The World Bank Group Quarterly Publication - The World Bank Middle East Department - Lebanon FIRST/SECOND QUARTER 2010 57791 In this edition Climate Change: Middle East Faces Looming Challenges First/ Second Quarter 2010 1 Editorial Team Contents In this edition Syria EDITORIAL 3 Lebanon Iraq Iran Climate Change and the Jordan Middle East 4 LEBANON EDITOR-IN-CHIEF Social Impact Analysis for the Hedi Larbi Electricity and Water Sectors 10 Director-Middle East Department SYRIA To Order World Bank Publications: publications.worldbank.org/ecommerce For Information on World Bank Programs: www.worldbank.org Impact of Drought and Climate Contacts Change on Agriculture 18 In Beirut Mona Ziade The World Bank Bouri House JORDAN Abdallah Beyhum Street Beirut Central Distrct Macroeconomic Outlook in the Phone: +961-1-987800 Email: mziade@worldbank.org Context of the Global Turmoil 26 In Washington Najat Yamouri The World Bank IRAQ MSN H10-1002 1818 H Street NW, Washington DC 20433 USA Zooming in on Energy Sector as Phone : 202 458 1340 Email: nyamouri@worldbank.org Part of Reconstruction Drive 34 EDITORIAL BOARD (in alphabetical order): Demba Ba Ziad Badr Asaeel Barghuthi Janet Dooley Zeina El Khalil Jean Michel Happi May Ibrahim Pilar Maisterra Stefano Mocci Marian Mohamed Saleh Simon Stolp Najat Yamouri Mona Ziade First/ Second Quarter 2010 2 The World is Changing – And So is the World Bank! T he World Bank Group has emerged from this year’s Spring In a previous issue of Horizons, we addressed the global recession Meetings with a resonant vote of confidence in its poverty-reduction and how the Bank and countries of the region partnered to overcome mandate and strong support for its vision of a multi-polar world its adverse impact. In this issue, we selected Climate Change, another economy, where the developing and developed nations pool their serious challenge the region is - and will be - facing for some time to resources and work more in partnership to overcome the global come. Climate Change, in particular its impact on water resources - a recession and serve global public goods in a sustainable manner. rare and precious commodity in our region – is unequivocal. From available data, we will explore natural conditions and examine some The Development Committee, which represents the 186 stakeholders of the political economy of Climate Change and how severely its im- and holds the purse strings, endorsed an historic US$86.2 billion capi- pact will be on MENA. We will attempt to outline areas where the tal increase to support the Bank’s strategic directions in the aftermath World Bank and MENA countries should partner to address Climate of the financial meltdown. Interestingly, the capital increase, the first in Change challenges under a framework of regional cooperation. 20 years, was committed by the richer economies as well as developing countries, underscoring multilateralism and burden-sharing. Indeed, The impact of Climate Change could be disastrous to the world’s the decision was partly motivated by the Bank’s swift response to the poorest countries. It could disrupt people’s access to basic needs global crisis with commitments since 2008 topping US$105 billion. The such as food, water and protection from extreme weather. Those Bank’s rapid and quality response has strengthened the institution’s that will suffer the worst consequences of Climate Change have leading role in facing the present-day development challenges. contributed the least to the problem because they do not own or use many goods that require fossil fuels to operate and as such The capital increase also signaled support for the extensive reforms have been the least contributors to the depletion of our planet. underway in the World Bank Group to reflect the post-crisis changes in the dynamics of the world economies. Significantly, the Spring In the previous issue of Horizons we had examined the issue of water Meetings culminated in an increase in the voting power of developing resources in MENA, which is the most water scarce region in the countries from 44 percent to 47, with a promise to raise that to 50 world and where per capita availability in the region is predicted to percent in due time. This gives developing countries a louder voice halve by 2050 as the population grows. The conclusion was that in the Bank’s decision-making process to better reflect the realities scarcity was only one of the water-related challenges facing MENA of the new multi-polar global economy, where some countries may countries; and climate change is another issue: altered rainfall be lagging behind in certain aspects of social and economic develop- patterns due to Climate Change; shifting demand structures due ment, yet they still carry weight as global economic players. to growing industrial and urban pollution; rising sea levels; and the consequences of unpredictable more frequent severe weather The world is changing. And sweeping changes in the World Bank changes (drought and floods) all combine to complicate efforts Group are just around the corner. of governments and countries to adapt, mitigate and continue to develop. Additionally, geopolitical conflicts have and will con- The institution is poised to begin as of July 1 consecutive reforms tinue to contribute to the obstruction of reliable cross-border that aim to consolidate transparency in its work and efficiency water-sharing arrangements. in delivering services to client countries. This process includes a ground-breaking access to information policy, governance and This proves that countries in the region will need to invest in anti-corruption initiatives, a new knowledge strategy, invest- knowledge and institutions to: (i) understand climate change and ment lending reform and decentralization, to name but a few. its impact on their ecological systems in the broader sense of the word “ecology” (economy, society, infrastructure, natural resources Skeptics might have argued that the Bank’s preoccupation with etc…); and (ii) develop and implement mitigation and adaptation the global recession would derail the course of reform. Instead, strategies in collaboration with neighbors. While complying with it provided an added incentive to aggressively consolidate its global protocols and agreements, countries in the region need role as the leading development institution that is positioned well access to the wealth of resources (technical and financial), which to swiftly respond to crises with a unique mix of quality policy developed countries have to make available to address this global advice and adequate financial support. The additional capital will challenge. In doing so, MENA countries can position themselves to enable the Bank to further sharpen its strategic focus where it transform the challenges of climate change into development oppor- can add most value, helping countries to: better target the poor tunities. This is what we intend to discuss in this issue of Horizons. and vulnerable; create opportunities for growth with a special focus on the business environment and infrastructure; promote Hedi Larbi global collective action on issues from Climate Change and trade Director to agriculture, food security, energy, water and health; strengthen Middle East Department governance and anti-corruption efforts; and prepare for crises. Editorial / First/ Second Quarter 2010 3 Climate Change and the Middle East - by Dorte Verner* and Jesse Biroscak** The Earth is getting warmer. Glaciers around the world are melting, droughts and floods are becoming more frequent, sea levels are rising, and the ocean is becoming warmer and more acidic. The climate is changing and already affects the lives of the people living in the areas impacted by such changes. This article summarizes the information available on how and why the climate is changing. It explores some of the political economy of climate change and how that can directly impact the Middle East and North Africa (MENA). Three broad areas are outlined where the World Bank can help MENA countries to address http://www.globalwarmingart.com/wiki/File:Instrumental_Temperature_ climate change challenges under a framework Record_png (other sizes available on the website – please note the licens- ing agreements on the same page. Use appropriate citation methods.) of regional cooperation. General recommen- dations are subsequently offered for countries Why has the Earth gotten warmer, especially in the past few and individuals in MENA regarding actions to decades? El Niño cycles do not last long enough to explain a take to adapt to and mitigate the effects of warming trend this sustained; volcanoes did not cause the in- climate change. The article concludes with a crease because they have not been less active over that period (decreased volcanic activity means less blocked sunlight from description of climate financing. discharged particles, which in turn means a warming effect); and the Sun has actually cooled slightly, so that cannot have Background caused the warming. We are experiencing the warmest temperatures in over 400 years. Throughout the Earth’s history, the climate has fluctuated We do know that specific molecules, like carbon dioxide and on time scales ranging from hundreds of thousands of years (the methane, are produced primarily by burning fossil fuels such ice ages), to decadal or even year-to-year variations (El Niño cy- as oil, coal, and gas. The period since the beginning of the In- cles). These changes are caused by variations in the Earth’s orbit, dustrial Revolution has seen a dramatic increase in the levels of differences in the amount of light coming from the Sun, fluc- greenhouse gases emitted into Earth’s atmosphere. We know tuations in volcanic activity blocking warmth from the Sun, and that greenhouse gases warm the air and we know that when variability in ocean currents and temperatures that change the known increases in greenhouse gases are put into climate mod- way air circulates. However, the warming trend since the begin- els, they account for all of the unexplained warming of the past ning of the Industrial Revolution in the late 18th century does four or five decades. For those reasons, the Intergovernmental not fit with any of those known cycles. The average temperature Panel on Climate Change (IPCC) declared in 2007 that “[t]here on Earth increased 0.6 degrees Celsius (°C) from 1800-1900 and is very high confidence that the global average net effect of 0.74 °C from 1900-2000. In 1910, the global average tempera- human activities since 1750 has been one of warming,”2 which ture was around 14.45 °C. Now, the global average temperature means that there is a more than 90 percent chance that humans is approximately 15.45 °C, registering a 1°C increase. In fact, the are causing the climate to warm. past decade was the warmest since temperatures began to be reported in 1880, and 2009 was the warmest year on record, Science that is the warmest in over 400 years1. To better comprehend how climate change works, imagine that the atmosphere is a big, porous screen that allows heat-trap- ping radiation to escape after the Sun heats up the Earth. When specific molecules clog up the screen until the radiation can no * Senior Economist ** Consultant 2 IPCC - http://www.ipcc.ch/publications_and_data/ar4/syr/en/ 1 NASA - http://www.giss.nasa.gov/research/news/20100121/ mains2-2.html First/ Second Quarter 2010 / The Middle East 4 The Middle East longer easily escape, the Earth is left hotter overall. The amount immediately, we will lose between 5-20 percent of the global of carbon dioxide in the atmosphere has increased from 280 gross domestic product (GDP) each year due to the negative parts per million (ppm) in pre-industrial times to around 387 effects of climate change. The Report estimates that costs as- ppm today. Oceanographers estimate that atmospheric levels of sociated with addressing the problem (i.e., the costs to check carbon at 360 ppm will doom Earth’s coral reefs if sustained or reduce global greenhouse gas emissions) can be limited to 1 over the long term. Our current levels of carbon emissions have percent of global GDP per year if we act now.3 already caused a 1 °C increase in global temperatures, which has visibly melted 39.2 percent of Arctic glaciers in 28 years, shown The United States historically emitted the most carbon dioxide in the picture below, courtesy of NASA. until around 2006 when China surpassed it. However, when the total emissions are divided per capita, the United States stays at the top. It is noteworthy that countries in the Middle East emit 6.4 tons of carbon dioxide per capita, whereas China emits 4.6 tons. While industrialized countries like the United States are historically responsible for the majority of climate change, it is critical that the issue be given attention by both developed and developing countries in order to mitigate the effects of green- house gas emissions. http://www.350.org/about/science Figure 1. Temperature changes relative to the corresponding average for 1901-1950 (°C) from decade to decade from 1906 to 2005 over The levels of methane, another carbon-based greenhouse gas the Earth’s continents, as well as the entire globe, global land area and that is 23 times more potent than carbon dioxide, have more the global ocean (lower graphs). than doubled from 700 parts per billion to 1,745 parts per bil- lion. It is emitted by burning fossil fuels, by raising livestock, and through accumulation of waste in landfills. These two gases are at their highest levels in at least 650,000 years and are proven to cause the climate to warm. A stated increase of 1 or 2 °C indicates a rise in the average global temperature. However, in some places the temperature increases are much higher or much lower than the average. The many ef- fects related to temperatures increases though, such as glacial melt, rising sea levels, intensification of hurricanes and wind- storms, and the extinction of sea life (e.g., from coral bleaching), have wide-ranging ramifications throughout the food chain. The impacts of climate change also disrupt the world’s poorest countries the most by interfering with people’s access to basic needs such as food, water, and protection from extreme weather. Those that will suffer the worst consequences of climate change have contributed the least to the problem because they do not own many goods that require fossil fuels to operate. Countries The black line indicates observed temperature change, while the colored will need to reduce current carbon emissions through a process, bands show the combined range covered by 90% of recent model simu- called mitigation, to prevent the further warming of the climate. lations. Red indicates simulations that include natural and human fac- tors, while blue indicates simulations that include only natural factors. Due to the slow levels of action to mitigate the effects of cli- Dashed black lines indicate decades and continental regions for which mate change, countries will also need to develop ways to adjust there are substantially fewer observations (from: http://www.ipcc.ch/ to a warmer climate, a process called adaptation. publications_and_data/ar4/wg1/en/faq-9-2.html) Climate Change and Political Economy Climate change is having a very serious impact on growth and 3 Stern Report - http://webarchive.nationalarchives.gov.uk/+/http:/www. development. The Stern Report estimates that if we do not act hm-treasury.gov.uk/media/9/9/CLOSED_SHORT_executive_summary.pdf The Middle East / First/ Second Quarter 2010 5 Climate Change and the Middle East Global Action to Reduce Greenhouse Gas Emissions sources, beneficiary countries, and management of the climate There have been multiple efforts to address climate change over finance mechanism have yet to be determined. The agreement the past 18 years. In 1992, the Rio Declaration on Environment also addresses issues of technology, adaptation, forestry, and and Development set out to guide future sustainable develop- climate financing. However, the Accord is not legally binding; ment around the world. The United Nations Framework Con- further negotiations will continue throughout 2010 to COP-16 vention on Climate Change (UNFCCC) was established in 1994, in Cancun, Mexico. and every member state of the UN now uses that Framework to consider what can be done to slow climate change and to deal It is especially noteworthy that the developing countries known with its consequences. Each year, the UNFCCC convenes a Con- as BASIC (Brazil, South Africa, India, and China) broke the dead- ference of the Parties (COP) to further negotiate these issues. lock at the end of the Copenhagen negotiations to reach an ac- The latest was COP 15 in Copenhagen; COP 16 will be held in cord. The rapidly developing economies of Asia, Africa, and Latin Cancun, Mexico in November 2010. America have emerged as keys to the solution. Climate Change and The Mena Region The MENA region is particularly vulnerable to climate change. As one of the world’s most water-scarce regions, it has a high dependency on climate-sensitive agriculture and a large share of its population and economic activity are in flood-prone urban coastal zones. On the other hand, societies in MENA have been under pressure to adapt to water scarcity and heat for thou- sands of years, and have developed various technical solutions photograph by Dorte Verner and institutional mechanisms to deal with these environmental constraints. However, the speed of the current climate change and societal changes due to population growth and urban de- velopment mean that people and communities may no longer Syria - Herds graze in the rural areas of Syria be able to adapt to these changes without assistance. In 1997, countries within the UNFCCC adopted the Kyoto Pro- MENA, therefore, is a valuable repository of traditional and in- tocol, which set binding emissions targets for 37 industrialized stitutional knowledge, which, if preserved and made accessible, countries and the European Union. These amounted to an aver- could prove to be an important contribution to global efforts to age of a 5 percent reduction against 1990 emissions levels over address climate change. the five-year period 2008-2012. Unfortunately, that reduction level, which many countries have not yet achieved, is insuffi- Consequences in MENA cient relative to what needs to be done to slow climate change. According to the latest IPCC assessment, MENA is predicted to be- The use of the Kyoto Protocol as a basis and stepping stone come even hotter and drier during the coming years. Higher tem- from which countries might advance to larger reductions was peratures and reduced precipitation will increase the occurrence of well intended, but the United States never signed on and the droughts, an effect that is already materializing in North Africa. An Protocol never gained enough momentum. additional 80–100 million people are estimated to be exposed to water stress by 2025, which is likely to result in increased pressure Most recently, in December 2009, COP 15 attempted to develop on groundwater resources already being extracted in most areas a successor to the Kyoto Protocol. The resulting Copenhagen beyond the aquifers’ recharge potential. Agricultural yields, espe- Accord sets a goal of limiting global temperature increases to cially in rain-fed areas, are expected to fluctuate more widely, ulti- 2 °C. Developed countries further agreed to provide $30 billion mately falling to a significantly lower long-term average. In urban yearly in “fast start” funding by 2012, and additional long term areas in North Africa, a temperature increase of 1-3 °C could expose financing of $100 billion a year from 2020. Still, the financing 6–25 million people to coastal flooding. In addition, heat waves, First/ Second Quarter 2010 / The Middle East 6 The Middle East an increased “heat island effect,” but rather whether projects water scarcity, decreasing water Good development policy is good will mitigate or exasperate the quality, worsening air quality, and adaptation and mitigation policy. Many causes of climate change men- ground ozone formation are likely countries implement individual projects tioned in this article. Are new to affect public health, and more public buses running on natural generally lead to challenging designed to adapt to or mitigate the gas or renewable energy? Or are living conditions. effects of climate change. Such efforts, they running on a petroleum- however, are often insufficient to create based product? Will the new Global models predict sea levels road be built using carbon- rising from about 0.1 to 0.3 me- large-scale, meaningful change. neutral materials? Or will it ters by the year 2050 and from be build with concrete and as- about 0.1 to 0.9 meters by 2100. For MENA, the social, econom- phalt, which increase the carbon dioxide in the atmosphere both ic, and ecological impacts are expected to be relatively higher during and after production? Questions like these are essential to compared to the rest of the world. Low-lying coastal areas in ask at every step of national development in order to reduce the Tunisia, Qatar, Libya, UAE, Kuwait, and particularly Egypt are at anthropogenic impact on the climate. significant risk. In order to reduce vulnerability and increase resilience through ac- Impacts of Climate Change on Regional Development tions geared towards adaptation and mitigation, governments can: Much of the progress in the region to tackle high unemploy- • Raise awareness on the effects of climate change in ment and integration with the global economy can be jeopar- all levels of society dized by climate change. Income and employment may be lost • Raise awareness on how populations can adapt to and as a result of more frequent droughts in rural areas and floods mitigate the effects of climate change and sea surges in urban and coastal areas. Changes in tempera- • Re-evaluate development plans, policies, and process- ture and precipitation patterns may result in damage to stra- es to ensure that these and individual projects account tegic economic sectors such as tourism or high-value-added for the effects of climate change agriculture. The combination of such impacts is likely to slow • Make projects “climate neutral” – this means changing down the economic reform processes and ultimately offset the government structures to consider where materials come growth benefits generated by oil revenues. from, how materials will be used, and what functions fi- nal products will perform Climate change also poses many challenges to the region’s cities, • Develop and use renewable resources, such as solar, which represent hubs for economic, social, cultural, and political wind, and hydropower, for energy production. activities. Rising sea levels could affect 43 port cities—24 in the Middle East and 19 in North Africa; a 0.5 meter rise would leave In order to reduce vulnerability and increase resilience through more than 2 million people displaced in Alexandria, Egypt and actions geared towards adaptation and mitigation, individuals cause $35 billion in losses of land, property, and infrastructure, and communities can: as well as incalculable losses of historic and cultural assets. • Actively seek out information on local causes of cli- mate change Policy Directions • Actively discuss such information with friends, rela- Good development policy is good adaptation and mitigation pol- tives, and colleagues, perhaps forming groups to act to icy. Many countries implement individual projects designed to adapt or mitigate the effects of climate change based on adapt to or mitigate the effects of climate change. Such efforts, such information however, are often insufficient to create large-scale, meaningful • Work with local authorities (e.g., community leaders, change. Basic structural changes to government policies are es- Sheikhs, mayors, political representatives, business lead- sential to address one of humanity’s greatest challenges, rather ers) on climate change related issues and urge them to than piecemeal and uncoordinated actions. Governments must act upon that information. not ask themselves which projects will deal with climate change, The Middle East / First/ Second Quarter 2010 7 Climate Change and the Middle East developed countries for adaptation, technology transfer, and mit- igation. Mobilization of those resources through a shift towards low-carbon economies will help to both adapt to and mitigate the effects of climate change. Such shifts are already creating significant new business opportunities for countries to invest in new technologies and energy efficiency. China, for example, now possesses the largest installed wind power capacity and is the world’s largest producer of photovoltaic (PV) solar panels. photograph by Dorte Verner Big countries, however, are not the only ones that can benefit from such investments. More specifically, low carbon growth can generate important national benefits for MENA’s econo- Lady Sells Vineleaves in Syria mies, some of which include the productivity gains and fis- cal savings associated with improved efficiency in energy use, The World Development Report 2010 sums up the above improved air quality, and reduced traffic congestion. However, policy recommendations, technological barriers and low-priced energy in the region pro- “[Adaptation and mitigation challenges] can be tackled vide limited economic incentives – in the absence of external through climate-smart policies that entail acting now, acting financial support – for a large-scale pursuit of low carbon de- together (or globally), and acting differently. Acting now, be- velopment options. cause of the tremendous inertia in both climate and socioeco- Acting now, because of the tremendous Climate finance instruments, nomic systems. Acting together, inertia in both climate and socio- like the Clean Technology Fund to keep costs down and protect (CTF), finance concentrated so- the most vulnerable. And acting economic systems. Acting together, to lar power (CSP) projects in Alge- differently, because a climate- keep costs down and protect the most ria, Egypt, Jordan, Morocco, and smart world requires a trans- Tunisia and can play a key role formation of our energy, food vulnerable. And acting differently, in unlocking MENA’s potential production, and risk manage- because a climate-smart world requires in renewable resources and en- ment systems.”4 a transformation of our energy, food ergy efficiency. Moreover, car- bon markets and international The World Bank is ready to as- production, and risk management agreements like the Copenha- sist countries to make the above systems. gen Accord have already started changes by providing conces- generating some of the neces- sional financing and technical assistance. National climate sary funds and standards for climate adaptation and mitigation. change strategies can be developed to specifically address cli- COP 13 in Bali, for example, set out a roadmap for a new inter- mate change related issues in each country, and ministries can national agreement on the reduction of greenhouse gas emis- work with the World Bank to effectively and efficiently imple- sions. It also launched a series of initiatives to help countries ment such strategies. adapt to climate change, including the activation of an “Adap- tation Fund” to be entrusted to the World Bank, with the Global Climate Financing Environment Facility (GEF) operating as secretariat of the Fund. Developing countries can obtain support to assist efforts to- wards adaptation and mitigation and are not expected to take The GEF and the World Bank Group partnership strives to protect action on their own. Political and economic mechanisms, called the global environment by promoting environmentally sound and climate finance instruments, are emerging to provide funds from sustainable economic development. One such example involves CSP in the Middle East and North Africa region. There, beginning 4 http://siteresources.worldbank.org/INTWDR2010/ in the late 1990s, GEF grants of $40 million in Egypt and Morocco, Resources/5287678-1226014527953/Overview.pdf - page 10 coupled with a $200 million investment from the Bank Group, First/ Second Quarter 2010 / The Middle East 8 The Middle East served to stimulate a renaissance of interest in the technology. This led to an investment scale-up project in the region through a $5-6 billion endorsement from the CTF combined with conces- sional co-financing of $750 million, helping to make the CSP technology commercially competitive with conventional electric- ity in regions with high annual direct solar insolation.5 Conclusion Climate change is already occurring and thousands of people in the MENA region feel its affects on a daily basis. Dying crops due to excessive, limited, or non-existent rainfall, longer travel times to collect water, and increases in dengue or other diseases that impact human health and income are all problems exac- erbated by climate change. Projects, such as that in Morocco and Egypt involving CSP, are raising awareness levels among all stakeholders in the MENA region regarding the significance of climate change. Other similar projects are also working to adapt to and mitigate the effects of increasingly frequent droughts and a looming water supply shortage. While effective adap- tation to climate change will ultimately depend on countries’ commitment, the World Bank stands ready to assist in main- streaming adaptation measures in MENA’s development agenda during efforts to address climate change challenges. 5 Insolation is a measure of solar radiation energy received on a given surface area in a given time. It comes from the words “incident solar radiation.” The MENA Region has exceptionally high insolation. The Middle East / First/ Second Quarter 2010 9 Lebanon Social Impact Analysis for the Electricity and Water Sectors - by Sebnem Akkaya*, Nils Junge **and Wael Mansour*** Introduction good electricity supply, with rationing limited to three hours a day, but the city receives the lowest water supply This Quick Note, is based on the report “Lebanon: Social Im- per household in Lebanon. pact Analysis for the Electricity and Water Sectors”, issued by • A key problem in the water sector is a disconnect World Bank’s Middle East and North Africa Region’s Social and between supply and demand. The absence of a meter- Economic Development Group in June 2009. The report consid- ing system means households pay a fixed fee for a fixed ers implications for the consumer of current service provision amount of water supply (or allotment). Solving this issue and impending reforms in Lebanon’s utility sector. It assesses: i) would rationalize water consumption to a degree. There how different categories of households, and especially the poor, appears to be an informal understanding between wa- are affected by deficient electricity and water service; ii) the po- ter companies and households: many households don’t tential social impact of alternative reform scenarios, including receive their water allotment, and the water companies tariff changes in the case of electricity and metering in the case often don’t pressure households to pay their bills. The key of water; and iii) implications of better cost recovery measures problem in the electricity sector is high cost of alternative in both sectors. supply, which is utilized by 58 percent of households. • Virtually all households are connected to the electric- The findings are based on analysis of primary data collected ity network. Connection rates for water are 80 percent. from households; sector assessments undertaken recently by However, given that water supply is inadequate in terms the World Bank and by other domestic or external agencies; and of both quantity and quality, connected households tend from consultations with stakeholders. Relatively little research to purchase from alternate sources. on the energy and water sectors in Lebanon has been conducted • Households have limited choice (on quality and cost) to date on the household/consumer perspective1. when it comes to electricity generation, with most buy- ing from generator companies operating in the grey The Electricity and Water Sectors in Lebanon: The electric- economy. There is a somewhat larger menu of options for ity and water sectors face major challenges in increasing supply purchasing water, available from tanker trucks, to wells, and improving service. A striking aspect of the electricity sector to large gallon bottles, and small bottles. is its heavy dependence on informal private generation operating • Willingness to pay for improved electricity service is outside any state supervision or guiding framework. In both the much higher for electricity than for water, reflecting the formal and informal water sector, quality concerns are of para- high cost and limited choice of electricity alternatives. mount importance—quality is a public health issue and there are serious additional socioeconomic consequences. Conclusions and Recommendations: The overarching challenge facing Lebanon’s public electricity and water sectors will be to The report points to the following key similarities and differenc- establish trust with consumers. Major investments in each sector es between the two sectors from a social impact perspective: targeting infrastructure, management and while simultaneously • Both sectors suffer from inadequate supply. In the improving performance human resources will need to take place electricity sector this takes the form of highly uneven ra- while increasing revenue from consumers who have little faith in tioning. Water supply on the other hand, is constrained the system and want to see concrete results or credible action. in every region by limited infrastructure capacity, popu- The following remarks consider each sector separately. lation density and demand. Both sectors experience high commercial and technical losses. Beirut households enjoy Electricity: Design a more effective and simplified tariff struc- ture. The current tariff structure is regressive and will do little * Lead Economist, MNSPR to shield the poor from any future tariff increases. The inverted ** Consultant, MNSED tariff block is not progressive—this is partly because it subsidiz- *** Consultant, MNSPR es all households and partly because effective kWh prices differ 1 The report should be read in conjunction with the “Republic of Leba- markedly from the quoted prices. This is especially so for low non Electricity Sector Public Expenditure Review, Report No. 41421-LB, electricity consuming households. Washington DC, January 31”; and “World Bank (forthcoming), Republic of Lebanon Water Sector Public Expenditure Review, Washington DC” which provide in-depth analysis of technical and institutional issues. First/ Second Quarter 2010 / Lebanon 10 Lebanon Ensure proper sequencing in implementing policy measures. Although compared to other problems in water provision, reduc- The burden resulting from EdL’s (Electricite du Liban) service de- ing expenditures for consumers is not the top priority, the costs cline has increased significantly, despite the fact that the cost which consumers bear in terms of quality of service—poor reli- of electricity purchased from EdL has remained relatively low ability and potential health risks—are significant. A focus on im- for consumers. However, increasing tariffs to cost recovery lev- proving quality and reducing losses, if accompanied by a public els without introducing commensurate service improvements awareness campaign, would have a direct effect on welfare. would likely meet with resistance. Consumers must feel that the burden of reform is not placed entirely on their shoulders but is Expand metering - The current flat fee system is not serving shared with EdL. providers or consumers well. Water companies cannot charge the marginal cost of production, and consumers do not get Reduce rationing, especially in the areas outside Beirut which what they pay for. Pilot programs show that metering can be in- experience long blackout hours. Among other things, this will troduced, but unless metering is either region-wide or metered have the effect of readjusting the burden imposed by rationing households are able to pay by volume, the benefits of metering from the poor to the non-poor. Although there may be good will be limited. reasons for keeping rationing in the capital to a minimum, it gives rise to social inequities. Beirut households have higher To increase revenues, RWAs will need to address household con- welfare levels and they are most able to afford paying for ex- cerns. RWAs can increase revenues in two ways, through im- pensive substitutes. Most households in other regions must proved bill collection and through tariff increases. In either case, choose between going without electricity and spending signifi- RWAs will need to revise the informal and formal contractual cant amounts on private generation. contractual agreements with households, raising tariffs and in- stalling meters to link supply with demand, while also investing Establish operating guidelines for the informal electricity sector. in improvements in quality. They will also need to strengthen The informal electricity sector, served by hundreds of private collection enforcement mechanisms. To be successful, the new generator businesses, provides up to 30 percent of Lebanon’s contractual arrangement will need to spread the benefits and electricity and is an indispensible service to many households. costs between consumers and water companies in a manner Yet the sector lies entirely outside the legal framework and does acceptable to both. not pay taxes to the state. It must be acknowledged that private generation will play a significant role in electricity generation for years to come. Hence, identification of proper operating guidelines that will protect and benefit consumers while ensur- ing continued availability of this alternative source should be given consideration and merit additional research work. With- out dampening private sector activity, or generating layers of bureaucracy, the guidelines should attempt to: • bring private generator businesses into the formal sector so that customers have access to means of redress for losses or damage incurred through faults on the sup- plier’s side; • enable the state to tax the sector like other businesses; • set technical standards for service; Water - Invest in improving water quality. In Lebanon, the bur- den on poor households comes from poor quality and low wa- ter supply, rather than high expenditures. Water expenditures by the low income households are in in line with World Bank recommendations of 3 to 5 percent of household budget, but could be reduced if households relied less on alternative sources. Lebanon / First/ Second Quarter 2010 11 The Future of Agriculture in Lebanon under Climate Change - by Julian Lampietti* L ebanon’s Mediterranean climate with its abundant winter adequate water storage facilities, much of Lebanon’s fresh water rains and warm summers has been one of the region’s most flows from its rivers directly into the sea. Between a growing important natural assets for millennia. Lebanon has the high- population and the effects of climate change, Lebanon may well est average annual rainfall of any country in the Middle East be in a state of water scarcity by the middle of this century (823 mm/year) and one of the highest levels of per capita water (figure 1).5 Historically the snow capped Lebanon Mountains resources (1,110 m3).1 Lebanon’s farmers can take advantage of provided a form of natural water storage as slow snow melt an early growing season to plant high value fruit and vegeta- through the summer months fed the springs and rivers of the bles, and the country’s location on the Mediterranean between lowlands. But satellite images taken over the past few decades Europe and the Gulf states gives it access to lucrative markets record a significant loss of snow cover on mountain peaks. And to sell their produce. But in spite of these natural advantages, warmer temperatures are making the snow that is there melt one fifth of Lebanon’s farmers continue to struggle with pov- faster, increasing the risk of spring flooding while reducing run- erty, and part-time farming on fragmented plots constrains off when it’s most needed in the summer.6 productivity. Irrigation systems and water storage facilities are unevenly distributed across the country, and most are badly in Figure 1. Climate Change Effects on Renewable Fresh Water Availabil- need of expansion and modernization. And more and more of ity per Capita, 2004 and 2050. the country’s best agricultural land is being swallowed up by its ever expanding cities.2 Global climate change will make these challenges to Lebanon’s agricultural sector even more pressing. Lebanon’s location on the Mediterranean coast will protect it from the severe warming projected for some other countries in the Middle East, but temperatures, which have already been rising steadily over the past fifty years, will continue to go up. The Intergovernmental Panel on Climate Change’s 4th report projects that by 2050 the average temperature in Lebanon dur- Source: Doumani, Fadi, 2009, Environmental Degradation, Remedial and ing the winter months will rise less than the world average (by Averted Costs in Northern Lebanon Coastal Zone, METAP. Washington, D.C. about 1 degree), but during the dry summer average tempera- Note: Total renewable fresh water is the sum of: Total internal renew- tures may increase by as much as 2 degrees.3 Precipitation in able water resources, which is the long-term average annual flow of the form of rain and snow will decrease in the critical winter rivers and recharge of aquifers generated from endogenous precipita- months by about 13 percent compared to current levels, and the tion. Double counting of surface water and groundwater resources is already arid Lebanese summers will lose up to 7 percent of their avoided by deducting the overlap from the sum of the surface water and rainfall. Drought, already a significant problem in parts of the groundwater resources; and External renewable water resources, which is the sum of the total natural external surface water resources and the country, will become more frequent and more severe.4 external groundwater resources. Extrapolation based on a reduction among the three countries due to a combination of lower precipitation Agriculture in Lebanon will feel the effects of climate change and lower runoff with a margin of error of ±12.5%. mostly through the availability and distribution of water. In spite of the highest rainfall in the region, there are already shortages The exact impact of the warmer and drier conditions under cli- of water for irrigation during the dry summer months; without mate change on Lebanon’s agriculture are in the process of be- ing evaluated—Lebanon’s Second Communication to the UNFCC *Lead Program Coordinator, Agriculture and Rural Development, MENA 1 FAO 2009, Aquastat, FAO, Rome. is currently in preparation—but there is enough data from other 2 World Bank, 2010, Lebanon Agriculture Sector Note: Aligning Public Expenditures with Comparative Advantage, Washington,DC: World Bank. 3 As reported in Doumani, Fadi, 2009, Environmental Degradation, 5 Doumani, Fadi, 2008, Climate Change Adaptation in the Water Sector Remedial and Averted Costs in Northern Lebanon Coastal Zone, METAP. in the Middle East and North Africa: A Review of Main Issues, Washing- Washington, D.C. ton, D.C.: METAP. 4 Bou-Zeid, E. and M. El-Fadel, 2002, “Climate Change and Water 6 Shaban, Amin, “Indicators and Aspects of Hydrological Drought in Resources in Lebanon and the Middle East,” Journal of Water Resources Lebanon,” Journal of Water Resources Planning and Management Planning and Management, 343-355. 23:1875–1891. First/ Second Quarter 2010 / Lebanon 12 Lebanon areas to suggest some of the adaptations that Lebanon will need weaken Lebanon’s fiscal balance, making it more difficult for to introduce. The strategies that will make agriculture in Leba- the country to respond to sudden rises in world grain prices. non more productive under current climate conditions—outlined Increasing wheat production is a particularly poor prospect un- in the recent World Bank Lebanon Agriculture Sector Note—will der the hotter conditions of climate change which are likely to become even more critical to cope with a changing climate.7 dampen cereal yields.10 Agriculture is a small but stable part of the Lebanese economy; Table 1: Agriculture plays a relatively small role in Lebanon’s economy, the agricultural sector has made up a steady 6–7 percent of GDP but the country is very productive in terms of agriculture value added over the past decade. Compared to other countries of the Middle per square kilometer. East and North Africa this is a relatively small fraction of the total Country Agriculture Agricultural Agriculture Value economy, but with the exception of Egypt, Lebanon’s agriculture Value Added Employment Added (Constant value added per square kilometer is at least six times greater than (%of GDP) (% of Total 2000 US$) / Employment) Agricultural Land any other country in the region (Table 1). The fruit and vegetables (sq. km) that make up about two thirds of Lebanon’s agricultural produc- Egypt 13.0 29.9 556,549 tion are largely responsible for this high value-added,8 and im- provements in productivity in this sub-sector are likely to deliver Jordan 3.1 3.6 26,019 the highest dividends in terms of overall growth. Lebanon 6.1 12.0 278,163 Morocco 12.4 44.6 22,155 Syria 20.4 27.0 43,572 Tunisia 10.9 -- 28,172 Source: World Bank, 2009a; Chamber of Commerce, Industry and Agri- culture of Beirut and Mount Lebanon (CCIAB), 2009 Note: Ag. Value Added Data is for 2007, Ag Employment data is for 2003 with the exception of Morocco (2006) and Lebanon (2009 estimate). All data is from the World Bank, except for Lebanon agriculture employ- ment data (CCIAB, 2009). www.istockphoto.com Tobacco farming is currently supported by massive government subsidies (US$ 51.1 million in 2008) that help to support 24,000 farmers. But the future of the tobacco industry in Lebanon does not look promising. The World Health Organization’s Framework Grapes of Lebanon Convention on Tobacco Control and Lebanon’s goal of accession into the World Trade Organization will make it difficult to justify Cereals and tobacco, which make up the remaining third of pro- the high cost of subsidizing this sector. Transitioning away from duction, are not well positioned for growth. Lebanon currently im- tobacco for dependent farmers will be difficult, but studies from ports about 83 percent of its cereals making it very vulnerable to other countries have shown that uncoupled monetary support the kind of food price shocks that rocked the Arab world in 2008.9 as well as extension services to provide information and techni- But increased domestic production of wheat does not appear to cal assistance about crop diversification can make the move to be a viable solution for the country’s food security. Converting other crops a viable alternative to perverse subsidies. agricultural land currently used for higher value fresh fruit and vegetables to wheat production would decrease exports and The high value fruit and vegetable sector in Lebanon can continue to prosper under new climate conditions only if irrigation, water 7 World Bank, 2010, Lebanon Agriculture Sector Note: Aligning Public storage, and water productivity are improved. The Government of Expenditures with Comparative Advantage, Washington,DC: World Bank. 8 Agricultural statistics reported for 1999. FAO 2009, Aquastat, FAO, Rome. 9 World Bank, 2009, “Improving Food Security in Arab Countries.” 10 World Bank 2010, WDR 2010, Development and Climate Change, Washington, DC: World Bank. Washington, DC: World Bank. Lebanon / First/ Second Quarter 2010 13 The Future of Agriculture in Lebanon under Climate Change Lebanon has adopted an ambitious irrigation strategy that aims of precipitation expected under climate change. Some of the to increase irrigation potential by 30 to 50 percent in the next 30 funds for these improvements could be obtained through the years. But the fragmentation of irrigation planning and manage- phasing out of the tobacco subsidy since more efficient irri- ment into numerous government gation will make conversion agencies has made it very diffi- Better water storage protects farmers to fruits and vegetables more cult to implement this strategy from both floods and drought, and well profitable for affected farmers. efficiently, and no overall master This kind of restructuring will plan has been formulated to pri- planned dams will be a key adaptation require a coordinated initia- oritize the investment programs to the variability of precipitation expected tive among many government and water-use of the various under climate change. agencies including the Ministry agencies. The hotter drier condi- of Finance (responsible for the tions under climate change will make it more urgent to adopt tobacco subsidy), the Ministry of Agriculture (administering the water efficient agricultural practices such as low-till cultivation, Green Plan), the Ministry of Energy and Water (guiding irriga- drip irrigation, rainwater harvesting and drought tolerant crop tion investment) and the Litani River Authority (responsible for varieties—as well as to fund better research and development the largest river basin in the country). and extension services to develop and bring these technologies to farmers.11 But water efficient practices must be accompanied by In order for Lebanon’s fresh fruit and vegetable sector to achieve limits on groundwater extraction or Lebanon’s aquifers, already its potential it will be necessary to increase its share of both threatened by salt water intrusion, risk dangerous depletion.12 the domestic and export markets. Some measures to lower the sector’s cost structure and increase competitiveness will also Improvements to irrigation will need to be accompanied by in- be good climate change adaptations: increasing irrigation ef- vestments in water storage capacity, which is now far below the ficiency, moving away from chemical fertilizers, and increasing level of other MENA countries: dam capacity accounts for only 5 incentives for long term investment by improving land tenure percent of total renewable water resources in Lebanon, against will lower both costs and vulnerability to climate extremes. Tar- geting high-end niche sectors that have higher premiums and more stable revenues is one promising avenue for expansion of the sector. Investments in quality control, safety and marketing will be important to develop this niche, particularly in order to penetrate lucrative European markets. More public investment in research and development—which is now below the develop- ing country average at only .4 percent of GDP—will be critical to find ways to improve food quality and safety within the re- gional context. The Government can also provide incentives for www.istockphoto.com more private sector participation in investments in cold stor- age, shipping, and information systems that help facilitate the timely transportation of perishable produce. Again, the major Olive Tree, Lebanon stumbling block to these kinds of coordinated efforts toward growth in the high value agricultural sector is the fragmenta- 56 percent in Morocco and almost 300 percent in Egypt. Better tion of decision making among Lebanon’s many governmental water storage protects farmers from both floods and drought, agencies. A critical recommendation of the Lebanon Agriculture and well planned dams will be a key adaptation to the variability Sector Note is to consolidate agriculture expenditures in the hands of a single institution, and to create a Food Quality and 11 World Bank 2010, WDR 2010, Development and Climate Change, Safety Directorate that would oversee the certification and Washington, DC: World Bank. marketing of the high value produce that promises to be the 12 Doumani, Fadi, 2009, Environmental Degradation, Remedial and future of agriculture in Lebanon. Averted Costs in Northern Lebanon Coastal Zone, METAP. Washington, D.C. First/ Second Quarter 2010 / Lebanon 14 World Bank Group Frees Up Development Data The World Bank Group access The World Bank Group said today it will offer free to more than 2,000 financial, business, health, economic and human develop- ment statistics that had mostly been available only to paying subscribers. The decision - part of a larger effort to increase access to information at the World Bank - means that researchers, jour- nalists, nongovernmental organizations (NGOs), entrepreneurs and school children alike will be able to tap into the World Bank's databases via a new website, data.worldbank.org “It’s important to make the data and knowledge of the World Bank available Experts say the Bank's open data initiative has the potential to stimulate more evidence-based policymaking in developing to everyone. Statistics tell the story countries by bringing more researchers and innovative analy- sis into the development process. The move is also likely to of people in developing and emerging stimulate demand for data and increase countries' capacity to countries and can play an important produce it, they say. part in helping to overcome poverty.” And, for the first time, data will be available in languages oth- World Bank President Robert B. Zoellick er than English, with an initial 330 indicators translated into French, Spanish and Arabic. Lebanon Partnership Program O n August 2, 2007, the World Bank’s Board of Executive Direc- improvements in the selected sites of Ba'albeck, Byblos, Saida, tors endorsed the World Bank’s Interim strategy Note (ISN). The Tripoli and Tyre, and (b) technical assistance services to strength- three pillars identified in the 2005 CAS continue to guide the en the capacity of the Directorate General of Antiquities, the Di- Bank's program in Lebanon with a shift in focus on supporting rectorate General of Urban Planning, and target municipalities early reform implementation. The three pillars are: in cultural heritage preservation and tourism development. (i) Governance for economic management and growth support; (ii) Development of human capital and the mitigation of Trust Fund for Lebanon the poverty effects of transition; and During the September 2006 Annual Meetings, the World Bank's (iii) Resource and environmental management. Board of Governors approved a grant of US$70 million for a Trust Fund for Lebanon to support the Government's recon- The ISN presents a program for 12 to 15 months focusing on struction efforts following the recent hostilities. The money analytical assistance backed by financial resources to advance comes from the Bank’s surplus, and does not involve any ad- the implementation of the medium term expenditure and social ditional debt burden for Lebanon. The Trust Fund is being used reform agenda. The program includes two Development Policy to scale up existing projects and advance projects already under Loans supporting the broader reform program with a particular preparation. Part of the grant was allocated to the International focus on the energy and social protection sectors. Finance Corporation (IFC), the private sector arm of the World Bank Group, which is working, in close coordination with the The Lebanon Portfolio consists of 8 active projects that are con- government on a program to rehabilitate Lebanon’s private sec- centrated in education, water, and infrastructure. Three of these tor, focusing, among other elements, on small and medium en- projects are funded by the International Bank for Reconstruc- terprises and the removal of administrative barriers. tion and Development (IBRD) and five are funded by the Leba- non Trust Fund (LTF). The Lebanon portfolio also contains four At the request of the Government, the World Bank carried out grants that are funded by the International Development Fund an Economic and Social Impact Assessment in 2006, which (IDF) and Post Conflict Fund (PCF). provided important inputs into the preparation of the Govern- ment’s reconstruction and reform program. The Government International Bank for Reconstruction and Develop- adopted this program on January 4, 2007 in advance of a Donor ment (IBRD) Conference which took place in Paris on January 25, 2007 where Ba'albeck Water Supply & Wastewater Project (US$43.5 the Bank pledged to offer up to US$700 million over the next million) - The major development objectives include: (a) de- four years (2007-2011). veloping and strengthening the capacity of the Ba'albeck Her- mel Water and Irrigation Authority (BHWIA) and the Zahle The Lebanon Trust Fund is financing the following 5 projects: and Chamsine Water Authorities; (b) improving the access of Municipal Infrastructure Project (US$30 million) - This the customers of the BHWIA to satisfactory water supply and grant aims to: (i) restore basic services and rebuild municipal wastewater services; (c) involving the private sector in the op- infrastructure in the most affected municipalities and villages, eration and maintenance of the water and wastewater facilities; and (ii) provide technical assistance to and build the capacity of and (d) rationalizing the use of water through the introduction municipalities to mitigate the impact of the hostilities on mu- of water meters. nicipal finances. Urban Transport Project (US$65 million) - The Project’s ob- West Beka'a Emergency Water Supply and Modernization jectives are to provide the city of Beirut and the Greater Beirut Project (US$15 million) - The objectives of the project are Area with the basic institutional framework that is currently to: (a) operate and maintain water and waste water facilities in lacking and to support critical investments needed to maximize the Beka'a Region, (b) undertake rehabilitation works using the the efficiency of the urban transport infrastructure. operations and the investment fund to be made available by the government, and (c) bill and collect on behalf of the Regional Cultural Heritage and Urban Development (US$31.5 mil- Water Utility for all its customers. lion) - The project finances: (a) priority site conservation and enhancement investments and associated urban infrastructure First/ Second Quarter 2010 / Lebanon 16 Lebanon Emergency Power Sector Reform Capacity Reinforcement Nahr Al Barid Emergency Recovery Project (US$2.025 mil- Project (US$5 million) - The objectives are to accelerate the lion) - The objectives of the Project are to assist Lebanon in design and implementation of reforms by enhancing the capac- re-building social infrastructure and strengthening social ser- ity of in the Ministry of Energy and Water, the Electricity Utility vices, and to facilitate the economic recovery in the localities and the Higher Council for Privatization. surrounding the Nahr al-Barid camp. Second Emergency Social Protection Implementation Sup- Al Fayhaa Sustainable Development Strategy-Cities Alliance port Project (US$6 million) - The project will improve the ad- (US345,190) The objective of the project is to assist the Munici- ministration, delivery, financial sustainability, and targeting of pality of Tripoli to develop a strategic development framework social services through implementation of new systems and the that would assist the concerned local authorities and other adoption of new policies in the NSSF, Ministry of Labor, Ministry stakeholders to prepare and activate response mechanisms to of Public Health, MOSA, Presidency of Council of Ministers, and face the urban challenges facing the community. the Ministry of Education and Higher Education. These systems and policies will improve access to and quality of the social insur- ance, social safety net, health and public education services, to the Lebanese middle class, and poor and vulnerable populations. Emergency Fiscal Management Reform Project (US$4 mil- lion) - The project will contribute to improving the control, al- location and use of public financial resources, by implementing a number of interlinked measures in budgeting, debt and aid management designed to improve efficiency and transparency in government financial management. Institutional Development Fund (IDF) Grants Supporting the Judiciary System in the Enforcement of Environmental Legislation (US$327,000) - This program aims to strengthen the capacity of the Ministry of Justice and the Ministry of Environment in judicial enforcement in environ- mental affairs and is implemented by UNDP. Developing Capacity Building Tools for Sustainable Gover- nance (US$338,000) - The objective of the Project is to build the capacity of the Institute of Finance in developing and providing a sustainable source of high quality, specialized training in public fi- nancial management, project management and leadership building through the development of new curricula and case studies and by delivering high quality training and capacity building. Post Conflict Fund (PCF) Grants Mechanism for National Reconstruction (US$1.25 million) - The Grant supports the establishment by the Government of Lebanon of a system to manage and monitor the reconstruc- tion funding in an effective and transparent manner, promoting international standards and good practice. Lebanon / First/ Second Quarter 2010 17 Syria Impact of Drought and Climate Change on Agriculture - by Maurice Saade* A t a time when the global debate over climate change has The drought of 2006-2009: the worst in four decades revolved around discussions of what might happen by 2050 During the past three cropping seasons (2006/2007 to or 2100, many analysts are arguing that the impact of climate 2008/2009), Syria has suffered three consecutive years of severe change is already clearly and painfully visible in Syria. The 2006- drought. The 2007/2008 season in particular had the worst rain- 2009 drought was the worst in more than four decades and had a fall levels in more than four decades and affected almost every devastating impact on crop production and livestock herding, par- part of the country. Out of the 154 weather stations 36 percent ticularly in the Northeast and the Badia (steppe). This has forced registered rainfall levels 50-80 percent below average and an- hundreds of thousands of small farmers and herders to migrate other 26 percent registered 25-50 percent below average1. As to the urban centers in search for jobs. The severe socio-economic shown in figure 1, the north-eastern province of Al-Hassakeh, and humanitarian impacts of this recent drought in Syria could which is the traditional breadbasket of Syria, was most severely serve as an important lesson for Syria and other countries in the affected by the drought. The Badia region, a huge expanse of region in anticipating what kind of preparedness plans, policies, dry steppe grazing land which supports Bedouin herders, was investments and programs will be needed for adequate adapta- also equally affected by the drought. Both regions already suf- tion to climate change particularly in the rural areas. fer from the highest levels of rural poverty in Syria. Syria has a high level of social and economic dependence Figure 1: Syria: Cumulative Rainfalls on agriculture. September 2007- May 2008 as a percentage of average annual Agriculture contributes about 25 percent of GDP and is the main source of employment and income for 35 percent of the population. The sector generates about 20 percent of non-oil exports and is a major source of raw materials for the process- ing industries. The major field crops grown are wheat, barley, cotton, sugar beet, tobacco and lentils, and the main fruits are olives, grapes, apples, almonds, pistachios and citrus. While only one third of cultivated land is irrigated, about two thirds of to- tal crop production originates in irrigated agriculture. Livestock contribute around 37 percent of agricultural GDP, but this is subject to large fluctuations as a result of drought and other natural calamities. (Source: United Nations Inter-Agency Assessment Mission, 11-25 Over the past four decades Syria’s agricultural strategies have August 2008) been driven by the pursuit of self-sufficiency in wheat and other strategic crops and concerns for social welfare in rural areas. The As a result of the severe drought, the average yield of basic food Government has invested in the agriculture sector as a source crops (wheat, barley, lentil and chickpeas) in 2007/2008 dropped of growth for the economy as well as a source of food security. by 32 percent in the irrigated areas and by as much as 79 per- Rapid expansion of irrigated areas became a cornerstone of the cent in the rain-fed areas. Total national wheat production was 51 government strategy to increase agricultural production and percent below the average of the previous 10 years, while barley stabilize rural incomes. The irrigated area doubled in size from production was one third lower. The drought has also resulted 0.6 million hectares in 1985 to 1.3 million hectares today. This in decreased vegetation in the rangelands, where contribution to strategy, based on subsidized irrigated field crops, encouraged feed resources dropped to negligible levels. As a result, herders inefficient water use and has led to rapid depletion of the coun- were forced to sell their animals at very low prices and a large try’s water resources. The overall water deficit currently stands number of small herders lost almost all their animals2. at more than 30 percent of the available renewable supply. * Senior Agriculture Economist, Sustainable Development Department, 1 United Nations Inter-Agency Assessment Mission, 11-25 August 2008. Middle East and North Africa. 2 Ibid. First/ Second Quarter 2010 / Syria 18 Syria By the beginning of the 2008/2009 cropping season, it was es- that the frequency of droughts has already increased from one timated that about one million people had seen their livelihoods event every 10 years at the beginning of the 20th century to five and assets shrink dramatically as a result of the drought. It was or six events each decade now6. hoped that the distribution of food aid and subsidized feed by the Government and aid agencies would help the most vulner- The magnitude and scope of the full impact of climate change able people to maintain their livelihoods and stay on the land to on Syrian agriculture is very difficult to predict accurately. To sow their fields and hope for the best that rainfall levels would date, climate change simulation models have only focused on go back to normal and bring with them good crop harvests and very large geographical areas and specific projections for Syria sufficient vegetation in the rangelands for their animals. The are not yet available. Nonetheless, the 2007 projections by the rains did fall in reasonable amounts in the western part of the International Panel on Climate Change (IPCC) for the Middle country through most of the 2008/2009 season. However, it East and North Africa predict an increase in temperature up to soon became clear that the Northeast and the Badia would suf- 2°C in the next 15-20 years and over 4°C by the end of the 21st fer from another dry year, and the cumulative effect of three century7. This increase could be accompanied by a decline of up years of drought had reached disastrous levels. According to to 20 percent in the level of precipitation. These changes will FAO3, the crisis has negatively impacted the livelihood and food result in shorter and warmer winters, dryer and hotter summers, security of an estimated 1.3 million people in the worst affected and more variability and extreme weather events occurrence. zones. The drought has caused severe food and water shortages and drastic decline in health and nutritional status. Many farm- ers suffered total crop failure for two consecutive years, while over 70 percent of animals belonging to small- and medium- scale herders had to be sold at very low prices due to lack of pastures and soaring feed costs. It was estimated that the in- come of severely affected groups had plummeted by 90 percent compared to 2006 levels4. The drought also forced 250,000-300,000 families (at least 1.25- photograph by Dorte Verner 1.5 million people) to migrate to the cities in search of alter- native work and entire villages have been reported to be com- pletely deserted5. The 2009/2010 growing season has already witnessed relatively good rainfall levels and promises to finally put an end to the worst drought spell in more than forty years. Syrian Nuts However, it remains to be seen if the farmers and the herders who migrated from the northeast would ultimately return back For agriculture, the anticipated impacts of the above projected to their villages to resume their previous livelihoods. changes will likely be very negative and will take several forms. As illustrated by the 2006-2009 drought in Syria, the most di- More frequent droughts: the most visible negative impact rect and visible impact of climate change will be more frequent of climate change in Syria crop failures and sharp reduction in animal production and herd The severity of the 2006-2009 drought has convinced the ma- size, and as a result, massive people exodus to urban areas. The jority of analysts and decision-makers - as well as farmers and reduced average participation levels combined with higher tem- herders - that similar severe drought spells are bound to become peratures will sharply decrease water availability as expressed more frequent in Syria as a result of climate change. For the in terms of water runoff – the difference between rainfall and Middle East and North Africa region, the World Bank estimates 3 Food and Agriculture Organization of the United Nations. FAO’s Role 6 World Bank website: http://beta.worldbank.org/content/middle-east- in the Syria Drought Response Plan 2009. August 11, 2009. Rome. north-africa (01/27/2010) 4 Ibid. 7 IPCC. 2007. Climate Change 2007 - Impacts, Adaptation and Vulner- 5 IRIN News (www.irinnews.org), 2 September, 209; and 24 November 2009. ability. Contribution of Working Group II to the Fourth Assessment Report of the IPCC. Cambridge University Press. Syria / First/ Second Quarter 2010 19 Impact of Drought and Climate Change on Agriculture compensated by a significant increase in yields, this could sharply reduce Syria’s self-sufficiency in wheat. The vast drier barley production belt at the edges of the Badia could expand northward to replace parts of the current wheat production ar- eas. As for the rangelands, lower precipitation and continued overgrazing could result in rapid degradation, loss of biodiver- sity and desertification. This is also likely to translate into more frequent dust storms that would spill-over from the Badia and photograph by Dorte Verner affect large parts of western and northern Syria. In fact, cities such as Damascus and Homs have already suffered from more frequent dust storms during the past three years of drought. Even in the more favorable agro-ecological zones, the increase in Syrian Produce summer and winter temperatures may seriously reduce productiv- ity of high-value crops, particularly fruit trees. As often observed evapotranspiration - which is expected to decline between 10 in warmer parts of the Middle East (e.g. in Egypt and northern to 30 percent in most of the region8. The projected increases Saudi Arabia), several fruit species, such as olives, peaches and in temperature during the irrigation season will significantly apples, will not flower unless they are exposed to a minimum increase the demand for irrigation water while overall water number of days of cold temperature10. Unusual warm weather availability will sharply drop. Moreover, the reduced water run- in winter could also trigger pre-mature budding or flowering, off is expected to significantly reduce groundwater recharge. which would expose fruit trees to greater risks of frost dam- In Syria, this would further exacerbate the already very serious ages. Hence, the likelihood of severe crop losses for some fruit problem of rapidly declining groundwater levels as well as the crops could increase as a result of projected warmer winters in a flow of rivers and streams. country like Syria, which could force farmers to shift to alterna- tive lower-value crops. Agricultural productivity in the Region is anticipated to suffer losses because of high temperature, drought, floods and soil deg- Finally, there is increasing concerns that animal pests and dis- radation, which, in turn, will put the food security of many coun- eases under climate change could severely impact animal pro- tries, such as Syria, under threat. A 2007 study provides estimates duction11. The lack of prior conditioning to extreme weather by country of the impact of global warming on agriculture9. For events can result in major losses in confined livestock feedlots. Syria, it is estimated that by 2080 crop yields will decline by an Moreover, animal nutrition models have shown that higher tem- average of 15-25 percent compared to the year 2000. peratures can put a ceiling to dairy milk yield from feed intake. Similarly, higher temperatures could negatively affect the con- The combined increase in temperature and decline in rainfall is ception rates of domestic animals not normally adapted such expected to cause shifts of agro-ecological zones and a possible conditions. Such potential negative impacts on animal health decline in total agricultural and range lands. In Syria, this shift and production could become quite significant in Syria given would be towards the more favorable northwest and coastal the increasing importance of animal exports and the gradual zones. The rainfed wheat production belt in the northeast could shift towards more intensive sheep feedlots in light of the rapid shrink due to a northward shift in wheat cultivation. Unless degradation of the rangelands. 10 This is often referred to as the vernalization requirements, which 8 FAO, 2008. Climate Change: Implications for Agriculture in the Near East. differ between various fruit species and varieties. 9 Cline, W. 2007. Global Warming and Agriculture: Impact Estimates by 11 World Bank. 2008. Climate Change Response Strategies for Agriculture: Country. Washington, DC: Peterson Institute for International Economics. Challenges and Opportunities for the 21st Century. Agriculture and Rural Development Discussion Paper 42. Washington, DC. First/ Second Quarter 2010 / Syria 20 Syria Post-Financial Crisis Recovery and Outlook for 2010* - by Christian Saborowski and Hania Sahnoun, MNSPR** E conomies around the globe have been hit hard by the fi- Figure 1: FDI and remittances only dropped slightly despite the global nancial crisis and the developing world has not been spared, crisis (in US$ billion) primarily due to a substantial drop in global demand. Syria is no exception and its real economy slowed, although the crisis impact has been modest relative to other Arab and Middle East- ern economies. After three consecutive years of severe drought, the global downturn was the second major shock hitting its economy and Syria’s per capita growth rates remain far below potential. With a new five-year plan in the making, and with an ambitious reform agenda ahead, dealing with the consequences and costs of these crises will be an important factor in deter- mining the development and growth prospects of the Syrian economy in decades to come. Growth slowed as supply and demand factors took their toll A record three-year drought led to a severe supply contraction in Source: IMF the agricultural sector. Agriculture accounts for around a quar- ter of Syrian GDP, a figure that is large relative to the country’s Fiscal stimulus and some help from monetary policy income per capita (US$2,600 in 2008). Low productivity and a What could such a policy response look like in a transition system of subsidies, which cost the Syrian government about 4% economy in the midst of major reforms, whose exchange rate of GDP in 2007, exacerbate the impact of the contraction in sup- is pegged to a basket of currencies, which is in the process of ply. After shrinking at rates almost in the double digits in 2007 introducing treasury bills and whose interest rates are de-facto and 2008, one of the backbones of the Syrian economy is only not liberalized? With monetary policy sidelined, stimulus had to slowly recovering. The farming regions in the north and east of come from the fiscal side. And it did. Syria took an expansionary the country in particular have had to cope with high rates of job fiscal stance during 2009 with total expenditure growing by 5 loss, decreased food intake and massive internal displacement. A percent of GDP, largely due to rising public investment, public large share of the population has been made dependent on emer- wages and transfers to compensate for rising fuel prices, wid- gency food assistance and other forms of public support. ening the fiscal deficit by two percentage points to about 5.5 percent of GDP. Policy measures were also aimed at mitigating The Syrian agricultural sector started to recover in 2009. But the impact of the drought (see box 1). plummeting global demand constituted a second major adverse shock. While Syria’s financial sector is not much interlinked with Box 1: Fiscal Stimulus global financial markets and prudential regulation is restrictive, 2009 Fiscal Policy stimulus: export demand has taken a hit. The decline in demand, mainly • 23 percent increase of the wage bill from European economies and the GCC states, has slowed real • Investment spending increased by about 40 percent in nominal terms growth and led to a worsening of the current account deficit. • Partial reversal of the fuel price increases introduced in Exports shrunk by 17 percent year-on-year in 20091. Foreign May 2008. investment and remittances only dropped slightly by 7 and 4 percent, a contraction that becomes significant when looking 2009 Emergency measures for the agricultural sector: at recent growth trends in these sources of financing. Although • Distribution of food aid the crisis impact was moderate, an expansionary policy re- • Exemption of all taxes and fees for a period of ten years for sponse was justified to support aggregate demand and bolster projects in the eastern area an economy previously shaken by the poverty impact of three • Debt rescheduling plan for farmers in the region severely hit by the drought. years of intense drought. *We thank Jorge Araujo, Elena Ianchovichina and Andrew Stone for valuable comments. The scope for independent monetary policy is gradually increas- ** Members of the poverty reduction unit for the Middle East and North ing in an economy with an exchange rate peg. Nevertheless, it Africa (MENA) has taken on a supportive role during the crisis. The Syrian Central 1 Mainly due to a drop in world oil prices, non-oil exports shrunk by Syria / First/ Second Quarter 2010 only 1 percent according to the IMF. 21 Post-Financial Crisis Recovery and Outlook for 2010 Bank put in place a range of measures including a lowering of deficit is thus 2 percentage points higher than in 2007. This in- reserve requirements (up to 5 percent) and indicative lending crease largely reflects both the drop in global demand and ex- rates, thereby easing the monetary policy stance and further pansionary policy actions taken during the crisis, yet is likely to strengthening fiscal policy efforts. revert to lower levels once global demand picks up in the course of 2010 and expansionary fiscal measures are withdrawn. Was this policy response appropriate? In the absence of a con- traction in aggregate demand, an expansionary fiscal policy With the rebound of commodity prices and recovery of global response to a supply shock (the drought) would have run the trade, the outlook for 2010 indicates a strengthening in eco- risk of inducing stagflation. But given the global crisis that fol- nomic performance for Syria. The economy is projected to grow lowed, the expansionary stance was suitable: first, because the by 5.2 percent in 2010. Still, policy challenges remain. Policy- supply and demand side impacts of the two crises needed to be makers will be faced with devising a fiscal adjustment strategy countered in the face of their impact on economic growth and while being mindful of the need to protect spending on the poor poverty, especially in the northern and eastern rural areas; and and sustain recovery. second, because substantive progress was made in fiscal con- solidation and subsidies reform prior to the crisis. What is more, Policy challenges the policy measures, it seems, achieved their objective. A challenging year lies ahead of the Syrian economy. The expan- sionary fiscal policy stance needs to be withdrawn gradually in The Syrian economy is recovering order to rebalance fiscal accounts; ongoing improvements in the Recent developments suggest that the Syrian economy weath- efficiency of fiscal spending especially in infrastructure need to ered the global financial crisis relatively well. Although the fiscal continue. At the same time, a new Five-Year plan is in the making deficit widened by 2.5 percentage points to 5.5% in 2009, both and the ambitious reform agenda launched since 2004 is to be internal and external accounts fare at sustainable levels. This strengthened and further progress in its implementation made implies that the expansionary policy measures can and should at a faster pace. be sustained until the economy is on a more solid footing. Syr- ian policymakers should plan for a careful phasing-out of the The main policy challenge remains largely the same as before stimulus alongside the long awaited introduction of a VAT and the crisis: the ongoing decline in oil production has driven both further fiscal consolidation. Continued reform of the costly sys- the current and the fiscal accounts into deficit. This trend needs tem of subsidies by gradually reducing the number of goods to be offset by a focus on policy measures aimed at encourag- subject to administrative pricing will be critical. A downside risk ing entrepreneurship and investment with the ultimate goal of will be the ongoing decline in oil revenues. boosting non-oil growth and diversifying and increasing exports volumes and earnings. Only in continuing on the reform path can With real growth slowing to 4 percent in 2009, the economy sufficient progress be made to increase living standards while ac- is growing only marginally in per capita terms as population commodating strong population growth and offering jobs for the growth rates are still high. Yet, successful structural reforms ever larger work force. in recent years and continued progress in the years to come can make the Syrian economy more attractive in terms of both Three areas stand out as targets for continued reform. First, al- investment and export demand and may allow it to benefit dis- though subject to significant reform efforts in previous years, proportionately once global demand picks up in the aftermath the financial sector requires further in-depth reform. The re- of the crisis. Post-crisis growth may receive further support structuring of the financial sector is a major step in accelerating from a recovering agricultural sector, larger volumes of remit- the transition to a social market economy. While credit volumes tances and a booming tourism sector that already contributed have grown strongly during the past five years, an excessively to softening the impact of the crisis in the closing year. large share is still channeled into the public sector and too little is reaching private firms (see Figure 2). As a result, private invest- In addition to the slowdown in economic growth, the global cri- ment is low. In order to improve the financial sector’s capacity to sis led to a substantial widening of the current account deficit, channel credit to its highest value use, financial intermediation reaching 4.5 percent of GDP in 2009 with exports falling faster needs improvement. Increasing the risk assessment capacities of than the demand for imports. The estimated current account both private and public banks can be one way of embarking on First/ Second Quarter 2010 / Syria 22 Syria this path. Various additional challenges remain in the financial Third, a major impediment to increasing private investment, both sector, including a strengthening of the Damascus stock exchange domestic and foreign, is the poor business environment and busi- recently re-opened and the issuance of treasury bills. ness infrastructure. Weak accountancy standards among SMEs cur- rently do not allow firms to give strong signals of creditworthiness Figure 2: Transformation of deposits into credit and have delayed the long awaited introduction of a VAT, which is urgently needed to consolidate fiscal accounts. Moreover, the 2009 ICA suggests that firms view corruption and regulatory uncertainty as the two major obstacles holding back business growth in the private sector (see figure 3). An important step in removing sources of corruption and moving towards a social market economy would be the streamlining of the system of subsidies currently costing the state a large share of its budget and severely distorting markets, and the implementation of the governance action plan recently adopted by the government of Syria. Source: Central Bank of Syria, IMF Finally, these structural reforms should be complemented by the ongoing reforms of the education sector, the social protection The second main challenge for Syria is to continue opening up system, agriculture and water resource management and last its economy to world markets and to further diversify its pro- but not least management of natural resources and environ- duction base and export basket. While the competitiveness of ment to sustain high job-creating growth. the Syrian import regime has improved markedly in recent years, rates of protection are still high, preserving the anti-export bias In sum, Syria has taken the appropriate measures to mitigate hampering export-led growth. Moreover, the regime is unneces- the impact of two major macroeconomic shocks hitting its sarily complicated and both infrastructure and trade facilitation economy in recent years. At the same time, it has embarked on services require substantial improvements. Last but not least, an ambitious reform path, the successful completion of which trading costs exceed those of Syria’s peers and a competitive ex- will put it in a position to improve living standards and grow port incentive system should urgently be put in place. Reforms sustainably in decades to come. However, income is still low should focus on simplifying the import protection regime, re- relative to other MENA countries and the main policy challenge ducing trade costs and improving export incentives. remains to increase non-oil production and employment to off- set the ongoing depletion of oil reserves. Figure 3: Major obstacles to Business Growth according to firms surveyed in the 2009 ICA for Syria (% of firms) Source : ICA 2009 Syria / First/ Second Quarter 2010 23 Syria Partnership Program World Bank Analytic and Advisory Assistance policy reforms, and has requested further Bank advice on key (AAA) in Syria specific areas for further trade reform such as export diversifi- cation, trade financing, free zones, and the removal or tariffica- The Bank’s technical assistance (TA) / Analytic and Advisory Assis- tion of non-tariff barriers. tance AAA program focuses on three main strategic areas: A Country Economic Memorandum (CEM), which is looking Economic Growth and Transition into constraints to and opportunities for growth and economic Governance TA culminating in a National Governance diversification in Syria, particularly in the non-oil sector, in close Symposium held on May 23-24, 2009 under the auspices of collaboration with the Deputy Prime Minister’s Office. This work the Prime Minister on (i) civil service reform, (ii) corporate gov- would provide the basis for the design of a strategy for broad- ernance, (iii) public financial management, (iv) fighting corrup- based, inclusive economic growth for Syria. Accordingly, the CEM tion, (v) governance indicators and (vi) the role of parliamentar- will be a key input for the Government’s 11th Five-Year Plan. ians and civil society in advancing the good governance agenda. At the Symposium, the Government developed an ambitious An update of the Bank’s 2005 Investment Climate Assessment governance reform action plan to be implemented in the com- (ICA) to provide up-to-date information and advice to the Gov- ing two years with Bank assistance, focusing on public financial ernment on priorities to improve investment climate and fur- management, civil service reform, corporate governance and the ther promote private sector development. ratification of the UN Convention against Corruption (UNCAC). Capacity Building on Doing Business (DB) Indicators, to build Support to the Ministry of Finance in Public Financial Manage- the government’s capacity in understanding the methodology ment (PFM) Reform, to improve fiscal control by linking policy underpinning the DB indicators, and identify potential reforms and budget management; support budget integration to increase to improve the business environment. Following a Doing Busi- the focus on service delivery/quality, and strengthen fiscal/budget ness workshop, organized by the Bank in March 2009, a draft control and reporting to improve performance and transparency. reform action plan focusing on business environment reforms has been prepared by technical working groups under the lead- A Public Expenditure Review (PER) is being conducted in ership of the Ministry of Economy and Trade. This action plan close cooperation with the Budget Department in MOF, which has been adopted by the authorities and implementation is be- will provide essential analysis and tools to strengthen its ca- ing started with Bank assistance. pacity in macroeconomic projections and forecasts, expendi- ture prioritization and selection, budget preparation, as well as Human Development and Social Protection Support monitoring and evaluation. A comprehensive Labor Market Study – utilizing the MILES framework – which will look at the constraints to the creation A Country Procurement Assessment (CPAR), which consists of good quality jobs in a manner that addresses the cross-sector of an evaluation of the current procurement and contract man- interdependence of macroeconomic (M), investment climate (I), agement practices and recommendations of relevant reforms labor (L), education and skills development (E) and social protec- and improvements to upgrade Syria procurement system to in- tion policies (SP). The MILES exercise will be a key input for the ternational standards. The Government has decided to review, Government’s 11th Five-Year Plan. in collaboration with the Bank, the public procurement law and its implementation and will use the CPAR’s recommendations A multi-year technical assistance program on Reform Options in the process of redrafting the law and implementing procure- for Social Insurance (Pensions and Unemployment Insur- ment system reforms to further transparency and efficiency. ance) aims to assist the Ministry of Social Affairs and Labor, and the Prime Ministry, in design and implementation options for A Review of Trade Policy Reforms, to help the government pension and unemployment insurance systems. This includes sequence and prioritize its trade policy reform efforts as part of examining the fiscal feasibility and options for introducing a coherent strategic framework. The Government has endorsed forms of social insurance. the findings of the Bank’s diagnostic review of Syria’s trade First/ Second Quarter 2010 / Syria 24 Syria A follow-up to the recently completed Education Sector Avian Influenza Preparedness Grant (AHI Facility) (US$1,360,070) Strategy, through capacity building for evidence-based policy to assist the Government of Syria in minimizing the risk of out- making in education, as well as assessment of expansion op- breaks of the Highly Pathogenic Avian Influenza (HPAI) in domes- tions for higher education that are affordable, of high quality tic poultry and to strengthen Syria’s preparedness and control and meet the demands of the labor market. capacity for potential outbreaks in humans. Environment Improvement for Sustainable Development Trust Fund for Statistical Capacity Building Grant (US$389,000) An Electricity Sector Strategy Study aims to identify op- to enhance the capacity for economic survey processes and analy- tions to improve the financial and technical performance of the sis of the Syrian Central Bureau for Statistics. Three main areas of electricity sector, particularly on ways to reduce the electricity support: the design of questionnaires, support to the conduct of demand and supply gap. It will also provide options for sec- surveys and capacity building on data processing and analysis. toral reforms and institutional changes needed to improve the efficiency and quality of service delivery and to enable private PPIAF Grant for PPP Capacity Development (US$75,000) participation in electricity sector investments. to provide assistance in developing the legal and institutional framework for Public Private Partnership (PPP) under the Technical Assistance in the Transport Sector, tthrough work- Deputy Prime Minister’s Office, including: (i) support to the shops and working papers focused on determining the role and preparation of a policy note outlining the Government’s PPP importance of the Transport sector in the Syrian economy, pro- vision and operating guidelines; and (ii) the review and finaliza- viding a framework for assessing the sector investment priorities, tion of a PPP Law. improving the efficiency and effectiveness of urban transport, and supporting the preparation of a national transport action plan. Technical Assistance in the Agriculture and Irrigation sectors, to support the Government in the implementation of a National Agricultural Support Fund, reviewing and rationalizing the agri- cultural subsidy schemes, and in the development of a national Rural Development strategy. Additional Support through Trust Funds Japan Social Development Fund (JSDF) grant (US$2,888,000) to improve the employability of marginalized youth, defined as youth aged 17-20 years with less than a 9th grade education who have been out of work for more than 2 years. The grant will rely on strong private sector participation, building partnerships across providers and developing the organization capacities of local institutions and NGOs to provide targeted technical train- ing and work skills in two pilot governorates. Syria / First/ Second Quarter 2010 25 Jordan Macroeconomic Outlook in the Context of the Global Turmoil - by Sebnem Akkaya* The global economic slowdown has created Inflation was negative in 2009, following the drop in interna- several medium-term challenges for Jordan. tional prices. Inflation measured by the Consumer Price Index de- The three most important of these are lower clined by 0.6 percent on average (y-o-y). The decline in the CPI was global oil prices (which have a positive im- the strongest in the second and third quarters of the year, reaching pact on trade deficit but a negative impact on negative 2.4 percent on average (y-o-y). This mainly reflects the transfers and capital account), lower private decline in international oil and food prices. Imported inflation has capital flows to developing countries (which a strong impact in Jordan, with imports of goods amounting to 67 were a major source of growth for Jordan in percent of domestic absorption between 2005 and 2008. Estima- the recent past), and sharply lower global and tions based on data available up to October 2009 show that prices regional growth outlook (which affect exports of imported goods have decreased by 15 percent. and remittances). Reflecting these effects, domestic economic performance has worsened Fiscal Developments since September 2008. The collapse in com- Preliminary data confirm a significant slowdown in revenues modity prices favored a reduction in expendi- in 2009. While income tax revenues increased by 27.0 percent tures through a decline in budgetary subsides over the first eleven months in 2009 (y-o-y), all other revenues but also generated a drop in tax revenues are on the decline, with particularly large decline in land reg- because of lower prices and lower economic istration fees (42.7 percent). The collapse in commodity prices activity. Also, while improving the current and lower demand generated a drop in general sales tax and account balance, the decline in international customs revenues by respectively 0.2 and 6.2 percent in 2009 prices and more broadly global turmoil has (y-o-y). The Government granted tax exemptions to the tourism reduced foreign inflows, and negatively af- sector and extended the tax exemptions on some imported con- fected growth and employment. struction materials to end-2009. The overall increase in domes- tic revenues during the first eleven months of 2009 is limited to Real Sector Developments 3.3 percent (down from 14.6 percent for the same period last Economic activity slowed down significantly in 2009. The year). According to preliminary estimations, domestic revenues real GDP growth for the first three quarters of 2009 remained would not exceed 25.6 percent of GDP, down from 26.7 percent at 2.7 percent, compared to 9.1 percent for the same period in 2008. In addition, grants from various donors, especially from in 2008. According to preliminary figures, foreign direct invest-Gulf countries, also declined sharply from 4.8 percent of GDP in ment (FDI) to Jordan declined by 54 percent in the first three 2008 to 2.1 of GDP in 2009. quarters of 2009 (y-o-y). Be- cause of its strong trade with The collapse in commodity prices Despite some savings from Gulf economies, data available budgetary subsidies due to for the past ten years show a favored a reduction in expenditures sharp decline in internation- strong sensitivity of FDI, exports through a decline in budgetary subsides al commodity prices, public of goods to the Arab countries, but also generated a drop in tax revenues spending in 2009 remained exports of services and remit- high resulting in high fiscal tances to the change in the in- because of lower prices and lower deficit. According to prelimi- ternational oil prices. Therefore, economic activity. nary figures, capital expendi- the sectors that experienced the tures increased by 49 percent in strongest slowdown are those who usually benefit from the 2009 (y-o-y), compared to a budgeted increase of 23 percent. capital inflows, foreign transfers and foreign demand (financial The Government has however contained current expenditures services, community and personal services, wholesale and retail which increased by only 1.2 percent (preliminary figures). The trade and manufacturing). Other sectors that benefited from overall increase in expenditures is 9.5 percent (27.6 percent in public spending (public services, construction) and from tourism 2008). Consequently, the already high level of expenditures to related activity (hotels, restaurants) continued to grow. GDP in 2008 at 36.1 percent increased further to reach 36.6 percent in 2009. This combined with slowdown in revenues led * Lead Economist First/ Second Quarter 2010 / Jordan 26 Jordan to a further significant deterioration of the fiscal balance. Fiscal deposits by the Government till end-2010, scaling back opera- deficit excluding grants is expected to rise to 11.2 percent of tions to soak up liquidity, reducing policy interest rates (so far GDP (9.4 percent in 2008); and fiscal deficit inclusive of grants is by 200 bps) and reducing reserve requirements (from 10 percent expected to reach 8.7 percent of GDP (4.6 percent in 2008). in October 2008 to 7 percent currently). Money Supply (M2) increased by 9.0 percent to US$28.2 billion in November 2009 Jordan’s public debt has increased in 2009. With the slow- compared to end-2008. A year earlier, M2 increased by 16.8 per- down in revenues in 2009 and the decline in foreign grants, the cent over the same period. The liquidity position of the banking gross debt to GDP ratio is expected to rise to 66.8 percent of system remains comfortable and the share of dinar deposits has GDP (compared to 62.4 percent in 2008). The composition of continued to increase since 2008, reflecting the interest rate public debt has changed in 2009 with domestic debt amount- differential between dinar and dollar denominated deposits. ing to around 65 percent of the total (61 percent in 2008) and The dollarization of resident deposits registered 16.5 percent in with the short term domestic debt (maturity less than one year) November 2009, down from 21.3 percent at end-2008. Overall rising to represent more than 70 percent of the increase in total lending to the private sector increased by only 2.1 percent in debt. The net debt ratio remained at around 60 percent ceiling 2009 compared to end-2008, reversing the annual growth of envisaged under the public debt law. Over the coming period, a 14–28 percent in each of the last four years. Finally, the Amman stronger discipline in fiscal policy as envisaged under the gov- Stock Exchange index declined by 11.6 percent between end- ernment’s 2010-2013 medium term budget program—keeping 2008 and end-2009, reflecting mainly the drop in the Banking debt increases below the rate of growth of the economy—is ex- sector index by 17.7 percent. pected to put the debt ratio on a downward path. Jordanian banks were not immediately affected by the first External Accounts round impact of the global financial turmoil but started The external balance improved due to the sharp decline reflecting the impact of the economic downturn in the in the prices of imported goods. The current account deficit second half of 2009. Limited integration with global financial (CAD) was cut by half in the first three quarters of 2009, reach- ing US$1.18 billion against US$2.28 billion a year earlier despite a drop in remittances by 3.3 percent. The improvement in CAD is mainly due to a sharp decline in trade-in-goods deficit by 25 percent. The CAD is expected to decline to less than 8.0 percent of GDP in 2009 (down from 11.4 percent in 2008). Reserves in foreign currencies of the Central Bank of Jordan (CBJ) increased to US$11.0 billion in November 2009 (equivalent of 9.8 months of goods imports), up from US$8.6 billion at end-2008. The in- www.istockphoto.com crease in the reserves of CBJ reflects the improvement in exter- nal balances and the conversion from foreign currency denomi- nated deposits to Jordanian Dinar denominated deposits. The Financial Sector Jordanian Dinars The Central Bank of Jordan has taken pre-emptive steps to maintain confidence and support the domestic money markets buffered Jordan from the financial turmoil preventing market. These measures include a full guarantee of all bank immediate and direct losses among banks. However, the second round effects of the financial turmoil have the potential to develop 1 In 2008, Jordan signed a buyback operation at an 11 percent discount into more discernable trends. Banks’ credit portfolios are charac- rate with 10 Paris Club member states. The operation covered up to terized as being relatively highly concentrated and the real estate, US$2.4 billion of foreign debt and the effective buyback after discount construction, and foreign trade sectors are vulnerable to weaker amounted to US$2.1 billion. This operation brought the share of external market activity. Banks with substantial exposures to these sec- debt from 59 percent at end-2007 to 39 percent at end-2008, down. Since then, all new debt is being contracted locally and the share of ex- tors as well as to markets abroad through their foreign opera- ternal debt has declined to around 35 percent of total debt by end-2009. tions are likely to be more adversely affected by the slowdown. Jordan / First/ Second Quarter 2010 27 Macroeconomic Outlook in the Context of the Global Turmoil Some deterioration in loan quality is expected by both the au- Club debt buyback as well as rapid nominal GDP growth. The thorities and the banks as economic activity slows, the long pe- Government took some actions to contain expenditures in 2009 riod of high credit growth reverses, and property prices soften. especially in the face of much weaker-than-envisaged revenue Currently, banks are monitoring exposures closely and re-pricing performance and grants in the original 2009 budget. The Bud- credits and/or cutting credit lines to customers facing increased get Law for 2010 envisages a significant reduction in public ex- risks, especially in the real estate and foreign trade sectors. Not- penditures (particularly capital expenditures) in terms of GDP withstanding a moderate decline in the banking system’s capital by more than 6.0 percentage points compared to 2009. Some adequacy ratio in 2008 due to implementation of Basle II stan- consolidation is also planned in current expenditures through dards, the aggregate ratio remains well above the 12 percent controlling wages and salaries and reducing/eliminating com- requirement. The non-performing loans ratio increased to 6.4 pensation transfers introduced mainly in 2008, but this remains percent in 2009 from 4 percent in 2008. more measured compared to the planned reduction in capital expenditures. A stronger discipline in fiscal policy—keeping debt Outlook increases below the rate of growth of the economy—will, in The ongoing global economic turmoil and uncertain outlook turn, put the debt ratio on a downward path by 2012. pose exceptional challenges to Jordan’s short- to medium- term economic prospects. Jordan’s strong regional ties pro- vided a cushion in its exposure to global economic slowdown— given the relatively limited impact of the financial turmoil in the region. Still the economic outlook is characterized by a high level of uncertainty, related to the evolution of world com- modity prices, the level of foreign current and capital inflows as well as the regional security situation. Jordan has, however, demonstrated strong resilience to dramatic external economic and political shocks since 2003, maintaining focus on compre- hensive development strategy. The Government’s increasing emphasis on cushioning the population from the impact of the price shocks and economic downturn since 2008 led to a di- vergence from the fiscal consolidation program and erosion of fiscal gains achieved over the previous years. Looking forward, however, the ongoing efforts to re-institute the fiscal discipline and address the economic slowdown by accelerating the key structural reforms which have been under preparation over the last several years combined with selected strategic infrastruc- ture projects to be developed with private sector participation, and short-term policy actions aimed at addressing immediate adverse impact of the crisis, augur well for a continuation of the more cautious economic policies of the recent years. Building on these fiscal and structural reforms, its strong regional ties and the prospect of economic recovery in the region, Jordan is projected to grow by around 4% in 2010. Jordan’s public debt can be kept on a sustainable trajec- tory provided fiscal adjustment continues. Public debt was significantly reduced in 2008 with debt to GDP ratio dropping by over 10 percentage points to 62.4 percent, thanks to the Paris First/ Second Quarter 2010 / Jordan 28 Jordan Experience with Public-Private Partnerships - by Paul Noumba-Um * Introduction around 5-6% per year and enhance its competitiveness. In other words, substantial fiscal resources should be allocated to ensure Private Public Partnerships (PPPs), also called Private participation appropriate maintenance of the existing stock of infrastructure in infrastructure, are not new in Jordan. During the past two as well as to develop new infrastructure facilities. The infrastruc- decades, the Government of Jordan has been successful in closing ture needs of the Jordanian economy and society are therefore a significant number of PPP transactions. Since 1990, it is esti- estimated around 10 percent of the yearly GDP to infrastructure mated that private investments in infrastructure have reached or whereas the total capital expenditure of the government has not exceeded $ 4,000 million. Jordan has been a front runner in exceeded 7.5 percent of the GDP during the past decade. Clearly, the region in using PPP schemes to develop its infrastructure, Jordan’s infrastructure needs (backlog and new) as estimated but could have attracted more private capital in infrastructure above are beyond what its fiscal space can accommodate, and by further strengthening its PPP framework, developing a robust increasing private investments is therefore crucial. pipeline of projects and by building the capacity of its institutions to implement PPP projects. This short note reviews the experience During the past two decades, Jordan has been successful in at- that Jordan has gained in PPPs during the past decade, discusses tracting private investments in infrastructure. Cumulative private the main lessons stemming from this experience and outlines investment commitments to infrastructure (figure 1) have been how the PPP agenda can be taken forward. estimated at $4.400 million since 1990. The telecommunications and the transportation sectors have attracted most of the private The Rationale for Promoting in Infrastructure PPPs in Jordan investments in infrastructure. For a total of 14 infrastructure PPP During the past decades, Jordan has been successful in addressing projects completed during this period, $1,562 million went to its infrastructure development challenges. Universal access to ba- transport projects; $2,157 million were invested in telecommuni- sic infrastructure services has been achieved as shown by Table 1. cations projects and $ 524 million in energy projects. Table 1 – Access Rate to Basic Infrastructure Services in Jordan Figure 1. Total Private Investment Commitments to Infrastructure in Jordan (million $) Infrastructure Service Jordan Access Rate MENA Average Ac- cess Rate Paved Roads (% total 100 58.3 km of roads) – 1999 Access to electricity (% 85 90.5 of population) – 2000 Fixed line and mobile 93.7 67.9 phone subscribers (per 100 people) - 2007 Access to improved 98 60.7 water source (% popula- tion) – 2006 Source: PPI Database. 2009. Access to improved 85 52.3 sanitation (% popula- Figure 2. Number of infrastructure PPP projects in Jordan. tion) – 2006 Source: WDI, 2009. However, strong economic growth, rapid urbanization and the structural transformation of the Jordanian economy are creating new demands for infrastructure services that the government is struggling to cope with. As a Middle Income Country in the Middle East and North Africa (MENA) region, it is estimated that Jordan should invest between US$1.2 –US$2.0 billion per year in infra- structure, especially in strategic infrastructure projects the gov- ernment has identified (water, energy, railways, light rail transit system, etc…) in order to sustain economic growth prospects Source: PPI Database 2009. * Lead Economist MNSSD and Member of the GETPPP (Global Expertise Team on Public-Private Partnerships) Jordan / First/ Second Quarter 2010 29 Experience with Public-Private Partnerships Partnerships with the private sector for the delivery of infra- competition. In telecommunications, the Jordan Telecommunications structure services form a key component of the government Company (JTC) was privatized and the sector was opened to development strategy since the early 1990s. This commitment competition with the issuance of three mobile licenses. The water to PPPs has been consistently reflected in the Government Pro- sector was unbundled with private participation introduced in some gram for Social and Economic Transformation (PSET). market segments such water treatment or wastewater treatment plants. A management contract was signed for the Amman Water Policy and Legal Framework for Private Participation in Authority. The As-Samra Wastewater Treatment Plant was pro- Infrastructure in Jordan cured under a BOT scheme. The As-Samra project suffered from The Jordanian PPP program was framed in the early 1990s and significant delays in its implementation, whereas the Amman Wa- was further refined in the early 2000 with the enactment of the ter management contract was not renewed at its termination. privatization law No 25 of 2000. Law No 25 is wide in its scope. It covers: (i) total and partial sales of public owned companies or Regarding the electricity sector, a successful industry restructuring assets; (ii) management contracts; (iii) license agreements issuance; program was implemented. In 1996, the Jordan Electricity Author- and (iv) private participation in infrastructure projects such as ity (JEA) was restructured into the National Electric Power Company BOT, BOOT etc. In addition to law No 25, the government strategy (NEPCO) and unbundled in 1999 into three legally and financially in- for private participation in infrastructure also strongly relied on dependent operating companies: the Central Electricity Generation sectoral legislations2 enacted to implement sector reforms, in- Company (CEGCO), the National Electric Power Company (NEPCO) cluding the implementation of market liberalization measures. for transmission and network operation, and electricity distribu- The Executive Privatization Commission was created and estab- tion companies. Distribution companies (CEDCO, IDECO and JEPCO) lished as the coordinating agency for PPP projects. were fully or partially privatized. The Government sold its shares in the Central Electricity Generation Company (CEGCO). Two gas-fired Key Achievements of the Private Participation Program independent power producers (IPPs) were contracted (Amman East, in Jordan Al-Qatrana) using PPP schemes. In addition, the government suc- In collaboration with the World Bank Group (IBRD, IFC) and other cessfully rolled back electricity subsidies, making Jordan one of the donors (USAID, EU, Government of Japan and recently AFD), the few countries in MENA with cost reflective electricity tariffs. Government of Jordan embarked on the implementation of PPP projects. Prior to the enactment of law No 25, the PPP program was In the port sector, the government introduced private sector in implemented in an ad-hoc manner, with individual line ministries the provision of port services at Aqaba sea port. In January 2004, identifying potential projects and relying on donors’ grants to bring a two year management contract was signed with APM Terminals these projects to the market. The enactment of law No 25 brought to manage the container port. The transaction took less than six greater formalism in the process, but it is only in 2008 with the months to complete. Prior to private sector introduction in 2004, publication of the regulation No 80 that greater clarity and the waiting time for vessels anchoring at Aqaba was estimated certainty will be brought to the PPP procedures and processes. around 8 days which dropped to few hours one year after. In the airport sector, the government successfully contracted the reha- Besides privatizing existing state owned corporations, the govern- bilitation and expansion of the Queen Alia International Airport ment also launched an ambitious sector restructuring program with the payment of a canon fee of $680 million for 25 years BOT that covered most infrastructure sectors. The aim of the sector contract. The concession contract was signed in June 2007 and restructuring program was to improve productive and allocative the developer took control of the facility in November 2007. efficiency of infrastructure sectors. In this context, autonomous regulatory commissions were established in Telecommunica- By 2006, the Aqaba Special Economic Zone Authority (ASEZA) has tions, Electricity, Gas, Water, Airport, etc. The main state owned attracted investment commitments of over US$8 billion through corporations were privatized through sale of shares to strategic public-private partnerships. ASEZA and its development partner partners, and where possible infrastructure sectors were opened to the Aqaba Development Corporation (ADC) have entered into the 2 Such as the Water Authority Law No. 18 of 1988; the General Electric- several partnerships including: (i) the APM contract to manage the container port at Aqaba; (ii) the development of the Aqaba ity Law No 64 of 2002; Transport Law No. 89 of 2003; The Public Trans- portation of Passengers Law No. 39 for the year 2006; The Civil Aviation International Industrial Estate (AIIE); and (iii) the development of Law No. 41 for the year 2007 establishes a Civil Aviation Regulatory the ALTS project - a US$550-700 million project for the develop- Commission; and the Municipalities law No. 14 of 2007. ment of the Red Sea frontage on the Gulf of Aqaba. First/ Second Quarter 2010 / Jordan 30 Jordan At the municipal level, few PPP transactions were concluded due prin- able to the end users. Going forward, the government will need cipally to the fact that Jordan municipal councils have no financial to address all of these issues, and elaborate mechanisms to ex- autonomy. Although the Municipalities Law of 1955 assigns service pand its PPP program at the municipality level. delivery responsibility of 39 local services to municipal councils, the central government agencies and public sector companies continue The government of Jordan recognizes the urgency to address to provide most of the public local services. these issues and has initiated the elaboration of a comprehensive PPP framework. It has published a PPP policy in 2008 and a "PPP Main Lessons and the Way Forward Manual" in 2009. A draft PPP law based on global best practice As shown above, the development of these PPP projects have is currently being finalized, which will provide Jordan with a provided Jordan with a valuable experience that will be crucial world-class PPP framework. The new legislation will brand the in taking its PPP agenda forward. The Government has achieved PPP agenda separately from the privatization agenda. some important successes with PPPs during the past decade, but there is still large room for improvement. As shown above, In addition, a new institutional arrangement has been put in the infrastructure investment needs of Jordan remain huge and place to coordinate and monitor the development and imple- call for the acceleration of the mobilization of private invest- mentation of medium to large size PPP-based projects. A dedi- ments. Jordan needs to further refine its PPP framework in order cated department was recently created in the Ministry of Public to deliver the world class infrastructure required by its economy. Sector Reforms, endowed with a highly competent team directly To successfully shift to knowledge-based economy and create reporting to the Minister and responsible for managing the the quality jobs required by a fast growing and educated labor preparation of PPP projects and ensure that they are timely and force, the government will need to address following issues. cost effectively implemented. First, the effectiveness of the PPP program in Jordan has been In the medium and longer term, the government will need to impeded by coordination and decision making issues. Even suc- deepen the development of the financial and capital markets. cessfully completed transactions took more time than planned Work can start to investigate in more depth the capital market because of deficiencies in the decision making chain, or poor issues and challenges and to start to build some basic building coordination among stakeholders. Second, and because the blocks. The World Bank Group stands ready to mobilize a wide PPP agenda was embedded with the privatization program, the range of its instruments to support the government efforts in government has not established an appropriate procedure for this area. The grant needs to further strengthen its in-house PPPs that would have helped to enhance the screening of po- capacity to manage PPP projects. Likewise, IFC through its lending tential projects to ensure their eligibility to PPP. With appropri- and advisory services will continue to support the preparation ate screening in place, few strategic projects such as the Disi- and financing of PPP projects as in the case of Queen Alia Airport Amman water conveyor or the Amman – Zarqa light rail could in 2007; or the Amman Ring road in preparation. The Bank and have benefited from on-time mobilization of capital subsidies, IFC could also work jointly with the government in the develop- thus making these projects bankable. ment financial intermediation institutions to deepen and widen the Jordanian capital markets. Third, the preparation of PPP projects suffered from weak proj- ect management as portfolio Ministries did not put in place full Conclusion time project management teams, or when such teams were in Jordan did very well, attached strategic investors, accumulated place, they were not empowered to act on behalf of the Govern- experience and knowledge. It recognized the challenges to attend ment. Four, the PPP agenda was carried out in an ad-hoc man- more FDI investors for its strategic infrastructure projects espe- ner as the government did not sufficiently link its PPP program cially in this difficult crisis environment and moved forward with to its broader development, growth and competitiveness goals. enhancing their legal/institutional framework for PPP. While packed with significant risks, municipal PPP projects are of smaller size and can be more affordable for development by do- mestic investors as long as their risk profiles are mitigated prop- erly. For instance, the Bank group through its municipal finance and OBAs (Output Based Aid) units could help in the structuring of municipal PPPs while ensuring that services remain afford- Jordan / First/ Second Quarter 2010 31 Jordan Partnership Program The World Bank Group’s support to Jordan is defined in the 2006- technical and administrative capacities at the local level, and (c) 2010 Country Assistance Strategy. The strategy is aligned with increase the coverage and quality of municipal service provi- the Government priorities, as expressed in particular in the 10- sion, with particular emphasis on under-served areas. year National Agenda, of poverty alleviation and the creation of higher productivity jobs. The Bank’s assistance revolves around Cultural Heritage, Tourism, and Urban Development four clusters: (US$56 million) - The project builds on the experience and achievements of the Second Tourism Development Project and (i) Strengthening the investment environment and building supports the National Tourism Strategy recommendations to human resources for value-added, skill-intensive and knowl- develop regionally balanced cultural tourism through regenera- edge-based economy; tion of historic urban neighborhoods and creation of cohesive (ii) Supporting local development through increased access and culturally rich urban attraction poles. The main focus of the to services and economic opportunities; proposed project reflects the current international experience in (iii) Reforming social assistance and expanding inclusion; and boosting local economies and improving the local quality of life (iv) Restructuring public expenditures and supporting public through creating investment opportunities in what is defined as sector reform. cultural and tourism industries. The strategy deploys several instruments to achieve its objec- Amman East Power Guarantee (US$45 million) - The proj- tives: lending, analytical and advisory activities, equity and loan ect's main objective is to meet Jordan’s electricity needs in an financing to the private sector, and training for institutional economically and environmentally sustainable manner to con- capacity. The new CAS covering fiscal years 2006 to 2010 was tribute to economic growth and well-being of the population discussed by the Bank's Board of Directors on May 4th 2006. of Jordan. The purpose of the IBRD Guarantee is to enhance competition and therefore help reduce the Project's financing The Jordan Portfolio consists of nine active projects, totaling costs. The Project components consist of a 370-MW gas-fired US$588.5 million, which are primarily focused on education, combined-cycle power station to be developed, owned, and op- finance, social protection, transport and urban development. erated by a private-sector project company. The portfolio also consists of a number of grants from the Social Protection Enhancement Project (US$4 million) - Global Environment Facility (GEF) that fund activities as fol- The project aims to improve the management and operations of lows: “Conservation of Herbal/Medicinal Plants” (US$5 million), the cash social assistance programs and to improve the access “Integrated Ecosystems in the Rift Valley” (US$6.15 million), to and quality of social care services. “Promotion of a Wind Power Market” (US$6 million), an “En- ergy Efficiency Investment Support Framework” (US$1 million), Employer-Driven Skills Development Project (US$7.5 mil- and one grant from the Institutional Development Fund (IDF) lion) - The project aims to enhance the internal and external on “Measuring the Impact of National Policies and Strategies on efficiency of the E-TVET sector by making it more flexible and Gender” (US$254,000) demand driven through the development of employer commu- nity participation in (i) sector policy formulation, (ii) institutional Amman Development Corridor (US$71 million) - The project development and reform, and (iii) skill development program aims at: (a) assisting Jordan's growth strategy by providing need- design and delivery. ed infrastructure to support Amman’s role as a regional center for trade and services; and (b) helping ensure that Jordan’s road Amman Solid Waste Project (US$25 million) - The solid assets are managed in a cost effective and sustainable manner. waste project objective is to enhance the quality, environ- mental and financial performances of municipal solid waste Regional and Local Development (US$20 million) - The management (MSWM) in the Greater Amman Municipality. objective of this project is to: (a) strengthen the intergovern- Systematically address municipal solid waste management is- mental finance system, (b) upgrade local financial management, sues and initiate steps towards integrated and efficient MSWM First/ Second Quarter 2010 / Jordan 32 Jordan while mitigating negative environmental effects at both the local and global level. The project could be a model for other municipalities in Jordan to enhance their MSWM systems. The Education Reform for the Knowledge Economy II (ERfKE II) Project (US$60 million) – This project is the follow up to ERfKE I which aimed at improving: (a) access to, and equity in, education through supporting pre-school education for dis- advantaged children and expansion of the school construction to meet population growth; and (b) quality of education through the use of technology and professional development. ERFkE II will deepen the impact of the reforms and widen the scope of the the Government’s Education Reform Program initiated in 2003. The objective of ERfKE II is to have students enrolled in all streams of pre-tertiary education in Jordan acquire skills necessary for par- ticipation in the knowledge economy. Jordan Recovery under Global Uncertainty Development Policy Loan (US$300 million) The Program supports the Gov- ernment's efforts to address economic and social consequences of the current global financial crisis and economic slowdown while improving resilience of the Jordanian economy to adverse shocks. Specifically, it supports policy measures which: (i) reduce fiscal vulnerability by broadening the tax base and enhancing effectiveness of government expenditures; (ii) strengthen the financial sector by further enhancing regulation and supervi- sion and improving access to finance; (iii) improve the business climate to encourage more private sector investment; and (iv) facilitate access of vulnerable groups to a more effective and fiscally sustainable social protection system. Jordan / First/ Second Quarter 2010 33 Iraq Zooming in on Energy Sector as Part of Reconstruction Drive - by Yahia Khairi Said* I raq and the World Bank recently (December 2009) signed Political deadlock over the passage of hydrocarbon legislation a US$5 million project under the Iraq Trust Fund to provide continued to hamper the recovery of the sector and consequently technical assistance in the development of an Integrated Energy the entire economy. Working within this context the government Strategy. The Iraqi team led by the Chairman of the Prime Ministers of Iraq had to develop a forward looking contractual framework Advisory Council, Thamir Ghadhban, has selected specialized which maintains consistency with legacy legislation. The resulting consultants to help develop the multi-year strategy covering oil, compromise combined government ownership and control, with gas and electricity. This is the latest in a number of World Bank a risk-sharing service contract to attract investors. activities in the Iraqi energy sector, which include major invest- ment projects in power generation as well as various technical The proposed contracts drew criticism from opposing directions assistance activities. including accusations of relinquished national sovereignty over the country’s main assets were matched by those suggesting it Iraq holds the third largest oil reserve in the World and has the did not go far enough to attract investors. Both the contracts potential to be one of the leading exporters. Reconstruction after and the bidding process were derided as complex, opaque and decades of wars, sanctions and mismanagement, depends pre- thus doomed to failure. These predictions seemed vindicated dominantly on oil revenues. Rebuilding the shattered economy when the first round held in November led to the award of only will demand fuel and power. Despite ‘floating on a sea of oil’, the one of the fields on offer. A consortium of BP and CNPC was the basic energy needs of Iraqis are yet to be met. only one willing to accept the government’s remuneration fee of US$2 per additional barrel of oil produced from the Rumaila Since 2003, Iraq struggled to restore pre-war levels of produc- field. Detractors did not recognise at the time that Rumaila, with tion, refining and generation. The new government inherited a current daily output of 1mbpd, accounts for over 40 percent a decrepit infrastructure and outdated institutions. Subsidised of Iraq’s oil industry. Rather than failure, the weeks following pricing meant that fuel and electricity were essentially free. En- the inking of the first deal, saw other bidders return to the ergy infrastructure has been regularly sabotaged. Many workers negotiation table to accept previously rejected offers. and sector officials were assassinated, kidnapped or forced to flee during the quasi-civil war of 2006-2007. The second round held in December improved on its predecessor with seven fields including two super giants auctioned off in an For Iraq’s energy sector, its place at the heart of the Iraqi economy open, well organized and transparent process. The auction was is a mixed blessing. Oil and electricity were the leading recipients the more remarkable given the difficult. It took place a day af- of both donor and Iraqi investments. The sector is also the stage ter a series of terrorist atrocities targeting government building, of political contestation among competing interests and visions murdering scores of civilians. for Iraq’s future. The way Iraq manages its oil will determine, to a large extent the nature of intergovernmental relations, and the Competition paid off for the Iraqi government which received divisions of roles between the state and the private sector. This lucrative offers with a combine peak production of 13.5 million explains the difficulty in reaching agreement on hydrocarbon leg- barrels per day in the long run for an average remuneration islation necessary to underpin the new institutional and regula- fee per barrel of US$2.5 above cost. The two rounds produced tory structure for the sector. over US$2 billion in signature bonuses. (Table 1 summarizes the results of the two bidding rounds.) Given this context, the achievements of the Iraqi energy sector over the past few years are remarkable. The gradual reduction of fuel Many obstacles stand in the way of Iraq reaching these targets subsidies since 2006 did not only remove an unsustainable fiscal which could make it the world’s number one oil producer in burden but also eliminated smuggling and the severe fuel shortage. 15 years. There is still no new legislation. There is a risk that Power supply has stabilized, significantly reducing outages over the the next government may seek to renegotiate the contracts. The past three years. companies may delay commencing work until the political and * Sr. Public Sector Specialist First/ Second Quarter 2010 / Iraq 34 Iraq security environment is more stable. They may fail to meet their Many countries will start to look at Iraq as an investor rather obligations under the contracts. Iraq’s dilapidated infrastructure than the other way around. Iraq’s future leaders will inherit a may not recover in time to support the planed expansion. country in a much stronger geopolitical position. In order to export new oil Iraq will almost certainly exceed the constraints These and other qualifications are valid but they should not obscure of OPEC. With its low lifting costs, Iraq, like Saudi Arabia, is less the profound economic and political changes that the contracts likely to suffer from a drop in prices. herald. Taken together the new contracts are as important as the formation of the Iraq Petroleum Company. Established in 1914, the Asian markets may absorb the bulk of Iraq's extra output. Asia's IPC preceded the formation of the modern state of Iraq by seven interest is evident by the visible presence of regional NOC’s in years. Needless to say there was no oil legislation at the time. the bidding. The additional exports will have a profound impact Having a law would create a more predictable and transparent on the global oil market and sadly, the climate. environment operating environment. It would make investors more comfortable but as it became clear from bidding rounds the lack of The contracts are likely to strengthen the hand of the Central law is not holding investors back. Government in the federalism debate. With such wealth at Baghdad’s disposal it would be easier to argue that sub-national Regardless of the outcome of the March elections it would be units stand to gain more from their share in Iraq's than what difficult for future Iraqi governments to justify renegotiating they can produce on their own. With so much oil under its con- the contracts. Which oil minister can defend reopening a deal trol the central government may in turn be more amenable to under which Iraq pays US$1.15 (e.g. Lukiol-Petronas) for ad- allow regions more autonomy. This dynamic is already producing ditional barrel of output before collecting 35 percent income signs of accommodation between the centre and the Kurdistan taxes and the 25 percent share of the state-owned partner? Regional Government. It is also unlikely that works will take years to start as some The experience of most petroleum dependent countries reveals, predict. CNPC already commenced operations on the Ahdab oil the management of Iraq’s newly enhanced wealth is likely to field a few months after they signed last year. Their exploration pose a significant challenge. Will oil revenues fuel authoritari- activities have already doubled estimates of the field’s reserves. anism and aggression as they did in the past? Will they be hijacked Dozens of oil company engineers are already deploying to Basra by oligarchs? The choices seem limited. Positive examples of where most fields are located. Schlumberger, Haliburton and resource wealth management remain few. It is encouraging in other oil services companies are building operational basis to this context that Iraq is undertaking concerted efforts to im- service investors. Shell, BP, ENI and other IOC’s have established plement the Extractive Industries Transparency Initiative (EITI), permanent presence in Iraq even before contracts were signed. having achieved Candidacy status early this month. The Ministry The contracts are structured in a way that encourages compa- of Oil has championed the initiative viewing transparency as a nies to ramp up production as quickly as possible. They have key factor in the efficient and accountable development of the strict requirements for the immediate commencement of work. industry. The World Bank is helping Iraq implement EITI. Looking Iraq has learned from past experience with contractors unable forward the Bank will also work with the government on the or unwilling to exercise concessions. The IPC companies only development of transparent and efficient revenue management exploited 1 percent of the concession area and the 1990’s con- mechanisms which could help address issues of fiscal stabiliza- tracts were never realized. tion, savings and transparent use of this wealth in the interest of the people of Iraq and, to a lesser extent, for the development Geopolitics of Oil and stability of the region. Today, it is difficult to predict the consequences of these con- tracts to Iraq and the region. The current context is not a good guide. When Iraq reaches an output of over 10mbpd, Iraq’s larg- er neighbors will no longer seem as dominant as they do today. Iraq / First/ Second Quarter 2010 35 Harnessing Oil Wealth for Long-Term Economic Development in Iraq: The Role Of Fiscal Policy - by Jorge Thompson Araujo* Whither Iraq? population has not felt the benefits of Iraq’s huge “natural capi- tal”. Confronting this reality should lie at the core of the efforts Iraq once stood out in the Middle East for the quality of its of all stakeholders involved in supporting broad-based, inclusive education and health systems as well as for its infrastructure economic development in Iraq. In the remainder of this article, we development. Wars, international sanctions, and misguided eco- outline some of the key issues involved, in the hope that they can nomic policies have led to a marked deterioration in the standards contribute to the debate on Iraq’s economic development. of living of the Iraqi people. Iraq’s infant mortality rate is close to those in the MENA region’s poorest countries, Djibouti and Yemen. Stabilizing an Unstable Economy School enrollment has declined over the past decades as a result of low quality of and low returns to education. About 23 percent The recent behavior of Iraq’s oil revenues sheds additional light of the population live below the poverty line1, in a country which on the fact that, historically, Iraq’s economy has been unstable in has the third largest crude oil reserves in the world2. a quite fundamental way. A quick examination of Iraq’s growth patterns indicate a high degree of instability in real per capita The good news is that, against all the odds, Iraq made consider- GDP over time, which is common in economies subject both to oil able progress on the macroeconomic front over the past few years. dependence and military conflict (international and domestic). Dollarization has been reversed, the Iraqi Dinar stabilized, and in- flationary pressures have been contained: After spiking at 65 per- Iraq’s real per capita GDP – a broad measure of welfare – has fol- cent in 2006, inflation is projected at 6 percent by end-2009. Iraq lowed a “boom-bust” process, with growth accelerations followed successfully concluded two Stand-By Arrangements (SBA) with the by growth collapses. Such collapses have been caused either by IMF in December 2007 and 2008, triggering the release of the final falling oil prices or periods of warfare and sanctions. Sustained tranche of the debt relief agreed with the Paris Club, for a total income growth for the poor can only occur when such sharp debt reduction of 80 percent in NPV terms. Furthermore, while rela- “boom-bust” processes are eliminated or at least smoothed out. tively high, poverty in Iraq is “shallow”: The poverty gap is only 4.5 Chart 1. Iraq: Real GDP per Capita, 1970-2003 percent. This means that a relatively small amount of resources– through income growth or transfer mechanisms–could lift most of the poor above the poverty line. As the security situation improves, so does the opportunity for Iraq to develop its private sector and use its immense oil wealth to the benefit of its population. More recently, Iraq suffered another setback with the abrupt de- cline in oil prices in the second half of 2008. After holding fiscal surpluses in the order of 8.8 percent of GDP and 1.6 percent of GDP in 2007 and 2008 respectively, Iraq is projected to have an overall fiscal deficit of about 29.1 percent of GDP in 2009. A large financing gap has emerged for the 2009-2011 period that would require external financing. Per capita GDP volatility in Iraq is not only due to oil price volatil- ity, but also (and perhaps surprisingly) to oil output volatility. The Iraq’s short-term fiscal woes reflect a deeper, longer-term eco- physical volumes of Iraq’s oil production and exports have been nomic problem: Iraq’s oil dependence. Revenues from crude oil considerably volatile and below potential, reflecting both periods exports account for about two-thirds of the country’s GDP and of deteriorating security and underinvestment in oil infrastruc- for almost all of its export and fiscal revenues. And yet the Iraqi ture. See chart 2 below. * Lead Economist (Iraq/ Syria) 1 Republic of Iraq (2010). National Strategy for Poverty Reduction, p.8. 2 Iraq’s proven oil reserves are currently estimated at 115 billion barrels. First/ Second Quarter 2010 / Iraq 36 The Role Of Fiscal Policy Chart 2. Iraq: Oil Production and Export Volumes, December 1996 to GDP generation but has very little contribution to employment, April 2009 (mbpd) which comes mostly from services and agriculture. Chart 3. Iraq: Structure of Employment and GDP by Sector, 2004 Can “crowding-out” be turned into “crowding-in”? Fiscal policy can play a critical role in achieving this, by mitigating the adverse On the production side, recent contracts signed between the Iraq impact of the oil wealth on the rest of the economy. Government and international oil companies are a promising new development. Iraq’s oil production could potentially reach 7 mbpd Is It Mainly Fiscal? in 2016-17 as a result of these contracts. Improved security would also reduce short-term disruption in oil production going forward. Fiscal policy in Iraq has three main characteristics aimed at providing some cushion against sudden fluctuations in oil Just as important, revenue flows from the State-dominated oil revenues: (i) a conservative budget oil price to guide estimates sector provide the bulk of savings and investments generated in of the budget envelope3; (ii) protection of expenditures from the Iraqi economy (for example, in 2008, public investments revenue volatility through development of borrowing instru- accounted for 91.4 percent of total gross domestic investment ments and through use of a Medium-Term Fiscal Framework in the Iraqi economy). Most of the resources domestically (MTFF); and (iii) use of fiscal buffers (positive balances at the available to finance investment needs in Iraq come from the Development Fund for Iraq as well as Ministry of Finance bal- oil sector. Therefore, oil resources can potentially be managed ances in the Central Bank of Iraq) to reduce the expenditure to foster non-oil growth and protect Iraq’s economy from the impact of oil revenue volatility. But even these fiscal safeguards volatility of oil price and production. did not prevent Iraq's fiscal stance from deteriorating signifi- cantly with the decline in oil prices in the second half of 2008. From Crowding-Out To Crowding-In A recent IMF working pape4 advocates an integrated approach It is a well-known fact that, in resource-rich economies, the oil to fiscal policy in oil-producing countries such as Iraq. Different sector can “crowd-out” the development of the non-oil econ- short-term and longer-term fiscal policy tools can be combined omy, through a variety of mechanisms that together comprise to deal with a number of characteristics of oil revenue: vola- the so-called “resource curse”: reduced competitiveness in non- tility, uncertainty, exhaustibility, and origination from abroad booming export sectors due to real exchange rate appreciation (through exports). Table 1 below summarizes the main elements (also known as “Dutch Disease”); a bloated public sector, absorbing of such integrated approach to fiscal policy as well as where much of the qualified workforce through wages higher and job Iraq finds itself in each of them: security greater than the private sector can offer, as well as acting 3 “The use of conservative budget oil prices reflects prudential consid- as a social safety net of sorts; weak governance as well as bigger opportunities for corruption and waste. Many of these factors erations and/or political economy factors. Such oil price assumptions are viewed as a prudent way to reduce the risk of a large deficit or fis- are present at varying degrees in the Iraqi case. cal adjustment in the event of an unanticipated decline in oil revenue. Governments have also sought to use low budget oil prices to contain It is also a well-known fact the oil sector per se cannot guarantee spending pressures”. In Ossowski, R., M. Villafuerte, P. Medas, and T. sustainable livelihoods for the majority of the population. Oil explo- Thomas (2008). “Managing the Oil Revenue Boom: The Role of Fiscal ration and production are not labor-intensive and by themselves Institutions”. IMF Occasional Paper 260, p. 15. 4 Medas, P. and D. Zakharova (2009). “A Primer on Fiscal Analysis in cannot be relied on to generate incomes for the poor. This is illus- Oil-Producing Countries”. IMF Working Paper WP/09/56. trated in Chart 3 below, which shows that the oil sector dominates Iraq / First/ Second Quarter 2010 37 The Role Of Fiscal Policy Table 1. An Integrated Approach to Fiscal Policy Special Fiscal Institutions – such as an explicit fiscal rule or even an oil stabilization fund. Fiscal Policy Objectives Available Policy Where Iraq Stands Choices • To help ensure long-term fiscal sustainability and Accurately assess the Adopt non-oil NOPB calculated counterbalance the effects of “Dutch Disease”, the Iraqi fiscal stance indicators, such as as part of the fiscal Government may wish to consider the adoption of a the Non-Oil Primary framework agreed long-term sustainability benchmark that is appropriate Balance (NOPB) with the IMF, but not for Iraq’s conditions6. actively used by the Government as a tool to assess the fiscal These policy choices are not trivial, and need to be grounded on stance solid analytical work. It is critical that work in these areas is ini- tiated without delay: Oil prices are rising anew, and Iraq needs Reduce impact of oil De-link govern- The Development Fund revenue volatility ment expenditures for Iraq (DFI) is not an to be better prepared in the future to cope with volatility, and from short-term oil oil stabilization fund, avoid falling into a new fiscal crisis. revenue fluctuations but the practice of through, for example, maintaining positive Towards A Virtuous Cycle Of Prosperity Special Fiscal Institu- balances (“buffers”) act tions such as oil as a stabilizing factor And Peace stabilization funds. to a limited extent. Ultimately, sustained prosperity and poverty reduction in a country Safeguard expendi- The Iraqi Government such as Iraq can only be achieved through medium-to-long-term ture quality through is implementing a PFM economic diversification. Given the country’s abundance of land, stronger PFM Reform Action Plan, mechanisms with support from the non-oil natural resources, and labor, economic diversification Bank and the IMF. is not a far-fetched goal for Iraq. While oil wealth is not the only development tool at Iraq’s disposal – specific measures to Adopt a long-term Apply long-term sus- Not currently in use improve the business environment and strengthen the private perspective to fiscal tainability benchmarks in Iraq. sector are critical – it can be harnessed to help accomplish this sustainability (Permanent Oil In- goal. The international experience shows a number of alterna- come, Van Der Ploeg/ tive mechanisms available to manage oil wealth from a long-term Venables approach) perspective, some of which could be adapted to Iraq, as discussed Manage uncertainty Adopt a Medium- MTTF adopted, but the in the previous section. Term Fiscal Frame- links between policy work (MTTF) priorities and medium- term budgeting are Stabilizing Iraq’s unstable economy and using the country’s still weak. oil wealth to crowd in private sector-led growth in the non- oil sector would not, in and of themselves, guarantee peace Table 1 shows that Iraq has made significant progress in some and security. However, success in the economic front could aspects of an integrated approach to fiscal policy: (i) the setting go a long way towards achieving a virtuous cycle of sustained up of the Development Fund for Iraq, which is also a critical tool peace and prosperity in Iraq. for safeguarding the integrity of the country’s oil resources5; (ii) the ongoing PFM reform; and (iii) the adoption of a MTTF. However, going forward, Iraq will need to address the oil 6 Different such benchmarks exist, including: (i) the very conservative revenue volatility and long-term fiscal sustainability issues “bird-in-hand” approach, where only the yield from net accumulated more systematically: financial assets is spent; (ii) the permanent oil income model (POIM), where the yield on the Government net wealth (oil plus financial is spent), ensuring a constant share for each generation; and the (iii) Van To help reduce the costs of volatility, the Iraqi Government may der Ploeg/Venables approach, where current consumption is initially wish to explore the possibility of adopting Special Fiscal Institutions lower than under the POIM, with the difference used to repay debt (if – such as an explicit fiscal rule or even an oil stabilization fund. applicable) and finance public investments, particularly in the non-oil • To help reduce the costs of volatility, the Iraqi Gov- economy, allowing for consumption levels higher than under the POIM ernment may wish to explore the possibility of adopting in the outer years. See also Van der Ploeg, F. and A.J. Venables (2008). “Harnessing Windfall Revenues in Developing Countries: Sovereign 5 It is critical to establish a sound successor regime for the DFI, as it will ex- Wealth Funds and Optimal Trade-Offs Between Citizen Dividends, Pub- pire by end-2010. This discussion, however, is beyond the scope of this note. lic Infrastructure, and Debt Reduction”. CEPR Discussion Paper 6954. First/ Second Quarter 2010 / Iraq 38 Iraq Partnership Program T he Joint World Bank-IFC Interim Strategy Note for 2009–11 Health Rehabilitation Project (US$25 million) - Aims to benefited from a stocktaking of the Bank Group’s engagement help rehabilitate emergency services in 9 hospitals and provide with Iraq to date as well as extensive consultations with Gov- 12 hospitals with basic medical and laboratory equipment and ernment of Iraq, the donor community, and other stakeholders, essential drugs. including representatives from private sector and civil society organizations. Activities under this ISN fall under one or more First Private Sector Development Project (US$65 million) - of three thematic areas of engagement: Aims to help strengthen the private/financial sectors by: (i) in- stalling a national high capacity telecommunications network; (i) Continuing to support ongoing reconstruction and socio- (ii) linking the Central Bank to commercial banks to improve economic recovery; the payment system; and (iii) addressing selected priorities in (ii) Improving governance and the management of public institution building. resources, including human, natural and financial; and (iii) Supporting policies and institutions that promote Baghdad Water Supply and Sanitation Project (US$65 broad-based, private-sector-led growth. million) - Aims to help restore basic water supply and sanitation services for Baghdad through rehabilitating existing networks The International Reconstruction Fund Facility for Iraq (IRFFI) and facilities, and to provide institutional support. The International Reconstruction Fund Facility for Iraq aims to help donors channel resources and coordinate support for recon- Water Supply, Sanitation and Urban Development Project struction and development in Iraq through two trust funds: The (US$110 million) - Aims to upgrade and rehabilitate water World Bank Iraq Trust Fund (ITF) and the UNDF Iraq Trust Fund. supply and sanitation in 9 cities, and conduct urban reconstruc- The ITF finances reconstruction and capacity building projects, tion in the poorest areas of 3 cities, benefiting over 2 million peo- within the framework of Iraq’s National Development Strategy ple. The project also provides training and technical support. and International Compact with Iraq. The donors to the ITF agreed to extend the termination date of the ITF to December Community Infrastructure Rehabilitation Project (Addi- 31, 2013, effective on May 26, 2009. tional Financing) (US$26 million) - Aims to undertake labor- intensive civil works to restore rural water infrastructure, Portfolio create local employment, enhance community participation, The Iraq portfolio includes 21 active projects. Out of these, 16 and increase institutional capacity. are financed by the ITF and 5 are financed by the International Development Association (IDA) and are concentrated in sectors Emergency Disabilities Project (US$16.8 million) - Aims to such as water, road rehabilitation, health, energy, education, financial improve rehabilitation and prosthetic services to the disabled to management, and social protection. reduce the burden of physical disability by upgrading the infra- structure of selected rehabilitation or prosthetic centers and the Iraq Trust Fund (ITF) skills of the staff to provide services. School Construction & Rehabilitation Project (US$60 million) - Aims to alleviate hazards and overcrowding in schools through Social Protection Project (US$8 million) - Aims to strengthen major rehabilitation of 133 existing schools and construction of the capacity of the Iraqi agencies to develop, manage and monitor 52 new schools, benefiting over 50,000 families with school age pension and social safety net reform programs. children (about 95,000 students). Household Survey & Policies Project (US$5.1 million grant Second Capacity Building Project (US$7 million) - Builds on / US$3.6 million TA) - Finances a comprehensive household the First Capacity Building Project to help authorities introduce income and expenditure survey and data analysis to enable the medium-term policies, focusing on economic and public sector authorities to establish a poverty line, target social assistance to management, and social safety nets. the neediest, and make informed policy decisions. Iraq / First/ Second Quarter 2010 39 Partnership Program Marshlands School Construction Project (US$6 million) - Emergency Road Rehabilitation Project (US$135 million) - Provides additional financing for the Emergency Schools Con- Finances the rehabilitation of highways and village access roads struction and Rehabilitation Project to finance new school con- in Central, Southern and KRG Governorates of Iraq. 3 floating struction of 33 small schools in the Southern Marshlands area bridges will also be replaced with permanent structures. of Iraq, benefiting 6,000 to 8,000 children. Dokan and Derbandikhan Emergency Hydropower Project Environmental Management Project (US$5 million) - Aims (US$40 million) - Aims to upgrade electricity supply primarily to strengthen key functions of the Ministry of Environment to in the Kurdistan region, but also nationally through its connection enable it to undertake policy analysis, formulate laws and regu- to the national grid. About 490,000 households will benefit lations, monitor environmental quality, promote environmental directly, as well as a number of industries. awareness, and conduct technical studies. Emergency Electricity Project (US$124 million, with the Electricity Reconstruction Project (US$6 million) - Aims companion ITF grant of US$6 million) - Aims to restore the to upgrade technical skills in operations and maintenance of base load generating capacity of the Hartha power plant and power utilities at the Ministry of Electricity (MOE), in conjunc- build capacity at the Ministry of Electricity. tion with the US$124 million IDA credit that aims to restore the base load generation capacity of the Hartha power station. Emergency Water Supply Project (US$109.5 million) - Aims to improve the quantity and quality of water in 4 high Regional Emergency Health Response (US$8.7 million) - Aims priority governorates through the rehabilitation and upgrade to assist the Kurdistan Regional Government to establish rapid, of the water supply and distribution infrastructure, and engage coordinated and effective response services to health emergencies. the government to develop a sustainable water sector policy. Banking Sector Reform Project (US$10 million) - Aims to support Iraq's implementation of its Banking Reform Strategy and Action Plan, focusing on the institutional, operational and financial restructuring of the 2 state-owned commercial banks, and strengthening of the regulatory and supervisory functions of the Central Bank of Iraq. Public Financial Management Reform (US$16 million Grant / US$2 million TA) (US$16 million Grant / US$2 million TA) The project supports the ongoing public financial management (PFM) reform process, including strengthening budget management, improving public financial reporting and control, strengthening public procurement, and establishing the tools, systems and insti- tutions required for effective PFM capacity development. International Development Association (IDA) Third Emergency Education Project (US$100 million) - Aims to assist the Ministry of Education to reduce school overcrowd- ing and strengthen its capacity to improve quality of teaching and curricula. First/ Second Quarter 2010 / Iraq 40