COUNTRY RE-ENGAGEMENT NOTE FOR THE CENTRALAFRICANREPUBLIC July 2004 - Country Department7 Africa Region The date of the last Transitional Support Strategywas December 16, 1999. CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1 = 544.7 CFAF (June 17,2004) GOVERNMENT FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities AfDB African DevelopmentBank BADEA Arab Bank for Economic Development inAfrica BONUCA UNPeace-Building SupportOffice inthe CentralAfricanRepublic CAF Conflict Analysis Framework CAR Central African Republic CBO Community BasedOrganizations CRN Country Re-EngagementNote CEMAC Communaute' Economique et Mone'taire d'Afique Centrale (Economic and Monetary Community of Central Africa) CFA Communaute FinancibreAfricaine DDR Demobilization, Disarmamentand Reintegration CFAF CFA Franc EIB EuropeanInvestment Bank EITI Extractive IndustriesTransparencyInitiative EU EuropeanUnion GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IDA International DevelopmentAssociation IMF International Monetary Fund I-PRSP InterimPoverty Reduction StrategyPaper JAM Joint AssessmentMission LICUS Low Income Countries Under Stress MDRP Multi-Country Demobilization and Reintegration Program MDTF Multi-Donor Trust Fund MLC Mouvement de Libe'rationdu Congo NGO Nongovernmental Organization OED OperationsEvaluation Department OPEC Organization ofthe PetroleumExporting Countries PCEA Post-Conflict EmergencyAssistance PPF Project PreparationFacility PRGF Poverty Reduction and Growth Facility PRSP PovertyReductionStrategyPaper UN UnitedNations UNAIDS Joint UnitedNations Programon HIV/AIDS UNDP UnitedNations Development Program UNICEF UnitedNations Children's Fund WHO World Health Organization Vice President: Callisto E.Madavo Country Director: Ali M.Khadr Task TeamLeader: Andrea Kucey COUNRY RE-ENGAGEMENT NOTE FOR THE CENTRAL AFRICANREPUBLIC TABLE CONTENTS OF ExecutiveSummary ....................................................................................................................... i Country Context ............................................................................................................................ Governance and Security ............................................................................................................ 1 1 People are poor and lackinginservices ...................................................................................... . . A dire economic andfinancial situation ..................................................................................... 3 4 Transitional Framework And Partnerships ............................................................................... TransitionalFramework.............................................................................................................. 5 5 Partnerships.,............................................................................................................................... 6 IMFRelations ............................................................................................................................. 7 The Bank's Program ..................................................................................................................... 8 (i)Supportingasmoothtransitionbyaddressingurgentgovernanceandsecurityissues 10 Economic Management ............................................................................................................ . Demobilization andRe-integration........................................................................................... 10 10 Capacity-Building for Leadership............................................................................................. 11 (ii)Improvingdeliveryof basicsocialservices Support for HIV/AIDS.............................................................................................................. ......................................................................... 11 11 Emergency Social Service Recovery Program......................................................................... 12 Risks.Monitoring. Exit and ScalingUp .................................................................................... Monitoring ................................................................................................................................ 14 Risks.......................................................................................................................................... 13 13 Exit and Scaling Up.................................................................................................................. 15 Table 1 Selected Economic andFinancial Indicators. 2000-2006 ................................................ . 4 Box 1: Recent Political Events...................................................................................................... 2 Box 3. Governance and Management of Natural Resources......................................................... Box 2. An ImplementationMatrix for the Transition................................................................... 7 9 Annex 1 Government of CAR TransitionMatrix............................................................................... 21 ........................................................ 16 Annex 3 Donors' Interventions., .......................................................................... Annex 2 Debt Sustainability 23 Annex 4 HIV/AIDS Annex 5 History of Bank Engagement inCAR......................................................... ......................................................................................... 24 26 Annex 6 Relations withthe Fund.......................................................................... 27 Standard Annexes............................................................................................ 29 Map: 28596R EXECUTIVESUMMARY 1. For much o f the period since it gained independence in 1960, the Central African Republic (CAR) has experienced political instability and bouts o f armed conflict, bad governance, and poor socio-economic outcomes. Much of the past decade in particular has witnessed a vicious cycle o f periodic mutinies and coup attempts and increasingly bankrupt and ineffective government, which has eroded the country's capital stock and accentuated its vulnerability to external shocks, thereby stunting income-generating opportunities, impoverishing the population, and fueling further social tension. Within this climate, assistance from development partners has been largely ineffective, and the country's dire financial situation i s reflected in significant arrears to multilateral institutions, including IDA, which has suspended disbursementssince January 2002. 11. Since the regime change in March 2003, the situation has stabilized somewhat, although a . security remains fragile, government i s still struggling to restore even the most basic functions, and social needs are immense. Politically, the country is intransition: a cabinet that includes all political parties as well as a Parliament-like National Transitional Council have been appointed, and a roadmap drawn up for a return to constitutional government, with Presidential and Parliamentary elections scheduled for early 2005, Key development partners are supporting the transition. France has provided security support and, alongside the European Union, assistance to restore the public financial management functions of government. The IMFconcluded Article IV consultations in March, and is currently discussing an Post-Conflict Emergency Assistance (PCEA) program with the authorities. iii. Againstthisbackdrop,theBankhasbeenengaginginanalyticalandadvisorywork, and has pursued its support for HIV/AIDS prevention and control as well as for demobilization and reintegration (paragraphs vii and viii). Inparticular, it has leveraged the analytical and advisory work to assist the authorities in developing a transitional framework that all development partners could rally support behind. The Bank led ajoint assessment mission(JAM) inFebruary 2004 to assess the key development challenges and the underlyinggaps in capacity, and through the process identify a few entry points where actions by the Government and appropriate donor support could lead to prompt, visible pay-off for the citizens o f CAR. The mission focused on key thematic areas including security, natural resource management, social sectors and public finance. iv. O f the many challenges CAR faces, perhaps the greatest are the inability o f the State to perform very basic functions adequately, including collection and stewardship o f financial resources as well as delivery of basic social services to address poverty and social needs. The J A M worked with the authorities to prepare an "implementation matrix" o f concrete actions to tackle these development challenges in the short and medium term. These include for example (i) improving transparency through the publication and dissemination of key political and legal documents; (ii) preparing and monitoring monthly cash-flow plans, and conducting an audit of domestic arrears, inview of establishing a credible arrears clearance plan; and (iii) rehabilitating health facilities and improving the supply of vaccines. v. The matrix i s a coordination and monitoring tool which allows the Government and its development partners to focus their energy on the implementation o f key reforms. Prepared by the Government, it was inspired by a concerted donor effort to harmonize reengagement 1 strategies. As a follow-up to the JAM, technical meetings took place in CAR in May 2004 to identify actions inthe matrix for which financing is available, and which can most realistically be implemented in light of the very limited country capacity. The final matrix prepared by Government identifies four major priorities for reform-security, governance, economic management, and delivery of social services; and progress will be monitoredon a quarterly basis. vi. The handicap of suspension on IDA disbursements notwithstanding, significant Bank assistance can be mobilized in the period immediately ahead to help CAR implement its transition program. Over the next 10-12 months, the expected life-span o f this CRN, the Bank's assistance program will address key development challenges, and will be founded on two building-blocks: (i) supporting a smooth transition by addressing urgent governance and security issues; and (ii)helping improve the delivery o f basic social services. A key theme underlying the two building-blocks o f Bank assistance i s better governance, a cross-cutting challenge- through improved transparency and accountability in the use o f public resources and in basic service delivery mechanisms. vii. To support a smooth transition and address urgent governance and security issues, the Bank intends to focus on leadership capacity building, economic management, and supporting the demobilizationandreintegrationofex-combatants. To promote leadership capacity building, the Bank will develop a forum for dialogue and exchange o f experience between senior CAR leadership and reformers and experienced practitioners in countries that have undergone successful transitions. In economic management, the Bank plans to support the restoration o f core fiscal and fiduciary capacity, through rapid technical assistance addressing the most critical areas and urgent capacity-building needs in the short term. This includes reinforcing the Ministryof Finance inorder to raise budgetrevenue andimprove expenditurecontrol. viii. ... To assist demobilization and socio-economic reintegration of ex-combatants into their home communities, the Bank approved the Reintegration of Ex-combatants and Support to Communities Special Project in April 2004. The project i s funded entirely through the Multi- Donor Trust Fund (MDTF) o f the Multi-Country Demobilization and Reintegration Program (MDRP), and is expected to contribute to the overall stability ofthe country by: (i) demobilizing ex-combatants and reintegrating them socially and economically back into their community; (ii) strengthening the capacities of communities of return to ensure the sustainable reintegration of the ex-combatants; and (iii) supporting projects on security and conflict prevention in and by communities that are the most vulnerable to and the most affected by security problems. ix. Within the context of improving delivery of basic social services, the Bank will actively pursue its on-going support for HIV/AIDS prevention and control. Despite CAR'Snon-accrual status, an exception was granted for the continued use o f PPF funds for the multi-sectoral HIV/AIDSProject, approved inDecember 2001 but never made effective. The funds were used to create an institutional framework and build capacity, and have leveraged significant support from other donors, notably the Global Fund, WFP and Caritas, who use the National AIDS Committee's structures to channel their resources. A new (third) PPF has now beenapproved to build on the progress in institution- and capacity-building in order to help facilitate the implementation of activities funded by the Global Fund and other important donors. The positive impact thus far of Bank support for HIV/AIDS notwithstanding, the constraint o f using credit, rather than grant, resources to help the country battle the tragic spread of the virus (incidence now stands at 15 percent of the population, far higher than any neighboring countries) 11 .. has been limiting. Going forward, the Bank will explore the possibility o f greater use o f grant resources. x. The Bank is also planning to support several activities that will seek to improve delivery o f basic social services, including assistance for an emergency social service recovery program. Within this program, the Bank will provide assistanceto the management and governance of the education sector, establishing a school map and an overall coherent vision o f the process o f managing entities within the educational system. Support i s similarly planned to improve the management o f the health sector, rehabilitating health facilities and improving the supply o f basic equipment, drugs, and vaccines. xi. Beyond the MDRP and HIV/AIDS support, US$4 million o f financing will be sought from the LICUS Trust Fundto finance the planned support for economic management, capacity building for leadership, and social service delivery. An initial request for the most urgent activities, mainly involving capacity-building for the restoration o f core fiduciary functions has been submitted(US$500,000). A subsequent applicationto fund the broader scope o f proposed support i s beingprepared with the Government for approximately US$3.5 million. xii. Over the period o f CRN implementation, the Bank will continue to play a coordinating role inthe engagement o f development partners with CAR. Aside from monitoring and actively supporting the implementation o f the socio-economic track o f the transitional framework, the Bank will also follow the security developments and the political process closely. While the transition matrix i s intended as a flexible framework of support, there are certain top-priority measures in the broader program which would be used to gauge progress. These include the satisfactory unfolding o f the political process with elections in January 2005; securing and satisfactorily implementing a program with the IMF, including adequate progress in improving revenues and meeting key expenditures, such as public sector wages; the redeployment o f teachers to provincial schools; and the extension o f vaccination programs to rural areas. xiii. ... Subject to satisfactory results along these lines, a senior-level donors' meeting would be held to assess the way forward. In general, prospects for arrears clearance remain uncertain during the next 12 months, and the severity of CAR's situation would require an exceptional effort to be made on the part o f the Bank and other creditors. As the situation develops, and the IMF program evolves, an update will be provided to the Board on the prospects and modalities for arrears clearance in CAR. To facilitate program implementation and coordination with Government and development partners, the Bank will work to recruit a liaison officer in order to establish a greater field presence inCAR inthe coming months. xiv. The proposed Bank engagement in this CRN strategy is an integral part of a concerted, broad-based effort by CAR's development partners to harmonize their engagement strategies. Timely delivery o f progressively increasing donor assistance will be critical to the successful implementation of the transitional framework, given the fragile balance in which the country hangs, At the same time, the ability of the Government to deliver on reforms will be a key determinant of success, Stalling risks are significant if an active partnership between the Government and donors does not continue to gain momentum. ... 111 COUNTRY CONTEXT 1. For much o f the period since it gained independence in 1960, the Central African Republic (CAR) has experienced political instability and bouts o f armed conflict, bad governance, and poor socio-economic outcomes. The past decade in particular has seen a vicious cycle o f periodic mutinies and coup attempts and increasingly bankrupt and ineffective government, which has eroded the country's capital stock and accentuated its vulnerability to external shocks, thereby stunting income-generating opportunities and impoverishing the population, The government has increasingly failed to maintain basic functions, and has frequently accumulated arrears inthe public military and civilian payrolls. The impact o f these failures has beento foment discontent -notably among members o fthe armed forces. 2. CAR ranked 168thamong the 175 countries in the UNDP's 2003 Human Development Index. Poverty is widespread with an estimated 67 percent of the PO ulation living under the poverty line, and the incidence of poverty in rural areas i s higher. P Access to even basic education and health services i s minimal, and outcomes are worsening as these sectors have been significantly underfunded for several decades. Several voluntary organizations are involved in service delivery at the community level, including to the most needy, but are desperately short o f qualified people, equipment and operating funds. 3. Within this climate, assistance from development partners has been largely ineffective, and the country's dire financial situation is reflected in significant arrears to multilateral institutions, including IDA,which has suspendeddisbursements since January 2002. CAR i s one o f the few eligible countries not to have reached HIPC Decision Point. As a result, its debt service remains unsustainable. Governance and Security 4. Governance and security are key challenges for the CAR. The Interim Poverty Reduction Strategy Paper (I-PRSP), discussed by the Executive Directors o f the Bank and the IMF in January 2001 [IDA/SecM2001-00011, identified governance and security as key challenges for the CAR. Poor governance in CAR is attributable to: (i) distorted incentive a system inthe civil service and public enterprises; (ii)lack of participation and transparency in a the design and implementationo f policies; and (iii) accountability. weak 5. The incentive system for the civil service has been distorted by the failure of governments to pay civil service and military salaries regularly, leading to the accumulation o f large wage arrears. Other sources o f distortion include a decline inreal wages and an ineffective merit-based promotion scheme. The long centralist tradition and the years o f authoritarian and military regimes has precluded the participation of citizens in the design, implementation and monitoring o f policies. Political instability has limitedthe ability of the Government to take the bold actions needed to address governance, and has impeded the functioning o f CAR'S public institutions for more than a decade. While the set of events leading to the regime change in 1 2004 World Development Indicators, World Bank. 1 March 2003 (see Box 1) were the latest culmination of a growing loss o f confidence inthe State, many long-standing factors underliethe recurrent conflict andpolitical turmoil inCAR.2 Box 1: Recent Political Events For many years, the CAR has suffered repeatedmutinies and recurrent coup attempts. The seeds o f the latest conflict were sown as early as May 2001 when rebel forces within the CAR military, led by former President and Army General Andre Kolingba, attempted a coup. However, with the support of Jean-Pierre Bemba, the leader of the Mouvement de Libkrution du Congo (MLC), a rebel group in neighboring DRC, and o f Libyan troops, Kolingba and his collaborators were defeatedand driven out of Bangui. The investigation into the coup attempt ledto the arrests ofthe Minister of Defense and of prominent military officers over the secondhalfof 2001. An attempt to arrest General FranqoisBozize, then Army Chief of Staff, inNovember 2001 met with resistance and led to renewed fighting inBangui. General Bozize fled to Chad but cross-borderclashes betweenrebels backing himand loyalist troops continued to occur intermittently. On March 15, 2003, General BozizC launched a successful coup attempt which deposed the civilian government of PresidentAnge-Felix Patasse. Inresponseto the events since May 2001, there has since been a concerted effort to resolve the situation and avoid a destabilizing impact on the fragile peace processes inthe troubled central Africa region. The Heads of State of the Economic and Monetary Community of Central Africa (CEMAC) have been actively involved in efforts to restore and maintain order in CAR, and on October 2, 2002, agreedto send a multinational force of over 300 soldiers to secure the border between Chad and CAR, protect the institutions in CAR and assist in the restructuring of the national army. The CEMAC troops remain deployed in Bangui, and are complemented by French troops. The United Nations Peace-building Office in CAR (BONUCA) is also active inpromoting peace and reconciliation inCAR. 6. The causes of conflict in CAR are complex and deep-rooted. One key source o f conflict i s the endemic corruption and mismanagement of public resources. The State and public offices are viewed as a major vehicle for enrichment, and the struggle to control the State is a principle factor behind the history o f civil strife, coup attempts, mutinies, rebellions and coups. A second source of conflict is the poor state of the national security forces, which are incapable o f preventingthe capture o f the state. As a result, there i s a tendency to turn to foreign troops for security, and this mistrust o f the national military, coupled with salary arrears and poor equipment, have led to low morale in the security forces, which have reduced their efficiency and made them prone to manipulation. 7. A third source of conflict is the lack of private alternatives for income generation, inturn attributable to the many obstacles to private sector investment. As the private sector continues to shrink, the struggle to secure public office has become more intense. A vicious cycle has been perpetuated as the conflict for control of the State has led to looting and destruction of assets, which has further hinderedprivate sector development. Finally, an additional source o f conflict i s the regional spillover effects from neighboring countries (Chad, Democratic Republic o f Congo (DRC), Congo and Sudan). Inthe past, rebel groups inChad, DRC and Congo have used CAR'S territory as rear bases, prompting pressures on the country to assert more control over its borders and to discontinue support to rebel groups. * An in-depth Conflict Analysis Framework (CAF) is being prepared as part ofthe Policy Notes, a formal AAA task which i s inthe process of being drafted. 2 People arepoor and lacking in services 8. Poverty is pervasive in CAR. An estimated 67 percent of households live under the poverty line and the incidence of poverty inrural areas i s higher. Access to basic education and health services i s limited and outcomes are worsening. Life expectancy declined from 48 years to 42 years between 1990 and 2002. The incidence o f HIV/AIDS, now at 15 percent - and significantly higher in other parts of the country - has continued to climb due to lack o f health services and major preventionprograms, and has now assumedcrisis proportions. The estimated number of adults and children who died of AIDS during 2001 was 22,000, and the estimated number ofchildren who lost aparent to AIDS at the endof2001 was about 110,000. 9. The education sector is now in serious need of rehabilitation and upgrading. The average studentkeacher ratio in primary education i s about 90 - the highest in sub-Saharan A f r i ~ a .The student to textbook ratio was about 5 in2000/2001 and, inbasic education, the ratio ~ o f students to school benches is about 8. Many elementary schools have leaking roofs, and no windows and fences. Three school years were officially canceled (1990-93) following teachers' strikes brought on by salary arrears, creating a backlog that the system i s still unable to make up. The quality and the efficiency of the education systemare very low: about 50 percent of primary school graduates cannot read or write, and the completion rate of compulsory education (middle school) is only 34 percent. 10. Access to health care is limited. Less than 37 percent o f CAR'S inhabitants live within 10 kilometers o f a health center, and only 24 percent o f rural births are assisted by professional staff. As a result o f lack o f maintenance, 90 percent of the health facilities are inpoor condition. Health centers in rural areas have to operate without equipment, medicines, and very often without runningwater or electricity. Health outcomes are therefore precarious, as indicated by the highunder-five mortality of 180 per thousand. Maternal mortality was 1,200 for 100,000 live births in2001 with malnutrition affecting 34 percent of children under 5 years. Inaddition to HIV/AIDS, other causes o f morbidity and mortality are parasitic and infectious diseases due to the inexistence o f adequate water and waste management systems. Access to an improved water source i s 70 percent for the country as a whole, and 57 percent inrural areas. 11. Civil society organizations have tried to fill the gap, but have limited capacity. There are about 110 NGOs in CAR, o f uneven size and professionalism. Several organizations are involved in service delivery at the community level, including to the most needy. Faith-based organizations have been active in delivering education and health services; and in several communities, Parents' Associations have taken charge o f hiring teachers and the financing o f education services. The UN agencies, particularly UNICEF, have also developed efficient community-based service delivery mechanisms. However, NGOs are desperately short of qualified people, equipment and operating funds. A social and institutional assessment undertaken in 1999 concluded that these organizations were largely ineffective because o f an inadequate legal and institutional framework; high concentration inthe capital city Bangui; and a lack o f financial andtechnical capacity. 2004 World DevelopmentIndicators, World Bank. The World Bank: 1998 - CentralAfricanRepublic:PovertyNote.ReportNo. 18134-CA. 3 A dire economic andfinancial situation 12. CAR'Seconomic outcomes have remained poor, and the frequent political turmoil has resulted in a state of economic stagnation. Real GDP contracted sharply in 2003 (-7.5 percent) as the result of the conflict CAR suffered in 2002 and early 2003, and the temporary suspension o f licenses in mining and timber sectors (see Table 1). Terms o f trade shocks, notably a collapse o f coffee and cotton prices, coupled with highpetroleum product prices have also contributed to poor economic performance. Real GDP grew at -0.6 percent and 0.3 percent in 2002 and 2001 respectively, well below the population growth rates of approximately 2 per annum. Per capita income, at about US$270, has beenstagnant over the last decade. Table 1. Selected Economic and Financial Indicators, 2000-2006 1996-2000 2000 2001 2002 2003 2004 2005 2006 Average Est. Projections (In annual percentagechange) RealGDP growth 1.7 1.8 0.3 -0.6 -7.3 2.5 4.4 4.2 Inflation (annual average) 1.o 3.2 3.8 2.3 4.2 0.8 3.3 2.1 Export volume 4.0 14.2 4.8 0.3 -32.1 30.5 12.4 4.9 Import volume -5.8 -10.3 -13.8 8.6 -15.6 12.5 9.5 6.5 Broad money -1.1 5.4 -1.1 -4.3 -8.0 6.0 Terms o ftrade (U.S.dollar basis) -4.5 -8.4 -17.1 1.3 8.2 4.3 0.7 2.8 (In percent of GDP) Overall fiscal balance, commitment basis, incl. Grants -1.0 -1.8 -0.9 -1.2 -3.1 -1.0 -0.4 -0.1 Total revenue 8.3 8.9 8.9 10.8 7.7 8.7 9.0 9.5 External current account balance -3.4 -3.0 -2.5 -2.4 -4.8 -3.0 -1.9 -1.5 Source: IMF 13. CAR has experienced poor revenue collection and budget outcomes. In 2003, revenue as a percentage o f GDP was 7.7 percent against 10.8 percent in 2002. The Government was not able to limit current primary expenditures,which were equivalent to 8.3 percent o f GDP in 2003 against 7.9 percent of GDP in 2002. As a result, the basic primary budget deficit worsened to 3.3 percent of GDP in 2003 against 0.5 percent in2002. As inthe past, the budget deficit was financed through a combination of arrears accumulation, bank financing, and tax advances from private companies. At end-December 2003, civil servants were owed more than two years o f the wage bill, amounting to approximately 71 billion FCFA, equivalent to 9.4 percent of GDP.' Salary arrears represent 33.1 percent o f all domestic arrears o f the government. Others arrears are to old-age pensions and scholarships, the Central Bank, commercial banks, private suppliers and the social security system. The Government pays extremely high penalty rates on arrears to commercial banks (18 %) and to the Central Bank, making the liquidity crisis more acute. 14. Exports and imports were dramatically low in 2003. The drop in exports was inpart due to the suspension of mining and forestry permits following the regime change in March IMFStaffReport for the 2004 Article IV Consultation. 4 2003. While projections for the 2004-2006 period indicate that the external current account deficit (excluding grants) will continue to improve, reaching 2.1 percent o f GDP in 2006 from 5.1 percent in 20036 (see Table l), total financing requirements (Le. current account deficit including grants, amortization and arrears payment) over the same period will remain daunting. These are estimated at US$492 million, including US$95 million for amortization and US$303 million for reduction o f external arrears. Capital grants, project and program financing, and private capital would provide US$91 million. This would leave a residual financing gap o f US$401 million which would need to be met through new pledges, deferral o f payment o f current and past debt from creditors in the Paris Club, and partial or full deferral o f arrears payments from multilateral creditors (BADEA, AfDB, OPEC Fund, EIB), agreements on arrears clearance, and eventually through debt reliefunder the HIPC initiative. 15. The macroeconomic projections summarized in Table 1 are predicated upon: (i) political stability and continued improvement inthe security situation; (ii) strong political commitment to, and gradual recovery in, implementation capacity; and (iii)no external shocks, including sufficient external financial support. However, CAR remains vulnerable to a number o f external factors, including the security situation in neighboring countries, international prices o f cotton, coffee, diamonds and oil, and the evolution of the Euro - to which the local (regional) currency i s tied at a fixed rate - vis-a-vis the dollar. Available estimates7 indicate that the terms o f trade losses for CAR amounted to US$50 million in 2000 and 2001, o f which one-third was on account o f the oil shock. 16. CAR is facing serious debt sustainability issues. At end-2003, CAR'S public and publicly guaranteed external debt amounted to about US$l.16 billion, with IDA beingthe largest creditor (see Annex 2). Arrears to IDA as o f June 17,2004 exceeded US$30 million. CAR also faces arrears to other multilateral creditors. Significant donor resources will be required to clear arrears, which would be a prerequisite for reaching Decision Point under HIPC8, as well as for receiving new multilateral lending. Inlight of debt sustainability concerns, it will be essential to weave the arrears clearance process together with debt relief under HIPC. As such, progress on reforms will be essential to build the necessary track record. TRANSITIONAL FRAMEWORK AND PARTNERSHIPS TransitionalFramework 17. Donors have beenworking inclose collaborationtowards a common platform for broader re-engagement during the transition period. A Bank-led JAM took place in February 2004 to launch analytical and capacity-building work addressing the key challenges in CAR, and to identify a few entry points where actions by the Government and appropriate donor support could leadto visible "quick wins" for the citizens of CAR. ` IMF StaffReport for Request for Post-Conflict Emergency Assistance. * Report No P-7415-AFR. The World Bank, 2000. While HIPC Decision Point could be attained following a six-month period o f satisfactory performance under a PRGF-supported program, the possibility of reaching it within the estimated life-span of this CRN is unlikely. 5 18. The mission work focused on key thematic areas, including security, natural resource management, social sectors and public finance, and each sector team produced a thematic report. This approach to analytical work was innovative in that the Policy Notes' will serve as a common assessment instrument for donors. The multi-donor team used this framework to work with the authorities to identify priorities inkey areas. The team also built on the conclusions o f two major fora for the management of natural resources (see Box 3), as well as "the National Dialogue conference". These three events helpedto create a conducive environment for reforms, and provided key stakeholders with a voice on the design of the reform agenda. Inaddition, the National Dialogue established a follow-up committee to monitor the implementation o f recommendations. 19. Follow-up technical donor meetings took place in May 2004, coinciding with an IMF mission, to assist the authorities inidentifying which actions have financing available, and which can realistically be implemented, particularly given the limited country capacity. The transitional framework which was finalized in consultation with donors and adopted by Government (see Box 2 and Annex 1) focuses on four priority areas and 10 sectoral clusters, and includes concrete actions for the political transition leading to Presidential and Parliamentary elections inearly 2005. 20. The. specific measures included inthe Government's implementationmatrix are selective and address what is essential to ensure the success of the transition period, and to restore the State's capacity to function. Nevertheless, in light o f the limited government implementation capacity, the agenda is an ambitious one. Special focus would therefore be placed on a few measures which are particularly significant and can be usedto gauge progress. These include: (i) ensuring that Presidential and Parliamentary elections take place in January; (ii)improving payroll management, which would result in a reduction in the overall payroll expense; (iii) improving transparency through the publication and dissemination o f key political and legal documents (e.g., publication of audits); (iv) the adoption and implementation o f an IMF program; (v) the redeployment o f teachers to provincial schools in time for the new school year (2004-2005); and (vi) the extension o f vaccination programs to conflict-affectedareas. Partnerships 21. In light of Government's limited capacity it will be particularly important for development partners to continue to work around a single framework to monitor performance, and clearly outline the division of labor. The major donors inCAR have already made progress inestablishing lead roles inkey areas of the matrix (see Annex 4). France has taken the lead in security sector support, with CEMAC also playing a significant role. The EU i s taking the lead role in the health and transport sectors. The EU, France, the Bank and the IMF are working together to provide assistance to restore the public financial management functions o f government. The UN system maintains a strong presence in Bangui, and i s supporting the promotion o f dialogue among the political parties, the trade unions and the Government. The UNis also taking the leadinhumanitarian assistance. Inaddition, UNDP has beenactive inthe governance area, and will also implement the Multi-Country Demobilization and Reintegration The Policy Notes are currently beingfinalized as a stand-alone product. 6 Program (MDRP) project inclose coordination with the Government and local partners. Several international non-governmental organizations are also present in CAR, involved notably in the healthand education sectors. Box 2. An ImplementationMatrix for the Transition The Government o f C A R has prepared, in consultation with its major development partners, an implementation matrix o f actions for the transitional period leading up to and including the Presidential and Parliamentary elections that are scheduled in January 2005. The process was inspired by a concerted effort by donors to harmonize their reengagement strategies. The first version o f the matrix was a synthesis of the findings from the February Joint Assessment Mission. The objective was to develop a coordination and monitoring tool which would allow the Government and its development partners to concentrate on the implementation o f key reforms where results could realistically be achieved. The final matrix which emerged was adopted by Government in May 2004 and sets out four priority areas and 10 sectoral clusters, with implementation over a period of 10 to 12 months. The four priorities crucial to ensuring a smooth transition period are: - Security: Restructure and redeploy defense and security forces inorder to restore security throughout the - nationalterritory. Governance: Restore constitutional order, improve economic and financial management andset up an -- efficient institutional framework. Economic management: Recover the core fiscal and fiduciary capacities o fthe State. Social service delivery: Improve access to basic social services. Within these priorities 10 sectoral clusters have been identified: Security: 1. Defense and security (training and deployment of three battalions, as well as o f police and gendarmerie) 2. Demobilization and reintegration o f ex-combatants Governance: 3. Rule o f Law, political institutions and elections 4. Justice and transparency (capacity o f thejudiciary) Economic management: 5. Public finance (focusing on revenue collection and improving budgeting and financial management) 6. Natural resource sector (Forestry and Mining) Social service delivery: 7. Rural development and Infrastructure (improving rural feeder roads to support revival o frural economic activities) 8. Nutrition and Humanitarian Assistance 9. Education(successfid opening and logistical support for the coming school year) 10. Health, andHIV/AIDS Prevention and Control IMFRelations 22. Establishing a program with the IMF will be critical to CAR'Ssuccess over the next 10 to 12 months. On April 2, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Central African Republic. The Executive Directors indicated that the Central African Republic i s a candidate for support under the Fund's Post-Conflict Emergency Assistance policy (PCEA), in the context o f a concerted international effort. Several Directors underlinedthe need for the authorities to continue to demonstrate their capacity to put inplace and sustain the elements of an economic recovery program, stressing the 7 importance o f a solid track record o f policy implementation prior to a medium-termeconomic program supported by the PovertyReductionGrowth Facility (PRGF). 23. Following Board discussions, an IMF mission visited Bangui in May 2004 to initiate discussions on a proposed program to be supported by the Post-Conflict Emergency Assistance facility. The missionassessedthe implementation status of the set o fpriority actions agreed with the Fund staff duringthe Article IV mission in January 2004. While some of the actions were implemented, further progress is needed on other actions, and the Fund staff agreed with the authorities on a list o f measureswhich neededto be met prior to Board consideration of a PCEA. The PCEA is currently scheduled for IMFBoardpresentation on July 23,2004. 24. An IMF program is a critical piece of the overall transitional framework as it will be needed to underpin a progressive returnto normal financial relations with external creditors, as well as to consolidate economic and financial management in CAR more broadly. An IMF programwould also catalyze other much-needed budgetary assistance. THE BANK'S PROGRAM 25. The unfavorable social and political developments, the lack of Government capacity and the absence o f continuity in country knowledge has adversely affected the performance o f Bank projects in CAR in the past (see Annex 5). The main lesson learned and reflected in the proposed Bank program i s the need to be extremely selective and realistic as to what the Government can achieve. Drawing on the experience in other LICUS countries, the Bank's approach has also focused on the need to build analytical work, coordinate re-engagement closely with development partners, and help the Government build a realistic, country-driven reform program. Also in line with the LICUS experience, the Bank program will seek to: (i) deliver rapid benefits to the population, particularly inconflict-affected areas, and (ii) the begin process o f strengthening longer-term governance, including core state functions, and buildingon an approach which uses the capacities available inlocal communities and NGOsto create a more effective and accountable service delivery. 26. O f the many challenges facing CAR, the Bank's assistance program addresses the weakest aspects o f the country's capacity to develop: the inability o f the state to perform very basic functions adequately, including collection and stewardship of financial resources; and the lack o f basic social services to address poverty and social needs. Over the next 10-12 months, the expected life-span of this CRN, the Bank's assistance program will therefore be founded on two building blocks: (i)supporting a smooth transition by addressing urgent governance and security issues; and (ii) improving the delivery o f basic social services. Within the first building- block, the intention i s to focus on strengthening economic management, demobilization and reintegration o f ex-combatants, and providing support for leadership capacity-building. The second building-block focuses on HIV/AIDSprevention and control, and on an emergency social service recovery program. 27. A key theme underlying the two buildingblocks of Bank assistance is better governance, a cross-cutting challenge-through improved transparency and accountability in the use o f public resources and in basic service delivery mechanisms. The proposed Bank assistance will address issues which are at the center of the governance debate in CAR, and if the planned 8 activities are properly implemented, they should contribute to improving transparency and accountability in the use of public resources, and would increase the government ability to reinforce governance rules and regulations. Box 3. Governance and Management of Natural Resources Overview Until recently, the allocation of production rights in the timber and diamond sector in CAR offered opportunities for rent-seeking behavior, and political interference. Inthe aftermath o fthe March2003 coup, the authorities launched a vast campaign to root out illegal activities in the management o f natural resources. They revoked 28 licenses out of 35 inthe miningsector, and 21 licenses out o f 30 inthe timber sector as part o f the government's effort to improve governance. In the summer o f 2003, the authorities organized two national fora (Etats Generaux) on the forestry and mining sectors to identify priority actions inthe areas o f legislation, taxation, regulation and institutionalcapacity. A NationalDialogue took place in September and engaged the major stakeholders in outlining measures to improve the contribution o f mining and timber sectors to the success of the Government reform agenda. As a result, the Government is now using competitive biddingwhen awarding mining and forestry permits, and publicizing the outcomes. Forestry The potential for the forestry sector to contribute to the national economy and to the social well-being of the rural population is strong in CAR. The sector has proved to be remarkably resilient, and is the top employer and source o f revenue for the State. However, until recently, there were significant problems in the implementation and oversight of policies and regulations. Measures adopted to improve governance in the sector are to: (a) accelerate adoption of forest management plans; (b) increase transparency o f logging- related benefits that accrue at the local level; (c) preempt rent seeking behavior in the allocation and transfers o f concessions; (d) assess compliance with social and other obligations contained in logging contracts; and (e) propose a transparent competitive mechanism to allocate concessions. In the context of the CRN, the Bank will monitor Government's progress in implementing the reform agenda outlined above, with a focus on key strategic issues such as: (a) introduction o f revised procedures regarding concession allocation, transfer and re-allocation; (b) delimitation o f the permanent forest estate; (c) systems that pro-actively guarantee the rights o f local populations; (d) introduction o f robust accounting procedures for the collection o f forest taxes; (e) development o f an effective forest monitoring capability; (f)reform o f the forest fund; and (g) use of market based instrumentsto determine the level o f annual rent payable by concession holders and inencouraging the development o f forest industries. Mining Smuggling inthe miningsector in CAR i s estimated to range from 30% to 50% o f production according to various sources. And the newly promulgated mining code does little to address the issue o f State intervention. More generally, the code compares poorly with international best practice. C A R signed on to the Kimberley process and was one o f the first African countries to endorse the Extractive Industries Transparency Initiative (EITI). Both are important for the proper management o f mineral resources in CAR, Nevertheless, the poor institutional capacity brought about by years o f nepotism and repeated conflicts continue to undermine these efforts. A major issue i s also the lack o f a traceability system, without which the Kimberley process is not effective. Inthe context of the CRN, the Bank will encourage the authorities to use the resources under the Mining Fundmore efficiently; establish and start implementing a traceability system so as to reinforce the control o f the diamond mines in CAR and prevent smuggling; revise the mining code to clarify provisions for mining closure, environmental responsibilities, health and security issues; ensure compliance with Extractive Industry Transparency Initiative and attract industrial private investment inthe miningsector 9 28. The Bank program proposes to support improvements in governance and transparency through specific activities for which funding i s being sought from the LICUS Trust Fund. Proposed measures under discussion include: publishing audits of the Mining and Forestry sectors, key annual reports from the main Government audit agencies (Finance Inspection Office and State Inspectionoffice), and reinforcing and strengthening Treasury functions. (i)Supportingasmoothtransitionbyaddressingurgentgovernanceandsecurityissues EconomicManagement 29. The objective of the economic management goal is to recover core fiscal and fiduciary capacity inthe State and addressthe most critical areas and urgent capacity-building needs inthe short term. This includes reinforcing the Ministry o f Finance's capability to raise budget revenue and improve expenditure control. The authorities need rapid technical assistance to implement functional systems in these core areas: revenue administration (tax and customs); treasury andpayment systems; and wage payments. 30. Bank assistance will focus on strengthening the capacity o f the tax and customs administrations through the procurement of basic equipment; providing technical assistance to the treasury department to improve cash management; providing assistance to carry out an audit o f treasury arrears; and providing support to establish a personnel and payroll management system. In designing its assistance, the Bank has worked closely with other donors to ensure a concerted approach to building capacity. Several meetings took place in Washington and in Bangui with the IMF, France, the EU and UNDP, and there i s complete convergence among donors on interventions in the area o f public finance management. For instance, Bank support on the payroll system i s part o f a larger UNDP program, and Bank support to the Treasury department and the audit of arrears is complementary to assistance from the EUand France. 31. Support for the economic management pillar i s estimated at a cost o f approximately US$1 million, and would be funded through the LICUS Trust Fund(See Table 2). Demobilization and Re-integration 32. The Bank approved the Reintegration of Ex-combatants and Support to Communities Special Project in April 2004 to contribute to current efforts in CAR related to the demobilizationand socio-economic reintegration o f ex-combatants into their home communities, and in turn contribute to the overall stability of the country. The expected results are to: (i) demobilize 7,565 ex-combatants and reintegrate them socially and economically back into their community o f return; (ii) strengthen the capacities of communities of return that are accepting the largest number o f returning ex-combatants in order to ensure the sustainable reintegration o f the ex-combatants; and (iii)support projects on security and conflict prevention in and by communities that are the most vulnerable and the most affected by security problems. The project is funded entirely through the Multi-Donor Trust Fund (MDTF) o f the Multi-Country Demobilization and Reintegration Program (MDRF'). The Bank has fiduciary responsibilities for the management o f the MDTF, although the project will not entail direct IDA funding. The 10 amount o f the grant i s approximately US$9.8 million, and UNDP will implement the project in close coordination with the Government and local partners. Capacity-Buildingfor Leadership 33. Strong leadership at the highest levels in CAR will be critical to ensuring stability and a smooth transition through the election period, as experience in other LICUS has shown, To this end, the Government has also requested Bank support for building capacity of its senior leadership during the transition process, both leadingup to and following the electoral transition. The program would be structured intwo phases and would aim to provide a forum for dialogue and exchange o f experience between senior CAR leadership, reformers and experienced practitioners incountries that have undergone successful transitions. 34. The main objective of the program would be to buildthe capacity o f senior leadership to manage more effectively and to carry out the short-term reforms necessaryto ensure stability and continued engagement with the international community during the transition period. Inthe first phase, it would target senior leaders responsible for implementing the transitional implementation matrix, and would focus primarily on keeping this reform program on track as well as managing donor relationships and expectations during the transition period. In the second phase, seminars would target a broader group, including parliament and civil society, bringingtogether the leadership of CAR with peers from other countries who have successfully managed transition and reform processes (e.g., from Madagascar, Rwanda and Senegal). The cost o f the first phase i s estimated at US$85,000, and the cost o f the second phase i s estimated at US$150,000, and both would be fundedthroughthe LICUS Trust Fund(See Table 2). (ii)Improvingdeliveryofbasicsocialservices Supportfor HIV'LAIDS 35. Support for HIV/AIDS prevention and control i s critical, given the high level o f incidence in the country. Infection rates are now estimated at above 15 percent, and are spreading quickly due to the lack o f functiona1,health and social services. Despite CAR'S non- accrual status, the Bank has been able to continue to provide support for HIV/AIDS during the transition period. An exception was granted for the continued use of PPF funds for the multisectoral HIV/AIDS Project, which was approved in December 2001. To date, two PPFs totaling US$900,000 have been fully disbursed. These funds were used to create the basic institutional framework and to build the capacities o f civil society and the public sector, as well as to leverage significant support from other donors, notably the Global Fund, WFP and Caritas, who use the National AIDS Committee's newly-created structures to implement their support programs (see Annex 6). In addition to building institutions through which other donors may channel special programs, the PPF has also trained NGOs to manage and distribute food supplies, which allowed the World Food Program to distribute 2,500 tons of food this year to people living with AIDS. Giventhat an arrears clearance is unlikely before March 2005, a new PPF (US$450,000) was approved to expand activities inall prefectures and build on the progress that has been made instrengthening capacity and buildinginstitutions. 11 36. While the PPFs have filled a clear technical gap in capacity-building and have helped mobilize significant resources, the use o f PPFs i s limiting, and a gap exists between needs and resources. For example, while the Global Fund i s providing US$5 million inthe first two years to support HIV/AIDS prevention and control, it i s dedicating its efforts to access to care and treatment with only a small portion on communication and prevention, and leaving no resources for local response and institutional development. By contrast, the Bank credit-which was never made effective-was to provide US$12 million to local response, US$3 million on communications, and US$6 million on institutional development, capacity-building, and monitoring and evaluation. Building on the work to date, the Bank could assist the country to leverage more resources from the Global Fundand WFP by buildingthe capacity o f civil society organizations and developingthe institutionalframework for coordinationat the provincial level. In light of CAR's financial situation, the use of grant rather than credit resources to provide support for HIV/AIDS prevention and control will be explored to the extent possible. Giventhe crisis proportions that the HIV/AIDS pandemic has now assumed in the country, as well as CAR'S debt-vulnerable situation, the case appears deserving of grant rather than credit assistance. Emergency Social Service Recovery Program 37. The Bank plans to work with the Government and civil society on an emergency social service recovery program inorder to identify the best way to efficiently deliver public services in the area of education andhealth, including assistance to conflict-affectedcommunities. The goal o f this program would be to prepare a broad platform for social service delivery which could provide the possibility for rapid scale-up. Possible components would include specific activities to aid the delivery o f basic services in health and education, and assistance to conflict-affected communities. 38. Inthe education sector, pedagogicalmanagement (Le., school inspections, monitoringof teachers, program development and textbook selection), and institutional management (i.e., the functions o f planning, organization, humanresources and teacher training, and control and audit) needto be re-developed virtually from scratch. The Bank will assist inestablishing a school map and coherent and systematic overall vision o f the process o f managing entities within the educational system. Following up with actions aiming at making institutional management more effective and efficient, the Bank will provide support for the launching o f the next school year (2004-2005), the organization o f training sessions for teachers and for adult education, the repair o f classrooms and the provision o f school equipment and manuals. In providing its assistance, the Bank will work closely with France, which is currently providing support under its EDUCA 2000 project. 39. In the health sector, the emergency social service recovery program would help rehabilitate health facilities and improve the supply o f basic equipment, drugs, and vaccines. In implementing those activities, the Bank would work closely with WHO, UNICEF, EU and France who are active in the sectors and with NGOs and CBOs (Community Based Organization), adopting a community-driven approach to reinforce local governance and therefore control. Within the social sectors more broadly, the Bank i s planning to provide assistanceto communities inconflict-affected areas. 12 40. To fund the emergency social service recovery program (estimated cost of US$2.35 million) as well as the economic management and capacity-building for leadership cited previously, the Bank will seek to mobilize LICUS Trust Fund financing in the amount o f US$4 million. Inview o f the relatively small amount that can feasibly be mobilized from the LICUS Trust Fund, Bank support will complement projects financed by other parties. An initial request (US$500,000) for the most urgent activities has already been submitted, including technical assistance to reinforce the Ministry of Finance in order to increase revenue and improve expenditure control. A subsequent application is being prepared" for an additional US$3.5 million. The detailed planning o f activities to be supported i s currently being finalized with the Government. Table 2. Overview of PlannedWorld BankSupport Buildingblocks Matrix cluster (see Box 1and Annex 1) Funding Support a smooth Recovercore fiscal andfiduciary capacity of State US$950,000 transition by addressing (Cluster 5) LICUS Trust Fund urgent governance and security issues Supportfor the demobilizationandreintegrationof financedthrough the ex-combatants (Cluster 2) MDRP TF Leadership capacitybuilding(Cluster 3) US$235,000 LICUS Trust Fund Activities to promotetransparency andimproved US$400,000 govemance'' (Cluster 3) LICUS Trust Fund Improve the delivery of Developcapacitybuildingand infrastructure for financedwith basic social services HIV/AIDS(Cluster 10) US$450,000 of PPFresources EmergencySocial Service RecoveryProgram US$2,250,000 (Cluster 8,9 and 10) LICUS Trust Fund Monitoring and Evaluation US$150,000 LICUS Trust Fund RISKS, MONITORING,EXIT AND SCALINGUP Risks 41. While there are risks o f failure with the proposed CRN, the risks o f not re-engaging appear substantially larger for CAR and the region. If renewed donor assistance, notably from IDA is not forthcoming, there is a highrisk that the country will not be able to break the long- standing vicious cycle o f political instability, with potentially dire consequences for the well- being of CAR'S population, and risks of spillovers into the sub-region as a whole. It will be equally important that donor support i s timely. After a long absence due to the recurring conflict, a prompt show o f donor support will help the small team o f reformists to stay the 10 The LICUS applicationwill contain further detailabout operationsto be supported. '1 Activities to promotetransparencywould include supportto the Ministry ofJustice anddisseminationof key audit reports. 13 course. Conversely, lack of timely donor support could affect the successful implementation o f the transitionmatrix and Government's reformprogram. 42. The risks o f failure for the implementation of the CRN relate to: (i)the fragile socio- political situation in CAR, which has engendered domestic instability, violent conflict and insecurity; (ii)the lack o f strong commitment to undertake necessary and effective policy and institutional reforms, as well as the lack of support inthe country for the necessary political and economic reforms; (iii) weak capacity in Government and civil society to implement reforms the and programs; (iv) a failure to build a strong coalition of external development partners willing to support the government politically and economically; and (v) regional instability from neighboring countries. There are also risks associated with the political transition, including the risk that the elections do not take place, stalling progress towards normalizing financial relations with external creditors andresumption ofnewmultilaterallending. 43. The risk mitigation factors include the MDW Special Project, along with the assistance provided by France and CEMAC on security, which should contribute to restoring stability. In addition, a large coalition o f donors (including EU, France and UN) are supporting the electoral process, with Presidential and Parliamentary elections scheduled for early 2005. The re- engagement o f the Bank and the IMF in the recovery program in the CAR will also enhance donor interest in assisting CAR. The risks of weak commitment to reforms, while significant in light of CAR'S historical record, are mitigated somewhat by the presence of a small nucleus of reforming forces. The implementation matrix i s itself a risk mitigating measure that will help keep the Government and development partners focused on a few priorities, and help avoid donor fragmentation. The Bank's proposed strategy will also address the weak capacity, with a strong focus on a few entry points for reform, including leadership capacity-building and a high content o f technical assistance. Monitoring 44. Over the next 10-12 months the Bank will actively support the multi-donor re- engagement approach and continue to follow the security situation and the political process closely. While it i s recognized that the Government's transition matrix i s ambitious, it is intended as a flexible framework for priority reform implementation, progress under which will be reviewedquarterly. Particular focus will be placed on certaintop-priority measureswithin the matrix, which appear feasible to implement in the next 12 months. Overall progress will be mainlyjudged on the basis o f results associatedwith these top-priority measures. 45. A key measure to indicate progress on security is to ensure the secure holding of the Presidential and Parliamentary elections by restructuring and redeploying defense forces. This i s feasible, particularly in light o f the support from CEMAC, France and the EU. Ensuring that Presidential and Parliamentary elections take place in January is also a key measure. An important intermediary step i s the electoral census, and donor funding for this activity will be critical to maintaining the electoral calendar. In the area o f governance, two key measures include improving payroll management, which would result ina reduction in the overall payroll expense; and improving transparency through the publication and dissemination o f key political and legal documents (e.g., publicationof audits). 14 46. Progress in economic management i s key, and could be measuredby reasonable progress inimproving revenues and the adoption and implementation of an IMFprogram. Some specific actions include preparing and monitoring monthly cash-flow plans, and conducting an audit of domestic arrears in view o f establishing a credible arrears clearance plan. Achieving the measures in governance and economic management will be difficult. Nevertheless, it i s realistic to see them implementedin the next 12 months, as support will be provided from several donor partners, including the Bank. 47. Inthe delivery of social services, one key measure of progress will be the redeployment o f teachers to provincial schools intime for the new school year (2004-2005). This i s realistic in light o f the promising recently-created capacity on the ground for implementation, provided for through France's on-going EDUCA 2000 project. Inthe health sector, a key measure would be the extension ofvaccination programs to conflict-affected areas. 48. The World Bank would expect the Government unit responsible for monitoring and evaluation o f the matrix to report progress on a quarterly basis. This unit would be in charge o f updating the matrix in concert with development partners, and would be supported by the Bank through the LICUS Trust Fund. Exit and Scaling Up 49. Provided the security situation and political process unfold in a satisfactory manner, following elections in January o f 2005, the Bank would anticipate convening a senior-level donors' meeting to assess the way forward, including possibilities for an arrears clearance plan which would lead, inter alia, to HIPC Decision Point and a resumption o f normal IDA lending. Ingeneral however, prospects for arrears clearanceremainuncertain duringthe time frame ofthe CRN, and the severity o f CAR'S situation would require an exceptional effort to be made on the part ofthe Bank and other creditors. As the situation develops, andthe IMFprogramevolves, an update will be provided to the Board on the prospects and modalities for arrears clearance in CAR. 50. Should progress and/or the country conditions not be sufficiently favorable to warrant longer-term planning such as a CAS, the Bank will propose an extension o f the CRN or similar short-term strategy vehicle. IDA'Sprogram would be limited to capacity building initiatives financed through instruments such as those contemplated inthis proposed CRN. 51. Bangui i s currently at a phase 3 in the UN security scale. In the event the security situation in CAR dramatically worsens as evidenced, for instance, by a phase 5 rating, the Bank would initiate a Watching Briefinaccordance with OP 2.30. 15 3 I I I r > a sE I iII IIi % E3 Q R 9 ;?IIi I III j d 0 r 4 Annex 2 CentralAfrican Republic: Debt Sustainability 1. A preliminary debt sustainability analysis (DSA) was preparedjointly by the authorities and the staffs of IDA and the IMF in 2002. The DSA assessed the possible evolution of the Central African Republic's external debt over the next 20 years. On the basis of macroeconomic projections agreed upon with the CAR authorities, the DSA concluded that CAR'S external debt would remain unsustainable in terms of the NPV of debt-to-exports ratio, even after the application o f traditional debt-relief mechanisms. The NPV o f debt-to-exports ratio was estimated at 324 percent in 2001, and would have remained above 150 percent until 2010. The NPV o f debt-to-revenue ratio was then estimated at 685 percent in2001. Without debt relief, the average debt service due per year was estimated at US$50 million duringthe period2002-2011. 2. More recent information from IMF staff confirms the validity o f the 2002 DSA. In the report on the Article IV Consultations in 2004l, IMF staff pointed that updated data and macroeconomic projections indicate that even after clearance of arrears to multilateral creditors, and debt relief from bilateral creditors, CAR'Sdebt indicators would be very high, with the ratio NPV o f debt-to-exports ratio remaining over 400 percent over the medium term, while the ratio o f debt service to revenue and grants would stay above 30 percent inmost years. CARArrears to IDA, December2001to December2005 55 50 45 40 35 15 10 5 0 1 Central African Republic- Staff Report for the 2004 Article IV Consultation. March 10, 2004. IMF SMl04183. 21 Annex 2 3. At present, CAR is not servicing its external debt. As of December 2003, CAR had accumulated about US$94.5 million in overdue obligations to multilateral creditors, in which US$31.3 million are due to the AfDB, and about US$26.1 million to the World Bark2 Other multilateral creditors include the OPEC Fund, EIB, IFAD, and BADEA. CAR would need to work out arrears clearance plans with all its creditors while establishing a policy track that could allow it to possibly benefit from debt relief under the enhanced HIPC initiative. Given the magnitude o f the arrears as well as the high burdeno f current obligations, it may be inevitable to weave the arrears clearance process together with the.HIPC decision point. In addition, Government's track record toward HIPC debt relief may have to be assessed based on performance under a broader array o f IMF instruments, including SMP and PCEA. 2 Arrearsto the World Bank are estimatedat US$30 million as of June 2004. 22 Annex 3 Donors' Interventions Donors IWBG-- France EU - ONUCA I riority 1: Security I : .r .r c b b;r C .r Priority 3 : .r Social c L service - delivery Development Rural and food TA rranspo security. ation Stabex - Nutrition and Humanitarian assistance Suppor Support to IDPs, refugeesand to population to NGC in war-affectedzones ECHO -- Rule of Law, Political Institutions and Elections. General Genera ilection' 31ection Priority 4 :I I -- Zevision of the Military Justice Code - I I Anticipated ActuaUOngoing 23 Annex 4 LeveragingHIV/AIDS Donor Support in CAR: Status of Donor Activities, May 31,2004 igency Plannedassistance Implementationstatus/comments 3lobal Fund(GF) Total allocation of US$25,090,588 (5 Activities underway: training of health year maximum) Grant approved in officers on anti-retrovirals (ARVs), early 2003, to be implementedby procurement o f vehicles, identification o f UNDP as Principal Beneficiary the 8 sites for testing and ARVs, selection of contractors to build health centers. MinistryofHealth andNational HIV/AIDSCommittee (CNLS) took part inall steps, from training to accompanying the GFteam inall provinces, linkingthem with Provincial AIDS Committees (CPLS), assisting them to select the sites ai the national level. IPEC grant Total allocation o f US$500,000 Activities implemented by CNLS: NGO approved early 2003 to support pilot leaders trained, implementingNGOs testingand prevention activities in selected and contracted inthe main site selected sites (Berberati), supervision o f their activities, under CPLS control. IDB- Regional Total allocation US$5,000,000 Experts hired. CAR provided anM&E -IIV/ALDSProgram expert inthe program. CNLS took part in :ongo Oubangui the launching workshop inBrazzaville and 2hari River contributed to preparationo f action plan in selected sites for prevention, testing, counseling and access to treatment, along the river. Contracts inpreparation with NGOs, based on CNLS experience in contractingNGO under PPF pilot activities. 3ates Foundation Grant o f US$500,000 to Amis Activities started, 50 NGO staff trained. D'Afrique,a Japanese NGO, to Contracts signedwith NGOs, with support capacity buildingofNGOs in involvement o f CPLS established under two provinces the PPF. CNLS team took part inmissions inthe selected provinces. :ANTAS IPHD HIV/AIDS prevention, care and Activities under implementation on two International treatment and food support for AIDS components: People Living With 'artnership for patients now reaching US$500,000 HIV/AIDS (PLWHA) and their families 3uman are receiving support. CNLS team took >evelopment)' Food support now reaching part in missions inconcerned the four us$1,200,000 selected provinces, where CNLS had well functioning CPLS. JNDP, prevention UNDP added US$500,000 on its own CNLS i s the implementing agency, with a ictivities with NGOs funds, to continue supporting CNLS tc special unit implementing pilot activities md communities conduct pilot activities with NGOs inwith NGOs and communities. CNLS and provinces where CNLS established the provincialAIDS committees take part provincialAIDS committees. inselection ofNGOs, supervision missions and fiduciarv control. 1 Grant financed by USA Department of Agriculture. 24 Annex 4 Lgency Plannedassistance Implementationstatus/ comments Norld Food Program Revised Food allocation for 2004, Activities expanding in Bangui and intwo WFP) 12,000 tons for families of PLWHA provinces, inclose collaboration with and orphans. Allocations could be CNLS and CPLS. Food delivery i s still increased but are limited by low limitedby low capacities ofNGOs and capacities. The Government and provincialcommittees. WFP works in CNLS put food supplies as one of provinces where CNLS built up capacities, their priorities to try to save most of CNLS i s directly involvedwith WFP to the 500,000 PLWHA, keepingthem identify capable NGOsto assistthem to alive for two or three more years, until select beneficiaries and to monitor their access to ARV will be improved. activities through CPLS. CNLS plans to expand WFP support usingthe thirdPPF to train more NGOs and CPLS on food aid management. h-opeanUnion EUofferedto hirean international The Government decided to ask the EUto consultant for a 2 years position in concentrate on supporting a reference CNLS, as a Monitoringand ARV center. None ofthese activities has Evaluation (M&E) specialist. started. Still EUis fundingpilot activities with NGOs and communities in its focus provinces. CNLS and CPLS are actively involved. nternational Red Piloting access to ARV ESTHER The project is still at an early stage. CNLS zross and French program is closely involved as the program serves zooperation as a reference ARV center. JNFPA Support to an AIDS information Center well established, disseminating IEC center inMinistryo f Health materials. CNLS communication specialis supported by PPF closely involved, disseminating lessons from the center to other partners. 'asteur Institute (IP) Laboratory services and support to the CNLS signedagreements with IP, which MinistryofHealthon M&Eofthe conducted an epidemiological survey epidemic usingPPF funds. This provided the most extensive national assessment o f the epidemic. IP i s continuing to M&Ethe epidemic in close collaboration with CNLS. 3ender trust fund Training o f trainers inwomen Training modules finalized with the NGO managedby the associations to train 1,000 peer "Advocates for Youth", participants 3ank as a counselors who will form 1,000 youth selected, and trainers from Burkina Faso :ontribution to the groups (5,000 youth involved, mainly are due to beginthe training inAugust 'PF) young women) who will serve as 2004. catalysts and role models intheir communities on behavioral change, care and support 25 Annex 5 History of Bank Engagement 1. The World Bank's assistance to the CAR began in 1969. The first country assistance strategy (CAS) for CAR was reviewed by the Board in June 1992, during discussions of the Agricultural Services Project. Its objectives were to help alleviate poverty by promoting broad- based and sustainable economic growth through the provision of social and infrastructure services. InDecember 1999, a Transitional Support Strategy Note (TSSN) was submitted to the Board as an Annex to the President Report for the Fiscal Consolidation Credit. The TSSN was centered on fiscal consolidation, improving governance and laying the foundations for a poverty reduction program. As o f March 30, 2004 IDA credits totaling approximately US$465 million had been approved to CAR, o f which US$27millioni s undisbursed. 2. IDA investment lendingto CAR has beento support transport rehabilitation, education, health, energy, rural development, management o f natural resources, enterprise rehabilitations and development, social dimensions of adjustment, and technical assistance projects in support of economic management. Since 1986,the Bank has supported the reform program through five adjustment credits (four SACS and a SECAL for cotton sector adjustment). These adjustment operations focused on strengthening the country's macroeconomic management and policy improvements, particularly trade and price liberalization and public enterprise reform. Due to limited involvement o f the Bank in CAR in the recent past, little attention has been given to economic and sector work. The last Country Economic Memorandum (No. 5332-CA) was distributedto the Bank's ExecutiveDirectors inAugust 1985. 3. Performance o f projects have generally beenunsatisfactory as evidenced by the last three OED project evaluations, which have been rated unsatisfactory, or highly unsatisfactory. This has been primarily due to the unfavorable social and political developments that frequently interruptedimplementation of projects, and caused loss of assets and project resources. Lack of institutional capacity by government and lack o f continuity in country knowledge adversely affected bothproject designand implementation. 26 Annex 6 Central African Republic: Relations with the Fund (As of April 30,2004) I. MembershipStatus:Joined:07110/1963;ArticleVI11 11. GeneralResourcesAccount: SDR million %Quota Quota 55.70 100.00 Fundholdingsofcurrency 55.55 99.73 ReservepositioninFund 0.16 0.29 111. SDRDepartment: SDR million %Allocation Netcumulativeallocation 9.32 100.00 Holdings 0.06 0.65 Iv. OutstandingPurchasesand Loans: SDRmillion %Quota PRGFarrangements 23.66 42.47 V. FinancialArrangements: Amount Amount Approval Expiration approved drawn TvPe date date (Inmillionsof SDRs) ESAF/PRGF 07/20/1998 01I1912002 49.44 24.48 Stand-ByArrangement 03/28/1994 0312711995 16.48 10.71 SAF 06/01/1987 0513111990 21.28 21.28 VI. ProjectedObligationsto the Fund (SDR million; basedon existinguse ofresourcesandpresentholdingsof SDRs): Forthcoming 2004 2005 2006 2007 2008 Principal 0.82 3.30 4.10 4.90 4.90 Chargedinterest 0.23 0.25 8.24 0.21 - 0.19 Total 1.05 3.55 4.33 5.11 5.08 VII. ImplementationofHIPC Initiative:NotApplicable VIII. SafeguardsAssessments: Underthe Fund'ssafeguards assessment policy,the Bank ofthe CentralAfrican States (BEAC), ofwhichthe CentralAfricanRepublicis a member,was subject to an on-site safeguards assessment,which was completedonJuly 20,200 1.The assessment concluded that highrisksmay exist inthe financialreportingframeworkand internalauditmechanism. A follow-up safeguards assessment ofthe BEAChas beeninitiatedonFebruary20,2004. 27 Annex 6 Exchange Rate Arrangement The Central African Republic is a memberof a monetary association with a common central bank, the Bank of Central African States (BEAC). The exchange system, common to all members, has operated without restrictions on the making of payments and transfers for current internationaltransactions. The CFA franc is peggedto the euro at the fixed rate of CFAF 655.957 = 1. On June 1,2004, the rate of the CFA franc interms o f SDRs was SDR 1=CFAF 545.452. Article IV Consultations The Central African Republic is onthe standard 12-monthcycle for Article IV consultations. The last Article IV consultation was concluded on April 2,2004. e Recent Technical Assistance Department Purpose April 2000 To monitor preparations for the introduction o f the VAT and help strengthenthe tax directorate. June 2000 FAD To monitor preparations for the introduction o f the VAT and help strengthenthe tax directorate. To monitor preparations for the introduction of the VAT and help strengthenthe tax directorate. Oct.-Nov. 2000 FAD To prepare the introduction of the VAT system and discuss specific measures to improve customs revenue 1 collection. December 2000 FAD To prepare the introduction of the VAT system (planned riD for January 2001) and discuss specific measures to improve tax revenuecollection. April 2001 To follow up on the introduction o f the VAT and discuss ~~ specific measuresto improve tax and customs revenue. collection. Jan.-Feb. 2004 STA To assist the authorities inreviewingand updating the General DataDisseminationSystem (GDDS) and to provide technical assistance ingovernment finance statistics. March2004 FAD To assist the authorities inthe area o f revenue administration. i_in April 2004 To assist the authorities inthe area o f public expenditure management. Resident Representative The Fund's office inBangui was closed inSeptember2003. 28 Central African Republic at a glance 8/20/03 Central Sub- POVERTY and SOCIAL African Saharan LOW- Republic Africa income I Developmentdiamond` 2002 Population, mid-year (millions) 3.8 688 2,495 Life expectancy GNi per capita (Atlas method, US$) 270 450 430 GNI (Atlas method, US$ billions) 1.o 306 1,072 I ~ Average annual growth, 1996-02 i Population (%) 1.8 2.4 1.9 Labor force (%) 1.7 2.5 2.3 p::; ~ Most recent estimate (latest year available, 1996-02) enrollment Poverty (% ofpopulation below nationalpoverty line) Urban population (% of total population) 42 33 30 Life expectancy at birth (years) 42 46 59 Infant mortality (per 1,000live births) 110 105 81 ~ Child malnutrition (% of children under 5) Access to improved water source Access to an improved water source (% ofpopulation) 70 58 76 Illiteracy (77 ofpopulaflon age 15+) 50 37 37 Gross primary enrollment (% of school-age population) 75 86 95 I -Central African Republic Male 89 92 103 Low-income group Female 61 80 87 i - KEY ECONOMiC RATIOS and LONG-TERMTRENDS 1982 1992 2001 2002 i Economic ratios` GDP (US$ billions) 0.75 1.4 0.97 1.1 Gross domestic investmenffGDP 6.7 12.2 14.0 14.4 Exports of goods and serviceslGDP 22.2 11.5 12.1 12.0 Trade Gross domestic savingslGDP -5.4 -0.4 11.2 9.9 Gross national savings/GDP 1.o 0.1 13.2 9.9 T Current account baiancelGDP -5.7 -5.8 1.7 Interest paymentslGDP 0.3 0.5 0.4 0.0 Total debVGDP 33.9 56.8 85.0 99.1 Total debt service/exports 5.0 9.0 10.3 0.7 Present value of debt/GDP 55.4 Present value of debffexports 416.1 Indebtedness 1982-92 1992-02 7.001 2002 2002-06 (average annual growth) GDP 0.4 3.0 1.5 4.2 -Central African Republic GDP per capita -1.8 0.7 0.1 2.6 __Low-incomegroup Exports of goods and services 0.2 STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (%) ~ (77 of GDP) I Agriculture 41.7 46.1 55.4 Industry 13.1 20.7 20.9 Manufacturlng 7.7 11.0 Services 45.2 33.2 23.7 Private consumption 89.5 83.6 77.3 General government consumption 15.9 16.9 11.4 11.5 Imports of goods and services 34.2 24.1 14.9 16.5 -GDI +GDP I 1982-92 1992-02 7.001 2002 (average annual growth) Agriculture 1.5 4.4 4.0 4.0 Industry 0.7 1.9 4.0 4.0 Manufacturing 0.3 1.4 4.0 4.0 Services -1.o 0.9 -5.2 4.8 Private consumption 1.3 General government consumption 0.2 Gross domestic Investment 3.4 Imports of goods and services 2 1 ~ ~~ Note: 2002 data are preliminary estimates. This table was produced from the Development Economicscentral database. *The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 29 CentralAfrican Republic ~ PRICESand GOVERNMENTFINANCE 1982 1992 2001 2002 Domestic prices (% change) Consumerprices 13 3 -0.8 1 4 2.5 ImplicitGDP deflator 20 9 2.4 3 0 1.4 Government finance I (% of GDP,includescurrent grants) Current revenue 8.9 10 8 11.6 Current budget balance -5.2 2 4 3.3 -GDP deflator +CPI Overall surpluddeficit -14.7 -7 9 -7.6 TRADE 1982 1992 2001 2002 (US$ millions) Export and Import levels (US0 mill.) Total exports (fob) 116 160 175 200 Diamonds 69 85 90 Coffee 5 25 27 Manufactures Total imports(cin 189 151 165 Food 30 14 15 Fuel and energy 16 17 18 Capital goods 64 88 94 Export price index (1995=100) 85 62 64 96 97 98 99 00 01 02 Import priceindex (1995=100) 89 114 117 w Exports Imports Terms of trade (7995=100) 96 54 55 BALANCEof PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (Oh) Exportsof goods and sewices 166 165 121 126 Importsof goods and sewices 256 346 149 174 4 T Resourcebalance -90 -181 -28 -48 Net income -7 -15 -2 -7 Net currenttransfers 55 23 22 7 Current account balance -43 -83 16 Financing items (net) 35 87 -21 Changes in net reserves 8 -4 4 10 Memo: Reservesincluding gold (US$ millions) Conversion rate(DDEC, loca//US$) 328 6 264.7 733 0 697.0 EXTERNALDEBTand RESOURCEFLOWS 1982 1992 2001 2002 (US$ millions) 1 Composition of 2002 debt (US8 mill.) Total debt outstanding and disbursed 254 814 822 1,066 IBRD 0 0 0 0 53 IDA 35 300 372 399 34 , Total debt sewice 9 16 13 1 IBRD 0 0 0 0 IDA 0 3 9 0 Composition of net resourceflows Officialgrants 44 92 58 Officialcreditors 16 41 -9 1 Private creditors 0 -1 0 0 Foreigndirect investment 9 -11 8 Portfolio equity 0 0 0 I 186 World Bank program Commitments 18 26 17 0 E Bilateral - Disbursements 2 21 0 1 B IDA D Othermultilateral - F Plivate - Principal repayments 0 1 6 0 C IMF -- G- Short-term Net flows 2 20 -6 1 lnterestpayments 0 2 3 0 Net transfers 2 18 -8 1 Note: This table was producedfrom the Development Economicscentra!database. 8/20/03 30 CAS Annex B2 - Selected Indicators* of Bank Portfolio Performance and Management As Of Date 05/19/2004 Indicator 2001 2002 2003 2004 Porffolio Assessment Numberof Projects Under Implementation a 2 3 2 2 Average ImplementationPeriod (years) 1.3 1.7 2.3 3.2 Percentof Problem Projects by Number 50.0 66.7 50.0 50.0 Percentof Problem Projects by Amount 71.4 62.2 32.0 32.0 Percentof Projectsat Risk by Number 100.0 66.7 100.0 100.0 Percentof Projectsat Risk by Amount a, 100.0 62.2 100.0 100.0 DisbursementRatio (%) e 3.5 12.1 0.0 0.0 Porffolio Management CPPR duringthe year (yedno) no no no no SuDervision Resources(total US$) 164.0 254.0 145.0 280.0 Average Supervision(US$/project) 82.0 85.0 92.5 140.0 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 23 3 Proj Eva1by OED by Amt (US$ millions) 413.9 21.4 % of OED Projects Rated U or HU by Number 65.2 100.0 % of OED Projects Rated U or HU by Amt 80.3 100.0 a. As shown in the Annual Reporton Portfolio Performance(exceptfor current FY). b. Average age of projects in the Bank'scountry portfolio. c. Percent of projects rated U or HU on developmentobjectives (DO) and/or implementationprogress (IP). d. As defined under the Portfolio ImprovementProgram. e. Ratio of disbursementsduring the year to the undisbursedbalanceof the Bank's portfolio at the beginningof the year: Investmentprojectsonly. * All indicators are for projects active in the Portfolio,with the exception of DisbursementRatio, which includes all active projectsas well as projectswhich exited during the fiscal year. 31 Annex 04 CAS Annex B4 Summary of Nonlending Services - - As Of Date 05/19/2004 Product CompletionFY Cost (US$OOO) Audiencea Objectiveb Recent completions Underway Policy Notes FY2005 220 Bank/Gvt/Donor Knowledge Planned Poverty Assessment FY2006 150 BanWGvt Knowledge Public Expenditure Review (PER) FY2007 170 Bank/Gvt Problem-solving Development Policy Report (DPR) FY2008 100 BanWGvt Knowledge ~~ a. Government,donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solvlng. 32 Central African Republic Social Indicators Latest single year Same regionlincome group Sub- Saharan Low- 1970-75 1980-85 1996-2002 Africa Income POPULATION Total population, mid-year(millions) 2.1 2.7 3.8 688.9 2,494.6 Growth rate (% annual averagefor period) 2.1 2.7 1.7 2.4 1.9 Urban population (% of population) 33.7 36.3 42.2 33.1 30.6 Total fertility rate (births per woman) 5.8 5.7 4.6 5.1 3.5 POVERTY (77ofpopulation) National headcount index Urban headcountindex Rural headcountindex INCOME GNI per capita (US$) 180 280 250 450 430 Consumer price index (1995=100) 78 112 Food price index (1995=100) 82 104 INCOMEKONSUMPTION DISTRIBUTION Gini index Lowest quintiie (% of incomeor consumption) Highest quintlle (% of incomeor consumption) SOCIAL INDICATORS Public expenditure Health (YOof GDP) 2.3 2.5 1.1 Education (% of GDP) 4.8 2.1 1.9 3.4 3.1 Social security and welfare (% of GDP) 1.4 Net primary school enrollment rate (% of age group) Total 50 61 80 Male 67 75 85 Female 33 47 74 Access to an improved water source (% of population) Total 70 58 76 Urban 89 83 90 Rural 57 46 70 Immunization rate (% of children ages 12-23 months) Measles 23 35 58 65 DPT 20 40 54 65 Child malnutrition (% under 5 years) 42 Life expectancy at birth (yea@ Total 44 47 42 46 59 Male 41 45 42 45 58 Female 46 50 43 47 60 Mortality Infant (per 1,000live births) 149 121 115 103 79 Under 5 (per 1,000 live births) 248 189 180 174 121 Adult (15-59) Male (per 1,000 population) 571 540 620 519 310 Female (per 1,000 population) 440 424 573 461 259 Maternal (modeled, per 100,000 live births) 1,100 Births attended by skilled health staff (%) 44 Note: 0 or 0.0 meanszero or less than haif the unit shown. Net enrollmentrate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization:refers to childrenages 12-23 months who receivedvaccinations before one year of age. 2004 World DevelopmentIndicatorsCD-ROM, World Bank 33 i U m 3 0