Documentof The World BankGroup FOR OFFICIAL USE ONLY ReportNo. 47273-DJ INTERNATIONAL DEVELOPMENT ASSOCATION COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OFDJIBOUTI March30,2009 DjiboutiCountryManagementUnit MiddleEastandNorthAfrica Region This documenthas a restricteddistributionandmay beusedby recipientsonly inthe performanceof their official duties. Its contents may not otherwisebe disclosedwithout WorldBankauthorization. The date ofthe last Country Assistance Strategy(Report no. 31613-DJ)was March24,2005. CURRENCY AND EQUIVALENTS UnitofCurrency=DjiboutiFrancs(DF) US$l = 177.7DF (Exchange RateFixedUnder Currency Board Arrangement) ABBREVIATIONSAND ACRONYMS AAA AnalyticalandAdvisory Activity HIV HumanImmunodeficiencyVirus ADDS Agence Djiboutiennede D6veloppementSocial ICT InformationandCommunications Technology AFD FrenchDevelopmentAgency IDA InternationalDevelopmentAssociation AfDB AfricanDevelopmentBank IDF InstitutionalDevelopmentFund AIDS AcquiredImmune-DeficiencySyndrome IEG IndependentEvaluationGroup ANEFIP Agence Nationale de l'Emploi, de la Formation, et IFC InternationalFinanceCorporation de 1'InsertionProfessionnelle CAS CountryAssistance Strategy IMF InternationalMonetaryFund CFAA CountryFinancialAccountability Assessment I N D S InitiativeNationalepour le D6veloppement Social CPIA CountryPolicyandInstitutionalAssessment IsDB IslamicDevelopmentBank CPAR CountryProcurementAssessment Report JSAN Joint StaffAdvisoryNote CPPR CountryPortfolioPerformanceReview MDG MillenniumDevelopmentGoal DPG DevelopmentPolicyGrant MIGA Multilateral InvestmentGuaranteeAgency DSA Debt Sustainability Analysis M&E MonitoringandEvaluation EC EuropeanCommission NPV Net PresentValue EDD Djibouti ElectricityAuthority ONEAD OfficeNationaldes Eaux et d'Assainissementde Djibouti EFA-FTI Educationfor All FastTrack Initiative PER PublicExpenditureReview ESMAP Energy Sector Management AssistanceProgram PPIAF Public-PrivateInfrastructure Advisory Facility ESW Economicand Sector Work PRGF PovertyReductionandGrowthFacility FDI ForeignDirectInvestment SDR SpecialDrawingRights FGM Female GenitalMutilation SEETF South-SouthExperienceExchangeTrust Fund FSAP FinancialSector Assessment Program SMEs SmallandMediumEnterprises GAC GovernanceandAnti-Corruption TA TechnicalAssistance GDP Gross Domestic Product TFSCB Trust Fundfor StatisticalCapacity Building GEF GlobalEnvironmentFacility TVET TechnicalandVocational Educationand Training GER Gross EnrollmentRatio UNDP UnitedNationsDevelopmentProgram GFDRR GlobalFacilityfor DisasterReductionand UNICEF UnitedNationsChildren's Fund Recovery GFRP GlobalFoodCrisisResponseProgram USAID UnitedStates Agency for International Development GPOBA GlobalPartnershipon Output-BasedAid VAT Value Added Tax HDI HumanDevelopmentIndex WHO WorldHealthOrganization Vice President Daniela Gressani CountryDirector EmmanuelMbi Task Manager GuidoRurangwa Core team members: AlexandraOrtiz, ClaudiaNassif, Conor Healy, GuidoRurangwa,Hoveida Nobakht, James Emery,LindaEnglish,MichaelHamaide, SamehEl-Saharty,Xavier Devictor This document has a restricteddistributionand may be used by recipients only in the performanceof their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. I FOROFFICIAL USE ONLY REPUBLICOF DJIBOUTI COUNTRY ASSISTANCE STRATEGY FY2009-2012 TABLE OF CONTENTS EXECUTIVESUMMARY.......................................................................................................................... i I INTRODUCTION.......................................................................................................................... 1 . I1. COUNTRYCONTEXT................................................................................................................. 1 A. Politicaland Social Context .............................................................................................. 1 B. RecentEconomic Developments....................................................................................... 2 C. Economic Outlook over the CAS Period........................................................................... 6 D. Living Standardsandthe MillenniumDevelopment Goals .............................................. 9 I11. GOVERNMENTOBJECTIVESAND STRATEGY.................................................................. 11 A. The National Initiativefor Social Development.............................................................. 11 B. SelectedKey Development Challenges........................................................................... 12 Sustaininggrowth andimproving competitiveness............................................................. 12 Improvinghumandevelopment and safety nets.................................................................. 15 Strengtheninggovernance................................................................................................... 17 IV. WORLD BANKEXPERIENCEUNDERTHE PREVIOUSCAS............................................. 18 A. Progresstoward CAS Outcomes for 2005-2008 ............................................................. 18 Outcomesinthe areas of growth and competitiveness........................................................ 18 Outcomes inhumanresources development ....................................................................... 18 Outcomes ineconomic governance..................................................................................... 19 B. Portfolio Management..................................................................................................... 20 V. PROPOSEDWORLDBANK STRATEGY................................................................................ 20 A. Guiding Principles ........................................................................................................... 20 B. ProposedAssistance Strategy.......................................................................................... 22 CAS Theme 1:Supporting economic growth...................................................................... 22 CAS Theme 2: Supporting access to basic social services and human development .........23 CAS Theme 3: Supporting governance andpublic sector management............................. 25 C. PartnershipsandParticipation ......................................................................................... 26 VI. MANAGINGRISKS.................................................................................................................... 27 ANNEXES ................................................................................................................................................ 29 Annex 1: Results Framework for the Djibouti CAS FY2009-2012........................................ 29 Annex 2: Djibouti's FY2005-2008 CAS Completion Report ................................................. 33 Annex 3: Djibouti Active Trust Funds.................................................................................... 48 CAS Annex A2: Djiboutiat a Glance ..................................................................................... 49 CAS Annex B2: Selected Indicators o f Portfolio Performanceand Management..................51 CAS Annex B3: IBRD/IDA Program Summary..................................................................... 52 CAS Annex B4: Summary ofNon-lending Services- Djibouti.............................................. 53 CAS Annex B5: Djibouti Social Indicators............................................................................. 54 CAS Annex B6: Djibouti Key Economic Indicators............................................................... 55 CAS Annex B8: OperationsPortfolio (IBRD/IDA and Grants) ............................................. 57 Map of Djibouti ....................................................................................................................... 59 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. Figures Figure 1: Foreign Direct Investment. 2003-2008 ......................................................................... 3 Text Boxes Box 1:Response to the Foodand Energy Crisis inDjibouti......................................................... 4 Box 2: Djibouti: The Costs ofthe GlobalFinancial andEconomic Crisis.................................... 7 Box 3: National Initiative for Social Development-A Second-GenerationPRSP................... 12 Tables Table 1:SelectedEconomic Indicators ......................................................................................... 8 Table 2: Djibouti's Progresstoward the MDGs............................................................................ 9 Table 3: ProposedIDA Financing. FY2009-2012....................................................................... 25 Table 4: Trust Fundsand IDFs. FY2009-2012............................................................................ 26 Table 5: Non-Lending Activities................................................................................................. 26 EXECUTIVESUMMARY 1. Djibouti is a small country of about 830,000 people, strategically located in the Horn of Africa at the southern end of the Red Sea. The country i s almost a city- state-about two-thirds o f town dwellers live in the capital city. The hinterland, an extension o f the deserts o f Ethiopia and Somalia, is sparsely occupied by a poor pastoral and nomadic population. Politically stable, the country plays a neutral role in the frequently tense regionalpolitics of theHorn of Africa. .. 11. Djibouti's economy is based on rents derivingfrom its strategic location:port revenues, military revenues, andforeign aid. Djibouti is poorly endowed with natural resources, with limited arable land, rainfall, and water. The manufacturing sector is weak and agriculture non-existent. As a result, the economy is based mainly on revenues and rents generated directly and indirectly from the activities o f the international Port o f Djibouti and related businesses, including the trade traffic transiting to and from landlocked Ethiopia, the main user o f Djibouti ports (with a population o f about 75 million people). ... 111. For the last four years-the period of the last Country Assistance Strategy (CAS)-Djibouti's economic growth has been strong. Real GDP growth accelerated from an annual average o f 3 percent in2001-2005 to 4.8 percent in2006 and 5.9 percent in2008. This surge in growth was driven mainly by fiscal expansion and large foreign direct investments (FDI) in the port, tourism, and construction sectors. Growth was accompanied by increased inflation, however, which reached 14 percent inthe 12-month period to August 2008 as a result o f the global spike inenergy and food prices. iv. However, Djibouti's economic growth has not been sufficient to address the country's deep structural poverty and break the cycle of low social and economic outcomes. Despite relatively highper capita income (US$ 1,060 in 2007), the incidence o f poverty i s high in Djibouti (42 percent absolute and 75 percent relative). Poverty is exacerbated by the presence o f a large number o f refugees living in Djibouti, who place further pressure on the country's already strained social services. Despite some progress inincreasing school enrollment and reducing mortality, outcomes remain comparatively low. As a food-deficit country, totally dependent on imports to meet its food requirements, Djibouti i s highly sensitive to external shocks such as surging food and fuel prices and natural phenomena such as floods and droughts. Finally, high unemployment-estimated at 45-60 percent-contributes to the fragility. v. Djibouti is not immune to the impact of the globalfinancial and economiccrisis. Although the risk o f direct crisis contagion into the country's embryonic financial sector remains low, the global crisis may reach Djibouti mainly through the reduction o f foreign direct investment. The impact o f this risk, currently considered limited, will depend on how deeply Djibouti's major economic partners would be affected and on Djibouti's own policy response. 1 vi. Djibouti's new Poverty Reduction Strategy Paper-the National Initiative for Social Development (INDS)-provides a comprehensive vision for economic growth and poverty reduction. Presented to the World Bank's Executive Board on October 17, 2008, the strategy aims to: (i) accelerate growth while maintaining macroeconomic stability; (ii)achieve universal access to basic services and the development o f humancapital; (iii) promote harmonious and balanced local development that preserves the environment; and (iv) improve governance and capacity building. vii. Theproposed CASfor FY2009-2012 has been prepared in consultation with the Government and other stakeholders in an effort to increase harmonization and complementarity. The objectives, themes, and programs included in the proposed CAS were discussed with the Government, civil society, and other donors during formal consultations betweenNovember 2008 and February2009. The feedback provided during these consultations has been incorporated into the strategy. The CAS places a strong emphasis on working in concert with donors, focusing Bank programs on the Bank's comparative advantage, avoiding program duplication, and strengthening aid harmonization. The CAS also represents an effort to strengthen coordination within the World Bank Group, with contributions from the International Finance Corporation (IFC) andthe Multilateral InvestmentGuaranteeAgency (MIGA). ... viii. The CAS is highly selective and builds on the achievements of the previous CAS. As laid out in the CAS Completion Report (Annex 2), solid performance was achieved under the previous CAS: portfolio management improved dramatically, and every project is expected to meet its development objectives. Inthe areas o f governance and competitiveness, however-two areas where the Government had not yet made a strong commitment to reform-not all outcomes were achieved. Based on the Bank's previous experience in Djibouti, the limited IDA resource envelope, and the lessons learned about development effectiveness in small states, the proposed CAS for FY2009- 2012 targets a small number of activities. The selection of lendingprograms has focused on areas where the Bank has a strong performance record. The Bank will also provide capacity building assistanceinother sectors where it has expertise. ix. The CAS isframed around three strategic themesaligned with the INDS. 0 Supporting growth. The Bank will support the Government's efforts to strengthen the business environment, with a focus on reducingconstraints and costs to private sector development, especially in the power, telecommunications, and financial sectors. 0 Supporting human development and access to basic services. The Bank will help Djibouti increase access to and quality of education and health services, and strengthen social protection and direct support to poor people. 0 Supporting governance and public sector management. The Bank will continue to engage in policy dialogue and technical assistance to strengthen the budgetprocess and improve monitoring andevaluation. .. 11 X. Theproposed assistance strategy recognizes that there are nonetheless risks that could derail implementation of the CAS or limit its impact. Growth and sustained macroeconomic stability depend on the steady flow o f Government revenues from the port and military bases and, more critically, on the flow of FDI and donor financing. While revenues from rentedmilitarybases are likely to remain and may partially mitigate the risk of revenue loss, port revenues and FDIare vulnerable to external economic and political shocks, including the persistence o f the current global financial crisis. Risks related to implementation capacity also exist, but experience from the previous CAS shows that well-focused projects with simple design and close and proactive supervision, together with additional capacity buildingassistance, can significantly minimize this risk. ... 111 I. INTRODUCTION 1. The last Country Assistance StrategV (CAS)for Djibouti was discussed by the World Bank's Executive Board in March 2005. The CAS for 2005-2008 supported implementation o f the country's first Poverty Reduction Strategy Paper (PRSP) with a focus on growth, human development, and governance. 2. The CAS for FY2009-2012 is based on Djibouti's National Initiative for Social Development (Initiative Nationale pour le Dkveloppement Social INDS). The - CAS will build on the foundation laid in the previous strategy and support continued implementation o f the INDS agenda. The three guiding principles for Bank engagement over this time period include: (i) alignment with the INDS; (ii) selectivity for optimal impact; and (iii) complementarity and harmonizationwith other donors. 11. COUNTRY CONTEXT A. Politicaland SocialContext 3. Djibouti is a small, resource-poor country of 23,200 square kilometers, strategically located in the Horn of Africa at the southern end of the Red Sea. Djibouti is poorly endowed with natural resources, lacking arable land, sufficient rainfall and undergroundwater, and oil or natural gas resources. The national population i s estimated at 830,000, o f which 87 percent live inurban areas.' Djibouti i s essentially a city-state- about two-thirds of town dwellers live inthe capital city. The hinterland, an extension o f the deserts of Ethiopia and Somalia, is sparsely occupied by a poor pastoral and nomadic population. Djibouti's population is young, with about 40 percent under age 15 and only 15 percent over age 40. 4. The countryplays a neutral role in thefrequently tenseregionalpolitics of the Horn of Africa. Djibouti has become Ethiopia's sole link to the sea since fighting broke out between Ethiopia and Eritrea in 1998. Djibouti had also maintained a cordial relationship with Eritrea until a border dispute emerged in May-June 2008. The two countries have not yet engaged in direct negotiations, but the situation is stable. Djibouti plays an active role inhosting peace meetings between the parties to the violent conflict in Somalia, and the country continues to accommodate a large number o f refugees from neighboring countries, particularly from Somalia. 5. Djibouti has strengthened relations and partnerships with other key nations. In addition to Djibouti's strong historical partnership with France, relations with the United States have deepened following the increased U.S.military presence inthe region and the establishment of a U.S. military base in the country. Similarly, a German naval base was established in March 2002 to monitor sea traffic between Somalia and the 1These figures are basedon dated information; the mostrecent demographic survey was conductedin 1991. However, these figures are generally accepted. A new national census is plannedfor 2009. See paragraph25. 1 Arabian Peninsula. Together, these partnerships have resulted in improved external revenueflows inthe form ofrent paid for use ofmilitarybases. 6. Arab countries, including the UnitedArab Emirates, have become important economic allies. In2000, Dubai Ports World obtained a 20-year managementcontract for the Port of Djibouti and later took over the administration o f customs and Djibouti Airport operations. The result has been a significant increase in investment, efficiency, activity, and revenues inDjibouti's ports. 7. Djibouti is internally at peace and secure. The power balance between the country's main ethnic groups remains a key determinant of domestic political stability. The two major components o f Djibouti's population are the Issas and the Afars. The former extendinto neighboring Somalia, while the latter extendinto Ethiopia and Eritrea. Competition for power between the two groups led to a civil war from 1991 to 1994, which formally ended through a peace agreement signed in2001. Inthe past, close ethnic ties to volatile and conflict-prone neighboring countries has sparked an inflow o f refugees, increasing competition for already scarce resources and affecting internal political stability. Under the current volatile regional circumstances, the country's leadership is under pressure to avoid upsetting the precarious balance o f stability; this situation diminishes the Government's ability to make decisions on economic and social reforms. 8. Djibouti's political system remains dominated by the presidential majority. The President i s elected directly for a six-year term and appoints a prime minister. The current President, in office since 1999, was re-elected in 2005 in a poll that was boycotted by the opposition. The Parliament i s also elected. In the most recent parliamentaryelection inFebruary 2008, the ruling unionpour la majorite` prbidentielle (UMP) coalition won a landslide victory in local and regional elections and kept all 65 seats o f the national assembly. The election was boycotted by the opposition coalition, the union pour l'alternance de`mocratique (UAD). The judiciary branch i s administratively subservient to the executive branch. B. Recent Economic Developments 9. I n September 2008, Djibouti concluded an agreement with the International Monetary Fund (IMF)for a newpoverty reduction and growthfacility (PRGF). Under the agreement, Djibouti will receive US$ 20 million in financial assistance and will be expected to implement a series o f social and economic reforms. The program aims to foster sustainable and balanced economic growth through macroeconomic stability, improved competitiveness, reduced inflation, and a strengthened external position. 10. Djibouti is essentially a rent-based economy, with rents deriving from its strategic location: port revenues, military revenues, and foreign aid. Agricultural production and manufacturing represent only 5 and 16 percent o f GDP, respectively. Services represent 79 percent o f GDP. Djibouti's economy i s based principally on revenues and rents generated directly and indirectly from the activities o f the international Port o f Djibouti and related businesses. About 95 percent o f the transit 2 traffic to and from Ethiopi ses the Port of Djibouti, and this constitutes 80 percent of ities. With investments from Emirates National Oil and Dubai Ports ficantly expanded the capacity o f its ports. A new container constructed in Doraleh to accommodate oil products, liquefied petroleum ble oils, and bitumen. The second phase o f the project consists o f a 8-20 meters deep, with a 2,000-meter quay length, which will be able to generation container vessels. These new additions will enable the Port o f Doraleh to meet growing cargo requirements over the next 20 years, and increase its o the standard o f sophisticated ports such as Dubai or Singapore. nomic environmenthas improved significantly over the lastfew accelerated from an annual average o f 3 percent in2001-2005 to o 5.3 percent in2007, and further to an estimated 5.9 percent in has been driven mainly by fiscal expansion and large foreign inthe port, tourism, and construction sectors. FDI as share of 23 percent in 2007 and to 31.3 percent in 2008 investment more than doubled inthree years, rising from 23.2 1 30 25 8 % 20 s .e G 15 E 10 5 0 I / 2003 2004 2005 2006 2007 2008 i I Source: IMF,February 2009 12. Inflation has accelerated in 2008, mainly due to rising global prices for imported energy andfood. The annual average inflation rate rose from 3.1 percent in 2005 to 5.0 percent in2007, and is estimated at 12percent in2008. This increase is partly a side effect o f increased consumption following rapid economic expansion, but it i s primarily explained by the price surge on international markets for food and energy. Djibouti produces very little food and energy domestically and is fully dependent on imports, thus remaining structurally vulnerable to external price shocks. 13. Thefiscal deficit increased in 2006 and 2007, but has declined in 2008 despite thefood and energy crisis. Djibouti's fiscal stance turned from slightly restrictive in 3 2005 (0.2 percent of GDP) to expansionary in 2006 (-2.5 percent of GDP) and 2007 (-2.6 percent o f GDP) following increased spending related to the regional elections, the November 2006 summit o f Common Market for Eastern and Southern Africa (COMESA) countries hosted inDjibouti, and risingelectricity subsidies. These increased expenditures were only partly offset by the country's stable revenue performance (20.3 percent o f GDP in 2006 and 20.5 percent in 2007). The fiscal deficit i s estimated at 1.9 percent o f GDP in 2008. Fiscal revenues have decreased as a result o f the elimination of the consumption tax on basic food items (about 0.5 percent o f GDP), but increased transfers to the public electricity company, Electricite` de Djibouti (EDD), were largely compensated through donors' assistance. Over the medium term, the fiscal deficit i s assumed to remain stable because the Government intends to keep the public wage bill constant in real terms while benefiting from increased revenues through the introduction o f a value-added tax (VAT) inJanuary 2009. 14. The widening current account deficit reflects mainly a surge in imports financed by FDI, but also the increase in food and oil prices. The external current account shifted from a small deficit in2005 to a deficit o f 25.6 percent in2007 and o f an estimated 40.4 percent in 2008. This increase has been offset, however, by the large capital and financial account surplus, which has led gross official reserves to grow to US$130million at the end of2007 and US$ 174millionat the end of2008. As a result, by the end of 2008, international reserves covered the equivalent of about 3.3 months of imports. 15. External debt remains high. External debt increased from US$437 million in 2006 to US$ 504 million in 2007 and US$ 614 million in 2008. Some 90 percent o f Djibouti's debt i s concessional and long term. The debt-to-GDP ratio has grown from 57 4 percent in 2006 to 59 percent in 2007 and 62.3 percent in 2008. Measured as a share o f GDP, debt service remains stable at 3.3 percent in 2006 and 2007 and 2.9 percent in 2008. Following the PRGF agreement between Djibouti and the IMF, the Government and Paris Club creditors agreed in October 2008 to a restructuring of external debt. The agreement, concluded under the Evian approach, was based on Houston terms. It included exceptional additional measures in view o f Djibouti's limited capacity o f payment, and covered US$ 69 million, including US$ 58 million in arrears and late interest. It is expected to reduce debt service to Paris Club creditors from U S $ 85 million to US$ 19 million during the IMF-supported program. The Government committed to seek comparable treatment from its non-Paris Club creditors. Paris Club creditors agreed inprinciple to consider anexit debttreatment ifnecessary to restore debt sustainabilityat the end o f the current agreement's consolidation period in 2012, provided that Djibouti concludes a follow-up program with the IMF, implements comparable treatment with its other external creditors, andmakes all payments under the current agreement on time. 16. Monetary conditions continued to ease in 2006 and 2007, but the situation changed slightly in 2008. The money supply (M3) expanded by 17.2 percent in 2008. Credit to the private sector increased by 23 percent in 2007 after remaining stagnant for several years, owing mainly to consumption, construction, a public investment boom and the entry o f new banks. The Djiboutian franc depreciated against the Euro in 2006 and 2007. This should have improved the competitiveness o f Djibouti's merchandise exports, but structural weaknesses such as limited natural resources, high electricity and labor costs, low skills, limited labor productivity, and a weak institutional environment continue to constrain the development of export sectors beyond port and transportation services activities. 17. The banking sector has been expanding rapidly. The banking sector i s well capitalized and profitable, and banks have progressively reduced their portfolio o f nonperfonning loans. Four new banks launched operations in 2006-2008, raising the number o f banks in Djibouti to six. Four additional banks are expected to enter the market by the end o f 2009. The banking sector has undergone substantial structural changes inthe past five years, including the closure o f ailing banks. The establishment o f new banks is expected to foster competition by reducing borrowing costs and widening the number of financial instrumentsavailqble to small and medium enterprises (SMEs). A recently launched Financial Sector Assessment Program (FSAP) is addressing the growing challenges of bankingsupervision. 18. Djibouti's trade system is fully open, with no protective tariffs or non-tariff barriers. Because capital movement is free and banking i s liberal, the country has become a regional center for trade services, taking advantage o f the Port o f Djibouti's natural strategic location and increased geopolitical importance. 5 C. Economic Outlook over the CAS Period 19. The risks of direct crisis contagion into thefinancial sector remain low, due to the relatively underdeveloped financial system and the largely cash-based economy. The stock market is non-existent, and financial intermediation i s based mainly on banking. Though the banking sector has been expanding rapidly, there are still only six banks in Djibouti, and most o f them originate from developing or emerging countries. Nonetheless, the two largest incumbent banks are owned by large Frenchbanking groups and account for more than 90 percent of all deposits and credit extensions. These banks operate largely independently and are well capitalized, reasonably liquid, and profitable. A substantial crisis would arise if both banking systems were affected in parallel by a liquidity shock andthe Frenchbanks were not sufficiently supported by the state. 20. The impact of the global crisis on the real economy andpoverty reduction will depend on how deeply Djibouti's major economic partners are affected and on Djibouti's own poZicy response. The major risk in the medium term arises from lower FDIflows. FDIhas beenhighat about 31.3 percent inGDP in2008, but it is expected to drop to 8.1 percent o f GDP in 2009 due to the likely postponement o f a large new investment project (construction o f second container terminal inDoraleh). Although it is reassuring that many of the planned investmentprojects for 2009 and 2010 have been re- confirmed, a few, including the construction o f an oil refinery and a pipeline, are at risk o f being cancelled due to the impact o f the global crisis in home countries o f investors. The authorities are currently assessing the potential impact o f the crisis, in close coordination with the IMF and the World Bank. The impact o f the global crisis on Djibouti's economy i s projectedto slow down FDI (Box 2), and hence reduce the growth o f the economy by 1-1.5 percentage points annually in the medium term. Should the global situation worsen, the authorities would likely have limited leverage to mitigate such a development and would rely on a tighteningof the fiscal position inresponse to a decrease in revenues. Changes in inflation and in the exchange rate would have to be closely monitored as external pressures may be conflicting (e.g., movements in commodity prices, adjustments in the US$ exchange rate, slow down o f capital inflows and imports). External assistance, in terms o f both technical assistance and financial support, would be needed to help mitigate the poverty impact of such a shock. 21. Medium-term growth prospects will be driven by investment project trends and the expected growth of port activities. Economic growth is projected to slow down moderately to about 5 percent in2009, mainly due to the postponement of constructiono f the second container terminal in Doraleh. Over the CAS period, growth is forecasted to rebound to rates o f about 7 percent with the expected increase inport and transshipment activities if investments remain stable. In a more conservative scenario, the economy is projected to grow at a rate o f 5.5 percent annually in the medium term. Annual average inflation, estimated at 12 percent in 2008, is expected to fall under 7.5 percent in2009 as world oil and food prices drop from their 2008 highs. Traditional exports are forecasted to continue rising in 2009-2010, following the recent expansion o f port activities and cattle processing facilities, while the trade deficit is expected to diminish in 2009 as a result o f reduced international food and oil prices and a fall in FDI-related imports after 6 the completion of large projects in2008. The gradual pick-up inFDIwill likely result in a renewed wideningo f current account deficits beginning in2010. 22. Expenditures on social andpoverty reductionprograms are likely to increase with the implementation of the INDS, but thefiscal position is projected to improve gradually after 2009. The fiscal deficit will increase in2009 due to lower grants, higher investments, and military expenditure related to the border conflict with Eritrea. However, tax reforms and improvements intax administration, including the introduction o f the VAT and the rationalization o f exemptions in the Free Trade Zone in 2009, are expected to increase tax revenue over the medium term. The outlook for increased revenues generated by the dividends from port activities is optimistic. Increased social spending would be offset mostly by a fall in other current expenditures, allowing for gradual fiscal consolidationover the CAS period. 7 23. Debt sustainability is expected to improve in the medium term, but remains high. A Debt Sustainability Analysis (DSA) conducted in September 2008 indicates that the net present value (NPV) o f total public and publicly guaranteed external debt (50 percent o f GDP in 2007) i s projected to remain above the sustainability threshold until 2016, reflecting short-term vulnerability. The N P V of the debt-to-export ratio i s projected to cross the 100 percent threshold in2009, and to improve considerably as a result of the expected opening o f an oil refinery in 2011. However, the DSA indicates that the debt service-to-exports ratio remains below the sustainability threshold o f 15 percent, even when exports ofrefined products are excludedfrom the denominator. The ParisClub debt rescheduling negotiated in October 2008 has not changed substantially the debt sustainability situation, as its objective was mainly to address immediate liquidity problems and regularize Djibouti's situation vis-a-vis external creditors, rather than to reduce the stock of debt. Table 1: Selected Economic Indicators Annual average inflation (%) 3.1 3.6 5.0 12.0 7.5 ..4.3 RealGDP Growth(%) 3.2 4.8 5.3 5.9 5.0 7.3 Investment(YOofGDP) Gross domesticinvestment 23.2 35.0 42.1 50.5 29.2 37.1 Public investment 9.3 7.5 11.2 10.3 12.0 11.0 Privateinvestment 13.9 27.5 30.9 40.2 17.2 26.1 ExternalIndicators("hofGDP) Current account balance(includinggrants) -3.2 -14.7 -25.6 -40.4 -12.5 -22.1 FDI(%of GDP) 8.3 21.3 23.0 31.3 8.1 16.7 Official reserves(months ofimports) 2.2 2.2 1.8 3.3 3.1 3.4 Governmentfinance (YOof GDP) Domesticrevenue 20.0 20.3 20.5 18.1 18.5 20.0 Grants 17.1 14.6 14.6 14.4 14.1 13.5 Currentexpenditures 27.5 29.9 26.5 24.1 22.8 23.3 Fiscalbalance(payment order) 0.2 -2.5 -2.6 -1.9 -2.2 -0.7 GDP at currentprices (DF billion) 126.0 136.6 151.0 175.0 197.6 249.4 Exchangerate(DF per US$) 177.7 177.7 177.7 177.7 177.7 177.7 Source: Djibouti Authorities andIMF,Februav 2009 24. The largest risk to maintaining macroeconomicstability is associated with an increase in debt and a simultaneous slowdown in economicgrowth. At the time o f CAS preparation, the prospects for achieving the growth objectives set forth in the IMF- supported structural adjustment program appear realistic, despite the challenges o f the global crisis and the continuation o f the border conflict with Eritrea. However, if the global crisis were to deepen over the CAS period and FDI, aid, and trade flows were more severely affected thanprojected, more external financing would be required to meet the country's financing needs. The decline in economic growth coupled with an increase in debt would then pose a substantial risk to macroeconomic sustainability, especially if the costs o fnewborrowing were to increase. 8 D. LivingStandardsandthe MillenniumDevelopmentGoals 25. Djibouti suffers from a very weak statistical base. The last census was carried out in 1983, and all population statistics are based on a demographic survey from 1991. This poses serious problems for the accuracy of almost all statistics inDjibouti, including information on population size, living standards, andthe nature and incidence of poverty inthe country. However, these sources arebroadly acceptedby all users inadvance ofthe results from the new population census, launched in March 2009, and the more detailed householdsurveysthat would follow. Table 2: Djibouti's Progresstoward the MDGs Scope for Goal Target Current for 2015 Status Attainment by 2015 1. Eradicateextreme povertyand hunger Populationbelow US$2 a day (%) 28 42 Unlikely Prevalenceofunderweight childrenunder 5 years of age (YO) 30 Unknown 2. Achieve universalprimary education Netprimary enrollmentratio ("hboth sexes) 66.2 Likely Pupils starting grade 1who reachgrade 5 ("hboth sexes) 84.3 87.7 Attainable 3. Promote gender equality and empower women Genderparity index inprimary level enrollment (ratio of girls/boys) 1.o 0.70 Likely 4. Reduce child mortality Mortalityrate of childrenunder 5 (per 1,000 live births) 75 94 Likely l-year old children immunized against measles (%) 40 67 Likely 5. Improve maternal health Maternal mortality ratio (per 100,000 births) 400 550 Possible 6. CombatHIV/AIDS, malaria and other diseases Peopleliving with HIV/AIDS, 15-49 years old ("h) 2.3 2.9 Likely Prevalenceoftuberculosis (per 100,000 people) 400 1,161 Possible 7. Ensureenvironmentalsustainability Access to improved drinkingwater source ("htotal population) 100 93.5 Likely Source: United Nations, MDG Monitor: Tracking the Millennium Development Goals, wwwmdgmonitor.org, 2007 26. Someprogress has been made in improving living standards in recent years, and Djibouti is on track to achieve some key Millennium Development Goals (MDGs): MDG2 on universal primary school enrollment, MDG3 on gender equality, and MDG4 on child mortality. A World Bank assessment of the 2004-2006 PRSP noted a few advancementsinliving standards. Although dropout and repetition rates remain high, net primary school enrollment has grown significantly to 66.2 percent, up from 34.7 percent in 2002. The elimination of gender inequality in school enrollment is on track, with a Gender Parity Index (ratio of girls to boys) of 0.70 at the primary level and increased female literacy. Infant and child mortality rates have improved, and malnutrition (as measured by the proportion of underweight children under the age of five) has fallen to 26 percent. Access to potable water has increased to 96 percent of the population in 9 Djibouti-Ville; water access in rural areas has improved, but still remains low at 52.5 percent. 27. Overall, however, social and human development indicators are still unsatisfyingand depict apicture of fragility among thepoor. Djibouti ranks 149thout o f 177 countries in terms o f human development, placing the country at the bottom o f the "medium human development" category using data from 2005.2 Djibouti's overall Human DevelopmentIndex (HDI) score of 0.516 is slightly higher than the average for Sub-Saharan Africa as a whole (0.493), but lower than the average HDI for low-income countries (0.570). Life expectancy at birthis estimated at 54 years. 28. Poverty is severe and pervasive. With a per capita income of US$ 1,060, Djibouti i s classified as a lower middle-income country, and i s ranked 52ndamong 103 developing countries on the 2005 HumanPoverty Index (HPI-1) with a score of 30.3 Still, the country has very highlevels ofpoverty (42 percent absolute and 75 percent relati~e)~ and some o f the poorest social indicators inthe world. Although poverty is more severe in rural areas, 52 percent of the poor and 72 percent of the extremely poor live in Djibouti-Ville, where two-thirds o f the population resides. Poverty in Djibouti is exacerbated by the presence of a highnumber of refugees, who place additional pressure on the country's social services. 29. Unemploymentremains high. Accurate employment figures for Djibouti do not exist, but it is estimated that 45 to 60 percent o f the labor force i s unemployed, with 58 percent o f the unemployed below the age o f thirty. Unemployment i s notably widespread among women, regardless o f their socio-economic background. In2007, unemployment rates were estimated at 34 percent among married men and 60 percent among married women. 30. Djibouti is afood-deficit country, completely dependent on imports to meet its food requirements. The food security situation is especially critical in livestock- dependent areas, where the scarcity of water and pasture land reduces the contribution of animal-derived products to household food and income. Annual rainfall i s low and erratic, averaging just 200mm ingood years. The persistent drought conditions, combined with frequent successive seasons o f failed rains, stretch the traditional coping mechanisms o f manypastoralists to the limit. 31. Djibouti is also vulnerable to thefollowing natural phenomena: (i) periodic floods with a recurrence period o f 10 years; (ii) earthquakes, which usually fall between 2 and 4 on the Richter scale but could have important effects in urbanized areas, where 2UnitedNations DevelopmentProgramme(UNDP), Human DeveZopmentReport 2007/2008. The Human DevelopmentIndexmeasuresa country's average achievement alongthree dimensions:life expectancy, knowledge, anda decent standardofliving. The HumanPovertyIndex, also compiledbythe UNDP, is calculatedbasedonthe following indicators: probabilityat birthofnot survivingto age40, adult literacyrate,populationwithout sustainableaccessto an improvedwater source, children underweightfor age, andpopulationbelow incomepoverty line. 4Absolutepoverty quantifiesthe numberofpeoplebelow a givenpoverty threshold. Relativepoverty definesthe poor as those with significantly less incomeandwealththan other membersoftheir society. 10 construction has taken place on inadequate soils; and (iii) fueled by the use o f fires inferior construction materials such as cardboard, plastic, and leaves. Inaddition, climate change i s expected to have a strong negative impact on the country's meager natural resources, notably through: (i) an increase inthe sea level, which coupled with the rain deficit, will cause a greater intrusion o f the sea incoastal areas; and (ii) an increase inthe temperature at the surface o f the sea, which will have adverse effects on sea life and cause the disappearance o f mangroves, likely increasing floods and erosion. 111. GOVERNMENTOBJECTIVESAND STRATEGY A. The NationalInitiativefor Social Development 32. Launched in January 2007, the INDS provides a comprehensive vision for economic growth and poverty reduction in Djibouti. The strategy was completed in January 2008 and replaces the former PRSP process (Box 3). Among its key targets are: (i) economicgrowthrateofabout7percentannually; (ii)reductioninpovertyto28 an a percent' by 2012; (iii) anincrease o fthe gross school enrollment ratio to 83 percent at the primary level and 61 percent at the secondary level, accompanied by a reduction in gender and geographical disparities; and (iv) a reduction o f the infant mortality rate to 60 per 1,000 live births, and in the maternal mortality rate to 400 per 100,000 live births. The newstrategy rests on four mainpillars. 33. Thefirstpillar o f the INDS aims to ensure macroeconomic stability and create conditions for strong and sustainable economic growth through: (i) increasing public investmentinsocial sectors and sectors that generate growth, while maintaining a prudent fiscal deficit and overall macroeconomic stability; (ii) strengthening the financial sector; (iii)improving the legal and business environment to attract private investment; (iv) reducing production costs, notably in energy, water, and communications; (v) diversifying the sources o f growth; (vi) improving the labor environment; and (vii) promoting Djibouti as a competitive economic and services hub, taking advantage o f its geo-strategic location and links recently established with key investors inthe region. 34. The secondpillar o f the INDS seeks to develop human resources and improve access to basic services, notably for women and youth. Inparticular, the objectives are: (i) improving access to education, while increasing the quality o f education services, reducing gender and geographic disparities inthe sector, and improving the management o f the sector; (ii)improving the coverage and quality of health care; (iii)reducing unemployment through the development o f labor intensive activities, micro-finance and other funding mechanisms, promotion o f small and medium enterprises, andjob training and placement; and (iv) expanding access to other essential services such as water, energy, andcommunications. 35. The thirdpillar of the INDS, incomplement to the first two pillars, reflects the Government's intent to promote the harmonious development o f rural and urbanareas by: Thistarget seems very ambitious.The PRSPJSAN(September 2008) advisedthat indicatorsrelatedto the MDGs beupdatedonce the populationcensus andthe other plannedsurveys are carriedout. 11 (i)supporting investments ininfrastructure (especially roads, housing, andsanitation), lands improvement, and storage facilities; and (ii)improving agriculture and livestock productivity while preserving the environment. 36. The fourth pillar o f the INDS seeks to improve governance and strengthen public sector management by: (i)increasing public service efficiency; (ii) improving transparency inthe budget process; (iii) devolving more authority to decentralized levels o f Government; and (iv) defining and implementing a sound monitoring and evaluation system to track progress toward INDSobjectives. B. Selected Key DevelopmentChallenges Sustaininggrowthandimprovingcompetitiveness 37. Diversifying the economy remains a critical challenge. The country wants to diversify the sources o f growth to reduce its heavy dependence on the services sector, centered on the ports. The creation o f new economic activities would generate additional fiscal revenues and sustain the country's growth prospects. The areas that offer the most promising opportunities for diversification include livestock, fisheries, tourism, and 12 mining. Yet the potential for diversification appears limited in the medium term. A livestock export facility with a capacity o f 80,000 animals per month has been set up to inspect, test, and quarantine animals to ensure that they do not carry diseases harmful to the economies and people o f importing countries. However, periodic droughts have a negative impact on livestock production. Fish production i s estimated at 1,000 metric tons per year with potential for about 48,000 metric tons, but the distribution network i s not operational. Tourist attractions include several sandy beaches, rare fauna and flora, and numerous islands, as well as the geographical nature o f the countryside, which features ravines, plains, active volcanoes, and lakes, including salt lakes such as Lake Assal. There i s also the potential to develop sea tourism, namely scuba diving and fish watching. Investment in the tourist sector i s still limited, however. In mining, opportunities exist mainly insalt production, with huge reserves inLake Assal. 38. I n order to attract more investment to Djibouti, the cost of doing business needs to be reduced significantly, especially outside the offshore centers. Djibouti's business environment is characterized by a dichotomy between the conducive investment environment o f the Free Zone and port zones on one hand, and the heavy regulation o f the domestic economy onthe other hand. For example, the single window administration in the Free Zone provides fast, effective, and inexpensive services, allowing a new business to be created in a short time frame (between 3 hours and 3 days). The situation changes dramatically outside the Free Zone, where it takes approximately 37 days to open a business. Formal consultations with the business community have indicated that the cost o f doing business in Djibouti is high, and that firms (and thus private sector development) are particularly vulnerable to the quality, supply, and cost o f infrastructure services (especially electricity, water, telecommunications, and transport). 39. Electricity access remains limited, tarvfs are high, and the power sector operates under a heavy financial burden. Djibouti's electrification rate remains low, with only 57 percent of urbanareas connected to the grid. Ina recent survey of SMEs commissioned by the World BankY6the lack o f a reliable, secure, and low-cost energy supply was cited by more thanhalf o f interviewees as the single most severe constraint to doing business in Djibouti. Real generation capacity i s limited (119 MW installed, but only an average o f 57 MW was effectively operational in 2008), and relies primarily on an ageing plant running on expensive imported fuel oil. As population growth and urbanization give rise to increasing demand for electricity, available capacity i s increasingly insufficient at peak periods. This situation leads to repeated power outages and leaves very little reserve for generation equipment maintenance or other unexpected accidents. In addition, electricity tariffs (averaging US$ 0.32 per KWh) are high due to persistently elevated oil prices and various technical and non-technical inefficiencies of the electric utility, EDD. Despite high tariff levels, the EDD i s in a fragile financial situation and has hadto rely on government budgetary support inrecent years.7 'Economistinet Associati. Feburary2008. Study on Local SMEs. The EDD's loss for 2008 is estimatedat US$4 million, despiteclose to US$30 million ingovernment subsidies. 13 40. Over the medium to long term, the Government plans to strengthen the availability of electricity by linking up with the considerable and more affordable hydropower resources available in Ethiopia. This link would take place through an electric interconnection transmission line funded by the African Development Bank (AfDB), which is expected to be completed by mid-2010. At the same time, the Government o f Djibouti would seek to maintain some degree o f energy independence by replacing and expanding its traditional thermal generation capacity, and by developing alternative sources o f energy. Plans include the exploration and development o f Djibouti's own geothermal resources, inpartnership with foreign investors. 41. The telecommunicationssector is also characterized by limited access and high costs.DjiboutiTelecom, the public telecommunicationscompany, is the sole service provider in the country. The company i s vertically integrated and provides landline, mobile (GSM), and Internet services to the entire country under a monopoly business model. Owing to the absence o f an effective and independent telecommunications regulator, the incumbent also undertakes regulatory functions. Tariffs are the highest in the region, and cheap alternative services such as Voice over Internet Protocol (VoIP) are blocked by the incumbent at its point of access to the external world. Installation o f satellite-based technology (VSAT) is also not allowed, as a "protectionist" strategy for the incumbent. I11 management o f frequency spectrum and numbering leads to further inefficiencies and poor quality o f service. 42. Road maintenance funding is inadequate, and the century-old railway to Ethiopia needs to be upgraded. The established road network is sufficient to meet Djibouti's needs, but quality suffers due to poor sector organization and insufficient funding o f road maintenance. The infrastructure and equipment of the Djibouti-Ethiopia railway are inpoor technical condition, and the Chemin de Fer Djibouti-Ethiopie (CDE) is de facto financially bankrupt. The railway only covers a 5 percent share o f the transit traffic to Ethiopia, although it would make economic sense for bothDjibouti and Ethiopia if it were to play a much larger role. In spite of the Government's efforts, however, attempts to concession the railway to a private operator have been unsuccessful to date. 43. Enhancing competitiveness also re uires regulatory improvements to support the business climate. Djibouti is ranked 153` out o f 181 countries on the ease o f doing 3 business according to Doing Business 2009.' The areas cited inthe survey as needing the most improvement include: (i) procedures for starting a business, especially outside the Free Zone; (ii) a bank credit; and (iii) getting protecting investors. The INDS recognizes that if the legal and regulatory framework for business i s to improve, action must be taken, inparticular, to: (i) a new commercial code; (ii) an arbitration center; adopt create and (iii) simplify business start-up procedures. A new code of commerce is expected to be adopted in early 2009, and the Government i s committed to increasing access to financing, including through micro-credit, to support private sector development. 'InternationalFinanceCorporationandWorld Bank.2008. DoingBusiness2009: ComparingRegulation in 181Economies. 14 Improvinghumandevelopment and safety nets 44. Unemployment needs to be reduced. Unemployment in Djibouti results from a combination o f factors: (i) limited employment opportunities due to an absence o f labor- intensive economic sectors; (ii) weak labor productivity due to low skill levels and long hours spent consuming qat (see paragraph 49); (iii) low levels o f education; and (iv) little potential for self-employment, mainly due to limited access to finance for micro and small enterprises. To address the issue o f unemployment, the Government has created a Free Zone to attract labor-intensive investment and launched a campaign to raise awareness about the negative impact o f qat consumption. The Government i s also determined to improve vocational training; a new employment promotion agency (ANEFIP) is now fully operational and responsible for technical training, especially for young people. 45. Thepoor are vulnerable and not sufficiently protected against the impact of systemic crises and other shocks. As indicated above, droughts, floods and other natural phenomena occur periodically in Djibouti. In 2006, the Government established the Executive Secretariat for Risk and Disaster Management (Secre`tariat Exe`cutif de la Gestiondes Risques et Catastrophes- SEGRC). The SEGRC is tasked with coordinating the preparation o f plans for risk and disaster management, providing technical advice, and coordinating the actions o f prevention, mitigation, and response. The Secretariat is operational, but its effectiveness i s constrained by limited resources. Apart from the SEGRC, there are few government-run social assistance programs in place to protect poor people against the impact o f systemic crises such as drought and price shocks, or idiosyncratic shocks like illness and employment loss. Most government assistance programs, especially food and nutrition-related assistance, are targeted to the extreme poor in rural areas. The majority o f poor people who live in urban areas do not receive any direct public assistance, either in the form of cash or other means, except for access to micro- redi it.^ The Government has beenexperimenting with food for work schemes in urban areas, but the coverage of these programs is very narrow. Providing social assistance to the urban poor poses several challenges, including designing effective targetingsystems. 46. Investment in the water sector is needed to increase supply and developsmall- scale agriculture in rural areas. Only 50 percent o f the population o f Djibouti-Ville is connected to the public water supply; the other half o f the capital's population draws water from connected neighbors or from public standpipes. It is estimated that more than 70 percent o f the rural population and their herds do not have access to water within a reasonable distance. The only available water sources in Djibouti are underground wells and wadi runoff, which are bothadversely affected by the arid climate. Inaddition, water quality is deteriorating. Most o f the wells are old and close to exhaustion, and are 9There is however a small-scale, successful experience with cash transfers inDjibouti-Ville. The religious NGO"Diwan-i-Zakat" collects donations, especially duringthe Ramadan, and distributes cashto a limited group of beneficiaries, consisting o f orphans (fatherless children) andthe handicapped. Orphans receive money on a regular basis ifthey provide their school grade records to the organization. The identification o f beneficiaries is done with the help o f neighborhood committees, while all check-based transfers to the orphans' guardians are meticulously documented. 15 affected by the saltwater wedge flowing from the sea. Moreover, Djibouti's public water supply systems suffer from inefficient organization and a flawed institutional environment. To overcome these challenges, the Government i s determined to explore ways o f improving the efficiency o f the water utility, the Office Nationale de l 'Eau et de I'Assainissement de Djibouti (ONEAD), and to mobilize resources to invest in the rehabilitation o f water wells and the construction o f dams on the wadis that flow from Ethiopia, in order to retain water for seasonal agriculture and livestock production and helprecharge the aquifer. 47. The quality of education is low, and the education system does not provide graduates with adequate skills to successfully enter the labor market. Despite some progress in recent years, the education sector is grappling with the following issues: (i) wide disparities in the quality o f education and learning outcomes between children in urban and rural areas; (ii) school completion due to a combination o f high dropout low rates inthe second year o f primary school and highrepetition rates in Grade 5; (iii) weak expenditure management and inability to plan for both expansion and quality improvements at the primary and post-primary levels; and (iv) low relevance o f education inpreparing students for the labor market,withthe consequence that recent largeprojects (including port expansion and hotel development) have not generated many jobs for Djiboutians. 48. Health services delivery and health systems need further strengthening to build on recent progress. Despite the significant decline in infant and child mortality rates in the last few years, these rates are still high. Other significant health challenges include: (i)hgh maternal mortality; (ii)high and rising incidence o f communicable diseases, among them tuberculosis (588, cases per 100,000 persons), malaria, and HIV/AIDS; (iii) significant geographic inequalities inhealth indicators; (iv) weak health systems and management capacity due to the scarcity o f qualified personnel and periodic shortages o f medicines and medical supplies in health facilities; and (v) low and inefficient public health spending, especially for adequate maintenance o f health facilities. 49. Considerable time and resources are devoted to chewing qat. This amphetamine-based stimulant i s imported from Ethiopia, Yemen, and Somalia, and is considered an important economic resource because it generates about 16 percent o f tax revenue, as well as employment in retail trade. Most adult males in Djibouti chew qat at all-male social gatherings for up to 3-5 hours a day, taking time away from work and family life. The practice diverts the limited incomes o f poor people from spending on basic needs and adversely affects labor productivity and livelihood opportunities. While precise figures are not available, it is estimated that 50 percent o f households inDjibouti use qat," and that qat absorbs up to 20 percent o f family budgets. The Government's campaign to raise awareness about the negative consequences o f qat consumption has received much press attention and triggered public debate, in particular as it equates the 10Milanovic, Branko.2006. "QatExpendituresinYemen and Djibouti:An EmpiricalAnalysis," Journalof AfiicanEconomies17(5): 661-687. 16 health and economic risks o f qat consumption with those o f tobacco and alcohol in a predominantly Muslimcountry. 50. The wide gender gap and female genital mutilation (FGM) are still major social developmental challenges. The disadvantaged status o f women in Djibouti i s reflected in gender gap indicators in social areas: lower literacy rates, lower school enrollment and completion rates, and highfemale mortality attributed to highfertility and anemia caused by malnutrition. Women's vulnerability i s exacerbated by the widespread practice o f FGM, which-though illegal since 1995-continues to affect more than 93 percent o f women.'' The practice mostly affects girls between the ages o f 8 and 9, and is administered mainly by grandmothers and mothers. According to a recent survey, however, 50 percent o f men are against this practice. Still, eradicating FGM remains a challenge, as the practice i s deeply rooted incultural tradition. Strengtheninggovernance 51. Institutional capacity is weak, but the Government is committed to making improvements.Despite Djibouti's fairly elevated per-capita income, institutional capacity i s constrained by insufficient skills and management capacity in the public administration, as well as by the fragmentation o f decision-making processes. However, the authorities appear committed to making continued improvements in governance. The President o f the Republic indicated recently that improving governance i s one o f the highest government priorities, and has requested the Bank's assistance in conducting a governance and anti-corruption survey. 52. Public finance management and economic governance have improved recently, but risks remain. A 2004 Country Financial Accountability Assessment (CFAA) identified serious weaknesses inbudgetpreparation and execution, as well as in internal control. To mitigate this risk, an action plan was developed consisting of: (i) upgrading the primary budget function (revenues and expenditures); (ii)reforming internal control procedures and upgrading internal audit; and (iii) conducting a study on how to better coordinate the three main audit bodies.12 Implementation o f the action plan has provided the system with the basic tools and procedures o f budget management. The Budget Directorate now has better capacity (humanand technical) to formulate, prepare, and execute the budget in more realistic conditions, but more work is needed to implement results-oriented budgeting within a multi-year perspective. In addition, little progress has been achieved in reforming the internal controls and granting more autonomy to line ministries. Priorities for reinforcing and improving critical aspects o f public finance include: (i)further integrating investment and expenditure budgets by developing a Medium-termExpenditure Framework (MTEF) to guide resource allocation and link sector budgets to programmatic outcomes; (ii) reinforcing financial controls, including more timely and higher quality reporting and audits; (iii) strengthening tax administration through improved information management; and (iv) developing adequate procurement legislation. '*Worldthree I' HealthOrganization.2008. "Eliminating Female Genital Mutilation." The mainaudit institutionsinDjiboutiare the ChamberofAccounts, the State Inspector General, andthe InspectorGeneralofFinances. 17 53. Adequate policy planning and implementation rely on improving data availability and enhancing statistical capacity. As stated above, the last census was conducted in 1983, and data accuracy i s a major issue. According to the IMF, weaknesses are particularly acute in the areas o f national accounts, trade, external debt, and some fiscal data. There is an indication that awareness o f the importance of statistics among government officials i s increasing. In2006, Djiboutireceived a grant from the Trust Fund for Statistical Capacity Building (TFSCB) to support improved compilation o f national accounts and assist inthe preparation of the population census. However, addressing the deficiencies inthe statistical system will require a more comprehensive approach. IV. WORLD BANKEXPERIENCE UNDERTHE PREVIOUSCAS A. ProgresstowardCAS Outcomesfor 2005-2008 54. With an envelope of SDR 14.6 million (about US$22million), the 2005-2008 CAS was aligned to the 2002 PRSP. It focused on three PRSP pillars: (i) and growth competitiveness; (ii)human resources development; and (iii)good governance. Following i s a brief review o f progress achieved in these areas over the previous CAS period. A more detailedevaluation o f progress is included inthe CAS Completion Report (CAS CR) inAnnex 2. Outcomes inthe areasof growthandcompetitiveness 55. The CAS CR concluded that the growth outcome was achieved. IDA assistance in this area was designed to help Djibouti to: (i)reform public expenditure, including by reducing the unsustainable share o f the wage bill; (ii)restructure the utilities sector to enhance competitiveness and improve access among poor people; and (iii) develop the transport sector to enhance the Port o f Djibouti as an engine for growth and employment. Growth accelerated to 4.8 percent in 2006 and 5.3 in 2007, and i s likely to remain strong at 5.9 percent in2008. 56. The sustainability of this growth path, however, depends on the continued attraction of foreign investment through reducing factor costs, maintaining fiscal stability, and upgrading manpower skills. Although the ratio of tax revenues to GDP remained stable at about 20 percent, expenditures increased by about 2 percent of GDP from 2005 to 2007. Increased spending led to a rise in the fiscal deficit, which was exacerbated by the 2008 spike inoil and food prices. According to the D S A conducted by IMF and World Bank staff in 2008, Djibouti's risk o f debt distress remains high but appears manageable. Finally, the CAS CR noted that, during the previous CAS period, the country failed to address high labor costs and skill shortages, or to restructure utilities as a means of restoring financial viability andreducing tariffs. Outcomes inhumanresourcesdevelopment 57. I n the area of human resources development, the CASfocused on a range of activities: (i)improved access to and quality o f education; (ii) employment generation through community development schemes; (iii)assistance for vulnerable groups who 18 were affected by natural catastrophes (particularly floods); and (iv) advancements on key social issues, such as gender equality, the fight against FGM, andthe abuse of qat. 58. Tangible results were achieved in education and health. The Gross Enrollment Ratio (GER) at the primary level increased from 52 percent in2005 to 68 percent in early 2008, including for girls, and the primary repetition rate was reduced from over 10 percent in 2005 to 4 percent in 2008. Good progress was made in the development of school management committees, which i s helping to improve results. However, completion rates have deteriorated over the last school year as a result o f the decision to shorten the primary cycle from 6 to 5 years. Inthe health sector, the proportion of births taking place in health facilities increased from 40 percent in 2002 to 93 percent in2008, and immunization of children aged 12-23 months grew from 45 percent to 71 percent during the same period. The prevalence o f HIV among pregnant women aged 15-24 declined from 2.7 percent in 2002 to 2.1 percent in 2007, and among patients being treated for sexually transmitted infections from 22 percent to 12.6 percent over the same timeframe. No information is available on the population's awareness o f HIV prevention methods. 59. Access to basic economic and social infrastructure has improved in 21 poor neighborhoods covered by the IDA-funded Public Works and Social Development program. Only 8,300 person-months o f work was created, as compared to the target o f 17,500; it has become clear that this ambitious target was unrealistic. The capacity o f the implementing agency, ADDS, has been strengthened. However, the number o f poor residents benefitingfromthe IDA-fundedproject i s not well established, and it i s difficult to assess the operation's efficiency due to the lack of economic analysis o f sub-projects. 60. There is a greater awareness of the negative impact of qat consumption on labor productivity and health. The planned analysis o f the social and economic implications o f qat importation and eonsumption at the household and macro level was not carried out, givenlimited resources. Outcomes in economic governance 61. Outcomesrelated to improving economicgovernance werepartially achieved. The CAS aimed to support implementation of the action plans proposed by the CFAA and the Country Procurement Assessment Report (CPAR), both completed in 2004 and agreed upon with the Government. The Budget Directorate's capacity to forecast revenues has improved, and it has acquired new tools to better monitor budget implementation. However, additional work is needed to better integrate the investment and recurrent budgets into a medium-term framework and to more closely involve line ministries in budget preparation and implementation. Financial controls have been enhanced through capacity building in the Inspector General o f Finance, including the preparation of a manual o f procedures and work program, and definition o f a better division o f labor among the country's various control institutions. 19 B. PortfolioManagement 62. As of end-February 2009, the current IDAportfolio comprisesfive operations. Total IDA funding volume stands at US$ 43.5 million, with an undisbursedbalance of US$ 14.5 million. The ongoing IDA program focuses on health, education, energy, and public works. In addition, as of February 2009, Djibouti had an active portfolio of 13 trust fund grants (Bank and country executed) for a total commitment of US$ 14.8 million, of which US$ 2.1 million remainsundisbursed(Annex 3). These funds include a US$ 6 million grant fully disbursed from the Education for All Catalytic Fund, a US$ 5 million grant fully disbursedfrom the Global Food Crisis Response Program, a US$ 2 million Avian Flugrant, and other (smaller) grants from the Global Alliance for Vaccines and Immunization (GAVI), the Global Environment Facility (GEF), the Institutional Development Fund(IDF), the Energy Sector ManagementAssistance Program (ESMAP) and TFSCB. As of end-February 2009, all projects are rated satisfactory. The disbursementratio for the entire portfolio was 44 percent for FY2008, against 34 percent inFY2007. 63. Portfolio performance has been broadly satisfactory. In June 2008, the Bank and the Government completed a Country Portfolio Performance Review (CPPR). It concluded that projects in Djibouti are broadly well implemented and reach their development objectives. Success factors include: (i)focused and simple project design, adapted to Djibouti's implementation capacity; (ii) intensive supervision of the portfolio, with a problem-solving approach buttressedby a strong dialogue with the Government and support from the Country Management Unit; (iii) fiduciary track record; and strong (iv) proactive involvement o f the Ministry of Economy and Finance's External Financing Unitinfollowing upwithsectoralministriesandProject ImplementationUnits(PIUs). 64. The CPPR highlighted some generic portfolio management issues for particular attention. These include: (i) slow start of projects, as exemplified by delays betweenproject approval and effectiveness; (ii) procurement delays; (iii) for better need integration of project monitoring and evaluation functions inthe line ministries; (iv) need for an increased role for government institutions (such as the Cow des Comptes) in project management, such as in project audits; and (v) need for stronger capacity in the daily managementoftrust fund grants. An action planhas been drawn upto address these issues, and i s under implementationby the Government. V. PROPOSEDWORLD BANK STRATEGY A. GuidingPrinciples 65. The CAS for FY2009-2012 is aligned with the INDS. Through both the existing portfolio and new lending, the Bank Group will support the implementation of the four-year INDS and help achieve a number of INDS goals. The CAS results framework is directly aligned with development outcomes derived from the INDS. The program of assistance was discussed with the Government, donors, private sector, and civil society during CAS consultations inDjibouti betweenNovember 2008 and February 2009. 20 66. The new CAS is highly selective. Considering the Bank's experience in Djibouti, the limitedIDA envelope, other stakeholders' activities inthe country, and the lessons learned about effective development approaches in small states,l3Bank support will target only a few activities. The Bank will provide a grant for one project per year and undertake one or two analytical studies per year, while maintaining a constructive dialogue ina broader set o f sectors throughtechnical assistance. 67. The new CAS is built on the success of the current portfolio. There are large financing needs in all sectors. However, given limited capacity on the Government side and the Bank's experience in few sectors, the proposed CAS intends to focus on areas where the Bankhas a solidperformancerecord. Inparticular, wherever possible, the CAS will provide additional financing for projects that have achieved their development objectives inorder to scale up impact and strengthen developmenteffectiveness. 68. Bank activities will reflect the Bank's comparativeadvantageand complement the work of other donors. The choice of activities to be supported in this CAS depends largely on the Government's priorities, but also on the extent and nature of support being provided by other donors. Care will be takento avoid the duplication o f interventions and emphasis will be placed on activities where the Bank has a comparative advantage in light of other donors' involvement, expertise, and financial contributions. Co-financing programs with other donors will be considered as a means to leverage the Bank's limited financial contribution. 69. The overall size of the IDA envelope during the CASperiod is assumed to be about SDR 16 mi1li0n.l~The CAS covers the period FY2009-2012, which includes the entire IDA15 period (FY2009-201 l), and the first year o f IDA16. The FY2009 allocation will be SDR 3.6 million. Allocations for FY2010-2012 are expected to be about SDR 3.8 million per year, on average, but these estimates can change. Actual allocations inthese years will depend on: (i) total available IDA resources; (ii) country's performance the rating according to the Country Policy and Institutional Assessment (CPIA); (iii) the performance and assistance terms of other IDA borrowers; (iv) the terms o f IDA'S assistance to Djibouti (grants or credits); and (v) the number o f IDA-eligible countries. The indicative allocation for FY2012 assumes that the IDA16 replenishment will be at the same level as in IDA15. Since Djibouti i s in debt distress, it will receive all its allocations inthe form o f grants unless its debt sustainability position changes. 70. This CAS intends to leverage IDA grants through access to global funds. Giventhat the IDA allocation is limited incomparisonto the country's financing needs, the Bank will continue to seek to leverage these resources through access to global funds (e.g., Carbon Fund, EFA, GEF, IDA Guarantees) and to work with Djibouti to improve its CPIA rating (and hence its IDA allocation) inthe short to medium term. l3IndependentEvaluation Group. 2006. Small States: Making the Most of Development Assistance - A Synthesis of WorldBank Evaluation Findings. l4IDA allocations are made in Special Drawing Rights(SDR) basedon performance, and the U S dollar equivalent i s dependent upon the prevailing exchange rate. 21 B. ProposedAssistance Strategy 71. With the above principles in mind, the Bank Group strategv is articulated around three core objectives.The CAS themes are: (i) supporting economic growth; (ii) supporting access to basic social services and human development; and (iii) supporting governance andpublic sector management. CAS Theme 1: Supportingeconomic growth 72. Reducing constraints and associated costs toprivate sector development (CAS Outcome 1.1). Accelerating economic growth will require strengthening the business environment by reducingthe constraints and costs o f doing business inDjibouti. Building on the assistance that began under the previous CAS, the Bank will support the Government's efforts to boost private sector development by: (i) increasing access to, and reliability `and quality o f service delivery in the electricity and telecommunications sectors; (ii)reducing the cost o f electricity and telecommunications services; (iii) improving the efficiency o f public utilities for electricity, water, and telecommunications; and (iv) strengthening the financial sector. The Bank program will involve a combination o f lending in the power sector and technical assistance to enhance the business environment. 73. Ongoing assistance. Through the ongoing Power Access and Diversification project (US$ 7 million), the Bank has helped EDD expand electricity distribution and identify key system efficiency gaps; it has also provided funds to buy fuel for electricity generation, thus offering relief to EDD's strained finances and, inturn, reducingthe fiscal cost o f the sector while assessing opportunities for better fuel procurement practices. In addition, ongoing technical assistance to the design o f a master plan for electricity will support more effective and economically sound planning for new investments in the electricity sector. 74. Planned assistance. Through a proposednew energy project (US$ 6.2 million), the Bank will help Djibouti to: (i) improve access to electricity through targeted energy efficiency and demand-side management measures that would reduce the user cost o f electricity, while shaving off peak demand and tapering EDD's need for large, capital- intensive investments in new generation capacity; and (ii)improve EDD's overall performance through high-impact technical and non-technical loss reduction measures that would increase the reliability and quality o f electricity services at a lower operating cost. 75. The Bank's technical assistance in the telecommunications sector will provide recommendations for policy and regulatory reform. Technical assistance will also be provided to assess the needs, priorities, and challenges in enhancing the country's business environment and investment climate. The Bank has undertaken, jointly with the IMF, an FSAP to help design measures to strengthen the bankingregulatory framework. This exercise is motivated by the fact that the banking sector has expanded rapidly and undergone substantial structural changes in the past three years, including the closure o f 22 ailing banks. Similarly, technical assistance may be provided to help the Central Bank of Djiboutimanage its foreign exchange reserves. 76. IFC. Inan effort to support the development of alternative sources of energy in Djibouti, IFC made an early stage equity investment with Reykjavik Energy Invest to develop a geothermalpower project inFY2008. This was the first investmentby the new InfraVentures facility, intendedto provide seed funding to promising projects that are not yet able to secure full funding. The project has encountered delays, including as a result o f the financial crisis in Iceland and the general uncertainty of raising the balance o f funding required following the global financial crisis. IFC i s currently working with the sponsor group to undertake initial test drilling, raise the additional capital required, and complete the feasibility assessment. If these activities proceed with strong results, the project could be structured and financed by end-FY2010. If implemented, the project could help Djibouti address its power shortage and reduce carbon emissions. 77. MIGA. MIGA has a substantial engagement in Djibouti. In December 2007, MIGA issued US$ 427 million in investment guarantees related to the development, design, construction, management, operation, and maintenance of a container terminal in Doraleh. At the time of its issuance, this constituted MIGA's largest single project exposure. This ongoing coverage extends for a period of 10 years against the risks of transfer restriction, expropriation, war and civil disturbance, and breach of contract. The project, sponsored by investors from the United Arab Emirates, i s expected to help Djibouti become a major business hub in East Africa by improving facilities, increasing port traffic, and opening up new opportunities for investment and growth (such as attracting other African countries to use the port as a gateway as well). If FDI remains significant, MIGA would be willing to provide more assistance as needed. CAS Theme2: Supporting access to basic social services and human development 78. Increase access to quality basic education (CAS Outcome2.1). The Bank has been involved inthis area over the past four years, incollaboration with key donors such as the AfDB, Islamic Development Bank (IsDB), United States, France, and Japan. During this CAS period, the Bank will continue to work closely with other donors to support the Government's efforts to: (i)further expand access to basic education, especially inrural areas and for girls, including by reducing dropout and repetition rates; and(ii) enhance the quality o f education, especially by increasingteacher training andthe availability of school books. 79. Ongoing assistance. IDA will continue to support the implementation o f the Government's education reform agenda with a US$ 10 million School Access and Improvement project. This project has been implemented in parallel with an FTI education grant of US$6 million, managedby the Bank. 80. Planned assistance. The CAS will launch an Education. and Vocational Training project (about US$ 6 million) to further expand school access, improve retention, reduce repetition and dropout rates, and strengthen the capacity of the public training systemto buildthe types of skills needed by employers. Moreover, an additional 23 US$2 million FTI education grant will continue to help increase equitable access to basic education and improvethe quality and efficiency of the education system. 81. Improve access to and quality of health services (CAS Outcome 2.2). During the CAS period, the Bank will help the Government improve access to and quality o f health services in a sustainable manner in order to contribute to the achievement o f the MDGs related to reducing malnutrition, stemming child and maternal mortality, and combating communicable diseases. 82. Ongoing assistance. The Bank will continue to implement the ongoing Health Sector Development project (US$ 15 million), which aims to help reduce maternal and infant mortality rates. Inaddition, work will continue on an existing IDF grant (US$ 2 million) to help Djibouti contain and prevent the emergence o f Highly Pathogenic Avian Influenza (HPAI) in domestic poultry, and to prepare for, control, and respond to an influenzapandemic as well as other infectious disease emergencies inhumans. 83. Planned assistance. The CAS will provide additional financing o f US$ 7 million to the health sector programto support the Government's efforts to: (i) improve the quality o f maternal and child health services; (ii) improve the quality o f prevention and treatment of communicable diseases; and (iii) improve the performance of health systems, including health worker qualifications and availability of drugs. 84. Strengthen social protection and direct support to the poor (CAS Outcome 2.3). The Bankhas engaged inan active policy dialogue withthe Government ofDjibouti on social protection and food security through: (i) the development o f an action plan to improve social safety nets, in connection with the GFRP Development Policy Grant; (ii) the financing o f basic economic and social infrastructure to increase community development opportunities in poor areas o f Djibouti, through the Flood Emergency Rehabilitation and Urban Poverty Reduction projects; and (iii) assistance provided to pensionreform. 85. Ongoing assistance. Duringthe CAS period, the Bank will continue to engage indialogue to help Djiboutito: (i) mitigate the vulnerability o fthe poor, including against recurrent floods, droughts, food insecurity, and other external shocks; (ii) improve the institutional framework for social protection; (iii)assess the extent and causes o fpoverty; and (iv) propose a strategy to ameliorate its effects. 86. Planned assistance. The Bank will provide a Water and Small-scale Rural Development project (US$ 5 million) to retainwater inwadis for small-scale agriculture and livestock, prevent floods, andrecharge the aquifer. Iftrust funds for social protection or food security become available, additional financial support will be provided. Bank assistance will also engage in policy dialogue and technical assistance on: (i) social protection and food security; (ii) development o f a sustainable solid waste collection system, using small-scale private operators; and (iii)establishment o f a vulnerability information system with funding from the Global Fund for Disaster Reduction and Recovery (GFDRR). A Poverty Assessment will help assess the nature, incidence, and dynamics o f poverty in Djibouti, as well as the evolution o f income distribution. It will 24 also help assess the progress achieved during PRSP implementation (2004-2006) and propose options for policy and institutional reforms to feed into the design o f the next poverty reduction strategy. A study on qat will enable the Bank to strengthen its dialogue on qat with all stakeholders in Djibouti and present options for discouraging qat consumption. CAS Theme 3: Supportinggovernanceand publicsector management 87. Improve expendituretransparency(CAS Outcome3.1). Bank assistance inthis area has supported the improvement o f financial management and public procurement through implementation of the 2004 CFAA recommendations, including: (i) improving budget planning; (ii) reforming internal control procedures and upgrading internal audit; and (iii) reinforcing coordination among the three main audit bodies. The latter two recommendations have been only partially implemented. The Bank will continue to support the Government in these areas through further policy dialogue and technical assistance, including on the design and implementation o f a governance and anti- corruption diagnostic survey. A Public Expenditure Review will also be conducted. 88. Improve monitoring and evaluation (CAS Outcome 3.2). For the last three years, the Bank has provided assistance through a trust fund for statistical capacity buildingthat has helpedto improve the production o fnational accounts and to prepare the population census launched in March 2009. Once the census i s completed, the country will need additional assistanceto implement its Statistical Master Plan (SMP), drafted in 2005. If funds for statistical capacity building are available, the Bank may provide financial support in coordination with other donors. Inaddition, technical assistance will be provided to establish and operationalize an effective monitoring and evaluation system for the INDS, to put inplace an aid coordination and management system, and to enhance the Government's capacity to collect, process, and analyze donor information and data. Finally, capacity building grants may be raisedto provide assistance inselected sectors. Table 3: ProposedIDA Financing,FY2009-2012 FY ProposedOperations Amount OJSSmillion) 2009 Health Sector Project (Additional Financing) 7 2010 EnergyAccess I1 6.2 2011 Water and Small-scale RuralDevelonment 5 ~~ IDA 15 Total 18.2 2012 Education and TVET 6 CAS Total 24.2 25 Table 4: Trust Funds and IDFs,FY2009-2012 FY Trust Funds and IDFs Amount (US%rniili~n)'~ 2009 IDF - Supportto Aid Coordination 0.35 2009 EFA-FTICatalytic FundGrant 2.00 2010 GFDRR - RiskMappingfor Djibouti 1.oo 2010 PPIAF - SolidWaste Collection 0.19 2010 SEETF'~ Social Safety - 0.10 2011 GPOBA17 - PotableWaterServices 0.10 Table 5: Non-LendingActivities FY Non-Lending Activities Economic and Sector Work 2009 FSAP 2010 Qat Awareness 2010 PER 2011 Povertv Assessment TechnicalAssistance 2009 Energy SectorMasterPlan 2010 Telecommunications and ICT 2010 GovernanceandAnti-Corruption 2011 Supportto SectoralReforms" C. Partnershipsand Participation 89. Djibouti benefitsfrom the support of a small group of bilateral donors (e.g., France, United States, United Arab Emirates, Saudi Arabia, Kuwait) and multilateral donors (Arab Fund for Economic and Social Development, IsDB, AfDB, European Commission, OPEC Fund for International Development, UnitedNations agencies, IMF, andWorld Bank). 90. Currently, there is no formal framework for donor coordination. However, given the small size o f the donor community, information sharing among donors i s easy. Although the World Bank does not have an office in Djibouti, Bank managers and task team leaders visiting the country are able to conduct regular discussions with their donors' counterparts. Donor collaboration inDjibouti has led to the parallel financing o f the Urban Poverty Reduction Program by the Agence Franqaise de De'veloppement (AFD), AfDB, IsDB, and the World Bank. The Bank's US$ 3 million contribution was substantially leveraged to a total o f US$ 38.5 million, which is helping to address infrastructure needs in the poorest neighborhoods of Djibouti-Ville and five secondary centers. Inthe education sector, several partners are providing financial andor technical support for the implementation of Djibouti's education reform agenda, especially with 15The amountsfor TFs andIDFsare purely indicative. 16South-SouthExperienceExchange Trust Fund 17GlobalPartnershiponOutput-BasedAid 1sSupport to be defmedbasedon emergingneeds at the time. 26 regard to expanding access.19 The Bank finances the coordination o f the sector activities through its education project. Moreover, the Catalytic Fund for Education for All- fundedby France, USAID, UNICEF, AFD, Arab Development Fundandthe World Bank andmanagedbythe World Bank-has been a unifyingforce among donors. 91. A Donor Meeting is planned for 2009, and will be co-organized by the Government and the World Bank. The meeting will be used as a platform for the Government to raise awareness among donors on current and planned economic and social reforms, as well as on the challenges the country faces. The meeting will help the authorities make the case for increased external assistance. 92. This CAS wasprepared in closecollaboration with the donor community, and is designed to complement other donors' efforts. In key areas, such as the Power and UrbanPoverty Reduction projects, IDA'Slending assistance has been prepared in close collaboration with AfDB, IsDB, and AFD and complements their investments in these sectors. As shown in the CAS results matrix (Annex 1)' there are many synergies between IDA assistance and other donors' proposed interventions. These links will be clarified further as donors continue to consult with the Government on defining their respective assistanceto the INDSinvestmentprogram. 93. . The WorldBank will continue its strong collaboration with the IMF to ensure that a consistent message is conveyed regarding macroeconomic, public finance management, and other structural reforms. The Bank's technical assistance on INDS monitoring and evaluation will reinforce and complement the IMF's recently concluded PRGF program. VI. MANAGINGRISKS 94. The realization of Djibouti's national initiative for social development, and the effectiveness of this CAS which is aligned to it, are subject to several external and internal risks. 95* Djibouti's economy depends mainly on the port and its development, the rental of military bases, and grants and soft financing from donors-all of which are subject to externalgeo-political andfinancial uncertainties.The surge inthe growth o f port activities with Ethiopia since the end o f the 1990s i s attributable to the war between Ethiopia and Eritrea, and Ethiopia's subsequent reliance on the Port o f Djibouti for most o f its imports and exports. To limit the risk that this increase in the share o f Ethiopian trade traffic will be reversed, Djibouti needs to improve the overall competitiveness o f the port by reducing costs and improving transport links (road and railways) to Ethiopia. This risk is being mitigated through the ongoing modernization of the Port o f Djibouti, and the construction o f a container terminal and oil terminal and creation of a Free Zone at the Port o f Doraleh. There is also the prospect that large investments from the United Arab Emirates may support the development o f Djibouti as a transshipment hub. 19PartnersincludeAfDB, IsDB,AFD, Japan, the WorldFoodProgram(WFP), the UnitedNations Children's Fund(UNICEF), andthe World Bank. 27 96. Djibouti faces the risk of lower FDI flows if the global financial and economic crisispersists and affects Djibouti's main partners. As stressed in section 11, although many plannedinvestment projects for 2009 and 2010 have been re-confirmed, a few projects can bejeopardized, ifthe global crisis hits hardthe home countries o f main investors. If this happens, the authorities would likely have limited leverage to mitigate such a development and would rely on a tightening of the fiscal position inresponse to a decrease in revenues. External assistance, in terms o f technical assistance and financial support, would be needed to help mitigate the impact o f such a shock. 97. Djibouti is located in an unstable region that has experienced many wars and episodes of civil unrest. InMay 2008, border tensions with Eritrea led to brief fighting between the two countries' armies. The situation is now stable, though there have been no direct negotiations between the two parties. Djibouti's highrefugee population, a result o f regional instability, creates tensions around access to already scarce national resources, such as food, water, and landfor grazing. There i s a risk that regional security conditions could worsen and the number o f refugees would increase. This situation would likely lead to fiscal unsustainability due to increased spending on defense and internal security, as well as the additional service needs o fthe refugee population. Such conditions would also affect the Bank's ability to implement its programs. This risk will be closely monitored throughout the CAS period. Another important regional risk is linked to sea piracy inthe Gulf of Aden, as this can pose a threat to trade through the Port of Djibouti. Ina bid to address the insecurity and instability that has allowed the piracy to grow, the Government is continuing to play an active role in facilitating discussions on the future o f the government inSomalia. Itwill also coordinate its efforts with the Government of Yemen. 98. The Bank's limited financial assistance could also pose risks for the effectiveness of the CASprogram. It is possible that the Government may not consider the financial support under the CAS sufficient for them to invest inpursuing a long-term dialogue and relationship with the Bank. The Bank will offset this risk by working to ensure greater engagement and mutual understanding on the CAS with the Djiboutian Government and stakeholders, inorder to highlight the Bank's value inbringingto bear a variety o f non-financial instruments o f assistance, including policy advice, analytical work, and technical assistance based on the Bank's global knowledge and reach, support to INDS implementation, access to global funds, and a convening power that can help leverage other donors' assistancefor greater development effectiveness inDjibouti. 99. Another source of risk relates to the Government's limited capacity to implement and monitor the INDS. Full implementation o f the INDS program implies a significant increase inDjibouti's public investment program ina context o f relatively low skill levels and limitedbudgetary, administrative, and management capacity. Experience from the previous CAS shows that well-focused projects with simple design and close and proactive supervision, together with additional capacity building assistance, can significantly minimize this risk. The highly selective approach to defining the proposed CAS program will also help address this risk. Nonetheless, institutional capacity constraints could potentially limit the Government's ability to utilize fully and effectively the increased support from other donors. IDA will keep this broader issue under review. 28 I I I , 0 M I I , x n e, , d 3 , I I G I yl e, .3 .3 * c) EE& I E B L c) V .-0 v1 z a 'El I 0 I I E a, L bM .-M c) a 0 a vl c) 6o - E Annex 2: Djibouti's FY2005-2008 CAS CompletionReport Date of CAS: March 1,2005 Periodcovered by CAS Completion Report: FY2005-2008 I.INTRODUCTION 1. This annex reviews the experience implementing the International Development Association's (IDA) Country Assistance Strategy (CAS) for the period FY05-08 (Report 31613-DJ) dated March 1, 2005, which was endorsed by the Board on March 24, 2005. It assesses the effectiveness of IDA'Sstrategy in (i)aligning its objectives with Djibouti's long-term strategic goals; (ii)setting relevant, measurable and realistic CAS outcomes; and (iii) achieving its expected outcomes in an efficient and sustainable way. It evaluates IDA'Sperformance in designing its strategy taking past assessments and lessons into consideration (such as Independent Evaluation Group -IEG- evaluations); and presents a set of lessons for subsequent CAS design. Inaddition to discussions with the country team and government counterparts, this assessment i s based on reference documents such as the CAS, Project Appraisal Documents (PADS) Implementation Status and Results Reports (ISRs), supervision reports (Aide-Memoires, and Back-to office Reports), reports related to Economic and Sector Work, Implementation Completion Reports (ICRs), and IndependentEvaluationGroup (IEG) reports and Project Assessments. 11.Context ofthe2005-2008CAS 11.a. Djibouti.LongerTerm StrategicGoals 2. Djibouti adopted its first Poverty Reduction Strategy Paper (PRSP-I) in May 2004, in a context marked by a worrying surge in poverty and glaring disparities between rural and urban areas. The PRSP aimed at: (i) strengthening competitiveness for higher and sustainable growth by maintaining overall macroeconomic stability, while speedingup structural reforms to create a better investment climate for private investment; (ii) accelerating human development through improved school enrollment and quality of education, strengthening the health care system, broadening the social safety net; and implementing the national gender strategy; (iii)promoting regional and local development to reach out to poor urban neighborhoods, nomads, and isolated rural communities; and (iv) improving governance and public sector management through greater transparency and accountability. 3. Good progress was made in achieving the objectives o f PRSP-I. Economic growth accelerated from 1.6 percent in 2004 to 4.8 percent in 2006 and 5.3 percent estimated for 2007, fuelled by increased inflow o f foreign direct investment in port-related activities and construction. Progress was also made in improving key social indicators. According to the 2006 household survey (EDIM), progress was made in improving access to primary education (enrollment rates increased from 42.7 percent in 2000 to 66.2 percent in 2006), increasing alphabetization among young females, and reducing infant mortality. Djibouti was able to maintain macroeconomic stability, accelerate growth and improve some social indicators, but there i s little indication that poverty has beenreduced. 4. Implementation of the PRS-I slowed down after the first year, and planned programs were only partially implemented, particularly inthe secondpillar of developing human capital. Resource 33 gaps, administrative capacity constraints and the lack of an effective monitoring and evaluation system are the main reasons behind the poor and limited implementation of the strategy. Learning from the PRSP-I weaknesses, the Government adopted aNational Initiative for Social Development (Initiative Nationale pour le De'veloppement Social - INDS) in January 2008. This is a provisional document, which would be finalized following completion of the demographic census. The INDS reviewed progress under the PRSP-I. It emphasized achievements in the social sectors, but noted that PRSP-I never became the sole frame o f reference for decision-makers, and that the culture of planning was not well established among the authorities. Key indicators of progress under PRSP-1 are inTable 1below. Literacy rate among women (15-24) 47.5% Improve healthcare Infant mortality rate 103%0 75%0 67%0 HNinfectionrate 3yo 3% Reduce poverty Incidence of extreme poverty 42.2% 36.1% 11.b. The2005-2008 CountryAssistanceStrategy(CAS) 5. The 2005-08 CAS indicated that solid performance had been achieved under the previous CAS (2001-04), marking a clear departure from the past. After a long period o f civil strife and deepeningpoverty inthe 1990s, growth and macroeconomic stability were restored. Performance o f the portfolio improved dramatically. During the consultation process for preparing the CAS, the Bank team and the authorities discussedtwo options. The first option was to target one of the four pillars to bring about critical change in that particular area, taking account of limited IDA allocation. The second option was to use small but strategic interventions mixing lending and economic and sector work (ESW) in each of the four areas. The second option was selected. The risk of the approach was to spread limited resources too thinly. With the benefit of hindsight, however, the option selectedenabled the Bank to advance the country dialogue across the board. 6. The 2005-2008 CAS was broadly aligned with the priorities outlined in the four pillars o f Djibouti's PRSP. The CAS focused on three broad themes: (i)competitiveness and growth; (ii) human resources development and poverty alleviation; and (iii) governance. The relevance o f good the CAS outcomesto the longer term strategic goalshas not changedduringimplementation. 7. Insupport ofthe first pillar (growth and competitiveness), IDA'Sassistancewas designed to help Djibouti (i) public expenditure, including a reduction o f the unsustainable share o f the reform wage bill; (ii) restructure the utilities sector to enhance competitiveness and improve access o f the poor; and (iii) develop the transport sector as a way of enhancing the Port o f Djibouti as an engine for growth and employment. In the area o f human resource development, the CAS argued for continuation of the support to (i) improved school access and quality o f education; (ii) employment generation through community development schemes; (iii)vulnerable groups who are victims o f natural catastrophes (flood in particular); and (iv) advancing key social issues (gender equality and 'The targetedand actual growth rates are averages for the period2004-2006. 34 fight against female genital mutilation and the abuse o f Qat - a stimulant). To promote good governance, the CAS indicated that it would support implementation of the action plans proposed by the Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Report (CPAR) - both completed in2004 - and agreed uponwith the authorities. 111.CASOutcomes CAS Theme 1: Improvingcompetitiveness,growthand incomedistribution 8. Under this broad CAS objective, three actions were envisaged. Creating fiscal space to expand priority public services was to be achieved through reducing the share of the public wage bill in total expenditure and recruiting additional public service professionals at the expense o f administrative and security personnel. The main instrument for this outcome was the policy dialogue through the preparation and discussion of a Country Economic Memorandum (CEM) and of the Public Expenditure Review (PER). Boththe CEM and the PER were completed in 2006. The CEM made forcefully the case that, inthe absence of reforms aimed at reducing the highproduction costs and addressing the paucity of skilled workers, Djibouti would remain locked ina trap o f slow growth, high poverty and high unemployment. It stressedthat rents derived from Djibouti strategic location (military revenues, foreign aid and port receipts) were channeled through the government budget and captured by the civil service elite inthe form o fhighwages and fringe benefits. 9. The second action proposed in the CAS was the restructuring o f high cost utilities, to improve the competitiveness of the economy and access of the poor to basic services. Average tariffs for electricity and water at US$0.20/kWh (US$26/kWh for industries) and US$I.l/m3 respectively were among the highest in the region. These hightariffs were the result of reliance on costly imported diesel, high network losses, overstaffing and high taxation. The CAS proposed a dual power and water project and a GEF grant for renewable and energy efficiency. 10. A power project was approved inJuly 2005. Its objectives were to increaseaccess ofthe poor to electricity through expansion of distribution, testing the feasibility of using wind energy and improving the performance of the utility through technical assistance. The wind component was eventually abandoned, however, because of delays inprocurement and increased cost o f equipment due to fast growing world demand. The project was restructured in 2008 to helpthe utility meet a hugely increased bill for imported diesel oil. Interconnectionwith Ethiopia and the development of geothermal energy with IFC support are expected to lower the cost of electricity in the medium- term. The inefficiencies in the management of the utility remain to be forcefully addressed, however. The water component of the project was abandoned, as the European Union agreed to provide assistanceto the sector. 11. The third action proposed in the CAS to support the Port of Djibouti as the main engine o f economic growth and employment generation was the development and rehabilitation o f the transport infrastructure. Over the past decade, the port activity increased considerably, as a result o f (i)changing traffic patterns following the Ethiopia-Eritrea war in 1997; (ii)the government decision to transfer the management of the port to Dubai Port International (DPI) in 2000; and (iii) the rehabilitation ofthe road linkto Ethiopia, with Bank support. The CAS proposedto support the privatizationof the Djibouti-Ethiopia rail link through the provision of a partial IDA guarantee for a concession scheme. No progress has been made in that respect, however, as the selection of a private operator dragged on and was not successful. The CAS mentioned also that a transport sector review was beingcarried out. The study, issued inApril 2004, made technical recommendations on how to improvethe role and efficiency of the Port of Djibouti. 35 12. Outcome 1 (growth): Increase average annual GDP growth to 4.5 percent in 2008. Achieved. Growth accelerated to 4.8 percent in 2006 and 5.3 in 2007. Sustainability o f that outcome i s dependent on continued attraction of foreign investment through reduction of factor cost, fiscal stability and upgrading manpower skills, however. 13. Outcome 2 (fiscal stability): Improve fiscal stability by maintaining the fiscal deficit to less than 2 percent of GDP. Not achieved. Fiscal policy was expansionary in 2006 and 2007. Tax revenue to GDP remained stable at about 20 percent, but expenditure increased by about 2 percentage points of GDP from 2005 to 2007. The sharp oil and food prices increases in 2008 underscoredthe vulnerability o fthe budgetto external factors. 14. Outcome 3 (debt sustainability): Maintain external debt within sustainable limits. Not achieved. A debt sustainability analysis was conducted by the IMF and World Bank staff in 2008. Almost all borrowing i s from official lenders, and most of it is concessional. The analysis concluded, however, that the country's risk o f debt distress i s high. Djibouti's ratio o f net present value (NPV) debt-to-GDP ratio i s expected to remain well above the threshold o f 30 percent for countries rated as "poor performers" (according to the Country Performance and Institutional Assessment - CPIA) over the next 20 years. Djibouti has also incurred external arrears in past years. 15. Outcome 4 (cost of factors): reduce the cost o f factors by addressing high labor cost and skill shortages, issue a new labor code, and restructure utilities to restore financial viability and reduce tariffs. Not achieved. The CAS mentioned that the wage bill absorbed about 15 percent o f GDP and half of budget expenditures. Duringthe CAS period, these percentages declined slightly to 14.6 percent and 49.6 percent respectively in 2007. A physical audit o f the civil service was completed and a single registry of civil servants was established in 2007. These instruments should helpwith the restructuring ofthe civil service inline with development priorities. Undera highcase scenario, a second fiscal consolidation credit was envisaged. Such credit was not extended, however, as Djibouti did not meet the criteria for moving to high case. A new labor code was adopted inDecember 2005, but i s still not effective for lack o f implementingdecrees. The financial viability of utilities has not beenrestored andtariffs have not beenreduced. CAS Theme 2: Human resourcedevelopmentand povertyalleviation 16. In support of this broad objective, the CAS proposed the continuation of programs for education improvement, employment generation in poor neighborhoods, and rehabilitation o f infrastructure inpoor areas devastatedby floods in2004. A secondphase o f an Adaptable Program Lending (APL) for education was approved in 2005, to improve access to, and the quality and efficiency o f primary education. The Djibouti UrbanPoverty Reduction Project, a second phase o f an APL, was approved inApril 2008 to increase access to and use of local infrastructure and basic urban services, community development and micro-finance by the poor segments o f the population o f Djibouti and secondary centers. Following devastating floods, which exposed the vulnerabilities o f a large number of poor families, an Emergency Floods Rehabilitation project was approved in September 2004, with additional financing inFebruary 2007. 17. Outcome 5 (education): Increase (i) enrollment ratio (GER) to 73 percent in2008, (ii) gross ratio o f girls to total student population from 44 percent in 2003 to 48 percent in 2008; and (iii) student 6-11 old completing primary schooling from 55 percent in 2003 to 80 percent in 2008. Partiallv achieved. The Gross Enrollment Rate (GER) increased from 52 percent in 2005 to 68 percent in early 2008, including for girls, and the primary repetition rate was reduced from over 10 36 percent in 2005 to 4 percent in 2008. Completion rates have deteriorated in the last school year, however, as a result of the decision to shorten the primary cycle from 6 to 5 years. Good progress has been made inthe development of school management committees, which i s helpingto improve results. Further expansion of the education system may not be sustainable, however, inthe absence of a reduction of teachers' wages and a better allocation of resources in the education budget in favor ofthe poor. 18. Outcome 6 (health): Reduce infant mortality rate (IMR) to 85 per 1000 live births and maternal mortality rate (h4MR) to 570 per 1000,000 live births in 2006; and ensure that at least 80 percent of the population is aware of at least 3 measures to prevent transmission of HIV/AIDS. Achieved. Inthe health sector, the ongoing project helpedincrease the proportion of birth in health facilities, from 40 percent in 2002 to 93 percent in 2008 and the vaccination rate of children 12-23 months from 45 percent to 71 percent during the same period. The reduction in the IMR was stronger than expected. No information is available on MMR, however. The ongoing HIV/AIDS project reported a decline in HIV prevalence rate among 15-24 year old pregnant women from 2.7 percent in2002 to 2.1 percent at end 2007 and among sexually transmitted diseases (STD) patients from 22 percent to 12.6 percent during the same period. No information was provided on the population's awareness on HIV prevention inimplementationstatus reports (ISRs), however. 19. Outcome 7 (employment and social protection): Develop high-labor intensive public works in support of the rehabilitation of basic services and community development. Partially achieved. The ICRfor the first phase ofthe social development and public works project was issued in March 2008. It indicated that access to basic economic and social infrastructure has been improved in 21 poor neighborhoods, but only 8,300 person-months of work was created compared to the target of 17,500, which was deemed unrealistic, however. The capacity o f the implementing agency has been strengthened. From available documentation, the number o f poor residents benefitting from the project is not well established, however, and it i s difficult to assess the efficiency of the operation because there was no economic analysis of sub-projects. The flood emergency rehabilitation project, closing in FY09, has so far helped rehabilitate social infrastructure destroyed by the 2004 floods, resettle 360 families, and set-up an executive secretariatfor disaster management. , 20. Within the framework o f a poverty assessment, an analysis o f the social and economic implications of Qat import and consumption at the household and macro level was to be carried out. Given Bank limited resources, however, focus was put on raising awareness through high-level country dialogue. InFebruary 2008, the Qat issue was discussed between the President of Djibouti and the MNA Vice President. In July 2008, the Government launched a public campaign aimed at sensitizing the population about the negative consequences o f Qat consumption (distortion of household expenditure, loss of working time and reduced economic productivity). The campaign received much press attention and triggered public debate, in particular as it equated the health and economic risko f Qat consumption with those of tobacco and alcohol. CASTheme 3: Promotinggoodgovernance 21. Two IDF grants were extended in September 2005 to build capacity, the first one for US$0.36 million in public procurement reform, and the second one for US0.34 million in the Ministryof Finance. Underthe first project, a new public procurement code hasbeenprepared, but has not yet been adopted. With support from the second one, budget preparation has improved, but additional work is needed to better integrate the investment and current budgets within a medium- term framework and involve line ministries in budget preparation and implementation. In spite of 37 training, internal and external financial controls are still weak. Good progress was made in budgetary discipline, including a reduction indomestic arrears. 22. Outcome 8: Improve economic governance through efficient and transparent procurement and training of staff on new customs information management tools. Not achieved. Procurement under Bank-financed project has marginally improved, but not in country systems. There was no improvement incustoms' use of modern managementtools. 23. Outcome 9: Improve public finance management (budget preparation, realism o f budget and consistency with medium-term economic framework and PRSP, internal and external controls, parliamentary oversight, cash management and efficiency o f ex ante controls). Partially achieved. The Budget Directoratehas been strengthened. Its capacity to forecast revenues has been improved and it has acquired new tools to better monitor budget implementation. Financial controls have been enhanced through capacity building of the General Inspectorate o f Finance (IGF), including preparation o f a manual of procedures and a work program, and a better division o f labor between control institutions, IGF, General State Inspectorate and the Chamber of Accounts. OverallAssessment 24. Implementation of the assistance program has contributed to improving social indicators, but has not done much to address the competitiveness agenda and governance issues, two areas where the Government was not strongly committed to reforms. During the CAS period, foreign direct investmentincreasedsteadily, from US$59 million in2005 to US$197 million in2007, mostly from Arab sources. This surge contributed to the strategy o f the Government to transform Djibouti into a regional trade and services hub, but it might have weakened its resolve to undertake difficult reforms. Also, expectations that Arab oil producers would provide petroleum products at below world market prices gave the authorities a false sense o f security. When oil prices hit an all time high in mid-2008, they had no other option than to request the Bank to help pay the bills of the power utility. 25. The assistance program was appropriate. It helped Djibouti move to a second generation PRSP and better focus on poverty reduction issues. Some steps have been taken to start the process of civil service reform, which is essential for making the budget more pro-poor over time. Insufficient attention was given to addressing the competitiveness agenda, however. The CEM focused sharply on that issue, but little has been done in the lending program to lower costs o f factors or improve the skills of the labor force. The power project could have been an opportunity to help Djibouti restructure its utility, but its main emphasis was on extending distribution, not reducing extremely high costs. In the education sector, no attempt was made to adjust teachers' salaries. Achieving universal primary education i s simply not feasible when the average salary o f a civil servant is 10times the average income per capita. IV. BankPerformance QualityofProductsand Services 26. The CAS was implemented under the base case scenario of about US$31.4 million of IDA credits. DuringFY05-08, 4 out of 5 operations planned under the base case scenario were delivered, for US$28.5 million, of which US$5.1 million in grants. These included the flood emergency and rehabilitation project and its additional financing, the power project (approved without the water component), the second phase o f the school access and improvement, and the urban poverty reduction project. In addition, the Bank showed flexibility in helping Djibouti 38 address the 2008 food and oil crises, by extending a grant to compensate the loss of tax revenues when the Government removed the consumption tax on key food staples, and by restructuring the power projectto finance the power utility's oil bill. 27. The Bankraised resourcesto complementIDA funding. Duringthe CAS period, the Bank made extensive use o f IDFgrants and similar facilities. Besides the two grants mentioned above for improving procurement and public finance management, the Bank approved (i) a US$0.25 million grant under the trust fund for statistical capacity buildingto support the Statistics Office inFebruary 2006, (ii)a US$6 million grant under the Education for all - Fast track initiative (EFA-FTI) Catalytic Trust Fund in May 2006, (iii)a US$2.1 million grant under the Avian and Human Influenza (AHI) Facility inOctober 2006, (iv) a US$0.24 million IDF grant to helpthe Government streamline its pension system in August 2007, and (v) a US0.29 million IDF grant to help the Government establish an effective M&E system for the MDS inApril 2008. Activities under these grants are still ongoing. While satisfactory progress was made in education and Avian flu, delays were encounteredinstatistics and pension reform. 28. The CAS design was adequate. Building on progress made under the previous CAS, it supported implementation of key objectives of the first PRSP. During the consultation process for preparation of the CAS, the Government and the Bank selectedthe option o f covering several areas of the PRSP, instead of focusing on one of the four pillars. The expected benefit o f the approach was to use Bank involvement as a catalyst for increased donor assistance in support of the PRSP. This approach was successful in the urban poverty reduction program (parallel financing by the African Development Bank, the Islamic Development Bank and o f the Agence Franpise de De'veloppement), and in the education sector (additional financing from the catalytic fund for education for all). The mix o f instrumentsto achieve the CAS objectives was also adequate. 29. However, the Bank work was not always sequenced properly. During CAS implementation, while the economic and sector work focused on how to move on the growth and competitiveness agenda (CEM) and to increase pro-poor expenditures (PER), the lending program became exclusively concerned with improving social indicators and services. The power project, which the CAS envisaged as a means to help Djibouti restructure its loss making utility, was eventually designed as an instrument to extend services to the poor. No real effort was made to address the basic problems of the bankrupt utility, however. In addition, the proposed IDA partial risk guarantee to support a concession scheme for the Djibouti-Ethiopia railway could not be activated because of the complexity o f finding appropriate solutions in a regional context. In the education sector, the second phase of the APL was prepared before the PER was issued. Accordingly, it did not benefit from the analysis o f public expenditure issues in the education sector. Itwas clear, however, that expansion o fthe systemwas fiscally unsustainable. Itwould have been highly advisable to reach agreement with the Government on a medium-termexpenditure program for the sector. 30. The performance of the Bank is rated as moderately satisfactory. The analytical work was good. As discussed above, in designing its operations, particularly inthe power and education sector, the Bank did not try with sufficient vigor to reach agreement with the Government on cost reduction and sustainability, however. Portfolio managementwas fully adequate. PortfolioAssessment 3 1. Overall implementationof the portfolioduring the CAS period has been satisfactory (6 projects) with only one problem project during FY08, the second school access and improvement project, with flags in monitoring and evaluation, and disbursement. However, all projects start with 39 two flags, the country record and country environment flags2which are automatically raised for all projects in Djibouti. Disbursement ratio for the entire portfolio has been stable over the CAS period, with a ratio higher than 33 percent. 32. A Country Portfolio Performance Review (CPPR) carried out in June 2008 noted that supervision of the portfolio was focused on results, but was hampered in its efforts by the limited capacity for M&E in Djibouti. Issues were brought to the attention of management and addressed expeditiously. The safeguards and fiduciary aspects were adequately monitored. Bank teams provided strong support to project implementation units, particularly as concerns procurement and financial managementissues. Table 2: Djibouti: PortfolioPerformance FYO5-OS FiscalYear FY05 FY06 FY07 FY08 FY09 Projects 4 6 6 6 6 Net Commitment (US$ million) 53.3 70.3 72.3 48.5 48.5 Disbursement Ratio (%) 34.1 37.3 33.7 37.4 IDA DisbursementinFY (US$ million) 9.2 11.4 12.4 7.1 7.5 Problem projects 0 0 0 1 0 % problemprojects 0.0 0.0 0.0 16.7 0.0 Projects at risk 1 0 0 2 2 %I Projects at risk 25.0 0.0 0.0 33.3 33.3 Commitments at risk (US$ million) 6.5 0.0 0.0 17.0 22.0 % Commitments at Risk 12.1 0.0 0.0 35.1 45.4 % Proactivity 100 % Realism 0 nla nla 50 0 33. IEG Evaluation of IC&. Duringthe CAS periodthe Independent Evaluation Group (IEG) evaluated three implementationcompletion reports (ICRs) for the Djibouti Social Development and Public Works, the International Road Corridor Project, and the first phase o f the Education APL. The ICRfor the Social DevelopmentandPublic Works received a moderately satisfactory rating on outcome. For lessons learned, IEG stated that there is a need to prepare projects with realistic targets andtimetables, with associatedrisks flagged up front. Implementation inclear phases would facilitate results at a reasonablepacewhile consolidating support for the project. Project preparation should be thorough, but envisage a flexible project design to adapt to the development pace o f the country, and in this case the evolution of the executing agency. Close support and intense supervision is required for projects in countries with low implementation capacity to ensure that problems are identified early on and that solutions are put inplace and followed up." 34. The ICR for the first phase of the Education APL was issued in December 2005. It was reviewedby IEG inFebruary 2006. IEGconcurred with the ICR's ratings(satisfactory for outcome, substantial for institutional development and highly likely for sustainability). Key lessons from experience are: broad consultation is essential in ensuring success, APL is a good instrument for To date, the flag for the countryenvironmentrecordsriskremainspermanently raised inthe portfolio management system, becausethe CPIA ratinghasbeen historicallylow, and, despiterecent economic management improvement, the ratingremainsbelow3.5. Similarly, the country recordflag remainsraised, following a net disconnect of20 percentbetweenthe outcome IEGrating andthe ISRrating for projects evaluatedbetweenFY2002andFY2006. 40 long-term commitment, and Bank supervision needs to pay more attention to monitoring and evaluation. 35. For the InternationalRoadCorridor project, which financed the rehabilitation of the road and associated service infrastructure from the port to the Ethiopian border, IEG concluded that the project achieved its objectives, and the outcome was rated satisfactory. Travel time from the port to the border has beenreduced from between 6 to 10 hours to less than three hours and transport cost have been reduced by 60 percent. Traffic increased faster than expected. The internal rate of return at 42 percent was higher than estimated at appraisal. IEG also reviewed the ICR for a Global Environment Fund (GEF) grant for the financing of a regional project to improve coastal and marine environments o f the Red Sea and Golf of Aden. The outcome of the project was rated as satisfactory. Cost of CASimplementation 36. Average project preparation costs, excluding additional financing, in the CAS period were relatively low (at US$240,000 / US$283,000 when PHRD grants are included). Incomparison, the average preparation costs excluding additional financing were US$472,000 (US$557,000 when PHRD are included) inYemen over the same period (FY05-08). However, it will be noted that the preparation cost amounts to US$306,000 in FY08. This amount is still the lowest for the region. For the ESW, the average completion cost was US$89,000 over FY05-08, and was below the regionalaverage (US$l25,000) for FY06. Table3: Djibouti LendingCost (FYOS-OS) - Delivery PHRD Total cost Cost BB & Fiscal vear PHRD FY ProjectName Actual Actual Actual 2005 Flood Emergency Rehabilitation $38 $169 $207 2006 Power Access And Diversification $340 $340 2006 Second School Access And Improvement $278 $278 2007 Flood Emergency Rehab Add. Grant $22 $22 2008 UrbanPovertyReductionProgram $306 $306 Average without additional financing $240 $283 Average with additional financing $197 $231 CountryDialogue and Aid Coordination 37. The country dialogue was adequate. The Government was helpful in addressing project implementation issues as they arose. It was less inclined to take appropriate measures to reduce costs inthe provision of public services. The issues raised in the CEM and PER should have been brought to the fore more forcefully, but this was not an easy task, as the Djiboutian authorities did not feel the urge to introduce difficult reforms duringa period marked by a fast increase inthe flow of private investment. During the CAS period foreign direct investment dwarfed IDA disbursements. 38. The Bank worked effectively with its development partners. The donor community is particularly small in Djibouti, and the Bank does not have an office there. Close coordination with 41 donors was maintained by Bank missions during the CAS period, however. As mentioned above, the Bank was able to develop a multi-donor program for urban poverty reduction with the African Development Bank and the Islamic Development Bank. The three institutions have operated within a common framework and coordinated with a new project financed by the Agence FranCaise pour le De'veloppement (AFD) inthe same domain, each however establishing a separateand parallel co- financing agreement with the Government. In total, the Bank US$3 million were substantially leveraged to a total of $38.5 million that i s helping cover infrastructure needs in the poorest neighborhoods of Djibouti-ville and infive secondary centers. Lessonslearned 39. Managing tensions among different ethnic groups and between local population and a large number of immigrants from unstable neighboring countries involves a delicate balancing act. After the lost decade of the 1990s due to civil strife and deepening poverty, the Government has been able to restore political stability and economic growth. Progresswas made also in improving social indicators. This is a major achievement. It i s important now for the Government to build up on success achieved to address key issues, which may stand in the way of sustained economic growth and poverty reduction. 40. The Bank assistance program helped Djibouti make rapid progress on social indicators, but had little influence on the growth and governance agenda. Building upon success achieved, it i s important now to consolidate results and help Djibouti achieve its vision o f a service hub in between the Arab world and the Eastern Africa Region. The vulnerabilities exposed duringthe food and oil crises of 2008 should serve as a basis for deepening the policy dialogue between Djibouti and the Bank. 41. Consultations with the Government for the preparation of the new CAS should be centered on how to improve competitiveness and ensure that improvements in the provision o f social services are sustainable. The new CAS should be highly selective and focus on enhancing competitiveness and improving the provision of basic services in a sustainableway. 42 cd ' B a, ticdcd ' Y 2 0 c 3 VI a .3 B ."' 20 E cd u cu -- 0 YVI .3 Mc 0 4 a3 v, d CAS CR Annex 2: Djibouti-PlannedLendingProgramandActualDeliveries FY 1 CASPlan IUS$m I Status US$ m 05 Emergency floods 6.4 Approved: 9/04 6.46 Additional financing: 2/07 2.10 Power/Water 7.0 Power project approved 7.00 11/05 06 School access and Improvement 10.0 Approved 11/05 10.00 (2ndphase) 07 Djibouti-EthiopiaRail Road 3.0 Not approved, as selection Partial Risk Guarantee of aprivate operator for the railway managementwas not successful 08 Social Developmenflublic 5.0 Approved 4/08 3.00 Works Global Food Crisis 5.00 1 Response; Approved 6/08 I 07 PRSP assessment FY07 CPPR Avian Influenza Control: US$2.11 m inFY07 08 PERupdate CPPR June 2008 IDFfor streamlining social protection systemsUS$0.24 m inFY08 IDFfor M&Esystem US$0.28 min FY08 47 s u3 B 00 m e r- 8 e00 W m 8 8 .. -- c? . 22 0 m 2 0 0 N 0 N 0 0 2 s s2 . - W . I- m m W Q\ O s B B B 0 m Q s t- m e ;3 0 W 0 0 0 0 0 . W .. . . a r- m m m B . 03 0 B m 8 8 e 3 m m 2 2 m s 0 m e 0 0 0 0 N Q\ 0 z e m . 2 - s 0. m m B Q\ r . 2 B c? m m I- W ss -8 0 0 ss 0 0 0 0 N 8 8 m r 2 N d 9 0 8 C - * N '5 8 8 t; 0 e s -8 O U 0 2 m 8 8 8m W 2 3 d 2 2 I- 0 8 t; m 0 8 .- * U .-* Lr a e0 -R 0 b'I e0 F N -0 L C 9 * .*c E * P 2 Y .* b) e .-* 5 .-C0 .- 8 * .3 * cl i;, $ PE H -E" w < Ai 4 2 cr8 * Be .-* P 5 b' $ - * -a!?de P 0 rn a 2 e Y h e r=i$ c Lr G8 .- * .-*I 5 0 o > 9 b' 9 b' I w r- m m W W mQ\ m I- 00 0 E sa I- E: L m m N 00 2 m \I mQ\ m N W m 0 Q\ 0 0 L c- E k CASAnnex A2: Djiboutiat a Glance Djibouti at a glance 9/16/08 M. East Lower I Key Development Indicators & North middle Ijibouti Africa income Age distribution,2007 (2007) Male Female Population.mid-year (millions) 0.83 313 3,437 175-79 Surfacearea (thousandsq. km) 23 8,778 35,510 Populationgrowth ( O h ) 1.8 1.7 1.o Urban population(% of total population) 87 57 42 GNI (Atlas method, US$billions) 0.9 876 6,485 GNI per capita (Atlasmethod, US$) 1,090 2,794 1,887 GNI per capita (PPP.international$) 2,260 7,413 4,544 GDP growth ( O h ) 4.0 5.8 9.7 I GDP per capita growth(%) 2.2 4.0 8.6 l5 lo percent lo l5 (most recent estimate,200520071 I Poverty headcount ratioat $1.25 a day (PPP, %) 5 Povertyheadcount ratioat $2.00 a day (PPP, %) 19 Under-5mortality rate (per 1,000) Lifeexpectancy at birth (years) 54 70 69 Infant mortality(per 1,000 live births) 86 34 41 2ool Child malnutrition( O h of children under 5) 26 25 Adult literacy,male ( O hof ages 15 and older) 83 93 Adult literacy,female (% of ages 15 and older) 63 85 Gross primary enrollment,male ( O h of age group) 49 108 112 Gross primaryenrollment,female ( O hof age group) 39 103 109 Access to an improvedwater source(% of population) 92 89 88 Access to improvedsanitationfacilities (% of population) 67 75 54 1990 1995 2000 2006 0 Djibouti 0Middle East & NorthAfrica Net Aid Flows 1980 1990 2000 2007 a (US$ mi//ionsf Net ODA and official aid 73 194 71 117 IGrowth of GDP and GDP per capita ( O h ) Top 3 donors (in 2006): I France 25 56 21 72 10 UnitedStates 3 6 1 10 T Japan 0 6 14 5 5 Aid ("hof GNI) 22.2 12.6 13.7 0 Aid per capita (US$) 215 345 98 143 5 Long-Term Economic Trends -10 95 Consumerprices(annual% change) 7.8 2.4 3.6 GDP implicitdeflator(annualO change)h 6.8 2.4 3.8 +GDP -GDP percapita Exchangerate (annualaverage, localper US$) 177.7 177.7 177.7 177.7 Terms of trade index (2000 = 100) 100 105 1980-90 1990-2000 2000-07 (average annualgrowth %) Population,mid-year (millions) 0.3 0.6 0.7 0.8 5.0 2.6 1.9 GDP (US$ millions) 452 551 830 -2.0 3 4 (% of GDP) Agriculture 3.1 3.5 3.9 -0.9 3.5 Industry 22.0 15.4 16.9 -5.2 4.9 Manufacturing 3.6 2.6 2.5 -5.5 3.I Services 74.9 81.1 79.3 -1.4 3.I Householdfinal consumptionexpenditure 78.9 76.8 56.6 -2.5 -0.5 Generalgov't final consumptionexpenditure 31.5 29.7 25.6 -3.9 2.8 Grosscapital formation 14.1 8.8 38.3 -6.6 28.7 Exportsof goods and services 53.8 35.f 58.3 -5.7 5.2 Importsof goods and services 78 4 50.4 78.8 -7.0 6.3 Gross savings 14.7 5.4 20 7 Note Figuresin italics are for years otherthan those specified 2007 data are preliminary ~ndicatesdata are not available a Aid data are for 2006 DevelopmentEconomics Development Data Group (DECDG) 49 Djibouti Balanceof Payments and Trade 2000 2007 ~ ~~~ IGov%tnse indicators, 2000 and 2007 I (US$ millions) 1 - I Total merchandise exports (fob) 32 50 Total merchandise imports @if) 207 346 Voice and accountability Net trade in goods and services -64 -134 Politicalstability Workers' remittances and compensation of employees (receipts) 26 Regulatoryquality Current account balance -19 -66 Ruleof law as a % of GDP -3.4 -8.6 Control of wrruptlon Reserves, including gold 66 117 Central Government Finance Country's percentilerank (0-100) hjghsr vsiues mply better Rhngs (% of GDP) Current revenue (including grants) 31.1 35.0 Tax revenue 21.5 20.4 Current expenditure 30.2 29.9 Technology and Infrastructure 2000 2007 Overall surplus/deficit -1.6 -2.4 Paved roads (% of total) 45.0 Highest marginal tax rate (%) Fixed line and mobile phone Individual subscribers (per 1,000 people) 1 7 Corporate High technology exports (%of manufactured exports) External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 262 464 Agricultural land (% of land area) 69 73 Total debt service 14 23 Forest area (% of land area) 0.3 0.3 Debt relief (HIPC, MDRI) - - Nationally protected areas (Oh of land area) 0.4 Total debt (% of GDP) 47.6 60.3 Freshwater resources per capita (cu. meters) .. 373 Total debt service (% of exports) 6.2 Freshwaterwithdrawal ( O h of internal resources) 6.3 Foreign direct investment (net inflows) 3 108 CO2 emissions per capita (mt) 0.53 0.46 Portfolio equity (net inflows) 0 0 GDP per unit of energy use I (2005 PPP $ per kg of oil equivalent) Composition of total external debt, 2006 Energy use per capita (kg of oil equivalent) Short-term, 19, IBRD, (US$millions) IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Interest payments 0 0 IDA Total debt outstanding and disbursed 50 133 Disbursements 4 9 Private Sector Development 2000 2008 Total debt service 1 2 Time requiredto start a business (days) - 37 IFC (fiscal year) Cost to start a business (% of GNI per capita) 200.2 Total disbursed and outstanding portfolio Time requiredto register property (days) -- 40 of which IFC own account -- Disbursements for IFC own account --- - Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managerssurveyed who agreed) repayments for IFC own account - - ma. n.a. MIGA Gross exposure - 427 Stock market capitalization (% of GDP) New guarantees - 427 Bank capital to asset ratio (Oh) Note: Figures in italics are for years other than those specified. 2007 data are preliminary. 9/16/08 ..indicates data are not available. -indicates observation is not applicable. Development Economics, Development Data Group (DECDG) 50 C A S Annex B2: Selected Indicators o f Portfolio Performance and Management As of February 25,2009 Indicator 2006 2007 2008 2009 Portfolio Assessment Number of ProjectsUnder Implementation' 6 6 6 5 Average ImplementationPeriod(years) 2.9 3.9 2.6 3.7 Percent ofProblemProjectsby Number a* 0.0 0.0 16.7 0.0 Percent of ProblemProjectsby Amount a, 0.0 0.0 20.6 0.0 Percent of Projectsat Riskby Number ', 0.0 0.0 33.3 40.0 Percent ofProjectsat Riskby Amount 0.0 0.0 35.1 50.6 DisbursementRatio (%) e 37.3 33.7 37.4 24.8 Portfolio Management CPPR during the year (yedno) No No Yes SupervisionResources (total US$) 637 656 627 301 Average Supervision(US$/project) 106 109 90 60 Memorandum Item Since F Y 80 Last Five FYs Proj Evalby OED by Number 14 3 Proj Evalby OED by Amt (US$ millions) 116.9 52.8 %ofOED ProjectsRatedUor HUby Number 42.9 0.0 % of OED ProjectsRatedUor HUby Amt 24.4 0.0 a. As shown inthe AnnualReport on Portfolio Performance(except for current FY). b. Average age ofprojects inthe Bank'scountryportfolio. c. Percent ofprojectsratedUor HUon developmentobjectives (DO) and/or implementationprogress (IP). d. As definedunder the Portfolio ImprovementProgram. e. Ratio of disbursements during the year to the undisbursedbalance ofthe Bank'sportfolio at the beginningofthe year: Investmentprojectsonly. * All indicatorsare for projectsactive inthe Portfolio, with the exceptionofDisbursementRatio, which includes all activeprojectsas well as projects which exited during the fiscal year. 51 CASAnnex B3: IBRD/IDA ProgramSummary As of February 25,2009 ProposedIBRDDDA Base-Case LendingProgram' Strategic Implementation Fiscalyear ProjectID US$(M) Rewards b b Risks 1H/WL) (H/WL) 2009 DJ - ImprovingHealth Sector Performance 7.0 H 1 Result 7.0 2010 DJ-Energy Access 6.2 H M Result 6.2 2011 DJ-Water and Integrated Rural Development 5.0 H M Result 5.0 2012 DJ-Education and WET 6.0 H M Result 6.0 OverallResult 24.2 a. This table presentsthe proposedprogram for the nextthree fiscal years. b. For eachproject, indicate whether the strategic rewards and implementationrisks are expected to be high(H),moderate(M)or low (L) 52 CAS Annex B4: Summary of Non-lendingServices Djibouti - As of January 26,2009 Completion Cost . Product FY (US$OOO) Audience a/ Objective b/ Recent completions CountryEconomicMemorandum 2006 183.3 Government KnowledgeGeneration CoordinatingEnvironmentandHealthInterventionsinMENA 2006 43.1 Government KnowledgeGeneration Building Cap. to prepareImpl. of IntegratedSOC.ProtectionSystem 2007 59.0 , Government Public Solving Monitoring & EvaluationSystem 2008 3.0 Government ProblemSolving TechnicalAssistanceto Initiative for NationalDevelopment 2008 24.0 Government ProblemSolving CPPR 2008 GovlBankDon. KnowledgeGeneration Dialogueon Technical andVocationalEducationandTraining 2008 96.0 Government KnowledgeGeneration JSAN for the NationalInitiative for SocialDevelopment 2009 12.0 Government KnowledgeGeneration Underway CountryAssistance Strategy 2009 100.0 Gov./Bank KnowledgeGeneration FinancialSector Assessment Program(FSAP) 2009 150.0 Government KnowledgeGeneration Energy Sector MasterPlan 2009 29.0 Government KnowledgeGeneration Assistanceto FoodCrisis 2009 100.0 Government KnowledgeGeneration Supportto Initiativefor NationalDevelopment(INDS) 2009 60.0 Government KnowledgeGeneration Economic Monitoring (incl. PRSP& Poverty) 2009 50.0 Government KnowledgeGeneration Planned GovernanceandAnti-Corruption 2010 100.0 Gov./Bank KnowledgeGeneration TelecommunicationsandICT 2010 120.0 Government KnowledgeGeneration Gov./BanW KnowledgeGeneration, QAT Awareness 2010 60.0 Publ.Dissem. ProblemSolving PublicExpenditureReview 2010 150.0 Government KnowledgeGeneration PovertyAssessment 2011 100.0 Government KnowledgeGeneration Supportto SectoralReforms 1011 100.0 Government Knowledge Generation a. Government, Donor, Bank, public dissemination. b. Knowledgegeneration, public debate, problem-solving. 53 CAS Annex B5: Djibouti Social Indicators M.East& North Lower-middle- 1970-75 1980-85 1997-03 2004-07 Africa income POPULATION Total population,mid-year(millions) 0.2 0.4 0.7 0.8 305.4 3,384.2 Growthrate PAannual averagefor period) 6.1 3.3 2.2 1.8 1.8 1.1 UrbanpopulationPA ofpopulation) 61.6 71.1 83.0 87 56.8 40.8 Total fertility rate (birthsper woman) 6.7 6.4 4.8 4.1 2.9 2.3 POVERTY (% ofpopulation) Nationalheadcountindex Urbanheadcountindex Ruralheadcountindex INCOME GNIper capitapS$) 771 1025 2,345 1,538 Consumerprice index (1995=100) 54 117 117 116 I29 Foodprice index (1995=100) INCOME/CONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highestquintile PA ofincome or consumption) SOCIAL INDICATORS Publicexpenditure Health(?Aof GDP) 4.6 4.4 2.8 1.9 Education(% ofGNI) 7.6 8.7 4.3 4.0 Social security andwelfare (% ofGDP) Net primaryschoolenrollmentrate (% of age group) Total 31 29 66 90 90 Male 37 33 92 91 Female 26 25 88 89 Access to an improvedwater source (?Aofpopulation) Total 83 93 89 88 Urban 88 96 95 96 Rural 61 53 81 82 Immunizationrate (% ofchildren ages 12-23 months) Measles 27 43 67 89 75 DPT 22 44 69 91 74 Childmalnutrition (?Aunder 5years) 26 25 Lifeexpectancy at birth bears) Total 42 46 53 54 69 69 Male 41 45 52 53 68 67 Female 44 48 55 56 71 70 Mortality Infant (per 1,000live births) 160 137 97 87 35 41 Under 5 (per 1,000) 241 199 147 94 43 44 Adult (15-59) Male(per 1,000population) 586 527 368 325 168 203 Female (per 1,000population) 470 428 314 328 116 129 Maternal(per 100,000live births) 730 550 200 300 Births attendedby skilledhealthstaffPA) 73 61 93 71 69 I. CAS Annex B5.This tablewas producedfiom the CMU LDB system. 02/09/05 Note:0 or 0.0 means zero or lessthan halfthe unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76to ISCED97.Immunization:refers to childrenages 12-23 monthswho receivedvaccinations before one year of age. 54 CAS Annex B6: Djibouti Key Economic Indicators National accounts(as YOof GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 100 100 Agriculture 4 4 4 4 4 4 4 4 4 4 4 Industry 17 16 16 16 15 15 15 16 16 16 16 Services 79 80 80 80 81 81 81 80 80 80 80 Total Consumption 80 80 80 84 88 82 85 82 81 79 81 Gross domestic fixed investment 21 23 35 42.1 50.5 29.2 31.1 39.8 40.4 4.4 37.8 Governmentinvestment 8 9 7.5 11.2 10.3 12 12.5 10.2 10.3 10.4 9.3 Privateinvestment 14 10 27.5 30.9 40.2 17.2 18.6 29.6 30 30 28.6 Exports(GNFS)b 36 40 41 43 43 42 43 85 114 107 101 Imports (GNFS) 49 54 64 76 86 59 65 107 134 125 157 Gross domestic savings Gross nationalsavings' 20 20 20.4 16.5 10.1 16.7 14 14.5 16.4 17.2 16.8 Memorandum items Gross domestic product 666 709 769 850 986 1112 1251 1402 1554 1727 1907 (US$million at currentprices) Real annual growthrates(%) Gross domestic productat marketprices 3.0 3.2 4.8 5.3 5.0 6.7 7.2 7.9 7.7 7.1 7.2 Gross Domestic Income Real annualper capita growthrates(%) Gross domesticproductat marketprices 1.1 1.4 2.3 2.7 3.4 3.5 4.7 6.8 5.1 4.5 4.7 Total consumption -0.2 2.8 4.1 7.9 11.4 3.6 11.3 7.6 6.3 4.8 8.6 Privateconsumption 14.4 4.3 13.1 5.5 6.1 4.4 14.4 Balanceof Payments (US$ millions) Exports(GNFS)b 251 288 312 363 417 468 546 1223 1802 1880 1963 MerchandiseFOB 38 40 55 79 98 114 129 763 1307 1349 1370 Imports(GNFS)~ 339 361 489 641 847 664 831 1541 2147 2190 2259 MerchandiseFOB 261 277 392 529 694 525 666 1342 1939 1974 2028 Resourcebalance -88 -73 -177 -278 -430 -55 -285 -318 -344 -310 -296 Net current transfers 14 13 -21 -27 -17 -17 -24 -26 -26 -27 -29 Currentaccountbalance(inYOof GDP) -14.7 -25.6 -40.4 -.12.5 -17.1 -25.2 -23.9 -23.2 -21 Net foreigndirect investment(in % of GDP) 39 59 164 195 309 110 156 193 205 180 190 Long-termloans(net) 14 11 24 34 57 50 41 38 -6 26 12 Official Private Gross official reserves 2.2 1.8 3.3 3.1 2.9 3.5 3.8 3.9 .. (in monthsofimport ofgoods and services) 55 CAS Annex B6: DiiboutiKey EconomicIndicators(Cont.) Public finance (as % of GDP at market prices)` Current revenues 35.6 37.1 34.9 35.1 32.5 32.6 33.6 33.4 33.7 33.6 31.6 Current expenditures 29.8 27.5 29.9 26.5 24.1 22.8 22.8 23.6 23.6 23.6 22.6 Current budgetbalance 5.8 9.6 -2.5 -2.6 -1.9 -2.2 -1.7 -0.3 -0.2 -0.4 -0.3 Capital expenditure 7.7 9.3 7.5 11.2 10.3 12.0 12.5 10.2 10.3 10.4 9.3 Foreignfinancing 5.6 6.5 2.7 3.3 4.1 3.5 3.3 1.6 1.1 1.0 0.7 Monetary indicators Credit to private sector (annual change inYO) 9.1 23.1 26.0 15.6 24.1 25.8 24.5 17.8 19.5 Growth of M 2 (%) 13.9 11.3 10.2 9.6 17.2 14.2 13.0 14.6 11.8 11.8 10.4 Price indices Real interest rates , 11.9 12.6 11.8 11.2 Consumer price index (Yochange, annual average) 3.1 3.1 3.6 5.0 12 7.5 5.5 4.5 3.0 3.0 3.0 GDP deflator (?hchange) 3.1 3.0 3.6 5.0 9.4 7.4 9.5 -0.9 3.0 3.0 3.1 a. GDP at factor cost b. "GNFS" denotes "goods andnonfactor services" c. Includes net unrequitedtransfers excluding official capital grants d. Includes use ofIMFresources e. Consolidatedcentral government 56 CASAnnex B8: OperationsPortfolio (IBRDDDA andGrants) As of Date 2/25/2009 Active Proiects DifferenceBetween LastPSR Original Amounts Expectedand in US$ m Actual Supervision Rating Disbursements Project - -IP Frm ID ProjectName DO IDA Grant Undisb. Orig. Rev'd PO89968 DJ-FloodEmergencyRehabilitation MS S 2005 6.4 2.1 0.23 -2.07 -0.01 PO71062 DJ-HealthSector DevelopmentProject S S 2002 15.0 1.97 -0.85 PO86379 DJ-PowerAccess andDiversification MS MS 2006 7.0 5.00 4.97 PO86994 DJ-Second SchoolAccess and Improvement MS MS 2006 10.0 4.51 3.48 PO88876 DJ-UrbanPovertyReductionProgram S S 2008 3.0 2.80 0.09 OverallResult 38.4 5.1 14.52 5.62 -0.01 Numberof Closed Projects 16 IBRDnDA *' Amount (US$m) Total Disbursed(Active) 32.16 of which has beenrepaid 0.00 TotalDisbursed(Closed) 130.07 of which has beenrepaid 11.77 Total Disbursed(Active + Closed) 162.23 o fwhich has beenrepaid 11.77 Total Undisbursed(Active) 14.52 Total Undisbursed(Closed) 0.00 Total Undisbursed(Active +Closed) 14.52 * Disbursementdata are updatedat the first week o f the month Intendeddisbursementsto-date minusactualdisbursementto-date as projectedat appraisal 57 IBRD 33396R DJIBOUTI SELECTED CITIES AND TOWNS MAIN ROADS REGION CAPITALS RAILROADS NATIONAL CAPITAL REGION BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES 42°E 43°E To REP. OF Assab ERITREA YEMEN DJIBOUTI Khôr `Angar Daddato O B O C K Dorra ETHIOPIA Sartai Balli Malah 12°N T A D J O U R A H 12°N Obock Doubie Randa To Bati G u l f o f A d e n Tadjourah Day 1783 m Lake Galafi Assal Plain of Plain of Sagallou Gulf ofTadjourah GagadeGagade Ambado DJIBOUTI D J I B O U T I Arta Plain of Plain of Yoboki Ambouli HanleHanle ChEbelley Chebelley Damerjog Loyada Cheiketi Goubetto A R T A PETIT BARA PETIT BARA D I K H I L Hol Hol Hol Hol GRAND GRAND BARABARA Beyade ' A L I Lake Plateau S A B I E H To Mouloua Abbé of Dakka Berbera Ali Adda Dikhil 'Ali Sabieh Plain of Plain of SOMALIA GobaadGobaad To As Ela Dira Dawa 11°N Modahtou Gobaad 11°N 0 4 8 12 16 20 Kilometers This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank 0 4 8 12 16 20 Miles Group, any judgment on the legal status of any territory, or any 42°E 43°E endorsement or acceptance of such boundaries. JUNE 2007