DFID MALAWI COUNTRY ASSISTANCE PLAN Draft for Secretary of State Comment 5 June 2007

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1 DFID MALAWI COUNTRY ASSISTANCE PLAN Draft for Secretary of State Comment 5 June June 2007

2 TABLE OF CONTENTS SUMMARY 4 THE CHALLENGE 7 The nature of poverty in Malawi 7 Getting Growth Going 10 Climate change and related disaster risk 12 POLITICAL AND GOOD GOVERNANCE 12 The Country Governance Prognosis 13 The Malawi Growth and Development Strategy 14 Partnership Principles 15 RISK ANALYSIS 15 Fiduciary Risk 16 WHAT WE HAVE LEARNT 17 PART II UK PARTNERSHIP PLANS 19 AID EFFECTIVENESS 19 UK SUPPORT 21 DFID MALAWI FOCUS: 22 Good governance and government effectiveness 23 Growth and Social Protection 25 Basic Services 27 PROGRAMME RESOURCES 30 Risk Response 31 PART III performance framework 32 Planning, Monitoring and Evaluating 32 Management Framework 33 Managing human and financial resources 33 Building for the future 34 Managing External Relationship 35 Annexes: Annex 1: Statistical Annex Annex 2: Performance Framework Annex 3: Development Partners Plans Annex 4: Aid architecture Annex 5: Other British Government Support in Malawi Annex 6: Social Exclusion Analysis Annex 7: Gender Analysis Draft 5 June

3 Acronyms ACB ADB AU CABS CAP CIDA COMESA DAC DRR DoPDMA EC EHP EHRP FCO GDP GoM HMG HPIC IMF JICA NGO M&E MDG MGDS MVAC NEPAD OECD PAF PEFA PRBS PRGF PVA RC SADC SSAJ SWAp UK UN Anti Corruption Bureau African Development Bank African Union Common Approach to Budget Support Country Assistance Programme Canadian International Development Agency Common Market for Eastern and Southern Africa Development Assistance Committee of the OECD Disaster Risk Reduction Department of Poverty and Disaster Management European Commission Essential Health Package Emergency Human Resources Package (UK) Foreign and Commonwealth Office Gross Domestic Product Government of Malawi Her Majesty s Government Highly Indebted Poor Country International Monetary Fund Japanese International Cooperation Agency Non government organisation Monitoring and evaluation Millennium Development Goals Malawi Growth and Development Strategy Malawi Vulnerability Assessment Committee New Partnership for African Development Organisation of Economic Cooperation and Development Performance Assessment Framework Public Expenditure & Financial Accountability Poverty Reducing Budget Support Poverty Reduction and Growth Facility Poverty and Vulnerability Assessment Resident Coordinator (UN) Southern Africa Development Community Security and Access to Justice Sector Wide Approach United Kingdom United Nations Draft 5 June

4 SUMMARY 1. Malawi faces formidable development challenges. Despite this, well targeted Government support and external aid can make a difference. Successes include 8% growth in 2006 following good rain, farmer subsidies, economic stability and debt forgiveness; a dramatic reduction in child mortality; large increases in school enrolment; stabilising HIV rates; and rapid growth in numbers of people receiving AIDS treatment. 2. These successes, however, are overshadowed by high poverty and vulnerability levels, continuing chronic hunger, high child malnutrition and high maternal mortality. 3. Malawi is one of the 10 poorest countries in the World and is resource poor, even by development standards. The country has less than 50 per person each year to spend from tax and aid. Its people are poorly educated and unable to access good health care due to years of under investment. The impact of AIDS has been devastating and the costs of future treatment are not assured. Small and shrinking land holdings with declining productivity alongside desperately low investment levels hold back growth. Unpredictable climate change and drought are increasing risks. 4. The future is uncertain and depends on Malawi s ability to tackle these problems, and attract investment and new resources. High population growth will add to the uncertainty. Growth is possible if agricultural productivity increases, there is investment in agro-processing and tourism, and Malawi taps into the mineral-driven growth of its neighbours. New uranium mining will offer some growth and export potential. But sustained growth needs investments in people s health and education, in land through the intensified use of inputs, an improved environment for doing business, as well as investments in Malawi s infrastructure. 5. Good governance is also required. Malawi is a stable and peaceful country. Rights, accountability and responsiveness received a boost in 1994 with the introduction of multiparty democracy. The likelihood of continued good governance is reasonable but depends on how the current minority government handles the lead up to the 2009 elections and the post-election settlement. After only 13 years of multi party democracy, democratic institutions and accountability and responsiveness to communities are weak. 6. Malawi s development will require long term and substantial external support. As Malawi s largest donor the UK commits itself to long term support and will consider backing this with a 10 year development partnership. 7. With sustained effort, reforms, and private sector responsiveness Malawi can, over the next 10 years, expect reductions in the levels of poverty with fewer movements in and out of poverty. The economy is likely to include more mining and tourism but remain heavily agriculturally based. Better functioning input and output markets underpinned by social protection will provide greater national and individual food security. Basic service provision could improve Draft 5 June

5 with progress towards meeting the millennium development goals, particularly in health and education, but without institutional and policy reform and improved efficiency will remain below regional norms. A more stable and mature democratic process would allow the political debate to shift more towards policy debate and delivery. 8. The UK, through DFID, commits itself to provide at least 70m a year for the 4 years of this plan. Working with the Foreign and Commonwealth Office (FCO), UK development assistance through DFID will focus on: Improving governance and longer term stability and managed change by strengthening the main democratic institutions and by supporting people s ability to demand change and improve policy-making and implementation. Backing the Government s efforts to promote growth through a stable economic environment and transformation of agricultural markets and helping those who don t benefit from growth. Improving people s health and education through the delivery of basic services focused on achieving results. 9. The UK will specifically aim to promote gender equality through support in 4 focus areas: reducing maternal mortality; achieving parity in girls and boys primary school completion rates; increased access to local level justice for women and better gender monitoring through national monitoring systems. 10. DFID will support UNDP s lead on the climate change action plan including supporting the Government of Malawi s efforts to improve disaster preparedness and mitigation including support to the Malawi Vulnerability Assessment Committee. 11. How the UK delivers its aid will depend on the Government of Malawi s continued support of the partnership principles: commitment to human rights, poverty reduction and addressing weak financial management and the fight against corruption. 12. Where and how the UK allocates aid takes account of the Government of Malawi s preferences, lessons from the past, and the activity of other donors. The World Bank and the European Commission are expecting DFID to continue its investments in health and education allowing them to re-orientate their support to infrastructure and agriculture. 13. Supporting the Government s budget (poverty reducing budget support) is an important element of the programme. It ensures aid is led by country preferences and backs Government s budget priorities in the delivery of services; helps promote systems of budget allocation and delivery; and, linked to support to democratic institutions, can support improved accountability between Malawi s leaders and people. 14. DFID provided 65m of support in 2006/07 with the bulk of funds split between support to the budget ( 20m), helping deliver basic services in health and HIV and AIDS ( 21m), and primary education ( 6m), building democratic institutions Draft 5 June

6 such as Parliament, the anti corruption bureau, and developing the justice sector ( 5m), backing the subsidies of fertiliser and seeds ( 6m), and responding to acute humanitarian needs ( 3m). 15. Additional resources on top of this commitment can be invested in a number of ways. The priority areas for investing an additional 20m by 2011 on top of the 2006/7 baseline would be double education spend to improve primary quality ( 6m); 5m to social protection such as cash transfers to tackle hunger and vulnerability; 8m to scale up health and HIV and AIDS to help close the drugs gap, double the numbers receiving AIDS treatment, and bring down Malawi s shockingly high maternal mortality rates; and increase poverty reducing budget support ( 6m) to keep it at 30% of the programme in support of delivering efficient public services. This would be accommodated by an expected reduction in spending on acute needs and other programmes. 16. If more than 85m became available, or we fail to develop new programmes in the priority areas, we will consider contributions to a water sector programme, and channelling support through other donors in support of agriculture, or rural roads, as well as additional support in the areas in which we already operate. 17. Effective development support not only requires working closely with Government but also improving the way development partners work. As well as seeking opportunities to complement other partners and better join up our efforts, the UK will specifically support the UN s efforts to pilot reforms in Malawi to improve its impact and reduce its costs. 18. The programme is not risk free. Malawi s absolute lack of capacity makes change and reform an uncertain process. Political uncertainties, particularly the lead up to and outcome of the 2009 election underpin risks to economic stability and the partnership principles. DFID and the FCO will track these risks. Commitment to the partnership principles underpins the benchmarks agreed by the Government and budget support donors. 19. Changes in DFID will also provide risks and opportunities. Despite expected reduction in its staff, DFID Malawi will invest in its own people and systems to ensure it has the capabilities and capacity to deliver on this programme. Draft 5 June

7 THE CHALLENGE PART I - POVERTY CONTEXT The nature of poverty in Malawi Over half (52%) of Malawi s 12 million inhabitants live in poverty and 22% don t have enough food to eat. In 2005, a year of severe drought, 5 million people received humanitarian food aid even in good year 1 million people receive food aid. Malawi ranks 166 out of 177 on the human development index (2004). There has been little change in levels of poverty over the past 25 years. 21. Annual income per capita is $160 2, roughly the same level as in Malawi is land-locked, resource-poor, with an economy dominated by Government delivered services and agriculture, each accounting for nearly 40% of GDP. The contribution of the non-agricultural sector to the economy has shrunk in the past 10 years % of households are engaged in agriculture, with 81% of the active rural population classified as subsistence farmers using low input rain fed farming. Most farm plots are not big enough to feed a family. This is set to worsen as the population doubles to 25 million in , challenging further the viability of subsistence farming. Employment on other people s farms and off-farm employment currently offer limited income opportunities. Only a third of households have household enterprises. 23. The most important factors affecting the level of household poverty are: household size, education, access to non farm employment, access to naturally or artificially irrigated land, proximity to markets and trading centres and access to tarmac roads. Access to larger landholdings and engagement in cash crop production also play an important role. 24. Two thirds of households have moved into or out of poverty over the last decade. The most common factors that push households further into poverty are drought or floods, increases in the price of food, and health-related shocks, such as illness, injury and death of a household member. HIV and AIDS has played a significant part in this pattern of vulnerability - at 14% prevalence Malawi has one of the highest HIV rates in the world. 25. Inequalities have changed little in 10 years 4. People in rural areas are more than twice as likely to be poor and almost half the poor people in Malawi live in 1 The statistics referred to in this section are from Poverty and Vulnerability Assessment (PVA) 2005 produced by the Ministry of Economic Planning and Development and the National Statistics Office with support from the World Bank. The PVA analysis mostly draws on the data from the Integrated Household Survey (IHS) GDP is underestimated and is due to be revised upwards. This is unlikely to alter the long term trend or Malawi s status as one of the poorest countries in the world. 3 UNFPA 4 The richest 10% of the population have an income eight times higher than the poorest 10%. The gini coefficient is Draft 5 June

8 the rural South. Female headed households and households headed by someone over 56 are poorer. 26. Women work longer hours, earn less, receive less education, are subject to high levels of domestic violence, are more at risk from HIV and have limited access to resources and decision making. They face discrimination in inheritance and divorce settlements a cause of increased vulnerability of women headed households. The passing of the Domestic Violence Act in 2006 is a step forward for women s rights, though the implementation of the Act remains a challenge. Progress has been good on gender differences in primary school enrolment but less so for secondary and higher education. The ratio of literate women to men is increasing but remains unequal (56% of women and 79% of men). Progress in employment outside agriculture (13% of non agricultural workers are women) and parliamentary representation (13.6%) remain low. 27. There has been historic under-investment in education for generations. Currently just over 80% of all children between 6 and 13 years of age are enrolled in primary school. The introduction of free universal primary education in 1994 saw enrolment jump by 1 million, the majority girls. Young people s literacy increased from 63% to 76%, almost all as a result of the rise in young women s literacy. However, quality is poor. Nearly half of all pupils drop out before their fifth year of primary school. Education beyond primary school is mainly limited to non poor households. There is an acute shortage of teachers, (pupil to qualified teacher ratios is 84 to 1, one of the worst across Africa) and basic infrastructure (only 20% of pupils have access to desks and chairs). This contrasts with very high expenditure per student, in higher education, by African standards. 28. Girls completion and exam achievement rates are lower than those for boys, with dropout being particularly significant in the last three standards. Cause of drop out include the inability to purchase material to attend school or the need for labour at home; safety and security fears; and cultural practices such as early marriage. 29. Child mortality has declined by over 40% in the last 15 years and Malawi is on track to meet the MDG. Success has been achieved by eliminating neonatal tetanus and polio and achieving high measles vaccination coverage and increasing malaria prevention. But one in every eight children still dies before reaching their fifth birthday; malnutrition is widespread, nearly half of all children under 5 are stunted and 22% severely stunted; and services to prevent mother to child HIV transmission are currently available to very few. Women give birth to an average of 6 children, one of the highest fertility rates in the region. Child mortality, fertility and malnutrition rates are strongly associated with mothers level of education and wealth. 30. Life expectancy declined from 48 to 41 years between 1990 and The leading cause of disease burden is AIDS, followed by respiratory disease, Draft 5 June

9 malaria, diarrhoeal diseases and peri-natal conditions 5. Maternal mortality has increased from 620 to 984 deaths per 100,000 live births since Malawi only has 2% of the basic emergency obstetric care facilities it requires. 31. HIV and AIDS prevalence rates have stabilised at 14% and encouragingly prevalence rates have declined slightly among urban residents. Young women are most at risk of infection, especially those in rural areas. 90,000 Malawians become infected every year which compromises economic growth and the sustainability of the HIV effort. Since 2004, the number of people on Antiretroviral treatment has increased from less than 4,000 to over 85,000-35% of those in need. There are ambitious plans to further scale up this programme. Malawi has over 1 million orphans, half of which are due to AIDS. Approximately 70,000 children are thought to be HIV positive and 7% of people receiving ARVs are children. 32. Access to health services is poor. Only 54% of the rural population have access to a health facility within 5 km, and 35% of health services are provided by fee charging mission facilities. Critical constraints to service delivery include a lack of basic health service inputs, including drugs and health professionals. Malawi has one of the worst health worker to population ratio in the world, with 2 doctors and 59 nurses for every 100,000 people and vacancy rates of 60%. This is due to previous low investment in human development, high attrition due to increased workloads, AIDS pandemic, out-migration internally to NGOs and research organisations and internationally particularly to the UK, low remuneration and inadequate conditions of service e.g. drug & equipment shortages and lack of supportive supervision. 33. Malawi is statistically on track to meet the water MDG. Access to water has increased from 41% to 66% and sanitation from 52% to 78% since 1990 a remarkable improvement, but investments have favoured better served areas with good road access. Maintenance remains a problem with an estimated 33% of water points out of use at any one time. Much of the existing sanitation system needs upgrading to be considered safe. Urban water and sanitation systems need to be repaired and extended to maintain current services and respond to the increases in the urban population. 34. Malawi is vulnerable to extreme weather events, especially drought. Climate change is expected to increase the frequency and severity of these events, making poor people, particularly, more vulnerable and threatening development. Deforestation, flooding, soil erosion and fertility loss further increase vulnerability. The demand for solid fuel is the main reason for deforestation 98% of the population rely on it for cooking. 35. Poverty in Malawi is the result of an acute overall lack of resources: lack of mineral and land resources, declining agricultural productivity, and a history of under-investment in its people. In an economy of just over $2 billion, funds available to the public sector from tax revenue and aid is only $73 per person per year, the third lowest of DFID s 16 priority African countries and lower than 5 Cam Bowie The Disease Burden in Malawi College of Medicine, Blantyre. Draft 5 June

10 Zambia ($181), Ghana ($160) Nigeria ($154), Zimbabwe ($137), Kenya ($122), and Mozambique ($102). Poverty reduction will depend on increasing funding through economic growth and additional aid flows for public expenditure, and strengthening policies and institutions to make existing funding have greater impact. Getting Growth Going 36. The Government s aim is to raise the growth rate to 6% per annum. Output per person was stagnant during as economic growth averaged 2.6% 6. The 2006 Malawi Poverty and Vulnerability Assessment concluded that the main reasons for this poor performance have been macroeconomic instability (mainly the result of poor fiscal management) and frequent agricultural production shocks (the result of both abrupt policy changes and weather variability). 37. In a country where close to 85% of all households rely on farming as their main source of income, raising agricultural productivity is a necessary condition to get growth going. This will require increases in the productivity of Malawi s main foreign exchange earning crops (tobacco, tea, sugar and cotton). International evidence also suggests that improvements in the productivity of food crops play a crucial role in spurring the growth process in agrarian economies. Maize accounts for half the cultivated land, but gives low average yields on small and decreasing land-holdings. Higher maize yields would release land and labour for other economic activity. 38. Investment in land and water is needed to raise agricultural productivity and strengthen resilience to climatic events. Malawi is rich in water resources, with abundant rainfall and a third of its area covered by the lake. The potential for irrigation is estimated to be up to five times the current 2% coverage. 39. Population pressure on land is high. Redistribution of idle land can ease this pressure, but is insufficient and short-term, as the population grows. The only sustainable scenario is a process of land consolidation to higher potential smallholders who can raise investment levels and agricultural productivity in a sustainable manner. This can be a gradual process, where less productive smallholders realise better returns to their labour are available from employment on others farms, off-farm employment, self-employment, and migration. Part of the population will not benefit from these opportunities and will need predictable long-term social protection. 40. Large-scale unpredictable interventions by Government and donors in markets for agricultural inputs (fertiliser) and outputs (maize and increasingly tobacco) have made investing in the agricultural sector riskier. The aim should be to make public sector interventions in these markets more predictable, and ensure they do not skew incentives for private sector investments. 6 World Development Indicators Draft 5 June

11 41. The Government has identified agro-processing and tourism as sources of growth. Prospects for mining are positive there is already some small scale coal mining and a medium sized uranium mine will at current world prices become Malawi s largest foreign exchange earner ahead of tobacco from An often overlooked source of growth is growth in neighbouring countries growth spillovers. This is particularly relevant to Malawi given the current copper boom in Zambia and the large coal development in Central Mozambique. 42. Critical to unlocking these sources of growth is to raise investment levels. Malawi has one of the lowest levels on the continent, 8.1% of GDP 7 - half the Sub-Saharan Africa average, and virtually none of it is taking place in the private sector. Malawi needs to attract additional private sector resources for capital investment if it is to expand its agro-processing, tourism and mining sectors. 43. According to the 2006 Malawi Investment Climate Assessment the top 5 constraints are poor macroeconomic environment, low skills, crime and corruption, lack of access to credit, and poor infrastructure 44. Macroeconomic stability is seen as the most important component of an improved investment climate. The macroeconomic downturn between 2000 and 2004, with unsustainable Government borrowing and high interest rates led to a dramatic fall in private sector investment. Since 2004 the country has been on a positive trend as fiscal discipline has been achieved, which in turn led to Malawi achieving debt relief by reaching completion point of the Heavily Indebted Poor Country (HIPC) programme. Signs are emerging of an economic recovery with lending to the private sector and tax receipts both growing. 45. The lack of an adequately skilled labour force is one of the major constraints highlighted by private sector firms to their operations and growth and is also a brake on public service delivery. A healthier and better skilled population is necessary to drive growth. Household incomes are 12% higher if the head has completed primary school 8, and health shocks lead to loss of income and assets. Global evidence on the links between health and education outcomes and income and revenue growth at household and firm level supports the consensus that health and education investments underpin economic growth. 46. Estimates suggest Malawian firms lose 4% and 2% of their sales respectively to crime and corruption. The lack of safety, security and access to justice at community level is a constraint on growth through its impact on livelihoods, gender equality and social cohesion, as well as basic services and governance. 47. Efforts by microfinance and other financial services providers will continue to play an important role in increasing access to credit in rural areas, the second key determinant of agricultural productivity after access to agricultural inputs. 7 World Development Indicators 8 PVA 2006 Draft 5 June

12 48. Electricity needs to be more widely accessible and reliable. Progress is being made in linking Malawi to the Cahora Bassa hydroelectric power station in Mozambique, which will give the country access to the Southern Africa power pool by the end of Malawi should also harness opportunities offered by renewable energy sources available in country, such as solar power and biofuels particularly as technological advances make these increasingly costeffective. 49. The small size of the domestic market and high transport costs to traditional export markets limit Malawi s competitiveness. Malawi is negotiating its new Economic Partnership Agreement as part of the Eastern and Southern African group of countries. However, in the past Malawi has consistently failed to take full advantage of preferential access to export markets, indicating that the critical constrain is that of expanding production, which requires addressing the constraints to investment listed above. Reducing transport costs is also important for expanding trade. Development of the transport infrastructure will bring down those costs including railway links to the main Mozambican ports of Beira and Nacala as well as the national road network. Meanwhile given the current constraints in its competitiveness in international markets the greatest potential for exports is likely to lie in expanding trade with its neighbours. Malawi would therefore benefit from further regional integration either in the context of COMESA or SADC. Climate change and related disaster risk 50. Climate forecasts models suggest that Malawi s weather will become less favourable over the next fifty years. A 15% drop in maize yields has been predicted. This poses a serious threat to growth and poverty reduction. Adaptation to these risks is needed, through irrigation where viable, increased technology adoption (e.g. shorter maturity and drought resistant hybrid seeds) and the identification of crops better suited to new conditions. 51. Disaster risk reduction strategies to prevent and prepare for associated disaster risks are also needed are also needed. These may include effective early warning systems for famine, drought and floods; improved environmental management; and well-structured land-use. Risk, vulnerability and capacity assessments are a first step to identifying the risks and how to address them. POLITICAL AND GOOD GOVERNANCE 52. The introduction of multiparty democracy in 1994 produced a marked improvement in human rights. Current President Bingu wa Mutharika was elected in May 2004, as the ruling United Democratic Front (UDF) candidate, but subsequently split from the UDF to form a new party, the Democratic People s Part (DPP) on a pro poor, zero tolerance of corruption platform. The Government does not command a majority Parliament, whose composition has been changing frequently, due to switching of party allegiances by MPs. 53. Implementing the legislative agenda is becoming increasingly constrained. The Government s minority in Parliament has exacerbated competition between Draft 5 June

13 political leaders to the point where it has disrupted government business. This is unlikely to abate as the 2009 Parliamentary and Presidential election approaches 54. On top of this, with democracy only 13 years old, drivers of change studies have suggested that Malawi is struggling to escape from a system where political competition is based more on personalities and rivalries between personal networks than on issues. Political alliances shift rapidly. There are a number of implications: The commitment of Government to poverty reduction and its direction continues to depend greatly on the vision and style of the President and a few key political figures. It is vulnerable to changes of personnel and leadership. To break out of a patronage system, the political leadership has to find an alternative way of winning and retaining power, such as responding to the needs and aspirations of voters. That requires a capable state and more money, including more aid, to finance services and an enabling environment for private sector led growth. In the absence of these possibilities, Government actions tend to be populist with a short term perspective. Further democratic progress depends on strengthening the state systems to be responsive and accountable, such as the electoral system, parliament, public financial management, as well as enabling the demand side civil society - to make legitimate demands on the system. The Country Governance Prognosis 55. A Country Governance Analysis, completed by DFID and FCO in December 2006, used data in the public domain to establish trends in capability accountability and responsiveness. 56. The prognosis is for incremental, long term improvement in capability. It seems unlikely that political stability will be seriously threatened by any of the underlying social dynamics (regionalism, ethnic divisions). Malawi is likely to remain a generally peaceful country. Society has shown itself to be relatively cohesive and robust. Similarly the personal security of most Malawians is not expected to be threatened, including during the 2009 national elections. 57. Concerted and sustained effort will be required to tackle low public service capacity. The Government has shown a general willingness to engage more in long term policy making that is generally pro-poor. This is encouraging. Pay reform will begin to reverse the erosion of incentives in the public service but more focused performance management is also required. Improved public expenditure management including a new financial management system will help expenditure control although a lack of capacity in the audit system and the slow progress on public procurement reform remain weaknesses. Draft 5 June

14 58. If the dramatic improvements in macro-economic management since 2004 continues the conditions for investment and trade will also improve. However much depends on other elements of governance. 59. Accountability: Systematic erosion of political freedoms and rights are not anticipated. However the volatile mix of minority politics and local, national and Presidential elections could result in some short term pressures. These are likely to be more a result of party political factors and electioneering than a concerted effort to subvert freedoms and rights e.g. pressures on media freedom. 60. Serious violations of constitutional principles and the basic tenets of the rule of law are not expected in the long term, although these will also be tested by election politics. Accountability institutions will continue to suffer the same capability weaknesses as the rest of government but improvements, as a result of the various reform processes currently underway, can be expected over the long term. The Government s relationship with accountability institutions is monitored by civil society. There is as yet no culture among service providers of outcome based performance or incentives to move in this direction, nor of representatives to respond to needs of citizens. 61. Civil society has many capacity and co-ordination challenges and needs to increase its effectiveness to better fulfil its accountability function. It is anticipated that accountability will gradually increase post 2009 but prior to that will be vulnerable in the context of highly contested elections. 62. Responsiveness: a significant reduction in human rights and civil liberties is unlikely in the short, medium and long term. Domestic party-political pressures may impact negatively on aspects of the human rights agenda and there may be some challenges to accepted norms. However these are likely to flow more from individual initiatives rather than direct government policy. It is anticipated that the anti-corruption drive will continue to make progress, particularly through convictions secured by the Anti Corruption Bureau. However Malawi is ranked 105 th (21 st out of 45 in Africa) in the transparency international index and the endemic and pervasive nature of Malawi s corruption means that it will be many years before systemic corruption is finally rooted out. Overall an incremental improvement in responsiveness is expected. The Malawi Growth and Development Strategy 63. The new Government elected in 2004 has launched the Malawi Growth and Development Strategy (MGDS) to serve as Malawi s poverty reduction strategy for the next 5 years ( ). The strategy has six themes: Sustainable economic growth Social protection and disaster risk management Social development Prevention and Management of Nutrition Disorders, HIV & AIDS Infrastructure Good governance Draft 5 June

15 64. And six focus areas picked out from the themes by the President as being particularly necessary for achieving the overall medium-term objectives: agriculture and food security; infrastructure development; energy generation and supply; irrigation and water development; integrated rural development; and HIV & AIDS prevention and management 65. The joint staff advisory note prepared by the International Development Association and the International Monetary Fund concludes that the MGDS provides a comprehensive framework for growth and poverty reduction. Its strengths include the emphasis on the need for growth in order to reduce poverty, greater local ownership, and results orientation. It identifies long-term goals, medium term outcomes, and constraints to achieving the outcomes. 66. Successful implementation of the strategy, however, will depend on: further prioritisation given lack of funds; better links to the budget and a system to ensure the budget drives choices and implementation; annual targets that can be realistically monitored; policy reforms based on evidence; and choices of infrastructure spend made with due consideration of alternative options 67. The assessment concurs with the priorities identified in the MGDS but highlight some areas that need attention. While investments in so-called productive sectors are central to economic growth, social spending ought to be seen as playing a complementary role in the growth agenda; within sectors identified as having potential for growth, some critical areas are overlooked such as agricultural pricing policies which play a major role in stimulating production. 68. DFID agrees with the main conclusions of the joint staff assessment. The MGDS provides a broad framework for growth and poverty reduction, but is some way off from being able to translate objectives into priorities, expenditure and effective implementation. More effort is needed in expenditure tracking, ensuring an adequate budget process and technical capacity. More evidence of commitment to the enabling environment for the private sector is also needed. Partnership Principles 69. The size and nature of DFID s programme in Malawi will continue to depend on 3 partnership principles: the Government s commitment to poverty reduction, human rights, and improving public financial management and accountability. The MGDs, and governance assessment suggests that these principles are broadly in place. DFID will, however, continue to track these commitments regularly. RISK ANALYSIS 70. The main risks over the period of the CAP relate to governance and the uncertainties created by the Government s minority position in Parliament and a highly contested Presidential and Parliamentary election in The Country Governance Analysis identified a number of risks to good governance and Draft 5 June

16 DFID s partnership principles. Those with the greatest impact and possibility of happening over the medium term are: a. Change in political leadership in 2009 leads to a reduction in emphasis in pro poor policy. b. Macro-economic position weakens. c. Budgetary allocation not regarded as substantively pro-poor. d. Local, national and/or presidential elections are not substantively fair. e. Frustration with minority position results in sustained circumventing of parliamentary and other accountability processes. f. Gender equality and women s empowerment fails to improve. 71. DFID will engage with the main political parties to understand their policy positions and likely commitment to the 3 partnership principles. 72. The remaining risks are within the control of the Government of Malawi. Poor commitment to macroeconomic and fiscal discipline before 2004 undermined the benefits of budget support, and led to the questioning of a commitment to poverty reduction and sound financial management. The result was the suspension of budget support. The current Government has reversed this situation leading to the resumption of budget support and HIPC completion. 73. The likelihood, now, of the risks b-e occurring are initially linked to how the Government responds to the short term political pressures leading up to the 2009 election. The Government of Malawi has made a number of poverty focus and good governance commitments in the performance assessment framework underpinning poverty reducing budget support. Progress against these commitments help guide the decisions of budget support donors. 74. DFID will consider the option of a 10 year partnership agreement with the GOM that reiterates the joint agreement to the partnership principles and reinforces GOM s commitments. 75. The last risk is more structural related to progress in gender rights. DFID will address this across our programming. 76. The main risk outside of the GOM s control is drought. DFID s work on reducing vulnerability though supporting agricultural input and output markets and social protection will go some way toward mitigating the impacts. Fiduciary Risk 77. The risk of misuse or poor financial management (fiduciary risk) associated with aid being channelled through Government systems will require special attention and mitigation mechanisms. The 2006 Public Expenditure and Financial Accountability report, reported significant improvements in public expenditure management and reporting over the preceding 18 months, the result of a new commitment to fiscal discipline, rule enforcement and the successful rollout of the Integrated Financial Management Information System (IFMIS). However, it Draft 5 June

17 also noted the continued weakness in external scrutiny by the National Audit Office and Parliament. 78. A public financial and expenditure management (PFEM) action plan has been agreed to address these and other weaknesses. Progress against the plan is monitored by the joint Government-donor Group on Financial and Economic Management (GFEM) in which DFID plays an active role. 79. Public financial management is assessed twice yearly as part of the CABS reviews the performance assessment framework includes a set of relevant indicators. In the Health Sector fiduciary risks and progress against the agreed plan are monitored by the Financial Management and Procurement Improvement Monitoring Working Group. An assessment of fiduciary risks will underpin the pace at which donors in the education sector are able to proceed toward a full sector programme. WHAT WE HAVE LEARNT 80. A DFID country evaluation, the country governance assessment, the drivers of change study, an evaluation of budget support, and programme and project experience and evaluations point to the following lessons: Donors need to understand the political economy of development better. We need to be realistic about weaknesses and political pressures. We must not assume that good policies equal effective implementation. We need to be clear about how we will monitor Governments commitment to poverty reduction and how we will respond to changes. A stable macroeconomic context is essential for budget support and donors need to be predictable reactions to changes need to be made in the medium rather than the short term to avoid significant long term negative effects on the economy and development. Long-term development requires long haul donor commitment. We need a balance between interventions on the supply and demand side, especially in promoting good governance. A successful sector approach takes time and effort. It needs consistent leadership and personnel in Government; long term support in critical areas; and building a relationship trust on both sides. Capacity constraints and lack of institutional reform is a serious impediment to the development effectiveness of all donor programmes directed through the central government. Government and donors need to find innovative ways to address short term constraints in government capacity. Malawi s Emergency Human Resources for health Programme is a pragmatic response to human resource constraint in the health service. Draft 5 June

18 Finally, it is important to have a diversified aid portfolio channelling funds through different instruments - in Malawi for balanced development and mitigating risks. Draft 5 June

19 AID EFFECTIVENESS PART II UK PARTNERSHIP PLANS 81. The UK is the largest provider of development assistance in Malawi. Up to 80% of aid comes from the 4 largest donors: UK, World Bank, EC and Norway. Figure 1: Breakdown of aid by MGDS theme (2005/2006) Breakdown of total aid by MGDS theme (2005/06) Sustainable Economic Growth 8% Good Governance 12% General budget support and debt relief 29% Infrastructure 5% Social Protection 10% Social Development 36% 82. The pool of effective donors is small. The UK, the World Bank or the EC lead in most sectors. Figure 2 shows the breakdown of development partner expenditure by MGDS theme in 05/06. GOM has been critical of donors spending too much in social sectors at the expense of growth and infrastructure development. 83. Annex 3 summarises development partners planned development assistance across the sectors. The EC and World Bank portfolio is increasingly focused on growth, agriculture and infrastructure and some social protection. Both look to DFID to build on its local experience and lead support to basic services. 84. In 2006/07, aid will finance over 40% of the Government s budget. Ensuring that donors work well together and with the Government to have the greatest impact is critical. The 2006 baseline survey on aid effectiveness suggest, however, low to moderate donor and government performance in the 5 areas of aid effectiveness. Too many donors are constrained in their ability to respond to a national agenda, have lengthy bureaucratic procedures that reduce flexibility, rules that inhibit the use of Government systems, limited local representation and programmes driven by donor rather than recipient interests. 85. Improvement also requires strong national leadership. The Government has begun to address the problem: for example, most aid is now recorded in the Draft 5 June

20 national budget. The Government has drafted jointly with development partners a Development Assistance Strategy (DAS) that sets out principles for support to Malawi in line with the Paris Declaration on Aid Effectiveness. But this has not yet been rolled out across government. 86. Development partners are beginning to address historically weak efforts at harmonisation. Annex 4 sets out the aid architecture. The second joint Government/ development partner programme review was held in May This focused on how the Paris Declaration is being implemented across 13 sectors. Much remains to be done if the government is going to improve on it s baseline performance as set out in the 2007 OECD baseline. Critical challenges include capacity constraints across government; weak public financial management, procurement and reporting systems; lack of a clear mechanism for enhancing harmonisation and lack of robust M&E systems. The Debt and Aid Division of the Ministry of Finance which is responsible for rolling out the development assistance strategy is working on an action plan which will focus on delivering improvements against the areas highlighted above over the next 12 months and beyond. 87. The UK is committed to making progress against the 12 targets set out in the Paris Declaration on Aid Effectiveness action plan. Many development partners are not yet being challenged to change their ways of working by Government or by each other. An action plan with clear indicators and deliverables against which government and donors can be measured (and challenged) will be a key mechanism for bringing about behaviour change in the future. There are opportunities to move this agenda forward over the next few years but success will be dependent upon the level of support by the HQs of the agencies participating. 88. DFID is also committed to the pursuit of a better division of labour 9. The choices made in this Country Plan take account of the sector choices of the other major donors, particularly the World Bank and EC. Over the period of this Country Plan DFID will aim to: Help GoM link the MGDS to the budget and ensure sector plans and support is linked to implementation. Promote active division of labour related to donor local knowledge and experience. Continue to link poverty reduction budget support to progress against public financial management Seek 100% coverage of DFID aid in GoM budget. Close our two project implementation units; seek to merge 3 donor Education PIUs into a single GoM Schools Infrastructure Agency; and develop a technical assistance pool funding in health. Provide greater predictability by agreeing a 10 year development partnership. Support the implementation of a 10 year education plan and support though pooled donor funding arrangements. 9 In line with the EU code of conduct on the division of labour Draft 5 June

21 89. The UK will support reform of the international system by supporting local UN efforts to harmonise its work in Malawi around one results based programme, one team and one head. DFID have encouraged the UN to take a further step and embrace one budget. Malawi has been added to the UN reform pilots in January In preparation for that, DFID will provide advice and support to the UN Resident Coordinator (RC) on the development of a local UN Transformation Fund to assist with the implementation of the reform programme over a three year period. The Fund will be jointly funded by interested donors. Some changes have already taken place. The RC has been given the lead by all UN agencies and will be accountable for the reform programme. A joint UN plan (UNDAF) has been agreed around 5 thematic areas. Each of these themes is now headed by one agency head acting on behalf of the RC and not on behalf oh the particular agency. This is an ambitious change. A draft business plan is already in place. By end 2009, we hope to see: - a resource mobilisation and allocation system in place; - one administration, financial and reporting system; - more rationalised use of operational and support staff across all agencies; - an accountability system for results with the RC empowered to make it work; 90. The success of UN reform will depend upon the level of support and engagement of each of the agencies. The Government also needs to show stronger leadership of the process. 91. The UK will also aim to build close working relations with the African Development Bank which opened a Malawi office in March Malawi has diplomatic relations with Taiwan, which limit its aid and commercial links with China. Malawi is attracting new bilateral relationships with some emphasis on people-to-people and institutional links Scotland, Flanders, Ireland and various Commonwealth associations. 93. Malawi is a member of the African Union (including 2 years on the Peace and Security Committee), NEPAD, SADC and COMESA. The AU currently has a limited influence on economic policies and capacity to translate policies into practice is weak. SADC is important for political reasons but the terms of trade are seen to be unfavourable for Malawi. COMESA represents a bigger market and is seen to be more useful economically. The Africa Peer Review is due to take place in 2007 with EC support. UK SUPPORT 94. The UK is committed to a long term and predictable partnership with Malawi to reduce poverty and achieve growth. Substantial external support will be needed into the long term to achieve the MDGs. The annual funding gap for the 5 year MGDS is at least $360m. Even with debt forgiveness and possible new aid flows, aid per capita is only expected to be $6 higher than the current $45 in five years time. Draft 5 June