Docmeut of The World Bank FOR OFFICIAL USE ONLY C-4 Z q IL 9 S- CD) C~ f;Z X- 37 -cA Report No. P-4806-CD REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 11.9 MILLION AND A PROPOSED AFRICAN FACILITY CREDIT OF SDR 15.7 MILLION TO THE REPUBLIC OF CHAD FOR A FINANCIAL REHABILITATION PROGRAM July 5, 1988 This document has a restricted distribution and may be used by recipients only in the performaoce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EOUIVALENT UNITS Currency Unit - CPA Franc (CFAP) US$1.00 * CFAF 285.0 (June 1988) CFAF 100 US$0.35 FISCAL YEUR January 1 - December 31 SYSTEN OF WEIGHTS AND MEASURESs METRIC ABBREVIATIONS AND ACRONYMS BEAC Banque des Etats d'Afrique Centrale CAL Caisse Autonome d*Amortissement CCCE Caisse Centrale de Coop4ration Economique CFAF Franc of the African Monetary Union £OTONTCNAD Societ6 CotonniAre du Tchad CT? Coop6rative des Transporteurs Tchadiens PAO Food and Agricultural Organization FIP? Fonds d'Intervention des Produits P4troliers NRC Financial Rehabilitation Credit FuA African Development Fund Units of Account IRCT Institut de Recherche du Coton et des Textiles ZEotiques MAGAVET Magasin GGneral d'Approvisionnement en Produits et Matdriels Vdterinaires MCT Manufacture des Cigarettes du Tchad NGO Non-Governmental Organization OFNAR Office National des Routes OMVSD Office de Nise en Valeur de Sat4gui-D6ressia ONDR Office National du D4veloppement Rural ONPT Office National des Postes et Tilcoammunications PFP Policy Framework Paper PHARMAT Centrale Pharmaceutique du Tchad SFA Structural Adjustment Facility SDAT Societe Industrielle de Mat4riel Agricole SONAPA Societe Rationale de Production Animale SONASUT SocietE Rationale Sucriere SOTERA Societe Tchadienne dlEploitation des Ressources AnImales SR Saudi Rial STT Societe Tchadienne de Textile TIT Societe de TelEcomunnications Internationales du Tchad FOaOFFICIAL USE ONLY REPUBLIC OP CHAD FINANCIAL REHABILITATION CREDIT TABLE OF CONSENTS Pagte CREDIT AND PROGRAM SUMMARY ............................... i I. THE ECONOMY . . . . . . . . . . . . . . . . . . 1 A. Background .... . . .. 1 B. Recent Economic Developments . . . . . . . 2 C. Adjustment Policy Issues . . . . . . . . . 3 II. THE ADJUSTMENT PROGRAM.. . 5 III. THE FINANCIAL REHABILITATION PROGRAM 1988-89... 6 A. Public Sector Resource Management . . . . . 6 B. Cotton Sector . . . . . . . . . . . . . . . 12 C. Preparation of Future Reforms . . . . . . 17 IV. THE PROPOSED OPERATION.. 19 A. History.. . . . . . 19 B. Economic and Social Impact of the Adjustment Program . . . . . . . . . . . . 19 C. Benefits and Risks . . . . . . . . . . . . 22 D. Proposed Financing . . . . . . . . . . . . 22 E. Disbursement, Procurement, Administration and Auditing . . . . . . . . . . . . . . . 23 F. Monitoring and Tranche Release . . . . . . 24 V. BANK OPERATIONS STRATEGY ..... ................. 24 VI. COLLABORATION WITH THE IMP .................... 26 VII. RECOMMENDATION .................. ................ 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TEXT TABL,ES Table 1 : Public Sector Financing Plan, 1987-89 Table 2 t Cotton Restructuring Plan - Key Indicators for Pricing Policy (1987188-1990191) Table 3 t Selected Economic Indicators, With and Without Structural Adjustment (1987-1995) ANNEXES Annex I t Key Macroeconomic Indicators, Balance of Payments, Status of Bank Operations Annex II : Supplementary PLogram Data Sheet Annex III t Government's Statement of Development Policy Annex IV : Matrix of Policy Actions MAP IBRD 21014 (i) FINANCIAL RENABn-UT ION CREDIT CREDIT AND PROGRUM StNEARY Borrower: Republic of Chad Benef_ciaries: Republic of Chad and COTONTCHAD Credit Amounts: IDA: SDR 11.9 million (US$16.2 million equivalent) African Facilitys SDR 15.7 million (US$21.3 million equivalent) Terms: Standard IDA terms with 40 years maturity Standard SFA terms with 50 years maturity Descriptions The proposed credit would support the first phase of the Government's adjustment program outlined in the Policy Framework Paper (1987-90). The principal objectives of this phase of the program are to improve resource use in two important areas of the economy: public finance and the cotton sector. The measures in public finance are designed to increase budgetary .evenues, augment development-oriented current expenditures, and improve investment programming. The economic and financial viability of the cotton sector will be improved through measures to reduce costs of the cotton parastatal, improve extension and research, strengthen the sector's institutional set-up, and reform pricing policy. The program also aims to resolve the problem of COTONTCHAD's arrears to the banking system. In addition, the program includes studies to prepare future adjustment measures in public finance/administration, the public enterprise sector, and agriculture. Benefits and Risks: The main benefits of the financial rehabilitation program would be improvements in government revenues and expenditures, increased viability of the cotton sector in economic and financial terms, and an improved financial position of the public sector. The program would also strengthen the basis for higher economic growth in the medium term. As other operations in Chad, the program is subject to risks resulting from external factors (drought and renewed border conflicts) which could delay policy actions and absorb substantial government resources. Risks (ti) inherent in the program are that the Government might not be able to implement policy actions cue to internal political resistance or that farmers' responses to cotton reform measures are not as anticipated. Efforts to reduce these risks to an acceptable level have been taken, e.g., by implementing the reforms gradually. Financing Plant IDA US$16.2 million equivalent SFA US$21.3 million equivalent SJF US$ 4.5 million equivalenc ADF US$38.3 million equivalent Estimated Disbursementt FY89 FY90 (US$ million equivalent) Annual 21.0 21.0 IDA 4.0 12.2 SPA 12.5 8.8 SJF 4.5 The credits would be disbursed in two trauches of US$21 million equivalent each. The first tranche would be available upon effectiveness. The second tranche is expected to be disbursed about nine months later after the conditions for tranche release have been fulfilled. Staff Appraisal Reports Not applicable MLans IBRD 21014 INT9ERNTIONAL DBV ELQPH S ASSOCIAT ION REPORT AND TIO Or T21 PRESIDENT TO THE EXECUTI DIECTORS ON A PROOSD V CREDIT AND A PROPOSED ARCAN FACILITY CREDIT TO THE REPUBLIC OF ClAD FOR A FINANCIAL REHAIILITAON PROGRUM 1. I submit the following report and recomendation on a proposed development credit to the Republic of Chad in the amount of SDR 11.9 million (US$16.2 million equivalent) for approval. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance a financial rehabilitation program. It is proposed to supplement this credit with a credit of SDR 15.7 million (US$21.3 million equivalent) from the Special Facility for Sub-Saharan Africa (the African Facility) established by resolution No. IDA 85-1, of May 21, 1985. and with special joint financing of SR17 million (US$4.5 million equivalent) from the Saudi Fund. The program would be cofinanced by the African Develo-ment Fund through a credit of FUA 30 million (US$38.3 million equivalent). I. TEE ECONY 2. The following assessment of the Chadian economy is based on the Country Economic Memorandum (Report No. 6785-CD) distributed to the Executive Directors in October 1987 and on missions that visited Chad in 1987 and 1988 to help the Government prepare its adjustment program. Annex I contains economic indicators. A. Backaround 3. Although Chad has considerable agricultural and some mineral potential, its economic development has been hampered by a landlocked location, volatile climatic conditions, as well as periods of conflict for most of the time since its independence in 1960. Crop production and livestock account for nearly half of Chad's GDP and provide a living for 90S of its population of 5.2 million. Population growth is only 2.4Z, and the balance of population to arable land remains quite favorable compared to other Sabelian countries. During periods of normal rainfall, Chad has been self-sufficient in cereals. Cotton and livestock are the main export products. Industry contributes about one-fifth of GDP and is dominated by a few large enterprises producing, apart from cotton, consumer goods for the domestic market. 4. Economic activity in the last 10 years has been severely disrupted by exogenous factors. In 1979-82, unrest escalated into a war during which GDP shrank by 302. During the conflict, industries reduced or suspended operations, the banks closed down, public administration ceased to function, and much of the country's infrastructure was destroyed or deteriorated due to lack of maintenance. Economic recovery, which began with the establishment of the current Government in 1982, was again disrupted by a drought of unprecedented severity in 1984, followed by a sharp decline of the world market price for cotton. The border conflict with Libya continues and it absorbing substantial - 2 - resources of the country. Although, by 1986, real GDP had recovered to its 1977 level, it must be shared with one million more people. Per capita income, which has declined by 2Z p.a. during the last 20 years, was only US$140 in 1986. Socioeconomic indicators as well confirm that Chad is one of the world's poorest countries. B. Recent Economic DeveloDm'nts 5. Performance of the Chadian economy in the last few years was deeply affected by the crisis in the cotton sector. The price of cotton in CFAF fell by 67Z from mid-1984 to mid-1986 due to a decline in the world market price and the depreciation of the US dollar. Moreover, the -price decline coincided with a sharp increase in the expenditures of COTONTCHAD (the cotton parastatal), caused by inefficient management. As a result, the company sustained huge losses and accumulated arrears of CFAF 43 billion to the banking system. Despite the downturn in the cotton industry, Chad's remarkable rebound from the drought, with cereals production doubling, caused GDP to grow by 302 in 1985. In 1986, however, real GDP declined by 22 as the effects of the cotton crisis were felt more fully. 6. In response to the cotton crisis, the Government implemented a rigorous Emergency Program which aimed at reducing the sector's deficit. The program covered the 1986187 and 1987/88 crop seasons and included the following measures: reducing input subsidies from 50Z to zero over two years, limiting cotton production to 100,000 tons, closing redundant ginneries, exempting COTONTCHAD from payment of export taxes, and substantially reducing the staffs of COTONTCHAD and ONDR, the agricultural extension agency. The two-year program has achieved its objective; COTONTCHAD's costs were reduced from CFAF 913 per kg fibe. in 1985/86, prior to the emergency program, to CFAF 544 per kg fiber in 1987/88. Cotton fiber is now being produced at about the same cost as in 1983/84, prior to the period of lax management, when COTONTCHAD's costs were roughly at the same level as those of other West African cotton companies. Its operating losses have been reduced from CFAF 19 billion in 1985/86 to approximately CFAF 5 billion in 1987/88. In 1986, the Central Bank of the Central African Monetary Union, of which Chad is a member, agreed to reschedule COTONTCHAD's arrears over a period of 10 years with 5 years grace and a two-year moratorium on the payment of interest. 7. Chad's already precarious public finances have been aggravated by the cotton crisis. The loss of export taxes on cotton, which was a major source of government revenue, contributed to a decline of nearly 20Z in budgetary receipts in 1986. As a result, domestic resource mobilization through the government budget is now a very low 6Z of GDP. To partially offset the loss of cotton revenue, the Government increased various consumer taxes. It also reduced current expenditures, which were already at a critically low level. Nevertheless, the fiscal deficit on current expenditures (commitment basis) increased from 1.6Z of GDP in 1985 to 2.7Z in 1986. The deficit was financed through budgetary aid and the accumulation of domestic and external arrears. The Government recognized the need to generate additional revenues through broadening the tax base and improving tax administration. In July 1987, as a first step, the cumbersome and complex system of taxing imports of petroleum products was replaced with a unitary consumption tax levied by the Customs services at entrv points. Additional measures - 3 - were taken in November 1987 to improve collection of the new tax, and its yields are increasing. 8. Chad's external current account deficit increased sharply due mainly to the decline of world cotton prices and the weakening of the US dollar. With export earnings declining by 402 between 1984 and 1986, Chad's current account deficit almost doubled to 252 of GDP in 1985 and 1986. The deficit was financed by an increase of both capital grants and concessional lending. Over this period, the focus of aid also changed from emergency food aid to development assistance, which tripled between 1985 and 1987. Budget support also increased in response to the impact of the cotton crisis on public finances. 9. Although, by conventional measures, Chad has a relatively small external debt and a low debt service ratio, it has experienced serious debt-servicing problems. The country's external debt is equivalent to 25Z of GDP; most of it is contracted by the public sector on concessional terms. In 1985 and 1986, Chad's scheduled debt service was only 7? of export earnings. Actual payments, however, covered only about half the debt service due, and arrears were accumulated which amounted ti about US$80 million by end-1986. The Chadian Government repaid arreers to most multilateral creditors and rescheduled arrears to bilateral creditors through negotiations. Scheduled debt service in 1987 and 1988 is in the order of US$8-10 million, i.e., about 72 of export earnings. The servicing of the debt is constrained by inadequate public sector resource mobilization. In 1987, scheduled debt service amounted to nearly one-fifth of budget revenues and, thus, represented a heavy burden for Chad's public finances. C. Adiustment Policy Issues 10. Chad's econortic growth in the next few years is hampered by a number of structural issues which mostly result from the country's low level of development. Among the most important adjustment issues are: (i) inefficiencies in public sector resource mobilization and expenditures as well as in public administration; (ii) restoring the competitiveness of the cotton sector; (iii) a pegged exchange rate which has increased the volatility of export earnings in local currency terms; (iv) an inefficient public enterprise sector; and (v) the rehabilitation of the banking sector. 11. Public Finance. Chad's public finances suffer from weak domestic resource mobilization, insufficient current expenditures, inadequate administration, and a severe debt service problem. The share of government revenue in GDP which already was very small has been further reduced by the cotton crisis. The challenge for the Government is to generate additional budgetary revenues and to raise civil administration expenditures to a level compatible with the requirements of the country's development strategy. In recent years, the Government has financed only current expenditures, with military spending and civil service salaries as the two biggest items; operating expenditures of development-oriented ministries have been slashed to the point where the Government is unable to carry out basic functions. Inadequacies exisit in tax administration, and budget execution is characterized by much discretionary decision-making. Due to low budget revenues, Chad's public sector debt service is too high to be sustainable over the medium term, especially if the Government has to also ensure debt service on COTONTCHAD's arrears. -4 - 12. Future growth will require massive investment in infrastructure and human capital development. The Government is completely reliant on concessional external financing for its public investment program, as well as for a large portion of the associated recurrent costs. In recent years, public fixed capital formation has equaled about 8Z of GDP. Domestic savings are highly negative, and the country has extremely limited access to private capital markets abroad. To use the available external resources effectively, the Government needs to define sectoral strategies and investment criteria, while emphasizing domestic resource mobilization through cost recovery schemes as well. 13. Cotton Sector. The Chadian economy depends heavily on the cotton sector for export earniz.gs, government revenues, and farmers' cash income. Fmndamental policy reforms are needed in the cotton sector in order to restore its competitiveness and to reduce the financial risks that result from fluctuations in the world market price. The efficiency of the cotton parastatal needs to be improved; measures are required to strengthen extension and research in the sector and to improve productivity at the farm level; and the pricing policy needs to be reformed to contribute to reestablish the financial viability of the sector. In addition, further study is needed to formulate a strategy for agricultural diversification with a view to reducing the predominance of the cotton sector. 14. Exchange Rate. As a member of the Central African Monetary Union, Chad cannot use the exchange rate to restore financial viability in the cotton sector and to improve the country's overall balance of payments position. The common currency of the Union, the CFA franc, is fully convertible into French francs at the rate of 50CFAF = lF, guaranteed by France. The Union also operates a common Central Bank (BEAC). In the last 15 years, exchange rate fluctuations vis-a-vis the US dollar played a larger role in destabilizing Chad's export earnings than changes in the world price of cotton. Under the Cotton Emergency Program, the donor community pr-'ided a de facto export subsidy by financing COTONTCHAD's operating deficits. In the absence of a flexible exchanSe rate policy, the need to step up efforts to improve the efficiency of the cotton sector is even stronger. 15. Public Enterorise Sector. The Chadian Government's use of public *"terprises and market regulations to control economic activities has beet fairly limited in the past. Many of the country's 40 public enterprises are plagued with inefficient operations and investments and have poor financial and administrative management. The accumulation of cross-arrears, particularly between the Government and the public utilities, has also become a major problem. The Chadian Government has no clearly-defined policy, legal framework, or institutional mechanism for evaluating and monitoring public enterprises. In addition, the Government has established a number of monopolies, mostly for public enterprises, and price controls on local production and imports. They have proven largely ineffective given the permeability of Chad's border and the existence of large informal markets. To the extent that these de jure controls do create distortions and inefficiencies, they will need to be progressively eliminated. 16. Rehabilitation of the Bankina Sector. Since it resumed operations after the 1979-82 war, the banking sector has been constrained in its activities by two factors. First, a large share of bank assets have been frozen since 1983 under a general bank moratorium. The moratorium was the result of the forced closing of the banking system in 1980 when the war prevented further operations; it is scheduled to expire at the end of 1988. Second, more than half of domestic credit has been absorbed by COTONTCHAD and is in arrears. The banking system, thus, has been unable to revolve funds lent previously and, under the rules of the Monetary Union, is constrained in expanding credit. The Government needs to assess the impact which the lifting of the moratorium in late 1988 will have on the banking system, and, as a priority measure to improve Chad's access to Central Bank credit, find a solution to COTONTCHAD's arrears. It. UR ADJUSTMT 17. Obiectives. In close cooperation with the Fund and the Bank, the Government prepared a Policy Framework Paper 1987-90 (SecM87-547), which the Executive Directors discussed on June 2, 1987. The overall objective of Chad's adjustment program, as described in the PFP, is to alleviate the economy's structural constraints on grnwth while containing the external and internal imbalances. The program aims at restoring modest economic growth and laying the foundation for more rapid growth in the l990s by improving resource use in the public and private sectors through appropriate policy design and strengthened economic management. Policy improvements are needed in public finance, agriculture, livestock, the public enterprise sector, the banking system, and the industrial sector, to mention only the sectors that have the most immediate impact on growth. The principal quantitative targets of the adjustment program for the 1987-90 period are to: (i) achieve an average GDP growth of 2Z in real terms per annum; (ii) keep the rate of inflation below 5t; (iii) contain the current account deficit (including grants) to 10? of GDP; and (iv) limit the overall balance of payments deficit to an average of SDR v million per annum, i.e., 102 of the 1985-86 deficits. 18. Adiustment Program for 1987188. The PFP objectives in prblic finance have been translated into specific policy measures which are supported through a first-year IMP Structural Adjustment Facility (July 1987-June 1988). The program includes measutes tot (i) increase revenues by introducing the new system for taxing petroleum consumption mentioned above; (ii) restrain the growth of expenditures through the application of strict budgetary controls, the integration of certain extra-budgetary revenues and expenditures into general Treasury accounting and limiting recruitment of civil servants; (iii) reduce domestic arrears and prevent the accumulation of new ones; and (iv) improve external debt management with respect to both borrowing and debt service payment. The Government's financial operations were consolidated by incorporating, for the first time, both current and capital expenditures in the 1988 budget. The program also includes measures aimed at the financial rehabilitation of COTONTCHAD and measures to pursue cautious credit policies. 19. Sectoral adiustment. In addition to reforms in public finance and in the cotton sector, the Government has also introduced policy reforms in two other important sectors, transport and livestock. In transportation, the Government has formulated a sector strategy and an investment program for 1988-93 wLich were presented at a sectoral donor meeting held in N'Djamena in February 1988. The new strategy focuses on: (i) the completion of rehabilitation and maintenance of the high - 6- priority road networks (ii) continued strengthening of sector institutions, in particular their planning and management capacity; (iii) continued improvement of road maintenance financing; (iv) basic air transport services, and (v) promotion of private participation in the transport sector. In the livestock sector, a policy reform program has been adopted which, together with rehabilitation of infrastructure and institution building, aims at increasing the national livestock production on a sustainable basis and improving livestock marketing. The export regime is being reformed through the elimination of export quotas and of the export monopoly of a parastatal, SOTERA; cost recovery for veterinary services will be introduced, and the imuportation and distribution of veterinary products will be liberalized. II1. THE FINANCIAL RERABILITATION PROGRAM 1988-89 20. Within the framework of the PFP, the next phase of the reform program, whUch the proposed IDA credit would support, aims at further improving resource use in two important areas of the economy: public finance and the cotton sector. The program would also include studies to deepen the reform process and to extend it to other sectors of the economy in subsequent phases of adjustment. Such a phased approach allows the Government to address the most urgent structural problems rapidly while reform measures in other areas are under preparation. The program takes into account the limited capability of the Chadian administration to prepare and implement policy reform programs as well as the need to identify measures in other areas. A UNDP-financed, Bank-executed Technical Assistance Project, provides assistance to the Government for the preparation and implementation of the reform program; an IDA-financed Economic and Financia' Management Project (Credit 1872-CD) will provide additional support. The content of the financial rehabilitation program is described in the Government's Statement of Development Policy in Annex III and is discussed below. The specific actions to be supported by the proposed credit and their timing are summarized in Annex IV. A. Public Sector Resource Nanaa1ent 21. Public sector resource management is one of the key tools for influencing economic act_:ity in Chad. Increasing efficiency in the mobilization and use of public sector resources is therefore a central component of the Financial Rehabilitation Program. To this end, the Government's program includes: (i) reforms of the tax system; (ii) initial steps to restructure current expenditures; (iii) a rationalization of the public investment program; and (iv) the formulation of a public sector financing plan which reflects all these measures as well as the cotton sector reform program described below. This program aims at making more efficient use of public sector resources, thereby allowing the Government to extend the provision of basic services to the population. Tax System 22. Chad's tax base is small relative to the size of the economy. In 1987, tax revenues accounted for only 6S of GDP, compared with 12S in the pre-war period (1973-75) and an average of 18S for other low-income African countries. Chad's low level of development and extremely narrow industrial base largely explain the low tax yields. Inadequate tax administration compounds the problem. The bulk of tax revenues are generated through import duties and *unitary taxes on domestic production, but this has jeopardized the viability of the few existing industries and has often increased smuggling rather than revenues. In recent years, the crisis in the cotton sector has aggravated Chad's fiscal problems. Historically, export duties on cotton have made up about 20 of tax revenues. In 1986, as part of the Cotton Emergency Program, COTONTCHAD was exempt from paying export duties; this put increased pressure on an already weak fiscal system. 23. The reform program includes short- and medium-term measures to increase tax yields and strengthen tax administration. To offset at least partially the loss of cotton export revenues, additional taxes were introduced in October 1986 on selected manufactured imported goods. Their yield, however, was small due to the inability of the tax administration to ensure adequate coverage of the tax base. In the short run, a reform of the cumbersome and complex system of taxing petroleum imports was the only source which could yield substantial additional revenue. In July 1987, a unitary consumption tax, which is levied by the customs service at entry points, replaced the existing petroleum tax system. In November 1987, the Government took additional measures to strengthen administration of the new system. Figures for the first five months of the new system indicate that the potential yield (tax assessment) of the new petroleum tax is close to the target (CFAF 4.5 billion over twelve months) set under the IMF's SFA program. It is expected that tax revenues from petroleum products, which made up 7.5% of tax revenues in 1987, will account for 19? of 1988 tax revenues. 24. While the measures described above are important, government expenditure needs and the limited scope for taxing the cotton sector during the adjustment period make it imperative to find new sources of revenue,-. The Government has decided to conduct a wide-ranging tax policy review and has requested IMF assistance. The review would include: (i) the tax administration system; (ii) extra-budgetary funds; and (iii! the scope for expanding the tax base. The study is scheduled for 1988, and the Government plans to start implementing reforms recommended by the study with its 1989 budget. Public Investment Program 25. In the last two years, the Government has made significant progress in preparing a public investment program that reflects the economic priorities of the country. The progress to date is all the more remarkable since Chad has not had a formal public investment program since 1975. In 1986, the Government prepared an inventory of externally funded projects, which served as a basis for the preparation of the 1987 public investment program. The public investment program for 1988, which includes all donor-financed projects, for the first time has been incorporated in the government budget. The Government is committed to preparing a three-year rolling public investment program for 1989-91. This program will be reviewed by IDA, and it will be updated and extended annually. 26. Overall, the 1988 public investment program conforms to the Government's development priorities. The size of the investment program seems appropriate in view of the continued large reconstruction needs of the country. Assuming an implementation rate of 80?, the investment program is equivalent to 17.4Z of GDP; fixed investment equals about 8Z - 8 - of GDP; the difference is accounted for by external funding for operating expenditures of development projects, technical assistance, and training. The sectoral allocation emphasizes agriculturellivestock and transport infrastructure which each account for 29X of the total; industry/energy account for 24S, human resources for 122 and general development support for 6%. The public investment program is almost fully funded by external assistance. About two-thirds of the 1988 investment program is financed from grants and one-third from concessional loans on IDA-comparable terms. 27. The Government also has taken steps to strengthen public investment programming. It has issued a set of criteria for evaluating project proposals. In addition, the Government is formulating sectoral strategies which will serve as the basis for preparing future projects. Strategies for agriculture, livestock, and transport have already been formulated; a strategy for the education sector will be completed in late 1988, and work on a health strategy is envisaged for 1989. The Government will continue to use the strategies as a basis for aid coordination; an education sector donor meeting is planned in 1989. Current Expenditures 28. The Government recognizes the need to reform its current expenditure system. The level of current expenditures is low, and their structure is flawed by serious imbalances. Personnel expenditures show the Government's resource constraints; most civil servants receive only 602 of their 1967 salary base. The most pronounced imbalance in the budget is reflected in the exceedingly small share dev3ted to non-personnel operating expenditures. In addition, budgetary control procedures are heavy. Under the financial rehabilitation program, the Government is starting to address these issues. As a priority, it is increasing operating expenditures of key development ministries; streamlining of budgetiry procedures has been initiated, and a study of the civil service system will be undertaken to prepare future reforms. 29. Non-personnel Operating Expenditures. The Government's non- personnel operating budget, i.e., expenditures for materials and supplies, has been particularly constrained in recent years. It has been shrinking steadily both in absolute amount and as a proportion of the total budget. In 1987, the non-personnel operating budget showed a 54? reduction over the previous year; in 1988. it was reduced by a further 35?. Its share in the total government budget declined from 41Z in 1986 to 202 in 1988. 30. These cuts have hit especially hard eight ministries central to development, i.e., the Ministries of Education, Public Health, Social Affairs, Agriculture, Livestock, Transport, Public Works, and .ourism/ Environment. Their non-personnel operating budgets were reduced by 27Z in 1986 and a further 63? in 1987. In 1988, allocations for these ministries make up only 112 of the total non-personnel operating budget. Moreover, actual expenditures are much lower than budget figures indicate, as military expenditures have been given priority reflecting continued security problems. Since 1985, only 20-502 of the allocations for non-personnel operating expenditures for these ministries have been authorized for payment; and the approved amounts represent only 3? of the total non-personnel operating budget. Actual expenditures, which are not broken down by ministry, are even lower. They are now so low that administrators lack basic office supplies, extension agents have no -9- means of transportation, health workers have no medicine to distribute, and teachers lack pedagogic materials. The Government urgently needs to raise these expenditures in order to restore administrative functions and to deliver basic services in agriculture and t'e social sectors. 31. Under the adjustment program, the Government is committed to increasing the expenditures for materials and supplies of these eight ministries. In 1988, budget execution for these ministries will follow more closely the initial budget allocation, and their non-personnel expenditures will be increased by CFAF 1.5 billion, thus restoring them to their level before the recent cuts. Revised budgets for the eight ministries have been prepared for the second half of 1988 incorporating the supplemental expenditures. The allocations for the social sectors have been increased as a priority. The revisions will be consolidated into an amendment to the 1988 budget to be adopted in July 1988. In 1989. operating expenditures for seven of the eight ministries will be maintained at that level and financed under the program. The 1989 increment for the Ministry of Livestock will be financed by the National Livestock Project, approved by the Executive Directors in May 1988. The detailed programming of the 1989 budget increase will be undertaken within the normal budget preparation process. 32. Expenditure Procedures. The existing expenditure authorization procedures do provide most of the information needed for monitoring the implementation of the operating expenditure increase. The Government will prepare, twice per year, detailed progress reports on the implementation of the operating expenditure increase. The reports will be countersigned by the Central Treasury, the Budget Director and by the technical Ministry concerned. They will include, for each of the eight ministries, the following information: the augmented budget allocation (i.e., the initial allocation plus the operating expenditure increase) cumulative commitments, disbursements, and the balance between budget allocation and disbursements (i.e., the implementation rate). Execution of the operating budget by end-1988 will be reviewed with IDA. 33. The existing budget execution procedure is complex because of the number of steps involved in the strict control of expenditures. To simplify budget execution, the Government has begun streamlining the expenditure authorization procedure by eliminating steps and reducing the documentation required. The Government intends to further review the scope for improvements in the expenditure authorization process in agreement with the IMF. 34. Civil Service Study. The Government recognizes the need to address the issue of personnel expenditure on the basis of an overall public administration study. In the period following the war, a substantial number of civil servants returned to their positions, which led to an increase in the overall size of the civil service. Due to budgetary resource constraints and the priority of military expenditnres, the Government has contained the level of the wage bill. The issues for the future are to improve the efficiency of the civil service by matching skills with tasks and to identify ways of increasing salaries within the budgetary constraints. The Government will conduct, with IDA assistance, a study on the civil service and public administration as a basis for preparing future policy reform in this area. - 10 - Public Sector PinancinA Plan 35. Under the adjustment program, the Government has prepared a public sector financing plan, covering the period 1988-1989. The plan, presented in Table 1, provides an overview of the Government's expenditure priorities and the resources available to finance those expenditures. The numbers for 1988 reflect the Government budget and are consistent with the targets established under the SPA program for June 1987-July 1988. The Government has confirmed that it intends to implement the financial program which was established with the staff of the IMF through December 1988. This program, which is presented in Table 1, includes objectives for revenues, expenditures, and the consolidated budget deficit. Implementation of the 1988 budget program will be reviewed with the staffs of the Fund and the Bank. The 1989 projections in the financing plan are tentative at this stage and will be firmed up with the preparation of the budget for next year. 36. This first public sector financing plan includes only the government budget and the financing requirements of the largest public enterprise, COTONTCHAD. While the plan covers the most important public sector expenditures, it underestimates the overall financing requirements of the Chadian public sector since data are lacking for several items. First, the financing requirements of other public enterprises will be assessed through several studies and incorporated into the plan at a later stage. Second, counterpart funds required for externally-financed investment projects are currently estimated at CFAF 800 million in 1988 and CFAF 1800 million in 1989. A detailed review is underway and may yield higher financing needs for 1989. 37. Public sector expenditures are fully financed in 1988, but a gap of CFAF 4.6 billion would still exist in 1989 after the adjustment measures have been taken. In June 1988, donors indicated that additional non-project assistance may be forthcoming which would be sufficient to cover the 1989 financing gap. The Government has established the following expenditure priorities: highest priority is given to adequately funding the Government's current budget; second priority is to make adequate provisions for covering the operating deficit of COTONTCHAD; the third expenditure priority consists of reducing COTONTCHAD's arrears vis-&-vis the banking system. In the event of insufficient resources, expenditures would be adjusted by reducing the amount currently envisaged for repayment of COTONTCHAD's arrears. t 11 TALE I CM: Ml 1e SecoF1rwVing Plan, 17-89 (mIII [ne of CFF) 183 119111 1988 1" 1988 et. 1st o. 2d o. CEN RAL _r Paw'jm 19,497 9,625 12,591 22,218 24,325 FigtIt 78,677 38,945 45,044 38.969 92,010 irent siNlitsu 27,77 11,445 17,344 21,719 30,810 aprtr mgw ul. Ing8 inistries 1/ 297 250,15 2.000 na gMnint INWt 297 250 250 500 n.a Wlmnbtal W*st 0 0 1,50 1,50 1,165 Capital nItures 51,000 27,S00 2,70 55,200 61,400 pipl IDm projects 51,00 27,500 2,00D 54,400 53,400 nw projZet 0 0 0 0 8,20D t _entc wteat ds0 am00 S00 1800 Variatlon In Cntral Go uet aras 502 (943) (1,388) (2.331) (1,500) Tea'ws' salares 13 0 (230 (20) 0 Exenal 09 750) (11 (,8 (1,500) Ottar Interval 469 V) (1,158 150 Extw3|TTi 0 193)$ 01J Central Oowriw deflcit (58,878) (30,263) (33,841) (64,104) (69,185) (an a cab basis) - - - RELIC ENrEIPRISES CTVNITO1a1 oeratirn deficit (4,109) (58a) (589) (1,177) (8,992) R.leion In aWDTCHAD arres (7.700) (1,700) (9.318) (11,018) (8,200) Ceeinad Central Govt./COTO1TCN) deficit (70,487) (Tg,551) (43.748) (78,297) (84,377) (on a cash bas Is) -~ FllNCING 70.407 33,149 43.148 78,297 79,7 ExteraI 688,973 33,149 43,454 78,80 81,134 Projwt assigt (PIP) 651,000 27,50 28,900 54,400 59,60 pip Ins proJec 51000 27,500 2E,9Q 54,40 53,400 nas projets 0 0 0 0 8,200 -project assistance 18,418 8,123 17,0Z 23,151 22,634 Uhlted States 1,609 750 750 1,500 1,831 Fra 9,09 3,000 7,010 10,010 4,010 Ministry of Cooperation 5,382 3,000 4,408 7,408 n.a CCE 3,717 0 2,602 2,802 4,010 SDr Id Bue* 1,600 0 6,500 8,500 6,782 AfrIcan DOvelopment Ibrk 0 0 1,268 1,288 7 ,81 NerIarKs 0 673 0 873 2,370 EurcpeEonomlc mity 8,110 1,700 1,500 3,200 n.a STADEX 4,410 1,70 1,500 3,20 n.a fifth EF 1,700 0 0 0 0 Rtaywt of ext. debt (Incl. debt relief) (445) (474) (474) (94) (1,100) internal 1,514 0 (306) (3Q0) (1,851) Bwalng Syste 439 0 (306) (308) (1,351) Nm4b*lrig system 1,075 0 0 0 0 Financlire Gap (0) (598) me 0 4,594 1/ IcWiont ministries tarptted- unr tte FRC Inrlus Pbilc Health, Euatimcn, Social Affairs, Pilic lofts, Trnnport, Agriciture, Tairlswvireunt, ard Llwestok. - 12 - S. Cotton Sector Rostrmucturin of the Cotton Sector 38. The financial rehabilitation program includes a comprehensive plan for restructuring the cotton sector and restoring its financial viability. Building on the achievements of the Emergency Program which reduced costs and losses within the existing incentives system and institutional framework, the restructuring plan, covering 1988189-1990I91, would introduce fundamental reforms in order to increase efficiency and reduce the financial risks of the cotton industry. The plan has three componentst (i) a program to increase COTONTCHAD's efficiency, (ii) a cotton development program at the farm level, and (iii) a reform of the producer pricing system. 39. Program to increase COTONTCHAD's efficiency. The restructur- ing plan contains an ambitious set of measures for improving COTONTCHAD's efficiency. These measures aim at reducing unit costs by about 30S so that by 1990191 COTONTCHAD would be performing at a level comparable to the most efficient West African cotton producers. Measures have been adopted to reduce variable costs by 16? and fixed costs by 38?. COTONTCHAD's technical performance is good. The primary source of its inefficiency is high fixed costs which account for 25S of its cost price and which are three times higher than in the most efficient West African companies. A key measure to reduce these costs and to improve COTONTCHAD's management is the transfer of its financial and administrative services from the capital city to Houndou, the site of its operations, 480 kilometers away by road. A detailed plan for the transfer has been prepared, and the transfer should be completed by May 1989. The consolidation of COTONTCHAD's activities at Moundou will permit a reorganization of the company as well as a reduction of administrative staff and overhead costs. 40. COTONTCHAD has adopted other measures to increase efficiency Including a staff reduction and training program, actions to improve management, and a modest investment program. COTONTCHAD will reduce its staff by 102 (109 positions) over the next three years and undertake a training program which will enable Chadians to fill 15 of the current 29 technical assistant positions. The salary scale and benefits will be modified to reduce the disparity between professional staff and workers as w311 as between COTONTCHAD and other employers. Actions to improve COTONTCHAD's management will also be undertaken% the recently created management and budget office will be strengthened; a unit will be set up to monitor the import, storage, and distribution of agricultural inputs; management of the varehouse and purchasing service will be improved; and a study will prepare a coherent management system and computerization plan. COTONTCHAD has potential for increasing the profitability of its oil and soap production. By November 1988, it will prepare an action plan for reducing costs of the oil and soap factory and, by March 1989, it will define a commercial strategy appropriate for the rapidly changing oil and soap market. COTONTCHAD's modernization program will permit the expansion of the capacity of two of its six ginneries and the purchase of other new equipment. These investments are needed to accommodate the expected increase in production, to reduce costs and to improve the quality of cotton fiber. COTONTCHeAD's commitments under the restructuring program are formalized in a contrat glan with Government which will be signed by August 1988. The - 13 - achievement of cost reductions will be closely monitored and external audits will be done annually. 41. Cotton DeveloPment program at the farm level. The second component of the restructuring plan includes measures to: (i) increase cotton production, (ii) raise productivity at the farm level, (iii) reorient the work programs of the extension (ONDR) and research (IRCT) agencies, (iv) strengthen coordination between COTONTCHAD, ONDR and IRCT, and (iv) introduce a more reliable financing mechanism. The cotton development program aims at increasing farmers' income from cotton production over the medium term through a combination of measures to expand production and reduce costs. Farmers were negatively affected by the Emergency Program. which limited cotton production to 100,000 tons through administrative means (control of cotton seed and other inputs distributed); maintained the producer price at 100 CFAF/kg, a decline in real terms; and reduced input subsidies from 502 in 1985/86 to zero in 1987/88. Despite these unfavorable factors, cotton production increased from 90,000 tons in 1986/87 to 127,000 tons in 1987188 in part due to favorable climatic conditions and the depressed market for cereals. Interviews with farmers and government agencies indicate that Chadian farmers want to grow more cotton and use more inputs than were made available to them under the Emergency Program. 42. The couton development program provides for an increase in cotton production to 145,000 tons by 1990/91, a level which has been surpassed in 5 out of the last 20 seasons. The expansion would favor the western part of the cotton zone where processing and export costs are lowest and where cotton fiber quality is highest. It is expected that farmers will increase production despite a lowering of the floor price based on evidence in Chad and elsewhere that the producer price is not necessarily the key determinant of the level of cotton production. The following other factors are important as well: (i) a guaranteed market outlet for cotton at a price known in advance which is not the case for alternative crops; (ii) returns to farmer's labor; (iii) relative returns to ^:otton and food crop production; and (iv) climatic conditions and incidence of pests. 43. Measures to increase productivity at the farm level aim at maintaining and, eventually, increasing the profitability of cotton production. These measures include increased availability of purchased inputs, a reduction in their cost, and the introduction of new technical packages. COTONTCHAD will increase the availability of inputs starting with the 1989/90 season. The plan aims at increasing the area on which inputs are used from 50Z in 1987/88 to 72Z of the cotton area by 1990/91. This would permit farmers who did not have access to inputs in 1988/89, to double their net income in 1989/90 by using the standard input package. Measures are also being taken to reduce input costs. For the 1988/89 season, inputs cost 202 less than in 1987/88 because of favorable world market conditions. In 1989/90, farmers will be able to choose among four technical packages, two of which are less expensive than the standard package currently offered. In order to identify other means of reducing costs, IRCT is testing less expensive, non-patented fertilizers and insecticides. Input costs would be further reduced if COTONTCHAD succeeds in lowering transport costs which account for up to half the cost of imported inputs. In support of these measures to increase productivity, ONDR is promoting the use of animal traction through farmer training and a credit scheme for equipment. - 14 - 44. To support the cotton development program, ONDR's and IRCT's objectives and work programs have been redefined. The research institute IRCT will pay more attention to developing techniques which provide good economic and financial returns to farmers. The extension agency. ONDR, will train farmers groups to take over from village level extension agents and COTONTCHAD administrative tasks such ast estimating quantities of inputs needed, distributing inputs, managing credit, organizing and doing primary marketing of cotton. There is excellent potential for the development of these groups in Chad, because there are many literate, young farmers in the villages. ONDR's village level extension staff will be reduced from 585 to 360 during the three-year program, and staff will be retrained to assume their new role of advisor of village groups. In order to improve their coordination, ONDR, IRCT, and COTONTCHAD have signed a formal agreement clarifying their respective responsibilities, in April 1988. 45. Under the program, adequate financing for ONDR's and IRCT's current operations would be provided out of the Government's budget. In the ksst, both agencies received substantial support from external donors, and, prior to the cotton crisis, COTONTCHAD paid them a levy based on the quantity of cotton produced. Currently, ONDR's and IRCT's operating expenditures are partly funded from external assistance, but ONDR's budget in particular has not been adequately financed. The Government has given its assurance that adequate provisions will be made in the 1988 and 1989 budgets for ONDR's and IRCT's financing requirements. 46. Reform of the producer pricing system. A new producer pricing policy is an essential feature of the adjustment program. Under the existing pricing system, cotton is purchased from farmers at a fixed price which is not linked to international market conditions and which, according to custom, can only be increased. Farmers are fully protected from world price decreases; on the other hand, they do not reap the financial benefits from up-swings in world prices. Since the producer price currently accounts for close to 502 of COTONTCHAD's total average production costs and 602 of its average variable costs, COTONTCHAD's ability to reduce costs to adjust to low world prices is severely limited at the current producer price of 100 CFAFIkg for the best quality cotton, and the risk of large deficits is high. 47. In the past, COTONTCHAD's operating deficits were to be financed by an independently managed cotton price stabilization fund (CAISTAB) which got its resources from transfers of 80? of COTONTCHAD's net profits. However, as in other African countries, the fund did not support the sector in times of collapsing international prices. It instead served as an instrument to tax the sector, and the accumulated resources were used to finance a variety of activities largely unrelated to the cotton industry. In addition, the past stabilization system did not provide incentives to COTONTCHAD to be efficient since its deficits were to be fully covered whether they stemmed from producer price supports or from high costs due to poor management. The weaknesses of the system were exposed in the cottcn crisis when the increased volatility of world cotton and financial markets, combined with the high producer price, which had been increased from 60 OFAF/kg in 1980181 to 100 CFAF/kg in 1984/85, resulted in large deficits. Due to the failure of CAISTAB, these deficits were financed by arrears to the banking system and by the donor community in the context of the Emergency Program. - 15 - Table 2 Cotton Restructuring Plan - K*Y Indicotors for Pricing Policy 1/ (CFAF/kg) Year 2 Eersency Progr m Restructuring Plan 198?7/66 1ad8I9 1069,0 1906,91 Floor Price-Seed Cotton 1st Quality (Us 98, 80, 62.5 6,5) 10 100 90 2nd quality (XU 0, 15, 12.5 10)- 75 70 70 8rd Quality (US 2, S, 6, 5) 40 50 45 46 Average Floor Price-Seed Cotton 86.9 908. 86.8 65.6 COTONTCHAD - Averege Floor Price - Fiber (1) 266 247 220 211 - Oth-r Variable Costs (2) 176 167 16e 162 - Total Variable Costs (1.2) 486 414 881 878 - Fixed Costs (3) (excluding depreciation) 60 55 48 8S - Proceessng Costs (2+8) 280 222 204 197 - Total Coat (1+2.8) V 490 469 424 408 Aesumed World Price - Fiber o 860 B80 880 B80 COTONTCHAD's Deficit at this World Market Price - Per kg Fiber 11 69 44 28 - Total (billion CFAF) 5.8 8.9 2.2 1.7 Memo Item Production of Fiber 47,910 48,600 60,430 68,9S0 I/ In curront prices. V Inclusion of the depreciation allowance would add 20 CFAF/kg to COTONTCWAD's cost price In 1990/91. / An assumed world price of 860 CAF/kg fiber has been Increased by 20 CFAF/kg to account for net revenues for oil and soop sales. This is a conservative hypothesis at the lowr end of the price band of 8s8-So CFAF/kg within which cotton prices have oscillated over the last 1S years. Under this hypothesis, COTONTCHAD'e deficits would be equivalent to its fixed costs In 1989/90 and lower than fixed coats In 1990/91. However, world price are expected to be higher than 880 CFAF/kg in thes two years, maning COTONTCHAD io likely to break even or gen-rate a surplus. - 16 - 48. The reform of producer pricing policy aims at minimizing financial risks of the Government and COTONTCHAD in the faece of considerable uncertaint, about world market prices, while protecting farmers' incomes and assuring that they benefit when world prices are high. The new pricing policy contains four elements: a price differential according to cotton quality, a floor price, a purchase price announced to farmers at planting time, and a price support fund. The price differential according to quality aims at encouraging farmers to sort their cotton by grade; this would improve the quality of ginned cotton. In 1988189, a third quality will be introduced which is intermediate between the existing two grades. 49. In the new pricing system, the floor price would guarantee farmers a minimum return to cotton production irrespective of the short-term fluctuation of world prices. The floor price will be reduced from 100 CFAF/kg for the first grade cotton to a maximum of 90 CFAF/kg for the 1989/90 and 1990/91 seasons. Combined with other cost reductions mentioned above, this would lower COTONTCHAD's variable costs to about 380 CFAF/kg fiber. This reduction in variable costs under the adjustment program would justify an expansion of cotton production which would, in turn, result in lower unit fixed costs. Since even in years of low world prices revenues would be sufficient to cover variable costs, COTONTCHAD's deficits would be limited to its fixed costs (CFAF 2 billion CFAF in 1990191). Hence, by reducing financial risks for COTONTCHAD and the Government, the new policy pricing policy would permit a sustainable increase in cotton production. 50. The element of flexibility in the new system is the purchase price which will be calculated in April of each year and announced to farmers in May/June, which is planting time. As mentioned above, the purchase price cannot be set lower than the floor price. However, if the world market price was more than sufficient to cover COTONTCHAD's variable and fixed costs (excluding depreciation) in the previous season, then a proportion of this surplus would be passed on to farmers through a higher purchase price in the season for which the price is being set. The balance of the surplus would be allocated between COTONTCHAD's depreciation allowance, the price support fund, and taxes. The detailed method for setting the purchase price and allocating the remaining surplus will be agreed upon with Government before November 1988. Farmers' reactions to the new policy will be closely monitored. 51. Under the reform program, a price support fund would be created within COTONTCHAD to finance the deficit arising from supporting the floor price. The new pricing system would substantially decrease the amount needed in the fund, and its joint management by COTONTCHAD and a representative of donors should improve accountability and provide the necessary incentive to use the resources for their intended purpose. The fund would be constituted from external financing under the adjustment program and would be replenished from a portion of the surplus between the world price and COTONTCHAD's cost. Clear guidelines will be developed for the constitution and operation of the fund before November 1988. Settlement of CITOUTCHAD's Arrears 52. COTONTCHAD accumulated CFAF 43 billion in arrears during the war and the cotton crisis; CFAF 42 billion have been rediscounted by the Central Bank, and the balance is held directly by the primary banks. - 17 - The arrears not only jeopardize COTONTCHAD's financial viability, they also present a problem for Chad's public finances and, under the rules of the monetary union, affect the availability of new credit to the economy. As mentioned in para 6, in 1986 the Central Bank rescheduled the CFAF 42 billion arrears over a ten-year period, with 5 years grace and a two-year moratorium on interest payments. This arrangement provided some time for the Government to seek a more sustainable solution for settling the arrears, before having to face service payments which substantially exceed the payment capacity of COTONTCHAD and the Government. 53. Under the terms of the reacheduling agreement with the Central Bank, COTONTCHAD is obliged to reduce its arrears by CFAF 11.1 billion before October 31, 1988. In accordance with the Government's commitments, COTONTCHAD repaid CFAF 7.7 billion by October 1987, and has made provisions to repay another CFAF 7.4 billion before October 31, 1988; this would bring the total arrears repayment to CFAF 15.1 billion by the end of October 1988, or CFAF 4 billion more than envisaged under the agreement with the Central Bank. These repayments were made possible by savings and receipts in excess of those anticipated in the financing plan of the Cotton Emergency Program. Taking into account the CFAF 3.8 billion interest accumulated during the moratorium, the total amount due to BEAC on October 31, 1988, is CFAF 30.6 billion. 54. Following a request of the Chadian authorities in May 1988, the Central Bank has proposed a freezing of CFAF 14.2 billion of COTONTCHAD's remaining arrears. The freeze would be in effect for at least five years, and no new interest charges would accumulate on these arrears. As part of this proposal, the Central Bank has asked the Government to repay CFAF 14.2 billion, which corresponds to the balance of principal, within a maximum period of two years. Discussions regarding the remaining interest due of CFAF 2.1 billion will take place later. This proposal was confirmed with representatives of the Central Bank during negotiations of the FRC. 55. The Government has confirmed its commitment to repay the Central Bank on the basis of such an arrears settlement program, on the condition that the other priority needs, (i.e., current expenditures of the Central Government and COTONTCHAD's operating expenditures) are met first. The public sector financing plan provides for the repayment in 1988 of CPAF 3.6 billion in addition to the CFAF 7.4 billion already scheduled under the Cotton Emergency Program. In 1989, CFAF 8.2 billion will be repaid, CFAF 7 billion of it to the Central Bank. In addition, CFAF 1.2 billion will be repaid to the commercial banks that extended loans to COTONTCHAD in 1985; this repayment will be funded through a special credit from the Caisse Centrale de Cooperation Economique. The financing plan shows a deficit of CFAF 4.6 billion in 1989, which, in the absence of additional resources, would reduce repayment to the Central Bank from CFAF 7 billion to CFAF 2.4 billion. C. Preparation of Future Reforms 56. Reform measures under the financial relabilitation program have been limited to the two areas in which changes are needed most urgently, while studies are being undertaken for preparing future phases of Chad's adjustment program. Studies identified thus far will address additional issues in public finance/administration and extend the preparation of adjustment measures to another important area of the - 18 _ public sector, paraetatals, as well as agricultural issues outside the cotton sector. 57. Public Enterprises. In the Policy Framework Paper, the Government indicated that it intends to initiate a public enterprise sector reform program. As preparatory steps for future policy reform, diagnostic studies of the most important public enterprises will be undertaken with financing from the Economic and Financial Management Project. These studies will provide the basis for deciding whether individual public enterpriseslagencies should stay in the public sector because they provide an essential public service or are of strategic importance to Chad; be privatized, if they are basically viable; or be liquidated, if they are not viable. A first set of studies for five enterprises will be completed in- 1988. Additional enterprises will be studied in a second phase. Another six enterprises are already being studied under other Bank operations or by other donors. 58. Reform of the public enterprise sector will also have to include the settlement of cross arrears among the parastatals, between them and the Government, and with the private sector. A study will be undertaken in 1988 to determine the extent of these cross arrears and to prepare proposals for eliminating them. In addition, a study of the banking sector is envisaged to prepare the lifting of the banking sector moratorium in late 1988 and to assess the need for policy reform. Terms of reference for the diagnostic studies and the cross arrearb study were finalized during the FRC appraisal mission, and terms of reference for the banking sector study are under preparation. These studies will be funded available under the IDA-financed Economic and Financial Management Project. 59. Public Administration/Civil Service. As mentioned above, the Government will undertake a study of the civil service/public administration. Building on a civil service census which was completed in December 1987, the study should determine what functions are essential for the Government to perform within its resource constraints and how best to perform these functions, and should analyze the present administrative structure and government staffing. It would also make recommendations for changes in these areas and develop a public administration in-service training program. The study will be financed by the Economic and Financial Management Project. Implementation of the civil service/public administration reforms will take place in future phases of the adjustment program. 60. Agriculture. The Government has defined a development strategy for the agricultural sector, including livestock, fisheries and forestry, which was presented at a donors meeting in December 1986. In many areas, however, the existing knowledge was insufficient to define a detailed strategy and action plan. Two priority issues which require more analysis are food security and irrigation development. The Government is addressing them in collaboration with IDA and other donors. The need to collect new data and do in-depth analysis of specific areas and policy questions is also being addressed by the IDA-financed Agriculture Sector Rehabilitation Project (Credit No. 1775-CD). The project will assist in the design of detailed strategies and implementation programs for agricultural extension, training, research, and seed production. It also finances studies on the diversification of agricultural production, marketing of livestock products, resource conservation, and agricultural credit. They are - 19 - expected to provide elements for extending the agricultural reform program in future phases of adjustment. 61. Social Dimensions of Adiustment. The financial rehabilitation program provides for an increase in current expenditures of development- oriented ministries and, thus, aims at improving basic public services in Chad. It also includes the formulation of sectoral strategies as a basis for rationalizing government expenditure programs in the medium term. While these elements of the adjustment program would improve social services, Chad still faces a decline in per capita income during the adjustment period. It therefore is desirable to introduce, in the short run, programs that aim at protecting the most vulnerable groups and at attenuating possible negative effects of the adjustment program. To this end, Chad is participating in the Social Dimensions of Adjustment Project. In addition to studies which would evaluate social welfare, an action program will be prepared to protect the most vulnerable groups. It will be developed in cooperation with other donors and will assess the possibility of relying on non-governmental organizations for its implementation. An IDA credit would be proposed later in FY90 to support this action program. IV. THE PROPOSED OPEUTION A. History 62. The proposed Financial Rehabilitation Credit (FRC) would support the first phase of the Chadian Government's adjustment program. It would also provide fast-disbursing budget support to a Government which has experienced severe resource constraints due to political conflicts of recent years and to the serious decline in cotton revenues. The preparation of the credit builds on the Policy Framework Paper 1987-90 and on the 1987 Country Econo$c Memorandum. The content of the proposed credit was first discussed with the Government in an identification mission in July 1987, which was followed in October/ November 1987 by a preparation/pre-appraisal mission; appraisal took place in February 1988. Negotiations were held in Washington in June 1988; the Chadian delegation was headed by H. E. Soumalla Mahamat, Minister of Planning. Preparation of the program was facilitated by a UNDP-financed, Bank-executed technical assistance project to strengthen the capacity of the Ministry of Planning. Technical assistance to implement the program and prepare future phases of adjustment will, in addition to the UNDP-project, also be provided through the Economic and Financial Management Project. Supplementary data on the proposed credit and program are presented in Annex II. B. Economic and Social ImDact of the Adiustment Pro&ram 63. The adjustment program aims at strengthening the basis for future economic growth and, thus, reversing the declining trend in per capita income. Increasing efficiency of resource use in the public sector and in the cotton sector would allow the country to make better use of its existing investments and to orient expenditures under the program into productive uses. To achieve these objectives, substantial capital inflows, mainly in the public sector, are required to finance continued high current account and budget deficits. The anticipated impact of the adjustment program is presented in Table 3 and contrasted with a scenario without adjustment. - 20 - 64. Public Finance. Under the adjustment program, reform of petroleum product taxation would permit a one-time increase in government revenues, of about 251, from CFAF 18.2 billion in 1987 to CFAF 22.2 billion in 1988. Thereafter, implementation of reforms prescribed in the upcoming fiscal study should permit growth of tax revenues at a rate equaling or surpassing nominal GDP growth. Restructuring of the cotton sector may also make it possible to reintroduce cotton sector taxation during a later phase of adjustment, if cotton profitability increases. 65. The adjustment program provides for a higher level of government spending, including an increase in operating expenditures in key development ministries. Increased fiscal revenues combined with non-project aid would allow government current expenditures to rise to 8.6Z of GDP in the 1988-90 period and 9.12 ir 1991-95. This would, however, result in a widening budget deficit, reaching an average of 2.0S of GDP in the 1991-95 period. In the absence of an adjustment program, the much lower revenue level combined with a lack of external budget support would force the Government to severely curtail expenditures; while this would bring down the budget deficit. it would also limit government operations essential for growth and meeting the basic needs of the population. 66. Balance of Payments. Reforms in the cotton sector would allow cotton fiber exports to expand, thus boosting exports in constant prices by 6.2X per annum during 1988-90, decelerating to about 2.52 per annum in later years. Increased export earnings plus a high level of capital inflows would permit a higher level of imports. The current account deficit would decline modestly as a share of GDP while import growth is maintained. In contrast, without adjustment in the cotton sector, the expansion in cotton export volume would not be feasible since the operating losses of COTONTCHAD would increase with higher production levels. The resulting lower growth in export earnings combined with external funding constraints would, thus, limit import growth. 67. External Debt. The rapid increase in capital inflow during the adjustment period would increase external debt outstanding and disbursed from 232 of GDP at end-1987 to 42? of GDP at end-1995. The Government is committed to borrowing only on highly concessional terms, so that Chad's debt service ratio would remain a relatively low 9-16? throughout the 1988-95 period. Without adjustment, the debt service ratio would be lower, reflecting lower capital inflows. - 21 - Table 3s Selected Economic Indicators. With and Without Structural Adjustment (1987-1995) With Without Adjustment Adjustment Actual period average period average 1987 1988-90 1991-95 1988-90 1991-95 GDP growth, constant prices (2) 0.5 2.6 3.9 1.9 2.5 As a share of GDP Total public investmnt 1117.4 19.0 20.0 24.0 23.0 Public fixed investmnt 1/ 7.1 8.0 8.7 10.0 10.0 Government current 8.7 8.6 9.1 8.1 7.0 expenditures Governmeut current budget deficit -2.5 -1.6 -2.0 -1.5 -1.1 External current account deficit -33.5 -28.8 -22.1 -19.0 -23.0 External debt (disb. at end of period) 23.4 35.6 42.1 26.6 32.8 Export growth (GNFS) constant prices (2p.a.) 1.2 6.2 2.5 1.5 1.3 Import growth (GNFS) constant prices (Zp.a.) 6.3 3.7 3.0 0.7 2.1 Scheduled public debt service/exports 6.5 13.6 10.3 9.7 7.6 Scheduled public debt service/government revenues 17.0 24.3 22.7 21.1 18.7 …---------------------------------------------------------.--------__--- Sources Government data and Bank staff projections /1 Total public investment comprises all foreign-funded projects included in the investment program; public fixed investment refers to fixed capital formation only. 68. Growth and Social Welfare. The adjustment program focuses on measures to improve the efficiency of the public sector and the cotton sector. Improvements in Investment programuing would, in the medium term, strengthen the basis for economic growth. The increase in cotton production under the program combined with a reduction of input cost would result in higher cash incomes In the principal agricultural zones of the country. Since the measures are being introduced gradually and their impact will be felt with some lags, the adjustment program is unlikely to result in an increase in real per capita income in the short term. It is expected that, starting in the early 1990s, the effect of the adjustment program, combined with the beginning of petroleum production, would increase economic growth to 3.91 p.a. which would reverse the current downward trend in per capita incom. In the absence of an adjustment program, real per capita income growth would remain below the projected 2.61 population growth rate. - 22 - 69. The adjustment program would have mainly positive distribu- tional effects. In public finance, it would increase and rationalize current expenditures in the social sectors as well as the delivery of agricultural services. In addition, sectoral strategies are being prepared to further strengthen the provision of basic services to larger parts of the population. In the cotton sector too, the. distributional impact of the adjustment program is expected on balance to be positive. As mentioned above, the Govermn.'t is also addressing social development issues affecting particularly vulnerable groups through a social development project. C. Benefits and Risks Benefits 70. Seen in the context of Chad's reconstruction efforts, there are three main benefits of the financial rehabilitation program. First, it would contribute to improvements in public finance, including increased resource mobilization, a focused public investment program, and an increase in current expenditures in development-oriented sectors. Second, it would result in a fundamental restructuring of the country's main export sector, cotton, and third, it would lead to an improved financial position of the public sector, especially through the settlement of arrears. The overall contribution of the program to the Chadian economy will be a strengthening of the foundations for higher growth in the 19909. The adjustment program also provides a framework for aid-coordination and for obtaining higher levels of external assistance in the appropriate form and on very concessional terms. Risks 71. The financial rehabilitation program is subject to considerable risk. As other operations in Chad, it would be adversely affected by external risks, such as drought and increased border conflicts which may divert public sector resources and delay the implementation of policy reform measures. There are also risks inherent to the financial rehabilitation program. First, the Chadian Government has to demonstrate its ability to implement and sustain the reform program. Second, it is possible that farmers will not increase their productivity to the extent anticipated under the program, thus diminishing the anticipated benefits. Efforts have been made in the design of the program to reduce these risks, through, e.g. a phased implementation of the reforms and technical assistance being provided to the Government for the preparation and implementation of the r^form program. D. Provosed Financing 72. The proposed financing of US$42 million for the PRC is composed of US$16.2 million from IDA, US$21.3 million from the Special Facility for Africa, and US$4.5 million equivalent in joint parallel financing from the Saudi Fund. The IDA share was determined on the basis of IDA's lending program for Chad and in view of the country's other priority needs for which IDA assistance has been requested. 73. The proposed PRC would finance about 112 of Chad's merchandise imports in the period July 1988 through December 1989 and meet about 72 - 23 - of the country's gross external capital requirements for the same period. The counterpart funds of the credit are equivalent to 22Z of Chad's current budget in these 18 months. 74. Significant cofinancing has been arranged for the financial rehabilitation program from the African Development Bank and the Government of France. The African Development Fund will contribute FUA30 million in cofinancing of the FRC. France is providing US$26 million equivalent in budgetary assistance in 1988 and has announced that the Caisse Centrale will also make available a loan, on concessional terms, of US$25 million equivalent to be disbursed during the three years of the program. Of this amount, US$16 million equivalent could be disbursed in 1989. The 1988-89 financing plan includes substantial amounts of non-projects funding forthcoming from other donors as well. USAID is providing US$7 million p.a., the European Community is providing about US$11 million in STABEX funding for the cotton program in 1988, and the Netherlands is providing a total of about US$12 million. There is, thus, considerable burden sharing among donors. E. Disbursement. Procurement. Administration and Auditing 75. The proposed credit would be disbursed in two equal tranches. The first tranche would disburse entirely the SJF funds as well as US$12.5 million equivalent of the SFA funds and US$4 million equivalent of the IDA funds. The second tranche would consist of the remaining US$8.8 million equivalent of SFA funds and US$12.2 million equivalent of IDA funds. It would be disbursed following a tranche review in early 1989, six to nine months after Board presentation. 76. The credit would reimburse 100Z of the foreign exchange costs of eligible imports on the basis of evidence that they were imported and paid for after credit signing. Due to Chad's acute funding shortage for the 1988 budget and to ensure that adequate funding is available to increase recurrent expenditures in the second half of 1988, retroactive financing of imports during the four months preceding the month of credit signing would also be permitted up to a maximum of 20S of the respective credit amounts. Eligibility for reimbursement from the African Facility Credit would be limited to imports from Part II members of IDA and from other countries designated as eligible by the Administrator under the African Facility. All arrangements for disburse- ment of the Saudi Fund contribution would be made in accordance with an Aide-M4moire between IDA and the Saudi Fund for Development dated July 3, 1986. Expenditures for goods procured under invoices for US$10,000 equivalent or less would not be eligible for financing out of credit proceeds. Both private and public sector imports would be eligible for financing. Imports by private entities would follow normal commercial practices. For public sector imports, procurement would be made through international competitive bidding for contracts of US$1 million or more, while for lesser amounts the purchaser's normal procurement procedures which are acceptable to IDA, would apply. 77. To facilitate disbursement and procurement, two special accounts would be established at the Central Bank on behalf of the Treasury, one each for the IDA credit and the SFA credit. The Government of Chad would be the borrower. The regional Central Bank, BEAC, would be responsible for maintaining the credit accounts and supporting expenditures on the basis of eligible imports (negative list) - 24 - for submission to IDA. After effectiveness, initial deposits of US$1.5 million each would be made by IDA and the SPA into the respective special accounts. These accounts would be replenished regularly and up to the limit of the First Tranche on the basis of fully documented reimbursement applications for amounts in excess of US$1 million and on the basis of statements of expenditures under that amount. The minimum amount of replenishment applications would be US$300,000. The Central Bank would indicate on the statements of expenditures the nature and origin of the goods, as well as the payment date, and would maintain all relevant supporting documentation (invoices. import certificates and evidence of payment) for review by supervision missions. Expenditures covered by the IDA credit would be in accordance with normal IDA rules while expenditures covered by the SFA credit would be in accordance with the resolution establishing the SFA. 78. Within six months after the completion of disbursements, an external audit report, conforming to internationally accepted standards prepared by Bank approved auditors, would be submitted to IDA. F. Monitorina and Tranche Release 79. Responsibility for monitoring the implementation and impact of the structural adjustment program would be with the Interministerial Committee that the Government has set up for this purpose, under the chairmanship of the Ministry of Planning. It would evaluate the need for additional adjustment measures and work closely with the Bank, the African Development Bank, the IMF and other donors in reviewing progress in implementing the adjustment program. 80. Release of the second tranche of the credit would be preceded by a review, by IDA and the co-financiers, of progress in the implementation of the adjustment program. Tranche release would be based on a review of general progress in implementing the program and, in particular, on the following measures having been taken: (i) implementation of the supplementary budget for 1988; (ii) adoption of the three-year rolling investment program for 1989-91; (iii) adoption of the 1989 current budget including an increase in non-personnel operating expenditures of development-oriented ministries; (iv) satisfactory completion of the review of COTONTCHAD's performance in reducing costs, and a decision on lowering the floor price for the 1989/90 cotton crop year; (v) e3tablishment of a Fund to support the cotton producer floor price and a mechanism for distributing the cotton sector surplus; and (vi) significant progress in the public enterprise studies. The African Development Bank has indicated that it would apply the same tranching conditionality as IDA. 81. The Interministerial Committee would submit to IDA a progress report on the adjustment program in time for the tranche review. This report would serve as a basis for the continuing dialogue with IDA and the other donors. The Government of Chad would submit to IDA a final report on the implementation of the financial rehabilitation program upon full disbursement of the credit. V. UK OPERATIONS STRATEGY 82. Twenty IDA credits totalling US$144.2 million equivalent have been approved for Chad as of March 31, 1988. Twelve of these credits - 25 - (US$43.6 million equivalent) have been fully disbursed, and two (US$19.1 million equivalent) were cancelled before becoming effective because of the 1979-82 war. All Bank Group operations in Chad were suspended in July 1979 because of accumulated arrears on IDA credits, although escalating hostilities had already halted project activities and led to considerable damage to project assets. The Bank resumed its activities in Chad in mid-1985 and four operations (US$65.2 million equivalent) have been approved as of March 31, 1988. Of the 18 credits (excluding the cancelled ones), nine were for agricultural or rural development, five for education, three for highways, and one for economic and financial management. In addition, credits for a Road Reconstruction Project and a National Livestock Project were approved by the Board in April and May 1988 respectively. Annex I contains a sunmary Statement of Bank-Group Operations in Chad. 83. IDA's assistance strategy for Chad supports the Government's strategy outlined in its Interim Development Plan 1986-88 and its adjustment program described above. The strategy is more fully described in the Country Brief distributed to the Executive Directors in May 1988. The strategy supports investments in the productive sectors (agriculture, livestock, and energy) as well as transport infrastructure, and begins to emphasize development of human resources. IDA also aims at strengthening economic management, begins to support macro-economic policy reform, and places increased emphasis on aid coordination. This strategy supports urgently needed reconstruction and rehabilitation works, and moves progressively towards macro-economic and sectoral reforms. 84. The Bank's strategy for the agricultural sector is shifting from emergency assistance through the Emergency Cotton Sector Program in FY86 (Credit No. 1716) and the Agricultural Rehabilitation Project (Credit No. 177') in FY87 to subsector operations supporting investments and policy refoxzq. A National Livestock Development Credit, approved by the Executive Diroctors in May 1988, would support the Government's efforts to increase livestock production, improve livestock health, and reform marketing. Additional sector work is underway to help define the objectives and content of the Bank's future agricultural lending in Chad. An agricultural services project (FY91) to strengthen extension and research is being prepared. An agricultural sector adjustment credit (FY92S) would support policy reforms in the following areas: (i) the cotton sector, by pursuing the adjustment measures supported under the proposed Financial Rehabilitation Credit; (ii) the irrigation sector, by implementing a cost effective strategy for the development of irrigated agriculture; and (iii) food security. 85. In transport, the Bank supports the Government's strategy which is presented in a sector strategy paper and a six-year investment program, both prepared with IDA assistance. They were presented to the donor community in February 1988. The strategy focuses on completing the rehabilitation and maintenance of the high priority road network, strengthening the planning and management capacity of sector institutions, improving road maintenance financing and air transport services, and promoting private participation in the sector. The Road Reconstruction Credit (Credit No. 1728) would complete the rehabilitation of high priority roads. A Transport Sector Project (FY90) would assist with the implementation of the policy and institutional elements of Chad's sector strategy including strengthening - 26 - of sectoral planning and management, private sector development, and ensuring adequate financing for maintenance. 86. In the eneray sector, the Bank would support the Government's efforts to reduce its dependence on petroleum imports. A petroleum project (FY91) would include well development, a pipeline, a micro refinery, and modifications to the power stations in N'Djamena and other major cities. A technical assistance project (FY91) would strengthen the Ministry of Hines and Energy in petroleum matters and assist with the promotion of petroleum exploration. 87. In human resources, the Government has begun the reconstruction of the country's social infrastructure dismantled by the recent period of war. In the education sector, the Bank will participate in the reconstruction effort first through an Education Rehabilitation Project (FY89). It will concentrate on primary schools, providing assistance to low-cost community-based construction and learning materials. and on teacher training and institutional strengthening. In the health sector, the Bank also envisages assisting in the rehabilitation of the basic health care system and the management capabilities of the Ministry, based on a sector survey scheduled for FY89. Policy options for addressing the most pressing human resources issues will be identified in a series of studies and discussed at a Round Table on education, scheduled for 1989. Further analytical work is planned through a manpower assessment survey in 1990. 88. In addition to institution-building efforts included in investment operations, IDA is providing assistance to ministries concerned with macro-economic management through free-standing technical assistance projects. IDA is the implementing agency for a UNDP-financed Technical Assistance Project that is providing a team of experts to the Ministry of Planning. An Economic and Financial Management Project, approved by the Executive Directors in January 1988, will complement the UNDP project. It includes studies to prepare policy reforms in the areas of public enterprises, public administration, and fiscal policy. The project also finances a demographic survey. 89. IDA expects to continue adjustment lendinX to Chad through structural and sectoral adjustment operations. A follow-up adjustment operation in 18-24 months is expected to deepen the adjustment effort, especially in public finance, and to extend it to the parastatal sector. The sector operations mentioned above for agriculture, transport, and education will also support sectoral policy reforms. A Social Development Program (FY90) is under preparation to address the social impact of adjustment and explore new approaches to social development. VI. COLLABORATION WITH THE IDF 90. Since 1985, when the Bank resumed lending operations in Chad, the Bank and the Fund have closely coordinated their activities and assisted the Government with the preparation of the Policy Framework Paper for 1987-90. A first-year SFA program, approved on October 30, 1987, is currently underway in Chad. IMF staff worked with the FRC preappraisal and appraisal missions, and cooperation on the adjustment program continues. In particular, Bank and Fund staff worked closely in the area of petroleum taxation, and the Government has requested Fund assistance for the upcoming fiscal study. - 27 _ VII. RRCOHBNDATONS 91. I am satisfied that the proposed IDA credit would comply with the Articles of Agreement of the Association and recomnend that the Executive Directors approve the proposed Credit. 92. I am satisfied that the proposed African Facility Credit would comply with the provision of Resolution No. IDA 85-1 of May 21, 1985, and recommend that the Executive Directors approve the proposed African Facility Credit. Barber B. Conable President Attachments Washington, D.C. July 5, 1988 06-Jul-88 CHAU: Key Macro.conomic Indicators 1I (porcent, except where Indicated) 198" 1984 1986 1966 1967 1968 1969 199l 1991 1992 1998 1994 1996 projected --- - - - Gros Doesetic Product growtn rate 5.6 -6.8 29.6 -2.8 0.6 8.1 2.8 2.4 2.4 2.4 6.6 8.8 8.8 Gross 9oDm_ic Income growth rate 9.4 -4.2 28.8 -2.5 0.5 8.4 2.6 8.4 8.6 8.6 6.5 4.2 4.6 CDI per capita growth rate 6.9 -7.7 26.1 -6.1 -2.1 6.6 -0.6 6.6 0.4 0.4 5.0 4.2 4.0 Consumption per capita growth rate 8.8 -6.1 16.1 -10.6 -8.5 -6.7 -0.7 -0.8 6.6 0.7 3.1 o.8 1.5 cebt ServIce cUSs millon) 2/ 0.6 6.4 9.0 19.6 16.9 28.5 88.5 C .8 80.6 80.9 25.6 29.1 29.5 Dbt Service Ratio 8/ e.6 8.9 7.8 7.2 6.5 12.0 16.6 18.6 12.2 11.7 9.2 9.2 s.8 Debt Service as X of OOP 6.1 1.2 1.4 1.2 1.1 2.0 2.6 2.2 2.1 1.9 1.4 1.5 1.4 Gross Inveetuant/Gop 5.0 7.1 9.6 17.2 16.4 16.4 19.0 19.5 20.0 20.0 20.0 26.6 20.0 DOmestic Savings/ODP -2.2 -1.4 .. .. -12.4 -11.5 -11.6 -9.9 -9.6 -9.8 -4.7 -5.1 -6.8 National Savings/DP -8.7 -2.8 .. .. -1.1 -14.6 -14.6 -12.5 -11.6 -11.9 -8.2 -4.7 -4.5 Marginal National Savings Rate .. .. .. .. .. 6.6 -0.1 6.5 6.1 4.1 0.8 0.8 6.9 PublIc Investment/GDP 4.6 S.1 6.6 16.2 17.4 17.4 16.0 16.5 19.0 19.- 19.0 19. 19.0 Public Savings/GOP .. .. .. .. .. .. .. .. .. .. .. .. .. Private Investment/GOP 1.0 1.6 1.6 1.0 1.0 1.0 1.6 1.6 1.6 1.6 1.. Private Savings/GOP .. .. *- *- *- *- *- *- *- *- *- * * o Public/Privato Invoetment Ratio 4.6 6.1 8.0 16.2 17.4 17.4 16.6 16.5 19.6 19.6 19.6 19.6 19.0 Government Budget Revenue/GOP 4.8 6.2 7.6 5.9 6.2 7.0 7.1 7.1 7.1 7.1 7.1 7.1 7.1 Governsant Current Expenditure/GOP 0.6 10.8 9.1 6.6 6.7 6.6 6.6 8.7 9.1 9.1 9.8 9.2 9.0 Budget Deficit/ODP -2.8 -2.1 -1.6 -2.7 -2.5 -1.6 -1.5 -1.6 -2.6 -2.0 -2.1 -2.6 -1.9 Export Growth Rate 4/ 21.2 -26.9 15.4 16.9 16.8 7.1 9.9 7.1 5.6 5.6 12.9 6.2 Exports/ODP 28.6 82.4 18.6 17.8 17.6 17.7 18.2 16.9 18.9 16.6 17.4 16.1 17.7 mpo.rt Growth Rate 4/ 16.8 58.5 9.5 22.6 1W.8 7.9 1.6 5.5 5.2 1.1 4.9 5.8 Importa/GDP 85.1 44.1 62.2 46.8 47.0 47.9 49.6 49.2 40.9 6 .5 48.7 47.0 47.4 Current Account Balance (US6 million) Including official transfers. 14.6 6.0 -89.6 -58.0 -64.8 -77.6 -161.3 -82.1 -09.2 -100.2 -81.1 -76.2 -9".0 Excluding official tranafors. -980.0 -71.6 -228.6 -254.0 -826.6 -8565. -864.0 -871.8 -804.2 -401.4 -M8.6 -a86.2 -898.3 Current Account Balance/GOW 6/ -18.6 -18.6 -8.6 -81.6 -88.6 -29.7 -29.9 -26.6 -25.8 -25.6 -21.4 -19.6 -16.7 1/ All figures are percentages, unless othernio specified; (..) Indicateu that the data compatiblo with the rest of the esries is not available. 2/ Includes the Interestc on, and the repayments of arroers (677.4 million at the end of 1987). 8/ Debt servIce as a percentage of all exported goods and serv Ic*. 4/ Basd on current US$f figure, including goods and non-factor services. 5/ Excludes pub lc transfoers and official capital grants. 0 ANNEX I - 29 - Page 2 of 3 OUO - BANCE OF PAYnE7S 7-s-19se Q(U mili ons at Current Pricee) Actual Prel im. Projections lses 1964 1916 1966 1987 1988 1989 1990 1991 1992 199 1994 19S5 A. Eorte af Gode & Ws IN7 :166 in 142 166 198 207 227 248 257 272 807 826 1. llrchad1is (F) 106 1*1 e8 99 1lo 129 140 182 177 190 205 289 28 2. Non-Fecor Servic.. 32 34 a5 44 8S 64 67 es 6 66 67 68 68 B. Import. of Good. & NM 204 826 847 880 4" 814 885 884 898 65 688 664 700 1. Nerchandila (FOS) 122 186 18S 206 261 287 809 816 887 887 as8 874 a89 2. Non-Fector Services 62 89 16O 174 208 227 246 248 259 289 278 291 804 C. Resrce a lanc -47 -60 -224 -237 -800 -821 -848 -387 -352 -369 -86l -867 -874 0. Not Factor Incooe -8 8 4 -9 -18 -28 -29 -26 -25 -25 -21 -20 -19 1. Factor Receipts 1 1 2 4 2 4 5 6 e 7 a 8 9 2. Factor Pay_mnt 7 10 8 18 17 3o 84 82 82 32 28 26 28 (In4er.et aym.nts) a 4 8 4 8 18 16 14 18 18 9 9 9 E. Bat Current Transfer, -7 -2 7 -8 -12 -8 -8 -8 -7 -7 -6 -6 -5 1. Current Reipt. 4 6 1S 1s 17 1S 16 17 1S 19 20 22 29 workers' reittances 0 0 0 1 2 1 2 2 2 2 2 2 2 b.other current trart. 4 6 Is 11 is 18 14 1S 16 17 1S 20 21 2. Current Payments 11 8 11 20 29 23 24 24 25 26 27 28 29 F. Current Account Balance -80 -71 -228 -254 -27 -8 -386 -71 -84 -01 -88 -388 -9 0. Long-Term Capital 2nfoe 91 8S 202 282 386 86a 390 372 888 408 888 S8? 408 1. Diro Inveatment -1 7 84 as 4 4 6 a 8 6 6 6 7 2. Official Capital Grant. 94 79 184 201 242 278 284 289 298 301 307 818 819 S. Not LT Loan (S data) 14 a 0 18 90 81 102 78 88 as 78 68 77 a. ui;bureemant- 14 6 6 20 98 92 120 94 105 116 91 a8 97 b.Repymnte, 0 8 6 2 8 11 S8 16 18 18 17 20 21 4. Other LT Inflowe (not) -16 -4 14 0 0 0 0 0 0 0 0 0 0 H. Tftal Other Item (not) -2 a -4 -1 -10 0 0 0 0 0 0 0 0 1. Net Short Term Capital 8 -1 8 0 -6 0 0 0 0 0 0 0 0 2. Capito tFloe N.E.I. -7 6 -8 -18 -4 0 0 0 0 0 0 0 0 3. Errora and Omission 0 0 0 0 0 0 0 0 0 0 0 0 0 I. Chang" in Not ieserve. 8 20 -24 -21 a -10 -11 -8 -4 -8 -2 -6 -7 1. Not Credit from D 0 -4 4 0 8 -1 -8 -4 0 0 -1 -1 -1 2. sther Reerv, chinges 9 28 -28 -21 0 -9 -7 -1 -4 -S 0 -8 -8 1- indicate increase) Share of ODP (Current USN): 1. Resource Balanc -11.6 -11.8 -83.7 -26.9 -80.8 -28.8 -27.0 -24.4 -28.6 -28.1 -19.9 -18.2 -17.8 2. Total lIntret Paymnta 0.8 0.7 0.8 0.4 0.8 1.1 1.2 1.0 0.9 0.8 0.8 0.8 0.4 8. Current Account Balance -18.8 -1J.8 -33.8 -81.0 438.8 -29.7 -29.9 -28.8 -28.8 -2S.0 -21.4 -19.8 -18.7 4. LT CapItal Inflow (lino 0) 15.6 16.6 30.8 80.7 84.8 80.8 80.a 26.9 28.1 25.8 21.4 19.7 18.9 8. Nlet Credit from the IW 0.f -0.1 -0.4 -0.8 0.0 0.0 -0.1 -0.1 -0.1 Neirandue Ite: 30P (ni I Ions of Current UNS) 88 S1S 668 8e0 978 1198 128? 1884 1489 1601 181S 1968 2138 Foreign Exchange Rearves: 1. Int'l. Resrv. (I2S lid) 28.0 44.2 38.8 15.9 18.8 -- -- -- -- 2. aold (end yr Londn price) 0.1 0.1 0.1 0.1 0.1 --- --- - -- -- -- . Grow Reservese incl. Goid 28.1 44.8 38.6 16.0 18.4 --- -- --- --- --- - _ 4. Orog. Rie. in Months Imort 1.7 2.8 1.2 0.8 0.4 --- -- -- --- -30 - ANNEX I Page 3 of 3 THE STATUS OF BANK GROUP OPERATIONS IN CHAD A. STATEE OF IDA CREDITS (As of May 31, 1988 ) Amount in US$ million (less cancellations) a/ Credit No. Fiscal Year Purpose IDA cl Undisbursed 2 credits have been cancelled and fully repaid bi 12 credits have been fully disbursed 43.59 Cr.489-1 1976 Sategui-Deressia Irrigation Supplement 8.00 0.05 Cr.811 1987 Third Education 8.30 3.03 Cr.1716 1986 Cotton Program 15.00 7.48 Cr.1728 1986 Highway Maintenance 20.00 15.16 Cr.1775 1987 Agriculture Sector Rehabilitation 17.40 16.73 Cr.1872 1988 Economic and Financial Management di 12.80 13.65 Cr.1901 1988 Road Reconstruction di 47.00 46.95 1988 Livestock d/ 18.60 18.02 TOTAL 190.69 121.07 of which has been repaid 1.98 Total now held by IDA 188.71 Amount sold 5.08 of which repaid 5.08 Total undisbursed 121.07 _________________ a/ Prior to exchange adjustments. b/ The Second Livestock (US$11.5 million) and Third Highway (US$7.6 million) Projects were cancelled before becoming effective, on October 16, 1980. Supplemental credits were approved for the First and Second Education Projects and for the Sategui-Deressia Project. cl Credit No. 1716-CD and higher are denominated in SDRs and are shown in US$ equivalent based on exchange rates in effect at the time of negotiations. d/ Not yet effective. B. STATEMENT OF IFC INVESTMENTS Chad is not a member of IFC. - 31 - AANEX II CHAD FINANCIAL REHABILITATION CREDIT SuDDlementary Program Data Sheet Section Is Timetable for Key Events (a) Time taken to prepare program: 6 months (b) Departure of Appraisal mission: February 5, 1988 (c) Completion of Negotiations: June 20, 1988 (d) Planned Date of Effectiveness: October 30, 1988 Section II: Special Bank Implementation Actions None Section III: Special Conditions (a) Conditions for Credit Effectiveness (i) Adoption of supplementary budget for 1988 reflecting increase in non-personnel operating expenditures of development-oriented ministries; (ii) Execution of COTONTCHAD's 'contrat-plan' (b) Conditions for Release of Second Tranche Ci) General progress in implementing the financial rehabilitation program; (ii) Implementation of the supplementary budget for 1988; (iii) Adoption of the investment program for 1989-91; (iv) Adoption of the 1989 current budget, including an increase in non-personnel operating expenditures of development-oriented ministries; (v) Satisfactory completion of the review of COTONTCHAD's performance in reducing costs and a decision on lowering the floor price for the 1989190 crop year; (vi) Establishment of a Fund to support the cotton producer floor price and a mechanism for distributing the cotton sector surplus; (vii) Significant progress in the public enterprise studies. ANNEX III - 32 - Page 1 of 13 N'Djamena, June 20, 1988 Mr. Barber B. Conable President World Bank Washington, D.C. Mr. Babacar N'Diaye President African Development Bank Abidjan. Gentlemen: I am pleased to send you this statement of development policy, which builds on the Policy Framework Paper for 1987-90, adopted in 1987. The Statement describes the first phase of the adjustment program being undertaken by the Government of Chad, and contains a request from the Government to the World Bank and the African Development Fund for a Financial Rehabilitation Credit (FRC) to support this first phase. I would therefore like to restate briefly the objectives of our adjustment program and the reforms already undertaken, and to describe the remaining actions that the Government intends to take during this first phase of adjustment of the Chadian economy. Yours faithfully, The Minister of Planning and Cooperation _ 33 A ANNEX III Page 2 of 13 GOVERNEN OF CHAD Statement of Develooment Policy 1. Recent Chanses in Chad's EconomI. Chad has experienced serious economic and financial difficulties over the past 20 years; per capita income (US$150 in 1986) is one of the lowest in the world. These difficulties are largely attributable to Chad's low level of development and to the impact of successive droughts, factors that were aggravated by a long conflict of external origin which absorbed a significant proportion of Chad's already limited resources. Since 1983, however, Chad has made considerable progress toward political stability and economic reconstruction. Real GDP, which had fallen almost 202, increased by 3? per year on average from 1983 to 1987 as a result of record cotton production in 1983/84 and the recovery in the agriculture and livestock sectors following the drought. Nevertheless, economic growth in 1986 and 1987 remained below the 2.4 2 population growth rate, due to the cotton crisis, which adversely affected government revenues, exports, and rural incomes. In the face of this new crisis, the Government of Chad took urgent action to improve the performance of the cotton sector and austerity measures to reduce the budget deficit. 2. Develoument Plan. At the same time, the Government took steps to tackle Chad's fundamental development problems and the structural constraints in the economy. It defined the main lines of its development strategy in an Interim Development Plan 1986-88, which outlines major objectives and specific project proposals and was presented to the Round Table Donors' Conference in Geneva in December 1985. The Government's long-term development objectives are to ensure food self-sufficiency, diversify the base of the economy by reducing its dependence on cotton, restore and maintain the transportation network and accelerate the development of human resources. Work is in progress to establish the strategies and measures needed to achieve these objectives in priority sectors and at the macro-economic level. 3. Policy Framework Paser 1987-90. It is against this background that the Government, in conjunction with the World Bank and International Monetary Fund, prepared a Policy Framework Paper (PFP) for the period 1987-90. T "FP outlines the principal structural problems in the Chadian economy including: over-dependence on the cotton sector, the low level of physical, human and institutional infrastructure, the imbalances in public finances, inadequate performance by the public enterprises and constraints on credit to the economy. The main quantitative targets for the 1987-90 adjustment program are to: achieve an average annual economic growth rate of 22 in real terms, keep the rate of inflation to S a year, reduce the current account deficit (including official transfers) from 13.52 of GDP in 1985186 to 102, and contain the overall balance of paymeiits deficit at an average of SDR 6 million (or about 252 of the average deficit for 1985 and 1986). The policy document contains a series of measures to be taken to achieve these targets. We have already received support from the International ANNEX III 34 Page 3 of 13 Monetary Fund for the first year of this program in the form of an agreement under the Structural Adjustment Facility, reached in October 1987, and a first loan tranche for the period 1987188. We itend to pursue this program. Adjustment Prostrs 1988-1 89 4. On the basis of the PFP, the Government of Chad has drawn up a detailed reform program for 1988-1989. The aim during this phase of the adjustment program is to prepare the ground for reform of two sectors that are crucial for improving the utilization of economic resources: public finances and the cotton sector. These are also the sectors that require iumediate and substantial financial support to maintain and strengthen their development. We have also embarked on a number of studies covering the public enterprise sector. public administration, and the social dimenaions of adjustment, the results of which will serve to prepare later phases of the adjustment process. The Government of Chad has therefore initiated a process of economic policy reform which will be pursued in several stages and is designed to improve the effectiveness of our economic management and strengthen the base for Chad's long-term development. The 1988/1989 Action Plan appears in Attachment 1 of this letter. A. Public Sector Resource Nanaeen_ t 5. The 1988-1989 phase of the public resource management component covers the following five areass sectoral strategies, the public investment program, current expenditures, fiscal reform and the public sector financing plan. 6. The Government intends to achieve the objectives outlined in the Interim Development Plan by implementing strategies prepared for the main sectors of the economy. These strategies will comprise analyses of sectoral problems, the identification of objectives and priorities, the development of sectoral criteria for selecting investments, a medium-torm investment program, and analysis of the implications for the structure and volume of current expenditure, and cost recovery measures. The institutional aspects and the need to strengthen the administrative structure will also be addressed in these strategies. In conjunction with the World Bank, a strategy document for the transportation sector has already been prepared and was submitted to a donors' meeting held in N'Djamena in February 1988. Formulation of a development strategy for the rural sector and the irrigation subsector is underway. We intend to prepare strategies for the education and health sectors before the end of 1988 and 1989 respectively. Given the importance of external assistance for our development programs in each of these sectors, we plan to present these strategies to the donors. Moreover, preparation of a planning document began in May 1988. This exercise will allow us to analyze Chad's economic and social situation, to determine the country's strengths and weaknesses, to define sectoral strategies and to prepare action programs. The sectors for which development strategies have not been formulated will therefore be included in this exercise. 7. To ensure effective utilization of financing, the Government resumed the preparation of a public investment program in 1987 after an interval of 12 years. This effort has been intensified for preparation of the 1988 investment program. The program, amounting to CFA? 81 billion, emphasizes the development of the agriculture sector and the ANNEX III - 35 - Page 4 of 13 rehabilitation and maintenance of the road network, and also launches a rebuilding of the social sectors. To improve the quality of the investment program we are undertaking additional studies, in the areas of irrigation, public enterprises and education; the conclusions of these studies will be incorporated into the final decisions on project implementation. The Government intends to introduce a three-year rolling public investment program. With this purpose, we prepared a public investment program for the years 1988-90 in December 1987. Thie program will be updated annually and reviewed with the World Bank and other interested donors. This program will be updated annually. We are well aware of the problem of recurrent charges arising from investments. Some 60Z of the assistance provided by donors is beinS used to meet Government operating expenditures and the costs of training and technical assistance relating to investment projects. Given the present low debt servicing potential of Cnad's economy, we are continuing to seek external financing in the form of grants and loans on highly concessional terms. We are in the process of strengthening the preparation and monitoring of the investment program with the support of UNDP and the World Bank. In April 1988, selection criteria for public investments were adopted by the Ministry of Planning and Cooperation. Finally, as regards the social sectors, we are studying ways of maximizing use of available resources by encouraging the financial participation of benEficiaries. 8. The adjustment program also includes an augmentation and restructuring of current expenditures under the support of the Financial Rehabilitation Credit (FRC). The restructuring is aimed at increasing the real operating expenditures of key development ministries whose budget allocations have been shrinking in recent years as a result of severe financial constraints. The curreLt level of real expenditures in these ministries is inadequate to carry out even the most basic operations and leads to the inefficient use of our resources. From mid-1988 onward, the Government will increase real operating expenditures in the following ministries: Agriculture; Livestock and Rural Water Supply; Public Works, Housing and Urbanism; Transport and Civil Aviation: Education; Public Health; Social Affairs and the Advancement of Women; and Tourism and Environmental Protection. For 1988 total expenditure by these ministries will be CFAF 2 billion. Part of the necessary resources will come from budget assistance on terms equivalent to those of IDA, in the amount of CFAF 1,500 million. The remaining resources will come from the budget as agreed with the DMF. To the extent necessary, budget allocations as a whole will be adjusted through supplementary allocations to be introduced in July 1988. The new allocations will be implemented as fully as circumstances permit so that actual and planned expenditures coincide as closely as possible. The overall increase in current expenditures and in the current deficit in relation to the totals agreed with the IMF under the structural adjustment facility will not exceed the additional amount provided for in the Financial Rehabilitation Program. We are in the process of strengthening the procedures for preparing, executing and monitoring operating expenditures within the Ministry of Finance and Technology and the Ministry to the Presidency in charge of General Inspection and State Control. The Government is currently taking measures to streamline expenditure authorization procedures (described in Attachment 2) s0 as to render the system more efficient without impairing necessary Government control. In 1989, we will ensure that the growth of real expenditures in the ministries mentioned above is in line with the growth of government revenues and with budget policy objectives to be ANNEX III _36 Page 5 of 13 agreed with the 114F. the World Bank. the African Development Bank, and France. 9. The Government is concerned with the current status of the civil service and recognizes the need for reform. With the support of USAID, we have already embarked on a census of civil servants. As part of the first phase of adjustment, a study of the civil serviceladminis- tration will be conducted in order better to identify the personnel needs of the various departments and the qualifications required, and to compare these with current numbers. The Chadian Government has already undertaken a similar study in the Ministry of Education with French assistance. The results of these studies and the projections for government revenues will be factored into any reform of the civil service. As well, civil service reform must deal with the question of the remuneration of civil servants. who for the most part are receiving only 60S of their 1967 salary base. Reforms resulting from these studies will be undertaken during the second phase of the program. The Government is currently taking measures to pay the salary arrears of National Education personnel as determined on July 1, 1988; no new arrears will be allowed to accumulate with respect to this group. 10. Given the gradual normalization of payroll and operating costs, as well as the increase in recurrent costs associated with new investments, the Government is aware of the need to raise consolidated budget revenue in relation to GD?. In 1988, revenue growth will depend largely on the results of the new system of taxing petroleum products that came into effect in August 1987. Initial difficulties encountered in implementing the new system are being overcome: since November, various steps have been taken to improve the way it is administered and to speed up the collection process. Measures will also be introduced in 1988 to expand the taxation of oil importing companies and limit their exemptions. On the basis of current inport duty assessments, we are already able to set our budget revenue target in this area at CFAP 4.5 billion for 1988. However, a sustainable increase in budget revenue cannot depend solely on the taxation of petroleum products. Other, supplementary sources of revenue will be tapped as far as allowed by the degree of overall fiscal pressure the economy can sustain. To this end, a general study of the whole field of tazation will be undertaken in conjunction with the International Monetary Fund and the World Lank. On the basis of this study and other pertinent data, new taxation measures will be introduced to the extent possible with the 1989 budget. 11. The Government confirmed its intention to respect the financial program established with the staff of the International Monetary Fund for 1988. This program sets out the objectives mentioned above for taxation of petroleum products, overall revenues and expenditures, as well as the consolidated budget deficit presented in Attachment 3 of this statement of development policy. Implementation of the 1988 budget will be examined in collaboration with the staffs of the International Monetary Fund and the World Bank. 12. The public sector financing plan (Attachment 3), covering both the general budget and the cotton sector, takes the form of a sueaarized statement of our goals for 1988 and 1989. It incorporates current expenditures, revenues and capital investment, and provides an estimate of our overall financing needs, including those relating to the settlement of COTONTCHAD's arrears. Although the figures on external financing for 1989 should be taken as indicative, it is apparent -- ANNEX III 37 Page 6 of 13 given the order of magnitude of the country's external financing requirements -- that significant and sustained non-project support will be needed. Moreover, the constraint represented by possible settlement of the arrears of COTONTCHAD will allow no progress toward an effective solution unless agreement can be reached with the Central Bank on lowering the charges that now apply. The Government is determined to set up a plan, designed in conjunction with donors, for settling these arrears within a reasonable period, and to see to it that the plan is carried out. S. Cotton Sector 13. The Government introduced an emergency program in 1986 to respond to the crisis in the cotton sector. The crisis was precipitated by the sharp fall in the world price of cotton in 1985, and coincided with a period of lax financial management in COTONTCHAD which resulted in accumulated operating losses of CFAP 41 billion. With the support of the World Bank and other donors, the Government undertook an emergency program covering the 1986187 and 1987/88 agricultural seasons. The emergency program has succeeded in cutting COTONTCHAD's costs by around 4O0 and reducing its operating losses from CFAP 23 billion in 1985/86 to CFAP 5 billion in 1987/88. 14. After this initial phase, the Government began to implement a program of basic reforms covering the period 1988/89-1990191 to re-establish the medium-term economic and financial viability of the cotton sector. This program has four componentst (a) a program to increase the efficiency of COTONTCHAD. A number of measures have been identified to improve the efficiency of COTONTCHAD. In order to reduce administrative costs and improve management, most services and personnel will be transfered from the N'Djamena headquarters to the production site (Moundou) by May 1989. This will be accompanied by the following actionst revision of the organizational chart, clarification of the division of responsibilities among the top managers, as well as a management support and training program; (b) a program which aims to improve cotton production which includes support to extension and research services. This component aims to: - increase cotton production; - raise farmers' productivity; - reorient the work programs of the extension (ONDR) and research (IRCT) agencies to respond to farmers' needs; - strengthen coordination between COTONTCHAD, ONDR and IRCT; and - allocate funds for IRCT and ONDR's expenditures in the government's budget to the extent possible given available resources. ANNEX III -38 - Page 7 of 13 (c) the establishment of a flexible producer pricing system and a new price support mechanism. The Government has adopted a more flexible producer pricing policy designed to take into account fluctuations in world cotton prices and to reduce and eventually eliminate the sector's deficit. To this end, the Government has introduced a price differential for three qualities of seed cotton and will reduce the floor producer price to a maximum of 90 CFAP per kilogramme -for first quality seed cotton for the 1989/90 and 1990/91 seasons. By November 1938, the Government will also establish a fund to support the floor producer price and develop guidelines for allocating surpluses that arise from high world prices; such guidelines will give top priority to farmers. (d) a plan for settlement of COTONTCHAD's arrears. In order to reduce COTONTCHAD's arrears to the banking system, the Government has begun discussions with the Central Bank which appears to be favorably disposed to the idea of freezing the arrears falling under the 1984 moratorium, for a period which has not yet been determined. Negotiations are underway with other donors to settle the balance of the arrears. 15. A contrat-plan, which is to be adopted by August 1988, defines the environment within which the objectives of the restructuring program will be achieved, the means for achieving these objectives, the schedule for the program's execution, as well as the Government's and COTONTCHAD's respective commitments under the program. C. Preparation of Future Reforms 16. As indicated above, this first phase of our adjustment program includes studies to prepare for reforms that will be undertaken during later stages of the program. We have already referred to studies of the tax system and the civil service, which will provide a basis for further reforms in the area of public finances. We also envisage studies on public enterprises, the agriculture sector, education and training, and the social dimensions of adjustment. 17. We are preparing a reform program to improve the performance of public enterprises and to rationalize the economic environment in which they operate. We have already initiated a first batch of five diagnostic studies of public enterprises, which will be completed before the end of 1988; we intend to begin studies on a second batch of enterprises by the end of 1988. A study of cross arrears among parastatals is also underway. The restructuring of the cotton sector described above is an important part of this reform. We have also taken measures in two other sectorst in livestock, we have decided to deregulate the distribution of veterinary products in mid-1988 and their importation as of January 1, 1991; we have also decided to eliminate export restrictions on livestock and to rationalize administrative procedures in April 1988. A complete system of cost recovery for veterinary services was introduced in April 1988. In the transportation sector we initiated a study in November-1987 of the functions of the CTT (Coopdration des Transporteurs Tchad'ens) and a study of the possibility of privatizing quarrying operations currently undertaken by OPCA. ANNEX III - 39 - Page 8 of 13 18. In the area of rural development, we plan to conduct two major studies. The first we envisage as a master plan for development of the Sudanese zone, where the principal income-producing activity until now has been cotton-growing. Uhile taking current development programs and existing studies into account, it will incorporate all possible avenues of development (diversification of output, upgrading and/or building of roads, storage facilities, reorganization of extension services, intensification of research, means of transportation, marketing organization, processing of products, ..ransportation of products to deficit areas, etc.), the final goal is a well-balanced development of this zone and its integration with the rest of the country. The second major study proposed, which will prepare the way for reforms in the agricultural sector, is concerned with the problem of food security. 19. As regards the education/training sector, over the next two years we intend, on the basis of studies supported in IDA, ADB and the French Government, to prepare a sectoral policy framework that will enable us to avoid major structural distortions in this important sector and to achieve balanced development of the different levels of education in innovative ways, while taking into account priority training needs, our budgetary constraints and changes in our employment market. 20. With regard to the social dimensions of the adjustment program, we have begun the work of collecting statistics on population and living standards; we have also begun to prepare complementary measures. In particular, we will take account of the social dimensions of adjustment in formulating strategies for the social sectors and in the allocation of current expenditures. We envisage a sociological study, a medium-term demographic study and a mini-survey of incomes and consumption. We also hope to study the potential impact of reductions in the civil service and in the staff of public enterprises before implementing reforms in these areas. We intend, with donor assistance, to create a fund to provide support and start-up help to new small holders in marginal cotton-growing areas and COTONTCHAD personnel dismissed as a result of measures taken as part of the emergency program and the adjustment program. This Fund will also support projects and programs in urban and rural small-scale enterprises, the improvement of urban and rural living conditions, as well as nutrition and health. Attachment ls Action Plan Attachment 2s Budgetary Procedures Attachment 3s Public Sector Financing Plan, 1988-89 ANNEX III 40 ~~~~Pag-e §-of 13 - 40 - ~1 Attacbment 1 CHAD - FINANCTAL REHABILITATION PROGRAM 1988 - 1989 ACTION PLAN Measure ComPletion Date I. Public Sector Resource Mananement 1. Public Investment Program (PIP) a. Adopt 1988 PIP January 1988 b. Prepare studies on specific projects March 1988 - Sugar - Irrigation c. Adopt first rolling PIP for 1989-91 January 1989 d. Strengthen investment program preparation June 1988 and evaluation process e. Formulate sectoral strategies 1988-1989 - Livestock March 1988 - Transport January 1988 - Education end 1988 - Health end 1989 f. Hold sectoral aid coordination meetings - Agriculture December 1986 - Transport February 1988 - Education mid-1989 2. Operating Budget a. Increase through supplementary financing July 1988 non-personnel operating expenditures for second semester 1988 in eight development ministries b. Adopt 1989 budget, including increased December 1988 non-personnel operating expenditures for the eight ministries c. Strengthen expenditure authorization February 1988 and monitoring procedures - 41 - ANNEX III Page 10 of 13 3. Fiscal Policy a. Replace differentiated petroleum import tax July 1987 system with Aiitary consumption tax b. Reinforce recovery efforts of petroleum tax November 1987 c. Prepare an overall study of the fiscal system, Before end 1988 including special funds IT. Restructuring of the Cotton Sector 1. Restructuring of COTONTCHAD a. Transfer COTONTCHAD's financial and administrative services to Moundou May 1989 b. Adopt a new organizational plan and redefinition of responsibilities October 1988 c. Create an agricultural input management office July 1988 d. Adopt a training program January 1989 e. Adopt a supplemental program to improve performance of DHS November 1988 f. Define a commercial policy for DHS March 1989 g. Negotiate with CTT a reduction of transport prices for 1989180 agricultural season October 1989 h. Adopt the contrat-plan August 1988 2. Pricing Policy Reform a. Introduce a three-tiered pricing system, each price being linked to a particular quality of seed cotton July 1988 b. Define the rules of operation for the new flexible pricing system November 1988 c. Establish guidelines for the operation and replenishment of the price support fund November 1988 d. Lower the floor price for the 1989/90 and 1990191 seasons March 1989 ANNEX III _-42 - PageI lof 13 3. Agricultural Policy a. Reformulate the 1988189 production plan to favor the efficient region February 1988 b. Formulate program to reduce input costs and enlarge the choice of inputs available to the farmer while continuing full cost pricing of agricultural inputs April 1988 c. Redefine the responsibilities of key institutions (ONDR, IRCT, COTONTCHAD) to ensure better coordination and improved efficiency: reorient their work programs June 1988 4. Settlement of COTONTCHAD's Arrears a. Reduce the arrears from CFAF 43 billion November 1986- (Oct 1986) to CFAF 30.6 billion (Oct 1988) October 1988 b. Establish a financing plan to settle To begin in arrears November 1988 II1. Studies to preDare Future Reforms a. Undertake diagnostic studies of five Before end important public sector enwerprises 1988 b. Undertake studies of add Lional public Studies to sector enterprises begin before end 1988 c. Undertake study of cross arrears of Before end parastatals 1988 d. Prepare a study of the composition, Before end configuration and efficiency of 1989 public administration ANNEX III - 43 Page 12 of 13 Attachment 2 CHAD - Budgetary Procedures With regard to the budgetary amendment, designed to increase operating expenditures (excluding personnel) of eight ministries, the monitoring procedure for real expenditures will be as follows. The Government (i) will set up a system of special bordereaux' for each ministry, and (ii) will prepare a semi-annual report to which detailed tables will be attached signed by the Central Treasurer, the Budget Director and the Director of the technical ministry concerned. These tables vill supply the following information for each budgetary line subject to the budgetary amendment: - total budget allocation (initial allocation and supplementary financing) - total committed - total payment - balance and implementation rate - 44 - ANNEX III Page 13 of 13 Attachment 3 OHW: Pbl tc Sector Financing Plan, 1987849 (l i I [aim of CFAf) 1987 1988 1988 19C8 1989 sest. Ist am. 2rd on. CENRD G0V0ERNT Reve.Ies 19,497 9.625 12.591 223216 24.325 Eqereitures 78,677 38.945 45.044 83.989 92.010 Current eedItures .27.67 11,445 17.344 28.789 3D.610 q4ratings ew. in 8 ministries 1/ 297 250 1.750 2.0OO n.a goverrint buxipt 297 250 250 500 n.a swipmental b1t 0 0 1.500 1.500 1.165 Capital eqenditures 51,000 27.500 27.700 55.200 61 400 pipil Irn projects 51,.0 27.500 28.900 54.400 53,400 new projects 0 0 0 0 6.200 governent counterpart funds 0 800 8a0 1100 Variatlon In Central Governt arrears 502 (943) (10898) (2,331) (0.500) Teachers' salaries 13 0 (230) (230) 0 Other Internal 489 (750) (1,158) (1i9t8) (1.500) Extermal 0 (193) 0 (198) 0 Cantral Govermat deficit (58.678) (30,283) (33.841) (64,104) (69.185) (on a cash basis) - PULIC ENTERPRISES COTONTrC operating defIcit (4,109) (588) (589) (1.177) (6.992) Red.tlon In COTNTOiAD arrears (7,700) (1.700) (9,316) (11,016) (8,200) Cobilned Central Govt.CINTOIAW deficit (70.487) (32.551) (43,748) (76.297) (84.377) (an a cash basis) _ _ _ FINANCING 70,487 33.149 43.148 78,297 79,783 Extemal 68,973 33.149 43.454 76,603 81,134 ProJect assistance (PIP) 51.000 27 500 26 900 54,400 59600 pilpeline proJects 51.000 27,500 26,900 54 100 53.400 rew proJects 0 0 0 0 6,200 Non-project assistae 18,418 6,123 17,02 23.151 22,634 tlnted States 1,609 750 750 1.500 1,631 france 9,099 3,000 7,010 10,010 4.010 Ministry of Cooperation 5,382 3,000 4,408 7,408 n.a CCCE 3,717 0 2.602 2.602 4.010 llorld Bak 1,600 0 6.50D 68500 6.782 African Development 84z* 0 0 1,268 1.288 7.841 Nether lands 0 673 0 673 2,370 European Economic Comity 6,110 1,700 1.500 3,200 n.a STABEX 4,410 1,700 1,500 3,200 n.a Fifth EDF 1,700 0 0 0 0 Repayment of ext. debt (Incl. debt relief) (445) (474) (474) (948) (1,100) Intemal 1,514 0 (306) (306) (1,351) Banking system 439 0 (30) (306) (1.351) Nmn-bankIng system 1,075 0 0 0 0 Financing GaD (0) (598) 588 0 4.594 1/ Deveiooment ministries targetted uzder the FRC incluis Puliic Health. Educatlon, Social Affairs, PZiIc st., Trarnport, Agriculture. Tourisa/Environmnt, and Livestock. -45- ANNEX IV Page 1 of 3 PlC POLICY MATRIX ..einnf - -. aas Poi I Fra ad Meaur Statue of Implementation Objeeti Preparation date 1. Public tecter Ihsoures Management . Public nastesat Progra. Improve ff iclency of public I Adopt 1M PIP completed January 19 I nvastant b. Prpere studlie on specitic pro,e)ut o - iriaiotten completed March 196M a. Adopt rollilg PIP for underway January 19J9 1919-91 d. Strengthen PIP underway June ls6 preparation and evaluation proes e . Formulate n actorl etratets: 19lo-lo" - Livestock completed lo" - Tr aeport completed low - Educetion end 196 - Helth ond 1960 f. Hold *soctral oId ooerdination - Agrlculture completed December 196 - Transport completed February 1966 fBEducation under preparation mid-1969 8. Operating Budegt Enhance operatienal *. Inereas non-personnel Budget _andment July 1966 Capacity of key operating expenditures preared ministries/ageneles for for seond s_mester devlopment 198 In 6 target miniatries b. Prepare 1930 budget, underway Decembr 1966 including inereased non/personnel oeprating expeitures for the 6 *inlatriee c. Strengthen expenditure Initial meaures taken February 1988 authorization and monitoring procedure S. Fiscal Polley Incrase goverment a. Replace differentiated comleted July 1987 revenues and Improve the petrolem Import tax system efficieney of the tax systm with unitary consumption tax to lncrense revenues In the short term b. Reinforce collection and completed Novembr 1987 recovery effort of petroleum tax c. Prare an overall study of IMF io preparing TORe Study to be flcal system, Including completed before special funds th end of 1688 - 46- ANNEX IV Page 2 of 3 Pollcy aroseCond eaeuree 5tatu oft hsp.mSttion Objectives Prperotlon dte . Coto $eto 1 Reetrueturlng ot Cottos Sprove eff lelseny, redue a. Ftore pricisg VolIcy u/w financal* risks and lmprovo - ditfereotiot price ericult4r1 the len tem frinncil ccordin to three qua tle complebed _on vabilitfy of tho Sector adopt ruleso tr op ratlon under preparation November IOU of new pricing system - loer floor price tor 10/98/ under preparation Mrch 1989 *ad 1998/91 Seaons b. Crete peice support fund Novber IOU within COIT ONIAO c. Refor lae tho 1908/89 completod February 1998 produetlon plan to favor the effitient region d. Formulcte prora to reduce Input completed April 1988 coot and enlare the choice f Input ovallable to the tfamr while continuing full coot prielin of agriulture input 3. Idenitfy dditlonal measures 1988-1989 for reducing COTONTCHAD as coOs and improving It* mannagent capacity - transfer C0ONTfCHAD financial underway May 1989 and adlmnlstrative servie. to - undou - adopt revised organizatlon propooal prepared October 198I etructure - create Input management otfice July 1988 - adopt program to improve underway Novebr 1988 oil end *oop production f. Adopt Ocontrst-plann for prepared August 1988 COTm4?OIAO g. Redefine the responsibilities *agtement finalized June 1988 of key Insiltutions (ONOR, IRCT, COTONtCHAD) to ensure better coordination and lmproved efficiency; reorient thelr work program 2. SettlIng COTWITCHAD'a Arrearn Improve the finanial a. Reduce arre f rom CFAF 43 Firet-year payment of Nove b r 1980- vIabilIty of COTONTCHAD and biliIon (Oct. 1986) to CFAF CFAF 7.7 billion made October 1988 Increase Chad'-s ese to 8.6 billion (Oct. 1988) Central Bank credlt b. Establish a financing plan to Proposal under Implementation settle arears n_gtiatien with Central to start November Iamb 1lo8 > I to 0 SR | XD o. su., , . IX 1.! 1~~~~~~~~~~~~~~~~~~1 U I f 3 . IBRD 21014 A- LI B Y A C HAD BORKOU-ENNEDI- TIBESTI S--andary moazh L _ argtu ___Others rd - RiversI I ___. i td*Mr: boundaries I j _. ntema0ional bourldaries _i,iodi o 50 loD 150 2o0Fado 2== Kilrnws .~, > O1 -l 100 15D 0 k \ /o / \ X,OmnChalouba tribo K A N E M N E |I l N I G E r ou irarOiom { f - < |0 °;( t~" ~ Goz-Beida N - ~ I G I E R I A~ ) n - jmDjedom I G 'E9 R I A N A J C Fio1!~ / ''J E ARI Mantu-igne C A M E R 0~~~S. ~ fl OCTOBE 1987