven at the beginning of this report and a supplementary project datasheet is provided as Annex III.

Project Objectives

39. The principal objectives of the proposed project are to: (i)stimulate the efficient expansion of Malawi's industrial, commercial,transportation and tourism subsectors by providing much needed termfinance; (ii) improve the utilization, efficiency and productivity ofagricultural estates and gradually encourage diversification into viablenew crops; and (iii) sustain and strengthen INDEBANK's institutionalcapabilities to effectively promote efficient development in theagricultural, industrial and commercial sectors.

40. The project would assist the Government in achieving itsobjectives under its structural adjustment program to increase agriculturaldiversification in the estate subsector by providing term finance. Theagricultural component fills a void in the financial system where currentlyestates have access only to short-term credit. The project would alsoencourage INDEBANK to build on its solid institutional foundation bydeveloping its overall project promotion capability and in particular itsagricultural projects promotion and appraisal capability. The project,which consists of two lines of credit and funds to finance technicalassistance, would be implemented by the two commercial banks and INDEBANKwhich are described below.

The Participating Financial Institutions

A. The National Bank of Malawi (NBM)

41. NBK was founded in 1971 by merging the operations of the StandardChartered Rank and Barclays Bank (both fully foreign-owned). At that time,ADMARC acquired a majority shareholding. At present Press Corporation andADMARC own 47% and 33% of shares, respectively, and the Standard CharteredBank 20%. NBM has a network of 14 branches and 66 agencies throughout thecountry. Top management of the Bank is provided by the Standard CharteredBank through seconded expatriate staff.

42. Ever since its incorporation, National Bank has been the dominantcommercial bank in Malawi. Its financial resources and volume ofoperations are about three times as large as those of the Commercial Bankof Malawi. Between 1981 and 1984, NBM's customers' deposits increased by60%, to K244 million (USS207.0 million). Similarly, its loan portfolio,after making provision for doubtful debts, increased by 192 to K126 million(US$107.2 million). In general, NBM follows conservative and soundfinancial policies and adequately provides for all bad and doubtful debts.Following this policy NBM has set aside nearly 100% of the amount of baddeuLs relating to the tobacco loans made in the late 1970s (para. 35).Despite making such large provisions, NBM has remained profitable.

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B. The Commercial Bank of Malawi (CbM)

43. CBM was incorporated in 1969 as a joint venture between local andforeign interests. Following the sale of Bank of America's 30% share in1983, CBM is now owned 40% by the Press Group and 30% each by theGovernment of Malawi and the Halawi Development Corporation. CBM has anetwork of 13 branches and over 80 agencies spread throughout the country.

44. Although CBM maintains as large a branch network as NBM, itsoperations in financial terms are much smaller. As of June 30, 1985, CBM'stotal assets amounted to K150 million (USS83.3 million). Total depositsamounted to K87 million (USS48.3 million), a large proportion of which camefrom large depositors. CBM's profitability has in the past been marginal.Due to large provisions against possible losses on its loans, the bank'snet profit after tax represented less than 1% of total assets in both 1983and 1984. However, following this period of having adequately provided forlosses, profitability has shown significant improvement in fiscal 1985.Prospects are for continued improvement (para. 46).

The Commercial Banks' Operations, Policies and Procedures

45. Both banks are involved in financing all the main sectors of theeconomy, primarily providing working capital financing. They activelycompete for customers' deposits which are the main source of theirfinancial resources.

46. Until the late 1970s, both commercial banks employed minimalagricultural staff. However, with the rapid increase in the banks' lendingto the estate subsector and the poor performance of the borrowers (para.35), the banks recruited additional staff to provide technical andfinancial management support to the borrowers, and revised theiragricultural lending policies. The banks now restrict their seasonallending mainly to activities that demonstrate strong viakility and nowimpose greater financial controls on their clients. The banks encourageborrowers to produce alternative crops (other than flue-cured tobacco) andassist them in adopting sound agricultural, conservation and managementpractices. These measures have resulted in a substantial drop in tobaccoloans from a peak of about K100 million (USS94.7 million) in outstandingloans to about 500 estates in 1982 to about K60 million (US$33.3 million)to less than 300 estates at present.

47. The commercial banks charge interest rates ranging from 11.5% to15% on agricultural loans. Generally, rates charged have enabled thecommercial banks to cover their costs and earn a sufficient profit margin.At negotiations, agreement was reached that the Government would annuallyreview and revise interest rates to ensure that the rates are (i) positivein real terms; (ii) in line with the overall interest rate structure in thecountry; (iii) adequate to enable the institutions to cover theirreasonable administrative expenses, provide for possible losses on theirloans and earn adequate profit margins; and (iv) adequate to permit theattainment of the objectives of the project.

48. In line with their new agricultural lending policies (para. 46),the commercial banks have strengthened their appraisal procedures andcapabilities, which are now satisfactory. To ensure that appraisal

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standards remain adequate, the Bank would review from time to timeagricultural appraisal reports produced by the institutions. Agreement wasreached at negotiations that at the Bank's request, each participating bankwould submit appraisal reports selected at random by the Bank. NBM and CEMwould be required to make the requisite improvements or adjustments intheir appraisal methodologies and practices based on the Bank's comments.Also agreement was reached that the Reserve Bank of Malawi would cause NBMand CBM to calculate financial rates of return for all projects of morethan K180,000 (US$100,000). The banks regularly supervise theirinvestments - particularly agricultural projects. Management is keptadvised of the performance of each borrower through supervision reportsprepared at least once a month. These supervision procedures and practicesare satisfactory. The commercial banks do not have specific procurementprocedures. They rely on subborrowers to obtain goods and services fromthe most advantageous sources.

C. Investment and Development Bank of Malawi (INDEBANK)

49. INDEBANK was established in December 1972 as a private limitedliability company under Malawi's Companies Act. Its basic objective is topromote the economic development of Malawi by providing finance and otherservices to viable projects in the productive sectors of the economy.INDEBANK gives preference to projects sponsored and financed by Mk-lawianinterests and encourages foreign investors to find local partners.

Ownership, Management and Staffing

50. INDEBANK is owned 22.25Z each by ADKARC, the CommonwealthDevelopment Corporation (CDC), the German Finance Company for Investmentsin Developing Countries (DEG), the Netherlands Finance Company forDeveloping Countries (FMO), and 11% by IFC. INDEBANK's capital-authorizedand fully paid-amounts to K4.5 million (US$2.5 million). In addition, theshareholders (with the exception of IFC) have provided INDEBANK withresources in the form of income notes amounting to K11.25 million (US$6.2million) which are unsecured and carry an interest charge of 8%, which ispayable only if INDEBANK makes a profit. INDEBANK's Board of Directorsconsists of eight members representing the shareholders. The ADMARCrepresentative is also the Chairman. The Board members, all senior peoplein their respective organizations, take active interest in INDEBANK'sactivities.

51. All management positions in INDEBANK, with the exception of theGeneral Manager and the Coordinator of Project Investigations, are held byMalawian nationals. The INDEBANK Board has recently appointed a Malawianas Assistant General Manager who is expected to replace the expatriateGeneral Manager when his contract expires in August 1986. INDEBANK doesnot have adequate staff to effectively participate in financingagricultural estate activities. The proposed project would supportinternational recruitment of a Manager for the Agricultural ProjectsInvestigation Division and an agricultural specialist. In addition,recruitment of two qualified Malawians capable of taking over from theexpatriate staff would be funded under the project (para. 70).

52. INDEBANK has 26 professional staff. Overall, the staff is ofgood quality and have solid academic backgrounds in Economics, BusinessAdministration and Accountancy. In order to manage adequately its future

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operations, INDEBANK plans to recruit four additional project officerswithin the next 12 months. INDEBANK actively pursues staff training whichemphasizes on-the-job training but which effectively utilizes selectedoverseas training programs. INDEBANK's staff development and trainingactivities are adequate.

Policies and Procedures

53. For its investment decisions, INDEBANK is guided by a Statementof Investment Policy Principles and Operating Procedures. The salientfeatures of the policies are that the institution will: (i) base itsinvestment decisions on sound technical, financial and economic appraisalcriteria; (ii) encourage local participation in its projects; (iii) limitto 35% of the project's total equity its equity investment in any oneproject; and,.(iv) maintain a prudent equity to loan ratio.

54. INDEBANK mainly provides long-term loans with maturities of 8 to12 years including grace periods of one to two years for appropriateprojects. Mortgages of projects' assets and the personal guarantees of theborrowing company's directors are used as security. ITTDEBANK's lendingrates range from 13% p.a. to 16% p.a. At the time of negotiations, aminimum rate of 13% p.a. was charged on loans denominated in foreignexchange and on projects that are considered to be of high developmentalvalue to the country. Interest rates higher than 13% p.a. are charged onlocal currency loans. INDEBANK also charges a one-time commitment fee of0.5% and a project appraisal fee of 1% of the value of the approved loan.Interest rates are adequate to ensure INDEBANK's profitability. The lowerinterest rate charged on foreign currency denominated loans is adequate toallow INDEBANK to earn an average spread of about 4%, given the low averagecost of these funds (9%). The foreign exchange risk is borne bysub-borrowers. Agreement was reached at negotiations that INDEBANK wouldannualily review and revise its lending ratesl/ to ensure that they are (i)positive in real terms; (ii) in line with the country's overall interestrate structure; (iii) adequate to enable INDEBANK to cover its reasonableadministrative expenses, provide for possible losses and earn an adequateprofit margin; and (iv) adequate to permit attainment of the objectives ofthe project.

55. INDEBANK has not developed an adequate project promotioncapability and therefore has not utilized fully its institutional resourcesand capabilities to foster the growth of productive activity in thecountry. To date most of the projects it finances have been promoted byPGL, ADMARC and MDC. INDEBANK acknowledges the need to develop in-houseproject promotion capability to help reduce concentration of its portfolioin the investments of the three companies. Agreement was reached atnegotiations that INDEBANK would (i) by June 30, 1986, establish a ProjectPromotion Unit and recruit two experienced Malawian professional staff tocarry out a project promotion function; and (ii) by December 31, 1986,prepare a manual establishing appropriate procedures for the promotion,appraisal and monitoring of agricultural projects. Agreement was reached

1/ The Reserve Bank of Malawi sets interest rates for financialinstitutions registered under the Bank Act. INDEBANK can set its ratestructure independently as it was established under the Companies Act.

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that INDEBANK would comply with the same review by the Bank of agriculturalsubprojects as specified for the commercial banks participating in theproject (para. 48).

56. Appraisals are comprehensive and cover the project's keyfeatures. The only major weakness is that most appraisals do not includean economic assessment in sufficient detail. Agreement was reached atnegotiations that INDEBANK would calculate economic rates of return forprojects requiring financing of more than US$100,000 as well as cover inits appropriate reports aspects such as projects' potential for creatingemployment and dependence on imported inputs. Projects in the portfolioare supervised regularly. INDERANK submits reports on the performance ofselected projects to each Board meeting to seek guidance for dealing withproblems. Supervision reports are comprehensive and of high quaiicy.

57. INDEBANK's procurement procedures are in line with pro:eduresfollowed by Bank-assisted DFCs namely, they are based on competitivequotations from the main sources of supply to ensure that purchases aremade from the most advantageous source.

Operations Portfolio and Financial Position

58. Since inception in 1973, INDEBANK has approved a total of 102loans amounting to K32.4 million (US$22.8 million) and equity investmentstotalling K5.2 million (US$2.9 million). INDEBANK's level of operationshave shown wide fluctuations, reflecting trends in the manufacturingsector. In the past five years, for example, total approvals declinedsharply from R5.0 million (US$6.2 million) in 1980 to K0.5 million (US$0.43million) in 1983 before rebounding to K4.2 million (US$2.9 million) in1984. The decline in the level of approvals between 1980 and 1983 was dueto two main factors: (i) sluggish growth in the Malawian economy andespecially in industrial activity over this period, and (ii) a sharpdecline in new investment activity by PGL, MDC and ADMARC due to theirliquidity and other operational problems (para. 24).

59. In 1981, INDEBANK established INDEFUND Limited as a subsidiaryresponsible for financing projects ranging in size from K25,000 (themaximum project size eligible for funding under the Government small-scaleindustries program) to K100,000 (the minimum loan size allowed underINDERANK's policies). INDEFUND was established with a paid-in sharecapital of K650,000 (authorized share capital is K1.0 million), of which62% is subscribed by INDEBANK and 38% by FMO. INDEFUND shares somemanagement and professional appraisal staff with INDEBANK. As of Janu4±ry31, 1985, INDEFUND had approved 43 loans in 45 projects amounting to K1.8million (USSI million) of which 11.1 million (US$0.6 million) had alreadybeen disbursed.

60. As of December 31, 1984, INDEBANK had a total portfolio amountingto 118.9 million (US$13.4 million). Projects in the industrial andcommercial sectors account for 59% of the portfolio; agriculture accountsfor 17% while tourism and property development constitute 14% and 10%,respectively. INDEBANK has maintained an excellent arrears record. As ofDecember 31, 1984, only four projects involving 0.4% of the value of theloan portfolio were in arrears of over three months. The total arrearsamounted to 1.5Z of loans outstanding. Despite this impressive record, the

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underlying quality of INDEBANK's portfolio is still of some concern because61Z is concentrated in enterprises wholly or partly owned by the PressGroup, MDC, and ADMARC. Although individual loans are well secured, theoverall safety of the portfolio will continue to depend on these companies'financial performance and condition. In view of this potential risk,INDEBANK has adequately increased provisions for possible losses to about4% of the portfolio. Overall, the portfolio of equity investments is invery good condition; in 1984 INDEBANK earned an excellent return of about16.4% on average equity.

61. INDEBANK has, since its inception, maintained sound financialperformance, with net profit averaging K290,000 (US$161,000) p.a.,representing an average return on average total assets and on equity of1.3% and 62 respectively. Administrative expenses averaged a relativelylow 2.7% of average total assets over the period 1980-1984. INDEBANK hasmaintained a sound liquidity position and an adequate debt servicecapacity. As a result of new borrowings, INDEBANK's debt-equity ratioincreased steadily from 2.6:1 in 1980 to 4:1 as of December 31, 1984.Despite the increase in the debt-equity ratio, INDEBANK's debt servicecapacity remains satisfactory with a debt service coverage ratio of 1.6 atthe end of December 1984. Agreement was reached at negotiations thatINDEBANK would (a) limit the value of its equity investments to 120Z of itsnet worth; (b) maintain a debt-equity ratio not exceeding 5:1; and (c)annually review with the Bank the level of its administrative expenses andimplement agreed measures to reduce the level, if necessary.

Projected Operations and Resource Needs

62. INDEBANK's approvals are projected to increase by 15X p.a. innominal terms from K5.0 million (US$2.8 million) in FY85 to K8.7 million(US$4.8 million) by FY89. On the basis of its projected operations,INDEBANK will require new resources amounting to K21.9 million (US$12.2million) to meet its investment commitments over the three year period,January 1986 to December 1988. The proposed Bank line of credit wouldrepresent about 25Z of INDEBANK's total resource requirements over the nextthree years.

63. In order to reduce its dependence upon external agencies as itsmain source of finance, INDEBANK plans to diversify its sources of financeby mobilizing domestic savings. It is also in the process of setting up aleasing company which would start a deposit mobilization operation.Obstacles such as lack of a branch network, the lack of a capital market inthe country and competition from the commercial banks for a small domesticsavings market could inhibit INDEBANK's ability to effectively mobilizesavings. iuring negotiations, INDERANK agreed to carry out by June 30,1986, a study of its prospects for domestic savings mobilization and todiscuss the findings and recommendations with the Bank.

Main Features of the Project

64. The proposed project consists of:

(a) an INDEBANK line of credit component of US$3.0 million;

(b) a pilot agricultural credit component of US$4.5 million to bechannelled through INDERANK, NBM and CBM; and

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{c) a technical assistance component of US$0.3 million.

Terms and Conditions

65. The proposed Bank loan of US$7.8 million would be made to theGovernment of Malawi on standard terms. The INDEBANK line of creditcomponent would be repayable in accordance with a schedule that wouldconform substantially to the aggregate of the amortization schedulesapplicable to the subloans made by INDERANK. The maximum repayment periodwould be 15 years including four years of grace. The balance amount ofUS$4.8 million would be repayable over 15 years including four years ofgrace. The Government of Malawi would utilize the proceeds of the Loan asfollows.

66. INDEBANK Line of Credit Component. The Government would on-lendto INDEBANR under a subsidiary loan agreement, USS3.0 million at a variableinterest rate (equal to the rate charged from time to time on the proposedBank loan). The execution of a subsidiary loan agreement, satisfactory tothe Bank would be a condition of disbursement of the line of credit toINDEBANK. INDEBANK would relend the funds at a variable rate of interestthat would be (a) positive in real terms; (b) in line with the country'sinterest rate structure; (c) adequate to cover reasonable administrativeexpenses; and (d) adequate to achieve the objectives of the project. Thecurrent rate is 13% p.a. for maturities of up to 15 years includingappropriate grace periods. Subborrowers would bear the exchange raterisk. In order to ensure that the Bank funds are used to finance as manyprojects as possible, agreement was reached at negotiations that INDEBANKwould not use Bank funds in excess of US$750,000 equivalent to finance anyone enterprise. INDEBANK would obtain Bank approval for all individualsubprojects requiring Bank financing of more than US$250,000. Theaggregate of individual subloans less than the amount which can be financedwithout Bank approval would be US$1.5 million.

67. Agricultural Estate Credit Component. US$4.5 million would bemade available under three separate participating bank agreements to thethree participating financial intermediaries--NBM, CBM and INDEBANK on afirst come, first served basis. The execution of a participating bankagreement, satisfactory to the Bank, between the RBM and a participatinginstitution would be a condition of disbursement of the proceeds of thecomponent to that institution. These funds would be channelled through theReserve Bank of Malawi. Participating institutions would use theseresources to provide term financing to the estate subsector. Participatingbanks would initially pay 10.5% per annum interest on the amountswithdrawn. Agreement was reached at negotiations that the RBM willannually review and revise as appropriate the onlending rate to theparticipating banks to reflect any changes made in interest rates foragricultural subloans. The Government has decided to bear both thevariable interest rate and the exchange rate risk for the agriculturalcomponent. This is deemed satisfactory in view of the Government'sobjective to expand credit availability and stimulate development in theestate subsector.

68. Participating banks would relend the funds for periods rangingberween three and ten years at interest rates initially ranging between11.5% and 15Z per annum. Subloans would be given to estate owners who haveclear right to the land, who have competent management and who can

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demonstrate the technical feasibility and financial viability of theproposed investment. The sub-borrower's contribution, which may be in cashor kind, will be determined by a participating bank on the basis of itsappraisal of the investment proposal.

69. Subloans would be available for investments including:irrigation and drainage; establishment and improvement of infrastructuree.g., curing barns, storage sheds, processing facilities; purchase andimprovements of farm equipment and machinery; purchase of livestock; andrehabilitation of estates with the objective of improving management andproductivity. In order to ensure that the component benefits as manyprojects as possible, agreement was reached at negotiations that themaximum size of a subloan (except for irrigation subprojects) would beK450,000 (US$250,000). For irrigation subprojects, subloans of up toK900,000 (US$500,000) would be allowed. For some time now the estatesubsector has not had access to term credit which has resulted in pent updemand. To satisfy part of this backlog and to accelerate projectbenefits, the project would provide for retroactive financing of up to K1.5million (US$0.8 million) to finance eligible subprojects approved afterJuly 1, 1985. It was agreed at negotiations that, as a condition ofdisbursement of funds to be provided retroactively, a sample of subprojectsto be retroactively financed would be submitted to the World Bank forreview.

70. Technical Assistance Component. The Government would provide agrant of US$0.3 million to INDEBANK to help the institution strengthen itscapabilities to promote, appr:-ise and monitor agricultural projects inorder to expand its role in agricultural lending. Proceeds of thiscomponent would finance the cost of employing for a term of three years, aManager for the Agricultural Projects Department with experience inagricultural credit operations and an experienced agricultural specialist.In view of a shortage of Malawians with the required experience, it isexpected that INDEBANK will recruit expatriates to fill these positions.In addition, proceeds of the technical assistance component would beutilized to finance the cost of employing two suitably qualified Malawiancounterparts. A US$41,00U cost per manyear is estimated for the expatriatestaff and a cost of US$9,000 per manyear is estimated for the Malawiancounterparts. The qualifications, experience and terms and conditions ofemployment for the persons selected would have to be acceptable to theBank. At negotiations, INDEBANK agreed to fill these positions by June30, 1986. Hiring the Manager for the Agricultural Projects InvestigationsDivision is a condition of disbursement of the agricultural line of creditto INDEBANK.

Project Implementation

71. Reporting and Audit Requirements. INDEBANK would submitquarterly reports which would include a summary of operations, financialstatements, resource position, statement of arrears and collection ratios.INDEBANK would also submit within six months following the end of eachfiscal year annual audited accounts prepared in accordance with the BankGroup guidelines for audit of DFCs, by qualified auditors approved by theBank. NBM and CBM would submit quarterly reports which would includedetails of the subloans approved and committed, and a summary analysis ofthe status of implementation and performance of subprojects financed underthe agricultural credit component of the project. The two commercial banks

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would submit their annual dudited accounts within nine months of the closeof their financial years. Agreement was reached at negotiations thatINDEBANR, CBM and NEM would comply with these repoxticg requirements. Inaddition, the three banks participating in the agricultural component wouldbe required to maintain separate records of transactions relating to thefinancing of agricultural subprojects, based on which statements ofexpenditures will be prepared, and against which reimbursements would besought by them from RBM (para. 74).

72. Procurement. Procurement of goods under the INDEBANK line ofcredit component of the project would be in accordance with INDEBANK'sprocurement practices which are adequate (para. 57).

73. Most equipment and materials to be financed under theagricultural credit component would be available locally. Neitherinternational nor local competitive bidding would be feasible under -this

component because of the small size of individual investments; balking ofcontracts is not practicable because of the wide dispersal of estates inMalawi. Mechinery and equipment would be acquired through ordinarycommercial channels in which both local and foreign firms operating inMalawi participate. Private contractors are available for construction ofcivil works on a competitive basis.

74. Disbursements. The proceeds of the loan would be used forfinancing:

(a) Under the INDEBANK line of credit component:

(i) 100% of the cif cost of imported goods and services neededfor the implementation of eligible subprojects;

vii) up to 75% of the local cost of goods previously importedinto Malawi;

(iii) up to 50% of the cost in local currency of civil worksincluded in subprojects; and

(b) 100% of the amounts disbursed under the agricultural credit andtechnical assistance components.

In order to facilitate disbursement of funds under the project, agreementwas reached at negotiations that two special accounts would beestablished. The account for the agricultural component would beadministered by the Reserve Bank of Malawi. The second account would beestablished for the INDEBANK line of credit and technical assistancecomponents and would be administered by INDEBANK. Reimbursement would beclaimed against Statements of Expenditures. Both accounts would beestablished in a financial institution acceptable to the Bank. Eachspecial account would be initially started with an advance of US$400,000and would be replenished by the World Bank in accordance with agreedprocedures. Establishment of the special accounts would be a condition fordisbursement of the proceeds of the loan. The 100% financing of amountsapproved for term agricultural subloans is justified since World Bank fundswould represent only a small part of the resources required to implementprojects. The commercial banks would provide seasonal credit and projectsponsors would make their own contribution to project costs.

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75. Pilot Agricultural Credit Component Implementation Review. Areview would be carried out by the Bank in cooperation with the Governmentapproximately two years after project effectiveness to assess progress inachieving the project's objectives (para. 39). During the review, specialattention would be given to assessing (a) commercial bank effectiveness inimplementing the agricultural credit component; (b) the level of demand;(c) the structure of interest rates for agricultural lending; and (d) theeffectiveness of the management training and extension service.

Benefits and Risks

76. The INDEBANK line of credit component of the proposed projectwould support the further strengthening of INDEBANK's institutionalcapabilities to play a more effective role in promoting the efficientdevelopment of productive economic activities. By developing its projectpromotion capabilities, INDEBANK would be able to expand and diversify itsoperations away from its traditional lending activities, which aredominated by the Press Group, ADMARC and MDC. The project would alsoenable INDEBANK to create new investment and employment opportunities inMalawi. Based on the experience with the first Bank line of credit toINDEBANK, it is estimated that the projects financed with the proposed lineof credit would help create about 500 new jobs.

77. The pilot agricultural credit component of the project wouldsupport Malawi's structural adjustment program by financing productivityimproving investments which would free up land and thereby improve thepotential for crop diversification. The pilot nature of the componentwould provide a basis for better assessment of investment credit needs andthe suitability of the existing institutional framework to effectivelyadminister term credit to the agricultural estate subsector.

78. The main risk associated with the project is that the exportmarket for estate crops could suffer from a substantial drop ininternational prices which would result in liquidity problems forsub-borrowers and in defaults on loan repayments. However, according toWorld Bank forecasts, prices in constant US dollars are expected to remainsomewhat stable in the medium term; these prices are forecast to drop belowcurrent prices by 5% in 1986 and by 7% by 1990. However, investments to befinanced are expected to develop lower cost producers better able towithstand price falls. Gradual diversification of estate crops wouldfurther reduce farmers' vulnerability to price instability. And finally,participating financial institutions' review procedures would screen outmarginal investments.

PART V - RECOMMENDATION

79. 1 am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

A. W. ClausenPresident

Attachments.Washington, DCDecember 2, 1985

- 22 -ASEX I

T A L * SA la-go 1 f 7

Or (M ;Ac umw#la

1i9MU it7a EkITNK 3 013 0P EMM A3CA .lo EMMA

am Oem IQ. MOIOTAL .111.5 118.3 118.*5aECmzLSLa 37.1 3u. *1.7

a a cairn CuES) .. .. 210.0 231.8 1083.8

CzuaRAMS or a uLut) . 35.0 48.0 82.3 981.5

lflltJ .NII- (M0SAM) 2329.0 4513.0 882..0an" POPULAEZON CZi TO M) 4.4 8.4 11.1 20.1 32.0

IIUSSZM PROJJ sZL lA 20 (N 11.4

wauuLatEdS NE1U1ilf 2.0

in sQ. ED. 29.8 38.1 35.9 33.2 63.1PU EQ. M. aI. LAND 93.1 14.3 154.1 IUJ 124A

POPULATXIS AG&SITURU (2)0-14 uE 3.S3 4*.U 47.1 48.0 45.

153-64 52312.0 50.J 48.9 so.8 31.5435 ANDA3 2. 2.4 4.0 2.9 2.7

P01PMAT13 GOMW RA CZ)TarAL 2.0 2.3 .0 2.8 2.9ninA, 4.3 6.2 7.0 8.4 3.1

ce Dinm tASK tR. TOM) 56.0 36.0 34.0 47.2 47.0cam OEM 33 (in IBMS) 29.7 26.0 23.0 17.1 13.063O0S 3EMOOUTEO am 3.a 3a. 5.8 3.3 3.2

PANMY PLASINGOACCOr . ANNUL(COS) .. ..

U tS (Z OF NA 1 N .. .. IA /c 5J 6.4

siM or PWo am. ms cairn(199-71-100) 90.0 91.0 96.0 033 82.9

. ca= smi orCALMZn Co OF ulquhu) 91.0 9. 9.a 67.7 ".3Puensm cAss in mAM" 62.0 71.0 68.0 51.9 55.4Of W ANAL AD AM 1.5 13.0 19.0 19.0 Ic 18.7 16.5

CO= CAMS 1-4) 03A2I 5iS 9.7 50J 38.0 23.1 6.6

LIFE Ctr. AT D11 (CUM) 36.3 40.0 44.2 47.S 52.0CNTr mET:. A (is c 30ous) 207.0 193.3 16.0 119.5 108.8

ACCSS 70 SAi uAu (CZi)TonL .. .. 41.0 id 27.1 42.4on" .. .. 27.0 63.5 67.5

iDEAL .. .. 37.0 19.3 35.8

ASUES '0 5031A, DISPOSALCZar rwuL*nrn)

TOTL .. .. 3.0 1d 26.5 Zl.9IISUII .. .. 00o.0 W 65.4 37.7RUAL .. .. s.e 77 20.4 20.7

iOPULAIONn PITICAZ 36380.0 38430.0 40 .0 27901.7 11791.7pop. PiE inr PSOS 13220.0 /r 9050.0 3830.0 i 33T0.4 2439.PP. PR HDSPITAL -30

TOal 80. 650.0 740.04p 1273.6 91.1URA 1200 if 160.0 80.8 i 428.2 388ARaRM t310. 7 900.0 1480.0o7T 3292.5 4371.9

ADNESSIOUS IM HOSPITAL D .D 32.1 39.0 / .. 27.2

swi sm or uammz

30*1 .. 5.407K ....

056 10. w7 iZSUSIRoTOrAL .. ..1B1a .. 1.7/ .

a. .. .....

inRcurs Or DNLLIES IInv nsc.ToTAL .. ..n11a .. 16.0k1t . ..

aIU .. .. . ..

- 23 -

T AS L ANNEX IlAawI - S AL IfDCJkmR DATA SHr P.e of 7

MLAWI REFEREIUZ CltOPS (WSICHTE AVSSM) /aMIOST (mSTwxU ESTS ATE) lb

'b 6 0/h 1,70/b RECENT LOW UlC01 ArRtCA MIDDLE INCON1960_ WWII ESrIKATSb SOUTH (O SAtAIU AVRICA S. Ct' SAHAR

ADJUSTED IOILIEIT tATIOSPtIMIAR: TOTAL .- 3b.0 62.0 67.8 9b.7

MALE .. 45.0 73.0 77.6 1WU.OFEMAlE .. 26.0 51.0 54.9 83.2

SECIDAEP: OTAL 1.0 2.0 4.0 13.5 17.3HaLE 1.0 3.0 5.0 17.9 25.0FEAltE 0.3 1.0 2.0 9.1 14.1

VOCAxxsaL C2 OF SECOuDAR) 23.6 2.9 2.9 /d 13.2 5.9

IPUPIL-TEACfR RATIOPRpuj 41.0 4.0 65.0 /d 44.9 41.1

SECONDAR 14.0 16.0 21.0 7d 27.4 25.5

PASSEmCnR CaRS/ToSND POP 1.8 2.2 2.4 II 3.8 20.8RADIO RECEsVERS/TuOUSAND POP 21.6 23.5 4.8 55.8 107.87V *ZCnnInsl So ND POP 1.7 .. .. 2.6 20.8NCE1SPAPEE ("DAUM GENERAL

IMlEREST') CIRCUnAnoPER DTIUSAND POPIUL4ON .. .. 4.8 5.0 18.4

CIaIM ANNUAL ATIENANCE/CAWETA 0.3 * . 0.5 0.4

LAStI DOICTOnLi LABOR FORCE (23005) 1621.0 1983.0 2751.0

FEMA (PERCENr) 38.7 38.1 37.5 34.2 3b.2AZRICUILUE (PERCIT) 92.0 89.0 86.0 /d 77.5 56.5nmuSn (PEM) 3.0 4.0 5.0 7T 9.7 18.3

PARTICPATIOI RATE CPCEMT)TOL 45.9 43.9 40.9 39.3 36.8HUE 57.5 55.3 52.6 50.9 47.1FMLJE 34.8 32.9 30.8 28.1 Z7.2

ECONOm DnnMicE RATIO 1.0 1.1 1.2 1.3 1.3

PERCENr OF PRIVAIE INCOMEPECSliED Er

amEn3 5S 0 H0M581OLDS .- 32.6 j ..RIDMET 20S OF OIUSNILDS .. 50.6 l

tWEST 20S F HOUSEHOLDS .. 10..LOWEST 402 OF HIOUSEHODS .. 21.5 .

IMD AFSOa=E rovry mLEVE CUS ER CAPTA)

uiBAN .. .. 123.0 /c 1t5.5 590.7omAL .. .. 99.0 T 95.0 275.3

ESrTMAIED RELATVE POPERZ! INCMELEML CUR PER CAPITA)

URcam .. .. 65.0 Ic 113.! 545.6RUUAL .. .. S2.0 - 67.6 201.1

ESTIIMAED POP. ELW ABSOLUTEPW7CM INO LEVEL CZ)

UliN .. .. 25.0 /c 36.6NIP?L .. .T 85.07; 61.8

MIlr AVAUABLEMrT APPLICABLE

N OTE S

la The group awerags for each Indicator ae populstion-ueighted aritbmtic um. CveraWe of couatriaamong the indicrtore depende a availability of data and Is not umifozu.

lb Unlte othervie octed. tData for 19W" refer to any yar hetusn 1959 and 1961: "Data for 1970" betvee1969 and 1971; and date for "Moat Recat Eatiate between 1981 ed 1983.

lc 1977; Id 1980; /e 1979; If 1962; :A 1967; /h 1972; Ii 1978.

.1Il1, 1985

ANNEX I- 24 - PageX3o f 7

PEFINMONS OF SOCIAL INDICATORSNotes Alithoush the dar are dmwn from wourcm generlly judged the most authoritadve and relible, it should also be noted that they may not be interfntonaliycompable becauwe or the iek of standardized definitions and concpts used by different countries in colletog the daa. The date ar nonetbele use(ld todescribe orde of magnitude. indicate trnds, and chamterize certain major diffeenc between countrie.The reference groups are I I) the -e country group or the subjet country and (2) a country wmsp with somewha higher averae Incomne tha the countrygroup of th ubjec coumtry texcept for -Hb Income Oil Exporersr group where "Mile Inconme North Afric and Middl EE I ese b e of stragnrsolo-cultural alfinities). In the reference grup duar the avegs ae populaden weighted arithmedc mea for each Indicator and shown only wben majorityof tbe counries ir a group has data for tha indicator Since the coverWe ocauntrzi among therlndica depends on thed avalabty ofda nd a is ot unWormcaudon must be exercied in relating a vegn oraone indictor to mnothe. Them averages ae only usel in cemparing the value done indicatr at a timeamngthe coumtry and referne grup

AREA (thousand sq.km.) Crude Ai& Rate (per tamdJ-Number oflive births in the year

ToJe-Total surface area comprising land area and iniand waters: per thousand of mid-year population; 1960, 1970, and 1983 data.1960. 1970 and 1983 data. Crude Death Rate (per thas_d)-Number of deaths in the year

Agrknhreal-Estimate of agriculturai area used temporily or per thousand of mid-year population; 1960. 1970, and 1983 dataLpermanenly for crops pastures market and kitchen gardens or to Gross Repredwedox Rate-Average number ofrdaughters a womanlie fallow. 1960.1970 and 1982 data. will bear in her normai reproductive period if she expeences

prsmnt ag-specific fertiity rates; usualy five-year avcrages endigGNP PER CAPITA (USS)-GNP per capita estimates at ctrrent in 1960. 1970, and 1983.market pnces. cakulated by same convemrsion method as World F P/NNag-Accqa vs, AAvaa (rxeamdfl-Annual n-Bank Arias (198143 basis): 1983 data. ber of acceptors of birth-control device underauspices of naiona

ENERGY CONSUMPTION PElt CAPITA-Annual apparent family planning program.consumption of comninercial primary energy (coal and lignite. Fadyp Pamsa-Usm (perce ofnsied uoassen-The pccn-peroleum. natural gas and hydro-, nuclar and geothernmal deec- tag or married womcn of child-bearng age who are practcing ortricity) in kilogrms of oil equivalent per capita; 1960. 1970, and whose husbands are practcing any form of contraception. Womcn1982 data. Sf child-bearing age are generally wmn aged 1549, although for

some countries contraceptive usage is mcasured for other agePOPULATION AND VITAL STATISTICS groups

Toan Popalt n Mid- Year (thowdaads)-As of July 1; 1960. 1970. FOOD AND NUTRMONand 1983 data.

Inle of Fhod Padwdion Per Cq*ia (JF990-71 - 1M-Index of peribhat PopuLa/e (perct of troit--Ratio of urban to total capita annual producon of al foo cmmoditd Production

population different definitions of urban aras may affect compar- excludes animal feed and seed for agricu=tue Food commoditiesability of data among countries; 1960. 1970. and 1983 data. indude primary commodities (cg. sugarcane instead of sugar)

Popuiioa tRwiecions which are edible and contain nutrients (eg. coffee and tea arePobpuadin in year 2000-The projection of population for 2000. excluded); they comprise cereals, root crops, pulse oil seeds,made for each economy separately. Starting with information on vegetables, fruits, nuts, sugarcane and sugar bets, lihveck. andtotal population by age and sex. fertility rates, mortality rates, and livestock products Aggrete production of each country is basedinternational migration in the base year 1980. these parameters on national avcrage producer price weights; 1961465, 1970, andwere projected at five-year intervals on the basis of generalized 19S2 data.assumptions until the population becamne stationary. P.r CGpt Spy qfCaries (perce t rfrequh'ese)- Comput-

Stationary popularion-ls one in which age- and sex-specific mor- ed from calorie equivalent of nt food supplies awilable in countrytality rates have not changed over a long period. while age-specific per capita per day. Available supplies comprise domestic produc-fertlity rates have sinultaneously remained at replace:ment levd tion, imports kss exports, and changes in stock Net supplies(net reproduction rate= 1). In such a populatin the birt-h rate is exclude animal reed, seeds for use in agrculture, quantities used inconstant and equal to the death rate. the age structurc is aiso food processing. and losses in disribution. Requiremnts wereconstant. and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal actvitysize was estimated on the basis of the projected characutristics of and health considering environmental temperature, body weights,the population in tie year 2000. and the rate of decline of fertility age and sex distribution of population, and allowing 10 pecent forrate to replacement level. waste at household levct 1961, 197u and 1982 dataL

Population Momentum-Is the tendency for population growth to Per Copita Sepply of Proten (Spasn per dej)-Protein content of

continue beyond the time that replacement-level fertity has been per capita net supply of food per day. Net supply of food is definedachieved; that is. even after the net reproductijn ratc has reached as above. Requirments for all countres established by USDAunity. The momentum of a population in the year : is measured as provide for minimum allowances of 60 grams of total protein pera ratio of t'ke ultimate stationary population to the population in day and 20 grams of animal and pulse protein, of which 10 grantsthe year t. given the assumption that fertility remains at replace- should be animal protei These standards are lower than those ofment level from year : onward. 1985 data. 75 grams of total protein and 23 grams of animal protein as an

mpq-*s tie.* average for the world, proposed by FAO in the Third World Food

Per sqkm.-Mid-year population per square kilometer (100 hec Su-ly 961. 1970 and 1982 datatares) of total aman 1960. 1970. and 1983 data. Per Capita Proteie Supply fronm t Amaan PWe-Protein supplyPer sqkm. agiculkral land-Computed as above for agricultural offood derived from animals and pulses in grans per day, 1961-65.land only. 1960. 1970. and 1982 data. 1970 and 1977 data.

Pop.krioa Age Stuere (percet) -Children (0-14 years). work- Child (aes 1-4) Death Rate (per thousad)-Number ofdeaths ofing age (15-64 years). and retired (65 years and ovcr)as pcrcentage children aged 1-4 years per thousand children ir the same ageof mid-year population; 1960. 1970. and 1983 data. group in a given year. For mest developing countries data derivedPopulariea Gromurh Rate (pmen)-torel--Annual growth rates or frmn life tables; 1960. 1970 and 1983 data.

total mid-year population for 1950-60. 1960-70. and 1970-83. HEALTH

PopJat Grok Rhatwe gpmenrp-rhAa-Annual growth rates Life Expecacy at Ilh (e-Nmher of years a ewbornof urban populatior for 1950-60. 1960-70. and 1970-83 data. infant would live if prevai!ng pattens of mortality for all people

ANNEX I

- 25 - Page 4 of 7

it the time of of its birth were to stay the same throughout its lire: Pupd-marker Raio - primary, and secondory-Total students en-'60. 1970 and 1983 data. rolled in pruimry and seandary lcvels divided by numbers of

.afan Moralty Rate (per tShousd)-Number of infants who dic teachers in the corresponding levels.befom reaching one year of age per thousand live births in a gkvenyear. 1960. 1970 and 19U3 data. CONSUMPTIONAccess to Safe Water (pecwt of populion -total. rban, and Pasecr Can (per thouand popalationJ-Passenger ears comn-rura-Number of people Xttal, urban. and rural) with reasonable prise motor cars seating less than eight persons: ecludes ambul-access to safe watcr supply (includes treated surface waters or ances. hearses and military vehicles.untreated but uncontaminated water such as that from protected Ra&o Rearws (per t lsandpopation)-All types of rmceivrsboreholks spnngs and sanitary weils) as percentages of their repec- for radio broadcasts to general public per thousand of population:tive populations. In an urban area a public fountain or standpost excludes un-licensed receivers in countries and in years whenlocated not more than 200 meters from a house may be considered registration or radio sets was in effect; data for t years mayas being within reasonable aazss of that house. In rural areas not be comparable since most countries abolidhed licensing.reasonable accss would irnply that the housewife or members of thehouselbold do not have to spend a disproportionate part of the day ToRger p(per A hudpopa Tio crevces forubni cestin fetching the fanfily's water needs. to gencral pu1bEc per thousand populatin; ceduds unliensd TvinAfetching the framilys water niqfeeds receivers in countries and in years when registration of TV sets wasAccess to Excrea DiVspoa (percent of populaton)--fotal, urba, in effect.and rrat-Number of people (total, urban, and rural) served byexcreta disposal as percentages of their respective populations. AIwsp"w Cwcxldoa (ptr ditaSandpopuiotl--Sbows the aver-Excreta disposal may include the colkction and disposaL with or age circulation of -daily gcneral interest newspaper.- defined as awithout treatment, or human excreta and waste-water by water- penodicwl publication devoted plimariy to recoding geal newborne systems or the use of pit privies and similar installations. It is considerd to be -daily if it appars at klest four times a we.Popatien per PAyPo-fpulation divided by number of prac- Gnm Annal Attendac per Capita per Yer-Based on thetising physicians qualified from a medical school at university levl. number of tickets sold during the year, including admissions toPopurato per Nursin Perso-Population divided by number of drive-in cinemas and mobile units.practicing male and female graduate nurses, assistant nurses.prAcidcal nurses and nursing auxiliaries. LABOR FORCEPopurn pe Hospital eSL-t4 un, ad rural-nPpulation Tota Labor Force (rho=wnd)-Economi:alIy active persons in-(total, urban, and rural) divided by their respective nunber of cluding armed forces and unemployed but excluding housewives.hospital beds available in public and private, geneal and p students. etc.. covering population of al ages. Definitions inhospitals and rehabiltation centers. Hospitals are establishments various countries are not comparable: 1960. 1970 and 1963 data.permanendtly staffed by at least one physician Establishments prov- Femak (percet)-Female labor force as percentage of total laborifing prindpally custodial care are not induded. Rural hospitals forcehowever. include health and medical centers not pemanently staffed Agr&lt- (perceut)-Labor force in fanuing. forestry, huntingby a physician (but by a medial assistant. nursn midwife. etc.) and fisiing as pentage of total labor force; 1960, 1970 and 1980which offer in-patient acconmnodation and provide a limited range data.of medical facilities. - dsry (percent)-Labor force in mining. construction. mnanu-Admissiow per Hospita fed-Total number of admissions to or facturing and electricity, water and gas as percentage of total labordischarges from hospitals divided by the number of beds. forc; 1960, 1970 and 1980 data.

P.9lephon Raw (pereear-tara,ale. andf-ipuFarticipationHOUSING or activity rates are computed as totaL male. and female labor forceAverWg . qf Hiof lnolod (persons per hmnselliold)--tot arban, as percentages of totaL male and female population of al agesad rural-A household consists of a group ofindiiduals who share respectively: 1960. 1970. and 1983 data These are based on MLWsliving quarters and their main meals. A boarder or lodger may or participation rates reflectng age-sex struum of the populaion, andmay not be induded in the hous:holi. for statistical purposes. long time trend. A few estimates are From national sourmcAerg Nunber of Perso per Room-riota, rban ad rual- Economic Depnideny Ratio-Ratio of population under 15. andAverage number of persons per room in all urban. and rural 65 and over. to the working age population (those aged 15-64).occupied conventional dwellings, respectively. Dwellings excludenon-permanent structures and unoccupied parts. INCOME DlS;RIBUTIONPecage of Delgs wit Eleetuidtp-totl, urba. and ra- Percentage of Tota Dispsbl Income (both in cas ad kind)-Conventional dweDlings with elatricity in living quarters as perne- Accruing to prctik groups of households ranked by total housetage of totaL urban. and rural dwellings respectively. hold income.

EDUCATION POVERTY TARGET GROUPSA,5ed Euroient Ratios The folowing estimates are very approximate measures of povertyPrF1amy school - total. mal and feJule-Gross total. male and levels, and should be interpreted with considerable caution.female enroDment of aU ages at the primary kvel as percentages of Eiated Absolt Poverty Incone Leve (= per capgta)-orbanrespecive prinmary school-age populations While many countries and rural-Absolute poverty income level is that income levlconsider primary school age to be 6-11 years. others do not The below which a minimal nutritionally adequate diet plus essentialdifferences in country pracics in the ages and duration of school non-food requirements is not affordable.are reflected in the ratios given. For some countries with universal Estaxed Relative Poverty Income Leve l(USS per capita)-urblneducation. gross enrollment may xceed 100 percent since some and rural-Rural relativc poverty incomc level is one-third ofpupils are below or above the country's standard primary-school average per capita personal income of the country. Urban kvel isage. derived from the rural kvel with adjustment for higher cost ofSicondvy shool - total. male and femak-Computed as above: living in urban areas.secondary education requires at least four vears of approved pri- Esmated Populaion Seow Absne vty Inome Lead (per-mary nstrucuion provids generaL vocationaL or teacher training cenr)-urban and rna- Prcent of population (urban and ruralinstrutions for pupils usually of 12 to 17 years of age: correspond- who arc absolute poor.'ence courses are generaUy excluded.Vocational Enrfoln (percent of secondary)-Vocational institu- Comparativc Analvsis and Data Divisiontions include tchmnicaL industriaL or other programs which operate Economic Analysis and Projections Departmentindependently or as departnents of secondary institutions. June 1985

- 26 -

s "2- 1S, d_Z~~~~~- or ftc~ ~~~~~~~~~~~~~~iTfladl o 645 - Cud-K.dW

- eO Dm:

(OL11M UN AbUEL hultidxkdLgmC St mat 1dm.)

13IN19G0 11 13M 1963 131 15 1986 137 19 13 I19O

own dsu c PMieL 103.3 -1.0 -3.1 2.5 4A 7.6 33 3.4 3.6 3.7 3. 4.0_m1b 437.A -G.6 -2 6.9 4.3 6.3 3.2 3.3 3. 3.5 3.6 3.7

lnizy 212 -1. -2.6 -0.1 4.1 2.9 3.4 36 3.3 4.0 4J 4.6atht 53.0 42 -3.6 0.6 4.9 3.6 33 3.5 3.7 3 4.0 41

amzmt 103. -3.5 4.3 -1.4 3.2 7.6 L0 1.3 2.5 2.6 3.0 2Iarm I *19O -I5J -34.1 21.1 147 -1A 6A 3A 23 3.9 43 6.9

.d ao 30.9 25d -19J -6.7 7.1 20.3 1I 5.3 5.0 5. 5.1 4.8jtU cc f 324.2 -9J -4.9 -4.5 4 -15.0 17.0 2a 2.6 2.7 3.7 3d

m ami mdrt_ 153.0 4 57 60.5 14.J7 1 -. 17. 3.L0 21.2 132 16A

C03 dMeltr C197lIV 109.6 13.A 1437 D.0 103.6 20A. 22Lo 20A 273.4 25.2 315.9bmiNW =buutuOUgdm* 1.2317 1.U1 0.933 OA854" 0.7 0.5747 0.5555 0.W 0.5 O.D5 0.53

Man. of OF at tkilt PtLm M) buMp huK l aa C)

I95 153 l9B5 1990 L95754: 1l9I8 1490

Gms icm sct 10.0 10.0 10D.0 1O.0 5S6 1s 3.65

ipIinI±.1 At ant m 37.5 36.3 35.3 35.9 5.8 032 3.4Iw~am . 2 *otef GOP at 19.4 3.5 17.7 17.9 4.7 055 3.95-dw f f ant 43 45.2 46.0 46.2 5. 2J65 3.73

Ou'-ti- 5.4A 36.8 90.2 85.8 5.0 0a2 4.065 iSau. 31.6 25.5 17.0 17.4 4.3 -10.75 467

1mqot 068 2U.8 25.6 23.1 25.1 8.7 3.48 4.55Iottm an S5.9 4L.6 3D.3 273 3.2 -V12W7 531

cmmm omdinl miiu. 12. 18 5.9 12.4 - 17.01 2.99

I of CM

197Kql7 1975/76 19681/2 193/33 1913/34 1935

Ofat zwfmom 25.5 16.5 20.4 19.9 19.6 20.0Cltu e nmitzi 16.5 15.4 2IA 21.2 20.4 2.7

S9p2 (W) er cdddt C-) -1.1 1.1 -15.9 -12J -10.8 -6.3adapil e adtzuz 124A IZ.9 11.5 11.4 10.1 7.6FaIp fl-g 11.2 8.8 6.8 9.5 8.5 52'

197540 19 5 139590

am

g0 BMW& (2) 5.8 3.72 4.01GNP P-t etta -ritb C() 1.9 0. 1.21R inqidm gpmth uto CZ) 6.1 2.22 2.62

lax 6.4 1.0 43711gu ml I uta 0.1 0.75 0.37bw-t dimtlty -0L2 1.35 0.83

C quvs!w am eqzina,1 at tb/ "jtu y at E pd Eatern and Southern Africa RegionC/At 1990 MDE October 5. 1985

- 27-

m 6 of 7

Papant : 6452 - (utd-1952 td.b)GN FM I! Lts : 1210 - (IS8)

KVAa- Ed=d Tadu uad 2

hwm ath meC)

(WLIII ACJeWa wu 16 Pd )-~~~~~~~o iliV' C lcbl)netLafimla at caazut Pdim)

354 1980 1981 1952 1953 1954 19B 6 I195 l955 1Dl9 1990

mt_diu 305.1 22.9 -16.5 -L6 43 323 -. 0 4.5 5. 5.3 5.0 4.7PdEI- 23.7 17.3 -19.5 6.1 4.7 31.5 -1.5 4.5 5.0 5.4 4.9 4.5

1 _IEadm 21.4 II.0 9.6 -26 0.5 141 4.0 4. 4.5 5.0 6.0 7.0

Nxblda U 174.3 0.3 -17.1 -18.7 0.1 -16.8 8.3 3.0 Z 7 3.0 3. 3.3Foad 5.8 3.0 57.2 -56.3 -11.A -30.7 14.3 1.0 1.4 L3 2.0 2.4Pftval ~ 31.2 -6.6 -5O -20.3 1.7 -1.6 B.3 2.6 27 2 2.7 2.8Ibdm1yud .yi 30.S I.9 41.3 -16.9 -3J -5.8 3.4 6.5 43 S. 6.3 6.113mm 56.5 -2.5 -6A -B.6 2.5 -19.6 9.7 2.1 2.2 l1 2.3 2.3

qmzpdt m 1Mm 1.1 39.0 9.1 -1.5 34.4 -20. 7.9 9.1 9.1 9.4 9.6IOzt pdctmuo 21.6 16.9 7.6 23J. 29.2 -1.6 4.7 7.0 7A 7.6 7.5

om E t -17.0 19.0 1.3 -2O.5 4.1 -19.2 3.1 1. 1.5 L7 L9

_lm of tl-ua&m 1mb CZ) *,g Amid mcm_ CC)(* ama pln) (Et ammt 1979 pttm)

1IN3 198 D 19750 1905 1915-50

Euou 100.0.IODD =A 10. 1M0.0 9.6 2.7 5.0pdmy 92.6 89.7 903 90.1 83 3.3 4.9

-umE M T7.4 10.3 9.7 9.9 17 -1.4 5.2

zu 100. 10D.0 1.0 ICO.0 -1.4 -9.4 3.1rea 9 7.3 5.6 5.2 -0.9 -39.8 L6fttulm 9.1 13.9 18.2 17.9 5.3 2.7Ibdd-t d e*dpmq= 24.5 34. 21.0 24.0 1.0 -15.1 5.9.Omeh 61S 444 55.2 52.9 -4.5 -5B 2.2

Sm of TOb uWth 9.16 of T1mb udd 9Dom cf T idthkWhatdSL Guu1u CZ) X I,PIg aotdim co C l l 1 74m1 ICZI)

1970 1975 19B0 1970 1975 1m 1970 1975 I950

P *65.3 76.2 69.0 11.3 10.3 7.0 23.4 13.S 2A.

56.7 6* 75.0 26.2 14.5 6.0 19.0 ZI 7 19.0

1/ illai a od n &wldua~a

Eastern and Southern Africa RegionOctober 5, 1985

- 28 -

cs 7r.pde1m i 2 6432 Odd-If. ua )iw FMtrit I Uio -'11"2)

MM- DEM ue,81 tULH 0171 S -RVMK meman pileD) M

nt_

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maw muss ~ ~ im 90no mlm mim i w

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bip of - ad m62.3 S06A 474.7 43J 414A 40.5 4414 470 3145J 1.3 531.3of ld I iB_Sam fob. 31.2 237J 198.6 111.2 17.J I3.0 199.3 21.3 2. 10.0 21.

ut umauls * 1.4 21.1 20.1 12.7 10.3 -13.7 -14.7 -15.7 -11J -13.0 -19.2

CIant asat blum -06.A -133J -12.0 -14.2 -34.3 -1 -132.9 116.1 -li07 -13 49.7

PinsM din le - - - - -lfl al PM a 30.0 46.2 35.3 29a 24.4 63A 32.1 64.8 3N.8 41 46J

"IL iSa (t) 176.9 51.4 24.3 22.6 427 42.5 "1 754 1234 75.4 92.9Otldat £36.8 423 32J 29 63.0 73.5 119J b6.9 12A 7141 79.3Iuivm 40.1 9.1 -6.4 -73 -20.3 -33.0 -24.6 -119 -6.0 4.4 16ar Itm 41.6 29.4 0.6 12A. 5.4 8.2 13.0 -19J -15. -49.6 -19

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Offldal Ctns 4.6 10.1 46.3 36.3 3.4 25.2 30.0 321 34.3 36A 39J 42.1t}is nml tmm 43UJ 60.6 46.1 42A 41.9 103.5 46.3 1231 3.4 934 LI0 N3

DeC 16 7 1JJ IL6 3 .1.3 5 3.3 68 4J 42 4.4 5.5S| - - _ - - _ _ - _ - - _

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Debt 0dt l d DlsbaS 718.3 638.8 726A 770.1 807.8 84.4 83. 9l.4 11132.9 1156.31 17.1 1315.9offdat 56741 4134 4t5.6 354.2 394.1 707.2 749.1 8A.8 925.2 1054.6 1l93 U96.1P t 171.4 225.4 21.0 2J.9 13.7 177.2 14.2 119.6 101.7 101.7 106.2 119a

tUhnlcd DIt 171. 17.2 2mJ3. 1.8 225.6 2.1 30116 3632 399.3 47.J 46.9 59.3

Debt SmniaThI SKIi k n -43.5 -67.6 -U. -61J -56.3 -. 9 -66.2 -93.0 -0.7 -60 9 -60

Dneant -24J -34.6 -49.4 -3L0 -29A -30.6 -0 -38.3 -3D.8 -31.9 -7.5 -41Dlf 0uMS ad ltpzd 4.0 -6.6 -13.9 -Z1.0 -18.9 -30J -3.3 -35.1 -3.3 -32.5 -35.3 -33.0

a - S p 194 25.0 B.8 17.9 21.9 23. 23. 21.7 203 17.1 152

Ahas lDt 1 iL 1m l 3 3.0 4.0 4.0 6.0 3.0 5.0 6.0

A mp IBbulty Sa - mm (j) *0m5 27.8 3.3 22. 29.0 2.1 29.5ifatPit

An Z of Oft CitntanIlzat afd o 31f 133

laiety Of eebt mtsediqthttris due wIthdn 5 yas 29.01 uldd anu ttu 10ym 44.1

e ft um an of eLbt ems grIbest dua tUtu fiast jw 3.6

Eastern and Southern Africa legionOctober 5, 1955

-29- ANNEX II

Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN NALAWI

A. STATEMENT OF BANK LOANS AND IDA CREDITS(As of September 30, 1985)

Amount in US$ milliontless cancellations)

Loan or Fiscal Undis-Credit No. Year Borrower Purpose Bank IDA bursed

6 loans and 19 credits have been fully disbursed 74.96 224.64

Cr. 857-MAI 79 NRDP I 22.00 3.04Cr. 910-MAI 79 Education III 14.50 1.03Cr. 992-MAI 80 - NRDP 1I 13.80 4.00Cr.1123-MAI 81 Education IV 41.00 11.53Cr.1183-MAI 82 NRDP III 7.30 2.99Cr.1272-MAI 82 Lil. Water Supply Eng. 4.00 1.56Cr.1330-MAI 83 Education V 34.00 27.49Cr.1343-MAI 83 NRDP IV 10.60 8.38Cr.1351-MAI 83 H Health 6.80 4.11Cr.1352-MAI 83 Smallholder Pert. 5.00 0.16Cr.1423-MAI 84 H Highway V 26.90J/ 19.20a/Ln.2363-MAI 84 Highway V 18.00 17.96Cr.1428-MAI 84 - Tech. Assist. II 1.50 1.10Ln.2486-MAI 85 Wood Industries 6.40 .6.04Cr.1528-MAI 85 Urban Housing b/ 15.00 15.00Cr.1549-NAI 85 Natl. Agri. Res. b/ 23.80 23.80

TOTAL c/ 99.36 450.84 147.39of which has been repaid 5.15 5.77

TOTAL now held by Bank and IDA 94.21 445.07Amount sold .30of which repaid .30

TOTAL undisbursed 24.00 123.39 147.39

ai Includes Special Fund Credit.

b| Became effective November 19, 1985.

cl In addition, a US$11.6 million equivalent credit for an AgriculturalExtension and Planning Support Project was approved by the ExecutiveDirectors on September 19, 1985, and will be signed shortly.

-0- AMAu 113 zPage 2 of 2

D. STATEMENT OF IFC INVESTMENTS(as of September 30, 1985)

investment Fiscal Type ofNumber Year Obligor Business Loan Equity Tbtal

---- (US$ Million)-

326-MAI 76,82 David Whitehead Textiles 10.8 - 10.8& Sons (Malawi)Limited

362-MAI 77,81 Dwangwa Sugar 9.9 - 9.9Sugar Corpora-tion Limited

434-MAI 79 Investment and Development - 0.6 0.6Development PinanceBank of Malawi Company

502-MAI 80,84 Malawi Tourism 2.1 - 2.1HotelsLimited

542-MAI 81,82 Ethanol Company Manufactur-Limited of ing AlcoholMalawi from

Molasses 2.2 0.3 2.5

Total gross commitments 25.0 0.9 25.9

Less cancellations3 terminations, 10.2 - 10.2repayments and sales

Total commitments now held by IFC 14.8 0.9 15.7

Total Undisbursed

V

- 31 -ANNEX IIIPage 1 of 2

MALAWT

INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

I. Timetable of Key Events

a) Time from project identification to appraisal: 9 monthsb) Prepared by : Government/

INDEBANK/Bankc) First Bank Mission to consider project : October 1984d) Appraisal Mission Departure : February 1985e) Negotiations : October 1985f) Planned Date of Effectiveness : January 1986

II. Special Bank Implementation ActionsNone

_II. Special Conditions

A. Conditions of Disbursement of the Agricultural Component

1) For the agricultural line of credit, R3BM's execution ofparticipating bank agreements with INDEBANK, NBM and CBM (para.67).

2) Establishment of two Special Accounts, one each for theagricultural credit component and foz the INDEBANK line of creditcomponent (para. 74).

3) INDEBANK shall hire the manager of the Agricultural ProjectsInvestigations Division as a condition of disbursement of theproceeds of the agricultural line of credit to INDEBANK (para.70).

B. Interest Rate Review

1) RBM shall annually review (a) the interest rates charged toparticipating banks, and (b) the rate charged by participatingbanks on agricultural subloans. These rates would be revised asappropriate (para. 67).

2) INDEBANK shall annually review its interest rates to ensure thatthey are (a) positive in real terms; (b) in line with the overallinterest rate structure of the country; (c) adequate to enableINDEBANK to cover reasonable administrative expenses; and (d)adequate to achieve the objectives of the project (para. 54).

- 32 - ANNEX IIIPage 1 of 2

C. Employment of Key Staff

By June 30, 1986, INDEBANK would employ a usnager for theAgricultural Projects Investigation Division, an agriculturalspecialist, and two counterpart Malawian staff (para. 70).

D. Retroactive Financing

US$0.8 million in retroactive financing would be provided for theagricultural component, subject to a prior review by the Bank ofa sample of subloans to be financed retroactively (para. 69).

E. Implementation Review of the Pilot Agricultural Credit Component

A joint review would be carried out by the Bank in cooperationwith the Government approximately two years after projecteffectiveness to assess progress in achieving the project'sobjectives, commercial bank effectiveness in implementing theagricultural credit component, the level of demand, the structureof interest rates and the effectiveness of the managementtraining and extension service (para. 75).

- -:. . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~