Malawi Public Expenditure Review Background and Overview PER Dissemination Workshop Capital Hotel, Lilongwe 21 November, 2007

Public Expenditure Review PER is not an audit of expenditures PER is not an audit of expenditures Scope is to assist Government to critically review its operations and the use of public resources: Scope is to assist Government to critically review its operations and the use of public resources: Identify policies to support fast and equitable growth and wealth creationIdentify policies to support fast and equitable growth and wealth creation Improve the effectiveness, quality, and equity in delivery of services to the people of MalawiImprove the effectiveness, quality, and equity in delivery of services to the people of Malawi

Institutional arrangements for Malawi PER 2006 Prepared by GoM, with assistance by WB and CABS partners Prepared by GoM, with assistance by WB and CABS partners Preparation overseen by ‘PER Taskforce’ Preparation overseen by ‘PER Taskforce’ GoM officials from line ministriesGoM officials from line ministries Chaired by Economic Affairs, in Ministry of FinanceChaired by Economic Affairs, in Ministry of Finance Chapters prepared by ‘PER Thematic Working Groups’, chaired by respective line ministry Chapters prepared by ‘PER Thematic Working Groups’, chaired by respective line ministry

Good progress in Macroeconomic front since 2003/04 In 2003/04 Malawi was on the verge of a macroeconomic crisis In 2003/04 Malawi was on the verge of a macroeconomic crisis Weak fiscal performance between 1999/00 to 2003/04: Weak fiscal performance between 1999/00 to 2003/04: Domestic debt at 25% of GDPDomestic debt at 25% of GDP Domestic interest bill at 10% of GDPDomestic interest bill at 10% of GDP But since 2004/05 GoM has taken rapid steps to prevent a crisis, and has reestablished macroeconomic stability But since 2004/05 GoM has taken rapid steps to prevent a crisis, and has reestablished macroeconomic stability Domestic debt down to below 14% of GDP in 2006/07Domestic debt down to below 14% of GDP in 2006/07 Domestic interest bill down to 5% of GDPDomestic interest bill down to 5% of GDP

Malawi is now at a critical juncture Reduction in interest bill has released resources that can be channeled to priority expenditures Reduction in interest bill has released resources that can be channeled to priority expenditures GoM need to decide how best to utilize these resources: GoM need to decide how best to utilize these resources: Report addresses two related questions: Report addresses two related questions: How best can GoM use these resources to consolidate recent gains, and accelerate economic growth and poverty reduction?How best can GoM use these resources to consolidate recent gains, and accelerate economic growth and poverty reduction? What reforms should GoM pursue to improve efficiency and equity of public expenditures?What reforms should GoM pursue to improve efficiency and equity of public expenditures?

What are the key priorities for GoM over the next few years? (i) stay the course with the macro economic program, and continue reduction of domestic debt burden (i) stay the course with the macro economic program, and continue reduction of domestic debt burden (ii) continue to strengthen the budget process, payroll management, and debt management, and take action to protect public finances from the impact of external shocks, notably weather (ii) continue to strengthen the budget process, payroll management, and debt management, and take action to protect public finances from the impact of external shocks, notably weather (iii) improve efficiency and equity of public expenditures by implementing the key measures recommended in this report (iii) improve efficiency and equity of public expenditures by implementing the key measures recommended in this report

How should GoM use the savings from domestic interest bill? In addition, a strategic balance must be struck between investing interest savings to: In addition, a strategic balance must be struck between investing interest savings to: (i) accelerate retirement of domestic debt, to achieve additional interest savings that can channeled to priority expenditures at a later stage(i) accelerate retirement of domestic debt, to achieve additional interest savings that can channeled to priority expenditures at a later stage (ii) build up Malawi’s external reserves and/or purchase drought insurance, as coverage to protect against exogenous shocks(ii) build up Malawi’s external reserves and/or purchase drought insurance, as coverage to protect against exogenous shocks (iii) expand investments in infrastructure and/or social services, to boost growth rates and progress towards the MDGs(iii) expand investments in infrastructure and/or social services, to boost growth rates and progress towards the MDGs The three ‘options’ above underpin much of the analysis in the PER The three ‘options’ above underpin much of the analysis in the PER GoM needs to carefully consider the costs and benefits of each option GoM needs to carefully consider the costs and benefits of each option

Structure of PER 2006 Discuss priorities in public financial management, including to protect against external shocks Discuss priorities in public financial management, including to protect against external shocks Identify measures to improve debt management, and reduce debt vulnerability Identify measures to improve debt management, and reduce debt vulnerability Assess the implications of changing allocation of resources across sectors for growth, poverty, and MDGs Assess the implications of changing allocation of resources across sectors for growth, poverty, and MDGs Assess the efficiency and equity of expenditures in education, health, and roads (and assessment in agriculture is ongoing) Assess the efficiency and equity of expenditures in education, health, and roads (and assessment in agriculture is ongoing) Four largest expenditure votes in the budget; account for almost 60 percent of total voted expendituresFour largest expenditure votes in the budget; account for almost 60 percent of total voted expenditures Provide public services critical to accelerate growthProvide public services critical to accelerate growth Assess expenditures on nutrition Assess expenditures on nutrition Added following the analysis in the 2006 Malawi Poverty and Vulnerability Assessment (MPVA)Added following the analysis in the 2006 Malawi Poverty and Vulnerability Assessment (MPVA)

Headlines in Macro and Debt Reforms to strengthen budget process and payroll management should remain at the center of the reform agenda Reforms to strengthen budget process and payroll management should remain at the center of the reform agenda Reforms to insulate budget implementation from the impact of exogenous shocks should be pursued Reforms to insulate budget implementation from the impact of exogenous shocks should be pursued Changing allocations across sectors can be important but Changing allocations across sectors can be important but Maintaining sound macroeconomic policies is critical for growth and human development indicatorsMaintaining sound macroeconomic policies is critical for growth and human development indicators Ensuring the ‘quality’ of public expenditures in all sectors is critical to accelerate growth and progress towards the MDGsEnsuring the ‘quality’ of public expenditures in all sectors is critical to accelerate growth and progress towards the MDGs

Headlines in Education Efficiency of education expenditures is low Efficiency of education expenditures is low Around 50 percent of the resources spent on primary education are wasted, due to drop outs and repetition Around 50 percent of the resources spent on primary education are wasted, due to drop outs and repetition Increasing number of qualified teachers is critical to raise quality & efficiency of primary education Increasing number of qualified teachers is critical to raise quality & efficiency of primary education Two-track system in secondary (CSSs and CDSSs) is inequitable and inefficient Two-track system in secondary (CSSs and CDSSs) is inequitable and inefficient Malawi’s University system is very inefficient Malawi’s University system is very inefficient The benefits from public spending in education are not equitably distributed The benefits from public spending in education are not equitably distributed

Headlines in Health Two areas are critical to improve efficiency in the provision of health services: Two areas are critical to improve efficiency in the provision of health services: (i) Lack of skilled health workers and overloading of the available staff results in low quality of services(i) Lack of skilled health workers and overloading of the available staff results in low quality of services (ii) Unavailability of even basic drugs, mainly due to slow progress in reforming the Central Medical Stores (CMS)(ii) Unavailability of even basic drugs, mainly due to slow progress in reforming the Central Medical Stores (CMS) Medium-term financing for meeting GoM’s target in HIV/AIDS programs needs to be urgently identified; available funding will run out within the next 2-3 years Medium-term financing for meeting GoM’s target in HIV/AIDS programs needs to be urgently identified; available funding will run out within the next 2-3 years

Headlines in Nutrition Malnutrition is the most severe challenge facing Malawians, irrespective of their income status and level of calorie consumption Malnutrition is the most severe challenge facing Malawians, irrespective of their income status and level of calorie consumption Current portfolio of nutrition interventions in Malawi does not prioritize cost-effective interventions Current portfolio of nutrition interventions in Malawi does not prioritize cost-effective interventions Interventions are not targeted at the most vulnerable Interventions are not targeted at the most vulnerable

Headlines in Roads Road network is imbalanced: Road network is imbalanced: Small network of main roads is mostly paved and in good conditionSmall network of main roads is mostly paved and in good condition The rest of the network, mainly rural roads, is unpaved and mostly in poor conditionThe rest of the network, mainly rural roads, is unpaved and mostly in poor condition Funds spent on routine maintenance, have been inadequate to meet maintenance needs of network Funds spent on routine maintenance, have been inadequate to meet maintenance needs of network There is a need to introduce planning and prioritization in road maintenance and construction activities There is a need to introduce planning and prioritization in road maintenance and construction activities There has not been a poverty focus in the road sector expenditure, and access to roads is heavily tilted in favour of the richest households There has not been a poverty focus in the road sector expenditure, and access to roads is heavily tilted in favour of the richest households

Conclusions Many areas to improve efficiency and equity have been identified Many areas to improve efficiency and equity have been identified Real challenge is the implementation of the proposed reforms Real challenge is the implementation of the proposed reforms