Documentof The WorldBank FOROFFICIAL USEONLY ReportNo-40768-CF MEMORANDUMAND RECOMMENDATION OFTHE PRESIDENTOFTHE INTERNATIONAL DEVELOPMENTASSOCIATION TO THE EXECUTIVEDIRECTORS ONASSISTANCE TO THE CENTRAL AFRICAN REPUBLIC UNDER THE ENHANCED HIPCDEBT INITIATIVE SEPTEMBER11,2007 This document has a restricted distribution and may be used by recipients only in the perfonnance o f their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCYEQUIVALENTS Currency Unit = CFA USD1.OO = 498.07 (as ofDecember 31,2006) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS A A A S Analytical andAdvisory Activities AfDB AfricanDevelopment Bank AfDF African Development Fund AIDS Acquired Immunodeficiency Syndrome BADEA Arab Bank for Economic Development inAfrica BDEAC Central African States Development Bank C.A.R. Central African Republic CEMAC Central African Economic andMonetary Community EIB European Investment Bank HIPC Heavily IndebtedPoor Country HIV HumanImmunodeficiency Virus IDA International Development Association IFAD International Fundfor Agricultural Development IMF International Monetary Fund I S N InterimStrategy Note LICUS Low Income Country under Stress MDRP Multi-Country Demobilization and Reintegration Program NPV Net Present Value OFID OPEC Fundfor International Development OPEC Organization o f Petroleum Exporting Countries PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper RLBSUP Reengagement and Institution-Building Support Program SDR Special DrawingRights USD United States Dollar Vice President : Obiageli Katryn Ezekwesili Country Director : Mary Barton-Dock Director, PRMED Vikram Nehru Director, AFTPM : Sudhir Shetty Sector Manager, AFTP3 : Yvonne M.Tsikata Task Team Leaders : FlorenceM.Charlier, Frederico Gil Sander Staff Members Eric Bell, Luc Razafimandimby, Brendan * Horton, Boris Gamarra, Lema Zekrya FOR OFFICIAL USE ONLY MEMORANDUMAND RECOMMENDATION OFTHE PRESIDENTOFTHE INTERNATIONALDEVELOPMENTASSOCIATION TO THE EXECUTIVEDIRECTORSONASSISTANCE TO THE CENTRALAFRICANREPUBLIC UNDERTHE ENHANCEDHEAVILY INDEBTEDPOORCOUNTRIES DEBTINITIATIVE TABLE OFCONTENTS I. INTRODUCTION ............................................................................................................... 1 11. PROPOSEDIDADEBTRELIEF ..................................................................................... 1 111. IDAASSISTANCE STRATEGY ....................................................................................... 4 IV. PROPOSEDCOMPLETIONPOINTTRIGGERS ......................................................... 5 V. RECOMMENDATION ...................................................................................................... 6 Figures Figure 1: Central African Republic: Potential Costs o fthe HIPC InitiativebyCreditor Group......2 Figure2: Central African Republic: Debt Service due to IDAbefore andafter Assistance underthe Enhanced H P C Initiative, 2006-2028 ............................................................................................. 3 Annexes 1. Central African Republic: IDA Credits Subject to Debt Service Reduction under the Enhanced H P C Initiative ......................................................................................................... 7 2. Schedule of Debt Service ReductionUnder the EnhancedHeavily IndebtedPoor Countries Initiative...................................................................................................................... 8 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. MEMORANDUMAND RECOMMENDATION OFTHE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVEDIRECTORS ONASSISTANCE TO THE CENTRALAFRICANREPUBLIC UNDERTHE ENHANCEDHIPC DEBTINITIATIVE I. INTRODUCTION IsubmitforyourapprovalthefollowingMemorandumandRecommendationonthe assistanceto be provided to the CentralAfrican Republic (C.A.R.) under the Enhanced Heavily IndebtedPoor Countries (HIPC) Debt Initiative with respect to debt owed bythe C.A.R. to the International Development Association (IDA). This report and recommendationaddress: (a) the amount andmodalities o f assistanceto be provided by IDA; (b) the proposed assistanceto be providedinthe interimperiodbetweenthe decisionpoint and completionpoint with respect to debt owed to IDA; and (c) the reliefthat is proposed to beprovidedwithrespect to debt owed to IDA at the completionpoint. It also discusses IDA'Soverall assistance strategy inthe C.A.R. andthe triggers that C.A.R. must satisfy to reach the completionpoint under the Enhanced HIPC Initiative. 2. This document complements the attachedjoint IDA-IMFpaper entitled "Central African Republic: Decision Point Document for the Enhanced Heavily IndebtedPoor Countries Initiative". The decision point document presents an assessment o fthe C.A.R.'s qualification for assistance under the enhanced HIPC Initiative, as well as the corresponding amount o f debt relief, and sets forth the triggers for reaching the completion point that have been agreed between the authorities and the staffs o f IDAandthe IMF. 3. Compared to the preliminary document discussed bythe Board on March 8, 2007,' the decision point document presents completion point triggers that were substantially sharpened and streamlined, as requested by the Executive Directors. The debt reliefanalysis inthe decision point document uses updated debt stocks as o f end-2006 and refines the assumptions o f debt reliefdelivery following consultations with multilateral creditors. The overall net presentvalue (NPV) o f debt declined somewhat due to the reclassification o fbilateral debt, leading to a reduction o f the common reduction factor from 73 to 68 percent. 11. PROPOSEDIDADEBTRELIEF 4. The ExecutiveDirectors have endorsed the staffs' assessmentpresented inthe preliminary document that C.A.R. is eligible for assistance under the HIPC initiative, and that it could reach decisionpoint by September 2007 provided that understandings were reached on appropriate completionpoint triggers and C.A.R. remainedon track with its IMF- and IDA- supported reform programs. Staff assesses that both of these conditions have beenmet. 5. The updated debt reliefanalysis indicates that C.A.R. has anNPV-of-debt-to-exports ratio at end-December 2006 o f 470 percent after traditional debt reliefand thus qualifies for debt reliefunder the Enhanced HIPC initiative. To bringC.A.R.'s NPV o f debt-to-exports ratio to 'See"Central AfricanRepublic-EnhancedHeavilyIndebtedPoor Countries(HIPC) Initiative: Preliminary Document", February21,2007, IDN38675. - 2 - the threshold o f 150percent, the total assistanceunder the Enhanced HIPC Initiative would amount to US$583 million inNPV terms. This corresponds to a common reductionfactor o f 68 percent. Based on proportionalburden-sharing, the multilateral creditors' share of assistancewould amount to US$365 million inNPV terms. O fthis amount, IDAwould provide US$209 million. Bilateral creditors' share would amount to US$188 million inNPV terms (Figure 1). Figure 1: CentralAfricanRepublic:PotentialCostsof the HIPC Initiativeby Creditor Group (TotalEstimatedHIPC EnhancedAssistance: $583 million, end-2006 NPVterms) Commercial Paris Club Other Official Bilateral 27% Other ..... 8% 5% 15% 6. Itis proposed that two modalities beusedto deliver IDA'SEnhanced HIPC debt relief. First, on November27,2006 arrears owed to IDAbythe C.A.R. were cleared through abridge loan which was repaidwith the proceeds o f a Reengagement and Institution-Building Support Program(RIBSUP) Grant2,resultinginanNPVreduction o fUS$66.0 milli~n.~ amount This will be appliedto enhanced HIPC debt reliefon debts owedto IDA4. 7. Second, it i s proposed that the remainingUS$142.7 million (inNPV terms) o f enhanced HIPC assistance from IDAbe delivered through debt reliefon IDA credits disbursed and outstanding as o f end-December 2006. We seek the Executive Directors' approval o fIDA 's Enhanced HIPC debt relief on amounts owed byC.A.R. to IDA on the following terms: (a) interim assistancewould be providedstarting October 1,2007, following approval of C.A.R.'s decisionpoint document by the Executive Directors o f IDA andthe IMF, and continue, subject to the limitation o f one third limit of NPV of assistance during the 2See "Program Document for a Proposed Grant inthe amount o f SDR 55.4 million (US$82 million equivalent) to the Central African Republic for a Reengagement and Institution-Building Support Program", November 3,2006 (Report NO.37864-CF). 3This amount corresponds to the actual amount o farrears to IDA at the date ofthe disbursement of the grant, compounded to the decision point, which i s the reference date for the deliveryof debt relief. 4See the "Joint Bank/Fund Note on the Heavily IndebtedPoor Countries (HIPC) Debt Initiative-Approach to Arrears to Multilateral Institutions" inAttachment 1of the "HIPC Debt Initiative: the Chairman's Summary o f the Multilateral Development Banks' Meeting," March 6, 1998 (IDAISec M98-90). - 3 - interimperiod, untilthe country has reached the completion point.5 The irrevocable delivery o f assistance at completionpoint will be subject to having C.A.R.'s other creditors confirm their agreement to provide debt reliefunder the Initiative, to the satisfaction o f IDA. (b) a 63.44 percent reductionwouldbe appliedto the debt service falling due to IDAon disbursed and outstanding IDA credits as o f end-December 20066'7,as specified in Annexes 1 and2, untilthe fillamount o f assistance i s delivered; and (c) debt relief from IDA i s expected to be delivered over 20 years, ending in2027. With this delivery mechanism, C.A.R. would receive an estimated cumulative debt service reduction from IDA o f approximately US$229 million innominal terms on the balance o f IDA's Enhanced HIPC debt relief. * 8. The total service owed to IDAbefore and after assistance under the Enhanced HIPC Initiative i s shown inFigure 2.' Absent MDRIassistance, from November 2027 onward, filldebt service payments would resume, averaging US$4.0 million annual1 for 2027-2041, untilthe final payments due on end-December 2006 stock of debt, in2041.18However, uponreaching HIPC Completion Point, C.A.R. would receive MDRIassistancewhich would result inthe average debt service falling to about US$40,000 per annum. Figure 2: CentralAfricanRepublic:Debt Servicedue to IDA before and after Assistanceunder the Enhanced HIPC Initiative, 2006-2028 Staffprojects that the one-third limitwould be reached by 2012. The debt relief is calculated using the end-December 2006 USD/SDR exchange rate. 7 Reliefi s not providedon IDA Project Preparation Loans, which are payable in2008 and 2009. For a total of US$228,739,182. This amount could change depending on the timing o fthe completionpoint. HIPC debt relief is shown inAnnex 2. loC.A.R.'s most recent IDA credit included inthe end-December 2006 stock o f debt was approved in2001 and has a final maturity date o f June 15,2041. - 4 - 9. IDAandIMFstaffs have initiated consultations with multilateral creditors andthe ParisClub. IDA, IMF,AfDF, IFAD, EIB, OFID, BADEA, BDEAC andParisClub creditors have indicated their willingness to provide HIPC Initiative debt reliefto C.A.R." These creditors account for 68.2 percent o f total HIPC Initiative relief. 111. IDAASSISTANCE STRATEGY 10. Following a Country Reengagement Note inJuly 2004, a Joint Interim Strategy Note (ISN) with the African Development Bank (AfDB)was discussed bythe AfDB BoardinDecember 2006, andthe IDABoardofExecutive Directors inJanuary 2007. The ISNis guidingIDA'Sengagement inC.A.R. over theFY2007-08 period. A Country Assistance Strategyis expected once the Government has finalized its full PRSP. The ISNpillars are: (i) economic recovery and support help strengthen public sector governance andtechnical capacity; and (ii) humandevelopment support with emphasis on the poor. 11. The I S Nfocuses on delivering quick results to the populationandrestoring credibility inpublic institutionsbyhelpingthe Government deliver basic services, createjobs and launchreforms that promote longer-term economic governance andinstitutional development. The I S Nis aligned with the Interim PRSP-the Economic Social Policy Framework-and envisages a mix o f IDA grant operations, including arrears clearance anddebt servicing; trust fund grants; and analytical and advisory activities (AAAs). 12. Three operations for a total commitment amount o fUS$124 million equivalent were presented to the Executive Directors inFY07. These include the Reengagement and Institution-Building Support Program (RIBSUP) Grant (US$82 million equivalent), which provided urgently needed support for the budget, an Emergency UrbanInfrastructureRehabilitation and Maintenance Project (US$18 million equivalent) to increase access to infrastructure and urbanservices inBangui,and a Central African Economic and Monetary Community (CEMAC) Transit-Transport Facilitation Project (US$24 million equivalent to the C.A.R.) to link the landlocked country with the main export port o f Douala. Inaddition, an existing HIV/AIDS project (USSl7 million equivalent) was restructured inFY07 to take into account developments while the country was inarrears andbroaden the scope o f the project to cover emergency needs inhealth and education. 13. The C.A.R. has also received two LICUS grants, for a total commitment amount o fUS$10.8 million inareas such as economic governance, community-driven development, HIV/AIDS, and mining. A Multi-Country Demobilization andReintegrationProgram(MDRP)o fUS$lOmillion that closed inFebruary 2007 reintegrated 7,500 ex-combatants and carried out reconstructionworks. 14. Several pieces o fanalytical and advisory activities were completed andunderpin the current andfutureIDAassistanceprogram. The AAA program includes a Country Procurement Issues Paper, Country Education Status Report, Technical Assistance on Customs, Assessment o f Public Financial Management, and Diagnostic Trade Integration, a Poverty Diagnostic, and support for the PRSP. 15. Several o f these projects and analytical work inthe area o fpublic administration and fiscal management directly complement the HIPC process, and support the HIPC triggers. The RIBSUP 11IFAD, EIB, OFID, BADEA,BDEAChaveagreed, inprinciple, to provideHIPCdebt reliefto the C.A.R. - 5 - and LICUS grants, as well as the Assessment o fPublic Financial Management, support budget preparationand execution, expenditure accounting and reporting, procurement, internal and external audit and also public administration. IV. PROPOSEDCOMPLETIONPOINTTRIGGERS 16. The proposed IDA assistance under the EnhancedHIPC Initiative would provide support for the implementationo f the Government's poverty reduction strategy as outlined inC.A.R.'s PRSP, which i s near completion.'* 17. The delivery o f HIPC assistance at completionpoint would be contingent uponthe fulfillment o f actions specified inthe accompanyingdecision point document. To reach the completion point, the Government will need to: (a) finalize the full PRSP through a participatory process and implement it for at least one year, as evidenced by a PRSP Annual Progress Report submittedbythe Government to the satisfaction o f IDA and the IMF; (b) maintainmacroeconomic stability as evidenced by satisfactory performanceunder the PRGF-supported program; and (c) implement key governance, structural and social sector measures specified inBox 3 o f the attached decisionpoint document. '*The C.A.R. currently has an interimPRSP, whichwas preparedin2001. - 6 - V. RECOMMENDATION 18. IamsatisfiedthattheproposedassistancetoC.A.R.willcomplywiththeArticlesof Agreement o f the International Development Association. 19. Irecommendthat the ExecutiveDirectors approve the recommendations presented inthe decisionpoint document concerning: (a) C.A.R.'s qualification for assistanceunder the Enhanced HIPC Debt Initiative; (b) the decisionpoint for C.A.R.; (c) overall NPV debt reliefrequired to bring C.A.R.'s debt to the NPV debt-to-exports ratio target o f 150percent as o f end-2006; and (d) the triggers for reaching the floating completion point. 20. IfurtherrecommendthattheExecutiveDirectorsapprovetheprovisionofreliefondebt owed by C.A.R. to IDA inthe amount and manner proposedinthis paper. RobertB.Zoellick President by Juan JosC Daboub ManagingDirector Washington, D.C. September 4,2007 - 7 - Annex 1 C.A.R.: IDA Credits Subiect to DebtServiceReduction Under the EnhancedHeavilvIndebtedPoor CountriesInitiative Credit Project Name Currency Balanceat December 31,2006 Inoriginal currency InUSDequivalent 1460 HIGHWAY USD 1,818,287.76 1,818,287.76 1990 HIGHWAY MAINTENANCE USD 1,874,55 1.02 1,874,551.02 3080 EDUCATION USD 1,813,500.00 1,813,500.00 8470 THIRD HIGHWAY USD 9,997,500.00 9,997,500.00 8940 LIVESTOCK DEVELOPMENT USD 1,687,500.00 1,687,500.00 10730 EDUCATION SUPPLEMENTALFINAN - SDR 450,693.16 678,022.79 10740 3RD HIGHWAY SUPPLEMENTALFIN - SDR 2,450,723.76 3,686,868.82 11500 TECHNICAL ASSISTANCE SDR 2,425,500.00 3,648,922.20 12580 FOURTH HIGHWAY SDR 12,381,544.89 18,626,796.13 13590 SECONDEDUCATION SDR 8,029,500.00 12,079,579.80 13760 COTTON AREA RURAL DEVELOPMENT SDR 7,711,500.00 11,601,180.60 15810 SECOND TECHNICAL ASSISTANCE SDR 7,163,497.95 10,776,766.32 16810 NATIONALLIVESTOCK SDR 9,115,500.00 13,713,358.20 17320 STRUCTURAL ADJUSTMENT CREDIT SDR 11,070,000.00 16,653,708.00 18360 COTTON SECTOR ADJUSTMENT CR. SDR 9,315,000.00 14,013,486.00 18630 EDUCATION REHAB. & DEVE. SDR 11,562,000.00 17,393,872.80 19160 SECONDSTRUCTURAL ADJ. CREDIT SDR 23,987,000.00 36,086,042.80 19710 ECONOMIC MGT SDR 7,369,159.91 11,086,164.17 19780 ENERGY SDR 11,175,743.92 16,s 12,789.15 21260 TRANSPORT SECTOR SDR 40,542,000.00 60,991,384.80 21380 NATURALRESOURCEMANAGEMENT SDR 12,272,323.75 18,462,483.85 21620 THIRD STRUCTURAL ADJUSTMENT SDR 30,O 15,000.00 45,154,566.00 22540 ENTERPRISEREHAB. & DEV. SDR 3,149,308.00 4,737,818.96 22750 SOCIAL DIMENSIONS & ADJUSTMENT SDR 4,165,208.36 6,266,139.46 23680 AGRICULTURAL SERVICESDEVELOPM SDR 11,469,260.77 17,254,355.90 26620 LIVESTOCK DEV & RANGELANDMGMT SDR 1,806,262.23 2,717,340.90 33050 FISCAL CONSOLIDATION CREDIT SDR 10,100,000.00 15,194,440.00 33600 POLICY SUPPORT SDR 944,880.76 1,421,478.62 A0230 STRUCTURAL ADJUSTMENT CREDIT SDR 12,600,000.00 18,955,440.00 Sources: IDA LoanAccounting Department. - 8 - Annex 2 C.A.R. Scheduleof Debt Service Reduction Under the EnhancedHeavilyIndebtedPoor CountriesInitiative ~~ Amount to be reduced Calendar Year (inthousandsU.S. dollars) TOTAL 228,730 Oct. 1- Dec. 31 2007 1,510 2008 9,4 16 2009 10,055 2010 11,102 201I 12,024 2012 12,145 2013 12,185 2014 12,105 2015 12,060 2016 11,979 2017 11,899 2018 11,818 2019 11,691 2020 11,722 2021 11,606 2022 11,488 2023 11,370 2024 11,290 202s 11,210 2026 11,129 2027 8,925 Sources: World Bank, and staff estimates.