Document of the International Development As: A acting as Administrator of the Interin Trust Fund FOR OFFICIAL USE' ONLY Report No. P-7150-CD REPORT AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED INTERIM FUND CREDIT IN AN AMOUNT OF SDR 18 MILLION TO THE REPUBLIC OF CHAD FOR A SECOND STRUCTURAL ADJUSTMENT CREDIT June 6, 1997 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS The CFA franc (CFAF) is pegged to the French Franc at the rate of FF1 100 CFAF. Year US$l = CFAF 1990 272.26 1991 282.11 1992 264.69 1993 283.16 1994 555.20 1995 506.50 1996 511.60 1997 572.00 METRIC SYSTEM WEIGHTS AND MEASURES Metric US Equivalent 1 meter (in) 3.28 feet (ft) 1 kilometer (km) 0.62 miles (mi) I hectare (ha) 2.47 acres (a) 1 kilogram (kg) 2.21 pounds (lb) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AFF Abattoires Frigorifiques de Farcha (Slaughterhouse) ANT Arm6e Nationale Tchadienne (Chadian National Army) BDT Banque de D6veloppement du Tchad (Development Bank of Chad) BTCD Banque Tchadienne de Cr6dit et des D6p6ts (Commercial Bank of Chad) BICIT Banque Internationale de Commerce et de l'Industrie (International Commercial and Industrial Bank) CDR Comit6 de D6mobilisation et R6insertion (Demobilization and Reinsertion Committee) CNPS Caisse Nationale de Prevoyance Sociale (Social Security Agency) CNRT Caisse Nationale de Retraite du Tchad (Retirement/Pension Fund) CSFC Comitd de Suivi de la Filibrc Coton (Cotton sector committee) Vice President Mr. Jean-Louis Sarbib Director Mr. David Berk Division Manager Mr. Luca Barbone Task Team Leader Mr. Alain D'Hoore, Country Economist FOR OFFICIAL USE ONLY COTONTCHAD Soci6t6 Cotonni6re du Tchad (Cotton processing and marketing company) DHS Direction Huilerie et Savonnerie de la COTONTCHAD (Oil and soap department of COTONTCHAD) ECOSIT Enqu6te sur la consommation de M6nage et le Secteur Informel Tchadien (Household survey) INT Imprimerie Nationale du Tchad (Publishing company) OHADA Organisation pour l'Harmonisation des Droits en Afrique (Organization to Harmonize Laws in Africa) ONDR Office National pour le D6veloppement Rural (Rural Development Office) ONHPV Office National de l'Hydraulique Pastorale et Villageoise (Rural Water Supply Agency) ONPT Office National des Postes et des T616communications (National Post and Telecommunications Office) SNER Soci6t6 Nationale de l'Entretien Routier (Road maintenance company) SONAPA Soci6t6 Nationale de Produits Animaux (Livestock products company) SONASUT Soci6t6 Nationale Sucrire du Tchad (Sugar company) SOTEC Soci6t6 d'Exploitation des Carri&res (Quarry exploitation company) STEE Soci6t6 Tchadienne d'Eau et d'Electricit6 (Water and electricity company) TCA Taxe sur le Chiffre d'Affaires (Turnover tax) TIT T616communications Intemationales du Tchad (International Telecommunications company) UDEAC Union Douani6re et Economique de l'Afrique Centrale (Central African Economic and Customs Union) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  REPUBLIC OF CHAD SECOND STRUCTURAL ADJUSTMENT CREDIT Table of contents Credit and program summary ..................i.... ............... I. Political, Social and Economic Background ................................... 1 A. Political Background.................................. ............. I B. Social and Economic Background . ...... ........................ ............................ 2 C. Past Experience with Adjustment ......................................... 3 D. The Role of Adjustment .........................3.... ............3 H. The Current Adjustment Program .......................................5 A. The Policy Reform Agenda 1995-1998 ..................... ........ 5 B. Program Implementation and Performance in 1996......... ..................8 I. Macroeconomic and financial performance........................8 II. Restoring Critical Public Sector Capacity and Improving Government Finances .................................. 10 III. Increasing the Development and Poverty Alleviating Impact of Public Expenditures...........................1 IV. Creating a Favorable Environment for Private Sector Growth...... 12 V. Assessment ......................3..... .............13 C. The 1997 Reform Agenda ........................................ 14 1. Restoring Critical Public Sector Capacity and Improving Government Finances ................................... ......... 14 II. Increasing the Development and Poverty Alleviating Impact of Public Expenditures......................... ........ 16 III. Creating a Favorable Environment for Private Sector Growth...... 17 IV. Ensuring Sustainable Demobilization and Reintegration................ 19 V. Cotton Sector Reform ............................. ..... 20 VI. Poverty Monitoring ...................................22 D. Prospects beyond the current Adjustment Program .......................22 M. The Proposed Credit .................................................. 23 A. The Credit and its Rationale ....................................... 23 B. Link to CAS............... ..................... ............25 C. Poverty Impact ................................................. 25 D. Benefits and Risks ................ .................. .......... 25 E. Disbursement Procedures and Implementation Arrangements ........... .....26 IV. Bank Group Operations .............................................27 A. Bank Portfolio......................................... 27 B. IFC and MIGA Activities .........................................27 V. Collaboration With The IMF And Other Donors..............................27 VI. Recommendation ................................................... 28 ANNEXES I. Economic Indicators II. Status of Bank Group Operations in Chad III. Policy Matrix IV. Selected Performance Indicators V. Letter of Development Policy VI. Supplementary Data Sheet Republic of Chad Second Structural Adjustment Credit Credit and Program Summary Beneficiary: Republic of Chad Amount: SDR 18 million (US$25 million equivalent) Terms: Standard IDA terms with 40 years maturity Description: The proposed operation will support Chad's adjustment program. The program aims to restore critical public sector capacity, reorient expenditures towards priority developmental sectors and facilitate the operation of the private sector. Specific measures include continued efforts at improving government revenues which are still critically low; the preparation of civil service reform; a continued switch in public expenditures towards priority sectors including primarily education and health; the implementation of a pilot reintegration program for demobilized soldiers; acceleration of public enterprise reform, especially in the sugar sector and in electricity and water; telecommunications sector reform; an acceleration of cotton sector reforms; and the development of poverty monitoring. Benefits: The operation would contribute to the Government's development strategy. Direct benefits include stronger growth performance and contributions to poverty alleviation, supported by macroeconomic stability, enhanced rule of law, increased public services in social sectors and infrastructure and a more favorable environment for private sector growth. Risks The operation is subject to several risks. The first is political. Though the country has engaged in a political reconciliation process that has culminated recently with the holding of a constitutional referendum, presidential elections in 1996 and legislative elections in early 1997, risks of unrest and localized military challenges to the current government cannot be excluded. Social opposition from the small but influential civil service unions cannot be excluded but the extensive consultation process that is envisaged to design civil service reform is geared towards associating social partners at all stages of the process and minimizing the risks of rupture. Finally, implementation capacity weaknesses could cause implementation of the program to stall. To mitigate this risk, the Government will continue to rely on the IDA-financed Capacity Building for Economic Management project. Poverty category: Poverty-focused operation, supporting policies that will contribute to faster growth and a shift in public expenditures towards social sectors. Macroeconomic and financial stabilization, efficiency gains from privatization, lower utility prices and improved supply, and increased provision of public infrastructure will all contribute to supporting private sector growth. The shift in expenditures towards social sectors, though still marginal in relation to the enormous social deficits in Chad, is a direct contribution to the fight against poverty. In addition, specific measures introduced in the 1997-98 reform program have drawn from the lessons of the Poverty Assessment: emphasis on cotton sector reforms and an increase in the share of world prices going to farmers, lower charges on farmers for the purchase of farm implements, lower real consumer prices for sugar, improvement in the security climate through effective reintegration of demobilized soldiers, and the setting up of an adequate poverty monitoring capability all are part of the Government's anti-poverty agenda. Appraisal Report: Not applicable Estimated Disbursements: The credit will be disbursed in one tranche following credit effectiveness, and will follow the Bank's new simplified disbursement procedures for structural adjustment operations. REPORT AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION (THE ASSOCIATION ACTING AS ADMINISTRATOR OF THE INTERIM TRUST FUND) TO THE REPUBLIC OF CHAD FOR A SECOND STRUCTURAL ADJUSTMENT CREDIT 1. I submit for your approval the following report and recommendation on a proposed second Structural Adjustment Credit (SAC) to the Republic of Chad for SDR18 million, the equivalent of US$25 million. The credit would be on standard IDA terms, with a maturity of 40 years. 2. The Credit would be the second in a proposed series of three single-tranche operations to support Chad's structural adjustment program. The first operation, in the amount of US$30 million, was approved in February 1996 and fully disbursed shortly thereafter. The program is described in the Policy Framework Paper (PFP) for 1996-98 and its updated 1997-98 portion is described in the attached Letter of Development Policy. The program aims at rehabilitating government finances and public sector capacity to sustain a core set of development-oriented services, focusing on economic management and the provision of social services, and at establishing an environment favorable for private sector growth. 3. The proposed second SAC is a key element in the continued implementation of the country assistance strategy (CAS) approved in early 1996. The CAS has four objectives: (i) restore critical public sector capacity; (ii) focus public expenditures on poverty reduction; (iii) create a favorable environment for private sector development; and (iv) promote sustainable use of natural resources. The second SAC would directly contribute to the first three objectives, and provide financial assistance needed to facilitate implementation of the program. I. POLITICAL, SOCIAL AND ECONOMIC BACKGROUND A. Political Background 4. Background. For almost two decades from the mid-seventies until the early 1990s, Chad's political history was one of instability and civil strife, characterized by virtually permanent conflict between warring internal factions or with external aggressors, and frequent changes in government. After taking power in December 1990, 1 President Idriss D6by embarked on a program of national political reconciliation and set a timetable to return the country to democratic rule. In 1993, a National Conference drafted a transition charter which included the establishment of an interim legislature and the preparation of a new constitution. As an integral component of this normalization program, motivated as well by public finance constraints, a multi-year program of reduction in the size of the army was launched, from an estimated 47,000 in 1991 to 26,000 in early 1996. 5. Recent Developments. The political transition to democracy has been successfully completed. The political reform agenda accelerated in 1996. In March, a new constitution was adopted by referendum, setting a calendar for presidential and legislative elections. The presidential election, which was won by the incumbent, took place in June and July 1996, and President D6by was sworn in on August 8. Legislative elections took place in early 1997, followed by a cabinet reshuffle. In parallel, agreements with major elements of remaining rebel forces were signed. Despite holding a majority in parliament, the party of the President ceded the chairmanship of the parliament to the main opposition leader, himself a historical figure of past internal dissension in Chad; the new cabinet also has members from opposition parties. B. Social and Economic Background 6. With a per-capita income of US$180 in 1996, Chad is among the ten poorest countries in the world. The few available social indicators illustrate the dramatic incidence of poverty in Chad. Life expectancy at birth is 47 years for males, and 55 years for females. Infant mortality was estimated in 1994 at 119 per thousand live births; under-5 mortality rates ranged from 131 to 285 per thousand among Chad's 14 administrative regions (prdfectures). Vaccination coverage rates (VCR) in 1992 were among the lowest by any standards, sub-regional, African or international, with VCR for, e.g., DPT and measles at respectively 10 and 25 percent. The share of population with access to safe water averages 24 percent nationally, although it is as low as 7 percent in one prefecture. The over-15 overall illiteracy rate was 87 percent in 1993, with the female rate at 95 percent; even among the 15-19 year age group which includes recent school-leavers, the illiteracy rate was 81 percent. 7. Total population was estimated at 6.5 million in 1996. About three-quarters of the population over 15 is economically active. Agriculture is the dominant activity, employing over 84 percent of the active population. Agricultural production is dominated by food crops, such as sorghum and millet, while cash-earning production includes cotton and peanuts in the southern, "sudanian", area and gum arabic, livestock and fishing in the middle, "sahelian", area. Because of low relative productivity, the primary sector accounts for only 40 percent of GDP. A small industrial sector, dominated by agro-industrial activities such as cotton ginning and sugar refining, accounts for about 20 percent of GDP, or $240 million, but generates little employment. Services, essentially formal and informal commerce and government services, account for the remainder. Cotton lint, livestock and gum arabic are the main exports. The 2 administration is small in size, with about 29,000 civil servants; overall, formal (contractual) employment occupies less than 3 percent of the total active population. C. Past Experience with Adjustment 8. In the aftermath of the devaluation of the CFA franc in early 1994, Chad initiated an adjustment program to correct past policy mistakes, restore financial stability and realize the incentive effects of the devaluation. The program comprised several measures to reduce public sector absorption, increase revenues and decrease the deficit; pass through some of the increase in the export price of cotton to producers to elicit a supply response; and mitigate the socially negative effects of the devaluation. The program was supported by an IMF Stand-by arrangement and the single-tranche IDA Economic Recovery Credit (ERC). Growth and inflation performance were broadly satisfactory in 1994. This deterioration of the performance in resource mobilization, with revenues falling to 6.9 percent of GDP, led to a weaker public financial situation than anticipated and additional recourse to accumulation of external and domestic arrears to finance the overall deficit which reached over 20 percent of GDP. Shortly after its inception, however, the program suffered implementation problems, due in large part to capacity weaknesses in revenue collection. The program was soon declared off-track and the Stand-by arrangement replaced by an IMF staff-monitored program, while the IDA Economic and Financial Management Technical Assistance project (Cr. 1872-CD) was quickly restructured to support program implementation, especially in revenue collection departments. 9. Despite these problems, the government took several important measures. It started to make improvements in the area of tax and customs administration; simplified the structure of domestic taxation; adopted the regional UDEAC tax and tariff reform program by simplifying and reducing indirect taxes on international transactions, removing most export taxes and eliminating licensing requirements for international trade; liberalized most domestic prices; and accelerated its divestiture program by liquidating 7 public enterprises and privatizing 5 others. These actions, as well as stronger commitment on the part of the authorities, led to a sharp improvement in performance and paved the way for the adoption of the current adjustment program. In February 1995, the Paris Club of official creditors granted Chad a rescheduling of eligible debt service arrears at end-March 1994 and debt service payments for the period April 1994 to March 1995. D. The Role of Adjustment 10. For two decades, Chad's growth potential was checked by civil strife, against a background of fundamental structural weaknesses, such as the low diversification of the economy and its exports, an extremely poor endowment in human capital and the country's landlocked geographical situation, which is made critical by its poor internal transport infrastructure. The combination of these factors considerably limited Chad's capacity to attract private investment and weakened the apparatus of the State, 3 contributing to unsustainable public finances, low debt sustainability and high dependence on official aid. This in turn constrained the provision, in adequate level and quality, of essential public goods, services and infrastructure. On the other hand, it also left Chad free of most of the policy distortions that characterized most other developing countries, and contributed to developing in the Chadian people a capacity for self-reliance and community organization for the provision of public services. 11. Chad's growth prospects are positive. The country is rich in natural resources and in its agricultural potential. Rapid, sustainable development and poverty alleviation require political stability, massive investment in human and infrastructural capital, and private investment for rapid economic growth. 12. The process of democratization and political reconciliation is addressing the issue of civil strife. Throughout this process, including at key popular consultations and during political debates, support for adjustment policies has been confirmed. The President reasserted his support to the program by appointing to key ministerial positions officials who had been instrumental in designing and initiating the implementation of the program. Political forces in Chad share a consensus on the proposition that political stability and democracy are required for economic and social development, and conversely that economic progress will strengthen political unity in the country. 13. The sustained increase in the country's human and infrastructural capital is a long- term investment process whose effects on growth and poverty will only be felt slowly. This investment process, in which the State has a key role to play, has three requirements: first, that macroeconomic and political stability be ensured; second, that private, community and public sector capacity to undertake and sustain investment be improved; and third that foreign financing be available to supplement domestic resources. Private investment, including foreign investment, essentially requires the same conditions. 14. The key contribution of current adjustment policies in Chad is to create the foundations of these processes; they are doing so by restoring the State's capacity to govern and perform its sovereign functions, including economic management for a sound macroeconomic environment; by enabling the administration to provide the minimum essential public goods and services - social services and public infrastructure which support development -, and paying for them; and by facilitating the operation of the private sector. 15. Policy reform is conducted not only at the national but also at the sub-regional level, as Chad is engaged in simultaneous regional integration efforts. Its monetary policy is conducted through the regional central bank (BEAC) of the central African monetary union; trade policies are set within the framework of the sub-regional UDEAC customs union; both areas are moving to closer integration under an economic and monetary community arrangement. Chad has also ratified the OHADA treaty on business law harmonization in Africa. 4 II. THE CURRENT ADJUSTMENT PROGRAM A. The Policy Reform Agenda 1995-1998. 16. In mid-1995, Chad adopted a new adjustment program. The program is described in the 3-year Policy Framework Paper for 1995-1998 distributed to the Executive Directors in September 1995. The PFP was updated in August 1996 to cover the period 1996-1999. The program's overall objectives are (i) to restore critical public sector capacity and improve government finances, (ii) to increase the developmental and poverty-alleviating impact of public expenditures, and (iii) to create a favorable environment for private sector growth. The detailed original reform agenda is presented for reference in Table 1, below. 17. The first objective is supported by (i) efforts to reform the civil service, redefine its mandates and improve its ability to deliver and (ii) improvements in the government's critically low resource mobilization capacity. Over the first two years of the program, the focus of the program has been more importantly on revenue mobilization. At the same time, the Government has come to realize that the design of a meaningful civil service reform strategy requires more preparation than originally envisaged. 18. The second objective is to pursue a switch in the composition of public spending towards developmental and poverty-alleviating expenditures, both sectorally (social sectors and infrastructure) and by type of expenditures (investment and maintenance), while public finances move towards medium term fiscal sustainability by achieving a level of total expenditures consistent with revenue raising, aid and sustainable borrowing capacity. An essential pre-requisite to fulfill this objective is the existence of sustainable strategies in social sectors. In 1997 and 1998, the Government will carry out a deep revision of its education strategy, and additional work towards establishing sustainability of its health strategy will also be undertaken. 19. To create an enabling environment for the private sector, the Government generally seeks to (i) continue to improve the judicial and regulatory environment, (ii) pursue its public enterprise divestiture program and (iii), along with privatization, pursue policy reform in key sectors that are still dominated by large public enterprises such as water and electricity, sugar, telecommunications and cotton. 20. As the program evolves, and knowledge is gained about the economy, the administration's implementation capacity and the degree to which specific reform measures genuinely impact the economy's performance, the program is redesigned on an on-going basis, within the broad directions of the medium-term framework. The status of implementation of measures under the 1996 agenda is presented in section II.B below and summarized in the attached matrix. Updates to this agenda is presented and explained in section II. C and summarized in the attached matrix. 5 Table 1: CHAD - Policy Reform Agenda, 1995-98 1995 1996 1997 1998 A. Restore Minimum Public Sector Capacity Civil Service Census Preparation of new Implementation of Continued civil service new organigram and implementation of organigram and merit- remuneration system new organigram and based remuneration remuneration system Indirect tax and Preparation of direct Implementation of Continued administrative reform; tax reform; continued direct tax reform; implementation of elimination of tax elimination of tax continued elimination direct tax reform; loopholes in special loopholes through of tax loopholes completion of enterprise regimes phase-out of special through phase-out of elimination of tax and exonerations; tax enterprise regimes. special enterprise loopholes through administration regimes. phase-out of special reforms; enterprise regimes. consolidation of budget accounts; abolition of off- budget operations. B. Increase the Development and Poverty Alleviation Impact of Public Expenditures Demobilization of Additional Completion of 7,00t soldiers demobilization reinsertion of towards target of at demobilized soldiers least 11,000 by 1998 Maintenance in real Increased budget Continued Continued switch in terms of budget share share of health, expenditure switch public expenditure of health and education and between development priorities; bring education and maintenance to begin services and security; priority sector share protection of switching expenditure implementation of in public expenditure allocations during priorities, revie%% strategy to increase to 62%-' of total; budget execution scope for increased direct community assessment of communit- provision proision of public community provision otpublic services services of public services (Continued) 6 Table 1: CHAD - Policy Reform Agenda, 1995-98 (continued) 1995 1996 1997 1998 C. Create a Favorable Environment for Private Sector Growth Liquidation of 4 Completion of Implementation of Continued enterprises privatization of 4 divestiture program of implementation of (SONACOT. BICIT, enterprises (Air Chad, SONASUT, ONPT, divestiture program of Caisse Sucre, FIP) INT, SONAPA. TIT, STEE and SONASUT, ONPT, and preparation to SOrEC). Preparation COTONTCHAD. TT, STEE and point of of divestiture of 5 COTONTCHAD. sale/privatization of 4 largest enterprises others (Air Chad. (SONASUT. OMPT, INT, SONAPA. TIT, STEE. SOTEC). COTONTCH-AD). Offer for privauization Conclusion of Implementation of Restructuring of of public share in privatization of BDT, debt settlement plans CNRT. BDTe BTCD and BTCD and BMBT; for CNPS and CNRT. replacement of action plan to settle partner for BMlBT. government debts to CNPS and CNRT. Re-establishment of Ratification of Implementation of Continued Ministry of Justice-d OHADA treaty and cotton sector human implementation of increase in cotton elaboration of resource development cotton sector human producer price: company and strategy. resource development freeze of ginning bankruptcy laws in strategy; capacity pending conformity implementation of reforms. Preparation of cotton cotton sector reform sector human resource strategy witin development study divestiture program as and strategy; above. adoption of two-part cotton pricing mechanism linked to world prices. Note: The implementation status of measures under 1996 is presented in section 1l.1 below and summarized in the attached matrix. Updates to this original reform agenda for its 1997-98 portion are presented in section I.C and summarized in the attached matrix. compay an B. Program Implementation and Performance in 1996 I. Macroeconomic and financial performance 21. Macroeconomic developments. Real GDP growth reached 2.7 percent in 1996, against an objective of 6 percent. A severe drought affected the sahelian area of the country, where it led to a 20 percent fall in the region's agricultural production. As a result, total agricultural value-added fell 3 percent. The rest of the economy grew by over 7 percent. Thus, the economy was able to withstand a large domestic shock to its agricultural sector with little spill-over into other sectors. As a result of the fall in agricultural supply, average prices increased above their long-term trend, with end-year inflation reaching 10.5 percent in 1996. However, the price level was declining in late 1996 and early 1997. 22. Despite a deterioration of the terms of trade, the current account of the balance of payments before grants improved marginally from a deficit of 20.5 percent of GDP in 1995 to 19.4 percent in 1996, largely as a result of an increase in net private transfers. As capital flows related to the execution of the public investment program increased, the overall balance of payments recorded a small surplus equivalent to about 1 percent of GDP. Table 2: Chad - Key Macroeconomic Indicators, 1993-98 1993 1994 1995 1996 1997 1998 lest.) (proj.) (proj.) Real Growth Rate (% p.a.) GDP -15.7 10.2 3.6 2.7 6.3 5.6 GDP per capita -17.8 7.6 1.1 0.2 3,7 3.0 Exports (GNFS) -4.5 0.5 29.6 7.5 719 10.0 Imports (GNFS) -10.4 -16.0 2.2 8.3 6,4 4,9 Ratios (% of GDP) Fixed Investment 11.0 18.7 17.9 19.3 20.7 213 Public 10.2 12.9 12,5 12.4 12.4 12.5 Private 0.8 5.8 54 6,9 8.3 8.8 Gross Domestic Savings -11,8 -8.0 1.5 2.6 58 8.3 Government Revenues 12.0 6.9 8,5 9.9 11.2 12.0 Government Expenditures 28.8 27,1 24.8 25.3 23.6 22.7 Wage Bill 7.8 5.6 5.7 5 I 4 6 4.4 CurrentExpenditures 17,8 14.2 12.3 12 4 11.3 10.1 Current Balance -6.5 -3.4 _1.0 -0.2 -0.1 1.9 Overall Budget Balance -16.8 -20.1 -16.3 -I54 -12 5 -107 Current Account (before Grants) -27.4 -29.7 -20.5 -19.4 -17.2 -15.5 Debt Service Ratio 16.7 12,9 10.1 10.3 10 19 10.5 GDP Deflator (% change) -1.3 43.3 10.0 11.1 4.4 3,5 8 23. Fiscal developments. Overall fiscal developments were mixed. Revenue targets were met while expenditure targets were missed. Nonetheless, overall expenditure envelopes remained relatively stable, allowing a reduction in the current and total deficit. Revenues rose from 8.5 percent of GDP in 1995 to 9.9 percent in 1996. Total government expenditures in relation to GDP increased from 24.8 percent in 1995 to 25.3 percent in 1996. Current expenditures increased from 12.3 percent of GDP in 1995 to 12.9 percent in 1996, against an objective of 12.4 percent, while investment expenditures remained at 12.4 percent of GDP. The direct budgetary cost of elections was equal to 0.6 percent of 1996 GDP. Thus, excluding exceptional spending, current expenditures were stable. Given the good revenue performance, the current deficit was reduced from 3.8 percent of GDP in 1995 to 2.9 percent of GDP in 1996. 24. The Government also cleared all its external arrears towards Paris Club and multilateral creditors. Cash repayments alone amounted to CFAF 13 billion, or 22 percent of government revenues. Remaining external arrears of about CFAF 4 billion to non-Paris Club bilateral creditors are being negotiated. The government also cleared CFAF 9 billion of arrears to domestic suppliers, short of the goal of CFAF 17 billion. 25. Progress towards fiscal sustainability. Chad's medium term framework envisages declining overall fiscal deficits. The primary and current balance will turn to a surplus, while the overall deficit should reach about 10 percent in 1999, from 20 percent in 1994. Despite such a rapid fiscal contraction, remaining high deficits may raise concerns of fiscal sustainability. However, these concerns have been factored in the setting of the medium term fiscal framework. First, a large fraction (over 80 percent) of these deficits is financed by grants from foreign donors, including the grant element of concessional loans, so that the contribution to debt accumulation is in fact small relative to the economy's potential growth rates. Second, Chad's public external debt is not high compared to countries in the sub-region and even under current deficit projections, the ratio of debt to GDP would continue to decline over the medium term. Third, the deficits are entirely generated by investment expenditures; sustainability issues thus revolve on the quality and return of public investment. Given the features of Chad's economy and geography, and the huge lag in development it had accumulated over the last two decades, a high level of investment is warranted, provided it is within the country's implementation capacity. Finally, the prospects of export and fiscal revenues from the exploitation of oil resources starting in 2001 considerably reduce concerns about external debt sustainability. As is argued below (see section II.D), the last two points are intimately related: oil revenues will not substitute for aid, but their most powerful impact will be to demand far-reaching improvement in economic management and capacity in general. 26. Medium-term framework. The medium term macroeconomic framework underlying the adjustment program has been updated to account for changes in 1996. The growth, balance of payments and fiscal prospects are broadly similar to last year's. 9 GDP growth is expected to be stronger in 1997 under the assumption that rainfall would return to normal, and upon continued strength in the modem sector. Private investment is expected to be stronger, even excluding the direct impact of the development of oil resources and the construction of a pipe-line in the south of the country. The domestic impact of oil sector development over the 1997-98 period are expected to be minor from an aggregate perspective, as investment will mostly consist of installation of imported equipment; since it will be fully financed by foreign sources, the direct balance of payment impact is also expected to be minor in the near future. External financing requirements (summarized in Annex I, p.6) have been marginally adjusted to reflect 1996 actual outcomes. II. Restoring Critical Public Sector Capacity and Improving Government Finances 27. Civil Service Reform. The government completed a civil service census in April 1996, which led to the removal from payroll of over 500 "ghost" workers, and work on new organizational charts in several ministries (inter alia, Finance, Plan and Education) was initiated. However, poor preliminary work and subsequent discussions with the authorities revealed that more preparation was needed to design and implement an effective reform program. First, designing such a program appears to be considerably more complex than initially envisaged, given the very administrative, legal, technical and financial constraints it is supposed to address. Though the Government recognizes the need for a sharp upgrade in management and performance of the civil service, it is also hesitant to undertake systemic administrative reforms given current capacity constraints. Second, systematic stakeholder consultation and involvement is required in order to achieve the degree of consensus which will make reform sustainable in the medium term. 28. Under these circumstances, and upon advice from Bank staff, the Government decided not to proceed with initial plans. As a result, the abolition of automatic (civil servant) wage increases and the adoption of a compensation system with selective increases based on merit did not take place in 1996. Work on new organizational charts for several ministries was initiated and implemented as envisaged, although it is unlikely to yield significant results in terms of improved performance. 29. Government Finances. Since the adoption of the current program, performance has improved dramatically, although revenue raising capacity remains limited (see Table 2). Revenues rose from 6.9 percent of GDP in 1994 to 8.3 percent and 9.9 percent in 1995 and 1996 respectively. This strong revenue performance was due largely to a strengthening of tax administration, in particular through internal reorganization at the Customs department; to the closing of tax loopholes which had been granted to a few large businesses through special tax conventions; and to a stricter application of tax laws, including the annulment of a ministerial arr& which had granted the reduced turnover tax (TCA) rate on certain goods and services without legal basis and the re-establishment of the full rate base for the TCA and excise tax on cigarettes. Rather than preparing a 10 direct tax reform for 1997 as originally envisaged, and upon receiving technical assistance from the IMF Fiscal Affairs Department, the authorities have chosen to focus further tax reform on improving the administration of indirect taxes including primarily customs and the TCA; in particular they have reorganized its administration for large taxpayers through the creation of a Large Enterprise Sub-directorate in the Tax Directorate of the Ministry of Finance. III. Increasing the Development and Poverty Alleviating Impact of Public Expenditures 30. Reorientation of Expenditures. The programmed switch in expenditures towards development priorities was only partially achieved in 1996. On the one hand, the share of wages in current expenditures declined and both budgetary allocations to priority sectors and their execution increased; on the other hand, weaknesses appeared in the execution of allocations to non-priority sectors. 31. The government made continued efforts at reducing the share of non-military wage expenditures in total spending in order to increase spending on goods and services and investment. The non-military wage bill declined from about 47 percent of current expenditures in 1995 to 40 percent in 1996. This represents a decline from 5.7 percent of GDP in 1995 to 5.1 percent in 1996. This was achieved essentially through a combination of limits on hiring and wage controls. Net additions to the civil service were limited to the education and health ministries, where 280 and 90 new recruits respectively are targeted each year. 32. These net additions represent a small increase in service provision in the sectors: for example, 280 new teachers represent a mere 4 percent of total public sector teachers (7,170 in 1995-96), thus allowing only a small increase in enrollment at existing pupil- teacher ratios. However, a more aggressive policy of recruitment is questionable from a sustainability point of view, given the budgetary implications of hiring full civil servants as teachers. An important element of the new education strategy will thus be to identify and finance alternatives to full civil servants. 33. Budgetary allocations for non-wage expenditures in education, health and social affairs were increased by 26 percent while the increase in total non-wage allocations was limited to 10 percent compared to actual 1995 expenditures. The execution rate of budget allocations to priority sectors increased to an average of 80 percent in 1996, while procurement problems in 1995 had held it below 70 percent. 34. However, under Chadian budgetary practices, allocations that are committed within the fiscal year but not executed are carried over into the next as arrears; in 1996, much of non-executed commitments from the 1995 budget were executed, in an amount equivalent to 25 percent of current year allocations, so that actual spending on priority sectors increased sharply from previous years. The major problem of slow execution rates is thus not so much that financial flows towards priorities are reduced but that 11 budgetary and operational management is impeded, leading to poor efficiency, delays and control problems in service and material delivery. 35. While budgetary execution in priority sectors, which was subjected to changing donor procurement rules, was slowed, weaknesses appeared in the control of non-wage expenditures in non-priority sectors, which recorded an overrun equivalent to about 5 percent of total current expenditures. The cause of the slippage was traced to the repeated use of exceptional budget procedures (dipenses non ordonnanc9es) which has since been severely curtailed. Other corrective measures have been introduced in a revised 1997 Budget Law (see paragraph 55). As a consequece, the share of education and health in current non-wage expenditure stayed constant at 18.7 percent, excluding carry-overs from the 1995 Budget. 36. Demobilization. To reduce the relative weight of military expenditures in total spending, as well as to enhance internal stability, the Government decided to pursue its demobilization program with financial and technical assistance from IDA. The CFA F counterpart of US$10 million from SAC I was set aside to fund the severance package for 7,000 officers and non-commissioned officers - about 22 percent of army staff - as well as operating costs of the demobilization and reinsertion unit. In the first phase of the program, which was delayed due to logistical problems but essentially completed by May 1997, some 7,000 soldiers were taken off the army payroll by official decree, while over 6,000 of them were gathered in five regional camps for identification, profiling and weapons retrieval, paid the first tranche of a four-tranche severance package equivalent to six months of statutory pay (about $1,100) and taken to a destination of their choice. 37. Because of the delay in demobilization, as well as lax controls in two military regions, military expenditures increased beyond the Government's fiscal targets by about 27 percent in nominal terms (about 15 percent in real terms) compared to 1995. The military budget targets assumed that demobilization of 7000 soldiers would have proceeded earlier in 1996. With the demobilization now completed, the Government decided to reduce 1997 budgetary allocations for military expenditure by 30 percent compared to actual 1996 expenditure. 38. Expenditure management. Finally, efforts at improving financial management were pursued, in part with the assistance provided under the Capacity Building for Economic Management project (Credit 2818, approved in February 1996). Budget execution monitoring improved and quarterly reports started to be published. Systematic reporting on the financial and physical implementation of the rolling 3-year Public Investment Program (PIP) also started to be carried out on a regular basis. For the first time in years, the Budget Law for the following year (1997) was prepared and adopted before the beginning of the fiscal year. IV. Creating a Favorable Environment for Private Sector Growth 39. Improve the judicial and regulatory environment. The regional OHADA business law harmonization treaty was ratified in early 1996 and a new Labor Code was 12 adopted and signed into law in December 1996. Work on simplification of business procedures was launched while some limited efforts to strengthen the judicial system were started with donor assistance, though much more remains to be done. The revision of the Investment Code began but is subject to the calendar of sub-regional work to harmonize investment codes in UDEAC countries which is still in progress. 40. Divestiture program and financial sector reforms. The privatization of INT (printing and publishing), SONAPA (animal products trading) and SOTEC (quarries) was completed, while the planned absorption of Air Tchad by Air Afrique, which would have effected Air Tchad's privatization, was interrupted due to Air Afrique's own financial problems. 41. Similarly, first attempts at privatizing the two banks, BDT and BTCD, faltered, as public share offerings of BDT in August 1996 failed. The Government had strictly followed recommendations of an independent audit firm and had set the offered price at a level advised by the auditors' financial analysis. The Government then promptly adapted its strategy to privatize these two banks and decided to launch a search for strategic partners to take them over before putting the residual minority block of shares for sale to the public. A preliminary plan to settle government debts to the pension companies, CNPS (private sector employees) and CNRT (public sector employees) was devised and first installments were made starting July 1996. Finally, preparatory work toward divestiture from the five largest enterprises, or policy reform of the sectors in which they operate, was carried out in 1996. 42. A study of the sugar sector and privatization prospects for the major sugar manufacturing company SONASUT was launched in early 1997, after a significant delay. On January 1, 1997 the company's import monopoly was lifted, and the Government put in place a temporary protection mechanism consistent with UDEAC trade policy reform. 43. Cotton sector. The human resource strategy study in the cotton parastatal, COTONTCHAD, has been completed and its recommendations will be implemented over several years, as it involves recruitment, training and assessment of performance. In April 1996, seed cotton producer prices were raised from FCFA 140 to FCFA 170 per kilo. A first draft study for a seed cotton producer pricing mechanism was completed in the second quarter of 1996. However, it was agreed that the quality of its conclusions was too weak to allow meaningful implementation for the 1996-97 crop season. The Government decided to pursue analytical work on pricing with a view to adopting a new pricing mechanism for the 1997-98 crop season (see paragraph 73). V. Assessment 44. While the focus of political attention was on the electoral calendar, the Chadian Government maintained the broad stance of its adjustment program. Some measures, such as demobilization, were implemented later in the year, while others suffered from inadequate preparation. This was particularly the case for civil service reform, where a reassessment of the program's objectives led to a sharp redesign. Chad cannot afford 13 social troubles over its much needed civil service reform; in addition, "learning-by- doing" during program implementation revealed that genuine ownership by the civil service itself, where much knowledge about its own internal problems resides, needed to be strengthened. Indeed, another legacy of two decades of civil strife is the absence of a tradition of civil service independence and initiative. 45. The program nevertheless achieved significant objectives: the country enjoyed its first full year of macroeconomic stability in a long time, while managing to weather a second consecutive drought; twelve months of civil service wages were paid for the first time in memory, allowing for example school teachers to remain in their classrooms to perform their duty; revenue collection continued to improve, with revenues increasing by 33 percent over the previous year; despite serious weaknesses, public expenditure management improved sharply; as a result, the overall budget deficit continued to decline; the divestiture program is proceeding - and the Government's privatization strategy enjoys wide consensus; once launched, demobilization proceeded at a remarkable pace through a transparent and carefully designed process; and all preparatory work for subsequent action has been launched, putting the Government in a position to take decisions fast. 46. After two decades of stagnation, and only two years of adjustment, the progress achieved has been significant, and warrants continued support. Moreover, the program's very progress has strengthened the commitment of the authorities as well as support from other political forces. Their resolve has been translated into 1997-98 agenda that sharply accelerates the implementation of far-reaching structural reforms. C. The 1997-98 Reform Agenda 47. The 1997-98 reform agenda pursues and accelerates the implementation of the adjustment program in six main directions. It will continue to (i) restore critical public sector capacity, (ii) switch expenditures towards developmental priorities, and (iii) provide an enabling environment for the private sector, including the pursuit of the divestiture program. In addition, it will (iv) launch the reintegration phase of the Government's demobilization program, (v) broaden and accelerate reform in the cotton sector, and (vi) emphasize poverty monitoring as a key component of economic management. I. Restoring Critical Public Sector Capacity and Improving Government Finances 48. The Government intends to pursue its ongoing agenda of (i) reforming its civil service, by laying out a participatory medium-term strategy. (ii) rehabilitating public finances mainly by improving tax collection and broadening the tax base. 49. Civil Service Reform. The rehabilitation of the civil service and its transformation into a well-managed professional body with clear mandates continue to be 14 important objectives to which the Government is committed. To ensure meaningful achievement of this objective in the long run, the Government will first undertake in 1997 internal consultation and diagnosis work with a view to setting priorities for a fully- owned civil service reform program. To signal clear political commitment to the process, the President has appointed a National Commission for Civil Service Reform, to be headed by the Prime Minister's office. The Government also recognizes that the challenge of optimizing the developmental impact of future oil resources requires a more profound redefinition of the role of its civil service and of its organization, especially with regard to the need for decentralization, and accelerated efforts to build its economic management capacity in the areas where the public sector has a major role to play. 50. The focus of this year's civil service reform program will thus be to lay out a medium-term strategy built on a thorough internal analysis and systematic consultation with civil society, donors and social partners. The medium term strategy would aim at redefining the mandates and improving the management of various ministries and government institutions, identifying the human resource implications of this program and implementing the transition. However, in view of continued problems in administrative control of civil service wages, the authorities have decided to maintain as an objective of the program the design of a compensation system eliminating automatic advancements, and as an indication of their commitment, have decided to allow grade advancement in 1997 without increases in individual wages. The system will be designed for implementation beginning in 1999. 51. Rehabilitation of Government Finances. The Government will continue its resource mobilization effort in 1997. Tax reforms which were prepared in 1996 have been incorporated in the 1997 Budget Law. In particular, indirect taxes on a few luxury items have been raised, the reduced rate of the TCA has been eliminated, (the only UDEAC country to do so), while excise taxes have been incorporated in the basis for calculation of the turnover tax. Exemptions from customs duties will be more tightly controlled. To that effect, the Government intends to introduce in mid-1997 a system of explicit assessment/reimbursement of indirect taxes on transactions financed under official foreign assistance which are normally exempted from these taxes. 52. The Government has also decided to prepare legislation to replace three taxes (the patente, business license fee; the business profit tax; and the TCA) by a synthetic tax (imp6t synthitique) for small businesses whose turnover does not exceed CFAF40 million. This reform should simplify tax collection, allow better enforcement and lead to a broadening of the tax base by facilitating taxation of the informal sector. The new tax will be introduced on January 1, 1998. Given continued efforts to improve tax collection and the introduction of new measures to broaden the tax base, overall revenues are targeted to reach over 11 percent of GDP in 1997. 15 II. Increasing the Development and Poverty Alleviating Impact of Public Expenditures 53. The Government intends to pursue its reform agenda by (i) continuing the reallocation of budgetary expenditures towards priority sectors, and (ii) upgrading its expenditure management capabilities. 54. Reallocation of Current Expenditures. The Government intends to accelerate the switch in public expenditures towards priority sectors. The wage bill will be kept constant in nominal terms. Net hiring in the civil service will again be limited to 280 primary school teachers and 90 primary health service workers. The government will thus create 280 new teaching posts in primary education, over and above the replacement of all departing primary school teachers and the reassignment of 100 teachers from non- teaching positions in the Ministry of Education to primary teaching ones. The government has also decided that at least 30 percent of new hires in education would be female, as a first step towards improving school enrollment rates for girls. However, the government is aware that these measures will only have a limited impact in the absence of a major overhaul of its current education strategy. Allocations for materials and supplies will increase from less than 18 percent of current expenditures in the 1996 Budget to about 21 percent in 1997. Non-wage allocations for education and health have been increased by 40 and 33 percent respectively, while allocations to non-priority sectors have been cut. On this basis, and given other measures (see next paragraph), the share of health and education (two of the four priority sectors) in total non-wage expenditures would increase from about 19 percent in 1996 to 34 percent in 1997. 55. To correct weaknesses in the execution of the 1996 Budget and compensate for the expenditure slippage so as to remain within the financial framework of the Program, the Government took strong corrective measures in a Revised 1997 Budget Law in March 1997. These include (i) additional measures to contain the growth in the wage bill, such as a continuation of a hiring freeze outside priority sectors, the freezing of the financial impact of automatic advancement and a 50 percent cut in indemnities; with these measures the wage bill should decrease in relation to GDP from 5.1 percent in 1996 to 4.6 percent in 1997; (ii) issuance of a Presidential Circular prohibiting spending by line ministries outside of normal budgetary procedures, which had been the major source of budgetary overruns; and (iii) a cut in non-priority sectors non-wage expenditures equivalent to about 15 percent of their 1996 actual level. Stronger controls on military expenditures have also been adopted and military wages will be paid on an individual basis, leading to some savings and better control. 56. Expenditure Management. The Government has reached agreement with IDA on the 1997 tranche of its updated PIP, which is mostly financed by external assistance, and required counterpart funds in the national 1997 Budget. In order to ensure the smooth implementation of investment projects, the Government will prepare a quarterly budget execution plan for counterpart funds and continue to monitor financial and physical implementation of the PIP, issuing quarterly reports for the former, and semi-annual 16 reports for the latter. With assistance provided under the IDA-financed Capacity Building for Economic Management project, the government will accelerate a training program for staff from the Ministry of Finance and Planning, in the areas of budgeting, accounting, planning, and project monitoring and management. 57. The Government recognizes that a sharp improvement in expenditure management is required to avoid the recurrence of problems that called for corrective measures in the revised 1997 Budget but also to improve expenditure efficiency towards the goals of development and poverty reduction. The expected arrival of large oil revenues in 2001 only makes this effort more urgent. The Government is preparing a medium-term action plan to address public expenditure management issues at three levels: (i) in the design of sustainable sectoral strategies and expenditure programs, such as in health, education and infrastructure, requiring in particular an integrated approach to the planning and execution of both recurrent and investment expenditures; (ii) in the development of macroeconomic management capacity; and (iii) in the upgrading of public financial management operations, including budgetary control and financial management processes and systems. III. Creating a Favorable Environment for Private Sector Growth 58. The Government is now entering the implementation phase of its remaining parastatal reform program, which deals with its five major enterprises, while it must complete the divestiture program for smaller enterprises. It has adopted a new telecommunications policy to be implemented over an 18 month period; a policy framework in the energy sector, centered on private participation; and is studying the privatization of its sugar manufacturing company in the context of a phase-out of the protection that the sector had enjoyed until recently. 59. Divestiture program. Of the 50 public enterprises in the Government portfolio in 1992, only 13 remain to be privatized or restructured. Under the 1997 program, the Government is committed to complete the privatization of 6 small to medium sized enterprises: the two banks, BDT and BTCD, a road maintenance company (SNER), a slaughterhouse (AFF), a hotel (Hotel du Chari) and a former public agency involved in rural water infrastructure (ONHPV). In addition, broad sector reform programs are envisaged for the 5 remaining large enterprises: the water and electricity utility (STEE), the sugar manufacturing company (SONASUT), the two telecommunications companies (ONPT and TIT) and the cotton parastatal (COTONTCHAD). Finally, a financial, actuarial and technical audit of the two pension companies (CNRT and CNPS) will be undertaken, with a view to restructuring the public employees pension company (CNRT). 60. Electricity and Water. The Government has adopted a Letter of Policy for its electricity sector. Its main objectives are to place STEE, the water and electricity parastatal, under private management with private participation in the financing of a major investment program. This program would expand electricity production and distribution, while sharply lowering its average cost which is one of the highest in the 17 world. A Sector Roundtable was held in April 1997 where Government, donors and potential private investors discussed the key parameters of the privatization program and conditions of effective implementation. Bids for the management of STEE by private investors will be solicited in the second half of 1997. 61. Sugar. After lifting the sugar import monopoly of the sugar manufacturing company SONASUT on January 1, 1997, the Government now intends to privatize it. Precise modalities remain to be established. The company operates under a relatively high level of protection and a key issue to determine is the speed at which this protection should be phased out. To answer these questions, a study has been launched in early 1997 and its conclusions should lead to Government decisions at end 1997, with the privatization effected in early 1998. 62. Telecommunications. In the context of its divestiture program, the Government initiated in 1995 and 1996 an action plan for the reorganization of its telecommunications sector centered on (i) the merger of the domestic telecommunications activities of the National Post and Telecommunications Office (ONPT) with the semi-private long- distance telecommunications company, TIT, (ii) the subsequent partial privatization of the newly-formed company, and (iii) the implementation of a long-term investment plan with public support. After careful review, it became clear however that this strategy would not, even in the long term, address the enormous supply deficit of the sector in the context of a growing economy. 63. New Telecommunications Policy Framework The Government has decided to adopt a new telecommunications sector strategy geared towards a medium-term closing of this supply gap to meet the needs of the Chadian economy, relying wherever possible on the private sector to finance and carry out investment as well as provide the technological upgrades that this medium-term goal entails. The three axes of this policy reform are: (i) to liberalize immediately the provision of all non-basic services, including cellular, data transmission, private phone booths, etc., and, after a transition period, basic services as well; (ii) to focus the main operator, which will be regulated as a private monopoly once privatized, on its core business to ensure a faster development of basic telephone infrastructures; and (iii) to reform the regulatory framework, including the transfer of all regulatory powers, after a transition period, to a unique public agency, and develop its capacity. 64. The Government has issued a Letter of Policy for its telecommunications sector, that outlines its main strategic options and a detailed action program. It will take immediate steps over a period of 12 months which would constitute the first phase of implementation of this new policy. First, a new legal and regulatory framework will be established. A Telecommunications Code will be adopted, setting the legal framework for the liberalization of the sector. Second, the Government will proceed with the merger of ONPT and TIT. Third, it will immediately begin to reinforce its regulatory capacity. And, fourth, once the Code is adopted and other regulatory and operational prerequisites are prepared for the core operator and for cellular operators (including technical 18 interconnection and pricing arrangements), a competitive bid process for the award of a cellular license will be launched. 65. At the same time, the Government will initiate the second phase of its program which will be implemented over an 18 months period. It will develop a strategy for its postal services; prepare a national strategy for the development of options for access to communication and information, including through private/public partnerships in geographical areas and subsectors where it is deemed unlikely that the private sector alone would invest; and prepare for the privatization of the new core operator for 1998. IV. Ensuring Sustainable Demobilization and Reintegration. 66. The demobilization and reintegration program, in addition to its impact on fiscal balance and political stability, is also a key component of the Government's policy to reinforce the rule of law. The Government is deeply aware of the need to ensure sustainability of its demobilization program by facilitating the successful reintegration of demobilized soldiers into civilian life. A broad reintegration program targeted at the 27,000 ex-combatants demobilized since 1992 has been prepared with donor assistance. The Government intends to seek external assistance to fund this program at a Donor Roundtable, scheduled for the last quarter of 1997. The Government has decided to test this program by launching a pilot reintegration program targeted at about 3,000 soldiers, and has asked IDA for limited financial assistance to finance this pilot. As for the demobilization, the Government would use part ($3 million) of the CFAF counterpart of the proceeds of the proposed credit to fund the pilot program. (See Box 1 for details) Box 1. Pilot Reintegration Program Background. Since 1992, nearly 27,000 soldiers of the Chadian Army (ANT) have been demobilized with assistance from France (through 1996) and the World Bank (1996/97). Upon discharge, they received severance payments to cover immediate needs. With limited skills and little education, the majority of these ex-combatants face severe problems to reintegrate economically into civilian life. Thus the Demobilization and Reintegration Committee (CDR) developed a reintegration program proposal, to be submitted to donors at the next general Donor Roundtable planned for late-1997. In the interim, the Chadian government proposes to implement a pilot reintegration program, which has been further developed by the CDR and the Bank. Objectives. The objectives of the one-year pilot reintegration program are fourfold: (a) to provide reintegration assistance to ex-combatants; (b) to set up the required institutional structure at the local level; (c) to bridge the gap until Roundtable funds are available; and (d) to test the viability of the program and institutional/implementation arrangements before expanding full-scale. Components. The pilot reintegration program consists of two components: (a) a pilot reintegration fund, to operate in four prefectures: a demand-driven tool to fund beneficiary-identified activities in agriculture, livestock, vocational training and self-employment. The pilot reintegration fund would reach approximately 2,500 beneficiaries, individuals or groups; and (b) an emergency fund, to operate nation-wide with central administration in N'Djamena: a fund to provide a safety net to about 3 percent of the 27,000 demobilized soldiers, approximately 800 of the most vulnerable ex-combatants and their dependents. Criteria for their selection are being developed by the CDR. The emergency fund would cover essentials such as food supplies, basic health assistance, school fees for children and minimum household utensils. Implementation arrangements. Upon discharge, ex-combatants returned to their communities throughout the country. It is necessary to put in place a minimal institutional structure in Chad's 14 prefectures to provide basic information 19 and counseling services and to monitor progress of veterans' social and economic reintegration. To that end, 14 prefectoral offices would be established. They would be assisted in each sub-prefecture by 1-2 counselors, themselves veterans of the previous demobilization program, who would serve as outreach agents to ex-combatants at the village level. The four pilot prefectoral offices would also employ NGO-experienced personnel knowledgeable in project planning and implementation. Local communities and NGOs. The participation of the local population is essential in facilitating the economic and social reintegration of ex-combatants. Local committees would be established at the prefectoral level. They would help advise on the selection of projects financed under the reintegration fund so that proposed activities mesh with or complement community priorities. The local committees would also play a critical role in sensitizing communities about the challenges of reintegration and in solving related problems. NGOs, both local and international, would provide technical assistance to the CDR and to the three pilot prefectures. They would also participate in the local committees and assist beneficiaries to identify and prepare proposals and implement projects. Costs. The costs for the pilot reintegration program are estimated at US$ 3.7 million, of which US$ 2.1 million for direct reintegration assistance and US$ 1.1 million to set up the institutional structure required for a 3-4 year program. The direct reintegration assistance, consisting of the reintegration and emergency funds, would test the concepts of the pilot program during one year. The institutional investments (skeleton office structure and staff, vehicles) in 14 prefectures during the pilot phase are required to lay the ground for the next phase, which would entail reintegration of the remaining 24,500 ex-combatants. Technical assistance for program implementation, external audits, an impact assessment and the management information system would comprise US$ 0.3 million, and contingencies would be US$ 0.2 million. V. Cotton Sector Reform 67. Background. The cotton sector is one of the key sectors of the Chadian economy. It contributes over 50 percent of exports and about 8 percent of GDP; has a significant impact on public finances; and is a key source of monetization of the rural economy. Available evidence also suggests that cotton provides an essential source of cash income to many poor farmers in the southern part of Chad where cotton is grown and sustains some 345,000 farm households. The poverty dimensions of the cotton sector have been highlighted in the forthcoming Poverty Assessment (see Section III. C below) 68. The sector is currently dominated by a public monopoly (with a small private foreign participation), the agro-industrial company COTONTCHAD, which, in addition to the ginning of seed cotton and the export of cotton fiber, performs numerous roles in the sector, including cotton grade selection, provision of inputs on credit to farmers, and collection and transportation of seed cotton. The sector is thus characterized by significant vertical integration, public ownership, monopolistic features and centralized administrative organization of production or commercial decisions at most levels of the value-added chain. In addition, until recently, farmers' prices, which must be regulated given the sector structure, were set in a discretionary fashion by the Government, which tended de facto to give disproportionate weight to the company's financial interest or to its own fiscal needs. 69. These features have not ensured efficiency of the company on a sustainable basis and have made the Chadian cotton sector susceptible to recurrent financial crises, especially when world prices were low, requiring donor intervention to prevent major economic and social crises; conversely, when world prices were high, these features have resulted in sometimes massive transfers of monopoly rents away from farmers to other 20 stakeholders in the sector, resulting in a vastly inequitable distribution of the sector's income; they have forbidden, preempted or discouraged the entry of private investors or the development of private market intermediaries at most levels of the sector (farm input procurement and distribution; credit provision to farmers; transport and storage services; trade in seed cotton; ginning; trade in lint; production, investment and trade in by- products such as cotton oil and soap or cotton cake); they have limited the extent of product diversification (cotton quality grades) to that best suited to the interests of the company; they have induced excessive political influence in pricing, investment and production decisions; and they have generally resulted in farmers' interests being given secondary weight, as exemplified by their small average share in output prices, and as a result, have muted their incentives to increase productivity. 70. Reform program. The cotton sector reform program that the Government has adopted addresses these features. At the core of this program is the goal of opening up the sector to create in the medium to long term the type of competitive conditions that will enforce economic and financial discipline, sustain incentives to improve the performance and efficiency of all actors, replace administrative controls by market-based (or market-compatible) mechanisms and tip the balance of economic power away from a monopolistic government-supported institution, including in the setting of seed cotton price and the share of output prices that accrue to farmers. Competition, whether actual or potential, will also enhance the flexibility and resiliency of the sector in the face of the likely negative impact of the expected oil boom on the tradable sectors of the Chadian economy after 2001, and is thus an integral part of the Government strategy to deal with the potential for a so-called Dutch disease. Competitive conditions however cannot be created overnight, neither can market mechanisms be mandated to come into existence. In addition, the role of government will neither be reduced nor disappear but will change substantially. Significantly also, these conditions are now deemed to be pre-requisites of divestiture, thereby avoiding the creation of a private monopoly. 71. The first key measure that the Government will take is to remove the de jure exclusivities on all activities performed by COTONTCHAD. Thus the legal monopsony (buyer monopoly) on seed cotton, and the legal monopolies on ginning and export will be lifted. The Government will first renegotiate the COTONTCHAD shareholders agreement with existing partners and adapt all legal and regulatory provisions accordingly, including the company's legal by-laws and its Tax Convention. The Government will announce the lifting of the monopoly in December 1997, for the measure to be effective in June 1998 at the latest, after the current crop season is completed. Practical modalities for allowing entry into the sector will also be defined whenever necessary. 72. The other components of the reform package include: (i) a new seed cotton price regulation mechanism, aimed at increasing the share of the output prices (both lint and seed) accruing to farmers, reflecting movements in world prices in an automatic, non- arbitrary fashion, and providing incentives for the company to improve its efficiency; (ii) a reduction in parafiscal charges on the purchase of basic farm implements from the 21 public rural development agency (ONDR); (iii) a strengthening and adaptation of the regulatory role of government; (iv) the inclusion of farmer representatives on the cotton sector monitoring committee (the Comiti de Suivi et de Rflexion de la Filire Coton); and (v) a company restructuring program, centered on spinning off non-core activities, decentralizing operations, and adopting a new human resource strategy to lessen the company's dependence on expensive foreign technical assistance. The Government will also launch a pilot experiment in selected cotton producing areas where upstream functions (input and credit provision) that are now performed by COTONTCHAD will be taken over and managed by producer organizations. 73. The new seed cotton pricing mechanism has been adopted as part of the 1996 reform agenda, resulting in an increase of 3.5 percentage points in the share of lint price accruing to farmers. Its originality stems from basing producer prices on an international cotton lint price index as reference rather than the company's own export sale prices, leading to more transparency and better incentives for the company in its marketing efforts. A decree restructuring the Comiti de Suivi and establishing farmer participation has been issued. Finally, a new price list for farm implements sold through ONDR has been published, with price reductions of about 15 percent on most items. 74. The reform agenda is by no means complete. Further work is needed to better define the roles of existing and potential actors in the sector, to optimally regulate it and build capacity to do so, and to ensure a smooth but effective transition to a genuinely competitive environment in input provision, primary marketing of seed cotton, ginning and export marketing, including through further support to producer organizations, provision of infrastructure, and implementation of a sustainable rural credit system not biased toward cotton cultivation. VI. Poverty Monitoring 75. The Government is committed to putting poverty alleviation at the center of its economic strategy. In order to do so, a benchmark national household survey needs to be carried out and systematic poverty monitoring indicators need to be put in place. As a preliminary step, the regional ECOSIT survey will be completed and its results made available to the community of researchers. The Government will then lay out a medium- term statistical investment plan whose main goal will be to improve poverty monitoring and mainstream it in economic management. D. Prospects beyond the current Adjustment Program 76. Commercial exploitation of oil resources in the south of the country is scheduled to begin in 2001, leading to an increase in government revenues in the order of 8 percent of GDP and a sharp increase in exports. Windfall petroleum revenues present Chad with both a unique opportunity to accelerate the country's development and substantial downside risks. There is no blueprint for properly managing an economy during an oil boom, and international experience is richer in pitfalls to avoid than in positive outcomes. 22 Through advance preparation and capacity building, Chad could prevent or lessen the incidence of problems created by the sudden influx of the new resources, and put in place policies and management systems to absorb those resources efficiently for sustainable development. 77. The windfall, although substantial, will not remove Chad's need for external assistance, nor make it creditworthy for commercial borrowing, but it will considerably improve Chad's debt sustainability prospects and create a massive incentive to build local capacity in ways that will alter Chad's aid dependency. Projected revenues to the Government would average US$110 millions per year over 25 years (at current price assumptions), less than the total amount of external assistance received in 1996. If oil revenues fully substitute for foreign aid, the net impact on the fiscal picture and the ability to finance developmental expenditures will be minimal. If Chad's absorptive capacity can be made to increase over the next few years, the combination of oil and aid would offer significant potential to undertake the large public investment programs, in social sectors and public infrastructure, that would be needed to remedy the huge deficits in these sectors and accelerate the fight against poverty. 78. The Chadian authorities are keenly aware of the challenges they face. They are determined to apply forthcoming oil revenues towards sustainable development. Their concerns include alleviating widespread poverty through the generation of income- earning opportunities, especially in the rural economy, and improved education and health, as well as safeguarding the interests of future generations. They realize that sound economic management during the "petroleum era" requires extensive preparation, far- reaching policy reforms, and early capacity building. A Preparation Strategy will be designed and launched during the latter part of 1997, and the Government will issue a Letter of Policy to outline the components of this strategy. III. THE PROPOSED CREDIT A. The Credit and its Rationale 79. The proposed credit is a single-tranche operation, with the proceeds to be disbursed against measures taken up-front. It would be the second in the series of three operations envisaged to support the Government's current adjustment program. Its counterpart funds, equivalent to about 9 percent of total expenditures, would help close, along with other donors, the 1997 budget financing gap, and assist in funding essential public services, external debt and the reduction of domestic arrears. In addition, the counterpart of $3 million of credit proceeds would cover the additional cost of setting up the pilot reintegration program whose budgetary implications had not been anticipated in the original fiscal framework. 23 80. The Credit would continue support to the Government reform program on the basis of (i) satisfactory progress already achieved on the overall reform program, including the implementation of measures outlined for 1996 in the first SAC (paragraphs 21 to 40 above) and additional up-front actions, (ii) the maintenance of the agreed macroeconomic framework, and (iii) the preparation of the detailed 1997 program, in line with the three-year framework (paragraphs 44 to 72 above). 81. While, at the time of SAC I presentation, the proposed SAC I was anticipated to take place in the first quarter of 1997, its presentation has been postponed to allow the authorities to complete key measures of the 1996 part of the agenda under SAC I such as (i) demobilization of 7,000 (which actually led to 7,270 decrees or arritds of demobilization), and (ii) the adoption of a new cotton producer price mechanism, as well as up-front actions in addition to the 1996 reform agenda. These up-front actions include: (i) the adoption of a Revised 1997 Budget and 1997-99 Public Investment Program with a sharp increase in allocations to social sectors, a reduction in the wage bill, cuts in non- priority expenditures, additional revenue raising measures, and a presidential Circular prohibiting the use of exceptional spending procedures; (ii) the adoption of a Letter of Policy in the electricity sector, committing the Government to privatization of its water and electricity utility; (iii) the adoption of a Letter of Policy in the post and telecommunications Sector, outlining the Government's liberalization strategy; (iv) the creation and appointment of members of a National Commission for Civil Service Reform; (v) the inclusion, by official decree, of farmer representatives in the Cotton Sector Monitoring Committee; (vi) a reduction by an average 15 percent of parafiscal charges on cash and credit sales of farm implements by the public rural development agency. 82. The Government would pursue implementation of its 1995-98 reform policy agenda, updated on the basis of implementation experience and knowledge gained through preparatory work for the current operation. This is in line with the Bank's strategy of supporting a medium-term reform framework through single-tranche operations, when the key directions of a coherent set of reforms are identified and agreed upon but precise implementation steps need to be elaborated as the program proceeds. 83. The specific elements of the 1997-98 program are summarized in the attached Letter of Government Policy. The key components of this program are (i) maintenance of the macroeconomic and fiscal framework, including significant progress towards expenditure switching, (ii) lifting of the COTONTCHAD monopolies and progress in the overall sector reform program, (iii) substantial completion of the divestiture program, including the banks and the electricity and water utility, (iv) adoption of a new Telecommunications Code and (v) the adoption of a satisfactory phasing-out of sugar sector protection along with the company's privatization. The program is ambitious as it deals simultaneously with many sectors or structural issues, but it reflects strong government commitment. Preparatory work on all these measures is already in progress. However, the detailed schedule of actions has been set assuming that no significant 24 outside factors (political or social unrest, external shock, major institutional change, etc.) will complicate implementation. B. Link to CAS 84. The proposed second single-tranche Structural Adjustment Credit is consistent with the high case scenario of the Country Assistance Strategy (CAS) for Chad discussed by the Executive Directors in January 1996. The CAS has four objectives: (i) o restore critical public sector capacity; (ii) focus public expenditures on poverty reduction; (iii) create a favorable environment for private sector development; and (iv) promote sustainable use of natural resources. The adjustment program, and the proposed Credit which supports it, directly address the first three of these objectives. The CAS envisions a sequence of three such single-tranche SACs, each based on actions already taken. The proposed operation would be the second in the series. C. Poverty Impact 85. Neither the proposed Credit nor the adjustment program itself can resolve the enormous poverty problems facing Chad. The program nevertheless makes several contributions to the goal of poverty alleviation. A draft Poverty Assessment, distributed to the Government in May 1997 for discussion, has highlighted the nature and dimensions of poverty, especially in rural Chad, and made preliminary identification of the broad components of a strategy to alleviate it. 86. The operation will contribute to poverty alleviation by supporting policies that will contribute to faster growth and by supporting the shift in public expenditures towards social sectors. Macroeconomic and financial stabilization, efficiency gains from privatization, lower utility prices and improved supply, and increased provision of public infrastructure will all contribute to supporting private sector growth. The shift in expenditures towards social sectors, though still marginal in relation to the enormous social deficits in Chad, is a direct contribution to the fight against poverty. In addition, specific measures introduced in the 1997-98 reform program have drawn from the lessons of the Poverty Assessment: emphasis on cotton sector reforms and an increase in the share of world prices going to farmers, lower charges on farmers for the purchase of farm implements, lower real consumer prices for sugar, improvement in the security climate through effective reintegration of demobilized soldiers, and the setting up of an adequate poverty monitoring capability all are part of the Government's anti-poverty agenda. D. Benefits and Risks 87. Benefits. The operation would contribute to the Government's development strategy. Direct benefits include stronger growth performance and contributions to poverty alleviation, supported by macroeconomic stability, enhanced rule of law, increased public services in social sectors and infrastructure and a more favorable environment for private sector growth. 25 88. Risks. The operation is subject to several risks. The first is political. Though the country has engaged in a political reconciliation process that has culminated recently with the holding of a constitutional referendum, presidential elections in 1996 and legislative elections in early 1997, risks of unrest and localized military challenges to the current government cannot be excluded. In addition, the Government will have to learn to live in a different policy making environment with parliamentarians. Despite holding a parliamentary majority, the leading political party has sought to associate other parties in the leadership of the parliament, and the newly appointed cabinet also reflects an attempt to build consensus in policy making. 89. Social opposition from the small but influential civil service unions cannot be excluded but the extensive consultation process that is envisaged to design civil service reform is geared to associating social partners at all stages of the process and minimizing the risks of rupture. Finally, implementation capacity weaknesses could cause implementation of the program to stall. To mitigate this risk, the Government will continue to rely on the IDA-financed Capacity Building for Economic Management project. E. Disbursement Procedures and Implementation Arrangements 90. The proposed Credit will be disbursed in one tranche. It will follow the Bank's new simplified disbursement procedures for structural adjustment operations immediately upon effectiveness of the Credit Agreement. Proceeds of the Credit will be deposited by IDA in a Central Bank account at the request of the Borrower. If, after deposit in this account, the proceeds of the credit are used for ineligible purposes (i.e. to finance items imported from non-member countries, or goods on the Bank's standard negative list), IDA will require the Borrower to either: (a) return that amount to the account for use for eligible purposes; or (b) refund the amount directly to IDA. The administration of the Credit will be the responsibility of the Minister of Finance. Although an audit of the deposit account will not be required, the Bank reserves the right to require audits at any time. 91. Implementation of the adjustment program is under the direct supervision of the High Interministerial Committee for Adjustment at the political level and a Technical Committee for Adjustment at the technical level. A Structural Adjustment Monitoring Unit monitors the program and produces quarterly implementation reports. In addition, IDA will monitor the program's implementation through regular supervision missions. 26 IV. BANK GROUP OPERATIONS A. Bank Portfolio 92. The currently active portfolio in Chad consists of 9 IDA-financed investment operations as of June 1997. The performance of the portfolio declined from having no unsatisfactory projects in FY95 to three projects that are rated unsatisfactory for both implementation and development objectives. Discussions are in progress with Government to reach agreement to restructure these projects or to cancel the credits. Disbursements for the Public Works and Capacity Building Project, an urban small works project supporting the private sector, were suspended in March 1997 due to poor project management. Total commitments for the nine current projects are US$193.5 million with an undisbursed balance of US$93.6 million. Total disbursements reached US$68 million in FY96 compared to US$47 million in FY95 and US$28 million in FY94. 93. The main constraint is the weak institutional capacity that continues to adversely affect project implementation in areas such as accounting, auditing and project management. With support from the former T.A. project for Economic and Financial Management, the current Capacity Building for Economic Management Project, as well as capacity building components in other projects, efforts will continue to be made to build the needed institutional capacity. B. IFC and MIGA Activities 94. Chad is expected to become a member of IFC in 1997. IFC is likely to participate directly and as an arranger in the financing plan for the Chad-Cameroon pipe-line project which is scheduled to start in mid-1998. Other potential private investment opportunities for which IFC's interest is being sought by Government also exist in other sectors, such as in the utilities. Chad is not a member of MIGA. V. COLLABORATION WITH THE IMF AND OTHER DONORS 95. The Bank has worked closely with the IMF and other donors (mainly France, the European Union and the African Development Bank) in helping Chad design and prepare its program, as well as mobilizing adjustment assistance and debt relief. The Bank and IMF collaborated with the Chadian authorities on the preparation of the PFP. The IMF approved a three-year arrangement under the ESAF in September 1995, covering the period from July 1995 to June 1998. Financing under the first and second year arrangements have been fully disbursed. A UNDP-sponsored general Donor Roundtable is scheduled for end 1997. 27 VI. RECOMMENDATION 96. I am satisfied that the proposed Interim Fund Credit would comply with Resolution No. 184 adopted by the Board of Governors of the Association on June 26, 1996, establishing the Interim Trust Fund and I recommend that the President approve it. Gautan Kaji Managing Director Washington, D.C. June 6, 1997 28 Annex I Page I of 6 Chad at a glance Sub- POVERTY and SOCIAL Saharan Low- Chad Africa Income Development diamond* Population mid-1995 (mlilons) 6.4 589 3,188 GNP per capita 1995 (USS) 180 490 480 Life expectancy GNP 1995 (billions USS) 1.1 289 1,466 Average annual growth, 1990-95 Population (%) 2.5 2.8 1.8 GNP Gross Labor force (%) 2.7 2.8 1.9 p Iper primary Most recent estimate (latest year available since 1989) capita enrolment Poverty: headcount index (% of population) Urban population (% of total population) 21 31 29 Life expectancy at birth (years) 48 52 63 Infant mortality (per 1,000 live births) 117 92 58 Access to safe water Child malnutrition (% of children under 5) .. .. 38 Access to safe water (% of population) 33 47 75 illiteracy (% of population age 15+) 52 43 34 Gross primary enrollment (% of schooi-age population) 59 71 105 Male 80 77 112 - Lowncome group Female 38 64 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1994 1996 GDP (millions USS) 608.6 727.1 761.2 938.8 Economic ratm' Gross domestic investment/GDP 23.0 8.2 15.1 154 Openness of economy Exports of goods and non-factor services/GOP 20.5 16.9 24.3 27.7 Gross domestic savings/GDP 6.8 -19.4 -5.5 -3.4 Gross national savings/GDP 4.9 -18.7 -7.6 -5.7 Current account balance/GDP -22.0 -30.4 -21.6 -22.1 Interest payments/GDP 0.2 0.3 0.6 1.7 Savings Investment Total debtlGDP 15.2 26.4 104.7 93.2 Total debt servicelexports 6.4 17.6 6.8 10.1 Present value of debt/GDP .. .. 53.0 47.4 Present value of debt/exports .. .. 210.0 169.7 Indebtednes 1976-44 1986-96 1994 1996 199644 (average annual growth) - Chad GDP -1.8 3.2 5.2 5.5 5.2 GNP per capita -3.7 0.6 2.5 2.9 2.8 --- Low-income group Exports of goods and nfs -1.6 0.8 -13.5 26.2 7.4 STRUCTURE of the ECONOMY 1975 1985 1994 1996 (% of GDP) Growth rates of output and Investment (%) Agriculture 45.5 45.2 40.4 40.3 20 Industry 20.8 17.6 16.7 16.6 Manufacturing 19.2 15.9 15.0 14.9 1o Services 33.7 37.3 42.9 43.1 o Private consumption 67.9 102.7 90.3 93.3 .10 General government consumption 25.3 16.7 15.2 10.1 Imports of goods and non-factor services 36.7 44.5 44.8 46.4 GDI GDP 1976-84 1986-96 1994 1996 (average annual growth) Growth rates of exports and imports (%) Agriculture -1.5 4.9 13.3 5.7 so Industry -2.2 1.6 -4.6 5.0 Manufacturing .. 1.9 -5.2 5.0 15 Services -1.2 1.9 0.8 3.3 Private consumption .. 2.7 3.0 8.1 General government consumption .. 1.6 -35.1 -10.2 Gross domestic investment .. 2.5 7.1 17.3 -ae imports of goods and non-factor services -4.S -0.1 -28.6 25.5 Exot -Q imports Gross national product -1.8 3.2 5.4 5.1 Note: 1995 date are preliminary estimates. The diamonds show four key Indicators In the country (in bold) compared with Its income-group average. If date are missing, the diamond will be incomplete. Annex I Page 2 of 6 Chad PRICES and GOVERNMENT FINANCE 1975 1986 1994 1998 Dom e rces Inflation I%) (% change) s0 Consumer prices .. .. 41.3 6.5 Implicit GDP deflator 8.6 -4.2 38.2 6.6 25 Government finance o (% of GDP) 9 9 04 a5 Current revenue .. 6.5 7.4 9.0 Current budget balance .. -1.1 7.8 4.1 - GDPdef -O-CPI Overall surplus/deficit .. -89 -21.8 -18.1 TRADE 1975 1985 1994 1995 (millions US$) Export and Import levels (mill. US$) Total exports (fob) .. 88 148 205 son Cotton .. 44 52 103 Meat .. 26 41 39 o ,00 Manufactures .. 5 0 1 Total imports (cif) .. 185 245 228 2o-- Food .. 5 4 Fuel and energy .. 19 8 8 m Capital goods .. 54 83 85 Export price index (1987=100) .. .. 113 124 s so 91 92 93 94 95 Import price index (1987=100) .. .. 133 92 o Exports m Imports Terms of trade (1987=100) .. .. 85 135 BALANCE of PAYMENTS 1975 1985 1994 1995 (milfons US$) Current account balance to GDP ratio (%) Exports of goods and non-factor services 102 94 185 260 - Imports of goods and non-factor services 227 320 342 436 s 90 91 92 93 94 95 Resource balance -125 -226 -157 -176 Net factor income -1 -2 -8 -13 -10 Net current transfers -8 7 -8 -9 Current account balance, before official transfers -134 -221 -173 -199 Financing items (net) 121 199 245 181 Changes in net reserves 12 22 -72 19 -30 Memo: Reserves including gold (mill. USS) 3 37 89 103 Conversion rate (locekUSS) 214.3 449.3 555.2 506.5 EXTERNAL DEBT and RESOURCE FLOWS 1976 1985 1994 1996 (millions USS) Composition of total debt, 1994 (mill. US$) Total debt outstanding and disbursed 93 192 797 875 IBRD 0 0 0 0 F 0 IDA 11 40 320 379 Total debt service 7 18 26 32 E IBRD 0 0 0 0 B IDA 0 5 3 4 320 Composition of net resource flows Official grants 27 126 109 129 Official creditors 18 5 45 70 Private creditors 0 -6 -1 -1 D Foreign direct Investment 20 54 7 1 250 C Portfolio equity 0 0 0 0 43 World Bank program Commitments 5 0 56 67 A - IBRD E - Bilateral Disbursements 5 4 19 42 B - IDA D - Other multilateral F - Private Principal repayments 0 4 1 1 C-IMF G - Short-term Net flows 5 0 18 41 Interest payments 0 1 2 3 Net transfers 5 -1 16 38 International Economics Department 9127/96 Chad - Key Economic Indicators Annex I Page 3 of 6 Estimate Projections 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Real arowth rates (%) Gross domestic product (GDPmp) 8.3 8.0 -15.7 102 3.6 2.7 6.3 5.6 5.6 5.6 Gross domestic income (GDY) 6.4 10.4 -18,5 129 2.3 1.7 5.2 5.3 4.0 5.6 Real per capita arowth rates (%) Gross domestic product 5.7 5.4 -17.8 7 5 1.1 0.2 3.7 3.0 3.0 3.0 Gross domestic income 3.8 7.7 -20.5 102 -0.2 -0.8 2.7 2.7 1.4 3.1 Total consumption 12.8 3.9 -19.2 07 -4.0 -0.3 3.2 1.5 2.2 2.8 Private consumption 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0 Debt and debt servicine (MT & LT) Total DOD (USS million) 610 710 757 708 781 822 810 865 900 1029 DOD/GDP (%) 46.1 53.6 73.5 85.3 74.2 70.1 69.6 68.8 65.9 66.8 Debt service (US$ million) 11 12 12 24 30 32 37 41 37 35 Debt service/Exports GNFS (%) 4.9 5.5 6.2 12.6 9.6 9.8 10.7 10.4 8.5 7.6 Debt service/GDP (%) 0.8 0.9 1.2 2.9 2.9 2.7 3.2 3.3 2.7 2.3 Domesticsavings/GDP(%) -10.3 -11.1 -11.8 -8.0 1.5 2.7 5.8 8.3 10.2 10.4 National savings/GDP (%) -7.5 -6.2 -10.4 0.6 7.2 7.2 9.6 9.8 10.3 10.6 Marginal national savings rate 1/ 388.6 -236.0 86.5 -1833.1 -118.7 -526.0 493.7 109.2 460.5 Governmentinvestment/GDP(%) 6.9 7.9 10.2 12.9 12.5 12.4 12.4 12.5 12.6 12.6 Government savings/GDP (%) -6.0 -3.7 -5.8 0.3 2.3 1.8 4.0 4 4.3 4.5 Private investment/GDP (%) 0.4 0.5 0.8 5.8 5.4 6.9 8.3 8.8 9.6 9.8 Private savings/GDP (%) -4.4 -5.0 -3.9 0.3 4.9 5.4 5.6 5.8 6.0 6.1 Ratio of public to private investment 18.2 15.3 12.9 2.2 2.3 1.8 1.5 1.4 1.3 1.3 (On commitment basis) Government revenues (excl. grants)/GDP (%) 8.7 11.3 12.0 6.9 8.5 9.9 11.2 12 12.2 12.4 Government expenditures (incl. net lending)/GDP(%) 21.6 27.4 28.8 27.1 24.8 25.3 23.7 22.7 22.9 22.9 Budget balance/GDP (%) -12.9 -16.1 -16.8 -20.2 -16.3 -15.4 -12.5 -10.7 -10.7 -10.5 GDP deflator, p.a. (%) 3.7 -11.4 -1.3 43.3 10.0 11.1 4.4 3.5 3.5 3.3 Exports of GNFS volume (% change) -3.5 -3.8 -9.8 0.5 29.6 7.5 7.9 10.0 7.4 5.0 Export ofGNFS/GDP (%) 17.0 15.8 18.9 22.9 29.8 27.8 29.7 31.2 31.9 30.3 Exports of GNFS/Imports of GNFS (%) 49.0 44.7 45.5 46.2 64.5 62.5 66.6 70.6 72.5 72.5 Import of GNFS Volume (% change) -7.1 -1.5 -11.8 -16.0 2.2 8.3 6.4 4.9 5.2 4.0 Imports of GNFS/GDP(%) 34.7 35.3 41.7 49.6 46.1 44.5 44.6 44.2 44.0 41.8 BOP current balance (incl. curr. grants, USS millions) -196 -192 -219 -182 -141 -174 -165 -159 -162 -198 BOP current balance (incl. curr. grantsyGDP (%) -14.9 -14.5 -21.3 -21.9 -13.4 -14.8 -14.2 -12.6 -11.9 -12.9 Sources: Government of CHAD, IMF, and World Bank staff estimates. Notes: 1/ Annual change in GNS relative to annual change in GNP. c:\data\chad\sac497.xls 6/6/97 5:04 PM Chad - Balance of Payments (USS million) Annex I Page 4 of 6 Estimate Projections 1991 1992 1993 1994 1995[ 19961 1997 1998 1999 2000 Exports of GNFS 224 209 195 190 313 326 346 393 435 467 Merchandise (FOB) 194 182 152 135 250 259 284 327 364 391 Non-factor services 31 27 43 55 63 66 62 66 71 76 Imports of GNFS 458 467 429 411 486 521 519 557 600 644 Merchandise (FOB) 250 243 205 212 278 301 297 321 347 378 Non-factor services 208 224 224 199 208 220 222 236 253 266 Resource balance -234 -258 -234 -221 -172 -196 -173 -164 -165 -177 Net factor income -2 3 -12 -27 -41 -43 -42 -45 -48 -51 Factor receipts 9 17 4 5 6 10 9 9 9 9 Factor payments II Is 16 32 47 53 50 53 57 59 LT interest 11 12 13 11 13 14 13 13 14 14 Interest on arrears Net private current transfers -19 -34 -35 2 -2 11 15 14 15 4 Current receipts 20 13 13 18 22 36 38 38 40 31 Current payments 40 48 48 16 24 25 23 24 25 27 Net official current transfers 59 97 62 64 74 54 35 35 36 26 Current account balance -196 -192 -219 -182 -141 -174 -165 -159 -162 -198 Long-term capital 164 148 229 125 124 150 139 146 158 165 Direct investment 6 3 21 17 12 18 17 27 29 31 Capital grants 77 76 95 78 75 67 81 81 88 91 Net LT borrowing 82 69 113 30 37 65 41 38 41 43 Disbursements 92 80 123 40 49 77 54 54 59 63 Repayments 10 12 10 11 12 12 13 16 18 20 Principal on arrears rescheduled Other LT inflows (net) 0 0 0 0 0 0 0 0 0 0 Other items -41 -25 -66 40 31 -23 -21 -1 1 2 Net short-term capital -52 -38 -83 -19 -5 -23 -21 -1 1 2 Capital flows, n.e.i. 1/ 12 13 17 59 36 0 0 0 0 0 Overall balance -73 -70 -56 -18 14 -47 -47 -14 -4 -32 Financia 73 70 56 18 -14 47 37 2 -16 7 Change in net reserves 8 27 32 -50 -59 4 -10 -20 -18 7 Net credit from IMF 0 0 -2 13 7 18 12 0 -5 -1 Reserve changes, n.e.i. 8 27 34 -63 -66 -14 -21 -20 -14 8 Change in arrears I1 10 10 8 -28 -78 -8 0 0 0 Debt relief 0 0 0 8 44 60 4 2 2 0 Exceptional financing 54 33 14 52 29 61 50 20 0 0 Residual financing gap 0 0 0 0 0 0 9 12 20 24 1 6/6/97 5:05 PM Chad - Balance of Payments (USS million) Annex I Page 5 of 6 Estimate Projections 1991 1992 1993 1994 19951 19961 1997 1998 1999 2000 Memorandum items (as percent of GDPI) Resource balance -17.7 -19.5 -22.7 -26.7 -16.4 -16.7 -14.9 -13.0 -12.1 -11.5 Interest payments (LT+IMF+ST) 0.9 1.1 1.5 3,9 4.4 4.5 4.3 4.2 4.2 3.8 Current account balance (incl. official transfers) -14.9 -14.5 -21.3 -21.9 -13.4 -14.8 -14.2 -12.6 -11.9 -12.9 LT Capital inflows 12.4 11.2 22.2 15.0 11.7 12.8 12.0 11.6 11.6 10.7 Net credit from the IMF 0.0 0.0 -0.2 1.5 0.7 1.5 1.0 0.0 -0.3 -0.1 Foreign exchange reserves (US$ million) Gross reserves minus gold 120 80 39 85 99 135 159 162 166 152 Gross reserves incl. gold 124 84 43 89 103 139 163 166 170 180 Gross reserves incl. gold, months of imports (G&S) 3.2 2.1 1.2 2.4 2.3 2.9 3.4 3.3 3.1 3.1 Nominal Exchange Rate (CFAF/USS) 282.1 264.7 283.2 555.2 499.2 511.6 572.0 578.0 582.0 585.0 Real effective exchange rate (1987=100) 92 86 72 48 52 55 Gross domestic product (US$ million) 1321 1325 1030 830 1053 1172 1163 1258 1365 1541 Sources: Government of CHAD, IMF, and World Bank staff estimates. Notes: 1/ Includes errors and omissions. 2 6/6/97 5:04 PM Chad - External Financing Requirements (USS million) Annex I Page 6 of 6 Estimate Projections 1991 1992 1993 1994 19951 19961 1997 1998 1999 2000 External financing requirements 198 177 197 258 224 230 214 207 199 211 Current account deficit 196 192 219 182 141 174 165 159 162 198 Amortization 10 12 10 11 12 12 13 16 i 20 of which IDA I I I 1 1 1 2 3 5 5 of which principal on arrears rescheduled Changes in reserves (+ increase) -8 -27 -34 63 65 14 21 20 14 -8 IMF repurchases 0 0 2 2 6 6 11 11 5 I Reduction in external arrears 0 0 0 0 0 25 3 0 0 0 Sources of financing 198 177 197 258 224 230 214 207 199 211 Disbursements 133 134 173 175 166 139 131 161 177 187 Loan disbursements 92 80 123 40 49 77 54 54 59 63 Existing commitments (pipeline) ofwhich IDA 46 33 25 19 23 17 12 14 8 11 Expected commitments Other capital flows 1/ -35 -22 -44 57 43 -6 -4 26 30 33 Official Capital grants 77 76 95 78 75 67 81 81 88 91 Addition to external arrears 11 10 10 8 -28 -53 -4 0 0 0 Debt relief 0 0 0 8 44 60 4 2 2 0 Adiustment financing 54 33 14 67 42 85 73 31 0 0 IMF 0 0 0 0 13 24 23 11 IDA 2 8 0 20 0 30 20 20 Other 52 25 14 47 29 31 31 0 0 0 Residual gl 0 0 0 0 0 0 9 12 20 24 Sources: Government of CHAD, IMF, and World Bank staff estimates. Notes: I/ Includes direct investment, trade-related credits, short term capital, and errors and omissions. 6/6/97 5:06 PM Annex II Page I of I Status of Bank Group Operations in Chad Statement of IBRD Loans and IDA Credits Original amount in USS millions Loan or Fiscal (Lens cancellations) Credit No. Year Borrower Purpose IBd) - TA Undisbursed Closing Date Number of Closed LoansiCredits 28 C28180 1996 GOVT OF CHAD CAPACITY BUILDING 9.50 7.00 6/30/00 C26920 1995 GOVT OF CHAD POP. & AIDS CO 20.40 15.73 6/30/01 C26850 1995 GOVT OF CHAD AG SERVICES 24.53 19.95 3/31/02 C25201 1995 GOVT OF CHAD TRANSPORT SECT 11 12.70 7.40 12/31/98 C21561 1995 GOVT OF CHAD SOCIAL DEV PRG 9.80 1.91 6/30/97 C26260 1994 GOVTOF CHAD HEALTH & SAFE MOTHER 18.50 8.34 6/30/00 C26140 1994 GOVT OF CHAD PUBLIC WORKS AND CAP 17.40 11.60 6/30/99 C25200 1993 GOVT OF CHAD TRANSPORT SECT11 37.00 1.20 12/31/98 C25010 1993 GOVT OF CHAD BASIC EDUCATION 19.30 15.19 6/30/99 C21840 1991 GOVTOFCHAD ENGINEERING 11.00 5.26 12/31/98 C21560 1990 GOVT OF CHAD SOCIAL DEV PRO 13.40 0.04 6/30/97 193.53 93.62 Active Loans Closed Loans Total Total disbursed (IBRD and IDA) 93.30 347.99 447.42 Of which repaid 0.00 16.15 16.15 Total now held by IBRD and IDA 193.53 325.58 519.11 Amount sold 0.00 6.00 6.00 Of which repaid 0.00 6.00 6.00 Total undisbursed 93.62 3.93 97.55 a, Iatended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data are updated at the end of the first week of the month. Page 1 & 龍,,目 Annex III Page 2 of 6 Measures scheduled for 1996 Status Measures Proposed for 1997-98 Timetable IL Increasing Development and Poverty Alleviating Impact of Public Expenditures a. Demobilization Departure of an additional 7,000 soldiers from the Completed in May 1997. (See below: Reintegration) army & Public Expenditure Management Elimination of arrears to domestic suppliers CFAF 9 billion out of 17 billion Continued reduction of outstanding arrears to Adopted in 97 were cleared. domestic suppliers (CFAF 29 billion). Budget c. Public EVenditure Prograinsfor 1996, and PIP 1996-98 Adoption of PIP criteria To be implemented over 1996- Agreement on the 1997-99 PIP Adopted in 97 98. Budget Monitoring of PIP implementation: quarterly for 1997-98 financial data, semi-annually for physical implementation Full implementation of budgeted counterpart funds 1997 to foreign-financed projects in PIP d. Improved Resource Allocation to Social Sectors Continued switch in public expenditure priorities, to Switch partially completed; Continued switch of public expenditure towards Adopted in bring share of priority sectors to 62 percent of total wage bill down to 5. 1 % of GDP; priority sectors (education, health, transport, social 1997 Budget in 1998. execution rates in non-wage affairs): (i) increase of at least 20 percent in real budgettary allocations to priority terms in budget allocations - and their full execution sectors increased from 70 to 80 - to non-wage current expenditures in education and percent; 280 net staff increase in health (1997 Budget); (ii) creation of 280 new primary education and 90 in primary teaching posts, 90 health service workers health ministry. Annex III Page 3 of 6 Measures scheduled for 1996 Status Measures Proposed for 1997-98 Timetable II. Creating a Favorable Environment for Private Sector Growth a. Judicial and Regulatory Environment Strengthening of the judicial system The government has received Continued strengthening of the judicial system 1997-98 donor assistance. Simplification of business procedures In progress. Action plan for the simplification and reduction of Dec. 97 the number of business procedures Implementation of action plan. 1998 Amendments to Labor Code Labor Code has been amended Diffusion of Labor Code to social partners 1997 and adopted. Simplification of Investment Code In progress. Preparation of an Investment Code in the context of Dec. 97 sub-regional (UDEAC) taxation and customs reform Ratification and initiation of the OHADA treaty treaty has been ratified Action plan for implementation of OHADA's "actes Dec. 97 uniformes" (uniform acts) b. Restructuring the Financial System Implementation of action plan to repay government Allocations towards repayment Completion of audits of CNRT and CNPS Dec.97 debts to CNPS and CNRT of government debts have been Restructuring of CNRT to ensure financial viability 1998 budgeted and executed as planned. Privatization of two banks (BDT and BTCD) Bids failed Search for private partners and completion of privatization Dec. 97 c. State Enterprise Divestiture Completion of privatization for 7 remaining public Dec. 97 Privatization of INT, SONAPA, SOTEC, Air Tchad All completed except Air Chad. enterprises and banks. (Hotel du Chari, ONHPV, BTCD, BDT, AFF, SNER, Air Tchad). Annex III Page 4 of 6 Measures scheduled for 1996 Status Measures Proposed for 1997-98 Timetable Sugar (SONASUT) i) Ending of formal import monopoly Jan. 1,1997 ii) Establishment of transitional protection system in 1997 Budget conformity with UDEAC customs reform for 1997 without restriction on right to import. iii) Adoption of divestiture plan for SONASUT and Dec. 1997 adoption of a multi-year tariff protection reduction framework acceptable to IDA. iv) SONASUT to point of sale May 98 Electricity and Water (STEE i) Letter of Policy and adoption of divestiture plan April 97 ii) Bids for privatization Sept. 97 Telecommunications (ONPT/TIT) i) Letter of Policy May 97 ii) Separation of postal services and telecom activities at ONPT (prior to (iii) below) iii) Merging of telecom component of ONPT and Mar. 98 TIT into new telecom company iv) Preparation (for presentation to parliament) of Oct. 97 new Telecommunications Code v) Granting of licenses for private cellular Jun. 98 operators on a competitive basis vi) Privatization of new Telecom company (point Sept. 98 of sale) Annex III Page 5 of 6 Measures scheduled for 1996 Status Measures Proposed for 1997-98 Timetable IV. Ensuring Sustainable Demobilization and Reintegration Departure of an additional 7,000 soldiers from the Completed in May 1997. Pilot Reintegration program to prepare for full Start Jul. 97 army Reintegration Program (1997-98) V. Cotton Sector Reform i) Primary marketing, ginning and export * Removal of de jure monopsony of Cotontchad To announce in primary marketing (effective June 1998) in Dec. 97 * Removal of dejure monopoly of Cotontchad in To announce ginning and export marketing (effective June in Dec. 97 1998) Adoption of two-part seed cotton pricing Implementation delayed to early ii) Pricing mechanism 1997 due to poor quality of * Adoption of a two-part seed cotton producer June 97 study. pricing mechanism, linked to world lint and domestic cotton seed prices (1997, for 1997-98 crop) iii) Input procurement and distribution * implementation for 1998-99 crop season of 1997-98 pilot operation for input procurement and distribution and input credit provision. iv) Institutional capacity building * Creation of a Support Unit to the "Comitd de 1997 Suivi de la Filire Coton" (CSFC, Cotton sector monitoring committee) Annex III Page 6 of 6 Measures scheduled for 1996 Status Measures Proposed for 1997-98 Timetable * Producer representation in CSFC Apr. 97 v) Cost of farm equipment and inputs * Pricing at cost of ONDR-distributed farm Apr. 97 equipment * Review of agricultural taxation on inputs and Dec. 97 equipment and preparation of a multi-year tax reduction plan (1998-99) vi) Divestiture of COTONTCHAD from oil and soap business (DHS) * Action plan for separation and initiation of Dec. 97 privatization of DHS * Privatization of DHS (to point of sale) Jun. 98 vii) Decentralization of gin factory management * Implementation of a management 1997-98 decentralization plan: pilot test in 2 factories viii) Human resource management at Cotontchad * Implementation of a recruitment and training 1997-99 program for Chadian managers at Cotontchad ix) Lint marketing * Preparation of a memorandum on Cotontchad's Dec. 97 export marketing operation and performance IV. Poverty monitoring i) Completion of ECOSIT (household budget) May 97 survey and release of data set ii) Preparation of a multi-year statistical poverty 1997 monitoring program Annex IV Page 1 of 3 CHAD: SAC Performance Indicators OBJECTIVES Performance Indicators: SAC I target Performance Indicators: actual Comments Performance Indicators SAC II Civil service reform Reduce civil service wage bill from 5.8% 1995: 5.7% Source of change: * Proper civil service of GDP in 1995 to 5.1% of GDP in 1998 1996: 5.1% updated GDP estimates performance indicators on 1997(Budget): 4.6% and policy unit costs, efficiency, quality implementation of service delivery, management quality, etc. will be devised as part of strategy exercise (output) strategic plan for civil service reform Public Finance Increase revenue from 9% of GDP in 1995 1995: 8.5% Source of change: Revenues: 11.2% of GDP Rehabilitation to 11.5% in 1998 1996: 9.9% updated GDP estimates 1997(Budget): 11.2% and policy implementation Demobilization Cut army from 47,000 to 21,000 by 1998 End 1996: 26,000 Source of change: Mid-1997: 19,000 army census Public Expenditures 1996 Budget: limit Actual Budget execution: Targets in % of GDP * Wages at 5.7% of GDP * Wages 5.1% * Wage bill: 4.6% * Goods and Services at 2.6% 0 Goods and Services 2.85% * Goods and Services: 2.4% * Current Expenditures at 13.5% 0 Current Expenditures 12.9% 0 Current Expenditures: 11.3% * Capital Expenditures at 14% * Capital Expenditures 12.4% * Capital Expenditures: 12.4% Improve resource 1996 Budget Actual allocation to social * 26% increase in allocation to 0 execution rate of 80% 0 improvement in 0 Execution rate in budgetary sectors education, health and social affairs 0 increase in executed execution rate from allocations to education, over 1995 (20% in real terms) allocations: health, 38%; 70% in 1995 health, social affairs and TP * 43% increase in road maintenance (to education, 30% 0 inflation (GDP): ministries above 90% CFAF4 billion in 1996) * Share of education and 11. 1% vs 8.7% * Increase in allocation as per health in non-wage: 18.5% projection Budget (40% education, 33% * CAER expenditures: FCFA health) 3.2 billion 0 Share of education and health in non-wage expenditures: 30% * Execution rate in Counterpart fund to PIP above 90% * Execution rate in budgetted road maintenance expenditures above 90% A OBJECTIVES Performance Indicators: SAC I target Performance Indicators: actual Comments Performance Indicators SAC II Create favorable Increase private investment from 1.4% of Actual (estimates): Source of change: new Private investment (excluding environment for private GDP in 1995 to 4.5% in 1998 (excluding 1995: 5.4% GDP, new private Doba oil project): 8.3% sector growth Doba) 1996: 6.9% investment figures and 1997(projection): 8.3% policy implementation Cotton sector reform Increase producer price for cotton from Actuals (prices set as of April) * Share of farmers price in CFAF120 per kilo to CFAF140 per kilo. 1995-96 crop: FCFA140 (or Cotlook A: 49.5% 33.75% of Cotlook A) 1996-97 crop: FCFA170 (or Medium term targets (1997- 46% of Cotlook A) 2000) * concentration measures in primary marketing, ginning and export marketing all down (e.g. CT share from 100% to less than 60%) * increase in sources of input and credit supply to farmers * increase in cotton farmers productivity (aggregate 20%) 10% annual increase in cotton exports in Actuals (exports in CFAF): 1995 1995: 61 billion (or 133% nominal increase; or 117% increase in volume) 1996: 56.1 billion (or 8% nominal decrease, or 3% increase in volume) 1997 (projection): 75.4 billion (or 34% nominal increase, or 27% increase in volume) Electricity sector reform Medium-term targets (1997- 2000): * Unit cost of electricity: reduction of 50% in real terms * Elimination of black-outs * Increase in number of hook- ups and supply of KWH * Billing and collection rates above 95% OBJECTIVES Performance Indicators: SAC I target Performance Indicators: actual Comments Performance Indicators SAC II Telecommunications Medium-term targets (1997- sector reform 2000): * Increase in number of lines * Reduction of unit costs * Private operators in non-core services Poverty Monitoring * Publication of ECOSIT results Medium term targets: * (output) completion of national household survey and estimate of poverty lines (1998) * Explicit use of poverty indicators in policy formulation (from 1999 on) * (output) Regular annual poverty surveys Reintegration * PI for pilot: achievement of significant learning on constraints to reintegration Medium term: * Economic and social integration measures for ex- combatant: food self- sufficiency, job holding, housing, education of children * Security issues: decrease in incidence of criminality  Annex V Page 1 of 11 ENGLISH TRANSLATION OF ORIGINAL FRENCH TEXT UNITY-WORK-PROGRESS REPUBLIC OF CHAD MINISTRY OF FINANCE, PLANNING, ECONOMY AND TERRITORIAL ADMINISTRATION N'Djamena, June 4, 1997 Minister of Finance, Planning, Economy and Territorial Administration to Mr. James D. Wolfensohn President of the IDA 1818 H. Street Washington, D.C. Mr. President, In the name of the Government of the Republic of Chad, I have the honor and the pleasure to address to you the following Letter of Development Policy for the Second Structural Adjustment Credit. This Letter of Development Policy, examined attentively and adopted by the Government, confirms the main commitments of the Government under the Structural Adjustment Program, in particular those associated with structural reform, rehabilitation of the essential capacities of the State, and improved public finances and the creation of a favorable environment for private sector development. The Government believes that the policies and measures described in the Letter of Development Policy are of such nature as to permit the realization of the objectives of the program, and remains ready to adopt any additional measures which prove essential to this end. The Government will respond favorably to all requests for information on the part of IDA relating to the implementation of these measures and policies. Sincerest regards, BICHARA CHERIF DAOUSSA Minister of Finance, Planning, Economy and Territorial Administration Annex V Page 2 of II REPUBLIC OF CHAD SECOND STRUCTURAL ADJUSTMENT CREDIT LETTER OF DEVELOPMENT POLICY I. Preamble 1. In April 1997, Chad successfully completed the transition to democracy begun several years earlier, having held a series of three popular votes within a period of less than a year: the constitutional referendum of March 1996, presidential elections in June and July 1996, and legislative elections in January and February 1997. With its ongoing process of national reconciliation, Chad has thus moved a long way toward political stability, an essential condition for its successful economic and social progress. 2. Concurrently, since July 1995, the Government of the Republic of Chad has been engaged in a very extensive program of economic and social reforms within the context of the country's Structural Adjustment Program. The key objective of this Program is to reduce poverty by accelerating economic growth on a sustainable basis and re-establishing the capacity of the State to carry out its essential functions, particularly in the provision of education and public health services and the creation and maintenance of public infrastructure. II. Macroeconomic and Financial Framework of the Adjustment Program 3. Economic growth targets have been set at 6.3 percent for 1997 and 5.6 percent for 1998. The high 1997 growth rate should be feasible, as the economy will recover from the decline in agricultural production caused by insufficient rainfall. Inflation, which was high in 1996 for the reasons that explain the weak growth rate, will slow significantly, reaching an average 4.4 percent for all of 1997 and 3.5 percent in 1998. 4. Public finance objectives reflect the Government's determination to continue the rehabilitation effort under way since 1994 and to rectify the weaknesses seen in 1996 in budget execution. On the basis of a GDP of approximately CFAF 665 billion, public revenues are expected to reach 11.2 percent of GDP in 1997. Total expenditure is projected at below 23.6 percent, including 11.3 percent in recurrent expenditures, leaving a current deficit of 0.1 percent of GDP. The government civil payroll will be limited to 4.6 percent of GDP. Moreover, the Government considers the 1997 armed services budget, excluding demobilization and reintegration, as adequate at CFAF 9 billion, some 30 percent less than the final 1996 figure. Annex V Page 3 of 11 III. 1997-1998 Reform Program 5. The Government proposes to accelerate the reform program in 1997 and 1998 in the following six directions: (a) re-establishment of the essential capacities of the State, and improvement in its finances; (b) increase in public expenditure impact on development and poverty reduction; (c) continuation of the effort to create an environment favorable to private sector development, including divestiture by the State and sector reforms; (d) initiation of a program to reintegrate demobilized armed services personnel into the work force; (e) reform of the cotton sector; (f) strengthening of poverty monitoring mechanisms. A. Re-establishment of the essential capacities of the State and improvement of government finances 6. The initial priority of the Adjustment Program was to resolve the crisis in the country's public finances and enable the public sector to maintain a minimum level of functioning, in particular by paying its work force and suppliers on a regular basis. Thanks to the very significant progress made over the last two years, this initial goal has been largely attained. The Government is therefore now in a position to focus on the effectiveness of the civil administration, the quality of the services it provides, and the quality of its management. It is also aware of the need for far-reaching reform of the civil service in the broad sense, meaning the complex of government departments and agencies responsible for carrying out State policies at both the central and decentralized levels. This reform requires a medium-term program, preceded by adequate preparation and by development of an internal consensus on the diagnosis of existing problems and the solutions called for. At the same time, fiscal consolidation and strengthening must continue if structural distortions are to be moderated in due course. 7. Civil Service Reform. The Government is committed to instituting civil service reform. A National Civil Service Reform Commission has been created to act as directing agency and to coordinate and supervise the preparation and putting into effect of a large array of reforms. Presided over by the Prime Minister's Office, this Commission has a mandate to define the specific objectives of the reform and the accompanying practical arrangements, including the implementation timetable. As a first step, the Commission will set in motion a process of consultation and internal debate within the executive branch, to take place in a participative context in which social partners and civil society will join. The results of this process are expected to be: (i) identification of the essential missions of the State and of the powers and Annex V Page 4 of 11 functions of its institutions; (ii) detailed assessment of the measures required to reorganize governmental entities and adjust their resources (including staffing) so that they are equipped to carry out their missions; (iii) a diagnosis of the functional and administrative management problems of the civil service in the broad sense, and specifically personnel policy issues, with emphasis on performance incentives, accountability, hiring policy, training, and career development; (iv) a medium- and long-term civil service reform strategy; and (v) a plan of action incorporating practical recommendations for launching this reform program. This plan of action, and the strategy it supports, will be ready by the end of December 1997, and will be focused to a large extent on practical recommendations regarding: (i) definition of the powers and functions of ministries, government departments and decentralized agencies; (ii) revision of all statutory texts governing the civil service; (iii) improvements in the management and administration of the civil service; and (iv) the technical, training, and material support required to ensure that this reform can be carried out successfully (a program component likely to be the subject of a later presentation to the donor community). 8. Since containment of the public sector payroll remains a key concern wherever government spending is concerned, and as the present civil service remuneration provisions in Chad do not provide public employees with adequate performance incentives, the Government has decided to revise compensation arrangements, mainly by eliminating automatic promotions and replacing it by a performance-based system. This system and the operational procedures for its implementation, to be designed as part of the work of the National Commission, will come into force on January 1, 1999. 9. Improvement in Finances. The Government will go on with efforts to improve the finances of the State, by simultaneously continuing to strengthen tax administration, increasing tax yields through anti-fraud and anti-evasion measures, and broadening the tax base. The Government proposes to introduce into the 1998 Budget Act a composite tax (imp6t synthetique) that will replace the business license tax (patente), the turnover tax, and the corporate profits tax payable by industrial and commercial corporations with turnover of less than CFAF 40 million. As one of the key purposes of this new tax will be to tax activities which easily escape taxation, the Government is anxious to avoid tax rates with a dissuasive effect and tax collection mechanisms that are not transparent and simple. B. Greater public expenditure impact on development and poverty reduction 10. Economic and social indicators in Chad are at a very low point, not only where the general level of poverty is concerned but also the health status of the population and the educational level. The Government is aware of the huge effort needed to offset twenty years of internal rifts and external conflicts, a still precarious financial situation, the obstacles inherent in the country's geographical location and size, and the fact that its communications infrastructure leaves much to be desired. The priority areas in the Government's development policy are (i) education, and basic education in particular, (ii) health, and primary health care in particular, (iii) social affairs, and (iv) public works and transportation. It is the Government's intention to reinforce these sectors first, with human, material, and financial resources, within the limits Annex V Page 5 of 11 dictated by what the State can realistically afford to do and with the aim of reducing the relative weight of donors in these sectors, even though their aid will still be necessary for many years. 11. Expenditure in priority sectors. The 1997 revised budget increases the allocations for non-wage expenditures for education (basic education only), health, social affairs, and public works by over 20 percent in real terms. Aware that execution rates for these budget allocations have been below 80 percent in previous years, the Government is firmly committed to making certain that the relevant authorities (sector ministries, the Public Procurement Department of the Secretariat-General of the Government, and the Finance Ministry), in conjunction with the donors supporting these sectors most heavily, make every effort to achieve the highest possible budget execution rate as soon as possible. In the field of basic education in particular, such efforts will ensure that 1997 budget allocations contribute to a successful opening of the new school year in September 1997. 12. The Government will continue to apply the civil service hiring policy which limits the creation of new job positions strictly to the basic education and public health sectors. More precisely, 280 new teaching posts in primary schools and 90 new posts in primary health care centers will be created. The necessary hiring and reassignment of personnel will be geared to ensuring that these net staffing increases actually materialize and will make allowances to compensate for losses owing to retirements, deaths, dismissals, and other causes in these two sectors. In addition, since its goals in these areas were only partially achieved during the previous two years, the Government will see to it that the resulting delays are made good in 1997 and 1998. 13. As Chad's Policy Framework Paper specifies, the Government will also ensure that: at least 30 percent of admissions to the country's teacher training institutes (ENIs) are reserved for women; that at least 100 administrative posts in basic education are converted into primary school teaching posts; and that the ENIs receive budget allocations sufficient to enable them to enroll at least 380 new students annually. 14. The Government is aware of the fact that these efforts, however demanding, are not enough to constitute an adequate response to the present enormous deficits in the social sectors, particularly in public health and basic education. Since it regards basic education as the fundamental component in any long-term sustainable growth and development strategy, the Government proposes to launch an in-depth revision of its education strategy during the third year of the Program, and to do so in consultation with donors to this sector. 15. Public Investment Program. Sound management and concerted execution of its investment program (PIP) are a priority for the Government. The authorities will therefore be strengthening their monitoring of both the financial and physical execution of the PIP, and will continue to issue periodic progress reports, aiming to achieve a quarterly frequency rate as soon as possible. 16. The Government has made budget provisions for all counterpart funding required for investment projects financed with external aid, and will ensure that these funds are forthcoming Annex V Page 6 of 11 in full. As a new budgetary mechanism will be put in place from July 1997 regarding exemptions on procurement contracts under externally financed projects, as well for introducing additional modifications in the taxation system applicable to such contracts and to suppliers of services under the projects involved, there is a clear need for systematic reassessment of the counterpart funding requirements of numerous PIP projects. The authorities will take all necessary steps to ensure a smooth transition to this new system. Estimates of these new counterpart funding requirements will be completed by the end of September 1997. 17. The authorities also propose to undertake a detailed examination of the complex of factors with a bearing on execution of the PIP, so that bottlenecks can be eliminated. The government departments and agencies concerned will move ahead with the study begun in 1995, and will being drawing up a program of action to be launched in 1998. They will continue to receive the necessary resources to enable them to carry out these functions, mainly within the context of the IDA-financed Capacity Building for Economic Management Project (Credit 2818- CD). 18. Finally, as was agreed under the first Structural Adjustment Credit, the authorities and IDA will carry out a joint review of the PIP prior to drafting of the 1998 capital budget, to reach agreement on the size and composition of the PIP. The main concern will be to ensure that the new projects incorporated into the PIP: (i) are consistent with the country's economic development strategy; (ii) promise an adequate economic rate of return; and (iii) are compatible not only with the absorption capacity needed for their implementation, but also with future financial ability to maintain the investments planned. C. Creation of an environment favorable to private sector development 19. The Government of Chad is convinced that development of the private sector is an essential condition for generating faster income growth and creating jobs. It envisages the function of the public sector as one of eliminating obstacles and creating conditions designed to facilitate the emergence of new enterprises, to enable existing informal-sector enterprises to participate in the formal sector, and to promote private investment, both domestic and foreign. 20. Strengthening of the legal framework. The Government will continue its ongoing efforts to strengthen the judiciary system. in part by capacity building for judicial staff in the area of business law. In addition, the Ministry of Justice, in liaison with the Ministry of Commerce and Industry and the Ministry of Finance, Planning, Economy, and Territorial Administration, will prepare by end December 1997 a detailed analysis and a precise action plan for the measures to be taken in order to implement the uniform acts of the OHADA. 21. Elimination of administrative obstacles. The Government is aware of the large number of administrative formalities and procedures that currently have to be observed prior to the exercise of commercial or industrial activities in Chad. These often represent obstacles to the development of the formal sector and tend to make the country less attractive to foreign investment. The Government intends to engage in an open debate with its private-sector partners and donors, within the framework of actions in preparation for civil service reform, to examine the desirability of Annex V Page 7 of II retaining all those arrangements and procedures. It will then take steps to have them simplified and reduced to an essential minimum by end December 1997, publishing a single form for businesses and investors to use in connection with the procedures required, and making provision for all residual procedures to be organized under the umbrella of a single unit to be established in 1998. 22. Investment code. The Government also intends to prepare a new draft Investment Code by end December 1997, simplifying it and making it more attractive for domestic and foreign investment, and to remove from it all arbitrary provisions, i.e. those that actually represent obstacles to investment and those that represent an expensive loss to the National Budget without generating an enhanced level of investment. 23. Continuation of the divestiture program. The Government intends to expedite the privatization by December 1997 of six enterprise still within the public portfolio, namely the two banks, BTCD and BDT, H6tel du Chari, Office National d'Hydraulique Pastorale et Villageoise (ONHPV), Abattoirs Frigorifiques de Farcha (AFF), and Socidti Nationale d'Entretien Routier (SNER). It will also attempt to find a solution to the takeover of Air Tchad before end December 1997. 24. Pension Funds. The Government is aware of the financial difficulties of Caisse Nationale de Retraite du Tchad (CNRT) and of Caisse Nationale de Privoyance Sociale (CNPS). It will therefore be carrying out financial, technical, and actuarial audits of these two pension funds, the results of which will be available by end December, 1997. On the basis of those results, action will be taken in 1998 to restructure CNRT and to revise the current pension system in force in Chad with a view to ensuring its long-term financial equilibrium and to preserving social justice while avoiding increasing costs to the businesses as well as private individuals that pay into those funds. 25. SONASUT. In April 1997, the Government launched an in-depth study of the sugar company, SONASUT, with a view to its eventual privatization. The Government is aware that while the degree of tariff protection accorded SONASUT is compatible with the UDEAC tariff reform, it is still quite high, resulting from a desire to effect a smooth transition to a competitive marketing system for sugar, a staple food of the majority of the population, including the very poorest. Consequently, the framework for SONASUT's privatization provides for rapid reduction of this tariff protection, including elimination of the reference price. The Government will announce its decisions concerning the modalities of this privatization and the tariff-related conditions by end December 1997 to ensure that the privatization process is completed by March 1998. 26. Socitd Tchadienne d'Eau et d'Electricitd (STEE). In April, 1997, the Government prepared a Policy Letter for the Water and Electricity Sector, setting out the general framework for the sector's reform. The Policy Letter specifies the State's objectives of increasing the production and regular distribution of electricity and of lowering costs by at least 50 percent in real terms. It outlines specifically the future institutional framework of the sector, focusing in particular on privatization of STEE by end September 1997. Annex V Page 8 of 11 27. Posts and Telecommunications Sector. The Government also prepared a Policy Letter for the Posts and Telecommunications Sector in May 1997, which is attached to the present Letter. The Government intends to launch an ambitious reform program consisting of the following principal phases: (i) preparation of a new Telecommunications Code, to be presented to the National Assembly at its October 1997 session; (ii) separation of the two activities, telecommunications and posts, within Office National des Postes et Tilcommunications (ONPT); (iii) merging by end March 1998 of the telecommunications activities of the former ONPT and of TIT within a new telecommunications company; (iv) launching of the process of awarding a cellular license to be completed by end June 1998. These constitute the preliminary stages of privatizing the new telecommunications company, the preparation of which is expected to start in the second quarter of 1998 and to be completed by end September 1998. In parallel, the Government's reform program for the posts and telecommunications sector provides for strengthening of the regulatory capacity of the Ministry of Posts and Telecommunications, preparation of a development strategy for postal activities, and preparation of a strategy to develop the options for access to communication and information to reflect Chad's particular development conditions and its geographic constraints. 28. The Government also intends to finalize the arrangements for membership in the International Finance Corporation (IFC), part of the World Bank Group, with a view to receiving support from that organization in the development and financing of private investment projects in Chad, particularly within the framework of development of the petroleum resources located in the southern part of the country. D. Implementation of the program to reintegrate demobilized armed services personnel into the work force 29. Following implementation of the first phase of the program for demobilization and reintegration into the work force of armed services personnel, the Government aims to lose no time in starting on the actual reintegration phase. A reintegration program has been prepared by the ComitJ de Dimobilisation et Rinsertion (CDR) and approved by the Government. This program will be presented to the Donor Round Table scheduled for the third year of the Adjustment Program. To ensure as thorough a level of preparation as possible, a pilot program of activities to reintegrate demobilized military personnel will be launched in July 1997 by the CDR in four prefectures, targeting around 3,000 former members of the armed services. Based on the lessons learned from this pilot operation, the final version of the reintegration program, covering the 24,000 armed services members demobilized since 1992, will be launched before end March 1998. 30. In order to finance the pilot program, the total cost of which is estimated at around CFAF 2.1 billion, the Government will receive financial support from IDA. For this purpose, it intends to use the CFAF counterpart to US$3 million out of the proceeds of the proposed second Structural Adjustment Credit. Annex V Page 9 of 11 E. Reform of the cotton sector 31. The studies and discussions that have been taking place have highlighted the need for a radical organizational reform of the sector, in which all of its subsectors would be opened up to new actors and COTONTCHAD would be led to refocus on its basic activities, namely ginning and export marketing. To accomplish this, it will also be essential to strengthen the regulatory capabilities of the State, since the reform program will depend upon an extensive capacity for analysis, monitoring, and supervision of the activities of all of the actors involved in the sector, to ensure that they, be they public, private, companies, or individuals, all adhere to the terms of their mandate within the sector. 32. In an Arreti of May 13, 1997, the Government decided to allow representatives of the cotton producers to become members of the Comitj de Suivi et de Riflexion de la Filibre Coton (Cotton Sector Oversight and Consultation Comittee). It also believes that this Committee should receive permanent support in the form of a permanent technical support unit, which would have the necessary expertise for the technical monitoring of the reform program. Since reform of the cotton sector has far-reaching implications for agricultural, industrial and commercial, social, banking, and tax policy, and also calls for expertise in business management, agricultural project management, and economic analysis, the Government will seek to provide this technical support unit with the requisite human, material, and technical resources. 33. Within the framework of its policy to liberalize the sector, the Government has committed to lift COTONTCHAD's legal monopoly on the primary marketing of seed cotton, ginning, and fiber and cottonseed marketing by end June 1998. Within this framework, in conjunction with all its partners, it aims to take all necessary action to complete this process, and in particular to renegotiate both the Tax Convention with COTONTCHAD and the Shareholders' Agreement. In addition, the practical modalities, including those of a regulatory and legal nature, for the entry of new actors into the sector, particularly on the ginning and export sides, will be spelled out by end December 1997, when the Government will announce the lifting of the legal monopolies. 34. By end 1997, the Government intends to have prepared an action plan for COTONCHAD's withdrawal from oil and soap manufacturing, leading to the privatization of DHS by end June 1998. In addition, the program to strengthen human resources by bringing in more local professionals will be continued and expedited, and the program for the progressive decentralization of ginning plant management will be launched with a first pilot experiment in two factories. To that end, preparation of the pilot experiment will be completed by end June 1998, with a view to its implementation during the 1998-99 cotton year. 35. The Government also intends, with IDA's support, to implement a pilot operation whereby input management and supply would be handled by the Village Associations, effective in the 1998- 1999 crop year. It regards this operation as an experiment from which the lessons learned will make it possible to better manage the introduction of competition at all levels of the sector. However, it is aware that the reform program will not have achieved its objectives until true competitive conditions are in place within the sector. Annex V Page 10 of 11 36. The Government is aware of the importance of the agricultural sector for the country's balanced development, and will therefore also be making an exhaustive analysis of the tax and quasi-tax burdens specifically affecting this sector by end December 1997. In April 1997, it revised ONDR charges on cash and credit sales of agricultural equipment. It intends to apply an equitable and balanced system of taxation across the agricultural sector, particularly in order to avoid discouraging farmers from seeking productivity gains, for example through the purchase of equipment or the use of fertilizer or pesticides. 37. Given that even the removal of the legal monopolies is not likely to make any immediate appreciable change in the defacto monopoly, the Government believes that the price of seed cotton should be regulated by the State. Given also that the structure of the sector will be changing over the coming years, this process of regulation should itself reflect those changes. The process of determining an automatic formula for fixing seed cotton prices should thus allow for flexibility. For the 1997-98 crop year, the Government has decided to introduce a mechanism for payment in two installments. As specified in ArrWt Nr 009/MDICA/DG/97 of June 4, 1997, the total producer price per kilo of seed cotton received by the producers will be fixed on the basis of a percentage of 19.3 percent of the average value of the 16 average monthly Cotlook grade A indices for the period January 1, 1997-April 30, 1998, to which will be added CFAF 5 per kilo of seed cotton corresponding to an increase of the seed"s imputed price. The first payment, to be made at the time the seed cotton is collected, will be CFAF 170, and the second payment, to be announced at the same time as the first payment of the next season (April 1998), will be made over the period May- July 1998, and will be calculated as the difference between the total price and the first payment, if the difference is positive. F. Strengthened poverty monitoring 38. The Government has placed the reduction of poverty at the core of its long-term development policy. It is aware that while poverty affects the country's entire population in a general way, it represents a particularly critical problem for certain sociological groups. In order to better monitor the general development of its poverty alleviation policy, while also being able to better identify the groups for which poverty is a critical problem and to adapt its means of action to those circumstances, the Government is firmly committed to strengthening its capacity for poverty assessment, analysis, and monitoring. 39. The Government intends to move rapidly to launch the preparatory studies for a National Household Survey, which will expand the ECOSIT survey to the whole of the country, and, with assistance from the donors, including IDA, to commission this National Survey in time to allow for its completion by end 1998. In addition, based on the results of this survey, an annual poverty monitoring program will be developed. The Government will also seek systematically to prepare, monitor, and, if necessary, shift its development policy to take account of outcomes in the area of poverty reduction. 40. This poverty monitoring program falls within the framework of a national medium-term program that the Government intends to implement to strengthen Chad's economic and social statistics. Over the short term, the Government will proceed to review its national accounts, and, Annex V Page 11 of 11 with assistance from IDA, will launch a diagnostic study of its statistical apparatus as well as preparatory studies for the drafting of its national strengthening program. It will accord the highest priority to the production of reliable basic data, and will strengthen the staffs of the departments in charge of the collection and production of economic and social statistics. IV. Preparing for Management of the Economy in the Petroleum Era 42. Exploitation of the petroleum resources existing in the southern part of the country is opening up new prospects for Chad's accelerated economic and social development. However, the Government is aware that a major effort of preparation is necessary to transform those prospects into reality. At the core of this effort of preparation is the task of strengthening the national capacities for economic management and for effecting the investments that will foster balanced and sustainable growth. 43. The Government intends to continue to draft and start implementing its preparation strategy with IDA's support. The work of the Technical Advisory Group on Economic Management at the Oil Era (Groupe Technique de Riflexion sur la Gestion de l'Economie 6 l'Ere Pjtrolire) will be intensified thanks to support from its permanent support unit (Uniti d'Appui Permanente). The Government proposes to prepare a document containing an overview of its entire preparation strategy by end March 1998 and to summarize it in a Letter of Policy to be presented to the donors. V. Monitoring of the Adjustment Program 41. The Structural Adjustment Program will continue to be implemented under the supervision of the High Interministerial Committee (Haut ComitJ Interministiriel), assisted by the Technical Committee for Adjustment (Comiti Technique 6 l'Ajustement) and the CAS (Cellule chargde de l'Ajustement Structurel). The CAS unit will continue to prepare quarterly progress reports on the program, and will endeavor to gather all pertinent information for delivery to all parties concerned. Annex VI Page 1 of I Republic of Chad Second Structural Adjustment Credit Supplementary Data Sheet Timetable of Key Processing Events a) Time taken to prepare 8 months b) Prepared by Government and IDA c) First Preparation Mission: December 1996 d) Appraisal : March 1997 e) Negotiations: June 1997 f) Interim Trust Fund Committee Presentation: June 1997 g) Planned Date of Effectiveness July 1997  IMAGING Report No.: P 7150 CD Type: MDR