Documentof The World Bank FOR OFFICIAL USEONLY ReportNo. 34053-ML INTERNATIONALDEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT CREDIT (EPPFMC) INTHEAMOUNT OFSDR 17.3MILLION (US$25MILLIONEQUIVALENT) TO THE REPUBLIC OF MALI DECEMBER 19,2005 PovertyReductionand EconomicManagement 4 CountryManagementUnit 15 Africa Region This document has a restricted distributionandmaybe usedby recipients only inthe performance o ftheir official duties. Its contents maynot otherwise be disclosedwithout World Bank authorization. MALI-GOVERNMENT FISCALYEAR January I -December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 3,2005) Currency Unit CFA Franc (CFAF) US$1.oo CFAF 543 Weights and Measures Metric System ABBREVIATION AND ACRONYMS AAP Assessment and Implementation o f Action Plans to Strengthen Capacity o f HIPC countries to Track Poverty ReducingPublic Expenditures BCEAO Central Bank o f (Francophone) West African States BHM Malian Housing Bank (Banque de I'Hubitat du Mali) BIM M a l iInvestment Bank (BanqueInternationalepour le Mali) CAS Country Assistance Strategy CASISFD Microfinance Promotion and Supervision Department CFAA CountryFinancialAccountability Assessment CFAF Franc o f the African Francophone Monetary Community C M D T Mali Textile Development Company CNCS National Coordinationand Monitoring Committee for the CPAR (Comiti National de Coordination et de Suivi du CPAR) CPAR Country Procurement Assessment Report C R M M a l i Retirement Fund(Caisse de Retraite du Mali) DGMP General Procurement Directorate DNSI National Statistics Department (Direction Nationale de la Statistique et de I'Informatique) DPC Development Policy Credit DSA Debt Sustainability Analysis EPPFMC Economic Policy and Public Finance Management Credit EU European Union GDP Gross Domestic Product GNP Gross National Product HIPC Heavily Indebted Poor Countries ICR Implementation Completion Report IDA International Development Association IDF Institutional Development Fund IFC International Finance Corporation IMF International Monetary Fund INPS Social Security Agency (Institut Nationalpour la Pre'voyance Sociale) JSAN Joint StaffAssessment Note LDP Letter o f Development Policy M&E Monitoring and Evaluation MDGs MillenniumDevelopment Goals MDRI Multilateral Debt ReliefInitiative MEF Ministry o fEconomy andFinance MET MinistryofEquipmentandTransport MIT Ministry o f Industry and Trade MOIPSMED Ministryfor InvestmentPromotionandSmall andMediumEnterpriseDevelopment MTBF MediumTermBudget Framework MTEF Medium-Term Expenditure Framework 11 .. OED Operations EvaluationDepartment OHADA Harmonized Investment Code for WAEMU countries (Organisation pour I'Harmonisation en Afi-ique du Droit des Affaires) ON Niger Office (Ofice du Niger) PACR Rural Community Development Project P A G Governmental Action plan for Modernizing and Strengthening Public Finance Management PASAOP Agriculture Services andProducer Organization Project PCDA Agricultural Competitiveness and DiversificationProject PDSF Financial Sector Development Project PER Public Expenditure Review PFM Public Finance Management PNIR National Rural Infrastructure Project PRGF Poverty Reductionand Growth Facility PRODEC Ten-year Educational Program PRODESS Ten year Health and Social Development Program PRSF Mali Poverty Reduction Strategy Framework PRSP Poverty ReductionStrategy Paper ROSC Report on the Observance o f Standards and Codes QAG Quality Assurance Group QEA Quality at EntryAssessment SAC Structural Adjustment Credit SDR Special Drawing Rights UNDP United Nations Development Program WAEMU West African Economic and Monetary Union Vice President: Gobind T. Nankani Country Director: DiariCtou Gaye (Acting) Sector Director: Sudhir Shetty Sector Manager: Robert R. Blake Task Team Leader: Christina A. Wood FOROFFIcI[AEUSEONLY This document has a restricted distribution and may be usedby recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization. REPUBLIC OF MALI ECONOMIC POLICY AND PUBLICFINANCEMANAGEMENT CREDIT (EPPFMC) TABLE OFCONTENTS CREDIT AND PROGRAMSUMMARY vi 1 INTRODUCTION 1 2.. ........................................................................................................................ ......................................................................................... COUNTRY CONTEXT ............................................................................................................... 1 RECENT ECONOMIC DEVELOPMENTS ............................................................................... INMALI 2 MACROECONOMIC OUTLOOK ANDDEBT SUSTAINABILITY ........................................................... 6 3. THE GOVERNMENT PROGRAM ........................................................................................... 10 PRSFIMPLEMENTATIONIN2003-2005 ............................................................................... 10 4. BANK SUPPORTTO THE GOVERNMENTSTRATEGY ................................................... 12 LINKTOCAS................................................................................................................................. 12 COLLABORATION WITH THE bfFAND OTHER DONORS ............................................................... 14 RELATIONSHIP ToOTHERBANKOPERATIONS............................................................................. 15 LESSONS LEARNED........................................................................................................................ 16 5. THE PROPOSEDECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT CREDIT ..................................................................................................................................... 20 OPERATION DESCRIPTION............................................................................................................. 20 CREDIT AMOUNT ANDTRANCHING .............................................................................................. 22 POLICYAREAS.............................................................................................................................. 22 Strengthening macroeconomic framework and budgetary policy ....................................... 22 Support to Growth ......................................................................................................... 29 40 6. Strengthening Public Expenditure Management, Transparency and Controls ..................... OPERATIONIMPLEMENTATION ......................................................................................... 47 POVERTY AND SOCIAL IMPACTS................................................................................................... 47 IMPLEMENTATION, MONITORING ANDEVALUATION................................................................... 47 FIDUCIARYASPECTS..................................................................................................................... 48 DISBURSEMENT ANDAUDITING .................................................................................................... 49 ENVIRONMENTAL ASPECTS ........................................................................................................... 49 RISKSANDRISK MITIGATION ....................................................................................................... 50 ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................. ANNEX 2: EVALUATIONOF PRIORACTIONS UNDEREPPFMC .....................................52 88 ANNEX 3: MATRIX OF POLICY ACTIONS AND RESULTS ...................................................................................... ................................................. 91 ANNEX 4: FUNDRELATIONS NOTE 106 ANNEX 5: COLLABORATION WITH THE IMP ONMALI ..................................................................................... ................................................. 109 ANNEX 6: ECONOMICINDICATORS 112 ANNEX 7: SOCIAL INDICATORS ............................................................................................. 113 ANNEX 8: PROGRESS ONTHE MDGs .................................................................................... 114 ANNEX 9: MALI: EXTERNALDEBTSUSTAINABILITY ANALYSIS @SA) .................... ANNEXlO: BANKVIEW ONMEDIUMTERMCOTTON SECTORREFORMS .............117 125 ANNEX 10: COTTON PRODUCTION. MALI'S ECONOMYAND POVERTY ANNEX 12: ECONOMIC IMPACT OF OIL PRICE DEVELOPMENTS ............................. ..................127 ANNEX 13: SIMULATING THE EFFECTSOF AN OIL PRICE SHOCK: A SOCIAL ACCOUNTING MATRIXFRAMEWORK ....................................... ................................129 ANNEX 14: COUNTRYAT A GLANCE (includes countrymap # IBRD33443) ..................131134 iv TABLES Table 2.1: Growth and Prices ........................................................................................................... 4 Table 2.2: Government Financial Operations, 2002-06 ................................................................. Table 2.3: Estimated ExternalDebt BurdenIndicators (In percent) ..........................................57 Table 2.4: Trend inpoverty using per capita consumption data, 1989-2001 ...............................8 Table 2.5: Trendinpovertyhequality after the devaluation, Mali 1994-2001 ........................... Table 4.1 : Summary of Relevant Lending Operations and Key Analytical Underpinnings ....19 9 BOXES Box 5.1: Prior Actions for Economic Policy and Public Finance Management Credit to Mali .................................................................................................................... ............................. 21 Box 5.2: Growth determinants inMali .......................................................................................... 30 The M a l i Economic Policy and Public Finance Management Policy was prepared by an IDA team consisting o f Christina A. Wood (team leader), Abdoulaye KonatC (macroeconomics andpublic finance management), Andre Ryba (financial sector), Abdoulaye TourC (cotton sector and Office duNiger), Patrick Labaste (cotton), YeyandC Sangho (cotton sector and Office duNiger), Agadiou D a m (cotton sector sector and Office duNiger), Franqois Nankobogo (private sector), D. Youssouf Thiam (private sector), Miguel Saponara (consultant), Alain Jean Catalan (financial management systems), Asha Ayoung (procurement reforms), Cheick TraorC (procurement reforms), Quentin Wodon (cotton PSIA and oil price shock assessment), Judite Fernandes (team assistant), and Aoua Tour6 Sow (team assistant). Peer reviewers were Robert Utz(AFTP2) andMarkRolandThomas (PRMED). Advisors includedA. DavidCraig, Diarittou Gaye, Alassane Diawara, Robert R. Blake. The EPPFMC team worked closely with an IMFteam ledby Chris Lane and with EU and bilateral donors inthe budget support group for Mali. V REPUBLIC OF MALI ECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT POLICY (EPPFMC) CREDIT AND PROGRAM SUMMARY Borrower Government Of Mali Implementing Agency Ministryo fEconomyandFinance coordinates implementation, whichalso involves several line ministries and agencies. Amount SDR 17.3 million(US$25 millionequivalent). Terms Standard IDA terms (40-year maturity & 10-year grace period). Tranching The credit will be disbursed in a single tranche upon effectiveness, expected in first quarter o f 2006. Description The EPPFMC contributes to implementation o f the first, second and fourth pillars o f Mali's Poverty Reduction Strategy Framework (PRSF), namely: accelerated and re-distributivegrowth in a context o f macroeconomic stability and openness, driven by the private sector; institutional development (including public finance management), governance and participation; and basic infrastructure and productive economic activities. Specifically, the EPPFMC aims to: (i)promote growth and poverty reduction through (a) strengthening macroeconomic and fiscal management and (b) implementing key actions underpinning Mali's long-term growth and competitiveness; and, (ii) improve efficiency, accountability and transparency in public finance management through strengthening (a) public expenditure management at central and decentralized levels and (b) the public procurement system. Macroeconomic management would be strengthened through prudent expenditure management; and greater linkage between the macroeconomic framework, the budget and the implementation o f the PRSF. This will be done by strengthening the medium term budget framework and medium term sector expenditure framework processes; continued implementation o f cotton producer price mechanism to reduce risk o f budgetary transfers; commenced implementation o f cotton sector reforms while ensuring close monitoring o f cotton sector financial position; and strengthened institutional framework in the Ministry o f Finance (MEF) for monitoring/coordination o f the PRSF and the growth agenda. The growth support agenda would be strengthened through continued implementation o f financial sector development actions to strengthen the health o f the sector and enhance access to finance particularly longer term funds; implementation o f key transport sector actions to improve quality and lower cost o f transportation services; and implementation o f trade facilitation measures to reduce processinghansactionscosts o f trade. vi Public expenditure management (PEM), drawing from the Government's Consolidated Action Plan for the Modernization and Improvement o f Publicfinance management, would be strengthened through continuing the automation o f information flows between key MEF de-concentrated departments (notably, treasury, budget and financial control) to increase information quality and transparency, improving the quality o f published material on the financial and expenditure situation o f the Government to increase transparency; and continued improvements in PEM processes, particularly internal and external budget control mechanisms. Public procurement would be strengthened through adoption o f a coherent action plan and commencing its implementation, comprising updating o f the legislative/regulatory framework, strengthening the linkages between public procurement and public finance management processes, and strengthening the private sector's access to public procurement opportunities. Benefits The proposed operation would support the Government in the pursuit of its policy objectives laid out in the PRSF within an appropriate macroeconomic framework, by providing sound financing for execution o f the Government's 2005 budget. It would also provide the incentives to implement key economic, social and institutional reform to strengthen overall performance o f the economy and contribute to poverty alleviation. Implementation o f the EPPFMC program contributes to strengthen public finance management, thereby enhancing efficiency and effectiveness o f public sector spending. This includes strengthening governance and performance o f the procurement system. In agriculture, the operation would contribute to stabilizing the performance o f the cotton sector and farmer incomes; and to laying the foundations for private sector led expansion o f the Office du Niger (ON) irrigation zone. The operation would also contribute to enhancing the export prospects o f handicraft products (typically produced by small informal sector firms) through removal o f the export assessment tax, thereby improving the incomes o f the poor. It would also improve the investment climate by lowering the administrative and financial cost o f starting a business, and strengthening property rights over land. Over the medium term, the operation would contribute to reducing transportation costs by ensuring regular road maintenance and lowering the cost burden (in money and time) on the private sector o f customs administration, and to increase agnculture growth and food security due to expansion o f the ON area. It would lower the costs o f financial services (and therefore enhance access to credit) through cleaning up non-performing loans from bank balance sheets. It would also improve access to longer term resources vitally needed to stimulate private sector led growth, through the strengthening the prospects o f institutions with long term assets whether financial (pension funds, housing bank, insurance companies) or physical (leasing companies). vii Risks The operation faces the external, institutional, and political risks. External risks stem mainly from the well-known vulnerability o f the Malian economy to vagaries o f weather and commodity price fluctuations (cotton, oil) as well as regional crises (e.g., Cote d'Ivoire, cricket infestation). Mitigating these risks over the horizon o f the proposed project remains difficult. However, the project would be broadly consistent with policies and initiatives to reduce the Malian economy's structural vulnerabilities over the medium term by the inclusion o f key measures for financial sector development, transport diversification and trade facilitation measures (including customs reform). Additionally, the country dialogue would allow for some budget flexibility to address crisis- related expenses within the context o f a prudently managed budget supporting priority growth and poverty reduction programs. Increasing progress toward predictable and timely donor support and coordination promotedunder the project will also be key. Institutional risk comprises the threat o f weak capacity and governance to program implementation and outcomes. This risk o f slower-than-desired program implementation stemming from capacity constraints will be reduced through continued technical support by the World Bank and other donors to strengthen capacity, particularly in coordination o f the financial sector and growtldmacroeconomic programs. Project design also includes strengthening growth-critical areas such as prudent fiscal policy, financial sector development and transport and trade facilitation. Furthermore, by building on the good record of policy reform in public finance management, the Credit itself will contribute to the institutional strengthening o f various agencies involved in public finance management including at sub-national levels. Political risk remains that the Government's current commitment to the continued reforms, including privatization and liberalization program (banking, cotton, telecommunication sectors) could wane. Potential re-opening o f discussion on agreed measures could cause a loss o f momentum inreform implementation. This risk i s constantly monitoredby the country team inorder to detect problemareas early on and adjust the Bank response as needed. Finally, and perhaps most importantly, given the low international cotton prices, there is a critical political risk that insufficient recovery of world cotton prices would dictate a sharp downward adjustment inlocal producer prices, an adjustment that could prove politically extremely difficult. While this risk i s not possible to control, the operation draws from estimates o f the potential poverty and financial impact o f various cotton prices in order to inform the policy choices and trade offs between the need for local prices to reflect world market conditions and the desirability o f cushioning the temporary impact on the poor. Operation IDNumber PO83799 ... Vlll INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED ECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT POLICY TO THE REPUBLIC OF MALI 1. INTRODUCTION 1.1 The Economic Policy and Public Finance Management Policy (EPPFMC) to Mali, to be presented to the Executive Board on January 19, 2006, i s a single tranche operation o f US$25 million supporting improved management and implementation o f the country's Poverty Reduction Strategy Framework (PRSF). The PRSF, formally adopted by the Government o f Mali in May 2002, identifies the framework for the Government's policies during 2002-2006. The second annual progress report (APR) covering implementation during 2003-2004 was adopted by the Government in August 2005 and transmitted to the Bank and FundinNovember 2005. The APR and Joint Staff Advisory Note will be distributed to the Executive Board for information in early January 2006. 1.2 Preparation of the credit has proceeded during a difficult economic period in Mali. Government revenues are lower due to adverse terms o f trade movements during 2004-05 (increasing oil price, declining cotton price), just as government expenditure requirements have risen to manage food shortage concerns resulting from the low rainfall and locust invasion in2004. Inflation i s up sharply in 2005 (5 percent this year versus -3.1 percent last year) due to the food shortages, and transport costs remain high due to the continuing reliance on more distant ports in the wake o f the political crisis in neighboring Cote d'Ivoire. The current economic situation underscores the precarious economic environment in which the country's macroeconomic and budgetary management occurs. 1.3 The EPPFMC, which builds on and expands the program under the Fourth Structural Adjustment Credit (SAC IV) approved by the Board inMarch 2005, comprises three components: (i)strengthening macroeconomic framework and budget policy; (ii)pursuing key growth- supporting measures for financial sector development, irrigation development, transport and trade facilitation, and business climate enhancement; and (iii) strengthening public finance management systems. The credit i s an integral part o f the 2003 CAS base case comprising annual policy-based lending complemented by specific sector operations. A new CAS will be prepared in FY07 to outline Bank support for the second PRSF (covering the period 2007-201l), which the authorities are preparing on a schedule aligned with the 2007 budgetpreparation cycle.' 2. COUNTRY CONTEXT 2.1 Mali benefits from a stable and inclusive political environment, having successhlly concluded four successive Presidential elections since 1990 and two sub-national elections since 1997. It has been a steady reformer over the past twenty years, albeit a plodding one at times. In ' A draft is expected to be available by July 2006 for integration into the 2007 Budget and a final version by October 2006. response to market-oriented economic reforms and broad-based political reforms over the last 20 years that spurred private sector activity and enhanced civil society participation, Mali's real GDP growth has averaged above 5 percent a year since 1994 when the currency was devalued. Gross national income per capita (atlas method) increased from US$240 in 1994 to US$370 in2004, a 4.0 percent average annual increase, translating into reductions in poverty (paragraph 2.16) and inequality (paragraph 2.17). 2.2 Despite the achievements over the past decade and half, Mali faces significant economic and social challenges. Over 60 percent o f Mali's population lived below the poverty line in 2001, and Mali's social indicators remain among the lowest in the world-it is ranked 172 out o f 175 countries inthe HumanDevelopment Index compiled by the UnitedNations Development Program (UNDP). This partly reflects the fact that Mali is avast landlockedcountrywith arelatively narrow natural resource and human capital base. It i s the largest country in West Africa (1.22 million square kilometers) covering twice the size o f Texas. With a population o f about 12 million, population density i s very low (10 persons per square kilomete?) resulting in high cost o f public service delivery, difficulty in accessing some segments o f the rural population as well as nomadic communities, andhightransportation costs for agricultural inputs and other goods. 2.3 Mali's economy remains fragile in view o f the economy's vulnerability to climatic conditions and commodity price fluctuations (primarily o f cotton, oil, gold). The economy i s dependent on agriculture and gold production, and exports are highly concentrated with gold and cotton together comprising over 90 percent o f export earnings. As a land-locked country, Mali faces challenges due to weak development o f infrastructure and transportation services, and to economic and political conditions in neighboring countries. The business environment-notably road transportation but also investment inflow prospects-continues to suffer from the protracted stalemate in the resolution o f the crisis in C8te d'Ivoire. As with other low income countries, administrative capacity i s also weak. A significant social, structural and macroeconomic agenda remains for Mali to consolidate the gains o f the past to sustain broad-based growth, hrther entrench market-oriented forces inthe country, and advance the poverty reduction program. RECENTECONOMIC DEVELOPMENTS I NMALI Growth and Prices 2.4 Mali's economic performance i s highly subject to several exogenous shocks, and 2004 was a particularly challenging year in that respect. In 2004 Mali faced several adverse exogenous shocks: natural disasters in the form o f drought and locust invasion; commodity price shocks; currency appreciation against the dollar; and persistent regional instability. Inadequate rainfall and locust infestation during the 2004-05 crop year3resulted indeclines in cereal and cotton production by at least 16 percent4 and 3 percent respectively, contributing to a decline inreal GDP growth to 2.3 percent in 2004, following 7.2 percent growth in 2003. While the terms o f trade overall improved marginally during 2004 at 1.4 percent, adverse shifts in key international prices were particularly burdensome to Mali's macroeconomic management-notably, a 30 percent fall in The next largest West African country by land area, Nigeria, covers 0.9 million square km. With a population of 129 millionpeople, its populationdensity i s 142persons per km2. The crop year runs fromM a y to April. Depending on which government methodology used, the drop incereals production is as high as 40 percent. 2 international cotton prices during 2004 contributed to severely worsening the cotton sector's financial position, thereby having implications for the state budget to cover the resulting sector deficit; while a 31 percent rise in oil prices induced the Government to lower petroleum taxes to ease the price impact at the pump, led to declining fiscal revenues. Weakening o f the U S dollar relative to the euro in2004 to which the local currency i s pegged, aggravated the adverse impact o f the cotton price decline since the latter i s denominated in U S dollars. Lastly, persistent instability inneighboring Cote d'Ivoire kept transport prices high as more distant ports continued to be used, and contributed to Mali's lackluster investment prospects. 2.5 In2005 Mali continues to bear the macroeconomic repercussions o f last year's exogenous shocks inaddition to continued terms o f trade declines during 2005. The cotton sector deficit from last year has constrained the smooth management o f the cotton season this year and, due to low food stocks stemming from the 2004 drought, the Government has had to devote resources to food security objectives through increased food imports and food distribution to affected population^.^ The timely distribution or sale o f food stocks by the Government and donor agencies, appear to have limited the human costs o f the drought and locusts. Reflecting the marketed food imbalance in 2005, however which raised cereal prices by over 50 percent in the 12 months through September 2005, consumerprices increasedby 23 percent resulting inan estimated average annual inflation for 2005 o f 5 percent compared with the -3 percent inflation outcome in 2004 and -1.3 percent in 2003. The rise in gold prices (5 percent on average in 2005 relative to 2004) was insufficient to counter the absence o f a recovery in cotton prices (the average price over first three quarters o f 2005 i s 12 percent lower than the 2004 average) and the continued oil price increase (by 39 percent on average inthe first three quarters o f 2005; see Annex 12 for discussion o f economic impact o f the oil price shock in Mali). The result i s continued deterioration o f the terms o f trade during 2005, by a projected 13 percent year-on-year, worse than the initial projections by about 3 percentage points. 2.6 At the same time, the return to more favorable climatic conditions and higher gold production in2005 have yielded better economic outcomes on some indicators albeit less favorable than the initial projections. Economic growth i s expected to return to the average post-1994 levels, with real economic growth in2005 projectedto be 5.4 percent due to strong rebound in agriculture production (both cereals and cotton) in response to the good rainfall levels. The projected growth for 2005 i s lower than the initial projection o f 5.8 percent, however, due to slightly lower projected gold output. Table 2.1 summarizes the main impact o f the exogenous shocks on growth and prices. Fiscal Developments 2.7 While the exogenous shocks in 2004 translated into some revenue shortfalls (such as petroleum tax), fiscal revenues overall were higher than the April program targets due largely to higher-than-expected value added tax receipts. Government revenue indicators improved in 2004 relative to 2003, reflecting improvements in revenue management and collections: total government revenueincreased interms o f GDP, to 17.4 percent in2004 from 16.4 percent in2003; and tax revenue increasedto 15.1percent in2004 from 13.6 percent in2003. Nonetheless, lower non- tax revenues and lower external grants than programmed, meant lower overall resources (revenues including grants) than targeted, inducing the authorities to reduce non-poverty budget expenditures 'TheWorld FoodProgram estimated that up to 20 percent of Mali's population (about 2.2 millionpeople) in the north of the country, was at riskof famine. 3 accordingly. Delays in executing externally financed capital spending in addition to lower-than- anticipated government transfers6, contributed to spending below budget. In terms o f GDP, the Government's prudent budget management translated into slightly better budget execution than April program targets, in addition to a lower overall fiscal deficit than programmed-the fiscal deficit on a commitment basis excluding grants was 6.6 percent, and the fiscal deficit on a cash basis including grants was 2.3 percent, both lower than the respective program target by 1 percentage point o f GDP (see Table 2.2). Table 2.1: Growth and Prices Source: Malian authorities and IMF staff. The first review was concluded inFebruary 2005. See IMF document EBSi0520,February 8,2005 IMF International Financial Statistics (CFAFRJS$, market rate, period average) 2.8 In2005 thepersistentoilprice shock andfood insecurity situationcontributedinlargepart to continued revenue shortfalls relative to program targets. The authorities lowered the tax on petroleum product imports to avoid sharp increases inpetrol prices at the pump duringthe first half o f the year. To compensate for rising food prices, they introduced temporary exemptions on import duties for food imports, and decided to postpone implementation o f some planned tax measures (e.g., the elimination of VAT exemptions for the agricultural bank and agricultural inputs). Shortfalls innon-tax revenues-notably difficulties incollecting dividendpayments, property taxes and capital gains taxes-also contributed to the revenue shortfall. Measures introduced to strengthen tax and customs collections (improved onsite accounting checks, large taxpayer unit computerization, recovery of WAEMSJ duty losses compensation, and strengthening o f import verification to combat customs fraud) are expected to enable the authorities to make up shock- related revenue shortfalls. 2.9 As a result of the revenue shortfalls, 2005 budget revenues in terms o f GDP fell short of program targets by about 1 percentage point o f GDP. A further shortfall in external grants by 1 percentage point of GDP i s projected. Nonetheless, total revenues o f 17.6 percent o f GDP represented a slight increase over 2004. Despite the revenue setbacks, execution of the 2005 budget has been good so far. Expenditure targets were broadly in line with program targets, particularly capital expenditures, with slight shortfalls experienced in current expenditures. Total expenditure and net lending in 2005 i s projected to be 26.3 percent o f GDP (versus the target 27 percent), with current expenditures at 13.8 percent o f GDP (versus the target 14.3). Expenditure of These comprise: a provision that didn't materialize, for potential transfers to the electricity/water utility to compensate for the government's lowering o f utility fees; and an unused provision to cover staff downsizing of privatized companies. 4 HIPC resources is projected to fully reflect the planned amount. The overall fiscal deficit (cash basis including grants) i s projected to be 4.2 percent o f GDPversus the 3.5 percent target. Table 2.2: Government Financial Operations, 2002-06 2002 2003 2004 2005 2006 Prel. Program Proj 1streview Rev.proj. (Inbillions of CFAF, unlessotherwise indicated) Revenue and grants 456.7 536.5 558.0 648.3 613.5 698.2 Total revenue 370.9 421.8 454.7 502.7 486.8 535.6 ofwhich : Tax revenue 306.0 349.2 393.3 434.1 430.0 469.9 Nontax revenue 31.2 35.2 18.7 28.5 15.8 23.2 Grants 85.8 114.8 103.3 145.6 126.7 162.6 Total expenditure and net lending 540.6 569.0 625.8 744.4 727.4 798.9 Budgetary expenditure 511.7 535.5 592.2 670.9 662.8 762.0 Current expenditure 308.7 316.3 350.0 388.2 380.1 418.4 Capital expenditure 203.1 219.2 242.2 282.7 282.7 343.6 Net lending -4.9 -3.9 -9.0 33.5 23.5 -5.6 ofwhich: CMDT 0.0 0.0 0.0 38.4 28.5 0.0 Overall fiscal balance, payment order basis Excluding grants -169.7 -147.2 -171.2 -241.7 -240.5 -263.7 Including grants -83.9 -32.5 -67.9 -96.1 -113.8 -100.7 Overall fiscal balance, cash basis Excluding grants -171.0 -136.4 -163.3 -24 1.7 -251.6 -263.3 Including grants -85.2 -21.7 -60.0 -96.1 -125.0 -100.7 Financing 85.2 21.7 60.0 96.1 125.0 100.7 ExternalFinancing(net) 88.5 106.1 74.5 141.5 140.1 138.2 Domestic Financing (net) -3.4 -84.4 -14.6 -45.4 -2.0 -37.5 (Inpercentage ofGDP) Revenue and grants 19.6 20.9 21.4 23.5 22.2 24.0 Total revenue 15.9 16.4 17.4 18.3 17.6 18.4 Tax revenue 13.1 13.6 15.1 15.8 15.6 16.2 Non tax revenue 1.3 1.4 0.7 1.o 0.6 0.8 Grants 3.7 4.5 4.0 5.3 4.6 5.6 Total expenditureandnet lending 23.2 22.2 24.0 27.0 26.3 27.5 Current expenditure 13.2 12.3 13.4 14.3 13.8 14.4 Capitalexpenditure 8.7 8.5 9.3 10.3 10.2 11.8 Overall fiscal balance (cashbasis, incl. grants) -3.7 -0.8 -2.3 -3.5 -4.5 -3.5 Memo: Nominal GDP (inbillions of CFAF) 2,329.9 2,568 2,607 2,753 2,761 2,905 Sources:Malian authorities and IMFstaff projections ExternalDevelopments 2.10 The current account deficit (excluding official transfers) worsened slightly in 2004 to 9.5 percent o f GDP due largely to lower gold exports. Gold exports declined (by 2.4 percentage points relative to the 2003 share) combining with a decline in other exports (by 0.5 percentage points) to 5 outweighed the increase in cotton exports (1.4 percentage points). A lower decline in imports (by 1.O percentage points) relative to the exports decline (by 1.3 percentage points total) and unchanged service account balance, thus translated into a worsening o f the current account balance by 0.8 percentage points. Including official transfers, the current account deficit was estimated to be 7.7 percent in 2004, up from 6.1 percent in 2003. Lower financial inflows (mostly by the private sector) led to an estimated deterioration in the overall external balance to minus US$186.9 million (or -3.4 percent o f GDP in 2004), following a surplus in 2003 o f US$221.4 million (4.5 percent of GDP). Gross international reserves are estimated to have decreased by about US$82.2 million in 2004, equivalent to about 1.5 percent o f GDP. Despite the decline, reserves represented 6.4 months of imports in2004, down from 7.1 months in2003. 2.11 In 2005, the current account deficit (excluding official transfers) is projected to widen further to 11percent of GDP, due largely to adverse terms o f trade7 whose impact i s projected to increase the burden of imports (including oil imports) and lower cotton exports which, together, outweighed the increase in gold exports. A strong projected increase in official inflows contributes to slightly improving the overall external deficit to US$80 million (or 1.6 percent o f GDP) in2005. Mali's contribution to the gross international reserves o f the Central Bank o f West African States (BCEAO) i s projectedto increase in2005 (by US$67.5 million) but still remain equivalent to about 6 months o f imports. Monetary Developments 2.12 As a member o f the Franc Zone, Mali's monetary policy i s implemented satisfactorily by the regional central bank, consistent with the peg to the Euro. Mali's monetary indicators reflect prudent monetary management on the part o f the Government. The bulk o f money supply growth in Mali is due to increases in credit to the economy rather than in government credit. In 2004 money supply growth i s estimated to have declined by 2.4 percent, reflecting a 6.5 percent decline in net foreign assets and 4.1 percent increase in net domestic assets which, in turn, reflected an increase in net credit to the Government and to the economy as a whole. In 2005, money supply growth i s expected to be higher at 6.5 percent, in view o f the higher economic growth. Both net foreign assets and net domestic assets are projected to increase, by 4.6 percent and 1.9 percent respectively. MACROECONOMIC ANDDEBTSUSTAINABILITY OUTLOOK 2.13 Giventhe likely recurrence o f climatic and commodity price shocks, Mali's economy faces a real challenge o f reducing annual volatility in GDP growth and o f increasing real GDP growth above the 5 percent average experienced since the 1994 devaluation. Under the revised medium- term macroeconomic framework for 2006-08 recently agreed with the IMF and the Bank, average annual growth i s projected at about 5.5 percent, inflation at about 1percent on average and current account deficits (excluding official transfers) at about 8.4 percent o f GDP. During 2006-08, continued prudent macroeconomic and fiscal management comprising enhanced revenue mobilization and efficient resource allocation and expenditure management will be crucial to maintaining macroeconomic stability. As gold production i s anticipated to level o f f after 2008, increased GDP growth would need to come from other sources, notably diversified agriculture, 'Theterms of trade i s projected to deteriorate in 2005 by 13.4 percent year-on-year, due to combined effect of rising oil prices and falling cottonprices. 6 ago-industry and services driven by private sector efforts. Critical to strengthening private sector led growth would be implementation o f structural reforms, notably: cotton sector reforms to restore the viability o f the sector and minimize the fiscal risk it poses; financial sector reforms; and infrastructure reforms particularly intransport, energy and water sectors. 2.14 Public finances and financing requirements. As noted above (paragraph 2.9) implementation o f the 2005 budget has been satisfactory to date. The budget reflects the priorities o f the PRSF overall and priorities o fthe key sectors as detailed inthe sector MTEFs. As a result o f the revenue shortfalls discussed above, and after adding donor financing, a residual financing gap of CFAF 9.7 billion (US$18.0 million equivalent and 0.35 percent o f GDP) remains. The authorities are expected to close the gap through domestic financing without affecting overall development objectives. The 2006 budget is consistent with PRSF priorities, and even enhances allocations to health and education programs relative to the 2005 budget. Reflecting a projected GDP growth o f 5.4 percent, and inflation o f -1.5 percent as food availability returns to normal levels, revenues are projected to increase relative to 2005 to underpin the expanded public expenditure program. With the shift to budget support by the donors for key sector programs (health, education, decentralization), inpart representing additional external financing to Mali and including the proposed EPPFMC financing, the 2006 program i s fully financed. 2.15 Debt Sustainability. At enhanced HIPC completion point (March 2003) Mali's net present value (NPV) o f debt-to-export ratio was reduced below the 150percent threshold and projected to remain below the threshold throughout the 20 year projection horizon. A joint IMF-World Bank debt sustainability analysis (DSA) (attached at Annex 9) shows that external debt sustainability i s broadly achieved under baseline projections in relation to the policy dependent debt burden thresholds.8 Thus under the IDA 14 criteria Mali i s a "green light" country, receiving its entire allocation inthe form o f credits rather than grants. Adverse external and internal shocks, however, could result in breaching the thresholds over the medium term, despite implementation o f sound macroeconomic policies and prudent debt management. Accordingly, Mali i s assessedas having a moderate risk o f debt distress. Further multilateral debt relief under the G8 initiative (MDRI) is estimated to reduce Mali's nominal debt and debt service by half in the medium term, but would approach the indicator level inthe baseline over the long term. Thus while the risk o f debt distress in the MDRI scenario is low over the medium term, it returns toward the moderate risk level assessed in the baseline. Table 2.3 summarizes the debt indicators prior to and post MDRIat the end o f2006. Table 2.3: EstimatedExternalDebt BurdenIndicators (In percent) Before Post Latest Post HIPC Low Income HIPC HIPC DSA MDRI Threshold DSA Baseline Threshold N P V o f debt to GDP 41.1 32.6 27 15 40 NPV o f debt to exports 152.4 120.6 96 51 150 150 Debt service to exports 9.0 5.1 7 4 20 20 Mali's CPL.4 score was 3.7 in2004, placing it at the top end of the medium performance category (3.75 With regard to the health and population component, objectives for 2002-03 have been satisfactorily attained, notably with respect to the extension o f health coverage andthe organization o fthe referral system. However, further efforts need to be made on vaccination, prenatal, and childbirth indicators. Moreover, despite the availability o f HIPC resources, the share o f health in the current expenditure o f the central government budget i s increasing too slowly. To improve the efficiency and coverage inthe health sector, the MinistryofHealthis focusing on: (i) increased vaccination rates throughout the country; (ii) improving the quality o f services, with the creation o f a national Agency for Evaluating Hospital Services in 2002; and (iii) working more closely with the private sector to harness this potential, since the poor do make extensive use o f private services. Regarding the population subcomponent, the Government adopted in April 2003 the updated National Population Policy (NPP), the overall objective o f which i s to contribute to the improvement o f the standard and quality o fpeople's lives. > Concerning the education and literacy component, the preparation and implementation o f the ten-year Education Development Program (PRODEC) has been speeded up with the effective start-up of the Investment Program o f the Education Sectorjointly financedbythe Central Government and donors. Moreover, the development o f a MTEF for the Education Sector will increase the capacity o f PRODEC to meet the PRSF and MDG targets. In particular, the objective o f 64.0 percent o f gross schooling rate (GSR) in the first cycle in 2002 has been achieved and slightly exceeded (64.3 percent). It is likewise for the GSR o f girls: 53.7 percent achieved as against 52.0 percent targeted. Inaddition, significant efforts have been made in improving budget allocations to the education sector, which have permitted the accelerated implementation o f PRODEC through the building o f classroom and recruitment o f contractual teachers, notably with resources from the enhanced HIPC Initiative. However, there is the persistence o f the low quality o f the Malian educational system despite the improvement o f the pupil-teacher ratio, and inadequate numbers o f classrooms and teachers inthe Teacher Training Institute. As a result, the objective o frecruiting and training 2,500 teachers was not reached. k With respect to drinking water and sanitation component, important institutional reforms and actions were conducted in2002 and 2003, allowing better identification o f the difficulties inherent to this sector including, among others, delay in the transfer o f responsibilities skills, and the number o f entities intervening inthe sector with different strategies. 0 Thefourth pillar: development of basic infrastructure and support toproductive sectors. This pillar aims at improving the economic environment and profitability o f factors o f production with the view o f attracting investment, creating jobs, increasing revenues, accumulating wealth, and reducingpoverty. > With respect to transportation infrastructure, institutional reforms have been undertaken in order to improve connections within the country and with the outside 11 world and facilitate the movement o f people and goods. Regarding airport infrastructures, the Government i s committed to concessioning the operations o f the Bamako Airport. Operations o f the Mali-Dakar railway has been successfully concessioned. Performance o f the railway has already improved and will continue to do so as improvements are made to the tracks, rail stock, and quality and safety o f rail services. P Concerning telecommunications, Mali's 1 per 100 persons ratio of telephone penetration i s particularly low compared to other countries in the region. Moreover, telecommunications services are unequally distributed over the national territory, and basic communication tariffs are high reflecting the monopolistic structure o f supply. To address these issues, the authorities preparing the national telecom company for privatizationto be completed inthe course of 2006. k Inthe energy sector,progress hasbeenmadeinincreasing thenationalrateofaccess to electricity from 9.3 percent in 2001 to 14 percent in2004. Inaddition, the Malian Agency for the Development o f Rural Electrification and Domestic Energy (AMADER)was created. P To.support productive sectors, the authorities emphasize the development o f the rural sector with the adoption of the Government Program for the Development of 50,000 Irrigated Hectares between 2003 and 2007. Restructuring o f the cotton sector, however, i s taking a longer time than anticipated. The authorities have delayed the CMDT privatization and are inthe process o f reflecting on the pace and scope o f cotton sector restructuring in light o f prevailing world market conditions. Considerable efforts are also underway in the fields o f equipment and credit to producers, the development o f other agricultural products, the promotion and extension o f the results o f agricultural research in order to achieve food security and self-sufficiency. 4. BANK SUPPORTTO THE GOVERNMENT STRATEGY 4.1 The Bank's CAS (July 2003) emphasizes support for the PRSF and improved public resource management for reducing poverty. The Bank's CAS is designed to support the implementation o f the PRSF in complement to interventions o f other donors. The CAS selectively focuses on the following three keythemes: 0 Promoting growth by combining policy support through adjustment (and subsequently, development policy) operations, with an approach o f increasing agricultural productivity and diversification through rural sector operations and non-rural growth driven by the private sector. This corresponds to the 1" and 4thPRSF pillars. 0 Developing human resources by working with donors to strengthen programmatic approaches inthe health and education sectors. This corresponds with the 2"d PRSF pillar. 12 Improving public finance management and governance by focusing on public sector financial accountability mechanisms covering public expenditure, procurement, and financial management systems. This corresponds to the 1'' PRSF pillar. 4.2 Mali is currently in the CAS base-casescenario andthe key instrumentsof the CAS in support of these themes were the following: (i) support via Structural Adjustment Credits (SACs); (ii) community driven development operations supporting productive sectors and fight against HlV/AIDS; and (iii) traditional investment operations targeting specific needs in transport and private sector development to enhance the competitiveness o fMali's economy. The Mali SACs I11 and lV, therefore, represented a central instrument o f the on-going CAS to support the macroeconomic stability and public sector management. SAC lV provided broad budget support for strengthening fiscal discipline and public expenditure management, and laying foundation for stronger financial sector. Another Bank lendingoperation focused on the more sector-specific rural development agenda (e.g., innovation, irrigation, improvement o f agricultural supply chain etc.). 4.3 DuringCAS implementation, the SACs became annual singletranche operations, insteado f multi-tranche operations-thus, the SAC IV (originally programmed in the CAS as a $55 million operation covering a two year policy horizon) was turned into the one tranche SAC IV o f $25 million that was approved by the Board in March 2005, and the one tranche EPPFMC o f $25 million. The EPPFMC i s part o f the base case lending scenario o f annual modest budget support operations. Its thematic coverage i s also relatively modest, focusing on policy and institutional issues in macro, public finance and selected sector areas instead o f also incorporating broad sector programs. It complements with self-standing sector investment operations covering, respectively, health, education, rural infrastructure, agricultural competitiveness, support to growth, and transport corridors. Transition to a medium term framework will be addressed in the upcoming CAS exercise and possible programmatic PRSCs in the future, and inclusion in EPPFMC o f a trigger for the next operation linkedto the privatization o f the cotton ginning company (CMDT) by 2008. 4.4 Based on the past record, the borrower's commitment to and ownership o f reforms i s deemed adequate, but slow progress on cotton sector reforms with high risk implications for macroeconomic stability has kept the country from accessing larger volumes o f policy-based lending assured over a multi-year period. With the satisfactory implementation o f the new producer price setting mechanism resulting inreduction in budgetary risk o f the sector under SAC IV and EPPFMC, as well as adoption of a cotton sector reform program and action plan, the possibility o f a multi-year series o f policy-based operations i s potentially within sight. Mali's ownership o f its reforms i s reflected in the track record under the third and fourth SACs, the ongoing IMF-supported PRGF program, and implementation of the PRSF. Under SAC III, Mali in the past four years made solid improvements inpublic expenditure management (as this component was rated highly satisfactory by the ICR) and also satisfactorily managed the cotton crisis o f 2001. Nonetheless, the structural agenda is unfinished: while implementation o f the cotton producer price mechanism has reduced the risk from fluctuating international cotton prices, there is a need to deepen the reform agenda in that sector. There i s also a need to implement policy reforms that support the structural reform agenda incotton and other growth-inducing sectors. 13 COLLABORATION W I T H THE IMFAND OTHER DONORS 4.5 The Bank closely coordinated the work o f the SAC N and the EPPFMC with the IMFteam and other bilateral partners, especially in the area o f macroeconomic and fiscal management and financial sector reform. This i s in line with intensifylng efforts to establish a unified framework for budget support in2006. Following an IMF-supported PRGF which expired in2003, the authorities reached an agreement on a new PRGF which was approved by the Fund Board in June 2004, comprising revenue mobilization, prioritizing expenditures, and supporting sustainable growth through faster human capital accumulation and private sector development, including via privatizations in the key sectors o f cotton and telecommunications. The first PRGF review was concluded in March 2005, and the second and third reviews o f the program was concluded in December 2005. The Bank and the Fund coordinate closely on the macroeconomic and structural policy dialogue: for example, under the agreement with the Bank and the IMF, priority poverty- reducing budgetary expenditures will be protected as long as the program remains on track and sufficient external assistance i s secured. Other areas o f collaboration with the Fund are detailed in Annex 5. As regards cotton reforms, the Bank has shared views and collaborated closely with development partners including AFD, France, EU, the Netherlands, Canada, Sweden, U SAID. 4.6 Regarding FSD, while bank is the only player in the banking, insurance and pension sectors; however, many partners are involved in the microfinance area. With the Bank playing a key role, several donors participated in the elaboration o f the action plan for microfinance 2005- 2008 which was adopted inApril 2005 by the Council o f Ministers. They also agreed to fund some o f these activities. USAID i s implementing a financial sector project. The World Bank i s placing the emphasis on regulatory issues. On Irrigation, the Bank works very closely with O N donors' coordination unit. This coordination unit is comprised of all O N donors: AFD, The World Bank, the Netherlands, the European Union, USAID, KFW. The Contrat Plan (CP) or performance contract for 2005-2007 intends that all donors will position their activities around objectives of the CP and those of the development guidelines o f ON area. A guiding Charter for donors' interventions inON area i s under preparation. On PSD, consultations were heldwith other donors, primarily U SAID, the Millenium Challenge Corporation and the European Union during preparation o f the proposed operation. France, Sweden and Switzerland support private sector associations (notably the two umbrella organization o f artisans), and the Africa Capacity Building Foundation provides support to the Chamber o f Commerce. Regarding Transport and trade facilitation: 4.7 The Bank i s closely coordinating with the other donors involved in road maintenance and road transit in Mali and in the region. Preparation o f the regional road transport and transit facilitation program was launched during a regional workshop organized in Accra in November 2003. All West African countries, the two regional economic institutions, representatives from the private sector and from six donors attended the workshop. Joint missions to prepare the program were carried out with the African Development Bank (ADB) in April 2004, July 2004 and May 2005. These missions concluded, in consultation with the regional institutions, that the most efficient contribution from the Bank to the program would be to complement the project approved bythe ADB inNovember 2003 to improve road transit conditions on the Ghana-Burkina Faso-Mali corridor. The World Bank i s preparing simultaneously with the African Development Bank similar operations on the Abidjan-Lagos and Cotonou-Niamey corridors. 14 4.8 The Bank i s also closely coordinating with the European Union (EU) which is preparing its own contribution to the regional program. Inthis respect, EUi s providing support to the Economic Community o f West Afncan States through the set-up o f a dedicated unit to help prepare and implement the program. EU will focus on support to the implementation o f structural reforms, capacity building and will limit the investment portion o f its contribution to the construction of joint border posts. EU i s also involved in the countries through its country,projects. In Mali, EU provides support for the construction o f weighing stations and road toll stations to control overloading of trucks and generateresources for road maintenance. RELATIONSHIPOTHERBANKOPERATIONS To 4.9 The EPPFMC complements other Bank operations in agriculture, financial sector, private sector, infrastructure and transportation with a focus on policies critical to the successful outcomes in the respective sectors. For cotton, the other Bank operations in the rural sector (PASAOP, PACR and PCDA) are flexible enough to be positioned to support broader cotton sector reforms once adopted by the Government. PASAOP i s more focused on producers' capacity building and support to soil rehabilitation, improvement o f farm-level productivity; PCDA focuses on enhancing value added of agricultural sub-sectors and PACR on collective support to communities. The financial sector development project (PDSF) accompanies the Government reform program inthe banking, insurance, microfinance and social security sectors. It supports all the actions that are part of the EPPFMC. (Privatization o f BIM, split o f CAS/SFD, audit o f non performing portfolio o f commercial banks, studies on the domiciliation o f insurance policies and on leasing companies, study on Government debt to INPS and actuarial studies o f INPS and CRM). The sources o f growth project and the agricultural competitiveness development project have also some financial sector elements; for example, the former supports the delivery o f services (including partial guarantees) to facilitate SME financing. 4.10 Regarding the private sector, this operation complements activities under the Growth Support Project (FY05). For irrigation, this operation complements the rural infrastructure investment project (PNIR) which is itself complemented by the other rural operations mentioned above in terms o f producers' capacity building, sub-sector valorisation and financial and technical support to communities. 4.11 As regards transport and trade facilitation, the operation complements the on-going Transport Corridor Improvement Project under which resources allocations to, and financing of, road maintenance i s monitored. The operation also complements the Regional Road Transport and Transit Program under preparation with the regional economic institutions and the countries o f West Africa, and scheduled'for Board presentation in December 2006. The objective o f the program i s to increase competition among more efficient transport corridors in West Africa to boost internal and external regional trade, a recognized vector o f economic growth and subsequently poverty reduction. In a first phase, the program will concentrate on the Ghana- Burkina Faso-Mali corridor. It will provide the resources which will finance the investments necessary to implement the structural reforms. The program will include the following key elements: 0 regional level: Streamlining and harmonization of road transport and transit regulation and procedures (implementation of Inter-State Road Transit guarantee system (ISRT), harmonization o f axle load and technical vehicle control regulation, removal o f bilateral 15 agreements on road freight allocation, capacity building (support to regional facilitation committee and regional institutions); e corridor level: Facilitation o f transit (construction o fjoint border posts and improvement o f transit procedures) and improvement o f information systems (monitoring o f corridor performance, electronic cargo tracking systems, electronic securitization o f ISRT transit documents); and, e country level: Improvement o f road infrastructure (long term performance based management contracts, truck stations and rest areas) and associated telecommunication system, improvement o f port security, benefits for corridor neighboring population (road safety, environment, HIV /AIDS), capacity building (support to national facilitation committees and administrations, consultationwith stakeholders). LESSONSLEARNED 4.12 The EPPFMC benefits from lessons learned in implementingrecent policy-based lending. Thematic coverage o f those operations (SACS I11and N)form a subset o f those pursued under the EPPFMC. As such, lessons from those operations are particularly pertinent. The SAC 111(which was approved in December 2001) supported two areas o f reforms that were critical for poverty reduction in Mali: (i) restructuring o f the cotton sector to enhance efficiency and support growth; and (ii)reform o fpublic expenditure management to improve efficiency and transparency o fbudget management for poverty reduction. According to the ICR (which was endorsed by the OED) the Credit broadly achieved its objectives with respect to macroeconomic performance, and to a significant extent in public expenditure management. The cotton sector reform, however, was less successful, especially with regard to adhering to the timetable for privatization o f the cotton company and limitingthe fiscal risks to the budget. 4.13 The EPPFMC incorporates the following lessons identified inthe ICR (FY04) for the SAC III: e Development policy operations focusing on a limited structural reform agenda are more likely to succeed than ambitious or complex operations in countries with weak institutional and administrative capacity; e Restructuring and/or privatization o f state-owned enterprises (e.g. cotton) should be planned over the mediumterm rather than short-term periods; the focus should be on best practice in privatization; and single adjustment operations may not be the best way o f achieving specific privatization objectives; e Effective coordination with the IMF and other donors i s critical; and, e Ensuringthat key implementinginstitutions have adequateresources (e.g., provision o f TA) i s important for implementation. 4.14 The SAC IV continued the SAC It1reform agenda with a slight expansion on growth- oriented measures in the financial and irrigation sectors, as identified in the context o f ongoing operations in the respective sectors-the Financial Sector Development Project (a TA operation) 16 and the National Rural Infrastructure Project (an investment operation). SAC lV achievements in those sectors-rated satisfactory in the Quality at Entry Assessment (QEA) o f the Bank's Quality Assurance Group (QAG) in August 2005-demonstrated the merits o f including in policy-based lendingoperation, policies and institutional measures complementary to and supportive o f ongoing sector operations. The EPPFMC deepens this practice in the financial and irrigation sectors and adding other growth-oriented policies in transport, trade facilitation and private sectors that complement investment operations inthe respective sectors. 4.15 Deepeningo f the growth-oriented agenda under EPPFMC addresses the QEA's concern of the need for strengthened structural, financial and macroeconomic aspects in the SAC IV. EPPFMC thus draws from various diagnostic reports including the Bank's 1997 IDF to assist Mali in assessing constraints to growth and formulate a growth strategy12,the FY04 ESW on Transport Support to Sustainable Economic Growth, the FY04 Integrated Framework Trade Diagnostic Report ("Expanding and Diversifying Trade for Growth and Poverty Reduction"), a report assessing factors underlyingsuccess o f Mali's imgation reforms13, andbackgroundreport under the Mali Country Economic Memorandum on Growth (forthcoming FY06). The EPPFMC sector coverage inthe growth agenda i s strategically selective, incorporating measures on which dialogue with the authorities on the needed reforms is established. Thus at least one sector, energy, was not includedunder EPPFMC despite its importance for Mali's growth, because the sector dialogue was in a state o f flux due to ongoing contract renegotiations between the Government and the private- sector managers o f the energy utility c~mpany.'~Under the next operation, it i s envisioned to deepen the growth agenda further, and possibly expand it into additional sectors (such as energy) if the nature o f the dialogue on those sectors i s sufficiently developed. ANALYTICALUNDERPINNINGS 4.16 The EPPFMC benefits from a number o fpieces o f analytical and fiduciary work undertaken by the Bank and in some cases by the Government and other partners. These are summarized in Table 4.1. First and foremost, a considerable analytical effort has been conducted in assessing the effectiveness of public spending in Mali, including a CFAA, CPAR, the WB/IMF HIPC AAP report, an IMF ROSC, an EU audit o f reform implementation to improve public finance management procedures, and a study on implementing the decentralization policy based on two pilot regions. These helped identify the strengths and main shortcomings in Mali's fiduciary system, and helped the authorities prepare two key action plans for reforms that integrate the various studies-one on public finance management (the Government Action Plan for Modernizing and Strengthening Public Finance Management 2006-2008), and the other the Institutional Development Program to support implementation o f the decentralization policy). These action '* Rdpublique du Mali (1997). Le Mali : Proposition pour une stratdgie de Croissance et Ddveloppement a I'Horizon 2010, Rapport du Synthsse. Cellule Croissance Acce`ldrde et Ddveloppement, MinistGre de I'Economie, du Plan et de 1'Inte`gration. November. l3 Aw, Djibril and Geert Diemer (2005). Making a Large Irrigation Scheme Work: A case Study from Mali. World Bank, Directions inDevelopment Series. l4 Subsequent events duringthe course of EPPFMC processing has borne out the decision to exclude the energy sector. The concession contract between the international strategic partner and the government collapsed in October 2005, After about 18 months o f contract renegotiations, the mainstrategic investor in the energy utility decided to pull out o f the company leaving the government with a 66% majority stake in the company along with a minor private sector partner, and with critical supply and financing issues to be resolved in the short term in order to clarify the sector strategy going forward. 17 plans, now supported by all donors, are key instruments in toward increased donor harmonization inMali. Technical assistance to Mali for development o f its sector medium term frameworks for health, education, and transport, as well as informal reviews of Mali's government-wide medium term budget framework, underpinthe MTEF proposals inthe EPPFMC. 4.17 The underpinnings to the growth component stem from a series o f studies to identify sources o f growth and refine the growth strategy. In 1997 the Bank approved an IDF grant to assist Mali in diagnostic work toward formulating a long term growth strategy. That IDF resulted in a government-issued 2010 Growth and Development Proposal, which underpinned the 1998 CAS and the subsequent support to Mali. The proposalreoriented government activity and Bank support toward structural constraints (e.g., judicial/regulatory environment for business, weakly organized economic activity), constraints with infrastructure and infrastructure services (transportation, telecommunications, energy, irrigation), constraints to priority producing sectors (agriculture and rural development, industry, mining, tourism), human resource development needs (education, health), and constraints to other private sector supporting activities (financial sector development). Subsequent studies that have deepened the knowledge base and sector strategies have been conducted inthe context of project preparation and/or implementation (of primary relevance to the EPPFMC are studies under the financial sector development TA project, the agricultural competitiveness and diversification project, and national rural infrastructure project). Documentation o f Bank-supported irrigation reform success factors inAw and Diemer (2005) that underpin an aspect o f the EPPFMC program, highlight the critical importance o f irrigation in overcoming vulnerability to climate shocks and enhancing food security in Mali. Those reforms enabled dramatic sustained increases in rice productivity (from 1-2 tons per hectare in 1980 to 5-6 tonsiha in late 1990s) during a period when productivity o f other crops (including cotton) stagnated or declined. 4.18 A recent supply chain analysis o f the textilelgarments, leathenvork and handicraft sectors conducted under the growth support project, an InvestmentClimate Assessment (FY05) highlighted concrete micro-level constraints to Mali's growth, including regulatory and non-price barriers that increase the time and monetary costs o f doing business. An integrated trade diagnostic study completed in 2004 also highlighted micro-level constraints in addition to cross cutting constraints stemming from the transport, trade facilitation and finance sectors. These studies, which have underpinned discussions at the President's Investor Council consultations (conducted bi-annually since September 2004), have laid the foundations for strengthened government commitment to improve the investment climate and remove other unnecessary impediments to private sector growth. A Country Economic Memorandum on growth (forthcoming FY06) builds on these findings with the purpose o f aiding Mali articulate an integrated growth strategy combining micro- and macro-level dimensions in a consistent framework. Background studies under the CEM underpin aspects of the EPPFMC program (notably growth performance study and transport and trade facilitation). 18 i ri & + v;w c) 5. THE PROPOSEDECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT CREDIT (EPPFMC) OPERATIONDESCRIPTION The Contextof the EPPFMC 5.1 The EPPFMC would be the first annual program o f budget support for Mali's growth and poverty reduction strategy and it meets the requirements o f OD8.60 o f appropriateness, country ownership and commitment, and adequate financing. The EPPFMC would continue the SACSIII and IV reform agenda and expand upon it in certain areas. However, moving to higher levels o f support will require reducing the fiscal risk o f the cotton sector through improved sector financial management, or eventual privatization o f the national cotton ginning company CMDT (programmed completion date i s 2008). Progress on implementing the cotton sector reforms, and the fiscal risk o f CMDT, will be closely monitored to determine the appropriate time to shift to a three-year program o f support. The EPPFMC, to be disbursed ina single tranche o fUS$25 million inthe first quarter of2006uponcredit effectiveness, comprises three components describedbelow. 5.2 As already mentioned, the 2003 CAS (July 2003) directly supports the four PRSF pillars under various lending and non-lending instruments, and places particular emphasis on improved resource management for achieving the poverty objectives. The Government's commitment is evident in their successful completion o f the reforms supported under SAC III(December 2001) and SAC IV (March 2005), and by their request for a successor operation in aid o f next phase reforms under its PRSF. Inthis respect, the borrower's commitment to and ownership o f reforms in the proposed EPPFMC is deemed adequate. The EPPFMC together with resources pledgedbyother donors, would ensure adequate financing o f Mali's reform program. The Bank's positive experience with structural adjustment in Mali has shown that policy-based lending i s an effective mechanism o f support. 5.3 Expanding on the SAC 111and SAC IV programs, the EPPFMC, therefore, i s designed in support to Mali's first, second and fourth PRSFpillars. Specifically, the EPPFMC aims to: (i)contributetogrowth andpovertyreductionthrough (a) strengtheningmacroeconomic and fiscal management; and (b) implementing key cross-sectoral policy reforms underpinning to long-term growth and competitiveness. Macroeconomic management would be strengthened through prudent expenditure management; greater linkage between the macroeconomic framework, the budget and the implementation o f the PRSF. This will de done by strengthening the global and sector mediumterm expenditure framework process; continued implementation o f cotton producer price mechanism to reduce risk o f budgetary transfers; commenced implementation of cotton sector reforms while ensuring close monitoring o f cotton sector financial position; and strengthened institutional framework in the Ministry o f Finance (MEF) for monitoring/coordination ofthe PRSFand the growth agenda. The growth support agenda would be strengthened through continued implementation o f financial sector development actions to strengthenthe health o f the sector and enhance access to finance particularly longer term funds; implementation o f key transport sector actions to 20 improve quality and lower cost o f transportation services; and implementation o f trade facilitation measures to reduce processingltransactions costs o f trade. (ii)improve efficiency, accountability and transparency in public finance management through strengthening (a) public expenditure management at central and decentralized levels; and (b) thepublicprocurement system. Public expenditure management (PEM) would be strengthened through continuing the automation o f information flows between key MEF de- concentrated departments (notably, treasury, budget and financial control) to increase information quality and transparency, improving the quality o f published material on the financial and expenditure situation o f the Government to increase transparency; and continued improvements inPEM processes, particularly internal and external budget control mechanisms. Public procurement would be strengthened through adoption of a coherent action plan and commencing its implementation, comprising updating o f the legislative/regulatory framework, strengthening the linkages between public procurement and public finance management processes, and strengtheningthe private sector's access to public procurement opportunities. 5.4 The prior actions for the Mali EPPFMC are listed in Box 5.1. They comprise a restricted set o f actions most critical to success o f the program. These closely match the triggers identified in SAC IV for the EPPFMC. Linkage o f the EPPFMC prior actions to the triggers identifies in the SAC IV operation are presented inAnnex 2. Box 5.1: Prior Actionsfor EconomicPolicyand PublicFinanceManagementPolicyto Mali The government has agreed upon and implementedthe following prior actions before the presentation o f the credit to the Executive Board: 0 Maintain a prudent budget policy consistent with the agreed macroeconomic framework;. 0 Adopt an overall logical framework for operationalizing and appropriating the medium term budget framework (MTBF) and medium term sector expenditure framework (MTEF), synchronized with the processing timelines for the macroeconomic framework, budget preparation cycle, and preparation o f the 2007-20 1IPRSF; 0 Adopt Terms o f reference for preparing the 2007-2011 PRSF, that integrates a work program for coordination o f the formulation and implementation o f an economic growth support strategy; 0 Continue implementation of the cotton producer price setting mechanism with a view to limiting the state budgetary risk o f the national cotton ginningcompany CMDT; 0 Re-constitute the Board o f Directors o f the Malian Housing Bank (Banque de Z'Habitat du Mali - BHM) with the addition o f three private sector specialists independent o f the shareholders; and canvass existing and potential new investors to invite them to participate inthe recapitalizationo f BHM; and, 0 Establish the institutional framework for implementing the Government's action plan for modernization and improvement o fpublic finance management; define the mechanisms for its implementation, monitoring and evaluation; and inscribe resources inthe draft 2006 budget for the 2006 time slice o f the action plan. Benefits 5.5 The proposed operation would support the Government in the pursuit o f its policy objectives laid out in the PRSF within a structure macroeconomic framework, by providing sound financing for execution o f the Government's 2005 budget. It would also provide the incentives to 21 implementkey economic, social and institutional reform to strengthen overall performance o f the economy and contribute to poverty alleviation. Implementation o f the EPPFMC program contributes to strengthen public finance management, thereby enhancing efficiency and effectiveness o f public sector spending. This includes strengthening governance and performance of the procurement system. In agriculture, the operation would contribute to stabilizing the performance o f the cotton sector and farmer incomes; and to laying the foundations for private sector led expansion o f the OfJice du Niger (ON) imgation zone. The operation would also contribute to enhancing the export prospects o f handicraft products (typically produced by small informal sector firms) through removal o f the export assessment tax, thereby improving the incomes o f the poor. It would also improve the investment climate by lowering the administrative and financial cost o f starting a business, and strengthening property rights over land. 5.6 Over the medium term, the operation would contribute to reducing transportation costs by ensuringregular roadmaintenance and lowering the cost burden(inmoney andtime) on the private sector o f customs administration, and to increase agnculture growth and food security due to expansion o f the ON area. It would lower the costs o f financial services (and therefore enhance access to credit) through cleaning up non-performing loans from bank balance sheets. It would also improve access to longer term resources vitally needed to stimulate private sector led growth, through strengtheningthe prospects o f institutions with long term assets whether financial (pension funds, housingbank, insurance companies) or physical (leasing companies). CREDIT AMOUNTANDTRANCHING 5.7 The one tranche in the amount o f SDR 17.3 million (US$25 million equivalent), will be available for disbursement upon credit effectiveness. The credit will become effective upon due authorization or ratification by all necessary legislative and governmental actions and IDA'Sreceipt o f a legal opinion confirming that the Development Credit Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the Borrower and i s legally binding upon the Borrower in accordance with its terms. POLICY-AS 5.8 The policies supported by the EPPFMC are outlined in the Letter o f Development Policy (Annex 1) and policy matrix (Annex 3) under the following three components: (i)Strengthening macroeconomic framework and budgetary policy; (ii) Support to growth; and (iii) Strengthening public expenditure management, transparency and verification procedures. 1. Strengtheningmacroeconomic framework andbudgetarypolicy 1.A-B. MacroeconomicManagementBudgetPolicy,andPovertyReductionand Growth Strategy Framework Description and Challenges 5.9 With the adoption o f its first National Poverty Reduction Strategy in 1998, the Government commenced preparation o f annual Program Budgets (annexed to the Budget Law) aimed at linking government programs to poverty reduction objectives and initiating a process o f results-oriented 22 budgeting.Following adoption o f second povertyreduction strategy comprising enhanced coverage o f macroeconomic considerations (the Poverty Reduction Strategy Framework-PRSF) in May 2002 (see paragraph 3.1), the Government intensified its efforts to translate the strategy into action through integration o fthe PRSF into the Government's regular operations. 5.10 An indicator o f successful integration o f the PRSF is the extent to which programs funded by the annual budgets reflect PRSF priorities toward achieving growth and poverty reduction objectives. To this end the authorities aim to maintain prudent macroeconomic and budgetary policies so as to ensure macroeconomic stability and foster growth. They have developed tools over the past couple years to facilitate the translation o f the poverty reduction strategy into expenditure terms: medium term expenditure frameworks (MTEF) were developed for the health and education sectors; an initial MTEF for the transportatiodpublic works Ministry was constructed; and a medium term budgetary framework (MTBF) covering the entire government was also developed to strengthen inter-sectoral resource allocation (Le., sector budget envelopes) by the Economy and Finance Ministry, consistent with priorities o fthe PRSF. The annual Program Budgets were strengthened progressively each year, and since 2003 they became medium term documents covering three year periods instead o fjust one. 5.11 A consequence o f these developments i s that the Government now disposes o f several tools, instruments and processes that are inadequately linked. This situation is problematic on three levels, which hamper the Government's ability to consolidate its achievements o f the past in the area o f macroeconomic management and budget policy. First, a major concern i s that the various instruments(PRSF, MTEF, MTBF, ProgramBudget, BudgetLaw, macroeconomic framework) are processed on somewhat separate timelines, with inadequate consideration for synchronizing those timelines despite the fact that some instruments serve as inputs into others (e.g., the macroeconomic framework feeds into the MTBF, which together are required for the sector MTEFs and budget elaboration). In addition, untimely availability andor updating of some of the instruments (particularly the macroeconomic framework, MTBF, MTEF, PRSF implementation status report, and annual expenditure reviews) relative to the budget preparation schedule weaken their relevance to thebudgetpreparationandbudget management process. Inadequate incorporation o f recommendations o f implementation status reports or o f expenditure reviews further aggravate this situation. 5.12 Second, sector MTEFs that should serve as the analytical/simulation tools to support sector ministry budget negotiations with the Ministry o f Economy and Finance, and underpin sector program budget preparations, do not adequately live up to those expectations. Inreality, the sector MTEFs are largely distinct from the Program Budget process (i.e., separate MTEF and Program Budget documents are prepared), and the program budgets show minimal if any linkage with the Budget Law to which it is annexed. Furthermore, the MTEFs (though used somewhat for budget negotiations) are not adequately appropriated by the respective sector ministries neither for budget preparation nor management/monitoring o f program implementation-indeed, they currently appear to beprepared largelyto satisfy donor conditionalities. 5.13 Third, gaps inthe PRSF-particularly the absence o f a clear economic growth strategy and action plan, despite growth being highlighted in the PRSF as a precondition for poverty reduction-by implication weaken the results-orientation o f the Government's expenditure program. In absence of a concrete growth strategy, the PRSF's reliance on macroeconomic stability alone i s proving insufficient (as expected) for achieving the higher growth objectives 23 identified inthe PRSF (target o f 6.7 percent average during 2002-2006 relative to the actual annual average o f 5.5 percent over the period 1994-2004). Government Action to date 5.14 The Government has consistently maintained prudent macroeconomic policies in recent years in partnership with the donor community, despite several exogenous shocks that risked destabilizing the macroeconomic framework. As part o f that effort the authorities established a mechanism to minimize the risks o f cotton sector deficits and their potential impact on the budget (as noted in paragraph 5.26, a tri-partite protocol was signed with farmer organizations and the CMDT to regulate the setting of the cotton producer price in line with international market developments). Taking into account the lessons drawn from implementation o f the PRSF, preparation o f the 2005 Budget Law explicitly ensured consistency with the macroeconomic framework while ensuring adequate resources were allocated to accelerate implementation o f the PRSF, on the basis o f strategic sector budgetprogramming tools. 5.15 As regards strengthening of budget formulation, the Government fully operationalized the medium term budget framework during 2004, leading to preparation of the 2005 Budget Law on the basis o f three-year sector envelopes furnished by the Ministry o f Economy and Finance. Those envelopes were on a sector basis rather than Ministry basis, providing insufficient information to some ministries on the budgetary constraints they faced. The two existing sector MTEFs, while perhaps not hlly appropriated by all the ministries concerned (health, education), are progressively being used each year to prepare sector budget proposals and negotiate budget allocations with the Economy and Finance Ministry, with favorable results. The Health Ministry-particularly advanced in appropriation o f its MTEF-established mechanisms for systematic annual updating of their MTEF for use during each new budget cycle, and for use as the financial framework for preparing the 2"d phase of the ten-year sector development program (PRODESS). A third ministry (transport and equipment) initiated development o f its MTEFwith Bank support. 5.16 The outcome o f the budget process during 2005 is a draft 2006 Budget Law reflecting enhanced links with the poverty reduction strategy. Conscious o f the importance o f synchronizing the PRSF with the budget, the Government has committed to prepare the PRSF implementation status report and the second PRSF during 2005-2006 on a schedule linkedto the budget preparation cycle, with a view to completing those documents by June 2006 inline with preparation o f the 2007 BudgetLaw. 5.17 As regards monitoring and evaluation(M&E), an M&E schedule for the PRSFwas adopted, allowing the authorities to incorporate conclusions o f the evaluation of PRSF implementation into the draft 2006 Budget Law. Also, the recently produced second evaluation report o f PRSF implementation i s in process o f being adopted according to the M&E schedule. Additionally, the current system of programming and monitoring o f public investments is being improved, to facilitate its incorporation in the budget management process. A new software application was developed and tested, and is in the process o f being installed to manage the Triennial Investment Program and its annual component (the Special Investment Budget). 5.18 The authorities conducted an institutional audit o f the PRSF implementation process in 2004 and are committed to implementing the audit's findings, comprising reorganization o f the PRSF Unit, enhancing the skills mix o f the Unit, and ensuringappropriate capacity building of the 24 institution. A Terms o f reference outlining the improvements has been prepared, and is being discussed with the donor community prior to finalization and submission to the Council o f Ministers for consideration and adoption. Bank's assessment and Recommendation 5.19 As noted, the authorities make the concerted effort to implement prudent macroeconomic policies in the face o f tight budgetary constraints and various unexpected exogenous shocks. The Bank recommends continuation o f those efforts by the Government, including continued implementationo f the cotton price setting mechanism, inclose dialogue with its external partners. 5.20 Institutional strengthening for coordinating and monitoring the PRSF process appropriately reflects, as currently envisioned, the needs o f the current PRSF-it i s based on the institutional audit taking account o f the current PRSF. However, the institutional audit did not reflect what the PRSF should be (based on the two previousjoint staff assessments o f the PRSF and PRSF progress report). Indeed, as the current PRSF lacks a coherent growth strategy, the recommendations o f the audit did not adequately take into account the need for strengthened coordination inthe PRSF Unit of preparation and monitoring o f a growth strategy. Inview o f the imminent preparation o f the 2"d PRSF in late 2005 to mid 2006, with implementation to commence January 2007, it is preferable that the new institutional structure o f the PRSF Unit anticipates the content o f the new PRSF to the extent possible. The Bank thus recommends that treatment o f growth strategy issues in the 2nd PRSF Unit be strengthened, and that the new structure o f the PRSF Unit reflect the need for appropriate skills mix to enable coordinating the preparation (and implementation monitoring) o f the growth strategy. Measures taken as part o f the proposed operation 5.21 Regarding Macroeconomic framework and budget policy, the specific actions in the EPPFMC are part o f a mediumterm reform agenda emanating from the Government's Institutional Development Program (PDI) and Governmental Action plan for Modernization and the Strengthening o f Public Finance Management (PAG). O f particular importance is deepening the results-based budgetingprocess through strengthening the links between various budget preparation instruments (MTBF, sector MTEFs, program budgets), sector strategies and the PRSF. As a first step the authorities will prepare a logical framework that rationalizes the content and preparatiodupdating schedules o f those various instruments and strategies consistent with the budget preparation cycle. The authorities will also update the MTBF, sector MTEFs (health, education and transport), macroeconomic framework, in line with the final outcome o f the budget arbitrage (the draft 2006 Budget Law) and the logical framework schedule. The following actions are included inthe EPPFMC: 0 Maintain a prudent budget policy consistent with the agreed macroeconomic framework; 0 Update the projections for the Medium Term Budget Framework (MTBF) for 2006-2008, consistent with the macroeconomic framework; 0 Produce an overview report presenting the draft 2006 Budgetthat discusses the consistency o f the budget with the macroeconomic framework for 2006-2008, with sector priorities defined in the PRSF, and with recommendations o f the 2003-2004 PRSF Implementation Progress Report; 25 0 Adopt an overall logical framework for operationalizing and appropriatingthe mediumterm budget framework (MTBF) and sector medium term expenditure framework (MTEF), synchronized with the processing timelines for the macroeconomic framework, budget preparation cycle, and 2007-2011 PRSF preparation; 0 Update the health sector medium-tern expenditure framework for 2006-2008, with the 2006 tranche consistent with the Ministry's component o f the draft 2006 Budget. The MTEF should be consistent with (i) MTBF of the Economy and Finance Ministry, and the (ii) healthsectorstrategyasenvisagedinthePRODESS11; the 0 Update the education sector medium-tern expenditure framework for 2006-2008, with the 2006 tranche consistent with the Ministry's component o f the draft 2006 Budget. The MTEF should be consistent with (i) MTBF o f the Economy and Finance Ministry, and the (ii) healthsectorstrategyasenvisagedinthe2ndphaseofPRODEC;and, the 0 Prepare the MTEF for the Equipment and Transport Ministry for 2006-2008 consistent with the MTBF. 5.22 Regarding Strengthened links between budget policy and the PRSF, the EPPFMC covers the following three aspects: (i) institutional framework for implementation M&E; (ii) the linkage with the donor harmonization process; and (iii) improving the quality and credibility o f the PRSF. The specific actions under the operation are as follows: Completion o f the 2003-2004 PRSF implementationprogress report; Adoption o f a Terms o f reference for preparing the 2007-2011 PRSF, that integrates the work required to coordinate the formulation and implementation o f an economic growth support strategy, and includes a work program and implementation schedule o f the various steps involved (e.g. surveys, participatory process, etc); Launching o f the preparation process for the 2007-2011 PRSF on the basis o f a defined implementation schedule; Establishment o f a work program for the formulation o f an economic growth strategy underpinnedby the macroeconomic framework inthe 2007-2011PRSF; Strengthening o f the capabilities o f the PRSF Unit consistent with the Unit's new TOR, including: redefinition o f its mission and attributions, human resource capacity, job descriptions, staff status; Provision o f adequate resources in the draft 2006 Budget for the PRSF Unit to operationalize its reforms and coordinate preparation o fthe 2007-2011PRSF; and, Definition o f an implementation schedule for preparing the annual PRSF Implementation Progress Report, consistent with the budget cycle timeline (Le., the logical framework mentioned above) and the common framework (under finalization by Government and donors) to monitor budget support. Indicativetriggers for the next operation 5.23 Actions for the next operation have been identified inthe policy matrix. Proposed triggers for the next operation are as follows: 26 0 Maintenance o f a prudent budgetary policy and macroeconomic framework, to ensure continued macroeconomic stability; 0 Prepare the Medium Term Budget Framework (MTBF) for 2007-2009 consistent with the macroeconomic framework o f the 2nd PRSF, and that provides resource allocations by Ministry,sector andexpenditure type; and, 0 Complete a draft o f the 2007-2011 PRSF to be used during the arbitrage sessions for the 2007 Budget. 1.C. Cotton Sector Reforms Description and Challenges 5.24 Cotton cultivation and ginning for exports i s an important sector for Mali's economy whose performance-vulnerable to climatic, terms o f trade and exchange rate shocks in addition to management quality o f the national ginning company and sector policy decisions-has direct repercussions on the government budget in view o f the Government's 60 percent shareholding o f the national cotton ginning company CMDT. The sector (cultivation and ginning combined) accounts for about 7 percent o f GDP and about 30 percent o f export earnings, and involves about 30 percent o f Mali's population. Vulnerability o f the sector results inperiodic financial crises, the latest one in 200415which i s beingmanaged inpart through budget support provided by the Bank (under SAC IV) and other donors. The estimated deficit for the 2004-05 crop season i s CFAF 50.3 billion (US$ 93 million equivalent), o f which CFAF 28.5 billion i s provisioned for in the 2005 budget as a loan to the CMDT. The recurrence o f financial crises inthe sector is attributed inpart to the sector's uncompetitive structure that i s dominated by a single ginning company that enjoys a monopsony on cotton purchases from farmers and a monopoly on sales o f cotton fiber. Despite these risks, it must be acknowledged that the current structure has facilitated the sector's rapid development from cultivation o f 5000 tons o f cotton inthe 1960s to over 500,000 tons today. 5.25 Following the previous cotton sector financial crisis in 2000, the Bank supported the Government in its adoption o f a reform strategy for cotton sector comprising improved financial management in CMDT and partial privatization o f CMDT in the first phase o f reforms, and full privatization CMDT in the subsequent phase.16 Following completion o f the first phase, however, implementation o fthe reforms stalled in2004, and CMDT privatization was officially delayed from 2006 to 2008. At the same time, the authorities agreed to a highcotton producer price (CFAF 210 per kilogram versus CFAF 190 per kilogram in neighboring countries) based on incorrect implementation o f the price mechanism at the time, which resulted in a ballooning sector deficit as the internationalprice fell precipitously. 5.26 To resolve the immediate financial crisis in the sector from the 2004-05 crop season the World Bank agreed, inconsultationwith other partners, to proceed with the SAC IV on the basis o f (i)financingplanforCMDT'sdeficitand(ii)crediblereformoftheproducerpricemechanism. a a The negotiation o f a new timetable for the privatization would be addressed through a dedicated l5Other cotton sector crises were in 1986, 1991 and 2000. l6The strategy, negotiated with all stakeholders inthe sector over a period of three years, was endorsed by the Council of Ministers inNovember 2003 following completion o f the first phase cotton sector reform program. It aimed at the creation of 3 or 4 new cotton ginning companies by sale of CMDT's existing assets to strategic private investors. 27 cotton sector dialogue with the authorities. InJanuary 2005, the Government, CMDT and farmer organizations signed a new protocol for setting the cotton producer price. This included an agreed range (applicable for three years) for the initial price set inApril each year based on the world price trends, and the possibility o f an adjustment inAugust each year ifthere was a significant change in the world price trend. Consistent with the protocol, Mali's cotton producer price setting committee announced a price of CFAF 160 per kilogram for the 2005-06 crop season. 5.27 In the course of 2005, the CMDT announced it was near bankruptcy and scheduled an Extraordinary Shareholders Meeting as required by WAEMU law (OHADA) to agree on recapitalization or dissolution of the company. The Meeting, held in September 2005, reached a decision to recapitalize the company. With only the Government participating in the recapitalization (of CFAF 6 billion), the Government's share o f the company will increase to 75 percent and that o f the foreign shareholder DAGRIS falling to 25 percent. The near bankruptcy of the CMDT underscores the dire situation Mali's cotton sector is facing, and that must be addressed inthe mediumterm to safeguard the sector's performance and competitiveness into the future (see Annex 10 for further information). Government Action to date 5.28 As noted above, the Government signed a protocol defining an improved producer price setting mechanism, together with the CMDT and farmer organizations, that i s to be in force until CMDT's privatisation. A special feature o f the new price mechanism i s its objective to minimise budget risks through setting the initial price in April each year within a conservative range (CFAF 160-175 per kilogram), reviewing price parameters in August for possible revision o f the producer price depending on cotton market developments, and distributing the sector's gross (as opposed to net) income to producers (60%) and the CMDT (40%). InJanuary 2005 the Government adopted an updated timetable for cotton sector reforms with the objective o f supporting the funding o f CMDT crop season campaigns, implementation o f support measures for CMDT privatisation, and CMDT privatisation in 2008. To strengthen producers' ability to participate in sector decision making, the authorities implemented an information awareness session with farmers on the content o fthe validated proposals from the study on the producers' inter-professionalassociation. 5.29 The authorities also concluded the privatization o f the cottonseed oil company HUICOMA, an action envisioned in 2002 under SAC IIIthat was not achievedI7 due inpart to adverse market conditions linkedto the Cote d'Ivoire crisis which eventually soured investor interest. Bank assessment and Recommendation 5.30 The Government's actions to correctly implementthe cotton producer price mechanism are an important first step in stabilizing the performance o f the sector, thereby minimize the risk o f deficits placing burden on the government budget. Inview o f the dire situation the sector faces, the authorities should make progress on the broader cotton sector reforms. Medium term actions for the sector are discussed inAnnex 10. "TheSACI11conditionstoprivatizeHUICOMAandCMDT's OHVNzone,wereamendedto"bring tothepointof sale" (or negotiationsphase) which the authorities achievedto enable disbursementof the last tranche of the SAC 111. 28 Measures taken as part o fthe proposed operation 5.31 The following actions are included under the EPPFMC: regarding the producer price setting mechanism, continued implementationo f producer price determination for the 2005-06 crop season; regarding monitoring o f CMDT management, transmission to the Bank o f the outcome o the Extraordinary General Assembly o f CMDT shareholders; regarding farmers involvement, the producers should designate their representatives for monitoring the CMDT privatization process while waiting for the establishment o f the inter-professional association. The authorities also finalized the strategy action plan for the privatizationo f CMDT. Indicative triggers for the next operation 5.32 The policy matrix includes the actions under the next operation. Proposed triggers for the next operation are as follows: 0 Continued implementation o f the cotton producer price setting mechanism for the 2006-07 crop season; 0 Define the zones (3 or 4) to be privatized by end January 2006); adoption by the Government o f the final design o f the full privatization operational scheme (by end- September2006); and, 0 Launchthe bids for the selection o fthe privatization advisor (by July 2006). 2. Support to Growth 5.33 Under SAC IV selected growth-related measures were introduced into the development policy dialogue, based on existing analytical work, with the intension o f expanding the growth component into other sector as updated analysis became available and if those actions were not already covered under existing operations. The growth measures under SAC IV comprised financial sector measures emanating from extensive analytical work conducted under the financial sector development TA project (FYOO), and irrigation measures complementing the investment program underthe national rural infrastructure project (FYOO). 5.34 The EPPFMC follows up on the SAC IV financial and irrigation sector program, and includes measures relative to transportation and private sector development based on the integrated trade diagnostic study, the findings o f the transport background study to the growth CEM, the investment climate assessment (FY05) and the supply chain analysis undertakenduringpreparation of the growth support project (FY05). As evident by the preliminary results o f the C E M growth analysis (Box 5.2), key driving forces o f Mali's growth over the last decade were the private sector (gold mining, other industry, services), transport activities, irrigation reforms enablingproductivity increases in rice, and financial sector development enhancing overall efficiency o f private sector investment. Selection o f these policy areas under the EPPFMC growth component rests on the fact that further reforms are needed to strengthentheir contributionto Mali's medium term growth. The next sections discuss the policy issues in each o f these four sectors-financial sector, transport, private sector, and irrigation. 29 Box 5.2: Growth determinantsin Mali Mali's average growth has improved dramatically over the past twenty years, and its volatility has also dropped significantly (Table 1). This performance, a result o f steady market-oriented reforms, today puts Mali among the top three highest performing WAEMU countries. Mali's GDP growth has improved from -1.3 percent on average during 1980-1986 (early days o f the reform from socialist to market oriented system), to zero on average during 1987-1993 (implementation of agricultural cereal marketing liberalization), and to 5.7 percent on average during 1994-2004 following the devaluation o f the CFAF in 1994. Growth since 1994 has been driven by industry (10.5 percent growth) and services (6.3 percent), dramatically over-performing agriculture growth (2.6 percent). Furthermore, the contribution of industry and services to GDP growth (40 percent each) has dominated agnculture's contribution to growth (20 percent), despite agriculture's larger share in the economy (Table 2) and presumed comparative advantage. A puzzle i s the fact that agriculture growth after the devaluation (2.6 percent) was lower than it was inthe period before the devaluation (3.5 percent). Table 1: Average annual growth rate and volatility byperiod (in %) 1 Per capita I Standard I Coefficient 1 GDP growth GDP growth deviation o f variation 1980-1986 -1.2 -3.6 7.0 5.6 1987-1993 3.0 0.3 5.3 1.7 1994-2004 5.7 3.3 3.1 0.5 Source: M a l i C E M (forthcoming) Industry growth has been fueled largely by the dramatic expansion o f gold production and exports after 1998, in response to a revision o f the mining code. Services growth has been in trade and transport sub-sectors, activities accompanying the export expansion in gold and cotton as well as growth in other sectors such as rice. Growth o f agnculture stemmed from expansion o f rice production (7.8 percent) for domestic consumption and cotton (4.5 percent) for export. O f note is that rice sector growth stemmed largely from productivity increases in response to sector reforms, while cotton sector growth was due exclusively to cultivated area expansion. A growth accounting decomposition attributes about half of Mali's GDP growth during 1994-2004 to factors other than physical and quality-adjusted human capital growth (or in other words, to growth in total factor productivity). Analysis o f TFP growth determinants during the same time period indicates that about 50 percent o f TFP growth was explained by policy variables. Inparticular, policies that resulted in increases in credit to the economy and in the share o f credit going to the private sector, accounted for 36 percent o f TFP growth, highlighting the critical importance o f financial sector development for growth in Mali. A further 13 percent o f TFP growth was due to better public expenditure allocations that reduced the share o f wages and salaries in public expenditures, highlighting the importance o f the quality of public expenditures for growth. Favorable trends o f two exogenous variables-terms o f trade and rainfall-together accounted for 15 percent o f TFP growth during the period. When viewed in terms o f their potential negative impacts, these exogenous variables highlight the importance to Mali's future growth o f trade diversification (to counter terms o f trade shocks) and irrigation management (to help stabilize agncultural production). 2.A. FinancialSector Description and Challenges 5.35 There are currently ten banks, including seven commercialbanks, one agricultural bank, one housing bank and one bank targeted at micro, small and medium enterprises and microfinance institutions. In addition, there are four financial establishments. The size o f these financial 30 establishments is small compared to that of the banking sector. Altogether, there are 480 microfinance institutions organized in 26 networks with 614,2 11 members. Six insurance companies and two social security institutions (providing pension benefits, family allowances and workers compensation for work related accidents and illnesses) complete the financial scene. 5.36 The banking sector suffers from several weaknesses: (a) it is highly concentrated and lacks competition-the assets of the largest bank, BDM, account for 40 percent o f the total; (b) it i s heavily concentrated in Bamako; (c) it lacks medium and long term resources and as a result its credit activities are highly concentrated on the short term; (d) it has a highlevel o f non-performing loans that contribute to keep interest rate spreads high; and (e) some banks and financial intermediaries experience difficulties. BHM and Credit Initiatives, a financial establishment, have negative net worth and serious liquidity problems; BIMremains fragile. 5.37 Micro finance institutions are facing a number o f challenges: (a) the absence o f internal controls and adequate procedures; (b) inadequate governance; (c) inadapted Management Information Systems for the major networks, (d) vast disparities between microfinance players, with a few strong institutions and a plethora o f smaller and weaker institutions; (e) increasing loan delinquency; and (f) rising costs. As a result, very few institutions have reached self-sustainability. 5.38 Inaddition, barring a correction inthe situation, the sector will suffer from weaknesses in supervision. The supervisory unit, CASISFD, has recently been placed under the authority o f the Ministryof InvestmentPromotion, which is in opposition with the regional legal framework that stipulates that the microfinance supervisory body should be under the authority o f the Ministry of Economy and Finance. This also signals a shift inpriority from supervision to promotion. 5.39 The critical challenge is for the financial sector (comprising banks, non-bank financial institutions, and microfinance institutions) to fully contribute to shared growth in Mali. InMali this translates into the need to create appropriate market-oriented incentives that encourage banks to lower the cost of credit and offer more mediumto long term resources as loans. Ability to lower costs o f credit depend on cleaning up non-performing loan portfolios o f banks; and the availability o f longer term resources depends on improved prospects o f various financial sub-sectors notably insurance, equipment leasing, and social security (public and private). Specific reforms needed in Mali immediately to address these challenges have been identified and are addressed as part of the continuing dialogue between the authorities and the World Bank team and as part o f the support provided by the Bank's financial sector technical assistance project (PDSF). Deeper next phase reform measures will be identified in the context o f a Country Economic Memorandum (CEM) on growth that i s nearingcompletion, and an FSAPplanned for third quarter o f 2006. 5.40 Strengthening commercial bank management is also a challenge, as doing so on a sustainable basis typically entails privatization o fbank shares still owned by the Government while the latter sometimes faces difficulties (whether political or market based) in divesting banks or enterprises. Privatization would serve as an assurance o f no potential (or no further) government interventions inbank operating decisions. It would also greatly improve bank management through the application o f private sector management principles. Currently three banks are fully privately owned, yet the Government of Mali i s present in the capital o f Banque de De'veloppement du Mali 31 (BDM)" and Banque Commerciale du Sahel (BCS); and it is the major shareholder of Banque Internationale pour le Mali (BIM)19,the housing bank, Banque de 1'Habitat du Mali (BHM), and the agricultural development bank, Banque Nationale de Developpement Agricole (BNDA). Although most o f the capital o f the Banque Malienne de Solidarite' (BMS) i s owned by micro- finance institutions, this was at the request o f the State which keeps some influence over the bank. The Government has committed to fully disengage from commercial banks, but this disengagement has not yet been completed. 5.41 Inthe insurance sector, two institutions are inpoor financial condition and have a negative impact on the market. The regional regulator, CIMA, has been involved with these two institutions for several years, with no visible improvement. In addition the sector suffers from low business activity compared to its potential. Finally the two social security institutions suffer from an imbalance between benefits paid and contributions collected. The challenge i s to bring the two institutions closer to long term sustainability. 5.42 Microfinance sector. Giventhe rapid growth o f the sector and its difficulties as well as the lack o f sustainability, it i s imperative to strengthen the supervision o f microfinance institutions (MFIs) to maximize their impact on growth and poverty alleviation. This implies, in the first instance, the split o f the CAS/SFD into two units. The first unit, in charge o f supervision o f MFIs, would returnunder the purview o f the Ministry o f Economy and Finance. The second, in charge o f promotion o f MFIs, would remain within the Ministry for InvestmentPromotion. Government actions to date 5.43 Actions initiated under SAC IV have been completed or are close to completion. Inthe commercial banking sector, the authorities launched an audit o fthe non-performing portfolios o f all commercial banks with a view o f developing a cleaning up strategy. Due to difficulties in securing the cooperation o f some o f the banks, the study i s still in the process o f being completed. Inthe insurance sector, the study on the domiciliation o f insurance policies which would contribute to significantly increase the business o f insurance companies has been completed. An implementation committee has met about 15 times to follow up on the recommendations o f the study. Regarding equipment leasing, a studyon the fiscal problemshinderingthe development o fthe leasing industry has been completed. Regardingpension system, the Government launched a study o f its debt to the private sector social security institution; it also launched actuarial studies o f the private and public sector institutions with a view to modifjmg the mainparameters to reduce the imbalances. 5.44 Inresponse to emerging financial difficulties of the housing bank (BHM) in 2005, the Government has been active inthe restructuring o f BHM. A team o f experts has beenplaced next to the general manager to assist with the daily management (particularly the management o f liquidity) and a restructuring action plan has been elaborated. The Government canvassed existing and potential shareholders for the purpose o f inviting them to participate in the recapitalization o f the bank. It has decided to renew the Board o f Directors and include three directors chosen for their expertise who are not directly linkedto the shareholders, as allowed under OHADA. l8The Government has postponed the sale o f its 20 percent stake until the central bank (BCEAO) i s ready to sell its own 20 percent shareholding. l9The Government acquired this historicallyprivate bank when the latter went into receivership in2000. 32 5.45 The Government had launched the privatization o f the BIM with the hiring o f a privatization adviser. A call for expression o f interest was successful in bringing six good candidates for the acquisition o f at least 51 percent o f the capital o f the bank. The Government i s hesitating between putting for sale at least 51 percent of the capital o fBIM to a reference partner or limiting the sale to 33 percent o f the capital (which would render the deal much less attractive to partners with an established international reputation). Ln addition, the Government put the process on hold until the Supreme Court renders ajudgment on the ownership o f the shares o f BIMby end 2005. 5.46 With respect to microfinance, the Council o f Ministers has adopted the 2005-2008 microfinance action plan which includes the above mentioned split o f the CAS/SFD. The legal texts specifying the split and the transfer o f the supervisory arm to the Ministry o f Economy and Finance have been prepared and sent to the Council o f Ministers for adoption. They will subsequentlybe sent to the NationalAssembly for adoption into law. Bank's assessment and Recommendation 5.47 The authorities have completed the key analytical work which i s enabling the formulation o f policies to strengthen financial sector institutions (bank and non-bank). Prompt action to redress financial crisis in the housing bank has been appropriate, but protracted privatization process for the BIM contributes uncertainty in the sector. The decision to split promotion and supervision functions for microfinance i s a welcome step. It i s important now to proceed to implementation of the policies emanating from the studies, complete the restructuring o f BHM, and separate microfinance supervision and promotion functions. It i s also important to proceed as quickly as possible (following resolution o f the judicial issue) with the privatization o f BIM (e.g. the sale to the reference partner o f 51percent o fthe capital). Measures taken as part o f the proposed operation 5.48 The EPPFMC programcomprises the following financial sector actions: a Completion o f the final audit o f Bank portfolios, including the proposed strategy to clean up bad loans o fthe banks; a Holding o f a meeting o f the validation committee for the study o f the leasing industryfiscal regime; Established the monitoring committee; Finalize the draft texts; a Reaching o f an agreement between the state and INPS on the amount o f arrears to be paid, based on the consultant study; a Re-constitution o f the Board o fDirectors o f the Malian Housing Bank (Banque de Z'Habitat du Mali - BHM) with the addition o f three private sector specialists independent of the shareholders, and a canvassing o f existing and potential new investors to invite them to participate inthe recapitalizationo f BHM; a Adoption (by the Council o f Ministers) o f draft laws (to be submitted for adoption by the National Assembly) that (i) separate microfinance supervision and promotion activities, and (ii) supervisionhctionstotheMinistryofEconomyandFinance;and, return a Agreementon the privatization strategy for BIMand the updated implementation timeline. 33 Indicative triggers for the next operation 5.49 Actions for the next operation are identified in the policy matrix. The proposed trigger under the financial sector component is: undertake negotiations with commercial banks to develop strategy to clean up their respective non-performingloans (NPL) (first half 2006). 2.B. Road Transport and Trade Facilitation Description and Challenges 5.50 Competitiveness o f goods sold or produced in Mali has been continuously hampered by high transport costs. As the trade regime has been liberalized and tariffs significantly reduced, transportation constraints have become one o f the bindingconstraints to market access (both within Mali and externally), and to improving Mali's growth prospects. International and regional trade o f Mali i s penalized compared to coastal countries because o f the country's status o f landlocked country. A 2004 study estimated that landlocked countries inWest Africa trade 92 percent less than coastal countries. Obstacles result from infrastructure in poor condition, inefficient customs operations and unofficial payments at unauthorized road blocks along the regional corridors. A 2003 survey estimated that on average on the regional corridors in West Afiica, trucks were stopped at 48 check points, spend Iialf an hour at each stop and paid on average US$240 per trip per direction. At 100vehicles per day during300 days, unauthorizedpayments total US$7.2 million annually on the corridor Mali-Burkina Faso-Ghana. This situation has been aggravated by the C8te d'Ivoire crisis which has diverted international traffic from CBte d'Ivoire to Ghana, Togo and even Benin. The additional transport costs are estimated at about CFAFlO billion annually due to the additional distance to reach these ports compare to the distance to Abidjan. 5.51 Domestic trade suffers also from high transport costs which have increased on average on the entire road network by 7 percent in real terms between 1995 and 2002. This aggravation o f transport costs is the result o f a policy which favors upgrading at high standards and paving o f a limited number o f roads while insufficient resources are allocated to maintenance o f the rest o f the network. Rural roads especially have suffered from a lack o f resources and it is estimated that 90 percent o f rural roads are in poor condition, which severely hampers the potential o f growth of agricultural production and thus o f growth o f the entire economy. While the Government has agreed to increase road maintenance resources from CFAF5.6 billion in2003 to CFAF 13 billion in 2007, it has been unable to meet the agreed target in 2005. Only CFAF 7.5 billion were budgeted that year and by mid-year only CFAF 1.6 billion had been actually disbursed to the Road Fund which manages road maintenance resources. In addition, road user charges which are collected from road users and supposed to be transferred to the Road Fund were not increased in 2005 as agreed by the Government in its 2004 letter o f transport sector policy and resources generated by the road user charges were partially retained by the Treasury. This lack o f resources for road maintenance i s likely to result inadditional road deterioration and further increase inroad transport costs. 5.52 High transport costs and inefficient road transport services are closely interlinked. The taxation system of the trucking industry favors companies with less than three trucks and thus informal companies which are not well organized to maintain their fleet o f trucks or to provide a quality service. Quotas define rules to share international traffic among corridor countries. Malian truckers have the monopoly for the transport o f petroleum products for Mali. Tariffs, while 34 maintained high by the cartelized organization o f the industry, are insufficient to make the activity profitable because o f the overcapacity and the protection o f inefficient transporters resulting from the quotas and the allocation o f freight among transporters by turns. Transporters are forced to overload their trucks to increase their revenues per trip as well as to cover the unauthorized payments along the road corridors. Overloading o f trucks inturn accelerates the deterioration of the roads resulting inadditional fundingrequirements to build or rehabilitateroads using higher design standards. The overall condition o f trucks i s poor as a result o f the low profitability o f the industry. The Government recently decided to exempt the import o f trucks o f customs duties to reduce the price o f new trucks and modernize the fleet o f international trucks. As long as the root issues described above have not beenaddressed, however, this measure will only have a short-term impact and i s likely to further exacerbate the sector inefficiency inthe long term. 5.53 To facilitate international transit and subsequentlyreduce transit costs, the Government has to face two main challenges: 0 The first one i s to implement a complex set o f measures which however are all necessary to ensure the success of each o f them. The measures involve several administrative services (customs, trade, health, transport) as well as several categories o f private operators (truckers, freight forwarders). Implementation will require a significant amount o f resources. The capacity to coordinate reforms as well as investments provided by several donors will be key to achieve all the objectives successfully. Implementation o f some measures need also to be coordinated at the regional level with other countries and the regional institutions as simultaneous execution i s requiredto be successful. 0 The second challenge i s to overcome vested interests which oppose the reforms. Numerous categories o f personnel in some administrations are benefiting from monies unduly collected at unauthorized road blocks and will lose these revenues after these road blocks are removed. Private customs agents helping the truckers at the borders to go through the administrative hurdles will not be needed after data on transit goods are electronically transmitted to customs offices at the borders. 5.54 With respect to financing of roadmaintenance, the challenge will be to build the capacity to manage the road sector, to absorb increased and sustained revenues and to use efficiently these resources and demonstrate to the road users that they ultimately benefit from the road user charges that they are paying. After road maintenance execution was privatized in the late 199Os, management remained inthe hands o f the Public Works Department which suffered o f inefficiency problems typical of a department o f the administration (lack o f resources, lack o f accountability, lack of autonomy) while having competent technical staff. In2004, the Public Works Department was restructured to concentrate on planning and programming or road works. Management o f programs' execution was transferred to two autonomous agencies (Agency for the execution o f small civil works, Agency for the execution o f rural infrastructure works). While efficiency in the execution o f programs improved, sector management remained weak. The Department o f Public Works had difficulties to fulfill its role o f supervisor o f the two agencies. The Road Data Bank created when the Department o f Public Works was restructured was unable to prepare road maintenance programs based on a survey o froad conditions inthe absence o f resources to carry out these surveys. 35 Government Actions to date 5.55 Mali i s one o f the country part o f the regional corridor Ghana-BurkinaFaso-Mali which i s a priority inUEMOA'sregional road transport and transit facilitation program. The program is being implementedon the priority corridor with support from African Development Bank, West Africa Development Bank, European Union and the World Bank. It includes physical investments to improve condition of regional roads, and support to implementation o f facilitation measures (construction o f joint border posts, electronic tracking o f vehicles, computerization o f transit documents and electronic data interchange between countries along the corridor, control o f axle load, suppression of road barriers). With support of the European Union and France, Mali has also launched a program on the 2004-2007 period to improve customs performance. Limited computerization o f customs procedures has been implementedunder the program. 5.56 The Government defined its road maintenance budget objectives in its Letter o f Sector Policy attached to the Transport Corridor Improvement Project (February 2004). The authorities are making the effort to provide the required resources for road maintenance even in difficult macroeconomic circumstances. A supplementary resource allocation o f CFAF 1 billion for road maintenance was made available in May 2005 to enable achievement o f the 2005 budget target specified inthe Policy Letter. 5.57 Inearly 2005, the Government created the RoadAgency to manage the execution ofroad maintenance programs. The Agency i s expected to be operational in early 2006. Its staff has a private statute and the Agency i s managed according to private procedures. Annual technical and financial audits will review and analyze the use o f road maintenance resources in conformity with the annual programs. The Agency i s managed by a Board with five membersout o f twelve coming from the private sector. The Agency receives its resources from the Road Fund, created in 2002, which was established on the basis o f the principles said o f c`2ndgeneration road funds" which have been agreed between the World Bank and the IMF. Resources for road maintenance come partly from the Government budget and increasingly from road user charges. The Fund i s managed by a RoadBoard half of whose the members represent road users and the other halfprivate stakeholders. Bank's assessment and Recommendation 5.58 The authorities have established the institutional and financial foundations enabling the implementation of regular road maintenance activities. The financial underpinnings o f that framework, however, need to be further strengthened to ensure sustainability o f the road maintenance program. In particular, the authorities need to increase the share o f the Road Authority's budget derived from road user charges, by increasing the level o f existing fees (e.g. the levy on petroleum product imports or axle load fee) or by introducing new fees. The authorities also need to ensure that the fees collected and sent to the state Treasury are transferred to the Road Authority (RA) in a timely manner, thereby enabling efficient planning and management o f the RA's resources. The measures proposed for the EPPFMC and next operation address these needs. Measures taken as part of the proposed operation > Transport and transit facilitation: o Operationalized the information system SYDONIA++ being extended to the Bamako rail station office. 36 > Road maintenance: o Confirmed that the road maintenance budget i s CFAF 11.5 billion in the 2006 Finance Law, as agreed between the Government, the World Bank and the European Union under existing transport programs; o Preparation bythe Road Fundof monthly cash-flow requirements for road maintenance based on the progress inthe execution o f road maintenance programs; o Established a mechanism in the Treasury Department to ensure regular monthly transfers o f revenues from roaduser charges and the budgetto the Road Fund's account, so as to ensure unconstrained contracting operations o f the RF during the year. (The collected fees must be transferred to the Road Authority by the end o f the subsequent month at the latest); and, o Did not renew the law under which imports of new trucks are exempt fiom import and value added taxes. Indicative triggers for the next operation o Confirm that the share o f the road maintenance budget stemming from fees reaches 40 percent in2007; and determine the level o f the fees @e., axle load fee, road user charge on petroleum product imports, other fees) neededto reach the 40 percent target. 2.C. PrivateSector: ExportpromotionandInvestmentClimate Description and Challenge 5.59 The proposed operation addresses selected issues pertaining to investment climate in Mali, namely business start up, property registration and handicrafts export taxation. These issues were selected for the EPPFMC in light o f their quick-win nature and their potential high impact on opportunities for the private sector. Mali needs a good investment climate so as to provide opportunities and incentives to firms to invest productively, create jobs, and contribute to growth. The private sector, both domestic and international, need the removal o f unjustifiedcosts and risks stemming from administrative procedures and various regulations that implicitly encourage informality, limit market opportunities, and reduce the propensityto invest. 5.60 Inthe area of business start up, entrepreneurs have to go through a process that entails 13 procedures, 42 days and whose cost i s about twice the per capita income. Reforms are needed to ease the burdeno f enterprise creation and expand the formal sector. 5.61 Regarding hundicrufs "export taution", Mali needs to take every action to unleash the potential o f crafts products for income generation outside agriculture for the poor inboth rural and peri-urban areas. However, there are currently obstacles to competitiveness o f export o f Malian crafts: a de facto 10 percent "export tax" on handicraft products (the "taxe d'expertise" or assessment tax) is collected by the national museum (ostensibly to certify that the product being exported i s not an antiquity) prior to granting an export authorization. While export taxes were removed in the early nineties, this de facto "export tax" on crafts products is a hindrance to the development o f the sector. Moreover, the national museum has no clear definition of a Mali cultural product, no system of determiningthe age o f the products, and no reference pricing system to assist exporters to price their products properly. Evenfor products other than handicrafts exports, 37 such a fee should correspond to a technical service requested by the exporter to determine the value and to brand the product so as to facilitate its sale on export markets. Government actions to date 5.62 Inorder to facilitate business start up, the Council ofMinister agreed to the principle of having a single national identification number that would help simplify, inter alia, business registration procedures. The single identification number, which will be managed by the Statistics Directorate in the Planning Ministry, would collapse the number o f departments involved in the process from five to one. Whereas currently a candidate for business start up has to secure different identification numbers from the statistics, tax, treasury, employment, and social security departments, the new system would allow the investor to get all this captured inone number issued bythe statistics directorate. 5.63 The regulatory framework for the collection o f the handicrafts export assessment tax i s spelled out inthe following texts: a law and its implementation decree, both dated 1986, settingthe conditions for dealing with cultural goods exports, and an inter-ministerial decision taken by the Ministers o f Culture and Tourism in 1996. Articles 20 and 21 o f this inter-ministerial decision are abusively interpreted. While these texts are aimed at protecting the cultural heritage, the assessment tax and the export authorization are applied to all crafts products exports. This indiscriminate fee i s appliedpresumably because many crafts products could be artistically aged and sold as antiques. Measures taken as part o f the proposed operation 5.64 The following measureswere achieved under EPPFMC: 0 Adopted an interministerial law (arrgte? specifying that handicraft products are subject neither to the expertise tax nor to the export authorization issuedby the National Museum; 0 Launched an awareness campaign to inform artisans that they are not required to obtain export authorization from the National Museumnor pay the expertise tax; and, 0 Prepared and submit a law to the National Assembly specifying a reduced number of departments inthe process for registering a business from five to one. Indicativetrigger for the next operation 5.65 The proposed trigger for the private sector component is: Adoption by the National Assemblyo f a law confirming that issuance o fthe single identification number for new businesses would be handledby one department (the Statistics department) instead o f five. 2.D. Office duNiger IrrigationReforms Description and challenges 5.66 The OBce du Niger (ON) irrigation zone has undergone some institutional reforms during the decade o f the 90s, which resulted in the ON becoming one o f the best performing irrigated zones in sub-Saharan Africa. Following a period o f stagnation in the production o f paddy rice, there was an extended production boom from 1988 due to rehabilitation o f canals, on-farm technical reforms and changes in fertiliser use, all resulting from significant institutional reforms at 38 within the ON and policy reforms at the national level (e.g., rice market Iiberalisation, tax reforms, CFA franc devaluation). This spectacular expansion attracted large numbers o f people who, with no available developed lands in the OfJice du Niger area, started to cultivate lands not initially intended for that purpose and thereby generated some problems still faced today. Management o f the Office du Niger i s governed by Performance Contracts agreed with the farmers and the Government-the first dating back to 1996-98; and the current fourth contract in force for the period 2005-2007. 5.67 The ON currently comprises 82,000 hectares o f fully-controlled irrigation areas, out o f a potential o f at least 600,000 hectares. Concerns have been expressed recently about the ON'S capacity to continue implementingreform measures to further improve its performance. The Bank- supported National Rural Infrastructures Programme (PNIR) includes new reforms under the Large Irrigation component to improve the funding mechanism for irrigation, specifically introduction o f approaches to attract private sector funding to enable more rapid expansion o f irrigated areas inthe Ofice. Two activities were implementedin connection with the private sector financing objective: (i)anexperimentaltesttointroducetheprivatesectorintotheKomounazone; and(ii)studyon a irrigation funding mechanism. Additionally, an organizational audit o f the Ofice du Niger i s underway as part o f the effort to improve the performance and corporate governance o f the ON. The outcome o f these activities are reflected inthe current Performance Contract (or Contrat Plan) for 2005- 2007. 5.68 The challenge will be: (i) adopt a reliable and attractive irrigation funding mechanism for to the private sector (inclusive o f small holders, agro-businessmen as well as the financial market) and to establish an execution agency-the Land Tenure Agency-to manage irrigation development funds and the land sale; and (ii) adopt relevant proposals to rationalise ON management and to improve ONperformance. Government Action to date 5.69 Underthe PNIR the Government has already developed the Koumouna plot (1115 ha) inthe ON. Private sector bids to purchase lands are in process o f being analysed. The study on the irrigation financing mechanism has been completed, and the decree on the installation o f private operators has been signed. An acceptable Performance Contract for 2005-07 has been signed by the Government, ON, and the producers. Measures taken as part o f the proposed operation 5.70 These measures are the following: o Continuedimplementing the 2005-2007 Performance Contract program agreed between the OfJice du Niger, producers, and external aid partners; o Reviewed implementation o f the 2005-2007 Performance Contract for the OfJice du Niger and its annual budget; o Finalized the attribution o f land to the private sector inthe Koumouna test zone, according to the criteria detailed inthe Legal Agreement for the Rural Infrastructure Project; o Moved the Land Management Unit to the CEO's Office and nominate the Manager o f the Unit; 39 o Signed the contract for the consultant conducting the organizational audit of the Office du Niger. Indicative triggers for the next operation 5.71 The proposed trigger for the private sector component is: Strengthen the report on the irrigation financing mechanism in line with the original objective o f augmenting resources allocated to irrigation through capital markets and private operators in the agriculture sector; and adopt the revised report. 3. StrengtheningPublicExpenditureManagement,Transparencyand Controls ' 3.A-E. PublicExpenditureManagementReforms Description and Challenges 5.72 A series of studies over the past few years (e.g. CPAR, CFAA, ROSC, EU's audit o fbudget support flows) have clarified the strengths and weaknesses o f Mali's budget system. Each o f these studies comprised recommendations and an action plan, requiring the authorities to monitor and report on the status o f implementation o f multiple plans for multiple donors, placing a burden on the already stretched capacity o f the Government. Inthe spirit o f donor harmonization aimed at easing the burden on government institutions, a consolidated action plan comprising recommendations of the various studies and based on a consolidated diagnostic o f those studies, . was agreed with the donors and adopted by the Government. 5.73 Overall Mali's budget system i s reasonably good, particularly at central government level. However, the system requires further strengthening to consolidate past achievements so as to support implementation of the Government's medium term budget reform program, and strengthen the role o f the budget as the key instrument for PRS implementation and the dialogue with the external partners. A major challenge for Mali i s to strengthen all budget control-related functions (i.e., administrative, internal, external, jurisdictional and legislative), so as to assure reliability of the budget system. Inparticular, emphasis needs to be on capacity building and establishment of an adequate institutional framework for independentjurisdictional audits. Progress inthis area would also assure external partners of the effectiveness o f Mali's budget system and facilitate the move to greater budget support flows. 5.74 Mali initiated its decentralization process in the early 1990s and has been working progressively over the years toward making it a reality. To advance implementation o f the decentralization process, the Government adopted the Institutional Development Program and in 2004 to accelerate the transfer of resources and competencies, the coordination and harmonization of functions, and the strengthening of the capacities o f authorities in the local govemments (the coZZectivith territoriales) in resource mobilization. The Government also adopted the texts governing the transfer of competencies in the priority sectors o f health, education, and water supply. Some important progress was achieved towards strengthening capacities of actors at sub- national level, such as the establishment of functioning Commune Advisory Centers (CACs) and o f technical and financial structures supporting the local govemments. 40 5.75 The Government i s nonetheless conscious o f the remaining challenges to implementingthe decentralization the process, notably: (i) the slow transfer o f the competencies and resources from the national to the local governments; (ii)the weak mobilization oflocal governments' own resources; (iii)the lack o f articulation between the sector programs (health, education, rural infrastructure) at the national level and the programs developed by local governments with the assistance o f the CACs; and (iv) some gaps inthe legal texts on decentralization resultinginweak coordination o f planning and management o f regional and local development. A key element of the process i s to ensure that public finance mechanisms are established and strengthened to enable progress in transferring resources to, and monitoring expenditure execution, o f the local governments. Government Action to date 5.76 Under the SAC IV, improvements to Mali's public finance system fell under two broad thematic areas: (i)strengthening o f budget execution and public expenditure control systems (integration o f the information systems, improvement o f budget execution procedures, strengthening o f internal and external controls, and introduction o f monitoring and evaluation tools); and (ii) improvement o f the transparency and the traceability o f public funds (to ensure a wider diffusion of the Government's consolidated accounts). As regards budget execution, the interconnection o f key budget-related departments in MEF, inclusive o f the establishment o f a shared data base covering all phases o f budget execution process (commitment, confirmation, authorization, payment), has been an important step in assuring the quality o f budget data and of budget management overall. The interconnection was achieved at the central government level, and actions toward achieving it at decentralized government level (regional units o f the MEF departments) were initiated. Actions were also initiated to establish an automated auxiliary accounting system in the Treasury department. To facilitate management o f procurement costs, a reference list o f prices was updated based on a 2004 survey and made available to staff electronically (on CD-ROM). To strengthen public procurement monitoring, terms o f reference were prepared to establish a data base o f information from the different phases o f the procurement process. 5.77 Budget control system. Regarding strengthening o f budget control activities, the authorities: (i) introduced monitoring indicators inMEF's Financial Controls Department to track the quality o f control activities and improve effectiveness through performance-based audit processes; (ii) established a classification system for invoices, and its difhsion to staff to facilitate ex-ante controls and reduce the number o f payment commitment requests that are rejected; and (iii)provisionedresources inthe 2006 Budget Law to fund actions needed to transform the Accounts Section o fthe Supreme Court into an independent Court o fAccounts. 5.78 As regards improvement o f the transparency of budget management, the capability to provide data on budget execution status was strengthened at central and decentralized levels. This contributed to strengthening the quality o f the quarterly information report produced by the MinistryofEconomy andFinance, which now includes information onbudgetexecutioninpriority sectors. The authorities commenced dissemination through the Internet o f the expanded quarterly report, made possible due to the software and database interconnection discussed above (paragraph 5.76). As regards accountability, the authorities made significant progress intimely completion o f the annual budget execution report (Loi de R2gZement)-the 2003 report was submitted to the 41 National Assembly in December 2004 only three months behind schedule, and the 2004 report was submittedat the end of September 2005 as requiredbythe statutes. 5.79 The authorities prepared and adopted a Consolidated Government Action Plan to Modernize and Strengthen Public Finance Management (PAG) over the medium term (2006-2008), signaling the Government's commitment to achieving increased aid flows through budget support for PRSF implementation. They have provisioned resources in the draft 2006 budget for the 2006 actions in the FAG, and are implementing precursor actions identified for 2005 to enable timely implementation o f the PAGin2006. Measures taken as part o f the proposed operation 5.80 As regards budget execution, the actions supported by the EPPFMC continue the process of interconnection o f key MEF departments at decentralized level that was initiated inthe SAC IV. This process i s consistent with the Government's Institutional Development Program (PDI) to operationalize the decentralization policy comprising de-concentration o f central government operations (specifically health, education and water supply) to regional departments so as to facilitate the operations o f local governments. It i s also consistent with the coordination framework with other external partners supporting Mali's decentralization program, with the Bank focusing on public finance aspects inwhich it has a comparative advantage and other external partners focusing on institutional capacity building o f the local governments. Scheduling o f the interconnection activity under the EPPFMC i s in line with the January 2007 target date under the PDI for transferring responsibility for health and education programs to the local governments. Specific actions under the EPPFMC are: 0 Establishment o f the institutional framework for implementing the public finance action plan; defining the mechanisms for its implementation, monitoring and evaluation; and providing adequate resources in the draft budget 2006 for implementing the 2006 activities o fthe actionplan (prior action); and 0 Steps taken to ensure the implementation in 2005, o f 2005 actions from the Modernization Plan that have no budgetary implications. 5.81 Budget control functions. Under the EPPFMC the authorities are focusing on capacity building o f audit departments and enhancing performance-based management. The following actions are included inthe policy matrix: Strengtheningadministrative control o fthe budget: 0 Establishment o f a framework for consultations between all participating entities in the public expenditure control system; 0 Provision o f adequate resources (financial and human) for implementation o f 2006 activities o f the Finance Inspection department (IF), as determinedby its specific objectives for 2006 and their control responsibilities; 0 Provision o f adequate resources for 2006 activities o f the General Public Service Audit Department (CGSP), as determined by their audit and capacity buildingprogram for 2006; 0 Production o f semi-annual reports on ex-post (IFandCGSP) administrative control activity; and 42 0 Production o f quarterly expenditure activity reports on the basis o f ex-ante control performance indicators. Strengtheningjurisdictional control ofthe budget: 0 Provision o f adequate resources in the draft 2006 budget for the Accounts Section o f the Supreme Court as determinedbythe Section's agreed work program for 2006; 0 Provision o f adequate budgetary resources in the draft 2006 budget for the eventual change inthe statutory numbero fstaff for the Accounts Section o fthe Supreme Court; 0 Definition o f the timeline for the establishment o f the Court o f Accounts consistent with Mali's commitment under WAEMU; 0 Rewriting o f the legal texts to increase the statutory number o f magistrate staff in the Accounts Section o f the Supreme Court from 15 to 67 by 2008; and 0 Commenced implementation o f actions required to redefine the status o f magistrates o f the Accounts Section o f the Supreme Court. 5.82 Budgetary transparency and accountability. The EPPFMC supports the systematic and timely production o f budgetary information so as to strengthen public finance management and transparency. The following actions are included inthe policy matrix: 0 Establish the website o f the Ministry o f Economy and Finance along with the institutional framework to daily management and regular updating o f the site. Complete compilation o f information to be posted on the site, including the MTBF o f the budget department, and the budget execution status prepared by the Financial Controls department DNCF, disaggregated by Ministryat the engagement and liquidation stages. 0 Prepare and submit the draft 2004 Budget Execution Law ( h i de r2glernent) to the National Assembly. Indicativetriggers for the next operation 5.83 The proposed trigger for the public finance management component is: Implement mechanisms for monitoring and evaluation o f the Government's public finance action plan; and implementthe actions inthe plan. 3.F. ProcurementReforms Description and Challenges 5.84 The 1998 Country Procurement Assessment Report (CPAR) prepared by the Malian Government and the Bank concluded that Mali possesses a corpus o f legislation and regulations that was remarkable for the sub region and that the private sector operated satisfactorily, benefiting from a widespread network and modem commercial practices. However, the report showed that far-reaching measures had to be adopted to (i)increase the public sector's efficiency and transparency o f its procurement system; (ii)improve the dialogue with the private sector, so that it can develop and become more competitive; and (iii) smuggling and import fraud. The 2004 reduce CPAR o f the Malian procurement system was based on an analysis of four pillars that define the structure o f a public procurement system, namely: (i)the legislative and regulatory fi-amework; (ii) 43 the institutional framework and capacity; (iii) procurement operations and market practices; and the (iv) the integrity of the public procurement system. The report concluded that the system continues to harbor a significant number o f deficiencies inthe four pillars as indicated below: (i) I: ThelegislativeandRegulatoryFrameworkisthestartingpointforthedevelopmentof Pillar a governance system and sets the rules o f the process and provides the legal basis for enduringthe rights of participants and establishing their responsibilities. Public Procurement Legislative and Regulatory Framework achieves the agreed standards and complies with applicable obligations:The legislative framework which i s governed by the Procurement Code - Dkcret No 95-401P-Rm o f November 10, 1995 needs to be completed and modernized to meet the agreed international standards and comply with applicable internal and external obligations. Existence of Implementing regulations and Documentation: Mali possesses a set o f implementing regulations and documentation (ministerial arr&tks, standard procurement documents and a manual o f procedures). However, like the code, they need to be completed andmodernized. (ii)Pillar 11: TheInstitutional Framework and Capacity is designed to examine the central government institutional framework and its capacity to oversee, manage and support efficient implementation as well as to provide leadership in modernizing and maintaining the public procurement system. Mainstreaming Procedures into Public Financial Management: Public procurement inMali is not an integral part o f the overall public financial management and public sector governance systems in a country. The procurement system should be strengthened to provide information to support the process o fbudgetdevelopment and execution. It should also be made to benefit from the public financial management system with regard to timely appropriations and availability o f funds to support the award and payments o f contracts. The lack o f integration between the budgeting and procurement processes may lead to cancellations and/or insufficient funds to make timely payments, resulting in increased costs and inefficiencies in the use o fpublic h d s . Existence of Functional Management Regulatory Body: Mali should benefit from the existence o f a regulatory body within the central government to provide a range o f functions that support the consistent development, maintenance and application o f the legislative and regulatory requirements o faprocurement system. This body canprovide guidance on interpretation o frules and support training and capacity development and can develop and overseethe implementation of the use o f technology to support procurement, including development and support to e- procurement solutions. The present system in Mali lacks independence and i s not efficient enough to respond to the needs o f a sound public procurement system. DNMPis supposedto be the bothregulatory and control body; there i s no separationo fresponsibilities andit gives rise to situations o fconflict o finterest. Existence of Institutional Development Capacity: The performance o f the system relies heavily on the capacity o f the participants, both public and private sector, to understand and implement the procedures. Performance is also reliant on the capacity o f the various stakeholders who interact with the system. There i s not an efficient system for collection and 44 dissemination o f procurement information, including tender invitations, requests for proposals and contract award information or for collection and monitoring of national procurement statistics. In addition, Mali does not have a national sustainable training strategy to provide training, advice and assistance to develop the capacity o f government and private sector participants to understand the rules andregulations andthe how they should be implemented. (iii)Pillar III:Procurement Operations and Market Practices: Public procurement requires performance from both the public sector and private sector participants. A functioning and competitive private sector market i s therefore a key partner to the public procurement system in a well-functioning system. To be an effective partner, the market must have confidence in the competence o f the contracting authorities at all levels within the system to implement and administer the public procurement system inaccordancewith the legislative andregulatory framework. EfJiciency of Procurement Operations and Practices: Procurement operations capacity and practices are at the core o f a well-functioning procurement system. They depend on the staffing, knowledge, skills and capabilities o f the human resources and on the incentives and controls in the systems that influence human behavior and institutional performance. The assessment has shown that the level o f procurement competence among government officials within the entity is not consistent with their procurement responsibilities; the procurement training and information programs implemented for government officials and private sector participants i s not consistent with demand and the administrative systems for public procurement operations, and information databases, to support monitoring o fperformance and reporting to and responding to the information needs o f other related government systems are inadequate just as the internal control mechanisms for the undertaking o f procurement operations at the contracting level which includes a code o f conduct, separation o f responsibilities as a checkhalance mechanism and oversightkontrol o f signature/approval authority. Functionality of the Public Procurement Market. A developed private sector able to respondto procurement opportunities i s important to a well-functioning public procurement market. The assessment has shown that there are major systemic constraints (e.g. inadequate access to credit, access to information on business opportunities, non existence o f an efficient complaint mechanisms, and other contracting practices etc.) inhibiting the private sector's capacity to access the procurement market. The report lists a few recommendations to improve the partnership betweenthe public and private sector. (iv) Pillar IV: The Integrity of the Public Procurement System. The system in Mali i s characterized by a lack of transparency, credibility and fairness. The report makes recommendations to strengthen the system by putting in place efficient mechanisms for independent control and audit o f procurement operations to provide for accountability and compliance. Similarly, there is a recommendation to put inplace a complaint mechanism to allow participants to file complaints and challenge decisions with administrative andjurisdictional review bodies having both appropriate levels o f independence and the legal power to impose corrective measures and remedies against contracting entities inbreach o fthe legal andregulatory framework. Even though corruption has been adequately addressed in legislation, there i s a lack o f accompanying measures for its enforcement. The Government o f Mali should address the issue of ii-aud, corruption and conflict of interest inlegislation as well as through special measures inorder to createa soundandfair environment for public procurement system. 45 Government Action to date 5.85 Following the action plan o f the 1998 CPAR, the Government engaged in a reform program with the assistance of an InstitutionalDevelopment Fund(IDF) Grant o f an amount o fUS$434,000. This grant's objectives were to allow the Government to (i) the National Procurement Code revise (Code national des marchis publics) in 1999; (ii)redefine the attributions o f the National Procurement Department (Direction ginhale des march& publics, DGMP); (iii)prepare the procedures manual and standard procurement documents; (iv) organize training sessions for staff involved inprocurement both at the central and decentralized levels o f the administration; and (v) put in place an information system in DGMP to strengthen its capacity to be more effective in managing and controlling the system. 5.86 The Government implementedonly some o f the above actions financed by the IDF and its impact on the public procurement system as a whole was limited. The Government failed to provide the number o f trained procurement staff to support the decentralizationpolicy andthe tools neededto do their work more efficiently. Inaddition, the Government did not implement the full range o f the recommendations made inthe 1998 CPAR which i s believed to have contributed to the degradation o f the system and its environment. Nonetheless, the authorities recently established a procurement reform committee comprising representatives from all stakeholders (Government, private sector, civil society) to review the 2004 CPAR update. This bodes well for implementing procurement reforms going forward. Bank's assessment and recommendation 5.87 Given the fact that procurement cuts across all sectors and given its sensitivity, there is a need for the Government to involve other national stakeholders such as the private sector, the civil society and other key ministries in the diagnostic study and reform. The stakeholder committee established by the Government i s deemed to be too large for effective discussion and decision making on procurement reforms. Furthermore the committee i s not sufficiently independent of the Government. It i s advised that the size o f the committee be reduced to a workable number of stakeholder representatives. The Government should also invest the new committee with full authority to steer the procurement reform process inpartnership with (rather than in subordination to) the Government. Measures taken as part o fthe proposed operation 5.88 The following measures have been achieved under the EPPFMC: 0 Establishment o f a tripartite national steering committee (comprising a restrained number of administration, private sector and civil society representatives) to coordinate and monitor implementation o fprocurement reforms (CNCS); and, 0 Adoption by the committee o fthe revised CPAR. 46 Indicative triggers for the next operation 5.89 The proposed trigger for the procurement component is: Adoption (by the Council o f Ministers) o f the revised CPAR. 6. OPERATION IMPLEMENTATION POVERTYANDSOCIAL IMPACTS 6.1 The poverty and social impacts o f the EPPFMC are expected to be favorable overall. Many of the measures have an indirect poverty and social impact through creating the conditions for improved governance and provision o f public services (Le., macroeconomic and public finance management), improved quality o f infrastructure services (Le., transport road maintenance, irrigation reforms), health or and access to financial sector services (i.e., financial sector reforms) and lower cost o f goods and services (transport road maintenance, trade facilitation). The potential increase inthe road user fee on petroleum product imports would tend to negatively impact better- off households rather than the poor since the former consume much more petroleum products than the poor (see Annex 13). The elimination o f the export-related "expertise tax" on handicrafts would benefit the poor since handicrafts are a major source o f income for large numbers of the poor. Handicraft activities are also the main source o f diversification outside agriculture in the rural areas, thereby translating into economic opportunities for the poorest Malians. As regards the cotton sector, the findings o f the poverty and social impact analysis (PSIA) o f the cotton producer price reform, suggest a much less adverse impact on farmers o f the drop in producer prices than initially feared. Annex 11 explains the dynamics underlyingthose findings. IMPLEMENTATION, MONITORINGEVALUATION AND 6.2 Supervision and monitoring o f results. The Ministry o f Economy and Finance i s the main interlocutor o f this operation, and i s responsible for overall coordination o f supervision and monitoring o f program implementation through a commission chaired by the Secretary General of the Ministry o f Economy and Finance. The commission will comprise designated representatives o f concerned sector Ministries (Transport, Industry and Trade, Investment Promotion and Small and Medium Enterprises, Culture, Tourism and Artisan Activities, Health, Education, State Patrimony), MEF Departments (Treasury, Budget, Financial Controls, Internal Controls, Fiscal, Customs), Agencies (Procurement (DGMP); the Financial Sector Development Project Unit (PDSF), Mission de Restructuration du Secteur Coton (MRSC), the Road Authority; National Highway Department; Public Sector Retirement Fund (CRM); Private Sector Insurance Agency (INPS); Office du Niger, the Central Bank) or Companies (CMDT); and the various private sector banks (BIM,BHM,BDM). 6.3 The participating Ministries and Agencies will furnish relevant documents to the MMU accompanied by an explanatory note (see below for hrther sector information as applicable). The MMUwill confirm and validate those notes and other documentation, and consolidate them into a package to be provided to IDA. The package will cover: (i) progress on the implementation o f the actions inthe policy matrix, (ii) progress on the jointly agreed key performance indicators; and (iii) macroeconomic developments, particularly budgetary outcomes. On a monthly basis, budget 47 revenues and expenditures, reconciled bank accounts and statements o f the EPPFMC's deposit account will be submitted to IDA. On a yearly basis, the detailed draft budget will be provided for review and discussion, prior to its adoption by the Council o f Ministers. IDA supervision missions will also monitor EPPFMC implementation, incoordinationwith the IMFand other major donors. 6.4 For Transport and trade facilitation, the Road Authority will produce monthly reports detailing: resources transferred from the Government budget, revenues from the axle load duty, revenues from the road user charge on petroleum products and revenues from road tolls. The 2006 road maintenance program will be prepared by the National Highway Department. A convention will be signed between the National Highway Department and the Road Agency delegating to the agency the management o f the execution o f the roadmaintenance program. In2007, a technical and financial audit o f the Road Agency and the Road Authority will review the financial and technical execution o f the 2006 road maintenance program. The service o f the Road Data Bank will carry out a survey in2006 and 2007 which will provide information on the condition o f the road network and the impact o fthe roadmaintenance program executed in2006. 6.5 For private sector development measures (Export assessment tax and Investment Climate), the Ministry o f Investment Promotion will be responsible for policy measures pertaining to business start up and property registration and will work closely with the Planning Ministry (regarding the single identification number) as well as the "MinistBre des Domaines de Z'Etat" (regarding property registration issues). 6.6 For handicrafts exports, whilst the Ministries in charge o f handicrafts and culture are responsible for the passing o f the "arre"tk interministe`rel" and for the communication campaign, the Ministry of Finance retains the primary responsibility o f making things happen as agreed upon in the context o fthe proposed operation and reporting onprogress. FIDUCIARY ASPECTS Publicfinancialmanagement(PFM) system 6.7 A Country Financial Accountability Assessment (CFAA) was completed in FY03. The main conclusions o f this report are that the Malian PEM system is quite coherent, with a strong budget process, functioning ina clear organizational framework with an improvingcontrol system. However, there are areas that need improvement. To further strengthenthe financial accountability, an integrated action planover the mediumterm (paragraph 4.16) was discussed and agreed with the Government and donors. Implementation o f the action plan is being supported under EPPFMC and will be supported under subsequent operations. Fundsflow arrangements2' 6.8 An on-site safeguards assessment o f the BCEAO proposed specific remedies to alleviate vulnerabilities that were identified by IMF staff. Although Fund staff and BCEAO authorities disagreed on the initial modalities o f the recommendations, the following specific understandings were subsequentlyreached regarding the keyremedies. ~~ 2oDraftstaffreport for the SecondReviewUnderthe Threeyear ArrangementUnderthe PRGF(July 2005). 48 6.9 Financial reportingframework. Fund staff recommended that the BCEAO formally adopt International Accounting Standards (IAS) and publish a complete set o f financial statements, including detailed explanatory notes. It was agreed between the BCEAO and Fund staff that the BCEAO will strive to improve its financial and accounting reporting by aligning its practices with those recommendedby IAS, as adopted internationally by other central banks. 6.10 Internal controls system. The staff noted that the absence o f oversight o f the bank's governance, financial reporting, and internal control practices by an entity external to the management o f the BCEAO represented a significant risk. It was agreed between the BCEAO and Fund staff that, after seeking the opinion of the external auditor (Commissaire Contrdleur), BCEAO staff will propose to the BCEAO Board o f Directors that it adopt a resolution whereby the external auditor will be required to apprise the Board o f Directors, during its annual review and approval of the financial statements, o f the state and quality o f internal controls within the bank. 6.11 Based on the 2002 financial statements, the staff noted that the BCEAO has improved the explanatory notes to the financial statements and further changes are scheduled for the next fiscal year, with a view toward a graduated alignment with I A S accounting to the extent applicable to central banks by 2005. The external auditor has apprised the Board o f Directors o f the BCEAO o f the quality o f internal controls in June 2003, and the financial statements for the year 2002 were published on the bank's website. The staff will continue its follow-up on the progress of the BCEAO in implementing the proposed recommendations as part o f the ongoing safeguards monitoring process. DISBURSEMENT AUDITING AND 6.12 The proposed credit will follow the Bank's disbursement procedures for development policy credits. The untiedbudget support will be disbursed against satisfactory implementation of the development policy program and not tied to any specific purchases and no procurement requirementswill be needed. Once the credit is approved by the Board and becomes effective, the proceeds o f the credit will be deposited by IDA in an account designated by the Borrower at the Central Bank o f West African States (BCEAO) in Bamako at the request o f the Borrower. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower's budget management system. If the proceeds o f the credit are used for ineligible purposes as defined in the Development Credit Agreement, IDA will require the Borrower to promptly refund upon notice from IDA, an amount equal to the amount of said payment to IDA. Amounts refundedto the Bank upon such request shall be cancelled. Although an audit o f the deposit account will not be required, IDA reserves the right to require audits at any time. The administration o f this credit will be the responsibility o f the Ministry o f Economy and Finance. ENVIRONMENTAL ASPECTS 6.13 The implementation o f the EPPFMC reform program is not expected to have any negative environmental impact, especially inthe short-term horizon o f this operation. Implementation of the sector reforms under the operation (cotton, irrigation and transport) may have environmental implications. Potential implications o f irrigation and transport measures are being addressed under the respective ongoing sector operations-the National Rural Irrigation Project (FYOO) and 49 Transport Corridor Improvement Project (FY04). Implementation o f the longer-term cotton sector reforms may have environmental implications due to the potential increase incotton production and attendant increase in fertilizer/pesticide use. An assessment of the likely environmental impact shows, however, that the magnitude o f environmental risks strictly associated with the cotton sector i s very limited, as no major expansion o f cotton cultivated areas i s expected. Specific measures that will address the minimal potential environmental impact of the cotton recovery program are included inthe ISDS o f the Agricultural Services Project (PASAOP, FY02). Environmental issues associated with the cotton privatization program will be incorporated in the biddinghegotiations process for each company privatized. 6.14 The EPPFMC program, ifsuccessful, would likely contribute to expansion o fprivate sector activity, inclusive o fproduction operations inpolluting sectors. These impacts will be addressed to some extent under future Bank projects, but would best be tackled in a perennial manner through the country's environmental management agency. Yet Mali's capacity to guide industrial development in sustainable manner (through, for example, the review o f proposals, issuance o f permits, and enforcement o f standards) i s currently assessed to be weak. Consideration for providing Bank support to strengthen Mali's environment management capacity should be discussed inthe context of the upcoming CAS exercise. R I S K S ANDRISK MITIGATION 6.15 The operation faces the external, institutional, and political risks. External risks stem mainly from the well-known vulnerability o f the Malian economy to vagaries o f weather and commodity price fluctuations (cotton, oil) as well as regional crises (e.g., Cote d'Ivoire, cricket infestation). Mitigating these risks over the horizon o f the proposed project remains difficult. However, the project would be broadly consistent with policies and initiatives to reduce Malian economy's structural vulnerabilities over the medium term by the inclusion o f key measures for financial sector development, transport diversification and trade facilitation measures (including customs reform). Additionally, the country dialogue would allow for some budget flexibility to address crisis-related expenses within the context o f a prudently managed budget supporting priority growth and poverty reductionprograms. Increasingprogress toward predictable and timely donor support and coordinationpromoted under the project will also bekey. 6.16 Institutional risk comprises the threat o f weak capacity and governance to program implementation and outcomes. This risk o f slower-than-desired program implementation stemming from capacity constraints will be reduced through continued technical support by the Bank and other donors to strengthen capacity, particularly in coordination o f the PRSF and growtWmacroeconomic programs. Project design also includes strengthening growth-critical areas such as prudent fiscal policy, financial sector development and transport and trade facilitation. Furthermore, by building on the good record o f policy reform in public finance management, the Credit itself will contribute to the institutional strengthening o f various agencies involved inpublic finance management including at sub-national levels. 6.17 Political risk remains that the Government's current commitment to the continued reforms, including privatization and liberalization program (banking, cotton, transport, telecommunication sectors) could wane. Potential re-opening o f discussion on agreed measures could cause a loss o f momentum in reform implementation. This risk i s constantly monitored by the country team in order to detect problem areas early on and adjust the Bank response as needed. Finally, and 50 perhaps most importantly, given the low international cotton prices, there i s a critical political risk that insufficient recovery o f world cotton prices would dictate a sharp downward adjustment in local producer prices, an adjustment that could prove politically extremely difficult. While this risk i s not possible to control, the operation draws from estimates o f the potential poverty and financial impact o f various cotton prices in order to inform the policy choices and trade offs between the need for local prices to reflect world market conditions and the desirability o f cushioning the temporary impact on the poor. 51 ANNEX 1: LETTER OF DEVELOPMENT POLICY Unofficialtranslationof the Frenchoriginal To: Mr.PaulWolfowitz Presidentof the World Bank Washington,DC Subject: Letter of DevelopmentPolicyfor the EconomicPolicyand PublicFinanceManagementCredit Mr.President: IhavethehonortosubmitthisLetterofDevelopmentPolicytoyouinsupport ofthe request o f the Government o f Mali for World Bank assistance for an Economic Policy and Public Finance Management Credit (EPPFMC). The assistance requested will allow the Government to continue implementation o f a reform program covering the following areas: (a) the macroeconomic and budget management, and poverty reduction strategy; (b) support to economic growth; and (c) improvement o f public finance management. It will also help cover the residual financing gap for fiscal year 2006, thereby ensuring financing o fthe priority public finance program for that year. The Ministry o f Economy and Finance will coordinate implementation o f EPPFMC- supported activities through a commission chaired by the Secretary General o f the Ministry which will include, among others, representatives o f the other ministerial departments involved with the reform program, as well as the Cotton Sector Restructuring Mission Unit (Mission de Restructuration du Secteur Coton). The attached documents are an integral part o f this Letter o f Development Policy. They set forth the specific objectives, strategies, and action plans for each program component that the Government intendsto implement, as well as their implementation schedule. Very trulyyours, / S I Abou-Bakar TRAORE Ministero fEconomy andFinance Attachments: Letter o fDevelopment Policy Matrix o f Reform Measures 52 MALI REFORM PROGRAMSUPPORTED BY THE ECONOMIC POLICY AND PUBLIC FINANCE MANAGEMENT CREDIT (EPPFMC) 1. OBJECTIVES OF THE REFORM PROGRAM SUPPORTEDBY THE EPPFMC 1. The Economic Policy and Public Finance Management Credit (EPPFMC) falls within the scope o f continued assistance by the World Bank to Mali to achieve macroeconomic stabilization. It seeks to support the Government's efforts to strengthenthe fundamentals for robust, sustainable, and equitable economic growth. To this end, it focuses on: (i) strengthening and deepening the reforms undertaken by the Government in recent years as part o f the Third and Fourth Structural Adjustment Credits (management of the budget, financial sector, cotton sector, and Office du Niger); (ii)providing assistance to the Government with implementation o f its poverty reduction strategy prepared in 2002 and the establishment o f conditions conducive to greater support for the strategy through direct budgetary assistance. The reform program revolves around three principal components. 2. The first program component is aimed at strengthening the macroeconomic, budgetary, and poverty frameworks. It encompasses those activities whose implementation should contribute to: (i) maintaining a coherent macroeconomic framework; (ii) enhancing consistency between fiscal policy and the poverty reduction strategy; (iii)strengthening implementation o f the poverty reduction strategy framework (PRSF) and preparing the second generation PRSF (2007-2011 period); and (iv) pursuing cotton sector reforms, including implementation o f ajoint vision o f the Government and all partners on progress made with cotton sector reform and the privatization o f the Mali cotton ginning company Compagnie Malienne pour le De'veloppement des Textiles (CMDT). 3. The second component covers reforms aimed at supporting equitable economic growth, with a view to achieving the poverty reduction objectives that the Government has set itself. It is deepeningthose reforms already undertaken as part o f the Fourth Structural Adjustment Credit in the financial sector and OfJice du Niger, and is expanding reforms to other key growth areas o f the Malian economy, such as transport and trade facilitation, export promotion, and the business climate. 4. The third component is aimed at strengthening budgetmanagement. The objective o fthis component i s the operationalization o f modem management tools that have been successfully implemented in recent years, with emphasis on streamlining the budget process and achieving greater transparency and dissemination o f budget information. This component also includes the basic elements for more extensive reform o fnational public procurement procedures. 53 2. STRENTHENING MACROECONOMIC AND BUDGET MANAGEMENT AND THE POVERTY REDUCTION STRATEGY 2.I Specific Objectives 5. Implementation o f this component should contribute to stabilization o f the macroeconomic framework and to greater consistency in fiscal policy. Specifically, the actions planned should, as a whole, contribute to: (i) maintaining prudent fiscal policy within a coherent macroeconomic framework; (ii) strengthening the overall consistency betweenthe budget and the poverty reduction strategy and improving mechanisms for the sectoral allocation o f resources (Medium-TermBudget Framework - MTBF); (iii)improving the allocation of intra-sectoral resources that target the development objectives sought by sectoral policies (Medium-Term Expenditure Framework in the health, education, and infrastructure sectors); and (iv) strengthening the PRSF process as a whole (implementation o f the 2002-2006 PRSF and preparation o f the 2007-2011PRSF). These actions fall within the scope o f deepening the activities supported by the Fourth Structural Adjustment Credit (SAC IV). The objective o f this component was to provide overall visibility to public policies and medium-term fiscal policy, with a view to a gradual shift from project assistance to budgetassistance for Mali. 2.2Reform Program 2.2.1 Macroeconomicframework and budgetpolicy 6. Macroeconomic framework. In this regard, the Government is continuing the prudent policy it adopted a few years ago, in particular since the shocks experienced by the Malian economy resulting from the deterioration inthe socio-political environment inthe sub-region. This prudence i s reflected in the design and implementation o f a rigorous fiscal policy which nonetheless ensures the allocation o f resources to the social sectors. In general terms, the Government has therefore pursued a macroeconomic management approach conducive to the stabilization of economic conditions, despite climatic vagaries and unfavorable price fluctuations on the international market (raw materials and petroleum products in particular). It intends to continue this rigorous macroeconomic management in 2006, as reflected in the draft proposal submitted for approval by the national assembly, the thrust o f which i s globally in line with the economic outlook for 2006. 7. Fiscal policy. With a view to obtaining the tools for ensuring that public policy i s in line with the state budget, the Government has developed and incorporated several instruments into the budgetary process inrecent years. The results-based fiscal management approach adopted in 1998 has beenbolstered by the introduction o fthe Medium-Term Expenditure Framework (METF). 2.2.1.1 Actions taken in2005 8. Ingeneral terms, areviewprocessundertakenbythe Governmenthaspointedto theneedto organize the use o f these current public policy management tools in such a way that the process i s assimilated by government departments and that second generation PRSF objectives are supported bycredible and financially sustainable strategies. To this end, the Government has decided to make the organizational framework for the budget formulation process clearer, introducing an overall 54 logic into multi-year public expenditure programming by: (i)establishing stronger linkages between the macroeconomic framework and the state budget preparation process, in order provide economic forecasts and analyses on a more regular basis and to integrate them fully with the budget formulation process, thereby enabling them to feed into the other phases (drafting and execution); (ii)establishing strong linkages betweenpreparation ofthe Medium-Term BudgetFramework (MTBF) and the sectoral Medium-Term Expenditure Frameworks; and (iii)creating stronger linkages between this process, on the one hand, and budget formulation and the PRSF monitoring/evaluation on the other. 9. Logical framework. Inorder to implement an organizational framework for the integration o f the PRSF process into the budget process, a logical framework has been adopted with a view to establishment o f the schedule to take effect in2006, inorder to ensure greater consistency between the budget, macroeconomic framework, sectoral priorities, and the PRSF process (preparation and implementation). This logical framework can beensummarized as follows: Conducting a review o f the programs during the first quarter o f the year in question in order to draw lessons from the program budget implementation process and to obtain information for programbudgetpreparation for the three years ahead; Establishing a macroeconomic framework (first quarter) in order to provide medium-term macroeconomic projections and the basic elements for preparing a Medium-Term Budget Framework (March-April) as well as a budget circular letter (May); Updating the Medium-Term Expenditure Framework o f the sectoral ministries (April- May) in order to simulate the intra-sectoral allocation o f resources, taking into account sectoral policy objectives and the poverty reduction strategy; Submitting sectoral draft budgets (program budgets and accounting budgets) to the Ministry of Economy and Finance (July) so that the technical and policy arbitrage processes can be carried out (August). These processes should be clarified through updating o fthe macroeconomic framework; and Submitting the draft state budget, taking into account the findings o f the PRSF implementation report (June), with the different arbitrage processes being finalized (August-September), for approval by the Council o f Ministers (September), followed by submission by the Government to the National Assembly for approval (October). 10. Medium-TermBudget Framework(MTBF). Overall, from the standpoint o fpreparation o f the 2007-2011 PRSF, the Ministry o f Economy and Finance has updated the Medium-Term Budget Framework (MTBF), allocating indicative sectoral financial packages to all ministries and institutions duringthe 2006-2008 period. The MTBF: (i) I s based on recent macroeconomic trends in Mali (2004-2005) and on the medium-term outlook, taking into account the environment in West African Economic and Monetary Union (WAEMU) countries and constraints linked to international conditions; 55 (ii)Makes projections regarding budgetary resources over the 2006-2008 period (internal and external resources); and (iii)Decides on the provisional allocation of expenditures, determined by the Mali's macroeconomic constraints and other sectoral priorities outlined for the social sectors and those sectors that support production. 11. The Government will systematize this highly effective exercise in the context o f PRSF implementation and dialogue with its partners on external support for PRSF implementation. The 2006 updating exercise will, in particular, facilitate operationalization o f the second generation PRSF from a programming andbudgetary standpoint for the 2007-2011period. 12. Medium-Term Expenditure Frameworks (MTEFs). At the sectoral level, the MTEFs for the education and health sectors have been updated for the 2006-2008 period and the Ministry of Equipment and Transport has prepared an initial MTEF for the 2006-2008 period. These activities have paved the way for: (i)ensuring consistency between the sectoral health and education strategies (as envisioned inthe second PRODESS and PRODEC phases), along with the medium-term macroeconomic outlook and the longer term objectives (millennium development goals); and (ii) linking the draft 2006 budget o f the Ministry o f Health and Education with 2006 PRODESS and PRODEC programming. 2.2.1.2. Medium-term actions envisioned 13. These actions will be carried out and strengthened in the years ahead (post-EPPFMC) period, through the following, among others: (i)preparing a Medium-Term Budget Framework (MTBF) for the 2007-2009 period consistent with the 2007-2001 1 macroeconomic framework, which allocates resources by ministry, sector, and expenditure type (deadline: April 2006); (ii) improving the content o f the budget framework letter, along with the provisional allocation o f resources to ministries and institutions as set forth in the MTBF (deadline: end-May 2006); (iii) systematizing the updating o f the health and education MTEFs within the ministries; (iv) updating the Equipment and Transport MTEF for the 2007-2009 period; (v) establishing a schedule for transition from the National Budget Directorate's computer system to the new PTLBSI (GEPRIMA) application for management o f the system (deadline: end-December 2005). 2.2.2. PovertyReductionStrategy Framework 14. The 2002 Poverty Reduction Strategy Framework (PRSF) prepared by Mali i s based on a projection o f the poverty situation and a shared vision o f its fundamental driving factors. The PRSF sets forth an overall strategy aimed at significantly reducing the incidence of poverty in the country inthe medium-term. 2.2.2.1 Actions taken in2005 15. In2005, the Government undertook a number of activities, the general objective o f which was to strengthen the PRSF process through: (i) an institutional mechanism for purposes o f monitoring, implementation, and evaluation (institutional matters, strengthening o f entities, and oversight procedures); and (ii) linkage with the aid harmonization process, and; (iii)bolstering the 56 credibility o f the poverty reduction strategy (defining a clear growth strategy to support the PRSF objectives for the 2007-2011period). 16. Inlinewiththe above, the Government has: (i) Adopted the official documents to restructure the PRSF coordination unit in order to accord it an expanded role in PRSF implementation and monitoring and allocated significant resources to this unit inthe draft 2006 budget so that it can properly serve as a driver o fthe second generation PRSF process; (ii)Produced the second PRSF implementation report based on a process of broad consultation with all stakeholders. This report covers the 2003-2004 period and provides guidance for orienting preparation o f the second generation PRSF, to cover the 2007-2011 period; and (iii)Draftedthetermsofreferenceforthe2007-2011PRSFinlinewith:(1)theprocessfor drafting the 2007 budget and 2006 budget execution; and (2) the formulation o f the second phases o f the sectoral strategies, which will facilitate implementation o f a health and education policyinthe years ahead. 17. Inview ofthe needto basethe 2007-2011PRSF on aclear growth strategy, the Government has incorporated the coordination aspects o f the formulation o f the economic growth strategy into the missions o f the PRSF coordination unit. It i s in the process o f making arrangements to formulate an economic growth strategy that will lay the groundwork for identifjmg objectives for the 2007-2011 PRSF. Inaddition, the 2007-2011 PRSF will provide an opportunity to implement more effective mechanisms for harmonizing the schedule for production o f PRSF implementation and annual evaluation reports, the budget cycle schedule, and implementation o f the joint framework (Govemment/technical-and-financial partners) for monitoring PRSF budgetary assistance. 2.2.2.2 Medium-term actions envisioned 18. During the post-EPPFMC period, the Government will implement a more functional mechanism for PRSF monitoring and implementation, inlight o f the experience gained with 2002- 2006 PRSF implementation. Special attention will be paid to capacity-building within the coordination unit that will pilot the process, as well as the entities involved with monitoring the statistics o fministerial departments. 2.2.3. Cotton sector reforms 19. Implementation and strengthening o f the cotton sector reform process i s a priority for the Government inorder to reinforce the sector's role as the driver o f economic growth and provider o f revenue to the rural populations. From the standpoint o f possible access to increased budgetary resources from the World Bank, the Government i s cognizant o f the importance o f continuing the reform process until the CMDT i s fully privatized, and it pledges its firm commitment to this process. 57 20. In view of the major shortfall experienced during the 2004-2005 crop year, which underscored the risks posed by the cotton sector vis-a-vis the state budget, the Government has adopted a new mechanism for determining the price o f seed cotton through a Memorandum o f Understanding signed by the State, the CMDT, and producers in January 2005. This should contribute to signification mitigation o f the risks tied to the cotton sector and to improved distribution o frevenue among CMDT producers. 21. Duringthe current crop year (2005-2006), all the principles o fthe mechanismwere adopted in fixing producer prices. Based on grain prices in August 2005 (65 cts/lb), projected production (600,000 tons o f cotton seed), and the exchange rate to the dollar (CFAF 500/US$l), the sector should post a surplus for the 2005/2006 crop year. Producers should benefit from a price supplement; consequently, the initial price for the crop year, set at CFAF 160Kg for the highest quality, should not have to be adjusted for reasons offorce majeure (Article 8 o f the January 13, 2005 Memorandum). 22. Moreover, the Government has reached ajoint agreement with all stakeholders on the main steps that should lead to privatization o f the CMDT in 2008. This agreement has resulted in a detailed timetable, implementation o f which should send a strong signal o f its desire to move the process forward. 2.2.3.1 Reform follow up 23. In view of the fact that the key steps during the 2006-2008 period have been clearly identified, the Government will adopt the measures it deems necessary to ensure that the reform process that will lead the sector to the watershed point o f full privatization can be reached by 2008. These steps entail: (i)defining the zones (3 or 4) to be privatized (by January 31, 2006) and adopting a final operational plan for full privatization (by September 30, 2006); (ii) launching the bidding process for recruitment o f the privatization council (by July 30, 2006); (iii) adopting the draft privatization law (September-November, 2007); (iv) issuing invitations to tender for the privatization o f zones (January 2008); and (v) executing o f the process o f privatization until the actual sale takes place (August 2008). 3. SUPPORTTO GROWTH 3.1 Objectives 24. The Government has already implemented the reforms supported by the Fourth Structural Adjustment Credit (SAC IV), based on the results of analytical studies conducted by it. These reforms include the development o f the financial sector and reforms applicable to the Ofice du Niger. These measures have been undertaken within the EPPFMC framework, and have been expanded to encompass other growth-supporting sectors such as transport and trade facilitation, export promotion, and the business climate. 58 3.2. Reform program 3.2.1 The financial sector 25. The financial reforms implementedby the Government over the past two years are part of an effort to strengthen the role o f the private sector based on a joint approach to growth. Consequently, it has sought to establish a framework that i s favorable to banks, so that they can mobilize long-term resources that permit them to offer financial services and medium- and long- term loans at lower cost. The actions supported by the Fourth Structural Adjustment Credit are taking place against this backdrop. Ingeneral, these actions have either been implementedor are in the process o f implementation. 3.2.1.1. Actions undertakenin2005 26. Specifically, within the framework o f the EPPFMC, the Government has continued and deepened actions undertaken as part o fthe Fourth Structural Adjustment Credit. 27. Consequently, it has: Undertakena review o f proposals related to a settlement planfor doubtful debt inthe final audit report completed this year. It has also adopted a final plan to be implemented in 2007; Prepared the official tax reform documents deemed necessary following validation o f the findings o fthe 2005 study on the tax system applicable to leasing; Renewed the term o f the Administrative Council o f the Malian Housing Bank (Banque de I'Habitat du Mali (BHM)) and appointed three specialists who have no ties to shareholders. The recapitalization plan for the bank has been implemented(State, INPS, OMH, and Chamber o f Commerce). O f the CFAF 18 billion needed, the State has contributed CFAF 15.5 billion; Adopted, in the area o f microfinance, an action plan for the 2005-2008 period, as well as draft laws separating supervision and promotion activities, and reassigning supervision to the Ministry o f Economy and Finance through the National Assembly (by December 31, 2005); Started the privatization process o f the Banque Internationale pour le Mali (BIM) and hired a privatization expert. The call for expressions o f interest has produced satisfactory results with six bidders expressing an interest in acquiring at least 51 percent o f the Bank's capital. However, a decision was made to suspend the process until the decision o f the Supreme Court to be handeddown in late November on the dispute regarding the ownership o f shares; and Reached an agreement with the INPS regarding the amount o f state arrears (CFAF 5.1 billion), with a three-year settlement plan being agreed upon between the two parties. Implementation o f this plan will begin in the context o f the 2006 budget (CFAF 5.1 billion over three-years). 59 3.2.1.2 Medium-termreforms 28. Duringthe post-EPPFMC period, the following actions will be taken: (i) negotiations with commercial banks with a view to identifyng final settlement and implementation strategies; (ii) adoption of amendments to tax system for leasing activities included in the amendments to the General Tax Code (Code ge'ne'ral des imp6ts); (iii) strengtheningo f oversight inthe insurance area; (iv) continuation of the BHM restructuring plan; and (v) implementation o f the privatization strategy for the BIM. 3.2.2 Transport 29. Inthe area of transport, efforts have focused largely on maintenance of the current road network. As part o f the 2006 budget, the Government has increased the resources earmarked for road maintenance to CFAF 11.5 billion, inaccordance with the commitment made inthe context o f the sectoral transport program. However, the share of own resources of the Road Authority, which should amount to 30 percent o f the financing o f road maintenance, will amount to a mere 16 percent (CFAF 1.7 billion instead o f 3.5 billion). Inorder to ensure the actual performance o f road maintenance work in 2006, the Government has decided to finance the CFAF 1.8 billion gap through inter-ministerial communal charges during execution o f the 2006 budget. The Government undertakes to make these additional resources available to the Road Authority on a semi-annual basis. 30. With regardto the post-EPPFMC period, the Government is confirming, at thisjuncture, its commitment to augment to CFAF 13 billionthe resources allocated to current road maintenance. It will adopt measures to increase the share o f resources o f the Road Authority to 40 percent o f total resources allocated to the Road Authority. Moreover, in order to lay the groundwork for an effective survey o f road data, the road data office will be given budgetary resources commensurate with its mission and the results expected o f it in terms o f the availability o f information for purposes o f road maintenance. 3.2.3 Exports and the investment climate 31. The actions taken in this area by the Government in the context o f this credit are aimed at enhancing the business climate in Mali. These actions will be deepened in the medium-term, and concern, inparticular, procedures regarding the establishment o f enterprises, export promotion, and implementation o f an integrated, trade-related technical assistance framework. 32. In order to streamline enterprise establishment procedures, the Government has agreed to the principle o f assigning responsibility for this task to a single government department, instead o f the five departments that were formerly involved in this process. In May 2005, it approved the official documents assigning a single identifier to the National Statistics Department (Direction Nationale de la Statistiqueet de I'Informatique (DNSI)). 33. Inorder to promote exports, the Government introduced aninter-ministerial decree that will allow for the exemption o f handicraft products from the expert's assessment tax (taxe d'expertise) 60 and an export permit from the national museum. Informationon this initiative will be disseminated largely through an awareness-building campaign targeting artisans. 3.2.4 Office du Niger reforms 34. In general, the actions supported by the EPPFMC are aimed at establishing a reliable irrigation financing mechanism for the private sector and establishing an improved system for managing and evaluating the performance o fthe Ofice. 3.2.4.1 Progressmade in2005 35. The activities undertaken in 2005 fall within the scope o f those carried out earlier by the Government in the context o f the Fourth Structural Adjustment Credit, supported by the national rural infrastructure project, for which the World Bank i s providing assistance. 36. Consequently: (9 Implementation o f the 2005-2007 contract plan has continued and the Government has assigned the initial parcels inthe Koumona pilot zone to the private sector. Based on the feedback provided by the technical and financial partners, it will undertake a more in- depth analysis o f results and will appoint the commission so that allocation can be resumedwith greater consideration being givento the objectives and specifications o f the pilot; (ii)The steps necessarywill betakenwith aview to amorein-depthassessmentofthe irrigation financing mechanism, taking into account the shortcomings identified in the findings o f the study conducted in relation to the initial objective to seek additional financing inorder to increase irrigated surface areas; and (iii)Thelandmanagementunithasbeenplaceddirectlyunderthegeneraldirectorateofthe OfJice with a view to enhancing its performance. 3.2.4.2 Reform follow up 37. During the post-EPPFMC period, the Government will take steps to ensure the dissemination of the results o f the Master Plan for the development o f the ON zone to producers, prior to its adoptionby the Council o fMinisters, and to allocate parcels inthe Koumona zone to the private sector, based on feedback receivedfrom technical and financial partners. 4. STRENGTHENINGPUBLIC FINANCE MANAGEMENT, TRANSPARENCY,AND OVERSIGHT 4.1 Objectives 38. Over the past three years, noteworthy improvements have been made to the budget system in Mali. The authorities have concentrated their efforts on the design and implementation of management instrumentswhich, by and large, are currently operational. The following are some of the actions taken: (i) o f key entities o f the Ministry o f Economy and Finance involved with linkage 61 the budget process (Budget Office, Financial Control Directorate, and Treasury Directorate), a measure that has significant implications for the reliability o f budget data; (ii)adoption o f a complete budget nomenclature showing budget allocations according to accepted international standards; (iii) establishment o f a budget and accounting nomenclature for the national authorities which i s consistent with budget nomenclature and WAEMU recommendations; and (iv) the design of tools for budget administrators and financial comptrollers with a view to improving execution of the state budget. 39. The main objectives sought in this component are: (i)establishment o f the fundamental elements for implementation o f a three-year budget program prepared by the Government on the basis o f the various public finance projections made in recent years (World Bank's CFAA, IMF's ROSC, and EuropeanUnion's Audit, among others); (ii) continuation o f actions undertaken as part o f the Third and Fourth Structural Adjustment Programs in the areas o f strengthening budget execution, enhancing the effectiveness o f public expenditure, and improving budget transparency; and (iii)commencement o fthe reformprocess o f national public procurement procedures. 4.2 Implementation of the actionplan 4.2.1. Action plan to strengthen fiscal management 40. In recent years, studies conducted and projections made have fostered a better understanding o f the strengths and weakness o f Mali's budget system. Based on these findings and on reform recommendations made, the Government drafted and adopted a government action plan for the modernization and strengthening o f public finance management proposing, over the medium-term (2006-2008), in-depth reforms which also provide guarantees with respect to the budgetary process. This action signals the willingness o f the Government to organize PRSF assistance through budgetarysupport. 4.2.1.1 Actions taken in2005 41. Based on the institutional mechanism proposed for implementation o f this action plan, the Government has: (9 Entrusted monitoring and implementation activities to the budget reform support unit (CARB), based on the mechanism for implementation, monitoring, and evaluation o f the action planproposed inthe consultants' study; (ii)Madeprovisionsforthe2006actionplantrancheinthedraftbudgetlawforthatyear(a total o f CFAF 7 billion). Amounts have beenearmarked for each beneficiary entity; and (iii)Takenstepstoensurethat2005projectedactionsthatdonothavebudgetaryimplications can actually be implemented duringthe course o f the year. These 2005 actions are being carried out (preparation o f a logical framework). 62 4.2.1.2 Reform follow up 42. Duringthe post-EPPFMC period, the Government will accord all the attentionneeded to its action plan for the modernization and improvement o f pubic finance management. Consequently, it will ensure that the following actions will be taken: (i) implementation o f the mechanisms for follow up and evaluation of the action plan (from January 2006); (ii) implementation o f the action plan (2006); and (iii) updating o f the 2006 programmed actions to reflect 2005 achievements (January 2006). 4.2.2. Budget execution 43. The actions undertaken in the area o f budget execution pertain largely to the computerization of the flow o fbudget information. These actions were all undertaken as part o f the Fourth Structural Adjustment Credit, based on a timeline that extends beyond that o f the EPPFMC. Consequently, during the post-EPPFMC period, the Government will continue the following actions, in particular: (i)computerizing auxiliary accounting with a view to exercising better control over shortfalls; and (ii)linking the deconcentrated services o f the National Budget Directorate, the National Financial Control Directorate, the National Treasury Directorate, and the Public Accounting Office. 4.2.3. Budget oversight and transparency 4.2.3.1 Strengtheningbudget oversight 44. One major challenge faced by Mali in the context o f its budgetary system is the strengthening o f all dimensions o f the oversight function (administrative, internal, external, judicial, and legislative). This i s necessary not only to ensure the reliability o f the budget system but also to facilitate dialogue between the Government and its partners on the effectiveness o f public expenditure, official development assistance, and poverty reduction policies. The core problem lies in capacity-building within the oversight entities and the establishment of an appropriate institutional framework for the autonomous exercise o fjudicial oversight. 45. Although efforts have been made in the context o f the SAC IV to produce draft budget execution laws within reasonable timeframes; a commensurate level o f progress needs to be made in the areas of a priori controls (monitoring o f control performance and the quality of the expenditure request files) as well as aposteriori controls (quality of the controls and audits, as well as follow up related to the recommendations contained in the control reports). The EPPFMC expects to provide very targeted assistance in order to strengthen the oversight bodies as well as results-based management. 4.2.3.I.I Actions taken in 200.5 46. With regardto administrative budget oversight, the Government has: (i) Provided the Inspection des Finances (IF) and the Contrde Gknkral des Services Publics (CGSP), in the context o f the 2006 draft budget, with resources that are generally in line with the results expected o f these entities from the standpoint o f their oversight functions and the quality o f oversight reports; 63 (ii) Prepared progress reports on the entities regarding a priori controls (IF and CGSP) (September 2005); and (iii)Prepared third-quarter progress reports on apriori control based on apriori control performance indicators. 47. With a view to enhancingjudicial budget oversight, the Government has: (i) Provided the Accounts Section (in the 2006) budget with resources determined on the basis o f the work program adopted for 2006 (September2005); (ii)Made provisions in the 2006 budget for the budgetary implications o f the Accounts Section staff review, programmed as part o f the Government action plan for the modernizationand strengtheningo f fiscal management; (iii)Undertakenthereviewofthelegaldocumentsneededtoincreasethenumberofstaff in the Accounts Section from 15 to 67 magistrates; and (iv) Begun a review o f the preliminary activities involved in the drafting o f the statutes for magistrates inthe Accounts Section. 4.2.3.1.2 Follow up actions 48. In the context of administrative oversight, the Government will review the documents establishing and organizing the oversight entities and will implement a training program with a view to the systematic application o f the international auditing standards and practices for a posteriori administrative oversight entities (IF-CGSP). Furthermore, it will adhere to the standards adopted in the framework of 2006 budget preparation in order to provide oversight entities with humanresources. 49. The following actions will be taken inthe area o fjudicial oversight: (i)implementation o f a training program with a view to the systematic application o f international audit standards and practices, (ii)systematic inclusion o f budgetary allocations in order to make allowances for the review o f staff inthe Accounts Section (2006-2007); (iii) o f a minimumo f 12 magistrates in hiring 2006 and the necessary administrative support staff; and (iv) drafting o f a statute for magistrates in the Accounts Section (end-March 2006). 4.2.3.2. Enhancing transparency and strengthening budget execution reporting mechanisms 50. The EPPFMC-supported program i s structured in such a way as to provide support, within reasonable timeframes, for the systematic production o f budget information, with a view to better public management and greater transparency o f this process. Noteworthy progress has been made intwo areas: (i) Transparency and the publication o f economic and financial information, as evidenced by the establishment o f a website that provides the public with the main data on budget execution by the state and improvement inthe content o f the quarterlypublic finance note. 64 These efforts should be continued and systematized from the standpoint of content and regularity. (ii)PreparationandsubmissionbytheGovernmentofthe2004draftbudgetexecutionlawto the National Assembly, thereby meeting institutional deadlines. This regularity will be maintainedinthe years ahead. 5 1. These activities will be strengthened during the post-EPPFMC period, with production taking place in accordance with the institutional deadlines applicable to 2005 draft budget executionlaw. 4.2.4. Public procurement 52. The World Bank has done a CountryProcurementAssessment Report (CPAR) for Mali and made a number of recommendations intended to strengthen the public procurement institutional framework and improve actualprocedures. This report is currentlybeingreviewedandis shouldbe adopted by end-December 2005. Steps have already been taken to ensure that the Public Procurement Reform Coordination and Monitoring (Coordination et le Suivi de la Rkforme des March& Publics, CNCS) committee will be limited in size and will have a tripartite structure (Government, private sector, and civil society). 65 . . -. ..~ .. ... . I - ._". , . ~ . - "-. L e NIinistrc de 1'Ecanomie -. .-_.-_....I ."I. . . ." . . . . . . ., ... .. h 7 . , . -.. -. . .. ,..-. ..- .. ._ . . . . .... . . __ .. .._- . .- .. - . i.._ . . _..-- ,. .. .. - " " .. ." .. . _.... . . ."..^ . . . . . __ .. . .., . .. __ _- ... -. - . - . __. . - I.. , ... . ... _--_I___- _- -. ... - ... . I - ("-1. .-. . . . .-. ..,"" ~. i .._. - ._ . ... .. . .. _"_I_ I I 0 m 3 m I 8 a P L 0 Y Y 5 9 5c ae, I 2 2 i ; e E b 1 E e e E eE m i s 0 I ANNEX 4: FUNDRELATIONS NOTE (As ofDecember 5,2005) 1. The Fund supports Mali's economic program for 2004-07 under a three-year Poverty Reduction and Growth Facility (PRGF) approved in June 2004. Total access underthe arrangement is SDR 9.33 million, or 10percent o f quota, ofwhich SDR 2.66 million has been disbursed. The second and thirdreviewsunder the arrangement have been combined because o f delays inreaching understandings on fuel taxes. Followingdiscussions duringApril 28-May 12, August 28-September 1,and October 1%November 1,2005, staff supports completion o f the outstanding reviews and approval o fwaivers for nonobservance of three structural performance criteria. The Executive Board meetingi s tentatively scheduled for December 19. A disbursement of SDR 2.66 million becomes available on the completion o fthese reviews. The PRGF-supported quantitative program i s broadly on track through end- September 2005. Although the recordon the structural programhasbeendisappointing, steadfast implementationof the program for 2006 would mark significant progress on addressing key challenges. 2. The 2005 Article IV Consultations have focused on the management of recent exogenous shocks and progress toward accelerating growth and poverty reduction. The policyresponse to shocks has been broadly appropriate and helpedmaintainmacroeconomic stability. Adverse exogenous shocks during 2004-05 weakened economic growth, budget finances, and the performance of several significant state enterprises. Agriculture i s beginning to recover from drought and locusts in2004, while the terms o ftrade declined 13 percent in 2005 to a 25-year low. Measured progress is beingmade toward growth andpoverty reduction goals. The staff view an acceleration of growth as unlikely unless the vulnerability to shocks is reduced and structural reforms, particularly private sector development, are accelerated. COPINGWITH ADVERSE EXOGENOUS SHOCKS 3. The Malian authorities have put in place broadly appropriate policies to address the terms of trade shocks that have contributed to weaker income growth and threatened budgetary objectives. Central to these efforts i s the successful implementation o f a flexible cotton producer price mechanisminfull consultation with producers. The new mechanism protects farmer interests while also limitingrisks of budget support to the cotton sector. The courageous decision to set seed cotton prices at the floor o f the price range for the 2005/06 seasontackles a significant risk that was hanging over the 2006 budget. Further, the authorities have continued to pass through increases o f international oil prices to pump prices to protect budgetary revenue, albeit partially and with some delay. A formula for full but gradualpass-through andmeasuresto protect the poor couldbetter balance consumer and revenue objectives. 4. Maliwill remain vulnerable to further shocks, linkedto climatic conditions and deteriorating terms of trade, and needs to be prepared to strengthen adjustment efforts ifnecessary. While the prompt sale anddistributiono ffood stocks contributedto anarrow avoidance o fwidespread food insecurity, the efficiency o f food markets remains indoubt, with substantial spatial and temporal price differences. More attentionshould be focused on impedimentsto food trade, particularly at a regional level. Furtherincreases inoil prices, and 106 declines incotton or gold prices, inthe context o f an undiversifiedeconomic base and a peggedexchange rate, are also major challenges to continued macroeconomic stability and growth. Stronger adjustment efforts may be needed, inparticular maintaining a prudent fiscal position and allowing prices to adjust. 5. The continuedsupport of developmentpartnershas contributedto a relatively smooth adjustmentto the difficult externalcircumstances. While some donor budget support has been delayed into early 2006 for procedural reasons, other donors have increased their support in2005. Nonetheless, the staffbelieves that continued increases indonor support are contingent on concrete steps to open up the cotton sector to private capital, financial management reform, and other operational reforms. However, progress toward privatization of CMDT has stalled. The initial steps taken by the authorities to improve surveillance o f the financial operations o fthe state-owned cotton company, CMDT, are welcome. To build on this success, a comprehensive business plan is requiredto chart the course to privatization, a clear strategy to disengage the Government from the cotton sector while protecting farmers' interests, and firm evidence that this strategy i s being implemented. 6. The staff recommendcloser surveillanceof the financialsector inMali, andin particular a significant reduction o f forbearance as regards observance o fprudential ratios, taking into account the unavoidably highlevels o f exposure to the cotton sector. Increased vigilance i s called for on the part o f the supervisory authorities, notwithstanding ample system-wideliquidity. Within the constraints o fprudential norms, the authorities should examine ways o freinvigorating financial intermediation and private sector lending. 7. As a memberof the West African Economicand MonetaryUnion,Malidoes not independentlydetermineits exchange ratepolicy.Nonetheless, the staff is o fthe view that the fixed peg o fthe CFA franc to the euro remains an important nominal anchor for inflation and remains credible inlight o fthe levels o f reserve coverage. Inconnection with its WAEMUcommitments, Mali has acceptedthe obligations o fArticle VI11and maintains an exchange system that i s free o frestrictions on current transactions. Moreover, the Union has succeededinsubstantially reforming the trade regimewhile economic convergence criteria are useful discipline on the conduct o f fiscal policies. Competitiveness issues are best addressed through reforms that will reduce the costs o f doing business and factor price flexibility. ENABLINGFASTER GROWTH POVERTY REDUCTION AND 8. Implementationof other structuralreformsunder the programhas been generallydisappointingand risks underminingboththe program's medium-term growth objectiveand poverty reductionobjectives.Although the privatization o fthe cottonseed oil company i s a move inthe right direction, the broader picture appears to be a waning commitment to pursue private sector development characterized by continued delays inthe disengagement from the bankingandtelecommunications sectors. Further,the deterioration o frelations with companies inrecently privatized sectors, notably electricity and water, does not augur well for attracting future investment.Implementation o fthe 2006 program o f structural reforms regardingprivatization and management o f state enterprises would provide a clear signal of the authorities policy priorities. 107 9. The authoritiesneedto complement their clear vision of the growthpotentialof various sectors, with determinedimplementationof reformsto improvethe investment environmentand boost productivity.Mucho fthe diagnostic work is inplace, andthe next Poverty Reduction Strategy should, inthe view o f the staff, make explicit the link between a growth strategy and poverty reduction, as well as maintaining a realistic assessment o f the growth potential. The discussions o f exchange rate competitiveness inthe context o f a fixed peg underscore the importance o f increasing the flexibility o f other prices, notably wages and key product market prices (cotton, fuel), to send market signals to producers and consumers and improve the efficiency o f resource allocation. 10. The concept of creatingand usingfiscal space is a usefulterm for analyzingthe medium-termbudgetaryoutlookand the scope for poverty reductionin Mali. While public finance management reforms continue to progress and are likely to support revenue growth over the mediumterm, the specifics o f key budgetary policies relating to pensions, the efficiency o f spending, and social safety net payments have not receivedthe attention commensurate with their potential impact on fiscal space. The staff will continue to focus o n policy advice inthese areas inthe remainder o f the PRGF.Nonetheless, economic growth remains the key factor increating fiscal space for poverty reducing spending over the medium term, even inthe context of MDRIand higher thanprojected external assistance. This, inturn, underscores the importance o f accelerating structural reforms, particularlyrelating to private sector and financial market development, while addressing the numerous impediments to doing business. 108 ANNEX 5: COLLABORATIONWITH THE IMFONMALI Mali: IMF-World Bank Relations (As ofDecember 6,2005) A. Partnership in Mali's development strategy 1. Mali's development strategy increasingly emphasizes growth and poverty reduction. Its PRSP (adopted by the government in May 2002) highlights growth as a precondition for poverty reduction, and outlines programs for (i)institutional development and improved governance, (ii)human development and access to basic social services, and (iii) infrastructure development and support for key productive sectors. Mali's growth strategy aims to be private sector led and market oriented toward the West Africa region as well as the global market. 2. The IMF and World Bank staffs maintain a collaborative relationship in supporting the government's macroeconomic and structural reforms, in line with the guidelines for enhanced Bank- Fund collaboration. This includes regular participation of Bank staff in the meetings with the government on the Fund's program review missions, IMF staff participation in Bank development policy missions and Bank internal review meetings. The IMF takes the lead in macroeconomic stabilization and the World Bank in social and structural areas, with close collaboration on a few structural areas that have a particular impact on macroeconomic stability. The Fund's dialogue and conditionality are consistent with the structural programs agreed with the Bank, and the Bank's dialogue and conditionality have maintained consistency with the macroeconomic framework endorsedby the Fund. B. World Bank Group strategy 3. The World Bank Group's strategy, outlined in the Country Assistance Strategy (CAS) discussed by the Board o f Directors on July 31,2003, emphasizes three broad themes in line with the country's PRSP: (i)promotion o f economic growth; (ii)human resources development; and (iii) finance management and governance. Mali also benefits under the Bank's Regional public Integration Assistance Strategy (2001), notably a program for connection to the West Afnca Power Pool, harmonization o f country policies and/or regulatory frameworks (telecommunications, agrlculture, financial sectors), water resource development o f the Niger and Senegal Rivers, strengthening o f road transport corridors, and strengthening the regional payments system. 4. Support to Mali duringfiscal years 2004-06 amounts to US$400 million inthe base case, with about 30 percent in grants. Budget support o f $25 million i s provided annually through development policy credits (DPCs), subject to satisfactory macroeconomic management. This i s complemented by selected investment operations (targeting education, support to growth, and infrastructure development) and a community-driven development operation. The Bank will prepare a new CAS in the course o f FY07 in support of Mali's next PRSP (under preparation inthe first half o f 2006). In that context, the Bank envisions aligning its annual budget support with Mali's budget cycle during 2007, possibly inthe form o f programmatic lendingalong the lines o f a PRSC. 5. The CAS also includes non-lending activities. Recently completed activities include a Country Financial Accountability Assessment, Macroeconomic Growth and Water Variability study, first phase Poverty Assessment, Country Procurement Assessment Review, and an Integrated Framework Trade Diagnostic Study. A Poverty and Social Impact Analysis of the cotton sector i s nearing completion. The Bank has also assisted with development o f medium-term expenditure 109 frameworks (MTEF) for health, education, and transport, and MTEF support i s envisioned for the agnculture-livestock-fisheries sector. Planned activities during FY06-07 include a Country Economic Memorandum on growth and a Public Expenditure Review. C. IMF-World Bank collaboration 6. Areas in which the Fund leads. The Fund takes the lead in macroeconomic stabilization including macro-fiscal policy, monetary policy, exchange rate policy, and financial stability and risk management. 7. Areas in which the Bank leads. The Bank takes the lead in structural areas where both institutions have conditionality, including cotton sector reform, privatization and regulatory reform (telecommunications, banking, financial and energy sectors), and pensionreform. The Bank also leads in other areas such as: agricultural competitiveness/diversification; rural development (irrigation, roads, support to producer organizations); private sector development (strengthening the investment climate, access to business services, support to small/medium enterprises); urban development (historic rehabilitation/ preservation, landhousing market development, watedroad infrastructure); transportation policy/infrastructure; energy sector reforms; and social sectors (health, education and social protection, including HJY/AIDS).The Bank's work in structural areas includes analytical work and dialogue on trade and growth policies, which form part o f the overall economic policy dialogue. The Bank collaborates with other donors whenever possible (notably in health, education, agnculture and cotton sectors), and i s pursuinga harmonized approach for donor support to health and education reforms as well as on budget support more broadly. 8. Areas of shared responsibility. Both Bank and Fund collaborate in assessing performance o f HIPC resource use. Both also monitor progress on budgetary and public expenditure management, yet emphasize different aspects of the government's reform program in the respective support operations. The Bank emphasis in this area i s on strengthening all phases o f the public expenditure system-budget preparation, budget execution, and budget controls-to support the government's objectives o f progressive shifts toward result-based budgeting and improved effectiveness of expenditures. Bank support i s at the national level in the finance ministry (global MTEF, integrated information technology system, audit capabilities, budget reporting) and sector ministries (selected sector MTEFs, inter- and intra-sectoral allocations), as well as at de-concentrated levels (budget nomenclature, IT system, capacity building). The Fund's emphasis i s on fiscal management, expenditure management (including financing o f transfers to parastatals), revenue enhancing measures, and audit capabilities. Table 1 summarizes the areas o f Bank-Fund collaboration inMali. 110 Table 1: BankFundCollaboration inMali (ongoingor planned) Specialized Advice from specialized Advice from