Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB3909 Project Name Togo - Financial Sector and Governance Project Region AFRICA Sector General finance sector (100%) Project ID P111064 Borrower(s) MINISTRY OF FINANCE Implementing Agency MINISTRY OF FINANCE Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared May 19, 2008 Estimated Date of Appraisal Authorization January 5, 2009 Estimated Date of Board Approval March 30, 2009 1. Key development issues and rationale for Bank involvement 1. Togo has known a long period of political and economic instability and tensions since its independence in 1960. The signing of a comprehensive political accord ( Accord Politique Global ) on August 20, 2006 was a breakthrough and provided for a transitional government of national unity charged of organizing legislative elections in October 2007. These were deemed free and transparent by the international community and marked a milestone in Togo’s democratization process. The new Government has committed to pursue political and economic reforms and to re-engage with the international community, and in particular with the Bretton Woods institutions, whose activities in the country have been modest over the last decade and a half. 2. The World Bank approved an Interim Strategy Note (ISN) for Togo on May [16], 2008. This ISN supports the Interim Poverty Reduction Strategy Paper (I-PRSP) approved by the Government in March 2008, which is based on three pillars: (i) strengthening political and economic governance, (ii) promoting economic recovery and sustainable development, and (iii) developing social sectors, human resources and employment. The goal of the ISN is to help Togo recover from a long period of instability and suspension of aid and begin laying the foundations for sustained, shared growth over the medium term. This will be achieved through: (i) support for the normalization of relations with the World Bank through the clearance of arrears which will facilitate Togo’s efforts to re-establish relations with the rest of the international community and pave the way for Togo toward debt relief under the HIPC initiative and MDRI; (ii) assistance to improve public financial management and governance in key sectors and public institutions; and (iii) assistance to address critical and social needs on the ground. 3. The US$170.6 million Economic Recovery and Governance Grant (ERGG) – approved on May [14], 2008 – provided US$153 million for arrears clearance, thus allowing IDA re- engagement in Togo. The additional operations proposed in the ISN aim at supporting economic Page 2 governance reforms in the critical sectors of the economy. The ISN has been developed in close collaboration with the IMF, which – following a satisfactorily implemented Staff Monitored Program – approved on April 21, 2008 a three-year program through a Poverty Reduction and Growth Facility (PRGF) for SDR 66.06 million 1 . 4. The proposed Financial Sector and Governance Project aims at supporting, through technical assistance, the critical structural reforms in the financial sector launched by the new Government. It therefore complements the budget support provided by IDA through the ERGG and by the IMF. The proposed project builds on the Financial Sector Review completed in 2006 and the 2008 Doing Business Report for Togo. 2. Proposed objective(s) 5. The proposed project development objective is to contribute to economic growth and improved economic governance through financial sector restructuring and strengthening. Financial sector restructuring will lead to more efficient government resources allocation towards poverty reducing and growth inducing sectors and will contribute to private sector led growth. 6. Key expected results include (i) development and implementation of a satisfactory strategy for banking restructuring (BTCI, UTB, BIA, BEPC and BDT), (ii) signature of partnerships with strategic investors for BTCI, UTB and BIA, (iii) strengthened supervision of microfinance institutions, (iv) increased financial transparency of microfinance sector, (v) a strategy to reduce the pension deficits of the social security institutions (CRT and CNSS) is developed and implemented, (vi) increased capacity of the Government to steer reforms in the financial and private sectors and (vii) improved public private sector dialogue. 3. Preliminary description 7. The proposed lending instrument is a Specific Investment Loan (SIL) 2 . The proposed US$10 million Financial Sector and Governance project will focus on technical assistance to various stakeholders with a view to improve economic growth and governance. More specifically, the technical assistance will support the Government reforms program agreed with the World Bank and the IMF budget, with a focus on the financial sector. 8. The project will have four components: (i) banking sector restructuring, (ii) microfinance sector strengthening, (iii) social security sector restructuring and strengthening and (iv) support to implementation of reforms in the financial and private sectors. 9. Component 1: Banking sector restructuring. The Togolese banking sector is facing a crisis due to serious lack of governance and very high levels of non performing loans (NPLs) which has led to three banks, accounting for 56 percent of the market, to require recapitalization of over 1 This is equivalent to around US$107 million at the current exchange rate. 2 A SIL is selected (instead of the Technical Assistance Loan) as it is a flexible instrument that allows to finance a diversity of activities. A SIL would allow to finance technical assistance (consultants) as well as equipment. Page 3 CFAF 100 billion. Technical assistance will support the financial and institutional restructuring of key commercial banks. 10. Component 2: Microfinance sector strengthening. Contrary to the banking sector, the microfinance sector is relatively healthy in Togo and plays an important role in providing access to financial services. There is however a need to strengthen the supervision of this sector to prevent crises. The microfinance supervision capacity of the Ministry of Finance therefore needs to be strengthened, as well as internal and external controls within the major microfinance networks (which represent 80% of the microfinance sector). This will also include support to the consolidation of the sector (i.e. independent credit and savings cooperatives joining networks). Increased financial transparency will also be supported (including promotion of rating). 11. Component 3: Social security sector restructuring and strengthening. The pension system for civil servants (CRT) is facing a deep financial deficit, which requires important government subsidies (CFAF 7 to 8 billion annually) to ensure timely payment of pensions. Technical assistance is needed to help reform the pension system with a view to bring the system closer to equilibrium and reduce the burden on the government budget. Technical assistance will also be provided to reduce the actuarial deficit of CNSS. 12. Component 4: Support to implementation of reforms in the financial and private sectors. Technical assistance will be provided to (i) increase capacity of the Government to steer reforms in the financial and private sectors through the Secrétariat Permanent pour le suivi des politiques de réformes et des programmes financiers and (ii) improve dialogue between the public and private sectors. 13. The World Bank has worked very closely with the IMF on financial sector issue and joint missions have been organized. Additional support from development partners will be sought. AFRITAC 3 , UNDP and UNCDF are currently supporting the microfinance sector in Togo and the proposed support to microfinance supervision would be undertaken in collaboration with these three agencies. 4. Safeguard policies that might apply The proposed operation is a Technical Assistance operation and should not trigger any safeguard policies. Funding is mostly for consultants and, to a lesser extent, equipment and refurbishment (i.e. painting, installing air conditioner; no civil works will be undertaken). 5. Tentative financing Source: ($m.) BORROWER/RECIPIENT 0 International Development Association (IDA) 10 Total 10 3 AFRITAC is a technical assistance facility financed by the IMF. Page 4 6. Contact point Contact: Guillemette Jaffrin Title: Financial Sector Specialist Tel: + 243 99 99 49 015 Email: gjaffrin@worldbank.org Location: Kinshasa, Congo Democratic Republic (IBRD)