Agricultural Marketing and Estate Development Project - Malawi

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Folder Title: Agricultural Marketing and Estate Development Project - Malawi - Credit1966 - P001650 - Legal Documents

Folder ID: 30065020

Project ID: P001650

Dates: 10/26/1994-10/27/1994

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© International Bank for Reconstruction and Development / International Development Association orThe World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.org

CREDIT No. 1966-MW MALAWI - AGRICULTURE MKTG &PRODUCT ID No. MW-PA-1650 ESTATE DEVELOPMENTMIS TASK No. 3MALPA064 LEGAL DOCUMENTS

ArdI1%v 30065020T2009-243 Other#: 16 3440108

Agricultural Marketing and Estate Development Project - Malawi - Credit 196 - P001 51Legal Documents A

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A L L - I N - 1 N 0 T E

DATE: 26-Oct-1994 03:40pm

TO: 4EHORNSBY

FROM: ELLA,HORNSBY@WBWASH@Al&AFlAE, ( ELLA,HORNSBY@WBWASH@Al&AFlAE

EXT.:

SUBJECT: WBKR6338 WBKS0762

ZCZC WBKR6338 WBKS0762QK WDIAL 4EHORNSBY DROP AFRICAFILES.ELLA,HORNSBY@WBWASH@Al&AFlAE

OINFO

-SUBJECT : AG. MARKETING & ESTATE DEVELOPMENT PROJECT (CR. 1966-MAI)-REALLOCATION OF CATEGORY FUNDS (DCA - SCHEDULE 1)-DRAFTED BY: Ella Horneby EXT: 33375-AUTHORIZED BY: Chaim Helman, Chief, AF6AE-CLEARED BY AND CC: ZERABRUK (LEGAF), FREESE (LOAAF), EDSTROM (AFlDR)-CC: CHRISTIANSEN (AFlC3), JESUS (AFIDS), ANSON, LARSON (AFlAE), AFR FILES

988 44407 =-HONORABLE ALEKE BANDA-MINISTRY OF FINANCE-LILONGWE, MALAWI988 44407 =-MR. ROY F. KAVINYA-SECRETARY TO THE TREASURY, MOF-LILONGWE, MALAWI988 44407 =-MR. E.F. MTINGWI-PRINCIPAL SEC. (FINANCE), OFFICE OF THE PRESIDENT & CABINET-LILONGWE, MALAWI988 44648 =-HONORABLE DR. MAPOPA CHIPETA-MINISTRY OF AGRICULTURE & LIVESTOCK DEVELOPMENT-LILONGWE, MALAWI988 44648 =-DR. S.S. KAMVAZINA-PRINCIPAL SECRETARY 1, MOALD-LILONGWE, MALAWI988 44648 =-MR. B.S. CHAWANI

-PRINCIPAL SECRETARY 2, MOALD-LILONGWE, MALAWI988 44389 =-MR. C.D. NTHENDA, PRINCIPAL SECRETARY-MINISTRY OF ECONOMIC PLANNING & DEVELOPMENT-LILONGWE, MALAWI

988 44529 =-MR. ARIF ZULFIQAR, RESIDENT REPRESENTATIVE-WORLD BANK RESIDENT MISSION-LILONGWE, MALAWI988 44529 =-MR. STANLEY HIWA-WORLD BANK RESIDENT MISSION-LILONGWE, MALAWIBT

* ALL-IN-1 ORIGINATOR DROPCOPY *

SUBJECT: AG. MARKETING & ESTATE DEV (CR. 1966-MAI)

WASHINGTON, D.C. 26-Oct-1994WE REFER TO THE DEVELOPMENT CREDIT AGREEMENT BETWEEN THE REPUBLIC OF MALAWIAND THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR THE AGRICULTURAL MARKETINGAND ESTATE DEVELOPMENT PROJECT (CR. 1966-MAI), WHICH WAS AMENDED THROUGH ANEXCHANGE OF LETTERS DATED SEPTEMBER 17, 1993 AND OCTOBER 12, 1993.IN ACCORDANCE WITH RECENT DISCUSSIONS HELD WITH IDA, WE ARE HEREBYREALLOCATING FUNDS IN THE CATEGORIES SET FORTH IN THE TABLE IN PARAGRAPH 1OF SCHEDULE 1 TO THE DCA TO CORRECT EXISTING EXPENDITURE IMBALANCES AND TOPROVIDE ADEQUATE RESOURCES FOR: SEDOM LENDING TO PRIVATE TRADERS DEALING INFARM INPUTS, MANAGEMENT AUDIT OF SEDOM, RESOURCES FOR MARKET EXTENSION TO TRAINPRIVATE TRADERS, CIVIL WORKS COMPONENT FOR MARKET CONSTRUCTION, AND SUPPORT TOPRIVATE TRADER ASSOCIATION.

PROPOSED REALLOCATIONS:

1. TRANSFER SDR 100,000 FROM UNALLOCATED CATEGORY TO CATEGORY 3(VEHICLES AND EQUIPMENT) TO CORRECT OVEREXPENDITURE IN CATEGORY 3.2. TRANSFER SDR 200,000 FROM CATEGORY 1-B TO CATEGORY 3 TO CORRECT OVEREXPENDITURE IN CATEGORY AND TO PROVIDE ADDITIONAL RESOURCES FOR THE MARKETEXTENSION SERVICE.3. TRANSFER SDR 800,000 FROM CATEGORY 1-A (SUB-LOANS TO ESTATES) TOCATEGORY 2 (SEDOM) TO PROVIDE ADEQUATE RESOURCES FOR LENDING TO PRIVATETRADERS.4. TRANSFER SDR 100,000 FROM CATEGORY 10 (SEASONAL CREDIT) TO CATEGORY 2TO PROVIDE ADEQUATE RESOURCES FOR LENDING TO PRIVATE TRADERS.5. TRANSFER SDR 150,000 FROM CATEGORY 10 (SEASONAL CREDIT) TO CATEGORY 5TO PROVIDE FOR OPERATING COSTS FOR THE EXTENSION OUTREACH PROGRAM.6. TRANSFER SDR 3,000 FROM CATEGORY 10 (SEASONAL CREDIT) TO CATEGORY 4(TECHNICAL ASSISTANCE) TO CORRECT FOR INCURRED OVEREXPENDITURE IN CATEGORY 4.7. TRANSFER 100,000 FROM CATEGORY 8 (PPF REFUND) TO CATEGORY 3(VEHICLES AND EQUIPMENT) TO CORRECT OVEREXPENDITURE IN CATEGORY 3.

ACCORDINGLY, WE HAVE REVISED SCHEDULE 1 OF THE DCA, AS FOLLOWS:

Category Revised SDR

1. Sub-loans:(a) Under Part A.1(a) of the Project 3,450,000

(b) Under Part A.1(b) of the Project 2,000,000

2. SEDOM Credits Under Part A.2 of the Project 2,180,000

3. Vehicles, equipment and office supplies 900,000

4. Technical assistance & overseas training 750,000

5. Operating costs 200,000

6. Civil Works 500,000

7. Information (M&E) and Studies 50,000

8. Refunding of PPF Advance 220,000

9. Incremental Seasonal Credit 3,950,000

10. Unallocated 0

TOTAL 14,200,000

Regards, Chaim Helman, Chief, Agriculture and Environment Division,Southern Africa Department

=10261542

NNNN

THE WORLD BANK/IFC/MIGA

OFFICE MEMORANDUM

DATE: October 25, 1994

TO: Mr. Chaim Helman, Chief, AF1AE

FROM: . Anson, Task Manager, AFlAS

EXTENSION: 3-4397

SUBJECT: MALAWI - Agricultural Marketing and Estate Development Project (Cr. 1966-MAI)Proposed Reallocations of the IDA Credit

1. Attached please find for your review and authorization a telex to Government approving arequest to re-allocate the proceeds of above IDA Credit. The basis for these reallocations wasworked out jointly with the relevant Government officials during our last supervision missioncarried out in July, 1994. The reallocations are fully consistent with the project objectives, andtherefore do not involve any amendments to the Development Credit Agreement; the attachedtelex reflects the revised allocations in Schedule 1 which will provide the basis for the remainingdisbursements under the Credit (expected to close in 1995, ahead of schedule).

2. The most important revision in the proposed reallocations involves the transfer of funds toSEDOM to enable it to support lending for traders and stockists who would sell inputs thisupcoming crop season. Given the need to re-build the smallholder credit system, this alternativesource of credit will play an important role in helping Malawi's drought recovery efforts thisupcoming season. The other revisions also reflect priority activities which are aimed at achievingthe project's objectives.

3. This memo and telex have been cleared by the Lawyer and Disbursement Officer.

Attachment

Cleared with and cc: Mr. A. Zerabruk (LEGAF) and R. Barahona (LOAAF)

cc: Messrs./Mmes. Edstrom, Fullerton, Zulfiqar and Hiwa and Africa Files

The World Bank 1818 H Street. N.W. (202) 477-1234INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington. D.C. 20433 Cable Address: INTBAFRADINTERNATIONAL DEVELOPMENT ASSOCIATION U.S.A Cable Address: INDEVAS

November 19, 1992

The Honorable Louis ChimangoMinister of FinanceMinistry of Finance

P.O. Box

LilongweMalawi

Dear Mister Minister,

Re: Agricultural Marketing and Estate Development Project(Credit Number 1966 MAI)

Amendment

I refer to (a) the Development Credit Agreement between the Republicof Malawi (the Borrower) and the International Development Association ( theAssociation) and (b) the Project Agreement between the Association and theReserve Bank of Malawi (RBM) for the above referenced Project dated March31, 1989 as amended in an exchange of letters between the Borrower and theAssociation, and the Association and RBM, respectively, dated October 1,1992, October 7, 1992 and October 8, 1992.

In order to assist the Borrower in its drought recovery efforts andits request to use part of the proceeds of Credit 1966 MAI for droughtrecovery purposes, we propose to amend the Development Credit Agreement asfollows:

1. Section 1.02 of the Development Credit Agreement.

Add new paragraphs (u) and (v) to read as follows: (u) "SACA" means theSmallholder Agricultural Credit Administration within MOA, and (v) "CreditNumber 1851 MAI" means the Credit for an amount of SDR 4,600,000 granted bythe Association to the Borrower to assist the Borrower in the financing ofthe Smallholder Agricultural Credit Project pursuant to a Development CreditAgreement dated December 22, 1987 between the Borrower and the Association.

2. Section 3.01 (a)(i) of the Development Credit Agreement.In line 1 add Part A.3 so that the said line 1 will now read:

"(i) shall carry out Parts B, C and D of the Project with ..

3. Section 3.06 of the Development Credit Agreement

Add a new Section 3.06 to read as follows: "The implementation of Part D ofthe Project shall be carried out by SACA in conformity with the provisionsof Schedule 4 to the Development Credit Agreement for Credit Number 1851

MAI".

ITT 440098 • RCA 248423 • WUI 64145 Y7040

-2-

4. Schedule 1 to the Development Credit Agreement - Withdrawal of theProceeds of the Credit.

4.1 The table set forth in paragraph 1 of Schedule 1 is amended asfollows:

4.1.1. A new category (9) is added to read:

"(9) Seasonal Credit

under Part D of the Project 4,200,000 100%

4.1.2. The "unallocated" category is renumbered as Category (10).

4.1.3. The table set forth in the table in paragraph 1 of Schedule 1

to the Development Credit Agreement is amended to read as in

the Annex to this letter.

4.2. Paragraph 2 of Schedule 1 to the Development Credit Agreement.

4.2.1. The word "and" at the end of paragraph 2(a) is deleted, the "."

at the end of paragraph 2(c) is deleted, and replaced by"; and", and new paragraphs 2(d) and (a) are added to read asfollows: "(d) the term "incremental seasonal credit" means theaggregate principal amount of credit, repayable in less than

a twelve-month period, provided or to be provided to farmers'

clubs or farmers countrywide, in a crop year ending onSeptember 30 of a given year and ending on September 30 of thefollowing year less the aggregate amount of such credit

provided in the preceding crop year;

(e) the term "Eligible Expenditures" means expenditures forgoods for incremental seasonal credit, over and above any suchcredit financed or to be financed from the proceeds of any suchloan, credit or grant under any scheme administered by MOA."

5. Schedule 2 to the Development Credit Agreement.

5.1 The paragraph dealing with the objectives of the Project is amended

to read as follows:

"The objectives of the Project are to

(a) improve the marketing of smallholder farmers' crops by supporting the

Borrower's efforts to develop a multi-channel marketing system;

(b) improve resource utilization and productivity on estates by providing

seasonal and medium-term credit to intensify and diversify production; and

(c) strengthen the Borrower's drought recovery efforts through the provision

of seasonal credit to farmers."

-3-

5.2 Add a new part D to read as follows:"Part D: Seasonal Credit - Smallholder Farmers.Seasonal credit to smallholder farmers for the purchase of inputs forcrops."

Please confirm you agreement to the forgoing proposed amendment bysigning, dating and returning the enclosed copy of this letter to us atwhich time the amendment shall constitute a binding agreement between theBorrower and the Association.

Very truly yours

INTERNATIO IDEVEL ASSOCIATION

by Steph n DenningDirector

Southern Africa Department

Africa Region

Conf irm d:REPUBL OF WI

By:Authorized( R resentative

Date s 9.9.

Encl.:

ANNEX

Amount of theCredit Allocated - % of(Expressed in Expenditures

Category SDR Ecuivalent) to be Financed

(1) Sub-loans

(a) under 4,330,000 100% of expendi-

Part A.1 (a) tures incurred

of the under Sub-loans

Project made by Partici-

pating Banks

(b) under 2,250,000 100% of expendi-

Part A.1 (b) tures incurred

of the under Sub-loans

Project made by Partici-

pating Banks

(2) SEDOM Credits 1,100,000 100% of expendi-

under Part A.2 tures incurred

of the Project under SEDOM credits

(3) Vehicles, equipment 150,000 100%

and office supplies

(4) Technical assistance 620,000 100%

and overseas training

(5) Operating costs 150,000 42%

(6) Civil Works 500,000 90%

(7) Information (M & E) 150,000 100%

and studies

(8) Refunding of Project 550,000 Amount due pursuantPreparation Advance to Section 2.02 (d)

this Agreement

(9) Eligible Expenditures 4,200,000 100%

for incremental Seasonal

(10) Unallocated 200,000

Credit

TOTAL 14,200,000(a:taariakjm2

The World Bank 1818 H Street, N.W. (202) 477-1234INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D.C. 20433 Cable Address: INTBAFRADINTERNATIONAL DEVELOPMENT ASSOCIATION U.S.A. Cable Address: INDEVAS

September 17, 1993

Hon. Louis J. ChimangoMinister of Finance DeadsMinistry of FinanceLilongwe, Malawi

I.Dear Sir:

Re: Amendment to the Development Credit AgreementAgricultural Marketing and Estate Development Project (Cr. 1966-LA1)

We refer to the above-mentioned Development Credit Agreement (the Credit Agreement) datedMarch 31, 1989 between the Republic of Malawi (the Borrower) and the International DevelopmentAssociation (the Association). Further to discussions held among representatives of the Borrower andthe Association, and your letter dated August 19, 1993 we are pleased to inform you that the Associationhereby agrees to amend the Credit Agreement as follows:

Development Credit Agreement

1. We are enclosing a revised table as per attached which indicates the amounts now allocated toeach of the categories set forth in the table in paragraph 1 of Schedule 1 to the Development CreditAgreement. This schedule takes into account the reallocation of proceeds requested in your letter datedAugust 19, 1993 and discussions with the Ministry of Agriculture.

2. Part A: Line of Credit, paragraph 2 of Schedule 2 to the Credit Agreement is amended to "apilot scheme to finance the short- and medium-term requirements of rural traders specializing in thepurchase, processing, storage and transportation of smallholder farmer's crops and in the distribution ofagricultural inputs."

3. With reference to the amendment of Section 1.02 paragraph "f" in Mr. Denning's letter datedOctober 1, 1992 which now reads "Participating Bank" means any of the following banks: Investmentand Development Bank of Malawi Limited, the Commercial Bank of Malawi Limited and the NationalBank of Malawi and shall include Investment and Development Fund Limited.

This is further amended to Investment and Development Fund Limited is now changed to INDEFUNDLIMITED.

RCA 248423. WUI a4146

Secretary to the Treasury - 2 - September 17, 1993

Please indicate your agreement with the foregoing by countersigning and dating the form ofconfirmation on the two original copies of this letter provided to you and returning one original, ascountersigned, to us. This amendment shall become effective as of the date of countersignature.

incerely,

Stephen DnningDirector

Southern Africa Department

COuico lw:Republic of alawi

By:2f

ANNEX 1Table 1

MALAWIAgricultural Marketing and Estate Development Project

(Credit 1966-MAI)

Schedule 1

Category Revised SDR % of Expendituresto be financed

1. Sub-loans:

(a) Under Part A.1(a) of the Project 4,055,000 100% of expendituresincurred under Sub-loansmade by Participating Banks

(b) Under Part A.1(b) of the Project 2,200,000 100% of expendituresincurred under Sub-loansmade by Participating Banks

2. SEDOM Credits under Part A.2 of the Project 1,300,000 100% of expendituresincurred under SEDOMcredits

3. Vehicles, equipment and office supplies 300,000 100%

4. Technical assistance and overseas training 770,000 100%

5. Operating costs 225,000 42%

6. Civil Works 625,000 90%

7. Information (M & E) and studies 50,000 100%

8. Refunding of Project Preparation advance 375,000 Amount due pursuant toSection 2.02(d) of thisAgreement

9. Incremental Seasonal Credit 4,200,000 100%

10. Unallocated 100,000

TOTAL 14,200,000

International Development Association aFOR OFFICIAL USE ONLY

IDA/R92-137

From: The President October 27, 1992

MALAWI

NATIONAL AGRICULTURAL RESEARCH PROJECT (CREDIT 1549-MAI)AGRICULTURAL MARKETING AND ESTATE DEVELOPMENT

PROJECT (CREDIT 1966-MAT)

PROPOSED AMENDMENTS TO THE CREDIT AGREEMENTS

TO SUPPORT THE MALAWI DROUGHT RECOVERY PROGRAM

1. This memorandum proposes amendments to the legal documents for the Malawi NationalAgricultural Research Project, Credit 1549-MAI, and the Agricultural Marketing and EstateDevelopment Project, Credit 1966-MAI, to help finance urgently needed drought recoveryactivities, in the form of agricultural inputs to smallholder farmers for which the Government ofMalawi (GOM) has requested IDA assistance. Restructuring of these two projects would providea total of SDR 10.2 million (USS 14.6 million equivalent) for this assistance. SDR 6.0 millionwould be reallocated from the National Agricultural Research Project, and SDR 4.2 millionwould be reallocated from the Agricultural Marketing and Estate Development Project.

2. Southern Africa is experiencing the worst drought in living memory. A year with asignificant shortfall in rains has resulted in a decline in agricultural production of approximately40 percent, and Malawi faces critical food shortages until the next harvest in 1993. Sufficientuncommitted funds are available under the above two Credits to make a substantial contributiontowards financing the required agricultural inputs for the upcoming planting season. Reallocationof funds under these ongoing projects is far more expeditious than processing a new droughtrecovery credit, and these two Credits are considered most suitable to help finance the neededagricultural inputs. The proposed amerdments alter the original concepts of strengthening thenational agricultural research program and supporting agricultural estate development,respectively, and therefore are submitted for Board approval on a non-objection basis.

Questions on thisdocument may bereferred to Mr. RichardAnson (ext. 34397).

Distribution

Executive Directors and AlternatesOffice of the PresidentExecutive Vice Presidents, IFC and MIGAVice Presidents, Bank, IFC and MIGADirectors and Department Heads, Bank, IFC and MIGA

This document has a restricted distribution and may be used by recipients only in the performanceof their offcial duties. Its :-caents may not otherwise be isciosed without World Bank authorization.

2

PART I: BACKGROUND

3. 1992 Drought Impact. Malawi and the rest of Southern Africa are currently sufferingfrom the most severe drought of this century. About 4.7 million people, or about 50 percent ofthe population, are estimated to be seriously affected by the drought in Malawi alone. Foodsecurity at the household level is most precarious for 55 percent of the farm households who haveless than one hectare of land. Agricultural production in 1992 was about 40 percent belownormal. Reliable and independent sources currently estimate that this year's maize harvest(Malawi's dominant staple food crop) will be about 50 percent below the 1991 levels and Malawifaces a food shortage of unprecedented magnitude. Malawi will need to import at least 650,000metric tons of maize to offset the drought-related production losses, assuming a draw-down fromexisting stocks and the Strategic Grain Reserve of approximately 430,000 metric tons. TheEntrepreneurship and Drought Recovery Program (Cr. 2396-MAI), which was approved by IDAin June 1992, is financing a portion (about USS 50.0 million equivalent) of the maize importsurgently needed to avoid widespread starvation prior to the next crop harvest in 1993. In themidst of its relief efforts, GOM must begin the arduous task of recovery in agriculture. The mostfar-reaching implication of the drought is its devastation of the agriculture sector. Most critically,smallholder farmers will not be able to generate the required food production in 1993 withoutobtaining seasonal loans to purchase available fertilizer and seeds.

4. Existine Projects. We propose that the two projects mentioned below, namely, Credits1549-MAI and 1966-MAI, be restructured to release funds for the drought recovery effort. TheNational Agricultural Research Project (NARP) was approved by the Board (SDR 24.3 million)on February 19, 1985 and became effective on November 19, 1985. The closing date, October31, 1992, will be extended for one year. The project has made substantial progress in meetingits objectives, particularly in regard to its outstanding contribution to maize research indeveloping flint hybrid maize. It has also provided infrastructure and equipment and has initiateda framework for supporting priority research action plans. Most of the infrastructuredevelopment planned under the project has been realized and the institutional development aspectsand implementation of priority research activities would be continued under the proposedAgricultural Services Project, which was recently appraised by IDA and is scheduled to bepresented to the Board in 1993. The on-going NARP will be extended by one final year toconsolidate the benefits under the project, especially involving the promising researchbreakthrough in maize hybrid variety, and to provide essential funds for implementing keyresearch programs until the proposed Agricultural Services Project is effective, subject to IDAapproval. Due to devaluation during the project life, expected savings of about SDR 6.0 million(USS 8.6 million equivalent) are available and recommended for reallocation to help support theGovernment's smallholder drought recovery program.

5. The Agricultural Marketing and Estate Development Project was approved by the Board(SDR 14.2 million) on December 1, 1988 and became effective on June 9, 1989. The closingdate is June 30, 1996. Implementation progress for the first three years of the project has beenvery slow, primarily due to the reluctance of financial institutions to extend credit to the smallestate sub-sector, which is perceived to have high risks and transaction costs. Under the project,the credit component was limited to medium-term credit. As a result of a supervision mission

3

in November 1991, the Bank and GOM prepared an action plan to improve project performance,including restructuring the credit component to allow use of credit funds for medium-term andincremental seasonal requirements. The disbursement lag, which had been 55 percent inDecember 1991, is now about 33 percent. About SDR 5.7 million (USS 8.2 million equivalent)of this agricultural credit component is uncommitted. Given the urgent requirements for seasonalcredit for the smallholder sector, about SDR 4.2 million (USS 6.0 million equivalent) areavailable and are recommended for immediate reallocation to the smallholder drought recoveryprogram. The balance of the funds in the credit component (SDR 1.5 million) would be availableto small estates as part of the ongoing project. A proposed Rural Financial Services Project wasrecently appraised by IDA and is scheduled to be presented to IDA's Board in 1993. Ifapproved, this new project would address some of the underlying constraints involving lendingto small estates and continue to provide the new lending channels to the small estates andsmaliholders opened up under this project.

6. Smallholder Agricultural Credit Administration (SACA). SACA, which is the primarychannel for providing credit to smallholder farmers for the purchase of agricultural inputs,including fertilizer and seed, was set up under the ongoing IDA/IFAD-financed SmaliholderAgricultural Credit Project (Cr. 1961-MAI), which became effective in September 1988. Underthe proposed Rural Financial Services Project, SACA would be converted into an autonomousand viable rural bank operating on a commercial basis. SACA, which charges market interestrates, is currently experiencing an unprecedented cash flow squeeze as a result of the drought-induced low recovery rates. With a history of average loan recovery rates of over 90 percent,SACA is the best performing agricultural credit scheme in sub-Saharan Africa. The 100% creditrecovery policy for farmer groups is a key element of its success. However, because of thedrought, the expected recovery rate for 1992 will be only about 33 percent. In addition, fertilizerprices were recently increased by nearly 40 percent, largely because of two major devaluationsin 1992. As a result, SACA has a financing shortfall of about USS 31.2 million, out of a totalfinancing requirement of nearly USS 40.0 million in the 1992/93 season. Although SACA hasa sound policy for dealing with arrears caused by the drought and has already rescheduled the1992 drought-induced arrears, it lacks sufficient funds to finance the smallholders' purchase ofkey agricultural inputs, especially fertilizer and seeds. Without a significant infusion of fundsto close this financing gap, SACA will not be able to maintain its 1991/92 lending levels, whichwill have an adverse impact on smallholder agricultural production in 1993. Smallholderscontribute about 70% of Malawi's total maize production. IDA could provide from the twoprojects described above about USS 14.6 million towards closing this financing gap. Anadditional S2.0 million will be provided by IFAD and ADB. Government would then furtherrationalize its recurrent budget expenditure and use available counterpart funds provided bydonors to fill the remainder of the financing gap (USS 14.6 million). Emergency droughtrecovery requirements in other sectors (e.g., water supply and health) make it extremely difficultfor Government to provide more than this amount.

7. Rationale for Restructuring. To ensure recovery of food production, resources areneeded now to enable farmers to obtain key production inputs for the upcoming planting season.As a result of the drought-related crop failures, smallholder farmers do not have the cash topurchase these inputs, and SACA does not have the resources to provide farmers with enoughcredit to offset their lack of cash. External assistance is required to provide resources to enablesmall farmers to purchase essential inputs. It is expected that these inputs would help Malawirestore its maize self-sufficiency next year. The two projects have been chosen for restructuringbecause, in both cases, there are undisbursed funds available which can help finance these inputsthrough SACA. In the case of the National Agricultural Research Project, there are about SDR

4

6.0 million that would most likely be canceled at project closure. For the Agricultural Marketingand Estate Development Project, drawing down of the credit component can be accelerated andbroadened to include smallholder farmers for urgent drought recovery assistance, because newprograms under preparation can replace these funds in future years. Reallocating the funds fromtwo ongoing projects will be the quickest way to help the Government recover from the droughtdamage this upcoming crop season. The funds would help finance about 2,500 metric tons ofseeds and about 35,000 metric tons of fertilizers, providing direct benefits to about 10% of totalsmalIholders.

PART II: PROPOSED AMENDMENTS

8. Proiect Restructuring. Approval is sought from the Executive Directors to amend theagreements, as set out below, relating to the two Credits, 1549-MAI and 1966-MAI. Thechanges envisaged are as follows:

a. National Agricultural Research Project. The main project objectives, improvingsmallholder-oriented agricultural research programs, formulating an overall research strategy,improving research/extension linkages, and improving efficiency and economy of researchactivities, have been substantially achieved. Restructuring would add a new objective, supportingGovernment's drought recovery program by providing agricultural credit to smallholders, for atotal of SDR 6.0 million.

b. Agricultural Marketing and Estate Development Proiect. The main project objectivesof improving the marketing system for smallholder farmers' crops by helping to develop a multi-channel marketing system, improving resource utilization and productivity' on estates, anddeveloping agricultural processing through provision of medium-term credit through the bankingsystem, remain unchanged. The existing project has a component providing medium-term creditthrough the banking system. Recent restructuring of the credit component (para 3) would allowuse of the credit funds for incremental seasonal requirements of the small estate sector. FurtherProject restructuring will add a new objective, supporting Government's drought recoveryprogram in the 1992/93 season by providing incremental seasonal credit to smallholders, for atotal of SDR 4.2 million.

9. Procurement and Disbursements. The procurement of inputs funded by the proposedreallocations is consistent with the procedures followed under the on-going IDA-assistedSmallholder Credit Project, which are satisfactory to IDA. The existing input distribution systemis adequate to ensure that the seeds and fertilizers are obtained by smallholders this crop season.Accordingly, the disbursement of these funds for the drought recovery program is expected tobe completed during the upcoming cropping season. SDR 10.2 million (TJS$ 14.6 millionequivalent) would be channelled to SACA according to procedures which are consistent with theSmallholder Credit Project, and satisfactory to IDA. SACA would use the funds to purchasefertilizer and improved seeds and on-lend the funds to smallholder farmers in the form of inputcredit.

5

PART III: RECOMMENDATION

10. 1 recommend that the Executive Directors approve the proposed amendments to theDevelopment Credit Agreements described above. In the absence of objection (which should becommunicated to the Vice President and Secretary or Deputy Secretary by close of business onNovember 5, 1992), the foregoing amendments will be deemed to have been approved and willbe so recorded in the minutes of a subsequent meeting of the Executive Directors. The legaldocuments will be amended accordingly.

Lewis T. PrestonPresident

October 27, 1992Washington, D.C.

Annex 1Table 1

MALAWIAgricukurl Marketing and Estate Development Project

(Credit 1966.MAI)

Schedule 1

Category Current Revised

SDR

1. Sub-loans:

(a) Under Pat A.1(a) 8,530,000 4,330.000of the Project

(b) Under Pat A.1(b) of 2,250,000 2,250,000the Project

2. SEDOM Credits under 1,100,000 1,100,000Part A.2 of the Project

3. Vehicles, equipment and 150,000 150,000offce supplies

4. Technical au•atio e and 620,000 620,000overmss raining

5. Operating Costs 150,000 150,000

6. Civil Works 500,000 500,000

7. Information (M A E) 150,000 150,000and sauties

S. Refunding of Project 550,000 550.000Prepmtion advance

9. Incunen Seasonal Cred - 4,200,000

10. Unallocated 200,000 200,000

Total 14,200,000 14,200,000

Annex 1Table 2

MALAWINational Agricultural Research Project

(Credit 1549-MAI)

Schedule 1

Category Current Revised

SDR

1. Civil works 9,590,000 6,840,000

2. Staff relocation 102,000 102,000

3. Equip. & Vehicles 3,430,000 3,580,000

4. (a) Consultants and 5,890,000 3,500,000training (other than (b)below)

(b) Contract research 2,000,000 1,660,000

1,820,000 1,820,0005. Operating Costs of new

activities introducedunder the Project

6. Refunding of Project 600,000 235,000Preparation advance

7. Special Account 410,000 410,000

8. Incremental Seasonal 6,000,000Credit

9. Unallocated 200,000 200,000

Total 24,300,000 24,300,000

OFFICIALIDOGUMENTS Coe)

RECOMMENDATION OF STATUTORY COMMITTEE

To: The President, International Development Association

Report of the Committee under Section 1 (d) ofArticle V of the Articles of Agreement on the

Proposed Development Credit (Agricultural Marketing

and Estate Development Project) to the Republic of

Malawi

The undersigned Committee constituted under Section 1 (d) of

Article V of the Articles of Agreement of International Development

Association (the Association) hereby submits its recommendation

pursuant to said Section in respect of the proposal that the

Association grant to the Republic of Malawi a development credit in an

amount in various currencies equivalent to SDR 14,200,000. The

purposes of said development credit are to assist the Republic of

Malawi in improving: (a) marketing of smallholder farmers' crops by

supporting the Republic of Malawi's efforts to develop a multi-channel

marketing system; and (b) resource utilization and productivity on

estates by providing medium-term credit to intensify and diversify

production.

1. The Committee has carefully studied the merits of the proposal

to grant such a development credit and of the purposes to which the

proceeds of the development credit are to be applied.

2. The Committee is of the opinion that the project toward the

financing of which the proceeds of such development credit are to be

applied comes within the purposes of the Association as set forth in

Article I of said Articles of Agreement, and that said project is

designed to promote the economic development of the Republic of Malawi

and is of high developmental priority in the light of the needs of the

Republic of Malawi.

(Republic of Malawi) - 2 - (Agricultural Marketing

and Estate Development Project)

3. Accordingly, the Committee finds that said project merits

financial assistance from the Association and hereby recommends said

project for such assistance.

COMMITTEE

Acting Stnior Vice President, Operations

Nominee Selected by Governor forRepublic of Malawi

Acting Vice President and General Counsel

.1Re t~a:1ce resident

Africa

Dated at Washington, D.

October 25, 1988