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Malawi Public Expenditure Review Background and Overview PER Dissemination Workshop Capital Hotel, Lilongwe 21 November, 2007 Public Expenditure Review PER is not an audit of expenditures Scope is to assist Government to critically review its operations and the use of public resources: • Identify policies to support fast and equitable growth and wealth creation • Improve the effectiveness, quality, and equity in delivery of services to the people of Malawi Institutional arrangements for Malawi PER 2006 Prepared by GoM, with assistance by WB and CABS partners Preparation overseen by ‘PER Taskforce’ • GoM officials from line ministries • Chaired by Economic Affairs, in Ministry of Finance Chapters prepared by ‘PER Thematic Working Groups’, chaired by respective line ministry Good progress in Macroeconomic front since 2003/04 In 2003/04 Malawi was on the verge of a macroeconomic crisis Weak fiscal performance between 1999/00 to 2003/04: • Domestic debt at 25% of GDP • Domestic interest bill at 10% of GDP But since 2004/05 GoM has taken rapid steps to prevent a crisis, and has reestablished macroeconomic stability • Domestic debt down to below 14% of GDP in 2006/07 • Domestic interest bill down to 5% of GDP Malawi is now at a critical juncture Reduction in interest bill has released resources that can be channeled to priority expenditures GoM need to decide how best to utilize these resources: Report addresses two related questions: • How best can GoM use these resources to consolidate recent gains, and accelerate economic growth and poverty reduction? • What reforms should GoM pursue to improve efficiency and equity of public expenditures? What are the key priorities for GoM over the next few years? (i) stay the course with the macro economic program, and continue reduction of domestic debt burden (ii) continue to strengthen the budget process, payroll management, and debt management, and take action to protect public finances from the impact of external shocks, notably weather (iii) improve efficiency and equity of public expenditures by implementing the key measures recommended in this report How should GoM use the savings from domestic interest bill? In addition, a strategic balance must be struck between investing interest savings to: • (i) accelerate retirement of domestic debt, to achieve additional interest savings that can channeled to priority expenditures at a later stage • (ii) build up Malawi’s external reserves and/or purchase drought insurance, as coverage to protect against exogenous shocks • (iii) expand investments in infrastructure and/or social services, to boost growth rates and progress towards the MDGs The three ‘options’ above underpin much of the analysis in the PER GoM needs to carefully consider the costs and benefits of each option Structure of PER 2006 Discuss priorities in public financial management, including to protect against external shocks Identify measures to improve debt management, and reduce debt vulnerability Assess the implications of changing allocation of resources across sectors for growth, poverty, and MDGs Assess the efficiency and equity of expenditures in education, health, and roads (and assessment in agriculture is ongoing) • Four largest expenditure votes in the budget; account for almost 60 percent of total voted expenditures • Provide public services critical to accelerate growth Assess expenditures on nutrition • Added following the analysis in the 2006 Malawi Poverty and Vulnerability Assessment (MPVA) Headlines in Macro and Debt Reforms to strengthen budget process and payroll management should remain at the center of the reform agenda Reforms to insulate budget implementation from the impact of exogenous shocks should be pursued Changing allocations across sectors can be important but • Maintaining sound macroeconomic policies is critical for growth and human development indicators • Ensuring the ‘quality’ of public expenditures in all sectors is critical to accelerate growth and progress towards the MDGs Headlines in Education Efficiency of education expenditures is low Around 50 percent of the resources spent on primary education are wasted, due to drop outs and repetition Increasing number of qualified teachers is critical to raise quality & efficiency of primary education Two-track system in secondary (CSSs and CDSSs) is inequitable and inefficient Malawi’s University system is very inefficient The benefits from public spending in education are not equitably distributed Headlines in Health Two areas are critical to improve efficiency in the provision of health services: • (i) Lack of skilled health workers and overloading of the available staff results in low quality of services • (ii) Unavailability of even basic drugs, mainly due to slow progress in reforming the Central Medical Stores (CMS) Medium-term financing for meeting GoM’s target in HIV/AIDS programs needs to be urgently identified; available funding will run out within the next 2-3 years Headlines in Nutrition Malnutrition is the most severe challenge facing Malawians, irrespective of their income status and level of calorie consumption Current portfolio of nutrition interventions in Malawi does not prioritize cost-effective interventions Interventions are not targeted at the most vulnerable Headlines in Roads Road network is imbalanced: • Small network of main roads is mostly paved and in good condition • The rest of the network, mainly rural roads, is unpaved and mostly in poor condition Funds spent on routine maintenance, have been inadequate to meet maintenance needs of network There is a need to introduce planning and prioritization in road maintenance and construction activities There has not been a poverty focus in the road sector expenditure, and access to roads is heavily tilted in favour of the richest households Conclusions Many areas to improve efficiency and equity have been identified Real challenge is the implementation of the proposed reforms