AFRICAN DEVELOPMENT FUND Language: English Original: English PROGRAMME: RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION (RFSSP) COUNTRY: MALAWI PROGRAMME APPRAISAL REPORT Appraisal Team Team Leader Mothobi Matila, Principal Macroeconomist (OSGE/ZMFO) Co-Team Leader Raymond Besong, Senior Rural Infrastructure Engineer, OSHD Team Members Mr F. Kamanga, Senior Governance Expert, OSGE/MWFO Mrs P. Ekoh, Senior Education Analyst, OSHD/ZMFO Ms. A Zeleza, Economist, MWFO D. Goyal, Regional Financial Management Specialist, ORPF.2/SARC M. Mbo, Senior Financial Management Specialist, ORPF.2/SARC Mrs, N. Alolo Alhassan, Senior Social Protection Specialist, ORPC Mr. I. Budali, Principal Social Protection Specialist, OSHD/EARC Mr. K. Banda, Social Development Specialist, MWFO Ms. E. Fasika, Country Programme Officer, ORSB/MWFO Mr Alieu Jeng, Consultant, OSGE. 2 Moses O. Ayiemba, Chief Regional Procurement Coordinator, SARC X. Long, YPP, OHSD .1 Sector Manager J. Mukete, OSGE.2 M. Youssouf, OSHD.1 Sector Director I. Lobe Ndoumbe, OSGE A. Soucat, OSHD Regional Director C. Ojukwu, Director, ORSB Resident Representative A. Mwaba, MWFO Peer Reviewers C. Do, Senior Macroeconomist, OSGE.1 R. Charo, Senior Social Development Specialist, OSHD T. Ngororano, Principal Governance Officer, OSGE.2
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AFRICAN DEVELOPMENT FUND Language: English
Original: English
PROGRAMME: RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION (RFSSP)
COUNTRY: MALAWI
PROGRAMME APPRAISAL REPORT
Appraisal Team
Team Leader Mothobi Matila, Principal Macroeconomist (OSGE/ZMFO)
Co-Team Leader Raymond Besong, Senior Rural Infrastructure Engineer, OSHD
Team Members Mr F. Kamanga, Senior Governance Expert, OSGE/MWFO
Mrs P. Ekoh, Senior Education Analyst, OSHD/ZMFO
Ms. A Zeleza, Economist, MWFO
D. Goyal, Regional Financial Management Specialist, ORPF.2/SARC
M. Mbo, Senior Financial Management Specialist, ORPF.2/SARC
Mrs, N. Alolo Alhassan, Senior Social Protection Specialist, ORPC
Mr. I. Budali, Principal Social Protection Specialist, OSHD/EARC
Mr. K. Banda, Social Development Specialist, MWFO
Ms. E. Fasika, Country Programme Officer, ORSB/MWFO
Mr Alieu Jeng, Consultant, OSGE. 2
Moses O. Ayiemba, Chief Regional Procurement Coordinator, SARC
X. Long, YPP, OHSD .1
Sector Manager J. Mukete, OSGE.2
M. Youssouf, OSHD.1
Sector Director I. Lobe Ndoumbe, OSGE
A. Soucat, OSHD
Regional Director C. Ojukwu, Director, ORSB
Resident Representative
A. Mwaba, MWFO
Peer
Reviewers
C. Do, Senior Macroeconomist, OSGE.1 R. Charo, Senior Social Development Specialist, OSHD T. Ngororano, Principal Governance Officer, OSGE.2
TABLE OF CONTENTS
CURRENCY EQUIVALENTS i
FISCAL YEAR i
WEIGHTS & MEASUREMENTS i
ACRONYMS & ABBREVIATIONS ii
GRANT INFORMATION iv
RESULTS-BASED LOGICAL FRAMEWORK v
PROGRAMME EXECUTIVE SUMMARY viii
I. THE PROPOSAL 1
II. COUNTRY AND PROGRAMME CONTEXT 2
2.1 Government Overall Development Strategy and Medium-Term Reform Priorities 2
2.2 Recent Economic and Social Development, Perspectives, Constraints and Challenges 2
2.3 Bank Group Portfolio Status 5
III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILTY 5
3.1 Link with CSP, Analytical Works Underpinnings and Country Readiness Assessment 5
3.2 Collaboration and Coordination with other Development Partners 8
3.3 Outcomes of Past and On-going Similar Operations and Lessons 8
3.4 Relationship to On-going Bank Group Operations 9
3.5 Bank’s Comparative Advantage 9
3.6 Application of Good Practice Principles on Conditionality 10
3.7 Application of Bank Group Non-concessional Borrowing Policy 10
IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS 10
4.1 Programme’s Goal and Purpose 10
4.2 Programme Components, Operational Objectives and Expected Results 11
4.3 Financing Needs and Arrangements 14
4.4 Beneficiaries of the Programme 14
4.5 Impact on Gender 15
4.6 Environmental Impact 15
V. IMPLEMENTATION, MONITORING AND EVALUATION 15
5.1 Implementation Arrangements 15
5.2 Monitoring and Evaluation Arrangements 16
VI. LEGAL DOCUMENTATION AND AUTHORITY 17
6.1 Legal Documentation 17
6.2 Conditions Associated with the Bank’s Intervention 17
6.3 Compliance with Bank Group Policies 17
VII. RISK MANAGEMENT 18
VIII. RECOMMENDATION 18
LIST of TABLES
Table I : Summary Assessment of the Pre-requisite Conditions for the Programme
Table II : Summary of Past Operations and Lessons Learnt
Table III : Mid-term Expenditure Framework (2009-2017) Projections
Table IV : Risks and Mitigation Measures
BOXES
Box I : GoM Reforms Since April 2012
Box II : Prior Actions for the programme
APPENDICES
Appendix I : Letter of Development Policy
Appendix II : IMF Country Relations Note: Letter of Assessment
Appendix III : Recent Evolution in Macroeconomic Key Indicators
Appendix IV : Programme Targets
i
Currency Equivalents
(As of June, 2012)
Currency Unit Malawi = Kwacha (MWK)
1 UA = MWK 407.319
1 UA = US$ 1.51
1 UA = Euro 1.22
1 US$ = MWK 269.748
Weights and Measures
Metric System
1 metric tonne = 2204 pounds (lbs)
1 kilogramme (kg) = 2.200 lbs
1 metre (m) = 3.28 feet (ft)
1 millimetre (mm) = 0.03937 inch (“)
1 kilometre (km) = 0.62 mile
1 hectare (ha) = 2.471 acres
Fiscal Year
01 July - 30 June
ii
ACRONYMS AND ABBREVIATIONS
AfDB African Development Bank
ADF African Development Fund
AGD Accountant General’s Department
AIDS Acquired Immuno-Deficiency Syndrome
ASYCUDA Automated System for Customs Data
CABS Common Approach to Budget Support
CIAU Central Internal Audit Unit
COMESA Common Market for Eastern and Southern Africa
CPIA Country Policy and Institutional Assessment
CPPR Country Portfolio Performance Review
CSP Country Strategy Paper
CSO Civil Society Organisation
DFID Department for International Development
DPs Development Partners
ECF Extended Credit Facility
EMIS Educational Management Information System
EPRCP Enhancing Procurement Reforms and Capacity Project
ETR Electronic Tax Register
EU European Union
Forex Foreign Exchange
FIMTAP Financial Management Transparency and Accountability Project
FRA Fiduciary Risk Assessment
FY Fiscal Year
GAP Governance Strategic Directions and Action Plan
GBS General Budget Support
GDP Gross Domestic Product
GFEM Group on Financial and Economic Management
GoM Government of Malawi
GPRSG Governance and Poverty Reduction Support Grant
HDI Human Development Index
HIV Human Immuno-Deficiency Virus
HoC Head of Cooperation
HoM Head of Mission
HRMIS Human Resources Management Information System
ICSP Interim Country Strategy Paper
IMF International Monetary Fund
IFMIS Integrated Financial Management Information System
ISP Institutional Support Project
JICA Japanese International Development Agency
KfW Kreditanstalt für Wiederaufbau
LA Loca Authority
MDTF Multi Donor Trust Fund
MGDS Malawi Growth and Development Strategy
MLGRD Ministry of Local Government and Rural Development
MRA Malawi Revenue Authority
MDGs Millennium Development Goals
MTEF Medium Term Expenditure Framework
MWK Malawi Kwacha
MWFO Malawi Field Office
iii
NAO National Audit Office
NSO National Statistics Office
NSSP National Social Sector Programme
ODPP Office of the Director of Public Procurement
PAF Performance Assessment Framework
PBO Policy Based Operation
PCR Project Completion Report
PFM Public Financial Management
PEFA Public Expenditure Financial Accountability
PER Public Expenditure Review
PETS Public Expenditure Tracking Survey
PFEMRP Public Financial and Economic Management Reform Programme
PI PEFA Indicator
PPA Public Procurement Act
PRSG Poverty Reduction Support Grant
PRSL Poverty Reduction Support Loan
PRSP Poverty Reduction Strategy Paper
RBCSP Results Based Country Strategy Paper
RBM Reserve Bank of Malawi
RFSSP Restoration of Fiscal Stability and Social Protection
RMC Regional Member Country
SAL Structural Adjustment Programme
SAP System Applications and Products
SGGL Support for Good Governance Loan
SWAP Sector-Wide Approach
SWG Sector Working Group
UA Unit of Account
UK United Kingdom
UNFPA United Nations Population Fund
UNICEF United Nations Children’s Fund
USAID United States Agency for International Development
UNDP United Nations Development Programme
US$ United States Dollar
WB World Bank
WFP World Food Programme
iv
GRANT INFORMATION
Client’s Information
GRANT RECIPIENT : Republic of Malawi
EXECUTING AGENCY : Ministry of Finance
Financing Plan (2012)
Source Amount Instrument
ADF UA 26 million Grant
World Bank US$ 50 million Grant
EU Euro 40 million Grant
DFID not yet indicated** Grant
Germany not yet indicated Grant
Norway Kroner 65 million Grant
Other Major Financing:
IMF ECF (under negotiations): US$ 157 million (Zero Interest Rate Loan)
Introduction of Electronic Tax Register system &Awareness of oversight
institutions
Improving transparency, accountability , preparation and execution of the budget
Strengthening capacity of external audit office
Component 2:
Increasing coverage of social protection programmes
Improving the social protection delivery and monitoring systems
Implementation of the social protection programmes.
Budget support only
ADF Grant = UA 26 million; Other
donors = UA 174.02 million
Missions: supervision, policy dialogue,
and donor coordination
Complementary capacity building and
technical assistance projects financed by
other donors not included in the budget
vii
PROGRAMME EXECUTIVE SUMMARY
Programme
Name
MALAWI: RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION
( RFSSP )
Overall
Timeframe
1 July 2012 to 30 June 2013
Programme
Cost
ADF Grant UA 26.00 million
Programme
Context
The proposed RFSSP programme will be provided to Malawi in the context of a difficult
macroeconomic environment, characterised by depletion of foreign exchange reserves,
shortages of raw materials, fuel and essential imports and a slowing economy. As
indicated in Box 1, the new Government of Malawi (GoM) has so far implemented
commendable reforms to restore fiscal and macroeconomic stability, and establish good
governance. The support from the Bank will contribute significantly towards boosting
GoM’s momentum for implementing on-going initiatives to sustain the reforms. These
reforms will assist in returning the country to a strong growth trajectory through the
implementation of MGDS II, 2011-2016. The reform measures, though necessary, will
have short term costs, including socio-economic effects and negative impact on the
population. Urgent action to improve public finance management while providing social
protection to the poor and vulnerable is thus required to assist GoM address the crisis.
Programme
Overview
This Programme is the Bank’s fifth policy based operation in Malawi. Its distinguishing
feature is that it is the Bank’s first Crisis Response Budget Support (CRBS) in Malawi. It
focuses on strengthening Public Finance Management (PFM), with particular emphasis
on transparency and accountability, and supporting the Government’s Social Protection
programme and strategy in the context of far-reaching reforms in economic and financial
governance. These areas of focus are in the Performance Assessment Framework (PAF)
that has been agreed between GoM and the Common Approach to Budget Support
(CABS) Development Partners (DPs).
Program
Outcomes and
Beneficiaries
The CRBS will contribute to stabilizing the economy, in the wake of the massive
devaluation of May, 2012. It will thus lay the basis for resumption of the high economic
growth that the economy registered before the current crisis set in 2 years ago. It will
contribute to improving social protection coverage, contribute to restoring macro-
economic stability and fiscal balance, improve PFM and enhance the business enabling
environment. The beneficiaries will be the people of Malawi. The implementation of the
RFSSP is necessary condition for the achievement of objectives of the MGDS II.
Needs
Assessment
A sound PFM is key to successful implementation of poverty reduction measures and
prudent use of public resources for mitigating the impact of the current socio-economic
challenges facing Malawi. Due to the rigorous reforms undertaken in exchange rate
management, the country urgently requires financial resources for meeting the financing
requirements for the FY 2012/2013. GoM’s own resources will not be sufficient to meet
the requirements. In 2012, the overall fiscal deficit excluding grants is projected at 12.5%
of GDP and 2.9% when grants are included. Thus, Programme resources will help to close
the FY 2012/2013 financing gap, in collaboration with the other CABS DPs.
Institutional
Development
and Knowledge
Building
From this Programme, the Bank will further augment its knowledge in the use of the
CRBS instrument to support economic and governance reforms. In using the country
systems, in line with the Paris Declaration on Aid Effectiveness, the Programme will
contribute to fostering institutional capacity building. A complementary Institutional
Support Project is planned by the Bank in 2013, which will focus on tax reform and procurement, to reinforce institutional development for sound public sector management.
Bank’s Added
Value
The Bank brings into this operation considerable experience in budget support operations,
and expertise gained from implementing similar programmes in RMCs with strategic
focus on PFM. The Bank also adds value in terms of dialogue, as it is the current Chair of
the CABS DPs’ group in Malawi.
1
REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS
ON A PROPOSED GRANT TO THE REPUBLIC OF MALAWI
TO SUPPORT THE RESTORATION OF FISCAL STABILITY AND SOCIAL PROTECTION
1 THE PROPOSAL
1.1 Management submits the following proposal and recommendation for an ADF Grant of
UA26.00 million to the Republic of Malawi to support the Restoration of Fiscal Stability and Social
Protection (RFSSP) programme. This is the Bank’s fifth policy based operation (PBO) in Malawi. It
will be implemented over the FY 2012/2013. It is a Crisis Response Budget Support (CRBS), following
an urgent request received in May, 2012 from the Government of Malawi (GoM) for assistance from the
Bank to help address the macro-economic instability, in particular fiscal distortions, and the social
protection challenges resulting from the massive 49% devaluation of the Kwacha in early May 2012. The
devaluation was a necessary measure for GoM to take in order to address severe macroeconomic
imbalances. Malawi’s development partners (DPs), as well as other major stakeholders including the
business community and the public in general, have welcomed the devaluation of the Kwacha. The GoM
has also implemented other commendable reforms to restore fiscal and macroeconomic stability, and
promote good governance (see Box 1). The devaluation has, however, engendered social hardships
among the population, particularly as it was followed by a 30% increase in fuel prices and a 63% increase
in electricity tariffs. These measures have necessitated urgent support from DPs to help offset the impact
of the crisis, help maintain core public expenditures (particularly in the social sectors) and provide scope
for additional poverty safety net spending to mitigate the impact of these reforms.
1.2 The proposed RFSSP programme would be disbursed in one tranche in July 2012, to
provide strong support to the GoM budget and the momentum for implementing on going
initiatives to sustain the reforms. Thereafter, it is envisaged that a complementary proposal will be
submitted to the Board in February 2013, subject to the availability of additional ADF grant resources for
Malawi and continued progress on implementation of the country’s reform agenda.
1.3 The urgency of the request from GoM led to the Programme being appraised on fast-track
basis, in May 2012. The appraisal mission coincided with an equally urgently-fielded IMF mission to
Lilongwe to resume consultations on a new Extended Credit Facility (ECF) arrangement, which will be
submitted to the IMF Board in July 2012 for an amount of US$ 157 million. At the same time, a World
Bank mission was also in the country to assist GoM with work on the 2012/13 Budget as well as to
finalise the preparation of their own emergency operation, a rapid-response development policy grant of
US$50 million, to be submitted to their Board in June 2012. Other donors have also disbursed, made
pledges or and are preparing operations for the 2012/13 FY (EU 40 million euros, DFID £ 33 million,
Norway 65 million Kroners). The Bank’s appraisal mission was thus able to hold detailed consultations
with the IMF and the World Bank, as well as other budget support partners, to co-ordinate our respective
crisis-response support to the country. The Programme is in line with the Malawi Growth and
Development Strategy (MGDS II) 2011-2016 and the Long Term Vision 2020. Furthermore, it is
consistent with (i) the Bank’s Governance Strategic Directions and Action Plan (GAP) 2008-2012; (ii) the
Bank’s Private Sector Development Strategy; (iii) the Bank Group Policy on Program-Based Operations;
and (iv) the Malawi Interim Country Strategy Paper 2011-2012.
1.4 The Programme’s operational policy objectives are focused on: Strengthening Public
Finance Management (PFM) Transparency and Accountability (Component 1) and Contributing to
Social Protection for the poor and vulnerable (Component 2). The expected outcomes of the
Programme therefore are (i) macroeconomic stability; (ii) improved PFM and economic governance; and
(iii) enhanced social protection for the poor and vulnerable. The expected impact of the programme is a
stabilised fiscal framework and protected social spending.
2
II COUNTRY AND PROGRAMME CONTEXT
2.1 Government Overall Development Strategy and Medium Term Reform Priorities
2.1.1 The GoM adopted in April 2011 the Malawi Growth and Development Strategy II (MGDS
II) as its development strategy for the medium-term (2011-16). The strategy's overall objective is
wealth creation through sustainable economic growth and infrastructure development. It is organized
around six thematic areas: (i) sustainable economic growth; (ii) social support and disaster risk
management; (iii) social development; (iv) infrastructure development; (v) good governance and (vi)
gender and capacity development. The long-term vision of MGDS II is to transform Malawi from a
predominantly importing and consuming country into a predominantly producing and exporting one
through agricultural production and industrialization. The MGDS II also acknowledges the important
roles of health, education, economic empowerment and social protection. The MGDS II is the successor
to MGDS I, both strategies predicated upon the Vision 2020: that by Year 2020, Malawi will be: “secure,
democratically mature, environmentally sustainable, self-reliant with equal opportunities for and active
participation by all, having social services, vibrant cultural and religious values and being a
technologically driven middle-income country’’.
2.1.2 In order to achieve the set objectives, the GoM has committed to undertake reforms in PFM,
social sectors, governance, the rule of law and human rights. The government intends to: (i) improve
the business enabling environment and promote private sector participation; (ii) improve electricity power
supply; (iii) enhance tax administration and efficiency, and (iv) streamline the processes for cross border
trade. In the social sectors, GoM is committed to increasing coverage of social support programmes to
address the risks and hardships affecting the vulnerable groups.
2.1.3 The principal challenges of MGDS II are scarce financial resources, limited institutional
capacity of line ministries, shortage of human resources, inadequate co-ordination among GoM
institutions as well as policy implementation limitations at both central and local government levels. There is also a need to improve GoM’s internal control systems and strengthen public finance
management. Meeting the objectives of MGDS II will require a substantial increase in external financing
to supplement Malawi’s low domestic savings. This includes a substantial scaling-up of DPs’ support to
finance public expenditures as well as private financial inflows for investments in key sectors, such as
energy. The continued support of development partners in the short to medium term will be critical as
Malawi remains vulnerable to a number of exogenous shocks, including weather conditions and a
deterioration in the terms of trade.
2.2 Recent Economic and Social Developments, Perspectives, Constraints and Challenges
2.2.1 During the period 2006-10, Malawi experienced stable economic growth averaging 7.1%,
moderate inflation of 6.8% (2006-10), and the level of its domestic debt stood at 1.4% of GDP in
2010/111. In 2011, the economy slowed down with estimated real growth standing at 4.3 %, from a
projected growth of 6.9%. Inflation remained at single digit despite rising commodity prices, shortage of
petroleum products and scarcity of foreign exchange. For 2012, GDP growth is estimated at 4.3%, while
average inflation is expected to rise sharply to 18.4% against the initial projection of 6.3%. The
slowdown in growth and rise in inflation reflect weakening fundamentals as a result of poor economic
management in the past year, with rising budget deficits financed by the central bank in a regime of an
overvalued exchange rate. Overall fiscal balance (excluding grants) is estimated at -10.5% of GDP in
2011 and projected at -12.5% in 2012. The policy distortions led to a severe shortage of foreign exchange,
which affected availability of basic goods, such as fuel, pharmaceuticals, foodstuff and other essential
imports. These shortages had an adverse impact, notably on the capacity of the private sector to engage in
production and contributed to the rise in inflation. The net effects on the population had been increased
1 Source: Malawi Annual Economic Report 2011
3
prices and reduced consumer purchasing power, which fuelled serious social unrest and anti-government
protests in July 2011.
2.2.2 Apart from slow growth in exports, the foreign exchange shortage has been exacerbated by
the suspension, during 2011, of budget support by DPs under the Common Approach to Budget
Support (CABS), on account of impasse on the IMF Extended Credit Facility (ECF). The GoM/IMF
impasse regarding the ECF since the government took a position against liberalizing the foreign exchange
market. The authorities were also reluctant to reverse tobacco dollars surrender requirement, i.e. to allow
tobacco proceeds to go to commercial banks and not through the Reserve Bank of Malawi (RBM).
2.2.3 Recent Reforms Undertaken Since April, 2012: Since the passing on of the late President Bingu
wa Mutharika in April 2012 and the swearing-in of Joyce Banda as the new President of Malawi, the
GoM has undertaken a number of important economic and governance reforms. The new government has
emphasized its commitment to the principles of sound macroeconomic management, effective anti-
corruption measures, the rule of law and respect for human rights. Some of the reforms undertaken thus
far are presented in box I below.
Box 1: GoM Reforms since April 2012
(1) In May 2012, the Kwacha was devalued by 49% (from MWK 167 to MWK 250 to the US Dollar). The exchange
rate reform measures included freeing up of the exchange rates determined by foreign exchange bureaus;
cancellation of the requirement for prior approval and pre-vetting of all imports in excess of $50,000; and the
reversal of surrender requirements on tobacco dollars so that all tobacco proceeds will now go to the commercial
banks. All these measures are in line with actions that were envisaged under the IMF ECF program which went off
track in June 2011, and was terminated in September, 2011;
(2) The Reserve Bank of Malawi (RBM) has been given increased independence in monetary policy operations and
decisions. This has already had the effect of tremendously boosting the credibility of the monetary policy
implementation process. Credibility is important in providing the correct signal to the market and anchoring
inflation expectations especially at a time when a pass-through of a significant currency adjustment has to be
contained to avoid prices spiralling out of control;
(3) As part of the measures aimed at strengthening monetary fundamentals in the context of a liberalized exchange
rate and in line with recent trends in rising non-food inflation, the authorities made an upward adjustment of the
bank rate from 13% (where it has been since 2010) to 16%;
(4) Revision of the policy on pricing and taxation of petroleum products and adoption of an automatic adjustment
mechanism to ensure that retail prices of these products reflect the true cost of importation. As a consequence, fuel
price was adjusted upwards by about 30% while electricity tariffs went up by 63.5%. GoM’s intention is to
establish a pricing structure that reflects the long-run average cost of producing electricity in order to attract
private sector investments in power generation;
(5) Some laws were repealed that impinged on civic, political and media freedoms and human rights. In conformity
with the law, the President also appointed Commissioners for the Malawi Electoral Commission in preparation for
the 2014 tri-partite elections;
(6) The GoM has restored normal relations with other countries and DPs, such as Mozambique, the United
Kingdom and the IMF. This has led other partners, such as the Millennium Challenge Corporation, to consider
lifting suspension of their support to Malawi.
(7) Following concerns on revenue data integrity by Parliament, CABS DPs and IMF, Government took
a decision that revenue data will now be published monthly to ensure transparency.
2.2.4. In addition to the above reforms, the new government has approved the MGDS II, which is
an overarching poverty reduction policy document for Malawi. A new PFM Reform Program has also
been approved; and a new ECF programme negotiated with the IMF. The new IMF programme is
expected to go to the IMF Board in early July, 2012. Devaluation of the currency, and having an IMF
program in place, were the key recommendations of the Bank’s July 2011 Country Dialogue Mission to
4
Malawi, as necessary measures for the Bank and other partners to provide financial support for the
implementation of reforms and poverty reduction programmes.
2.2.5 The challenges facing Malawi remain considerable. The following key development issues will
to be critically important in the medium to long term: (i) pursuit of macro-economic stability and growth;
(ii) fiscal consolidation to contain internal and external imbalances; (iii) containing expenditure while
increasing the revenue base to reduce the fiscal deficit and (iv) implementing growth-enhancing structural
reforms to preserve fiscal and external stability.
2.2.6 The required actions are: (i) credible reforms in PFM specifically on budget preparation
and execution, financial control and reporting, auditing and procurement; (ii) improving business
enabling environment to diversify the economy and create employment; (iii) improving the quality of,
and access to education and training to build human capacity; (iv) developing infrastructure, particularly
in the energy sector, to make economic opportunities accessible to the population and provide the basis
for industrialisation; (v) consolidating democracy, peace and stability and enhancing the oversight role of
Parliament in accountability and transparency; (vi) and promoting efficiency in the delivery of public
services through enhanced public financial management and audit.
2.2.7 The fiscal challenges include lower than projected revenue, with collections in FY 2011/12
showing a shortfall of MWK 41 billion (US$245.7 million), comprising a deficit of MWK 29.0
billion (US$173.8 million) in tax collections and MWK 12.0 billion (US$71.9 million) in non-tax
collections. The decline in tax collections reflects the slowdown in the economy. On the other hand, GoM
expenditures were running ahead of projection by about MWK 13.3 billion (US$79.7 million). The
ambitious budgetary objective of attaining zero primary deficit, by ensuring that domestic revenues
covered recurrent spending, was not attained as recurrent spending exceeded the budget by nearly
MWK43.0 billion (US$ 257.7 million). GoM has estimated arrears of about MWK 70 billion
(US$421.7million) during the 2011/12 Fiscal Year. Given this situation, the budget for 2012/2013
focuses on achieving zero net domestic financing of the budget. The World Bank assisted the government
in this exercise.
2.2.8 The import requirements of the economy are estimated at US$131 million per month, with
official reserves at US$132 million (i.e less than 1 month import cover!) at the end of April 2012.
Out of the official reserves, $38.4 million was encumbered, leaving only US$93.7 million as usable. Out of this usable amount only US$12.0 million was available as the rest was committed. In short, the
country is experiencing a severe shortage of foreign exchange with arrears in the banking system
estimated at over US$40 million. These led to scaling down of production, closures and retrenchment,
hence increased unemployment.
2.2.9 The recent significant devaluation has had severe negative impacts on spending and
individual incomes and could erode the gains registered in poverty reduction. People’s income has
been reduced by about 50% due to devaluation, which has led to a general increase in prices of imported
items, petrol, food and electricity. GoM took these rigorous measures since they are necessary for
restoring macroeconomic stability. However, urgent external support is needed to mitigate the social
impact. If no support is received, or support is delayed, the following could result: severe shortage of
foreign exchange in the short term, hence limited imports including shortages of essential drugs for the
population; lack of fuel and raw materials, disrupting productive activities with ripple effects throughout
the economy; high or galloping inflation further impoverishing people; and no protected financing for the
social sectors. There is also a political risk of social unrest occurring, if the negative effects of the
devaluation are not mitigated with the help of budget support. Thus, social protection (mitigation
measures) is critical in the short to medium term. In addition, the shortage of foreign exchange will result
5
in high costs of doing business, and significant infrastructure bottlenecks, especially in energy supply and
transportation services. This will limit Malawi’s competitiveness.
2.2.10 Poverty in Malawi remains high with a Human Development Index of 0.400 (in 2011),
placing it below the Sub-Saharan African average of 0.463. Although the country has made some
progress in achieving the Millennium Development Goals (MDGs), more improvements particularly in
maternal health, primary education and gender equality are required (see Annex II). According to the
World Bank/ADB Country Economic Memorandum of 2009, the primary constraint to growth is the
low quality of education. The education sector faces significant challenges, including: high pupil-trained
teacher ratio of 76:1, with large classroom sizes of up to 100 children, high repetition and drop-out rates
at 25%, with repetition at 20% in primary education, one of the highest in Sub Saharan Africa.
2.2.11 GoM has prepared a draft National Social Support Policy, which is expected to be adopted
by Cabinet by December 2012. The policy underpins the National Social Support Programme (NSSP),
which is a five-year plan of action with a strategy for coordination and linkages. The NSSP prioritises
five sub-programmes that are currently being implemented namely: the Social Cash Transfers, Micro
Finance, the Village Savings and Loans, the Public Works Programme, and the Targeted School Meals
Programme. The main challenge with these programmes is insufficient resources to extend coverage and
ensure sustainability.
2.3 Bank Group Portfolio Status
2.3.1 The Bank’s portfolio in Malawi consists of 10 operations for UA 181.4 million, as at 31 May
2012. One of the projects is a regional one, namelythe Naccala Road Corridor involving Malawi,
Mozambique and Zambia and supporting regional integration. In terms of sectoral distribution of the
portfolio, the social sector accounts for 46%, followed by transport sector with 21%, agriculture sector
17%, and water supply and sanitation 16%. The current average age of the portfolio is 3.8 years compared
to 3.5 years in 2010. During the same period, the portfolio was rated as “satisfactory” with an overall
portfolio rating of 2.2 (on a scale from 0 to 3) compared with 2.3 in 2010. It is expected that the average
age will decline when the Support to Health Sector Programme and Education V Projects exit the
portfolio by December 2012. The disbursement rate as at 31 May, 2012 is 31%. There are no problem or
potential-problem projects.
III RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY
3.2 Link with the CSP, Analytical Works Underpinnings and Country Readiness Assessment
3.2.1 Link with the CSP: The proposed Programme is linked to the Malawi 2011-2012 Interim
CSP pillars (i) Improving Infrastructure and (ii) Accelerating Private Sector Development. The
Bank’s Interim CSP proposes general budget support as an effective instrument for enhancing economic
competitiveness, private sector development, and for increasing the fiscal space in the budget for social
sector spending for more efficient and reliable service delivery. The first Component of this proposed
Programme is: Strengthening Public Financial Management (PFM) by improving budget preparation and
execution, improving tax regime and administration, as well as enhancing oversight through the audit
office. By improving the governance framework in Malawi, through supporting sound PFM, the proposed
Programme will contribute to creating an attractive fiduciary environment conducive to stimulating
foreign and local investments in infrastructure development and accelerating private sector development.
The second Component of the proposed Programme, the Enhancement of the Social Protection system,
will strengthen budget allocation to social services, protect the poor from the current adverse social
effects of the reforms, and contribute to achieving the fiscal stability and sound macroeconomic
environment that is conducive to private sector development.
6
3.1.2 Underpinning Analytical Works. There are important analytical works that have been used
to underpin the design of the proposed RFSSP operation. These include (i) the Malawi Growth and
Development Strategy (MGDS) II; (ii) the 2010 MGDS I Assessment Report; (iii) the Bank’s Interim
Malawi Country Strategy Paper 2011/12; (iv) the PFM Situation Analysis Report; (v) the World
Bank/AfDB 2009 Malawi Country Economic Memorandum; (vi) the March 2011 and May 2012 CABS
Reviews; (vii) the 2011 Public Expenditure Financial Accountability assessment; (viii) the 2010 Public
Expenditure Review of Travel; (ix) the Bank’s 2009 Malawi Skills for Private Sector Development; (x)
the Bank’s Project Completion Reports (on RBCSP, GPRSG II and the 2010 CPPR); and (xi) the
preliminary OPEV 2011 Joint Evaluation of PFM reform in Africa. There is also the April 2012 GoM
paper entitled: ‘Malawi Government Position on Macroeconomic and Social Support Package for
Malawi.” Some of the important conclusions and key recommendations from these analytical works are
as follows:
While progress has been made in improving Malawi’s public financial management and revenue
administration, there is a need to strengthen compliance mechanisms. The Malawi Revenue
Authority (MRA) and the Revenue Policy Division of the Ministry of Finance should intensify the
programme of modernizing their systems to enhance efficiency and accelerate tax administration
reforms. There is need to address the issue of a narrow tax base, which perpetuates the country’s
heavy reliance on development partners to finance the Budget.
IFMIS has contributed to improvements in expenditure control and accelerating accounting
processes, but challenges of coverage and integration limit its effectiveness. The system is
integrated at central level but not fully at the local level. There is no electronic integration between
the payroll systems, the Tax Payer Identification Number systems, tax administration systems
including the Automated System for Customs Data (ASYCUDA), debt management systems, and
the Reserve Bank of Malawi’s systems. There is need to fully roll out IFMIS and elaborate a
strategy for interconnection of the various systems to enhance expenditure control and reporting.
Capacity weaknesses are evident in the public service and must be tackled systematically. The
2011 PEFA noted that a balance has to be struck between academic and practical training, with
need to focus on professionalizing public financial management. Strong leadership and direction is
also required in PFM reforms, so that reforms are properly coordinated and monitored. Co-
ordination of PFM Action Plan activities remains weak, with no specific plan in place to
effectively guide preparation, planning and implementation of reforms. MRA also needs support
to implement its systems modernization, including adoption of SAP as a backbone Tax Enterprise
Resource Planning tool for improvement of Ministry of Finance liquidity management.
GoM’s Position on Macroeconomic and Social Package for Malawi recognizes that restoring
macroeconomic stability through exchange rate adjustment will have unintended socio-economic
impacts, which need to be urgently mitigated, particularly the impact on the poor and vulnerable
in both rural and urban areas. Thus, it concludes, “as Malawi implements a macroeconomic
restructuring programme it is imperative to scale-up interventions that will protect most
vulnerable Malawians from rising food and fuel prices, and rising transport and distributional
costs.”
3.1.3 Overall Fiduciary Environment: In accordance with the Bank’s Operational Guidance Note
to Fiduciary Risk Management Framework for Policy-Based Operations (PBOs), a fiduciary risk
assessment (FRA) was carried out to assess the adequacy or otherwise of the Malawi fiduciary
environment and the existing country systems for managing the proposed Restoration of Fiscal
Stability and Social Protection operation. The objective of the assessment was to determine: (i) the
extent to which the country’s PFM system could be relied upon for the efficient and economical
utilization of Programme funds; (ii) whether the system could generate accurate and reliable financial
7
reports in a timely manner; and (iii) whether effective procedures and processes exist to safeguard
Programme resources. (see Annex I)
3.1.4 The assessment concluded that, although progress continues to be made in improving the
PFM system in Malawi, numerous challenges still exist, particularly in accounting and reporting,
internal audit, external audit and scrutiny and procurement, areas where GoM is undertaking
various reforms to address the problems. The overall risk rating was assessed as substantial, but could
not preclude budget support for Malawi due to ongoing PFM reforms and risk mitigation measures
undertaken by both GoM and development partners.
3.1.5 Country Readiness Assessment: The country assessment found compliance with the Bank’s
safeguard policy. Malawi meets the pre-requisites for provision of both general and crisis response
budget support. Details of how the pre-requisites have been met are provided in table I.
Table I: Summary Assessment of the Pre-requisite Conditions for the Programme
Prerequisites Comments on the current situation
Government
commitment to
poverty
reduction
GoM is strongly committed to the country’s poverty reduction agenda. Indeed, this is clearly reflected in
Malawi Growth and Development Strategy (MGDS II), and evident from the progress in reforms under targets
set in the Performance Assessment Frameworks (PAF); as well as key strides recorded in the 2011 Public
Expenditure and Financial Accountability Review (PEFA). Preliminary findings of the review by the Common
Approach to Budget Support (CABS) Group indicate that the country has made significant improvements in
PFM systems, albeit challenges still remain. GoM has adopted MGDS-II, 2011-16, as successor to MGDS I.
GoM, in conjunction with DPs, jointly prepared the PAF 2011-2012, which contains a set of indicators, derived
mainly from MGDS II, that measure progress. GoM has put in place effective implementation mechanisms to
address the objectives of MGDS II through the three-year Medium Term Expenditure Framework (MTEF) and
the PAF.
Macroeconomi
c stability
Up until the 2011/12 crises, Malawi’s economy experienced rapid growth, largely driven by the agriculture
sector, which was supported by the Government’s Farm Input Subsidy Program and good weather conditions.
In recent years, however, macroeconomic imbalances (rising sovereign debts, inflation and foreign exchange
shortages) have threatened economic stability. Nonetheless, the new Government is committed to pursuing
sound macro-economic and financial policies and programmes to address the economic challenges. In fact, the
Government has re-engaged the IMF for resumption of key ECF reforms, which had gone off-track.
Satisfactory
fiduciary risk
assessment
As indicated in the Fiduciary Risk Assessment report (Annex I), the country’s PFM system is demonstrating a
positive trajectory of change, as both the PEFA and preliminary CABS reviews have shown improving PFM
systems. The Bank’s assessment of the PFM system also shows a positive trend although significant challenges
remain. The proposed program will therefore seek to address the areas of weakness, such as improving budget
planning and execution, strengthening revenue collection and tax reforms and strengthening external audit
system.
Political
stability
The political environment is generally stable, although there were initial fears that the ascension of President
Joyce Banda to the presidency - after the death of the former President – could lead to instability. Currently,
there are fears of unrest if the rising prices of food items and the forex situation are not contained swiftly.
Harmonization
There is strong partnership between GoM and DPs providing budget support through the CABS. The proposed
program is in line with CABS effort to provide emergency grants to address urgent liquidity needs and
moderate impact of devaluation on the poor. Seven DPs, World Bank, AfDB, EU, DFID, Ireland, Germany and
Norway will provide rapid support to GoM. In line with the Paris Declaration, CABS members agreed to draw
targets and triggers from a common PAF. There are joint reviews and GoM leads implementation of the
framework. Ministry of Finance is the lead, and CABS activities are coordinated by the Debt and Aid
Department.
8
3.2 Collaboration and Co-ordination with other Development Partners
3.2.1 A Heads of Co-operation (HoC), Heads of Mission (HoM) and Common Approach to Budget
Support (CABS) Group provide the platform for dialogue between DPs and GoM on economic,
financial and sectoral issues. The Government has a Development Assistance Strategy which promotes
the principles of the Paris Declaration (2005), the Accra Agenda for Action (2008) and Busan Aid
Effectiveness (2011) in Malawi, and contributes to improving the coherence of DPs’ engagement with the
Government through the CABS and the Group on Financial and Economic Management (GFEM). The
Bank is the chair of the CABS for the period January to June 2012. The other major DPs providing
budget support are the World Bank, European Union, Norway, DFID, Germany and Ireland. GoM and
these DPs signed in 2005 a Joint Framework of Agreement that sets out the conditions for providing
budget support. Under the CABS, two bi-annual reviews are held to assess progress in implementing
measures in the Performance Assessment Framework. With MWFO chairing the CABS (January to
June), the Bank participates actively in the review process and policy dialogue. During the May 2012
CABS Review, the DPs agreed that the new Government had registered significant progress in just 4
weeks, with bold measures to begin to address macroeconomic and political governance issues through
the liberalisation of the foreign exchange market and the planned review of laws deemed to be
unfavourable to political freedoms and human rights. At the sector level, in 2011 the Bank chaired the
DPs’ sector working groups in the agriculture and food security sectors (from June 2011– August 2011),
and water sector (from December 2009–March 2011). Currently, the HoC Group is undertaking a Joint
Country Analysis as a potential basis for a joint programming exercise in the future.
3.2.2 In the social sector, many DPs provide aid to Malawi. There are 14 DPs in the health sector,
comprising AfDB, Clinton Health Access Initiative, DFID, Flanders, Germany, the Global Fund, Japan
International Cooperation Agency (JICA), Norway, UN agencies, USAID and World Bank. In education,
there are 8 DPs: the AfDB, World Bank, DfID, Germany, USAID, UNICEF, JICA and World Food
Programme. China is also financing the construction of the University of Science and Technology. The
World Bank and AfDB are conducting studies on policy options for investing in higher education. Most
of the DPs focus their funding on basic education. In Gender, Youth Development and Social Protection
key partners include UNFPA, DfID, WFP, UNICEF, Norway, KFW, World Bank and EU.
3.2.3 The proposed RFSSP, in line with harmonisation and aid effectiveness under the Paris
Declaration, the Accra Agenda for Action and the Busan declaration, will use country systems for
implementation and monitoring. The triggers for disbursement have been co-ordinated with CABS
partners and are drawn from the common PAF. In particular, the programme is co-ordinated with the
World Bank’s Rapid Response Development Policy Grant, planned for disbursement in July, 2012, and
also designed to provide social protection for the poor and the vulnerable under the current difficult fiscal
and macroeconomic environment.
3.3 Outcomes of Past Similar Operations and Lessons
3.3.1 The Bank Group has approved five policy-based operations for Malawi, amounting to UA
63.45 million. Lessons from these operations and other DPs’ programmes, as well as lessons from the
2011 and 2012 CABS reviews, have been taken into account in the design of this proposed RFSSP. Major
lessons, and how they have informed design, are shown in table II.
9
Table II. Summary of Past Operations and Lessons Learnt
Past Operations Lessons Learnt Action taken into account Structural Adjustment Loan (SAL) of UA
15 million, approved in December 1998,
supported reforms for achieving fiscal
sustainability, improvement in the delivery of
social services, as well as privatization and
diversification of agricultural production and
export
The Bank and other DPs should
rely more on GoM budget
processes and PFM systems.
Using national systems
simplified design,
implementation, supervision
and monitoring of PRSG I and
GPRSG II operations.
National systems of budgeting, procurement,
monitoring and audit are being used by the
proposed RFSSP..
Support for Good Governance Loan (SGGL) of UA 12 million, approved in
December 2004, supported the
implementation of the country’s first poverty
reduction strategy (2001-2005) with a focus
on strengthening public sector governance.
Alignment with the budget
cycle was weak in former
operations and disbursements
did not occur in the first half of
the fiscal year as they should.
Processing of the proposed RFSSP is being
expedited to enable the Bank disburse in first
quarter of 2012/13 FY and help build foreign
exchange reserves, reduce domestic borrowing
and mitigate negative effects of devaluation on
the poor. To encourage GoM undertake
reforms, second operation will be disbursed in
third quarter of the same FY.
Poverty Reduction Support Loan (PRSL) of
UA 14.9 million, approved in April 2007, was
for one tranche supporting stimulation of
social sector and PFM reforms. PRSL suffered
significant delays of ratification by Malawi’s
Parliament, but eventually implemented and
achieved the intended objectives.
Where performance of PFM
institutions is critical, budget
support alone is insufficient to
ensure progress and should be
complemented by institutional
support.
The proposed RFSSP programme will be
complemented by a PFM Institutional Support
Project (PFM-ISP) in 2013. The design of the
ISP will be coordinated with other DPs.
Poverty Reduction Support Grant (PRSG I)
of UA 10 million, approved in March 2009,
supported increased economic growth by
augmenting budgetary resources. PRSG I was
a one-year single tranche operation due to
uncertainty surrounding the May 2009
elections and the potential negative
implications for future budget support;
The need for specificity in the
selection of disbursement
conditions so as to ease
program implementation;
hence the importance of joint
appraisal with other DPs and
use of the common PAF;
Appraisal of the proposed RFSSP included
consultations, on evidence required for
disbursement, with Government and CABS
partners. The disbursement conditions have
been derived from the PAF which was agreed
between CABS partners and Government
Second Governance and Poverty Reduction
Support Grant (GPRSG II) UA 11.54
million, approved in April 2010, as two
tranches for enhancing transparency and
accountability in use of resources and
increasing service delivery.
Shared fiduciary risk analysis
and macroeconomic analysis,
critical to success,
sustainability of budget support
in Malawi.
The macroeconomic, fiduciary risk and other
underlying analysis were done by the Bank and
other partners (such as IMF, DFID and
Germany).
3.4 Relationship to On-going Bank Group Operations
3.4.1 The proposed RFSSP will build on lessons learnt from past operations in Malawi. The
programme will consolidate the Bank’s support to improve the public financial management systems,
which is fundamental to all on-going Bank operations in terms of improving the quality and timeliness of
financial reporting and ensuring that procurement is done with efficiency, transparency and
accountability.
3.5 Bank’s Comparative Advantage and Value-addition
3.5.1 Comparative Advantage: The Bank, under the “Governance Strategic Directions, 2008-
2012”, has streamlined its approach to governance, focusing primarily on PFM and business
enabling environment. In so doing, it has scaled up its resources and re-oriented its policy and
institutional actions towards its RMCs so as to respond more effectively to the challenges they face in
implementing key PFM reforms, which are a central agency of good governance. In this context, the
Bank’s knowledge of governance challenges in Malawi is a comparative advantage. The Bank’s overall
10
support for the country’s various social sectors has provided firm base for the Bank to further engage in
social protection.
3.5.2 The RFSSP builds on the Bank’s experience and competence promoting PFM transparency
and accountability in RMCs. It will contribute to enhanced accountability, transparency in the budget
process, improved competitiveness and a stable macro-economic framework, which are pre-requisites for
sustained economic growth. The Bank, currently chairing the CABS, has been involved actively in
dialogue on governance and PFM in Malawi.
3.5.3 Value-addition: The Bank currently chairs the CABS group of DPs, thereby giving it a
vantage position for value-added in coordinating the policy dialogue between DPs and GoM.
Further, the presence of the Bank, through the Malawi Field Office (MWFO) ensures that there is a
regular country dialogue with GoM and facilitates quick and close supervision of the programme during
implementation.
3.6 Application of Good Practice Principles on Conditionality
3.6.1 Reinforce Ownership. The Programme is fully owned by GoM and reflects the orientations of
the reforms being implemented, the MGDS II, the budget for FYs 2011/12 and 2012/13 and the
GoM Social Protection Policy Framework. The Programme scope is covered in the Letter of
Development Policy (Appendix I) and consistent with the 2012/13 Budget Statement delivered on 8 June
2013 by the Minister of Finance.
3.6.2 Coordinate the Accountability Framework. There exists in Malawi an active formal DPs’
coordination mechanism (CABS), which meets regularly and has identified and agreed with the
authorities the key issues to be addressed as well as the reform measures to be implemented aimed
at strengthening the PFM and enhancing social protection systems.
3.6.3 Customize the Accountability Framework and Modalities of Bank Support to Country
Circumstances. The Bank’s support reflects GoM’s priorities and is appropriate for a country
facing the following major challenges: the social hardships and destabilizing effects of massive
Money and credit (change in percent of broad money at the beginning of the period, unless otherwise indicated)
Money and quasi money 23.9 33.9 35.7 18.2 24.5 16.7 19.7 18.4 17.2 Net foreign assets -15.5 13.3 -7.9 -1.2 11.1 8.6 10.5 10.0 8.1 Net domestic assets 39.5 20.6 43.6 19.5 13.4 8.1 9.2 8.5 9.1
Credit to the government 19.4 -9.2 19.7 11.0 1.7 -0.2 0.5 0.4 1.5 Credit to the rest of the economy (percent change) 36.5 47.6 30.1 17.5 19.0 13.2 12.8 12.8 12.8
Current account (percent of GDP) -4.8 -1.3 -5.9 -4.3 -1.7 -2.2 -1.9 -2.1 -2.6 Current account, excl. official transfers (percent of GDP) -14.2 -17.0 -11.9 -15.7 -12.7 -11.7 -11.0 -10.4 -10.4 Real effective exchange rate (percent change) -8.2 -0.4 10.7 ... ... ... ... ... ... Overall balance (percent of GDP) -2.0 2.2 -1.9 -0.5 3.1 2.5 2.9 2.9 2.5 Terms of trade (percent change) 7.7 3.0 -17.6 20.5 1.1 3.1 2.9 2.3 2.6
Debt stock and service (percent of GDP, unless otherwise indicated)
External debt (public sector) 15.9 16.0 16.2 20.3 20.6 19.5 18.5 17.4 17.5 NPV of debt (percent of exports) 57.1 44.6 48.1 52.2 46.1 41.9 37.8 33.9 31.7 External debt service (percent of exports) 1.3 1.3 1.6 2.4 2.5 3.8 3.8 3.6 2.5 External debt service (percent of revenue excl. grants) 1.4 1.5 1.7 3.6 4.0 5.8 5.8 5.4 3.7 91-day treasury bill rate (end of period) 10.5 6.2 6.8 ... ... ... ... ... ...
1 Reflects substantial upward revisions to the historical national accounts data received in March 2011. 2 The government savings—investment balance is calculated adding foreign grants to government savings above. The private savings—investment balance is calculated adding the items in the balance of payments, net of foreign grants, to private savings above. 3 For example, 2009 refers to fiscal year 2008/09, which is from July 1, 2008, to June 30, 2009. 4 For 2011/12 fiscal year, reflects the outturns of the first three quarters and the projections for the fourth quarter.